Asian investments: five key risks to watch
October 2015 | EXPERT BRIEFING | FINANCE & INVESTMENT
By any metric, Asia is increasingly assuming the mantle of a global commercial powerhouse. Despite a current slowdown in the Chinese economy, the Asia Development Bank has forecast the region to grow by 6.1 percent this year, and countries such as India and Indonesia present businesses with huge potential markets. Operating in this diverse, dynamic and at times volatile region poses risks that investors and business leaders need to navigate in order to ensure every chance of success.
Many of these risks are complex and intertwined, mixing politics and economic policies with national movements and religious extremism. In light of this, investors seeking to understand Asia’s conditions on the ground might benefit from considering five major risks that have the potential to disrupt the region’s business environment over the coming months.
Democracy under strain?
The year ahead looks fairly bleak in terms of democratic governance. Regimes across Asia are turning their backs on liberal reforms and the principle of transparent government. In Thailand, the military junta seems in no hurry to relinquish power and has acknowledged that its original commitment to hold elections will not be met by the end of 2015. The generals there are also set to cement some form of permanent political role for the military in the new constitution currently being drafted under the army’s supervision.
Across the border in Myanmar, after much fanfare, the march toward democratic reform has also stalled. In June, two of the most crucial barriers to reform were upheld by lawmakers in a vote on constitutional amendments. The first is a bar against opposition leader Aung San Suu Kyi from becoming president, the second is a de facto military veto in parliament. It seems extremely unlikely there will be any major concessions before parliamentary elections in November, ensuring that the military will retain its political dominance. Further, observers fear that neither campaigning nor voting will be free or fair. Tentative steps toward democracy are also likely to be challenged in various ways in countries such as Malaysia and Sri Lanka. This drift away from democratic governance and transparency is likely to undermine investor confidence across a range of emerging markets.
Integration vs. protectionism
Competing priorities within Southeast Asian countries will match the prospect of regional economic integration against the notion of protectionism. Closer economic integration between the 10 member states of the Association of Southeast Asian Nations (ASEAN) — in the form of the ASEAN Economic Community (AEC), which is scheduled to be completed by the end of 2015 — carries the potential to fundamentally alter the investment landscape. And yet rising economic nationalism in some ASEAN countries threatens the implementation of the AEC. Cross-party support for protectionist policies in countries such as Indonesia, which is the bloc’s largest and arguably most important economy, suggests that progress toward integration may face resistance.
Indeed, the halting pace at which certain foreign-ownership caps and nontariff barriers between member states are being removed has raised concerns over the practicality of even completing the AEC project on time. ASEAN’s commitment to non-interference in the internal affairs of member states means there is little possibility of countries being penalised for noncompliance, making the completion of the AEC by the end of the year increasingly unlikely.
East Asia – nationalism on the march
Widening nationalist tendencies will also remain a key geopolitical risk in East Asia. Although the handshake shared by China’s president Xi Jinping and Japan’s prime minister Shinzo Abe in April was warmer than the frosty affair that took place toward the end of last year, full reconciliation remains a distant prospect. Diplomatic relations between Beijing and Tokyo were strained for much of 2014 because of an ongoing territorial dispute in the East China Sea, adding to a toxic historical legacy stretching back to the Second World War. Given the volatile nature of this relationship, the direction of Sino-Japanese affairs could easily take a negative trajectory.
The month of September marks the 70th anniversary of the end of the Pacific war against Japan, known in China as the ‘War of Resistance’. High-profile commemorative events planned by Beijing throughout this year have the potential to further stoke anti-Japanese nationalism, either intentionally or inadvertently. In all likelihood such a development would lead to a further fall in Japanese investment in China, as investors look for more stable opportunities. As Mr Abe continues to advocate for a stronger Japan – in an economic, political and military sense – Tokyo too will have to navigate East Asia’s tense geopolitical environment cautiously during this particularly sensitive period.
An arms race in Asia?
The continuing rise of regional defence spending and military modernisation, spurred on by geopolitical tensions and territorial disputes, is another critical issue in the spotlight. Whether this trend constitutes an arms race in any traditional sense is an open question. It could be argued that many Southeast Asian nations are simply reaping the benefits of strong economic growth to upgrade their outdated military assets.
Nonetheless, a move for improved surveillance and naval warfare capabilities is apparent, reflecting the role that maritime security is playing on strategic decision making across coastal countries in the region. This trend encompasses states directly embroiled in maritime disputes – such as Vietnam, the Philippines, Japan and China – as well as other nations, including Indonesia and India. Asian nations will continue to boost their defence capabilities, with many seeking to at least narrow the vast arms gap that exists between themselves and China.
As a result, geopolitical tensions will remain high for the foreseeable future, which will in turn increase the incentive to further strengthen military capabilities. While the impact of these tensions on business is at present minimal – and the prospects for tensions erupting into armed conflict seemingly remote – investors must remain wary while governments continue to pour so many resources into defence.
Threat of radical Islam
Finally, governments across the region are increasingly wary of the threat that radical Islamist groups, such as Islamic State and al-Qaeda, are likely to pose in the coming months. South Asia now has to contend with a rebranded and potentially reinvigorated terrorist franchise, al-Qaeda in the Indian subcontinent, alongside more established threats emanating from groups based in Pakistan. Separately, Beijing fears that nascent links between its own marginalised Muslim Uyghur population in China’s western Xinjiang region and the international jihadist movement could lead to a further increase in domestic attacks.
Southeast Asia, particularly the Muslim-majority states of Indonesia and Malaysia, has proved a fertile recruiting ground for Islamic State in the past year, and as a result, the region faces a rising threat. There is increasing evidence that radicalised fighters with combat experience returning from Iraq and Syria are seeking to attack Western interests. Observers will closely monitor the measures that individual governments adopt in the coming months, including the prospect of broader multilateral antiterrorism cooperation, in order to deal with threats posed by radical Islamist groups.
While operating in any environment carries a degree of risk, the growth of the risk analytics and strategic forecasting industry means that contemporary leaders are better equipped to deal with today’s ever-shifting business conditions. Identifying risks and formulating an appropriate mitigation strategy are no longer seen as luxuries, but as necessary first steps for businesses seeking to insulate their operations from unexpected events. In fact, those failing to do so may experience serious negative impacts on their assets, personnel, supply chains and business continuity.
Hugo Brennan is an Asia Analyst at Verisk Maplecroft.
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