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Important disclosures can be found in the Disclosures Appendix
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Standard Chartered Asia Focus | 24 September 2012
The resurgence
Highlights
Asia is still partly insulated from the West – in much of the region,
domestic demand has grown more strongly than exports in 2012.
However, Asia has been slowing in recent months. We expect growth to
turn up in H1-2013, and we forecast better growth in 2013 than in 2012 for
almost all economies in the region. Indeed, we expect growth in Thailand,
Indonesia, Malaysia, the Philippines and Taiwan to exceed 10-year
average rates.
A weak US recovery and ugly deleveraging in Europe mean a difficult
external environment. The US has to avoid the fiscal cliff towards which it
is heading. The ECB‟s move to accept bond purchases buys Europe time
and means that a Greek exit from the euro area in 2013, while likely,
should not be too disruptive.
Flat US interest rates until 2015, unlimited QE3, and the possibility of
unsterilised ECB action will make Asian central banks nervous. We expect
them to start hiking in Q2-2013. We expect China to follow in Q4-2013.
China is key. We look for a pick-up in activity in H1-2013, and growth of
7.8% for the full year. The authorities are content with current growth,
apparently believing that some deleveraging is necessary. The labour
market still looks firm.
We are cautious on India, forecasting growth of 6% for FY14. Recent
reform measures are welcome but will not help much in 2013. The twin
budget and current account deficits make the Indian rupee (INR)
vulnerable and raise the risk of a sovereign downgrade.
The Philippines should be the star of 2013. We expect growth of 5.4%,
supported by a surging business services sector and FX inflows in
anticipation of the sovereign upgrade we expect in 2014.
Asian currencies should appreciate in 2013 on capital inflows early in the
year, rate hikes and stronger growth expectations. Signs of a resumption
of solid growth in China should also boost regional currencies. However,
given lower current account surpluses, the scale of FX appreciation should
be smaller than in years past. The Philippine peso (PHP), Korean won
(KRW) and Taiwan dollar (TWD) should outperform; The Singapore dollar
(SGD) and Indonesian rupiah (IDR) are likely to underperform.
We also look at credit markets in Asia. Overall, issuance has boomed in
2012, and strong fund inflows have continued. We expect 2013 to be
another year of strong issuance. Valuations are not great, but fund flows
are still robust, so we remain cautiously long. Any signs of an improvement
in global growth expectations could trigger a shift into Asian equities.
Contents
Global and regional overview: Resilience
in the midst of slowdown p. 2
Economy insights:
Australia: Living with a sub-8% China
p. 6
Bangladesh: Domestic conditions to
support growth p. 8
China: No country for old ideas p. 10
Hong Kong: An overcast dawn p. 12
India: At a crucial juncture p. 14
Indonesia: Yudhoyono prepares for a
legacy p. 16
Japan: Signs of fading growth
momentum p. 18
Malaysia: Domestic boost p. 20
Philippines: Maintaining momentum
p. 22
Singapore: Still in difficult waters p. 24
South Korea: Stimulus expected p. 26
Sri Lanka: Policy measures gain traction
p. 28
Taiwan: Economy to show resilience
p. 30
Thailand: Driving growth from within
p. 32
Vietnam: A warmer 2013 p. 34
Forecasts p. 36
Reference tables p. 40
Standard Chartered Asia Focus
Global and regional overview – Resilience in the midst of slowdown Gerard Lyons, +44 20 7885 6988
24 September 2012 2
In this overview, we explore three key issues confronting
the world economy. First, below, is an overview of the
global economy. Second is a summary of the present
situation in Asia. Third, we look at some of the structural
issues impacting Asia.
Global trends
Global growth has slowed this year. And, in recent
months, sentiment has deteriorated noticeably as the euro
crisis has evolved. Since the financial crisis, we have
stressed three underlying structural developments that are
impacting the world economy.
The first is the debt deleveraging in the West. A lesson of
financial crises is that the subsequent hit to economies is
hard, and recovery is slow as balance sheets are
restructured. History shows that demand is sluggish in a
post-financial-crisis recovery. This helps to explain the
weak recovery in the West, where the US is seeing only
steady growth, while problems in the UK and euro area
persist.
One of the many issues for Asia is whether the latest
policy developments will change the situation. In the
West, central banks have effectively become the shock
absorbers in that, whenever there is disappointing
economic news, they ease policy. In recent weeks there
has been further evidence of this with the US Fed's QE3
and the European Central Bank's bond-buying operations.
The message is that interest rates in the West will stay
low for some time, potentially causing future problems for
Asia as liquidity seeks a home there. Japan, too, has
extended its asset purchase programme, providing
additional liquidity to support its flagging economy.
The Fed's actions reflect the fact that this is a weak US
recovery compared with previous cycles. We expect US
rates to stay low for some time. The „fiscal cliff‟ and
„regulatory mountain‟ mean there is considerable year-end
uncertainty in the US. Growth is likely to be steady, not
spectacular, in the medium term.
In Europe, there are some who view the ECB's bond
buying as a „game changer‟. More likely, it is a „time
buyer‟. It is aimed at limiting the downside, and at
improving the transmission mechanism of monetary policy
given the problems in the interbank market. Some
economies, like Ireland, are adjusting, but demand is still
weak across the euro area. And this remains the problem.
The second major development is the shift in the balance
of economic and financial power to the East. This makes
the global economic cake bigger. It does not mean all
emerging economies grow all the time. Rather, it implies
that the trend is upward, but there will be setbacks along
the way. Setbacks are part and parcel of this global
change, and offer buying opportunities.
32-62-72: These three figures are key to understanding
recent world economic trends. USD 32trn was the size of
the world economy at the start of this century; just under
USD 62trn was its size prior to the financial crisis; and
USD 72trn is the likely size of the world economy at the
end of this year. This means that, despite the crisis, the
world economy has continued to grow. These figures are
in nominal terms. Some of this reflects inflation, but most
of it reflects growth led by emerging economies.
The third key development is structural change across the
globe. In the West, the reliance on continued monetary
stimulus may delay structural reform, as has been the
case in Japan over recent decades. There is a fear that it
could lead to zombie banks and zombie firms. In contrast,
many companies across the emerging world are seeking
to move up the „value curve‟. Unfortunately, not all
emerging economies are pushing through the reform
agenda as they should.
Figure 1: Real GDP growth, Standard Chartered forecasts
% y/y
Sources: CEIC, Standard Chartered Research
0
2
4
6
8
10
12
CN HK TW KR SG MY ID TH PH VN IN
2011E 2012F 2013F 2000-10 average
Standard Chartered Asia Focus
Global and regional overview – Resilience in the midst of slowdown
24 September 2012 3
Last December, we predicted global growth of 2.2% for this
year. This was the lowest forecast from any major
organisation or financial institution A few months ago, we
revised this to 2.6%. We use slightly different weightings to
the IMF, which reports growth on a PPP basis, but our story
is consistent with the IMF‟s analysis. Back in December
2011, our expectations for this year were a steady, not
spectacular, recovery in the US; recession in the UK and
Europe; and cooling across the emerging world. We
thought China could weaken in the first half, possibly even
recording growth with a 6% handle, and expected a pick-up
in growth by Q3. It turns out that the US recovery has been
sluggish and that Europe has remained in recession. China
was slightly stronger in H1 than we had expected, but it
looks like the current weakness will last slightly longer than
expected. India, meanwhile, was expected to slow but has
weakened more than we thought. Next year, we believe
global growth will rise to 3.1%, and, if this is to be achieved,
China will play an important role.
In looking at Asia in this global context, three words stand
out: risk, insulation and differentiation. The global context
means that financial markets are now not fully pricing in
risk, while, at the same time, it is difficult to say what
constitutes a risk-free asset. Despite its present cooling,
one could argue that Asia offers more attractive return
opportunities given its better growth prospects. Yet,
international investors still appear underinvested in the
region, and markets with much opportunity – including
Indonesia and Thailand – are less favoured than the „safe‟
destinations of Hong Kong and Singapore.
Insulation reflects the fact that, while Asia is not fully
decoupled from events in the West, it is better insulated
and able to rebound, as was seen in the wake of the global
financial crisis. Likewise now.
Differentiation reflects the need to make a distinction
across the region: between the more open economies, hit
harder by the global slowdown, and closed economies. It
also points to the need to differentiate between the export
and domestic sectors. In much of Asia, domestic demand
has been growing more strongly than the export sector, a
welcome step towards rebalancing the global economy.
Asia's cycle is cooling
The outlook depends on the interaction between the
fundamentals, policy and confidence. Throughout this
year, I have stressed that the outlook for any region or
country depends on the interaction between these three
key factors.
For Asia, the underlying fundamentals remain good but
the near-term outlook continues to be impacted by events
in the West. Naturally, there are significant differences
across the region, as the latest economic performance
has shown. Because of the growth it has seen in recent
years, Asia is at a different stage of the cycle to
economies in the West.
Meanwhile, Asia's policy cupboard is relatively full, and in
recent months it has been geared more towards boosting
growth. This is in sharp contrast to over a year ago, when
inflation was the worry. Now, downside risks to growth
have come to the fore, and the policy bias across the
region has shifted towards easing. Still, it is necessary to
look at each country on its own merits to determine the
immediate policy outlook.
Figure 2: Asian regional inflation average
Figure 3: Post-crisis GDP levels in Asian economies
Real GDP, seasonally adjusted, Q4-2008 = 100
Sources: CEIC, Bloomberg, Standard Chartered Research Sources: CEIC, Standard Chartered Research
-2
-1
0
1
2
3
4
5
6
7
8
2008 2009 2010 2011 2012 2013
Q4 09
Q4 10
Q4 11
80
90
100
110
120
130
140
CN IN SG ID TW VN MY KR HK PH TH
Bottom bar = Q4-09 Middle bar = Q4-10
Top bar = Q4-11
Standard Chartered Asia Focus
Global and regional overview – Resilience in the midst of slowdown
24 September 2012 4
Confidence is the hardest to forecast but can often have
the most dramatic near-term impact. And, indeed, there is
some evidence of this now. In recent months, economic
and financial-sector confidence across Asia has
deteriorated. At the moment, this is consistent with the
cooling of growth that we had factored into our thinking for
this year, but the outlook needs to be watched closely. We
were anticipating some rebound in H2-2012 in Asia, and
this remains our thinking, despite the more prolonged
slowdown in China. But contagion from the euro-area
crisis has hit exports, and worries about China's
immediate outlook are weighing on the region.
We have continued to stress the need to differentiate
between small- to medium-sized economies across Asia,
which are more exposed to weaker global activity, and the
more closed economies, which tend to enjoy more stable
growth rates.
Overall, Asia is enjoying growth rates above those in the
West. Even Japan is forecast to grow at a faster pace
than the US this year. But the recent slowdown is most
apparent in the seasonally adjusted quarterly data, which
shows contractions in Q2 in Hong Kong, Taiwan and
Singapore. The Philippines and South Korea were also
weak in Q2. In previous cycles, weakness in exports soon
spread to weaker domestic demand. Now, as the
domestic economies have grown, the previous
correlations may not hold as strongly.
Inflation has been trending downwards in Asia throughout
2012 and is expected to be around 3% in Q2, down from its
post-crisis peak of 5.9% in July 2011. Whilst the inflation
situation is currently largely benign, expected food-price
increases and rebounding oil prices could create inflationary
risks for H1-2013. The most dramatic deceleration in inflation
has been in Vietnam, where it dropped to 8.6% in Q2-2012
from 22.5% in Q3-2011. The most closely watched inflation
figures are in India, where inflation remains stubborn, and in
China, where inflation could accelerate in 2013 after
moderating this year.
We remain cautious about inflation across Asia on a two-
year cycle. For now, falling inflation may allow further easing
if needed, though the picture varies on an economy-by-
economy basis. Indonesia, for instance, may hike rates next
year, reflecting the possibility that growth there may be
above trend. The rest of the region may rebound, with growth
stronger than in the West but below the previous trend. This
is shown in Figure 1.
Longer-term issues
Much attention has recently been focused on India and
China, where the challenges have been greatest.
India has been hit over the last year by a loss of
confidence and a loss of economic momentum as a lack
of reform progress and public alarm at the extent of
corruption have held back growth. Instead of taking
advantage of healthy growth in previous years to push
through necessary reforms, Indian politicians seemed to
believe that growth in itself was enough. Clearly it wasn't,
as the weakness of the last year has shown. The
economy soon ran into inflationary bottlenecks, prompting
the Reserve Bank of India to hike rates. This tightening of
monetary policy, along with long-standing underlying
issues, has slowed growth. The government is now trying
to push reforms through, recently announcing some major
Figure 4: India’s twin deficits – current account and fiscal
% of GDP
Figure 5: India’s governance deficit
Number of cabinet decisions taken in a year
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
(5.5)F
(3.4)F
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
Mar 04 Mar 07 Mar 10 Mar 13
Fiscal deficit
Current account deficit
20 70 120 170 220 270
Jul 05 - Jun 06
Jul 06 - Jun 07
Jul 07 - Jun 08
Jul 08 - Jun 09
Jul 09 - Jun 10
Jul 10 - Jun 11
Jul 11 - Jun 12
Standard Chartered Asia Focus
Global and regional overview – Resilience in the midst of slowdown
24 September 2012 5
measures that had previously been shelved – better late
than never, but still a long way to go.
China, too, faces challenges. Its economy is slowing, but
there is not yet a sense of panic. China is moving from an
investment- and export-led economy to one driven more by
consumer spending. One implication of changing the model
for China's economy is the need to focus less on the
quantity and more on the quality of growth. That means
worrying less about the decimal point in China's GDP
number and instead seeing where growth is coming from.
China was hit hard by the global recession as exports
slowed. It then unveiled a huge fiscal stimulus. Although
the economy rebounded strongly, the authorities are
reluctant to repeat the scale of that boost now. There is a
feeling that pumping so much money into the economy
created problems, leading local governments into financial
difficulty and causing many things to be rushed. This meant
that not all investment spending was productive or sensible;
for example, some poor-quality roads were built, and there
have been serious safety issues with the rail build-out.
The current policy picture in China is one of proactive
fiscal policy and prudent monetary policy. The implication,
therefore, is that there is no need to worry about this
slowdown getting out of hand, as the authorities can ease
policy to prevent growth from weakening too much.
Indeed, since May, they have done just that. In any case,
this is not like the end of 2008, when 30 million migrant
workers lost their jobs – at least, not yet. In fact, 11 million
new jobs have been created this year, according to official
figures. And the authorities seem to have learned from
past mistakes. For instance, they are now relying more on
the private sector for investment projects, rather than
having purely public-led investment initiatives.
To achieve stronger domestic demand, some structural
changes are needed across Asia. This was highlighted in
the wake of the crisis at one of the annual meetings of the
Asian Development Bank. In order to move from export-
led to domestically driven growth, Asia needs to deepen
its bond markets, ensure finance for small- and medium-
sized firms to generate jobs, and develop its social
welfare system. The latter is seen as important in order to
discourage excess savings and to encourage people to
spend. All of this takes time. But Asia is moving in the
right direction.
Nonetheless, challenges from outside the region mean
that there is an air of uncertainty, but not pessimism,
among businesses, and a desire for the region generally –
and policy makers in particular – to avoid complacency.
Asia is in better shape than the West but has some
problems of its own. And this highlights the necessity of
macroeconomic stability.
Overall, Asia‟s economy is cooling. In recent months,
confidence has been hit. Our forecasts suggest that there
will be some recovery in growth rates across the region
next year. But for many countries, growth will be below the
trend rate seen over the last decade. Increasingly, Asia will
be the main driver of global growth. Inflationary pressures
are easing, but inflation remains a key worry for the region,
particularly if continued low interest rates in the West feed
increased inflows into Asia in the coming years.
Figure 6: Asian export growth
% y/y
Figure 7: China’s GDP growth
Real GDP, %
Sources: CEIC, CRB, Standard Chartered Research Sources: IMF – World Economic Outlook,
Standard Chartered Research
-27%
42%
6%
-40
-30
-20
-10
0
10
20
30
40
50
Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 0
2
4
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16
1981 1986 1991 1996 2001 2006 2011
Standard Chartered Asia Focus
Australia – Living with a sub-8% China Kelvin Lau, +852 3983 8565
Ned Rumpeltin, +44 20 7885 5558
24 September 2012 6
Steady as she slows
A less helpful China
Australia should be well positioned to benefit as China revs
up its stimulus engine to counter slowing growth. This,
however, becomes a moot point when Beijing – after months
of measured policy easing – has yet to succeed in stabilising
growth, let alone turning things around. We now expect
China to record weak but stable growth in Q4-2012 and to
undergo a slow and difficult recovery in H1-2013, rather than
a more decisive upswing. China‟s shallower recovery
trajectory will mean less of a lift to Australia‟s growth over the
next 12 months. In addition, reduced upside for commodity-
price appreciation is weighing on Australia‟s terms of trade.
Given these factors, we revise down our GDP growth
forecasts for Australia to 3.3% for 2012 and 2.9% for 2013
(from 3.5% for both years).
These new forecasts are far from devastating; in fact, they
are still consistent with growth “running close to trend”, as
Reserve Bank of Australia (RBA) Governor Glenn Stevens
has described recent economic indicators. The terms of
trade have deteriorated from their Q3-2011 record high, but
they are still above their 2008 peak. While downside risks
are apparent in the coming months, we expect prices of
Australia‟s key commodity exports, such as iron ore, to
recover gradually throughout 2013. Australia‟s long-running
mining boom, plus the RBA‟s flexibility to cut policy rates
again if needed, will also provide support.
The beginning of the end?
Whether Australia‟s mining investment boom – which helped
the economy to weather the 2008-09 global financial crisis –
is coming to an end has been hotly debated in the market of
late. As the saying goes, all good things must come to an
end. The RBA has also said so: “The peak of the resource
investment boom as a share of gross domestic product, the
highest such peak in at least a century, will occur within the
next year or two”.
To take a glass-half-full view, though, the expected peak in
the next year or two means it is not imminent. The latest
Australian Bureau of Statistics survey shows that private
businesses still expect a 41.4% rise in mining investment in
FY13 (year ending June 2013), to AUD 119bn (see Figure
1). While recent news that some longer-term mining
expansions are being shelved points to a less favourable
operating environment for miners (in the form of narrowing
margins and more intense competition), we believe the boom
can still carry the Australian economy a bit further.
It is uncertain how quickly mining investment will retrace from
its peak once this happens, whether in FY14 or FY15.
Hopefully, China and the global economy will be much
healthier by then. A structural uptrend in commodities over
the medium term should also help to ensure that mining
investment comes off its peak in an orderly manner. If
anything, the non-mining sector, having long been a victim of
the „Dutch disease‟, could start playing a bigger role in
driving growth by then. Less crowding-out will mean a more
balanced economy.
RBA can afford to play it safe by cutting again
The combination of a stabilising (at best) Chinese economy,
subdued commodity prices, and the government‟s goal of
balancing the fiscal budget this fiscal year underpins our
view that near-term risk to policy rates is to the downside.
We see room for another 25bps cut by the RBA sometime in
Figure 1: Mining investment boom is still intact
New mining capital expenditure, actual & estimated, AUD mn
Figure 2: Recent disappointment in a still-tight job market
Employment change, thousands, 3mma
Sources: ABS, Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
0 30,000 60,000 90,000 120,000
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13 (F)
-15
-10
-5
0
5
10
15
20
25
30
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Standard Chartered Asia Focus
Australia – Living with a sub-8% China
24 September 2012 7
Q4-2012, given that inflation is not a concern (the RBA
continues to see inflation as consistent with its 2-3% average
target over the next one to two years, and we agree).
Increasingly mixed domestic economic indicators (following
stronger-than-expected readings across the board for May
and June) could also prompt the RBA to play it safe by
easing pre-emptively, as it did in Q2. For example, the
surprise drop of 8,800 in employment in August (Figure 2)
has revived market concerns that the impressively steady
unemployment rate since the global downturn started in 2011
may not be sustainable. Recent data on building approvals
has also been disappointing, while consumer confidence is,
at best, stabilising at weak levels for now (Figure 4). The
RBA‟s monetary flexibility should underpin domestic
resilience; this, coupled with the mining investment boom,
should help Australia to weather any further drag on headline
growth from the external sector.
