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Authors:

Amy Auster Head of International Economics +61 3 9273 5417 [email protected]

Katie Dean Senior Economist, International +61 3 9273 1381 [email protected]

Jasmine Robinson Senior Economist, International +61 3 9273 6289 [email protected]

Amber Rabinov Economist, International +61 3 9273 4853 [email protected]

Mark Rodrigues Senior Economist, Australia +61 3 9273 6286 [email protected]

Riki Polygenis Economist, Australia +61 3 9273 4060 [email protected]

October 2007

ANZ International Economics Monthly

Shaking off the USA

Our Vision:

For Economics@ANZ to be the most respected, sought-after and commercially valued source of economics research and information on Australia, New Zealand, the Pacific and Asia.

Inside:

Main article...............................1

Financial Markets Update............5

FX and Policy Rate Forecasts.......7

Macro Economic Forecasts ..........8

LT FC Govt. Bond Ratings ...........9

Country Updates .....................10

Economics@ANZ

This issue highlights key changes to our economic and financial market forecasts for the US, Asia and Australia in light of a rapidly shifting global view on the outlook for the United States. In summary:

• We now expect the US Federal Reserve to cut the Fed funds rate one more time, at its January meeting, for a trough of 4.25% that should last through December 2008. Although very negative sentiment around the housing market will dominate the headlines, the US is not expected to go into recession.

• The US slowdown represents a downdraft on global growth, but the bottom line impact on our Asia and global growth forecasts is limited. We forecast global GDP growth will slow from 5.0% per annum in 2007 to 4.7% in 2008, still well above trend. Our forecast is predicated on only slightly lower growth in the EU and Japan, which will allow Asia to make a sizeable contribution to global growth and to demand for natural resources.

• With Chinese demand for hard commodities as strong as ever, our forecast for energy and metals prices show continued rises in the coming months. Importantly for Australia, iron ore prices are expected to rise by 35% next year, and coking coal prices by 27.6%.

• At the same time, high energy prices are showing greater pass through to consumer price inflation, via food. The uptick in inflation leaves little room to cut interest rates in Asia or Australia, despite an easing US Federal Reserve. The PBOC and the RBA will keep raising rates; we have shifted our forecast for the Australian cash rate to peak at 7.25% next year and for the one-year lending rate in China to peak at 7.83% over the same horizon.

• The US dollar is expected to remain weak in this environment. Asian currencies will strengthen across the board, but central bank intervention will prevent rapid rises. In contrast, there is nothing holding back the A$, which we expect to strengthen against all Asian currencies over a six-month horizon.

Exchange rate forecasts

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

07 086.6

6.8

7

7.2

7.4

7.6

7.8

8

Exchange rates

Sources: Bloomberg and Economics@ANZ

105

107

109

111

113

115

117

119

121

123

125

07 088700

8800

8900

9000

9100

9200

9300

9400

9500

NZD/USD (lhs)

AUD/USD (lhs)

USD/CNY (rhs)

USD/SGD (lhs)

EUR/USD (lhs)

USD/IDR (rhs)

USD/JPY (lhs)

.

Economics@ANZ ANZ International Economics Monthly – October 2007

US uncertainty is ongoing The fallout from the US subprime catastrophe continues to weigh on the US economy and global financial markets. Although US money markets have started functioning again after the US Federal Reserve cut its target interest rate by 50 bps in September, reported losses by some of the biggest Wall Street banks in mid October brought wobbles in the equity markets. Rising risk premiums for holding the credit of these major lenders serves as a reminder that subprime-related issues are not yet fully resolved, while data out of the US points toward continued downside risks to US growth.

Financial markets show ongoing issues Equity markets


0

20

40

60

80

100

120

140

160

180

Jan-07 Apr-07 Jul-07 Oct-07

Bear Stearns

Merrill Lynch

Citigroup

Wachovia

Basis points

80

90

100

110

120

130

140

150

Jan-06 Jul-06 Jan-07 Jul-07

Index Jan 2006 = 100

Australia

US

Japan

Credit default swaps

By mid October, the financial markets were pricing in another cut to the Fed funds rate this month, an expectation fulfilled by the Fed on 31 October. The future path of interest rates in the US remains data dependent and somewhat prone to unpredictable financial market developments. Markets are now pricing in 1 more cut in the Fed funds rate to 4.25% by March 2008, and thereafter show split probabilities on further declines, as seen in the charts below. We have shifted our forecast to a trough in the Fed funds rates of 4.25%, and believe that risks to growth are on the downside.

Market expectations of Fed action


March 2008 meeting June 2008 meeting

0%

10%

20%

30%

40%

50%

60%

70%

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90%

100%

3.75 4.0 4.25

4.5 4.75

% probability

15 Oct 24 Oct 31 Oct0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

3.5 3.75 4.0

4.25 4.5 4.75

% probability

15 Oct 24 Oct 31 Oct

US slowdown a drag, not a brake Once upon a time, a bleak US economic outlook would have meant the death knell for global growth

expectations. We are no longer in that world, and there is a simple explanation for it: the US economy is not as important to the global economy as it once was. Europe is stronger, Japan is out of recession and developing economies contribute more to global demand than ever before. Recent evidence is telling; US private consumption growth came in below trend at 3% on an annualised basis in the third quarter, and industrial production in the US rose less than 1% from the previous quarter. Across the G7, however, IP was up nearly 2% from the second quarter, and across East Asia rose at an annual pace of 14%. Exports for East Asia ex-Japan were up more than 15% p.a. over that period. Importantly, over the past six months, China has consistently exported more to Europe than to the US. So long as EU growth hovers at around 2% or above and Japan records positive growth, there is sufficient demand out of the G3 economies to provide developing countries all the external demand they need.

Our global growth forecast therefore anticipates a drag from the US economy on global growth, but not a brake. We expect global GDP to expand at an annual rate of 4.7% next year, down from the 5.0% expected this year, but still well above trend. The biggest risk to our forecast is a US recession, which at this stage we still view as unlikely.

Another key risk, and one to which we would attach a greater probability of occurring, is that market ructions will cause losses at European banks and pose the Euro economy with the same challenges as the US. The Euro area does seem to be slowing, as the data in the below charts suggests. However, inflation is running hotter in the Euro area than in the US, leaving a hawkish ECB with less room and less impetus to lower interest rates than the US Federal Reserve to preserve growth. It is Europe that we will be watching in the coming months as a key barometer of our global growth call.

European growth our key risk

0

5

10

15

20

Jan-05 Nov-05 Sep-06 Jul-07

% YOY

0

2

4

6

8


% YOY

Eurozone industrial production Eurozone retail sales

Eurozone exports Eurozone core inflation

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-05 Oct-05 Jul-06 Apr-07

% YOY

0

2

4

6


% YOY


Ex-US, inflation still the key risk Not only do we expect that global growth will remain above trend in 2008, our forecast for above-trend global growth extends to the end of our forecast period in 2010. The reason is not the G7, which has


been growing at below-trend pace of sub-3% since the start of this decade. Rather, the reason is the magnificent economic performance of the developing world, where growth is solidly above historic trend levels across Asia, Latin America, the Middle East and emerging Europe.

Developing world exceeds trend growth

2007f 2008f Trend

East Asia 9.7 9.0 7.8

South Asia 8.3 8.1 5.1

Latin America 5.0 4.5 3.6

Eastern Europe 6.5 5.6 1.1

Source: Economics@ANZ

We have written extensively about why the sustainable rate of economic growth in developing countries is rising, and will not repeat that here. What is relevant to our immediate outlook is that the continuation of this growth rate means that inflation risk remains well and truly present. Much of this risk comes from the high demand for natural resources – particularly energy – from rising infrastructure investment and improving living standards in developing countries.

In the initial years of the oil price rally from 2004, economists wondered at the apparent lack of pass through from higher energy prices to prices for other goods. As it turns out, there is no such thing as a free lunch, and the long anticipated “second round” impact of higher oil prices appears to have arrived in the form of higher food prices. The relationship between the price of oil and the price of alternative, renewable energy sources such as grains and natural oils is becoming more clear, and agricultural prices are rallying hard.1 Wheat prices are up nearly 60% from this time last year, while barley is up 90% and canola oil 44%. The charts below highlight our forecasts; we have raised our forecast for the iron ore contract price and now expect an increase of more than 30% next year.

Energy prices pushing food prices

01020304050607080


US$/t

Iron ore Copper

WTI Grains

Forecast

4000

5000

6000

7000

8000

9000


US$/t

01020304050607080


US$/bbl Forecast

50

100

150

200

250

300


Index Jan 06=100

Barley

Wheat

Forecast

Forecast


1 “Food Stress” ANZ Economic Outlook, 15 October 2007.

The fact that central banks could see little pass through from higher oil prices to consumer price inflation allowed interest rates to remain relatively low over the past several years. Higher energy prices have affected headline inflation, but in many countries are excluded from the “core” measure of inflation. Food is also often excluded from core inflation, as in the US. However, persistent upward pressure on food prices as a result of higher energy prices is not an issue that can be ignored by central banks forever. Food is a major part of the household consumption basket, and if rising prices are a result of real capacity constraints as opposed to one-off events such as poor weather, then central banks must regard higher food prices as a threat to overall price stability.

Australia is a case in point. The RBA gauges inflation through a “trimmed mean” measure that excludes the most volatile items in that reading. Although there are issues with all methodologies to measure inflation, the RBA’s measure gives us a good idea as to when food prices start to permeate underlying inflation. In Australia, there is no question that food prices are contributing to the uptick in consumer price inflation that raised the annual inflation rate to 3.0% in the September quarter, which is right at the top of the RBA’s target band. Of course, global wheat prices are not all to blame; the drought is contributing to higher food prices domestically, and high commodities prices are contributing to the generally buoyant economic conditions that fuel inflation pressures.

Ex-US, interest rates are not falling The point is that with inflation risks still paramount, the likelihood is that the US Federal Reserve will be the only central bank of note cutting interest rates in the next six months. Across Asia, we expect central banks to either maintain a tightening bias – in China, Singapore, Taiwan – or to remain on hold. Our forecast for the peak interest rate in China is 7.83% for the one-year lending rate, which we expect to be reached after Chinese New Year in March.

Ex-US, rates not falling

3

4

5

6

7

8

9

Aug-02 Feb-04 Aug-05 Feb-07 Aug-08

% pa

New Zealand

Australia

0

1

2

3

4

5

6

Aug-02 Feb-04 Aug-05 Feb-07 Aug-08

% pa

USFed funds

JapanDiscount rate

EuroEUR refi rate

Policy rates – G7 Policy rates – AU & NZ

Sources:Bloomberg, Economics@ANZ

To the south, our Australian economic team now expects that inflation pressures will be sufficient to


force the RBA to raise its benchmark interest rate three more times in the coming months, to peak at 7.25% next year. Our New Zealand team doesn’t anticipate a cut by the RBNZ until late 2008, despite expectations of a steep slowdown in growth.

