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					                                                            MORGAN            STANLEY           RESEARCH
                                                            ASIA/PACIFIC

                                                            Morgan Stanley Asia (Singapore)   Deyi Tan
                                                            Pte.
                                                                                              Deyi.Tan@morganstanley.com
                                                                                              +65 6834 6703




September 3, 2013


ASEAN Economics
What Does A Cross-Current
of DM Recovery, Rising Real
Rates & China Slowdown
Mean for ASEAN?
What’s new? We are downgrading our 2013/2014
ASEAN4 GDP growth numbers from 4.8%/5.3% to
4.5%/4.6%. Our first stab at 2015 looks for a growth
pickup to 5%. The downgrade reflects a weaker-than-
expected 1H13, and a more clouded outlook. Indeed,
apart from idiosyncratic country factors, ASEAN now
faces a more disparate cross-current of macro forces
from: (a) a DM recovery which would help buoy exports;
(b) exogenous tightening from a less easy Fed policy;
and (c) further China slowdown which would have
collateral impact on commodity prices. Country outlines
below:

Indonesia: Still in Disequilibrium; Too Early to Turn
Constructive – We believe real exchange rates need to
be 10% weaker from current levels and real interest
rates need to rise to 2%. This would drive a growth
slowdown, needed for a more sustainable equilibrium.

Malaysia: Not Quite In The Same Boat As Indonesia
Malaysia does not face the same funding squeeze as
Indonesia. The bigger similarity lies in what lower
commodity prices would mean for medium-term growth.

Singapore: Lower Trend Growth, Higher Trend
Inflation & A Less Easy Fed Policy – The economy
continues to see a new normal of lower growth and
somewhat higher inflation though the worst of
“stag-flation” is behind us. A less easy Fed policy would
likely take some wind out of the credit cycle.

Thailand: Next At Risk After Indonesia To Rising
Real Rate Trend – Weak current account, previously
strong credit cycle and elevated LDR increase the
vulnerability to the exogenous tightening from less easy
Fed policy. The latter could also constrain how
aggressive fiscal policy in Thailand can be.                For important disclosures, refer to the
                                                            Disclosures Section, located at the end of
                                                            this report.
                                                                    MORGAN                          STANLEY                                          RESEARCH

                                                                    September 3, 2013
                                                                    ASEAN Economics




What Does A Cross-Current of DM Recovery, Rising Real Rates &
China Slowdown Mean for ASEAN?
What’s new?                                                         Exhibit 1

We are revising our ASEAN4 GDP growth numbers down from             GDP Growth Revisions
4.8% to 4.5% for 2013, and from 5.3% to 4.6% for 2014.              Real GDP
                                                                    %YoY
                                                                                          2004-2007
                                                                                          average                                 2012                2013O                     2014O             2013E                        2014E                    2015E

Meanwhile, our first stab at 2015 looks for a mild growth           Global                                   5.0                  3.2                        3.1                 3.9                      2.9                           3.5                   3.7
                                                                    US                                       2.8                  2.8                        1.9                 2.7                      1.6                           2.7                   2.6
recovery to 5.0% (Exhibit 1). The mostly downward revisions
                                                                    Euro                                     2.5                  -0.5                   -0.7                    0.9                 -0.5                               0.9                   1.2
incorporate weaker-than-expected datapoints for 1H13 and a          China                              12.1                       7.8                        7.6                 7.6                      7.6                           7.1                   6.9

more clouded outlook going forward. Indeed, apart from
                                                                    Indonesia                                5.6                  6.2                        5.6                 5.9                      5.6                           5.1                   5.5
idiosyncratic domestic developments (which we will elaborate        Malaysia                                 6.0                  5.6                        4.8                 4.8                      4.1                           4.3                   4.8
in the country pages), ASEAN economies now also face a              Singapore                                8.5                  1.3                        2.3                 4.0                      2.9                           3.6                   4.0
                                                                    Thailand                                 5.3                  6.5                        4.7                 5.3                      3.7                           4.4                   4.8
more disparate cross-current of global macro forces, namely:
                                                                    ASEAN4                                   6.0                  5.6                      4.8                   5.3                      4.5                           4.6                   5.0

                                                                    Source: CEIC & Morgan Stanley Research O=Original estimates; E=Current estimates
(1) a DM recovery i.e healthy rebound in US and a less bad
                                                                    Exhibit 2
Europe (as expected);
                                                                    DM Economies: From “Twilight to Daylight”
(2) exogenous tightening effects from expected QE taper and            5
rising US real rates on the back of the US growth rebound;             4

                                                                       3
(3) a further China GDP growth downgrade which would have              2
implications not only on end-demand but also on commodity              1
prices.
                                                                       0

                                                                      -1
These factors make us less optimistic about ASEAN’s 2014                                   US Real GDP growth (%YoY)
                                                                      -2
growth prospects compared to before. We discuss in further                                 Euro Area Real GDP growth (%YoY)
                                                                      -3
detail as follow:
                                                                      -4