Our call for another 25bps rate cut in Q4-2012 is broadly in
line with what the AUD OIS is currently pricing in (30bps of
cuts by year-end). Beyond that, we expect the RBA to keep
interest rates steady until at least Q3-2013; the additional
55bps of RBA cuts the market is pricing in over the next 12
months appear excessive, in our view.
FX outlook
AUD faces its fair share of headwinds
Australia‟s terms of trade have deteriorated sharply amid the
recent collapse in iron ore and coal prices. The persistently
high value of the Australian dollar (AUD) has contributed to
the trade balance slipping back into deficit this year, while
the domestic economy is also showing signs of deceleration.
Concerns about a slowdown in mining capex and the
housing market have added to the view that Australia‟s boom
period is over.
It is important to note, however, that the AUD is often more
responsive to external factors than domestic ones. In this
context, the AUD has remained remarkably steadfast despite
concerns about China‟s growth prospects. Recent gains in
global equity markets account for some of this resilience, as
the AUD is often a reliable barometer of broad investor
sentiment. Here, the Federal Reserve‟s renewed quantitative
easing programme may boost the performance of risk assets
in coming weeks, providing further support to the currency.
Substantial bond-market inflows from both private- and
public-sector accounts have also supported the currency.
While such inflows have slowed in recent months alongside
slower export growth in key Asian economies, we expect
these flows to remain an important source of support over
the medium term. With markets pricing in roughly 90bps of
further policy rate cuts over the next 12 months, if the RBA
cuts by only another 25bps in Q4-2012 – as we expect – this
may be mildly positive for the AUD as such expectations
diminish.
Figure 3: Retail sales have ended their recent impressive run
Retails sales, % m/m
Figure 4: Still waiting for domestic green shoots
Consumers are not convinced yet
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
-1.0
-0.5
0.0
0.5
1.0
1.5
Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12
80
90
100
110
120
130
140
-60
-40
-20
0
20
40
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80
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Consumer Confidence Index (RHS)
Building approvals (% y/y)
Standard Chartered Asia Focus
Bangladesh – Domestic conditions to support growth Samantha Amerasinghe, +94 11 2480015
Nagaraj Kulkarni, +91 22 6115 8842
24 September 2012 8
Downside risks may offset gains
Economic momentum is reasonably strong in the short term.
Improving domestic macroeconomic conditions, particularly
on the inflation and exchange rate fronts, should cause
growth to pick up to 6.5% in FY13 (year ending 30 June
2013) from our forecast growth of 6.1% for FY12. We believe
stronger domestic demand will drive this improvement.
However, the weak global outlook – particularly the impact
on Bangladesh‟s key export markets and the spillover effects
from the euro-area crisis – concerns us. Political tensions are
high, affecting the real economy via weak sentiment and
investor caution. Power shortages, poor infrastructure,
declining exports amid the faltering global recovery, and the
threat of political instability are risks to our 6.5% growth
target for FY13.
Monetary easing is possible in H1-FY13
Monetary policy remains accommodative, with a special
focus on stimulating „inclusive growth‟ while keeping
inflation at moderate levels. Headline inflation averaged
10.6% in FY12 and remained stubbornly high at the start of
FY13 due to sharp increases in non-food inflation driven by
higher domestic fuel and energy prices. However, it slowed
to a 20-month low of 7.9% y/y in August. We expect
domestic price pressures to continue to ease, in line with
the gradual deceleration in M3 (broad money supply)
growth. We have therefore revised down our FY13 inflation
forecast to 8.1%. Falling inflation could be a boon to
Dhaka‟s depressed stock market.
In line with our view, Bangladesh Bank (BB) kept rates on
hold in H2-FY12 after hiking the benchmark repo rate by
50bps to 7.75% in January. We expect the existing monetary
policy stance to continue, but lower inflation might prompt BB
to cut policy rates by at least 25bps in H1-FY13 (to 7.50%) to
boost liquidity and stimulate growth.
IMF loan – A buffer against external headwinds
Under the IMF loan package approved in April, Bangladesh
will receive USD c.987mn in seven equal instalments over
three years. This is a clear positive in terms of stabilising
the balance-of-payments (BoP) position. The loan is
extended under an Extended Credit Facility (ECF) and
carries a 0% interest rate, with a grace period of 5.5 years
and a final maturity of 10 years; it can be extended for two
additional years.
The BoP position is improving – the current account balance
returned to a USD 1bn (0.9% of GDP) surplus in FY11, and
we expect another surplus for FY12 owing to weakness in
the Bangladeshi taka (BDT); the surplus is likely to narrow
marginally to USD 0.8bn (0.7% of GDP) in FY13. The IMF
loan will provide a buffer against external headwinds.
Bangladesh‟s foreign reserves position is still precarious,
with the latest data showing reserves at the internationally
recognised minimum level of just three months of imports in
March 2012.
Export growth is slowing largely due to continued weakness
in the EU – Bangladesh‟s largest export market, accounting
for c.53% of total exports. Export growth remained in
negative territory (-4.2% y/y) in May, according to the latest
data available. A higher fuel import bill is likely to put
significant pressure on the BoP, but remittances are a silver
lining, growing consistently in double digits and helping to
push the current account into surplus. The conditions
attached to the IMF loan programme should also act as a
policy anchor, helping to push through important structural
reforms. The authorities have agreed to improve fiscal
consolidation by containing subsidies and raising tax
revenues, to take a more restrained approach to monetary
policy, and to maintain greater flexibility in exchange and
interest rates.
Fiscal consolidation is on track
The Bangladesh Awami League (BAL)-led government
unveiled its record BDT 1.92trn (USD 24.3bn, or 18.1% of
GDP) budget on 7 June. The FY13 budget includes
credible steps towards fiscal consolidation, underpinned by
the conditions attached to the ECF. Fiscal slippage seems
Figure 1: Standard Chartered Research forecasts –
Bangladesh
2011 2012F 2013F 2014F
GDP (real % y/y) 6.7 6.1 6.5 6.9
CPI (% annual average) 8.8 9.0 8.1 8.5
Policy rate (%)* 6.75 7.75 7.00 6.75
USD-BDT* 77.5 80.5 83.5 87.0
Current account balance (% GDP) 0.9 0.7 -0.7 -0.5
Fiscal balance (% GDP) -4.2 -5.0 -5.5 -5.6
Note: All forecasts except USD-BDT refer to the July-June fiscal
year ending in the year in column heading; * end-period;
Source: Standard Chartered Research
Standard Chartered Asia Focus
Bangladesh – Domestic conditions to support growth
24 September 2012 9
unlikely given the BAL‟s proven track record of achieving its
fiscal targets since returning to power. In its three previous
budgets, the BAL government has set its expenditure
targets higher than revenue growth. In this budget, the
government projects expenditure growth of 18.9%, down
from 25.8% in FY12. In line with IMF conditions, the
government has agreed to create fiscal room for more
growth-critical spending by increasing tax revenues 22%
and containing subsidy costs through better targeting of the
country‟s social safety nets.
The FY13 budget targets GDP growth of 7.2% in FY13 – a
very optimistic target, in our view. It also pledges to limit
inflation to 7.5% and the fiscal deficit to 5% of GDP. The
monetary programme for FY13 seeks to contain reserve
money growth to 14.5% and broad money growth to 16%
by end-2012, which will help to contain inflation. In light of
the subdued outlook for global trade, Bangladesh Bank
expects only modest growth in foreign reserves, but will
continue to support a market-based exchange rate while
minimising exchange rate volatility as much as possible.
Bangladesh‟s perennial energy crisis is another key
concern. While overcoming power shortages may be
feasible in the medium term, the short-term outlook is
challenging. The lack of political will and the scarcity of
funding (both domestic and international) are major
stumbling blocks; as a result, many major power projects
are unlikely to be completed. On a positive note, the
country‟s energy supply should receive a boost from the
first discovery of commercially viable oil reserves, 137mn
barrels of oil in two gas fields in the north eastern Sylhet
district. Bangladesh spent about USD 5bn on crude oil
imports in FY11, a large portion of which was subsidised by
the government. Bangladesh plans to float an international
bid to select foreign firms to commence oil extraction within
the next 18 months.
Stable BDT as BoP position improves
USD-BDT has remained relatively stable, trading in a
narrow band in Q2-2012, largely as strong remittances
boosted the current account. We forecast USD-BDT at 80.5
at end-2012. Our medium-term outlook for the BDT is more
cautious, as we believe the current account may slip back
into deficit due to external risks. The BDT depreciated
substantially in FY12 after Bangladesh Bank removed the
hard peg against the USD in mid-2010. We expect BDT
stability to be supportive of the economy in FY13. With the
BoP outlook stabilising, the central bank is likely to
maintain the BDT at current levels.
Stable government bond yields
Since the beginning of FY13, several factors have
contributed to the stability of the government bond yield
curve: consolidation in the macro environment, easing
money market rates, and a change in the central bank‟s
policy on commercial banks‟ investments in government
securities. Inflation has been softening amid stable growth
(although it remains above the central bank‟s 7.5% target),
and this has increased expectations of a stable policy rate
environment for the remainder of 2012. The central bank is
likely to maintain its anti-inflation policy stance via tight
banking-system liquidity. However, it continues to fine-tune
the liquidity situation – interbank overnight borrowing costs
(the monthly average call money rate) touched a 2012 low
of 10.58% in July – and this has supported government
bonds.
More importantly, in an attempt to ease pressure on
primary dealer banks, the central bank has mandated 25
scheduled non-primary dealer banks to buy 40% of the
notified amount at every T-bill and T-bond auction. This
measure has widened the investor base for government
bonds and limited the rise in yields, despite the central
bank‟s anti-inflation stance. Given our view of monetary
easing in Q1-2013, we expect yields to peak in Q4-2012.
Figure 2: Headline inflation is starting to cool
% y/y
Sources: Bangladesh Bank, Standard Chartered Research
Food inflation
CPI Inflation
0
2
4
6
8
10
12
14
16
Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12
Standard Chartered Asia Focus
China – No country for old ideas Stephen Green, +852 3983 8556
Wei Li, +86 21 6168 5017
Lan Shen, +86 21 6168 5019
Robert Minikin, +852 3983 8567
24 September 2012 10
The economy has changed, has Beijing?
This is not the economy Vice Premier Li Keqiang wanted to
inherit. But it is the one he is going to have to run – and we
hope, transform – over the next decade. Rather than the
sudden collapse in demand Beijing faced in Q4-2008, it has
endured an inexorable slide in real growth in 2012,
particularly in manufacturing. Actual GDP growth is probably
now running below the official numbers, although not to a
large extent. More worrying is that sentiment has
deteriorated, both offshore and on. This is not a country for
old ideas – China‟s new leadership will need to think anew
about how to run this economy. Here, we run through the big
themes for 2013 and beyond.
Below-8% GDP growth. We expect official GDP growth for
2012 to come in at 7.7% (revised down from our late-2011
call of 8.1%). The monetary stimulus of Q2-2012 was
measured, delivering loan growth of 15-16% y/y for most of
H2, but the evidence is not yet clear-cut that it has
neutralised the downward momentum generated by the
housing and export sectors. We look for clearer signs of
stabilising growth in Q4-2012 and a slow recovery in H1-
2013. We estimate that official GDP growth in 2013 will be
7.8% (previous: 8.7%). Growth in the 7-8% range should be
achievable over 2013-18, but will depend on the
implementation of a real structural reform programme.
The end of active monetary policy. With the loss of large
FX inflows, there is now no natural driver of China‟s base
money growth (although we suspect that the trade surplus
will rise in 2013, so there will likely be some net FX inflows).
M2 growth will be around 14% again in 2013, and total bank
loan growth around 15%. The leadership of the People‟s
Bank of China (PBoC) seems to believe that rates are already
at an appropriate level. We now no longer expect another
benchmark rate cut in 2012, and expect only one more reserve
ratio requirement (RRR) cut; but if the data deteriorates further,
the State Council will act to cut further. In terms of rate reform,
the next move will be for an interbank rate (repo or reverse
repo) to be used as a new benchmark. Repo volatility needs to
be reduced, though, before this is feasible.
Keeping leverage flat. While the US and Europe are in the
midst of a painful multi-year deleveraging process, China is
undergoing something slightly different. Policy makers seem
to want to keep leverage levels flat, or up only a bit. This is
different from the debt-fuelled growth of 2009-10, but is
nowhere near as painful as what is happening in the
developed world. This policy stance comes at the same time
as the downturn in China‟s business cycle. Bosses who
expanded companies by boosting assets, relying on cheap
cash and endless top-line-sales growth, now have to worry
about margins, cash-flow management and efficiency.
Hopefully, the cycle will be turning by H2-2013.
Resolving non-performing loans (NPLs). Banks‟ NPLs
and corporate receivables have begun to rise this year, and
will likely become bigger problems in 2013. The State
Council will need to consider a new NPL resolution regime,
which could involve selling commercial NPLs to the four
asset-management companies (AMCs) and other boutique
NPL firms, and possibly setting up a dedicated loan
resolution mechanism for local-government-investment-
vehicle (LGIV) loans. A working corporate bankruptcy regime
would help. Many banks will need to recapitalise, and some
small banks will be closed or merged.
Opening up the services sector. Services are growing on
the back of the expanding urban middle class and the
increased complexity of manufacturing. But the government
urgently needs to nurture the services boom by getting out of
the way and selling down its interests in businesses such as
hotels, telecommunications, financial services, and
entertainment. The sector could also do with a big regulatory
clean-up and a reduction in the number of rules and
regulatory agencies.
Tax cuts, spending cuts and a slightly bigger budget
deficit. China has been able to run small budget deficits as
the government pushed massive infrastructure spending off
to banks‟ balance sheets. Such loans to LGIVs have been
reclassified, but they remain a key quasi-fiscal risk. All of this
Figure 1: A moderate recovery in 2013
Real GDP growth; includes our forecasts
Sources: CEIC, Standard Chartered Research
GDP, q/q SAAR
Official GDP growth, y/y
6%
7%
8%
9%
10%
11%
12%
13%
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13
Standard Chartered Asia Focus
China – No country for old ideas
24 September 2012 11
needs to be brought onto public balance sheets. Tax
revenues are down, and the very slow land market has
further tightened local government finances. In order to
stimulate growth, the government could consider cutting
budgets for official banquets, cars and holidays/study trips,
as well as spending on domestic security and industrial
subsidies and use the savings to finance a VAT cut, which
would stimulate consumption. There is no shame in a 3%
GDP deficit if the money is well spent.
Selling state assets. Former Premier Zhu Rongji oversaw a
big sale of small state enterprises in the mid-1990s, driven
by debt and inefficiency; this boosted productivity growth and
catalysed the emergence of the private sector. Given rising
local government debt, a second wave of state-owned-
enterprise (SOE) sales would be welcome. At the same time,
central-level SOEs need to donate about 30% of their profits
to the budget; until now, their dividends have been
channelled back into industrial subsidies.
Housing market. The housing market will be dominated by
the absorption of residential housing inventory in H1-2013.
We expect home purchase restrictions to be tweaked but not
eliminated, and do not expect a significant property tax to be
rolled out. Such a tax would be progressive (as it would
reduce the incentive to take land from farmers) and
reasonable (urban residents need to pay for urban
infrastructure), but the politics of introducing another tax are
extremely difficult. Housing prices in Tier 1 cities will
increase. As inventories fall in the rest of the country, prices
could rise there too in H2. Construction activity will see a
strong rebound only in H2.
A debate about inflation. In 2013, CPI inflation will be
driven by the pig cycle, easy money in US and Europe, and
utility price reform. Metro, water, gas and electricity prices for
households all need to increase to make these sectors
sustainable – water by 50%, for instance. Wage pressures
will be contained, though. We look for CPI inflation of 2.5% in
2012 and 4% on average in 2013. We think it will breach 5%
y/y in H2-2012, and that this will trigger a new round of hikes
from the PBoC, one in 2013 and four in 2014.
Adopting a ‘more than one child’ policy. If Premier Li
wanted to give everyone a big shot of optimism about the
future, he would resolutely scrap the one-child policy.
China‟s demographics indicate that the labour force is
probably already shrinking, and the expense incurred in
rearing a child is likely to stifle any feared baby boom.
FX, rates and credit
The case for a substantial change in the value of the Chinese
yuan (CNY) is very weak. The likely current account surplus,
at 1.9% of GDP for 2012, is far below the 10.1% recorded in
2007. This ratio would not be noteworthy in a major developed
economy. Rebalancing towards domestically led growth
seems to be under way; indeed, there are signs that fast wage
growth and a stronger CNY have undermined China‟s external
competitiveness in recent years.
While we predict little change in the CNY‟s trade-weighted
value through to end-2013, there is still room for modest
CNY gains against the USD. We project USD-CNY at 6.31
by end-2012 and 6.19 by end-2013 (a 1.9% CNY gain over
the year). This appreciation reflects a broader advance by
Asia ex-Japan currencies against the USD. Of the three
major FX forward curves, the USD-CNH deliverable forward
curve is the most steeply upward-sloping, discounting the
most forward FX depreciation. MNCs with onshore CNY
payables and USD receivables in 2013 should hedge these
flows in the offshore deliverable market.
Chinese credits have outperformed JACI (the Asian credit
index) on a total return basis, thanks to the rally in Chinese
HY credits throughout 2012. Quasi-sovereign high-grade
(HG) credits have done OK but have underperformed their
Korean peers due to a combination of higher-than-expected
supply and concerns about slowing growth. We are currently
Underweight Chinese HY corporates and prefer stronger BB
names over single-B names given slowing growth; we broadly
prefer property names to industrials. However, we see value
in selected HG quasi-sovereigns given the recent widening
of spread differentials versus Korean quasi-sovereigns,
which have weaker standalone fundamentals.
Figure 2: CNY’s trade-weighted value is set to plateau
near 2012 highs (2010 = 100, BIS methodology)
Source: Standard Chartered Research
85
90
95
100
105
110
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Forecast
Standard Chartered Asia Focus
Hong Kong – An overcast dawn Kelvin Lau, +852 3983 8565
Robert Minikin, +852 3983 8567
24 September 2012 12
A drawn-out recovery
China is in for a slow turnaround
Recent data from mainland China has been generally
lacklustre, while policy stimulus from Beijing appears
measured at best. Rather than expecting imminent green
shoots, we are now calling for weak but stable growth in
China in Q4-2012, followed by a difficult recovery in H1-
2013. This, along with our long-held cautious view of the
West‟s recovery trajectory over the coming year, prompts us
to revise down our Hong Kong GDP growth forecasts to
1.8% for 2012 and 3.8% for 2013, from 2.3% and 5.0%,
respectively. A bigger external drag will mean a more drawn-
out, U-shaped recovery.
We still believe that H1-2012 was the trough of Hong Kong‟s
current growth cycle. The y/y base effect, for one, is
expected to improve in the coming quarters. A stabilising
China should at least create a floor for Hong Kong‟s GDP
growth entering Q3. Hong Kong‟s recent PMI readings have
diverged from China‟s, holding above the neutral 50 mark
after falling briefly below it in May and June (while the
mainland‟s official reading dipped below 50 for the first time
in nine months). The „New China Business‟ PMI sub-
component came in at 50.1 in August, up from 46.8 in July,
suggesting an expansion in China-related new orders for the
first time in five months.
This evidence of insulation from external headwinds,
however, should not be mistaken for immunity. Our SME
Leading Business Index for July (derived from a quarterly
survey conducted independently by the Hong Kong
Productivity Council) foresaw still-challenging times
throughout Q3-2012 for Hong Kong SMEs. The diffusion
index came in at a weak 42.9 (a reading below 50 denotes
general pessimism over a three-month horizon). Sentiment
among manufacturers was even more bearish, at 41.5.