The loss of US dollar hegemony Just as the US is less important to the global economy, so US dollar assets have lost their hegemony in the financial markets. This is one of the most important structural shifts in the financial markets and the global economy in our generation, as it implies the potential end of the US dollar as the global reserve currency.

Over the past few years, McKinsey’s Global Institute has printed a “Mapping the Global Capital Markets” data series.2 What stands out is that the stock of US financial assets has historically been much larger relative to the size of the US economy than has been the case for most other countries (excepting special cases such as Hong Kong). The data also show that the financial stock of large countries is now growing quickly, bringing a level of competition to the asset markets that has never existed before.

The chart below illustrates the story. Growth in the EU financial stock has far surpassed the rate of US asset growth. Over the 10 years to 2005, the total financial stock of the EU rose by 122% to 300% of regional GDP, while the US financial stock grew by 102%. As of the end of 2005, the Eurozone boasted US$3.3 bn of financial stock as against US$3.0 bn in the United States (measured in constant 2005 exchange rates). In particular, the equity markets in the EU are now far larger than those of the US.

EU financial stock larger than US

0

50

100

150

200

250

300

350

400

450

US UK EU

19952005

% of national GDP

+102%

+77%

+122%

EU financial stock growth outpacing that of US

Source: McKinsey Global Institute

0

500

1000

1500

2000

2500

3000

3500

4000

UK

Japan

USA

EM

Euro

zone

Other financial assetsEquities securities

US$ bn, at constant 2005 FX rates

Size of financial stock, 2005

In Asia, China’s skyrocketing market has received a lot of press, but the capitalisation of most major Asian stock markets has nearly doubled over the past year. This growth – driven by IPOs – is a way for investors to express a bullish view of regional growth prospects. And investing they are.

2 McKinsey Global Institute, “Mapping the Capital Markets,” January 2007.

Asian stock market capitalisation

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

Hong Kong S Korea China Singapore Indonesia

Sep-06Sep-07

US$

Equity market capitalisation, US$ terms

Source: Bloomberg, Economics@ANZ

+98%

+51%

+409%

+72%

+66%

While some may argue that this growth is purely due to an asset price bubble, the P/E ratio of most Asian equity markets are right in line with those of the US. The P/E ratio for the Dow Jones is about 16.1; for the Hang Seng it is 16.2 and for the Kospi it is only 10.8. Rather than an equity price bubble, it seems quite likely that the expansion of the equity markets in Asia simply represents a catch-up with the process of disintermediation of the financial system in which capital markets become a main source of funding for the corporate sector.

This growth in alternative investment markets may have a lasting impact on the US dollar. Once upon a time, investors were forced to hold US dollar assets because the US economy featured the most liquid, most prudentially regulated markets in the world. Over a long-term horizon, the risk-adjusted return for a US dollar asset was superior.

The proof is in historic market behaviour during the last US downturn. That was during the tech wreck of 2001-2002; despite the wasteland that was the NASDAQ and the fact that the US economy experienced negative growth, the US dollar index rose by 25% on a nominal basis from January 1999 through the wreck’s nadir in January 2002.

In 2007, news from the US is getting worse, but there is no flight to US assets. Instead, the reverse is occurring.

US$ gets pummelled


75

80

85

90

95

Jan-06 Nov-06 Sep-07

Index

USD broad currency index hits new lows AUD and NZD rallying

0.5

0.6

0.7

0.8

0.9

1.0


ANZAC/USDAUD

NZD

1.11.21.21.31.31.41.41.5


EUR/USD

EUR climbing higher

105

110

115

120

125Jan-06 Nov-06 Sep-07

Per USD

As is JPY


The US dollar index – which provides a trade-weighted average of the US dollar exchange against the currencies of major trade partners – has not been this low since the advent of the Euro. As of the end of October, it had fallen by 35% since its January 2002 peak. It is not surprising that the majority of this fall has been thanks to US dollar weakness against the Euro, which for the first time in history presents a viable alternative to US dollar asset markets.

We see little on the horizon to cause a shift in sentiment around the US dollar. US interest rates are falling, while rates in the rest of the world are stable or rising. US dollar assets face competition in a growing marketplace, and home bias seems to be on the decline. We don’t expect a US$ recovery any time soon.

Asia currencies stronger vs US$, not vs A$ Prolonged US dollar weakness is expected to translate into stronger Asian currencies against the US dollar. However, a continued bias by Asian central banks to manage their currencies against the US dollar is likely to mean continued intervention into the markets to prevent the currencies from appreciating too much, or too rapidly.

Broadly speaking, we would not expect any Asian currency to appreciate by more than 5% over the next nine months. Our forecast is for the Chinese RMB to strengthen by a nominal 3% against the US dollar to reach USD/CNY7.22 by June 2008; we expect slightly faster appreciation of 4% for the Singapore dollar following the October statement from the Monetary Authority of Singapore stating the need to further contain inflation pressures. We also expect appreciation of 2-3% across Japan, Korea and Indonesia.

In contrast, we are now forecasting a further 6% nominal appreciation of the Australian dollar against the US dollar, to reach AUD/USD0.96 by June 2008. Risks are firmly to the upside considering our view of upward movement in both Australian interest rates and commodity prices, two of the key drivers of our Australian dollar model.

A$ to outbid Asian currencies

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05 06 07 080

1,000

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8,000

9,000CNYSGDMYRIDR (RHS)

A$ A$

US$ vs strongest Asians A$ vs strongest Asians

A similar story holds true for the Asian currencies against the Euro. Although we expect slightly less Euro appreciation over the period to June 2008 (1.8% nominal), the appreciation of the Euro against the US dollar implies that Asian currencies won’t strengthen much against the Euro at all in the coming period if recent behaviours remain unchanged.

A word about Hong Kong In October, market rumours surfaced of pending changes to Hong Kong’s monetary policy system, which consists of a currency board that pegs the Hong Kong dollar to the US dollar in a range between USD/HKD7.75–7.85. Late in the month, the Hong Kong Monetary Authority intervened in the market to defend the floor of the peg.

The currency board arrangement that ties the Hong Kong economy with that of the US is increasingly inappropriate. HK’s economy is experiencing real GDP growth in excess of 8%, and inflation has hovered just around 2% as food prices have begun to accelerate. Yet, the HKMA is being forced to cut its benchmark interest rate in lock step with the US Federal Reserve, whereas current trends in the territory would suggest that higher interest rates would be warranted.

The chart below highlights the growing disparity between official and market interest rates in HK. On the left hand side is the difference between the HKMA target rate and the “prime” interest rate charged by commercial banks. The other chart shows the difference between US and Hong Kong swap rates, where HK rates are nearly trading through US rates for the first time since 2003.

Market interest rates tell HK story HKMA rate vs Prime rate


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-1

0

1

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4

5

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7

97 99 01 03 05 07

% pa

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Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Basis points

US vs HK 3-year swap rates

Speculation that the HKMA will need to change the peg will prove correct one day. When that day will come is anyone’s guess, but we believe it will be later and not sooner. 3

Amy Auster Head of International Economics [email protected] +61 3 9273 5417

3 See,”Hong Kong Dollar – the Five Year Outlook” 2 Oct 2007.


Financial Markets Update

4.0

4.5

5.0

5.5

6.0

6.5

1 day

15day

30day

60day

4 mth

6 mth

%

1-August-07

30-August-07

26-October-07

27-September-07

VIX US$ commercial paper yield curve

5

10

15

20

25

30

35

Jan-07 Apr-07 Jul-07 Oct-07

Index

Source: Bloomberg and Economics@ANZ

Money markets • Risk aversion remained elevated with the VIX proxy of

US equity market volatility sitting close to the 20 level. The market price of risk, as represented by the spread between interbank and OIS interest rates, has climbed higher in the US, UK and Australia, but has fallen slightly in Europe. In this environment it's no surprise that equity markets have been flat to falling and that investors are continuing to abandon the USD in favour of EUR, JPY and AUD.

• There has been a notable drop in the short-term funding costs of asset-based commercial paper last week which have fallen up to 28 bps at some parts of the curve. Nevertheless, volumes of asset-backed commercial paper (ABCP) continue to fall, albeit at a slower pace, dropping US$5 bn last week. US commercial paper volumes meanwhile picked up again last week to rise by US$6 bn, the biggest rise in 11 weeks.

Policy rates

0

1

2

3

4

5

6

7

8

9

10

Jun-06 Sep-06 Jan-07 May-07 Sep-07

Korea

Taiwan

% pa.

US

Australia

New Zealand

Japan

China

0

2

4

6

8

10

12

14

Jun-06 Sep-06 Jan-07 May-07 Sep-07

Thailand

Malaysia

Philippines

% pa.

Singapore

Indonesia

Source: Bloomberg

Policy rates

• A widely-expected 25 bps reduction in the US Fed Funds rate announced on 31 October is likely to be followed by another cut early next year reflecting downside risks to the US economy but inflation pressures are expected to limit the US Fed’s ability to cut rates further.

• Asian central banks, on the other hand, are likely to tighten or hold rates steady in coming months amidst rising inflation pressures coming from higher food, fuel and other commodity prices.

• On exception is the Philippines where another interest rate cut by the end of the year is a possibility given the recent US Fed Funds rate cut and below-target inflation.

• Stronger-than-expected inflation in the September quarter in Australia and healthy domestic demand is likely to prompt the RBA to raise its cash rate by 25 bps at its November meeting.

Foreign exchange reserves

0

200

400

600

800

1,000

1,200

1,400

1,600

01 02 03 04 05 06 07

China

US$ bn

Korea

Taiwan

Hong Kong

Japan

0

50

100

150

200

250

01 02 03 04 05 06 07

Singapore

US$ bn

Malaysia

Thailand

India

Indonesia

Philippines

Foreign Exchange reserves

• China’s foreign exchange reserves reached US$1.43 tn at the end of September, adding pressure for a faster appreciation of the yuan.

• Stronger-than-expected trade performances have also supported a steady climb in reserves in Southeast Asian economies.

• The challenge of liquidity management in India persists as a surge in capital inflows exerts inflationary concerns. India’s FX reserves have risen by close to US$70 bn since the start of the year.

• The rapid accumulation of reserves has underpinned the rise of Sovereign Wealth Funds not only in Asia but also in several resource-based economies such as the Middle East and Russia. The funds, which currently collectively amount to US$2-3 tn, could reach US$10 tn within the decade.


Exchange rates, US$ per local currency unit, indexed

80

85

90

95

100

105

110

115

120

Oct-06 Dec-06 Feb-07 Apr-07 Jul-07 Sep-07

03 Jan 2005 = 100

Korea

Australia

Japan

China

New Zealand

Taiwan

95

100

105

110

115

120

125

130

Oct-06 Dec-06 Mar-07 May-07 Aug-07 Oct-07

03 Jan 2005 = 100

Indonesia

Singapore

Thailand(onshore rate)

Philippines

Malaysia

Vietnam

Source: Bloomberg and Economics@ANZ

Exchange rates

• The expectation of wider interest rate differentials in favour of the Australian dollar, solid commodity prices and robust domestic economic growth continue to underpin the Australian dollar which has hit a 23-year high against the US dollar.

