Looking ahead to a regional economy

Thursday, Aug 15, 2013 08:00

(VNS) —The Association of Southeast Asian Nations is planning to form by 2015 an ASEAN Economic Community, a highly competitive single market and production base that will allow free movement of capital and goods across the region. HSBC has a long history in the region, promoting investment and trade flows. Viet Nam News spoke to Sumit Dutta, CEO of HSBC Bank Vietnam, about current trends in investment and trade flows, and what opportunities exist for ASEAN members, especially Viet Nam.

Whats your perspective on foreign direct investment in the region?

CEO Sumit Dutta

China has been an important destination for FDI since the 1990s, as foreign investment has been central to its national development strategy. And it has had an important advantage: excess rural labour for factories quickly raised its production capacity. However, the worlds largest manufacturer is transforming into a more consumption-oriented and higher valued-added economy. This has major implications for its neighbours, ASEAN countries included, especially those with strong demographic growth like Indonesia, the Philippines, and Viet Nam. Prior to the Asian financial crisis in 1998, FDI flows to ASEAN were robust, accounting for around 8 per cent of the worlds total. They declined to 2 per cent in the five following years. However, in the past two years, investors are returning to ASEAN, recognising its growth potential and taking advantage of lower costs. ASEANs share of the worlds total FDI is now 7.6 per cent, almost equal to that of China, at 8.1 per cent. With more favourable demographic growth, ASEANs share of global FDI will likely rise in the coming decade.

By 2010 China became the worlds second largest economy, and its income per capita increased from US$415 in 1992 to $5,441 in 2011. Manufacturing wages have increased 20 per cent annually between 2005 and 2011, these increased costs have slowed FDI, and have prompted investors to look for alternatives.

Investors, particularly from Japan, have turned their attention from China towards ASEAN countries including Thailand, Indonesia, and Viet Nam in order to lower their cost base and diversify their production.

And how about Viet Nam?

In terms of manufacturing, Malaysia, Thailand, the Philippines, Indonesia, Viet Nam, and India are often the focus of a "China plus one" strategy. While India has a population and domestic market that trumps Viet Nams, it currently has one of the smallest FDI inflows in Asia relative to GDP, given the relative inefficiency of its labour market, limited access to certain sectors, and poor infrastructure.

Viet Nam, relative to its GDP, attracts the second highest level of FDI in ASEAN after Singapore. Also, its business environment is relatively competitive compared with India, the Philippines, and Indonesia, though it still trails significantly behind Thailand and Malaysia, according to HSBCs "The great migration – How FDI is moving to ASEAN and India" report.

The urbanisation rate in Viet Nam is still low at around 30 per cent, and is expected to accelerate in the coming years, and over 60 per cent of Viet Nams population is under 35. These factors will drive continued growth in the labour force over the next 20 years alleviating potential wage pressure.

In the past two years Viet Nams FDI inflows slowed down, however they remain robust for a country of its size.

So what about trade flows, what are the opportunities?

Intra-ASEAN trade grew steadily between 1993 and 2011, from 19 to 25 per cent, standing at US$598 billion in 2011. Trade between ASEAN and China grew on average 24 per cent annually between 2000-2009, representing 43 per cent of total trade in 2009. Trade between ASEAN and India also increased by 24 per cent per annum between 2004-2009, accounting for 11 per cent of total trade in 2009. Generally, ASEAN trade increased by 10 per cent annually between 1990 and 2010.

Viet Nam, in contrast to many neighbours in emerging Asia, maintained 20 per cent export growth last year, driven by strong demand in telecoms, plastics, and clothing and apparel.

In 2011 the US and the EU were Viet Nams top export destinations. Intra-Asia trade is forecast to grow by over 15 per cent annually until 2020. By 2030 we expect China to be Viet Nams largest export market, with significant growth from Bangladesh, India, Indonesia, and Malaysia. Plans for ASEAN to eliminate all tariffs on goods by 2015 will also support Viet Nams trade with economies in the region in the medium term.

What can HSBC do to help promote FDI and trade in the region?

Looking ahead, with further trade and investment liberalisation and the implementation of the AEC, the importance of this region to international businesses will undoubtedly increase.

HSBC is best-positioned to support the growth of this region both in terms of facilitating foreign investment, and helping domestic companies succeed. Our bank has been operating in the ASEAN region for more than 140 years and we thoroughly understand the needs of customers in and outside the region and can help make the right connections.

As Asian companies and markets are growing, evolving, and looking beyond lending for more sophisticated financial solutions, HSBC is ready to help. With proven local experience in advisory, and equity and debt capital markets, together with bespoke solutions to facilitate trade, our in-country teams are perfectly placed to help companies succeed. —VNS

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