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					 Nomura | Asia Economic Monthly                                                            24 November 2011



Asia Economic Monthly
Economics Research | Asia Ex-Japan




 Flagging growth momentum                                                   24 NOVEMBER 2011


 Growth performance within the region is starting to diverge.               Economists

                                                                            Robert Subbaraman
 Asia Letter                                                        2       Chief Economist Asia
   Flagging growth momentum                                         2       rob.subbaraman@nomura.com
                                                                            +852 2536 7435
 Asia Views                                                         3 
   Taking Asia’s pulse                                              3       Tomo Kinoshita
                                                                            Deputy Head, Asia
   A cold winter in China                                           6 
                                                                            tomo.kinoshita@nomura.com
   China risks                                                      7 
                                                                            +852 2536 1858
   China bashing                                                    8 
   The dilemma facing Asian central bankers                        10       Zhiwei Zhang
   A condition for Asia’s domestic-led growth                      13       China
                                                                            zhiwei.zhang@nomura.com
   Asia’s manufacturing sector under pressure                      16 
                                                                            +852 2536 7433
   Thailand: Dealing with another disaster                         19 
                                                                            Young Sun Kwon
 Chart Alerts                                                      22 
                                                                            South Korea
   China's economy faces a tipping point                           22       youngsun.kwon@nomura.com
   South Korea: Short-term external debt falls in Q3               22       +852 2536 7430
   China: Labour market remains tight                              23 
                                                                            Sonal Varma
   Korea: Downturn continues to reduce union membership            23 
                                                                            India
   India: Indirect tax collection moderates sharply in September   24       sonal.varma@nomura.com
   China: Liquidity improves as policy is marginally loosened      24       +91 22 4037 4087
   Singapore: a temporary jump in electronics PMI                  25 
                                                                            Aman Mohunta
   Australia: Home buying starting to improve                      25 
                                                                            India
   Australia: Consumer sentiment on the rise                       26       aman.mohunta@nomura.com
   China: A sharp drop in shadow banking                           26       +91 22 6617 5595
 Calendar                                                          27 
                                                                            Euben Paracuelles
   The Month Ahead                                                 27       Southeast Asia
                                                                            euben.paracuelles@nomura.com
 Outlook 2011-2013                                                 28 
                                                                            +65 6433 6956
   Australia: One and done                                         28 
   China: Near-term downside risks are rising                      29       Stephen Roberts
                                                                            Australia, New Zealand
   Hong Kong: Downside risks rise                                  30 
                                                                            stephen.roberts@nomura.com
   India: Further signs of a slowdown                              31 
                                                                            +61 2 8062 8631
   Indonesia: A more aggressive central bank                       32 
   Malaysia: Unsustainable fiscal support                          33 
   New Zealand: GDP growth about to lift                           34 
   Philippines: Speeding up spending                               35 
   Singapore: Stronger external headwinds                          36 
   South Korea: High beta                                          37 
   Taiwan: Downside risks persist                                  38 
   Thailand: Floods recede, politics back?                         39 
 Asia in Charts                                                    40 
 Forecast Table                                                    47 




                                                                                Nomura International (HK) Limited

  See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures
Nomura | Asia Economic Monthly                                                                                       24 November 2011




Asia Letter
Flagging growth momentum
Growth performance within the region is starting to diverge.

We are in the process of reassessing our outlook and have a bias to lower our Asian GDP            Rob Subbaraman
growth forecasts. As part of the process we have analyzed eight of our preferred timely or         +852 2536 7435
                                                                                                   rob.subbaraman@nomura.com
forward-looking indicators to assess Asia’s current growth momentum (see the articles
“Taking Asia’s pulse” and “Asia’s manufacturing sector under pressure”). They confirm that
Asia’s economies are indeed cooling but, at this juncture, not collapsing as they did in late
2008/early 2009. They also suggest that growth performance within the region is becoming
more divergent: China and Indonesia look most resilient, while at the other end of the
spectrum, growth momentum seems to be flagging most in India, Singapore, Taiwan and
Thailand.

With the economies losing growth momentum, CPI inflation abating and the non-trivial risk
that the crisis in Europe continues to deepen, it may appear ripe for Asian central banks to
start cutting interest rates. Yet so far only Bank Indonesia has done so, with a 25bp cut on
11 October and a 50bp cut on 10 November. Others may soon follow with modest rate cuts
but we believe – and we think most Asian central banks would concur – that aggressively
easing monetary policy at this juncture is risky and unwarranted, particularly given that fiscal
policies are turning expansionary and real policy interest rates are already negative in nearly
all countries. We can think of six reasons why Asian central bankers should not ease pre-
emptively in a big way (see “The dilemma facing Asian central bankers”).

Over the past month, Zhiwei Zhang and the China team have done considerable research
on China’s economic outlook. In A cold winter in China they explain why the risk of GDP
growth dropping below 8% y-o-y in Q1 2012 is rising – a view that has been vindicated this
week with HSBC’s flash PMI for China dropping to 48. Looking beyond the near term,
Nomura’s global research team has published a major study assessing the risk of a China
hard landing, which we define as real GDP growth slowing to an average of 5% y-o-y or less
over four consecutive quarters. In China risks we discuss six factors that lead us to attach a
one-in-three likelihood that a hard landing commences before the end of 2014. In this study
we also launch Nomura’s China Stress Index (CSI), which uses 18 indicators to quantify the
macro risks in a single measure. We will update the CSI quarterly. Finally, in “China bashing”
we explain why blaming China for lost US jobs may be “good” politics, but “bad” economics
(recall that last month the US Senate passed a bill that essentially seeks to punish China for
allegedly holding down its currency). We highlight four subtle issues regarding China’s trade
and the renminbi that are not well understood.

Euben Paracuelles and Nuchjarin Panarode take a close look at the economic impact of the
severe flooding in Thailand, and besides substantially marking down Thai GDP forecasts
they explain how supply-chain disruptions, notably in motor vehicle and electronic parts, will
be felt most severely in other Southeast Asian countries (see “Thailand: Dealing with
another disaster”).

In the coming month (please see our data calendar for details), we expect China’s official
PMI (due 1 December) to fall from 50.4 to 49.0, and to be followed by across-the-board
weakening of core activity data, albeit from still strong levels. Meanwhile, China’s CPI
inflation rate is likely to drop a full percentage point in November to 4.5%, setting the stage
for heightened expectations of selective policy easing. Of the three last countries to release
Q3 GDP reports, we expect a significant growth slowdown in India, but a pick-up in growth in
Australia and most notably, the Philippines. Over the next month we expect seven of the
nine countries that we cover to report lower or stable CPI inflation in November, with only
Hong Kong and Korea bucking the trend. Meanwhile, the central banks of Thailand, the
Philippines, Australia, Indonesia, New Zealand, Korea and India will all hold monetary policy
meetings over the next month. Despite inflation easing, we expect only Bank Indonesia and
the Bank of Thailand to cut rates with the rest on hold for the reasons outlined in “The
dilemma facing Asian central bankers”.



                                                                  2
Nomura | Asia Economic Monthly                                                                                         24 November 2011




Asia Views
Taking Asia’s pulse
Asia’s growth slowdown is deepening and growth divergences within the
region are emerging.                                                                                Rob Subbaraman
                                                                                                    +852 2536 7435
Along with our colleagues in other regions, we are in the process of reassessing our                rob.subbaraman@nomura.com

outlook, and have a bias to lower our Asian GDP growth forecasts. A useful starting
point in this exercise is to assess Asia’s current growth momentum using eight of our
preferred timely or forward-looking indicators. The results confirm that, at this juncture,
Asia’s growth is cooling but not collapsing; the results also highlight varying growth
performance within the region.

1. Nomura’s leading index of Asian exports. Our composite leading index is
                                                                                                    Our export leading index is
comprised of the OECD leading economic index, the US ISM index and its import sub-                  pointing south…
component index, China’s imports, the Baltic Dry Freight index, US semiconductor
global sales, US manufacturers’ new orders of electronic products and the US semi-
conductor equipment book-to-bill ratio. While most Asian countries have yet to release
October trade data, our leading index provides an indication of Asian export growth
through to December (Figure 1). It currently points to a continued slowdown in the
growth of Asian exports in coming months. But, reassuringly, unlike September 2008,
it is not pointing to an imminent plunge.

2. Composite leading economic indexes. The OECD constructs leading economic
                                                                                                    … as are composite leading
indexes for China, India and Indonesia, while we used each country’s official leading               indexes but with variations
index for Malaysia, Korea, Singapore, Taiwan and Thailand. Since different
methodologies are used to construct the leading indexes, we standardised them by
computing Z-scores. From June to September 2011, all eight indexes have fallen,
pointing to weaker GDP growth in the next 3-6 months. However, there are some
notable differences in: 1) the rate of decline; and 2) the September level (Figure 2).
The leading economic indexes for India, Thailand and Singapore have fallen the most
since June, which suggests that these countries are losing growth momentum most
rapidly. The level in September, however, is still well above the December 2008 low
point (represented by the diamonds in Figure 2) for all countries except India, which is
already below its December 2008 level. This suggests that India’s GDP growth could
possibly slow below the 5.9% y-o-y rate recorded in Q1 2009.

3. Purchasing managers indexes. The PMIs compiled by Markit Economics provide a                     PMIs are mostly below 50, but
timely gauge of business conditions for five Asian countries. Save India, the PMIs for              well above the 2008 lows
October (the first number in brackets) are all below 50 signalling that economic activity
is cooling, but still

Fig. 1: Nomura’s leading index of Asian exports                        Fig. 2: Composite leading economic indexes

% y-o-y                                       Jan 2000 = 100           Z-score         Jun-11
48                                                       104           1.5
                                                                                       Sep-11
                                                                        1.0
 36                                                     101             0.5            Dec-08
                                                                        0.0
 24                                                     98
                                                                       -0.5
 12                                                     95             -1.0
                                                                       -1.5
  0                                                     92             -2.0
                                                                       -2.5
-12            Asia ex-Japan's total                    89
                                                                       -3.0
               exports, lhs
-24                                                     86             -3.5
               Nomura'sa export leading
               index, rhs
-36                                                     83
  Dec-01    Dec-03     Dec-05    Dec-07   Dec-09   Dec-11

Source: OECD; Bloomberg; CEIC and Nomura Global                        Source: CEIC and Nomura Global Economics.
Economics.



                                                                   3
Nomura | Asia Economic Monthly                                                                                                          24 November 2011




well above the nadir reached in late 2008/early 2009 (the second number in brackets):
Hong Kong (49.0, 39.6), India (50.6, 44.9), Korea (48.0, 39.7), Singapore (49.5, 44.8)
and Taiwan (43.7. 22.9). Judging from the OECD’s leading economic index, India’s
PMI could soon fall abruptly, while Taiwan’s PMI is currently the lowest in Asia, albeit
still well above its December 2008 low. China’s official PMI declined from 51.2 in
September to 50.4 in October, staying slightly above 50 and well above 38.8, the low
recorded in December 2008.

4. Consumer confidence surveys. All bar one of Asia’s nine major economies have
                                                                                                                    Confidence is holding up fairly
reputable surveys of consumer confidence. They generally show that confidence is                                    well
holding up well despite the sell-off in equity markets. In recent months, consumer
confidence has risen in Indonesia and the Philippines; held relatively stable in Korea,
Malaysia and Taiwan; and fallen slightly in China and more notably in Hong Kong and
Thailand, the latter likely influenced by the flooding disaster. In all countries, consumer
confidence remains well above the lows in late 2008/early 2009.

5. Domestic motor vehicle sales. This is a timely indicator. All countries have                                     Motor vehicle sales are starting
released data for October except Hong Kong, the Philippines and Singapore. In                                       to fall sharply
contrast to consumer confidence, year-on-year growth in the volume of local motor
vehicle sales fell sharply from September to October in China (5.7% to -0.9%), India
(19.4% to -1.1%), Korea (3.8% to -8.8%) and especially Thailand (27.5% to -40.5%).
The growth rates are low but positive in Malaysia (2.2% to 2.6%) and Taiwan (12.9%
to 3.5%), with only Indonesia still posting a high growth rate in October of 24.8% y-o-y.
The weakness in motor vehicle sales may be exaggerated by temporary shortages of
car parts and components caused by Thailand’s severe floods. Even so, apart from
Thailand the growth rates remain well above the lows in late 2008/early 2009.

6. Industrial inventory-to-shipment ratios. An unanticipated decline in firms’ shipments
                                                                                                                    Inventories do not look overly
can result in a build up of inventories, and so a sharp rise in the ratio of inventories to                         bloated at this stage
shipments is often followed by a pullback in production. Only three Asian countries
have timely data on industrial inventory-to-shipment ratios, and indeed, in all three,
ratios surged at the height of the global financial crisis, peaking in late 2008/early 2009
at 1.27 in Korea, 1.61 in Taiwan and 1.48 in Thailand. So far this year, the inventory-
to-shipment ratios have risen only slightly, and the latest data for September for Korea,
Taiwan and Thailand, at 1.04, 0.98 and 0.94 respectively, are still well below the late
2008/early 2009 peaks.




Fig. 3: The growth pulse of exports                                        Fig. 4: The growth pulse of industrial output
                   % y-o-y         % 3m-o-3m            % m-o-m                                % y-o-y           % 3m-o-3m         % m-o-m
             Aug Sep Oct         Aug Sep Oct         Aug Sep Oct
                                                                                         Aug Sep Oct            Aug Sep Oct       Aug Sep Oct
   China     24.4 17.0 15.8       0.9 -2.7 -5.7      1.8 -5.2 0.7          China         13.5 13.8 13.2         7.1 10.4 11.4     0.9   1.3   0.9
    HK       6.8    -3.0 n.a.     2.6   3.0 n.a.     2.4 -9.9 n.a.         India         3.6     1.8     n.a.   -5.5 -6.3 n.a.    -0.8 -1.3 n.a.
   India     44.3 36.4 n.a.      15.4 2.8 n.a.       -6.4 0.6 n.a.         Indonesia     1.6 10.1 n.a.          -0.8 -0.3 n.a.    -3.2 2.7 n.a.
 Indonesia 35.9 46.3 n.a.        18.7 8.6 n.a.       1.6   5.2 n.a.
                                                                           Korea         4.7     6.8     n.a.   2.3 -0.6 n.a.     -1.9 1.1 n.a.
   Korea     25.5 18.1 8.0       -9.0 6.4    5.0     3.4 -4.8 0.1
                                                                           Malaysia      3.6     2.5     n.a.   -2.1 2.6 n.a.     4.0   0.3 n.a.
 Malaysia    10.9 16.6 n.a.      -8.8 -6.6 n.a.      2.3   0.4 n.a.
                                                                           Philippines   2.6    n.a. n.a.       -12.0 n.a n.a.    -0.1 n.a. n.a.
Philippines -13.7 -27.0 n.a.     -26.1 -23.9 n.a.    -10.3 -6.1 n.a.
                                                                           Singapore     22.8 12.8 n.a.         -19.0 15.9 n.a.   4.5 -0.7 n.a.
Singapore    3.8    -4.6 -16.2   -1.3 -6.2 -16.5     7.1 -9.3 -5.9
                                                                           Taiwan        4.0     1.8     1.4    -14.9 -8.3 -8.1   -1.8 -2.3 2.5
  Taiwan     7.2     9.9 11.7    -21.8 -17.0 -18.0   -8.5 -0.2 5.0
                                                                           Thailand      6.8    -0.5 n.a.       24.5 8.5 n.a.     3.7 -3.1 n.a.
 Thailand    21.5 12.6 n.a.       7.7   6.2 n.a.     -1.5 -5.3 n.a.
Note: % m-o-m and % 3m-on-3m data are seasonally adjusted.                 Note: % m-o-m and % 3m-on-3m data are seasonally adjusted.
Source: CEIC and Nomura Global Economics.                                  Source: CEIC and Nomura Global Economics.




                                                                       4
Nomura | Asia Economic Monthly                                                                             24 November 2011




7. Export pulse. In Asia, it is common to express export growth in year-on-year terms,
                                                                                           Our export pulse measures
but base effects can distort these numbers. To get a better feel for the pulse of Asian    point to weakness ahead…
exports, we calculate the annualised percentage change in the sum of the last 3
months on the previous 3 months (% 3m-o-3m) and the % month on month (% m-o-m)
change using official seasonally adjusted data or, if not available, data we seasonally
adjust ourselves (Figure 3). Our pulse measures suggest that the year-on-year growth
rates of Asian exports will continue declining, and possibly more steeply than that
suggested by our leading index of Asian exports. The outlook seems most stark for the
Philippines, Singapore and Taiwan, three of Asia’s largest exporters of electronic
items. Aggregating the export data for the four countries that have released data for
October (China, Korea, Singapore, Taiwan), export growth in year-on-year terms was
weakest to the EU (1.1%), followed by the US (8.0%) and Asia (15.4%).

8. Industrial output pulse. Following a methodology similar to that of exports, our
                                                                                           … as do our pulse measures of
pulse measures of industrial output point to a slowdown in year-on-year growth,            industrial output
although not to the same extent as exports. Domestic demand is likely providing some
resilience (Figure 4). The outlook for industrial output seems weakest in India and
Taiwan.

Overall, our assessment is that, while Asia’s growth is slowing and looks set to
                                                                                           These indicators point to
continue to do so, the situation and outlook is nowhere near as dire as it was in late     increasing growth divergences
2008. Still, we are cognizant that a tipping point could be reached such that non-linear
effects suddenly kicked in. Within the region, growth divergences are becoming more
apparent. China and Indonesia look most resilient, while growth momentum seems to
be flagging most in India, Singapore, Taiwan and Thailand; the rest fall between these
two groupings.




                                                                 5
Nomura | Asia Economic Monthly                                                                               24 November 2011




A cold winter in China
The Chinese economy faces several challenges this winter, as both private
and public housing investments are slowing, with exports set to weaken as                 Zhiwei Zhang
well.                                                                                     +852 2536 7433
                                                                                          zhiwei.zhang@nomura.com

Executive Summary
We believe housing investment in China will likely slow sharply in Q4 2011 and Q1
2012 for two reasons. First, leading indicators, such as sales and new floor space
starts, have plummeted in recent months. These indicators have correctly predicted a
sharp downturn in the private housing sector in the past. Second, public housing has
been a pillar supporting housing investment, but relatively little incremental public
housing investment is set to occur from now until March 2012, as the government has
already achieved its annual target of 10 million units new starts.

We see heightened risks of GDP growth dropping below 8% y-o-y in Q1 2012. A sharp
slowdown of housing investment will likely have a nonlinear, adverse effect on
industries related to housing (steel, cement, etc.), thereby dragging down overall
industrial production. Exports are set to weaken as well, which should exacerbate the
nonlinear effect on these industries.

We believe policy might be loosened, but only gradually, and whatever effect this has
on the economy will occur with a lag. Economic conditions today are very different
from those in 2008, as the labour market is currently tight, inflation is higher and a
structurally inflation problem is emerging. Policymakers face constraints to loosening
aggressively: they understand that the low cost of capital fuelled the overheated
housing market. A resumption of public housing investment beyond Q1, combined with
policy loosening, will help support GDP growth in 2012, which we expect to remain
above 8%.

In our recent initiation report on the Chinese steel sector, Can China avoid the steel
industry’s boom and bust history? (31 October 2011), we forecast China steel
consumption to be flat at 655mtpa over 2011-13. We believe current levels of steel
consumption are not supported by natural levels of demand. We estimate some 95mt
of 2011 demand is likely to be a direct result of 2008 crisis stimulus packages and
social housing programs; this represents 14.5% of total steel demand in 2011.
Fundamentals alone seem insufficient to support continued growth in annual steel
consumption and without new stimulus programs to replace those rolling off, we see a
real risk that consumption volumes will actually fall from 2013. Data released in the
last few weeks has been largely supportive of our thesis, particularly the weakness in
housing and construction markets, which account for around half of steel demand in
China.

The risk of lower GDP growth would also affect power demand growth (to recap, it was
negative for seven months after the 2008 financial crisis), and thus demand for
thermal coal. With the current spot price already at RMB850/t and our estimated 2012
average price of RMB844/t, we expect the spot coal price to correct by 10-15% in
1H12 and rebound in 2H12, depending on how fast the government executes its
stimulus policy and the increase in coal supply in 2012. On the other hand, the risk of
the key coal contract price remaining unchanged for 2012 is escalating; we
recommend taking profit on the thermal coal sector and waiting for a better entry point
in 1Q12. Our only current recommendation is Shenhua.

This is the executive summary of our Asia Special Report, A Cold winter in
China, originally published on 18 November 2011.




                                                               6
Nomura | Asia Economic Monthly                                                                                            24 November 2011




China risks
We see a one-in-three chance of a “hard landing” commencing before the end
of 2014.                                                                                                Rob Subbaraman
                                                                                                        +852 2536 7435
                                                                                                        rob.subbaraman@nomura.com
This month we published a major study of the challenges and risks facing China over the next
few years 1 . Our base-case forecast is for the Chinese economy to continue to grow strongly in
coming years; we forecast real GDP growth of 9.2% this year, 8.6% next year and 8.4% in 2013.
But the meteoric rise of China’s economy has been associated with a build-up of fundamental
imbalances. The study takes China’s still enormous economic development potential as a given
and focuses on the risks and challenges that lie ahead.

