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As we approach the end of the first quarter of 2021, following a year of much unprecedented uncertainty on the back of the COVID-19 pandemic and the much-anticipated November 3 U.S. elections, we take a look at some key developments in Southeast Asia, their impact on the region relevant for Japanese investors and key trends and business risks to watch in the coming weeks.
2020 has been a relatively quiet year for Japanese investors in Indonesia. In the past decades, Indonesia has consistently been a key market for Japanese investors within the Association of Southeast Asian Nations (ASEAN). The footprint of Japanese investments in the manufacturing sector in Indonesia goes back to the 1970s, and while Japanese investors remain active today, the momentum may be slowing for now. According to the Investment Coordinating Board (BKPM), in 2019, Japan invested USD 4.3 billion (bn) in Indonesia, making it the third-largest foreign investor in Indonesia after Singapore and China. In 2020, BKPM data indicates that Japan fell to the fourth spot in the country’s foreign direct investment (FDI) ranking. Singapore was the number one source of FDI (with USD 9.8 bn), followed by China (USD 4.8 bn), Hong Kong (USD 3.5 bn) and Japan (USD 2.6 bn).1, 2 Nonetheless, the BPKM data shows that Japan has the second-highest number of projects in the country.
FDI, including from Japan, was initially slow to pick up following the country’s May 2019 national elections, despite President Joko “Jokowi” Widodo securing his second (and final) presidential term through to 2024. Jokowi’s re-election indicated broader policy continuity, particularly on his infrastructure development plan. In the current COVID-19 environment, Indonesia’s widely perceived poor management of the pandemic appears to have affected its economy and foreign investors.3 There are also stories in 2020 specifically about Japanese staff of Japanese multinationals with local operations being constrained by the COVID-19-related border restrictions and are unable to return to Indonesia.
On the corruption-related front, the arrests of two cabinet ministers in late 2020 on corruption charges highlight the country's persistent struggle in tackling corruption. Corruption risk continues to be a key challenge for investors, even as Indonesia remains an attractive investment destination and with Jokowi’s attempts to boost the country’s business environment. This is most evident in the president’s push for the controversial but pro-FDI, business-friendly Job Creation Omnibus Law, which seeks to amend at least 76 laws aimed at improving Indonesia’s business climate.4,5,6 Despite some public opposition and legal challenges at the Constitutional Court, the omnibus law is significant for FDI as it aims to streamline business licensing processes and ease the country’s arduous land acquisition and labor regulations. Public frustration related to the government’s handling of the COVID-19 pandemic, coupled with the previously mentioned arrests of two ministers, also led to an expected cabinet reshuffle on December 22, 2020.
Geopolitics is another important factor that impacted Japanese investors in Indonesia in 2020. Japanese political and commercial actors have become increasingly aware of the growing Chinese influence in the country. Japanese investors have become more cautious, especially following the 2018 pre-election nationalization of a handful of major foreign-controlled natural resource assets from Freeport, Chevron, Total and—its own counterpart—Inpex.7 But perhaps, a key concern for Japanese investors in recent years is Jakarta’s sidelining of Tokyo over Beijing in 2015 for its USD 5 bn Jakarta-Bandung high-speed rail (HSR) contract, despite years of negotiation between Jakarta and Tokyo prior to Beijing’s entrance. Jakarta at the time delivered the bad news to Yoshihide Suga—the then frustrated Japanese top government spokesman who in September 2020 became Japan’s prime minister—about Jakarta’s handling of the HSR project, calling the decision “extremely regrettable”.8 Still, Tokyo continues to place importance on diplomatic ties with Indonesia and greater ASEAN, evident from Yoshihide’s first official overseas trip to Indonesia and Vietnam in October 2020.9
Any potential bilateral and commercial developments between Jakarta and Tokyo are likely to provide impetus to renewed interest from Japanese and global investors in 2021, particularly as the December 2020 cabinet reshuffle brought in several investor-friendly faces. By the end of 2020, Indonesia also saw a turnaround in its investment outlook when U.S. tech giants Tesla, Amazon and Google expressed interest in investing in Indonesia,10 keen to explore and tap into the country’s potential in the digital economy and electric vehicle industry.11 Some of these opportunities constitute invitations extended by the highest level of the Indonesian government, including Jokowi and Finance Minister Sri Mulyani. This month, Sri Mulyani has invited the new Japanese ambassador to Indonesia to call for Japanese collaboration as Indonesia plans to grow its electric vehicle sector.12
In Myanmar, the unexpected military coup on February 1, 2021 has been gripping attention worldwide. The country has been in turmoil since. The army (colloquially known as “Tatmadaw”) took power after alleging widespread fraud in the November 8, 2020 elections after a landslide win by the National League for Democracy (NLD) party. The Election Commission has consistently denied the fraud allegations. Tatmadaw Leader Min Aung Hlaing, on the same day of the coup, detained State Counselor Aung San Suu Kyi (“Suu Kyi”), President Win Myint and several senior NLD leaders and thereafter declared a one-year state of emergency.13 Suu Kyi and Win Myint now each face at least four charges of alleged law violations, following the first February 3, 2021 charge against Suu Kyi on illegally importing six walkie-talkie radios. Further charges against Suu Kyi to politically undermine her are expected. The junta on March 11, 2021 further accused Suu Kyi of receiving illegal payments worth USD 60K and some gold when she was in office. Suu Kyi was due to face another virtual court hearing on March 15, 2021 but was later adjourned because the internet (which has been suppressed by the junta) was down and affected the videoconferencing. The next hearing is now scheduled for March 24.
