ASEAN-MENA corridor: it’s just a start

Trade leverage

The trade relationship between ASEAN and MENA (Gulf Cooperation Council (GCC) member countries and Egypt) has gained our attention when the Red Sea disruptions started. In HSBC’s previous note, it concluded that there has been a limit  ed impact on ASEAN’s trade so far, although certain products are more vulnerable than others.

Similar to China-MENA trade, ASEAN-MENA trade, which totalled over USD126bn in 2023, is rather uneven. While ASEAN’s exports to MENA have enjoyed double-digit growth since 2024, the absolute level of exports is only a third of its imports. Undoubtedly, ASEAN has consistently seen a wide trade deficit with MENA, topping over USD5bn per month, which only briefly shrank right after the first wave of the pandemic when the oil prices collapsed.

HSBC said MENA only accounts for a marginal share of ASEAN’s export basket. Even in Indonesia and Thailand, which have the largest exposure to the Middle East, the share is minimal, at only 4% each country. That said, a closer look reveals that certain products from individual economies have higher exposures.

Thailand, for example, ships almost 20% of its automobiles to the Middle East, making it the third largest export destination. A similar story is also observed in Malaysia: 17% of the country’s palm oil is exported to the Middle East, highlighting that the latter is still a sizeable market. That said, the same cannot be said for Indonesia, the world’s largest palm oil exporter, where the equivalent export exposure is only 7%.

Despite some specific products, ASEAN’s export exposure to the Middle East is rather limit  ed. This is perhaps due to barriers to trade liberalisation, as both blocs’ average tariff rates remain elevated. Fortunately, policymakers have recognised the barriers, and recent efforts have been made to promote potential trade opportunities. Singapore is the only ASEAN country that has signed a free trade agreement (FTA) with GCC member countries, which became effective in 2013. Other ASEAN economies, including Malaysia and Indonesia, have either launched or signed FTAs with individual economies. However, in HSBC’s view, on a regional level, an ASEAN-GCC FTA was only proposed by Malaysia’s Prime Minister Anwar Ibrahim in October 2023. While FTA negotiations may take time, it marks the start of a new formal cooperation in the trade mechanism.

On the flip side, ASEAN has a higher import exposure than MENA. On average, 6% of ASEAN’s imports come from the Middle East, with Thailand the most exposed with a share of 10%. As the first impression may suggest, ASEAN’s imports from MENA are heavily concentrated in the energy space. While non-fuel imports steadily rose over the years, fuel imports obviously held a dominant position, with a share close to 80%.

Despite varying degrees, ASEAN as a region is particularly exposed to imports from MENA, as all but Malaysia are large net energy importers. Thailand – once again – stands out, importing close to 80% of its crude oil and gas products from the region, followed by the Philippines and Vietnam. Among energy exporters, the UAE and Saudi Arabia are two dominant oil exporters, with a large share that exceeds 70%.

In the oil space, it is worth introducing the role of Singapore as it holds a special position as one of the world’s top three oil trading and refining hubs, despite having no hydrocarbon resources. Around half of Singapore’s crude oil imports come from the Middle East, particularly from the UAE (26%), Qatar (13%) and Saudi Arabia (6%). With three refineries, Singapore has a refining capacity of 1.3 million barrels per day, before exporting its refined petrochemical products to Asian neighbours. ASEAN peers alone import as much as 45% of Singapore’s petrochemicals.

HSBC stressed the importance of intra-ASEAN trade in last month’s ASEAN Perspectives, in which ASEAN is its own largest exporting destination. That said, Singapore’s oil domestic exports have played a significant role. Using its non-oil domestic exports (NODX) – the market’s preferred indicator of Singapore’s trade – ASEAN’s share in its export basket dwindled to be on par with that of the US. While the loss in share is marginal, the sheer magnitude of the difference can be as large as USD2bn on average per month.

Despite limit  ed trade flows for now, there remains significant unrealized potential, which we estimate to be as much as USD47bn, that can be tapped. Based on ITC data, ASEAN’s unrealized potential exports can amount to close to USD30bn, on par with its actual exports. In particular, the unrealized potential in electronic equipment (USD7.1bn) and electric machinery (USD7.1bn) takes the lead, as ASEAN deepens its integration in the global electronics supply chain. On the other hand, MENA’s unrealised export potential to ASEAN can amount to USD18bn, with plastics (USD4.4bn), chemicals (USD3.2bn) and metals (USD2.3bn) being the promising exporting industries.

Apart from trade, investment is also an emerging area for cooperation between the two regions, particularly given the financial strength of MENA. However, the bulk of flows are in the form of portfolio investment, rather than FDI.

From a FDI perspective, Asian investors retain the domain position in ASEAN’s FDI portfolio investment, whereas FDI from MENA accounts for a marginal share. However, it is interesting to note where MENA’s investment flows into ASEAN. Unlike Asian investors, where the lion’s share is concentrated in ASEAN’s pillar manufacturing sector, MENA’s FDI is diversified. A third of its investment interests flowed into ASEAN’s property sector, followed by the finance and mining sectors. In recent years, rising interests from MENA investors in sectors, including ASEAN’s tourism, renewable energy and food, have been gaining attention.

However, for now, MENA’s portfolio inflows take the lead. Given limit  ed data availability, the inflows underestimate the actual inflows, as data from the UAE, with Dubai as a leading global financial centre, is unavailable; We can still see the trend in the past years, as Malaysia, Indonesia and Singapore were the main beneficiary recipients.

People-to-people flows

In addition to goods and investment flows, people-to-people integration is a key area. As a region that can offer a diversified range of tourism products, ASEAN has gained popularity among MENA tourists after the pandemic. Alas, this, of course, cannot compete with ASEAN’s traditional source market, particularly China. After all, tourists from MENA only accounted for as much as 2% of total tourists. This represents only a fraction of China’s share of 12% in 2023, even though the latter’s share already dwindled from a pre-pandemic peak of c30%.

“That said, many ASEAN countries have sought efforts to diversify their source markets to accelerate a full recovery of the tourism sector. No doubt, Thailand stands out, luring over half of the 1.1m MENA tourists who visited the region in 2023. While the number of visitors is still limit  ed, their spending power matters. MENA tourists not only tend to stay for twice as long as the average tourist, but they also spend 30% more, almost reaching THB8k (USD200) per day”, said HSBC.

Despite the limit  ed number of visitors from MENA, the recovery pace, nonetheless, beat that of other regions. Amid a still subdued recovery when Thailand only saw a 70% return of tourists back to pre-pandemic levels, the Tourism Authority of Thailand (TAT) successfully attracted 600k tourists from the Middle East, easily beating its own target by a wide margin of 50% last year. This is largely thanks to a record high of Saudi visitors, six times the 2019 level, followed by the restoration of diplomatic relations between Thailand and Saudi Arabia that resulted in the resumption of direct flights.

Unlike Thailand that emphasises the tourism industry, in HSBC’s opinions, the Philippines takes a different route with MENA through overseas worker remittances. Total remittances account for almost 10% of GDP, in which the Middle East alone had a sizeable weight of 17% in 2023. However, this represents a sharp decline from the peak of 28% in 2017, with a broad-based fall across all MENA countries. Part of the story reflects better job opportunities both at home and elsewhere.

All in all, while the linkages between ASEAN and the Middle East are not as far-reaching as those with other regions for now, the potential remains untapped. Encompassing areas, including trade, investment and people-to-people exchanges, the two regions are set to benefit from further connectivity.