Tag: Asia

Australian businesses not activating growth opportunities with Asia

Australian businesses are more aware than ever of the growth opportunities offered by Asia, but most are struggling to convert these opportunities into revenue outcomes. Groundbreaking research launched today by Asialink Business, sponsored by Commonwealth Bank of Australia, reveals that while awareness and interest in Asian markets — including China — is at a high, many businesses are struggling to activate the opportunities to deliver financial returns. 

“Asia’s emerging middle class continue to offer huge growth potential for Australian businesses of all sizes. By 2030, emerging Asian economies will have middleclass markets that are more than AUD$20 trillion bigger than they are today — yet for Australian businesses, while Asia is now firmly on their radar, many are not activating these opportunities, especially small and medium enterprises. 

“The Asialink Business Commonwealth Bank of Australia survey demonstrates that the ‘top performers’ all share common strengths, including employing a highly Asia capable team, customising products to keep-up with changing local tastes, and investing in an on-the-ground presence in Asia,” Asialink Business CEO, Mukund Narayanamurti, says.

Released today, the Activating Asia report and Asialink Business Commonwealth Bank of Australia survey results find that while 80% of Australian businesses include Asia to some extent in their corporate strategy, most are failing to generate significant revenue from these markets: More than half of the organisations (54.7%) surveyed generate less than 5% of their revenue from Asia.

CBA Head of Asian Business Banking, Jonathan Yeung says: “The business opportunities that exist in Asia are well known and well versed. But while many Australians businesses are including Asia as part of their strategy, we know that majority of these organisations don’t optimise their operations to maximise revenue streams.

“Through our research, we’ve charted a practical roadmap for Australian businesses to build the specific skills, knowledge and networks they need to succeed and capitalise on the opportunities in the region. We are excited to launch the Activating Asia report, the latest report in our Asia Capability research partnership with Asialink Business.”

Drawing on a unique survey of businesses across diverse sectors of the economy, and backed by practical case studies and interviews, Activating Asia reveals three key lessons for succeeding in Asia’s competitive markets:

  • Asia capable staff are critical: Businesses that succeed in the region are more likely to actively seek staff with language or in-country experience. For example, businesses that always mention Asian language capabilities or Asia experience in job ads earn, on average, more than 5 times the revenue from Asia than those that never mention these skills.
  • Keep up with customers’ fast changing preferences: Businesses that tailor and adjust their product or service and marketing earn, on average, more than 8 times the revenue from Asian markets than those that sell the same offering using the same marketing.
  • Technology is a complement, not a substitute for being on the ground 33 per cent of Australian businesses that earn more than 5 per cent of their revenues from Asia undertook in-country visits at least once a month – more than double that of businesses earning less than 5 per cent of revenues from Asian markets.

Professional services businesses feature in the top performers — of those businesses that generate more than 50% of their revenue from Asia, 26% are professional services firms, followed closely by private education and training organisations at 25%.

The study also reveals that overall business sentiment towards Asia is positive. Despite the ongoing China-US trade tensions, China continues as the most attractive market for Australian Businesses. Nearly half of participating businesses (44%) report an active interest or existing presence in China. Australian businesses also have significant interest in the opportunities presented by the ten ASEAN economies in Southeast Asia collectively ranking as the second most popular market for Australian organisations.

To actualise the diverse opportunities across the region, Activating Asia calls on Australian businesses to invest in building Asia capabilities and embed an Asia capable mindset into long-term business planning.

Asia Remains the Engine of Global Growth in 2016 and 2017 – IMF

The latest  IMF briefing on Asia says the region is expected to grow by 5.3 percent in 2016 and 2017, which is 2 to 4 percentage points higher than the growth rate in other regions. This growth rate accounts for two-thirds of global growth as it has been since 2010. So Asia remains the engine of the global growth. This is based on data in the Regional Economic Outlook, to be presented on May 3rd in Hong Kong.

While Asia’s relatively in better shape than other regions, it shares the same downside risk that my colleagues have emphasized the last two days, such as weakening global recovery, tighter global financial conditions, and China’s slowdown and its spillover.

In terms of policies, in addition to continuing its structural reform, Asia should prioritize building policy buffers and tackling vulnerabilities while being ready to support aggregate demand if downside risks materialize. Let me explain these points before we go on to the questions.

