Why exporters must hang tough

How does this crisis compare to the Asian financial crisis of 1997?

As we deal with the “recession porn” headlines concerning the global economic outlook, there’s one thing that’s important to remember about the global financial crisis (GFC).

In short, as the shock troops of the Australian economy, our exporters have seen a version of it all before.

In 1997, after the plunge of the Thai baht following a large capital outflow, contagion flowed around south east Asia at a rate of knots and even reached north to South Korea.

This was dubbed the “Asian financial crisis’ (AFC) and in the end was short lived with most of the contagion-hit economies growing again in 1999. But from 1997-99, Australian exports were hit hard, and in the face of the downturn our exporters at the time undertook three strategies to survive.

First, under the “through thick and through thin” strategy, exporters formed strong relationships in the crisis-hit markets, took a hit during the slump but were well placed when Asia experienced a “V” shaped recovery.

An example was Holden engines, which formed alliances with local component makers in South Korea, and as a result, have a strong presence in the Korean market today.

Second, some exporters with multiple markets practiced “trade diversion” and sent goods to the Middle East, Europe and the USA, when things slumped in Asia temporarily. However, most of them maintained their foothold in Asia and they ended with greater market share across all markets when demand picked up.

Third, exporters practiced “third market strategies” to take advantage of the devaluation of the Australian dollar at the time of the AFC.

In 1997, we saw the clear advantage of having a floating exchange rate. As demand for Australian exports fell, the dollar devalued and as a result Australian exporters became super-competitive in Asia and were able to compete against US and European competitors.

Many formed a “beach head” in those markets, and formed a strong enough business relationship that they held their ground when the dollar later strengthened.

All in all, the AFC taught exporters that international business is a long term game that relies on strong business relationships in good times and in bad.

Exporting is not a game for get-rich-quick carpet-baggers.

But how is the GFC different than the AFC? There are a few differences in causes for a start.

First, the circumstances in the financial system are different. The GFC stemmed from financial problems in the US, while in 1997 Asia’s banking issues were mainly home-grown.

As Rod Morehouse, Australia’s Senior Trade Commissioner in Jakarta has pointed out: “This crisis is quite different from the 1997 Asian financial crisis. That was characterised by excessive lending throughout the ASEAN nations. Banks, for example, were lending 110% to 130% of their deposits. This crisis is not financial as much as one of lost export markets. Banks are heavily regulated now, with about 30% of their deposits on loan.”

In addition, ASEAN nations are cashed up, and are not as vulnerable to capital outflow or attacks on their currencies as in 1997.

Second, economic policy makers have learnt from history. In 1997, representatives of the International Monetary Fund (IMF) were racing around the region making prescriptive judgements on various economies and ended up making nations like Indonesia contract fiscal policy and liquidity at just the time Jakarta actually needed to support domestic incomes.

Fortunately, Indonesia survived the IMF advice (thanks to the efforts in part of Stephen Grenville and Glenn Stevens of the Reserve Bank of Australia, who modified the IMF prescription based on Grenville’s extensive knowledge of the Indonesian economy).

Now most nations know the importance of appropriate fiscal and monetary policy stances and the need to avoid trade protection and “beggar thy neighbour” exchange rate policies.

Third, there’s the role of China and intra-Asian trade. In 1997, many east Asian nations (such as Malaysia) were heavily dependent on the US as a market for their exports.

In 2009, there is more intra-Asian regional trade and more economies are integrated in global supply chains with China being the final assembler. China’s growth and momentum with affect the rest of east Asia but its exchange rate policy matters too (hence the importance of the US-China bilateral talks at the G20 meetings in London).

So times are tough for a lot of exporters, and many are hurting, but it is noticeable that the proportion of Australian companies that export has not dropped off despite the shock run of bad headlines that we’ve had on the global economy.

This demonstrates that our exporter community does demonstrate resilience, and as in the AFC in 1997, when the going get tough, Australian exporters stick in there and gain pole position when recovery comes.

*Tim Harcourt is Chief Economist with the Australian Trade Commission and the author of The Airport Economist (see www.theairporteconomist.com).