We attach a one-in-three likelihood to the scenario of a “hard landing” commencing before the
end of 2014. We define a hard landing in China as an abrupt slowdown in real GDP growth to
an average of 5% y-o-y or less over four consecutive quarters. We identify (and in the full report
analyse) six compelling reasons for judging that the risk of a hard landing has increased and is
now non-trivial.

Overinvestment and excessive credit. China’s investment is almost half of GDP, while
domestic credit is nearly 1.5x GDP, or 1.8x if the shadow banking sector is included. Empirical
literature shows that investment booms are more likely to trigger a crisis if they are associated
with credit booms. China ticks both the “investment boom” and the “credit boom” boxes.

A rudimentary monetary architecture. China’s monetary system is centred on controlling the
exchange rate and is becoming less effective in managing an economy that is rapidly becoming
more open and sophisticated; it has also resulted in a cost of capital that is too low and a
financial sector that is repressed.

Privileged state-owned enterprises. These enterprises receive preferential government
subsidies and bank financing, yet they are capital intensive, inefficient and crowd out smaller
private enterprises.

Unintended consequences of financial liberalization. Internationalization of the renminbi is
adding pressure for China to accelerate financial liberalization, but this is not without risks, such
as falling credit standards as banks overly compete with one another.

The Lewis turning point. The supply of surplus labour from the countryside is dwindling, which
could trigger a serious outbreak of inflation, raising the risks of a macro policy management
error (particularly given the second point above).

The setting in of growing pains. Worsening demographics and increasing strains on natural
resources and the environment are in growing evidence. These growing pains will almost
certainly cause the economy's growth potential to slow over this decade, making it more
challenging to implement structural reforms and address high income inequality.

China’s economy is now so big and complex that many of its structural problems are becoming
more interrelated. Also, many of its critical reforms are becoming unavoidably connected,
making it more difficult to continue undertaking individual reforms gradually and in isolation.

The government would no doubt do all in its power to respond to a hard landing, but the
question is how large, quick and effective a policy stimulus would be. On all three counts, we
judge that it would be less than in 2008.

We are well aware that picking the exact timing of a hard landing is devilishly difficult. The key
will be whether the risk of a hard landing rises or falls in the future. To help gauge that, we have
developed a new proprietary tool, our China Stress Index, which uses 18 indicators to
summarize the macro risks in a single measure. We will update this on a regular basis and keep
our clients apprised of the signals that it is giving.

Also in the report, our macro, fixed income and equity strategy teams and equity sector analysts
conduct a “what if” exercise, discussing the global macro implications should this non-trivial risk
scenario of a China hard landing materialize, and identify associated trading recommendations.
Again, a hard landing is not our base-case forecast, but it is a plausible enough downside risk
scenario to warrant investors paying heed and remaining alert.

1
    See Anchor Report: China Risks, November 2011.


                                                                   7
Nomura | Asia Economic Monthly                                                                                              24 November 2011




China bashing
There are subtle issues regarding China’s trade and the renminbi that are not
well understood.                                                                                       Rob Subbaraman
                                                                                                       +852 2536 7435
Early this month, the US Senate passed a bill that essentially seeks to punish China                   rob.subbaraman@nomura.com

for allegedly holding down its currency. Blaming China for lost US jobs may be “good”
politics, but it is “bad” economics as highlighted by the four issues below.

Saving-investment identity. The US merchandise trade deficit with China is at a record
high, yet many Asian countries and big commodity producers are running trade
surpluses with China. The better gauge is China’s trade with all countries, in goods
and services; that is, China’s current account, which has halved from a surplus of 10%
of GDP in 2007 to a still big 4.5% in H1 2011. By GDP accounting identity, the current
account surplus is the excess of gross domestic saving over investment, and from this
perspective China’s still large surplus is due to its very high domestic savings rate, at
54% of GDP in 2010 (Figure 1). From this vantage point, renminbi (RMB) appreciation
is just one of many policies needed to reduce China’s very high household and
corporate savings; others include beefing up the social welfare system and removing
an array of generous government subsidies to state-owned enterprises – from low
effective taxes to the under-pricing of key factor inputs, such as energy, water, land
and capital.

“Made in China” misnomer. The value-added accruing to China from its exports is less
than it seems. The bulk of the high-tech parts that are assembled in China are
imported; they are made by multinational companies (MNCs) operating in other
countries, notably in Asia. Take the iPad. Its retail price in the US is $499, but the
labour assembly cost accruing directly to China is just $8; the bulk of the value of an
iPad is in design, the components, marketing and distribution, accruing to Apple itself
and other non-China MNCs. This is also borne out in the macro data: of China’s total
goods exports of USD1.4trn in Jan-Sep 2011, 52% were by foreign-invested firms
(including JVs) based in China and 37% by fully foreign-owned enterprises. An
undervalued RMB has benefitted not only China, but MNCs globally, including those
based in the US.




Fig. 1: China’s saving, investment and current account               Fig. 2: China’s USD spot and real effective exchange rate

 % of GDP                                          % of GDP           CNY/USD                                      Index, 2005=100
12              Current account, lhs                     54           9.0               CNY/USD spot rate, lhs                  70
10              Gross domestic investment, rhs             52
                                                                                        Real effective exchange rate, rhs
                Gross domestic saving, rhs                            8.5                                                       80
 8                                                         50
 6                                                         48
                                                                      8.0                                                       90
 4                                                         46
 2                                                         44         7.5                                                       100
 0                                                         42
                                                                      7.0                                                       110
 -2                                                        40
 -4                                                        38         6.5                                                       120
 -6                                                        36                                     Appreciation

 -8                                                        34         6.0                                                       130
      1985     1990       1995   2000      2005     2010                Jan-94       Jan-99        Jan-04         Jan-09

Source: CEIC, Nomura Global Economics.                               Source: BIS, CEIC, Nomura Global Economics.




                                                                 8
Nomura | Asia Economic Monthly                                                              24 November 2011




CNY/USD vs REER. The heavily managed CNY/USD rate gets the most attention, but
China’s real effective exchange rate (REER) is a better measure of external
competitiveness. The REER is a trade-weighted average of the RMB against all of
China’s major trading partners’ currencies, adjusted also for inflation differentials. In
September, driven by a weaker euro and high Chinese inflation, China’s REER
appreciated by 3.8%, to close to its strongest level since 1994 (Figure 2). In our view,
a diminishing flow of surplus rural labour moving to the cities will make it more
challenging for China to manage CNY/USD without generating higher inflation (see
Asia Special Report, China: The case for structurally higher inflation). Either through
nominal currency appreciation or relatively higher inflation, China’s REER looks set to
continue to appreciate.

Flying geese pattern. As incomes in China rise and its REER appreciates, it is unlikely
to create more low-end jobs in higher-income countries. Rather, MNCs will relocate
their low-end operations to lower-income countries like Bangladesh, Vietnam, India,
Indonesia and Mexico. Outsourcing production has been key to Asia’s successful
economic development model, famously described as the flying geese pattern. It is
also a key reason for low global inflation.



This article was originally published on 4 November 2011




                                                                 9
Nomura | Asia Economic Monthly                                                                                               24 November 2011




The dilemma facing Asian central bankers
We see six reasons why Asian central bankers should not ease pre-emptively
in a big way.                                                                                            Rob Subbaraman
                                                                                                         +852 2536 7435
Asian central banks appear to be changing their tack. Recently, Bank Indonesia cut                       rob.subbaraman@nomura.com

rates and the Monetary Authority of Singapore reduced its targeted rate of currency
appreciation. Others are publicly starting to signal a bias to ease. Even the Reserve
Bank of India, after hiking by 25bp last week to tame inflation near 10%, toned down
its forward-looking guidance: “notwithstanding current rates of inflation persisting until
November (December release), the likelihood of a rate action in the December mid-
quarter review is relatively low. Beyond that, if the inflation trajectory conforms to
projections, further rate hikes may not be warranted”.

The case for Asian central banks to ease pre-emptively is twofold:

      1)   CPI inflation looks set to fall, possibly quite steeply in the coming months. Of              The principal reason is falling
           the various commodity price measures, we found the CRB commodity price                        commodity prices
           index to have the strongest empirical relationship with Asian CPI inflation.
           This index has been volatile, but the monthly average has declined steadily
           from 344 in July to 311 in October, a 10% drop. To compare like-to-like with
           CPI inflation, the year-on-year rate of change in the CRB index fell from 31%
           in July to 5% in October, and if the CRB index holds at its October average in
           the next two months, the year-on-year rate will fall to -3.2% in December. The
           impact of falling commodity prices on easing Asian inflation can be acute
           given that the average weight of food and energy items in CPI baskets in
           Asian countries is 44%. One new inflationary force, though, has been the
           recent weakening of Asian currencies against the US dollar, raising the costs
           of imports. But as growth is slowing, it is likely becoming more difficult for
           producers to pass on higher import costs to consumers. This is borne out in
           our models of Asian inflation, which include commodity prices, exchange
           rates and output gaps, and overall predict Asia ex-Japan’s average (GDP
           weighted) CPI inflation rate to abate from 6.4% y-o-y in Q3 2011 to 5.1% in
           Q4 (see Modelling Asian inflation, Global Weekly Economic Monitor, 7
           October 2011).

      2)   Asia’s economic growth is currently cooling but not collapsing, like in Q4
                                                                                                         Asia’s economies could reach a
           2008. Yet, there is a non-trivial risk that the crisis in Europe deepens, which               tipping point
           could result in a market meltdown. Here, there is a risk that Asia's GDP
           growth continues to slow,



Fig. 1: A gauge of excess loan growth, Q2 2011                          Fig. 2: Real policy interest rates, September 2011

 % y-o-y, pp                                                             % p.a.
                         Loan growth, % y-o-y                             4
 35
                         Nominal GDP growth, % y-o-y                      2
 30
                         Excess loan growth, pp
 25                                                                       0
 20                                                                      -2
 15
                                                                         -4
 10
                                                                         -6
  5
                                                                         -8
  0
                                                                        -10
 -5



Note: Data for China, Singapore and Korea are for Q3 2011.
                                                                        Note: Headline CPI is subtracted from the nominal policy rates.
Source: IMF; CEIC and Nomura Global Economics.
                                                                        Source: Bloomberg; CEIC, and Nomura Global Economics.
           reaching a tipping point where non-linear effects kick-in, and the Asian
           economies are hit hard again (see Asia: Financial decelerator effects, Global

                                                                   10
Nomura | Asia Economic Monthly                                                                                               24 November 2011




            Weekly Economic Monitor, 2 September 2011). A case can be made for
            Asian central banks to pre-emptively cut rates to reduce this risk.
                                                                                                         Real policy rates are still
We think Asian central banks face somewhat of a dilemma, for there is also a non-                        negative in 8 of the 11 countries
trivial risk – indeed our base case – that 2) above does not transpire, in which case
pre-emptive easing could fuel excessive lending, asset price bubbles and overheating.
We see many reasons for Asian central banks not to act pre-emptively at this juncture;
i.e., to stand pat and not move to cut rates aggressively unless the tipping point to
growth is reached. We think most central banks also see it this way, and hence we
expect only Bank Indonesia to cut rates in the coming months.

We see six reasons for Asian central banks to remain cautious against pre-emptive
easing:

     1)     In H2 2010 and through to Q1 2011, the concern amongst Asian central
            banks revolved around Asian economies growing too fast relative to potential,
            leading to asset (notably property) price bubbles and economic overheating.
                                                                                                         Asia’s output gaps are not large
            In the last two quarters, Asia’s economic growth has slowed, but moderately,
            and hence the amount of spare economic capacity remains limited. In other
            words, Asia’s output gaps remain small, as indicated by unemployment rates,
            which declined to, or below, pre-2008 levels. For Hong Kong, Malaysia,
            Korea, Singapore, Taiwan and Thailand, all countries with reliable and timely
            labour market data, the unemployment rate ranges between 0.7%-4.3%.

     2)     While we believe CPI inflation is likely to ease sharply, this is mainly due to
            falling commodity prices. If we strip out food and energy items from the CPI,
            core inflation will remain either relatively high or continue to rise in 8 of the 11         Core inflation is uncomfortably
            countries. This collaborates with our point above that Asia’s output gaps                    high…
            remain small.

     3)     Surveys show that inflation expectations have risen in recent years and, at
            this juncture, have either yet to decline (India, Korea and Singapore) or have
            eased only modestly (China, Hong Kong and Thailand). The exceptions are
            Indonesia and Philippines, where inflation expectations have retreated,                      … as are inflation expectations
            although there are nascent signs of upticks again. Cutting interest rates at                 and credit growth
            this stage risks entrenching these still relatively high inflation expectations.

     4)     Credit is still growing strongly across most of Asia: bank loan growth is
            outpacing nominal GDP growth in all countries bar China, and in many by a
            wide margin (Figure 1).



     Fig. 3: Nomura’s Exchange Market Pressure Index (EMPI)                     Fig. 4: Change in Nomura’s EMPI, Aug-2011 to Sep-2011

      Index                                                                      Index
     108                                                                         1.0
                                                     Net capital
                                                   inflow pressure               0.5
     106
                                                                                 0.0
     104
                                                                                 -0.5
     102                                                                         -1.0

     100                                                                         -1.5
                                                                                 -2.0
       98            Rest of emerging Asia            Net capital
                                                    outflow pressure             -2.5
                     China
       96

       94
        Sep-03        Sep-05      Sep-07       Sep-09       Sep-11

     Source: BIS; IMF; CEIC and Nomura Global Economics.                        Source: BIS; IMF; CEIC and Nomura Global Economics.




                                                                       11
Nomura | Asia Economic Monthly                                                                                   24 November 2011




     5)   Macro policies are not tight. Fiscal policy is turning more expansionary in
          several countries: recently the governments of Indonesia, Korea, Malaysia,
          Philippines, Taiwan and Thailand all announced new stimulus measures
          (see Asia’s policymakers on the move, Global Weekly Economic Monitor, 21
          October 2011). Monetary policy too is loose: adjusted for CPI inflation, real
          policy rates are still negative in all countries bar three (Figure 2).

     6)   An eventual resurgence in foreign capital inflows. The most comprehensive
          data on foreign capital flows – capturing portfolio (debt and equity), foreign
          bank claims and FDI – are balance of payments (BOP) data, but they are not         Net capital inflows to Asia could
                                                                                             come roaring back
          timely, with Q2 2011 the latest available for most countries. Our Exchange
          Market Pressure Index (EMPI) is a weighted average of two components: the
          percent quarter-on-quarter change in the local currency/USD rate and the
          quarterly change in FX reserves scaled by the monetary base. The weights
          are the inverse of the standard deviations of the two components. In
          September, reflecting the depreciating Asian currencies (against the USD)
          and falling FX reserves, our EMPI fell sharply, signalling net capital outflow
          pressure, notably outside China (Figures 3 and 4). Our EMPI suggests that
          the net capital outflow pressure in September was roughly half as severe as it
          was in H2 2008, a period in which, according to BOP data, Asia ex-Japan
          faced USD118bn of net capital outflows. In 2009-10, our EMPI snapped back
          and net capital inflows totalled USD462bn, attracted by Asia’s relatively better
          economic fundamentals and higher interest rates. These relativities between
          Asia and the West are becoming starker. If global risk aversion fades, Asia
          could once again attract massive capital inflows, increasing the potential for
          economic overheating. This, we reckon, is the strongest argument against
          large, pre-emptive easing by Asian central banks.



This article was originally published on 4 November 2011




                                                                 12
Nomura | Asia Economic Monthly                                                                                               24 November 2011




A condition for Asia’s domestic-led growth
Asia is shifting from a manufacturing hub to a global growth engine. A global
financial safety net is a prerequisite for domestic-led growth to take off.                              Young Sun Kwon
                                                                                                         +852 2536 7430
                                                                                                         youngsun.kwon@nomura.com
An increasing presence in the global market
Economic growth in Asia ex-Japan during past recoveries has typically been led by                        Past recoveries have been led
exports (supported by currency depreciation), taking place when growth in advanced                       by exports
economies was rebounding. Relevant examples have been the recoveries after the
1997 Asian crisis and the 2001 dotcom bubble, which coincided with rebounds in the
US and Europe.

Since the 2008 global financial crisis, Asia ex-Japan has increased its global market
                                                                                                         Asia’s relative position in the
share of exports, gaining ground on advanced economies such as Japan and                                 world is rising
Germany. In Q2 2011, total global export value surpassed its previous peak of Q2
2008 by 5% (Figure 1). Surprisingly, Asia ex-Japan’s aggregate exports increased by
24% over the same period, resulting in a higher global market share of 27% in Q2
2011 versus 22% in Q2 2008 (Figure 2). This does not necessarily mean that Asia has
been growing at the expense of other regions. Indeed, we see that export-led growth
in one economy can engender export-led growth in another (net trade positively
contributed to the US and euro area growth in 1H 2011).

Due to sound fundamentals, Asian economies were able to implement substantial
                                                                                                         Asia boosted domestic demand
stimulus when the 2008 crisis unfolded. Policy rate cuts have been four times greater                    in post-2008 crisis
than the average of past recessions; the fiscal response has been twice as large as
that which followed the Asian crisis. Taken together, the size of fiscal and monetary
policy easing was unprecedented, exceeding the G20 average. Relative to the G20,
stimulus packages in Asia were more heavily weighted towards spending, with a
particular emphasis on investment and infrastructure.

While the US economy has experienced permanent output loss due to the financial                          Multiplier effect felt on one
crisis, Asia only saw a slight fall in aggregate output. China and India, in particular,                 country and then another
suffered no reduction in GDP relative to trend. Each Asian economy’s ability to
undertake substantial and credible policy responses has benefited the region as a
whole. An increase in fiscal stimulus boosted intra-regional exports, inducing
additional investment and labour. This, in turn, has contributed to higher household
income and consumption – the so called “multiplier effect” of exports on domestic
demand.

Fig. 1: Export value                                                   Fig. 2: Share of global exports

  USDbn                   World exports, lhs
                          Asia ex-Japan exports, lhs                     %
5,000                                                                   30                                -Japan
                                                                                                    Asia ex
                          Japan + Germany
                                                                                                    Japan + Germany
4,000                                                                   25

                                                                        20
3,000

                                                                        15
2,000
                                                                        10
1,000
                                                                         5

     0                                                                   0
     1961       1971        1981      1991      2001    2011             1961       1971     1981         1991        2001       2011
Note: Last data point is Q2 2011.
Source: IMF, Bloomberg and Nomura Global Economics.                    Note: Last data point is Q2 2011.
                                                                       Source: IMF, Bloomberg and Nomura Global Economics.




                                                                  13
Nomura | Asia Economic Monthly                                                                                          24 November 2011




Similar to pre-1985 Japan and Germany
Asian ex-Japan’s share of global GDP rose from 14% in 2007 to 18% in 2010 (Figure
                                                                                                     Japan and Germany saw
3). The road Asia has taken so far is similar to that travelled by Japan and Germany                 domestic-led growth post-1985
before 1985. In the post-War era, both Japan and Germany focussed on boosting
exports, benefitting from: 1) floating exchange rates (from 1971 as the Bretton Woods
system ended), since both JPY and the DM were undervalued against USD before the
Plaza Accord; 2) Asia’s late industrialization; and 3) European economic integration. It
was not until the 1985 Plaza Accord that the two economies were pushed towards
domestic-driven growth. The G5 statement of 22 September 1985 indicated an
awareness that USD was overvalued and that increased domestic demand in Japan
and West Germany (both of which were running current account surpluses) was
needed. Thereafter, for example, growth in Japanese domestic demand accelerated
from its five-year average of 2.7% through 1985 to an average 5.4% over the next five
years. As a result, Japan’s current account surplus, which had been around 4% of
GDP contracted to just 1%. Meanwhile, the US current account deficit, which had
been 3% of GDP, was almost eliminated in 1991 (Figure 4). The global economy then
received a boost as the increased purchasing power of the Japanese and German
economies allowed them to use their FX reserves for more imports from the rest of the
world and more direct investments overseas than otherwise would have been the case.
However, both returned to export-led growth in 1990 after the Japanese bubble burst
and Germany went through the process of reunification.

Gradually shifting toward domestic-led growth
Holding huge FX reserves of USD5.1trn (46% of Asia ex-Japan’s GDP in September),
                                                                                                     G20 is not as strong as the
Asian policymakers could play a similar role to that of Japan and Germany after the                  Plaza Accord
1985 Plaza Accord by allowing currency appreciation, increasing domestic demand
and boosting the global economy. However, the G20 commitment to avoid persistent
exchange rate misalignment and to refrain from competitive devaluation is not as
binding as the Plaza Accord. We think Asian policymakers still fear sharp currency
appreciation due to deep-rooted bad memories of the Asian crisis and the Japanese
bubble bursting (it is often said that the Plaza Accord caused the Bank of Japan to
aggressively ease monetary policy; see China risks, November 2011).




Fig. 3: Share of global GDP                                            Fig. 4: Current account balance

 % of world                      Asia ex-Japan                           USDbn
30                                                                                  Plaza                                 G20
                                 Japan + Germany                         600
                                                                                    Accord
            Plaza                                         G20
            Accord                                                       400
25
                                                                         200

20                                                                         0

                                                                         -200
15                                                                       -400

                                                                         -600                 US
10                                                                                            Asia ex-Japan
                                                                         -800                 Japan + Germany

 5                                                                     -1,000
     1980    1985     1990        1995     2000    2005    2010              1980   1985     1990   1995   2000    2005    2010

Source: IMF and Nomura Global Economics.                               Source: IMF and Nomura Global Economics.




