UBS: Ultra Business Solution

Moving forward with the AEC

The ASEAN Economic Community or AEC will make ASEAN a more interesting place to do business.
The AEC will have an aggregate population of 580 million, more than that in the European Union itself. Given the low levels of income in many of the ASEAN countries, however, the aggregate size of the economy in the AEC is not that large, roughly that of just South Korea. This makes it incumbent on businesses to identify those salient characteristics of ASEAN which should make it of particular interest. For example, aggregate FDI in ASEAN is quite substantial, and it is a top tourist destination, second only to France.


But what the AEC will achieve in 2015 will still be quite far removed from the European Union (EU)
in terms of achieving a single market. For example, while the AEC has achieved a FTA in the form of the ASEAN Free Trade Area (AFTA), there are no immediate plans for a customs union (charging the same tariff on imports from outside the region). Restrictions on investment and labor will remain more significant than in the EU. Significantly, many of the supranational agencies which will facilitate the emergence of a true single market (e.g., common central bank, competition authority, and the like in the EU) are all but absent in the AEC. The AEC has taken a more consensual, intergovernmental approach, with the expected consequences.


Next up in the AEC is the liberalization of trade in services, investment, labor mobility, and greater
harmonization of rules and regulations. Liberalization of trade in goods under AFTA was completed in
2010. The AEC also makes the usual calls for greater economic cooperation in such areas as SME networking and joint research.


Businesses in Thailand will confront greater challenges from the AEC as a result of (i) the higher
percentage of ownership by ASEAN investors in services sectors; and (ii) the greater ability of skilled
professionals to move within the region. Ownership limits are raised to 70% for ASEAN investors. The four priority sectors earmarked for such liberalization in 2010 include ICT, tourism, healthcare, and air transport, with others to follow in 2013 (logistics) and 2015 (the rest). The immediate impact of higher foreign ownership may not be that large as ownership levels in many sectors are still below the 49% statutory ceiling. But higher remuneration of professionals elsewhere in the region-e.g., Malaysia and Singapore-may eventually mean greater competition for skilled workers in the 7 professions liberalized to date.


With greater challenges come greater opportunities for Thai businesses to expand elsewhere in
ASEAN. Thai businesses will benefit from higher investment ceilings in countries such as Indonesia, Malaysia, and the Philippines. (Statutory ceilings are already high elsewhere.) Sectors with particularly high EBITDA margins include retail in Singapore and IT in Malaysia. Despite such greater liberalization of statutory limits, however, businesses need to be aware that many countries still have in place domestic rules and regulations (e.g., on minimum investment and modes of investment) which will continue to discriminate against foreign investment.


Taking full advantage of opportunities from AEC will require Thai businesses to focus on those particular areas where Thailand has an advantage (our core competencies) and where ASEAN is particularly distinctive. The AEC will tend to result in a greater concentration of production in the region. But given the limited size of the aggregate market, it is important to identify specific opportunities from Thailand’s and ASEAN’s unique relative strengths. For example, Thailand has a traditional strength as a food producer. Demand for halal food has been growing much faster than demand for food overall. With around 270 million Muslims, ASEAN has the largest Muslim population in the world. Taken together, this suggests an opportunity for Thailand to be a key (if not the key) producer of halal food for the region and beyond.

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