These days, before you make a decision about whether to invest in a coffee plantation in Dalat or a call centre in Delhi, you have to consider Athens, Lisbon and Paris.
The eurozone crisis is affecting decisions around the world, in perhaps the most in-your-face proof that globalisation is here to stay. “We’re seeing a lot more complexity in capital and trade flows, and more complexity in financial markets — indeed the level of complexity has risen exponentially,” said Jeremy Pitts, Asia-Pacific regional chairman for Baker & McKenzie, at the annual regional meeting for the firm’s Asia-Pacific lawyers, held in Ho Chi Minh City.
“So we need to be even closer to our clients, to better understand how these changes are affecting them and to work with them to deal with their issues. That dialogue can be about regulatory issues, but it is also increasingly about opportunities, such as M&A in Europe.”
The bottom line though, for Pitts, is that “what that means to us is that we have to be more joined-up with our clients”.
He was speaking about all professional service providers — from lawyers to accountants to bankers — during a roundtable discussion on how to deliver greater value in a challenging market environment. The starting point, of course, is understanding that this crisis is different from earlier ones.
“I think there are some fundamental differences about what is happening this time as compared with previous crises,” said Pitts. “This is very much a sovereign-debt crisis, not a corporate crisis. Corporations are in a fairly good position, but are waiting to see what will happen. There are no precedents for a country to exit from the eurozone and, if this were to happen, there would be a range of issues for companies doing business in that market. So far, there has only been limited discussion on how that process would work from a technical point of view. So what the impact would be on clients and how they would manage through that is somewhat up in the air. We are, of course, staying close to those issues, our banking lawyers are looking closely at the technical aspects, but how this will actually play out remains to be seen.”
But he was quick to point out that it is not just unchartered territory we’re in now. Another fundamental difference is that many clients are in a better position than they were before the crisis, because companies have managed their costs and reduced their leverage. Indeed, Asian companies did the hard work in the late 1990s on the heels of the Asian financial crisis, stayed focused through the dot.com bust and mostly strengthened their balance sheets in 2008, at the start of this prolonged time of uncertainty.
Asia’s central banks have also worked hard to keep money flowing.
“In terms of the impact of the eurozone crisis on Vietnam specifically, we have seen a reduction in the liquidity that European banks have here now,” said Louis Taylor, CEO of Standard Chartered Bank for Vietnam, Laos and Cambodia. “But we are less concerned now about withdrawal of credit by European banks to emerging markets, particularly in Asia (although we have seen a couple of French banks closing banks and exiting countries). Part of the reason we aren’t too concerned is because local and US banks have strong liquidity in place, not on the interbank market mind you, but largely with central banks. There are lots of banks in the region with good dollar liquidity and we see that as a good thing for the future in terms of their ability to pick up slack from European banks. So the European crisis will have some impact on Vietnam, but it will be relatively limited in terms of credit. And while 50% of Vietnam’s trade is with Japan, Europe and the US, actually it is the other half that is more important as it is going to grow more rapidly.”
Moving on
Thierry Lintermans, director of legal services, Asia-Pacific, at Accenture, highlighted the key driving forces in the region that will continue to present new growth opportunities: increasing domestic consumption, with the majority of global middle-class spending power estimated to reside in Asia by 2030; the adoption of new technologies; government spending, particularly on infrastructure; and the rise of emerging-market multinational companies — there has been a 60% increase in companies from Asia-Pacific (ex-Japan) on the Forbes Global 2000 list during the past five years.
How does Vietnam — and really all of Southeast Asia — capitalise on this? One key step will be to continue to ensure that infrastructure is world-class, which will attract foreign investment for manufacturing that will drive both an export economy in the short-term and help spur intra-Asia domestic consumption.
“In Vietnam, the state is involved in many investments into infrastructure through state-owned enterprises,” explained Fred Burke, managing partner of Baker & McKenzie’s Vietnam offices. “It’s easy for us to say: ‘We’ll just let the private sector in to finance and build toll roads or other infrastructure.’ But, in fact, here in Vietnam, the private sector always wants government guarantees so there always ends up being some liability back on the government’s balance sheet. The question then becomes where is the government going to get the resources for these projects?”
