The economic future for Southeast Asia is looking bright. In the past three decades, the region experienced growth far exceeding the global average, research by Roland Berger shows, with specifically CLMV economies seeing high growth levels. Following increased intra-region trade and FDI, the firm foresees that the SEA countries will to continue to flourish economically.
In the recently released ‘Southeast Asia’s Economic Outlook – The Big Picture’ report, Roland Berger researches the economic outlook for Southeast Asia (SEA) economies. In the past 30 years, South Asian countries have been experiencing an average growth rate of 5.3%, which well above the world average of 3.6% and almost triple of that of Europe (1.9%).
According to the consulting firm, Southeast Asia is becoming an even more important growth cluster and continues to be a magnet for commercial activity. Economically, the region relies on both on trade and FDI in order to increase its wealth, although its dependency on trade has declined over the last 10 years, at a rate of 2.9% CAGR (Compound Annual Growth Rate). The country most dependent on trade is Singapore, which has a dependency rate that is triple that of the whole region, followed by Vietnam and Malaysia.
In 2013, SEA countries exported the biggest share (26%) of their goods to other SEA countries. Other important export partners include Russia (13%), Australia (12%), China and Canada (both at 10%). The region also imported almost a quarter (22%) of its goods through intra-region trade. Between 2004 and 2013, both intra- and extra-region trade grew at rates of nearly 10% per year.
Foreign Direct Investment
Intra- region investment has also experienced steep growth; at 28% between 2000 and 2014, compared to 12% for investments from outside the region, to a total FDI inflow share of 18%. According to the consulting firm, this is linked to ever-improving bilateral relations and increasing cross-border migration. The establishment of the ASEAN Economic Community (taking effect by the end of 2015) is also expected to further boost economic integration and cement the region’s strong growth.
While investment within the region experienced the biggest growth, countries outside the region have been the main FDI source. The biggest investors have been the EU (at 21%), Japan (10%) and the US (10%), which together accounted for almost half (41%) of the total FDI inflow.
Roland Berger’s research shows that the CLMV economies (Cambodia, Laos, Myanmar and Vietnam) are the SEA region’s fastest growing countries. Both local and foreign businesses are set to flourish, which will also grow due to ballooning FDI in recent years and proximity to China. In addition, economic liberalisation and improved relations with major trading nations such as the EU and the US are expected to buoy up growth.
Myanmar leads the cluster in average real GDP growth, GDP per capita growth and average total trade growth for the ten-year period 2005-2014. Laos, which comes in second in both the average real GDP growth and GDP per capita, leads in FDI CAGR at 47%. This lead is, according to the researchers, largely due to increasing trade with neighbouring countries, improvements in infrastructure and tourism development, as well as development of natural resources industries.
To sustain the growth, the CLMV nations will need to address some important challenges facing their country in the future. One key issue is the low level of agricultural productivity. Cumulatively, agriculture makes up more than a quarter of the GDP of CLMV states. Agricultural productivity, which is the measure of value added per worker, languished between $480 and $540 for the cluster in 2013, which is substantially lower than the other SEA countries. In comparison, for Indonesia, the Philippines and Thailand the numbers ranged from $1,000-$1,200.
Other challenges include discrepancies in standard of living between urban and rural environments (Cambodia), diminished human rights policy (Laos), inadequate resource allocation between the public and the private sector (Vietnam) and major inequalities between the different ethnicities (Myanmar).
The automotive industry has been identified as one of the key industries for the SEA region in terms of pushing growth, which will be the result of improvements in transportation infrastructure and road networks. The research foresees that the light commercial vehicle production will grow 5.2% in Southeast Asia between 2013 and 2020. Thailand will make up the largest share of the capacity growth, at more than 3.3%, followed by Indonesia at 1.8%.
Other key industries for growth include energy, with energy policies strongly emphasising renewable energy; steel, as steel consumption for the region is set to grow at an average of 4.7%; and tourism, which is a large economic sector for the region as a whole and is set to grow strongly over the next 10 years.