                                                                  14
Nomura | Asia Economic Monthly                                                                                   24 November 2011




In this regard, strengthening its financial safety net and increasing its role in the
                                                                                            A financial safety net and a
international monetary system are crucial elements to support Asia’s use of its FX
                                                                                            larger role are crucial for Asia
reserves for its own organic growth. One way to achieve this is to have Asian
countries reduce G3 bonds and increase Asian bonds in their FX reserves. Indeed, a
number of steps have already been taken in this direction as Asian central banks and
sovereign wealth funds have diversified their assets to the region (see Korea: falling,
converging bond yields, October 2011). Korea has also agreed to increase its bilateral
currency swap with China (from USD26bn to USD56bn) and with Japan (from
USD13bn to USD70bn). The IMF has extended a new precautionary and liquidity line
to provide on a case-by-case basis, increased, more flexible short-term liquidity to
countries with strong policies and fundamentals facing exogenous shocks, and a
single facility to fulfil the emergency assistance needs of its members.

Our European economics team sees the ongoing sovereign debt crisis – and the
                                                                                            Asia still has room to respond if
resulting negative banking sector feedback effect – as posing downside risks to its         Europe turns down sharply
growth forecasts. If there is a sharp downturn in the euro zone due to the credit crunch,
the negative impact on Asia would be smaller than in 2008, but inevitable, as
European banks have exposure to the region (3.5% of Asia ex-Japan’s GDP in June).
In this case, we would expect sizable fiscal stimulus and monetary easing in Asia
(see Global market turbulence: Implications for Asia, August 2011). This should
accelerate the region’s domestic-led growth through the wealth transfer from state (i.e.,
FX reserves) to the private sector, if this is associated with stronger Asian currencies
supported by a strong financial safety net.




This article was originally published on 11 November 2011




                                                                15
Nomura | Asia Economic Monthly                                                                                             24 November 2011




Asia’s manufacturing sector under pressure
We expect Asia’s industrial production growth to be weak in the near term,
but the risk of a marked drop should be limited in China, India and Indonesia.                       Tomo Kinoshita
                                                                                                     +852 2536 1858
Asia’s manufacturing sector is under pressure. Output in the electronics sector, which               tomo.kinoshita@nomura.com

is the most important sector for many regional economies, has already started to
moderate since the beginning of this year. In the last few months, a slowdown in                     Manufacturing output continues
Europe emanating from financial market turbulence began to exert additional                          to slow
downward pressure on manufacturing output growth. A shortage of hard disc drives
(HDDs) as a result of the Thai flood is also likely to adversely affect electronics
production, at least in Q4.

We expect weak overall production growth to persist in Asia in the short run under the
                                                                                                     We expect a moderate pick-up
relatively low-growth global environment. Inventory levels appear to have risen in Asia,             in 2012
which should create short-term downward pressure on production. Availability of
inventory data is quite limited, but inventory-to-shipment ratios in Taiwan and Korea
have risen considerably in recent months (Figure 1). Nonetheless, we expect a
moderate pick-up in production in 2012, helped by a rise in output in the electronics
sector. Our analysts expect global semiconductor sales growth to rise from 1.0% in
2011 to 3.7% in 2012 and 8.9% in 2013. Although we expect sales volume of
television sets to rise only 1% y-o-y in 2012, we expect PC sales growth in volume
terms to increase from 10.3% in 2011 to 15.1% in 2012 due both to a sharp rise in
tablet PC sales and to the expected introduction of Windows 8 software in H2 2012.

Winners and losers in a highly competitive environment
Several economies in Asia have experienced especially weak industrial production
                                                                                                     Production growth has been
growth over the past few months, notably Thailand, Taiwan, India, the Philippines and                especially weak in Thailand…
Malaysia (Figure 2). Except in India, the production weakness reflects weak external
demand as these economies are heavily dependent on exports. We take a closer look:

Thailand. Apart from cyclical factors, a flooding disaster which hit Bangkok and the                 … which suffered the impact of
central part of Thailand disrupted supply-chain network of electronics and automobile                the floods
sectors (see Thailand: Dealing with another disaster, 3 November 2011). We believe
that it takes at least a few months before the affected factories become fully
operational again. But with a sizable reconstruction spending, production growth
should regain strength in 2012.




Fig. 1: Inventory-shipment ratio in Korea and Taiwan                 Fig. 2: Industrial production growth in Asian economies
 Index, 2006 =100                                                    % y-o-y       1Q11    2Q11   Jul-11 Aug-11 Sep-11 Oct-11
 170                       Korea        Taiwan                       Thailand      -2.2    -2.5    -0.7     6.8     -0.5         n.a.
 160                                                                 Taiwan        14.8    6.2     3.6      4.0      1.6         n.a.
 150                                                                 India         7.9     7.0     3.8      3.6      1.8         n.a.
 140                                                                                                                             n.a.
                                                                     Philippines   11.9    2.0     4.5      2.1      NA
 130
                                                                     Malaysia      2.4     -1.6    -0.5     3.6      2.5         n.a.
 120
                                                                     Vietnam       8.8     6.9     1.5      6.3      6.9         4.8
 110
                                                                     Korea         10.6    7.2     3.9      4.7      6.8         n.a.
 100
                                                                     Indonesia     5.7     4.9     5.4      1.6     10.1         n.a.
  90
                                                                     Singapore     16.8    -5.6    7.9     22.8     12.8         n.a.
  80
  70                                                                 China         14.4    14.0   14.0     13.5     13.8       13.2
       06       07         08      09            10   11             Japan         -2.6    -6.8    -3.0     0.4     -3.3         n.a.

Note: Data are seasonally- adjusted.                                 Source: CEIC and Nomura Global Economics.
Source: CEIC and Nomura Global Economics.




                                                                16
Nomura | Asia Economic Monthly                                                                                              24 November 2011




Taiwan. Taiwan’s production growth was a mere 1.6% y-o-y in September due to
                                                                                                         Growth was weak in both
weaker growth not only in electronics but also in the chemical sector, caused by a                       electronics and chemical
temporary closure of some chemical facilities owned by Formosa Plastic Group (FPG).                      sectors
Although FPG’s operations were largely normalised in October, production growth is
likely to remain weak in the coming months as global demand for electronics products
is likely to remain weak.

India. Domestic factors have been the main cause of India’s weak production growth
                                                                                                         Domestic factors slowed India’s
in recent months. Persistently high inflation and associated slower consumption                          production growth
growth, coupled with slower investment growth due to tight monetary policy, has led to
lower production growth.

Philippines. High exposure to the electronics sector (60.4% of total exports in 2010)
has meant weak overall industrial production growth.

Malaysia. Malaysia’s production growth has been lacklustre throughout the year as
                                                                                                         Structural weakness hurts
exports are heavily exposed to the electronics sector, which accounted for a 41.4%
                                                                                                         Malaysia
share in 2010. There also is a structural issue – Malaysia’s electronics sector appears
to have lost some of its competitive edge. Indeed, Malaysia is the only Asian economy
where the most recent level of industrial production has not recovered to pre-global
crisis levels (Figure 3).

On the other hand, industrial production growth has remained relatively robust in                        IP growth has been strong
China, Singapore, Indonesia and Korea, with year-on-year growth rates of 13.2%,                          elsewhere
12.8%, 10.1%, and 6.8%, respectively, according to the most recent data (Figure 2).

China. China’s industrial production growth has been the fastest in Asia, with even the                  Domestic demand sustains
electronics sector showing robust 13.5% y-o-y growth in September. The                                   China’s production growth
government’s accommodative fiscal policy coupled with fast rising wages has
supported strong domestic demand growth.

Singapore. Strength in Singapore’s manufacturing sector lies in its diversity. Although                  Manufacturing diversity helps
biomed production – which accounts for 19.6% of the total – has been very volatile, its                  Singapore
growth averaged 31.3% in 2008-10, which certainly provided an impetus to overall
production growth.

Indonesia. Robust growth in domestic demand also helped Indonesia achieve steady                         Indonesia is also supported by
growth in industrial production. Favourable structural factors include a growing middle                  its domestic strength
class and the expansionary fiscal policy, which are likely to support robust growth in
production in 2012.




Fig. 3: Movements in industrial production levels                       Fig. 4: Real private consumption in select Asian economies
              Pre-crisis Average Average Latest IP         Most
                IP level IP level in IP level in figure   recent         Jan-Sep 2008 = 100
              (1Q-3Q08) 2009          H1 2011              data         135                                                China
                                                          (2011)        130
China            100      111.2      142.7     149.3        Oct         125
Taiwan           100       86.6      119.2     110.5       Sep
                                                                        120                                                  India
Korea            100       95.9      120.0     119.9       Sep
                                                                        115
Singapore        100       93.3      132.3     134.7       Sep
                                                                        110                                                 Indonesia
Malaysia         100       90.3       97.3      98.3       Sep
Thailand         100       90.3      102.0     102.6       Sep          105
                                                                                                                              Korea
Indonesia        100      101.3      110.0     110.0       Sep          100
Philippines      100       86.5      112.8     111.0       Aug           95
Vietnam          100      108.0      125.2     131.7        Oct          90
India            100       99.6      115.5     111.8       Sep           85
Japan            100       75.5       84.2      84.3       Sep                07          08        09           10         11

Note: Data are seasonally adjusted.                                     Note: China data are per capita-based, taken from household
Source: CEIC and Nomura Global Economics                                survey.Source: CEIC and Nomura Global Economics




                                                                   17
Nomura | Asia Economic Monthly                                                                              24 November 2011




Korea. A weak Korean won has been a major factor behind Korea’s relative strength,
                                                                                         A weak KRW has helped
especially when we compare Korea to Taiwan. However, Korea’s diversified                 Korean production growth
production base, which includes among major sectors not only electronics but also
chemicals, steel, automobiles and shipbuilding, also supported robust production
growth. We expect the weak KRW to continue to support production growth in the near
term.

Downside risks remain in the near term
There remain considerable downside risks to Asian industrial production growth in the    External factors remain a major
near term, in our view. The risk of lower-than-expected growth in Europe appears to      risk
be rising as financial market woes there persist and as economies face stronger fiscal
headwinds.

Nonetheless, we see limited downside risks in the relatively populous and low- to        Risks are limited in China,
middle-income economies of China, India, Indonesia and Vietnam. These economies          Indonesia and India
are more domestic demand-oriented than others in Asia, which should limit the
negative effects of slower growth in exports. In fact, production levels in these four
economies either did not decline at all, or barely declined, in 2009 when the global
economy was hit hard by the crisis (Figure 2). On the back of this robust rise in
production in these economies lies a sustained increase in private consumption, which
has created sufficient domestic demand for strong industrial production growth (Figure
4).




This article was originally published on 18 November 2011




                                                               18
Nomura | Asia Economic Monthly                                                                                             24 November 2011




Thailand: Dealing with another disaster
We see a wide range of implications from the flooding, from growth and
inflation to policy responses and potential concerns of spillover to the region.                        Euben Paracuelles
                                                                                                        +65 6433 6956
Thailand was one of the Southeast Asian economies hardest hit by the supply-chain                       euben.paracuelles@nomura.com

disruptions from the March earthquake in Japan, and it is now battling another disaster                 Nuchjarin Panarode
from sustained flooding in key areas of the country. This time, the scale of the flooding               +662 638 5791
                                                                                                        nuchjarin.panarode@nomura.com
is much bigger than in previous episodes, with the impact hitting not only agriculture,
but industrial sectors as well. According to the government’s estimates the damage so                   Advin Pagtakhan
                                                                                                        +65 6433 6555
far is around THB475bn versus the THB30bn from last year’s floods. And unlike last                      advin.pagtakhan@nomura.com
year, the economy is in a weaker position and hence less able to withstand the shock.
                                                                                                        The scale of the floods is much
We summarize the conclusions from our Asia special report Thailand: Dealing with
                                                                                                        bigger this time
another disaster published on 3 November.

We reduce our 2011 real GDP growth forecast for a second time in less than one
month, to 2.2% from 3.3%, which in turn was down from our original forecast of 4.1%                     We downgrade GDP growth to
                                                                                                        2.2% in 2011…
before the floods occurred. So in total, we have lowered our GDP growth forecast by
1.9 percentage points, all attributed to the impact of the floods. Our new 2011 GDP
forecast, below the Bank of Thailand’s (BOT) 2.6% forecast, is based on information
that nearly 10,000 factories are affected and our judgment that the domestic supply-
chain disruption may be much larger than estimated. There are also now several
knock-on effects in the services sector, including tourism and related sectors, which
we previously thought would only occur if Central Bangkok was inundated.

We maintain our 2012 forecast at a relatively optimistic 4.7% given the likely                          … but maintain 2012 at a
acceleration of fiscal expansion and higher investment spending. In the run-up to the                   relatively optimistic 4.7%
July elections, the fiscal stance was already highly expansionary and the
government’s net cash position of THB270bn as of August 2011, up from THB114.3bn
in April, should provide more firepower to implement its stimulus policies promised
during the campaign. In the aftermath of floods, the fiscal expansion should accelerate
further; we expect the overall budget deficit to rise to 5% of GDP from 3.5% this year.
This implies a more sizeable fiscal impulse of about 1.8% of GDP, up from 0.9% in
2011 (Figure 1). In addition to the above-mentioned policy factors to boost growth, we
expect both private and public sector investment to rise for reconstruction purposes.
According to the Ministry of Industry, losses in terms of machinery, raw materials and
inventories totalled THB475bn, which should show up in the GDP accounts over H1
2012, when rehabilitation and reconstruction work is expected to begin.




Fig. 1: Fiscal impulse versus output gaps                            Fig. 2: Drivers of CPI inflation

  % of GDP                                                             pp                                        Others
                       Fiscal impulse          Output gap
 4                                                                     12                                        Transportation
                                                                       10                                        Housing
 3
                                                                                                                 Food
                                                                        8
 2                                                                                                               CPI (%y-o-y)
                                                                        6
 1
                                                                        4
 0                                                                      2
-1                                                                      0
-2                                                                     -2
                                                                       -4
-3
                                                                       -6
-4
     2003       2005        2007        2009      2011f                -8
                                                                        Apr-07              Oct-08          Apr-10            Oct-11
Source: Nomura Global Economics.
                                                                     Source: CEIC, Nomura Global Economics.




                                                                19
Nomura | Asia Economic Monthly                                                                                                                                                 24 November 2011




CPI inflation is already rising, but should be relatively benign in 2012, averaging 3.7%,                                                                  Inflation should remain benign
from the latest 4.3% y-o-y. Food inflation soared in October but this was partly offset                                                                    next year
by the sharp decline in fuel prices following the government’s decision to reduce
excise taxes in August (Figure 2). We expect the government to continue to use its
balance sheet to limit inflation via more subsidies, and other measures including the
release of more rice supply at much lower prices. In our view, the government sees
the need to contain inflation given that rising prices impacts its broader constituency
(i.e., lower income households), disproportionately. The flipside is that this means the
government will incur large additional fiscal costs.

In terms of monetary policy, the BOT will likely look through the temporary effects of                                                                     BOT is likely on-hold in the near
the floods, and keep the policy rate unchanged over the next six months. We judge,                                                                         term
however, that rate cuts will become more likely if weak external demand stemming
from the European crisis and turbulent financial markets worsen. The Thai economy is
vulnerable to the risk of a global downturn (Figure 3), given large spillover effects into
domestic demand – investment spending, for example, is closely tied to export
performance and tourism is a large employer.

We have two longer-term concerns resulting from the floods: (1) worsening public
                                                                                                                                                           Public finances and hollowing
finances given the large-scale fiscal response; and (2) the risks of “hollowing out” in                                                                    out are longer-term concerns
some industries, affecting exports and GDP. The public debt to GDP ratio now stands
at 40.2% of GDP, still below the debt ceiling of 60%, so there is available fiscal space.
However, the maintenance of a populist approach to fiscal policy could undermine
medium-term prospects of fiscal consolidation. On the industrial front, coupled with
bouts of political instability in the last few years, the floods will likely render Thailand
less attractive to foreign investors. The lack of progress in infrastructure
implementation in general (in part due to political instability) has prevented economic
activity from expanding geographically outside of Bangkok and the Eastern seaboard,
and has kept transport and logistics costs fairly high. Indeed, compared with
Southeast Asian counterparts, while Thailand still fares well, it is gradually losing
ground in global competitiveness rankings.

In term of external spillovers, we think the impact on the global supply chain for the
                                                                                                                                                           Supply disruption is largely
electronics and car industries is likely to be much less severe than that of the Japan
                                                                                                                                                           regional
earthquake. However, the impact on other Southeast Asian countries could be more
considerable given relatively high imports from Thailand. In the car industry, for
example, a breakdown of car parts and components exports by destination suggests
that the bulk of Japan’s exports are to the larger markets of China and the US, while
those from Thailand are more dispersed with a large portion feeding into Southeast
Asian and Indian car manufacturing and assembly plants.



Fig. 3: Thailand exports versus GDP of trading partners                                                                     Fig. 4: Thailand weekly export prices of 100% white rice

  % y-o-y                        Trading partners real GDP (lhs)                                         % y-o-y             USD/ton
 7                                                                                                           20
                                 Thailand's expots (rhs)                                                                      700
 6                                                                                                               15
 5                                                                                                                            650
                                                                                                                 10
 4                                                                                                                            600
                                                                                                                 5
 3
                                                                                                                 0            550
 2
                                                                                                                 -5
 1                                                                                                                            500
 0                                                                                                               -10
                                                                                                                              450
-1                                                                                                               -15
     1999
            2000
                   2001
                          2002
                                 2003
                                        2004
                                               2005
                                                      2006
                                                             2007
                                                                    2008
                                                                           2009
                                                                                  2010
                                                                                         2011f
                                                                                                 2012f
                                                                                                         2013f




                                                                                                                              400
                                                                                                                                Oct-08          Oct-09         Oct-10           Oct-11
Source: CEIC, Nomura Global Economics.                                                                                      Source: Bloomberg, Nomura Global Economics.




                                                                                                                       20
Nomura | Asia Economic Monthly                                                                                  24 November 2011




The impact on food inflation in the main rice importing economies, notably the               Food inflation risks should be
Philippines and to a lesser extent Indonesia, should remain limited. The Philippines,        limited
the world’s largest rice importer, has record-high inventories and announced recently
that, despite the typhoons hitting the country, the government is unlikely to import any
rice for the remainder of this year. India also lifted a ban on rice exports last month,
increasing the global supply, and is reportedly considering exporting to Indonesia. This
is probably a key reason why export prices of Thai rice have thus far remained stable
despite the floods in Thailand (Figure 4). However, the situation bears close
monitoring next year if Thailand’s rice production remains constrained.

On interest rate strategy, the cuts priced into the front-end of the IRS may dissipate, if   The rate cuts priced in by
we are correct that the BOT stays on hold. This, coupled with the downgrade of our           markets may dissipate
growth outlook, should support a view for lower 5yr yields, which may flatten the front-
end of the curve. The risks are that the substantial increase in the fiscal deficit could
add steepening pressure to the curve; or that a worsening growth picture (from our
downgraded outlook or events unfolding in Europe) results in a rate cut. Then, the
cleaner expression of our growth view would be directional, with receiving the belly of
the curve the most attractive option.




This article was originally published on 4 November 2011




                                                                  21
Nomura | Asia Economic Monthly                                                                                                 24 November 2011




Chart Alerts
China's economy faces a tipping point
The sharp fall in HSBC’s flash PMI heightens the risk of sub-8% GDP growth in Q1 2012.


                 China’s official PMI and the HSBC PMI                            The flash HSBC PMI for China’s manufacturing
                                                                                   sector dropped below 50 to 48 in November from
    Index
                                                                                   51.1 in October, the lowest level since March 2009.
     60
                                                                                   Among sub-indices, the production component
                                                                                   dropped more sharply to 46.7 from 51.4.
    55
                                                                                  We highlighted the risks of a sharp economic
                                                                                   slowdown in our latest Special Report (see A cold
    50                                                                             winter in China, 18 November 2011). The weak
                                                                                   HSBC flash PMI reinforces our view that the risk of
                                                                                   GDP growth below 8% in Q1 2012 has increased.
    45              Official PMI
                                                                                  We expect the official PMI to also drop below 50 to
                    HSBC PMI
                                                                                   49 in November. We reiterate our view that the
    40                                                                             housing sector has reached a tipping point, should
                                                                                   deteriorate quickly in the coming months, and drag
                                                                                   down related sectors (steel and power in particular).
    35
     Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11

Source: CEIC; WIND and Nomura Global Economics.
Author: Zhiwei Zhang, originally published on 23 November 2011.


South Korea: Short-term external debt falls in Q3
The rising trend in the ratio of FX reserves to short-term external debt is encouraging.


                                                                                  The Bank of Korea’s quarterly international
            Korea’s short-term external debt and FX reserves                       investment position data, released today, shows that
                                                                                   short-term external debt fell by USD11.2bn to
                       Short-term external debt, lhs               times           USD138.5bn in Q3. The fall came mainly from
     USDbn
   350                 FX reserves, lhs                                    4       foreign bank branches in Korea, which may reflect
                       FX reserves/short-term external debt, rhs                   European bank deleveraging.
   300
                                                                                  Meanwhile, FX reserves fell only slightly, by
                                                                           3       USD1.1bn to USD303.4bn in Q3, supported by the
   250
                                                                                   current account surplus (USD7.2bn in Q3) and an
   200                                                                             increase in long-term external debt (by USD1.1bn to
                                                                           2       USD255.8bn in Q3). The rising trend in the ratio of
   150                                                                             FX reserves to short-term external debt is an
                                                                                   encouraging sign that the health of Korea's balance
   100                                                                             of payments is strengthening.
                                                                           1

    50                                                                            If European banks cut their exposure to Korea
                                                                                   sharply, we would expect the authorities to attempt
     0                                                                  0          to stabilize the financial market first by using FX
     Sep-95          Sep-99        Sep-03         Sep-07           Sep-11          reserves and then, if needed, currency swap
                                                                                   agreements with China (USD56bn) and Japan
                                                                                   (USD72bn).
Source: BOK, CEIC and Nomura Global Economics.
Author: Young Sun Kwon, originally published on 22 November 2011.




