Malaysia's External Trade Balance

According to the import and export statistics of the Ministry of International Trade and Industry, in April this year, Malaysia's exports grew by 11.1 percent to 57.8 billion Malaysian ringgit ($19.6 billion) whereas the imports grew by 9.4 percent to 46.8 billion ringgit ($15.9 billion). The imports and exports were similar in May -- the exports grew by 5.4 percent to 55.1 billion ringgit ($18.7 billion) while the imports increased by 5.6 percent to 46.6 billion ringgit ($15.8 billion). In May, Malaysia's trade with China and Japan rose by 10 percent and 16 percent respectively. These figures reflect the changes in Malaysia's external trade relations and release some noteworthy alerts.
This obvious change in trade could be deemed as a result of the change from the previous ‘one triangular trade relationship’ to the current ‘two triangular trade relationships,’ in which China, Japan, and Thailand play the key roles. In the past, the government emphasized on the development of processing and export industries. Primarily, it involved importing machines and raw materials from other countries and utilizing the relatively skilled yet cheap labor force to process and manufacture products to be exported to countries like China, Singapore, Japan, the United States, and Thailand. Therefore, Malaysia's trade relations with these countries had turned from trade deficit in earlier years to trade surplus and the trade surplus had increased year by year. At the same time, our trade deficit against certain countries had also increased year after year.
World Investment Report
In recent years, driven by the free trade agreements and strong pressure from relevant countries to open up our market, Malaysia's trade surplus has seen some decrease. Yet, the triangular trade relationship remains. The new triangular trade relationship is the result of Malaysia's external investment in other countries, coupled with the increase of exports of machine equipments and components in the recent five years. According to the world investment report 2011 released recently by the United Nations Trade and Development Agency, the foreign direct investment to Malaysia soared 536 percent to 27.3 billion ringgit ($9.3 billion) in 2010, constituting the highest record in the history. Meanwhile, Malaysia has relied on Japan for the supply of key raw materials needed for the exports of machine equipments and components. Thus, Malaysia's trade deficit against Japan has been increasing year by year. Consequently, the issue of trade deficit against Japan has not shown any sign of improvement or solution; instead, it has deteriorated year after year.
On the surface, the changes of export markets and the expansion of exports caused by the overseas investment have maintained the growth of Malaysia's exports (the first five months of this year saw an increase of 8 percent despite the worsening external environment). This has enabled Malaysia to maintain a reasonable economic growth and led to the major changes in Malaysia's trade balance with its major trade partners. This is a normal structural adjustment. However, if we study more in-depth, we will realize that there are indeed some worrying issues in the current process of Malaysia's trade and economic development.
Export-Oriented Economy
The first issue is about the capability to maintain our overseas investment. Some officials have been talking about ‘all-round development’ lately and advocating investment in places like China, West Asia, and Middle East. However, a country's capability of overseas investment is subject to its international balance of payments. A county will only be capable to invest overseas if it enjoys massive international trade surplus for consecutive years. When its international balance of payments turns from surplus to deficit, the country's capability of overseas investment will decline substantially, or even b e eliminated altogether. Prior to the Asian financial crisis, Malaysia had enjoyed increasing surplus in the international balance of payments almost every year and the overseas investment had naturally flourished.
During the crisis and even the early stage of the recovery, the surplus in Malaysia's international balance of payments dropped drastically and even came to the verge of deficit. As a result, Malaysia's capability to invest overseas is no longer as strong as that in the years before the crisis. Therefore, a very important issue now is about how to maintain the development of our export-oriented economy.
Overseas Investment
The second issue is concerning the subsequent growth of the export of components derived from overseas investment. The export of components derived from overseas investment has constituted the major part of the growth of Malaysia's exports in recent few years. However, China has become the main destination of Malaysia's overseas investment. We must not overlook the capability of China-made components replacing imported components in the country itself. This is especially so considering the fact that Malaysia's investment in China has shifted from coastal areas to inland areas.
To save the cost of transportation, of course it is more convenient to use locally-produced components. Thus, it will be not surprising if Malaysian enterprises in China choose China-made components over those imported from Malaysia. This will lead to a shrink in the export of components derived from Malaysia's overseas investment. Should this happen, after some time, the growth of Malaysia's export will be retarded and another huge change may be seen in the value of Malaysia's trade balance against other countries.
Increasing Trade Deficit
The third issue is the issue of the development of key raw materials. Malaysia's industries have indeed seen substantial development in the past. However, the experience of the two triangular trade relations tell us that Malaysia has relied on China and Japan for key raw materials, both in processing-type export and investment-type export. Thus, the growth of exports to countries other than China will always come together with the increase of trade deficit against China and Japan. The fundamental issue here is that Malaysia is not able to develop key raw material industry on our own yet. The government and the industrial sector have to get Malaysia out of this nightmare by planning and developing relevant key raw material industries so that Malaysia's economy could grow normally.
The changes in Malaysia's external trade balance indeed show us negative signs in the long-term development of industries in this country.

