ASEAN more attractive for FDI in mfg services

MANILA, Philippines — The Association of Southeast Asian Nations (ASEAN), which is expected to be among the main growth engines in Asia Pacific in the next decade, is expected to become a more attractive destination for foreign direct investments (FDI) in manufacturing and services, according to S&P Global Market Intelligence.

Rajiv Biswas, S&P chief economist for Asia-Pacific, said in a report the ASEAN is expected to continue to be one of the fastest growing regions of the world economy, and one of the three main growth drivers of Asia-Pacific, along with mainland China and India, over the next decade.

He said total ASEAN gross domestic product is forecast to more than double to $6.4 trillion by 2030 from $3 trillion in 2020.

“The rapidly growing size of the ASEAN consumer market will become an increasingly important magnet for FDI inflows as multinationals establish manufacturing and services capacity in Southeast Asia to tap the domestic demand in the region,” Biswas said.

He said FDI inflows into ASEAN reached a record high of $174 billion last year, the same as the pre-pandemic high seen in 2019.

Contributing to the high level of FDI to the ASEAN last year are inflows to electronics manufacturing and projects related to electric vehicles.

Biswas said the electronics industry is an important part of the manufacturing export sectors of ASEAN economies like the Philippines, Singapore, Malaysia, Thailand, and Vietnam.

“Consequently these countries have been attracting new FDI inflows into the electronics sector as multinationals try to expand their production capacity given strong growth in global electronics demand since 2020,” he said.

In the near-term, he said FDI inflows to the ASEAN are expected to be supported by the resilience of the region to the slowdown in the US and European Union this year.

Citing the latest S&P Global Purchasing Manager’s Index data, he said manufacturing conditions across the ASEAN improved at the quickest pace for nearly a year in September, with firms seeing higher increases in output, new orders, purchasing activity and employment, while business confidence remained historically strong.

The headline ASEAN Manufacturing PMI rose to 53.5 in September from 52.3 percent in August, reflecting an improvement in the health of the region’s manufacturing sector for the 12th successive month.

Over the medium-to-long term, Biswas said the diversification of supply chains will be supporting the FDI inflows to ASEAN.

To reduce vulnerability to global supply chain disruptions due to natural disasters and the coronavirus pandemic, he said multinationals are focused on diversifying supply chains.

With the Russia-Ukraine war also leading to supply chain problems and disruption of pipeline gas supplies for the EU, he said this may reinforce diversification of manufacturing supply chains toward the ASEAN region.

In addition, he said ASEAN nations are expected to benefit from their membership in the Regional Comprehensive Economic Partnership (RCEP) agreement which seeks to boost trade and investment flows among Southeast Asian countries and trade partners China, Japan, South Korea, Australia and New Zealand through further reduction in tariff barriers and higher quality rules for trade in services.

“Following considerable disruption to Asia-Pacific trade flows during 2018-2021 due to the US-China trade war and the impact of the pandemic, the implementation of RCEP will help to further reduce barriers to regional trade flows within the Asia-Pacific region over the medium to long-term,” he said.

He said one important advantage of the RCEP is its very favorable rules of origin treatment, which is seen to help build manufacturing supply chains within the RCEP region across different countries.

“This will help to attract FDI flows for a wide range of manufacturing and infrastructure projects into the RCEP member nations,” he said.

While the Philippines is among the countries that signed the RCEP, it has yet to complete the ratification process for the agreement.

During the previous administration, the Senate did not vote upon the resolution to confirm the RCEP amid concerns on the agreement’s impact on the agriculture sector.

The Department of Trade and Industry and National Economic and Development Authority are pushing for the immediate ratification of the RCEP to allow the country to attract more investments.