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Why Singapore Should Look Towards ASEAN Rather Than China for Growth
Photo: Gunawan Kartapranata
- The ASEAN Economic Community (AEC) is scheduled to be fully implemented by the end of this year.
- Singapore would serve as the regional financial centre for companies to rise funds and lower-cost countries like Vietnam can serve as a production centre. This will benefit our banking and shipping sectors as the supply chain shifts to ASEAN.
- As skilled professionals move to Singapore for work and leisure, the local hospitality sector will benefit likewise.
- The AEC is more practical and less ideological than the EU. It is more likely to succeed without a common currency and free movement of labour.
- The AEC would set Singapore up economically over the next decade as regional integration deepens.
The ASEAN Economic Community is the result of decade-long talks and negotiations between the 10 ASEAN nations of Singapore, Malaysia, Indonesia, Thailand, Myanmar, Philippines, Laos, Vietnam, Brunei and Cambodia. It started with an agreement to explore talks in 2003 by the various head of states and it is slated to be fully implemented by year 2015. The AEC will change the way we do business in Singapore and around the region.
From the ASEAN Economic Community blueprint:
The AEC will establish ASEAN as a single market and production base making ASEAN more dynamic and competitive with new mechanisms and measures to strengthen the implementation of its existing economic initiatives; accelerating regional integration in the priority sectors; facilitating movement of business persons, skilled labour and talents; and strengthening the institutional mechanisms of ASEAN.
In short, the AEC will transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital.
Facilitating ASEAN Investment
The AEC is more than just a free trade agreement even though that is a core aspect of it. It is about building a common market across these ten countries which would allow different nations to grow and leverage on their own strengths. For example, it is envisioned that companies can rise capital in Singapore and set up their factories in low-cost locations like Vietnam. This is an important role for companies to adopt as investments levels in ASEAN have not recovered fully since the 1997 Asian Financial Crisis.
According to Deputy Prime Minister Tharman Shanmugaratnam, investors were hesitant to enter ASEAN after the 1997 crisis and investments are 25% lower than it should be at their current stage of development. Hence there is a role for Singapore to play in the AEC as a trusted financial centre to bring institutional investors and companies together to facilitate investments and capital flow.
This is especially crucial for ASEAN as it is a young and growing economy as a whole which needs to provide jobs for its population. While Singapore is a developed nation, other ASEAN nations require more infrastructure development. The recent water shortage in Bangkok highlights the need for water treatment plants and these are long-term projects that would require 30 years of patience before the investments can be fully realized.
Spillover Benefits to Other Sectors in Singapore
ASEAN has a combined population of 600 million people and it is an effective counterweight to China which is now on a path of slower growth. China has plans to grow at 7% this year and there are doubts of whether it can reach those levels. While ASEAN as a whole is not as politically stable as China, its economic growth is on a steady upturn. Therefore Singapore has to embrace the ASEAN market if it wishes to grow steadily in the near future and even out the slower economic growth in China.
Once the regional AEC agreement is fully implemented this year, we can expect more companies in ASEAN to be listed in Singapore. This should be good for investment banks and provide more options for investors here in Singapore. Skilled labourers will also have reasons to be in Singapore whether it is for short-term visits or longer-term stays. This would be another boost to our property markets and hospitality sectors including REITs.
The AEC is actually a mission critical move because China is moving up the manufacturing value chain. China is no longer the nation that solely manufactures cheap, labour-intensive products like it did in the 80s and 90s. They are now producing advanced computer chips and eroding away our lead in the manufacturing industry. When these companies raise funds, they would do so in either Shanghai, Shenzhen or Hong Kong. Singapore would be squeezed out of the picture.
Singapore cannot compete with China on cost but our neighbours can. Countries like Vietnam and Cambodia have low costs which is their advantage against China. China used to be a low-cost production base but increasing demand for labour and a shrinking population from the one-child policy, worker wages in China have been spiralling up steadily. In addition, our neighbours do not fully trust China as they have sea and territorial disputes with China. Hence they will rather embrace Singapore for our clean and fair reputation. This is also the reason why foreign investors come over to invest in Singapore.
Besides benefiting our financial and hospitality sectors, it is also an advantage for our transportation sector. I am not just referring to the increased demand for air travel when these expats fly to Singapore for work or leisure. The whole shipping industry will benefit as supply chains all over the world move to ASEAN to take advantage of its low costs and open economy. This liberation of trade and economies that the AEC brings is a win-win for all ten ASEAN countries.
If you believe in the ASEAN growth story, one way to ride on the long-term growth of ASEAN is to invest in the CIMB FTSE ASEAN 40 ETF which is listed on the SGX. The ETF mirrors the FTSE/ASEAN 40 index and includes blue-chip companies from around ASEAN like DBS Group Holdings, Keppel Corp, Petronas, Unilever Indonesia, Bangkok Bank, etc.
The ETF has an annualized total return of 9.3% since its listing in September 2006 to 2014, but as you can see from the chart above, the ETF has been more or less sideways for the last five years and trending down the past 12 months. The AEC will only fully implemented by the end of this year and it will take some time for the economic benefits to take hold. However, if you believe in the ASEAN growth story and that the ten ASEAN nations can successfully synergize their economies in the coming years, this is one ETF you can take note of.
AEC is Different from EU
Lastly it is important to note that the ASEAN Economic Community is not the European Union. There is no common currency which would stifle the growth of weaker nations such as Cambodia and cause internal discord. This is important in the light of the Grexit saga that proved the weakness of the artificially imposed single-currency system.
It is also noted that there will be no free exchange of labour. Movement of people will only be limited to skilled labour. In other words, you won’t see a sudden influx of poor or unskilled Laotians moving to Singapore to take advantage of our education system or medical services. This is one of the leading reasons why the UK is considering breaking off from the European Union with a referendum scheduled by 2017 as promised by their Prime Minister after his General Election victory.
But the core difference between the EU and the AEC is that ASEAN is linked together for practical and not political reasons. The EU was formed to pull Europeans together to prevent major wars from happening again after two disastrous world wars in the last century – both of which were started in Europe. There was a lot of ideology involved which overruled practical constraints; the creation of the common euro currency is one such example. ASEAN is more pragmatic and this is why we are more likely to succeed economically than the European model.
The benefits of the AEC will not be apparent immediately and it will take some time for all ASEAN nations to reach common ground, but as regional economic integration deepens, it will put us in good stead over the next decade and provide the platform for further growth and success for Singapore and our neighbours in years to come.Discover what's really working in the investing world as you get FULL access to our private closed-door, 100% content-only "investment brain-dump". Find out more.
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Ong Kai Kiat
Ong Kai Kiat is an avid investor and forex trader. His expertise and focus is on how global macroeconomic affairs affect investment outlook and choices. He is a frequent contributor on Seeking Alpha under the author name FX Analyst and is currently ranked #4 in Forex and #5 in ETF Quick Picks and Lists. He writes regularly about topics related to forex, market outlook, ETFs and occasional stock articles.