nomura | asia economic monthly 7 march 2013 ... -...

Nomura | Asia Economic Monthly 7 March 2013

Nomura International (HK) Limited

See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures

Asia Economic Monthly

Economics Research | Asia Ex-Japan

Forecasting is getting trickier 7 MARCH 2013

Export leading indicators are sending mixed signals, the longer-run structural challenges are deepening and Asia's economies are becoming more differentiated.

Asia letter 2

Forecasting is getting trickier 2

Asia views 4

Gauging Japan's competition with the rest of Asia 4

Southeast Asia: Different strokes 9

China: Thoughts on the first day of the NPC 16

China: Both official PMI and HSBC PMI drop in February 18

India budget: Quality and credibility of fiscal consolidation disappoint 19

China: Sector-level data cast doubt on strength of recovery 24

South Korea: Thoughts on future economic policy 26

Chart alerts 29

South Korea: Fiscal front-loading should boost Q1 GDP 29

China: The largest hike in the rail freight tariff since 2003 29

Malaysia: The government still meets its 2012 fiscal target 30

South Korea: A healthy household restructuring 30

China: Property prices rose faster in January 31

India: Nominal salary growth to moderate in 2013 31

Korean data hint at a downside surprise in China's exports 32

South Korea: The inverted yield curve looks unsustainable 32

Calendar 33

The month ahead 33

Outlook 2013-2014 34

China: Mixed signals cast doubt on the strength of the recovery 34

Hong Kong: Fiscal stimulus 35

India: Politics trumps economics 36

Indonesia: Still a case to tighten 37

Malaysia: All eyes on the elections 38

Philippines: In a virtuous cycle 39

Singapore: A weak start to 2013 40

South Korea: Growth momentum set to carry into Q1 41

Taiwan: External demand is key 42

Thailand: A positive start to 2013 43

Asia in charts 44

Forecast table 51

Recent articles 52

Global Economics

Economists

Rob Subbaraman +852 2536 7435

[email protected]

Zhiwei Zhang +852 2536 7433

[email protected]

Young Sun Kwon +852 2536 7430

[email protected]

Sonal Varma +91 22 4037 4087

[email protected]

Euben Paracuelles +65 6433 6956

[email protected]

This report can be accessed electronically via: www.nomura.com/research or on Bloomberg (NOMR)

mailto:[email protected]






2

Rob Subbaraman +852 2536 7435 [email protected]

Asia letter

Forecasting is getting trickier

Export leading indicators are sending mixed signals, the longer-run structural

challenges are deepening and Asia's economies are becoming more differentiated.

We titled our first monthly of the year, Here comes the sun, as the data flow had turned positive,

but two months on and Asia‟s export outlook is looking murkier again. Two important leading

indicators are moving in opposite directions. In February, new export orders in China‟s official

PMI slumped to 47.3, while imports in the US manufacturing ISM surged to 54.0 (Figure 1).

Asia‟s manufacturing PMIs in February hugged close to the 50 dividing line between expansion

and contraction. From January to February, manufacturing PMIs fell in China (50.4 to 50.1),

Hong Kong (52.5 to 51.5), Singapore (50.2 to 49.4) and Taiwan (51.5 to 50.2), and rose in India

(53.2 to 54.2) and Korea (49.9 to 50.9). One support for Asian exports which looks to be in a

strong upcycle is global demand for electronics: the US semiconductor equipment book-to-bill

ratio jumped to 1.14 in January, a 29-month high (Figure 2).

Our house view on the global economy also points to cross-currents for Asian exports. In the

US, we expect fiscal deals to be struck, paving the way for GDP growth to recover to about 3%

saar in H2. In Japan, we expect “Abenomics” reflationary policies to lift growth to over 3% as

early as Q2. By contrast, we expect the euro area to remain mired in recession this year, while

in China – an increasingly important export market for the region – we expect the debt build-up

and rising inflation to force tightening policies, causing GDP growth to slow from over 8% y-o-y

to 7.2% in Q4. It is true that China‟s economy only recently started to recover, but it is not based

on solid foundations, in our view – potential growth is slowing and cracks are starting to appear

(see “China: Sector-level data cast doubt on strength of recovery” in this issue).

Meanwhile, domestic demand remains strong across most of Asia (Korea being an exception).

There are tentative signs that monetary policy generally is moving toward a tightening bias, but

more through macroprudential measures than higher interest rates. China recently introduced a

capital gains tax, while Hong Kong and Singapore have imposed higher stamp duties to curb

property market speculation. No Asian central bank has yet to raise interest rates, which can be

justified by low or falling inflation (Indonesia is perhaps an exception). But given monetary policy

is meant to be pre-emptive, we believe other considerations are being taken into account, such

as erring on the side of laxity as insurance against the downside risks to exports and concerns

that rate hikes could provoke even stronger capital inflows.

Cyclical/structural interplay

With real interest rates staying low, and potentially falling further if inflation rises, domestic

demand should remain strong. On top of this, some countries like India, Indonesia, Thailand

and the Philippines are at the stage of economic development in which they are starting to face

what China has already: a burgeoning middle class, leading to a take-off in demand for durable

Fig. 1: Two important leading indicators of Asian exports

25

30

35

40

45

50

55

60

65

Feb-05 Feb-07 Feb-09 Feb-11 Feb-13

Index US import orders PMI

China new export orders PMI

Source: CEIC and Nomura Global Economics.

Fig. 2: US semiconductor equipment book-to-bill ratio

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13

Ratio




3

goods and services. However, persistently low real interest rates and strong domestic demand

are creating new structural challenges, which if unresolved could at some point lead to growth

setbacks. A symptom of these challenges is the sharp narrowing in Asia‟s current account

surpluses since the financial crisis (Figures 3 and 4). India‟s current account swung to a deficit

of 5.3% of GDP in Q3 2012, and we expect it to increase to over 6% in Q4, while Indonesia‟s

deficit increased to 3.6% in Q4. This year, we expect the current accounts of Hong Kong and

Thailand to also turn into deficits, and China to run a thin surplus equal to 1% of GDP. We

believe that weak foreign demand is only part of the reason for the narrowing surpluses:

Perhaps in part because of reform fatigue, new investments have not been strong

enough in some countries to match burgeoning demand, creating supply-side

bottlenecks and leading to a surge in imports (India and Indonesia).

Slow progress in removing government subsidies on oil and food amid burgeoning

demand have led to overconsumption (and smuggling) and excessive imports (China,

India, Indonesia and Malaysia).

Because of low interest rates, debt has built up in several countries, including China,

Hong Kong, Korea (household), Malaysia, Singapore, Taiwan and Thailand. From the

saving-investment identity this has contributed to narrowing current account surpluses.

Of course, current account deficits are not necessarily “bad” if driven by domestic investment

and not by debt, but as we note above, this is questionable in Asia. In any case, they leave

Asian currencies vulnerable to depreciation if, for whatever reason, there is a sudden stop in

capital inflows. Rising debt levels could also jeopardize GDP growth once interest rates rise.

Growing differentiation

Another forecasting challenge is the growing differentiation in the region. Consider our focus:

China: We expect the government to crackdown on flourishing shadow-banking activities and

hike the 1yr bank lending rate by 50bp in H2 in response to rising inflation.

Hong Kong: Because of the HKD/USD peg, it is importing QE from the US and it is unclear

whether tighter macroprudential measures can avoid a boom-bust property market cycle.

Korea: An exception, where domestic demand should remain moribund due to a household

debt overhang, chaebol outsourcing production and global overcapacity in key industrial sectors.

India: Following an unrealistic budget, reform fatigue is likely in H2 before the 2014 elections,

keeping the current account deficit dangerously large and causing inflation to rise again.

Indonesia: Also has elections in 2014 and seems to be moving in the direction of India. It is not

clear to us that policymakers will be able to contain inflation and the current account deficit.

Philippines: A virtuous spiral is in motion; improving governance and reforms are lifting

business sentiment, reinforcing the government‟s popularity and helping it push more reforms.

Thailand: The economy is rapidly gaining momentum on loose monetary and fiscal policies, but

we worry about the central bank losing some of its monetary policy independence.

Malaysia: The general election, which is likely to be held in April, could make or break our

relatively positive economic outlook.

Fig. 3: Current account positions

-6

-3

0

3

6

9

12

15

18

1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

% of GDP China

India

Indonesia

Thailand

Philippines


Fig. 4: Current account positions

-5

0

5

10

15

20

25

30

35

1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

% of GDP Hong Kong Korea

Malaysia Taiwan

Singapore



4


Candy Cheung +852 2536 7436 [email protected]

Craig Chan +65 6433 6106 [email protected]

Wee Choon Teo +65 6433 6107 [email protected]

Asia views

Gauging Japan's competition with the rest of Asia

In earlier analysis, we concluded that the contemporaneous negative impact of JPY

depreciation on the rest of Asia is much more limited than it was a decade ago (see Asia

Insights: The yen’s impact on Asia, 10 January 2013). Our FX strategy team's USD/JPY

forecast of 93 by end-2013 is, in our judgment, still not enough to warrant any downgrades to

our 2013 Asia ex-Japan GDP forecasts. However, were JPY to depreciate sharply from here,

some Asian economies would be hurt more than others. Korea seems most exposed due to

indirect competition with Japan in third-country export markets, whereas China, India and

emerging Southeast Asia seem the least exposed. To recap, we examine JPY‟s impact on Asia

through three main channels:

Direct export competition with Japan. This measures the direct competition between, for

example, Korean exporters to Japan and domestic manufacturers in Japan. As JPY

depreciates against KRW, local Japanese manufacturers can gain a competitive price

advantage over Korean exporters to Japan. This channel has diminished in importance as the

size of the Japan market has stagnated. The simple average of each Asian country's exports to

Japan as a share of their total exports has declined from 11.7% in 2000-01 to 8.8% in 2011-12.

Direct import competition with Japan. Again using Korea as an example, JPY depreciation

cheapens Korea's imports from Japan, hurting Korea's import-competing firms. At first glance,

this may seem a powerful channel as the simple average of each Asian country's imports from

Japan as a share of their total imports has surged from 11.1% in 2000-01 to 16.5% in 2011-12,

but this is misleading. With the exception of Korea, most Asian countries do not have many of

their own large, high value-added companies that compete head-on for local market share with

Japanese companies. Rather, the increased import shares from Japan reflect Asia's flourishing

cross-country vertical supply chain. A hefty 80% of the gross value of intra-Asian exports is

accounted for by intermediate goods (for a good analysis of intra-Asian trade, please see the

IMF‟s Implications of Asia's Regional Supply Chain for Rebalancing Growth, Regional Economic

Outlook: Asia and Pacific, April 2011). Japanese companies or MNCs with factories in lower-

cost Asian countries import high value-added components from Japan; these are assembled

into finished goods to be exported typically to the US and Europe. Some of Asia's cross-country

vertical supply chain can benefit from JPY depreciation against other Asian currencies.

Indirect third-market competition with Japan. This measures the degree to which, for example,

Korean firms compete against Japanese firms in markets other than Japan or Korea. JPY

depreciation against KRW would give Japanese exporters a competitive advantage over their

Korean counterparts in third markets. Third-market competition is potentially the most powerful

channel, but it is also the most difficult to measure. In our January report, we estimated third-

market competition by using the Bank for International Settlements' (BIS) nominal effective

exchange rate (NEER) trade weights for Asian countries. The BIS's NEER trade weights are

made up of three components – direct export competition, direct import competition and indirect

third-market competition – but the BIS only publicly discloses the total weight. We therefore

estimate the weights of the two direct channels of competition and from that calculate the

indirect third-market competition weight as the residual. This shows Korea to be most exposed

to indirect third-market competition with Japan.

Calculating export similarity indexes (ESIs)

An alternative approach to measuring the extent of indirect third-market competition is to

calculate export similarity indexes (ESIs). To do this we use detailed export product data for

different countries from the United Nations' Comtrade database. At the SITC 3-digit level we

were able to compare the shares in total exports of 260 different product groups for each of the

10 Asian countries under our coverage, as well as for the US, Germany and Switzerland. Full

details of the methodology used in constructing our ESIs are in Appendix 1, but basically the

ESI takes higher values for country pairs with similar shares of each product category in total





http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=588064&appname=GRP&cid=TWFOV2I0UlFsMFE90



5

exports. An ESI value of 1 corresponds to identical export product structures, suggesting very

high indirect third-market competition, whereas an ESI value of zero indicates completely

dissimilar export product structures.

Results

Figure 1 shows the results of our calculated ESI between Japan and other Asian countries, the

US, Germany and Switzerland in 2000, 2007 and 2011 (for a full matrix of the ESI, please see

Appendix II). The most striking feature is how much Korea stands out, with a high – and rising –

ESI vis-à-vis Japan of 62.8% in 2011, indicating intense competition with Japan in third markets.

For all other Asian countries the ESIs are below 50%. The relatively less developed Asian

economies – India, Indonesia and the Philippines – have the lowest ESIs, which is as we had

expected, given these countries export more labour-intensive, lower value-added products than

Japan. In addition to Korea, the ESIs of China, India and the Philippines have increased over

time, supporting the notion that exports of these countries are moving up the value-added

ladder. Outside of Asia, it is revealing that Germany‟s ESI vis-à-vis Japan has also been rising,

and at 70.2% in 2011 was significantly higher than that of Korea. In contrast, the US ESI with

Japan had fallen to 59.5% for 2011, while Switzerland‟s, against our expectations, was a low

ESI of 35.2% (being a renowned producer of precision instruments, we expected the Swiss to

be in fierce competition with Japan).

Limitations of our ESIs

One limitation is that the SITC 3-digit level data of 260 products we use to calculate our ESIs

may not be detailed enough to capture the different degrees of sophistication of export products.

SITC 5-digit level data of 2,819 different products are available, but even at that level it can be

difficult to capture differences in quality of very similar products (e,g., according to analysis of

US customs micro-level data, a shirt imported from Japan costs on average 30 times as much

as a shirt from the Philippines). This limitation is particularly relevant for Asia given its elaborate

vertical cross-country production network. The similarity in export product structures may reflect

a higher level of complementarity with Japan due to the outsourcing of production by Japanese

companies – notably in the electronics and auto industries – to lower-wage countries in the

region, rather than increased competition. The exaggeration of export similarity is probably most

extreme in China, given it takes about half of all intra-Asian intermediate imports, but is also

relevant in the emerging economies in Southeast Asia. In other words, for China, Indonesia,

Malaysia, Thailand and the Philippines our conjecture is that the degree of indirect third-market

competition vis-à-vis Japan is lower than that suggested by our calculated ESIs.

Conclusion

Our export similarity indexes show that Korea is by far Asia‟s most exposed country to third-

market competition with Japan, which leads us to conclude that, if JPY were to depreciate

sharply from here, Korea's economy is the most vulnerable in Asia. In contrast, China, India,

Indonesia, Malaysia, Thailand and the Philippines would all be relatively immune to further JPY

depreciation, particularly once their roles as outsourcing hubs for production by Japanese

companies is taken into account. Moreover, the growing anticipation of reflationary monetary

and fiscal policies in Japan should, over time, lower Japan's real interest rate and lift its

economic growth, which should lead to increased Japanese direct and portfolio investments in

the rest of Asia. With their relatively low labour costs and high long-run potential growth rates, it

should be China, India and emerging Southeast Asia that benefit the most from Japanese

investment, and indeed surveys of Japanese companies suggest as much (Figure 2).


6

Fig. 1: Export similarity indexes between Japan and countries listed

2000 2007 2011

China 40.7% 44.5% 46.0%

Hong Kong 45.3% 39.8% 35.9%

India 24.8% 30.6% 36.2%

Indonesia 29.2% 27.6% 25.1%

Korea 58.2% 61.1% 62.8%

Malaysia 43.1% 39.7% 37.2%

Philippines 33.0% 30.3% 35.8%

Singapore 51.0% 48.2% 46.3%

Thailand 50.2% 49.5% 46.9%

Average 41.7% 41.2% 41.4%

Germany 67.2% 69.4% 70.2%

Sw itzerland 40.9% 35.4% 35.2%

USA 67.3% 61.3% 59.5%

Based on SITC Level 3 data

Note: See Appendix I for details. Source: UN Comtrade, Nomura. Unfortunately, UN Comtrade data are unavailable for Taiwan.

Fig. 2: Japanese companies’ most promising countries for overseas business over the medium term

2012 2011 2012 2011 2012 2011

1 - 1 China 319 369 62.1 72.8

2 - 2 India 290 297 56.4 58.6

3 5 Indonesia 215 145 41.8 28.6

4 3 Thailand 165 165 32.1 32.5

5 4 Vietnam 163 159 31.7 31.4

6 5 Brazil 132 145 25.7 28.6

7 12 Mexico 72 29 14.0 5.7

8 7 Russia 64 63 12.5 12.4

9 8 USA 53 50 10.3 9.9

10 19 Myanmar 51 7 9.9 1.4

11 9 Malaysia 36 39 7.0 7.7

12 11 Korea 23 31 4.5 6.1

12 15 Turkey 23 12 4.5 2.4

14 10 Taiwan 22 35 4.3 6.9

15 14 Philippines 21 15 4.1 3.0

16 13 Singapore 16 25 3.1 4.9

17 16 Cambodia 13 8 2.5 1.6

18 16 Australia 11 8 2.1 1.6

19 16 Bangladesh 10 8 1.9 1.6

20 21 Germany 6 5 1.2 1.0

Ranking No. of companiesPercentage share

(%)Country /

Region

Note: Respondents were asked to name their top five countries. The percentage share is calculated by the number of respondents citing a country divided by the total number of respondents. Source: Japan Bank for International Cooperation.

Asia FX – ESIs support our short KRW vs. THB and PHP recommendations

These findings are broadly in line with our current Asia FX portfolio recommendations to be

short KRW and MYR (vs. USD) and long THB and PHP (vs. USD). We had continued to

reposition our Asia FX portfolio since 21 January to capture the more idiosyncratic strengths

and weaknesses within the region (see Asia Insights: Asia FX portfolio update: delinking from

JPY, 8 February 2013) while avoiding those currencies more exposed to JPY depreciation.

With our export similarity analysis between Japan and Asia reconfirming stronger trade

competitiveness between Japan and Korea, this supports our short KRW bias, especially if JPY

depreciation continues (Figure 3). We maintain our short MYR recommendation given upcoming

general election risk. For PHP and THB, the relatively lower export similarities and both

economies outperforming in the region, support our long THB and PHP recommendations

(Figure 4). The Philippines remains one of our top picks as, beyond the strong growth backdrop,

it should also benefit from ongoing reforms (see Asia Special Report: Southeast Asia: Different

strokes, 6 March 2013).

Fig. 3: USD/KRW and USD/JPY with 120d rolling correlation

-30%

-20%

-10%

0%

Aug-12 Oct-12 Dec-12 Feb-13

USD/KRW and USD/JPY 120d rolling correlation

75

80

85

90

95

1040

1080

1120

1160

1200


USD/KRW

USD/JPY (rhs)

Source: Bloomberg, Nomura.

Fig. 4: USD/THB and USD/JPY with 120d rolling correlation

-10%

0%

10%

20%

30%


USD/THB and USD/JPY 120d rolling correlation

75

80

85

90

95

29.50

30.00

30.50

31.00

31.50

32.00


USD/THB

USD/JPY (rhs)

Source: Bloomberg, Nomura.

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=594864





7

Appendix I: Constructing our ESIs

An export similarity index, developed by Finger and Kreinin (1979), is a measure of exports

similarity between two countries (A and B) to a third market (the global market, in our analysis).

As illustrated in the equation below, it is based on exports of product i as a proportion of total

exports for country A and B, and is calculated as the sum of the minimum value for each

product. An ESI value of zero suggests there is no competition between country A and B, while

a value of 1 suggests perfect competition.

An intuitive way to understand the ESI equation is to look at the illustrative example in Figure 5.

In the case of ESI between country A and B, country A only exports product 1 to the world while

country B only exports an equal proportion of product 2 and 3. Obviously, there is no overlap

between their exports and the ESI value should be zero, as shown in the computation.

Countries C and D, however, both export only product 1 and hence are perfect competitors; the

ESI between them works out to be unity.

