Trade agreements could help SE Asia attract big foreign investment again, lead recovery

24, Feb. 2021

Singapore's high-rise residential buildings are seen beyond the fringe of Tanjong Pagar area in the financial district. Investments for the region are often funneled through Singapore, the financial capital of Southeast Asia. (NNA)
Singapore's high-rise residential buildings are seen beyond the fringe of Tanjong Pagar area in the financial district. Investments for the region are often funneled through Singapore, the financial capital of Southeast Asia. (NNA)

By Celine Chen

SINGAPORE, NNA - The new RCEP free-trade agreement could offer a promising investment boost in post-COVID recovery for countries in the Asia Pacific walloped by the pandemic, according to the United Nations Conference on Trade and Development (UNCTAD).

In a report in January, UNCTAD said ASEAN could take advantage of RCEP or the Regional Comprehensive Economic Partnership to reinvigorate its ability to draw sizable foreign direct investments (FDI) after it plunged by 31 percent to $107 billion last year as flows to its largest recipients in the grouping weakened.

The setback contrasted sharply to their best-ever performance in 2019 when FDI continued an uptrend, rising 5 percent to $156 billion.

With the exception of China, global FDI collapsed in 2020 in the wake of pandemic lockdowns and factory stoppages, tumbling 42 percent from $1.5 trillion the year before to an estimated $859 billion, said the United Nations intergovernmental body which released its Investment Trends Monitor report on Jan. 24.

In fact, the APAC region looks set to lead the recovery in FDI which slumped globally last year, said UNCTAD although it gave a weak global outlook for 2021.

It noted that Southeast Asia was able to garner more than $70 billion in greenfield investment projects, the highest volume among developing regions, despite the devastating crisis. Also, greenfield investments for the ASEAN group shrank moderately by 14 percent compared to other developing regions.

While greenfield investment in trade-exposed manufacturing in the RCEP region dived by more than 40 percent over the last decade, UNCTAD observed an uptick in new greenfield investment projects in Singapore in the third quarter of 2020. This could signal an impending FDI recovery in Southeast Asia, it said.

In fact, Singapore attracted about nearly $13 billion (S$17.2 billion) in fixed asset investments in 2020, beating the country's Economic Development Board's medium to long-term target of $6 billion to $7.5 billion, and exceeding 2019's performance of $11.4 billion. The large capital investments were for electronics, chemicals, and research and development sectors, said the statutory board in January.

UNCTAD also noted that the least developed country signatories of Cambodia, Myanmar and Laos had respectively received more than 70 percent, 80 percent and 90 percent of their FDI from other RCEP members. Economic cooperation under the trade partnership could further enhance both project finance in infrastructure and industrial investment in these countries, it said.

The sectors seeing the greatest inward investment into much of ASEAN since the most severe period of lockdowns have been in manufacturing, finance and real estate, said Bob Savic, advisor to Dezan Shira & Associates.

With regards to manufacturing, ASEAN is valued by investors from outside the region as a vital hub in the process of supply chain management, including both the security of medical supplies that are essential to battling the current and future pandemics, but also in a wide range of consumer and capital goods, he said in an interview with NNA.

"This is particularly so, as US, Japanese and European companies relocate production out of China, where the costs of production have risen over recent years," said Savic, who has provided over 20 years of tax, legal and economic advisory services to businesses and international institutions in Asia Pacific and North America.

In addition, investments in finance and real estate have risen too due to the expanding nature of ASEAN's services economy which is developing rapidly alongside manufacturing, he noted.

Giving Vietnam as an example, he said FDI flows to the country in January saw a yearly increase of 4.1 percent to $1.5 billion. The lion’s share of about 75 percent went to manufacturing and processing industries, while real estate accounted for nearly 9 percent. Their top investment sources came from Singapore, China and Hong Kong.

Vietnam's positive FDI statistics may be a forward indicator of improving FDI inflows for the rest of ASEAN, he added.

Savic also firmly believes that regional trade agreements, including the RCEP and the Comprehensive Progressive Trans Pacific Partnership (CPTPP) are proving to be game-changers in enabling more seamless and efficient platforms of trade in goods and services across East Asian economies, in particular.

