Reimagining emerging ASEAN in the wake of COVID-19
Courtesy of McKinsey & Company
By Eoin Daly, Kaushik Das, and Rebecca Yeoh

No nation has escaped widespread disruption from COVID-19. But while the pandemic has affected nearly every country, its timing, the degree of its disruption, and the ability of countries to respond have varied significantly. Larger, developed nations have generally had the resources and infrastructure to weather the pandemic and provide a solid foundation for recovery. Less-developed countries, including emerging ASEAN (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) began the crisis at a disadvantage, and COVID-19 exposed and often heightened their challenges.

McKinsey's research on emerging ASEAN countries explored a series of trends that the pandemic has caused or accelerated. Within these trends lie the potential recipe for recovery, but stakeholders must be prepared to reimagine their country’s economy. Five key levers—manufacturing hubs, green infrastructure, investments in digital, talent reskilling, and high-value food industries—could not only speed up the economic recovery in these countries but also lay the foundation for extended growth.

COVID-19’s impact on lives and livelihoods

Although the pandemic hit the Asian region first, its countries—including emerging ASEAN—have to date recorded significantly lower transmission and fatality rates per capita than other regions. As of August 20, 2020, transmitted cases per million people stood at approximately 582 across emerging ASEAN countries compared with 16,737 in the USA, 4,121 in the Eurozone, and 9,924 in Latin America. ASEAN countries also experienced lower death rates—16 per million across versus 524 in the USA, 368 in the Eurozone and 388 in Latin America. If this trend holds, ASEAN countries could emerge from the COVID-19 pandemic with a significantly lower toll on lives compared with other regions.

So far, the lower fatality toll has not translated into a rosier economic outlook for many ASEAN countries. In emerging ASEAN, some governments generally weren’t able to mount the same magnitude of stimulus programs as developed nations to cushion the pandemic’s blow. Moreover, their significant informal economy and large unbanked population have hindered the distribution of relief aid. As emerging ASEAN leaders look to the next phase of the recovery, forecasts indicate that these countries could take a bigger hit to growth and face less certain prospects in the coming years.

McKinsey modeled nine potential economic outlook scenarios that reflected the effectiveness of virus containment and economic response. A survey of 100 ASEAN executives found that 40 percent of respondents favored the A1 scenario, in which economic interventions would be effective in shoring up essential consumption but a recurrence of the virus was likely, leading to a second round of lockdowns. Eighteen percent of executives agreed with the A3 scenario, where initial measures would contain the virus and prevent repeated lockdowns. These results were in line with a larger survey of 2,500 global executives.

Under the A1 scenario, the global economy’s growth rate would be -11.1 percent compared with Q4 2019 growth rates. Several emerging ASEAN countries could see a more drastic slowdown: Thailand (-13 percent), Malaysia (-13.5 percent), and the Philippines (-13.6 percent). Meanwhile, Indonesia’s economy could see a decline of -10.3 percent, roughly on par with the global average. All of these countries are estimated to record annual GDP growth below that of the 2008 global financial crisis (-11.5 percent to -5.3 percent forecasted for 2020 compared with -2.2 percent to 4.5 percent in 2009).

Five growth levers for emerging ASEAN to consider

The pandemic accelerated five trends in the ASEAN region. As Southeast Asian policy makers and executives turn their attention from reopening to reimagining their economies, these trends could be an engine propelling ASEAN’s growth in the coming years.

Advancing as manufacturing hubs

Trade had been regionalizing in the years before the COVID-19 pandemic. Intra-Asia trade increased fourfold from 2000 to 2017 compared with growth in global trade of 2.8 times, as consumption demand from emerging Asian economies rose. Meanwhile, China’s share of exports in labor-intensive manufacturing declined (down three percentage points from 2014 to 2016), as this kind of production shifted to other markets, with Southeast Asia as a leading alternative.

Intra-Asia trade is expected to fall 13 percent from 2019 to 2020 compared with a drop of 20 percent in East-to-West trade. The inclination of senior global executives to diversify supply chains from China to other Asian countries has intensified. Based on a survey of 150 global businesses by QIMA, 67 percent of EU executives and 80 percent of US executives said they intend to shift sourcing to other Asian countries.