Product data

We have used product-level total exports data classified according to the UN Comtrade‟s

Standard International Trade Classification Revision 3 (SITC Rev 3) at the 3-digit level. Based

on these data, there are a total of 260 product groups ranging from live animals to tobacco, from

fuels to manufactured goods. We have listed the short product description of the “machinery

and transport equipment” category to provide a sense of the product resolutions at the 3-digit

level. In our analysis we used data for 2000, 2007 and 2011 (latest available full set) to get a

sense of how the ESIs have evolved over the years.

Understandably, the computed ESI will be dependent on the chosen level of product data. At a

higher product resolution (e.g. 5-digit level with 2,819 detailed products), we would generally

expect a lower ESI value than that offered by a lower product resolution (e.g. 3-digit level).

Hence, it is important to make cross-sectional assessment based on the same product

resolution.

Fig. 5: An illustrative example of ESI

Example 1: No competition

Country A Country B

Product % of total X % of total X Min

1 100% 0% 0%

2 0% 50% 0%

3 0% 50% 0%

ESI 0%

Example 2: Complete competition

Country C Country D

% of total X % of total X

Product % of total X % of total X Min

1 100% 100% 100%

2 0% 0% 0%

3 0% 0% 0%

ESI 100%

Sum

Sum

Source: Nomura

Fig. 6: Sub components of “machinery and transport equipment” category

SITC Level 3 code description for "machinery and transport equipment" category

Short description Short description Short description

711 STEAM GENER.BOILERS,ETC. 737 METALWORKING MACHNRY NES 771 ELECT POWER MACHNY.PARTS

712 STEAM TURBINES 741 HEATNG,COOLNG EQUIP,PART 772 ELEC.SWITCH.RELAY.CIRCUT

713 INTRNL COMBUS PSTN ENGIN 742 PUMPS FOR LIQUIDS,PARTS 773 ELECTR DISTRIBT.EQPT NES

714 ENGINES,MOTORS NON-ELECT 743 PUMPS NES,CENTRIFUGS ETC 774 ELECTRO-MEDCL,XRAY EQUIP

716 ROTATING ELECTRIC PLANT 744 MECHANICAL HANDLNG EQUIP 775 DOM.ELEC,NON-ELEC.EQUIPT

718 OTH.POWR.GENRTNG.MACHNRY 745 OTH.NONELEC MCH,TOOL,NES 776 TRANSISTORS,VALVES,ETC.

721 AGRIC.MACHINES,EX.TRACTR 746 BALL OR ROLLER BEARINGS 778 ELECTRIC.MACH.APPART.NES

722 TRACTORS 747 TAPS,COCKS,VALVES,ETC. 781 PASS.MOTOR VEHCLS.EX.BUS

723 CIVIL ENGINEERING EQUIPT 748 TRANSMISSIONS SHAFTS ETC 782 GOODS,SPCL TRANSPORT VEH

724 TEXTILE,LEATHER MACHINES 749 NON-ELECT MACH.PARTS,ETC 783 ROAD MOTOR VEHICLES NES

725 PAPER,PULP MILL MACHINES 751 OFFICE MACHINES 784 PARTS,TRACTORS,MOTOR VEH

726 PRINTNG,BOOKBINDNG MACHS 752 AUTOMATC.DATA PROC.EQUIP 785 CYCLES,MOTORCYCLES ETC.

727 FOOD-PROCESS.MCH.NON DOM 759 PARTS,FOR OFFICE MACHINS 786 TRAILERS,SEMI-TRAILR,ETC

728 OTH.MACH,PTS,SPCL INDUST 761 TELEVISION RECEIVERS ETC 791 RAILWAY VEHICLES.EQUIPNT

731 METAL REMOVAL WORK TOOLS 762 RADIO-BROADCAST RECEIVER 792 AIRCRAFT,ASSOCTD.EQUIPNT

733 MACH-TOOLS,METAL-WORKING 763 SOUND RECORDER,PHONOGRPH 793 SHIP,BOAT,FLOAT.STRUCTRS

735 PARTS,NES,FOR MACH-TOOLS 764 TELECOMM.EQUIP.PARTS NES

Source: UN Comtrade, Nomura


8

Appendix II

Export similarity between selected countries in 2000, 2007 and 2011

Fig. 7: Inter-country export similarity index in 2000

ESI based on 2000 SITC Level 3 data

China Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand Germany Sw iss USA

China - 68.2% 44.2% 49.5% 40.7% 46.6% 42.9% 36.0% 40.1% 54.3% 41.7% 34.3% 46.5%

Hong Kong 68.2% - 34.7% 41.9% 45.3% 53.5% 47.4% 39.5% 45.2% 56.8% 39.6% 37.9% 48.3%

India 44.2% 34.7% - 36.8% 24.8% 31.6% 21.1% 21.6% 24.2% 40.6% 31.6% 28.9% 31.6%

Indonesia 49.5% 41.9% 36.8% - 29.2% 39.2% 45.9% 32.7% 30.8% 46.6% 33.2% 25.0% 34.8%

Japan 40.7% 45.3% 24.8% 29.2% - 58.2% 43.1% 33.0% 51.0% 50.2% 67.2% 40.9% 67.3%

Korea 46.6% 53.5% 31.6% 39.2% 58.2% - 55.7% 45.4% 58.6% 54.9% 48.2% 30.0% 54.1%

Malaysia 42.9% 47.4% 21.1% 45.9% 43.1% 55.7% - 53.8% 64.2% 55.7% 34.1% 26.7% 46.6%

Philippines 36.0% 39.5% 21.6% 32.7% 33.0% 45.4% 53.8% - 62.0% 45.5% 25.7% 18.6% 38.3%

Singapore 40.1% 45.2% 24.2% 30.8% 51.0% 58.6% 64.2% 62.0% - 51.9% 41.3% 31.2% 55.4%

Thailand 54.3% 56.8% 40.6% 46.6% 50.2% 54.9% 55.7% 45.5% 51.9% - 44.9% 33.8% 55.5%

Germany 41.7% 39.6% 31.6% 33.2% 67.2% 48.2% 34.1% 25.7% 41.3% 44.9% - 53.7% 69.1%

Sw iss 34.3% 37.9% 28.9% 25.0% 40.9% 30.0% 26.7% 18.6% 31.2% 33.8% 53.7% - 48.9%

USA 46.5% 48.3% 31.6% 34.8% 67.3% 54.1% 46.6% 38.3% 55.4% 55.5% 69.1% 48.9% -





China - 58.8% 40.8% 38.2% 44.5% 50.5% 49.2% 40.4% 40.9% 56.5% 46.1% 32.2% 46.9%

Hong Kong 58.8% - 30.6% 28.1% 39.8% 48.5% 52.1% 42.3% 52.4% 45.7% 33.9% 30.1% 42.2%

India 40.8% 30.6% - 35.8% 30.6% 35.8% 27.4% 23.2% 38.5% 40.4% 36.7% 31.5% 38.0%

Indonesia 38.2% 28.1% 35.8% - 27.6% 29.3% 47.4% 30.0% 25.3% 41.0% 33.5% 23.0% 32.7%

Japan 44.5% 39.8% 30.6% 27.6% - 61.1% 39.7% 30.3% 48.2% 49.5% 69.4% 35.4% 61.3%

Korea 50.5% 48.5% 35.8% 29.3% 61.1% - 45.9% 35.6% 51.7% 51.4% 52.9% 27.9% 52.7%

Malaysia 49.2% 52.1% 27.4% 47.4% 39.7% 45.9% - 51.2% 59.0% 55.4% 39.1% 27.1% 45.4%

Philippines 40.4% 42.3% 23.2% 30.0% 30.3% 35.6% 51.2% - 50.2% 43.7% 29.0% 17.4% 34.8%

Singapore 40.9% 52.4% 38.5% 25.3% 48.2% 51.7% 59.0% 50.2% - 44.4% 46.7% 32.0% 52.4%

Thailand 56.5% 45.7% 40.4% 41.0% 49.5% 51.4% 55.4% 43.7% 44.4% - 50.7% 33.6% 57.0%

Germany 46.1% 33.9% 36.7% 33.5% 69.4% 52.9% 39.1% 29.0% 46.7% 50.7% - 50.6% 69.0%

Sw iss 32.2% 30.1% 31.5% 23.0% 35.4% 27.9% 27.1% 17.4% 32.0% 33.6% 50.6% - 46.6%

USA 46.9% 42.2% 38.0% 32.7% 61.3% 52.7% 45.4% 34.8% 52.4% 57.0% 69.0% 46.6% -





China - 54.5% 39.9% 32.6% 46.0% 49.1% 43.3% 36.4% 37.1% 52.2% 46.6% 31.2% 48.9%

Hong Kong 54.5% - 27.7% 22.7% 35.9% 39.9% 47.9% 41.1% 46.1% 41.5% 31.9% 28.0% 40.4%

India 39.9% 27.7% - 30.0% 36.2% 38.8% 29.2% 27.8% 47.5% 40.9% 39.9% 29.0% 45.9%

Indonesia 32.6% 22.7% 30.0% - 25.1% 25.0% 50.6% 30.2% 21.8% 38.8% 30.1% 19.6% 30.3%

Japan 46.0% 35.9% 36.2% 25.1% - 62.8% 37.2% 35.8% 46.3% 46.9% 70.2% 35.2% 59.5%

Korea 49.1% 39.9% 38.8% 25.0% 62.8% - 41.9% 32.5% 49.3% 48.7% 51.0% 26.2% 52.5%

Malaysia 43.3% 47.9% 29.2% 50.6% 37.2% 41.9% - 46.2% 52.6% 49.9% 38.2% 25.7% 46.1%

Philippines 36.4% 41.1% 27.8% 30.2% 35.8% 32.5% 46.2% - 47.1% 38.2% 33.9% 17.0% 41.2%

Singapore 37.1% 46.1% 47.5% 21.8% 46.3% 49.3% 52.6% 47.1% - 41.8% 43.3% 31.1% 56.5%

Thailand 52.2% 41.5% 40.9% 38.8% 46.9% 48.7% 49.9% 38.2% 41.8% - 47.8% 30.6% 57.6%

Germany 46.6% 31.9% 39.9% 30.1% 70.2% 51.0% 38.2% 33.9% 43.3% 47.8% - 47.4% 66.8%

Sw iss 31.2% 28.0% 29.0% 19.6% 35.2% 26.2% 25.7% 17.0% 31.1% 30.6% 47.4% - 41.8%

USA 48.9% 40.4% 45.9% 30.3% 59.5% 52.5% 46.1% 41.2% 56.5% 57.6% 66.8% 41.8% -


This article was published on 7 March 2013.


9

Euben Paracuelles +65 6433 6956 [email protected]



Southeast Asia: Different strokes

Last week, we took a trip around Southeast Asia – stopping in Indonesia, Malaysia, the

Philippines and Thailand – meeting senior policymakers and local political and economic

experts.

Our meetings generally reinforced our main theme of “greater differentiation” in Southeast Asia,

which we highlighted in our 2013 outlook: Asia’s overheating risks (28 November 2012).

Investors should beware of treating Southeast Asia as one homogeneous region: the growth

prospects, reform momentum, political outlook and central bank responses are becoming

increasingly varied from country to country. For Indonesia, despite still-strong growth, we are

cautious because of reform fatigue ahead of the 2014 elections, rising political uncertainty

surrounding the election result and growing question marks over whether policymakers will be

able to keep inflation and the widening current account deficit in check. By contrast, we left the

Philippines with our bullish view intact; virtuous spirals between reforms, business confidence

and growth seem to be in motion. The Philippine economy is set to be the second-fastest

growing in Asia this year after China. In Malaysia, the focus is on politics. The general election,

which will likely be held in April, could make or break our relatively positive economic outlook.

Thailand‟s economy is rapidly gaining momentum on loose monetary and fiscal policies, but the

risk we sense is that it may be growing too fast for its own good.

We maintain our GDP growth forecasts, but have a bias to revise up Thailand and to a smaller

extent Malaysia, which we will review after the elections. In addition, in terms of policy rates, we

remain comfortable with our forecast of rate hikes in Indonesia and Malaysia in H2, but the risk

is they may be pushed back in the Philippines. We are comfortable with our forecast that the

Bank of Thailand will keep its policy rate unchanged through 2013 (Figure 1).

Fig. 1: Nomura’s Asean forecast summary

2012 2013 2014 2012 2013 2014

Indonesia 6.2 6.1 6.2 4.3 5.2 5.1

Malaysia 5.6 4.3 4.6 1.7 2.4 2.5

Philippines 6.6 6.4 5.8 3.1 4.6 4.5

Singapore 1.3 2.4 4.2 4.6 3.9 3.6

Thailand 6.4 4.5 5.0 3.0 3.2 3.1

Indonesia -2.7 -1.9 -1.7 -1.8 -2.0 -2.2

Malaysia 6.4 4.7 4.2 -4.5 -4.5 -4.2

Philippines 3.3 1.9 1.7 -2.3 -2.6 -2.2

Singapore 18.9 16.1 17.0 1.1 1.0 0.4

Thailand 0.7 -0.4 -0.4 -2.6 -3.2 -3.7

Indonesia 5.75 6.25 6.75 9790 9900 9700

Malaysia 3.00 3.50 4.00 3.06 2.95 2.87

Philippines 3.50 4.00 4.50 41.0 39.2 38.2

Singapore 0.38 0.48 0.50 1.22 1.19 1.17

Thailand 2.75 2.75 3.25 30.60 29.10 28.60

Currency per US Dollar

Fiscal Balance (% of GDP)

Official Policy Rate

Current Account (% of GDP)

Consumer PricesReal GDP

Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. Source: CEIC; Nomura Global Economics estimates.

Inflation and monetary policy

The most hawkish central bank we met was the Bank of Thailand (BOT), which views the

current stance of the policy rate as still loose. Bank Indonesia (BI) and Bangko Sentral ng

Pilipinas (BSP) both view their policy stances as neutral. Bank Negara Malaysia (BNM) is

probably between the two camps, i.e. neutral now but may soon turn hawkish.




http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=580289&appname=GRP&cid=YVVsNGRHWmplbXN4UnpBOTA1


10

The differences are not explained by their views on the inflation outlook. If there was something

that surprised us during the trip it was the extent to which all central banks see limited inflation

risks at this point. This is partly because of their assumption that global growth remains

uncertain, putting a lid on commodity prices. Domestically, overall capacity utilization rates

remain relatively stable and some capacity expansion is underway (Figure 2). As a result, their

inflation forecasts remain benign even beyond this year. BI forecasts end-2013 CPI inflation at

4.9% y-o-y even though the latest reading in February was already at 5.3%. BSP expects

inflation to average at the low end of its 3-5% target range, and see the risks evenly balanced.

BNM forecasts inflation to rise closer to 3%, but remains comfortable with this level (BNM is the

only one of the four central banks without an official inflation target). The BOT expects inflation

to remain stable and notes that even if the direct impact of fiscal subsidies and controls that

helped keep price pressures in check are stripped out, inflation expectations are still well

anchored.

Fig. 2: Capacity utilization

45

50

55

60

65

70

75

80

85

90

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

Malaysia Philippines Thailand%

Source: CEIC; Nomura Global Economics.

Fig. 3: Investment spending

15

20

25

30

35

40

45

1995 1997 1999 2001 2003 2005 2007 2009 2011

Indonesia Malaysia

Philippines Thailand

% GDP


However, it was clear that all four central banks face other policy considerations, not just

targeting inflation, and there was a lot of discussion on the use of macroprudential measures.

BNM, the central bank that most strongly emphasizes that it has a multi-targeting framework, is

conscious of monetary policy responding to supply-side pressures that tend to be temporary. At

the same time, it is concerned of rising financial stability risks if rates are kept too low for too

long. These risks include the household debt build-up (close to 80% of GDP), asset price

bubbles and too-strong domestic demand that could narrow the current account surplus further.

The BOT‟s hawkishness is based on similar arguments. While inflation is still low, domestic

demand is very strong: the current account swung to a deficit in January and the household

loan-to-GDP ratio jumped from 71% in 2011 to 77% in Q3 2012. In our view, if the BOT had it its

way, it would hike policy rates in H2, but it faces strong political pressure to cut the policy rate

further in a bid to stem THB appreciation. These political pressures are likely to persist, in part

due to the strong relationship between BOT Chairman Virabongsa Ramangkura (a non-MPC

member) and Finance Minister Kittiratt Na-Ranong.

It seems that BI is still in no rush to hike rates as the inflation outlook is seen as benign (Figure

4). This may change following the latest February CPI print, which jumped to 5.3% y-o-y,

already exceeding BI‟s year-end forecast of 4.9% (see Asia Insights: Indonesia: Inflation jumps

in February, 1 March 2013). A possible response could be to raise the FASBI rate (the lower

end of the policy corridor) to signal a change in bias, before raising the policy rate later in the

year, but there is no guarantee as core inflation in February was a more benign at 4.3%. We left

with the sense that BI prefers to use the policy rate to focus squarely on inflation, not domestic

demand or the current account deficit, which increased to 3.6% of GDP in Q4 2012. In addition,

in the near term there is the added complication of leadership change: Finance Minister Agus

Martowardojo has been nominated to take over as BI governor from Darmin Nasution in May.

BSP believes that despite the strong growth outlook it can afford to stay on hold. Due to strong

reform momentum and robust investment, potential growth is officially estimated to have risen to

5.5-6.5%, which should keep inflation at bay. Given the favourable economic conditions, BSP is




11

instead taking the opportunity to focus on rationalizing its monetary policy framework, as

reflected in the recent decision to make the interest rate paid on Special Deposit Accounts

(SDA) uniform across all tenors at 3%. It is also considering formalising the use of an official

interest rate corridor, which should allow more policy flexibility.

Fig. 4: Indonesia: Headline inflation versus target

2

4

6

8

10

12

14

Feb-07 Feb-09 Feb-11 Feb-13

inflation target range

CPI inflation, %y-o-y

%


Fig. 5: Philippines: Headline inflation versus target

0

2

4

6

8

10

12

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

inflation target range

Headline inflation

%y-o-y


All this considered, we remain comfortable with our forecast that BI and BNM will hike by a total

of 50bp hikes in H2, and that the BOT will remain on hold through 2013. However, we see a risk

that our rate hike forecast by BSP in H2 may be pushed back to a later date.

Capital flow management

Foreign capital inflows are recognised to remain strong in the region and hence pose a

challenge to central banks. The consistent view among them is that interest rates are not the

tool to slow the pace of the inflows. The focus is more about whether the composition of capital

inflows becomes more speculative and short-term in nature. For now, the mix is viewed as

relatively healthy. BNM, for instance, did not sound too worried about the relatively high level of

foreign ownership of local government bonds – at nearly 30% it is one of the highest in the

region1 (Figure 6) – highlighting large domestic financial institutions that could absorb any

unwinding, but also citing past reforms that are now encouraging two-way flows. Meanwhile,

BSP sees the recent surge in portfolio inflows as a natural consequence of the economy‟s

strengthening fundamentals (and in line with regional developments), and so seems relatively

tolerant of the inflows, especially given that they are associated with a large surplus in the

current account which should provide a strong buffer against the risk of capital flow reversals

(Figure 7). However, BSP is carefully monitoring the capital inflow composition.

The preferred policy response seems to be to employ macroprudential measures. We sense

that across the board the central banks are actively studying their options. For example, BSP is

looking at measures on the real estate sector and says it will be ready to implement them as

necessary. Given the structural flows, BSP can tolerate the strength of PHP as it sees it as a

reflection of the economy‟s positive outlook, and thus seems less likely to implement further FX-

related measures. Similarly, the BOT is also starting to signal the use of macroprudential

measures having lagged the rest of the region, but we see room for greater FX flexibility in

Thailand given that THB is not seen as overvalued.

1 Data from BNM shows that foreign ownership of MGBs was as high as 45% (as of end-Q4 2012). For ease of comparison

with the rest of the region we cite data from Asia Bonds Online (ADB). This differs as the denominators are calculated differently, with ADB including investment issues in total bonds outstanding.


12

Fig. 6: Foreign ownership of government bonds

0

5

10

15

20

25

30

35

40

Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

Malaysia Thailand Indonesia

% total holdings

Source: Asia Bonds Online; Nomura Global Economics.

