ASIAN INTELLIGENCE An Independent Fortnightly Report on Asian Business and Politics No. 825
Wednesday April 20, 2011
Vulnerability to Japan Disaster Intensity index 0.25
Imports from Japan/GDP
Imports from Japan/Exports
0.20 0.15 0.10 0.05 0.00
GDP and export figures are estimates for 2010, while “imports from Japan” are , in fact, exports statistics for 2010 to the individual countries published by JETRO. The bigger the number, the bigger the impact on a country’s GDP and exports.
REGIONAL OVERVIEW ..................... 2
PHILIPPINES ....................................... 8
CHINA .................................................... 4
SINGAPORE .......................................... 8
HONG KONG ........................................ 5
SOUTH KOREA .................................... 9
INDIA ..................................................... 5
TAIWAN .............................................. 10
INDONESIA .......................................... 6
THAILAND .......................................... 10
JAPAN .................................................... 7
VIETNAM ............................................ 11
MALAYSIA ............................................ 7
EXCHANGE RATES ........................... 12
POLITICAL & ECONOMIC RISK CONSULTANCY LTD.
Political & Economic Risk Consultancy, Ltd.
Issue #825
REGIONAL OVERVIEW Implications for Asia of Japan and oil price shocks This year has started off with a number of shocks that have heightened uncertainty about how well the individual countries of the region will perform economically. Oil and commodity prices are threatening to rise much higher than most analysts were factoring into their projections at the start of the year, while Japan’s natural disaster has upset supply lines in ways that no one was anticipating. In view of these developments it is worth reviewing which countries are most vulnerable and how prospects for individual countries and the region as a whole could be affected. The answer to the second question in most cases is that there is no need for panic. Japan is a special case, of course. Its economy will suffer from falling exports, infrastructure damage that hurts production for months to come, and extremely weak consumer demand. Higher oil prices will only add to the pain. The value of Japan’s exports could fall this year after having risen 32.6% in 2010, and since exports were the only thing pushing the Japanese GDP forward, the economy could contract too. Eventually the extra government spending required to rebuild damaged areas and to upgrade infrastructure and the new corporate investment that will be needed to repair damaged facilities will cause the economy to grow, but that is unlikely to happen before 2012. Japan aside, there is no obvious need yet to change relatively optimistic projections for 2011. Most countries will experience slower export and real GDP growth in 2011, but that is only to be expected. Last year’s results were inflated by the comparisons made against the depressed figures for 2009. But there will still be good growth – that will more closely match the region’s and individual countries’ medium-term potential. The biggest concern most governments will have is keeping a lid on inflation. However, unemployment levels should decline, the GDP growth for the region minus Japan will probably be between 6% and 7%, and there will be absolutely no change in the underlying trends showing intra-regional trade and investment
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growing more rapidly than trade and investment between Asia and the West. As for East-West trade and investment, the important trend shift is the increase in investment flows from Asia to the rest of the world. In addition to capital flows, this will also be the story for tourism flows and for supporting industries like transportation and communications. The economic performance of the different countries will vary, of course, depending on the specific policies of the government and the make-up of the individual economies. However, several metrics help to explain which countries are more vulnerable to a surge in oil prices and the fallout from Japan’s disaster. One is a country’s oil intensity (how much oil it takes to produce a unit of output, as well as a unit of exports). A second is a country’s “Japan intensity” (which we define as how many imports from Japan it takes to produce a unit of output and a unit of exports). The rational is that the more oil it takes to produce a unit of output or exports, the more an increase in oil prices will have a dampening impact on economic growth and exports, and the more a country depends on imports from Japan to facilitate its production, the more a disruption to imports from Japan will hurt economic growth and exports. When it comes to oil prices, Malaysia is in the best position of all the countries covered by this report to benefit from a rise in prices. It is, after all, a net exporter of petroleum and petroleum products, and an increase in oil prices adds to economic growth and exports. Vietnam is in the second best position. It is a net exporter of petroleum, but it is more dependent on imports of refined petroleum products than is Malaysia. Hence, higher oil prices will add to economic output and exports, but these gains will be partially offset by the higher cost of imported oil products. Indonesia is the third country that stands to benefit – not so much because of the direct impact of higher crude prices, since Indonesia has become a net oil importer in recent years, but because of the positive impact higher oil prices should have on LNG and coal, of which Indonesia is a major net exporter. Moreover, higher oil prices should encourage more exploration for oil, so the government has some discretion to influence the extent that higher oil prices are a net plus or minus for the country.
