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January 2009: Gareth Thomas UK Minister of Trade visit to Singapore, Taiwan, Vietnam and Malaysia Focus on the Impact of the Current Economic Situation To go to a chapter – Click on heading, press `Ctrl’, then left click. Trade Minister’s Visit to the Region 
Trade Minister’s trip to the RegionTrade Minister Gareth Thomas is planning to visit the region from 12th to 23rd January 2009. The proposed markets are Singapore (13-14th), Taiwan (15-16th), Vietnam (19-20th) and Malaysia (21st-22nd). Trade talks will take place in Taiwan during the Minister’s visits. Readers of the e.bulletin wishing to know more about the visit can contact Rob Lally (rob.lally@ukti.gsi.gov.uk). UK Trade and Investment is keen that the Minister is aware of business issues (both positive and negative) in order to offer his full support to the development of the UK’s economic agenda in Asia and looks forward to your input. Impact of the Current Economic Situation The past few months have been dominated by the economic turmoil which has hit markets globally. Asian markets have been caught up in the storm as much as any other part of the world. However, in general, with continued strong growth, high levels of foreign currency reserves and the recent lessons learned from the Asia financial crisis in the mid 1990’s, Asia Pacific markets are weathering the storm. KoreaSouth Korean financial markets have continued to fluctuate wildly in recent weeks, hitting all-time highs and lows amid growing concerns over the global financial crisis and an economic downturn. The benchmark KOSPI index has plummeted over 40% and the Korean won (KRW) is down around 50%The Korean won has continued to weaken in part due to a persistent shortage of USD liquidity onshore, closing at 1,476KRW/$ on 27 November. South Korea’s economic growth slowed in the 3rd Quarter to its lowest rate in 3 years. GDP in the 3rd Quarter grew 3.9% compared with the same period a year earlier. Morgan Stanley has downgraded its forecast for South Korea’s 2009 GDP to 2.7% from 3.8%. (Others forecast slightly higher – in the 3-4% range). Lowest forecast on the street is UBS, which has cut its already pessimistic forecast of 1.1% to –3%, citing fears of deleveraging. CPI in October slowed to 4.8% y-o-y, from 5.1% in September. However, it still remains above the target inflation rate of the central bank (2.5%-3.5%). Exports grew 10% y-o-y in October, less than half of the 22.9% growth for the same period last year. Encouragingly, Korea posted a current account surplus of USD 4.9bn in October -more than expected, although it is still expected to post an overall deficit for the year. The government has been forced to stabilise the financial market and real economy via several stimulus packages including construction sector bailout packages and liquidity support package. They include a combination of tax cuts and an increase in fiscal spending. Despite a series of support measures by the government, the economy has shown no signs of improvement.
TaiwanTaiwan's direct exposure to the on-going global financial crisis is limited and bearable. The banking sector remains healthy despite limited losses from buying structured notes and overseas investment. Taiwan is unlikely to exhibit as much risk as Korea due to low foreign debt, high saving rates and healthy current account. The economy, however, is still facing severe challenges.In 2007 economic growth was 5.5% and exports increased by 15.3%. Its unemployment rate of 3.9% is the lowest rate in seven years. However, the US downturn will effect exports on 2008 and impact economic growth. To date the global economic crisis downturn has had a limited impact on Taiwan. It has US$281bn of foreign exchange reserves and high national savings, which makes it better placed than many other Asian economies to deal with the global downturn. The Taiwanese government has introduced a number of measures to further increase liquidity including cutting interest rates, a National Stabilisation Fund, guarantee of deposits and a limit of a 3.5% fall in share prices within one trading day.Nonetheless there are concerns. In Septembers exports fell by 1.6%, there was a decrease in exports to China of by 16%. GDP growth forecasts range from 2.8%-4.2%, compared to 5.5% last year. South East Asia SummaryThe Global Financial Crisis has hit the Southeast Asian region, with economic growth being revised downwards for 2008, and the pace slowing further in 2009 (though still positive). Some governments have unveiled moderate fiscal stimulus (Malaysia’s £1.2 bn stimulus package earlier in November, and Singapore’s £1.3 bn package announced last week), but most (Indonesia, Vietnam, Thailand and the Philippines) have yet to announce such plans, mindful of financing a higher budget. Political uncertainties, slowing exports and investments, and weakening domestic economies continues to plague policymakers. Comment & Implications for the UKDespite healthy government debt/GDP ratios (except the Philippines 56% GDP, all have a lower government debt ratio than the UK), they have not yet opted for major fiscal stimulus to offset the anticipated drop in exports. This might be because the financial crisis largely passed by SE Asia, and the impact on the real economy (lower exports and FDI) is only just beginning to be felt (so policymakers have yet to react). Those with the most open economies who feel the impact fastest (Malaysia and Singapore) have already responded – the others may follow in due course. The reticence of policymakers to pull the fiscal lever may be due to the current high financing costs of issuing new government debt. Any new international financial architecture, which opens the possibility of government access to low-cost funds, will, of course, be popular here in SE Asia. Real GDP Growth (%) (EIU estimates) (EIU forecasts) Malaysia 6.3 5.6 3.1
The Singapore Government has indicated that Budget 2009 (to be unveiled a month earlier than usual, in January 2009) will be an expansionary one to spur growth and create jobs, with tax cuts and higher government spending expected. Several ministries will be bringing forward their expenditure plans (particularly in manpower, through accelerated hiring, as well as spending on healthcare, transport & IT infrastructure). Emphasis will be to provide assistance to business on costs and cash flow, and targeted help to the lower income groups through cash handouts. Budget deficit in the current financial year is already expected to be more than 3 times the earlier estimate of S$800 million. Meanwhile, a S$2.9 (GBP 1.3) billion package was announced last week, aimed at easing the credit tightening faced by Singapore companies through an enhancement of the government's business financing schemes. It also included measures to help employers reduce manpower costs and save jobs through retraining. While any fiscal stimulus will benefit businesses through an increase in domestic demand, its impact will be limited by the fact that Singapore is a small and very open economy, with high import content for most spending.
