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Asia’s next FDI magnets
We believe India and the ASEAN-5 including Indonesia, Malaysia, Philippines, Thailand and Vietnam — or what we collectively call Asia’s tiger cubs — will be the next big magnets for foreign direct investment (FDI)
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e believe India and the ASEAN-5 including Indonesia, Malaysia, Philippines, Thailand and Vietnam — or what we collectively call Asia’s tiger cubs — will be the next big magnets for foreign direct investment (FDI).
This is consistent with a key theme we are seeing in Asia: a long-run economic divergence between these striving cubs and Asia’s ageing tigers — China, Korea, Taiwan, Hong Kong and Singapore.
Unlike in the past, when the United States and European Union accounted for bulk of FDI flows, we expect a growing regional bias in capital flows, as the source of FDI shifts from west to east, especially FDI from high-saving Japan and China. For Japan, the push to invest in emerging Asia reflects an even greater need than in the past for new growth opportunities to offset its ageing population and a contracting domestic market.
Japanese companies have strong balance sheets and plenty of cash to put to work by investing in the fast-growing economies of India and the ASEAN-5. For China, this change is driven by an ongoing domestic slowdown, the government’s push for its Belt and Road Initiative and rising labor costs.
Even geopolitics is playing a more supportive role, with the easing tensions in the South China Sea likely starting to facilitate an increase in FDI, particularly into the ASEAN-5.
Apart from these “push” factors which we think are structural in nature and should therefore persist, there are also “pull” factors that are strengthening among the tiger cubs.
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We believe President Joko “Jokowi” Widodo’s political standing remains firm.
Specifically, India and the ASEAN-5 have: 1) large and growing domestic markets; 2) reforms focusing on improving infrastructure and the ease of doing business; 3) a more open and liberal FDI regime; 4) sound economic management and political stability; and 5) the availability of low-cost labor.
Our scorecard of FDI attractiveness, which takes into account all these pull factors and quantifies them into an aggregate score, confirms the cubs’ strong advantage, not just among regional peers but over a large number of other emerging markets. Next to China, India and the ASEAN-5 stand out.
Overall, like Asia’s ageing tigers before them, we expect these cubs to experience virtuous cycles, as rising investment boosts productivity growth which, in turn, strengthens economic fundamentals and lifts sovereign credit ratings. This should lead to even more FDI inflows. We estimate that FDI flows into India and the ASEAN-5 combined will surge from around US$100 billion a year currently to around $240 billion a year by 2025.
Indonesia in particular is league-leading in many aspects. It has quickly climbed the ease of doing business rankings and recently earned a sovereign rating upgrade by S&P to investment grade.
Thanks to a series of bite-sized and targeted economic reform packages — 15 in total since 2015 — Indonesia rose 26 places in the World Bank’s ease of doing business rankings over the last couple of years. This is already a remarkable achievement, and yet authorities continue to set ambitious targets.
The political environment is stable despite the recent Jakarta election surprising with a big win by the opposition. We believe President Joko “Jokowi” Widodo’s political standing remains firm and his approval ratings are relatively high, which helps support the implementation of well-founded economic policies.
Importantly, the Indonesian government has clearly prioritized infrastructure development, which ultimately increases the return on investment and therefore stimulates more FDI inflows. By substantially cutting inefficient energy subsidies and now keeping them at a minimum in the budget, the government has generated a lot of fiscal space that has been earmarked for capital expenditures and targeted social programs.
Other off-budget priority projects are taking off, with more big-ticket projects now under construction. These projects by themselves also involve foreign financing from both Japan and China.
Finally, some foreign ownership restrictions — for which Indonesia has the greatest scope to open up within ASEAN — are starting to be relaxed. Last year, President Jokowi’s revision of the so-called “negative list” liberalized 35 sectors, including raising caps on foreign investment into public works, trade and transportation, which further supports the public infrastructure agenda. We believe this is only the beginning and expect more sectors to be removed from the list.
If all these trends continue as we expect, Indonesia could be at the cusp of a long-overdue investment boom.
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The writer is the chief economist for Southeast Asia at Nomura, based in Singapore. The views are his own
