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Standard Chartered Asia Focus | 24 September 2012

The resurgence

Highlights

Asia is still partly insulated from the West – in much of the region,

domestic demand has grown more strongly than exports in 2012.

However, Asia has been slowing in recent months. We expect growth to

turn up in H1-2013, and we forecast better growth in 2013 than in 2012 for

almost all economies in the region. Indeed, we expect growth in Thailand,

Indonesia, Malaysia, the Philippines and Taiwan to exceed 10-year

average rates.

A weak US recovery and ugly deleveraging in Europe mean a difficult

external environment. The US has to avoid the fiscal cliff towards which it

is heading. The ECB‟s move to accept bond purchases buys Europe time

and means that a Greek exit from the euro area in 2013, while likely,

should not be too disruptive.

Flat US interest rates until 2015, unlimited QE3, and the possibility of

unsterilised ECB action will make Asian central banks nervous. We expect

them to start hiking in Q2-2013. We expect China to follow in Q4-2013.

China is key. We look for a pick-up in activity in H1-2013, and growth of

7.8% for the full year. The authorities are content with current growth,

apparently believing that some deleveraging is necessary. The labour

market still looks firm.

We are cautious on India, forecasting growth of 6% for FY14. Recent

reform measures are welcome but will not help much in 2013. The twin

budget and current account deficits make the Indian rupee (INR)

vulnerable and raise the risk of a sovereign downgrade.

The Philippines should be the star of 2013. We expect growth of 5.4%,

supported by a surging business services sector and FX inflows in

anticipation of the sovereign upgrade we expect in 2014.

Asian currencies should appreciate in 2013 on capital inflows early in the

year, rate hikes and stronger growth expectations. Signs of a resumption

of solid growth in China should also boost regional currencies. However,

given lower current account surpluses, the scale of FX appreciation should

be smaller than in years past. The Philippine peso (PHP), Korean won

(KRW) and Taiwan dollar (TWD) should outperform; The Singapore dollar

(SGD) and Indonesian rupiah (IDR) are likely to underperform.

We also look at credit markets in Asia. Overall, issuance has boomed in

2012, and strong fund inflows have continued. We expect 2013 to be

another year of strong issuance. Valuations are not great, but fund flows

are still robust, so we remain cautiously long. Any signs of an improvement

in global growth expectations could trigger a shift into Asian equities.

Contents

Global and regional overview: Resilience

in the midst of slowdown p. 2

Economy insights:

Australia: Living with a sub-8% China

p. 6

Bangladesh: Domestic conditions to

support growth p. 8

China: No country for old ideas p. 10

Hong Kong: An overcast dawn p. 12

India: At a crucial juncture p. 14

Indonesia: Yudhoyono prepares for a

legacy p. 16

Japan: Signs of fading growth

momentum p. 18

Malaysia: Domestic boost p. 20

Philippines: Maintaining momentum

p. 22

Singapore: Still in difficult waters p. 24

South Korea: Stimulus expected p. 26

Sri Lanka: Policy measures gain traction

p. 28

Taiwan: Economy to show resilience

p. 30

Thailand: Driving growth from within

p. 32

Vietnam: A warmer 2013 p. 34

Forecasts p. 36

Reference tables p. 40

Standard Chartered Asia Focus

Global and regional overview – Resilience in the midst of slowdown Gerard Lyons, +44 20 7885 6988

[email protected]

24 September 2012 2

In this overview, we explore three key issues confronting

the world economy. First, below, is an overview of the

global economy. Second is a summary of the present

situation in Asia. Third, we look at some of the structural

issues impacting Asia.

Global trends

Global growth has slowed this year. And, in recent

months, sentiment has deteriorated noticeably as the euro

crisis has evolved. Since the financial crisis, we have

stressed three underlying structural developments that are

impacting the world economy.

The first is the debt deleveraging in the West. A lesson of

financial crises is that the subsequent hit to economies is

hard, and recovery is slow as balance sheets are

restructured. History shows that demand is sluggish in a

post-financial-crisis recovery. This helps to explain the

weak recovery in the West, where the US is seeing only

steady growth, while problems in the UK and euro area

persist.

One of the many issues for Asia is whether the latest

policy developments will change the situation. In the

West, central banks have effectively become the shock

absorbers in that, whenever there is disappointing

economic news, they ease policy. In recent weeks there

has been further evidence of this with the US Fed's QE3

and the European Central Bank's bond-buying operations.

The message is that interest rates in the West will stay

low for some time, potentially causing future problems for

Asia as liquidity seeks a home there. Japan, too, has

extended its asset purchase programme, providing

additional liquidity to support its flagging economy.

The Fed's actions reflect the fact that this is a weak US

recovery compared with previous cycles. We expect US

rates to stay low for some time. The „fiscal cliff‟ and

„regulatory mountain‟ mean there is considerable year-end

uncertainty in the US. Growth is likely to be steady, not

spectacular, in the medium term.

In Europe, there are some who view the ECB's bond

buying as a „game changer‟. More likely, it is a „time

buyer‟. It is aimed at limiting the downside, and at

improving the transmission mechanism of monetary policy

given the problems in the interbank market. Some

economies, like Ireland, are adjusting, but demand is still

weak across the euro area. And this remains the problem.

The second major development is the shift in the balance

of economic and financial power to the East. This makes

the global economic cake bigger. It does not mean all

emerging economies grow all the time. Rather, it implies

that the trend is upward, but there will be setbacks along

the way. Setbacks are part and parcel of this global

change, and offer buying opportunities.

32-62-72: These three figures are key to understanding

recent world economic trends. USD 32trn was the size of

the world economy at the start of this century; just under

USD 62trn was its size prior to the financial crisis; and

USD 72trn is the likely size of the world economy at the

end of this year. This means that, despite the crisis, the

world economy has continued to grow. These figures are

in nominal terms. Some of this reflects inflation, but most

of it reflects growth led by emerging economies.

The third key development is structural change across the

globe. In the West, the reliance on continued monetary

stimulus may delay structural reform, as has been the

case in Japan over recent decades. There is a fear that it

could lead to zombie banks and zombie firms. In contrast,

many companies across the emerging world are seeking

to move up the „value curve‟. Unfortunately, not all

emerging economies are pushing through the reform

agenda as they should.

Figure 1: Real GDP growth, Standard Chartered forecasts

% y/y

Sources: CEIC, Standard Chartered Research

0

2

4

6

8

10

12

CN HK TW KR SG MY ID TH PH VN IN

2011E 2012F 2013F 2000-10 average


Global and regional overview – Resilience in the midst of slowdown

24 September 2012 3

Last December, we predicted global growth of 2.2% for this

year. This was the lowest forecast from any major

organisation or financial institution A few months ago, we

revised this to 2.6%. We use slightly different weightings to

the IMF, which reports growth on a PPP basis, but our story

is consistent with the IMF‟s analysis. Back in December

2011, our expectations for this year were a steady, not

spectacular, recovery in the US; recession in the UK and

Europe; and cooling across the emerging world. We

thought China could weaken in the first half, possibly even

recording growth with a 6% handle, and expected a pick-up

in growth by Q3. It turns out that the US recovery has been

sluggish and that Europe has remained in recession. China

was slightly stronger in H1 than we had expected, but it

looks like the current weakness will last slightly longer than

expected. India, meanwhile, was expected to slow but has

weakened more than we thought. Next year, we believe

global growth will rise to 3.1%, and, if this is to be achieved,

China will play an important role.

In looking at Asia in this global context, three words stand

out: risk, insulation and differentiation. The global context

means that financial markets are now not fully pricing in

risk, while, at the same time, it is difficult to say what

constitutes a risk-free asset. Despite its present cooling,

one could argue that Asia offers more attractive return

opportunities given its better growth prospects. Yet,

international investors still appear underinvested in the

region, and markets with much opportunity – including

Indonesia and Thailand – are less favoured than the „safe‟

destinations of Hong Kong and Singapore.

Insulation reflects the fact that, while Asia is not fully

decoupled from events in the West, it is better insulated

and able to rebound, as was seen in the wake of the global

financial crisis. Likewise now.

Differentiation reflects the need to make a distinction

across the region: between the more open economies, hit

harder by the global slowdown, and closed economies. It

also points to the need to differentiate between the export

and domestic sectors. In much of Asia, domestic demand

has been growing more strongly than the export sector, a

welcome step towards rebalancing the global economy.

Asia's cycle is cooling

The outlook depends on the interaction between the

fundamentals, policy and confidence. Throughout this

year, I have stressed that the outlook for any region or

country depends on the interaction between these three

key factors.

For Asia, the underlying fundamentals remain good but

the near-term outlook continues to be impacted by events

in the West. Naturally, there are significant differences

across the region, as the latest economic performance

has shown. Because of the growth it has seen in recent

years, Asia is at a different stage of the cycle to

economies in the West.

Meanwhile, Asia's policy cupboard is relatively full, and in

recent months it has been geared more towards boosting

growth. This is in sharp contrast to over a year ago, when

inflation was the worry. Now, downside risks to growth

have come to the fore, and the policy bias across the

region has shifted towards easing. Still, it is necessary to

look at each country on its own merits to determine the

immediate policy outlook.

Figure 2: Asian regional inflation average

Figure 3: Post-crisis GDP levels in Asian economies

Real GDP, seasonally adjusted, Q4-2008 = 100

Sources: CEIC, Bloomberg, Standard Chartered Research Sources: CEIC, Standard Chartered Research

-2

-1

0

1

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3

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2008 2009 2010 2011 2012 2013

Q4 09

Q4 10

Q4 11

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CN IN SG ID TW VN MY KR HK PH TH

Bottom bar = Q4-09 Middle bar = Q4-10

Top bar = Q4-11



24 September 2012 4

Confidence is the hardest to forecast but can often have

the most dramatic near-term impact. And, indeed, there is

some evidence of this now. In recent months, economic

and financial-sector confidence across Asia has

deteriorated. At the moment, this is consistent with the

cooling of growth that we had factored into our thinking for

this year, but the outlook needs to be watched closely. We

were anticipating some rebound in H2-2012 in Asia, and

this remains our thinking, despite the more prolonged

slowdown in China. But contagion from the euro-area

crisis has hit exports, and worries about China's

immediate outlook are weighing on the region.

We have continued to stress the need to differentiate

between small- to medium-sized economies across Asia,

which are more exposed to weaker global activity, and the

more closed economies, which tend to enjoy more stable

growth rates.

Overall, Asia is enjoying growth rates above those in the

West. Even Japan is forecast to grow at a faster pace

than the US this year. But the recent slowdown is most

apparent in the seasonally adjusted quarterly data, which

shows contractions in Q2 in Hong Kong, Taiwan and

Singapore. The Philippines and South Korea were also

weak in Q2. In previous cycles, weakness in exports soon

spread to weaker domestic demand. Now, as the

domestic economies have grown, the previous

correlations may not hold as strongly.

Inflation has been trending downwards in Asia throughout

2012 and is expected to be around 3% in Q2, down from its

post-crisis peak of 5.9% in July 2011. Whilst the inflation

situation is currently largely benign, expected food-price

increases and rebounding oil prices could create inflationary

risks for H1-2013. The most dramatic deceleration in inflation

has been in Vietnam, where it dropped to 8.6% in Q2-2012

from 22.5% in Q3-2011. The most closely watched inflation

figures are in India, where inflation remains stubborn, and in

China, where inflation could accelerate in 2013 after

moderating this year.

We remain cautious about inflation across Asia on a two-

year cycle. For now, falling inflation may allow further easing

if needed, though the picture varies on an economy-by-

economy basis. Indonesia, for instance, may hike rates next

year, reflecting the possibility that growth there may be

above trend. The rest of the region may rebound, with growth

stronger than in the West but below the previous trend. This

is shown in Figure 1.

Longer-term issues

Much attention has recently been focused on India and

China, where the challenges have been greatest.

India has been hit over the last year by a loss of

confidence and a loss of economic momentum as a lack

of reform progress and public alarm at the extent of

corruption have held back growth. Instead of taking

advantage of healthy growth in previous years to push

through necessary reforms, Indian politicians seemed to

believe that growth in itself was enough. Clearly it wasn't,

as the weakness of the last year has shown. The

economy soon ran into inflationary bottlenecks, prompting

the Reserve Bank of India to hike rates. This tightening of

monetary policy, along with long-standing underlying

issues, has slowed growth. The government is now trying

to push reforms through, recently announcing some major

Figure 4: India’s twin deficits – current account and fiscal

% of GDP

Figure 5: India’s governance deficit

Number of cabinet decisions taken in a year

Sources: CEIC, Standard Chartered Research Sources: CEIC, Standard Chartered Research

(5.5)F

(3.4)F

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Mar 04 Mar 07 Mar 10 Mar 13

Fiscal deficit

Current account deficit

20 70 120 170 220 270

Jul 05 - Jun 06

Jul 06 - Jun 07

Jul 07 - Jun 08

Jul 08 - Jun 09

Jul 09 - Jun 10

Jul 10 - Jun 11

Jul 11 - Jun 12



24 September 2012 5

measures that had previously been shelved – better late

than never, but still a long way to go.

China, too, faces challenges. Its economy is slowing, but

there is not yet a sense of panic. China is moving from an

investment- and export-led economy to one driven more by

consumer spending. One implication of changing the model

for China's economy is the need to focus less on the

quantity and more on the quality of growth. That means

worrying less about the decimal point in China's GDP

number and instead seeing where growth is coming from.

China was hit hard by the global recession as exports

slowed. It then unveiled a huge fiscal stimulus. Although

the economy rebounded strongly, the authorities are

reluctant to repeat the scale of that boost now. There is a

feeling that pumping so much money into the economy

created problems, leading local governments into financial

difficulty and causing many things to be rushed. This meant

that not all investment spending was productive or sensible;

for example, some poor-quality roads were built, and there

have been serious safety issues with the rail build-out.

The current policy picture in China is one of proactive

fiscal policy and prudent monetary policy. The implication,

therefore, is that there is no need to worry about this

slowdown getting out of hand, as the authorities can ease

policy to prevent growth from weakening too much.

Indeed, since May, they have done just that. In any case,

this is not like the end of 2008, when 30 million migrant

workers lost their jobs – at least, not yet. In fact, 11 million

new jobs have been created this year, according to official

figures. And the authorities seem to have learned from

past mistakes. For instance, they are now relying more on

the private sector for investment projects, rather than

having purely public-led investment initiatives.

To achieve stronger domestic demand, some structural

changes are needed across Asia. This was highlighted in

the wake of the crisis at one of the annual meetings of the

Asian Development Bank. In order to move from export-

led to domestically driven growth, Asia needs to deepen

its bond markets, ensure finance for small- and medium-

sized firms to generate jobs, and develop its social

welfare system. The latter is seen as important in order to

discourage excess savings and to encourage people to

spend. All of this takes time. But Asia is moving in the

right direction.

Nonetheless, challenges from outside the region mean

that there is an air of uncertainty, but not pessimism,

among businesses, and a desire for the region generally –

and policy makers in particular – to avoid complacency.

Asia is in better shape than the West but has some

problems of its own. And this highlights the necessity of

macroeconomic stability.

Overall, Asia‟s economy is cooling. In recent months,

confidence has been hit. Our forecasts suggest that there

will be some recovery in growth rates across the region

next year. But for many countries, growth will be below the

trend rate seen over the last decade. Increasingly, Asia will

be the main driver of global growth. Inflationary pressures

are easing, but inflation remains a key worry for the region,

particularly if continued low interest rates in the West feed

increased inflows into Asia in the coming years.

Figure 6: Asian export growth

% y/y

Figure 7: China’s GDP growth

Real GDP, %

Sources: CEIC, CRB, Standard Chartered Research Sources: IMF – World Economic Outlook,

Standard Chartered Research

-27%

42%

6%

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Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 0

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1981 1986 1991 1996 2001 2006 2011


Australia – Living with a sub-8% China Kelvin Lau, +852 3983 8565

[email protected]

Ned Rumpeltin, +44 20 7885 5558

[email protected]

24 September 2012 6

Steady as she slows

A less helpful China

Australia should be well positioned to benefit as China revs

up its stimulus engine to counter slowing growth. This,

however, becomes a moot point when Beijing – after months

of measured policy easing – has yet to succeed in stabilising

growth, let alone turning things around. We now expect

China to record weak but stable growth in Q4-2012 and to

undergo a slow and difficult recovery in H1-2013, rather than

a more decisive upswing. China‟s shallower recovery

trajectory will mean less of a lift to Australia‟s growth over the

next 12 months. In addition, reduced upside for commodity-

price appreciation is weighing on Australia‟s terms of trade.

Given these factors, we revise down our GDP growth

forecasts for Australia to 3.3% for 2012 and 2.9% for 2013

(from 3.5% for both years).

These new forecasts are far from devastating; in fact, they

are still consistent with growth “running close to trend”, as

Reserve Bank of Australia (RBA) Governor Glenn Stevens

has described recent economic indicators. The terms of

trade have deteriorated from their Q3-2011 record high, but

they are still above their 2008 peak. While downside risks

are apparent in the coming months, we expect prices of

Australia‟s key commodity exports, such as iron ore, to

recover gradually throughout 2013. Australia‟s long-running

mining boom, plus the RBA‟s flexibility to cut policy rates

again if needed, will also provide support.

The beginning of the end?

Whether Australia‟s mining investment boom – which helped

the economy to weather the 2008-09 global financial crisis –

is coming to an end has been hotly debated in the market of

late. As the saying goes, all good things must come to an

end. The RBA has also said so: “The peak of the resource

investment boom as a share of gross domestic product, the

highest such peak in at least a century, will occur within the

next year or two”.

To take a glass-half-full view, though, the expected peak in

the next year or two means it is not imminent. The latest

Australian Bureau of Statistics survey shows that private

businesses still expect a 41.4% rise in mining investment in

FY13 (year ending June 2013), to AUD 119bn (see Figure

1). While recent news that some longer-term mining

expansions are being shelved points to a less favourable

operating environment for miners (in the form of narrowing

margins and more intense competition), we believe the boom

can still carry the Australian economy a bit further.

It is uncertain how quickly mining investment will retrace from

its peak once this happens, whether in FY14 or FY15.

Hopefully, China and the global economy will be much

healthier by then. A structural uptrend in commodities over

the medium term should also help to ensure that mining

investment comes off its peak in an orderly manner. If

anything, the non-mining sector, having long been a victim of

the „Dutch disease‟, could start playing a bigger role in

driving growth by then. Less crowding-out will mean a more

balanced economy.

RBA can afford to play it safe by cutting again

The combination of a stabilising (at best) Chinese economy,

subdued commodity prices, and the government‟s goal of

balancing the fiscal budget this fiscal year underpins our

view that near-term risk to policy rates is to the downside.

We see room for another 25bps cut by the RBA sometime in

Figure 1: Mining investment boom is still intact

New mining capital expenditure, actual & estimated, AUD mn

Figure 2: Recent disappointment in a still-tight job market

Employment change, thousands, 3mma

Sources: ABS, Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research

0 30,000 60,000 90,000 120,000

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

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FY12

FY13 (F)

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Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12


Australia – Living with a sub-8% China

24 September 2012 7

Q4-2012, given that inflation is not a concern (the RBA

continues to see inflation as consistent with its 2-3% average

target over the next one to two years, and we agree).

Increasingly mixed domestic economic indicators (following

stronger-than-expected readings across the board for May

and June) could also prompt the RBA to play it safe by

easing pre-emptively, as it did in Q2. For example, the

surprise drop of 8,800 in employment in August (Figure 2)

has revived market concerns that the impressively steady

unemployment rate since the global downturn started in 2011

may not be sustainable. Recent data on building approvals

has also been disappointing, while consumer confidence is,

at best, stabilising at weak levels for now (Figure 4). The

RBA‟s monetary flexibility should underpin domestic

resilience; this, coupled with the mining investment boom,

should help Australia to weather any further drag on headline

growth from the external sector.

