How To Change Asia's Reliance On Exports

Asia's growth model relies extensively on exports. We all know that that places us at the mercy of our consumers. Is there a better way? How can we lessen the reliance on exports? Is it OK to do nothing? If we do change, are the changes for the betterment of Asian economies? Roubini's RGE has a good article weighing the matters at hand:

• Asia is dependent on the export model (using an undervalued exchange rate and sourcing inputs from other Asian countries) to drive its growth. A large share of its extensive reserves have been invested in the G-3 markets. Asia's export to GDP ratio rose from 36% in 1998 to 46.7% in 2007 with the ratio exceeding 100% for Singapore and Hong Kong, and over 60% for Malaysia, Taiwan and Thailand.
• Problems with the model: Large FX reserves and current account surpluses have contributed to the global imbalances which are unsustainable. Consumption has been subdued especially in China, Singapore and South Korea, followed by Hong Kong, Taiwan, Thailand and Malaysia. Consumption to GDP ratio for emerging Asia actually declined from above 50% in 1998 to around 47% in 2007
• Governments put off other areas of the economy, such as liberalizing domestic sectors and encouraging domestic demand and ignored social services and good governance
  
• Rising wage and other costs in Asia along with upward pressure on exchange rates, high oil and shipping prices reduced cost-savings for Western producers from importing from Asia.
• Since exports started weakening in mid-2008, many Asian countries returned to favoring an undervalued currency or at least stopped allowing appreciation
• Stimulus related investment policies to raise consumption indirectly by boosting production will temporarily boost growth, but they cannot result in a sufficiently large increase in domestic net consumption to replace American buying. Also some of these policies (es: China increasing loan growth which will only raise NPLs) will sharply constrain future domestic consumption just when it is needed most
• Benefits of continuing with the model: Trade helped several Asian economies attain higher per capita incomes, stronger economic growth while reducing poverty significantly. Letting their currencies appreciate will result in losses on their U.S. holdings
• It might be politically easier to continue with the present policies to boost manufacturing jobs and rural migration than to initiate economically/politically difficult and longer-term structural changes in the economy
• Changing the model would entail diffusing rather than concentrating wealth and political power
  
• The adjustment will largely depend on China's stance on its currency and export policies (as ASEAN takes cues from China to maintain their relative export competitiveness), and the political will of Asian leaders to re-balance their economies
• Reforms/Structural changes needed to change growth model/boost domestic demand: Increasing domestic demand will boost imports and help reduce current account surpluses and global imbalances
• Need to increase social safety net for workers (pensions, public services), reform Social Security systems, increase returns of pension schemes and improve health care access. Move from low-end to high-end and labor-intensive manufacturing and also services to increase job creation and also incomes. Need to attract private investors and banks, increase government spending on innovation, development of human capital, raise crop yields
  
• Will need to improve credit access to reduce the need to save, move away from devalued currency which will lead to cheaper imports for consumers (and lower commodity prices), government investment in infrastructure. Higher public spending on health, education and welfare support could encourage households to save less and spend more. Financial intermediation of savings to investment to reduce dependence on external capital, speeding up financial liberalization to lift the cost of capital for firms (reducing the need to borrow from abroad)
  
• It may already be too late for developing ASEAN countries to attract the kind of foreign investments that will help them benefit from technology transfer and MNCs. They have few homegrown MNCs. Private investments are constrained by capital limitations and a general lack of entrepreneurial spirit. As a percentage of GDP, domestic credit from the banking sector in ASEAN, apart from Vietnam and Cambodia, is lower than 1995 levels. Domestic capital markets, an alternative funding source, are shallow: stock and bond markets are small
  

p/s photos: Intan Ayu

Details Of Collapse In Asian Exports

Trends:

