ASIAN INTELLIGENCE

An Independent Fortnightly Report on Asian Business and Politics

No. 820 Wednesday February 9, 2011

Foreign Direct Investment Inflows

US$ billion

120 100

80
60 40 20 0

2009 2010

REGIONAL OVERVIEW .................... 2 CHINA .................................................. 4 HONG KONG ....................................... 5 INDIA ................................................... 6 INDONESIA ......................................... 6 JAPAN .................................................. 7 MALAYSIA .......................................... 8

PHILIPPINES ...................................... 9 SINGAPORE ........................................ 9 SOUTH KOREA ............................... 10 TAIWAN ........................................... 11 THAILAND ....................................... 11 VIETNAM ......................................... 13 EXCHANGE RATES ......................... 14

POLITICAL & ECONOMIC RISK CONSULTANCY LTD.

Political & Economic Risk Consultancy, Ltd. 2.

Issue #820 Although political uncertainty could have discouraged the flow of investment to some countries (such as Thailand and the Philippines), by far the biggest factors influencing the level and direction of FDI inflow to most Asian countries were the level of regulatory barriers and the ability of foreign investors to work their way through the approval and implementation obstacles. This helps explain why FDI inflows to China have consistently been so much larger than to India despite the overall bullishness of foreign companies toward both of Asias giants. Factors like corruption, governance standards and transparency levels were not major deterrents. Although more Western companies are trying to tap into Asia by investing there, a sea change is taking place in that a growing proportion of total FDI into Asia is by other Asian countries. Moreover, the biggest Asian investors historically, namely, companies from Japan, Korea, Taiwan, Hong Kong and Singapore, are being joined by state-owned and private investors from developing Asian countries a new development commonly referred to as South-South investment. Companies from China and India are leading the way, but companies from smaller developing countries like Indonesia, Malaysia and Thailand are also investing more in other Asian countries. The result is to create stronger economic linkages between different Asian countries. Cross-border mergers and acquisitions are more a feature of the US and Europe than Asia. However, they are growing. Chinese companies, in particular are buying into existing companies elsewhere in the region and the world. One problem with future M&A business in Asia could be a growing selectiveness by Asian governments in the kinds of foreign direct investment they accept (in the case of China and Korea, for example) or negotiating tactics by Asian owners that set too high a price for assets they own. For example, foreign investors were put off by Garudas relatively high pricing for its recent IPO. Given the spotted history of the Indonesian airline, it is hard to justify pricing

REGIONAL OVERVIEW
FDI trends and fallout from Egyptian crisis for Asia Global foreign direct investment inflows amounted to US$1,122 billion in 2010, according to preliminary estimates by UNCTAD, little changed from US$1,114 billion in 2009 and still 25% down from average pre-crisis levels from 2005 to 2007.

Foreign Direct Investment Inflows

Country China Hong Kong India Indonesia Japan Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2009 95.0 48.4 34.6 4.9 11.9 1.4 1.9 16.8 5.8 2.8 5.9 4.5 2010 101.0 62.6 23.7 12.8 2.0 7.0 1.31 37.4 7.01 2.21 6.8 4.71 3.

Source: UNCTAD Global Investment Trends Monitor, January 17, 2011.

1PERC

estimate

Although it will take a while to compile the final figures for last year, some important conclusions are already possible. They include: 1. FDI figures reflect the increasing focus and growth of East, Southeast and South Asia relative to the US and Europe. After a 17% decline in 2009 (half the rate of the global decline), FDI inflow to South, East and Southeast Asia rose by about 18% in 2010, reaching US$275 billion. In contrast, FDI inflows to developed countries as a group fell some 7% last year to US$527 billion. Most of the fall in direct investment to the developed world was accounted for by Europe, where FDI was down 21.9% on 2009 levels to US$295.4 billion. FDI into the US rebounded 43.3% in 2010 to US$186.1 billion.

4.

5.

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Issue #820 valuing the airline at 18 times forecast earnings when companies like Cathay Pacific, which have a much better track record, can command only nine times earnings. Garuda is not alone in its high pricing ambitions. Asian investors are even more cautious than Western investors and will be very demanding in their pricing. The gap between what is wanted and what investors are willing to pay could be too much to bridge. 6. A special feature of investments by resourcehungry countries like China, India, Japan and Korea is that a large and growing amount of their total investments are in infrastructure projects in developing countries like Indonesia and a number of African nations in exchange for energy, mineral supplies and agricultural products. This means their investment model is very different and possibly more secure than the old model used by private Western companies in which they were repaid for infrastructure investments by income earned from these investments. The new Asian model for infrastructure investments greatly reduces exchange rate risks and payment defaults due to radical changes in domestic economic conditions.

