Repeated lockdowns leaving South-east Asian businesses on edge

Singapore

SOUTH-EAST Asia's "zero-Covid" approach - entailing enforcement of strict lockdowns whenever cases emerge - has cast a heavy pall on business operations across the region, and investors have taken a wait-and-see stance.

The Economist Intelligence Unit (EIU), the respected research and analysis division of Economist Group, has warned that enforcement of stringent lockdowns measures when infection cases emerge is not a sustainable route, because it could potentially undercut rather than support economic activity.

The officials in Indonesia's first Special Economic Zone (SEZ) know this all too well. Back in 2019, the management body of the Sei Mangkei SEZ fielded more than 360 investor engagements, said Muhammad Fadillah, assistant manager of the management body. Then when the pandemic swept through the archipelago last year, the number of investor engagements dived to just six.

Indonesia's response to the rising number of cases - the national tally has shot past two million - has been to tighten curbs in the world's fourth most populous nation. It has announced that the curbs will be in force until July 20.

Save palm oil-related companies in the SEZ (such as PT Unilever Oleochemical Indonesia and PT Industri Nabati Lestari), most other companies have been badly hit by the pandemic. The SEZ has not been able to meet its target, said Mr Fadillah.

Over at Kendal Industrial Park (KIP), the largest industrial township development in Central Java and a joint venture between Singapore's Sembcorp Development and Indonesia's PT Jababeka Tbk, the mood is similar.

Stanley Ang, KIP's president director and chief executive officer, said: "We face two destabilising forces. One, the delay in passing and implementing of regulations and two, Covid."

In the 2,200-hectare KIP project, committed business entities are dealing with "pressing and urgent" operational issues such as value-added tax (VAT) and import duties. Prospective customers to the SEZ, realising that the situation has created uncertainties, are preferring to wait things out.

The mobility controls in force are also not helping matters: Site inspections by prospective customers has been seriously curtailed, and business entities already established there are facing obstacles to getting their expatriates into Indonesia.

Mr Ang said: "Some of our business entities also face market disruptions to their businesses. Logistics costs have gone up along with operational costs, with the need to provide for costs of testing, disinfection and etc."

Elsewhere in most of South-east Asia, the business outlook is similar. Japan's Panasonic, which is eyeing Vietnam, Malaysia, Thailand and Indonesia as the key markets to drive the growth of its regional consumer business, has come up against procurement delays.

Store closures in the wake of sudden lockdowns and social-distancing rules have dented sales, especially of products which require installation.

Jake Hirose, Panasonic's managing director for consumer appliances marketing for the Asia-Pacific, said: "Productivity is reduced due to mandated shutdowns, temporary closure of factory operations or partial operations." He expressed fear that if the pandemic drags on, businesses could face further challenges, not only in operations, but in financial management as well.

"There will be a need to optimise a company's resilience, such as rebalancing for risk and liquidity, addressing short-term liquidity challenges, to solve costs and profitability and generate funding to invest," he said.

Business continuity and working capital of business partners or suppliers also add to the list of concerns.

TE Asia, which operates specialty hospitals and medical centres in Singapore, Hong Kong, Malaysia, Indonesia, Vietnam, the Philippines and Thailand, is juggling cash conservation and cost management during these trying times.

Gavin Kanan, its director, said: "We believe that repeated lockdowns will have a reduced impact over time. Fatigue will set in and patients will simply carry on with whatever care they need.

"Still, volumes do take a dip whenever it happens and we are far from out of the woods; the mood is still to be very careful in managing resources to weather this pandemic. Across the geographies in which we operate, the impact of Covid on our business is somewhat similar, differing only in the timing."

This environment makes it difficult to originate and grow new businesses, because healthcare investments are long-term in nature.

"Frequent lockdowns scare stakeholders like business partners and doctors; commissioning work and construction face uncertainty. Unfortunately, the countries that need these investments are also the ones hardest hit by Covid, such as Indonesia," said Mr Kanan.

