Inflation risis with Asia's recovery (Asia Times Online)

Written for and published by February 25, 2010. Click here for original article

Inflation rises with Asia's recovery
By Jennee Grace U Rubrico

MANILA - Asian economies, buoyed by fiscal pump-priming, loose monetary policies and growing intra-regional trade, have generally rebounded from recession faster and in better financial shape than other regions around the world. But as economic recovery comes quicker to Asia than in Europe and the United States, inflationary threats are rising as regional governments remain reluctant to rein in their crisis-induced stimulus measures, including, in many countries, record low interest rates.
Asia's economies are on the upswing, with China leading the way. The International Monetary Fund (IMF), in its World Economic Outlook, in January adjusted up its previous gross domestic product (GDP) forecast for China this year to 10% from 9% after the country reported 8.7% growth in 2009. It also raised its projections for India and the Association of Southeast Asian Nations' (ASEAN) top five economies - Indonesia, Thailand, Malaysia, Singapore and the Philippines.
As fast economic growth resumes, so too are pricing pressures that some say could undermine the medium-term effectiveness of government stimulus measures and, if poorly managed, open a new Pandora's box of economic troubles. Food and energy are major components of Asia's consumer price indices - accounting for as much as 60% and 15% respectively in certain economies - and are where new pricing pressures are expected to be most acutely felt.
In 2008, regional food prices rose to crisis levels and raised fears of severe shortages. The numerous factors involved included low levels of cereal stock, crop failures in exporting countries, demand for biofuel, rising oil prices, export restrictions, a weakening US dollar, price speculation, and enormous liquidity in the global financial system, according to the United Nations' Food and Agriculture Organization (FAO).
Current market conditions lack that same confluence, yet food prices are now approaching levels last seen in 2008, when a record spike in global oil prices contributed to a surge in cost-push inflation across various commodities. Oil prices collapsed with the global economic downturn, falling from a record high of US$147 per barrel in July 2008 to below $35 in February 2009. They are now again on an upward trajectory.
Market prices were just below $80 per barrel at the start of 2010 and are expected by many analysts to rise higher as economic recovery among Asian importers pushes up global demand. The countries seen by economists as most vulnerable to escalating food and energy prices are Vietnam, India and Sri Lanka, with the Philippines, Hong Kong and Korea representing the second tier of those most at risk.
Vietnam is a case in point, with inflation on course to return to double-digit levels by the second quarter of this year. Rising inflation expectations pushed the Vietnamese government into devaluing the currency this month for the second time since last November. Its not clear that Vietnam's rising inflation will have a contagion effect on other regional countries, but economists are closely tracking the situation.
In the FAO's price situation report released on January 25, the United Nations-affiliated agency reported that its Food Price Index had hit its highest level in November since the 2008 surge in inflation. The upward trend, it said, was driven by higher prices of rice, sugar, oil seeds and dairy products.
"Prices of rice are rising in several [Asian] countries, mainly in Vietnam, where they are 50% higher than two years ago; in Sri Lanka, where they have been at record levels in January; and in Bangladesh, where they have increased 30% in the past three months," the FAO report noted.
In India, the world's second-largest rice producer, the crop's price was well above the inflationary levels of two years ago and drought conditions have caused the government to scrap import taxes it maintained on the commodity through 2010. The need for more Indian imports is expected to push rice prices up across the entire region, according to the FAO.
Multinational bank HSBC noted in a recent research report that "Even in China, which has enjoyed a relatively good harvest over the past year and maintains ample stocks, food prices have risen 11.8% [quarter on quarter] in November."
Pricing pressures
What worries some economists is that unlike in 2008, commodity prices and core inflation are now pushing prices up in tandem. The HSBC report said that core inflation is no longer as "well-behaved" as previously, indicating "structural changes" in the behavior of inflation in the region driven by labor shortages and flexible wage policies.
Indeed, the bank's Asian Business Index (ABI) points to soaring input and output costs, with the latter "well correlated with core price inflation in most Asian economies". While Asia's flexible wage policies allowed many countries to avoid the massive lay-offs seen in some Western countries at the height of the global financial crisis, those same policies with recovery are increasing wages and in cycle putting more pressure on core prices.
There is growing evidence of labor shortages across the region, with Chinese firms in the country's export-oriented southern regions complaining of insufficient skilled workers and Taiwanese technology companies reportedly advancing New Year bonuses to avoid staff from being poached by competition. Increasing consumer spending power, too, is contributing to inflationary pressures.
While property prices have approached bubble territory in some markets in the region, particularly in China, Hong Kong and Singapore, many economists believe governments and their affiliated central banks understand the inflationary risks of maintaining overly loose monetary policies implemented against the global crisis and that most will begin tightening in the second half of this year as recoveries take hold.
"We expect monetary tightening will be a key feature of 2010, with higher interest rates and stronger currencies sharing the burden about equally," said Singaporean bank DBS in its first-quarter report on Asian economies. The bank expects monetary tightening to begin in the middle of the year, except in a handful of countries, including India and South Korea, which it expects will start to raise rates earlier.
That will require Asia's central banks to break their historical tendency to shadow movements of the US Federal Reserve and devise monetary policies better calibrated to the region's now dramatically different economic and financial fundamentals.
Noting that central banks may hesitate to adjust monetary policies because of political considerations, HSBC says it is best for monetary authorities to act sooner rather than later. It warned that any substantial delay in raising interest rates "inevitably involves a more aggressive subsequent move [and] may then introduce considerable volatility into financial markets".
If central banks are hesitant to raise interest rates, HSBC suggests alternatively that they withdraw fiscal stimuli; tighten banking supervision, including by beefing up capital requirements or the application stricter lending guidelines, most notably for mortgages; cap aggregate credit growth; or allow exchange rates to appreciate more rapidly. Few of the region's export-oriented countries have taken on board the advice to appreciate their currencies due to fears they will lose market share to regional competitors, including vis-a-vis China and its fixed exchange rate regime.
The IMF, for one, does not support the rapid withdrawal of Asia's fiscal stimulus measures, warning that while economies have recovered they may not be strong enough yet to stand alone. "Due to the still-fragile nature of the recovery, fiscal policies need to remain supportive of economic activity in the near term. The fiscal stimulus planned for 2010 should be fully implemented," the IMF said in a statement.
At the same time, the IMF said "countries that are already enjoying a relatively robust rebound of activity and credit will have to tighten monetary conditions earlier and faster than their counterparts elsewhere". Whether Asia's central banks do so in a timely and effective manner will determine whether Asia's recovering economies sustain growth or set the macroeconomic stage for the region's next bust.
Jennee Grace U Rubrico has been a journalist for over 10 years.
(Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

