May 2019

Now that the Association of Southeast Asian Nations (ASEAN) has celebrated its 50th birthday, how will it meet its 2025 objectives? flow provides an update on this vibrant trading bloc’s progress so far and looks at how it is leading the way in digital transformation

While certain parts of the globe have been demonstrating a preference for economic nationalism over multilateralism, this most certainly does not apply to the ASEAN trading bloc.

The Kuala Lumpur Declaration on ASEAN 2025: Forging Ahead Together, signed by all 10 ASEAN leaders at the 27th summit in November 2015, is alive and well and the ASEAN Economic Community (AEC) has agreed a blueprint of measures to transform industries, enrich lives and propel global progress.1 The summit also saw the establishment of the AEC, a milestone in the regional economic integration agenda in ASEAN.

Having celebrated its 50th anniversary in 2017, the bloc has gone a long way towards meeting the goal of the ASEAN founders: to improve the lives of Southeast Asian people. Over the past two decades, ASEAN has lowered the proportion of people living on less than US$1.25/day from one in two people to one in eight. Life expectancy increased to 70.9 years in 2016 from 55.6 years in 1967. Infant mortality rates fell from 57 per 100,000 live births in 1990 to 20 per 100,000 in 2015. Adult literacy rates increased to 94.9% in 2016 from 74.5% in 1980. This is solid evidence that ASEAN member state progress has reached the grass-roots level.

In 2017, flow’s Reimagining ASEAN microsite2 reviewed progress made on the AEC goals of creating a more holistic and globally competitive ASEAN. It noted that the bloc is home to nearly 650 million people (9% of the world’s population), and its 10 countries (see Figure 1) are creating a regional powerhouse of infrastructure, trading corridors and connectivity. It has youth on its side − while population ageing is becoming a prominent feature in more advanced and maturing economies, ASEAN’s large young population has helped build its US$2.8trn (2017) economy.

At the time, Deutsche Bank’s Head of Market Advocacy, Asia Pacific, Boon-Hiong Chan, made the point that ASEAN integration involves both the economic and financial markets, “breaking down cross-border barriers for an enlarged market with higher economies of scale”. Progress had been good, he noted: “Tariff barriers are falling down, regional supply chains are flourishing, and multinational companies in ASEAN are supporting smaller domestic firms’ participations in global value chains.”3

Since then, robust GDP growth, investment rates, tariff reductions and financial cooperation have remained positive, but these trends only tell part of the story. Good macroeconomic policy is certainly helpful, but, most importantly, ASEAN human resources are now stronger to meet the challenges that the future will bring.

“Close to 99% of tariffs on goods within ASEAN have already been removed and intra-ASEAN trade has significantly risen,” notes Deutsche Bank’s Head of Global Transaction Banking, Asia Pacific, David Lynne. “As ASEAN progresses on its goals, leading to seamless movement of goods, services, data, investments, capital and transaction banking flows, they will in turn provide new opportunities for those who can more efficiently cover their ASEAN operations.”

650
million people

(asean.org)

Economic growth

ASEAN’s economic expansion has outpaced the rest of the world and the region is ranked as the world’s fifth largest – and Asia’s third largest – economy. Since 2018, ASEAN has been publishing its own economic data.4 As Deutsche Bank Research noted in 2017, the major ASEAN economies have strengthened their macroeconomic fundamentals by trimming budget deficits and accumulating sufficient foreign currency reserves, which has built market confidence and reduced their vulnerabilities to external shocks.5

As the ASEAN Secretariat explains (see note 4), total GDP for ASEAN reached US$2.77trn in 2017, more than quadrupling the 2000 value of US$615bn. The economic data demonstrates how the trend in ASEAN GDP per capita follows the trend of total GDP: after the 1997–98 Asian financial crisis plunge, another strong decline was observed in 2009, likely as a result of the 2007–2008 global financial crisis, followed by another period of growth – albeit fluctuating – reaching US$4,308 in 2017.

