Why technology alone will not save the Filipino economy

Having kept their borders shut for close to a quarter, countries around the world are coming out of the daunting shadows of coronavirus as a ray of hope shows itself in the form of subsiding new cases. As policymakers introduce new social distancing measures and people once again fill up office buildings, the world is, without a doubt, making its way towards the post-pandemic new normal. Nevertheless, amid the recovery, came the resurgence of a US-China dispute.

 

Being the world’s largest economy, it is said that when America sneezes, the world catches a cold. Now the world’s biggest exporter, China poses a similar level of influence. Certainly, when the superpowers are engaged in a tug-of-war, the global supply chain is bound to be disrupted. In relation to that, emerging markets in Southeast Asia (i.e. Thailand and Vietnam) are expected to be beneficiaries of investment (factory) relocations due to their pleasant investment climate.

 

However, the Philippines, in particular, is expected to be one of the smallest beneficiaries, if not a loser. This is by no means arbitrary, as the country’s foreign direct investment (FDI) inflows have been falling incessantly since 2017, reaching a four-year low of US$7.65 billion last year when its regional peers experienced an uptick in FDI. Once viewed as one of the most prospective emerging countries, why is the Philippines so unappealing in the eyes of foreign investors?

 

For starters, the Philippines lacks a nurturing climate for business investments. Referring to World Bank’s Ease of Doing Business Index as an indicator of investor-friendliness, the country was ranked at 95th, compared to 2nd for Singapore, 12th for Malaysia, and 21st and 70th for Thailand and Vietnam respectively. To further elaborate, it was revealed that the Philippines is especially inadequate in providing credit and enforcing contracts, in which it ranked 132nd and 152nd respectively, in addition to other challenges such as cross border trading issues and property registration. Seeing that these factors have a substantial bearing on businesses’ sustainability as well as their ability to expand, it is hardly surprising that foreign investors are discouraged.

 

Other than that, the current Philippine government’s policies have also put pressure on foreign capital inflows. In anticipation of the Corporate Income Tax and Incentive Reform Act (CITIRA) from the government, investors remained wary of the future status of their tax incentives. Currently still pending in the Senate, the CITIRA bill intends to reduce corporate income tax by one per cent every year, from the current level of 30 per cent to 20 per cent by 2029. Intended to spur foreign investment, the viability of the bill has raised a number of questions, as capital gains tax on unlisted shares of resident foreign corporations and nonresident foreign corporations is expected to increase from five to 15 per cent, prompting investors abroad to take a wait-and-see stance.

 

On top of that, political risks have also deterred foreign investors in recent years. The government’s “anti-oligarch” and “anti-big-business” rhetoric has raised doubts on regulatory bodies’ justness in reviewing and renewing contracts in the Philippines.For instance, the state water regulator recently cancelled a 15-year extension of the water utilities’ concession with Manila Water and Maynilad after pressure from Duterte. The existing concessions will expire in 2022, instead of 2037 as initially agreed in 2009. At the same time, raging allegations of human rights violations in the country (think the killing of drug addicts) have also come under international investors’ radar.

 

As a result of the mentioned incidents, the Philippines is seen as a relatively unfavourable destination for investment with raging political instability. Naturally, as an enabler of businesses, many have wondered if technological advancement could improve the status quo in the Philippines and, in turn, facilitate FDI inflows. Undoubtedly, by helping the unbanked and fostering credit, technology could make business processes more efficient. Notwithstanding that, political risks and failures to enforce business contracts would surely weigh on investments. Thus, in order to spur FDIs, the government needs to take the sanctity of contracts and regulations to heart, thereby instilling political stability in the country.

 

                       The article was originally published on e27

 

How can Singapore benefit from the US-China trade war?

The ongoing US-China trade war has been talked about for more than two years and the glooming uncertainty that it brings towards the world economy is worrying. The relationship between the two nations was getting better at the start of the year when they signed a Phase 1 Trade Deal. However, with the recent Luckin Coffee accounting scandal followed by the US Senate passing a bill to delist Chinese companies from its exchange and the US blaming China for the coronavirus outbreak, this tension could possibly re-escalate and worsen the relationship again. But because of the current pandemic crisis that is happening across the globe, both countries have put their ongoing tension aside to focus on saving their own respective countries from this unprecedented crisis.

