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					Global economic outlook

Resilient ASEAN provides shelter
from G2 & China volatility

November 2012

P. K. Basu, Regional Head of Research & Economics
(65) 6432 1821
 Concerted easing: US M2-growth was healthy even before
 QE3; EU M3 growth has been depressed for 4 years

           US: money multiplier edging up; M2 decelerating as base money declines

                                                                                                             EU: M3 sluggish, as recent surge in base-money wanes
14                                                                                  120            14                                                                       70
                                                                                                   13                                                                       60
12                                                                                  100
                                                                                                   12                                                                       50
10                                                                                  80             11                                                                       40
 8                                                                                  60             10                                                                       30
                                                                                                    9                                                                       20
 6                                                                                  40
                                                                                                    8                                                                       10
 4                                                                                  20              7                                                                       0
 2                                                                                  0               6                                                                       -10
                                                                                                    5                                                                       -20
 0                                                                                 -20
                                                                                                    Aug-02     Aug-04           Aug-06     Aug-08         Aug-10       Aug-12
 Aug-62         Aug-72         Aug-82            Aug-92        Aug-02         Aug-12
                                                                                                              Money multiplier (x): LHS             Base money: YoY%
                   Money Multiplier (M2x): LHS            Base Money: YoY%                                    Money supply: M3: YoY%
                   Money supply: M2: YoY%

     Source: CEIC, MBKE                                                                       Source: CEIC, MBKE
      •    The 2008-09 collapse in the US money-multiplier was a natural consequence of the
           aftermath of a banking crisis. So QE2 was needed to boost the monetary base at a time
           when the money-multiplier was depressed. The money-multiplier is edging up now, and
           M2 growth of 6.5%YoY in Aug 2012 was still decent. FOMC’s focus on “maximum
           employment” suggests a tolerance for slightly higher inflation. Open-ended QE3 is a form
           of over-insurance against an economic downturn.
      •    The ECB targets headline (rather than core) CPI inflation (with M3 growth as the other
           twin of its “twin-pillar” approach to monetary policy). Eurozone M3 growth has been well
           below the ECB’s 4.5%YoY target (currently 3.2% YoY), so there is ample justification for
           the OMT, to backstop bond prices in the Euro-periphery. With ESM now able to proceed
           toward banking union, OMT too is a form of “over-insurance”. G2 policy is ultra-bullish
           for asset markets globally!
ISM new orders suggest a rebound in US demand by March 2013; EU was
dragging OECD demand down, but QE3 has swiftly changed that

                        OECD CLI is troughing, but suggests weak Asia exports until end-2012                                       US imports from Asia to decelerate, then regain momentum by March-April 2013
           50                                                                                        15                                                                                                                 35
           40                                                                                                        70
           30                                                                                                                                                                                                           25
           20                                                                                        5
           10                                                                                                                                                                                                           15
         (10)                                                                                        -5                                                                                                                 5
                                                                                                     -10             40
         (30)                                                                                                                                                                                                           -5
         (40)                                                                                        -15
            Jan-92   Jan-95      Jan-98        Jan-01       Jan-04        Jan-07       Jan-10   Jan-13               30                                                                                                 -15

                                                                                                                     20                                                                                                 -25
                                       Exports: Asia-9: YoY%: 3mma                                                    May-93     May-97                 May-01         May-05                 May-09               May-13

                                       OECD CLI (amplitude adjusted): YoY%: 6 m lag
                                                                                                                                  US ISM new orders (6m lag) (LHS)   US imports from Asia-10 (YoY %, 3mma) (RHS)

 Source: CEIC, Thomson Reuters, MB-KE                                                                          Source: CEIC, Maybank-KE

     •      The OECD composite leading indicator is rising from a year-on-year trough,
            suggesting a weak outlook for Asia’s exports until end-2012 before a slight rebound.
            Slumping EU demand was pulling the world (including Asia’s exports) into an abyss
            (until Draghi’s stabilizing moves in September).
     •      ISM new orders improved steadily from Nov11-May12 – suggesting an acceleration in
            Asia’s exports to the US in May-Nov 2012. But the severe setback for ISM new orders
            in June-Aug 2012 suggests rising risks of a sharp US deceleration in 1Q 2013; the
            onset of QE3, we believe, helps offset the fiscal risks at year-end, reflected in the
            latest sharp rebound in ISM new orders.
                                                                                                           3                                                                                                                  3
Private consumption in EM (Asia10+EM6) is 92% of that in the
US, but increasing three times as fast

  Source: CEIC, Thomson Reuters, PK Basu       Source: CEIC, Thomson Reuters, PKBasu

  •    Non-Japan Asia-10 plus EM6 (Brazil, Russia, Mexico, South Africa, Argentina and
       Turkey) have seen private-consumption expenditure (PCE) increase at more than
       twice the pace of that in the US since 2003 (except in 2010). We believe PCE
       growth in the Asia-10+EM6 should outpace that of the US considerably over the
       next five years.
  •    Asia10+EM’s private consumption is over 92% of that in the US. Even with our
       expectation of private consumption in the US remaining weak for the 2012-14
       period, we believe there will be ample consumption growth in the emerging
       markets – not replacing the US completely, but a substantial substitute for it.
Asia’s exports less dependent on G3 markets, and much more
driven by intra-Asia/EM demand

Source: CEIC, PK Basu; Asia-9 excludes China
Note: EU = European Union, Non-Asian EM aggregate includes Africa, LatAm, the Middle East, and East European EM not in the EU

 •     Asia is not immune to a G3 recession, but its dependence on G3 markets has
       declined, with an increasing share of exports going to emerging economies.
 •     Medium-term weakness in G3 demand will hurt Asia, but less than 30% of Asia-9’s
       exports go to developed markets, while nearly two-thirds goes to non-OECD
       emerging economies. China is more dependent on the OECD, but about half of its
       exports go to non-OECD economies.
 •     Given the large current-account surpluses, we think Asia has ample room to boost
       domestic demand in 2012 and subsequent years, but a stable China is key.

The US and Japan had prolonged bear markets after a five-fold surge
in market capitalisation; China too in the midst of one now

   16,000        Market Capitalisation trajectories (US$bn)                                2.5                    Market Cap to GDP Ratios
   14,000                                                                                  2.0
   10,000                                                                                  1.5
      8,000                                                                                1.0
      4,000                                                                                0.5
      2,000                                                                                0.0
         0                                                                                   Dec-90    Dec-93   Dec-96   Dec-99   Dec-02     Dec-05   Dec-08   Dec-11
         Sep-89 Sep-92 Sep-95 Sep-98 Sep-01 Sep-04 Sep-07 Sep-10                                      US                 UK                  Japan             China
          US      UK          Japan          China+HK         India   China (A+B+H)                   Brazil             India               Russia            China+HK

Source: CEIC, Thomson Reuters, MBKE                                                   Source: CEIC, Thomson Reuters, MBKE

  •       US equity-market capitalisation increased more than five-fold in the decade ended August
          2000, but only surpassed those levels again briefly (June-October 2007) before falling back.
          In effect, the US has been in a 10-year bear market since August 2000 – a lot like Japan,
          which recorded a similar five-fold surge in the 1979-89 period followed by a decade-long
          bear market until the end of 1999.
  •       The key difference between the two economies lies in their approach to monetary policy –
          the Bank of Japan (BoJ) tightened policy to deflate the asset bubble entirely, while the
          Federal Reserve has kept real interest rates low.
  •       Market capitalisation-to-GDP ratios are similar across developed and developing countries,
          with the ratios for most countries converging toward one.
 Non-Japan Asia should narrow its market-capitalisation gap with the
 US over the medium term

4,000       Market Capitalization - ASEAN and East Asia
                               (US$bn)                                                                Market Capitalization - BRICs
3,000                                                                           5,000                          (US$bn)
2,000                                                                           3,500
1,000                                                                           2,000
   0                                                                            1,000
   Jun-94    Jun-97      Jun-00     Jun-03     Jun-06     Jun-09     Jun-12         0
                                                                                    Jun-94   Jun-97       Jun-00     Jun-03      Jun-06       Jun-09     Jun-12
                  Singapore           HK                  Malaysia
                  Thailand            Korea               Taiwan                             China (A+B+H)             Brazil         India            Russia

    Source: CEIC, Thomson Reuters, MBKE                                       Source: CEIC, Thomson Reuters, MBKE

        •   High savings rates (over 50% for China, 35% for India, and 34% on average for the
            other economies in Asia) and stable banking systems with robust domestic
            deposit bases should provide the platform for strong economic growth over the
            medium term for Asia’s 10 big economies.
        •   Superior medium-term growth prospects for emerging economies should ensure
            faster increases in their market capitalisations, compared with those of
            developed economies. The market capitalisation of emerging economies should
            continue to narrow the gap with those of developed economies.
Asia: persistent overall BoP surpluses (even larger than current-
account surpluses) feed the tide of liquidity pushing up asset prices

 Source: CEIC, PKBasu.                           Source: CEIC, PKBasu

•    Asia has had consistent current-account surpluses since 1998, China since 1994.
•    In addition, unusually, Asia has consistently received net capital inflows since 1998 –
     which ensured that the overall BoP surplus was larger than the current-account
     surplus. In the past six years (2006-11), Asia-10’s current-account surplus averaged 5%
     and the overall BoP surplus was slightly smaller amid lower net capital inflows.
•    China’s surpluses are larger: the current-account surplus averaged 8.5% and the
     overall BoP surplus 10.6% of GDP from 2005-09, and 4% and 7% respectively in 2010-11.
•    Such persistent surpluses feed the tide of liquidity pushing up asset prices (and/or
     real-estate capacity), especially in the absence of local-currency appreciation.