Political & Economic Risk Consultancy, Ltd. fallout in ways that change the pattern of FDI flows. If the unrest were to spread beyond the Arab world and create such turmoil that oil prices surge, the global economy would be shocked and FDI could take another downturn worldwide. Some Asian countries like Malaysia and India are at more risk to fallout than others, but every Asian country could be affected one way or another. Now is the time to start thinking about how, which we try to do in the country entries that follow. On the other hand, the unrest might be contained to the Arab world. If so, the impact could be to make Asia look even safer and better by comparison. It could stimulate resource investment in places like Australia, Indonesia, and Latin American countries, especially since shipments to Asia of commodities from these regions would reduce the need to go through much riskier waters closer to Africa and the Middle East. There might be little or no direct contagion from the Middle East turmoil to individual Asian countries, but there could be indirect fallout in such forms as higher inflation, a temporary decrease in investor appetite for emerging market risk, and a flight to safety back into the US dollar, which could cause Asian exchange rates to reverse their current trend. Many governments and Asian exporters would like this, but there would also be a cost, particularly with respect to inflation. Weaker exchange rates would push up local currency costs of oil and other commodities at the very time when the US dollar prices of these commodities are rising and other inflationary pressures are building. Rising prices are already one of the biggest headaches faced by most Asian governments. If their price assumptions for 2011 are now upset by surging oil and other commodity prices, further compounded by weakening exchange rates, this could be another factor destabilizing social conditions in Asia. At the very least, the social and political turmoil in Egypt will result in greater market volatility everywhere. This should benefit the trading profits of banks and commodity trading houses, which thrive on such volatility provided it does not get too out of hand.

For 2011, UNCTAD is forecasting that global FDI will expand further to between US$1.3 trillion and US$1.5 trillion. This sounds reasonable, but more interesting will be the breakdown of these figures into such components as regional and national inflows and outflows of FDI, the types of investment (how much is greenfield compared with M&A business), and how much new investment is accounted for by companies re-investing their profits. UNCTAD says that one of its biggest assumptions is that there will be a steady economic and FDI recovery of developed economies. The main risks identified by UNCTAD that could upset its relatively optimistic forecasts relate to currency volatility, sovereign debt and investment protectionism, and governments making mistakes in guiding their economies to a lower, more stable growth path after last years recovery boost that saw many countries growth rates surge. However, other developments could throw off UNCTADs projections. One of the most obvious is the possibility for Egypts unrest to have global

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Political & Economic Risk Consultancy, Ltd. The increase in social unrest in Arab countries seems to support the recent warning by Nicholas Sarkozy, the French president, who in a speech laying out his G20 agenda (France has just assumed the presidency of this group) warned that the worlds top economies must agree to new measures to curb volatility in commodity markets or risk a destabilizing rise in social unrest. Mr. Sarkozy said: If we dont do anything, we run the risk of food riots in the poorest countries and a very unfavorable effect on global economic growth. There are good arguments to challenge Mr. Sarkozy on his suggested solution, namely, controls, but his identification of the problem and potential risks was prescient and deserves serious consideration, especially in the wake of what is happening in the Middle East. Egypt might be a symptom, but the flooding and cyclone in the Australia, the snow storms in the US, and the drought in China all are major reasons to fear there will be problems on the supply side of the food equation too in 2011. One impact of the food fears could be to prompt governments to adopt controls on food exports to ensure adequate local supplies. Another impact could be to create tensions between those countries that want to encourage foreign investment in agricultural projects to ensure supply sources and those who have land but want to

Issue #820 protect local farmers and use nationalistic arguments to oppose foreign investments in agriculture. One scenario, therefore, could see the resulting pressures on food supplies and prices bring out the worst in government policies, promoting protectionism and xenophobic behavior. However, another scenario could see some of the biggest agricultural producers like the US, Brazil, Canada and Australia use the opportunity to create closer relations with major consumer countries like China, Korea and Japan. They would do so not by selling these countries the commodities they need at the highest possible prices but by actively encouraging foreign direct investment in their agricultural sectors. This would require overcoming nationalist arguments that such investments compromise national security, but it is a debate that is likely to intensify in 2011. If those favoring the cooperative approach win the debate, global investment will grow nicely in the coming years, but the big change will be a shift in which more of the investment is by major Asian countries in the US, Canada, Australia and Brazil. On the other hand, if the nationalists dominate, the process of globalization will be set back, the growth of FDI will slow, if not go into a period of decline, and geopolitical tensions between China and the US will intensify.