He said, "Indeed, one may say that RCEP, as a regional integrator for both ASEAN and East Asia, as a whole, is the regional bloc's premier masterpiece in economic and political diplomacy. Of course, RCEP's successful conclusion is also built on the regional integrative effects of the ASEAN Economic Community (AEC), which the bloc successfully concluded and enacted a half decade earlier."

Inked in mid-November last year, RCEP is one of the world’s largest trade and investment pacts with the 10-member ASEAN grouping in Southeast Asia.

On the efficacious features of RCEP, UNCTAD said, "The investment provisions in the agreement mostly consolidate existing market access as contained in myriad bilateral agreements. However, the provisions related to market access and disciplines in trade, services and e-commerce are highly relevant for regional value chains and market-seeking investment."

Fifteen countries in the Asia-Pacific region have joined RCEP, including major and mature economies of Japan, China, South Korea, Australia and New Zealand.

UNCTAD noted that the RCEP region is already an important investment destination, accounting for 16 percent of global FDI stock and more than 24 percent of flows. While global FDI has been stagnant in the past decade, the RCEP group has demonstrated a consistent upward trend until 2019.

It said, "The agreement comes at a time of major upheaval caused by COVID-19. The pandemic will lead to a drop in FDI in the region of about 15 percent. However, this compares favorably to a fall of 30-40 percent in global FDI, and the region looks set to lead the FDI recovery."

Backing the opinion, Savic said, "Suffice it to say, Asia is currently leading the global economy with FDI inflows either picking up, at the beginning of 2021, or demonstrating convincing signs of a significant rise from last year’s negative growth patterns."

Writing in Asia Briefing, Savic, who is a visiting professor with Nottingham University's Asia Research Institute in the UK, Malaysia and China, said, "Although ASEAN’s FDI inflows were largely negative during 2020, several of its economies appear to be back on track in attracting growing levels of FDI, boosted by a series of recently-agreed regional trade agreements, in addition to prospective ones, which connect the regional bloc to the giant growing markets of China and India."

A key challenge for RCEP and ASEAN is following through on economic integration efforts at a time of global and intra-regional geopolitical and trade tensions. However, UNCTAD sees the diversity within the RCEP as favorable for boosting investment prospects through complementary locational advantages.

Intra-regional investment, which stands at about 30 percent of total FDI in RCEP, has enormous room for further growth as it is relatively low compared to other major economic partnerships.

UNCTAD added, "The ASEAN group, at the heart of the RCEP, will play an important role. Already about 40 percent of investment in ASEAN comes from RCEP members."

Emphasizing the need for multinational enterprises to diversify supply sources and strengthen regional value chains, UNCTAD said this should translate not only in shifting FDI patterns within the region, but also in renewing overall growth of international investment in industry.

Savic pointed out that ASEAN has received increasing recognition by world governments, from Japan, China and India to the US and Europe which sees the bloc's "centrality" as a major geographic, political and economic intersection point for the large and fast-expanding economies of the Asia-Pacific.

He told NNA, "Hence, the region will continue to serve as a focal point for major players in which to resolve policymaking differences, while also pushing ahead with new plans for economic connectivity, such as re-designing international supply chains through the ASEAN region and its increasingly integrated economies," he added.

Savic also noted how ASEAN countries had come together to tackle challenges during the pandemic, such as Vietnam and Thailand facilitating rice exports to the Philippines and Indonesia when supplies saw a shortage.

"This collective response has raised the consciousness of policymakers both in ASEAN and overseas, of the region's great potential to become an increasingly seamless integrator of shared economic interests that would benefit both supplies of and demand for international investors' goods and services," Savic concluded.

However, Edward Senju, regional CEO of Sansan, a provider of digital contact management solutions, feels there is a need for much better integration and uniformity.

He told NNA, "I think Asean could attract more foreign investment by establishing a unified market structure that comprehensively covers areas like trade and regulation. Southeast Asia is often thought of by international investors as being a single market. But in reality, it’s still very fragmented and each country has its own laws and regulations."

These complexities can create barriers to entry and investment. A more unified pan-ASEAN regulatory framework would be a positive development for efforts to attract more international capital inflows, especially after a difficult year of COVID," said Senju.

If ASEAN could adopt a super regulatory structure similar to the one of European Union with jurisdiction covering an extensive spectrum including logistics, data, privacy, language and currency, it would certainly make it a more attractive investment destination, he stressed.

