Author: Simon Littlewood

The bigger the opportunity, the bigger the risk. This certainly holds true for frontier and emerging economies in Asia. Finding the right balance between the two is a key challenge for multinationals looking to invest there.

With elections this summer in Indonesia and military governments in Thailand and Myanmar, investors in Asia have been spreading their bets. Each of these countries boasts strong potential, but each also poses serious risks.

“The outlook is good, there’s huge growth potential everywhere you look, but making the right choice of partner and route depends more than ever on an accurate reading of the politics,” says Reza Maghsoudnia, strategic development director for the global advisory group Solucom.

Multinationals and manufacturers have invested heavily in Thailand over the past few years, setting up regional hubs and shared-services centers. Situated centrally within the lively economies of the region, the country has clear advantages. But the prospect of military intervention is never far away in Thailand, and that prospect became reality again recently with the 12th coup since the establishment of the constitutional monarchy in 1938.

Indonesia boasts an immense fount of minerals and natural resources. But the country recently enacted a law limiting raw natural resource export by nondomestic businesses. Market watchers believe that after the summer elections and with commodities prices no longer on their sky-high trajectory, policymakers in the country will once again focus on attracting investors.

With free elections finally taking place and the markets beginning to open, Myanmar is trying to boost its appeal to foreign corporations—not least by auctioning off its offshore oil rights. But there are clearly risks in this burgeoning economy, including its protracted history of military rule.


“Change is rarely bad for all,” says Solucom’s Maghsoudnia, “and the intervention of the military, despite the arrest of government and opposition leaders, may finally break the logjam that has been at the heart of Thai politics and has seriously checked inward investment.” Historically, growth has continued unabated during periods of military rule, he notes. “Immediately prior to the coup, analysts had cut growth expectations from 4.5% to less than 3%. We expect continued impact on tourism and travel, but medium-term this holds out the prospect of change and a recovery in key growth indices, so we are seeing a more positive sentiment.”

Maghsoudnia believes the coup is about the establishment’s reasserting control to prepare for the death of the king, who is 83 and ill. “The military will want to manage a smooth succession by quietly pushing aside the crown prince—perceived as lightweight and probably in [deposed leader] Thaksin Shinawatra’s pocket—in favor of another.”

The bottom line, says Maghsoudnia, is that Thailand could be looking at a relatively long period of military rule, ending in another attempt to reform the constitution to neutralize the Thaksin party. “A parliament with seats reserved for the military or ex-military seen as establishment stalwarts is not unlikely.”


For Thomas Oentoro of KV Asia Capital, a private equity company focusing on consumer, health, IT and infrastructure opportunities, Indonesia is a market with massive opportunity that has proved its ability to enact orderly regime change.

In addition he believes the presidential election on July 9 (as this issue went to press) will bring a welcome change from the respectable but uninspiring Susilo Bambang Yudhoyono, who has not lived up to early promise. Corruption, cronyism and nepotism—the perennial plagues of this market—appear to be declining, with a concomitant strengthening of key institutions.

Maghsoudnia, Solucom: Making the right choice of partner and route depends more than ever on an accurate reading of the politics.

But Oentoro worries that voter sentiment is shifting from the Joko Widodo/Jusuf Kalla ticket—which represents continuity with the current regime but with a younger face—to Prabowo Subianto, an army general whose Gerindra coalition includes Islamic conservatives. “Every time Prabo(wo) does better in the polls, the market shifts down a gear; investors fear the fundamentalists and would prefer Jokowi and continuity,” says Oentoro.

A Gerindra victory could heighten the risk of unfriendly legislation on—among other things—foreign ownership, tax and governance, and licensing regimes in key sectors like telecoms, infrastructure and extraction industries. “Consumer industries could also be hit,” Oentoro says.

This is a problem for a country which, for example, is a major oil producer yet has to import the refined product due to a lack of domestic refining capacity. Over the past 30 years enough memorandums of understanding for new refinery projects have been signed to paper the walls of the president’s office many times over. The Japanese, the Iranians, the Malaysians, multinationals like Shell, Exxon and Total, have all flirted with investment. But not one has broken ground.

Not only do wealthy elites, including the TNI (Indonesian army), benefit from the fuel-smuggling opportunities enabled by the long-standing subsidy system, notes Oentoro, but “when it comes down to it, no one trusts [state-owned oil and gas firm] Pertamina not to change the rules the moment production starts.” An oil refinery, he adds, “is a big, big hostage to fortune.”

But as with much of Southeast Asia, the Chinese are becoming major players in Indonesia, says Oentoro: “Not only do they invest in extractive industries, they use government subsidies to help service and equipment suppliers displace more-expensive—mainly Western—suppliers. This is likely to become more of a political issue where the need for Chinese demand may be tempered by concern over naked mercantilism.” International players like Caterpillar, with 50 years of history in Indonesia, Volvo and Cummins have seen steep declines in market share as cheaper Chinese products have won over local customers whose appreciation of expensive technology has proved fragile in the face of cheaper alternatives.

“Fundamental questions also remain about the government’s ability to deliver the infrastructure change needed for growth,” adds Oentoro. He cites the struggle of the commuter in Jabodetabek—the northwest corner of Java which contains Jakarta, its wealthy environs and 50% of Indonesia’s middle-class consumers—whose 5-hour traffic jams compare with those in Mumbai or Delhi.

Continuous growth has not provided new highways, the much touted metro is stalled, the whole city floods annually ,and no solution is in sight, says Oentoro. “New projects are apparently forever on the verge of happening.”


“If you are about to pack a bag and head for Yangon, expect cultural felicities, not commercial ones,” says Desmond Sheehy, chief investment officer of Duxton Asset Management in Singapore.

“It still takes 400 days to set up a company in Myanmar,” Sheehy notes. “And while [democratic politician and activist Aung San] Suu Kyi may be the darling of the West, the path to anything like an open economy is likely to prove long, winding and rock-strewn.”

That Myanmar has reversed course from its days of military rule is more a reflection of a general fear of Chinese domination than evidence of sympathy for the West, according to Sheehy. “The astonishingly rapid rise of China, its encroachment into extraction, infrastructure and other key areas of Burmese economic life, has spooked the elite and caused it to reengage the West.” This would have been impossible without making concessions to the NLD [National League for Democracy] and Suu Kyi, so those concessions have been made, but without opening the door to her presidency or an army-free administration, he notes.

New projects are apparently forever on the verge of happening.

~ Oentoro, KV Asia Capital

When considering investment in Myanmar, think of Vietnam in the early 1990s, Sheehy says: “Except that there are more opportunities to lose money than to make it. Many putative business partners are, for example, still on the US blacklist. Of the $10 billion that will probably be invested next year, the bulk will probably fail, and about 5% will generate massive gains.”

Sheehy points to agriculture, healthcare, education, technical services and some areas of finance, including consumer financing and leasing, as offering promising investment opportunities, but he believes that simple distribution or extraction deals will be at serious risk. “It’s all about picking the right area and the right partner. If Aung San Suu Kyi was able to take over…improbable but not impossible, and subject to constitutional amendment…then great, except that existing deals would be at risk of restructuring and/or renegotiation.”

For Sheehy it is big opportunity, big political risk. “We are bullish, we are actively looking, but....we are being very careful. In reality, the likely outcomes are not clear and the risks are high.”