Southeast Asia is home to several promising industries across its regional economy, which will report faster than global average growth in 2023. Despite a concerning macroeconomic backdrop, several factors will continue to attract business investment to the region.
Southeast Asia, or the ASEAN (the Association of Southeast Asian Nations) region as it is more commonly referred to in Asia, is among the fastest growing regions in the world. According to the Asian Development Bank (ADB), economic growth in Southeast Asia has reached 5.5 percent in 2022.
However, a host of evolving and generally negative economic pressures push down the growth forecast for the region by ADB – reflecting patterns elsewhere in the world – to 4.7 percent.
The International Monetary Fund (IMF) forecast for global growth was 3.2 percent for 2022 and 2.7 percent for 2023, meaning that ASEAN is still forecast to grow significantly faster than the global average.
Despite the prevailing gloomy economic climate, Southeast Asia remains very attractive for foreign direct investment (FDI), and several industries look set to grow in 2023. continue as China’s ‘re-opening’ provides a much-needed boost to tourism and travel from the second quarter (Q2 2023).
ASEAN Growth Trends
The region is on track to become the world’s largest single market by 2030. This is reflected in the investment flows, which have continued at a high level in recent years. ASEAN states are increasingly opening up to international trade, which has incrementally removed barriers to inter- and intra-regional trade and investment.
The growth of Southeast Asia’s indigenous economies also provides a lucrative environment for foreign businesses, as does the large size of the regional population and workforce. ASEAN countries have a total population of 662 million people and a combined gross domestic product (GDP) of US$3.2 trillion.
Growth patterns will be strengthened as the economy and work arrangements become more formalized and more young people enter the labor market. The median age in Southeast Asia is 30.2 years, significantly lower than in China (38.4) and Europe (44.1).
Finally, the ASEAN region has benefited, and will likely continue to benefit, from a privileged geopolitical position. An intensifying rivalry between superpowers, the United States and China, has prompted the two nations to deepen their ties with the region.
China has significant ties with ASEAN economies and is trying to improve them through increased infrastructure spending and by improving access to trade, such as through the Regional Comprehensive Economic Partnership (RCEP).
What are the most promising industries for Southeast Asia in 2023?
There are clear challenges for the region’s manufacturing sector in 2023. We see pressure on demand across the world, mainly in advanced economies, affecting manufacturing activity in ASEAN states.
Other challenges are rising interest rates, which increase the cost of borrowing and therefore growth, and inflation, which puts pressure on margins at a time when demand is already under pressure.
Manufacturing is an important part of the regional economy. In some countries, this dependence on manufacturing is more pronounced – in Vietnam it is the backbone of the economy, and in Thailand – the sector will contribute 27 percent of GDP in 2021.
However, there are several reasons to believe that capital inflows into manufacturing in the region will continue in 2023. For one, ASEAN-made goods are generally considered more cost-effective than those made in China, primarily due to Factors such as labor costs, lead to the growing shift to ASEAN.
In addition to lower labor costs, the US-China trade war has forced many China-based manufacturers to move part of, and in some cases, all of their supply chains to Southeast Asia.
To pursue these ‘China Plus One’ or ‘China Plus Many’ strategies, ASEAN governments have issued preferential incentives and enabling policies to capitalize on this shift in regional supply chains. This includes implementing tax cuts, increasing the ease of doing business, increasing infrastructure spending, and providing incentives in special economic zones and free trade areas.
Vietnam has been one of the biggest beneficiaries of the China Plus One strategy in recent years, with the manufacturing sector alone attracting around 58 percent of total FDI in the country in 2020.
Since the beginning of the pandemic, the tourism sector has faced challenges across ASEAN states. It plays an important role in various economies of the region and is also one of the key areas of ASEAN cooperation since the establishment of the association.
Thailand was the most visited ASEAN state, receiving almost 40 million visitors in 2019. It was the first country in the Asia Pacific to initiate the reopening of international tourism back in July 2021 with its Phuket Sandbox program. However, while 2022 data has yet to be finalized, visitor numbers remain significantly down over the pre-pandemic era. It is understood that about 10 million people will visit Thailand in 2022.
Vietnam’s tourism sector has also struggled. The state will likely welcome 3.5 million tourists in 2022, just 18 percent of the 19 million international arrivals in 2019.
However, there are several reasons to expect 2023 to be a more positive year for the sector. First of these is China’s ‘opening’ to travel. The Chinese immigration authority recently announced that it will resume issuing visas for mainlanders to travel overseas from January 8. A lack of Chinese tourists has been seen as the dominant challenge for the sector in most ASEAN states.
Another reason is the demand for tourism elsewhere in the world. US households continue to shed two or three years’ worth of accumulated debt as Covid-19 fears fade, according to data shared by CNBC. The Asia Pacific is one of the most popular destinations.
Travel demand continues to grow in Europe, despite inflationary challenges, while airlines increase routes and inject more supply.
Further, ASEAN states have also developed programs to attract foreign arrivals, such as the digital nomad visa program in Malaysia, and Indonesia’s second home visa scheme. Indonesia has set an ambitious target of attracting 7.4 million foreign tourists by 2023, almost double the number in 2022.
The digital economy across the ‘ASEAN-6’ (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam) is expected to reach a gross merchandise value (GMV) of US$200 billion by the end of 2022, according to a report by Google, Temasek and Bain & Company. This is expected to reach a GMV of US$330 billion by 2025.
In the last three years, the region has seen the emergence of 100 million new Internet users. In many countries around the world, internet adoption has been enhanced by the pandemic as the virus restrictions on socializing and public activity have affected offline shopping and entertainment, etc.
Tech start-ups are well represented in Southeast Asia’s booming start-up ecosystem. According to a recent UNCTAD report, the number of start-ups in ASEAN that have raised more than US$1 million in funding has almost tripled to 1,920 between 2015 and 2021. The growth rate is 85 percent greater than in Europe and 65 percent faster than to the US.
The digital transformation agenda continues to be a major driver of investment and growth in the region. Importantly, the expanding digital economy offers enormous opportunities in the field of digital financial services.
The majority of the population of Southeast Asia is still unbanked or underbanked and the majority of workers are in the informal sector, thus lacking bank accounts and making it difficult for banks to build a credit history.
Further, MSMEs in the region also lack formal credit histories, which hinder their access to capital. This is crucial as MSMEs form the backbone of most ASEAN countries. Fintech companies can close this gap by issuing microloans that have terms and maturities that are small and short – borrowers can get as little as US$100, which can be paid out within 24 hours.
ASEAN Briefing is produced by Dezan Shira & Associates. The company assists foreign investors throughout Asia and maintains offices throughout ASEAN, including in Singapore, Hanoi, Ho Chi Minh City, and Da Nang in Vietnam, Munich, and Essen in Germany, Boston, and Salt Lake City in the United States, Milan, Conegliano, and Udine in Italy, next to Jakarta, and Batam in Indonesia. We also have partner companies in Malaysia, Bangladesh, the Philippines, and Thailand as well as our practices in China and India. Please contact us at [email protected] or visit our website at www.dezshira.com.