CHINA
Comments
Chinas official FDI figures jibe with those put out by UNCTAD. According to Chinas Commerce Ministry, inbound FDI last year rose 17% to US$105.74 billion, reversing a 2.6% decline in 2009. Although Chinas outward direct investment is still much less than inward flows, it is growing much more rapidly. Last year overseas investment by Mainland companies in non-financial sectors totaled US$59 billion, 36.3% more than in 2009. While inward investment flows are likely to grow more slowly from here onwards, the increase in outward investment flows should remain strong. One reason outflows are not growing even faster has to do less with a lack of interest by Chinese companies than resistance by target countries like the US to Chinese investment in what the host countries consider to be sensitive industries. One of the main points President Hu Jintao tried to make during his recent trip to the US was to press the US to reduce restrictions on foreign investments due to national security considerations. Beijing clearly feels threatened by developments in Egypt, which is why they are blacking out news of the turmoil in the local media. There are good reasons for this discomfort. First, from the perspective of Chinas leaders, they do not want the local population to draw any parallels with a mass movement with grassroots momentum whose primary focus is to throw out the government in power. The movement does not even have a successor government in mind. It just wants to get rid of a government whose sell by date has long since past.

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Secondly, Beijings political and national security leaders probably feel threatened by a new development: the backlash of the Egyptian public and Western multinationals to undermine the governments efforts to enforce a communications and information blackout. Egypts government tried to shut down all Internet communications, which it did quite effectively for a while. It also shut down cellphone services throughout much of the country. However, individuals used their own inventiveness to get around the communications barriers and many people did so. Moreover, private companies like Google, Twitter and Facebook at their own initiative set up new means of communications so people in Egypt could get around the governments barriers. Admittedly their efforts have had only limited success, but their actions represent a new challenge that Chinas control-conscious leaders are undoubtedly worried about. Anything that is not in the governments hands and can play a role in coordinating and sustaining unrest causes red lights to flash in Beijing. Third, Chinas leaders recognize that the Mainland is suffering from many of the same economic and social problems that are affecting Egypt and causing the unrest. The problems include accelerating inflation, especially food prices; income inequality; and rising unemployment among youths. Finally, China has to view developments in Egypt through the same prism that it views its overall international relations in which its interests are defined not just by China-Egyptian relations today and tomorrow but also by how its actions might affect its interests elsewhere in the Middle East and Africa, relations with the US and Europe, and relations with Russia. Beijing will be watching carefully to see how the US reacts. China will have to decide if it is in its interests to cooperate with the US or to take a different or even an opposing position with respect to Egypt. Will the US and Beijing, for example, support the same groups who are likely to succeed the Mubarak government? If Iran tries to influence future political developments in Egypt, will Beijings position be supportive of or in opposition to Tehrans agenda, and how will this affect Chinas political and economic interests in Iran?

HONG KONG
Comments
Hong Kongs foreign direct investment figures reflect the citys growing role as a base for Mainland companies to interface with the outside world. They set up local offices, which raise funds through IPOs on the local stock market, and then use these funds to pay for investments and other needs in China and elsewhere in the world. Consequently, the FDI that flows into Hong Kong is largely matched by outflows and the investment does not create many jobs or actually add to the SARs productive capacity, but it does add to the dynamics of the services sector and enables companies to pay high salaries to bankers, lawyers, accountants and other professionals facilitating this business. To give an example of the value-added role Hong Kong is playing in facilitating China-related business, consider that the number of employed people in Hong Kong increased by about 46,600 last year. This means that every new job equated to more than US$1.3 million in FDI. In fact, only a small portion of the new employment was directly involved with facilitating investments into and out of the territory, but this only further underscores how much Hong Kongs services sector is deriving an increasing proportion of its revenues from facilitating the investment-related business. Developments in the Middle East should not hurt Hong Kongs growth performance in 2011. The turmoil could stimulate trading volume on the local stock, foreign exchange, gold and other commodity markets. And it could affect where Mainland companies choose to invest abroad in the coming year, but the trend will still be toward increased outward investment flows by Chinese companies and toward stable-to-moderate growth in FDI inflows into China, and Hong Kong will still be the main base that supports this business.

