KellyOCG Asia Pacific Global Market Brief and Labor Risk Index - Q2, 2011

Think ouTside.

Global
Market Brief
& Labor Risk Index
asia Pacific
2011
2


Tokyo Bay, Tokyo, Japan © 2009 Robert Churchill

asia Pacific

2 | GloBal MarkeT Brief & laBor risk index Q2 2011 overview
risk index
australia
Bangladesh

Overview:
china
consumers tighten their belts and costs across Asia. Today, many Asian hong kong
shift toward lower-cost products. governments intervene in energy india

Asia Pacific For governments in the region, the
general goal will be to normalize
prices to protect households and
industry from price volatility. But as
indonesia
Japan
Malaysia
monetary policies that were primed resource prices rise, the costs of this
new Zealand
for growth during the financial crisis, intervention will grow. Philippines
but this is happening only slowly. singapore
In some countries, such as the south korea
The risk is that inflation has already
Philippines and Indonesia, where Thailand
become too pervasive, and that
➔ Inflation is the preeminent budget constraints are real and Vietnam
governments around the region aBouT sPonsors
challenge for most Asian affect economic volatility, the
could be facing more persistent
governments this quarter, the result government’s capacity to continue
price rises in coming months.
of years of expansionary monetary these interventions is limited,
policies, government initiatives to A major inflation driver Asian meaning higher input prices,
limit currency appreciation, upward manufacturing costs for industry,
governments are struggling to
wage pressures, higher international and potentially less discretionary
address is higher international
energy and commodity prices, incomes for consumers there.
energy and commodity prices—a
and food shortages. Resulting Other countries, including China,
result of recent unrest in the Middle
Malaysia, Singapore, and Thailand,
higher prices for a range of goods East, plus a rebounding global
will likely allow some more gradual
like fuel, basic commodities, and recovery. Policy differentiation over
currency appreciation to offset
housing will likely shift job growth how to manage inflation will mean
higher energy import costs.
away from higher-end and luxury more volatility in exchange rates,
sectors in coming months, as growth rates, and manufacturing ■ ■ ■



asia Pacific

risk index
australia
Bangladesh
asia Pacific – risk index suMMary TaBle – Q2 2011
china
hong kong
Macro risks laBor risks india

foreign indonesia
Political social security economic flexibility availability Quality contentment
investment Japan
Malaysia
Australia 8 Y 9 9 8 9 8 6 8 8
new Zealand

Bangladesh 4 Y 4 6 3 3 Y 5 5 1 2 Y Philippines
singapore
China 7 Y 5 Y 9 6 6 Y 4 5 7 4 south korea
Thailand
Hong Kong 9 8 10 7 Y 10 6 6 8 7 Y Vietnam

India 7 Y 4 7 6 XX 5 5 5 1 3 aBouT sPonsors

Indonesia 6 6 8 4 3 Y 4 5 3 4

Japan 4 Y 9 10 5 7 5 4 8 Y 7

Malaysia 7 4 9 5 X 7 7 4 7 X 7

New Zealand 8 8 10 6 Y 9 8 6 8 7

Philippines 6 X 3 7 5 X 4 5 5 4 6 Y
Singapore 9 X 8 8 8 Y 10 7 5 Y 8 9

South Korea 7 8 6 7 8 4 5 Y 8 6 Y
Thailand 5 X 4 Y 7 6 7 7 5 Y 5 7

Vietnam 7 6 8 4 6 6 5 Y 4 5

for all variables, scores range from 1 to 10, where 1 is ‘high risk’ and 10 is ‘low risk’.

very positive trend
positive trend
negative trend
very negative trend



asia Pacific

risk index
australia
Bangladesh

Australia
china
trading partner—is expected while the natural disasters at the hong kong
to shave about a quarter of a end of the year resulted in just india

percentage point from GDP growth 2,300 job cuts. The surge in mining indonesia
Japan
in the 2010-2011 fiscal year. Despite sector activity is raising risks of a
Malaysia
➔ Australia’s economy grew by a short-term negative impact from skills shortage and placing upward
new Zealand
2.7% in 2010, but Treasurer Wayne these natural disasters, rebuilding pressure on wages. Mining wages Philippines
Swan stated on 2 April that the in both Queensland and, more jumped 4.6% in 2010 (compared to singapore