                                                                      -5
(1) “Twilight to Daylight” in DM Should Buoy Export
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Growth
The twilight-to-daylight call for DM economies remains              Source: CEIC & Morgan Stanley Research
according to script (Exhibit 2), and our US and Europe teams
                                                                    Exhibit 3
have left their 2014 GDP growth forecasts unchanged (Exhibit
1). In the Back-to-School Global Macro Outlook piece which
                                                                    Export Orientation Across AXJ
the Global Economics Team published today (see                       200          As at 2012                                                         Exports (% of GDP) (LS)                                                                                  25
Back-to-School Global Macro Outlook: Acceleration,                   180                                                                             Current account balance (% of GDP) (RS)                                                                  20
Stabilisation and Accommodation by Joachim Fels & team),             160
                                                                     140                                                                                                                                                                                      15
our Global Chief Economist highlighted that the global
                                                                     120                                                                                                                                                                                      10
narrative for the next 6-12 months is likely to be based on three
                                                                     100
pillars (Acceleration, Stabilisation and Accomodation). One of                                                                                                                                                                                                5
                                                                      80
these pillars – Acceleration, alludes to the fact that DM growth      60                                                                                                                                                                                      0
looks set to accelerate, with the US, UK and Japan all expected       40
to show solid growth in the next few quarters and the Euro area,                                                                                                                                                                                              -5
                                                                      20
having just escaped recession.                                         0                                                                                                                                                                                      -10
                                                                                                                   M alaysia
                                                                              H ong


                                                                                                 Singapore




                                                                                                                                    Taiw an




                                                                                                                                                                        Korea

                                                                                                                                                                                        C hina

                                                                                                                                                                                                         Indonesia

                                                                                                                                                                                                                         Philippines

                                                                                                                                                                                                                                               India
                                                                                                                                                      Thailand
                                                                              Kong




ASEAN economies (e.g. Singapore, Malaysia and Thailand are
some of the most export-oriented economies) in AXJ (Exhibit 3)
and ASEAN export growth has been on a downtrend (Exhibit 4)
                                                                    Source: CEIC & Morgan Stanley Research
since the 2010 peak, posing a drag on overall momentum. A
rising DM tide should help to lift the ASEAN exporters’ boat and



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                                                                      MORGAN                                                            STANLEY                                                                              RESEARCH

                                                                      September 3, 2013
                                                                      ASEAN Economics




lend some beta to the export growth cycle as we head into             Exhibit 4

2014. Indeed, the US ISM new orders index has already shown           ASEAN Export Growth Momentum Has Trended
a strong rebound and our US economist, Ted Wieseman,                  Down
                                                                       60%
highlights that this is consistent with a robust manufacturing                                       %YoY, 3MMA (US$ terms)

growth showing a pace of improvement typically seen when the           50%

economy is accelerating out of recession, supporting                   40%

expectations for an inflection higher in 2H13 (See US                  30%

Economics: ISM, August 1 by Ted Wieseman). Meanwhile,                  20%

Europe PMIs have also shown an uptick (Exhibit 5).                     10%

                                                                            0%
That said, whilst the export trajectory is up, we believe this
                                                                       -10%
                                                                                                                              Indonesia exports
export growth recovery is likely to be more subdued than                                                                      Malaysia exports
                                                                       -20%
previous ones due to two factors.                                                                                             Singapore exports
                                                                                                                              Singapore non-oil domestic exports
                                                                       -30%
                                                                                                                              Thailand exports

First, global growth is likely to be lower than before as Europe       -40%




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continues to navigate what our chief European Economist Elga
Bartsch believes is still a frustratingly slow and fragile recovery   Source: CEIC & Morgan Stanley Research
and as EM economies such as China see dimmer growth
                                                                      Exhibit 5
prospects. MS estimates 2014/2015 Global GDP growth at
                                                                      US ISM & Euro PMI: On an Improving Trend
3.5% and 3.7% (vs 5% CAGR in 2004-2007) (Exhibit 1).
                                                                      75

                                                                      70
Second, our US economics team points out that the uptick in
US growth is primarily driven by a significant pickup in business     65

investment and residential investment, quite unlike the               60

consumption boom which had driven ASEAN export cycle                  55

before. One could argue that ASEAN export segments e.g.               50

electronics – PC & PC parts, office equipment and telcom              45

products could still very well cater to the investment pickup to      40
meet office demand. However, the same could not be said for           35                                        US ISM: New Orders Index (3MMA)
segments such as electrical appliances, consumer electronics                                                    Euro PMI (3MMA)
                                                                      30
and autos. Moreover, Malaysia and Indonesia, the two largest
                                                                      25
net commodity exporters (as % of GDP) in AXJ, would also
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suffer from slower commodity exports amid the collateral
impact from China slowdown as we discuss in (3) below.                Source: CEIC & Morgan Stanley Research

