Covid-19 could accelerate supply chain shift to Asean

THE shift in supply chains away from China that started with the US-China trade war would likely be reinforced by the Covid-19 virus outbreak, and Asean is poised to benefit from this structural shift, a report by Maybank Kim Eng has suggested.

"Japanese automakers - Toyota and Honda - and Samsung have indicated their plans to speed up relocation plans due to the virus outbreak. We think that ASEAN will benefit from this structural shift, as MNCs adopt a "China+1" strategy and look for alternative bases to diversify their risks," Maybank KE analysts Chua Hak Bin, Lee Ju Ye and Linda Liu wrote in a joint report.

The report said Vietnam and Thailand show the strongest evidence of the supply chain shift, with a surge in actual foreign direct investment inflows and a pickup in imports of capital goods.

In Vietnam, total newly registered manufacturing FDI rose 33 per cent to a new record US$12.1 billion in 2019, while in Thailand, one encouraging indicator is the 19 per cent jump in private construction in the fourth quarter on the back of industrial plants. the report said.

Malaysia has also seen strong foreign investment applications and actual FDI into manufacturing, led by US and China firms. However, the report noted that the data is more mixed in the Philippines, with FDI approvals surging but actual FDI flows falling sharply in 2019. Meanwhile, Indonesia remains a laggard with foreign investment realisation in manufacturing falling to a 8-year low in 2019.

Meanwhile, foreign bank lending to Asean is rising, but declining in China, and Maybank KE said this is consistent with the thesis that supply chains are reconfiguring towards ASEAN and away from China. Total foreign bank claims on Asean rose 6.9 per cent in the first 9 months of 2019 from a year ago, according to Bank for International Settlements data.

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However, domestic loan growth to businesses across most of Asean with the exception of Singapore remains sluggish and is not seeing any material lift from the rising FDI and shifting supply chains, the report said.

Maybank KE said it has observed a clear divergence between foreign bank claims and domestic loan growth across most of ASEAN, especially in Indonesia, Philippines, Thailand & Vietnam.

It added that the rising FDI in Asean has not supported domestic loan growth as yet, because MNCs may be relying on foreign banks, rather than domestic banks, to fund their capacity expansion.