Vietnam's Choices for Post-Financial Crisis, Monetary Policies

The Vietnamese economic development in 2010 depends largely on the targets we have set on and the selection of macroeconomic policies to attain these targets. These targets on their part will require the choice of appropriate macroeconomic policies. This is why we should be careful in choosing macroeconomic policies and socioeconomic development targets in the short, medium and long term, based on scientific and realistic reasoning.

Strategy for Socioeconomic Development
The year of 2010 is the last one in the implementation of the 2001-2010 Strategy for socioeconomic development period so this is the last opportunity to achieve the targets of the strategy. With the most important target to double the Gross Domestic Product (GDP) after 10 years, it is necessary that the economic growth rate in 2010 must attain at least 6.5percent as set by the National Assembly's Resolution. On this bumpy road, the Vietnam's economy "vehicle" still relies on the traditional driving forces that are:

First, economic growth still relies mainly on the increase of investment with the total social investment capital ratio growing continuously from one third of GDP in the last part of the 20th century to nearly 40 percent in the last few years, ensuing the overall investment effectiveness has decreased drastically as demonstrated by the high ICOR index.

Second, the slow restructuring of the economy created no change in quality of growth, even though the speed of economic growth might attain the strategic target and more critically, no premises can be created to get a breakthrough for higher growth rate.

Third, the growth model is based on exports while the change of export commodities and markets structure is limited. Within the structure of export commodities, the ratio of raw materials and resources still occupy a large share while the light industrial group of products is mainly composed of cheap labor-intensive processing products with low value added.

Fourth, the stability of macro economy is not solid yet. The inflation rate (as reflected by CPI [Consumer Price Index]) in the period of 2001-2010 is lower that the preceding one. However, if inflation in the period of 1991-2000 followed a downward trend, it started to go up since 2001.

Affecting Economic Growth
Control of inflation has become a focal concern in the stabilization of the Vietnam's macro economy during the last few years, but recently, the efforts to maintain the main equilibriums of the economy have created many problems affecting directly the stability of the macro economy and limit the space for the management of policies. The most striking example is the deficit in the trade balance. Although export trade has made outstanding gains in turnover, because of the limitations in structure, in export development model and in imports control, excess imports have persisted for a long period of time and affected negatively on the economic growth and the socioeconomic stability.

The target to control imports to reduce the trade deficit to under 10 percent of the GDP and under 20 percent of total exports turnover is very necessary to stabilize the macro economy and at the same time to create a premise and motive force to restructure the economy and speed up the time to regain the trade balance equilibrium.

Trade deficit is the decisive factor causing the heavy deficit in the current balance of payments in recent years and dragging along deficit in comprehensive balance of payments. In addition to trade deficit, State budgetary deficit lingering for many consecutive years has also increased the risks for the economy, including growth risks and destabilization of the macro economy.

Fiscal Policy Options
The short-term focus of the fiscal policy is to ensure that the level earmarked to the state budget at one fourth of the GDP no less but also no more so as not to increase the burden to mobilize for the state budget of the economy. However, all discriminations about economic sectors should be reduced to the lowest level albeit to abolish completely both in obligations to contribute to the state budget as well as to benefit from the state budget spending or disbursement of such nature.

The second priority is to reduce the budgetary deficit in the roadmap to restore the state budgetary balance in the long-term.

Choice of Monetary Policy
If the fiscal policy should be "neutral" in short term basis and active in promoting the restructuring of the economy in the medium and long term range, the monetary policy will become the policy tool to promote economic growth and ensure macro stability. The flexible and marketable character of the monetary policy should be promoted to realize at the same time these two core targets.

On one hand, increasing aggregate credits has been and will be the key factor to promote economic growth while other financial channels for businesses are still scarce. Reality has shown that the economic growth rate of Vietnam has an organic link with opening up credits. On the other, the degree of stability of the macro economy, particularly inflation in Vietnam also has a dialectic relationship with the growth rate of credits though it has a certain latent period. Interest rates should be implemented flexibly and following market mechanisms.

