Tuesday, March 31, 2015

Russia looks beyond China to avoid a shaky Asian pivot

This eastward drive has been in the making for quite a while. In the second half of the 2000s, Moscow began taking steps to develop the long-neglected Russian Far East, expand economic cooperation with East Asia, and diversify away from economically stagnant Europe.

At the time, Moscow’s pursuit of closer ties with Asia seemed somewhat half-hearted and did not produce substantial results.

It was not until the arrival of the Ukraine crisis and subsequent Western sanctions that Russia’s relations with Asia became critical. China was the most obvious option to turn to, especially considering that Beijing remained neutral regarding Russia’s actions in Crimea and Ukraine.

Putin’s visits to China in May and November 2014, as well as multiple high-level meetings during the past year, underscore the growing closeness between the two great powers. They concluded a host of agreements in — among other fields — the energy, finance, and high-tech sectors. The strengthened ties between Moscow and Beijing were epitomised by a 30-year, US$400 billion deal to supply natural gas from eastern Russia to northeast China. At the same time, China’s imports of Russian oil skyrocketed by 36 per cent in 2014.

The central banks of the two countries signed a currency swap agreement worth RMB150 billion (US$25 billion), enabling Russia to draw on renminbi in case of need. And as leading Western agencies — such as Moody’s, Standard & Poor’s and Fitch — downgraded Russia’s credit rating to junk or near-junk level, Chinese credit rating agency Dagong Global gave Russia’s Gazprom the highest AAA rating, enabling the Russian energy giant to place shares in Hong Kong.

In October 2014, while meeting with Chinese Premier Li Keqiang, Russia’s President Vladimir Putin declared that Russia and China were ‘natural partners and natural allies’.

There are areas in Asia where Russia and China have competing interests; particularly Central Asia where China’s growing economic presence has long worried Russia. But even here, Moscow and Beijing recently agreed to coordinate their flagship economic initiatives, the Russian-led Eurasian Union and China’s Silk Road Economic Belt.

Russia has been traditionally wary of the Chinese presence in its far east. Yet Moscow has now lifted tacit restrictions on Chinese investments and begun to actively court Chinese capital. In a landmark move in 2014, the Russian government agreed to sell Chinese companies minority stakes in the country’s most lucrative oil field and the world’s third biggest copper field, both located in Eastern Siberia. Moscow is even willing to let Chinese investors into its holy of holies: a controlling ownership of Russia’s major strategic oil and gas fields.

Despite its seeming enthusiasm for intimacy with Beijing, Moscow is aware of the costs and risks of embracing China too closely. If Russia is seeking to diversify its Asian partnerships then Japan might be an ideal choice. Prime Minister Shinzo Abe appears eager to improve relations with the northern neighbour, having met with Putin seven times during 2013 and 2014.

But Tokyo’s alliance with Washington places restrictions on how far it can advance in its rapprochement with Russia. Under American pressure, Japan introduced sanctions and indefinitely postponed a visit by Putin to Tokyo. If Russia’s relations with the West remain poor, Abe will hardly risk hosting Putin in 2015.

Unlike Japan, South Korea has refused to sanction Russia over Ukraine. The dialogue between Moscow and Seoul seems to be in a pretty good shape, with Russia occupying an important place in President Park Geun-Hye’s flagship ‘Eurasian initiative’.

Yet it is the other Korean state, the DPRK, that has lately seen the most remarkable progress in its relations with Russia. A flurry of high-level exchanges between Moscow and Pyongyang will culminate with Kim Jong-un’s visit to Russia in May — his first trip abroad as head of state. After both being ostracised by the West, Russia and the DPRK now share an increased affinity. Increased support for North Korea may also serve as additional leverage for Moscow in the dealings with the West, Tokyo and Seoul.

In Southeast Asia, apart from its long-time friend Vietnam, Moscow looks to Singapore, which it sees not only as a potential investor and gateway into the Asia Pacific for Russian businesses, but also as a mentor on many modernisation issues.

In South Asia, Russia has scored a diplomatic success, securing the simultaneous admission of India and Pakistan into the Shanghai Cooperation Organization, in spite of a reluctant China. Meanwhile Moscow has managed to substantially improve its traditionally problematic relations with Islamabad, while remaining a close partner of Delhi.

Two main questions remain concerning Russia’s ongoing eastern pivot. First, will Moscow’s newfound interest in Asia prove durable when and if Russia somehow succeeds in normalising relations with the West? Second, will Russia’s Asian pivot engage not only China but with Asia more broadly? There is a mismatch between Moscow’s diplomatic activism towards other Asian countries and economic deliverables. Unless this changes, Russia faces the unenviable prospect of becoming just China’s raw material periphery.