Foreign reserves have stagnated in the past year; property
deflation likely to be a drag on China’s growth in 2013-15
                        NJ Asia's foreign reserves have stopped rising in the past year                                                 Japan and China: land price inflation
6,000,000                                                                                                  39
5,600,000                                                                                                          20
5,200,000                                                                                                  34
4,800,000                                                                                                  29      15               1H03                                  1H-FY90
4,000,000                                                                                                  24      10
3,200,000                                                                                                  19       5
2,400,000                                                                                                  14
2,000,000                                                                                                  9
1,600,000                                                                                                          (5)
1,200,000                                                                                                  4
  800,000                                                                                                                               Plaza Accord
  400,000                                                                                                  -1
                                                                                                                         T1   T5   T9     T13 T17 T21 T25 T29 T33 T37 T41 T45 T49
         Mar-05   Mar-06        Mar-07         Mar-08   Mar-09       Mar-10         Mar-11        Mar-12
                                                                                                                                              Japan: land price: %YoY (2H-FY78 = T1)
                   Asia-10 forex reserves, US$m (LHS)       Asia-10 forex reserves: YoY % (RHS)
                                                                                                                                              China: land price: %YoY (1H98 = T1)

 Source: CEIC, PKBasu                                                                                           Source: CEIC, PKBasu

 •      Asia’s foreign reserves declined slightly in 2H08 and 1Q09, but resumed rising strongly with
        the normalisation of global risk appetite from 2Q09. Since 3Q11, however, they have
        stagnated amid renewed risk aversion.
 •      In the era of QE, asset prices in Asia rose further. China, in particular, has already seen
        land-price appreciation since 2003 that exceeds Japan’s experience in the 1984-90 period.
        Currency appreciation served to temper slightly the tide of liquidity washing into asset
        markets, but the accumulated excess liquidity of the past kept asset prices inflated.
        Property deflation is a medium-term threat to China (a la Japan after 1990); we expect
        China’s real GDP to decelerate to 5% YoY average growth in 2014-15.

China: sustained rise in the M2/GDP ratio suggests ample room for
asset inflation; early action the key to preventing Japan’s fate
                                                                                                                     Investment spending (GFCF) as % of GDP
                   China: M2 has grown much faster than nominal GDP                      60
             100,000                                                              2.00
              80,000                                                              1.75
  (Rmb bn)

              60,000                                                              1.50
              40,000                                                              1.25

              20,000                                                              1.00   20

                    0                                                            0.75    10
                    Jun-94    Jun-97   Jun-00   Jun-03   Jun-06   Jun-09    Jun-12
                        Money Supply M2                      Nominal GDP: 4Q Rollsum
                                                                                              1986          1991              1996                2001          2006     2011
                        M2/GDP ratio (RHS)

                                                                                                     Source: CEIC, PKB     China         US          Thailand   Korea
             Source: CEIC, PKB

              China’s M2 is nearly 35% larger than the stock of M2 in the US (although China’s GDP is less
               than 40% the size of US GDP). The surge in the M2/GDP ratio (to 1.87 currently) suggests that
               a lot of the excess liquidity has gone toward inflating an asset bubble.
              Japan’s experience is instructive: the surge in M2 in 1985-90 clearly fuelled the asset bubble,
               and the sharp decline in the M2/GDP ratio in 1990-92 helped burst the bubble; once deflation
               set in, however, further increases in M2 have failed to ignite a rise in nominal GDP (or asset
               prices). China will need to avoid bursting the bubble with too much zeal, but will need a period
               (2013-15) of M2 growing less than nominal GDP, to rein in property inflation.
       China: FAI slowdown concentrated in residential buildings

40.00           Property investment now growing slower than overall FAI                                                 GDP growth usually responds to stronger loan growth with a lag
36.00                                                                                                                                                                               15.000
32.00                                                                                                   32.000                                                                      14.000
28.00                                                                                                   28.000                                                                      13.000
24.00                                                                                                   24.000                                                                      12.000
20.00                                                                                                   20.000                                                                      11.000
16.00                                                                                                   16.000                                                                      10.000
12.00                                                                                                   12.000                                                                      9.000
 8.00                                                                                                    8.000                                                                      8.000
 4.00                                                                                                    4.000                                                                      7.000
 0.00                                                                                                    0.000                                                                      6.000
    Sep-06          Sep-07            Sep-08         Sep-09    Sep-10          Sep-11          Sep-12
                                                                                                               Aug- Aug- Aug- Aug- Aug- Aug- Aug- Aug- Aug- Aug- Aug- Aug- Aug-
             Industrial Prodction YoY %                       Fixed asset investment: YTD: YoY %                00 01 02 03 04 05 06 07 08 09 10 11 12
             FAI: residential building: YTD: YoY %
                                                                                                                   Financial Institutional Loans, YoY % (LHS)   Real GDP, YTD, YoY % (RHS)
     Source: CEIC, MBKE

       China’s FAI is growing slower in 2012 (20.4% YoY, ytd to July) than any year in the past decade. But FAI in
        residential buildings decelerated to 5% YoY in June-July 2012, and non-residential FAI accelerated to 24.5%
        YoY in June-July (from 21%YoY in Jan-Apr 2012).
       Monetary easing usually works with a 2-4 quarter lag (eg, 2009), so the full impact will be evident only in 4Q
        2012 and 1Q 2013.
       In the medium-term, such rapid loan and M2 growth is unsustainable, so we expect them to be reined-in
        after the leadership transition is completed (March 2013).
    China: coping with demographic challenges

          Dependency ratio                                                                                                                                             China in 2020
                                                                                                                                                              Age                           millions of people
    100                                                                                                                                                                    Male                                        Female
                                                            Demographic                                                                                        80+
                                                              dividend                                                                                       75-79
                               China                                                                                                                         70-74
                                                                                                                   Japan                                     65-69
     80                                                                                                                                                      60-64
     70                                                                                                                                                      50-54
     60                                                                                                                                                      35-39
     50                                                                                                                                                      25-29
                                                                                                              Demographic debt                               10-14
     30                                                                                                                                                         0-4
                                                                                                                                                                      80   60     40   20          0         20   40     60     80
    Source: UN, PKB

     China’s demographic dividend will be depleted by 2013, when its dependency ratio is projected
      to resume rising.
     The supply of cheap labour can no longer be taken for granted, and the government too is
      focused on allowing wages to rise faster as labour force growth slows.
     The demographic transition to rising dependency ratios will mean the savings rate should fall
      and consumption should rise relative to investment – contributing to a global rebalancing.
Global imbalances: Non-China investment drought of the past
15 years likely to be relieved as China’s GFCF boom ends

                            Gross Fixed Capital Formation: 2011 vs 1996 (% change)                Asia-10's current account surplus moderating
         China(583.12%)                                                                                  (as % of GDP, 4Q rolling sum)
          OECD(30.08%)                                                                4
              US(27.05%)                                                              0
          Japan(-22.64%)                                                             (8)
       Thailand(-25.44%)                                                               Dec-96    Dec-99          Dec-02         Dec-05           Dec-08    Dec-11
 -200 -150 -100 -50         0   50 100 150 200 250 300 350 400 450 500 550 600 650                     Asia-10            US             ASEAN-4 + Korea

