Q4 2010
EMERGING ASIA
ECONOMIC OUTLOOK
Asia’s slowdown to bottom soon
•
GDP growth across Asia has slowed sharply as industry and exports have pulled back. The upswing
will almost certainly stay on a weak track over the next 1-2 quarters but a prolonged slump remains
unlikely. We still anticipate that the upswing will regain traction during the course of 2011.
Domestic demand, trade between the emerging markets, as well as policy flexibility, will cushion the
downside. Accordingly, capital inflows are likely to hold at a high level and restraining inflation and
ensuring that asset bubbles do not develop will be the top policy priorities. Rates are likely to move
up further, while more capital controls and targeted credit restrictions are probable too. The rally in
currencies should continue and 2011 should be another good year for Asian stock markets as well.
•
In China, concern that inflation is rising too fast has replaced hard-landing worries. Policy will be
tightened further but conflicts over the renminbi are here to stay (pages 12-13). In Hong Kong, the
currency peg creates an especially acute vulnerability to asset bubbles (pages 14-15).
•
In Korea, high private sector debt levels and the weak housing market will probably keep GDP
growth on a soft track in coming quarters (pages 16-17). Singapore is remodelling itself, yet again,
with the vibrant services sector leading the way (pages 18-19). Continued high unemployment in
Taiwan means that its economy in 2011 will probably struggle relative to the region (page 20-21).
•
GDP growth in India should stay strong but policy rates probably need to be lifted into restrictive
territory to ensure that inflation moves sustainably lower (page 22-23). In Pakistan, the economy
should expand more rapidly than looked likely a few months ago (pages 24-25). Sri Lanka needs to
tighten fiscal policy to avert the risk that policy rates have to rise aggressively in 2011 (pages 26-27).
•
Indonesia’s economy should grow strongly again next year but the reform effort needs to be stepped
up (pages 28-29). In Malaysia, the outlook remains upbeat too and we still expect that structural
reforms will be successfully implemented (pages 30-31). In the Philippines, we continue to expect
significant progress on fiscal consolidation (pages 32-33). Meanwhile, Thailand’s political problems
look set to become higher profile again in coming months (pages 34-35) while Vietnam is the
country in the region most at risk of suffering an overheating crisis in 2011 (pages 36-37).
•
Australia’s mining boom will probably bring above-trend GDP growth, lower unemployment, and
more cash rate hikes (pages 38-39). New Zealand’s upswing is set to stay sub-par (pages 40-41).
North America
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Managing Director
Chief International Economist
Senior International Economist
Senior China Economist
Asia Economist
Asia Economist
Asia Economist
Roger Bootle ([email protected])
Julian Jessop ([email protected])
Kevin Grice ([email protected])
Mark Williams ([email protected])
Vishnu Varathan ([email protected])
Sukhy Ubhi ([email protected])
Ashira Perera ([email protected])
Tel: +65 6595 5190
Emerging Asia Economic Outlook 4/2010 1
Key Forecasts
TABLE 1: GDP & CONSUMER PRICES
Share of
(1)
World
% y/y
1990-2008
an. av.
GDP
2010F
2011F
2009
2012F
2009
Consumer Prices
2010F
2011F
2012F
China
Mainland China
12.5
9.9
9.1
10.2
8.0
9.0
-0.7
3.2
2.8
3.0
Hong Kong
0.4
4.2
-2.8
6.5
4.0
4.3
0.6
2.2
3.0
3.5
1.9
5.8
0.2
6.0
3.5
5.0
2.8
3.0
3.5
3.0
Early Industrialised
South Korea
Singapore
0.3
6.8
-1.3
14.5
4.5
6.0
0.6
3.5
3.0
2.0
Taiwan
1.0
5.4
-1.9
10.5
3.5
4.0
-0.9
0.9
0.8
1.5
South Asia
(2)
India
5.1
6.1
7.4
8.8
8.6
8.8
3.8
8.5
6.5
5.5
Pakistan
0.6
4.4
5.0
2.5
5.0
4.0
11.0
15.0
12.0
10.0
Sri Lanka
0.1
5.1
3.5
8.0
8.0
6.0
3.4
6.0
6.0
5.5
South East Asia
Indonesia
1.4
4.6
4.5
6.0
6.5
6.4
4.8
6.0
6.5
5.5
Malaysia
0.5
6.5
-1.7
7.5
5.5
6.2
0.6
1.8
2.5
2.5
Philippines
0.5
3.6
1.1
6.5
5.5
6.0
3.2
3.5
4.0
4.0
Thailand
0.8
5.2
-2.3
7.5
4.0
5.0
0.3
0.9
2.0
1.5
Vietnam
0.4
7.4
5.3
6.7
5.8
6.4
5.9
10.0
9.0
8.0
(3)
Australasia
Australia
1.2
3.2
1.2
3.3
3.8
4.0
1.8
3.0
3.0
3.0
New Zealand
0.2
2.9
-1.7
2.0
4.5
2.5
2.1
2.5
4.0
2.5
Emerging Asia
26.9
7.0
5.9
8.6
6.9
7.6
1.3
4.5
4.0
3.7
Japan
6.0
1.5
-5.2
3.5
1.5
1.0
-1.3
-0.6
0.2
-0.5
20.5
3.0
-2.4
2.7
2.0
2.0
-0.3
1.5
0.5
0.3
Euro-zone
15.2
2.2
-4.0
1.6
(1) In PPP terms, 2009
(2) Wholesale prices rather than consumer prices
(3) Core prices (exc. raw food and energy) rather than headline
(4) Annual average 1996-2008
0.5
1.0
0.3
1.5
1.0
0.5
US
(4)
Chart 1: GDP (% y/y)
Emerging Asia inc. China
Japan
US
Chart 2: Consumer Prices (% y/y)
Euro-zone
Emerging Asia inc. China
Japan
US
Euro-zone
10
5
8
8
4
6
6
3
3
4
4
2
2
2
2
0
0
1
1
0
-1
10
Our Forecasts
-2
-2
0
-4
-4
-1
-6
-6
-2
2009
2010
2011
2012
5
Our Forecasts
4
-2
2009
2010
2011
2012
Sources – Thomson Datastream, IMF, Capital Economics
2 Emerging Asia Economic Outlook 4/2010
TABLE 2: CENTRAL BANK POLICY RATES
Policy Rate
End
2009
Latest
th
(30 Nov)
12m B’mark Lend.
5.31
South Korea
Base Rate
Taiwan
Discount Rate
Forecasts
End
2010
Last Change
Next Change
End
2011
5.56
Up 25bp (Oct 10)
Up 25bp (Dec 10)
2.00
2.50
Up 25bp (Nov 10)
Up 25bp (Feb 11)
2.50
3.50
1.25
1.500
Up 12.5bp (Sep 10)
Up 12.5bp (Dec 10)
1.625
1.625
Repo Rate
4.75
6.25
Up 25bp (Nov 10)
Up 25bp (Mar 11)
6.25
7.00
Pakistan
Discount Rate
12.50
14.00
Up 50bp (Nov 10)
Down 50bp (Sep 11)
14.00
13.50
Sri Lanka
Repo Rate
7.50
7.25
Down 25bp (Jul 10)
Up 25bp (Jul 11)
7.25
8.00
Indonesia
Reference Rate
6.50
6.50
Down 25bp (Aug 09)
Up 25bp (Feb 11)
6.50
7.50
Thailand
Repo Rate
1.25
1.75
Up 25bp (Aug 10)
Up 25bp (Mar 11)
1.75
2.75
3.50
%
China
Mainland China
5.81
6.31
Early Industrialised
South Asia
India
South East Asia
Malaysia
Overnight Rate
2.00
2.75
Up 25bp (Jul 10)
Up 25bp (Jan 11)
2.75
Philippines
Reverse Repo Rate
4.00
4.00
Down 25bp (Jul 09)
Up 25bp (Mar 11)
4.00
5.00
Vietnam
Base Rate
8.00
9.00
Up 100bp (Nov 10)
Up 100bp (Feb 11)
9.00
11.00
Australia
Cash Rate
3.75
4.75
Up 25bp (Nov 10)
Up 25bp (Feb 11)
4.75
5.75
New Zealand
Cash Rate
2.50
3.00
Up 25bp (Jul 10)
Up 25bp (Mar 11)
3.00
4.00
Australasia
Japan
Overnight Rate
0.10
0-0.1
Down 20bp (Dec 08)
None on horizon
0-0.1
0-0.1
US
Fed Funds Target
0.25
0.25
Down 75bp (Dec 08)
None on horizon
0.25
0.25
Euro-zone
Refinancing Rate
1.00
1.00
Down 25bp (May 09)
None on horizon
1.00
1.00
TABLE 3: FX RATES PER USD1 & STOCK MARKETS
Forecasts
Currency End
2009
Latest
End
th
(30 Nov) Q1 2011
Forecasts
End
2011
Stock Market
End
2009
Latest
End
th
(30 Nov) Q1 2011
End
2011
China
Mainland China
CNY
6.83
6.67
6.55
6.30
SH Comp.
3,277
2,820
2,900
3,250
Hong Kong
HKD
7.75
7.76
7.76
7.76
Hang Seng
21,873
23,008
23,000
26,000
South Korea
KRW
1,164
1,160
1,100
1,000
KOSPI
1,683
1,905
2,000
2,300
Taiwan
TWD
32.0
30.5
31.0
31.5
TAIEX
8,188
8,372
8,400
9,350
Singapore
SGD
1.40
1.32
1.28
1.20
Straits Times
2,898
3,143
3,200
3,400
Early Industrialised
South Asia
India
INR
46.8
46.0
45.0
42.0
Sensex 30
17,465
19,520
19,600
20,100
Pakistan
PKR
84.3
85.7
86.0
90.0
Karachi 100
9,387
11,235
11,500
12,600
Sri Lanka
LKR
114.4
111.4
110.0
100.0
Colombo All
3,386
6,435
6,500
7,000
Indonesia
IDR
9,404
9,040
9,000
8,800
Jakarta Comp.
2,534
3,531
3,600
3,650
Thailand
THB
33.4
30.2
31.0
29.0
Thai SET
735
1,005
1,050
1,100
Malaysia
MYR
3.43
3.15
3.08
2.98
KLCI
1,273
1,485
1,550
1,700
Philippines
PHP
46.2
44.0
43.0
39.0
PSEi
3,053
3,954
4,000
4,550
Vietnam
VND
19,498
19,500
20,000
20,500
495
452
440
410
Australia
AUD
0.97
0.96
1.00
0.98
ASX 200
4,871
4,585
4,600
4,750
New Zealand
NZD
0.75
0.75
0.76
0.74
NZX 50
3,230
3,265
3,400
3,300
Japan
JPY
84.0
84.5
85
90
Nikkei 225
10,546
9,837
10,000
10,000
US
USD
-
-
-
-
S&P 500
1,115
1,180
1,200
1,100
Euro-zone
EUR
1.33
1.33
1.30
1.00
DAX 30
5,957
6,710
6,750
6,250
South East Asia
Ho Chi Minh
Australasia
1
except AUD and NZD which are USD per local dollar
Emerging Asia Economic Outlook 4/2010 3
TABLE 4: MARKET INTEREST RATES
Forecasts
End
2009
%
Now
th
(30 Nov)
End
Q1 2011
End
Q2 2011
End
Q3 2011
End
2011
End
2012
China
12m B’mark Lending
5.3
5.6
5.8
6.0
6.0
6.3
6.8
10yr Bond Yield
3.6
4.0
4.2
4.3
4.4
4.5
4.8
3m KORIBOR
2.9
2.8
3.1
3.5
3.6
3.8
3.8
10yr Bond Yield
5.3
4.4
4.7
5.0
5.1
5.2
5.2
3m USD SIBOR
0.3
0.3
0.3
0.3
0.3
0.3
0.6
10yr Bond Yield
2.9
2.3
2.1
2.1
2.1
2.1
2.4
3m CP
1.2
1.4
1.5
1.5
1.5
1.5
1.5
10yr Bond Yield
1.5
1.4
1.5
1.6
1.7
1.8
2.2
South Korea
Singapore
Taiwan
India
3m T-Bill Rates
3.6
6.8
7.0
7.2
7.4
7.5
7.5
10yr Bond Yield
7.7
8.0
7.8
7.5
7.8
8.2
8.0
3m KIBOR
12.1
13.1
12.8
12.5
12.4
12.2
12.0
10yr Bond Yield
12.8
14.2
14.0
13.8
13.5
13.3
13.0
Pakistan
Indonesia
3m JIBOR
7.1
6.7
7.3
7.3
7.6
7.8
7.8
10yr Bond Yield
10.1
7.5
7.8
8.0
8.3
8.5
8.5
Malaysia
3m KLIBOR
2.2
3.0
3.4
3.5
3.6
3.7
3.7
10yr Bond Yield
4.3
3.8
4.0
4.1
4.2
4.3
4.3
8.1
6.0
6.4
6.6
6.8
7.0
7.0
3m BIBOR
1.4
1.9
2.3
2.5
2.7
2.9
2.9
10yr Bond Yield
4.5
3.6
3.8
4.0
4.2
4.4
4.4
3m Rate
10.4
12.4
12.8
13.0
13.5
14.0
13.0
5yr Bond Yield
10.6
11.3
11.5
11.7
11.9
12.0
12.0
90-day Bill
4.0
5.0
5.3
5.4
5.6
5.8
5.8
10yr Bond Yield
5.7
5.4
5.5
5.7
5.9
6.0
6.0
90-day Bill
2.7
3.2
3.4
3.6
3.8
4.2
4.2
10yr Bond Yield
5.8
5.6
5.6
5.9
6.1
6.2
6.2
3m JPY LIBOR
0.3
0.2
0.2
0.2
0.2
0.2
0.2
10yr Bond Yield
1.3
1.2
1.0
1.3
1.3
1.3
1.3
3m USD LIBOR
0.3
0.3
0.3
0.3
0.3
0.3
0.3
10yr Bond Yield
3.8
2.8
2.5
2.5
2.5
2.5
2.5
Philippines
10yr Bond Yield
Thailand
Vietnam
Australia
New Zealand
Japan
US
Euro-zone
3m EUR LIBOR
10yr Bond Yield
(1)
0.6
1.0
1.0
1.0
1.0
1.0
1.0
3.4
2.7
2.3
2.3
2.3
2.3
2.3
Sources – Bloomberg, Capital Economics (1) Germany
4 Emerging Asia Economic Outlook 4/2010
Emerging Asia Economic & Markets Outlook
Asia’s slowdown to bottom soon
We forecast ahead of time that Emerging Asia’s
recovery would be “V-shaped” (see Emerging Asia
Economic Outlook “Decoupling is back”, Q4
2009). Furthermore, for the last two quarters we
have been signalling that the “easy” growth phase
is over and that the regional upswing will
inevitably slow. This is because the impact of base
effects on the data has become less favourable,
while the West has stayed weak. What’s more, the
boost from the inventory cycle has tailed off and
the support from stimulatory policies has been
gradually withdrawn.