Artyom Lukin is Associate Professor at the Far Eastern Federal University, Vladivostok.


It's artificial islands, like this one planned by China, that are causing alarm around the South China Sea

A powerful American naval officer has fired a warning at China for rapidly building "a Great Wall" of artificial islands across hotly-contested waters.

Admiral Harry Harris, soon to take charge of Pacific Command, told a dinner at the Australian War Memorial on Tuesday night that the string of new islands posed a serious threat to stability in the South China Sea.

He said the artificial expanse was "roughly the size of Canberra's Black Mountain Nature Reserve" and that they stretched across some of the world's busiest sea lanes.

Those sea lanes carry around 60 per cent of Australian trade, posing a major strategic conundrum for the Abbott government.

The comments by Admiral Harris are by far the most strident and colourful on the subject by a senior American leader.

They show the US pushing back against China's assertive president, Xi Jinping, who had been seen to be "winning" a contest for maritime dominance at the expense of its neighbours. 

His  speech also poses a major test for Australia as it endeavours to engage in good relations with its major trading partner, China, while "hedging" against security risks by drawing closer to the US and other partners in the region. 

One of the new islands in question is a runway and port-shaped structure extended more than 3km, over previously submerged coral reef, which analysts say could mark a tipping point in China's ability to project air power thousands of kilometres from its coastal waters.

"China is creating a great wall of sand with dredges and bulldozers over the course of months," said Admiral Harris, who is currently commander of the US Pacific Fleet.

"When one looks at China's pattern of provocative actions towards smaller claimant states, the lack of clarity on its sweeping nine-dash line claim that is inconsistent with international law, and the deep asymmetry between China's capabilities and those of its smaller neighbours – well, it's no surprise that the scope and pace of building man-made islands raises serious questions about Chinese intentions," he said. 

China has repeatedly rejected regional concerns, saying the constructions are "necessarily" and are taking place on Chinese territory. 

Michael Wesley, director of the Asia Pacific school at the Australian National University, said the speech shows how the US has been stung by claims that it "capitulated" to early rounds of Chinese coercion at the expense of an ally, the Philippines.

"This marks a real ramping up of US determination and resolve in the region, reflecting a realisation that China is determined to play hard ball in the South China Sea," said Professor Wesley.

He said Australia could not  avoid being affected "given that 60 per cent of its trade goes through the South China Sea". 

Professor Wesley said the strident American rhetoric marked a "dangerous escalation". 

However Prime Minister Tony Abbott, who has treated the South China Sea as a top-line strategic challenge, is likely to welcome the US intervention as a means of showing support for regional allies and partners and discouraging future Chinese misbehaviour.

Earlier this month, Mr Abbott signed a landmark security co-operation agreement with Vietnam, Australia's former wartime enemy, to "support freedom of navigation by air and by sea in the South China Sea".

"We both deplore any unilateral change to the status quo," said Mr Abbott, without mentioning China by name. 

It followed similar arrangements India and Japan and a series of lower-level co-operation moves with south-east Asian nations. 

Admiral Harris warned in his speech to the Australian Strategic Policy Institute about the increasing potential for "miscalculation" between regional players.

 He urged China and other nations to conform to a China-ASEAN code of conduct, which commits nations to exercise self-restraint.

 "How China proceeds will be a key indicator of whether the region is heading towards confrontation or co-operation," he said. Sydney Morning Herald


Flailing Malaysian Regime Doubles Down on Sedition

                                       Five independent editors the latest to be hauled in

Malaysian authorities have upped their ante on the use of sedition laws, hauling in five editors in a deepening crackdown on dissent that critics say is aimed partly at shoring up Premier Najib Tun Razak’s standing inside his own political party.

The five are from The Malaysian Insider and The Edge Media Group, which owns the independent news portal, kicking off a storm of protest from press and human rights organizations that charge the arrests were aimed at silencing voices critical of the government and particularly its fiasco over its state-backed investment fund 1Malaysia Development Bhd,

The troubled fund has fallen deep into the red, requiring the government to supply a RM950 million standby credit facility and to engineer a US$2 billion loan from an UMNO crony. Fitch, the international rating service, has stated it could possibly issue a credit downgrade for the country’s entire banking system because of the danger that the debt, estimated at RM5 billion to the country’s banks, could end in default.

More than 100 people have been arrested in the past week, prompting an opposition senator, Ariffin Omar, to tell the opposition website Malaysiakini that the country could be headed for disintegration. The government, Ariffin said, “behaves as if it is a law unto itself. It has lost its credibility, and is not even able to control the police force, which is running wild. The police come under the control of the Home Ministry. The force cannot act on its own. The police are not supposed to be like the Gestapo during Hitler’s reign, which could do as it liked.”

