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Asia September 2012
Important disclosures can be found on the last page of this publication
Produced by The Royal Bank of Scotland plc, Singapore Branch.
Analysts
Sanjay Mathur Head of Economic Research, APAC (ex Japan)
65 6518 5165
www.rbsm.com/strategy
Bloomberg: RBSR<GO>
Asia Navigator It’s all about growth
We are resuming this publication after a long hiatus. What has materially changed during
this period is the growth outlook. Hopes and forecasts of an H2 2012 rebound have
diminished; sluggish and moderate growth lies ahead. Policy will be recalibrated, but
moderately. Do not expect high-impact policy responses. Financial markets will remain
dull but rates can broadly be expected to drift lower.
What has materially changed over this period is the growth outlook. We started the year with the
view that economic activity would gather momentum in the second half of the year. The actual
outcome has been quite the opposite – Q2 2012 ended on a weak note with little or no sequential
growth. Available Q3 data portends even weaker growth considering the global external
environment.
Some important intra-regional differences have, however, emerged. The region’s developed
economies – including Hong Kong, Japan, Korea, Singapore and Taiwan – have, quite
predictably, borne the brunt of the weakness in external demand. The loss in growth momentum
has been the highest in this group. However, what has been surprising and disappointing has
been the sluggishness in China and India. In China, Q2 2012 growth fell to sub-8% yoy for the
first time since 2009, reflecting a coincidence of developments – sluggish exports and fixed
asset formation. Underlying the sluggish asset formation was the impact of the government’s
tightening policies towards the real estate sector. India’s problems are almost entirely
home-grown. The ruling Congress administration’s ability to revive critical economic reforms or
even approve non-controversial infrastructure projects has been curtailed by a series of
scandals. Investment activity has dropped sharply below trend with weak prospects of an early
turnaround. It now appears that growth will be sub-6% through FY13 (fiscal year ending March
2013), a far cry from the 8-9% trend rate that market participants had become accustomed to. In
fact, an obvious and important lesson we have learnt from the slowdown in India is that high
potential growth and realised growth can be far apart from each other.
ASEAN has, by contrast, held up well. In Malaysia, Philippines and Thailand, expansionary fiscal
policies have provided valuable counter-cyclical support to growth. The Aquino administration in
the Philippines is finally stepping up infrastructure spending whereas in Thailand, post-flooding
reconstruction has dominated growth. In Malaysia, the ruling administration has been generous
with handouts to lower-income groups and ramped up spending on infrastructure projects;
although the objective may also be to bolster its popularity ahead of the elections. We are,
however, not certain whether this can continue much further considering that public debt is now
close to the self-imposed limit of 55% of GDP. In Indonesia, domestic demand continues to chug
along nicely on a secular basis.
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At this stage, the question on everyone’s mind is what role policy will assume; ie, will government
spending be ramped up, is an easing cycle on the cards or will QE3 do the trick? Let’s start with
the last one. We have little faith in QE3. Previous rounds of QE have tended to prop up risk
sentiment rather than actual growth. More importantly, it has had the effect of lifting commodity
prices, which has worked to the detriment of commodity dependent Asia. As for domestic
policies, we do not expect anything more than symbolic cuts of 25-50bp. Real rates are already
at accommodating levels and should remain so even if they rise somewhat in response to lower
inflation. Indeed, Korea and the Philippines have cut rates, but largely because of specific
considerations. The rate cut in Korea was probably motivated by the need to address growing
risks around household debt. In the Philippines, the rate cut was to stop hot money flows. In
short, it would be misplaced to assume that monetary policy will be relaxed in a manner similar to
that in 2008-09.
The same applies to fiscal policy. High-impact stimulus programmes are unlikely despite
sufficient fiscal capacity. For example in China, both subsidies and infrastructure spending have
been raised, but the scale remains modest. The Korean authorities have, for now, ruled out a
supplementary budget. Even in ASEAN, where fiscal policy has become more expansionary,
higher spending is part of a more medium-term programme or has been necessitated by
conditions not related to the current slowdown. Why exactly have governments taken this
approach is not clear. We suspect that while the growth outlook has dimmed, it is not excessively
dire. China is a good example in this regard. Growth in 2012 is still likely to be close to the official
forecast even though it may not be adequate to excite financial markets.
Overall, we believe that growth will be sluggish through the remainder of the year and probably
H1 2013. Policy responses, be it fiscal or monetary, will be moderate. The implications for asset
markets are not particularly exciting – currencies are likely to trade sideways while rates can be
expected to drift lower as demand for funds moderate alongside growth. Curves are likely to
remain flat.
Asia Navigator | September 2012 Page 2
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Contents
Quarterly GDP and inflation forecasts 4
Quarterly FX & policy rate forecasts 5
Regional structural indicators 6
Regional macro trends 7
China 11 Revisiting China's recovery: no quick relief
Hong Kong 16 Doing justice to its global image : slowing down
India 20 It's still about politics
Indonesia 24 A tale of two concerns: CA deficit and overheating
Japan 28 Growth revised down
Korea 32 Weak data strengthens case for interest rate cut
Malaysia 36 Lower current account surplues = reduced policy flexibility
Philippines 40 Pro growth fiscal stance
Singapore 44 Slowing growth yet elevated inflation
Taiwan 48 Supply-side inflation adds to Taiwan's woes
Thailand 52 Rates on hold, for how long?
Asia Navigator | September 2012 Page 3
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Asia Navigator | September 2012 Page 4
Quarterly GDP and inflation forecasts
2012F 2013F Q1 12F Q2 12F Q3 12F Q4 12F Q1 13F Q2 13F Q3 13F Q4 13F
GDP (% yoy) Emerging Asia (ex Japan) 6.0 6.7 6.2 5.7 5.9 6.1 6.4 6.6 6.7 6.7 ex Japan, China and India 3.8 4.6 3.0 3.4 3.6 5.3 4.8 4.7 4.6 4.4 China 7.5 7.8 8.1 7.6 7.4 6.9 7.3 7.8 7.9 8.0 Hong Kong 1.7 4.3 0.7 1.1 2.1 2.8 3.3 4.5 4.6 4.7 India 5.2 6.8 5.6 3.9 5.2 5.3 6.2 6.3 6.4 6.7 Indonesia 6.2 6.5 6.3 6.4 6.2 6.1 6.3 6.4 6.5 6.6 Japan 2.8 1.8 5.3 0.7 0.3 0.7 2.3 1.7 1.5 3.7 Korea 2.7 3.5 2.9 2.3 2.4 3.0 3.1 3.6 3.6 3.6 Malaysia 5.0 6.2 4.9 5.4 4.5 5.3 5.8 6.3 6.7 6.2 Philippines 5.8 6.2 6.3 5.9 5.6 5.4 5.6 6.5 6.2 6.4 Singapore 2.5 3.8 1.5 2.0 2.4 3.9 4.3 4.0 3.6 3.2 Taiwan 1.3 3.0 -0.1 0.2 1.7 3.3 3.5 3.3 2.9 2.5 Thailand 5.7 5.0 0.4 4.2 3.9 14.2 8.0 5.0 4.0 3.0 CPI (% yoy period avg) Emerging Asia (ex Japan) 4.4 3.7 4.6 3.8 3.8 3.8 4.1 4.5 4.2 3.8 ex Japan, China and India 3.0 2.9 3.1 2.9 2.7 2.6 2.7 2.9 3.0 3.1 China 2.6 2.5 3.8 2.9 1.8 2.0 2.2 2.4 2.6 2.8 Hong Kong 3.5 2.5 5.2 4.2 3.3 1.3 0.9 1.1 3.9 4.1 India 10.6 7.9 8.4 7.2 10.1 10.1 10.5 11.8 9.7 7.3 Indonesia 4.2 4.6 3.7 4.5 4.3 4.1 4.5 4.6 4.8 4.5 Japan 0.1 -0.1 0.3 0.1 -0.0 0.1 0.1 0.0 -0.0 -0.1 Korea 2.1 1.9 3.0 2.4 1.3 1.6 1.2 1.7 2.3 2.5 Malaysia 1.7 2.7 2.3 1.7 1.4 1.5 1.8 2.6 3.0 3.4 Philippines 3.3 4.6 3.1 2.9 3.5 3.7 4.7 4.6 4.6 4.6 Singapore 4.0 2.8 4.9 5.2 3.5 2.2 2.0 2.5 3.0 3.5 Taiwan 2.2 2.2 1.3 1.6 3.1 2.9 3.6 2.7 1.3 1.0 Thailand 4.0 2.8 3.4 2.5 2.7 3.0 3.1 3.2 2.9 2.8
Source: CEIC; Bloomberg; RBS forecasts
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Asia Navigator | September 2012 Page 5
Quarterly FX and policy rate forecasts
Q1 12 Q2 12 Q3 12F Q4 12F Q1 13F Q2 13F Q3 13F Q4 13F USD/CNY 6.31 6.31 6.33 6.34 6.32 6.27 6.22 6.18 USD/HKD 7.77 7.76 7.75 7.75 7.75 7.75 7.75 7.75 USD/INR 51.16 56.31 55.50 55.00 54.50 54.00 53.50 52.00 USD/IDR 9,146 9,433 9,550 9,600 9,500 9,400 9,300 9,200 USD/JPY 82.87 79.79 79.00 79.00 82.00 83.00 84.00 84.00 USD/KRW 1,133 1,145 1,150 1,150 1,150 1,150 1,140 1,130 USD/MYR 3.06 3.18 3.10 3.08 3.06 3.12 3.08 3.06 USD/PHP 42.90 42.80 41.60 41.50 41.40 41.20 41.10 41.00 USD/SGD 1.26 1.27 1.26 1.25 1.25 1.24 1.24 1.23 USD/TWD 29.51 29.87 29.97 30.07 30.17 30.27 30.37 30.47 USD/THB 30.83 31.56 31.10 31.00 30.50 30.00 29.80 29.50 EUR/USD 1.33 1.26 1.29 1.33 1.35 1.33 1.31 1.30
Source: CEIC; Bloomberg; RBS forecasts
Q1 12 Q2 12 Q3 12F Q4 12F Q1 13F Q2 13F Q3 13F Q4 13F China 6.56 6.31 6.00 5.75 5.75 5.75 5.75 5.75 Hong Kong 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 India (repo rate) 8.50 8.00 8.00 7.75 7.75 7.50 7.25 7.00 Indonesia 5.75 5.75 5.75 5.75 5.75 5.75 5.75 6.25 Japan 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 Korea 3.25 3.25 3.00 2.75 2.75 2.75 2.75 2.75 Malaysia 3.00 3.00 3.00 3.00 3.00 3.00 3.25 3.25 Philippines 4.00 4.00 3.75 3.75 3.75 4.00 4.00 4.25 Taiwan 1.88 1.88 1.88 1.88 1.88 1.88 1.88 1.88 Thailand 3.00 3.00 3.00 3.00 3.00 3.00 3.25 3.50 Fed funds rate 0 to 0.25 0 to 0.25 0 to 0.25 0 to 0.25 0 to 0.25 0 to 0.25 0 to 0.25 0 to 0.25 ECB rate 1.00 0.75 0.50 0.50 0.50 0.50 0.50 0.50
Source: CEIC; Bloomberg; RBS forecasts
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Asia N
avigato
r | Sep
temb
er 2012P
age 6
Regional structural indicators
Regional structural indicators
Population 2011 GDP structure (% GDP) GDP Sovereign rating
Competitiveness
Mn Life expectancy
at birth (yrs)
Agric and mining
IndustryConstruction Services Private consump
-tion
Govern-ment
consum-ption
Investment Net Exports
Nominal GDP,
USD bn (2010)
2010 Purchasing
power parity GDP per capita,
USD th
Moody's S&P Share of 2010 world
exports %
WEF competitive-
ness ranking, percentile
China 1348 73 6 51 NA 43 35 13 49 3 7,298 8 Aa3 AA- 10.65 29
Hong Kong 7 83 0 4 3 90 64 8 20 6 243 49 Aa1 AAA 0.05 9
India 1207 65 16 17 8 59 58 11 32 -7 1,676 4 Baa3 BBB-u 1.67 59
Indonesia 241 69 20 27 6 47 56 8 24 11 846 5 Baa3 BB+ 1.14 50
Japan 128 83 1* 27* 6* 72* 59 21 21 -1 5,869 35 Aa3 AA-u 4.61 10
Korea 49 81 3 34 6 57 51 14 25 9 1,116 32 Aa3 A+ 3.11 19
Malaysia 29 74 14 30 3 56 54 15 22 8 279 16 A3 A 1.27 25
Philippines 96 68 13 26 5 56 71 10 20 -2 213 4 Ba2 BB+ 0.27 65
Singapore 5 82 0 28 4 62 36 10 24 34 260 60 Aaa AAAu 0.79 2
Taiwan 23 79 2 33 2 63 53 11 17 18 467 38 Aa3 AA-u 1.73 13
Thailand 64 74 11 43 2 44 52 10 21 16 346 9 Baa1 A- 1.28 38
United States 312 78 3 14 3 79 71 19 13 -3 15,094 48 Aaa AA+u 8.31 7
* 2010 Source: CEIC; World Competitiveness Report; World Bank; IMF; Bloomberg; RBS
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Regional macro trends
Figure 1: Real GDP growth
Figure 2: Most recent unemployment rate
-5
0
5
10
15
2007 2008 2009 2010 2011 2012
% y
oy
Asia ex Japan Asia ex China, India & Japan
0.7
1.8
3.0
3.4
4.1
4.3
6.3
6.9
0 1 2 3 4 5 6 7 8
THSGMYHKCNTWID
PH
% of labour force
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Industrial production
Figure 4: Retail sales
-30-20-10
010203040
2007 2008 2009 2010 2011 2012
% y
oy
10 NJ-Asia NJ-Asia ex CN,IN
-20-10
01020304050
2007 2008 2009 2010 2011 2012
% y
oy
NJA ex CN, IN, MY & PH CN
Source: CEIC, RBS Source: CEIC, RBS
Figure 5: External trade
Figure 6: Direction of trade
-40
-20
0
20
40
60
80
2007 2008 2009 2010 2011 2012
% y
oy
Imports Exports
525456585
105125
2007 2008 2009 2010 2011
USD
bn
EU JP US
NJA (ex-CN) CN Others
Source: CEIC, RBS Source: CEIC, RBS
Asia Navigator | September 2012 Page 7
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Asia Navigator | September 2012 Page 8
Regional macro trends Figure 7 : M2 growth
Figure 8 : Domestic loan growth
6
10
14
18
22
26
30
2008 2009 2010 2011 2012
% yo
y
NJA NJA ex CN China
0
10
20
30
40
2007 2008 2009 2010 2011 2012
% yo
y
NJA NJA ex CN, IN CN
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Headline inflation
Figure 10: Inflation vs. central bank targets*
-202468
10
2007 2008 2009 2010 2011 2012
% yo
y
NJA NJA, ex CN, IN
012345678
IN* ID SG* HK* CN* KR TH MY* PH
% yo
y
Current Central bank target band/forecast range
Source: CEIC, RBS * latest central bank forecasts used where inflation targets not announced.Source: CEIC, Bloomberg, RBS
Figure 11: Real policy rates – current vs. 1y ago
Figure 12: REER (2010 = 100) and ADXY Index
-10-8-6-4-202468
HK ID SG CN MY KR TW PH TH ^ IN*
%
Current 1y ago Difference
80
90
100
110
120
2007 2008 2009 2010 2011 2012
NJA ex China China ADXY Index
*Repo rate; ^6m SOR; ^^ Core inflationSource: CEIC, Bloomberg, RBS
Source: CEIC, Bloomberg, RBS
Note: Aggregate series calculated using 2010 nominal GDP fixed weight
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Regional macro trends
Figure 13: Foreign exchange rate pressure and resistance index
Figure 14: Regional monetary conditions
-1.0-0.50.00.51.01.52.02.5
2007 2008 2009 2010 2011 2012
Change in FX reservesChange in FX ratePressure index
-3.0-2.0-1.00.01.02.03.04.0
2007 2008 2009 2010 2011 2012
Real interest rate Real exchange rate Total
tight
loose
Source: CEIC, RBS Source: BIS, RBS
Figure 15: FX intervention (net FX purchases, Jul 2011- Jun 2012)
Figure 16: Sterilisation of FX intervention
-4
4
12
20
28
HK KR SG PH TW MY TH ID IN
Total turnover July 11- June 12 (USD bn) % of daily turnover
-40
-20
0
20
40
60
80
2007 2008 2009 2010 2011 2012
NFA (100 bn USD) NDA Base money growth (yoy)
Source: Bloomberg, BIS, CEIC, RBS Source: Bloomberg, BIS, CEIC, RBS
Note: CN = China; HK = Hong Kong; IN = India; ID = Indonesia; KR = Korea; MY = Malaysia; PH = Philippines; SG = Singapore; TW = Taiwan; TH = Thailand
Asia Navigator | September 2012 Page 9
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Asia Navigator | September 2012 Page 10
Country Sections
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China
Louis Kuijs
Real economy: China’s economy has been slowing since the second quarter of 2011, largely
because of weak exports and a policy-induced slowdown in real estate. Real GDP growth
slowed to 7.6% yoy in the second quarter. Even though monthly data through August points to
some further weakness in the third quarter, the activity data suggest a modest slowdown so far.