 

Singapore is well known to be an open economy and highly dependent on international trade. In 2019, Total Merchandise Trade stood at S$1,022 billion (US$738 million), which is a 3.19 per cent decline from SG$1,055 billion (US$762 million) in the previous year. Geographically, Singapore is strategically located as it is at the crossroads of major air and sea routes within the Asia Pacific region and the Indian subcontinent. Singapore also has the highest trade to GDP ratio in the world, averaging about 400 per cent from 2008 to 2011 and 326 per cent in 2018. Being at the centre of international trade, the US-China trade war will no doubt have a negative impact on Singapore.

 

Singapore is more exposed to the Chinese market with about 25 per cent of exports bound for mainland China (13 per cent) and Hong Kong (12 per cent), whereas the US only accounts for 7.64 per cent. Majority of the export items compromised of electronics and types of machinery. As for Singapore’s re-exports, approximately 20 per cent of re-exports (which is SG$274 billion or 52 per cent of total exports) goes to China (13.6 per cent) and US (6.1 per cent). According to the Ministry of Trade and Industry, the US-China bilateral trade made up 1.1 per cent of Singapore’s GDP in 2018. Hence, if there was a fallout between the US and China, these are the numbers that would be heavily impacted.

 

US tariffs that are directly applicable to Singapore affect a relatively small set of products which include solar panels, modules, washing machines, steel, and aluminium. Singapore’s exports of these products to the US accounts for only about 0.1 per cent of total exports. While many of the tariffs do not directly affect Singapore, they would still have a spillover effect due to Singapore’s role in China’s supply chain.

 

With that being said, goods and merchandise trade will definitely be impacted by the trade war. However, a silver lining could result from the US-China trade war and that is from the ongoing Hong Kong-China nationalisation dispute. Should Beijing impose the new National Security Law on Hong Kong, the US may remove its special treatment towards Hong Kong. The removal of this special treatment could lead to the US to treat Hong Kong the same way as it treats China, such as higher tariffs and export controls over sensitive technology. Apart from that, the Chinese government will also be able to track and seize rich Chinese money in Hong Kong as more than half of Hong Kong’s estimated private wealth of over US$1 trillion comes from the mainland.

 

Ultimately, this would impact Hong Kong’s status as one of Asia’s leading business and financial hub, therefore, forcing businesses, financial services and private wealth to relocate to Singapore, which is clearly the next best alternative in Asia. Last year alone during the early phase of the protest in Hong Kong, Goldman Sachs reported US$4 billion outflows to Singapore because of concerns over the protest and while global FDI stagnated in 2019, Singapore’s inward FDI jumped 42 per cent to US$110 billion.

 

Singapore will emerge as a winner in Asia thanks to the US-China trade war but the question is:  Will this gain on the financial service sector be able to offset the decline in merchandise trade in the long run?

 

           The article was originally published on e27

Will Thailand Rise To Be A Tech Manufacturing Base Post US-China Trade War?

With the escalating trade dispute between the United States and China over the past two years, it has certainly induced an economic slowdown across the globe. While the trade tension stems from persistent growth in US trade deficit with China as well as the growing technological competition between the two major economies, this led to a series of tariff impositions to tackle the deficit which is mainly driven by electrical and electronics parts.The ASEAN region is particularly challenged by the negative spillover from the destruction of trade and severe impacts on supply chains, especially Thailand’s economy that is trade dependent and reliant on US and China as its key markets. In 2019, Thailand’s exports to China have seen a decrease of 3.8%, a decline for the first time in four years, with companies believed to be buying less parts for their Chinese production hubs.

 

However, there may be a silver lining to Thailand’s current situation – Thailand gained from trade diversion effects, with exports to the US having increased by 11.8% last year as American importers increasingly sought for alternatives to Chinese-made products. With foreign companies increasingly seek to relocate their production bases out of China due to the rising cost of production, Thailand’s exports are expected to benefit and recover once these factories ramp up their production. Coupled with the effects of Covid-19, manufacturers’ relocation has accelerated as businesses intend to reduce future supply chain risks.

 

The Kingdom has long been an attractive destination for foreign investments due to the availability of skilled labours and its capacity to produce high-value goods. Last year, Chinese investments in Thailand has surged to $8.6 billion, representing 5 times increase from the previous year and overtaking Japan as its largest source of FDI for the first time. Specifically, the automotive and electronics industry are some of the players gaining from the relocation of manufacturing base due to the country’s proximity to China and the relatively fragmented auto and electronics export market. Google has reportedly preparing for the production of its smart-home products in Thailand, while other players that have relocated to Thailand include Casio Computers, Daikin Industries, Sony, Sharp and Delta Electronics to name a few.

