Asian firms’ confidence falls on geopolitical tensions

MUMBAI: Business confidence among Asian companies fell for the first time in three quarters in July-September as escalating geopolitical tensions outweighed an improved performance by most economies in the region, a Thomson Reuters/INSEAD survey showed.

The Thomson Reuters/INSEAD Asian Business Sentiment Index, representing the six-month outlook of 86 firms, slipped to 69 for the September quarter from 74 three months before. A reading above 50 indicates a positive outlook.

While China, India and South Korea led the fall in sentiment in the third quarter, reflecting regional tensions and sluggish growth, most Southeast Asian economies and Australia put in a stable performance, limiting the downside in the overall index.

“Companies expressed concerns this quarter about trade and diplomatic tensions not only in the region but also in the world,” said Antonio Fatas, a Singaporebased economics professor at global business school INSEAD.

“This brought the index down, in a reflection of cautiousness because of the potential risks that could derail the current state of the economy,” he said.

South Korea’s sub-index fell the steepest among its peers in the survey, dropping to 50 from 75 in the previous quarter. The country has been rattled by North Korea’s series of nuclear tests and missile launches, although a war on the Korean peninsula is seen as unlikely.

Trade friction with China has also risen over Seoul’s deployment of a US anti-missile system to counter the North Korean threat, as Beijing fears the system’s radar can penetrate its territory.

China, upon which much of Asia depends for trade, saw its sub-index fall to 63, its lowest since the last quarter of 2015. India’s fell to 63 from 82 in April-June, a level last seen in the second quarter of 2013.

Australia’s sub-index inched up to 69 from 67 in the June quarter, and Singapore’s rose to 64 from 62.

Sentiment climbed the most in Indonesia in the September quarter, with a 17 point jump in its sub-index to 100, its highest since the second quarter of 2013.

The sub-index for three other economies — Malaysia, Philippines and Taiwan — remained unchanged over the previous quarter.

The pace at which global central banks tighten their accommodative monetary policies is set to be one of the biggest factors for Asia business sentiment in the quarters ahead.

“More than geopolitical tensions, policy normalisation by global central banks and firming up of oil prices are a bigger issue for Asian economies,” said Radhika Rao, chief economist at DBS Bank in Singapore.

The survey showed that while the proportion of respondents with a positive bias fell to 47, the lowest level since the December quarter of 2016, companies which were neutral rose to 45, the highest level since the March quarter of 2016.

Sectors including retail, metals, real estate and technology showed bullish trends while others like autos, construction, health care and transport were more subdued.

Corporates such as survey respondent Kossan Rubber Industries of Malaysia cited exchange rates and interest rates as the key risks going ahead.

While maintaining that it was cautiously positive, given increasing global demand for gloves, Kossan was worried about “escalating production cost due to higher raw material cost, energy, labour and volatile exchange rate”.