IndonesiaAs the Indonesian fiscal year follows a calendar year, there is little room to manoeuvre in 2008. Indeed, by the end of 2008 the budget deficit is expected to be around 1.2%, as opposed to the government’s planned 2.1%. This decline is mainly due to lower fuel prices (therefore less energy subsidy needed) and lower government spending in the region. The government might like to introduce a fiscal stimulus to bolster economic growth, but it faces two impediments:
PhilippinesThe Philippine government will stimulate the economy with a 1-percent of GDP additional deficit in 2008-2010 due to increased spending for safety net programs for the poor and on infrastructure. In light of the financial crisis, government has abandoned its goal of a balanced budget from 2008 to 2010. The Development and Budget Co-ordinating Committee (DBCC), the government co-ordinating body on major economic policies, revised its fiscal policy targets for 2008-2010. From a three-year average deficit of 0.2 percent of GDP, the committee thinks that it is prudent to stimulate the economy by increasing government expenditures, leading to an average deficit of 1.2-percent of GDP for the next three years. The 1.0- percent variance in the deficit programs is indicative of two things: (1) Philippine fiscal policy is expansionary in light of the crisis; and (2) despite this, the government is wary of excessive fiscal expansion, which explains the timid attitude toward greater economic stimulus. The reason for this is that, in 2003, the country had gone through rigorous fiscal reforms reducing debt from 78.2 percent of GDP in 2003 to 55.8 percent of GDP in 2007. It is noteworthy that the increase in spending for next year will focus on programs targeted at mitigating repercussions of the crisis on the poor and improving infrastructure support to business. Budgets for agriculture and agrarian reform are proposed to have a nominal budget increase of 55 percent; infrastructure of 21 percent; and social security, welfare and employment safety nets of 24 percent. These mean a substantial increase for these budget items in real terms as inflation is projected to be at 6 percent for 2009. On the revenue side of fiscal policy, government has made a commitment not to impose new taxes but will harmonize fiscal incentives on investments and taxes on tobacco and alcohol. Funding for the expanded deficit will primarily come from peso-denominated debt. Government does not anticipate any problems raising debt next year having had successful auctions for treasury bonds in the past two months.
ThailandThailand’s biggest worry is the prospects of a slowdown in its exports, going forwards. With its political situation in turmoil, the domestic economy has been rather lacklustre for the last two years both on the consumption and investment fronts. Government spending has been trumpeted as a key driver for the economy in 2008, but failed to roll out as planned due to politics and fell 8% short of target. Exports had single-handedly powered Thailand’s GDP, estimated to have grown 5.1% in the first 9 months, thanks to the bonus of high agricultural commodity prices this year. The global crisis will undoubtedly slow down the export engine in 2009. The need to pump prime the domestic economy is extremely crucial from here on. Just before the crisis, the government had raised the budget deficit to a staggering 2.4% of GDP, unusual for Thailand whose fiscal budget tends to be balanced or kept within 1% of GDP. 3-4 weeks into the financial crisis, the target was revised upwards another Bt100bn (£1.8bn) on 14 October and the target figure now stands at 3.4% of GDP. This will be spent on rural lending, SME lending, development, health care, infrastructure, education, etc. Overall target is to keep 2009 GDP above 4%. Other than job creation, emphasis was given to funding schemes to SMEs or smaller borrowers to pre-empt prospects of credit tightening to these segments by commercial banks. This government-spending package supplements an earlier effort (Bt46bn) (£0.8bn) initiated mid July that subsidised cost of living expenses to keep consumer spending going. Thailand has not plunged into recession yet, partly propped up by crop prices - 3Q GDP growth is estimated at 4%. The Bank of Thailand has not resorted to monetary policy easing so far but more accommodative measures are almost certain before year-end.