Anecdotally, while some clients noted that US orders have
stabilised somewhat lately, orders from the euro area were
said to have remained weak; this is in line with what the
actual data is telling us (Figure 1). The SME Leading
Business Index for Q4-2012 (to be released in October)
could stay below 50, suggesting another quarter of subdued
sales and margin compression. We also expect it to show a
continued willingness to hire and to invest (these readings
were at 53.1 and 54.0, respectively, in July), indicating
underlying optimism towards the ability to ride out the storm.
A soft landing for domestic consumption
Lingering external weakness means that domestic demand is
likely to remain instrumental in driving headline growth. As
Figure 2 shows, private consumption expenditure (PCE) has
been doing much of the heavy lifting. Admittedly, PCE
contributed less to headline growth in Q2 than previously,
partly reflecting the inevitable spillover from external
uncertainty to local sentiment; the less favourable base effect
also played a role. Recent disappointing retail sales growth
also deserves a closer look.
In value terms, retail sales growth came in at a weaker-than-
expected 3.8% y/y in July, down from an average of just
above 10% y/y in Q2-2012 and 23.3% in Q4-2011. Cooling
per-capita spending by mainland Chinese tourists has clearly
weighed on sales of jewellery, watches and other valuable
goods – the largest retail sales component in nominal terms,
accounting for some 20% of the total. The silver lining is that
the number of mainland tourists visiting Hong Kong
continues to grow at an extraordinary rate (Figure 3). We
Figure 1: Exports to the EU – Like a sore thumb
Export growth by destination, % y/y 3mma
Figure 2: PCE has helped Hong Kong weather the storm
Contributions to y/y real GDP growth, ppt
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
To EU
To US
To China
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
PCE
Net exports
Others
-10
-5
0
5
10
15
20
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Headline growth
Standard Chartered Asia Focus
Hong Kong – An overcast dawn
24 September 2012 13
believe that this, alongside other still-favourable domestic
factors, should provide a floor for retail sales growth.
The ability and willingness of Hong Kong households to
spend is normally better illustrated by sales of consumer
durable goods. Sales of motor vehicles, furniture and big-
ticket electronic items, whose growth has also moderated of
late, continue to be much more resilient to external
headwinds this time around than during the 2008-09
downturn. An unemployment rate that is consistent with full
employment certainly helps – the latest 3.2% reading is the
same as the cyclical lows registered in mid-2008 and mid-
2011 (Figure 4). Low unemployment underpins nominal
wage growth; we expect an increase of around 5.0% in H2-
2012. This, together with the likely muted near-term impact
of the government‟s latest property-cooling measures, should
ensure a soft landing for retail sales – a prerequisite for Hong
Kong to see a U-shaped economic recovery.
QE3 to keep inflation worries alive
The US Fed‟s recent launch of QE3 is also growth-positive
for Hong Kong. Through it, Hong Kong is set to enjoy
monetary easing thanks to its currency peg and its openness
to capital inflows. The resulting support for local liquidity
conditions, however, should keep inflation worries alive for
longer. QE3 is also likely to increase housing price
appreciation expectations. We are revising up our CPI
inflation forecast for 2012 to 4.0% from 3.5% to reflect the
property sector‟s better-than-expected performance year-to-
date; we also revise up our 2013 forecast to 4.5% from 3.5%
on expectations that QE3 will anchor broader price
appreciation expectations, whether for consumer goods,
wages or property.
FX outlook
We recently reviewed the backdrop to the linked exchange
rate system between the Hong Kong dollar (HKD) and the
US dollar (USD) (FX Alert, 24 August 2012, ‘HKD –
Fundamentals reinforce case for no change’). In our view,
the Hong Kong authorities theoretically have more room for
manoeuvre in setting FX policy now than they did in previous
decades. This reflects strong economic fundamentals, the
powerful build-up of international reserve assets, and other
factors. Hong Kong clearly has the option of adopting a more
flexible FX policy (similar to that of Singapore) while
maintaining a reserve fund to back HKD note issuance.
In practice, however, the case for exploiting this room for
manoeuvre is very weak. Making such a change would entail
tangible costs given the credibility and transparency of the
current FX regime and the access to hedging opportunities in
the deep USD financial markets afforded by the link. The
benefits of any change are highly uncertain. It is notable, for
example, that Singapore‟s FX-oriented monetary policy has
not generated substantially better inflation outturns than
those in Hong Kong, despite the Monetary Authority of
Singapore‟s ability to manage the Singapore dollar‟s value.
It is appropriate for the suitability of the HKD peg to come
under periodic official review, but any change in Hong Kong‟s
FX regime will likely be delayed for many years. Any such
adjustment may involve a more profound change (such as a
link to a convertible Chinese yuan) rather than simply a more
flexible link to the USD. Against this backdrop, strategies
based on an unchanged FX regime are likely to be
appropriate. In the case of corporations, this will be
particularly true where the strategies complement underlying
FX exposure (for example, selling USD-HKD downside in the
context of HKD receivables and USD payables).
Figure 3: Mainlanders are more cautious, but still arriving
Retail sales by value (RS), visitor arrivals from China, % y/y
Figure 4: Sales of consumer durable goods are down but
not out, thanks in part to still-tight labour market
Sources: CEIC, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Retail sales: Jewellery, watches and valuable gifts
Visitor arrivals from mainland China
Headline retail sales
2%
3%
4%
5%
6% -20%
-10%
0%
10%
20%
30%
40%
50%
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
Retail sales: Consumer durable goods (% y/y)
Unemployment rate (RHS, inverted)
Standard Chartered Asia Focus
India – At a crucial juncture Anubhuti Sahay, +91 22 6115 8840
Robert Minikin, +852 3983 8567
Nagaraj Kulkarni, +91 22 6115 8842
Bharat Shettigar, +65 6596 8251
24 September 2012 14
2013 outlook is cautious as risks persist
While India‟s macro backdrop remains challenging, a series
of recently announced government reforms to contain the
fiscal deficit and increase foreign participation in selected
sectors has led to renewed optimism. These measures
should have a positive medium-term impact; however, they
may not have an immediate effect on growth. It will be
important to maintain the reform momentum in order to put
growth back onto an upward trajectory. The government has
promised more action, but until it delivers, we will remain
cautious.
Against this backdrop, forecasting the economic scenario in
2013 is challenging. It will hinge on three inter-related
factors: immediate government action to kick-start the
investment cycle, the resulting impact on India‟s sovereign
rating, and the likelihood of a mid-term election thereafter.
Policy inertia in approving investment projects has reduced
India‟s growth to levels similar to those seen during the
global financial crisis. The market has priced in GDP growth
of 5.0-5.5% for FY13 (year ending 31 March 2013). The
slowdown in growth has had consequences including a wider
fiscal deficit amid lower tax revenue generation. Though the
government‟s recent announcements send a strong signal of
its commitment to fiscal consolidation, further expenditure
reforms are needed to ensure that fiscal consolidation is
sustainable. Otherwise, the risk of a sovereign rating
downgrade cannot be ruled out (India‟s current sovereign
rating from S&P is BBB- with a negative outlook). While S&P
commended the recent reform announcements, it raised
doubts about their effective implementation and their
medium- to long-term benefits. Also, a further deterioration in
economic conditions or a strong push by the government to
implement contentious reforms would increase the
probability of a mid-term election in 2013 amid increased
opposition from other political parties. If any of these risks
materialise, they could cloud the growth outlook for FY14.
We assume a „muddle-through‟ scenario where policy
measures partially revive the investment cycle, defining a
floor for growth and deferring negative rating actions. We
also expect the next elections to occur as scheduled in May
2014, despite a busy political schedule, with 10 state
elections slated until the end of 2013. Again, risks to our
base-case scenario remain high and will depend crucially on
government actions in the next few months.
We forecast dismal GDP growth of 5.4% in FY13 (versus
6.5% in FY12), followed by a marginal improvement to 6.0%
in FY14 (largely a technical rebound). We also expect further
government action to improve economic activity. Assuming
some positive steps are taken in the next couple of months,
a measurable impact on investment is unlikely before Q3-
FY14. Investment has languished for the past three quarters,
growing at an average of 1.3% y/y, and many corporates
have shelved plans for capacity addition or expansion.
Restoring investor confidence and reviving investment plans
will occur with a lag.
The crowding-out of private investment is likely to continue
next year, as the government is expected to run a large fiscal
deficit. We forecast the FY14 deficit at 5.5% of GDP (with
risks to the upside), versus our forecast of 5.8% in FY13.
With 10 state elections scheduled for 2013 and general
elections due in 2014, contentious reforms (such as those
involving land acquisition) or spending cuts (particularly to
subsidies, which are forecast at 2.4% of GDP in FY13) are
likely to be deferred.
There is also a risk that the government will announce
populist measures such as the implementation of the Food
Security Bill to woo voters, further straining fiscal health.
According to the food minister, implementation of this bill
alone would add 0.3% of GDP annually to the fiscal deficit.
A wide fiscal deficit is likely to keep inflationary pressures
high, despite a slowdown in economic activity. We expect
inflationary pressure to ease on slower growth but to stay
above the Reserve Bank of India‟s (RBI‟s) usual comfort
level of 5%. We forecast WPI inflation at 6.5% y/y in FY14,
versus 7.8% in FY13. Given the likely slowdown in economic
Figure 1: Slower growth, still-elevated inflation
% y/y
Sources: CEIC, Standard Chartered Research
WPI
GDP growth
0%
2%
4%
6%
8%
10%
12%
Q3-FY6 Q3-FY8 Q3-FY10 Q3-FY12 Q3-FY14
Forecast
Standard Chartered Asia Focus
India – At a crucial juncture
24 September 2012 15
activity and lower inflation, we expect the RBI to reduce the
repo rate by 100bps to 7% in 2013. While lower interest rates
should help the investment cycle, they will not be enough to
provide a strong boost to economic activity, in our view.
The external sector will face continued headwinds from weak
macro fundamentals. Financing of the still-wide current
account deficit (which we forecast at 3% of GDP in FY14) will
remain vulnerable to capital flows such as portfolio
investment. The expected increase in FDI triggered by
recently announced reforms will help at the margin but is
unlikely to offset the pressure from huge debt redemptions.
Local markets outlook
Rate cuts to be mildly positive for GoISecs
We are only mildly positive on GoISecs for 2013 given our
base case of still-slow growth, monetary easing and a
persistently wide fiscal deficit. While the expected 100bps of
repo rate cuts in 2013 should be a significant positive, we
expect another year of record market borrowing, which is
likely to limit duration gains.
During India‟s last two monetary easing cycles (March 2001
to March 2004 and October 2008 to April 2009), GoISec
yields and policy rates showed strong co-movement, and the
peak-to-trough decline in GoISec yields was similar in
magnitude to policy rate cuts. However, with the FY14 fiscal
deficit estimated at c.5.5% of GDP, market borrowing is likely
to exceed that in FY13, resulting in another year of record
GoISec issuance. Initial estimates of demand from key
investors point to supply pressure in the market. Specifically,
if sluggish deposit growth continues into next year, demand
from the banking system – the largest investor in GoISecs –
is unlikely to keep pace with supply, particularly after the
recent reduction in the statutory liquidity ratio (SLR). The risk
of a rating downgrade is also likely to weigh on foreign
investors‟ sentiment.
INR outlook is still cloudy
The latest raft of policy measures underpins the 2013 outlook
for the Indian rupee (INR). Of particular importance to India‟s
external accounts is the satisfactory resolution of the General
Anti-Avoidance Rules (or GAAR) issue, which appears
imminent. The government has also pressed ahead with
liberalisation of FDI in certain sectors. These steps,
combined with measures to curb the budget deficit
overshoot, should promote foreign institutional investor
inflows. However, they come against an unfavourable
domestic backdrop of persistently high inflation, weak activity
readings and downside surprises in external trade (the
monthly trade deficit for April-August 2012 averaged USD
14bn). Our forecast profile for USD-INR is modestly below
the onshore forwards for 2013, but India‟s twin trade and
budget deficits create risks to the INR over the medium term.
We recommend that Indian corporations with overseas FX
receivables and INR payables maintain neutral hedge ratios.
Marginally Overweight Indian credits
We maintain our Negative outlook on the Indian sovereign,
although we do not expect a rating downgrade in 2012. That
said, unless the government takes policy steps to revive
growth (especially investment demand) and reduce the fiscal
deficit (especially fuel/fertiliser/food subsidies), the risk of a
downgrade will increase in 2013.
While the global macro picture remains weak, strong
technicals – supported by cash on the sidelines and low US
Treasury yields – appear to be supporting credit markets.
Also, given stronger-than-expected moves by the European
Central Bank and the Fed, credit spreads will likely grind
tighter in the near term. Despite their recent outperformance,
Indian corporate and bank credits continue to trade wider
than most names in the low-investment-grade Asian space
and offer attractive carry. Hence, we are marginally
Overweight India in our Credit Model Portfolio. That said,
current Indian spreads are only partly pricing in the possibility
of a downgrade to non-investment grade. Hence, we will
consider adjusting our positioning in the next two to three
months, depending on macro data and policy steps by the
government.
Figure 2: Twin deficits
% of GDP
Sources: CEIC, Standard Chartered Research
Fiscal deficit
C/A deficit
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14
Forecast
Standard Chartered Asia Focus
Indonesia – Yudhoyono prepares for his legacy Fauzi Ichsan, +62 21 2555 0117
Eric Alexander Sugandi, +62 21 2555 0596
Jennifer Kusuma, +65 6596 8250
Thomas Harr, +65 6596 8247
24 September 2012 16
Forecast
Stronger growth expected in 2013
2013 will be the last year during which President Yudhoyono
can rule effectively before the general and presidential
elections in 2014. While Yudhoyono is constitutionally barred
from running for a third term, he is likely to want to cement
his legacy as a successful president. With his Demokrat
Party still struggling to regain popularity after several
corruption scandals involving its elites, the best way for him
to achieve this goal is to deliver a strong economic
performance for Indonesia. In the post-Soeharto era,
Yudhoyono‟s predecessors (Habibie in 1998-99,
Abdurrahman Wahid in 1999-2001, and Megawati
Soekarnoputri in 2001-04) were all unable to deliver growth
rates above 6.5%.
In the 2013 budget bill, the government targets GDP growth
of 6.8% next year, versus 6.5% in the revised 2012 budget.
To achieve this ambitious target, the government has tried to
boost spending on infrastructure, issuing a presidential
decree on land clearance for public infrastructure
development in August 2012 and increasing funds allocated
to infrastructure by 7.7% in the 2013 budget. However, Bank
Indonesia (BI) Governor Darmin Nasution has called the
government‟s 2013 GDP growth target “too optimistic”, citing
Indonesia‟s deteriorating export performance amid the global
economic slowdown (BI projects that the economy will grow
6.6- 6.7% next year).
Although we acknowledge that the government has made
some progress on infrastructure development, we do not
expect it to significantly accelerate its infrastructure spending
or encourage the private sector to increase such spending
next year. Hence, in our view, the government‟s 2013 GDP
growth target may be difficult (if not impossible) to achieve.
While we are less optimistic than both the government and
BI, we expect Indonesia‟s GDP growth to accelerate in 2013,
driven by robust household consumption and strong
investment growth. We revise up our GDP growth forecast
for 2013 to 6.5% from 6.3%, as we expect the government to
push for higher growth and to refrain from hiking subsidised
fuel prices. Even if the government proposes subsidised fuel
price hikes, they are likely to be rejected by parliament
members eager to display their populist credentials prior to
the elections.
We also revise up our 2012 growth forecast to 6.3% from
6.0% to reflect strong growth in H1-2012 (6.3% y/y). This
also incorporates our expectations that households‟
purchasing power will remain strong in H2 in the absence of
subsidised fuel price hikes, and that foreign direct investment
will remain strong.
BI to tighten monetary policy
Given concerns about Indonesia‟s current account deficit and
stronger inflationary pressure in 2013, we expect BI to hike
the BI policy rate from a projected 5.75% at end-2012 to
6.25% by end-2013, via 50bps of hikes in H2-2013. In
addition to BI rate hikes, we expect the central bank to hike
the overnight deposit facility rate (FASBI rate). However, we
now expect only a moderate FASBI rate hike (of 25bps in
H2-2012, versus our previous projection of 75bps), as BI
said at its September policy meeting that it was optimistic the
current account deficit would narrow in Q3-2012. We expect
BI to hike the FASBI rate from an estimated 4.25% at end-
2012 to 4.75% by end-2013, and to raise the overnight
lending facility rate (repo rate) from a projected 6.75% to
Figure 1 GDP growth
Growth did not exceed 6.5% during the 2001-11 period (% y/y)
Figure 2: BI rate, FASBI, and repo rate
We expect monetary policy tightening in 2013 (%)
Sources: National Statistics Agency, Standard Chartered Research Sources: National Statistics Agency, Standard Chartered Research
0
1
2
3
4
5
6
7
8
2001 2003 2005 2007 2009 2011 2013F
FASBI rate
Repo rate
BI rate
3
4
5
6
7
8
Q1-11 Q3-11 Q1-12 Q3-12 Q1-13F Q3-13F
Standard Chartered Asia Focus
Indonesia – Yudhoyono prepares for his legacy
24 September 2012 17
Forecast Forecast
7.25% over the same period (see Figure 2). By raising
interest rates, BI aims to slow bank credit growth – which is
indirectly responsible for strong import demand and therefore
pressure on the Indonesian rupiah (IDR) – and absorb
excess IDR liquidity in the market.
We estimate that, based on its current production capacity,
Indonesia‟s economy will start to overheat when growth
exceeds 6.7% in 2013. By „overheating‟ we do not mean that
inflation will accelerate sharply, but rather that persistent
(non-seasonal) demand-side pressures will start to build. We
expect inflation to accelerate to 5.0% by end-2013 from 4.5%
at end-2012, with real interest rates remaining in positive
territory (Figure 3). In annual average terms, we project that
inflation will accelerate to 4.6% in 2013 from 4.4% in 2012.
Current account deficit to narrow
We expect Indonesia‟s current account deficit to narrow to
USD 5.0bn (0.5% of GDP) in 2013 from USD 16.0bn (1.8%
of GDP) in 2012, driven by a recovery in the global economy
and commodity prices and slowing demand for imports amid
BI tightening. We forecast that the capital and financial
account surplus will increase to USD 17.5bn in 2013 from
USD 15.9bn in 2012, driven by an increase in net foreign
direct investment (to USD 11.0bn from USD 9.0bn). We
expect the overall balance of payments (including errors and
omissions) to turn from a USD 0.1bn deficit in 2012 to a USD
12.5bn surplus in 2013.
Rates strategy
We have a Neutral duration recommendation on IDR
government bonds. Tactically, we refrain from re-entering the
market at current levels. We see a risk of further corrections
given expectations of liquidity tightening by BI. A rise in the
FASBI rate will weaken onshore banks‟ support for IDR
bonds. However, the market‟s strong fundamentals should
limit the extent of any bond sell-off.
Inflation is not an immediate threat in the absence of fuel
price hikes, and we expect BI to keep the BI rate at the
current level of 5.75% until H1-2013. We also expect the
benign supply outlook to support government bonds. As of
12 September, the MoF had raised 75.7% of its gross
financing requirements for 2012, or 83.1% on a net basis. If
the MoF issues another global bond and another retail bond
in H2-2012, we estimate that remaining net treasury supply
will be negligible, at about IDR 3trn. Thus, gross issuance
would only be sufficient to replace maturing debt.
FX strategy
We expect USD-IDR to edge higher in Q4 given deteriorating
external balances and policy tolerance for gradual IDR
weakness. Solid current account (C/A) surpluses and BI's
strong FX policy were key drivers of trend IDR real effective
exchange rate (REER) appreciation from 2001-10. The IDR
REER peaked in August 2010 and has since edged modestly
lower. The sharp deterioration in the C/A and the shift in FX
policy suggest that the IDR REER will fall further in H2-2012,
negating the rise in inflation. We do not expect USD-IDR to
break substantially higher, as BI has sufficient FX reserves to
manage worst-case capital outflows.
