SE Asia losing edge as investment site on rising labor costs — Fitch unit

MANILA, Philippines — The Philippines and other Southeast Asian countries may lose their competitiveness as a location for businesses over the next decade due to rising labor costs in the region, a unit of Fitch Ratings said.

Fitch Solutions Macro Reasearch said in its industry trend analysis titled, “Rising Labor Costs Gradually Eroding Ease and Southeast Asia’s Competitiveness,” several East and Southeast Asian countries which currently offer lower labor costs compared to developed economies, as well as other less-developed states in Central and Eastern Europe, may fail to keep their advantage as the minimum wage increases in the region.

It said East and South East Asia’s average minimum wage has risen to nearly 82 percent this year from just around 63 percent of the global average in 2015.

Fitch Solutions said the region’s average is seen to catch up with the global average or even overtake it by the end of the next 10-year period.

It also said East and Southeast Asia’s average cost of employment score in the Labor Market Risk Index has decreased to 56.8 out of 100, down from 59.3 in 2018.

A cost of employment score of 100 indicates the lowest risk, while zero means highest risk.

The latest cost of employment score shows increasing labor cost risks for businesses in the region.

“We expect the average nominal minimum wage to continue rising across East and Southeast Asia over the short-to-medium term, underpinned by the region’s transition into high-value manufacturing and service-based economies associated with higher labor costs, while moving away from agriculture and low-cost labor-intensive sectors, which generally have lower wages,” Fitch Solutions said.

In addition, it said robust economic growth and the rising costs of living would lead to workers’ demands for higher minimum wages.

“While higher minimum wages across East and Southeast Asia boost the demand for a wide range of consumer products and reduce economic dependence on external trade and investment, it will undermine the region’s overall appeal to labor-intensive business activities,” Fitch said.

For labor-intensive businesses in the region - particularly those in the low value manufacturing segments to remain competitive in the medium to long-term, Fitch Solutions said they need to find production alternatives which include using artificial intelligence and automating more parts of the production process.

“Alternatively, firms can start to consider setting up their low-cost operations in other destinations, such as Sub-Saharan Africa and South Asia, that still offer relatively low labor costs by global comparison,” Fitch Solutions said.