Southeast Asia Report - Cascade Asia Advisors

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Feb 22, 2013 - Indonesia announced plans this week to revise its negative ... Cascade Asia Analysis ..... International
Southeast Asia Report February 22, 2013

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In Southeast Asia This Week Indonesia announced plans this week to revise its negative investment list with support from the dormant, but potentially influential, National Team on Increasing Exports and Investment (Pepi). Investors welcome pledges to liberalize the economy, but the revision of the list on its own will be inadequate to address the underlying issues foreign investors face in the country. Thein Sein’s recent appointment of an opposition MP to his cabinet was followed a week later by his appointment of two former senior generals to head important ministries. The decision prompted opposition parties to raise questions about his government’s genuine commitment to civilian rule. Meanwhile, the National League for Democracy, Myanmar’s largest opposition party, is ramping up preparations for the first party congress. The peace process in Mindanao received a timely jolt as President Benigno Aquino made a historic trip to rebel territory, and fighters from the MNLF began an assault to push out the extremist Abu Sayyaf Group. These steps reaffirm the commitment of all parties and demonstrate the rebels’ ability to maintain peace and security during the negotiating process. A recent poll shows the Pheu Thai Party leading the Democrat Party by 10 points in the hotly contested Bangkok gubernatorial race. Notwithstanding political wrangling stressing ideological and policy divisions, the rival candidates offer equally compelling policy changes to improve the city’s business environment.

Events and Economic Releases February 2013 20 - Malaysia releases monthly consumer price index, quarterly GDP figure and monthly balance of payments 20 - Thailand releases monthly monetary policy update 22 - Philippines quarterly business expectation survey

FDI: ASEAN Giving China a Run for its Money

22 - Malaysia releases monthly foreign reserve figures

ASEAN gained slightly on China last year in terms of FDI flows. Indonesia led the region in FDI flows last year, hauling in USD 23bnl in FDI, up 26% from 2011. ASEAN is proving to be increasingly competitive with China, largely due to labor cost differentials, as manufacturing production continues to shift from China to the region.

25 - Vietnam releases monthly consumer price index, foreign direct investment totals, industrial production figures and retail sales

Southeast Asia Financial Markets Equity markets across the region continued to outperform the MSCI Emerging Markets index, with the exception of Malaysia which is lagging on political uncertainties. The Philippine and Thailand stock exchanges added 2.89% and 2.48% in respective gains. Markets in Vietnam were closed due to Chinese New Year.

26-28 - Regional Comprehensive Economic Partnership (RCEP) negotiations in Bali, Indonesia 26 - Vietnam releases monthly monetary policy rate 27 - APEC Finance and Central Bank Deputies Meeting March 2013 1 - Indonesia releases monthly consumer price index and trade balance figures

Southeast Asia Report February 22, 2013

Indonesia to revise negative investment list by Q3 2013

Thein Sein appoints opposition lawmaker to cabinet ahead of NLD party congress

Indonesia’s Investment Coordinating Board (BKPM) announced plans on February 18 to revise the business sectors that are wholly or partially closed to private foreign investment, known as the negative investment list (Daftar Negatif Investasi or DNI). The 2010 revision to the DNI relaxed foreign ownership caps in sectors like construction, health care and electricity generation, partially in order to comply with Indonesia’s commitments under the ASEAN Economic Community. According to BKPM, the latest revision is aimed at further improving Indonesia’s business climate. The Coordinating Economics Minister Hatta Rajasa is also mobilizing a lesser known and rarely utilized entity called the National Team on Increasing Exports and Investment (Pepi), consisting of 19 cabinet members in economic-related portfolios, to work with BKMP to usher in the investment reforms.

President Thein Sein on February 6 appointed Tin Shwe, a representative from the National Democratic Force (NDF) in the upper house of Parliament, to Deputy Minister of Hotels and Tourism. A week later, General Myat Hein, the country’s air force commander, was appointed Minister of Communications and Information Technology, and Lieutenant General Thet Naing Win (from the Ministry of Defense) Minister of Border Affairs. In response, NDF Chairman Khin Maung Swe said his party was not informed of the decision and will not adopt a different stance toward the government despite Tin Shwe’s new role in the administration. The NDF was formed ahead of the 2010 national elections after splitting with the National League for Democracy (NLD) led by Aung San Suu Kyi. Several NDF members have since rejoined the NLD following the latter’s sweeping victory in last year’s April by-elections. Meanwhile, the NLD announced on February 11 that it will hold its first ever party congress since the party was founded in 1988 on March 8-10. About 1,500 delegates are expected to elect central executive committee members, as well as a new Party chairperson. According to the Party, the NLD currently has around 400,000 members, and is trying to register 1 million members nationwide.

