In an era marked by rapid technological innovation and turbulence in the global trade environment, China’s ascendance to superpower status is having a profound impact on emerging markets the world over, and nowhere more so than in South-east Asia. Over recent years China has successfully established itself as the largest trade partner for ASEAN and is increasingly being relied upon by governments across the 10-member bloc to provide finance and manpower to fulfil ambitious public infrastructure programmes.
Evidence of the shift away from unipolarity can be seen in the fact that every single Asian country now trades more with China than with the US, an imbalance that is expected to grow as the Chinese economy continues to outpace that of the US. How does this impact the decisions of corporate executives in the fast-growing economies of ASEAN?
The results of OBG’s latest regional business barometer suggest that a slowdown in Chinese demand is the biggest external concern shared by CEOs. Indeed, a collective 28% of respondents across the four participating countries cite this as the biggest external threat to the growth trajectories of their domestic economies, followed by some 26% who choose trade protectionism and 20% who highlight rising commodity prices.
The participating countries in the latest OBG Business Barometer: ASEAN CEO Survey are the Philippines, Indonesia, Thailand and Myanmar – all states that have experienced significant growth in Chinese foreign direct investment (FDI), trade and tourism flows over recent years. Interestingly, Philippine executives are least concerned about a slowdown in Chinese demand, despite the concerted efforts of President Rodrigo Duterte to court Chinese backing for big-ticket infrastructure projects, which have so far resulted in headline-grabbing pledges but few tangible results.
In a country where Chinese visitors are now the second-largest source market for the burgeoning tourism industry, and where real estate developers are increasingly reliant on Chinese investors and tenants, one might have expected more concern from executives about a decline in demand from its
heavyweight neighbour as it grapples with US trade sanctions while attempting a seismic economic rebalancing towards consumption-led growth. But the biggest concern of Philippine CEOs is, in fact, rising commodity prices (30%), with the steady increase in oil prices throughout much of last year contributing to a severe trade deficit and elevated inflation.
Despite the growing influence of China across the region and beyond, there are reasons to believe that ASEAN can remain resilient to any external effort to put undue pressure on its interests. As regional thought-leader Parag Khanna, founder and managing partner of FutureMap, reminded OBG recently, ASEAN has a larger GDP than India and receives more FDI than China. While poorer member states such as Cambodia and Laos remain particularly vulnerable to robust economic diplomacy from foreign powers, closer economic integration and trade linkages between the bloc of over 600m people can help safeguard against turmoil in the global economy, as well as provide the scale needed to commercialise new innovations that can address development bottlenecks.
Further improvements needed in the business climate Results are mixed on questions related to the domestic business climate in participating member states. This reflects significant regulatory divergence, notwithstanding incremental efforts to foster a cohesive single market and production base in line with the ASEAN Economic Community 2025 blueprint.
When asked to describe their domestic tax environment on a global scale, a total of 38% of CEOs describe it as competitive or very competitive, with 45% opting for the opposite responses. Once again, the Philippines is the main outlier: just 23% of executives based there describe their domestic tax environment as positive or very positive, against 59% who choose negative responses.
Philippine CEOs responded at a time of tremendous disruption in the tax framework, with the government forging ahead with a comprehensive tax reform agenda designed to raise revenues for its Build Build Build infrastructure drive, while boosting the competitiveness of small and medium-sized enterprises, and expanding the provision of social services such as universal health care. While these are all worthy aims, critics have – perhaps unfairly – linked tax reforms effected at the start of last year to the spike in inflation in 2018, and some are concerned that the proposed rationalisation of investment incentives to offset the reduction in the corporate income tax rate will make the country a less appealing destination for FDI.
On the issue of credit access, the results again paint a mixed picture. Some 39% of respondents across all four states describe it as easy or very easy, with 46% choosing the opposite responses. Thai CEOs are most satisfied with the environment for accessing credit, while Philippine executives are also generally upbeat. The overall results were skewed by the very negative responses from CEOs in Myanmar, where 81% say it is difficult or very difficult to access credit and just 8% express a positive view.
The Myanmar financial sector’s inability to serve the needs of the real economy is a persistent problem we have encountered in our research since entering Myanmar in 2014. Although the banking sector began slowly opening up in 2011, it remained severely constrained by restrictions on the participation of foreign banks in the market and interest rate caps imposed by the central bank, which made it very difficult for financial institutions
to adequately price risk when extending credit.
However, recent positive moves by the Myanmar government and central bank are addressing some of the main problems, with foreign banks being permitted to engage in wholesale banking services and trade finance for the first time. This liberalisation wave is expected to extend to retail banking services next year, while the central bank has also allowed lenders to offer higher interest rates for borrowers unable to meet strict collateral requirements. As reforms gather pace, we would expect to see an improvement in sentiment in our next survey.
Despite challenges in the business environment, investor sentiment remains enthusiastic across participating countries, with 75% of respondents indicating their firm is likely or very likely to make a significant capital investment in the next 12 months. Sentiment is highest in Thailand (81%) and lowest in Indonesia (72%), but the broadly positive results indicate that ASEAN’s potent mix of aspirational consumers, digital natives and abundant
natural resources continue to hold the promise of high returns.
Regional leadership deficit
One factor that could nevertheless prevent the region from reaching its full potential is the significant skills gap observed in each country. For example, while Thailand and Indonesia have each set out national Industry 4.0 and digital economy strategies for nurturing innovative industries and high-tech services, both lack the deep talent pool required to enable such a comprehensive transition in the short term.
As well as the technical and analytical skills needed to drive growth in tech industries and advanced manufacturing, a more abstract quality seems to be lacking from the regional workforce: leadership. According to the results of our survey, leadership is the skill most needed in the labour force across the region (33%), followed by engineering (18%), and research and development (14%). When asked to elaborate on why they chose leadership, Indonesian CEOs in particular often bemoan a limited pool of skilled mid-level managers capable of nurturing junior talent, and raising productivity and performance levels.
With this in mind, wholesale changes to national curricula and teaching methods may be in order so the promising emerging economies of ASEAN can successfully cultivate the next generation of entrepreneurs and business leaders with the vision to harness disruptive technologies to promote inclusive, sustainable growth.