 

Perhaps what is driving the jump in foreign investments is not only the competitiveness of some Thai industries, but also the government’s initiatives to lure investments from manufacturers seeking to escape US tariffs on imports from China. In light of the US-China trade war, the Thai government played a crucial role in taking strategic moves to assist businesses that were affected. Among some of the actions taken was “Thailand Plus”, a stimulus package that contains various measures and incentives reportedly designed to improve the ease of doing business for companies looking to relocate full or part of their operations. Thailand’s Eastern Economic Corridor (EEC) along with the government’s Thailand 4.0 development plan have also attracted numerous projects application as it encourages investments into value-based, digital and innovation-driven industries by offering incentive packages such as tax reductions and holidays.

 

Thailand, being the leader in global automotive, electronics and electrical appliance industries, is poised to rise with readily available infrastructure and increasing investments that is able to support continuous adoption of advanced technology, specifically in the tech manufacturing space that is mainly driven by automation and robotics technology. Nevertheless, the future of Thailand remains uncertain as it is exposed to risk factors such as political instability, that might turn the investors away as they lose confidence.

 

(Image credit:  Dave Kim on Unsplash)

 

         The article was originally published on Asia Tech Daily

Is the supply chain shifting to Vietnam in a post-COVID-19 world?

Trade tensions between the US and China have been the talk of the town since the year 2018. With the two world powers undergoing a lengthy trade dispute, there are unending speculations on the impacts on both nations, and also the probable spillover effects on the Southeast Asian (SEA) countries. Rumour has it that Vietnam is poised to be one of the biggest winners of all – let us dive a little into it.

 

According to the Foreign Investment Agency (FIA) of Vietnam, the total newly registered, adjusted and contributed capital of foreign investors have been stagnant since the trade war started, after experiencing a surge of 47 per cent in the year 2017. This is mainly due to the dive in capital inflows for existing projects over the past few years.

 

On the other hand, a spike can be observed from the year 2018 onwards when it comes to newly registered capital and capital contribution for share purchases – the number of new projects granted has increased by 18 and 27 per cent in years 2018 and 2019, respectively. Apart from that, the FIA has disclosed that Manufacturing and Processing Industry is the top industry that the capital flows to, accounting for 65 per cent of total foreign direct investment (FDI) and recording a 48 per cent growth in the year 2019.

 

This is not surprising since it reinforces the common belief that the US-China trade war is accelerating the pace of businesses relocating their operations elsewhere from China as a diversification strategy. Vietnam is well known as a rising manufacturing hub in the region, particularly for these top sectors: (1) Electronics sector; and (2) Textile, Garment and Footwear sector.

 

To name an example of the relocation of operations, Luxshare-ICT, assembler of Apple’s AirPods wireless earphones in Vietnam, has gone on a hiring spree for thousands of new workers in June this year. Another phenomenon that can be observed that supports the possibility of production moving away from China away to Vietnam is that Vietnam’s share of US apparel imports has benefitted as China’s share in the market is slipping – the country even surpassed China and ranked the top apparel supplier to US in March and April this year.

 

Taking a glance at Vietnam’s position in the global value chain for both these sectors, the country primarily engages in mid-stream (lowest value-added) activities – being very dependent on imports of raw materials and only playing the role of manufacturing and assembling products for exports. Vietnam is also highly reliant on foreign players, backed by the fact that FDI holds 80% of local market share of the Electronics sector, while 80% of material supply for textile and garment production in the country comes from overseas.

 

Undeniably, Vietnam is emerging as an alternative favourite for businesses to set up their supplementary manufacturing facilities due to a number of reasons, mainly to take advantage of the affordable labour costs and free trade agreements (FTAs) that it has to offer.The recently ratified EU-Vietnam Free Trade Agreement (EVFTA) and the EU-Vietnam Investment Protection Agreement (EVIPA) are the spotlights of all FTAs, helping Vietnam to harness the opportunities arising from the shift of supply chains.

 

However, the nature of the manufacturing industry in Vietnam poses a potential threat – if the country does not move up in the value chain, other countries in the region like Thailand or Cambodia might also compete in terms of labour costs. Despite the government’s efforts to spur investments into hi-tech manufacturing and infrastructure to align further with the global supply chain, only a few multinational companies (MNCs) have limited research and development (R&D) activities in Vietnam, namely Samsung, Renesas Design Vietnam, and the latest one being Qualcomm with its first R&D facility in SEA.

