More pain to come for exporters

The debt crisis in Europe is likely to drag on for the next couple of years and China’s economic growth will slow to single digits this year, said a senior analyst from global consultancy Control Risks this week, spelling more bad news for Korea’s already sluggish exports.

“Do I think we have seen the last shoe fall in the euro crisis? The answer to that is no, not yet,” Dane Chamorro, director of Asia Pacific for the company, told the Korea JoongAng Daily on Tuesday.

“I think this is something that is going to continue. If you look at Greece, for example, it’s been in a recession for five years. Even in the most optimistic scenario, their level of national debt is still increasing and will continue to increase for a while.”

Chamorro and a group of analysts from Global Risks were visiting Seoul to hold its first forum here.

“Greece is hugely uncompetitive [and] highly leveraged, so they need to work themselves out of the debt cycle - that is not a one- or two-year process, that’s a 10-year or longer process,” Chamorro said.

“Europe is the biggest export destination for China. So we are already seeing [the southern province of] Guangdong, which is the export base in China, affected by the slowdown in Europe. It’s already affecting Asia.”

Alarm bells have been sounding about Korea’s exports recently as outbound shipments have been falling in response to shrinking global demand resulting from the bad news emanating from the euro zone.

According to a recent report by the Bank of Korea, domestic exports to Europe have dropped more than 37 percent from one year ago.

However, the very real threat of a slowdown in China would compound the problem and present exporters with another giant hurdle as their profits erode.

“China has been the driver of economic growth in the last few years of emerging markets. In the last two decades, China has been growing at a double-digit rate,” Chamorro said. “It is not going to grow in double digits anymore.”

He said China is not just at risk from the ailing global economy, but can also make it much worse. Andrew Gilholm, head of Control Risks’ Asian operations, said the key concern is not China’s immediate deceleration but what is going to happen to its economy in the long run.

“In 2008, when the global situation started hitting China, China was already in a cyclical slowdown, and the same thing is happening now,” Gilholm said. “It’s just a matter of how fast, how far and how long.”

He said China will feel the weight of the slowdown in the first two quarters of 2012, but that Beijing has the resources and firepower to keep growth going in the second half.

“They will likely to hit an 8 percent growth [rate] or thereabouts,” Gilholm said.

He said people should be more worried about the long-terms threats to China’s economy, such as the huge amounts of debt being amassed by local governments.

The country is expected to see a major political reshuffle in the second half of this year when President Hu Jintao steps down.

To avoid the risk of instability, Beijing will focus on boosting the economy, but unless the government reforms China’s tax system and real estate regulations, the country may face a major crisis in the longer term, he said.

“These are problems that are very difficult to fix,” he added.

China’s future is of crucial importance to Korea as the country provides its largest export market, gobbling up over one-fifth of Korea’s outbound shipments.

Another problem for Seoul is the continuous rise of crude oil prices.

Gala Riani, head analyst for Control Risks’ Middle East and North Africa operations, said oil prices will continue to grow in tandem with conflict in the Middle East.

Oil supply could be further shortened if Israel attacks Iran, a move that is not beyond the realm of credibility at this point, she added.

Chamorro said it would be difficult for the global economy to rebound this year with the same momentum it enjoyed in 2010 due to the unique characteristics of the situation that year.

“The spurt of growth that happened in 2010 was the result of two things. One was pent up demand after a couple of years of recession. The more important reason was that most of the central banks around the world, including the U.S. and China, flooded the world with money,” Chamorro said. “When you do that, obviously, you get that growth, but it’s going to be temporary.”

Nonetheless, he said the incredible opportunities in countries like India, Indonesia and Vietnam point to strong growth potential in Asia.

“These economies can easily grow up towards double-digit levels if they reform some of the policies that they have in place,” he added. They are currently growing in the range of 6 percent to 7 percent.

“The common factor in all of these markets is that they are growing at a suboptimal level,” Chamorro said. “They could easily grow at 9 percent if they reform such things as land ownership and labor laws, and reform basic elements in their economic activities. Then they would easily make up for [the shortfall and] take the China problem off the board.”

When asked about the probable impact of Korea’s free trade agreements with Europe and the U.S., which are in various stages of implementation, Gilholm said the benefits for Korea would be limited in the short term due to reduced demand for its exports.

However, the two pacts will ultimately give Seoul a competitive edge over Tokyo, he added.

“Not all sectors are going to benefit from the fee trade agreements,” Gilholm said. “However, the overall economy clearly stands to benefit.”

He said now is the worst time to try and gauge the benefits of the trade deal with Europe, which went into effect last summer.

“A good way to think about it is by comparing it with the situation in Japan,” Gilholm said.

“One of the reasons why Korean companies are outperforming Japanese companies now is because they are better positioned due to the trade agreement. If you speak to Japanese exporters, especially in the automobile and electronics sectors, they are worried that their Korean competitors are doing much better than they are.”

He said one of Japan’s shortcomings has been its failure to liberalize its trade sectors such as agriculture.

By Lee Ho-jeong [ojlee82@joongang.co.kr]