VietnamThe need for fiscal stimulus in Vietnam is still seen as absent at the moment - the Government and enterprises are being cautious. Though the CPI has decreased in the last two months, overall inflation rate is still high at 26.7% y-o-y by October 2008. Indeed, the government is tightening its budget, by retracting projects that are deemed not urgent and putting stricter review on investment projects of State-owned corporations. Enterprises, on the other hand, are waiting for more reduction in the prime lending rates, operating in an idle mode rather than expanding businesses and investments. Though the effects of the global economic crisis have been felt, opinions from senior economists and advisers agreed that deflation, or a decrease in growth, is not a major concern in Vietnam yet.
MalaysiaOn 5 November 2008, Malaysia's Deputy Prime Minister/Finance Minister Najib announced a RM7 billion (£1.2 billion) stimulus package (equivalent to 0.9% of GDP), funded by the savings in fuel subsidies the government had been able to make following the recent drop in oil prices. This measure received broadly positive reactions. It supplements the expansionary budget of 29 August and means the 2008 fiscal deficit is expected to be large: 4.8% of GDP in 2008 and 2009. By the same token, there is a reduction in revenue to the government from Petronas (the national Oil Company). But the levy paid by Petronas to the government is based on the previous year's income. So revenue in 2009 will be based on high prices for most of 2008. Najib is spending now and taking something of a gamble that oil and gas prices will recover next year so that the government will not be left short for 2010. Malaysia's Central Bank on Nov. 24 lowered its benchmark Overnight Policy Rate by 25 basis points to 3.25% from 3.5%, its first cut in over five years. It signalled the rate might be reduced further, to provide a more accommodative monetary environment given the heightened downside risks to growth and diminishing inflationary pressures. The statutory reserve requirement (SRR) for banking institutions was also reduced by 50 basis points to 3.5% from 4%, its first revision in a decade. The last time the SRR was cut was during the Asian Financial Crisis when it was reduced to 4% from 6% on Sept. 16, 1998.
BruneiWhilst Brunei's sovereign wealth fund, the Brunei Investment Agency, may have been affected in the same way as other similar funds, life for Brunei's inhabitants appears to have changed little, despite the worldwide financial crisis. There is no stock exchange in Brunei. The currency (the Brunei dollar) is pegged at par to the Singapore dollar, so has depreciated by 10% against the US dollar but appreciated against the Euro by a similar magnitude. Brunei has said it will join other Asian countries to guarantee all bank deposits for the next two years, and is urging financial institutions to manage risks more responsibly. The Ministry of Finance said recently that banks and other financial institutions in Brunei remained stable and retained public confidence because they were "well capitalised, strongly regulated and supervised on a continuous basis." Nevertheless, the ministry said the government will fully guarantee all Brunei dollars and foreign currency deposits in banks and financial companies until December 2010, in line with similar moves by authorities elsewhere in the region. Hong Kong & MacauThe financial crisis hits Hong Kong's real economy The impact of the global financial crisis unavoidably affects Macao since Macao's service-oriented economy is highly depended on the external economic environment, and the gaming industry, the pillar of its economy, is undergoing changes that affect the casino revenues. The Chief Executive of Macao Special Administration Region (SAR) in his recent policy address stated that the gaming operators are set to face operational difficulties, due to the market shrinkage and the government demand of guaranteeing local employment that renders their running costs high and will discuss the issue with the operators and figure out a reasonable solution to the issues. To boost the sustainable development of local economy, the government will also increase public investment to a total of 10.2 billion patacas (1.28bn in US dollars) in infrastructure projects including the construction of a light rail transit system, building more public residential houses, launching the landscape works of the city's World Heritage sites.
Asia Task Force Awareness Raising EventsUKTI’s Asia Task Force are working on a series of regional events to promote trade in the South East Asia & Pacific Rim markets. UKTI are working closely with Harvey Nash on an event in the South East focussing on Vietnam & Korea, for 19th February. Also confirmed are events in the East Midlands, West Midlands, Scotland, North West & North East. Each with a different market & sector focus. Please contact Mike Qureshi if you wish to register interest. Mike.qureshi@uktradeinvest.gov.uk 020 7215 4827. UKTI’s website – includes trade opportunities, exhibitions, recent successes and trade briefs, by market. https://www.uktradeinvest.gov.uk/ Email mike.qureshi@uktradeinvest.gov.uk with your request or questions about UK Trade & Investment activity. Your suggestions for content or themes to appear in the next edition are welcomed. Email mike.qureshi@uktradeinvest.gov.uk |
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