The upshot is that headline GDP growth, which in
y/y terms has pulled back sharply across the
region, will continue to pull back for a while. All
the countries we cover, with the exceptions of
Indonesia, Sri Lanka, Pakistan, Australia and New
Zealand, are likely to see full-year GDP growth in
2011 that is slower than will be the case this year.
For Emerging Asia as a whole we forecast that the
annual expansion pace will ease to around 7%
next year, which would be some 1-2 percentage
points lower than in 2010. Nevertheless, 7% is in
line with the long-run trend and should remain far
superior to growth anywhere else in the world.
CHART 1: EMERGING ASIA GDP (% Q/Q SAAR INC. Q4
ESTIMATE & Q1 FORECAST)
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
2005
2006
2007
2008
2009
2010
2011
Sources – Thomson Datastream, Capital Economics
By late next year, it is probable that most
economies will again be growing above our
estimate of trend GDP growth, with the latter
shown in Chart 2.
CHART 2: TREND GDP GROWTH (% Y/Y)
10
9
8
7
6
5
4
3
2
1
0
10
9
8
7
6
5
4
3
2
1
0
Sources – Thomson Datastream, Capital Economics
In addition, we judge that most of the slowdown
has now come through and anticipate that GDP
growth will bottom and then start to pick up again
in q/q terms over the next one-two quarters. (See
Chart 1.) The second half of 2011 in all the
countries we cover is likely to be stronger than
the first half, so the quarterly pattern will be the
reverse of this year. Singapore, as is usual, is
leading the way, with the October data already
published now just about confirming that GDP will
rise in q/q terms in October-December, after
collapsing in Q3.
Structural reforms which lift domestic demand will
continue to come through. China has lagged
behind the region, but household incomes are
starting to rise there and a rebalancing is likely to
take place in coming years as the focus of growth
shifts from state-sector investment geared for
exports towards the expansion of the services
sector and the development of the more rural
Western provinces. Elsewhere in the region,
Indonesia, Malaysia, and the Philippines are
implementing new reforms aimed at lifting
Emerging Asia Economic Outlook 4/2010 5
business investment and household spending.
Singapore is developing its services sector too. The
upswing in Emerging Asia excluding China has
been led by household spending (see Chart 3),
domestic demand more generally, as well as
increased intra-regional trade. The reliance on
trade with the West has been relatively small.
Accordingly, continued weakness in the West
should have little impact on Asia’s outlook.
CHART 3: REAL HOUSEHOLD SPENDING (Q1 2007 =100)
120
120
Emerging Asia exc. China
US
115
115
Euro-zone
110
110
105
105
100
100
95
95
2007
2008
2009
2010
Sources – Thomson Datastream, Capital Economics
Private sector balance sheets remain in good
shape, with debt levels still generally low and
savings rates high. Furthermore, structural factors
such as catch-up, favourable demographics, and
increased urbanisation will support consumer
spending and household spending for a long time.
Macro policies should also remain sound and there
is plenty of flexibility given relatively high interest
rates and low government debt levels to adjust
policies should the outlook threaten to be
significantly worse than we currently envisage.
The upshot is that we forecast GDP growth will
accelerate in 2012 relative to 2011, although the
expansion pace is unlikely to match what has been
achieved this year. In 2011-12 combined, we
anticipate that growth in most countries in
Emerging Asia will either be above trend or in line
with trend. What’s more, for most countries our
forecasts are higher than the consensus view.
6 Emerging Asia Economic Outlook 4/2010
With growth in Emerging Asia set to remain far
superior to the pace of expansion in the economies
in the West, capitals inflows into the region look
set to stay strong in 2011. Accordingly, the
challenge for policy-makers across the region will
be to ensure that inflation does not develop into a
major problem and to ensure that asset bubbles do
not develop.
The challenge will continue to be tackled through
a variety of channels. More currency appreciation
looks inevitable, the pulling back of fiscal stimulus
measures will continue and more prudential curbs
and targeted credit restrictions are likely to be
implemented to try to curb asset bubbles. In
addition, interest rates will probably move up
further.
Policy rate hikes will continue
Of the countries we cover, only Australia and
India, have already lifted policy rates into a
“neutral” range. Furthermore, over the next 12
months, we anticipate that both countries will lift
rates into “restrictive” territory which weighs on
growth. Australia is the only high-income economy
which faces an imminent inflation problem while
price stresses will linger in India.
Vietnam almost certainly should lift interest rates
into restrictive territory too. But judging the
direction of policy there is inevitably far more
difficult than elsewhere in the Asia.
We expect policy rate hikes in most countries in
2011. (See Chart 4.) But the early starters this year
will probably soon come to the end of the
tightening cycle while the late beginners and those
still to join have far to go. Taiwan and Malaysia are
expected to be the first to finish. Pakistan, we
judge, has already reached the end of its policy
tightening given the rate hike this week. We
anticipate that the next move by the central bank
there will be to reduce the discount rate, although
this is unlikely to happen before mid-2011.
CHART 4: EXPECTED POLICY RATE CHANGE BY END-2011
(BASIS POINTS)
Vietnam
N ew Ze aland
Phili ppines
Indonesia
Australia
Kore a
Thailand
China
India
Mal aysia
Sri La nk a
Taiw an
Pakis tan
-50
-25
0
25
50
75
100
125
150
175
200
Sources – Bloomberg, Capital Economics
The countries which started late and have more
work to do are China and Korea, while the
persistence of inflation pressures in India will
probably force the Reserve Bank to keep going
there as well. The medium-term inflation risks will
force the Reserve Bank of Australia’s hand.
Meanwhile both Indonesia and the Philippines
have not hiked policy rates at all in 2010 given
that their benchmark rates in the crisis did not fall
to the lows of elsewhere in the region.
Nonetheless, we expect that a tightening cycle in
both countries will start from Q1.
The money markets and swaps market typically
move and discount the central bank rate hikes
which are on the way ahead of time. However, in
most of the countries we cover it looks like the
markets are seriously underestimating the likely
policy rate hikes to come. This appears to be the
case in Thailand, Korea, Malaysia, Indonesia, the
Philippines, and Australia. On the other side, the
markets’ rate hike expectations, relative to our
view, look most aggressive in India.
A tougher year for bonds
The return from local currency government bond
markets, with the exception of India, has been
good in 2010. Relatively high yields have attracted
large capital inflows, and have lifted prices, and
Asian currencies have appreciated. 2011 will
probably be more difficult. Capital curbs have
already targeted the bond markets in Indonesia,
Thailand, Korea, and in Taiwan (with extended
holding periods, the elimination of tax
concessions, etc). More restraints are on the way
too. The absolute level of yields is also lower while
further currency appreciation is not so assured.
What’s more, central bank policy rates still look set
to move up some more.
Our forecasts for benchmark government bond
yields are in Table 4 on page 4. As before, we
anticipate that yields will generally rise in 2011,
even in the context of equivalent yields in the West
remaining very low. It is likely that yields will
climb the most in Australia, Indonesia and the
Philippines. Admittedly, we still anticipate that
Indonesia will achieve investment grade from one
of the three major agencies in coming quarters. But
foreign holdings of Indonesian government bonds
(and in many other bond markets in the region too)
have already surged to record levels. Surely, the
inflow cannot keep rising at so rapid a pace.
We have also changed our view on Indian
government bonds. Having previously expected
that a rally would occur in 2011, we now
anticipate another difficult year as annual inflation
stays too high. Nevertheless, the recent moves to
actually encourage more capital inflow into the
bond market, which of course contrasts with
elsewhere in the region, will limit the downside.
Singapore should be one of the best performers.
The AAA credit rating is rock-solid and there are
no liquidity concerns. The 10-year bond yield is
low, at just over 2%, but further significant
currency appreciation is, we judge, very likely.
Emerging Asia Economic Outlook 4/2010 7
More currency gains on the way
Our view on Asian FX rates is little changed from
last time. In the Q3 Outlook we forecast that all
currencies across the region, with the exception of
the Vietnamese dong, would rise against the US
dollar. This has been the case. We continue to
expect more appreciation, even though many
currencies have already moved far and even in the
context that more capital controls will be applied..
What’s more, exchange rates across Asia,
including the renminbi, will probably keep
climbing together. This will continue to make
policy-makers in all countries more tolerant of
further FX gains too. In addition, a new trend
which has emerged in 2010 and is likely to persist
in coming years is that Asian central banks will
increasingly diversify their foreign reserves into
other regional currencies.
The case for more appreciation remains
compelling for several reasons. Firstly, stronger
currencies will help in the fight to ensure that
inflation is contained and, even in the most tradedependent countries, is a less politically
contentious form of policy tightening than interest
rate hikes and fiscal consolidation. Secondly,
interest rates across the region will still continue to
move up far ahead of the West. Thirdly, the
appreciation of many currencies in real tradeweighted terms still lags behind the change in the
US dollar. (See Table 1.)
Finally, Asia’s external balance will probably
diminish but most countries should continue to run
a surplus. In addition, capital inflows will probably
hold at a high level too with returns set to remain
impressive relative to elsewhere. This should
happen even in the context of portfolio flows
probably peaking out as local asset markets
eventually become more expensive and as restraint
measures on capital flows proliferate. What’s
more, there is probably less scope now for the
“increased insulation of Asia” story to surprise
global investors on the upside.
TABLE 1: CURRENCY VALUATIONS (JAN. 2007=100)
The only exceptions to the general appreciation
trend for the long run will probably be the
Vietnamese dong (VND) and the Pakistan rupee
(PKR). The economic fundamentals behind these
currencies are far weaker than is the case
elsewhere in Asia. Inflation in both countries is too
high, while there are also large external deficits
and sizeable fiscal shortfalls. What’s more, policy
making is poor and foreign reserve levels are too
low relative to monthly imports to credibly defend
these currencies at current levels should foreign
and local investment sentiment sour.
REAL EFFECTIVE EXCHANGE RATES
%-change relative to
Australia AUD
Now
th
(29
Nov)
112
China CNY
108
6
-7
Under
India INR
98
0
-9
Under
Indonesia IDR
123
35
2
Over
Korea KRW
78
-11
-22
Under
Malaysia MYR
96
3
-7
Under
New Zea’d NZD
98
9
-11
In line
Philippines PHP
88
1
-16
Under
Singapore SGD
102
10
-8
In-line
Taiwan TWD
89
-10
-12
Under
Thailand THB
111
17
1
Over
10yr
avge
07/08
peak
CE view*
18
-9
Over
Sources – Bloomberg, JP Morgan, Capital Economics *We assume the
real effective exchange rate will rise over time in line with productivity
improvements. 1% pa is taken as the norm. A current value
significantly more than 10% above the 10yr average is viewed to be
over-valued, around 10% is viewed to be fair value and are designated
as in-line in the table; less than 10% as undervalued. Remember though
that this is just one way at looking at FX rate valuations.
8 Emerging Asia Economic Outlook 4/2010
We expect relatively small slippage against the US
dollar for the VND and PKR over the period to
end-2011 as capital inflows into both countries
should hold at a high level. But the risk that any
fall is large and disorderly is significant as well.
Table 2 summaries our currency forecasts against
the US dollar for end-2011 and compares this view
to the latest Bloomberg consensus projections and
the exchange rate implied by the forwards market.
In percentage terms, we expect the Korean won
(KRW), the Indian rupee (INR), the Singapore
dollar (SGD), and the Philippine peso (PHP) to rise
the most. Relative to the consensus we are most
bullish on the Singapore dollar (SGD), the Indian
Rupee (INR), the Thailand baht (THB) and the
Philippine peso (PHP). The only currencies where
are views are significantly more bearish than the
consensus are the Taiwan dollar (TWD) and the
Indonesian rupiah (IDR).
TABLE 2: CURRENCY FORECASTS
End 2011
Per US$ (except
AUD and NZD)
China CNY
Now
th
(30
Nov)
6.67
CE
F’cast
Con’sus
F’cast
Forward
Market
6.30
6.27
6.53
Hong Kong HKD
7.76
7.76
7.76
7.74
Korea KRW
1,160
1,000
1,040
1,167
Taiwan TWD
30.5
31.5
29.5
29.7
Singapore SGD
1.32
1.20
1.26
1.32
India INR
46.0
42.0
43.5
48.3
Indonesia IDR
9,040
8,800
8,700
9,516
Thailand THB
30.2
29.0
29.5
30.4
Malaysia MYR
3.15
2.98
2.97
3.20
Philippines PHP
44.0
39.0
41.5
44.2
Vietnam VND
19,500
20,500
20,500
21,750
Australia AUD
0.96
0.98
0.96
0.92
New Zea’d NZD
0.75
0.74
0.74
0.72
Japan JPY
84.0
95
90
83
Euro-zone EUR
1.31
1.00
1.32
1.31
Sources – Bloomberg, Capital Economics
Near term, however, we anticipate that Asian
currencies may well struggle to gain further
traction. This is because China’s monetary
tightening still has far to go. The uncertainty over
what this may or may not bring will likely
overhang Asian markets for some time and will
bring periods, admittedly which we anticipate will
be brief, when capital flows plunge and risk assets
come under pressure. Accordingly, our currency
forecasts for end March 2011 against the US dollar
are little different to now, weaker, or only a little
stronger. (See Table 3 on page 3.)
There are local risks too, such as the political
situation in Thailand, which could well stress the
baht for a while. Nevertheless, we are still bullish
on the baht for the long term and recall that this
currency climbed strongly against the US dollar in
2006 (by 15%) when former prime minister
Thaksin Shinawatra was forced to leave office.
Stocks still far from being a “bubble”
In the Q3 Economic Outlook we forecast that all
the Asian markets would rise. This has been the
case, with the exception of India and Vietnam,
although we did highlight these markets as being
highest risk and most likely to underperform. We
expect more upside for stocks across the region
over the period to end-2011 although the next few
months are likely to stay difficult as China tightens
policy further. What’s more, Asian stocks will
almost certainly not outperform to the extent that
was the case in 2009 and may struggle to even
surpass the gains which are likely this year.