• East Asian currencies have also strengthened amidst negative sentiment towards the US dollar and sustained capital inflows into the region. A slight change in the Monetary Authority of Singapore’s exchange rate policy regime announced in October has effectively allowed for a stronger appreciation of the currency amidst upside risks to inflation. The Malaysian ringgit also strengthened by a similar extent during the month.

• The Vietnamese government has reportedly halved its depreciation target for the dong (VND) to 0.5% per annum signalling the challenge of maintaining a policy of exchange rate depreciation amidst strong domestic growth, rising inflation and rapid capital inflows.

100

150

200

250

300

350

400

Nov-06 Mar-07 Jun-07 Oct-07

Gold

Copper

Oil (Tapis)

Jan 2004=100

Base metals

Commodity Prices

40

90

140

190

240

290

340

Jan-06

May-06

Aug-06

Dec-06

Apr-07

Aug-07

Jan-06 = 100

Dairy

Wheat

Barley

Source: Datastream, Bloomberg

Commodities

• Tapis oil prices continued to climb in October as the West Texas Intermediate oil price breached the US$90/bbl mark. Heightened geopolitical risks exacerbated by the Turkey/Iraq situation and fresh US sanctions against Iran, as well as concerns over US inventory levels are likely to keep oil prices elevated.

• Gold prices have also strengthened further on the back of US dollar weakness and rising oil prices.

• Strong demand from Asia, particularly China, and tight supply conditions are likely to keep prices of base metals firm although an expected slowdown in the US economy could temper price growth.

• The rise in food prices remains a concern with food accounting for the largest weight in Asian Consumer Price Indices. Wheat prices, in particular, have emerged as a major contributor to the acceleration in food inflation across Asia.

Share price indices

100

120

140

160

180

200

220

240

260

280

300

320

340

360

380

400

420

Oct-06

Dec-06

Feb-07

Apr-07

Jun-07

Aug-07

Oct-07

1 Jan 2004 = 100

Korea

Taiwan

China

HK

Aust

India

75

100

125

150

175

200

225

250

275

300

325

350

Oct-06

Dec-06

Feb-07

Apr-07

Jun-07

Aug-07

Oct-07

1 Jan 2004 = 100

Singapore

Malaysia

Indonesia

Philippines

Thailand

Source: Datastream and Economics@ANZ

Equity markets

• Most Asian equity markets retreated towards the end of October amidst renewed concerns over corporate earnings but a number regained some ground by the end of the month.

• Hong Kong’s stockmarket continues to power ahead, spurred by aggressive IPO activity and a surge in capital inflows, boosting demand for Hong Kong dollars.

• India was a standout performer. Despite the announcement of measures to moderate the pace of capital inflows, the equity market rallied, after the initial correction sparked by negative sentiment to the news, to briefly reach an all-time high above the 20,000 mark.

• Indonesia’s credit rating upgrade by Moody’s has helped to underpin a further rally in the market, breaching its previous peak in late July.


Foreign Exchange and Policy Rate Forecasts Sep-07 Oct-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

China

USD/CNY, eop 7.51 7.45 7.40 7.31 7.22 7.13 7.04

AUD/CNY, eop 6.66 6.74 6.95 6.94 6.93 6.63 6.34

One year base lending rate 7.29 7.47 7.65 7.83 7.83 7.83 7.83

Hong Kong

USD/HKD, eop 7.77 7.77 7.78 7.79 7.79 7.79 7.80

AUD/HKD, eop 6.90 7.04 7.31 7.40 7.48 7.24 7.02

HKMA discount rate 6.25 6.25 6.00 6.00 6.00 6.00 6.00

India

USD/INR, eop 39.8 39.5 39.0 38.5 38.0 38.3 38.5

AUD/INR, eop 35.3 35.8 36.7 36.6 36.5 35.6 34.7

Repo rate 7.75 7.75 7.75 7.75 7.75 7.75 7.75

Indonesia

USD/IDR, eop 9,105 9,053 8,950 8,875 8,800 8,850 8,900

AUD/IDR, eop 8,084 8,196 8,413 8,431 8,448 8,231 8,010

BI rate 8.25 8.25 8.25 8.25 8.00 8.00 8.00

Korea

USD/KRW, eop 915 910 900 890 880 875 870

AUD/KRW, eop 813 824 846 846 845 814 783

Overnight call rate 5.00 5.00 5.00 5.00 5.00 5.00 5.00

Malaysia

USD/MYR, eop 3.41 3.39 3.35 3.34 3.33 3.32 3.35

AUD/MYR, eop 3.03 3.07 3.15 3.17 3.20 3.09 3.02

Overnight policy rate 3.50 3.50 3.50 3.50 3.50 3.50 3.50

Philippines

USD/PHP, eop 44.9 44.3 43.0 42.0 44.0 45.0 46.0

AUD/PHP, eop 39.9 40.1 40.4 39.9 42.2 41.9 41.4

Overnight Reverse Repo rate 6.00 5.75 5.50 5.50 5.50 5.75 5.75

Singapore

USD/SGD, eop 1.49 1.47 1.44 1.42 1.41 1.39 1.38

AUD/SGD, eop 1.32 1.33 1.35 1.35 1.35 1.29 1.24

3-month interbank rate 2.63 2.53 2.50 2.50 2.50 2.50 2.50

Taiwan

USD/TWD, eop 32.7 32.7 32.8 32.5 32.8 33.0 33.0

AUD/TWD, eop 29.0 29.6 30.8 30.9 31.5 30.7 29.7

Discount rate 3.250 3.250 3.375 3.500 3.500 3.500 3.500

Thailand

USD/THB, eop 34.3 34.2 34.0 33.9 33.8 34.0 34.3

AUD/THB, eop 30.4 30.9 32.0 32.2 32.4 31.6 30.9

1-day repo rate 3.25 3.25 3.25 3.00 3.00 3.00 3.00

Vietnam

USD/VND, eop 16,086 16,103 16,136 16,157 16,177 16,197 16,217

AUD/VND, eop 14,283 14,577 15,168 15,349 15,530 15,063 14,595

Japan

USD/JPY, eop 114.8 114.5 114.0 113.0 112.0 110.0 108.0

AUD/JPY, eop 101.9 103.7 107.2 107.4 107.5 102.3 97.2


Australia

AUD/USD, eop 0.89 0.91 0.94 0.95 0.96 0.93 0.90

Cash rate 6.50 6.50 6.75 7.00 7.25 7.25 7.25

New Zealand

NZD/USD, eop 0.76 0.76 0.77 0.76 0.74 0.71 0.68

AUD/NZD, eop 1.17 1.19 1.22 1.25 1.30 1.31 1.32


United States Fed Funds Rate, eop 4.75 4.50 4.50 4.25 4.25 4.25 4.25


Macro Economic Forecasts Real GDP Growth (%)

2005 2006 2007f 2008f

Australia 2.8 2.7 4.3 3.9

Cambodia 13.4 10.7 9.0 8.0

China 10.4 10.7 11.3 10.3

Hong Kong 7.5 6.8 6.3 5.7

India+ 9.0 9.4 8.7 8.5

Indonesia 5.6 5.6 6.2 6.5

Japan 1.9 2.2 1.6 1.2

Korea 4.0 5.0 4.8 4.2

Malaysia 5.2 5.9 5.5 5.5

New Zealand 2.7 1.7 2.8 1.5

Philippines 5.1 5.4 7.0 5.2

Singapore 6.6 7.9 8.3 5.6

Taiwan 4.1 4.6 4.6 4.2

Thailand 4.5 5.0 4.3 5.6

United States 3.2 3.3 2.0 2.6

Vietnam 8.4 8.2 8.5 9.0

Nominal GDP (US$ bn)

2005 2006 2007f 2008f

Australia 710.0 760.5 924.7 1104.2

Cambodia 6.3 7.2 8.4 9.5

China 2233.7 2529.6 2888.9 3234.3

Hong Kong 208.8 223.3 236.5 249.8

India+ 780.8 886.9 1029 1189

Indonesia 287 364.2 411 465

Japan 4758.2 4882.2 5024.6 5181.5

Korea 787.2 847.2 910 975

Malaysia 130.8 150.9 163 175

New Zealand 108.9 104.5 126.6 131.2

Philippines 99.0 118.0 130 142

Singapore 116.7 132.2 145.5 157

Taiwan 367.5 379.6 392.3 410.1

Thailand 176.5 206.3 219 237

United States 12,434 13,195 13,816 14,453

Vietnam 53.1 61.0 70.1 81.1

Inflation (%)

2005 2006 2007f 2008f

Australia 2.7 3.5 2.3 3.1

Cambodia 5.8 4.7 7.0 5.0

China 1.8 1.5 4.6 3.4

Hong Kong 0.9 2.0 2.0 3.6

India+ 4.2 6.2 6.7 6.5

Indonesia 10.5 13.3 6.4 6.2

Japan -0.6 0.2 0.4 1.3

Korea 2.8 2.5 2.6 2.7

Malaysia 2.9 3.6 2.1 2.3

New Zealand 3.2 2.6 2.8 2.8


Singapore 0.5 1.0 1.6 2.5

Taiwan 2.3 0.6 1.5 3.2

Thailand 4.6 4.7 2.0 2.2

United States 3.4 3.2 2.6 1.6

Vietnam 8.2 7.5 8.3 7.5

Fiscal Balance (% of GDP)*

2005 2006 2007f 2008f

Australia 1.2 1.7 1.6 1.2

Cambodia -3.4 -2.0 -3.0 -3.5

China -1.1 -2.0 -1.9 -2.1

Hong Kong -0.4 -0.2 -0.5 -0.5

India+ -4.2 -3.8 -3.6 -3.5

Indonesia -0.5 -1.0 -1.6 -1.7

Japan -6.2 -6.0 -5.8 -5.5

Korea 1.9 1.8 1.9 2.4

Malaysia -3.8 -3.5 -3.2 -3.1

New Zealand 4.1 7.3 5.2 3.8

Philippines -12.1 -4.9 -5.0 -4.0

Singapore 0.2 -0.8 -0.3 0.1

Taiwan -2.5 -2.0 -2.6 -2.0

Thailand 0.1 -0.8 -2.0 -1.8

United States -2.6 -1.6 -1.3 -1.6

Vietnam -2.1 -1.8 -1.9 -1.8

Current Account (% of GDP)