Source: CEIC, PKBasu                                                                 Source: CEIC, PKBasu
 •        Asia’s large current-account surplus was arguably a major contributor to the excess liquidity
          that led to the global crisis. The US deficit has shrunk over the past 5 years, as has China’s
          current-account surplus.
 •        The rest of Asia’s surplus widened in 2009, so the region as a whole recorded scant reduction
          in its surplus. As domestic demand rebounded in 2010-11, Asia’s surplus shrank further, to a
          still-healthy 4% of GDP.
 •        Structural surpluses in Southeast Asia are partly a consequence of an investment drought, only
          slightly relieved since 2010 (and especially in 2012). China’s low cost of capital (and under-
          valued Renminbi) has resulted in an investment boom there, and an excessively capital-
          intensive pattern of economic growth. To address such internal imbalances, expect China to
          allow the Renminbi to appreciate modestly to US$:Rmb6.28 by the end of 2012, 6.22 in 2013.
      The rest of Asia has lost US market share to China, but less so
      over the past five years

(%)       China has rapidly gained US market share in the past decade, less so recently (12-month
                                           moving averages)




 Apr-94       Apr-96   Apr-98       Apr-00       Apr-02   Apr-04    Apr-06       Apr-08       Apr-10   Apr-12

                        ASEAN exports: mkt share in US              China exports: mkt share in US

                        Taiwan exports: mkt share in US             S Korea exports: mkt share in US

      Source: CEIC, PKBasu                                                                                      Source: CEIC, PKBasu

          •       China gained market share in the US at the expense of all of Asia (except India, which
                  had a tiny share) from 1997-2005. Since 2006 (and until 2010), China’s market-share
                  gains were at the expense of non-Asia economies, while the rest of Asia held its US
                  market share stable. China’s own market share was stable in 2011-12.
          •       China did not gain market share during periods when the Renminbi appreciated
                  (although it did again in 3Q08-1Q10, when the Rmb was held stable).
          •       All of Asia (with the exception of India) has large bilateral trade surpluses with China,
                  and that mitigated the impact of the market-share loss in the US.

‘Stable disequilibrium’: China’s large surplus with the US and deficits
with Asia (ex-India) declined in 2009, but have widened anew since

                                Trade surpluses with the US                                                             China's bilateral trade balances with Asian economies
                                  US$m, 12m rolling sum                                                                              US$m, 12 month rolling sum
150,000                                                                                      (40,000)

100,000                                                                                      (60,000)
     0                                                                                              Apr-00   Apr-02       Apr-04          Apr-06           Apr-08          Apr-10   Apr-12
     Apr-96         Apr-00                 Apr-04                      Apr-08      Apr-12

                         China+HK         ASEAN-5             Korea+Taiwan+India                                ASEAN        Taiwan         India       Japan         Korea

Source: CEIC, Maybank-KE                                                                         Source: CEIC, Maybank-KE

      •       China’s large deficit with East Asia is increasing anew now that China’s loan and
              investment growth is rebounding. Note that Taiwan, Korea and Japan are the
              main net suppliers of capital and intermediate goods to China – and have large
              bilateral trade surpluses with China. ASEAN’s surplus reversed in 2009, but is
              rising slowly once again, while India has a deficit.
      •       China’s large bilateral surplus with the US shrank in 2009, but widened again in
              2010-11, flattening as China’s domestic demand slowed in early-2012. Bilateral
              deficits with Taiwan, Korea and Japan should widen in 2H12 as China stimulates.

  China: baseline forecasts

         China: Key Macroeconomic Indicators   2010      2011      2012E   2013F   2014F
         Real GDP Grow th (%)                     10.4       9.2     7.4     6.8      5.2
         Private Consumption (%)                  10.0       9.5     8.7     8.6      6.3
         Urban Fixed Asset Investment (%)         24.5      23.8    18.8    13.5      4.5
         Exports (US$, % yoy)                     31.3      20.3     6.2     8.4      9.5
         Imports (US$, % yoy)                     38.7      25.0     5.9     7.8      8.3
         Inflation Rate (% yoy, avg)               3.3       5.4     2.8     2.9      2.7
         Unemployment Rate (%)                     4.1       4.1     4.2     4.4      4.6
         Exchange Rate (per USD, end-period)      6.59      6.29    6.28    6.22     6.19
         Benchmark Interest Rate (% p.a.)         5.81      6.56    5.75    5.75      5.5
Source: Maybank-KE forecasts

Malaysia: Cyclical slowdown led by exports, but cushioned by
stable domestic demand

               Malaysia: Trade surplus stable despite decelerating exports & imports                           Leading index suggests mild recovery ahead
      50,000                                                                            60      30
                                                                                        50      25
      40,000                                                                            40      20
      30,000                                                                            30      15
      20,000                                                                            10      10
                                                                                        0        5
      10,000                                                                            -10      0
          0                                                                             -20
                                                                                        -30    (5)
   (10,000)                                                                             -40   (10)
          Mar-97          Mar-00        Mar-03         Mar-06          Mar-09      Mar-12     (15)
                                     Trade balance, US$ mn 12m rolling sum (LHS)              (20)
                                                                                                 Jun-00   Jun-02     Jun-04     Jun-06        Jun-08       Jun-10       Jun-12
                                     Exports (US$), YoY% 3mma
                                                                                                           IPI, YoY%, 3mma               Leading index, YoY%, 3mma, 3 mth lag
                                     Imports (US$), YoY% 3mma
                                                                                                Source: CEIC, PKBasu
 Source: CEIC, Maybank-KE
  •        Real GDP decelerated to 4.7% YoY growth in 1Q 2012, and should improve slightly in
           2H 2012, led by domestic demand. Despite the relative decline of manufacturing,
           Malaysia has comfortably sustained 4.5-5% annual real GDP growth over the past 15
           years – with soaring tourist arrivals driving the expansion of the services sector.
  •        After a decade of virtually no expansion in private investment spending, the latter
           rebounded in 2010, to enable the first year of productivity-led growth since the 1997-
           98 crisis; private investment has strengthened further in the latest two quarters. The
           New Economic Model (NEM), largely abandoning ethnic quotas, coupled with the
           Economic Transformation Program (EPT) should be a medium-term positive for fixed-
           investment spending.
 Malaysia: still large current account surplus, coupled with
 robust FDI inflow

                                   The current-account surplus shrinks to a 10-year low                                                      FDI inflows strong (after 2008-09 hiatus); portfolio flows are volatile
40                                                                                                                  30

30                                                                                                                  20

   Jun-02   Jun-03     Jun-04     Jun-05   Jun-06     Jun-07     Jun-08     Jun-09     Jun-10     Jun-11   Jun-12   (30)
                                                                                                                       Jun-02   Jun-03   Jun-04      Jun-05        Jun-06   Jun-07    Jun-08      Jun-09         Jun-10   Jun-11   Jun-12

      Current account: % of GDP      Merchandise balance: % of GDP        Services balance: % of GDP
                                                                                                                                     FDI into Malaysia: % of GDP                Portfolio investment: % of GDP

     Source: CEIC, Maybank-KE                                                                                       Source: CEIC, PKBasu

      •       The current-account surplus remains large, but the sharp decline since 2010 (to 4-8%
              of GDP in 1-2Q12, from 16-18% in 2005-09) is a good sign – of the first rebound in
              fixed-investment spending after a decade of investment-drought.
      •       The expanding role of Kuala Lumpur as a leading global centre for Islamic finance,
              and surging inflows of capital from OPEC and Asia boosted portfolio and FDI inflows.
      •       Portfolio flows remain volatile (correlated to global risk appetite), but FDI inflow has
              rebounded in 2010, 2011 and 1H 2012 to the levels (3-5% of GDP annually) that
              existed pre-1997, after a slump in 2007-09.

