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INDONESIA

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Tax Cuts – Enough to Make India a Global Manufacturing Hub?

India has recently announced an unprecedented reduction in its corporate tax rates. Not only is this a respite for domestic and existing foreign companies, but it is also expected to boost India’s position as a preferred investment destination for international companies looking to diversify their manufacturing footprint. Amidst the ongoing trade war between China and the USA, many companies, such as Apple, are looking to relocate a chunk of their manufacturing facilities away from China as part of a de-risk strategy. This presents the perfect opportunity for India to swoop in and encourage manufacturers to set base there instead of other Asian countries. However, tax reduction alone may not be enough to score these investments as the government needs to provide additional incentives apart from improving logistics and infrastructure, as well as land and labor laws in the country.

For the past three decades, India had one of the highest corporate tax rates in the South Asian region standing at 30% (effective rate of about 35% including surcharge and cess), making it one of the biggest sore points for investors looking at setting up a shop here.

However, September 2019 brought an unprecedented move, as the Indian government slashed the corporate tax rate to 22% from the existing 30%. Moreover, new manufacturing units established after 1 October 2019, are eligible for even lower tax rate of 15% (down from 25%) if they make fresh manufacturing investments by 2023.

The effective tax rate in these cases (subject to the condition that companies do not claim benefits for incentives or concessions) will be 25.75% (in case of 22% tax rate) and 17.01% (in case of 15% tax rate). These companies will also be exempt from minimum alternate tax (MAT). The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

The tax cuts in effect are believed to have improved India’s competitiveness among investment destinations in the region.

To put this into perspective, India’s new tax rate is lower than the rate in China (25%), Korea (25%), Bangladesh (25%), Malaysia (24%), Japan (23.2%), however still a little higher than that of Vietnam (20%), Thailand (20%), Taiwan (20%), Cambodia (20%), and Singapore (17%). However, for new companies/MNCs looking to set up a unit in India, the country offers the most competitive rates in the region.

This tax break by India is also well-timed to exploit the degrading US-China relationship, which is resulting in several US-based companies, such as Apple, Google, Dell, etc., to look for manufacturing alternatives outside of China. Currently, Vietnam, Taiwan, and Thailand have been the prime beneficiaries of the trade war, with the three countries attracting about 80% of the 56 companies that have relocated from China during April 2018 to August 2019. However, India’s recently introduced tax cuts may act as a major stimuli for companies (that are looking to partly move out of China or are already in the process of doing it) to consider India for their investments.

While the tax reform stands across all industries, India is looking to boost investment in the labor-intensive electronics manufacturing sector including smart phones, televisions, etc. To achieve this, the government recently scrapped import tax on open cell TV panels, which are used to make television displays. In addition to large brands such as Apple, India is also targeting component and contract manufacturers for such companies (such as Wistron, Pegatron, and Foxconn) to shift their business from China and set a shop in India.

India's Tax Cuts Not Enough by EOS Intelligence

Is a tax break enough?

While this is a big step by the Indian government to attract foreign investments in the manufacturing space, many feel that this alone is not enough to make India the preferred alternative to its neighbors. Companies looking to relocate their manufacturing facilities also consider factors such as infrastructure (including warehousing cost and set-up), connectivity (encompassing transportation facilities and logistical support), and manpower (such as availability of skilled manpower and training costs) along with overall ease of doing business, which covers the extent of red tape, complexity of policies, and transparency of procedures.

The Indian government has to work towards improving the logistical infrastructure, skilled labor availability, and cumbersome land-acquisition process, among many other aspects. As per the World Economic Forum’s Global Competitiveness Report 2019, India ranks 70 (out of 141 countries) in terms of infrastructure. While India heavily depends on road transportation, it needs to invest in and develop modern rail and water transportation and connectivity if it wishes to compete with China (rank 36).

India also ranks poorly with regards to skilled workforce and labor market, ranking 107 and 103 on the indices, respectively. To put this in perspective, Indonesia ranks 65 with regards to skilled workforce and 85 for labor market, and Vietnam ranks 93 for skilled workforce and 83 for labor market. Other than this, India also struggles with complex land acquisition laws and procedures, and must look into streamlining both to position itself an attractive investment destination.

