Preferred region for investment-

The ASEAN region has a population of over 620 million people and is the third largest combined market in Asia. The region is expected to remain resilient, with emerging Southeast Asian economies growing at approximately 5 per cent to 7 per cent. Amidst the global economic slowdown, ASEAN remains a promising region for trade and investments with sound economic fundamentals. China continues to play a dominant role in providing infrastructure finance to Southeast Asia, given the latter’s economic and strategic importance to China, through various channels including the  Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund, and the “One Belt One Road” initiative.

ASEAN performance vis-à-vis global growth

The global economy showed signs of dynamism in the second half of 2016, which have been sustained in early 2017. The sustained, albeit relatively slow, expansion in the US, the Euro Area, and Japan has been accompanied by better-than-expected growth in the UK, Brazil and Russia. This revival in activity has led to a pickup in global trade, leading to a recovery in commodity prices; that said, commodity prices remain low by historical standards.

Amidst this scenario, the ASEAN region has exhibited strong growth and outperformed most of the developed economies on the back of robust domestic demand, pro-investment policies, and increased infrastructure spending. In 2016, the region posted healthy economic data, with moderate-to-good GDP growth and relatively low inflation. In Vietnam, the GDP growth picked up by more than 1 percentage point in the second half of 2016, to reach 6.7 per cent (year on year) in the fourth quarter of 2016. In the Philippines, after six quarters of acceleration, GDP growth rate moderated to a still very high 6.6 per cent in fourth quarter of 2016. In Malaysia, GDP growth held up, as rising minimum wages and civil servants’ salaries supported private consumption. Cambodia continued to expand rapidly as agriculture recovered from the drought in 2016.

Global uncertainty and domestic vulnerabilities, however, still pose risks to Southeast Asia’s prospects. In the wake of interest rate hikes in the US, protectionist sentiments in some advanced economies, and rapid credit expansion and high levels of debt in several Southeast Asian countries, policymakers continue to focus on prudent macroeconomic management and ensuring sustainable fiscal balances in the medium term.

Growing thrust on infrastructure

Governments in Southeast Asia are ramping up spending on infrastructure. Countries including Thailand, Malaysia and the Philippines are boosting budgets for railway, road and other infrastructure projects to help bolster growth in a region facing uncertain global markets and the threat of a US trade pullback.

Laos: According to World Bank forecasts, the GDP is expected to increase to 7 per cent in 2017 on the back of investment in the power sector and deeper integration with the ASEAN region. This is in line with the country’s aim of providing electricity to 10 per cent of households by 2020 and possibly exporting it as well.

The Philippines: The World Bank has estimated the country’s GDP to expand at 6.9 per cent in 2017, a major fillip being received by the development of expressways. Public spending on infrastructure is slated to reach a high of $17.7 billion, over 5 per cent of the GDP. The country’s growth will be bolstered by the expected faster and effective roll-out of tax reforms, government infrastructure projects and public-private partnership (PPP) projects.

Cambodia: The World Bank forecasts the $19.4 billion economy to expand at 6.9 per cent in 2017, with the major growth drivers being sizeable foreign direct investment into the real estate and construction sectors.

Indonesia: Higher government infrastructure spending will be the main engine of growth for 2017 and private consumption is expected to increase further. Indonesia’s GDP growth recovered in 2016, averaging 5 per cent in the first three quarters of 2016, up from 4.8 per cent in 2015. The GDP is forecast to rise to 5.2 per cent in 2017. The government will focus on accelerating infrastructure development by improving private participation up to 40 per cent through PPPs.

Thailand: Thailand’s economy is poised for modest growth in 2017 as the government has earmarked higher spending on infrastructure, especially for transportation, and substantial domestic spending is expected to offset weak export growth. The cabinet has recently approved an infrastructure action plan worth THB 895.8 billion ($25.2 billion) for 2017 that includes 36 infrastructure projects covering rail, roads, air transport and ports throughout the country. Public investment, particularly in transport projects, is expected to drive GDP growth in 2017.

Malaysia: The country’s construction growth is invigorated by the ongoing infrastructure projects, such as the Pan-Borneo Highway and Sungai Buloh-Serdang-Putrajaya Line. Other mega projects in the pipeline include the East Coast Rail Link and the Kuala Lumpur-Singapore High Speed Rail.

Outlook

Growing middle-income classes, increasing regional integration propelled by the ASEAN Economic Community (AEC) and a strong connection to China’s growth engine are set to fuel growth in Southeast Asia. The infrastructure gap in Southeast Asia, which presents room for greater investment opportunities, is projected to require annual financing equal to 5.7 per cent of the GDP until 2030. Multilateral funding, coupled with higher private investment, will help in bridging the financing gap. Greater budget allocations for infrastructure in most Southeast Asian countries and pro-investment policies signify the governments’ thrust on infrastructure development, a factor crucial for attracting foreign investment.

Although backed by strong domestic demand and increased public spending on infrastructure, the ASEAN region must brace itself for a series of potential shocks from across the globe, particularly from the US, China and Europe. From the US, a tightening of monetary policy, a shift towards protectionist trade policies and expansionary fiscal policies could hurt the international flow of capital. ASEAN needs to closely monitor China’s financial stability as credit growth remains high and the country is striving to recover from the economic slowdown. Political developments in Europe, including the uncertainties of Brexit and the rise of Euro scepticism in the Netherlands and France, could hit world trade volumes. Finally, the recent increases in the price of oil, liquefied natural gas and refined petroleum products threaten to push up inflation in ASEAN. However, the favourable demographics of Southeast Asian countries will help attract investments as long as these countries continue to remain stable. American protectionism, to the extent that it slows down global trade, will not derail these fundamentals.