Fig. 7: Gross portfolio inflows

-6

-4

-2

0

2

4

6

8

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

USDbn Indonesia Philippines

Singapore Thailand


By contrast, given Indonesia‟s large current account deficit, capital flow reversals pose a more

significant risk. Net foreign direct investment (FDI) inflows have remained large and stable, but

portfolio inflows are also substantial (Figure 8). The combination of external uncertainty (e.g. a

global risk-off triggered by Europe or US fiscal worries) and local factors (e.g. election risks,

reform fatigue, BI‟s preference of a weak IDR to help correct the current account deficit, more

resource nationalism) argues for IDR remaining under depreciation pressure.

Fig. 8: Indonesia: Gross FDI versus portfolio inflows

-6

-4

-2

0

2

4

6

8

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

USDbn FDI inflows Portfolio inflows


Fiscal policy

Fiscal policy should continue to play a major role in all four economies, but the nature of fiscal

support to growth now varies more. The Philippines and Thailand are both focusing on higher

infrastructure spending. Thailand has unveiled more details of its infrastructure “mega-projects”

and is likely to make more implementation progress this year. In the Philippines, the government

is eyeing more fiscal reforms to generate fiscal space for even higher capital expenditures, after

passing landmark fiscal legislation last year (sin taxes; Figure 9). More internal initiatives are

being implemented to improve tax administration and to channel the gains to higher-quality

spending, such as on social and economic services. In Malaysia and Indonesia, the elections

will likely drive spending increases, such that growth should remain supported ahead of the

elections. In Malaysia, implementation of measures outlined in the 2013 budget is in full swing,

particularly the cash transfers. Indonesia continues to struggle with disbursements, but this is

being corrected and elections in 2014 are expected to provide more impetus for making up for

past under-spending, starting in Q3 this year.


13

Fig. 9: Capital expenditure

-60

-40

-20

0

20

40

60

80

2007 2008 2009 2010 2011 2012*

Indonesia Malaysia

Philippines Thailand% y-o-y

Note: *For 2012: Unaudited estimates have been used. Source: Ministry of Finance for the respective countries; CEIC; Nomura Global Economics.

Despite the broad fiscal expansion, the authorities were quick to point out that they remain

conscious of not compromising fiscal sustainability. In Thailand, the medium-term fiscal plan,

which incorporates large-scale infrastructure spending, is to keep public debt-to-GDP below

50% of GDP, allowing a 10 percentage point (pp) buffer against external shocks given the legal

limit of 60% of GDP. To achieve this, authorities envisage a balanced budget by 2017, which

implies that short-term measures that were criticized as populist are likely to be allowed to

expire. In Malaysia, fiscal consolidation remains a top policy priority, narrowing the fiscal deficit

to 4% of GDP this year despite the elections. This supports our forecast that GDP growth could

slow this year due to fiscal tightening after the elections, but the risk is it is going to be more

gradual. Longer-term, the government remains determined to keep the public debt ratio below

its self-imposed (i.e. not legally binding) ceiling of 55% of GDP and is looking to resume the

fiscal reform agenda if Prime Minister Najib secures a mandate after the election.

Fig. 10: Thailand: Public debt-to-GDP ratio projections

42.0

43.0

44.0

45.0

46.0

47.0

48.0

49.0

FY12 FY13 FY14 FY15 FY16 FY17

Public debt projections% GDP

Note: Projections as of 10 October 2012. Source: Debt management office; Nomura Global Economics.

Fig. 11: Malaysia: Fiscal deficit versus budget targets

-7.0 -5.0 -3.0 -1.0

2005

2006

2007

2008

2009

2010

2011

2012

Targeted fiscal deficit Actual fiscal deficit

% GDP


In Indonesia, the fiscal news is less encouraging. The likelihood of a much-needed fuel subsidy

cut this pre-election year is low, and the most likely scenario under which it might happen is only

if oil prices surge from here. Politically, it is more difficult to implement this given that more

households may now be affected by the subsidy cuts following the boom in local ownership of

motorcycles (Figure 12). And given the political cycle, the risk is that there will be no changes

made even after 2014. This would keep not only the fiscal position weak (high fuel subsidies)

but also the current account deficit under pressure (little price incentive to ration demand for

imported oil and energy-intensive consumer goods).


14

Fig. 12: Indonesia: Motorcycle sales

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Motorcycle sales (Units mn)

Units (mn)


Watch politics

In all four countries we visited, political discussions feature prominently, raising concerns in

three, but not the Philippines.

In Malaysia, our baseline scenario is for the ruling Barisan Nasional (BN) to win, but by a

smaller majority of 120-124 seats, which is lower than we had previously penciled in, partly

because recent surveys show an emboldened and well-organized opposition (Figure 13). This

raises uncertainty over whether there would be an orderly transition of power, whether Prime

Minister Najib remains in power (Figure 14) and whether the much-needed economic reforms

can continue.

Fig. 13: Malaysia: Our election scenarios

Baseline: Barisan

Nasional wins 120-124 seats

60%

<120 seats & risk of a

hung parliament

20%

>125 seats20%

Source: Nomura Global Economics.

Fig. 14: Malaysia: Performance of Prime Minister Najib

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Overall Malay Chinese Indian

Jan-13 Dec-12Satisfaction levels of pollsters

Source: Merdeka Institute; Nomura Global Economics.

In Indonesia, concerns about policy continuity are rising ahead of the presidential election

scheduled for 1 July 2014. President Yudhoyono is no longer eligible to run and his Democrat

Party, still without a strong candidate, is plummeting in the polls. That said, there is still no clear

frontrunner among the other major parties, which means that forming coalitions looks

necessary. Meanwhile, the two names emerging as the most popular presidential candidates –

Jakarta Governor Joko Widodo (Jokowi) and Prabowo Subianto – are still not assured they will

receive a nomination. The political situation will likely remain in flux – see the large proportion of

undecided voters (Figures 15 and 16) – and it will be some time yet before we can talk about

possible outcomes. Meanwhile, there is widespread belief, even in the business community,

that the political uncertainty could usher in more “bureaucratic nationalism” and populist

policies, heightening the risk of poor-quality growth.


15

Fig. 15: Indonesia: Presidential preference poll

17.9

18.5

7.2

8.7

8.9

9.8

10.9

18.1

Undecided/No response

Others

Megawati Soekarnoputri

Aburizal Bakrie

Jusuf Kalla

Wiranto

Prabowo Subianto

Joko Widodo

% of respondents

Note: The survey was conducted by the Jakarta Survey Institute, 9-15 February, across all 33 provinces. Margin of error is 2.8%. Source: Reformasi (22 Feb); Nomura Global Economics.

Fig. 16: Indonesia: Party preference poll

28.2

13.8

5.8

6.9

10.3

16.5

18.5

Undecided voters

Others

Hanura

Demokrat

Gerindra

PDI Perjuangan

Golkar

% of respondents

Note: The survey was conducted by the Jakarta Survey Institute 9-15 February, across all 33 provinces. Margin of error is 2.8%. Source: Reformasi (22 Feb); Nomura Global Economics.

In Thailand, the Bangkok gubernatorial election was highlighted by those we met as important.

The concern we heard was that if the ruling Pheu Thai‟s candidate won, it could lead to more

interference by the government on the BOT‟s monetary policy decisions. However, it turned out

that the incumbent Democrat candidate emerged the surprise the winner (see First Insights:

Thailand: Democrat Party triumphs in Bangkok, 4 March 2013). Longer-term, discussion of the

amnesty bill is on-going, while the referendum on the constitutional amendment may be

delayed, suggesting Prime Minister Yingluck Shinawatra is taking a more a practical approach

and not pushing the agenda too hard2. Overall, the political environment remains calm at the

moment, but there are potential flashpoints.

The Philippines will have its mid-term elections in May, which looks supportive for the overall

economic outlook, in our opinion, as President Aquino rides high in the opinion polls. Based on

the latest polls, the ruling administration would likely win a majority in the Senate (it currently

does not have one), which should bode well for the enactment of more difficult legislation that is

in the pipeline. In the near term, we think the elections will also provide a strong catalyst to

increase infrastructure spending and hence be a boost to growth.

Fig. 17: Philippines: Net satisfaction ratings of presidents, past and present

-60

-40

-20

0

20

40

60

80

1994 1997 2000 2003 2006 2009 2012

%

Ramos Estrada

Arroyo

B. Aquino

Note: Net satisfaction refers to the % satisfied minus the % dissatisfied (correctly rounded). Source: Social Weather Survey (8-11 December 2012); Nomura Global Economics.

This is an excerpt from Southeast Asia: Different strokes, published on 6 March 2013.

2 The public perception is that the ultimate goal of the constitutional amendment is to make it easier for former Prime

Minister Thaksin Shinawatra to return from exile.

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=599725&appname=GRP&cid=aUl4dGZjemsxRzA90



16

Zhiwei Zhang +852 2536 7433 [email protected]

Wendy Chen +86 21 6193 7237 [email protected]

China: Thoughts on the first day of the NPC

China‟s 2013 growth target was set at 7.5%, unchanged from 2012 and in line with

expectations.

The inflation target was lowered to 3.5% from 4% in 2012, and the M2 target was cut to

13% from 14%, which implies monetary policy may tighten after the NPC.

The government reiterated its one-child policy, raised retirement benefits, and

budgeted for a fiscal deficit of 2% of GDP.

The National People's Congress (NPC) convened this morning, and Premier Wen Jiabao

delivered the 2013 government work report, which discloses the government‟s targets on some

key macro indicators.

1) The 2013 GDP growth target was set at 7.5%, in line with expectations. It remains

unchanged from the 7.5% target (actual: 7.8%) in 2012, which suggests that the government

intends to maintain stability in the first year following the leadership transition.

2) The inflation target was lowered to 3.5% for 2013 from 4.0% in 2012. Premier Wen cited

rising prices in food, labour and natural resources, imported inflation from QEs in major

economies, and the need to reform energy prices as the primary factors driving inflation. This

suggests to us that further price hikes on energy and public utilities may be implemented in H1.

3) The target for M2 growth in 2013 was lowered to 13% from 14% in 2012, the lowest target for

money supply growth since 2002. M2 growth in January was 15.9%, much higher than the 13%

target. We believe the government is starting to become concerned with financial risks from the

surges in shadow banking activities during 2012. This reinforces our view that the authorities will

tighten monetary policy in 2013.

4) The fiscal deficit target was raised to RMB1,200bn from RMB800bn in 2012, due to a

slowdown in revenue growth (the lagged impact from a structural tax reduction) and an increase

in expenditures (particularly on social welfare). The budgeted fiscal deficit will be 2% in 2013,

slightly up from 1.5% in 2012, but we do not view this as an accurate measure for China‟s fiscal

policy stance (for reasons we discussed in China: A preview of the National People’s Congress,

27 February 2013).

5) The targets for fixed asset investment and retail sales were increased to 18% and 14.5%,

respectively, partly due to higher inflation. Meanwhile, the 2013 target for foreign trade growth

(from a report of the NDRC) was lowered to 8% from 10% in 2012, which implies that the

government may be cautious on its external demand outlook and on the competitiveness of the

Chinese exports.

There has been some market chatter on whether the government will abolish the one-child

policy, as the working age population declined in 2012. The government reiterated its one-child

policy in the working report, which suggests other policies to counter the trend in demographics

are being considered, such as lifting the retirement age. Premier Wen also announced policies

to enhance welfare, such as increasing the retirement pension payout by 10% in 2013.

Overall, the targets set for 2013 are broadly in line with our expectations. We continue to expect

CPI inflation to climb above 3.5% by mid-2013, and expect the government to tighten monetary

policy after the NPC. We forecast GDP growth of 7.7% in full-year 2013, but growth should

moderate to 7.3% in H2 on policy tightening. Regarding structural reforms such as on

urbanisation and financial liberalisation, we think more detail will be provided during the

Communist Party meeting in October/November.



http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=598828&appname=Email&cid=d28vbi9Cdkx1TzQ90


17

Fig. 1: Targets for macroeconomic indicators

% % RMB bn RMB bn % % % % % % % % % %

Target Actual Target Actual Target Actual Target Actual Target Actual Target Actual Target Actual

2000 7.0 8.4 249 14.0 14.0 7.1 9.7 10.0 10.3 0.4 3.0 31.5

2001 7.0 8.3 252 13.0 14.4 10.1 10.0 13.0 1.0 0.7 8.0 7.5

2002 7.0 9.1 315 13.0 16.8 8.8 10.0 16.9 1.0 -0.8 21.8

2003 7.0 10.0 293 16.0 19.6 9.0 9.1 12.0 27.7 1.0 1.2 7.0 37.1

2004 7.0 10.1 209 17.0 14.6 13.3 26.8 3.0 3.9 8.0 35.7

2005 8.0 11.3 228 15.0 17.6 12.5 12.9 16.0 26.0 4.0 1.8 16.0 23.2

2006 8.0 12.7 216 16.0 16.9 12.0 13.7 18.0 23.9 3.0 1.5 17.0 23.8

2007 8.0 14.2 -51 16.0 16.7 12.0 16.8 24.8 3.0 4.8 23.6

2008 8.0 9.6 236 16.0 17.8 21.6 25.9 4.8 5.9 17.8

2009 8.0 9.2 950 950 17.0 27.7 14.0 15.5 20.0 30.0 4.0 -0.7 8.0 -13.9

2010 8.0 10.4 1050 1000 17.0 19.7 15.0 18.4 20.0 23.8 3.0 3.3 8.0 34.7

2011 8.0 9.3 900 850 16.0 13.6 16.0 17.1 18.0 23.8 4.0 5.4 10.0 22.5

2012 7.5 7.8 800 850 14.0 13.8 14.0 14.3 16.0 20.3 4.0 2.6 10.0 6.2

2013 7.5 1200 13.0 14.5 18.0 3.5 8.0

Growth of export &

importReal GDP growth

Fiscal deficit

combinedM2 growth Retai sales FAI CPI inflation

Source: Government work report and CEIC.

Fig. 2: Fiscal deficits

RMB bn % of GDP RMB bn % of GDP RMB bn % of GDP

2009 950 2.79 950 2.79 10.1 0.03

2010 1050 2.62 1000 2.49 225.8 0.56

2011 900 1.90 850 1.80 289.2 0.61

2012 800 1.54 850 1.64 270.0 0.52

2013 1200 2.07 100.0 0.17

Fiscal deficit Central Fiscal Stabilization Fund

Budget Actual Actual

Source: Government work report and CEIC.

This article was originally published on 5 March 2013.


18



China: Both official PMI and HSBC PMI drop in February

China‟s official PMI surprisingly dropped to 50.1 in February from 50.4 in January, and

the HSBC PMI fell to 50.4 from 52.3, both weaker than expected.

The drop in both PMIs has cast more doubt over the strength of the recovery.

The policy stance critically depends on the macro data release on 9 March.

China's official PMI surprisingly dropped to 50.1 in February from 50.4 in January, which was

weaker than expected (Consensus: 50.5; Nomura: 50.7; Figure 1). The HSBC PMI fell to 50.4 in

February after a jump to 52.3 in January (Consensus: 50.6). The drop in PMIs has cast some

more doubts on the strength of the recovery. This is consistent with signals from sector level

data (see China: Sector-level data cast doubt on strength of recovery, 28 February 2013).

By component, new export orders of the official PMI declined further to 47.3 in February from

48.5 in January (Figure 2), suggesting that external demand remains weak. New orders

(including both domestic and export orders) fell to 50.1 from 51.6. Production dipped to 51.2 in

February from 51.3 in January. Raw material inventory dipped to 49.5 from 50.1 and finished

goods inventory was down to 46.6 from 47.4. Input prices dropped from 57.2 to 55.5, but are

still at a high level, in line with our view that inflation will trend higher throughout 2013. Notably,

the official PMI has included a new “expectation of business activities” –measuring whether

purchasing managers are optimistic or pessimistic on business activity in the next three months

– in 2013. The expectation of business activities rose sharply to 64.6 in February from 55.9 in

January, but its usefulness as a leading indicator is yet to be seen.

Signals from survey indicators in January and February may have been distorted by the lunar

new year effect. We will watch the macro data released on 9 March closely for a clearer picture

of the economic pulse and expect policies to be altered accordingly. As a baseline case, we

continue to expect GDP growth to peak at 8.2% y-o-y in Q1, and slow to 7.3% y-o-y in H2 on

policy tightening.

Fig. 1: China’s official PMI and HSBC PMI

35

40

45

50

55

60

Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

Official PMI HSBC PMI

Index

Source: Bloomberg, CEIC and Nomura Global Economics.

Fig. 2: Breakdown of the official PMI

Dec-12 Jan-13 Feb-13

PMI 50.6 50.4 50.1

Output 52.0 51.3 51.2

New orders 51.2 51.6 50.1

New export order 50.0 48.5 47.3

Input price 53.3 57.2 55.5

Raw material inventory 47.3 50.1 49.5

Finished goods inventory 49.4 47.4 46.6

Purchase 52.1 53.2 50.2

Employment 49.0 47.8 47.6

Supplier delivery times 48.8 50.0 48.3

Imports 49.0 49.1 48.1

Overstock orders 45.9 44.4 44.4

Business expectation n.a. 55.9 64.6

Source: Bloomberg, CEIC and Nomura Global Economics.

This article was originally published on 1 March 2013.



http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=599155&appname=Email&cid=d28vbi9Cdkx1TzQ90


19

Sonal Varma +91 22 4037 4087 [email protected]

Aman Mohunta +91 22 6617 5595 [email protected]

Vivek Rajpal +91 22 4037 4438 [email protected]


Prateek Gupta +65 6433 6197 [email protected]

India budget: Quality and credibility of fiscal consolidation disappoint

The government has presented a prudent budget targeting a fiscal deficit of 4.8% of

GDP in FY14, in line with expectations, versus a revised estimate of 5.2% of GDP in

FY13.

However, we think the quality of the consolidation is disappointing. Consolidation has

to be achieved by cutting expenditure and raising tax revenue. But the government has

focused mainly on revenue, while spending remains high.

The revenue assumptions (tax and asset sales) in the budget also appear optimistic.

With elections due in 2014, we doubt spending can be cut (as in FY13) to create

savings. We expect a fiscal deficit of 5.2% of GDP in FY14.

Rates strategy view: We think gross supply of INR6.3trn is a negative surprise for bond

markets. We maintain our stance of recommending investors wait until supply

concession develops on the bond yield curve before buying bonds in the 7-15yr part of

the yield curve.

FX strategy view: We expect INR performance to remain subdued as the focus shifts to

medium-term concerns with limited scope for additional disinvestments in FY13.

Key highlights

In line with market expectations, the government penciled in a fiscal deficit target of 4.8% of

GDP in FY14 (Consensus: 4.8%, Nomura: 4.6%), versus a revised estimate of 5.2% of GDP in

FY13 (Budget: 5.1%). The government plans to finance 89% of the fiscal deficit through dated

market borrowings versus 90% last year, pegging net market borrowings at INR4840bn

compared with INR4674bn in FY13. With redemptions of INR950bn and the government also

deciding to buyback INR500bn of bonds, gross borrowings will rise to INR6290bn from

INR5580bn in FY13.

Key measures announced in the budget

Direct tax: Imposition of a surcharge of 10% on individuals, whose taxable income

exceeds INR10mn per annum and an increase in the surcharge from 5% to 10% on

domestic companies, whose taxable income exceeds INR100mn per annum.

Indirect tax: Increase customs duty on luxury goods, excise duty on SUVs, cigarettes,

mobile phones among others. By contrast, a reduction on export duties in the

traditional sectors such as gems and jewelry and leather to boost exports.

Capital Markets: FIIs will be allowed to participate in exchange-traded current

derivatives, using their investments in corporate bonds and government securities as

collateral to meet their margin requirements. The list of eligible securities for pension

and provident funds is expanded to include ETFs, debt mutual funds and asset-backed

securities.

Savings: Propose the introduction of inflation-indexed bonds and other savings

instruments that will protect savings from inflation.

