Chris Larkin, Man­ag­ing Direc­tor of con­sult­ing firm CLC Asia, was kind enough to answer a few ques­tions I had about polit­i­cal risk in the region his firm spe­cial­izes in.  His biog­ra­phy is below and from his responses you can see that he (and his firm) clearly know Thai­land, Laos, Cam­bo­dia, Viet­nam, Indone­sia, Malaysia, and the Philip­pines exceed­ingly well.  Chris can be con­tacted on Twit­ter, CLC Asia’s web­site, or at [email protected]

Enjoy, and feel free to con­tact Chris about any polit­i­cal risk needs you may have.  I found him to be incred­i­bly approach­able and engag­ing and he clearly has a strong han­dle on the region.  

Polit­i­cal Risk Explored: Cur­rently a lot of focus on polit­i­cal risk revolves around China and how it inter­acts with its neigh­bours.  What polit­i­cal risk do you think most ana­lysts are over­look­ing? 

Chris Larkin: I don’t think that peo­ple over­look things per.se, but I guess much of the analy­sis you see come out of the indus­try tends focus on macro risk of a coun­try. This makes for great read­ing, but my feel­ing is that analy­sis that might apply to a spe­cific project some­times gets over­looked. Often the coun­try wide risk analy­sis and com­ment has lit­tle or no bear­ing on the actual risk asso­ci­ated with a project.

I tend to do a lot of work – par­tic­u­larly with min­ing and nat­ural resources com­pa­nies — on look­ing at a par­tic­u­lar project and with them come to a view on the dis­count rate that might be used in a par­tic­u­lar val­u­a­tion.  It is part art, part sci­ence, and part gut-feel, but it is much more accu­rate than just grab­bing a sov­er­eign bond spread and adding that as a risk pre­mium to your dis­count rate!   

Polit­i­cal Risk Explored: How does CLC Asia view Thai­land?  Is it overblown in terms of how investors are react­ing?  Herd men­tal­ity? 

Chris Larkin: Ah, Thailand…the Italy of SE Asia. In one sense you have a semi-dysfunctional polit­i­cal class and sys­tem which in other coun­tries would scare off a lot of investors. But peo­ple who know Thai­land sim­ply shrug their shoul­ders (a bit like Italy) and look at the eco­nom­ics and the via­bil­ity of indi­vid­ual projects, and just get on with it.

The key to this is a rel­a­tively robust and well run­ning civil ser­vice to admin­is­ter the coun­try. To a large extent, this acts as a pro­tec­tive bar­rier between the day to day run­ning of the coun­try which investors care about and the polit­i­cal shenani­gans we see and are the focus of plenty of analy­sis. The pro­fes­sion­al­ism of the Thai civil ser­vice – at the top lev­els they are often west­ern edu­cated and with a keen sense of pub­lic pol­icy imper­a­tives and good admin­is­tra­tion — helps cre­ate con­fi­dence for busi­ness peo­ple I speak to. 

Ford for instance, announced a few days before the recent Thai elec­tions a half-billion dol­lar expan­sion of their pro­duc­tion facil­i­ties on the east­ern seaboard of Thai­land. It is impos­si­ble they would have done that unless they were happy with the invest­ment fun­da­men­tals and admin­is­tra­tive frame­work of the country. 

Equally, I know many smaller for­eign sup­pli­ers to the auto indus­try that have ramped up their invest­ments in Thai­land, and have been pleas­antly sur­prised that doing busi­ness there seems far removed from any polit­i­cal too-ing and fro-ing that might severely affect investor con­fi­dence in another country. 

More broadly, the Thai stock exchange was the sec­ond best per­form­ing in 2010, ris­ing some­thing like 41%, mainly due to for­eign invest­ment. This despite the riots we saw in cen­tral Bangkok last year. I think this reflects the fact that once you take a look at Thai­land, there are a range of com­pa­nies there for whom polit­i­cal risk can be man­aged, but whose under­ly­ing busi­ness model is also inher­ently sound. 

A clas­sic exam­ple of this is Banpu – a pan-Asian coal min­ing com­pany who is listed in the Thai Stock Exchange. I’ve advised them in a num­ber of capac­i­ties over many years. Until a few years ago, most peo­ple would not have heard of Banpu, but today it is a $6bn dol­lar listed com­pany and I think at last count the third largest ther­mal coal pro­ducer in Indone­sia (Indone­sia in turn is the largest ther­mal coal exporter in the region and one of the largest in the world). Senior man­age­ment is top notch, and they have bought in world class management.