Our call for another 25bps rate cut in Q4-2012 is broadly in

line with what the AUD OIS is currently pricing in (30bps of

cuts by year-end). Beyond that, we expect the RBA to keep

interest rates steady until at least Q3-2013; the additional

55bps of RBA cuts the market is pricing in over the next 12

months appear excessive, in our view.

FX outlook

AUD faces its fair share of headwinds

Australia‟s terms of trade have deteriorated sharply amid the

recent collapse in iron ore and coal prices. The persistently

high value of the Australian dollar (AUD) has contributed to

the trade balance slipping back into deficit this year, while

the domestic economy is also showing signs of deceleration.

Concerns about a slowdown in mining capex and the

housing market have added to the view that Australia‟s boom

period is over.

It is important to note, however, that the AUD is often more

responsive to external factors than domestic ones. In this

context, the AUD has remained remarkably steadfast despite

concerns about China‟s growth prospects. Recent gains in

global equity markets account for some of this resilience, as

the AUD is often a reliable barometer of broad investor

sentiment. Here, the Federal Reserve‟s renewed quantitative

easing programme may boost the performance of risk assets

in coming weeks, providing further support to the currency.

Substantial bond-market inflows from both private- and

public-sector accounts have also supported the currency.

While such inflows have slowed in recent months alongside

slower export growth in key Asian economies, we expect

these flows to remain an important source of support over

the medium term. With markets pricing in roughly 90bps of

further policy rate cuts over the next 12 months, if the RBA

cuts by only another 25bps in Q4-2012 – as we expect – this

may be mildly positive for the AUD as such expectations

diminish.

Figure 3: Retail sales have ended their recent impressive run

Retails sales, % m/m

Figure 4: Still waiting for domestic green shoots

Consumers are not convinced yet

Sources: Bloomberg, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research

-1.0

-0.5

0.0

0.5

1.0

1.5

Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12

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Consumer Confidence Index (RHS)

Building approvals (% y/y)


Bangladesh – Domestic conditions to support growth Samantha Amerasinghe, +94 11 2480015

[email protected]

Nagaraj Kulkarni, +91 22 6115 8842

[email protected]

24 September 2012 8

Downside risks may offset gains

Economic momentum is reasonably strong in the short term.

Improving domestic macroeconomic conditions, particularly

on the inflation and exchange rate fronts, should cause

growth to pick up to 6.5% in FY13 (year ending 30 June

2013) from our forecast growth of 6.1% for FY12. We believe

stronger domestic demand will drive this improvement.

However, the weak global outlook – particularly the impact

on Bangladesh‟s key export markets and the spillover effects

from the euro-area crisis – concerns us. Political tensions are

high, affecting the real economy via weak sentiment and

investor caution. Power shortages, poor infrastructure,

declining exports amid the faltering global recovery, and the

threat of political instability are risks to our 6.5% growth

target for FY13.

Monetary easing is possible in H1-FY13

Monetary policy remains accommodative, with a special

focus on stimulating „inclusive growth‟ while keeping

inflation at moderate levels. Headline inflation averaged

10.6% in FY12 and remained stubbornly high at the start of

FY13 due to sharp increases in non-food inflation driven by

higher domestic fuel and energy prices. However, it slowed

to a 20-month low of 7.9% y/y in August. We expect

domestic price pressures to continue to ease, in line with

the gradual deceleration in M3 (broad money supply)

growth. We have therefore revised down our FY13 inflation

forecast to 8.1%. Falling inflation could be a boon to

Dhaka‟s depressed stock market.

In line with our view, Bangladesh Bank (BB) kept rates on

hold in H2-FY12 after hiking the benchmark repo rate by

50bps to 7.75% in January. We expect the existing monetary

policy stance to continue, but lower inflation might prompt BB

to cut policy rates by at least 25bps in H1-FY13 (to 7.50%) to

boost liquidity and stimulate growth.

IMF loan – A buffer against external headwinds

Under the IMF loan package approved in April, Bangladesh

will receive USD c.987mn in seven equal instalments over

three years. This is a clear positive in terms of stabilising

the balance-of-payments (BoP) position. The loan is

extended under an Extended Credit Facility (ECF) and

carries a 0% interest rate, with a grace period of 5.5 years

and a final maturity of 10 years; it can be extended for two

additional years.

The BoP position is improving – the current account balance

returned to a USD 1bn (0.9% of GDP) surplus in FY11, and

we expect another surplus for FY12 owing to weakness in

the Bangladeshi taka (BDT); the surplus is likely to narrow

marginally to USD 0.8bn (0.7% of GDP) in FY13. The IMF

loan will provide a buffer against external headwinds.

Bangladesh‟s foreign reserves position is still precarious,

with the latest data showing reserves at the internationally

recognised minimum level of just three months of imports in

March 2012.

Export growth is slowing largely due to continued weakness

in the EU – Bangladesh‟s largest export market, accounting

for c.53% of total exports. Export growth remained in

negative territory (-4.2% y/y) in May, according to the latest

data available. A higher fuel import bill is likely to put

significant pressure on the BoP, but remittances are a silver

lining, growing consistently in double digits and helping to

push the current account into surplus. The conditions

attached to the IMF loan programme should also act as a

policy anchor, helping to push through important structural

reforms. The authorities have agreed to improve fiscal

consolidation by containing subsidies and raising tax

revenues, to take a more restrained approach to monetary

policy, and to maintain greater flexibility in exchange and

interest rates.

Fiscal consolidation is on track

The Bangladesh Awami League (BAL)-led government

unveiled its record BDT 1.92trn (USD 24.3bn, or 18.1% of

GDP) budget on 7 June. The FY13 budget includes

credible steps towards fiscal consolidation, underpinned by

the conditions attached to the ECF. Fiscal slippage seems

Figure 1: Standard Chartered Research forecasts –

Bangladesh

2011 2012F 2013F 2014F

GDP (real % y/y) 6.7 6.1 6.5 6.9

CPI (% annual average) 8.8 9.0 8.1 8.5

Policy rate (%)* 6.75 7.75 7.00 6.75

USD-BDT* 77.5 80.5 83.5 87.0

Current account balance (% GDP) 0.9 0.7 -0.7 -0.5

Fiscal balance (% GDP) -4.2 -5.0 -5.5 -5.6

Note: All forecasts except USD-BDT refer to the July-June fiscal

year ending in the year in column heading; * end-period;

Source: Standard Chartered Research


Bangladesh – Domestic conditions to support growth

24 September 2012 9

unlikely given the BAL‟s proven track record of achieving its

fiscal targets since returning to power. In its three previous

budgets, the BAL government has set its expenditure

targets higher than revenue growth. In this budget, the

government projects expenditure growth of 18.9%, down

from 25.8% in FY12. In line with IMF conditions, the

government has agreed to create fiscal room for more

growth-critical spending by increasing tax revenues 22%

and containing subsidy costs through better targeting of the

country‟s social safety nets.

The FY13 budget targets GDP growth of 7.2% in FY13 – a

very optimistic target, in our view. It also pledges to limit

inflation to 7.5% and the fiscal deficit to 5% of GDP. The

monetary programme for FY13 seeks to contain reserve

money growth to 14.5% and broad money growth to 16%

by end-2012, which will help to contain inflation. In light of

the subdued outlook for global trade, Bangladesh Bank

expects only modest growth in foreign reserves, but will

continue to support a market-based exchange rate while

minimising exchange rate volatility as much as possible.

Bangladesh‟s perennial energy crisis is another key

concern. While overcoming power shortages may be

feasible in the medium term, the short-term outlook is

challenging. The lack of political will and the scarcity of

funding (both domestic and international) are major

stumbling blocks; as a result, many major power projects

are unlikely to be completed. On a positive note, the

country‟s energy supply should receive a boost from the

first discovery of commercially viable oil reserves, 137mn

barrels of oil in two gas fields in the north eastern Sylhet

district. Bangladesh spent about USD 5bn on crude oil

imports in FY11, a large portion of which was subsidised by

the government. Bangladesh plans to float an international

bid to select foreign firms to commence oil extraction within

the next 18 months.

Stable BDT as BoP position improves

USD-BDT has remained relatively stable, trading in a

narrow band in Q2-2012, largely as strong remittances

boosted the current account. We forecast USD-BDT at 80.5

at end-2012. Our medium-term outlook for the BDT is more

cautious, as we believe the current account may slip back

into deficit due to external risks. The BDT depreciated

substantially in FY12 after Bangladesh Bank removed the

hard peg against the USD in mid-2010. We expect BDT

stability to be supportive of the economy in FY13. With the

BoP outlook stabilising, the central bank is likely to

maintain the BDT at current levels.

Stable government bond yields

Since the beginning of FY13, several factors have

contributed to the stability of the government bond yield

curve: consolidation in the macro environment, easing

money market rates, and a change in the central bank‟s

policy on commercial banks‟ investments in government

securities. Inflation has been softening amid stable growth

(although it remains above the central bank‟s 7.5% target),

and this has increased expectations of a stable policy rate

environment for the remainder of 2012. The central bank is

likely to maintain its anti-inflation policy stance via tight

banking-system liquidity. However, it continues to fine-tune

the liquidity situation – interbank overnight borrowing costs

(the monthly average call money rate) touched a 2012 low

of 10.58% in July – and this has supported government

bonds.

More importantly, in an attempt to ease pressure on

primary dealer banks, the central bank has mandated 25

scheduled non-primary dealer banks to buy 40% of the

notified amount at every T-bill and T-bond auction. This

measure has widened the investor base for government

bonds and limited the rise in yields, despite the central

bank‟s anti-inflation stance. Given our view of monetary

easing in Q1-2013, we expect yields to peak in Q4-2012.

Figure 2: Headline inflation is starting to cool

% y/y

Sources: Bangladesh Bank, Standard Chartered Research

Food inflation

CPI Inflation

0

2

4

6

8

10

12

14

16

Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12


China – No country for old ideas Stephen Green, +852 3983 8556

[email protected]

Wei Li, +86 21 6168 5017

[email protected]

Lan Shen, +86 21 6168 5019

[email protected]

Robert Minikin, +852 3983 8567

[email protected]

24 September 2012 10

The economy has changed, has Beijing?

This is not the economy Vice Premier Li Keqiang wanted to

inherit. But it is the one he is going to have to run – and we

hope, transform – over the next decade. Rather than the

sudden collapse in demand Beijing faced in Q4-2008, it has

endured an inexorable slide in real growth in 2012,

particularly in manufacturing. Actual GDP growth is probably

now running below the official numbers, although not to a

large extent. More worrying is that sentiment has

deteriorated, both offshore and on. This is not a country for

old ideas – China‟s new leadership will need to think anew

about how to run this economy. Here, we run through the big

themes for 2013 and beyond.

Below-8% GDP growth. We expect official GDP growth for

2012 to come in at 7.7% (revised down from our late-2011

call of 8.1%). The monetary stimulus of Q2-2012 was

measured, delivering loan growth of 15-16% y/y for most of

H2, but the evidence is not yet clear-cut that it has

neutralised the downward momentum generated by the

housing and export sectors. We look for clearer signs of

stabilising growth in Q4-2012 and a slow recovery in H1-

2013. We estimate that official GDP growth in 2013 will be

7.8% (previous: 8.7%). Growth in the 7-8% range should be

achievable over 2013-18, but will depend on the

implementation of a real structural reform programme.

The end of active monetary policy. With the loss of large

FX inflows, there is now no natural driver of China‟s base

money growth (although we suspect that the trade surplus

will rise in 2013, so there will likely be some net FX inflows).

M2 growth will be around 14% again in 2013, and total bank

loan growth around 15%. The leadership of the People‟s

Bank of China (PBoC) seems to believe that rates are already

at an appropriate level. We now no longer expect another

benchmark rate cut in 2012, and expect only one more reserve

ratio requirement (RRR) cut; but if the data deteriorates further,

the State Council will act to cut further. In terms of rate reform,

the next move will be for an interbank rate (repo or reverse

repo) to be used as a new benchmark. Repo volatility needs to

be reduced, though, before this is feasible.

Keeping leverage flat. While the US and Europe are in the

midst of a painful multi-year deleveraging process, China is

undergoing something slightly different. Policy makers seem

to want to keep leverage levels flat, or up only a bit. This is

different from the debt-fuelled growth of 2009-10, but is

nowhere near as painful as what is happening in the

developed world. This policy stance comes at the same time

as the downturn in China‟s business cycle. Bosses who

expanded companies by boosting assets, relying on cheap

cash and endless top-line-sales growth, now have to worry

about margins, cash-flow management and efficiency.

Hopefully, the cycle will be turning by H2-2013.

Resolving non-performing loans (NPLs). Banks‟ NPLs

and corporate receivables have begun to rise this year, and

will likely become bigger problems in 2013. The State

Council will need to consider a new NPL resolution regime,

which could involve selling commercial NPLs to the four

asset-management companies (AMCs) and other boutique

NPL firms, and possibly setting up a dedicated loan

resolution mechanism for local-government-investment-

vehicle (LGIV) loans. A working corporate bankruptcy regime

would help. Many banks will need to recapitalise, and some

small banks will be closed or merged.

Opening up the services sector. Services are growing on

the back of the expanding urban middle class and the

increased complexity of manufacturing. But the government

urgently needs to nurture the services boom by getting out of

the way and selling down its interests in businesses such as

hotels, telecommunications, financial services, and

entertainment. The sector could also do with a big regulatory

clean-up and a reduction in the number of rules and

regulatory agencies.

Tax cuts, spending cuts and a slightly bigger budget

deficit. China has been able to run small budget deficits as

the government pushed massive infrastructure spending off

to banks‟ balance sheets. Such loans to LGIVs have been

reclassified, but they remain a key quasi-fiscal risk. All of this

Figure 1: A moderate recovery in 2013

Real GDP growth; includes our forecasts


GDP, q/q SAAR

Official GDP growth, y/y

6%

7%

8%

9%

10%

11%

12%

13%

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13


China – No country for old ideas


needs to be brought onto public balance sheets. Tax

revenues are down, and the very slow land market has

further tightened local government finances. In order to

stimulate growth, the government could consider cutting

budgets for official banquets, cars and holidays/study trips,

as well as spending on domestic security and industrial

subsidies and use the savings to finance a VAT cut, which

would stimulate consumption. There is no shame in a 3%

GDP deficit if the money is well spent.

Selling state assets. Former Premier Zhu Rongji oversaw a

big sale of small state enterprises in the mid-1990s, driven

by debt and inefficiency; this boosted productivity growth and

catalysed the emergence of the private sector. Given rising

local government debt, a second wave of state-owned-

enterprise (SOE) sales would be welcome. At the same time,

central-level SOEs need to donate about 30% of their profits

to the budget; until now, their dividends have been

channelled back into industrial subsidies.

Housing market. The housing market will be dominated by

the absorption of residential housing inventory in H1-2013.

We expect home purchase restrictions to be tweaked but not

eliminated, and do not expect a significant property tax to be

rolled out. Such a tax would be progressive (as it would

reduce the incentive to take land from farmers) and

reasonable (urban residents need to pay for urban

infrastructure), but the politics of introducing another tax are

extremely difficult. Housing prices in Tier 1 cities will

increase. As inventories fall in the rest of the country, prices

could rise there too in H2. Construction activity will see a

strong rebound only in H2.

A debate about inflation. In 2013, CPI inflation will be

driven by the pig cycle, easy money in US and Europe, and

utility price reform. Metro, water, gas and electricity prices for

households all need to increase to make these sectors

sustainable – water by 50%, for instance. Wage pressures

will be contained, though. We look for CPI inflation of 2.5% in

2012 and 4% on average in 2013. We think it will breach 5%

y/y in H2-2012, and that this will trigger a new round of hikes

from the PBoC, one in 2013 and four in 2014.

Adopting a ‘more than one child’ policy. If Premier Li

wanted to give everyone a big shot of optimism about the

future, he would resolutely scrap the one-child policy.

China‟s demographics indicate that the labour force is

probably already shrinking, and the expense incurred in

rearing a child is likely to stifle any feared baby boom.

FX, rates and credit

The case for a substantial change in the value of the Chinese

yuan (CNY) is very weak. The likely current account surplus,

at 1.9% of GDP for 2012, is far below the 10.1% recorded in

2007. This ratio would not be noteworthy in a major developed

economy. Rebalancing towards domestically led growth

seems to be under way; indeed, there are signs that fast wage

growth and a stronger CNY have undermined China‟s external

competitiveness in recent years.

While we predict little change in the CNY‟s trade-weighted

value through to end-2013, there is still room for modest

CNY gains against the USD. We project USD-CNY at 6.31

by end-2012 and 6.19 by end-2013 (a 1.9% CNY gain over

the year). This appreciation reflects a broader advance by

Asia ex-Japan currencies against the USD. Of the three

major FX forward curves, the USD-CNH deliverable forward

curve is the most steeply upward-sloping, discounting the

most forward FX depreciation. MNCs with onshore CNY

payables and USD receivables in 2013 should hedge these

flows in the offshore deliverable market.

Chinese credits have outperformed JACI (the Asian credit

index) on a total return basis, thanks to the rally in Chinese

HY credits throughout 2012. Quasi-sovereign high-grade

(HG) credits have done OK but have underperformed their

Korean peers due to a combination of higher-than-expected

supply and concerns about slowing growth. We are currently

Underweight Chinese HY corporates and prefer stronger BB

names over single-B names given slowing growth; we broadly

prefer property names to industrials. However, we see value

in selected HG quasi-sovereigns given the recent widening

of spread differentials versus Korean quasi-sovereigns,

which have weaker standalone fundamentals.

Figure 2: CNY’s trade-weighted value is set to plateau

near 2012 highs (2010 = 100, BIS methodology)


85

90

95

100

105

110

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

Forecast


Hong Kong – An overcast dawn Kelvin Lau, +852 3983 8565

[email protected]


[email protected]


A drawn-out recovery

China is in for a slow turnaround

Recent data from mainland China has been generally

lacklustre, while policy stimulus from Beijing appears

measured at best. Rather than expecting imminent green

shoots, we are now calling for weak but stable growth in

China in Q4-2012, followed by a difficult recovery in H1-

2013. This, along with our long-held cautious view of the

West‟s recovery trajectory over the coming year, prompts us

to revise down our Hong Kong GDP growth forecasts to

1.8% for 2012 and 3.8% for 2013, from 2.3% and 5.0%,

respectively. A bigger external drag will mean a more drawn-

out, U-shaped recovery.

We still believe that H1-2012 was the trough of Hong Kong‟s

current growth cycle. The y/y base effect, for one, is

expected to improve in the coming quarters. A stabilising

China should at least create a floor for Hong Kong‟s GDP

growth entering Q3. Hong Kong‟s recent PMI readings have

diverged from China‟s, holding above the neutral 50 mark

after falling briefly below it in May and June (while the

mainland‟s official reading dipped below 50 for the first time

in nine months). The „New China Business‟ PMI sub-

component came in at 50.1 in August, up from 46.8 in July,

suggesting an expansion in China-related new orders for the

first time in five months.

This evidence of insulation from external headwinds,

however, should not be mistaken for immunity. Our SME

Leading Business Index for July (derived from a quarterly

survey conducted independently by the Hong Kong

Productivity Council) foresaw still-challenging times

throughout Q3-2012 for Hong Kong SMEs. The diffusion

index came in at a weak 42.9 (a reading below 50 denotes

general pessimism over a three-month horizon). Sentiment

among manufacturers was even more bearish, at 41.5.

Anecdotally, while some clients noted that US orders have

stabilised somewhat lately, orders from the euro area were

said to have remained weak; this is in line with what the

actual data is telling us (Figure 1). The SME Leading

Business Index for Q4-2012 (to be released in October)

could stay below 50, suggesting another quarter of subdued

sales and margin compression. We also expect it to show a

continued willingness to hire and to invest (these readings

were at 53.1 and 54.0, respectively, in July), indicating

underlying optimism towards the ability to ride out the storm.