2005 2006 2007f 2008f

Australia -5.8 -5.5 -5.8 -5.4

Cambodia -9.4 -7.2 -7.0 -8.0

China 7.2 9.5 9.8 9.6

Hong Kong 11.4 9.0 10.0 8.5

India+ -1.2 -1.1 -1.0 -1.1

Indonesia 0.1 2.6 2.0 1.5

Japan 3.6 3.7 3.5 2.5

Korea 2.4 1.7 1.2 1.1

Malaysia 15.3 15.8 15.3 15.0

New Zealand -8.6 -8.7 -7.9 -6.8


Singapore 24.5 27.5 25.0 24.0

Taiwan 4.7 5.8 5.5 6.0

Thailand -4.5 1.6 5.0 4.2

United States -6.1 -6.2 -5.9 -5.7

Vietnam 0.9 1.5 -1.2 -1.8

Foreign Exchange Reserves (US$ bn)

2005 2006 2007f 2008f

Australia 43.3 55.1 n/a n/a

Cambodia 0.94 1.09 1.4 1.6

China 818 1066 1400 1750

Hong Kong 147 154 160 162

India 131.0 170.2 250 290

Indonesia 33 40.7 53 60

Japan 828 865 880 900

Korea 210 238 265 295

Malaysia 69.3 81.7 102 114

New Zealand 9.1 13.8 n/a n/a

Philippines 18.5 22.3 30 35

Singapore 115.3 136.3 150 160

Taiwan 301 313 320 325

Thailand 50.5 65.1 76 85

United States 37.84 41.5 n/a n/a

Vietnam 8.5 13.0 22.0 31.0

+: Fiscal year beginning April; *:Fiscal balance for Australia, New Zealand, Malaysia and Singapore corresponds to fiscal year


Long Term Foreign Currency Government Bond Ratings Investment Grade Sub-Investment Grade

Moody’s S&P Moody’s S&P

Aaa AAA Ba1 BB+ Australia Australia Brazil Egypt Canada Canada Costa Rica Peru France France Egypt Brazil

Germany Germany Morocco Costa Rica Japan Singapore Panama

New Zealand United Kingdom Singapore United States Ba2 BB

United Kingdom Colombia Jordan United States Fiji Panama

Guatemala Guatemala Aa1 AA+ Jordan Vietnam

Belgium Belgium Peru New Zealand

Aa2 AA Ba3 BB- Hong Kong Hong Kong Indonesia Cook Islands

Italy Japan Turkey Indonesia Qatar Vietnam Philippines Kuwait Serbia UAE Turkey Aa3 AA- Venezuela

Cayman Islands Kuwait Ukraine Macau Qatar Uruguay Oman Taiwan

Taiwan Saudi Arabia

A1 A+ China Italy B1 B+ Cyprus Pakistan Argentina

Czech Republic Papua New Guinea Ghana Saudi Arabia Philippines Pakistan

A2 A Suriname Cambodia Chile Chile Ukraine Papua New Guinea

Hungary China Uruguay Israel Cyprus Korea Czech Republic B2 B Poland Korea Honduras Fiji

Oman Venezuela Paraguay Cambodia

A3 A- B3 B- Israel Argentina Bolivia

Malaysia Malaysia Bolivia Lebanon Poland Lebanon

Baa1 BBB+ Mexico Hungary Caa1 and below CCC and below

South Africa Mexico Cuba Ecuador Thailand Russia Ecuador

South Africa Nicaragua Thailand Paraguay

Baa2 BBB Mauritius Tunisia Tunisia Russia

Baa3 BBB-

Bulgaria Romania India India

Romania Colombia Morocco


Country Update: Australia Core inflation accelerates

0

1

2

3

4

5

01 02 03 04 05 06 07

Headline

% change from year earlier

Consumer price inflation(excl. GST)

Core*RBA target band

Source: Australian Bureau of Statistics

Labour market tightens further

Employment growth

0

1

2

3

4

5

01 02 03 04 05 06 07

Annual % change

Unemployment and participation rates

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

01 02 03 04 05 06 0762

63

63

64

64

65

65

66

66% %

Unemployment rate (LHS)

Partic ipation rate (RHS)

Source: Australian Bureau of Statistics

• Recent partial data and survey evidence suggest that monetary policy tightening in August and subsequent developments in global credit markets have thus far had little impact on Australian economic activity. Real retail sales increased by 1.9% in the September quarter, lifting annual growth to 5.1%, the strongest rate in three years. Consumer sentiment, which fell after the August rate rise, rebounded in September and held that level in October, although business confidence softened in both August and September.

• In addition, the labour market has tightened further, with the unemployment rate falling to a new three-decade low of 4.2% in September. Employment growth has slowed a little, but remains robust at an annual rate of 2.5%.

• Meanwhile, underlying inflationary pressures have intensified. While headline inflation was relatively benign at 0.7% in the September quarter and 1.9% over the year, the Reserve Bank’s favoured measures of core inflation have accelerated over the past two quarters, and are currently running at an average annual rate of 3.0%, or the top of the Reserve Bank’s target band.

• Higher than expected underlying inflation will prompt the Reserve Bank to raise the cash rate by 25bp in November to 6.75%. In addition, a stronger outlook for the domestic economy, coupled with higher global oil and food prices, have increased medium-term inflationary risks and may result in further monetary policy tightening in 2008.

• Further rate hikes are unlikely to derail the Australian economy from its solid growth path. We are forecasting GDP growth of 4% in 2008 following growth of 4¼% in 2007, driven by further income flows stemming from higher commodity prices, further fiscal stimulus from the federal government and buoyant labour market conditions. Higher interest rates, however, are expected to delay recovery in dwelling construction and we expect the housing demand/supply balance to tighten further, placing greater upward pressure on house prices and rents. We estimate that underlying housing demand will reach 182,000 in 2007-08 while dwelling approvals are currently running at an annualised 'completions rate' of just 142,000.

• Another area that is struggling is the rural sector, with ABARE significantly revising down its forecasts for production of the three major winter crops – wheat, barley and canola – to 42% below the 5-year average.

Riki Polygenis

Economic data – Australia Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Building Approvals, 000’s 13.5 12.3 12.8 12.1 13.0 13.1 12.8 13.7 Retail Sales, % YOY 6.8 7.8 5.9 5.6 6.9 7.3 7.8 8.2 Exports, % YOY 7.6 8.7 3.8 9.4 -3.8 3.2 4.1 1.0 Imports, % YOY 11.1 9.4 5.1 2.2 4.5 5.7 10.5 6.9 Trade Balance, AUD bn -0.99 -1.56 -1.00 -1.06 -1.91 -1.01 -1.67 -1.86 Foreign Exchange Reserves, US$ bn 53.7 57.5 67.4 69.8 67.6 68.9 57.8 46.5 Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 3.2 3.3 2.3 2.4 3.0 3.8 4.3 n/a - Private consumption 2.3 2.7 2.8 3.0 3.8 4.1 3.9 n/a - Government consumption 3.4 2.6 4.6 5.8 2.8 3.6 1.9 n/a - Gross fixed capital expenditure 9.7 11.0 6.0 4.6 4.6 6.1 11.6 n/a Consumer Price Index, % YOY (nsa) 2.8 3.0 4.0 3.9 3.3 2.4 2.1 1.9 Current Account, AUD bn -14.3 -13.3 -13.5 -12.7 -15.4 -15.6 -16.0 n/a Capital Account, AUD bn (nsa) 14.2 13.4 12.5 14.8 15.1 15.4 13.9 n/a

Sources: Australian Bureau of Statistics, Reserve Bank of Australia Note: data seasonally adjusted unless otherwise stated


Country Update: Cambodia Food is driving inflation higher while the riel has

been steady against the USD

0

2

4

6

8

10

12

14

06 07


Food

Total urban CPI

CPI Cambodian Riel

Source: National Institute of Statistics

4000

4050

4100

4150

4200

4250

Jan-06 Aug-06 Mar-07 Oct-07

USD/KHR

Tourism is on track for another record year

50

70

90

110

130

150

170

190

210

230

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

'000 persons

2007

2006

2005

Tourism arrivals

Source: CEIC

• The latest data shows inflation in Cambodia jumped to 6.4% YOY in September from 5.2% YOY in August. As with the rest of Asia, spiralling food prices are the dominant driver of this spike. The food, beverage and tobacco component of the CPI soared by 12.8% YOY in September, more than double the 5.6% YOY rise recorded in May. With world agricultural prices for key Cambodian food items, especially grains and rice, rising further since June, and oil prices hitting record highs, it looks likely that Cambodian inflation figures will print higher in the coming months. As such, we have revised up our forecast and now expect Cambodian inflation to average 7.0% in 2007.

• In line with official policy, the National Bank of Cambodia has kept the riel trading at a fairly steady pace against the USD in the last couple of months. Given the recent fall in the USD however, this policy has seen the riel depreciate against other key cross rates, including the euro, yen, won and Australian dollar. While a boost for Cambodia’s exports, this relative exchange rate depreciation has the potential to add to imported inflation pressures and is yet another upside risk to the inflation outlook in the period ahead.

• Turning to the real economy now and Cambodia’s rapidly expanding tourism sector continues to perform well. Tourist arrivals rose 16.5% in the peak month of July and in the first seven months of 2007 arrivals are 19% higher than this period last year. International merchandise trade is also performing well with the latest printed data showing export revenue rising by a strong 16.5% YOY in May.

• The government has announced plans to establish a stock market in Cambodia in 2009. This is an ambitious goal, for in this time a legislative and institutional framework will need to be established and the physical infrastructure to support the exchange will need to be built. External financing and donor assistance are likely required to meet these goals. In a key step however authorities passed the country’s first securities law last month and a nine-member Securities and Exchange Commission, which will regulate the market and issue government bonds, is now to be established.

Katie Dean Economic data – Cambodia Monthly data Feb 07 Mar 07 Apr 07 May07 Jun 07 Jul 07 Aug07 Sep 07 Consumer Price Index, % YOY 2.9 3.5 4.0 4.1 5.8 6.5 5.2 6.4 -Transport & Communication 5.4 5.8 5.1 6.0 3.8 4.5 2.9 2.0 -Food & Beverages 2.8 4.3 5.5 5.6 10.3 11.3 9.9 12.8 Exports, % YOY 16.4 9.7 14.7 16.5 n/a n/a n/a n/a Imports, % YOY 102.4 70.2 70.6 82.9 n/a n/a n/a n/a Trade Balance, US$ mn -78.0 -97.7 -176.0 -195.7 n/a n/a n/a n/a Foreign Exchange Reserves, US$ mn 1205.8 1247.0 1280.7 1336.8 1393.4 1432.4 n/a n/a Tourist Arrivals, % YOY 16.7 25.5 15.6 23.0 20.3 16.5 n/a n/a GDP Composition 2005 Trading Partners Exports Imports Real GDP, % YOY 13.4 2005 % share US 60.0 Thail’ 24.7 - Agriculture, % YOY 5.1 Germany 11.5 China 16.3 - Industry, % YOY 3.3 UK 4.6 HK 13.4 - Services, % YOY 4.5 Vietnam 4.5 Vietn’m 12.8 Nominal GDP, US$ bn 5.5 Cananda 3.9 Sing’ 8.2

Sources: Datastream, National Institute of Statistics of Cambodia


Country Update: China Inflation is now the major concern

0

10

20

30

40

50

60

01 02 03 04 05 06 07

Industrial production

Fixed asset investment

% YOY

Exports

Key growth indicators

Source: Datastream

Inflation still problematic

CPI


-16

-12

-8

-4

0

4

8

12

2006 2007

GrainRiceFlourTuber

YOY %

0

1

2

3

4

5

6

7

2006 2007

% YOY

Agricultural prices

• Real GDP growth rose 11.5% on an annual basis in the third quarter, just on market expectations and slightly lower than the blistering 11.9% pace reported in the second quarter. Underlying data all appear strong, with industrial production up 17-18% per annum over the past few months as exports continue to expand at more than 20% on an annual basis. The all-important fixed asset investment appears to be accelerating slightly, as growth in this cumulative index has lifted from below 25% per annum early this year to more than 26% annual growth over the past few months.