The coup effectively halted a transition to democracy that began in 2011 and since February 1 has triggered massive nationwide demonstrations. As well as the likely prolonged political instability, the escalating protests and Tatmadaw’s increasing violent crackdown on protestors,14 journalists and news outlets,15 internet16 and social media17 will likely lead to heightened risks of social unrest and political violence. This would likely pose a security risk for foreign investors with local assets and operations. The past weeks’ killings of civilian protestors by the Tatmadaw, which killed and injured civilians, have prompted condemnation by the European Union (EU)18 and concerns from U.S. representatives19 and several other nations that have described the violence as “unacceptable”20 and “inexcusable”.21 Following another violent weekend on March 13 and 14, 2021, at least 126 people have been killed (including two NLD officials who died in detention22) and 2,150 people have been arrested since the coup, according to the independent Assistance Association for Political Prisoners.23 The numbers are widely believed to be higher.
Meanwhile, as anti-Chinese sentiment is growing driven by wide perception among pro-democracy protestors that China has sided the army, protestors have also started targeting Chinese factories. Myanmar local media on March 14, 2021 reported that at least five Chinese garment factories were set on fire, while Chinese state media had later put the number of attacked factories in Yangon at 32 and had caused USD 37 million in damage and two Chinese employees injured.24,25 This prompted calls by the China government to protect its nationals in Myanmar.26 Shortly after the attacks against the Chinese factories on March 14, 2021, the junta imposed martial law in Hlaingthaya and Shwepyitha districts of Yangon.27 Following weeks of delays, the United Nations (UN) on March 10, 2021 agreed on a statement to “condemn” Myanmar violence and urge military restraint but refrained from condemning the coup and stronger measures due to opposition, particularly from Russia and China.28 Apart from the backing of the two super powers, Myanmar is becoming quickly isolated on the international stage. Myanmar representatives at the UN, Washington D.C., and—the latest on March 8, 2021, the UK—who were elected under the democratically Suu Kyi-led government, have broken with the junta and called for a return to democracy.29 Several Western countries have implemented sanctions since the February 1 coup to punish the Tatmadaw coup actors. The U.S. on March 10, 2021 imposed further sanctions on Myanmar: The U.S. Treasury Department blacklisted two children of Min Aung Hlaing and six companies they control in response to the coup and killing of protestors since the takeover. More sanctions are highly likely. Military conglomerates, especially Myanmar Economic Corporation (MEC) and Myanmar Economic Holdings Limited (MEHL)—used by the Tatmadaw to control vast swathes of the country’s economy—are likely targeted; this potentially negatively affects companies working with the two conglomerates.
Political uncertainty and broader risks for businesses do not end here. The coup has brought Myanmar’s economy to its knees. The wider civil disobedience movement and union strikes by activists and large sections of the public—aimed at protesting against the coup and undermining the junta—has crippled government business and led to widespread shutdowns of shops, factories, public transportation and banks in Yangon and beyond.30 Both businesses and civilians have felt major disruptions in recent weeks (with payments of tax, logistics, import and export trade grinding to a near halt),31 but large sections of the public and businesses have vowed to continue protesting to put pressure on Tatmadaw to release its detainees and return to democracy.32 Myanmar’s economy will likely feel the pain from the prolonged financial loss by business shutdowns, the protest movement and economic sanctions imposed by foreign states (even where these are carefully targeted).
Since the country’s transition into democracy in 2011, more than 400 Japanese companies have entered Myanmar. In a 2020 survey on Japanese manufacturers by JBIC, prior to the COVID-19 pandemic and current coup crisis, Myanmar was ranked No. 10 as a market with growth potential over the next three years.33 Myanmar’s Directorate of Investment and Company Administration indicated that Japanese investments constituted USD 768 Million (or 14% of Myanmar’s total FDI in 2019-2020 period) and is more than China’s USD 553 mn.34 Japan and Myanmar have in recent years been deepening diplomatic and economic ties, including through Japanese economic assistance to Myanmar, improving basic infrastructure and jointly developing the Thiwala Special Economic zone.