                                                                      Exhibit 6
(2) ASEAN domestic demand Face Exogenous Tightening                   Real Policy Rate Trend
Effects From Less Easy Fed Policy
                                                                       8
The overeasy monetary policy in DM since the 2008/2009 GFC                                                                                                 Indonesia                                                                     Malaysia
                                                                       6
has been exported to ASEAN as capital flows moved from DM                                                                                                  Thailand                                                                      Singapore

to EM in search of yields. Such easy money has been funding            4

domestic demand in current account deficit economies such as           2
Indonesia. Meanwhile, real interest rates were also depressed,
                                                                       0
leading ASEAN economies to leverage up to varying degrees
                                                                       -2
in the past 5 years. Indeed, bank credit (% of GDP) in
Singapore and Thailand has increased by ~40% of GDP in the             -4

2007-2012 period (Exhibits 7-8).                                       -6
                                                                                       Real policy rates %

                                                                       -8
Expectations of a start to QE taper and a rise in real rates in US
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(See Asia Economics: Rise in Real rates – Why It Feels like the
1990s, August 22 by Chetan Ahya) have unwound the carry               Source: CEIC & Morgan Stanley Research




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                                                                    MORGAN                        STANLEY                                              RESEARCH

                                                                    September 3, 2013
                                                                    ASEAN Economics




trade which has been in favour of EM, exerting a tightening         Exhibit 7

effects on these economies from without. To be sure, we do not      Bank Credit Has Picked Up In Past Years
hold the view that the current reversal in capital flows would       200%
                                                                                   Bank credit penetration (% of GDP)
lead to a situation akin to 1998 because of the following            180%                                                                                                      Indonesia                                          Malaysia
reasons:                                                             160%                                                                                                      Singapore                                          Thailand

                                                                     140%
(a) The run-up to 1998 had seen a large degree of asset              120%
misallocation and domestic demand excesses. This has taken
                                                                     100%
place amid financial liberalization, run-away credit growth and
                                                                      80%
moral hazard within the banking sector given inadequate
                                                                      60%
macroprudential and supervisory standards. Much of such
lending turned out to be unviable when growth slowed. Now,            40%

with the exception of Singapore, the pick up in leverage in the       20%

last five years (% of GDP) and the level of bank credit                0%




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penetration (as % of GDP) is less than the 5 years running up
to 1998 (Exhibit 8).
                                                                    Source: CEIC & Morgan Stanley Research

(b) Before the AFC, the pegged currency regimes (e.g. Baht          Exhibit 8
and Ringgit) and the very steady Rupiah depreciation                Leverage cycle: 1998 vs Now
engineered by the Suharto regime had meant an increase in            200%          % of GDP                                                                   Increase in bank credit: 1992-1997
unhedged foreign currency debt as the private sector tried to        180%                                                                                     Increase in bank credit: 2007-2012
                                                                                                                                                              Bank credit penetration: 1997
take advantage of low foreign interest rates and high visibility     160%                                                                                     Bank credit penetration: 2012
with regards to their currency. Now, however, external debt
                                                                     140%
(as % of GDP) has been brought down (Exhibit 9) and total
                                                                     120%
external debt to FX reserve ratio, short-term external debt to FX
reserve ratio and foreign reserve import cover ratio (except for     100%

Indonesia’s import cover) have mostly improved.                       80%

                                                                      60%
(c) Current accounts were in deficit positions for Malaysia           40%
(-4.2% of GDP in 1996), Indonesia (-3.4% of GDP in 1996) and          20%
Thailand (-7.9% of GDP in 1996) in the run up to 1998. Now,
                                                                       0%
Indonesia’s current account deficit has gone back to 1996                             Indonesia                                            Malaysia                                    Singapore                                            Thailand
levels. However for Malaysia and Thailand, current account
                                                                    Source: CEIC & Morgan Stanley Research; Singapore data for 2007-2012 refers to resident
balances have weakened but are still less stretched compared        lending by DBU & ACU; For 1992-1997, it refers to lending by DBU.

to the run-up to 1998 (Exhibit10). This is a reflection that we     Exhibit 9
have not seen domestic demand excesses of the sort seen in          External Debt Ratios
the run up to 1998.                                                  160%
                                                                                                                                                                                       External debt, % of GDP

                                                                     140%
(d) Loan-to-deposit ratios were 100% and above before 1998
but are mostly less stretched now.                                   120%