Infrastructure: Focus on Infrastructure Debt funds, increase the total sum of tax free

bonds to INR500bn in FY14 for infrastructure-oriented institutions. Announces an

investment allowance on high value investments in the manufacturing sector.

Food security bill: Allocates INR100bn in additional food subsidies on account of the

food security bill (pending with parliament).







20

Quality and credibility of the fiscal consolidation

Even though the budget looks prudent in terms of the headline fiscal deficit number, we have

concerns about the quality of consolidation. Prudent consolidation would have to come from

both lower expenditure and higher tax revenue, but the government has focused mainly on

revenues. In fact, spending is projected to rise sharply by 16.5% y-o-y in FY14, with the size of

government spending budgeted to increase to 14.7% of GDP from 14.3% in FY13. The budget

assumptions on expenditure are reasonable, but we think that the revenue assumptions are

optimistic. We expect a fiscal deficit of 5.2% of GDP in FY14 versus the budgeted 4.8% of GDP,

largely due to revenue slippage.

First, budgeted tax revenue growth of 19.1% y-o-y in FY14 versus 16.7% in FY13 is optimistic.

The budget assumes nominal GDP growth of 13.4% y-o-y in FY14 compared with a revised

estimate of 11.7% in FY13, with real GDP growth in the 6.1-6.7% range, higher than our

expectations (12.4% in FY14). Tax rates have been largely kept unchanged, yet the budget

assumes tax buoyancy of 1.4 (5-year average: 0.8). We expect 14.5% growth in tax revenue in

FY14, which translates into a tax to GDP ratio of 10.5% in FY14 versus a budgeted 10.9% and

a revised estimate of 10.4% in FY13.

Second, the government is targeting raising INR558bn through asset sales as compared with

INR240bn in FY13 and an average of INR200bn in the two years prior, and we think this is

optimistic. Because of the lackluster response to recent telecoms re-auctions, the budgeted

receipts from telecoms also appears high (the government has budgeted INR408bn from

spectrum charges and spectrum auctions).

On the expenditure side, we do not expect an overshoot as there is a sufficient inbuilt cushion,

but neither do we think that the government can create substantial savings as it did in FY13.

The budget assumes a 29.4% y-o-y rise in plan expenditure in FY14 up from a revised estimate

of 4.1% in FY13. However, unlike last year we think the scope to reduce plan expenditure to

create savings will be limited because of the general elections in 2014. During the last two

elections years (2004 and 2009), the average rise in expenditure was 19.5% y-o-y, with plan

expenditure up 24% and non-plan up 18% y-o-y.

Further, the fiscal consolidation achieved in FY13 has been through a combination of real

austerity measures combined with delays in payments on subsidies to government contractors

and lower income tax refunds. These delayed payments will further add to the carry-over burden

for FY14. The food security act will add to the food subsidy burden and the lower non-food

subsidy bill budgeted is contingent on continued petroleum price hikes and raising urea prices

during the year. With elections around the corner, sustaining price hikes will be politically difficult

especially in H2 FY14. Even after accounting for a gradual hike in diesel and urea prices, we

estimate the overall subsidy bill at 2.3% of GDP versus the budgeted 2% of GDP.

Fig. 1: Key assumptions

FY12 FY13 FY13 FY14 FY14

Actual BE RE BE NOM

Nominal GDP growth % y-o-y 15.1 14.0 11.7 13.4 12.4

Gross tax revenue % y-o-y 12.1 21.2 16.7 19.1 14.5

Expenditure % y-o-y 8.9 14.3 9.7 16.5 15.4

Capital expenditure % y-o-y 1.3 29.2 5.8 36.6 32.2

Revenue expenditure % y-o-y 10.1 12.2 10.2 13.7 13.1

Food subsidy INR bn 728 750 850 900 1035

Fertiliser subsidy INR bn 700 610 660 660 720

Oil subsidy INR bn 685 436 969 650 703

Disinvestment INR bn 181 300 240 558 458

Fiscal deficit % of GDP 5.7 5.1 5.2 4.8 5.2

Net market borrowing INR trn 4.4 4.8 4.7 4.8 4.8

Gross market borrowing INR trn 5.1 5.7 5.6 6.3 6.3

Source: India budget, CEIC and Nomura Global Economics.


21

Fig. 2: Budget at a glance

FY10 FY11 FY12 FY13 FY13 FY14 FY14

INR bn Actual Actual Actual BE RE BE Nomura

Total receipts/expenditure 10259 11909 13044 14909 14308 16653 16507

Net tax revenues 4565 5699 6298 7711 7421 8841 8499

Corporation tax (% yy) 14.7 22.1 8.1 15.6 11.2 16.9 11.1

Income tax (% yy) 24.8 10.8 16.2 14.9 21.0 20.2 16.1

Customs (% yy) -16.6 63.0 10.0 25.0 10.4 13.6 12.4

Union Excise Duties (% yy) -2.1 30.1 5.3 33.5 18.1 14.9 13.6

Service Tax (% yy) -4.1 21.6 37.3 27.2 36.1 35.8 24.8

Non-tax revenue 1163 2186 1217 1646 1297 1723 1609

Dsinvestment 246 228 181 300 240 558 458

Plan expenditure 3034 3790 4124 5210 4292 5553 5169

Non-plan expenditure 7211 8183 8920 9699 10016 11100 11338

Food subsidy 584 638 728 750 850 900 1035

Fertiliser subsidy 613 623 700 610 660 660 720

Oil subsidy 150 384 685 436 969 650 703

Interest payments 2131 2340 2732 3198 3167 3707 3707

Fiscal deficit 4185 3736 5160 5136 5209 5425 5835

Revenue Deficit (% of GDP ) 5.2 3.2 4.4 3.5 3.9 3.3 3.7

Fiscal deficit (% of GDP) 6.5 4.8 5.7 5.1 5.2 4.8 5.2

Primary Deficit (% of GDP ) 3.2 1.8 2.7 1.9 2.0 1.5 1.9

Net market borrowing 3984 3254 4362 4790 4674 4840 4840

Gross market borrowing 4510 4370 5103 5696 5580 6290 6290

Redemption 526 1116 741 906 1450 1450 1450

Source: India budget, CEIC and Nomura Global Economics.

Economic impact

A segregation of the fiscal balance into structural and cyclical factors suggests that most of the

fiscal consolidation is cyclical, and the structural fiscal deficit remains high in for FY14 as well.

The fiscal impulse from the FY14 budget is largely neutral (+0.04bp), unlike the contractionary

impulse from the FY13 budget (Figure 3 and 4). The budget has failed to re-orient spending

away from consumption towards investment. With the continued focus on welfare and inclusive

growth schemes, the budget will support rural consumption. As such, we do not expect the

budget to contain demand-side pressures from the fiscal side, nor do we expect it to improve

the current account deficit. In fact, the disappointment on the budget may risk a reversal on

portfolio flows and lead to difficulties in financing the current account deficit.

In our view, a tight fiscal policy that truly reins in spending will have perhaps led to a more

accommodative monetary policy. But with overall government spending much higher and mainly

consumption oriented, we doubt the RBI will be too aggressive in easing interest rates,

particularly with the rising risk on the external front. Even if the RBI eases interest rates, the

current tight liquidity will limit the transmission of monetary policy. With the budget largely a

disappointment, external demand already weak and a shrinking investment pipeline, we expect

growth to remain weak for a longer period of time.


22

Fig. 3: Cyclical versus structural fiscal consolidation

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14

Cyclical fiscal balance (a-b)

Structural fiscal balance (b)

Actual fiscal balance (a)

% of GDP

Note: Based on budgeted fiscal deficit of 4.8% of GDP. Source: CEIC and Nomura Global Economics estimates.

Fig. 4: Fiscal impulse

-2

-1

0

1

2

3

FY98 FY02 FY06 FY10 FY14

Fiscal impulse (- contractionary, + expansionary)

% of GDP

Note: Based on budgeted fiscal deficit of 4.8% of GDP. Source: Nomura Global Economics estimates.

INR rates strategy – uncomfortable supply

The government has announced the FY14 budget, and is targeting a 4.8% of GDP fiscal deficit

with INR6.3trn (vs. INR5.6trn in FY13 ) of gross borrowing in FY14. Net borrowing for FY14 will

be INR4.84trn (vs INR4.67trn in FY13). One of the intended benefits of a smaller fiscal deficit is

lower borrowing in an economy. Unfortunately, that does not seem to be the case for India.12%

higher gross borrowing versus last year is unlikely to be something that an India rates market

participant would have wanted. This is clearly a negative surprise for the bond markets. In our

view, this much issuance of bonds should result in the re-widening of bond-swap spreads (bond

over swap), with bonds underperforming as we head into April. We maintain our stance of

recommending investors wait until supply concession develops on the bond yield curve before

buying bonds in the 7-15yr part of the yield curve (see India budget preview: Balancing

prudence and populism, 22 February 2013). Rather than levels, we would recommend investors

hold until April (to allow supply concession to develop on the yield curve) before reloading on

the 10yr bond. With this supply, we think a breach on the higher side of our current working

range of 7.75-7.95% on the 10yr bond is likely once the issuance of the bonds begins in April.

In our view, the steepening impact on the (ND) OIS curve will be very limited and short lived and

participants can use the current spill-over steepening to initiate flatteners. We remain

comfortable with our 1s3s (ND) OIS flatteners (see India Rates: (ND) OIS – flatteners continue

to make sense, 8 February 2013). In fact, we note that higher gross borrowing suggests that the

government may continue to run a high cash surplus even in April, which will keep MIBOR

fixings elevated and hence, help the positive carry trades in (ND) OIS. On our other

recommendation of long 5yr bond, though there is a near-term impact, the effect over time is

expected to be much less than the 7-15yr part of the curve. In April, amid supply, ahead of the

May 3 policy meeting (when our economics‟ team expect next repo rate cut), we expect 2-5yr

bonds to outperform on the curve and, therefore, remain comfortable holding 5yr bonds in our

strategy portfolio.

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=598060&appname=Email&cid=V1M3cFlVb0hXNUE90

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=598060&appname=Email&cid=V1M3cFlVb0hXNUE90

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=594959&appname=Email&cid=bkhhUmhDZG4vWGs90

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=594959&appname=Email&cid=bkhhUmhDZG4vWGs90


23

Fig. 5: Gross Supply

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan

-Mar 12

Ap

r-Jun 1

2

Jul-

Sep

12

Oct-

Dec 1

2

Jan

-Mar 13

Ap

r-Jun 1

3

Jul-

Aug

13

Actual Gross Supply EstimatedINR bn

Source: Nomura

Fig. 6: 5yr, 10yr bond yields and the 5s10s spread

7.5

7.6

7.7

7.8

7.9

8.0

8.1

8.2

8.3

8.4

-5

0

5

10

15

20

Jun-12 Aug-12 Oct-12 Dec-12 Feb-13

Spread (2022-2017), lhs

8.07 2017, rhs

8.15 2022, rhs

%bp

Source: Nomura

FX strategy: INR – fiscal concerns re-emerge

In today‟s union budget speech, the Finance Minister set the fiscal deficit target for FY14 at

4.8% of GDP from 5.2% in FY13 (better than the revised target of 5.3%). However, the details

suggest a move towards targeting higher expenditure and revenues rather than looking to cut

spending for fiscal consolidation. As noted in our previous report (see India budget preview:

Balancing prudence and populism, 22 February), a positive medium-term view on INR needs

credible steps from the government to narrow the macroeconomic imbalances which we believe

are absent in the budget as highlighted earlier. In this respect, we exited our short USD/INR

cash position (see Asia FX Portfolio Update: Exit our short USD/INR cash position, 26 February)

as we believe the focus will now turn to medium-term concerns and we see reduced scope for

additional disinvestments by the government (FY13 target reduced to INR240bn from INR300bn

earlier).

Looking at the details, we believe the budget is mildly positive for capital inflows. The

announced measures include the lowering of the securities transaction tax and simplifying the

entry process for foreign portfolio investors. On asset sales, the government has set a

disinvestment target of INR558bn for FY14 which looks ambitious to us given INR240bn

(revised estimate) and INR155bn worth of proceeds in FY13 and FY12 respectively. In addition,

Finance Minister Chidambaram urged parliament to pass the insurance and pension bills in the

current session to increase FDI limits in the sector.

However, the lack of expenditure controls with an expansion of tax revenues remains a key

concern. As discussed, we believe that slippage in the budgeted fiscal deficit target of 4.8%

may be unavoidable, which could raise concerns about sovereign rating downgrade risks. If this

materializes, such a scenario would be INR negative.

This article was originally published on 28 February 2013.





24



China: Sector-level data cast doubt on strength of recovery

Leading indicators sent conflicting signs in January and February.

However, the message from sector-level data does not suggest a strong recovery.

Macro data due for release on 9 March should offer a clearer picture. We expect the

policy stance to change accordingly.

Leading indicators sent conflicting signs in January and February. Total social financing (TSF)

hit a record high of RMB2.5trn and M2 growth jumped to 15.9% y-o-y in January from 13.8% in

December, reaching its highest level since March 2011. For business surveys on the positive

side, the MNI business sentiment indicator, which has a correlation of 0.74 with the official PMI,

rose substantially to 60.98 in February from 55.16 in January, reaching its highest level since

May 2011. On the other hand, the HSBC flash PMI fell surprisingly to 50.4 in February after a

jump to 52.3 in January.

The message from sector-level data is also mixed, but overall does not suggest a strong

recovery. Of the four sectors (cement, steel, construction machinery and auto) from which timely

high-frequency data are available, and which enjoy a high correlation with industrial production,

three sent negative data signals. Cement prices have fallen in recent months after rising in Q3

(Figure 1); steel production growth slid in January despite the fact that the lunar new year fell in

February this year but January last year; steel prices have rebounded since Q4, but only

modestly (Figures 2 and 3); excavator sales volume (construction machinery) is also lower

(Figure 4). The only bright spot is the auto sector, where both production and sales have shown

a pick-up in 3m-o-3m growth since August (Figures 5 and 6).

It is still too early to say decisively how strong the current recovery is, but our conjecture is that

it is relatively weak compared to past ones. A batch of macro data (including industrial

production, fixed asset investment, retail sales and inflation) is due for release on 9 March and

should provide a clearer picture of the state of the economy. We maintain our view of slower

growth of 7.3% y-o-y in H2 2013 from 8.1% in H1, as policy is tightened to contain inflation and

any excessive debt build-up.

Fig. 1: Cement prices and industrial production growth

0

5

10

15

20

25

300

330

360

390

420

450


% y-o-yRMB/ton Cement price

Industrial production, rhs

Source: Digital Cement, CEIC and Nomura Global Economics.

Fig. 2: Steel production and industrial production growth

0

5

10

15

20

25

-15

0

15

30

45

60

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

% y-o-y% y-o-y Crude steel






25

Fig. 3: Steel future price and spot price

3,500

4,000

4,500

5,000

5,500

Feb-10 Feb-11 Feb-12 Feb-13

RMB/ton

Spot price

Future price


Fig. 4: Excavator sales and industrial production growth

8

9

10

11

12

13

0

5,000

10,000

15,000

20,000

25,000

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

% y-o-yUnit

China excavator sales


Source: Sector data and Nomura Global Economics.

Fig. 5: Auto production and sales (level)

0

300

600

900

1,200

1,500

1,800

2,100

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

Auto production

Auto sales

Thousand unit


Fig. 6: Auto production and sales (growth)

0

5

10

15

20

25

Jan 05 Jan 07 Jan 08 Jan 10 Jan 11 Jan 13

% 3m-o-3m

Auto production

Auto sales

Note: We have chosen to compare only those years in which CNY fell in February. Source: CEIC and Nomura Global Economics.

This article was originally published on 28 February 2013.


26

Young Sun Kwon +852 2536 7430 [email protected]


Kewei Yang +65 6433 6246 [email protected]

South Korea: Thoughts on future economic policy

We expect the new government to unveil domestic demand stimulus measures as

early as in March. We expect targeted micro measures on specific areas rather than a

broad-based easing of monetary or fiscal policies.

President-elect Park seems focussed on “potential” rather than “actual” GDP growth.

This suggests that the new government‟s policies will also focus on structural reforms.

We maintain our call that the Bank of Korea will keep rates unchanged at 2.75%

through 2013. We see no risk to our monetary policy outlook from the new

government.

New government poses no risk to our BOK policy outlook

The presidential inauguration on 25 February will see President-elect Park Gun-Hye take office,

with Hyun Oh-Seok as her chosen finance minister and Cho Won-Dong as presidential

economic advisor. We expect the new government to announce fiscal stimulus measures as

early as in March. As domestic demand remains weak, we expect stimulus measures to target

specific areas such as the property market, small and medium-sized enterprises (SMEs), and

low-income families:

Stimulating the property market: To stimulate property transactions, we expect the new

government to cut property holding, transaction and capital gains taxes, lower the loan-

to-deposit (LTV) and debt-to-income (DTI) ratios, and facilitate renovation and

reconstruction activity.

Supporting SMEs: Favourable tax benefits for SMEs are likely to be introduced to

provide them financial support.

Helping low-income families: We expect increased social welfare expenditure for low-

income families and believe old-age benefits are likely to be introduced.

We do not expect the Bank of Korea (BOK) to cut rates this year as GDP growth bottomed out

in Q3 2012, supported by stronger exports on improved global demand. The BOK‟s current

policy rate of 2.75% is a full percentage point lower than our 3.8% estimate of a neutral rate,

meaning that maintaining current policy settings ought to be accommodative enough to support

domestic demand. Weaker sequential GDP growth would be required for the BOK to cut rates,

in our view, but this is not our base case. First of all, the government‟s plan to spend 60% of its

annual expenditure in H1 should contribute markedly to Q1 GDP in seasonally adjusted quarter-

on-quarter growth terms. We expect government consumption to increase by 3.1% q-o-q (sa)

in Q1 2013, contributing 0.4 percentage points (pp) to our 0.7% Q1 GDP growth forecast (see

South Korea: Fiscal front-loading should boost Q1 GDP, 25 February 2013). Secondly, we

expect real exports (goods and services) to gain 0.5% q-o-q (sa) in Q1 after a 1.2% fall in Q4

2012 as global demand should improve, albeit modestly, while an increase in real wage growth

and social welfare spending is likely to support private consumption in the months ahead. We

believe the BOK is wary of accelerating the recovery with more rate cuts as that could trigger a

further build-up of household debt, which is already very high, at 156% of disposable income in

2012.

We expect President Park to focus on “potential” rather than “actual” GDP growth, which means

her economic agenda will also focus on structural reforms rather than aggressive counter-

cyclical macro policy easing. During her election campaign in December, Ms. Park did not

promise any targeted level of GDP growth – in stark contrast to outgoing President Lee Myung-

bak‟s ambitious “747” agenda in 2007 (targeting 7% annual GDP growth, USD40,000 per

capita income, and the establishment of Korea as the world‟s seventh-largest economy within

his five-year term). Rather, Ms. Park has pushed the concept of an “economic democracy” and

better-quality growth, focusing on fiscal policies (taxation and social spending) and fair trade




http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=596348&appname=GRP&cid=Ny8xTWIxd29kTGs90


27

(limiting the concentration of economic power held by the chaebol) in an effort to reduce the

high income inequality.

Rather than a policy rate cut, we see a much higher likelihood of a supplementary budget in H1

2013 in association with social-welfare spending and efforts to boost the property market. This

is, however, not our base case, so it does provide upside risk to our below-consensus forecast

of 2.5% GDP growth in 2013. We expect macro policy to continue to promote stability, in terms

of inflation, the financial system and the currency (see South Korea: Explaining our rates-on-

hold call, 8 January 2013).

All in all, we believe growth momentum will neither be weak enough to trigger rate cuts, nor

strong enough to bring rate hikes. As such, we continue to expect rates to remain on hold

throughout 2013. As a small, open economy, Korea is vulnerable to sudden changes in global

economic conditions, commodity prices and financial markets. That said, we would expect the

BOK to cut rates if one of the major downside risks to global growth – the US fiscal cliff, a

renewed eurozone sovereign crisis, or a China hard landing – materializes, but none of these

form part of our base case assumptions.