    Malaysia: fiscal deficit a seeming necessity over the past
    decade; monetary policy usually ahead of the curve

Source: CEIC, PKBasu                                 Source: CEIC, PKBasu

•    In 2010, 7% real GDP growth boosted revenue – but the continuing fiscal deficit of 5.6% of
     GDP last year was high compared with the rest of Asia. Notable fiscal improvement in 1H11
     lifted the 4-quarter moving average of the fiscal deficit to a 5-year low of 3.7% of GDP, but
     the full-year deficit moderated only slightly to 5% of GDP.
•    Monetary policy was ahead of the curve in 2010, with BNM the first Asian central bank to
     raise rates (mainly to preclude capital outflows). The 75bps of OPR hikes ensured steady
     appreciation of the Ringgit – and very modest increases in foreign reserves, limiting upside
     pressure on asset prices. The real interest rate stayed positive in 2009-10, turned negative
     briefly last year – but is solidly positive again. But with subsidy cuts likely to be passed
     through, we expect no further cuts in the OPR this year.
                                                19                                              19
India: external sector has been transformed by economic reform
   (YoY %) India: both merchandise and services exports soared over 2 decades
                                                                            (US$m)               Trade/GDP ratio resumes rising in the 1990s..having edged
  100                                                                           330,000                           lower until the mid 70s
    80                                                                          280,000   30
    60                                                                          230,000   25
    40                                                                          180,000
    20                                                                          130,000
     0                                                                          80,000    15
  (20)                                                                          30,000    10
  (40)                                                                          -20,000
     Mar-92        Mar-96        Mar-00        Mar-04        Mar-08        Mar-12
                      Merchandise exports: YoY % (LHS)                                    0
                      Invisible exports: YoY % (LHS)                                           1951 1957 1963 1969 1975       1981 1987 1993 1999 2005 2011
                      Merchandise exports, four-quarter rollingsum (RHS)
                      Invisible exports, four-quarter rollingsum (RHS)
                                                                                                             Exports, % of GDP         Imports, % of GDP
                                                                                           Source: CEIC, PKB
      Source: CEIC, PKB

  •      The export/GDP ratio declined from 7% in the early-1950s to 3-5% in much of
         the 1965-85 period, but has since rebounded steadily to 15.2% now.
  •      Goods exports rose from US$18.5bn in FY1990/91 to US$310bn in FY2011/12,
         and invisible exports from US$7.5bn to US$220bn over the period. The surge in
         exports (especially of services) enabled the import/GDP ratio to rise sharply
         (to 23%, from <10% in 1950-90), broadening consumer choice.
  •      Sharply rising incomes in the export sector (goods and services) have filtered
         through to the rest of the economy, pushing out India’s potential GDP growth
India: medium-term potential growth has risen with higher national
savings and investment rates; but the latter moderated in FY11/12

    (YoY %)                 India: real GDP growth, five- and ten-year moving averages
    12                                                                                                             10          India: Slight moderation in nvestment/GDP ratio slows growth pace   45
    10                                                                                                              9                                                                              40
      8                                                                                                             8                                                                              35
      6                                                                                                             7                                                                              30
      4                                                                                                             6
      2                                                                                                             5
      0                                                                                                                                                                                            20
    (2)                                                                                                             3                                                                              15
    (4)                                                                                                             2                                                                              10
    (6)                                                                                                                                                                                            5


                                                                                                                    0                                                                              0
                                                                                                                        1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
                 Real GDP              Real GDP, 10-year moving avg.        Real GDP, five-year moving avg.                          GDP: YoY%: 5yrMA(LHS)               GDI: % of GDP (RHS)

                                                                                                              Source: CEIC, PKBasu
    Source: CEIC, PKBasu

•         Real GDP growth slowed in FY2011/12 to 6.5%, primarily because of the moderation in
          the investment/GDP ratio to 35.5% (from 36.2% in FY10/11) – far from catastrophic,
          especially as the savings rate remained above 31%.
•         The 10-year moving average of real GDP growth has risen steadily – to 7.8% now (the
          same as the 5-year moving average, which peaked at 8.8% in FY2007/08, just before the
          global financial crisis). That inflation remains high despite the slowdown in GDP growth
          (almost “stagflationary”) is a reflection of the RBI’s policy error in 2010 (when it was
          too slow to raise rates amid 10%+ inflation, and had to consequently tighten too sharply
          in FY2011/12). Normalcy should be restored with another year of 6.5% growth.
India: services are structurally strong; the cyclical slowdown in capex
has reined-in manufacturing; new reforms should trigger recovery

 (YoY %)          Manufacturing contraction drags down real GDP growth                 70
                                                                                                  Industrial slump led by capital goods (YoY %, 3mma), recovery by consumer
  20                                                                                   60
  15                                                                                   50
  10                                                                                   30
   5                                                                                   20
   0                                                                                    0
  (5)                                                                                (10)
 (15)                                                                                   Jun-00    Jun-02        Jun-04        Jun-06        Jun-08          Jun-10      Jun-12
    Mar-02       Mar-04         Mar-06         Mar-08          Mar-10     Mar-12
                                                                                                             Consumer Goods                   Basic Goods
             Real GDP           Agriculture          Manufacturing       Services
                                                                                                             Capital Goods                    Intermediate Goods

 Source: CEIC, Maybank-KE                                                           Source: CEIC, Maybank-KE

        •    Services account for half of GDP, and have expanded at an average pace of 10% annually for the
             past 10 years. The wider cross-border tradability of services has bolstered their expansion, as
             India is still a price-taker for internationally-traded services. After decelerating substantially in
             the aftermath of the GFC, we expect Services to return to the pace seen in the previous decade.
             NREGA, and the shift in internal terms of trade in favour of agriculture, boosted rural
             consumption strongly. But policy paralysis contributed to the moderation in capex last year.
        •    The slump in manufacturing would have reduced the current-account deficit, but rising oil
             prices caused the deficit to widen to 4% of GDP for FY11/12. The weak rupee, and sharply lower
             oil prices, should allow the current account deficit to moderate sharply this year to 2.5% of GDP.

    India: the trade deficit widened sharply as oil prices soared, but is
    now set to decline with lower oil prices

                          India: trade deficit begins mild turnaround
                                                                                    70      150
    (20,000)                                                                        30
    (30,000)                                                                        10

    (40,000)                                                                        (10)      0

    (50,000)                                                                        (30)   (50)
           Jun-92        Jun-96       Jun-00         Jun-04         Jun-08     Jun-12      (100)
                                       Trade Balance, 3m rollsum, US$m (LHS)                   Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

                                       Exports, %YoY, 3mma (RHS)
                                                                                                               Oil imports: YoY%     Crude-oil price: mthly avg: YoY%
                                       Imports%YoY,3mma (RHS)

                                                                                           Source: CEIC, MBKE
    Source: CEIC, MBKE

•   The trade deficit widened to new record levels in FY2011/12, as surging oil prices raised the
    oil-import bill – causing imports to outpace even the fast 35%YoY pace of export growth.
•   With oil prices moderating in the Apr-Jun12 quarter, India’s exports resumed outpacing imports
    in Apr-May 2012 – and the trade deficit began to edge lower.
•   Crude oil prices, however were only down 4% YoY in May – but were 19.4% YoY lower in June
    2012, and should stay 5-25% lower than year-ago levels for July 2012-March 2013. Consequently,
    we expect the trade deficit to narrow further, and the current deficit to moderate to 2.5% of
    GDP in FY2012/13.

India: rising FDI inflows bolster the BoP; higher real lending rates are
likely to impede industrial growth in the near term

                   Strong capital inflows boost overall BoP
  40,000                                                                                              20                                                                                                             6.0
                               US$m, quarterly
  30,000                                                                                              15                                                                                                             4.0

  20,000                                                                                              10                                                                                                             2.0

  10,000                                                                                              5                                                                                                              0.0

          0                                                                                           0                                                                                                              -2.0

 (10,000)                                                                                             -5                                                                                                             -4.0

 (20,000)                                                                                            -10                                                                                                             -6.0
        Mar-03    Sep-04     Mar-06        Sep-07         Mar-09          Sep-10      Mar-12           Apr-01   Apr-02   Apr-03   Apr-04   Apr-05   Apr-06    Apr-07    Apr-08   Apr-09   Apr-10   Apr-11   Apr-12

                       FDI   Portfolio Investment   External Assistance    Commercial Bank Flows
                                                                                                                                                    IIP YoY     LI YoY (RHS)

Source: CEIC, MBKE                                                                                 Source: OECD, MBKE

      •       Despite policy paralysis, FDI inflows rebounded to US$33bn in FY2011/12 (from US$25bn in FY10/11) –
              although inflows were stronger in 1H-FY11/12 (US$21.87bn). Signs point to a rebound this year (IKEA,
              Coke, POSCO), especially as the New Manufacturing Policy (backed by the DMIC project) begins to
              have an impact. Opening multi-brand retail, aviation, broadcasting will induce more inflows too.
      •       The OECD leading indicator for India leads India’s industrial growth by 3-6 months – and it is pointing
              to a clear recovery ahead for industrial output. The real policy rate is also negatively correlated with
              industrial growth – and the continued decline in real interest rates should also contribute to igniting
              that industrial recovery. We expect industrial growth of 6% to allow real GDP growth of 6.5% in

