Digital Special Edition (March 2021 Update)
Before COVID-19 struck, Southeast Asia was a dynamic region, with a rapidly growing middle class. Put together, the region is already the fifth largest economy in the world. What are the region’s current prospects?
When we talk about a region’s prospects, it is always relative to how it is doing or could do vis-à-vis others. Broadly speaking, growth around the world has come down except for the one, two rare exceptions. China may be the only major economy that has bounced back to pre-COVID levels—every other economy is still doing worse than before COVID struck, and there are some worries about productive capacity being diminished as an outcome of the pandemic.
However, I remain optimistic about the future of Southeast Asia even though on an absolute basis, economies in Southeast Asia have declined like everyone else. This is because the fundamentals have not changed. Before COVID, Southeast Asia had been growing consistently at an average of 5% per annum over the past decade, even with the global financial crisis. Despite recent political uncertainty in some countries, the tailwinds are still present. Many have young populations and are urbanising rapidly. There are significant productivity gains, such as in energy and resource use, when populations move from rural regions to urban centres. As a result, the Southeast Asia market is growing in importance for many industries. Earlier fears of financial instability arising from the shock of this very rapid, COVID-induced downturn in global demand have also receded somewhat.
Of course, even pre-COVID, it never made sense to talk about Southeast Asia as a bloc—it has never been and will never be homogeneous. There will be periods when some countries go through difficult patches. The question is whether there will always be enough bright spots at any one time to propel the region forward.
So instead of thinking of Southeast Asia as a homogeneous bloc, I think of it as a portfolio. The countries are sufficiently different such that there are different engines of growth. You have the commodity-focused countries; you have manufacturing and export-driven countries; you have countries with large, fast-growing populations of under-served middle-class consumers, like Indonesia and the Philippines. All this diversity provides resilience and strength.
Southeast Asia will never be homogeneous. The question is whether there will always be enough bright spots at any one time to propel the region forward.
Furthermore, COVID has added another positive for Southeast Asia, which is the accelerated need for companies to build resilience into their supply chains, and reduce their dependence on any one source country. To appreciate why Southeast Asia is well placed to catch this shift, we just need to remember that before China opened up to foreign investment, a number of countries in Southeast Asia had been manufacturing hubs for multinational companies (MNCs).
Now that companies are moving away from just-in-time to just-in-case supply chains—many are re-looking at Southeast Asia for risk diversification. Contract manufacturers and suppliers from Southeast Asia are already benefitting from the first wave of this diversification. This wave used existing capacity that was already available, but we believe we will eventually see new investments and new capacity added in Southeast Asia when demand recovers post-COVID.
Of course, some firms may choose to return to their home markets: US, Europe and so on. But my colleagues and I at EDB have not observed reshoring happen in any big way.
What does a post-COVID environment mean for Singapore’s economic future, and how will Southeast Asia be relevant to this future?
In the early days of COVID, when so much economic activity was happening off-site, with people working from home and so on, there was anxiety about whether companies would continue to need regional offices. And if these were not needed, then Singapore as a regional hub for many corporate offices, would lose out. Instead, CEOs of big firms have assured us that while they are indeed centralising more, they are doing so by region—rather than pulling roles back home, they are concentrating even more in their regional control towers for important growth markets. As a result, Singapore, as the regional hub for Asia, is likely to remain relevant.
If anything, the preference for Singapore has risen. Many companies and owners of capital like how Singapore has been governed through the pandemic. In times of uncertainty, there is a flight to safety. At the same time, Hong Kong has become less attractive, especially to American companies, due to US-China tensions.
The pandemic has also accelerated digitalisation and the growth of the digital economy across the world including Southeast Asia. The players participating in this sector have done very well during this time. But this digitalisation is also driving productivity gains that might otherwise have taken a longer time—including the use of e-wallets, electronic payments, or new areas such as telemedicine and digital health. The accelerated adoption of these advances helps economies become more efficient, which releases resources to be better utilised in other areas.
The pandemic has accelerated digitalisation and the growth of the digital economy across the world including Southeast Asia.
So if you look broadly at the sectors of our economy that have done well in 2020, you see the semiconductor companies, you see firms involved in providing the tools that enable us to work digitally and to live digitally—including e-commerce, delivery and so on. Pharmaceutical, healthcare, wellness also did very well. As Southeast Asia recovers and resumes its growth trajectory, there will be opportunities in FMCG (Fast-Moving Consumer Goods), F&B, retail, education and so on. Infrastructure development and urbanisation; the movement of goods and people; intra-Asian cross border transactions, investments and business deals.