                                                                     100%                                                                                                                               Indonesia
However, that said, ASEAN will not be immune to this rise in                                                                                                                                            Malaysia
                                                                      80%                                                                                                                               Thailand
US real rates and a reversal of the carry trade. Pressures will
be felt in ASEAN economies which have weak current account            60%

balances (Indonesia) and which have seen strong credit                40%

growth cycle/rising LDR amid depressed real interest rates
                                                                      20%
before (Thailand/Singapore). Indeed as we saw in recent
                                                                       0%
months, expectations of a less easy Fed policy is already
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causing “cashflow” problems in Indonesia, leading to currency
depreciation and forcing policymakers’ hand in undertaking          Source: CEIC & Morgan Stanley Research




                                                                                                                                                                                                                                                                            4
                                                                      MORGAN                               STANLEY                                        RESEARCH

                                                                      September 3, 2013
                                                                      ASEAN Economics




rate hikes. We think Thailand looks next most at risk within          Exhibit 10

ASEAN to such tightening effects given its weak current               Current account balance trends
                                                                         20%                                                                                                                                                                                              30%
account balances and previously strong credit growth cycle                               Current account balance (4Q trailing sum, % of GDP)

and rising LDR. Meanwhile, although the Fed will likely not              15%
                                                                                                                                                                                                                                                                          25%
start hiking rates until mid-2015, an end to the zero-interest rate
                                                                         10%
policy which is now closer than it had been before is already                                                                                                                                                                                                             20%

causing Singapore banks to start re-pricing longer tenure loans           5%
                                                                                                                                                                                                                                                                          15%
such as mortgages.
                                                                          0%

                                                                                                                                                                                                                                                                          10%
(3) A Further China Slowdown Would Also Have Collateral                  -5%

                                                                                                                                                                            Indonesia
Impact on Commodity Prices                                              -10%
                                                                                                                                                                            Malaysia                                                                                      5%
                                                                                                                                                                            Thailand
Our regional AXJ economist Chetan Ahya has been bearish on                                                                                                                  Singapore (RS)

                                                                        -15%                                                                                                                                                                                              0%
China (See The China Deleveraging Series Part 1 – A Bumpy




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                                                                                                                                                                                                                                                                 Mar-13
Ride Ahead, by Chetan Ahya, 23rd July) and our China
economist Helen Qiao further downgraded her 2014 GDP                  Source: CEIC & Morgan Stanley Research
growth numbers from 7.6%YoY to 7.1%YoY and her first stab
                                                                      Exhibit 11
at 2015 GDP growth stands at 6.9%YoY. North Asia
                                                                      Who Has Bigger Trade Linkages With China?
economies tend to have the largest trade links and the largest
trade surplus with China (Exhibit 11) and would be more                 18%                                                                                                                                                         2012                                  10%

directly impacted from a China slowdown. However, for                   16%                                                                                        Exports to China (% of GDP)                                                                            8%
ASEAN, there would also be the indirect impact via the                  14%                                                                                        Trade balance with China (% of GDP)

collateral impact that a China slowdown would have on                   12%
                                                                                                                                                                                                                                                                          6%

commodity prices. China is either the world’s largest or a key,         10%                                                                                                                                                                                               4%
consumer for several commodities such as iron ore, steel,
                                                                         8%                                                                                                                                                                                               2%
aluminium, copper, oil, coal and CPO (Exhibit 12). It also
                                                                         6%
accounted for more than 50% of the increase for many of these                                                                                                                                                                                                             0%
                                                                         4%
commodities in 2012. To that point, we note that Malaysia and
                                                                                                                                                                                                                                                                          -2%
Indonesia are the two largest net commodity exporters (as % of           2%

GDP) in AXJ (Exhibit 13). The reversal in the commodity                  0%                                                                                                                                                                                               -4%
                                                                                        Taiwan              Singapore                      Korea                   Malaysia                   Thailand            Philippines Indonesia
supercycle has already led Indonesia to see its most persistent
stretch of CAD since 1998 and Malaysia’s current account              Source: CEIC & Morgan Stanley Research
surplus to fall from double-digit territory in 2011 to 1.1% of GDP
                                                                      Exhibit 12
(quarterly annualized) in 2Q13. Continually soft or falling
                                                                      China: % Share of World Commodity Demand
commodity prices would mean poor or poorer terms-of-trade
for the commodity exporters.                                           80               China's % Share of World Commodity Demand (2012)                                                                                                                        76

                                                                       70       64
What Are The Risks and Where We Could Go Wrong?                        60                                                                                                                                                           53
As our chief global economist Joachim Fels pointed out in MS’s                                                                                                                                  50
                                                                       50                                   46                          45
Back-to-School publication, our global base case assumes that                                                                                                       40
                                                                       40                                           35                                                36
DM bond market stabilizes and China slows down in a                                                                                             29                                                      30
controlled fashion. However, the bear case scenario could              30               25
                                                                                                                                                                                                                                        21
emerge if US bond yields surge to 4% in the next few months            20                                              12
                                                                                                                                                   15                         15                                                      15
                                                                                                                                                     11                                                          12        11                          12 11
                                                                                              9                               9                                                      9
on fears of earlier Fed rate hikes and if China undergoes a            10                                                                                                                                  8
                                                                                                  2                                                                                                                                                                       2
U-shaped slowdown in 2H13 and 1H14 with growth rolling over
                                                                        0
to 5%-6%                                                                       Iron Ore                             Steel Aluminum Copper    Coal                                                                                   Oil                     CPO
                                                                                   China                                    ROW           Europe                                                                                                US

