Updated: May 24
With Southeast Asia beginning to plan for the COVID-19 endgame, investors stand to benefit from reviewing their due diligence protocols now
The coronavirus (COVID-19) pandemic has driven governments across the world either to implement social quarantine measures or institute complete lockdowns. With a global recession this year something of a foregone conclusion, countries have raced to launch economic stimulus measures to limp through the COVID-19 crisis.
Southeast Asian countries are no exception, with the region’s largest economies unveiling major social welfare and business-orientated stimulus plans. While Southeast Asia will feel the pinch as much as the rest of the world, it could still stand to capitalise from a rush of new investment in the aftermath of the pandemic. Optimistic observers predict that Southeast Asian economies could be among the first to experience the beginning of a V-shaped recovery next year.
The Association of Southeast Asian Nations (ASEAN) had been attracting a rising volume of foreign direct investment (FDI) in recent years, drawing an increasing amount of money away from China as investors sought better margins. As such, the combination of ASEAN members’ ongoing economic reforms, a growing number of distressed asset targets, and China’s deepening slowdown should help drive the investment appeal of Southeast Asia. With the above in mind, investors eager to enter the region would do well to consider whether their due diligence programmes are fit for purpose now to avoid a costly misstep down the road. Countermeasures
The combined GDP of ASEAN’s member states climbed from US$2.5 trillion in 2015 to US$3 trillion in 2018, according to the ASEAN Integration Report 2019. Further, the bloc’s economic growth has consistently outstripped the global average, leading to forecasts that ASEAN will become the world’s fourth largest economy by 2030. Southeast Asia’s rapidly growing middle class, deepening regional integration and commitment to infrastructure development underpin foreign investor interest. To protect their economic gains and prevent a social and financial collapse in the wake of COVID-19, Southeast Asia’s leading economies have unveiled a raft of healthcare, social security and business recovery initiatives. Indonesia has announced a combined IDR436.1 trillion (US$26.91 billion) economic stimulus and plans to widen the budget deficit to 5.07% of GDP. Thailand intends to direct THB1.9 trillion (US$58.04 billion) to prop up the local economy, with the economic stimulus rolled out over three phases. Singapore has set aside S$59.9 billion (US$42.09 billion) for use across three stimulus packages. Malaysia will roll out a total of MYR260 billion (US$59.92 billion) in stimulus measures.
These fiscal efforts are designed to allow the region to recuperate and stabilise until business can resume with some semblance of normality. When it does, ASEAN will once again seek to offer itself as an investment alternative to China a proposition that has gained weight in the past two years, which have seen the emergence of the Sino-US trade war, China’s deepening economic slowdown and the rise of civil and political unrest in financial hub Hong Kong. Multinational companies (MNCs) have begun to remap global supply chainsand Southeast Asia’s younger demographic, lower wages and regional synergies represent an attractive package. Growth markets
China’s GDP grew by 6.1% last year, the slowest pace since 1990 as a softening in exports, investment and consumer spending took their toll. The Chinese economy has not seen double-digit expansion since 2010, owing to reforms aimed at shifting from manufacturing-driven growth to one led by services and consumption.
The World Bank has projected that COVID-19 will send the country’s GDP growth as low as 2.3% this year, its lowest since a recession in 1976.
While the Asian giant will remain a key driver of the global economy in the years to come, the reality is that investors looking for new opportunities are turning to frontier markets in Southeast Asia. This is translating into fresh demand for due diligence as investors seek either to enter or expand in emerging markets that are home to less well -understood risks and where experience on the ground is limited.
Indonesia, Vietnam and Myanmar, have emerged as markets where due diligence is increasingly in demand; and where limits on information accessibility present one of several hurdles to foreign investment. Investment opportunities
While Indonesia has vast natural resources, it needs and wants to move away from the extractive- or resource- commodity trap to leverage on more value-added sectors such as manufacturing and IT. As such, Indonesian President Joko Widodo, a reformist figure with support from across the political, military and business spectra has launched major infrastructure projects. These initiatives require heavy spending and have created a plethora of foreign investment opportunities.
Vietnam’s economic development curve roughly echoes that seen in China about fifteen years ago, with the Southeast Asian country courting foreign and private investment to drive its economic expansion. Hanoi launched a wave a state-owned enterprise (SOE) privatisation drives in the mid-2000s and continued this strategy in its subsequent five-year plans. The country is also striving to establish its economic and political independence on the regional stage and has embraced FDI to achieve that goal. Sectors of opportunity include retail banking, modern agri-business and financial technology.
Myanmar’s military regime, meanwhile, cut the country off from most international investment from the early 1960s until a gradual reopening to international trade and commerce began in the late 1990s. Except for Laos, Papua New Guinea (PNG) and fringe parts of Cambodia, Myanmar is now regarded as the only frontier investment destination left in Southeast Asia. As such, investors in everything, from telecommunications, banking, heavy industries to fast-moving consumer goods (FMCG), have flocked to the country. Due diligence demand
MNCs looking to enter ASEAN must combat a range of regional hurdles , such as differing regulatory environments, patchy record keeping and a far from desirable reputation for corruption.