Asia arms itself against the weakening world economy (Retail Asia)

Published in the December 2008 issue of Retail Asia 

GOVERNMENT INTERVENTION HAS BECOME NECESSARY FOR ASIAN ECONOMIES TO WEATHER THE GLOBAL ECONOMIC STORM, AND SPURRING DOMESTIC SPENDING HAS BECOME THE WEAPON OF CHOICE. FROM APPROVING FISCAL INCENTIVES TO EASING MONETARY POLICIES, ASIAN ECONOMIES ARE DOING EVERYTHING TO MAKE ITS CONSTITUENTS GO OUT AND SPEND. JENNEE GRACE U RUBRICO REPORTS.

AS concerns over the impact of the global financial crunch continue to mount, Asian governments have started putting in place measures that seek to limit the contagion of the crisis on their respective economies.

Policy changes — ranging from intervention by monetary authorities to approving fiscal packages aimed at stimulating domestic spending — are being imposed one after the other by countries in a region that is starting to feel the pinch of the economic slowdown of traditional trading partners.

Asian countries have revised economic growth forecasts downward in response to the upheavals that started in the US and spread to the rest of the world.

The China Chengxin International Credit Rating Co has announced that China, which has seen a slump in its exports sector, will likely see its gross domestic product (GDP) — a measure of its economy — posting a single-digit growth of 9.4% this year from last year’s 11.%. Singapore, also heavily dependent on external trade, has revised its growth outlook to 3% from the initial forecast of 4%-5%.

Malaysia has likewise pre-empted a bleak economic scenario for 2009 by revising its GDP outlook for the year to 3.5% from 5.4% as its government warned that it would not be immune to the effects of the global financial crisis.