The Kuala Lumpur-based Center for Independent Journalism and the Southeast Asia Press Alliance, among other organizations, called for the immediate release of Jahabar Sadiq, the chief executive editor of the Malaysian Insider, Ho Kay Tat, the publisher of the parent company Edge, and three editors from Malaysian Insider. They were expected to be detained at least overnight. Anyone found guilty under the country’s sedition act faces the possibility of five years in prison and a fine of RM5,000.

“Prime Minister Najib Tun Razak’s scandal-ridden government is under fire on various fronts and is resorting to outdated laws to suppress critical media coverage of its alleged mismanagement and abuse of power,” said Shawn Crispin, the Southeast Asia representative of the Committee to Protect Journalists. “Instead of threatening media critics with an outdated sedition law, Najib should be working to scrap the legislation as he vowed to do in mid-2012 but reneged on in November 2014 supposedly to ‘protect the sanctity of Islam.’ As long as the Sedition Act is on the books, Malaysia’s journalists will always work in fear of arbitrary arrest and politically charged criminal accusations.” 

The arrests ostensibly stemmed from a March 25 report on the Insider website that the country’s nine sultans had voted to oppose the imposition of hudud, harsh Islamic law, in the eastern state of Kelantan. The Conference of Rulers denied the report, which was quoted at length in Asia Sentinel the next day. Government MPs demanded that police reports be filed against Insider.

Crispin and others charged that the government is using the seemingly incorrect report as a tool to get back at both Malaysian Insider and The Edge for critical reporting on the government. The Edge in particular has been at the lead with penetrating reports on the scandal surrounding 1MDB. The arrests of the five journalists are the latest in a deepening wave of sedition arrests that began in midyear 2014. Among those recently arrested were Rafizi Ramli, the secretary general of the opposition Parti Keadilan Rakyat, who was hauled in barefooted, handcuffed and wearing a purple jail jumpsuit, and Mohamad Sabu, the deputy president of Parti Islam se-Malaysia and the head of the party’s moderate wing, who was accosted in Penang as he got out of his car by 20 policemen wearing full uniforms and ski masks. Nurul Izzah Anwar, the daughter of the imprisoned opposition leader Anwar Ibrahim, was arrested in connection with a speech on the floor of parliament in which she criticized the arrest of her father. Eric Paulson, head of the human rights NGO Lawyers for Liberty was arrested on March 23. Asia Sentinel


The Destruction of Philippine Politics

A week ago, Janet Lim Napoles, the Filipino-Chinese businesswoman at the center of the country’s massive P10 billion Pork Barrel scandal, handed over affidavits to a Blue Ribbon Senate committee implicating an astonishing 20 members of the Senate and 100 members of the House of Representatives.

That is five sixths of the entire Senate and more than a third of the House of Representatives in an episode involving venal lawmakers who funneled government money into their own pockets that was meant to improve the lives of their constituents in a desperately poor country with a per capita gross domestic product of US$4,700 in purchasing power parity. The Philippines ranks 165th in the world out of 267 countries.

The list of lawmakers includes virtually all of the country’s top politicians, including Manny Villar, a presidential candidate in the 2010 general election; two members of the family of former President Joseph Estrada; Ferdinand “Bongbong” Marcos Jr; Loren Legarda, ranked by the US Embassy as one of the country’s five most prominent women; three members of the family of former President Gloria Macapagal Arroyo’ and many more. [The full list can be found here]

The scandal revolves around the Priority Development Assistance Fund, established under another name in 1990 during the term of President Corazon Aquino, the current president’s mother. Its ostensible purpose was to allow lawmakers to fund small-scale infrastructure or community projects outside the scope of national projects. It has since become universally known as the Pork Barrel. Each senator was to receive P200 million (US$4.47 million at current exchange rates), and each congressman P70 million annually.

Napoles allegedly established a syndicate of non-government organizations through which lawmakers could channel their pork barrel funds. The money could then find its way back into their personal accounts – with a certain amount ending up in Napoles’ own accounts, making her extremely wealthy. Napoles is said to have established as many as 20 such NGOs under her JLN Group.

“To the extent of my knowledge, the following are the Senators, Congressmen and their agents and the officials or staff of implementing agencies of government that had connections with me and received part of the pork barrel,” Napoles said in her affidavit naming them all.

But Napoles was hardly alone. Between 2010 and 2012, another estimated P500 million went to fake NGOs through the state-owned Philippine Forest Corp., the office of Agriculture Secretary Proceso Alcala and the National Agribusiness Corp, and ended up in the bank accounts of lawmakers. They have not been named yet.

