ASIA MONTHLY February 13 Topics Changing Thai labor market and supply chain 1 Korea 3 Indonesia India 5 China 6 http://www.jri.co.jp/english/periodical/asia/
February 13, No.13 Topics Changing Thai labor market and supply chain As of January 1, 13, Thailand s minimum wage was raised to a nationwide flat rate of Bt3 per day. Additionally, restrictions on foreign labor have been tightened. These changes in the labor market are expected to have an effect on Thailand s supply chain. Minimum wage level raised As of January 1, 13, Thailand s minimum wage was raised to a nationwide flat rate of Bt3 per day. This had been one of That Pheu Thai s election promises, but given the extensive damage that followed the flooding that hit Thailand just after the Yingluck administration came to power, many businessmen felt that the increase was too high, and there was a strong reaction from industry. This caused the implementation of the new legislation to be delayed. In April, 1, while the new minimum wage level of Bt3 per day was introduced in Bangkok and five neighboring provinces, where wages were already comparatively high, the increase for the rest of the country was just a flat rate of around %. This latest increase was a flat rate of Bt3 per day across the country, as per the election promise. For low income level provinces this is a particularly big increase. For example, in Phayao province in northern Thailand, the daily minimum wage rose from Bt159 to Bt3, almost double. It is estimated that there are some 5. million people in the whole of Thailand working at less than the Bt3 minimum daily wage. For workers at Japanese and other foreign firms, wage levels are already higher than this, but the raising of the minimum wage level will force a review of salary structures and, for foreign firms also, wage costs are expected to rise by about 1%. In response to the new higher minimum wage, from the perspective of the impact on small and medium sized enterprises, industrial circles have been asking the government to cover at least some portion of the wage rise. While the government did not accede to this request, on January 9, the cabinet voted through a range of remedies, such as some exemptions from corporate tax for small and medium sized enterprises, the introduction of professional development seminars, lower social security contributions, and expanded bank finance for small and medium sized enterprises. Labor shortage appearing It needs to be borne in mind that, in addition to a new minimum wage, the Thai labor environment is undergoing big changes. For example, Thailand s unemployment rate is extremely low. At.6% in November, this low level trend has continued since late 1. However, there is a surplus of labor in the rural areas in Thailand. Nevertheless, the implementation of government policies related to income security in agricultural communities has weakened the supply of labor to the cities. In addition, the effects of the rapid decline in the birthrate and the ageing of society in Thailand cannot be ignored. The details of the population census carried out in 1 have not yet been made available, but there is a strong possibility that Thailand s total fertility rate has fallen below 1.5. (1, persons) This labor shortage has been made up for to some extent by foreign workers from neighboring countries. For example, the population census shows that the number of foreign workers in Thailand rose from 7, (1.% of the population) in to.3 million (.1%) in 1. The number of Myanmar living in Thailand increased over the same period from 11, to 1.6 million (68% of total foreign workers). Myanmar workers are not only concentrated in Bangkok and central provinces where there are well developed service industries, but some 31, are to be found in the southern provinces. In fact, Myanmar workers are an important source of labor in the rubber plantations of the south. The population census does not include illegal foreign workers, and some believe that the actual number of Myanmar living and working in Thailand may be over 3 million. In addition, according to the census, the number of Cambodians increased from, to, over the same period, and the number of Laotians from 3, to 18,, similarly. 1, 9 8 7 6 5 3 1 <Unemployment in Thailand> Number (L) Ratio (R ) 9 1 11 1 Source: Bank of Thailand 3 1 1