Overall Asia’s GDP growth rate is expected be 5.3 percent in 2016 and 2017, 0.1 percentage point lower than the growth rate in 2015. However, this aggregate number masks heterogeneity across the regional economies. Let’s start with China.

We actually revised up our growth forecast for China for this year from 6.2 percent to 6.5 percent, and then also revised the overall growth rate for the next year to 6.2 percent in 2017. You may be surprised because the IMF revised downward our global growth rate. Why did we just revise up the overall China’s growth rate? The main reason is that China recently announced its commitment to the new stimulus packages together with a variety of structural reforms in its 13th 5-year plan.

And we believe China has this policy space to achieve its growth target in the short-term. But I’d like to emphasize that depending on where this stimulus is used and whether the stimulus is used wisely and does not just go to boosting the old growth engines, the medium-term risk of ever rising credit and investment can also increase. So in the short-term, due to the structure reform and stimulus, China’s growth rate is upgraded. But on the other hand, depending on where the stimulus can be used, the medium-term risk can also increase.

In Japan, the GDP growth rate is projected to remain 0.5 percent in 2016, but it is expected to significantly slow down to -0.1 percent in 2017 assuming current policies. That means our -0.1 percent growth rate in 2017 incorporates the negative impact of the expected consumption tax increase from 8 to 10 percent in 2017, but does not assume offsetting measures to support economic activity. But in reality you can easily expect that Japan’s government will be more likely to rely on offsetting measures, including fiscal expansion, to offset the negative impact of the consumption tax increase, which means that the actual growth rate in 2017 should be higher than our forecast. And we will adjust once we know the details of Japan’s fiscal plans.

In India, India is the fastest growing emerging economy with a growth rate at 7.5 percent both in 2016 and 2017. Activity is expected to continue to be underpinned by private consumption, which has benefitted from low energy prices.

Australia’s growth rate is expected to remain stable at 2.5 percent in 2016, while mining investment will continue to contract.

Korea’s growth rate is expect to remain subdued but stable at 2.7 percent this year and rise moderately to 2.9 percent in 2017 as domestic demand benefits from low oil prices.

Developments in ASEAN economies will remain uneven, reflecting the bloc’s heterogeneity. Overall growth in ASEAN countries will average 4.7 percent in this year and 5 percent in 2017. Indonesia is projected to grow at 4.9 percent in 2016 and 5.3 percent in 2017. Growth in the Philippines, Malaysia, and Vietnam is expected to remain robust because of resilient domestic demand. Thailand’s growth rate will continue to be below its potential, but it will pick up modestly, driven by public spending.

For frontier economies and small states, growth remains generally strong, but several countries are facing vulnerabilities such as rising twin deficits, declining reserves, and also challenges from natural disasters. On the strong side Bangladesh’s growth rate is expected to exceed 6.5 percent in 2016 and ’17 helped by low commodity prices and investment in manufacturing. In Myanmar, the growth rate is projected to strengthen partly helped by the peaceful political transition and higher investment.

While this baseline outlook for Asia remains favorable there are downside risks that continue to dominate. External risks emanating from weak global growth and tighter global liquidity conditions compound domestic vulnerabilities. One big difference on the trade side from the past is that emerging markets, including China, are important contributors to the global trade slowdown at this moment, unlike the case in 2009 when advanced economies actually led the slowdown of global trade.

And second, asynchronous monetary policy in the U.S., Euro Area, and Japan can also increase volatility and the possibility of capital outflows from the region. But so far we have not seen major capital outflows in the region, except China, but that does not mean that asynchronous monetary policy of the advanced economies does not have an impact on the region. We saw that financial volatility has been high, and for many Asian countries, their currencies also have depreciated quite significantly.

The turning of the credit and financial cycle amid high debt poses significant risk to the growth in Asia. Several Asian countries have pockets of high corporate debt leverage problems while corporate profit also has significantly weakened.

And as for the spillover impact from China, we believe that while China’s necessary rebalancing will make growth more sustainable and in the longer-term its spillover effect must be positive to the global economy. But in the short-term its transition can have adverse but heterogeneous spillovers in the region through trade channels.

On trade, the impact depends on the type of exposure, type of goods you’re exporting to China. Countries which sell more consumption goods can be winners. On the other hand, countries which are selling more investment goods and manufacturing goods can lose in the near-term. And we also find that spillovers through financial channels are actually increasing as China is more integrated to the global financial market, especially the strength of financial spillovers have increased quite rapidly after the global financial crisis.