However, profit growth has decelerated much more and this has aggravated negative sentiment
among corporates and financial markets.
Key forecasts
GDP % yoy
CPI % yoy
Policy rate
USD/CNY
Q1 12A 8.1 3.8 6.56 6.31 Q2 12A 7.6 2.9 6.31 6.31 Q3 12 7.4 1.8 6.00 6.33 Q4 12 6.9 2.0 5.75 6.34 Q1 13 7.3 2.2 5.75 6.32 Q2 13 7.8 2.4 5.75 6.27 Q3 13 7.9 2.6 5.75 6.22
Q4 13 8.0 2.8 5.75 6.18
Source: CEIC, RBS forecasts
Overall domestic demand has cooled alongside weaker global demand. Real exports have fallen
in recent months, seasonally adjusted, reflecting subdued global demand. In July, they were flat
on a year ago. Domestically, real consumption growth has remained solid at 9-10% so far in
2012, supported by strong wage increases on a resilient labour market. In the real estate sector,
measures to rein in housing prices caused a major slowdown – first in sales, then in starts and
construction – although it is cushioned by scaled-up social housing construction. Infrastructure
investment has picked up pace again, buoyed by the acceleration of project approvals, and
investment in manufacturing has seen surprisingly steady growth. However, destocking has in
recent months dampened production growth. Meanwhile, inflation has retreated to a low level
again – it was 2% yoy in August.
In the corporate world and the financial markets, the slowdown is perceived as more
pronounced than the real GDP data suggest because profits have slowed down much more
sharply. They were down 2.7% yoy in the first seven months of 2012. The declining profitability
has left its mark on China’s stock markets. The A-share market last week reached its lowest point
in 41 months.
In this context, since May 2012, China’s government has eased its macro policy stance, with
interest rates and reserve requirement rates both cut twice this year, more accommodating
guidance on bank lending, subsidies for energy-saving household products and approval of
investment projects has been accelerated, as evidenced by the NDRC’s confirmation in the first
week of September that it had approved new infrastructure projects in previous months.
Looking ahead, we expect China’s GDP to grow 7.5% this year and 7.8% next year. This
assumes some more support from a pro-growth macro stance but not the kind of stimulus
programme that could turn the economy around by itself. Such growth is below our estimate of
China’s current potential growth, implying continued spare capacity and pressure on prices and
profit margins through 2013.
As to the specific components of growth, we expect exports to remain weak though 2013,
consumption slowing down somewhat on the back of lower wage income, real estate investment
decelerating further before picking up speed and manufacturing investment feeling downward
pressure from lower profitability, but infrastructure investment regaining momentum.
In our view, inflation is not really an issue anymore. There are still some lingering concerns about
it in Beijing, in part motivated by the recent global corn and soybean price hikes. But, in our
view, given the subdued global economic outlook, the recent retreat of commodity prices and
spare capacity in many manufacturing sectors globally, inflation is unlikely to be an issue any
time soon.
Policy outlook: This scenario factors in some more easing of monetary and fiscal policy in the
rest of 2012 and in 2013, but no major stimulus. This is because there is now somewhat more
tolerance among senior leaders for lower growth than in end-2008 as the government is still
dealing with some of the consequences of the previous stimulus – such as NPLs, local
government debt, and surging housing prices.
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Asia Navigator | September 2012 Page 12
In the monetary area, the PBC has surprised the market by not taking more ‘headline’ measures,
such as cutting RRRs, since July. Nonetheless, looking ahead, in case of weak data in the
months ahead, we believe more RRR cuts are likely. We also expect another 25bp interest rate
cut this year, given the moderate growth prospects and benign inflation outlook. A significant
further decline in inflation could trigger another interest rate cut.
In the fiscal area, ambitious investment targets presented by local governments cannot all be
taken for granted. Nonetheless, the confirmation of approval of substantial infrastructure projects
by the NDRC in the first week of September and the on-the-ground data signal that infrastructure
investment is gaining momentum.
On the housing market, after a recent uptick in housing prices, senior leaders including Prime
Minister Wen Jiabao and NDRC head Zhang Ping recently reiterated the government’s resolve to
rein in housing prices and called for the continued implementation of existing housing policies.
However, we think that the housing market measures will eventually be relaxed, with the
government able to “define success”, explaining that housing has become more affordable in
the past two years relative to incomes and that the construction of affordable housing has been
scaled up.
FX outlook: After gradual appreciation of the CNY and a reduction of the current account
surplus to 2.8% of GDP in 2011, the CNY is now much closer to its equilibrium. As a result,
market expectations on the future path of the CNY have shifted. This seems to have reduced net
financial capital inflows and brought the FX market closer to market clearing. The exchange rate
is still set by policy, but the considerations feeding into FX policy have also shifted. With the USD
having strengthened against most major currencies since the fall of 2011 and China’s
government concerned about slowing exports, the CNY has been broadly stable against the
USD since the fall of 2011.
Looking ahead, in the short run, we expect the government to maintain the CNY broadly stable
against the USD as long as the outlook for exports remains weak. Thus, we project it to be 6.34
by end-2012. If the global economic outlook improves in 2013, the CNY is likely to see further
medium-term strengthening on account of productivity catch up. We project it to be 6.16 by end-
2013. In addition, as part of the longer-term transition to a more independent monetary policy,
the PBC is likely to introduce more volatility.
The main risks to this outlook are external. The biggest risk is still a larger global downturn
combined with financial turmoil. This would hit China mainly via the real economy – ie, via weaker
exports. Clearly, in such a scenario, we would expect the macro policy response to be more
forceful, with more RRR and interest rate cuts, more infrastructure investment, and less appetite
for a stronger CNY.
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China
Figure 1: Production and PMI
Figure 2: Investment
0
4
8
12
16
20
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
35
40
45
50
55
60
65
Inde
xIndustrial Production PMI (RHS)
05
10152025303540
2007 2008 2009 2010 2011 2012
% y
oy
Fixed Assets InvestmentFixed Asset investment from Real estate
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Inflation
Figure 4: Money growth
-4-202468
10
2007 2008 2009 2010 2011 2012
% y
oy
-4-20246810
% yoy
Contribution of food, ppts Contribution of non-food, ppts
CPI (RHS)
0
5
10
15
20
25
30
35
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
M2 Credit growth
Source: CEIC, RBS Source: CEIC, RBS
Figure 5: Trade performance
Figure 6: Fiscal balance
-100
-50
0
50
100
150
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
-500
0
500
1000
1500
2000
% y
oy, 3
mm
a
Trade Balance (RHS) Exports Imports
17181920
21222324
2007 2008 2009 2010 2011 2012
as %
of G
DP, R
ollin
g 4
quar
ters
av
erag
e
-2
-1
0
1
2
3
as %
of G
DP, R
ollin
g 4
quar
ters
av
erag
e
Surplus/Deficit (RHS) Revenue Expenditure
Source: CEIC, RBS Source: CEIC, RBS
Asia Navigator | September 2012 Page 13
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China
Figure 7: Policy rates
Figure 8: Yield curve
8
12
16
20
24
2007 2008 2009 2010 2011 2012
%
2
3
4
5
6
7
8
%RRR Deposit Rate Lending Rate
2.4
2.8
3.2
3.6
4.0
3m 6m 9m 1yr 2yr 3yr 5yr 6yr 7yr 8yr 9yr
%
3.0
3.1
3.2
3.3
3.4
%
1 month ago 3 months ago
6 months ago today (RHS)
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Spot exchange rates
Figure 10: Forward curve
6
6.5
7
7.5
8
2007 2008 2009 2010 2011 2012
USD/CNY USD/CNH
6.26
6.31
6.36
6.41
6.46
6.51
Spot 1m 3m 6m 12m
Onshore CNY CNH Offshore NDF
Source: Bloomberg, RBS Source: Bloomberg, RBS
Figure 11: Effective exchange rates
Figure 12: Equity market
80859095
100105110115
2007 2008 2009 2010 2011 2012
REER
, NEE
R (2
010=
100)
6.0
6.5
7.0
7.5
8.0
REER NEER USD/CNY
01,0002,0003,0004,0005,0006,0007,000
2007 2008 2009 2010 2011 201210203040506070
Shanghai SE Composite Index PE Ratio (RHS)
Source: CEIC, RBS Source: CEIC, RBS
Note: 3mma = 3-month moving average, yoy = year on year growth.
Asia Navigator | September 2012 Page 14
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Asia Navigator | September 2012 Page 15
China – key economic indicators
2009 2010 2011 2012F 2013F
Growth (% y/y)
Real GDP 9.2 10.4 9.3 7.5 7.8
Domestic demand 13.7 10.2 9.9 8.0 8.2
- Private consumption 9.4 9.1 9.7 8.2 8.0
- Government spending 18.4 11.4 10.2 7.8 8.4
- Fixed investment 21.7 11.1 9.5 9.0 8.2
Fixed investment, % of GDP 46.0 45.7 45.5 45.8 45.8
Exports -10.4 27.5 7.6 5.5 6.5
Imports 4.3 22.0 8.8 7.2 8.0
Domestic demand contribution to growth 12.6 9.8 9.6 7.8 8.0
Net exports contribution to growth -3.5 0.4 -0.4 -0.3 -0.2
Unemployment (%labour force) - - - - -
Inflation, FX and interest rates
CPI inflation (% end of period) 1.9 4.6 4.1 2.0 2.8
CPI inflation (% period average) -0.7 3.3 5.4 2.6 2.5
USD/LCU, end period 6.83 6.62 6.30 6.34 6.16
USD/LCU, average period 6.83 6.77 6.39 6.32 6.25
REER (% end of period) -5.3 4.4 6.2 0.7 2.5
Policy rate % end of year 5.31 5.81 6.56 5.75 5.75
Fiscal accounts (% of GDP)
Central budget fiscal balance -2.8 -2.5 -1.8 -1.7 -1.6
- Government expenditure 22.4 22.4 23.1 23.9 24.0
- Government revenue 20.1 20.7 22.0 22.2 22.4
Primary fiscal balance 36.6 34.7 44.1 - -
Local government fiscal balance 17.0 17.7 26.5 - -
Government debt 35.1 33.5 42.9 - -
- Domestic 1.5 1.2 1.3 - -
- External -2.8 -2.5 -1.8 -1.7 -1.6
Money and credit (% y/y)
M2 27.7 6.0 5.5 4.8 5.5
Private sector credit 1.8 3.2 7.1 6.0 6.5
Private sector credit, % of GDP 157.0 147.1 146.1 147.7 149.2
Balance of payments (USD bn)
Exports 1,333 1,744 2,087 2,234 2,380
% y/y -15.7 30.8 19.7 7.1 6.5
Imports 1,113 1,521 1,898 2,029 2,152
% y/y -9.7 36.6 24.8 6.9 6.1
Trade balance 249.5 254.2 243.5 264.1 288.9
Current account balance 261.1 237.8 201.7 193.7 228.8
Current account balance, % of GDP 5.2 4.0 2.8 2.4 2.5
Net FDI 70 186 170 136 109
Net FDI (%GDP) 1.4 3.1 2.3 1.7 1.2
Overall balance 453 448 334 330 338
Foreign reserves and debt
FX reserves 2,399 2,847 3,181 3,511 3,849
FX reserves, months of imports 26 22 20 21 21
FX reserves, % of ST debt - - - - -
FX debt - - - - -
FX debt, % of GDP - - - - -
ST FX debt - - - - -
M< debt amortisation - - - - -
External financing requirement (ST, MT & CAD) - - - - -
Nominal GDP
Nominal GDP, USD bn 4.99 5.93 7.40 8.24 9.26
Nominal GDP, CNY trn 34.1 40.2 47.3 52.3 58.1
GDP per capita, USD 3,740 4,423 5,491 6,089 6,806 Source: CEIC; State Administration of Foreign Exchange; RBS Forecasts
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Hong Kong
Erik Lueth
Key forecasts
GDP %yoy
CPI %yoy
Policy rate
USD/HKD
Q1 12A 0.7 5.2 0.50 7.77
Q2 12A 1.1 4.2 0.50 7.76
Q3 12 2.1 3.3 0.50 7.75
Q4 12 2.8 1.3 0.50 7.75
Q1 13 3.3 0.9 0.50 7.75
Q2 13 4.5 1.1 0.50 7.75
Q3 13 4.6 3.9 0.50 7.75
Q4 13 4.7 4.1 0.50 7.75
Source: CEIC, RBS forecasts
Real economy: Hong Kong is cooling rapidly, doing justice to its image of a global hub. Exports
of transhipment and financial services, the key transmission channel of global trends, remained
flat in Q2 over a year ago. Cargo vessel arrivals were down 4% yoy in June. But, also retail sales,
largely driven by mainland visitors, slowed to 5% yoy growth from 22% growth in August last
year. As a result, GDP contracted by 0.1% qoq in the second quarter, the first quarterly
contraction in a year. In light of the weaker economy credit growth slowed to 9.5% yoy in July,
down from 32% in May 2011. This is mostly due to credit for use in Hong Kong with credit
extended abroad – presumably mostly mainland China – still contributing 6.3 percentage points
to the headline number. Inflation has also taken a dive, amounting to 1.7% yoy in July, down from
7.9% a year ago, and prices stagnating on a three-months-over-three-months (sa) basis.
Reflecting lower inflation expectations, the yield curve flattened with 15y yields falling from 1.8%
a year ago to 0.8% in early September. The one noteworthy exception to this cooling trend is
property prices, which after falling during the second half of 2011 rose by another 10.5% in the
first half of 2012.
Policy outlook: The government remains concerned about the red-hot property sector as well
as the financial health of Hong Kong lenders, should the market correct. It was reported in the
South China Morning Post on 31 August that Chief Executive Leung Chun-ying will reveal new
prudential measures before long.
FX outlook: Joseph Yam, the former head of the Hong Kong Monetary Authority (HKMA),
suggested in June that the city should review its currency peg to the USD. The comments are
significant given Mr. Yam’s former role and the fact that he helped create and defend the peg for
the better part of his professional life. We don’t believe that the peg will be abandoned over the
next 7-10 years. To begin with, one of the central tenets of those who question the peg is not
true, namely that Hong Kong’s economy is more closely aligned with the Chinese business cycle
than with the US cycle. Yes, mainland Chinese come in droves to shop, including for property,
but Hong Kong is also a global financial and transhipment centre. As a result, Hong Kong’s GDP
growth is much more correlated with the global and US business cycle, than with the mainland
cycle. Reflective of the above, some of the stresses that Hong Kong has no doubt been exposed
to are receding. Both inflation and credit growth have slowed considerably and will continue to
do so in the current global environment. We also see no indication that the HKD is undervalued.
Both nominal and real effective exchange rates have been flat over recent years. In fact, seeing
an economy as advanced as Hong Kong depreciate in real effective terms against mainland
China is what we would expect based on Balassa-Samuelson. Moreover, many observers now
believe that the CNY is fairly valued, including against the USD. This means that the HKD should
not depreciate further against the CNY, eliminating the need for a re-peg. This also seems to be
the view of Hong Kong residents, who have started to draw down their CNY deposits. In light of
the above evidence, we believe changing the HKD peg is not worth the costs. Pegging to the
CNY is not an option, because the CNY is not a convertible currency. Allowing the HKMA to buy
and sell CNY in unlimited quantities – which would be required for a CNY peg – would open
China’s capital account through the back door of Hong Kong. A one-off re-peg against the USD,
say, at HKD6 would invite speculative flows which would be very costly to fend off. A complete
breakdown of the peg would be a distinct possibility at great costs to the very open city state.
This leaves a Singapore-style peg to a basket of currencies, including the CNY, which Mr. Yam
seems to be proposing. The problem is that the HKMA has no experience and track record in
running such a currency arrangement. The transition is therefore a risky undertaking that could
invite speculative attacks. While it can be done, it is not clear why the HKMA would take such
risks given that macro pressures are subsiding and given that Hong Kong will anyway, one day,
peg to the CNY.
Asia Navigator | September 2012 Page 16
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Hong Kong
Figure 1: Trade, transports and financial services exports Figure 2: Port activity
-15-10-505
101520
2007 2008 2009 2010 2011
%, y
oy
Global services exports GDP
-30
-20
-10
0
10
20
30
2007 2008 2009 2010 2011
%, y
oy, 3
mm
a
Cargo vessel arrivals Port throughput
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Tourist arrivals and retail sales Figure 4: Yield curve
-20-10
01020304050
2008 2009 2010 2011 2012
%, y
oy, 3
mm
a
Mainland Chinese Others Retail volume
0
0.5
1
1.5
2
3m 6m 1y 2y 3y 4y 5y 7y 10y 15y
%
Today 3m ago 6m ago 12m ago
Source: CEIC, RBS Source: Bloomberg, RBS
Figure 5: Credit growth
Figure 6: Inflation
-100
10203040
2007 2008 2009 2010 2011 2012
%, y
oy
Trade finance Use in HK
Use outside HK Total
-2
0
2
4
6
8
2008 2009 2010 2011 2012
%, y
oy, 3
mm
a
HeadlineAjusting for one-off government measures
Source: CEIC, RBS Source: CEIC, RBS
Asia Navigator | September 2012 Page 17
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Hong Kong
Figure 7: Residential property transactions and prices Figure 8: Rental yields
100
150
200
250
300
2008 2009 2010 2011 2012
Pric
e in
dex,
199
9=10
0
0246810121416
thou
sand
uni
tsTransactions (RHS) Average (LHS) High-end (LHS)
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012
%
High end Low end High end Low end
Residential
Commercial
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: CNY deposits in Hong Kong Figure 10: Perceived pressure on HKD peg 1/
0
200
400
600
800
2007 2008 2009 2010 2011 2012
billi
on R
MB
0
2
4
6
8
10
%
Current Time % of total deposits (RHS)
-3
-2
-1
0
12007 2008 2009 2010 2011 2012
3m 1y
Source: CEIC, RBS 1/ Price of USD call minus price of USD putSource: Bloomberg, RBS
Figure 11: Exchange rate Figure 12: Stock market
90
95
100
105
110
2008 2009 2010 2011 2012
Inde
x, 2
010=
100
7.70
7.75
7.80
7.85
7.90
NEER (LHS) REER (LHS) HKD/USD (RHS)
Band for HKD/USD
0
50
100
150
200
2007 2008 2009 2010 2011 2012
Hong Kong Asia World
Source: CEIC, RBS Source: Bloomberg, RBS
Note: 3mma = 3-month moving average, yoy = year on year growth.
