http://www.asiaweek.com/asiaweek/magazine/ dateline/0,8782,178032,00.html

OCTOBER 12, 2001

The Price Of Anger

The global slowdown is already hurting. Now South and Southeast Asia fear that foreign investors may equate Muslim discontent toward the U.S. with extremism - and pull out

By SANGWON SUH

These are trying times to be an Asia-based executive. First, it was the global slowdown dashing the region's business prospects. Today, it's the fear of terrorism and communal strife. "Until a few weeks ago, head office wanted to know whether it was really worth our while having a big presence in Southeast Asia in the face of China's rapid industrialization," says the head of a European bank in Singapore. "Now they want to know whether Islamic radicals are going to take over Malaysia, Indonesia, the Philippines and Thailand - and how safe is Singapore?" It is, of course, his job to dish out facts and dispel myths, but he says the task has become harder. He sighs, "You'd think we were almost like Afghanistan."

It may be tough for any businessman in Asia, but it's especially bad in South and Southeast Asia with their large Muslim communities. As America prepares to take action against Afghanistan, whose fundamentalist Taliban regime has been sheltering suspected terrorist mastermind Osama bin Laden, anti-U.S. sentiment has been bubbling up across the region, with angry protests against any retaliatory strikes by Washington. These economies are already reeling from a slowing global economy, made worse by the probability that the Sept. 11 attacks in New York and Washington will delay any recovery in the U.S. The concern is that they will go into a steeper tailspin if international investors equate anti-American sentiments with Islamic extremism - or simply view them as signs of political instability - and pull the plug on the region.

To be sure, Asia is not about to experience a massive capital flight or a sudden halt in business dealings with the West. "A few small fringe radical groups will not have a huge impact on investment or portfolio flows over the long term," says Manu Bhaskaran, chief economist for SG Securities in Singapore. It is clear, however, that foreign companies and financial institutions have grown more concerned, even paranoid, about the possible threat of religious extremism. And that could cost Asia. "Even if people understand that these are fringe groups, the fact is that they are there," says Jim Walker, chief economist at CLSA Emerging Markets. "It does scare people, and if it holds up new investments in a region that has traditionally been so dependent on foreign investment, [the region] will continue to suffer."

Pakistan is the leading candidate to take it on the chin. Afghanistan's next-door neighbor is a potential tinderbox in which a secular military government, which has pledged to help the U.S. in its war on terrorism, faces off a large section of pro-Taliban militants, who have threatened jihad against America. War clouds over Afghanistan have cast a shadow over Pakistan's key cotton industry - the world's fourth-largest - with Western buyers considering alternative sources. Foreign businessmen and multinational company managers have been advised by their embassies to leave the country while it is in a state of tension. "Over the last year or so, we were looking to an increase in foreign investment," says Sohail Sethi, president of the Rawalpindi Chamber of Commerce and Industry. "Now we are looking at a drop." As his two deputies sit idly by, Sethi mentions it is his first day on the job. "Not the best time to take up the position, I suppose," he says with a sheepish grin.

Indonesia is another economy that will keenly feel any fallout. The country has been roiled by anti-U.S. demonstrations and "sweeps" by Muslim extremists to find and expel Americans - much to the embarrassment of the Jakarta government, which has been actively trying to woo U.S. investors. "We need to do damage control," says Suryo Sulisto, vice chairman of the Indonesian Chamber of Commerce. And quickly, too. The U.S. embassy has already sent home nonessential staff, while apparel maker Nike and electronics giant Motorola have temporarily moved the families of employees out of the country.

As yet, the exodus remains a trickle, but it could have a knock-on effect on other foreign residents. "It's hard to know what to say when your daughter asks why her friends at school are leaving," says one mining company executive. At stake is Indonesia's economic recovery, which Jakarta acknowledges is dependent on foreign capital and expertise. "Foreign investment means bringing in foreign expatriates to manage, and it may become harder to bring people in," says Frank Shea, an adviser at Arthur Andersen in Jakarta.

Predominantly Christian Philippines was already hurting from the dangers posed by the extremist Abu Sayyaf, which claims to be seeking an independent Muslim state in the country's south but acts more like bandits. "There's no question that the two major kidnappings [of foreigners and Filipinos] by the Abu Sayyaf have deterred new business interests in the Philippines," says political and economic risk analyst Peter Wallace of AYC Consultants in Manila.

