DELOITTE - Asia Pacific Economic Outlook by riteshbhansali


									             Asia Pacific
             In thIs Issue:

             The Philippines

April 2012

Reading tea leaves                                             suggesting that the currency is close to its “equilibrium”
This year, as Chinese leadership enters a period of            level. Wen was not specific about what types of
transition, the country will face many questions               reform he advocates. In addition, Chinese President
concerning its future policy decisions and what                Hu is reported to have told U.S. President Obama that
they will mean for China’s economic structure and              market forces will set the exchange rate in the future.
growth. Recent comments from current and future
                                                             •	Focusing on the issue of social harmony, Wen
leaders provide a bit of clarity on these issues.
                                                               said that “economic development has produced
                                                               unfair distribution, a lack of trust, graft, and
China’s Premier, Wen Jiabao, who will retire at the end
                                                               other problems.” He also said that resolving these
of the year, suggested that China is at a turning point
                                                               issues will require political reform. This is not the
and must make the right choices or risk social turmoil
                                                               first time that high-level Chinese officials have
similar to the Cultural Revolution of the 1960s and
                                                               focused on income distribution. It is an issue that
1970s. He recently held an unusual three-hour press
                                                               is clearly top-of-mind for many Chinese officials.
conference in which he focused on several key issues:
                                                             •	 While home prices have declined, they are “far
•	Successful economic reform will require more                  from returning to reasonable levels.” He said that
  political reform. While vague, his comment                    the government must continue to curb real estate
  indicates a desire for more democratic reform.                speculation. He said that not everyone needs to
  Wen has discussed this before, but it is not clear            own a home and that more people should rent.
  whether or not such a view is widely held.                    Investment in real estate now accounts for 13
                                                                percent of GDP, which is a relatively high number.
•	China’s growth in 2012 will be slower largely
  due to the European situation and its impact
  on Chinese exports. This is a commonly held                China’s incoming Premier Li Keqiang, who will replace
  view among private sector economists.                      Wen Jiabao at the end of the year, concurred with Wen
                                                             and said that China must accelerate the process of
•	China will “step up exchange rate reforms.” Wen
                                                             reform. He said that China must “deepen reforms on
  repeated yesterday’s remarks by a central bank official,
                                                             taxes, the financial sector, prices, income distribution

                                                                            Asia Pacific Economic Outlook — April 2012      2
A debate is stirring as to whether China faces a
hard landing (growth under 6 percent) or a soft
landing this year.
and seek breakthroughs in key areas to let market forces        China’s own steel industry association says that, in 2012,
play a bigger role in resource allocation.” Li’s statement is   growth in demand for steel will only be about 4 percent.
significant for backing up Wen’s pro-reform statements
last week because it suggests that there is a consensus         In addition, the pace of foreign direct investment into
about the need to continue the process of reform.               China declined in February for the fourth consecutive
                                                                month. This is likely due to concerns about the slowdown
Recent economic news                                            in China’s economy. It could also reflect concern about
A debate is stirring as to whether China faces a hard           rising wages and a rising currency, thus making China a
landing (growth under 6 percent) or a soft landing              less competitive exporter. The U.S. Chamber of Commerce
this year. Although the government has cut its growth           in Shanghai, in a survey of members, found that many
forecast from 8.0 percent to 7.5 percent, many analysts         U.S. companies are concerned about the difficulty of
see this as a soft landing and expect as much.                  finding and retaining skilled labor in China. This may
                                                                reflect declining migration from rural to urban areas.
There is conflicting evidence about the direction of the        The government says it wants to shift foreign direct
economy. On the positive side, a purchasing manager’s           investment away from manufacturing and toward services.
index for Chinese manufacturers rose to a 12 month
high of 53.1 in March. This was compiled by the                 Given all this, most analysts continue to believe that
Chinese government. However, there was negative                 monetary policy will be loosened in order to boost a
news as well. A similar index posted by a private sector        stalling economy — especially as inflation has retreated
commercial bank indicated a decline in manufacturing            significantly from its highs last summer. The central
activity. The latter report also indicated a decline in         bank has cut the required reserve ratio for banks several
export orders. Analysts point out that the government           times and is expected to cut interest rates in the near
index is skewed toward large, state-run enterprises             future. In addition, credit is being funneled toward rural
and also fails to adequately account for seasonality.           areas and small businesses. Evidently, the government
                                                                is trying to balance its concerns about inflation with a
In addition, one of the world’s largest mining companies        desire to keep growth from falling too far. Thus, the
said it is seeing a flattening of demand for steel in China.    expectation of a soft landing remains warranted.
It said that big infrastructure spending is slowing and that
a shift toward consumer demand in China is taking place.