Cascade Asia Analysis

Despite consistently poor business environment rankings and increasingly protectionist policies during President SBY’s second administration, Indonesia’s FDI reached a record high of USD 32.4bn last year. However, the country faces increasing regional competition for a greater portion of global liquidity, as the US economy picks up steam. It has also set a high bar for itself in targeting 6.8% GDP growth this year, much of which would be driven by a similarly high target of USD 40bn in realized FDI. Attaining such ambitious economic growth will certainly require a more open and transparent investment environment. However, past revisions of the DNI have lacked detail, were steeped in comprise and had no major benefit to the economy. Additionally, not all of Indonesia’s foreign investment regulations are dictated by the DNI. Investment restrictions have surfaced through decrees issued by ministers (such as mining divestment rules from the energy minister), technical policies issued by departments, laws from parliament, and Constitutional Court verdicts (like the 2010 ruling which prohibited foreign investment in education). Indonesia’s erratic policy environment is one of the main impediments to investor confidence, but liberalization of the economy is only part of that equation. More meaningful changes would require cross-government policy coordination, judicial restraint, limiting the scope of ministerial decrees and imbuing a less populist tone into parliament. Similarly, there is also reason to temper hope in the recent Pepi meeting, which produced a provocative list of measures to help facilitate increased investment and promote exports. While we welcome the shift in tone, it appears to lack substance as the initiatives fail to address the most significant issues negatively impacting Indonesia’s business climate, such as the country’s burdensome labor laws, infrastructure bottlenecks and difficulty acquiring land. Also, notably absent from the meeting were genuine reformers, such as Finance Minister Agus Martowardojo and Presidential Work Unit (UKP4) Chair Kuntoro Mangkusubroto.

Cascade Asia Analysis

Despite reforms in press freedom, freedom of assembly, and last year’s release of political prisoners, we expect that President Thein Sein will continue to appease the military on major policy issues. The appointment of Tin Shwe is in part a response to criticism of his government being only quasi-civilian, while paving the way for the subsequent appointment of two senior former generals to important cabinet posts. Opposition MPs, including those from the NLD, highlighted the lack of transparency surrounding the backgrounds of political appointees. For the NLD, this year’s status-quo political climate means it will need to navigate a lawmaking body in which the military-backed ruling party – the Union Solidarity and Development Party (USDP) – could be even less willing to compromise and more determined to affirm its legislative role and political influence after initial reforms. How the NLD attempts to reinvent itself in the next two years will be crucial in shaping Myanmar’s path toward future reforms.

Bottom Line

While the recent personnel change in Thein Sein’s cabinet attracted less attention than last year’s major reshuffle, it conveys signals about the emerging status-quo political environment in which both the USDP and the NLD must operate following a year of rapid reforms. -- Phuong Nguyen, Political Analyst

Bottom Line

Meaningful improvements to Indonesia’s investment climate run deeper than a revision of the DNI which itself has historically lacked finesse and clarity. -- Brian Sheley, Managing Director © 2013 Cascade Asia Advisors. All Rights Reserved | http://www.cascadeasia.com

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Southeast Asia Report February 22, 2013

A boost for peace in Mindanao Philippine president Benigno Aquino III made a historic trip on February 11 into the Moro Islamic Liberation Front’s (MILF) heartland in Mindanao, pushing forward a peace process to end the decades-long conflict with Islamist rebels in the country’s south. Aquino’s peace mission, the first by a president into the MILF stronghold, promoted the launch of a joint development project to bolster health, education and social welfare services for those living in the conflict-ridden region. Aquino also indicated that he hopes to sign off on a final deal before midterm elections in May. Meanwhile, armed conflict in Jolo erupted between other rebel groups the Moro National Liberation Front (MNLF) and the Al-Qaeda-linked Abu Sayyaf Group (ASG). The MNLF launched the attack after the ASG, which had previously agreed to hand over foreign journalists held hostage in MNLF-controlled land, reneged on the deal.