Apart from this, the government also needs to provide additional incentives for investments in sectors that are its key priorities, such as tech and electronics manufacturing for export. As per industry experts, electronics manufacturing in India carries 8-10% higher costs in comparison with other Asian countries. Thus the government must provide other incentives such as easy and cheaper credit, export incentives, and infrastructural support, to steer companies into India (instead of countries such as Vietnam, Indonesia, and Thailand).

Several experts and industry players suggest that the government should provide the electronics manufacturing industry incentives for exports that are similar to those under the ‘Merchandise Exports from India Scheme’, which provides several benefits including tax credits to exporters.

In August 2019, the Ministry of Electronics and Information Technology (MeitY) proposed incentives to boost electronics manufacturing in India. These include a 4-6% subsidy on interest rates on loans for new investment, waiver of collateral for loans taken to set up machinery, and the renewal of the electronics manufacturing cluster (EMC). EMC creates an ecosystem for main company and its suppliers to operate in a given area (the previous EMC scheme ended in 2018).

Apart from this, industry players are also seeking an extension of another scheme, Modified Special Incentive Package Scheme (MSIPS), which also ended in 2018. MSIPS provided a subsidy of about 25% on capital investment.

EOS Perspective

India’s tax break came at an extremely opportune time, with several MNCs having expressed their plans to branch out of China (for at least 20% of their existing manufacturing facilities). From imposing some of the highest corporate taxes, India has now become one of the most tax-friendly markets, especially for new investments.

This is likely to put India in the forefront for consideration, however, it is probably not enough. The government needs to work on several other facilitating factors, especially infrastructure, land laws, and availability of skilled labor, which are more favorable in other Asian countries.

Moreover, the appeal of some countries, such as Vietnam and Thailand, seems to remain high, as several of them introduced a ‘single point of contact’ facilities for investors. Under these facilities, in various forms, investors are provided with investment-related services and information at a single location, and/or are provided with single point of contact within each ministry and agency they have to deal with. This makes the access to information and investment procedures much easier for foreign investors, and increases the perception of transparency of the whole process. India on the other hand struggles with bureaucracy, fragmented agency landscape, and red tape. Despite initiating a single window policy, multinational representatives need to visit multiple offices and meet several officials (also in many cases offer bribes) to get an approval of their proposals and subsequently get the required permits. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

India struggles with bureaucracy, fragmented agency landscape, and red tape. Bureaucratic and procedural delays, as well as poor work culture remain to be considerable deterrents for foreign investors.

Also in 2018, India only managed a mere 0.6% of its GDP from manufacturing FDI, indicating a low confidence level among foreign companies to make medium to long-term commitments in India. However, large part of the reason for this were also the high tax rates. Therefore, the recent tax reduction is a major step in the right direction, while the government still has some distance to bring India to replace China in the position of manufacturing giant of Asia, especially in the electronics sector.

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Fintech Paving the Way for Financial Inclusion in Indonesia

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Over the past two decades, financial sector in Indonesia has witnessed a massive transformation with the introduction of fintech solutions, fuelled by growing digital market and increasing investments in the fintech market. The sector’s growth offers tremendous opportunities and has led to the emergence of various start-ups offering online financial services. Fintech promises technological solutions to various challenges within the financial sector and offers value-added services such as transaction analysis and customer engagement initiatives. However, challenges such as poor financial literacy among Indonesians and cumbersome regulatory processes continue to pose a threat to the market growth.

Fintech is increasingly gaining traction in Indonesia and changing the way financial companies do business. Gone are the days when banks were the only source of financial transactions in the country. Fintech has revolutionized the financial sector with the emergence of various technological start-ups in areas of mobile payment, loans, money transfers, asset management, etc.

Fintech sector’s growth in Indonesia is largely driven by the rapidly increasing internet penetration and rising smartphone usage, as well as solid and continuous investments – over 2013-2018, investments in the fintech industry are forecast to reach US$ 8 billion, growing at a CAGR of 21.7%. Despite these growth drivers, the sector faces several hurdles such as inexperienced financial personnel, lengthy regulatory processes, and poor financial knowledge among the Indonesian population.

Fintech Paving Way for Financial Inclusion in Indonesia

Nevertheless, the country has been taking measures to tackle the challenges to create banks of the future. In November 2016, Bank Indonesia, central bank of the country, set up a fintech office in Jakarta to boost development of the industry. The office is aimed to optimize technological advancements across the fintech sector, assist players in understanding the regulations, and increase industry’s competitiveness by sharing its developments with international institutions. In addition, Indonesia’s Financial Services Authority is in the process of developing regulations to govern the industry, a significant step to enable both the fintech players as well as the regulators to function cohesively. Further, the industry is also receiving support from conventional financial institutions, which have started adopting digital innovations by initiating collaborations with fintech companies.