A soft landing for domestic consumption

Lingering external weakness means that domestic demand is

likely to remain instrumental in driving headline growth. As

Figure 2 shows, private consumption expenditure (PCE) has

been doing much of the heavy lifting. Admittedly, PCE

contributed less to headline growth in Q2 than previously,

partly reflecting the inevitable spillover from external

uncertainty to local sentiment; the less favourable base effect

also played a role. Recent disappointing retail sales growth

also deserves a closer look.

In value terms, retail sales growth came in at a weaker-than-

expected 3.8% y/y in July, down from an average of just

above 10% y/y in Q2-2012 and 23.3% in Q4-2011. Cooling

per-capita spending by mainland Chinese tourists has clearly

weighed on sales of jewellery, watches and other valuable

goods – the largest retail sales component in nominal terms,

accounting for some 20% of the total. The silver lining is that

the number of mainland tourists visiting Hong Kong

continues to grow at an extraordinary rate (Figure 3). We

Figure 1: Exports to the EU – Like a sore thumb

Export growth by destination, % y/y 3mma

Figure 2: PCE has helped Hong Kong weather the storm

Contributions to y/y real GDP growth, ppt


To EU

To US

To China

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

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

PCE

Net exports

Others

-10

-5

0

5

10

15

20

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Headline growth


Hong Kong – An overcast dawn


believe that this, alongside other still-favourable domestic

factors, should provide a floor for retail sales growth.

The ability and willingness of Hong Kong households to

spend is normally better illustrated by sales of consumer

durable goods. Sales of motor vehicles, furniture and big-

ticket electronic items, whose growth has also moderated of

late, continue to be much more resilient to external

headwinds this time around than during the 2008-09

downturn. An unemployment rate that is consistent with full

employment certainly helps – the latest 3.2% reading is the

same as the cyclical lows registered in mid-2008 and mid-

2011 (Figure 4). Low unemployment underpins nominal

wage growth; we expect an increase of around 5.0% in H2-

2012. This, together with the likely muted near-term impact

of the government‟s latest property-cooling measures, should

ensure a soft landing for retail sales – a prerequisite for Hong

Kong to see a U-shaped economic recovery.

QE3 to keep inflation worries alive

The US Fed‟s recent launch of QE3 is also growth-positive

for Hong Kong. Through it, Hong Kong is set to enjoy

monetary easing thanks to its currency peg and its openness

to capital inflows. The resulting support for local liquidity

conditions, however, should keep inflation worries alive for

longer. QE3 is also likely to increase housing price

appreciation expectations. We are revising up our CPI

inflation forecast for 2012 to 4.0% from 3.5% to reflect the

property sector‟s better-than-expected performance year-to-

date; we also revise up our 2013 forecast to 4.5% from 3.5%

on expectations that QE3 will anchor broader price

appreciation expectations, whether for consumer goods,

wages or property.

FX outlook

We recently reviewed the backdrop to the linked exchange

rate system between the Hong Kong dollar (HKD) and the

US dollar (USD) (FX Alert, 24 August 2012, ‘HKD –

Fundamentals reinforce case for no change’). In our view,

the Hong Kong authorities theoretically have more room for

manoeuvre in setting FX policy now than they did in previous

decades. This reflects strong economic fundamentals, the

powerful build-up of international reserve assets, and other

factors. Hong Kong clearly has the option of adopting a more

flexible FX policy (similar to that of Singapore) while

maintaining a reserve fund to back HKD note issuance.

In practice, however, the case for exploiting this room for

manoeuvre is very weak. Making such a change would entail

tangible costs given the credibility and transparency of the

current FX regime and the access to hedging opportunities in

the deep USD financial markets afforded by the link. The

benefits of any change are highly uncertain. It is notable, for

example, that Singapore‟s FX-oriented monetary policy has

not generated substantially better inflation outturns than

those in Hong Kong, despite the Monetary Authority of

Singapore‟s ability to manage the Singapore dollar‟s value.

It is appropriate for the suitability of the HKD peg to come

under periodic official review, but any change in Hong Kong‟s

FX regime will likely be delayed for many years. Any such

adjustment may involve a more profound change (such as a

link to a convertible Chinese yuan) rather than simply a more

flexible link to the USD. Against this backdrop, strategies

based on an unchanged FX regime are likely to be

appropriate. In the case of corporations, this will be

particularly true where the strategies complement underlying

FX exposure (for example, selling USD-HKD downside in the

context of HKD receivables and USD payables).

Figure 3: Mainlanders are more cautious, but still arriving

Retail sales by value (RS), visitor arrivals from China, % y/y

Figure 4: Sales of consumer durable goods are down but

not out, thanks in part to still-tight labour market

Sources: CEIC, Standard Chartered Research Sources: Bloomberg, Standard Chartered Research

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Retail sales: Jewellery, watches and valuable gifts

Visitor arrivals from mainland China

Headline retail sales

2%

3%

4%

5%

6% -20%

-10%

0%

10%

20%

30%

40%

50%

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

Retail sales: Consumer durable goods (% y/y)

Unemployment rate (RHS, inverted)

https://research.standardchartered.com/configuration/ROW%20Documents/HKD_%e2%80%93_Fundamentals_reinforce_case_for_no_change_%5bCORRECTION%5d_24_08_12_06_46.pdf

https://research.standardchartered.com/configuration/ROW%20Documents/HKD_%e2%80%93_Fundamentals_reinforce_case_for_no_change_%5bCORRECTION%5d_24_08_12_06_46.pdf


India – At a crucial juncture Anubhuti Sahay, +91 22 6115 8840

[email protected]


[email protected]

Nagaraj Kulkarni, +91 22 6115 8842

[email protected]

Bharat Shettigar, +65 6596 8251

[email protected]


2013 outlook is cautious as risks persist

While India‟s macro backdrop remains challenging, a series

of recently announced government reforms to contain the

fiscal deficit and increase foreign participation in selected

sectors has led to renewed optimism. These measures

should have a positive medium-term impact; however, they

may not have an immediate effect on growth. It will be

important to maintain the reform momentum in order to put

growth back onto an upward trajectory. The government has

promised more action, but until it delivers, we will remain

cautious.

Against this backdrop, forecasting the economic scenario in

2013 is challenging. It will hinge on three inter-related

factors: immediate government action to kick-start the

investment cycle, the resulting impact on India‟s sovereign

rating, and the likelihood of a mid-term election thereafter.

Policy inertia in approving investment projects has reduced

India‟s growth to levels similar to those seen during the

global financial crisis. The market has priced in GDP growth

of 5.0-5.5% for FY13 (year ending 31 March 2013). The

slowdown in growth has had consequences including a wider

fiscal deficit amid lower tax revenue generation. Though the

government‟s recent announcements send a strong signal of

its commitment to fiscal consolidation, further expenditure

reforms are needed to ensure that fiscal consolidation is

sustainable. Otherwise, the risk of a sovereign rating

downgrade cannot be ruled out (India‟s current sovereign

rating from S&P is BBB- with a negative outlook). While S&P

commended the recent reform announcements, it raised

doubts about their effective implementation and their

medium- to long-term benefits. Also, a further deterioration in

economic conditions or a strong push by the government to

implement contentious reforms would increase the

probability of a mid-term election in 2013 amid increased

opposition from other political parties. If any of these risks

materialise, they could cloud the growth outlook for FY14.

We assume a „muddle-through‟ scenario where policy

measures partially revive the investment cycle, defining a

floor for growth and deferring negative rating actions. We

also expect the next elections to occur as scheduled in May

2014, despite a busy political schedule, with 10 state

elections slated until the end of 2013. Again, risks to our

base-case scenario remain high and will depend crucially on

government actions in the next few months.

We forecast dismal GDP growth of 5.4% in FY13 (versus

6.5% in FY12), followed by a marginal improvement to 6.0%

in FY14 (largely a technical rebound). We also expect further

government action to improve economic activity. Assuming

some positive steps are taken in the next couple of months,

a measurable impact on investment is unlikely before Q3-

FY14. Investment has languished for the past three quarters,

growing at an average of 1.3% y/y, and many corporates

have shelved plans for capacity addition or expansion.

Restoring investor confidence and reviving investment plans

will occur with a lag.

The crowding-out of private investment is likely to continue

next year, as the government is expected to run a large fiscal

deficit. We forecast the FY14 deficit at 5.5% of GDP (with

risks to the upside), versus our forecast of 5.8% in FY13.

With 10 state elections scheduled for 2013 and general

elections due in 2014, contentious reforms (such as those

involving land acquisition) or spending cuts (particularly to

subsidies, which are forecast at 2.4% of GDP in FY13) are

likely to be deferred.

There is also a risk that the government will announce

populist measures such as the implementation of the Food

Security Bill to woo voters, further straining fiscal health.

According to the food minister, implementation of this bill

alone would add 0.3% of GDP annually to the fiscal deficit.

A wide fiscal deficit is likely to keep inflationary pressures

high, despite a slowdown in economic activity. We expect

inflationary pressure to ease on slower growth but to stay

above the Reserve Bank of India‟s (RBI‟s) usual comfort

level of 5%. We forecast WPI inflation at 6.5% y/y in FY14,

versus 7.8% in FY13. Given the likely slowdown in economic

Figure 1: Slower growth, still-elevated inflation

% y/y


WPI

GDP growth

0%

2%

4%

6%

8%

10%

12%

Q3-FY6 Q3-FY8 Q3-FY10 Q3-FY12 Q3-FY14

Forecast


India – At a crucial juncture


activity and lower inflation, we expect the RBI to reduce the

repo rate by 100bps to 7% in 2013. While lower interest rates

should help the investment cycle, they will not be enough to

provide a strong boost to economic activity, in our view.

The external sector will face continued headwinds from weak

macro fundamentals. Financing of the still-wide current

account deficit (which we forecast at 3% of GDP in FY14) will

remain vulnerable to capital flows such as portfolio

investment. The expected increase in FDI triggered by

recently announced reforms will help at the margin but is

unlikely to offset the pressure from huge debt redemptions.

Local markets outlook

Rate cuts to be mildly positive for GoISecs

We are only mildly positive on GoISecs for 2013 given our

base case of still-slow growth, monetary easing and a

persistently wide fiscal deficit. While the expected 100bps of

repo rate cuts in 2013 should be a significant positive, we

expect another year of record market borrowing, which is

likely to limit duration gains.

During India‟s last two monetary easing cycles (March 2001

to March 2004 and October 2008 to April 2009), GoISec

yields and policy rates showed strong co-movement, and the

peak-to-trough decline in GoISec yields was similar in

magnitude to policy rate cuts. However, with the FY14 fiscal

deficit estimated at c.5.5% of GDP, market borrowing is likely

to exceed that in FY13, resulting in another year of record

GoISec issuance. Initial estimates of demand from key

investors point to supply pressure in the market. Specifically,

if sluggish deposit growth continues into next year, demand

from the banking system – the largest investor in GoISecs –

is unlikely to keep pace with supply, particularly after the

recent reduction in the statutory liquidity ratio (SLR). The risk

of a rating downgrade is also likely to weigh on foreign

investors‟ sentiment.

INR outlook is still cloudy

The latest raft of policy measures underpins the 2013 outlook

for the Indian rupee (INR). Of particular importance to India‟s

external accounts is the satisfactory resolution of the General

Anti-Avoidance Rules (or GAAR) issue, which appears

imminent. The government has also pressed ahead with

liberalisation of FDI in certain sectors. These steps,

combined with measures to curb the budget deficit

overshoot, should promote foreign institutional investor

inflows. However, they come against an unfavourable

domestic backdrop of persistently high inflation, weak activity

readings and downside surprises in external trade (the

monthly trade deficit for April-August 2012 averaged USD

14bn). Our forecast profile for USD-INR is modestly below

the onshore forwards for 2013, but India‟s twin trade and

budget deficits create risks to the INR over the medium term.

We recommend that Indian corporations with overseas FX

receivables and INR payables maintain neutral hedge ratios.

Marginally Overweight Indian credits

We maintain our Negative outlook on the Indian sovereign,

although we do not expect a rating downgrade in 2012. That

said, unless the government takes policy steps to revive

growth (especially investment demand) and reduce the fiscal

deficit (especially fuel/fertiliser/food subsidies), the risk of a

downgrade will increase in 2013.

While the global macro picture remains weak, strong

technicals – supported by cash on the sidelines and low US

Treasury yields – appear to be supporting credit markets.

Also, given stronger-than-expected moves by the European

Central Bank and the Fed, credit spreads will likely grind

tighter in the near term. Despite their recent outperformance,

Indian corporate and bank credits continue to trade wider

than most names in the low-investment-grade Asian space

and offer attractive carry. Hence, we are marginally

Overweight India in our Credit Model Portfolio. That said,

current Indian spreads are only partly pricing in the possibility

of a downgrade to non-investment grade. Hence, we will

consider adjusting our positioning in the next two to three

months, depending on macro data and policy steps by the

government.

Figure 2: Twin deficits

% of GDP


Fiscal deficit

C/A deficit

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14

Forecast


Indonesia – Yudhoyono prepares for his legacy Fauzi Ichsan, +62 21 2555 0117

[email protected]

Eric Alexander Sugandi, +62 21 2555 0596

[email protected]

Jennifer Kusuma, +65 6596 8250

[email protected]

Thomas Harr, +65 6596 8247

[email protected]


Forecast

Stronger growth expected in 2013

2013 will be the last year during which President Yudhoyono

can rule effectively before the general and presidential

elections in 2014. While Yudhoyono is constitutionally barred

from running for a third term, he is likely to want to cement

his legacy as a successful president. With his Demokrat

Party still struggling to regain popularity after several

corruption scandals involving its elites, the best way for him

to achieve this goal is to deliver a strong economic

performance for Indonesia. In the post-Soeharto era,

Yudhoyono‟s predecessors (Habibie in 1998-99,

Abdurrahman Wahid in 1999-2001, and Megawati

Soekarnoputri in 2001-04) were all unable to deliver growth

rates above 6.5%.

In the 2013 budget bill, the government targets GDP growth

of 6.8% next year, versus 6.5% in the revised 2012 budget.

To achieve this ambitious target, the government has tried to

boost spending on infrastructure, issuing a presidential

decree on land clearance for public infrastructure

development in August 2012 and increasing funds allocated

to infrastructure by 7.7% in the 2013 budget. However, Bank

Indonesia (BI) Governor Darmin Nasution has called the

government‟s 2013 GDP growth target “too optimistic”, citing

Indonesia‟s deteriorating export performance amid the global

economic slowdown (BI projects that the economy will grow

6.6- 6.7% next year).

Although we acknowledge that the government has made

some progress on infrastructure development, we do not

expect it to significantly accelerate its infrastructure spending

or encourage the private sector to increase such spending

next year. Hence, in our view, the government‟s 2013 GDP

growth target may be difficult (if not impossible) to achieve.

While we are less optimistic than both the government and

BI, we expect Indonesia‟s GDP growth to accelerate in 2013,

driven by robust household consumption and strong

investment growth. We revise up our GDP growth forecast

for 2013 to 6.5% from 6.3%, as we expect the government to

push for higher growth and to refrain from hiking subsidised

fuel prices. Even if the government proposes subsidised fuel

price hikes, they are likely to be rejected by parliament

members eager to display their populist credentials prior to

the elections.

We also revise up our 2012 growth forecast to 6.3% from

6.0% to reflect strong growth in H1-2012 (6.3% y/y). This

also incorporates our expectations that households‟

purchasing power will remain strong in H2 in the absence of

subsidised fuel price hikes, and that foreign direct investment

will remain strong.

BI to tighten monetary policy

Given concerns about Indonesia‟s current account deficit and

stronger inflationary pressure in 2013, we expect BI to hike

the BI policy rate from a projected 5.75% at end-2012 to

6.25% by end-2013, via 50bps of hikes in H2-2013. In

addition to BI rate hikes, we expect the central bank to hike

the overnight deposit facility rate (FASBI rate). However, we

now expect only a moderate FASBI rate hike (of 25bps in

H2-2012, versus our previous projection of 75bps), as BI

said at its September policy meeting that it was optimistic the

current account deficit would narrow in Q3-2012. We expect

BI to hike the FASBI rate from an estimated 4.25% at end-

2012 to 4.75% by end-2013, and to raise the overnight

lending facility rate (repo rate) from a projected 6.75% to

Figure 1 GDP growth

Growth did not exceed 6.5% during the 2001-11 period (% y/y)

Figure 2: BI rate, FASBI, and repo rate

We expect monetary policy tightening in 2013 (%)

Sources: National Statistics Agency, Standard Chartered Research Sources: National Statistics Agency, Standard Chartered Research

0

1

2

3

4

5

6

7

8

2001 2003 2005 2007 2009 2011 2013F

FASBI rate

Repo rate

BI rate

3

4

5

6

7

8

Q1-11 Q3-11 Q1-12 Q3-12 Q1-13F Q3-13F


Indonesia – Yudhoyono prepares for his legacy


Forecast Forecast

7.25% over the same period (see Figure 2). By raising

interest rates, BI aims to slow bank credit growth – which is

indirectly responsible for strong import demand and therefore

pressure on the Indonesian rupiah (IDR) – and absorb

excess IDR liquidity in the market.

We estimate that, based on its current production capacity,

Indonesia‟s economy will start to overheat when growth

exceeds 6.7% in 2013. By „overheating‟ we do not mean that

inflation will accelerate sharply, but rather that persistent

(non-seasonal) demand-side pressures will start to build. We

expect inflation to accelerate to 5.0% by end-2013 from 4.5%

at end-2012, with real interest rates remaining in positive

territory (Figure 3). In annual average terms, we project that

inflation will accelerate to 4.6% in 2013 from 4.4% in 2012.

Current account deficit to narrow

We expect Indonesia‟s current account deficit to narrow to

USD 5.0bn (0.5% of GDP) in 2013 from USD 16.0bn (1.8%

of GDP) in 2012, driven by a recovery in the global economy

and commodity prices and slowing demand for imports amid

BI tightening. We forecast that the capital and financial

account surplus will increase to USD 17.5bn in 2013 from

USD 15.9bn in 2012, driven by an increase in net foreign

direct investment (to USD 11.0bn from USD 9.0bn). We

expect the overall balance of payments (including errors and

omissions) to turn from a USD 0.1bn deficit in 2012 to a USD

12.5bn surplus in 2013.

Rates strategy

We have a Neutral duration recommendation on IDR

government bonds. Tactically, we refrain from re-entering the

market at current levels. We see a risk of further corrections

given expectations of liquidity tightening by BI. A rise in the

FASBI rate will weaken onshore banks‟ support for IDR

bonds. However, the market‟s strong fundamentals should

limit the extent of any bond sell-off.

Inflation is not an immediate threat in the absence of fuel

price hikes, and we expect BI to keep the BI rate at the

current level of 5.75% until H1-2013. We also expect the

benign supply outlook to support government bonds. As of

12 September, the MoF had raised 75.7% of its gross

financing requirements for 2012, or 83.1% on a net basis. If

the MoF issues another global bond and another retail bond

in H2-2012, we estimate that remaining net treasury supply

will be negligible, at about IDR 3trn. Thus, gross issuance

would only be sufficient to replace maturing debt.

FX strategy

We expect USD-IDR to edge higher in Q4 given deteriorating

external balances and policy tolerance for gradual IDR

weakness. Solid current account (C/A) surpluses and BI's

strong FX policy were key drivers of trend IDR real effective

exchange rate (REER) appreciation from 2001-10. The IDR

REER peaked in August 2010 and has since edged modestly

lower. The sharp deterioration in the C/A and the shift in FX

policy suggest that the IDR REER will fall further in H2-2012,

negating the rise in inflation. We do not expect USD-IDR to

break substantially higher, as BI has sufficient FX reserves to

manage worst-case capital outflows.

