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ASEAN: THE AEC IS HERE, FINALLY 2014: NOMINAL GDP 2030: NOMINAL GDP USD TRILLION USD TRILLION US $1 EURO AREA $1 CHINA $1 JAPAN UK ASEAN 7.4 0.4 $4 3.4 $3 JAPAN UK .5 0.8 $8 .5 $6 .8 $6 .4 IN 2010... IN 2030... 29% $ URBANIZATION RATES of the ASEAN population will be in the middle income class URBANIZATION RATES 83.2% 79.3% 48.1% 44.5% >65 YEARS OLD 65% $ of the ASEAN population were considered in the middle income class High Income Middle Income Countries Countries 4.6 3.6 $2 ASEAN .9 $2 $3 CHINA EURO AREA .6 $2 US ASEAN 59.1% 55.8% 38.2% 28.5% High Income Middle Income Countries Countries Low Income Countries COMPARING DEPENDENCY RATIOS ACROSS ASIA IN 2014 ASEAN Low Income Countries <15 YEARS OLD Japan Hong Kong Taiwan 46.5 YEARS median age of Japanese citizens Thailand China Singapore Indonesia India Vietnam Malaysia Deciphering The Chart: 8.5% of Singaporeans were >65 years old 13.4% of Singaporeans were <15 years old Source: UOB Global Economics & Markets Research Myanmar Philippines Laos 28.9 YEARS median age of ASEAN citizens ASEAN FOCUS THE AEC IS HERE, FINALLY Much had been talked about the AEC and there had been skepticism on the grounds that the AEC is just a marketing hype and will not bring much material benefit for its members. We are aware that the AEC itself is not a panacea the moment it is launched. Rather, the AEC is the beginning of a long process of integration that leverages each other’s strength, and providing a guiding mandate for all the ten member states to move towards the objectives mentioned above. But at the same time, it is also clear to the member states that any other alternatives would be sub-optimal to the AEC solution. Issues such as productivity, competitiveness, market size, among others, will be key surviving factors to work on for ASEAN countries in the increasingly competitive environment where rising economic powers like China and India, and other emerging economies are also vying for a piece of the global trade and investment pie. This is the first of a 3-part series on the ASEAN Economic Community (AEC), and discusses the economic potential of ASEAN in view of the implementation of the AEC at end-2015. We highlight the favourable demographic and income trends that will promote ASEAN economies as one of the top regions to invest as a key production base as well as a large consumer market for global corporates. The second & third part of this series will be published in our next quarterly report (1Q2016) and will outline the potential trade and investment opportunities in ASEAN over the next decades, as well as a discussion of the closer integration between ASEAN and China as a result of several on-going initiatives such as the One-belt, One-road, AIIB, and the AEC. AEC Is A Journey, Not A Bus-Stop The commencement of the ASEAN Economic Community (AEC) at the end of 2015 will usher in a new era of cooperation and business opportunities among the grouping’s ten members. The AEC will play a crystalizing role for the region as it aims to achieve objectives of a 1) single market and production base; 2) highly competitive economic region; 3) region of equitable economic development; and 4) region fully integrated into the global economy. ASEAN’s Economic Size To Exceed Japan By 2025 With the dynamism and scale of an integrated region, our projections show that even by growing annually at just about 2/3 of the pace that it experienced during the 2001-2014 period, the size of the 10-member ASEAN’s economy could reach nearly US$3.9 trillion by 2020 (the size of Germany in 2014), and would be more than three times larger by 2030, at US$8.1 trillion (twice the size of Germany in 2014). This integration project will bring to the table a unified economic platform with more than 600 million population, and nominal GDP value of US$2.5 trillion (in 2014), which accounts for a 3.2% share of global GDP of US$77 trillion. If ASEAN were a country, it would be the world’s 6th largest economy, just ahead of Brazil, though still lagging far behind the US (the world’s largest), and the second largest, China (Exhibit 1). This means that along the way in the AEC journey, ASEAN’s economy would be larger than that of the UK, and would overtake that of Japan by 2025 (Exhibit 2). This would make ASEAN one of the world’s fastest growing consumer markets as more enter the middle class status. EXHIBIT 1: Nations/Regions With The Highest Level Of Nominal GDP In 2014 India 2.0 EXHIBIT 2: ASEAN’s GDP To Surpass UK By 2018, And Japan by 2025 US$ Trillion 40 US$ Trillion Brazil 2.4 35 ASEAN 2.5 30 U.K. China Eurozone Euro area 17.4 10 ASEAN Japan UK 10 13.4 U.S. 15 Source: World Bank, UOB Global Economics & Markets Research 16 US China 15 10.4 5 2025 20 4.6 0 2018 25 2.9 Japan 2010 20 5 0 2001 2005 2009 2013 2017 2021 2025 2029 Source: IMF, World Bank, UOB Global Economics & Markets Research Quarterly Global Outlook 4Q2015 • UOB Global Economics & Markets Research ASEAN FOCUS EXHIBIT 3: Most of ASEAN Economies Experiencing The “Demographic Sweet Spot” 2015 Laos Philippines Cambodia Malaysia Indonesia Vietnam Myanmar Brunei Thailand China South Korea Singapore Hong Kong Japan 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Source: UN World Population Prospect, UOB Global Economics & Markets Research As a side note, we also anticipate China’s economy to expand to US$28 trillion by 2030, just shy of the US economy’s size of US$29 trillion, but would