8 out of 10 SEA executives are confident in their local economy

While nearly 7 out of 10 respondents perceive the global economy to be declining.

Ernst & Young’s bi-annual Southeast Asia Capital confidence barometer study reveals that corporate confidence continues to be robust in Southeast Asia. Capital conditions of SEA companies have remained healthy with expectations of steady earnings and strong cash reserves, and the availability of funding and liquidity. These factors are also influencing companies to place a stronger emphasis on growth with M&A activities continuing to be on their agenda. The Ernst & Young global survey results also saw 1,000 senior executives identifying several key SEA markets among the top target destinations for investment, competing with the BRIC (Brazil, Russia, India and China) economies.

Confidence in local markets with growing concerns over global economy
In checking the pulse of the SEA region, 81% of the SEA respondents express confidence in their local economy, and believe that their local market is stable or improving. This significantly contrasts their perspective on the global economy.

On the back of the return of volatility to the capital markets following the downgrade of the US credit rating and the deepening of the European debt crisis, 65% of the SEA respondents perceive the global economy to be declining.

Despite concerns over the global economy, 94% of the SEA respondents are confident that the corporate earnings will remain stable or will improve. However they are divided in their expectations for the stock market as they believe that the uncertainties in the global economy could potentially continue to dampen the mood of the capital markets despite strong underlying corporate performance.

Harsha Basnayake, Transaction Advisory Services Leader for Southeast Asia,Ernst & Young, comments: “We are in the interesting markets within Southeast Asia. Most of them continue to be stable, liquid and our corporates are well-positioned to ride the stability of their local and regional economies that they are exposed to. However, the consistent gloomy headlines from the rest of the world is a cause for concern, as most corporate executives know that if stability is not established in Europe, US and Japan and other developed markets, there will be a sense of pessimism that will overtake the capital agenda of Southeast Asian companies as well. This is what people are going to watch very closely.”

High confidence in capital market conditions
Ninety-one percent of the SEA respondents believe that there is sufficient availability of credit to support their growth plans, affirming the liquidity levels that they experience in many of these markets. Companies are taking advantage of the lower cost of debt and availability of credit to enable them to optimize their capital structures, extend maturity and reduce borrowing costs. Thirty percent of the SEA respondents expect to refinance within the next 12 months, compared to 19% six months ago attempting to take advantage of the current market conditions.

In addition, SEA companies have strong balance sheets and decision makers are looking to use their cash balances to invest in growth opportunities. Most (61%) SEA respondents plan to use cash or equity as their primary funding source for their growth plans, demonstrating a large number of these SEA businesses having a healthy balance sheet requiring minimal debt to support growth. For the remaining 39% of the SEA respondents, a strong balance sheet and low leverage coupled with the availability of credit means that debt continues to be a viable source of funding.

Focus on organic growth, but M&A on agenda
More than half (57%) of the SEA respondents indicate they will focus on growing their businesses, a logical choice given the market conditions that they currently enjoy. When it comes to growth, organic as well as M&A appear high on the agenda.

For the SEA respondents with excess cash, organic growth features strong on the minds as 51% of the respondents indicate their plans to do so over the next 12 months. Plans for inorganic growth through M&A, joint ventures and alliance with private equity come next at 23%.

Harsha Basnayake adds: “It is not surprising that companies are looking to grow – organically or inorganically. Their high cash reserves, healthy balance sheet and the low cost of borrowing mean that businesses in Southeast Asia are in a strong position to expand. The survey also highlights that the increased confidence also brings for a stronger appetite for M&A deals.”

When asked if they intend to pursue M&A activities in the next 12 months, 53% of the SEA respondents are keen. This is an increase from six months ago when 35% indicated it was likely that they would do deals in the next 12 months.