Supply chain shifts and reshoring to have mixed impact on Asean: Moody's

SHIFTING supply chains as countries reconfigure trade relationships following the coronavirus pandemic will result in mixed credit implications for the Association of Southeast Asian Nations (Asean), said Moody's Investors Service in a report this week.

"While the technological capabilities of the Asean region still lag those of more advanced Asian economies, particularly in electronics, a general openness to foreign direct investment and lower production costs will offer some advantages," said Moody's assistant vice-president and analyst Deborah Tan.

"We expect many governments and companies will reduce their dependence on China in global value chains moving forward, driven by the coronavirus outbreak, the China-US trade conflict, and heightened national concerns over economic security," she added.

But while trade diversification will likely favour Asean economies over time, the reshoring of supply chains closer to consumer markets, particularly in sectors with heightened security requirements such as pharmaceuticals, could move productive capacity away.

To mitigate the impact of a possible reshoring trend and the associated fragmentation of the global trading system, the region could look to enhancing free trade agreements, or FTAs, with advanced economies, stated the report. This might provide additional incentives for multinational corporations to retain some of their productive capacity in the region. Asean could also deepen its linkages in Asia through mechanisms such as regional multilateral trade agreements.

Asean could also develop further as a trading bloc in its own right, developing deeper economic integration and taking advantage of its growing middle class.

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As its middle-class population grows, household purchasing power will rise and become a significant driver of consumption and investment. But the region will need to address structural challenges to harness its full potential, stated the report.