                                                                      Source: World Bureau of Metals statistics, International Copper Study Group, BP Stats, Wood
                                                                      Mackenzie Brook Hunt, Morgan Stanley Research




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                                                                                                                              MORGAN           STANLEY             RESEARCH

                                                                                                                              September 3, 2013
                                                                                                                              ASEAN Economics




quickly. The likely result from this given the still fragile state of                                                         Exhibit 15

EM and Euro would be the next global recession. We believe                                                                    GDP: Bull Bear Base
                                                                                                                              Real GDP (%YoY)                  2012         2013E       2014E        2015E
Indonesia would be worst impacted in the bear case (and also                                                                  Global
in the base case). In the bull case scenario, incoming US                                                                     Bull                                               3.2          4.1          4.4
datapoints remain in a sweet-spot of continued expansion and                                                                  Base                                 3.2           2.9          3.5          3.7
the Fed successfully communicates the separation principle of                                                                 Bear                                               2.6          2.4          2.7
keeping rates low for longer. Meanwhile, China sees a soft
                                                                                                                              Indonesia
take-off in growth amid stimulus measures and structural                                                                      Bull                                               5.7          5.5          5.8
reforms. Overall, the team still sees growth risks as skewed to                                                               Base                                 6.2           5.6          5.1          5.5
the downside (Exhibit 14).                                                                                                    Bear                                               5.5          4.3            5

Exhibit 13                                                                                                                    Malaysia
AXJ: Who’s the Largest Net Commodity Exporter                                                                                 Bull                                               4.3          5.2          5.4
                                                                                                                              Base                                 5.6           4.1          4.3          4.8
  15%
          2012 Trade Balance (% of GDP)                                                                                       Bear                                               3.9          2.5          3.9
  10%

   5%                                                                                                                         Singapore
   0%                                                                                                                         Bull                                               3.1          5.1          5.2
                                                                                                                              Base                                 1.3           2.9          3.6            4
  -5%
                                                                                                                              Bear                                               2.7          1.1          2.6
  -10%

  -15%                                                                                                                        Thailand
  -20%                                                                                                                        Bull                                               3.9          5.4          5.5
                                                                                                                   Malaysia
                     Taiwan



                              Hong Kong



                                           Singapore



                                                       India



                                                                 China




                                                                                                    Indonesia
                                                                         Philippines
          Korea




                                                                                         Thailand




                                                                                                                              Base                                 6.5           3.7          4.4          4.8
                                                                                                                              Bear                                               3.5          2.7          3.9

                                                                                                                              Source: CEIC & Morgan Stanley Research E=MS estimates
             Food and live animals                                       Beverages and tobacco
             Crude materials                                             Mineral fuels and lubricants
             Animal and vegetable oils and fats                          All Commodities
                                                                                                                              Exhibit 16
Source: CEIC & Morgan Stanley Research                                                                                        Policy Rates: Bull Bear Base
                                                                                                                              Policy Rates                 2012          2013E         2014E        2015E
Exhibit 14
                                                                                                                              Indonesia
Inflation: Bull Bear Base                                                                                                     Bull                                        7.25         7.25         7.25
Inflation (%YoY)                          2012                 2013E                   2014E                    2015E
                                                                                                                              Base                          5.75          7.75         7.75         7.75
Global
                                                                                                                              Bear                                        9.00         9.00         9.00
Bull                                                            3.4                     3.6                      3.9
Base                                      3.3                   3.3                     3.0                      3.1
                                                                                                                              Malaysia
Bear                                                            2.9                     2.0                      2.1          Bull                                        3.00         3.00         3.50
                                                                                                                              Base                          3.00          3.00         3.00         3.00
Indonesia                                                                                                                     Bear                                        3.00         2.50         2.50
Bull                                                            7.5                     7.3                      6.2
Base                                      4.3                   7.3                     7.6                      6.5          Singapore
Bear                                                            7.1                     8.6                      7.1          Bull                                        0.40         0.40         1.25
                                                                                                                              Base                          0.38          0.40         0.40         1.00
Malaysia                                                                                                                      Bear                                        0.40         0.40         0.40
Bull                                                            2.0                     2.8                      2.8
Base                                      1.7                   1.9                     2.4                      2.4          Thailand
Bear                                                            1.8                     2.0                      2.0          Bull                                        2.50         4.00         4.00
                                                                                                                              Base                          2.75          2.50         3.50         4.50
Singapore                                                                                                                     Bear                                        2.50         2.50         2.50
Bull                                                            2.6                     3.2                      3.3
Base                                      4.6                   2.4                     2.5                      2.6          Source: CEIC & Morgan Stanley Research; E=MS estimates
Bear                                                            2.2                     1.8                      1.9

