27 Sept 2016
Stability Amid Uncertainty
The latest G20 meeting held in Hangzhou, China, in September, failed to find concrete solutions to jumpstart global growth. Mirroring the sluggish economic performance worldwide, Hong Kong’s exporter confidence registered only a marginal rise in the third quarter of 2016 (3Q16), compared to the previous quarter. The latest HKTDC Export Index edged up slightly to 38.8, from 37.2 in the previous quarter. The index measures confidence among local exporters, with a reading below 50 indicating pessimistic sentiment.
“While exporter confidence is clearly stabilising, they remain pessimistic with regard to their likely export performance over the short-term,” said Nicholas Kwan, HKTDC Director of Research.
Among the best performing industries in the June-to-September period, timepieces and jewellery showed a strong rebound. For timepieces, the index bounced to 43, up from the previous reading of 33.8, while jewellery rose to 41.3, compared to 21.6 in the previous quarter. Electronics edged up to 39.3 from the previous reading of 37.4. “These industries saw better procurement sentiment on a quarter-to-quarter basis,” Mr Kwan explained.
On the other hand, the indices for clothing and machinery fell slightly to 32.3 and 39.4, respectively, while toy exporter sentiment turned rather negative, with the respective index retreating to 28.9, after touching its recent high of 41.5 in 2Q16.
Export confidence in major markets remains largely unchanged overall. Japan continued to register the highest reading of 46.9, which is slightly lower than the previous quarter (47.4). A more positive trend was seen for the United States, which recorded 46.7 (2Q16, 45.8) and the Chinese mainland index reading of 46.1 (2Q16, 45.8). On the other hand, the index for the European Union slid to 42.4, down from 44.3 in the previous quarter.
The United Kingdom’s “Brexit” referendum vote last June to leave the European Union has had little effect on Hong Kong exporters, according to Daniel Poon, HKTDC Principal Economist (Global Research). “Nearly 83 per cent said they had not seen any impact on their sales performance so far, while almost all of the remaining respondents (17%) said they had felt slightly negative repercussions,” he said. “Among those affected, more than half (55%) planned to respond, with the top three strategies being: developing new markets, company downsizing and trading down.”
Among new markets, Iran is considered one of the countries with strong potential for Hong Kong exporters and investors, albeit with some risk. HKTDC Research recently conducted a field study to assess Iran’s suitability as an export destination for Hong Kong consumer products and services, and to review the country’s business environment and practices in order to gain a deeper understanding of local market conditions there.
Following the lifting of UN sanctions in January 2016, Iran is on course to become one of the most attractive economies in the Middle East and North Africa (MENA) region, the study found. The re-opening of the region’s second-largest economy has been the subject of considerable interest from foreign companies seeking to tap business opportunities in this upper middle-income country.
Iran recorded an estimated nominal GDP of US$387.6 billion in 2015, second behind Saudi Arabia in the MENA region. Iran’s economy over the years has been stunted by a series of US, UN and EU sanctions, including a trade embargo, the freezing of overseas Iranian assets, and the prohibition of financial and bank dealings with Iran.
The government and Central Bank of Iran are eager for more business activity abroad, now that UN sanctions have been lifted. In line with Vision 2025, the Iranian government identified several core industries that the country will focus on developing. These include petrochemical products, metals and minerals, energy, food, pharmaceuticals, industrial machinery and equipment, home appliances, textiles and apparel, and transport.
“Several strategic growth objectives have been outlined in relation to this long-term development plan, including productivity enhancement through the adoption of advanced technologies and a focus on innovation-driven manufacturing,” said Dickson Ho, HKTDC Principal Economist (Asian and Emerging Markets). “It is also worth noting that Iran has maintained a reasonably large domestic manufacturing industry despite many years of international sanctions. This means Iran is quite different from many other emerging markets and FDI investors in Iran have the option of upgrading existing facilities apart from building new infrastructure, potentially lowering initial capital requirements. The government is also committed to providing a host of incentives to foreign investors, many of which are sector-specific.”
With a population of nearly 80 million and more than 60 per cent of its citizens aged 30 or under, Iran is among the region’s largest consumer markets with strong growth potential for imported goods. Throughout the sanctions period, Iran’s large middle class maintained a strong preference for foreign products, which is expected to further strengthen in the post-UN sanctions era, as trade and banking normalisation will help ease related business activity.
“With UN sanctions now lifted, Iran’s retail landscape is likely to experience rapid changes in response to pent-up demand for authentic, high-quality imported goods, including electronics, telecom products and parts, watches and clocks, jewellery, clothing and other consumer products,” said Mr Ho. “Companies should carefully consider their next steps and be mindful of the remaining sanctions on Iran. This, combined with many legacy issues in Iran, will continue to present some uncertainty in the short-term, and hurdles for overseas companies to overcome.”
HKTDC Research: http://research.hktdc.com/