Asia Sourcing Update. Bangladesh, India, Pakistan and Turkey July 2013 FUNG BUSINESS INTELLIGENCE CENTRE IN THIS ISSUE:

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1 FUNG BUSINESS INTELLIGENCE CENTRE Asia Sourcing Update Bangladesh, India, Pakistan and Turkey IN THIS ISSUE: I. In the News II. Major Economic Indicators III. Daily Exchange Rates IV. Appendix: Global Competitiveness Index Turkey Real GDP grew by 3.0% yoy in 1Q13 PMI signaled improvement in manufacturing industry in June Orders delivered as usual despite anti-government protests Pakistan Textile and garment exports grew by 5.3% yoy in May More power cuts to come in summer months New Budget introduced an additional 2% tax on supplies to unregistered firms India GDP growth slowed to a decade low Rupee depreciation cheers garment exporters Global apparel buyers are expanding sourcing from India on better compliance Bangladesh Social sustainability measures heightened in wake of the Rana Plaza collapse Prominent brands signed binding accord on factory safety US suspended GSP trade benefits

2 Asia Sourcing Update In the News Bangladesh: Social sustainability measures heightened in wake of the Rana Plaza collapse The Rana Plaza tragedy, which claimed the lives of over 1,100 garment workers and injured many in April, has raised concerns both within the country and internationally, forcing the Bangladeshi government to take steps for the welfare of workers. In June, the government announced a sixmember wage board, which was tasked with fixing a new minimum wage for garment workers within six months. The current minimum wage level is Tk 3,000 (US$ 38) per month, and some garment worker unions are demanding an increase to as high as Tk 8,000 (US$ 103). Minimum wage adjustments in Bangladesh are few and far between; but when they do occur, the changes are usually significant. (See Exhibit 1 for the last 3 adjustments) In the same month, the government placed an amendment to the labor law in the parliament with an aim to improve the welfare of factory workers. The proposed changes, if approved by the parliament, will prohibit factory owners from obstructing or blocking the exit doors at the factories during the work day, require factory owners to carry out fire drills every six months (the current requirement is once per year), and allow workers to form trade unions. While government officials have repeatedly expressed their support for trade unions in garment factories, Bangladeshi union leaders point out that there remain severe obstacles to unionization, collective bargaining and the right to strike. At the same time, according to the Labour Minister, factories located in Ashulia, Savar and Dhaka will be moved to Gazaria, Munshiganj, where 500 acres of land has been set aside to develop a special garment factory zone. Housing projects for workers will be set up in the zone as well, which will include schools, colleges and hospitals. Bangladesh: Prominent brands signed binding accord on factory safety Following the recent tragedies, there was wide global interest from both consumers and clothing retailers in establishing enforceable standards for factory and building safety in Bangladesh. After a series of meetings in May, the IndustriALL Global Union and the UNI Global Union, together with some leading NGOs, created and sponsored an Accord on Fire and Building Safety in Bangladesh. Expanding on an earlier two-year agreement that had been signed by PVH and Tchibo, the current Accord is a five-year legally binding agreement between the sponsors and retailers engaged in the textile industry to maintain minimum safety standards in Bangladesh s textile industry. As of 31 May, 44 companies have already signed up to the Accord (see Exhibit 2), and the list is growing. By the end of June, the Accord covers around 2,000 of Bangladesh s 4,000 garment factories. Exhibit 1: Last 3 adjustments of minimum wage for garment workers in Bangladesh Minimum monthly wages for garment workers Tk 940 (up by 48 %) Tk 1,662 (up by 76.8%) Tk 3,000 (up by 80.4%) Source: The Financial Express 1