 

Apart from the above, other considerations include the size of labour pool, availability of skilled workers, capacity to absorb a sudden surge in production demand, and many more. Therefore, it is important for businesses to take a step back and rethink their relocation strategy – given that the country still has a long way to catch up with China’s pace, would it be ultimately more feasible to go for the ‘China-plus-one’ strategy instead?

 

(Image credit: Sam Williams on Unsplash)                 

 

                    The article was originally published on e27

The Global Travel Industry Will Not Fly

From its onset in late-2019 to the current full-blown pandemic, the burgeoning novel coronavirus has now infected close to 3,000,000 people as it makes its way from Wuhan to other parts of the world. In response to the pandemic, policymakers around the globe have restricted travels, essentially shutting their national borders. Having made multiple headlines, the coronavirus’s impact on the global aviation sector has been nothing short of catastrophic.

 

As domestic and international travels are being clamped down, airlines suddenly found themselves deprived of demand. Struggling to keep their heads above the water, many carriers began reducing their capacity or grounding all flights immediately. To name a few, Qantas and Jetstar have halted all international flights, while EasyJet, Cathay and Singapore Airlines have stopped virtually all flights. In the absence of demand, IATA and Bloomberg noted that a typical airline only had cash reserves to last for 1.5 months. As it is, the downward pressure on revenues has already obliterated some airlines, with the most notable one being Virgin Australia which declared bankruptcy in April. Meanwhile, the IATA estimates that Malaysia’s airline industry could face up to $3.32 billion revenue losses, putting some 169,700 jobs at risk. In particular, the country’s flagship carrier, Malaysian Airlines reported a 94% drop in revenues. In light of that, there are perhaps no words better suited for the circumstance than Warren Buffett’s quote – “Only when the tide goes out do you discover who’s been swimming naked.”

 

The travel industry accounts for 10.3% of global GDP or 330 million jobs. In the aviation sector, 98% of passenger revenues come from major countries already in severe travel restrictions with a total forecasted revenue loss of $314 billion. While some optimists have turned to affordable fuel as a silver lining for the aviation industry, it is somewhat a double edge argument as aviation demand accounts for the largest demand of fuel. Firstly, in order to capitalize on what would be a lower cost of sales, aviation companies first need to be able to have flights. Second, due to the general volatility of prices, airlines tend to engage in hedging activities for their jet fuel consumption in the coming months. In other words, even if oil price fell drastically, majority of carriers will still be paying the hedged price for months. Recognizing the elephant in the room, governments in different countries have provided financial support or bailouts to carriers in their homeland – including the $58 billion loan and grant from the US government, and Singapore Airlines’s $15 billion support from state fund Temasek Holdings. Despite that, various airlines around the world have appealed that it would take much more ammunition to save the whole aviation sector.

 

By the same token, the global economic downturn and widespread imposition of social distancing has presented a double whammy to the hospitality industry. Occupancy rate, available daily rate (ADR) and revenue per available room (RevPAR) have all fallen substantially. In Prague, Paris, and Barcelona, RevPAR fell more than 95% in March, whereas hotel occupancies in China plummeted by 89% in January. The American Hotel and Lodging Association (AHLA) reported that an estimated $3.5 billion in revenue is vanishing each week. In Malaysia, survey by the Malaysian Association of Hotels (MAH) indicated that 50% of hotels are considering to cease their operations, while another 35% would temporarily halt their businesses. Owing to the disruptions, the association predicted that the local hospitality sector could see a potential loss of up to RM3.3 billion in room revenue. As rooms remain largely vacant and cancellations come pouring in, major hotel chains like Marriott, and Hilton began cutting down on staff costs, either through furloughs or layoffs to weather the storm.

 

Notwithstanding that, it is worth mentioning that compared to their peers in the aviation sector, the hospitality sector is in a much better position to withstand a temporary paucity of demand. For one thing, leading hoteliers, including Marriott, InterContinental Hotel Group (IHG), Wyndham Hotels, etc. have relatively healthy balance sheet. Average EBITDA margin for most hotel groups are above 50%, a far cry from the majority of airlines operating at margins of 15% or lower. On top of that, the sector has also proven itself to be extremely resilient. To elaborate, after the SARS epidemic subsided in 2003, hotel occupancy in affected regions was able to bounce back to normal levels in mere months, with ADR and RevPAR following closely. In fact, in China where COVID-19 is allegedly under control currently, 87% of hotels have already resumed their operations as of the end of March, with occupancy climbing from below 10% in February to above 30% in March.