Indonesia is expected to also announce a cut in its economic growth following deputy central bank governor Hartadi Sarwono’s pronouncements that it would be “tough” to grow over 6% next year given the current global economic conditions.

Pump priming

Asian states are pinning their hopes on domestic consumption to keep economic engines chugging and have imposed policies aimed at encouraging their people to spend.

State-owned Xinhua News Agency reported that Chinese authorities are looking at pump priming efforts to expand domestic consumption, including supporting farmers and allocating public resources to improve social welfare.

State officials also said that the government would put more investments into railroads, urban rail systems and environmental protection facilities.

It recently launched a four-trillion yuan (US$570-billion) stimulus package that is aimed at loosening credit conditions, cutting taxes and funding a massive infrastructure spending programme to offset adverse global economic conditions. The package will be spent over two years and used to finance programmes in 10 major areas, including low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation, and the rebuilding of areas that have been hit by disasters. A comprehensive reform in value-added taxes is also included in the plan and is expected to cut industry costs by 120 billion yuan.

Su Ning, deputy governor of the People’s Bank of China, the central bank, was also quoted as saying that there was “still room to tap more domestic consumption” and that the country’s central bank would adopt a flexible and prudent monetary policy, starting with an October 31 decision to cut interest rates to boost domestic spending.

Malaysia, believed to be fighting off recession, has also announced in early November that it has put together a RM7-billion (US$1.968-billion) stimulus package that would focus on projects that would increase its people’s income and have “major” multiplier effects.

“If we manage to increase domestic consumption, it means we can ensure that there is still momentum in the domestic economy and we can achieve reasonable economic growth,” Finance Minister Datuk Seri Najib Razak stressed.

Thailand, meanwhile, has adopted a deficit spending stance, submitting to Parliament a proposal to augment its 1.84 trillion baht (US$51.41 billion) budget for 2009 by 100 billion baht. The additional allocation, which would raise the country’s deficit to 349.5 billion baht, is aimed at preventing mass layoffs and would be used to create more jobs, help the poor and fund community lending programmes, media reports stated.

For its part, Singapore, believed to already be in a technical recession, has worked towards protecting the economy by announcing in October a “zero percent appreciation” policy for its currency’s nominal effective exchange rate policy band.

The Monetary Authority of Singapore conducts monetary policy through the local currency rather than by setting interest rates. The Singapore dollar is traded against a basket of currencies of its major trading partners within an undisclosed band known as the nominal effective exchange rate (NEER).

“This policy maintains the current level of the policy band and there will be no recentring of the band or change to its width,” MAS said, adding that it would “continue to closely monitor developments in the external environment and their impact on the Singapore economy”.

Asian powerhouses Japan and South Korea have likewise been cutting rates.

Necessary and appropriate

CIMB-GK regional economist Song Seng Wun said that the moves of Asian governments “are all necessary and appropriate responses to cushion the slowdown in external demand”.

“Asian economies are by and large quite dependent on external demand, some more than others. The Philippines and Indonesia are less dependent on it than Singapore and Malaysia, but export is still a fairly sizeable portion of their economies,” he said.

“It is appropriate to increase domestic spending … They (measures) are all complementary. You can’t rely on exchange rate without also getting the fiscal policy side to help out as well,” he explained, adding that lowering taxes could also help boost domestic spending.

Meanwhile, Singapore-based DBS said in a research note that pump-priming measures, particularly in Malaysia’s case, “will certainly help to alleviate pains of an economic slowdown” but added that “timely implementation will be fundamental to ensure effectiveness of these measures”.

The bank, however, also noted some upsides in the dismal US situation.

“There is, to be sure, plenty of room for upside surprises… the financial crisis did not start in September; it has been going for more than a year. And if there is one thing that we’ve seen, it is that the spillover to the real economy has been far less than even the most optimistic imagined a year ago.

“We believe this will continue to be the case, although the meltdown in September/ October means the absolute impact will be larger than before, at least temporarily,” the bank said.

How long the region would feel the effects of the US recession and the financial crunch, experts said, remains uncertain.

