ASEAN: Finding Growth in a
Slowing Global Economy
Beyond China and India, Asia’s global heavyweights, the continent
harbors yet another dynamic and fast-growing region that remains
relatively unknown: the 10-nation grouping known as ASEAN, or the
Association of South East Asian Nations.
Formed in 1967 to promote regional solidarity and cooperation, and to
collectively leverage its influence in regional affairs, the grouping is broadly
separable into two blocs: “ASEAN-6” and “CLMV”— Cambodia, Laos,
Myanmar and Vietnam. The more developed ASEAN-6 comprises Singapore,
Malaysia, Thailand, Indonesia, the Philippines and Brunei. Meanwhile, the
CLMV bloc shares the same characteristics of rapid growth, but tends to be at
an earlier stage in its economic development.
Despite the collective categorization implicit in the grouping, ASEAN nations
are highly diverse. This diversity ranges from distinct ethnicities and cultures,
varied languages and religions, different stages of economic development and
stages of demographic cycles to a wide range of political governance.
However, when looked at collectively, the region’s long-term potential
becomes more apparent. If ASEAN were a single economy, it would be the
world’s seventh-largest today. With its dynamic demographics, rising labor
force and productivity-enhancing structural transformation, urbanization,
and increased regional integration, we believe there are significant opportuni-
ties in this space awaiting discovery by the entrepreneurial active investor.
September 2016
Sriyan PieterszInvestment StrategistMatthews Asia
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ASEAN: Finding Growth in a Slowing Global Economy
Southeast Asia has made strong, if uneven, progress in the
nearly half century since ASEAN was founded, with the
region growing at an average annual pace of approximately
6% over the past decade. The region covers over 4.4
million square kilometers, more than half the size of the
continental United States.
Looking forward, ASEAN is poised to make further strides
by leveraging some key attributes: a population of over 630
million people (the third-largest population globally), a
potential market larger than the European Union or North
America, and a strategic location between Asia’s two economic
giants—India and China. As a foreign direct investment
(FDI)-driven manufacturing base second in scale globally only
to China, increasing intra-regional trade and global linkages
are fueling income growth. This, together with a young
population that is increasingly entering the workforce, and
migrating from rural areas to urban centers, makes ASEAN one
of the fastest-growing consumer markets in the world.
The region’s interconnectedness has taken another step
forward in 2016 with the inception of the ASEAN Economic
Community (AEC), which aims to promote freer movement
of goods, services, skilled labor and capital. Over time, this
should help the region leverage its natural advantages through
more connective infrastructure and improved opportunities
for its population and workforce, and by better harnessing
synergies among its 10 members. While the AEC will increase
regional integration over time, understanding the complexity
and the diversity of the region is critical to successful
investing, in our view. In the discussion, we highlight key
characteristics and long-term trends in ASEAN, and conclude
by illustrating the importance of active investing to try to
capture the region’s abundant potential growth opportunities.
ASEAN: HIGHLY DIVERSEThe standard deviation in average incomes among ASEAN
countries is more than seven times that of the E.U. members,
with the diversity extending to language, culture and
religion, according to McKinsey Global Institute (MGI). For
example, Singapore, a small island state of just 5.6 million
enjoys developed nation status with per capita income of
US$53,000, while Myanmar’s 54 million people who are
emerging from 50 years of isolation under military rule, have
per capita income of just US$1,200. Indonesia, formerly a
Dutch colony, is the largest Muslim nation in the world, with
a population of 258 million, while Thailand, where 95% of
the population is Buddhist, enjoys the distinction of never
having been colonized by outside powers.
To put the diverse stages of economic development into
context, it is interesting to look at where the 10 Southeast
Asian nations are distributed along China’s growth curve in
terms of per capita GDP. Figure 2 shows that Cambodia and
Myanmar, with per capita GDPs similar to China in 1994,
are the grouping’s least-developed members. Meanwhile, the
small city-states of Singapore and Brunei have “developed
nation” status with per capita GDP in the US$35,000 to
US$55,000 range.
Vietnam
Thailand
Cambodia
Malaysia
Philippines
Myanmar
Singapore
Laos
Indonesia
Brunei
FIGURE 1. THE 10-MEMBER NATIONS OF ASEAN
Source: ASEAN Secretariat
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ASEAN: Finding Growth in a Slowing Global Economy
Politically, ASEAN runs the gamut from pluralistic democra-
cies to authoritarian states. The Philippines recently elected
Rodrigo Duterte, its first president from outside the nation’s
capital of Manila. Duterte hails from the tiny city of Davao
in Mindanao in the underdeveloped South—a testament to
the democratic process. Thailand, in contrast, is controlled
by a military government that took control in May 2014
in the country’s 12th bloodless coup d’état, while Vietnam
is under single-party Communist rule. In common with
China, however, all ASEAN countries have market-oriented
economic systems, with Myanmar the most recent entrant
to the club.