2011 should be another good year because priceearnings ratios remain generally below long run
average levels. (See Table 3.) Admittedly, interest
rates will move up further. Nevertheless, we judge
it most likely that central bank policy rates and
government bond yields will peak at a level which
will be lower than was the case in the last upswing
between 2003 and mid-2008. Accordingly, the
price-earnings ratio has a good chance of peaking
above its previous level too.
Valuations are also in line with or remain below
those in the high-income markets, yet GDP growth
will be three times faster than in the West while
the rise in corporate profits looks set to stay far
more rapid too. What’s more, currency
Emerging Asia Economic Outlook 4/2010 9
appreciation is likely to continue as well, which
will enhance the return to foreign investors.
Finally, research from the IMF and from others
suggests that global investors are still
underexposed to emerging markets. It may not
happen over the next 12 months but, over the long
run, allocations to emerging markets will almost
certainly rise further.
TABLE 3: STOCK MARKET PRICE-EARNINGS RATIOS (PERS)
Ave. Last
Six Years
M’land China
26
Peak in
2003mid-08
Upswing
50
Hong Kong
15
Singapore
PER
Now
PER
2011
Earnings
18
13
20
14
13
13
12
12
14
South Korea
14
19
13
10
Taiwan
29
21
15
13
India
18
25
18
15
Pakistan
12
16
10
8
Indonesia
20
25
32
15
Malaysia
15
18
13
14
Philippines
13
19
13
14
Thailand
13
20
15
12
Vietnam
20
45
10
9
Australia
20
23
18
12
New Zealand
19
29
60
12
S&P 500
17
210
15
12
Topix
21
123
16
14
Stoxx 600
18
26
16
10
Source – Bloomberg. Based on the benchmark indices used in Table 3
on page 3.
Our views on Asian equity markets are
summarised in Table 3 on page 4 and in Table 4
below. We remain bullish. The next few months
will probably be stressful, as on the currency side.
But we anticipate that China outlook concerns will
diminish in the first half of 2011. During next year
as a whole, we expect that Korean equities will
rise the most in East Asia, followed by China,
Malaysia, and the Philippines. The markets we
judge will struggle are Vietnam, Indonesia, India,
Australia and New Zealand.
10 Emerging Asia Economic Outlook 4/2010
TABLE 4: STOCK MARKET PERFORMANCE
% Change
in 2009
% Change
2010 ytd
% Change to
end-2011 on
CE Forecast
M’land China
+74
-13
+15
Hong Kong
+45
+5
+13
Singapore
+58
+8
+8
South Korea
+45
+15
+20
Taiwan
+74
+1
+12
India
+76
+11
+3
Pakistan
+63
+19
+12
Indonesia
+76
+44
+3
Malaysia
+42
+17
+15
Philippines
+55
+35
+15
Thailand
+54
+370
+10
Vietnam
+58
-12
-10
Australia
+31
-6
+3
New Zealand
+1
-4
+1
S&P 500
+20
+7
-8
Nikkei 225
+4
-5
+1
Dax 30
+24
+5
-11
Source – Bloomberg
What could go wrong?
We are upbeat on the outlook but there are
obviously risks. Firstly, a trade war may develop.
The West faces a long period of low growth and
high unemployment while the policy options left to
lift the economy are close to being exhausted.
Meanwhile, China will rebalance toward domestic
demand, and this process will include more
renminbi appreciation. But China will move slowly
and more trade friction with the US looks
inevitable from time to time.
We anticipate that a middle-way will be found and
that any disputes will be resolved. After all, Asia is
the part of the world most dependent on foreign
trade and so would suffer disproportionately from
protectionism. However, there is a chance that
moves are made which provoke extreme reactions,
and an escalation which impacts the economy.
Secondly, there could be a policy mistake in
China. Correctly calibrating the withdrawal of
stimulus is never easy and is particularly difficult in
China where large parts of the economy still
operate beyond market forces and old centralplanning habits will die hard. We expect that
China will be able to squeeze inflation lower while
ensuring that growth does not slow far. However,
there is a chance that policy may not be tightened
enough, in which case the overheating threat and
the risk of asset bubbles will grow. Alternatively,
policy may be tightened too much, which would
crash-land the economy. Either event would stress
Asian markets, probably for long enough to
adversely affect the economic outlook too.
Thirdly, another risk is that Emerging Asia quickly
suffers an inflation problem and an asset markets
boom and bust. The good news is that policymakers and companies have spent the last 11 years
providing Asia with the insulation needed to
ensure that a repeat of 1997-98 is avoided.
Monetary and fiscal stimulus is also being removed
ahead of time while the response to the risk that
asset bubbles development has kicked-in early too.
The upshot is that we anticipate that inflation will
continue to slow (see Chart 5.), while more
prudential controls should be expected too.
CHART 5: EMERGING ASIA CONSUMER PRICES
(% Y/Y INC. Q4 ESTIMATE)
6
6
5
4
5
4
3
2
3
2
1
0
1
0
-1
-2
-1
-2
-3
-4
-3
-4
Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10
Sources – Thomson Datastream, Capital Economics
Nevertheless, with liquidity set to stay plentiful it
will be a challenge to ensure that prices are not
pushed beyond the levels which cannot be
justified by “fundamentals. The country most at
risk of suffering a overheating problem in 2011 is
Vietnam. Hong Kong, Singapore, and India, are
most at risk of suffering an asset bubble,
particularly in local property markets.
A fourth risk is the introduction of draconian
capital controls. We anticipate that the curbs will
stay incremental. The aim will be to manage the
flow and exchange rate appreciation rather than
shut out capital. Nevertheless, the effectiveness of
controls diminishes over time and there is a risk of
proliferation and escalation. Of the countries we
cover, Taiwan, Korea, and Indonesia are most at
risk of introducing draconian measures. The
countries where this is least likely to happen are
Singapore, India, and the Philippines.
Finally, there is that threat that a country specific
problem impacts the region. The obvious local
issue which would hit region for a while would be
military conflict on the Korean peninsula.
Summary
GDP growth has slowed sharply as industry and
exports have pulled back. The upswing will almost
certainly stay on a weak track over the next 1-2
quarters but a prolonged slump remains unlikely.
We still anticipate that the upswing will regain
traction during the course of 2011. Accordingly,
capital inflows are likely to hold at a high level and
restraining inflation and ensuring that asset bubbles
do not develop will be the top policy priority.
Rates are likely to move up further, while more
capital controls and targeted credit restrictions are
probable too. Nevertheless, the rally in currencies
should still continue and 2011 will probably be
another good year for Asian stocks.
Kevin Grice
Tel: +44 (0)20 7808 4993
Emerging Asia Economic Outlook 4/2010 11
China
Inflation fears should not be overdone
•
The economy bottomed out during the
summer, helped by a loosening of lending
constraints, and has been picking up speed in
recent months. (See Chart 1.)
•
Worries about a possible hard landing for GDP
growth have been replaced by concern that
inflation is rising too fast. While the increase in
the headline annual consumer price inflation
rate is almost entirely due to rising food costs
(see Chart 2), officials are concerned that,
given the looseness of monetary conditions,
inflation could easily spread. Accordingly, the
People’s Bank has increased reserve
requirements for commercial banks, which
limits their capacity to lend for any given
quantity of reserves. Benchmark interest rates
have also been hiked. (See Chart 3.)
•
•
The latter step will have little direct impact on
the economy – interest rates remain low, and
are not a big constraint on borrowing. The
government is also leaning on banks to rein in
lending, which will have an effect. At this late
stage, it seems unlikely that total lending will
be kept to the government’s 2010 target –
meeting the target would require monthly
lending to drop to RMB300bn in the last two
months of the year. (See Chart 4.) For 2011
though, the government will probably adopt a
fairly tight quota – perhaps RMB6.5trn rather
than the RMB7.5trn of 2010. In addition, at
least at the start of the year, the government
will insist that banks stick to this target.
The fact that inflation is limited to foodstuffs
makes it in some ways the more damaging
since food typically accounts for a large share
of spending by the poorest households. The
government has pledged to increase transfers
to low-income families in response. However,
as long as non-food price inflation remains
low, it is far more likely that the headline
change in annual consumer prices will drop
back as a food supply response kicks in, rather
than spiral ever higher.
•
Property prices have stabilised since the
government launched the campaign against
speculation in April. (See Chart 5.) That should
be enough to rapidly lift affordability since
average wages are rising at a double-digit rate.
Sales have picked up but are down from their
levels in late 2009. (See Chart 6.)
•
The renminbi’s pace of appreciation against
the dollar has ebbed and flowed in line with
shifts in international pressure. In tradeweighted terms, the currency has been on a
weakening path. (See Chart 7.) The passing of
the November G20 summit removes one of the
international community’s key points of
leverage over China. Now, with exports
slowing, renminbi gains are likely to be slow
as well. But the bilateral imbalance with the
US is as large as ever. (See Chart 8.) Conflicts
over the currency will not go away.
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP
Private cons’ptn
Total fixed invest.
10.1
8.2
12.0
9.1
9.5
20.2
10.2
10.0
9.0
8.0
9.0
7.0
9.0
10.0
7.0
Consumer prices
1.8
-0.7
3.2
2.8
3.0
Gen’l gov’t bal(1)
Current account(1)
-1.6
5.1
-2.2
6.1
-3.0
5.0
-3.0
6.0
-2.5
6.5
(1) As % of GDP
12 Emerging Asia Economic Outlook 4/2010
China Charts
Chart 2: Consumer Prices (% y/y)
Chart 1: China Activity Proxy & Industrial Production
(vol., % 3m/3m)
20
8
Industrial Output Volume (CE measure, LHS)
15
6
10
4
5
2
0
-5
0
-10
-2
01
02
03
04
05
06
07
08
09
10
8
Consumer Prices Excl. Food
6
6
4
4
2
2
0
0
-2
-2
-4
-4
00
11
01
Chart 3: Policy Rates (%)
20
Require d Reserve Ratio (major banks)
12m Be nchmark Lending Rate
12
12m Be nchmark Deposit Rate
02
03
04
05
06
07
08
09
10
11
Chart 4: Net New Lending (RMB bn)
20
16
10
Consumer Prices
8
CE China Activity Proxy (RHS)
00
10
16
12
8
8
4
4
2,000
2,000
1,800
1,800
1,600
1,600
1,400
1,400
1,200
1,200
1,000
1,000
800
800
600
600
400
400
200
200
0
0
99
00
01
02
03
04
05
06
07
08
09
10
11
2005
Chart 5: Property Prices (Jan. 06 = 100)
150
0
0
2006
2007
2008
150
350
Residential secondary market
140
130
New low-end residential
130
250
120
120
110
110
100
100
90
90
2009
2010
2011
124
Nominal Trade-weighted Exchange Rate
(Jan 2000=100, LHS)
120
Dollar Spot Rate (inverted, RHS)
6.8
7.2
112
7.4
108
7.6
104
7.8
100
8.0
8.2
Renminbi stronger
92
8.4
01
02
03
04
05
06
07
08
09
200
150
100
100
50
50
Chinese New Year holiday
0
0
Chart 8: Merchandise Trade ($bn 12m sum)
6.6
116
00
250
Property measures
announced
Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10
7.0
96
300
150
Chart 7: Renminbi Exchange Rate
128
350
National (all property, CE estimate)
200
2008
2011
Beijing (residential)
Shanghai (residential)
300
140
2007
2010
Chart 6: Property Sales (units, 2-week ave., Jan. 2010 = 100)
New high-end residential
2006
2009
10
11
200
200
Surplus with the US
150
150
Surplus with the rest of the world
100
100
50
50
0
0
-50
-50
-100
-100
94
96
98
00
02
04
06
08
10
Sources – Thomson Datastream, Bloomberg, CEIC, Capital Economics
Emerging Asia Economic Outlook 4/2010 13
Hong Kong
Property entering bubble territory
•
The economy continued to expand at a solid
pace in Q3 (see Chart 1) thanks to strong
spending by residents and a surge in spending
by tourists, particularly from the mainland. The
unemployment rate is already historically-low
(see Chart 2), and will probably fall further in
2011-12. As a result, household spending
should remain strong in the quarters ahead.
•
The currency peg and openness to capital
flows leave Hong Kong more vulnerable than
most to inflation and asset bubbles,
particularly when capital flows into emerging
markets are picking up. In order to maintain
the peg, Hong Kong must, in effect, mirror the
loose monetary policy stance of the US.
•
As far as equities are concerned, there is no
sign that this is – so far at least – driving
unsustainable price rises. The main Hong Kong
index has moved in lockstep with others in the
region. (See Chart 3.) Similarly, consumer
price inflation is still low (See Chart 4.)
•
Property prices, however, are a different
matter. (See Chart 5.) Low interest rates mean
that average mortgage payments are about a
fifth lower relative to incomes than the longrun average. But that is not a good measure of
long-run affordability. The level of prices
relative to incomes suggests that the cost of
property is now unsustainably high. (See Chart
6.) In time, rental costs will rise too, feeding
broader consumer price inflation.
•
These strains have reawakened the debate over
whether Hong Kong should drop the dollar
peg and have helped to push the Hong Kong
dollar to the strong side of its trading band.
14 Emerging Asia Economic Outlook 4/2010
(See Chart 7.) There is very little chance of this
happening anytime soon. Exchange rate
stability is central to Hong Kong’s success as a
trading centre. Re-pegging to something else,
such as the renminbi or to a currency basket,
as in Singapore, would probably lead to even
stronger capital inflows as markets will assume
that nominal appreciation would follow.
•
Instead, Hong Kong will try to adapt to the
inevitable price movements and mitigate the
risks as far as possible. The unusually flexible
markets, including that for labour, will play a
key role in helping this process.
•
Meanwhile, the government has introduced a
series of prudential measures targeting
property, for example raising minimum downpayments and increasing stamp duty. It has
also stepped up the pace of land auctions
which, in time, should feed an increase in
supply. The number of property completions
has increased in 2010, but remains far too low
to satisfy current demand. (See Chart 8.)
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP
Private cons’ptn
Total fixed invest.
4.7
3.3
0.9
-2.8
-0.4
-1.8
6.5
5.5
6.5
4.0
4.4
4.0
4.3
4.5
4.0
Consumer prices
Unemp. rate (%)(1)
-0.6
5.6
0.6
5.1
2.2
4.0
3.0
4.0
3.5
4.0
Gen’l gov’t bal(2)
Current account(2)
0.1
9.3
0.8
8.6
-1.0
9.0
0.0
8.5
0.5
8.0
(1) End of period (2) As % of GDP
Hong Kong Charts
Chart 1: GDP
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
Chart 2: Unemployment Rate (%, Seas. Adj.)
