Southeast Asia, once seen as a rising power that would balance the rise of China and India, has started to face hurdles in its path toward that goal as political risk takes an increasing toll.
One would be forgiven for thinking that the problems are merely in Thailand and Cambodia, as a closer look shows that many countries in the region are facing problems which stems from the political unrest.
The turmoil in Thailand, where protesters are determined to scuttle a Feb 2 election and force the ouster of the caretaker government led by Yingluck Shinawatra, has attracted the most attention. Next door in Cambodia, unrest continues among low-paid garment industry workers, whose cause has been embraced by the political opposition to strongman Hun Sen.
Asean’s biggest economy and the region’s only member of the G-20 economies, Indonesia has also faced occasional protests from workers demanding wage hikes or calling for the restoration of subsidies. More such rallies are likely to flare up ahead of presidential polls around July this year.
The issue of governance is one of the causes of the ongoing political turmoil, according to Dr Posh Raj Pandey, executive chairman of South Asia Watch on Trade, Economics and Environment.
Poor governance and high levels of corruption, he said, have left many governments unable to deliver what they have promised to their citizens, who are no longer afraid to come out onto the streets to vent their anger.
“And because of the political turmoil, the economy is even worse,” he said, noting that the rise of the middle class has been an important factor given that people are better informed than ever before.
Dr Kanit Sangsubhan, director of the Fiscal Policy Research Institute Foundation of Thailand, agreed that as more people get better access to information, they aspire to a better livelihood. That is why they are coming out to demand fairness and justice.
The protests are happening at a time when stable governments are becoming more important ahead of the formation of the Asean Economic Community (AEC), he said. Without political stability, regional economic cooperation will be impeded.
“A change of government for a short time will not lead the country forward as there will be no clear vision, and international agreements can’t be negotiated or made possible. Governments and policymakers need to realise the importance of this opportunity. Otherwise, the growth rate will continue to deteriorate,” he told Asia Focus.
Dr Martin Schulz, senior economist with the Fujitsu Research Institute, said political conditions in each individual country have also become more important for other countries.
Business relationships between countries are no longer limited to free trade agreements, he noted. Businesses need production facilities in their targeted markets, so they need regional approaches that are backed by governments.
“Until last year basically, all Japanese investors were happy with Thailand because even if there was political problem, [the economy] always worked,” he said. “But now the investors are getting concerned not only because of the demonstrations, but also the quality (of policy implementation) is changing.”
Although Thailand was still in a strong position, he said, other countries such as Malaysia, Indonesia and the Philippines may become more competitive. The Thai government thus needs to take serious steps in order to get to the next level.
ECONOMIC IMPACT ON ASIA
Rajiv Biswas, Asia-Pacific chief economist with IHS Global Insight, a global market and economic information provider, said that while other parts of Asia Pacific are reviving because of the strengthening recovery in the United States and Europe, Asean in 2014 faces an outlook clouded by political risks.
Asean’s regional GDP growth is forecast to slow from 5% in 2013 to 4.7% in 2014 due to both political and economic factors. These negative factors will have a bigger influence on growth than the positive economic impact from increasing export orders from North America and Europe.
IHS has cut its 2014 GDP growth forecast for Thailand from 3.9% to 3.2% as the risk of civil unrest could curb activity and reduce foreign direct investment. Dr Kanit also has a similar forecast of 3% GDP growth.
In Cambodia, major global garment companies are very concerned about the violent suppression of strikes by the government, and the reputational risk they face to their brands. The strike is estimated to have cost US$200 million in lost revenues for an industry with estimated annual exports of around $5 billion.
However, despite major protests both politically and economically, the Cambodian economy performed well last year, said Dr Socheat Heng of the advisory department of Phnom Penh Securities.
The impact of unrest was seen mostly on FDI, but it was not that significant. Approved investment projects both from domestic and foreign investors in 2013 climbed 69%. Only investments from Japan experienced a decline from $328 million in 2012 to $47.5 million in 2013. Both exports and imports increased, especially rice and garments.
In Indonesia, Mr Biswas said economic growth was expected to moderate in 2014 as uncertainty persists over the composition and leadership of the next government.
In Thailand, he said, foreign investors have been reducing their stock and bond exposure in recent weeks. The attractiveness of Thailand for FDI is also being eroded.
“At the very least this will put foreign investors on the sidelines for major new projects involving FDI,” he said. “Foreign investors are also confronting a gradual erosion of Thailand’s previously sound macroeconomic environment, with the baht hitting its lowest level since 2010, and government ministries unable to implement meaningful long-term economic policies.”
Stephen Groff, vice-president for East Asia, Southeast Asia and the Pacific of the Asian Development Bank (ADB), said the bank was monitoring protests in Asean countries closely. In the short term, political tensions can affect tourism and dampen domestic consumption. In the long term, tensions can weigh on investment decisions, risk downgrading of a country’s credit rating, and delay priority infrastructure projects.
“There is also the possibility that the political crisis might delay the forming of a new government, which may eventually lead to a delay in the approval of the government budget. This would have an impact on the economy,” said Mr Groff.
“It is also important to watch for spillover effects, as smaller economies in the region are vulnerable to the slowdown of a larger neighbouring economy such as Thailand.”
In countries such as Malaysia or Indonesia, temporary protests against specific government policies are unlikely to have notable, long-term economic consequences. The ADB does not expect any unrest in Indonesia ahead of the upcoming elections.
In Cambodia, investors will be watching for signs of stability in the labour force, particularly at government interventions in resolving workplace issues.
“Geopolitical tensions have been on the rise in parts of Asia. We would hope that sound economic reasoning would prevail so the region can maintain its strong growth momentum,” he said.
The private sector, meanwhile, is cautiously monitoring the situation.
Kyoichi Tanada, president of Toyota Motor Thailand and head of Toyota for Asean and many Asian countries, said the company was monitoring possible impacts on the company’s sales and operation.
“If the political unrest is prolonged, it will not be easy for us to invest more in the country,” he said.
In Asean, Toyota has production sites in Thailand, Indonesia, Malaysia, Vietnam and the Philippines, with Thailand the largest facility.
Mr Tanada said that when Toyota planned to build a new manufacturing plant, it would consider many factors, not only the Thai political situation.
Toyota expects car sales this year in Thailand of 1.15 million units, down 13.6% from 2012. It expects its own production for the domestic market to fall 10.2% to 400,000 units.
Despite the seemingly bleak outlook, the current uprisings may bring a better future to the region, says Dr Ronald Mendoza, executive director of the Asian Institute of Management (AIM) Policy Centre.
He says the region should support protests as they represent what democracy offers.
He raised the example from his country, the Philippines, where some democratically elected leaders have been forced out by street protests. Yet today Philippine democracy and the economy are stronger than ever.
He has a different view of the economic impacts from current protests, saying he expects stronger institutions to emerge in the longer term.
“If there is a sudden loss of confidence in an economy, obviously it can create both financial and real losses in terms of investments and jobs. Hopefully after facing all these challenges, the institution will come out stronger,” he said.
“You need institutions to underpin the trust of the people, not personalities. Personalities come and go but institution will stay. A credible supreme court, a credible justice system, a credible congress, a credible media, a private sector that really cares about social responsibility — these are the things we need to focus on.”