LI & FUNG RESEARCH CENTRE

Asia Sourcing Update – Bangladesh, India, Pakistan and Turkey

November 2012

IN THIS ISSUE: I. In the News II. Major Economic Indicators III. Daily Exchange Rates

Turkey:

Pakistan:













Exports grew strongly in September Government marks down medium-term growth forecasts Chinese yarn producer Texhong announced to invest in western Turkey







India:








Industrial output registered a surprise fall in September Inflation eased in October Exports remained weak amid the global economic slowdown Apparel exports are unlikely to reach the target set for the year M&S plans a 12-fold increase in cotton sourcing from India by 2015

Bangladesh:




Chinese Mainland and Hong Kong capital was pouring into the garment sector Minimum wage increase stalled despite inflation Exports posted moderate growth in October. Garment orders picked up slowly with new markets being developed

Consumer inflation further moderated in October Textile exports reported robust growth in October, though buyers are still cautious about energy shortages and safety issues EU trade preferences are set to boost Pakistan’s textile exports

Asia Sourcing Update

November 2012

In the News Bangladesh: Chinese Mainland and Hong Kong capital was pouring into the garment sector

Sheikh Hasina on 21 October. During the meeting, Li promised to ask Chinese companies to invest more in Bangladesh.

On 4 October, an agreement was signed by SML Packaging Solutions Bangladesh Limited, a China-Canada joint venture to invest US$ 5.1 billion in setting up a garment accessories factory in the Adamjee Export Processing Zone. The newly created unit will be employing 244 people to produce different garments labels and accessories.

Bangladesh: Minimum wage increase stalled despite inflation State Minister of Labor announced in early October that an immediate pay hike for garment workers was not possible despite employees’ demands for a 30% increase as there should be a gap of at least three years between two wage reviews. The last review came into effect in November 2010, raising minimum monthly pay to 3,000 Bangladeshi taka (US$ 36).

A few days later, on 9 October, Horizon Carpets Company BD Limited from Turkey signed an agreement to invest US$ 4.6 million in setting up a carpet manufacturing unit in the Ishwardi Export Processing Zone. 1,235 jobs will be created by the new initiative.

In September, inflation, as measured by the change in the consumer price index, came down slightly to 4.96% yoy from 4.97% in August. Nonfood inflation rose from 9.29% yoy in August to 10.18% yoy in September, mainly due to the power tariffs hike; while food inflation dropped to 1.75% yoy from previous month’s 2.25% yoy. According to a study published in October, the retail price of rice increased 100% from 2005 to 2011, whereas the price of wheat increased 67% during the same period.

In mid October, Ananta Group (leading manufacturers of readymade apparel based in Bangladesh employing about 13,500 people with annual revenue of US$ 120 million) launched three new joint ventures. The companies launched are Ananta Huaxiang Limited - a specialized heavy knit (sweater) plant with Chinese capital; T&S Buttons (Bangladesh) Limited - a state-of-the-art metal button manufacturing plant with Hong Kong investment; and Universal Menswear Ltd - a menswear tailoring and suit factory.

Labor unrest may occur if wages cannot catch up with inflation. In September, CEO of Hennes & Mauritz (H&M) Karl-Johan Persson met Prime Minister Sheikh Hasina and urged regular reviews of workers’ salaries. Currently, H&M is sourcing from a lot of Bangladeshi factories and labor stability in the country remains one of its major concerns.

In fact, Chinese investors are showing increasing interest in Bangladesh. In early October, president of Hong Kong New Territories Manufacturers Association Andy Wong visited Bangladesh to explore investment opportunities as costs of doing business in China are rising rapidly. Issues that he pursued with Bangladesh officials included the setting up of a separate Hong Kong industrial zone and the guarantee of uninterrupted supply of power. Li Changchun, the then member of the Standing Committee of Political Bureau of the Communist Party of China Central Committee, visited Bangladesh and met with Prime Minister

Bangladesh: Exports posted moderate growth in October. Garment orders picked up slowly with new markets being developed Bangladesh’s exports rose by 6.3% yoy to US$ 2.1 billion in October, following a jump of 31.3%

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Bangladesh, India, Pakistan and Turkey September, increasing by 5.5% yoy and 3.9% yoy respectively. However, manufacturing output (which accounted for three-fourths of the IIP) shrank by 1.5% yoy. It is noteworthy that India's IIP data is subject to revision in the coming months and should therefore be read with some caution.

yoy in September and a decline of 17.9% yoy in August. Total exports for July-October, the first four months of Bangladesh’s financial year, were up 3.1% yoy to US$ 8.4 billion. In July-October, woven garment exports grew by 9.5% yoy to US$ 3.2 billion, while knitwear exports increased by 1.1% yoy to US$ 3.4 billion. The two categories combined witnessed a modest year-on-year growth of 5.0%, and accounted for about 79.2% of Bangladesh's total exports in JulyOctober.