He added: "The sustainability of periodic lockdowns is therefore questionable, especially without government support. Once the real economy is hit, how many will be able to afford private care and private insurance?"

In Malaysia, where a lockdown is in effect, a manufacturer who requested anonymity said many of his peers are facing difficulties resuming operations and seeking approval from the authorities because of the mounds of red tape. "We rather shut our factories than risk having dubious people come to inspect, issue fines or cause trouble," he said.

In neighbouring Thailand, the daily tally of new cases has jumped from 50 to more than 2,000. Schwin Chiaravanont said businesses are concerned about the fall in liquidity, supply-chain disruptions and headwinds in the hospitality and retail sector whenever there is a lockdown.

"I hope the government takes advantage of these times to implement major changes to enhance our long-term competitive advantages as a country," said the co-founder and managing partner of multi-family office, Blueprint Forest Group.

Singapore Manufacturing Federation (SMF) president Douglas Foo said that travel curbs have hindered production and made it difficult for companies here to monitor their operations in the region.

"The SMF has been in contact with its members, and while they are adapting to the constantly changing situation of lockdowns and extension of lockdowns, they are affected by the rising cost of operations and reduced productivity," he said.

The federation is organising webinars and virtual business-to-business matching sessions to help members expand their market presence, but there are limitations to the effectiveness of these virtual efforts.

"We hope that the recognition of vaccine certificates will be implemented as soon as possible, so that businesses can resume expansion planning and operations," he said.

The resurgence of Covid-19 in South-east Asia this year is forcing economists to relook their growth projections.

Anwita Basu, head of Asia country risk at Fitch Solutions, said: "We started the year expecting Asean to grow by close to 7-8 per cent. Now, we are expecting 4-5 per cent."

Except for Singapore, which could revise its 5.8 per cent growth forecast upwards, the risk of downward revisions is high elsewhere in the region because of the slow progress in vaccination rollouts, Ms Basu said.

Singapore is aiming to inoculate most of its population by the third quarter of this year, and the government is preparing to live with Covid-19 as a new endemic norm.

Growth for Malaysia has been revised down to 4.9 per cent this year, from the earlier projection of at least 10 per cent; Indonesia's growth has been shaved to 5.1 per cent from 6.2 per cent - a figure that could be pared back yet again.

The Philippines is now projected to grow at 4.4 per cent instead of 6 per cent. No strong growth is expected from Thailand, where the tourism sector used to power 20 per cent of its gross domestic product (GDP).

Even Vietnam - lauded for its successful containment of the virus last year - has not been spared. Its GDP growth forecast has been revised to 4-5 per cent, from 8 per cent.

French bank Natixis, which has been tracking the progress in vaccine supplies and inoculation, labels Thailand and Indonesia as laggards. However, it expects vaccination to accelerate sharply in the region in the coming months.

Esty Dwek, Natixis Investment Managers' head of Global Market Strategy and Solutions, said: "As the pandemic lasts, we have seen a waning effect on growth from smaller lockdowns, so the impact will be much smaller than in 2020."

"The biggest risk is of variants that could prove resistant to vaccines. This is why the speed of inoculations is of the essence."

Consumers have adapted and working from home has become normal. "Still, the recovery cannot be smooth in such a context, and it will be uneven across countries due to ongoing restrictions or lockdowns," she said.

But Ms Basu believes the region is still attractive because of its competitive hub status and because most regard the Covid risk as a temporary one.

The EIU, referring to the enforcement of stringent lockdown measures when infections rise in number as being unsustainable, said such a move deprives economies of the opportunity to benefit from a revival in international tourist and student flows. Challenges in business travel and operations could lead to companies choosing to direct investment to other markets, and tight border controls will affect the ability of these "zero-Covid" countries to attract and retain foreign talent.

The EIU said: "Asia's city states could permanently damage their status as business hubs if they fail to liberalise border controls, and Australia and New Zealand risk missing out on a revival in international tourist and student flows."

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