Indonesia’s high dependency on cash-based transactions along with low financial penetration rate serve as untapped opportunity areas for fintech players to explore. As of 2014, only 36% of the adult Indonesian population had bank accounts. Additionally, 89.7% of all transactions are still conducted in cash. Fintech players have gradually started leveraging these opportunity areas by expanding services with introduction of various start-ups offering a range of online financial products. As of 2016, the country hosted around 140 independent start-ups, an improvement from just a handful a few years ago, representing a steady growth of the industry. Some of the prominent players of the industry include HaloMoney, Cekaja, and Kartuku, among others.

EOS Perspective

Fintech is the answer to the need for a more secure, fast, and practical financial processing system. It has the potential to transform Indonesia’s financial industry by creating a paradigm shift in the way financial services sector operates. However, certain measures need to be taken to realize its full potential. In order to cultivate skilled personnel, the government should collaborate with universities across the country and promote fintech courses to develop the required skill set among people. Additionally, the government should encourage the association between conventional financial institutions and fintech companies to promote collaborative training and communication, which could help to improve financial education among players in the market. The association would also help both parties to improve their own areas of expertise.

Fintech industry has slowly started changing the way financial services are being accessed in Indonesia. Gradual yet steady on-going efforts to overcome hurdles are likely to result in a larger population enjoying benefits of digital financial services.

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Solar Rises in the East

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The international solar arena which was once dominated by the developed countries in the West is now flaring in the emerging markets of Asia. We are looking at a holistic view of solar PV market across selected Asian countries – the finale of our series focusing on solar photovoltaic market landscape across selected Asian countries.


Our previous articles of the series took a detailed look into current scenario and future prospects of solar PV market in China (China’s Solar Power Boom), India (Solarizing India – Fad or Future?), Thailand (Utility-scale Projects to Boost Thai Solar Market), as well as Malaysia (Uncertainty Looms over Future of Solar PV Market in Malaysia).


 

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Local Sourcing – It’s The New Global Sourcing

Not long ago, the buzz term for the automotive world was global sourcing. OEMs aimed to standardise product offerings and pricing by producing in select emerging countries that offered low production costs. This rendered the supply chain long and complex, but equally justified in the name of cost saving. Recently, however, global sourcing seems to be on the reverse gear, with local sourcing gaining momentum among OEMs globally.

Localisation brings cost-savings across the supply chain, especially in light of climbing costs in traditionally low-cost regions. According to a study by BCG, manufacturing costs in previously low cost sourcing locations like China, Latin America and Eastern Europe that for many years attracted global vehicle manufacturers, are reaching parity with manufacturing costs in developed countries, once productivity, energy prices and currency conversions are factored in.

To continue reading, please go to the original article on Automotive World.

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Universal Health Access in Southeast Asia – Bridging the Coverage Gap

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Affordable and accessible health care service is a common objective for governments across developed as well as developing nations.

Global trends suggest that generally countries, as they attain prosperity, tend to move towards a Universal Health Care (UHC)/ Social Health Insurance (SHI) regime, in which 100% population is provided with health care coverage (scope varies from country to country). There are some exceptions in the developed world, with the USA being an example.

In the Southeast Asian region, each country is at a different phase/stage regarding the implementation of universal health access. Several of these countries, such as Indonesia, Philippines, and Thailand, have implemented UHC (as a policy). The remaining countries in this region have various types of health insurance schemes to cover certain sections of the population, and are experimenting with some schemes to judge their effectiveness. It is expected that these countries will eventually work towards the common goal of achieving 100% UHC.

The following illustration captures the current health care sector situation (from UHC/SHI perspective) in four Southeast Asian countries (Cambodia, Indonesia, Philippines, Vietnam), and highlights few areas that require immediate attention in order to successfully manage universal health access for their citizens.


ASEAN UHC



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Details on country-specific social health insurance design and infrastructure:

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Indonesia – Public and Private Participation in Universal Healthcare

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Under its National Health Strategic Plan (NHSP), Indonesia is continuously focusing on improving the quality and accessibility of its public healthcare system. NHSP (2010-2014) aims to enhance health status through involvement of private sector and civil society. It also focuses on the prevention and cure of health problems faced by the community through availability of comprehensive and equitable health services and health resources, supported by good governance.