On the other hand, Savic does not expect obstacles to new investments to arise out of ASEAN's expanding and deepening regional construct, which is increasingly raising the interest of both global governments and commercial investors planning to invest and trade with ASEAN.

Any downside is likely to crop up when an ASEAN state takes action which may shake the confidence of foreign investors, such as in the case of the coup d'état in Myanmar, he said.

Nevertheless, while some foreign governments have been heavily critical of the Myanmar military with moves to impose sanctions, neighboring states and the ASEAN organization itself have undertaken the road of "quiet diplomacy" to deal with the crisis behind the scenes. It is sometimes referred to as "the ASEAN way" in which international diplomatic circles have increasing faith, he said.

Slavic also noted that recent ASEAN's AEC meetings covering the development of regional e-commerce, ICT, transport, tourism, innovation and many other areas affecting trade, were all discussed in detailed and systematic formats to progressively advance regional integration, alongside efforts of the ASEAN Integration Task Force.

However, recovery for Southeast Asian stock markets has been slower as daily COVID-19 cases in some countries continued to rise, said Chilok Cheung, a multi-asset portfolio manager in Mercer’s investment management business, adding he would prefer exposure to the broader Asia-Pacific region instead.

He said, "We expect growth to continue to hinge on the containment of the virus and vaccine rollouts which are likely to be slower in ASEAN than Europe and the US due to both supply and distribution issues. While ASEAN is cheaper relative to the Asia Pacific on measures such as P/E and P/B, this is a reflection of some countries’ struggles with the COVID situation such as Malaysia, Philippines and Indonesia and others which are leveraged plays on the global economic recovery as seen in Singapore and Thailand. Therefore, we think these discounts are warranted at this time, and we prefer exposure to the broader Asia Pacific over ASEAN."

Recently, BlackRock, Inc., the world's largest asset manager, reaffirmed its commitment to the fast-growing APAC region as a "top strategic priority for BlackRock" when it appointed one of the firm's strongest leaders to manage its Asia-Pacific business from Hong Kong.

At the same time, BlackRock CEO Larry Fink made an urgent plea to world CEOs and investors to go green, in line with UNCTAD's earlier recommendation that RCEP partnerships focus on priorities such as boosting investment in sustainable post-pandemic recovery.

UNCTAD said, "This requires investment in infrastructure, clean energy and healthcare, all of which rely on increasing international project finance. The RCEP includes several top source countries for project finance. There is room for growth. For example, the RCEP attracts projects in line with its global FDI share but accounts for only about 12 percent of projects in renewable energy."

Southeast Asia received a record $156 billion in FDI in 2019 as it continued to shine as the region’s growth engine. It was driven by strong investments mainly in Singapore, Indonesia and Vietnam which collectively accounted for 80 percent of inflows which came from other Asian economies, the U.S. and within ASEAN too.

But last year, FDI for Singapore plummeted 37 percent to $58 billion, Indonesia by 24 percent to $18 billion, and Vietnam by 10 percent to $14 billion. Malaysia tumbled 68 percent to $2.5 billion.

In Singapore, through which investments are often funneled to the sub-region, cross-border mergers and acquisitions nosedived by 86 percent, reflecting a significant downswing in foreign acquisitions in the region.

In Thailand, FDI fell 50 percent to $1.5 billion mainly due to a large divestment when Tesco UK sold its stores to Thai conglomerate CP Group for $9.9 billion. Bucking the trend, investment flows to the Philippines jumped 29 percent to $6.4 billion.

However, FDI in South Asia rose 10 percent to $65 billion, with India seeing foreign investments rising 13 percent to $57 billion as funds continued to pour into the digital economy, especially through acquisitions.

UNCTAD said 2020's low level of global FDI, last seen in the 1990s, is more than 30 percent below the investment trough that followed the 2008-2009 global financial crisis.

UNCTAD expects FDI flows to remain weak as long as there is uncertainty over how the COVID-19 pandemic would pan out.

While investors have generally remained cautious, they have also said they plan to double their allocations to sustainable products over the next five years, according to BlackRock’s global client sustainable investing survey. R

Releasing the survey results last December, the firm said 20 percent said the pandemic would actually accelerate their sustainable investing allocations.

The survey gathered feedback from 425 investors in 27 countries, including corporate and public pension plans, asset managers, endowments, foundations, and global wealth managers with a total of nearly $25 trillion in assets under management.