                                                                       22
Nomura | Asia Economic Monthly                                                                                                 24 November 2011




China: Labour market remains tight
The tight labour market reduces the potential for aggressive policy loosening.


                                                                              The latest job opening / job seeker ratio in China’s
                                                                               urban labour market fell to 1.04 in Q3 from 1.07 in Q2,
     Job opening / job seeker ratio in China’s labour market                   which suggests that the labour market shortage has
                                                                               improved slightly as the economy slowed.
     Ratio
                                                                              However, labour market conditions today are very
      1.1                                                                      different from 2008. The ratio today stayed above 1,
     1.05                                                                      which indicates that labour conditions remain tight,
                                                                               while the labour supply was abundant before 2009, and
         1
                                                                               during that time the ratio was consistently below 1.
     0.95                                                                      Thus, contrary to the situation in 2008, there is no
      0.9                                                                      urgency for the government to loosen policy
                                                                               aggressively due to unemployment pressure.
     0.85
                                                                              The tight labour market reinforces our view that policy
      0.8
                                                                               will only be fine-tuned, and the reserve requirement
     0.75                                                                      ratio and interest rates will be kept on hold for the rest
      0.7                                                                      of the year. The People’s Bank of China states in their
       Sep-01      Sep-03        Sep-05   Sep-07    Sep-09   Sep-11            Q3 monetary policy report that the recent economic
                                                                               slowdown is guided by policy, and good for economy in
                                                                               the long run. The report implies that policy will not be
                                                                               loosened aggressively soon, in our view.

Source: CEIC and Nomura Global Economics.
Author: Zhiwei Zhang, originally published on 17 November 2011.




Korea: Downturn continues to reduce union membership


                     Labour unionization rates                                Korea’s labour unionization rate dropped to 9.8% in
                                                                               2010, all the way down from 19.8% in 1989, which
     %                                      Korea             US
                                                                               suggests that the bargaining power of labour unions
    50                                      Japan             Taiwa
                                            UK
                                                                               has deteriorated significantly over time.
    45
                                                                              The downtrend in union membership is a global
    40                                                                         phenomenon. Both structural (e.g., increasing
                                                                               competition in the labour market due to labour
    35                                                                         mobility) and cyclical factors (e.g., The 2009 Great
    30                                                                         Recession) support this.

    25
                                                                              One implication is that any wage-inflation spiral at
                                                                               present would be less strong relative to the period
    20                                                                         from 1980-90. Given increasing risks of a global
                                                                               recession, lower unionization rates should help
    15
                                                                               contribute to disinflation in Korea.
    10
                                                                              We expect Korea’s CPI inflation to slow from 4.2%
     5                                                                         in 2011 to 3.5% (within the Bank of Korea’s inflation
         1985      1990          1995      2000       2005      201
                                                                               target band of 2-4%) in 2012.


Note: Labour unionization rate is the unionized share of the total work force. Taiwan data are available up to 2005.
Source: KOSIS, Ministry of Employment and Labor (Korea), Bureau of Labor Statistics (US) and Nomura Global Economics.
Author: Young Sun Kwon, originally published on 16 November 2011.



                                                                      23
Nomura | Asia Economic Monthly                                                                                              24 November 2011




India: Indirect tax collection moderates sharply in September
Weak indirect tax collection likely reflects an economic slowdown


                     Net Indirect tax collection                           Growth in net indirect tax collection moderated sharply to
                                                                            8.6% in September after growing at a robust 25.7% in
                                                                            Apr-Aug 2011. This suggests that economic activity has
   45                              Service Tax, pp                          started to lose steam.
   40                              Union Excise Duties, pp
                                                                           Weak tax collection strengthens our case of fiscal
   35                              Customs, pp                              slippage of 0.9% on top of the government’s target of
   30                              Total Indirect Tax, % y-o-y              4.6% of GDP for FY12 (year ending March 2012). In fact,
                                                                            disinvestment in FY12 looks very likely to undershoot the
   25
                                                                            government’s initial target while we expect fuel subsidies
   20                                                                       to be much larger than the budgeted amount.
   15
                                                                           In our view, economic activity will remain weak in H2
   10
                                                                            FY12 as we expect high interest rates and global
     5                                                                      uncertainty to weigh on overall demand. We also expect
     0                                                                      inflation to drop considerably from December onwards on
    -5                                                                      base effects, weakening demand and lower commodity
         Apr-11    May-11 Jun-11     Jul-11   Aug-11 Sep-11                 prices. These factors should keep the nominal growth in
                                                                            tax collection subdued for the rest of the fiscal year.

Source: CEIC and Nomura Global Economics.
Author: Tomo Kinoshita, originally published on 3 November 2011.



China: Liquidity improves as policy is marginally loosened

                                                                            Liquidity conditions have improved recently. The
                                                                             6m bill discount rate fell to 5.8% from the late
            China’s 6m bill discount rate and 7d repo rate                   September peak of 11.0%. Meanwhile, the 7d repo
                                                                             rate also dropped to 3.71% on 2 November from
                                                                             5.08% on 29 September.

                                                                            Premier Wen said on October 25 that, “we should
                                                                             judge the dynamics of economic trend, focus on
                                                                             targeted, flexible and forward-looking policies, and
                                                                             fine-tune policies at the appropriate pace on the
                                                                             right occasions (our emphasis added).” We believe
                                                                             that policy may have already been marginally
                                                                             loosened by the Peoples Bank of China (PBC)
                                                                             through open market operations.

                                                                            We maintain our view that the PBC will keep the
                                                                             bank reserve requirement ratio and interest rates
                                                                             unchanged for the remainder of this year. We expect
                                                                             authorities to decide upon a policy stance for 2012
                                                                             during the Central Economic Working Conference,
                                                                             likely to be held in early December. In the interim,
                                                                             there may be more fine-tuning of policy in order to
                                                                             avoid a sharp slowdown of the economy, but we do
                                                                             not expect policy to be loosened aggressively given
                                                                             that domestic demand is still quite strong.

Source: WIND, CEIC and Nomura Global Economics.
Author: Zhiwei Zhang and Wendy Chen, originally published on 3 November 2011.




                                                                   24
Nomura | Asia Economic Monthly                                                                                                    24 November 2011




Singapore: a temporary jump in electronics PMI
                                                                               The manufacturing Purchasing Managers’ Index (PMI)
                                                                                October improved to 49.5 from 48.3 in September. New
                                                                                export orders eased to its lowest reading since March
                                                                                2009 but the production sub-index has returned to
                                                                                expansion territory at 50.1.

                                                                               More significantly, the electronics PMI jumped to 52.1
                 Manufacturing and electronics PMI                              from 47.2 in September. This was led by a 7.7
                                                                                percentage point (pp) increase in production, followed
                                                                                by inventory (5.9 pp), and new orders from domestic
   pp                            Manufacturing PMI                              (4.8) and export markets (4.7).
  58
                                 Electronics PMI
                                                                               We suspect this could be related to the floods in
  56
                                                                                Thailand, which are forcing firms to outsource
  54                                                                            production elsewhere. This is likely the case for the
  52                                                                            hard disk drives (HDD) segment, of which Thailand is
                                                                                the world’s second largest exporter. The outsourcing is
  50
                                                                                already happening in China (the largest exporter) and
  48                                                                            the Philippines but, as the PMI suggests, may also be
  46                                                                            occurring in Singapore.

  44                                                                           The impact on Singapore’s total electronics output may,
                                                                                however, be small. HDDs now account for only 1.6% of
  42
   Feb-09          Oct-09           Jun-10        Feb-11      Oct-11            non-oil domestic exports. In addition, we understand that
                                                                                the increased demand is likely to be temporary because
                                                                                it will be met by overtime work. Unless production
                                                                                capacity is expanded, orders are likely to revert to
                                                                                Thailand once factories there resume operations,
                                                                                although we think that this is unlikely to take place before
                                                                                end-2011.

Source: CEIC; Nomura Global Economics.
Author: Euben Paracuelles and Lavanya Venkateswaran, originally published on 2 November 2011.



Australia: Home buying starting to improve


                       Home loans rise strongly                                 Home buying activity appears to be in the early stages
                                                                                 of improvement, with owner-occupier home loan
    '000 sa                                                                      commitments up by 2.2% m-o-m, sa in September.
   70
                                                                                 This marks the sixth consecutive monthly increase
                                                                                 and takes the number of commitments to its highest
                                                                                 level since December 2009.
   60                                                                           At this stage, the lift in housing activity is most
                                                                                 prominent in the biggest housing market, New South
                                                                                 Wales, where commitments rose for a seventh
                                                                                 consecutive month and were up by 3.9% m-o-m, sa in
   50
                                                                                 November.

                                                                                We believe owner-occupier housing finance
                                                                                 commitments will gain further momentum, especially
   40                                                                            in November, as we expect the RBA's 25bp cash rate
    Sep-01      Sep-03      Sep-05       Sep-07      Sep-09   Sep-11
                                                                                 cut to translate almost entirely to lower mortgage
                                                                                 lending rates, improving the affordability of housing.

Source: ABS and Nomura Global Economics.
Author: Stephen Roberts, originally published on 9 November 2011.



                                                                   25
Nomura | Asia Economic Monthly                                                                                           24 November 2011




Australia: Consumer sentiment on the rise
               Consumer sentiment rising strongly                         Consumer sentiment has started to rise strongly,
                                                                           up 6.3% m-o-m, lifting the November index to
    Index                                                                  103.4, marking the first time since June 2011 that
    130                                                                    optimists have outnumbered pessimists.

    120
                                                                          The November improvement in sentiment could
                                                                           have been aided by the RBA's 25bp cash rate cut
    110                                                                    and the 13.9% increase in the sentiment index for
                                                                           mortgage holders.
    100                                                                   The strength of the rebound in consumer spending
                                                                           - up by 15.4% from the 89.4 low point in August -
      90                                                                   is consistent with our view that retail spending is
                                                                           past its weakest point in H1 2011 and is starting to
      80                                                                   firm, notwithstanding the constant diet of negative
                                                                           headlines about soft economic conditions in much
      70                                                                   of the developed world.
      Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov -


Source: Westpac-MI and Nomura Global Economics.
Author: Stephen Roberts, originally published on 9 November 2011.




China: A sharp drop in shadow banking

                    Total social financing breakdown                      China’s overall financing conditions became tighter in
                             Corporate bond financing                      Q3. The People's Bank of China (PBOC) released
    RMB bn
    5,000                    Trust and entrusted loans
                                                                           total social financing (TSF) data for Q3 2011. The
                             Others
                             Bank acceptance bill                          result shows that TSF dropped from RMB3,572.5bn
    4,000                    Bank loans                                    in Q2 to RMB2,036bn in Q3. From a year-on-year
                                                                           perspective, TSF fell much faster in Q3 (-30.2%) than
    3,000                                                                  in Q1 and Q2 (-7.1% and -1.6%, respectively).

                                                                          The details suggest that the lower total social
    2,000                                                                  financing in Q3 was mainly due to regulators’ action
                                                                           to close credit supply loopholes. One loophole was
    1,000
                                                                           for firms to give margin deposits to banks in
                                                                           exchange for bank acceptance bills, which could
                                                                           then be discounted for cash. Since there was no
           0
                                                                           reserve requirement for margin deposits before Q3,
                                                                           banks had incentive to issue these acceptance bills.
   (1,000)                                                                 Regulators expanded the reserve requirements to
               1Q10    2Q10      3Q10   4Q10     1Q11    2Q11   3Q11       include margin deposits in Q3, therefore outstanding
                                                                           bank acceptance bills contracted by RMB347.5bn.
                                                                           Moreover, trust and entrusted loans dropped from
                                                                           RMB464.6bn in Q2 to RMB360.7bn in Q3.

                                                                          In contrast, bank loans played a larger role in total
                                                                           social financing, accounting for 81% of total social
                                                                           financing in Q3 2011, much higher than the average
                                                                           of 58% over the previous six quarters. These data
                                                                           suggest the regulators are gaining more control of
                                                                           the overall liquidity conditions in China.

Source: PBC, CEIC, Nomura Global Economics.
Author: Zhiwei Zhang and Wendy Chen, originally published on 21 October 2011.




                                                                  26
Nomura | Asia Economic Monthly                                                                                                       24 November 2011




Calendar
The Month Ahead
Sometime in the month                                                         Units      Period   Prev 2   Prev 1   Last    Nomura
11-15 Dec China           Money supply, M2                                   % y-o-y      Nov      13.6     13.0     12.9     13.0
11-15 Dec China           New Yuan loans                                     RMBbn        Nov     548.5    470.0    586.8    550.0
19-25 Dec Philippines     Fiscal balance                                     PHPbn        Nov      9.2      -18.5   -24.6    -20.8
20-23 Dec Thailand        Custom trade balance                               US$bn        Nov      -1.2      0.2     0.9      0.8
Monday 28 November
10.00     Philippines Real GDP                                               % y-o-y      Q3       6.1      4.6      3.4     5.3
Wednesday 30 November
07.00       South Korea   Industrial production                              % y-o-y      Oct      4.0      4.7     6.8       7.2
13.30       India         Real GDP                                           % y-o-y      Q3       8.3      7.8     7.7       6.9
15.30       Thailand      Central bank policy meeting, 1 day repo rate         %          Nov      3.25     3.50    3.50     3.25
Thursday 1 December
07.00       South Korea   Consumer price index                               % y-o-y      Nov      5.3      4.3     3.9      4.3
07.00       South Korea   Exports                                            % y-o-y      Nov      25.5     18.8    9.3      9.2
08.30       Australia     Retail sales                                     % m-o-m, sa    Oct      0.8      0.6     0.4      0.4
09.00       China         PMI                                                 Index       Nov      50.9     51.2    50.4     49.0
12.00       Indonesia     Consumer price index                               % y-o-y      Nov      4.8      4.6     4.4      4.2
12.00       Indonesia     Trade balance                                      US$bn        Oct      1.2      3.6     2.7      2.0
12.00       Thailand      Consumer price index                               % y-o-y      Nov      4.3      4.0     4.2      4.0
16.00       Philippines   Central bank meeting, overnight borrowing rate        %         Dec      4.50     4.50    4.50     4.50
16.30       Hong Kong     Retail sales (volume)                              % y-o-y      Oct      22.4     20.7    15.2     13.0
Monday 5 December
16.00       Taiwan        Consumer price index                               % y-o-y      Nov      1.3      1.4      1.2     1.2
Tuesday 6 December
07.00       South Korea   Real GDP (final)                                 % q-o-q, sa    Q3       0.5      1.3      0.9      0.7
07.00       South Korea   Real GDP (final)                                  % y-o-y       Q3       4.7      4.2      3.4      3.4
08.30       Australia     Current account balance                           A$bn, sa      Q3       -8.1    -11.1    -7.4     -4.0
09.00       Philippines   Consumer price index                              % y-o-y       Nov      4.7      4.8     5.2      5.0
11.30       Australia     Reserve Bank's cash rate                             %          Dec      4.75    4.75     4.50     4.50
Wednesday 7 December
08.30       Australia     Real GDP                                         % q-o-q, sa    Q3       0.8      -0.9     1.2     1.5
Thursday 8 December
            Indonesia     Central bank policy meeting, policy rate             %          Dec      6.75     6.50    6.00     5.75
04.00       New Zealand   Reserve Bank's official cash rate                    %          Dec      2.50     2.50    2.50     2.50
08.30       Australia     Employment change, '000                           m-o-m, sa     Nov     -10.8     22.5    10.1     15.0
08.30       Australia     Unemployment rate                                  %, sa        Nov      5.3      5.3     5.2      5.2
09.00       South Korea   Central bank policy meeting, BOK base rate           %          Dec      3.25     3.25    3.25     3.25
Friday 9 December
            China         Industrial production                              % y-o-y      Nov      13.5     13.8    13.2     12.8
            China         Retail sales                                       % y-o-y      Nov      17.0     17.7    17.2     17.0
            China         Urban fixed asset investment (ytd)                 % y-o-y      Nov      25.0     24.9    24.9     24.8
10.00       China         Consumer price index                               % y-o-y      Nov      6.2      6.1     5.5      4.5
Saturday 10 December
            China         Exports                                            % y-o-y      Nov      24.5     17.1    15.9     10.0
            China         Imports                                            % y-o-y      Nov      30.2     20.9    28.7     17.0
            China         Trade balance                                      US$bn        Nov      17.8     14.5    17.0     16.1
Monday 12 December
13.30       India         Industrial production                              % y-o-y      Oct      3.8      3.6      1.9     2.3
Wednesday 14 December
14.30       India         Wholesale price index                              % y-o-y      Nov      9.8      9.7      9.7     9.3
Thursday 15 December
            Philippines   Remittance from aboard                             % y-o-y      Oct      6.1      11.1     8.6     7.8
Friday 16 December
08.30       Singapore     Non-oil domestic exports                           % y-o-y      Nov      3.9      -4.5    -16.2    -7.0
14.30       India         Central bank meeting, repo rate                      %          Dec      8.00     8.25    8.50     8.50
Tuesday 20 December
16.30       Hong Kong     Consumer price index                               % y-o-y      Nov      5.7      5.8      5.8     6.5
Wednesday 21 December
05.45       New Zealand   Current account balance                            NZ$bn        Q3       -3.3     0.1     -0.9     -2.0
17.00       Malaysia      Consumer price index                               % y-o-y      Nov      3.3      3.4     3.3      3.2
Thursday 22 December
05.45       New Zealand   Real GDP                                         % q-o-q, sa    Q3       0.6      0.9      0.1     0.7
Friday 23 December
13.00       Singapore     Consumer price index                               % y-o-y      Nov      5.7      5.5      5.4     5.2
13.00       Singapore     Industrial production                              % y-o-y      Nov      22.8     12.8     1.6      0.6
16.00       Taiwan        Industrial production                              % y-o-y      Nov      4.0      1.6      1.4     -2.4

Note: All times in HKT
Source: Bloomberg, Reuters and Nomura Global Economics




                                                                           27
Nomura | Asia Economic Monthly                                                                                                24 November 2011




Outlook 2011-2013
Australia: One and done
The RBA’s November rate cut tweaked monetary policy to a neutral setting.
Barring much weaker global growth, the RBA should maintain rates until H2                                 Stephen Roberts
2012.                                                                                                     +61 2 8062 8631
                                                                                                          stephen.roberts@nomura.com

Activity: We expect 2011 GDP growth of 2.2% following the firm Q2 GDP report and
likely quite strong Q3 and Q4 reports too. Growth should accelerate strongly in 2012
(we forecast 4.6%) before settling back to 3.1% in 2013, near its long-term trend. We
expect spending by a leveraged household sector to remain relatively cautious, even
with borrowing interest rates back to their long-term average through H1 2012 after the
RBA's November rate cut. An exponential rise in resource investment underpins our
strong base-case GDP growth forecast for 2012.

Inflation: Q3 underlying inflation readings were low at 0.3% q-o-q, but are subject to
revision (average Q2 underlying inflation was revised up to 0.8% q-o-q from 0.6%).
The RBA has lowered its 2012 and 2013 inflation forecasts, more in line with its 2-3%
target. We are less convinced that inflation will hold lower in 2013 given that strong
2012 growth should renew capacity pressures.

Policy: As the stronger 2012 growth outlook firms up, we expect the RBA to reverse
the November 25bp rate cut in Q3 2012 and to hike by a further 25bp in Q4 2012 to
5.00%. We see one more 25bp hike in the cycle to 5.25% in 2013. Only in the event
that our worse-case global growth view starts to develop would we expect a case for
the RBA to continue cutting rates further.

Risks: Current global financial market conditions have room to worsen, increasing
bank funding costs and intensifying deleveraging in Australia’s heavily indebted
household sector. Any major setback in Chinese growth beyond our current forecasts
would also present a downside risk, as would a worsening La Nina.