“You could win a Nobel Prize for [correctly predicting] that,” said Song. ra

Tough times ahead, but Asian retailers remain resilient (Retail Asia)

Published in the april 2008 issue of Retail Asia 
 
As recession rears its ugly head in the US, countries that have trade relations with the economic giant expect to feel the pinch. Industry players and retail observers, however, are one in pointing out that while the going will definitely get tough, Asian retailers are resilient enough to weather the storm. Jennee Grace U Rubrico reports.

For Philippine retailer Roberto S Claudio, the continuing battle between the US and recession
could mean tough times ahead for Asian retailers.

Claudio, chairman of sporting goods chain Toby Sports and the Philippine Retailers Association’s vice-chairman for international affairs, observes that while the economic slowdown is happening in a country thousands of miles away, the impact is pervasive in the region.

“We have what we call an ‘imported recession’. Overall drop in consumer confidence will be felt all over Asia,” he says in an e-mail response to questions from RETAIL ASIA.

Noting that the ongoing property crisis in the US has already put a dent on the Asian country’s retail sector, he adds that Philippine retail sales for the first quarter of 2008 “have dropped almost
10%-15% [from] the same period last year”.

“[The] drop in bottom lines went as much as 50%,” he continues.

 Industry experts polled by RETAIL ASIA attribute fears that Asian retailing would be affected by the US economic crisis to the region’s dependence on the latter’s economy. As weakened demand
from the US slows Asia’s manufacturing sector, Asian consumers’ cash and, consequently, spending would also be reduced.

“Merchandise orders slow gradually,” says Scott Langdoc, vice-president for research and business leader for IDC’s Global Retail Insights.

“Any significant manufacturing slowdown will have a trickle effect on GDP (gross domestic product, the value of all goods and services produced by an economy) growth and consumer spending
rates,” particularly in China, which has benefited most from the US demand for cheaper goods.

Paula Rosenblum, managing partner of Retail Systems Research (RSR), a research firm run by retailers, expounds: “[The US] pumps vast amounts of money into Asian economies. Much of this money finds its way into the pockets of workers, who become more affluent.”


“Affluence and discretionary spending power drive retail sales. Therefore, if recession continues for any period of time, I expect Asian retailers to be affected as a consequence of reduced demand in the US,” she says.

Domestic demand to drive growth

Experts, however, stress that mitigating measures to the US economic crisis have
been put in place.

“To the extent that the economy of the individual countries in Asia is dependent on exports to firms in the US where customers are reducing their consumptions, they will be affected. But I think a lot of companies in Asia have diversified their customer base from traditional high-reliance on the US market to other markets around the world. That will soften the impact,” says Dale D Achabal, chairman of the marketing department of Santa Clara University’s Leavey School of Business.

Deloitte & Touche, in a recent study, also notes that Asia’s move to lessen its dependence on the US market would insulate it from a US meltdown.

“The geographic mix of consumer spending growth will shift away from the US and towards Asia. For the world’s largest retailers, this means increased growth opportunities in Asia. It also means that the US market will be a bit more challenging,” the study, 2008 Global Powers of Retailing, states.

Domestic consumption would also cover the slack in US demand for Asian goods, India-based RNCOS E-Services Pvt Ltd chief executive Shushmul Maheshwari notes.

He maintains that India and China because of their population, as well as Vietnam because of its rapidly growing economy will continue to be among the most sought-after destinations for global
retailers. “These markets represent vast opportunities to expand,” he says.

In the Philippines, 95% of retail sales come from local consumption, says Claudio. “The key is to keep this consumption dynamic by offering customers exciting reasons to continue buying.”

RSR’s Rosenblum, meanwhile, says that while affluent Asians might also see the weakening US economy as an opportunity to get US goods at lower prices, demand from them would not be
enough to significantly shift Asian retail spending elsewhere.

“I like to call it the biggest ‘buy-one-get- one-free’ sale. I live in Miami and I already see people from other countries coming here to buy merchandise at a lower price than they would in their home countries. I don’t think this is big enough to cause a dramatic shift in Asian retail economies, except perhaps at the very high end,” she elaborates.

Recently released data on different markets have so far indicated strong support for the Asian retail sector.

AT Kearney’s 2007 Global Retail Development Index named India the most attractive retail market in the world, followed by Russia and China.

Vietnam and Malaysia were ranked fourth and eighth respectively.