This article is part of a series focusing on universal healthcare plans across selected Southeast Asian countries. The series also includes a look into the plans in The Philippines, Cambodia, Vietnam, Indonesia, and Thailand.


The Indonesian government is planning to cover every Indonesian under Universal Health Insurance (UHI) by 2019 under a new scheme called Jaminan Kesehatan Nasional (JKN). As of January 2014, about 120 million Indonesians (government servants, police and army personnel, and poor) were automatically included under this scheme. The government has already allocated about 20 trillion rupiah (US$1.6 billion) to cover health insurance premiums for the poor in 2014.

Indonesia UHC

One of the features of the Indonesian UHI is the participation of the private sector wherein a number of hospitals and clinics have signed-up under the JKN.

When implemented fully, UHI is expected to create significant demand for companies operating in the industry, as the scope of the services is bound to increase. However, uncertainties exist regarding the smooth transition of the social health insurance mechanism from the current (prior to 2014) multiple-scheme-based system to a single system. The foundation design and the support infrastructure would determine the long term success of UHI.

 

INFRASTRUCTURE
Key Stakeholders
  • Indonesia has a decentralized administrative system since early 2000s wherein each of the 33 provinces is divided into districts and each district is further divided into sub-districts. District Governments are the direct authority in prioritizing the sectors (including health) for development

Healthcare Service Delivery
  • Public healthcare service delivery is based on a hierarchical referral system, which includes primary health clinics (PHC), district and provincial hospitals (secondary care) and specialty hospitals (tertiary care). Secondary health care is further classified as (Kabupaten (rural) and Kotamadya (urban)

  • Depending on the range and quality of healthcare services, hospitals are classified in to four categories

    • Level D – District-level hospital headed by a General Practitioner (GP) and provides some basic inpatient care. These are just one step above the primary health center
    • Level C – District-level hospital, which provides four basic specialties (surgery, internal medicine, pediatrics, and OBGYN services) and three supporting specialties (anesthesia, radiology, and pathology)
    • Level B – Provincial level hospital providing more specialist services as compared with level C hospitals. Specialist medical clinics, including pulmonary clinics and eye clinics, and medical supporting care are also included
    • Level A – These are described as ‘Centers of Excellence’ with sophisticated equipment with state-of-the-art facilities. This level includes specialist hospitals, such as Maternal and Child Hospital, Cancer Hospital, Coronary Hospital
KEY CHALLENGES
Capacity Constraints

  • Indonesia faces capacity constraint in terms of the number of hospitals as well as resources (qualified doctors, nurses and other staff). Public healthcare system is characterized with high occupancy rate at hospitals, and the situation is likely to worsen as more people come under the coverage of the government-sponsored health insurance scheme

  • Though a three-tier referral system exists, there is a lack of integration resulting in the by-passing of the lower-tier facilities and overcrowding at the secondary and tertiary level

Uneven Concentration of Healthcare Personnel

  • Indonesia has 25 health workers per 10,000 people (against WHOs minimum benchmark of 23); however, most of them are concentrated in urban centers, leaving rest of the country (especially the rural area) without sufficient number of health personnel

  • Healthcare professionals need to be compensated adequately to create a pool of resources large enough to meet the demand of a healthcare system catering to about 250 million people

 

DESIGN
Beneficiary Classification

Prior to the implementation of UHI in January 2014, certain sections of the population were already covered under different schemes, such as:

  • Askes (for civil servants and pensioners)
  • Jamkesmas (poor and near poor)
  • Jamsostek (private formal sector workers)
  • Jamkesda (district-level schemes for near-poor)
Healthcare Insurance Financing
  • Expenditure on public healthcare services under UHI is provided through taxation revenues and member contribution

  • Formal sector employees (both public and private) will pay 5% of the salary as premium wherein the employer will makes 4% contribution. Informal workers, the self-employed and investors, will pay monthly premiums of between Rp 25,500 (US$2.15) and Rp 59,500 (US$5.1) each

  • The government would be paying for the premiums of the rest of the groups (mentioned in ‘Beneficiary Classification’)

Payment System
  • For primary health care, the payment system is to be based on monthly capitation (based on registered users), and the Diagnosis-related group (DRG) system (to classify hospital cases into groups to determine cost) would be applicable for hospitals

