Southeast Asia’s Trillion-Dollar Economies – OpEd
Four Southeast Asian economies will soon pass the trillion-dollar GDP mark by 2030, according to a recent report released by IHS. While the firm identified ten countries across the Asia-Pacific as top foreign investment destinations, four members of ASEAN were projected to achieve this prestigious milestone: Malaysia, Indonesia, Thailand, and the Philippines.
The ASEAN countries consolidated their collective position as one of the world´s fastest growing markets last December with the creation of the ASEAN Economic Community, a single market between the ten member states. With a combined GDP of $2.4 trillion and a projected annual growth rate of 5% for the next decade, the AEC looks set to be the major beneficiary of the Asian shift in global economic clout.
In its report, HIS singled out Malaysia as the most likely first candidate to escape the middle-income trap, achieving a per capita GDP of $20,000 by 2025. By doing so, Malaysia would reach one of the primary goals of the Economic Transformation Program (ETP) unveiled by Prime Minister Najib Razak in 2009. By 2030, the country’s total value of goods and services is projected to top $1 trillion USD. To reach this goal, the Malaysian government is investing heavily in infrastructure projects, including a 350-kilometer high-speed rail link between Kuala Lumpur and Singapore that is projected to cost between $9.7 billion and $14.5 billion. Malaysia is also fostering the development of promising growth industries, aiming to move up the value-added supply chain in manufacturing and services. The drop in commodities prices, inquiries into the 1MDB development fund, and China’s economic slowdown have impacted Malaysia’s growth forecasts, but Beijing continues to look to the country as an investment destination: thanks to Chinese bond and asset purchases, Malaysia could still hit its target of 40 billion ringgit ($10.24 billion) in foreign direct investment (FDI) this year. Even with last year’s falling oil prices, national GDP growth managed to exceed expectations by reaching 5%.
Indonesia, for its part, is slated to reach the trillion-dollar mark by 2020 as strong and growing consumer demand lifts it up the global economic rankings. Currently the world´s 16th largest economy, McKinsey estimates Indonesia could leap into 7th place (overtaking Germany and the UK) if it can increase productivity. A rapidly growing population, set to add 90 million more people over the next two decades, is spurring domestic consumption. The liberalisation of foreign investment regulations spearheaded by President Joko Widodo boosted FDI inflows by 3% (to $29.3 billion) in 2015. That growth was especially strong at the end of the year, with $7.9 billion coming in between October and December. By tackling bottlenecks in transportation, agriculture and fisheries, and energy diversification, Indonesia could unlock a further $1.8 trillion in business opportunities by 2030. To achieve its full potential, MicKinsey advises labour productivity will need to grow at an annual rate of 4.6% (a 60% increase over the average growth rate this past decade).
Thailand, despite struggling since 2014 as a result of political uncertainty and currency appreciation against the yuan and the dollar, is now in recovery mode. Growth is expected to average 3% between 2016-2020, having fallen to 1% in 2014. While this is low by historical and regional standards, the Thai economy has come a long way: by the time Thailand attained upper middle-income status in 2011, the percentage of the population living below the poverty line had dropped from 58% in 1990 to 13%. This rapid progress in alleviating poverty was the result of sustained growth combined with targeted social programs, new infrastructure, and better earnings for Thai farmers. Significant challenges remain to be overcome, however, if investors are to put their faith back in the Thai economy. The stalled return to democratic government after the ruling junta’s 2014 military coup, as well as possible EU sanctions on the vital fisheries industry, could undo much of the recent progress.
The fourth potential trillion-dollar market is the Philippines. After decades of weak growth, political instability, and crippling poverty, the Filipino economy is now headed firmly upward. Improved governance and anti-corruption measures, as well as investments in roads and ports, have improved the business environment. Remittances from Filipinos living abroad ($25.8 billion in 2015) and a booming business services sector are the predominant drivers of growth, and IHS projects 5.8% GDP expansion annually between 2016-2018. As the broader economy grows, the wealth of individual Filipinos is projected to do the same: from $2,800 in 2014, per capita GDP is expected to more than double (to $5,800) by 2024. The total size of the economy should, if expectations hold, rise from $300 billion today to $1 trillion in 2030.
Of the potential stumbling blocks that could keep ASEAN’s rosy outlook from taking shape, China looms largest. Much of ASEAN’s economic growth is predicated on Chinese consumption, investment, and tourism. As the Chinese economy has seen annual GDP growth drop from double digits to an expected 6.3% this year, regional observers fear its appetite for products offered by its southern neighbours will subside accordingly.
A prime example of this threat is Thailand, where a growth rate of 7.0% in 2012 tanked to 0.8% in 2014. This collapse was partially a result of a fall-off in investment and tourism from China. Slower economic growth has also put pressure on the yuan, resulting in devaluation. The consequent appreciation of ASEAN currencies has made their exports more expensive at a time when Chinese demand is already dropping. There is also, of course, the question of regional tensions stemming from the South China Sea. Vietnam, the Philippines, Brunei, and Malaysia all have ongoing disputes with China over maritime borders, punctuated by the build-up of military hardware and exercises.
One avenue to reduce reliance on Chinese trade (and dissuade Chinese aggression) is the Trans-Pacific Partnership, which Barack Obama continues to propose to the ASEAN member states as a means of gaining new export markets and curbing China. Four ASEAN members (Singapore, Malaysia, Vietnam, and Brunei) have already signed on, and several others (particularly Thailand and Indonesia) have made it clear they intend to follow suit. While deepening ties with trading partners in the Americas offers a backup plan, China’s economic health will continue to weigh heavily on the course of ASEAN growth.
*Alicia Conway is currently undertaking a Master’s in Economics and Management in London