It follows that emerging ASEAN has a chance to attract new investment in labor-intensive manufacturing. Several Southeast Asian countries have already taken steps in this direction:

•  Thailand has announced policies to establish the country as an electric vehicle hub in five years, including use of electric vehicles by governmental organizations and state enterprises and the introduction of electric buses and electric motorcycle taxis.
  
  
•  Malaysia has built up 4.3 gigawatts of solar-cell-module manufacturing capacity, making it the third-largest maker outside of China.
  
  
•  Vietnam has become a popular destination for electronics manufacturing, with companies such as Google and LG locating their smartphone manufacturing operations in the country.

Investing in basic and green infrastructure

The green energy revolution has been a long time in the making, but the past few months have seen a spike in interest. Climate action remains critical over the next decade, and investments in green infrastructure and the transition to a lower-carbon future could spur significant near-term job creation. And with near-zero interest rates for the foreseeable future, there is no better time than the present for such investments.

The proportion of renewable energy generated as a percentage of total energy in China, the European Union, and the United States grew from 18 percent in 2005 to 27 percent in 2020 as the cost efficiency of these technologies improved. In the wake of the pandemic, countries are investing in green infrastructure to spur economic recovery and create jobs. The European Union, for example, unveiled an $825 billion COVID-19 relief package that includes boosting clean energy and transport, with the goal of carbon neutrality by 2050. Likewise, China has announced its intent to attract $500 billion in investment for “new infrastructure,” including electric-vehicle charging stations.

Emerging ASEAN has an opportunity to unlock economic growth by doubling down on green infrastructure as well as addressing basic infrastructure gaps. For example, in Indonesia, 47 percent of households have no internet access, and 11 percent do not have access to clean water. In a fiscally constrained environment, policy makers could consider regulatory models that offer fair returns to encourage investment in these sectors.

In addition, building out green infrastructure such as renewable and energy efficiency technologies could accelerate economic growth. According to 2017 research by Heidi Garrett-Peltier, these technologies have nearly three times the job-creating impact of investment in fossil fuels. Current share of renewables in power capacity stands at 11 percent in Indonesia, 22 percent in Malaysia, and 22 percent in Thailand, compared with an Asia average of 34 percent, leaving ample room for investment and expansion. Governments can accelerate penetration of renewables and energy-efficient technology in a few ways:

•  Build capabilities that enable climate-risk modeling and assessment of climate change economics. This creates a fact base to inform recovery programs, develop improved infrastructure planning, and enable climate stress-testing in funding programs.
  
  
•  Invest in a broad range of sustainability levers. These levers include building renewable-energy infrastructure, expanding the capacity of the power grid and increasing its resiliency to support increased electrification, retrofitting buildings, and developing and deploying technologies to decarbonize heavy industries.
  
  
• Enhanced financial incentives that encourage consumer and business investment. Policy makers could expand incentives to invest in distributed renewable generation (for example, solar panels) on commercial and residential premises and energy-efficiency technologies. They could employ schemes that allow consumers to sell energy back to the grid by introducing loans and grants that defray initial infrastructure investment costs.
  
  
• Coordinate complicated and interdependent infrastructure rollout. Large-scale infrastructure investment, such as electric-vehicle charging networks and floating solar technology, requires coordination across multiple private and public sector entities to execute successfully. Governments can help address dependencies by taking on an explicit coordination role to facilitate communication between players, laying out frameworks that make clear how investors will be remunerated, and establishing regional rollout timelines.
  
  
•  Accelerating public sector uptake. Governments are the owners of a vast amount of infrastructure in many countries, ranging from schools to offices. They could adopt energy-efficiency solutions across these premises, positioning themselves as leading consumers of green energy.

To read the full article, please visit https://www.mckinsey.com/featured-insights/asia-pacific/reimagining-emerging-asean-in-the-wake-of-covid-19

About the author(s)

Eoin Daly is a senior partner in McKinsey’s Kuala Lumpur office; Rebecca Yeoh is an associate partner in the Singapore office, where Kaushik Das is a senior partner and managing partner of McKinsey’s offices in Southeast Asia