We continue to expect the IDR to strengthen in 2013. We

forecast that the C/A deficit will narrow substantially in 2013

to USD 5bn as monetary tightening helps to slow the

domestic economy and global demand improves. Meanwhile,

higher FASBI rates will eventually be positive for the

currency. In our view, higher interest rates tend to support

the IDR, as they support the carry premium in USD-IDR.

Figure 3: BI rate, inflation, and real interest rate

Inflation, although benign, will accelerate in 2013 (%)

Figure 4: Current account deficit

Expected to narrow in 2013

Sources: Bank Indonesia, Standard Chartered Research Sources: Bank Indonesia, Standard Chartered Research

BI rate

Inflation

Real interest rate

0

1

2

3

4

5

6

7

8

Q1-11 Q3-11 Q1-12 Q3-12F Q1-13F Q3-13F

Amount (USD bn)

As % of GDP (RHS)

-4

-3

-2

-1

0

1

2

3

-20

-15

-10

-5

0

5

10

15

2007 2008 2009 2010 2011 2012F 2013F


Japan – Signs of fading growth momentum Jeff Ng, +65 6596 8075

[email protected]

Tony Phoo, +886 2 6603 2640

[email protected]

Ned Rumpeltin, +44 20 7885 5558

[email protected]


Growth slows; political risk rises

Early elections in October are likely

Japan is likely to hold early general elections in October

2012. Pressure continues to mount on Prime Minister

Yoshihiko Noda to dissolve the government after the

opposition-controlled upper house of parliament passed a

censure motion against him in late August. It subsequently

blocked deficit-financing bills, threatening to complicate the

government‟s efforts to sustain the growth recovery.

There are growing doubts about Noda‟s chances of re-

election in October. Recent polls suggest that the ruling

Democratic Party of Japan (DPJ) is headed for defeat.

Noda‟s recent deal with the opposition to double the sales

tax to curb social and welfare spending, and his decision to

reactivate two nuclear power reactors to stem the rising oil

import bill, have resulted in a split within the party. A poll

conducted on 4 September showed that the opposition

Liberal Democratic Party (LDP) had the support of 21.7% of

voters, while the newly formed Japan Restoration Party had

23.8%. The ruling DPJ managed a mere 17.4%.

Signs of fading growth momentum

We expect Japan‟s GDP growth to remain lethargic in 2013,

in line with the global economy. In its latest report on the

economy on 28 August, the Cabinet Office downgraded its

assessment of Japan‟s economy, citing the bearish outlook

for exports and industrial production. Japan‟s current account

surplus narrowed to JPY 3.66trn in 7M-2012 from JPY

6.58trn in the year-earlier period as the trade deficit swelled

(to JPY 2.87trn in 7M-2012 from JPY 0.35trn in 7M-2011).

This, along with the absence of domestic growth drivers, is

likely to weigh on GDP growth (see Figure 2).

Heading into 2013, Japan‟s post-reconstruction domestic

consumption engine is showing signs of fatigue. The

contribution from disaster relief spending in the wake of the

2011 earthquake and tsunami is likely to wane in Q3. The

latest Cabinet Office report cited concerns about the

sustainability of private consumption growth and home-

building.

Consumer confidence and retail sales growth are both

weakening. The continuing slowdown in economic activity

may further undermine manufacturers‟ confidence, leading to

cutbacks in corporate investment and hiring. This could

potentially derail the nascent job-market recovery and

negatively affect consumer spending. This is especially true

for the wholesale and retail trade sector, where the number

of employees on the payroll declined by 160,000 in H1-2012,

significantly more than the 10,000 jobs lost for the whole of

2011. Manufacturing employment is also slowing as a result

of weak exports and production.

Of greater concern is the absence of firm government action

and clear policies to stimulate the economy as domestic

consumption falters. Finance Minister Jun Azumi recently

warned that the government could run out of cash in Q4-

2012 if the opposition-dominated upper house continues to

block legislation authorising the sale of deficit-financing

bonds, which would cover more than 40% of budgeted

spending for current fiscal year (which began on 1 April).

Deflation risk returns; BoJ may need to act further

Deflationary pressures are likely to persist between now and

H1-2013. While the Bank of Japan (BoJ) has set an inflation

target of 1% by 2014, energy and food inflation have been

unable to push headline inflation out of negative territory in

Figure 1: Standard Chartered forecasts – Japan

Previous forecasts are shown in brackets

Figure 2: Japan’s economy shows signs of slowdown

% y/y

2011 2012F 2013F

Real GDP (% y/y) -0.7 2.1

(2.2) 1.4

(2.0)

Inflation (% y/y) -0.2 0.0

(0.2) 0.1

(0.2)

Overnight rate (%) 0.10 0.10 0.10

Current account bal (% GDP) 2.0 1.5

(2.0) 1.8

(3.2)

USD-JPY, period end 81.12 82.0 85.0


Exports

Industrial production

Machinery orders

-60

-40

-20

0

20

40

60



Japan – Signs of fading growth momentum


recent months. In July, y/y headline inflation was negative for

a second consecutive month, while core inflation (excluding

food and energy) remained in negative territory for a 43rd

straight month (see Figure 3).

Succumbing to both domestic and international pressure, the

BoJ aggressively expanded its Asset Purchase Program

(APP) by JPY 10trn to JPY 80trn on 19 September. This is

the fourth APP expansion this year; the JPY 10trn will be

added to the BoJ‟s asset purchase fund, which is intended to

boost domestic economic activity and spur inflation. The

move was in line with our expectations that the BoJ would

expand the APP by the end of 2012. The BoJ was under

mounting pressure to act following recent calls by the

Finance Ministry to expand the APP, and easing measures

announced by the European Central Bank and the Fed in

September. The BoJ also cut its assessment of Japan‟s

economy, in line with the Cabinet Office‟s assessment in late

August. We believe that further APP expansion is likely,

especially if the economy continues to underperform

expectations in the next few quarters.

The BoJ is also under political pressure to consider other

monetary measures, including steps to curb JPY strength.

The debate over whether the bank should do more to

stimulate growth has recently gained further traction among

government officials and politicians. The ruling DPJ has

joined the opposition LDP in urging the BoJ to consider

purchasing foreign bonds to boost the flagging recovery and

show its commitment to achieving 1% inflation by 2014.


In our view, the Japanese yen (JPY) is caught between

longer-term dynamics that suggest it should depreciate and

shorter-term factors that are keeping it firm. The deterioration

in the European sovereign debt crisis and mounting evidence

of slowing growth in major economies have reinstated the

JPY‟s safe-haven appeal among investors. Market

expectations of further monetary accommodation from the

US Federal Reserve have added to pressure on the JPY to

appreciate, and USD-JPY has traded down to its lowest level

in seven months. Repeated rounds of monetary easing by

the BoJ, along with its APP expansion on 19 September,

have offered some counterweight (see Figure 4).

The Fed‟s decision to launch a third round of QE on 13

September introduces meaningful risks to our forecast that

USD-JPY will finish Q3-2012 at 79.00 before grinding higher

to close the year at 82.00. However, we note that the

programme, which focuses on purchases of mortgage-

backed securities, may not drag US Treasury rates

appreciably lower. This may limit its drag on the JPY spot

rate. Tail risks from Europe have diminished, which may

ease safe-haven demand for the JPY in coming weeks. The

threat of FX intervention will continue to hang over the

market, however, and will act as a significant brake on

further JPY appreciation.

On a much longer-term view, the case for JPY weakness is

building. Japan‟s shift away from nuclear power adds to the

negative outlook for the terms of trade and the current

account. Japan also faces its own substantial sovereign debt

risks. The JPY is unlikely to see sustained depreciation,

however, until foreign interest rates begin to climb,

particularly in the US.

Figure 3: Deflationary pressure has returned

% y/y

Figure 4: JPY was firming on previously hawkish BoJ

stance

USD-JPY (LHS), % (RHS)


Headline inflation

Inflation ex food and energy

-3

-2

-1

0

1

2

3


USD-JPY

3M interbank (USD minus

JPY)

-1

0

1

2

3

4

5

6

60

70

80

90

100

110

120

130

140



Malaysia – Domestic boost Edward Lee, +65 6596 8252

[email protected]

Jeff Ng, +65 6596 4194

[email protected]

Danny Suwanapruti, +65 6596 8262

[email protected]

Thomas Harr, +65 6596 8247

[email protected]


External headwinds mitigated

A steady performance expected in 2013

Malaysia‟s current economic performance justifies a positive

outlook for 2013. Despite its relative openness, Malaysia is

one of only three economies in South East Asia that

managed faster growth in H1-2012 than in 2011. We expect

Malaysia‟s GDP growth to become more balanced between

the domestic and external sectors in 2013. While domestic

consumption and the government-led investment boom are

likely to continue, we expect their contribution to diminish

slightly to accommodate a recovery in external demand. We

expect export growth and the current account to rebound to

some degree in 2013. Although we expect some slowdown

in sequential growth in H2 versus H1 in light of the still-weak

external outlook, we upgrade our 2012 growth forecast to 5%

from 4%. We lower our growth forecast for 2013 to 4.7%

from 5.0% to reflect a higher base effect and still-modest

global growth.

Domestic strength, external rebound

The divergence between the domestic and external

sectors, a key theme in 2012, is expected to narrow in

2013. Despite Malaysia‟s high exposure to trade (China is

its top export market) and lower commodity prices, the

economy managed to register growth of 5.1% in H1-2012.

Net external demand subtracted 4.9ppt from y/y GDP

growth in Q2, but the economy still expanded by 5.4% y/y.

Private consumption grew 8.8% y/y (adding 4.3ppt) and

investment rose 26.1% y/y (6.2ppt). Wage measures such

as the increase in civil service pay and cash payouts to

low-income households have boosted private consumption,

while the ongoing Economic Transformation Programme

(ETP) has driven investment. In 2013, Malaysia‟s open

external sector is likely to benefit from gradually improving

global conditions. In contrast, domestic activity, while likely

to remain robust next year, could be weighed down slightly

by the high base in 2012.

While growth momentum was strong in H1-2012, we expect

sequential growth to moderate somewhat in H2-2012, before

picking up slightly in 2013. The labour market remains

strong, with the unemployment rate unchanged at 3% in Q2.

Wage growth is still positive in the manufacturing, wholesale

and retail sectors, although its pace is slowing. Similarly,

imports of consumer goods remain high but the pace of

growth is easing. Passenger vehicle sales contracted for a

third consecutive month in August.

We expect investment to remain robust in 2013. Total loan

growth was steady at about 12.6% y/y in July, although loan

approvals have started to decline from year-ago levels.

Imports of capital goods remain robust, rising 29.8% y/y in

July (on a 3-month moving average basis). Given the focus

on the ETP, investment looks set to continue to support

growth in the months ahead, barring a sharp deterioration in

global conditions. On balance, while we expect growth to

remain firm as strong domestic conditions overshadow weak

external demand, we project some moderation in H2-2012.

Given the growth environment, there is little urgency for Bank

Negara Malaysia (BNM) to cut policy rates, in our view. The

latest monetary policy statement (released on 6 September)

underlined BNM‟s neutral stance. It acknowledged the

uncertain global environment but noted that the current

monetary policy stance is accommodative and is supportive

of the economy. BNM also extended its inflation outlook into

2013, noting that it expects inflation to remain moderate

Figure 1: Domestic strength overwhelms external

weakness (ppt)

Figure 2: Still robust, but some signs of moderation

% y/y


-10

-5

0

5

10

15

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Private Govt Investment Net exports Imports of consumer

goods Passenger

vehicle sales

Private consumption

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12


Malaysia – Domestic boost


heading into next year. We estimate that administered prices

contracted 0.6% y/y in July, depressing headline inflation

(1.4%). Given the lack of subsidy rationalisation, this

component of the inflation basket, which accounts for about

30% of the total, will continue to keep prices low for some

time. As such, we reiterate our view that BNM will keep the

Overnight Policy Rate unchanged at 3% for the rest of the

year. For 2013, we now forecast one hike in Q4-2013, versus

our previous view of two hikes during the year, as the

government may implement subsidy rationalisation only

gradually after the elections.

Key near-term events include the 2013 budget

announcement on 28 September and potential elections,

which have been widely expected since last year. Given the

market focus on Malaysia‟s sovereign rating, we believe the

government will be wary of excessively loose fiscal policy

and is likely to keep its fiscal deficit target below 5% of GDP.

Inflation outlook is benign for now

We maintain our benign view of the inflation outlook for the

rest of 2012. Inflationary pressures are well contained by

Malaysia‟s administered price programme for food and other

basic necessities. That said, the solid domestic economic

performance in H1 is likely to result in some degree of

demand-pull core inflation in 2013. We revise our inflation

forecasts for 2012 and 2013 to 1.7% (from 1.9% previously)

and 2.7% (from 2.6% previously), respectively.


Neutral duration outlook on MYR bonds

With BNM likely to remain to hold for the rest of the year, we

do not expect a significant rally in the MYR bond market, and

expect yields to grind lower only gradually. The next key

event will be the budget announcement. If the budget is

large, bond supply pressures could emerge, resulting in

pivotal steepening of the yield curve.

Feedback from real-money accounts is that they are now

neutral duration on Malaysia. Low yields and stable USD-

MYR make MYR bonds less attractive than other EM bond

markets. However, we expect demand from central banks

and sovereign wealth funds to remain robust. According to

feedback from central bank reserve desks, they are looking

to deepen their diversification, and Asian bonds – particularly

SGD, KRW and MYR bonds – are the preferred way to

achieve this.

Local demand for bonds should cap upside in yields.

Feedback from our meetings with local asset managers is

that they are still short duration and are looking to

accumulate bond inventory on yield upticks. This was

reflected in the mid-August sell-off, when MYR bond yields

rose by 20bps within two or three days following the sell-off

in USTs. However, yields came back down swiftly, as locals

saw this as an opportunity to build inventory.

Overweight medium-term weighting on the MYR

We have a Neutral short-term FX weighting on the

Malaysian ringgit (MYR) and an Overweight medium-term

weighting. The MYR real effective exchange rate (REER)

appears to be undervalued relative to the SGD REER.

Given that the positive outlook for the Malaysian economy

is well supported by solid domestic fundamentals, the

authorities are likely to be tolerant of gradual MYR NEER

appreciation in 2013. Meanwhile, the MYR remains

vulnerable to a correction in positioning and to the global

industrial production cycle in the short term.

Figure 3: Little inflation pressure

% y/y

Figure 4: Foreign inflows supported by CBs and SWFs

MYR bn

Sources: CEIC, Standard Chartered Research Sources: BNM, Standard Chartered Research

Headline inflation

Administered price inflation

-1

0

1

2

3

4

5

6

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

Public sector

Insurance

Banks

Foreign holders

0

20

40

60

80

100

120


Social security institutions


Philippines – Maintaining momentum Jeff Ng, +65 6596 8075

[email protected]

Danny Suwanapruti, +65 6596 8262

[email protected]

Jaiparan Khurana, +65 6596 7251

[email protected]


2013 is likely to be domestically driven

The Philippines is positioned favourably heading into 2013.

We expect the domestic economy to remain supportive of

growth, with the country on track to a likely upgrade to

investment grade by 2014. Based on the sanguine growth

outlook and robust performance in H1, we revise our 2012

growth forecast to 5.8% from 4.7%. We now expect the

economy to expand 5.4% in 2013, versus 5% previously. We

maintain our general inflation outlook of higher inflation in

H2-2012 than in H1, but lower our 2012 forecast slightly to

3.5% from 3.7%. Due to upward pressure from food and

energy, we expect inflation to climb to 4.7% in 2013, and

Bangko Sentral ng Pilipinas (BSP) to hike rates twice, by

25bps each time, after a 25bps cut in Q4-2012.

Maintaining the growth momentum in 2013

We expect the Philippines to continue its steady, resilient

and domestically driven growth path for the rest of 2012 and

2013. However, the strong momentum of H1-2012 is unlikely

to be surpassed. Q2 growth remained above historical levels

on a y/y basis, but it was only 0.2% q/q seasonally adjusted

(SA) because of the strong base in Q1. We expect only 0.1%

q/q SA growth in Q3, improving to 1.5% in Q4. We forecast

that domestic consumption will continue to support growth.

Growing household income has increased local demand for

food and other consumer goods, including luxury items, and

Q2 growth was driven by domestic consumption and exports.

Domestic consumption contributed 3.9ppt to growth, while

net exports contributed 2.1ppt. Growth in overseas workers‟

remittances has slowed slightly this year, but domestic

consumption remains resilient, indicating that such spending

is increasingly supported by internal sources.

Government spending and investment growth are also

expected to contribute to growth, albeit to a smaller extent.

Public-private partnership (PPP) projects have moved slowly

in 2012, with only one major project awarded so far.

Nonetheless, the government‟s focus on infrastructure

investment to facilitate long-term growth is clear. For 2013, it

has increased allocation for infrastructure and other capital

expenditure by 17.5% to PHP 296.7bn. In addition, the

Bureau of Internal Revenue estimates that tax collection will

increase to 10.3% of GDP in 2012 from 9.5% in 2011

following the implementation of a crackdown on tax evaders.

Improving tax collection should support higher government

spending.

The outlook for the external sector is cloudier. In 2011, the

Philippines‟ top three export markets were Japan, the US

and China. In addition to downside risks from the euro area

and the US, the sharp loss of momentum in Japan‟s

domestic economy and the slowdown in China are likely to

adversely affect export growth this year and in 2013. We

expect the favourable base effect for export growth to fade

by Q1-2013. In addition, robust domestic activity is likely to

increase import demand among businesses and consumers.

Unless global conditions improve, we expect the positive

contribution from net exports to fade in 2013.

We expect the tropical storms that hit the Philippines in early

Q3 to have an adverse, but limited, impact on growth for the

rest of this year. Although the capital, Manila, was hit the

hardest, many factories and industries are located on the

outskirts of the capital, where flood damage is less

extensive. Nevertheless, the damage is likely to limit growth

momentum over the short term.

Figure 1: A resilient, domestically driven growth path is

expected in 2013 (% y/y)

Figure 2: CPI inflation could escalate in H1-2013

% y/y


GDP growth

GDP forecasts

Consumption

0

2

4

6

8

10

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

Inflation

Inflation forecasts

Lower band of inflation target

Upper band of inflation target

0

2

4

6

8

10

12

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

Standard Chartered Asia Focus Philippines – Maintaining momentum


Inflation risks ahead Inflation is expected to firm in H1-2013. Although the spike in

inflation caused by recent short-term supply disruptions is

likely to be transient, other sources of price pressure have

built up. First, crude oil prices have returned almost to their

March-April highs. Second, the healthy growth outlook for the

Philippines is likely to increase demand-pull inflation. Third,

major grain prices have climbed in Q3. As a result, BSP is

likely to focus on keeping inflation in check by raising policy

rates twice, by 25bps each time, in Q2 and Q3-2013.

Local markets outlook Overweight duration outlook for PHP bonds With BSP expected to cut rates by 25bps in Q4-2012, we

see scope for PHP bond yields to edge slightly lower from

current levels, and we therefore have an Overweight duration

outlook. Meanwhile, supply dynamics are very positive. The

Bureau of the Treasury (BTr) has already raised PHP 316bn

of funding for the year, versus a full-year issuance target of

PHP 470bn; this means it has met 67% of its domestic

funding needs. The projected budget deficit for this year is

PHP 279bn, and the run rate for the first seven months of the

year was just PHP 73bn. The deficit is therefore likely to

significantly undershoot this year, which means that the BTr

will need less funding than initially planned. It is also looking

to conduct a USD bond buyback and to issue a global peso

note (GPN) in Q4-2012, tentatively in November. We believe,

however, that this is akin to a USD-for-GPN debt switch, as

the money raised will not be used for additional funding.