• Importantly, inflation moderated in September to an annual rate of 6.2% as against a 6.5% rise in August. This takes some pressure off of the PBOC to tighten monetary policy at the frenetic pace of the past several months. Nonetheless, we still expect interest rates will rise as inflation is well beyond target and on current trends would average 4.6% this year as against 1.5% last year. The authorities initially blamed inflation on disease hitting the pig population, but it is clear from agricultural price indices that food inflation is more broad-based. Grain prices are up more than 3% from last year, while the price of flour and root vegetables is rising at a pace in excess of 8%.

• The 17th Chinese Communist Party was held in October, and concluded with a major reshuffling of senior leadership. Nine new members were elevated to the Politburo, with a distinct tendency toward the promotion of regional bosses from some of China’s largest provinces. The appointments of Xi Jinping and Li Keqiang confirmed speculation that they would become the heirs apparent to President Hu Jintao and Premier Wen Jiabao. The Politburo appointments also meant announcements for new local leaders in key provinces.

• Aside from the leadership announcements, no key policy initiatives appear to have been forthcoming as yet following the congress. However, an important bit of news is the pending passage of new city planning legislation, to go to parliament in January, aimed at improving the organisation around China’s ongoing process of rapid urbanisation.

Amy Auster

Economic data – China Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Industrial Production, % YOY 12.6 17.6 17.4 18.1 19.4 18.0 n/a n/a Retail Sales, % YOY 16.9 15.3 15.5 15.9 16.0 16.4 17.1 17 Consumer Price Index, % YOY 2.7 3.3 3.0 3.4 4.4 5.6 6.5 6.2 Exports, % YOY 51.6 6.9 26.8 28.7 27.0 34.1 22.8 22.7 Imports, % YOY 13.1 14.5 21.3 19.1 14.3 26.9 20.1 16.1 Trade Balance, US$ bn 23.7 6.8 16.8 22.4 26.9 24.33 25 23.81 Foreign Exchange Reserves, US$ 1157.4 1202.0 1246.6 1292.7 1332.6 1385.2 1408.6 1433.6 Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 9.9 10.4 11.5 10.6 10.4 11.1 11.9 11.5 - Primary sector 5.2 4.5 5.1 4.9 5.0 4.4 4.0 4.3 - Secondary sector 11.7 12.7 13.3 13.3 12.5 13.2 13.6 13.5 - Tertiary sector 10.5 8.9 9.3 9.5 10.3 9.9 10.6 11.0 Nominal GDP, US$ bn 615.4 604.5 630.3 658.7 733.8 710.4 761.6 810.0 Current Account, US$ bn 173.0 200.2 236.4 270.2 292.8 304.4 310.8 316.9 FDI (actual), US$ bn* YTD 60.3 14.2 28.4 42.6 63.0 15.9 31.9 47.2 Sources: Datastream, Bloomberg * - Quarterly sum


Country Update: India Inflation risks prevail

Inflation Money supply (M3) growth

Sources: Bloomberg, Datastream

10

15

20

25

03 04 05 06 07

Annual % change

2

3

4

5

6

7

8

9

10

03 04 05 06 07

Annual % change

WPI

Capital inflows surge

39

40

41

42

43

44

45

461-Jan-07 10-Apr-07 18-Jul-07 25-Oct-07

12000

13000

14000

15000

16000

17000

18000

19000

20000

21000INR Index

INR per USD (lhs)(inverted scale)

Bombay Stock Index (rhs)

Source: Datastream

• On 30 October, the RBI lifted the cash reserve ratio to 7.5% from 7% previously. While there are upside risks to inflation which will prompt the Reserve Bank of India (RBI) to maintain a firm stance, it is likely to assess the impact on liquidity of recent measures to moderate the pace of capital inflows. The RBI is likely to keep its key policy rates unchanged in the short term. However, further increases in the reserve requirement cannot be ruled out.

• Inflation has receded, with the wholesale price index rising by 3.07% YOY in the second week of October, down from over 6% YOY recorded in the first half of the year. A relatively good monsoon is likely to yield a solid harvest which will help to alleviate price pressures going forward. However, higher fuel prices remain a concern, particularly as India imports about two-thirds of its oil requirements, although a strong rupee will serve as a cushion. In addition, money supply growth continues to exceed targets and domestic demand is expected to remain healthy. In its monetary policy statement, the RBI highlighted the challenge of liquidity management as capital inflows remain robust.

• The Securities & Exchange Board of India (SEBI) have recently announced measures to regulate foreign equity capital inflows. The SEBI has imposed controls on the use of participatory notes for investments in equities. Foreign investors who have not registered with Indian regulators can no longer use participatory notes (PNs) to invest in the market. This move is expected to improve transparency and could help to stem short-term speculative flows. Estimates indicate that about half of all foreign investment in India’s stockmarkets is in the form of PNs. There was US$89.8 bn in PNs outstanding in August, up from US$8.1 bn in March 2004. The stockmarket retreated sharply when the SEBI measures were first proposed in mid October but has since rallied, briefly hitting an all-time high above the 20,000 mark. The latest measures follow restrictions on external commercial borrowings announced in August.

Jasmine Robinson

Economic data – India Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Industrial Production, %YOY 11.7 16.0 11 10.6 9 7.5 10.5 n/a Passenger car sales, % YOY 36.8 6.2 7.7 6.5 12.1 14.5 15.7 8.7 Consumer Price Index, % YOY 7.6 6.8 6.7 6.64 5.67 6.48 7.25 n/a Exports, % YOY 23.8 12.3 26.7 18.07 14.05 18.52 22.21 n/a Imports, % YOY 30.1 20.1 40.4 26.4 36.7 20.4 41.1 n/a Trade Balance, US$ bn -4.7 -4.2 -7.1 -6.2 -7.3 -5 -6.9 n/a Foreign Exchange Reserves, US$ bn 187.0 192.0 197.0 201 206 220 222 n/a Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY (at factor cost) 9.3 10.0 9.6 10.2 8.7 9.1 9.3 n/a - Industry 7.2 8.6 10.6 11.3 10.8 11.2 10.6 n/a - Agriculture 8.7 6.2 2.8 2.9 1.6 3.8 3.8 n/a - Services 10.0 12.1 12.0 11.1 11.3 9.9 10.6 n/a Nominal GDP, US$ bn 193.4 200.2 187.1 184.8 223.6 233.2 237.4 n/a Current Account, US$ bn -4.8 1.8 -4.6 -4.8 -2.8 2.6 n/a n/a Capital Account, US$ bn 0.1 10.5 10.6 6.8 10.3 17.9 15.3 n/a Source: Datastream, Bloomberg


Country Update: Indonesia Indonesia’s credit ratings improve

Sources: Standard & Poor’s, Moody’s Investor Services

S&P’s LTFC Bond Ratings History Moody’s LTFC Bond Ratings History

0

1

2

3

4

5

5-Sep-02

12-May-03

8-Oct-03

11-May-04

22-Dec-04

1-Sep-05

9-Feb-06

26-Jul-06

CCC+& below

B-

B

B+

BB-

Positive outlook

Positive outlook

Stableoutlook

Positive outlook

Stable outlook

Stable outlook

BB

0

1

2

3

4

5

30-Nov-01

25-Jun-03

29-Sep-03

26-Feb-06

18-May-06

1-Aug-07

18-Oct-07

Caa1& below

B3

B2

B1

Ba3

Possible upgrade

Possible upgrade

Ba2

LTFC: Long Term Foreign Currency

Possible upgrade

Inflation stays elevated

Inflation

-8

-6

-4

-2

0

2

4

6

02 03 04 05 06 07

Real interest rates

-5

0

5

10

15

20

02 03 04 05 06 07

CPI

Source: Datastream, Economics@ANZ

CPI-Food

Annual % change % pa.

• Moody’s lifted Indonesia’s sovereign bond ratings in October. Both foreign and local currency debt ratings are now at Ba3, just three levels from investment grade. The upgrade comes amidst consistent improvements in both domestic macroeconomic conditions and external balances with real GDP forecast to exceed 6% in 2007 and 2008, fiscal deficit expected to range between 1.5-2% of GDP and external debt having been reduced significantly over the years making debt service obligations more manageable. A higher credit rating will help to reduce the interest cost of future bond sales.

• Inflation ticked up to 6.95% YOY in September, the fastest pace this year, but is expected to remain within the central bank’s target of 5-7% for 2007. The government continues to make efforts to improve supplies of basic commodities such as cooking oil by raising the export tax rate on crude palm oil again from 7.5% to 10% with effect from November. Rice imports may also increase if a shortfall arises in coming months. An expected appreciation of the rupiah will help to contain imported inflation. Consumer prices are likely to ease in coming months as the festive season ends but high food and oil prices as well as a pick-up in domestic demand are likely to keep inflation in the upper half of the central bank’s target range. We therefore expect Bank Indonesia to keep its key policy rate unchanged at 8.25% for the rest of the year.

• The budget for 2008 was passed by the lower house in October. The deficit is expected to widen to 1.7% of GDP from 1.5% this year. Revenues are estimated at Rp781.4 tn or 18.1% of GDP while expenditure is expected to rise to Rp854.7 tn (19.8% of GDP) with most of the additional spending geared towards capital expenditure. The shortfall could be bigger if the underlying economic assumptions are not met. The budget is based on real GDP growth of 6.8% in 2008, inflation at 6% and the BI rate easing to 7.5%. Oil production is estimated at 1.03 mn bbl/day on an oil price of US$60/bbl.