February 13, No.13 Therefore, given the current labor shortage, the Thai government has tended to be tolerant of the employment of foreign laborers. For example, even for illegal laborers, a certain period of employment was permitted, as long as the laborers were registered. However, on December 1, the government adopted a much tougher stance on foreign workers, threatening to deport some 15, Cambodians, 9, Laotians, and 6, Myanmar who had not completed procedures for proof of nationality. Additionally, at the end of December, although the Thai Board of Investment (BOI) permits the employment of unskilled foreign workers for a period of two years, a new requirement was added whereby the numbers of such workers must be reduced by 5% every six months. It is obvious that such measures to tighten restrictions on foreign workers have worsened the labor shortage. Supply chain development positioning Thailand as a production hub In the Japan Bank for International Cooperation s (JBIC) December, 1, Report on Overseas Business Operations of Japanese Manufacturers (fiscal 1), a greater number of Japanese firms listed rising labor costs among issues facing businesses in Thailand, while a decreasing number of firms listed cheap labor among Thailand s attractions. However, the recent changes in the labor market do not mean that Thailand has suddenly lost its appeal as a production center. The reason is that Thai production centers are transforming themselves into centers for the production of high added value goods, such as digital cameras, color printers, and automobiles for markets in the emerging economies. Certainly, firms involved in labor intensive industries, such as garments and food processing, are speeding up their shifting of production bases to neighboring countries, such as Myanmar, Cambodia and Vietnam. On the other hand, this trend presents Thailand with an opportunity to strengthen its position within the global supply chain. In fact, some major Japanese automobile parts manufacturers have already begun relocating labor intensive processes in Cambodia and Laos, and this is linked to lower costs in Thai bases. By constructing and developing road links with neighboring countries, the Thai government is trying to establish Thailand s position as a hub in Indochina. 6 5 3 1 Cambodia 8% Of course, for Thailand to be able to function as a hub, it will not be enough merely to relocate labor intensive work to neighboring countries. There will need to be a review of production centers in Thailand. Today there are many companies whose employees number over 1,. As was once the case with Japanese production plants, it will be important for factories productivity to be improved through a review of internal promotion systems and the strengthening of training programs. The changes occurring in the Thai labor market should be seen as an opportunity to review the dispersion and concentration of production processes in a supply chain that spreads throughout ASEAN. (Keiichiro Oizumi) Laos 8% China % Japan % <Foreigners in Thailand> Others 8%.318,81 persons Source: The 1 Population and Housing Census Myanmar 68% <Advantage and Challenge of Thailand for Japanese Companies> (Percentage of Reply) Cheap Work Force (Advantage) Rise in labor cost (Challenge) 9 1 11 1 (Y) Source: The Japan Bank of International Cooperation
February 13, No.13 Korea Park Geun-hye to be Korea s next president Policy balance expected South Korea s general elections, which took place on December 19, 1, attracted special attention for two reasons. One was the one to one face-off between the conservative ruling Saenuri party candidate, Park Geun-hye, and the reformist opposition Democratic United party candidate, Moon Jae-in. Another was that, against the backdrop of the failure of the conventional chaebol led economic growth to improve the lives of the people to a sufficient degree, both candidates, although with different policy emphases, promised to promote economic democratization and to enhance welfare provision. When the votes were in, Ms. Park was declared the next president of South Korea (taking office on February 5). While the people have high hopes for the new president, S. Korea is facing many economic problems and the new administration will be faced with some tough policy management decisions. Currently, the Presidential Transition Committee (chaired by Kim Yong-jun) is receiving working reports from all government ministries, and is working to prepare for the policy directions of the new administration. In consideration of the level of public expectation over economic democratization, the Park administration will need to get on with this swiftly, but there are important points that need to be borne in mind. First, there will need to be cooperation with the business community. President-elect Park s stance may be described as one of taking a positive attitude with regard to the role of the chaebol in Korea s economic development, while demanding that they also shoulder social responsibility. From the chaebol perspective, the challenge will be whether they can establish a business model that allows them to operate in step with the people. What is expected after the inauguration of the new administration is that representatives of chaebol groups will be summoned and that, while the President makes a statement