Investors with exposure to the Chinese market must prepare for the fact that Southeast Asia, for the most part, is far behind East Asia in terms of record keeping. While financial records are available for numerous publicly listed companies, private companies are not legally required to file such reports, and the effectiveness of state audits has been limited. In Myanmar, Thailand and Vietnam, for example, litigation record keeping is generally sub-par, with information either erroneous or outdated. Records are often in hardcopy and need to be manually retrieved and translated.
The paucity of publicly accessible information is compounded by media restrictions in most Southeast Asian countries, where authoritarian rule is the norm. A highly regulated and censored media limits what is available to investors via the public domain.
These considerations have driven demand for effective due diligence resources. The world is heading for recession, and regional demand for reactive investigations such as forensic reviews and asset traces is likely to soar. As Southeast Asia begins to recover from the downturn, pre-investment due diligence and deal-related investigations should ramp up. To carry out this work properly, and given the pre existing barriers to entry, investors will need to lean on experienced due diligence providers with proven and reliable networks of sources.
A tried and true way of vetting businesses or individuals has been to approach a contact with credible knowledge about an investigation’s subject. These can include former business partners, work colleagues, or industry rivals, as well as sector professionals, academics and journalists, former members of law enforcement and former government sources. Our experience is that the in-person approach yields the best results, as sources are typically more responsive and open to investigators.
Investigators with experience in Southeast Asia, having overcome existing fundamental operating challenges with sources cultivated over decades, will be better placed to adapt to the new challenges of conducting due diligence in a post-pandemic world. Social distancing has made people more reliant on and receptive to digital communication. Established professional investigators, who are also creative and nimble, will continue to rely on their networks without putting themselves or their sources at risk. Outlook
The COVID-19 outbreak has rattled the world, and rightly so. Few countries have responded at the speed that this outbreak has demanded. While most Southeast Asian nations rank low on the global table in terms of confirmed cases, these numbers have been brought into question given limited testing programmes. Indonesia, for example, has been criticised for its limited approach to COVID-19 testing.
The region, however, has extensive experience with zoonotic diseases including dengue fever and malaria. While COVID-19 will have a lasting impact on the global economy, it should not deter investors already eyeing Southeast Asia as a potential host for supply chain investment. MNCs will have factored zoonotic diseases into their risk profiles for each country and should understand that COVID-19 is likely a health issue only until a vaccine has been successfully developed and distributed. As such, they will likely stand ready for when a V-shaped recovery begins to emerge as infection curves flatten and lockdowns ease. Due diligence within the region’s economies is as important as ever, and a thorough understanding of the regional investigative barriers is key to ensuring the success of any investigation.
For further information, please contact:
Jeremy Tan, Principal, Berkeley Research Group
Jeremy Tan is a director based in BRG’s Singapore office. He has a decade of experience advising private companies, law firms, and governments, having supervised and led the execution of numerous investigative and strategic intelligence assignments focused on Southeast Asian countries. These discreet undertakings have supported decision-making for market entry, green field investments, pre-initial public offering, mergers and acquisitions, litigation support, and business strategy in a multitude of sectors. The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.
1 https://www.straitstimes.com/opinion/s-e-asian-economies-better-prepared-this-time-for-crisis The Straits Times, April 10, 2020
2 https://asean.org/storage/2019/11/ASEAN-integration-report-2019.pdf, ASEAN Integration Report 2019, Page 14, April 4, 2020
3 https://asean.org/storage/2019/10/Investing_in_ASEAN_2019_2020.pdf, Investing in ASEAN 2019, Page 5, April 5, 2020
4 https://www.thejakartapost.com/news/2020/04/07/indonesias-covid-19-stimulus-worth-2-5-of-gdp-lower-than-singapore-malaysia.html, The Jakarta Post, April 7, 2020
5 https://www.bangkokpost.com/business/1894985/cabinet-gives-green-light-to-b1-9tn-stimulus, The Bangkok Post, April 7, 2020
6 https://www.ibtimes.sg/singapore-unveils-new-stimulus-spending-3-5-billion-combat-coronavirus-42501. International Business Times, April 6, 2020
7 https://www.scmp.com/week-asia/politics/article/3078674/coronavirus-malaysia-announces-us23-billion-third-stimulus, South China Morning Post, April 6, 2020
9 https://www.scmp.com/economy/china-economy/article/3046476/china-gdp-growth-last-year-was-61-cent-slowest-rate-29-years, South China Morning Post, April 4, 2020
10https://www.scmp.com/economy/china-economy/article/3077696/coronavirus-pandemic-expected-slash-chinas-2020-growth-23?utm_source=CASL%20Compliant%20Canada%20List&utm_campaign=a3c9389f8f-EMAIL_CAMPAIGN_2018_09_19_07_59_COPY_01&utm_medium=email&utm_term=0_44dbe570f5-a3c9389f8f-72666937, South China Morning Post, April 4, 2020
11 https://www.thejakartapost.com/news/2020/04/07/indonesia-ranks-among-worlds-worst-in-coronavirus-testing-rate.html, The Jakarta Post, April 5, 2020