Asean can tussle with emerging economic giants

If asean comes together as a single economic bloc by 2015, it would become a serious contender for investor dollars, compared with emerging economic giants China and India, said a leading economist yesterday.

Mr Leif Eskesen of HSBC noted that, as a single entity, the 10-nation ASEAN bloc is home to about 600 million people and ranks as the eighth-largest economy in the world with a combined gross domestic product of around US$2 trillion (S$2.5 trillion).

"It's a watershed moment right now for the ASEAN region, which presents a strong growth story over the medium term. It's time for policymakers to put in place the necessary reforms to tap that potential," said Mr Eskesen, the bank's chief ASEAN economist, who was at a telephone press conference in Singapore, talking about the rise of the ASEAN bloc.

"Policymakers need to change tack and move away from the easy solutions of fuelling growth through cheap credit and fiscal handouts. Structural reforms, rather than easy monetary and fiscal policies, have to take centre stage to drive growth."

Mr Simon Constantinides, HSBC's regional head of global trade and receivables finance in Asia-Pacific, added that to become a unified force, ASEAN members need to view one another less as competitors for inbound investments and jobs, and more as a single market.

That is a challenge and would require more work given the structural differences in these economies. Even so, the goal is to become a single economic bloc by 2015, he added.

The excitement over the growth of China and India has led to a neglect of ASEAN.

"It's strange that ASEAN does not get as much publicity as China, which we think it deserves," said Mr Constantinides.

Solid growth in the region, which has a strong manufacturing base, a growing labour force and a rising middle-class hungry for consumer goods, makes ASEAN a bright spot.

But concern that the United States Federal Reserve stimulus spending might be reduced has led investors out of emerging markets into developed economies.

In May, when the Fed first signalled it plans to dial back the bond-buying programme, the tapering jitters spooked regional markets, with equities and currencies being hit hard.

Investors started scrutinising the macro fundamentals of ASEAN and fled back to developed markets on expectations of the monetary policy path in the US.

Fears that the liquidity party that had fuelled a rally in most Asian markets would end led to a violent sell-off but those losses have since been recouped, following the decision to delay the tapering.

Now that the tapering concerns are back on the table - most expect it to happen next month or early next year - the consensus seems less bleak.

Indonesia, which experienced a dramatic fall in its currency recently, has since implemented monetary fiscal tightening to address some imbalances in the economy, noted Mr Eskesen.

Malaysia, whose weakening current account position is a concern, has presented a budget with subsidy reforms that address the issue.

These measures need to be stepped up if the region is to grow to the next level, added Mr Eskesen.

There is also the influence of Japan, where Prime Minister Shinzo Abe is heading an aggressive stimulus drive to boost growth.

That will lift ASEAN and could partly offset the much-feared capital repatriation from the region when the Fed cuts its stimulus.

It also sweetens ASEAN's foreign direct investment (FDI) picture.

Australian bank ANZ noted in a recent report that Japan sends 11.3 per cent of its FDI to ASEAN. Japan also accounts for almost 40 per cent of Thailand's FDI.

Indonesia and Vietnam have become beneficiaries and have now become major recipients of Japanese FDI due to the liberalisation of certain sectors and competitive labour costs.

"Fed tapering may certainly pull some volatile liquidity out of emerging Asia. Reflation in Japan and the expansion of corporate profitability going with that now are likely to push more stable liquidity into the region over 2014-15," said ANZ.

A recovery in the US economy, barring a disruptive fiscal showdown and stabilisation in Europe, and ongoing recovery in China, will help stabilise ASEAN growth this year, paving the way for better expansion next year.

Even so, it is unlikely that ASEAN will grow at the speed it was cruising at just a few years ago, said Mr Eskesen.

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