about the eradication of improper political involvement, the chaebol will be asked to cooperate with the government s economic democratization policies by 1) co-existing with small and medium sized enterprises (no participation in small and medium sized enterprises business sectors, realization of fair trade prices, placing orders with companies outside of chaebol groups, etc.), ) bearing social costs (increased employment of regular workers, greater social security contributions, etc.), and 3) returning profits to society (there is a possibility that any such call for cooperation may be by presidential decree ). Second, the government will need to balance the varying timespans of different policies. Korea is currently facing economic issues that are short term, mid term and long term in nature, such as economic stimulus countermeasures, economic democratization, and falling birthrates and an ageing society, so it will not do to simply prioritize economic democratization. For example, if all of the party s election promises of free child-care, college tuition fees halved, non-regular employment switched to regular employment, enhanced social welfare, etc., were to be implemented in one fell swoop, the financial soundness of the government would be compromised and it would be difficult for the government to tackle the fast approaching issue of an ageing society. Also, if economic countermeasures are neglected and the employment situation worsens, there is a danger that public dissatisfaction will boil over into anger. Third, Korea s small and medium sized enterprises need to be nurtured. As economic democratization proceeds, after large corporations, small and medium sized enterprises will also need to be supported and nurtured. The importance that President-elect Park places on the small and medium sized enterprises can also be seen from her choice of Lee Hyun-jae, former president of the Small and Medium Business Administration, to head the Presidential Transition Committee s second economic subcommittee, which is charged with responsibility for industrial policy. The subcommittee is due to reorganize (review sectors that are similar or overlapping) small and medium sized enterprises support policies, which are dispersed across various industry sectors, and develop a more efficient support system. The challenge facing the Park administration will be whether it can develop a new model for sustainable economic growth. (Hidehiko Mukoyama) 3
February 13, No.13 Indonesia Current account deficit larger than expected? Finance Ministry forecasts 6.3% growth in 1 In early January, Finance Minister Martowardojo revealed that Indonesia s real GDP growth rate for the October to December quarter, 1, is expected to have been between 6.% and 6.%, with a growth rate of 6.3% for the whole year, coming in below the government target (6.5%). The Minister has claimed that this is due to the effects of the delay in implementing the capital expenditure budget. At the end of 1, the budget disbursement rate was only 8%, leaving some 3 trillion rupiah pending. The Ministry is trying to improve the disbursement rate by simplifying procedures, so that this set of circumstances does not arise again. The growth rate target for 13 has been set slightly high at 6.8%, but there are more than a few who express pessimism with regard to the future outlook. This is because it is believed that it will not be easy to dismantle the current structure whereby growth is driven by private consumption and investment. Although retail indices and the consumer confidence index were rather soft at the end of 1, there are strong expectations that prices will stay low and stable and that incomes will rise, and it is expected that private consumption will perform solidly. Automobile sales for the period January to November were 1.3 million vehicles, with the accumulated total passing the 1 million vehicles mark for the first time. Sales of around 1, vehicles are expected for the month of December. Investments are also performing well. The Investment Adjustment Bureau (BKPM) reports that foreign direct investment (realized basis) in the period January to September, 1, was up 7.% compared to the same period in the previous year, at $18.3 billion, and domestic investment, similarly, up 6.% at 66 trillion rupiah. There are many points that need improvement in the investment environment, with regard to both hardware and software, but the domestic market, for which high growth is expected, has played an important role in attracting investment. Trade deficit with China has doubled Rupiah depreciation has surfaced recently as a potential cause for concern. Part of the background to this is concern over the swelling current account deficit. The main cause of the worsening current account deficit is the trade deficit. Exports for the period January to November were down 6.3% compared to the same period in the previous year, at $17.8 billion, and imports up 9.