China’s slowdown has also had a larger impact on global commodity demand, but here, the impact is also quite heterogeneous. We find that the unexpected decline in demand for commodities such as metals, iron ore, and nickel has been much stronger, as these metals are the major input for construction and heavy industries.

On the other hand, it’s impact on oil demand has been relatively diluted but the demand for food is actually benefiting from China’s rebalancing so in some sense, China’s rebalancing has a very heterogeneous impact on commodities and has focused more and has a larger impact on metals.

In Asia, geopolitical tensions and domestic policy on certain things could also cause trade disruptions for lower growth rate. Natural disasters are another risk to the region, especially low income countries and small states. Small states also face new challenges such as de-risking by global banks which could undermine financial inclusion and growth for many Pacific island countries that heavily depend on remittances.

So far, we have just focused on the downside risk but I want to emphasize, before I move to the policy issues that Asia also has some upside risk. Low commodity prices could be a big net boost to the region, and also progress on the regional and multilateral trade negotiations such as TPP could benefit its member countries even before it is ratified. Finally, China — recent statistics from China show that it has surprised on the upside and that this could be good news for the region.

So let’s move on to the challenges now to navigate the turbulent global environment. I am glad to say that Asia can build on a number of strengths. In general, Asian economies have much stronger efforts and are well positioned to face challenges compared with other emerging markets in the other regions.

Broadly speaking, monetary policy settings are appropriate at this moment and inflation remains quite low, therefore, if growth disappoints, there is room to cut policy rates in a number of Asian economies.

Fiscal conditions vary across countries and several economies have fiscal space that can be used if the downside risk materializes or to prevent the downside risk. However, many others, especially low income Asian economies, are now seeing more vulnerabilities, and gradual fiscal consolidation is desirable to build policy space. For most of them, the composition of spending to allow for the infrastructure and social spending is important, including considering the rising inequality trend in the region.

Exchange rates should remain the major line of defense and macro potential policies, which have been used more extensively in Asia, can be used to deal with financial risk.

On structural reform, Asia has made lots of structure reforms in many countries and I am very glad that in our recent report, Asia is really outstanding, that we are actually doing a lot more structure reform than other regions. Pushing ahead with the structure reform will help ensure that Asia remains a global growth leader and they can also help reduce inequalities and foster inclusive growth. The reform agenda definitely is country specific, but timing and effective implementation will be quite critical.

So in conclusion, let me reiterate that Asia is in a relatively strong position, but there are pockets of vulnerabilities and the external environment has become much more difficult. So in order to build on its strengths during these turbulent times, Asia needs to continue to build buffers and to tackle urgently the high leverage problem it has and also needs to continue to implement structural reform to boost potential growth.

Asia Growth to Normalise, Not Collapse as Pressures Mount – Fitch

Fitch Ratings says that emerging Asia’s real GDP growth should slow to 6.3% in 2016 as regional economic pressures continue to add to a challenging outlook . That said, effective policy responses and sovereign buffers should provide a degree of protection, and the slowdown is better understood as a normalisation of growth rates and not an uncontrolled collapse. A hard landing in China is unlikely, and growth in India and in ASEAN should pick up. We forecast emerging Asia as remaining the fastest-growing emerging markets region in 2016.

Fitch’s latest Global Economic Outlook, published yesterday, forecasts global growth to pick up slightly in 2016. Issues linked to lacklustre trade and investment growth remain. But major advanced economies such as the US, Eurozone, UK and Japan seem to have emerged relatively unscathed from the slowdown in key emerging markets in 2015. We forecast global growth to accelerate to 2.6% in 2016 and 2.7% in 2017, from 2.3% in 2015.

In Asia-Pacific, the outlook remains challenging with added economic pressures from the continued slowdown in China’s growth, sluggish global trade growth, and an expected rise in US rates and resulting dollar strength. The expected slowdown in emerging Asia, however, is likely to be driven almost entirely by China. Fitch forecasts Indian growth to accelerate to 8% in the fiscal year ending March 2017, while emerging Asia excluding China and India should grow by 5.2% in 2016, up from 5% in 2015.