Even countries little affected by fundamentalist unrest or separatist activity are bracing for the worst as they fear they will be found guilty by association. "There will be some effect on foreign investors coming to Muslim countries, because of the way Islam has been portrayed - even though there have been desperate attempts to say Muslims and terrorists are separate," says Rameli Musa, executive vice chairman of Ingress Corp., a Malaysian car-parts manufacturer. "Most people still think Islam has the potential to be destructive."

The global downturn in technology had already buffeted Malaysia. Penang state, an electronics manufacturing center, has been feeling the impact of the tech wreck since early this year. Global names like Seagate and AMD have been retrenching and laying off workers, while smaller companies have been closing up shop altogether. And the events of Sept. 11 mean that the pain is likely to continue. Layoffs in the state totaled 9,300 up to August, and the authorities expect the figure to climb to 33,000 by year's end. "In the next six months or so, most Western companies will delay reinvestment because they will be inclined to give Islamic countries a skip," predicts Toh Kin Woon, a member of Penang's executive council. "We had hoped for a pickup, but recent events show that Penang has to brace itself for future problems."

Ironically, while Penang, a cosmopolitan state with a large ethnic Chinese population, is suffering in part because of overseas fears of Muslim radicalism, those parts of Malaysia ruled by an Islamic party that Prime Minister Mahathir Mohamad claims is extremist have been shielded from much of the fallout. Officials in Kelantan and Trengganu states, both controlled by the conservative Parti Islam SeMalaysia (Pas), report no major setbacks. "We are not experiencing any sort of difficulty," says Mustafa Ali, who is in charge of economic matters in Trengganu's state cabinet. "Before the incident and after - we don't find there's any difference."

One reason is that Kelantan and Trengganu are agriculture-based economies not dependent on foreign markets and investment. They also have their own lures to encourage foreign companies stationed there to stay put. "It's very safe here, there are no dangers," says Masamitsu Fujikawa, general manager of a Japanese wool-processing plant that has been in Trengganu for seven years. "We thought when the new [Pas] government came in, it might be very restrictive, but in fact it is not. We can still drink beer at home."

Still, even the Pas-controlled states are not immune to external disturbances. An executive at a large Kelantan textile plant, 85% of whose output is exported to America, reports encountering more difficulties dealing with U.S. buyers in the aftermath of Sept. 11. "The buyers in the U.S. have suddenly become more stringent," he says. "We don't know if this is because of the incident or just that they are raising standards. But they tend to reject products for small mistakes that last time were acceptable to them."

For their part, Kuala Lumpur officials are resigned to feeling the heat from any backlash in the West against dealing with Muslim states. "If an American company had to choose between Singapore, Thailand and Malaysia to site a project, from now on we would probably come third," says Raja Munir Shah, a member of Prime Minister Mahathir's United Malays National Organization. This is not to say places like Singapore will emerge unscathed. "Singapore does not have a wall around it," says Mark Mobius of Templeton Emerging Markets Fund. "Singapore depends on the health and prosperity of its neighbors and will be directly impacted by events in Malaysia, Indonesia and other countries in Southeast Asia."

If there is a winner in the current gloom, it is China which, even before the attacks, accounted for about 70% of foreign direct investments from Europe and North America to East Asia. "One unfortunate side effect of the terrorist attacks will be that China will get even more foreign direct investment flows, and much of that will be at Southeast Asia's expense," says CLSA's Walker. He also tips India as another beneficiary on the strength of its strategic position. "The U.S. needs a stronger India now more than ever. That means more U.S. companies investing in India, more U.S. cooperation with India."

Ironically, despite its precarious position, Pakistan, too, will probably reap some windfall. Islamabad's cooperation with Washington is expected to bring reward in the form of increased aid. But Sethi is not overly thrilled at the prospect. "We would be happy enough if we could get a package of trade instead of aid," he says.

How long will the pain last? For many months, given that the attacks probably put back any U.S. rebound that may have boosted the global economy. "We had expected the U.S. to recover toward the end of the year or, at worst, early next year," says AYC's Wallace. "We now think that recovery won't occur till the middle of next year." And what of Islamophobia? It will fade, simply because extremists form such a small portion of the Muslim community - as long as events in the days to come do not turn more moderates into extremists.

Reported by ASSIF SHAMEEN/Singapore, ARJUNA RANAWANA/Penang, JULIAN GEARING/Rawalpindi, ROGER MITTON/Kota Baru, SIMON MONTLAKE/Jakarta and RAISSA ESPINOSA-ROBLES/Manila