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
% q/q (seas. adj., RHS)
% y/y (LHS)
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Chart 3: Equity Indices
30,000
Chart 4: Consumer Price Index
450
Hang Seng (LHS)
25,000
120
120
115
115
110
110
105
105
100
100
400
MSCI Asia Pacific excluding
Japan and Hong Kong (RHS)
350
20,000
300
250
15,000
200
10,000
150
100
5,000
50
0
0
00
01
02
03
04
05
06
07
08
09
10
95
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Chart 5: Property Prices
300
95
11
Chart 6: Average Private Residential Property Price
Relative To Average Wage (Q1 1990 = 100)
Private Retail Premises
300
250
250
250
200
200
200
150
150
150
100
100
100
50
50
50
0
Private Domestic Premises
250
Private Offices
200
1999=100
150
100
50
00
01
02
03
04
05
06
07
08
09
10
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Chart 7: Exchange Rate (HK$/US$)
Chart 8: Residential Property Completions (Units)
7.74
7.74
7.75
7.75
7.76
7.76
7.77
7.77
7.78
7.78
7.79
7.79
7.80
7.80
7.81
7.82
7.83
7.84
HK$ stronger,
US$ weaker
The HKMA undertakes
to maintain the HK$
within 7.75-7.85/US$
2005
2006
2007
0
11
7.81
7.82
40,000
40,000
30,000
30,000
* Q1-Q3
only
20,000
10,000
20,000
10,000
7.83
7.84
2008
2009
2010
2011
0
0
80
85
90
95
00
05
10*
Sources – Thomson Datastream, Bloomberg, CEIC, CE
Emerging Asia Economic Outlook 4/2010 15
South Korea
Should regain momentum soon
•
GDP growth has slowed to a sub-trend pace
and will probably stay on a weak track over
the next one or two quarters. The
manufacturing PMI has declined further (see
Chart 1) but the slowdown should bottom out
by the middle of next year. China’s industrial
sector, which typically leads Korea, already
appears to be picking up and China is by far
Korea’s biggest export market. (See Chart 2.)
•
Stimulus measures are being removed and the
government is aiming to keep spending below
expected revenue growth. However, new
stimulus measures should be expected ahead
of the December 2012 presidential election.
Overall, we expect GDP growth to pick up in
the second half of next year and settle in a 45% range in 2011-12, which would be at
Korea’s trend pace. (See Chart 7.)
•
Korea retains a comparative advantage in
some key sectors and has the education system
and invests enough in research and
development to stay competitive. The
implementation of a free trade deal with the
EU in mid-2011 will help too. In addition, the
won should stay competitive in trade weighted
terms (see Chart 3), although we do expect
faster and sustained appreciation against the
US dollar over the next 12 months.
•
Inflation has breached the ceiling of the Bank
of Korea’s (BoK) 2-4% target and will probably
stay in the upper half of this range in 2011-12.
The Bank of Korea has started to tighten
monetary policy but the 7-day repo rate
remains historically low. We expect the policy
rate to end next year at 3.5% (see Chart 8),
which would still be below neutral for Korea.
•
Tensions with the North escalated once more
in mid-November. The usual pattern is that the
tensions ease after a few days, but then
periodically re-emerge. This will probably stay
the case in coming quarters given the inherent
instability in the North due to its leadership
transition and the dire state of the economy.
•
•
On the domestic side, the winding down of
government job creation programmes has
distorted labour markets trends (see Chart 4)
but the private sector should carry on lifting
employment overall. Household incomes will
probably continue to rise while consumer
confidence, although trending lower, is still at
a high level. (See Chart 5.) However, the high
debt burden among households (see Chart 6),
as well as in small to medium-sized firms, will
inevitably bring some balance sheet
rebuilding.
The housing market will probably stay under
some pressure next year as well, with supply
set to increase. All of this will tend to restrain
the expansion in household spending, but we
still expect some growth rather than a slump.
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 - 08
GDP
Private cons’ptn
Total fixed invest.
5.5
5.1
4.2
0.2
0.2
-0.2
6.0
4.5
8.0
3.5
2.5
6.0
5.0
3.5
7.0
Consumer prices
Unemp. rate (%)(1)
2.9
3.7
2.8
3.6
3.0
3.4
3.5
3.2
3.0
3.0
Gen’l gov’t bal(2)
Current account(3)
1.4
1.6
-1.7
4.0
0.5
3.0
1.0
2.0
1.5
1.5
(1) End of period (2) As % of GDP, average for 2000-2008
(3) As % of GDP
16 Emerging Asia Economic Outlook 4/2010
South Korea Charts
Chart 1: Manufacturing PMIs
58
Jun-10
Jul-10
Aug-10
Chart 2: Exports ($bn)
Sep-10
Oct-10
56
50.2
10
8
8
6
6
4
4
46
2
2
44
0
52
50
50
48
48
46
Contraction
44
PMI Index
Output
2006
Won Real Trade Weighted Index (RHS)
800
1000
2.5
120
2.0
200
1.5
150
80
100
50
0.0
-50
-100
-1.0
60
-1.5
00
02
04
06
08
0
-0.5
70
98
10
-150
2005
Chart 5: Confidence Indicators
120
2007
2008
2009
2010
100
100
80
80
60
60
40
40
120
110
2006
Chart 6: Household Sector Debt (% of GDP)
140
Consumer Sentiment Composite (LHS)
Expected Business Conditions (R HS)
250
0.5
1800
96
300
m/m change (000s, seas. adj. RHS)
% y/y (LHS)
1.0
1600
94
2010
130
90
Won stronger
92
2009
3.0
100
1200
90
2008
140
110
1400
2007
Chart 4: Employment
Won per US$ (inverted, LHS)
600
12
0
2005
New Orders
Chart 3: Exchange Rate
400
Japan
10
54
52
US
12
56
Expansion
54
China
58
100
100
80
90
60
80
20
20
0
0
40
2005
2006
2007
2008
2009
2010
Chart 7: GDP
15
Our Forecasts
10
Chart 8: BoK Policy Rate & Consumer Prices
8
7
6
6
4
5
2
0
0
-2
-5
% q/q (RHS)
-10
% y/y (LHS)
-15
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
7
Our Forecasts
Policy Rate (%)
6
Headline CPI (% y/y)
5
5
4
4
3
3
-4
2
-6
1
-8
0
2
Inflation target range widened to 2.0%-4.0%
for 2010-12 from 2.5%-3.5% in 2007-09
1
0
00
01
02
03
04
05
06
07
08
09
10
11
Sources – Thomson Datastream, Bloomberg, IMF, Capital Economics
Emerging Asia Economic Outlook 4/2010 17
Singapore
A “new” Singapore emerging with services leading the way
•
Compared to the rest of Asia, the upswing in
Singapore since mid-2009 has been even more
“V-shaped” due to three local factors. There
has been a big expansion of capacity in the
pharmaceuticals sector, the opening of two
casino resorts has lifted tourist inflows from the
region, while the financial services sector,
particularly wealth management and
commodity trading, has grown rapidly too.
•
The initial boost from inventory-rebuilding and
from exports has of course been unravelling
since mid-year. Nevertheless, October data
have been strong and it is now unlikely that
GDP will decline in Q4, as well as in Q3. (See
Chart 1.) In addition, the outlook remains
good. We expect that the economy will
expand at above its trend pace of around 4%
in 2011-12, with the risk to the upside.
•
•
US manufacturing trends and local indicators
such as container traffic suggest that exports
and industrial production should still, once the
adjustment phase is through, be able to
expand at a high single-digits pace in coming
quarters. (See Charts 2 & 3.) The structural lift
in the services sector will also bolster
Singapore’s resilience to external conditions
which will be stressed for some time.
The spectacular growth in visitor arrivals will
slow further but should still remain rapid. This
in turn will lift retail sales. (See Chart 4.) In
addition, new research and development
initiatives in manufacturing (in the biomedicals area and in “green” technologies), as
well as the probable continued fast expansion
of the services sector, are likely to keep the
unemployment rate very low. (See Chart 5.)
18 Emerging Asia Economic Outlook 4/2010
•
What’s more, Singapore has the policy
flexibility to ensure the upswing stays on track
even if external conditions end up being even
tougher than we envisage. Public finances are
rock-solid. Tax revenues have been lifted by
the soaring property market, higher gaming
receipts, strong wage gains, and fast corporate
profits growth. Government debt is low as a
percentage of GDP, at 43%, and the budget is
likely to be in surplus in 2010-12.
•
The acceleration in consumer price inflation
has broadened out after being initially led by
transport and food costs. Wages are now rising
rapidly (see Chart 6), given that the
unemployment rate has dropped to what is
usually considered Singapore’s full
employment level. Accordingly, the Singapore
dollar nominal effective exchange rate should
continue to rise (see Chart 7), and it is likely
that the appreciation bias and wider trading
band will be retained at the next monetary
policy review in April. Residential property
prices are climbing less rapidly (see Chart 8)
but more prudential controls may well be
needed to curb speculative activity.
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99– 08
GDP
Private cons’ptn
Total fixed invest.
5.8
5.8
4.7
-1.3
0.4
-3.3
14.5
11.0
13.5
4.5
4.5
5.0
5.0
5.0
6.5
Consumer prices
1.4
0.6
3.5
3.0
2.0
Gen’l gov’t bal(1)
Current account(1)
6.0
19.4
-2.0
19.0
1.0
18.0
2.2
16.0
4.5
14.0
(1) As a % of GDP
Singapore Charts
Chart 1: GDP
Chart 2: Exports & US ISM New Orders
50
% q/q (seas. adj., annualised)
50
50
40
% y/y
40
40
30
30
30
20
20
20
10
10
10
0
0
0
-10
-10
-10
-20
-30
-20
-20
-40
-30
-30
-50
01
02
03
04
05
06
07
08
09
75
70
65
60
55
50
45
40
35
30
25
20
Singapore Non-Oil Dom. Exports (% 3m y/y,
LHS)
US ISM New Orders (Adv. 3m, RHS)
99
10
Chart 3: Shipping, Industrial Production & NORI (% 3m y/y)
00
01
02
03
04
05
06
07
08
09
10
11
Chart 4: Visitor Arrivals & Retail Sales (% y/y)
30
30
Visitor Arrivals (Adv. 3m)
Retail Sales
Retail Sales ex-Autos
60
Conta iner Throughput
60
50
Industria l Production
50
25
40
30
Non-oil re tai ne d import s (NOR I)
40
30
20
20
10
20
10
10
10
5
5
0
-10
0
-10
0
0
-20
-30
-20
-30
-5
-5
-10
-10
-40
-40
-15
01
02
03
04
05
06
07
08
09
10
15
-15
05
06
Chart 5: Employment & Unemployment (Per Quarter)
60
3
20
2
0
-20
Services (000s, LHS)
Construction (000s, LHS)
Manufacturing (000s, LHS)
Unemployment rate (%, RHS)
-40
-60
06
07
08
1
0
09
07
08
09
10
11
Chart 6: Inflation & Wages (% y/y)
4
40
20
15
11
80
25
12
Consumer Prices (Monthly Data)
10
Wages (Quarterly Data)
12
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
10
99
Chart 7: SGD Nominal Effective Exchange Rate
00
01
02
03
04
05
06
07
08
09
10
Chart 8: Property Prices (% y/y)
108
50
106
40
104
30
102
20
100
10
10
98
98
0
0
96
96
-10
-10
94
94
-20
-20
92
-30
-30
90
-40
108
NEER
106
Mid-Point
104
102
100
SGD NEER appreciation.
Policy band widened "slightly"
92
90
06
07
08
09
10
Residential
Industrial
Office
50
40
30
20
-40
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Sources – Thomson Datastream, Bloomberg, Capital Economics
Emerging Asia Economic Outlook 4/2010 19
Taiwan
Household spending critical to outlook
•
GDP growth remained close to a double-digit
pace in Q3 in y/y terms, and looks set to come
in above 10% for the year as a whole. This
would be the strongest performance in over
twenty years. But, on current trends, growth
looks likely to slow sharply in y/y terms in the
quarters ahead. In Q2 and Q3 this year, the
economy on the official figures expanded only
0.5% in total from Q1’s level. (See Chart 1.)
•
The loss of momentum can be attributed in
part to the slowing of exports. (See Chart 2.)
Nevertheless, whereas domestic spending has
been able to take up the slack elsewhere in the
region, in Taiwan the contribution to growth
from investment and household spending has
long been low. Most of Taiwan’s growth in the
last decade can be attributed to net exports.
•
Admittedly, recent retail sales data suggests
that local spending has been firmer than the
GDP figures suggest. In addition, given the
weakness in Q2 and Q3, there is a good
chance that GDP in q/q terms will pick up in
coming quarters. However, any upswing will
probably be subdued. Real wages have made
back only part of the losses suffered during
2008-09 and are no higher now than a decade
ago. (See Chart 3.) Unemployment has fallen,
but only to 5% which was the peak during the
dot.com recession. (See Chart 4.)
•
The free trade agreement signed with China
should deliver benefits over time, in terms of
more rapid productivity growth, inward
investment, tourist arrivals, and the faster
development of Taiwan’s services sector more
generally. Moves to target green energy, rural
development, and domestic consumption, in
China’s 12th 5-year plan, should help Taiwan
20 Emerging Asia Economic Outlook 4/2010
too. But many firms have already relocated to
China so the boost to the local economy from
strong sales growth there tends to be limited.
•
Consumer price inflation remains very low.
(See Chart 5.) But property prices have risen
sharply and appear still to be heading higher in
Taipei, a particular hot spot. (See Chart 6.)
Overheating in the property market is the chief
concern of the central bank. It has raised the
policy rate twice so far this year, and is likely
to do so again in December. However, with
inflation so low and growth momentum weak,
there is a risk that tightening hobbles GDP
growth or tips the economy into deflation.
Much depends on how property prices
respond. But, if we are right that growth is set
to underperform, a move in December will
probably be the last for a while. (See Chart 7.)
•
The Taiwan dollar is touching highs against the
US dollar, although is still weak in tradeweighted terms. (See Chart 8.) Policymakers
will have little enthusiasm for currency
appreciation and we expect the Taiwan dollar
to underperform regional currencies.
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP
Private cons’ptn
Total fixed invest.
4.2
3.5
1.9
-1.9
1.4
-11.1
10.5
5.0
22.0
3.5
3.0
5.0
4.0
4.0
3.5
Consumer prices
Unemp. rate (%)(1)
1.1
4.1
-0.9
5.9
0.9
4.9
0.8
4.6
1.5
4.3
Gen’l gov’t bal(2)
Current account(2)
-4.2
6.3
-4.4
11.2
-3.0
8.5
-3.0
8.0
-2.5
8.0
(1) End of period (2) As % of GDP
Taiwan Charts
Chart 1: GDP
Chart 2: Industrial Production & Exports (Seas Adj. % 3m/3m)
30
30
% q/q annualised
% y/y
20
20
10
10
0
0
-10
-10
Q3 10 = 0.1%
-20
-20
00
01
02
03
04
05
06
07
08
09
10
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
Exports ($)
Industrial production (vol.)
