Southeast Asia is set to outpace China over the next 10 years in terms of gross domestic product (GDP) and foreign direct investment (FDI) growth, according to a new report by DBS Bank, Bain & Company and the Angsana Council, a non-profit advisory council by Monk’s Hill Ventures.
The report, titled “Navigating High Winds: Southeast Asia Outlook 2024 – 2034”, finds that the GDP of the top six economies in Southeast Asia (SEA-6), will grow at an annual average rate or 5.1% with Vietnam and the Philippines driving the region’s growth, exceeding 6% each.
The report provides a 10-year growth forecast for SEA-6 economies by reviewing factors that impact labour, capital and productivity. It also highlights the historical economic performance of SEA-6 markets against traditional and contextual drivers of growth.
In 2023, for the first time in ten years, the SEA-6 attracted more FDIs than China; the SEA-6’s FDI grew to US$206 billion ($276.83 billion) while China recorded US$43 billion. Between 2018 and 2022, SEA-6 grew its FDI by 37%, compared to China’s 10%.
This is mainly due to politics and not competitiveness as the main driver of change, says Charles Ormiston, the founding partner of Bain & Company’s Singapore office at a briefing on July 30. Ormiston says both Southeast Asia’s internal political openness and geopolitical tensions between the US and China will contribute to this.
Yet, China’s domestic capital formation is at a high 90%, which Ormiston says does not mean China will have lower growth rates because it is losing out on FDI flows. “Is this because Southeast Asia is now so much more competitive versus China? No, it's really because politics and tariffs is the main driver of this change,” he adds.
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Driving home the point about China’s competitiveness compared to Southeast Asia, Ormiston says: “Chinese businesses are so competitive in most of the industries that are being worked on. And there are reasons for that number of engineers, the quality of infrastructure, and it's only increased over time.”
He notes that the cost of moving operations outside of China to a country in Southeast Asia because of the China plus one strategy will often be higher. This is due to a lack of infrastructure, supplier base and help from the local government.
In addition, China remains the largest trading partner for each of the SEA-6. Therefore, the report recommends that Southeast Asian companies should work as closely as possible with China to benefit from its low cost and steady financing in order to benefit from the US China trade competition.
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Growth opportunities in SEA-6
Vietnam and the Philippines are set to grow at an average annual rate of more than 6% over the next 10 years.
For Vietnam, this can be attributed to the country’s domestic ecosystem, which promotes a “healthy inter-provincial competition” and a strong workforce. This sets them up to attract diverse investment sources.
Meanwhile, the Philippines’ pro-growth administration, which is prioritising infrastructure investments particularly with renewable energy projects, are gaining investor interest.
Taimur Baig, chief economist at DBS Bank, highlights that Malaysia’s 4.5% projected growth shows “real optimism for the first time”, which is a substantial step up in his view due to the excitement around its semiconductor and data centre ambitions in Penang, Kuala Lumpur and Johor.
“By comparison, Singapore’s 2.5% average annual growth number looks terrible, a far cry from the 4%-5% [of its peers], but the nation will suffer a huge drag from ageing,” explains Baig.
Looking ahead, the report encourages the SEA-6 to adopt opportunities in five areas: in emerging growth sectors, to be proactive in leveraging technology, develop financial markets, accelerate the green transition and embrace collective growth.
Already, the report notes that Singapore, Malaysia and Thailand are poised to be key players in developing a range of financial products and services in the banking, insurance, private equity and microlending space, among others.
Meanwhile, the Philippines, Vietnam and Indonesia are well-positioned to produce low-cost energy, which will help to fuel the region’s growing energy needs.
