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Beyond Derisking: Australia’s Economic Strategy for Southeast Asia

09 Jul 2024
By Teck Chi Wong
DFAT Secretary Jan Adams at ASEAN-Australia Special Summit. Daniel Walding / Department of Foreign Affairs and Trade /

Economic engagement was a key focus at the 2024 ASEAN-Australia Special Summit, and there has been some serious money being put on the table by the Australian Government to help “derisk” private sector investment in Southeast Asia. But will this redress Australia’s underweight investment in its closest neighbours?

Invested: Australia’s Southeast Asia Economic Strategy to 2040 was launched by Prime Minister Anthony Albanese and his ministers last October in Jakarta and followed up with a package of initiatives announced at the 2024 ASEAN-Australia Special Summit in Melbourne in March. The strategy was the latest iteration of Australia’s economic diplomacy in the region. It comes at a particular historical conjuncture when both Australia and Southeast Asian countries are navigating geopolitical tensions and economic realignments amid the so-called “Second Cold War” between the United States and China, while also recovering from the pandemic disruptions and dealing with the climate emergency. It establishes a pathway to increase Australia’s two-way trade and investment with a region that is projected to be the world’s fourth largest economy by 2040.

The report, which was developed by a former investment banker who is now Australia’s Special Envoy for Southeast Asia, identifies a critical gap in Australia’s engagement with its closest neighbours in Asia. While Australia’s trade with Southeast Asia was its second largest after trade with China, Australia’s investment in Southeast Asia constituted only 3.4 percent of its total outbound investment in 2022, a shockingly small amount considering the close geographical proximity and relationship between the two. Comparatively, 29 percent of Australia’s outbound investment was routed to the United States with 23 percent to the United Kingdom. Similarly, for ASEAN, Australia stood at only 2.9 percent of its inbound investment, a drop from 6.3 percent in 2017. The report therefore argues Australian investment in Southeast Asia is “underweight.” It is nevertheless optimistic that Australia is well placed to be a substantial investor by drawing on “our well-capitalised corporate sector, our deep and sophisticated capital markets, and our substantial national savings pool,” which includes a “A$3.5 trillion and growing” superannuation industry.

To boost Australian investment, the report advances a “whole-of-nation” approach. In particular, it seeks a joint public-private effort through investment “deal teams” that identify opportunities and provide investment services. It also prescribes a “derisking” role for the Australian Government, with a recommendation for political risk insurance to be considered so that investors can “share risks” partly or fully with the government. It also recommends a strategic investment facility that would provide direct infrastructure financing for projects in the region to signal Australian government confidence and help “crowd in” private capital.

While it’s unclear whether the recommendation of political risk insurance has been adopted, in Melbourne the Australian Government announced AU$2 billion dedicated to a Southeast Asia investment financing facility, which includes a host of financial instruments including equity, guarantees, and insurance that would reduce, share, or underwrite investment risks for private sector investors. It also confirmed the creation of three investment “deal teams” in Singapore, Jakarta, and Ho Chi Minh City, which will be supported by both public and private expertise to identify “investment-ready” projects in the region and provide advice. In effect, these measures lead the Australian Government to play the role of investment banker, match-making Australian investors with opportunities, and providing derisking mechanisms. By derisking, they also seek to turn Southeast Asia into a “profitable” asset class that is attractive for private investors.

However there are critical limits with this strategy if Australia were to crowd in private sector investment. The report fails to mention that international efforts to mobilise private finance for global development via derisking have been largely unsuccessful so far. There are also deeper political and economic reasons for a lack of Australian private investment in Southeast Asia.

Australia’s low levels of outbound investment in the region reflect its changing capital formation after the end of the Cold War; shaped by globalisation, liberalisation, and financialisation. Australia’s manufacturing sector has been declining in relative terms since the 1960s and in absolute terms since 2009, which means there is less industrial capital to mobilise. Its economy is also shifting towards a consumption-led growth model, fuelled by debts and financial assets, along with the increase of raw resource extraction and export, primarily to China. Its population is also increasingly aging; and with the financialisation of Australia’s retirement system, more capital is accumulated in risk-adverse superannuation funds. Consequently, Australia’s outbound investment has been concentrated in developed economies, particularly the US, UK, and Europe, mostly in portfolio equity and debt investment rather than direct investment.

Whether Southeast Asia as an asset class would meet the profit demands of Australian superannuation funds is another question. There is only so much derisking can do: it can shift some of the risk, but not eliminate it entirely. Superannuation funds seek reliable and low risk returns for its members’ retirement savings, and as former Australian foreign minister Alexander Downer put it bluntly, “it’s easier and safer to invest in the US and the UK than ASEAN.” In other words, why invest in Southeast Asia if you can earn the same (or even higher) return with lower risk in the US and UK? This is also the same problem faced by other similar Western schemes that tried to mobilise private finance for development and infrastructure in the Global South, but failed. Even if there is any flow of superannuation funds into the region, it’s also likely to be uneven, concentrated in Southeast Asian countries with more mature financial systems such as Singapore and Malaysia, rather than those with less developed financial systems but with more capital needs.

Southeast Asian countries are more likely to be interested in getting industrial capital that can help them in economic development and energy transition, rather than financial capital. This is where Australia’s own industrial policy matters, as it seeks to remake its manufacturing and embark on energy transition.

Under the Albanese Government’s Future Made in Australia plan there has been a marked shift in Australia’s state-capital relations where the Washington Consensus, that prioritises free market competition, is being supplanted by a more hands-on approach by the state in mobilising and guiding capital into specific industries or firms such as those in critical mining and minerals processing, and clean energy manufacturing. These are areas where Australian and Southeast Asian firms can complement and invest in each other to drive economic transformation, but there are also potential tensions as a result of competition. There are some low-hanging fruits that have been picked. For example, Australia and Indonesia have already signed a Climate and Infrastructure Partnership (KINETIK), which involves the two countries working together to power Indonesia’s energy transition. But in Australia, this industrial policy shift is far from certain. Free market liberalism remains deeply rooted in its institutions, and the path of energy transition faces another emergent “climate war” in the lead-up to the next federal election due in May 2025.

In short, the Southeast Asia economy strategy marks renewed investment by the Australian Government in its closest neighbours in Asia. The future of the strategy, nevertheless, will be contested and shaped by dynamic political economy relations within and beyond Australia and Southeast Asia.

Teck Chi Wong is a PhD candidate at the School of Political Science and International Studies at the University of Queensland.

This article is published under a Creative Commons License and may be republished with attribution.