Cascade Asia Analysis

Normalization continues to be one of the most sensitive issues hampering the peace process, known as the “Framework Agreement Bangsamoro” (FAB). Many rebels remain skeptical about the government’s commitment to power and wealth sharing, and thus are hesitant to fully disarm until more concrete steps are taken. However, Aquino’s landmark visit to Mindanao helps assuage these concerns and reinforces Manila’s seriousness in forging lasting peace. On one hand, the development program functions as practical support for fighters who want to reintegrate into society. It provides them with employment opportunities, a higher standard of living and a meaningful alternative to life in revolt. But Aquino’s overture also advances the process on a much deeper, symbolic level. MILF Chief Murad Ibrahim noted the significance of Aquino personally engaging the MILF on their home turf and highlighted development as the “single most important task of this partnership.” The MNLF’s assault on ASG rebels adds another much-needed boost to the peace process. The MNLF initially rejected Manila’s October 15 signing with the MILF, concerned it might jeopardize the organization’s previous agreements with the government. But as negotiations have continued moving forward, the MNLF has modified its position accordingly, hedging its bets to ensure it remains an instrumental stakeholder in the peace process. The most recent move demonstrates the MNLF’s relevance in guaranteeing regional security and willingness to clamp down on extremist offshoot groups determined to spoil peace talks. Manila is much more likely to advocate for the MNLF’s inclusion at the negotiating table if the organization continues to cooperate and illustrate its value. Both of these developments should help relieve the anxieties of investors waiting to see if peace lasts in resource-rich Mindanao. Although Aquino’s visit and the MNLF’s commitment do not merit decisive conclusions, they do signal that all parties are working to ensure that negotiations translate into rule of law and security on the ground.

Bottom Line

Developments in Mindanao help underwrite the peace process and reflect mounting political will in the government and rebel camps. -Liam Hanlon, Senior Political Analyst

Despite divisions, the two-horse race for governor of Bangkok bodes well for investors Thailand’s top rival parties are locked in an increasingly bitter struggle for governor of Bangkok. With a little under two weeks before the March 3rd elections, Democrat Party MP Watchara Phetthong has launched the latest in a string of graft charges, accusing Pheu Thai Party candidate Police General Pongsapat Pongcharoen of failing to complete the construction of hundreds of police stations. In a tit-for-tat legal battle, Phetthong has requested that the House Committee on Police Affairs probe Pongsapat and his links to the company awarded the building contract, PCC Development and Construction Co Ltd. Despite the rhetoric, the charismatic Pongsapat is distancing himself from his competition, with the latest poll from Suan Dusit Rajabhat University showing his approval rating at 44%, a 10 point lead ahead of his closest rival and Democrat Party incumbent Sukhumbhand Paribatra.

Cascade Asia Analysis

The Democrat Party’s accusations of unfinished construction projects appear to have merit but the rhetoric merely clouds the party’s waning popularity. The devastating 2011 floods in Bangkok, the botched construction of the Bangkok Futsal Arena, and legal turmoil over the Skytrain contract extension have tarnished Sukhumbhand’s record. For his part, Pongsapat’s proposed policies are closely aligned with PM Yingluck’s pro-business platform and supported by the ruling party, potentially making them easier to implement. These include proposals to boost Bangkok residents’ incomes and ease their debt through reining in racketeering rings, promoting Bangkok products, and establishing new markets in the city. Infrastructure is a hot-button issue in the Bangkok elections. Sukhumbhand has made more grounded campaign promises, supporting cuts to bus and rail transit fares, new bridge constructions in the Kiakkai area, and five new monorail and light electric rail routes to alleviate traffic congestion. Pongsapat is promising a daunting 20% to 30% reduction in rush hour commuting under his tenure through new bus zoning, free commutes for 30% of public buses from the city’s periphery, and an expansion of new electric rail, boats, buses and bicycle lanes. Commonly, these lofty campaign promises fall short in implementation. Additionally, Sukhumband and Pongsapat have touted their respective plans to construct new flood barriers and drainage tunnels that will avert flooding in the capital, and mollify investor concerns surrounding disruptions to supply chains in the future.

