East Asia and the Pacific
Top ten risks in East Asia and the Pacific
- Natural catastrophes
- Interstate conflict
- Fiscal crises
- Extreme weather events
- Asset bubble
- Data fraud or theft
- Energy price shock
- Unemployment or underemployment
- Failure of national governance
Marked by recent events, businesses in East Asia and the Pacific face risks on four different fronts: environmental, technological, geopolitical and economic.
Environmental risks are the leading concerns for doing business across East Asia and the Pacific, with “natural catastrophes” ranking first and “extreme weather events” ranking fifth. The concerns about “natural catastrophes” were heavily driven by responses from Japan and New Zealand, where they ranked first, while in Indonesia and the Philippines they ranked third. The devastating earthquake and tsunami that struck Indonesia in September 2018, and the flash floods that hit Japan earlier that year, are just two cases of increasingly frequent natural disasters in Asia and the Pacific that stress the need for strengthening resilience against future catastrophes.8 According to the Centre for Research on Epidemiology of Disasters, the broader Asia Pacific Region witnessed 50% of all the natural disasters in the world during 2018. The disasters in the region claimed over 80% of the total deaths, affected over 50 million people, and totalled $56.8 billion in costs. Asia Pacific not only suffers the most from natural disasters and extreme weather events in terms of loss of life, but its large and highly vulnerable population make the region especially susceptible to economic losses. Industrialization and unplanned urbanization have also led to environmental degradation, which weakens the region’s natural defences against disasters. If unchecked, natural catastrophes run the risk of further eroding East Asia and the Pacific’s economic competitiveness.
Chief executive officers in the region identified “cyberattacks” as the second most pressing risk for business. All of the countries in the region, except for Cambodia, Laos and Viet Nam, rated “cyberattacks” as one of their top risks. In Singapore, this was the top threat to business, with nearly 80% of the respondents ranking it first. The effect of the 2018 cyberattack on its largest health group, which leaked the personal data of nearly 1.5 million people, including the prime minister, is still influencing the way Singaporean businesspeople assess risk. Beyond Singapore, as highlighted by Cisco in its 2018 Asia Pacific Security Capabilities Benchmark Study, companies in the rest of the region are not immune to cyberattacks.9 Asia Pacific companies are the target of at least 10,000 cyberthreats every day.10 Australia is the most attacked nation in the region, with 7% of its companies facing more than 500,000 attacks every day.11 In Australia, because of the high investment costs for developing cyber-resilient infrastructure, the financial impact on business of responding to such threats is also the most expensive in the region.
Nearly 30% of the respondents chose “interstate conflict” and “fiscal crises” as the next two biggest risks to doing business in East Asia and the Pacific. The risk of “interstate conflict” could refer to a number of potential issues, such as the tensions in the South China Sea, the situation in Hong Kong or the evolving relationship between the US and China. However, in our survey, the result is mostly driven by responses from Japan and the Republic of Korea, which suffer from the constant tensions surrounding North Korea. Japan recently upgraded its estimate of North Korea’s nuclear capability and the country’s defence minister also highlighted that North Korea’s nuclear and ballistic missile programmes pose a “serious and imminent threat” to its security, a sentiment that is echoed by the Japanese business community. On top of this enduring conflict, the recent escalation in the trade dispute between Japan and the Republic of Korea is not only raising economic worries in these countries, it is also affecting their ability to respond cooperatively to threats from North Korea, particularly in areas such as information sharing.
In addition to geopolitical concerns, Japan is also driving the high ranking of “fiscal crises” in the region, which is not surprising given the long-lasting indebtedness accrued by the country. As highlighted by the World Bank in its East Asia and Pacific Development Update, economic growth in the region is expected to decelerate to 6.0% in 2020 from 6.3% in 2018.12 Furthermore, as a region heavily reliant on exports, it is highly exposed to an escalation of the trade war between China and the US, and in the broader economic risk context, to a resulting currency war between the two superpowers. As noted by the World Bank, throughout 2018, the region drew on its international reserves to manage exchange-rate volatility. Furthermore, several of the region’s currencies are highly sensitive to US monetary policy and thus vulnerable to any further appreciation of the US dollar. Considering the region’s historical vulnerability to large capital outflows, businesses in East Asia and the Pacific are wary of any prolonged market pessimism. This perceived bearish behaviour in the region’s markets could also explain why businesspeople in the region ranked “asset bubbles” as the sixth most troublesome risk this year.
The highest-ranked risk in Australia was “energy price shock”, compared to a region-wide ranking that placed it eighth. Australia is the only net energy exporter in the region. However, energy prices in Australia have remained volatile as a result of the country opening its domestic natural gas markets to international trade, network distribution issues and the closure of coal-based energy sources. Indeed, energy policy was at the forefront of the national debate during the recently concluded national election (which coincided with the timing of this survey), slowing down progress in this regard. Following 2017’s Independent Review into the Future Security of the National Electricity Market, the government has embarked on a set of energy reforms to help lower domestic energy prices, but Australian businesses remain sensitive to the possibility of further price shocks.