  • Amount under DRG system will be fixed on the basis of negotiations with the hospital associations in various regions

Benefits
  • The UHI covers comprehensive benefits, including the treatment of commonly occurring illness, such as influenza as well as expensive medical treatment, such as heart surgery, dialysis, and cancer therapies

Co-payment (Reimbursement) System
  • At present no co-payment regime has been planned at the point of care. Healthcare services are to be fully reimbursed to the healthcare facilities on behalf of the patients

Reimbursement System for Drugs
  • Drugs specified under the formulary list are covered under the social sector health insurance plan. As mentioned above, the drugs used for the treatment are covered by the zero-co-payment system

KEY CHALLENGES
Concern about Quality

  • There are apprehensions that the quality of health services may suffer under the current provisions of the universal healthcare schemes

    • According to the Indonesian Medical Association, the government is paying substantially low amount for the poor, which may not be able to cover expensive treatment, such as cancer therapies. Hospital may struggle to cover costs due to lower reimbursement rates, which may discourage private hospitals from participating in the UHI. This would lead to overburdened state-run hospitals (and hence erosion of quality)

Ensuring Comprehensive Coverage

  • A large population comprising informal sector is yet to be covered under UHI. It would be a challenge for the government to motivate this section of population to be a part of the scheme. Contribution from the informal sector in the form of premium is crucial, as the Indonesian UHI would primarily draw its finances its expenses through it (along with the contribution from the formal sector employees)

Addressing the Grey Areas

  • There is lack of clarity about the role of private insurance after the implementation of UHI, as several private employers who have obtained private insurance for their employees may end-up paying double premium

Opportunities for Healthcare Companies

Healthcare Service Providers

  • The current set-up does not provide enough incentives for the private sector healthcare providers; however, the UHI policy envisages a space for private players. Also, the government has indicated about increasing the premium paid for the poor gradually, therefore private clinics and hospitals have significant opportunities to increase their business as well as to fill the resource gap in the Indonesian healthcare system

Medical Device Manufacturers

  • Irrespective of the implementation of the UHI, there was significant growth potential for the medical device companies due to years of under investment in the hospital equipment and devices such as MRI, Tomography scanners, mammography etc. A wider UHI coverage would require purchase of such equipment, to cater to the increasing demand

  • It is expected that new health facilities would come up in the regions where the newly insured population resides i.e. outside Java and other large cities. This would boost the demand for equipment and devices

Pharmaceuticals Companies

  • UHI is expected to create additional demand for medicines, as the population that was previously unable to purchase medicines comes under the coverage. Demand for generic medicines is expected to increase, as the government focuses on procuring low-cost medicines to keep the cost of UHI down

A Final Word

Considerable ground needs to be covered before Indonesia realizes the goal of 100% healthcare access coverage. The current state of the healthcare infrastructure as well as the healthcare benefits that have been designed (for the population under coverage as of January 2014) pose challenge in creating a working (and efficient) UHI system.

Success of UHI primarily hinges on the inclusion of informal sector population. Introducing an informal sector-specific mechanism for the premium contribution, attractive enough to ensure participation, would be the key in this direction. More clarity about the role of private insurance will help towards creating a system capable enough to cater to 250 million plus population.

Size of the Indonesian healthcare market already presents ample opportunities for pharmaceutical as well medical device manufacturers. 100% coverage under UHI will further boost the prospects of these firms. The expected expansion of healthcare infrastructure beyond the developed regions (cities) is likely to create demand for equipment as well as medicines.

Existing capacity constraints in the public healthcare system may augur well for the private health care service providers. As of now, given the geographical challenges and regional disparity in healthcare services, the goal of 100% coverage under UHI looks a distant dream without the participation of private sector. Therefore a workable payment system needs to be devised to ensure greater participation of the private sector players.

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A Dragon Unfurls its Wings – How China’s Economic Slowdown Is Rippling Through Emerging Markets

Almost 10 years ago, Goldman Sachs published a report, in which it predicted Chinese GDP to overtake the USA’s GDP by 2020. Today, this prognosis looks like a far-fetched dream as China has recently been riding a wild economic horse. When Chinese economy was growing, its demand for various products and services contributed to the economic growth of emerging markets across the world. The deteriorating performance of Chinese economy over the past few years appears to have started adversely affecting these markets. Will the emerging markets be able to successfully sustain in future?

