Bangkok--5 Oct--Standard & Poor's A new report published today by Standard & Poor's Ratings Services highlights the need for liberalization of the services sector in Southeast Asia to ensure the region can sustain strong long-term growth. The report, entitled "Unfulfilled Potential: The Services Sector In Southeast Asia", points to the limitations of Southeast Asia's export goods-led growth strategy, which has been instrumental in lifting sovereign creditworthiness in the region since the Asian financial crisis. "Southeast Asia has regained much of its economic strength over the past decade, largely through growth in goods exports," said Standard & Poor's credit analyst Kim Eng Tan. "However, increasing competition from China and India cast doubts on whether Southeast Asia's strong growth momentum of recent years can be sustained." The larger population and faster income growth in China and India have attracted the increasing interest of manufacturing direct investment, which partly accounts for the flat or declining trends of manufacturing foreign direct investment in ASEAN countries. In the event that India proves to be a viable alternative to China, a further slide in manufacturing investment in ASEAN is almost inevitable. "Liberalization of the services sector across Southeast Asia could counter these risks to regional exports," said Mr. Tan. "While services in the region currently comprise a large proportion of GDP in the region, small and fragmented markets limit their growth." On paper, ASEAN provides a favorable environment for a thriving services sector. In the seven economies where Standard & Poor's has assigned sovereign ratings, the total population size exceeds 500 million and average per-capita income amounted to US$2,100 in 2006. This is similar to the average in China and well above US$820 in India. However, barriers that largely aim to protect local firms have prevented the development of a large and more efficient Southeast Asian services sector. The lack of services integration also leaves ASEAN exposed to volatile economic conditions due to the dependence on goods exports for growth. This is why a potential U.S. economic slowdown, triggered by the troubled state of credit markets in recent months, has been a greater concern in the region than in more services-based economies. In the event that manufacturing growth declines significantly, the gains Southeast Asia has made in economic output and employment could slow from rates seen in recent years. In such a scenario, ASEAN countries will lose their most important driver of improvements in sovereign credit ratings. "Decelerating growth doesn't spell the end of ratings improvements," said Mr. Tan, pointing out that fiscal rebalancing could lead to improved assessments of ASEAN creditworthiness. "However, fiscal consolidation would yield much greater improvements in credit quality if accompanied by faster growth. Real achievements in the liberalization of the services sector would be a vital step toward achieving this higher growth." The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to [email protected]. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Members of the media may request a copy of this report by contacting the media representative provided. Media Contact: David Wargin, New York (212) 438-1579 [email protected] Analyst Contacts: KimEng Tan, Singapore (65) 6239-6350 Sani Hamid, Singapore (65) 6239-6346 Agost Benard, Singapore (65) 6239-6347 Elena Okorotchenko, Singapore (65) 6239-6375