Asian trade

Southeast Asia is one of the most vibrant economic areas in the world. It’s also one of the most volatile. Finbarr Bermingham examines the economic, political and social risks parties need to watch for while trading in the region.


Indonesia is home to more than 10% (742) of all the world’s languages. Neighbouring Papua New Guinea provides almost 12% (820). These facts show Southeast Asian diversity in a nutshell. But with the beauty of cultural, ethnic and natural diffusion comes challenges, particularly for those hoping to engage in trade there. And while the Asean grouping has led efforts to unify the region, it remains a complex place to do business.

In 2016, the region is facing a fresh raft of economic and political challenges, all of which can act as barriers to trade. There are ways around these – diligence inside and outside the jurisdiction, choosing the right local partners, hiring risk consultancies and using various forms of political risk insurance can help. GTR spoke to regional risk experts to examine some of the greatest risks that these difficulties provide.



In August, Indonesian authorities announced they had arrested a group of militants in the city of Batam, who were planning to launch a rocket at Singapore across the Strait. The target was Marina Bay, adjacent to the city state’s business district and home to some of its largest hotels and tourist attractions. It highlights the rising risk of terrorism in Southeast Asia and the fact that it is no longer contained to its emerging economies.

“The plot doesn’t seem to have been credible but it raises the question of Singapore’s vulnerability as being an attractive target to regional extremists,” says Tim Powdrill, associate director at the Risk Advisory Director.

With its financial architecture and multicultural demography, Singapore may well be an easy target and its government has beefed up security on locations such as Jurong Island, which hosts valuable petrochemical assets and power stations. The risk here, however, is nascent. Elsewhere in the region, the affect on trade is much more material.

In the south of the Philippines, Islamic militia Abu Sayyaf kidnapped 10 Indonesian coal freighting sailors in March this year. They were transporting cargo from South Borneo to Batangas province in the Philippines and it was the latest in a line of abductions by the group. The tugboat company agreed to pay a US$1mn ransom fee to ensure the hostages’ release. Abu Sayyaf were not deterred and have since abducted more Indonesian fishermen and sailors, as well as some from Malaysia.

In Indonesia, the rising influence of the Islamic State (IS) has been blamed for a series of lone wolf attacks, but organised militia are very active in the country too.

“We are seeing a revised threat in the form of disenfranchised individuals being radicalised either individually through easily accessible online IS propaganda, translated into local languages, or through regular contact with Southeast Asian IS fighters located in Syria and Iraq who use secure online platforms to radicalise and direct their followers,” says Aon’s regional director for crisis management, Daniel Bould.

He adds: “These individuals are highly motivated, but judging from past attacks in Southeast Asia, namely in Jakarta and Kuala Lumpur, they are poorly trained and equipped. However, they pose a significant risk, as it is difficult for security services to identify and interdict them. If the current situation continues, the next attack in any part of Southeast Asia is a matter of when, not if.”


Political machinations

In a UN court in The Hague in July, China was found to have violated the laws of the sea in claiming rocks and islands dotted around the resource-rich South China Sea. Beijing will not pay any heed to the verdict and have ramped up their militarisation of the region. Vietnam has followed suit and the claimants of the tribunal, the Philippines, earlier this year purchased the first warships ever to be exported from Indonesia.

This has long since been mooted as the next flashpoint and a potential multi-party conflict. Experts prefer to play down the intentional risk, but the possibility is clear. “If it was to go all wrong, it’s the risk that has the most impact on global trade in terms of disruption of movement of oil and LNG. Maritime insurance would spike, there would be huge disruption to the logistics route, it wouldn’t be too long before that would be felt, not just in Southeast Asia but globally,” Powdrill says.

The region is known for its political volatility. Coups are commonplace and nationalism is rife. In the Philippines, Rodrigo Duterte was elected president on a ticket of anti-corruption, anti-crime and bellicose territorial statements. His rhetoric has been toned down since he took office, but analysts say that they are still contacted with extensive queries about his intentions by those hoping to do business in the country.

The region’s image of political chaos is well-earned and has serious implications for those with business prospects there, particularly in the projects space.
“I would class a political risk as an inability of some governments to prioritise which projects they should bring to market,” says Singapore-based Roddy Adams, managing director for infrastructure finance at engineering consultants Atkins Acuity.

He explains: “Take Indonesia, which says it has a national pipeline of hundreds of projects priced at however many billions of dollars. It does that every year but doesn’t actually produce any projects. They don’t focus their attention and resources into delivery of, say, two projects, never mind hundreds. This action of prioritising projects is a big political risk and one which stops a lot of projects from coming to market.”

For banks, the political situation in Myanmar is daunting too. As the country opens up, the lines between sanctioned and legitimate trade are extremely blurred. OFAC has made carve-outs in its regime to encourage banks to finance trade into the Yangon port owned by a former regime-backed figure, but the confusion surrounding the system has provided a headache for the nascent National Development Party government.


Emerging market weakness

Economic conditions in the region, despite relatively strong growth on the whole, are weak. Few places in the world are as susceptible to fluctuations in global trade as Southeast Asia, with its manufacturing and exports-heavy makeup.

“The main catalyst for the downturn is demand from China, which is changing. The fact that China is moving up the value chain means it is trying to look at domestic suppliers more and to foreign suppliers less. In the electronic sector, the upgrade in the Chinese economy means they will import less from old friends like Singapore, but source production domestically,” says Mahamoud Islam, Asia Pacific economist at Euler Hermes.

Many of the other macroeconomic woes can be traced to a similar source. Commodity producers such as Malaysia and Indonesia are suffering due to the Chinese construction slump. Even companies in Singapore are feeling the burn.

“The cautiousness of commodity traders in Singapore continues, especially those with high leverage funding. We see increasing debtor days as a result of longer payment terms offered to customers. Low oil prices are still affecting the activities in the offshore oil and gas sector. An example of this trend is the recent case of Swiber Offshore being placed under judicial management,” says Petr Racek, head of risk, Southeast Asia and Japan at Atradius.

Banks lending to this sector will find themselves with stressed assets, a feature which may become more common in the financial sector as the deal flow continues to ebb downwards. In Hong Kong, cross-border deals with China have fallen away over the past 18 months, and across the region, banks are finding themselves fighting for business and offering terms that would have been unheard of a few years ago.

Take the Sports Hub PPP in Singapore, a project which reached financial close in 2010 but which was refinanced last year. Borrowers managed to achieve a 20-year tenor and margins close to 100 basis points. An equivalent transaction in Australia, Adams at Atkins Acuity says, would have had a tenor of seven years and a much higher price.

He says: “I’m not seeing any lack of liquidity. In fact, there’s a lot of aggression from the banks. It’s purely because of deal flow. The deal flow issue is the biggest. It works in two ways: it causes banks to disappear from the market if things aren’t viable, but also makes banks desperate to do deals and and take on risk profiles they really shouldn’t – it’s not ideal. A balanced market should have a steady flow of deals, and that isn’t the case for the region just now.”

Also of concern is the level of corporate indebtedness in Southeast Asia, particularly in Malaysia and Indonesia, where companies have borrowed big in US dollar and are nervously awaiting the next Fed hike. In the projects space, companies have “pigged out” on US debt, Adams says, creating a highly leveraged house of cards, the collapse of which could have significant ramifications throughout the region.