Weakening Currencies and Lukewarm Exports Trouble Asia Pacific
Asia’s emerging nations, the darling of the world economy since the 2000s, uncharacteristically slowed in the first quarter of 2013. After a decade of robust growth, many of Asia’s fast-growing economies are coming to terms with structural changes. Asian currencies, which had appreciated quite a bit over the past few years thanks to ultra-loose monetary policy in the developed world, came tumbling down at the first talk of a slowdown in the supply of cheap money. India and China, two Asian giants, continued to slow during the quarter. While China’s expansion was impacted by an aftereffect of ballooning credit creation over the past five years, India’s depreciating currency exposed the country’s current account deficit and the yawning fiscal deficit.
Even Southeast Asian economies such as Indonesia, Malaysia and Thailand lost steam. Export engines in these countries sputtered as China slowed down and the developed world refused to increase the purchases of commodities and finished goods. While weakening currencies did nothing to help exports, they aggravated inflation by making the import of energy commodities such as crude oil expensive in Southeast Asia.
Amidst all the lackluster growth, one Asian economy stood out: the Philippines. The country is witnessing an investment cycle that has helped it erect ports, airports and other big-ticket infrastructure investments. Accompanied by low levels of inflation, the Philippines was in a sweet spot posting the fastest pace of growth in three years.
China: A Brief Credit Crunch Teaches a Lasting Lesson to Banks
China’s banking system witnessed some nerve-wracking moments in late June. The normally placid money market of China was a scene of tempest in June: the overnight interbank lending rate, normally ranging in the mid-single digits, briefly hit 30 percent in a sign of a severe credit crunch. A crisis of confidence gripped the financial system in the wake of doubts over the strength of some of China’s big banks. What caused the uproar has been a question of intense debate in China.
Many analysts opined that the brief crisis itself was a making of the country’s central bank in its attempt to rein in unproductive lending from the country’s banks. Over the past couple of years, China’s economy had experienced a rapid ascent in credit creation thanks to overzealous commercial banks. Despite efforts from the Chinese central bank to curb profligate lending, China’s banks found ways to loan money to favored borrowers. When in June, after a round of strong lending, China’s commercial banks approached the central bank for an injection of fresh funds, the central bank refused to acquiesce. Interbank lending rates spiked and confusion and mayhem promptly followed. In short, it became a question of survival for some Chinese banks.
As fears of a credit crunch deepened, the central bank eventually stepped in to provide liquidity and thawed the credit freeze. Nonetheless, the swift fallout of events laid bare many of China’s structural imbalances. China’s rapid growth in credit has not been accompanied by strong economic growth. Economists worry that most of China’s credit is increasingly holed up in empty apartment complexes and unproductive infrastructure projects, which the central bank fears could plant the seeds for a future property bubble.
But the Chinese central bank’s bitter medicine in June is said to have sent a stern message to the country’s commercial banks about their lending practices. For its part, China’s government announced that it would not provide a stimulus to boost investment-led growth despite a slowing economy. Even as the Asian giant’s second quarter growth for 2013 touched 7.5 percent, a far cry from the double-digit GDP figures of early 2000s, Chinese Premier Li Keqiang announced that the country will tolerate slower growth in favor of rebalancing.
China’s expansion over the past decades has largely been fuelled by exports and investments. With both these engines showing signs of strain, the country is working overtime to build a more durable economy based on internal consumption. Still, experts say that it will take much longer for China to achieve a meaningful consumer-based economy. Some factors are helping China in its quest towards a more consumerist economy: despite slowing GDP, Chinese manufacturing wages haves jumped nearly 70 percent since 2008 along with a strengthening Yuan. While these factors can help, the Asian giant is working on providing a strong social safety network like healthcare and pensions to fuel consumption.
India: Weak Currency and Current Account Deficit are Cooking up Trouble
India’s economic problems in some ways are the opposite of China. While China has too much investment and inadequate consumption, India’s economy is high on consumption and low on investment and manufacturing, creating high inflation. Despite ample interest rate hikes over the past two years, which was interrupted by small interest rate cuts lately, inflation has reared its ugly head in Asia’s largest democracy. India’s jump in consumer price inflation for June was the highest among the G-20 countries. Ideally, in the wake of lower global commodity prices, India’s consumption-based economy should flourish. However, India is not realizing the opportunities provided by a decline commodity prices. This is partly because the country’s currency, the rupee, has been weakening persistently. In June, the country’s currency slipped to a record low against the world’s major currencies. At its lowest, the rupee depreciated 33 percent against the U.S. dollar since the beginning of the year. A weak rupee robs the country’s ability to buy commodities such as metals and crude oil inexpensively.
