Demographics, post-Covid rebound to keep Asean region stable in uncertain times: panellists
FEARS of a potential global recession may be setting in even as central banks raise interest rates to rein in inflation. But South-east Asia is expected to be relatively shielded from such concerns, thanks to its favourable demographics and the prospect of business recovery as Covid-related restrictions are lifted.
The region is still poised for growth, with digitalisation, sustainability and domestic demand acting as drivers, said panellists at a roundtable discussion organised by The Business Times (BT) and Maybank, which was themed “Asean’s Moment: Uncovering Opportunities in Disruptive Times”.
Moderated by BT senior correspondent Anita Gabriel, speakers at the roundtable were:
- Gregory Seow, global banking head and global head of financial institutions group at Maybank Singapore
- Khairul Anwar, director for South-east Asia at Enterprise Singapore
- Geoff Howie, market strategist at the Singapore Exchange (SGX)
- Takeshi Sasaki, partner at Japanese private equity firm Advantage Partners
South-east Asia has the third-largest population in the world, at over 680 million people, and a combined gross domestic product (GDP) of US$3.2 trillion in 2019, according to figures from the Association of South-east Asian Nations (Asean). In 2021, foreign direct investment inflows rose 42 per cent to reach near pre-pandemic levels at US$174 billion.
Given the diversity of the Asean region, which comprises 10 member states including Singapore, Indonesia, Malaysia, Vietnam and the Philippines, the roundtable participants noted different areas that member countries can benefit from amid a changing global economy.
Here are some excerpts:
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Q: South-east Asia’s growth is being reshaped by stronger domestic demand from countries reopening, and reduced external demand from global risks. As the region grapples with surging inflation, rate hikes, a war and recession fears, what most excites you about the region’s prospects?
Khairul Anwar: This year has seen fairly good recovery in domestic consumption and exports. The favourable pricing for commodities has also led to good recovery for a lot of South-east Asian corporates, who are major drivers of the economy. For me, I’m quite excited by three areas. First, domestic demand. The region has a large population of people who are technologically adventurous and open to working with new consumer brands and new ideas that are coming to market, which should benefit sectors such as healthcare, education, food and retail. Second, tech and the digital economy, not just in e-commerce and fintech, but increasingly also in the areas of water and solutions and agriculture. And finally, in energy transition and the opportunities to expand from that.
Geoff Howie: An area to look at would be the role of digitalisation in the ongoing economic integration as well as its role to boost growth further and also sustain some of the consumer and export growth. The United Nations Conference on Trade and Development, as well as the Asean Secretariat, have also noted that the key growth drivers for Asean are electronic vehicles, electronics and digitalisation. And if you look across our stock market, there are a number of stocks that have a strong Asean presence and are really embracing this digitalisation trend.
Gregory Seow: From a financial services perspective, we see a lot of digitalisation interspersed with sustainable solutions. In South-east Asia, particularly Singapore, we also see a lot of foreign direct investments, both from the family offices incorporation and from the fund management members. And because of this landscape, we will see more and more of the financing and the investment community coming together, to look at how we can invest into the ecosystem and the infrastructure, both in the digital and sustainable space.
Takeshi Sasaki: As a fund manager, we cautiously look at opportunities in healthcare, technology, education, which are the attractive areas, but the valuations tend to be higher as everybody is flocking to those sectors. At the same time, traditional bricks-and-mortar industrial companies are also experiencing the tailwind from the global shift in supply chains away from China, with Asean companies standing to capitalise on such trends.
Q: China’s zero-Covid policy and the Russia-Ukraine war have created havoc in the global supply chain. This has accelerated a rearrangement of sorts in the supply chain, and Asean is benefiting big time from this diversification and increasingly playing a bigger role. Which nations are stepping up, and how do you see this playing out in the longer term?
Howie: We were seeing a shift in capital, trade and supply chains to South-east Asia. In China, the technology sector was taking the opportunity to move up the value chain. And we’re also seeing China’s technology ecosystem look to trade more and have more reliance on Asean, more so than Europe and the United States. Companies have been fortifying supply chains, and are becoming client-focused. If the clients are requiring supply chains to be routed through South-east Asia, they are moving accordingly.
Anwar: Countries like Vietnam and Malaysia have had outstanding performance. Both have manufacturing bases that are very well developed and have networks that they are already connected to, so there has been a lot of swing in investments for global manufacturers looking for alternatives, with a lot of global brands growing their manufacturing footprint in these countries. There are also countries that are trying to step up, with Indonesia trying to get plugged in to the global supply chains, starting with electric vehicles, although the ecosystem is probably going to take time to build up.
Seow: A lot of foreign direct investment is flowing into these regions because of the very diversified landscape of South-east Asia. For example, Vietnam and the Philippines have an advantage over China in terms of cost and thus a lot of the more labour-intensive markets, such as those for toy materials, shoe manufacturing, textile and clothes, are in these countries. There is also a marked increase into higher automation, precision, electronic and advanced chip manufacturing, where Singapore, Malaysia, and in some ways, Thailand, play a key role. There is also a shift in supply chain value into this whole region in terms of logistics, funding and liquidity as well as capital investments.
Q: How is the current climate of food security or even food nationalism on the back of soaring prices and supply chain woes shaping the region’s agri-food sector? What and where are the opportunities emerging from these challenges?