Details of the forecast
% y-o-y growth unless otherwise stated      1Q11     2Q11    3Q11      4Q11       1Q12    2Q12    3Q12    4Q12     2011    2012        2013
Real GDP (sa, % q-o-q, annualized)           -3.5      4.7     6.0       8.0        3.2     4.2     2.7     1.9
     - % q-o-q, sa                           -0.9      1.2     1.5       2.0        0.8     1.1     0.7     0.5
     - % y-o-y                                1.0      1.4     2.6       3.8        5.6     5.4     4.6     3.0     2.2      4.6        3.1
  Household consumption                       3.5      3.2     3.3       3.4        3.3     3.0     2.8     2.9     3.3      3.0        3.3
  Government (total spending)                 2.0      1.2     1.0       0.5        0.2     0.6     0.9     1.0     1.2      0.7        1.5
  Investment (private)                        6.7      6.4    11.5      17.6       19.4    23.7    22.2    21.3    10.6     21.7        6.5
  Exports                                    -4.4     -3.7     1.3       2.0       13.2    13.9    12.3    10.3    -1.2     12.4        9.5
  imports                                     9.4     10.5     9.4      10.3       12.8    11.8    15.8    16.5     9.9     14.3       10.5
Contributions to GDP growth (% points):
  Domestic final sales                        3.9      3.4      4.6         5.8     6.3     7.3     7.1     7.1     4.5      7.0        3.7
  Inventories and statistical discrepancy     0.3      1.4     -0.1         0.0    -0.4    -2.0    -1.3    -2.3     0.1     -1.7        0.0
  Net trade                                  -3.2     -3.4     -1.9        -2.0    -0.3     0.1    -1.2    -1.8    -2.6     -0.7       -0.6
Unemployment rate                             5.0      5.0      5.2         5.1     4.9     4.7     4.5     4.4     5.1      4.6        4.3
Employment, 000                              15.0     -5.2      2.4        15.0    33.0    33.0    33.0    33.0     6.8     33.0       27.0
Consumer prices                               3.3      3.6      3.5         3.6     3.0     3.2     3.7     4.3     3.5      3.6        3.8
  Trimmed mean                                2.2      2.6      2.3         2.6     2.7     2.7     3.5     3.8     2.4      3.2        3.5
  Weighted median                             2.6      2.9      2.6         2.8     3.0     3.1     3.9     4.2     2.7      3.6        3.6
Federal deficit (% of GDP) FY end-June                                                                             -3.4     -1.5        0.2
Current account deficit (% GDP)                                                                                    -1.8     -2.3       -2.8
Cash rate                                    4.75     4.75    4.75         4.50    4.50    4.50    4.75    5.00    4.50     5.00       5.25
90-day bank bill                             4.89     4.96    4.78         4.55    4.60    4.60    4.90    5.25    4.55     5.25       5.35
3-year bond                                  5.04     4.76    3.63         3.80    4.20    4.50    5.00    5.20    3.80     5.20       5.45
10-year bond                                 5.50     5.21    4.25         4.30    4.70    5.00    5.20    5.30    4.30     5.30       5.60
AUD/USD                                      1.03     1.07    0.98         0.98    0.98    1.00    1.02    1.05    0.98     1.05       1.00
Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 24 November
2011. Source: Australian Bureau of Statistics; Reserve Bank of Australia and Nomura Global Economics.




                                                                      28
Nomura | Asia Economic Monthly                                                                                                24 November 2011




China: Near-term downside risks are rising
                                                                                                          Zhiwei Zhang
Housing investment and exports are likely to slow quickly in Q4 2011 and Q1                               +852 2536 7433
2012.                                                                                                     zhiwei.zhang@nomura.com


Activity: Real GDP growth moderated to 9.1% y-o-y in Q3 from 9.5% in Q2. We
expect GDP growth to ease further in Q4 to 8.6%, with export growth dropping to 8%
y-o-y. The growth rates for industrial production and retail sales dropped to 13.2% and
17.2%, respectively in October, from 13.8% and 17.7% in September, while growth of
urban fixed asset investment remained flat at 24.9%. Leading indicators such as the
PMI, OECD leading index, and steel output suggest a further slowdown ahead. In
particular, housing investment looks set to drop faster in coming months as new floor
space starts and sales fell sharply in October.

Inflation: CPI inflation fell from 6.1% y-o-y in September to 5.5% in October, mainly
on base effects and lower food prices, while PPI inflation fell sharply to 5.0% from
6.5% over the same period. We expect CPI inflation to trend down through Q4 and
drop below 5% in November, largely reflecting continued base effects. Over the
medium term, we expect CPI inflation to remain structurally high, at 4.8% in 2012 and
4.5% in 2013, driven by rising input costs and wages, utility price deregulation, and
loose global liquidity.

Policy: We believe the People’s Bank of China (PBC) will continue to fine tune its
policy through open market operations for the rest of 2011, and cut the reserve
requirement in Q1 when economy slows further and a trade deficit emerges. The Q3
Monetary Policy Report shows that PBC does not think aggressive policy loosening is
urgently needed, as "growth slowdown was guided by policies" and "because potential
output is slowing, keeping growth at a reasonable level is good for controlling inflation
and for structural adjustments and sustainable growth in the long term." The Central
Economic Working Conference in early December will decide the tone for fiscal and
monetary policies in 2012.

Risks: Risks in housing investments have heightened, as the private housing market
cooled quickly in October and new starts for public housing are set to drop sharply in
Q4 2011 and Q1 2012. Signs of weakness have emerged in related sectors such as
steel, where both output and prices have dropped in recent weeks. We also expect
export growth to slide. We see risks for Q4 2011 and Q1 2012 being predominantly on
the downside. Beyond Q1 2012, we expect public housing to pick up again and policy
may be loosened to support growth.

Details of the forecast
% y-o-y growth unless otherwise stated        1Q11    2Q11    3Q11      4Q11    1Q12    2Q12     3Q12     4Q12     2011     2012    2013
Real GDP                                        9.7     9.5     9.1       8.6     8.2     8.5      8.7      8.7      9.2      8.6     8.4

Consumer prices                                 5.1     5.7     6.3       5.4     4.2      4.4     5.0      5.4      5.6     4.8      4.5
 Core CPI (excl. food & energy)                 2.2     2.4     2.4       2.2     2.0      2.8     2.9      3.0      2.3     2.7      2.6

Retail sales (nominal)                         16.3    17.0    17.3      16.8    17.3    17.9     18.4     18.9    16.9     18.1     18.8
Urban Fixed-asset investment (nominal, ytd)    25.0    25.6    24.9      23.8    21.0    22.0     23.0     22.0    23.8     22.0     20.1
Industrial production (real)                   14.4    13.9    13.8      13.3    12.0    12.7     13.4     13.4    13.9     12.9     12.5

Exports (value)                                26.5    22.1    20.6       8.0     8.0    12.0     14.0     15.0    18.6     12.5     11.0
Imports (value)                                32.6    23.1    24.9      15.0    15.0    16.0     17.0     17.0    23.4     16.3     16.0
Trade surplus (US$bn)                          -1.0    46.7    63.8      41.5   -28.8    35.2     59.1     39.0   151.3    104.5     16.0
Current account (% of GDP)                                                                                          4.5      4.0      3.5
Fiscal balance (% of GDP)                                                                                          -1.3     -1.0     -1.2
Net increase in RMB loans (RMBtrn)                                                                                  7.3      8.0      9.0
1-yr bank lending rate (%)                     6.06    6.31    6.56      6.56    6.56    6.56     6.56     6.81    6.56     6.81     7.06
1-yr bank deposit rate (%)                     3.00    3.25    3.50      3.50    3.50    3.50     3.75     4.00    3.50     4.00     4.50
Reserve requirement ratio (%)                 20.00   21.50   21.50     21.50   21.00   21.00    21.00    21.00   21.50    21.00    21.00
Exchange rate (CNY/USD)                        6.50    6.47    6.40      6.33    6.25    6.16     6.10     6.08    6.33     6.08     5.88
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 24 November
2011. Source: CEIC and Nomura Global Economics.


                                                                   29
Nomura | Asia Economic Monthly                                                                                                 24 November 2011




Hong Kong: Downside risks rise
Private consumption is set to slow after the government completes its cash
payout.                                                                                                     Tomo Kinoshita
                                                                                                            +852 2536 1858
                                                                                                            tomo.kinoshita@nomura.com
Activity: Q3 GDP growth slowed further to 4.3% y-o-y from 5.3% in Q2. Although
private consumption and gross fixed capital formation were robust, with growth rates
of 8.8% y-o-y and 10.2%, respectively, export growth slowed to -1.1% from 0.7% in Q2.
As growth on a seasonally adjusted quarter-on-quarter basis in Q3 was 0.1%, the
economy only just avoided a technical recession after growth of -0.4% in Q2. We
expect GDP growth in Q4 to rise marginally to 4.7% y-o-y helped by a government
program to pay HKD6,000 to each permanent resident, disbursements of which began
in early November. However, this is a one-off measure, and we expect overall growth
to slow in H1 2012, due to a further slowdown in exports, and negative wealth and
bank collateral effects from falling asset prices. We recognize that the downside risks
to growth in 2012 have risen considerably, given the deepening crisis in Europe.

Inflation: We see persistently high inflation at 4.7% in 2012 due to the lagged feed-
through effect of rising rental prices, higher prices on food imported from China and
hikes in the minimum wage from May 2011 – despite proposed inflation-mitigating
measures, which include a temporary waiver of public housing rent.

Policy: As Hong Kong uses a currency board system, with HKD pegged to USD, we
expect the near-zero US Fed funds rate to continue to bring very accommodative
monetary conditions to Hong Kong through 2013. We believe that deeper ties with
China through measures to liberalise its services, as announced in August, will benefit
the Hong Kong economy over the medium term. As the average residential house
price is off 2.5% from the June peak, we do not expect any more housing market
tightening measures in the short term.

Risks: Being a small, open economy and a financial hub, Hong Kong is one of the
most vulnerable economies in Asia to a global economic downturn. A sharp slowdown
in global growth would hurt Hong Kong through slower growth in demand for trade-
related services and larger negative wealth effects from a further reduction of asset
prices.

Details of the forecast
% y-o-y growth unless otherwise stated        1Q11     2Q11     3Q11       4Q11    1Q12    2Q12    3Q12    4Q12      2011    2012       2013
[sa, % q-o-q; annualized]                     12.8    -1.4      0.3        7.7     4.1     4.6     7.3     4.3
Real GDP                                      7.5      5.3      4.3        4.7     2.6     4.1     5.9     5.1      5.4      4.5        4.2
  Private consumption                         8.0      9.7      8.8        8.4     5.4     2.7     3.1     1.4      8.7      3.1        3.3
  Government consumption                      2.6      1.2      1.7        3.9     9.0     5.4     6.5     5.2      2.4      6.6        3.2
  Gross fixed capital formation               -0.3     7.0     10.2        5.5     7.0     7.1     8.5     8.4      5.7      7.8        5.8
  Exports (goods & services)                  13.6     0.7     -1.1        1.7     4.9     5.8     6.1     7.0      3.3      6.0        7.3
  Imports (goods & services)                  11.9     2.6      1.5        2.9     6.2     5.8     5.9     6.4      4.5      6.1        7.4
Contributions to GDP:
  Domestic final sales                        5.6       8.4      8.5         7.4     6.1     3.9     4.6     3.2     7.5      4.4     3.9
  Inventories                                 -4.3     -0.5      0.9         0.4    -0.6     0.2     0.7     0.6    -0.8      0.2     0.4
  Net trade (goods & services)                4.0      -4.2     -5.7        -2.3    -2.3     0.1     1.0     1.5    -2.1      0.2     0.2
Unemployment rate (sa, %)                     3.4       3.5      3.2         3.2     3.2     3.2     3.2     3.2     3.3      3.0     3.0
Consumer prices                               3.8       5.2      6.4         5.8     5.5     4.8     4.8     3.9     5.3      4.7     4.4
Exports                                      24.4       7.9      4.0         7.5    12.0    13.8    13.5    14.8    10.2     13.6    13.4
Imports                                      20.4      10.3      8.5         9.6    13.4    13.2    13.2    13.9    11.8     13.4    13.5
Trade balance (US$bn)                        -10.4    -15.2    -14.2       -14.8   -13.3   -16.7   -15.7   -15.8   -54.7    -61.5   -70.4
Current account (% GDP)                                                                                              3.9      2.8     1.2
Fiscal balance (% of GDP)                                                                                            0.2      0.9     1.0
3-month Hibor (%)                             0.26    0.26     0.28        0.28    0.28    0.28    0.28    0.28     0.28     0.28    0.28
Exchange rate (HKD/USD)                       7.78    7.78     7.79        7.80    7.77    7.75    7.75    7.75     7.80     7.75    7.75

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 24 November
2011. Source: CEIC and Nomura Global Economics.




                                                                      30
Nomura | Asia Economic Monthly                                                                                                       24 November 2011




India: Further signs of a slowdown
We expect real GDP growth to remain below potential and inflation to
moderate as tight monetary policy and weaker global growth cap demand.                                        Tomo Kinoshita
                                                                                                              +852 2536 1858
                                                                                                              tomo.kinoshita@nomura.com
Activity: We expect real GDP growth in Q3 to slow to 6.9% y-o-y from 7.7% in Q2,
reflecting a broad-based slowdown in private consumption, fixed investment and, more                          Aman Mohunta
                                                                                                              +91 22 6617 5595
recently, exports. We expect GDP growth to remain below 7% y-o-y in Q4. Although                              aman.mohunta@nomura.com
we expect GDP growth to rise in 2012, the downside risk to the economy has risen,
mainly due to prolonged turbulence in global financial markets.

Inflation: Headline WPI inflation in October remained high at 9.7% y-o-y, unchanged
from September. Although we expect WPI inflation to stay above 9% in November, it is
likely to moderate to around 8% in December and fall to below 7% by March 2012 on
base effects, lower commodity prices and weaker growth, the weaker rupee
notwithstanding. Our expectation of a slightly negative output gap in 2011-12 and
lower commodity prices should keep inflation at around 6-7% y-o-y in 2012-13.

Policy: The Reserve Bank of India (RBI) in October indicated that further rate hikes
are unlikely as long as inflation continues to moderate, as the RBI expects. Our view is
that the RBI will stay on hold as we also expect inflationary pressures to wane and the
growth slowdown to broaden in coming months. On the fiscal front, rising subsidies
and lower revenues should result in a higher fiscal deficit of 5.5% of GDP in FY12
versus a budget estimate of 4.6%. We expect similar fiscal slippage in FY13 and FY14,
which leaves little room for a fiscal policy boost, if required, especially given public
debt is the highest in emerging Asia, at 65% of GDP.

Risks: If global conditions continue to deteriorate, we believe exports will be further hit
and corporate investment will slow on weaker demand expectations. Further
depreciation of INR due to weak capital inflows and a large trade account deficit would
mitigate any positive effects on inflation from falling commodity prices. Revival of the
reform process is the key upside risk.



Details of the forecast
 % y-o-y growth unless otherwise stated        1Q11    2Q11     3Q11        4Q11   1Q12    2Q12    3Q12     4Q12     2011     2012       2013
 Real GDP (sa, % q-o-q, annualized)            8.1     7.3      5.2         5.7    9.8     9.0     7.2      6.7
 Real GDP                                      7.8     7.7      6.9         6.7    7.5     8.1     7.8      8.2      7.3      7.9        8.1
 Private consumption                           8.0     6.3      6.2         6.3    7.0     5.1     5.7      6.9      6.5      6.2        7.0
 Government consumption                        4.9     2.1      5.1         2.7    3.7     4.1     4.9      3.2      3.1      3.9        6.2
 Fixed investment                              0.4     7.9      2.9         8.4    8.6     9.7     9.7      10.0     5.3      9.5        11.1
 Exports (goods & services)                    25.0    24.3     24.1        12.0   10.2    7.2     8.9      11.3     21.0     9.4        14.7
 Imports (goods & services)                    10.3    23.6     20.1        24.7   11.8    4.6     11.8     12.4     19.9     10.1       13.6
 Contributions to GDP (% points)
 Domestic final sales                          5.3     9.2      7.4         10.2   8.1     6.9     8.5      8.4      8.1      8.0        8.2
 Inventories                                   0.2     0.2      0.2         0.2    0.2     1.0     1.0      0.9      0.2      0.8        0.6
 Net trade                                     2.3     -1.7     -0.7        -3.7   -0.8    0.2     -1.7     -1.1     -1.0     -0.9       -0.7

 Wholesale price index                         9.6     9.6      9.6         8.8    7.0     6.2     6.8      7.2      9.4      6.8        7.1
 Consumer price index                          8.6     8.9      9.2         9.4    8.6     9.2     8.8      9.2      9.1      9.0        8.4

 Current account balance (% GDP)                                                                                     -2.8     -2.4       -2.6
 Fiscal balance (% GDP)                                                                                              -5.5     -4.9       -4.9

 Repo rate (%)                                 6.75    7.50     8.25        8.50   8.50    8.50    8.50     8.50     8.50     8.50       8.50
 Reverse repo rate (%)                         5.75    6.50     7.25        7.50   7.50    7.50    7.50     7.50     7.50     7.50       7.50
 Cash reserve ratio (%)                        6.00    6.00     6.00        6.00   6.00    6.00    6.00     6.00     6.00     6.00       6.00
 10-year bond yield (%)                        8.02    8.33     8.41        8.65   8.50    8.40    8.40     8.40     8.65     8.40       8.40
 Exchange rate (INR/USD)                       44.7    44.7     49.2        49.8   49.0    48.3    47.8     47.2     49.8     47.2       45.6

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. CPI is for industrial workers. Fiscal deficit is for the central government and for fiscal year, eg, 2011 is for year ending
March 2012. Table reflects data available as of 24 November 2011. Source: CEIC and Nomura Global Economics.




                                                                       31
Nomura | Asia Economic Monthly                                                                                              24 November 2011




Indonesia: A more aggressive central bank
Bank Indonesia has room to cut rates further given the high external risks to
growth and our expectation for inflation to stay within its 2012 target.                                 Euben Paracuelles
                                                                                                         +65 6433 6956
                                                                                                         euben.paracuelles@nomura.com
Activity: GDP growth held up well at 6.5% y-o-y in Q3, driven by strong domestic
demand – particularly private consumption and investment spending. In addition, and
perhaps somewhat surprisingly, net exports added 3.3 percentage points (pp) to GDP
growth, with exports rising 18.5% y-o-y, the fastest rate in nearly two years. This
helped the current account remain in surplus in Q3, but, in line with robust domestic
demand conditions, it has already dropped to USD0.2bn from USD2.1bn in Q1. GDP
growth remains on track to meet our 2011 forecast of 6.5%, but, given the external
risks, our 7.0% forecast for 2012 looks increasingly optimistic.

Inflation and monetary policy: Bank Indonesia (BI) unexpectedly cut its policy rate
by 25bp to 6.5% at its 11 October meeting and followed it with a 50bp cut on 10
November. The two main reasons behind the more aggressive move were: 1) CPI and
core inflation surprised to the downside in October, leaving the real policy rate above
the BI’s estimate of the neutral level of 0.5-1%; and 2) downside risks to growth have
increased. Looking ahead, the manageable inflation environment (we see rising
downside risks to our Q4 CPI inflation forecast of 5%) allows BI to focus on supporting
growth amid rising global uncertainty. We expect two more 25bp cuts, one in Q4 and
one in Q1 2012. Moreover, BI will likely maintain an interventionist stance in FX and
bond markets, which should reduce risks of financial market instability.

Fiscal policy: The fiscal outturn in 2011 looks likely to disappoint our expectations of
more fiscal tailwinds this year. In January-September, the fiscal deficit stood at 0.7%
of GDP versus the budgeted 2.1% as expenditures have again underperformed. Next
year, the 2012 budget projects the deficit at 1.5% of GDP, reflecting a 16% increase in
tax revenues, a 12% reduction in subsidies and a 19% rise in capital spending. There
is a heavy emphasis on infrastructure projects, which we think should accelerate once
parliament enacts the land acquisition bill.

Risks: In a worse-case scenario of a global recession, Indonesia is likely to be the
most resilient among ASEAN economies given the government’s fiscal firepower, lots
of room to cut the policy rate, and robust domestic demand. Large foreign holdings of
Indonesian bonds and equities leave bond and stock prices vulnerable, but the bond
stabilization framework and USD114bn of FX reserves (as at October) can be utilized
to buffer against capital reversals.

Details of the forecast
% y-o-y growth unless otherwise stated      1Q11     2Q11     3Q11     4Q11    1Q12    2Q12     3Q12    4Q12     2011     2012    2013
Real GDP                                      6.5      6.5      6.5      6.6     6.5     6.8      7.1     7.5      6.5      7.0     7.0
  Private consumption                         4.5      4.6      4.8      5.0     5.3     5.3      5.3     5.3      4.7      5.3     5.7
  Government consumption                      2.8      4.5      2.5      3.0     6.0     5.0      4.5     4.5      3.2      4.9    10.0
  Gross fixed capital formation               7.3      9.4      7.1     11.0    11.7    12.0     11.9    12.0      8.7     11.9    10.7
  Exports (goods & services)                 12.5     17.5     18.5     10.7    10.7    11.0     11.5    11.5     14.7     11.2    11.0
  Imports (goods & services)                 14.4     15.3     14.2     12.4    12.6    12.6     12.6    12.6     14.0     12.6    16.2
Contributions to GDP (% points):
  Domestic final sales                         4.5     5.1      4.6      5.9     6.1     6.2      6.2     6.6      5.0      6.3      6.7
  Inventories                                  0.8     1.4      0.3      0.0     0.0     0.0      0.0     0.0      0.6      0.0      0.0
  Net trade (goods & services)                 0.6     2.4      3.3      0.6     0.4     0.6      1.0     0.9      1.8      0.7     -0.9
Consumer prices index                          6.8     5.9      4.7      5.0     4.8     6.2      6.2     5.9      5.6      5.8      5.3
Exports                                       30.6    38.3     32.8     13.0    13.0    12.8      3.2    14.6     27.9     10.8     18.2
Imports                                       32.0    37.8     34.5     20.2    15.6    13.9      7.2    16.7     30.6     13.3     22.3
Merchandise trade balance (US$bn)              8.7     9.6      9.6      7.8     8.8    10.4      8.2     8.0     35.7     35.3     34.1
Current account balance (% of GDP)             1.1     0.2      0.1     -0.2     0.9     0.4     -0.5    -0.1      0.3      0.2      0.0
Fiscal Balance (% of GDP)                                                                                         -1.7     -1.6     -1.4
Bank Indonesia rate (%)                       6.75     6.75    6.75     5.75    5.50     5.50    5.50     5.50    5.75     5.50     6.00
Exchange rate (IDR/USD)                      8708     8591    8950     9050    8900     8750    8650     8500    9050     8500     8200

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal (i.e., the single most likely outcome). Table reflects data available as of 24 November 2011.
Source: CEIC and Nomura Global Economics.