The weak rupee is also a reflection of the country’s chronic current account deficit. To a great extent a current account deficit arises when a country imports more goods than it exports. A ballooning current account deficit sorely points to India’s lack of manufacturing prowess as well. India, a majorly agrarian country, with agriculture representing nearly 15 percent of GDP and accounting for 50 percent of the country’s employment, imports nearly a third of its fertilizer needs. To manufacture the remaining two-thirds of the fertilizer, it imports oil. The country imports iron ore and coal despite having reserves of its own, due to a lack of coherent policy to extract them. It imports quite a few other goods like cellular phone equipment and telecom gear for a lack of a clear manufacturing policy. In fact, India’s industrial output contracted yet again in May. Without a strong manufacturing base, India is struggling to address its current account deficit.
India’s government, however, is resorting to short-term measures to trim its current account deficit. The country is actively discouraging the purchase of gold by its citizens by raising the import duty on gold.
South Korea: Drab Consumer Spending Plays Party-Pooper
South Korea, one of Asia’s most advanced and export-dependent economies shook off a period of stupor to post robust gains during the first part of 2013. After enjoying a period of recovery in 2009, South Korea’s economy had looked tired, posting progressively diminishing growth for the three years through 2012. The year 2012, in particular, was painful for South Korea as the country’s storied export-engine, replete with giant-sized conglomerates known as chaebols, posted slower growth. South Korea’s overseas customers including the European Union and even the U.S. were too busy deleveraging, leaving little money to spend on South Korean durables such as cars.
Nonetheless, 2013 opened more briskly with the first quarter of 2013 recording the country’s fastest pace of growth in two years. Smart gains in the overseas sales of petrochemicals and telecommunications boosted South Korean exports. And a double-digit surge in foreign direct investment from European and U.S. companies also lent a supporting hand.
But South Korea expects the going to get tough in the latter half of 2013. For one, the country’s currency, the won, has strengthened substantially against the Japanese yen, courtesy of an ultra-loose monetary policy in Japan. A stronger Korean won makes Korean exporters much less competitive against Japanese car and electronics makers as they fight for market share in overseas economies like China, the U.S. and Europe. Further, a stronger won, also poses as deterrent for investment. In fact, top chaebols have planned a reduction in their investment outlay for the second half 2013.
Meanwhile, South Korean consumers are increasingly closing their purse strings these days thanks to a debt binge in the recent past. With South Korean household debt-to-income ratio hitting a nine-year high in 2012, the purchasing power of the average South Korean looks stretched.
Partly to push employment up and boost consumer spending, the South Korean government announced a $15 billion stimulus in April. Unlike the country’s consumer, the South Korean government is well placed to loosen its purse. Even after the stimulus, the fiscal deficit of the country is likely to be well below the 2 percent GDP mark.
Taiwan: Investment in Electronics Helps Alleviate Slowdown in Exports
Tablets and smartphones have been the saving grace for Taiwan. The small island began the year on a tired note with first quarter GDP unexpectedly contracting. For a country that depends on exports for two-thirds of its economy, a slowdown in major markets such as China and the European Union was a letdown.
In recent times, Taiwan’s export problems have been aggravated by a strengthening of the country’s currency, the Taiwan dollar, against the Japanese yen.
Further, with personal consumption barely growing, Taiwan’s economy has lost momentum. Government officials have started lamenting the slowdown in growth and have revised the projections for growth and inflation downward for 2013. Adding to the problems were the frothy conditions in the housing market that many analysts say resembles a property bubble.
Amidst this gloom, the tablet and smartphone markets are shining some light on the manufacturing-based island. One of Taiwan’s largest semiconductor companies, TSMC, announced that it will invest nearly $10 billion in developing an advanced chip-making facility, on the back of strong global demand for smartphones and tablets. Taiwan is at the forefront of supplying critical chips and semiconductors to the world. This investment may alleviate the sour consumer sentiment among Taiwanese who have been increasingly worried about jobs and wages.
For its part, Taiwan’s central bank is keeping the monetary policy loose. The bank in June held its policy rate unchanged for the past eight straight quarters, pointing to meager recovery in international growth.