% in the same period, at $176.1, leaving a trade deficit of $1.3 billion. The Ministry of Trade has reported expectations of a $ billion trade deficit for the whole year, the highest level ever. In terms of individual items, exports of iron ore and slag (HS) and rubber (HS) declined, and in terms of countries and regions, the impact of the expanding trade deficit with China has been significant. The trade deficit with China in the period January to November was $7.5 billion, twice the size of the $3.7 billion posted for the same period in the previous year. There is a possibility that the accompanying current account deficit will expand also, in defiance of Central Bank expectations. The challenge is whether or not the current account deficit can be kept to within a range that can be offset by the inflow of stable capital, such as direct and portfolio investment. The International Monetary Fund (IMF) forecasts that Indonesia s current account deficit, from 1 onwards, will be around % against GDP, and that this level can be covered by direct investment and other stable capital, and at the same time feels the level is just right for the maintenance of the investments necessary for sustainable growth. At the end of September, 1, the current account deficit was 3.5% against GDP, well over the IMF s expectations. At what levels will the current account deficit settle? This issue will be influenced not only by the rupiah but also by mid to long term economic management. (Yuji Miura) 16 15 1 13 1 11 1 9 (Million US$) 7, 6, 5,, 3,, 1, Source: CEIC <Consumer Confidence Index and Retail Sales Index> Retail Sales Index Consumer Confidence Index 8 1 11 1 <Domestic and Foreign Investment (Realization)> Foreign(Left Scale) Domestic (Right Scale) (Trillion Rupiah) 3 1Q Q 3Q Q 1Q Q 3Q Q 1Q Q 3Q 1 11 1 (Y/Q) Note: Retail Sales Index based October =1. The net balance+1 method has been used to construct the consumer confidence index, where the index above 1 points indicates optimism. Source: CEIC 5 15 1 5
February 13, No.13 India Inflation continues to rise as economy stagnates Real GDP growth loses momentum again in Q3, 1 India s economy continues to stagnate. Real GDP growth for the April to June quarter, 1, was 5.5%, compared to the same period in the previous year, the first accelerated growth in five consecutive quarters, but slowed again to 5.3% in the July to September quarter. Though tertiary industries, such as wholesale and retail, hotels and restaurants, and transportation and communications, made slight increases in performance, economic growth was slowed by factors such as the electrical industry suffering the effects of a massive power outage in late July, continuing poor housing sales against a backdrop of persistently high interest rates, and the impact of poor corporate construction investment on the construction industry, as well as the effect of drought on agriculture, forestry and fisheries. Moreover, the GDP to which India s government and Central Bank refer when judging the state of the economy is a so-called factor cost GDP, which does not include indirect taxation and does not exclude subsidies, and is computed from the production (supply) side. However, internationally, it is normal to refer to the purchasers prices, which includes indirect taxation and excludes subsidies, and the GDP computed from India s expenditure side (demand side) is estimated with this purchasers prices also. The purchasers prices GDP growth rate has not been able to slow its decline against the backdrop of falling indirect taxation and expanded subsidies in the wake of economic stagnation, and grew only.8% in the July to September quarter, year on year, marking seven consecutive quarters of stunted growth. Growth rates in monthly economic indices have been slack since October, and the verdict must be that India s economy has still not been able to shrug off its tendency to decelerate. Policy interest rate may be lowered in Q1, 13 Though the economy continues to languish, India has been unable to implement positive financial relaxation for some time, against the backdrop of a high inflation rate. Though consumer price and wholesale price indices of mainly primary products began to fall from early 1, the consumer price index increase rate then began to rise again, and the wholesale price index stayed more or less unchanged. This prompted Central Bank to keep its policy interest rate unchanged at the MPC of December, 1, citing fears of accelerating inflation. On the other hand, citing the slowing trend in the wholesale price index increase rate since October, Central Bank has suggested a gradual shift of emphasis going forward, from inflation control to economic boost, and