3 Bangladesh, India, Pakistan and Turkey The Accord provides a binding programme of fire and building safety reforms based on independent inspections, worker-led health and safety committees and union access to factories. Signatories commit to fund improvements in dangerous factories that they source from and to properly tackle fire safety and structural problems. (For details of the Accord on Fire and Building Safety in Bangladesh, please visit Exhibit 2: Signatories to the Accord on Fire and Building Safety in Bangladesh (as at end-may) Abercrombie & Fitch Aldi North Aldi South Benetton Bonmarche C&A Carrefour Charles Vögele Comtex El Corte Inglés Ernstings s Family Esprit Fat Face G-star H&M Source: IndustriALL Global Union Helly Hansen Hema Hess Natur Inditex Jbc John Lewis Kik Lidl Loblaw Mango Marks and Spencer Mothercare N Brown New Look Next Otto Group Primark PVH s.oliver Sainsbury's Sean John Stockmann Switcher Tally Weijl Tchibo Tesco V&D We Europe Zeeman Bangladesh: US suspended GSP trade benefits On 27 June, the US suspended Generalized System of Preferences (GSP) trade benefits for Bangladesh after a six-year review exposed serious shortcomings in safety and labour standards. According to the US, the suspension underlines the lack of progress by the Bangladeshi government in improving factory conditions. I have determined that it is appropriate to suspend Bangladesh s designation as a beneficiary developing country under the GSP programme because it is not taking steps to afford internationally recognized worker rights to workers in the country, US President Barack Obama said in a message to the Congress. The cancellation of GSP from the US will bring tariffs back on some of Bangladesh s exports to the US, but direct economic impact will not be significant as Bangladesh s major export item garment was not included in the US GSP package. India: GDP growth slowed to a decade low GDP rose by 5.0% yoy in the last fiscal year (April March 2013), the slowest growth in a decade. Low business confidence, slumping investment, high inflation and weak export demand from developed countries all contributed to the dismal performance of the once-booming South Asian economy. Recent data releases continued to show a disappointing economic environment without any distinct signs of recovery. Growth in factory output, as measured by the Index of Industrial Production (IIP), decelerated to a dismal 2.0% yoy in April compared to 3.4% yoy growth registered in March. The slowdown was attributed to poor performance by the manufacturing and mining sectors. The 2

4 Asia Sourcing Update seasonally adjusted HSBC Purchasing Managers Index a composite indicator designed to provide a snapshot of the performance of the manufacturing industry edged up only to 50.3 in June from a 50-month low of 50.1 in May. (An index reading above 50 indicates an overall expansion in the sector; below 50, an overall contraction.) India: Rupee depreciation cheers garment exporters The Indian rupee hit an all-time low of against the US dollar on 26 June, which is also the first time when it slid past the 60 mark. Cumulatively, the rupee has depreciated by over 10% against the US dollar since May this year. The depreciation appears to have come at the right time for the garment industry as orders for the next season have begun pouring in. A weak rupee is going to increase profit margins for garment exporters by 5-7%, according to Rahul Mehta, president of the Clothing and Manufacturers Association of India. The increase in profitability will also allow Indian apparel exporters to accept more orders, whereas in the past, they might have to give up some orders due to lack of profitability. However, depreciation of the rupee will also lead to a rise in prices of petroleum and imported raw materials, which will offset the profitability gains. Meanwhile, apparel buyers are asking for price reductions or discounts and urging Indian exporters to pass on a Rs 1-2 (US$ ) per US dollar benefit to them, according to A. Sakthivel, chairman of the Apparel Export Promotion Council. India: Global apparel buyers are expanding sourcing from India on better compliance Due to persistent improvement in factory compliance in India, global apparel buyers prefer to expand their sourcing from India. Some of them are switching from Bangladesh to India because of concerns about safety standards there. According to the Apparel Export Promotion Council (AEPC), factory-compliant manufacturers in India have seen an unprecedented surge in export orders this season. With a flow of new orders into the country, Indian exporters are expected to fetch an additional US$ 3 billion in the current fiscal year amid a market rebound in the US and a weak Indian rupee. The Ministry of Textiles has set a target of bringing 2,900 apparel factories under the DISHA (Driving Industry towards Sustainable Human Capital Advancement) program in the country s 12 th Five-Year Plan ( ). Launched in December 2011, the DISHA program aims at encouraging members to follow better social practices and to meet global standards on labour and environmental issues. Pakistan: Textile and garment exports grew by 5.3% yoy in May Textile and clothing exports from Pakistan grew by 5.3% to US$ 1.19 million in May this year as compared to US$ 1.13 million in May 2012, due to a rise in demand from the US and European markets. In the first eleven months of the current fiscal year (July June 2013), exports of textile and clothing amounted to US$ billion, up by 6.0% yoy. Items that recorded positive export growth in May included cotton carded or combed (+177.3% yoy), yarn other than cotton yarn (+46.4% yoy), readymade garments (+22.7% yoy), bedwear (+14.0% yoy), cotton yarn (+11.9% yoy), towels (+8.0% yoy), other textile materials (+6.5% yoy), cotton cloth (+5.8% yoy) and knitwear (+2.1 yoy). By contrast, exports of raw cotton plummeted by 66.4% yoy in May, and exports of art silk and synthetic textile and made-up articles excluding towels and bedwear fell by 30.3% yoy and 0.43% yoy, respectively. 3

