Singapore. Indonesia is the big winner as Southeast Asia’s investment landscape is transformed, with politics driving the tectonic shifts in market perceptions.
Thailand, the archetypal Asian tiger long a favored destination for global conglomerates and emerging markets investors, is increasingly being viewed as the region’s basket case, as chronic political conflict batters its image.
As protesters paralyzed central Bangkok in a protracted standoff that exploded into gun battles and arson attacks in the heart of the capital’s business district, Indonesia has been experiencing a profound shift in how it is viewed by fund managers and multinationals.
A decade ago it was regarded as among the world’s riskiest countries, riven by sectarian and ethnic violence, and crippled by rampant corruption.
Even 18 months ago, in the global panic that ensued after Lehman Brothers collapsed, investors desperate to lower their risk exposure dumped the rupiah and local stocks.
Now Indonesia is on course to achieve sovereign investment grade and is widely regarded as deserving inclusion in the BRICs bloc of emerging markets that investors cannot afford to ignore.
Across the region, whether driving markets up or down, political risk is back at the top of the investor agenda.
“As sovereign debt concerns in Europe unfold, risk aversion is spreading across global financial markets, and political events in Asia are likely to receive more scrutiny than usual,” Standard Chartered said in a research note this month.
While it is clear that political risk is central to market performance in Asia, quantifying it and predicting its impact on asset prices is anything but a straightforward process.
One of the most respected gauges of political risk is the World Governance Indicators data set produced annually with the support of the World Bank. They aggregate a large number of risk ratings from several sources, and they paint a telling picture.
In 2002, they rated Thai political stability at 59.1 out of 100. By 2008, it had dived to 12.9. Events since then will have dragged it even lower. Over the same period, Indonesia saw strong gains, while the Philippines drifted sideways.
Those trends have been mirrored in flows of portfolio funds and foreign direct investment. Following the re-election of President Susilo Bambang Yudhoyono last year, Indonesia has seen a surge in inflows, Thailand the reverse.
Deutsche Bank, in a report this month on the region that focused heavily on politics, ranked Thailand as the least attractive of the major regional markets.
“Our pecking order: Indonesia, Philippines, Singapore, Malaysia and Thailand,” it said.
Sovereign ratings are another key gauge.
Indonesia is being steadily upgraded toward investment level while Thailand risks further downgrades. Moody’s has a negative outlook on its Baa1 rating on Thailand and warned on Monday that “a protracted undermining of investor sentiment would have adverse effects on Thailand’s longer term credit fundamentals.”