Jasmine Robinson

Economic data – Indonesia Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Industrial Production, %YOY 3.6 9.3 9.2 8.1 4.6 4.3 4.3 n/a Motor cycle sales, % YOY 5.4 31.6 16.2 16.6 7.8 -1.6 -3.0 n/a Consumer Price Index, % YOY 6.3 6.5 6.3 6.0 5.8 6.16 6.51 7.0 Exports, % YOY 12.4 22.6 15.8 16.0 11.4 10.5 7.8 n/a Imports, % YOY 3.0 23.3 18.1 27.3 3.6 15.4 20.1 n/a Trade Balance, US$ bn 3.7 3.8 3.2 3.2 3.5 3.6 2.8 n/a Foreign Exchange Reserves, US$ bn 44.1 45.7 47.7 48.6 49.4 50.3 n/a n/a Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 4.9 5.1 5.0 5.9 5.9 5.9 6.3 n/a - Private consumption 4.2 3.0 3.0 2.9 3.8 4.4 4.6 n/a - Government consumption 27.3 11.4 27.8 2.3 0.5 3.1 3.02 n/a - Gross fixed capital expenditure 2.8 1.5 1.1 0.5 8.7 7.2 6.7 n/a Nominal GDP, US$ bn 76.8 84.7 89.4 94.0 96.2 101.2 107.5 n/a Current Account, US$ bn 0.8 2.6 1.5 3.5 2.1 n/a n/a n/a Capital & Financial Account, US$ bn 4.0 2.4 -0.4 -1.7 2.2 n/a n/a n/a Sources: Bloomberg, Datastream, Bank Indonesia


Country Update: Japan Inflation stays weak

Sources: Datastream, Economics@ANZ

-3

-2

-1

0

1

2

3

4

2001 2002 2003 2004 2005 2006 2007

Corporate goods price index

Annual % change

Headline CPI

Inflation ex food and energy

Consumption ticks up but is it sustainable?

Sources: Bloomberg, Datastream.

3.0

3.5

4.0

4.5

5.0

5.5

6.0

01 02 03 04 05 06 07

% pa

Unemployment rate

Unemployment Household living expenditure

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

01 02 03 04 05 06 07

Annual % change, 3-mth mvg avg

• As widely expected, the Bank of Japan left its key policy rate unchanged at 0.5%. While we still expect the central bank to normalise interest rates, lower central bank projections for domestic inflation and economic growth for fiscal 2007 suggest that interest rates in Japan are likely to remain on hold for the rest of this year.

• Japan continues to struggle with deflation. Inflation, excluding fresh food, recorded its eighth consecutive month of decline in September, falling by 0.1% YOY in September. Excluding energy prices, the core CPI fell by a larger 0.3% YOY.

• Household spending accelerated in September to 3.2% YOY, the fastest pace in 3½ years. Recent employment data, however, suggest that this pace of growth may not be sustainable. Japan’s unemployment rate rose to 4% in September from 3.8% in August, the second successive monthly increase from the nine-year low of 3.6% hit in July, to be the highest rate since March. Wages growth has also remained muted.

• In its latest economic review, the Bank of Japan lowered its forecast for real GDP growth and inflation for fiscal 2007 (year ending 31 March 2008). Consumer prices, excluding fresh food, are expected to be flat compared with a 0.1% YOY gain forecast in April. Real GDP growth has been downgraded to 1.8% compared with an earlier projection of 2.1%. Nevertheless, the outlook for FY2008 is for the economy to gain momentum with real GDP forecast to grow by 2.1% and inflation edging up to 0.4% YOY.

• Although soft patches remain in domestic demand, Japan's external balances continue to be robust and will support overall growth. The current account rose in August to ¥2.1 tn, underpinned by strong growth in the trade surplus. Goods exports rose by 13.5% YOY as imports climbed by just 3.7% YOY. The surplus on the income account also rose, fuelled by rising income from overseas investments. For the first eight months of this year, the current account surplus was up almost 27% from the same period in 2006.

Jasmine Robinson

Economic data – Japan Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Industrial Production, %YOY 4.5 3.2 2.4 2.4 2.3 2.0 4.4 3.4 Retail Sales, % YOY -0.2 -0.7 -0.7 0.1 -0.4 -2.3 0.5 n/a Consumer Price Index, % YOY -0.2 -0.1 0.0 0.0 -0.2 0.0 -0.2 -0.2 Exports, % YOY 7.4 10.3 6.4 6.6 8.6 6.5 13.7 8.4 Imports, % YOY 7.9 0.2 1.8 7.0 3.6 11.6 5.1 -1.5 Trade Balance, US$ bn 8.1 13.9 7.7 3.2 10.0 5.4 6.3 14.2 Foreign Exchange Reserves, US$ bn 884.0 888.0 894.3 890.1 892.8 902.5 910.9 922.5 Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 2.8 2.6 2.2 1.4 2.5 2.6 1.7 n/a - Private consumption 2.7 1.8 1.4 -0.3 0.5 1.4 1.2 n/a - Government consumption 0.7 -0.8 0.7 0.2 1.4 1.2 0.8 n/a - Gross fixed capital formation 2.5 3.4 3.7 1.4 5.2 2.8 -0.3 n/a Nominal GDP, US$ bn 4732.0 4698.5 4675.1 4622.0 4646.4 4620.9 4571.5 n/a Current Account, US$ bn 194.0 182.8 168.1 174.2 206.9 201.9 233.1 n/a Capital Account, US$ bn -11.9 -11.0 -5.2 -1.3 -3.0 -9.0 -0.8 n/a Source: Datastream


Country Update: Korea Economic activity resilient

Sentiment & spending rise

-2

0

2

4

6

8

01 02 03 04 05 06 07

% change

Real GDP growth solid

Sources: Bloomberg, Datastream, Economics@ANZ

80

90

100

110

120

130

01 02 03 04 05 06 07-4

0

4

8

12Index

Annual

QuarterlyHousehold consumption, RHS

Consumer sentiment, LHS

Annual % change

BOK on hold, but price pressures remain

Inflation

2

3

4

5

6

2003 2004 2005 2006 2007

% pa.

Interest rates

Sources: Bloomberg, CEIC, Datastream

0

1

2

3

4

5

6

2003 2004 2005 2006 2007

Annual % change

Government bond index

Overnight call rate

core

Headline

• The Korean economy appears to have thus far sailed through the credit crunch that hit global financial markets in recent months. Real GDP expanded 1.4% in Q3 to be 5.1% higher over the year, the fastest annual rate of growth in over a year. The key driver of this result was a 1.5% QOQ (4.8% YOY) surge in private consumption, supported by strong labour market outcomes (with the unemployment rate down to 3.2% in September) and buoyant consumer sentiment which hit a five-year high of 112 points in the quarter. However, fixed investment was weak in Q3, falling 2.2% QOQ to be just 1.7% higher over the year. Machinery and equipment investment took a dive, tumbling 5.8% QOQ, while construction investment dipped 0.3% QOQ. Export growth continues to be solid, up 9.1% YOY, largely due to productivity gains and strong demand for key products including steel, automotive vehicles, ships and semiconductors. However, an appreciation in the won to USD/KRW901 this month from above USD/KRW945 in August may pose some challenges for exporters in coming months if sustained.

• The Bank of Korea left interest rates on hold at 5% for the second consecutive month in October. Price pressures persist in the economy, with inflation ticking up 2.3% YOY in September and higher oil prices raising inflation risks in the near term. Nonetheless, we believe that interest rates are likely to remain unchanged for the rest of the year due to heightened volatility in global financial markets. Further, an expected slowdown in the US may have a negative impact on exports (particularly white goods).

• On the political front, the country’s two top presidential candidates have laid out their general policy agendas in the lead up to the presidential election on 19 December. Front runner Lee Myung-bak of the conservative Grand National Party (GNP) currently has around 54% support in the polls. Chung Dong-young, a former (ruling) Uri party chairman, recently won the primary for the left-leaning United National Democratic Party (UNDP), but is trailing behind in second place with only a 17% share of the polls.

Amber RabinovEconomic data – Korea Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Industrial Production, %YOY 4.8 3.2 6.9 6.7 7.7 14.4 11.3 n/a Retail Sales, % YOY 13.1 5.2 2.7 3.8 3.8 4.3 4.2 n/a Consumer Price Index, % YOY 2.2 2.2 2.5 2.3 2.5 2.5 2.0 2.3 Exports (US$), % YOY 10.3 13.2 17.0 11.1 14.5 17.2 13.7 -0.9 Imports (US$), % YOY 8.1 12.8 20.6 13.6 9.4 14.3 9.6 -2.2 Trade Balance, US$ bn 0.8 1.1 0.4 1.3 3.5 1.0 1.4 2.4 Foreign Exchange Reserves, US$ bn 242.3 243.4 246.8 250.3 250.2 254.4 254.9 256.8 Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 5.7 6.1 5.2 4.8 4.0 3.9 5.0 5.1 - Private consumption 4.7 5.4 4.0 3.9 3.6 3.9 4.2 4.8 - Government consumption 5.4 5.4 5.2 5.8 6.8 5.6 5.9 3.9 - Gross fixed capital expenditure 4.3 3.5 0.1 4.6 4.5 7.0 6.7 1.8 Nominal GDP, US$ bn 200.9 213.2 221.5 223.4 229.7 232.9 241.0 n/a Current Account, US$ bn 5.2 -1.1 0.7 0.4 6.1 -1.7 0.0 n/a Capital Account, US$ bn -0.5 -0.7 -0.8 -0.7 -0.9 -0.8 -0.7 n/a Source: Datastream


Country Update: Malaysia Interest rates to remain on hold

Inflation

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

01 02 03 04 05 06 07

% pa

Real interest rates


0

1

2

3

4

5

01 02 03 04 05 06 07

CPI

%YOY

Signs of economic growth are slowing

Trade trends

-6

0

6

12

18

02 03 04 05 06 07


Industrial production

Source: Datastream

-15

-10

-5

0

5

10

15

20

25

30

35

02 03 04 05 06 07

Exports


Imports

• Bank Negara left its key policy rate unchanged at 3.5% at its October meeting. The bank said that the strength of domestic fundamentals will mitigate the negative influence of recently increased risks to global growth and trade on the economy. CPI was up 1.8% YOY, driven largely by higher alcohol and tobacco prices (up 8.9% YOY, primarily due to the government’s increase in tobacco excise duties in July) and food prices (up 3% YOY). In the medium term, rising food and commodities prices are likely to support overall inflation.

• There are signs that economic growth may be threatened in the near term. Industrial production growth slowed to 0.9% YOY in August, with the key electronics sector weighing on performance. The US, Malaysia’s largest trading partner, is a concern, with the recent housing market downturn dampening demand for Malaysian exports, and the threat of a softening in consumption and investment also looming. Bank Negara Governor Aziz said that the bank would intervene in the foreign-exchange market if there is any excessive speculative trading, no doubt to keep the ringgit stable in order to support exports (Malaysia’s biggest component of GDP). However, Malaysia’s second-biggest foreign exchange earner, tourism, has been boosted by government promotion, with tourist arrival numbers for the first six months of 2007 up 24.8% compared to the same period in 2006.

