Can export revival sustain recovery?

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.