11
99
00
Chart 3: Wages (Industry & Services, 12m sum, Jan. 00 = 100)
110
110
Nominal
01
105
100
02
03
04
05
06
07
08
09
10
11
Chart 4: Unemployment Rate (%)
7
7
Unemployment Rate (%, nsa)
6
Real
105
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
6
Unemployment Rate (%, sa)
5
5
4
4
3
3
2
2
1
1
100
95
95
90
90
0
0
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Chart 5: Consumer Prices
6
Chart 6: Sinyi Residential Property Price Index (1993 = 100)
6
Headline CPI (% y/y)
5
Seasonally-adjusted (% 3m/3m)
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
99
00
01
02
03
04
05
06
260
Taipei City
260
220
Taipei County
220
5
07
08
09
10
All Taiwan
180
140
140
100
100
60
60
98 99 00 01 02 03 04 05 06 07 08 09 10 11
11
Chart 7: US & Taiwanese Policy Rates (%)
7
Taiwan (Discount)
6
Chart 8: Exchange Rate
CE Forecasts
US (Fed Funds)
180
7
28
US Dollar Spot Rate (TWD/USD, inverted, LHS)
115
6
29
Nominal Trade-Weighted Rate (RHS)
110
5
5
4
4
30
105
Taiwan dollar
stronger
31
100
32
3
3
2
2
1
1
35
0
36
0
01
02
03
04
05
06
07
08
09
10
11
12
95
33
90
34
85
80
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Sources – Thomson Datastream, Bloomberg, CEIC, Capital Economics
Emerging Asia Economic Outlook 4/2010 21
India
Upswing set to stay strong
•
Prospects for growth are little changed
compared to the Q3 Outlook but inflation has
eased more slowly than expected. What’s
more, government spending has stayed strong,
credit growth in the banking system has picked
up sharply, while Reserve Bank (RBI) concerns
about potential asset bubbles have increased.
Accordingly, we have adjusted our forecast
and now anticipate that the RBI will be forced
to lift its key policy rate beyond “neutral” and
into restrictive territory in 2011-12.
•
Recent industrial output data have swung
wildly, particularly capital goods production,
while the recent trend in some core
infrastructure sectors, such as electricity
generation, has been weak too. (See Charts 1
& 2.) Softer exports demand and the end of the
inventory rebuilding cycle will be having a
dampening impact. But industry overall, we
judge, is most probably just adjusting from
what was unsustainably strong to a more
normal expansion pace which can be
sustained. We continue to expect that
industrial output will climb at a high singledigit pace in 2011-12, while the services
sector should expand at a similar rate too.
•
Household incomes will probably grow
rapidly. Capacity use has tightened too, profits
should climb at a fast pace, and credit
availability will be plentiful. Car sales and the
forward-looking PMI indices also point to
continued expansion. (See Charts 3 & 4.) The
upshot is that we expect GDP growth of close
to 9% pa in coming years. On the output side,
services as well as industry will lead the way
while private investment should drive the
upswing on the expenditure side.
•
The fiscal deficit is on track to narrow sharply
in FY10-11. (See Chart 5.) Tax revenues have
soared but one-off factors such as the 3G
licence auction and the selling of equity stakes
in state companies have helped too.
Meanwhile, government spending was up 20%
y/y in April-September. Fiscal consolidation
needs to be stepped up otherwise more of the
burden of ensuring that inflation moves lower
and stays lower will shift to the RBI.
•
The annual gain in wholesale prices has
probably peaked (see Chart 6) but food costs
have not dropped far due to structural issues,
dire distribution systems and higher per capita
incomes which have changed food demand.
Nevertheless, increased supply following this
year’s above-normal monsoon along with the
policy tightening should pull inflation down to
the RBI’s comfort zone of 5-6% during 2011.
•
The RBI has lifted the repo rate to the low end
of a neutral rate, which is 6-7%. Deposits in
the banks are also rising at a more rapid pace.
(See Chart 7.) We expect there will be another
hike in March, and that the repo rate will rise
75bp over the next 12 months to 7%. (See
Chart 8.) The risk is that the RBI hikes by more.
TABLE 1: KEY FORECASTS (FYS, 2010 = APR. ’10-MAR. ‘11)
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP
Private cons’ptn
Total fixed invest.
7.2
6.3
11.3
7.4
4.3
9.3
8.8
7.0
12.0
8.6
7.0
10.0
8.8
7.5
13.0
Wholesale prices
5.2
3.8
8.5
6.5
5.5
Gen’l gov’t bal(1)
Current account(1)
-8.6
-0.3
-10.8
-3.0
-8.8
-3.3
-8.2
-2.5
-7.5
-1.0
(1) As % of GDP
22 Emerging Asia Economic Outlook 4/2010
India Charts
Chart 1: Industrial Production (% 3m y/y)
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
Chart 2: Infrastructure Sectors (% y/y)
50
45
40
35
30
25
20
15
10
5
0
-5
-10
-15
Capital Goods
Consumer Durable Goods
Industrial Output
01
02
03
04
05
06
07
08
09
20
16
Steel Production
12
8
4
4
0
0
-4
-4
-8
-8
-12
-12
07
10
60
50
65
60
55
55
50
30
30
20
20
50
10
10
45
0
0
-10
-20
-20
05
06
07
08
09
10
45
Manufacturing
-10
04
40
35
11
35
06
07
12
10
10
8
8
6
6
4
4
General Government
2
Central Government
0
0
92
94
96
98
00
02
04
06
08
08
09
10
Chart 6: Wholesale Prices (% y/y)
12
90
40
Services
Chart 5: Budget Deficit (% of GDP)
2
10
60
40
03
09
65
40
02
08
Chart 4: Purchasing Manager Indices (PMI)
Passenger Car Sales
Two-Wheeler Sales
50
12
8
Chart 3: Vehicle Sales (% 3m y/y)
60
20
Electricity Generation
16
24
22
20
18
16
14
12
10
8
6
4
2
0
-2
10F 12F
WPI (New) - Manufactured Products
WPI (New) - Primary Articles
09
08
Chart 7: Bank Loans & Deposits (% y/y)
24
22
20
18
16
14
12
10
8
6
4
2
0
-2
Wholesale Price Index - New
10
11
Chart 8: Reserve Bank Policy Interest Rates (%)
10
40
40
10
35
35
9
30
30
8
8
25
25
7
7
20
6
6
15
5
5
10
4
5
3
0
2
20
15
10
Bank Loans
5
Bank Deposits
0
02
03
04
05
06
07
08
09
10
CE Forecasts
9
4
Repo Rate
3
Reverse Repo Rate
2
02
03
04
05
06
07
08
09
10
11
12
Sources – ADB, World Bank, Thomson Datastream, Bloomberg
Emerging Asia Economic Outlook 4/2010 23
Pakistan
Fiscal adjustment key to averting more policy rate hikes
•
•
•
•
Measures to tackle the floods disaster and
bring the budget back on track are now
coming through. A new tax to help pay for
flood damage will be in place for the first six
months of next year. What’s more the new
goods and services tax, which cuts exemptions
although is at a lower overall rate, has finally
been approved by the National Assembly and
so has a good chance of being implemented
soon. Financial assistance from friendly
governments and from multilateral
organisations has also increased. As a result,
the rupee has held its value against the US
dollar since mid-2010.
The activity data, inevitably, have been poor.
Large scale manufacturing has dropped back
while vehicle sales have plummeted. (See
Charts 1 & 2.) Nevertheless, we doubt that the
weakness will last and have actually revised
up our GDP forecast. We now anticipate that
growth will reach 2-3% in FY10-11. (See Chart
3), despite the slump in agriculture.
This is a far from disastrous prospect but
growth will still be very low for a country
where population is rising by 2% pa. Low
growth and high food price inflation is a
volatile mix when per capita incomes are low.
Pakistan, for a long time to come, will stay
vulnerable to the risk that its political and lawand-order problems deteriorate even more.
Revised targets agreed with the IMF aim to
reduce the fiscal shortfall to the equivalent of
4.7% of GDP in FY10-11. (See Chart 4.) It is
wise to be sceptical on Pakistan’s ability to
deliver. Government spending does appear to
be under better control but the challenge, as
ever, is to curb tax evasion and increase tax
revenues. The official target is to lift the tax
take to 15% of GDP by 2015 from 9% in
2009. This aim is very ambitious.
•
The merchandise trade gap is likely to stay
wide but worker remittance inflows are still
climbing at a double-digit pace in y/y terms.
(See Charts 5 & 6.) This will limit the damage
to the current account as a whole. The shortfall
should stay comfortable to finance even
though foreign direct investment and portfolio
capital inflows look set to stay at a far lower
level than in the past. Foreign reserve levels
should rise but will still remain far too low to
support to rupee in times of stress.
•
Inflation declined in y/y terms in October. (See
Chart 7.) Demand-side pressures have eased
and government borrowing from the central
bank (SBP) has fallen, which has slowed the
rise in the money supply. However, the full
impact of higher food costs has yet to come
through and we still expect inflation to average
15% in FY10-11, with the risk to the upside.
The SBP raised the policy rate by 50bp in late
November. We believe that the SBP is now
done and anticipate that the next move will be
a cut, from late 2011. (See Chart 8.)
TABLE 1: KEY FORECASTS (FYS, 2010 = JUL.’10-JUN.’11)
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP
Private cons’ptn
Total fixed invest.
5.1
3.6
5.2
5.0
10.0
10.0
2.5
1.0
5.0
5.0
6.0
5.0
4.0
3.5
4.5
Consumer prices
8.3
11.0
15.0
12.0
10.0
Gen’l gov’t bal(1)
Current account(1)
-5.1
-1.1
-6.3
-2.4
-6.5
-3.50
-6.0
-2.5
-5.5
-1.5
(1) As % of GDP
24 Emerging Asia Economic Outlook 4/2010
Pakistan Charts
Chart 1: Large Scale Manufacturing
40
Chart 2: Motorcycle & Car Sales (% 3m/3m)
% m/m
% 3m y/y
30
20
40
40
30
30
20
10
10
0
0
-10
-10
-20
-20
03
04
05
06
07
08
09
Motorcycle Sales (LHS)
Car Sales (RHS)
20
10
10
0
-10
0
-20
-10
-30
-40
-20
-50
-60
-30
10
07
15
10
10
5
5
0
0
-5
-5
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
-7
-7
-8
-8
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F
Chart 5: Merchandise Trade Balance ($m, per month)
5,000
Trade Balance
Exports
Imports
4,000
3,000
4,000
Chart 6: Overseas Workers’ Remittances
100
2,000
2,000
1,000
1,000
80
600
500
40
20
300
-1,000
-2,000
-2,000
-3,000
-3,000
-20
03
04
05
06
07
08
09
10
25
20
20
15
15
10
10
5
5
0
0
06
07
08
09
10
100
0
04
05
06
07
08
09
10
Chart 8: Policy Interest Rate & Market Rate (%)
30
Headline Consumer Prices
Core Consumer Prices (ex. Food & Energy)
200
03
Chart 7: Consumer Prices (% y/y)
05
700
60
0
25
800
400
0
-1,000
30
1,000
900
$m per month (RHS)
% 3m y/y (LHS)
3,000
0
10
0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F
5,000
09
08
Chart 4: Budget Balance (% of GDP)
20
Agriculture
Real GDP
Manufacturing
Services
15
30
20
Chart 3: GDP By Output (% y/y)
20
40
20
20
SBP Discount Rate
18
CE Forecast
18
6-mth Rate
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Sources – SBP, Thomson Datastream, Bloomberg, Capital Economics
Emerging Asia Economic Outlook 4/2010 25
Sri Lanka
Fiscal reform will be a challenge
•
The peace dividend will continue for a while.
GDP remains on course to rise 8% in 2011,
which would be about the same pace as this
year and significantly higher than average
growth of 6% pa over the last five years. While
industry has gained momentum since the
beginning of the year, the change in
merchandise exports has moved the other way.
(See Charts 1 & 2.) Both are likely to suffer, at
least for a while, once the full effect of the
EU’s withdrawal of trade concessions kicks in.
However, the low dependence on exports,
only 20% of GDP, means there is a good
chance that any weakness in the externallyexposed areas is offset by domestic demand.
•
Overseas workers’ remittances will provide
households with a reliable source of income in
the years ahead. (See Chart 3.) Domestic credit
to the private sector has accelerated too while
business confidence reached an all-time high
in November and suggests that investment will
be strong for some time as well.
•
Meanwhile, the government aims to reduce
the 2011 fiscal deficit to 6.8% of GDP, which
is in line with the IMF programme. Revenues
are projected to rise 20% next year while
spending is slated to climb by only 11%.
However, we are sceptical on the
government’s ability to deliver, particularly on
the revenues side. The 2011 budget cut tax
rates on individuals and companies and the
aim is to lift the overall tax take by improving
collection and curbing evasion. Only time will
tell whether Sri Lanka’s institutions are up to
this job. Some progress should be expected but
it is still likely, we judge, that the budget
deficit in 2011 will exceed the targeted level.
26 Emerging Asia Economic Outlook 4/2010
Accordingly, we suspect that the aim of
lowering public debt as a percentage of GDP,
down to 60% over the medium term from 86%
in 2009, will prove too much of a stretch as
well. (See Charts 4 & 5.)
•
Nevertheless, the authorities should do enough
to ensure that the IMF agreement stays on
track. Accordingly, foreign reserves are likely
to climb higher from the record level of
US$6.8bn reached in October. (See Chart 6.)
•
Inflation has accelerated due to a surge in food
prices. (See Chart 7.) But import duties on
some key food items have been cut and food
price pressures should ease in coming months.
What’s more, the Central Bank’s (CBSL)
intention to begin targeting inflation should
help to anchor inflation expectations. Policy
rates were unchanged in November and
should remain on hold into 2011. But if we are
right that GDP will grow at an above-trend
pace this year and next, then overheating
concerns will intensify. Therefore, the next
move in policy rates would probably be up,
from mid-2011 onwards. (See Chart 8.)
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 - 08
GDP
Private cons’ptn
Total fixed invest.