Asia Navigator | September 2012 Page 18
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Asia Navigator | September 2012 Page 19
Hong Kong – key economic indicators
2008 2009 2010 2011 2012F 2013F
Growth (%y/y)
Real GDP 2.3 -2.6 7.1 5.0 1.7 4.3 Domestic demand 1.6 0.8 7.5 6.0 4.0 4.9 - Private consumption 2.4 0.7 6.7 8.5 3.5 3.4 - Government spending 1.8 2.4 2.8 1.8 2.8 1.3 - Fixed investment 1.0 -3.9 7.7 7.6 6.2 11.1 Fixed investment , % of GDP 20.2 19.9 20.0 20.5 21.4 22.8 Exports 2.5 -10.3 16.7 4.2 0.5 8.3 Imports 2.3 -9.0 17.3 4.7 1.5 8.7 Domestic demand contribution to growth 1.5 1.1 6.9 5.6 3.8 4.7 Net exports contribution to growth 0.8 -3.7 0.2 -0.6 -2.0 -0.4 Unemployment (% labour force) 3.4 5.2 4.4 3.5 3.4 3.4
Inflation, FX and interest rates CPI inflation (%, end of period) 2.1 1.5 2.9 5.7 1.3 4.1 CPI inflation (%, period average) 4.3 0.6 2.3 5.3 3.5 2.5 USD/HKD, end-period 7.75 7.76 7.77 7.77 7.75 7.75 USD/HKD, period average 7.79 7.75 7.77 7.78 7.75 7.75 REER (% end of period) 3.7 -5.0 -3.1 2.0 -1.5 -1.5 Policy rate % end of year 0.50 0.50 0.50 0.50 0.50 0.50
Fiscal accounts (% of GDP)* Central budget fiscal balance 7.0 0.1 1.4 3.9 3.2 -0.2 - Government expenditure 13.3 17.5 16.3 15.5 17.5 17.8 - Government revenue 20.2 17.6 17.7 19.4 20.7 17.7 Primary fiscal balance** 5.7 -2.0 -0.2 2.4 2.2 -1.1 Government debt 1.3 1.3 1.3 1.3 1.3 1.3 - Domestic 0.5 0.5 0.5 0.5 0.5 0.5 - External 0.8 0.8 0.8 0.8 0.8 0.8 Fiscal reserves 27.8 27.5 28.9 30.7 31.7 29.8
Money and credit (% y/y) M2 2.6 5.3 8.1 12.9 5.3 6.9 Private sector credit 11.0 -2.1 20.9 12.6 -0.3 8.2 Private sector credit, % of GDP 150.5 152.3 171.6 177.4 168.0 170.0
Balance of payments (USD bn) Exports 365 322 394 438 437 467 % Y/Y 6 -12 22 11 0 7 Imports 388 349 437 494 504 548 % Y/Y 6 -10 25 13 2 9 Trade balance -23 -27 -43 -56 -67 -81 Current account balance 29 18 12 13 8 6 Current account balance, % of GDP 13.7 8.6 5.5 5.3 3.0 2.3 Net FDI 70 -90 -189 12 -13 -23 Net FDI (% of GDP) 4 -6 -11 1 -1 -1 Overall balance 34 71 9 14 0 0
Foreign Reserves and debts (USD bn) FX reserves 183 256 269 285 285 285 FX reserves, months of imports 5.0 7.9 6.6 6.2 6.1 5.6 FX reserves, % of ST debt 37.5 51.8 42.5 40.2 38.9 37.5 FX debt 945 891 903 914 914 914 FX debt, % of GDP 439 426 403 375 355 332
Nominal GDP Nominal GDP, USD bn 215 209 224 244 258 276 Nominal GDP, HKD bn 1,677 1,623 1,742 1,897 1,997 2,136 GDP per capita, USD 30,956 30,019 31,782 34,213 35,997 38,307 Population (mn) 6.9 7.0 7.1 7.1 7.2 7.2
*Fiscal year, ending in March of same calendar year, ** Excluding investment incomeSource: CEIC; RBS forecasts
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Asia Navigator | September 2012 Page 20
India Sanjay Mathur
Real economy: We now forecast FY13 (fiscal year ending March 2013) GDP growth at 5.2%. This forecast primarily reflects the fluid political situation which is not only delaying critical infrastructure-related reforms but even stalling non-controversial projects. Quite predictably, the softest spot in our growth projections is investment. However, we also expect consumption to slow as income uncertainty rises. The April-June quarter data was already reflective of this trend: gross fixed capital formation grew by only 0.7% yoy and consumption by 4% yoy. In fact, public consumption was the fastest-growing component, up 9% yoy – this clearly can not be sustained considering that the fiscal deficit in April-July was already more than half of the full-year target. Coincident indicators are also suggesting a continuation of this lacklustre trend. At the consumer level, growth in auto sales and currency held by the public remain stuck in recent low ranges. Ditto for investment indicators such as capital goods output. Finally, on the external front, the weakness in exports has intensified despite the newly found competitiveness in the currency. Inflation has moderated, although not into the RBI’s comfort zone. In August, headline WPI came in below 7% yoy for the first time in more than two and half years. Core inflation (non-food manufacturing inflation) had jumped back to 5.5% yoy from under 5% yoy in the previous two months but in all likelihood, this bounce was a one-off. In the current environment of weak domestic demand, corporates are likely to find it difficult to pass on increases in input costs, be it fuel or agriculture products.
Policy outlook: As already mentioned, the moderation in inflation has as yet not been sufficient to cut rates. Lower inflation is, however, a necessary but not a sufficient condition for rate cuts. We believe that ensuring overall macroeconomic stability is emerging as a key consideration for monetary policy. Macro stability in the current context encompasses the fiscal and current account deficits and falling household financial savings. On the fiscal side, a material slippage in government subsidies for fuel, food and fertilisers appears inevitable. We estimate the fiscal deficit to reach 5.8% of GDP compared with a target of 5.1%. The current account is expected to improve, but only modestly to around 3% of GDP (FY12: 4.2% of GDP). Although, gold imports which accounted for as much as 1.6% of GDP last year have tapered off, weak exports as well as import substitution in industries like iron and steel are limiting the extent of correction. Finally, household savings in financial assets declined to a multi-year low of 7.8% of GDP in FY12 presumably reflecting low real returns on bank deposits. Consequent to this shift in household savings, the intermediation capacity of the financial sector has been compromised. Overall, attaining stability in these areas will need to precede rate cuts.
FX outlook: The projected narrowing of the current account coupled with the strength in non-resident Indian (NRI) deposits – which are offsetting weak FDI flows – should lend stability to the INR. We expect USD/INR to trade in the 54.50-56.50 range. Appreciation is unlikely given that a significant portion of external commercial borrowings contracted in 2007-08 are due for repayment this year. The risks to our USD/INR forecasts remain to the upside arising from a rebound in oil prices, resumption of gold imports and most of all, a sovereign rating downgrade. The probability of a downgrade is high considering that little is being done to reverse the structurally deteriorating growth momentum, high fiscal deficit or stalled reforms. These have been the three prominent concerns of the two rating agencies that have revised their rating outlook to negative. We understand that the recently appointed Finance Minister Mr P. Chidambaram is reported to be sensitive to this issue, but he will need to take decisive action quickly.
Key forecasts
GDP % yoy
WPI % yoy
Policy rate USD/INR
Q1:12 5.6 7.5 8.50 51.2
Q2:12 3.9 7.4 8.00 56.3
Q3:12 5.2 6.7 8.00 55.5
Q4:12 5.3 6.5 7.75 55.0
Q1:13 6.2 6.2 7.75 54.5
Q2:13 6.3 5.0 7.5 54.0
Q3:13 6.4 5.6 7.25 53.5
Q4:13 6.7 6.1 7.00 52.0
Source: RBS forecasts
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India
Figure 1: Contribution to GDP growth
Figure 2: Trends in Purchasing Mangers Index (PMI)
-10-505
101520
2007 2008 2009 2010 2011 2012
Cont
ribut
ion
(in %
)
Private consumption Government consumptionGFCF Changes in Stocks Valuables Net exportsGDP (% yoy)
40
50
60
70
2007 2008 2009 2010 2011 2012
PMI (
50: e
xpan
sion
-co
ntra
ctio
n cu
tt-of
f)
ServicesManufacturingExpansion-contraction cut-off
Source: CEIC, RBS Source: Bloomberg, RBS
Figure 3: Industrial production by major components Figure 4: Business optimism survey
-40-20
020406080
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
Industrial production Manufactuing Capital goods Consumer durablesConsumer non-durables
0
20
40
60
80
100
2007 2008 2009 2010 2011 20120
50
100
150
200
250
Volume of salesNet profitsBusiness optimism index (RHS)
Source: CEIC, RBS Source: CEIC, RBS
Figure 5: External trade by major components Figure 6: Inflation by major sources
-100
-50
0
50
100
150
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
Exports Imports
Oil imports Non-oil imports
-5
0
5
10
15
20
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
CPI WPI
Non-food/fuel WPI Non-food manufacturing WPI
Source: Bloomberg, RBS Source: CEIC, RBS
Asia Navigator | September 2012 Page 21
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Asia Navigator | September 2012 Page 22
India
Figure 7: BoP trends by major components
Figure 8: Contribution to reserve money growth
-10-505
1015
2007 2008 2009 2010 2011
% G
DP
-19,000-14,000-9,000-4,0001,000 USD m
n
BoP balance (% GDP)CA balance (% GDP)Trade balance (USD mn) (3mma)
-100
-50
0
50
100
150
2007 2008 2009 2010 2011 2012
Con
tribu
tion
to re
serv
e m
oney
gro
wth
(3m
ma)
-10
0
10
20
30
40
Res
erve
mon
ey (%
yoy
, 3m
ma)
Net foreign assets Net domestic assetsReserve money
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Growth in monetary aggregates Figure 10: Evolution of yield curve
05
101520253035
2007 2008 2009 2010 2011 2012
% yo
y, 3m
ma
M1 M2 Aggregate credit Non-food credit
7.0
7.5
8.0
8.5
9.0
3m 1y 2y 5y 10y
%
Today 1m ago 3m ago6m ago 12m ago
Source: CEIC, RBS Source: Bloomberg, RBS
Figure 11: Equity market trends Figure 12: Exchange rate movements
5,000
10,000
15,000
20,000
25,000
2007 2008 2009 2010 2011 201210
15
20
25
30
BSE Sensex PE ratio
80859095
100105110115120
2007 2008 2009 2010 2011 2012
NEER
, REE
R (2
010:
100)
35
40
45
50
55
USD/
INR
NEER REER USD/INR
Source: CEIC, RBS Source: CEIC, RBS
Note: 3mma = 3-month moving average, yoy = year on year growth.
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Asia Navigator | September 2012 Page 23
India – key economic indicators (fiscal year starting April) 2008/09 2009/10 2010/11 2011/12 2012/13F 2013/14F
Growth (% y/y)
Real GDP 3.9 8.2 9.6 6.9 5.2 6.8 Domestic demand 4.3 9.4 9.1 5.4 4.1 7.4 - Private consumption 7.2 7.2 8.1 5.5 4.9 6.4 - Government spending 10.4 14.3 7.8 5.1 5.4 3.3 - Fixed investment 3.5 6.8 7.5 5.5 4.2 11.6 Fixed investment, % GDP 33.5 33.1 32.5 32.0 31.7 33.1 Exports 14.6 -4.8 22.7 15.3 6.0 11.7 Imports 22.7 -2.2 15.6 18.5 3.7 12.5 Domestic demand contribution to growth 4.6 10.2 9.9 5.9 4.4 7.9 Net exports contribution to growth -2.8 -0.4 0.4 -1.9 0.3 -1.0
Inflation, FX and interest rates CPI inflation (%, end of period) 8.0 14.9 8.8 8.6 11.5 8.3 CPI inflation (%, period average) 8.8 12.3 10.5 8.4 10.6 7.9 WPI inflation (% Fiscal year - March over March) 1.6 10.4 9.7 7.7 5.8 6.5 WPI inflation (% change in average index for the fiscal year) 8.1 3.9 9.6 9.0 6.7 5.8 USD/INR, end period 51.0 45.1 44.7 51.2 54.5 51.0 USD/INR, average period 47.3 46.9 46.6 49.5 55.3 52.6 REER (% end of period) 2.2 -11.2 2.8 -4.8 Reverse repo rate, end of year % 3.5 3.5 5.8 7.5 6.8 6.0 Repo rate (end-year %) 5.0 5.0 6.8 8.5 7.8 7 10 year bond yield (end-year, %) 7.0 7.8 8.0 8.6 7.7 7
Fiscal accounts (% of GDP) Central government fiscal balance -6.0 -6.4 -4.9 -5.9 -5.1 - Government expenditure 15.7 15.7 15.8 15.6 14.8 - Government revenue 9.7 9.7 9.4 10.7 8.9 Primary fiscal balance -2.6 -3.0 -1.8 -2.8 -1.9 State government fiscal balance -2.4 -2.9 -2.7 -2.2 Government debt 72.2 70.8 66.0 63.0 - Domestic 67.5 67.0 62.4 62.2 - External 4.7 3.9 3.5 3.3
Money and credit (% y/y) M3 money supply 19.6 16.8 15.2 12.9 14.0 17.0 Private sector credit 17.5 16.9 20.8 17.0 11.0 16.5 % of GDP 47.4 44.0 48.8 47.1 46.2 46.5
Balance of payments (USD bn) Merchandise exports 189.0 182.4 250.5 309.8 303.6 340.0 % y/y 13.7 -3.5 37.3 23.7 -2.0 12.0 Merchandise imports 308.5 300.6 381.1 499.5 487.0 526.0 % y/y 19.8 -2.6 26.7 31.1 -2.5 8.0 Trade balance -119.5 -118.2 -130.6 -189.8 -183.5 -186.0 Current account balance -27.9 -38.2 -45.9 -78.2 -57.5 -52.3 Current account balance, % of GDP -2.3 -2.8 -2.8 -4.4 -3.2 -2.4 Net portfolio flows -14.0 32.4 30.3 17.2 20.0 27.0 Gross FDI 22.4 18.0 9.4 22.1 15.0 25.0 Capital account balance 7.4 51.6 62.0 67.8 66.9 93.9 Overall balance -20.5 13.5 16.0 -10.4 9.4 41.6
FX reserves and debt (USD bn) FX reserves 241.4 254.7 274.3 260.1 270.3 312.8 FX reserves, months of imports 9.4 10.2 8.6 6.2 6.7 7.1 FX reserves x ST debt (%) 5.6 4.9 4.2 3.7 3.5 3.8 FX debt 224.5 261.0 306.5 321.1 344.9 368.2 FX debt, % of GDP 19.1 19.7 18.6 18.0 19.1 16.9 ST FX debt 43.3 52.3 65.0 70.5 77.5 82.6 MT & LT debt amortisation 15.9 20.1 19.7 26.7 27.30 24.40 External financing requirement (ST, MT & CAD) 71.2 90.5 110.9 148.6 134.9 134.9
Nominal GDP and per capita Nominal GDP, USD bn 1,178 1,328 1,646 1,788 1,807 2,181 Nominal GDP, INR bn 55,744 62,312 76,741 88,558 99,954 114,789 GDP per capita, USD 1,015 1,128 1,378 1,475 1,468 1,746 Population (mn) 1,161 1,177 1,195 1,213 1,231 1,249
Source: BIS; CEIC; RBS forecasts
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Asia Navigator | September 2012 Page 24
Indonesia
Enrico Tanuwidjaja
Real economy: Real GDP growth of 6.3% in 1H 2012 was relatively robust. Going forward, we
think that while that slowing global demand – notably that from China – would dampen exports,
we believe that domestic demand should be able to cushion the adverse impact. We forecast
the archipelago to grow by 6.2% this year and 6.5% next year. With the budget revision that
includes additional infrastructure spending, our growth target may even be exceeded. We think
inflation will continue to remain range bound within the 3.8-4.3% yoy in the remaining months of
2012 in the absence of references on fuel subsidy removal in Budget 2013. Impact from the
potential electricity tariff hikes are reckoned to be minimal as they will be tilted towards the
corporate sector.
