World Risk Developments October 2014


China — Economic slowdown continues to deepen

View a summary of this month's edition.

The latest monthly indicators from August show a deepening economic slowdown. 

Industrial production growth slowed to a five-year low of 6.9% (y/y) in August from 9% in July. Growth in fixed asset investment also slowed, though retail sales held up better. The housing correction continues to be a serious drag, even as local governments continue to ease their housing restrictions and banks increase mortgage availability to homebuyers.

The authorities are adopting selective counter-cyclical measures in response. The People’s Bank recently injected RMB500b ($92b) of liquidity into the Top Five banks and cut the 14-day repo rate by 20 basis points. But it stopped short of across-the-board cuts in policy rates, because it wants to slow credit expansion and shadow banking.

Premier Li repeated recently that the government would rely more on targeted easing and reforms than on comprehensive fiscal and monetary stimulus to buoy growth. He seems to accept growth somewhat lower than the target now that the 2014 job creation target has been almost fulfilled.

Still, if the slowdown gets any worse, additional selective stimulus measures could be forthcoming, especially since annual inflation has now eased to 2%.


Thailand — When putsch comes to shove

Interim Prime Minister General Prayuth Cha-Ocha said on September 4 that he expects it will take at least a year to draft a new constitution – Thailand’s ‘own version of democracy’. He also said he might not hold to the original timetable of elections in October 2015.

Despite deep ‘red versus yellow’ divisions in Thai society made all the deeper by the coup staged in May, resistance to the junta has so far been minor. Still, if the red shirts sense that the democratic rules are being rigged against them, or that the generals are clinging to power for too long, that could change.

The economy is in quite a fragile state at the moment because of low consumer and business confidence. There are also structural concerns to do with ageing and a lack of adaptability. So another political crisis could be a large setback.

Philippines — Shock at ore export ban

A proposed ban on Philippine exports of unprocessed metal ores has caught the market unawares. 

The nickel price rose 7% in the four days after the announcement, and is up 22% since the start of the year, when Indonesia announced its own ban on nickel ore exports.

The Philippines was actually able to benefit from the Indonesian ban by stepping up its nickel ore exports to China. As a result, it has become China’s No. 1 foreign supplier this year.

But now, surprisingly, the government proposes to enact its own ban. Critics of the move have made essentially two points. First, if processing is so profitable, the market would already be doing it. Second, high power costs and shortages will undermine the profitability of ore processing. After all, the President recently asked Congress for emergency powers to deal with a ‘red alert’ declared by the National Grid Company.

One of the bill’s sponsors, Congressman Ping Amanto, has waved away these objections. ‘It’s a chicken-and-egg situation’, he said. ‘Who in his right mind will build an expensive power plant if no one will use it?’

After its initial alarm, the market seems to be calming down on news that the ban could take seven years to effect — two years to enact, according to Mr Amanto, after which miners should be given a five year grace period.

Even before the announcement of the ban, Philippine producers had an incentive to increase supply — to fill the gap left by Indonesia. Now they have a second incentive — to beat the ban.

Cambodia — Pay demands not only economic challenge

Thousands of clothing industry workers from around 300 factories staged a Global Day of Action on September 18 to campaign for an increase in the minimum wage from US$100 to US$177 a month.

All parties – workers, foreign fashion buyers and the government – appear to be taking a more conciliatory approach to the current campaign than to a previous one in 2013, in which police shot dead four striking workers.

This time, the workers protested in their lunch break, rather than striking. The following day, eight international fashion companies – Inditex, H&M, C&A, Primark, Next Retail, New Look, N Brown Group and Tchibo – sent a letter to the Cambodian government promising to pay higher garment prices to their Cambodian suppliers to enable the suppliers to pay a ‘fair living wage’. They wrote that their ‘sourcing volumes are forecast to increase’ provided the government and garment manufacturers show a ‘positive attitude’ and support ‘freedom of association, the right to collective bargaining, fair living wages, stability and peaceful conflict resolution’. For its part, the government is currently considering a pay rise for 2015.

It has also just released an ambitious National Strategic Development Plan for 2014-18 that aims to boost national productivity and prepare Cambodia for the start of the ASEAN Economic Community next year – a single market that will eliminate all tariff and non-tariff barriers on intra-ASEAN exports. Among the plan’s goals are 7% annual economic growth to reduce the poverty rate by 1% annually and push the economy towards upper middle-income status by 2030. To accomplish this, the government wants to mobilise almost US$27b of public and private investment over five years – US$10b for services, US$4b for farming, fisheries and forestry, and US$13b for industry.

Apart from pay rises, businesses in Cambodia also have to contend with infrastructure bottlenecks, labour skill shortages and corruption. There is also considerable tension between the government and the political opposition that some fear could boil over into violence.


Congo (Dem Rep) — Ebola sideswipes Australian miners

The Ebola epidemic has caused several mining operations to suspend production and evacuate staff – some Australian.

The Australian operations are the Kinsevere mine of MMG Limited (Hong Kong-listed, but Melbourne-headquartered), the Dikulushi mine of Mawson West, and the Kipoi Mine of Tiger Resources. The Tenke Fungurume copper mine of Freeport McMoRan has reportedly also had to shut. All are copper mines in the Katanga province of the Congo (Dem Rep).

The problem has been Botswana closing its borders to Congolese, including trucks from the Congo carrying copper ore to South Africa.

West Africa — Ebola economic cost could go either way

A World Bank analysis of the Ebola epidemic released last month finds that the economic costs could be limited if containment is swift. Then again, if the virus continues to surge in the three worst-affected countries – Guinea, Liberia, and Sierra Leone – its economic impact could grow eight-fold, dealing a ‘potentially catastrophic blow’ to the already fragile states.

In Liberia, the hardest hit country, the GDP hit could be almost 12 percentage points in 2015.

The analysis finds that the direct costs of the crisis – death, sickness, nursing, and associated lost working days – aren’t the largest ones. The largest cost is rather fear. This leads people to shun one another and withhold their labour, which closes businesses and disrupts transport, including through sea and airports. 80-90% of the total economic impact of epidemics comes from fear, the Bank concludes after studying previous epidemics such as SARS in 2002-2004 and H1N1 flu in 2009.

Roger Donnelly, Chief Economist

The views expressed in World Risk Developments are Export Finance Australia’s. They do not represent the views of the Australian Government. The information in this report is published for general information only and does not comprise advice or a recommendation of any kind.  While Export Finance Australia endeavours to ensure this information is accurate and current at the time of publication, Export Finance Australia makes no representation or warranty as to its reliability, accuracy or completeness.  To the maximum extent permitted by law, Export Finance Australia will not be liable to you or any other person for any loss or damage suffered or incurred by any person arising from any act, or failure to act, on the basis of any information or opinions contained in this report.