The Brexit Lessons for ASEAN (Asia’s EU)

The Brexit decision in late June was unexpected, and markets now worry that other EU members may use the political momentum to seek their own referendum.  For ASEAN, we do not believe that the bloc is at risk nor will it face a similar EU crisis. However, the lessons of Brexit are too important to ignore.

Compared to the EU, ASEAN is plagued with political inefficiencies, which ironically, protects the fate of the bloc nations. The ASEAN Secretariat lacks true authority over member countries, while ASEAN foreign ministers often fail to reach communication statements that reflect the common viewpoints. Referred to as the ASEAN way, members avoid interfering into neighboring affairs, preferring generally paltry statements. Less hapless, ASEAN countries maintain individual fiat currencies and independent central banks. Avoiding the creation of an ASEAN currency, the bloc escaped political instability that European Central Bank (ECB) now experiences.  Politically contentious, the euro is economically efficient, as it effectively further integrated trade and augmented trade partners within the bloc. ASEAN intra-regional trade is about a quarter compared to the EU, reflecting the huge growth potential.

Though unlikely to see an ASEAN member exit from the bloc, the Brexit vote echoes concerns globally. Specially, the Brexit voice of frustration that integration and economic prosperity are not shared equally underscores the important lesson for ASEAN in hopes to avoid destabilization.  Wealth disparity, evident not just across the bloc but among individual members as well, is pernicious and leads to populism. Labor immobility also hinders growth potential and produces frustration.

But following the Brexit vote, investors will begin to remove the discount that developing markets once garnered over developed markets. Across ASEAN, the removal of wasteful fuel and energy subsidies, the expansion of foreign ownership and competition, as well as tax reform, have contributed to ebbing nationalistic and protectionist policies that hinder growth potential. With better capital efficiency, the country should achieve better balanced growth. Promotion of freer migration is also achievable as currently ASEAN’s Mutual Recognition Arrangements only allows movement of skilled workers, which accounts for less than two percent of the total labor force.

Despite these achievements, disunity still plagues the region. The recent resolution that favored the Philippines over China in a dispute over sovereignty in the South China Sea, not only elevates tension but proliferates alliances either towards the US or China. This still is unlikely to break ASEAN. Without a formal ASEAN parliament or Secretariat, little will be resolved, but little damage is produced.

ASEAN’s medium and long term growth story remain exciting in our view, as rising intra-regional trade and improving political sentiment that obtains shared economic growth hopefully avoids the weaker sentiment faced in the EU. With global growth below trend and the Federal Reserve now likely to raise interest rates in December at the earliest, Asian stock markets look attractive. Since Brexit, Asian equities have recovered their losses with ASEAN markets leading gains. Given the appeal of rising domestic demand, ASEAN will continue to attract foreign investment. Shared prosperity is achievable, as ASEAN would do best, and mind the gap caused by Brexit.