As Southeast Asia becomes an even more important growth cluster, the region will continue to be a magnet for commercial activity, given a growing population and GDP growth that is higher than the world average. A study by Roland Berger, entitled "Southeast Asia's Economic Outlook – The Big Picture", highlighted this conclusion and illustrated that the region is set to grow through intra-region investments. From 2000-2014, intra-region investments grew 28%, as opposed to investments from outside the region at 12%. This is linked to ever-improving bilateral relations and increasing cross-border migration. Additionally, the establishment of the ASEAN Economic Community (taking effect by the end of 2015) is expected to further boost economic integration and cement the region's strong growth.
According to the study, while the region continues to leverage trade, both external and intra-region, it lags behind in competitiveness, a key obstacle to fully realizing its potential in attracting investments. "ASEAN member countries need to improve their market efficiency and technological readiness in order to enhance their attractiveness. They must continue to develop toward innovation-driven economies," said Anthonie Versluis, Managing Partner, Malaysia, at Roland Berger and co-author of the study. "Additionally, red tape must continue to be reduced to enhance the business environments for countries in the region, especially for CLMV economies," he added, referring to the cluster comprising Cambodia, Laos, Myanmar and Vietnam.
The study also had a focus on Indonesia's business potential, citing access to vast and diversified natural resources, where it is one of the world's largest exporters of commodities. However, the study warned that institutional challenges would continue to restrict growth, with corruption (15.7%) and overregulation (13.7%) – the two biggest challenges – continuing to impede growth, according to the World Economic Forum.
While there is much potential to be realized, deep structural reform would be necessary to enable Indonesia to meet future challenges such as job creation and inflation management. Established forecasts indicate that without major changes, GDP per capita would reach a mere USD 4,990 in 2020, trailing significantly behind the equivalent measure for Malaysia (USD 17,483) and Thailand (USD 7,545). Indonesia would also continue to face significantly higher inflation in the period through 2020, its inflation rate being 4.7%, while Malaysia and Thailand would have more muted rates of 2.9% and 1.9%, respectively.
Though much of the limelight has focused on Indonesia's potential, analysis by Roland Berger indicates that the CLMV economies (Cambodia, Laos, Myanmar and Vietnam) are growing at an extremely fast pace. Local and foreign businesses are set to flourish in the cluster, which will also grow due to ballooning FDI in recent years and proximity to China. Economic liberalization and improved relations with major trading nations such as the EU and the U.S. would also buoy up growth.
Myanmar led the cluster in average real GDP growth, GDP per capita growth and average total trade growth for the ten-year period 2005-2014. Laos led in FDI growth, attracting 47% growth over the same period, largely due to increasing trade with neighboring countries, improvements in infrastructure and tourism development, as well as development of natural resources industries.
However, a key issue for the CLMV cluster economies is the low level of agricultural productivity. Cumulatively, agriculture makes up more than a quarter of the GDP of CLMV states. But agricultural productivity, the measure of value added per worker, languished between USD 480-540 for the cluster in 2013, as compared to Indonesia, the Philippines and Thailand, where equivalent figures are in the range of USD 1,000-1,200.
In the longer term, the CLMV cluster is expected to improve its infrastructure given the governments' proactive efforts to improve connectivity and enhance economic competitiveness with stronger integration in the Southeast Asian economy. Additionally, the betterment of the education system is expected to improve the workforce.
The study highlighted selected industries that would continue to grow. For automakers in Indonesia, local long-term growth will continue to be strong, given a rising middle class and industry policies that favor growth. Additionally, production capacity will be turbocharged. Projections indicate that light commercial vehicle production will grow 5.2% in Southeast Asia as a whole, and a whopping 8.8% in Indonesia, from 2013-2020. Anticipated improvements in transportation infrastructure and road networks will allow the automotive industry to continue growing.
Energy policies will strongly emphasize renewable energy, which is projected to power more than 23% of the archipelago's energy needs by 2025. For instance, hydropower will account for 11% of the energy mix by 2020. Indonesia already has the second-largest hydropower capacity in Southeast Asia, producing more than 5,000 MW of power in 2013.
The provision of energy will be critical to the energy-hungry steel industry, where Indonesia is the third-biggest apparent steel consuming nation in Southeast Asia. However, the country's per capita consumption of apparent steel is the lowest in the region at 53 kilograms, which only goes to show that Indonesia's steel demand has room for more growth. Projections in the study indicate that steel consumption for the region is set to grow at an average of 4.7%, with construction and development, transportation vehicles and industrial machinery as the pillars of growth. Growth in production capacity within the region is expected in Indonesia and Vietnam.
The tourism industry, a large economic sector for the region as a whole, is set to contribute even more to the region's economies and will grow strongly over the next 10 years. From 2014-2020, tourist arrivals in the region are expected to grow strongly, though some regions can expect faster growth rates, such as Northeast Asia.
The study cited a deteriorating environment, safety concerns, generally poor hygiene levels and inadequate human capital as deterrents to tourism sector developments. "Beyond addressing these challenges, countries serious about boosting tourism must take proactive steps to encourage tourist arrivals, including waiving visa requirements and creating express lanes for Southeast Asia tourists. Tourism boards should also strive to improve connectivity to ease the commute between one location and another," said Vincent Casanova, Principal at Roland Berger, Singapore, and co-author of the study.
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Southeast Asia is an attractive territory: composed of 10 nations having gained independence relatively recently, it is characterized by conflicting trends.
