SINGAPORE - The creation of the Asean Economic Community (AEC) has potentially significant consequences for the Singapore economy, say experts.
Asean leaders on Sunday established the AEC, one of whose aims is to promote freer movement of trade and capital in the region. The community will come into effect on Dec 31.
Mr Guy Harvey-Samuel, chief executive of HSBC Singapore, said that if the AEC is well implemented, Singapore's GDP would be 9.5 per cent higher by 2030 compared to if there was no such community.
That said, the impact of the creation of this community on Singapore firms is likely to be gradual, noted Mr Glenn Maguire, ANZ Research's chief economist for the South Asia, Asean and Pacific region. This is because Asean leaders have aimed for the community to become fully operational only by 2025.
The near term impact of this community's creation is that it would spur more Singapore firms to move production of lower value goods to countries where labour is cheaper, Mr Maguire said.
The AEC's creation brings about more awareness of the opportunity to expand abroad, and will bring about a standardisation of customs procedures. The latter makes shipment of goods easier, and thus encourages outsourcing of production processes to other countries, Mr Maguire said.
Moreover, in the present low trade-growth environment, many companies would seek to grow their margins as a means of protecting their bottom lines. This would also motivate firms to take advantage of the AEC and move production to cheaper bases.
The few firms still producing clothing here will likely move production to Mekong economies like Vietnam and Thailand where labour costs are lower. More companies producing electronics will shift productions to Malaysia, he added.
The creation of the community will also result in more cross-border movement of services and investment, added Mr Harvey-Samuel. This will lead to the expansion of financial products and services sold within the region, and further consolidate Singapore's position as its financial hub, he said.
Companies in high value sectors like pharmaceuticals and computing related to the "cloud" are less likely to be affected by the creation of the AEC, Mr Maguire said. This is because they are likely to remain in Singapore due to the quality of the labour force and better intellectual property protection.
The pace at which Singapore companies move abroad would pick up slightly in 2016 and 2017, and then increase further in 2018 and 2020, Mr Maguire added. As more policies on free movement of goods and services are implemented, and companies see more firms moving abroad, they will become more comfortable with doing so themselves.
