Bain warns of heightened ASEAN exposure to global economic slump

Southeast Asia would be harder hit by a global economic downturn than it was during the last financial crisis according to management consultancy Bain & Company, with many local firms acting as if in denial.  

Only weeks after McKinsey sounded the alarm on a brewing Asian debt crisis, fellow MBB strategy and management consultancy Bain & Company has delivered its own warning over ASEAN’s growing vulnerability to a global economic downturn – contending that the bloc is more exposed now than it was during the global financial crisis of 2007 to 2009, when regional GDP growth plummeted from almost 7 percent down to just 2 percent.

This drop, the firm is quick to note, didn’t technically constitute a recession, and the ASEAN region was quicker to bounce back than most other parts of the globe. However, that was more than a decade ago, and the firm points to the several factors which have evolved since then, not the least of which is the current slowdown in China, the country’s former powerhouse growth one of the primary factors in helping to cushion the blow for the Southeast Asian economy at the time.

“With many business leaders across Southeast Asia watching for indicators of a downturn, should the region be considered special?’ the report asks, responding; “Yes, but not in the way that many believe. The region’s strong economic growth does not, in fact, shelter it from harm should other parts of the world sink into a downturn or even a recession. To the contrary, several factors ensure that it will feel the effect of the next global downturn.”

In addition to the slower growth in China, other factors putting ASEAN economies at risk include the significant fall in commodity sales, the region’s substantial reliance on exports – in particular to the US, Europe and China – and the capital flows from outside the region financing Southeast Asia’s contemporary growth, which for most of the region bar the Philippines and Vietnam already sits at a lower rate than in the years prior to the global financial crisis.

Where and how a global downturn would hit the economies of Southeast Asia would depend on its severity and causes, with Bain’s Singapore-based Asia Pacific strategy and corporate finance practice head Thomas Olsen (a co-author of the report) telling The Business Times that the next economic downturn would likely be broad-based and not just limited to an acute financial crash, playing out as a “more typical economic correction at the end of a cycle.”

Singapore, as an example forwarded by Bain, has a potentially greater level of exposure compared to some of its lower-income, more domestic-market-focused neighbours due to the city-state’s heavy reliance on exports, while markets in the region are susceptible according to the level of impact of a global downturn in foreign countries that buy large amounts of the region’s commodities such as palm oil, coal, and computers.

“Individual companies and even entire industries could feel deeper pain based on their exposure to other regions, sectors or commodity prices,” state the authors. Nevertheless, just like in the aftermath of 2007, any impending financial crisis will no doubt create some very handsome winners among the swag of (sometimes willfully) unprepared losers. Here, Bain ran the numbers on the fate of 200 public Southeast Asian companies before and after the last global storm.

According to the firm’s analysis, this cohort of local companies recorded double-digit growth on average prior to the financial crisis before diverging markedly between 2007 to 2009 and beyond; the ‘winners’ on average achieving compound annual growth rates of 20 percent from 2007 through to 2009 and then 26 percent from 2009 to 2012. The ‘losers’ meanwhile dropped to average CAGRs of 2 percent and 12 percent in the corresponding periods, with this trend also extending into the future.

“There is every reason to expect a similar divergence between winners and losers in Southeast Asia come the next downturn,” states the firm. Despite this, Bain believes many senior executives in the region are sticking their heads in the sand, citing its own recent survey with local CEOs and CFOs which found that over 60 percent believe a downturn wouldn’t have a severe or medium effect on their company.

Meanwhile, 70 percent are indeed expecting at least a medium downturn in the region within the next two years, yet barely one fifth have a serious action plan in place, with many having no plan at all. “Our conversations with them suggest that some are loath to even think about cost programmes while they are growing, or they have never weathered a downturn as senior executives," the firm says on a final note. "Others are overly optimistic or believe they have time to wait.”