There are two issues that are currently brewing and hotly debated. First, Indonesia’s current
account (CA) deficit, which widened from USD3.2bn in 1Q 2012 to USD6.9bn in 2Q 2012 (3% of
GDP). We think, however, that such a situation is relatively normal for a country in an early stage
of development, where imports are high and mainly in the form of capital goods used for
investment. We expect a narrowing of the CA deficit in 3Q 2012 as a result of the lag effect of the
weaker IDR. Firmer commodity prices, somewhat softer domestic demand and tighter domestic
liquidity should also help the turnaround. Finally, the consensus among private sector
representatives and foreign observers on the ground was that the CA situation is nothing to lose
sleep over. The Ministry of Finance targets a CA deficit of 2.3% of GDP in 2012 while BI projects
the CA deficit to narrow to 2% of GDP in 2H 2012. Secondly, market participants believe that
credit growth is too high and could lead to a deterioration of credit quality down the road.
However, we think that, if at all, this concern applies only to a few pockets of activity, such as the
property and auto sectors. The headline credit growth figure of 25-26% yoy does not look
excessive, given Indonesia’s low credit-to-GDP ratio. A few more points to note: First, most of the
credit growth is for investment and working capital, not for consumption. Second, credit quality is
reasonably good, with non-performing loans (mostly in the consumer loan segment) at 2.2-2.5%
and on a downward trend. Third, one needs to remain watchful that prudential regulations are
not circumvented by the shadow-banking system. Overall, prudential measures may slow loan
growth from current levels to 20-24% yoy. This would also have the added advantage of reigning
in the current account deficit.
Key forecasts
GDP % yoy CPI % yoy Policy rate USD/IDR
Q1 12A 6.3 3.7 5.75 9,146
Q2 12A 6.4 4.5 5.75 9,433
Q3 12 6.2 4.3 5.75 9,550
Q4 12 6.1 4.1 5.75 9,600
Q1 13 6.3 4.5 5.75 9,500
Q2 13 6.4 4.6 5.75 9,400
Q3 13 6.5 4.8 5.75 9,300
Q4 13 6.6 4.5 6.25 9,200
Source: CEIC, RBS forecasts
Policy: Based on our growth-inflation outlook, we think that Bank Indonesia (BI) will stand pat at
5.75% until mid-2013. One interesting observation, however, is that the interbank overnight rate
has been moving close to the deposit rate instead of oscillating around the policy rate. Moreover,
the deposit rate was lowered twice last year, leading to asymmetric corridor around the policy
rate. This was probably done to reduce the cost of carry associated with FX intervention in light
of the past QE1 and 2 which had put some upward pressures on the IDR. With abating
pressures of capital inflows, there is scope now for BI to normalise monetary policy and move the
interbank rate closer to the benchmark rate. We think the deposit rate may be raised by another
25-50bp from the current 4%. A higher interbank rate would allay foreign investors’ fear of
overheating.
FX outlook: We believe that BI remains committed to a market-determined exchange rate. At the
same time, it remains alert for excess volatility that could disrupt the stability of the Indonesian
financial market. A weaker currency in this situation could help in reducing the CA deficit. We
think the USD/IDR may reach 9,600 by end-2012, driven mainly by external factors, such as the
US’s and Europe’s fiscal issues and weaker global growth. Nevertheless, given our relatively
sanguine view of the Indonesian economy, we forecast the IDR to strengthen to 9,200 by end
2013.
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Indonesia
Figure 1: Contributions to GDP growth
Figure 2: Key inflation measures
-10
-5
0
5
10
15
2007 2008 2009 2010 2011 2012
%-p
t con
trib
PCE Govt cons GFCFChg in stocks Net exports Stat discGDP yoy
02468
101214
2008 2009 2010 2011 2012
% y
oy
Headline CPI Core WPI BI target (headline CPI)
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Actual vs expected consumer price inflation
Figure 4: Growth in monetary aggregates
140150160170180190200
2008 2009 2010 2011 2012
Inde
x
0.02.04.06.08.010.012.014.0
% y
oy
Px expectations 6mths fwd Headline CPI (RHS)
-20-10
01020304050
2007 2008 2009 2010 2011 2012
% y
oy
Money base M2 Comm & rural bk loans
Source: CEIC, RBS Source: CEIC, RBS
Figure 5: Imports by economic group
Figure 6: Exports by major commodity
-60-40-20
020406080
100
2009 2009 2010 2010 2011 2011 2012
% y
oy, 3
mm
a
Total impts C'ser gdsRaw materials Capital gds
-40-20
020406080
2007 2008 2009 2010 2011 2012
%-p
t con
trib
to y
oy
Crude materials Min fuels, lubricManuf gds OthersTotal exports
Source: CEIC, RBS Source: CEIC, RBS
Asia Navigator | September 2012 Page 25
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Indonesia
Figure 7: BOP trends by major component
Figure 8: Consumption indicators
-10000
0
10000
20000
2007 2008 2009 2010 2011
USD
mn
Curr acct Cap acct Dir inv
Portfolio inv Other inv Errors & omm
Overall BOP
-40
-20
0
20
40
60
80
2007 2008 2009 2010 2011 2012
% y
oy
95
100
105
110
115
120
125
Inde
x
Motorbike sales yoyConsumer confidence (RHS)
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Reserves and cumulative portfolio inflows
Figure 10: Evolution of yield curve
020406080
100120
2007 2008 2009 2010 2011 2012
USD
bn
0102030405060
USD bn
Portfolio inflows (cum. 1Q07), RHS FX reserves
3.0
4.0
5.0
6.0
7.0
8.0
5y 10y 15y 20y 30y
%
Today 1m ago 6m ago 12m ago
Source: CEIC, RBS Source: Bloomberg, RBS
Figure 11: Equity market trends Figure 12: Exchange rates
0
1000
2000
3000
4000
5000
2007 2008 2009 2010 2011 2012
Inde
x
0
10
20
30
40
Ratio
Jakarta Composite Index PE ratio (RHS)
8,000
9,000
10,000
11,000
12,000
13,0002007 2008 2009 2010 2011 2012
70
80
90
100
110
12020
10=1
00
USD/IDR (inv) NEER (RHS) REER (RHS)
Source: Bloomberg, RBS Source: CEIC, RBS
Note: 3mma = 3-month moving average, yoy = year on year growth.
Asia Navigator | September 2012 Page 26
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Asia Navigator | September 2012 Page 27
Indonesia – key economic indicators
2008 2009 2010 2011 2012F 2013F
Growth (%y/y)
Real GDP 6.0 4.6 6.2 6.5 6.2 6.5
Domestic demand 5.8 3.8 5.9 5.5 7.9 6.5
- Private consumption 5.3 4.9 4.7 4.7 5.1 5.2
- Government spending 10.4 15.7 0.3 3.2 5.7 5.2
- Fixed investment 11.9 3.3 8.5 8.8 11.8 10.0
Fixed investment, % of GDP 23.7 23.4 23.9 24.4 25.8 26.7
Exports 9.5 -9.7 15.3 13.6 5.3 8.2
Imports 10.0 -15.0 17.3 13.3 9.4 9.8
Domestic demand contribution to growth 5.3 3.4 5.3 4.9 7.0 5.9
Net exports contribution to growth 0.7 1.2 0.9 1.5 -1.0 0.2
Unemployment (%labour force) 8.4 7.9 7.1 6.6 6.0 6.0
Inflation, FX and interest rates
CPI inflation (% end of period) 11.1 2.8 7.0 3.8 3.8 5.0
CPI inflation (% period average) 9.8 4.9 5.1 5.4 4.2 4.6
USD/IDR, end period 10,950 9,400 8,991 9,068 9,600 9,200
USD/IDR, average period 9,692 10,408 9,087 8,776 9,430 9,350
REER (% end of period) -8.6 15.6 5.9 -1.2 -0.5 2.0
Policy rate % end of year 9.25 6.50 6.50 6.00 5.75 6.00
Fiscal accounts (% of GDP)
Central budget fiscal balance -0.1 -1.6 -0.7 -1.2 -2.3 -1.7
- Government expenditure 19.9 16.7 16.2 17.4 18.8 18.3
- Government revenue 19.8 15.1 15.5 16.2 16.5 16.6
Primary fiscal balance 1.7 0.1 0.6 0.0 - -
Local government fiscal balance - - - - - -
Government debt 33.1 28.4 26.1 24.3 24.3 23.4
- Domestic 14.2 13.1 11.1 10.6 10.5 10.2
- External 18.8 15.2 14.9 13.7 13.7 13.2
Money and credit (% y/y)
M2 14.9 13.0 15.4 16.4 10.7 11.4
Private sector credit 30.7 6.8 20.0 25.8 18.4 18.7
Private sector credit, % of GDP 26.6 25.0 26.2 28.5 30.5 32.5
Balance of payments (USD bn)
Exports 139.6 119.6 158.1 200.8 211.3 232.1
% y/y 18.3 -14.3 32.1 27.0 5.3 9.8
Imports 116.7 88.7 127.4 166.0 181.6 199.4
% y/y 36.9 -24.0 43.7 30.3 9.4 9.8
Trade balance 22.9 30.9 30.6 34.8 29.7 32.7
Current account balance 0.1 10.6 5.1 1.7 -5.6 -7.3
Current account balance, % of GDP 0.0 2.0 0.7 0.2 -0.6 -0.7
Net FDI 3.4 2.6 11.1 11.5 12.0 15.0
Net FDI (%GDP) 0.7 0.5 1.6 1.4 1.3 1.5
Overall balance -1.9 12.5 30.3 11.9 9.4 10.7
Foreign reserves and debt
FX reserves 51.6 66.1 96.2 110.1 119.5 130.2
FX reserves, months of BOP imports 5.3 8.9 9.1 8.0 7.9 7.8
FX reserves, % of ST ext debt 252.0 274.9 291.1 288.5 297.3 311.1
Ext debt outstanding 155.1 172.9 202.4 225.4 237.4 247.1
Ext debt, % of GDP 30.4 32.1 28.6 26.6 26.4 24.3
ST Gross ext debt 20.5 24.0 33.0 38.2 40.2 41.9
M< debt amortisation 21.5 16.5 25.4 55.3 58.2 60.6
External financing requirement (ST, MT & CAD) 40.0 26.4 44.3 86.6 102.0 108.1
Nominal GDP
Nominal GDP, USD bn 510.6 538.6 708.3 846.3 898.0 1017.6
Nominal GDP, IDR trn 4,949 5,606 6,436 7,427 8,219 9,156
GDP per capita, USD 2,234 2,328 2,981 3,572 3,734 4,178
Population (mn) 228.5 231.4 237.6 237.0 240.5 243.6
Source: Bank Indonesia; Ministry of Finance; Statistics Bureau; CEIC; IIF; RBS forecasts
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Japan
Junko Nishioka and Long Hanhua Wang
Real economy: Recent economic data suggest domestic business activity is slowing down. A
contraction in manufacturing is depressing the overall economy. In fact, the 2Q GDP number
was revised down more than market expectations from the original 1.4% qoq annualised to
+0.7%. Corporate capex, the cornerstone of the business cycle, remained almost unchanged
but private inventories were revised down more than we expected.
Key forecasts
GDP % yoy
CPI % yoy Policy rate USD/JPY
Q1 12A 5.3 0.3 0-0.10 82.87
Q2 12A 0.7 0.1 0-0.10 79.79
Q3 12 0.3 -0.0 0-0.10 79.00
Q4 12 0.7 0.1 0-0.10 79.00
Q1 13 2.3 0.1 0-0.10 82.00
Q2 13 1.7 0.0 0-0.10 83.00
Q3 13 1.5 -0.0 0-0.10 84.00
Q4 13 3.7 -0.1 0-0.10 85.00
Source: CEIC, RBS forecasts
July labour data also suggest a slowing down of final demand. In particular, a yoy decline in
hours worked, for the first time in the past 11 months, has cast a shadow on domestic demand,
which has supported overall household consumption since last year. Although yoy growth in the
nominal wage per head remains positive, we think growth in employment and income has
peaked, given that a reduction in overtime hours is generally followed by lower wages in the
early stages of an economic slowdown.
As long as financing conditions for the corporate sector remain easy and the financial system is
protected, we believe the likelihood of the economy falling into a severe recession, as in 2008-
09, is low. We might see a mild contraction in business activity owing to cyclical liquidation of
inventories in the short term, but it is worth noting that the corporate sector has already improved
its financial standing, and margins on tangible fixed assets vs sales and revenues have
recovered. Therefore, we expect sustained capex recovery once the global economy picks up.
However, a downgrade of our economic assessment is inevitable from our somewhat optimistic
view that relied on reconstruction demand in disaster-affected areas and strong domestic
demand. Revising estimates lower applies not only to us (and other market participants) but also
to the BoJ and the Japanese government. The Japanese government and the Cabinet office
maintain their general assessment of the economy as “on the way to recovery at a moderate
pace” according to the August Monthly Economic Report.
Monetary policy outlook: All eyes are on the FOMC this week, followed by any policy reaction
from the BoJ on18-19 September. If the Fed implements QE3 and changes its guidance about
policy duration, driving the USD/JPY lower again, we cannot rule out the BoJ expanding the size
of the APP (Asset Purchase Program). We also think that it is getting more difficult for the BoJ to
fend off market pressure to take action. Meanwhile, economic indicators increasingly suggest
that a downward revision in the BoJ’s price forecast is likely in its October Outlook Report.
In this regard, Governor Masaaki Shirakawa’s apparent change of heart on JPY appreciation is
worth noting. When the USD/JPY remained below 80 during the second half of last year, he
emphatically denied any negative impact on corporate confidence from the strong yen. When
European fiscal woes intensified late last year, Shirakawa attributed the strong JPY to ‘flight-to-
quality’ and rebuffed market pressure, saying that the JPY’s strength was driven by external
factors. Recently, however, the governor clearly said that “it is necessary to pay more attention to
(the strong JPY’s) negative impact on the economy at this stage” (6 September Tokyo speech). It
almost sounds as if the BoJ is ready to take action if the JPY starts gaining further on the back of
other central bank actions.