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INDIA
Comments
The huge gap between the level of FDI flowing into India compared with China would be much narrower were it not for Indias slow approval process and regulatory hurdles. Recent FDI trends have reflected more these obstacles than any shifts in demand. According to UNCTAD figures, FDI slumped 31% last year to US$23.7 million. Figures published by the Reserve Bank of India paint a similar picture. They show that FDI fell by 36% from April to September 2010 (the first half of Indias fiscal year) to US$12.6 billion. The Central Bank blamed the decline on hurdles in environmental clearances problems in land acquisitions and poor infrastructure. It noted that the biggest declines were in the construction, mining and business-services sectors. This year should show a big growth in FDI due to one single project: the approval of POSCO of Koreas US$12-billion steel investment in the state of Orissa. It took six years for POSCO to get approval for this project due mainly to objections from the environmental ministry. This is emblematic of similar problems would-be foreign investors are encountering across India. The main economic problem India faces going into 2011 is the high rate of inflation. This could discourage foreign capital inflow into the countrys stock market, but it should not have much of an impact on foreign direct investment except by pushing up the cost of land further and making it difficult for some types of projects to earn a satisfactory return. Recent riots in New Delhi had some similarities to the complaints of protesters in Egypt. The economy may be growing rapidly, but many Indians are frustrated and feel the boom is passing them by. High inflation, especially food prices, are another common complaint. However, Indias political system is much more flexible than Egypts so it would be a mistake to over-emphasize the parallels. A much bigger threat to India than direct fallout from the rise in unrest in the Arab world is that social conditions in Pakistan could be destabilized. Any rise in social turmoil in Pakistan would pose threats to India, especially if it enabled Islamic extremist groups to raise their profile. Fortunately, there has not been an indication yet that social and political conditions in Pakistan are being destabilized by developments in the Arab world, but this possibility needs to be monitored closely because of the negative implications for India. Another potential implication of the unrest in the Middle East is that it could stimulate investment by Indian companies in other parts of the world. Like China, India is eager to secure foreign supply lines of oil, food, coal and other raw materials. It is competing more against China in Central Asia, Africa and the Middle East, but where the competition is particularly noticeable lately is in Indonesia. A number of Indian companies are undertaking major infrastructure building investments in Indonesia in exchange for access to the countrys raw materials. Indonesian President Susilo Bambang Yudharono signed more than US$15 billion in deals when he visited India in January. Among them, Trimex Sands plans to invest US$800 million in a titanium plant in Indonesia. Adani will build a US$1.6-billion 270 km railway and coal terminal in southern Sumatra. GVK Power and Infrastructure Ltd. will spend US$4 to US$5 billion to build airport terminals in Yogyakarta and Bali. The turmoil in Egypt will make these kinds of investments even more appealing.

INDONESIA
Comments
Indonesias economic prospects are still good, but potential foreign investors face a number of regulatory and other obstacles that are holding down the overall level of FDI. Real GDP growth this year will

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probably reach 6% or better, and a number of major multinationals in such industries as consumer products and car manufacturing would like to invest in the country to sell to the domestic consumer market, which is a major attraction. According to preliminary estimates by the United Nations, foreign direct investment flows into Indonesia increased 162.7% last year to US$12.8 billion from US$4.9 billion in 2009. But the country could be attracting even more FDI if it had the political will to reduce bureaucratic barriers, clear up regulatory confusion and take a stand against nationalists who are opposed to FDI in many industries. On a positive note, major companies from resource-hungry economies like India, China, Japan and Korea are investing in major infrastructure projects in Indonesia in exchange for having long-term access to such raw materials as iron ore, coal, and natural gas. Many of these deals make a lot of sense. The foreign investors have held down their risks by basing their expected returns not on revenues from tariffs and charges levied in Indonesia, which can be upset by such factors as political turmoil and big exchange rate shifts (which is what happened in 1998) but on access to raw materials the amount of which is negotiated up front in volume terms. There would be a lot more M&A business in Indonesia if local owners of assets were more realistic in their pricing. Conditions in Indonesia are good but not to the extent that many Indonesians inside and outside the government seem to think. An example of the exaggerated pricing was the way the state airline, Garuda, overpriced its recent IPO, causing foreign investors to stay away and the issue to flop. This high pricing combined with the slow investment approval process helps to explain why Indonesia is not getting more FDI than it is. As in the case of India, the foreign interest is there, but the country is unable or unwilling to absorb the foreign investment as rapidly as China has been. As we noted in the Regional Overview, Indonesia could be infected by the same social unrest as Egypt, but the more likely scenario is that the unrest in the Arab world will make Indonesia look better. It has already undertaken the democratic reforms that countries like Egypt are only now being pushed into. It is ahead in the game of limiting the influence of Islamic extremism within a multi-party framework, and while average Indonesians might have many of the same complaints as average Egyptians, there are more outlets to vent frustrations, making the entire system more stable. However, there will still be consequences for Indonesia. For example, because of Egypt, international investors are likely to turn more cautious to emerging market risk in general. Until now Indonesia has gotten away with holding its interest rates low, but last week the increasing focus on emerging market risks prompted the Central Bank to lift its interest rate to 6.75% from a record low of 6.5%. This was the first adjustment since August 2009 and would probably have been delayed longer were it not for the way the Egyptian turmoil spooked investors into pulling more than US$7 billion from emerging market equity funds in the space of one week.

JAPAN
Comments
Japan gets surprisingly little foreign direct investment considering the size of the economy and the level of M&A that takes place in other developed economies like the US and Europe. Moreover, according to UNCTAD estimates, the level of FDI into Japan slumped more than 83% last year to only US$2 billion. Although the low level of FDI inflow could be a sign of protectionism in Japan, the country has actually opened its doors quite a bit to FDI in a number of major industries. A bigger factor is that the cost of entry of just too high relative to the rates of return most foreign companies estimate they can make. There are too many other places where they can employ their capital more effectively.

