Right solution to recovering our export business will take time and effort

Some economists still say some delay in export volume is to be expected, but depreciation of the exchange rate might be able to improve foreigners’ desire over the longer term. 

How long – a month, year or decade? No one can really tell. In my view, this time is different and we might have to wait longer than anyone could anticipate.

We should not lose faith in our export capabilities. However, I believe that the causality between currency devaluation and export growth should be revisited. Let me share with you an example of the real causes and consequences seen in Japan and South Korea.

Why those two countries? No doubt Japan and South Korea are major players in international trade, and their products have high similarity. Thus exchange rates should always be on their business radar. 

Since the end of 2012, the Japanese yen has fallen by almost 40 per cent against both the dollar and the currencies of other trade partners, while the South Korean won has appreciated by 15 per cent against most currencies. 

If the prices in importing countries did not change, Japanese exporters should gain a further 40 per cent, without any extra effort, while Korean 

 exporters might suffer severely from exchange rates.

So what actually happened? According to research by the International Monetary Fund, Korea’s export volume dropped by about 7 per cent per year while Japan’s export volume gained by only 3 per cent per year from 2012 to 2014. 

How does foreign-exchange depreciation or appreciation really affect Japan’s and Korea’s export sectors? In particular, research from the IMF in April found that profit margins absorbed all of the exchange-rate movement. 

This implies that profit margins expand (compress) in the event of real depreciation (appreciation). Profit margins in Japan were widened, while they were squeezed in Korea because export prices were adjusted by only small figures. Export volumes did not respond heavily to the changes in large real effective exchange movements. 

What does this example teach us? In my view, the key takeaway is that depreciation does not mean growth in the export sector. In fact, a change in foreign exchange can only cure a short-term negative profit margin or increase the margin for exporters. Baht depreciation or appreciation should not be the tool to rely on to revive Thai exports.

We have to admit that slow export performance has hit almost all Asian countries, not only those whose currency appreciated. Actually, slower growth in international demand, shifts in the composition of expenditures and the maturation of cross-border supply chains have together been the major causes for the export slowdown. 

In the near future, we could wish for advanced economies’ demand to grow if their businesses can make a comeback. Nevertheless, the shift in the composition of world demand and the slower pace of cross-border fragmentation of production are here to stay, harming our export growth for a while. 

Export growth is low not only because we cannot catch up with the global demand trend, but also because our exports still focus on undifferentiated intermediate goods, which can easily be replaced by domestically sourced intermediaries. 

Our export sector was our rising star early this century, but it has been flat for three years in a row. Depreciation could only keep exports afloat in the market, but could not help our export business survive for the long term. 

Nobody but exporters themselves can revive the export sector. Instead of relying on depreciation, the export industry should develop their edge in product specialisation to stay relevant in the global market, stay focused on what they can do best and expand market diversification to cope with volatility in global demand. 

Unfortunately, there is no shortcut to recovering our export business, and the right solution will take time and effort. 

To our exporter friends, Stanisslas Warinka Stanislas Wawrinka, the recent French Open champion, had this to say: “You have to get used to losing every week. Unless you win the tournament, you always go home as a loser. But you have to take the positive out of a defeat and go back to work. Improve to fail better.” 

 

JITIPOL PUKSAMATANAN, an economist at TMB Analytics, the economic analysis unit at TMB Bank, can be reached at [email protected]. 

The views expressed herein are those of the author and not necessarily of TMB Bank or its executives.