“The truth is there are a lot of resources in Vietnam, as in China, that may not be absolutely essential to keep on the state’s balance sheet for national security purposes. I can think of one, the Saigon Tourist Company, for example. It’s a huge asset but I think the government could easily equitise [take public, in effect] a reasonable part of it and raise a huge amount of money to help fund infrastructure development. It is just a matter of having the political will to do that. There is a lot of talk now about the next stage of reforming state-owned enterprises so maybe we’ll see those hard decisions being made this year.”
Indeed, the sentiment was that Vietnam’s government is on track to continue reform, which will only help attract more investment. But you need to be willing to ride out the rough times.
“The thing about Vietnam is there is never a shortage of business opportunities that are attractive to invest in if you are a dong-based investor,” said Standard Chartered’s Taylor. “If you’re a foreign investor there are FX risks around that investment as well, which has historically been a very big risk. I think what we are seeing now is that the government has received the message that a highly volatile cycle of inflation makes investment decisions, particularly foreign investment, virtually impossible. And thus the monetary policy of the past nine months or so have been aimed at creating stability in currency and prices, which has had some effect, but it will take some time for confidence to build. The message has to get through now to investors that the stability in prices and the currency will be enduring.”
But Burke cautioned: “The initial learning curve can be really very high. What that means is that because the barrier to entry is quite substantial the people who are here and established can do quite well.”
He noted that when he first moved to Vietnam 20 years ago, the entire legal system was written in a 70-page booklet — whereas now there are more than 80,000 legal instruments in his firm’s database. “Legally, it has gone from a desert to a jungle,” he said.
Crisis breeds innovation
As China redefines itself, it is handing over low-cost manufacturing to Vietnam, which is taking up a significant amount of the slack. That has led to infrastructure investments that have provided opportunities for investors and corporations from around the region.
Lintermans points to the amount of innovation being driven out of centres of excellence in Asia-Pacific. “In some instances we’re seeing organisations in emerging markets in Asia-Pacific leapfrogging trends as they’re able to study best practices and experiences from mature markets,” he said. “With the incredible growth being experienced in the region, having the flexibility to expand quickly, having agile operations, and a detailed understanding of customer behaviours, the playing field has become more even.”
As technology has broken down geographical barriers, and with the world becoming more and more connected, organisations need to be aware of the new competitive landscape and the changing face of the consumer. “Rapid and sustained levels of economic growth in Asia-Pacific provide greater certainty for business,” said Lintermans. “With the proliferation of data, analytics, and technologies such as cloud computing, we’re seeing organisations in Asia-Pacific becoming more agile, competitive and successful.”
All of this, of course, requires funding. While the conventional bond markets are on fire right now, CIMB Islamic’s director of product distribution and strategy, Roslinda Ahmad, points out that there is a broader opportunity for Islamic finance in the region.
“When there is a credit crunch investors are trying to look for alternative investment vehicles,” said Roslinda. “But at the end of the day, from both an issuer’s and investor’s perspectives, the pricing for Islamic financing, for example sukuk or Islamic bonds, must be competitive. From our observation, one of the ways we can achieve competitive pricing is by restricting the leakage of Islamic funds into the conventional system. So you will see more innovation coming in order to attract regional and global issuers who need alternative options, but only if it is on favourable or competitive terms at the very least. Aside from pricing competitiveness though, international issuers are now looking at Islamic finance as an opportunity to diversify their investor pool to include those from the Middle East.”
Word of caution
“We all feel the world getting more complex, all the time. But as important as Asia as a whole is, it’s more important to look at the individual countries within Asia,” said Taylor. “The financial and legal regulations are all quite diverse. You only have to look around Asean and you see democracies, constitutional monarchies and two of the last Communist nations in the world, and you see that the legal systems and cultures are incredibly diverse. More and more it’s all about bringing together things that don’t naturally join and answering the question about how you join them up — for legal services, accounting and financing. From a client perspective, what we really need from our service providers is to be able to work with them across the region in a seamless way and for them to ensure that the standard across the region is equally good.”