China witnessed a spectacular and continued rise of its GDP during major part of last three decades. However, end of 2007 saw a turning point, and the country’s economic growth rate cooled off from 14.2% still in 2007 down to 9.6% in 2008, reaching mere 7.4% in the first quarter of 2014. This single digit growth would be more than satisfactory for a lot of economies. However, for China, which regularly recorded double digit rates, this extended period of slower growth is disappointing, with some calling it as ‘an end of an era’.

For years, China was enjoying relentless economic growth through massive investments, exemplary rise in exports, as well as abundance of labor force which was available at low wages. Due to these factors, economists started referring to China’s economic growth model as an investment-and-export driven model. This model has played a key role in driving exports also from emerging markets such as Latin America, Asia, and Middle East, as there was substantial demand for commodities from China’s end to support its domestic consumption as well as export requirements. With the weakening of foreign demand and internal consumption, China’s export demands have considerably weakened, leading to declining prices of export-related commodities and resulting in an adverse impact on emerging markets’ GDPs.

Is the Slowdown for Real?

China’s economic slowdown has not only been reflected in its modest GDP growth figures, but also in several other negative trends that have been observed. These include a continuous decline in the percentage of fixed-asset investments as a part of China’s GDP. Investments contracted from 24.8% in 2007 to 19.6% in 2013. Reduction of fixed-asset investments is likely to negatively contribute towards a country’s economic slowdown by adversely affecting sectors such as real estate, infrastructure, machinery, metals, and construction.GDP

Moreover, yuan has depreciated against US dollar (with average exchange rate of 7.9 in 2006 down to 6.26 in April 2014). In addition to this, Purchasing Managers’ Index (PMI), which is a composite index of sub-indicators (production level, new orders, supplier deliveries, inventories, and employment level), has plunged from 52.9 in 2006 to 48.3 in April 2014, below the middle value (50), thus indicating some contraction of China’s manufacturing industry. This industry contributes significantly to China’s GDP, therefore, the industry’s deterioration has a direct adverse effect on China’s economy.

This negative twist in China’s economic growth story is believed to be a result of a synergetic effect of various internal and external factors, some of which include:

  • Over-reliance on abundant supply of low-cost labor. For decades, China has based its growth on production of goods requiring high amount of cheap manual labor. However, as the economy continued growing, the demand for higher wages has increased, pumping up the labor cost. This cost is contributing to the inflation of products’ export prices, which is ultimately translating to a lower demand of Chinese goods.

  • The focus of Chinese workforce has been shifting from rural agriculture to urban manufacturing. The government has been taking steps to propel this transition in order to boost economic growth, prosperity, and industrialization. As more and more Chinese moved to urban areas, gradually, the transition has started yielding diminishing returns mainly due to saturation in the manufacturing industry.

  • Europe has also played a villainous role in China’s story. It has been one of China’s largest export markets but has recently been extending a significantly low demand for commodities and products from China. In 2007, the European Union accounted for 20.1% of all the exports from China. This percentage has fallen to 16.3% in 2012.

Chinese Leaders React

The Chinese government is in a reactive mode and has been unveiling a plethora of actions to bolster growth. The overall approach looks conservative in nature with a targeted GDP growth of 7.5% for this year, after recording a growth of 7.7% in 2013.

In an attempt to improve the situation, some of the expected financial and fiscal reforms are in the pipeline. Liberalizing bank deposit rates and relaxing entry barriers for private investment are some of the moves to be implemented by 2020. Various property measures (such as relaxing home purchase rules, providing tax subsidies, or cutting down payments) are planned to be introduced (based on local demands and conditions prevailing in a particular city) in order to balance the property market as a whole. A target of creating 10 million new jobs in Beijing has also been set for 2014. The underlying motive of all the rescue measures is strengthening the Chinese economy’s reliance on domestic consumption and services.

Influence on Emerging Markets

Undoubtedly, swing of the Chinese economy towards consumption and services is expected to considerably affect all the connected economies, several of them being emerging markets economies (EMEs). Commodity producing emerging markets such as Latin America, Middle East, parts of Africa and Asia are likely to be affected. Within this group, metal producers will probably suffer the most, as China had a significant demand for iron ore, steel, and copper during its investment boom phase. Within this subgroup, economies which are running current account deficits are forecast to be more susceptible to the ill-effects of China’s economic slowdown.