Overweight on the PHP We maintain our Overweight short- and medium-term FX

weightings on the PHP, as we expect the currency to be well

supported by macro fundamentals and the possibility of an

upgrade to investment grade. Steady remittance inflows and

the constructive bond-market outlook are likely to remain

supportive of the PHP. In addition, BSP’s focus on the PHP

and the pre-emptive rate cut in July were intended to keep

the currency ‘firm’ and slow capital inflows rather than

explicitly weaken the currency.

Credit outlook is well supported The Philippines’ credit profile is underpinned by a

strengthening external position and improving debt metrics.

As of August 2012, FX reserves had increased to USD 80bn

and were adequate to cover total external debt of USD 63bn.

On the fiscal side, fiscal consolidation continues, despite

increased spending in H1-2012. The administration has

undertaken measures to improve tax compliance, improve

revenue collection, reduce public-sector indebtedness, and

lower debt-servicing costs, and aims to narrow the deficit to

2% of GDP by 2013. While the country’s prudent external

and fiscal stance led to positive rating actions in 2012, the

Philippines will need to undertake further reforms to increase

its rate of investment and achieve an investment-grade

rating, in our view. The Philippines sovereign is a low-beta

play and already reflects a potential investment-grade rating.

The PHILIP complex trades well inside double-B EM

sovereigns and in line with Korea, Malaysia and Qatar.

Having said that, it does not appear very rich against

benchmark Latam sovereigns such as Mexico and Brazil. At

current levels, we see value in the PHILIP 19N and the

PHILIP 25, while we see the PHILIP 26 and the PHILIP 37

as trading a bit tight.

Figure 3: Fiscal position is gradually improving

% GDP

Figure 4: PHILIP trades tighter than higher-rated sovereigns

Duration, Z-spread (bps)


-4

-3

-2

-1

0

1

2

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

BRAZIL 24N

BRAZIL 34BRAZIL 41

COLOM 24

COLOM 37INDON 22

INDON 35

INDON 37

INDON 42

MEX 22

MEX 34MEX 40

PERU 25

PERU 37

PHILIP 21

PHILIP 24N

PHILIP 25

PHILIP 26

PHILIP 30 PHILIP 31

PHILIP 32PHILIP 34 PHILIP 37

QATAR 30 QATAR 42

RUSSIA 22

RUSSIA 42

TURKEY 25

TURKEY 41

QATAR 22MALAYS 21

100

125

150

175

200

225

5 7 9 11 13 15


Singapore – Still in difficult waters Edward Lee, +65 6596 8252

[email protected]

Jeff Ng, +65 6596 4194

[email protected]

Thomas Harr, +65 6596 8247

[email protected]


[email protected]


External conditions remain challenging

Underperformance continues

We expect economic growth to remain moderate in 2013.

Singapore‟s small and open economy is extremely

vulnerable to the volatile external environment and may

continue to stutter in the months ahead. The weak external

environment should eventually impact domestic demand.

While labour-market conditions have remained firm, slowing

retail sales and construction approvals suggest that the

domestic economy will not be fully insulated from an

extended external slowdown in 2013. We revise down our

2012 growth forecast to 1.9% from 2.8%, and our 2013

forecast to 3.8% from 4.5%.

We expect inflation to ease to 3.9% in 2013 from 4.5% in

2012, while remaining slightly above its long-term trend. The

government has implemented policies to tackle housing and

transport inflation; we expect these to directly alleviate

inflationary pressures. However, food inflation is likely to

push headline inflation higher in 2013.

A modest growth outlook

Trade growth is likely to remain patchy and depressed

overall due to weak demand from the euro area, the US and

China. On the brighter side, trade growth may receive

support from factors including intra-ASEAN trade links and

Singapore‟s diversified trade partners. In H1-2012, South

East Asian countries such as the Philippines, Malaysia and

Thailand registered faster GDP growth rates than in 2011,

even as Singapore‟s growth fell below trend. Indeed, almost

100% of Singapore‟s 1.5% export growth for 8M-2012 was

accounted for by Malaysia, Indonesia and Thailand.

Singapore‟s GDP growth would have been weaker had these

regional economies not experienced such strong

domestically driven growth.

Meanwhile, the major economies still look weak. Tail risks

from the euro-area crisis may have receded, but the region‟s

economy is still expected to be in recession this year. US

growth is exposed to fiscal risks in 2013, while the measured

stimulus being provided to China‟s economy will mean less

positive spillover to the Singapore economy.

Industrial production (IP) growth may recover only

moderately in 2013 as global demand improves. Amid weak

external demand, the manufacturing sector managed growth

of just 1.9% in 7M-2012, slightly better than the H1 rate of

1.7%. The electronics sector, which accounts for 33% of total

value-added by Singapore‟s industrial sector, contracted for

a 16th

consecutive month in July. The latest domestic

electronics PMI (for August) surprised by rising above the

neutral 50 mark to 50.7 (possibly due to advance orders), but

given that the North American semiconductor book-to-bill

ratio has fallen below 1 again, the outlook for the industry

remains bleak.

We expect IP data to remain volatile due to inconsistent

production in the pharmaceuticals and transport engineering

sectors. On a more positive note, in the Q3-2012 Survey of

Business Expectations of the Manufacturing Sector, the

majority of biomedical and transport engineering firms said

they expected similar business conditions in H2-2012 to Q2-

2012. Production in both of these sectors grew by about 20%

y/y in 7M-2012. We expect them to continue to provide a

cushion against the underperforming electronics sector in

2013.

Figure 1: Singapore underperforms

% GDP y/y

Figure 2: External environment remains challenging

Simple avg. of CUSE (China, US, EU) PMI (RHS)

Sources: CEIC, Standard Chartered Research Sources: Bloomberg, CEIC, Standard Chartered Research

2011 H1-2012

0

1

2

3

4

5

6

7

8

9

10

PH TH MY ID KR VN CN SG TW HK

SG GDP y/y

CUSE PMI (RHS)

30

35

40

45

50

55

60

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%



Singapore – Still in difficult waters


Despite the ongoing economic slowdown, domestic labour-

market conditions may remain firm in 2013 as the

government restricts Singapore‟s dependence on foreign

labour. Indeed, despite the sequential contraction in GDP

growth in Q2-2102, the resident unemployment rate eased to

2.8% (seasonally adjusted) from 3% in Q1. This may be

partly due to government efforts to tighten the inflow of

foreign labour as part of its economic restructuring plan. The

29,200 increase in the number of jobs created in Q2 is also

positive, although this was lower than the average 30,400

jobs created each quarter since Q4-2010.

Retail sales are showing signs of cooling, despite the firm

labour market. The headline retail sales number for June

was -0.9%. Ex-autos, the print was better, at 2.3% y/y. The

picture is similar on a constant price basis – retail sales

contracted 1.6% y/y in June, and rose a modest 2% y/y

excluding motor vehicle sales. Construction contracts

awarded fell by 18% y/y (3mma) in July, after growing at a

30% pace in 2011. This also reflects considerable building

activity in recent years and the expected slowdown in 2013.

MAS expected to ease slightly

Given weak growth and sticky non-tradable inflation, we

expect the Monetary Authority of Singapore (MAS) to ease

monetary policy slightly in mid-October. We estimate the

current slope of the Singapore dollar nominal effective

exchange rate (SGD NEER) policy band at +3.25% per

annum, and the policy band width at +/-2% on either side of

the band. In its previous policy meeting on 13 April 2012, the

MAS increased the slope of the policy band slightly and

narrowed its width. We now expect the previous tightening to

be reversed, and expect the policy band slope to be reduced

to +2% per annum, with no change to the policy band width.

There are several factors underpinning this view. Economic

growth has slowed considerably, and the external outlook

remains challenging. While inflation remains high, we believe

that direct measures may be more effective than using FX

policy to address non-tradable price pressures. Moreover,

inflation is slowing on a sequential basis.

In addition, US growth has come in weaker than previous

projections from the MAS, and China‟s slowdown has

become more worrying. In terms of local sentiment, the

Singapore government recently introduced direct measures

to address inflation and said that inflation is likely to

moderate towards the end of the year; we concur. Finally,

since the start of 2012, the SGD NEER has appreciated

5.1%. Hence, there is scope for MAS to slow the

appreciation of the SGD NEER.

SGD rates to edge higher on rising SOR fix

We have a Neutral duration recommendation on SGD

government bonds and expect yields to be range-bound in

Q4-2012, in line with the low-interest-rate environment in the

US and other major economies. We now forecast a lower

SGD NEER policy band slope in Q4-2012 and Q1-2013 (at

2% p.a. versus 3.25% currently), and expect the 6M SOR

fixing to rise marginally to 0.8% by end-2012 (from 0.62%

currently) as the SGD underperforms the USD and regional

currencies. A rise in the SOR fixing would drive swap rates

higher, and we expect the bond swap spread to continue to

widen. On the FX front, the market does not appear to have

priced in any MAS easing yet, and the SGD NEER remains

near the top side of the policy band. As such, we have a

short-term Underweight FX weighting on the SGD, but we

maintain a medium-term Overweight FX weighting.

Figure 3: Outlook for the electronics sector is poor

y/y production growth (LHS), book-to-bill ratio (RHS)

Figure 4: Direct measures are a more appropriate way to

address non-tradable inflation

Inflation, % y/y (LHS); appreciation, % per annum (RHS)

Sources: CEIC, Standard Chartered Research Sources: Bloomberg, CEIC, Standard Chartered Research

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

North America semiconductor book-to-bill

ratio (RHS)

Electronics production y/y

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-4

-2

0

2

4

6

8

10

May-03 Sep-04 Jan-06 May-07 Sep-08 Jan-10 May-11

Estimated SGD NEER appreciation per annum (RHS)

Tradable inflation

Non-tradable inflation

Standard Chartered Asia Focus South Korea – Stimulus expected Suktae Oh, +822 3702 5011 [email protected]

Robert Minikin, +852 3983 8567 [email protected]

Danny Suwanapruti, +65 6596 8262 [email protected]

Shankar Narayanaswamy, +65 6596 8249 [email protected]


Recovery led by stimulus policies We expect the Korean economy to recover gradually from

early 2013, led by monetary and fiscal stimulus measures

and an improving external environment. The dip in GDP

growth to 0.3% q/q in Q2-2012 appears to have triggered

stimulus measures, but Korea’s GDP growth has in fact been

slowing since H2-2010 (Figure 1). Average q/q growth since

Q3-2010 has been 0.7%, and most believe it is below

potential growth. The improving external outlook previously

led us to expect a recovery starting in H2-2012, but we now

expect a delayed recovery, supported by stimulus policies.

We revise down our GDP growth forecasts to 2.4% for 2012

(from 2.6% previously) and to 3.2% for 2013 (from 3.6%).

We maintain our base-case scenario that China’s recovery

will be the main driver of the recovery in Korea’s exports.

Exports remained weak until August 2012, in line with the

slowdown in China’s key macro indicators. We now expect

China’s recovery to start only in early 2013 (versus H2-2012

earlier); this means that Korea’s export recovery will also be

delayed to Q1-2013. The expected recovery is likely to be

modest, as developed economies will be unable to provide

significant support and ship exports are likely to continue to

contract. Meanwhile, we revise up our current account

surplus forecasts to 3.0% of GDP for 2012 and 2.7% for

2013 to reflect the recent rise in the services account surplus

(driven by travel and construction services).

Domestic demand is also likely to recover modestly in 2013

thanks to stimulus policies and the stabilisation of global

financial-market sentiment. Monetary easing will lighten

households’ and corporates’ interest payment burden and

support credit growth, and fiscal stimulus will be focused

mainly on investment. The improvement in the external

environment – namely the recovery in China’s economy, the

stabilisation of the euro-area crisis and the efficient

resolution of the US ‘fiscal cliff’ – should stabilise financial-

market sentiment and support domestic demand. But

domestic structural burdens, such as private-sector leverage

and the low household savings rate, are likely to continue to

limit the upside for private domestic demand. We believe

these structural issues have been the key drivers of the

weakness in domestic demand since H2-2010.

The housing market is likely to stabilise in 2013 thanks to the

government’s policy measures. The government has already

announced plans to ease regulations on mortgage loans (the

cap on the debt-to-income ratio) and temporarily reduce

property acquisition taxes until end-2012. The monetary

easing cycle should also support the property market. Given

the severity of the housing slump, we expect the government

to implement more market-boosting measures, such as

extending the reduction in acquisition taxes and easing

mortgage-related regulations (i.e., the cap on the loan-to-

value ratio).

BoK’s easing cycle is likely to end in 2012 The Bank of Korea (BoK) is likely to extend its monetary

easing cycle to Q4-2012; we forecast the base rate at 2.5%

at the end of the year, versus 3.0% currently. The slowdown

in Q2-2012 economic activity led the BoK to revise down its

GDP growth forecast and triggered a surprise 25bps rate cut

in July 2012, which marked the beginning of a fresh

monetary easing campaign. We expect two additional 25bps

rate cuts in Q4-2012 given the bearish near-term growth

outlook. We expect the central bank to continue its easing

measures as part of a policy mix aimed at boosting economic

growth, particularly considering that the government has

already announced two rounds of stimulus measures

(although without formal changes in the budget).

We expect no further policy rate cuts in 2013, as the China-

driven export recovery that we expect to start in Q1-2013 is

likely to reduce the need for additional easing. We also

expect food inflation to rise in early 2013 owing to higher

grain prices and the normalisation of inflation after the impact

of welfare spending. This is likely to heighten inflation

concerns and work against further monetary easing. We

revise up our inflation forecasts to 2.3% for 2012 and 3.0%

for 2013 (from 2.2% and 2.8%, respectively) to reflect the

impact of higher oil and grain prices.

Figure 1: GDP growth, including forecasts (% q/q, SA)

Growth has been slowing since H2-2010

Sources: BoK, Standard Chartered Research

Forecast

0

1

2

3

4

Q1-09 Q1-10 Q1-11 Q1-12 Q1-13


South Korea – Stimulus expected


Government will give up balanced budget in 2013

We believe the government is likely to give up its goal of

achieving a balanced budget in 2013 (in terms of the fiscal

balance under management – excluding social security funds,

which generate a structural surplus). The government is still

cautious on fiscal easing, despite slow growth, as fiscal

prudence was the main driver of Korea‟s recent sovereign

rating upgrades. The two fiscal stimulus packages announced

in June and September 2012 stopped short of a formal

supplementary budget, and as of mid-September, the

government officially maintained its goal of achieving a

balanced budget in 2013. But we believe it will abandon this

goal in its 2013 budget proposal, as the assumptions for a

balanced budget are unlikely to be met: GDP growth of 4.3%,

fiscal revenue growth of 9.4%, and spending growth of 5.1%.

Rather, we expect the government to maintain a small fiscal

deficit in 2013 to support growth. We now forecast a fiscal

deficit of 1.5% of GDP in 2012 and 2.0% in 2013 (Figure 2).

Our main scenario rests on two assumptions. First, in the

initial budget proposal to be announced in late September,

the government will give up its goal of achieving a balanced

budget by adopting more realistic expectations, but will stop

short of implementing active stimulus measures such as tax

cuts and significant spending increases. Second, in early

2013 (i.e., under the new president), the government will

propose a supplementary budget that includes tax cuts (the

re-introduction of temporary tax cuts on property acquisition

and personal income, and reductions in excise taxes) and an

increase in spending. Admittedly, none of the leading

presidential candidates appear to be focused on growth.

However, we believe that regardless of who wins the

December election, the new administration will want to see

strong economic growth in its first year.


Medium-term Overweight on the KRW

The Korean won (KRW) continues to benefit from medium-

term positives such as healthy payment surpluses and

valuations. While the ongoing global slowdown is negative

for the KRW, the current account surplus has been

surprisingly resilient. Moreover, capital inflow dynamics are

showing clear signs of improvement. For the moment, the

BoK is keen to foster FX stability and is rebuilding its FX

reserves amid a revival of capital inflows. As the global

economic outlook improves, however, positive external

payment dynamics will likely feed through into KRW gains.

These would represent a recovery towards „fair value‟ for the

KRW. In June, the nominal and real effective exchange rates

were 12.2% and 9.8%, respectively, below their past-decade

averages. We have an Overweight medium-term FX rating

on the KRW, forecasting USD-KRW at 1,100 at end-2012

and 1,040 at end-2013.

Overweight duration outlook on KRW bonds

We have an Overweight duration outlook on the KRW bond

market given that the BoK is in easing mode, supply

dynamics are positive, and foreign demand from central

banks and sovereign wealth funds is rising, Despite slight net

foreign outflows from the Korean bond market in August,

central banks continued to buy. The top four investors in

Korean bonds in August were Norway, Switzerland, China

and Malaysia; this suggests sovereign flows. The KRW IRS

curve is already inverted versus the 3M CD fixing, and it is

therefore very expensive to receive KRW IRS rates given the

associated negative carry. As such, we favour being long

bonds as opposed to receiving KRW IRS. We have taken

profit on our long 10Y KTB trade and are looking for

opportunities to re-enter on yield upticks.

Korean credits expensive at current spread levels

Korean credits, both corporates and financials, have

outperformed the rest of the Asian high-grade (HG) space so

far in 2012. The outperformance has been driven by the

changed perception of the Korean sovereign as a low-beta

sovereign and by lower-than-expected supply from the

Korean HG space. We have an Underweight stance on the

Korean credit space, owing mainly to expensive valuations

and weakening credit metrics. While the Korean quasi-

sovereign corporates benefit from sovereign support, their

standalone credit metrics have weakened on a combination

of higher gearing and lower profitability. In the financial

space, we prefer quasi-sovereigns to commercial banks at

current spread differentials.

Figure 2: Fiscal balance under management (% of GDP)

Government will give up goal of a balanced budget in 2013

Sources: MoSF, Standard Chartered Research

Forecast

Government's current plan

-5

-4

-3

-2

-1

0

1

2000 2002 2004 2006 2008 2010 2012 2014


Sri Lanka – Policy measures gain traction Samantha Amerasinghe, +94 11 2480015

[email protected]

Nagaraj Kulkarni, + +91 22 6115 8842

[email protected]


Growth to pick up in 2013

The economy is in fair shape, and policy measures appear to

be gaining traction. Despite the external headwinds of

slowing global demand and rising food prices, the economy

is poised to achieve 6.8% growth in 2012, and we forecast

that growth will pick up to 7.5% in 2013. We expect domestic

activity to compensate for lower export growth in 2013.

Following the central bank‟s implementation of policy

tightening measures in H1-2012 – currency depreciation, two

policy rate hikes in February and April, and an 18% cap on

banks‟ credit growth – the economy is on a stronger footing.

However, policy makers are likely to remain cautious as long

as external risks prevail. We expect growth to slow to around

6.3% in H2-2012 from 7.1% in H1, and inflation to moderate.

Although the Central Bank of Sri Lanka (CBSL) is mindful of

higher inflation risks arising from domestic supply-side

constraints and external factors, it will likely keep policy rates

on hold in the near term to avoid jeopardising growth.

The external and domestic environments remain challenging.

We have revised our full-year 2012 growth forecast to 6.8%

from 7.1%, with risks to the downside, to reflect the following

factors: (1) The euro area, which accounts for c.30 of Sri

Lanka‟s exports, remains vulnerable to event risk and is

expected to stay weak. (2) With reduced hydropower supply

due to a drought, Sri Lanka has had to shift to higher-cost

thermal power generation. (3) The drought has had a

significant impact on agricultural output, destroying close to

50,000 hectares of rice, according to the Finance Ministry.

This has resulted in increased subsidies, with LKR c.10bn

allocated to drought relief for farmers. (4) We do not expect

the 18% credit ceiling on banks‟ lending, which has

considerably slowed domestic consumption, to be lifted in

the near term, as the central bank‟s tight monetary policy

stance is likely to prevail until inflation moderates.