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Japanese companies seem to have come to much the same conclusion. Although they are investing more in Japan, much of this investment is to pay for capacity to produce for export. At the same time, the surge in the value of the yen, high domestic production costs and other factors are pushing Japanese companies to invest more abroad. The peak year was 2008, when Japanese companies invested US$130.8 billion abroad, according to JETRO figures, compared with FDI inflows that year of US$24.6 billion. Inflow and outflow figures both fell in the following two years, but extrapolating from JETRO and UNCTAD figures, last years FDI outflow of US$38.3 still eclipsed the inflow figure of just over US$2 billion. Although Japans foreign investment is led by private companies, the government recently announced that it is moving to deploy its massive stockpile of foreign-currency reserves outside the country. Part of the diversification is to include US$3.9 billion for strategic investment overseas through the Japan Bank for International Cooperation. JBIC will be financing deals in both developing markets and industrialized nations. There is speculation that if the initial plan is successful, the government will transform the bank into a sovereign wealth fund like those in China, the UAE, Norway and Singapore. Japans biggest immediate concern with developments in the Middle East is the potential for the turmoil to push up oil prices and depress global growth in 2011, hurting Japans exports and foreign investment profits in the process. A bigger concern but fortunately one that is less likely to happen is that the waterways around the Middle East are disrupted, which would be a national security risk for Japan since so many of its raw materials are sourced from this region. For this reason, combined with the initiatives already announced to undertake more strategic investments, Japan is likely to look more to Australia, Indonesia and other resourceproducing countries in Asia for investments rather than increasing its exposure in the Middle East.

MALAYSIA
Comments
Although the inflow of FDI increased quite sharply last year, the absolute level of FDI is still not as strong as the government would like. Meanwhile, Malaysia is becoming a more active foreign direct investor in its own right, led by state-owned firms like Petronas and Khazanah Nasional Bhd, the countrys plantation companies and several of its banks. Last month, for example, Malayan Banking Bhd. offered US$1.4 billion for Kim Eng Holdings, one of Singapores most prominent brokerages. Beginning in 2009 the dollar value of Malaysias outward direct investments actually exceeded the value of FDI inflow for the first time. One of the criticisms leveled against the government is that it crowds out foreign investors. This is not exactly accurate, but it does send out mixed signals to foreign companies in some industries on whether or not foreign investment is really wanted. This is particularly true in industries in which the government is also trying to groom national champion companies like in automotive manufacturing. The government has not had a great deal of success with this policy, and while it has dithered, other governments like that of Thailand have moved more decisively and have already attracted a critical mass of FDI to these industries. It will therefore now be more difficult for Malaysia to attract the foreign companies even if it more genuinely opens the industries. Compared with manufacturing (with the notable exception of automobiles), the services sector has been relatively closed to international competition, with FDI restrictions comprising the major obstacles. Again, the government has recently been relaxing or removing foreign investment restrictions in services, but more measures are needed to promote competition in what has been the largest contributor to GDP. One of the reasons that Malaysia might be more directly vulnerable to fallout from the popular unrest in Egypt than most East and Southeast Asian countries is because it has thousands of students studying in Egypt. Malaysia is now in the process of evacuating these students, but it is possible that they might so sympathize and

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identify with the frustrations of the protesters in Egypt that they turn into activists bent on forcing changes at home, where the ruling National Front coalition is already under heavy pressure to change. If popular unrest were to escalate in Malaysia in the run-up to the next national elections, foreign investors might be even more reluctant to invest in the country than they are at present, preferring to wait until existing question marks are either reduced or answered.

PHILIPPINES
Comments
Central Bank figures for January-September 2010 support the annual figures of UNCTAD that indicate a decline in FDI in 2010 to US$1.3 billion from US$1.9 billion in 2009. According to the CB, actual foreign direct investment inflows declined 31.8% in January-September last year to US$1.093 billion from US$1.603 billion in the like span of 2009. It is possible that investors adopted a wait-and-see attitude until the May elections were over, but the Philippines has been lagging behind most other Asian countries in attracting new FDI for a number of years now, so it is probably wrong to put too much of the blame on political uncertainty. More likely, the difficult regulatory environment, infrastructure shortcomings, and the governments failure to push ahead with privatization programs as quickly as indicated it would like are behind the relatively low levels of FDI figures. To the extent that this is the case, there will probably be some improvement in the numbers this year but not enough to push the Philippines up the ladder of Asian countries in terms of the amount of FDI it gets each year. As long as the turmoil in Egypt remains contained, the main impact on the Philippines will be to make it more expensive to raise foreign borrowings it needs to bridge the budget deficit. Fortunately, the government has already raised most of the funds it needs for 2011, so it is largely protected from this risk. Since the Philippines relies almost entirely on imported oil and also must import rice and a number of other foodstuffs, there could also be negative fallout in the form of higher inflation, a worsening trade deficit and possibly an increase fiscal deficit. More serious problems in the form of a decrease in remittances would occur only if the Nile virus spreads to countries like Saudi Arabia, Kuwait and the UAE since this is where most Filipino workers are concentrated, not in places like Egypt, Yemen and Tunisia. It is unclear if the Middle East turmoil will have any impact on the Islamic insurrection movement in southern Philippines. So far the movement in Egypt and other moderate countries is not being led by religious extremists. Moreover, the Philippines has a much healthier democracy and, especially now that there is a new president who enjoys genuine widespread support, there is no pressure at the grassroots level, including among Islamic activists, for a change in national leadership.