                                                                              Asia Pacific Economic Outlook — April 2012     3

Japan’s economy is recovering, albeit slowly.                 his party’s consent, followed by the approval of his
Investors and other market participants are bullish           coalition government. Achieving an intraparty consensus
about Japan’s growth prospects in 2012, owing                 to raise the consumption tax rate from the current 5
to signs of improvement in the U.S. economy and               percent to 8 percent in April 2014 and to 10 percent in
a brighter outlook for the Eurozone. If positive              October 2015 is the immediate challenge for the DPJ.
news in the external macroeconomic environment
persists, exporters will likely benefit. Private spending     Meanwhile, the Bank of Japan took additional steps
has picked up, and the outlook for capital spending           during its policy meeting in March to increase lending.
is positive for the first time in eight months. Private       The bank extended its lending program for the growth-
consumption, which accounts for more than 50 percent          sector industries by 2 trillion yen. As of now, the total
of Japan’s GDP, was resilient in January and February.        size of the program is nearly 5.5 trillion yen. In addition,
Moreover, domestic demand and industrial production           the deadline for applications for new loans under the
are trending upward. GDP growth is unlikely to be very        Growth-Supporting Funding Facility was extended to
high. However, Japan’s economy could experience a             March 31, 2014. The Bank of Japan is trying to achieve
period of stable growth over the next few quarters.           two goals. First, by scaling up the asset purchase
                                                              program and maintaining a near-zero interest rate
The government’s bill for raising the consumption tax         policy, it is trying to boost inflation in the economy.
awaits parliamentary approval. Tax opponents within           Second, increased liquidity is expected to dampen the
the Democratic Party of Japan (DPJ) want the tax hike         unprecedented rise in the value of the Japanese yen.
to be contingent on real economic growth of at least          If successful, the lending program will compensate,
2 percent. The bill, in its current form, allows sufficient   at least partially, for the lack of private investment in
headroom to shelve tax increases if the economy stalls.       Japan. Stemming the appreciation of the yen bodes well
However, it does not warrant an economic rebound as           for Japanese exporters who are finding it increasingly
a pre-condition for raising the tax rate. Before the prime    difficult to compete with other regional players.
minister presents the bill to parliament, he must achieve

                                                                             Asia Pacific Economic Outlook — April 2012      4
Despite the overall positive outlook and the
optimism around Japan’s economy, the
government remains cautious.
Furthermore, in January 2012, Japan experienced an          In addition, Japan’s job market is nothing short of
unprecedented current account deficit because exports       dire. According to government estimates compiled
dropped, and the import bill shot up due to rising          by the Cabinet Office, half the 2010 graduates from
fuel costs. The rising yen and weak external demand         universities and technical colleges and two-thirds
were cited as the main reasons for the deficit, but         of high school graduates are either unemployed,
analysts expected Japan’s current account to return         working as temporary staff, quitting their jobs, or
to surplus in February, riding on Asia-bound exports.       expecting to quit their jobs within three years. Ominous
In line with expectations, exports rose in February,        employment trends and an aging population will likely
and Japan reported a trade surplus. In addition, the        weigh in on the Japanese economy sooner rather than
yen’s recent decline favored Japan’s export sector.         later. Together, these factors could be detrimental
                                                            to the growth of domestic demand in Japan.
Despite the overall positive outlook and the optimism
around Japan’s economy, the government remains              The recovery is underway, but Japan’s worries are far
cautious. The phase of rebuilding Japan’s economy           from over. Dysfunctional nuclear power plants have
has been slow and arduous. Rising inventory levels do       resulted in excessive reliance on imported gas and
not bode well for future production. Moreover, new          petroleum products, leading to deficits. Moreover,
export orders declined from 50.2 to 47.1 in February.       currency appreciation has stifled export-led growth.
Perhaps, the rising demand for Japanese goods was a         Reconstruction activity and public sector spending are
temporary result of the flood in Thailand. As Thailand’s    expected to support the economy. However, the pace of
manufacturing sector returns to normal, output levels       reconstruction-led growth has been less than satisfactory.
may drop in Japan. Furthermore, Japan confronts             The silver lining, however, is that investors and businesses
significant downside risks posed by the possible            are optimistic about Japan’s prospects in 2012.
worsening of Europe’s sovereign debt crisis, escalating
oil prices, and the possibility of a global deceleration.