POLITICAL CHALLENGES
To be sure, internal political issues can pose long-term
challenges within ASEAN. In Vietnam, the Communist
Party’s single-party model remains the sole such example
in Southeast Asia, and the country’s solid economic growth
has helped to cushion dissent. But the young and well-ed-
ucated population is increasingly carving out greater civic
space, with activism against environmental issues, caused
by rapid industrialization, providing a platform for greater
political participation.
Elsewhere in the region, there have been simmering ethnic
and religious insurgencies and political rifts caused by
rising income inequality. Both the Philippines and Thailand
have been struggling with long-running, but slow-burning,
insurgencies in their southern regions. Islamist militant
groups in Mindanao have agitated for independent gover-
nance for decades, largely motivated by a lack of economic
opportunity. Despite President Duterte’s plans to enter into
dialogue with the rebels, he recently declared the country
under a “state of lawlessness” following a lethal explosion
at a night market in his home town. The tough-talking
president’s recent diplomatic row with U.S. President Barack
Obama and calls to abruptly depart from a U.S.-Philippine
military alliance exemplify the sort of unpredictable polit-
ical risks that can unnerve markets.
Thai politics have also been tumultuous for years, driven
largely by an underlying rift between its largely urban
middle class and more rural and populous areas to the
north, which have sought a greater share of political power.
The unrest involving ethnic Malay Muslim insurgency
calling for independence has smoldered in the south for
some time. The military government’s push toward a
“guided democracy,” starting with general elections sched-
uled for 2017, may provide some interim stability. In both
Thailand and the Philippines, government authorities are
seeking deeper political engagement with insurgents—a
move that may help to defuse tensions over time.
Geopolitically, as China flexes its muscle as an emerging
global power, it also poses a potential threat to stability and
unity of East Asia. It has demonstrated increasing assertive-
ness over maritime disputes with the Philippines, Vietnam,
Malaysia, Brunei and Indonesia in the South China Sea.
While China’s actions have increased tensions with ASEAN
states, it also raises the potential for heightened geopolitical
competition between China and the U.S. as the latter strives
to retain its traditional sphere of influence in East Asia.
DEMOGRAPHICS ARE ATTRACTIVE
Not only is the population of ASEAN the third-largest in
the world, it is also among the youngest (Figure 3). In 2015,
52% of the combined population was under the age of 30,
second only to India. Demographics will stay attractive over
the next 15 years, with the under-30 population expected
to ease modestly to 45% by 2030, according to the United
Nations Population Division, Department of Economic and
Social Affairs (UNPD). The importance of the region’s young
FIGURE 2. ASEAN IN THE CONTEXT OF CHINA’S GDP PER CAPITA EVOLUTION
Sources: International Monetary Fund, World Economic Outlook Database, April 2015
China’s GDP per capita
GDP per capita GDP (US$)
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
Dec-15Dec-05Dec-1995Dec-1985Dec-1980
Myanmar,Cambodia
LaosVietnam
Philippines
Indonesia
Thailand
MalaysiaSingapore, Brunei
FIGURE 3. PROPORTION OF POPULATION UNDER AGE 30
Source: United Nations Department of Economic and Social Affairs, Population Division, 2015
2015 2030 estimate
0%
10%
20%
30%
40%
50%
60%
JapanEuropeU.S.ChinaASEANIndia
4
ASEAN: Finding Growth in a Slowing Global Economy
population is that steady growth of the workforce can be
expected, with UNPD estimating stable annual workforce
growth of 0.9% from 2015 to 2030. This compares to China,
Europe and Japan, where the working populations are
projected to contract annually by -0.3%, -0.6%, and -0.7%,
respectively, during the same period.
Within ASEAN, the disparity in population age is wide
(Figure 4). Broadly, the more developed ASEAN countries
are more aged. Singapore is most senior with a median age
of 40, followed by Thailand at 38. The CLMV block ranges
from Vietnam’s 30.4 year median age to Laos’ dewy 22,
pointing to years of potentially strong growth ahead as the
earning power of these young populations is realized. The
labor engine that is CLMV can also help to power the more
FIGURE 5. FOREIGN DIRECT INVESTMENT INFLOWS INTO ASEANValue (US$ million) Share to total inflows (%)
Country or region1 20133 2014 2015* 20133 2014 2015*
ASEAN 19,562.2 22,134.5 22,149.0 15.7% 17.0% 18.5%
European Union (E.U.) 24,511.3 24,989.9 19,666.5 19.6% 19.2% 16.4%
Japan 24,750.2 15,705.4 17,395.2 19.8% 12.1% 14.5%
U.S. 7,157.2 14,748.5 12,191.5 5.7% 11.3% 10.2%
China 6,426.2 6,990.1 8,155.3 5.1% 5.4% 6.8%
South Korea 4,303.3 5,750.7 5,680.2 3.4% 4.4% 4.7%
Australia 2,587.7 6,281.5 5,193.0 2.1% 4.8% 4.3%
Hong Kong 5,251.2 9,813.2 3,621.1 4.2% 7.5% 3.0%
Taiwan 1,381.8 3,253.9 2,646.4 1.1% 2.5% 2.2%
New Zealand 335.9 550.0 2,241.1 0.3% 0.4% 1.9 %
Total Top 10 sources 96,267.1 110,217.7 98,939.3 77.1% 84.8% 82.5%
Others2 28,597.4 19,777.4 21,035.5 22.9% 15.2% 17.5%
Total FDI Inflow to ASEAN 124,864.5 129,995.1 119,974.8 100.0% 100.0% 100.0%
* Preliminary estimates Details may not add up to totals due to rounding off. 1 Ranked according to FDI inflows in 2015; covers countries for which data is available. 2 Include inflows from all other countries, as well as total reinvested earnings and debt instruments in the Philippines. 3 Lao PDR’s data on “by source country” for 2013 is not available, intra-/extra-ASEAN breakdown shown are estimated.Source: ASEAN Foreign Direct Investment Statistics Database as of 30 June 2016 (Data is compiled from submission of ASEAN Central Banks and National Statistical Offices through the ASEAN Working Group on International Investment Statistics (WGIIS).
aged countries in ASEAN, particularly Thailand, which
shares borders with Cambodia, Myanmar and Laos.
FDI AND TRADE ARE IMPORTANT GROWTH DRIVERS
Trade has been a consistently important driver of economic
growth, with its linkages to the manufacturing sector and
domestic employment helping to kick-start income and
consumption activity. This has in turn been sparked by
strong foreign direct investment flows attracted by advanta-
geous labor cost differentials and a motivated and trainable
workforce. The shift of agricultural labor, which comprises
about 40% of the ASEAN workforce (in comparison to
less than 10% in developed countries), into more skilled
manufacturing tasks is creating productivity gains that are
driving income growth.
ASEAN’s share of global FDI surged to 11% in 2014, from under
2% in 2000. In recent years, ASEAN itself has become the
top investor in the region, contributing an estimated US$22.1
billion (18.5%) of total FDI in ASEAN in 2015. The next three
biggest investors were the European Union (16.4% of total
FDI), Japan (14.5%), and the U.S. (10.2%). China’s investment
in ASEAN has become more dynamic, growing from US$6.4
billion in 2013 to US$8.2 billion in 2015 (Figure 5).
Japan has played a vital role in ASEAN FDI, with the Japan
Bank for International Cooperation (JBIC) spearheading
ASEAN infrastructure investment over the last decade. As of
fiscal 2014–15, the bank had ¥1.6 trillion in assets and equity
across 343 projects in ASEAN, over 11% of its balance sheet
FIGURE 4. MEDIAN AGE OF ASEAN POPULATION
Source: United Nations Department of Economic and Social Affairs, Population Division, 2015
ASEAN nations
LaosCambodiaPhilippinesIndiaMyanmarIndonesiaMalaysiaVietnamChinaThailandSingaporeSouth KoreaHong KongJapan 46.5
43.2
40.6
40.0
38.0
37.0
30.4
28.5
27.9
26.6
24.2
23.9
28.4
21.9
5
ASEAN: Finding Growth in a Slowing Global Economy
(Indonesia received nearly 50% of the total), according to the
Financial Times (FT). These investments create a virtuous
circle, with better infrastructure helping to draw in addi-
tional investment from Japanese corporates, especially in the
least developed parts of ASEAN.
Today, ASEAN accounts for 7% of global exports, with a
well-diversified export base (Figure 6). The more open econ-
omies of Singapore, Malaysia, Thailand and Vietnam, where
exports have a greater than 70% share of GDP, are focused
primarily on higher value manufactured exports, while
the more domestically oriented Philippines and Indonesia
export a larger proportion of commodities, both agricultural
and mineral.
ASEAN is increasingly the heir to China as a global export
base, as documented in the flow of FDI (Figure 7). Since 2002,
when FDI into ASEAN was US$17 billion and accounted
for just 32% of flows into China, FDI has surged to US$126
billion in 2015, 93% that of China, according to the United
Nations Conference on Trade and Development (UNCTAD).
Formerly a key competitor, China is turning into a customer
for ASEAN. Following the ratification of the ASEAN-China
Free Trade Area agreement in 2002, ASEAN-China bilateral
trade has soared. From 9.1% of the value of total ASEAN
trade in 2003, bilateral trade jumped to 19.1% in 2014,
according to the Economist Intelligence Unit (EIU).
