Can export revival sustain recovery?

By Elwin Tobing

BOSTON (JP): As it helped to fuel the economic crisis in 1997, the accelerating growth of exports among Southeast Asia's major economies has underpinned the region's economic recovery.

The major regional economies in the region experienced rosy growth rates in exports last year. According to data from the International Monetary Fund (Direction of Trade Statistics Quarterly, 1999), during the first half of the year, the strongest growth was recorded in the Philippines, where merchandise export earnings rose about 25 percent year-on-year to US$3.5 billion.

Singapore's revenues from non-oil exports increased 15 percent to $5.5 billion, while Malaysia and Thailand recorded rises of 10 percent and 6 percent respectively. In Indonesia, export revenues grew 2.6 percent.

A number of factors are contributing to the region's strong trade performance. The first is the simultaneous effects of the yen appreciation, strong growth of the U.S. economy and the regional currency devaluations.

The rise in the value of the yen against the dollar has improved the competitiveness of non-Japanese Asian exports vis-a- vis Japanese goods in third markets, while the currency devaluations in the region have made their products cheaper in the world market, boosting demand.

Since the U.S. economy absorbed about 23 percent of the region's exports, robust growth of the U.S. economy has increased demand for the region's products.

The second factor has been an upsurge in global demand for electronic goods. Combined with the currency devaluations experienced throughout the region in 1997 and 1998, this increase has enabled the major economies of Southeast Asia to regain market share in electronic products.

Singapore reported an 11 percent year-on-year increase in electronic exports in October, with a 37 percent rise in exports of integrated circuits more than offsetting an 11 percent decline in disk drives. Dollar earnings for the Philippines from electronics exports rose 46 percent, while Malaysia recorded a 16 percent increase in ringgit receipts in the same month.

The increase in the value of electronic exports is partly due to higher prices and demand for semiconductors. Prices for the benchmark 64-bit DRAM have doubled since June 1999, and global demand for semiconductors rose more than 20 percent in October 1999 from the same period in 1998. With this rising demand for semiconductors, increased outsourcing by U.S. and Northeast Asian companies as well as the growth in electronic commerce, the electronic sector is expected to sustain robust growth in 2000.

Third, there is more intensive intraregional trade. The regional surge in exports is also being driven by the recovery of domestic demand in a number of key Asian markets. In turn, this has lessened the region's dependence on the U.S. market. In the first half of 1999, Japan and the rest of Asia contributed around 45 percent to export growth while the United States accounted for 30 percent, a reversal of earlier trends. This process is expected to continue as the region's economies recover which will boost private consumption.

Fourth, an increase in oil prices. The strong rebound in oil prices has been particularly beneficial for the two major oil producers, Malaysia and Indonesia, as well as Singapore's refining industry. The benchmark Brent crude price per barrel has increased from just over $10 at the beginning of the year to around $25. Indonesian exports of oil and gas increased 15 percent in dollar terms in the first 10 months of 1999, largely as a result of the jump in global oil prices. Prices are likely to remain strong at least for the first half of 2000, underpinning export earnings for Indonesia and Malaysia next year.

Most indicators suggest that the current revival in exports will likely continue through this year, fostering the economic recovery efforts. However, a number of risks remain.

First, investment growth remains weak. This is partly due to the problems in the region's banks. With the exception of Singapore, regional banks are still dealing with high levels of nonperforming loans and inadequate capital levels.

As such, banks remain cautious about extending new lines of credit, putting the existence of small and medium enterprises that really need capital in danger. This eventually will weaken the domestic supplier bases. Additionally, slow progress in setting up domestic supplier bases will perpetuate the reliance on imported components and equipment, wiping out most trade and current account surpluses in the near future.

The crisis has also resulted in low human capital investment. Insufficient investment in labor skills will not only hamper technology transfers, but also undermine efforts to add more value to production once the benefits of short-term currency depreciations have worn off.

The dynamism of the U.S. market is another crucial factor. Although the region is becoming less dependent on U.S. markets, a significant slowdown in the U.S. would harm Southeast Asia's recovery. A sustained and substantial fall in the dollar would undermine export markets in the U.S. and potentially expose the region to unwanted trade friction.

Steady and robust export growth will promote economic recovery. However, most of the trade gains made in 1999 were essentially of a temporary nature and have not been supported by deeper structural reforms.

Recovery efforts could be put at risk by a sharp decline in external demand, insufficient private investment and a lack of commitment to structural reforms. Once the benefits of short- term currency depreciations have worn off, the demand for the region's products will decrease. A stronger commitment to structural reforms is thus required to sustain economic recovery.

The writer is chairman of a research organization, The Indonesian Institute, in Boston, the United States.