Inflation to moderate by year-end

We have revised up our average inflation forecast for 2012 to

7.7% from 7.2%, as our earlier forecast did not reflect the

spike in June inflation to 9.3% (from 7.0% in May) resulting

from drought-related supply-side constraints. Inflationary

pressure seems to be dissipating, with the rate of food

inflation declining due to improved supply from the north.

However, we expect headline inflation to hover around

double digits approaching the year-end, limiting the central

bank‟s scope for monetary easing to stimulate growth (unlike

its regional counterparts). However, we think a rate cut is

likely in Q1-2013 as inflation moderates. We expect a

cumulative 50bps of rate cuts next year, taking the repo rate

to 7.25% by end-2013.

BoP position to improve

The balance of payments (BoP) is improving. The monthly

trade deficit has been narrowing since December 2011 and

is at its lowest level since February 2011 thanks to slower

import growth. The Sri Lankan rupee (LKR) is stable at 132.0

versus the US dollar, and credit growth – at 31.6% y/y in

June – is showing early signs of moderating. Credit flows to

the manufacturing and agricultural sectors recorded

significant declines in June. These are clear signs that the

central bank‟s policy measures are gaining traction.

Export earnings contracted by 2.2% in H1-2012 to USD

4.9bn (compared with 35.1% y/y growth in H1-2011), and

continue to fall due to faltering economic activity in the euro

area. Lower apparel export earnings (c.40% of total export

earnings) have been the main driver of this contraction,

falling 1.6% y/y in H1-2012. We are also concerned about

the contraction in imports of investment goods, as it likely

signals a moderation in domestic investment and production

– two key growth drivers.

The authorities have allowed greater exchange rate

flexibility, largely ceasing FX intervention. This has helped

the foreign reserves to stabilise at USD 7.1bn (4.2 months

of import cover) and curtail the trade deficit. Robust

remittance inflows and tourism receipts are likely to

continue and should help to narrow the current account

deficit to 4.0% of GDP in 2013 from 6.1% in 2012.

However, should the slowdown in global growth persist, this

might pose further downside risk to exports. Steady capital

Figure 1: Standard Chartered Research forecasts –

Sri Lanka

2011 2012F 2013F 2014F

GDP (real % y/y) 8.3 6.8 7.5 7.7

CPI (% annual average) 6.7 7.7 7.5 7.2

Policy rate (%)* 7. 00 7. 75 7.25 7.00

USD-LKR* 113.9 130.0 126.5 124.0

Current account balance (% GDP) -7.6 -6.1 -4.0 -3.5

Fiscal balance (% GDP) -6.9 -7.0 -6.5 -6.0

*End-period; Source: Standard Chartered Research


Sri Lanka – Policy measures gain traction


inflows, government bond issuance, and further IMF

support in the form of an Extended Fund Facility (still under

negotiation) should help to finance the current account

deficit and push the BoP further into surplus ;in 2013 (from

an expected USD 0.9bn surplus in 2012).

Medium-term steps towards fiscal consolidation

According to the Finance Ministry, policy adjustments

implemented in H1-2012 (including an increase in import

duties to curb demand for imported consumer goods and a

reduction in fuel subsidies) and the re-prioritisation of

development activities will allow the government to achieve

its fiscal deficit target of 6.2% of GDP in 2012.

However, we expect the authorities to overshoot this target.

We forecast a deficit of close to 7.0% due to losses at state-

owned enterprises (SOEs), electricity subsidies, and the

impact of the drought. Fiscal consolidation may prove

challenging in the near term given that growth is expected to

slow in H2-2012 and tax collection on external trade has

fallen short of targets. Higher interest payments and the

increase in non-interest expenditure on wages and welfare

spending this year have also contributed to fiscal slippage. In

2013, steps to reduce current expenditure, broaden the

revenue base and improve the efficiency of SOEs will be

needed to reduce public debt and keep the fiscal deficit

within our forecast of 6.5% of GDP.

LKR likely to remain stable

Given the improvements in the BoP due to slowing import

growth and steady debt inflows, we remain optimistic on the

USD-LKR and expect to see sustained appreciation. After

heightened volatility when the central bank removed the

USD-LKR trading band in February 2012, the LKR has now

stabilised, and depreciated c.16% versus the USD in H1-

2012. It is clear that USD-LKR in the 130-132 range is within

the central bank‟s comfort level. Given that exports have

contracted for the past four months, the weaker LKR should

benefit exporters.

The sharper-than-expected slowdown in exports due to

weak global growth has limited the positive impact of export

earnings on the trade deficit and on the LKR. We are now

less optimistic on the LKR over the medium term and have

revised our USD-LKR forecast, expecting it to settle at

around 130.0 in Q4-2012 (versus our previous forecast of

123.5). We expect USD-LKR to remain within the 130-132

range until end-2012, as export weakness is likely to

prevail. We expect some appreciation pressure in 2013,

taking USD-LKR to 126.5 by end-2013, due to a revival of

risk appetite as global growth starts to pick up and amid

prolonged USD weakness.

Monetary easing in 2013 to support T-bonds

Two key drivers of the T-bond market – the CBSL‟s

hawkish monetary policy stance (in response to elevated

inflation) and the government‟s excess market borrowing –

have pushed the entire yield curve higher this year. The 4Y

T-bond yield is c.420bps higher year-to-date in 2012.

However, the long end of the yield curve has stabilised over

the past quarter, while the short end continues to harden on

the back of tightening banking-system liquidity, flattening

the yield curve. The 1Y/4Y spread has narrowed by

c.50bps over the past quarter.

Given the upward revision of our inflation forecasts for the

remainder of 2012, we expect the central bank to maintain its

anti-inflation stance via stable policy rates and tight banking-

system liquidity. We therefore revise up our forecasts for 1Y

T-bill rates for Q3-2012 (by 75bps to 13.50%) and Q4-2012

(by 25bps to 13.25%).

In 2013, we expect slowing growth to prompt a shift in the

central bank‟s focus from containing inflation to supporting

growth, paving the way for mild monetary easing in H1-2013.

Such easing would be supportive of T-bonds; in combination

with expected fiscal consolidation (we forecast that the fiscal

deficit will narrow to 6.5% of GDP in 2013 from 7.0% in

2012), this should trigger a reversal of the up-move in long-

end yields. However, we believe the magnitude of the

reversal will depend on the extent to which the government

front-loads issuance.

Figure 2: Slowing imports should help to improve the BoP

Sources: CBSL, Standard Chartered Research

-1,200

-1,000

-800

-600

-400

-200

0

-80

-60

-40

-20

0

20

40

60

80

100


Trade balance, USD mn (RHS) Exports, % y/y

Imports, % y/y


Taiwan – Economy to show resilience Tony Phoo, +886 2 6603 2640

[email protected]

Eddie Cheung, +852 3983 8566

[email protected]


[email protected]


Signs of a modest rebound

We cut 2012 growth to 2.0%; keep 2013 at 4.5%

We lower our 2012 growth forecast to 2.0% from 2.7%. This

takes into account surprisingly weak H1 data, which was

dragged down by falling exports and capital investment.

However, we expect Taiwan‟s economy to remain resilient to

soft global demand. We forecast that GDP growth will

rebound to 4.5% in 2013, as shown in Figure 1.

Indeed, the Q2-2012 growth data shows that the economy

expanded on a q/q seasonally adjusted annual rate (SAAR)

basis for a second straight quarter. This suggests that

underlying growth momentum has started to pick up. It is

also in line with the recent trend in the leading indicators

index, which indicates that economic activity hit a trough in

H1-2012.

There are still potential headwinds, however. A protracted

period of export weakness risks further undermining

manufacturers‟ confidence, and could result in reductions in

planned capex spending and hiring. This could be further

aggravated by rising volatility in global equity markets, which

could be triggered by the risk of a credit crunch in Europe.

Strong boost from consumer spending

Taiwan‟s economy has remained largely resilient to weak

exports thanks to the continuing revival in domestic demand,

especially private consumption (see Figure 2). This is largely

attributable to the continuing improvement in average

household financial conditions. According to the central

bank‟s latest Financial Stability Report (May 2012), the ratio

of household debt to disposable income declined to a multi-

year low of 36.4% in 2011 from more than 44% in 2006. This

is largely due to rising incomes and improving job-market

conditions, though the average household debt-to-GDP ratio

has hovered around 80%.

Recent data indicates that consumer spending is likely to

remain robust. Consumer confidence weakened

considerably in H1-2012 due to falling equity prices, but it

has stabilised since July amid optimism on household

income expectations and the steady job-market outlook. This

is evident in recent improvements in retail and auto sales.

A surge in tourist arrivals, particularly from mainland China,

is also lending strong support to the local economy. Taiwan‟s

tourism bureau is confident that mainland Chinese arrivals in

2012 will surpass the 1.8mn record set in 2011. The number

of visitors from mainland China increased by almost 52% y/y

to 1.26mn in H1-2012. As Taiwan and mainland China

further liberalise cross-straits tourism flows, this will boost

tourist spending. It also bodes well for hiring in the tourism

and retail services sectors.

Rising inflation risk to keep CBC on alert

Taiwan‟s headline CPI inflation has been trending up in

recent months, and anecdotal evidence suggests growing

upside risk. Headline inflation reached a four-year high of

3.42% y/y in August 2012 and is likely to remain elevated at

least into H1-2013. The benefit of a high base, which capped

y/y gains in transportation costs, is likely to have waned after

the government raised retail fuel prices and utility charges in

Q2-2012.

More importantly, as the government seeks to prevent further

financial losses at state-owned petroleum and power

companies, we expect a second round of hikes in local

Figure 1: Key Taiwan forecasts

Figures in brackets are previous forecasts

Figure 2: Strength in domestic demand

% y/y

2011 2012F 2013F

Real GDP (% y/y) 4.1 2.0

(2.7) 4.5

(4.5)

Inflation (% y/y) 1.4 2.1

(1.6) 1.8

(1.6)

Re-discount rate (%)* 1.875 1.875 2.25

(2.375)

Current account bal (% GDP) 8.8 8.5

(5.5) 8.0

(6.0)

USD-TWD, period end 30.28 29.00 28.50


Domestic demand, excl FCF (RHS)

Fixed capital formation

Real GDP - exports % y/y

-6

-3

0

3

6

9

-40

-20

0

20

40

60



Taiwan – Economy to show resilience


electricity charges in 2013. This will increase upside risks to

both headline and core inflation in 2013. We therefore raise

our headline CPI inflation forecasts to 2.1% for 2012 (from

1.6% previously) and to 1.8% for 2013 (from 1.6%).

With exports remaining a drag on growth, rising inflation risk

will complicate monetary policy decision-making for the

Taiwan central bank (CBC). Local media reports have

recently raised expectations that the CBC may be

considering a rate cut after the Bank of Korea (BoK) and the

People‟s Bank of China (PBoC) cut policy rates recently in a

bid to stimulate demand. However, we do not share this

view, given that monetary conditions in Taiwan remain highly

accommodative by comparison (see Figure 3).

We also believe that policy makers in Taiwan are likely to

look beyond the recent streak of poor export and industrial

production data, and focus instead on signs of a modest

growth rebound and upside risks to inflation. This will help to

ensure that monetary policy maintains a balance between

promoting growth and ensuring price stability. Barring a

significant increase in recession risk, we expect the CBC to

resume its rate-hiking cycle in 2013, after keeping policy

rates unchanged for the remainder of 2012.


Constructive outlook on the TWD

After holding within a tight range in August, the Taiwan dollar

(TWD) has re-established an appreciating trend against the

USD. Growing onshore growth momentum and an upturn in

equity portfolio inflows are creating a more constructive

backdrop for the TWD.

Inflation developments have been key to our call for a

stronger TWD heading into H2. Inflation risks remain to the

upside for Taiwan as international fuel prices edge higher;

hikes in local fuel prices and natural weather events have

also caused food inflation to spike. Given our call that the

CBC is unlikely to hike rates until 2013, we expect a stronger

FX policy to be used to temper rising inflation.

Equity portfolio flows have improved since August. More than

USD 3bn of net inflows were recorded during the month of

August, taking year-to-date flows back into positive territory

after outflows in Q2. Seasonal patterns suggest that foreign

ownership of Taiwan equities will head higher after bottoming

in July. More generally, our work on TWD seasonality

suggests a tendency towards late-year strength versus the

USD. Further cross-straits liberalisation may also boost

investment flows, which will be supportive of the local

currency.

We have a medium-term Overweight FX rating on the TWD.

The undervaluation of the TWD nominal effective exchange

rate (NEER) means the currency still has room to appreciate.

A re-acceleration in US growth and a recovery in China,

ample global liquidity, a more sustained global growth

rebound, and improving domestic fundamentals are likely to

push USD-TWD lower. Our end-2012 forecast of 29.00 for

USD-TWD is 1.9% below the onshore forward and 1.7%

below the consensus forecast (according to Bloomberg).

Figure 3: Taiwan’s real interest rate remains low

%

Figure 4: Equity flows are a driver of TWD strength

USD bn


China

Korea

-2

-1

0

1

2

3

4

Jan-09 Jan-10 Jan-11 Jan-12

Total equity flows

(2012 YTD)

USD-TWD (RHS)

29.0

29.2

29.4

29.6

29.8

30.0

30.2

30.4 -4,000

-2,000

0

2,000

4,000

6,000

Jan-12 Mar-12 May-12 Jul-12

Taiwan 3M interbank rate, % inflation-adjusted


Thailand – Driving growth from within Usara Wilaipich, +66 2724 8878

[email protected]


Economic outlook

Sluggish export growth continues

Tail risks arising from the European crisis will remain the key

challenge to Thailand‟s growth in 2013. Given heightened

uncertainty, Thailand‟s export sector is likely to continue to

suffer from faltering global demand. Although Thailand‟s

export markets are well diversified, past experience suggests

that this does not fully insulate it from external shocks. In

2009, following the US sub-prime crisis, Thai exports

contracted by 14% – despite the fact that the US market

accounts for only about 11% of Thailand‟s total exports.

Based on this experience, persistently high global risk does

not bode well for the export outlook in 2013.

Thai consumers are sensitive to external shocks

Thailand‟s household consumption has expanded

continuously since 2000, with the exceptions of 2009 and

Q4-2011 (see Figure 2). Consumption growth has been

driven by a combination of factors – favourable employment

conditions, rising disposable income, fiscal stimulus

measures, and supportive monetary policy conditions.

Unemployment has averaged only 2.0% in the past decade,

and per-capita GDP has risen 2.7 times, to USD 5,024 in

2011 from USD 1,852 in 2001.

On the policy front, in recent years, Thai political parties have

often used populist fiscal measures – such as minimum

wage increases, agricultural price subsidies, and tax breaks

for first car purchases – in order to gain popularity among

voters. Meanwhile, monetary policy conditions have been

supportive. The real policy rate has averaged only 0.2%

since Thailand adopted inflation targeting in May 2000.

We believe that ongoing fiscal stimulus measures and

benign monetary policy conditions will continue to support

consumption growth in 2013. However, the pace of growth is

likely to cool as consumer spending on reconstruction after

the 2011 floods fades. In addition, tax breaks for first car

purchases will expire at the end of 2012. Event risk from

Europe could also undermine Thai consumer confidence.

Recent history suggests that Thai consumers are highly

sensitive to event risk, both domestically and externally.

Figure 3 shows the correlation between Thailand‟s

Consumer Confidence Index (CCI) and Private

Consumption Index (PCI). The US sub-prime crisis in late

2008 and the global recession in 2009 dampened

confidence among Thai consumers, and they subsequently

cut consumption. This suggests that Thailand‟s domestic

consumption is not decoupled from external shocks. The

same pattern was seen in response to the domestic shock

of severe floods in late 2011. Thai consumers could cut

and/or delay spending in response to deteriorating

confidence if there are unexpected headwinds from the

European debt crisis in the coming quarters.

Fiscal policy will play a greater role

Thailand‟s low public debt (currently 43% of GDP) implies

that there is ample room for policy manoeuvre, if needed, to

protect growth. In FY13 (year starting 1 October 2012), the

government plans to run a budget deficit of THB 300bn

(about 2.6% of GDP). This is lower than the planned deficit

of THB 400bn (about 3.2% of GDP) in FY12. The

government also plans off-budget spending of about THB

350bn under a special water management decree aimed at

Figure 1: Net exports subtract from growth

ppt

Figure 2: Quarterly real consumption growth

% y/y

Sources: NESDB, Standard Chartered Research Sources: NESDB, Standard Chartered Research

Private consumption

Government consumption

Investment

Net exports

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12

-4

-2

0

2

4

6

8

10

Q1-2000 Q1-2002 Q1-2004 Q1-2006 Q1-2008 Q1-2010 Q1-2012


Thailand – Driving growth from within


preventing future flood disasters. Larger government

spending and investment in FY13 should contribute

positively to the Thai economy. However, private

investment is likely to slow as demand for post-flood

reconstruction fades.

Taking all of these factors into account, we now expect the

Thai economy to grow 4.0% in 2013 (versus our previous

forecast of 4.9%). We also raise our 2012 growth forecast to

4.4% from 3.5%.

Monetary policy outlook

Policy rebalancing may be needed

Policy uncertainty in Europe will continue to complicate

Thailand‟s monetary policy outlook. While the current policy

stance remains accommodative enough to support growth,

the prolonged European crisis may require some policy

rebalancing over the coming quarters. To ensure the

continuity of the economic recovery, we now see potential

for gradual rate cuts – 25bps in Q4-2012 and 25bps cut in

H1-2013 – taking the policy rate to 2.50% from 3.0%

currently. Thereafter, we expect the policy rate to be on

hold in H2-2013.

In our view, the current downward inflation trend is unlikely to

continue into 2013 given the minimum wage increase to THB

300 per day, to take effect nationwide for two years from 1

January 2013. Meanwhile, the Bank of Thailand (BoT) has

recently voiced concerns that rapid credit growth in some

sectors warrants close monitoring. Against this backdrop, we

believe the BoT is unlikely to cut rates aggressively.

THB to catch up with AXJ FX

Growth, C/A and positioning support the THB

We expect the Thai baht (THB) to strengthen in Q4-2012

and especially at the beginning of 2013, supported by

positive growth dynamics and stabilising external balances.

Thailand is among the few Asian economies where positive

growth dynamics are continuing. This should support

capital inflows. We expect growth to slow in 2013, but from

a relatively high level, and this is unlikely to be a significant

negative for the THB.

Meanwhile, the current account (C/A) appears to be

stabilising thanks to a recovery in exports following the floods

in late 2011. We expect the C/A to continue to stabilise in

2013, after having been a net negative in H1-2012. Finally,

the Standard Chartered Transaction Flows (SCTF) index

suggests that the market is substantially long USD-THB, in

contrast to general USD-AXJ client positioning (see FX Alert

– Flow Analysis, 17 August 2012, ‘Standard Chartered

Transaction Flows – August’).

Bond curve to bear steepen on supply

FY13 bond supply is heavy. Gross Loan Bond supply will be

THB 651bn, including THB 110bn of linkers and THB 16bn of

FRBs. Net supply will be THB 443bn. The issuance profile

will also be more long-dated, which should exert further

steepening pressure on the curve. We recommend switching

from the 10Y THB into the 3Y BoT (BOT157A) bond.