We expect the president-elect to continue to respect the BOK‟s independence, with Governor

Kim Choong-soo remaining in place until his term expires in April 2014. If the BOK was to cut

rates soon, without a substantial downward revision to its growth outlook, it would run the

serious risk of creating an unintended market misperception that there was political pressure on

the BOK to act – which we believe is far from what President-elect Park wants. We do not

believe the new government poses a risk to our BOK policy outlook; rather, that still remains

with any significant change in the global growth outlook. If the BOK does decide to cut rates, it

would only do so because of weaker growth, not because of the new government.

Limited impact on KRW; near-term focus remains on JPY and equity flows

Our view that the new government‟s stance on FX will be similar to the current government‟s

implies that there may still be a preference for KRW undervaluation with continued risk of

macroprudential controls. While the structural and cyclical drivers of KRW strength (see Asia

Special Report: 2013 outlook: Asia’s overheating risks, 28 November 2012), including central

bank/sovereign wealth fund bond inflows and the current account surplus remain intact, there

are a few headwinds that have grown and may continue to affect KRW over the medium term.

As we highlighted in Asia Insights: Asia FX: Rising convergence risk (6 February 2013), the

breakout of USD/JPY above 90 looks to have reached a point where it has raised the risk of

potential currency weakness in other parts of Asia. Unless JPY stabilizes, the risk is that the

increased sensitivity of currencies that are more closely related by trade – in particular KRW –

will remain under weakening pressure. We have already seen some evidence in the FX reserve

data that some regional policymakers have been buying USD to realign their currencies with

moves in USD/JPY.

Beyond FX intervention, the other risk to KRW is from potential equity-related outflows. This risk

comes on two fronts: 1) deterioration in corporate earnings due to a weaker JPY (stronger

KRW). This is most evident in the various FX-sensitive sectors of the Korean equity market,

such as the automakers and industrial sectors (the heaviest competitors with Japan), and; 2)

Vanguard‟s benchmark transition. Nomura Korea equity research estimates that there may be

as much as USD8.6bn of net outflows (USD344mn per week) over a 25-week period (which

started 9 January through to 3 July) – see Impact of Vanguard benchmark transition, 8 January

2013. This is significant as even in 2012 – which was considered a stellar year for foreign equity

inflows – the net inflow was USD15.1bn for the full year, or an average of USD290mn a week.

Rates: continue to hold fwd starting 1s3s steepeners

We continue to believe the BOK is unlikely to cut rates further given the turn to positive in

growth momentum. In the last decade the BOK has never cut rates further once economic

growth momentum has turned upwards, which is consistent with recent comments from BOK

Governor Kim. While the market may be divided on whether there is one more cut or not, the

view is largely held that the BOK is close to the end of this cycle. As such, we believe the curve

is very likely to steepen, from its current low and flat trajectory. We therefore continue to hold a

paying bias. The belly usually underperforms the wings in such a scenario, so we favor paying








28

the 3-5yr part of the curve. For example, we recently shorted the 3yr KTBF (see again South

Korea: Explaining our rates-on-hold call, 8 January 2013).

However, judging by price movements around the January and February MPC meetings, the

market seemingly continues to expect a rate cut. The concerns seem to be that aggressive

Bank of Japan easing will, via USD/JPY depreciation, have an impact on Korea‟s growth

outlook given the importance of exports to the economy; political pressure from the new

government and new financial minister on the BOK (which we believe is misplaced); and that

US sequester issues also pose a risk to the future growth path of the global economy.

To avoid digital risk while maintaining our core bias, we converted our outright paid position into

a steepener via a 3m1y received position (see Korea rates: Hedging digital risk over MPC

meeting, 5 February 2013). We continue to like the hedge for our short 3y KTB futures position

with a received position in the front end IRS (effectively a front-end fwd starting 1s3s

steepener). Given the consensus view that the BOK is near the end of its rate cut cycle, we

believe steepeners provide better risk-reward relative to outright paid positions at this stage (we

have a 3m1y-3y KTBF steepener in our portfolio; see our latest FX Portfolio Performance, 14

February, for details).

This article was published on 20 February 2013.



http://intranet.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=593735

http://intranet.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=593735

http://intranet.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=596233&appname=Email&cid=Q2NCdEFQU21zSnc90


29

Chart alerts

South Korea: Fiscal front-loading should boost Q1 GDP

The government's plan to spend 60% of its annual expenditure budget in H1 should contribute markedly to Q1 GDP in seasonally

adjusted growth terms.

Fig. 1: Government consumption in Q1 versus Q2-Q4

-1

0

1

2

3

4

Q1 09 Q1 10 Q1 11 Q1 12 Q1 13

Government consumption% (sa) q-o-q

F

Note: The column next to Q1 in each year is the Q2-Q4 average.

Since the 2008 global financial crisis, Korea‟s

government has spent about 60% of its annual

expenditure budget in H1 to support domestic demand

(for example, 60.8% and 60.1% in 2010 and 2012,

respectively). This year, the government‟s fiscal front-

loading target ratio is also set at 60%.

We expect government consumption to increase by

3.1% (sa) q-o-q in Q1 and contribute 0.4 percentage

points to our 0.7% Q1 2013 GDP growth forecast.

Due to this fiscal front-loading, Q2-Q4 2013 GDP will

likely be dependent upon private sector domestic

demand and exports, on which we are sanguine. We

expect global demand, especially from the US, euro

area and Japan, to improve in Q2-Q4 on a sequential

basis, supporting Korea‟s exports and investments.

We maintain our call for the Bank of Korea to keep rates

unchanged at 2.75% throughout 2013. Also, although

this is not our base case, if the new government

formulates a supplementary budget, upside risks to our

2.5% 2013 GDP growth forecast would increase and the

likelihood of a rate cut would lessen.

Source: CEIC and Nomura Global Economics estimates. Author: Young Sun Kwon, originally published on 15 February 2013.

China: The largest hike in the rail freight tariff since 2003

It reinforces our view that CPI inflation will rise above 3.5% in H2 and lead to two interest rate hikes.

Fig. 1: Rail freight tariff and its growth

0

2

4

6

8

10

12

14

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

Dec 03

Mar 05

Mar 06

Nov 07

Jun 08

Dec 09

Apr 11

May 12

Feb 13

%

Rail f reight tarif f , lhs

Growth of rail f reight tarif f , rhs

RMB per ton-km

Earlier today, the National Development and Reform

Commission (NDRC) and the Ministry of Railway (MOR)

raised the rail freight tariff by 13.0% effective 20

February 2013, from RMB0.1151 per ton-km to

RMB0.1301, the largest hike since 2003.

The tariff hike suggests that the government may move

to lift other administratively suppressed prices, such as

electricity and other public utilities. Energy price reform

has been on the top of the government‟s policy agenda

since 2012, but was delayed due to concerns over GDP

growth slowing. Now that growth has recovered while

inflation remains low, the window for energy price reform

has reopened.

This, together with slowing potential growth and a tight

labour market, supports our view that CPI inflation will

rise to 3.5% for full-year 2013 (Consensus: 3.1%), rise

to 4.4% y-o-y in H2 2013 and cause the People‟s Bank

of China to hike interest rates twice in H2. We continue

to expect growth to slow from 8.1% in H1 to 7.3% in H2.

Source: NDRC, MOR, media reports and Nomura Global Economics. Authors: Zhiwei Zhang and Wendy Chen, originally published on 20 February 2013.


30

Malaysia: The government still meets its 2012 fiscal target

... but the details and rising public debt continue to highlight the need for fiscal consolidation.

Fig. 1: Targeted fiscal deficit versus actual deficit

The fiscal deficit stood at 4.5% of GDP in 2012 from 4.8%

of GDP in 2011, in line with the government‟s estimates.

The government has been able to consistently meet its

fiscal deficit targets in the past few years, supporting our

view it is cognizant of the need to balance fiscal prudence

with political objectives.

However, the details also underscore the need for more

fiscal reforms. Revenues increased 12.1% y-o-y in 2012

from 16.1% in 2011, but the bulk of these receipts is still

petroleum related (30% by our estimates). Specifically for

Q4, Bank Negara Malaysia stated that revenue growth

was largely “supported by the higher petroleum income

tax”. Meanwhile, current expenditures rose 12.6% y-o-y

from 20.4%. This reflects election-related spending but at

the expense of other key items indicated by the 2.2%

drop in development expenditures.

Public debt was 53.5% of GDP in 2012. This is still below

the ceiling of 55% but nonetheless within striking

distance. Given the elections, we see fiscal slippage in

early 2013, which should then be followed by bigger fiscal

consolidation if the government is to again meet its fiscal

deficit target of 4.0% of GDP and avoid exceeding the

debt ceiling. This poses a strong headwind to growth.

Source: CEIC; Nomura Global Economics Authors: Euben Paracuelles and Lavanya Venkateswaran, originally published on 22 February 2013.

South Korea: A healthy household restructuring

In 2012, households increased net savings and slowed debt growth to match income growth. We expect policies by the new

government to support this restructuring.

Fig. 1: Korea’s household income, expenditure and debt

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012

Household income

Household debt

Household expenditure

% y-o-y

Income growth of Korean households rose to 6.1% in

2012, but growth of expenditures slowed to 3.3%.

Also, household debt growth slowed to 5.8%, slightly

less than income growth. We view this as a healthy

restructuring of the household balance sheet.

The net savings ratio of Korean households, which

was Asia‟s lowest at 2.7% in 2011, likely rose slightly

in 2012, while Korea‟s household debt to disposable

income ratio (156% in 2011) may have fallen slightly.

A soft landing of the household debt problem is part

of the 140-point policy agenda of the new

government. That said, we believe the Bank of Korea

is wary of accelerating the recovery via further rate

cuts, as this could trigger another household debt

increase and lower the savings ratio (see South

Korea: Park’s policy agenda unveiled, 21 February).

As growth bottomed from its low base in Q3 2012,

we maintain our out-of-consensus call that the Bank

of Korea will keep rates at 2.75% throughout 2013.

Source: CEIC and Nomura Global Economics. Author: Young Sun Kwon, originally published on 22 February 2013.

-8.0 -6.0 -4.0 -2.0 0.0

2005

2006

2007

2008

2009

2010

2011

2012

Targeted fiscal deficit Actual fiscal deficit

% GDP




31

China: Property prices rose faster in January

This should further pressure the government to tighten monetary and property market policies.

Fig. 1: Property price growth and M2 growth

10

14

18

22

26

30

-4

0

4

8

12

16


% y-o-y% y-o-y Property price growth in 70 cities

M2 growth, rhs

Note: The composite growth of property prices after January 2011 is estimated based on property price growth of 70 cities.

In January, the average property price in 70 cities rose

by 0.63%, its first year-on-year increase in eleven

months, according to the National Bureau of Statistics.

On a month-on-month basis, it rose by 0.54%, the

fastest growth since January 2011.

We think loose monetary policies and abundant liquidity

were the primary drivers of the recent property price

increases. M2 growth bottomed in April 2012 and rose to

15.9% y-o-y in January. Total social financing reached a

historical high of RMB2.5trn in January.

We believe the recent rise in property prices will

pressure the government to tighten policies. Indeed, the

State Council announced five measures to cool the

property market on Wednesday. We believe authorities

will soon tighten monetary policies to control risks and

continue to expect growth to slow from 8.1% in H1 to

7.3% in H2, mainly due to policy tightening.

Source: WIND, Bloomberg and Nomura Global Economics. Authors: Zhiwei Zhang and Wendy Chen, originally published on 22 February 2013.

India: Nominal salary growth to moderate in 2013

With real salary growth almost flat and a worsening employment outlook, we expect private consumption growth, particularly in

urban areas, to remain weak.

Fig. 1: Nominal and real salary growth

-10

-5

0

5

10

15

20

2003 2005 2007 2009 2011 2013

Nominal salary Real salary% y-o-y

According to global HR consultancy firm Aon-

Hewitt, nominal salary growth in India is likely to

moderate to 10.3% y-o-y in 2013, down from an

estimated 11.9% in 2012. Adjusted for inflation, we

estimate that real salaries are likely to grow at a

meager 0.7% y-o-y in 2013 from 2.2% in 2012.

In our view, a steady decline in corporate

profitability and no clear sustained demand

recovery on the horizon has forced firms to

rationalise employee costs.

With flat real income growth and a worsening

employment outlook, we expect private

consumption growth, particularly in urban areas, to

remain weak. Ongoing fiscal consolidation, a

sluggish investment cycle and lackluster external

demand all suggest that GDP growth is unlikely to

pick up quickly.

Note: Real salary is Nomura estimate calculated as Nominal salary - CPI inflation. Survey methodology: Aon Hewitt surveyed over 500 organizations representing 20 primary and 30 secondary industry sectors from December 2012 to January 2013. The study measures actual and projected salary increases, as well as compensation practices for five specific job categories, namely top/senior management, middle management, junior manager/professional/supervisor, general staff, and manual workforce. Source: Aon Hewitt, CEIC and Nomura Global Economics estimates. Authors: Sonal Varma and Aman Mohunta, originally published on 26 February 2013.


32

Korean data hint at a downside surprise in China's exports

Consensus expects growth of 7.6% y-o-y in February. We expect exports to shrink by 10%.

Fig. 1: Export growth rates in China and Korea

-30

-20

-10

0

10

20

30

40

50

Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

Gap between China and Korea

Korea export growth

China export growth

% y-o-y (3mma)

Note: China’s export growth in February 2013 is our forecast. Data will be released on 8 March.

The consensus forecast is for China‟s exports to continue to

grow strongly in February, at 7.6% y-o-y despite the

unfavorable lunar new year base effect. But a 1 March data

release shows Korea‟s exports contracted by 8.6% y-o-y in

February. This suggests to us that China‟s exports may have

also declined in February.

On a 3mma y-o-y basis, China‟s and Korea‟s export growth

are positively correlated. The gap between the two has been

stable, at about 10 percentage points (pp) since mid-2012. If

China‟s export growth is 0% y-o-y in February, the gap

between the export growth rates for the two countries would

widen to 16pp, which has only occurred once since 2008

(January 2009). Thus, contrary to the consensus view, we

believe China‟s exports likely contracted in February. This

would gel with the export orders component of China‟s official

PMI, which fell from 48.5 in January to 47.3 in February.

We expect China‟s export and import growth to have both

declined by 10% y-o-y in February, resulting in a trade deficit

of USD28.5bn. On a 3mma basis, this implies China‟s exports

grew by 14.1% y-o-y in February, and the gap with Korea‟s

export growth widened to 13.3pp from 10.9pp in January.

Source: CEIC and Nomura Global Economics. Author: Young Sun Kwon, originally published on 4 March 2013.

South Korea: The inverted yield curve looks unsustainable

We expect GDP to grow modestly on improved global demand and the government's targeted stimulus measures, which should

eventually normalise the yield curve.

Fig. 1: Korea’s yield curve

2.75

4.10

4.51

4.80

2.752.63

2.73

2.93

2.5

3.0

3.5

4.0

4.5

5.0

BOK policy rate 3yr KTB 5yr KTB 10yr KTB

7-Feb-11

5-Mar-13

%

3.75%: Our estimate of a nominal neutralpolicy rate

Note: Given the policy rate is at 2.75%, the yield curve was steepest on 7 February 2011and the most inverted on 5 March 2013.

Upcoming macro data and the Bank of Korea‟s

March policy decision will test the validity of the

inverted yield curve, which given a 2.75% policy rate,

reached an historical extreme on 5 March.

The January-February MPC meeting minutes

showed that a majority of the MPC voted to hold

rates, with one member voting for a 25bp rate cut.

Recent macro data have been mixed. January

industrial output fell, but year-to-date exports gained

slightly. We expect most MPC members to remain in

wait-and-see mode at the 14 March meeting.

We expect exports to gain further, supported by solid

demand from the US, China and Asean. The

government‟s fiscal front-loading, increase in social-

welfare spending and upcoming deregulation in the

property market should support domestic demand.

We maintain our call for no rate cuts through 2013.

Based on this, our rates strategist, Kewei Yang,

recommends staying with steepeners (see AEJ rate

updates: Think Global, Act Local, 26 February 2013).

Source: CEIC and Nomura Global Economics. Author: Young Sun Kwon, originally published on 4 March 2013.




33

Calendar

The month ahead

Units Period Prev 2 Prev 1 Last Nomura

10-15 Mar China Money supply, M2 % y-o-y Feb 13.9 13.8 15.9 14.8

10-15 Mar China New Yuan loans RMBbn Feb 523 454 1070 650

10-15 Mar China Total social financing RMBbn Feb 1122 1626 2535 1400

23-27 Mar Thailand Custom trade balance US$bn Feb -1.5 -2.4 -5.5 -0.9

China Exports % y-o-y Feb 2.9 14.1 25.0 -10.0

China Imports % y-o-y Feb 0.0 6.0 28.8 -10.0

China Trade balance US$bn Feb 19.6 31.3 29.2 -28.5

09.30 China Consumer price index % y-o-y Feb 2.0 2.5 2.0 3.1

13.30 China Industrial production % y-o-y Jan/Feb 9.6 10.1 10.3 10.6

13.30 China Retail sales % y-o-y Jan/Feb 14.5 14.9 15.2 15.5

13.30 China Urban fixed asset investment (ytd) % y-o-y Jan/Feb 20.7 20.7 20.6 20.6

India Consumer price index % y-o-y Feb 9.9 10.6 10.8 10.70

13.30 India Industrial production % y-o-y Jan 8.3 -0.8 -0.6 1.3

09.00 South Korea Central bank policy meeting, BOK base rate % Mar 2.75 2.75 2.75 2.75

14.30 India Wholesale price index % y-o-y Feb 7.2 7.2 6.6 6.8

16.00 Philippines Central bank meeting, overnight borrowing rate % Mar 3.50 3.50 3.50 3.50

Philippines Remittance from aboard % y-o-y Jan 8.5 7.6 9.7 6.6

08.30 Singapore Non-oil domestic exports % y-o-y Feb -2.6 -16.3 0.5 -10.8

13.30 India Central bank meeting, repo rate % Mar 8.00 8.00 7.75 7.75

17.00 Malaysia Consumer price index % y-o-y Feb 1.3 1.2 1.3 1.4

16.30 Hong Kong Consumer price index % y-o-y Feb 3.7 3.7 3.0 4.2

13.00 Singapore Consumer price index % y-o-y Feb 3.6 4.3 3.6 4.3

16.00 Taiwan Industrial production % y-o-y Feb 5.7 2.1 19.2 -6.0

13.00 Singapore Industrial production % y-o-y Jan 2.8 1.3 -0.4 -6.6

19.30 India Current account balance US$bn Q4 -21.7 -16.4 -22.3 -29.5

07.00 South Korea Industrial production % y-o-y Feb 2.1 -0.5 7.3 -5.0

Thailand Consumer price index % y-o-y Mar 3.6 3.4 3.2 3.0

07.00 South Korea Consumer price index % y-o-y Mar 1.4 1.5 1.4 1.7

08.00 South Korea Exports % y-o-y Mar -6.0 10.9 -8.6 3.0

09.00 China Official purchasing manager's index Index Mar 50.6 50.4 50.1 51.5

12.00 Indonesia Consumer price index % y-o-y Mar 4.3 4.6 5.3 5.1

12.00 Indonesia Trade balance US$bn Mar -0.6 -0.2 -0.2 -0.3

16.30 Hong Kong Retail sales (volume) % y-o-y Feb 8.1 8.1 10.5 6.2

15.30 Thailand Central bank policy meeting, 1 day repo rate % Mar 2.75 2.75 2.75 2.75

09.00 Philippines Consumer price index % y-o-y Mar 2.9 3.0 3.4 3.6

Friday 15 March

Monday 18 March

Saturday 9 March

Sometime in the month

Thursday 14 March

Tuesday 12 March

Friday 8 March

Tuesday 19 March

Monday 25 March

Tuesday 26 March

Wednesday 20 March

Thursday 21 March

Thursday 28 March

Monday 1 April

Tuesday 2 April

Friday 29 March

Wednesday 3 April

Friday 5 April

Note: All times in HKT. Source: Bloomberg and Nomura Global Economics.


34



Outlook 2013-2014

China: Mixed signals cast doubt on the strength of the recovery

Policy will likely tighten, but pace of tightening depends on the strength of activity data.