We continue to expect the IDR to strengthen in 2013. We
forecast that the C/A deficit will narrow substantially in 2013
to USD 5bn as monetary tightening helps to slow the
domestic economy and global demand improves. Meanwhile,
higher FASBI rates will eventually be positive for the
currency. In our view, higher interest rates tend to support
the IDR, as they support the carry premium in USD-IDR.
Figure 3: BI rate, inflation, and real interest rate
Inflation, although benign, will accelerate in 2013 (%)
Figure 4: Current account deficit
Expected to narrow in 2013
Sources: Bank Indonesia, Standard Chartered Research Sources: Bank Indonesia, Standard Chartered Research
BI rate
Inflation
Real interest rate
0
1
2
3
4
5
6
7
8
Q1-11 Q3-11 Q1-12 Q3-12F Q1-13F Q3-13F
Amount (USD bn)
As % of GDP (RHS)
-4
-3
-2
-1
0
1
2
3
-20
-15
-10
-5
0
5
10
15
2007 2008 2009 2010 2011 2012F 2013F
Standard Chartered Asia Focus
Japan – Signs of fading growth momentum Jeff Ng, +65 6596 8075
Tony Phoo, +886 2 6603 2640
Ned Rumpeltin, +44 20 7885 5558
24 September 2012 18
Growth slows; political risk rises
Early elections in October are likely
Japan is likely to hold early general elections in October
2012. Pressure continues to mount on Prime Minister
Yoshihiko Noda to dissolve the government after the
opposition-controlled upper house of parliament passed a
censure motion against him in late August. It subsequently
blocked deficit-financing bills, threatening to complicate the
government‟s efforts to sustain the growth recovery.
There are growing doubts about Noda‟s chances of re-
election in October. Recent polls suggest that the ruling
Democratic Party of Japan (DPJ) is headed for defeat.
Noda‟s recent deal with the opposition to double the sales
tax to curb social and welfare spending, and his decision to
reactivate two nuclear power reactors to stem the rising oil
import bill, have resulted in a split within the party. A poll
conducted on 4 September showed that the opposition
Liberal Democratic Party (LDP) had the support of 21.7% of
voters, while the newly formed Japan Restoration Party had
23.8%. The ruling DPJ managed a mere 17.4%.
Signs of fading growth momentum
We expect Japan‟s GDP growth to remain lethargic in 2013,
in line with the global economy. In its latest report on the
economy on 28 August, the Cabinet Office downgraded its
assessment of Japan‟s economy, citing the bearish outlook
for exports and industrial production. Japan‟s current account
surplus narrowed to JPY 3.66trn in 7M-2012 from JPY
6.58trn in the year-earlier period as the trade deficit swelled
(to JPY 2.87trn in 7M-2012 from JPY 0.35trn in 7M-2011).
This, along with the absence of domestic growth drivers, is
likely to weigh on GDP growth (see Figure 2).
Heading into 2013, Japan‟s post-reconstruction domestic
consumption engine is showing signs of fatigue. The
contribution from disaster relief spending in the wake of the
2011 earthquake and tsunami is likely to wane in Q3. The
latest Cabinet Office report cited concerns about the
sustainability of private consumption growth and home-
building.
Consumer confidence and retail sales growth are both
weakening. The continuing slowdown in economic activity
may further undermine manufacturers‟ confidence, leading to
cutbacks in corporate investment and hiring. This could
potentially derail the nascent job-market recovery and
negatively affect consumer spending. This is especially true
for the wholesale and retail trade sector, where the number
of employees on the payroll declined by 160,000 in H1-2012,
significantly more than the 10,000 jobs lost for the whole of
2011. Manufacturing employment is also slowing as a result
of weak exports and production.
Of greater concern is the absence of firm government action
and clear policies to stimulate the economy as domestic
consumption falters. Finance Minister Jun Azumi recently
warned that the government could run out of cash in Q4-
2012 if the opposition-dominated upper house continues to
block legislation authorising the sale of deficit-financing
bonds, which would cover more than 40% of budgeted
spending for current fiscal year (which began on 1 April).
Deflation risk returns; BoJ may need to act further
Deflationary pressures are likely to persist between now and
H1-2013. While the Bank of Japan (BoJ) has set an inflation
target of 1% by 2014, energy and food inflation have been
unable to push headline inflation out of negative territory in
Figure 1: Standard Chartered forecasts – Japan
Previous forecasts are shown in brackets
Figure 2: Japan’s economy shows signs of slowdown
% y/y
2011 2012F 2013F
Real GDP (% y/y) -0.7 2.1
(2.2) 1.4
(2.0)
Inflation (% y/y) -0.2 0.0
(0.2) 0.1
(0.2)
Overnight rate (%) 0.10 0.10 0.10
Current account bal (% GDP) 2.0 1.5
(2.0) 1.8
(3.2)
USD-JPY, period end 81.12 82.0 85.0
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
Exports
Industrial production
Machinery orders
-60
-40
-20
0
20
40
60
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Standard Chartered Asia Focus
Japan – Signs of fading growth momentum
24 September 2012 19
recent months. In July, y/y headline inflation was negative for
a second consecutive month, while core inflation (excluding
food and energy) remained in negative territory for a 43rd
straight month (see Figure 3).
Succumbing to both domestic and international pressure, the
BoJ aggressively expanded its Asset Purchase Program
(APP) by JPY 10trn to JPY 80trn on 19 September. This is
the fourth APP expansion this year; the JPY 10trn will be
added to the BoJ‟s asset purchase fund, which is intended to
boost domestic economic activity and spur inflation. The
move was in line with our expectations that the BoJ would
expand the APP by the end of 2012. The BoJ was under
mounting pressure to act following recent calls by the
Finance Ministry to expand the APP, and easing measures
announced by the European Central Bank and the Fed in
September. The BoJ also cut its assessment of Japan‟s
economy, in line with the Cabinet Office‟s assessment in late
August. We believe that further APP expansion is likely,
especially if the economy continues to underperform
expectations in the next few quarters.
The BoJ is also under political pressure to consider other
monetary measures, including steps to curb JPY strength.
The debate over whether the bank should do more to
stimulate growth has recently gained further traction among
government officials and politicians. The ruling DPJ has
joined the opposition LDP in urging the BoJ to consider
purchasing foreign bonds to boost the flagging recovery and
show its commitment to achieving 1% inflation by 2014.
Local markets outlook
In our view, the Japanese yen (JPY) is caught between
longer-term dynamics that suggest it should depreciate and
shorter-term factors that are keeping it firm. The deterioration
in the European sovereign debt crisis and mounting evidence
of slowing growth in major economies have reinstated the
JPY‟s safe-haven appeal among investors. Market
expectations of further monetary accommodation from the
US Federal Reserve have added to pressure on the JPY to
appreciate, and USD-JPY has traded down to its lowest level
in seven months. Repeated rounds of monetary easing by
the BoJ, along with its APP expansion on 19 September,
have offered some counterweight (see Figure 4).
The Fed‟s decision to launch a third round of QE on 13
September introduces meaningful risks to our forecast that
USD-JPY will finish Q3-2012 at 79.00 before grinding higher
to close the year at 82.00. However, we note that the
programme, which focuses on purchases of mortgage-
backed securities, may not drag US Treasury rates
appreciably lower. This may limit its drag on the JPY spot
rate. Tail risks from Europe have diminished, which may
ease safe-haven demand for the JPY in coming weeks. The
threat of FX intervention will continue to hang over the
market, however, and will act as a significant brake on
further JPY appreciation.
On a much longer-term view, the case for JPY weakness is
building. Japan‟s shift away from nuclear power adds to the
negative outlook for the terms of trade and the current
account. Japan also faces its own substantial sovereign debt
risks. The JPY is unlikely to see sustained depreciation,
however, until foreign interest rates begin to climb,
particularly in the US.
Figure 3: Deflationary pressure has returned
% y/y
Figure 4: JPY was firming on previously hawkish BoJ
stance
USD-JPY (LHS), % (RHS)
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
Headline inflation
Inflation ex food and energy
-3
-2
-1
0
1
2
3
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
USD-JPY
3M interbank (USD minus
JPY)
-1
0
1
2
3
4
5
6
60
70
80
90
100
110
120
130
140
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Standard Chartered Asia Focus
Malaysia – Domestic boost Edward Lee, +65 6596 8252
Jeff Ng, +65 6596 4194
Danny Suwanapruti, +65 6596 8262
Thomas Harr, +65 6596 8247
24 September 2012 20
External headwinds mitigated
A steady performance expected in 2013
Malaysia‟s current economic performance justifies a positive
outlook for 2013. Despite its relative openness, Malaysia is
one of only three economies in South East Asia that
managed faster growth in H1-2012 than in 2011. We expect
Malaysia‟s GDP growth to become more balanced between
the domestic and external sectors in 2013. While domestic
consumption and the government-led investment boom are
likely to continue, we expect their contribution to diminish
slightly to accommodate a recovery in external demand. We
expect export growth and the current account to rebound to
some degree in 2013. Although we expect some slowdown
in sequential growth in H2 versus H1 in light of the still-weak
external outlook, we upgrade our 2012 growth forecast to 5%
from 4%. We lower our growth forecast for 2013 to 4.7%
from 5.0% to reflect a higher base effect and still-modest
global growth.
Domestic strength, external rebound
The divergence between the domestic and external
sectors, a key theme in 2012, is expected to narrow in
2013. Despite Malaysia‟s high exposure to trade (China is
its top export market) and lower commodity prices, the
economy managed to register growth of 5.1% in H1-2012.
Net external demand subtracted 4.9ppt from y/y GDP
growth in Q2, but the economy still expanded by 5.4% y/y.
Private consumption grew 8.8% y/y (adding 4.3ppt) and
investment rose 26.1% y/y (6.2ppt). Wage measures such
as the increase in civil service pay and cash payouts to
low-income households have boosted private consumption,
while the ongoing Economic Transformation Programme
(ETP) has driven investment. In 2013, Malaysia‟s open
external sector is likely to benefit from gradually improving
global conditions. In contrast, domestic activity, while likely
to remain robust next year, could be weighed down slightly
by the high base in 2012.
While growth momentum was strong in H1-2012, we expect
sequential growth to moderate somewhat in H2-2012, before
picking up slightly in 2013. The labour market remains
strong, with the unemployment rate unchanged at 3% in Q2.
Wage growth is still positive in the manufacturing, wholesale
and retail sectors, although its pace is slowing. Similarly,
imports of consumer goods remain high but the pace of
growth is easing. Passenger vehicle sales contracted for a
third consecutive month in August.
We expect investment to remain robust in 2013. Total loan
growth was steady at about 12.6% y/y in July, although loan
approvals have started to decline from year-ago levels.
Imports of capital goods remain robust, rising 29.8% y/y in
July (on a 3-month moving average basis). Given the focus
on the ETP, investment looks set to continue to support
growth in the months ahead, barring a sharp deterioration in
global conditions. On balance, while we expect growth to
remain firm as strong domestic conditions overshadow weak
external demand, we project some moderation in H2-2012.
Given the growth environment, there is little urgency for Bank
Negara Malaysia (BNM) to cut policy rates, in our view. The
latest monetary policy statement (released on 6 September)
underlined BNM‟s neutral stance. It acknowledged the
uncertain global environment but noted that the current
monetary policy stance is accommodative and is supportive
of the economy. BNM also extended its inflation outlook into
2013, noting that it expects inflation to remain moderate
Figure 1: Domestic strength overwhelms external
weakness (ppt)
Figure 2: Still robust, but some signs of moderation
% y/y
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
-10
-5
0
5
10
15
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Private Govt Investment Net exports Imports of consumer
goods Passenger
vehicle sales
Private consumption
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12
Standard Chartered Asia Focus
Malaysia – Domestic boost
24 September 2012 21
heading into next year. We estimate that administered prices
contracted 0.6% y/y in July, depressing headline inflation
(1.4%). Given the lack of subsidy rationalisation, this
component of the inflation basket, which accounts for about
30% of the total, will continue to keep prices low for some
time. As such, we reiterate our view that BNM will keep the
Overnight Policy Rate unchanged at 3% for the rest of the
year. For 2013, we now forecast one hike in Q4-2013, versus
our previous view of two hikes during the year, as the
government may implement subsidy rationalisation only
gradually after the elections.
Key near-term events include the 2013 budget
announcement on 28 September and potential elections,
which have been widely expected since last year. Given the
market focus on Malaysia‟s sovereign rating, we believe the
government will be wary of excessively loose fiscal policy
and is likely to keep its fiscal deficit target below 5% of GDP.
Inflation outlook is benign for now
We maintain our benign view of the inflation outlook for the
rest of 2012. Inflationary pressures are well contained by
Malaysia‟s administered price programme for food and other
basic necessities. That said, the solid domestic economic
performance in H1 is likely to result in some degree of
demand-pull core inflation in 2013. We revise our inflation
forecasts for 2012 and 2013 to 1.7% (from 1.9% previously)
and 2.7% (from 2.6% previously), respectively.
Local markets outlook
Neutral duration outlook on MYR bonds
With BNM likely to remain to hold for the rest of the year, we
do not expect a significant rally in the MYR bond market, and
expect yields to grind lower only gradually. The next key
event will be the budget announcement. If the budget is
large, bond supply pressures could emerge, resulting in
pivotal steepening of the yield curve.
Feedback from real-money accounts is that they are now
neutral duration on Malaysia. Low yields and stable USD-
MYR make MYR bonds less attractive than other EM bond
markets. However, we expect demand from central banks
and sovereign wealth funds to remain robust. According to
feedback from central bank reserve desks, they are looking
to deepen their diversification, and Asian bonds – particularly
SGD, KRW and MYR bonds – are the preferred way to
achieve this.
Local demand for bonds should cap upside in yields.
Feedback from our meetings with local asset managers is
that they are still short duration and are looking to
accumulate bond inventory on yield upticks. This was
reflected in the mid-August sell-off, when MYR bond yields
rose by 20bps within two or three days following the sell-off
in USTs. However, yields came back down swiftly, as locals
saw this as an opportunity to build inventory.
Overweight medium-term weighting on the MYR
We have a Neutral short-term FX weighting on the
Malaysian ringgit (MYR) and an Overweight medium-term
weighting. The MYR real effective exchange rate (REER)
appears to be undervalued relative to the SGD REER.
Given that the positive outlook for the Malaysian economy
is well supported by solid domestic fundamentals, the
authorities are likely to be tolerant of gradual MYR NEER
appreciation in 2013. Meanwhile, the MYR remains
vulnerable to a correction in positioning and to the global
industrial production cycle in the short term.
Figure 3: Little inflation pressure
% y/y
Figure 4: Foreign inflows supported by CBs and SWFs
MYR bn
Sources: CEIC, Standard Chartered Research Sources: BNM, Standard Chartered Research
Headline inflation
Administered price inflation
-1
0
1
2
3
4
5
6
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Public sector
Insurance
Banks
Foreign holders
0
20
40
60
80
100
120
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Social security institutions
Standard Chartered Asia Focus
Philippines – Maintaining momentum Jeff Ng, +65 6596 8075
Danny Suwanapruti, +65 6596 8262
Jaiparan Khurana, +65 6596 7251
24 September 2012 22
2013 is likely to be domestically driven
The Philippines is positioned favourably heading into 2013.
We expect the domestic economy to remain supportive of
growth, with the country on track to a likely upgrade to
investment grade by 2014. Based on the sanguine growth
outlook and robust performance in H1, we revise our 2012
growth forecast to 5.8% from 4.7%. We now expect the
economy to expand 5.4% in 2013, versus 5% previously. We
maintain our general inflation outlook of higher inflation in
H2-2012 than in H1, but lower our 2012 forecast slightly to
3.5% from 3.7%. Due to upward pressure from food and
energy, we expect inflation to climb to 4.7% in 2013, and
Bangko Sentral ng Pilipinas (BSP) to hike rates twice, by
25bps each time, after a 25bps cut in Q4-2012.
Maintaining the growth momentum in 2013
We expect the Philippines to continue its steady, resilient
and domestically driven growth path for the rest of 2012 and
2013. However, the strong momentum of H1-2012 is unlikely
to be surpassed. Q2 growth remained above historical levels
on a y/y basis, but it was only 0.2% q/q seasonally adjusted
(SA) because of the strong base in Q1. We expect only 0.1%
q/q SA growth in Q3, improving to 1.5% in Q4. We forecast
that domestic consumption will continue to support growth.
Growing household income has increased local demand for
food and other consumer goods, including luxury items, and
Q2 growth was driven by domestic consumption and exports.
Domestic consumption contributed 3.9ppt to growth, while
net exports contributed 2.1ppt. Growth in overseas workers‟
remittances has slowed slightly this year, but domestic
consumption remains resilient, indicating that such spending
is increasingly supported by internal sources.
Government spending and investment growth are also
expected to contribute to growth, albeit to a smaller extent.
Public-private partnership (PPP) projects have moved slowly
in 2012, with only one major project awarded so far.
Nonetheless, the government‟s focus on infrastructure
investment to facilitate long-term growth is clear. For 2013, it
has increased allocation for infrastructure and other capital
expenditure by 17.5% to PHP 296.7bn. In addition, the
Bureau of Internal Revenue estimates that tax collection will
increase to 10.3% of GDP in 2012 from 9.5% in 2011
following the implementation of a crackdown on tax evaders.
Improving tax collection should support higher government
spending.
The outlook for the external sector is cloudier. In 2011, the
Philippines‟ top three export markets were Japan, the US
and China. In addition to downside risks from the euro area
and the US, the sharp loss of momentum in Japan‟s
domestic economy and the slowdown in China are likely to
adversely affect export growth this year and in 2013. We
expect the favourable base effect for export growth to fade
by Q1-2013. In addition, robust domestic activity is likely to
increase import demand among businesses and consumers.
Unless global conditions improve, we expect the positive
contribution from net exports to fade in 2013.
We expect the tropical storms that hit the Philippines in early
Q3 to have an adverse, but limited, impact on growth for the
rest of this year. Although the capital, Manila, was hit the
hardest, many factories and industries are located on the
outskirts of the capital, where flood damage is less
extensive. Nevertheless, the damage is likely to limit growth
momentum over the short term.
Figure 1: A resilient, domestically driven growth path is
expected in 2013 (% y/y)
Figure 2: CPI inflation could escalate in H1-2013
% y/y
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
GDP growth
GDP forecasts
Consumption
0
2
4
6
8
10
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
Inflation
Inflation forecasts
Lower band of inflation target
Upper band of inflation target
0
2
4
6
8
10
12
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13
Standard Chartered Asia Focus Philippines – Maintaining momentum
24 September 2012 23
Inflation risks ahead Inflation is expected to firm in H1-2013. Although the spike in
inflation caused by recent short-term supply disruptions is
likely to be transient, other sources of price pressure have
built up. First, crude oil prices have returned almost to their
March-April highs. Second, the healthy growth outlook for the
Philippines is likely to increase demand-pull inflation. Third,
major grain prices have climbed in Q3. As a result, BSP is
likely to focus on keeping inflation in check by raising policy
rates twice, by 25bps each time, in Q2 and Q3-2013.
Local markets outlook Overweight duration outlook for PHP bonds With BSP expected to cut rates by 25bps in Q4-2012, we
see scope for PHP bond yields to edge slightly lower from
current levels, and we therefore have an Overweight duration
outlook. Meanwhile, supply dynamics are very positive. The
Bureau of the Treasury (BTr) has already raised PHP 316bn
of funding for the year, versus a full-year issuance target of
PHP 470bn; this means it has met 67% of its domestic
funding needs. The projected budget deficit for this year is
PHP 279bn, and the run rate for the first seven months of the
year was just PHP 73bn. The deficit is therefore likely to
significantly undershoot this year, which means that the BTr
will need less funding than initially planned. It is also looking
to conduct a USD bond buyback and to issue a global peso
note (GPN) in Q4-2012, tentatively in November. We believe,
however, that this is akin to a USD-for-GPN debt switch, as
the money raised will not be used for additional funding.