Asia Navigator | September 2012 Page 28
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Japan
Figure 1: Industrial production and exports
Figure 2: Manufacturing capacity utilisation index
-60
-40
-20
0
20
40
60
2007 2008 2009 2010 2011 2012
% Y
oY
IIP Export volume
60708090
100110120
2007 2008 2009 2010 2011 2012
-6.000
-4.000
-2.000
0.000
2.000
4.000
% y
oy
Manufacturing capacity & utilization (2005=100)OECD Leading IndicatorOECD Leading indicator (%yoy, RHS)
Source: METI, MoF, RBS Source: METI, OECD, RBS
Figure 3: Investment/shipment ratio Figure 4: Business confidence BoJ Tankan
90100110120130140150160
2007 2008 2009 2010 2011 2012
2005
=100
Inventory / Shipment ratio
-60
-40
-20
0
20
40
2007 2008 2009 2010 2011 2012
DI %
Manufacturing Non-manufacturing
Source: METI, RBS Source: BoJ, RBS
Figure 5: Core CPI and CGPI Figure 6: Current account and trade/income balance
-10
-5
0
5
2007 2008 2009 2010 2011 2012
% Y
oY
Core CPI CGPI
-10,000
0
10,000
20,000
30,000
40,000
2007 2008 2009 2010 2011 2012
JPY
100m
n
Trade balance Income balance Current account
Source: MIC, BoJ, RBS Source: MoF, RBS
Asia Navigator | September 2012 Page 29
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Asia Navigator | September 2012 Page 30
Japan
Figure 7: External debt and foreign reserves Figure 8: Money and credit growth
1000
1500
2000
2500
3000
3500
2007 2008 2009 2010 2011 2012
bn U
SD
400
600
800
1000
1200
1400
bn U
SDExternal debt (LHS) Foreign reserve
-5
-3
-1
1
3
5
2007 2008 2009 2010 2011 2012
% Y
oY
-125-100-75-50-250255075100125
% Y
oY
M2 Bank lending Reserve money (RHS)Source: MoF, RBS Source: BoJ, RBS
Figure 9: Policy rate Figure 10: Yield curve
-2
-1
0
1
2
3
2007 2008 2009 2010 2011 2012
%
Nominal Real
0.0
0.4
0.8
1.2
1.6
2.0
3m 6m 1yr 2yr 3yr 4yr 5yr 7yr 10yr 15yr 20yr 30yr
%
3 month ago 1 month ago 03-Sep-12
Source: MIC, BoJ, RBS Source: Bloomberg, RBS
Figure 11: Nikkei index and PE Ratio
Figure 12: Exchange rates
0300060009000
120001500018000
2007 2008 2009 2010 2011 2012
yen
0
10
20
30
40
50
%
Nikkei index (LHS) PE ratio
708090
100110120130140
2007 2008 2009 2010 2011 2012
yen/
USD
60708090100110120130
2000
=100
USDJPY(LHS) NEER REER
Source: Bloomberg, RBS Source: Bloomberg, RBS
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Asia Navigator | September 2012 Page 31
Japan – select economic indicators
2008 2009 2010 2011 2012F 2013F
Growth (% yoy)
Real GDP -1.0 -5.5 4.4 -0.7 2.8 1.8 Domestic demand -1.3 -4.0 2.7 0.1 3.1 1.9 Private Demand -1.2 -6.1 3.1 -0.2 3.1 2.0 - Private consumption -0.9 -0.7 2.6 0.1 2.6 0.7 - Residential investment -6.6 -16.6 -4.2 5.4 -0.1 3.1 - Fixed investment -2.6 -14.3 0.5 1.1 3.6 5.2 - Contribution of private inventory 0.2 -2.1 0.1 0.1 0.5 0.7 Public demand -1.5 3.0 1.8 1.0 3.2 1.5 - Government consumption -0.1 2.3 2.1 1.9 1.6 0.3 - Public investment -7.4 7.0 0.4 -3.6 10.3 6.9 External demand (contribution rate) 0.2 -1.5 1.7 -0.8 -0.2 0.1 - Exports 1.4 -24.2 24.2 -0.1 5.2 8.2 - Imports 0.3 -15.7 11.1 5.9 7.5 9.2 Total Fixed investment -4.1 -10.6 -0.2 0.5 4.6 5.4 Nominal GDP -2.3 -6.0 2.3 -2.8 2.1 2.1 GDP deflator -1.3 -0.5 -2.1 -2.1 -0.7 0.2
Inflation, FX and interest rates
CPI inflation (% yoy, period average)) 1.4 -1.3 -0.7 -0.3 0.1 -0.1 Core CPI inflation (% yoy, period average) 1.5 -1.3 -1.0 -0.2 -0.0 -0.1 Core of core CPI (% yoy, period average) 0.0 -0.7 -1.3 -0.9 -0.3 0.0 Policy rate (end-year, %) 0.10 0.10 0-0.1 0-0.1 0-0.1 0-0.1 2-year JGB yield (end-year, %) 0.38 0.14 0.17 0.13 0.10 0.10 5-year JGB yield (end-year, %) 0.69 0.47 0.40 0.34 0.25 0.40 10-year JGB yield (end-year, %) 1.17 1.29 1.13 0.99 0.90 1.10 20-year JGB yield (end-year, %) 1.74 2.10 1.88 1.74 1.80 2.00 30-year JGB yield (end –year, %) 1.83 2.26 1.99 1.92 2.05 2.25 JPY/USD, end-period 90.64 93.03 81.12 76.91 79.0 85.0
Finance
Current account (% nominal GDP) 3.3 2.9 3.7 2.1 1.1 1.6 Trade balance (JPY trn) 4.1 4.0 7.9 -1.6 -3.3 -4.3 Budget balance (% nominal GDP) -6.8 -9.3 -9.2 -9.5 -9.9 -9.5 General government debt (% nominal GDP) 169 185 191 205 209 210
Other key indicators
Industrial Production (yoy, %) -3.4 -21.8 16.6 -3.5 2.4 4.1 Corporate goods price (yoy, %) 4.6 -5.2 -0.1 2.1 0.2 1.1 Employment (yoy, %) 0.0 -1.2 -0.1 0.5 -0.1 0.2 Unemployment rate (%) 4.0 5.1 5.0 4.7 4.4 4.6 Corporate profits (yoy, %) -26.3 -35.4 68.5 -6.3 1.0 -1.5
Source: CAO, METI, BoJ, MIC, MoF, Bloomberg, RBS forecasts
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Asia Navigator | September 2012 Page 32
Korea Erik Lueth
Real economy: Incoming data continue to be weak. Exports were down 6.2% yoy in August, confirming a downward trend that started in March 2011. Exports were weak across the board, but hardest hit were exports to Europe. As is common in Korea, imports contracted in line with exports – 9.8% yoy in August – resulting in a healthy trade surplus of USD2bn. Imports of capital goods contracted most, but consumer and intermediate imports were also weak. Real data for July painted an equally dull picture. Industrial production (IP) was flat over a year ago. This was somewhat better than the contraction in exports, but resulted in higher than normal inventories. Capacity utilisation in the manufacturing sector came to 77% in July, compared to a historical average of 79%. Service sector activity did somewhat better than IP, but at 1.5% yoy remained lacklustre. Real consumption expanded, and real investment contracted by 1.8% yoy in the three months to July. We expect growth to pick up from the 0.4% qoq, sa, recorded in Q2 and reach 2.7% for the year as a whole. In 2013, we expect Korea to grow at 3.5%, or below potential growth of around 4%. This is based on a global baseline in which China grows at 8.5%, the US expands by 2.3% and Europe grows at 0.7%. Inflation dropped to 1.2% yoy in August, the lowest reading in 12 years. We don’t expect inflation to move much lower from here. In fact, core inflation rebounded slightly to 1.1%, from 1.0% in July. We project inflation of 1.5% yoy by year-end and 2.5% by end-2013.
Policy outlook: After its surprise cut in July, the BoK kept its policy rate on hold in August at 3%. This was expected by 10 out 16 economists in a Bloomberg poll. It also keeps with past patterns: Only twice – during the recessions of 2001 and 2008 – did the BoK cut in successive months. The BoK’s 9 August statement was bearish, stating that the monetary policy committee “anticipates that the domestic economy will sustain a negative output gap for a considerable time going forward, due mostly to the increase in euro area risks and the sluggish economies of its major trading partners.” We will review this issue after an upcoming trip to Seoul.
The government is expected to reveal fiscal stimulus measures next week. Reportedly, this will not require a supplemental budget and the deficit target will remain as previously budgeted. We see this measure as of little consequence, intended mainly to show off a pro-active government that cares about sub-par growth. The magnitude cited in the press – 0.2% of GDP – is too small to have a notable impact on growth, in our opinion. This is particularly true for an economy as open as Korea’s, where much of the stimulus will end up boosting imports and trading partner economies.
FX outlook: Since the market turmoil in Aug-Sep last year, the KRW has traded in a band of 1,100-1,200 against the dollar (±4.3% around the mid-point of 1,150). During the same period, historical 3m volatility fell from 15 percentage points at the height of the turmoil to 7 percentage points more recently. FX intervention, comprising both selling and buying of dollar in the spot and forward markets, was also much lower. It came to USD1.8bn per month compared to USD5.2bn per month in the previous two years, suggesting that the relative stability in the won was not policy induced. Can the relative stability of the KRW be extrapolated? If so, a reasonable strategy would be to buy the won at 1,200 and sell the won at 1,100. We believe that one big trend factor for Asian currencies, the steady appreciation of the CNY, is no longer present, strengthening the case for our strategy. But, could the enactment of QE3 lead to a breach of the strong side of the band? Probably not. The ability to buoy asset prices weakened with every success round of QE, because major tail risks were less and less of an issue. Could the intensification of the European crisis lead to a breach of the weak side of the band? This is a distinct possibility. The KRW remains one of the most risk-prone currencies in Asia. One can either hope that BoK will defend the KRW at 1,200, which it did during the tumultuous episode of 2011 or modify the strategy to just selling the KRW at 1,100.
Key forecasts
GDP %yoy
CPI %yoy
Policy rate USD/KRW
Q1 12A 2.9 3.0 3.25 1,133 Q2 12A 2.3 2.4 3.25 1,145 Q3 12 2.4 1.3 3.00 1,150 Q4 12 3.0 1.6 2.75 1,150 Q1 13 3.1 1.2 2.75 1,150 Q2 13 3.6 1.7 2.75 1,150 Q3 13 3.6 2.3 2.75 1,140 Q4 13 3.6 2.5 2.75 1,130
Source: CEIC, RBS forecasts
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Korea
Figure 1: Exports and industrial production Figure 2: Inventories and capacity utilisation
-30-20
-100
1020
3040
2007 2008 2009 2010 2011 2012
%, y
oy, 3
mm
a
Exports Industrial production
020406080
100120140
2007 2008 2009 2010 2011 2012
%
Inventory-to-shipment ratio, saOperating ratiohist avg for inventory to shipment ratiohist avg for operating ratio
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Labour market Figure 4: Inflation
23.0
23.5
24.0
24.5
25.0
2007 2008 2009 2010 2011 2012
mn
pers
ons
2.5
3.0
3.5
4.0
4.5
5.0
%
Employment, sa (LHS)Unemployment rate, sa (RHS)
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012
%,y
oy,3
mm
a
Headline Core
Source: CEIC, RBS Source: CEIC, RBS
Figure 5: Bank loans Figure 6: Balance of payments
0
5
10
15
20
2008 2009 2010 2011 2012
%, y
oy
Corporates Households Total
-20
-15
-10
-5
0
5
10
2007 2008 2009 2010 2011 2012
US
D b
n
Reserves Current account Capital account
Source: CEIC, RBS Source: CEIC, RBS
Asia Navigator | September 2012 Page 33
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Korea
Figure 7: Bank’s short-term external debt and loan-to-deposit ratio
Figure 8: Exchange rates
0
20
40
60
80
100
2007 2008 2009 2010 2011 2012
bn U
SD
0
50
100
150
200
%
Domestic banks Foreign bank branches LDR (RHS)
020406080
100120
2007 2008 2009 2010 2011 2012
Inde
x, 2
005=
100
800900100011001200130014001500
NEER REER KRW/USD (RHS)
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Cross currency basis spreads Figure 10: Interest rates
-700-600-500-400-300-200-100
0100
2007 2008 2009 2010 2011 2012
basi
s po
ints
1y 5y
01234567
2008 2009 2010 2011 2012
Policy rate KTB yield 5y US TB yield 5y
Source: Bloomberg, RBS Source: Bloomberg, RBS
Figure 11: Yield curve Figure 12: Stock market
0.0
1.0
2.0
3.0
4.0
5.0
3m 6m 1y 2y 3y 5y 10y 20y
%
Today 3m ago 6m ago 12m ago
0
50
100
150
200
2007 2008 2009 2010 2011 2012
Korea Asia WorldSource: Bloomberg, RBS Source: Bloomberg, RBS
Note: 3mma = 3-month moving average, yoy = year on year growth.
Asia Navigator | September 2012 Page 34
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Asia Navigator | September 2012 Page 35
Korea – key economic indicators
2008 2009 2010 2011 2012F 2013F
Growth (%y/y)
Real GDP 2.3 0.3 6.3 3.6 2.7 3.5 Domestic demand 1.4 -3.1 7.2 2.0 1.9 2.8 - Private consumption 1.3 0.0 4.4 2.3 1.8 2.3 - Government spending 4.3 5.6 2.9 2.1 4.1 3.9 - Fixed investment -1.9 -1.0 5.8 -1.1 1.8 4.2 Fixed investment, % of GDP 27.0 26.6 26.5 25.3 25.1 25.2 Exports 6.6 -1.2 14.7 9.5 4.3 8.1 Imports 4.4 -8.0 17.3 6.5 3.1 7.6 Domestic demand contribution to growth 1.2 -2.5 6.2 1.7 1.8 2.6 Net exports contribution to growth 1.1 2.8 0.1 1.9 0.9 1.0 Unemployment (%labour force) 3.2 3.7 3.7 3.4 3.2 3.2
Inflation, FX and interest rates CPI inflation (% end of period) 4.1 2.8 3.0 4.2 1.6 2.5 CPI inflation (% period average) 4.7 2.8 2.9 4.0 2.1 1.9 USD/KRW, end period 1,260 1,164 1,126 1,152 1,150 1,110 USD/KRW, average period 1,102 1,277 1,156 1,108 1,145 1,145 REER (% end of period) -30.4 14.0 0.8 -2.3 0.2 3.6 Policy rate % end of year 3.00 2.00 2.50 3.25 2.75 2.75
Fiscal accounts (% of GDP) Central budget fiscal balance -1.1 -4.1 -1.1 -2.0 -1.0 0.2 - Government expenditure 21.2 23.3 19.9 22.5 22.6 22.3 - Government revenue 20.1 19.2 18.8 20.6 21.7 22.6 Primary fiscal balance 0.3 -3.0 0.3 -0.3 0.7 1.9 Government debt 29.0 32.5 31.9 27.6 25.4 24.3 - Domestic 28.1 31.4 31.0 26.8 24.7 23.6 - External 0.9 1.1 0.9 0.7 0.7 0.7
Money and credit (% y/y) M2 9.9 9.9 6.0 5.5 4.8 5.5 Private sector credit 1.8 1.8 3.2 7.1 6.0 6.5 Private sector credit, % of GDP 157.0 157.0 147.1 146.1 147.8 149.2
Balance of payments (USD bn) Exports 358.2 358.2 461.4 553.7 571.6 615.9 % y/y -17.6 -17.6 28.8 20.0 3.2 7.7 Imports 320.3 320.3 421.4 521.6 541.3 584.1 % y/y -25.4 -25.4 31.5 23.8 3.8 7.9 Trade balance 37.9 37.9 40.1 32.1 30.4 31.9 Current account balance 32.8 32.8 29.4 27.7 27.6 30.4 Current account balance, % of GDP 3.9 3.9 2.9 2.4 2.4 2.5 Net FDI -14.9 -14.9 -22.2 -15.7 -17.0 -17.0 Net FDI (%GDP) -1.8 -1.8 -2.2 -1.4 -1.5 -1.4 Overall balance 68.7 68.7 27.0 13.9 11.1 10.9
Foreign reserves and debt FX reserves 270.0 270.0 291.6 306.4 317.5 328.4 FX reserves, months of imports 7.5 7.5 6.4 5.7 5.7 5.5 FX reserves, % of ST debt 180.9 180.9 208.6 225.1 253.6 257.3 FX debt 345.7 345.7 359.4 398.4 417.4 425.4 FX debt, % of GDP 41.4 41.4 35.4 34.9 36.1 34.8 ST FX debt 149.2 149.2 139.8 136.1 125.2 127.6 M< debt amortisation 35.4 35.4 39.5 39.5 52.6 53.6 External financing requirement (ST, MT & CAD) 152.5 152.5 159.4 151.7 161.1 148.4
Nominal GDP Nominal GDP, USD bn 834.1 834.1 1,014.6 1,141.6 1,157.8 1,221.6 Nominal GDP, KRW trn 1,065.0 1,065.0 1,173.3 1,264.9 1,325.7 1,398.7 GDP per capita, USD 17,257 17,389 21,090 23,659 23,923 25,166 Population (mn) 48.3 48.0 48.1 48.3 48.4 48.5
Source: CEIC; RBS forecasts
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Malaysia
Sanjay Mathur
Real economy: Malaysia has held up reasonably well for a variety of reasons with Q2 2012
growth expanding 6.7% saar. The slide in exports that has characterised much of Asia has been
avoided owing to the large share of commodities in its export basket. On domestic demand, a
generous fiscal policy ahead of the elections has provided valuable counter-cyclical support.
Fiscal measures comprising of income support to low income groups and wage/pension
increases for civil servants allowed for an 8.8% yoy expansion in private consumption spending
in the second quarter. Investment also jumped up by a remarkable 26% yoy owing to higher
public-sector-related capex in the transportation and hydrocarbon sectors. We believe, however,
that this pattern of growth is not sustainable as fiscal policy is reaching its limits. Public debt at
53% of GDP is running close to the self-imposed ceiling of 55%. The limit can, of course, be
relaxed but it would be to the detriment of the sovereign rating. The traditional cushion of high
current account surpluses that in the past had allowed for expansionary policies is also waning.
In Q2 2012, the current account surplus had narrowed to 4% of GDP after averaging a little over
14% during 2006-11. The implication of these constraints is that further acceleration in growth,
independent of a more supportive external environment, does not appear possible. Our revised
growth forecasts indicate a flattish outlook for the remainder of 2012 and a modest upturn in
2013 on the assumption of an improvement in global demand.
Key forecasts
GDP %yoy
CPI %yoy
Policy rate
USD/MYR
Q1 12A 4.9 2.3 3.00 3.06
Q2 12A 5.4 1.7 3.00 3.18
Q3 12 4.5 1.4 3.00 3.10
Q4 12 5.3 1.5 3.00 3.08
Q1 13 5.8 1.8 3.00 3.06
Q2 13 6.3 2.6 3.00 3.12
Q3 13 6.7 3.0 3.25 3.08
Q4 13 6.2 3.4 3.25 3.06
Source: CEIC, RBS forecasts
Policy outlook: This growth outlook does not call for a cut in policy rates even though at sub-2%
yoy, inflation has turned comfortably numb. Add to it that Bank Negara has traditionally favoured
policy stability and views the current policy stance to be growth supportive. This issue was
reiterated in the 6 September policy announcement. Further evidence lies in the fact that at 12-
13%, growth in credit has been well ahead of nominal GDP. It is correct that excess liquidity (as
measured by commercial bank deposits with the central bank that are in excess of statutory
requirements) in the system has moderated, but even so, remains at supportive levels. Money
market yields may not move lower but current levels are appropriate for growth. We also think
that running with simultaneously expansionary fiscal and monetary policies when the current
account surplus is fading will add to the pressure on the MYR. The MYR has been trading on the
soft side for sometime now and particularly against the SGD. The SGD/MYR cross at 2.50 is at its
highest in the post-Asian financial crisis period.
