RCEP could drive more foreign direct investment into Asean this year, says UOB report

THE Regional Comprehensive Economic Partnership (RCEP) could provide the next impetus for growth in Asean, which attracted about one third less foreign direct investment (FDI) on the back of the Covid-19 pandemic, says a report by UOB.

FDI in Asean fell by 31 per cent to US$107 billion in 2020; globally, the drop was worse - 42 per cent, going by data from the United Nations Conference on Trade and Development (UNCTAD).

Although UNCTAD has warned that FDI is expected to remain weak this year, UOB's head of research Suan Teck Kin believes the RCEP will be another catalyst for Asean's prospects ahead, given that the region has historically outperformed other regions.

RCEP is a trade deal that includes the 10 members of Asean, plus China, Japan, South Korea, Australia and New Zealand. The members account for nearly a third of the world's population and 29 per cent of global gross domestic product. The trade grouping is bigger than both the US-Mexico-Canada Agreement and the European Union.

The adoption of harmonised rules of origin in the zone will allow ample opportunities for the shifting and diversification of supply chains within the grouping, especially in light of the Covid-19 pandemic and uncertainty in US-China relations, Mr Suan said.

It is also attractive for countries that are not involved in the free-trade agreement (FTA) to produce and export to RCEP members, he added, especially to the emerging markets in Asean and China.

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In terms of FDI inflows, RCEP as a grouping has become a main investment destination in recent years due to the size of its economy, as well as a range of countries at varying stages of economic development; the member countries also have different cost structures and resource endowments, he said. FDI inflows into RCEP accounted for 37 per cent of global FDI inflows in 2020, well ahead of other groupings.

RCEP is also highly integrated into the global value chains (GVC), accounting for 26 per cent of the world's GVC trade volume, UNCTAD noted.

GVC in RCEP is centred on large and established hubs such as China, Japan, and South Korea, giving room for trade and investment opportunities for peripheral countries such as Vietnam and Myanmar, Mr Suan said.

He noted that GVC patterns are closely connected to FDI patterns, with the top five GVC industries in RCEP absorbing more than half the value of greenfield investment project announcements.

"With RCEP the leading destination for global FDI inflows in recent years, this position is likely to be entrenched further once the FTA goes into force," Mr Suan said.

"In addition, the region's deep-rooted GVC participation, China's dual-circulation strategy and Asean's rising population and income will also be the main drivers for further investments into the region and Asean."

This comes even though performance in the past year was uneven within the region. The Philippines, Vietnam and Indonesia performed relatively better, while Malaysia and Thailand suffered sharper declines in FDI inflows, he noted.

The Philippines was the lone exception in the region, with a 29 per cent growth in FDI inflows in 2020 despite the pandemic, and even as the country reported its worst recession on record, he said.

FDI inflows to Vietnam fell more moderately, as the country was able to control the pandemic for the most part, he said. The relocation of supply chains and infrastructure investments also helped to sustain inflows.

Inflows into Indonesia fell by a "relatively mild 24 per cent" to US$18 billion. Mr Suan said the outlook for FDI inflows is promising since the country managed to achieve its overall investment targets in 2020.

Malaysia and Thailand logged the worst decline in FDI inflows in Asean.

In Malaysia's case, it was partly due to political uncertainty and movement restrictions due to the pandemic.

"However, with investment approvals in the first nine months of 2020 exceeding RM100 billion (S$33.1 billion), particularly with strong gains in investment approvals in the manufacturing sector, the actualisation of these approvals should pave the way for further inflows in 2021 and beyond," Mr Suan said.

Thailand's performance was attributed to a divestment of a foreign-owned supermarket chain to a Thai investor group during the year, UNCTAD reported.

Mr Suan said he was less bullish about Thailand, given that its FDI performance has historically lagged its peers by "a wide margin".

The "outlook for Thailand could be challenging as competition for investment is likely to remain fierce in the years ahead", he said.

Singapore's FDI inflows contracted by 37 per cent to US$58 billion, worse than the overall rate for Asean, as a result of the pandemic and a slump in business activities globally. This was largely due to an 86 per cent plunge in cross-border mergers and acquisitions, as foreign acquisitions slowed in the region, said UNCTAD.

"Nevertheless, the outlook for Singapore's FDI inflows remains positive, as regional economies are expected to see a growth rebound in 2021, which would be favourable to Singapore's role as an investment funnel to the region," Mr Suan said.

He noted that Singapore managed to attract US$12.7 billion in fixed-asset investments in 2020, the largest amount since 2008, despite its worst recession since independence.

In addition, the city-state is planning to grow its manufacturing by 50 per cent over the next target so that the sector continues to contribute about 20 per cent to economic output over the medium term.

"The signing of RCEP will be another catalyst just as companies relocate and reconfigure supply chains in a post-pandemic world," Mr Suan said.