The report shows that the largest digital economies in Southeast Asia are expected to reach $200 billion in 2022

Two women use their mobile phones at Raffles Place, Singapore’s central business district.

Nikki Luo | Bloomberg | Getty Images

SINGAPORE – Southeast Asia’s major digital economies have grown faster than expected in 2022 and are set to reach $200 billion in total transaction value this year, according to a new report from Google, Temasek and Bain & Company.

The achievement comes three years ahead of previous forecasts and represents a 20% increase from last year’s $161 billion in gross merchandise value (GMV). A previous report in 2016 estimated that the Internet economy of the six largest countries in the region would lock in $200 billion in GMV by 2025.

The six major economies covered in the report are: Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. The report did not address the population of Brunei, Cambodia, Laos and Myanmar, as well as East Timor and Papua New Guinea.

“After years of acceleration, digital adoption growth is back to normal,” the report released Thursday said.

Southeast Asia continues to see Internet user growth – with 20 million new users added in 2022, bringing the total number of users to 460 million.

However, this growth is starting to slow, and it was only 4% in 2022 compared to last year. That’s compared to a 10% year-over-year increase in 2021 and 11% growth in 2020, at the height of the coronavirus pandemic.

growth engines

E-commerce continues to drive growth in the region despite the resumption of offline shopping with increased pandemic lockdowns. GMV in the sector grew by 16% to reach $131 billion in 2022.

However, the report said the next three years could see a slowdown, predicting the sector in e-commerce will grow at a compound annual growth rate of 17% from 2022 to 2025.

“E-commerce continues to accelerate, food delivery and online media returning to pre-pandemic levels of growth, while it will take time for travel and transportation to recover to pre-COVID levels,” the report said.

Another driver of growth, digital financial services, which includes payments, remittances, lending, investments and insurance, saw healthy growth from 2021 to 2022, thanks to behavioral shifts from offline to online after the pandemic, the report wrote.

Among these services, insurance registered the highest growth rate of 31% YoY, while lending grew 25% YoY.

“Because we opened spare doors after the pandemic, retail commuting has actually gone beyond pre-pandemic. [levels] in multiple countries. However, the digital economy is still growing at 20% year-over-year. This shows that a lot of the adoptions that took place during the pandemic are here to stay. “Some new habits have been formed,” Stephanie Davis, Google’s vice president for Southeast Asia, said on CNBC’s “Street Signs Asia.”

Slowing growth in digital adoption

After years of acceleration, the growth of digital adoption is beginning to return to normal, the same report wrote. This happens when Southeast Asian economies reopened their borders in 2022 after prolonged lockdowns and consumers resumed offline shopping.

The tech sector is still doing well despite the difficult period, says Daniel Flax of Neuberger Berman

In addition, current macroeconomic conditions such as high inflation have affected consumers in Southeast Asia and the digital economy. The report pointed to higher prices, lower disposable income due to the slowdown, as well as lower consumer access to products as supply chains are disrupted while backlogs pile up, in part due to the non-spreading policies of the Coronavirus in China.

The online economy in Southeast Asia is still on track to reach $1 trillion by 2030 as online shopping has become the norm, according to the report.

Overall, the internet economy in the six countries is expected to reach $330 billion by 2025 if companies focus more on profitability for the next three years. Some of the largest unicorns in Southeast Asia such as Catch And the sea ​​ltd It hasn’t posted a profit yet, accumulating billions in losses in 2021.

“The high rate environment has led to the conclusion that a growth strategy at all costs is no longer a viable strategy. Investors continue to focus on profitability, free cash flow, and normal profit margins. Finding the right balance and calibration between Temasek Technology and Consumer Vice, on CNBC’s “Street Signs Asia” Cost optimization and top line growth is something all businesses have to work through.

Investors will be cautious in the short term as most do not expect a return of 2021 deal activity and peak valuations in the next two years.

The six countries are set to record double-digit growth in GMV from 2022 to 2025.

The report showed that Vietnam leads the way and is set to record 31% growth in GMV from $23 billion in 2022 to $49 billion in 2025. The Philippines comes right behind with a projected 20% growth in GMV, from $20 billion in 2022 to $35 billion in 2025.

Cautious investors

The strong momentum in investments continued into the first half of 2022, but investors are getting wiser.

“Investors will be cautious in the short term because most of them do not expect the return of 2021 deals activity and peak valuations in the next two years,” the report said.

Read more about technology and cryptocurrency from CNBC Pro

“Nevertheless, most investors remain optimistic about the potential of SEA in the medium to long term,” the report continued, but venture capitalists in the region were still entitled to $15 billion in dry powder to maintain deals.

“We see increased interest in emerging markets, such as the Philippines and Vietnam, and in emerging sectors, such as SaaS and Web3.”

Early-stage entrepreneurs thrive, while late-stage investments are affected by bleak public listing prospects, according to the report.

Singapore-based transportation and food delivery giant Grab saw a less than stellar stock debut at the end of 2021 despite it being the largest Southeast Asian initial public offering in US history.

FinAccel – the parent company of Kredivo’s buy now pay later platform – canceled plans to go public in October due to unfavorable market conditions.

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