                                                                  32
Nomura | Asia Economic Monthly                                                                                                 24 November 2011




Malaysia: Unsustainable fiscal support
Relatively weak public finances will likely make sustaining the fiscal boost to
growth beyond the near-term difficult.                                                                      Euben Paracuelles
                                                                                                            +65 6433 6956
                                                                                                            euben.paracuelles@nomura.com
Activity: GDP grew 5.8% y-o-y in Q3 after expanding to an upwardly revised 4.3% in
Q2. Growth was led by domestic demand, particularly a large upside surprise in
government expenditures (up 21.7% y-o-y). We expected fiscal stimulus ahead of the
likely elections (which we see within the next three months), but clearly public
spending is already being frontloaded. Investment has also accelerated, driven by
higher capital expenditures by the government and projects under the Economic
Transformation Program, while consumption has held up well, supported by still low
unemployment, and civil servant bonuses. We reiterate our 2011 GDP growth forecast
of 4.7%, which implies that the economy slows sharply in Q4. We see increased
downside risks to GDP growth in 2012 from the uncertainty in Europe and the lack of
fiscal space for the government to sustain the current large spending increases.

Inflation and monetary policy: Inflation was stable in October at 3.4% y-o-y but
should decline gradually from here, in line with Bank Negara Malaysia’s (BNM)
assessment that inflation may have already peaked. With strong Q3 GDP growth and
BNM’s monetary policy statement of 11 November sounding far less dovish than
expected, we believe BNM will likely keep rates on hold, at least until early 2012
unless external conditions deteriorate significantly.

Fiscal policy: The 2012 budget targets a deficit of 4.7% of GDP, down from a
projected 5.4% this year, which in our view looks ambitious. A lower deficit target
suggests the government trying to stick to consolidation plans. But given it has
postponed subsidy rationalization and is offering one-time handouts ahead of the
election, this target looks difficult to achieve. We reiterate our fiscal deficit forecast for
2011 and 2012 of 5.3% and 5.1%, respectively.

Risks: A decline in oil prices is a downside risk to Malaysia’s commodity-driven
economy. We see progress on economic reforms as a medium-term upside risk,
whereas weak reform momentum, now further clouded by the prospect of elections,
may decrease Malaysia’s ability to escape the middle-income trap. Given the public
debt-to-GDP ratio of 55% (the second highest in Asia), scope to continue with a very
expansionary fiscal policy next year could prove to be limited.

Details of the forecast
 % y-o-y growth unless otherwise stated      1Q11     2Q11     3Q11         4Q11    1Q12    2Q12    3Q12    4Q12    2011     2012     2013
Real GDP                                       5.2      4.3      5.8          3.6     3.6     4.3     5.1     7.3     4.7      5.1      5.0
 Private consumption                           6.7      6.4      7.3          3.8     4.5     7.2     6.9     7.2     6.1      5.4      6.0
 Government consumption                       11.7      6.6     21.7          6.1     5.7     5.4     6.8     5.7    10.9      2.7      4.0
 Gross fixed capital formation                 6.5      3.2      6.1          6.7     4.0     6.0     6.0    11.0     5.6      9.3      6.0
 Exports (goods & services)                    1.4      4.1      4.2         11.5    10.1    11.7     9.9     5.3     5.4      5.9      7.5
 Imports (goods & services)                    8.4      3.2      3.2         14.1     8.1     8.5     6.8     8.2     7.2      5.5      9.7
Contributions to GDP (% points):
 Domestic final sales                          6.3      4.9      7.9          4.6     3.3     6.8     3.3     8.0     5.9      5.4     5.2
 Inventories                                   5.5     -1.9     -3.5          0.9    -3.8    -2.4    -0.2     1.5     0.2     -1.2     1.5
 Net trade (goods & services)                 -6.5      1.3      1.3         -1.8     4.1     0.0     1.9    -2.2    -1.4      0.9    -1.7
Unemployment rate (%)                          3.1      3.0      3.1          3.0     3.0     3.0     3.0     3.0     3.1      3.0     3.0
Consumer prices index                          2.8      3.3      3.4          3.0     2.6     3.1     3.7     3.3     3.1      3.2     3.1
Exports                                       16.5     16.6     13.2         10.1     5.9     7.0     9.1     8.5    13.8     11.5    11.7
Imports                                       25.0     15.1      9.1         18.4     4.2     4.8     6.6     0.4    17.0     10.2    14.0
Merchandise trade balance (USD bn)            10.4      9.1      9.7          5.4    11.8    10.7    11.7    10.2    34.6     52.9    54.2
Current account balance (% of GDP)            12.7     11.1     12.3         16.4    14.6    13.0    14.8    15.2    13.2     16.0    15.6
Fiscal Balance (% of GDP)                                                                                            -5.3     -5.1    -4.6
Overnight policy rate (%)                     2.75     3.00     3.00         3.00    3.00    3.00    3.25    3.50    3.00     3.50    3.75
Exchange rate (MYR/USD)                       3.03     3.02     3.19         3.18    3.14    3.12    3.10    3.08    3.18     3.08    2.96

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 24 November
2011. Source: CEIC and Nomura Global Economics.




                                                                       33
Nomura | Asia Economic Monthly                                                                                              24 November 2011




New Zealand: GDP growth about to lift
Reconstruction spending will boost growth in 2012 and 2013.
                                                                                                         Stephen Roberts
Activity: We forecast GDP growth to accelerate in 2012 and rise further in 2013 as                       +61 2 8062 8631
                                                                                                         stephen.roberts@nomura.com
earthquake reconstruction spending gathers pace after a slow start in 2011. Economic
indicators have been mixed over the past month, but terms of trade, although
tempered by downside global growth risks, are still running at their highest level in 37
years. Even allowing for slow initial post-earthquake reconstruction spending, we
expect GDP to grow 2.0% in 2011. Even in a worse-case global growth scenario,
where the US and Europe slide into recession 2012, we estimate that GDP would still
grow by 3.0% in 2012 and rise to 3.4% in 2013, supported by substantial
reconstruction spending funded by reinsurance claims and the government.
Inflation: We expect CPI inflation to fall back to around the top of the Reserve Bank of
New Zealand’s (RBNZ) 1-3% target band in Q4 2011 as the 2.5 percentage point lift in
the goods and services tax falls out of the annual CPI calculation. We expect CPI
inflation to stay close to the top of the target band through 2012 and 2013.
Policy: We expect the RBNZ to delay a normalization of its official cash rate (OCR)
until March 2012, starting with a 25bp hike to 2.75% rather than reversing in full the
50bp rate cut delivered in March 2011 (to 2.50%) after the Christchurch earthquakes.
Beyond our forecast 25bp hike in March we expect five more 25bp rate hikes in 2012,
taking the OCR to a peak of 4.00% by year-end. We see no further hikes in 2013.
Risks: The biggest downside growth risk is weaker-than-expected spending by the
heavily indebted farm sector. The main two-way risk (to the up/downside) is if
economic growth in Australia and Asia proves to be stronger or weaker than we
forecast.
Details of the forecast
% y-o-y growth unless otherwise stated        1Q11    2Q11    3Q11     4Q11       1Q12   2Q12    3Q12    4Q12    2011     2012        2013
Real GDP - % q-o-q saar*                       3.7     0.4     2.8          3.6    4.4    4.4     2.4     0.8
                        - % q-o-q, sa*         0.9     0.1     0.7          0.9    1.1    1.1     0.6     0.2
                        - % y-o-y*             1.7     1.5     2.3          2.6    2.8    3.9     3.7     3.0      2.0      3.5        3.6
            Household consumption              1.9     1.9     2.1          2.2    2.0    2.1     1.9     2.1      2.0      2.0        3.0
            Government consumption             3.1     1.8     3.2          1.9    3.0    3.4     2.4     2.5      2.5      2.5        2.2
            Investment (private and public)    9.2     3.9     4.9          1.2    3.2    3.7     4.7     6.5      4.7      4.3        5.5
            Exports                            2.0     1.1     3.8          3.0    3.8    4.7     4.0     3.8      2.5      4.1        7.0
            Imports                            7.6     8.6     5.3         -0.6    1.7    -0.6    3.0     1.9      5.1      0.7        6.5
Contributions to GDP growth (pp)**:
            Domestic final sales               3.8     2.4     3.1          2.0    2.6    2.8     2.8     3.1      1.9      2.8        3.6
            Inventories and statistical        -0.6    0.9     -0.3         0.8    0.7    -0.5    -0.4    -1.6     0.1     -0.6        0.0
            Net trade                          -1.9    -2.5    -0.7         1.2    0.6    1.7     1.3     0.5      0.0      1.0        0.0
Unemployment rate                              6.5     6.5     6.6          6.0    5.6    5.3     5.0     4.9      6.4      5.2        4.8
Employment, 000                               26.0     1.0     5.0         15.0   15.0   18.0    18.0    18.0     11.8     17.3       18.0
Consumer prices                                4.5     5.3     4.6          2.5    2.0    2.0     1.8     1.9      4.2      1.9        2.3
            Trimmed mean (15% trim)            4.0     4.9     4.5          2.5    2.4    2.4     2.2     2.3      4.0      2.3        2.4
            Weighted median                    3.3     4.4     4.0          2.2    2.4    2.4     2.2     2.2      3.5      2.3        2.4
Fiscal balance (% of GDP) FY end-June                                                                             -9.2     -5.0       -2.5
Current account deficit (% GDP)                                                                                   -4.5     -3.7       -3.8
Cash rate                                     2.50    2.50    2.50         2.50   2.75   3.00    3.50    4.00     2.50     4.00       4.00
90-day bank bill                              2.62    2.66    2.85         2.85   3.20   3.50    4.00    4.25     2.85     4.25       4.25
3-year bond                                   3.46    3.22    3.15         3.30   3.70   4.10    4.30    4.40     3.30     4.00       4.40
10-year bond                                  5.66    5.07    4.39         4.70   5.00   5.20    5.30    5.50     4.70     5.30       5.50
NZD/USD                                       0.74    0.83    0.76         0.77   0.80   0.82    0.85    0.90     0.80     0.90       0.90
Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. ** GDP contributions are expenditure-based, whereas GDP measures* are production-based. All forecasts are modal
(i.e., the single most likely outcome). Table reflects data available as of 24 November 2011. Source: Statistics New Zealand; Reserve
Bank of New Zealand and Nomura Global Economics.




                                                                      34
Nomura | Asia Economic Monthly                                                                                                 24 November 2011




Philippines: Speeding up spending
The government is starting to implement its disbursement acceleration plan,
which should gradually reverse the fiscal drag on growth.                                                  Euben Paracuelles
                                                                                                           +65 6433 6956
                                                                                                           euben.paracuelles@nomura.com
Activity: Our 4.5% 2011 GDP growth forecast takes into account the weaker-than-
expected outturn in H1, with GDP growth slowing to 3.4% y-o-y in Q2 from 4.6% in Q1
due to a slump in public construction spending. But it also implies GDP growth will
accelerate in H2 as base effects narrow, government spending catches up, and
private consumption remains buoyant. Remittances from overseas workers rose by
8.4% y-o-y in September after a gain of 11.1% in August, with the authorities saying
the outlook still remains “favourable” despite the external environment. Meanwhile, the
electronics down-cycle is manifesting more in overall exports, which slumped 27.4% y-
o-y in September after falling by 15.1% in August.

Fiscal policy: President Aquino in mid-October unveiled a PHP72.1bn “Disbursement
Acceleration Plan” to promote projects such as public works rehabilitation, agriculture
infrastructure projects, and support for local governments. We do not expect all of
these projects to be implemented this year, but it should help to reduce the
government’s under-spending, and hence the fiscal drag to growth this year. Indeed,
as of early November, the government announced that it had already disbursed 60.2%
of the plan, with another 20% likely to be disbursed before the end of the month. The
fiscal balance swung to a deficit in September, and we expect the deficit to widen
further in October from the spending catch-up despite the tax agency reporting higher-
than-targeted collections for the month. We maintain our forecast for a 2011 fiscal
deficit of 2.1% of GDP, below the official target of 3.2%.

Inflation and monetary policy: CPI inflation continued to rise in October, to 5.2%
from 4.8% in September due to food prices. Weather-related problems could push it
higher in the near-term, but the Bangko Sentral ng Pilipinas (BSP) still sees inflation
within the 3-5% target in 2012-13. Hence, we expect BSP to stay on hold for now.

Risks: The external outlook is the main downside risk. This, along with the risk of
further unrest in the Middle East, could negatively affect worker remittances. Slower-
than-expected progress on the reform agenda, as well as fiscal and infrastructure
spending, could hurt confidence.

Details of the forecast
% y-o-y growth unless otherwise stated     1Q11     2Q11       3Q11     4Q11    1Q12     2Q12      3Q12      4Q12     2011      2012      2013
Real GDP [sa, % q-o-q, annualized]            8.0     2.5        8.9     -0.1    11.8      1.6       6.8       6.8
Real GDP                                      4.6     3.4        5.3      4.8     5.7      5.4       4.9       6.7      4.5       5.7        6.5
Private consumption                           5.3     5.4        5.2      5.0     5.2      5.3       5.7       5.7      5.2       5.5        5.9
Government consumption                      -17.2     4.5        8.5     29.8    21.0     11.0      14.9       4.6      4.6      12.5       14.0
Gross fixed capital formation                12.7    -5.7        1.8      5.3    11.1     21.9      17.4      15.5      3.4      16.3       13.5
Exports (goods & services)                    2.0    -0.3        1.2      2.5     4.4      5.5       6.6      11.3      1.3       6.8        9.1
Imports (goods & services)                   11.3     4.1        5.8     13.5     9.1      9.9      15.1      11.0      6.4      11.3       11.7
Contribution to GDP growth (% points):
Domestic final sales                         4.4       3.0       4.7      7.1     8.2       9.1      8.7       7.9       4.8       8.0        8.7
Inventories                                  5.1       1.4       3.1     -0.9    -0.7      -0.8     -0.4       0.1       2.1      -0.4       -0.4
Net trade (goods & services)                -4.5      -2.3      -2.4     -1.5    -2.6      -2.4     -4.3      -0.9      -2.6      -2.5       -1.9
Exports                                      7.8       1.0       5.6      8.6     9.9      10.9      7.4      11.0       5.8     11.8       15.9
Imports                                     22.2       9.4      14.3     15.8    11.3      13.4     12.7      10.8     15.3      12.6       16.8
Merchandise trade balance (US$bn)           -3.4      -2.4      -0.3     -2.9    -4.0      -3.0     -1.1      -3.2      -8.9    -11.2      -14.3
Current account balance (US$bn)              0.9       2.1       3.3      3.5     1.0       1.1      2.6       3.5       9.3       8.2        8.1
(% of GDP)                                   1.8       3.7       6.2      5.5     1.8       1.8      4.1       4.7       4.2       3.2        2.8
Fiscal balance (% of GDP)                                                                                              -2.1      -2.3       -2.4
Consumer prices (2006=100)                    4.5      5.0        4.9   5.0        5.3      5.3      5.7        5.6      4.9       5.0        5.0
Unemployment rate (sa, %)                     7.2      7.1        6.9   6.6        6.4      6.3      6.2        6.2      7.0       6.3        6.1
Reverse repo rate (%)                       4.25     4.50       4.50  4.50       4.50     4.75     5.00       5.00     4.50     5.00       6.00
Exchange rate (PHP/USD)                     43.4     43.3      43.40 43.70      43.30    42.89    42.60      42.20    43.70    42.20      40.77
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 24 November
2011. Source: CEIC and Nomura Global Economics.



                                                                   35
Nomura | Asia Economic Monthly                                                                                                 24 November 2011




Singapore: Stronger external headwinds
External demand has now weakened more broadly and downside risks will
likely continue to rise into 2012.                                                                          Euben Paracuelles
                                                                                                            +65 6433 6956
                                                                                                            euben.paracuelles@nomura.com
Activity: Q3 GDP growth was 6.1% y-o-y, up from 1.0% in Q2 (Consensus: 6.1%,
Nomura: 6.2%), following the government’s earlier flash estimates of 5.9%. On a
sequential basis, the economy avoided another negative print and a technical
recession by posting 0.6% q-o-q sa from -1.7% in Q2. We maintain our 2011 GDP
growth forecast of 4.8%, which implies a sharp sequential contraction in Q4. This is
consistent with non-oil domestic exports (NODX) falling by a worse-than-expected
16.2% y-o-y in October, led by electronics. But non-electronics exports also
contributed. As such, we think the external weakness has now broadened, and will
likely carry over into next year given the uncertainty. Indeed, the guidance from the
government seems worrisome, penciling in a below-potential 2012 growth forecast of
1-3%.

Inflation and FX policy: The Monetary Authority of Singapore (MAS) stated recently
that its current policy stance is “appropriate” after it reduced the slope of the S$NEER
band in October. However, the dovish tone of the 14 October policy statement,
combined with recent comments that the global economy is at a critical stage, may
suggest further easing ahead. The MAS also expects core inflation to decline to 1.5-
2% next year because of the growth slowdown and subsiding imported inflation.
However, we think there will be additional downward pressure from a softening in
global commodity prices, which, in 2009, contributed to core inflation of 0% from 5.7%
in 2008. Our FX strategy team assigns a 60% probability to a lowering in the slope of
S$NEER appreciation to zero in April from an estimated 1% annualized appreciation.

Risks: The high level of uncertainty in the external outlook is the single most important
source of downside risk to Singapore’s growth prospects. A renewed slump in the
global economy, driven by the European fiscal crisis, could pose a risk from direct
effects but also macro-financial linkages which have strong mutually reinforcing effects
on growth. This will likely elicit a strong fiscal response as the government has plenty
of scope for fiscal stimulus and the ability to quickly introduce emergency measures
(perhaps in next budget announcement in February), including a draw-down of fiscal
reserves. A hard landing in China, to which we assign a one in three chance of
happening within three years, could also prove a major risk.

Details of the forecast
% y-o-y growth unless otherwise stated     1Q11      2Q11     3Q11 4Q11           1Q12    2Q12     3Q12       4Q12    2011     2012    2013
Real GDP [sa, % q-o-q, annualized]          27.9      -6.4      1.3 -7.9           34.1    -4.3      5.1       -4.3
Real GDP                                     9.4       1.0      6.1  3.0            4.2     4.8      5.6        6.6     4.8     5.3     5.5
 Private consumption                         4.7       5.9      7.1  4.2            8.1     5.7      4.7        5.8     5.5     6.1     4.6
 Government consumption                      3.2       5.7      2.3  6.6            1.2    15.8     11.5        4.6     4.3     7.1     4.0
 Gross fixed capital formation              -7.7       9.5      6.3  5.3            8.3     4.1      7.2       10.1     3.3     7.4     6.8
 Exports (goods & services)                  8.4       1.9     -0.3  0.8            4.7     6.9     11.5        8.2     2.5     7.8    13.0
 Imports (goods & services)                  6.1       3.0      1.2  3.5            7.1     7.9     12.7        8.8     3.4     9.1    11.4
Contributions to GDP (% points):
 Domestic final sales                         0.2      4.6      4.2         3.5     4.8      4.3      4.5       5.2      3.2     4.7     3.8
 Inventories                                  2.5     -1.8      4.6         4.5     2.3     -2.2     -0.7       0.0      2.4    -0.1     1.2
 Net trade (goods & services)                 7.0     -1.5     -3.0        -5.3    -2.9      0.3      1.2       1.0     -0.8    -0.1     0.7
Unemployment rate (sa, %)                     1.9      2.1      2.0         1.9     2.0      2.0      2.0       2.0      2.0     2.0     2.0
Consumer prices index                         5.2      4.7      5.5         4.8     3.4      3.6      3.0       2.8      5.0     3.2     3.0
Exports                                      24.5     19.7     16.0         6.5     4.4      8.9     13.8      11.5    15.2      9.7   16.0
Imports                                      20.9     21.6     17.7        16.9    18.4     11.7     27.8       9.8    19.2    16.9    14.4
Merchandise trade balance (US$bn)            11.4      9.6     12.1         5.4    -0.1      7.9      0.5       7.7    38.6    15.9    25.4
Current account balance (% of GDP)           20.3     18.0     17.4        11.9    10.5     19.0     10.0      14.3    16.8    13.4    15.1
Fiscal Balance (% of GDP)                                                                                                0.0     0.1     0.6
3 month SIBOR (%)                            0.44     0.44     0.37        0.35   0.35     0.35     0.35       0.35    0.35    0.35    0.63
Exchange rate (SGD/USD)                      1.26     1.23     1.29        1.31   1.29     1.28     1.27       1.26    1.31    1.26    1.22

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 24 November
2011. Source: CEIC and Nomura Global Economics.