The question is what happens next.  The cases are before the country’s Sandiganbayan, a special appellate court made up of 15 jurists to handle corruption cases that was put in place as a kind of head fake by the late strongman Ferdinand Marcos in 1978.  It is an extraordinarily complex case, involving 42 corruption charges and three cases of plunder against at least 30 defendants.  It is uncertain if Napoles’ affidavit will bring the total number to 120.

“According to investigators, Napoles worked with congress members and senators individually and the lawmakers did not know the specifics of the illegal activities of their colleagues,” according to an analysis of the case by Pacific Strategies & Assessments, a country risk firm headquartered in Manila. “This is more than a technicality for prosecutors trying to build a case. It means that rather than addressing pork barrel schemes as a broad conspiracy with many players, they might have to address each individual scheme separately. This is vastly more labor intensive than building a single consolidated large-scale case.”

Unfortunately the Sandiganbayan is far behind in working its way through anti-corruption cases.  As PSA pointed out, the court took from 1998 to 2014 to convict two regional government officials of funneling millions of pesos to companies of their choosing. Unfortunately, after 16 years one of the two was mentally incapacitated and other had died.

The anti-corruption court started 2015 with more than 3,000 unresolved cases before it. The Sandiganbayan resolved only 277 cases in 2014, meaning that “At their current rate, it would take more than a decade to resolve the present caseload; much less the additional cases filed each year,” PSA said.

The ineffectiveness of the government and court system at prosecuting major corruption figures, as PSA points out, “has a corrosive impact on the country’s reform efforts. Though the situation is improving, the slow pace of justice means that the seedy details of lawmakers robbing the poor to line their pockets will be the narrative in the country, rather than that of an improving investment climate.”

In addition to the tedious pace of the march to justice, the issue of impunity in the Philippines makes the situation worse.  The family of Ferdinand Marcos, the strongman deposed and driven from the country and politics in 1987, remains firmly fixed in the Congress. Joseph Estrada, driven from the presidential office in 2001 on charges of massive corruption,  served his time in comfortable house arrest at his own estate until he was pardoned by former President Gloria Macapagal Arroyo, who is now under house arrest on corruption charges while Estrada has been elected mayor of the city of Manila. Vice President Jejomar Binay has been under attack in the newspapers for months for massive corruption that made him extremely wealthy during his service as mayor of Makati City. According to the country’s polling organizations, the scandal has hardly dented his popularity. 

“One of the prominent cases for the Philippines being a banana republic [or camote (sweet potato) republic if you’re feeling cheeky] is our inability to put to rest the ghosts of our political past,” wrote a blogger who goes under the name “I write as I write.” “It speaks to the inherent weakness of our political and judicial structures – weaknesses that were caused by martial law, and exacerbated by almost every government since. Only in truly third world countries can murderers, the corrupt and the dregs of humanity rise to some of the highest offices in the land. And not only be accepted; but honored and praised as saviors and heroes. Even in the face of incontrovertible proof and evidence.”

Most of the 120 senators and congressmen now named in the Pork Barrel scandal will be up for office in 2016. It is unknown how many will go to the voters in lieu of going to jail but the prognosis is pretty clear. Asia Sentinel


Monday, March 30, 2015

Time for China to let go of the dollar


Among other things, the blueprint declared that financial markets would be freed up, continuing reforms that were already launched prior to the Third Plenum. Interest rate and capital account liberalisation would be accelerated, a system of deposit insurance would be set up, and private banks would be allowed for the first time. The changes in the financial markets were targeted at improving the ability of private firms to compete with state-owned enterprises. And importantly, China’s mechanism for setting the exchange rate was also set to be improved on the way to capital account liberalisation.

The re-appointment of Zhou Xiaochuan as governor of the People’s Bank of China (PBoC) in March 2013 was an important institutional statement of earnestness in the lead-up to the reforms, for two reasons.

It underlined policy continuity and the commitment of the new leadership to deepening market-based reforms. Zhou has been a driving force behind China’s financial liberalisation and his re-appointment signalled Beijing’s aim to put economic growth on a more sustainable footing through broad-based economic reforms. Zhou took the helm of the central bank in 2002 and led the drive to liberalise interest rates and abolish the renminbi peg to the US dollar, a step along the path to turning the renminbi into a global currency.

His re-appointment also strengthened PBoC’s institutional role in the policymaking hierarchy. To keep his post at the bank, Zhou was elevated to the Chinese People’s Political Consultative Conference (CPPCC) that carried ‘national-level leader’ rank and exempted him from compulsory retirement at 65 for officials in cabinet minister-ranked jobs. PBoC — long reliant on its policy knowledge and expertise for its clout, rather than its formal position in the system — thereby acquired new policy influence and heft.

