Asia Weekly

Postcard from Southeast Asia

Week Ended: March 12, 2010

Traveling in Asia, and meeting entrepreneurs is always fascinating to me. It is even more rewarding to be on the road during emerging global concerns in order to assess any impact they may have on Asian companies. During my recent trip to Southeast Asia, it was interesting to discover that developments regarding sovereign debt in Greece figured only briefly in my meetings as management teams seemed more focused on their immediate priorities—quite a contrast to the global market concerns of late 2008. Arguably, the scale of these developments seems to be smaller than the confluence of negative factors during 2008. Overall, I got the sense that companies are now more confident about their long-term prospects.

Despite the confidence, stronger institutional frameworks need to be further developed in some countries. For example, in Thailand, billions of dollars worth of new projects planned for an industrial zone on the Gulf of Thailand, known as Map Ta Phut (MTP), have been halted since a landmark environmental lawsuit was filed two years ago. Late last year, Thai courts blocked approvals for major investment projects in the area until environmental impact studies could be concluded. In speaking with executives at companies involved in the issue, it seemed that frustrations have stemmed not from the severity of any potential regulations, but from the lack of clarity over the remediation process for compliance. Regulations have yet to be defined and there appears to be no institutional framework. This has underscored a broader challenge with decision-making in Thailand, which has been sluggish due to political stalemates.

In Indonesia—a nation that seems to have weathered the recent global economic crisis well—I also sense that government policies can be unpredictable, labor laws arcane and institutional infrastructure lacking. Recent events surrounding the government's 2008 bailout of PT Bank Century, a small Indonesian bank that nearly collapsed at the height of the global financial crisis, points to the lack of institutional capability to monitor key parts of the Indonesian economy. By some estimates, Jakarta alone has 100 banks. The granting of banking licenses has been ad hoc in the past, and there is a possibility that operating licenses in sectors such as mining will be issued in similar fashion.

Both the MTP and PT Bank Century examples highlight the importance of having clear and well-defined institutional frameworks, a point that cannot be over-emphasized. Otherwise, there is the risk of missing out on foreign investment, which I believe is crucial to the long term-prospects of both these economies.

Sharat Shroff, CFA
Portfolio Manager
Matthews International Capital Management, LLC

As of December 31, 2009, Matthews Asia Funds held no positions in PT Bank Century.

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The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information.