SINGAPORE
Comments
Singapore has been remarkably successful in attracting foreign direct investment. Within Asia last year, only China and Hong Kong received more, and the level of FDI in Singapore, at US$37.4 billion according to UNCTAD, was more than double the US$16.8 billion attracted in 2009. Paradoxically, China and Hong Kong have also been the biggest foreign investors in Singapore in recent years. Other big sources of investment from within the region include India and Malaysia, while Indonesia, Japan and Korea have weakened slightly as sources of FDI

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Issue #820

for Singapore. Looking outside the region, European investors have been prominent investors in Singapore, particularly in financial services. The outflow of direct investment from Singapore has roughly matched where Singapore is getting investment from. China has been the main focus in recent years, while India has also grown in importance. Malaysia and Indonesia have been major targets of Singapore investors for years now. In Europe, the UK has received much more direct investment from Singapore than have other EU countries. The US has received a lot of investment from Singapore, while the one country that is an increasing target for Singapore companies but has not really reciprocated by stepping up its investments in Singapore in a big way is Australia. The turmoil in Egypt should not have a big impact on Singapore investment inflows or outflows. Neither should it jeopardize Singapores major existing foreign direct investments, since they are located elsewhere in the world. As in the case of Hong Kong, Singapores role as a foreign exchange and commodities trading center could be stimulated by the increased volatility that is likely to affect markets in the months ahead. However, only if the problems in the Middle East escalate and the fallout results in shocks to world trade or increased unrest in countries like India and Malaysia would Singapore really have to change the assumptions that are behind the governments economic forecasts for this year.

SOUTH KOREA
Comments
South Korea has opened the door a lot to foreign direct investment since the 1997/98 financial crisis, but the local playing field is still tilted heavily toward major local companies. In many cases it is easier for foreign companies to make greenfield investments rather than purchase Korean companies. When there are major Korean companies or banks that are looking to sell strategic equity stakes, the government tries to see that local companies get first dibs, and if local buyers are not forthcoming, the government frequently adopts delaying tactics to ensure that enough time passes so local buyers can be found. UNCTAD figures show that FDI into Korea increased last year to US$7 billion from US$5.8 billion in 2009, which means that Korea attracted more FDI than did Japan or Taiwan, but it is not even close to attracting the magnitudes of investment that Singapore and Hong Kong are getting, not to mention Mainland China. Like most of Asias other developed economies, Korea has become much more significant as a foreign investor in its own right than as a site attracting other foreign investors. Korean companies have been rushing to set up production facilities in less expensive locations abroad and directly to markets that buy the products so they can avoid future protectionist barriers. It is possible that recent agreements like the free trade pact with the US will reduce the need for these kinds of investments and will give exports in both directions a boost, but more likely investments in industries like automotive manufacturing and consumer electronics will continue, while the trade that will be stimulated will be in products like agricultural commodities that generally do not attract a lot of foreign investment, while new investment in services could be stimulated, particularly in Korea, where a number of professions that until now have been closed to foreign investors may start to open. Korea could be more directly affected by developments in Egypt and other Middle East countries than most other developed economies in East and Southeast Asia. Korea does not have a lot of investments in these countries, but it does have a lot of construction contracts. If unrest in the Middle East puts a brake on some of the major plant and infrastructure projects that are currently underway in this region, it would be a major blow for Korea, especially since the domestic construction industry is stuck in recession. Last year alone Korean

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construction companies won roughly US$70 billion in foreign construction contracts, of which some 77% were in the Middle East (mainly countries like Saudi Arabia, the UAE and Kuwait).

