Corporate growth expectations moderate in Southeast Asia

• Majority of businesses expect to come under earnings pressure due to continuing economic uncertainties
• Shift in focus from growth to bottom-line improvement
• Reduced appetite for M&A among corporates

A sense of pessimism dominates findings from the latest Ernst & Young’s bi-annual Southeast Asian (SEA) issue of the Global Capital Confidence Barometer released recently. The survey of more than 1,500 senior executives in 41 countries around the world, of which 118 were from Southeast Asia (Singapore, Malaysia, Indonesia, Thailand and Vietnam), was conducted in August and September 2012.

For the first time in two years, SEA respondents, who have consistently held a bullish view of both the global and local economies, expressed little confidence in the immediate prospects of global recovery. More than half (54%) of SEA respondents thought that the global economy was declining, up from 42% who held such sentiments six months ago.

The most pessimistic views about the global economy came from Singapore respondents: none saw any signs of improvement compared to 24% six months ago. Also, an overwhelming 85% of Singapore respondents thought that the global economy was going to deteriorate over the next six months. Overall, 65% of the SEA respondents expect the global economic volatility to continue for more than a year.

Views of local economies were more promising. 42% of the SEA respondents indicated that their local economies were stable, up from 24% six months ago. Still, the proportion of respondents who thought that their local economy was improving dropped from 54% as of six months ago to 36% presently. Those based out of Indonesia were most confident in their local economy, while those in Singapore were least so.

Harsha Basnayake, Transaction Advisory Services Leader for Southeast Asia and Singapore at Ernst & Young says: “The results reflect the current mood among corporate decision-makers in Southeast Asia. For the first time in two years, we are seeing the sense of bullishness that has been there making way and the dominating sentiment now is stability. Corporates in our markets continue to see Southeast Asia as a stable geography to do business, but there is a lot more concern about revenue and margin pressures and the importance of smart capital allocation given the uncertainties.”

48% and 61% of SEA and Singapore respondents respectively felt that revenue and margin pressure is the most significant business challenge facing their companies.

There is a strong focus on margin and productivity improvements, cost controls, and risk management. In the midst of uncertainties, a sense of cautiousness prevails and boardrooms and senior management teams are more focused on improving profitability. Emphasis on growth has therefore moderated among SEA respondents; the focus has significantly shifted to ensure that the business basics to protect profitability stay top on the agenda.

According to the survey, about half (48%) of SEA respondents have placed greater emphasis on capital optimisation activities while reducing interest in investing capital. This is not surprising considering 48% of the SEA respondents expect the continuing Eurozone crisis to exacerbate revenue and margin pressures.

Basnayake explains: “We are going through a period where there is a sense of cautiousness, it is important that corporates focus on smart capital allocations. With most corporates having very low gearing ratios and strong balance sheets, there has been little emphasis in this part of the world to focus on capital optimisation activities. However, when you are experiencing cost pressures, constant regulatory change and moderate economic growth, there is then a need to refocus and ensure that your competitiveness remain strong. Optimisation activities, be it unlocking balance sheet inefficiencies or focusing on strong cash flows, have now become top-of- mind issues. This is a good thing for stakeholders.”

With moderated growth expectations, appetite for M&A has dipped even as companies report cashed-up balance sheets. A majority 63% of SEA respondents said they will not pursue M&A activities in the next 12 months, up 11% from six months ago, despite stability in the number and quality of opportunities, and likelihood of closing deals.

Basnayake comments: “What the SEA respondents are saying is ‘let’s wait and see, maybe this is not the right time to undertake acquisitions’. While there is merit to such thinking, it is times like this that also present the best expansion opportunities, and smart companies will continue to capitalise on that. In growth markets such as Indonesia, Malaysia, Thailand, Vietnam and even Singapore, consolidation opportunities can never take a backseat. While the appetite for M&A may have declined due to preoccupations with overall economic conditions, it is important for corporates to remain vigilant for opportunities. Smart acquisitions can also be a good way to optimise capital.”