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Oil Intensity 1.50 1.00 0.50
0.19
0.00 (0.50) (1.00) (1.50) (2.00)
(0.76)
(0.55) (0.54) (0.71) (0.65) (0.60)
(0.29) (0.27)
(0.13)
(1.50)
Singapore’s position at the bottom of the list of countries is misleading. The reason its oil intensity is so heavy is because it has a large domestic oil refining industry, which requires oil imports. However, these imports are offset by exports of refined products, so Singapore’s economy is not nearly as vulnerable to higher oil prices as the intensity graph here implies. The actual position of Singapore is probably closer to that of Hong Kong, which lacks this domestic refining base. On the one hand, this means Hong Kong does not have an oil industry that stands to benefit from higher prices the way that Singapore does. On the other hand, the role of manufacturing in Hong Kong is much less than in Singapore, so the SAR is not as vulnerable to the impact of oil prices on production. The main negative impact of high oil prices in Hong Kong will be on services like transportation. China imports more oil than any other country covered by this report, but it still generates most of its energy from domestic sources and its oil import intensity is not particular large. This is good news for all of Asia, since in a worst case scenario that sees global oil prices move sharply higher, China’s economy is in a strong position to absorb these higher costs without suffering a serious deceleration in growth, and China’s continued rapid expansion should help to hold up most of the other economies covered by this report. In terms of oil import intensity, China’s GDP is even less vulnerable than Japan’s to changes in oil prices.
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In contrast, India’s GDP is very vulnerable to higher oil prices. As the oil intensity graph here shows, the impact of higher oil prices on India’s GDP is more than twice the level of impact of the same 0.98 dollar-value change on China’s economy. The Philippines is in a similar situation to India, but the situations for Taiwan, Thailand and South Korea are even worse. A given dollar change in global oil prices affects South Korea’s economy more than 2.8 times harder than China’s economy. In the case of Thailand, the difference is 2.4 times and in the case of Taiwan the difference with China is 2.6 times. These are the three countries, therefore, whose GDP projections for this year are vulnerable to the biggest revisions depending on what happens to the price of oil. Fortunately for India, it is one of the countries in Asia that is least dependent on imports from Japan. And whereas the threat of sharply higher oil prices so far is just a threat, it is a virtual certainty that countries’ imports from Japan will be disrupted this year. The impact of this disruption on both India’s GDP growth and its exports should be negligible. On the other hand, Thailand and Taiwan are both very vulnerable. They depend heavily on Japanese imports of machinery, spare parts and other materials to sustain key export industries, which in turn are critical to driving economic growth – as opposed to countries like Indonesia and Malaysia, where Japanese imports are more important to sustaining industries producing goods for the local market, not so much for export. The Philippines is a bit different. The disaster in Japan could interfere with imports that are critical for the country’s export industries, but since exports do not account for as big a share of the Philippine economy as they do for the other countries covered by this report, the Philippines’ overall economic growth should not be too badly affected this year. It has more to be worried about in the form of higher oil prices than it does from supplies interrupted from Japan, many of which the
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Issue #825
country’s factories will be able to find alternative sources of supply. As in the case of oil imports, as big a supplier as Japan is to China, neither the Mainland’s overall economy nor its exports are especially dependent on Japan. The Mainland should be able to digest a disruption to imports from Japan without experiencing a major slowdown in economic growth or a major bottleneck to its further growth of exports. Taiwan and Thailand are both much more dependent on Japanese imports to help sustain exports. In their cases, a given fall in imports from Japan would have double the negative impact on exports that the same fall would have on Chinese exports. Neither Singapore nor Hong Kong are especially dependent on Japanese imports to produce goods for exports. To be sure, both are major entrepots, which mean they re-export a lot of Japanese products to neighboring economies, but this trans-shipment business does not have a major
impact on the economy or domestic production that is exported. The bigger impact will be on goods consumed locally, especially consumer electronics, automobiles and other such products consumed by the local population. These types of products can be sourced from alternative locations like Korea, so Japan’s loss to the Singapore and Hong Kong markets could be the gains for producers in Korea and Europe. Therefore, the chief implications for the region of higher oil prices and serious interruptions to Japanese exports are not particularly unsettling. They do not mark an unexpected break in current trends. Rather, they imply that underlying trends will be fortified. Chief among those trends is that Mainland China will take over even faster as the economic engine driving growth in Asia, that other countries in the region will be under even more pressure to cultivate good relations with the Mainland, and that intraregional trade and travel will be further supported.
