It’s no EU for better or worse
But indeed the ASEAN Economic Community (AEC) was launched over six months ago amid little fanfare. The ambition is not that different in essence to the European Union (EU) but very different in scope and political divestment.
For AEC, the promise is a substantial reduction in tariffs, the removal of most trading barriers and increased access to markets comprising about 620 million people across Southeast Asia.
A snapshot is emerging of what to expect amid turbulence in the broader economy triggered by the downturn in China, dwindling commodity prices, a sharp deterioration in regional currencies and an ongoing raft of political issues.
“ASEAN countries are on a long, slow path towards greater liberalization,” Director of Singapore-based Emerging Markets Consulting (EMC) David Totten says. “They are moving in the right direction. But slowly.”
The better performers so far include tourism, hotels, construction and transport. But analysts say more needs to be done in the banking, financial and insurance sectors while non-tariff barriers are still a headache alongside potential competition from the Trans-Pacific Partnership (TPP).
Initially, eight professions were tapped to head the free trade regime: doctors, nurses, dentists, engineering, architects, surveying, accountancy and tourism – with the EU actually serving as an economic role model.
But unlike the EU and the issues underpinning the Brexit, the AEC does not have a central bank or its own currency and the mobility of labour remains heavily restricted.
DIVIDED BY CULTURE
The Association of Southeast Asian Nations (ASEAN) is partitioned into two camps. The original members – Indonesia, Malaysia, the Philippines, Singapore and Thailand – established the group as a bulwark against their common fear of communism in 1967.
Brunei joined in 1984 while Cambodia, Laos, Myanmar and Vietnam were admitted after the Cold War in the 1990s, although these nations are often cast as the poor relations of the fledgeling trading bloc. East Timor is expected to become the 11th member next year.
If it was a country the AEC would rank as the seventh-richest in the world, buoyed by a GDP of $US2.5 trillion. Culturally, however, ASEAN is a complex mix.
Southeast Asia remains divided by belief (Christianity, Buddhism, Hinduism, Islam and atheism) and political make-up (democracy, military rule and communism).
It's a constant source of friction that prompted recent warnings from Malaysian Prime Minister Najib Razak who says ASEAN's volatile and violent past was behind the slow pace of reform.
“Today, we live in a fast-paced world and the demographic dividend of young populations will become a liability if we do not take active steps to integrate, innovate and advance.” Najib told a World Economic Forum on ASEAN in Kuala Lumpur.
UNITED BY ECONOMICS
ASEAN's stunning economic performance is underpinned by exports into China, up about 20 per cent year-on-year for most of the last two decades.
But returns have fallen sharply in line with the slump in Chinese growth from double digits to 6.9 per cent last year and the International Monetary Fund (IMF) is anticipating 6.3 per cent growth for 2016, following on from last August when Beijing was forced to devalue the yuan.
Rajiv Biswas, Asia-Pacific Chief Economist with IHS Global Insight, says the Chinese slowdown had hit East-Asian supply chains hard, forcing governments to follow Beijing and devalue their currencies to keep exports competitive.
It's what ANZ Research dubbed the Asian Trade Recession*. Regional currencies experienced their worst falls since the 1997-1998 Asian financial crisis, with Indonesia and Malaysia among the worst-off.
However, the downturn has been limited as the AEC outperformed through intra-ASEAN trade which has risen to $US609 billion a year, from about $US82 billion more than 20 years ago. Biswas says intra-ASEAN trade now accounts for 25 per cent of all ASEAN exports.
Aviation and hotels have enjoyed a smooth ride on the back of tourism while construction and medical have recruited cross-border workers in fields ranging design and brick layers to nursing and accountancy.
Comparative figures are difficult to obtain in Southeast Asia but according to the ASEAN secretariat China accounted for about 14 percent of total trade before the downturn, followed by Europe with 10 per cent, Japan on 9 per cent and the US with 8 per cent.
As a result the IMF outlook for ASEAN is better with growth expected to top 5.0 per cent this year, a slight improvement from 4.6 percent registered in 2015.
Indonesia, Malaysia, Thailand and the Philippines are expected to do moderately well in the growth stakes and expand by at least four per cent annually over the next five years. The IMF says this could reach six per cent if further structural reforms lead to better productivity.
In a report released June 30, the IMF noted interest rates in the established ASEAN economies had been pushed unusually low and this and loose liquidity conditions “increased the risks of boom and bust cycles” of credit and asset prices.
PENDING REFORM, GREAT AND SMALL
Historically, the outlook numbers are low and analysts say the world will have to get used to single-digit economic growth in East Asia for the foreseeable future but ASEAN would continue to benefit by an expansion of intra-ASEAN trade.
“Significant progress has also been made towards liberalisation of trade in services, in sectors such as commercial aviation,” Biswas says, adding 80 percent of AEC objectives have been achieved.
He says major issues now include the integration of the financial systems by 2020, key to lifting cross-border investment flows in line with the AEC Blueprint 2025.
ASEAN finance ministers and central bank governors have struck bilateral deals for a Banking Integration Framework, which will enable greater market access for ASEAN banks.
Similar agreements are being forged in the insurance industry, opening up cross-border access for products such as catastrophic risk insurance against natural disasters.
An ASEAN Trading Link has also been worked out between the Singapore Stock Exchange, Bursa Malaysia and the Stock Exchange of Thailand. Biswas says this would provide common disclosure standards for regional share markets.
At the micro-economic level, EMC's Totten says non-tariff barriers in the trade of goods and services, foreign investment, and labour mobility still existed and needed to be dealt with.
“For example, the Mutual Recognition Arrangements are designed to promote labour mobility between ASEAN countries in the eight designated professions, but ASEAN countries are still years away from establishing the national regulations and institutions to give practical effect to this aim.”
Totten's sentiments were echoed by Najib who cited data from the Economic Research Institute for ASEAN and East Asia while urging speedier reforms. According to the institute all tariff rates were halved between 2000 and 2015 but non-tariff measures actually tripled over the same period to 5,975 from 1,634.
“We need to find more efficient ways of ensuring we recognise each other’s documentation, whether it is for pharmaceutical products, professional certificates or port entry requirements,” the Malaysian Prime Minister says.
THE TPP AND THE ROAD AHEAD
The TPP with the US and Japan (the world's first and third economies) on board along with 10 Pacific rim countries including four from ASEAN – Brunei, Singapore, Malaysia and Vietnam – holds the potential to sharply diminish the AEC's worth.
“Several other ASEAN members have also signalled an interest in joining the TPP trade deal, notably Indonesia and the Philippines,” Biswas says. “It will have a positive impact on their exports.”
He is backed by Gavin Greenwood, analyst with Hong Kong-based Allan & Associates, who warns the US-initiated TPP would offer access to far more attractive markets than the AEC.
“The AEC was born into a world where the natural instincts of political and business leaders was to preserve what they had rather than experiment with new arrangements many saw as containing more obstacles than advantages,” he says. “Six months on there is no indication this mood has shifted towards a more positive attitude.”
The poorest nations, Cambodia, Laos and Myanmar, which along with China, were left off the invitation list are railing against the TPP's introduction saying they will be worse off.
Still all three straddle important transport routes, strategic for the TPP and AEC – and with that access across ASEAN where a quarter of all people are middle class and have money to spend.
The ASEAN Bankers Association has forecast the region's population to grow by another 80 million people to about 700 million, with two-thirds attaining middle-class status, by 2030.
Totten says an intangible benefit of the AEC was it creates momentum for domestic, economic reforms in ASEAN countries which lack the same reform drivers that exist in open, democratic, market-driven economies.
“It gives a focus for efforts by donors, multinational companies and domestic businesses to push for reforms,” he says.
The prize is large – but so are the challenges, according to ANZ’s comprehensive studyCaged Tiger: The Transformation of the Asian Financial System.
It's an important aspect which the TPP is incapable of dealing with in a region divided by rigid political, ethnic and religious parameters that historically have acted as a brake on free trade and commerce.
That ability to reform, even slowly, did lend the AEC much needed support against the economic turbulence coming out of China, and elsewhere. And that is worthy of some praise at such an early stage of its existence.
Source ANZ BlueNotes