December and January cyclones importantly, Japan, will generate an economy-wide increase of 3.9%). south korea
Thailand
and flooding in Queensland and strong demand and employment Industry pressure for a loosening
Vietnam
elsewhere would cost the economy in the country’s already booming of restrictions on the skilled worker
aBouT sPonsors
AUD 9 billion ($9.4 billion). In resources sector. visa program is mounting. Although On 24 February, Prime
addition, the main economic impact immediate changes may not be Minister Julia Gillard
of the summer floods is likely to The mining and LNG boom in forthcoming, an expansion of visa announced the government’s
be felt in the first quarter of 2011, Australia has had a dramatic impact allocations is likely later this year or intention to put in place a
particularly with a major slowdown on job creation. According to the early next year. three- to five-year fixed carbon
in coal exports. And the massive Australian Bureau of Statistics, the tax that would later transition
March earthquake and tsunami in economy created 362,800 jobs ■ ■ ■ to an emissions trading
Japan—Australia’s second-largest during the first 11 months of 2010,
program. Details must still be
worked out and the road to
passage will not be smooth,
but the plan will most likely
pass parliament. Transitional
low risk 10
MACRO RISKS LABOR RISKS assistance to industry is
9 probably inevitable, especially
8 to trade-exposed sectors such
7
as manufacturing and LNG,
6

5
which will mitigate the tax’s
4
negative effect on employment.
3

2

1

hiGh risk 0
Political Social Security Economic Foreign Flexibility Availability Quality Contentment
Investment

very positive trend current quarter
positive trend prior quarter
negative trend current quarter
very negative trend prior quarter


asia Pacific

risk index
australia
Bangladesh

Bangladesh
china
growth of remittances has stalled, youth are seeking employment in hong kong
inching up to $5.55 billion during the Middle East—particularly in india

the first half compared to $5.53 Saudi Arabia and Kuwait—and in indonesia
Japan
billion during the same period a Malaysia. It is estimated that around
Malaysia
➔ The Bangladeshi economy year earlier. A second problem is 6 million Bangladeshis are working
new Zealand
is likely to be pressured by two annualized inflation that has climbed abroad. The Bangladeshi authorities Philippines

concerns. First, the country’s balance due to high food prices hitting are concerned that the recent singapore

of payments swung to a $686 million 8.14% in November 2010 compared economic discontent and social south korea
Thailand
deficit during the first half of the to 8.12% in the previous month. unrest in several Middle Eastern host
Vietnam
countries could disrupt the export of
2010—2011 fiscal year from a $2.09 aBouT sPonsors
The government is increasingly surplus labor and could potentially The textile sector continues to
billion surplus during the same
concerned about the impact of lead to the return of immigrant suffer from labor discontent
period a year earlier. This deficit was
social unrest in the Middle East workers to Bangladesh. This would and unrest. In July 2010,
caused by a sharp 37% year-on-year on the domestic labor market. put additional pressure on the the government raised the
increase in imports in the first half of Bangladesh’s annual employment monthly minimum wage
government to create jobs.
the fiscal year. Bangladesh routinely growth (1.6%) has been unable to from $23 to $43, but this
runs a trade deficit but growth in keep up with the increase in the ■ ■ ■ fell short of union demands
remittances has kept the overall size of the labor force (4.7%). As a ($70) and lags minimum
balance of payments in surplus. But result, large numbers of Bangladeshi wages in other Asian textile
manufacturers. High inflation
has also undermined the
wage increase. Tens of
low risk 10
MACRO RISKS LABOR RISKS thousands of textile workers
9 are taking to the streets to
8 demand better enforcement
7 of the new minimum wage
6
and another increase.
5

4

3

2

1
hiGh risk 0
Investment



asia Pacific

risk index
australia
Bangladesh

China
china
Growing inflation could lead to is to develop a vibrant services hong kong
more rate hikes or encourage sector. As China rebalances away india

faster income growth to keep pace from relying on exports, it is trying to indonesia
Japan
with consumer prices. Numerous absorb workers and create new jobs
Malaysia
➔ Policymakers continue provincial governments, especially in an expanded services sector. The new Zealand
to wrestle with inflation. Yearly along the coast, have already new plan calls for creating 45 million Philippines

consumer price inflation clocked rushed to raise minimum wages. new jobs by 2015—a tall order that singapore
south korea
in at 4.9% in February, unchanged This will increase the cost of labor requires the development of new
Thailand
from January, and economists are there, and rising costs could spread industries and job opportunities. The Vietnam