Last week, at the China Development Forum in Beijing in the presence of IMF managing director Christine Lagarde, Zhou pledged further liberalisation of capital account controls this year in a bid to create conditions for the Fund to include the renminbi as an international reserve currency. Lagarde flagged easing the criteria for measuring capital account openness, a step that could boost the chances of the renminbi to join the IMF’s Special Drawing Right (SDR) in October at the Fund’s first review of the currency basket since 2010 — even if China has not by then fully opened up its capital account. She warned, however, that ‘a lot of work (still had) to be done’. A currency’s full convertibility is a normal criterion for its inclusion as an international reserve currency, like the US dollar, the euro, the yen and the pound sterling.

Zhou said that China would facilitate investment in domestic and international capital markets, opening its capital market to global investors, and allowing domestic investors to invest in and sell securities overseas. Currently foreigners cannot buy China-listed securities directly.

In this week’s lead essay Guonan Ma argues that: ‘It’s high time that the People’s Bank of China let the dollar peg go’. This would be an important step along the way to achieving Zhou’s ambitions for the yuan’s role as a global currency.

Ma points out that, while the 20-year old peg of the Chinese renminbi to the US dollar has served the Chinese economy well, its time is up. ‘As the biggest trading nation and second largest economy, China is too big to be anchored to any single currency, even in a loose fashion. A dollar peg has often amplified external shocks to the Chinese economy because of the dollar’s safe haven role. Although the US no longer welcomes the Chinese peg to its currency, it continues to demand nothing but “one-direction flexibility”‘. The US expectation, in other words, is that the renminbi should continue one-way appreciation against the dollar. In the long term, with China likely to gain in the productivity stakes vis-à-vis the United States and other economies, this makes good sense. But along the way there will be periods — such as the one both economies face now — when letting the renminbi slip against a strengthening ‘greenback’ (while continuing its rise against most other currencies) will make more sense in terms of sustaining Chinese demand and global growth.

Ma’s argument that the PBoC now needs to let the renminbi move more freely against the dollar while being prepared to lean against the wind by selling dollars out of its official reserves from time to time makes sense for a number of reasons.

The immediate impact would be to facilitate Chinese monetary easing and stabilise the effective exchange rate. In the longer term, it would help enhance two-way currency flexibility ahead of fuller interest rate deregulation on the way to greater capital account liberalisation.

There is no doubt that the renminbi will become a major international currency in future, as Lagarde proclaimed last week. Zhou’s declaration of an active agenda of capital account reform represents an important acceleration of momentum towards that goal. The journey could still be a long one. But China is now more clearly committed to making it.

Peter Drysdale is Editor of the East Asia Forum.



The fear of a wide-ranging war between the Sunni nations and the Shia is now realised. (Keep your eye on Indonesia!)


For many years, the world has looked at the Middle East in fear that any conflict there could spill over into a region-wide war that pits the two great sects of Islam against each other.

On the weekend the Sunni Arab states announced that they were forming a joint army, a standing force of some 40,000 elite troops.

Their most urgent target: the agents of the superpower of the Shia world, Iran.

Giving concrete force to their intention, the leading Sunni powers of Saudi Arabia and Egypt last week launched a joint assault on Iran's agents in Yemen, the Houthi fighters who've taken control of the capital, Sanaa.

Iran is rising, and the Sunni Arab states have had enough. As the Saudi Foreign Affairs Minister, Saud al-Faisal, has said: "We see Iran involved in Syria and Lebanon and Yemen and Iraq and God knows where."

While the Saudis and Egyptians are their leading powers, the wider bloc of Sunni-majority nations includes Jordan, United Arab Emirates, Qatar and Iraq.

A group of the Sunni Arab nations are taking an active part in the air war against the Houthis in Yemen.

Yemen is the world's latest failed state. But Saudi Arabia shares a 1800 kilometre border with its southern neighbour and has no intention of allowing it to become an Iranian playground.

The two sides of this sectarian divide, the Sunni and the Shia, are not attacking each other's territory directly, but they are fighting an intensifying proxy war across several fronts.

A question that springs immediately to mind for Australia as it seeks a bearing – which side is America on? The answer: both.

On one hand, the US is the chief ally and longtime protector of Saudi Arabia and its Sunni Arab allies.

On the other hand, the US is allied on the same side as Iran as they fight to regain control of Iraq from the so-called Islamic State forces.

Further, the US is leading the international negotiations with Iran seeking agreement over its nuclear program, with the deadline for a deal in the next 24 hours.

In fact, that's one of the key reasons that the Sunni Arabs have decided they need to create their joint army and act decisively against Iran.