Anwar: Covid motivated some rethinking over food and food security. But looking ahead, climate change may present some of these risks on a more ongoing basis. While the immediate response to food security is protectionism, now that we’ve passed the crisis, we are seeing some opportunities for collaboration. Countries are looking to diversify their sources, and that is where business opportunities are going to come up, particularly for the fairly well-established trading community that we have in Singapore. Innovation is also an area that we’ve got a lot to offer, because of the deep ecosystem of development around research and development, around intellectual property, around funding. You are going to need that as more firms look at resilience or productivity and try to bring more produce to market in a resilient way.
Howie: On the SGX, during the first phase of the Asean Economic Cooperation Plan going into 2015, we did see a lot of listed companies really accelerate their transcending in the value chain. Upstream producers of food and beverage really moved downstream and embraced their consumers, and built a more integrated value chain as well as diversified revenue streams in the last five years.
Q: South-east Asia is a hotbed for tech SMEs and startups, owing to its large and growing tech-savvy population, rapidly rising middle class, high Internet penetration rates, and the size of the region’s economy being other plus points. How rapidly is Asean unfolding as a new growth market in the digital and tech space, and to what extent and why are startups flocking to our part of the world to seize these opportunities?
Sasaki: Startup investments are still booming, with startups still raising a lot of funds and both buyout and venture capital willing to spend more money amid the prospect of the growth of the economy in Asean. But investors are becoming more cautious, particularly on tech startups, on whether they are sustainable, and on how long it may take for these startups to turn profitable. More investors are scrutinising the business models of startups and whether the services or products create tangible benefits.
Seow: Funding is becoming a lot more selective. In the past, with easy money, there was lots of money and the fund managers needed to deploy in a very fast manner so that they could launch new funds. Currently, the global tightening environment has caused funds to be taken out of the system quite rapidly. From our perspective, we are more selective on sponsorship. We look at the whole supply chain, from an ecosystem and support perspective. We are also keen on bringing in strong sponsors into this area, by tying up with some key companies to look at acquisition and look at how we can help with the funding.
Anwar: Singapore today finds itself in a sweet spot that has captured the attention of not just other South-east Asian corporates, but also those from the US and Europe. And what we have been able to do is to coalesce this around a programme that we call the Global Innovation Alliance. This includes working with the startups that are coming out of Singapore to prepare them for the other South-east Asian markets, and bringing the innovation ecosystem from these markets to tie it more closely with Singapore. And while we talk about startups, we should not ignore the fact that corporates in South-east Asia continue to play a very important role as demand drivers for these new technologies.
Q: The global race towards green transportation leaves plenty of scope for Asean to capitalise on, from the standpoint of innovation or becoming a vital part of electric vehicle supply chains. Which Asean countries should we watch closely to ride this wave?
Sasaki: The auto industry requires economies of scale to produce a car, so mass production capabilities are still important. For electric vehicles, people are increasingly paying attention to the innovations behind the batteries, speed of charging and recyclability, and it is hard to tell which country can do that. Singapore could be in a good position to focus on R&D or high value-added areas in the car, although it is unlikely to produce a car itself because it is too costly to do so in Singapore. Thailand, Vietnam and Indonesia still have an advantage for mass production.
Anwar: Governments need to coordinate the transition and provide charging infrastructure, to solve the whole issue of range anxiety. Without that, and work on prices in comparison with regular vehicles, there will likely be a struggle to speed up the transition in South-east Asia.
Q: The integration of Asean as a single market appears to be somewhat of an elusive goal amid fluid politics in some nations, risks of regulatory changes as well as lack of digital infrastructure or business-friendly ecosystem. Where are these fault lines or weak spots that businesses and investors need to be wary of? And how can they navigate them?
Anwar: We often forget that Asean is 10 countries in many provinces. For those of us who are very familiar with operating in Singapore, I think we need to step up and get used to a far more diverse and colourful operating environment and business environment, outside what we see. Local regulations have differences in terms of interpretation, and you need people who have experience and people who have been in the market. You can work with partners that usually are familiar with how to operate in the market; they have got the understanding honed over many product cycles, over many business units and sectors.
Seow: While there are lots of opportunities, these countries have also got tight local currency. You also have to be mindful, apart from the legal aspects, of your financial aspects, of the working capital in the local currency. Companies should look at swaps and other hedging mechanisms.
Q: In 2023, which half should we look forward to more and why?
Sasaki: From an investor’s perspective, I believe the recession creates a good investment opportunity. When I look back at the global financial crisis in 2008, after the global financial crisis, it was a good period for investment in Japan. I look at the second half of the next year for good timing, for investment.
Seow: The second half next year is what our house predicted, but it is still a moving target. It depends on how much and how fast the US Federal Reserve continues to raise rates. The intensity and aggressiveness will create an effect in this part of the world. And the faster they hike without looking at a forward mirror but a backward mirror, the faster recession could come. But I think in some ways Asean is shielded, and a key reason is that we are a commodity space economy in Indonesia, the Philippines, Malaysia, Thailand, Vietnam. There is also a lot of inflow of capital, both on the private side in family offices as well as on the public side. I also think that the importance of how the rates increase will be more moderated in Asean, and therefore we may be shielded from the global storm.
Howie: The International Monetary Fund is stating that consumption services and exports are strong, putting us in an enviable, strong recovery position going into 2023. But the key risk is those higher interest rates in the US. The stronger US dollar obviously can create currency depreciation for the Asean member states, and that also means we can be importing more inflation. So there certainly are some big global downside risks, but certainly enough intrinsic drivers to keep investors interested here at home.
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