FX outlook: A critical change in our thinking over the last few months has been on the degree of
undervaluation of the MYR. With the current account surplus receding, the MYR is no longer
severely undervalued and its performance is likely to become contingent on capital flows and net
FDI in particular. The best of the surge in portfolio flows are now behind us – foreign ownership
of the local bond market has already increased sharply and the heavy spate of IPOs has
concluded. Fortunately, the deficit in net FDI has receded largely because of a moderation in
overseas investment but this trend needs to be maintained. Overall, the odds are that we are
moving into a period of lower surpluses on the BoP and this should result in greater two-way
movements in the MYR. For now, we expect the USD/MYR to trade in a 3.08-3.12 range over the
next six months.
Asia Navigator | September 2012 Page 36
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Malaysia
Figure 1: Contributions to GDP growth Figure 2: Trends in external trade
-15
-10
-5
0
5
10
15
2006 2007 2008 2009 2010 2011
Cont
ribut
ion
to g
rowt
h
Private consumption Government consumptionChange in stock GFCFNet exports GDP (% yoy)
-40-30-20-10
010203040
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
Exports Non-commodity exports Imports
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Consumption indicators Figure 4: Industrial production by sector
-20-10
010203040
2007 2008 2009 2010 2011 2012Auto
sal
es, c
onsu
mer
cre
dit (
%
yoy,
3m
ma)
)
0
5
10
15
20
25
M1
(% y
oy, 3
mm
a)
Auto sales Consumer loans (incl. housing) M1
-30-20-10
0102030
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
Industrial production Export oriented production
Domestic oriented production
Source: CEIC, RBS Source: CEIC, RBS
Figure 5: Trends in inflation Figure 6: Trends in BoP
-4-202468
10
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
-15-10-505101520
% y
oy, 3
mm
a
CPI Core CPI PPI (RHS)
-60
-40
-20
0
20
40
2006 2007 2008 2009 2010 2011Curre
nt a
ccou
nt, B
oP (%
GDP
)
0
5
10
15
20
MYR
bn,
3m
ma
Current account balance (% GDP)BoP balance (% GDP)Trade balance (MYR bn, 3mma)
Source: CEIC, RBS Source: CEIC, RBS
Asia Navigator | September 2012 Page 37
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Malaysia
Figure 7: Contribution to reserve money growth Figure 8: Growth in monetary aggregates
-150-100-50
050
100150200
2007 2008 2009 2010 2011 2012
Cont
ribut
ion
to re
serv
e m
oney
gro
wth
-40
-20
0
20
40
60
Rese
rve
mon
ey (%
yoy
, 3m
ma)
Net foreign assets Net domestic assetsReserve money (% yoy)
0
5
10
15
20
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
M3 Credit
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Foreign holdings of domestic debt Figure 10: Evolution of yield curve
04080
120160200240
2007 2008 2009 2010 2011 2012
MYR
bn
Aggregate foreign holdings of debtBank Negara billsGovernment bonds
2.7
2.9
3.1
3.3
3.5
3.7
3m 1y 3y 5y 10y
%
Today 1m ago 1y ago3m ago 6m ago
Source: CEIC, RBS Source: Bloomberg, RBS
Figure 11: Equity market trends Figure 12: Exchange rate movements
800
1,000
1,200
1,400
1,600
1,800
2007 2008 2009 2010 2011 201210
12
14
16
18
20
22
FTSE Malaysia PE ratio
9092949698
100102104
2007 2008 2009 2010 2011 2012
NEER
, REE
R (2
010:
100)
2.52.72.93.13.33.53.73.9
USD/
MYR
NEER REER USD/MYR
Source: CEIC, RBS Source: CEIC, RBS
Note: 3mma = 3-month moving average, yoy = year on year growth.
Asia Navigator | September 2012 Page 38
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Asia Navigator | September 2012 Page 39
Malaysia – key economic indicators
2008 2009 2010 2011 2012F 2013F
GDP (% y/y)
Real GDP 4.9 -1.5 7.3 5.1 5.0 6.2 Domestic demand 6.4 -3.2 10.7 7.5 11.3 8.0 - Private consumption 8.8 0.5 6.6 7.1 7.7 6.7 - Government spending 6.8 3.7 3.5 15.3 5.4 2.8 - Fixed investment 2.6 -5.5 10.3 6.6 18.6 11.3 Fixed investment (% GDP) 23.3 21.4 22.5 23.2 23.5 26.5 Exports 1.6 -10.1 11.9 4.2 2.1 9.3 Imports 2.3 -12.5 16.8 6.2 7.9 11.3 Domestic demand contribution to growth 5.3 -2.8 8.6 6.2 9.9 7.4 Net exports contribution to growth -0.4 1.1 -1.4 -1.1 -4.8 -1.2 Unemployment (% labour force) 3.4 3.4 3.1 3.0 3.4 3.2
Inflation, FX and interest rates CPI inflation (%, end of period) 4.5 1.0 2.1 3.0 1.6 3.5 CPI inflation (%, period average) 5.4 0.7 1.7 3.0 1.7 2.7 USD/MYR, end-period 3.45 3.42 3.08 3.17 3.08 3.06 USD/MYR, period-average 3.34 3.51 3.17 3.10 3.11 3.08 REER (% end of period) -1.2 -1.5 5.9 -2.1 Policy rate (end-year, %) 3.25 2.00 2.75 3.00 3.00 3.25 3 month KLIBOR (end-year, %) 3.37 2.17 2.98 3.22 3.20 3.45 10 year bond yield (end-year, %) 3.22 4.29 4.04 3.70 3.50 3.80
Fiscal accounts (% of GDP) Central government fiscal balance -4.8 -7.0 -5.6 -5.4 -4.7 - Government expenditure 26.4 30.3 26.5 27.0 25.0 - Government revenue 21.6 23.3 20.8 21.6 20.4 Primary fiscal balance -3.1 -4.9 -3.6 -3.2 -2.5 Government debt (% GDP) 41.4 53.3 53.1 53.8 - Domestic 38.6 51.3 51.0 51.7 - External 2.7 2.0 2.2 2.0
Money and credit (% yoy) M3 money supply 11.9 9.2 6.8 14.4 12.0 13.5 Private sector credit 12.8 7.8 12.7 13.6 12.5 14.0 Private sector credit, % of GDP 100.0 109.9 111.1 113.9 119.6 120.4
Balance of payments (USD bn) Merchandise exports 199.0 157.7 202.1 224.7 232.5 253.6 % y/y 12.7 -20.8 28.1 11.2 3.5 9.1 Merchandise imports 147.5 117.6 159.5 176.9 191.1 216.5 % y/y 6.3 -20.3 35.7 10.9 8.0 13.3 Trade balance 51.5 40.1 42.5 47.8 41.4 37.1 Current account balance 39.4 31.6 27.8 31.3 21.4 22.7 Current account balance , % of GDP 17.1 15.5 11.1 11.0 7.0 6.6 Gross FDI 7.2 1.5 9.3 11.8 7.8 9.1 Capital account balance -34.9 -23.6 -6.1 -3.2 -2.8 -16.5 Overall balance -5.5 3.9 -0.8 20.2 10.7 -2.5
FX reserves and debt (USD bn) FX reserves 92.1 96.7 106.5 133.6 144.4 141.9 FX reserves, months of imports 7.5 9.9 8.0 9.1 9.1 7.9 FX reserves x of ST debt (%) 4.0 4.3 4.1 4.0 4.9 4.1 FX debt 70.8 66.3 71.7 85.5 80.5 86.0 FX debt, % of GDP 32.5 32.6 28.6 30.1 26.5 24.8 ST FX debt 23.1 22.6 25.8 33.5 29.5 34.6 MT & LT debt amortisation 13.6 16.2 10.9 12.4 12.9 12.0 External financing requirement (ST, MT and CA) -2.7 7.3 8.8 14.5 21.1 23.9
Nominal GDP and per capita Nominal GDP, USD bn 230.8 203.2 251.0 284.2 304.1 347.1 Nominal GDP, MYR bn 769.9 712.9 795.0 881.1 944.3 1069.0 GDP per capita, USD 8489 7377 8997 10059 10628 11979 Population (mn) 27.5 27.9 28.3 28.6 29.0 29.4
Source: BIS, CEIC, RBS forecasts
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Philippines
Vaninder Singh and Sanjay Mathur
Real economy: The focus of growth is now conclusively on domestic demand. Export growth
has visibly slowed with the contribution of net exports falling to 2.1% in Q2 2012 from 7.1% in Q1.
In light of weak external demand, further deterioration is likely. At the domestic level, the outlook
is bright. Household consumption should remain supported by steady growth in remittances,
which we expect to be 6% for the full year. Fiscal policy is also becoming increasingly more
supportive. Disbursements to public departments, especially for agriculture and infrastructure
activity, have increased significantly starting July. Capital formation, which had been temporarily
impacted by the floods in Q3, is likely to accelerate in Q4 reflecting both on-going capital
spending and reconstruction activity. Based on these, we expect full-year growth to average
5.8%.
Key forecasts
GDP %yoy
CPI %yoy
Policy rate
USD/PHP
Q1 12A 6.3 3.1 4.00 42.9
Q2 12A 5.9 2.9 4.00 42.8
Q3 12 5.6 3.5 3.75 41.6
Q4 12 5.4 3.7 3.75 41.5
Q1 13 5.6 4.7 3.75 41.4
Q2 13 6.5 4.6 4.00 41.2
Q3 13 6.2 4.6 4.00 41.1
Q4 13 6.4 4.6 4.25 41.0
Source: CEIC, RBS forecasts
Headline inflation has printed towards the lower end of BSP’s 3-5% target so far in 2012. The
trend is, however, worrying. August headline inflation accelerated to 3.8% primarily because of
supply-side-related food inflation caused by the recent floods. With supply issues receding, we
expect food inflation to drop in September. The bigger concern for now is the continuous rise in
core inflation over the last six months, indicating a possible permeation of asset price increases
into broader goods and services inflation. Asset price inflation appears to have become quite
entrenched. Although timely property price data are not available in the Philippines, the 25% yoy
growth in real estate lending over the last year is a worrying sign.
Policy outlook: In 2011, government spending had contributed negatively to growth with the
final deficit underperforming the target, undershooting by as much as 1% of GDP. A similar
pattern emerged in H1 2012 with the deficit amounting to only 11% of the full-year commitment
even though expenditure levels were somewhat stronger. However, from July, the government
has shown a greater commitment towards meeting its spending target. With this stance, the
full-year target is likely to be closer to the target of 2.6% of GDP. The target itself will not
jeopardise public indebtedness – total debt will drop to 55% of GDP from 56.7% in 2011. If the
government is able to push through the proposed revenue enhancing ‘sin tax’ bill, debt to GDP
would go down even further than the 52.3% of GDP we forecast currently for 2013. The
government is also attempting to change its debt profile. In addition to elongating the maturity
profile of its debt, it is substituting its foreign currency liabilities into domestic liabilities. Both
these are credit positive events. Considering the growth and debt profile of the Philippines as
well as the administration’s commitment towards fiscal prudence, we expect a rating hike to
investment grade as early as June 2013.
On the monetary policy front, the BSP has pursued an accommodative stance in order to support
growth. The low inflation prints in H1 gave the BSP space to cut rates by 25bp in July. This has
brought the total cuts in 2012 to 75bp. Combined with the 3% reduction in the required reserves
ratio, the central bank has pumped a large amount of liquidity into the economy. With core
inflation on the rise and strong credit growth already in place, the BSP may be constrained from
further easing.
FX outlook: The PHP has been the strongest performer in the region, rising by 5.2% in 2012. A
positive current account balance, strong stable growth and expectations of a rating hike to
investment grade have attracted increased portfolio flows. The current account has remained
positive, driven by both a narrower trade balance compared to last year and continued stable
remittance growth. The effect of the restriction on using the special deposits account (SDA) to
park money from foreign funds has failed to contain the appreciation of the PHP. Government
buying of the USD notwithstanding, we believe incoming portfolio flows will continue to be strong
enough to push the PHP stronger through the rest of the year and into 2013.
Asia Navigator | September 2012 Page 40
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Philippines
Figure 1: Contributions to GDP growth Figure 2: Consumer and producer price inflation
-10
-50
510
15
2007 2008 2009 2010 2011 2012
%-p
t con
trib
to y
oy
Pte consump Govt GFCFChg in stocks Net expts Stat discGDP yoy
-10
-5
0
5
10
15
20
2006 2008 2010 2012
% y
oy
Headline CPI (2006 base) PPI BSP target (headline)
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Remittances and domestic passenger car sales Figure 4: Production and capacity utilisation
-60
-40
-20
0
20
40
60
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
Pssgr car sales Overseas remittances
-30-20-10
010203040
2007 2008 2009 2010 2011 2012
% y
oy
77.078.079.080.081.082.083.084.0
%
Indust prod index Capacity util (RHS)
Source: CEIC, RBS Source: CEIC, RBS
Figure 5: Exports by commodity group Figure 6: Imports by commodity group
-60-40-20
0204060
2007 2008 2009 2010 2011 2012
%-p
t con
trib
to y
oy
Agric Forest prod Minerals
Manuf Exports yoy
-60-40-20
0204060
2007 2008 2009 2010 2011 2012
%-p
t con
trib
to y
oy
Capital gds Raw materials Min fuels
C'ser gds Imports yoy
Source: CEIC, RBS Source: CEIC, RBS
Asia Navigator | September 2012 Page 41
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Philippines
Figure 7: Growth in monetary aggregates Figure 8: BOP trends by major component
0
20
40
60
80
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
Reserve money M3 Loans
-4
-2
0
2
4
2007 2008 2009 2010 2011 2012
USD
bn
Curr acct Cap acct Dir invPortf inv Fin deriv Other invErrors & omm Overall BOP
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Business and consumer sentiment Figure 10: Evolution of yield curve
-20
0
20
40
60
80
2007 2008 2009 2010 2011 2012
Inde
x
-30
-20
-10
0
10
20
Diff
inde
x
Biz outlook index, next qtrC'ser expectations DI, next qtr (RHS)
0.01.02.03.04.05.06.07.08.0
1m 3m 6m 2y 5y 10y 20y
%
today 1m ago 6m ago 12m ago
Source: CEIC, RBS Source: Bloomberg, RBS
Figure 11: Equity market trends
Figure 12: Exchange rates
1400
2400
3400
4400
5400
6400
2007 2008 2009 2010 2011 2012
Inde
x
8
10
12
14
16
18
20
Ratio
PSE Index PE ratio (RHS)
80859095
100105110115
2007 2008 2009 2010 2011 2012
2010
=100
35
40
45
50
NEER REER USD/PHP (RHS)
Source: Bloomberg, RBS Source: CEIC, RBS
Note: 3mma = 3-month moving average, yoy = year on year growth.
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Asia Navigator | September 2012 Page 43
Philippines – key economic indicators
2008 2009 2010 2011 2012F 2013F
Growth (%y/y)
Real GDP 4.2 1.1 7.6 3.9 5.8 6.2
Domestic demand 6.6 1.1 8.2 6.1 4.0 6.9
- Private consumption 3.7 2.3 3.4 6.3 5.7 6.0
- Government spending 0.3 10.9 4.0 1.0 11.1 7.2
- Fixed investment 3.2 -1.7 19.1 0.2 6.2 7.6
Fixed investment, % of GDP 19.3 18.7 20.7 20.0 20.1 20.3
Exports -2.7 -7.8 21.0 -4.2 7.2 7.7
Imports 1.6 -8.1 22.5 0.2 3.5 9.2
Domestic demand contribution to growth 6.4 1.1 8.2 6.1 4.1 7.0
Net exports contribution to growth -2.2 0.1 -0.6 -2.2 1.7 -0.8
Unemployment (%labour force) 7.4 7.5 7.4 7.0 6.9 6.8
Inflation, FX and interest rates
CPI inflation (% end of period) 7.8 4.5 3.7 4.2 4.0 4.6
CPI inflation (% period average) 8.2 4.3 3.8 4.7 3.3 4.6
USD/PHP, end period 47.5 46.4 43.9 43.9 41.5 41.0
USD/PHP, average period 44.5 47.6 45.1 43.6 42.2 41.2
REER (% end of period) -6.7 1.8 4.0 0.6 - -
Policy rate % end of year 5.50 4.00 4.00 4.50 3.75 4.25
Fiscal accounts (% of GDP)
Central budget fiscal balance -0.9 -3.7 -3.5 -2.0 -2.6 -2.0
- Government expenditure 16.5 17.7 16.9 16.0 17.3 17.2
- Government revenue 15.6 14.0 13.4 14.0 14.7 15.1
Primary fiscal balance 2.6 -0.2 -0.2 0.8 0.4 0.8
Local government fiscal balance 61.7 62.4 58.5 56.7 55.0 52.3
Government debt 32.2 31.8 31.3 31.1 30.5 29.5
- Domestic 29.5 30.7 27.2 25.6 24.5 22.8
- External -0.9 -3.7 -3.5 -2.0 -2.6 -2.0
Money and credit (% y/y)
M2 15.4 7.7 10.7 6.5 9.0 8.0
Private sector credit 16.8 8.2 8.7 15.7 17.7 18.2
Private sector credit, % of GDP 32.3 33.6 32.6 34.8 37.6 40.1
Balance of payments (USD bn)
Exports 58.0 48.6 64.8 62.7 67.7 73.4
% y/y -2.2 -16.1 33.4 -3.3 8.0 8.4
Imports 69.7 55.4 73.1 74.5 77.7 85.3
% y/y 6.5 -20.6 32.0 2.0 4.2 9.9
Trade balance -11.7 -6.7 -8.2 -11.9 -10.0 -11.9
Current account balance 3.6 9.4 8.9 7.1 8.7 8.7
Current account balance, % of GDP 2.1 5.6 4.5 3.2 3.4 3.0
Net FDI 1.3 1.6 0.7 1.3 1.5 2.9
Net FDI (%GDP) 0.7 1.0 0.3 0.6 0.6 1.0
Overall balance 0.1 6.4 14.3 10.2 10.6 13.7
Foreign reserves and debt (USD bn)
FX reserves 37.6 44.2 62.4 75.3 87.2 102.2
FX reserves, months of imports 7.9 12.3 13.6 14.9 16.7 17.9
FX reserves, % of ST debt 536 1106 991 1074 1309 1615
FX debt 65.0 65.3 74.6 77.9 80.4 84.6
FX debt, % of GDP 29.5 30.7 27.2 25.6 24.5 22.8
ST FX debt 7.0 4.0 6.3 7.0 6.7 6.3
M< debt amortisation 5.6 5.1 3.7 5.2 4.4 4.6
External financing requirement (ST, MT & CAD) -2.6 0.3 6.7 2.6 3.4 3.0
Nominal GDP
Nominal GDP, USD bn 174 168 200 223 252 286
Nominal GDP, PHP bn 7721 8026 9003 9736 10624 11773
GDP per capita, USD 1918 1827 2123 2327 2577 2869
Population (mn) 90.5 92.2 94.0 95.9 97.7 99.7 Source: BSP; DOF; Bureau of Treasury; ADB; IMF; IIF; CEIC; RBS forecasts
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Singapore
Enrico Tanuwidjaja
Real economy: Singapore’s non-oil domestic exports (NODX) was better than expected in July
at 5.8% yoy, beating Bloomberg consensus’s 5.0%. For the first six months of this year, NODX
averaged 5.7%. Going forward, with a positive NODX growth surprise in 1H 2012, we believe the
full-year official forecast of 4-5% is likely to be bettered. Even so, uncertain global economic
prospects are likely to keep Singapore’s growth sub-par this year. The two main external
headwinds are that China’s growth is now slowing alongside that of the US and EU and that the
US semi-conductor equipment book-to-bill ratio has remained below 1 – the latter is an important
indicator of global electronics demand. Nevertheless, one comforting factor is a relatively
supportive construction sector which is benefiting from the property development this year and
potentially next.