Figure 3: Confidence is crucial for Thai consumers

Figure 4: Robust bank credit growth

% y/y

Sources: BoT, UTCC, Standard Chartered Research Sources: BoT, Standard Chartered Research

Consumer confidence index (LHS) Private

consumption index (% y/y)

-6

-4

-2

0

2

4

6

8

60

63

66

69

72

75


-5

0

5

10

15

20


https://research.standardchartered.com/configuration/ROW%20Documents/Standard_Chartered_Transaction_Flows_–_May_17_05_12_07_21.pdf




Vietnam – A warmer 2013 Jeff Ng, +65 6596 8075

[email protected]

Thomas Harr, +65 6596 8247

[email protected]


[email protected]

Jaiparan Khurana, +65 6596 7251

[email protected]


GDP growth likely to improve next year

Owing to an absence of positive pull factors, Vietnam's GDP

growth is likely to stay below trend until early 2013. The

country‟s open economy and reliance on export demand

mean that its growth path for the rest of 2012 and 2013 is

heavily dependent on global factors. For now, based on our

core scenario of a slow, moderate US recovery, policy

easing in China in H2-2012, the euro-area recession and a

lethargic Japan, we maintain our 5.0% growth forecast for

2012. We now expect GDP to grow 5.9% in 2013, versus

6.8% previously. We expect inflation to come in at 9% and

10.4% in 2012 and 2013, respectively. We expect no change

to the refinance rate until end-2013 as the government works

on improving the efficiency of the banking sector.

Growth to depend on the global economy

Vietnam‟s economic growth is likely to continue to depend on

global trade demand and foreign investment. In line with the

improved GDP growth reading of 4.7% y/y in Q2 (up from

4.1% in Q1), we expect growth to continue to pick up as

2012 progresses, forecasting 5.2% y/y in Q3 and 5.5% in

Q4. On a seasonally adjusted q/q basis, we expect growth to

be modestly positive until end-2013, except in Q1-2013, as

the economy typically gets off to a slow start at the beginning

of the year. However, there are downside risks to our

projections if the global economy significantly underperforms

our expectations.

Vietnam‟s export growth and freight growth – generally

viewed as more stable and easier to capture accurately than

value-added measures (Figure 2) – both slowed in H1.

Export demand faded during the period amid slowing growth

in Vietnam‟s key markets – Japan, the US and China. This

trend is likely to continue in 2013, in the absence of clear

signals of a pick-up. Strong growth in exports of computer

and electronics components, along with coffee, is helping to

offset the downtrend in other export products.

Inflation expectations likely to rise in H1-2013

Vietnam‟s inflation is likely to bottom out in Q3, and we see

inflationary pressures escalating in Q4 and H1-2013.

Vietnam is the most exposed to global food price inflation

among Asian economies – food constitutes about 40% of its

CPI basket. We estimate that a 1% rise in the Commodity

Research Bureau’s (CRB) food index could increase

headline inflation by more than 10%, after a lag of around

five months. Hence, the full inflationary impact is likely to set

in by H1-2013.

We expect the coming inflation wave to be milder compared

with those in 2008 and 2011. Agricultural prices stabilised in

August-September after climbing sharply in July. According

to the World Bank, global food stocks are still sufficient to

prevent a repeat of the food shortages seen in 2008. Higher

agricultural prices are also likely to incentivise more supply in

the next planting season, in turn moderating prices.

However, upside risks persist; weather conditions in the

coming months, for example, could swing the inflation

outlook sharply.

Active government management in 2013

We expect proactive government efforts in 2013 to manage

the economy. To improve lending conditions, the State Bank

of Vietnam (SBV) capped maximum lending rates at 15% in

July. Given fragile growth and inflation conditions, however,

we do not expect any change in the refinance rate unless

Figure 1: GDP growth expected, but with downside risks

% y/y

Figure 2: A challenging external environment ahead

% y/y


GDP growth

GDP forecasts

Manufacturing

0

2

4

6

8

10

12


Freight carried Exports

-60

-40

-20

0

20

40

60

80

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12


Vietnam – A warmer 2013


conditions deviate sharply from our core scenario. We expect

the government to run another budget deficit in 2013 to

improve investment in facilities and infrastructure (the 2013

budget will be announced by the Ministry of Finance in

December 2012). The government has also adopted an

proactive stance towards reforming the distressed financial

sector and state-owned enterprises (SOEs). In May, the SBV

governor said that eight small banks were "unhealthy", while

many SOEs face bankruptcy concerns. Non-performing

loans (NPLs) remain an issue. Estimates vary, but local

media reported NPLs at 8.6% of total loans, or USD 9.69bn,

in July. A Moody‟s report in August presented a downbeat

view of the country‟s asset quality. We believe the SBV‟s

assurance of liquidity assistance to troubled banks will

minimise the contagion effect for now, and that it will take

time for the banking sector and SOEs to return to health.


Neutral outlook on the VND and VGBs

USD-VND remains stable, as the current account is

recovering sharply, while inflation risks have diminished. In

addition, rising FX reserves are providing some cushion

against capital outflows. Further down the road, however,

rising concerns about the health of the Vietnamese banking

sector is a risk. We continue to expect USD-VND to remain

stable around current levels for the rest of 2012 and in 2013.

We have a Neutral outlook on Vietnam Government Bonds

(VGBs). We believe that yields bottomed in May 2012, as the

2Y VGB touched a three-year low of 8.8% before rebounding to

the current 9.45%. Rising but still manageable inflation in 2013

(see forecasts in Figure 3) should maintain upward pressure on

yields, but we expect VGBs to find support from the SBV‟s

neutral monetary stance and a constructive demand outlook.

Supply-demand dynamics in the VGB market are generally

balanced, as the MoF can adjust debt issuance to meet

market demand and source its remaining financing

requirements from bilateral and multilateral loans. We expect

onshore banks‟ demand to remain resilient amid ample

liquidity in the banking system (see Asia Focus, 2 July 2012,

‘The importance of local factors’). Foreign inflows will be an

important swing factor for supply-demand dynamics. We

expect inflows to shorter-dated instruments to pick up given

the stable VND outlook for 2013. The MoF has also allowed

trading in 1Y T-bills (effective 10 September 2012), making

this instrument accessible to foreign investors.

Concerns weigh on credit outlook

The authorities have made progress in establishing a

balanced environment of milder inflation, stable GDP growth

and a manageable balance-of-payments position. The trade

deficit narrowed to USD 62mn in 8M-2012 (from USD 6.2bn

in 8M-2011), and the composition of exports is shifting

towards higher-value-added products. Furthermore, FX

reserves rose to USD 19.9bn as of May 2012 from USD

13.8bn in 2011, and near-term private external debt

maturities are negligible. That said, the balance-of-payments

position is vulnerable to capital flight, as FX reserves cover

only nine weeks of imports. The VIETNM complex has

underperformed in recent weeks as concerns about

worsening asset quality in the banking system have

resurfaced. The authorities estimate that the financial system

will need an injection of USD 12bn for bank recapitalisation.

Given concerns about the banking system and the

contingent liabilities of the SOE sector, we remain cautious

on the complex. We prefer the VIETNM 16 over the VIETNM

20 given the flat credit curve.

Figure 3: Food inflation could lead to another inflation

wave in 2013 (% y/y)

Figure 4: Ample liquidity in the interbank market

%

Sources: CEIC, Standard Chartered Research Sources: Bloomberg

Inflation

Inflation forecasts

-60

-30

0

30

60

90

-20

-10

0

10

20

30

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

O/n interbank rate

2Y VGB

1

3

5

7

9

11

13

Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12

Simple average of soy, corn, wheat in local currency

(6M lead; RHS)

https://research.standardchartered.com/configuration/ROW%20Documents/The_importance_of_local_factors_02_07_12_00_39.pdf

https://research.standardchartered.com/configuration/ROW%20Documents/The_importance_of_local_factors_02_07_12_00_39.pdf


Forecasts – Economies and FX


Country Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP) FX

2011 2012 2013 2014 2011 2012 2013 2014 2011 2012 2013 2014 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13

Majors 1.3 1.1 1.5 2.5 1.9 1.8 1.5 1.7 -1.0 -1.0 -1.1 -0.8

US^ 1.7 2.0 2.0 3.0 1.4 1.8 1.8 2.0 -3.1 -2.8 -2.9 -2.9 N.A. N.A. N.A. N.A. N.A. N.A.

Euro area 1.5 -0.6 0.4 1.8 2.7 2.4 1.6 1.8 -0.1 -0.2 -0.4 -0.1 1.27 1.27 1.23 1.21 1.21 1.25

Japan -0.7 2.1 1.4 2.5 -0.2 0.0 0.1 0.3 2.0 1.5 1.8 2.8 79.00 82.00 83.00 84.00 85.00 85.00

UK 0.7 -0.5 1.1 2.3 4.4 2.6 1.6 1.8 -1.9 -1.4 -1.8 -2.2 1.57 1.59 1.55 1.53 1.58 1.63

Canada 2.5 2.2 2.4 3.0 2.5 2.2 2.0 2.0 -3.0 -2.5 -2.2 -1.9 0.98 0.98 0.99 1.00 0.98 0.98

Switzerland 2.1 0.9 1.5 2.4 0.2 -0.7 0.2 0.8 10.5 13.5 11.5 12.0 0.95 0.95 0.98 1.00 1.00 0.97

Australia 2.0 3.3 2.9 3.2 3.4 2.5 2.6 2.5 -2.4 -2.5 -2.5 -2.2 1.07 1.07 1.05 1.03 1.00 0.95

New Zealand 1.1 2.4 3.8 2.8 4.1 1.6 1.7 1.9 -4.0 -4.3 -4.1 -4.8 0.81 0.81 0.79 0.78 0.82 0.86

Asia 7.3 6.2 6.7 6.7 5.7 3.3 4.4 4.3 2.2 1.6 2.3 2.4

Bangladesh* 6.7 6.1 6.5 6.9 8.8 9.0 8.1 8.5 0.9 0.7 -0.7 -0.5 81.50 80.50 80.50 81.50 82.50 83.50

China 9.2 7.7 7.8 7.5 5.4 2.0 4.0 4.0 2.8 1.9 2.7 3.1 6.36 6.31 6.29 6.27 6.23 6.19

CNH - - - - - - - - - - - - 6.360 6.295 6.275 6.255 6.215 6.175

Hong Kong 5.0 1.8 3.8 4.5 5.3 4.0 4.5 4.0 5.2 4.0 5.0 5.5 7.765 7.785 7.785 7.775 7.770 7.770

India* 6.5 5.4 6.0 6.8 8.7 7.8 6.5 6.0 -4.2 -3.4 -3.0 -2.8 56.00 54.50 54.00 57.50 56.00 55.00

Indonesia 6.5 6.3 6.5 6.8 5.4 4.4 4.6 5.1 0.2 -1.8 -0.5 0.0 9,500 9,600 9,400 9,500 9,400 9,200

Malaysia 5.1 5.0 4.7 5.6 3.2 1.7 2.7 3.1 11.0 5.5 7.5 8.5 3.06 3.02 2.97 3.02 2.97 2.90

Mongolia 17.3 16.0 12.0 10.0 9.2 13.0 10.0 10.0 -15.1 -14.0 -10.0 -8.0 1,340 1,360 1,280 1,260 1,240 1,270

Pakistan* 2.4 3.7 4.0 4.3 13.9 11.0 10.5 12.0 0.3 -1.9 -1.5 -1.8 94.00 96.00 97.00 98.00 99.00 102.00

Philippines 3.8 5.8 5.4 5.0 4.8 3.5 4.6 4.0 2.8 3.2 4.1 3.9 41.75 40.50 40.00 41.00 40.50 39.50

Singapore 4.9 1.9 3.8 5.2 5.1 4.5 3.9 3.0 21.9 16.2 19.5 18.2 1.23 1.22 1.20 1.21 1.20 1.17

South Korea 3.6 2.4 3.2 3.8 4.0 2.3 3.0 3.0 2.4 3.0 2.7 2.2 1,120 1,100 1,070 1,070 1,060 1,040

Sri Lanka 8.3 6.8 7.5 7.7 6.7 7.7 7.5 7.2 -7.6 -6.1 -4.0 -3.5 132.0 130.0 128.5 128.0 127.0 126.5

Taiwan 4.0 2.0 4.5 5.2 1.4 2.1 1.8 1.3 8.8 8.5 8.0 6.0 29.60 29.00 28.70 28.50 28.30 28.50

Thailand 0.1 4.4 4.0 5.5 3.8 2.9 3.1 3.6 3.7 -0.8 -0.4 -0.9 30.75 30.50 30.00 30.50 30.25 29.75

Vietnam 5.9 5.0 5.9 6.8 18.6 9.0 10.4 7.0 -5.5 -2.5 -2.0 -1.5 21,000 21,000 21,000 21,000 21,000 21,000

Africa 4.8 5.1 5.2 5.4 8.5 8.7 6.9 6.9 1.6 0.9 0.6 0.2

Angola 3.7 8.0 6.5 6.5 15.0 14.0 10.0 9.0 12.0 7.0 6.0 5.0 95.00 95.50 95.80 96.00 96.30 96.50

Botswana 8.0 5.6 4.8 6.5 6.9 8.2 6.7 5.7 -1.5 -1.2 0.4 1.3 7.720 7.53 7.66 7.54 7.46 7.61

Cameroon 3.5 4.0 4.5 4.5 2.6 2.5 2.5 2.0 -3.8 -3.3 -3.0 -2.5 517 517 533 542 542 525

Côte d'lvoire -5.8 8.0 5.5 5.0 3.0 2.5 2.5 2.5 1.0 -0.5 -2.0 -2.5 517 517 533 542 542 525

The Gambia -5.0 4.0 9.7 8.3 6.0 5.0 4.0 4.0 -17.0 -14.0 -13.0 -13.0 31.00 31.50 32.00 32.50 33.00 33.50

Ghana 14.4 8.5 7.9 7.6 9.0 10.1 12.7 10.8 -8.9 -6.3 -4.3 -3.6 1.99 2.10 2.01 1.96 1.94 1.89

Kenya 4.9 5.3 5.5 5.9 14.0 10.0 5.1 6.5 -9.3 -8.5 -6.8 -6.5 86.00 87.00 88.00 87.00 86.50 86.00

Nigeria 7.2 6.9 7.3 7.5 10.9 12.1 9.0 9.7 12.2 11.3 10.5 9.0 163.0 161.0 160.5 160.0 161.5 162.0

Sierra Leone 5.2 30.0 8.0 7.0 16.0 11.0 10.0 10.0 -50.0 -7.6 -9.5 -12.4 4,410 4,450 4,470 4,490 4,500 4,510

South Africa 3.2 2.7 3.2 3.5 5.0 5.6 4.9 5.0 -3.4 -3.8 -4.0 -4.2 8.00 8.20 8.00 7.90 7.80 8.00

Tanzania 6.1 6.4 7.5 7.3 11.3 11.7 5.7 5.6 -9.5 -8.7 -10.2 -9.1 1,600 1,620 1,650 1,680 1,720 1,760

Uganda 4.4 5.1 6.9 7.3 18.7 14.7 7.8 9.1 -10.2 -9.9 -7.7 -7.3 2,590 2,660 2,640 2,550 2,400 2,500

Zambia 6.6 7.0 7.2 7.5 8.8 7.4 9.2 9.0 3.2 2.0 2.2 2.4 4,900 4,700 4,600 4,800 4,700 4,650

MENA 6.3 3.7 3.9 4.4 5.2 5.4 4.7 4.8 7.0 7.8 7.2 6.9

Algeria 2.5 3.0 4.0 4.5 4.5 5.5 3.5 3.5 10.5 10.0 8.0 10.0 75.50 77.00 76.00 75.00 74.50 74.00

Bahrain 2.2 3.5 4.0 4.5 -0.4 2.0 3.5 3.5 12.0 10.0 12.0 14.0 0.38 0.38 0.38 0.38 0.38 0.38

Egypt* 1.8 2.0 3.0 3.5 11.3 8.7 9.8 11.0 -1.2 -3.0 -2.0 -0.5 6.06 6.08 6.17 6.18 6.15 6.10

Jordan 2.4 2.5 2.9 3.5 4.6 4.5 5.0 5.2 -7.5 -8.0 -7.5 -7.0 0.71 0.71 0.71 0.71 0.71 0.71

Kuwait* 4.7 3.0 3.0 3.5 5.0 3.8 4.0 4.0 30.0 27.0 28.0 27.0 0.28 0.28 0.27 0.27 0.27 0.27

Lebanon 1.5 3.5 5.5 7.5 5.0 4.8 5.5 5.5 -17.5 -16.0 -15.0 -13.0 1,500 1,500 1,500 1,500 1,500 1,500

Morocco 4.8 2.2 5.5 6.0 0.9 1.5 2.5 2.0 -6.5 -6.8 -5.0 -3.5 8.38 8.75 8.50 8.35 8.30 8.30

Oman 4.1 4.7 4.3 4.0 4.0 3.6 4.5 5.0 10.0 13.0 14.0 9.0 0.39 0.39 0.39 0.39 0.39 0.39

Qatar 16.9 5.9 5.6 5.4 2.4 3.3 3.8 4.2 32.0 30.0 27.0 25.0 3.64 3.64 3.64 3.64 3.64 3.64

Saudi Arabia 6.8 5.1 3.8 3.9 6.1 5.4 4.5 4.2 20.0 23.5 21.0 19.5 3.75 3.75 3.75 3.75 3.75 3.75

Tunisia -1.8 3.0 4.0 5.5 3.5 4.0 3.0 2.8 -7.4 -7.5 -3.5 -2.5 1.49 1.56 1.48 1.50 1.52 1.52

Turkey 8.5 3.5 4.0 5.0 6.5 8.0 5.5 5.5 -9.8 -7.5 -7.0 -7.0 1.75 1.70 1.65 1.63 1.60 1.58

UAE 4.2 3.4 3.7 3.4 0.9 1.5 2.1 2.8 11.2 10.2 8.5 7.4 3.67 3.67 3.67 3.67 3.67 3.67

Latin America 3.8 2.8 4.2 5.0 5.7 5.2 5.3 5.0 -1.7 -1.6 -2.1 -2.3

Argentina 6.3 3.0 3.5 4.5 9.2 11.0 12.0 12.0 0.1 -1.5 -1.5 -1.0 4.68 4.95 5.05 5.25 5.00 5.00

Brazil 2.7 1.7 4.1 5.5 6.5 5.2 5.5 5.0 -2.5 -2.2 -2.8 -3.2 2.05 1.92 1.85 1.80 1.75 1.60

Chile 6.0 4.5 5.0 5.0 4.4 3.0 3.0 3.0 -1.0 0.1 -0.8 -1.1 500 500 490 485 470 450

Colombia 5.7 4.5 4.5 4.5 3.7 3.3 3.3 3.0 -2.7 -2.2 -2.3 -3.0 1,850 1,740 1,750 1,750 1,750 1,725

Mexico 3.9 3.8 4.0 4.0 3.8 4.1 3.8 3.5 -0.7 -0.4 -0.8 -1.0 14.00 13.25 12.50 12.40 12.20 11.00

Peru 6.9 5.5 6.0 6.2 4.7 3.0 2.7 2.5 -1.6 -2.0 -2.4 -2.5 2.70 2.63 2.65 2.60 2.60 2.56

Global 3.1 2.5 3.0 3.7 3.8 3.1 3.1 3.1 -- -- -- --

* Fiscal year starts in April in India and Kuwait, July in Bangladesh, Pakistan, and Egypt