                                                                          Asia Pacific Economic Outlook — April 2012       5
The Philippines

The Philippine economy is expected to grow at a              building infrastructure program worth PHP10.4 billion
modest pace of around 4.0–4.5 percent in 2012.               ($241 million) in early January, setting pace for the
Dwindling exports are not expected to see a noteworthy       rest of the year. The administration plans to roll-out 17
turnaround because external demand conditions remain         infrastructure projects worth over PHP200 billion this
weak. Meanwhile, domestic consumption and investment         year, about eight of which are expected to be announced
are expected to stay the course and propel the economy       within the first half of the year. It remains to be seen how
forward this year. After under-spending budgeted             successful it will be, given results achieved in 2011; last
allocations in 2010–2011, the government expects             year, ten PPP projects were expected to be announced,
significant improvements in public spending and project      but only one project was implemented. Nevertheless,
execution in 2012. If it succeeds in achieving its target,   substantial efforts have been made to fast-track the PPP
infrastructure development could play an important role      program this year, including sanctions of additional funds,
in brightening the country’s long-term growth prospects.     which indicate a sense of urgency. The government
However, due to the long gestation periods of these          has allocated PHP182.2 billion for PPP projects in 2012,
projects, significant benefits from these investments        which are crucial to addressing infrastructure bottlenecks
may not be immediately visible. Nonetheless, proactive       and attracting more foreign investment in the future.
public sector participation and timely achievement
of targets could go a long way in improving private          To fund its rising expenditure while protecting the
sector confidence and also help the country attain an        environment at the same time, the government is trying to
investment grade sovereign credit rating, which could        reform mining regulations. The finance minister reportedly
attract more foreign investment into the country.            announced that the government is not getting its fair
                                                             share of mining revenue at present. It is estimated that
Public spending under the government’s flagship              in 2011, tax collected from the mining industry was $47
PPP program gained momentum during the past few              million, accounting for just 0.2 percent of total national tax
months. Following a substantial increase in spending in      collection. Details of the new mining executive order are
December 2011, the government tendered a school-             still undeclared, but it is widely rumored that the industry

                                                                           Asia Pacific Economic Outlook — April 2012       6
Going forward, external demand is expected to
remain subdued, forcing the economy to rely
on domestic consumption and investment.
could potentially face higher taxes in the future. Such       sent food prices soaring. However, inflation has been
a reform could also see some financial incentives being       declining in recent months because food stocks, the
taken away from foreign companies. The government             largest component of the CPI basket, are recovering.
believes this step to ensuring long-term sustainability       From 4.0 percent in January, annual inflation slowed
is essential, but the industry is critical of its near-term   down to 2.7 percent in February — its lowest level in 29
impacts, which could result in investment delays.             months. Decelerating inflation has afforded the central
                                                              bank room to loosen its monetary policy rates in order
In addition to modification of the mining tax, the            to stimulate the economy. Interest rates were slashed in
government is contemplating an inflation-indexed excise       January this year, and given lackluster export prospects and
duty on alcohol and tobacco. Analysts estimate that the       a declining manufacturing sector, the central bank may
proposed legislation could double the government’s tax        continue to slash interest rates in the months to come.
revenue from alcohol and tobacco to about PHP60 billion
within the first year of implementation. The Philippines      The 3.7 percent GDP expansion recorded last year was
came under pressure from the World Trade Organization         slower than expected because declining export demand
to restructure its excise duty on alcohol and tobacco,        weighed down on the local electronics and electrical
which it considers discriminatory. Although inflation is      equipment industry. Going forward, external demand
under control at the moment, a hike in the prices of          is expected to remain subdued, forcing the economy
alcohol and tobacco could likely exert upward pressures.      to rely on domestic consumption and investment.
Consumer prices in Asian economies are vulnerable             While the government seems committed to spurring
to external oil price shocks, which could be further          investment, ample liquidity and stable inflation will likely
exacerbated by an increase in excise duty at home.            foster healthy levels of household consumption, helping
                                                              to support 4.0–4.5 percent GDP growth this year.
Rising inflation had been a contentious problem in
2011 as floods in Thailand wiped out rice harvests and

                                                                             Asia Pacific Economic Outlook — April 2012      7

Despite some positive news emanating from                      benefitted from an increased demand for hard-disk
the Eurozone, economists remain less than                      drives following the Thai flood. Overall, the outlook
optimistic about Singapore’s growth prospects                  for Singapore’s manufacturing sector is lackluster, and
in 2012. Two factors weigh heavily on the outlook              expectations are likely to be lower over the next quarter.
for Singapore. First, rising oil prices and the possibility
of a continuing price spiral do not bode well for a            A strong performance in manufacturing translated into a
net energy importer like Singapore. Second, Europe’s           robust export performance. Non-oil exports outstripped
austerity measures and a possible slowdown in China            consensus expectations, rising 30 percent year-over-year in
limit the upside for export-led growth. While some             February. Pharmaceuticals, electronics, semiconductors, and
economists opine that China may not experience a               disk-drives registered significant growth rates. However,
hard landing, an uncertain external environment casts a        demand in key export markets was reportedly weaker.
shadow of doubt over Singapore’s growth prospects.             New export orders have declined across sectors, and the
                                                               factors affecting demand in the United States and Europe
Manufacturing output contracted 9.6 percent in January,        do not augur well for the export sector. As a result, growth
but it rose by 12.1 percent in February. The recent            in exports is likely to be weak in the coming months.
improvement over January’s disappointing performance
is a welcome sign, however, the manufacturing                  Meanwhile, Singapore’s CPI declined from 4.8 percent in
sector underperformed against median expectations.             January to 4.6 percent in February. Despite the dip, price
Furthermore, output from the biomed sector rose 38.3           levels remain elevated. Food, housing and, transportation
percent, owing to a staggering rise in the output of the       prices increased in February. Core inflation rose by nearly
pharmaceutical sector. Traditionally, output from the          0.4 percent over the previous month. Going forward,
pharmaceutical sector, which is dominated by several           weaker economic activity in domestic and global markets
small firms, is extremely volatile because output fluctuates   is expected to reduce inflationary pressure. However, costly
dramatically when plants change product lines or close         crude oil and energy will likely pull prices upward. A new,
for maintenance. Meanwhile, the electronics sector             stricter foreign labor policy that’s designed to reduce the

                                                                             Asia Pacific Economic Outlook — April 2012     8
Overall, the outlook for Singapore is weak. The
government forecast for GDP growth stands
between 1.0 and 3.0 percent, which is a
significant deceleration from 2011.
country’s reliance on foreign labor is being implemented.        Positive news emanated from the housing sector. A rise
While the policy may have significant long-term benefits         in housing transactions propped up market sentiment,
for Singapore, it is likely to result in wage inflation in the   sidelining the concerns around an uncertain economic
near term. Amidst the inflation scenario, the Monetary           outlook and government measures to cool housing
Authority of Singapore is expected to continue with its          prices. Developers intensified efforts by launching new
current stance of allowing a gradual appreciation in the         projects and offering many more homes for sale. The
nominal effective exchange rate of the Singapore dollar.         buyer-led momentum resulted in a record 3,138 new
                                                                 home sales in February 2012. This buying momentum
Singapore recorded its lowest unemployment rate in over          is expected to continue unless the government
14 years, averaging just 2 percent. However, extremely           introduces another round of cooling measures.
low levels of unemployment are not necessarily a good
thing and could lead to higher living costs, significant         Overall, the outlook for Singapore is weak. The
wage inflation, and overall elevation in prices. Furthermore,    government forecast for GDP growth stands between
there is a huge disparity in employment levels across age        1.0 and 3.0 percent, which is a significant deceleration
categories. In fact, unemployment is as high as 61 percent       from 2011. One of the biggest risks to the global
for workers aged between 55 and 64 years. In addition,           economy is the price of oil, which can have a cascading
workers in their 40s and 50s are the first to be laid-off.       effect on Singapore’s export-dependent economy. If
By the end of the year, Singapore’s unemployment rate            Singapore’s currency appreciates rapidly on the back of
may climb to 2.3 percent, but correcting the disparity           rising capital inflows, exports could slide even further.
in employment may require stringent policy initiatives.

