Asean economies should tackle structural issues during Covid-19 slump

Singapore

WHILE Covid-19 has put a pause on investment activities in the region, there are a number of structural issues that Asean economies can and should tackle even as they grapple with the virus fallout.

Jeff Pirie, executive director, Corporate Finance Advisory, Deloitte Southeast Asia & Singapore, said this pause in investment activity could last from six months to a year, after which we may see a resurgence in merger and acquisition activity.

According to data from Mergermarket, Southeast Asia recorded 80 inbound and domestic deals in Q1 this year compared with 88 deals the same period last year.

David Wijeratne, Partner, PwC Growth Markets Centre was also optimistic.

"In the near past, Asean has shown strong signs of stability which should help post a robust recovery in investments once the current situation stabilises," he said, noting that as per the 2019 Asean Investment Report, the region registered all-time high figures for FDI in 2018 (US$ 155 billion), having witnessed a steady rise since 2016 and new investment records being seen for Cambodia, Indonesia, Singapore and Vietnam.

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But executive director of the EU-Asean Business Council, Chris Humphrey said those same numbers are a cause for concern.

"The region has been riding a wave of good news for the last few years, certainly since the last financial economic downturn in 2009 ... but something like (Covid-19) comes out of the blue, it can deflate your balloon quickly," he said.

One of the key issues highlighted by the association is the lack of progress on the implementation of the Asean Economic Community (AEC).

The EU-Asean Business Council published a paper in late March calling on Asean to realise the vision of the AEC, to remove non-trade barriers (NTBs) and trade more with itself.

"Progress on the Asean AEC continues to be painfully slow. The much talked about promise of a 'single market and production base' as set out in the original AEC Blueprint 2015 has failed to materialise; the dream remains a dream and if anything is further away than ever before," stated the report.

According to the EU-Asean Business Sentiment survey which was released in September last year, 88 per cent of respondents said they expect to increase their trade and investment in Asean in the next five years, up from 75 per cent in 2018.

It is worth noting that while these figures reflect pre-Covid-19 sentiments, issues including perception of unfair competitive practices from local/regional actors have continued to increase (77 per cent said they believe they face unfair competition at least occasionally, up from 62 per cent in 2018).

More than half (54 per cent) of the respondents said there are too many barriers to the efficient use of regional supply chains in Asean. Of those who already use regional supply chains, 80 per cent said they would increase usage if barriers were removed.

Indeed, even as Asean aims to remove NTBs to trade, 78 per cent of respondents said they face too many barriers, up from 63 per cent in 2016.

PwC's Mr Wijeratne agreed that NTBs remain an issue and "must be considered a priority" by Asean governments to improve investments.

Deloitte's Mr Pirie added that the current situation "provides an impetus" to redouble efforts to meet the 2025 goals for the AEC.

"Of course, such efforts have to take a back seat until we transition to the next 'normal'. As that state becomes clearer, it will likely be recognised that a more integrated Asean will be more resilient as a whole," he said.

Marc Philipp, Management Consulting Leader, PwC South East Asia Consulting added that moving forward, end-to-end connected supply chains will become imperative for market success, not just for large-scale customers but also medium and smaller suppliers.

Using digital solutions to connect various data sources across the value chain participants in real time will enable companies to move towards more autonomous, self-managing supply chains, he noted.

"Unfortunately companies in Asean are lagging behind peers in other APAC countries when it comes to digitalising its operations. This is an area that will require accelerated efforts to take advantage of market opportunities and remain a preferred investment destination for multi-nationals worldwide."

Even as consultants look further out for a rebound in interest in the region, Enterprise Ireland (EI), which is the Irish Government's trade and innovation agency, notes that Asia remains a bright spot for Irish companies.

Mainstream Renewable Power for instance has appointed a CEO for the Asia-Pacific region as it ramps up development in the region.

"In terms of energy needs and requirements, Vietnam is one of the fastest growing markets in SEA," said group CEO and executive director Andy Kinsella.

"We are currently developing South-east Asia's largest offshore wind farm in Vietnam, we are progressing two wind farms in the Philippines and are evaluating a number of exciting opportunities across a range of new markets in the APAC region."

Meanwhile, Irish IT firm Arkphire announced at the end of April that it had acquired Singapore-based Generic Technologies in what it called a "landmark acquisition" following the opening of its regional office in 2019.

In a post-Covid-19 world, the fundamental shifts in growth are broadly going to remain relevant to companies seeking new growth opportunities. But more may now look at how they can make their global supply chains more resilient and less China-centric, said PwC's Mr Wijeratne.

Asean could be a potential destination for them to establish more balanced and regional value chains.

Kevin Ryan, director of Asean for Enterprise Ireland, said: "The Free Trade Agreements already signed between Vietnam, Singapore and the European Union, which are coming into force this year, are only the beginning.

"As we navigate through these current global uncertainties, we remain steadfast and committed to increasing the awareness of our client company's vibrancy in the Asean region, and are looking forward to making a positive contribution towards greater economic vibrancy in South-east Asia."