A huge and rapidly growing middle class in Southeast Asia is beginning to reshape the region’s economic foundations but also carries new challenges. BY CHRISTIAN VITS.
Southeast Asia is seeing the birth of a new species: the middle class consumer. e total number of high net worth individuals in the Asia Pacific region as well as their total assets under management has already surpassed North America in 2015. The epicentre of wealth generation has clearly shifted from mature economies in the West to the dynamic growth region in the East of the globe.
Between 2012 and 2020 the number of Southeast Asia’s wealthy citizens will more than double to 400 million – more than in Brazil, France, Germany, the UK and the US combined, according to market research company Nielsen, which defines middle class people as having a disposable income of $16 to $100 per day.
Economic growth in the region is expected to remain exceptionally strong. “Southeast Asia as a whole is maintaining its growth pace despite marginal downward revisions for Indonesia, the Philippines and Singapore,” the Asian Development Bank (ADB) wrote in its recent update of the economic outlook for the region. The bank projects ASEAN to expand 4.9 percent this year, up from 4.4 percent in 2015.
“The rapid growth in the number of middle class households in Southeast Asia is becoming an increasingly important growth engine for the region,” says Rajiv Biswas, chief economist Asia Pacific at IHS Global Insight in Singapore. “As the size of Southeast Asia’s middle class continues to expand, it will reduce the region’s dependence on export-led growth, with domestic demand becoming an increasingly important growth driver.”
Indonesia is a case in point. Being Southeast Asia’s by far most populous country and also its biggest economy, the country has huge potential for development. “Indonesia’s economic expansion has clearly hit some turbulence lately,” says Vaishali Rastogi, a senior partner at Boston Consulting Group (BCG). “Despite these bumps, Indonesia is still a growth story with a consumer base that is growing larger and more economically empowered each year.”
Vietnam and Myanmar are considered to be ‘Southeast Asia’s new growth frontiers’. Vietnam has the fastest growing middle and affluent class in the region which will almost triple to 33 million people by 2020.
Meanwhile, dynamic economic growth in the region is creating positive economic ripple effects. “ The rapid growth of household incomes in Southeast Asia is driving rapid growth in a wide range of manufacturing sectors such as autos and fast-moving consumer goods, as well as service sector industries such as financial services, healthcare, education, retail trade and logistics,” IHS’s Biswas says.
In the Philippines, vehicle sales jumped almost a third in 2015 compared with the previous year, according to estimates of the country’s Chamber of Automotive Manufacturers. At the same time, the growing number of middle class citizens is attracting foreign manufacturers. Many of them now aim to produce close to their rapidly growing consumer markets.
“For Japanese multinationals, Southeast Asia has become an increasingly attractive FDI destination due to the declining size of the Japanese domestic consumer market as its population contracts, as well as the attraction of the large population size and fast-growing middle class consumer market in ASEAN member states,” Biswas explains.
Still, rampant growth might also entail some drawbacks. Auto loans in the Philippines surged a record 26 percent in the first quarter of last year, the central bank said. Indonesian consumers also have a huge appetite for durable goods which are bought on credit. During the past two years, lending for purchases of durable goods jumped 50 percent, according to BCG.
As the Indonesian archipelago accounts for more than 40 percent of the gross domestic product in ASEAN member states any turbulence due to rising household debt levels for instance can have negative repercussions on the whole region and its 625 million people.
The explosive growth of Southeast Asia’s middle class also brings other problems.
“It is easy to be impressed by the potential of the world’s next big consumer market, but difficult to ignore the challenges,” says Kevin
Martin, regional head of Retail Banking and Wealth Management Asia-Pacific at HSBC. “ASEAN members need to improve their infrastructure, stabilise their labour market and narrow the income gap to ensure that the benefits of regional integration are widely shared. Greater transparency in the financial markets and regulation to facilitate investment flows will be needed to build a more mature financial services industry.”
With an expansion of the middle class, people “want more political participation in order to protect their political and economic interests,” says Pavin Chachavalpongpun, associate professor at the Centre for Southeast Asian Studies of Kyoto University. is could heat up the political debate in countries such as Thailand. Still, he is convinced that “the emergence of a middle class may help narrow existing gaps of inequalities, rather than the opposite.”
The rapid transformation of ASEAN societies will also challenge regional and multi-national companies.
“Organisations which proactively adapt and develop new business infrastructure such as transportation and supply chains will benefit from first-mover advantage, ”Nielsen wrote in its study ASEAN 2015. “Conversely, organisations which adopt a ‘wait-and-see’ approach will forfeit opportunities and expose themselves to risk.”
But all in all, the outcome of this fundamental evolution of a powerful consumer base might be positive.
“The rise of the middle class will continue to be the big story for Southeast Asia’s economies over the coming years,” HSBC’s Martin says. “The promise of growth will transform one of the most overlooked regions in the world into one of the most important.”
Follow Christian Vits on Twitter – @ VitsChristian