Country risk: Economics is not the only factor putting Asia in a quandary


Jeremy Weltman
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Euromoney’s survey shows Hong Kong, Japan, South Korea and Taiwan struggling against a tide of economic malaise and political/foreign policy concerns. Investors would be wise to take heed of these warning signs.


Asia is sound, superficially. The region is, after all, one of several showing improvement in Euromoney’s country risk survey this year along with the Caribbean, CIS and sub-Saharan Africa.

Among the investor locations analysts have upgraded are Bangladesh, Bhutan, Cambodia, Mongolia, Myanmar, Nepal and Vietnam.

This shows there is some indirect benefit from global trade frictions, as many of these countries are viewed as important conduits for avoiding the tariffs on ‘Made in China’ goods.

By offering tax and other incentives, governments there are still successfully attracting inward investment, and economies are growing, in most cases spectacularly.

Vietnam in particular is still seen as a favourite low-cost centre with a positive legal framework. In 2018, the country received $16 billion of inward foreign direct investment, and already $18.4 billion in January-September 2019, according to the ministry of planning and investment.

India, Indonesia, Singapore and Thailand are other notable hotspots for investors, where the risks are low and the opportunities numerous. Strong market competition, large state-backed infrastructure projects and digital development are among the various positive factors.

Caution advised

However, dig a bit deeper and the picture is more diverse.

Risk scores for Asia vary enormously, from 88.1 (out of 100) for low-risk Singapore, to just 11.3 for North Korea, with 14 countries scoring less than half the points available, making them medium-to-high risk options.


Plus the region is struggling in other ways, as Hong Kong’s crisis illustrates. The special administrative region is, along with nine Asian countries, downgraded in Euromoney’s survey so far this year. They include China, Japan, Malaysia, South Korea and Taiwan.

Foreign relations, ostensibly with China, are a big factor, underlined by the rioting in Hong Kong, the knock-on effect for Taiwan’s elections in January, and territorial claims in the South China Sea, which haven’t resolved themselves, despite the apparent lack of media attention in the west.


Economic prospects have also faded as China’s economy slows. Industrial sector fragility outweighing strength in services saw China’s real GDP growth slow to 6% in the third quarter.

“This reflects the lowest pace of growth in three decades and is at the bottom of the government’s growth target for 2019 (6.0% to 6.5%),” says ECR survey contributor and ABN Amro senior economist Arjen van Dijkhuizen, who sees China slowing more sharply as one of the region’s big threats.

Fiscal stimulus and monetary policy easing is helping, but is fairly moderate, and the failure to resolve the trade dispute is still a notable factor.

“The recent ‘phase one’ agreement between the US and China does little to change the macro scenario, although that could change over time if this ‘handshake deal’ would mark the end of the tit-for-tat tariff spat – but seeing is believing,” says Dijkhuizen.

“That said, even in case Trump and Xi would sign an agreement in November, strategic tensions between the US and China will likely linger, particularly on the technology front.”

ABN Amro sees China’s annual GDP growth slowing from 6.6% in 2018 to 6.2% in 2019, and to 5.8% in 2020.

The trade environment uncertainty has clipped the wings of export-oriented Asian countries, hitting the supply chains, and equity markets fluctuating in sync with any developments in the negotiations.

GDP growth prospects are now anaemic for Singapore and Hong Kong – worsened by the domestic conflict – and not much better for South Korea or Taiwan. All of these countries have seen downgrades to their relevant risk factors – a mix of growth, employment and/or government finances.

Political problems

The issues, however, are not purely economics based.

Japan and South Korea are locked in a damaging rift over wartime reparations that has spilled over into the spheres of security, trade, tourism and even a row over the use of the Japanese flag.

Both countries are among a handful showing the largest increases in investor risk in the region on a five-year trend basis, along with China, Japan and Malaysia – the latter is partly due to ethnic tensions also making Indonesian investors wary.

Their respective leaders, Shinzo Abe and Moon Jae-in, appear to be seeing sense after agreeing to meet to try to put their differences to one side.

There is even talk of a fund being created to allow Japanese private firms to provide economic cooperation as compensation for forced wartime labour without contravening Japan’s insistence that all reparations were completed under the 1965 bilateral accord.

However, Taiwan’s difficulties may prove harder to resolve.

The Hong Kong crisis has turned the vast majority of Taiwanese against the ‘one-country-two systems’ model of unification with China. Beijing’s restrictions on travel to the island, causing tourism to plummet, has failed to turn the tide.

Forthcoming elections on January 11 are pointing to re-election for the pro-independence president Tsai Ing-wen, but with her Democratic Progressive Party unable to gain a majority in the legislature, complicating policymaking.

Government stability is one of the key risk factors downgraded by risk experts this year.

However, given the intricate geopolitics and economic dependency on China, for a number of countries it may not be the last.