CHINA Comments The US$1.02-billion trade deficit China registered in the first quarter of this year suggests that the pace of import growth will again exceed that of export growth in 2011, only by a larger margin than last year. In 2010, total exports increased 31.3% to US$1,577.93 billion, while imports rose 38.7% to US$1,394.83 billion. This still resulted in a merchandise trade surplus for the year of US$183.1, but it was 6.4% smaller than the year before. Both exports and imports are likely to slow this year, in line with the deceleration in the economy. But since the GDP will still expand by around 9%, it will still take a hefty growth in imports of oil and other commodities to fuel this rate of expansion. We are forecasting a 25% increase in imports for all of this year to about US$1.75 trillion. This would compare with a 20% growth in exports to a little less than US$1.9 trillion, The resulting balance will still be in surplus by about US$150 billion. The biggest concern of the government this year will be inflation, and one of the approaches the government is likely to adopt to deal with this problem in the face of high global oil prices is cutting tariffs on goods and commodities. This will benefit resource-rich countries like Indonesia, Malaysia and Australia more than developed Asian countries like Korea, Japan and Taiwan. Provided exports do not slow down too sharply, the government might also permit a faster rate of currency appreciation. From the perspective of helping to restore a better balance to China’s economy, this is all good news. Foreign governments have been pressuring China for years to do more to stimulate imports and to reduce the size of its trade surplus. To some extent, they are likely to get what they asked for. However, all the implications of the currency appreciation, tariff cuts and import increases will not be positive. Other countries too are worried about higher oil prices and inflation. Since China already accounts for the biggest increase in new oil
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demand each year, the extra Mainland demand for oil and other commodities this year will be one of the key factors pushing the world market dollar prices for these commodities higher, aggravating inflationary conditions elsewhere. The US dollar price of Chinese exports will also be pushed higher by currency appreciation and increased labor costs. This might please those who would like to see a reduction in the size of the US trade deficit with China, but it will mean higher US dollar prices for Chinese products in markets like the US, which will be yet another factor contributing to higher inflation.
HONG KONG Comments Hong Kong’s export growth (including both exports and re-exports) is likely to slow to between 10% and 15% this year from 22.8% in 2010. Import growth will also slow sharply from last year’s rate of 25.0%. It will probably be one or two percentage points faster than export growth in view of the relatively strong level of domestic consumer demand. The Japanese disaster could cause local demand to shift more to products purchased from countries like Korea and Germany, but it should not have much of an impact on the overall level of imports. Compared with most other Asian countries, Hong Kong depends less on Japan for imports required for production purposes than it does for end-user consumer products. Last year Hong Kong’s domestic exports to Japan increased 23.0% but they amounted to only HK$2.03 billion, which means a slump in demand resulting from the disaster should not hurt local producers much at all. Any loss here is likely to be more than offset by an increase in domestic exports to the US, which increased 14.2% in 2010 to HK$8.36 billion. Moreover, China is still the largest market for Hong Kong by far. The SAR’s domestic exports to the Mainland increased 17.1% last year to HK$33.22 billion, where they were 16 times more than exports to Japan, which implies that even a modest slowdown in Chinese demand could have a bigger negative impact on Hong Kong than a collapse of Japanese demand. Hong Kong’s re-export trade is more vulnerable, but the main impact on the economy will be felt more by the loss in shipping and air cargo business than in merchandise re-exports, which by definition offset any decline in exports with a comparable fall in imports. Japan was Hong Kong’s third largest re-export market last year, but as in the case of domestic exports, it was a distant third. China stood out in first place, absorbing reexports from Hong Kong of HK$1,570.0 billion, 26.7% more than in 2009, while re-exports to the US increased 16.5% to HK$323.7 billion. In contrast, Hong Kong’s re-exports to Japan rose 17.2% to only HK$125.6 billion. Where Hong Kong could be hurt more is in production at its factories across the border in China. This is where most Hong Kong factory owners have relocated to, and many depend on Japanese electronic, watch and other components. Even so, the impact on Hong Kong should not be too great and most will work its way through the system before the end of the first semester.