• All major economies have witnessed at least 1 month of double-digit export contraction with Japan, S.Korea, Taiwan, Singapore, Philippines, Indonesia, Vietnam witnessing contraction over 20% for at least 1 month. Asian exports have fallen more during Q4 2008 than they did during 1997-98 or 2001. 6 months after peaking in July 2008, exports contracted more than a third and 40% cumulatively.
• Export, production and consumption free-fall occurred in a synchronized manner b/w the West and Asia compared to the West 'leading' Asia in 2001. This was exacerbated by sudden crunch in trade finance in Sep/Oct 2008, high inventory build up in U.S. (which is now coming down) and large base effects.
• By Dec 2008, every country in Asia had contracting exports, a trend that was delayed by boost from commodity prices to Indonesia, Malaysia, Thailand, and Vietnam. Asia ex-Japan exports contracted by 3% y/y in Nov 2008 (first decline since March 2002). Ex-China and India, exports dropped by 3.5% y/y. Export growth slowed sharply in Q4 2008 on worsening G-7 recession, EM slowdown and global tech and semi-conductor slump.
• Asia ex-Japan's total exports grew 19.3% in 2008 led by exports to EMs. Exports to other regions which have been strong growth markets in recent years (ex-US, Europe, Asia) grew 31.2% compared with 5.6% and 16.2% to US and Europe.
• Easing commodity prices have reduced import prices sharply while export prices have been easing relatively more steadily. export and import volumes have been contracting at a similar pace since mid-2008. Improvement in terms of trade has been a plus for nominal trade balance but the sharply narrowing gap between the real export and import growth is having a negative impact on real trade balances which is contracting on y/y basis esp. if China is excluded.
  
• Baltic Dry Index shows significant slowdown in shipping b/w Asian countries and b/w Asia, G-3 and EMs like Latam, Middle-East. Much of intra-regional trade consists of parts and components for final export to the G-3. China’s imports from Asia fell by 23.8% y/y in Dec 2008, the first contraction since Nov 2001, affecting Philippines, India, Taiwan and Hong Kong. Asia's exports to China have contracted much more than exports to U.S. Also, Asia's exports to China have fallen much more than China's exports to US and EU. This is due to slowing domestic demand and in China.
• Since Asian exports have large import content, imports are also slowing. Countries with higher import content will see lesser risk to the trade balance and trade contribution to growth. Slowing domestic demand is also reducing intra-Asia exports.
  
• By reducing export prices, profit margins are shrinking. Export sector job losses and slower income growth are accelerating posing risk of social instability in some countries and creating excess capacity.
• Some govts are now extending support for export sector via fiscal stimulus packages by easing credit cost, trade finance and tax cuts to protect employment. Central banks are also favoring currency depreciation to support exports.
  
• As exposure to exports has risen from 36% of GDP in 1998 to 46.7% in 2007, so has the export contribution to growth and its spill-over effects on domestic activity. Domestic demand in Asian countries will not fully offset export slowdown since exports are significantly tied to industrial production, domestic (fixed asset) investment, consumer spending--> all of which are now slowing in most countries.

Outlook:
• As global trade contract 3% in 2009, Asian exports will continue to contract through most of 2009 and for much longer and greater extent than in 2001. Sluggish U.S. and global recovery and global business investment and manufacturing activity pose further risk.
• Net exports will remain a drag on real GDP growth and outstrip any gains in real income from easing commodity prices, whose effect will also fade ahead.
• Most key Asian countries will face 10%-20% decline in exports in 2009 or 20-40% in worst scenario.
  
• Exports to U.S. (17% of total) will turn negative ahead; exports to EU will slow further; exports to rest of the world will decline to single-digits.
• Exports might contract by 10-20% y/y/ through mid-2009.
• Commodity importers (Philippines, Singapore, Thailand) will see improvement in trade a/c and domestic demand (income effect) while commodity exporters (Indonesia, Malaysia) will witness slowdown in exports, domestic demand. EM Asia tech indicator below 2001 levels.

Overview of Individual Countries:

• China: exports contracted by 17.5% y/y in Jan, steepest in 13 years and the third month of contraction. Imports contracted even more (43.1%, worst since data begun being collected in 1995).
• Japan: Exports posted the sharpest plunge on record in Jan falling 46% yoy after 35% yoy fall in Dec-08. Imports fell 32%.
• Singapore: exports plunged -34.8% in Jan-09 after dropping -21% y/y in Dec-08 (biggest drop in at least 22 yrs) with a consecutive 9 months of decline. Electronic exports fell 38.4%, non-electronic exports also decreased -32%. Exports to US declined -50%, to China plunged -54%, to Malaysia fell 40%.
• Taiwan: exports fell 44.1% in Jan 2009 following a record drop of 41.9% in Dec 2008 as demand by China fell significantly.
  