India: equity valuations were expensive by Nov10, justifying the 2011
sell-off, but are now cheap; so is the rupee’s REER

              India: valuations (trailing P/E) at low end of 10-year average range                                Rupee's REER no longer overvalued -- even though ndia's inflation exceeds trading partners'

     20,000                                                                                 60         115
                                                                                            50         105
     14,000                                                                                 40          95
                                                                                            30          85
      8,000                                                                                 20
      6,000                                                                                             65
      4,000                                                                                             55
      2,000                                                                                0             May-97           May-00                     May-03                    May-06                    May-09     May-12
           Jul-96   Jul-98   Jul-00   Jul-02     Jul-04   Jul-06   Jul-08   Jul-10   Jul-12
                                                                                                                               REER, FY95=100 (6 currencies basket)          NEER, FY95=100 (6 currencies basket)
                     BSE Sensex-30 Index (LHS)                 PE Ratio: BSE Sensex (RHS)

Source: CEIC, MBKE                                                                               Source: CEIC, MBKE

 •       Equity valuations were indubitably expensive in November 2010, justifying the sell-off
         in Indian equities that lasted through 2011. The trailing PE ratio is now well below the
         mean of the past 15 years, making the market relatively cheap.
 •       The rupee’s NEER is at an all-time low; the rupee sell-off began in July 2011, when the
         REER was about 15% above its 15-year average level. Now, despite India’s higher
         inflation rate than that the average of its trading partners, the REER has moved below
         its 10-year mean. We expect the rupee to rebound to Rs53.50/US$ by March 2013,
         aided by a lower inflation differential with trading partners (WPI inflation should be
         below 6%YoY by October 2012).

Thailand: Severe investment drought since 1997, relieved
only during the 2002-06 period (when Thaksin was PM)
                                                        0 996 (% change)
                   Gro ss Fixed Capital Fo rmatio n: 201 / 1
                                                                                                  Thaiiland GFCF (THB bn)
        China (479.3% )                                                     1,400
        India (264.4% )
        S'pore (59.6% )                                                     1,200
   Philippines (39.9% )
    Indonesia (39.3%  )
        OECD (25.3%   )                                                      800
           US (26.0%  )
    Eurozone (22.3%   )
        Taiwan (19.7% )                                                      400
         Korea (19.5% )
            HK (15.3% )
     M alaysia (-0.6% )                                                        0
     Thailand (-27.8% )
         Japan (-31.1%)                                                             1982   1986   1990     1994   1998      2002   2006    2010

  (150)        (50)        50         150       250        350        450
                                                                                              GFCF         GFC: P rivate       GFCF: P ublic

   Source: CEIC, PKBasu                                                             Source: CEIC, PKBasu

  • Despite the 2010 rebound, the level of Thailand’s fixed investment
    spending was still nearly 28% lower than in 1996. Thailand has suffered a
    severe investment drought since the Asian Financial Crisis of 1997-98.
  • The only period of stronger investment spending was in 2002-06 (when
    Thaksin Shinawatra was PM): during that period, GFCF growth averaged
    9.2% (and private investment grew 12.4% annually; in 2007-10, private
    investment grew just 1.1% annually).

Thailand: fiscal stimulus likely to boost growth in 2012, and
actually improve fiscal balances if PTP stays in office until 2013

                   Fiscal deficit declines in 1Q11, as stimulus is pulled back                        30            Thailand: policy rate remains well above headline and core inflation
         5                                                                                            20

        (5)                                                                                            5
       (10)                                                                                           (5)
       (15)                                                                                             Aug-94   Aug-97          Aug-00          Aug-03         Aug-06   Aug-09   Aug-12
          Mar-94      Mar-97        Mar-00        Mar-03        Mar-06           Mar-09    Mar-12
                                                                                                                          1-day bilateral repurchase rate (%)
                        Cash balance; % of GDP                   Cash balance:% of GDP: 4qMA                              CPI: YoY%
                                                                                                                          Core CPI: YoY%

 Source: CEIC, PKBasu                                                                               Source: CEIC, Maybank-KE

   •      Thaksin’s fiscal stimulus kept the deficit large during his first year in office. But the
          substantial acceleration in real GDP strongly boosted government revenue – and pushed the
          fiscal balance into surplus by end-2002, and surpluses were sustained until 2006. This time,
          PTP will start from a similar fiscal position. Its fiscal spending will likely boost the deficit
          in Jan-Sep12 by 2% of GDP. If allowed to stay in office past 2012, the fiscal balance should
          begin improving in 2013, as a sustained economic rebound gains momentum.
   •      Thaksin also obliged the BoT to weaken the Baht soon after taking office in 2001. This
          time, the BoT’s anti-inflationary zeal is being countered by an easing of inflationary
          pressure amid post-flood weakness in economic activity. With headline inflation at 2.7%YoY
          in July-August 2012 (and core inflation below 2%YoY in May-Aug 2012), there is room for
          rates to decline anew.

 Election outcomes since 2001: Thaksin uber alles

    Year of                                                 "Thaksin" Party                    Democrat Party                             Others                   Coalition
    election          Total number of seats            Seats won      % of votes         Seats won       % of votes                      Seats won                government
                  500 (400 constituencies, 100
      2001        party list seats)                    TRT (248)          40.6                 128                26.6        NDP (29), TNP (41), NAP (36) TRT, NAP, TNP
                  500 (400 constituencies, 100                                                                                                             TRT single party
      2005        party list seats)                    TRT (375)          60.7                 96                 18.3             TNP (27), MH (2)        government
                                                                                                                                                           TRT single party
                  500 (400 constituencies, 100                                         boycotted the                                                       government (40
      2006        party list seats)                    TRT (460)          61.1           election                    0.0         boycotted the election    vacant seats)
                                                                                                                                                           PPP, TNP, CPP,
                  480 (400 constituencies, 80                                                                               TNP (37), CPP (24), TUNDP (9), TUNDP, NDP-2,
      2007        party list seats)                    PPP (233)          36.6                 165                30.3            NDP-2 (7), RPP (5)       RPP
                  500 (375 constituencies, 125                                                                                                             PT, CP, CPP, PC,
      2011        party list seats)                     TPT (265)         48.4                 159                35.2       BT(34), CP(19), PC(7), CPP(7) MH

TRT               Thai Rak Thai                       NDP           National Development Party (Chat Pattana)              MH (Great People's Party)         Mahachon
PPP               People's Power Party                CP            ChartThai Pattana (Thai Nation Development)            RPP (Phak Pracha Raj)             Royalist People's Party
NAP               New Aspiration Party (Chavalit's)   NDP-2         Neutral Democratic Party                               BT (Proud Thais Party)            Bhumjai Thai
TNP               Thai Nation Party (Chat Thai)       TUNDP         Thais United National Development Party
PC                Palung Chon                         CPP           Chart Pattana Puea Pandin (For the Motherland)

Source: Bangkok Post, Wikipedia
•       The pro-Thaksin party has comfortably won a plurality in every election since 2001, but the 2011
        victory was much more emphatic than in 2001.
•       Given that the coalition has 299 (of 500) parliamentary seats and PT alone has 265, PM Yingluck
        looks likely to survive through 2013 at least. Implacable hostility of elites have eased, and a
        genuine reconciliation appears possibly – implying that growth could well accelerate in 2013 to
        6%+ real GDP growth, as the full impact of the fiscal stimulus unfolds.

   Singapore: productivity declines, net employment gains are healthy

                     Productivity declines, so GDP driven entirely by net employment gains                 Productivity falls with decelerating machinery investment
                                                                                                (YoY %)
  15                                                                                             15
  10                                                                                             10                                                                           25
                                                                                                 5                                                                            15
                                                                                                 0                                                                            5
(10)                                                                                            (5)                                                                           -5
(15)                                                                                           (10)                                                                           -15
       4Q99        3Q01       2Q03          1Q05      4Q06        3Q08        2Q10     1Q12    (15)                                                                           -25
                                                                                                  Mar-00    Mar-02       Mar-04       Mar-06       Mar-08       Mar-10   Mar-12
              Growth in employment: % YoY          Growth in productivity: % YoY
                                                                                                             Productivity growth: YoY% (LHS)
                                                                                                             Machinery & equipment investment: YoY% (RHS)

        Source: MTI, CEIC, Maybank-KE                                                         Source: CEIC, Maybank-KE

       •        The flexibility of the labour market (‘when the going is good, the foreign workers pour
                in’) allowed 3-4% YoY growth in net employment over the past two years (and 8-9% in
                2007-1H08), but that model of growth is running out of political capital.
       •        Machinery investment drives productivity. The former was weak from 2005-09, hence
                weakening the productivity performance, but began to rebound in 4Q09, accelerated
                sharply in 2010, but lost momentum by 2H 2011, contributing to the slump in productivity
                in recent quarters. The strong recent investment commitments are likely to boost
                machinery investment and productivity over the next half year.

     Singapore: construction rebound to run out of steam soon, but the
     pipeline of machinery investment is strong

             Machinery investment to be boosted by large pipeline of investment                    Construction growth to run out of steam by 4Q-2012
                                       commitments                                                                  YoY %, 12mma
                                                                                         70                                                                                 120
                                                                                         60                                                                                 100
                                                                                         50                                                                                 80
                                                                                         40                                                                                 60
  60                                                                                                                                                                        40
  40                                                                                                                                                                        20
  20                                                                                                                                                                        0
   0                                                                                      0
                                                                                       (10)                                                                                 -20
(40)                                                                                   (20)                                                                                 -40
   Sep-92      Sep-96          Sep-00           Sep-04        Sep-08          Sep-12      Apr-01   Apr-03        Apr-05       Apr-07       Apr-09         Apr-11   Apr-13

             Net InvCommitments: YoY %, 4Qma, 2QLag                                                         Construction progress payments (LHS)
             Machinery/eqpt investment, YoY %                                                               Construction contract awards, 12m lag (RHS)

      Source: CEIC, Maybank-KE                                                           Source: CEIC, Maybank-KE

            • Foreign investment commitments have rebounded strongly in the past
              half year, and the large pipeline of commitments should bolster
              machinery investment in 2H 12.
            • However, the construction recovery is likely to run out of steam by
              4Q12, as contract awards (a 1-year leading indicator of construction
              activity) have decelerated in the past half year.

Singapore: leading indicators suggest real GDP will rebound from
2Q12, manufacturing strongly in 3Q12

               Leading indicator predicts real GDP is set to rebound                          Business expectations suggest manufacturing will recover strongly
  25                                                                                50                                                                                 60
  20                                                                                40                                                                                 40
  15                                                                                30                                                                                 20
  10                                                                                20
   5                                                                                10
   0                                                                                 0
  (5)                                                                             (10)                                                                                 -40
 (10)                                                                             (20)                                                                                 -60
 (15)                                                                             (30)                                                                                 -80
    Jun-96        Jun-00               Jun-04              Jun-08        Jun-12      Sep-94   Sep-97      Sep-00      Sep-03      Sep-06      Sep-09     Sep-12
                        Real GDP: YoY%               CLI: YoY%: 1Q Lag                                      Industrial production: qtly: YoY% (LHS)
                                                                                                            Business Expectations: %: 6m lag (RHS)

 Source: CEIC, Maybank-KE                                                          Source: CEIC, Maybank-KE

   • The composite leading indicator suggests real GDP is set to begin
     recovering in 2Q12 (from the 1Q12 trough of 1.6% YoY growth).
   • Manufacturers’ business expectations (which lead manufacturing output by
     two quarters) suggest another subdued quarter of growth for
     manufacturing in 2Q12, but a strong acceleration in 3Q12.

Singapore: fiscal surplus larger than official projections, so there is
room for fiscal stimulus if the need arises; more property curbs likely

               Singapore property prices remain affordable                                         Fiscal balance outperforms official estimates

      0                                                                           (12)
      Mar-92        Mar-96        Mar-00        Mar-04        Mar-08   Mar-12        Mar-96        Mar-00                Mar-04               Mar-08             Mar-12
                      Nominal GDP Index: Dec 87 = 100                                         Fiscal balance (operating revenue - total expenditure): % of GDP
                      Private Res Property Price Index: Dec 87 = 100                          Fiscal balance: % of GDP, 4Qma

Source: CEIC, Maybank-KE                                                        Source: CEIC, Maybank-KE

  •      The fiscal surplus for the fiscal year ending March 2012 widened to 1.45% of GDP (versus an
         official estimate of 0.4%), allowing ample room for additional fiscal stimulus later this year
         – should the need arise.
  •      This year’s Budget (like last year’s) included a slew of income transfers to lower-income
         households (some of whom received a boost of as much as 35% of GDP); but fiscal prudence
         was still evident (in an official projection of a small surplus).
  •      Property prices are affordable relative to 1988 and 1996, but tightening actions will
         continue (in order to contain speculative exuberance).

Indonesia: Non-volatile, sustained growth aided by low export/GDP
ratio; but IDR undermined by base money outpacing FX reserves

                                                                                                       IDR usually weak when base money outpaces foreign reserves
         Disaggregated contributions to real GDP growth (YoY%)                              80
  (2)                                                                                       20
  (6)                                                                                        0
    Jun-02       Jun-04         Jun-06       Jun-08        Jun-10          Jun-12          (20)
                                                                                              Aug-02       Aug-04      Aug-06        Aug-08        Aug-10          Aug-12
                          GDP                                    Private Consumption
                          Gvt Consumption                        GFCF
                                                                                                             Base Money: %YoY             Foreign Reserves: %YoY
                          Net Real Exports

 Source: CEIC, PKB                                                                     Source: CEIC, PKB

  •     China and India have not had a recession over the past two decades. Indonesia is
        the next best example of economic stability in Asia – with no contraction in real
        GDP since the AFC ended in mid-1999.
  •     Indonesia’s low export/GDP ratio should insulate it from the G3 downturn.
  •     However, Indonesia’s commodity-driven export basket (although highly
        diversified, and therefore less volatile) will suffer as commodity prices decline
        amid the global economic slowdown.
  •     Crucially, base money has outpaced foreign reserves this year – and the IDR is
        thus likely to continue under-performing other Asian currencies.

Indonesia: growth aided by domestic consumption, strong loans and
record inflows of FDI; but the higher fiscal deficit is a challenge

               Loan growth remains robust, as does deposit growth                                                Indonesia: large fiscal stimulus this year
                                                                                               (% of GDP)
           %                                                                                         8
     100                                                                          40
      80                                                                                            6
      60                                                                                            4

                                                                                       YoY %
                                                                                  20                2
       0                                                                          0
        Jul-04             Jul-06          Jul-08           Jul-10          Jul-12                 (4)

                Loan/Deposit ratio (LHS)                      Comm'l bank deposits (RHS)           (8)
                                                                                                     Jun-04      Jun-06              Jun-08              Jun-10   Jun-12
                Comm'l bank loans (RHS)
                                                                                                                Fiscal balance             Fiscal balance, 4qma

  Source: CEIC, Maybank-KE                                                                        Source: CEIC, Maybank-KE

  • We expect strong FDI inflows to continue strengthening fixed-
    investment, enabling real GDP growth of 6.2% in 2012.
  • Banks are still liquid (with a loan-to-deposit ratio of 85%), so there is
    scope to sustain loan growth.
  • But this year’s growth has been sustained primarily via a large implicit
    fiscal stimulus, with the 4qma of the fiscal deficit widening to 3.8% of
    GDP (the highest in 10 years), and the 1H 2012 deficit at 3.3% of GDP    .
    Indonesia’s growth outlook in 2013 is fiscally vulnerable.
Indonesia: robust FDI remains a big driver of growth, but trade
balance shrinks as exports decelerate but imports stay strong

               Realized foreign investment rebounds, and domestic capex is beginning      3m rolling sum,       Trade swings to a deficit, as exports slump       (YoY %, 3mma)
      25,000                                   to rise                                        US$m                          but imports don't
                                                                                               10,000                                                                            80
      20,000                                                                                    8,000                                                                            60
                                                                                                6,000                                                                            40
      15,000                                                                                    4,000                                                                            20
                                                                                                2,000                                                                            0
      10,000                                                                                         0                                                                           (20)
                                                                                              (2,000)                                                                            (40)
       5,000                                                                                  (4,000)                                                                            (60)
                                                                                                      Jul-96          Jul-00          Jul-04           Jul-08              Jul-12
               1993 1995 1997 1999 2001 2003 2005 2007 2009 2011                                           Trade balance (LHS)                     Exports (RHS)
                                                                                                           Imports (RHS)                           Non-oil exports (RHS)
                  Domestic Investment (USD mn)              Foreign Investment (USD mn)                    Non-oil imports (RHS)

Source: CEIC, Maybank-KE                                                                     Source: CEIC, PKB

 •    The trade balance has swung to a deficit, as exports have decelerated sharply with
      the moderation in commodity prices, but imports have remained relatively robust.
 •    FDI has staged a strong recovery in recent years, climbing to all-time highs in 2008,
      2010 and 2011, and boosting fixed-investment spending. Domestic investment too is
      picking up, so we expect fixed investment spending to remain a key driver of growth.

Indonesia: IDR pressured by sharp deterioration of overall BoP and
current account; equity valuations in the middle of their 10yr range

                                                                                            4,500        Indonesia: Valuations near the middle of post-crisis range,        35
     (US$m)         Capital flight minimal since 2006 (except 2H08)                                                   but well below pre-1997 PERs
                                                                                            4,000                                                                           30
     10,000                                                                                 3,500                                                                           25
       8,000                                                                                3,000
       6,000                                                                                2,500
       4,000                                                                                                                                                                15
       2,000                                                                                                                                                                10
           0                                                                                1,500
                                                                                            1,000                                                                           5
     (4,000)                                                                                  500                                                                           0
     (6,000)                                                                                    0                                                                           (5)
     (8,000)                                                                                    Aug-96          Aug-00              Aug-04             Aug-08          Aug-12
           Jun-97     Jun-00           Jun-03      Jun-06        Jun-09        Jun-12
                                                                                                                          Jakarta Composite Index (LHS)
                     Current account             Trade balance            Overall balance
                                                                                                                          Jkt Composite Index: PER ratio (RHS)

    Source: CEIC, Maybank-KE                                                                Source: CEIC, Maybank-KE

•      After severe capital flight in the early stages of the post-Lehman crisis,
       Indonesia’s overall BoP position had stabilised by March 2009, and was robust
       until mid-2011. With the current-account switching into deficit, the overall BoP
       too has been in deficit for the latest 4 quarters, pressuring the IDR.
•      After the multi-year surge in equity prices since 2004 (and the setback during the
       global downturn), the trailing PER (about 13x) is in the middle of its 10-year
       range, but still well below the pre-1997 valuations. Anti-foreigner legislation is
       particularly poorly-timed in these circumstances.

Philippines: export-led rebound aided by low real interest
rates, but momentum likely to slow later in the year

10                                                                                                                                -6
                      Rising real interest rates will restrain real GDP growth in 2H 2012
                                                                                                                                  -4                          Exports to the US set to lose momentum
 8                                                                                                                                -2       80                                                                      40.00
                                                                                                                                  2        60                                                                      20.00
                                                                                                                                  6        40                                                                      0.00
                                                                                                                                  10       20                                                                      -20.00
 0                                                                                                                                12
                                                                                                                                  14       0                                                                       -40.00
(2)                                                                                                                                16      Feb-89    Feb-93    Feb-97      Feb-01       Feb-05       Feb-09   Feb-13
  Dec-91     Dec-94              Dec-97              Dec-00             Dec-03              Dec-06               Dec-09       Dec-12

                                                                                                                                                                ISM new orders (6m lag, LHS)
                             Real GDP (% yoy, LHS)                                     Real 3m T-bill, %, 2Q lag (inverted)
                                                                                                                                                                US Imports from Philippines (% yoy, 3mma)
     Source: CEIC, Maybank-KE                                                                                                           Source: CEIC, Maybank-KE

     •     Real GDP expanded by 6.2% YoY in 1H 2012, as a strong export-led recovery took
           hold, augmented by the lagged benefit of low real interest rates in 2H 2011.
           With real interest rates edging higher (as inflation moderates faster than market
           interest rates), we expect a moderation in real GDP growth in 2H 2012, although
           potential growth rates have clearly risen.
     •     US and Asian demand have bolstered exports of goods and services, and the
           former is likely to be sustained – helping to partly offset the weakening in
           demand from the EU.

Philippines: fiscal gains of the past half-decade were reversed during
the global downturn, but the Aquino administration is regaining ground

                      Better revenue performance restrains fiscal deficit                     Tax collections improve slightly, helping to contain the fiscal deficit
       50                                                                   60       2                                                                                       18
        0                                                                   50       1                                                                                       17
      (50)                                                                  40
     (100)                                                                           0
                                                                                   (1)                                                                                       16
                                                                            10     (2)                                                                                       15
     (300)                                                                  0      (3)                                                                                       14
     (350)                                                                  (10)
     (400)                                                                  (20)
                                                                                   (5)                                                                                       13
                                                                                   (6)                                                                                       12
                                                                                     Mar-97         Mar-00           Mar-03            Mar-06           Mar-09          Mar-12
                            Budget balance: 12m rolling sum: PHP bn
                            Govt. revenues: YoY%: 3mma (RHS)                                            Budget balance (as % of GDP, 4Q rolling sum)
                            Govt. expenditures: YoY%: 3mma (RHS)                                        Government Tax Revenue (as % of GDP, 4Q rolling sum, RHS)

 Source: CEIC, Maybank-KE                                                          Source: CEIC, Maybank-KE

 •      The Arroyo (GMA) Administration widened the tax base (primarily through
        improved administration of the VAT), and this enabled the Philippines to report a
        fiscal surplus in 2007 (the first in a decade). The need to counter the global
        downturn caused fiscal gains to be drastically reversed between 4Q08 and 1Q10.
 •      President Benigno ‘Noynoy’ Aquino (in office since the end of June 2010) has
        reined-in the fiscal deficit, although most of the gains in the first 4-5 quarters
        came from sluggish spending. The rebound in the tax/GDP ratio is driving recent
        improvements, and enabling stronger government spending too.

Philippines: structural improvement in the current account has led to
a marked improvement in external liquidity

                    BPO and other services exports enable a structural improvement in the               Short-term external debt is less than one-tenth of total foreign reserves
                                              current account                                120
       3,000                                                                                 100
       2,000                                                                                 80                                                                                     60,000
           0                                                                                 60                                                                                     40,000
     (3,000)                                                                                 20
     (5,000)                                                                                   0                                                                                   0
           Jun-97       Jun-00         Jun-03           Jun-06           Jun-09     Jun-12     Jun-97           Jun-00         Jun-03          Jun-06          Jun-09         Jun-12
                                     Current account, 3m rolling sum, US$ mn                                                   FX reserves (US$ mn, RHS)

                                     Trade balance, 3m rolling sum, US$ mn                                                     ST external debt (as % FX reserves)

  Source: CEIC, Maybank-KE                                                                         Source: CEIC, Maybank-KE

• The other major gain of the past half-decade – a structural improvement
  in the current account, which moved to a surplus based on the Philippines’
  increasing role in business-process (and other services) outsourcing –
  continued even amid the global downturn.
• Consequently, foreign reserves rose three-fold in the four years to end-
  2010 (to US$61bn) and further to US$76bn by May 2012 – while external
  debt (especially short-term) moderated -- and the Philippines’ external
  liquidity position improved markedly. Investment grade rating likely soon.
ASEAN’s share of world population is much larger than its share of world
GDP, reflecting the latent potential for economic growth in ASEAN

                            GDP (US$ mn)                                                   P o pulatio n (mn)
 18,000,000                                                   1,500

 15,000,000                                                   1,200

  3,000,000                                                    300

         0                                                       0
               1990       1995   2000        2005     2010             1990          1995     2000           2005     2010
                 A SEA N-10 China India    Japan US    EU                     A SEA N-10 China India      Japan US   EU

Source: CEIC, Maybank-KE                                     Source: CEIC, PKB

   •    ASEAN’s population (605m) is nearly double that of the US (312m), but nominal
        GDP (US$1.92tn) is just over an eighth of the US ($14.66tn).
   •    In its heyday (1990-95), ASEAN’s nominal GDP expanded faster (+97%) than even
        China’s (+87%). But in 2005-10, both India (+107%) and China (+160%) have
        outpaced ASEAN (+104%). In the past 10 years, India’s GDP grew 277%, China’s
        390% and ASEAN’s 206%.
   •    As ASEAN integrates, it becomes a more enticing market. With a larger
        population than the EU-27, the potential size of ASEAN’s market is huge, as its
        economic potential is achieved.
New-ASEAN (Indochina+Burma) would benefit hugely from the
enhanced commercial integration of ASEAN

                                GDP (US$ mn)                                                         P o pulatio n (mn)
  6,000,000                                                        1,500



         0                                                            0
                1990     1995       2000      2005        2010                 1990       1995           2000           2005        2010
        A SEA N-6 New A SEA N    China India+Ko rea+Taiwan Japan           A SEA N-6   New A SEA N      China     India+Ko rea+Taiwan Japan

Source: CEIC, PKBasu                                                Source: CEIC, PK Basu

   • Within ASEAN, the original 6 have most of the wealth, and annual income
     (as represented by GDP), but new-ASEAN has huge potential (with a
     population totalling 170mn, and GDP of just US$170bn).
   • Integration would be a boon to new-ASEAN, especially as political
     changes now contribute to Burma’s ability to participate too. Indochina’s
     110mn people also represent spectacular potential.