INDIA Comments Like China, India will again be one of the drivers of economic growth in Asia in 2010. It is heavily dependent on oil imports, so higher oil prices could hurt the Indian economy and exports more than China. India will also be hurt by the disruption in the Middle East, which could dampen both its exports and service income. However, India is even less dependent than China on imports from Japan, so it is less vulnerable to a disruption in imports from that source. New Delhi and Tokyo signed a free-trade agreement one month before the
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earthquake, which will do away with tariffs on 94% of trade between the two countries over the next decade, but the disaster is likely to make it more difficult for Japanese companies to reap all the gains they had hoped from this agreement. For example, companies such as Hitachi had hoped to get up leg up in competing for civilian nuclear power projects in India. For obvious reasons, this type of business now has a dark cloud over it. Last year India’s exports rose by around 29% to US$211.95 billion, while its imports increased 19% to US$319.40 billion. The resulting deficit of US$107 billion was fractionally larger than in 2009. The government is hoping that pharmaceuticals, leather and textiles, and jewelry will spearhead export growth in the near term and that the country will also be more successful in developing exports of electronics products than it has been in the past. The latter goal is doubtful, however, in view of the relatively low level of foreign investment flowing into this type of manufacturing. The government is also hoping to re-orient it trade much more toward Southeast and East Asia, which will involve both exporting more to this region and importing more from there. In addition to the FTA with Japan, India has also signed FTAs with ASEAN and Korea. In the wake of a visit by Chinese Premier Wen Jiabao late last year, New Delhi and Beijing announced a goal to lift their annual bilateral trade to US$100 billion by 2015, more than double the total last fiscal year, but the two governments remain at odds over such issues as disputed border territory, China’s support for Pakistan, and its initiatives towards a number of other developing countries like Myanmar that India also consider to be strategically important. The trade balance is currently heavily in China favor, and political issues are likely to continue to hobble ties between the two countries for years to come. The implication is that while India’s trade and overall economy will be more oriented toward Asia in the years ahead, it is likely to be less dependent on China than most of the other countries of the region and that the relationship will be dominated more by feelings of competition than cooperation.
INDONESIA Comments Indonesia’s merchandise exports rose by over 35% in 2010 to reach the pre-crisis level of US$157.82 billion. Export growth in 2011 will moderate due to the higher base in 2010. Import growth was also much stronger in 2010. Merchandise imports of Indonesia rebounded by over 40% to US$135.66 billion. Indonesia’s import growth will continue to outperform export growth in 2011, due chiefly to the strong domestic demand, but the rate of import growth this year is still likely to be only about half the rate of last year. Higher oil prices are more a fiscal problem than a drag on the economy or a negative feature for the balance of trade. Indonesia’s oil intensity is less than most other Asian countries, but the government subsidizes domestic fuel prices, so the impact of higher costs will be felt most on the government’s budget. Any rise in the oil import bill is likely to be more than compensated by a rise in oil exports and, more importantly, in LNG, the price of which tends to move roughly in step with oil. Japan’s recent natural disaster could actually stimulate that country’s imports from Indonesia, since the resulting bottleneck on electricity production in Japan will cause the country to import more oil and natural gas, of which Indonesia is one of Japan’s bigger suppliers. Indonesian industry, particularly automobiles, does depend on Japanese spare parts, so there could be some disruption to domestic production in the near term. However, once the immediate crisis has stabilized, Japanese companies are likely to shift more of their production to Indonesia. Consequently, the impact of the disaster should not be long-lasting on Indonesia. It could even stimulate more foreign direct investment this year if the government allows it. Unfortunately, recent signs are that the government is following slightly more protectionist policies.