• Malaysia: exports dropped 14.9% y/y in Dec 2008 after falling 4.9% in Nov as electronics exports fell 26% and exports to U.S. fell 30%.
  
• South Korea: Exports contracted 32.8% y/y Jan 2009.
• Thailand: exports dropped 14.55% y/y in Dec-08. Exports fell 17.7% y/y by value and 20.5% y/y by volume in Nov-08, biggest decline in 17 years.
• Philippines: Exports fell 40.4% y/y, steepest since 1987 led by a contraction in electronics shipments and weaker sales to China, Japan and the U.S.. Electronic exports declined 47.6%.
• Indonesia: Exports decreased 20.6% y/y in Dec 2008, biggest annual slide since 2001.
• Vietnam: Exports plunged 24% while imports tumbled 45%.
• India: Exports fell -1.1% y/y in Dec-08, third consecutive decline after falling 9.9% in Nov. Earnings of IT exporting companies hit as U.S. (financial) companies a/c for 60% of service exports and these firms are slowing their IT spending.

p/s photo: Tyas Mirasih

Report Card For Asia

Impact of current crisis different from Asian crisis:
• Since the 1997-98 crisis, most countries have current a/c surplus and above-adequacy level forex reserves, lower govt deficit and debt, higher savings rate; currency and maturity balance sheet mismatches among firms and banks have declined; stronger corporate balance sheets and banking system. Banking, capital market, corporate reforms have been adopted though risk management, supervision and prudential norms are still far from international standards in most countries
• In spite of moving away from fixed exchange rates exchange rates, currencies are not yet fully flexible. Capital controls might contain risks of speculative attack on central banks have enough reserves to defend exchange rate and finance capital outflows and easing external balances. Some countries an also use excess reserves to finance counter-cyclical policies. As a result, forex reserve growth has been declining/reversing
  
  But Asia is still vulnerable:
  
• Exposure to exports has risen from 36% of GDP in 1998 to 46.7% in 2007. export contribution to growth along with impact on industrial production, investment, employment and consume spending) has increased in most countries. Exports and manufacturing, investment, GDP growth will contract in 2009 in excess of contraction in 1998 or 2001 on G-7 recession, slowdown in EM, intra-Asian trade (from slowdown in domestic demand and final exports to G-7), correction in commodity prices and demand
• Domestic demand is slowing as well and will not offset slump in external demand: Low share of consumer spending in GDP and consumption has been highly linked to recent external sector boom (exports, capital inflows). consumption is slowing (on job losses, slower income growth,high inflation and interest rates in 2008). Slowing industrial production and investment (high rates in 2008, global liquidity crunch, IPO slump)
• In spite of low direct subprime exposure, contagion from global credit crisis is leading to liquidity squeeze and jump in short-term borrowing costs, bank panics and deposit withdrawals, external funding crunch and shrinking profit margins for banks and corporates, declining asset quality, high exposure to correction in domestic stock and real estate markets
• Banks in Taiwan and South Korea have high leverage, growing instances of corporate and consumer default; thin regulation has also encouraged excessive risk-taking incl. short-term, foreign currency overseas investment (though much lower than in 1997), raising risks to external debt, currency; But stock of forex reserves and hedge against currency risk (lacking in 1997) this time will finance external liabilities in most countries
• Correction in asset bubbles like real estate (Hong Kong, Singapore, India), equity markets, electronics and semi-conductor sectors. Worsening stock market slide in several countries led by foreign funds sell-off on global risk aversion, domestic macro risks; bank guarantees in developed countries and a few Asian countries might also cause outflows in those w/o guarantees
• reliance on foreign capital (esp. short-term portfolio capital as a share of investment, stock market cap) has increased since 1997-98 crisis in most countries. Apart from capital flight from equity and bond markets, declining trade and current balance is leading to currency depreciation in most countries
• Given internal and external vulnerability indicators, India and Thailand most vulnerable to external uncertainty; Vietnam and S.Korea most vulnerable to sudden stops of capital flows; Indonesia and South Korea most vulnerable to sudden reversal of capital flows
• Trade and current account deficits rising in India, Vietnam, S.Korea, Indonesia, Pakistan on high oil import bill, slowing exports. Trade and current account balances easing in Singapore, Thailand, Malaysia, China and Taiwan
• Fiscal: Worsening in India, Indonesia, Pakistan, Thailand, Philippines, Vietnam due to food and fuel subsidy bill, fiscal stimulus, pre-election spending; ADB: Crisis will raise cost and access to capital esp. to finance govt spending
  