5 Bangladesh, India, Pakistan and Turkey According to the Economic Survey of Pakistan ( ), textile and garment exports contributed US$621.8 million or 76.0% to the overall US$818 million year-on-year increase in Pakistan s exports in the first ten months of the current fiscal year. 1% annually for 5 years, from the current level of 35% to 30%. This policy is expected to encourage corporatization in the country. The income tax exemption period for investments made in Special Economic Zones will be extended from 5 years to 10 years, which will help boost investments in such zones. Pakistan: More power cuts to come in summer months With currently 12 to 18 hours of load shedding a day in most parts of the nation, Pakistan now suffers one of the worst energy crises in its history. The Ministry of Petroleum and Natural Resources warned that power cuts may worsen in the summer season due to a severe shortage of fuel oil, as Pakistan State Oil, the country s largest supplier of fuel oil, fell into financial distress and cut off provisions of fuel oil. All Pakistan Textile Mills Association (APTMA) has cautioned the government that textile mills in Punjab the most populous province in the country are on the verge of closing down, as load shedding has increased to 12 hours a day and gas supply has decreased to twice a week. The entrepreneurs in Punjab are thinking seriously of shifting their businesses to other provinces for smoother operations. Pakistan: New Budget introduced an additional 2% tax on supplies to unregistered firms The Federal Budget imposed an additional 2% sales tax on all taxable supplies provided to unregistered entities. The All Pakistan Textile Mills Association (APTMA) has expressed concern over the tax hike, which may lead to increase in production cost for textile firms in the country. Pakistan s textile industry is already losing half of its production capacity due to shortage of gas and electricity, and the new tax measure will further add to the burden. On the other hand, the Budget also provides incentives for corporations and investments. Beginning from the fiscal year , the maximum corporate tax rate will be reduced by Turkey: Real GDP grew by 3.0% yoy in 1Q13 Turkey s economy has continued to grow for the 14 th quarter running, as the real GDP expanded by 3.0% yoy in 1Q13, according to the Turkish Statistics Institute. By sector, the fastest growth was achieved in the hotels and restaurants sector at 13.7% yoy in 1Q13, while financial intermediary institutions came second with yoy growth of 6.5%. The manufacturing industry, which contributed 26% to the total GDP of the country, also grew by 2.8% yoy in the same quarter. In terms of expenditure, domestic demand was the main driver of growth in 1Q13, as household consumption increased by 3.0% yoy and government expenditure grew by 7.2% yoy. Investment remained weak, mainly due to the slump in private sector investment. Export growth moderated to 3.4% yoy in 1Q13, after posting double-digit rates in the past four quarters. According to the Finance Minister Mehmet Simsek, balanced public accounts, real and financial stability, strong household consumption and increasing industrial production will support economic growth in the coming months. Turkey: PMI signaled improvement in manufacturing industry in June Manufacturing conditions in Turkey improved for the tenth consecutive month in June, with the pace of expansion accelerating slightly after a four-month deceleration. The seasonally adjusted HSBC Turkey Manufacturing PMI a composite indicator designed to provide a snapshot of the performance of the 4

