Payment delays in China are worrying
View a summary of this month's edition.
View a summary of this month's edition.
The slowing economy has increased the time it takes for Chinese customers to pay their bills.
It takes the average business in China 84 days to get paid—double the payment time in other emerging economies. More worryingly these payment delays have risen sharply in recent years, to levels not seen since the late 1990s when China had its last economic slump.
Payment delays are most pronounced in the energy, industrial and IT sectors (Chart 1). That owes to China’s ongoing rebalancing away from investment-led growth toward consumption which is crimping industrial output. The underlying increase in payment days threatens companies entwined in China’s extensive supply chains. For Australian exporters, lengthy payment delays from Chinese customers could increase the demand and tenor for working capital facilities to bridge financing gaps.
China’s pork shortage bodes well for Australian pork exporters. Tougher environmental regulations and outbreak of disease have weighed heavily on China’s domestic pork production, leading to higher prices and imports.
China is the world’s largest consumer of pork and the expanding middle-class is driving robust demand growth. Pork prices in China rose 50% from a year earlier in April to A$4.00/kg, while imports have more than doubled between March 2015 and March 2016 (Chart 2). Surging pork prices have been behind the strong rise in food inflation‒up 7.4% p.a. in April. In response Beijing has released 3,050 tonnes of frozen pork, but this may not be enough to cool prices.
China and Hong Kong account for 10% of Australia’s pork exports. While pork exports fell 18% p.a. in 2014-2015, stronger Chinese demand and higher pork prices should support Australian exporters this year. This should partly offset headwinds in key markets—Papua New Guinea’s ongoing foreign exchange shortage is weighing on Australian pork exports, while greater market share by US and EU producers is crowding out Australian producers in New Zealand.
A Temer-led administration will embrace an economically liberal agenda, but economic and political hurdles are immense and Temer's window of opportunity to pass reforms is narrow.
After a marathon debate, the Brazilian Senate voted to suspend President Dilma Rousseff for 180 days while she undergoes an impeachment trial for alleged manipulation of the size of the country’s exports.
Vice President Michel Temer temporarily assumed the presidency on 12 May—and has sought to boost confidence by appointing a reputable economic team and setting expectations for a battery of market-friendly economic policies. But political obstacles are enormous—Temer will face stiff legislative resistance from an unwieldy coalition to unpopular but urgently needed fiscal reforms (Chart 3) and his succession is unpopular with the electorate—about two-thirds of Brazilians favour new elections.
Inherited economic hurdles are also enormous—profound recession and rising unemployment wrack the economy. Fitch's recent downgrade of Brazil's sovereign rating deeper into junk territory suggests scepticism that Temer can implement the major reforms required to boost confidence and improve the poor business environment. Still, the prospect of more orthodox policies provoked a marginally positive response from markets—with the Bovespa rising almost 1% following the announcement (Chart 4). Despite considerable hurdles, latest developments offer new hope of recovery in Australia's largest South American trading partner.
Wildcard Rodrigo Duterte appears to have won recent Presidential elections in The Philippines based on a populist campaign to cut crime and reduce poverty. Encouraging statements for economic policy continuity has calmed investor nervousness, but significant uncertainties remain.
Duterte appears to have won the hotly contested presidential election with a larger than expected mandate. Polling was peaceful with record voter turnout, and is therefore the result is considered credible. ‘Duterte Harry’ made his name as the crime-fighting mayor of Davao, in the violence-wracked southern island of Mindanao. He campaigned on wiping out crime nationwide within six months—declaring his presidency would be "bloody". He also emphasised inclusive growth—messages which resonated with an electorate that believes it has not benefited from the strong growth achieved under outgoing President Aquino, but which has endured a sharp increase in crime.
Duterte’s sketchy economic policies initially unnerved investors, who have poured in increasing amounts of FDI. But Duterte's team have since confirmed continuity of the Aquino administration's broad policy trajectory—the Philippines remains 'open for business'. Social spending will enhance capacity in education and agriculture, while 5% of GDP will be spent improving infrastructure. The administration will clamp down on corruption, attempt to reform the constitution to raise foreign investment limits, make the public-private partnership system more efficient, and the regulatory environment more competitive. The IIF expect growth to remain stable around 5.8% this year and next.
These encouraging signs are offset by continued uncertainty over cabinet selection and whether investor-friendly policies can be successfully implemented. Duterte is likely to be hands-off on economic policies—instead relying on appointed cabinet members and policymakers. But unlike his predecessor, Duterte may not have control over Congress and the vice-presidential race is still far from certain.
Saudi Arabia has announced an ambitious economic overhaul to drastically curtail its reliance on oil and diversify the economy. This will be achieved via a bold privatisation plan and a reduction in runaway state finances. Although new export opportunities are likely in a more diverse Saudi marketplace, authorities will need to manage implementation carefully to avoid social unrest.
‘Vision 2030’ aims to raise the private sector contribution to the economy from 45% to 60%. Privatisations and relaxing limits on foreign ownership are central to the plan. Authorities aim to raise capital through the part-privatisation of state assets—including up to a 5% public listing of the state oil company Aramco, which is expected to yield an estimated windfall gain of over 30% of GDP—to fund wide ranging reforms to diversify the economy.
This is expected to offer new opportunities for Australian exporters—the IIF expect Vision 2030 will lead to sustained higher growth from 2017. But it may also create new risk. In particular, these newly independent businesses could choose to reduce their bloated workforce creating social unrest. For instance, Kuwait oil strikers recently went on strike to protest reforms they feared would lead to reduced benefits.
Fiscal consolidation efforts are also key to Vision 2030. While Saudi has relatively low extraction costs, ever higher oil prices (currently over US$95/bbl) are needed to balance the books. In the five years following the Arab Spring, spending has increased 50%. The subdued oil price outlook that prompted Moody’s to downgrade Saudi’s credit rating earlier this month is likely to endure—making expenditure cuts critical to fiscal sustainability. But implementation will need to be carefully managed in order to avoid inflaming social tensions in a society accustomed to cradle-to-grave benefits.
The use of artificial colours, flavourings and sweeteners in new food and drinks products globally has fallen significantly since 2011, while the consumption of fresh foods has risen. Healthier diets will have a material positive impact on Australian fresh food exports.
These findings align with the Nielsen consumer survey done in late 2014, which found an increase in the demand for natural and fresh food. The survey also found customers in developing countries were more willing to pay a higher premium for fresh foods relative to those in developed markets.
The increasing shift to healthier diets is having a materially positive impact on Australian fresh food exports, which have risen 30% p.a. over the last three years to A$1.1b. Fresh food consumption is expected to remain robust over the coming years. Australia’s strong links with emerging economies who have a large expanding middle-class, many of which are willing to pay a premium for fresh produce, will add further upside to the outlook.
Cassandra Winzenried, Senior Economist
Fred Gibson, Economist
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