Key forecasts
GDP %yoy
CPI %yoy
USD/SGD
Q1 12A 1.5 4.9 1.26
Q2 12A 2.0 5.2 1.27
Q3 12 2.4 3.5 1.26
Q4 12 3.9 2.2 1.25
Q1 13 4.3 2.0 1.25
Q2 13 4.0 2.5 1.24
Q3 13 3.6 3.0 1.24
Q4 13 3.2 3.5 1.23
Source: CEIC, RBS forecasts
Sustained growth in tourist arrivals is also a positive. Retail sales averaged 5.5% yoy in the first
half of 2012 (2011: 4.5%, 2010: -1.0%) as higher tourist arrivals boosted spending in the city-
state. Monthly tourist arrivals has averaged more than 1mn since 2011, with total tourism receipts
of around SGD22bn (7% of GDP) in 2011. Hotel occupancy rate has recovered since the onset
of the credit crisis in 2008 from a low of 66% to a high of 94% in mid-2011 and has stabilised to
an average of 87% ever since. We expect tourism revenue to gain 10% this year (five-year
average: 14.3%). Given the overall current backdrop of the global economic outlook and recent
domestic economic numbers, we forecast 2012 Singapore GDP at the higher end of the official
forecast range of 1.5-2.5%.
Policy and FX outlook: Inflation eased in July in light of moderating increases in the costs of
accommodation, private road transport and oil-related items. Nevertheless, we think that inflation
will remain volatile and on an elevated trajectory at least over the next six months, owing to
housing and transportation costs. We forecast inflation to average 4% in 2012 (1H: 5.1%), at the
lower end of the official projection of 4.0-4.5%, assuming no further administrative measures are
introduced. This is to be contrasted with an average of 0.8% during the 2000-05 period and
2.6% from 2006 until the middle of 2008 (pre-Lehman period).
We also forecast that the MAS will stand pat and keep the modest and gradual appreciation of
the SGD NEER intact. Currently, we estimate a 1.5% appreciation (3% annualized) slope with a
2% band. Our forecast is for USD/SGD to settle at 1.25 by end-2012 and 1.23 by end-2013. Our
key consideration for policy neutrality (from hereon) is inflation. Slowing growth is an issue, but
the overall situation is not as severe as in 2008-09. Second, most of the factors driving inflation
higher than its historical average are domestically driven (accommodation and private transport
costs). This is best addressed by administrative measures, in our opinion, rather than by relying
on adjustments in the exchange rate policy. Although there is room for the monetary policy to be
used to stem imported inflation, we believe that – given the growth-inflation trade-off and looking
at the core issues – the monetary authority’s best option is to stand pat and continuously monitor
external developments that may impact the local currency. The policy option of slight easing may
also entail the risks of having more of imported inflation seeping through to headline inflation but
may not address growth slowdown concern given weakness in external demand.
Asia Navigator | September 2012 Page 44
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Singapore
Figure 1: Contributions to GDP growth Figure 2: Headline and underlying inflation
-20
-10
0
10
20
30
2007 2008 2009 2010 2011 2012
%-p
t con
trib
to y
oy g
rowt
h
Gds producing Svcs GDP % yoy
-2
0
2
4
6
8
2007 2008 2009 2010 2011 2012
% y
oy
Headline CPI MAS underlying inflation
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Other inflation indicators Figure 4: Unemployment and unit labour cost
-30-20-10
0102030
2007 2008 2009 2010 2011 2012
% y
oy
Dom supp px Manuf PPI Export pxs Impt pxs
-10
-5
0
5
10
15
2007 2008 2009 2010 2011 2012
% y
oy
1.0
1.5
2.0
2.5
3.0
3.5
% s
a
Unit lb cost % yoyUnemployment rate sa (RHS, inv)
Source: CEIC, RBS Source: CEIC, RBS
Figure 5: Manufacturing, exports and global chip demand Figure 6: Purchasing managers’ index and new orders
-40
-20
0
20
40
60
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
0.20.40.60.81.01.21.4
Ratio
Ind prod IP ex biomedNODX US Semicon BB ratio (RHS)
40
45
50
55
60
2007 2008 2009 2010 2011 2012
Inde
x
PMI New ordersPMI Electronics Neutral
Source: CEIC, RBS Source: CEIC, RBS
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Singapore
Figure 7: Growth in monetary aggregates Figure 8: BOP trends by major component
05
101520253035
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
M2 Reserve money Loans & advcs
-40
-20
0
20
40
60
2007 2008 2009 2010 2011 2012
SGD
bn
Curr acct Dir invPort inv OthersErrors & omm Overall BOP
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Retail sales and tourist arrivals Figure 10: Evolution of yield curve
-20
-10
0
10
20
30
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
Retail sales Ret sales ex motor veh Visitor arriv
0.0
0.5
1.0
1.5
2.0
2.5
1m 3m 6m 2y 5y 10y 15y
%
Today 1m ago 6m ago 12m agoSource: CEIC, RBS Source: Bloomberg, RBS
Figure 11: Equity market trends Figure 12: Exchange rates
1000
1500
2000
2500
3000
3500
2008 2009 2010 2011 2012
Inde
x
0
5
10
15
20
25
Ratio
FSSTI Index PE ratio (rhs)
85
90
95
100
105
110
115
2007 2008 2009 2010 2011 2012
Inde
x ba
se 3
Apr
09
= 10
0
Source: Bloomberg, RBS Source: Bloomberg, RBS
Note: 3mma = 3-month moving average, yoy = year on year growth.
Asia Navigator | September 2012 Page 46
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Asia Navigator | September 2012 Page 47
Singapore – key economic indicators
2008 2009 2010 2011 2012F 2013F
Growth (%y/y)
Real GDP 1.7 -1.0 14.8 4.9 2.5 3.8
Domestic demand 14.5 -8.2 5.1 5.7 5.5 5.8
- Private consumption 3.3 0.1 6.5 4.1 4.8 5.2
- Government spending 6.4 3.6 11.0 0.9 -2.4 0.2
- Fixed investment 13.0 -2.9 7.0 3.3 5.9 5.8
Fixed investment, % of GDP 26.5 26.0 24.2 23.8 24.4 22.7
Exports 4.7 -7.8 19.1 2.6 5.2 9.5
Imports 9.5 -11.1 16.2 2.4 5.5 8.1
Domestic demand contribution to growth 10.0 -6.4 3.6 3.7 2.3 7.6
Net exports contribution to growth -8.3 5.4 11.1 1.2 1.2 5.9
Unemployment (%labour force) 1.4 1.5 1.1 0.7 1.3 1.0
Inflation, FX and interest rates
CPI inflation (% end of period) 5.3 -0.5 4.6 5.6 3.1 3.7
CPI inflation (% period average) 6.6 0.6 2.8 5.2 4.0 2.8
USD/SGD, end period 1.44 1.40 1.29 1.30 1.25 1.23
USD/SGD, average period 1.41 1.45 1.36 1.26 1.26 1.24
REER (% end of period) 5.3 0.0 3.4 5.5 - -
Policy rate % end of year - - - - - -
Fiscal accounts (% of GDP)
Central budget fiscal balance 0.1 -1.0 -0.1 0.6 -0.4 0.0
- Government expenditure 14.3 15.6 14.9 14.1 14.4 13.6
- Government revenue 15.4 14.0 14.6 15.0 14.5 14.1
Primary fiscal balance 1.1 -1.6 -0.3 0.9 0.1 0.5
Local government fiscal balance - - - - - -
Government debt 95.0 108.0 103.6 108.3 114.5 116.4
- Domestic 95.0 108.0 103.6 108.3 114.5 116.4
- External 0.0 0.0 0.0 0.0 0.0 0.0
Money and credit (% y/y)
M2 10.9 11.3 8.9 10.3 7.8 9.1
Private sector credit 23.1 5.1 9.6 25.6 17.6 11.4
Private sector credit, % of GDP 101.2 101.2 104.2 128.6 134.4 146.6
Balance of payments (USD bn)
Exports 444.1 369.9 472.1 543.5 575.2 634.1
% y/y 14.7 -16.7 27.6 15.1 5.8 10.2
Imports 404.9 325.6 407.2 474.1 494.0 541.7
% y/y 21.7 -19.6 25.1 16.4 4.2 9.6
Trade balance 39.2 44.3 64.8 69.3 81.1 92.4
Current account balance 26.5 30.2 55.8 57.1 73.9 83.8
Current account balance, % of GDP 13.9 16.2 24.5 21.9 26.7 27.5
Net FDI 5.0 6.7 27.4 38.8 - -
Net FDI (%GDP) 2.6 3.6 12.0 14.9 - -
Overall balance 13.1 11.8 42.1 17.3 51.7 58.7
Foreign reserves and debt
FX reserves 177.5 187.4 222.7 235.0 245.5 276.7
FX reserves, months of BOP imports 5.3 6.9 6.6 5.9 6.0 6.1
FX reserves, % of ST ext debt 56.6 55.9 57.8 45.9 40.8 43.4
Gross ext debt 421.8 456.6 515.1 689.9 810.6 857.6
Gross ext debt, % of GDP 221.4 245.5 225.9 265.2 293.3 281.4
ST ext debt 313.6 335.5 385.5 512.4 602.1 637.0
M< debt amortisation - - - - - -
External financing requirement (ST, MT & CAD) - - - - - -
Nominal GDP
Nominal GDP, USD bn 190.5 186.0 228.0 260.1 276.3 304.7
Nominal GDP, SGD bn 269.1 269.9 310.3 327.0 340.2 367.9
GDP per capita, USD 39363.3 37295.8 44911.2 50181.5 52471.0 57004.2
Population (mn) 4.8 5.0 5.1 5.2 5.3 5.3 Source: CEIC; BIS; IIF; RBS forecasts
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Taiwan
Erik Lueth
Key forecasts
GDP %yoy
CPI %yoy
Policy rate USD/TWD
Q1 12A -0.1 1.3 1.88 29.5
Q2 12A 0.2 1.6 1.88 29.9
Q3 12 1.7 3.1 1.88 30.0
Q4 12 3.3 2.9 1.88 30.1
Q1 13 3.5 3.6 1.88 30.2
Q2 13 3.3 2.7 1.88 30.3
Q3 13 2.9 1.3 1.88 30.4
Q4 13 2.5 1.0 1.88 30.5
Source: CEIC, RBS forecasts
Real economy: Taiwan has suffered more than others in the recent downturn. Quarter-on-quarter
growth (seasonally adjusted) was negative in Q3 and Q4 2011, marking a technical recession.
While quarterly growth picked up to 0.7-0.8% in the first two quarters of this year, it remains below
potential. Assuming that activity picks up further – to 1% qoq, sa in Q3 and Q4 – this would still
leave growth at 1.5% for the year as a whole. There are no signs that growth will pick up in the
second half. Exports contracted by 7.9% yoy in July/August – deterioration from the 5.3% yoy
contraction in Q2. And, domestic demand is not picking up the slack: The latest readings for
private consumption and private credit growth were the weakest since 2009.
Inflation surged recently, but this was due to supply bottlenecks. Headline inflation reached 3.4%
in August, up from 1.8% in June and the highest reading since the food crisis in 2008. However,
the surge was entirely due to food prices – particularly for fruits and vegetable which account for
5.2% of the consumer basket – and core inflation remained steady at 0.6% yoy.
Policy outlook: Given slower growth and low and stable core inflation, should we expect interest
rate cuts? Before answering this question, we need to figure out which interest rate we are talking
about. In most countries, the central bank announces a policy rate and then keeps the
corresponding market rate close to this target through the injection or withdrawal of liquidity. This
is not the case in Taiwan. Here the market rate – the ‘call rate’ banks charge each other on
overnight uncollateralised loans – is much lower than the policy rate, has a varying (negative)
spread to the policy rate, and does not always move in lockstep with the policy rate. We therefore
need to decide on which of these two rates we want to focus. For all practical purposes, it is the
call rate that matters. Banks’ lending rates, which transmit monetary policy to the real economy,
are more closely correlated with the call rate than with the policy rate. Government bond yields
which serve as benchmarks for corporate bond yields are also more closely aligned with the call
rate. Furthermore, 3m corporate paper rates, which are the basis for interest rate swaps, follow
the call rate more closely.
Is it likely that the central bank will lead the call rate lower to counter disappointing growth? With
the call rate currently at 40bp (versus the policy rate of 1.875%), interest rate reductions would
anyway not amount to much. But, wouldn’t the central bank want to be seen as proactive when
growth falters, particularly when key central banks and regional peers have already acted?
Possibly, but the most straightforward way would have been to extend the downward move
started on 12 July. The fact that rates returned to the 40bp level, and stayed there since 22 July
suggest that they will remain there for some time. Stop-and-go moves and frequent directional
changes make the bank look like it is chasing the market and could undermine its credibility.
Hyperactive central banks also upset financial markets – the reason most central banks, including
the CBC, move very steadily.
FX outlook: In our opinion, more effective than lowering the interest rate by 0.4 percentage points
would be weakening the currency. This is particularly true for an economy as open as Taiwan. Of
course, there are geopolitical constraints to this beggar-thy-neighbour policy, but the fact that
Taiwan is hit harder than others could provide some cover. Indeed, many Asian currencies rallied
after the ECB president, Mario Draghi, revealed plans for buying peripheral bonds in early
August, but the TWD remained broadly stable against the greenback. We estimate that Taiwan’s
central bank bought about USD0.5bn in the spot market during August. This is broadly in line with
Korea – the only other Asian country for which August reserve data are already available – despite
Korea’s FX market being 3.5 times the size of Taiwan’s.