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JAPAN Comments The latest economic update by the IMF probably understates the negative impact of the recent disaster on the economy’s performance this year. According to the IMF, Japan’s real GDP will still increase by 1.4% this year, whereas we think it is more likely that the GDP will be closer to zero or even contract. Japanese exports increased 32.1% in US dollar terms last year to US$767.03 billion, while imports increased 25.2% to US$691.45 billion. This year these rates of increase could be two-thirds slower than last year. The big swing factor with respect to imports is the price of oil. Mineral fuels accounted for 28.6% of Japan’s total imports last year. This year they could approach 30% due to the need to switch more to oil and LNG to make up for shortages in domestic nuclear power production. On the other hand, Japan’s imports of other commodities like rubber could remain depressed for the rest of this year due to reduced needs for production, while weakness in consumer demand will slash imports of consumer luxuries. It is possible, therefore, that exports will again grow faster than imports this year, resulting in a larger trade surplus. The worst hit of all Japanese exports is likely to be foodstuffs. Radiation fears will slam foreign demand for such products, and it could take a very long time to rebuild consumer confidence that Japanese foods are safe to eat. Fortunately for Japan, foodstuffs account for only about 0.6% of the country’s total exports, so even in the worst-case scenario, the country’s overall exports will not be hurt too much by the loss of the food component. The impact on chemicals, manufactured goods, machinery, electrical machinery and transport equipment is a more serious matter. Together, they account for 84.5% of the country’s total exports. All of these industries will be disrupted to some extent by the disaster. Hopefully, most will suffer only a temporary interruption to business and will be back on stream by the start of the third quarter. But electricity constraints could hurt their ability to recover lost ground in the second half of the year. Then there is the question of how much the companies behind these industries will try to rebuild local production capacity or, instead, relocate production abroad in order to diversify their risks against future natural disasters and currency appreciation. Even before the natural disaster, the strengthening of the yen was prompting Japanese companies to move more production abroad. This shift will be further stimulated by the need to find alternative places for production while Japan rebuilds from the damage. This means that Japanese companies could increase their new investments, joint ventures and foreign acquisitions in the coming year, particularly elsewhere in the Asian region. In this sense, Japan’s disaster could have the paradoxical impact of stimulating other economies in the region this year. If this happens, Thailand and Indonesia are likely to be the main beneficiaries.
MALAYSIA Comments A look at the graphs on the cover of this newsletter and in the Regional Overview show why Malaysia should be the Asian country in the best position to benefit from high world oil prices and why its economy is not especially vulnerable to fallout from the Japan disaster. Malaysia is a net oil exporter and the country’s stateowned oil company, Petronas, is a major global investor in energy assets elsewhere in the world. Any increase in world market prices for oil should add to Malaysia’s economic and export growth. As in Indonesia, the one negative impact will be on the government’s fiscal position, since it subsidizes domestic energy prices, but this is a burden Malaysia can shoulder.
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Malaysia does depend heavily on Japan for machinery and components used by such local industries as automobile manufacturing. If supplies from Japan are disrupted by the disaster there, industries in Malaysia could be squeezed. The same goes for commodity industries like rubber. To the extent that Japan will be exporting fewer automobiles this year, it will need less rubber to produce tires, and this could affect global prices adversely for this commodity. However, rubber accounts for only about 1.4% of Malaysia’s total exports, so the negative impact from Japan will be limited. It is possible that new demand from other sources like Mainland China could more than make up for the difference. Although Malaysia’s exports and imports are likely to slow this year compared with 2010, the deceleration is likely to be more modest than in most other Asian countries. Last year, Malaysia’s exports increased 15.6% to M$639.43 billion, while imports increased 21.7% to M$529.2 billion. This year the increases are likely to be closer to 10% and 15%, respectively.