A Bloomberg survey, meanwhile, reports that China, the retailers’ mecca, posted a 20.2% growth in retail sales for the first two months of 2008.

The Nielsen Company’s online survey also indicates that retail spending in the country has not been affected by movements in stock prices, which have been impacted in large part by global
sell-offs stemming from the US property woes. The survey polling stock-market investors in Shanghai, Beijing and Guangzhou reveals that two-thirds of the respondents did not take the stock
market’s performance in consideration when spending.

Moreover, Philippine consumers have been showing signs of optimism, a Philippine central bank report indicates.

A survey by the Bangko Sentral ng Pilipinas, released last month, bares that the Philippine consumer confidence index in the first quarter of 2008 improved to negative 21%, or by 6.2 index points from the first quarter of 2007, and by 6.5 index points from the last three months of last year.

“The consumer confidence in Q1 2008 and in the near term (next quarter and next 12 months) was borne out of expectations of better business conditions and additional income for the family due to the increase in the number of employed household members locally and overseas,” the survey states.

Meanwhile, Hong Kong continues to reign as the luxury shopping destination in Asia, posting a 19.5% increase in the value of retail sales an a 15.3% growth in retail volume as of November
2007, data from property services company CB Richard Ellis show.

More pressing concerns
More than the effects of the US recession, Asian retailers feel they have more to fear from the impact of high oil prices and inflation which target the core of retail — cost of production and prices.

The Nielsen survey shows that while the performance of the stock market was a non-issue to Chinese investors, 61% say that inflation and oil-price hikes would affect spending habits.

Says RNCOS’ Maheshwari: “As most economies in Asia are on their growth trajectory, the rising inflation level and oil prices are major concerns not only for retailers but also for the governments across these countries.

Rising inflation can put brakes on booming consumption thereby slowing the growth of the retail industry.”

Government regulations that put restriction on the expansion of modern retail also hinder retail growth, he adds.

Claudio, for his part, notes that high oil prices “will make customers cut on their spending”,

The Bangko Sentral survey lends support to Claudio’s assertions, pointing out that Filipinos still plan to hold back on big-ticket items like consumer durables, motor vehicles and houses.

“On the average, the ratio of consumers who expressed the intention to buy in Q1 2008 was slightly lower at 19% from 23% in Q4 2007 and from 20.7% in Q1 2007,” the Bangko Sentral states.

Other factors that worry Philippine retailers are the high cost of doing business, particularly power costs, shipping and transport, Claudio adds.

Similar to the US recession, these threats can also be addressed. For instance, Philippine retailers offset the negative factors by better inventory planning, says Claudio.

As the Asian retail sector weathers these storms, some markets are expected to do better than others.

IDC’s Langdoc predicts that while China has been seeing pullbacks of planned expansion into the market by US retailers, local and foreign retailers would still expand into the country’s underserved Tier II and III cities.

India, Langdoc adds, will remain attractive to foreign retailers because of “a combination of expanded consumer spending by a broader middle class … and the reduction in restrictions on
foreign direct investment by retailers”.

Japan will be a steady market, with limited retail space and an “overstored” environment tempering retail growth.

“While growth will be moderate, further consolidation among retailers will occur in the next 12-18 months,” Langdoc adds.

RSR, meanwhile, sees Vietnam and Indonesia as emerging markets. “The only obstacles are infrastructural — enough roads, water, high-speed Internet access, and electricity to power new
retail centres and manage logistics,” says Rosenblum.

As for the retail segments that are likely to enjoy growth, retail experts believe that more markets are likely to be shielded from the negative effects of these concerns than are to be affected by them.

Achabal says high-end products and low-end goods are not likely to suffer.

“Retailers that are positioned in the mid- to lower-end of the marketplace tend to do well in recession. But the high-end tend to be recession-proof because the customer is not that sensitive to the economic fluctuation. The retailers in the middle tend to get hurt more as the customer trades down.”

Rosenblum also predicts continued robust sales for low-end products. “I don’t think consumers stop spending; they just trade down. Unless we are headed into an extremely disastrous situation… the demand for goods and services won’t decrease, it will just shift. Even if the problem globalises, consumers will still want to consume. We’d like to say that even in a down economy, retail
winners emerge,” she concludes. ra