Strong trade and investment interest-

The ASEAN Economic Community (AEC) was launched in December 2015 and aims to achieve a single market and production base, a highly competitive economic region, equitable economic development and a region fully integrated into the global economy. Recently, the AEC launched a blueprint for 2025, which set out plans for further integration.

This year also marks the 50th anniversary of ASEAN. More than ever, it is an exciting time for ASEAN. Aside from its robust economic dynamics, ASEAN has a relatively young and diverse multilingual talent pool, burgeoning middle-class segment and a strong investment pipeline of infrastructure development projects, which present wide opportunities for investors to participate in economic development.

Global and regional investors remain vested in ASEAN and see it as a sustainable growth nucleus in Asia, despite wider challenging economic externalities. Among emerging markets, ASEAN has in the recent decade become a focal point of global investor interest, with total trade having increased steadily at a compound annual growth rate (CAGR) of 6.4 per cent to $2.3 trillion in 2015.

Underpinning investor interest are the relatively stable economies in the region. ASEAN’s member countries are expected to post healthy gross domestic product (GDP) growth rates of 3-8 per cent over the next five years, and enjoy a CAGR of 5.1 per cent from 2017 to 2021 collectively. Emerging markets – Cambodia, Laos and Myanmar – are expected to expand at a rate of above 7 per cent, while the developing markets of Indonesia, Malaysia, the Philippines and Vietnam are projected to generate a steady CAGR of 5-6 per cent.

Further, ASEAN’s trade linkages are well entrenched with over 230 markets globally. With the AEC policy thrust encouraging regional economic integration, there is an even higher upside for intra-ASEAN trade growth.

In the longer term, the Regional Comprehensive Economic Partnership involving ASEAN, Australia, China, India, New Zealand, Japan and South Korea will help drive further regional trade growth.

Dynamic FDI and deal outlook

A testament to the strength of foreign investor confidence in ASEAN, foreign direct investment (FDI) inflow into the region recorded a double-digit CAGR of 11.5 per cent in the decade up to 2015. While extra-regional investments accounted for over 80 per cent of total FDI, it is noteworthy that the growth rate of intra-regional investment was almost double that of extra-regional FDI.

Nearly two-thirds of the foreign investments were in the services sector, predominantly the financial and insurance segments. The key extra-regional FDI contributors were from the US, Europe and Japan, and these investors and regional titans are expected to remain keen on the region.

Over two-thirds (68 per cent) of the Mergers and Acquisition (M&A) deals in ASEAN from 2010 to 2016 were either intra-ASEAN or inter-Asia-Pacific, reflecting the strong appetite in the region. The most active sectors were consumer, energy and financial services.

In tandem with the surge in FDI and trade activities, the size of ASEAN’s financial system has more than doubled over the past decade. While ASEAN’s total banking assets doubled to nearly $2 trillion, its equity market based on the market capitalisation of the seven bourses tripled to $2.2 trillion.

Growing infrastructure investments

As ASEAN undergoes economic and population growth, the region’s appetite for infrastructure development continues to increase. Infrastructure investments are estimated at $110 billion per annum until 2025. The key areas of infrastructure investment include multimodal transport connectivity to improve logistics efficiency, utilities infrastructure and  ICT projects.

In infrastructure interconnectivity, ASEAN’s transformation to be well connected via enhanced logistic efficiencies will further improve the region’s linkages to the global supply chain and support the growth in trade and tourism activities. Multimodal initiatives covering air (ASEAN Open Skies agreement), rail (Singapore-Kunming Rail Link), sea (ASEAN Roll-On, Roll-Off Shipping Network and Short Sea Shipping) and land (ASEAN Highway Network) will expand intra-ASEAN connectivity.

ICT infrastructure development, as part of building a trusted, secure and resilient digital ecosystem, is vital to improving ASEAN’s economic competitiveness and enabling businesses to transform in the rapidly expanding digital economy. Today’s disruptive operating environment will require both governments and businesses in ASEAN to leverage the right data, tools and systems for predictive insights to identify long-term growth opportunities.

A key cross-border ICT initiative is the SEA-ME-WE 5 submarine fibre optic cable link project that connects ASEAN, the Middle East and Western Europe. The project provides transmission speeds of up to 100 Gbps. In addition, the ASEAN broadband corridor is aimed at providing affordable and universal broadband access in the region.

By 2040, ASEAN’s energy demand will increase by 80 per cent. As such, two flagship projects to safeguard ASEAN’s energy security and sustainability are under way. The projects involve bilateral and regional partnerships to connect and integrate energy grids and gas pipelines across ASEAN. In addition, these projects promote the efficient utilisation, optimisation and sharing of ASEAN’s energy resources.

New tourism opportunities

Enhanced air connectivity is bringing tourism opportunities to the region. According to the World Travel and Tourism Council, ASEAN’s international tourism receipts reached $116 billion in 2015. It is projected that international tourist arrivals will reach 192 million and contribute $223 billion to the region within the next decade. The liberalisation of ASEAN’s aviation sector has eased restrictions on air travel and facilitated the expansion of low-cost airlines in the region, helping drive tourism growth.

It is forecast that ASEAN aircraft fleets may triple in size by 2030, in view of the 3,750 new aircraft orders. This significant growth in fleet size should catalyse the growth of the aviation maintenance, repair and overhaul (MRO) services industry. There are already investment plans to establish and upgrade MRO operations in Singapore, Malaysia, the Philippines, Indonesia, Thailand and Vietnam as regional MRO hubs.

The hotel and hospitality services sector is also poised to benefit from increased travel and tourism. Real estate projects to build new hotels, retail outlets, gaming and recreation centres, as well as upgrade roads and tourist sites are developing across ASEAN’s major destinations.

An investor’s gem

At a time of volatility in various parts of the world, ASEAN may well be the prized ecosystem of certaint, consistent and resilient economic growth. The region is well positioned to be a growth nucleus in Asia, even as China and India continue to power ahead. In the longer term, it is expected that ASEAN’s growth will be shaped by economic policies, regional trade policies, competitive tax incentives, and access to infrastructure financing.

Eng Ping is the EY Asean Managing Partner for Tax and heads the Transaction Tax unit in Malaysia. She has 20 years of experience in professional services, including tax services, and advocates at tax appeals before the Special Commissioners of Income Tax. She is proficient in M&A work and Malaysian inbound and outbound investments. Her clients include private equity funds and multinational corporations. Eng Ping plays an active role in thought leadership and regularly contributes articles on tax. She has written on topics such as tax administration and incentives in Malaysia and structured finance products including Islamic finance. She also speaks regularly at tax seminars.

The views in this article are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms.