Southeast Asia: Hiding in plain sight

southeast corner of Asia is the best place to manufacture, source from and sell to in recent years, according to executives at HSBC. JON GAMBOA

Emerging-markets jitters notwithstanding, there are compelling reasons to be optimistic about the economic prospects of this part of the world. Ask many American, German or Canadian businesses or investors about Asian business opportunities, and they’ll probably think China and perhaps India. Southeast Asia — home to countries, including Indonesia, Malaysia, the Philippines and Singapore — is likely to be an afterthought. Indeed, only about 30 percent of Canadian companies expect to maintain or expand their trade with the region.

That’s a pity. As we head toward 2019, this fast-growing region is worth a serious look as a location to manufacture in, source from and sell to, despite the downturn in global emerging markets over the past few months.

Sheer size is part of the story, and it’s often not fully recognized by observers outside Asia.

Taken together, the 10 members of the Association of Southeast Asian Nations (ASEAN) form an economic powerhouse whose combined gross domestic product of nearly US$2.8 trillion in 2017 topped that of the UK, France or India. To put it another way, if ASEAN were a single economy, it would rank sixth globally, after the US, China, Japan, Germany and the eurozone. And as a group, ASEAN countries rank as Canada’s sixth-largest trading partner, with Canada-ASEAN merchandise trade reaching $23.3 billion in 2017.

Or take population. ASEAN’s 650 million people outnumber Canada’s population by more than 15:1 and that of the UK by almost 10:1. By 2030, their numbers will have swelled by another 80 million — roughly the equivalent of the population of Turkey.

But it’s what’s going on beneath those headline numbers that’s turning Southeast Asia into a bright spot on the global economic stage.

Today’s emerging-markets jitters obscure, for now, how far the region has come since the 1997-98 Asian financial crisis, or even the so-called taper tantrum of 2013.

Its constituent economies, broadly speaking, are now more resilient to external financial shocks. Foreign exchange reserves have risen. External debt levels have come down. Current account balances have improved.

The region’s manufacturing capabilities, meanwhile, play an integral role in global trade and supply chains — and as in China, businesses are going high-tech. Look across the region and you’ll find factories that produce everything from high-end fabrics to hard drives and semiconductors.

What’s more, many ASEAN companies, both established and start-ups, now have the experience and clout to serve international markets and attract sizable investments from abroad. Witness how Jollibee, a popular fast-food chain, which opened its first Canadian restaurant in 2016 in Winnipeg, has expanded beyond its home market in the Philippines, with the goal of becoming a leading global player. Or how Singapore and Indonesia have spawned start-ups like e-commerce portal Lazada and ride-hailing-to-payments companies Grab and Go-Jek, which are rapidly becoming ubiquitous on streets and smartphones across much of the region.

On the consumption front, urbanization and improving infrastructure have put millions within reach of higher-paying jobs and better education, health care and financial services opportunities. For many Vietnamese, Filipinos or Thais, a flight to Hong Kong, London or even Toronto or Vancouver is no longer a financial impossibility. A new car or a life insurance policy? For the first time, it’s something to consider. No wonder that a survey by the EU-ASEAN Business Council earlier this year found that 99 percent of European businesses in the region expect to maintain or expand their trade and investment there over the next five years. Meanwhile, HSBC’s recent Navigator survey of companies around the world found respondents in Southeast Asia to be the most upbeat on the global trading environment.

True, doing business in this sprawling and breathtakingly diverse region has its challenges. Swings in commodity prices and global investor sentiment can still hurt individual economies to different degrees. And while tariffs on goods traded between ASEAN members have effectively been eliminated and global trade tensions may actually see production and supply chains move toward the region, that doesn’t mean policymakers and companies can afford to stand still.

More needs to be done to remove obstacles to the flow of services and labor, bring down cross-border financial transaction costs and erode non-tariff barriers, for example and continued investment in education and productivity growth is key.

Then there are the momentous shifts that will come with technological advances (robotics, 3D printing, artificial intelligence, the Internet of Things) and climate change (to which much of Southeast Asia is particularly vulnerable). Addressing these will require national policymakers to think and act beyond election cycles and domestic political dynamics.

At the end of the day, ASEAN isn’t the EU: integration doesn’t aim to reach into the realms of politics.

Still, the direction of travel is clear, and it is unlikely be derailed by global trade tensions and periodic emerging-markets nervousness. The coming years are set to bring more economic and financial cohesion and intra-regional trade. Domestic and intra-Asian infrastructure initiatives will improve physical connectivity. And consumption and innovation will pick up speed as urbanization and growing Internet and smartphone penetration transform the way 650 million people shop, bank and exchange information.

Anyone even remotely interested in Asia needs to have this part of the continent firmly on their radar — or risk missing out on one of the world’s most dynamic growth stories.

Matthew Lobner, HSBC head of International and Head of Strategy and Planning, Asia-Pacific.