Trade tensions between China and US, and fears of an emerging-markets (EMs) crisis have caused stock market indices to decline with the MSCI AC Asia excluding Japan index and MSCI EM Index down 8.1% and 9.5% year-to-date (as of Sept 28, in Singapore dollar terms) respectively.
Among Asean markets, Indonesia and the Philippines are in the spotlight due to their twin fiscal and current account deficits and external debt.
These fears have injected volatility into the Asean-5 (Singapore, Thailand, Indonesia, Malaysia and the Philippines) markets despite their bright long-term prospects due to demographic changes and structural advances.
Looking at GDP growth of the Asean-5 — Indonesia, Malaysia and Philippines have been experiencing fairly high and stable growth.
Singapore, being a developed economy, posted lower growth while Thailand experienced volatile growth due to the 2011 floods’ and political turmoil in 2014.
Indonesia, Malaysia and the Philippines are expected to continue their growth trajectories throughout 2019 and 2020, whereas Thailand is expected to have lower growth relative to these three countries.
Singapore is forecast to experience much lower growth due to its status as a developed country.
The Monetary Authority of Singapore (MAS) estimates the Asean-4 (excluding Singapore) could average at least 6% growth if Asean becomes more integrated and structural reforms are implemented to improve productivity and competitiveness.
The GDP growth is not all there is to the story.
The region is the third-largest market in the world and subsequently benefits economically from being an integrated bloc.
The combined population of Asean stands at more than 640 million people, larger than the US and European Union population, with India and China being the two economies larger than Asean.
A report by McKinsey estimates the number of consuming households in Asean is expected to reach 178 million by 2025.
Internet penetration stands at 38.8% across the region and still has room to grow. All these would translate to greater flow of goods and services within the region, thus boosting GDP growth through demographic growth and digitalisation.
To that end, the Asean Economic Community seeks to realise the goal of economic integration in the Master Plan Asean Connectivity 2025 through increasing infrastructure investment, digital innovation, making logistics and people mobility more seamless, and increasing the standard of regulations.
While tariffs on goods have been virtually eliminated, financial integration is still a work in progress.
The Asean Financial Integration Framework (AFIF) was initiated to improve financial integration by 2020 which would complement the masterplan of Asean Connectivity 2025.
The AFIF sets out the following key thrusts: Remove restrictions to the intra-Asean provision of financial services by financial institutions, build capacity and infrastructure
to develop and integrate the capital markets, liberalise the flow of capital across the region, harmonise payments and settlements systems, and lastly strengthen capacity building, regional financing arrangement and regional surveillance.
Banks in Asean play an integral role in bringing financial integration, with the first step being becoming a Qualified Asean Bank (QAB).
A QAB allows an Asean-based bank to be re-classified as a local bank across the economies, giving them preferential treatment over international banks.
This would increase competition and spread of technology like payment systems, thus lowering business costs which are extremely beneficial to small-to-medium enterprises (SME).
Indonesia’s Bank Mandiri has begun operations in Malaysia as a QAB last year, while there are ongoing talks between the Philippines and Indonesia, and Thailand with Malaysia.
Countries such as Cambodia and Myanmar, with low bank account ownership and financial services usage, stand to benefit from financial inclusion with the Asian Development Bank estimating Cambodia could experience a 32% potential boost to its GDP.
For countries with high lending rates, for example Laos at 22.6%, increase in competition could help drive down interest rates, thereby allowing easier access to financing which would help stimulate economic growth.
Financial integration could bring about digitalisation of the Asean economies and allow for a simpler payment system in the region.
For example, digitalisation through e-commerce could open up new markets for SMEs. A recent report by Bain & Co estimates digital integration of the region can bring about US$1 trillion (RM4.1 trillion) uplift in GDP by 2025, which translates to a 40% increase in total Asean GDP.
Currently, Asean’s digital economy contributes about 7% of Asean GDP, a far cry from China’s 16% or 35% in the US.
These frameworks could quicken the process of bringing in more convenient systems like mobile banking and e-payment systems to countries like Myanmar and Vietnam. By introducing seamless cross border digital payment options, Asean countries would benefit through higher intra-regional trade.
As all these are long-term structural changes, investors should have a long investment horizon to ride out the volatility and reap the benefits.
For investors looking to tap into the growth opportunities in the Asean region, one viable avenue is to gain exposure via unit trust funds that are invested in the region.