Activity: Data in the first two months of 2013 have sent conflicting signals. The official PMI

surprisingly fell to 50.1 in February from 50.4 in January and the HSBC PMI dropped to 50.4

after a jump to 52.3 in January, which is consistent with some sector level data. However, the

MNI business sentiment indicator rose to 61.0 in February from 55.2 in January. The release of

key data on 9 March should provide more clarity on the direction of the economy. We continue

to expect real GDP growth to rise to 8.2% y-o-y in Q1 before it moderates to 7.3% in H2.

Inflation: We expect CPI Inflation to rise to 3.1% y-o-y in February from 2.0% in January, due to

rising food prices and positive base effects. The government lowered its CPI inflation target to

3.5% in 2013 from 4.0% last year. In the National People‟s Congress (NPC), Premier Wen cited

rising prices in food, labour and natural resources, imported inflation from QEs in major

economies, and the need to reform energy prices as the primary factors driving inflation. This

suggests to us that further price hikes on energy and public utilities will be implemented in H1.

Policy: Credit supply continued to grow strongly in January with total social financing hitting an

all-time high at RMB2.5trn and M2 growth jumping to 15.9% y-o-y. However, in light of

increased concerns over rising financial risks and inflation, we believe that monetary policy has

to shift away from its very loose stance. The government announced tightening measures on

the property market and set the M2 growth target for 2013 at 13% at the NPC, down from 14%

in 2012. These announcements suggest monetary policy will tighten after the NPC, but we

believe the pace of tightening will depend on the strength of activity data in January and

February (to be announced on 9 March).

Risks: We see three key risks to our forecast. The largest risk is policy uncertainty, as political

pressure could force the government to maintain its currently loose policy stance longer than we

expect. The second is inflation, which may rise more slowly than we expect and delay policy

tightening. The third is external demand, given the uncertain outlook of EU and US economies.

Details of the forecast

% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 8.1 7.6 7.4 7.9 8.2 8.0 7.4 7.2 7.8 7.7 7.5

Consumer prices 3.8 2.9 1.9 2.1 2.5 3.0 3.6 4.8 2.6 3.5 4.0

Core CPI 1.5 1.3 1.5 1.5 2.0 2.1 2.4 2.1 1.5 2.2 2.0

Retail sales (nominal) 14.9 13.9 13.5 14.9 16.2 15.9 15.5 15.6 14.2 15.8 16.0

Fixed-asset investment (nominal, ytd) 20.9 20.4 20.5 20.6 21.0 21.2 21.3 22.0 20.6 22.0 20.0

Industrial production (real) 11.6 9.5 9.1 10.0 10.8 10.5 9.6 9.6 10.1 10.1 9.7

Exports (value) 7.6 10.4 4.4 9.5 3.0 4.0 6.0 6.0 7.9 4.9 6.0

Imports (value) 6.9 6.4 1.4 2.8 7.0 8.0 9.0 9.0 4.4 8.3 10.0

Trade surplus (US$bn) 0.2 68.4 79.2 83.4 -16.9 52.9 70.1 74.3 231.2 180.3 122.0

Current account (% of GDP) 2.6 1.0 -0.4

Fiscal balance (% of GDP) -1.6 -1.5 -1.6

New increased RMB loans (CNY trn) 8.2 9.0 9.0

1-yr bank lending rate (%) 6.56 6.31 6.00 6.00 6.00 6.00 6.25 6.50 6.00 6.50 6.5

1-yr bank deposit rate (%) 3.50 3.25 3.00 3.00 3.00 3.00 3.25 3.50 3.00 3.50 3.5

Reserve requirement ratio (%) 20.5 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 19.0

Exchange rate (CNY/USD) 6.31 6.32 6.34 6.29 6.22 6.18 6.16 6.15 6.29 6.15 6.14

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. The CNY/USD forecast is for the fixing rate, not the spot rate. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 7 March 2013. Source: CEIC and Nomura Global Economics.




35



Hong Kong: Fiscal stimulus

The 2013-14 budget focusses on increasing social welfare spending.

Activity: Real GDP growth increased to 2.6% y-o-y in Q4, led by a pick up in private

consumption and exports. Retail sales growth in volume terms also remained strong, at 10.4%

in January from 8.5% in December, while the PMI remained in the expansion zone at 51.2 in

February, albeit down from January. We expect private consumption to remain robust,

underpinned by a tight labor market, positive wealth effects from buoyant property prices and

increasing visitor numbers from mainland China. Further, domestic fixed asset investment

should remain strong, led by infrastructure works. We expect fiscal stimulus and a moderate

improvement in external demand to lift real GDP growth from 1.4% in 2012 to 2.5% in 2013.

Inflation: CPI inflation eased to 3.0% y-o-y in January from 3.8% in December, largely on base

effects created by the lunar new year holiday, and hence we expect a payback in February.

Thereafter, inflation should rise through 2013, driven by higher food, fuel and rent prices, only

partly offset by inflation-mitigating fiscal measures such as a temporary waiver of public housing

rent and electricity subsidies. We expect CPI inflation to rise from 4.1% in 2012 to 4.3% in 2013.

Policy: Hong Kong's FY13 (April 2013 to March 2014) fiscal policies are more expansionary

than in FY12. The government expects the fiscal balance to shift to a deficit of HKD4.9bn in

FY13 from a surplus of HKD64.9bn in FY12 due to increased expenditures. The budget includes

a reduction in taxes and an increase in the child allowance for low income families; a subsidy for

electricity; and two months‟ waiver of rent payments for public housing tenants. We also expect

the government to continue implementing more macroprudential property tightening measures,

such as hikes in the stamp duty if house prices continue to rise. Because of the USD/HKD peg,

Hong Kong is importing the super-loose monetary policy of the US, and it remains unclear

whether tighter macroprudential measures can provide a sufficient offset in the long run.

Risks: As a small, open economy and financial hub, Hong Kong is one of the most vulnerable

in Asia to weakness in the global economic outlook. An economic hard landing in China would

be especially detrimental through both trade and financial channels.



Real GDP (sa, % q-o-q, annualized) 1.5 -0.4 3.4 4.9 0.6 1.1 5.2 2.8

Real GDP 0.7 1.2 1.1 2.6 2.1 2.5 2.9 2.4 1.4 2.5 3.5

Private consumption 6.3 2.8 2.8 4.5 3.2 3.4 3.6 4.5 4.0 3.7 4.4

Government consumption 3.3 4.1 4.0 3.2 3.5 3.7 3.8 4.2 3.7 3.8 4.4

Gross fixed capital formation 12.5 5.7 8.3 6.0 5.8 5.8 5.7 5.8 9.1 5.8 6.1

Exports (goods & services) -3.6 0.3 3.0 5.0 4.5 5.0 5.0 5.5 1.3 5.0 7.2

Imports (goods & services) -1.6 0.9 3.8 6.4 5.1 5.5 6.2 6.9 2.5 6.0 7.7

Contributions to GDP (% points)

Domestic final sales 7.4 3.6 4.3 5.6 3.8 4.0 4.2 4.8 5.2 4.2 4.8

Inventories -1.7 -1.3 -1.0 -0.3 -0.5 -0.2 1.2 0.6 -1.1 0.3 -0.2

Net trade (goods & services) -4.4 -1.3 -1.6 -2.6 -1.1 -1.4 -2.3 -2.9 -2.5 -1.9 -1.2

Unemployment rate (sa, %) 3.3 3.3 3.5 3.3 3.4 3.4 3.4 3.4 3.4 3.4 3.2

Consumer prices 5.2 4.2 3.1 3.8 3.7 4.3 4.5 4.6 4.1 4.3 4.3

Exports -1.2 2.0 4.4 7.4 9.2 10.4 10.1 10.4 3.2 10.0 12.3

Imports 0.9 2.3 5.0 8.4 9.5 10.5 10.9 11.7 4.3 10.7 12.5

Trade balance (US$bn) -12.7 -15.9 -15.6 -17.4 -14.2 -17.6 -18.3 -21.0 -61.6 -71.2 -80.9

Current account balance (% of GDP) 1.5 -0.1 -0.7

Fiscal balance (% of GDP) 3.3 -0.2 -0.5

3-month Hibor (%) 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40

Exchange rate (HKD/USD) 7.76 7.76 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75

Source: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 7 March 2013. Source: CEIC and Nomura Global Economics.




36

Sonal Varma +91 22 4037 4087 [email protected]


India: Politics trumps economics

With the government likely to increase spending ahead of the elections in 2014, macro

imbalances should continue and growth will likely disappoint.

Forecast change: We have revised our 2013 GDP growth forecast down to 5.2% (from 6.1%)

and our current account balance forecast down to -5.3% of GDP in 2013 (from -4.7%) and

-4.2% in 2014 (from -3.9%).

Activity: Sharp cutbacks in government spending and a slowdown in the financial sector

dragged down GDP growth to 4.5% y-o-y in Q4 2012. Although growth appears to have

bottomed, in the absence of any positive triggers in the near term we expect GDP growth to

remain below 5% in H1 2013, with a cyclical pick up from Q4 2013 due to increased

government spending ahead of the general election in 2014. However, new capex projects

remain moribund, and we see no pick up in sight. As a result, supply-side constraints remain

binding and suggest limited spare capacity to accommodate a significant pickup in demand

(without generating inflationary pressures and/or a widening trade deficit).

Inflation: Price pressures have eased and we expect WPI inflation to remain below 7% in Q1

2013 due to the lagged impact of a negative output gap, falling input costs and a delay in

updating the coal price index of the WPI basket. However, we expect WPI inflation to start rising

again in Q2 2013 due to higher food prices and the release of some fiscally suppressed inflation,

as subsidies and price controls are relaxed a little. INR depreciation is likely to intensify

inflationary pressures from Q3 2013. Further, double-digit CPI inflation suggests that underlying

pressures remain strong, notwithstanding the fall in WPI inflation.

Policy: The Reserve Bank of India (RBI) cut its repo rate by 25bp in January and we expect

another 25bp cut in May given the fall in WPI inflation. However, with inflation likely to rise again

from Q2 and a worsening current account deficit, we expect policy rates to remain on hold in H2

2013. The government achieved its fiscal deficit target of 5.2% of GDP in FY13, which is lower

than the revised target of 5.3%, and has budgeted for a fiscal deficit of 4.8% in FY14. However,

we expect the fiscal deficit to remain at 5.2% in FY14, as we believe the government is likely to

miss its revenue target, and the elections due in 2014 will limit its ability to cut expenditures.

Risks: A reversal of capital flows, a sharp rise in oil prices, a deeper and prolonged global

slowdown and weather-related shocks are the key downside risks. Lower commodity prices, a

stronger-than-expected global recovery and a quick investment revival are upside risks.



Real GDP (sa, % q-o-q, annualized) 5.9 5.3 6.0 2.5 1.7 9.0 8.1 5.4

Real GDP 5.3 5.5 5.3 4.5 4.7 4.8 5.2 6.0 5.1 5.2 6.6



Fixed investment 2.6 -4.6 -1.0 6.0 4.0 7.2 4.3 4.5 0.7 5.0 6.5

Exports (goods & services) 13.4 7.2 5.2 -2.1 1.5 4.5 6.5 8.6 5.8 5.2 10.3

Imports (goods & services) 24.3 3.9 13.8 -0.3 2.0 8.2 6.5 10.2 9.8 6.7 9.2



Inventories -1.1 1.2 1.2 1.1 1.0 -0.1 0.0 0.1 0.6 0.3 0.2

Net trade 4.0 -0.2 -1.4 1.1 -8.3 -1.7 -0.8 -1.3 1.0 -3.1 -0.6

Wholesale price index 7.5 7.5 7.9 7.2 6.8 7.1 7.2 7.5 7.5 7.1 6.8

Consumer price index 8.6 10.2 9.9 10.1 10.7 9.8 9.6 9.1 9.7 9.8 8.1

Current account balance (% GDP) -4.9 -5.3 -4.2

Fiscal balance (% GDP) -5.2 -5.2 -5.0

Repo rate (%) 8.50 8.00 8.00 8.00 7.75 7.50 7.50 7.50 8.00 7.50 7.00

Reverse repo rate (%) 7.50 7.00 7.00 7.00 6.75 6.50 6.50 6.50 7.00 6.50 6.00

Cash reserve ratio (%) 4.75 4.75 4.50 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.75

10-year bond yield (%) 8.54 8.18 8.15 8.05 7.80 7.80 7.70 7.50 8.05 7.50 7.00

Exchange rate (INR/USD) 51.2 54.0 52.7 55.0 53.0 55.5 60.0 59.0 55.0 59.0 56.0

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. CPI is with base year 2010. Fiscal deficit is for the central government and for fiscal year, e.g, 2012 is for the year ending March 2013. Table reflects data available as of 7 March 2013. Source: CEIC and Nomura Global Economics.




37


Lavanya Venkateswaran +91 22 3053 3053 [email protected]

Indonesia: Still a case to tighten

A combination of recent increases in inflation and persistently weak external balances

makes a compelling case for BI to hike rates.

Activity: Monthly indicators for January, including the consumer confidence index, motorcycle

and cement sales and strong import growth, suggest that consumption demand remained

strong. This, along with higher government spending ahead of the 2014 elections, supports our

2013 GDP growth forecast of 6.1% GDP. But the sustainability of growth is becoming more

worrisome. Merchandise exports improved in January, but we still see upside risks to our

current account deficit forecast of 1.9% of GDP this year, because of robust imports. Without

reducing fuel subsidies or tightening monetary policy, the risk is that domestic demand

increasingly outstrips supply.

Inflation and monetary policy: CPI inflation jumped to 5.3% y-o-y in February from 4.6% in

January, approaching the upper limit of Bank Indonesia‟s (BI) 3.5-5.5% target range. The

increase was largely due to higher food prices, as core inflation remained stable at 4.3%. We

continue to expect inflationary pressures to persist given the electricity tariff adjustments, the

lagged impact of IDR depreciation and elevated inflation expectations (see Asia Insights:

Indonesia: Inflation jumps in February, 1 March 2013). This, combined with persistently weak

external balances, bolsters the case for BI to act. Our base case calls for 50bp of policy rate

hikes in H2. Raising the FASBI rate (the lower bound of the interest rate corridor) can occur

sooner, which would be a signal that BI is moving toward a tightening bias.

Fiscal policy: Our recent trip to Jakarta confirmed the low likelihood of fuel subsidy cuts this

year (see Asia Insights: Indonesia: Postcard from Jakarta, 25 February 2013). That said, we

continue to expect the government to improve its execution on infrastructure spending and other

capital expenditures. Some positive signs of this include progress made on the development of

the Jakarta Mass Rapid Transit system. All told, we expect higher operating expenditures to

increase the 2013 deficit to 2.0% of GDP (versus the budgeted 1.65%).

Risks: The key risk we see is the implementation of more protectionist and populist policies

ahead of the elections, which could damage already-fragile investor sentiment and slow FDI

inflows. On the external front, weaker growth in the EU, US and China also pose downside risks.



Real GDP (sa, % q-o-q, annualized)

Real GDP 6.3 6.4 6.2 6.1 6.1 6.2 6.0 6.0 6.2 6.1 6.2


Government consumption 6.4 8.6 -2.8 -3.3 7.0 8.0 10.0 10.0 1.2 9.0 7.0


Exports (goods & services) 8.2 2.6 -2.6 0.5 6.0 6.0 7.0 9.0 2.0 7.0 10.0

Imports (goods & services) 8.9 11.3 -0.2 6.8 6.5 7.0 5.5 8.0 6.6 6.8 11.9



Inventories 2.0 2.3 -0.1 3.1 -0.2 -0.3 0.0 0.5 1.8 0.0 -0.3

Net trade (goods & services) 0.6 -3.0 -1.2 -2.5 0.4 0.1 1.3 1.2 -1.5 0.7 0.2

Consumer prices 3.7 4.5 4.5 4.4 4.6 5.1 5.4 5.5 4.3 5.2 5.1

Exports (goods) 5.3 -8.2 -13.0 -7.9 7.0 9.0 8.0 9.0 -6.3 8.2 10.4

Imports (goods) 21.6 9.7 -0.3 4.6 6.0 7.0 8.0 10.5 8.3 7.9 12.0

Trade balance (US$bn) 1.7 -2.1 0.6 -2.7 1.6 -1.1 2.7 -3.5 -2.4 -0.3 -0.9

Current account balance (% of GDP) -1.4 -3.5 -2.4 -3.6 -1.2 -2.0 -1.3 -3.2 -2.7 -1.9 -1.7

Fiscal Balance (% of GDP) -1.8 -2.0 -2.2

Bank Indonesia rate (%) 5.75 5.75 5.75 5.75 5.75 5.75 6.25 6.25 5.75 6.25 6.75

Exchange rate (IDR/USD) 9146 9433 9591 9790 9900 10000 9900 9900 9790 9900 9700

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal (i.e., the single most likely outcome). Table reflects data available as of 7 March 2013. Source: CEIC and Nomura Global Economics.



http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=599451&appname=Email&cid=aUl4dGZjemsxRzA90




38



Malaysia: All eyes on the elections

GDP growth remained robust in 2012 and the momentum is likely to continue this year,

but a lot is dependent upon the outcome of the upcoming elections.

Activity: The economy grew by 6.4% y-o-y in Q4 2012 from 5.3% in Q3, driven by strong

domestic demand, namely from private consumption and investment spending. This took full-

year GDP growth to a robust 5.6% in 2012 (5.1% in 2011). The outlook for this year rests on the

upcoming general elections, which we think will likely be held in April. For now, we maintain our

forecast for 2013 GDP growth to average 4.3%, given the need for the government to move

quickly to fiscal consolidation after the election to avoid exceeding its self-imposed debt limit.

However, admittedly there are upside risks given the strong economic momentum.

Inflation and monetary policy: January CPI inflation rose by 1.3% y-o-y from 1.2% in

December, largely driven by higher food prices. We estimate core inflation also rose by 1.4%

y-o-y from 1.3% in December, consistent with the strength in domestic demand. We maintain

our forecast for CPI inflation to average 2.4% y-o-y in 2013. Furthermore, the uptick in January

inflation justifies Bank Negara Malaysia‟s (BNM) slightly more hawkish stance at its 31 January

meeting. As such, we continue to expect BNM to hike the policy rate by 50bp in H2 to 3.50% as

it looks to normalize rates to avoid not only inflation, but overheating pressures more generally.

Fiscal policy and political outlook: The government met its fiscal deficit target of 4.5% of

GDP in 2012, but the details continue to underscore the need for fiscal reforms. More positively,

our recent trip to Kuala Lumpur bolstered our confidence in the government‟s commitment to

reform. That said, we expect the fiscal impulse to remain positive until the elections, after which

spending cutbacks are likely. We continue to forecast a deficit of 4.5% of GDP versus the target

of 4%, given the political cycle. We expect the elections to be called between 6-20 April and our

baseline (assigned a 60% probability) remains for the incumbents to retain power, but with a

smaller majority (see Asia Insights: Postcard from Malaysia, 26 February 2013).

Risks: With exports at nearly 100% of GDP, a sharp drop in commodity prices and another

global recession are the biggest downside risks. A weaker-than-expected coalition or an

opposition victory would raise questions about the political transition and the reform agenda.