One potential downside risk to regional growth could come from high private-sector debt, which is still rising. Four Asian emerging markets have the highest ratios of bank private-sector credit to GDP of any Fitch-rated emerging markets – China, Malaysia, Thailand and Vietnam. Upward pressure on regional interest rates stemming from the US may weigh on domestic demand in more indebted economies.

Fitch maintains its view that the China slowdown is part of a broader structural adjustment necessary to achieve a more sustainable growth pattern. The data thus far from 2015 supports this picture, with weak exports and investments being offset by relatively robust consumption and a solid labour market. Importantly, the scenario of a very sharp slowdown in Chinese growth following the financial market volatility in the summer has not played out. This has reinforced the view that China is likely to muddle through during its structural-adjustment process – and avoid a hard landing.

The Chinese authorities maintain significant resources and capacity to avoid a disorderly deceleration. Fitch has raised its forecast 2017 growth rate for China to 6% from 5.5%, based on the latest Five-Year Plan which suggests a growth target of 6.5% for 2016-2020.

More broadly in Asia, sovereign rating outlooks are mostly stable despite the general outlook and mounting regional pressures. The risks of a financial crisis akin to 1997 are significantly mitigated. External balance sheets are stronger in the region; sovereigns rely less on foreign-currency funding than in 1996; and most countries now also benefit from flexible exchange-rate regimes.

Macroeconomic policy responses thus far have also helped to buffer credit profiles. This is especially the case in Indonesia and Malaysia, which stand out as relatively more exposed to external risk factors than other major economies in the region such as the Philippines and Vietnam.

Emerging Asia in Transition

Fed Vice Chairman Stanley Fischer spoke on “Emerging Asia in Transition“.  After a long period of rapid economic growth, Asia’s emerging economies appear to have entered a transitional phase. For decades, emerging Asian economies have been among the fastest growing and most dynamic in the world. Supported by an export-oriented development model, annual growth averaged 7-1/2 percent in the three decades leading up to the global financial crisis. Will developments in the global economy permit the continuation of the export-centered growth strategy that underlies the Asian miracle or will we later conclude that this period, the period after the Great Recession and the global financial crisis, marked the beginning of a new phase in the economic history of the modern global economy?

Emerging Asia has played an outsized role in commodity markets for some time now. Specifically, China, with its investment-heavy growth model, has accounted for a substantial amount of incremental commodity demand over the past two decades. Since 2000, China has accounted for roughly 40 percent of the increase in global demand for oil and 80 percent of the growth in demand for steel. For copper, all of the incremental rise in global demand has come from China, with demand excluding China falling over the period.

The strength of emerging Asian demand growth pushed commodity prices up sharply over most of the past decade, at least temporarily reversing what seemed to be an inexorable decline in both commodity prices and the terms of trade of commodity producers in the preceding two decades. Higher prices were a tremendous boon to commodity producers and supported a decade of strong growth in a number of emerging market economies, as well as commodity sectors in certain advanced economies, including Australia and the United States.

Since mid-2014, commodity prices have plummeted, with oil prices falling almost 60 percent and a broad index of metals prices losing about one-third of its value, dragging down growth in many commodity producers. Although rapid commodity output growth in recent years, which has reflected in part the response of producers to previous price increases, has certainly contributed to the fall in commodity prices, the slowing of demand growth from China and emerging Asia has also been an important factor.

While the path ahead for commodity prices is, as always, uncertain, declining investment rates in emerging Asia, particularly China, present the prospect of a prolonged decline in the growth rate of commodity demand. And prices could remain low for quite some time, which seems particularly true for metals, such as copper and steel, used heavily in construction and investment. However, for oil, the implications of a shift from investment-led growth to a consumption-led model are less certain. On a per capita basis, China’s consumption of oil remains far below that of advanced economies, in line with China’s lower rate of car ownership. Per capita oil consumption tends to increase with wealth, such that further income growth in China has the potential to provide strong support for the oil market in the coming years.

Indeed, more generally, the world stands to benefit from a transition to more consumption-led growth in emerging Asia. Under a successful transition toward more-balanced growth, emerging Asia can be expected to import a broader array of goods and services both from within the region and globally. Whether a country benefits from or is harmed by emerging Asia’s transition is likely to be determined by the flexibility of that country’s economy in adapting to shifts in Asian demand away from commodities and inputs for assembly into the region’s exports and toward services and goods to meet Asian final demand.