Some are areas where Singaporean companies are already strong in. Others, such as consumer insights and other consumer-facing services, are part of the new opportunities that will arise from the emerging middle class in the region. As more and more companies use Singapore to create new businesses and products for the regional market, they will generate and create a lot of value for our economy.
The three thrusts for Singapore’s future economic development—Asia, Digital and Innovation—thus remain very relevant, despite the pandemic. Let me add one more point that is related to innovation. Central banks around the world have pumped in a lot of liquidity to ensure financial systems remained stable. This means a lot of capital owners continue to have the appetite to invest, to take risks, and in fact, have more resources to power and propel innovation. While a world which faces depressed demand does cause investors to become more prudent, that has been mitigated by the plentiful capital.
Last but not least, sustainability or more specifically, climate change will become more and more significant to the global economy. Despite COVID, countries are stepping up in their commitment to green their economies and accelerate some of their climate-related ambitions. We see governments putting more emphasis on addressing climate change because it is a socially acceptable and politically popular way to pump prime the economy.
How can Singapore work with the region so we can recover stronger together?
A lot will depend on each country’s approach to addressing COVID-19—what each country does to contain COVID-19 and not let it get out of hand, to secure enough vaccines for their citizens and rolling them out, etc. There is very little we can do on that front.
But let’s assume that every country is able to get the COVID-19 situation under control soon enough. At that point, it would be about how we can work together so that Southeast Asia fulfils its potential to be that second source for supply chains. Singapore is comfortable because the types of manufacturing that we can participate in today is quite different from what we were doing 30 years ago, and the spectrum of activities that Southeast Asia can host is very wide. There is more room for cooperation today compared to 30 years ago.
The three thrusts for Singapore’s future economic development—Asia, Digital and Innovation—remain very relevant, despite the pandemic.
We can also do more to foster and facilitate the growth of the digital economy. For example, putting friction to stop data flows, especially when you have an aspiration to grow the digital economy is not smart. Companies need to achieve economies of scale and to learn from the data that they collect from different countries in the region, which add up to some 600 million consumers.
Instead, governments in Southeast Asia should come together and establish a common code of principles about how they will deal with data privacy, data flows and so on in a practical but effective manner. This will enable Southeast Asian tech companies to grow fast and at the same time, attract more investments into Southeast Asia.
While Singapore may benefit from the global shift in supply chains, what significant uncertainties and challenges could we face in the post-COVID world?
A big question mark is the fate of the aviation industry. It would be difficult to imagine staying attractive as a regional hub without an aviation hub like Changi, so it is in our interest to ensure we keep our airport open, we keep flights coming in.
A domestic concern that is more vital than our positioning and our relative competitiveness has to do with our people. A major economic downturn means retrenchments and unemployment, and if people stay unemployed for too long, you will need a lot more effort to get them back on track—their longer-term productive potential gets eroded. As a government, our priority is to ensure Singaporeans who unfortunately lost their jobs are re-employed quickly and are not left behind.
As we engage Southeast Asia more, one question in my mind is whether our companies can embrace uncertainty more and find a different way to manage risk. Singapore’s firms are very used to operating in an ordered and predictable environment. Their level of risk tolerance and comfort with uncertainty is quite low. The easiest way to avoid risk is not to do anything—but that also means you are not going to grow.
As we engage Southeast Asia more, one question is whether our companies can embrace uncertainty more and find a different way to manage risk.
Two to three decades ago, we had some Singaporean businessmen who were bold and went to China when it was a big uncertainty. Of course, you could say there are a billion people in China: if I’m going to take a big risk, my potential upside had better be good enough. But there are also big markets in Southeast Asia where it’s worth the risk: Vietnam, Indonesia, Philippines, Thailand. So, the question is: can our Singapore companies rethink their approach to Southeast Asia?
The government can preach but ultimately, we are not the ones putting capital at risk; our private sector has to do that. International companies tend to be more growth oriented and they don’t just operate in Southeast Asia, they also operate in other countries with even greater risk profiles. The key is finding ways to mitigate the risks.
When things are humming along, you might be reluctant to rock the boat, but when you are down, there is less to lose. When you have no choice, you have to do something different to generate business—so COVID-19 could make companies less risk averse. If you want to harness the potential for growth, you must be prepared to take a higher risk.
When things are humming along, you might be reluctant to rock the boat, but when you are down, there is less to lose.