5.1
4.7
6.4
3.5
1.5
1.4
8.0
7.0
11.0
8.0
7.0
15.0
6.0
5.0
10.0
Consumer prices
11.2
3.4
6.0
6.0
5.5
Gen’l gov’t bal(1)
Current account(1)
-7.7
-3.8
-9.8
-0.5
-8.0
-2.0
-7.5
-4.0
-7.0
-5.0
(1) As % of GDP
Sri Lanka Charts
Chart 1: Industrial Production
Chart 2: Merchandise Exports
20
30
15
15
20
10
10
5
5
20
% m/m
% 3m y/y
0
0
-5
-5
-10
-10
-15
-15
-20
-20
00
01
02
03
04
05
06
07
08
09
800
600
400
10
200
0
0
-200
-10
-400
-20
Trade balance ($US mn, RHS)
10
03
04
Chart 3: Overseas Worker Remittances
60
OWRs (US$m, RHS)
% 3m y/y (LHS)
50
40
30
0
-2
250
-4
-4
200
-6
-6
150
-8
-8
100
-10
-14
Sri Lanka
Pakistan
-10
Actual shortfalls with CE forecasts for 2010 & 2011
IMF Target
10
00
Chart 5: Public Debt (% of GDP)
120
10
300
-12
09
09
0
0
08
-800
08
-2
-20
07
07
Chart 4: Budget Balance (% of GDP)
-10
06
06
0
50
05
05
350
20
10
-600
Exports (% 3m y/y, LHS)
-30
01
02
03
04
05
06
07
08
09
10
-12
-14
11
Chart 6: Gross Foreign Reserves & Import Coverage
India
The Philippines
100
80
120
7
100
6
80
6
5
5
4
4
3
3
2
2
1
60
60
40
40
20
20
1
0
0
0
7
Import cover (months)
Gross foreign reserves (US$bn)
0
06
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Chart 7: Consumer Prices (% y/y)
07
08
09
10
Chart 8: Repo & Reverse Repo Rates (%)
60
14
50
13
40
12
12
30
30
11
11
20
20
10
10
10
10
9
9
60
Overall
Food
Transport
50
40
14
Repo Rate
Reverse Repo Rate
CE
Forecast
13
0
8
8
-10
-10
7
7
-20
-20
6
0
04
05
06
07
08
09
10
6
04
05
06
07
08
09
10
11
12
Sources – Thomson Datastream, CEIC, IMF, CBSL, Bloomberg, CE
Emerging Asia Economic Outlook 4/2010 27
Indonesia
Reform effort losing some momentum
•
•
•
GDP growth will probably ease in coming
quarters but mainly on the back of a rundown
in inventories which have climbed sharply
since the start of 2010. (See Chart 1.) Any
slowdown is unlikely to be deep or long.
Business investment and household spending
are well-placed to continue expanding at a
rapid pace. Given the limited dependence on
exports, which account for only 30% of the
economy, and with most shipments now going
to the rest of Asia as well, Indonesia will
probably be one of the best performers in the
region in terms of GDP growth in 2011-12.
That said, business sentiment has fallen while
capacity use has also pulled back. (See Chart
2.) What’s more, the focus on the reforms
needed to improve the investment climate
appears to have faltered in recent quarters,
with parliament stalling on the approval of
new measures. Our sense is that this is not too
serious and we anticipate that reform will kickstart from early 2011, probably with the longdelayed approval of the land reform bill.
In addition, there is evidence that firms are
shifting to Indonesia from higher cost locations
in Asia, for exports production and also to
access the large domestic market where per
capita incomes are rising rapidly. Finally,
corporate debt levels are low and profits
should continue to climb rapidly, while
leverage in the household sector is low too.
Consumer credit is equivalent to only 26% of
GDP, while mortgage debt is negligible at
around 2%. These small penetration rates for
the financial sector should underpin
discretionary spending and property demand
over the long run.
•
Higher wages and fast employment growth
should also ensure that household spending
keeps rising at a faster pace. Consumer
confidence is also consistent with strong retail
sales, while vehicle sales will probably
continue to surge as well. (See Charts 3 & 4.)
Bank lending has been climbing (see Chart 5)
and should grow at a rapid pace too.
•
Inflation expectations have started to move up
again (see Chart 6) and will probably rise
further given the prospect that the upswing will
stay strong. Actual inflation has picked up too
and is expected to accelerate further in coming
months. Accordingly, we expect the policy
rate to rise from Q1, despite our monetary
conditions index suggesting that strong gains in
the real exchange rates have kept monetary
settings fairly tight. (See Charts 7 & 8.)
•
The main risk is a sharp reversal of capital
flows. Indonesia is the most vulnerable in
ASEAN given that the country has already
attracted a disproportionately large share of
capital inflows already. Debt spreads, earnings
multiples, the rupiah, also now look expensive
relative to average long-run average levels.
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP
Private cons’ptn
Total fixed invest.
4.7
4.0
4.0
4.5
4.9
2.8
6.0
5.5
9.0
6.5
5.5
10.0
6.4
6.0
10.0
Consumer prices
Unemp. rate
10.5
8.9
4.8
8.1
6.0
7.5
6.5
7.4
5.5
6.8
Gen’l gov’t bal(1)
Current account(1)
-1.3
2.7
-1.6
2.0
-1.3
0.5
-1.0
0.0
-0.5
-1.0
(1) As a % of GDP
28 Emerging Asia Economic Outlook 4/2010
Indonesia Charts
Chart 1: GDP by Expenditure (%-point annual contribution)
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
04
Inventories
Net Exports
Investment
Gov't Spending
Household spending
GDP % y/y
05
06
07
08
09
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
Chart 2: Capacity Utilisation & Business Sentiment
80
Business sentiment (Adv. 6m, RHS)
50
75
45
70
40
65
35
60
10
30
04
Chart 3: Consumer Confidence & Retail Sales
Consumer confidence (Adv. 9m, LHS)
130
55
Capacity utilisation (LHS)
05
07
06
08
09
10
11
Chart 4: Vehicle Sales (000s)
50
800
40
700
70
30
600
60
20
500
50
10
400
40
0
300
30
-10
200
20
70
-20
100
60
-30
0
Retail sales (% 3m y/y, RHS)
120
110
100
90
80
05
06
07
08
09
10
Motorcycles (LHS)
10
Chart 5: Bank Lending (% 3m y/y)
50
200
40
40
190
30
30
20
20
10
10
0
0
Total Private
Investment
-20
06
07
Consumer
Working Capital
08
09
115
110
09
10
-20
140
16
10
8
160
150
18
12
170
-10
20
14
180
10
6
4
2
0
07
08
09
10
Chart 8: Policy Rate & Consumer Prices
Indonesia
India
Philippines
Malaysia
Thailand
120
08
6-mth CPI Exp. (LHS)
6-mth Food Exp. (LHS)
CPI (% y/y) (RHS)
Chart 7: Monetary Conditions Index
125
07
06
Chart 6: Inflation & Inflation Expectations
50
-10
80
0
05
11
Cars (RHS)
125
14
120
12
115
110
14
CE Forecast
12
10
10
105
105
8
8
100
100
6
6
95
95
90
90
Tighter monetary conditions
85
85
80
80
00
01
02
03
04
05
06
07
08
09
10
4
4
BI Rate (%)
2
2
Consumer inflation (% y/y)
0
0
07
08
09
10
11
Sources – Thomson Datastream, CEIC, Bloomberg, Capital Economics
Emerging Asia Economic Outlook 4/2010 29
Malaysia
A good structural story
•
•
•
GDP contracted in q/q annualised terms in Q3
while growth eased relative to a year ago. (See
Chart 1.) The slowdown may well continue for
one or two more quarters. Final demand in the
West will stay weak while the boost from
inventories, which has lifted GDP since the
end of 2009 (see Chart 2), has now largely
come through. Electronics exports, in
particular, are at risk of falling sharply from
early 2011 once Christmas demand has
worked through (see Chart 3), which will
probably keep industrial output on its current
weak track too. (See Chart 4.)
Nevertheless, we still anticipate that the
slowdown will come to an end during the first
half of next year. We expect that GDP growth
will be back up to Malaysia’s trend pace of 5%
pa, or will be stronger, by this time next year.
The continued rapid expansion of intra-Asian
trade should partly offset the weakness in the
West. In addition, rising incomes, in tandem
with a supportive fiscal stance (see Chart 5),
should ensure that household spending keeps
expanding at a reasonable pace, even though
consumer debt levels are relatively high.
In addition, Malaysia is tackling the fall off in
foreign direct investment inflows through the
so-called Economic Transformation
Programme (ETP). The ETP over the period to
2020 has targeted investments totalling
$444bn, which is equivalent to 160% of
nominal GDP in 2010. Around 90% of this
total is slated to come from the private sector,
and some 70% of the latter will probably come
from domestic companies. Projects to improve
the transportation infrastructure will start from
Q1 next year, perhaps with an eye to holding
early elections in 2011.
30 Emerging Asia Economic Outlook 4/2010
•
The government is also aiming to accelerate
GDP growth through new reforms which
deregulate the economy. However, an
overhaul of the positive discrimination policies
toward bumiputra groups still looks too
politically contentious an issue to tackle. The
commitment to change appears deep-rooted
and we anticipate that there will some
progress. But the risk is that the private sector
does not buy into the reforms and the
implementation of ETP projects is delayed.
•
Consumer price inflation has stayed wellcontained. (See Chart 6.) What’s more, the
roll-back of subsidies will stay gradual while
there is still plenty of scope for more MYR
appreciation, at least on a trade-weighted
basis. (See Chart 7.)
•
Nevertheless, the central bank will not want to
be overly reliant on currency gains to keep
inflation at bay. Accordingly, we expect that
rate hikes will resume in Q1 and see rates
climbing to the middle of a neutral range,
which is 3-4%, by end-2011. (See Chart 8.)
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP
Private cons’ptn
Total fixed invest.
5.6
7.6
7.0
-1.7
0.7
-14.6
7.5
6.5
9.0
5.5
5.0
6.5
6.2
6.0
7.0
Consumer prices
Unemp. rate (%)(1)
2.4
3.4
0.6
3.7
1.8
3.4
2.5
3.2
2.5
3.2
Gen’l gov’t bal(2)
Current account(2)
-4.3
13.0
-7.0
16.5
-5.0
14.0
-4.0
13.0
-3.2
10.0
(1) End of period (2) As % of GDP
Malaysia Charts
Chart 1: GDP
Chart 2: GDP by Expenditure (%-point annual contribution)
16
% q/q (saar, CE estimate)
16
12
% y/y
12
15
15
10
10
8
8
4
4
5
5
0
0
0
0
-4
-4
-8
-8
-12
-12
-10
-16
-16
-15
2004
2005
2006
2007
2008
2009
-5
2010
-5
Net Exports
Inventories
Household Spending
2005
1.3
Merchandise Exports (% 3m y/y, LHS)
North America Book-to-Bill Ratio (RHS, adv. 4m)
30
1.1
1.0
10
0.9
0
0.8
0.7
-10
0.6
-20
-30
0.4
2006
2007
2008
2009
2008
2009
2010
20
20
10
10
0
0
-10
-10
Exports
-20
2010
-20
Industrial Production
0.5
2005
-15
2007
1.2
20
2004
-10
Chart 4: Exports & Production (% 3m/3m)
Chart 3: Malaysia Exports & Book-to-Bill Ratio (%)
40
2006
Investment
Govt
-30
-30
2004
2011
2005
Chart 5: Government Budget (% of GDP)
2006
2007
2008
2009
2010
Chart 6: Consumer Prices
10
25
25
10
20
20
8
15
15
6
10
10
4
4
5
5
2
2
0
0
0
0
-5
-5
-2
-2
-10
-4
Revenues
-10
01
02
Operating Exp
03
04
05
Dev Exp
06
07
08
Budget Bal
09
10E
CPI (% 3m/3m, LHS)
Food (% 3m/3m, LHS)
-4
Chart 7: Exchange Rate
120
2006
2007
2009
2008
2010
Chart 8: Policy Rate & Real Interest Rate (%)
Ringgit Real Trade Weighted Index (LHS)
Ringgit per US$ (Inverted, RHS)
115
6
CPI (% y/y, RHS)
2005
11F
8
6
3.2
4
4
2
2
0
0
3.4
110
Bank Negara Overnight Policy Rate
Real Interest Rate (BNM minus annual CPI)
3.0
6
3.6
105
3.8
100
4.0
95
Ringgit stronger
90
00
01
02
03
04
05
06
07
08
09
10
11
-2
-2
4.2
-4
4.4
-6
CE Forecasts
-4
-6
2005
2006
2007
2008
2009
2010
2011
Sources – Thomson Datastream, Bloomberg, CEIC, Capital Economics
Emerging Asia Economic Outlook 4/2010 31
Philippines
Private sector investment remains the missing piece
•
•
•
•
S&P’s upgrade of the foreign currency debt
rating (to BB) is a vote of confidence in the
ability of the government to improve the fiscal
position, lift spending on infrastructure through
the public-private partnership scheme, and
boost the investment climate. The optimism is
justified, given the Aquino Administration’s
strong political mandate. However, graduating
to investment grade looks several years away.
To reach this level, the Philippines first needs
to increase the low-for-Asia gross investment
to GDP ratio, from 19%, and the woeful tax
revenues to GDP measure. (See Chart 1.)
GDP fell q/q in Q3 (see Chart 2) but we still
expect above-trend growth in 2011-12. The
expansion of exports has stayed surprisingly
strong (see Chart 3), with electronics leading
the way. This may mean that inventories are
piling up somewhere and, surely, the prospect
of sustained weakness in the West will show
up in the data at some point. Nevertheless,
shipments to Asia will cushion the downside.
Domestic demand will probably stay wellsupported too. Overseas workers’ remittance
(OWRs) inflows have continued to climb at a
rapid pace given the diverse range of countries
where Filipinos work. Local labour market
conditions are better as well and the
unemployment rate is low by historical
standards. (See Chart 4.)
In addition, business investment, finally,
should surprise on the upside. The Philippines
remains an internationally competitive
location for electronics and high-technology
processing industries, while the infrastructure
improvement schemes, by lowering transport
costs, should create new opportunities and lift
private sector investment as well.
•
The budget deficit is on track to achieve, or
maybe better, the 4% of GDP target. (See
Chart 5.) Nevertheless, most of the
improvement has come through spending
curbs which will be tough to sustain. Despite a
better performance recently, both tax and
customs revenues are likely to fall short despite
the strong economy and the high-profile
campaign targeting tax evasion. We expect
that the budget deficit will narrow in 2011-12
but for this to be the case, revenues need to
rise sharply and investment will have to climb
far more rapidly than overall GDP.