PHILIPPINES Comments Whereas export growth exceeded import growth last year, the trend is likely to be reversed this year, with imports growing faster than exports. This means the country’s trade deficit is likely to grow. In 2010, exports increased 33.71% to US$51.39 billion, while imports rose 26.94% to US$54.70 billion. This year the growth of exports could slow to only about 10%. Most of the reason for this deceleration is that it will be in line with regional trends. However, what is special about the Philippines is that it is the one country covered by this report that has Japan as its largest single market, and it has been the least successful of all countries covered here in breaking into the Mainland China market. Consequently, the Philippines will be hurt more by the fall in demand in Japan in the wake of the natural disaster than will other countries, and it is in a weaker position to offset the loss in Japan business by selling more to the Mainland. The Philippines is also more dependent on Japan for imports than are most other Asian countries. Last year Japan was the largest single source of imports, accounting for US$6.75 billion or 12.33% of the total. Many of these imports were in the form of machinery and inputs required to manufacture products for export, so the disaster in Japan could also hurt Philippine exports. However, the bigger impact on imports would result from a sharp rise in the price of oil, since the Philippines must import nearly 100% of its oil. Last year’s import bill for mineral fuels, lubricants and related materials was US$9.52 billion, or 17.4% of total imports.
SINGAPORE Comments Singapore’s oil trade is likely to grow strongly this year, as rising world market prices will inflate the value of both imports of crude and exports of refined products. The main negative impact of high oil prices will therefore not be on Singapore’s foreign trade but on inflation, which is running higher than the government would like to see, especially in an election year. As in the case of all other Asian countries, Singapore’s overall exports are headed for a sharp slowdown this year, since last year’s results were inflated by the extremely poor figures of 2009 against which they were compared. Total exports in 2010 increase 22.4% in local currency terms to S$478.8 billion (the increase was nearly 30.5% in US dollar terms due to the appreciation of the Singapore dollar during the year).
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Japan was not a particularly large market for Singapore, so the disaster there should not have much of an impact on Singapore’s exports at all. Singapore’s biggest markets were other ASEAN countries (particularly Malaysia and Indonesia), China and Hong Kong. Since demand in all these major markets is likely to stay strong, export prospects for Singapore are relatively good. Japan is an important supplier for Singapore. Total imports last year increased 18.8% to S$423.2 billion. Japan was the fourth largest supplier, accounting for 7.9% of the total import bill last year. However, Malaysia, the US and China are all more important suppliers, and any disruption of supplies from Japan can probably be sourced for elsewhere without too much trouble. The main difference between last year and 2011 is that Singapore’s imports might grow slightly faster than its exports. To the extent that imports are required to produce for exports, the trends will exactly match each other, but Singaporeans are enjoying good pay increases and there is also a strong growth in tourism, which creates a demand for imports that is not reflected in merchandise export figures. Consequently, this strong level of domestic demand will fuel the growth of retained imports so that the total import growth rate is one or two percentage points faster than the export growth rate.
SOUTH KOREA Comments Korea would be hurt by a sharp rise in world oil prices, while the Japanese disaster could actually stimulate Korean exports, particularly of products like automobiles and electronic components. Korea is the fifth largest oil importer in the world and the second largest importer of LNG. In 2010 it spent US$68 billion on crude-oil imports, US$22 billion on imported LNG, US$17 billion on refined oil products and nearly US$13 billion on imports of coal. It will not take long for higher oil prices to be reflected in import costs, but unlike most other Asian countries, domestic consumer demand in Korea is quite weak as households struggle to meet their heavy debt burdens. Consequently, most import growth will go to feed exports, which have been holding up well. Moreover, some Korean companies might benefit from the devastating earthquake in Japan, as they are in a position to supply goods and components usually shipped out of Japan. For all of 2010, exports increased 28.3% to US$466.38 billion, while imports increased 31.6% to US$425.21 billion. The resulting surplus of US$41.17 billion was slightly larger than the year before. Information technology-related products such as semiconductors and liquid crystal displays performed particularly well. Exports of autos, auto parts, and general machinery also grew rapidly. In terms of export destinations, demand from Mainland China and Southeast Asia drove growth in the first half and held up well in the second. Demand from Japan and the US also picked up last year from 2009. This year exports are likely to grow by around 15%, which would be only half last year’s rate but faster than Asia’s other industrialized economies. Imports are likely to grow around 18%, which would still leave the trade balance in surplus by around US$35 billion. Exports to Japan are likely to fall in 2011, and Korean exports to the Middle East and Northern Africa could be hurt by the turmoil there, although the bigger impact of this unrest will be on Korean construction contracts. Korean exports to China and the ASEAN region should remain strong. The Free Trade Agreement with the US will come into effect too late to have a big impact on this year’s trade results, but the impact could be more noticeable in 2012. Although US cars will gain more access to the Korean market, consumer resistance is likely to be strong. On the other hand, there is no such resistance on the part of US purchasers of Korean autos, but according to the FTA as it now stands, the US tariff on Korean autos will end only in five years rather than immediately or in three years as earlier drafts suggested.