^ Inflation: Core PCE deflator used for US



Forecasts – Rates


End-period Current Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14

% % % % % % %

United States Policy rate 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

3M LIBOR 0.33 0.45 0.45 0.45 0.45 0.45 0.45 0.45

10Y bond yield 1.79 1.85 1.70 1.80 2.05 2.25 2.50 2.50

Euro area Policy rate 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.50

3M EURIBOR 0.24 0.20 0.15 0.20 0.20 0.30 0.40 0.60

10Y bond yield 1.62 1.30 1.35 1.50 1.65 1.95 2.30 2.50

United Kingdom Policy rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

3M LIBOR 0.65 0.65 0.60 0.65 0.70 0.80 0.90 1.00

10Y bond yield 1.85 1.45 1.55 1.85 2.10 2.25 2.65 2.70

Australia Policy rate 3.50 3.50 3.25 3.25 3.25 3.50 4.00 4.25

3M LIBOR 3.95 4.00 3.75 3.75 3.75 4.00 4.25 4.50

China Policy rate 6.00 6.00 6.00 6.00 6.00 6.00 6.25 6.50

7-day repo rate 3.28 2.50 2.60 3.00 3.00 3.30 3.90 4.40

10Y bond yield 3.55 3.35 3.25 3.30 3.40 3.40 3.40 3.40

Hong Kong 3M HIBOR 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40

10Y bond yield 0.81 0.70 0.75 0.80 0.90 0.95 1.00 1.10

India Policy rate 8.00 8.00 8.00 7.75 7.50 7.25 7.00 7.00

91-day T-bill rate 8.09 8.25 8.00 7.75 7.75 7.50 7.25 7.00

10Y bond yield 8.17 8.50 8.25 8.00 7.75 7.50 7.50 7.50

Indonesia Policy rate 5.75 5.75 5.75 5.75 5.75 6.00 6.25 6.25

3M JIBOR 4.92 4.90 5.20 5.30 5.30 5.50 5.80 5.80

10Y bond yield 5.91 5.80 5.50 5.60 5.80 6.00 6.10 6.10

Malaysia Policy rate 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.25

3M KLIBOR 3.19 3.20 3.20 3.20 3.20 3.20 3.20 3.45

10Y bond yield 3.46 3.50 3.50 3.60 3.75 3.75 3.75 3.75

Mongolia Policy rate 13.25 15.00 15.00 13.00 13.00 13.00 13.00 13.00

Philippines Policy rate 3.75 3.75 3.50 3.50 3.50 3.50 3.50 3.50

3M PDST-F 1.41 1.50 2.00 2.50 3.00 3.25 3.50 3.50

10Y bond yield 4.68 5.05 4.80 5.10 5.30 5.50 5.50 5.50

Singapore 3M SGD SIBOR 0.38 0.35 0.35 0.35 0.35 0.35 0.35 0.35

10Y bond yield 1.51 1.48 1.40 1.50 1.60 1.65 1.70 1.80

South Korea Policy rate 3.00 3.00 2.50 2.50 2.50 2.50 2.50 2.75

91-day CD rate 3.15 3.15 2.70 2.70 2.70 2.70 2.70 2.95

10Y bond yield 3.12 3.00 2.80 2.80 2.80 2.90 3.00 3.20

Taiwan Policy rate 1.88 1.88 1.88 1.88 2.00 2.13 2.25 2.38

3M TAIBOR 0.89 0.90 0.90 0.90 0.95 1.00 1.05 1.10

10Y bond yield 1.19 1.20 1.30 1.30 1.40 1.50 1.60 1.60

Thailand Policy rate 3.00 3.00 2.75 2.75 2.50 2.50 2.50 2.50

3M BIBOR 3.16 3.13 2.80 2.75 2.55 2.60 2.65 2.70

10Y bond yield 3.66 3.40 3.50 3.60 3.75 3.90 4.00 4.00

Vietnam Policy rate (Refi rate) 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00

Overnight VNIBOR 5.11 5.50 7.00 7.00 7.00 7.00 7.00 7.00

2Y bond yield 9.45 9.50 9.50 9.25 9.50 9.65 9.75 9.85

Ghana Policy rate 15.00 15.00 15.00 16.00 16.50 16.00 15.00 14.50

91-day T-bill rate 22.99 22.80 22.70 22.00 21.00 19.00 16.40 15.20

3Y bond yield 17.25 19.00 21.00 19.00 18.00 16.00 15.00 16.00

Kenya Policy rate 13.00 13.00 11.50 10.00 9.00 8.50 8.50 8.50

91-day T-bill rate 7.51 8.15 7.40 6.80 6.30 6.50 6.40 6.20

10Y bond yield 10.50 12.50 11.50 11.00 10.50 10.00 9.50 9.50

Nigeria Policy rate 12.00 12.00 12.00 12.00 12.00 12.00 12.00 13.00

91-day T-bill rate 13.15 14.60 15.20 15.50 15.80 15.50 14.90 14.30

10Y bond yield 12.05 11.00 10.00 9.50 10.00 11.00 12.00 16.60

South Africa Policy rate 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.50

91-day T-bill rate 5.31 5.54 5.60 5.67 5.72 6.06 6.08 6.54

10Y bond yield 7.04 6.90 7.00 7.10 7.20 7.30 7.40 7.80



Forecasts – Commodities


Market

closeQ2 - 12 Q3 - 12 Q4 - 12 Q1 - 13 Q2 - 13 Q3 - 13 Q4 - 13 2011 2012 2013

19-Sep-12 A F F F F F F A F F

Crude oil (nearby future, USD/b)

NYMEX WTI 92.0 93 94 102 100 99 106 110 95.1 98 104

vs fw d % 2% 10% 7% 6% 15% 20% 6% 12%

ICE Brent 108.2 109 111 114 110 107 112 115 111.0 113 111

vs fw d % 1% 1% 1% 3% 9% 13% 0% 8%

Dubai spot1 109.8 106 106 111 107 104 109 112 106.1 110 108

Refined oil products cracks and spreads

Singapore naphtha (USD/b)1 -6.2 -8.5 -10 -8 -5 -3 -2 2 -3.8 -7.5 -2.0

Singapore jet kerosene (USD/b)1 20.5 15.9 17 17 17 17 25 17 19.4 16.3 16.8

Singapore gasoil (USD/b)1 18.7 15.4 16 17 18 19 23 17 18.3 16.1 17.9

Singapore regrade (USD/b)1 1.7 0.6 1 0 -2 -2 -1 -1 1.1 0.2 -1

Singapore fuel oil 180 (USD/b)1 -4.0 -1.3 -1 -2 -3 -3 -2 -3 -4.0 -1.3 -3

Europe gasoil (USD/b)1 19.1 15.3 15 16 16 17 17 17 14.4 15.2 16

Rotterdam 3.5% barges (USD/b)1 -8.4 -10.4 -12 -12 -12 -13 -11 -13 -14.9 -11.1 -12

Europe jet (USD/b) 26.3 17.1 17 17 15 14 15 14 17.9 16.6 15

Coal (USD/t)

API4 87 93 88 92 95 97 97 98 117 94 97

vs fw d % 0% 3% 3% 2% -1% -2% 7% 0%

API2 90 92 92 94 98 98 100 100 121 95 99

vs fw d % 0% 3% 4% 1% -1% -4% 5% 0%

globalCOAL NEWC*1 91 96 90 95 105 102 105 108 121 99 105

Base metals (LME 3m, USD/t)

Aluminium 2,140 2,021 1,900 2,100 2,200 2,200 2,200 2,200 2,424 2,059 2,200

vs fw d % -2% -2% 2% 1% 0% -1% -3% 0%

Copper 8,350 7,837 7,600 8,000 8,500 9,000 9,000 9,000 8,833 7,939 8,875

vs fw d % -2% -4% 2% 8% 8% 8% -5% 6%

Lead 2,271 1,988 1,900 2,050 2,150 2,300 2,300 2,300 2,391 2,013 2,263

vs fw d % -4% -10% -6% 0% 0% 0% -11% -1%

Nickel 17,755 17,219 16,000 18,000 19,000 21,000 21,000 21,000 22,896 17,728 20,500

vs fw d % -2% 1% 7% 18% 17% 17% 0% 15%

Tin 21,380 20,625 19,000 21,000 23,000 25,500 25,500 25,500 26,042 20,891 24,875

vs fw d % -2% -2% 8% 19% 19% 19% -2% 16%

Zinc 2,124 1,934 1,875 2,000 2,100 2,250 2,250 2,250 2,212 1,962 2,213

vs fw d % -1% -6% -2% 4% 4% 3% -7% 2%

Iron ore (USD/t)

Iron ore2 108 140 110 115 125 140 133 140 168 127 135

Steel** (CRU assessment, USD/t)

HRC, US1 697 728 680 765 840 840 840 840 814 742 840

HRC, Europe1 636 692 612 632 632 650 640 665 771 658 647

HRC, Japan1 830 828 820 875 965 965 965 965 910 846 965

HRC, China1 594 690 589 632 664 717 788 795 736 649 741

Precious metals (spot, USD/oz)

Gold (spot) 1,770 1,612 1,650 1,750 1,800 1,900 1,900 1,900 1,573 1,676 1,875

vs fw d % 0% -1% 1% 7% 7% 7% -5% 5%

Palladium (spot) 672 629 600 650 800 800 800 800 733 640 800

vs fw d % -3% -3% 19% 19% 19% -5% 19%

Platinum (spot) 1,640 1,501 1,450 1,650 1,700 1,800 1,800 1,800 1,720 1,552 1,775

vs fw d % -3% 0% 3% 9% 9% -5% 8%

Silver (spot) 35 29.5 29 33 34 35 35 35 35.3 31 35

vs fw d % -3% -5% -2% 1% 1% 1% -10% 0%

Softs (nearby future)

NYBOT cocoa, USD/t 2,538 2,218 2,450 2,400 2,500 2,600 2,700 2,800 2,921 2,343 2,650

vs fw d % 0% -6% -2% 1% 5% 8% -8% 3%

LIFFE coffee, USD/t *** 2,010 2,067 2,085 2,000 1,950 1,950 1,950 1,950 2,195 2,023 1,950

vs fw d % 0% -1% -5% -6% -7% -8% 0% -6%

NYBOT coffee, USc/lb 174 170 175 180 185 190 205 205 253 183 196

vs fw d % 1% 3% 4% 4% 10% 8% 4% 7%

NYBOT sugar, USc/lb 19 21.2 21 22 24 23 26 26 27.1 22 25

vs fw d % 1% 12% 22% 16% 29% 26% 15% 23%

TOCOM RSS3 rubber#, JPY/kg 260 280.8 235 250 255 260 260 260 375.2 271 259

Fibres

NYBOT cotton No.2, USc/lb 75 81 73 80 85 86 83 85 138 82 85

vs fw d % 0% 5% 10% 10% 4% 5% 8% 7%

Grains & oilseeds (nearby future)

CBOT corn (maize), USc/bushel 757 618 790 820 830 780 760 780 680 717 788

vs fw d % 1% 8% 9% 4% 13% 22% -5% 11%

CBOT soybeans, USc/bushel 1,670 1,426 1,700 1,675 1,500 1,550 1,450 1,500 1,318 1,518 1,500

vs fw d % 1% 0% -8% 0% -1% 10% -9% 0%

CBOT w heat, USc/bushel 882 641.6 870 890 920 880 800 850 708.9 761 863

vs fw d % 0% 1% 3% 0% -8% -3% -14% -2%

CBOT rice, USD/cw t 15 14.8 15 15 16 16 16 16 15.1 15 16

vs fw d % 0% -2% 2% 0% 2% 2% -3% 1%

Thai B rice 100%, USD/tonne*1 575 602 600 600 600 600 625 625 566 591 613

Edible oils (nearby future)

Palm oil (MDV,MYR/t) 2,705 3,237 2,975 3,250 3,500 3,300 3,250 3,400 3,244 3,176 3,363

vs fw d % 2% 15% 19% 11% 10% 16% 13% 14%

Soyoil (CBOT, USc/lb) 56 53 55 54 52 53 51 53 56 54 52

vs fw d % 1% -4% -8% -6% -8% 0% -4% -6%

Sources: Bloomberg, Standard Chartered Research

Energy

Metals

Agricultural products

*weekly quote **monthly average ***10 tonne contract; 1no forward price comparison available; 2cost and freight at China’s Tianjin port, 62% iron content, Indian origin; #6th contract;


Forecasts – GDP growth and inflation


Quarterly forecasts

Real GDP growth (y/y)

Q1-11A Q2-11A Q3-11A Q4-11A Q1-12A Q2-12F Q3-12F Q4-12F Q1-13F Q2-13F Q3-13F Q4-13F

US* 0.4 1.3 1.8 3.0 1.9 1.7 2.1 1.9 1.8 2.0 2.2 2.2

Euro area 2.4 1.6 1.3 0.6 0.0 -0.5 -1.0 -0.9 -0.7 -0.1 0.8 1.5

Japan 0.0 -1.8 -0.6 -0.7 2.9 3.2 1.2 1.1 0.9 1.0 1.6 2.1

UK 1.4 0.5 0.5 0.6 -0.2 -0.5 -0.8 -0.3 0.3 1.2 1.3 1.8

Bangladesh 6.6 6.3 6.7 6.5 6.3 6.2 6.2 6.4 6.7 6.6 6.3 6.5

China 9.7 9.5 9.1 8.9 8.1 7.6 7.4 7.3 7.5 7.8 8.0 8.0

Hong Kong 7.8 5.1 4.3 2.8 0.7 1.2 2.2 3.0 3.8 4.0 3.6 3.6

India 9.2 8.0 6.7 6.1 5.3 5.5 5.1 5.3 5.6 5.6 6.0 6.3

Indonesia 6.5 6.5 6.5 6.5 6.3 6.4 6.4 6.3 6.4 6.5 6.6 6.6

Malaysia 5.2 4.3 5.8 5.2 4.8 5.4 5.2 4.5 4.2 4.4 4.8 5.3

Philippines 4.9 3.6 3.2 4.0 6.3 5.9 5.3 5.5 4.8 5.1 6.3 5.5

Singapore 9.3 0.9 6.1 3.6 1.4 2.0 1.4 3.0 2.3 3.5 4.6 4.6

South Korea 4.2 3.5 3.6 3.3 2.8 2.3 2.1 2.5 2.4 3.1 3.5 3.9

Sri Lanka 7.9 8.2 8.4 8.3 7.9 6.4 6.4 6.7 7.4 7.3 7.5 7.8

Taiwan 6.6 4.5 3.5 1.9 0.4 -0.2 2.2 5.5 6.0 5.0 4.0 3.0

Thailand 3.2 2.7 3.7 -8.9 0.4 4.2 2.8 10.7 3.6 3.5 4.3 4.8

Vietnam 5.4 5.7 6.1 6.1 4.1 4.5 5.2 5.5 7.4 5.3 5.4 5.9

Consumer price inflation (y/y)

Q1-11A Q2-11A Q3-11A Q4-11A Q1-12A Q2-12F Q3-12F Q4-12F Q1-13F Q2-13F Q3-13F Q4-13F

US* 1.1 1.3 1.6 1.7 1.9 1.8 1.7 1.7 1.6 1.7 1.8 1.9

Euro area 2.5 2.7 2.7 2.9 2.7 2.5 2.4 2.1 2.0 1.7 1.5 1.4

Japan -0.5 -0.4 0.1 -0.3 0.3 0.2 -0.5 -0.1 -0.3 -0.2 0.6 0.6

UK 4.1 4.4 4.7 4.7 3.5 2.7 2.4 2.0 1.6 1.7 1.7 1.8

Bangladesh 9.8 10.3 11.4 11.2 10.7 9.2 8.1 8.2 8.3 8.7 7.8 7.4

China 5.1 5.7 6.3 4.6 3.8 2.9 1.4 1.5 2.5 3.5 4.5 5.5

Hong Kong 3.8 5.2 6.4 5.7 5.2 4.2 3.2 3.5 4.0 4.2 4.5 4.8

India 9.6 9.6 9.7 9.0 7.5 7.7 8.5 7.8 7.2 6.8 6.5 6.2

Indonesia 6.7 5.5 4.6 3.8 4.0 4.5 4.6 4.5 4.8 4.4 4.4 5.0

Malaysia 2.8 3.3 3.4 3.2 2.3 1.7 1.3 1.5 1.9 2.5 3.1 3.3

Philippines 4.5 4.9 4.9 4.7 3.1 2.9 3.7 4.2 5.2 5.1 4.4 3.6

Singapore 5.2 4.7 5.5 5.5 4.9 5.3 3.8 4.0 3.7 3.5 4.1 4.2

South Korea 3.8 4.0 4.3 4.0 3.0 2.4 1.6 2.2 2.5 3.2 3.4 2.7

Sri Lanka 7.0 8.1 7.4 7.3 4.0 7.5 9.6 9.8 8.3 7.5 6.6 7.3

Taiwan 1.3 1.7 1.3 1.4 1.3 1.7 2.9 2.4 2.0 1.8 1.7 1.5

Thailand 3.0 4.1 4.1 4.0 3.4 2.5 2.7 2.8 2.9 2.8 3.0 3.6

Vietnam 12.8 19.4 22.5 19.8 15.9 8.6 5.1 6.2 8.1 10.7 12.2 10.4

*(quarterly) Core PCE deflator y/y sa ;



Reference tables


Economy

Size

(USD bn) Population

(mn)

Private consumption (% of GDP)

Government spending

(% of GDP)

Investment (% of GDP)

Exports of goods

(% of GDP)

Imports of goods

(% of GDP)

FX reserves (USD bn, latest)

Bangladesh 104.2 164.5 75.6 5.4 25.0 18.5 24.9 10.2

China 7400.0 1,339.7 33.8 28.0 49.0 26.0 24.0 3,204.0

Hong Kong 243.0 7.1 65.2 8.3 21.9 176.4 198.9 298.2

India 1860.0 1,202.0 61.7 11.9 34.1 26.9 34.7 287

Indonesia 847.1 241.2 55.4 8.2 25.2 49.3 38.1 109.0

Malaysia 278.9 28.7 47.7 13.6 20.1 94.2 77.7 134.7

Philippines 225.0 94.0 73.4 9.4 19.3 31.2 36.2 80.8

Singapore 260.0 5.3 39.4 9.7 23.4 209.0 182.3 246.0

South Korea 1,116.4 50.0 52.9 15.4 29.5 49.7 46.6 316.9

Sri Lanka 59.0 20.8 69.8 21.4 29.9 23.1 37.6 7.1

Taiwan 430.6 23.3 58.0 12.2 22.6 73.7 66.5 400.8

Thailand 318.9 67.4 51.7 10.0 20.9 69.5 52.9 187.3

Vietnam 123.6 89.3 66.5 6.5 38.9 77.5 87.8 15.0

Sources: National Statistics Offices, CEIC, Bloomberg, Standard Chartered Research

Policies

Politics and fiscal policy Monetary policy

Date of next

election Type of election

Date of next budget

announcement Policy objectives

Explicit inflation target

Key monetary policy tools

Bangladesh 2014 Parliamentary Jun-13 Ensuring growth and price

stability NA

Repo and reverse repo rates

China Late 2012 Party Congress N/A Stable economic growth and

price levels NA

1Y benchmark deposit and lending rates

Hong Kong 2016 Legislative Council Feb-13 Exchange rate stability NA Linked Exchange Rate

System

India 01-May-2014 Parliamentary Feb-13 Ensuring growth, price and

financial stability NA Repo rate, CRR

Indonesia 2014 Parliamentary and

presidential Oct-12

(2013 budget) Price stability 3.5-5.5%

BI rate, overnight deposit facility rate

(FASBI)

Malaysia 01-Mar-2013 Parliamentary Oct-12 Sustainable growth and

monetary stability N/A Overnight policy rate

Philippines 13-May-2013 Local/senatorial Oct-12 Low and stable inflation and sustainable economic growth

3-5% Overnight repo and reverse repo rates

Singapore 01-May-2016 Parliamentary Feb-13 Non-inflationary economic

growth N/A SGD NEER policy band

South Korea 19-Dec-2012 Presidential Sep-12 Price stability and financial

stability 2-4% Base rate

Sri Lanka 2016 Parliamentary and

presidential Nov-12 Price stability N/A

Repo rate, Statutory required reserve

Taiwan 01-Jul-2015 Parliamentary Oct-12 Price stability 0.5-3.0%

(core) 1-day repo

Thailand 01-Jul-2015 Parliamentary Oct-12 Price stability 0.5-3.0%

(core) 1-day repo

Vietnam 2016 National Party Congress Q4-2013 Price stability N/A Refinance rate

Sources: Standard Chartered Bank



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Data available as of

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