Southeast Asian companies cautiously optimistic
By Renato J. Galve
Companies from around Southeast Asia (SEA) are cautiously confident about the future of their local economies and are focused on growth.
This was the primary finding of the bi-annual Ernst & Young Global Capital Confidence Barometer conducted in the first quarter of this year — a study which aims to help companies make more informed capital decisions, particularly in preserving, optimizing, raising and investing capital. The SEA issue of the survey was spearheaded by Harsha Basnayake, Southeast Asia and Singapore Transaction Advisory Leader at Ernst & Young.
In fact, 48% of the 118 SEA respondents have indicated a significantly higher inclination to continue pursuing merger and acquisition (M&A) activities compared with 31% from their global counterparts, implying that SEA markets offer more stable opportunities for companies seeking expansion.
Continuing confidence regionally, cautious optimism globally
In large part, this confidence is fueled by Indonesia reaching investment grade; stable and positive sentiments in the Philippines and Thailand; and growing economic affluence in Asia. This isn’t simply a question of growing populations, but of populations becoming more mature, stable and global in outlook.
Take the Philippines, for example. With the government’s drive to root out corruption, support business growth and promote public-private partnerships, our economy has been showing sustained growth and stability. The Bangko Sentral ng Pilipinas recently announced that our country had moved up to creditor status, with half of our US$251.5 million contribution to the IMF providing assistance to distressed Eurozone economies, such as Ireland, Portugal and Greece. Regionally, we also contributed US$4.55billion to the US$120 billion Chiang Mai Initiative Multilateralization Facility, a fund put together by China, Japan and the Association of South East Asian Nations to address balance of payment difficulties.
Certainly these are significant achievements, considering that prior to 2006, we had been an IMF borrower country for 45 years.
And it is these, and other economic improvements, that are making us more attractive to both local and foreign investors.
This optimism extends to the global landscape, with a majority of respondents believing that the global economy is now stable or improving, with the expectation of corresponding improvements in credit availability, corporate earnings and employment growth.
Clear expectations from corporate capital agenda
Companies remain focused on growth, which means increasing capital optimization activities through increased borrowing and better leverage on corporate balance sheets. Over half the respondents indicate that they have lowered their debt-to-capital ratios significantly in the last six months; 36% of respondents have indicated that they will refinance their loans within the next 12 months with the objective of optimizing their capital structures or reducing interest costs.
Conservative M&A appetite; strong appetite to invest in Asia-Pacific
Even though the necessary ingredients for deal recovery, such as healthy cash reserves and good credit access, are in place, many companies are still cautious about M&A, although this sentiment is stronger globally than in the region. Based on the study, Southeast Asian companies have expressed that they will pursue opportunistic M&A activities to take advantage of the Eurozone crisis.
Respondents also say that access to new markets remain their primary motivation; particularly since M&A fundamentals have become more positive in recent months. In fact, 45% of respondents believe that valuations for M&A will remain at current levels in the next 12 months.
This is bolstered by the fact that 46% of global respondents prefer to invest in the Asia-Pacific region, driven in large part by their confidence in local economies. The barometer indicates that, of the top 10 countries that corporates prefer to invest in, six are in the Asia-Pacific, namely, Indonesia, Malaysia, Singapore, Thailand, Vietnam and the Philippines.
Common challenges for business
Nevertheless, there are still expectations of tough times ahead. While the fears of a European default have eased, we can still anticipate challenges arising from distressed economies in Europe. At the same time, the possibility of a double dip recession in the US has still not been ruled out.
For the Southeast Asian respondents, the three main areas of concern for business will be revenue margin pressures, credit availability and supply chain risk – which are understandable if companies will pursue a more active M&A or investment strategy into other Asian countries. To help mitigate these challenges, respondents have said that they plan to implement cost reduction policies and to be more opportunistic with regards to M&A strategies.
Continuing growth in labor market
Outlooks are positive concerning labor and employment, with 86% of respondents stating that they plan to maintain or increase their workforce in the next 12 months. However, this is averaged out over the respondent countries, with Singapore being optimistic about hiring, and Malaysia expecting reductions in labor pool.
This sentiment is consistent with local Department of Labor and Employment reports indicating that labor force and labor force participation rates have increased over the last year, and our national unemployment rate has by 0.2 percentage points since last year. More cause, indeed, for cautious optimism.
Time to catch up
Many people have often expressed the view that the Philippines, once the economic peer of its neighbors, has fallen far behind the pack. Yet, if it is true that adversity breeds opportunity, then the ongoing global economic volatility, coupled with our growing economic and political stability, may provide just the right environment for us to regain competitiveness in the region. The time is ripe for businesses and government to work even more closely together to capitalize on our growing attractiveness as an investment destination.
Renato J. Galve is a Partner and the Head of Transaction Advisory Services for SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.