Intra-ASEAN trade makes up the largest market for ASEAN total trade, reflecting the bloc’s success with economic integration compared with, say, intra-regional African trade, which only accounts for around 10% of commerce on that continent.6 The share of imports represented 23.5% and 22.3% of ASEAN total exports and imports respectively in 2017, which indicates that the Kuala Lumpur 2015 expectation of growth of intra-ASEAN trade to 30% of total trade by 2020 was accurate. At the time, Malaysia External Trade Development Corporation CEO Datuk Dzulkifli Mahmud noted that the region has “all the ingredients of a great trading hub”, having eliminated many trade barriers.

“The other largest markets for ASEAN exports in 2017 were China (14.1% of ASEAN total exports value), EU-28 (12%), USA (10.8%), and Japan (8%); while the other largest markets for ASEAN imports were China (20.3%), Japan (9.1%), EU-28 (8.3%), Republic of Korea (7.9%), and US (7.3%),” continues the ASEAN Secretariat (see note 4).

“The other largest markets for ASEAN exports in 2017 were China (14.1% of ASEAN total exports value), EU-28 (12%), USA (10.8%), and Japan (8%); while the other largest markets for ASEAN imports were China (20.3%), Japan (9.1%), EU-28 (8.3%), Republic of Korea (7.9%), and US (7.3%),” continues the ASEAN Secretariat (see note 4).

"We need to ensure the 4IR will really contribute to what we are doing in ASEAN, particularly in terms of economic integration"

Aladdin Rillo, Deputy Secretary
General, ASEAN

Size and profile of population, along with scope for economic growth, have all helped attract booming foreign direct investment (FDI) to the region from intra- and extra-ASEAN sources. Post-crisis, FDI levels have risen significantly, with the region recording the highest amount in 2017 at US$27bn from intra-ASEAN FDI and US$108bn from extra-ASEAN FDI. According to ASEAN Secretariat data (see note 4), the EU remains the largest extra-ASEAN source of FDI inflows, although its share has decreased from 42.2% in 2000 to 18.3% in 2017. The largest recipients of FDI inflows in 2017 were the wholesale and retail trade sectors (28.6%).

Financial cooperation

During the 2018 Singapore chairmanship, the strategic objectives of financial integration, financial inclusion and financial stability were set out. These are helpfully summarised in the infographic produced by the Monetary Authority of Singapore (see Figure 5).

Delivering on these objectives would mean that all ASEAN member states would have embraced the fourth industrial revolution (4IR). From cross-border instant e-payments using QR codes, to e-commerce, its trade governance framework, data governance, cyber security, ASEAN Single Window (ASW) and ASEAN Smart Cities Network (ASCN); it’s a hefty programme.

In an interview with flow,7 ASEAN Deputy Secretary General Aladdin Rillo pointed out that 4IR affects “everyone in ASEAN, businesses and government”, and that, at recent summit events, ASEAN leaders had given the highest political recognition to the need to maximise the opportunites from 4IR. An ASEAN assessment study to identify how prepared the different ASEAN countries were to embrace the 4IR, revealed a wide diversity of readiness. “We need to have a more holistic regional strategy to ensure the 4IR will really contribute to what we are doing in ASEAN, particularly in terms of economic integration,” said Rillo.

Digital integration framework

The ASEAN agreement on e-commerce was signed in November 2018, setting out how e-commerce can be developed and actioned in the regions. In the same year, the ASEAN digital integration framework 8 was adopted, identifying the priority areas for digital integration. These are: to facilitate cross-border e-commerce transactions; create an environment of trust and confidence in the use of e-commerce; and to deepen cooperation among ASEAN member states to further develop and intensify the use of e-commerce to drive regional economic growth.

Payments and settlement

One key area is cross-border electronic payments. In November 2017, leading ASEAN payment system operators, observed ASEAN Today, “moved a step closer towards regional real-time payments connectivity”. They signed a Memorandum of Understanding to enable real-time cross-border payments. “Together, Payments Network Malaysia, National ITMX Co. Ltd of Thailand, National Payment Corporation of Vietnam, Singapore’s Network for Electronic Transfers and Indonesia’s PT Rintis Sejahtera agreed to their respective payment infrastructures,” noted the newswire.