                                                                      36
Nomura | Asia Economic Monthly                                                                                                 24 November 2011




South Korea: High beta
We expect GDP growth to outperform the global average in 2012, supported
by a weaker KRW/JPY and election-related domestic demand.                                                    Young Sun Kwon
                                                                                                             +852 2536 7430
                                                                                                             youngsun.kwon@nomura.com
Activity: GDP growth slowed from 0.9% (sa) q-o-q in Q2 to 0.7% in Q3, as solid
exports and construction investment failed to offset weaker consumption, business
investment and inventory run-down. Going forward, the negative impact from the
August-September global market sell-off will likely impact Q4 GDP, and we now
expect growth of only 0.4% q-o-q. In 2012, we expect a very modest global demand
recovery and a sizable fiscal stimulus (ahead of the general election in April and the
presidential election in December). Also, the weaker KRW/JPY will likely boost Korean
exporters’ global market share through export price competitiveness. All in all, we
expect Korea’s GDP growth to slow to 3.5% (versus global GDP growth of 3.8%) in
2011 before rising to 5.0% (versus global GDP growth of 4.1%) in 2012.

Inflation: We expect CPI inflation to slow modestly in Q4 and 2012 as negative wage
growth, lower oil prices and KRW movements (which should continue to weaken in Q4,
but strengthen from Q1 2012 onward) will likely put downward pressure on inflation.
We forecast CPI inflation to slow to 3.5% in 2012 from 4.2% in 2011.

Policy: We expect the BOK’s next move to be a 25bp hike in July 2012. We believe
the BOK will likely pause ahead of the presidential election in December 2012, and
deliver a total of 50bp of hikes in 2013.

Risks: Korea’s economy is still very open: exports made up 52% of GDP in 2010; the
external debt to GDP ratio has fallen (from 48% in 2009 to 37% in 2010) but is still
relatively high; and it is one of Asia’s largest net importers of oil (6.3% of GDP in 2010).
As such, the economy is vulnerable to sudden changes in global economic conditions
and financial markets. The deepening European sovereign debt crisis and the
potential negative European banking sector feedback effects add substantial
downside risks to our growth forecast. We believe that large FX reserves, a flexible
exchange rate regime, room to cut rates and a sound fiscal position should provide a
buffer to further external deterioration. On North Korea, we view a major escalation of
geopolitical tensions as a low probability for now, but that could rise as the presidential
election in December 2012 approaches.
Details for forecast
% y-o-y growth unless otherwise stated         1Q11    2Q11    3Q11     4Q11        1Q12    2Q12    3Q12    4Q12    2011    2012    2013
Real GDP (sa, % q-o-q, annualized)               5.4     3.6     3.0      1.6         6.1     6.1     7.0     5.7
Real GDP (sa, % q-o-q)                           1.3     0.9     0.7      0.4         1.5     1.8     1.7     1.4
Real GDP                                         4.2     3.4     3.4      3.4         3.6     4.5     5.5     6.6    3.5     5.0     4.0
 Private consumption                             2.8     3.0     2.2      2.3         2.9     4.0     4.5     4.6    2.6     4.0     3.1
 Government consumption                          1.7     2.1     3.4      5.1         5.0     6.3     6.4     6.1    3.0     6.0     4.6
 Business investment                            11.7     7.5     1.4      2.8         5.0     2.1     5.6     9.3    5.6     5.5     7.4
 Construction investment                       -11.9    -6.8    -4.2     -2.7         5.4     5.8     4.6     4.9   -6.6     5.2     4.1
 Exports (goods & services)                     16.8     9.6     9.4      7.7         7.0     8.8     8.8    10.9   10.7     8.9     9.3
 Imports (goods & services)                     10.8     7.9     6.4      7.5         8.9     8.6     9.3    10.9    8.1     9.4    10.9
Contributions to GDP growth (% points):
 Domestic final sales                            1.2     1.2     1.1         2.0      4.9     4.3     4.7     5.1     0.8     4.5     3.9
 Inventories                                    -0.1     0.7     0.5         0.6     -1.0    -0.7     0.2     0.5     0.9     0.0     0.0
 Net trade (goods & services)                    3.1     1.4     1.8         0.8     -0.3     0.9     0.5     1.0     1.9     0.5     0.1
Unemployment rate (sa, %)                        3.9     3.6     3.5         3.4      3.4     3.4     3.4     3.4     3.6     3.4     3.4
Consumer prices                                  4.5     4.2     4.8         4.4      3.9     4.2     3.5     3.3     4.2     3.5     3.0
Current account balance (% of GDP)                                                                                    2.0     1.3     0.3
Fiscal balance (% of GDP)                                                                                             0.1    -0.3     0.2
Fiscal balance ex-social security (% of GDP)                                                                         -1.0    -1.5    -1.0
Money supply (M2)                                5.3     5.0     6.0          6.5     7.0     7.5     8.0     8.5     5.7     8.0     7.0
House prices (% q-o-q)                           2.3     2.0     1.5          0.2     1.0     1.0     0.5     0.5     6.0     3.0     2.0
BOK official base rate (%)                      3.00    3.25    3.25         3.25    3.25    3.25    3.50    3.50    3.25    3.50    4.00
3-year T-bond yield (%)                         3.74    3.77    3.56         3.50    3.50    3.50    3.75    3.75    3.50    3.75    4.00
5-year T-bond yield (%)                         4.12    4.01    3.67         3.75    3.75    3.75    4.00    4.00    3.75    4.00    4.00
Exchange rate (KRW/USD)*                       1097    1068    1178         1195    1160    1140    1120    1100    1195    1100    1050
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data as of 24 November 2011.
Source: Bank of Korea; CEIC and Nomura Global Economics.



                                                                       37
Nomura | Asia Economic Monthly                                                                                                24 November 2011




Taiwan: Downside risks persist
Industrial production growth likely to turn nagative in Q4
                                                                                                          Tomo Kinoshita
Activity: According to the government’s advanced estimate, real GDP growth was                            +852 2536 1858
3.4% y-o-y in Q3, lower than 5.0% in Q2. Weaker growth was primarily due to a 13.5%                       tomo.kinoshita@nomura.com

y-o-y drop in gross capital formation. Private consumption growth also slowed to 2.7%
y-o-y in Q3 from 3.1% in Q2 due to negative wealth effects emanating from lower
equity prices. Industrial production growth dropped further to 1.4% y-o-y in October,
from 1.6% in September. A shortage of hard disc drives (HDDs) as a result of the Thai
floods is also likely to adversely affect electronics production, at least in Q4. Due to
base effects, we expect production growth to turn negative on a year-on-year basis in
Q4. Looking further ahead, there remain considerable downside risks to Taiwan’s
growth in 2012, in our view, given the risk of lower-than-expected growth in Europe.
Although operations at chemical facilities owned by Formosa Plastic Group were
largely normalised in October, production is likely to remain weak in the months ahead
as global demand for electronics products is likely to remain weak.

Monetary and fiscal policy: Subdued commodity prices and slower growth should
help contain CPI inflation in 2012-13. We expect no rate hikes by the Central Bank of
China (CBC) until the end of June 2012. On the fiscal policy front, the government has
approved a budget proposal for 2012 under which it will continue to maintain a
relatively accommodative fiscal policy stance by increasing spending by 6.7% y-o-y. In
addition, President Ma Ying-jeou on 13 October instructed government officials to
formulate economic stimulus measures.

Risks: Mostly on the downside. Another deep recession in the advanced economies
would likely have a large impact on Taiwan’s open economy through lower external
demand, weaker investment demand and slower consumption spending via negative
wealth effects. Taiwan is also one of Asia’s more exposed economies to weaker-than-
expected growth in China.

Details of the forecast
% y-o-y growth unless otherwise stated      1Q11    2Q11     3Q11     4Q11       1Q12   2Q12    3Q12    4Q12     2011     2012    2013
Real GDP [sa, % q-o-q, annualized]          14.6      0.9     -2.5        -0.1   15.8    3.9     2.3      2.2
Real GDP                                    6.2       5.0     3.3         3.0    3.3     4.0     5.3      5.9     4.3      4.7        5.2
 Private consumption                        4.4       3.1     2.7         2.5    2.7     3.3     3.6      3.7     3.2      3.3        3.6
 Government consumption                     0.2       0.4     1.8         1.9    3.5     2.4     2.5      2.6     1.1      2.7        1.8
 Gross fixed capital formation              8.6       1.6    -10.5        -0.5   3.0     4.5     6.0      8.0     -0.7     5.5        6.5
 Exports (goods & services)                 11.2      4.4     2.2         3.0    4.7     5.7     6.2      7.5     5.0      6.1        7.9
 Imports (goods & services)                  7.4      0.9     -4.8        2.0    4.6     4.8     5.8      6.6     1.2      5.5        7.1
Contributions to GDP:
  Domestic final sales                      4.0       2.0     -0.4         1.4    2.4   2.8      3.2      3.7      1.7     3.0      3.2
  Inventories                               -1.5      0.2     -0.7         0.5    0.1   -0.3     0.7      0.4     -0.4     0.2      0.1
  Net trade (goods & services)               3.7      2.8      4.5         1.1    0.8   1.5      1.4      1.8      3.0     1.4      1.9
Exports                                     19.4     14.6     11.6         6.0    8.2   9.2      9.7     11.0     12.7     9.5     11.4
Imports                                     21.8     18.8     10.3         6.0    9.1   9.3      9.8     10.6     13.9     9.7     11.1
Merchandise trade balance (US$bn)           4.5       5.5      7.8         5.3    4.3   6.0      8.5      6.2     23.1    24.9     28.6
Current account balance (% of GDP)          9.3      7.8      7.5         13.4    8.7   7.7      7.8     12.8      9.5     9.4      9.2
Fiscal balance (% of GDP)                                                                                         -1.2    -1.1     -1.2
Consumer prices index                       1.3       1.6      1.3         1.2    0.8    0.9     1.4      1.7      1.4     1.2      1.4
Unemployment rate (%)                       4.6       4.4      4.3         4.2    4.2    4.2     4.2      4.1      4.4     4.2      4.1
Discount rate (%)                           1.63     1.75     1.88        1.88   1.88   2.01    2.13     2.26     1.88    2.26     2.76
Overnight call rate (%)                     0.28     0.36     0.40        0.40   0.53   0.65    0.78     0.90     0.40    0.90     1.28
10-year T-bond (%)                          1.35     1.50     1.29        0.34   0.47   0.59    0.72     0.84     0.34    0.84     1.34
Exchange rate (NTD/USD)                     29.4     28.8     30.5        30.7   30.5   30.3    30.1     29.9     30.7    29.9     29.0

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 24 November
2011. Source: CEIC and Nomura Global Economics.




                                                                     38
Nomura | Asia Economic Monthly                                                                                                24 November 2011




Thailand: Floods recede, politics back?
Growth should be negative in Q4 due to the floods. There are additional
concerns from external factors, and now from domestic politics.                                           Euben Paracuelles
                                                                                                          +65 6433 6956
                                                                                                          euben.paracuelles@nomura.com
Forecast change: We now expect a 25bp cut in the policy rate on 30 November.
                                                                                                          Nuchjarin Panarode
Activity: GDP rose 3.5% y-o-y in Q3 from an upwardly revised 2.7% in Q2, but this                         +662 638 5791
fell short of expectations (Consensus: 4.5%, Nomura: 3.9%). We expect GDP in Q4 to                        nuchjarin.panarode@nomura.com

fall outright by 0.6% y-o-y due to the floods. However, this will be a temporary shock,
as the worst of the floods appears to have passed, with the recovery beginning in key
industrial estates and central Bangkok largely spared. We expect reconstruction to
begin in earnest in H1 2012, with the government already setting aside funds to
provide financial assistance to affected households and business. The government is
also debating a larger 2012 budget to finance reconstruction, which arguably is likely
to pass given the government has the fiscal space to implement a large stimulus
(see Asia special report: Thailand – Dealing with another disaster, 3 November 2011).

Inflation and monetary policy: Headline CPI inflation accelerated to 4.2% y-o-y in
October as the floods pushed food prices higher by 9.9% y-o-y following an already
substantial 8.8% increase in September. We expect CPI inflation of 4.1% y-o-y in Q4
before gradually easing in H1 2012. Despite this high near-term inflation path, the
Bank of Thailand (BOT), in recent weeks, signaled the possibility of a rate cut at its 30
November meeting. We expect the BOT to justify a rate cut with a significant
downgrade in its GDP 2011 forecast from the current 2.6%.

Risks: Political conflict and external factors are the main downside risks. The political
temperature could rise if the government moves to amend the Constitution or issue
any acts to allow the ex-prime minister Thaksin to return. On the economic front,
another global recession could hurt domestic demand as investment tends to be
closely tied with export performance while tourism and export-oriented manufacturing
sectors are large employers. Other longer-term concerns resulting from the floods
include the risk of deteriorating public finances and a hollowing out in certain sectors.

Details of the forecast
% y-o-y growth unless otherwise stated         1Q11    2Q11    3Q11     4Q11     1Q12    2Q12     3Q12    4Q12     2011     2012    2013
Real GDP [sa, % q-o-q, annualized]              7.5      0.2     2.1    -11.1     25.6      1.3     9.8    -9.4
Real GDP                                        3.2      2.7     3.5     -0.6      3.4      3.7     5.6     6.1      2.2      4.7     4.8
 Private consumption                            3.3      2.7     2.4      2.0      3.5      4.6     5.1     2.8      2.6      4.0     3.6
 Public consumption                             1.8      1.0     1.1      5.0      3.2      2.7     5.6    -8.5      2.1      1.0     4.5
 Gross fixed capital formation                  9.3      4.1     3.3     -0.1      6.9      6.1     6.4     2.3      4.1      5.5     5.1
 Exports (goods & services)                    16.0     12.0    17.4      5.3      2.9      3.1     3.3    11.5     12.6      5.2     4.7
 Imports (goods & services)                    16.8     15.1    19.3     -8.3      6.9      8.8     1.8    17.1     10.5      8.2     5.1
Contribution to GDP (%points):
 Domestic final sales                           3.5      2.5     2.1      1.5      3.4     4.1      4.7     1.1      2.4     3.3      3.4
 Inventories                                   -3.0      0.1     0.4     -6.8      1.4     1.7     -1.5     3.9     -2.4     1.4      0.7
 Net trade (goods & services)                   2.5      0.3     1.4      8.1     -1.5    -2.9      1.5     0.1      3.2    -0.7      0.6
Exports                                        28.1     19.4    29.0      3.6      5.2     5.7      5.9     8.4     19.7     6.3      6.6
Imports                                        27.9     29.2    32.7      7.7     11.0    13.3      3.9    17.1     24.1    11.0      7.7
Merchandise trade balance (US$bn)               2.7      0.8     1.8      2.0     -0.3    -3.6      3.2    -2.3      7.3    -3.0     -5.9
Current account balance (US$bn)                 6.8      1.8     3.1      4.7      3.3    -3.4      4.5     3.5     16.4     7.9      6.2
(% of GDP)                                      7.6      2.1     3.5      5.4      3.4    -3.6      4.6     3.6      4.7     2.1      1.4
Fiscal balance (% of GDP, fiscal year basis)                                                                        -3.8    -3.5     -4.2
Consumer prices                                 3.0      4.1     4.1      4.1      4.1     3.7      3.6     3.4      3.8     3.7      3.6
Unemployment rate (sa, %)                       0.7      0.4     0.8      0.8      0.8     0.8      0.8     0.8      0.7     0.8      0.8
Overnight repo rate (%)                        2.50     3.00    3.50     3.25     3.25    3.25     3.50    3.75     3.25    3.75     3.75
Exchange rate (THB/USD)                        30.3     30.7    31.2     31.0     30.7    30.4     30.2    30.0     31.0    30.0     29.2

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are
period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 24 November
2011. Source: CEIC and Nomura Global Economics.




                                                                   39
Nomura | Asia Economic Monthly                                                                                                   24 November 2011




Asia in Charts
Gross domestic product (quarterly)                                           Consumer price index (monthly)

% y-o-y                                                                      % y-o-y
15                                                                           10              Asia ex-Japan         Japan         EU        US
                                                                              8
 10
                                                                              6
  5
                                                                              4
  0
                                                                              2
 -5                                                Asia ex-Japan
                                                                              0
                                                   Japan
-10                                                EU                         -2
                                                   US
-15                                                                           -4
  Sep-07          Sep-08         Sep-09       Sep-10           Sep-11          Oc t-07      Oct-08        Oct-09            Oct-10       Oct-11

Note: Aggregate Asia ex-Japan is calculated using purchasing                 Note: Aggregate Asia ex-Japan is calculated using purchasing
power parity (PPP) adjusted share of world GDP and excludes                  power parity (PPP) adjusted share of world GDP and excludes
Australia and New Zealand.                                                   Australia and New Zealand.
Source: CEIC and Nomura Global Economics.                                    Source: CEIC and Nomura Global Economics.

Current account balance (quarterly)                                          Asia export leading index (monthly)

USD bn                           Asia, ex-Japan        Japan                 % y-o-y                                            Jan 2000 = 100
                                                                             48                                                            104
 150                             EU                    US
                                                                              36                                                            101
 100
                                                                              24                                                            98
  50
                                                                              12                                                            95
   0
 -50                                                                           0                                                            92
                                                                                            Asia ex-Japan's total
-100                                                                         -12            exports, lhs                                    89

-150                                                                         -24            Nomura'sa export leading                        86
                                                                                            index, rhs
-200                                                                         -36                                                           83
   Sep-07          Sep-08         Sep-09          Sep-10       Sep-11          Dec-01    Dec-03      Dec-05   Dec-07        Dec-09    Dec-11

Note: Aggregate Asia ex-Japan is calculated using purchasing                 Note: Aggregate Asia ex-Japan is calculated using purchasing
power parity (PPP) adjusted share of world GDP and excludes                  power parity (PPP) adjusted share of world GDP.
Australia, New Zealand and Vietnam.                                          Source: Bloomberg; OECD; Semiconductor Industry Association;
Source: CEIC and Nomura Global Economics.                                    CEIC and Nomura Global Economics.

Foreign exchange (against USD, monthly)                                      Policy rate (monthly)

 Index (Jan 2007 = 100)                                                       %                                      Asia ex-Japan
  160              Asia ex-Japan                                              8                                      Japan
                    Japan                                                     7                                      EU
  140               EU                                                                                               US
                                                                              6
  120                                                                         5
                                                                              4
  100                                                                         3
                                                                              2
   80
                                                                              1
   60                                                                        0
   Nov-07          Nov-08         Nov-09          Nov-10       Nov-11        Nov-07        Nov-08        Nov-09            Nov-10       Nov-11

Note: Aggregate Asia ex-Japan is calculated using purchasing                 Note: Aggregate Asia ex-Japan is calculated using purchasing
power parity (PPP) adjusted share of world GDP and excludes                  power parity (PPP) adjusted share of world GDP and excludes
Australia and New Zealand. Last data point is 23 November.                   Australia and New Zealand. Last data point is 23 November.
Source: Bloomberg and Nomura Global Economics.                               Source: CEIC and Nomura Global Economics.




                                                                        40
Nomura | Asia Economic Monthly                                                                                                24 November 2011




Gross domestic product (quarterly)                                        Industrial production (monthly)

% y-o-y                          Australia       New Zealand               % y-o-y                 Australia          New Zealand
15                                                                         25                      China              India
                                 China           India
                                                                           20
 10                                                                        15
                                                                           10
  5                                                                            5
                                                                               0
  0                                                                        -5
                                                                          -10
 -5                                                                       -15
  Sep-07         Sep-08           Sep-09     Sep-10        Sep-11           Oct-07       Oc t-08          Oct-09     Oct-10          Oct-11

Source: Australian Bureau of Statistics; Statistics New Zealand;          Source: CEIC and Nomura Global Economics.
CEIC and Nomura Global Economics.




Gross domestic product (quarterly)                                       Industrial production (monthly)

% y-o-y                                                                   % y-o-y             Indonesia              Thailand
                    Indonesia                 Thailand
 15                                                                       40                  Philippines            Vietnam
                    Philippines               Vietnam
                                                                                              Malaysia
 10                 Malaysia                                              30
                                                                          20
   5
                                                                          10
   0                                                                       0
                                                                         -10
  -5
                                                                         -20
 -10                                                                     -30
   Sep-07         Sep-08          Sep-09     Sep-10       Sep-11           Oct-07       Oct-08           Oct-09    Oct-10          Oct-11
Source: CEIC and Nomura Global Economics.                                Source: CEIC and Nomura Global Economics.




Gross domestic product (quarterly)                                        Industrial production (monthly)

% y-o-y                                                                    % y-o-y
 25                 Korea                                                  80                    Korea             Taiwan
  20                Taiwan                                                                       Singapore
                                                                           60
  15                Hong Kong                                              40
                    Singapore
  10                                                                       20
      5                                                                        0
      0                                                                   -20
  -5                                                                      -40
 -10                                                                      -60
   Sep-07         Sep-08          Sep-09     Sep-10        Sep-11           Oct-07        Oct-08          Oct-09     Oct-10          Oct-11

Source: CEIC and Nomura Global Economics.                                 Source: CEIC and Nomura Global Economics.




                                                                    41
Nomura | Asia Economic Monthly                                                                                                       24 November 2011




Purchasing manager’s index (monthly)                                           Leading economic index (monthly)

Index                                                                           % y-o-y
                           Korea              Singapore                                                 Australia               New Zealand
65                                                                              15
                           China              India                                                     China                   India
60                                                                              10
55                                                                               5

50                                                                               0

45                                                                              -5

40                                                                             -10

35                                                                             -15
 Oct-07          Oct-08            Oc t-09     Oct-10            Oct-11          Sep-07        Sep-08           Sep-09        Sep-10         Sep-11

Note: Korea’s PMI is the business confidence index, of which                   Source: OECD and Nomura Global Economics.
diffusion index converted from original 100 to 50.
Source: Markit; CEIC and Nomura Global Economics.



