The muddy docks in Yangon. Myanmar is tipped to see the fastest growth in Asean this year. Photo: the author
Southeast Asia greets the new year with the launch of the Asean Economic Community (AEC) to bind the bloc’s economies closer together and coordinate growth strategies.
Its inception has coincided with the economic slump experienced by China, battering exports and confidence ahead of the economic community’s birth but the varied bloc clearly has such considerable potential that hopes for 2016 remain high.
Uncertainty over China, Asean’s biggest export market for resources and commodities, and pressure from declining commodity prices are casting shadows over the 10-member bloc.
The Asian Development Bank (ADB) has cut Southeast Asia’s projected growth rate but still expected it to be stronger this year with 4.9 per cent compared with 4.4 per cent estimated for 2015.
A slump in exports accounted for Asean’s declining economic progress last year.
The biggest commodity exporters, such as Indonesia, Malaysia and Brunei, have been hit particularly hard by declining prices with oil prices dropping below US$35 a barrel last month.
“One bright light for Asean countries is the widely expected AEC,” said Francis Tan, economist at Singapore-based United Overseas Bank (UOB). “And this will not be a one-year good story, but will benefit the region for the next couple of years.”
The AEC’s ambitious goal of developing Asean into a European-Union style single market and production base with free movement of goods, services, investment and skilled labour is expected to boost the manufacturing sector.
Myanmar tops the list of Asean members with economic potential in 2016.
It is projected by the International Monetary Fund to grow by 8.4 per cent this year, followed by Laos with 8 per cent and Cambodia’s 7.2 per cent.
There are fears that Thai household debt-to-GDP ratio is too high and that it will hold back domestic consumption.
Household debt in Thailand has increased by 13.4 per cent annually for the last 10 years and the ratio of household debt to nominal GDP has risen above 80 per cent. In comparison, in more-developed Singapore the figure is an estimated 75 per cent.
“The quality of debt raises more concerns as the purchasing is not mainly for houses,” Tan said. “Instead, a large proportion of the debt is created by purchasing vehicles, which depreciate easily. This means Thailand’s economy remains fragile.”
Thailand’s heavily taxed vehicle market and the importance placed on owning a car or pick-up truck in Thai society has saddled a heavy debt burden on families.
Higher levels of debt make households vulnerable to macroeconomic weakness, which poses a warning sign for Southeast Asia’s second-biggest economy, after Indonesia.
Thailand’s economic growth was expected to accelerate to 3.5 per cent in 2016 from 2.9-3 per cent in 2015, Deputy Prime Minister Somkid Jatusripitak announced last month. The more impartial IMF forecast is for a growth rate of 3.2 per cent this year.
As one of the few Asean net energy exporter, Malaysia, also a significant commodity exporter, is expected to grow slower this year.
The World Bank forecast the country’s real gross domestic product to grow 4.7 per cent in 2015 and dropped its projections for this year to 4.5 per cent.
Malaysia has been hit by the declining oil prices. “With lower oil prices around the world, obviously there are lower export revenues from oil,” Ulrich Zachau, World Bank country director for Southeast Asia, explained.
Malaysia and Indonesia account for 85-90 per cent of global palm-oil production, meaning they retain a firm grip on that market.
Singapore, the most advanced Asean economy, is likely to outperform its neighbours but a high exposure to China’s stuttering growth in manufacturing have led analysts to cut growth projections for 2016.
One area where Asean has the opportunity to leapfrog other regions is digital technology.
The implementation of a proper digital agenda and strategy could add an estimated US$1 trillion to the bloc’s GDP over the next 10 years.
Asean has a combined population of more than 600 million people, 94 per cent of which is literate and 50 per cent are under 30, of which 90 per cent of those under 30 years have internet access.
With Asean’s combined economy currently, valued at US$2.5 trillion, projected to grow 6 per cent a year over the next 10 years, this demographic youthful group is likely to see its income levels rise, with more disposable cash.
Regional governments’ investment in IT projects has grown by 15 per cent over the past five years, with an estimated US$100 billion invested in 2015.
There remain many factors holding the region back from reaching the sun-lit uplands of technological nirvana.
Except for Singapore, Asean is between 10 and 20 per cent more reluctant than the global average to share financial information to make an online purchase.
Asean needs to cooperate and find a way to harmonise cyber-security, data protection and privacy laws to boost public confidence in the safety of cyber commerce.
If Asean wants to get the most from the AEC, it needs a coordinated IT strategy to allow the region to trade more smoothly.
Meanwhile, some aspects of the region’s economies expect to be unaffected by the AEC.
Indonesian Food and Beverage Association chairman Adhi Lukman said the AEC would bring about no major changes for the industry, as most members of the bloc had already reduced tariff barriers in the sector over the last five years.
“We won’t see anything new with the birth of the AEC, as most Asean countries reduced over 90 per cent of tariffs to 0 per cent during the period of 2010 to 2015,” he said.
“The harmonisation is indeed not an easy process, as each Asean member tends to cleave to its own interests. This is something that needs to be resolved.”
One commentator said that “Asean has no meaning for the majority of the 600 million citizens living in the region… They have no real feeling of being a member of an Asean community”.
It seems that much work is yet to be done before Asean’s population feels the same sense of shared identity experienced by many members of the European Union.
However, its potential for growth far outstrips that of the EU and if a fraction of the energy of its youthful, educated population can be harnessed, the AEC has a rosy future.