Bottom Line

Despite differences in policy implementation, both front-running candidates are pro-business with their campaign promises rooted in making Bangkok a more hospitable environment for investors. -- George Gorman, Political Analyst

© 2013 Cascade Asia Advisors. All Rights Reserved | http://www.cascadeasia.com

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Southeast Asia Report February 22, 2013

Foreign Direct Investment: ASEAN Giving China a Run for its Money FDI flows to ASEAN and China have moved in tandem since 2008 but ASEAN has narrowed the margin during the past three years. In 2012, China accounted for 9.13% of global FDI flows and ASEAN accounted for about 8.6%, or some USD 112.3bn. ASEAN is proving to be increasingly competitive with China, largely due to labor cost differentials, as manufacturing production continues to shift from China to the region. Part of Indonesia’s FDI surge from 2010-2012 is attributed to the absorption of this ‘China-flight’ production. However, Indonesia, Thailand and Vietnam each passed increases in minimum wages last year. For its part, Jakarta passed an astounding 44% minimum wage increase that went into effect on January 1, almost completely eliminating Indonesia’s wage advantage with China. Investors will continue to seek and find more hospitable wage environments elsewhere in the region and we expect to see more production shifting to Vietnam, Cambodia, Laos and, in the medium term, Myanmar.

FDI flows mixed across the region Indonesia led the region in FDI flows last year, hauling in USD 23bn in FDI, up 26% from 2011. However, it has only enjoyed preeminence since 2010 when it made a breakout from its regional peers, as FDI flows generally stagnated. Vietnam, Thailand and Malaysia could each make a similar breakaway, however, not without deep economic and political reform, which may still be some way off. There will be a continued surge of interest in Myanmar for the foreseeable future, and we expect a corresponding surge of FDI, albeit from a low rate. We likewise expect Cambodia and Laos to continue to attract healthy levels of FDI, relative to their historical levels, but to a lesser extent than Myanmar. Cambodia and Myanmar surpassed the Philippines in FDI for the first time last year, indicative of the restrictive foreign investment laws in the Philippines.

© 2013 Cascade Asia Advisors. All Rights Reserved | http://www.cascadeasia.com

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Southeast Asia Report February 22, 2013

Regional Business Opportunities Indonesia | Industrial estate is poised for expansion | USD 20-30 million A newly established group is in need for mezzanine financing of USD 20–30mn over three years for a controlled area of 200 acres of industrial estate development in West Java and Central Java, with plans to release another 300 acres. The group is in discussions with Japanese manufacturers to develop the land. Please direct inquiries to [email protected].

Indonesia | Plastic packing plant in needs of investment financing | USD 10 million A plastic packing company is seeking USD 10mn of investment financing from a strategic investor(s) to expand its market exposure and to find new buyers. The company is producing plastic packaging for healthy beverages, synthetic oil lubricant, and other staples or discretionary products. Please direct inquiries to [email protected].

Indonesia | Company to spin off its hospital unit | USD 8 million An operating hospital unit with hundreds of beds worth USD 8mn is to be divested by a West Java-based company. Please direct inquiries to [email protected].

Indonesia | Light steel on the rise, seeks financing for debt buyback and expansion | USD 2-3 million With the burgeoning demand of light steel, especially used by residential and commercial estate, a light steel producer seeks investment and working capital financing worth USD 2-3mn. Situated in the West Java industrial estate, the company is positioned to enjoy the revival of Indonesia’s property infrastructure development. Please direct inquiries to [email protected].

Indonesia | Factory, land, machinery and equipment to divest | USD 1.5-2 million An ex-corrugated carton box manufacturer for a shoe producer with a warehouse located strategically in West Java is looking to sell machinery and equipment (USD 1mn) which is also suited for consumer goods, with 1 hectare in land bank and 8800 sqm in factory space (USD 0.5mn). Alternatively, a loan principal buyback worth USD 0.5mn is also possible. Please direct inquiries to [email protected].

Indonesia | 2-wheeler battery manufacturer seeks financing | USD 1-5 million To serve the growing Indonesia’s motorcycle market, a 2-wheeler battery manufacturer seeks financial injection to expand its operation. Please direct inquiries to [email protected].

