Philippines and Vietnam will lead SEA-6 growth in the next decade.

By Komfie Manalo

The Philippines and Vietnam are expected to drive Southeast Asian growth over the next decade, with each economy seeing an annual gross domestic product (GDP) increase above six percent. Indonesia is tailing close at 5.7 percent, according to the 'Navigating High Winds: Southeast Asia Outlook 2024 – 34' report released today by the Angsana Council, Bain & Company, and DBS Bank.

The same report states that the top six economies of SEA-6 will outpace China in GDP and foreign direct investment (FDI) growth in the next ten years. SEA-6 refers to Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

"SEA-6 has attracted more FDIs than China for the first time in a decade. In 2023, SEA-6's FDI amounted to $206 billion, while China recorded $43 billion. Between 2018 and 2022, SEA-6 grew its FDI by 37%, compared to China's 10%," the report said.

Between 2024 and 2034, the study forecasted the Philippines to expand by 6.1% annually, benefiting from a pro-growth administration prioritizing infrastructure investments, particularly with renewable energy projects garnering investor interest. Unlike Singapore and Thailand, it can also reap demographic dividends, which will face challenges in this area.

Over the past 30 years, Southeast Asia's GDP growth has been moderate, with Vietnam succeeding as the regional leader in most metrics. SEA-6 grew significantly slower than China or India. Between 1993 and 2003, real GDP growth in the SEA-6 countries averaged 3.8 times. In comparison, China experienced a much higher GDP growth of 11 times, while India saw a growth rate of 6.6 times.

One notable aspect is that most Southeast Asian countries saw their manufacturing value-added (MVA) as a share of GDP peak in the 2000s. The region then 'prematurely de-industrialised' as China became more competitive.

The report added, "Yet, Southeast Asia has improved its fundamentals for a resurgence in growth. Southeast Asia's domestic capital formation is increasing steadily, reflecting businesses' confidence in most countries in the region. In the past decade, the region has strengthened its key sectors, such as export-oriented manufacturing and semiconductor packaging, and attracted investments in growth sectors, such as data centers."

The rise of technology-enabled disruptors (TEDs) has introduced increased competition and innovation even in traditional economic sectors. Countries such as Malaysia, the Philippines, and Indonesia have refocused their strategies towards growth, while Vietnam has already raced ahead of the pack.

"Due to strong domestic growth and the China +1 strategy, we are increasingly optimistic that Southeast Asia will outpace China's growth in GDP and FDI in the next decade. However, multinational investments will be highly contested, with the competition between countries improving outcomes for businesses and consumers," said Charles Ormiston, Advisory Partner at Bain & Company and Chair of Angsana Council.

"The world has turned increasingly protectionist and inward-looking in recent years, a trend unlikely to change. Yet, most Southeast Asian economies and companies are well placed to find opportunities as capital allocation is recalibrated across geographies and sectors while dealing with tech disruption and climate change. We think the doomsayers are wrong; a decade of tailwind awaits the region," said Taimur Baig, Managing Director and Chief Economist at DBS Bank.

Despite a slowdown in Vietnam, it is still expected to lead the region to grow at 6.6% GDP growth on average over the next decade. Vietnam's export-oriented economy is well-positioned to capture "China + 1" opportunities. Its domestic ecosystem promotes healthy inter-provincial competition and cultivates a strong workforce. This combination sets Vietnam up well to attract diverse investment sources while developing its economy.

Indonesia is expected to grow at 5.7%, but it has strong potential to exceed this forecast given the availability of resources, a growing population and workforce, and a thriving ecosystem of entrepreneurship and innovation. It needs to improve its MVA, going beyond commodities, and embrace keeping the economy open and competitive.

Likewise, Malaysia, which is expected to grow at 4.5%, shows signs of doing well with recent efforts to attract FDI, leveraging its past successes in growth sectors such as semiconductors. It could also be the primary beneficiary of the flow-through of opportunities from Singapore, mainly reflected in the sharp uptick in data center investments. Malaysia's data center capacity has the potential to more than double that of Singapore, which has hitherto been the leader in the region.