As China tilts towards domestic consumption, Latin America has started to witness a dawdling growth as the region’s growth rate dropped from an average of 4.3% in the period of 2004-2011 to 2.6% currently. For instance, as Chile depends heavily on copper exports to sustain its economic expansion, the country has been regularly reporting sluggish growth rates (5.8%, 5.9%, and 5.6% in 2010, 2011, and 2012, respectively) due to the decline in the price of copper, largely fueled by a lower demand from China. In addition to this, Brazil and Mexico are struggling to survive through falling benchmark stock indexes. The fall is mainly due to declining prices of commodities, as exports to China from Brazil and Mexico have weakened.

Middle East will probably register both positive and negative effects of China’s economic slowdown. One of the ill-effects could be reduction in oil prices, from US$140 per barrel in 2008 to approximately US$80 per barrel by the end of 2014, due to China’s lower demand of oil. On the positive side, Middle East is strengthening its position as an attractive region with long-term growth since China is being considered as a slightly less attractive option for investment by a majority of investors. This is mainly due to Middle East’s good infrastructure and accelerated development of industries such as defense, chemical, and automotive, and not only traditionally developed energy and petrochemicals.

The impact on African countries is expected to be negative primarily due to declining commodity prices. As Africa’s growth substantially depends on its exports to China, some African commodity exporters, such as Zambia, Sudan, and Angola, have started to feel the strain as China’s demand for commodities is weakening. This weakened demand has led to lower prices of commodities such as aluminum, copper, and oil, which registered a y-o-y decline by 4%, 9.5%, and 5.4%, respectively in January 2013. Zambia is likely to receive the strongest hit as copper constitutes almost 80% of the country’s total exports and reduction in copper prices could make its current account deficit to account for almost 4% of GDP in 2014.

Effect of China’s economic slowdown will vary from country to country in case of Asia. Countries such as Indonesia and Philippines, which have significant domestic demand, would be less adversely affected as they are less dependent on commodities exports to China. China’s unstable economy has spurred new investments in other growing Asian economies such as Cambodia. India is also likely to benefit from the ability to import oil at lower prices, which are pushed down by China’s weakened demand for oil. At the same time, however, export of cotton and metals such as copper and iron ore from India to China is dampened, adversely affecting India’s economy.

While EMEs have already been witnessing a lower demand from their traditional trading partners such as European Union and the USA, China’s slowdown will be an added burden to their economies.
China's Impact


It’s Touch and Go

It is rather evident that Chinese economic slowdown is having an adverse impact on emerging countries across Africa, Asia, and Latin America. One can hope that the measures taken by the Chinese leadership to curtail the slowdown will soon start taking effect and gradually lift up the economy, and in doing so, control the extent of damage spilling over many emerging countries and their economies.

In the event that the Chinese economy is unable to recover from this period of slowdown soon, it will continue to be a terrible blow to the economic ambitions of several emerging markets, especially those in Africa and parts of Asia-Pacific, which are heavily reliant on Chinese investment and trade relations.

Simultaneously to absorbing fewer production inputs imported from emerging countries, it is worth noting that China’s role in world economics might start to alter as it transforms to a consumption-led economy. This transformation is likely to slowly increase China’s appetite for imports of products and services, apart from traditional commodities-focused imports. It will be interesting to observe whether and how some of the emerging economies will attempt to satisfy this new Chinese hunger for goods extending beyond simple commodities.

by EOS Intelligence EOS Intelligence No Comments

Strike On Syria – Potential Impact On Emerging And Frontier Markets

Though there is still uncertainty of the US military action on Syria, global markets seem to have already given an indication of what could be in store if it actually happens. Crude oil prices rallied in the last week of August amid indication of strike, followed by a fall in oil futures, as the fear of imminent action receded. In another instance, share markets showed signs of panic due to a false alarm regarding missile attack on Syria (which eventually turned out to be an Israeli missile testing exercise).

The possible US strike on Syria has implications for global economy, and specifically for emerging economies, which are experiencing economic slowdown. The situation could be a tough test for countries such as India and Indonesia, as both of them struggle to keep trade-deficit under control, and are under the watch of credit rating agencies. For countries such as Brazil and Mexico, the US action may lead to delayed economic recovery. For Russia, being one of the largest oil producers, political implications are more than the economic one in case of a unilateral US action (i.e. without UN backing) on Syria.

While a sense of uncertainty and urgency prevail globally, we take a look at what potential impact the strike might have on select emerging and frontier markets.

Strike on Syria - Impact on Emerging Economies

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