[As 15 nations on Sunday signed the Regional Comprehensive Economic Partnership (RCEP) agreement, one of the world's largest trade and investment pacts, United Nations Conference on Trade and Development (UNCTAD) published an especial issue of its Investment Trend Monitor. It argued that RCEP could give a significant boost to foreign direct investment (FDI) in the region. The Financial Express (FE) publishes slightly reduced version of the report in two parts. The first part was published yesterday. The second and last part appears here today.]
A key challenge for the Regional Comprehensive Economic Partnership (RCEP) agreement will be to follow through on economic integration efforts at a time of global and intra-regional geopolitical and trade tensions. The global economic recession caused by the pandemic will also limit the potential of RCEP to expand trade, investment global value chains (GVCs) in the short term. Nevertheless, a key opportunity lies in the diversity within RCEP, which can lift investment prospects through complementary locational advantages and catch-up development potential. Among the members, foreign direct investment (FDI) stock relative to the size of the economy ranges from less than 5.0 per cent to a multiple of Gross Domestic Product (GDP). It is to be noted that 15 member countries of the deal are Brunei, Burma (Myanmar), Cambodia, Timor-Leste, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam (all are member states of Association of South-East Asian Nations or ASEAN), and also Australia, China, Japan, the Republic of Korea and New Zealand.
M&AS MOSTLY DRIVE FINANCIAL SECTOR INTEGRATION IN THE REGION: Cross-border Merger and Acquisition (M&A)s are a significant proportion of foreign direct investment (FDI) in RCEP. Transactions in RCEP members accounted for about 40.0 per cent of global M&A activity in 2010-2020. However, most M&A sales are concentrated in Japan, China, Singapore and the Republic of Korea due to their relatively more mature M&A environment. More than 40.0 per cent of M&As are intra-RCEP transactions.
Five industries accounted for almost 60.0 per cent of the value of total M&A sales in RCEP over the last decade, including finance, real estate, mining, food and beverage, and logistics services. M&As in food and beverages and transportation and storage are driven by strong economic growth and increasing numbers of more affluent consumers in the region. Several RCEP countries are resource rich, which explains an annual average $5.0 billion of M&A transactions in extractive industries over the decade. The importance of finance and real estate activities reflects global consolidation trends in these industries.
In the financial sector, recent years have seen mega M&A transactions in RCEP countries, mainly by investors headquartered within the region. Mitsubishi UFJ Financial Group (Japan) made several significant acquisitions in Australia, Indonesia and the Philippines between 2016 and 2019. Thai banks also acquired banking assets in neighbouring countries and strengthened their position at home by acquiring foreign financial institutions with operations in Thailand. As American and European banks divested assets abroad to consolidate their international operations following the financial crisis, banks from China, Japan, the Republic of Korea and ASEAN countries increased their internationalization in the RCEP area. The internationalization of RCEP financial institutions has pushed up FDI flows in finance.
GREENFIELD INVESTMENT IN MANUFACTURING: Greenfield investment in RCEP is closely linked to GVCs. In 2018-2019, about 51.0 per cent of projects were in manufacturing and 48.0 per cent in services, based on announced greenfield investment values. Greenfield investment values in the primary sector are small (mostly accounted for by international project finance). Top-5 recipient industries are petroleum products, hospitality activities, motor vehicles, utilities, and manufacturing of electronics and electrical equipment. The largest number of projects is in ICT industries, driven by the growth of the digital economy, although the total value is relatively low due to the asset-light nature of such investments.
RCEP comes at a time when greenfield investment in manufacturing, and especially in export-oriented or 'trade-exposed' manufacturing, is under severe pressure. Trade exposed projects were already in decline over the last decade and dipped further in the last two years as a result of global trade policy tensions (figure-2). These policy tensions are only accentuated more by a post-Covid scenario that is likely to see a push for reshoring and diversification for resilience.
RENEWABLES OUTPACE FOSSIL FUELS BUT COULD GROW FASTER: RCEP is an important destination for international project finance. The group received $1.3 trillion in international project finance in 2010-2020 or 26.0 per cent of the world total in value terms and 15.0 per cent of project numbers. Six RCEP countries are among the top-15 host economies in project finance (figure-2). The sectoral distribution of international project finance varies depending on resource endowments (e.g. extractive activities, renewable energy projects) and opportunities for industrial investment projects (e.g. development of industrial estates). For instance, Australia receives most project finance in renewable energy, extractive industries and transportation infrastructure, Malaysia shows a significant proportion of project finance in industrial estates and Myanmar in transportation infrastructure.
Three sectors accounted for about 75.0 per cent of 758 total international project finance deals over the last decade. These include renewable energy, mining, oil and gas, and non-renewable power generation (figure-3). Renewables alone attracted some 40.0 per cent of the total number of project finance deals; it is a significant sector in most RCEP members. Still, RCEP only accounts for about 12.0 per cent of global financing deals in renewable energy, compared to nearly one-fifth of global deals in extractive and fossil fuel-based projects, suggesting there is room for further growth. The total value of deals in renewables is also relatively low, as individual projects are less capital intensive than those in extractive sectors.
About 23.0 per cent of global project finance deals in industrial and real estate projects went to RCEP as compared with the average of 15.0 per cent for all industries in 2010-2020, reflecting the rapid industrial and economic growth in the group. This includes the construction of large-scale industrial estates, special economic zones, and residential and commercial estates.
