SINGAPORE has much to gain from tighter regional integration but needs to be aware of the challenges presented by cost normalisation, according to a report by Citi Research which looks into Asean's long-term prospects for economic growth.
With the impending implementation of the Asean Economic Community (AEC) by end-2015, intra-regional trade and foreign direct investment (FDI) are expected to increase, especially in services.
Singapore's GDP gains through regional integration are likely to stem from services liberalisation, given its status as a net services exporter. Singapore accounted for nearly 65 per cent of services FDI inflow into Asean in 2010-11.
More than half of FDI inflows into Asean in 2010-11 were services FDI, and the report projected that Asean demand for services is likely to rise with rising per-capita incomes and urbanisation in the region.
The report noted that Singapore's export orientation may thus be increasingly via tradable services, especially with mid to low-end manufacturing increasingly relocating to other parts of Asean.
The Republic will need to deal with the pressures of cost normalisation, however.
Citi Research's report suggested that cost normalisation need not undermine export competitiveness but Singapore is less well placed to cope.
Aside from Singapore's high price levels, the report also said that the country being "closer to the technology frontier" means that it has less scope to offset future wage increases by increasing productivity.
Sectors in Singapore potentially most affected by wage normalisation include higher-end manufacturing and non-tradable or net importing services such as government and healthcare services.
Despite such caveats, Citi Research remained bullish overall about Asean's prospects for sustained economic growth, calling investor fears about Fed tapering and China's economic rebalancing "misplaced".
"Not only will Asean continue to reap dividends from favourable demographics, rising consumption and urbanisation, but we see new levers for a sustained era of economic success," it said.
Unlike China, which could see its working age population start to decrease before 2020, according to United Nations projections, demographics in Asean are more favourable.
The working age population in Asean was 67 per cent in 2011 and is expected to grow until 2020-24, the report noted.
The report also advised Asean countries to turn to export-oriented segments like manufacturing.