ASEAN 2019 host member country Thailand presented its plans for a national digital trade platform at a January 2019 Bangkok conference. Scoped as a domestic and cross-border B2B platform featuring good connectivity across the Thai trade ecosystem, it would, reflects Deutsche Bank’s Boon-Hiong Chan, “support the Thai exporting sector, which accounts for more than 70% of Thai GDP, and can synergise with other projects, such as the one from the Thailand Blockchain Community on block-based letters of guarantee to reduce the current manual and paper processes”.9

This initiative, together with similar ASEAN digital trade platforms such as those of Singapore’s Networked Trade Platform and TradeTrust, alongside the ASW, are, he adds, “examples to the rest of the world on how to make the 10% trade cost reduction target agreed by ASEAN leaders two years ago possible”. In other words, explains Deutsche Bank’s David Lynne, “ASEAN is progressing with cross-border interoperability in instant payments, seeking connectivity between different national trade platforms, overhauling its capital market infrastructures, and embracing digitalisation and the 4IR”.

In 2012, the ASEAN Central Banks’ Working Committee on Payment and Settlement Systems (WCPSS) identified that there was no reference for the development and harmonisation of payment and settlement systems and stated: “ASEAN payments aim to foster integrated, safe and efficient payment and settlement systems in the region that enable businesses and individuals to make or receive cross-border electronic payments with greater convenience.” Currently, the WCPSS is progressing on a number of initiatives, including a redraft of the ASEAN Payments Policy Framework and a roadmap for an interoperable real-time retail payment system.10

Road ahead

While some ASEAN countries are presently more advanced than others when it comes to digital transformation, it seems inappropriate to single out what are often grouped as the top five or six. There is an ‘all for one and one for all’ mentality that pulsates out from all the positioning and policy statements. As Rillo aptly put it: “At the end of the day, the economic community is all about how the market responds.”

US$2.8trn
economy

(asean.org)

Rillo sees the private sector – including financial institutions – as important contributors to the bloc’s market integration efforts: “There is a significant need for the private sector to help us with critical infrastructure. In addition, we are looking to the private sector to help us develop innovative products and instruments to deepen our capital market presence”.

"Close to 99% of tariffs on goods within ASEAN have already been removed and intra-ASEAN trade has significantly risen"

David Lynne, Head of Global Transaction
Banking, Asia Pacific, Deutsche Bank

Deutsche Bank’s David Lynne concludes: “We remain excited by ASEAN as the third pillar of growth in Asia. The ASEAN Economic Community goals by 2025 should create a region of prosperity and opportunities for all.”

This article is based on updated research and analysis from resources available at flow’s Reimagining ASEAN pages. This can be viewed at https://bit.ly/2TZVW7P. The flow team are also grateful to Syetarn Hansakul, Deutsche Bank’s Senior Economist in Singapore, for her additional insights

What is the ASEAN Single Window (ASW)?

The ASW is a regional initiative set up to expedite cargo clearance and promote ASEAN economic integration by enabling the electronic exchange of trade-related documents among ASEAN member states.

 

According to the World Bank, each day of delay in cargo clearance reduces import and export volumes by 1%; in ASEAN, it takes more than 20 days on average to import or export goods, raising costs for traders. Two years ago, ASEAN economic leaders agreed a target that by 2020, trade transaction costs in the region would decrease by 10%.

 

The ASW has been operational in a live environment since 1 January 2018 among Indonesia, Malaysia, Singapore, Thailand and Vietnam. The granting of preferential tariff duties under the ASEAN Trade in Goods Agreement is based on the exchange of an electronic Certificate of Origin, received through the ASW gateway. The remaining member states are still developing their National Single Windows in preparation to join the ASW system.

 

This streamlines trade procedures and documentation for government agencies and reduces costs.

Source asw.asean.org

_________________________________________

Sources

1 See https://bit.ly/2Utjnqr at asean.org

2 See https://bit.ly/2TZVW7P at cib.db.com

3 See https://bit.ly/2YXtuCm at cib.db.com

4 Economic statistics are from the ASEAN stats database up to 2017 at https://bit.ly/2G0cKBK, aseanstats.org

5 See https://bit.ly/2D4lAhl at cib.db.com

6 See https://bit.ly/2IlHBLT at eac.int

7 See https://bit.ly/2uWW8FY at cib.db.com

8 See https://bit.ly/2WW5NIP at asean.org

9 See https://bit.ly/2UZBEa0 at cib.db.com

10 See https://bit.ly/2GcTZMY at aseanwcpss.org

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