•
The external accounts should stay in large
surplus (see Chart 6), which in turn will tend to
lift the peso further even though controls in
various forms will continue to be used to curb
the gains. Headline annual inflation has been
subdued in recent months. (See Chart 7.)
Nevertheless, we judge that the central bank’s
policy rate will need to rise from early next
year to ensure that inflation tracks inside the 35% range in 2011. (See Chart 8.)
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP
Private cons’ptn
Total fixed invest.
4.6
4.6
1.3
1.1
4.1
-5.7
6.5
6.0
7.0
5.5
5.5
7.5
6.0
5.8
8.0
Consumer prices
5.5
3.2
3.5
4.0
4.0
Gen’l gov’t bal(1)
Current account(1)
-3.0
0.6
-3.9
5.3
-3.9
7.9
-3.0
8.1
-2.5
6.5
(1) End of period (2) As % of GDP
32 Emerging Asia Economic Outlook 4/2010
Philippines Charts
Chart 1: Tax, Savings & Investment (% of GDP)
25
Chart 2: GDP
25
Gross Investment
Gross Savings
Tax Revenues
20
20
15
15
10
10
90
92
94
96
98
00
02
04
06
10
9
8
7
6
5
4
3
2
1
0
-1
-2
03
08
Chart 3: Merchandise Exports
25
18
40
20
16
30
15
20
10
10
5
0
0
-10
-5
-20
% m/m (RHS)
% 3m y/y (LHS)
-40
06
07
08
09
06
07
08
09
10
36
34
32
30
10
28
-15
6
26
24
22
20
4
98
10
Chart 5: Budget Balance (% of GDP)
99
00
01
02
03
04
05
06
07
08
09
10
Chart 6: Balance of Payment Position (3m av., US$m)
0
0
2000
-1
-1
1500
-2
-2
1000
-3
38
Employment Gains (000s, RHS)
Unemployment Rate (%, LHS)
12
-10
-25
05
05
14
8
-20
-50
04
04
Chart 4: Employment & Unemployment Rate
50
-30
10
9
8
7
6
5
4
3
2
1
0
-1
-2
% q/q sa
% y/y
Current account position (RHS)
Portfolio investment (LHS)
Direct investment (LHS)
1000
750
500
500
-3
250
0
-4
0
-4
-5
-5
CE Forecasts
-6
-6
-500
-250
-1000
-500
-1500
98 99 00 01 02 03 04 04 05 06 07 08 09 10 11 12
Chart 7: Consumer Prices (% y/y)
25
Headline
Fuel
Food
25
20
15
15
10
10
5
5
0
0
-5
-10
05
06
07
08
09
05
06
07
08
09
10
Chart 8: Policy Rate & Real Interest Rate (%)
20
04
-750
04
10
Reverse Repo Rate
16
16
Real Interest Rate (Reverse Repo Rate minus CPI)
12
12
CE Forecasts
8
8
4
4
0
0
-5
-4
-4
-10
-8
-8
00
01
02
03
04
05
06
07
08
09
10
11
Sources – Thomson Datastream, Bloomberg, Capital Economics
Emerging Asia Economic Outlook 4/2010 33
Thailand
Domestic demand-driven growth with politics the key risk
•
•
•
•
GDP contracted in q/q terms in Q3 (see Chart
1) while heavy floods in October-November
will have hit growth in Q4 as well. However,
the impact from the floods is unlikely to be
long-lasting given that only around 5% of
crops have been damaged while transport links
have not been severely affected. What’s more,
the government has stepped in quickly with
financial support and at a fiscal cost which
almost certainly will not be excessive.
Meanwhile, exports growth has slowed sharply
(see Chart 2), along with the expansion in
industrial output. Inventories rose in Q3 as
well. Nevertheless, a deep and long slowdown
remains unlikely. Strong intra-regional trade
will help while tourism (see Chart 3) should
continue to be lifted by arrivals from Asia too.
Domestic demand prospects are good.
Business and consumer confidence remains at
high levels. (See Chart 4.) Commodity prices
should stay high enough to keep supporting
rural incomes, the unemployment rate will
probably stay low, while the household
savings rate is high too and has plenty of scope
to fall. Progress in lifting the restrictions which
have held back some industrial projects should
also boost investment, while the strong yen is
encouraging a new wave of Japanese firms to
locate production facilities in Thailand.
What’s more, corporate debt levels are low,
banks are willing to lend and capacity use is
tightening. A capital replacement cycle is
kicking-in after more than a decade of
underinvestment. (See Chart 5.) Finally, fiscal
stimulus still has further to run as well. (See
Chart 6.) In addition to supporting low-income
34 Emerging Asia Economic Outlook 4/2010
groups, the fiscal stimulus package is also
focused on infrastructure improvements and so
will facilitate more private sector spending.
The upshot is that we expect investment to
climb faster than overall GDP in 2011-12.
•
Capital inflows have lifted the baht by more
than most other ASEAN currencies. (See Chart
7.) Further appreciation is likely given the
external surplus but additional measures to
manage the inflow look likely as well.
Meanwhile, the Bank of Thailand will continue
its adjustment of the policy rate to more
“normal” levels (see Chart 8), which should
ensure that inflation pressures stay contained.
•
Politics is the main risk. The government hopes
that good GDP growth, welfare schemes, and
divisions amongst opposition groups will keep
the tensions in check. This will probably be
the case. But the underlying strains, over the
flawed democracy and Bangkok’s dominance
of the economy and political system remain
unresolved. New elections have to be held by
late 2011 and the risk is that the result is not
accepted by large sections of the population.
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 - 08
GDP
Private cons’ptn
Total fixed invest.
4.7
4.4
3.8
-2.3
-1.1
-9.0
7.5
5.0
12.0
4.0
3.5
6.0
5.0
4.0
8.0
Consumer prices(1)
1.2
0.3
0.9
2.0
1.5
Gen’l gov’t bal(2)
Current account(2)
-1.1
3.4
-4.0
7.7
-5.0
4.0
-4.0
3.0
-3.0
2.0
(1) Core consumer prices (2) As % of GDP
Thailand Charts
Chart 1: GDP
Chart 2: Merchandise Trade (% y/y)
15
6
% q/q (RHS)
% y/y (LHS)
80
Exports
80
Imports
10
4
60
60
5
2
40
40
0
0
-5
-2
Global Financial Crisis
Asian Financial Crisis
-10
-15
20
20
0
0
-20
-20
-4
-40
-40
-6
-60
-60
01
97 98 99 00 01 02 03 04 05 06 07 08 09 10
02
Chart 3: Tourists (millions per month)
1.6
Last military coup (Sep '06)
1.4
1.8
100
1.6
95
1.4
90
1.2
1.2
1.0
1.0
0.8
0.8
Bangkok airport disruption
(Nov - Dec '08)
0.6
0.4
Red Shi rt protests turn violent
(April-May '10)
SARS (Nov '02 - July '03)
0.2
0.0
07
08
09
10
65
60
Business Sentiment - Expected Conditions (RHS)
55
80
0.6
75
0.4
70
0.2
65
0.0
60
50
45
40
35
2005
2006
2007
2008
2009
2010
Chart 6: Budget Balance (% of GDP)
Total
Private
Public
35
06
Consumer Confidence - For The Future (LHS)
Chart 5: Investment (% of GDP)
40
05
85
97 98 99 00 01 02 03 04 05 06 07 08 09 10
45
04
Chart 4: Confidence Indicators
Of fic ial (non s easonally adjuste d)
Capita l Ec onomic s (seasonally adjuste d)
1.8
03
45
2
40
1
35
0
0
-1
-1
-2
-2
-3
-3
30
30
25
25
20
20
2
Our
Forecasts
1
15
15
10
10
-4
-4
5
5
-5
-5
0
0
-6
1993
1995
1997
1999
2001
2003
2005
2007
2009
-6
00
01
Chart 7: Real Effective Exchange Rates (Jan. 07 = 100)
130
Indonesia
Singapore
Philippines
120
130
Thailand
Malaysia
120
110
100
100
90
90
Stronger
80
80
2007
2008
2009
2010
03
04
05
06
07
08
09
10
11
12
Chart 8: Thai Policy Rate (%)
Thai Policy Rate
6
6
O ur F orec asts
5
5
R eal Policy Rate
(Pol icy ra te minus
c ore CPI inflation)
4
110
02
3
4
3
2
2
1
1
0
0
-1
-1
00
01
02
03
04
05
06
07
08
09
10
11
12
Sources – Thomson Datastream, Bloomberg, Capital Economics
Emerging Asia Economic Outlook 4/2010 35
Vietnam
Most at risk of suffering an overheating crisis
•
•
•
The authorities are aiming for faster GDP
growth but inflation is accelerating from a
pace which is already too rapid. Both the
external deficit and the fiscal shortfall also
remain large. In addition, the upswing remains
dependent on a China-type expansion of bank
credit which, although helpful for a time, is
probably best reined back soon to avert the
development of a bad debts problem in the
financing system. Finally, and unlike China,
Vietnam does not have the cushion of high
foreign reserves and low debt, which would
enable the country to comfortably steer a path
through these challenges.
GDP growth accelerated in Q3 and is likely to
beat the official target of 6.5% for 2010 as
whole, while the recent acceleration in annual
consumer price inflation has taken the 8%
target for this year out of reach. (See Charts 1
& 2.) The good news is that the authorities do
now seem to be targeting stability over high
economic growth for its own sake. The central
bank (SBV) base rate was lifted in early
November and commercial banks are no
longer being encouraged to reduce their
lending and deposit rates. In addition, the
National Assembly has encouraged the
government to target a bigger reduction in the
2011 fiscal deficit. (See Chart 3.)
Unfortunately, Vietnam needs to adjust policy
much more to ensure that inflation is slowed
toward the regional average and that its fiscal
and external deficits are brought down to
levels which can be more comfortably
sustained. Accordingly, we anticipate that
GDP growth next year will be far slower than
the current official target of 7.0-7.5%. (See
Table.) There are already some signs that
growth is easing in the industrial sector. (See
Chart 4.) Nevertheless, there remains a high
risk that policies will stay too biased towards
achieving high growth at all costs. If this
happens, GDP next year would expand close
to the government target but, in our view, this
would make it even more likely that Vietnam
will eventually suffer another overheating and
balance of payments crisis.
•
On the external side, the merchandise trade
deficit has widened (see Chart 5) but higher
worker remittances and tourism receipts have
limited the damage caused to the current
account balance. What’s more, foreign direct
investment is rising again as well. (See Chart
6.) The upshot is that foreign reserve levels
have increased but, with import cover only 4-5
months, remain too low to credibly support the
dong exchange rate for any length of time.
•
The authorities aim to keep the exchange rate
stable over the next three months but this will
be a challenge. We expect further base rate
increases and more devaluations over the next
12 months. (See Charts 7 & 8.)
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP
Private cons’ptn
Total fixed invest.
7.2
6.9
11.3
5.3
3.7
4.3
6.7
6.5
12.0
5.8
5.5
9.0
6.4
6.4
8.0
Consumer prices
6.4
5.9
10.0
9.0
8.0
Gen’l gov’t bal(1)
Current account(1)
-2.0
-2.2
-7.7
-7.8
-6.0
-7.0
-4.0
-5.0
-2.0
-3.0
(1) As % of GDP
36 Emerging Asia Economic Outlook 4/2010
Vietnam Charts
Chart 1: GDP
Chart 2: Consumer Prices
% q/q SAAR (CE Estimates)
16
16
% y/y (Official data)
12
12
8
8
4
4
0
0
-4
-4
-8
-8
2004
2005
2006
2007
2008
2009
40
35
30
25
20
15
10
5
0
-5
-10
% 3m ma, annualised
2007
2010
2008
Chart 3: Budget Balance (% of GDP)
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
97
99
01
03
05
07
09
50
Trade Balance (RHS)
Exports (LHS)
2010
State Sector
Industrial Output
40
50
Foreign Sector
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
2006
11F
Chart 5: Merchandise Trade ($bn)
10
2009
Chart 4: Industrial Output (% 3m y/y)
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
95
40
35
30
25
20
15
10
5
0
-5
-10
% y/y
2007
2008
2009
2010
Chart 6: Foreign Direct Investment ($bn)
Imports cif (LHS)
8
6
70
5
60
4
3
6
4
70
60
Implemented FDI
50
50
Committed FDI
2
40
40
1
30
30
20
20
0
-1
2
-2
0
-3
2007
2008
2009
10
10
0
0
91
2010
Chart 7: Interest Rates (%)
95
97
99
01
03
05
07
09
11F
Chart 8: Exchange Rate Against the US Dollar
20
20
15500
18
18
16000
16
16500
14
14
17000
12
12
17500
10
10
18000
8
8
18500
CE Forecast
16
93
15500
16000
CE Forecast
16500
17000
17500
Dong weaker
18000
18500
6
SBV Base Rate
6
19000
SBV Reference Rate
19000
4
Deposit Rates
4
19500
Official Rate
19500
2
Bond Yields, 5-yr
2
20000
0
20500
0
2007
2008
2009
2010
2011
20000
20500
2005
2006
2007
2008
2009
2010
2011
2012
Sources – ADB, WEF, Thomson Datastream, Bloomberg, CE
Emerging Asia Economic Outlook 4/2010 37
Australia
Further policy tightening needed to curb inflation
•
Q3 GDP data are likely to be soft but strong
business investment should still bring abovetrend GDP growth in 2011-12. The
government’s watering down of its mining tax,
which starts in mid-2012, has helped to bolster
capital expenditure plans in the mining sector
while investment in other parts of the economy
is set to rise sharply too. (See Chart 1.)
•
The potential hit to commodity prices from
China’s probable structural shift away from
investment-led growth is something to watch.
But we anticipate that the impact on
Australia’s commodity exports, particularly
iron ore and coal, will not be large in 2011-12.
China should remain Australia’s most
important export market while trade links with
India and the Emerging Markets more
generally will deepen given ongoing
urbanisation and rising per capita incomes.
(See Chart 2.) Commodity prices have
probably peaked but the terms of trade are
unlikely to collapse. (See Chart 3.) The boost
to local incomes will be sustained.
•
•
One policy challenge will be managing the
restructuring of the economy. Concerns over
“two-speed” growth will probably climb given
that most of the population do not live in
resource-rich Western Australia and
Queensland (see Chart 4) while the Aussie
dollar (AUD) is likely to stay strong and will
hit other sectors. Australia will have to learn to
live with a wide disparity in unemployment.
A second challenge will be moving short-term
interest rates higher to restrain inflation while
also ensuring that growth does not stall.
