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| July 15, 2002 | Monday | Jamadi-ul-Awwal 4, 1423 |
World economic report
Economies throughout Asia are improving faster than had been expected, thanks to the rising exports and the renewed spending by consumers. As in the past recoveries, the main driver this time is the United States, the main destination for a large share of Asia’s exports. Yet the growing role of consumers, larger foreign currency reserves and stronger banking legislation have made many Asian economies more resilient to outside shocks that they were in, during 1997. Still, the region remains strongly tethered to the US economy, which is currently benefiting from the low inflation and the interest rates. A renewed downturn in the United States, perhaps triggered by turmoil in the financial markets, could take a toll in Asia, as well.
According to the report released by the Asian Development Bank, the combined gross domestic products of Indonesia, Malaysia, the Philippines, Singapore, Thailand, South Korea and China are expected to grow by 5.8 per cent this year after expanding by 4.3 per cent in 2001. Recent trade and production figures have led the bank to raise its GDP forecast for the group of countries by 0.6 percentage points since its last report was issued in April. Growth is becoming more balanced with a turnaround in exports being complemented by strengthening domestic demand.
For several years, exports in many developing economies in the region have made up an oversized portion of overall growth. Nearly half of Singapore’s GDP, for instance, is based on shipments overseas. But the clearing the thickets of regulations, particularly in the financial industry, has spurred growth in credit used and made it easier for consumers to spend in South Korea, Thailand and elsewhere. Waves of interest-rate cuts and stable prices during the past two years have also contributed to the change in behaviour. The bank expects the region’s central bankers to lean toward keeping rates on hold until recoveries are firmly in place, noting the Bank of Korea’s decision not to change its monetary policy at its meeting in June.
The renewed vigour in Asia this year bodes well for 2003. Economies in South Korea, China and the countries of the Association of South East Asian Nations will probably expand by 6.2 per cent next year, 0.2 percentage points more than had been forecast in April. ASEAN comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma, the Philippines, Singapore, Thailand and Vietnam.
The average growth forecasts did not include Brunei or Burma. Even so, the bank remains alert to risks from potential downturns in the US asset prices and from the rising oil prices. Further declines in the value of the dollar, too, could make Asian exports less appealing to the US companies and consumers. A weaker dollar has already raised the cost of Japanese exports, leading to worries that the country’s nascent recovery could falter before it firmly takes hold.
So far, the depreciation of the dollar has been slow and orderly, and, if anything somewhat supportive of the US recovery. But “a faltering US recovery and a sharp depreciation of the US dollar could deal serious blows to East Asia.
Maoist insurgency and the aftershocks of September 11 have taken a toll on the Nepali economy, pushing incomes lower and sapping growth. The government’s economic survey of the fiscal year 2001-02 has painted a gloomy picture of the economy with its growth in the gross domestic product (GDP) remaining at just 0.8 per cent, the lowest in a decade. The per capita income stands at $226, down from last fiscal year’s $240, due to the low economic growth rate and the depreciation of the Nepali rupee vis-a-vis the dollar.
The GDP increased by 4.8 per cent in the 2000-01 fiscal, while the finance minister had projected 6 per cent growth this year - 7 per cent if the agriculture sector is excluded. Non-agricultural growth was put at only 0.2 per cent in the closing fiscal year, while agricultural production was projected at just 1.7 per cent.
Nepal’s population increased by 2.02 per cent to 23.21 million. Economists said tourism, the main earner of foreign currency in Nepal, was devastated after the September 11 terrorist attacks in the United States, which also hit Nepal’s export market. Total trade accounted for 104.77 billion rupees ($1.4 billion) in the current fiscal year, down 8.26 per cent from 2000-01.
The tourist arrivals have dropped by nearly half since June 1, 2001, when 10 members of the royal family were killed in a place massacre carried out by the crown prince. The recovering industry was set back again in November, when the Maoist rebels broke a four-month ceasefire and launched attacks with a new ferocity. Inflation was three per cent in 2001-02. Foreign exchange reserves were $1.33 billion, with 73.3 per cent of its in convertible currency. The figure would cover the cost of imports for more than 10 months.
The GDP growth rate in comparison to population growth rate has been a negative 1.44 per cent. “This is possibly the first time that the population growth rate has surpassed the economic growth rate, which indicates an increasing number of the poor in the country,” noted the survey, which covers the first eight months of the current fiscal year ending July 15. The survey attributed the plummeting growth mainly to the downslide in the non-agriculture sector, which grew at just 0.2 per cent, while the growth in the agriculture sector has also not been satisfactory with the growth rate at just 1.7 per cent.
The biggest negative trend was seen both in the industry and commerce sector and the hotels and restaurants sector, which have witnessed a contraction by 5.9 per cent and 6.4 per cent, respectively, compared with a growth of 3.6 per cent and 2.8 per cent, respectively, in the last fiscal year. The survey presumes that the poor economic performance was mainly due to the social instability caused by the anti-government guerrilla’s insurgent activities. The other reasons for the decline of the GDP growth include the 21.2 per cent decline in the tourist arrivals as well as the decrease in exports by 23.1 per cent in carpets, 28.8 per cent in readymade garments and 78.5 per cent in pashmina, namely cashmere. All of them are main foreign currency earners of the country.
The International Monetary Fund (IMF) gave a positive report on the Indonesian economy saying that macro economic indicators were encouraging and urged the government to stick to the agreed reform programme to maintain the current positive sentiment in the economy. Since the star of 2002, Indonesia has managed to make significant progress in several of its key programmes, which has been the cause of the revival of the needed foreign confidence. Progress in question included, among other things, the sale of assets held by the Indonesian Bank Restructuring Agency (IBRA) and the approval by the House of Representatives of the government’s privatization programme for 2002. Progress in the asset sale programme included the sale of government shares in Bank Central Asia (BCA), and the launch of the Bank Niaga divestment plan.
The positive development had lifted sentiment in the Indonesian market, both currency and stocks, to new heights. The rupiah appreciated by more than 10 per cent of its value in the first four months of 2002, while the Jakarta Stock Exchange Composite Index jumped almost 40 per cent. It was considered as one of the most best performing markets in the region. Also helping the rupiah’s upward movement was the Paris Club of creditor nations agreeing in April to reschedule Indonesia’s debt repayments totalling $5.4 billion.
While Indonesia’s economy has been making significant improvement in a number of key areas, progress remains relatively fragile. Jakarta still needed to work on sustaining progress it has made in the past 12 months. A lot would depend not only on global economic condition, but also on domestic reforms. The stronger rupiah has now moved to the region of Rp8,500 to Rp9,000 to the dollar. Indonesia should not squander the opportunity presented. This is a point of opportunity, Indonesia has been at this point before, at the start of the Abdurrahman Wahid’s presidency in October 1999 when the rupiah was in the range of Rp7,000 to Rp8,000. Indonesia needs improved investment climate not only for foreign investors, but also more importantly, for local investors. Gaining investors’ confidence was crucial for Indonesia to maintain the progress it had made so far.
The rupiah had been gaining ground before the US dollar began to weaken globally in March. Other economic indicators however point at the other direction, underpinning investors’ lack of confidence. Foreign direct investment as well as domestic investment both fell in the first six months of the year with officials laying much of the blame on controversial court rulings that discouraged investors. Export revenues also dropped during the period, and minister of industry and trade has attributed this to falling orders for manufacturing products because of labour conflicts besetting the industrial sector.
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