South-east Asia remains an investment bright spot in uncertain global economy

(Photo credit: BT File)

Source: The Business Times

It was 2013, the night before the launch of UOB’s Foreign Direct Investment (FDI) Advisory centre in Indonesia. It was then too, that the rupiah weakened due to global and domestic factors. While the weakened currency was not representative of Indonesia’s vast hinterland and growing economy, there were understandable concerns.

At the launch, the local media questioned why investors should still invest in Indonesia and the region. To which I replied: “The answer is in the room.”

After a moment of puzzled silence, I shared that FDIs will continue to flow into Indonesia because of the availability of young talents like yourself. Indonesia’s rich resource of a young demographic remains a key draw for FDIs.

More than a decade later, this has proven true. But it has taken more than young talent to drive record investments into South-east Asia. The numbers are also built on a robust regional trade structure set up by the Association of Southeast Asian Nations (Asean).

In particular, the Asean Economic Community (AEC), which celebrates its 10th anniversary in 2025. Despite the achievements, however, intraregional trade and the sheer diversity of the region present challenges.

Record inflows

When the AEC was created in 2015 to drive regional economic integration, there were doubts about the Asean consensus approach, where decision-making is based on consultation and trust. Was the dream of achieving a single market, with shades of the European Union, a step too ambitious?

Yet, a decade on, the numbers have allayed such concerns. Annual FDI inflows since AEC was created have increased 45 per cent, breaking the US$200 billion mark in 2021 and achieving three consecutive years of record inflows since.

The AEC has created an investment-friendly environment through numerous initiatives.

Regional agreements such as the Asean Free Trade Area (AFTA), and frameworks such as the Asean Single Window and the Asean Investment Facilitation Framework have integrated economies and stimulated growth in strategic sectors such as manufacturing and professional services.

Complementing these are national measures to promote FDI, and agreements with non-Asean countries, such as the Regional Comprehensive Economic Partnership (RCEP), which is the world’s largest free trade agreement (FTA), comprising about 30 per cent of global gross domestic product.

With the region moving decisively into higher-value services such as semiconductor manufacturing and facilitating the growth of the digital economy, Asean is no longer seen as just a base for low-cost production.

In emerging areas such as electric-vehicle (EV) manufacturing, countries including Indonesia, Malaysia and Thailand are a one-stop shop, providing raw materials for batteries, production lines and even a consumer market.

And it is not just in EVs where Asean is becoming a single production base and market. With a fast-growing middle class among the region’s 700 million population, international brands including supermarket chain Don Don Donki, hotpot leader Haidilao and lifestyle wear Andar have embedded themselves in South-east Asia.

The region is also rapidly cementing itself as a financial and digital hub, with international investment in the digital economy (e-commerce, fintech and digital infrastructure) growing more than five-fold to US$4.4 billion since the AEC was created.

Where there was once doubt about Asean’s potential, now there is belief, manifested in more than 5,000 multinational enterprises (MNEs) operating regional headquarters here.

Yet, it is more than just policies and population that have attracted FDI. The winds of geopolitics have also brought many to the region.

Singapore Deputy Prime Minister Gan Kim Yong noted this at the Asean Conference last August, sharing that while the world has become a more difficult place amid US-China tensions, wars and protectionism, Asean has remained a “bright spot”.

The region’s open and multilateral stance has marked it out as a hub for trade and investment. On the ground, we have seen how partnerships are formed between firms from different countries that may not collaborate back home, but do so on neutral ground in South-east Asia.

We have also witnessed how the landmark RCEP, driven by Asean, is the first FTA between China, Japan and South Korea.

These are testament to how Asean plays its role as a convenor and honest broker for the world.

Eyes on AEC 2045

The first decade of AEC has brought good results, but what about the next 20 years and beyond?

Despite the successes, several obstacles remain. For example, the Asean Investment Report 2024 pointed out how intraregional investment fell by 35 per cent year on year to US$21.9 billion in 2023. More can be done to facilitate this, such as enhancing cooperation to support the regionalisation of businesses.

One prime example is the partnership between Singapore and Malaysia with the upcoming Johor-Singapore Special Economic Zone (JS-SEZ). The SEZ will potentially draw more investments not just between both countries, but also across the region, supporting businesses’ expansion plans.

Inherent difficulties exist across the sheer diversity of the region, which has about a thousand languages.

This is why we often quip that when foreign businesses enter the region, banking is typically not the first priority but understanding the lay of the land: Which country to invest in, what the regulations are – and sometimes, even where to get reliable power supply for business operations.

Now is also the time for Asean businesses to level up to meet the world-class demands of MNEs. This is where financial institutions can work with governments and trade associations to uplift local enterprises in areas such as sustainability, and creating livelihoods to meet their immediate needs.

Development among member states remains uneven, and this is a big reason that we are also working towards more even development in Asean so that FDI flows are directed across the region’s economies. It is essential for developed economies such as Singapore to continue leveraging their role as strategic hubs, facilitating the flow of FDIs to neighbouring countries.

Our neighbours possess unique strengths and resources, and by playing to these complementary advantages, the region can collectively create an appealing environment for investors.

The effectiveness of Singapore as a hub-and-spoke model relies heavily on the ability of our neighbours to provide the resources and opportunities that businesses seek, thereby enhancing the overall attractiveness of the region.

Still, we continue to believe that the bright spot of the world will continue to glow.

UOB projections indicate investment inflows could reach US$312 billion by 2027, up from US$226 billion in 2023, while total trade flows could hit US$4.7 trillion in 2027, up from US$3.5 trillion in 2023. Asean, with its surging consumption, exports and young workforce, is on track to become the world’s fourth-largest economy by 2030.

By then, there could be the prospect of a US$2 trillion Asean digital economy, powered by the upcoming implementation of the Digital Economy Framework Agreement and AFTA 2.0.

If the region remains united, the years ahead could entrench South-east Asia as the world’s conduit. And it will be powered by the next generation, much like the young journalists in the conference room whom I met back in 2013 in Indonesia.