Several RCEP economies are important sources of project finance, with eight members accounting for 27.0 per cent of global project finance in terms of the number of deals. Five RCEP countries are among the top-15 investor home countries in project finance. (International project finance deals often involve a consortium of sponsors and shares in the project company are rarely disclosed. Therefore, rankings are based on numbers of projects in which an investor or sponsor is involved). More than 55.0 per cent of projects in RCEP are sponsored by firms and financial institutions based in other RCEP countries. Sponsors based in China and Japan participated in 15.0 per cent and 12.0 per cent, respectively, of all international project finance in RCEP.
Most project finance flowing from China is in industrial real estate and infrastructure. Investors from Japan sponsor mostly projects in power generation (renewable and fossil-fuel based) and extractive industries, while those from Singapore and Thailand are often in renewables. Outside investors, with those from the United States and the United Kingdom in first place, were also major sponsors of project finance in RCEP with the highest number of financing activities in renewables.
INVESTMENT IN HEALTH: FDI in health care in the region is small but, compared to other regions, relatively dynamic. It has been increasing over the past decade due to rising local demand (e.g. population growth, changing demographics, universal health care programmes and the rise in the incidence of non-communicable diseases) and medical tourism. Most RCEP countries already encourage private investment, including FDI, in hospitals and related medical services. FDI could play an important role in accelerating investment in health care in the post-pandemic environment.
In several RCEP members the private sector plays an important role, complementing public investment in health care, including through public-private partnerships. Private ownership of hospitals in RCEP is significant. For instance, more than 50% of hospitals in Cambodia, China, Indonesia, Malaysia, the Philippines and the Republic of Korea are privately owned, and between 29.0 per cent and 49.0 per cent of hospitals in Australia, Brunei Darussalam, Singapore and Thailand have private sector participation (table-1). In other members, private sector participation in health infrastructure is relatively low, but growing due to more active promotion of private investment in recent years.
Foreign investment in health care frequently takes the form of acquisitions - often with follow-up investment for expansion or modernization. The top-20 cross-border health care M&As in RCEP in 2015-2020 were mainly in Australia, China, Malaysia and Singapore. Non-RCEP investors are active acquirers of health care facilities in RCEP countries. Within RCEP, MNEs headquartered in China, Japan and Singapore are the main buyers. Major intra-RCEP health care M&As include Mitsui's (Japan) acquisition of a 32.0 per cent stake in IHH Healthcare (Malaysia), one of the largest networks of hospitals in Asia, for $2 billion in 2019; Luye Medical Group (China) acquired Health Care Australia for $688 million in 2016; and an investor group (Singapore) acquired a 15.0 per cent stake in Metro Pacific Hospitals Holding (Philippines) for $584 million in 2019.
International project finance for the construction and operation of new facilities is also common. Investors have built or are building, owning and operating hospitals in RCEP countries, particularly in ASEAN (see ASEAN Investment Report 2019). For instance, OUELH headquartered in Singapore and a member of the Indonesian Lippo group is investing with local partners in two new hospitals in Myanmar; Bangkok Chain Hospital (Thailand) in Lao People's Democratic Republic; BDMS (Thailand) in Cambodia; Ramsay Health Care (Australia) in Malaysia and Indonesia with Sime Darby Healthcare (Malaysia) partner; Genea Group (Australia) in Viet Nam; Sejong Hospital and Kim's Eye Hospital (both Korean) opened specialized facilities in Viet Nam; and many Japanese companies are operating health care facilities in the CLMV countries.
PATH AHEAD: The RCEP agreement has the potential to provide a boost for FDI, MNE and GVC activities in the region with the implementation of liberalization and facilitation measures that can improve efficiency and lower the cost of operating in the region. The large RCEP market of more than 2.3 billion people with a combined GDP of $24 trillion will provide opportunities for market-seeking investment, including from outside the region. Most importantly, intra-regional industrial connections will support efficiency-seeking FDI and help post-pandemic recovery and regional value chain growth. The experience of ASEAN's economic cooperation - at the heart of the RCEP group - suggests that investors in the region will react positively to enhanced cross-border opportunities.
RCEP could stimulate investment for development. LDC members are expected to benefit as MNEs shift productive capacity from high-cost locations to lower cost environments. FDI to Cambodia, Myanmar and Lao People's Democratic Republic has grown significantly between 2010 and 2019, with more than 70.0 per cent of investment coming from other RCEP members. China, Japan and the Republic of Korea are significant sources of investment, as is intra-ASEAN investment. RCEP could help narrow the development gap between LDCs and other members through investment, industrial connectivity and economic cooperation programmes under the agreement.
RCEP countries have been relatively successful in attracting investment into sectors relevant for the sustainable development goals (SDGs). Almost 70.0 per cent of cumulative project finance deals since 2015 are in SDG-related sectors (e.g. infrastructure, renewable energy, water and sanitation, health care, food and agriculture, and education), up from 57.0 per cent in 2010-2014. But significant room for growth remains, with overall project finance well below RCEP's share in global FDI, and projects in renewable sectors lagging extractive and fossil fuel projects.
Supporting the post-pandemic acceleration of industry and regional value chains, increasing investment for development, and promoting a sustainable recovery will thus be likely investment policy priorities for RCEP in the coming years.