Some­what under the radar when com­pared with the Chi­nese majors such as Shen­hua and Yanzhou, it has qui­etly expanded into Aus­tralia (another large coal export­ing coun­try), and is mak­ing inroads into Mon­go­lia. The com­pany is a huge ben­e­fi­ciary of the so-called ‘China and India story’. 

But if you were to take Thai polit­i­cal risk at face value, and you would basi­cally ignore the place, and would have missed out on invest­ing in a well run, pro­fes­sional com­pany which has grown its mar­ket cap from $100m in 2000 to $6bn today. There are very few com­pa­nies any­where in the world who can tell that story.

Other sec­tors I think are a lit­tle more fraught. Tele­coms con­ces­sions are con­tin­u­ally sub­ject to a high degree of polit­i­cal med­dling, and this has left Thai­land some­what lag­ging behind its neigh­bours in terms of roll­out of the lat­est mobile tech­nol­ogy. This is in part because the reg­u­la­tory inde­pen­dence of the reg­u­la­tor is hotly con­tested by incum­bent State Owned oper­a­tors dis­put­ing an out­sider hav­ing reg­u­la­tory con­trol over them. 

Nev­er­the­less, at a polit­i­cal level, I think Thai­land still has to nego­ti­ate some bumps in the road ahead, but that is part of the polit­i­cal evo­lu­tion that the coun­try needs to go through, and there is no way around that. 

Thaksin (let’s just admit that it was him peo­ple voted for, not his sis­ter) while win­ning a huge major­ity had put enough peo­ple off­side last time he was in power (espe­cially for­mer key business/political allies) so as to ensure that he’ll have a weaker team behind him this time around. I pre­dict that his gov­ern­ment will start open­ing itself up to crit­i­cism rel­a­tively quickly as a result of the lack of depth in its gov­ern­ing ranks. 

In addi­tion, legit­i­mate polit­i­cal oppo­si­tion from many fronts will start to eat away at his pop­u­lar­ity – civil soci­ety groups, are now well aware of his auto­cratic and oft-times anti-democratic ten­den­cies, and prob­a­bly will be will­ing to bring him to account more often this time around. The out­go­ing Demo­c­rat party gov­ern­ment, while under­whelm­ing in power, is gen­er­ally an effec­tive oppo­si­tion. They just need to for­mu­late a way to turn that effec­tive­ness in oppo­si­tion into votes at an election.

The mil­i­tary, I think also will be wary of inter­fer­ing again. I often think that had they not under­taken the 2006 coup, Thaksin would have been voted out at the bal­lot box not long after. Peo­ple tend to for­get that his pop­u­lar­ity was suf­fer­ing at the time of the 2006 coup.  

Instead they inter­fered, and essen­tially their last foray into pol­i­tics ulti­mately resulted in the restora­tion of the pop­u­lar­ity of the man they tried to get rid of. Now they are stuck with him for the next few years, at least.    

Polit­i­cal Risk Explored: What advice would you give to investors look­ing at the Asian mar­ket? 

Chris Larkin: There is no one size fits all answer to this ques­tion unfor­tu­nately! It really comes down to get­ting your­self as well acquainted with a mar­ket, and this can take time and good coun­sel. For many com­pa­nies I’ve come across, that often means start­ing small in a mar­ket and get­ting a feel for the poten­tial to ramp up your invest­ment. 
In terms of get­ting advice – go for some­one local – truly on the ground in Asia – and in the coun­try you are invest­ing in.

This is eas­ier said than done how­ever, so as a result, I often see clients make their deci­sions to invest based on analy­sis by peo­ple sit­ting in Lon­don, Wash­ing­ton, Paris, New York, Syd­ney etc. They may have a regional office in Sin­ga­pore for instance – staffed by expats on 3 year sec­ond­ments – but essen­tially these peo­ple have no ongo­ing links to the region, don’t speak the lan­guage etc. As a result the qual­ity of the advice that is some­times given wor­ries me…it is too broad, not enough depth, and lit­tle under­stand­ing of the intri­ca­cies of the sit­u­a­tion on the ground.

I’ve seen clients of these com­pa­nies get very, very annoyed with advice that has been given, and then turn to com­pa­nies like CLC Asia to basi­cally re-do the work for them. 

But to be hon­est, com­pa­nies like CLC Asia – who spe­cialise in a par­tic­u­lar region and who only hire staff that are com­mit­ted to the region– are few and far between. We have a good on the ground pres­ence in Thai­land, Laos, Cam­bo­dia and Viet­nam, and via asso­ciates in places like Indone­sia. But we don’t extend our­selves too thin and pre­tend we know coun­tries where we don’t have a good on the ground presence.

