You can never generalise about Asia. Mark Cooper, the new Hong Kong-based director of structured credit and political risk at Howden Broking Group, finds that each Asian country has its own unique set of features that create new risk points.
Cooper sees emerging-market investors convincing themselves of a feel-good factor at times when markets are buoyant and producing strong returns, which means that they often take less notice of the risks and the relative absence of regulation.
“In Vietnam, the inadequacy of local factors like rule of law, the costliness of implementing legislation, risks of remitting dividends and getting paid for royalties all add up to make a very risky place for foreign investors,” he says. “At a macro level, foreign exchange reserves are stressed and any factor that makes exports uncompetitive leads to business failures.”
To mitigate risks, Asian firms have adopted ways of keeping supply chains intact in the face of potential incidents. For example, Japanese companies use a 'China plus one' thesis, in which they maintain a discrete supply line (or production unit) in at least two Asian countries.
So if, say, their supply of rare earths for electronics manufacturing from China is impeded, they can still source their raw materials from somewhere else and keep their production going. However, because of the 2011 earthquake and tsunami, ironically and in an unforeseen way, Japan itself has now become a weak link in the Asian supply chain.
Thailand has all the problems of a political schism, and the July 3 landslide win by the opposition at the general election may solve problems but may also create new risks.
“There could be a civil war in Thailand,” says Cooper. “Given not only the troubles in the south of the country but the political rift, one side supported by the police and junior army officers and the other by senior army staff. It’s quite conceivable that a guarantee or contracts issued by one government in Thailand could be rescinded by another."
A country he feels more optimistic about is the Philippines, which has more drawbacks and pitfalls than most Asian countries. “In the Philippines, there is endemic corruption and you can’t pretend it doesn’t exist,” he says. “You can still eliminate a lot of risks in a Filipino deal by the way you structure it.
"You’re going to have influence there if you can bring in a modest amount of investment and create some jobs," adds Cooper, "because the Philippines is so keen to demonstrate successes at high level.
“If a deal is well structured, there are often flexible and effective ways to mitigate risk," he says. "That’s the job of an expert as much as choosing an expert lawyer or surveyor.”
The point he is making is that, in Asia, an investor shouldn’t pretend the risks don’t exist or try to find excuses for them. The way to do business in Asia is to face up to their existence, and structure deals that take into account an Asian country’s unique, idiosyncratic risks.