Thailand
Bull                                                            2.5                     3.2                      3.1
Base                                      3.0                   2.3                     2.6                      2.5
Bear                                                            2.1                     2.0                      1.9

Source: CEIC & Morgan Stanley Research; E= MS estimates




                                                                                                                                                                                                                 6
                                                                        MORGAN                                         STANLEY                                            RESEARCH

                                                                        September 3, 2013
                                                                        ASEAN Economics




Indonesia: Still in Disequilibrium; Too Early to Turn Constructive
What’s new? How are we different from consensus?                        Exhibit 17

We have been bearish on Indonesia and are now downgrading               Indonesia: Forecast Revisions
                                                                                                                                                                                    2012               2013O                          2014O               2013E                    2014E                 2015E
our 2014 GDP growth numbers from 5.9%YoY to 5.1%YoY                     Real GDP growth               %YoY                                                                            6.2                 5.6                            5.9                 5.6                      5.1                   5.5
(Exhibit 17) but leaving our 2013 GDP growth number                     - Private consumption         %YoY                                                                            5.3                 4.6                            5.0                 4.9                      4.2                   4.6
                                                                        - Public consumption          %YoY                                                                            1.2                 6.7                            6.3                 2.9                      4.0                   4.0
(+5.6%YoY), which already pencils in a 2H13 slowdown,                   - Gross capital formation     %YoY                                                                           16.9                11.3                           10.5                 3.3                      2.2                   7.5
unchanged. Our first stab at 2015 looks for a mild uptick to            -- Gross fixed capex          %YoY                                                                            9.8                 6.4                            8.5                 4.5                      3.4                   6.3
                                                                        - Exports                     %YoY                                                                            2.0                 1.2                            7.0                 4.8                      6.3                   6.5
5.5%YoY. Consensus has been downgrading and 2013/2014                   - Imports                     %YoY                                                                            6.6                 3.0                            9.5                 0.7                      2.8                   6.5
                                                                        - Domestic demand             %YoY                                                                            8.2                 6.8                            6.9                 4.2                      3.6                   5.4
now stands at 5.8%/6.0%. We think more downgrades from the              - Domestic demand (ex inventor%YoY                                                                            6.2                 5.3                            6.1                 4.6                      3.9                   5.0
street are likely but suspect that we would still be below                                            %YoY,
                                                                                                      period
consensus for 2014.                                                     CPI                           average                                                                               4.3              6.7                           6.6                     7.3                   7.6                          6.5
                                                                                                      %,
                                                                                                      period
Key points:                                                             Policy rate                   end                                                                                   5.8              7.0                           7.0                 7.75                  7.75                         7.75
                                                                                                      % of
                                                                        Current account balance       GDP                                                                              -2.8                -2.6                          -2.6                    -3.7                  -2.5                       -2.5
- Why are we downgrading?                                               Source: CEIC & Morgan Stanley Research; O=Original estimates; E= Current estimates
We have highlighted for a while that Indonesia’s uncomfortable          Exhibit 18
current account deficit (CAD) and still healthy domestic                Foreign Reserve Trend
demand do not go hand-in-hand with a stable IDR – we called
                                                                         250
this the “Impossible Trio”. Macro stability is not in the hands of                      Foreign reserves, US$bn

policymakers given the uncomfortable external imbalances
                                                                                                                             Malaysia                                   Indonesia
and dependence on external funding, and further policy                   200                                                 Singapore                                  Thailand

tightening and currency depreciation are required to bring                                                                   Philippines

Indonesia to a more sustainable near-term equilibrium of lower           150
cyclical growth, narrower CAD and a less overvalued currency.
Indeed, expectations of QE taper and rising real rates in the US         100
since late May have exposed this macro vulnerability and
forced policymakers’ hand in undertaking a cumulative 125bps
                                                                          50
policy rate hike. The reversal in carry trade has led IDR/USD to
depreciate by 18% ytd, even after policymakers spent
US$20bn in foreign reserves this year, of which US$12.5bn                  0
                                                                               Jan-00

                                                                                                 Jan-01

                                                                                                                   Jan-02

                                                                                                                                 Jan-03

                                                                                                                                                   Jan-04

                                                                                                                                                                 Jan-05

                                                                                                                                                                                   Jan-06

                                                                                                                                                                                                  Jan-07

                                                                                                                                                                                                                    Jan-08

                                                                                                                                                                                                                                       Jan-09

                                                                                                                                                                                                                                                      Jan-10

                                                                                                                                                                                                                                                                        Jan-11

                                                                                                                                                                                                                                                                                       Jan-12

                                                                                                                                                                                                                                                                                                         Jan-13
happened since May (Exhibit 18).

                                                                        Source: CEIC & Morgan Stanley Research
Despite the policy response, we believe the macro adjustment            Exhibit 19
is not over yet and it is still too early to turn constructive on the   Current Account: Going Back to 1996 Levels
economy. The confluence of: (a) the longest stretch of CAD
                                                                         8%
since 1998, courtesy of the commodity supercycle reversal
(Exhibit 19); and (b) market adjustments to a less easy Fed              6%

policy have now increased the risk of a sharper tightening
                                                                         4%
process and more currency depreciation within a compressed
time span. This will drive a bigger growth deceleration in               2%

domestic demand than we had previously anticipated, forcing
                                                                         0%
current account deficit down from -3.7% of GDP in 2013 to a
narrower -2.5% of GDP in 2014. Growth risks are still skewed             -2%
to the downside.
                                                                         -4%
                                                                                                                                                   Current account balance (Quarterly annualised, % of GDP)
- Currency adjustment process far from over                              -6%                                                                       Current account balance (4Q trailing sum, % of GDP)
                                                                               Dec-93

                                                                                        Dec-94

                                                                                                          Dec-95

                                                                                                                    Dec-96

                                                                                                                             Dec-97

                                                                                                                                          Dec-98

                                                                                                                                                      Dec-99

                                                                                                                                                               Dec-00

                                                                                                                                                                          Dec-01

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                                                                                                                                                                                                           Dec-04

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                                                                                                                                                                                                                                                 Dec-07

                                                                                                                                                                                                                                                               Dec-08

                                                                                                                                                                                                                                                                          Dec-09

                                                                                                                                                                                                                                                                                    Dec-10

                                                                                                                                                                                                                                                                                                Dec-11

                                                                                                                                                                                                                                                                                                             Dec-12




Indeed, the still incomplete currency adjustment process is why
we believe it is still too early to turn constructive on Indonesia.
Although the IDR/USD has depreciated by 7% in the                       Source: CEIC & Morgan Stanley Research




                                                                                                                                                                                                                                                                                                                            7
                                                                       MORGAN                                                     STANLEY                                                            RESEARCH

                                                                       September 3, 2013
                                                                       ASEAN Economics




Dec12-Jul-13 period and by 18% from the strength in Aug-11             Exhibit 20

vs Jul-13, the real effective exchange rate (REER) (trade              IDR Currency Trends
weighted basket adjusted for inflation differentials), which we                        140
                                                                                                                                                                     IDR NEER
believe is the more relevant matrix to watch, has appreciated                          130
                                                                                                                                                                     IDR REER
                                                                                                                                                                     IDR/USD
by 6% between end Dec-12 and Jul-13. Meanwhile, it has only




                                                                        Appreciation
                                                                                       120
marginally depreciated by 0.5% since Aug-11 (Exhibit 20). This
                                                                                       110
is because Indonesia’s inflation is typically higher compared to
its trading partners.                                                                  100

                                                                                        90
In our view, there needs to be two phase of currency




                                                                        Depreciation
                                                                                        80
adjustments. The first phase of currency adjustment is to
correct for what looks like an overvalued currency amid the                             70

persistent CAD and a lower new normal in commodity prices.                              60
Indeed, the IDR has behaved like a commodity currency                                                       Indexed Jan-2000=100
                                                                                        50
(Exhibit 21). The REER has appreciated amid the commodity




                                                                                                 Jan-00

                                                                                                                     Jan-01

                                                                                                                                       Jan-02

                                                                                                                                                           Jan-03

                                                                                                                                                                              Jan-04

                                                                                                                                                                                                Jan-05

                                                                                                                                                                                                                  Jan-06

                                                                                                                                                                                                                                      Jan-07

                                                                                                                                                                                                                                                            Jan-08

                                                                                                                                                                                                                                                                              Jan-09

                                                                                                                                                                                                                                                                                                      Jan-10

                                                                                                                                                                                                                                                                                                                          Jan-11

                                                                                                                                                                                                                                                                                                                                            Jan-12

                                                                                                                                                                                                                                                                                                                                                                 Jan-13
supercycle in past years (Exhibit 22) and the non-commodity
current account balance has deteriorated as a result. Hence, to
                                                                       Source: CEIC & Morgan Stanley Research
account for the lower new normal in commodity prices and to            Exhibit 21
restore competitiveness in the non-commodity segments and              IDR Had Behaved Like Commodity Currency
get CAD to a more comfortable level, we believe that REER still              600                                                                                                                                                                                                                                                                105
needs to depreciate by ~10% from current levels after what the
                                                                             550                                                                                                                                                                                                                                                                100
IDR has done recently.