China has been ASEAN’s biggest trading partner for the past
seven years, with trade value on track to total US$1 trillion
by 2020.
An interesting development is the rapid growth in services
exports to China, predominantly through tourism. ASEAN
complements an emerging Chinese middle class; as China’s
middle class consumers increase their expenditure on leisure,
the impact on recipients of tourism flows has been nothing
short of transformational (Figure 8). Thailand is a case in
point: Chinese arrivals to Thailand have increased ten-fold
in six years from 2009–2015, pushing direct tourism income
from 6.2% of GDP to nearly 8% of GDP and providing vital
support to a slowing domestic economy.
Looking forward, ASEAN remains well-positioned to benefit
from an eventual recovery in global demand. Participation
in free trade agreements such as the Trans-Pacific Partner-
ship (TPP) and the Regional Comprehensive Economic
Partnership (RCEP) are already drawing in new FDI aimed
at increasing backward integration to comply with more
stringent rules of product origin. This will deepen ASEAN’s
linkages with the global supply chain and make its competi-
tive position as a manufacturer for the world more durable.
It must be noted that much of the region’s growth to date
has been driven by increasing factor inputs (more people
entering the workforce and investment in capital stock) and
by transformational benefits of shifting from low produc-
tivity agricultural work to higher productivity manufacturing
and services. Overall productivity levels remain low, and
5.4%
5.8%
6.2%
6.6%
7.0%
7.4%
0%
2%
4%
6%
8%
10%
12%
2000 2002 2004 2006 2008 2010 2012 2014
FIGURE 6. ASEAN’S SHARE OF GLOBAL EXPORTS AND FDI
Source: UNCTAD
ASEAN share of global FDI (LHS) ASEAN share of global exports (RHS)
FIGURE 7. ASEAN VS. CHINA FDI
Source: UNCTAD
China FDI ASEAN FDI
0
20
40
60
80
100
120
140
160
1990 1995 2000 2005 2010 2015
US$ Billion
FIGURE 8. CHINESE TOURIST ARRIVALS IN THAILAND
Source: Thailand Department of Tourism
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
20152010200520001997
Thousands
6
ASEAN: Finding Growth in a Slowing Global Economy
the region’s challenge is to raise output per worker levels to
continue to attract new FDI flows and sustain income growth.
The recent trend of “near-shoring” or relocation of manufac-
turing back to source countries is a potential threat to lower
value-added producers in ASEAN. We believe that domestic
markets with adequate scale may be able to avoid the loss
of export manufacturing. Only time will tell, but ASEAN’s
strategic location next to China and India (making up a 3.3
billion-strong market) and resulting low distribution/logis-
tics costs may outweigh the cost savings of automating/near-
shoring manufacturing plants back to the developed market
locations of multinational manufacturers.
“BOOTSTRAPPING” ASEAN— RISING INTRA-REGIONAL GROWTH POTENTIAL
Amid concerns over sluggish external growth trends, ASEAN
offers strong potential for regionally generated growth. The
inception of the ASEAN Economic Community (AEC) this
year will further ease barriers to intra-regional trade, invest-
ment and employment, while concerted fiscal spending on
infrastructure will have significant medium-term benefits
for the region.
Intra-ASEAN trade has been more resilient against a recent
trend of weaker trade (Figure 9). Since 2003, about 25% of
the region’s exports have gone to other ASEAN partners.
Thailand is now eyeing its CLMV neighbors to help offset
shrinking shipments to key market destinations, aiming to
boost exports to these markets by nearly 14% this year. Thai
exports to the CLMV bloc currently account for over 10% of
the country’s total, underlining their importance as trading
partners. The Thai Commerce Ministry predicts that Thai
exports to CLMV will reach US$25.3 billion this year.
Similarly, intra-ASEAN investment has grown as a share
of FDI into ASEAN as more mature economies such as
Singapore, Thailand, and Malaysia seek to leverage their
faster-growing neighbors (Figure 10). Intra-regional FDI,
coming mainly from the more developed ASEAN-6,
comprised an average 17% of total FDI flows between
2008 and 2014 as against an average of 13% from 2001-07,
according to the ASEAN secretariat.
Intra-ASEAN employment mobility, although officially
restricted to eight professions under the AEC, already offers
a growth pathway for less-developed ASEAN countries via
overseas worker remittances, both official and unofficial.
The contributions are non-trivial, with remittances having
increased household income in Cambodia and Laos by 59%
to 120%, according to a 2010 International Labor Organiza-
tion study by Deelen and Vasuprasat. The economic benefits
are not a one-way street: countries with older demographic
profiles such as Singapore and Thailand are manning
construction, fishing and increasingly manufacturing indus-
tries with the influx of young and lower cost labor from
Myanmar and Cambodia, in particular.
URBANIZATION AND THE RISE OF A CONSUMER CLASS
ASEAN’s population is still largely rural. Farming/
agriculture accounts for a significant portion of labor force
employment, with the exception of the highly developed
city-states of Singapore and Brunei. As FDI drives increasing
manufacturing for both export and domestic markets,
more and more workers are recruited away from low value-
added agricultural work to higher value manufacturing and
assembly jobs.
FIGURE 9. ASEAN TRADE STATISTICS
Source: ASEAN Secretariat
Total trade
0
500
1,000
1,500
2,000
2,500
3,000
20152010200520001993
US$ BillionBeginning of AFTA(ASEAN Free Trade Agreement)
Beginning of ATIGA(ASEAN Trade in Goods Agreement)
Extra-ASEAN
Intra-ASEAN
FIGURE 10. INTRA-ASEAN NET FDI INFLOWS
Source: ASEAN Secretariat
US$ Million
0%
5%
10%
15%
20%
25%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Intra ASEAN net FDI in�ow (LHS) % of net total FDI in�ow into ASEAN (RHS)
$0
$10,000
$5,000
$15,000
$20,000
$25,000
7
ASEAN: Finding Growth in a Slowing Global Economy
This structural transition from primary sources of activity
to secondary manufacturing and tertiary services activities
is a key driver of productivity in ASEAN, helping to
boost incomes and raise large proportions of the regional
population up the income ladder. As they move to factories,
urbanization rates rise, creating agglomerations of people
and network effects that reinforce consumption activity,
and in turn generate more job and income opportunities.
In ASEAN, the urbanization rate is expected to grow 5.3
percentage points in the next decade (vs 3.7 percentage
points for the global average), according to the UNPD
(Figure 11).
Currently, there are 235 cities spread across ASEAN with
populations greater than 200,000. Just over one-third of
the ASEAN population lives in these cities, which generate
two-thirds of the region’s GDP, according to MGI. MGI
expects that over 90 million more people could migrate
to these cities by 2030, taking their GDP share to three-
fourths of the ASEAN total.
With the increasing trend of urbanization, ASEAN has a
large and rising base of new consumers. Rising productivity
and wages are creating a growing consumer class that
demands discretionary purchases, from washing machines
and cars to leisure activities and travel. The number of
households at or above the middle income threshold of
over US$7,500 (in 2005 PPP terms), where discretionary
consumption begins to rise, could double to 163 million in
2030, driven by Indonesia, according to MGI (Figure 12).
This emerging consumer class will galvanize demand for a
wide range of goods and services. Penetration rates are low
for consumer durables and discretionary services such as
health care, and can be expected to follow the trajectory
of more developed economies as per capita incomes rise
(Figure 13).
The housing requirements generated by this massive wave
of urbanization are large. ASEAN needs an estimated
US$3.1 trillion in residential housing development over
the next two decades with over half of it concentrated in
Indonesia and the Philippines, according to MGI.
The deepening penetration of technology in ASEAN, helped
by the young and technologically savvy demographic profile,
FIGURE 11. URBANIZATION RATE AND GROWTH
Source: United Nations
2% 4% 6% 8% 10% 12%20%
40%
60%
80%
100%Northeast Asia
Australasia
U.S. and Canada
Latin AmericaWestern Europe
Global average
Eastern andCentral Europe
Middle East andNorth Africa
China
Southeast Asia
Sub-Saharan Africa
South Asia
Urbanization Rate (2015)
% of Incremental Urbanization Expansion in the Next Decade
FIGURE 13. ASEAN HEALTH CARE EXPENDITURE
Source: World Bank, data as of 2014
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,5000%
2%
4%
6%
8%
10%
12%
Costa Rica
BrazilNew Zealand
Korea
South Africa
Japan
Singapore
UAE
Qatar
Health Care Expenditure as % of GDP
Health Care Expenditure as Per Capita
U.K.
Kuwait
Cambodia
MexicoTurkey
Average EM
VietnamChina
Thailand
PhilippinesMalaysia
IndonesiaLaos
Myanmar
SaudiArabia
Oman
FIGURE 12. ASEAN CONSUMING CLASS HOUSEHOLDS, 2013–2030*
*De�ned as households with more than US$7,500 in annual income (in 2005 purchasing power parity terms).This is the income level at which households begin to make signi�cant discretionary purchases.
Source: McKinsey Global Institute
2013 2030 estimate
0 45 90 135 180
Laos
Singapore
Cambodia
Malaysia
Myanmar
Thailand
Vietnam
Philippines
Indonesia
ASEAN 81
163
3474
1123
1021
203
9
6
13
9
13
12
11
Millions
8
ASEAN: Finding Growth in a Slowing Global Economy
is also facilitating growth of consumption (Figure 14). Factors
such as improved telecom coverage, deeper smartphone
and internet penetration, as well as low penetration rates for
big-box retailers who experience access difficulties due to the
archipelagic geography of Indonesia and the Philippines, are
likely to accelerate ASEAN e-commerce trends even in advance
of increased urban concentrations.
Southeast Asia is the world’s fastest-growing online market,
with internet usage growing at a compounded annual
growth rate of around 14% over the past five years. The
established user base of 260 million in ASEAN-6 is forecast
to grow to 480 million by 2020 with 3.8 million users
added every month, according to a recent report issued by
Google and Temasek. Social media has also gained wide
acceptance, with 36% of adults across ASEAN having a
Facebook account. E-commerce and mobile commerce are
also set to follow the broader Asian trend, with the poten-
tial to turbocharge consumption patterns among ASEAN’s
emerging spenders. For example, more than 8% of all retail
sales in China are now made online, and are forecast to
double to 16% by 2018, according to the EIU.
The first-hand e-commerce market is thus expected to
reach about US$88 billion in value by 2025, significantly
outgrowing off-line retail (32% vs. 7% 10-year CAGR).
Just as the number of China’s outbound tourists has grown
exponentially in recent years, overall, ASEAN’s market for
leisure is also rising with its disposable income. Nowhere is
this more evident than in the newfound taste for air travel.
As a combined region, ASEAN’s international tourist arrivals
grew at the fastest pace in the world over the past decade,
generating US$108 billion in receipts in 2015.
And much of this expenditure stays within the region—47%
of arrivals in ASEAN were from other ASEAN countries in
2014, according to the ASEAN Secretariat.
STRATEGIC LOCATION
While ASEAN offers a large captive domestic market
to its own members, its strategic geographical location
allows access to two even larger markets with a combined
population of nearly 2.7 billion: China to the northeast
and India to the west.
ASEAN’s linkages with China are deep, with exports to
China comprising a significant share of GDP, from 13.8%
in Singapore to 8.2% in Malaysia (Figure 15). As China’s
economic structure evolves to a more domestically driven
model, imports from ASEAN will likely fall. However, this
is now being compensated by increased exports of services
from ASEAN to China, coming mainly in the form of rising
tourism flows.
India remains a largely untapped market to date for
ASEAN, but as India’s per capita income ramps up, import
demand is likely to rise following China’s prior trajectory
(Figure 16). ASEAN is well-placed to supply this market,
given common borders to the west of Myanmar.
FIGURE 15. ASEAN: EXPORTS TO CHINA BY CATEGORY
Source: CEIC, June 2016Commodities Manufacturing
0%
2%
4%
6%
8%
10%
PhilippinesIndonesiaMalaysiaThailandSingapore
% GDP
FIGURE 14. ASEAN MOBILE COMMERCE
Source: consumerbarometer.com, as of August 23, 2016
20% 40% 60% 80% 100%10%
20%
30%
40%
50%
60%
70%
80%
90%
Thailand
Singapore
South KoreaMalaysia
Taiwan
Philippines
Vietnam
Japan
Australia
U.S.
India
Indonesia
Smartphone Penetration Rate
China
Hong KongU.K.
Consumers Who Researched or Made Purchases Via Smartphone
9
ASEAN: Finding Growth in a Slowing Global Economy
In this context, infrastructure and logistical linkages are
critical. ASEAN as a whole needs to invest an estimated
US$110 billion per year in infrastructure by 2025,
especially for roads and railways, according to UNCTAD.
At present, ASEAN countries have a combined average of
10 kilometers of roads per 1,000 persons, compared to the
OECD countries’ 200 km, while railways average about
0.25 km per 1,000 people in ASEAN compared to the
OECD’s 5 km.
To address these deficits, key land, water, maritime and
air linking infrastructure plans are being implemented
under the ASEAN Economic Community integration.
With a length of 38,400 km and 23 designated routes, the
ASEAN Highway Network (AHN) will play a major role in
facilitating the movement of goods among ASEAN member
states and neighboring countries, according to the ASEAN
Secretariat’s Master Plan on ASEAN Connectivity.
A second ambitious project, aimed at linking ASEAN to
China in the North and East, is the Singapore-Kunming
Rail Link (SKRL). The SKRL consists of a main Singa-
pore-Malaysia-Thailand-Cambodia-Vietnam-Kunming
route, with spurs between Thailand and Myanmar and
Thailand and Laos. In all, the rail route would run a stag-
gering 7,000 km, with a potential future spur extension to
Surabaya in Java via Singapore or Malaysia.
Maritime infrastructure is also important, as a large part
of ASEAN is archipelagic (Indonesia and the Philippines),
and sits astride a major global transshipment route in the
Straits of Malacca. Forty seven new ports are designated to
improve shipping services across the region by 2030, with
only Singapore and Malaysia currently at full developed
status, according to the Japanese International Cooper-
ation Agency (JICA). The improvement of the maritime
network will add further nodes to intra-ASEAN and inter-
ASEAN trade flows, while reducing transportation costs to
provide ASEAN with significant cost advantages in a highly
competitive global trade arena.
ASEAN IS NOT THE E.U.
Following the recent decision of Britain to leave the Euro-
pean Union and with other potential exits hanging in the
balance, questions may be raised about the future of ASEAN.
It is important to note the differences between the E.U.
and ASEAN in degree of integration. In a regional union
continuum that can be defined in five stages such as a free-
trade market; a common market; standardization of customs
regulations; a common currency; and supranational union
covering all aspects of integration, ASEAN is still at second
base while the E.U. has progressed well into the fourth stage.
ASEAN does not incorporate currency union, nor does it
yet allow free labor mobility across borders. The former
has never been envisaged, given that the more developed
ASEAN nations have highly open economies and would
not consider relinquishing control of their respective
currencies, not to mention that the single currency has
proven to be the source of many of the E.U.’s problems.
The latter, which entails free migration across the E.U., was
perhaps the most influential point in the Brexit decision.
The AEC, in contrast, facilitates freer movement of only
eight professions: engineers, nurses, architects, surveyors,
accountants, medical practitioners, dentists and tourism
professionals. Even so, the cross-border movement in
these eight areas has been constrained by professional
certification standards that have yet to be aligned across
countries. Thailand, for instance, requires outside doctors
to be locally certified before being allowed to treat patients.
Given the ASEAN member countries’ varied histories and
strong sense of individual sovereignty, regional “harmo-
nization” rather than full integration may prove to be the
long-term result. Such nuanced integration may be more
durable and less subject to internal stresses, in our view.
Despite its more nuanced approach, the AEC has generated
benefits for the region as a whole. Prior tariff cuts and
market integration that have come with the AEC stage
have helped to highlight the potential of the region’s over
630 million-strong market to direct investors, drawing in
fresh flows of FDI that continue to increase employment,
upgrade technology, boost productivity, and deepen
ASEAN’s integration with global supply chains.
FIGURE 16. ASEAN TRADE WITH CHINA AND INDIA
Source: ASEAN SecretariatASEAN-China trade % of intra-ASEAN trade ASEAN-India trade % of intra-ASEAN trade
25%
50%
75%
20152013201120092007200520032001
10
ASEAN: Finding Growth in a Slowing Global Economy
RISKS AND OPPORTUNITIES
Earlier in this commentary, we discussed the risks that
can come with unexpected political and geopolitical
developments. Here, we outline some other potential risk
factors that we are often asked about, including slowing
growth from China.
While ASEAN countries have benefited from China’s
strong and sustained investment-driven growth model
in recent decades, China’s economic rebalancing toward
a consumption-driven model may have spillover effects
that affect ASEAN. Key transmission channels of China’s
slowdown are trade, commodities and financial markets,
although the latter is most significant for Singapore,
a regional financial center. Trade in investment-
related goods and intermediate components as well as
commodities represent the bulk of ASEAN’s exposure
to China. Exports to China, as a proportion of GDP,
vary substantially across the region, given differences
in “openness to trade,” from 17% of GDP for Singapore
to just 2% for Indonesia. Net commodity exporters in
ASEAN, such as Indonesia and Malaysia, have been
negatively affected as prices and volumes have fallen
on lower demand from China. Even net commodity
importers, such as Thailand, have some exposure to
commodity price shocks due to a large agricultural sector
and high farming industry employment.
That said, there are also opportunities for ASEAN in
China’s growth rebalancing, as imports shift away from
investment and toward consumption goods. A recent
paper from the IMF finds that ASEAN economies are
gaining market share in China’s consumption imports,
which could grow over time to supplant former industrial
export losses. Further, the rise of the Chinese middle class
is driving increasing demand for services and growth in
travel and leisure trends.
DEALING WITH DISASTER
Geographically, ASEAN is considered to be one of the more
disaster-prone regions in the world—situated along an area
known for its tectonic activity called the “Ring of Fire” that
is subject to earthquakes, tsunamis and volcanic eruptions.
It is also located between the Pacific and Indian oceans,
giving rise to convection effects that cause seasonal tropical
cyclones and intermittent drought and flood cycles. Natural
disasters often surpass the ability of individual countries to
manage them, such as in the case of the 2004 Indian Ocean
tsunami that decimated the region following an underwater
earthquake off the coast of Indonesia. ASEAN’s collective
efforts to manage this risk led to a legally binding regional
agreement to collaborate over disaster risk management and
emergency response.