Overweight on the PHP We maintain our Overweight short- and medium-term FX
weightings on the PHP, as we expect the currency to be well
supported by macro fundamentals and the possibility of an
upgrade to investment grade. Steady remittance inflows and
the constructive bond-market outlook are likely to remain
supportive of the PHP. In addition, BSP’s focus on the PHP
and the pre-emptive rate cut in July were intended to keep
the currency ‘firm’ and slow capital inflows rather than
explicitly weaken the currency.
Credit outlook is well supported The Philippines’ credit profile is underpinned by a
strengthening external position and improving debt metrics.
As of August 2012, FX reserves had increased to USD 80bn
and were adequate to cover total external debt of USD 63bn.
On the fiscal side, fiscal consolidation continues, despite
increased spending in H1-2012. The administration has
undertaken measures to improve tax compliance, improve
revenue collection, reduce public-sector indebtedness, and
lower debt-servicing costs, and aims to narrow the deficit to
2% of GDP by 2013. While the country’s prudent external
and fiscal stance led to positive rating actions in 2012, the
Philippines will need to undertake further reforms to increase
its rate of investment and achieve an investment-grade
rating, in our view. The Philippines sovereign is a low-beta
play and already reflects a potential investment-grade rating.
The PHILIP complex trades well inside double-B EM
sovereigns and in line with Korea, Malaysia and Qatar.
Having said that, it does not appear very rich against
benchmark Latam sovereigns such as Mexico and Brazil. At
current levels, we see value in the PHILIP 19N and the
PHILIP 25, while we see the PHILIP 26 and the PHILIP 37
as trading a bit tight.
Figure 3: Fiscal position is gradually improving
% GDP
Figure 4: PHILIP trades tighter than higher-rated sovereigns
Duration, Z-spread (bps)
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
-4
-3
-2
-1
0
1
2
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
BRAZIL 24N
BRAZIL 34BRAZIL 41
COLOM 24
COLOM 37INDON 22
INDON 35
INDON 37
INDON 42
MEX 22
MEX 34MEX 40
PERU 25
PERU 37
PHILIP 21
PHILIP 24N
PHILIP 25
PHILIP 26
PHILIP 30 PHILIP 31
PHILIP 32PHILIP 34 PHILIP 37
QATAR 30 QATAR 42
RUSSIA 22
RUSSIA 42
TURKEY 25
TURKEY 41
QATAR 22MALAYS 21
100
125
150
175
200
225
5 7 9 11 13 15
Standard Chartered Asia Focus
Singapore – Still in difficult waters Edward Lee, +65 6596 8252
Jeff Ng, +65 6596 4194
Thomas Harr, +65 6596 8247
Jennifer Kusuma, +65 6596 8250
24 September 2012 24
External conditions remain challenging
Underperformance continues
We expect economic growth to remain moderate in 2013.
Singapore‟s small and open economy is extremely
vulnerable to the volatile external environment and may
continue to stutter in the months ahead. The weak external
environment should eventually impact domestic demand.
While labour-market conditions have remained firm, slowing
retail sales and construction approvals suggest that the
domestic economy will not be fully insulated from an
extended external slowdown in 2013. We revise down our
2012 growth forecast to 1.9% from 2.8%, and our 2013
forecast to 3.8% from 4.5%.
We expect inflation to ease to 3.9% in 2013 from 4.5% in
2012, while remaining slightly above its long-term trend. The
government has implemented policies to tackle housing and
transport inflation; we expect these to directly alleviate
inflationary pressures. However, food inflation is likely to
push headline inflation higher in 2013.
A modest growth outlook
Trade growth is likely to remain patchy and depressed
overall due to weak demand from the euro area, the US and
China. On the brighter side, trade growth may receive
support from factors including intra-ASEAN trade links and
Singapore‟s diversified trade partners. In H1-2012, South
East Asian countries such as the Philippines, Malaysia and
Thailand registered faster GDP growth rates than in 2011,
even as Singapore‟s growth fell below trend. Indeed, almost
100% of Singapore‟s 1.5% export growth for 8M-2012 was
accounted for by Malaysia, Indonesia and Thailand.
Singapore‟s GDP growth would have been weaker had these
regional economies not experienced such strong
domestically driven growth.
Meanwhile, the major economies still look weak. Tail risks
from the euro-area crisis may have receded, but the region‟s
economy is still expected to be in recession this year. US
growth is exposed to fiscal risks in 2013, while the measured
stimulus being provided to China‟s economy will mean less
positive spillover to the Singapore economy.
Industrial production (IP) growth may recover only
moderately in 2013 as global demand improves. Amid weak
external demand, the manufacturing sector managed growth
of just 1.9% in 7M-2012, slightly better than the H1 rate of
1.7%. The electronics sector, which accounts for 33% of total
value-added by Singapore‟s industrial sector, contracted for
a 16th
consecutive month in July. The latest domestic
electronics PMI (for August) surprised by rising above the
neutral 50 mark to 50.7 (possibly due to advance orders), but
given that the North American semiconductor book-to-bill
ratio has fallen below 1 again, the outlook for the industry
remains bleak.
We expect IP data to remain volatile due to inconsistent
production in the pharmaceuticals and transport engineering
sectors. On a more positive note, in the Q3-2012 Survey of
Business Expectations of the Manufacturing Sector, the
majority of biomedical and transport engineering firms said
they expected similar business conditions in H2-2012 to Q2-
2012. Production in both of these sectors grew by about 20%
y/y in 7M-2012. We expect them to continue to provide a
cushion against the underperforming electronics sector in
2013.
Figure 1: Singapore underperforms
% GDP y/y
Figure 2: External environment remains challenging
Simple avg. of CUSE (China, US, EU) PMI (RHS)
Sources: CEIC, Standard Chartered Research Sources: Bloomberg, CEIC, Standard Chartered Research
2011 H1-2012
0
1
2
3
4
5
6
7
8
9
10
PH TH MY ID KR VN CN SG TW HK
SG GDP y/y
CUSE PMI (RHS)
30
35
40
45
50
55
60
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Standard Chartered Asia Focus
Singapore – Still in difficult waters
24 September 2012 25
Despite the ongoing economic slowdown, domestic labour-
market conditions may remain firm in 2013 as the
government restricts Singapore‟s dependence on foreign
labour. Indeed, despite the sequential contraction in GDP
growth in Q2-2102, the resident unemployment rate eased to
2.8% (seasonally adjusted) from 3% in Q1. This may be
partly due to government efforts to tighten the inflow of
foreign labour as part of its economic restructuring plan. The
29,200 increase in the number of jobs created in Q2 is also
positive, although this was lower than the average 30,400
jobs created each quarter since Q4-2010.
Retail sales are showing signs of cooling, despite the firm
labour market. The headline retail sales number for June
was -0.9%. Ex-autos, the print was better, at 2.3% y/y. The
picture is similar on a constant price basis – retail sales
contracted 1.6% y/y in June, and rose a modest 2% y/y
excluding motor vehicle sales. Construction contracts
awarded fell by 18% y/y (3mma) in July, after growing at a
30% pace in 2011. This also reflects considerable building
activity in recent years and the expected slowdown in 2013.
MAS expected to ease slightly
Given weak growth and sticky non-tradable inflation, we
expect the Monetary Authority of Singapore (MAS) to ease
monetary policy slightly in mid-October. We estimate the
current slope of the Singapore dollar nominal effective
exchange rate (SGD NEER) policy band at +3.25% per
annum, and the policy band width at +/-2% on either side of
the band. In its previous policy meeting on 13 April 2012, the
MAS increased the slope of the policy band slightly and
narrowed its width. We now expect the previous tightening to
be reversed, and expect the policy band slope to be reduced
to +2% per annum, with no change to the policy band width.
There are several factors underpinning this view. Economic
growth has slowed considerably, and the external outlook
remains challenging. While inflation remains high, we believe
that direct measures may be more effective than using FX
policy to address non-tradable price pressures. Moreover,
inflation is slowing on a sequential basis.
In addition, US growth has come in weaker than previous
projections from the MAS, and China‟s slowdown has
become more worrying. In terms of local sentiment, the
Singapore government recently introduced direct measures
to address inflation and said that inflation is likely to
moderate towards the end of the year; we concur. Finally,
since the start of 2012, the SGD NEER has appreciated
5.1%. Hence, there is scope for MAS to slow the
appreciation of the SGD NEER.
SGD rates to edge higher on rising SOR fix
We have a Neutral duration recommendation on SGD
government bonds and expect yields to be range-bound in
Q4-2012, in line with the low-interest-rate environment in the
US and other major economies. We now forecast a lower
SGD NEER policy band slope in Q4-2012 and Q1-2013 (at
2% p.a. versus 3.25% currently), and expect the 6M SOR
fixing to rise marginally to 0.8% by end-2012 (from 0.62%
currently) as the SGD underperforms the USD and regional
currencies. A rise in the SOR fixing would drive swap rates
higher, and we expect the bond swap spread to continue to
widen. On the FX front, the market does not appear to have
priced in any MAS easing yet, and the SGD NEER remains
near the top side of the policy band. As such, we have a
short-term Underweight FX weighting on the SGD, but we
maintain a medium-term Overweight FX weighting.
Figure 3: Outlook for the electronics sector is poor
y/y production growth (LHS), book-to-bill ratio (RHS)
Figure 4: Direct measures are a more appropriate way to
address non-tradable inflation
Inflation, % y/y (LHS); appreciation, % per annum (RHS)
Sources: CEIC, Standard Chartered Research Sources: Bloomberg, CEIC, Standard Chartered Research
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
North America semiconductor book-to-bill
ratio (RHS)
Electronics production y/y
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-4
-2
0
2
4
6
8
10
May-03 Sep-04 Jan-06 May-07 Sep-08 Jan-10 May-11
Estimated SGD NEER appreciation per annum (RHS)
Tradable inflation
Non-tradable inflation
Standard Chartered Asia Focus South Korea – Stimulus expected Suktae Oh, +822 3702 5011 [email protected]
Robert Minikin, +852 3983 8567 [email protected]
Danny Suwanapruti, +65 6596 8262 [email protected]
Shankar Narayanaswamy, +65 6596 8249 [email protected]
24 September 2012 26
Recovery led by stimulus policies We expect the Korean economy to recover gradually from
early 2013, led by monetary and fiscal stimulus measures
and an improving external environment. The dip in GDP
growth to 0.3% q/q in Q2-2012 appears to have triggered
stimulus measures, but Korea’s GDP growth has in fact been
slowing since H2-2010 (Figure 1). Average q/q growth since
Q3-2010 has been 0.7%, and most believe it is below
potential growth. The improving external outlook previously
led us to expect a recovery starting in H2-2012, but we now
expect a delayed recovery, supported by stimulus policies.
We revise down our GDP growth forecasts to 2.4% for 2012
(from 2.6% previously) and to 3.2% for 2013 (from 3.6%).
We maintain our base-case scenario that China’s recovery
will be the main driver of the recovery in Korea’s exports.
Exports remained weak until August 2012, in line with the
slowdown in China’s key macro indicators. We now expect
China’s recovery to start only in early 2013 (versus H2-2012
earlier); this means that Korea’s export recovery will also be
delayed to Q1-2013. The expected recovery is likely to be
modest, as developed economies will be unable to provide
significant support and ship exports are likely to continue to
contract. Meanwhile, we revise up our current account
surplus forecasts to 3.0% of GDP for 2012 and 2.7% for
2013 to reflect the recent rise in the services account surplus
(driven by travel and construction services).
Domestic demand is also likely to recover modestly in 2013
thanks to stimulus policies and the stabilisation of global
financial-market sentiment. Monetary easing will lighten
households’ and corporates’ interest payment burden and
support credit growth, and fiscal stimulus will be focused
mainly on investment. The improvement in the external
environment – namely the recovery in China’s economy, the
stabilisation of the euro-area crisis and the efficient
resolution of the US ‘fiscal cliff’ – should stabilise financial-
market sentiment and support domestic demand. But
domestic structural burdens, such as private-sector leverage
and the low household savings rate, are likely to continue to
limit the upside for private domestic demand. We believe
these structural issues have been the key drivers of the
weakness in domestic demand since H2-2010.
The housing market is likely to stabilise in 2013 thanks to the
government’s policy measures. The government has already
announced plans to ease regulations on mortgage loans (the
cap on the debt-to-income ratio) and temporarily reduce
property acquisition taxes until end-2012. The monetary
easing cycle should also support the property market. Given
the severity of the housing slump, we expect the government
to implement more market-boosting measures, such as
extending the reduction in acquisition taxes and easing
mortgage-related regulations (i.e., the cap on the loan-to-
value ratio).
BoK’s easing cycle is likely to end in 2012 The Bank of Korea (BoK) is likely to extend its monetary
easing cycle to Q4-2012; we forecast the base rate at 2.5%
at the end of the year, versus 3.0% currently. The slowdown
in Q2-2012 economic activity led the BoK to revise down its
GDP growth forecast and triggered a surprise 25bps rate cut
in July 2012, which marked the beginning of a fresh
monetary easing campaign. We expect two additional 25bps
rate cuts in Q4-2012 given the bearish near-term growth
outlook. We expect the central bank to continue its easing
measures as part of a policy mix aimed at boosting economic
growth, particularly considering that the government has
already announced two rounds of stimulus measures
(although without formal changes in the budget).
We expect no further policy rate cuts in 2013, as the China-
driven export recovery that we expect to start in Q1-2013 is
likely to reduce the need for additional easing. We also
expect food inflation to rise in early 2013 owing to higher
grain prices and the normalisation of inflation after the impact
of welfare spending. This is likely to heighten inflation
concerns and work against further monetary easing. We
revise up our inflation forecasts to 2.3% for 2012 and 3.0%
for 2013 (from 2.2% and 2.8%, respectively) to reflect the
impact of higher oil and grain prices.
Figure 1: GDP growth, including forecasts (% q/q, SA)
Growth has been slowing since H2-2010
Sources: BoK, Standard Chartered Research
Forecast
0
1
2
3
4
Q1-09 Q1-10 Q1-11 Q1-12 Q1-13
Standard Chartered Asia Focus
South Korea – Stimulus expected
24 September 2012 27
Government will give up balanced budget in 2013
We believe the government is likely to give up its goal of
achieving a balanced budget in 2013 (in terms of the fiscal
balance under management – excluding social security funds,
which generate a structural surplus). The government is still
cautious on fiscal easing, despite slow growth, as fiscal
prudence was the main driver of Korea‟s recent sovereign
rating upgrades. The two fiscal stimulus packages announced
in June and September 2012 stopped short of a formal
supplementary budget, and as of mid-September, the
government officially maintained its goal of achieving a
balanced budget in 2013. But we believe it will abandon this
goal in its 2013 budget proposal, as the assumptions for a
balanced budget are unlikely to be met: GDP growth of 4.3%,
fiscal revenue growth of 9.4%, and spending growth of 5.1%.
Rather, we expect the government to maintain a small fiscal
deficit in 2013 to support growth. We now forecast a fiscal
deficit of 1.5% of GDP in 2012 and 2.0% in 2013 (Figure 2).
Our main scenario rests on two assumptions. First, in the
initial budget proposal to be announced in late September,
the government will give up its goal of achieving a balanced
budget by adopting more realistic expectations, but will stop
short of implementing active stimulus measures such as tax
cuts and significant spending increases. Second, in early
2013 (i.e., under the new president), the government will
propose a supplementary budget that includes tax cuts (the
re-introduction of temporary tax cuts on property acquisition
and personal income, and reductions in excise taxes) and an
increase in spending. Admittedly, none of the leading
presidential candidates appear to be focused on growth.
However, we believe that regardless of who wins the
December election, the new administration will want to see
strong economic growth in its first year.
Local markets outlook
Medium-term Overweight on the KRW
The Korean won (KRW) continues to benefit from medium-
term positives such as healthy payment surpluses and
valuations. While the ongoing global slowdown is negative
for the KRW, the current account surplus has been
surprisingly resilient. Moreover, capital inflow dynamics are
showing clear signs of improvement. For the moment, the
BoK is keen to foster FX stability and is rebuilding its FX
reserves amid a revival of capital inflows. As the global
economic outlook improves, however, positive external
payment dynamics will likely feed through into KRW gains.
These would represent a recovery towards „fair value‟ for the
KRW. In June, the nominal and real effective exchange rates
were 12.2% and 9.8%, respectively, below their past-decade
averages. We have an Overweight medium-term FX rating
on the KRW, forecasting USD-KRW at 1,100 at end-2012
and 1,040 at end-2013.
Overweight duration outlook on KRW bonds
We have an Overweight duration outlook on the KRW bond
market given that the BoK is in easing mode, supply
dynamics are positive, and foreign demand from central
banks and sovereign wealth funds is rising, Despite slight net
foreign outflows from the Korean bond market in August,
central banks continued to buy. The top four investors in
Korean bonds in August were Norway, Switzerland, China
and Malaysia; this suggests sovereign flows. The KRW IRS
curve is already inverted versus the 3M CD fixing, and it is
therefore very expensive to receive KRW IRS rates given the
associated negative carry. As such, we favour being long
bonds as opposed to receiving KRW IRS. We have taken
profit on our long 10Y KTB trade and are looking for
opportunities to re-enter on yield upticks.
Korean credits expensive at current spread levels
Korean credits, both corporates and financials, have
outperformed the rest of the Asian high-grade (HG) space so
far in 2012. The outperformance has been driven by the
changed perception of the Korean sovereign as a low-beta
sovereign and by lower-than-expected supply from the
Korean HG space. We have an Underweight stance on the
Korean credit space, owing mainly to expensive valuations
and weakening credit metrics. While the Korean quasi-
sovereign corporates benefit from sovereign support, their
standalone credit metrics have weakened on a combination
of higher gearing and lower profitability. In the financial
space, we prefer quasi-sovereigns to commercial banks at
current spread differentials.
Figure 2: Fiscal balance under management (% of GDP)
Government will give up goal of a balanced budget in 2013
Sources: MoSF, Standard Chartered Research
Forecast
Government's current plan
-5
-4
-3
-2
-1
0
1
2000 2002 2004 2006 2008 2010 2012 2014
Standard Chartered Asia Focus
Sri Lanka – Policy measures gain traction Samantha Amerasinghe, +94 11 2480015
Nagaraj Kulkarni, + +91 22 6115 8842
24 September 2012 28
Growth to pick up in 2013
The economy is in fair shape, and policy measures appear to
be gaining traction. Despite the external headwinds of
slowing global demand and rising food prices, the economy
is poised to achieve 6.8% growth in 2012, and we forecast
that growth will pick up to 7.5% in 2013. We expect domestic
activity to compensate for lower export growth in 2013.
Following the central bank‟s implementation of policy
tightening measures in H1-2012 – currency depreciation, two
policy rate hikes in February and April, and an 18% cap on
banks‟ credit growth – the economy is on a stronger footing.
However, policy makers are likely to remain cautious as long
as external risks prevail. We expect growth to slow to around
6.3% in H2-2012 from 7.1% in H1, and inflation to moderate.
Although the Central Bank of Sri Lanka (CBSL) is mindful of
higher inflation risks arising from domestic supply-side
constraints and external factors, it will likely keep policy rates
on hold in the near term to avoid jeopardising growth.
The external and domestic environments remain challenging.
We have revised our full-year 2012 growth forecast to 6.8%
from 7.1%, with risks to the downside, to reflect the following
factors: (1) The euro area, which accounts for c.30 of Sri
Lanka‟s exports, remains vulnerable to event risk and is
expected to stay weak. (2) With reduced hydropower supply
due to a drought, Sri Lanka has had to shift to higher-cost
thermal power generation. (3) The drought has had a
significant impact on agricultural output, destroying close to
50,000 hectares of rice, according to the Finance Ministry.
This has resulted in increased subsidies, with LKR c.10bn
allocated to drought relief for farmers. (4) We do not expect
the 18% credit ceiling on banks‟ lending, which has
considerably slowed domestic consumption, to be lifted in
the near term, as the central bank‟s tight monetary policy
stance is likely to prevail until inflation moderates.
Inflation to moderate by year-end
We have revised up our average inflation forecast for 2012 to
7.7% from 7.2%, as our earlier forecast did not reflect the
spike in June inflation to 9.3% (from 7.0% in May) resulting
from drought-related supply-side constraints. Inflationary
pressure seems to be dissipating, with the rate of food
inflation declining due to improved supply from the north.
However, we expect headline inflation to hover around
double digits approaching the year-end, limiting the central
bank‟s scope for monetary easing to stimulate growth (unlike
its regional counterparts). However, we think a rate cut is
likely in Q1-2013 as inflation moderates. We expect a
cumulative 50bps of rate cuts next year, taking the repo rate
to 7.25% by end-2013.
BoP position to improve
The balance of payments (BoP) is improving. The monthly
trade deficit has been narrowing since December 2011 and
is at its lowest level since February 2011 thanks to slower
import growth. The Sri Lankan rupee (LKR) is stable at 132.0
versus the US dollar, and credit growth – at 31.6% y/y in
June – is showing early signs of moderating. Credit flows to
the manufacturing and agricultural sectors recorded
significant declines in June. These are clear signs that the
central bank‟s policy measures are gaining traction.
Export earnings contracted by 2.2% in H1-2012 to USD
4.9bn (compared with 35.1% y/y growth in H1-2011), and
continue to fall due to faltering economic activity in the euro
area. Lower apparel export earnings (c.40% of total export
earnings) have been the main driver of this contraction,
falling 1.6% y/y in H1-2012. We are also concerned about
the contraction in imports of investment goods, as it likely
signals a moderation in domestic investment and production
– two key growth drivers.
The authorities have allowed greater exchange rate
flexibility, largely ceasing FX intervention. This has helped
the foreign reserves to stabilise at USD 7.1bn (4.2 months
of import cover) and curtail the trade deficit. Robust
remittance inflows and tourism receipts are likely to
continue and should help to narrow the current account
deficit to 4.0% of GDP in 2013 from 6.1% in 2012.
However, should the slowdown in global growth persist, this
might pose further downside risk to exports. Steady capital
Figure 1: Standard Chartered Research forecasts –
Sri Lanka
2011 2012F 2013F 2014F
GDP (real % y/y) 8.3 6.8 7.5 7.7
CPI (% annual average) 6.7 7.7 7.5 7.2
Policy rate (%)* 7. 00 7. 75 7.25 7.00
USD-LKR* 113.9 130.0 126.5 124.0
Current account balance (% GDP) -7.6 -6.1 -4.0 -3.5
Fiscal balance (% GDP) -6.9 -7.0 -6.5 -6.0
*End-period; Source: Standard Chartered Research
Standard Chartered Asia Focus
Sri Lanka – Policy measures gain traction
24 September 2012 29
inflows, government bond issuance, and further IMF
support in the form of an Extended Fund Facility (still under
negotiation) should help to finance the current account
deficit and push the BoP further into surplus ;in 2013 (from
an expected USD 0.9bn surplus in 2012).
Medium-term steps towards fiscal consolidation
According to the Finance Ministry, policy adjustments
implemented in H1-2012 (including an increase in import
duties to curb demand for imported consumer goods and a
reduction in fuel subsidies) and the re-prioritisation of
development activities will allow the government to achieve
its fiscal deficit target of 6.2% of GDP in 2012.
However, we expect the authorities to overshoot this target.
We forecast a deficit of close to 7.0% due to losses at state-
owned enterprises (SOEs), electricity subsidies, and the
impact of the drought. Fiscal consolidation may prove
challenging in the near term given that growth is expected to
slow in H2-2012 and tax collection on external trade has
fallen short of targets. Higher interest payments and the
increase in non-interest expenditure on wages and welfare
spending this year have also contributed to fiscal slippage. In
2013, steps to reduce current expenditure, broaden the
revenue base and improve the efficiency of SOEs will be
needed to reduce public debt and keep the fiscal deficit
within our forecast of 6.5% of GDP.
LKR likely to remain stable
Given the improvements in the BoP due to slowing import
growth and steady debt inflows, we remain optimistic on the
USD-LKR and expect to see sustained appreciation. After
heightened volatility when the central bank removed the
USD-LKR trading band in February 2012, the LKR has now
stabilised, and depreciated c.16% versus the USD in H1-
2012. It is clear that USD-LKR in the 130-132 range is within
the central bank‟s comfort level. Given that exports have
contracted for the past four months, the weaker LKR should
benefit exporters.
The sharper-than-expected slowdown in exports due to
weak global growth has limited the positive impact of export
earnings on the trade deficit and on the LKR. We are now
less optimistic on the LKR over the medium term and have
revised our USD-LKR forecast, expecting it to settle at
around 130.0 in Q4-2012 (versus our previous forecast of
123.5). We expect USD-LKR to remain within the 130-132
range until end-2012, as export weakness is likely to
prevail. We expect some appreciation pressure in 2013,
taking USD-LKR to 126.5 by end-2013, due to a revival of
risk appetite as global growth starts to pick up and amid
prolonged USD weakness.
Monetary easing in 2013 to support T-bonds
Two key drivers of the T-bond market – the CBSL‟s
hawkish monetary policy stance (in response to elevated
inflation) and the government‟s excess market borrowing –
have pushed the entire yield curve higher this year. The 4Y
T-bond yield is c.420bps higher year-to-date in 2012.
However, the long end of the yield curve has stabilised over
the past quarter, while the short end continues to harden on
the back of tightening banking-system liquidity, flattening
the yield curve. The 1Y/4Y spread has narrowed by
c.50bps over the past quarter.
Given the upward revision of our inflation forecasts for the
remainder of 2012, we expect the central bank to maintain its
anti-inflation stance via stable policy rates and tight banking-
system liquidity. We therefore revise up our forecasts for 1Y
T-bill rates for Q3-2012 (by 75bps to 13.50%) and Q4-2012
(by 25bps to 13.25%).
In 2013, we expect slowing growth to prompt a shift in the
central bank‟s focus from containing inflation to supporting
growth, paving the way for mild monetary easing in H1-2013.
Such easing would be supportive of T-bonds; in combination
with expected fiscal consolidation (we forecast that the fiscal
deficit will narrow to 6.5% of GDP in 2013 from 7.0% in
2012), this should trigger a reversal of the up-move in long-
end yields. However, we believe the magnitude of the
reversal will depend on the extent to which the government
front-loads issuance.
Figure 2: Slowing imports should help to improve the BoP
Sources: CBSL, Standard Chartered Research
-1,200
-1,000
-800
-600
-400
-200
0
-80
-60
-40
-20
0
20
40
60
80
100
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Trade balance, USD mn (RHS) Exports, % y/y
Imports, % y/y
Standard Chartered Asia Focus
Taiwan – Economy to show resilience Tony Phoo, +886 2 6603 2640
Eddie Cheung, +852 3983 8566
Robert Minikin, +852 3983 8567
24 September 2012 30
Signs of a modest rebound
We cut 2012 growth to 2.0%; keep 2013 at 4.5%
We lower our 2012 growth forecast to 2.0% from 2.7%. This
takes into account surprisingly weak H1 data, which was
dragged down by falling exports and capital investment.
However, we expect Taiwan‟s economy to remain resilient to
soft global demand. We forecast that GDP growth will
rebound to 4.5% in 2013, as shown in Figure 1.
Indeed, the Q2-2012 growth data shows that the economy
expanded on a q/q seasonally adjusted annual rate (SAAR)
basis for a second straight quarter. This suggests that
underlying growth momentum has started to pick up. It is
also in line with the recent trend in the leading indicators
index, which indicates that economic activity hit a trough in
H1-2012.
There are still potential headwinds, however. A protracted
period of export weakness risks further undermining
manufacturers‟ confidence, and could result in reductions in
planned capex spending and hiring. This could be further
aggravated by rising volatility in global equity markets, which
could be triggered by the risk of a credit crunch in Europe.
Strong boost from consumer spending
Taiwan‟s economy has remained largely resilient to weak
exports thanks to the continuing revival in domestic demand,
especially private consumption (see Figure 2). This is largely
attributable to the continuing improvement in average
household financial conditions. According to the central
bank‟s latest Financial Stability Report (May 2012), the ratio
of household debt to disposable income declined to a multi-
year low of 36.4% in 2011 from more than 44% in 2006. This
is largely due to rising incomes and improving job-market
conditions, though the average household debt-to-GDP ratio
has hovered around 80%.
Recent data indicates that consumer spending is likely to
remain robust. Consumer confidence weakened
considerably in H1-2012 due to falling equity prices, but it
has stabilised since July amid optimism on household
income expectations and the steady job-market outlook. This
is evident in recent improvements in retail and auto sales.
A surge in tourist arrivals, particularly from mainland China,
is also lending strong support to the local economy. Taiwan‟s
tourism bureau is confident that mainland Chinese arrivals in
2012 will surpass the 1.8mn record set in 2011. The number
of visitors from mainland China increased by almost 52% y/y
to 1.26mn in H1-2012. As Taiwan and mainland China
further liberalise cross-straits tourism flows, this will boost
tourist spending. It also bodes well for hiring in the tourism
and retail services sectors.
Rising inflation risk to keep CBC on alert
Taiwan‟s headline CPI inflation has been trending up in
recent months, and anecdotal evidence suggests growing
upside risk. Headline inflation reached a four-year high of
3.42% y/y in August 2012 and is likely to remain elevated at
least into H1-2013. The benefit of a high base, which capped
y/y gains in transportation costs, is likely to have waned after
the government raised retail fuel prices and utility charges in
Q2-2012.
More importantly, as the government seeks to prevent further
financial losses at state-owned petroleum and power
companies, we expect a second round of hikes in local
Figure 1: Key Taiwan forecasts
Figures in brackets are previous forecasts
Figure 2: Strength in domestic demand
% y/y
2011 2012F 2013F
Real GDP (% y/y) 4.1 2.0
(2.7) 4.5
(4.5)
Inflation (% y/y) 1.4 2.1
(1.6) 1.8
(1.6)
Re-discount rate (%)* 1.875 1.875 2.25
(2.375)
Current account bal (% GDP) 8.8 8.5
(5.5) 8.0
(6.0)
USD-TWD, period end 30.28 29.00 28.50
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
Domestic demand, excl FCF (RHS)
Fixed capital formation
Real GDP - exports % y/y
-6
-3
0
3
6
9
-40
-20
0
20
40
60
Mar-04 Mar-06 Mar-08 Mar-10 Mar-12
Standard Chartered Asia Focus
Taiwan – Economy to show resilience
24 September 2012 31
electricity charges in 2013. This will increase upside risks to
both headline and core inflation in 2013. We therefore raise
our headline CPI inflation forecasts to 2.1% for 2012 (from
1.6% previously) and to 1.8% for 2013 (from 1.6%).
With exports remaining a drag on growth, rising inflation risk
will complicate monetary policy decision-making for the
Taiwan central bank (CBC). Local media reports have
recently raised expectations that the CBC may be
considering a rate cut after the Bank of Korea (BoK) and the
People‟s Bank of China (PBoC) cut policy rates recently in a
bid to stimulate demand. However, we do not share this
view, given that monetary conditions in Taiwan remain highly
accommodative by comparison (see Figure 3).
We also believe that policy makers in Taiwan are likely to
look beyond the recent streak of poor export and industrial
production data, and focus instead on signs of a modest
growth rebound and upside risks to inflation. This will help to
ensure that monetary policy maintains a balance between
promoting growth and ensuring price stability. Barring a
significant increase in recession risk, we expect the CBC to
resume its rate-hiking cycle in 2013, after keeping policy
rates unchanged for the remainder of 2012.
Local markets outlook
Constructive outlook on the TWD
After holding within a tight range in August, the Taiwan dollar
(TWD) has re-established an appreciating trend against the
USD. Growing onshore growth momentum and an upturn in
equity portfolio inflows are creating a more constructive
backdrop for the TWD.
Inflation developments have been key to our call for a
stronger TWD heading into H2. Inflation risks remain to the
upside for Taiwan as international fuel prices edge higher;
hikes in local fuel prices and natural weather events have
also caused food inflation to spike. Given our call that the
CBC is unlikely to hike rates until 2013, we expect a stronger
FX policy to be used to temper rising inflation.
Equity portfolio flows have improved since August. More than
USD 3bn of net inflows were recorded during the month of
August, taking year-to-date flows back into positive territory
after outflows in Q2. Seasonal patterns suggest that foreign
ownership of Taiwan equities will head higher after bottoming
in July. More generally, our work on TWD seasonality
suggests a tendency towards late-year strength versus the
USD. Further cross-straits liberalisation may also boost
investment flows, which will be supportive of the local
currency.
We have a medium-term Overweight FX rating on the TWD.
The undervaluation of the TWD nominal effective exchange
rate (NEER) means the currency still has room to appreciate.
A re-acceleration in US growth and a recovery in China,
ample global liquidity, a more sustained global growth
rebound, and improving domestic fundamentals are likely to
push USD-TWD lower. Our end-2012 forecast of 29.00 for
USD-TWD is 1.9% below the onshore forward and 1.7%
below the consensus forecast (according to Bloomberg).
Figure 3: Taiwan’s real interest rate remains low
%
Figure 4: Equity flows are a driver of TWD strength
USD bn
Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research
China
Korea
-2
-1
0
1
2
3
4
Jan-09 Jan-10 Jan-11 Jan-12
Total equity flows
(2012 YTD)
USD-TWD (RHS)
29.0
29.2
29.4
29.6
29.8
30.0
30.2
30.4 -4,000
-2,000
0
2,000
4,000
6,000
Jan-12 Mar-12 May-12 Jul-12
Taiwan 3M interbank rate, % inflation-adjusted
Standard Chartered Asia Focus
Thailand – Driving growth from within Usara Wilaipich, +66 2724 8878
24 September 2012 32
Economic outlook
Sluggish export growth continues
Tail risks arising from the European crisis will remain the key
challenge to Thailand‟s growth in 2013. Given heightened
uncertainty, Thailand‟s export sector is likely to continue to
suffer from faltering global demand. Although Thailand‟s
export markets are well diversified, past experience suggests
that this does not fully insulate it from external shocks. In
2009, following the US sub-prime crisis, Thai exports
contracted by 14% – despite the fact that the US market
accounts for only about 11% of Thailand‟s total exports.
Based on this experience, persistently high global risk does
not bode well for the export outlook in 2013.
Thai consumers are sensitive to external shocks
Thailand‟s household consumption has expanded
continuously since 2000, with the exceptions of 2009 and
Q4-2011 (see Figure 2). Consumption growth has been
driven by a combination of factors – favourable employment
conditions, rising disposable income, fiscal stimulus
measures, and supportive monetary policy conditions.
Unemployment has averaged only 2.0% in the past decade,
and per-capita GDP has risen 2.7 times, to USD 5,024 in
2011 from USD 1,852 in 2001.
On the policy front, in recent years, Thai political parties have
often used populist fiscal measures – such as minimum
wage increases, agricultural price subsidies, and tax breaks
for first car purchases – in order to gain popularity among
voters. Meanwhile, monetary policy conditions have been
supportive. The real policy rate has averaged only 0.2%
since Thailand adopted inflation targeting in May 2000.
We believe that ongoing fiscal stimulus measures and
benign monetary policy conditions will continue to support
consumption growth in 2013. However, the pace of growth is
likely to cool as consumer spending on reconstruction after
the 2011 floods fades. In addition, tax breaks for first car
purchases will expire at the end of 2012. Event risk from
Europe could also undermine Thai consumer confidence.
Recent history suggests that Thai consumers are highly
sensitive to event risk, both domestically and externally.
Figure 3 shows the correlation between Thailand‟s
Consumer Confidence Index (CCI) and Private
Consumption Index (PCI). The US sub-prime crisis in late
2008 and the global recession in 2009 dampened
confidence among Thai consumers, and they subsequently
cut consumption. This suggests that Thailand‟s domestic
consumption is not decoupled from external shocks. The
same pattern was seen in response to the domestic shock
of severe floods in late 2011. Thai consumers could cut
and/or delay spending in response to deteriorating
confidence if there are unexpected headwinds from the
European debt crisis in the coming quarters.
Fiscal policy will play a greater role
Thailand‟s low public debt (currently 43% of GDP) implies
that there is ample room for policy manoeuvre, if needed, to
protect growth. In FY13 (year starting 1 October 2012), the
government plans to run a budget deficit of THB 300bn
(about 2.6% of GDP). This is lower than the planned deficit
of THB 400bn (about 3.2% of GDP) in FY12. The
government also plans off-budget spending of about THB
350bn under a special water management decree aimed at
Figure 1: Net exports subtract from growth
ppt
Figure 2: Quarterly real consumption growth
% y/y
Sources: NESDB, Standard Chartered Research Sources: NESDB, Standard Chartered Research
Private consumption
Government consumption
Investment
Net exports
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12
-4
-2
0
2
4
6
8
10
Q1-2000 Q1-2002 Q1-2004 Q1-2006 Q1-2008 Q1-2010 Q1-2012
Standard Chartered Asia Focus
Thailand – Driving growth from within
24 September 2012 33
preventing future flood disasters. Larger government
spending and investment in FY13 should contribute
positively to the Thai economy. However, private
investment is likely to slow as demand for post-flood
reconstruction fades.
Taking all of these factors into account, we now expect the
Thai economy to grow 4.0% in 2013 (versus our previous
forecast of 4.9%). We also raise our 2012 growth forecast to
4.4% from 3.5%.
Monetary policy outlook
Policy rebalancing may be needed
Policy uncertainty in Europe will continue to complicate
Thailand‟s monetary policy outlook. While the current policy
stance remains accommodative enough to support growth,
the prolonged European crisis may require some policy
rebalancing over the coming quarters. To ensure the
continuity of the economic recovery, we now see potential
for gradual rate cuts – 25bps in Q4-2012 and 25bps cut in
H1-2013 – taking the policy rate to 2.50% from 3.0%
currently. Thereafter, we expect the policy rate to be on
hold in H2-2013.
In our view, the current downward inflation trend is unlikely to
continue into 2013 given the minimum wage increase to THB
300 per day, to take effect nationwide for two years from 1
January 2013. Meanwhile, the Bank of Thailand (BoT) has
recently voiced concerns that rapid credit growth in some
sectors warrants close monitoring. Against this backdrop, we
believe the BoT is unlikely to cut rates aggressively.
THB to catch up with AXJ FX
Growth, C/A and positioning support the THB
We expect the Thai baht (THB) to strengthen in Q4-2012
and especially at the beginning of 2013, supported by
positive growth dynamics and stabilising external balances.
Thailand is among the few Asian economies where positive
growth dynamics are continuing. This should support
capital inflows. We expect growth to slow in 2013, but from
a relatively high level, and this is unlikely to be a significant
negative for the THB.
Meanwhile, the current account (C/A) appears to be
stabilising thanks to a recovery in exports following the floods
in late 2011. We expect the C/A to continue to stabilise in
2013, after having been a net negative in H1-2012. Finally,
the Standard Chartered Transaction Flows (SCTF) index
suggests that the market is substantially long USD-THB, in
contrast to general USD-AXJ client positioning (see FX Alert
– Flow Analysis, 17 August 2012, ‘Standard Chartered
Transaction Flows – August’).
Bond curve to bear steepen on supply
FY13 bond supply is heavy. Gross Loan Bond supply will be
THB 651bn, including THB 110bn of linkers and THB 16bn of
FRBs. Net supply will be THB 443bn. The issuance profile
will also be more long-dated, which should exert further
steepening pressure on the curve. We recommend switching
from the 10Y THB into the 3Y BoT (BOT157A) bond.