have exceeded Eurozone’s economic size of about US$20 trillion by then. We believe that these projections for ASEAN are achievable, going by recent developments in ASEAN, including the opening up of Myanmar to the international community, presidential election in Indonesia, the stronger mandate given to the ruling party in Singapore, the return of stability in Thailand after the military coup that ousted former PM Yingluck, among others. In addition, the lesser developed members such as Myanmar, Cambodia, Laos, and also Vietnam, have plenty of room for growth and to catch up given their low starting bases. We expect that pro-business policy will continue to be pursued by various member states within ASEAN, especially within the guiding framework of AEC that helps to promote free flow of goods, services, investment, the “freer” flow of skilled labour, as well as freer flow of capital, all of which would serve to make the region as an enlarged production base and a consumer market. Driving Factors For ASEAN’s Growth Story Large, Young Population Base If having a large population of more than 600 million is an advantage, then having a predominantly young population is the trump card. The median age of the ASEAN population today is 28.9 years, more favourable than that of more advanced nations such as Japan (46.5 years), Germany (46.3 years), Italy (45 years), Hong Kong (43.2 years), U.S. (40.8 years), and even China (36 years). Even in 2030, ASEAN population’s median age will just be 33.6 years, a considerably youthful workforce and consumer base. In fact, a number of ASEAN economies are currently experiencing what we term as the “demographic sweet spot” – a term that describes the period when the working population surpasses1 the non-working population. That means, the dependency ratio of the economy is low. Exhibit 3 displays the “demographic sweet spot” for selected countries. For instance, Japan was in the “sweet spot” from the early-1960s to the mid-1990s. During this time, we witnessed the quick economic expansion and wealth accumulation led by a youthful Japanese workforce and heavy investments in high value added and innovative industries. It is estimated that when countries are in the “sweet spot”, economic growth averages 10% p.a. However, Japan exited the “sweet spot” in the mid-1990s as the population greyed and baby boomers retired. Long term consumption growth slowed and the economy endured a multi-decade deflationary spiral. In contrast, many ASEAN economies are still experiencing the “sweet spot”. In fact, some ASEAN economies have a population that is still so young that they will only be in the “sweet spot” many years later. The “demographic sweet spot” can be a useful tool for corporates to plan their next production base and/ or target market (or even to put weightage to their marketing budget). However, we do not advise using it as the “only” tool, as it is unwise to invest based on only one factor – namely, demography. ASEAN members are very different in various aspects such as culture, governance, risk, infrastructure divide, 1 Defined as the period when the population under 15 years of age drops below 30%, and the population over 65 years of age is less than 15%. Quarterly Global Outlook 4Q2015 • UOB Global Economics & Markets Research 17 ASEAN FOCUS wealth disparity, and social acceptance of capitalism. For instance, Exhibit 4 shows the disparity amongst ASEAN economies across several metrics, and this could be daunting for a new corporate entering into these markets. less than half (47.6%) of the ASEAN population lives in urbanised areas. This is still some way off from the average urbanisation rate of 51.3% for middleincome countries, and certainly is still a long way off from the 80.4% rate for high-income countries (Exhibit 5). Moreover, average demographic trends may not tell us much about the distribution of population. Different industries may cater to economies at different stages of economic growth. For example, although FMCG (fast-moving consumer goods) companies dealing in baby products may not do as well in Japan, while geriatrics-related healthcare products/services could do better. But herein, lies the opportunity that ASEAN has for global corporates. Over the next 15 years to 2030, ASEAN will experience one of the fastest growth in urbanization rates amongst major regions of the world (Exhibit 6), as income growth and wealth accumulation accelerates. There are a few reasons to why the prosperity of a nation goes hand-in-hand with urbanization. Rising Urbanisation Rate & Growing Middle Income Class Urbanisation is an important driver of economic growth and it is said that no country has ever gone from low-income to middle-income status without experiencing significant rural-urban migration. Today, First, as rural workers leave self-sufficient farming jobs and work in the manufacturing and services jobs in cities, national productivity levels improves due to the training they receive and the higher value added EXHIBIT 5: Urbanisation Rates Across Countries Of Different Income Tiers % Urbanisation 100 83.2 90 80.4 80 70 59.1 55.8 60 51.3 47.6 50 40 30 20 10 0 High-income Middle-income ASEAN countries countries 2015 % Growth in Urbanisation Oceania 0.8 N. America 3.2 S. America 3.3 Europe 30.8 38.2 4.6 West Asia 6.0 Central Asia 9.0 World 11.1 ASEAN Low-income countries 17.1 East Asia 19.2 Sub-Saharan Africa 19.9 0 2030 Source: World Urbanisation Prospects 2014, UOB 18 EXHIBIT 