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The US conceded that Korea can keep its 25% pork tariffs two years longer than 2014, as the initial drafts proposed. While South Korean farmers seem happy, the auto sector seems less so and the free trade agreement will face parliamentary opposition, but will likely pass. It will likely pass in the US, though the political allies of the beef farmers may be a bit disappointed that there is no fresh agreement on beef, only pork.
TAIWAN Comments For all of last year, exports rose 34.8% to US$274.60 billion, while imports increased 44.1% to US$251.24 billion, leaving the island with a surplus of US$23.36 billion, about one fifth smaller than in 2009. It is already apparent from trade figures for the first quarter of this year that rates of both export and import growth will be sharply lower this year. In January-March, Taiwan’s exports rose only 19.5% over the like span of 2010 to US$73.83 billion, while imports increased 21.8% to US$69.26 billion. Taiwan’s growing dependence on China as a market is reflected by the fact that Hong Kong and the Mainland absorbed 41.8% of Taiwan’s total exports last year, compared with only 11.5% that went directly to the US and 6.6% that went to Japan. Admittedly, many of Taiwan’s exports to the Mainland ultimately went into products that were shipped to the US and elsewhere, but the domestic market in China is still the Number One driving forced behind Taiwan’s exports, and Taiwan is much more vulnerable to weaker demand in China this year than it is to a sharp fall in its exports to Japan. Fortunately, exports to China are likely to hold up better than to most other major markets this year, since Taiwan will begin to benefit from the Economic Cooperation Framework Agreement signed last year. The first set of tariff reductions under the agreement came into effect at the start of this year and therefore should stimulate demand on both sides of the Strait in 2011. Merchandise imports last year were fueled by imported materials for manufacturing industries and capital goods required by the investment boom. Demand for these kinds of inputs will once again cause imports to grow more rapidly than exports in 2011. Taiwan’s Council for Economic Planning and Development estimates that the island could lose more than US$650 million as a result of the Japanese disaster. This would be equivalent to about 0.2 percentage point of GDP. Petroleum accounted for about 10.2% of Taiwan’s total imports last year, which implies that every 10% increase in the per barrel price for crude adds about 1% to the island’s total import bill.
THAILAND Comments Despite the many negative events, both foreign and domestic, of recent months Thai exports are continuing their strong growth. They increased by 16.3% in January and February to US$35.5 billion compared with the same months last year. Though it will slow through the year, growth of about 15% in the full year is still expected by the government and independent assessors. Their estimates are contingent upon oil prices not rising much above the current level -- about US$110 a barrel. The biggest exports continue to be autos and parts, electronic equipment and components and natural rubber. About 1 million of the 1.8 million vehicles that Thailand will produce this year will be exported.
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Issue #825
Political & Economic Risk Consultancy, Ltd.