Furthermore, this balancing act will be made
more difficult by stretched personal sector
balance sheets. (See Chart 5.) Nevertheless,
household spending is being underpinned by
the big improvement in the labour market,
which likely has further to go. (See Chart 6.)
The unemployment rate should fall below 5%
in 2011, and this usually brings faster rises in
wages. Population growth will also probably
stay rapid for a high-income economy.
•
Government stimulus is now going into reverse
and the aim is to generate budget surpluses
from FY2012-13. However, even with fiscal
consolidation, Australia cannot accommodate
a mining boom and rapid household spending
without generating more inflation. The upshot,
we judge, is that further Reserve Bank (RBA)
cash rate hikes should be expected in 2011.
This will increase rate differentials relative to
the US (see Chart 7) and support the AUD.
•
The key local risk is a property crash. The
tension here is between stretched affordability
(see Chart 8), rising mortgage costs, and very
low new build rates. Given the good labour
market outlook, prices levelling out or drifting
lower looks more probable than a meltdown.
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 - 08
GDP
Private cons’ptn
Total fixed invest.
3.4
3.9
6.7
1.2
1.7
-1.1
3.3
3.5
7.0
3.8
4.0
8.0
4.0
3.2
10.0
Consumer prices
Unemp. rate (%)(1)
3.1
5.5
1.8
5.5
3.0
5.0
3.0
4.7
3.0
4.5
Gen’l gov’t bal(2)
Current account(2)
1.1
-4.7
-4.1
-4.4
-2.0
-3.0
-1.0
-3.5
0.0
-4.0
(1) End of period (2) As % of GDP
38 Emerging Asia Economic Outlook 4/2010
Australia Charts
Chart 1: Capital Expenditure Plans (A$bn, fourth est.)
140
Chart 2: Merchandise Exports (A$trn)
140
7
120
6
6
100
100
5
5
80
80
4
4
60
60
3
3
40
40
2
2
20
20
1
1
0
0
Manufacturing
Mining
Other industries
120
Nb. 2011 = Jul.2010 - Jun. 2011
0
88
90
92
94
96
98
00
02
04
06
08
00
Terms of Trade (quarterly, RHS)
100
80
60
80
40
7
India
03
04
05
06
07
08
09
Tasmania
2%
ACT
2%
10
Northern
Territory
1%
Western
Australia
10%
90
New South
Wales
33%
70
20
60
0
50
90
92
94
96
98
00
02
04
06
08
Debt (LHS)
Queensland
20%
Victoria
25%
10
Chart 5: Household Finances (% of Disposable Income)
180
02
South
Australia
7%
110
100
US
Chart 4: Population By State/Territory (22m, 2009)
120
120
01
130
RBA Commodity Price Index (monthly, LHS)
Japan
0
10
Chart 3: Terms of Trade & Commodity Prices
140
China
Savings rate (RHS)
160
20
16
140
120
12
100
8
80
60
4
Chart 6: Unemployment Rate & Capacity Utilisation
Capacity Utilisation (%, Adv. 5m, LHS)
Unemployment Rate (%, inverted, RHS)
86
3.0
84
3.5
4.0
83
4.5
82
5.0
81
5.5
80
40
0
20
-4
0
Higher capacity utilisation,
Lower unemployment rate
79
2006
8
US
Our Forecasts
8
7
6
6
5
5
4
4
3
3
2
2
1
1
0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
250
2008
2009
2010
2011
250
Relative to Incomes
9
7
0
2007
Chart 8: House Price Ratios
10
Australia
6.5
7.0
2005
Chart 7: Australia & US Policy Rates (%)
9
6.0
78
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
10
2.5
85
Relative to Rents
200
200
Rebased Q1 1974 = 100
150
150
100
100
50
50
74
77
80
83
86
89
92
95
98
01
04
07
10
Sources – Thomson Datastream, Bloomberg, ABS, Capital Economics
Emerging Asia Economic Outlook 4/2010 39
New Zealand
Upswing set to stay weaker than is usual
•
•
•
Sustained recovery is not in doubt. (See Chart
1.) The commodity prices important to New
Zealand should stay high enough to provide
some lift from exports, even though the Kiwi
dollar will probably remain at a high level too.
In addition, the labour market is improving.
The unemployment rate dropped in Q3 (see
Chart 2), while earnings rose at a faster pace.
Income taxes were reduced at the beginning of
Q4 as well. What’s more, post-earthquake
reconstruction in Canterbury will provide a
boost in coming quarters and the Rugby World
Cup in late 2011 will also help.
Nevertheless, the upswing overall looks set to
stay far more sluggish than is typically the
case. This is because household sector
spending behaviour has changed and will
probably stay focused on reducing the high
debt level (see Chart 3) by boosting savings.
Furthermore, annual net immigration is likely
to hold at a far lower level in coming years
than was the case in 2008-09 (see Chart 4),
given the prospect that job opportunities will
be much better in Australia. Finally, the New
Zealand housing market will probably stay
under pressure too.
Recent data have shown that retail sales rose
in real terms in Q3 despite the downtrend in
consumer confidence. (See Chart 5.) However,
much of the rise last quarter will have been
due to the bringing forward of spending on big
ticket items to beat the 250bp rise in the goods
and services tax (GST) which started on 1st
October. Business sentiment within
manufacturing continues to point to a
contraction in that sector, which reflects the
challenges from the high NZD and sluggish
40 Emerging Asia Economic Outlook 4/2010
domestic demand. In addition, the October
services index pulled back too. (See Chart 6.)
•
Policy changes and supply disruptions from
the earthquake lifted non-tradeables inflation
in Q3. (See Chart 7.) What’s more, the hike in
GST will boost the annual gain in headline
inflation in coming quarters, probably to
around 5% by mid-2011. Nevertheless, the
Reserve Bank (RBNZ) remains confident that
long-run inflation expectations will be
anchored despite the imminent price surge.
Time will tell but our sense is that the RBNZ
will become more concerned about inflation
in 2011. Accordingly, we forecast that policy
tightening will resume from Q1 and that rates
will rise to 4.0% by year-end. (See Chart 8.)
•
S&P’s debt outlook downgrade is a warning
shot ahead of the half-year fiscal update in
December. To avoid a downgrade the
government will need to reinforce its plan to
move the budget back to surplus by 2015-16,
even given the prospect of a weak upswing.
TABLE 1: KEY FORECASTS
% y/y, unless stated
Forecasts
Average
2009 2010 2011 2012
99 – 08
GDP(1)
Private cons’ptn
Total fixed invest.
3.1
3.3
5.5
-1.7
-0.6
-13.3
2.0
2.5
1.5
4.5
2.5
6.0
2.5
2.0
4.5
Consumer prices
Unemp. rate (%)(2)
2.5
4.7
2.1
7.1
2.5
6.0
4.0
6.0
2.5
5.7
Gen’l gov’t bal(3)
Current account(4)
2.7
-6.2
-2.1
-2.9
-3.7
-4.0
-4.2
-4.5
-2.5
-5.0
(1) Production-based (2) End of period (3) As % of GDP, Fiscal
Years (July-June) (4) As % of GDP
New Zealand Charts
Chart 1: GDP
Chart 2: Labour Market
% q/q (RHS)
4
8
3
7
4
2
6
2
1
5
0
4
-1
3
-2
2
8
% y/y (LHS)
6
Our Forecasts
0
Trend is around 2.5% y/y
-2
-4
00
01
02
03
04
05
06
07
08
09
10
Unemployment Rate (%, LHS)
11
00
Chart 3: Household savings rate and debt
Savings Rate (RHS)
170
Debt (LHS)
5
130
-5
110
-10
90
70
-15
50
-20
95
97
99
01
03
05
07
03
04
05
06
07
08
09
10
Net immigration (Adv. 12m, LHS)
House prices (% y/y, RHS)
25
4000
20
3000
15
2000
10
1000
5
0
0
-1000
-5
-2000
-10
-15
-3000
93
09
Consumer Confidence (LHS)
Retail Sales (% y/y, RHS)
30
5000
Chart 5: Retail Sales & Consumer Confidence
140
02
6000
0
93
01
Chart 4: Net Immigration & House Prices
150
91
60
50
40
30
20
10
0
-10
-20
-30
-40
Change in Employment (000s, RHS)
95
97
99
01
03
05
07
09
11
Chart 6: Manufacturing & Services PMIs
10
Services
65
Manufacturing
60
130
5
110
60
Expansion
55
120
0
100
-5
90
55
50
50
45
45
40
40
35
80
-10
2006
2007
2008
2009
35
Contraction
30
2010
2008
Chart 7: Consumer Prices (% y/y)
8
7
6
5
4
3
2
1
0
-1
-2
-3
CPI
Tradables
01
02
03
04
05
06
Non-tradables
07
08
09
2009
30
2010
Chart 8: Policy Rate (%)
RBNZ targets CPI inflation at 1-3%
over the medium term
00
65
10
8
7
6
5
4
3
2
1
0
-1
-2
-3
10
CE Forecast
9
8
10
Forecasts
Market Expectations
(up to September 2011)
9
8
7
6
7
6
5
4
5
4
3
2
3
2
1
0
1
0
2008
2009
2010
2011
Sources – Thomson Datastream, Bloomberg, REINZ, Capital Economics
Emerging Asia Economic Outlook 4/2010 41
TABLE 5: GDP
Annual Averages
2010F
China
(1)
Mainland China
Hong Kong
Early Industrialised
South Korea
Taiwan
Singapore
South Asia
(1)
India
(1)
Sri Lanka
South East Asia
(1)
Indonesia
Thailand
(1)
Malaysia
Philippines
(1)
Vietnam
Australasia
Australia
New Zealand
Emerging Asia
Japan
US
Euro-zone
2011F
% q/q saar
2012F
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10F
10.2
6.5
8.0
4.0
9.0
4.3
6.4
-12.2
14.5
13.0
17.1
1.2
11.1
10.0
8.8
8.7
8.2
5.7
9.1
2.8
8.7
1.0
6.0
10.5
14.0
3.5
10.5
4.5
5.0
3.5
6.0
1.0
-4.1
-11.0
9.8
13.5
18.5
13.4
11.8
11.1
0.7
18.4
-1.0
8.8
17.3
45.6
5.8
1.9
27.3
3.0
0.1
-18.7
2.0
1.0
10.0
8.8
8.0
8.6
8.0
8.8
6.0
3.9
-2.4
7.7
8.9
14.6
10.4
0.5
7.8
12.1
1.8
8.4
13.7
15.2
6.0
4.0
6.0
6.0
7.5
7.5
6.5
6.7
6.5
4.0
5.5
5.5
5.8
6.4
5.0
6.2
6.0
6.4
4.5
-7.3
-13.3
-6.1
-1.3
4.5
8.7
10.2
5.3
9.9
5.6
8.5
9.4
3.6
8.3
7.6
15.9
12.9
6.6
14.0
5.2
15.1
8.8
15.6
-6.6
6.5
-2.3
4.6
5.6
11.3
4.1
-0.9
-4.1
-1.9
11.6
3.0
-1.0
-1.0
1.6
4.0
3.3
2.0
8.6
3.5
2.7
1.6
3.8
4.5
6.9
1.5
2.0
0.5
4.0
2.5
7.6
1.0
2.0
1.0
2.9
-3.5
3.0
-15.8
-4.9
-9.5
2.2
0.6
10.9
9.9
-0.7
-0.6
1.3
0.9
13.3
-1.5
1.6
1.7
4.2
4.0
7.8
4.2
5.0
0.8
2.7
2.2
9.6
6.6
3.7
1.4
4.9
0.7
7.2
1.8
1.7
3.9
1.0
-0.8
7.4
3.9
2.5
1.4
4.0
5.0
5.5
-1.2
2.0
0.4
Q2 10
Q3 10
(1) Capital Economics estimate of q/q seasonally-adjusted annualised rate (saar)
TABLE 6: HEADLINE CONSUMER PRICES
Annual Averages
% y/y
2010F
Mainland China
Hong Kong
Early Industrialised
South Korea
Taiwan
Singapore
South Asia
(2)
India
Pakistan
Sri Lanka
South East Asia
Indonesia
(3)
Thailand
Malaysia
Philippines
Vietnam
Australasia
Australia
New Zealand
Emerging Asia
Japan
US
Euro-zone
2011F
2012F
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q4 10
3.2
2.2
2.8
3.0
3.0
3.5
-8.0
1.8
-8.6
-0.1
-6.3
-0.9
-1.9
1.4
2.8
1.9
4.5
2.7
4.9
2.3
4.9
2.6
3.0
0.9
3.5
3.5
0.8
3.0
3.0
1.5
2.0
3.9
0.0
0.2
2.8
-0.8
-0.3
2.0
-1.3
-0.8
2.4
-1.3
0.9
2.7
1.3
3.1
2.6
1.1
3.4
2.9
0.4
0.0
4.1
0.6
3.5
8.5
15.0
6.0
6.5
12.0
6.0
5.5
10.0
5.5
3.5
14.9
7.8
0.5
10.7
2.4
0.2
10.0
0.9
4.3
13.2
3.0
9.5
13.0
6.6
10.6
13.8
5.3
9.1
0.0
5.0
8.6
15.3
6.6
6.0
0.9
1.8
3.5
10.0
6.5
2.0
2.5
4.0
9.0
5.5
1.5
2.5
4.0
8.0
8.6
1.6
3.7
6.9
19.9
5.6
-0.1
1.4
3.2
11.3
2.8
-0.5
-2.4
0.3
3.9
2.6
0.1
-0.2
2.9
2.4
3.7
0.4
1.3
4.3
6.5
4.4
0.9
1.6
4.2
9.5
6.2
1.1
2.0
3.8
8.7
5.7
1.1
2.0
2.8
1.3
3.0
2.5
4.5
-0.6
1.5
1.5
3.0
4.0
4.0
0.2
0.5
1.0
3.0
2.5
3.7
-0.5
0.3
0.5
2.5
1.9
-1.3
-0.1
-0.2
0.9
1.5
1.7
-2.9
-1.0
-1.0
0.2
1.3
2.0
-2.4
-2.2
-1.6
-0.4
2.1
2.0
0.7
-2.1
1.5
0.4
2.9
1.7
4.3
-1.1
2.4
1.1
3.1
1.5
5.4
-1.0
1.8
1.5
2.8
0.0
5.0
-0.8
1.2
1.7
2.9
4.2
5.3
0.2
1.2
1.9
(1) October or latest data except Australia and New Zealand which are forecasts (2) Wholesale prices rather than consumer prices
(3) Core (exc. raw food and energy) rather than headline
42 Emerging Asia Economic Outlook 4/2010
(1)