Polit­i­cal Risk Explored: In gen­eral, the advice sur­round­ing China has gen­er­ally been that it is a place that isn’t as promis­ing as peo­ple make it out to be.  What are your thoughts on that?

Chris Larkin: Broadly, I believe that this is the China (and Indian) cen­tury, but China’s rise to eco­nomic power still faces one or two stum­bles. But fol­low­ing on from the last ques­tion, given my focus, I don’t pre­tend to be a huge expert on China.

But I do have some views, so I’ll answer this at the risk of offend­ing the pro­fes­sional Sinol­o­gists out there! 

What I do know are from obser­va­tions made from Chi­nese due-diligence projects — on what on the out­side appear to be well run, respectable, cor­po­rate enti­ties — is the shaky debt foun­da­tions many local com­pa­nies must have. Essen­tially debt has been raised not on the core busi­ness fun­da­men­tals, but on the rela­tion­ships between the exec­u­tives of the banks and the companies.

This reminds me of the sit­u­a­tion I saw in Thai­land prior to the 1997 Asian finan­cial cri­sis. Sto­ries abounded of exec­u­tives from large Thai firms walk­ing into Thai finan­cial insti­tu­tions and walk­ing out with bun­dles of cash which they then invested in the lat­est ‘hot’ sec­tor (in Thailand’s case, it was prop­erty and con­struc­tion). We know how this turned out, and Thai­land, as well as much of SE Asia, paid for this approach for nearly a decade.

Add to this the fun­da­men­tal les­son of recent eco­nomic his­tory – that any time an econ­omy or a sec­tor opens itself up the access to easy cash is all the more tempt­ing for peo­ple happy to be free of the old restric­tions. Unfor­tu­nately, the under­stand­ing for respon­si­bly invest­ing this money has not yet devel­oped to a sig­nif­i­cant extent.  

In the decade fol­low­ing that open­ing there is inevitably some sort of over exu­ber­ance fol­lowed by a pretty severe crash. Exam­ples are numer­ous – Aus­tralia in the late 80’s fol­low­ing de-regulation of the bank­ing sec­tor, Japan in the 90’s, East Asian finan­cial cri­sis of 1997, the US tech bub­ble and more recently the GCF caused by sub-prime.

I think China has a sim­i­lar cor­rec­tion due. I don’t say this out of mal­ice, nor do I pre­tend to know when it will hap­pen. Nobody knew that a run on an obscure Asian cur­rency like the Thai baht in 1997 would cause a domino effect on the economies in SE Asia. I think it will be the same for China, a small seem­ingly incon­se­quen­tial event which sets the domino’s tum­bling, which most of us will only be able to iden­tify in hind­sight. I’m guess­ing at most, there are prob­a­bly a half dozen obscure ana­lysts out there who will gen­uinely pre­dict what this one event will be…and I’m not one of them (though I guar­an­tee there will be plenty who will claim to have picked it, after the fact!).

Over­all though, a sig­nif­i­cant eco­nomic cor­rec­tion, or re-balancing will be a valu­able les­son for Chi­nese pol­icy mak­ers and busi­ness lead­ers, and hope­fully pro­vide moti­va­tion for real eco­nomic reform and imple­men­ta­tion of good cor­po­rate gov­er­nance which will help China grow sus­tain­ably in the com­ing years. 


Chris Larkin’s Pro­file:
Chris Larkin is the founder and man­ag­ing direc­tor of bou­tique polit­i­cal and mar­ket intel­li­gence firm CLC Asia. The company’s pri­mary focus is on Thai­land and Indochina. 

Chris was born in Aus­tralia but has split his life evenly between there and Thai­land. He is a dual Aus­tralian and Thai cit­i­zen and is flu­ent in Eng­lish and Thai. He has worked in con­sult­ing and advi­sory in both coun­tries, as well as being a for­mer in-house eco­nomic advi­sor to the Thai gov­ern­ment from 2001 to 2004.  Since then he has assisted a num­ber of major West­ern and Asian com­pa­nies and invest­ment funds with their expan­sion plans into Asia, mainly in the min­ing and oil sec­tors, as well as return­ing to assist advis­ing the Thai gov­ern­ment between 2008 and 2010.

He has an Hon­ours Degree in Eco­nom­ics from Monash Uni­ver­sity Aus­tralia, as well as a Mas­ters in Pub­lic Pol­icy from the same insti­tu­tion. He has also recently com­pleted a post grad­u­ate level course in Min­eral Eco­nom­ics from the Uni­ver­sity of Mel­bourne.