Investment Risks In Southeast Asia Compounded By COVID-19

Updated: May 24

By Andrew Kemp








The coronavirus (COVID-19) pandemic has complicated the Southeast Asian investment picture, with the ensuing economic downturn exacerbating pre-existing concerns about corruption

Southeast Asia has been rocked by the coronavirus (COVID-19) pandemic, with countries across the region enforcing strict quarantine measures that will weigh heavily on their economic performance this year.


The International Monetary Fund (IMF) has projected that the economies of the Association of Southeast Asian Nations’ (ASEAN) five largest economies – Indonesia, Malaysia, the Philippines, Singapore and Thailand – will jointly contract by 1.3% in 2020. The situation has seen the ASEAN-5 unveil a raft of financial and social welfare measures in order to weather the economic storm.


While the IMF has projected a V-shaped recovery for Asia-Pacific, the economic downturn is going to place companies under greater pressure to survive – creating the perfect environment for increased instances of fraud and corruption.


Economic downturn


The combined GDP of the ASEAN’s 10 member states climbed from US$2.5 trillion in 2015 to US$3 trillion in 2018, according to the ASEAN Integration Report 2019, which was published in November 2019. FDI inflows, meanwhile, climbed from US$118.7 billion in 2015 to US$154.7 billion in 2018. The region’s total trade reached US$2.8 trillion in 2018, up from US$2.3 trillion in 2015, with intra-ASEAN trade accounting for 23% of that figure.


The year ahead , however, is set to tell a very different tale.


IMF Asia and Pacific Department director Changyong Rhee said in mid-April that Asia-Pacific GDP would likely record zero growth in 2020 for the first time in 60 years, owing to the pandemic’s global toll.


“These are highly uncertain and challenging times for the global economy. The Asia-Pacific region is no exception. The impact of the coronavirus on the region will be severe, across the board, and unprecedented,” Rhee told a virtual news briefing on April 16. “This is not a time for business as usual. Asian countries need to use all policy instruments in their toolkits.”


Global risk consultancy Kroll, a division of Duff & Phelps, has created a snapshot of the COVID-19 pandemic’s far-reaching consequences on multiple geographies and sectors around the world. The Kroll COVID-19 Heat Map tracks trends across regions over time and provides a visual demonstration of the pandemic and the associated government responses.

The IMF has revised down its growth outlook for the ASEAN-5 to -1.3% in 2020. Tourism-dependent Thailand is projected to fare the worst, with its economy contracting by 6.7%. Singapore and Malaysia are to follow with negative growth rates of 3.5% and 1.7% respectively, while Indonesia, the Philippines and Vietnam are projected to grow by 0.5%, 0.6% and 2.7% respectively.


Such sharp economic contractions invariably lead to increased risk of exposure to corporate maleficence, with the number of instances of fraud, corruption and bribery expanding in the wake of decreased liquidity. The situation could be compounded if ASEAN member states opt to prioritise rebooting economic growth over anti-corruption reforms in the coming months.

Transparency International’s Corruption Perceptions Index (CPI) 2019 ranks Malaysia 51 out of 180.


Southeast Asia still faces challenges in winning over investors this year, owing to an unenviable reputation for institutionalised corruption.




Corruption concerns


While Transparency International’s Corruption Perceptions Index (CPI) 2019 ranks Singapore in joint fourth place with Sweden among 180 countries and territories, the rest of Southeast Asia did not perform as well. Of the other Southeast Asian countries, Brunei Darussalam was the next highest in 35th place, followed by Malaysia at 51 and Indonesia in 85th place.


Southeast Asia has been positioning itself as alternative investment destination to China prior, with Japanese daily The Nikkei reporting in July 2019 that more than 50 multinational companies were investigating the relocation of manufacturing operations from China to the region. Japan announced in April 2020, that it would provide roughly US$2.4 billion in support for domestic firms willing to relocate their manufacturing operations either to Japan or countries in Southeast Asia.

Indonesia’s appointment last year of a five-member supervisory council to the Anti-Corruption Commission (KPK), which critics fear will undermine the independence and hence effectiveness of the anti-graft watchdog.

But Southeast Asia still faces challenges in winning over investors this year, owing to an unenviable reputation for institutionalised corruption.


Notable examples include the infamous 1Malaysia Development Bhd (1MDB) embezzlement scandal and Indonesia’s appointment last year of a five-member supervisory council to the Anti-Corruption Commission (KPK), which critics fear will undermine the independence and hence effectiveness of the anti-graft watchdog.


Thailand’s National Anti-Corruption Commission (NACC) is also under review for failing to release documents to the media relating to the investigation of Deputy Prime Minister Prawit Wongsuwon.


When weighing up opportunities in Southeast Asia, it would be wise to balance the region’s long-term growth prospects, – with the IMF projecting that Asia-Pacific will grow by 7.6% – with pre-existing and emerging corruption concerns.

Vietnam is one of the few prominent Southeast Asian states to ramp up its anti-corruption efforts, with senior figures in the Communist Party of Vietnam (CPV) coming under increased scrutiny.


Moreover, the region has a history of patchy record keeping and a paucity of publicly accessible information, owing to authoritarian governments’ media restrictions that limit access to public record information necessary to making an informed decision.

Vietnam is one of the few prominent Southeast Asian states to ramp up its anti-corruption efforts, with senior figures in the Communist Party of Vietnam (CPV) coming under increased scrutiny.

With the global supply chain disrupted, the region’s manufacturing sector faces an uphill struggle to get back on its feet. This may tempt some within the sector to try to hide the extent of the downturn’s impact on their business, which could open up investors to serious risk from potential partners and associated third- party suppliers and contractors.


Investors will need to be extra cautious during this challenging time, a stance that may limit the investment pool and further drive Southeast Asian corporates to more desperate measures.


Due diligence


When weighing up opportunities in Southeast Asia, it would be wise to balance the region’s long-term growth prospects, – with the IMF projecting that Asia-Pacific will grow by 7.6% – with pre-existing and emerging corruption concerns.


Companies need to conduct due diligence on local employees, joint venture partners, suppliers and vendors to minimise exposure to fraud and corruption now more than ever. This is true of anywhere in the world, but especially so in Southeast Asia, where top-down cultures of corruption are more apparent.


Given that organisations are being judged more than ever by the company they keep, they would be wise to embrace a holistic approach to due diligence. This should include third parties’ legal, financial and operational processes as well as in-house cybersecurity practices.


At the same time, investors must also factor in the risks of working with local governments and state-owned enterprises.


Goldman Sachs’ exposure to Malaysia’s 1MDB scandal is a cautionary tale of such risks, with Malaysian prosecutors having filed charges against the bank in December 2018. Four Goldman units stand accused of misleading investors as they raised US$6.5 billion from 1MDB bond sales.


While the bank has denied any wrongdoing, reports have emerged that it has entered talks with US regulators to reach a settlement. The US Federal Reserve, meanwhile, has banned Goldman partner Andrea Vella from the banking industry for life for his role in the affair.


The risks relating to an oversight in Southeast Asia are great, especially given the politically volatile nature of some of the region’s countries. These countries offer incredible investment opportunities, but investors must tread carefully for fear of stumbling.


#AntiCorruption #SEA


This article was written by Andrew Kemp for Conventus Law in association with Kroll, a division of Duff & Phelps. For further information on the doing business in South East Asia, please contact:


krollasia@kroll.com  | www.kroll.com



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