expecting it to climb. In response, to other provinces. service sector is an obvious choice aBouT sPonsors
Beijing will likely respond
Beijing has raised banks’ reserve for job growth, as the industrial
Not only is Chinese labor becoming to higher inflation by
sector is approaching saturation.
requirement ratios to 20.5% with
more expensive, but it is also accelerating the nominal
A more services-based economy appreciation of its currency,
a string of successive hikes. On 4 shifting into new sectors, driven by
also uses less energy and develops which will allow the
April the government also raised government policy. Beijing formally
human capital. government to mitigate
interest rates for the fourth time ratified its 12th Five-Year Plan in mid-
imported inflation driven
since October 2010. March, an important goal of which ■ ■ ■
by rising international
commodity and energy prices.
While Beijing is unwilling
to implement a fast-enough
rate of appreciation to fully
low risk 10
MACRO RISKS LABOR RISKS offset these dynamics, any
9 appreciation could reduce
8 the level of China’s trade
7
surplus with the US, which
6

5
will help reduce tension with
4
the US over currency issues.
3

2

1

hiGh risk 0
Investment



asia Pacific

risk index
australia
Bangladesh

Hong Kong
china
A large property bubble is an year before. Retail sales also hong kong
added concern on this front. rose 18.3% in 2010. india
indonesia
House prices are up nearly 50% in
For employers, recent changes Japan
the past two years.
Malaysia
➔ The Hong Kong economy in Hong Kong labor laws bear
new Zealand
continues to grow rapidly, driven by On the labor front, Hong Kong monitoring. On 1 May, Hong
Philippines
a rebounding financial sector and remains a bright spot. Seasonally Kong’s first-ever mandatory singapore

strong economic performance in adjusted unemployment dropped minimum wage law will go into south korea

effect, with the wage rate set at Thailand
mainland China. The government to 3.6% in the three months ending
Vietnam
still expects growth of 4%–5% $3.60/hour. The move—which has
in February 2011, a two-year low aBouT sPonsors
in 2011. Policymakers, however, been politically contentious in Hong Under public pressure to
and a significant improvement
face an immediate challenge in Kong for months—also carries near- alleviate income inequality,
from the already-low 4.3% average
cooling inflation. City officials term economic risk. Specifically, the Hong Kong government
unemployment rate for 2010. Job in mid-March passed
expect 4.5% inflation in 2011, with higher mandatory wages will raise
growth continues in finance and an interim budget that
private estimates of above 5% for labor and manufacturing costs,
the year. Near-term concerns are financial services, consumer retail, authorized $5.2 billion in tax
further amplifying inflation concerns
driven by a mixture of rising energy tourism, and hospitality. Meanwhile, and cash rebates, including
over coming months.
and commodity import prices and there were 36 million tourists in $770 payments for all citizens.
The populist measure, which
higher labor and food costs. 2010, a 22% increase from the ■ ■ ■
received final approval on
15 April, is expected to
increase consumption by 1.4
low risk 10
MACRO RISKS LABOR RISKS percentage points but will also
9 stoke inflation and increase
8 public demands for more
7
such moves in the future.
6

5

4

3

2

1

hiGh risk 0
Investment



asia Pacific

risk index
australia
Bangladesh

India
china
likely increase and a delay in the on R&D projects, will likely trickle hong kong
implementation of subsidy reforms down in the form of increased india
is also likely. Meanwhile, the budget skilled and non-skilled job creation. indonesia

fails to provide specifics on major Moreover, the government plans Japan

to allocate more funding to Malaysia
➔ The United Progressive fiscal and economic reforms—
new Zealand
notably, it does not establish a the National Skill Development
Alliance (UPA) government’s Philippines
timeline for the delayed goods and Fund, which promotes vocational
2011–2012 budget—announced singapore
skills building, a step that should
on 28 February—is marked by services tax (GST) or a roadmap south korea
improve workers’ access to skilled
the continuation of the political for disinvestment in state owned Thailand
jobs. Finance Minister Shri Pranab Vietnam
companies. Finally, the budget
and economic priorities seen in Mukherjee has pledged 5 billion aBouT sPonsors
does not propose any effective Progress on labor reforms
the previous two budgets. The rupees ($112 million) to the Fund
measures to tackle high food prices. will remain slow because of
budget, which presumes a 9% GDP during 2011–2012. The government
growth rate, emphasizes spending aims to create a skilled work force competing pressures on the
The 2011–2012 budget will likely
on infrastructure and social numbering 500 million by 2022. government. Industry requires
boost employment in priority
According to government statistics, a larger and more flexible
programs. These sectors account sectors: education, healthcare,
during 2010–2011, the program skilled work force, and is
for nearly 90% of all spending. The real estate and housing,
provided training to 20,000 people, calling for changes, particularly
government expects a fiscal deficit infrastructure development,
75% of whom were able to find on more flexible working
of 4.6% of GDP but this is probably logistics, telecommunications, and
skilled jobs. hours. Labor unions, however,
unrealistically small. Subsidy manufacturing. High spending on
fear that reforms will
allocations, particularly for fuel, will projects in these sectors, including ■ ■ ■
lead to exploitation and
weaken their position. Large
low risk 10
MACRO RISKS LABOR RISKS union-led protests were
9 held in early-February in
8 New Delhi. Further isolated
7
unrest is likely, particularly
6