Indonesia: Staring at a Slowdown after Three Strong Years of Growth
Over the past four years, even as many parts of the world have sunk into a period of slow growth and anemic demand, Indonesia held its own, growing on a healthy mix of consumption, investment and exports. Lately, Indonesia too is giving into the world’s blues. It opened the first quarter of 2013 on a somber note, growing at the slowest pace in 10 quarters.
Investment in manufacturing, such as autos and construction of ports and roads, has slowed in Indonesia. With a population of over 240 million and favorable demographics, healthy consumption was a given for Indonesia. But the Indonesian consumer too is refusing to spend more and prop up the economy. As for the Indonesian commodity exports, they are following China’s growth path – slowing.
On the monetary front too, Indonesia seems constrained. With a globe-rattling statement from the U.S. Federal Reserve stating that the supply of easy money will slow down, many emerging market currencies were rattled. The Indonesian rupiah too was not immune to the broader fall. As the domestic currency depreciated, the result was higher prices for Indonesian imports, especially oil. The country’s central bank caught between a falling rupiah and slowing growth, chose to support the country’s currency and surprised market observers with an interest rate hike at its latest policy meeting in July. For a country that has enjoyed a 6 percent growth rate over the past four years, the prospect of sub-6 percent growth for 2013 would come as a disappointment, but a possibility.
Some market observers also complain that Indonesia is shooting itself in the foot. With presidential elections pending in 2014, observers complain that the country’s politicians are stoking nationalist sentiments. Lately, the usually business-friendly Indonesia is said to have been instituting policies inimical to foreign investment. Over the past year, the government has levied export taxes on raw minerals, urged foreign firms to pare their stakes in Indonesian mining firms, and has lowered the maximum amount foreign firms can invest in the country’s banks. These measures have prompted many economists to pare down Indonesia’s GDP growth figures for 2013.
Thailand: Currency Volatility Hampers Growth Arising from Political Stability
Thailand’s economy began the year worried about the strengthening of its domestic currency, the Thai baht, affecting the country’s myriad export industries such as autos and electronics. But mid-year, the challenge for the economy took a U-turn arising from the Thai baht’s rapid fall to a 10-month low against the U.S. dollar.
During the early part of the year, Thailand’s ruling government clamored for an interest rate cut from the central bank amidst slowing growth and declining exports. The central bank trimmed the interest rate in May, the first rate cut in 2013. Since the rate cut, the Thai baht has declined and now the central bank is working overtime to stabilize the baht in the currency markets.
Even as the currency and the monetary policy posed challenges, Thailand’s fiscal policy remained quite expansive. The country’s Prime Minister, Yingluck Shinawatra, raised the incentives paid to rice farmers and outlined a plan to spend nearly $70 billion on building high-speed rail links to major cities from Bangkok, the country’s capital. Thanks to the expansionary policy and political stability, a rare commodity in Thailand in the recent past, Fitch Ratings raised its assessment of the country’s credit rating.
Philippines: Records Fastest Pace of Growth in Three Years
The Philippine economy is in fact one of the fastest growing in Southeast Asia. Its economic growth rate of 7.8 percent during the first quarter of 2013 beat all other high-achieving nations in the region like China, India, and Indonesia. In fact, it was the Philippines’s fastest pace of growth in three years. A spate of policy reforms aimed at the infrastructure industry and marked improvement in governance has brought billions of dollars of investments into the country. Capital investments in industrial machinery and construction paved the way for strong growth in 2013. As well, low inflation has contributed to the fast-paced growth in the country. The inflation rate in the Philippines during the first half of the year has averaged roughly 3 percent, quite near the lower end of the central bank’s target of 3 percent - 5 percent. That gives the central bank further room to cut the policy interest rate further and stimulate more growth.
Construction spending and government spending surged a handsome 33.7 percent and 13.2 percent, respectively for the three months ended March 2013. Both the industrial and manufacturing sectors too supported strong growth during the period. However, personal consumption grew just 5.1 percent, causing some concern for the policy makers during the first quarter of 2013. In recent times despite strong growth, the Philippines has struggled to boost job creation. The country’s unemployment touched a 4-year high of 7.5 percent in April of this year. Even as the pace of manufacturing output doubled in the three years through 2012, factory jobs grew by a meager 1.6 percent in the same year, affecting personal consumption.
After ensuring strong investments and improving governance, policy makers are urging the Philippines to boost social spending to raise consumption-based growth.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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