TAIWAN
Comments
Taiwans official investment figures are in line with UNCTAD estimates. According to the UN agency, the value of FDI inflows into Taiwan last year fell 20% to US$2.2 billion. These were actualized investments. In contrast, Taiwan's Ministry of Economic Affairs (MOEA) approved foreign direct investments worth US$3.81 billion last year, down 20.6% from 2009. This implies that the implementation rate for foreign investments in Taiwan is just under 60%. Also the average size of foreign investments going into Taiwan is decreasing, reflecting a move away from manufacturing to services. Of the total approved foreign direct investments last year, 32.3% were in banking, financial and insurance business, followed by retail and wholesale with 10.18% and production/sales of electronics and electronic components with 9.21%. Although the prospects for 2011 are similar for the past year, Taiwan is one country covered by this report that has the potential to rocket up the ladder of countries receiving foreign investment. For such conditions to exist, there will have to be more major breakthroughs in commercial contacts with Mainland China that would not only open the door to more investment from China but also would make Taiwan much more attractive for many foreign companies to integrate more completely into their Greater China operations. Regarding inward investment from Mainland China (permissible on a very selective basis since June 30, 2009), the MOEA approved seven applications in November 2010, with a total amount of US$4.7 million. Aggregated from July 2009 to November 2010, the ministry approved 93 cases worth a total of US$131.4 million. In terms of Taiwans outbound investment (worldwide except to Mainland China), the total value in the first 11 months of last year was US$2.55 billion, 0.1% more than January to November of 2009. The stagnant value of such investment stood in stark contrast to the surge in Taiwans investment in the Mainland, which showed a growth of 104.02% in the same 11-month period to US$10.17 billion. Some 62% of these outward investments to China were follow-on capital increases of previous applications. According to the Investment Commission, from January to November 2010, only 22.9% (i.e. US$2.78 billion out of the total) of outbound investment into Mainland China was actually carried out.

THAILAND
Comments
Thai FDI statistics differ considerably from UNCTAD estimates. According to the Thai government, FDI last year dropped by 32% to US$14 billion compared with 2009 when it reached a record high of some US$21 billion. In contrast, UNCTAD estimates that FDI into Thailand rose 15.3% to US$6.8 billion. The difference is because the Thai figures are on an approval basis, whereas the UNCTAD figures are on an actualized basis. Putting the two series together leads to the conclusion that there was less overall foreign interest in Thailand last year but those investors who did show an interest were not deterred by political uncertainties. Consequently, the rate of actualized investment compared with approved investment improved considerably. Japanese clearly figured prominently in the latter group. Even the official approval figures show an increase of 35% in the value of new Japanese investments, which exceeded US$3 billion. Japan remains by far

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the biggest foreign investor, providing half of total funds, while 18% comes from Europe, 13% from East Asia (excluding Japan), nearly 10% from the ASEAN countries and 5.3% from North America. Most of the latest Japanese investments have gone into metal, machining and transport equipment, electronics and electrical appliances, chemicals, plastics and paper. This to some extent reverses the position a year ago when interest in chemicals, metal processing, plastics and paper had waned. The Board of Investment (BOI) expects the value of FDI this year to be about the same as last although fresh concerns about oil prices (see below) could negatively impact investor sentiment. The BOI sees other negative factors as being the fragility of the global economic recovery, social conflict in Thailand, appreciation of the currency and interest rate increases A big reason for the drop in the value of new investment this year and last is that most of the new projects are medium-size with values generally less than US$1 million per project. The number of individual projects actually rose last year by 6% to just on 1,600. The BOI says investor confidence in Thailand remains high. According to its new survey, confidence in the 2010-11 period shows that a rise of two points into positive territory, from 52 to 54.5. Most foreign companies (86%) are maintaining investments at existing levels or are expanding slightly. Just under 10% plan significant expansions while only 1.3% plan to reduce their investments. Just 0.3% say they are pulling their money out. The firms planning reductions and repatriation of investments number only 14. Most of the Japanese auto makers have signaled intentions to invest at least another US$1.5 billion to expand production in Thailand in the next year or two. But some foreign companies have adopted a wait and see stance on new investments. One Japanese firm has switched plans for a new ethanol plant from Thailand to Vietnam because of uncertain Thai regulations for the environment and health. More and more foreign firms and managers are identifying regulations on the environment and wider green issues as an increasingly vexing question for investors, particularly the uncertainties surrounding government policies and intentions. The BOI admits that there are plenty of current problems affecting the investment climate and identifies the following major difficulties: unresolved problems concerning environmental and health issues at the major industrial projects on the eastern seaboard, political unrest and labor shortages. Foreign investors have long agreed that the investment incentives offered by the government are a major positive factor influencing investment decisions. They also stressed in the BOI survey the importance of the corporate tax rate, the availability and cost of labor, the stability of government policies and the transparency of government procedures. The foreign chambers in Bangkok complain regularly about the tax, which is the highest in ASEAN. The government has promised an early review and some ministers and officials have suggested cutting the rate from 30% to 18% but the likelihood of a concession that large is remote. When considering the overall business environment foreign investors reckon that the most negative change for them is a jump in the oil price. Thailand is still heavily dependent on imported oil. Its vital tourist industry is hit whenever airlines lift fuel surcharges. Compared with their competitors the Thais move the vast bulk of goods by oil guzzling road vehicles and only small quantities by the rail and sea transport systems.

