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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.
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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
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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
24-Jun-11 China: Investing to save on labour
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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