5
if the government pursues
4
labor reforms without first
3 building political consensus.
2

1

hiGh risk 0
Investment



asia Pacific

risk index
australia
Bangladesh

Indonesia
china
6.7% year-on-year has raised the coalition remains fragile. hong kong
hopes that price increases are One change that parliament may india

moderating. For this reason, approve this year is a new land indonesia
Japan
policymakers will likely concentrate acquisition law, which would
Malaysia
➔ Domestic consumption, on keeping the economy stable improve the cumbersome process
new Zealand
infrastructure and natural resources in the light of uncertainty over oil for acquiring rights-of-way for Philippines

investment, and high commodity prices and the possibility of weaker infrastructure projects, primarily singapore

prices will sustain economic growth growth in Japan. toll roads, and highway upgrades. south korea
Thailand
through the next few quarters with However, changes to the labor
President Susilo Bambang Vietnam
law—the primary roadblock holding
GDP growth expected to be 6.4% aBouT sPonsors
Yudhoyono has to manage what The Indonesian government is
up the development of an export-
in 2011. The main threat remains
is becoming a more contentious planning tax incentives for large
oriented manufacturing sector—will
the possibility that sustained coalition. Over the past few
be difficult. Labor availability capital projects, in an effort
inflation in food and fuel could months, there have been strong
and productivity remain major to encourage infrastructure
spill over into the wider economy rumors of changes to the cabinet
constraints to increased investment and “big steel” manufacturing
and force the central bank to raise and a possible falling out between investments. For several years,
and are likely to persist given the
interest rates more aggressively the president and his main coalition Jakarta has been grappling
lack of incentives for workers.
in the next few months. But the partner, the Golkar party. While with the country’s inability to
slower inflation rate in March of neither event has materialized, ■ ■ ■ attract large projects and the
government’s hope is that clear-
cut tax incentive program would
offset the other disadvantages
low risk 10
MACRO RISKS LABOR RISKS of investing in the country
9 (such as the weak bureaucracy
8 and unpredictable regulatory
7
and judicial environment).
6

5

4

3

2

1

hiGh risk 0
Investment



asia Pacific

risk index
australia
Bangladesh

Japan
china
no major policy fights are expected Japan experienced a slight decline hong kong
until the crisis subsides. in prices during the early part of india

2011, but increased demand and indonesia

Economic growth hit 4.0% in Japan
supply shortfalls caused by supply
Malaysia
➔ The Tohoku earthquake and 2010 but the pace is expected to chain disruptions are expected
new Zealand
tsunami have altered the country’s slow substantially in the wake of to push inflation toward 1% later Philippines
political course. Prime Minister the disaster to 0.8% in 2011. this year. If recent trends continue, singapore

Naoto Kan is temporarily in a more An expected strong rebound in the yen has reached the end of its south korea
Thailand
secure position now and will likely substantial appreciation, suggesting
the first quarter has now been Vietnam
survive the ongoing legislative that global commodity inflation
downgraded to an annualized aBouT sPonsors
session, despite criticism from both will now start to affect domestic One likely casualty of the
0.5% jump in output compared
opposition parties and the ruling prices. These trends, combined
disaster is the current proposal
to the disappointing 1.1% to amend the Worker Dispatch
Democratic Party of Japan (DPJ). with increased domestic economic
contraction in the fourth quarter Law. This law governs
However, neither group will push activity focused on disaster recovery
Japan into a paralyzing general of 2010. Unemployment temporary employment
efforts, may finally help Japan
election or a leadership challenge remained steady in January at intermediation, and the
escape persistent deflation.
during a national emergency. 4.9%, though the total number proposal would reverse years
Political skirmishes will persist, but of jobs fell slightly. ■ ■ ■
of deregulation by imposing a
range of powerful restrictions
on staffing agencies, including
a near-ban on intermediating
short-term manufacturing jobs.
low risk 10
MACRO RISKS LABOR RISKS The bill will likely die in the
9 upper house as it would be
8 impossible for the government
7
to enact while coordinating
6