% y-o-y growth unless otherwise stated

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 5.1 5.6 5.2 6.4 5.1 4.7 4.2 3.2 5.6 4.3 4.6


Government consumption 9.1 10.9 2.3 1.1 0.1 -3.0 -2.5 -1.1 5.0 -1.6 3.5


Exports (goods & services) 2.8 2.1 -3.0 -1.5 0.3 1.1 2.2 3.5 0.1 1.8 7.2

Imports (goods & services) 6.8 8.1 4.4 -0.9 1.8 3.3 4.5 4.6 4.5 3.6 8.5



Inventories -0.2 -1.2 2.2 0.2 0.2 0.3 -0.2 -2.1 0.3 -0.5 0.0

Net trade (goods & services) -3.1 -4.9 -6.8 -0.6 -1.3 -1.9 -1.8 -0.7 -3.8 -1.4 -0.6

Unemployment rate (%) 3.0 3.0 3.0 3.2 3.2 3.4 3.5 3.5 3.0 3.4 3.4

Consumer prices 2.3 1.7 1.4 1.3 2.1 2.6 2.5 2.7 1.7 2.4 2.5

Exports 3.3 -0.3 -4.7 0.6 4.6 7.3 6.9 5.6 -0.3 6.1 8.4

Imports 6.2 5.5 3.9 3.9 8.8 10.0 11.7 7.7 4.8 9.6 13.1

Merchandise trade balance (USD bn) 9.7 6.8 5.5 8.7 8.2 6.0 3.5 8.1 30.8 25.7 17.8

Current account balance (% of GDP) 8.0 4.1 4.0 9.4 4.8 4.4 3.3 4.9 6.4 4.7 4.2

Fiscal Balance (% of GDP) -4.5 -4.5 -4.2

Overnight policy rate (%) 3.00 3.00 3.00 3.00 3.00 3.00 3.25 3.50 3.00 3.50 4.00

Exchange rate (MYR/USD) 3.06 3.18 3.06 3.06 3.10 3.06 3.01 2.95 3.06 2.95 2.87

Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as 7 March 2013. Source: CEIC and Nomura Global Economics.





39



Philippines: In a virtuous cycle

Growth remains supported by improving governance. Monetary policy is neutral with

macroprudential tools remaining the prefered option for capital flow management.

Activity: Similar to 2012, we expect solid GDP growth of 6.4% y-o-y in 2013. Increased

government spending ahead of the elections in May in addition to the government‟s undeterred

focus to improve capital spending should continue to crowd in private investment and support

GDP growth. We believe the economy is in a virtuous cycle, with improving governance

bolstering consumer and business sentiment, which reinforces the administration‟s popularity,

helping support its push for further reforms.

Inflation and monetary policy: CPI inflation increased to 3.4% y-o-y in February from 3.0% in

January, driven by higher food prices that offset lower utilities prices. Core inflation also

increased to 3.8% y-o-y from 3.6% in January, consistent with the strength of domestic demand.

Headline inflation, however, remains comfortably within the 3-5% target range of Bangko

Sentral ng Pilipinas (BSP). On our recent trip to Manila, BSP indicated that it could afford to stay

on hold for some time, despite robust growth (Asia Insights: Postcard from the Philippines, 28

February 2013). In the interim, macroprudential tools remain the preferred option for managing

strong capital inflows. We maintain our view that headline inflation will average 4.6% y-o-y this

year. Our policy rate forecast is 50bp of hikes in H2, but with a rising potential growth rate and

BSP‟s current neutral stance, there are risks that these hikes are delayed.

Fiscal policy: The fiscal deficit was 2.3% of GDP in 2012, undershooting the original projection

of 2.6%. But the details remain encouraging, as revenue collections are close to target and

capital spending has improved. For 2013, the government has proposed a fiscal deficit of 2.0%

of GDP that continues to focus on increasing capital outlays, especially infrastructure spending,

while higher revenue targets have also been set, which implies improved tax administration.

Risks: The main risk to our forecast is an external shock from the still-fragile European and US

economies. A slowdown in reforms and infrastructure spending could also hurt growth. We see

the election as a political non-event given the current popularity of the government.




Real GDP 6.3 6.0 7.2 6.8 6.7 6.4 6.0 6.3 6.6 6.4 5.8




Exports (goods & services) 10.9 8.3 6.7 9.1 6.8 7.0 7.4 5.4 8.7 6.7 9.0

Imports (goods & services) -3.2 10.3 4.9 4.6 16.4 11.2 16.2 12.0 4.2 13.9 13.0

Contribution to GDP growth (% points)


Inventories -7.2 -0.2 -1.2 -2.3 2.8 1.2 2.4 1.0 -2.6 1.6 0.0

Net trade (goods & services) 7.1 -0.8 1.0 1.2 -4.3 -2.1 -4.3 -3.1 2.0 -3.4 -2.3

Exports 4.8 10.5 6.2 9.1 6.8 7.0 7.4 5.4 7.6 6.7 9.0

Imports -1.5 2.2 0.8 6.4 17.4 12.2 17.2 13.0 1.9 15.0 13.0

Merchandise trade balance (USDbn) -2.6 -1.4 -2.0 -3.7 -4.5 -2.3 -3.6 -5.1 -9.7 -15.4 -19.6

Current account balance (USDbn) 1.1 3.0 3.1 1.1 -0.2 2.3 1.7 1.9 8.2 5.6 5.7

Current account balance (% of GDP) 2.0 4.8 5.1 1.5 -0.2 3.4 2.4 2.2 3.3 1.9 1.8

Fiscal balance (% of GDP)

-2.3 -2.6 -2.2

Consumer prices (2006=100) 3.1 2.9 3.5 3.0 3.5 4.4 4.9 5.4 3.1 4.6 4.5


Reverse repo rate (%) 4.00 4.00 3.75 3.50 3.50 3.50 3.75 4.00 3.50 4.00 4.50

Exchange rate (PHP/USD) 42.9 42.1 41.7 41.0 40.2 39.8 39.6 39.2 41.0 39.2 38.2

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 7 March 2013. Source: CEIC and Nomura Global Economics.





40





Singapore: A weak start to 2013

Production and export data surprised on the downside in January. The policy focus

remains on the restructuring agenda to raise productivity.

Forecast changes: Based on the larger budget surplus in FY12, we revise up our FY13 budget

estimate to a surplus of 1.0% of GDP from a deficit of 0.2% of GDP.

Activity: Q4 2012 GDP growth was revised up to 1.5% y-o-y from the flash estimate of 1.1%,

which takes full-year 2012 growth to 1.3%. Data for January indicate that the economy got off to

a weak start in 2013, with industrial production contracting by 0.4% y-o-y in January from growth

of 1.3% in December, despite favourable base effects led by electronics and biomedical output.

Non-oil domestic exports were also weak in January. Forward looking data remained mixed, as

the total manufacturing PMI fell below 50 in February, but the electronics PMI rose above 50.

For 2013, we have a subdued GDP growth forecast of 2.4%, as the government focuses more

on long-term restructuring to boost competitiveness than short-term counter-cyclical policies.

Inflation and monetary policy: CPI inflation eased to 3.6% y-o-y in January from 4.3% in

December, due to favourable base effects. Underlying inflation, which excludes accommodation

and private road transportation costs, also eased sharply to 1.2% y-o-y in January from 1.9%.

However, the easing in January will likely prove temporary given still-elevated transportation

and housing costs, rising wages and tight labour markets. We continue to forecast headline

inflation to average 3.9% y-o-y in 2013. Underlying inflation, according to the Monetary Authority

of Singapore (MAS) should also remain sticky at 1-3%. As such, we remain comfortable with our

view that the MAS will not alter its policy of a modest and gradual appreciation of the S$NEER

policy band at the next announcement in April.

Fiscal policy: The FY13 budget announced on 25 February continued to highlight the

government‟s commitment to raising productivity and restructuring the economy. The measures

announced include further restrictions on foreign workers, cash programs for industries to share

the burden of rising wages and additional help for the elderly. This fiscal balance is expected to

be in a smaller surplus of 0.7% of GDP in FY13 from an upwardly revised surplus of 1.1% in

FY12. Based on this, we now expect a higher surplus of 1.0% of GDP given historical revenue

outperformance. However, we still expect limited counter-cyclical support to growth.

Risks: With exports at 200% GDP, Singapore is the most vulnerable economy in Southeast

Asia to a major contraction in global GDP. Another risk is domestic overheating, fuelled by low

interest rates and capital inflows.



Real GDP (sa, % q-o-q, annualized) 1.3 2.4 4.2 1.3 12.0 -1.2 -4.2 4.7

Real GDP 2.2 3.7 3.5 2.2 2.5 2.2 2.3 2.7 1.3 2.4 4.2

Private consumption -3.6 0.6 4.0 -3.6 3.7 3.9 4.0 3.1 2.2 3.7 3.5

Government consumption 6.6 3.3 5.7 6.6 -0.9 -0.3 1.1 2.7 -3.6 0.6 4.0


Exports (goods & services) 3.2 3.0 11.1 3.2 -1.4 0.9 5.4 6.7 0.3 2.9 10.1

Imports (goods & services)

-0.2 1.5 4.8 5.8 3.2 3.0 11.1

Contributions to GDP (% points) 2.0 2.2 3.1 2.0

Domestic final sales 4.9 -0.4 0.8 4.9 2.2 2.1 2.3 2.1 2.0 2.2 3.1

Inventories -5.6 0.6 0.8 -5.6 3.1 1.1 -2.9 -2.9 4.9 -0.4 0.8

Net trade (goods & services) 2.0 2.2 2.4 2.0 -2.9 -1.0 2.9 3.4 -5.6 0.6 0.8


Consumer prices 0.1 7.6 12.1 0.1 4.2 4.1 3.8 3.4 4.6 3.9 3.6

Exports 3.5 6.3 13.1 3.5 2.6 7.9 9.6 10.3 0.1 7.6 12.1

Imports 31.5 38.7 40.2 31.5 3.2 5.9 7.9 8.2 3.5 6.3 13.1

Merchandise trade balance (US$bn) 18.9 16.1 17.0 18.9 6.8 9.2 11.1 11.7 31.5 38.7 40.2


Fiscal Balance (% of GDP) 0.38 0.48 0.50 0.38 1.1 1.0 0.4

3 month SIBOR (%) 1.22 1.19 1.17 1.22 0.38 0.48 0.48 0.48 0.38 0.48 0.50

Exchange rate (SGD/USD) 1.3 2.4 4.2 1.3 1.21 1.20 1.20 1.19 1.22 1.19 1.17







41


South Korea: Growth momentum set to carry into Q1

We expect the Bank of Korea to keep rates unchanged at 2.75% through 2013 as

GDP growth and CPI inflation should rise modestly from a low base.

Activity: January-February export data suggest that GDP growth is improving slightly. We

expect GDP growth to rise to 0.7% q-o-q in Q1 (from 0.4% in Q4), supported by inventory

restocking, fiscal front-loading and a modest foreign demand recovery. We view the

strengthening of KRW against JPY as a process of normalization, reflecting improvements in

global demand. The new government will likely increase social welfare spending, implement

some measures to boost the housing market and frontload 60% of its annual expenditure

budget to H1, which should support consumption and construction investment. However, we

expect business investment to remain weak as uncertainty surrounding the global outlook

remains elevated. Domestic demand should recover only slightly due to structural problems,

including a household debt overhang. We maintain our below-consensus forecast for GDP

growth of 2.5% in 2013.

Inflation: A negative output gap and stable KRW should exert downward pressure on inflation,

but higher food prices, rising housing rent and public service fare hikes should push CPI

inflation up to 2.7% in 2013 from 2.2% in 2012, although it should remain below the midpoint of

the Bank of Korea‟s (BOK) new inflation target range of 2.5-3.5% for 2013-15.

Policy: We expect targeted micro stimulus measures on specific areas (e.g., property market)

rather than a broad-based easing of macro policy. We expect the BOK to keep rates at 2.75%

through 2013, as growth and inflation should increase modestly from a low base.

Risks: As a small, open economy, Korea is vulnerable to sudden changes in global economic

conditions, commodity prices and financial markets. That said, we would expect the BOK to cut

rates if one of the major downside risks to global growth (the US fiscal cliff; a renewed eurozone

sovereign crisis; a China hard landing) materialises, but none of these are part of our base case.

Domestically, the new government could formulate a supplementary budget in H1 2013 of as

much as KRW20trn (USD20bn or 1.5% of GDP), which provides an upside risk to our domestic

demand forecast.




Real GDP (sa, % q-o-q) 0.9 0.3 0.1 0.4 0.7 0.9 0.8 0.9

Real GDP 2.8 2.3 1.5 1.5 1.4 2.0 2.8 3.3 2.0 2.5 3.5



Business investment 9.1 -3.5 -6.5 -5.1 -13.1 -5.6 1.2 5.1 -1.8 -3.4 7.7

Construction investment 2.1 -2.1 -0.2 -4.1 -0.7 0.7 1.6 4.1 -1.5 1.8 4.1

Exports (goods & services) 5.0 3.2 2.9 4.0 0.5 1.6 -0.2 2.5 3.7 1.1 4.8

Imports (goods & services) 4.6 0.5 1.1 3.1 -1.6 0.8 -0.1 2.5 2.3 0.4 5.2

Contributions to GDP growth (% points)


Inventories -0.1 0.1 -0.2 -0.1 -0.4 -0.3 0.6 -0.3 -0.1 0.1 0.2

Net trade (goods & services) 0.1 1.4 1.0 0.8 1.0 0.5 -0.1 0.3 0.9 0.4 0.3


Consumer prices 3.0 2.4 1.6 1.7 1.9 2.6 3.1 3.0 2.2 2.7 3.0

Current account balance (% of GDP) 3.8 2.8 2.2

Fiscal balance (% of GDP) 1.3 1.0 1.0

Fiscal balance ex-social security (% of GDP) -1.2 -1.3 -1.0

BOK official base rate (%) 3.25 3.25 3.00 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.25

3-year T-bond yield (%) 3.55 3.30 2.83 2.82 2.75 2.80 2.85 2.90 2.82 2.90 3.30

5-year T-bond yield (%) 3.69 3.42 2.93 2.97 2.80 2.85 2.90 3.00 2.97 3.00 3.40

Exchange rate (KRW/USD) 1133 1154 1118 1071 1065 1040 1035 1030 1071 1030 1020

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data as of 7 March 2013. Source: Bank of Korea, CEIC and Nomura Global Economics.



42



Taiwan: External demand is key

The economy should benefit from the upcycle in global electronics demand and China

GDP, as well as improved cross-strait relations.

Activity and inflation: Real GDP gained strongly in Q4 2012, supported by a rebound in fixed

capital formation and exports. Private consumption also showed modest gains, while

government expenditure fell. Taiwan‟s growth is largely dependent on global demand,

especially from China, its largest export destination accounting for 27% of total exports in 2012.

We expect stronger demand from China and a gradual recovery in global electronics demand to

help lift GDP growth from 1.3% in 2012 to 3.0% in 2013. The government recently upgraded its

2013 GDP growth forecast from 3.15% to 3.53%, citing the benefits of demand for mobile

devices and electronics products. We expect CPI inflation to rise to 2.3% in 2013 from 1.9% in

2012 due to higher food prices and diminished spare capacity. However, given that electricity

tariff hikes will be implemented in multiple stages, inflation is unlikely to become a serious factor

for growth through our forecast horizon.

Cross-strait relations: A faster-than-expected liberalisation of trade and investment with China

would add upside risks to our growth forecasts. The latest developments in this area include

Taiwanese government plans to double the current limit on mainland Chinese institutions‟

securities investments in its market, while Taiwanese banks have (as of this month) started to

accept renminbi deposits.

Monetary policy: We expect the Central Bank of China (CBC) to hike the discount rate from

1.875% to 2.125% in H2 2013 as GDP growth and CPI inflation rise. We view this as a

normalisation of very loose monetary policy rather than a move to outright tightening.

Risks: Another deep recession in advanced economies would have a large impact on Taiwan‟s

open economy. Positive risks include a stronger-than-expected recovery in the global

electronics cycle and a faster-than-expected liberalisation of trade and investment with China.



Real GDP (sa, % q-o-q, annualized) 5.0 -0.1 3.9 7.3 1.3 0.5 4.6 3.6

Real GDP 0.6 -0.1 0.7 3.7 3.1 3.2 3.4 2.5 1.3 3.0 3.5


Government consumption 2.1 2.5 -0.7 -1.7 3.0 3.5 3.0 2.6 0.4 3.0 3.2

Gross fixed capital formation -10.2 -7.7 -0.9 1.3 7.0 5.0 4.0 3.5 -4.4 4.8 4.2

Exports (goods & services) -3.4 -2.5 2.3 4.0 2.8 3.4 3.6 2.2 0.1 3.0 3.3

Imports (goods & services) -7.2 -4.1 1.9 2.2 2.2 2.2 2.3 2.4 -1.9 2.3 3.5

Contributions to GDP growth (% points)

Domestic final sales -2.6 -1.1 -0.4 2.2 2.1 1.9 2.4 1.9 1.2 3.7 3.0

Inventories 1.5 0.5 0.5 -0.3 0.2 0.0 -0.4 0.3 0.0 -0.3 0.2

Net trade (goods & services) 1.7 0.5 0.6 1.8 0.8 1.3 1.4 0.4 1.1 1.0 0.5

Exports -4.0 -0.5 4.3 6.0 5.3 5.9 6.1 4.7 -2.3 5.5 6.3

Imports -5.9 0.3 6.3 6.6 3.7 3.7 3.8 3.9 -3.8 3.8 5.0

Merchandise trade balance (US$bn) 5.7 5.6 8.4 10.8 7.0 7.4 10.5 11.8 30.4 36.7 42.6


Fiscal balance (% of GDP) -1.8 -1.9 -2.0

Consumer prices 1.3 1.6 2.9 1.8 2.1 2.2 2.5 2.5 1.9 2.3 2.3

Unemployment rate (%) 4.1 4.2 4.3 4.3 4.3 4.2 4.2 4.2 4.3 4.2 4.2

Discount rate (%) 1.88 1.88 1.88 1.88 1.88 1.88 2.00 2.13 1.88 2.13 2.13

Overnight call rate (%) 0.42 0.51 0.38 0.41 0.39 0.41 0.45 0.50 0.41 0.50 0.50

10-year T-bond (%) 1.28 1.23 1.19 1.17 1.15 1.20 1.28 1.30 1.17 1.30 1.35

Exchange rate (NTD/USD) 29.5 29.9 29.3 29.1 28.9 28.7 28.7 28.7 29.1 28.7 28.2





43


Nuchjarin Panarode, CNS Thailand +662 638 5791 [email protected]

Thailand: A positive start to 2013

Growth momentum remained strong in January and credit growth is on the rise, which

supports our forecast for the BOT to stay on hold despite political pressure to cut.

Activity: Although most economic indicators slowed on a year-on-year basis in January given

less favourable base effects, they remained strong seasonally adjusted month-on-month.

Business and consumer sentiment indices continued to suggest strong economic momentum,

while industrial production also picked up in January. In addition, exports rose in January, but

the trade deficit increased substantially on strong import growth. We do not see this is as a

cause for concern, however, since imports were partly driven by the volatile gold imports. We

therefore see upside risks to our 2013 GDP growth forecast of 4.5%.

Monetary policy and inflation: CPI inflation eased further to 3.2% y-o-y in February from 3.4%

in January, while core inflation was stable at 1.6% y-o-y, remaining within the Bank of Thailand‟s

(BOT) 0.5-3.0% target range. Inflation expectations were also stable at 3.6% in January.

However, credit growth (15.0% y-o-y in January from 14.2% in December) and outstanding

loans to households (17.4% y-o-y in Q3 2012 or 77.5% of GDP) continued to increase and may

be an increasing concern for the BOT. Thus, even though inflation remains low, we continue to

expect the BOT to keep the policy rate on hold at 2.75% at the 3 April meeting and for the rest

of the year.

Fiscal policy: Following the cabinet‟s approval, more details on the government‟s THB2trn

infrastructure investment plan and major transportation projects were released. These projects,

combined with the on-going water management projects for which the government is scheduled

to borrow THB340bn (3% of GDP) by June 2013, will likely increase public debt to 47-48% of

GDP by end-FY13, still well-below the debt ceiling of 60%. On our recent trip to Bangkok, we

discovered that the borrowing will be done on an incremental basis, and not all at once, which

suggests that the government is focused on maintaining financial flexibility and sustainability of

its debt (see Asia Insights: Postcard from Thailand, 1 March 2013).

Risks: The downside risks to our forecasts stem from a deepening of the euro area recession

and domestically, from increased political uncertainty over the constitutional amendment and

reconciliation bill. Slow progress on infrastructure plans could weaken investment sentiment.



