What is the expected hit on the regional economic growth prospects if the haze situation in Sumatra, Indonesia persists for a longer duration?

The haze situation which has blanketed much of the regional countries including Indonesia, Malaysia, and Singapore has resulted in quite a significant amount of disruption to the everyday lives and mobility of all the citizens living in the three countries, not to mention to various disruptions to air travel, health hazards, school closings, business losses, etc. Citizens from all three countries are also expressing their anger and frustration over the lack of concrete actions made by the Indonesian Government in tackling the decades long haze problem. This has prompted the Indonesian Government to take some initial actions such as the naming of eight palm oil plantation business entities, most of them owned by Indonesian. and Malaysian companies, along with some Singapore listed public corporations such as Golden Agri Resources, Limited (GAR) and its Indonesian subsidiary, PT Sinar Mas Group, through its pulp and paper entity known as Asia Pulp & Paper (APP). This form of naming the companies does provide some form of concrete actions undertaken by the Indonesian Government to enforce strict ‘no burn’ policies, but it also pose some questions over whether these firms will publicly admit their wrongdoings given that these fires occur in many sparsely populated regions in Sumatra, Indonesia, with many inaccessible areas, including the possibility that local farmers might have started the fires in order to prepare for the upcoming harvest season.

In a Bloomberg news report published on June 24, 2013, it was mentioned that if the haze situation were to persist in Singapore for a week or so, economists from Barclays PLC has estimated that the bill could amount to approximately USD 1.0 billion. During the height of the haze situation in 1997, the combined total cost for all three regional economies (Indonesia, Malaysia, and Singapore) amounted to approximately USD 4.5 billion. The biggest sectors that are expected to bear the brunt of the haze situation are the tourism industry, followed by shipping, aviation, etc. It is particularly felt hard in Singapore, given its popular tourism destination spot for many travellers abroad. Outbound traffic according to a research firm, Skyscanner, noted an approximately 20.0 percent increase in travel activities last week, with promotions targeting at the locals. Hotels, Food & Beverage (F&B) outlets have announced reductions in their takings, and forced reductions in hiring of part-time staff, etc. The local unit of McDonalds Inc. (MCD) has temporarily halted their local door-to-door deliveries island-wide due to the severe haze situation. Other businesses have taken measures including issuing advisories for staff members to stay indoors, or closing early in order to ease the burden of traveling outdoors to work. Work stoppages for some construction projects have been issued so as to reduce the constant exposures of the haze to workers’ health, and safety. Clinics across the island in Singapore have reported an upsurge in the number of haze-related breathing issues. The government has also been busy stocking up the so-called N95 face masks in order to lessen the exposure of many residents to the haze as the Pollutant Standards Index (PSI) rose to a record peak of 401 last week.

The haze situation is indeed proving quite catastrophic in terms of the economic costs it poses on all three countries. This issue has long been outstanding since 1997, and that period was just the beginning of the Asian Financial Crisis which brought down several firms, and caused quite a significant amount of misery for many living around the region. Indonesia, on its part, has repeatedly called upon firms that they need to adopt the strict rules of maintaining the ‘no burn’ policies, but such policies were not strictly enforced due to several cases of corruption, oversights by the officials and firms, etc. However, the year 2013 is particularly significant as many of the regions’ Pollution Standards Index (PSI) have reached to such astronomical levels, with the latest hard-hit area in the southern Malaysian city, Muar (part of the Johor State) reported on June 24 that the PSI reading rose to approximately 791. This is a relative high level, considering that the highest recording of the PSI in 1997 was approximately 262.

Such an economic toll to the three affected countries could be quite significant if Indonesia does not move ahead in tackling an already annual occurrence since 1997. The economies are affected by the actions of the eight named firms. Singapore’s Foreign Affairs Minister, K. Shamungham, have openly declared the government’s stance that it will not offer any form of shelters to the companies seeking refuge from the Indonesian authorities. The country will continue to help its Indonesian counterparts to help tackle the haze situation, and will continue to monitor the potential escalating number of health cases involving respiratory, heart and lung-related issues.

In conclusion, I do believe that there is an economic cost attached to the haze-related issues, but naming the eight firms outright without providing any substantial backing of the claims might cause some legal retaliation by the firms. That said, these eight firms being named are still being held responsible for tackling the haze problem due to their enormous stakes they’ve held throughout the forestry, and palm oil plantations in Sumatra. Unless the firms can come out to prove their cases without any doubts that their farmers are not responsible for razing the lands, there are still quite a significant amount of negative publicities on these firms ranging from the levels of transparency, potential boycotts of their products and services, and potential loss of confidence among investors due to all the negativism surrounding the firms’ actions on the environment as a result of the lack of follow through in their official ‘no-burn’ policies.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc