deutsche bank asia economics monthly - china

Asia

14 October 2011

Asia Economics Monthly October 2011

Deutsche Bank AG/Hong Kong

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 146/04/2011.

Economics

Table of Contents Asia economic and financial forecasts ............... Page 2China................................................................... Page 3Hong Kong .......................................................... Page 6India .................................................................... Page 8Indonesia .......................................................... 4Malaysia............................................................ Page 16Philippines ........................................................ Page 18Singapore ......................................................... Page 20South Korea ...................................................... Page 22Sri Lanka ........................................................... Page 26Taiwan .............................................................. Page 28Thailand ............................................................ Page 30Vietnam ............................................................ Page 32Interest rate and inflation charts ....................... Page 34Asian economic indicators ............................... Page 38

Research Team

Michael Spencer, Ph.D Chief Economist, Asia (+852) 2203 8305 [email protected]

Jun Ma, Ph.D Chief Economist, Greater China (+852) 2203 8308 [email protected]

Taimur Baig, Ph.D Chief Economist, India (+65) 6423 8681 [email protected]

Juliana Lee Senior Economist (+852) 2203 8312 [email protected]

Kaushik Das Economist (+91) 22 6658-4909 [email protected]

Mac

ro

Glo

bal

Mar

kets

Res

earc

h

Eco

no

mic

s

CHINA: We reiterate our view that the cooling property market, slowing export demand, and inventory destocking will slow sequential GDP growth in the coming two quarters. Property sales declined by 40%yoy in past month in 35 major cities. CPI inflation remains on a deceleration track towards 4%yoy in December. Food, oil and some raw materials prices declined in recent weeks

HONG KONG: The economy likely rebounded in Q3 from Q2’s contraction led by continued strong retail sales growth and at least stable export volumes. Inflation has proved “sticky” and may continue to do so even with more moderate growth. Property market sentiment has softened appreciably, which could dampen both growth and inflation.

INDIA: High frequency macro indicators point to lackluster growth but are far from suggesting growth weakening to levels seen in 2008/09. A likely shortfall in the disinvestment target, lower tax collection and higher fuel subsidies could compel the government to resort to further market borrowings in the later part of the fiscal year.

INDONESIA: The economy continues to boom in all respects, with little downside visible despite a weaker outlook for commodities.

MALAYSIA: Export growth has slowed to a crawl, but the 2012 budget offers less stimulus than expected. But inflation will likely be lower without subsidy cuts.

PHILIPPINES: Trade is contracting, which poses downside risk to growth, but domestic economy remains resilient.

SINGAPORE: We think the economy escaped recession in Q3, but there’s hardly any growth in the economy as global growth stagnates.

SOUTH KOREA: Assuming a sustained growth in the US, we rule out a recession in South Korea, although we expect its growth to remain below trend.

SRI LANKA: Growth momentum still holding up, thanks to strong domestic demand and accommodative monetary policy stance but risks of policy error cloud the growth outlook for 2012.

TAIWAN: While high frequency data point to a qoq contraction in Q3, we expect a rebound in Q4, if the US economy continues to expand.

THAILAND: Data thus far point to a rebound in growth in Q3, but Thailand faces strong headwinds as floods and weaker G2 demand threaten growth, prompting the Bank of Thailand to pause.

VIETNAM: Amid sustained growth rises, the State Bank of Vietnam (SBV) delivers a rate hike, prioritizing inflation, as the dong remains under pressure.

14 October 2011 Asia Economics Monthly


Asian Economics and Financial Forecasts

I. Macroeconomic Indicators

(YoY%) (YoY%) (% of GDP) (% of GDP)2009 2010 2011F 2012F 2009 2010 2011F 2012F 2009 2010 2011F 2012F 2009 2010 2011F 2012F

China 9.1 10.3 9.0 8.3 -0.7 3.3 5.3 2.8 6.0 5.2 4.4 3.7 -2.9 -1.7 -1.5 -2.3

Hong Kong -2.7 7.0 5.8 4.4 0.6 2.3 5.4 5.0 8.6 6.2 5.7 2.8 1.6 4.2 1.7 3.5

India 6.8 10.0 8.0 8.0 2.4 9.6 9.4 6.4 -2.0 -3.1 -3.4 -3.5 -6.4 -4.7 -5.5 -4.8

Indonesia 4.6 6.1 6.5 6.5 4.9 5.1 5.5 6.1 2.0 0.8 0.4 0.3 -1.5 -0.6 -1.1 -1.5

Malaysia -1.6 7.2 4.6 4.2 0.7 1.7 3.2 2.6 16.5 11.5 9.4 6.7 -7.0 -5.6 -4.9 -5.0Philippines 1.1 7.6 4.0 4.5 3.3 3.8 4.8 3.7 5.6 4.2 4.5 4.0 -3.6 -3.5 -3.1 -2.9

Singapore -0.8 14.5 6.2 4.4 0.6 2.8 5.1 2.2 19.1 22.2 19.6 15.1 -1.6 5.1 8.1 5.0

South Korea 0.3 6.2 3.7 3.9 2.8 3.0 4.4 3.4 3.9 2.8 1.1 0.0 -1.7 -0.2 0.0 -1.0

Sri Lanka 3.5 8.0 8.0 8.0 3.6 6.2 7.0 6.0 -0.5 -2.9 -5.0 -5.5 -9.9 -7.9 -7.5 -6.5

Taiwan -1.9 10.9 4.6 3.9 -0.9 1.0 1.4 1.3 11.4 9.2 7.7 6.3 -4.5 -3.7 -3.3 -3.6

Thailand -2.3 7.8 3.7 4.0 -0.8 3.3 3.9 4.5 8.3 4.6 4.7 4.1 -5.6 -1.1 -3.3 -4.4

Vietnam 5.3 6.8 5.9 6.3 6.8 9.2 19.1 15.9 -8.0 -4.2 -5.0 -4.9 -9.0 -6.5 -5.0 -5.3

Emerging Asia* 6.1 9.5 7.6 7.2 1.0 4.6 6.0 4.1 5.1 4.0 3.1 2.4 -3.9 -2.9 -2.3 -2.9

EM Asia ex China&India* 0.5 7.6 4.9 4.7 2.8 3.6 5.0 4.5 6.7 5.2 3.9 2.7 -2.9 -1.0 -1.0 -1.7

Real GDP Growth Inflation Current Account Fiscal Balance

II. Exchange Rates (vs. USD) Forecasts vs Forward Rates

DB Forward DB Forward DB Forward

China CNY 6.36 6.31 6.39 6.25 6.40 6.17 6.40

Hong Kong HKD 7.78 7.80 7.77 7.80 7.76 7.80 7.75

India INR 49.3 48.0 49.7 47.7 50.2 47.1 50.6

Indonesia IDR 8950 8835 8957 8790 9076 8700 9294

Malaysia MYR 3.14 3.09 3.15 3.07 3.15 3.04 3.17

Philippines PHP 43.5 43.0 43.4 42.6 43.4 42.0 43.4

Singapore SGD 1.28 1.24 1.27 1.23 1.27 1.21 1.26

South Korea KRW 1167 1150 1163 1100 1166 1080 1167

Taiwan NTD 30.4 29.8 30.1 29.5 30.0 28.5 29.7

Thailand THB 30.8 30.2 31.0 30.6 30.0 31.1 30.8 29.2 31.4 #Vietnam VND 20873 20900 21945 21000 22332 22000 23232

12-Month 6-Month 3-Month

14-Oct

Spot

III. Interest Rates (3-Month Interbank Rate)** Forecasts vs Implied Offshore Rates

DB Implied DB Implied DB Implied

China 3.50 3.50 3.39 3.50 3.35 3.50 3.43

Hong Kong 0.20 0.25 0.48 0.25 0.59 0.25 0.56

India 8.45 8.50 8.14 8.10 7.60 7.90 7.32

Indonesia 6.50 6.00 5.57 6.00 5.69 6.50 5.64

Malaysia 3.30 3.30 3.35 3.30 3.47 3.50 3.11

Philippines 2.89 3.50 2.15 4.00 1.86 4.55 2.32

Singapore 0.40 0.40 -0.02 0.40 0.67 0.40 0.39

South Korea 3.60 3.60 3.47 3.65 3.37 3.85 3.38

Taiwan 0.80 0.80 1.06 0.90 0.82 1.10 0.89

Thailand 3.60 3.60 2.49 3.90 2.50 4.40 2.86

14-Oct

3-Month 6-Month 12-Month

Source: Bloomberg Finance LP, Reuters, DB Global Markets Research Note: * GDP (PPP) weighted. ** Except for China, 1-yr deposit rate; India and Philippines, 3-mth T-bill yield; Indonesia, 1-mth BI rate; Pakistan, 12-mth T-bill yield; South Korea, 3-mth CD rate; Taiwan, 3-mth CP rate; Thailand, 3-mth on-shore THB/THB swap rate.



China Aa3(Pos)/AA-/A+ Moody’s/S&P/Fitch

We reiterate our view that the cooling property

market, slowing export demand, and inventory destocking will slow sequential GDP growth in the coming two quarters. Property sales declined by 40%yoy in past month in 35 major cities.

CPI inflation remains on a deceleration track towards 4%yoy in December. Food, oil and some raw materials prices declined in recent weeks.

However, policy easing is not yet a consensus at the central government level, although local pressures for changes are growing. The reversal of Foshan government decision to relax HPRs is the most recent case of the “policy stalemate”. We think a combination of a sub-44 export orders index, a 30%yoy drop in property sales for a few more months, some visible contraction in construction activities, and a decline of yoy CPI inflation below 5% may trigger some significant policy relaxation.

We reiterate our view that the cooling property market, slowing export demand, and inventory destocking will slow sequential GDP growth in the coming two quarters. In our last monthly, we published our forecast that qoq (saar) GDP growth would decelerate from 9.1% in Q2 to 8% in Q3, 7% in Q4, and 6.8% in Q1 next year. The most recent developments reinforced our conviction that this deceleration will occur:

First, in September and the first week of October, property sales in 35 major cities declined by 40%yoy (compared with about zero growth in the first eight months of this year), according to Soufun. This reflected the growing reluctance of potential home owners to buy as expectations of further price cuts are reinforced by the worsening credit crunch for developers. We believe this will lead to a slowdown in construction activities and demand for materials in the coming months.

Second, European manufacturing PMI continued to deteriorate, to 48.5 in September from 49 in August, indicating that China’s export demand will likely weaken further, given that Europe is China’s largest export market and the historical correlation between the EU and US economies was as high as 80%.

Third, the decline in commodity prices in recent months will likely trigger another round of inventory destocking. This should in turn depress apparent demand for a while.

Property sales volume in 35 cities, yoy% change, 5-

week moving avg

-50%-40%-30%-20%-10%

0%10%20%30%40%50%60%

5/15

/201

1

5/22

/201

1

5/29

/201

1

6/5/

2011

6/12

/201

1

6/19

/201

1

6/26

/201

1

7/3/

2011

7/10

/201

1

7/17

/201

1

7/24

/201

1

7/31

/201

1

8/7/

2011

8/14

/201

1

8/21

/201

1

8/28

/201

1

9/4/

2011

9/11

/201

1

9/18

/201

1

9/25

/201

1

10/2

/201

1

10/9

/201

1

Source: Soufun.

CPI inflation remains on a deceleration track towards 4% in December. We expect yoy CPI inflation to decline from 6.1% in September to 5.3% in October, 4.4% in November and 4% in December. In recent weeks, the daily agriculture price index fell 4% from the peak of 199.5 (September 26) to the 191.3 on October 12. This partly reflected the seasonal pattern that after mid-autumn festivals food prices tend to decline. If the daily index is maintained at the current level for the remainder of this month, the mom change in this index will be a decline of 2.8% in October. This will knock off CPI by around 50bps. In addition, the cut in retail gasoline prices implemented on October 8 (by 3.5%) should reduce CPI by another 10bps.

Daily wholesale agriculture price index

150

160

170

180

190

200

210

1-Ju

l-10

15-J

ul-1

029

-Jul

-10

12-A

ug-1

026

-Aug

-10

9-Se

p-10

23-S

ep-1

07-

Oct

-10

21-O

ct-1

04-

Nov

-10

18-N

ov-1

02-

Dec

-10

16-D

ec-1

030

-Dec

-10

13-J

an-1

127

-Jan

-11

10-F

eb-1

124

-Feb

-11

10-M

ar-1

124

-Mar

-11

7-A

pr-1

121

-Apr

-11

5-M

ay-1

119

-May

-11

2-Ju

n-11

16-J

un-1

130

-Jun

-11

14-J

ul-1

128

-Jul

-11

11-A

ug-1

125

-Aug

-11

8-Se

p-11

22-S

ep-1

16-

Oct

-11

Source: Ministry of Agriculture

Pressures for policy easing have become more evident, but it will take time to reach policy consensus. Over the past month, several developments suggest that the government is becoming a bit more concerned on the downside risk to the economy arising from the SME sector. Premier Wen Jiabao paid a special visit to



Wenzhou where many cases of “ran-away bosses” (SME defaults) were reported and informal lending rates rose. Premier Wen suggested that banks should increase their NPL tolerance for small businesses, special financing facilities should be set up to serve micro firms, and more tax incentives should be offered to micro firms. However, it does not appear to us that any major policy changes will take place immediately to significantly change the operating environment for SMEs.

Another case that illustrates the anxiety felt by local governments is the announcement by Foshan (a second tier city in Guangdong) municipal government to relax the home purchase restrictions (HPRs) in the morning of October 11. However, in the mid-night of the same day, the government decided to revoke this policy. We believe that the desire to relax the HPRs reflects the local government’s concern on declining property sales, construction activities, and government revenue, but such a decision remains contradictory to central government policy and is opposed strongly by new home buyers.

Overall, we believe that the macro policy stance will remain largely unchanged in the near future, as long as export growth remains over 15%yoy and inflation is still above 5%. Policy easing should take place when real economic growth deteriorates more significantly and inflation falls to a more comfortable level. As an illustrative example, we think the combination of the following may be sufficient to trigger some major policy relaxation: a sub-44 export orders index, a 30%yoy drop in property sales for a few more months, some visible contraction in construction activities, and a decline of yoy CPI inflation below 5%.

Local government bonds to help mitigate banks’ risk to LGFV loans. Zhejiang provincial government announced that the Ministry of Finance has authorized it to issue RMB8bn in bonds independently as a pilot program for local finance reform. The issuance will consist of 50% 3-year bonds and 50% 5-year bonds. The proceeds will be used to fund transport infrastructure such as railway projects (RMB2.75bn, or 34% of total), public housing (RMB1.37bn or 17%), health care and education infrastructure (RMB1.7bn, or 21%), agriculture infrastructure (RMB0.49bn, or 6%) as well as others. The central government requires that the bond proceeds be used to support only on-going projects (rather than to start new projects). In our view, an important purpose of permitting local government bond issuance is to refinance some LGFV loans that are maturing. By refinancing these on-going projects, it helps avoid the potential defaults of some LGFVs on bank loans.

It was also reported in local press (e.g., Daily Economics News on Sep 30) that three other provinces/cities (including Shanghai, Guangdong, and Shenzhen) were

authorized to issue bonds independently soon. The total quota for these four provinces/cities may reach RMB25-30bn.

We expect that provincial government bond issuances will be formally authorized soon, i.e., many more provinces will be allowed to issue bonds from next year. Our assumption is that local government bond issuances may amount to RMB300bn per year over the coming years. As reported by the State Audit Office, total outstanding bank loans to local governments and LGFVs amounted to RMB8.5tn by the end of 2010. Market estimates of the potential NPL ratios, assuming no government support (refinancing or other forms of bailout) on these loans, range from 20-30%.

In sum, we believe that the launch of independent local government bond issuances will form part of the resolution strategy for potentially non-performing LGFV loans. This will essentially turn part of banks' exposure to LGFVs to provincial governments' fiscal liabilities. It should be viewed as positive for banks over the medium term as it helps mitigate the banks' asset quality risk.

Jun Ma, Hong Kong, (852) 2203 8308



China: Deutsche Bank forecasts 2009 2010 2011F 2012FNational Income Nominal GDP (USD bn) 4921 5879 7031 8117Population (mn) 1364 1374 1383 1389GDP per capita (USD) 3608 4279 5084 5843 Real GDP (YoY%)1 9.1 10.3 9.0 8.3 Private consumption 10.8 9.0 8.4 8.4 Government consumption 7.1 8.0 9.0 8.5 Gross capital formation 20.2 11.6 10.5 9.0 Export of goods & services -10.8 22.0 12.0 7.4 Import of goods & services -0.9 23.0 14.0 8.8 Prices, Money and Banking CPI (YoY%) eop 1.9 4.6 4.0 2.8CPI (YoY%) ann avg -0.7 3.3 5.3 2.8Broad money (M2) 29.0 19.7 14.5 15.0Bank credit (YoY%) 31.0 19.9 15.0 16.5 Fiscal Accounts (% of GDP) Budget surplus -2.9 -1.7 -1.5 -2.3 Government revenue 11.7 21.3 20.3 18.0 Government expenditure 21.9 17.8 19.0 20.0Primary surplus -1.5 -1.2 -0.9 -1.3 External Accounts (USD bn) Merchandise exports 1202.0 1578.0 1893.6 2083.0Merchandise imports 1003.9 1395.0 1701.9 1889.1Trade balance 198.1 183.0 191.7 193.9 % of GDP 4.0 3.1 2.7 2.4Current account balance 297.0 306.0 311.7 303.9 % of GDP 6.0 5.2 4.4 3.7FDI (net) 150.2 214.4 265.0 220.0FX reserves (USD bn) 2399.0 2847.0 3450.0 4100.0FX rate (eop) CNY/USD 6.83 6.59 6.32 6.12 Debt Indicators (% of GDP) Government debt2 21.0 20.3 19.6 18.7 Domestic 20.2 19.6 19.0 18.2 External 0.8 0.7 0.6 0.5Total external debt 7.4 5.9 4.4 3.1 in USD bn 360.0 340.0 300.0 250.0 Short-term (% of total) 60.0 50.0 50.0 50.0 General (YoY%) Fixed asset inv't (nominal) 30.1 23.8 23.0 17.0Retail sales (nominal) 15.5 18.4 16.5 15.0Industrial production (real) 11.0 15.7 13.0 11.5Merch exports (USD nominal) -16.0 31.3 20.0 10.0Merch imports (USD nominal) -11.2 38.7 22.0 11.0 Financial Markets Current 3M 6M 12M1-year deposit rate 3.50 3.50 3.50 3.5010-year yield (%) 3.77 3.85 3.90 3.90CNY/USD 6.36 6.31 6.25 6.17 Source: CEIC, DB Global Markets Research, National Sources Note: (1) Growth rates of GDP components may not match overall GDP growth rates due to inconsistency between historical data calculated from expenditure and product method. (2) Including bank recapitalization and AMC bonds issued



Hong Kong Aa1(Pos)/AAA/AA+ Moody’s/S&P/Fitch

The economy likely rebounded in Q3 from Q2’s

contraction led by continued strong retail sales growth and at least stable export volumes.

Inflation has proved “sticky” and may continue to do so even with more moderate growth. Property market sentiment has softened appreciably, which could dampen both growth and inflation.

No recession in Q3. There has been considerable speculation recently that the economy is in a technical recession – that GDP contracted in Q3 as well as Q2. We don’t think this has been the case. After a 2.1%QoQ(saar) decline in Q2, we think the economy likely posted growth of as much as 8.0% in Q3 led by continued strong consumption growth and a modest rebound in exports.

Retail sales volumes fell 0.4%mom(sa) in August but this followed a 3.7% gain in July. Seasonally adjusted, the volume of retail sales in July/August was about 4.0% higher than the Q2 average and continues a string of six quarters of relatively robust sales.

Retail sales volume (sa)

-6

-4

-2

0

2

4

6

8

05 06 07 08 09 10 11

%QoQ(sa)

Sources: CEIC and Deutsche Bank. 2011Q3 figure is based on July/August average.

We’ve noted in the past the importance of tourists to the retail sales dynamics in Hong Kong and this certainly remains key. But with the unemployment rate (3.2%) at its lowest level since February 1998, negative real interest rates and reasonably strong income growth, it should be no surprise that consumption indicators remain strong.

Exports are an important driver of income growth in Hong Kong and there the news seems to be better than most people appreciate.

Seasonally adjusted unemployment rate

0

1

2

3

4

5

6

7

8

9

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

%

Sources: CEIC and Deutsche Bank. Note: there is a break in the series in Jan-07 but the old and new series differed by only 0.1% on that month.

The government is a little slow to report its trade volume indexes, but given the July figure of export volume growth of 1.0%yoy (versus -0.5% in Q2) and assuming the same deflator in August as was reported in July, we estimate August export volumes fell 1.8%. But, that actually translates into a better than 4%mom(sa) rise in export volumes in August. This puts the July/August average at about 0.5% higher than the Q2 average. Note that in Singapore we likewise estimate marginally positive growth in export volumes in July/August versus Q2.

Export volume index

50

70

90

110

130

150

170

190

210

230

250

00 01 02 03 04 05 06 07 08 09 10 11

2000=100

Sources: CEIC and Deutsche Bank. 2011Q3 figure is based on July and estimated August figures.

Good news coming on inflation? In Hong Kong, as in China, inflation has surprised to the upside this year mainly because of higher than expected food price inflation. Our view remains that food inflation will fall over the next six to nine months as world food prices stabilize. Indeed, the IMF’s food price index has fallen 7.9%(nsa) since April. The rate of inflation in this measure of food prices has fallen from 33% in June to



12% in September. That should soon deliver lower inflation in Hong Kong.

Food prices in Hong Kong and internationally

-5

0

5

10

15

20

25

-30

-20

-10

0

10

20

30

40

50

60

05 06 07 08 09 10 11

IMF (-3) HK (rhs)%yoy %yoy

Sources: IMF and Deutsche Bank

Michael Spencer, Hong Kong, (852) 2203 8305

Hong Kong: Deutsche Bank Forecasts

2009 2010 2011F 2012FNational Income Nominal GDP (USD bn) 209.3 224.5 239.9 252.9Population (mn) 7.0 7.1 7.1 7.2GDP per capita (USD) 29757 31628 33601 35202 Real GDP (YoY%) -2.7 7.0 5.8 4.4 Private consumption 0.7 6.2 8.5 6.0 Government consumption 2.3 2.7 1.8 1.6 Gross fixed investment -3.9 7.8 3.7 7.6 Exports -10.1 16.8 5.6 5.3 Imports -9.0 17.3 5.2 5.5 Prices, Money and Banking CPI (YoY%) eop 1.5 2.9 6.3 4.1CPI (YoY%) ann avg 0.6 2.3 5.4 5.0Broad money (M3) 8.7 7.6 12.6 4.8HKD Bank credit (YoY%) 0.3 -0.4 15.1 6.9 Fiscal Accounts (% of GDP)1 Fiscal balance 1.6 4.2 1.7 3.5 Government revenue 19.2 21.1 22.0 21.3 Government expenditure 17.7 16.9 20.3 17.8Primary surplus 1.6 4.3 1.7 3.5 External Accounts (USD bn) Merchandise exports 321.9 394.0 436.5 472.5Merchandise imports 348.7 437.0 492.2 534.2Trade balance -26.9 -43.0 -55.7 -61.8 % of GDP -12.8 -19.1 -23.2 -24.4Current account balance 18.0 13.9 13.7 7.1 % of GDP 8.6 6.2 5.7 2.8FDI (net) -11.6 -7.2 3.5 2.5FX reserves (USD bn) 255.8 268.7 273.2 264.1FX rate (eop) HKD/USD 7.75 7.76 7.80 7.80 Debt Indicators (% of GDP) Government debt1 1.4 2.2 2.6 2.8 Domestic 0.7 1.6 2.0 2.2 External 0.7 0.6 0.6 0.5Total external debt 319.4 357.9 298.0 286.7 in USD bn 668.5 803.5 715.0 725.0 Short-term (% of total) 74.3 78.0 75.0 75.0 General Unemployment (ann. avg, %) 5.2 4.4 3.4 3.3 Financial Markets Current 3M 6M 12MDiscount base rate 0.50 0.50 0.50 0.503-month interbank rate 0.20 0.25 0.25 0.2510-year yield (%) 1.3 1.40 1.45 1.50HKD/USD 7.78 7.80 7.80 7.80 Source: CEIC, DB Global Markets Research, National Sources Note: (1) Fiscal year data.



India Baa2/BBB-/BBB- Moody’s/S&P/Fitch

High frequency macro indicators point to lackluster

growth but are far from suggesting growth weakening to levels seen in 2008/09.

A likely shortfall in the disinvestment target, lower tax collection and higher fuel subsidies could compel the government to resort to further market borrowings in the later part of the fiscal year.

Below trend IP growth and near double-digit WPI inflation

A combination of below 5% industrial production growth and near 10% inflation reflects an undesirable macro environment, but that has unfortunately been the case for India lately. August industrial production was up 4.1%yoy, slightly above our expectations. Even when excluding the typically volatile capital goods series, the IP trend reported a similar outturn. For the fiscal year so far, industrial production has risen by 5.6%. The components of IP don’t offer any major shift in trend. Mining (-3.4%yoy) remains lackluster, manufacturing is below trend (+4.5%yoy), and power production offers some relief (+9.5%yoy). Among the use based categories, some encouragement can be found in consumer goods production (+7.2%yoy).

The industrial production data reflects an economy going in sideways direction. There is no upward momentum, but major downside tendencies are not being revealed either. Later in this piece we examine the fact that the present trend IP data is in contrast to the buoyant exports data. All in all, the production data is not indicative of an inflection point in the economy.

Inflation and monetary policy outlook. While the year on year inflation rate for food (9.2% vs. 9.6%) and primary articles (11.9% vs. 12.6%) have eased a bit in September, fuel inflation rate has increased to 14.2%yoy, up from 12.8% in August, mainly reflecting higher prices of petrol, electricity and other non-administered fuel items. Assuming a +0.2% mom (7.7%yoy) rise in manufactured goods inflation, we forecast WPI inflation for September to remain sticky at last month’s level of 9.8%. While the softening in world commodity prices should have led to lower pressure on manufactured goods inflation in Sep, we note that the negative effect of a depreciating rupee (-11% since August) will provide little respite and is likely to nudge RBI to hike the repo rate once again by 25bps in its 25 October monetary policy review.

Mixed signals on growth

India’s growth headwinds are being driven by both domestic factors (high inflation, rising interest rates, and political turmoil) and foreign ones (anemic G3 growth and financial market stress due to peripheral Europe’s debt crisis). Both the manufacturing and services PMI have been declining steadily (see chart below), industrial production growth has been anemic lately, and investment has been hurt by rising interest rates and a slowdown in reforms due to governance scandals.

PMI, IP and core infra sector growth trending lower

-10

-4

2

8

14

20

40

45

50

55

60

65

2006 2007 2008 2009 2011

Manufacturing PMI, lhsServices PMI, lhsIP, rhsCore infra, rhs

% yoy, 3mma

3mma

Source: Haver Analytics, CEIC, Deutsche Bank

But caution is warranted in reading high frequency indicators’ bearing on growth. While manufacturing PMI and industrial production go hand in hand, and therefore the latest decline in the former suggests continued weakness for the latter, the manufacturing part of national accounts is only loosely related to these indicators. Over the past half decade, there have been several episodes when a decline in PMI did not lead to a weakening of manufacturing GDP. Same holds for industrial production. Indeed, in the April-June quarter both the PMI and IP weakened, whereas manufacturing sector GDP growth picked up. Of course we are not using this argument to suggest no relationship whatsoever among these variables. While recognizing that the economy’s inflection points are well captured by the PMI and IP series, we hasten to point out that neither the present level nor the pace of decline of these series are consistent with a major economic slowdown.

There is similar room for caution in interpreting the reading from service sector PMI. The sharp decline in the indicator in 2008 was a useful early warning indicator for the subsequent slowdown in services GDP, but that was not the case in less extreme situations such as in early 2007 (when the PMI reading did not anticipate an upswing



in the service sector) or in mid 2010 (when it did not anticipate a sharp slowdown).

Manufacturing PMI and GDP – weak relationship

0

3

6

9

12

15

18

45

50

55

60

65

2006 2007 2008 2009 2010 2011

Manufacturing PMI, lhsManufacturing GDP, rhs

3mma % yoy


Service PMI and GDP series are tied rather loosely

7

8

9

10

11

40

45

50

55

60

65

2006 2007 2008 2009 2010 2011

Services PMI, lhsServices GDP, rhs

3mma % yoy


India’s exports data in fact has been starkly disconnected from the industrial production series. While IP growth has been lackluster since early 2010, the opposite has been the case with exports, which have been rising at a pace typically not seen in India’s history (despite the PMI’s sub-component on export orders suggesting a sharp exports slowdown). This disconnect brings into question about the veracity of the two data series. We are inclined to rely on the latter as it is not survey based and is more comprehensive by definition. Since the national accounts methodology relies on trade data, the strong exports data suggest that at least that component of GDP would contribute positively to growth when the July-September data are released.

Non-oil imports growth has been very strong in this cycle too, suggesting continued resilience of domestic demand. Since the capital goods component of the IP data show lackluster growth in investment goods production, we’re inclined to conclude that private consumption must be holding up well (despite high inflation and rising nominal interest rates).

Disconnect between IP and exports

-35

-15

5

25

45

65

-10

-5

0

5

10

15

20

2006 2007 2008 2009 2010 2011

IP, lhsExports, rhs

% yoy, 3mma% yoy, 3mma


Outside of trade and IP, we can look at tax collection data as an indication of economic momentum. The chart below shows that real corporate income tax collection has been weakening for more than a year now, but is estimated to have rebounded lately. Again, this series is useful in picking up the economy’s inflection points; note however that the present outturn does not suggest further impending slowdown, nor does it support any likelihood of a rebound at this juncture. The situation appears to be somewhere in between, consistent with a real GDP growth rate of 7-8%.

Growth and tax collection

-25

-10

5

20

35

50

5

6

7

8

9

10

2007 2008 2009 2010 2011

Real GDP, lhsReal corporate tax collection, rhs

% yoy% yoy

Source: CEIC, Deutsche Bank

We conclude by looking at money and credit indicators, which are showing continued financial intermediation related activities in the economy (credit growth at 20%yoy), which is striking given the prolonged nature of the ongoing policy tightening cycle. Recent cement and auto sales data also corroborate this proposition. Further, a likely strong turnout from the farm sector in response to a good monsoon and reported resiliency in rural consumption due to the government’s transfer policies, would also support the growth picture amid the various headwinds, in our view. All in all, the indicators examined above point to lackluster growth but are far from suggesting growth weakening to the level seen in 2008.



Fiscal troubles come to the fore

The central government announced a higher than anticipated market borrowing number (INR2.20trn versus INR1.67trn budgeted) for the second half of FY11/12 (October-March). The additional gross borrowing of INR529bn (0.6% of GDP; 12.7% higher than budgeted) is not for meeting fiscal slippages but to address potential shortfall in below the line financing items such as small savings (government estimates indicate a shortfall of INR350bn) and a likely lower cash surplus (INR160bn vs. INR330bn) than earlier anticipated. Proceeds from small savings are expected to fall short of the target on account of depositors reallocating their funds in favor of long-term bank deposits, which pays higher returns (in a rising interest rate environment) than that rendered by small savings instruments (which are typically capped at 8.5%).

Gross market borrowing 1H actual 2H est. FY12 est.

Budgeted gross market borrowing 2.5 1.67 4.17

Revised gross market borrowing 2.5 2.20 4.70

Revised over budgeted (% change) 0.0 31.7 12.7Source: Controller General of Accounts, Deutsche Bank

While this announcement ostensibly is only a financing issue, and has nothing to do with fiscal risks, we see substantial likelihood of slippage. Latest fiscal data through August show that the fiscal deficit in the April-August period has already touched 66.3% of budget estimates for FY11/12, significantly higher than its past trend in the comparable period.

Fiscal position – April-August Items % of

FY11/12 budget

% of FY10/11 actuals

% of FY09/10 actuals

1 Revenue Receipts (2+3) 23.9 36.6 27.4

2 Tax Revenue (Net) 21.8 24.2 23.4

3 Non-Tax Revenue 34.8 68.8 43.3

4 Non-Debt Capital Receipts (5+6) 18.4 15.4 11.6

5 Recovery of Loans 59.9 26.4 21.2

6 Other Receipts 2.9 9.3 8.2

7 Total Receipts (1+4) 23.5 35.7 26.6

8 Non-Plan Expenditure 41.7 37.9 34.0

9 Plan Expenditure 29.9 36.2 32.3

10 Total Expenditure (8+9) 37.5 37.3 33.5

11 Fiscal Deficit (10 -7) 66.3 41.0 43.6

12 Revenue Deficit 74.9 41.0 45.7

13 Primary Deficit 119.6 49.0 53.6Source: Controller General of Accounts, Deutsche Bank

Both tax (in net as well as gross terms) and non-tax revenue collection are running at a lower rate compared to the previous two fiscal years, keeping overall receipts trend weaker compared to its past trend (it is however more constructive to compare the current fiscal position with that of FY09/10 as the FY10/11 fiscal position looks unusually better at this stage mainly due to the positive impact of large one off gains from 3-G revenues). Within taxes, direct tax collection across segments remain weak, while indirect taxes though faring better compared to its trend, may not sustain in the coming months as the full impact of the June fuel price measures (customs and excise duty cuts) start taking effect. Meanwhile, expenditure – mainly non-plan expenditure is running at a higher rate than the comparable period in the last two years.

Tax collection trend – April-August Items % of FY11/12

budget % of FY10/11

actuals% of FY09/10

actuals

Gross Tax Revenue 25.8 27.0 26.9

Direct Taxes 18.1 22.5 23.1

Corporate Tax 14.3 19.7 20.4

Income Tax 26.0 28.5 28.5

Indirect Taxes 35.3 32.3 31.9

Customs 41.6 36.5 37.3

Excise 29.1 29.3 27.3

Services 36.0 30.2 32.4

Others 136.4 34.2 42.7Source: Controller General of Accounts, Deutsche Bank

Below, we explain our assumptions regarding potential fiscal slippages in various categories:

Disinvestments: Even if we assume that the government would be able to achieve 50% of its disinvestment target (INR400bn) through the course of this fiscal year (though equity market conditions remain severely weak), still there will be a shortfall of INR200bn in revenues.

Fuel subsidy: Our calculation suggests that at current oil prices, the government would need to pay INR600bn as compensation to OMC’s in FY11/12 (assuming that the government shares 50% of the overall under-recoveries), with only INR36bn left in the budget (as INR200bn has been exhausted to pay for last year’s losses). Consistent with past trend, it is very unlikely that the government will pay the entire cash subsidy in the current fiscal year itself. But even assuming that the government will push 50% of the payments to the next fiscal year, still the government will need to pay INR300bn in this fiscal year itself.

Tax collection: Government estimates suggest that indirect taxes are likely to fall short by INR368bn in



FY11/12 owing to fuel price measures (cut in excise and customs duty) announced in June 2011. Further, direct tax collection is also likely to fall short of target, given weak economic activities. We are factoring around INR300bn shortfall in overall tax revenues (direct and indirect taxes).

Potential fiscal slippage from likely sources Items INR bn

Shortfall in disinvestment proceeds 200

Shortfall in revenue collection 300

Fuel subsidy bill overshoot 300

Total potential fiscal slippage 800

% of GDP 0.9%Source: Deutsche Bank

Note that there are other likely sources of risks such as higher fertilizer and food subsidy bill, but the three items mentioned above could by themselves lead to a potential fiscal slippage of INR800bn (or 0.9% of GDP), which could push the fiscal deficit to 5.5% of GDP, from the budgeted estimate of 4.6% of GDP. While we acknowledge that some part of this slippage could be offset by the government cutting down expenditure on non-essential items (though it will be extremely challenging), the gap however is too large in our view to be removed completely. Moreover, even if we assume that some part of the fiscal slippage will manage to get financed through the additional borrowing announced recently, we still see risks of further market borrowings, given the size of the likely fiscal slippage.

Will India’s “resilient” BOP sustain?

Data through the April-June 2011 quarter show that India’s current account deficit has begun to worsen on the back of rising trade deficit. But the rising current account deficit has been, through June, comfortably exceeded by a robust capital account surplus. Other than a brief period in 2008/09, when global risk aversion spiked, India’s capital account has remained firmly on the surplus territory, helping to keep the balance of payments resilient. Net BOP position has seldom been on the negative side.

Balance of Payments trend in 2011 – a snapshot USD bn Jan-March April -June

Trade balance (a) -29.9 -35.5

% of GDP -6.1 -7.7

Invisibles (b) 24.5 21.3

Current account balance (a + b) -5.4 -14.2

% of GDP -1.1 -3.1

Capital account balance 8.2 20.9

BOP balance 2.0 5.4Source: RBI, Deutsche Bank

Balance of payments trend

-20

-10

0

10

20

30

40

2007 2008 2009 2010 2011

Current AccountCapital AccountChange in FX Reserves

USD bn

Source: CEIC, Deutsche Bank. Date ranges from Q1 2007 to Q2 2011.

In recent years, the movement of India’s current account appears to have been dominated by fluctuations of the trade deficit. Net balances of payments with respect to services, transfers, and income have been broadly stable (in USD terms), reflecting fairly even growth rates in the payments and receipts sides. But the trade deficit has fluctuated considerably, worsening sharply twice in the last five years when oil prices spiked.

Key components of the current account

-40

-30

-20

-10

0

10

20

2007 2008 2009 2010 2011

Goods Services

Transfers IncomeUSD bn

Source: CEIC, Deutsche Ban

The chart below shows a clear relationship between oil price and the trade deficit. India’s exports sector has done rather well in recent years, growing by over 20%yoy for the past half decade. Still, the trade deficit has tended to be large owing to the economy’s growing demand for imports in general and oil imports in particular. Spikes in world oil price have coincided with the trade deficit, as has been the case in the last few quarters. With a slowdown in the world economy taking hold, and commodity prices beginning to ease, there may be some respite for the trade deficit in the coming months. Also noteworthy is that the nominal value of the trade deficit has not widened considerably in recent cycles; as a result the trade deficit has eased as a share of GDP (from about 10% of GDP in 2008 to a projected 7.5% of GDP this year).



Trade deficit and oil price

0

20

40

60

80

100

120-40

-30

-20

-10

0

2007 2008 2009 2010 2011

Trade deficit, leftOil price, right, reverse scale

USD bn USD/barrel

Source: Oil price used here is Dubai crude. Bloomberg Finance LLP, CEIC, Deutsche Bank

Notwithstanding the vulnerability of the nominal value of the current account with respect to oil prices, financing of the current account has been orderly in recent years due a broadly robust capital account. Through the past economic cycles, India has been successful in drawing portfolio flows, foreign direct investment, external loans, and banking capital (see chart below). Data from the latest two quarters show that despite slowing growth both locally and globally, capital account flows have been resilient (with the obvious exception of portfolio flows). Going forward, the likelihood of portfolio flows resuming may be small, but other flows ought to continue. Global risk aversion and financial market stress could stem some flows temporarily, but the experience of the 2008 crisis suggests that flows tend to return to India.

Key components of the capital account

-5

0

5

10

15

20

2007 2008 2009 2010 2011

FDIPortfolio InvestmentECBShort Term Credit to IndiaBanking Capital

USD bn

Source CEIC, Deutsche Ban

The rupee has come under pressure lately as the oil import bill has mounted and portfolio flows have weakened. Since imports are captured in the current account and portfolio flows are in the capital account, the overall balance of the balance of payments ought to be a good indicator of the rupee’s movements. Indeed, the chart below shows that weakness in the BOP is a fairly adequate explanatory factor for the rupee’s direction.

Balance of payments and the rupee

38

40

42

44

46

48

50

52-20

-10

0

10

20

30

2007 2008 2009 2010 2011

Overall Balance, left

INR/USD (inverted), right

USD bn


Clearly the exchange rate will be vulnerable as the balance of payments situation likely deteriorates in the coming months. Persistent inflation is yet another complicating factor, reducing the competiveness of the currency through real exchange rate appreciation. The rupee therefore has cyclical and structural headwinds.

The saving grace could be a likely decline in commodity prices and a resumption of flows when global markets stabilize. India’s medium term growth potential makes it an attractive destination for foreign capital, and flows tend to return in sizeable quantities following selloffs. With this in mind, we are not expecting considerable stress to India’s BOP. There may well be some deterioration in the short term given global developments, but as long as India’s medium term potential is deemed intact, financing of the current account should be orderly. There is a case to be made for better quality financing, and clearly it would be desirable to see the capital account driven by FDI, which is typically stable, than portfolio, which can be volatile. For that switch to occur, the onus is on the Indian policy makers to create room for more stable flows.

Balance of Payments forecast USD bn 2010-11 2011-12F 2012-13F

1. Exports 250.5 296.8 335.4

2. Imports 380.9 445.7 503.6

3. Trade Balance (1-2) -130.5 -148.8 -168.2

% of GDP -7.6 -7.5 -7.3

4. Invisibles, net 86.2 91.3 101.2

5. Current Account Balance (3+4) -44.3 -57.5 -66.9

% of GDP -2.6 -2.9 -2.9

6. Capital Account Balance 57.3 50.0 65.0

% of GDP 3.3 2.5 2.8

7. Overall BOP (5+6) 13.1 -7.5 -1.9Source: RBI, CEIC, Deutsche Bank

Taimur Baig, Singapore, (65) 6423 8681 Kaushik Das, Mumbai, (91) 226658-4909



India: Deutsche Bank Forecasts 2009 2010 2011F 2012FNational Income Nominal GDP (USD bn) 1269 1645 1932 2190Population (mn) 1158 1175 1200 1218GDP per capita (USD) 1096 1400 1610 1798 FY09/10 FY10/11 FY11/12 FY12/13

Real GDP (YoY %), FY 9.1 8.7 8.0 8.0Real GDP (YoY %), CY 6.8 10.0 8.0 8.0 Private consumption 7.2 8.4 6.8 7.1 Government consumption 13.7 5.1 4.6 6.0 Gross fixed investment 2.3 12.6 7.8 12.3 Exports -9.0 14.0 19.8 17.2 Imports -7.9 11.6 15.4 17.2 Prices, Money and Banking WPI (YoY%) eop 7.1 9.5 7.5 6.0WPI (YoY%) avg 2.4 9.6 9.4 6.4Broad money (M3) eop 16.9 16.5 16.7 19.1Bank credit (YoY%) eop 13.4 23.2 16.9 19.0 Fiscal Accounts (% of GDP)1 Central government balance -6.4 -4.7 -5.5 -4.8 Government revenue 9.3 10.5 9.5 10.1 Government expenditure 15.6 15.2 15.0 14.9Central primary balance -3.1 -1.7 -2.5 -1.8Consolidated deficit -9.8 -7.6 -8.1 -7.4 External Accounts (USD bn) Merchandise exports 168.2 225.7 268.2 303.0Merchandise imports 275.2 357.9 418.8 473.2Trade balance -107.0 -132.2 -150.6 -170.2 % of GDP -8.4 -8.0 -7.8 -7.8Current account balance -25.9 -51.7 -65.4 -75.7 % of GDP -2.0 -3.1 -3.4 -3.5FDI (net) 19.7 10.0 25.0 32.5FX reserves (USD bn) 283.3 296.5 281.1 270.4FX rate (eop) INR/USD 46.7 44.8 48.0 46.5 Debt Indicators (% of GDP) Government debt 69.8 64.9 61.2 60.2 Domestic 65.9 61.3 58.0 57.3 External 3.9 3.6 3.1 2.9Total external debt 18.8 15.0 13.7 13.7 in USD bn 238.0 247.0 265.0 300.0 Short-term (% of total) 18.0 17.0 17.0 18.0 General Industrial production (YoY %) 9.5 8.1 3.7 6.7 Financial Markets Current 3M 6M 12MRepo rate 8.25 8.50 8.50 7.503-month treasury bill 8.45 8.50 8.10 7.9010-year yield (%) 8.74 8.50 8.50 8.00

INR/USD 49.3 48.0 47.7 47.1 Source: CEIC, DB Global Markets Research, National Sources Note: (1) Fiscal year ending March of following year, consolidated deficit includes state and central government finances, as well as bonds issued as payments to oil and fertilizer companies on account of the losses incurred from the provision of subsidies..



Indonesia Ba1/BB+(Pos)/BB+(Pos) Moody’s/S&P/Fitch

The economy continues to boom in all respects, with

little downside visible despite a weaker outlook for commodities.

The authorities are intervening in financial markets through various means, which could end up being counter-productive. Bank Indonesia could ignite a credit boom and asset price bubble through aggressive rate cuts.

Recent interventions raise the risk of policy error. Since the global market sell-off hit Asia last month, the Indonesian authorities have intervened repeatedly to stem the decline in bond prices and the exchange rate. Bank Indonesia promptly became the key purchaser of bonds and the key seller of dollars in the economy. We fear that instead of calming markets, the actions of the authorities have given rise to greater discomfort among investors.

Despite a decline of foreign reserves of about USD10bn last month and an exchange rate depreciation of about 6% (against the USD since the peak in early August), market participants have reasons to worry about the direction of policies in Indonesia. Major policy initiatives seem to be taking a backseat owing to various political factors; appetite to carry out subsidy reform appears to have vanished; and the monetary authorities are giving signals of boosting credit growth from the already high levels, which in our view could create an asset price bubble (seen in many EM economies in the past).

Strong credit and money growth

0

10

20

30

40

5

10

15

20

2007 2008 2009 2010 2011

M2. lhs

Bank credit, rhs

%yoy, 3mma %yoy, 3mma


Monetary policy. There had been quite a bit of chat in Indonesia's policy circle in recent weeks about providing support to the economy in the face of rising uncertainty in the global economy. There had even been some mention of a rate cut by government officials, but we discounted such chatter as we saw the economy hardly being impacted by the slowdown, and expected the policy

makers to keep their powder dry in case further weaknesses were to manifest. Instead, at the Board of Governors' Meeting on Oct 11, Bank Indonesia decided cut the policy BI rate by 25bps to 6.5%. The central bank officials are clearly comfortable with the trajectory of inflation (4.6% through September), expecting inflation to stay within the 4-6% target band this year and next, when the target will be 3.5-5.5%. Indeed, the policy statement expressed confidence that inflation would remain below 5% through 2012.

We find the rate cut decision inconsistent with the central bank's past line of policy action. Through 2010 and 2011, the central bank advocated a policy of allowing exchange rate appreciation to fight inflation pressures. Along that line of logic, the fact that the rupiah has depreciated against the US dollar by 6% in the past month or so would imply a need to maintain a neutral stance or move to tighter policy. With the latest monetary policy move, the central bank has done exactly the opposite. The decision also seems curious given that credit, consumption, and investment indicators point to very strong demand, while the USD10bn or so decline in reserves in September suggests a need to maintain a stable policy stance.

An economy not in need of a rate cut

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

4.0

5.0

6.0

7.0

2006 2007 2008 2009 2010 2011

GDP growth, lhs

Real BI rate, rhs%yoy %


While global economic conditions have clearly weakened in recent months and policy makers need to take measures to protect their economies, the action by BI seems to be pushing the idea of a pre-emptive move to the limit. As noted above, the economy does not appear to need any boost at this moment (as seen in the large gap between real GDP growth and real interest rate). The best way to assuage foreign investor sentiment would be to demonstrate that the authorities remain committed to macroeconomic stability, but the latest measure, in our view, fails to meet that test.



Looking forward, with the central bank’s demonstrated intent, we see BI cutting rates again next month. The central bank could choose to cut the policy rate down to 6% by the end of this year, which would result in further rise in lending related activities. The risk is that fixed income investors will find these steps somewhat aggressively stimulatory and potentially inflationary. Attractiveness of Indonesian papers could become suspect as a result.

Taimur Baig, Singapore, (65) 6423 8681

Indonesia: Deutsche Bank Forecasts

2009 2010 2011F 2012FNational Income Nominal GDP (USD bn) 541.1 707.8 824.0 906.7Population (mn) 238.0 240.8 243.7 246.6GDP per capita (USD) 2274 2939 3381 3676 Real GDP (YoY%) 4.6 6.1 6.5 6.5 Private consumption 4.9 4.6 4.9 6.1 Government consumption 15.7 0.3 4.1 4.9 Gross fixed investment 3.3 8.5 8.8 7.8 Exports -9.7 14.9 11.5 8.5 Imports -15.0 17.3 11.9 8.8 Prices, Money and Banking CPI (YoY%) eop 2.8 7.0 4.5 6.5CPI (YoY%) ann avg 4.9 5.1 5.5 6.1Core CPI (YoY%) 5.3 4.3 5.0 5.5Broad money (M2) 15.9 15.4 16.0 15.0Bank credit (YoY%) 13.9 13.0 22.0 20.0 Fiscal Accounts (% of GDP) Budget surplus -1.5 -0.6 -1.1 -1.5 Government revenue 14.9 15.8 15.7 16.3 Government expenditure 16.4 16.4 16.8 17.7Primary surplus 0.2 1.4 0.9 0.5 External Accounts (USD bn) Merchandise exports 119.5 158.1 199.6 223.6Merchandise imports 84.3 127.4 166.4 190.9Trade balance 35.1 30.6 33.3 32.7 % of GDP 6.5 4.3 4.0 3.6Current account balance 10.7 5.6 3.2 3.0 % of GDP 2.0 0.8 0.4 0.3FDI (net) 1.9 10.7 9.1 9.1FX reserves (USD bn) 66.1 95.0 120.3 131.7FX rate (eop) IDR/USD 9400 8991 8850 8700 Debt Indicators (% of GDP) Government debt 33.0 27.0 26.0 24.9 Domestic 18.4 14.7 15.0 14.1 External 14.6 12.3 11.0 10.8Total external debt 32.4 25.4 23.7 23.3 in USD bn 175.5 180.0 200.0 220.0 Short term (% of total) 17.9 18.6 18.5 20.5 General Industrial production (YoY%) 1.5 4.0 7.0 8.0Unemployment (%) 7.9 7.1 7.0 6.8 Financial Markets Current 3M 6M 12MBI rate 6.50 6.00 6.00 6.5010-year yield (%) 6.60 7.00 7.20 7.40IDR/USD 8950 8835 8790 8700 Source: CEIC, DB Global Markets Research, National Sources



Malaysia A3/A-/A-

Export growth has slowed to a crawl, but the 2012 budget offers less stimulus than expected. But inflation will likely be lower without subsidy cuts.

Any further reduction in G3 growth forecasts could tip the economy into recession

Q3 off to a weak start. Manufacturing production fell 0.7%yoy in July after falling at an average rate of 1.5% during Q2. We estimate that this implies a 3.8%mom(sa) decline in output, the largest decline since March 2009. The decline was concentrated in the export sectors, as production in primarily domestic-oriented sectors actually improved, rising 8.5%yoy, the strongest growth in four months.

This decline in output seems to us to exaggerate the decline in final demand, as export growth has remained relatively stable – albeit slow – even through August. Seasonally adjusted, exports in MYR terms rose 0.9%mom(sa) in July although to a level still 1.3% below the Q2 average. So we think there is likely to be a rebound in activity in August.

Export growth in value (MYR) and volume terms

-40

-30

-20

-10

0

10

20

30

40

50

2008 2009 2010 2011

value volume%yoy

Sources: CEIC and Deutsche Bank

But the truth remains that external demand growth is very weak at best. The US and EU economies have settled into a slow-growth equilibrium while households, banks and governments try to reduce their debt burdens. For an export-sensitive economy like Malaysia – real exports of goods and services were 110% of GDP last year – this is an unsettling background.

It was for this reason that when we lowered our growth forecast in August following the sharp downgrades to US and EU growth forecasts we increased our fiscal deficit projection, assuming not only weaker revenue growth but some degree of fiscal stimulus.

In the event, last week’s budget was less expansionary than we had expected and we have scaled back slightly our deficit forecast for 2012. The budget contained something for everyone – as is to be expected from what is most likely a pre-election (likely to be held early next year) budget. But the sum total of the handouts was less than we had expected. Indeed, even the government’s projections show a significant decline in spending as a share of GDP in 2012 and a decline in the deficit from 5.4% of GDP this year to 4.7% next year.

With 2011 spending having been revised higher – although we think it will be a challenge to spend as much as the budget forecasts in the next three months – the fiscal stance in 2012 versus 2011 is essentially neutral. It appears that both the headline and primary fiscal deficits will be roughly the same in both years.

This new budget projection will have little impact on the government’s debt outlook, however. The 2009 recession saw Malaysia’s government debt/GDP ratio rise to 53% and it looks likely to remain at that level through this year and to rise slightly in 2012. We are not worried about debt sustainability at this time. Interest payments absorb just under 10% of revenues and with nominal GDP growth comfortably – at least for now – above the average interest rate on government debt, the forecast primary balance is about in line with the debt-stabilizing primary balance.

But overall, the impression of the economic outlook is that it is in both growth and fiscal respects, somewhat precarious. Our forecast of slow, but positive, growth in the US and EU means the Malaysian economy will grow more slowly than it has in the past. The fiscal policy outlook suggests the debt/GDP ratio will rise but not alarmingly. But both growth and debt sustainability are both very sensitive to any further deterioration in the external growth outlook.

While there wasn’t as much stimulus in the budget as we had expected, we do think that the budget indicated that subsidy cuts will be suspended for the time being. These subsidies are expensive – the budget estimates spending of MYR33.2bn (4% of GDP) – and the government has been cutting them over the past two years. But with an election looming, further cuts seem to be off the table. The budget makes no statement about cutting subsidy costs.

This means that inflation will probably be lower than we were expecting and we have lowered our 2012 inflation forecast to 2.3% from 2.8% previously. Note, though, that this implies potentially higher fiscal costs. Note that the benchmark price for exported Thai rice has risen 23%



in the last four months and floods there and in Vietnam threaten even higher prices. The government did raise the rice price in 2008 by 38% after world prices tripled. A moderate increase in prices would likely be absorbed by the government in higher subsidy costs. Another rice crisis like 2008 would probably see price increases.


Malaysia: Deutsche Bank forecasts 2009 2010 2011F 2012F

National Income Nominal GDP (USD bn) 193.0 238.4 275.3 289.6Population (mn) 27.9 28.3 28.6 29.0GDP per capita (USD) 6918 8438 9619 9991 Real GDP (YoY%) -1.6 7.2 4.6 4.2Private consumption 0.7 6.5 6.6 4.8Government consumption 3.9 0.5 9.4 5.4Gross fixed investment -5.6 9.8 3.9 4.8Exports -10.5 9.9 4.3 4.7Imports -12.2 15.1 6.4 4.8 Prices, Money and Banking CPI (YoY%) eop 1.0 2.1 3.3 2.3CPI (YoY%) ann avg 0.7 1.7 3.2 2.6Broad money (M3) 7.4 8.3 9.8 5.9Bank credit (YoY%) 5.8 10.7 10.3 6.6 Fiscal Accounts (% of GDP) Federal government surplus -7.0 -5.6 -4.9 -5.0Government revenue 23.3 20.8 22.1 21.0Government expenditure 30.3 26.5 27.0 26.0Primary fed. gov't fiscal -4.9 -3.6 -2.7 -2.8 External Accounts (USD bn) Merchandise exports 157.7 199.4 227.4 244.5Merchandise imports 117.5 157.7 185.6 202.7Trade balance 40.3 41.8 41.8 41.8 % of GDP 20.9 17.5 15.2 14.4Current account balance 31.8 27.4 25.8 19.5 % of GDP 16.5 11.5 9.4 6.7FDI (net) -6.6 -4.4 2.6 -3.0FX reserves (USD bn) 96.7 106.5 141.1 144.1FX rate (eop) MYR/USD 3.41 3.13 3.09 3.03 Debt Indicators (% of GDP) Government debt 53.3 53.1 53.1 55.2 Domestic 51.3 51.0 51.5 53.8 External 2.0 2.2 1.6 1.4Total external debt 34.3 29.5 28.7 27.8 in USD bn 68.1 73.4 79.0 80.0 Short-term (% of total) 33.4 35.1 36.7 35.0 General Industrial production (YoY%) -8.2 8.9 1.7 2.7Unemployment (%) 3.5 3.3 3.2 3.0 Financial Markets Current 3M 6M 12MOvernight call rate 3.00 3.00 3.00 3.253-month interbank rate 3.3 3.3 3.3 3.510-year yield (%) 3.69 3.80 3.70 3.70MYR/USD 3.14 3.09 3.07 3.04 Source: CEIC, DB Global Markets Research, National Sources



Philippines Ba2/BB/BB+ Moody’s/S&P/Fitch

Trade is contracting, which poses downside risk to

growth, but domestic economy remains resilient.

Further unrest in global financial markets and additional downside to G3 demand could hurt trade and investment, which in turn could affect consumption.

Manageable downside risks. The Philippine economy continues to face headwinds from adverse global economic dynamic, as trade continues to weaken. Data through August shows exports contracting by 15.1%yoy, with electronics, the main export item, declining by 30.6%yoy. While the situation is not as dire as it was in the last financial crisis (electronics exports were down by about 50%yoy in January 2008), there is no question about the negative impact of the ongoing decline in trade on investment, consumption, and ultimately, growth.

Sharp decline in trade, but still not like 2008/09

-40-30-20-10

01020304050

2006 2007 2008 2009 2010 2011

Exports Imports%yoy, 3mma


Given our expectation of no recession in the US, and only a single quarter of negative growth in the Euro area, it would be reasonable to expect a better GDP outturn in the Philippines this year and next compared to the 2008 global financial crisis. Indeed, a host of indicators suggest that to be the likely scenario. Domestic sentiments have not been impacted the global developments, with latest surveys indicating that consumers see a stable or improving outlook. This has been helped by the fairly benign inflation (4.8% through August), and a broadly stable exchange rate. Recent floods and trade weakness could well hurt those expectations later this year, but we expect the downside to be limited as long as inflation and remittances (up 6.7%yoy through July) remain stable.

Consumer expectations show lingering optimism

-30

-20

-10

0

10

20

30

40

2006 2007 2008 2009 2010 2011

Next Q Next 4 QsDiffusion index


Philippines has not escaped the regional sell-off of the past month, but the stock market’s year to date performance (-2.2%yoy) has been the best among its peers. Long term bond yields jumped temporarily, but have eased in the past couple of weeks. The government’s decision to buy back some of the existing stock of issuance should also be supportive of the market. Net capital flows remained positive through August, helping the peso to remain as one of few currencies to have experienced appreciation against the USD this year.

Net flows remain positive despite the global turmoil

40

45

50

55

-0.5

0.0

0.5

1.0

2006 2007 2008 2009 2010 2011

Net portfolio inflows, lhs

Peso/USD, rhsUSD bn, 3mmaUSD bn, 3mma

Source: CEUC, Deutsche Bank

Similarly, there has been no let up in domestic financial market intermediation. Latest data through August show that private sector credit to trade, real estate, manufacturing, and finance was growing robustly (see chart on the next page). Domestic liquidity remains ample, with M2 up 9.4%yoy through August, helped by sustained flow of external flows. Given this, we don’t think BSP would consider easing monetary policy anytime soon, although if commodity prices decline further and external conditions exacerbate more, a rate cut could become part of the central bank’s consideration in early 2012. For the



time being though, the monetary authorities seem to be taking a backseat to ongoing developments. The government’s fiscal plans are expected to provide a ½ percent of GDP boost to the economy without increasing the deficit. Whether or not this heroic ambition is achieved, we see only a moderate slowdown in the economy.

Strong credit growth

-20

-10

0

10

20

30

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

Agriculture ManufacturingTrade FinanceReal Estate

%yoy, 3mma

Source: BSP, Deutsche Bank

Taimur Baig, Singapore, (65) 6423 8681

Philippines: Deutsche Bank Forecasts

2009 2010 2011F 2012FNational Income Nominal GDP (USD bn) 167.9 199.5 228.5 255.4Population (mn) 90.2 92.5 94.8 97.1GDP per capita (USD) 1861 2158 2411 2630

Real GDP (YoY%) 1.1 7.6 4.0 4.5 Private consumption 2.3 3.4 4.0 4.5 Government consumption 10.9 4.0 0.0 2.0 Gross fixed investment -8.7 31.6 15.0 12.5 Exports -7.8 21.0 1.8 5.0 Imports -8.1 22.5 5.5 8.0

Prices, Money and Banking CPI (YoY%) eop 4.3 3.1 4.5 4.0CPI (YoY%) ann avg 3.3 3.8 4.8 3.7Core CPI (YoY%) 4.1 3.7 4.2 4.5Broad money (M3) 13.2 9.8 9.7 10.1Bank credit1 (YoY%) 12.5 8.9 10.3 11.1

Fiscal Accounts (% of GDP) National government surplus -3.6 -3.5 -3.1 -2.9 Government revenue 13.9 13.4 14.1 14.6 Government expenditure 17.5 16.9 17.2 17.5Primary surplus -0.2 -0.2 0.3 0.3

External Accounts (USD bn) Merchandise exports 37.6 50.7 52.2 55.5Merchandise imports 46.5 61.1 67.7 74.5Trade balance -8.8 -10.4 -15.5 -19.0 % of GDP -5.3 -5.2 -6.8 -7.4Current account balance 9.4 8.5 10.3 10.4 % of GDP 5.6 4.2 4.5 4.0FDI (net) 1.6 1.2 1.3 0.5FX reserves (USD bn) 44.0 58.4 77.7 89.2FX rate (eop) PHP/USD 46.4 43.9 43.0 42.0

Debt Indicators (% of GDP) Government debt2 62.9 57.6 58.2 55.2 Domestic 33.6 30.4 31.4 30.6 External 29.3 27.2 26.8 24.7Total external debt 39.3 34.1 32.2 29.5 in USD bn 68.0 70.0 72.0 76.0 Short-term (% of total) 16.8 16.8 16.5 16.0

General Industrial production (YoY%) 12.2 15.6 3.0 6.0Unemployment (ILO) (%) 8.3 8.1 7.9 7.7

Financial Markets Current 3M 6M 12MBSP o/n repo 6.50 6.50 6.50 6.50BSP o/n reverse repo 4.50 4.50 4.50 4.503-month treasury bill 2.89 3.50 4.00 4.5510-year yield (%) 6.08 6.25 6.10 6.00PHP/USD 43.5 43.0 42.6 42.0 Source: CEIC, DB Global Markets Research, National Sources Note: (1) Deposit money bank credit to the private sector. (2) Incl. guarantees on SOE debt.



Singapore Aaa/AAA/AAA Moody’s/S&P/Fitch

We think the economy escaped recession in Q3, but

there’s hardly any growth in the economy as global growth stagnates.

Exports will continue to set the tone for growth, but inflation is proving “stickier” than expected.

No recession, just weak growth. After declining 6.5%QoQ(saar) in Q2, we think the economy is on track for modest growth in Q3. Industrial production rose 3.9%mom(sa) in August, the third consecutive monthly increase. This took July/August production to a level only 2.9% higher than the Q2 average, but an increase nonetheless. Given the historical relationship between industrial production and GDP this suggests Q3 GDP growth could be about 6.8%QoQ(saar).

Industrial production and GDP

-20

-10

0

10

20

30

40

50

04 05 06 07 08 09 10 11

IP GDP QoQ(saar)%QoQ

Sources :CEIC and Deutsche Bank

That is, the IP data suggest the level of GDP in Q3 could end up essentially where it was in Q1 and about 7% up from a year ago with almost all of that growth coming in the first quarter of this year. That’s better than a recession, but indicative of how weak global growth is.

We see the same pattern in the export data. Seasonally adjusted, real exports have essentially stagnated over the past year. Inflation adjusted exports rose 2.8%mom(sa) in August bringing the July/August level of real exports to a level 0.4% higher than the Q2 average and also 0.4% higher than a year ago. As the chart below shows, exports have essentially just fluctuated within a narrow band around this level over the past year.

Seasonally adjusted real exports

20

25

30

35

40

45

50

03 04 05 06 07 08 09 10 11

2006 SGDbn


Retail sales data are available only through July, which saw a 1.8%mom(sa) increase, similar to June’s rise. It’s too early to say, clearly, but this suggests Q3 sales could also rise from Q2 even after the previous quarter saw a very punchy 35%QoQ(saar) rise in retail sales volumes.

So, overall, we think the data support our forecast that the economy will post a modest recovery in Q3 after Q2’s decline. Importantly, while growth is weak, the economy is not in the same dire straits it was in three years ago when the economy had contracted for two consecutive quarters and, with trade collapsing, was expected to remain in recession. Hence, we don’t think the real economy data support a shift in monetary policy all the way to a flat NEER target band.

Inflation is “sticky” Meanwhile, inflation has risen higher than we had expected, hitting a three-year high of 5.7%. Worryingly, the inflation impulse – measured as the 3m/3m seasonally adjusted change in the CPI – has risen over the last couple of months to 5.9%. True, the core inflation rate is much lower at 2.2%yoy – inflation is still mostly in accommodation and private transportation costs – but we think it would be unwise for the MAS to signal that they are not concerned about inflation when inflation is as high as it is. Hence, we think they will retain a positive slope to the policy band after this week’s policy review. With the currency trading near the bottom of the band, though, we think they could provide a modicum of support to growth by recentering the band around the current level as they have done four times in the last four years.



Consumer prices

-4

-2

0

2

4

6

8

10

00 01 02 03 04 05 06 07 08 09 10 11

YoY 3m/3m (saar)%



Singapore: Deutsche Bank Forecasts 2009 2010 2011F 2012FNational Income Nominal GDP (USD bn) 183.3 222.7 252.5 251.7Population (mn) 5.1 5.2 5.3 5.5GDP per capita (USD) 36112 43007 47336 45380 Real GDP (YoY%) -0.8 14.5 6.2 4.4 Private consumption 0.2 4.2 6.2 3.6 Government consumption 3.5 11.0 1.6 8.6 Gross fixed investment -2.9 5.1 1.8 -2.4 Exports -8.1 19.2 3.0 4.8 Imports -11.0 16.6 2.4 4.5 Prices, Money and Banking CPI (YoY%) eop -0.5 4.6 4.6 1.7CPI (YoY%) ann avg 0.6 2.8 5.1 2.2Broad money (M2) 10.6 8.5 10.5 10.0Bank credit (YoY%) 5.3 9.6 23.7 12.8 Fiscal Accounts (% of GDP) Fiscal balance -1.6 5.1 8.1 5.0 Government revenue 19.3 21.1 24.5 21.0 Government expenditure 20.9 16.0 16.4 16.0 External Accounts (USD bn) Merchandise exports 274.0 358.5 424.6 480.2Merchandise imports 244.6 311.7 374.4 441.3Trade balance 29.4 46.8 50.1 38.8 % of GDP 16.0 21.0 19.9 15.4Current account balance 35.1 49.5 49.5 38.0 % of GDP 19.1 22.2 19.6 15.1FDI (net) -3.1 19.1 19.8 10.0FX reserves (USD bn) 187.8 225.8 257.3 274.0FX rate (eop) SGD/USD 1.40 1.31 1.25 1.21 Debt Indicators (% of GDP) Government debt 109.3 105.8 109.8 119.9 Domestic 109.3 105.8 109.8 119.9 External 0.0 0.0 0.0 0.0Total external debt 171.0 169.1 237.7 258.2 in USD bn 455.9 513.6 600.0 650.0 Short-term (% of total) 73.5 74.8 75.0 75.0 General Industrial production (YoY%) -4.2 29.7 4.7 2.5Unemployment (%) (eop) 3.0 2.2 2.2 2.2 Financial Markets Current 3M 6M 12M3-month interbank rate 0.4 0.4 0.4 0.410-year yield (%) 1.63 1.60 1.60 1.80SGD/USD 1.28 1.24 1.23 1.21 Source: CEIC, DB Global Markets Research, National Sources Note: includes external liabilities of ACU banks.



South Korea A1/A/A+ Moody’s/S&P/Fitch

Assuming a sustained growth in the US, we rule out a

recession in South Korea, although we expect its growth to remain below trend.

Stability of the Korean economy and its currency remain tied to the stability of the G2 economies and their financial systems.

Domestic demand data mixed… High frequency data pointed to a relatively slower growth in domestic demand in Q3. In particular, the equipment index fell 3.3%yoy in July/August, vs. 4.8% growth reported in Q2, pointing to weaker investment growth in Q3. The trade reports confirmed this deterioration trend in investment growth, albeit not as severe. That is, capital imports growth decelerated to 10.2% in July/August from. 12.9% in Q2.

Retail sales growth stable, while investment weaken

-10

-5

0

5

10

15

20

25

-40

-20

0

20

40

60

80

2007 2008 2009 2010 2011

Index of Equipment Investment

Retail sales (rhs)

%yoy 3mma

Sources: CEIC and Deutsche Bank CIB Research

Meanwhile, retail sales growth moved sideways, from 5.7% in Q2 to 5.3%yoy in July/August. This growth was supported by steady payrolls growth of 1.7% in July/August, unchanged from Q2. By sector, this growth was led services payrolls, which rose 3% in July/August vs. 2% in Q2. In contrast, manufacturing payrolls barely increased – by 0.2% in July/August vs. 2.8% growth in Q2 – reflecting weakness in exports.

…while export growth moderates... Exports growth slowed to 19.6%yoy in September, from 25.9% (revised) reported in August, led by a 40.1% fall in exports to Latin America, along with 21.7%, 15.2% and 1.6% dips in exports to the EU, the US and China, in September, vs. August’s -9%, 12%, 7.6% and 21.2%, respectively. In contrast, import growth remained largely unchanged at 30.5%yoy in September vs. 28.9% (revised) in August, reflecting relatively resilient private consumption. On a positive note, the trade account surplus widened to USD1.4bn in September vs. USD0.5bn in August.

IP growth weakens while services strengthen

-202468101214

-30

-20

-10

0

10

20

30

40

2007 2008 2009 2010 2011

IP Services (rhs)%yoy 3mma


Mixed production data… Reflecting weaker export growth, industrial production rose at a slower pace of 4.4%yoy in July/August vs. 7.2% in Q2. Worse still, the inventory to shipment ratio continued to rise, pointing to sustained weakness in industrial production ahead. The ratio (sa) rose further in August, to 1.1 from 0.98 in Q2 and 0.94 in Q1, as inventory growth accelerated while shipment growth slowed. In contrast, reflecting resilient private consumption, services production rose at a faster pace of 4.3%yoy in July/August, vs. 3.3% in Q2. High frequency data thus far suggest a below trend GDP growth of 3.5%yoy in Q3, vs. 3.4% in Q2, with risks to the downside.

Inventory to shipment ratio bodes ill for IP

-40

-20

0

20

400.8

0.9

1.0

1.1

1.2

1.3

1.4

2006 2007 2008 2009 2010 2011

Inventory to shipment ratio

Industrial production (rhs)

ratio %yoy


Downside risks rise… Our previous adjustment was relatively small in the context of South Korean growth’s sensitivity to G2 growth, due to sustained growth in private consumption amid payrolls gain and easy monetary policy conditions (negative interest rates). However, if the G2 economies slip into recession again, South Korea consumers could be deterred from spending further, which in turn would entail a relatively sharp cut to



our current growth forecast. In this regard, we have become more cautious with our Euroland economists now expecting a mild recession in the region. On a positive note, we have yet to hear from our US economists calling for a recession in the US.

BoK to continue to pause as inflation falls

0

1

2

3

4

5

6

2009 2010 2011 2012

CPI Call%


…while inflation eases… CPI inflation fell more than expected to 4.3% in September, from 5.3% in August. This was led by a sharp fall in food price inflation, to 4.6% in September vs. 11.4% reported in August, followed by a slower pace of increase in housing and recreation costs, which rose 5% and 1.1%, respectively, in September , vs. 5.5% and 1.6% in August. Meanwhile, communication costs continued to fall, at an accelerated rate of 2.2% in September vs. 1.1% in August. In contrast, we saw the cost of transportation and miscellaneous items rise at a faster pace of 8.6% and 9.9%, respectively, in September vs. 7.8% and 8.6% previously. Note that despite the fall in international fuel prices, local fuel prices have failed to adjust accordingly. Meanwhile, the core rate also fell in September, to 3.9% from 4% in August.

…keeping the Bank of Korea on the sidelines until mid-2012… We expect inflation to decelerate modestly in coming months, helping the Bank of Korea (BoK) remain on the sidelines until mid-2012. Meanwhile, we expect the authorities to maintain their vigilance over loan growth, which stood at 6.9% in July vs. 5.9% in June, while addressing the weakness of the financial sector. In particular, the authorities pushed ahead with the restructuring of mutual savings banks (MSBs). MBSs remained focused on real estate-related loans, including PF loans, which constituted 42.8% of their’ total loans by Q1 2011, albeit down from 44.7% at end-2010. According to the Financial Supervisory Services, as of end-March 2011, the delinquency ratio of MSBs stood at 15.8%, up from 14.8% at end-2010. Earlier the government suspended 8 MSBs (one sold to a commercial bank now), leaving 98 MSBs in operation until September, when they suspended another seven. The government plans to end its review of most MSBs by year-end. We do not think

that MSBs pose a systemic risk as they constitute only 2% of total assets of the financial system and 2.4% of total loans.

Loan growth remains limited

-30

-20

-10

0

10

20

30

40

2000 2002 2004 2006 2008 2010

Loans of Commercial/Specialized Banks loansNon-Bank Financial Corporations loansTotal

%yoy 3mma


In contrast, the delinquency ratio of commercial and specialized banks (CSBs), which account for 79.8% of total loans and 64% of total assets, stood relatively low. The ratio stood low, at 1.2% in August, albeit up from 1.1% at end-Mach and 0.9% at end-2010. However, its foreign currency liabilities, which account for 11.4% of total liabilities, reflects CSBs’ vulnerable to the stability of the G2 financial system.

KRW/Kospi correlation recovers

900

1100

1300

15001,200

1,400

1,600

1,800

2,000

2,200

2,400

1-Mar 8-Aug 15-Jan 24-Jun

Kospi KRW/USD (rhs)


…as it limits the won’s volatility... Foreign investors and lenders disengaged from South Korea as the sovereign debt crisis in Europe deepened, threatening a banking crisis there and a global recession. Consequently, the won depreciated 10.4% against the US dollar in September, vs. 5.9% fall in the Kospi. This is in sharp contrast to the previous month, when the KRW depreciated only 1.2% against the US dollar vs. the Kospi fell 11.9%. Note that the KRW/USD’s correlation with the Kospi fell to its lowest level in nine months in early September, before rising sharply thereafter. Moreover, in the context of its own history, the won remained relatively



stable. The chart shows that the depreciation rates of the won against the US dollar in recent weeks were about 2.0 standard deviations (calculated using data from 2007 to present) away from the historical mean, still lower than that in mid-2010.

KRW/USD, not too volatile, against its own history

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2006 2007 2008 2009 2010

z-score of weekly % change against USD


Despite the larger war chest, i.e. FX reserves (covered 203% of short-term debt in Q2 2011 vs. 126% in Q3 2008.) and improved external debt composition (short-term share of total stood at 37.6% in Q2 2011 vs. 51.9% in Q3 2008), the won remains vulnerable to the state of the global economy and its financial system. That is, if there is a recession in the US or a banking crisis in Euroland, we expect to see a notable adjustment in the won against the US dollar, reflecting a weaker BoP support for the won, despite the improvement in the composition of external liabilities. South Korea’s FX reserves fell to USD303.4bn in September, from USD312.2bn in August, as the BoK responded to the increasing pressure on the won.

…as the BoP support wanes. Adding to investors concerns, foreign investors’ commitment to the Korean bond market waned in September, with their net investment falling by USD2.5bn in September, after their net investment fell to KRW134bn in August from KRW2,903bn in July. Meanwhile, foreign investors continued sell equities, unloading KRW1,314bn-worth of local stocks in September, albeit down from KRW5,924.5bn in July.

Other investment moves sideways

0

50

100

150

200

250

300

350

1996 1999 2002 2005 2008 2011

Other Investment Liabilities

Portfolio Investment Liabilities

USD bn, cumulative


This shift in foreign investment behavior was also apparent in the BoP data. Although South Korea reported no notable change in the headline, again reporting a financial account deficit of USD2.4bn in August, vs. USD2.5bn in July, there was a meaningful change in its composition. In particular, the portfolio account balance turned negative, to a deficit of USD2.9bn vs. a surplus of USD9.3bn, led by foreign sale of local stocks. There was a net outflow of USD5.8bn in foreign investment in local stocks in August, more than reversing the net inflow of USD2.5bn reported in July. Meanwhile, foreign flows into the local debt market slowed, to a surplus of USD1.7bn in August, vs. USD6.5bn in July. In contrast, the other investment account balance improved sharply, which reported a net surplus of USD4.0bn in August, vs. USD6.6bn deficit in July, reflecting increase in Korea's FX debt. On the latter, we expect a notable fall in other investment, including external debt, in September, due to dislocation in the European financial markets.

Current account surplus narrows

-60

-40

-20

0

20

40

60

80

-10-8-6-4-202468

10

2007 2008 2009 2010 2011

Trade balanceExportsImports

%yoy USD bn


South Korea reported a smaller current account surplus of USD0.4bn in August, vs. USD3.8bn in July, as the trade account surplus fell to USD0.5bn from USD4.7bn in the same period. While we expect the current account balance to improve in September, with South Korea reporting a larger trade surplus of USD1.4bn in September vs. USD0.5bn in August, we expect further weakness in



G2 growth to depress the account in coming quarters, without further fall in import prices and/or weaker domestic demand.

Juliana Lee, Hong Kong, (852) 2203 8312

South Korea: Deutsche Bank forecasts 2009 2010 2011F 2012F

National income Nominal GDP (USD bn) 835 1015 1134 1224Population (mn) 48.7 48.8 48.9 49.0 GDP per capita (USD) 17153 20799 23182 24980 Real GDP (YoY%) 0.3 6.2 3.7 3.9 Private consumption 0.0 4.1 2.8 2.9 Government consumption 5.6 3.0 2.0 2.5 Gross fixed investment -1.0 7.0 -1.7 4.5 Exports -1.2 14.5 10.2 7.0 Imports -8.0 16.9 7.6 7.4 Prices, money and banking CPI (YoY%) eop 2.8 3.5 3.8 4.2 CPI (YoY%) ann avg 2.8 3.0 4.4 3.4Broad money (M3) 10.2 9.5 8.0 8.0 Bank credit (YoY%) 7.8 3.4 6.8 7.0 Fiscal accounts (% of GDP) Central government surplus -1.7 -0.2 0.0 -1.0 Government revenue 24.0 22.6 21.9 21.1 Government expenditure 25.7 22.8 21.9 22.1Primary surplus -0.5 1.1 1.6 0.6 External accounts (USD bn) Merchandise exports 358.2 464.3 550.5 621.8Merchandise imports 320.3 422.4 527.8 609.4Trade balance 37.9 41.9 22.6 12.3 % of GDP 4.5 4.1 2.0 0.9Current account balance 32.8 28.2 12.4 -0.6 % of GDP 3.9 2.8 1.1 0.0FDI (net) -14.9 -19.4 -12.0 -13.0FX reserves (USD bn) 270.0 297.1 305.8 311.0FX rate (eop) KRW/USD 1165 1135 1150 1080 Debt indicators (% of GDP) Government debt1 35.4 37.4 34.4 33.1 Domestic 34.3 36.5 33.5 32.3 External 1.1 0.9 0.9 0.8Total external debt 41.4 35.8 32.1 29.4 in USD bn 345.4 360.0 371.0 390.0 Short-term (% of total) 43.2 37.5 36.7 35.9 General Industrial production (YoY%) 0.1 17.3 8.5 9.0 Unemployment (%) 3.6 3.7 3.5 3.3 Financial markets Current 3M 6M 12MBoK base rate 3.25 3.25 3.25 3.5091-day CD 3.60 3.60 3.65 3.8510-year yield (%) 3.80 4.00 4.10 4.20KRW/USD 1167 1150 1100 1080Source: CEIC, Deutsche Bank Global Markets Research, National Sources Note: (1) FX swap funds unaccounted for. (2) Includes government guarantees..



Sri Lanka B+(Pos)/BB- S&P/Fitch

Growth momentum still holding up, thanks to strong

domestic demand and accommodative monetary policy stance but risks of policy error cloud the growth outlook for 2012.

The central bank’s stance of intervening in the FX market to prevent depreciation of the rupee could lead to stress on the balance of payments.

So far, so good…

2011 has turned out to be extremely disappointing for equity markets worldwide, thanks to the re-emergence of heightened global risk aversion, triggered by rising European sovereign debt risks and fears of an impending double-dip recession in G-3 economies. In this adverse global backdrop, Sri Lanka has emerged once again as the best performing equity market among its regional Asian peers. Year to date, Colombo All Share Index is up +0.4% (in USD terms), while all other Asian indices are in the negative territory (see chart below). Recall that even in 2010, the Sri Lankan equity market outperformed all other Asian markets, rising a whopping 102.5% in Dollar terms through the course of the year.

Sri Lankan equity market has outperformed in 2011

-26 -22 -18 -14 -10 -6 -2 2

CNYHKDTHBPHP

TWDSGDIDR

MYRKRW

INRLKR

YTD performance in USD (1st Jan 2011 - 12 Oct 2011)%

Source: Bloomberg Finance LP, Deutsche Bank

The relative outperformance of the Sri Lankan equity market is not surprising though. The end of the three decade long civil war with LTTE rebels in mid 2009 unleashed a golden opportunity for the economy to function at its full potential, supported by peace dividend and a stable government at the centre. Indeed, Sri Lanka’s growth momentum picked up sharply in 2010, which has been sustained at 8% till the first half of 2011, providing impetus for the relative stock market outperformance. The government’s focus on fiscal consolidation (leading to a recent credit upgrade by rating agencies) and recent moderation in inflation also helped support investor sentiments to a great extent.

Rising discontentment over FX policy

While the Sri Lankan economy seems to be doing reasonably well on an overall basis, its FX policy has however faced criticism in recent months from none other than the IMF. One of the pre-conditions for awarding monetary assistance to Sri Lanka under the IMF Stand-By Arrangement (SBA) was that the Sri Lankan authorities would be willing to accept increased two-way flexibility in the currency movement, with the final intention of making the rupee market determined. However, the CBSL has actively intervened in the FX market since July onwards by selling Dollars, thereby preventing any meaningful depreciation of the rupee. Latest data shows that the CBSL has sold USD615mn Dollars in July and August, thereby preventing the rupee from heading significantly above 110. This compares with USD1.7bn Dollar sold between Sep-08 and March-09, post the Lehman crisis.

FX intervention by CBSL

-700

-400

-100

200

500

800

1100

106

108

110

112

114

116

118

2007 2008 2009 2010 2011

Net purchase(+)/sale(-) of USD,rhsLKR/USD, lhs

LKR/USD USDmn

+ Purchase of USD

- Sale of USD

Source: Bloomberg Finance LP, Deutsche Bank

The USD selling resulted in a liquidity shortage in the money market as equivalent amount of rupee liquidity gets sucked out, in case of an unsterilized intervention. This in turn pushed up overnight call money rate towards reverse repo rate of 8.5%, which led CBSL to re-introduce reverse repo auction (to infuse rupee liquidity into the system) in order to put a lid over rising interest rates.

The Sri Lankan authorities have defended their FX policy stance on the following grounds: a) there is adequate foreign exchange reserves to defend the rupee without risking any balance of payments crisis; b) the policy is geared towards putting a lid on imported inflation, as the Sri Lankan economy remains a highly import dependent economy; and iii) such policy intervention is likely to be temporary as the authorities expect robust capital flows in the remaining period of this calendar year, which should help reduce strong depreciating pressure on the rupee.



Last time when the CBSL had tried to defend the rupee by running down its foreign exchange reserves, it almost led to a default in the balance of payments, which was narrowly averted, thanks to the IMF’s intervention through the SBA-loan programme. In March 2009, gross official reserves had fallen to USD1.3mn, barely sufficient to cover even one month’s imports. Finally, when the CBSL stopped intervening in April 2009, the rupee shot up to 120 from 114 in the previous month.

Since then Sri Lanka’s reserves position has improved appreciably, with gross official reserves having risen to USD8.1bn by end of August 2011. But note that this high level of reserves gives an illusory comfort, as bulk of these reserves has been obtained through loans (Eurobonds, IMF disbursements, and foreign holdings of Treasuries). Net reserves, which are non-borrowed reserves, or earned FX reserves have been falling (reflecting FX sales by CBSL) and are currently around USD700mn, even lower than the USD900mn reserves that Sri Lanka held in mid 2009.

This is indeed a worrisome situation and could pose a destabilizing impact on Sri Lanka’s macroeconomic stability and robust growth outlook. If the CBSL continues to intervene in the FX market and capital flows do not pick up as anticipated, then the balance of payments could come under severe stress in the coming months. On the other hand, if the CBSL stops active intervention in the FX market, then one could expect a sharp depreciation of the Sri Lankan rupee (assuming Dollar continues to remain strong globally), given that the currency has faced hardly any depreciation pressure (thanks to central bank intervention), in stark contrast to other Asian currencies in this bout of global risk aversion cycle. While this outcome may be favorable for exporters on the margin, imported inflation will likely rise (assuming no sharp collapse in global oil prices), complicating monetary policy decisions.

FX performance in Asia between July-October 2011

-10 -8 -6 -4 -2 0 2

CNYHKDTHBPHP

TWDSGDIDR

MYRKRW

INRLKR

FX performance vs. USD (1st July 2011 - 12 Oct 2011)%

Source: Bloomberg Finance LP, Deutsche Bank. Note: (-) sign indicates depreciation against USD

Kaushik Das, Mumbai, (91) 226658-4909

Sri Lanka: Deutsche Bank Forecasts 2009 2010 2011F 2012FNational Income Nominal GDP (USD bn) 42.1 49.6 58.8 68.6Population (mn) 20.5 20.7 20.9 21.2GDP per capita (USD) 2058 2395 2809 3244

Real GDP (YoY %) 3.5 8.0 8.0 8.0 Total consumption 4.1 8.6 8.8 8.2 Total investment 1.3 8.0 10.0 10.8 Private -2.1 7.0 10.0 11.0 Government 14.5 12.0 10.0 10.0 Exports -12.3 9.0 8.0 9.0 Imports -9.1 10.0 11.0 11.0 Prices, Money and Banking CPI (YoY%) eop 5.0 6.8 5.0 7.5CPI (YoY%) avg 3.6 6.2 7.0 6.0Broad money (M2b) eop 18.6 15.8 17.0 15.0Bank credit (YoY%) eop -5.8 25.1 22.0 15.0 Fiscal Accounts (% of GDP) Central government balance -9.9 -7.9 -7.5 -6.5 Government revenue 15.0 14.9 15.1 15.5 Government expenditure 24.9 22.9 22.6 22.0Primary balance -3.5 -1.7 -1.3 -0.5 External Accounts (USD bn) Merchandise exports 7.1 8.3 10.0 11.5Merchandise imports 10.2 13.5 16.9 20.0Trade balance -3.1 -5.2 -6.9 -8.5 % of GDP -7.4 -10.5 -11.7 -12.3Current account balance -0.2 -1.4 -2.9 -3.8 % of GDP -0.5 -2.9 -5.0 -5.5FDI (net) 0.4 0.4 0.8 1.0FX reserves (USD bn) 6.8 8.3 9.3 10.0FX rate (eop) LKR/USD 114.4 111.0 110.0 108.0 Debt Indicators (% of GDP) Government debt 86.2 81.9 79.0 75.3 Domestic 49.8 45.8 44.5 42.5 External 36.5 36.1 34.4 32.8Total external debt 49.8 50.1 45.5 39.5 in USD bn 20.9 24.8 26.9 27.5 Short-term (% of total) 13.5 13.5 13.5 13.5 General Industrial production (YoY %) 9.2 10.4 2.5 7.4Unemployment (%) 5.8 4.9 4.8 4.7 Financial Markets Current 3M 6M 12MReverse Repo rate 8.50 8.50 8.50 8.50

LKR/USD 110.2 110.0 110.0 108.0 Source: CEIC, DB Global Markets Research, National Sources



Taiwan Aa3/AA-/A+ Moody’s/S&P/Fitch

While high frequency data point to a qoq contraction

in Q3, we expect a rebound in Q4, if the US economy continues to expand.

A G2 recession points to a recession in Taiwan and a notably weaker TWD.

The CBC to remain on the sidelines… As expected, the Central Bank of China (CBC) left the policy rate unchanged at the September meeting, ending its monetary tightening that began mid-2010, and adopted a neutral stance. The CBC’s comments were decisively dovish, noting that "a stronger local currency is reducing inflationary pressure" and that its previous actions to ease mortgage loan growth are having effect. On the latter, the CBC added that banks have improved mortgage risk management. On growth, the CBC raised its concern, noting that “production and export order growth are easing.” We expect the CBC to stay on the sidelines until mid-2012 in response to rising risks to growth. In fact, high frequency data suggests that the Taiwanese economy contracted in Q3, on qoq basis, on the back of weaker external demand.

…as growth slows… The leading economic index continued to fall in August, to 2.2%yoy 3mma, down from 3.3% in Q2, pointing to a further slowdown in economic activities in Q3. On the demand front, we attribute much of this slowdown to weaker exports and investment. In fact, the machinery and electrical equipment investment index fell sharply, by 7.6%yoy 3mma in August, vs. 2.6% growth in Q2. Worse still, capital imports continued to fall 24.7% in September, leaving Q3 growth at -14%, vs. +11.3% in Q2. Meanwhile, retail sales growth was relatively stable, rising 3.5%yoy 3mma in August, vs. 4% growth in Q2. Consumer goods imports rose 21.8% in Q3, vs. 19.2% in Q2. Note that our growth revision in September assumed relatively stable private consumption as long as the G2 economies were expanding, albeit at muted levels. However, this benign outlook is at risk now with our Euroland economists expecting a mild recession in the region. If the US economy follows suit, we expect it to prompt a notable slowdown in private consumption in Taiwan, pushing the latter to a recession.

Meanwhile, exports continued to expand at a slower pace of 9.9%yoy in September, leaving Q3 growth at 11.6%, down from 14.9% in Q2, boding ill for overall growth. Weakness in exports points to sustained weakness in industrial production, which rose 3.8%yoy 3mma in August, down from 5% in July and 6.2% in Q2. Worse still, the trade data suggest sustained weakness in the inventory to shipment ratio, which continued to trend upward, to 0.97 (sa 3mma) in August from 0.96 in Q2, after bottoming at 0.84 in Q2 2010.

…amid a benign inflationary environment… Headline inflation remained largely unchanged at 1.35%yoy in September vs. 1.34% in August, as lower core prices countered the impact of higher food and transport prices. Food and transportation costs rose 1.9% and 1.7% respectively in September, up from 1.6% and 1.4% in August, while clothing and medical price inflation fell to 2.6% and 1.8% in September, from 3.2% and 2.4% in August, respectively. Meanwhile, housing inflation was largely unchanged at 1.1% during the month. The core rate stood at 1.2% in September, down from 1.3% in August. We expect inflation to remain contained in coming months, led by falling energy prices.

TWD’s volatility rises sharply

-4.0-3.0-2.0-1.00.01.02.03.04.0

2006 2007 2008 2009 2010



…while limiting the TWD volatility. The TWD depreciated 5.1% against the US dollar in September, albeit far less than the KRW’s 10.5% depreciation. However, against its own historical trend, the TWD’s volatility rose sharply, depreciating 3 standard deviation (calculated using the data from 2006 to date) away from the mean in mid-September, its highest since May 2008. Meanwhile, Taiwan’s FX reserves fell again in September, to USD389.2bn from USD400.3bn in August, as the CBC responded to the increasing pressure on the TWD. Despite the fall in FX reserves, Taiwan has more than enough to cover its FX liabilities. Taiwan’s FX reserves (USD392.6bn) covered 364% of total external debt reported in Q1. Also note that, when there was a severe financial market dislocation in 2008, Taiwanese investors brought their investment funds back home, countering the impact of foreign investment outflows and thereby reducing the pressure on the TWD. Hence, barring a US recession or a banking crisis in Euroland, we expect a relatively stable TWD, against its peers.



Taiwan is a net investor to the world

-20-15-10-505

1015

1998 2000 2002 2004 2006 2008 2010

Financial assets Financial liabilitiesUSD bn



Taiwan: Deutsche Bank’s forecasts 2009 2010 2011F 2012FNational Income Nominal GDP (USD bn) 377.0 433.2 475.8 497.3Population (m) 23.1 23.2 23.3 23.4GDP per capita (USD) 16318 18674 20420 21251 Real GDP (YoY%) -1.9 10.9 4.6 3.9 Private consumption 1.1 3.7 3.4 3.0 Government consumption 3.9 1.8 -0.1 1.0 Gross fixed investment -11.0 23.4 -2.4 1.5 Exports -8.7 25.7 5.1 5.8 Imports -12.8 28.2 0.5 3.5 Prices, money and banking CPI (YoY%) eop -0.2 1.2 1.4 1.7CPI (YoY%) ann avg -0.9 1.0 1.4 1.3Broad money (M2) 7.0 4.5 6.0 6.0Bank credit1 (YoY%) -0.5 5.3 5.8 5.0 Fiscal accounts (% of GDP) Budget surplus -4.5 -3.7 -3.3 -3.6 Government revenue 16.9 15.8 16.0 15.8 Government expenditure 21.4 19.5 19.3 19.4Primary surplus -3.4 -1.7 -1.1 -1.3 External accounts (USD bn) Merchandise exports 203.4 273.8 311.0 348.5Merchandise imports 172.7 247.3 290.3 331.6Trade balance 30.8 26.5 20.7 16.9 % of GDP 8.2 6.1 4.3 3.3Current account balance 42.9 39.9 37.3 32.9 % of GDP 11.4 9.2 7.7 6.3FDI (net) -2.0 -9.1 -9.0 -10.0FX reserves (USD bn) 348.2 382.0 397.0 409.4FX rate (eop) TWD/USD 31.5 30.3 29.8 28.5 Debt indicators (% of GDP) Government debt2 41.3 41.7 43.9 46.2 Domestic 39.7 39.8 42.0 44.5 External 1.6 1.9 1.9 1.7Total external debt 21.7 23.4 23.5 21.5 in USD bn 82.0 101.6 111.7 111.7 Short-term (% of total) 83.3 68.9 65.3 65.3 General Industrial production (YoY%) -5.7 28.5 8.5 8.0Unemployment (%) 5.8 5.0 4.4 4.3

Financial markets Current 3M 6M 12MDiscount rate 1.88 1.88 1.88 2.1390-day CP 0.80 0.80 0.90 1.10 10-year yield (%) 1.31 1.30 1.40 1.40TWD/USD 30.4 29.8 29.5 28.5 Source: CEIC, Deutsche Bank Global Markets Research, National Sources Note: (1) Credit to private sector. (2) Including guarantees on SOE debt.



Thailand Baa1/BBB+/BBB Moody’s/S&P/Fitch

Data thus far point to a rebound in growth in Q3, but

Thailand faces strong headwinds as floods and weaker G2 demand threaten growth, prompting the Bank of Thailand to pause.

Inflation is likely to rebound, temporarily, led by higher food prices.

Temporary relief before the slowdown…High frequency data thus far pointed to a rebound in growth in Q3. In fact, exports rose 31.1%yoy in August, vs. 38.3% in July and 19.8% in Q2, led by agricultural goods exports (64.3% in August vs. 53.5% in July). In contrast, exports of electronics (9.3% vs. 15.6%) and electrical equipment (5.2% vs. 12.3%) slowed during the month. Meanwhile, imports rose at a robust pace of 44% in August, vs. 13.5% in July and 29.3% in Q2, marking its fastest pace of expansion since May 2010, reflecting sustained expansion in domestic demand. The private consumption index rose 3.7%yoy 3mma in August, albeit down from 4.4% in Q2, while the private investment index continued to expand at 7.5% vs. 10.8% in the same period.

On the production front, manufacturing production growth surprised to the upside, expanding 7.0%yoy in August, vs. the 0.7% (revised) decline reported in July, as auto production recovered. On a seasonally adjusted mom basis, manufacturing output rose 3.9% in August, vs. 4.8% fall in July.

However, further recovery is threatened by heavy rain and floods that left 269 dead thus far since the monsoon season began late July. The Thai authorities’ estimates of the cost of flood damage range between THB60bn to THB120bn, about 0.6%-1.2% of GDP. Earlier, the finance ministry revised down its growth forecast for the year, to 3.7% from 4%. This, however, may be revised down further as floods threaten not only agricultural production but also industrial production. We will revisit our forecast after we get more September data.

…while inflation ease…Headline inflation unexpectedly eased to 4% in September, from 4.3% in August, driven by lower energy prices. Energy prices rose at a sharply slower pace of 4.8% in September, vs. 9% in August. Despite the heavy rain, however, raw food price inflation unexpectedly stood relatively stable at 7.9% in September vs. 7.5% in August. Meanwhile, the core rate stood at 2.9% in September, largely unchanged from last month. Looking forward, we expect headline inflation to rebound, temporarily, due to flood-related supply shocks, albeit falling short of the upper limit of the (suggested) new inflation target of the Bank of Thailand – headline inflation of 1.5-4.5% vs. core inflation of 0.5-3%. On the other

hand, the government-led wage hike policy is likely to be scaled down, helping to check inflationary expectations.

…suggesting no rate hike by the Bank of Thailand… Despite the upside risks to inflation in the near term, we expect deteriorating growth outlook to prompt the Bank of Thailand (BoT) to stay on the sidelines until next year. During an interview at the IMF meeting, the BoT governor hinted at a downward revision to the BoT’s growth forecast, while noting that "inflation expectations aren't likely to increase and the BoT has closed the gap somewhat on normalizing borrowing costs." Later in Thailand, the governor noted that BoT’s willingness to use the monetary policy to boost the economy if necessary, reflecting its shift to a neutral stance from tightening bias.

Volatile THB/USD

-4.0-3.0-2.0-1.00.01.02.03.04.0

2006 2007 2008 2009 2010



…while it responds to the baht’s volatility. While it remained relatively stable against its peers, depreciating only 4.2% in September, in the context of its own history, the THB/USD volatility rose sharply in September. That is, the baht depreciated 2.7 standard deviations away from the historical mean (using data from 2003 to date) in the last week of September, reaching its highest level since May 2008. As the BoT responded to limit the baht’s volatility, Thailand’s FX reserves fell to USD180.1bn in September, from USD188.3bn in August. Despite the fall, the country has more than sufficient FX reserves to cover its external debt. Note that in Q2 this year, FX reserves at USD184.9bn covered 173% of total external debt, vs. 130% in Q3 2008. Moreover, in case of further dislocation in global financial system, we expect Thai investors to bring their funds back home, as they did in 2008, countering the impact of withdrawal of foreign investments from Thailand. Note that Thai assets rose relatively sharply in recent months, while foreign flows into Thailand waned. Hence, we expect the baht to remain relatively stable, against its peers.



Foreign inflows fall while Thai overseas flows rise

-6-4-202468

2005 2006 2007 2008 2009 2010 2011

Financial assets Financial liabilitiesUSD bn



Thailand: Deutsche Bank Forecasts

2009 2010 2011F 2012FNational Income Nominal GDP (USDbn) 263.7 318.8 360.7 400.8Population (m) 63.5 63.9 64.2 64.6GDP per capita (USD) 4153 4989 5618 6205 Real GDP (YoY%) -2.3 7.8 3.7 4.0 Private consumption -0.9 4.8 3.3 3.3 Government consumption 6.1 6.4 2.2 6.1 Gross fixed investment -9.2 9.4 5.3 5.4 Exports -12.5 14.7 9.0 6.1 Imports -21.2 21.5 9.2 6.0 Prices, Money and Banking CPI (YoY%) eop 3.5 3.0 4.4 4.5CPI (YoY%) ann avg -0.8 3.3 3.9 4.5Core CPI (YoY%) 0.3 0.9 2.1 2.5Broad money 8.2 8.0 8.0 8.5Bank credit1 (YoY%) 3.2 8.4 8.0 8.0 Fiscal Accounts2 (% of GDP) Central government surplus -5.6 -1.1 -3.3 -4.4 Government revenue 15.6 16.8 16.5 16.6 Government expenditure 21.2 17.9 19.8 21.0Primary surplus -3.4 -0.8 -2.3 -3.4 External Accounts (USDbn) Merchandise exports 150.7 193.7 230.7 261.1Merchandise imports 131.4 179.6 216.7 247.2Trade balance 19.4 14.1 14.0 13.9 % of GDP 7.4 4.4 3.8 3.4Current account balance 21.9 14.8 17.3 16.5 % of GDP 8.3 4.6 4.7 4.1FDI (net) 0.9 1.0 -1.3 2.8FX reserves (USDbn) 138.4 172.1 186.7 209.5FX rate (eop) THB/USD 33.0 30.6 30.2 29.2 Debt Indicators (% of GDP) Government debt2,3 38.2 35.0 36.0 38.0 Domestic 35.4 31.2 32.2 34.5 External 2.8 3.8 3.8 3.5Total external debt 27.3 23.8 21.8 21.4 in USDbn 72.0 76.0 81.0 86.0 Short-term (% of total) 40.3 39.5 39.5 41.9 General Industrial production (YoY%) -6.4 15.5 6.0 7.0Unemployment (%) 1.5 1.1 1.0 1.0 Financial Markets Current 3M 6M 12MBoT o/n repo rate 3.50 3.50 3.75 4.253-month Bibor 3.60 3.60 3.90 4.4010-year yield (%) 3.57 3.60 3.70 3.80THB/USD (onshore) 30.8 30.2 30.0 29.2 Source: CEIC, DB Global Markets Research, National Sources Note: (1) Depository institutions credit to the non-government sector; (2) Fiscal year ending September. (3) Including guarantees on SOE debt.



Vietnam B1(Neg)/BB-(Neg)/B+ Moody’s/S&P/Fitch

Amid sustained growth rises, the State Bank of

Vietnam (SBV) delivers a rate hike, prioritizing inflation, as the dong remains under pressure.

Weaker G2 growth poses downside risks to growth and the dong.

Growth accelerated in Q3… The Vietnamese economy expanded at a faster pace of 6.1% yoy in Q3, vs. 5.7% in Q2, but was weaker than our forecast of 6.3% growth. With the exception of the industry sector, all sectors reported stronger growth in Q3 vs. Q2. In particular, the former rose 7.3% in Q3, down from 8.2% in Q2. In contrast, the agricultural sector expanded 3.2% in Q3 vs. 2.2% in Q2, while services rose 6.5% in Q3 vs. 6.0% in Q2. Moreover, despite ongoing concerns about the market, the construction sector expanded at a faster pace of 5.0% in Q3 vs. 4.2% in Q2. We attribute its strength to public-sector activities. As a result, the economy expanded 5.7%ytd in Q3 vs. 6.6% in the same period last year.

…supported by resilient domestic and external demand… Retail sales growth remained strong, rising 20% in Q3, albeit slowing modestly from 21.3% in Q2. By sector, this was a broad-based moderation in growth, with the exception of households, retail sales of which rose at a faster pace of 20.2% in Q3 vs. 19.8% in Q2.

Export growth accelerated to 41.9% yoy in Q3 from 29.3% in Q2. Meanwhile, imports continued to underperform vis-à-vis exports on the back of government measures to limit consumer goods imports. Imports rose 27.9% in Q3, up from 26.7% in Q2. As a result, the trade deficit was limited to USD0.4bn vs. USD2.9bn in Q2. In fact, this year’s trade balance has been better than expected thus far, prompting us to expect a narrower trade deficit of USD10bn this year vs. USD11.5bn expected earlier. The trade deficit stood at USD6.8bn ytd in September, vs. USD8.4bn a year earlier.

…but likely to miss the earlier growth target. We now expect the sovereign debt crisis in Euroland to push the region into a mild recession, starting Q4 this year. Moreover, we have cut our 2H 2011 and 2012 US growth forecast by 0.5ppts and 0.6ppts, respectively, to 1.8% and 2%. Vietnam’s historical beta (sensitivity) to G2 growth stood relatively low at 0.4 (2000-10) vs. the region’s average of 0.9. However, it is higher than China’s 0.3, and India and Indonesia’s 0.2 and 0.1, respectively. We expect muted G2 growth to limit Vietnam’s growth, leaving the latter’s 2011 and 2012 GDP growth at 5.9% and 6.3%, respectively, with risks to the downside. Note

that the government again adjusted down its 2011 GDP growth target to 6% from 6.5%.

Trade balance improves, temporarily

-3-2-101234

-60-40-20

020406080

2004 2005 2006 2007 2008 2009 2010 2011

Trade Balance (rhs)ExportsImports

%yoy 3mma USD bn


However, as the dong remains under pressure… In connection, we expect the pressure on the dong to worsen in coming months, as trade deficits to widen on the back of weaker external demand, while imports remain relatively stable on the back of gold imports and rising consumer demand ahead of holidays. If the US slips back into recession or there is a banking crisis in Europe, we expect the dong to depreciate notably.

Meanwhile, the dong remains under pressure also due to high inflation and FX loan repayment needs. Note that FX loan growth remained high, at 22.2%ytd in June, while VND loans rose 2.7%, pointing to rising FX related risks to the soundness of banks’ assets. On a positive note, total loan growth stood at 7.1%, suggesting that the new credit growth target of 17% (vs. 20% earlier) will be met. The SBV also asked banks to reduce the non-productive sector (e.g. real estate) loans share of total loans to 16% by end-2011, from 22% in 1H.

Inflation still high

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011

Refinancing rateHeadline inflation

%


…and inflation remains high… CPI inflation remained high at 22.4% in September, albeit down slightly from 23.0% in August. Food and transportation price inflation stood at 33.4% and 19.9%, respectively, in September, down from 34.1% and 21.5% in August. Despite lower



international fuel prices, we remain concerned about headline inflation due to bad weather conditions, which we expect to keep food prices high. Note that the food share of the CPI basket stands at 40% vs. transportation’s 8.9% and housing’s 10%. Meanwhile, housing price inflation remained also high, at 22.5% in September, up from 22% in August. We attribute high inflation in Vietnam, not only to high raw-material prices and negative interest rates, but also to inefficient investments. Note that the country’s incremental capital output ratio (the marginal amount of investment capital necessary to generate the next unit of output, also called ICOR) continued to worsen in recent years, with its 5-year average at 5.7 in 2010, twice the level of Thailand’s,

Inefficient investment

0

1

2

3

4

5

6

1995 1997 1999 2001 2003 2005 2007 2009

ICOR5 yr moving avg


…the State Bank of Vietnam delivers a rate hike. The State Bank of Vietnam (SBV) unexpectedly reversed its course and hiked the refinancing rate by 100bps to 15%, effective 10 October. This rate hike in refinancing rate follows a 100bps cut to 14% in the repo rate in July, which the SBV left unchanged this time. We think the repo rate was left unchanged to sustain its liquidity support for financial institutions struggling to attract deposits or at least give them time to adjust. To address the latter issue, the SBV has reiterated its time deposit (more than one month) rate cap of 14%, while threatening to impose sanctions against violating credit institutions. The SBV also capped the rate on demand and time deposits below one month at 6%. At the same time, the SBV has asked credit institutions to lower their lending rates for the production sector to 17-19% from 18-22%, to limit loan defaults. These administrative measures reflect the problem of monetary policy transmission in Vietnam. Regardless of the existing problem, we support the SBV’s rate hike, which signals the Vietnamese authorities’ policy priority in limiting inflationary pressure and stabilizing the dong.


Vietnam: Deutsche Bank Forecasts

2009 2010 2011F 2012F

National Income Nominal GDP (USD bn) 92.9 103.4 119.2 142.2Population (m) 86.0 86.9 87.9 88.8GDP per capita (USD) 1079 1190 1356 1601 Real GDP (YoY%) 5.3 6.8 5.9 6.3 Private consumption 3.7 6.1 5.2 6.2 Government consumption 7.6 6.0 5.5 6.3 Gross fixed investment 8.7 11.6 5.7 6.0 Exports -5.0 10.0 7.0 6.8 Imports -9.0 12.8 6.8 6.2 Prices, Money and Banking CPI (YoY%) eop 4.6 11.7 20.6 13.7CPI (YoY%) ann avg 6.8 9.2 19.1 15.9Broad money (M3) 31.6 25.0 19.0 30.0Bank credit (YoY%) 38.0 27.0 17.0 22.0 Fiscal Accounts1 (% of GDP) Federal government surplus -9.0 -6.5 -5.0 -5.3 Government revenue 26.7 28.1 27.6 28.2 Government expenditure 35.7 34.6 32.6 33.5Primary fed. govt surplus -7.8 -5.2 -3.5 -3.8 External Accounts (USD bn) Merchandise exports 57.5 72.5 80.0 93.0 Merchandise imports 68.0 81.0 90.5 105.0 Trade balance -10.5 -8.5 -10.5 -12.0 % of GDP -11.3 -8.2 -8.8 -8.4Current account balance -7.4 -4.3 -6.0 -7.0 % of GDP -8.0 -4.2 -5.0 -4.9FDI (net) 6.9 7.0 7.0 7.0FX reserves (USD bn) 16.8 12.5 14.5 15.5FX rate (eop) VND/USD 18479 19500 21000 22000 Debt Indicators (% of GDP) Government debt 51.0 52.0 53.0 53.0 Domestic 20.0 21.0 21.0 20.0 External 31.0 31.0 32.0 33.0Total external debt 39.8 40.6 41.1 39.4 in USD bn 37.0 42.0 49.0 56.0 Short-term (% of total) 1.1 1.2 1.6 1.4 General Industrial production (YoY%) 6.8 14.0 11.0 14.0Unemployment (%) 5.0 4.7 4.7 4.5 Financial Markets Current 3M 6M 12MRefinancing rate 15.00 15.00 13.00 11.0014-day repo rate 14.00 14.00 12.00 10.00VND/USD 20873 20900 21000 22000 Source: CEIC, DB Global Markets Research, National Sources Note: (1) Fiscal balance includes off budget expenditure, while revenue and expenditure include only on budget items.



China – Inflation (CPI) China – One-year Deposit Rate

-2

0

2

4

6

8

2009 2010 2011 2012

%yoy

3.50

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 2010 2011 2012

%

Source: DB Global Markets Research Source: DB Global Markets Research

Next CPI release: Nov 9 DB Forecast (Previous): 5.2%yoy (6.1%) Next policy meeting: N.A. DB Rate Call: No change in rate expected

India – Inflation (WPI) India – Repo Rate

-2

0

2

4

6

8

10

12

2009 2010 2011 2012

%yoy

8.50

4

5

6

7

8

9

2009 2010 2011 2012

%


Next WPI release: Oct 14 DB Forecast (Previous): 9.8%yoy (9.8%) Next policy meeting: Oct 25 DB Rate Call: 25bps rate hike in Oct

Indonesia – Inflation (CPI) Indonesia – One-month SBI Rate

2

4

6

8

10

2009 2010 2011 2012

%yoy

6.00

5

6

7

8

9

2009 2010 2011 2012

%


Next CPI release: Nov 1 DB Forecast (Previous): 5.0%yoy (4.6%) Next policy meeting: Nov 10 DB Rate Call: 25bps rate cut in Nov



Malaysia – Inflation (CPI) Malaysia – Overnight Policy Rate

-3-2

-101

23

45

2009 2010 2011 2012

%yoy

3.00

1.5

2.0

2.5

3.0

3.5

2009 2010 2011 2012

%


Next CPI release: Oct 21 DB Forecast (Previous): 3.3%yoy (3.3%) Next policy meeting: Nov 11 DB Rate Call: No change in rate expected

Philippines – Inflation (CPI) Philippines – Overnight Repo Rates

0

2

4

6

8

2009 2010 2011 2012

%yoy

6.50

4.50

3

4

5

6

7

8

2009 2010 2011 2012

Repo Rev repo%


Next CPI release: Nov 4 DB Forecast (Previous): 5.1%yoy (4.8%) Next policy meeting: Oct 20 DB Rate Call: No change in rate expected

South Korea – Inflation (CPI) South Korea – Overnight Call Rate Target

1

2

3

4

5

6

2009 2010 2011 2012

%yoy

3.25

1

2

3

4

2009 2010 2011 2012

%


Next CPI release: Nov 1 DB Forecast (Previous): 3.9%yoy (4.3%) Next policy meeting: Nov 11 DB Rate Call: No change in rate expected



Sri Lanka –Inflation (CPI) Sri Lanka – Reverse Repo Rate

0

2

4

6

8

10

12

2009 2010 2011 2012

%yoy

8.50

8

9

10

11

12

13

2009 2010 2011 2012

%


Next CPI release: Oct 31 DB Forecast (Previous): 5.6%yoy (6.4%) Next policy meeting: Nov 8 DB Rate Call: No change in rate expected

Taiwan – Inflation (CPI) Taiwan – Discount Rate

-3

-2

-1

0

1

2

3

4

2009 2010 2011 2012

%yoy

1.875

1.00

1.50

2.00

2.50

2009 2010 2011 2012

%


Next CPI release: Nov 7 DB Forecast (Previous): 1.3%yoy (1.3%) Next policy meeting: Dec 30 DB Rate Call: No change in rate expected

Thailand – Core Inflation (CPI) Thailand – 1-day Repurchase Rate

-2

-1

0

1

2

3

4

2009 2010 2011 2012

%yoy

3.50

0

1

2

3

4

5

2009 2010 2011 2012

%


Next core CPI release: Nov 1 DB Forecast (Previous): 2.1%yoy (2.9%) Next policy meeting: Oct 19 DB Rate Call: No change in rate expected



Vietnam – Inflation (CPI) Vietnam – Discount rate

0

4

8

12

16

20

24

2009 2010 2011 2012

%yoy

13.0

4

7

10

13

16

2009 2010 2011 2012

%


Next CPI release: Oct 24 DB Forecast (Previous): 22.8%yoy (22.4%) Next policy meeting: N.A. DB Rate Call: 100bps rate cut in Dec

Hong Kong – Inflation (CPI) Hong Kong – Base Rate

-2

0

2

4

6

8

2009 2010 2011 2012

%yoy

0.50

0.40

0.45

0.50

0.55

0.60

2009 2010 2011 2012

%


Next CPI release: Oct 21 DB Forecast (Previous): 5.7%yoy (5.7%)

Singapore – Inflation (CPI) Singapore – 3m SGD Sibor

-1

0

1

2

3

4

5

6

2009 2010 2011 2012

%yoy

0.40

0.25

0.35

0.45

0.55

0.65

0.75

2009 2010 2011 2012

%

Source: DB Global Markets Research

Source: DB Global Markets Research

Next CPI release: Oct 24 DB Forecast (Previous): 5.2%yoy (5.7%)



Asian Economic Indicators

(%YoY unless stated) Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Policy rates (%)China (1yr depo) 2.25 2.25 2.50 2.50 2.75 2.75 3.00 3.00 3.25 3.25 3.25 3.50 3.50HKMA (base rate) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50India (repo) 5.75 6.00 6.00 6.25 6.25 6.50 6.50 6.75 6.75 7.25 7.50 8.00 8.00Indonesia (28-day SBI) 6.50 6.50 6.50 6.50 6.50 6.50 6.75 6.75 6.75 6.75 6.75 6.75 6.75 6.75Malaysia (overnight) 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.00 3.00 3.00 3.00 3.00Philippines (repo) 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.25 6.25 6.50 6.50 6.50 6.50 6.50Singapore (3mo SIBOR) 0.54 0.51 0.44 0.44 0.44 0.44 0.44 0.44 0.44 0.44 0.44 0.44 0.35South Korea (o/n call) 2.25 2.25 2.25 2.50 2.50 2.75 2.75 3.00 3.00 3.00 3.25 3.25 3.25 3.25Sri Lanka (rev repo) 9.00 9.00 9.00 9.00 9.00 8.50 8.50 8.50 8.50 8.50 8.50 8.50 8.50Taiwan (rediscount) 1.38 1.38 1.50 1.50 1.63 1.63 1.63 1.63 1.75 1.75 1.75 1.88 1.88Thailand (o/n repo) 1.75 1.75 1.75 1.75 2.00 2.25 2.25 2.50 2.75 2.75 3.00 3.25 3.50Vietnam (refinancing) 8.00 8.00 8.00 9.00 9.00 9.00 11.00 12.00 13.00 14.00 14.00 14.00 14.00

Consumer pricesChina 3.5 3.6 4.4 5.1 4.6 4.9 4.9 5.4 5.3 5.5 6.4 6.5 6.2Hong Kong 2.4 1.9 2.5 2.8 2.9 3.5 3.6 4.4 4.6 5.3 5.6 7.9India (WPI) 8.9 9.0 9.1 8.2 9.5 9.5 9.5 9.7 9.7 9.6 9.5 9.2 9.8Indonesia 6.4 5.8 5.7 6.3 7.0 7.0 6.8 6.7 6.2 6.0 5.5 4.6 4.8Malaysia 2.0 1.8 1.9 1.9 2.1 2.4 2.9 3.0 3.2 3.3 3.5 3.4Philippines 4.5 4.0 3.1 3.4 3.4 4.1 4.7 4.8 4.7 5.1 5.2 5.1 4.7Singapore 3.3 3.7 3.5 3.8 4.6 5.5 5.0 5.0 4.5 4.5 5.2 5.4South Korea 2.6 3.6 4.1 3.3 3.5 4.1 4.5 4.7 4.2 4.1 4.4 4.7 5.3Sri Lanka 5.0 5.7 6.5 6.9 6.8 6.3 7.2 7.7 8.8 8.1 7.1 7.4 7.0Taiwan -0.5 0.3 0.6 1.5 1.2 1.1 1.3 1.4 1.3 1.7 1.9 1.3 1.3Thailand 3.3 3.0 2.9 2.8 3.0 3.0 2.9 3.1 4.0 4.2 4.1 4.1 4.3Vietnam 8.2 8.9 9.7 11.1 11.8 12.2 12.3 13.9 17.5 19.8 20.8 22.2 23.0

CreditChina 18.6 18.5 19.3 19.8 19.9 18.5 17.7 17.9 17.5 17.1 16.9 16.6 16.4Hong Kong 24.1 25.9 29.5 25.9 28.6 30.0 29.8 30.9 27.5 32.4 28.0 27.6India 18.5 18.3 20.4 22.3 27.2 22.7 22.7 21.3 21.7 21.7 20.2 18.0 20.1Indonesia 21.0 22.8 22.3 22.9 24.1 22.9 22.7 23.5 23.0 23.2 22.6 23.7Malaysia 9.5 8.8 10.9 11.6 9.7 9.9 9.5 10.2 10.0 11.0 12.7 10.7Philippines 9.8 10.2 9.1 10.3 8.9 12.4 13.6 16.8 18.0 19.3 20.5 23.6Singapore 9.0 10.9 12.3 12.9 13.4 13.6 14.9 15.4 17.2 18.0 18.8 19.6South Korea 2.9 2.7 3.3 3.8 3.2 4.3 4.3 4.1 4.4 3.4 3.6 4.4Sri Lanka 13.7 17.4 22.7 26.1 27.8 30.1 31.3 32.0 32.7 35.1 35.9Taiwan 6.2 5.9 6.3 6.4 6.4 8.0 7.9 8.4 8.0 7.9 7.5 7.0Thailand 9.7 10.5 11.6 11.7 12.3 13.9 14.5 14.5 15.0 15.0 15.4 15.5

ExportsChina 34.3 25.1 22.8 34.9 17.9 37.7 2.3 35.8 29.8 19.3 17.9 20.3 24.4Hong Kong 35.5 23.9 13.9 16.4 12.3 27.1 24.4 21.2 4.0 10.3 9.3 8.9India 24.1 24.6 21.4 44.1 60.0 58.4 75.7 51.9 34.4 56.9 46.4 81.8Indonesia 30.2 23.8 17.6 45.1 26.1 26.0 29.1 28.1 37.5 44.9 49.1 39.5Malaysia (USD) 24.2 20.0 10.9 12.8 16.3 16.5 18.9 12.6 19.5 13.8 18.2 15.5Philippines 37.5 46.8 27.8 11.5 26.5 11.8 8.3 4.1 19.1 -3.1 -9.4 -1.7Singapore (USD) 33.4 26.1 28.1 19.4 20.0 27.1 21.7 24.4 16.1 23.2 20.1 16.8South Korea 26.0 16.2 27.6 21.4 22.6 44.7 16.5 28.8 23.5 22.0 11.2 25.2 27.1Sri Lanka 7.0 16.7 27.6 36.0 33.9 70.2 36.8 59.5 37.2 34.3 16.9Taiwan 26.6 17.5 21.9 21.8 19.0 16.6 27.2 16.6 24.6 9.4 10.8 17.6 7.2Thailand 23.9 21.2 15.7 28.5 18.8 22.3 31.0 30.6 25.0 17.6 16.8 38.3Vietnam 51.6 34.2 23.9 41.7 37.2 41.5 29.6 33.2 39.5 14.6 33.9 54.6 21.0

20112010

Source: Deutsche Bank



Asian Economic Indicators (cont’d)

(%YoY unless stated) Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Retail sales (real)China 15.4 15.8 14.7 14.0 15.0 16.2 7.3 12.8 12.4 12.0 11.9 11.1 11.0Hong Kong 14.9 15.0 18.9 14.5 15.1 14.7 13.0 20.9 22.4 21.3 22.6 22.7India (motor veh & bikes) 24.8 21.3 44.9 14.7 27.8 19.8 22.5 19.7 24.8 14.9 14.1 11.8 15.1Indonesia 32.0 21.1 18.5 18.8 21.8 20.0 18.0 16.4 16.0 16.0 19.9 22.9Malaysia (motor veh.) 13.7 -5.8 13.5 -0.8 14.9 8.6 -0.7 12.7 4.4 -9.5 -22.6 -6.0Philippines (pass. cars) 34.1 29.9 18.2 9.5 -0.1 3.7 -14.3 -1.7 -17.0 -35.6 -28.2Singapore -3.0 1.1 -2.9 -1.2 -1.2 -5.6 -7.4 -1.7 5.8 8.3 9.2South Korea 8.8 5.9 3.6 6.2 4.0 9.0 1.5 5.2 5.1 5.7 5.5 5.7Taiwan 9.4 5.1 6.6 3.8 2.1 14.7 0.7 7.7 5.6 4.4 4.8 4.2Thailand 14.6 13.6 8.6 12.3 10.5 12.3 10.0 10.5 6.1 5.7 8.4Vietnam 24.8 24.4 10.7 11.3 -0.1 13.8 8.8 11.0 1.6 3.1 -2.6 -3.7

Industrial productionChina 13.9 13.3 13.1 13.3 13.5 14.9 14.8 13.4 13.3 15.1 14.0 13.5Hong Kong 5.4 5.8 3.6India 4.5 6.2 11.4 6.4 8.1 7.5 6.7 9.4 5.3 5.9 8.8 3.3Indonesia 4.7 0.8 4.9 4.7 7.1 7.4 2.1 7.5 4.1 5.3 4.9 5.7Malaysia 4.1 5.8 2.6 4.2 4.4 0.5 4.5 2.4 -0.2 -5.6 1.2 -0.6Philippines 25.6 15.7 17.0 17.0 15.6 13.3 10.1 9.1 1.8 1.8 -0.2Singapore 6.9 26.0 29.6 41.2 8.8 11.6 5.2 30.3 -9.1 -16.2 10.7 7.4South Korea 15.9 2.9 13.4 11.2 10.7 13.6 9.0 9.1 6.9 8.2 6.5 3.8Sri Lanka 8.5 8.3 12.3 11.4 10.4 10.7 9.9 10.2 8.5 8.6 8.3Taiwan 23.5 12.1 14.4 19.6 18.9 17.4 12.9 13.7 7.2 7.6 3.8 3.9Thailand (manuf) 8.4 8.1 6.0 5.7 -3.4 4.1 -3.0 -6.7 -8.1 -3.7 3.8 -1.1Vietnam 15.2 15.1 13.5 14.3 16.2 16.1 17.7 14.2 14.3 14.2 15.2

FX Reserves (USD bn)China 2547.8 2648.3 2760.9 2767.8 2847.3 2931.7 2991.4 3044.7 3145.8 3166.0 3197.5Hong Kong 261.4 266.1 267.1 266.1 268.7 273.2 272.7 272.6 276.9 275.9 277.2 278.8India 283.1 292.9 298.0 292.4 297.3 299.2 301.6 305.5 313.5 305.5 315.7 319.1Indonesia 81.3 86.6 91.8 92.8 96.2 95.3 99.6 105.7 113.8 118.1 119.7 122.7 124.6Malaysia 99.2 100.7 104.5 103.4 106.6 109.0 111.0 113.9 132.2 133.3 134.5 138.6 138.3Philippines 49.9 53.8 57.2 60.6 62.4 63.5 63.9 66.0 68.5 68.9 69.0 71.9 75.6Singapore 206.2 214.2 220.5 218.1 224.4 225.8 230.2 234.0 241.5 240.3 242.0 249.0 248.6South Korea 285.4 289.8 293.3 290.2 291.6 296.0 297.7 298.6 307.2 305.1 304.5 311.0 312.2Sri Lanka 5.7 6.2 6.7 6.6 6.6 6.6 6.7 7.0 7.2 7.0 7.5 8.1Taiwan 372.1 380.5 383.8 379.3 382.0 387.1 390.7 392.6 399.5 398.7 400.3 400.8 400.3Thailand 155.2 163.2 171.1 168.0 172.1 174.0 179.5 181.6 189.9 185.5 184.9 187.6 188.3Vietnam 14.5 12.9 12.7

Real GDPChina 9.6 9.8 9.7 9.5Hong Kong 6.9 6.4 7.5 5.1India 8.9 8.3 7.8 7.7Indonesia 5.8 6.9 6.5 6.5Malaysia 5.3 4.8 4.9 4.0Philippines 7.3 6.1 4.6 3.4Singapore 10.5 12.0 9.3 0.9South Korea 4.4 4.7 4.2 3.4Sri Lanka 8.0 8.6 7.9Taiwan 10.7 7.1 6.2 5.0Thailand 6.6 3.8 3.2 2.6Vietnam 7.4 7.2 5.4 5.7

20112010

Source: Deutsche Bank



This page is left blank intentionally



Appendix 1 Important Disclosures

Additional information available upon request

For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Michael Spencer/Jun Ma/Taimur Baig/Juliana Lee/Kaushik Das



Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless “Japan” is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

Risks to Fixed Income Positions Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

David Folkerts-Landau Managing Director

Global Head of Research

Stuart Parkinson Chief Operating Officer

Guy Ashton Global Head Company Research

Marcel Cassard Global Head Fixed Income Strategies and Economics

Germany Asia-Pacific Americas

Andreas Neubauer Regional Head

Michael Spencer Regional Head

Steve Pollard Regional Head

Principal Locations

Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ Tel: (44) 20 7545 8000

Deutsche Bank AG New York 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250-2500

Deutsche Bank AG Hong Kong Filiale Hongkong Intl. Commerce Centre 1 Austin Road West Kowloon, Hong Kong tel: (852) 2203 8888

Deutsche Securities Inc. Japan 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Tel: (81) 3 5156 6770

Deutsche Bank AG Frankfurt Große Gallusstraße 10-14 60272 Frankfurt am Main Germany Tel: (49) 69 910 00

Deutsche Bank AG Aurora business park 82 bld.2 Sadovnicheskaya street Moscow, 115035 Russia Tel: (7) 495 797-5000

Deutsche Bank AG Singapore One Raffles Quay South Tower Singapore 048583 Tel: (65) 6423 8001

Deutsche Bank AG Australia Deutsche Bank Place, Level 16 Corner of Hunter & Phillip Streets Sydney NSW 2000 Tel: (61) 2 8258 1234

Deutsche Bank Dubai Dubai International Financial Centre The Gate, West Wing, Level 3 P.O. Box 504 902 Dubai City Tel: (971) 4 3611 700

Subscribers to research via email receive their electronic publication on average 1-2 working days earlier than the printed version.

If you would like to receive this or any other product via email please contact your usual Deutsche Bank representative.

Publication Address: Deutsche Bank AG Level 55 Cheung Kong Center2 Queens Road Central Hong Kong (852) 2203 8888

Internet: http://gmr.db.com Ask your usual contact for a username and password.

Global Disclaimer

Emerging markets investments (or shorter-term transactions) involve significant risk and volatility and may not be suitable for everyone. Readers must make their own investing and trading decisions using their own independent advisors as they believe necessary and based upon their specific objectives and financial situation. When doing so, readers should be sure to make their own assessment of risks inherent to emerging markets investments, including possible political and economic instability; other political risks including changes to laws and tariffs, and nationalization of assets; and currency exchange risk.

Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report.

Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis. Deutsche Bank makes no representation as to the accuracy or completeness of the information in this report. Deutsche Bank may buy or sell proprietary positions based on information contained in this report. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a reader thereof. This report is provided for information purposes only. It is not to be construed as an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting.

Copyright © 2011 Deutsche Bank AG

deutsche bank asia economics monthly - china

Documents