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Balancing protectionism instincts with foreign investment

Jovi Ho
Jovi Ho • 7 min read
Balancing protectionism instincts with foreign investment
Buffeted by global headwinds and increasingly fraught US-China relations, is Asean empowered to chart its own course? Photo: Shutterstock
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Buffeted by global headwinds and increasingly fraught US-China relations, is Asean empowered to chart its own course?

Ben Bland, Asia head at London-based independent policy institute Chatham House, thinks it is possible. He cautions against counting out “even the smallest states”, and that the region punches above its weight on the global stage.

“Talking so much about the US and China makes you think that the nations of Southeast Asia don’t have much agency, that they’re lines on a map to be fought over by great powers. I don’t think that’s the case,” says Bland, who used to report for the Financial Times out of Vietnam, Indonesia and South China. “In previous periods of great power competition, like the Cold War, we often underestimated the agency of even the smallest states.”

Bland, speaking at the UBS OneASEAN Conference 2022 on June 7, reminds sceptics that the region is home to some heavy-hitters. “Indonesia is obviously huge — 270 million people, and a member of the G20. Then we have the Philippines, Vietnam and Thailand, all with between 70 and 110 million. Of course, Singapore is a key global financial centre and an active player in the multilateral global system.”

Hence, Southeast Asia enjoys interdependence, says Bland. “The deep links that China has into the economies of Southeast Asia also give those countries agency in dealing with China, and the same with US security ties.”

Ensuring food security

See also: Expect 'a year of two halves' amid reopening, inflation: UBS

However, staying open to the world is a double-edged sword. Bland notes that concerns over rising food prices came to the fore quickly in recent weeks. “What's striking to me is how quickly our focus shifts and how quickly that connection between international politics and the consumption economy can shift.”

In the West, rising food prices are painted as an issue of the cost of living, says Bland. “There's more of an emphasis on the ‘cost’ — people are paying more for their food staples than they were in the past — but less on the ‘living’ crisis.”

In contrast, when staples turn dearer, many Southeast Asians face an existential issue, says Bland. “Particularly for the large developing countries in Southeast Asia, [such as] Vietnam, the Philippines and Indonesia; and some of the smaller countries as well, like Cambodia and Laos, these questions are really existential.”

See also: Family offices sacrificing liquidity for returns in a new era of strategic asset allocation: UBS

Rising prices have sparked protests and uprisings in the past, he adds. “If you look back in Southeast Asian history, it was food and fuel price spikes in 1997-1998 that led to the fall of the Suharto regime in Indonesia.”

In turn, countries in the region have tried shoring up domestic supply. Indonesia banned palm oil exports in late-April, before reversing the decision three weeks later — “a classic Indonesian policy flip-flop”, quips Bland. Malaysia, too, restricted the export of chickens from June 1, only to partially lift the ban for live kampung and black chickens from June 14.

The broader concern, Bland explains, is that export restrictions can prompt a vicious cycle, not unlike the 2008 rice export ban by Vietnam and India. “This time, things don't seem as bad yet. Obviously, it’s net food importers like the Philippines that are particularly exposed. Even for the likes of Indonesia and Malaysia, much of their food exports are cash crops like palm oil, rather than consumable staples.”

Government responses tend to be reactive, says Bland. But this is less effective in large countries like Indonesia or the Philippines. “There’s vastly different levels of inflation across the country; the price of staples like rice, onions or chilies in eastern Indonesia can be dramatically different from those in Jakarta, and you see similar patterns across the Philippines.”

Taming food price inflation is a mammoth task for such countries, says Bland. “It's not just about managing inflation and food prices at a national level, but how do you do that on a sub-national level? I think that’s where tackling the short-term problems can sometimes exacerbate the long-term challenges.”

The uneasy trade-off can harm countries in years to come, he adds. “Governments tend to look to cap food prices and restrict exports in the short term, but these responses can make supply imbalances worse in the longer term by undermining investment.”

See also: UBS launches new digital platform UBS Circle One

Open for business

On the other hand, Ed Teather, UBS’ senior Asean and Asia economist, is more optimistic about this region. For one, Asean’s opening-up recovery dynamic has further to run but the region is very much open for business, says Teather, moderator of the fireside chat with Bland.

“We believe that Asean remains an attractive investment destination and we see positive net inflow of foreign direct investments into the region as a sign of resilience in the context of global headwinds,” adds Teather. “Inflation looks less of a concern for Asean than in the Americas and Europe, but we are watching food price developments closely.”

Should China’s lockdowns persist, Teather sees near-term setbacks and sequential downward pressure on growth. “Looking ahead, with mobility restrictions easing and a benign credit cycle, our forecast of better economic outcomes for the second half of the year remains on track.”

To be sure, Asean is a region that has seen its share of financial and economic woes — and to their credit, they have not forgotten the lessons learned. More than two decades on, Asean countries have maintained “pretty conservative” fiscal and monetary policies. “[This] has helped various countries manage their way through the global financial crisis, the taper tantrum and the financial concerns at the start of the pandemic,” says Bland.

But some countries were also willing to take some risks and go their own way, says Bland. “We saw, interestingly, at the start of the pandemic, Indonesia defying conventional market views when it opted for debt monetisation.” The so-called “burden-sharing programme” allowed Bank Indonesia to directly buy 836.6 trillion rupiah ($79 billion) over three years.

“There were a lot of jitters about how the market would react but, in the end, I think it was the right call,” Bland adds. “The market was able to take it and it gave the Indonesian government extra space to spend their way through the early days of the pandemic, when there was a lot of uncertainty.”

“So, despite the broad pattern of economic and fiscal conservatism, there is a willingness to take some calculated risks at the right points,” says Bland.

Protectionism vs foreign investment

Playing it safe may have kept Southeast Asian markets resilient over past decades, but maintaining growth in the years ahead will involve taking more risks, says Bland.

“It's easy when you're opening up a closed economy, or liberalising an inward-looking economy, to do relatively simple things that boost your growth. But once you’ve reached middle-income status, it’s much harder to reform; it's much harder to deal with inequalities in societies,” says Bland.

Going forward, governments in Southeast Asia will need to do more, not less, just to maintain growth, he adds. But protectionist measures stand in their way. “A lot of countries are caught between this need for foreign capital and investment and the protectionist instincts that are quite deep-seated in some Southeast Asian nations.”

“What these countries need is to find a stable balance where they can open up certain sectors and protect others in a sensible way.”

He adds: “That's where the challenges of day-to-day politics get in the way of tackling these big reforms. So, the fear I have is that you run out of room for tinkering. You can survive that way, but can you thrive?”

Photos: UBS

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