The Saudis and other Sunni Arab states are frantic that the US is entering into a close relationship with the Ayatollahs:

"In recent weeks dozens of articles in the Arab press, and particularly in the Saudi press, have harshly criticised the Obama administration's policy in the region – especially its Iran policy, which they term 'destructive', 'idiotic', 'dangerous' and 'narrow-minded'," summarises the Middle East Media Research Institute.

Their fear? That the US will reach a nuclear deal with Iran, and this will then lead them on to reach a deal over the civil war in Syria. Iran is the chief ally of Syria's Bashar al-Assad.

In this, the Saudis and other Sunnis share the apprehension of the Israelis. As its prime minister, Benjamin Netanyahu, said to the US Congress: "In the Middle East, Iran now dominates four Arab capitals – Baghdad, Damascus, Beirut and Sanaa. And if Iran's aggression is left unchecked, more will surely follow.

"So, at a time when many hope that Iran will join the community of nations, Iran is busy gobbling up the nations."

Iran, interestingly, applauded the Israeli leader for recognising the sweep of its growing power. "Netanyahu acknowledged with certainty Iran's might and influence; he said that Iran has taken over four countries in the region," said an adviser to Iranian President Hassan Rouhani and former intelligence minister, Ali Younesi, according to the state-owned news service.

All sides agree on Iranian imperial ambition. And all US allies in the region, Arab and Jew alike, converge in deep doubt over American willpower and wisdom.

The collapse of Yemen is cited as yet more evidence of failing US policy. A year ago, Barack Obama lauded his Yemen strategy as a model for US counterterrorism. The US waged a drone war on terrorist targets with the help of a sympathetic government.

But now the US-backed government in Sanaa has fallen, the president has fled to Riyadh, the Iranian-supplied Houthis have taken over, and US special forces detonated tonnes of sensitive equipment on March 20 and fled the Houthi onrush.

The Sunni Arab states have a second reason for forming their combined army – they are threatened by so-called Islamic State.

Although IS is notionally Sunni, the governments it most hates are those of the Sunni Arab countries because they are the most guilty of betrayal of Islam, they claim.

The natural temptation faced with such an intensifying series of complex threats is withdrawal. Yet that's the last thing that the US and its allies should do, according to Martin Indyk, the Australian-born US Middle East expert:

"Not taking a stand in Syria was the original mistake that helped to open the gates of hell." Intelligent involvement, not inaction, is the right response.

Yet the acid test for Australia, as the Lowy Institute's Anthony Bubalo puts it, is this: "The whole regional order has broken down. We have very little influence. The question for us: 'How smart is the guy whose action we're joining? How good is his policy?'."

The evidence on the ground makes it increasingly difficult for US allies to put their hands on their hearts and express full confidence.

Peter Hartcher is the international editor Sydney Morning Herald


Japan denying all new flight requests from Thai airlines


TOKYO -- Japan has notified Thailand that it will not approve any new regular international or chartered flights from the country. According to government sources, Japan is concerned with the Thai aviation authority's low standards.

     The move comes after the International Civil Aviation Organization raised concerns about the Thai government's issuing of aviation licenses to airlines despite a lack of sufficient operator safety standards.

     Japan's transport ministry is saying no only to new flights by Thai airlines. Routes that Thai carriers are already flying are unaffected.

     In January, the ICAO conducted an air safety investigation into the Thai aviation authority and concluded that the country had issued licenses to airlines that did not meet ICAO-sanctioned standards.

     Due to the conclusion, Japan, the U.S., European nations and other ICAO member states are unable to accept any new routes, additional flights along existing routes or new chartered flights from Thailand. The ban will remain in place until the ICAO judges that the issue has been resolved.

     This means Japan cannot lift the ban at its own discretion.

     Thai low-cost carrier NokScoot Airlines has had to postpone the launch of a route between Narita and Bangkok. Similarly, Thai AirAsia X will likely have to put off its scheduled new service to Hokkaido.



BALI – latest updates - Om Swastiastu ...

Last week participated on a panel at 62nd Travel Agents Association of India conference at Nusa Dua, Always interesting to meet Bali Update readers from around the world who take the time to introduce themselves.

Among lead news stories in this edition: A domestic tourist fell into the sea and drowned last week at Tanah Lot. For the second time in this harvest season, a falling durian has killed a man in Bali. Admission charges to tourist attractions in South Bali to increase on January 1, 2016. And, Bali’s Tourism Minister say difficulties to hit tourism targets due, in part, to dirty public toilets.

There are a large number of articles this week on immigration-related matters. Governor Pastika voices his support for competency requirements for the Island’s tourism workers. The Tourism Minister asks permission to allow tour guides from Mainland China to work in Bali. The Manpower Ministry appears to be backtracking on plans requiring expatriate workers demonstrate fluency in the Indonesian language. Bali immigration installs electronic data management devices to keep track of foreign workers. Effective April 1st, immigration in Bali will no longer require visitors to submit disembarkation-embarkation cards. Coordination meetings are underway to facilitate new rules that give 45 nations visa-free access to Indonesia and avoid possible conflicts with existing regulations. And, the government promises to simplify and speed up the application process for working permits for foreign workers.