Singapore | Senoko Power refi to hit market by end of February | Amount Unspecified The refinancing of the huge SGD 3bn acquisition loan for Senoko Power is expected to hit the market before the end of February. DBS, a Singapore bank, is understood to be leading the facility. Senoko Power, the largest power plant in Singapore, is owned by Lion Power, a consortium that comprises Marubeni Corp, Kansai Electric Power, Kyushu Electric Power, JBIC and IP GDF. They acquired the asset through competitive bidding in 2009. Source: Project Finance International

© 2013 Cascade Asia Advisors. All Rights Reserved | http://www.cascadeasia.com

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Southeast Asia Report February 22, 2013

Southeast Asia Financial Markets Southeast Asian equity markets continued to outperform the MSCI Emerging Markets index, which declined slightly (-0.24% w/w) on weaker than expected German and Eurozone economic data. The Philippine and Thai stock exchanges added 2.89% and 2.48% in respective gains last week to their already impressive YTD returns of 13.9% and 10.07%. Indonesia and Singapore also posted minor gains. The Philippine index saw net inflows last week while Bangkok’s SET index rose to an 18-year high as institutional investors bought large cap stocks. We believe significant capital inflows into the region driven by positive economic outlooks, improved corporate profitability, and higher yields will continue to support the upbeat price levels of stock markets in the region well into 2013. Despite net inflows into Malaysia’s KLSE, the index continues to lag behind the rest of its peers on political uncertainties.

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© 2013 Cascade Asia Advisors. All Rights Reserved | http://www.cascadeasia.com

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Southeast Asia Report February 22, 2013

Cascade Asia Advisors PO Box 51194 Seattle, WA 98115 www.cascadeasia.com

p. 1.360.358.3094 e. [email protected]

Brian Sheley | Managing Director | MA International Economics and Southeast Asia Studies, Johns Hopkins University, School of Advanced International Studies; BA Brigham Young University | Speaks Bahasa Indonesia, Thai, Lao and Bahasa Melayu

Seattle New York City Washington D.C. Vientiane Rangoon Jakarta

George Gorman | Political Analyst, Cambodia, Indonesia and Thailand | MA Candidate International Affairs, American University, School of International Services; BA Evergreen State College | Speaks Bahasa Indonesia, Bahasa Melayu and German Ryan Hakim | Economist, Indonesia and the Philippines | MPA International Finance and Economics, Columbia University; School of Oriental and African Studies, University of London| Speaks Bahasa Indonesia Liam Hanlon | Senior Political Analyst, Philippines and Malaysia | MA International Relations, London School of Economics and Political Science; BA University of California, Los Angeles | Speaks Bahasa Melayu Febrio Kacaribu | Senior Economist, Indonesia | PhD Economics, University of Kansas; MA International and Development Economics, The Australian National University; BA University of Indonesia | Speaks Bahasa Indonesia Ryker Labbee | Country Director, Myanmar | MA International Economics and American Foreign Policy, Johns Hopkins University, School of Advanced International Studies; BA Pacific Lutheran University Phuong Nguyen | Political Analyst, Vietnam and Thailand | MA Candidate International Affairs, American University, School of International Service | Speaks Vietnamese Pon Sagnanert | Economist, Thailand and Vietnam | MA International Economics and Southeast Asia Studies, Johns Hopkins University, School of Advanced International Studies; BA University of California, Berkeley | Speaks Thai Andhika Suryadharma | Senior Market Analyst, Indonesia | MA International Business, Tufts University, Fletcher School of Law and Diplomacy; BA University Indonesia | Speaks Bahasa Indonesia and Mandarin

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Cascade Asia Advisors is a risk assessment and strategic advisory firm focused on Southeast Asia. We combine quantitative and qualitative analysis with rich perspective to render convoluted information into actionable intelligence and uncertain environments into navigable terrain. Our specialized focus is monitoring and assessing what drives political, macroeconomic and financial market developments in frontier and emerging markets in Southeast Asia and how they impact organizations. Our clients find more prosperous market opportunities, modify their business planning with sharper focus and face challenges with greater clarity and confidence. We help organizations understand, adapt and prosper in the Pacific Century. Photo credits in order of appearance 1. Photo from Flickr | InnovationNorway Stream | http://www.flickr. com/photos/innovationnorway/8286151971/ 2. Photo from Flickr | Atti-La Stream | http://www.flickr.com/photos/ attila/120652483/ 3. Photo from Flickr | World Economic Forum Stream | http://www. flickr.com/photos/worldbank/6170233437/ 4. Photo from Flickr | Central_Vietnam Stream | http://www.flickr. com/photos/35833849@N00/3260571535/ All photos taken under a creative commons license

© 2013 Cascade Asia Advisors. All Rights Reserved | http://www.cascadeasia.com

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