Figure 3: Confidence is crucial for Thai consumers
Figure 4: Robust bank credit growth
% y/y
Sources: BoT, UTCC, Standard Chartered Research Sources: BoT, Standard Chartered Research
Consumer confidence index (LHS) Private
consumption index (% y/y)
-6
-4
-2
0
2
4
6
8
60
63
66
69
72
75
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
-5
0
5
10
15
20
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Standard Chartered Asia Focus
Vietnam – A warmer 2013 Jeff Ng, +65 6596 8075
Thomas Harr, +65 6596 8247
Jennifer Kusuma, +65 6596 8250
Jaiparan Khurana, +65 6596 7251
24 September 2012 34
GDP growth likely to improve next year
Owing to an absence of positive pull factors, Vietnam's GDP
growth is likely to stay below trend until early 2013. The
country‟s open economy and reliance on export demand
mean that its growth path for the rest of 2012 and 2013 is
heavily dependent on global factors. For now, based on our
core scenario of a slow, moderate US recovery, policy
easing in China in H2-2012, the euro-area recession and a
lethargic Japan, we maintain our 5.0% growth forecast for
2012. We now expect GDP to grow 5.9% in 2013, versus
6.8% previously. We expect inflation to come in at 9% and
10.4% in 2012 and 2013, respectively. We expect no change
to the refinance rate until end-2013 as the government works
on improving the efficiency of the banking sector.
Growth to depend on the global economy
Vietnam‟s economic growth is likely to continue to depend on
global trade demand and foreign investment. In line with the
improved GDP growth reading of 4.7% y/y in Q2 (up from
4.1% in Q1), we expect growth to continue to pick up as
2012 progresses, forecasting 5.2% y/y in Q3 and 5.5% in
Q4. On a seasonally adjusted q/q basis, we expect growth to
be modestly positive until end-2013, except in Q1-2013, as
the economy typically gets off to a slow start at the beginning
of the year. However, there are downside risks to our
projections if the global economy significantly underperforms
our expectations.
Vietnam‟s export growth and freight growth – generally
viewed as more stable and easier to capture accurately than
value-added measures (Figure 2) – both slowed in H1.
Export demand faded during the period amid slowing growth
in Vietnam‟s key markets – Japan, the US and China. This
trend is likely to continue in 2013, in the absence of clear
signals of a pick-up. Strong growth in exports of computer
and electronics components, along with coffee, is helping to
offset the downtrend in other export products.
Inflation expectations likely to rise in H1-2013
Vietnam‟s inflation is likely to bottom out in Q3, and we see
inflationary pressures escalating in Q4 and H1-2013.
Vietnam is the most exposed to global food price inflation
among Asian economies – food constitutes about 40% of its
CPI basket. We estimate that a 1% rise in the Commodity
Research Bureau’s (CRB) food index could increase
headline inflation by more than 10%, after a lag of around
five months. Hence, the full inflationary impact is likely to set
in by H1-2013.
We expect the coming inflation wave to be milder compared
with those in 2008 and 2011. Agricultural prices stabilised in
August-September after climbing sharply in July. According
to the World Bank, global food stocks are still sufficient to
prevent a repeat of the food shortages seen in 2008. Higher
agricultural prices are also likely to incentivise more supply in
the next planting season, in turn moderating prices.
However, upside risks persist; weather conditions in the
coming months, for example, could swing the inflation
outlook sharply.
Active government management in 2013
We expect proactive government efforts in 2013 to manage
the economy. To improve lending conditions, the State Bank
of Vietnam (SBV) capped maximum lending rates at 15% in
July. Given fragile growth and inflation conditions, however,
we do not expect any change in the refinance rate unless
Figure 1: GDP growth expected, but with downside risks
% y/y
Figure 2: A challenging external environment ahead
% y/y
Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research
GDP growth
GDP forecasts
Manufacturing
0
2
4
6
8
10
12
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
Freight carried Exports
-60
-40
-20
0
20
40
60
80
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Standard Chartered Asia Focus
Vietnam – A warmer 2013
24 September 2012 35
conditions deviate sharply from our core scenario. We expect
the government to run another budget deficit in 2013 to
improve investment in facilities and infrastructure (the 2013
budget will be announced by the Ministry of Finance in
December 2012). The government has also adopted an
proactive stance towards reforming the distressed financial
sector and state-owned enterprises (SOEs). In May, the SBV
governor said that eight small banks were "unhealthy", while
many SOEs face bankruptcy concerns. Non-performing
loans (NPLs) remain an issue. Estimates vary, but local
media reported NPLs at 8.6% of total loans, or USD 9.69bn,
in July. A Moody‟s report in August presented a downbeat
view of the country‟s asset quality. We believe the SBV‟s
assurance of liquidity assistance to troubled banks will
minimise the contagion effect for now, and that it will take
time for the banking sector and SOEs to return to health.
Local markets outlook
Neutral outlook on the VND and VGBs
USD-VND remains stable, as the current account is
recovering sharply, while inflation risks have diminished. In
addition, rising FX reserves are providing some cushion
against capital outflows. Further down the road, however,
rising concerns about the health of the Vietnamese banking
sector is a risk. We continue to expect USD-VND to remain
stable around current levels for the rest of 2012 and in 2013.
We have a Neutral outlook on Vietnam Government Bonds
(VGBs). We believe that yields bottomed in May 2012, as the
2Y VGB touched a three-year low of 8.8% before rebounding to
the current 9.45%. Rising but still manageable inflation in 2013
(see forecasts in Figure 3) should maintain upward pressure on
yields, but we expect VGBs to find support from the SBV‟s
neutral monetary stance and a constructive demand outlook.
Supply-demand dynamics in the VGB market are generally
balanced, as the MoF can adjust debt issuance to meet
market demand and source its remaining financing
requirements from bilateral and multilateral loans. We expect
onshore banks‟ demand to remain resilient amid ample
liquidity in the banking system (see Asia Focus, 2 July 2012,
‘The importance of local factors’). Foreign inflows will be an
important swing factor for supply-demand dynamics. We
expect inflows to shorter-dated instruments to pick up given
the stable VND outlook for 2013. The MoF has also allowed
trading in 1Y T-bills (effective 10 September 2012), making
this instrument accessible to foreign investors.
Concerns weigh on credit outlook
The authorities have made progress in establishing a
balanced environment of milder inflation, stable GDP growth
and a manageable balance-of-payments position. The trade
deficit narrowed to USD 62mn in 8M-2012 (from USD 6.2bn
in 8M-2011), and the composition of exports is shifting
towards higher-value-added products. Furthermore, FX
reserves rose to USD 19.9bn as of May 2012 from USD
13.8bn in 2011, and near-term private external debt
maturities are negligible. That said, the balance-of-payments
position is vulnerable to capital flight, as FX reserves cover
only nine weeks of imports. The VIETNM complex has
underperformed in recent weeks as concerns about
worsening asset quality in the banking system have
resurfaced. The authorities estimate that the financial system
will need an injection of USD 12bn for bank recapitalisation.
Given concerns about the banking system and the
contingent liabilities of the SOE sector, we remain cautious
on the complex. We prefer the VIETNM 16 over the VIETNM
20 given the flat credit curve.
Figure 3: Food inflation could lead to another inflation
wave in 2013 (% y/y)
Figure 4: Ample liquidity in the interbank market
%
Sources: CEIC, Standard Chartered Research Sources: Bloomberg
Inflation
Inflation forecasts
-60
-30
0
30
60
90
-20
-10
0
10
20
30
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13
O/n interbank rate
2Y VGB
1
3
5
7
9
11
13
Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12
Simple average of soy, corn, wheat in local currency
(6M lead; RHS)
Standard Chartered Asia Focus
Forecasts – Economies and FX
24 September 2012 36
Country Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP) FX
2011 2012 2013 2014 2011 2012 2013 2014 2011 2012 2013 2014 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13
Majors 1.3 1.1 1.5 2.5 1.9 1.8 1.5 1.7 -1.0 -1.0 -1.1 -0.8
US^ 1.7 2.0 2.0 3.0 1.4 1.8 1.8 2.0 -3.1 -2.8 -2.9 -2.9 N.A. N.A. N.A. N.A. N.A. N.A.
Euro area 1.5 -0.6 0.4 1.8 2.7 2.4 1.6 1.8 -0.1 -0.2 -0.4 -0.1 1.27 1.27 1.23 1.21 1.21 1.25
Japan -0.7 2.1 1.4 2.5 -0.2 0.0 0.1 0.3 2.0 1.5 1.8 2.8 79.00 82.00 83.00 84.00 85.00 85.00
UK 0.7 -0.5 1.1 2.3 4.4 2.6 1.6 1.8 -1.9 -1.4 -1.8 -2.2 1.57 1.59 1.55 1.53 1.58 1.63
Canada 2.5 2.2 2.4 3.0 2.5 2.2 2.0 2.0 -3.0 -2.5 -2.2 -1.9 0.98 0.98 0.99 1.00 0.98 0.98
Switzerland 2.1 0.9 1.5 2.4 0.2 -0.7 0.2 0.8 10.5 13.5 11.5 12.0 0.95 0.95 0.98 1.00 1.00 0.97
Australia 2.0 3.3 2.9 3.2 3.4 2.5 2.6 2.5 -2.4 -2.5 -2.5 -2.2 1.07 1.07 1.05 1.03 1.00 0.95
New Zealand 1.1 2.4 3.8 2.8 4.1 1.6 1.7 1.9 -4.0 -4.3 -4.1 -4.8 0.81 0.81 0.79 0.78 0.82 0.86
Asia 7.3 6.2 6.7 6.7 5.7 3.3 4.4 4.3 2.2 1.6 2.3 2.4
Bangladesh* 6.7 6.1 6.5 6.9 8.8 9.0 8.1 8.5 0.9 0.7 -0.7 -0.5 81.50 80.50 80.50 81.50 82.50 83.50
China 9.2 7.7 7.8 7.5 5.4 2.0 4.0 4.0 2.8 1.9 2.7 3.1 6.36 6.31 6.29 6.27 6.23 6.19
CNH - - - - - - - - - - - - 6.360 6.295 6.275 6.255 6.215 6.175
Hong Kong 5.0 1.8 3.8 4.5 5.3 4.0 4.5 4.0 5.2 4.0 5.0 5.5 7.765 7.785 7.785 7.775 7.770 7.770
India* 6.5 5.4 6.0 6.8 8.7 7.8 6.5 6.0 -4.2 -3.4 -3.0 -2.8 56.00 54.50 54.00 57.50 56.00 55.00
Indonesia 6.5 6.3 6.5 6.8 5.4 4.4 4.6 5.1 0.2 -1.8 -0.5 0.0 9,500 9,600 9,400 9,500 9,400 9,200
Malaysia 5.1 5.0 4.7 5.6 3.2 1.7 2.7 3.1 11.0 5.5 7.5 8.5 3.06 3.02 2.97 3.02 2.97 2.90
Mongolia 17.3 16.0 12.0 10.0 9.2 13.0 10.0 10.0 -15.1 -14.0 -10.0 -8.0 1,340 1,360 1,280 1,260 1,240 1,270
Pakistan* 2.4 3.7 4.0 4.3 13.9 11.0 10.5 12.0 0.3 -1.9 -1.5 -1.8 94.00 96.00 97.00 98.00 99.00 102.00
Philippines 3.8 5.8 5.4 5.0 4.8 3.5 4.6 4.0 2.8 3.2 4.1 3.9 41.75 40.50 40.00 41.00 40.50 39.50
Singapore 4.9 1.9 3.8 5.2 5.1 4.5 3.9 3.0 21.9 16.2 19.5 18.2 1.23 1.22 1.20 1.21 1.20 1.17
South Korea 3.6 2.4 3.2 3.8 4.0 2.3 3.0 3.0 2.4 3.0 2.7 2.2 1,120 1,100 1,070 1,070 1,060 1,040
Sri Lanka 8.3 6.8 7.5 7.7 6.7 7.7 7.5 7.2 -7.6 -6.1 -4.0 -3.5 132.0 130.0 128.5 128.0 127.0 126.5
Taiwan 4.0 2.0 4.5 5.2 1.4 2.1 1.8 1.3 8.8 8.5 8.0 6.0 29.60 29.00 28.70 28.50 28.30 28.50
Thailand 0.1 4.4 4.0 5.5 3.8 2.9 3.1 3.6 3.7 -0.8 -0.4 -0.9 30.75 30.50 30.00 30.50 30.25 29.75
Vietnam 5.9 5.0 5.9 6.8 18.6 9.0 10.4 7.0 -5.5 -2.5 -2.0 -1.5 21,000 21,000 21,000 21,000 21,000 21,000
Africa 4.8 5.1 5.2 5.4 8.5 8.7 6.9 6.9 1.6 0.9 0.6 0.2
Angola 3.7 8.0 6.5 6.5 15.0 14.0 10.0 9.0 12.0 7.0 6.0 5.0 95.00 95.50 95.80 96.00 96.30 96.50
Botswana 8.0 5.6 4.8 6.5 6.9 8.2 6.7 5.7 -1.5 -1.2 0.4 1.3 7.720 7.53 7.66 7.54 7.46 7.61
Cameroon 3.5 4.0 4.5 4.5 2.6 2.5 2.5 2.0 -3.8 -3.3 -3.0 -2.5 517 517 533 542 542 525
Côte d'lvoire -5.8 8.0 5.5 5.0 3.0 2.5 2.5 2.5 1.0 -0.5 -2.0 -2.5 517 517 533 542 542 525
The Gambia -5.0 4.0 9.7 8.3 6.0 5.0 4.0 4.0 -17.0 -14.0 -13.0 -13.0 31.00 31.50 32.00 32.50 33.00 33.50
Ghana 14.4 8.5 7.9 7.6 9.0 10.1 12.7 10.8 -8.9 -6.3 -4.3 -3.6 1.99 2.10 2.01 1.96 1.94 1.89
Kenya 4.9 5.3 5.5 5.9 14.0 10.0 5.1 6.5 -9.3 -8.5 -6.8 -6.5 86.00 87.00 88.00 87.00 86.50 86.00
Nigeria 7.2 6.9 7.3 7.5 10.9 12.1 9.0 9.7 12.2 11.3 10.5 9.0 163.0 161.0 160.5 160.0 161.5 162.0
Sierra Leone 5.2 30.0 8.0 7.0 16.0 11.0 10.0 10.0 -50.0 -7.6 -9.5 -12.4 4,410 4,450 4,470 4,490 4,500 4,510
South Africa 3.2 2.7 3.2 3.5 5.0 5.6 4.9 5.0 -3.4 -3.8 -4.0 -4.2 8.00 8.20 8.00 7.90 7.80 8.00
Tanzania 6.1 6.4 7.5 7.3 11.3 11.7 5.7 5.6 -9.5 -8.7 -10.2 -9.1 1,600 1,620 1,650 1,680 1,720 1,760
Uganda 4.4 5.1 6.9 7.3 18.7 14.7 7.8 9.1 -10.2 -9.9 -7.7 -7.3 2,590 2,660 2,640 2,550 2,400 2,500
Zambia 6.6 7.0 7.2 7.5 8.8 7.4 9.2 9.0 3.2 2.0 2.2 2.4 4,900 4,700 4,600 4,800 4,700 4,650
MENA 6.3 3.7 3.9 4.4 5.2 5.4 4.7 4.8 7.0 7.8 7.2 6.9
Algeria 2.5 3.0 4.0 4.5 4.5 5.5 3.5 3.5 10.5 10.0 8.0 10.0 75.50 77.00 76.00 75.00 74.50 74.00
Bahrain 2.2 3.5 4.0 4.5 -0.4 2.0 3.5 3.5 12.0 10.0 12.0 14.0 0.38 0.38 0.38 0.38 0.38 0.38
Egypt* 1.8 2.0 3.0 3.5 11.3 8.7 9.8 11.0 -1.2 -3.0 -2.0 -0.5 6.06 6.08 6.17 6.18 6.15 6.10
Jordan 2.4 2.5 2.9 3.5 4.6 4.5 5.0 5.2 -7.5 -8.0 -7.5 -7.0 0.71 0.71 0.71 0.71 0.71 0.71
Kuwait* 4.7 3.0 3.0 3.5 5.0 3.8 4.0 4.0 30.0 27.0 28.0 27.0 0.28 0.28 0.27 0.27 0.27 0.27
Lebanon 1.5 3.5 5.5 7.5 5.0 4.8 5.5 5.5 -17.5 -16.0 -15.0 -13.0 1,500 1,500 1,500 1,500 1,500 1,500
Morocco 4.8 2.2 5.5 6.0 0.9 1.5 2.5 2.0 -6.5 -6.8 -5.0 -3.5 8.38 8.75 8.50 8.35 8.30 8.30
Oman 4.1 4.7 4.3 4.0 4.0 3.6 4.5 5.0 10.0 13.0 14.0 9.0 0.39 0.39 0.39 0.39 0.39 0.39
Qatar 16.9 5.9 5.6 5.4 2.4 3.3 3.8 4.2 32.0 30.0 27.0 25.0 3.64 3.64 3.64 3.64 3.64 3.64
Saudi Arabia 6.8 5.1 3.8 3.9 6.1 5.4 4.5 4.2 20.0 23.5 21.0 19.5 3.75 3.75 3.75 3.75 3.75 3.75
Tunisia -1.8 3.0 4.0 5.5 3.5 4.0 3.0 2.8 -7.4 -7.5 -3.5 -2.5 1.49 1.56 1.48 1.50 1.52 1.52
Turkey 8.5 3.5 4.0 5.0 6.5 8.0 5.5 5.5 -9.8 -7.5 -7.0 -7.0 1.75 1.70 1.65 1.63 1.60 1.58
UAE 4.2 3.4 3.7 3.4 0.9 1.5 2.1 2.8 11.2 10.2 8.5 7.4 3.67 3.67 3.67 3.67 3.67 3.67
Latin America 3.8 2.8 4.2 5.0 5.7 5.2 5.3 5.0 -1.7 -1.6 -2.1 -2.3
Argentina 6.3 3.0 3.5 4.5 9.2 11.0 12.0 12.0 0.1 -1.5 -1.5 -1.0 4.68 4.95 5.05 5.25 5.00 5.00
Brazil 2.7 1.7 4.1 5.5 6.5 5.2 5.5 5.0 -2.5 -2.2 -2.8 -3.2 2.05 1.92 1.85 1.80 1.75 1.60