Industrial inventory-shipment ratios                                            Leading economic index (monthly)
 Ratio                                                                           % y-o-y
                                                      Taiwan                                            Indonesia                 Thailand
 1.6
                                                                                10                      Malaysia
  1.5                                                 Korea                      8
  1.4                                                 Thailand                   6
  1.3                                                                            4
  1.2                                                                            2
                                                                                 0
  1.1
                                                                                -2
  1.0
                                                                                -4
  0.9                                                                           -6
  0.8                                                                           -8
    Sep-07           Sep-08        Sep-09      Sep-10            Sep-11          Sep-07        Sep-08           Sep-09         Sep-10         Sep-11

Source: CEIC and Nomura Global Economics.                                       Source: OECD; CEIC and Nomura Global Economics.



Domestic motor vehicle sales (monthly)                                          Leading economic index (monthly)

 Millions of units                                                               % y-o-y                            % 6m rate of chan ge, annualised
                                                                                                  Korea, lhs
  2.0                                                                            20               Singapore, lhs                                40
                      China
  1.8                 Rest of Asia ex-Japan                                      15               Taiwan, rhs                                   30
  1.6                                                                                                                                           20
                                                                                 10
  1.4                                                                                                                                           10
  1.2                                                                             5
                                                                                                                                                0
  1.0                                                                             0
                                                                                                                                                -10
  0.8
                                                                                 -5                                                             -20
  0.6
                                                                                -10                                                            -30
  0.4                                                                             Sep-07       Sep-08         Sep-09        Sep-10        Sep-11
    Oct-07           Oct-08         Oct-09     Oct-10            Oct-11
                                                                                Note: For Taiwan, we use the annualized 6-month rate of
Note: Rest of Asia is the sum of domestic vehicle sales in India,               change, and use the y-o-y growth rate for other economies.
Indonesia, Malaysia, Philippines, South Korea, Taiwan and                       Source: CEIC and Nomura Global Economics.
Thailand.
Source: CEIC and Nomura Global Economics.




                                                                          42
Nomura | Asia Economic Monthly                                                                                                        24 November 2011




Current account balance (quarterly)                                              Exports (monthly)

USD bn                                     Australia, lhs       USD bn           % y-o-y                         Australia
 5                                         New Zealand, lhs        120           80
                                           India, lhs                                                            New Zealand
                                           China, rhs                             60                             China
  0                                                                   100
                                                                                                                 India
                                                                                  40
 -5                                                                   80
                                                                                  20
-10                                                                   60
                                                                                   0

-15                                                                   40         -20

-20                                                                20            -40
                                                                                   Oct-07       Oct-08        Oct-09         Oct-10         Oct-11
  Sep-07         Sep-08           Sep-09        Sep-10        Sep-11

Source: Australian Bureau of Statistics; Statistics New Zealand;                 Source: Australian Bureau of Statistics; CEIC and Nomura
CEIC and Nomura Global Economics.                                                Global Economics.




Current account balance (quarterly)                                              Exports (monthly)

 USD bn                          Indonesia                 Thailand              % y-o-y
  14                                                                             60
                                 Philippines               Malaysia
  12
                                                                                  40
  10
   8                                                                              20

   6                                                                               0
   4
                                                                                 -20
   2                                                                                                                            Indonesia
                                                                                                                                Thailand
                                                                                 -40                                            Philippines
   0
                                                                                                                                Vietnam
  -2                                                                             -60                                            Malaysia
   Sep-07         Sep-08            Sep-09        Sep-10        Sep-11             Oct-07       Oct-08        Oct-09           Oct-10       Oct-11

Source: CEIC and Nomura Global Economics.                                        Source: CEIC and Nomura Global Economics.




Current account balance (quarterly)                                              Exports (monthly)

USD bn                  Korea                       Taiwan                       % y-o-y
 16                     Hong Kong                   Singapore                    80                  Korea                        Taiwan
 14                                                                                                  Hong Kong                    Singapore
                                                                                  60
 12
 10                                                                               40
  8
                                                                                  20
  6
  4                                                                                0
  2
                                                                                 -20
  0
 -2                                                                              -40
 -4                                                                              -60
 -6                                                                                Oct-07       Oct-08       Oct-09          Oct-10        Oct-11
  Sep-07          Sep-08            Sep-09        Sep-10        Sep-11

Source: CEIC and Nomura Global Economics.                                        Source: CEIC and Nomura Global Economics.




                                                                            43
Nomura | Asia Economic Monthly                                                                                                          24 November 2011




Foreign exchange (monthly)                                                   Policy rate (monthly)
 Index (Jan 2007 = 100)                                                       %                                          Australia
  150             Australia               New Zealand                        10
                                                                                                                         New Zealand
  140                                                                         9
                   China                  India                                                                          China
  130
                                                                              8                                          India
  120
                                                                              7
  110
                                                                              6
  100
   90                                                                         5
   80                                                                         4
   70                                                                         3
   60                                                                         2
   Nov-07         Nov-08         Nov-09           Nov-10       Nov-11         Nov-07         Nov-08          Nov-09         Nov-10          Nov-11
Note: Foreign exchange is the country’s currency against USD                 Note: For China, the policy rate refers to 1 year bank lending
and converted into the index (2007 January = 100). Higher index              rate; for Australia and New Zealand, this refers to cash rate; for
means the country’s currency appreciate against USD. Last data               India, this refers to repo rate. Last data point is 23 November.
point is 23 November.                                                        Source: Bloomberg and Nomura Global Economics.
Source: Bloomberg and Nomura Global Economics.


Foreign exchange (monthly)                                                   Policy rate (monthly)

 Index (Jan 2007 = 100)                                                       %
  150                                                                                             Vietnam                   Philippines
                                                                             16
  140                      Malaysia                   Philippines                                 Malaysia                  Indonesia
                                                                             14
                           Thailand                   Indonesia
  130                                                                                             Thailand
                           Vietnam                                           12
  120
                                                                             10
  110
                                                                              8
  100
                                                                              6
   90
   80                                                                         4
   70                                                                         2
   60                                                                         0
   Nov-07         Nov-08         Nov-09           Nov-10      Nov-11          Nov-07         Nov-08          Nov-09         Nov-10           Nov-11

Note: Foreign exchange is the country’s currency against USD                 Note: For Philippines and Vietnam, the policy rate refers to
and converted into the index (2007 January = 100). Higher index              reverse repo rate; for Thailand this refers to repo rate; for
means the country’s currency appreciate against USD. Last data               Malaysia this refers to overnight policy rate. Last data point is 23
point is 23 November.                                                        November.
Source: Bloomberg and Nomura Global Economics.                               Source: Bloomberg and Nomura Global Economics.


Foreign exchange (monthly)                                                   Policy rate (monthly)

 Index (Jan 2007 = 100)                                                          %
                                                                             6                                          Korea
  150
                   Korea                   Singapore                                                                    Singapore
  140
                                                                             5                                          Taiwan
  130               Taiwan                 Hong Kong
  120                                                                        4                                          Hong Kong

  110
                                                                             3
  100
   90                                                                        2
   80
                                                                             1
   70
   60                                                                        0
   Nov-07         Nov-08         Nov-09           Nov-10       Nov-11        Nov-07         Nov-08           Nov-09         Nov-10           Nov-11

Note: Foreign exchange is the country’s currency against USD                 Note: For Hong Kong and Singapore, the policy rate refers to 3M
and converted into the index (2007 January = 100). Higher index              Hibor and 3M Sibor, respectively; for Korea this refers to BOK official
means the country’s currency appreciate against USD. Last data               base rate. Last data point is 23 November.
point is 23 November.                                                        Source: Bloomberg and Nomura Global Economics.
Source: Bloomberg and Nomura Global Economics.




                                                                        44
Nomura | Asia Economic Monthly                                                                                                 24 November 2011




Consumer price index (monthly)                                               Unemployment (monthly)

 % y-o-y                                                                         %
                         Australia              New Zealand                                   Australia
 18                                                                           7               New Zealand
                         China                  India
 16                                                                                           China
 14
                                                                              6
 12
 10
  8                                                                           5
  6
  4
                                                                              4
  2
  0
 -2                                                                           3
  Oc t-07        Oct-08           Oct-09        Oct-10        Oct-11          Oct-07        Oct-08           Oct-09     Oct-10         Oct-11

Note: Consumer Price Index for India refers to Wholesale Price               Source: CEIC and Nomura Global Economics.
Index.
Source: CEIC and Nomura Global Economics.




Consumer price index (monthly)                                              Unemployment (monthly)

 % y-o-y                              Indonesia, lhs       % y-o-y           %                       Indonesia            Thailand
18                                    Philippines, lhs          30           12                      Philippines          Malaysia
16                                    Thailand, lhs
14                                                               25
                                                                                                     Vietnam
                                      Malaysia, lhs                          10
12                                    Vietnam, rhs
10                                                               20           8
 8
 6                                                               15           6
 4
 2                                                               10           4
 0
-2                                                               5            2
-4
-6                                                              0             0
 Oct-07         Oct-08           Oct-09       Oct-10       Oct-11             Aug-07       Aug-08        Aug-09       Aug-10      Aug-11
Source: CEIC and Nomura Global Economics.                                   Source: CEIC and Nomura Global Economics.




Consumer price index (monthly)                                              Unemployment (monthly)

 % y-o-y                                                                     %
                           Korea                  Hong Kong                                         Korea                Taiwan
 10                                                                          8
                           Singapore              Taiwan                                            Hong Kong            Singapore
  8                                                                          7

  6                                                                          6

  4                                                                          5
                                                                             4
  2
                                                                             3
  0
                                                                             2
 -2
                                                                             1
 -4
  Oct-07          Oct-08          Oct-09        Oct-10        Oct-11         0
                                                                             Oc t-07       Oct-08           Oct-09    Oct-10         Oct-11
Source: CEIC and Nomura Global Economics.
                                                                            Note: Hong Kong's data is a 3 month moving average.
                                                                            Source: CEIC and Nomura Global Economics.




                                                                       45
Nomura | Asia Economic Monthly                                                                                                      24 November 2011




Stock price index (monthly)                                                House price index (monthly)

 Index (Jan 2007 = 100)                                                      Index (Jan 2007 = 100)
                                          Australia
  240                                                                         200
                                          New Zealand                                            Australia                 China
  220
                                          China                               180
  200                                                                                            New Zealand
                                          India
  180                                                                         160
  160
  140                                                                          140
  120                                                                          120
  100
   80                                                                          100
   60
                                                                                80
   40
   20                                                                           60
    Nov-07        Nov-08            Nov-09        Nov-10     Nov-11              Oct-07      Oct-08          Oc t-09          Oct-10         Oct-11

Note: Stock Price index for each country is rebased with 100 as the        Note: House Price index for each country is rebased with 100 as
index value in January 2007. Last data point is 23 November.               the index value in January 2007. For China, Average Residential
Source: S&P/ASX 200 (Australia); NZX (New Zealand); Shanghai               Bldg Selling Price is used to calculate the House Price Index.
Composite (China); SENSEX (India) and Nomura Global                        Source: CEIC and Nomura Global Economics.
Economics.


Stock price index (monthly)                                                House price index (monthly)

 Index (Jan 2007 = 100)                                                      Index (Jan 2007 = 100)
  240            Indonesia                   Philippines                       200                    Indonesia               Malaysia
  220
                 Vietnam                     Thailand                          180
  200                                                                                                 Thailand
                 Malaysia
  180                                                                          160
  160
  140                                                                          140
  120                                                                          120
  100
   80                                                                          100
   60
                                                                               80
   40
   20                                                                          60
    Nov-07        Nov-08            Nov-09        Nov-10     Nov-11             Oc t-07       Oct-08             Oct-09        Oct-10        Oct-11

Note: Stock Price index for each country is rebased with 100 as the        Note: House Price index for each country is rebased with 100 as
index value in January 2007. Last data point is 23 November.               the index value in January 2007.
Source: Jakarta Composite (Indonesia); FTSE Bursa Malaysia                 Source: CEIC and Nomura Global Economics.
Composite (Malaysia); PSEi (Philippines); SET (Thailand); Ho Chi
Minh City Index (Vietnam); CEIC and Nomura Global Economics.


Stock price index (monthly)                                              House price index (monthly)

  Index (Jan 2007 = 100)                                                  Index (Jan 2007 = 100)
  240                                                                    200
                            Korea                                                       Korea                     Hong Kong
  220
  200                       Hong Kong                                    180            Taiwan                    Singapore
  180                       Taiwan                                       160
  160
  140                       Singapore                                    140
  120
                                                                         120
  100
   80                                                                    100
   60
   40                                                                     80
   20                                                                     60
    Nov-07       Nov-08          Nov-09         Nov-10     Nov-11          Oct-07         Oct-08          Oct-09          Oc t-10        Oct-11
Note: Stock Price index for each country is rebased with 100 as          Note: House Price index for each country is rebased with 100 as
the index value in January 2007. Last data point is 23                   the index value in January 2007.
November.                                                                Source: CEIC and Nomura Global Economics.
Source: KOSPI (Korea); Hang Seng (Hong Kong); FTSE Strait
Times (Singapore); CEIC and Nomura Global Economics.




                                                                    46
Nomura | Asia Economic Monthly                                                                                                     24 November 2011




Forecast Table
                                                   Real GDP                                                Consumer Prices
                                  2011              2012                2013                2011                2012                  2013
Australia                         2.2                4.6               3.1                3.7 ↓ 3.5             3.7 ↓ 3.6            3.8
China                             9.2                8.6               8.4                5.6                   4.8                  4.5
Hong Kong                         5.4                4.5               4.2                5.3                   4.7                  4.4
India*                            7.3                7.9               8.1                9.4                   6.8                  7.1
Indonesia                         6.5                7.0               7.0                5.6                   5.8                  5.3
Malaysia                          4.7                5.1               5.0                3.1                   3.2                  3.1
New Zealand                       2.0                3.5               3.6                4.6 ↓ 4.2             2.9 ↓ 1.9            2.7 ↓ 2.3
Philippines                       4.5                5.7               6.5                4.9                   5.0                  5.0
Singapore                         4.8                5.3               5.5                5.0                   3.2                  3.0
South Korea                       3.5                5.0               4.0                4.5 ↓ 4.2             3.7 ↓ 3.5            3.0
Taiwan                            4.3                4.7               5.2                1.4                   1.2                  1.4
Thailand                          3.3 ↓ 2.2          4.7               4.8                3.8                   3.7                  3.6
Vietnam                           5.9                6.4               6.6               18.3                  10.0                  9.0
Asia ex Japan, Aust, NZ          7.6 ↓ 7.5         7.6              7.5                6.2                      5.0                  4.9
Note: * CPI refers to wholesale prices. Source: CEIC, Bloomberg, Nomura Global Economics.
                                         Current Account (% of GDP)                                    Fiscal Balance (% of GDP)
                                  2011             2012             2013                    2011                  2012                2013
Australia                        -1.8               -2.3              -2.8                -3.4                 -1.5                  0.2
China                             2.9 ↑ 4.5          1.4 ↑ 4.0         0.5 ↑ 3.5          -1.3                 -1.0                 -1.2
Hong Kong                         5.7 ↓ 3.9          4.7 ↓ 2.8         3.1 ↓ 1.2          0.2                   1.0 ↓ 0.9            1.0
India                            -2.8               -2.4              -2.6                -5.5                 -4.9                 -4.9
Indonesia                         0.4 ↓ 0.3          0.4 ↓ 0.2         0.0                -1.7                 -1.6                 -1.4
Malaysia                         15.2 ↓ 13.2       16.0               15.6                -5.3                 -5.1                 -4.6
New Zealand                      -4.5               -3.7              -3.8                -9.2                 -5.0                 -2.5
Philippines                       4.2                3.2               2.8                -2.1                 -2.3                 -2.4
Singapore                        18.5 ↓ 16.8       14.8 ↓ 13.4        14.2 ↑ 15.1         0.0                   0.1                  0.6
South Korea                       2.0                1.3               0.3                0.1                  -0.3                  0.2
Taiwan                            9.4 ↑ 9.5          9.3 ↑ 9.4         9.1 ↑ 9.2          -1.2                 -1.1                 -1.2
Thailand                          4.5 ↑ 4.7          2.5 ↓ 2.1         1.8 ↓ 1.4          -3.8                 -3.5                 -4.0 ↓ -4.2
Vietnam                          -4.6               -3.7              -3.3                -3.8                 -3.5                 -3.1
Asia ex Japan, Aust, NZ           2.2 ↑ 3.0           1.4 ↑ 2.7         0.7 ↑ 2.3              -2.2               -1.9                 -2.0
Note: Fiscal balances are for fiscal years which differ from calendar years for Australia (Jul-Jun), Hong Kong (Apr-Mar), India (Apr-Mar), New
Zealand (Apr-Mar), Singapore (Apr-Mar) and Thailand (Oct-Sep). Fiscal data are for the central government and do not include off-budget. Source:
CEIC, Bloomberg, Nomura Global Economics.
                                               Official Policy Rate                                     Currency per US Dollar
                                   2011               2012              2013               2011                  2012                 2013
Australia                        4.75 ↓ 4.50        5.00              5.50 ↓ 5.25        0.98                 1.05                  1.00
China                            6.56              6.81               7.06               6.33                  6.08                 5.88
Hong Kong                        0.28              0.28               0.28               7.80                  7.75                 7.75
India                            8.25 ↑ 8.50       8.25 ↑ 8.50        8.25 ↑ 8.50        49.8                  47.2                 45.6
Indonesia                        6.25 ↓ 5.75       6.00 ↓ 5.50        6.50 ↓ 6.00        9050                 8500                 8200
Malaysia                         3.00              3.50               3.75               3.18                  3.08                 2.96
New Zealand                      2.50              4.00               4.00               0.77 ↑ 0.80           0.90                 0.86 ↑ 0.90
Philippines                      4.50              5.00               6.00               43.7                  42.2                 40.8
Singapore                        0.35              0.35               0.63               1.31                  1.26                 1.22
South Korea                      3.25              3.50               4.00               1195                 1100                 1050
Taiwan                           1.88              2.25 ↑ 2.26        2.75 ↑ 2.76        30.7                  29.9                 29.0
Thailand                         3.50 ↓ 3.25       4.00 ↓ 3.75        4.50 ↓ 3.75        31.0                  30.0                 29.2
Vietnam                          14.00               10.00               10.00              21000            22500               23100
Note: All figures relate to the modal forecast, ie, the "most likely" outcome. Source: CEIC, Bloomberg, Nomura Global Economics.
The ↑↓ arrows signify changes from last week.




                                                                      47
Nomura | Asia Economic Monthly                                                        24 November 2011




Recent Articles
 Date                    Article Title
 18-Nov-11               Asia’s manufacturing sector under pressure
 18-Nov-11               A cold winter in China
 11-Nov-11               A condition for Asia's domestic-led growth
 4-Nov-11                Asia: The dilemma facing Asian central bankers
 3-Nov-11                Thailand: Dealing with another disaster
 2-Nov-11                China risks
 28-Oct-11               China bashing
 28-Oct-11               Australia and New Zealand: Inflation respite
 21-Oct-11               Asia's policymakers on the move
 19-Oct-11               Korea: Falling, converging bond yields
 14-Oct-11               Will housing investment hold up in China?
 14-Oct-11               India: A new manufacturing policy
 7-Oct-11                Modelling Asian inflation
 7-Oct-11                Indonesia: Capital flows – what's new and what's next?
 30-Sep-11               Hong Kong: RMB market evolves further
 23-Sep-11               Australia and New Zealand: Beacons in the gloom
 21-Sep-11               China: The case for structurally higher inflation
 16-Sep-11               Asia: Taking the pulse
 16-Sep-11               Singapore: Gauging the risk of the technical recession
 9-Sep-11                South Korea: Decline in long-term interest rates
 2-Sep-11                Asia: Financial decelerator effects
 26-Aug-11               Asia is shifting policy stance
 26-Aug-11               Indonesia: Maintaining fiscal conservatism
 26-Aug-11               Australia: Cutting 2011 growth, but lifting 2012
 19-Aug-11               China's soft landing despite external weakness
 12-Aug-11               Asia: Resilient for now
 12-Aug-11               Singapore: Low (if not negative) interest rates for longer
 8-Aug-11                Global market turbulence: Implications for Asia
 5-Aug-11                Hong Kong: Inflation rises amid solid growth
 29-Jul-11               Asia: Non-electronics sectors drive export growth
 29-Jul-11               India: Approaching a policy pause
 22-Jul-11               India: Managing the consumption-investment gap
 22-Jul-11               Thailand: New government, old (costly) policies
 15-Jul-11               South Korea: Prolonged wait-and-see mode
 8-Jul-11                Asia: Growing but diverging in 2013
 30-Jun-11               Asia: The risk of persistent inflation
 30-Jun-11               Thailand: Sister act
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 17-Jun-11               Indonesia: Building momentum
 17-Jun-11               China: Postcard from Wuhan
 10-Jun-11               Asia: Introducing the VIMPTs




                                                                  48
Nomura | Asia Economic Monthly                                                                                                             24 November 2011



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                                                                           49
Nomura | Asia Economic Monthly                                                                                                            24 November 2011



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