Asia Navigator | September 2012 Page 48
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Taiwan
Figure 1: Exports and Industrial production Figure 2: Monthly tourist arrivals
-60
-40
-20
0
20
40
60
2007 2008 2009 2010 2011 2012
%, y
oy, 3
mm
a
Exports Export orders Industrial production
0100200300400500600700800
2007 2008 2009 2010 2011 2012
thou
sand
per
sons
Mainland Chinese Other
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Inventory-to-shipment ratio Figure 4: Labour market
0
50
100
150
200
2007 2008 2009 2010 2011 2012
%
Inventory-to-shipment ratio Trend
-5-4-3-2-10123
2007 2008 2009 2010 2011 2012
%, y
oy, 3
mm
a
Employment Regular earnings
Source: CEIC, RBS Source: CEIC, RBS
Figure 5: Inflation Figure 6: Money, credit and property prices
-3-2-10123456
2007 2008 2009 2010 2011 2012
%, y
oy, 3
mm
a
Headline Core
-10
0
10
20
30
2007 2008 2009 2010 2011 2012
%, y
oy, 3
mm
a
Broad money Bank loans Home prices
Source: CEIC, RBS Source: CEIC, RBS
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Taiwan
Figure 7: Monetary conditions Figure 8: Balance of payments
0
50
100
150
200
2007 2008 2009 2010 2011 2012
bn T
WD
0.0
1.0
2.0
3.0
4.0
%
Excess reserves Policy rate (RHS) Call rate (RHS)
-20-15-10-505
101520
2007 2008 2009 2010 2011
bn U
SD
Reserves Current account Capital Account
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Foreign capital flows Figure 10: Exchange rates
-20
-10
0
10
20
30
2007 2008 2009 2010 2011
bn U
SD
Equities Bonds Other investment
inflows
outflows
8590
95100105
110115
2007 2008 2009 2010 2011 2012
2010
=100
2628
303234
3638
NEER REER TWD/USD (RHS)
Source: CEIC, RBS Source: CEIC, RBS
Figure 11: FX pressure index Figure 12: Stock market
-3.0-2.0-1.00.01.02.03.04.0
2007 2008 2009 2010 2011 2012
%, y
oy
Exchange rate Reserves Total
0
50
100
150
200
2007 2008 2009 2010 2011 2012
Taiwan Asia WorldSource: CEIC, Bloomberg, RBS Source: Bloomberg, RBS
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Asia Navigator | September 2012 Page 51
Taiwan – key economic indicators
2008 2009 2010 2011 2012F 2013F
Growth (%y/y)
Real GDP 0.7 -1.8 10.7 4.0 1.3 3.0 Domestic demand -2.4 -3.7 9.8 0.3 1.1 3.0 - Private consumption -0.9 0.8 3.7 3.0 1.3 1.9 - Government spending 0.8 4.0 0.6 1.9 1.5 1.1 - Fixed investment -12.4 -11.2 24.0 -3.9 0.2 7.9 Fixed investment, % of GDP 18.4 16.6 18.6 17.2 17.0 17.8 Exports 0.9 -8.7 25.6 4.5 -0.5 5.8 Imports -3.7 -13.1 28.2 -0.7 -1.4 6.9 Domestic demand contribution to growth -2.1 -3.2 8.3 0.3 0.9 2.5 Net exports contribution to growth 2.8 1.4 2.4 3.8 0.4 0.5 Unemployment (%labour force) 4.1 5.8 5.2 4.4 4.5 4.5
Inflation, FX and interest rates CPI inflation (% end of period) 1.3 -0.2 1.2 2.0 2.9 1.0 CPI inflation (% period average) 3.5 -0.9 1.0 1.4 2.2 2.2 USD/TWD, end period 32.9 32.0 30.4 30.3 30.1 30.7 USD/TWD, average period 31.5 33.1 31.6 29.5 29.9 30.3 REER (% end of period) -1.8 -3.4 4.4 0.3 0.6 -2.0 Policy rate % end of year 2.000 1.250 1.625 1.875 1.875 1.875
Fiscal accounts (% of GDP) General budget fiscal balance -0.5 -3.5 -2.3 -1.8 -1.9 -1.5 - Government expenditure 20.6 22.6 19.8 19.4 20.5 20.1 - Government revenue 20.1 19.1 17.5 17.6 18.6 18.6 Primary fiscal balance 0.7 -2.5 -1.3 -0.8 -0.9 -0.5 Government debt 36.0 39.9 38.0 37.8 38.4 38.1 - Domestic 36.0 39.9 38.0 37.8 38.4 38.1 - External 0.0 0.0 0.0 0.0 0.0 0.0
Money and credit (% y/y) M2 7.0 5.7 5.3 4.8 3.5 5.2 Private sector credit 2.6 1.0 6.7 5.8 6.1 6.0 Private sector credit, % of GDP 137.7 140.6 134.3 134.6 138.0 139.0
Balance of payments (USD bn) Exports 254.9 203.4 273.8 307.0 305.5 326.5 % y/y 3.4 -20.2 34.6 12.1 -0.5 6.9 Imports -236.4 -172.8 -247.3 -279.2 -279.4 -298.7 % y/y 9.4 -26.9 43.1 12.9 0.1 6.9 Trade balance 18.5 30.6 26.5 27.8 26.0 27.8 Current account balance 27.5 42.9 39.9 41.6 38.6 40.3 Current account balance, % of GDP 6.9 11.4 9.0 8.3 7.6 7.6 Net FDI -4.9 -3.1 -9.1 -14.7 -6.6 -7.2 Net FDI (%GDP) -1.2 -0.8 -2.1 -2.9 -1.3 -1.4 Overall balance 26.3 54.1 40.2 6.2 11.3 18.5
Foreign reserves and debt FX reserves 291.7 348.2 382.0 385.5 396.8 415.3 FX reserves, months of imports 12.9 20.6 16.1 14.4 14.8 14.5 FX reserves, % of ST debt 370.3 510.7 456.6 372.6 320.8 287.0 FX debt 90 82 102 126 150 176 FX debt, % of GDP 22.6 21.7 23.0 25.2 29.5 33.2 ST FX debt 78.8 68.2 83.7 103.5 123.7 144.7 M< debt amortisation 11 5 3 4 5 6 External financing requirement (ST, MT & CAD) 62 31 47 66 90 110
Nominal GDP Nominal GDP, USD bn 400 378 441 499 510 529 Nominal GDP, TWD bn 12,620 12,481 13,953 14,721 15,237 16,033 GDP per capita, USD 17,369 16,329 19,034 21,499 21,883 22,660 Population (mn) 23.0 23.1 23.2 23.2 23.3 23.4
Source: CEIC; RBS forecasts
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Thailand
Enrico Tanuwidjaja
Real economy: Q2 2012 real GDP growth came in stronger than expected at 4.2% yoy
(Bloomberg consensus: 3.1%). We maintain our full-year growth forecast of 5.7% based on Q3
and Q4 growth assumptions of 1.5% and 1.0% qoq sa. We think that inflation would average
3.5% in 2012 – higher than the official forecast, but well within the BoT’s comfort zone. The BoT
has also lowered its 2012 GDP forecast to 5.7% from 6.0% as well as next year’s target to 5.0%
from 5.4% previously. The BoT justified the growth downgrade with weaker export prospects.
Insurance flows in the aftermath of the floods in 4Q 2011 may continue to support the recovery
of the economy, with capital (such as the automotive and electronics parts) and government
spending (road infrastructure and water management investment) the key drivers in 2H 2012.
This recovery stage would also underpin a rebound in domestic private consumption spending.
Based on the 2Q 2012 private consumption growth figure (5.32% yoy vs 1Q’s 2.93%), it seems
that strong domestic consumption may keep inflation from coming down. Our econometrics
estimate shows that stronger domestic demand will push inflation higher. It shows that for every
1 percentage point increase in the private domestic spending growth, inflation will be pushed
higher by 0.25 percentage points. Market expectations are for energy prices to remain elevated
in 4Q 2012 and this may continue into 1H 2013. In addition, retail fuel prices have also been
rising consistently as global oil prices have yet to show some price stabilisation. Domestically,
minimum wage hikes (40% hike in Bangkok and six other provinces in April 2012 and more
provinces to go by 2013) will add to labour costs and may keep inflation on the high side of
official forecasts.
Key forecasts
GDP % yoy
CPI % yoy
Policy rate USD/THB
Q1 12A 0.4 3.4 3.00 30.8
Q2 12A 4.2 2.5 3.00 31.6
Q3 12 3.9 2.7 3.00 31.1
Q4 12 14.2 3.0 3.00 31.0
Q1 13 8.0 3.1 3.00 30.5
Q2 13 5.0 3.2 3.00 30.0
Q3 13 4.0 2.9 3.25 29.8
Q4 13 3.0 2.8 3.50 29.5
Source: CEIC, RBS forecasts
Policy: Given the stronger-than-expected growth, the urgency for rate cuts has somewhat
receded. The BoT is likely to take a wait-and-see approach following adjustments in the labour
market and taking into account external-related risks. The BoT kept rates unchanged at 3% at its
sixth meeting of the year on 5 September. There was little change in the tone of September’s
meeting minutes; however, the Monetary Policy Committee’s view appears to be that even
though there is an increasing impact of slower global demand on the Thai economy, robust
domestic demand and accommodative monetary conditions are enough to support sustained
economic growth. We think the BoT will hold rates unchanged for the rest of 2012 and possibly
until mid-2013. Budget 2013 will start to kick in by the end of this month, with projected spending
of THB2.4trn (a deficit of 2.4% of GDP). The bulk of the spending remains on fixed expenses,
while the investment spending budget is set 2.4% higher than last year. We think that fiscal
policy remains expansionary and therefore growth-positive. At the same time, it may result in a
somewhat elevated inflation environment in the near-term.
FX outlook: On the back of our shift in the interest rate call, we expect USD/THB to remain
range-bound. We target the currency pair to settle at 32.00 by the end of this year. Despite some
differing views and objectives between the government and the monetary authority, we think
central bank independence will prevail and hence give support to the local currency. The recent
speech by BoT Governor Prasarn Trairatvorakul indicated that interest rates could still go either
way, depending on developments in the developed economies, a point made with key reference
to the prospect of Thai exports. This could imply that should global economic conditions worsen
from here, the BoT could respond by cutting rates, thereby adding to pressure on the THB.
Although we cannot fully dismiss such a possibility, we think that the Thai economy should
continue to remain supported by its domestic demand and thus we project a stronger THB by
end-2013. The country’s strong FX reserves position (USD178.03bn in September 2012) would
be another factor favouring the THB to appreciate from here. There are also indications that the
country has managed to attract higher FDI into sectors such as metal products, machinery, and
transport equipments (evident from 38% yoy increase in investment applications).
Asia Navigator | September 2012 Page 52
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Thailand
Figure 1: Contributions to GDP growth Figure 2: Headline and core inflation
-15-10
-50
510
15
2007 2008 2009 2010 2011 2012
%-p
t con
trib
PCE Govt cons GFCFChg in stocks Net exports Stat discGDP yoy
-15
-5
5
15
25
2007 2008 2009 2010 2011 2012
% y
oy
Headline CPI Core BOT target range (core) PPI
Source: CEIC, RBS Source: CEIC, RBS
Figure 3: Actual vs expected inflation Figure 4: Production and capacity utilisation
-6.0-4.0-2.00.02.04.06.0
2009 2010 2011 2012
% y
oy
Headline CPI Expected inflation in 1yr
-50
-30
-10
10
30
50
2007 2008 2009 2010 2011 2012
% y
oy
354045505560657075
%
Value added prod index Capacity util (RHS)
Source: CEIC, BOT, RBS Source: CEIC, RBS
Figure 5: Exports by product group Figure 6: Imports by economic group
-40-20
020
4060
2007 2008 2009 2010 2011 2012
%-p
t con
trib
to y
oy
Agric Fishery ForestryMining Manuf Adjustmnt
Custom expts
-60-40-20
020406080
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
Total impts C'ser gdsRaw materials Capital gds
Source: CEIC, RBS Source: CEIC, RBS
Asia Navigator | September 2012 Page 53
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Thailand
Figure 7: Growth in monetary aggregates Figure 8: BOP trends by major component
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012
% y
oy, 3
mm
a
M2 Money base Comm bks credit outstanding
-8000-6000-4000-2000
02000400060008000
2007 2008 2009 2010 2011 2012
USD
mn
Curr acct Cap acct Dir invPortfolio inv Other inv Errors & ommOverall BOP
Source: CEIC, RBS Source: CEIC, RBS
Figure 9: Momentum of private consumption and investment Figure 10: Evolution of yield curve
-6-4-202468
2007 2008 2009 2010 2011 2012
% m
om s
a, 3
mm
a
Pte cons index Pte investment index
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1m 3m 6m 2y 5y 10y 15y
%
Today 1m ago 6m ago 12m ago
Source: CEIC, RBS Source: Bloomberg, RBS
Figure 11: Equity market trends Figure 12: Exchange rates
0200400600800
100012001400
2007 2008 2009 2010 2011 2012
Inde
x
0
5
10
15
20
25
30
Ratio
SET Index PE ratio (RHS)
25
27
29
31
33
35
372007 2008 2009 2010 2011 2012
85
90
95
100
10520
10=1
00
USD/THB NEER (RHS) REER (RHS)
Source: Bloomberg, RBS Source: CEIC, RBS
Note: 3mma = 3-month moving average, yoy = year on year growth.
Asia Navigator | September 2012 Page 54
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Asia Navigator | September 2012 Page 55
Thailand – key economic indicators
2008 2009 2010 2011 2012F 2013F
Growth (%y/y)
Real GDP 2.5 -2.3 7.8 0.1 5.7 5.0
Domestic demand 4.4 -6.7 10.2 0.9 8.5 4.9
- Private consumption 2.9 -1.1 4.8 1.3 4.0 3.3
- Government spending 3.2 7.5 6.4 1.1 2.8 6.8
- Fixed investment 1.2 -9.2 9.4 3.3 15.7 8.0
Fixed investment, % of GDP 22.1 20.5 20.8 21.4 23.5 24.1
Exports 5.1 -12.5 14.7 9.5 4.5 8.9
Imports 8.9 -21.5 21.5 13.7 8.0 9.5
Domestic demand contribution to growth 3.7 -5.8 8.3 0.7 7.2 4.2
Net exports contribution to growth -1.2 3.4 -0.5 -0.7 -1.4 0.8
Unemployment (%labour force) 1.4 1.5 1.1 0.7 1.3 1.0
Inflation, FX and interest rates
CPI inflation (% end of period) 0.4 3.5 3.0 3.5 2.8 2.7
CPI inflation (% period average) 5.5 -0.8 3.3 3.8 4.0 2.8
USD/THB, end period 35.0 33.2 30.1 31.2 31.0 29.5
USD/THB, average period 33.0 34.3 31.7 30.5 31.1 30.0
REER (% end of period) -4.3 2.4 8.0 -4.3 0.7 5.1
Policy rate % end of year 2.75 1.25 2.00 3.25 3.00 3.50
Fiscal accounts (% of GDP)
Central budget fiscal balance -1.0 -3.2 -0.9 -1.2 -2.4 -1.0
- Government expenditure 20.6 22.6 21.1 22.3 24.1 24.5
- Government revenue 19.6 19.4 20.2 21.1 23.2 23.9
Primary fiscal balance - -1.9 0.3 0.1 0.3 0.6
Local government fiscal balance - - - - - -
Government debt 23.5 28.6 29.7 29.3 27.9 26.4
- Domestic 22.7 28.0 29.2 28.9 27.5 26.0
- External 0.8 0.6 0.5 0.4 0.4 0.4
Money and credit (% y/y)
Broad money supply 9.2 6.8 10.9 15.2 16.5 17.9
Private sector credit 8.1 2.9 11.9 16.3 10.7 10.1
Private sector credit, % of GDP 97.3 100.6 100.7 112.3 114.3 116.3
Balance of payments (USD bn)
Exports 175.2 150.8 193.7 219.1 228.9 249.2
% y/y 0.8 -13.9 28.4 13.1 4.5 8.9
Imports 157.9 118.2 161.9 202.1 218.4 243.8
% y/y 26.7 -25.1 37.0 24.9 8.0 11.7
Trade balance 17.3 32.6 31.8 17.0 10.5 5.3
Current account balance 2.2 21.9 13.2 5.3 -1.9 -8.6
Current account balance, % of GDP 0.8 8.3 4.1 1.5 -0.5 -2.1
Net FDI 4.4 0.7 4.2 -1.1 3.0 4.0
Net FDI (%GDP) 1.6 0.3 1.3 -0.3 0.8 1.0
Overall balance 24.7 24.1 31.3 1.2 -0.9 -4.6
Foreign reserves and debt
FX reserves 111.0 138.4 172.1 175.1 174.2 169.7
FX reserves, months of BOP imports 8.4 14.1 12.8 10.4 9.6 8.3
FX reserves, % of ST ext debt 330.3 417.8 339.8 360.3 339.2 317.5
Ext debt 76.1 75.3 100.6 106.0 112.0 116.5
Ext debt, % of GDP 27.6 28.6 31.5 30.6 30.4 28.2
ST ext debt 33.6 33.1 50.7 48.6 51.4 53.4
M< debt amortisation 15.7 12.6 9.4 8.0 8.4 8.8
External financing requirement (ST, MT & CAD) - 24.3 29.3 53.3 58.9 68.7
Nominal GDP
Nominal GDP, USD bn 275.4 263.5 318.8 345.9 368.8 413.6
Nominal GDP, THB bn 9080.5 9041.6 10104.8 10540.1 11468.6 12408.6
GDP per capita, USD 4034.4 3835.4 4611.9 5053.8 5368.2 6004.0
Population (mn) 68.3 68.7 69.1 68.4 68.7 68.9 Source: Bank of Thailand; National Economic and Social Development Board; CEIC; IIF; RBS forecasts
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Economics
Sanjay Mathur Head of Economic Research, APAC (ex-Japan)
+65 6518 5165
Erik Lueth Senior Regional Economist +852 3961 3075 [email protected]
Louis Kuijs Chief China Economist
+852 2966 2867
Tiffany Qiu China Economist +8523961 3157 [email protected] Enrico Tanuwidjaja South East Asia Economist +65 6518 5167 [email protected] Vaninder Singh South East Asia Economist +65 6518 5732 [email protected]
Junko Nishioka Chief Japan Economist
+81 3 6266 3589
Long Hanhua Wang Japan Economist +81 3 6266 3584 [email protected]
Asia Navigator | September 2012 Page 56
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Asia Navigator | September 2012 Page 57
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