Chile 6.0 4.5 5.0 5.0 4.4 3.0 3.0 3.0 -1.0 0.1 -0.8 -1.1 500 500 490 485 470 450
Colombia 5.7 4.5 4.5 4.5 3.7 3.3 3.3 3.0 -2.7 -2.2 -2.3 -3.0 1,850 1,740 1,750 1,750 1,750 1,725
Mexico 3.9 3.8 4.0 4.0 3.8 4.1 3.8 3.5 -0.7 -0.4 -0.8 -1.0 14.00 13.25 12.50 12.40 12.20 11.00
Peru 6.9 5.5 6.0 6.2 4.7 3.0 2.7 2.5 -1.6 -2.0 -2.4 -2.5 2.70 2.63 2.65 2.60 2.60 2.56
Global 3.1 2.5 3.0 3.7 3.8 3.1 3.1 3.1 -- -- -- --
* Fiscal year starts in April in India and Kuwait, July in Bangladesh, Pakistan, and Egypt
^ Inflation: Core PCE deflator used for US
Source: Standard Chartered Research
Standard Chartered Asia Focus
Forecasts – Rates
24 September 2012 37
End-period Current Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14
% % % % % % %
United States Policy rate 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25
3M LIBOR 0.33 0.45 0.45 0.45 0.45 0.45 0.45 0.45
10Y bond yield 1.79 1.85 1.70 1.80 2.05 2.25 2.50 2.50
Euro area Policy rate 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.50
3M EURIBOR 0.24 0.20 0.15 0.20 0.20 0.30 0.40 0.60
10Y bond yield 1.62 1.30 1.35 1.50 1.65 1.95 2.30 2.50
United Kingdom Policy rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
3M LIBOR 0.65 0.65 0.60 0.65 0.70 0.80 0.90 1.00
10Y bond yield 1.85 1.45 1.55 1.85 2.10 2.25 2.65 2.70
Australia Policy rate 3.50 3.50 3.25 3.25 3.25 3.50 4.00 4.25
3M LIBOR 3.95 4.00 3.75 3.75 3.75 4.00 4.25 4.50
China Policy rate 6.00 6.00 6.00 6.00 6.00 6.00 6.25 6.50
7-day repo rate 3.28 2.50 2.60 3.00 3.00 3.30 3.90 4.40
10Y bond yield 3.55 3.35 3.25 3.30 3.40 3.40 3.40 3.40
Hong Kong 3M HIBOR 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
10Y bond yield 0.81 0.70 0.75 0.80 0.90 0.95 1.00 1.10
India Policy rate 8.00 8.00 8.00 7.75 7.50 7.25 7.00 7.00
91-day T-bill rate 8.09 8.25 8.00 7.75 7.75 7.50 7.25 7.00
10Y bond yield 8.17 8.50 8.25 8.00 7.75 7.50 7.50 7.50
Indonesia Policy rate 5.75 5.75 5.75 5.75 5.75 6.00 6.25 6.25
3M JIBOR 4.92 4.90 5.20 5.30 5.30 5.50 5.80 5.80
10Y bond yield 5.91 5.80 5.50 5.60 5.80 6.00 6.10 6.10
Malaysia Policy rate 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.25
3M KLIBOR 3.19 3.20 3.20 3.20 3.20 3.20 3.20 3.45
10Y bond yield 3.46 3.50 3.50 3.60 3.75 3.75 3.75 3.75
Mongolia Policy rate 13.25 15.00 15.00 13.00 13.00 13.00 13.00 13.00
Philippines Policy rate 3.75 3.75 3.50 3.50 3.50 3.50 3.50 3.50
3M PDST-F 1.41 1.50 2.00 2.50 3.00 3.25 3.50 3.50
10Y bond yield 4.68 5.05 4.80 5.10 5.30 5.50 5.50 5.50
Singapore 3M SGD SIBOR 0.38 0.35 0.35 0.35 0.35 0.35 0.35 0.35
10Y bond yield 1.51 1.48 1.40 1.50 1.60 1.65 1.70 1.80
South Korea Policy rate 3.00 3.00 2.50 2.50 2.50 2.50 2.50 2.75
91-day CD rate 3.15 3.15 2.70 2.70 2.70 2.70 2.70 2.95
10Y bond yield 3.12 3.00 2.80 2.80 2.80 2.90 3.00 3.20
Taiwan Policy rate 1.88 1.88 1.88 1.88 2.00 2.13 2.25 2.38
3M TAIBOR 0.89 0.90 0.90 0.90 0.95 1.00 1.05 1.10
10Y bond yield 1.19 1.20 1.30 1.30 1.40 1.50 1.60 1.60
Thailand Policy rate 3.00 3.00 2.75 2.75 2.50 2.50 2.50 2.50
3M BIBOR 3.16 3.13 2.80 2.75 2.55 2.60 2.65 2.70
10Y bond yield 3.66 3.40 3.50 3.60 3.75 3.90 4.00 4.00
Vietnam Policy rate (Refi rate) 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00
Overnight VNIBOR 5.11 5.50 7.00 7.00 7.00 7.00 7.00 7.00
2Y bond yield 9.45 9.50 9.50 9.25 9.50 9.65 9.75 9.85
Ghana Policy rate 15.00 15.00 15.00 16.00 16.50 16.00 15.00 14.50
91-day T-bill rate 22.99 22.80 22.70 22.00 21.00 19.00 16.40 15.20
3Y bond yield 17.25 19.00 21.00 19.00 18.00 16.00 15.00 16.00
Kenya Policy rate 13.00 13.00 11.50 10.00 9.00 8.50 8.50 8.50
91-day T-bill rate 7.51 8.15 7.40 6.80 6.30 6.50 6.40 6.20
10Y bond yield 10.50 12.50 11.50 11.00 10.50 10.00 9.50 9.50
Nigeria Policy rate 12.00 12.00 12.00 12.00 12.00 12.00 12.00 13.00
91-day T-bill rate 13.15 14.60 15.20 15.50 15.80 15.50 14.90 14.30
10Y bond yield 12.05 11.00 10.00 9.50 10.00 11.00 12.00 16.60
South Africa Policy rate 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.50
91-day T-bill rate 5.31 5.54 5.60 5.67 5.72 6.06 6.08 6.54
10Y bond yield 7.04 6.90 7.00 7.10 7.20 7.30 7.40 7.80
Source: Standard Chartered Research
Standard Chartered Asia Focus
Forecasts – Commodities
24 September 2012 38
Market
closeQ2 - 12 Q3 - 12 Q4 - 12 Q1 - 13 Q2 - 13 Q3 - 13 Q4 - 13 2011 2012 2013
19-Sep-12 A F F F F F F A F F
Crude oil (nearby future, USD/b)
NYMEX WTI 92.0 93 94 102 100 99 106 110 95.1 98 104
vs fw d % 2% 10% 7% 6% 15% 20% 6% 12%
ICE Brent 108.2 109 111 114 110 107 112 115 111.0 113 111
vs fw d % 1% 1% 1% 3% 9% 13% 0% 8%
Dubai spot1 109.8 106 106 111 107 104 109 112 106.1 110 108
Refined oil products cracks and spreads
Singapore naphtha (USD/b)1 -6.2 -8.5 -10 -8 -5 -3 -2 2 -3.8 -7.5 -2.0
Singapore jet kerosene (USD/b)1 20.5 15.9 17 17 17 17 25 17 19.4 16.3 16.8
Singapore gasoil (USD/b)1 18.7 15.4 16 17 18 19 23 17 18.3 16.1 17.9
Singapore regrade (USD/b)1 1.7 0.6 1 0 -2 -2 -1 -1 1.1 0.2 -1
Singapore fuel oil 180 (USD/b)1 -4.0 -1.3 -1 -2 -3 -3 -2 -3 -4.0 -1.3 -3
Europe gasoil (USD/b)1 19.1 15.3 15 16 16 17 17 17 14.4 15.2 16
Rotterdam 3.5% barges (USD/b)1 -8.4 -10.4 -12 -12 -12 -13 -11 -13 -14.9 -11.1 -12
Europe jet (USD/b) 26.3 17.1 17 17 15 14 15 14 17.9 16.6 15
Coal (USD/t)
API4 87 93 88 92 95 97 97 98 117 94 97
vs fw d % 0% 3% 3% 2% -1% -2% 7% 0%
API2 90 92 92 94 98 98 100 100 121 95 99
vs fw d % 0% 3% 4% 1% -1% -4% 5% 0%
globalCOAL NEWC*1 91 96 90 95 105 102 105 108 121 99 105
Base metals (LME 3m, USD/t)
Aluminium 2,140 2,021 1,900 2,100 2,200 2,200 2,200 2,200 2,424 2,059 2,200
vs fw d % -2% -2% 2% 1% 0% -1% -3% 0%
Copper 8,350 7,837 7,600 8,000 8,500 9,000 9,000 9,000 8,833 7,939 8,875
vs fw d % -2% -4% 2% 8% 8% 8% -5% 6%
Lead 2,271 1,988 1,900 2,050 2,150 2,300 2,300 2,300 2,391 2,013 2,263
vs fw d % -4% -10% -6% 0% 0% 0% -11% -1%
Nickel 17,755 17,219 16,000 18,000 19,000 21,000 21,000 21,000 22,896 17,728 20,500
vs fw d % -2% 1% 7% 18% 17% 17% 0% 15%
Tin 21,380 20,625 19,000 21,000 23,000 25,500 25,500 25,500 26,042 20,891 24,875
vs fw d % -2% -2% 8% 19% 19% 19% -2% 16%
Zinc 2,124 1,934 1,875 2,000 2,100 2,250 2,250 2,250 2,212 1,962 2,213
vs fw d % -1% -6% -2% 4% 4% 3% -7% 2%
Iron ore (USD/t)
Iron ore2 108 140 110 115 125 140 133 140 168 127 135
Steel** (CRU assessment, USD/t)
HRC, US1 697 728 680 765 840 840 840 840 814 742 840
HRC, Europe1 636 692 612 632 632 650 640 665 771 658 647
HRC, Japan1 830 828 820 875 965 965 965 965 910 846 965
HRC, China1 594 690 589 632 664 717 788 795 736 649 741
Precious metals (spot, USD/oz)
Gold (spot) 1,770 1,612 1,650 1,750 1,800 1,900 1,900 1,900 1,573 1,676 1,875
vs fw d % 0% -1% 1% 7% 7% 7% -5% 5%
Palladium (spot) 672 629 600 650 800 800 800 800 733 640 800
vs fw d % -3% -3% 19% 19% 19% -5% 19%
Platinum (spot) 1,640 1,501 1,450 1,650 1,700 1,800 1,800 1,800 1,720 1,552 1,775
vs fw d % -3% 0% 3% 9% 9% -5% 8%
Silver (spot) 35 29.5 29 33 34 35 35 35 35.3 31 35
vs fw d % -3% -5% -2% 1% 1% 1% -10% 0%
Softs (nearby future)
NYBOT cocoa, USD/t 2,538 2,218 2,450 2,400 2,500 2,600 2,700 2,800 2,921 2,343 2,650
vs fw d % 0% -6% -2% 1% 5% 8% -8% 3%
LIFFE coffee, USD/t *** 2,010 2,067 2,085 2,000 1,950 1,950 1,950 1,950 2,195 2,023 1,950
vs fw d % 0% -1% -5% -6% -7% -8% 0% -6%
NYBOT coffee, USc/lb 174 170 175 180 185 190 205 205 253 183 196
vs fw d % 1% 3% 4% 4% 10% 8% 4% 7%
NYBOT sugar, USc/lb 19 21.2 21 22 24 23 26 26 27.1 22 25
vs fw d % 1% 12% 22% 16% 29% 26% 15% 23%
TOCOM RSS3 rubber#, JPY/kg 260 280.8 235 250 255 260 260 260 375.2 271 259
Fibres
NYBOT cotton No.2, USc/lb 75 81 73 80 85 86 83 85 138 82 85
vs fw d % 0% 5% 10% 10% 4% 5% 8% 7%
Grains & oilseeds (nearby future)
CBOT corn (maize), USc/bushel 757 618 790 820 830 780 760 780 680 717 788
vs fw d % 1% 8% 9% 4% 13% 22% -5% 11%
CBOT soybeans, USc/bushel 1,670 1,426 1,700 1,675 1,500 1,550 1,450 1,500 1,318 1,518 1,500
vs fw d % 1% 0% -8% 0% -1% 10% -9% 0%
CBOT w heat, USc/bushel 882 641.6 870 890 920 880 800 850 708.9 761 863
vs fw d % 0% 1% 3% 0% -8% -3% -14% -2%
CBOT rice, USD/cw t 15 14.8 15 15 16 16 16 16 15.1 15 16
vs fw d % 0% -2% 2% 0% 2% 2% -3% 1%
Thai B rice 100%, USD/tonne*1 575 602 600 600 600 600 625 625 566 591 613
Edible oils (nearby future)
Palm oil (MDV,MYR/t) 2,705 3,237 2,975 3,250 3,500 3,300 3,250 3,400 3,244 3,176 3,363
vs fw d % 2% 15% 19% 11% 10% 16% 13% 14%
Soyoil (CBOT, USc/lb) 56 53 55 54 52 53 51 53 56 54 52
vs fw d % 1% -4% -8% -6% -8% 0% -4% -6%
Sources: Bloomberg, Standard Chartered Research
Energy
Metals
Agricultural products
*weekly quote **monthly average ***10 tonne contract; 1no forward price comparison available; 2cost and freight at China’s Tianjin port, 62% iron content, Indian origin; #6th contract;
Standard Chartered Asia Focus
Forecasts – GDP growth and inflation
24 September 2012 39
Quarterly forecasts
Real GDP growth (y/y)
Q1-11A Q2-11A Q3-11A Q4-11A Q1-12A Q2-12F Q3-12F Q4-12F Q1-13F Q2-13F Q3-13F Q4-13F
US* 0.4 1.3 1.8 3.0 1.9 1.7 2.1 1.9 1.8 2.0 2.2 2.2
Euro area 2.4 1.6 1.3 0.6 0.0 -0.5 -1.0 -0.9 -0.7 -0.1 0.8 1.5
Japan 0.0 -1.8 -0.6 -0.7 2.9 3.2 1.2 1.1 0.9 1.0 1.6 2.1
UK 1.4 0.5 0.5 0.6 -0.2 -0.5 -0.8 -0.3 0.3 1.2 1.3 1.8
Bangladesh 6.6 6.3 6.7 6.5 6.3 6.2 6.2 6.4 6.7 6.6 6.3 6.5
China 9.7 9.5 9.1 8.9 8.1 7.6 7.4 7.3 7.5 7.8 8.0 8.0
Hong Kong 7.8 5.1 4.3 2.8 0.7 1.2 2.2 3.0 3.8 4.0 3.6 3.6
India 9.2 8.0 6.7 6.1 5.3 5.5 5.1 5.3 5.6 5.6 6.0 6.3
Indonesia 6.5 6.5 6.5 6.5 6.3 6.4 6.4 6.3 6.4 6.5 6.6 6.6
Malaysia 5.2 4.3 5.8 5.2 4.8 5.4 5.2 4.5 4.2 4.4 4.8 5.3
Philippines 4.9 3.6 3.2 4.0 6.3 5.9 5.3 5.5 4.8 5.1 6.3 5.5
Singapore 9.3 0.9 6.1 3.6 1.4 2.0 1.4 3.0 2.3 3.5 4.6 4.6
South Korea 4.2 3.5 3.6 3.3 2.8 2.3 2.1 2.5 2.4 3.1 3.5 3.9
Sri Lanka 7.9 8.2 8.4 8.3 7.9 6.4 6.4 6.7 7.4 7.3 7.5 7.8
Taiwan 6.6 4.5 3.5 1.9 0.4 -0.2 2.2 5.5 6.0 5.0 4.0 3.0
Thailand 3.2 2.7 3.7 -8.9 0.4 4.2 2.8 10.7 3.6 3.5 4.3 4.8
Vietnam 5.4 5.7 6.1 6.1 4.1 4.5 5.2 5.5 7.4 5.3 5.4 5.9
Consumer price inflation (y/y)
Q1-11A Q2-11A Q3-11A Q4-11A Q1-12A Q2-12F Q3-12F Q4-12F Q1-13F Q2-13F Q3-13F Q4-13F
US* 1.1 1.3 1.6 1.7 1.9 1.8 1.7 1.7 1.6 1.7 1.8 1.9
Euro area 2.5 2.7 2.7 2.9 2.7 2.5 2.4 2.1 2.0 1.7 1.5 1.4
Japan -0.5 -0.4 0.1 -0.3 0.3 0.2 -0.5 -0.1 -0.3 -0.2 0.6 0.6
UK 4.1 4.4 4.7 4.7 3.5 2.7 2.4 2.0 1.6 1.7 1.7 1.8
Bangladesh 9.8 10.3 11.4 11.2 10.7 9.2 8.1 8.2 8.3 8.7 7.8 7.4
China 5.1 5.7 6.3 4.6 3.8 2.9 1.4 1.5 2.5 3.5 4.5 5.5
Hong Kong 3.8 5.2 6.4 5.7 5.2 4.2 3.2 3.5 4.0 4.2 4.5 4.8
India 9.6 9.6 9.7 9.0 7.5 7.7 8.5 7.8 7.2 6.8 6.5 6.2
Indonesia 6.7 5.5 4.6 3.8 4.0 4.5 4.6 4.5 4.8 4.4 4.4 5.0
Malaysia 2.8 3.3 3.4 3.2 2.3 1.7 1.3 1.5 1.9 2.5 3.1 3.3
Philippines 4.5 4.9 4.9 4.7 3.1 2.9 3.7 4.2 5.2 5.1 4.4 3.6
Singapore 5.2 4.7 5.5 5.5 4.9 5.3 3.8 4.0 3.7 3.5 4.1 4.2
South Korea 3.8 4.0 4.3 4.0 3.0 2.4 1.6 2.2 2.5 3.2 3.4 2.7
Sri Lanka 7.0 8.1 7.4 7.3 4.0 7.5 9.6 9.8 8.3 7.5 6.6 7.3
Taiwan 1.3 1.7 1.3 1.4 1.3 1.7 2.9 2.4 2.0 1.8 1.7 1.5
Thailand 3.0 4.1 4.1 4.0 3.4 2.5 2.7 2.8 2.9 2.8 3.0 3.6
Vietnam 12.8 19.4 22.5 19.8 15.9 8.6 5.1 6.2 8.1 10.7 12.2 10.4
*(quarterly) Core PCE deflator y/y sa ;
Source: Standard Chartered Research
Standard Chartered Asia Focus
Reference tables
24 September 2012 40
Economy
Size
(USD bn) Population
(mn)
Private consumption (% of GDP)
Government spending
(% of GDP)
Investment (% of GDP)
Exports of goods
(% of GDP)
Imports of goods
(% of GDP)
FX reserves (USD bn, latest)
Bangladesh 104.2 164.5 75.6 5.4 25.0 18.5 24.9 10.2
China 7400.0 1,339.7 33.8 28.0 49.0 26.0 24.0 3,204.0
Hong Kong 243.0 7.1 65.2 8.3 21.9 176.4 198.9 298.2
India 1860.0 1,202.0 61.7 11.9 34.1 26.9 34.7 287
Indonesia 847.1 241.2 55.4 8.2 25.2 49.3 38.1 109.0
Malaysia 278.9 28.7 47.7 13.6 20.1 94.2 77.7 134.7
Philippines 225.0 94.0 73.4 9.4 19.3 31.2 36.2 80.8
Singapore 260.0 5.3 39.4 9.7 23.4 209.0 182.3 246.0
South Korea 1,116.4 50.0 52.9 15.4 29.5 49.7 46.6 316.9
Sri Lanka 59.0 20.8 69.8 21.4 29.9 23.1 37.6 7.1
Taiwan 430.6 23.3 58.0 12.2 22.6 73.7 66.5 400.8
Thailand 318.9 67.4 51.7 10.0 20.9 69.5 52.9 187.3
Vietnam 123.6 89.3 66.5 6.5 38.9 77.5 87.8 15.0
Sources: National Statistics Offices, CEIC, Bloomberg, Standard Chartered Research
Policies
Politics and fiscal policy Monetary policy
Date of next
election Type of election
Date of next budget
announcement Policy objectives
Explicit inflation target
Key monetary policy tools
Bangladesh 2014 Parliamentary Jun-13 Ensuring growth and price
stability NA
Repo and reverse repo rates
China Late 2012 Party Congress N/A Stable economic growth and
price levels NA
1Y benchmark deposit and lending rates
Hong Kong 2016 Legislative Council Feb-13 Exchange rate stability NA Linked Exchange Rate
System
India 01-May-2014 Parliamentary Feb-13 Ensuring growth, price and
financial stability NA Repo rate, CRR
Indonesia 2014 Parliamentary and
presidential Oct-12
(2013 budget) Price stability 3.5-5.5%
BI rate, overnight deposit facility rate
(FASBI)
Malaysia 01-Mar-2013 Parliamentary Oct-12 Sustainable growth and
monetary stability N/A Overnight policy rate
Philippines 13-May-2013 Local/senatorial Oct-12 Low and stable inflation and sustainable economic growth
3-5% Overnight repo and reverse repo rates
Singapore 01-May-2016 Parliamentary Feb-13 Non-inflationary economic
growth N/A SGD NEER policy band
South Korea 19-Dec-2012 Presidential Sep-12 Price stability and financial
stability 2-4% Base rate
Sri Lanka 2016 Parliamentary and
presidential Nov-12 Price stability N/A
Repo rate, Statutory required reserve
Taiwan 01-Jul-2015 Parliamentary Oct-12 Price stability 0.5-3.0%
(core) 1-day repo
Thailand 01-Jul-2015 Parliamentary Oct-12 Price stability 0.5-3.0%
(core) 1-day repo
Vietnam 2016 National Party Congress Q4-2013 Price stability N/A Refinance rate
Sources: Standard Chartered Bank
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Document approved by
Stephen Green Regional Head of Research, Greater China
Data available as of
01:00 GMT 24 September 2012
Document is released at
01:00 GMT 24 September 2012