6 Asia Sourcing Update manufacturing industry posted at 51.2 in June, edging up from 51.1 in May (an index reading above 50 indicates an overall expansion in the industry; below 50, an overall contraction). The factory output sub-index indicates a rise in manufacturing production in June, although manufacturers also commented that the ongoing nationwide protests had prevented a stronger increase. The new orders sub-index continued to show growth, and new export orders returned to the growth path after contracting in May. Turkey: Orders delivered as usual despite anti-government protests Anti-government protests have swept the country for more than three weeks. The protests began on 28 May against a plan to redevelop the Gezi Park in Istanbul, but escalated rapidly into nationwide anti-government protests after the police responded to peaceful protesters heavy-handedly. More than 60% of Turkey s textiles and apparel are manufactured in Istanbul, where the unrest is taking place. According to the Turkish Clothing Manufacturers Association (TCMA), which represents most Turkish clothing manufacturers, these recent protests have not disrupted order delivery. Garment workers have continued working in factories and production is unaffected. Garment workers have been participating in demonstrations but not strikes. Many of the workers involved in the strikes are members of the United Transport Workers Union, who play a vital role in transporting clothing and textile products to the European market. So far the unrest has not disrupted shipments, partly due to the off season for European retailers. 5

7 Bangladesh, India, Pakistan and Turkey Major Economic Indicators Bangladesh Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Quantum index of medium and large-scale manufacturing (yoy growth %) Consumer price index (yoy growth %)* Exports (yoy growth %) Exports (FOB, US$ mn) Of which: - Knitwear (US$ mn) Woven garments Home textile Jute and jute goods Footwear Leather products Plastic products Imports (yoy growth %) Imports (FOB, US$ mn) One-day repo rate (%, end of month) * The consumer price index uses as the base year. Source: Bangladesh Bureau of Statistics, Bangladesh Bank, Export Promotion Bureau India Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Quarterly GDP (real yoy growth %) 4.8(4Q ) - Index of industrial production (yoy growth %) Manufacturing PMI (HSBC) Wholesale price index (yoy growth %) Consumer price index (yoy growth %) Exports (yoy growth %) Exports (FOB, US$ bn) Imports (yoy growth %) Imports (CIF, US$ bn) Trade balance (US$ bn) One-day repo rate (%, end of month) Source: Ministry of Finance, Reserve Bank of India, HSBC PMI reports Pakistan Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Quantum index of large-scale manufacturing (yoy growth %) Consumer price index (yoy growth %) Exports (yoy growth %) Exports (US$ mn) Imports (yoy growth %) Imports (US$ mn) Balance of trade (US$ mn) Overnight reverse repo rate (%, end of month) Source: Pakistan Bureau of Statistics, State Bank of Pakistan 6

8 Rupee/dollar Lira/dollar Taka/dollar Rupee/dollar Asia Sourcing Update Turkey Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Quarterly GDP (real yoy growth %) 3.0(1Q13) - Industrial production index*, manufacturing (yoy growth %) Manufacturing PMI (HSBC) Industrial turnover index* (yoy growth %) Producer price index (yoy growth %) Consumer price index (yoy growth %) Exports (yoy growth %) Exports (US$ mn) Imports (yoy growth %) Imports (US$ mn) Balance of trade (US$ mn) One-week repo rate (%, end of month) * Since January 2013, the base year of industrial production index and industrial turnover index has changed to Source: Turkish Statistical Institute, Central Bank of the Republic of Turkey, HSBC PMI reports Daily Exchange Rates Bangladesh: USD buy rate (Jan - Jun 2013) India: INR/USD RBI reference rate (Jan - Jun 2013) Source: Bangladesh Bank Source: Reserve Bank of India (RBI) Pakistan: weighted average customer USD buy rate (Jan - Jun 2013) 2.00 Turkey: USD buy rate (Jan - Jun 2013) Source: State Bank of Pakistan Source: Central Bank of the Republic of Turkey 7

9 Appendix Global Competitiveness Index (Rank out of 144 countries) Rank/144 Bangladesh Cambodia China India Indonesia Pakistan Philippines Thailand Turkey Vietnam Overall competitiveness Institutions Intellectual property protection Burden of government regulation Strength of investor protection Infrastructure Quality of roads Quality of railroad infrastructure Quality of port infrastructure Quality of air transport infrastructure Quality of electricity supply Macroeconomic environment Health and primary education Higher education and training Goods market efficiency Prevalence of trade barriers Trade tariffs, % duty Burden of customs procedures Labor market efficiency Cooperation in labor-employer relations Flexibility of wage determination Pay and productivity Business sophistication Local supplier quantity Local supplier quality State of cluster development Source: The Global Competitiveness Report ( )

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