Real GDP (sa, % q-o-q, annualized) 48.0 13.0 6.1 15.0 -14.5 13.9 7.6 15.4

Real GDP 0.4 4.4 3.1 18.9 4.2 4.4 4.8 4.8 6.4 4.5 5.0


Public consumption -0.2 7.4 10.0 12.1 4.5 -0.1 -3.1 0.2 7.4 0.1 -0.7


Exports (goods & services) -3.2 1.1 -2.8 19.0 6.1 3.2 5.7 1.6 2.9 4.1 5.0

Imports (goods & services) 4.3 8.6 -1.8 14.7 4.2 2.1 6.6 0.3 6.1 3.4 5.0

Contribution to GDP growth (% points)


Inventories 2.9 2.8 -3.7 1.4 -2.7 -2.7 1.2 1.6 0.8 -0.6 -0.1

Net trade (goods & services) -4.7 -4.2 -1.1 4.9 2.0 1.1 0.2 0.8 -1.4 1.0 0.7

Exports -1.4 2.0 -3.8 21.1 3.8 3.0 6.4 2.3 3.1 5.0 6.9

Imports 10.4 9.2 -1.7 18.5 3.5 5.6 14.7 2.7 8.2 6.6 7.2

Merchandise trade balance (US$bn) -5.2 -5.0 -1.6 -6.1 -5.2 -6.7 -6.8 -4.2 -18.1 -23.0 -25.4

Current account balance (US$bn) 1.4 -2.3 2.7 0.9 -0.1 -3.4 -1.9 3.6 2.7 -1.8 -1.9

Current account balance (% of GDP) 1.6 -2.6 3.1 1.0 -0.1 -3.3 -1.8 3.3 0.7 -0.4 -0.4

Fiscal balance (% of GDP, fiscal year basis) -2.6 -3.2 -3.7

Consumer prices 3.4 2.5 2.9 3.2 3.3 3.4 3.1 3.0 3.0 3.2 3.1


Overnight repo rate (%) 3.00 3.00 3.00 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.25

Exchange rate (THB/USD) 30.8 31.8 30.8 30.6 29.5 29.3 29.2 29.1 30.6 29.1 28.6






44

Asia in charts

Gross domestic product (quarterly)

-15

-10

-5

0

5

10

15

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

% y-o-y

Asia ex-JapanJapanEUUS

Note: Aggregate Asia ex-Japan is calculated using purchasing power parity (PPP) adjusted share of world GDP. Source: CEIC and Nomura Global Economics.

Consumer price index (monthly)

-4

-2

0

2

4

6

8

10


EU US

Japan Asia ex-Japan

% y-o-y


Current account balance (quarterly)

-200

-150

-100

-50

0

50

100

150

200

250


USD bn Asia, ex-Japan Japan

EU US


Asia export leading index (monthly)

80

85

90

95

100

105

-28

-14

0

14

28

42

Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13

% y-o-y

Asia ex-Japan's total exports, lhsNomura's export leading index, rhs

Jan 2000 = 100

Note: Aggregate Asia ex-Japan is calculated using purchasing power parity (PPP) adjusted share of world GDP. Source: Bloomberg; OECD; Semiconductor Industry Association; CEIC and Nomura Global Economics.

Foreign exchange (against USD, monthly)

60

80

100

120

140

160


Asia ex-JapanJapanEU

Index (Jan2007 = 100)

Note: Aggregate Asia ex-Japan is calculated using purchasing power parity (PPP) adjusted share of world GDP. Last data point is 6 March. Source: Bloomberg and Nomura Global Economics.

Policy rate (monthly)

0

1

2

3

4

5

6

7

8


Asia ex-Japan Japan

EU US

%

Note: Aggregate Asia ex-Japan is calculated using purchasing power parity (PPP) adjusted share of world GDP. Last data point is 6 March. Source: CEIC and Nomura Global Economics.


45


0

3

6

9

12

15


% y-o-yChina India Indonesia


Industrial production (monthly)

-10

-5

0

5

10

15

20

25


% y-o-yChina India Indonesia



-10

-5

0

5

10

15

20


% y-o-y

Thailand Philippines Malaysia



-60

-40

-20

0

20

40

60

80

100


% y-o-yThailand Philippines Malaysia



-15

-10

-5

0

5

10

15

20

25


% y-o-y Korea Taiwan

Hong Kong Singapore



-60

-40

-20

0

20

40

60

80


% y-o-yKorea Taiwan Singapore



46

Purchasing manager’s index (monthly)

35

40

45

50

55

60

65


Index

Korea Singapore

China India

Note: Korea‟s PMI is the business confidence index, of which diffusion index converted from original 100 to 50. Source: Markit; CEIC and Nomura Global Economics.

Leading economic index (monthly)

-10

-5

0

5

10

15


% y-o-y

China

India

Indonesia

Source: OECD and Nomura Global Economics.

Industrial inventory-shipment ratios

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7


Taiwan Korea ThailandRatio



-8

-6

-4

-2

0

2

4

6

8

10


% y-o-y

Thailand Malaysia

Source: OECD; CEIC and Nomura Global Economics.

Domestic motor vehicle sales (monthly)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5


Volume of MV production

Volume of MV domestic sales

Volume of MV total sales

Millions of units

Note: Rest of Asia is the sum of domestic vehicle sales in India, Indonesia, Malaysia, Philippines, South Korea, Taiwan and Thailand. Source: CEIC and Nomura Global Economics.


-30

-20

-10

0

10

20

30

40

-15

-10

-5

0

5

10

15

20


% y-o-y

Korea, lhs

Singapore, lhs

Taiwan, rhs

% 6m rate of change, annualised

Note: For Taiwan, we use the annualized 6-month rate of change, and use the y-o-y growth rate for other economies. Source: CEIC and Nomura Global Economics.


47


20

40

60

80

100

120

140

-25

-20

-15

-10

-5

0

5


USD bnUSD bn

Indonesia, lhs

India, lhs

China, rhs


Exports (monthly)

-40

-20

0

20

40

60

80


% y-o-y

China India Indonesia



-4

-2

0

2

4

6

8

10

12

14


USD bnThailand Philippines Malaysia


Exports (monthly)

-60

-40

-20

0

20

40

60


% y-o-y

Thailand

Philippines

Malaysia



-6-4-202468

1012141618


USD bn Korea Taiwan

Hong Kong Singapore


Exports (monthly)

-60

-40

-20

0

20

40

60

80

Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

% y-o-y Korea Taiwan

Hong Kong Singapore



48

Foreign exchange (monthly)

60

70

80

90

100

110

120

130

140

150



Index (Jan 2007 = 100)

Note: Foreign exchange is the country‟s currency against USD and converted into the index (2007 January = 100). Higher index means the country‟s currency appreciate against USD. Last data point is 6 March. Source: Bloomberg and Nomura Global Economics.


2

3

4

5

6

7

8

9

10


China

India

Indonesia

%

Note: For China, the policy rate refers to 1 year bank lending rate; for India, this refers to repo rate. Last data point is 6 March. Source: Bloomberg and Nomura Global Economics.


60

70

80

90

100

110

120

130

140

150


Malaysia Philippines Thailand

Index (Jan 2007 = 100)



0

2

4

6

8


Philippines

Malaysia

Thailand

%

Note: For Philippines the policy rate refers to reverse repo rate; for Thailand this refers to repo rate; for Malaysia this refers to overnight policy rate. Last data point is 6 March. Source: Bloomberg and Nomura Global Economics.


60

70

80

90

100

110

120

130

140

150


Korea Singapore

Taiwan Hong Kong

Index (Jan 2007 = 100)



0

1

2

3

4

5

6


Korea

Singapore

Taiwan

Hong Kong

%

Note: For Hong Kong and Singapore, the policy rate refers to 3M Hibor and 3M Sibor, respectively; for Korea this refers to BOK official base rate. Last data point is 6 March. Source: Bloomberg and Nomura Global Economics.


49


-2

0

2

4

6

8

10

12

14



% y-o-y

Note: Consumer Price Index for India refers to Wholesale Price Index. Source: CEIC and Nomura Global Economics.

Unemployment (monthly)

3

4

5

6

7

8

9

10


Indonesia

China

%



-6

-4

-2

0

2

4

6

8

10

12

14


Philippines Thailand Malaysia% y-o-y



0

2

4

6

8

10

12


Thailand Philippines Malaysia

%



-4

-2

0

2

4

6

8

10


Korea Hong Kong

Singapore Taiwan

% y-o-y



0

1

2

3

4

5

6

7

8


Korea Taiwan

Hong Kong Singapore

%

Note: Hong Kong's data is a 3 month moving average. Source: CEIC and Nomura Global Economics.


50

Stock price index (monthly)

50

70

90

110

130

150

170

190

210

230

250

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

China India IndonesiaIndex (Jan 2007 = 100)

Note: Stock Price index for each country is rebased with 100 as the index value in January 2007. Last data point is 6 March. Source: Shanghai Composite (China); SENSEX (India), Jakarta Composite (Indonesia) and Nomura Global Economics.

House price index (monthly)

60

80

100

120

140

160

180

200


China Indonesia

Index (Jan 2009 = 100)

Note: House Price index for each country is rebased with 100 as the index value in January 2007. For China, Average Residential Bldg Selling Price is used to calculate the House Price Index. Source: CEIC and Nomura Global Economics.


20

40

60

80

100

120

140

160

180

200

220

240


Philippines

Thailand

Malaysia

Index (Jan 2007 = 100)

Note: Stock Price index for each country is rebased with 100 as the index value in January 2007. Last data point is 6 March. Source: FTSE Bursa Malaysia Composite (Malaysia); PSEi (Philippines); SET (Thailand; CEIC and Nomura Global Economics.


60

80

100

120

140

160

180

200


Malaysia Thailand

Index (Jan 2009 = 100)

Note: House Price index for each country is rebased with 100 as the index value in January 2007. Source: CEIC and Nomura Global Economics.


20

40

60

80

100

120

140

160

180

200

220

240


Korea Hong Kong

Taiwan Singapore

Index (Jan 2007 = 100)

Note: Stock Price index for each country is rebased with 100 as the index value in January 2007. Last data point is 6 March. Source: KOSPI (Korea); Hang Seng (Hong Kong); FTSE Strait Times (Singapore); CEIC and Nomura Global Economics.


60

80

100

120

140

160

180

200

220

240


Korea Hong Kong

Taiwan Singapore

Index (Jan 2009 = 100)

Note: House Price index for each country is rebased with 100 as the index value in January 2007. Source: CEIC and Nomura Global Economics.


51

Forecast table

2012 2013 2014 2012 2013 2014

China 7.8 7.7 7.5 2.6 3.5 4.0

Hong Kong 1.2 ↑ 1.4 2.5 3.5 4.1 4.3 4.3

India* 5.3 ↓ 5.1 6.0 ↓ 5.2 6.6 7.5 7.2 ↓ 7.1 6.9 ↓ 6.8

Indonesia 6.2 6.1 6.2 4.3 5.2 5.1

Malaysia 5.3 ↑ 5.6 4.3 4.6 1.7 2.4 2.5

Philippines 6.6 6.4 5.8 3.1 4.6 4.5

Singapore 1.2 ↑ 1.3 2.4 4.2 4.6 3.9 3.6

South Korea 2.0 2.5 3.5 2.2 2.7 3.0

Taiwan 1.2 ↑ 1.3 3.0 3.5 1.9 2.3 2.3

Thailand 6.0 ↑ 6.4 4.5 5.0 3.0 3.2 3.1

Asia ex-Japan 6.2 6.4 ↓ 6.2 6.6 3.7 4.3 ↓ 4.2 4.5

Note: * CPI refers to wholesale prices. Source: CEIC, Bloomberg, Nomura Global Economics.

2012 2013 2014 2012 2013 2014

China 2.6 1.0 -0.4 -1.5 ↓ -1.6 -1.5 -1.6

Hong Kong 2.6 ↓ 1.5 -0.1 -0.7 -0.2 ↑ 3.3 -0.5 ↑ -0.2 -0.5

India -4.9 -4.7 ↓ -5.3 -3.9 ↓ -4.2 -5.3 ↑ -5.2 -5.2 -5.0

Indonesia -2.4 ↓ -2.7 -1.9 -1.7 -1.8 -2.0 -2.2

Malaysia 5.9 ↑ 6.4 4.7 4.2 -4.9 ↑ -4.5 -4.5 -4.2

Philippines 2.9 ↑ 3.3 1.9 1.7 ↑ 1.8 -2.2 ↓ -2.3 -2.6 -2.2

Singapore 15.7 ↑ 18.9 16.1 17.0 0.2 ↑ 1.1 -0.2 ↑ 1.0 0.4

South Korea 3.8 2.8 2.2 1.3 1.0 1.0

Taiwan 9.7 ↑ 10.5 8.4 7.8 ↑ 7.9 -1.8 -1.9 -2.0

Thailand 0.7 -0.6 ↑ -0.4 -0.6 ↑ -0.4 -2.5 ↓ -2.6 -3.2 -3.7

Asia ex-Japan 1.3 ↑ 1.4 0.3 ↓ 0.2 -0.4 -2.2 ↑ -2.1 -2.2 -2.3

2012 2013 2014 2012 2013 2014

China 6.00 6.50 6.50 6.29 6.15 6.14

Hong Kong 0.40 0.40 0.40 7.75 7.75 7.75

India 8.00 7.50 7.00 55.0 59.0 56.0

Indonesia 5.75 6.25 6.75 9790 9900 9700

Malaysia 3.00 3.50 4.00 3.06 2.95 2.87

Philippines 3.50 4.00 4.50 41.0 39.2 38.2

Singapore 0.38 0.48 0.50 1.22 1.19 1.17

South Korea 2.75 2.75 3.25 1071 1030 1020

Taiwan 1.88 2.13 2.13 29.1 28.7 28.2

Thailand 2.75 2.75 3.25 30.6 29.1 28.6

Note: All figures relate to the modal forecast, ie, the "most likely" outcome. Source: CEIC, Bloomberg, Nomura Global Economics.

The ↑↓ arrows signify changes from last week.

Consumer Prices

Official Policy Rate Currency per US Dollar

Note: Fiscal balances are for fiscal years which differ from calendar years for Hong Kong (Apr-Mar), India (Apr-Mar), Singapore (Apr-Mar) and

Thailand (Oct-Sep). Fiscal data are for the central government and do not include off-budget. Source: CEIC, Bloomberg, Nomura Global

Economics.

Current Account (% of GDP) Fiscal Balance (% of GDP)

Real GDP

Note: Forecast changes are since te last Asia Economic Monthly (7 February 2012).


52

Recent articles

Date Article Title

6-Mar-13 Southeast Asia: Different strokes

7-Feb-13 Happy Year of the Snake!

10-Jan-13 Here comes the sun

28-Nov-12 2013 outlook: Asia's overheating risks

14-Nov-12 South Korea: An Economic Democracy

25-Oct-12 India reforms (Part I): A long way to go

11-Oct-12 Introducing NESII - The Nomura Economic Surprise Index for India

11-Oct-12 Glass half full

24-Sep-12 Thailand: New growth engines

14-Sep-12 China primed to surprise on the upside

6-Sep-12 Policy challenges abound

3-Sep-12 India's chronic balance of payments

9-Aug-12 The consumption engine continues to chug along

8-Aug-12 Asia's inflation wildcard

2-Aug-12 Indonesia: Policy swings

31-Jul-12 India: A poor monsoon and its impact (Q&A)

9-Jul-12 South Korea: Prolonged low growth, inflation and rates through 2013

5-Jul-12 Distinguishing China from the rest of Asia

31-May-12 Pan-Asia: Inventory cycle threatens a slow recovery

29-May-12 China's peaking FX reserves

10-May-12 Current account worsens

2-May-12 India: Make or break

23-Apr-12 The China compass

15-Apr-12 Korea: Uncomfortable trade-off

11-Apr-12 India: Four cyclical tailwinds to watch

5-Apr-12 Green-shoot signs of recovery

8-Mar-12 Cautiously relaxing

2-Mar-12 Good, bad, and ugly oil price scenarios

23-Feb-12 Disconnect

17-Feb-12 Asia: Monetary easing likely to continue

10-Feb-12 South Korea: Risk of a fiscal drag on growth

27-Jan-12 India: This time is different

20-Jan-12 India: Decoding stubbornly high inflation

19-Jan-12 Prepare for a slew of rate cuts across Asia this year

16-Jan-12 Decoding India's stubbornly high inflation

13-Jan-12 ASEAN: Policy on the move

6-Jan-12 Asia: Taking stock

16-Dec-11 Brace for bumpy ride in China

25-Nov-11 Taking Asia's pulse

24-Nov-11 Flagging growth momentum

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=600270&appname=Email&cid=TWFOV2I0UlFsMFE90









http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=539652&cid=eFJMbno3U2EvcGM90



http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=523535&cid=MaNWb4RQl0Q=

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=522883&cid=EhAVbWB02b4=










http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=485085&cid=MaNWb4RQl0Q=






53

Disclosure Appendix A-1

ANALYST CERTIFICATIONS

We, Rob Subbaraman, Zhiwei Zhang, Young Sun Kwon, Sonal Varma and Euben Paracuelles, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report. ADDITIONAL DISCLOSURES REQUIRED IN THE U.S. Principal Trading: Nomura Securities International, Inc and its affiliates will usually trade as principal in the fixed income securities (or in related derivatives) that are the subject of this research report. Analyst Interactions with other Nomura Securities International, Inc. Personnel: The fixed income research analysts of Nomura Securities International, Inc and its affiliates regularly interact with sales and trading desk personnel in connection with obtaining liquidity and pricing information for their respective coverage universe.

Valuation Methodology - Fixed Income Nomura‟s Fixed Income Strategists express views on the price of securities and financial markets by providing trade recommendations. These can be relative value recommendations, directional trade recommendations, asset allocation recommendations, or a mixture of all three. The analysis which is embedded in a trade recommendation would include, but not be limited to: • Fundamental analysis regarding whether a security‟s‟ price deviates from its underlying macro- or micro-economic fundamentals. • Quantitative analysis of price variations. • Technical factors such as regulatory changes, changes to risk appetite in the market, unexpected rating actions, primary market activity and supply/ demand considerations. The timeframe for a trade recommendation is variable. Tactical ideas have a short timeframe, typically less than three months. Strategic trade ideas have a longer timeframe of typically more than three months. Disclaimers This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. („NIHK‟), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. („NFIK‟), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. („NSL‟), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. („NAL‟), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia („PTNI‟), Indonesia; Nomura Securities Malaysia Sdn. Bhd. („NSM‟), Malaysia; NIHK, Taipei Branch („NITB‟), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited („NFASL‟), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034); NIplc, Madrid Branch („NIplc, Madrid‟) and NIplc, Italian Branch („NIplc, Italy‟). „CNS Thailand‟ next to an analyst‟s name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited („CNS‟) to provide research assistance services to NSL under a Research Assistance Agreement. CNS is not a Nomura entity. THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP. Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice.

http://www.nomuranow.com/research

http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx

[email protected]

http://dis.kofia.or.kr/


54

Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (as defined within Financial Services Authority („FSA‟) rules in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor‟s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Any MSCI sourced information in this document is the exclusive property of MSCI Inc. („MSCI‟). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates. Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a number of different types of research product including, among others, fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and services from the research department depending on their individual requirements. Clients outside of the US may access the Nomura Research Trading Ideas platform (Retina) at http://go.nomuranow.com/equities/tradingideas/retina/ Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. The securities described herein may not have been registered under the US Securities Act of 1933 (the „1933 Act‟), and, in such case, may not be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura entity in your home jurisdiction. This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc, which is authorized and regulated by the FSA and is a member of the London Stock Exchange. It does not constitute a personal recommendation, as defined by the FSA, or take into account the particular investment objectives, financial situations, or needs of individual investors. It is intended only for investors who are 'eligible counterparties' or 'professional clients' as defined by the FSA, and may not, therefore, be redistributed to retail clients as defined by the FSA. This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. This document has not been approved for distribution in the Kingdom of Saudi Arabia („Saudi Arabia‟) or to clients other than 'professional clients' in the United Arab Emirates („UAE‟) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or to any person located in Saudi Arabia or to clients other than 'professional clients' in the UAE. By accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are a 'professional client' in the UAE and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia. NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright © 2013 Nomura International (HK) Limited. All rights reserved.

http://go.nomuranow.com/equities/tradingideas/retina/

http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx

nomura | asia economic monthly 7 march 2013 ... -...

Documents