 

By and large, while the hotel sector appears to be relatively stable at the moment, the aviation industry seems to be headed towards a debacle. As a result of airlines’ internal mismanagement from bad hedging practices to obscure pricing and lavish sponsorship policies, policymakers may find themselves in a conflicted position. In that case, are we going to spend money to bail out the aviation sector or to let free markets take its course and allow a merger and acquisition between the airlines groups?

Which way do stimulus cheque cut?

On 27 March 2020, President Trump signed into law the CARES Act, a historic $2 trillion economic stimulus package aimed as a fiscal response to the nation’s economic slowdown triggered by the COVID-19 pandemic. While the announcement of a stimulus package in times like this does not come as a surprise, the sheer size of the package itself has caught the world’s attention. At $2 trillion, America’s stimulus is one of the largest fiscal response in the world announced to-date, eclipsing its very own stimulus package during the Great Recession caused by the 2008 Global Financial Crisis by more than double the amount.

 

Out of the $2 trillion allocation, the component that draws the most headlines recently is the $1,200 direct cheque payments to Americans. Direct reliefs to individuals and households are in fact a common inclusion for almost every economic stimulus package across the globe. For instance, the Malaysian government has set aside RM10 billion of its stimulus package for direct one-off payments to the nation’s lower and middle class. Thailand, Vietnam and the Philippines are among nations that have also adopted similar measures, mainly targeted at the nation’s financially vulnerable communities which are at risk during times of crisis. America’s cash handouts in comparison are more far-reaching, with stimulus cheques only phasing out completely for individuals earning more than $99,000 a year. The objective in mind certainly extends beyond just addressing financial difficulty – i.e. to spur consumer spending as America braces itself for a sharp decline in economic activity given the nationwide quarantine.

 

However, the effectiveness of direct cash handouts in spurring consumer spending has long been debated. Critics argue that stimulus cheque recipients do not put money back into the economy – a 2009 study on the effectiveness of President Bush’s tax rebates in 2008 reveals that less than 20% of recipients spent the money, while one-thirds of recipients put the money back into savings and almost half of the recipients use the money to pay off existing debts. Consumer spending largely depends on the confidence level of future outlook, wherein current indicators are not pointing to a positive outlook at all. According to The Conference Board, the consumer confidence index slid to 120.0 in March from 132.6 in February, with an estimated sharp decline in consumer spending of 40% and GDP contraction of 33.3% for the second quarter of the year. Other analysts are predicting up to a 40% contraction in America’s economy for the current quarter.

 

Regardless of the economic objectives, the stimulus cheques are certainly a welcome sight for most Americans as the cheques arrive at a time when unemployment is rising at an alarming rate in the US – although the official unemployment rate stands at only 4.4% as at March, a staggering 22 million unemployment claim applications were filed between mid-March to mid-April, putting approximately 13.5% of America’s workforce out of job in just 4 weeks. This also comes at a backdrop of household debts reaching an all-time high of $14.15 trillion as at the fourth quarter of 2019. It is also estimated that 11% of Americans can only afford their household expenses for up to a week under quarantine, and another 15% can only afford those expenses up to 3 weeks.

 

Whichever way the stimulus cheques cut, it is without a doubt a populist move by the incumbent government. The lasting effect of alleviating one’s financial difficulty in times of crisis can’t be any more profound than having a cheque appear directly in one’s mailbox. More so when President Trump cheekily inscribed his own name and signature onto every stimulus cheque that Americans will be receiving this month, despite the stimulus payments being a bipartisan Congressional response to the current crisis.

 

In any case, the stimulus payments – and the overall stimulus package – is expected to be a costly endeavour to the US government, with the Congressional Budget Office estimating that the overall stimulus to add over $1.8 trillion to the federal deficit over the next decade, at a time when the US government is already over $24 trillion in debt. Notwithstanding that the stimulus payments don’t necessarily guarantee an improvement to overall consumer spending, the stimulus cheques are certainly expected given the upcoming presidential election in November – neither party would want to be caught denying Americans of a cash handout in times of crisis. Regardless of the government’s ability to afford it, Americans can certainly expect more populist fiscal responses to the COVID-19 pandemic to come in the coming months under the leadership of President Trump as he scrambles to cover his recent missteps in a bid to secure his re-election in November.