• Bank Negara Governor Aziz has also stated that the country may remove its remaining capital controls (implemented in the wake of the Asian financial crisis in 1998) and allow offshore trading of the ringgit, although she did not provide a date for the change. This would benefit the economy by making it more attractive to foreign investors.

• Politics are heating up, with Prime Minister Abdullah Ahmad Badawi launching an ambitious 112bn ringgit development plan for the country’s poorer eastern states. It is expected that he will call an election earlier than the April 2009 deadline.

Amber Rabinov

Economic data – Malaysia Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Industrial Production, %YOY 1.1 -2.2 0.8 3.8 1.6 2.1 0.9 n/a Motor Vehicle sales, % YOY -13.6 -16.6 -16.8 -11.9 8.2 2.3 0.8 4.9 Consumer Price Index, % YOY 3.1 1.5 1.5 1.4 1.4 1.6 1.9 1.8 Exports, % YOY 3.9 1.2 7.5 9.3 6.2 6.6 5.7 n/a Imports, % YOY 4.6 7.9 9.8 10.0 4.8 9.3 8.5 n/a Trade Balance, US$ bn 2.0 1.9 1.7 2.3 2.5 2.3 2.6 n/a Foreign Exchange Reserves, US$ bn 87.5 87.6 92.0 99.7 98.6 98.8 95.8 n/a Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 5.6 5.6 6.0 6.1 5.9 5.4 5.6 n/a - Private consumption 8.8 6.6 7.7 7.0 7.0 8.6 13.1 n/a - Government consumption 13.4 1.2 4.5 9.9 4.1 7.1 10.2 n/a - Gross fixed capital expenditure 0.5 11.4 7.6 3.5 9.8 9.9 6.6 n/a Nominal GDP, US$ bn 35.9 37.1 38.9 39.6 40.6 42.3 45.3 n/a Current Account, US$ bn 4.5 5.5 5.0 7.4 7.7 5.7 6.9 n/a Capital & Financial Account, US$ bn -12.4 -1.4 -0.1 -4.9 -5.5 0.8 2.2 n/a

Sources: Datastream, Bloomberg


Country Update: Philippines

Inflation well below inflation target

Inflation

0

5

10

15

20

25

30

05 06 07

Annual % change

Money supply


0

1

2

3

4

5

6

7

8

9

10

03 04 05 06 07

Annual % change

M3core

Total CPI

Private consumption remains healthy

Overseas workers remittances to the Philippines

Unemployment rate


4

6

8

10

12

14

16

01 02 03 04 05 06 07

%

4

6

8

10

12

14

16

01 02 03 04 05 06 07

US$ bn (12-mth mvg totals)

• The Philippine central bank lowered its key overnight borrowing and lending rates by 25 bps to 5.75% and 7.75% respectively in October. This came after the 50 bps reduction in the US Fed Funds rate in September. Notwithstanding the impact of higher food and fuel prices, a well-contained domestic inflation environment, easing money supply growth and another US Fed Funds rate cut, provide scope for a further reduction in interest rates by the end of the year. Peso appreciation will also assist in holding down the cost of imports. Since the start of the year, the peso has strengthened by 11.5% against the US dollar.

• Inflation accelerated to 2.7% YOY in September, the fastest pace since January 2007. Average inflation for this year is expected to fall well within the central bank’s 4-5% target. For the first nine months of 2007, inflation was 2.6% YOY. Our forecast is for inflation to average 2.7% in 2007 but edge up to 4% in 2008, although this remains well below the 6.7% pa rate recorded in 2004-2006. For 2008, the inflation target has been set at 3-5%. Money supply growth eased to 11.4% YOY in September, the slowest pace in 17 months.

• Remittances continue to underpin private consumption. For the first eight months of this year, remittances rose 15.3% YOY to US$9.3 bn, which is on track to meet the government’s target of US$14 bn for 2007. Although Philippines runs a trade deficit, remittance inflows as well as foreign investment inflows have more than offset this shortfall and continue to be important sources of foreign exchange. Reserves stood at US$27 bn as at August 2007, sufficient for about 5.4 months of imports.

• On the political front, President Gloria Macapagal-Arroyo’s decision to pardon her predecessor and political rival Joseph Estrada just weeks after the country’s anti-corruption court handed him a life-imprisonment sentence, has sparked controversy. Separately, the bomb blast in the Philippine Makati financial district and continued attacks in southern Philippines underscore concerns over the threat of terrorism.

Jasmine Robinson

Economic data – Philippines Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Manufacturing Production, %YOY -14.5 -6.7 -3.1 -7.6 -4.2 1.5 -4.7 n/a Motor Vehicle sales, % YOY 41.1 22.7 18.8 14.0 15.6 15.5 7.5 23.2 Consumer Price Index, % YOY 2.6 2.2 2.3 2.4 2.3 2.6 2.4 2.7 Exports, % YOY 7.8 8.5 5.1 6.1 1.6 5.9 -4.6 n/a Imports, % YOY 9.9 10.4 -1.7 -3.4 3.8 14.5 1.8 n/a Trade Balance, US$ mn 27.0 -89.0 -225.0 -174.0 -588.0 -853.0 -901.0 n/a Foreign Exchange Reserves, US$ bn 21.4 21.5 21.9 22.5 23.3 24.9 27.2 n/a Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 5.4 5.7 5.5 5.1 5.5 7.1 7.5 n/a - Private consumption 5.0 5.3 5.4 5.2 5.8 5.9 6.0 n/a - Government consumption -1.5 7.6 3.3 4.5 9.9 9.9 13.6 n/a - Gross fixed capital expenditure -6.0 2.4 -1.0 2.1 2.2 8.5 10.0 n/a Nominal GDP, US$ bn 26.2 28.0 28.5 29.7 31.7 32.6 34.7 n/a Current Account, US$ bn 1.1 1.2 1.5 1.0 1.7 2.0 1.8 n/a Capital & Financial Account, US$ bn -3.1 1.4 -1.7 -0.9 -0.8 0.2 0.1 n/a Sources: Datastream, Bloomberg


Country Update: Singapore Inflation stays elevated

-5

-4

-3

-2

-1

0

1

2

3

4

5

01 02 03 04 05 06 07

Annual % change

Source: Datastream

CPI-Total

CPI-Transport & Communications

CPI-Food

SGD trends against major trading partners

-10

-8

-6

-4

-2

0

2

4

6

8

10

US Euro Yen IDR AUD CNY MYR PHP

Oct 07 vs Dec 06

Depreciation of SGD

Appreciation of SGD

App/Dep of SGD against foreign currency

Source: DatastreamEnd-of-period exchange rates

• There seems to be no letting-up with the Singapore economy continuing to beat growth expectations. Advance estimates, based on July and August data, suggest that the economy expanded by 9.4% YOY in Q3 2007 against a median estimate of 7.8% YOY based on a MAS survey. This brings growth for the first three quarters of 2007 to 8.2%. We have revised our growth projections for 2007 to 8.3%, placing it among the fast-expanding economies of India and Vietnam, both forecast to grow by 8-9%. For 2008, the economy is projected to moderate to around 5.6% as global growth eases and also reflecting base effects.

• Inflation has gained momentum, with consumer prices rising by an average annual rate of 2.7% in the September quarter in contrast to 0.8% YOY for the first six months of this year. About half of the increase was due to the GST hike. Other domestic factors such as rising wages, relatively low unemployment and pass-through of rising business costs have also underpinned domestic price pressures and this is likely to persist. External factors such as food, oil and other commodity prices are also likely to stay elevated over the coming months. The MAS has forecast an average inflation rate of 1.5-2% for 2007. For H1 2008, the MAS has projected headline CPI inflation of about 3.5% YOY largely reflecting the GST hike, and base effects of lower energy and car prices in H1 2007 but inflation is forecast to ease to 2-3% YOY in the second half.

• The upbeat momentum in the economy, coupled with upside risks to inflation, has prompted the Monetary Authority of Singapore to continue with its policy of a gradual appreciation of the S$ NEER policy band but the slope of the band was increased slightly, effectively allowing for a stronger appreciation of the Singapore dollar. Since the start of the year, the Singapore dollar has appreciated by some 7.5% and 1.3% against the US dollar and the Japanese yen respectively but weakened by 3.3% against the Euro and a sharper 8.3% against the Australian dollar. Against regional currencies, the Singapore dollar has been mixed.

Jasmine Robinson

Economic data – Singapore Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Industrial Production, %YOY 1.1 -2.8 19.3 17.9 -7.4 22.1 13.3 -2.8 Retail Sales, % YOY 5.3 -5.3 0.9 2.1 14.7 -1.8 6.7 n/a Consumer Price Index, % YOY 0.6 0.7 0.6 1.0 1.3 2.6 2.9 2.7 Exports, % YOY -0.7 8.4 14.1 4.0 4.1 14.0 6.2 5.7 Imports, % YOY -1.8 9.8 14.3 2.2 4.3 7.6 2.0 4.7 Trade Balance, US$ bn 2.1 3.9 3.0 2.6 2.6 3.4 3.5 4.1 Foreign Exchange Reserves, US$ bn 137.1 137.7 140.0 140.9 144.1 147.0 n/a n/a Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 8.2 10.3 8.1 6.9 6.5 6.5 8.7 n/a - Private consumption 3.3 2.8 1.9 2.5 2.7 2.6 5.6 n/a - Government consumption 10.9 11.7 11.9 19.4 3.6 -0.7 0.9 n/a - Gross fixed capital expenditure 18.0 10.4 8.2 10.2 17.0 18.2 25.8 n/a Nominal GDP, US$ bn 30.4 31.3 32.3 33.4 35.2 36.3 38.2 n/a Current Account, US$ bn 7.4 8.1 9.3 9.0 9.8 10.9 11.9 n/a Capital & Financial Account, US$ bn -4.0 -3.6 -6.2 -5.7 -5.5 -9.2 -5.3 n/a Sources: Bloomberg, Datastream, Economic Survey of Singapore


Country Update: Thailand Inflation edges up

Inflation

0

1

2

3

4

5

6

03 04 05 06 07

% pa.

Policy rate

-1

0

1

2

3

4

5

6

7

03 04 05 06 07

Annual % change

1 day Repurchase rate(14-day rate prior to Jan 07)

Core CPI

Total CPI


Economy driven by external demand

Sentiment indices Trade performance


30

40

50

60

70

80

90

100

110

120

00 01 02 03 04 05 06 07

Index

Consumer confidence

Business sentiment

45

65

85

105

125

145

165

00 01 02 03 04 05 06 07

12-mth mvg total, US$ bn

Imports

Exports

• Inflation ticked up in September to 2.1% YOY, the fastest pace since February 2007. The increase was largely attributed to food and oil prices. Core inflation edged up slightly to 0.8% YOY. The Bank of Thailand left its 1-day repurchase rate unchanged for the third successive month at 3.25% during its October meeting. Upside risks to inflation coming from high fuel prices, a potential increase in the ceiling on cooking oil retail prices, higher production costs and wages growth, are expected to keep the policy rate unchanged for the remaining months of this year. The Bank of Thailand narrowed its inflation forecast for 2007 to 1.8%-2.3% YOY from 1.5%-2.5% projected in July 2007, but raised its inflation expectation for 2008 to 1.5%-2.8% YOY from 1%-2.5% YOY.