  Recovery:
• Pro-active govt role: Fiscal stimulus for firms and households, govt spending on infrastructure; as a share of GDP stimulus has been large in China, Singapore. stock market regulation (halt on trading, ban on short-selling, stabilization fund). Central banks have been cutting interest rates, injecting liquidity, entering into swap agreements with Fed and other Asian central banks, selling forex reserves
• Will need to improve safety-net (pensions, public services). Need to boost consumption by moving to labor-intensive manufacturing, service sector development to create jobs and higher wages. Credit access will reduce the need to save. Moving away from devalued currency (and eport growth model) will lead to cheaper imports for consumers. This will be helped by govt's rate cuts, infrastructure spending via fiscal stimulus, low public and household debt in most countries
• Economist: But recovery will be faster due to room for rate cuts, fiscal stimulus in many countries, stronger fundamentals compared to 1998

p/s photos: Janine Zhang

Export Trend In Asia

The export trend in Asia:

Overview of Individual Countries


• China: Chinese exports contracted 2% y/y in November, though imports slumped more. Trade surplus $40.2b, the 4th consecutive record monthly trade surplus as commodity prices falls eroded import growth. Processing trade components have shown the sharpest slowing
• Japan: Export value was down -7.7% yoy in Oct-08 (biggest drop in 7 years), export volume was down -6.1% yoy. Exports to developed nations are expected to fall further and will likely have a negative impact on Japan's already slowing exports to Asia
• Singapore: Govt expects exports to contract by 4% in 2008; exports fell 5.7% in Sep (-13.9% in Aug) led by electronics, pharma, semiconductors. non-electronics fell -1.9%; exports to EU fell -23.6% and to U.S. fell -24.5%
• Taiwan: Exports contracted sharply in November plunging about 20% y/y, driven by a sharp drop in exports to other Asian countries since September. All tech exports declined drop in exports to China was particularly sharp (down 40% y/y)
• Malaysia: Exports fell 2.6% in Oct led by lower electronic and commodity exports after growing 15% in Sep. Export growth moderated in Q3 but stayed firm at 16.9% (Q208: 20.8%) due to high exports price and sustained demand of resource-based products; global slowdown, easing oil, commodity prices pose risk to commodity exports and current a/c surplus
• South Korea: Slowing IT, semiconductor exports; export growth led by price not volume gains; oil prices will lead to current a/c deficit this year
• Hong Kong: volume of domestic exports fell -24.1% in July, re-exports rose 8.8%, volume of total exports rose 7.3%, volume of imports rose 10.9%; exports to U.S. and Japan and also China declining.
• Thailand: Contribution of net exports to GDP might fall to 13% in 3Q08 from 16% in 2Q08. Export volume might grow 6.2% yoy Q3 from 9% yoy in 1H08
• Philippines: Jan-Jul trade deficit rose over 200% y/y on oil, rice and steel costs; resilience of non-electronic exports due to price than volume effects; commodity correction pose downside risk to non-electronics primary goods exports
• Indonesia: Exports fell 11.61% in Oct on declining oil and gas exports (-25.72%) as well as non-oil and gas exports (-8%); exports to China, India helping offset weakness in U.S. In Jan-Oct, exports increased 26.92% y/y. Exports slowed to 14.3% y/y in Q3
• Vietnam: Export turnover falling on decreasing crude, coal, and rice prices; Weak sales in apparel, coffee, seafood slowed exports to U.S. but exports as a whole increased 39% in Sep (fastest growth since 2005)
• India: Exports growth declined -12.1% y/y in Oct (first time since 2001) amid US and EU recession after growing 10.4% in Sep and 30.9% in H1-08. Earnings of IT exporting companies hit on U.S. slowdown as U.S. (financial) companies (a/c for 60% of service exports) slow their IT spending

p/s photos: Saki Fukuda