6: ASEAN Will Enjoy One Of The Fastest Growth In Urbanization Over The Next 15 Years 5 10 Source: World Urbanisation Prospects 2014, UOB Quarterly Global Outlook 4Q2015 • UOB Global Economics & Markets Research 15 20 25 ASEAN FOCUS EXHIBIT 7: Positive Correlation Between Per Capita Income And Urbanisation Rates Log of Income 14 y = 0.0501x + 5.3512 R² = 0.5909 12 10 8 6 % Urbanisation 4 0 10 20 30 China Indonesia United States 40 50 60 Vietnam Malaysia United Kingdom 70 80 90 Thailand Myanmar Singapore 100 Korea India Source: World Urbanisation Prospects 2014, UOB Global Economics & Markets Research products/services they produce. With that, they will earn higher wages and GDP grows over the years. Second, the products/services and factors of production in self-sufficient farming are not compiled in the country’s national accounts as they are not traded. With rural-urban migration, workers partake in formal business settings where the costs of production and profits from the sale of products/ services are properly recorded and compiled as GDP. This also increases the government’s coffers in the form of revenue inflows from both direct and indirect taxes, and will generate indirect stimulus to the economy in the form of future government expenditure. Third, as the new urban worker remits a part of their now-higher income back to their rural families, investments in rural infrastructure (such as housing and sanitation) and farming machinery further EXHIBIT 8: The Rise Of The Middle Income In ASEAN Mil Pax 1200 1110 Fourth, increased incomes of the urban dwellers will see an upgrade in their tastes and preferences and where better quality products will be in higher demand. The higher expectations and the willingness and ability to pay more for better and safer food products (think: organic food products) will further improve the profit margins of the agricultural sector and further contribute to stronger economic activities. Indeed, using our analysis of data across 135 countries and over time (5-year periods from 1980 to forecasts of 2020), we found a mildly-strong and positive correlation between the rates of urbanisation and per capita income (proxied by nominal GDP in EXHIBIT 8: The Rise Of The Middle Income In ASEAN % 100 1053 1000 79 80 800 69 65 60 600 454 400 200 improves the productivity of the agriculture industries. More efficient farming techniques will produce surplus agricultural stock and will thus be traded and higher incomes earned in the process. 172 336 251 227 0 China 2010 India 2030 53 29 19 20 65 ASEAN 40 47 5 0 LatAm ASEAN Source: ADB Institute; Note: Middle Income = daily expenditure of US$10 to US$100 2010 China India 2030 LatAm Source: ADB Institute; Note: Middle Income = daily expenditure of US$10 to US$100 Quarterly Global Outlook 4Q2015 • UOB Global Economics & Markets Research 19 ASEAN FOCUS USD) (Exhibit 7). The growth path of the selected countries in Exhibit 7 further illustrates the positive relationship across time. about problems when global corporates look to invest in ASEAN is the lack of infrastructure development, making it hard to achieve market access. The combination of abundant and low cost labour and the economic integration of ASEAN economies brought about by the AEC will see more global manufacturers setting up production bases in ASEAN. With inbound technological transfers, capital investments and human capital investments, promises of higher wages in the manufacturing sector will draw migrant workers from rural areas into urban cities, and eventually increasing the urbanisation rates of developing ASEAN economies. Growing income and accumulated wealth will in turn create a new and savvy group of consumers that will attract global firms to market their goods and services. For instance, there is only 10.5 km of roads per 1,000 persons in ASEAN today, compared to 211.7km (per 1,000 persons) for the rest of Asia. For rail-roads, there is only 0.27 km per 1,000 people in ASEAN, compared to 5.21 km (per 1,000 persons) for the rest of Asia. Only 71.7% of ASEAN has access to electricity, comparing with 99.8% for the rest of Asia. In fact, the Asian Development Bank estimated that by 2030, nearly half a billion of the population in ASEAN will be classified as middle income class. This represents close to 65% of the population by then, from 29% of the ASEAN population in 2010 (Exhibit 8). With rising income and standards of living, the ASEAN consumer will be an important consideration in the game plans for global corporates. The prospect behind ASEAN and the AEC looks promising. However, one of the commonly talked 20 That said, this present impediment does not mean that the lack of infrastructure will be a continuous issue for ASEAN. On the contrary, we think that the existing under-investment and the promise of good returns in investing in the ASEAN story will see a lot more infrastructure investment. In the next two part of this series, we will discuss the investment potential in ASEAN as well as the increase in intra-regional trade that will arise from the increasing trend in production fragmentation in the region as corporates take advantage of each ASEAN member’s factor abundance and comparative advantage amid the zero-tariff environment. We will also discuss the closer integration between ASEAN and China as a result of several on-going initiatives such as the One-belt, One-road, AIIB, and the AEC. Quarterly Global Outlook 4Q2015 • UOB Global Economics & Markets Research