Imports increased by 17.3% to US$34.7 billion in the first two months of 2011 compared with last year. Crude oil is still by far the biggest import item. The government is confident that the trade account will be in surplus for the full year. Some disruption of exports to Japan and Arab nations is inevitable. Auto and electronics exporters are facing shortages of components normally supplied by Japan, but they are beginning to obtain alternative supplies from North America and Europe. The leeway in export volume is likely to be made up by increased exports to China, southern Africa and the US, and into the biggest market of all -- the other ASEAN countries. Increasing economic cooperation and deepening integration of those economies are giving further impetus to Thai exports, but smaller firms are missing opportunities because they are still failing to take advantage of the zero tariffs that are available to them under ASEAN regulations. A major reason for this is the government red tape surrounding the procedures that must be negotiated in order to obtain those concessions. Thai exports to the US last year grew by 21% to more than US$20 billion, making it the 5th largest export destination after ASEAN, China, the EU and Japan. Imports from the US also increased by 27% to US$10.67 billion. Trade with the US was hard-hit by the global financial crisis but is now recovering. The US argues that bilateral trade and US investment would accelerate if Thailand agreed to take part in the proposed multilateral trade pacts known as the Trans Pacific Partnership (TPP) in which nine countries including the US are already engaged. Thailand will sell more foodstuffs to Japan this year but sales of raw rubber, the biggest Thai export item to Japan, may be cut because of floods in southern Thailand. Sales of Thai fresh fruit to Japan are expected to quadruple this year because of fears about local produce among Japanese consumers. Thai mangoes are now selling in Japanese shops for US$3 to US$6 dollars each. Floods in southern Thailand damaged thousands of SMEs, which are also suffering losses, including a drop in exports, because of a shortage of Japanese components. Because of those problems output of Thai SMEs will grow 4.2% this year compared with 6% growth forecast earlier. Japan is the biggest market for Thai SME products. If Thailand had more skilled workers, it would be gearing up now to meet the fresh opportunities opened up by the disasters in Japan. Workers with technical and managerial skills and foreign language capabilities are required in all sectors of industry and business. For several years the Japanese have urged successive Thai governments to raise education and training standards and have warned that without progress on these shortcomings Japanese industry will go elsewhere with new investments. They say that at least 700,000 skilled workers are needed now and if they were available Japanese firms in the auto, electronics and electrical appliance industries would be ready to invest. American firms are delivering a similar message. The American Chamber of Commerce has identified skilled labor development, reforms to the tax structure and customs procedures as issues that could help Thailand gain a competitive edge as an exporter.
VIETNAM Comments Vietnam posted an estimated trade deficit of US$12.38 billion last year, with exports up 25.5% to US$71.63 billion and imports up 20.1% to US$84.0 billion.. In an attempt to discourage imports and stimulate
April 20, 2011
ASIAN INTELLIGENCE
Page 11
Political & Economic Risk Consultancy, Ltd.
Issue #825
exports, the government has been gradually devaluing the dong against the US dollar. However, this has had the side-effect of adding to domestic inflation pressures. Consumer prices rose 13.89% in March-over-March, the fastest of any country covered by this report. On a more positive note, exports rose 34% in the first quarter of this year to US$19.25 billion, while imports rose only 24% to US$22.27 billion. The current trend therefore seems toward faster trade growth. The trade deficit for January-March of US$3.029 billion was smaller than the US$3.43-billion shortfall registered in the first quarter of last year. One of the government’s priorities for this year is to rebalance trade and reverse the decline in foreign exchange reserves, which fell to only about US$10 billion last year. Higher oil prices should work in Vietnam’s favor, since crude oil accounted for US$32.8 billion or 45.8% of the country’s total exports last year. Offsetting this was US$6.99 billion in imports of oil products and LNG, but the net balance was still strongly in Vietnam’s favor and means that Vietnam, as a net oil exporter, benefits from higher world market prices for crude. There is also a risk that the supply of manufactured components from Japan for Vietnam’s export industries, as well as exports to that market, could be disrupted by the impact of the 11 March earthquake. But considering that Japan accounts for only about 11% of Vietnam’s total imports and the same percentage of its exports, the downside risks here are not particularly large.
EXCHANGE RATES Currency
4/15/11
Chinese renminbi
6.5326
Hong Kong dollar
7.7744
Indian rupee
44.287
Indonesia rupiah
8,666
Japanese yen
83.084
Malaysian ringgit
3.0230
Philippine peso
43.253
Singapore dollar
1.243
South Korean won
1,088
Taiwan dollar
28.9939
Thai baht
30.139
Vietnamese dong
20,893
Commercial middle rate expressed in terms of US$1.
Published by: Political & Economic Risk Consultancy, Ltd. 20th Floor, Central Tower 28 Queen’s Road, Central, Hong Kong Mailing address: G.P.O. Box 1342, Hong Kong
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