ASEAN Economic Outlook 2023

The ASEAN region will continue to be among the world’s fastest-growing areas in 2023, however, its economic growth is expected to slightly decrease compared to 2022 due to unfavorable global economic conditions and stricter monetary policies.

During the latter half of the year, conditions are expected to improve and support organic growth as declining inflation gives central banks more room to maneuver with interest rates. This will align with the growing economic activity in China.

Despite a tougher macroeconomic scenario, the ASEAN region will still be a desirable destination for foreign direct investment, with patterns in both commercial and government investment expected to remain steady throughout 2023.

The ASEAN region is among the world’s fastest-growing areas in 2023

Overview

The ASEAN region was one of the world’s fastest-growing areas in 2022, with the Asian Development Bank (ADB) predicting a 5.5 percent economic growth for the region. However, 2023 presents various economic challenges that may affect global growth. The ADB has revised its 2023 forecast to 4.7 percent for ASEAN due to declining global demand.

It’s important to note that forecasts can vary, and the definition of the region plays a role. Credit Suisse analysts predict a moderate growth for the ASEAN-six economies (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam) of 4.4 percent in 2023, compared to the projected 5.6 percent in 2022.

Despite this slight decrease, ASEAN’s economic growth still outpaces the global average. The IMF has forecast global growth at 3.2 percent in 2022 and 2.7 percent in 2023, making ASEAN a desirable location for international investment and providing investors with exposure to one of the fastest-growing regions globally.

Foreign direct investment

In recent years, ASEAN economies have been a popular choice for foreign direct investment (FDI). Companies are drawn to these nations as an alternative to China due to rising trade barriers and the need for more affordable production sites.

The region is characterized by higher than average GDP growth, driven by population growth and increasingly open trade policies. As a result, multinational corporations are increasingly looking to Southeast Asia as a production hub, attracted by its competitive wages, improved business regulations and infrastructure, and growing domestic demand.

Southeast Asia will became an alternative production hub to China

In 2021, Singapore received over US$100 billion in foreign investment, with key investment industries including IT, aerospace, electronics, pharmaceuticals, and professional services.

As of Q3 2022, Indonesia received a total FDI of 169 trillion rupiah (US$10.8 billion), and the government is confident it has met its target for the year. For 2023, the government aims to raise its foreign and domestic investment target to US$92 billion, or 1,400 trillion rupiah. As the only G20 member in ASEAN, Indonesia offers long-term investment opportunities with its vast natural resources and a large domestic market of 260 million.

Vietnam provides investors with access to internationally competitive industries, as well as offers greater market access and certainty for producers than China. As a result of the US-China trade war, Vietnam has emerged as an alternative supplier of wood products, with the US being its main export market. The country’s textile industry is also becoming more attractive, following recent US laws on forced labor and cotton sourced from China’s Xinjiang.

Thailand has consistently attracted Chinese investments. It is a crucial part of the ASEAN region and plays an important role in China’s plans for global connectivity and private investment. The Belt and Road Initiative is addressing the former, while private investors view Thailand as a destination for investment opportunities in crypto, fintech, blockchain, AI, healthcare, and medical tourism.

These trends are indicative of a long-term pattern that is expected to persist despite a declining global economy. The inflow of foreign direct investment into ASEAN, especially in countries like Singapore, Malaysia, Thailand, Indonesia, and Vietnam, is likely to continue in 2023.

China reopening in focus

The health of China’s economy has a significant impact on the economic growth of the ASEAN region due to their proximity and trade connections. In 2023, China’s reopening from Covid-19 is expected to have a twofold effect. The spread of viruses due to loosening restrictions may cause supply chain disruptions and declining demand.

China loosens zero Covid restrictions

However, after the epidemiological situation stabilizes, China is expected to experience an economic boom similar to other countries that have recovered from Covid-19. The World Bank predicts China’s economic growth will increase to 4.3% in 2023 from an estimated 2.7% in 2022.

The reopening will likely have a major impact on overall economic data, despite some risks, such as stress in the real estate sector. Although some sectors in some ASEAN economies may benefit from China’s internal issues and trade war with the US, improving growth in China will have a positive impact on the ASEAN region.

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