India: Inflation eased in October The Wholesale Price Index – India’s most widely watched inflation measure – increased by 7.5% yoy in October, remaining stubbornly above the central bank’s “comfort level” of 5%. The reading was lower than the 7.8% recorded in September and the revised 8.0% in August.

Bangladesh’s garment exports to the US in JulyOctober stood at US$ 1.49 billion, up slightly from US$ 1.48 billion in the same period last year. We believe the figure will continue to rise, especially in market segments where China is losing its competitiveness due to labour shortage and higher production costs.

The unexpected deceleration in inflation came after the government raised the state-controlled diesel prices by about 14% in September in an effort to reduce the massive fuel subsidies that had contributed to a bloated fiscal deficit. Subindex of ‘fuel and power’ rose by 0.8% mom in October as compared to 3.6% mom increase in September. Still, the pass-through of higher diesel prices to downstream inflation is likely to be felt further in the coming months. Meanwhile, factors such as slower economic growth, tight monetary policy and the revival of rains (which would help relieve food inflation) will continue to moderate inflationary pressure.

The Bangladeshi garment sector also saw remarkable success in the development of new markets as encouraged by the government’s cash incentives. Of the total export earnings worth US$ 4.3 billion of both woven and knit products in the July-September period, about US$ 527.6 million came from new export destinations, a rise of 28.7% over the corresponding period last year. The new emerging markets are Australia, Japan, China, Russia, South Africa, New Zealand, Malaysia, South Korea, India and Turkey, with South Korea being tipped as a new major export destination.

India: Exports remained weak amid the global economic slowdown

India: Industrial output registered a surprise fall in September

India’s exports continued to decline for the sixth month in this fiscal year, contracting by 1.6% yoy to US$ 23.2 billion in October due to slowdown in the western economies. Cumulative exports for the April-October (2012-13) period registered a negative growth of 6.2% yoy.

The growth rate in the index of industrial production (IIP) moved to the negative terrain again in September with a slight contraction of 0.4% yoy, following a revised growth of 2.3% yoy in August. Industrial production declined by 0.2% yoy and 2.0% yoy in July and June respectively.

In view of the weak exports, the Finance Ministry is examining proposals submitted by the Commerce Ministry to provide incentives to

Of which, output in the mining and electricity sectors registered positive year-on-year growth in

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Asia Sourcing Update

November 2012

exporters, including interest subsidy for sectors which suffer the most from the impact of global economic slowdown. The US and EU markets account for about one-third of the country's total shipments.

markets with diversified products, the contraction in exports to the EU market would hold back Indian exporters from achieving the US$ 18 billion export target set by the Textile Ministry for the current fiscal year.

On 6 October, the government announced the new Duty Drawback Scheme for the current fiscal year (2012-13) covering about 4,000 export items. The drawback rates (refund of duties on imported inputs for export items) have increased on most of the products eligible for the incentive scheme, a move aimed at boosting India's outward shipments. However, the drawback rates for some items like leather trunks and handbags, wool yarn and fabric, gaskets, lawn tennis balls, cricket balls, felt tipped/porous tipped pens and markers have been lowered from the rates applicable in the last fiscal year.

When talking about the effects of allowing FDI in multi-brand retail on the domestic apparel industry, the AEPC chairman said though small traders would be hit by the policy, on a wider scale it would prove advantageous for the apparel industry, as more orders would come from major international players in the future. The AEPC is also persuading the Textiles Minister to sign a Free Trade Agreement with the EU, to enable Indian producers to better compete with rivals from countries such as Bangladesh, which enjoys a 10% duty benefit with such an agreement.

India: Apparel exports are unlikely to reach the target set for the year

India: M&S plans a 12-fold increase in cotton sourcing from India by 2015

Apparel exports declined by 7.2% yoy in August to US$ 989.0 million due to the weak demand in major western markets, according to the Chairman of the Apparel Exports Promotion Council (AEPC). During April-August, apparel exports declined by 12.2% yoy to US$ 5.3 billion. In the last fiscal year (April 2011- March 2012), apparel exports grew by 17.9% yoy to US$ 13.7 billion.

UK-based retail giant Marks & Spencer (M&S) plans an over 12-fold increase in cotton sourcing from India in three years to 64,000 metric tons. M&S currently sources 5,000 metric tons of cotton annually from India. The company also plans to expand its Indian farmer base from 9,000 farmers to 25,000 farmers by 2015. The move is part of the M&S’s “Plan A”, which aims to make the company the world’s most sustainable major retailer by 2015. As part of its sustainability program, the company is also sourcing more locally for the domestic market in India, so as to reduce the environmental impact from transport and logistics. At present, 61% of the clothes sold in India are sourced from India, compared to 55% in 2011.

Currently, the EU accounts for around 50% of India’s apparel exports, while the shares of the US and other countries are 26% and 24% respectively. While Indian exporters are targeting new destinations like China, Latin America, Norway, South Korea and Russia, the US and European markets would be difficult to substitute as they are high-margin export destinations. In the past, Indian exporters focused on knitwear and woolen wear. In recent months, they have started offering other products such as trousers, kids wear, pullovers and jackets. Even as Indian apparel exporters are trying to expand in new

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Bangladesh, India, Pakistan and Turkey Pakistan: Consumer moderated in October

inflation

further

permanently in Karachi because of energy shortages and persistent problems of law and order.

Pakistan’s year-on-year growth rate of consumer price index (CPI) moderated to 7.7% in October from 8.8% in September and 9.1% in August, the lowest level in three years. The decline in CPI was mainly due to subdued food inflation and lower fuel prices.

Foreign buyers are increasingly cautious when sourcing from Pakistan after a factory fire in Karachi killed more than 250 garment workers in September. Kochra reported that many foreign buyers had paid “surprise visits” to PRGMEA members’ factories, but he believed that the increased emphasis on compliance and safety measures would benefit the sector in the longer term.

This is the fourth consecutive month in which inflation has remained single-digit. In fact, the CPI has been on a downward trend since May this year. In view of the declining inflation rate, the State Bank of Pakistan (SBP) reduced the policy rate by 150 basis points in August and 50 basis points in October.

Pakistan: EU trade preferences are set to boost Pakistan’s textile exports The implementation of European Union’s Autonomous Trade Preference (ATP) Scheme from November this year is expected to boost Pakistan’s textile exports to the EU countries.

Pakistan: Textile exports reported robust growth in October, though buyers are still cautious about energy shortages and safety issues

Under the ATP scheme, 75 items at the HS Code 8 digit level have been granted duty free market access, 64 of which are textile items. Among the 75 items, 26 items are under quantity-based tariffrate quota and the remaining 49 items are under a 25% quantity increase cap where an increase in export volume by 25% or more from the average exports in the last three years would cause the item to be removed from the ATP for the remainder of the year.

According to the provisional data released by the Pakistan Bureau of Statistics (PBS), exports of textiles and garments posted a growth of 10.5% yoy to amount to US$ 1.1 billion in October. The increase was mainly driven by a surge in demand from recession-hit key markets of Europe and the US. By category, the country exported readymade garments (excluding knitwear) worth US$ 155.9 million in October, which was 29.3% higher than the US$ 120.6 million recorded in the same period last year. Exports of knitwear and bed wear reached US$ 177.3 million and US$ 154.5 million in October, representing growth of 4.4% yoy and 9.7% yoy respectively.

Pakistan’s textile exports to the EU is expected to rise by 31.4% from US$ 1.7 billion in 2011 to US$ 2.2 billion this year, owing to the enforcement of the ATP, according to Mujeeb Ahmad Khan, Head of WTO Cell of Trade Development Authority of Pakistan.

South Zone Chairman of the Pakistan Readymade Garments Manufacturers and Exporters Association (PRGMEA) Atiq A Kochra said few new customers were willing to come to the country as energy crisis had caused longer lead time for garment makers. Without giving an exact figure, Kochra claimed that many garment manufacturers had shut down their operations

Turkey: Exports grew strongly in September According to the provisional data, exports increased by 21.0% yoy to US$ 13.0 billion in September.

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Asia Sourcing Update

November 2012 steam and air conditioning supply index rose by 4.1% yoy.

By country, the United Arab Emirates (UAE) was Turkey’s top export destination in September, with total export value up by 452.3% yoy to US$ 1.4 billion. More than 82% of the goods sold to the UAE were comprised of gold. Other major exporting countries included Germany (US$ 1.1 billion), Iraq (US$ 1.0 billion), the United Kingdom (US$ 0.8 billion) and Russia (US$ 0.6 billion).

Turkey’s consumer price index increased by 1.96% mom in October, accelerating from the 1.03% mom growth recorded in September. By main expenditure group, ‘clothing and footwear’ registered the highest monthly increase (6.8% mom), followed by ‘housing’ (3.3% mom), ‘transportation’ (2.1% mom) and ‘food and nonalcoholic beverages’ (1.7% mom).

Though the EU remained the top export destination by region, Turkey managed to compensate for the loss in exports to the EU by diversifying sales to emerging African and Asian markets. Exports to the EU accounted for 39.2% of Turkey’s total exports in September, compared to 44.6% in the same month last year. Meanwhile, 5.7% of total exports went to the North African countries in September, up from the 4.8% share in the same month last year. The share of total exports going to the Near and Middle Eastern countries also climbed to 29.5% in September from 21.6% a year before.

It is noteworthy that the government raised natural gas and electricity prices by 9.8% in early October, following the exercise of higher special consumption tax on automobiles, gasoline and certain alcoholic beverages in September. These measures may add to the inflationary pressure going forward.

Turkey: Chinese yarn producer Texhong announced to invest in western Turkey Investment Support and Promotion Agency of Turkey (ISPAT) announced in October that Chinese textile producer Texhong plans to invest US$ 70 million in a yarn production plant in Balikesir province, western Turkey. The new unit is scheduled to commence production within a year and provide employment for at least 500 people.

Turkey: Government marks down mediumterm growth forecasts The government has marked down its growth forecasts in the recently-announced medium-term plan, in view of the weak external demand. The 2012 GDP growth forecast was revised down to 3.2% from the previous 4.0%, and the 2013 forecast was marked down to 4.0% from 5.0%. The CPI inflation forecast for this year was revised up to 7.4%, given the impact of tax increases and energy price hikes.

The company is one of the largest cotton textile suppliers in the world and is a leading textile enterprise specializing in high value-added corespun cotton textile products. According to Mustafa Gundogan, Secretary General of the regional investment office for Balikesir and Canakkale provinces, the company chose Balikesir for its logistics and strategic advantages and the project would enable the company to reach European markets via Turkey.

Turkey’s industrial production index in September rose by 6.2% compared to the same month of the previous year. By sector, the mining and quarrying index increased by 10.8% yoy, the manufacturing index grew by 6.2% yoy, and the electricity, gas,

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Bangladesh, India, Pakistan and Turkey Major Economic Indicators Bangladesh Quantum index of medium and large-scale manufacturing (yoy growth %) Consumer price index (yoy growth %)* Exports (yoy growth %) Exports (fob, US$ mn) Of which: - Knitwear (US$ mn) - Woven garments - Home textile - Jute and jute goods - Footwear - Leather products - Plastic products Imports (yoy growth %) Imports (fob, US$ mn) One-day repo rate (%, end of month)

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

4.8

11.3

6.6

-

-

-

6.01 -4.2 2199.4

5.54 -3.1 2311.2

5.21 4.3 2439.1

4.97 -17.9 1951.5

4.96 31.3 1900.9

6.3 2077.0

876.0 866.6 91.4 83.6 21.9 9.3 7.1 -21.2 2785.0 7.75

915.4 906.4 79.9 77.9 33.8 16.1 7.5 -26.6 2245.0 7.75

1001.1 993.8 81.9 78.5 42.0 13.2 6.6 13.3 3033.0 7.75

792.5 765.9 56.6 74.7 36.7 11.3 5.7 7.75

746.2 697.2 60.3 98.0 32.8 18.7 7.5 7.75

873.2 761.5 60.2 79.2 30.4 9.8 7.2 7.75

May-12 Jun-12 5.5(2Q12) 2.5 -2.0 54.8 55.0 7.5 7.6 10.4 9.9 -4.2 -5.5 25.7 25.1 -7.4 -13.5 41.9 35.4 -16.3 -10.3 8.00 8.00

Jul-12

Sep-12

Oct-12

-0.2 52.9 7.5 9.9 -14.8 22.4 -7.6 37.9 -15.5 8.00

Aug-12 2.3 52.8 8.0 10.0 -9.7 22.3 -5.1 38.0 -15.6 8.00

-0.4 52.8 7.8 9.7 -10.8 23.7 5.1 41.8 -18.1 8.00

52.9 7.5 9.8 -1.6 23.2 7.4 44.2 -21.0 8.00

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

1.1

0.5

1.6

0.1

4.1

-

12.3 -6.0 2159.0 -9.3 3891.0 -1732.0 12.0

11.3 -11.6 2141.0 3.0 3979.0 -1838.0 12.0

9.6 -4.6 2057.0 -0.7 3662.0 -1605.0 12.0

9.1 -1.8 1911.0 -3.2 3685.0 -1774.0 10.5

8.8 21.1 2219.0 -3.2 3506.0 -1287.0 10.5

7.7 7.2 2016.0 5.1 3790.0 -1774.0 10.0

* The consumer price index uses 2005-06 as the base year. Source: Bangladesh Bureau of Statistics, Bangladesh Bank, Export Promotion Bureau

India Quarterly GDP (real yoy growth %) Index of industrial production (yoy growth %) Manufacturing PMI (HSBC) Wholesale price index (yoy growth %) Consumer price index (yoy growth %) Exports (yoy growth %) Exports (f.o.b., US$ bn) Imports (yoy growth %) Imports (c.i.f., US$ bn) Trade balance (US$ bn) One-day repo rate (%, end of month) Source: Ministry of Finance, Reserve Bank of India, HSBC PMI reports

Pakistan Quantum index of large-scale manufacturing (yoy growth %) Consumer price index (yoy growth %) Exports (yoy growth %) Exports (US$ mn) Imports (yoy growth %) Imports (US$ mn) Balance of trade (US$ mn) Overnight reverse repo rate (%, end of month) Source: Pakistan Bureau of Statistics, State Bank of Pakistan

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Asia Sourcing Update

November 2012

Turkey Quarterly GDP (real yoy growth %) Industrial production index, manufacturing (yoy growth %) Manufacturing PMI (HSBC) Industrial turnover index (yoy growth %) Industrial new orders index (yoy growth %) Producer price index (yoy growth %) Consumer price index (yoy growth %) Exports (yoy growth %) Exports (US$ mn) Imports (yoy growth %) Imports (US$ mn) Balance of trade (US$ mn) One-week repo rate (%, end of month)

May-12 Jun-12 2.9(2Q12)

Jul-12

Aug-12 -

Sep-12

Oct-12

5.8

1.8

3.0

-2.6

6.2

-

50.2 17.8 19.1 8.1 8.3 20.1 13138.7 3.1 21752.2 -8613.5 5.75

51.4 10.5 11.1 6.4 8.9 16.7 13246.7 -5.4 20441.2 -7194.5 5.75

49.4 6.6 5.2 6.1 9.1 8.3 12849.9 -1.5 20755.0 -7905.1 5.75

50.0 0.8 0.5 4.6 8.9 14.5 12874.2 -4.8 18736.0 -5861.8 5.75

52.2 4.9 4.9 4.0 9.2 21.0 13013.0 -6.4 19838.0 -6825.0 5.75

52.5 2.6 7.8 5.75

Source: Turkish Statistical Institute, Central Bank of the Republic of Turkey, HSBC PMI reports

Daily Exchange Rates India: INR/USD RBI reference rate (May 2012 - Oct 2012)

82.0 81.9 81.8 81.7 81.6 81.5 81.4 81.3 81.2 81.1

Rupee/dollar

Taka/dollar

Bangladesh: USD buy rate (May 2012- Oct 2012)

Source: Bangladesh Bank

97.0

58.0 57.0 56.0 55.0 54.0 53.0 52.0 51.0 50.0

Source: Reserve Bank of India (RBI)

Pakistan: weighted average customer USD buy rate (May 2012- Oct 2012)

Turkey: USD buy rate (May 2012- Oct 2012) 1.90

96.0 1.85 Lira/dollar

Rupee/dollar

95.0 94.0 93.0 92.0

1.80 1.75

91.0 90.0

1.70

Source: State Bank of Pakistan

Source: Central Bank of the Republic of Turkey

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Bangladesh, India, Pakistan and Turkey

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