Inflation, interest rates slowing Southeast Asia’s digital growth while private funding plummets; AI data centre investments provide hope
Southeast Asia's digital economy is growing at the weakest pace in its history as consumers trim their online spending amid high inflation and interest rates. According to the latest report of Google, Temasek Holdings, and Bain & Co., the internet economy of this region will face challenges with a mere growth estimate of 15% in online spending, which would amount to $263 billion this year. This is a drop from the 17% growth seen last year, marking the lowest rate since at least 2017.
Among over 650 million people, the digital economy in the region is fighting weaker consumer demand. Technology companies that have heavily invested in countries such as Indonesia, Singapore, Thailand and Vietnam currently ask if their investment would be profitable. Countries like China and Japan have always led Asia's digital landscape but the boom of Southeast Asia emerged as an alternative destiny for growth.
In recent years, intense competition for market share has characterized the play of global players such as Amazon and Alibaba with regional firms such as Grab, Sea Ltd., and GoTo in e-commerce, food delivery, and ride-hailing. This has resulted in forcing the region's tech firms to move away from growth in revenues toward profitability through cost-cutting, job losses, and business exits as growth slows. The report stated that Southeast Asia's internet economy will generate profits of $11 billion this year on $89 billion in total revenue, with much of this growth fueled by the online media industry.
“Robust macroeconomic conditions in SEA continue to underpin the digital economy,” researchers noted in the annual report. They added, “SEA’s digital economy will be shaped by increasing user sophistication, the growing importance of digital safety and security, and the need to unlock greater business value from AI.”
Another key fact that the report presents is that private funding in the region's tech sector has fallen to an all-time low. The funding regarding the engagement of the tech companies fell from 564 in the first half of the year 2023 to 306 in the same period last year. This is indicative of how investors tend to become risk-averse with increasing costs of capital and their preference for software and sustainability technology over the more consumer-centric platforms.
But it does leave a silver lining in terms of AI-ready data centres. Tech giants have placed close to $30 billion in Southeast Asia's data centres in the first half of 2024. Top tech leaders, including the CEOs of Apple, Microsoft, and Nvidia, recently came to the region to have large-scale investment discussions with government officials. These AI-ready facilities would be seen as forming part and parcel of an expanding regional digital ecosystem, hence as the critical infrastructure required to further support future developments in AI applications and related cloud services.
While the digital economy of Southeast Asia is perceived to be in a challenging period, researchers believe that underlying economic resilience will help sustain its progress. The report indicates that as user sophistication grows, and as safety, security, and AI's business value grow in importance, Southeast Asia's digital landscape may find new avenues for expansion.
This year's results point toward a critical change point in Southeast Asia's tech sector - where companies are adjusting to make profits and hit targets amidst headwinds. As this region's digital economy takes off, investments in data infrastructure and specific technology sectors may be the harbinger of a change toward more sustainable growth over the coming years.