Climate change is also a significant concern for ASEAN,
given its large agricultural population (about 40% of
ASEAN’s labor force is tied to the agricultural sector).
More frequent drought and flood cycles have wide-
ranging impacts as lower agricultural output translates
into weaker incomes and higher food inflation. While this
has been a persistent drag on economic activity in the
region, the rise of FDI-driven manufacturing is driving
increasing migration into secondary and tertiary sectors,
allowing rural households to cushion income sources,
while pushing increased productivity in the agriculture
sector over time.
INVESTING IN ASEAN
This commentary has attempted to shed some light
on Southeast Asia as a region, highlighting both its
individual differences and collective strengths. We
believe that the region’s demographics, in the form of
its large combined population of over 630 million, of
whom nearly 50% are below the age of 30, form the
base for a dynamic growth story. FDI continues to be
attracted by the availability of abundant and low cost
labor, driving the shift of labor from low productivity
pursuits to more productive manufacturing and services
activities. Productivity gains are multiplied by the scale
and network effects of increasing urbanization, leading
to income growth. As the proportion of the population
reaching middle income levels increases, consumption
expands. Participation in global and super-regional trade
partnerships such as the TPP and RCEP will enhance
the region’s attractiveness and make it more durable,
buying time to generate the productivity gains that are
necessary to sustain future income growth. Investment
in connectivity across the region is leading to increased
synergies, and will make the region less vulnerable to
external demand swings over time.
But how does one invest in this resilient growth story?
While our discussion has included all of ASEAN, only six
of the countries have investible stock markets, namely
Singapore, Thailand, Indonesia, Malaysia, the Philippines
and Vietnam. Among them, Singapore is listed with
developed markets, and nearly two-thirds of its listed
company revenues are derived from the rest of ASEAN.
Consequently, the five emerging ASEAN markets are of
greatest interest to growth-seeking equity investors, in
11
ASEAN: Finding Growth in a Slowing Global Economy
FIGURE 18. LISTED STOCKS GROUPED BY MARKET CAP
Source: Bloomberg, data as of July 2016
Thailand
Indonesia
Malaysia
Philippines
Singapore
Vietnam
Laos
Cambodia
0% 25% 50% 75% 100% >$5bn $500mn–$5bn $100–500mn <$100mn
FIGURE 17. NUMBER OF LISTED STOCKS IN ASEAN
Source: Bloomberg, data as of July 2016
Cambodia
Laos
Philippines
Indonesia
Thailand
Singapore
Malaysia
Vietnam 1,004
929
767
726
539
264
5
4
our view. Nascent stock markets in Laos, Cambodia and
Myanmar lack institutional capacity and governance
structures, and may be best accessed via regional listings,
particularly in Thailand’s SET index, which is gearing up as
a gateway to Indochina.
The difficulties facing equity investors in the region can
be illustrated by a few interesting numbers. In all of the
accessible ASEAN markets, there are a total of 4,238 listed
company stocks (Figure 17). The MSCI individual country
index universe based on free float market capitalization
eligibility requirements features less than 4% of this total,
or just 167 companies. Screening for market capitalization
alone, using US$5 billion as a lower bound, yields just 92
companies (Figure 18). Below this, screening a further layer
of companies with market capitalization above US$500
million yields a further 693 stocks. But the majority of the
listed company universe, 2,608 stocks (62% of the total
listed ASEAN universe), lies in the sub-US$100 million
range and is poorly covered by the analyst community.
Consequently, we believe there are significant opportuni-
ties in this space awaiting discovery by the entrepreneurial
investor who is willing and able to perform on-the-ground
due diligence.
To sum up, we believe successful investing in Asia requires an
increased focus on regional growth and domestic demand.
Nowhere is this more likely to be accessed than in ASEAN,
powered by its dynamic demographics, rising workforce
entrants and productivity-enhancing structural transforma-
tion, urbanization and increased regional integration.
The views and information discussed are as of the date of publication, are subject to change and may not reflect the writer’s current
views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not
be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a
recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and
emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a
high level of volatility and limited regulation. These risks are magnified in frontier markets. Many Asian countries are considered
emerging or frontier markets. Such markets are often less stable politically and economically than developed markets, and investing
in these markets involves different and greater risks. There may be less publicly available information about companies in many Asian
countries, and the stock exchanges and brokerage industries in many Asian countries typically do not have the level of government
oversight as do those in developed countries. Securities markets of many Asian countries are also substantially smaller, less liquid and
more volatile than securities markets in developed countries. Past performance is no guarantee of future results. The subject matter
contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation, but no
representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews
International Capital Management, LLC (“Matthews Asia”) does not accept any liability for losses either direct or consequential caused
by the use of this information.©2016 Matthews International Capital Management, LLC VA013