Currently, political instability will negatively impact the country’s investment climate. However, for now, the impact of political unrest remains modest even as manufacturers such as Suzuki Motor Corp have temporarily halted production and Toyota Motor Corp has delayed the start of its auto plant. The quickly growing sanction and reputational risks have also prompted foreign and Japanese businesses to abruptly re-evaluate their local operations and business strategies, especially for those working closely with businesses linked to Tatmadaw. Days after the coup, the Tokyo-based Kirin on February 5 became the first Japanese multinational to terminate and a “swift end” to its beer alliance with MELH-owned Myanmar Brewery that began in 2015,35,36 though its CEO also stressed that it would not withdraw and is keen to stay in Myanmar.37
Foreign investors, including Japanese companies, will likely take a wait-and-see approach regarding the political situation, rather than rapidly exiting the market, but new investment decisions will likely be hampered for now, as confirmed by the Yangon representative of the Japan External Trade Organization.38 Meanwhile, companies already operating in Myanmar are seeking to continue operations by ensuring the safety of their workers. Investors are advised to monitor the situation in Myanmar closely.
Regarding political dynamics in Thailand, little has changed at the government level since the 2014 coup and the March 2019 election that was widely seen to be favoring Prime Minister Prayuth Chan-o-cha. Prayuth’s military-backed government still maintains its grip on political power.39 However, things are very different on the ground. The initial optimistic sentiments in mid-2020 as the Thai government was lauded for its handling of the pandemic compared with its ASEAN counterparts quickly dissipated when a pro-democracy movement in July 2020 started to bring thousands of youths to Bangkok streets, with their rallies persisting till December 2020.40 Soon after came a brief respite in early 2021 due to the second wave of COVID-19 stemming from a seafood market in Samut Sakhon province and several illegal gambling dens.41,42
While street protests are clearly not a new phenomenon in Thailand, the youth-led pro-democracy movement is new for Thailand. The protests initially focused on calling for Prayuth’s removal and constitutional change but have since expanded to challenge the role of the monarchy. This has effectively broken longstanding taboos by openly discussing—or rather, criticizing—the King’s control of two military units and speculated wealth of the monarchy’s Crown Property Bureau (CPB).43,44 Now, the opposition is criticizing Prayuth for mishandling the vaccine campaign and that the government was too reliant on CPB-owned Siam Bioscience, the sole local producer of AstraZeneca Plc’s COVID-19.45
The prolonged months of protests and unprecedented challenge to the monarchy have forced the government, for the very first time, to consider one of the three demands of the protestors for constitutional amendment. However, critics argue that the Prayuth-led government continues to come up with measures,46 including having the Constitutional Court to rule on the legality of the charter amendment process,47 to delay this constitutional amendment; as a result, there has been minimal progress on the progress of the constitutional amendment.
While the pro-democracy protest leaders on December 14, 2020 announced that the movement will take a break until 2021, investors should expect the youth-led anti-government protest movement to return in 2021. On December 2, 2020, Prayuth survived a key test when the Constitutional Court ruled—on a complaint by the largest opposition Pheu Thai party—in his favor that he did not violate any law by continuing living in his military residence after he retired as army commander in late 2014, which would otherwise have forced him to step down, and which in turn would have triggered a potential political crisis.
On February 20, 2021, Prayuth48 and nine other ministers49 survived the—second in two years—no-confidence vote, thanks to his coalition government’s majority in the lower house. Nonetheless, Prayuth is not out of the woods yet. Political and social instability risks stemming from the persistent political opposition and anti-government protests are expected to persist in 2021. Meanwhile, another cabinet reshuffle looks increasingly inevitable, after the Criminal Court on February 24, 2021 found three of Prayuth’s cabinet members (namely deputy transport minister, and digital economy and education ministers) guilty of sedition for participating in the then anti-government protests in 2013 and 2014.50 Under the Thai constitution, cabinet members will be forced to resign if convicted.51 This will likely retrigger horse trading and infighting within Prayuth’s divided ruling coalition, as has been the case for past cabinet appointments since Prayuth came into office after the 2019 elections, and leading to a slight increase in the risk of political uncertainty in the coming weeks.
At the time of writing, renewed anti-government rallies have resumed to protest against the outcome of the no-confidence motion,52 the detention of four key pro-democracy youth protest leaders and the controversial lese majeste law “or commonly known as article 112”.53 Opposition lawmakers and the public will continue to scrutinize the Prayuth-led government’s roll-out of the COVID-19 vaccine program and its economic policies. The latest wave of the COVID-19 outbreak will further hurt the fragile economy heavily reliant on tourism. Thailand’s economy is one of the worst COVID-19-hit economies within ASEAN and had contracted by 6.1% in 2020.54,55
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