• The economic outlook is for a pick-up in growth in 2008 from an estimated 4.2% in 2007. The government is expecting growth of 5%, underpinned by an increase in investment. The Bank of Thailand has projected a range of 4.5-6% but has indicated that the economy may grow at the lower end of this range as high oil prices prompt a moderation in global growth. The IMF has forecast growth of 4.8%

• Exports have, thus far, been the main driver of growth. Export growth slowed to 10.4% YOY in September as shipments to the US and Japan declined. However, for the first nine months of this year, exports have climbed by 16% YOY and the government’s target of 12.5% is expected to be achieved. Import growth also eased in September resulting in a wider trade surplus than in the previous month. However, higher fuel costs and increased demand for capital goods as public sector infrastructure spending steps-up, together with a moderation in external demand could see the trade surplus narrow in coming months.

• Domestic demand has remained sluggish with business and consumer confidence at 5-year lows. Sentiment is unlikely to improve much until the cloud over political leadership lifts. Elections are due on 23 December.

Jasmine Robinson

Economic data – Thailand Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Manufacturing Production, %YOY 5.2 3.7 6.7 6.3 3.9 7.6 9.8 n/a Car Sales, % YOY -18.2 -15.2 -7.2 -7.8 -4.2 1.0 0.9 n/a Consumer Price Index, % YOY 2.3 2.0 1.8 1.9 1.9 1.7 1.1 2.1 Exports, % YOY 18.5 18.4 18.5 20.9 17.7 6.3 17.9 10.3 Imports, % YOY 4.9 2.2 10.6 6.7 5.1 2.4 14.0 7.4 Trade Balance, US$ bn 1.0 2.1 0.1 0.8 0.9 0.2 0.8 2.0 Foreign Exchange Reserves, US$ bn 66.4 69.1 69.3 69.3 71.3 72.2 72.6 n/a Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 4.3 6.3 5.1 4.6 4.2 4.2 4.5 n/a - Private consumption 3.7 4.0 3.4 2.8 2.4 1.1 0.8 n/a - Government consumption 9.7 6.6 5.4 4.8 -2.9 11.4 8.0 n/a - Gross fixed capital expenditure 6.5 6.3 3.9 4.0 2.0 -1.6 0.0 n/a Nominal GDP, US$ bn 45.2 48.7 50.9 52.2 54.7 60.6 63.5 n/a Current Account, US$ bn -0.2 0.7 -2.3 1.2 2.6 5.0 1.4 n/a Capital & Financial Account, US$ bn 2.0 2.3 2.4 1.7 -0.7 -2.9 1.0 n/a

Sources: Bloomberg, Datastream,


Country Update: United States

The US housing market is in recession…

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

00 01 02 03 04 05 06 07400

425

450

475

500

525

550

575

600

625

Permits(LHS)

No. (million), trend

Starts(LHS)

Real dwelling

investment(RHS)

$bn

Housing construction activity

Sources: Thomson Financial Datastream, Economics@ANZ

…but rising inflationary pressures will limit the monetary policy response

-2

-1

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07

annual % ch.

Unit labour costs

Sources: Thomson Financial Datastream, Economics@ANZ

• As expected, the Fed cut interest rates by 25bps at its 31 October meeting. This follows a 50bp cut in September, leaving the Federal Funds rate at 4.5%.

• The Fed’s latest move is tacit acknowledgement of the mounting downside risks to economic growth as conditions in the US housing market deteriorate. Dwelling investment fell by a further 5.5% in the September quarter to be down 16.4% over the year. Leading indicators portend further housing weakness, with starts down 31% and new building permits down 24% over the year to September.

• To date, the downturn in the housing market has not spread more broadly. GDP expanded by 1% in the September quarter (3.9% SAAR), reflecting solid growth in household consumption, business investment and public demand.

• While we expect economic growth will slow to well below trend over the next year, the key to averting outright recession remains the labour market. On this front, employment appears to be holding up relatively well, notwithstanding a clear trend slowing in the rate of growth. And although the unemployment rate has ticked up a little in recent months, it remains near historic lows at 4.7%.

• Inflation remains a concern despite having eased in both headline and core terms. Recent increases in energy and commodity prices, the depreciation of the US$ and a pick up in unit labour costs will put upward pressure on prices even as demand-related price pressures ease.

• Reflecting these concerns, the Fed noted in the statement accompanying the latest interest rate decision that, “after this action, the upside risks to inflation roughly balance the downside risks to growth.” This confirms that the Fed will not embark on an aggressive easing cycle pre-emptively, although we believe the deteriorating economic outlook will warrant another rate cut early in 2008.

Mark Rodrigues

Economic data – United States Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Building permits, 000’s 1541 1569 1457 1520 1413 1389 1322 1261 Retail Sales, % YOY 3.5 4.3 2.6 5.0 3.7 3.3 3.6 5.0 Consumer Price Index, % YOY 2.4 2.8 2.6 2.7 2.7 2.4 1.9 2.8 Core Consumer Price Index, % YOY 2.7 2.5 2.4 2.3 2.2 2.2 2.1 2.1 Exports, % YOY 9.7 10.7 10.6 11.5 10.8 14.9 12.8 n/a Imports, % YOY 3.7 7.3 4.9 4.1 4.3 5.0 3.0 n/a Trade Balance, USD bn -57.9 -62.7 -58.6 -59.6 -59.4 -59.0 -57.6 n/a Quarterly data Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Real GDP, % YOY 2.9 3.3 3.2 2.4 2.6 1.5 1.9 2.6 - Private consumption 2.8 3.3 3 2.7 3.4 3.2 2.9 3 - Government consumption 0.9 1.8 1.8 1.2 2.5 1.2 1.9 2.7 - Gross fixed capital expenditure 5.1 7.5 7.3 6.4 5.2 2.5 4.1 4.8 Unit labour costs (non-farm), %YOY 1.6 2.8 2.2 2.6 4.1 4.3 4.9 n/a Current Account, US$ bn -215.8 -200.6 -205.6 -217.3 -187.9 -197.1 -190.8 n/a Capital & Financial Account, US$ bn 291.2 192.4 142.2 239.5 226.4 166.6 150.3 n/a

Sources: Datastream. Note: data seasonally adjusted unless otherwise stated

ANZ International Economics Monthly – October 2007

Country Update: Vietnam Rapid industrialisation fuelling strong economic

growth

0 2 4 6 8 10 12 14

GDP

Hotel & restaurant

Manufacturing

Transport, warehouse &communication

Electricity, gas & water supply

Construction

Finance, banking & insurance

Agriculture, Forestry & Fishery


Sources: General Statistics Office of Vietnam

Real GDP growth, selected sectors, Jan-Sep 2007

Surging food prices underpin higher inflation; will the recent dong appreciated cut imported inflation?

4

6

8

10

12

14

16

2006 2007

Food

All items

Housing & construction materials

% yearly change

Inflation and its components

Source: National Statistics Office of Vietnam, CEIC and Economics@ANZ

15900

15950

16000

16050

16100

16150

16200

16250

16300

Aug-06 Dec-06 May-07 Oct-07

USD/VND

Vietnamese dong

• The Vietnamese economy is on fire. The General Statistics Office reports that in the nine months to September GDP was 8.2% higher than the corresponding period last year. This is the strongest rate of expansion in a decade and has prompted the government to upgrade its economic growth targets to 8.5% in 2007 and 9.2% for 2008.

• Vietnam’s rapid industrialisation is the dominant driver of the country’s strong economic growth. The industry and construction sector expanded by 10.2% in first nine months of this year, led by strong growth in manufacturing and electricity, gas and water supply. Vietnam’s services sector is also growing rapidly, rising by 8.5% with strong performances across hospitality, transport and finance. Growth in the agriculture, forestry and fishing sector has been modest at just 3.0%, with productivity improvements in rice cultivation largely offset by falls in the area of land planted and the devastating impact of the August typhoons in north Vietnam.

• The flipside of Vietnam’s rapid development is a swelling import bill. Compared with the corresponding 2006 period, imports rose 30.3% in the nine months to September. In a sign of the country’s growing personal wealth, imports of automobiles and motorbikes recorded the fastest growth, surging 96% and 89% respectively. Export growth, while an impressive 19.4% in this period, has nevertheless been unable to match the pace of import demand. As a result, Vietnam’s trade deficit ballooned to US$7.6 bn in the nine months to September, more than double the US$3.4 bn deficit in this period last year.

• Another ‘casualty’ of Vietnam’s strong economic growth is inflation, which spiralled to 9.3% YOY in October. Admittedly, a sharp 13.9% YOY jump in food prices is the dominant driver of this high inflation. However, surging capital inflows rising remittances, rapid credit growth and the government’s policy of dong depreciation are all also contributing to these inflationary pressures.

• In an acknowledgement of the conflicts of maintaining an exchange rate depreciation policy in this environment, the government this month cut its target for the rate of annual dong depreciation from 1% to 0.5%. This follows a turbulent month for the dong, which was allowed to appreciate sharply to be back near June-07 levels.

Katie Dean Economic data – Vietnam Monthly data Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Industrial Production, %YOY+ 11.9 16.6 16.7 16.8 16.9 17.0 17.1 17.1 Retail Sales, % YOY 24.2 21.3 24.5 27.7 27.3 25.1 22.7 22.8 Consumer Price Index, % YOY 7.5 7.5 7.5 7.3 7.8 8.4 8.6 8.8 CPI-Food & Foodstuffs, %YOY 7.6 8.1 8.3 9.2 9.9 11.1 11.9 13.3 Exports, % YOY+ 7.7 23.5 17.9 22 18.4 19.6 19.3 19.4 Imports, % YOY+ 45.8 33.6 32.8 26.9 30.4 29.8 29.9 30.3 Trade Balance, US$ bn + -1.1 -1.7 -2.6 -3.2 -4.7 -5.4 -6.4 -7.6 Tourist Arrivals, %YOY+ 11.3 13.4 12.5 12.7 14.7 16.2 23.5 18.5 Quarterly data Growth Q3-2007 Real GDP+, % YOY 8.2 Agriculture, forestry, fishery, % YOY 3.0 Industry & construction, % YOY 10.2 Services, % YOY 8.5 +: January-to date vs same period in previous year , *: January to date, ^: US$ bn. Source: General Statistics Office of Vietnam


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Head of International Economics

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Research Analyst, Financial System Analysis

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