Trip Advisor has ranked Bali’s hillside community of Ubud among the top 25 tourism destinations in the world.

Klungkung Regency in Bali plans to develop traditional sea salt production centers as tourism attractions.

Aviation News: Indian travel agents meeting in Bali say direct flights to Bali are the key to growing tourism numbers. AirAsia Indonesia considering direct flights to China from Medan and Bali. And the Transportation Ministry is preparing to announce safety rankings for all Indonesian air carriers.

Hotel News: Uday Rao has been promoted to manage both Four Seasons Resorts in Bali. Agoda.com ranks worldwide destination in terms of their accessibility to handicapped travelers. And, Bali's homegrown Pino de Bali fortified wine is now on the wine list of one of the world’s leading restaurants in Hong Kong.

This week’s edition also an editorial examining the confusion regarding efforts to regulate the sale and use of beer in Bali.

Bali hotels, event organizers, meeting venues and wedding organizers are invited to join the next edition of the Bali MICE Guide to be published in September 2015.

Looking Ahead:



Om Çanti Çanti Çanti Om ...

J.M. Daniels,
Editor Bali Update
Bali Discovery Tours

Sunday, March 29, 2015

ASEAN’s goal of achieving economic integration by the end of 2015 has been largely written off by critics.

But despite the delay, analysts still see sizeable gains from the ASEAN Economic Community (AEC), particularly for the region’s bigger economies.

In a March 4 presentation, BMI Research’s head of Asia research, Cedric Chehab said ASEAN’s collective gross domestic product (GDP) would grow from $2.4 trillion in 2013 to more than $6.2 trillion by 2023, expanding at a compound annual growth rate of more than 10 percent. ASEAN’s share of global GDP is expected to increase from 3.2 percent to 4.7 percent by 2023, with its share of world trade rising from 5 to 6 percent.

“Asia’s GDP will double while ASEAN’s will more than double, and it’s faster growth than the Middle East and as large and larger than Africa…it’s quite difficult to find other regions with as strong growth prospects as ASEAN,” he said.

The economic growth will occur despite ASEAN’s expected failure to meet its self-imposed deadline, Chehab said.

“We don’t believe the AEC will actually meet the end-2015 deadline and in fact we see the AEC as more of an evolution rather than a revolution. The move toward the AEC will be a gradual process given the numerous trade and non-tariff barriers that currently exist,” he said.

The AEC is seen as the “realization of the end goal of regional economic integration” by ASEAN’s 10 member economies, comprising Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, encompassing more than 620 million people.

The AEC aims to transform ASEAN into a region with “free movement of goods, services, investment, skilled labor and freer flow of capital,” based on four key pillars of a single market and production base, a highly competitive economic region, equitable economic development and full integration into the global economy.

Yet after first being proposed in 2007 as part of the ASEAN Vision 2020, the deadline for the AEC was moved from January 1, 2015 to December 31, 2015, with observers now reportedly eyeing a “post-2015 agenda,” despite official reassurances.

In November 2014, ASEAN reported that “good progress” had been made across approximately 88 percent of three pillars of the AEC. However, business has shown skepticism, with respondents to a survey of U.S. businesses in the region expressing doubts whether the AEC’s goals would be achieved even by 2020.

According to the “ASEAN Business Outlook Survey 2015,” just 4 percent of respondents considered it likely that the organization would achieve the AEC goals by the end-2015 deadline, down from 23 percent in the corresponding survey the previous year.

Nevertheless, 66 percent of respondents said ASEAN markets would become more important to their companies’ global revenues over the next two years, with 89 percent forecasting increased trade and investment over the coming five years.

According to the Asian Development Bank’s Jayant Menon, ASEAN has made the greatest progress in tariff reduction, with more than 70 percent of intra-ASEAN trade now incurring zero tariffs under the ASEAN Free Trade Area. According to ASEAN, average tariff rates on intra-ASEAN imports have declined from nearly 3 percent in 2003 to 0.5 percent in 2014.

However, gaps remain between the region’s larger and smaller economies in areas such as trade facilitation and investment liberalization, while services trade has proved harder to liberalize. Menon also cited problems in protecting intellectual property rights as well as reducing development disparities between the region’s rich and poor, although progress with the fourth pillar has seen the rise of “Factory ASEAN.”

“Accommodating AEC accords will not be easy when they require changes to domestic laws or even the national constitution. The flexibility that characterizes ASEAN cooperation, the celebrated ‘ASEAN way’, may hand member states a convenient pretext for non-compliance,” he warned in East Asia Forum.