Assessment
To achieve the important macro economic targets, particularly the control of excess imports, to attract foreign investments, to ensure the equilibrium of the balance of trade, current accounts and payments, to balance investment saving and consumer accumulative spending and to manage foreign debts, the foreign exchange policy will play a very important role.

It is foreseen that, under the pressure of the economic disequilibrium between domestic and foreign scenes, in 2010, the devaluation of the Vietnamese Dong is inevitable but the scope and timing should be synchronized with the foreign exchange control and trade policy in order not to create a shock to the macro economic stability while refraining from too much expectation in solving immediately all the macro disequilibrium that have been accumulated through the recent years, especially with only a separate tool such as the exchange rate adjustment.

State of Vietnamese Economy

The trade deficit which in the last three years reached $45 billion has had a negative impact not only on the international balance of payments, but also on the macro balances of our economy. The target to "rein in this wild horse" at 20 percent this year is absolutely necessary.

Managers have approached this target from two directions: promoting exports and restricting imports. The Ministry of Industry and Commerce forecast that the increase in exports this year will not be 6 percent as planned by the National Assembly but rather 7 percent, so the export goal should be $60.777 billion (the 2009 figure was adjusted to $56.801 billion). By keeping the trade deficit at the threshold of 20 percent, this year's import "quota" will be $72.932 billion, and the import turnover will be $12.155 billion, which means a decrease of $719 million compared to the import turnover in 2009.

Export-Import Growth
According to the January 2010 estimate announced by the General Department of Statistics, although the absolute level of trade deficit decreased sharply compared to the last four months of 2009, the scale of trade deficit was still above the goal because while exports increased vigorously, imports increased even more.

Specifically, while export turnover was estimated at $4.9 billion, an increase of 28.1 percent compared to the same period in 2009, imports reached $6.2 billion, an increase of 86.6 percent. Therefore the import surplus was $1.3 billion, and the trade deficit was 26.53 percent, higher than the target limit of 20 percent.

Obviously, in theory, this is just a "warm up," and perhaps there is time to adjust, but actually there are grounds to assume that there will be a strong increase in imports, while exports will grow at a much slower rate. Therefore it is possible to be unable to achieve the target of reining in the trade deficit.

An increase in both exports and imports will resonate because of two factors, the increase of quantity and the increase in prices, but the factors for the basket of imported products are much more significant than for the basket of exports.

In particular, the estimates of export and import of products for which statistical data on quantity and value are available - nine export products and 11 imported products - showed that in January, total imports increased 95.82 percent, and that 41.1 percent was due to increases in price and 54.5 percent was because of an increase in quantity. The price factor caused a 45.24 percent increase in exports, and although actual export value increased only 37.43 percent, quantity decreased 7.81 percent because a considerable amount of crude oil was reserved for the "first-born" of the petrochemical industry in our country.

IMF Forecast
Certainly in the future "made in Vietnam" petrochemical products will replace some products we have had to import for a long time, but it is obvious that the import segment of the economy in general will grow much more than exports.

This judgment is based on the price trends which are very different for various product groups on the world market, as well as their unequal correlation in the two baskets of export and imported products. In fact, whether world prices decrease or increase, prices of manufactured and processed products will change less than prices of raw materials. In the present period, according to an International Monetary Fund (IMF) forecast, instead of the decrease of 31 percent in 2009, world prices of raw materials will increase about 16 percent this year, while the estimates for manufactured and processed products are -9.1 percent and +3.1 percent respectively.

Affect of World Pricing
Given the conditions of world pricing, the structures of the two baskets of export and import products in our economy are sensitive. There are two reasons for this. First, on the average in the last three years, the basket of imported products was nearly 22.5 percent more than the basket of export products. Second, in such correlation, the group of raw and unprocessed materials and fuel accounted for 65 percent of the basket of imported products, while the group of raw and semi-processed products accounted for only about 46 percent of the basket of export products. Therefore, the affect of world pricing on the basket of imported products is 1.7 times greater than on the basket of export products.

Because of structural differences, the basket of imported products shrunk much more than the basket of export products (13.68 percent versus 9.39 percent) during global economic recession in 2009. This year the basket of imported products will expand much more than the basket of exports.

For this reason, instead of decreasing in the chilled conditions of 2009, the trade deficit will increase this year when world prices heat up again according to the familiar scenario of the past years. However, to restrict imports in order to restrain the trade deficit, we cannot avoid restructuring the economy, but that would take a long time.