To recap, the transition to slower growth in the emerging Asian economies, as well as a shift toward domestic demand and consumption and away from external demand and investment in the region, is likely to have profound implications for the global economy. For one, trade growth is unlikely to resume its rapid pace of recent decades, and the long climb in commodity prices, which has benefited commodity producers, appears to have come to an end.

Can India Recharge Growth in Emerging Asia?
One source of uncertainty in this outlook, as alluded to earlier, is the prospect for India to provide a new growth engine for Asian development. In principle, India has enormous potential to recharge the Asian growth engine. For one, India is relatively unintegrated into global production-sharing networks. For example, machinery and electrical products, which feature heavily in production-sharing and which make up about half of exports in other emerging Asian economies, account for only 15 percent of India’s exports. Foreign direct investment into India is about half the size of similar flows into China as a percentage of GDP, and GDP per capita, at $1,600 in 2014, remains considerably below emerging Asia’s average.

All told, while the export-led growth model that propelled growth in China and other economies in emerging Asia has matured, pushing down growth rates, India remains at a relatively early stage of its development trajectory. Further capital deepening and the potential for further productivity gains suggest that India could maintain rapid economic growth for a number of years. As mentioned previously, India is also a young country, with a relatively low dependency ratio and a growing workforce. By United Nations estimates, India is set to overtake China during the next decade as the world’s most populous nation.

In the 1960s and 1970s, the Indian economy grew at around 3 to 4 percent. In subsequent decades the growth rate averaged close to 6 percent, and in the early years of this century it rose further, as can be seen in Table 1. In 2015, growth in India is expected to be 7-1/4 percent, the fastest among large economies, and the IMF expects growth to pick up from this already rapid pace through the end of the decade. Growth has been supported by an improved macroeconomic policy framework, including a strengthening of the framework for conducting monetary policy, as well as legal and regulatory reform. And the authorities have embarked on an ambitious program to improve the business environment.

That said, significant roadblocks need to be overcome for India to reach its full potential. The economy continues to suffer from a number of infrastructure bottlenecks that will be alleviated only through a pronounced increase in investment rates, a process that would likely be helped by a relaxation of restrictions on foreign direct investment. Likewise, efforts at difficult reform will have to be sustained. There is much hard work ahead if India is to come closer to fulfilling the potential that it so manifestly has.

Concluding Remarks
The performance of the Asian economies–notably those of East Asia, particularly China, Japan, and Korea–especially in the past six or seven decades, is an outstanding, if not unique, episode in the history of the global economy.

What lies ahead? In the relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates. The question here is whether the emerging market countries of Asia–and, indeed, of the world–are sufficiently prepared for these decisions, to the extent that potential capital flows and market adjustments can take place without major macroeconomic consequences. While we continue to scrutinize incoming data, and no final decisions have been made, we have done everything we can to avoid surprising the markets and governments when we move, to the extent that several emerging market (and other) central bankers have, for some time, been telling the Fed to “just do it.”

Further ahead lies the answer to the question of whether developments in the global economy will permit the continuation of the export-centered growth strategy that underlies the Asian miracle or whether we will later conclude that this period, the period after the Great Recession and the global financial crisis, marked the beginning of a new phase in the economic history of the modern global economy.7 Either way, the question of the economic future of India is of major importance not only to the 18 percent of the world’s population that lives in India, but also to the other 82 percent of the global population.

At a more structural level are three recent developments whose potential importance is currently difficult to assess: the setting up of the Asian Infrastructure Investment Bank; the likely inclusion of the Chinese yuan in the Special Drawing Rights basket; and the possible establishment of the TPP, a partnership in which China is not expected to be a founding member.

These are interesting and potentially important developments. Underlying the answer to the questions of what they portend, is the answer to the basic question of whether the economic center of gravity of the world will continue its shift of recent decades toward Asia–in particular, to China or, perhaps, to China and India. This shift would represent a return in some key respects to the global order of two centuries ago and earlier, before the economic rise of the West.

A partial answer to that question is that China is for some time likely to continue to grow faster than the rest of the world and thus to produce an increasing share of global output. Its importance in the global economy is likely to increase, and it is probable that, one way or another, its growth will result in its playing a more decisive role in the international economy and in international economic institutions.

Finally, we need to remind ourselves that geopolitical factors will play a critical role in the unfolding of that process.