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Foreign investors are dismayed by what they say are ambiguous government policies on energy, which they reckon is a major factor wakening Thailands international competitiveness. On the other side of the ledger they believe two of the most positive factors in the business environment are Thailands suitable geographic location and the attractiveness of its li ving environment for expatriates. They might also have added that the BOI does a good job marketing Thailand to foreign companies. The turmoil in the Middle East poses new economic and political risks for Thailand. The most evident is the impact on the price and supply of oil, which directly influence business costs and confidence. Our FDI report above shows how important this issue is for foreigners making decisions about putting money into Thailand. Not much of Thailands imported oil comes through the Suez Canal but any disruption there and at the Suez-Mediterranean oil pipeline would upset supplies and prices globally. Moreover, the Canal is an important route for Thai exports to the Middle East, Africa and Europe. Trade and financial links between Thailand and the Middle East have been expanding as populations there have an increasing appetite for Thai foodstuffs and stylish consumer goods. Thailand has been receiving Middle East tourists in increasing numbers, and turmoil in the region linked with higher airline fuel surcharges across the world would hurt the Thai tourist industry. Any upheaval in the Muslim world is upsetting for the Thais because of the links that exist between Islamic extremists in other countries and groups in the long-running Muslim insurgency in the south of Thailand. Those fears are exacerbated by the presence today of significant numbers of young Thai Muslims studying in Egypt and elsewhere in the region.

VIETNAM
Comments
It is difficult reconciling the differences between UNCTAD and official Vietnamese government statistics relating to FDI. UNCTAD puts the value of FDI in 2009 at US$4.5 billion, whereas the government reports the value of FDI licensed in 2009 (including supplementary capital of projects licensed in previous years) at US$23.1 billion. If both figures are correct, it implies that the implementation rate is less than 20%, which would be very low and an indication of the obstacles to investors actually implementing projects. According to the governments estimates, the value of FDI licensed between January 1, 2010 and December 21, 2010 was US$18.6 billion, nearly 20% less than the year before. Of this amount, the government says the registered capital of newly licensed projects was US$17.2 billion, while US$1.4 billion was in the form of existing investors increasing their registered capital. The government says realized foreign direct investment in 2010 reached US$11 billion, up by 10% against 2009, of which disbursed FDI amounted to US$8 billion, compared with US$9.8 billion in 2009 and US$11.5 billion in 2008. Pick any government figure you want and we have trouble with the absolute amounts. The percentage changes might be a more accurate reflection of trends, but we put a lot more stock in the UNCTAD figures than the governments. What we do know is that Vietnam was out of step with the rest of the region in 2010. It was alone in suffering a large trade deficit, and its currency was the only one that depreciated against the US dollar. There was an upturn in interest in the country by foreign companies, especially ones that were finding China becoming too expensive or too difficult to work with, but there were also unique deterrents like a high rate of inflation, difficulties in obtaining foreign exchange, and mounting infrastructure bottlenecks.

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Vietnam is the only country covered by this report for which developments in Egypt and the Middle East have few negative implications. If anything, Vietnam could benefit if the turmoil pushes up international oil and food prices, since two of Vietnams biggest exports are oil and rice. Enough foreign investment has been flowing into Vietnam to keep the economy growing at a rate of 5.3% in 2009 and 6.8% last year. Investors are being attracted to the domestic market and relatively low cost labor to produce goods for export. However, the easy pickings of industrializing based on cheap labor costs are fizzling out and Vietnam will have to start attracting more higher value-added investments if it wants to sustain its growth momentum. Foreign investors in the countrys stock market are becoming more cautious, and companies interested in direct investments might be undergoing a similar change in sentiment. Two large state-owned companies, oil and gas group PetroVietnam and coal miner Vinacomin, were unable to complete foreign bond issues in December, following sovereign debt downgrades from all the main credit rating agencies. Now all eyes are on the attempt by Vietnam Airlines to relaunch its long-stalled privatization plan through an IPO. The company is considered to be one of the best of Vietnams SOEs, but that is not saying much these days. Moreover, in the wake of the disappointing response to Garudas recent IPO and the way foreign institutional investors are shying away from emerging markets in general in the wake of the Egyptian crisis, Vietnam Airlines might be very disappointed in the response it gets.

EXCHANGE RATES
Currency Chinese renminbi Hong Kong dollar Indian rupee Indonesia rupiah Japanese yen Malaysian ringgit Philippine peso Singapore dollar South Korean won Taiwan dollar Thai baht Vietnamese dong 2/04/11 6.5585 7.7870 45.579 8,993 82.203 3.042 43.706 1.275 1,114 29.0276 30.826 19,495

Commercial middle rate expressed in terms of US$1.

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