Economic integration good for SE Asia, says Moody’s

Economic integration will be good for Southeast Asian countries, but several issues still need to be addressed for the full impact to be felt across the region.

Moody’s Investor Service this week said the finalization by members of the Association of Southeast Asian Nations (Asean) of tariff liberalization by the end of 2015 was credit positive for the region and would boost intra-regional trade and economic growth.

“Greater intra-regional trade is credit positive for the region given that growth in other key export markets, such as China, is slowing,” Moody’s senior research analyst Rahul Ghosh said in a new report.

The Asean Economic Community (AEC) aims to accelerate integration among the region’s 10 members through four distinct pillars: a single market and production base, a competitive economic region, equitable economic development, and integration with the global economy.

Intra-regional trade has reached record highs since the 2007 removal of tariffs for six Asean countries—Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. These have been operating tariff-free on 99 percent of products in the inclusion list.

The relative strength of intra-Asean trade, which accounts for 24.2 percent of the region’s total, will reduce the vulnerability of member states to external shocks, says Moody’s.

In addition, the rise in intra-regional foreign direct investment (FDI)—due to Asean’s successful implementation of various free trade agreements and associated arrangements—to 17.4 percent of total flows in 2013, from 11.3 percent in 2007, is another “credit positive trend,” Moody’s said.

“Intra-Asean FDI is a more stable source of funding and insulates the regional economy from external headwinds,” it added.

However, other important aspects of the AEC, including the elimination of non-tariff barriers, enhanced regional labor mobility and financial integration, will face delays due to intra-regional disparities, a lack of institutional capacity and a shift in focus toward domestic political issues.

Moody’s also expects that the implementation of non-trade aspects of the AEC will face delays, suggesting that the wider positive implications of economic integration will take some time to manifest.

Key issues that hamper full implementation include various disparities among the region’s countries such as population size, per-capita income and ease of doing business, as well as structural differences in regulatory and tax regimes, and corporate governance standards, Moody’s said.