the possibility of further monetary easing in the January to March quarter, 13. Of course, there are still factors remaining that might cause inflation to accelerate, such as: 1) the household expected inflation rate is persistently high, ) inflationary pressure caused by last November s diesel price hike is continuing, 3) the trend of the weak rupee during last October to December is continuing, and ) there is a possibility that resource prices will rise in response to financial easing in the advanced economies. Therefore, the degree of monetary easing will need to be considered carefully, taking all of these factors into account, and any short term economic stimulus measures are likely to be limited in effect. (Shotaro Kumagai) 15 1 <Real GDP Growth Rate (YoY)> 5 6 7 8 9 1 11 1 Source: MOSPI 18 16 1 1 1 8 6 - Purchasers' prices Factor Cost (Y/Q) 6 7 8 9 1 11 1 Source:RBI <CPI and WPI (YoY) > Wholesale Price Index Consumer Price Index 5
February 13, No.13 China Economy picks up, with 7.9% growth in Q, 1 Whole year growth at 13 year low, but latest figures an improvement China s real GDP growth rate for 1 was 7.8%, the lowest level posted since 1999 (7.6%). The principal causes would appear to have been the drop in external demand, occasioned by the 16 Exports (R) European debt crisis and other economic 1 slowdowns among the developed economies. The 1 year on year growth rate for exports was 7.9%, 1 the third lowest level since. Exports were 8 the driver of high economic growth in the s, at annual rates of over 1%, and for export growth to fall to single digit growth will be an inhibiting factor for China s economic growth. However, recent figures indicate something of 6 an economic rally. Quarterly GDP growth rates for 1 were 8.1% in the January to March, 7.6% for April to June, and 7.% for July to September, all exhibiting a general downward trend. However, the October to December quarter posted 7.9% growth, the first quarter on quarter 35 increase in eight consecutive quarters. 3 Domestic demand has been the driver of this recovery. The fixed asset investment (excluding rural households) growth rate had been falling since the autumn of 11, and the rate for the period January to May, 1, fell to.1%, 5 15 compared to the same period in the previous year. However, it began to show some signs of a gentle recovery after that, and posted.6% year on year growth for the whole year 1. This is <GDP Growth Rate, Exports> (Y o Y) GDP Growth Rate (L) 1 3 5 6 7 8 9 1 11 1 (Y) Source: National Bureau of Statistics, General Administration of Customs believed to have been due to the effects of economic measures introduced mid-year, such as faster approval for infrastructure projects and the base lending rate being lowered twice. Real total retail sales of consumer goods year on year growth also picked up towards the end of the year. Contributory factors include the stability of commodity prices and increased consumption due to consumption stimulus measures for energy saving household electrical appliances and eco-cars, increased private income due to higher minimum wage levels, and so on. General Secretary Xi Jinping shows willingness to improve quality of growth As the economy shows signs of staging a recovery, all eyes and ears are on General Secretary Xi Jinping. The economy was not directly part of his remit in the Hu Jintao administration and, until now, Mr. Xi s comments on the economy have gone largely unreported. However, that all changed once he was selected for the post of General Secretary. He chose Guangdong province, considered the origin of policies of reform and opening up, as the starting place for his first regional tour, and has become noted for his aggressive approach, pushing for deeper reform, etc. In particular, he attracted attention in a November 3 speech in which he stressed that economic growth must be without any padding, efficient and of high quality, and sustainable. This is being interpreted as a statement of his strong intention to firmly rein in local governments that aim to boost high economic growth by expanding inefficient investments, and to switch the model of economic development. In March of this year he will take over the post of President, and once the transfer of political power is complete, the most important point from the standpoint of sustainable Chinese economic growth will be whether his administration can be consistent in their stance of undertaking qualitative growth improvement. (Junya Sano) <Investment in Fixed Assets (excluding Rural Households)> Investment in Fixed Assets Of which, Real Estate Development 1/7 11/1 7 1/1 7 Note: Figures are year-to-date. The growth rate in January is not announced. Therefore, this graph used the growth rate in January-February compared to previous period. Source: National Bureau of Statistics 5 3 1-1 - -3 6