In Part 3 of our series on ASEAN connectivity, we look at ASEAN’s FDI trends, and how local currency settlement could spur better financial connectivity.

Boosting ASEAN’s connectivity will contribute to a more cohesive ASEAN, a region that will in turn foster competitiveness, inclusivity, and a stronger sense of community.

Achieving that will require the strengthening of three vital areas: physical connectivity, trade connectivity, and investment and financial connectivity.

On the topic of investment and financial connectivity, the amount of foreign direct investment (FDI) coming into ASEAN in 2021 had returned to its pre-pandemic level, clocking US$179.2 billion. The US remained the largest source of FDI contributing 22.5 per cent, followed by EU at 14.8 per cent and intra-ASEAN at 13.1 per cent.

Singapore receives more than half of ASEAN’s FDI

Singapore continued to be the largest recipient of FDI coming into ASEAN in 2021, receiving up to 55.3 per cent of ASEAN’s total FDI. This was followed by Indonesia (11.2 per cent), Vietnam (8.7 per cent), and Thailand (8.2 per cent).

By industry, the financial and insurance industry continued to be the largest recipient at 32 per cent share in 2021, followed by manufacturing (25.8 per cent), and wholesale and retail trade (13.5 per cent).

On the other hand, FDI into the information and communication sector grew a whopping 428 per cent from US$1.4 billion to US$7.4 billion in 2021. The era of “work-from-home” that precipitated a huge surge of demand for devices in the communications sector during the pandemic explains the huge jump.

Figure 1: FDI inward flows to ASEAN by host country. Source: ASEAN statistics, UOB Global Economics & Markets Research

Figure 2: Top five ASEAN balance of trade by commodity. Source: ASEAN statistics, UOB Global Economics & Markets Research

Local currency settlement

The most recent and notable progress on financial connectivity in ASEAN is the promotion of local currency settlement (LCS) initiatives. LCS has a significant impact on international trade and FDI. In 2022, international trade using LCS in Indonesia was at US$3.8 billion, rising 50.2 per cent from US$2.5 billion in 2021. The LCS agreement in the ASEAN region will continue to be implemented into a wider range of international trade transactions.

The ASEAN connectivity master plan envisions a seamless, comprehensive, connected, and integrated ASEAN that will promote competitiveness, inclusiveness, and a greater sense of community. In conclusion, to further strengthen and deepen ASEAN connectivity through physical, trade, and investment and financial, concerted efforts are required for member countries to play a part in it.

Towards this end, further enhancement towards higher and greater intra-ASEAN trade and higher utilisation of LCS are crucial to bring about higher welfare for ASEAN.

This is an excerpt from ASEAN: Deepening trade and financial inter-connectivity for sustainable growth that was first published on 8 June 2023 by UOB Global Economics & Markets Research. View Part 1 and Part 2 here.

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