“If the AEC is to be more than a display of political solidarity, ASEAN must find a way to give the commitments more teeth. The 2015 deadline should be viewed not as the final destination but as a milestone on the slow and long journey towards the AEC.”

Highlighting the region’s economic divide, both Brunei and Singapore had GDP per capita exceeding $35,000 in 2013, while Indonesia, Malaysia, the Philippines and Thailand ranged from $2,700 to $10,400.

However, BMI’s Chehab said there were benefits to the slow implementation of the AEC, which he said could be delayed to 2018 or even 2020 due to its legal, compliance and institutional requirements.

“One positive dynamic from this slow and incremental process of integration is that it will limit the risks of larger versus strong stemming from rapid liberalization,” he said.

“Sometimes there are shocks associated with the rapid liberalization of a particular economy, including the forced restructuring of uncompetitive industries which are subject to foreign competition, but also sometimes you have uncontrolled capital inflows which can be the result of rapid economic liberalization. A piecemeal approach will help reduce the risk of such unintended consequences.”

Industry Winners And Losers

While ASEAN has nominated 11 “priority integration sectors” comprising agribusiness, air travel, automotive, e-ASEAN, electronics, fisheries, healthcare, rubber, textiles, tourism and wood, there are expected to be some winners and losers in the process.

In the auto sector, Chehab said Thailand, Indonesia and Malaysia would further strengthen their position as manufacturing hubs, resulting in other countries such as the Philippines missing out on jobs and investment. Indonesia and the Philippines are expected to drive vehicle demand growth, given their large populations and low car ownership. Already, Japan’s Toyota Motor has flagged a new $1 billion investment in Indonesia, with Indonesian President Joko Widodo seeking further Japanese investment during his recent visit to Tokyo.

However, while smaller economies such as Cambodia and Laos are also expected to attract investment due to their lower wages, Chehab said non-tariff barriers such as excise duties could weigh on further integration, preventing the predicted industry growth from being fully realized.

The pharmaceuticals and healthcare industry is seen as another winner from the AEC, with Chehab predicting that ASEAN pharmaceutical sales will more than double by 2023, rising from $21 billion in 2013 to $50 billion, despite disparities in intellectual property rights and resources preventing full integration.

Chehab said increased government investment in healthcare and aging populations would spur demand, along with rising incomes. Private healthcare providers are expected to expand their regional footprint, while medical tourism should benefit Singapore, Malaysia and Thailand.

However, he warned of a potential “brain drain” of medical professionals from the less developed economies to their richer rivals, compounding a shortfall of medical staff and infrastructure in countries such as the Philippines and Indonesia.

“This is an existing trend, as for example many Filipino healthcare workers are already moving to Japan, but the AEC may accelerate this process, putting more pressure on some of the poorer countries which are unable to retain their staff,” he said.

In agribusiness, Thailand, Malaysia and Vietnam are expected to benefit the most, although given the sector’s political sensitivities, protectionist countries such as Indonesia may see limited gains. According to Chehab, Thailand could gain market share in sugar exports from the Philippines and Vietnam, while Vietnam should emerge as a winner in rice exports at the expense of Thailand. Vietnam, Malaysia and Thailand should also benefit the most from growing demand for dairy products, he said.

Another key winner from the AEC should be the region’s consumer electronics, IT and telecommunications sector. This is despite slow progress on removing barriers to foreign investment, particularly in telecoms, where countries such as the Philippines, Vietnam and Indonesia have high levels of state involvement.

Vietnam, Cambodia and Laos should attract increased investment in consumer electronics due to their lower wages, with both Indonesia and Vietnam becoming sizeable growth markets. Meanwhile, Chebab said the e-ASEAN initiative and increased smartphone usage would boost e-commerce, with some 60 million new consumers gaining internet access over the next five years, particularly in Indonesia.

“As a whole, the ASEAN region will benefit tremendously from the growth opportunity, the increased specialization, the reduction in prices for consumer goods as well as the increased integration of these economies,” Chehab said.

However, despite the AEC’s potential, headwinds include protectionist pressures limiting reforms, along with a potential slowdown in major trading partners, given that intra-ASEAN trade accounts for only a quarter of the total. China’s position as the region’s largest trading partner has left ASEAN exposed to a slowing Chinese economy, while top foreign investor, the European Union is struggling to emerge from recession.

Concerns have also been raised about the ability of the ASEAN Secretariat to drive change given its limited resources compared to bodies such as the European Union.

Nevertheless, ASEAN’s growth potential should keep the region in the spotlight for some time to come, regardless of its expected stumbles toward full integration. The Diplomat