                                                                               Asia Pacific Economic Outlook — April 2012    9

The reelection of President Ma Yeing-jeou, who is            bolstered to a certain extent by resumption of activity
in favor of warm cross-strait relations, seems to            after the Chinese New Year. On a seasonally adjusted
have injected temporary optimism in the Taiwanese            basis, unemployment dropped to 4.2 percent in
economy. The export-dependent economy lost steam             February, and earnings registered a modest increase.
in 2011 because of dampening external demand, and            Further improvements in relations with China could
thus, improving cross-border trade relations is considered   potentially encourage more trade and investment,
a fillip to exports. The government adopted a proactive      thereby enhancing labor market conditions at home.
stance toward improving relations with China as well as
reopening previously stalled trade talks with the Unite      However, despite recent optimism, the Taiwanese
States. This has been welcomed by businesses, which          economy remains vulnerable to external headwinds. Due
have significant economic interests in China and the         to its substantial reliance on export demand from the
United States — two of its main export destinations.         mainland, Taiwan’s economic fortunes are increasingly
                                                             tied to the Chinese economy, which is expected to expand
Stock markets have rallied since January, reflecting         at its slowest pace in a decade. Growth prospects of its
strengthening investor sentiment. HSBC/Markit’s              other important export markets are not encouraging
Purchasing Managers Index (PMI), another indicator of        either; the Eurozone is expected to contract this year,
investor confidence, also increased to 52.7 in February      and the United States will likely see only modest growth.
from 48.9 in January. PMI entered expansionary territory     In fact, the first two months of this year saw Taiwan’s
(a reading above 50) after eight straight months of          exports contract by 4.5 percent year-over-year while
contraction. Consumers are also more optimistic about        export orders for the future also remained weak.
jobs, household finances, and the local economy; the
consumer confidence index compiled by the National           Another big risk to the export sector comes from the
Central University rose for a third consecutive month        implementation of a Free Trade Agreement (FTA) between
in March. Consumers’ spending capacity is looking            the United States and South Korea. South Korean exports,
up as employment and earnings have improved,                 which compete with Taiwanese exports in the U.S.

                                                                          Asia Pacific Economic Outlook — April 2012   10
Given the risks of inflation, currency volatility,
and uncertain global demand, the recent
optimism in the economy may be short-lived.
market, will now face little or no tariff on most product     sharp exchange rate appreciation (driven by speculative
categories. This could squeeze out Taiwanese exports          inflows), which could exert upward pressure on inflation.
and cost the economy up to $3 billion in revenue. The
industries that will likely be most affected are textiles,    The first two months of 2012 recorded 1.3 percent
chemicals, and heavy machinery. South Korea is also           inflation, which is expected to average 1.4 percent
currently in talks with and Japan and China regarding         throughout the year. So far, the central bank has
a three-way trade pact. This could pose a major threat        maintained its main policy rate at 1.9 percent since
to the economy if Taiwan does not manage to attain            September last year. Going forward, the central bank
similar preferential treatment for its own exports.           will keep a close watch on external developments and
                                                              subsequent risks to inflation. However, weak prospects
Even as the government ramps up its efforts to sign FTAs,     of the global economy may pose a policy dilemma for
seek more FDI from China, and liberalize its own trade,       the central bank as raising interest rates could hurt
it will likely face opposition from domestic groups that      growth. Given the risks of inflation, currency volatility,
may assume additional risk if Taiwan decides to open up       and uncertain global demand, the recent optimism in
its economy. Meanwhile, the economy is expected to be         the economy may be short-lived. Taiwan’s economic
supported primarily by domestic consumption. Upbeat           performance this year will depend on developments
consumer confidence, improving retail sales, and low levels   abroad, and private consumption alone may not
of inflation bode well for consumption expenditure, which     be able to support growth beyond 3 percent.
is expected to expand by 2.7 percent in 2012. Risks to
this forecast come from a surge in global oil prices and a

                                                                           Asia Pacific Economic Outlook — April 2012      11
About the Economists
editor                                                           Contributors
                       Dr. Ira Kalish                            Pralhad Burli
                       Deloitte Research                         Deloitte Research
                       Deloitte Services LP                      Deloitte Services LP
                       Tel: +1 213 688 4765                      India Tel: +91 40 6670 1886
                       E-mail:              E-mail:

                      Dr. Ira Kalish is Director of Global       neha Jain
                      Economics at Deloitte Research.            Deloitte Research
He is an expert on global economic issues as well as             Deloitte Services LP
the effects of economic, demographic and social trends           India Tel: +91 40 6670 3133
on the global business environment.                              E-mail:

Managing editor
Ryan Alvanos
Deloitte Research
Deloitte Services LP
Tel: +1 617 437 3009

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                                                                             Asia Pacific Economic Outlook — April 2012   12
Contact information
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                                                        Asia Pacific Economic Outlook — April 2012   13
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