5
with opposition parties on
4
disaster recovery efforts.
3

2

1

hiGh risk 0
Investment



asia Pacific

risk index
australia
Bangladesh

Malaysia
china
infrastructure initiatives that are Any meaningful implementation hong kong
part of the government’s ambitious of economic reforms under the india

economic transformation program ETP will have to wait until after indonesia
Japan
(ETP)—particularly transportation the general elections, however.
Malaysia
➔ High commodity prices projects for the greater Kuala Although elections are scheduled
new Zealand
and strong domestic demand Lumpur area. The government is for 2013, there is a strong likelihood Philippines
are driving economic growth in also expected to shave subsidy that the date will be moved up to singapore

Malaysia, with output likely to cuts as part of efforts to help late 2011 or early 2012. south korea
Thailand
expand by 5%–6% in 2011, up lower-income groups cope with
One persistent risk is the fiscal Vietnam
from the 3%–4% estimated in the rising prices.
situation. The government’s goal is aBouT sPonsors
previous report. Looming elections Ever since the ruling National
The key to Malaysia’s long-term to cut the budget deficit from 7.4% Front (BN) coalition lost
are encouraging the government
outlook is its goal of becoming of GDP in 2009 to 2.8% of GDP by its two-thirds parliamentary
to focus on policies that will sustain
a high-income country by 2020. 2015, but it has not released any supermajority in 2008, politics
or accelerate this growth, and
This would involve an ambitious details about its plans, apart from has been in flux. Speculation
maintain overall macroeconomic
infrastructure build-up, boosting its intention to adjust prices for was that this marked the end
stability in the face of geopolitical
utilities and other subsidized items of BN dominance, but the
uncertainties. Some of the the skill level of Malaysian workers,
every six months. opposition’s lack of focus and
programs being implemented and rolling back some of the
in the near term are focused on country’s affirmative action policies. ■ ■ ■
internal disagreements make
it likely that the government
will retain control, if not win
back the supermajority. This
low risk 10
MACRO RISKS LABOR RISKS would give Prime Minister
9 Najib Razak the political capital
8 to implement his economic
7
transformation program.
6

5

4

3

2

1

hiGh risk 0
Investment



asia Pacific

risk index
australia
Bangladesh

New Zealand
china
spending in the budget it is set economic activity in the second half hong kong
to release on 19 May. Cuts to of 2011 and into 2012. india

government services could erode indonesia

consumer and business sentiment Unemployment in the fourth quarter Japan

of 2010 rose to 6.8%, up 0.4 Malaysia
➔ The New Zealand economy in the short term, challenging
new Zealand
job creation. percentage points from the previous
will continue to suffer from Philippines
quarter. Prior to the December
the devastating late-February singapore
The short-term impacts of the quake, employment numbers south korea
earthquake in Christchurch
Japanese earthquake and Middle appeared to be trending upward, Thailand
(following a September 2010
East unrest on global economic according to the Department of Vietnam
earthquake in the same region). aBouT sPonsors
conditions are expected to further Labor, but first quarter job figures Changes to New Zealand’s
The government has thus far spent
dampen the economic recovery will likely reflect the quake’s effect. employment laws took effect
NZD 1.1 billion ($844 million) on
in New Zealand, and slow growth Employment will be particularly on 1 April. They include
recovery efforts. This is a primary may persist into 2011. Despite this affected in the construction, retail, extending the 90-day trial
reason for the larger-than-expected short-term setback, low interest hospitality, manufacturing, and employment provision, giving
NZD 9.2 billion ($7.1 billion) rates, high commodity prices, employees the option to cash
business services sectors in the
budget deficit for the eight months reconstruction efforts, and the 2011 in their fourth week of annual
Christchurch region.
ending in February. In response, Rugby World Cup are expected leave, doubling penalties for
the government will not increase to lead to a modest uptick in ■ ■ ■ breaching the Holidays or
Employment Relations acts,
and adjusting holidays and
sick leave payments. The
low risk 10
MACRO RISKS LABOR RISKS adjustments are designed
9 to encourage hiring, reduce
8 compliance costs, and
7
increase worker flexibility.
6

5

4

3

2

1

hiGh risk 0
Investment



KellyOCG Asia Pacific Global Market Brief and Labor Risk Index - Q2, 2011

KellyOCG Asia Pacific Global Market Brief and Labor Risk Index - Q2, 2011

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