ASEAN-6 current account surpluses can help finance capital
(especially FDI) inflows into new-ASEAN

   8               Current acco unt balance: % o f GDP              8               Current acco unt balance: % o f GDP

   6                                                                6
   2                                                                0
   0                                                              (2)
 (2)                                                              (4)
 (6)                                                             (10)
 (8)                                                             (12)
          1990          1995     2000            2005     2010             1990         1995          2000          2005        2010
                 A SEA N-10 China India       Japan US   EU             A SEA N-6    New A SEA N     China    India+Ko rea+Taiwan Japan

Source: CEIC, PK Basu                                            Source: CEIC, PK Basu

   • ASEAN-6 had current account deficits (despite Singapore’s already large
     surpluses) before 1997, but has now switched to large surpluses.
   • New-ASEAN still has current account deficits, with a relatively large one
     in Vietnam. But the obverse side of those deficits is the need for capital
     inflows (especially FDI), which is actually pouring into new-ASEAN (esp.
     Vietnam and Cambodia) now, especially from ASEAN-6 (and will likely
     flow to Burma soon as well).

Vietnam: last year’s aggressive rate hikes (and sharp VND devaluation)
have reined in the trade deficit and inflation

              Last year's rate hikes have tamed inflation, restoring a positive real rate                     Trade deficit moderates as export growth outpaces imports
                                                                                                     5,000                                                                                 100
    40                                                                                                                                                                                     80
    32                                                                                              (5,000)                                                                                40
    24                                                                                             (10,000)                                                                                20
                                                                                                   (15,000)                                                                                0
    16                                                                                                                                                                                     (20)
                                                                                                   (20,000)                                                                                (40)
     8                                                                                             (25,000)                                                                                (60)
                                                                                                         May-04              May-06             May-08              May-10            May-12
                                                                                                                                      Trade balance (US$m): 12 month roll sum (LHS)
     May-03                    May-06                       May-09                      May-12
                                                                                                                                      Exports (US$m) YoY%3mma(RHS)
                    Refinancing rate            CPI: YoY%                CPI (food): YoY%                                             Imports (US$m) YoY%3mma(RHS)

    Source: CEIC, Maybank-KE                                                                     Source: CEIC, Maybank-KE, IMF
•        The devaluation in November 2009 was accompanied by a 100bp rate hike, but this did not help curb inflation,
         which rose to 6.5% YoY in December and to 9.5% YoY by March 2010. Subsequent devaluations in 2010
         (February and August) were not accompanied by a rate hike, and inflation rose to 11.8% YoY by December, and
         12.3% YoY by February 2011. The February 2011 devaluation was followed by a 300bp hike in the Refinance
         rate and a 500bp hike in the Discount rate in subsequent weeks, plus another 100bp hike in October 2011.
•        CPI inflation has consequently been reined in (to just 8.34% YoY in May 2012), allowing the SBV to cut the
         refinance rate by 300bp this year. Banks still remain cautious about lending – another good sign of prudence.
•        Foreign reserves had declined to US$14.3bn by Oct 2011; we think the absence of timely data prompts risks of
         speculation. But the World Bank estimates that reserves have rebounded to US$20.3bn (2.3 months’ import
         cover) by March 2012.
•        Exports expanded 26%YoY in Jan-May 2012, strongly outpacing imports (+6.6%YoY), as the latter were reined-
         in by the sluggish economy. May’s 13%YoY import growth also suggests domestic demand is starting to recover.
Vietnam: Smaller fiscal deficit in 2011 helped restrain inflation; loan
growth is also slowing sharply now

           Loan-deposit ratio high, but loan growth is slowing sharply now                     (% of GDP)          Fiscal deficit declined in 2011 with
                                                                                                                           removal of stimulus                        (% of GDP)
   170                                                                               70       45                                                                               0
   160                                                                               60       40
   150                                                                               50       30                                                                               (2)
   140                                                                               40       25
   130                                                                               30
                                                                                              15                                                                               (4)
   120                                                                               20       10
   110                                                                               10        5
                                                                                               0                                                                               (6)
   100                                                                                0            1997     1999   2001       2003        2005        2007     2009     2011
      Oct-04   Oct-05      Oct-06      Oct-07   Oct-08    Oct-09     Oct-10     Oct-11
                                                                                                                           Govt. revenue: % of GDP (LHS)
                Loan-deposit ratio: % (LHS)                 Loans: YoY% (RHS)                                              Govt. expenditure: % of GDP (LHS)
                Deposits: YoY% (RHS)                                                                                       Fiscal balance: % of GDP (RHS)

 Source: CEIC, Maybank-KE, IMF                                                            Source: CEIC, Maybank-KE, MoF.

   •     Loan growth has slowed sharply this year (to single digits YoY), and this has contributed to the
         sharp deceleration in real GDP. The SBV remains focused in improving banks’ asset quality.
   •     The fight against inflation was helped by the gradual removal of the fiscal stimulus over the
         past year – including higher prices for energy. Fiscal restraint has helped rein in inflation, but
         restarting the privatization program is key to a longer-term improvement.

Vietnam: FDI inflows remain robust, and a crucial source of support to
the external balances; portfolio inflows are beginning to resume

  (US$m)      Foreign portfolio inflows mildly positive this year                                                                         0;
                                                                                                                  FDI at 8% o f GDP in 201 to remain ro bust in 2011
  400                                                                                        1,200.00   3,500                                                                  14

  300                                                                                        1,000.00   3,000                                                                  12
                                                                                                        2,500                                                                  10
  200                                                                                        800.00
                                                                                                        2,000                                                                  8
  100                                                                                        600.00
                                                                                                        1,500                                                                  6
    0                                                                                        400.00
                                                                                                        1,000                                                                  4
 (100)                                                                                       200.00
                                                                                                         500                                                                   2
 (200)                                                                                       0.00
                                                                                                           0                                                                   0
     May-03                    May-06                      May-09                       May-12
                                                                                                            M ar-99   M ar-01   M ar-03   M ar-05    M ar-07   M ar-09   M ar-11
                                      HCMC: foreign investors: net buying (monthly) (LHS)
                                     HCMC VN Index (RHS)                                                                   FDI (US$ mn)             FDI: % o f GDP

  Source: CEIC, Maybank-KE                                                                              Source: CEIC, Maybank-KE

   •       Vietnam remains a darling of the MNCs, especially Asian ones, and its attractiveness as a destination
           for foreign direct investment (FDI) remains undimmed by other macroeconomic woes, in our opinion.
           FDI inflows remain healthy at 7-10% of GDP.
   •       Modest foreign portfolio inflows have resumed this year, after a significant net outflow through much
           of last year as macro concerns surged.
   •       Since FDI is bundled with technology and market-access, FDI inflows of 8-10% of GDP would boost
           productivity and restore annual real GDP growth to 7-8% over the medium term, in our view, once
           macro stability is restored. Although FDI is sufficient to finance most of the current-account deficit,
           any widening of the latter still undermines confidence – resulting in capital outflows.

Asia’s demographics: well-endowed for the next decade in
India and Indonesia, less so in Korea and China

                                                                          China                                                  India
                                                                          Indonesia                                              Republic of Korea





















                                                    Dependency ratio (ratio of population aged 0-14 and 65+ per
                                                                   thousand population 15-64)

      Source: CEIC, PKBasu
  •      We expect non-Japan Asia to continue to benefit from declining dependency
         ratios until 2020. Typically, savings rates rise during periods of declining
         dependency ratios (this began to happen in Asia from 1965 onwards; in India
         from 1980). Higher savings should be able to fund higher investment rates,
         enhancing the productivity of the increasing workforce.
  •      Technology (embodied in FDI and through imports) should ensure strong total
         factor productivity (TFP) growth and a rapid economic catch-up for Asia. We
         think India has the demographic advantage in 2020-50.
Thank You…

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Description: Resilient ASEAN provides shelter from G2 & China volatility