                                                                                                                                                                                                                                                                                                                                                      Appreciation
                                                                             500
                                                                                                                                                                                                                                                                                                                                                95
                                                                             450
Once this overvaluation is corrected, we believe the second                                                                                                                                                                                                                                                                                     90
                                                                             400
phase of currency adjustment would involve keeping the real                                                                                                                                                                                                                                                                                     85
                                                                             350
exchange rate stable so as not to again weaken




                                                                                                                                                                                                                                                                                                                                                      Depreciation
                                                                                                                                                                                                                                                                                                                                                80
                                                                             300
competitiveness in non-commodity segments. This can be
                                                                                                                                                                                                                                                                                                                                                75
achieved either by raising productivity and hence lowering                   250                                                                                                                     CRB Commodity Index (LS)

                                                                                                                                                                                                     Indonesia REER (2010=100) (RS)                                                                                                             70
inflation, or by engineering a steady rate of nominal exchange               200

rate depreciation. Policymakers may have concerns regarding                  150                                                                                                                                                                                                                                                                65

the potential destabilizing effects of weaker currency, given                100                                                                                                                                                                                                                                                                60
                                                                                       Jan-00

                                                                                                       Jan-01

                                                                                                                         Jan-02

                                                                                                                                         Jan-03

                                                                                                                                                           Jan-04

                                                                                                                                                                             Jan-05

                                                                                                                                                                                            Jan-06

                                                                                                                                                                                                              Jan-07

                                                                                                                                                                                                                             Jan-08

                                                                                                                                                                                                                                                   Jan-09

                                                                                                                                                                                                                                                                     Jan-10

                                                                                                                                                                                                                                                                                         Jan-11

                                                                                                                                                                                                                                                                                                               Jan-12

                                                                                                                                                                                                                                                                                                                              Jan-13
memories of 1998. However, we believe a weaker currency will
not have the same destabilizing effect this time, to the extent
that the currency depreciation should be significantly lower           Source: CEIC, Bloomberg & Morgan Stanley Research
                                                                       Exhibit 22
than during 1998 when NEER and REER depreciated by
60-80% between mid-97 and mid-98. Moreover, external debt              Non-Commodity Current Account Balance
(% of GDP) has come down from 48.2% of GDP in 1996 to                  Deteriorated Amid REER Appreciation
29.1% of GDP in 2Q13. Meanwhile, concerns on how currency                        -2%                                                                                                                                                                                                                                                                 40


depreciation could increase the oil import bill are also likely less             -3%
                                                                                                                                                                                                                                                                                                                                                     50

valid given the hedge in the form of USD commodity export
                                                                                                                                                                                                                                                                                                                                                                     Depreciation




                                                                                                                                                                                                                                                                                                                                                     60
revenue.                                                                         -4%

                                                                                                                                                                                                                                                                                                                                                     70
                                                                                 -5%

- Real interest rates still need to go up more                                                                                                                                                                                                                                                                                                       80

The gap between Indonesia’s real interest rate and US real                       -6%
                                                                                                                                                                                                                                                                                                                                                     90
                                                                                                                                                                                                                                                                                                                                                                     Appreciation




rates both at the short end and the long end of the curve has                    -7%
                                                                                                                                                                                                                                                                                                                                                     100
been falling as carry trade depressed EM yields. This fall in                                                                                                                    CAB less commodities trade balance
                                                                                                                                                                                 (4Q trailing sum, % of GDP)
Indonesia real rates has also coincided with worsening CAD                       -8%
                                                                                                                                                                                 REER (2010=100)                                                                                                                                                     110


trends in Indonesia (Exhibit 23) as capital inflows/ low real rates              -9%                                                                                                                                                                                                                                                                 120
                                                                                        Dec-93

                                                                                                   Dec-94

                                                                                                                Dec-95

                                                                                                                              Dec-96

                                                                                                                                       Dec-97

                                                                                                                                                  Dec-98

                                                                                                                                                                    Dec-99

                                                                                                                                                                             Dec-00

                                                                                                                                                                                       Dec-01

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                                                                                                                                                                                                                           Dec-04

                                                                                                                                                                                                                                          Dec-05

                                                                                                                                                                                                                                                        Dec-06

                                                                                                                                                                                                                                                                     Dec-07

                                                                                                                                                                                                                                                                                Dec-08

                                                                                                                                                                                                                                                                                                  Dec-09

                                                                                                                                                                                                                                                                                                                 Dec-10

                                                                                                                                                                                                                                                                                                                           Dec-11

                                                                                                                                                                                                                                                                                                                                       Dec-12




fund domestic demand. Now, the rise in US real rates, the

                                                                       Source: CEIC & Morgan Stanley Research




                                                                                                                                                                                                                                                                                                                                                                                    8
                                                                      MORGAN                                      STANLEY                                                       RESEARCH

                                                                      September 3, 2013
                                                                      ASEAN Economics




reversal in capital flows from EM to DM, the lack of excess           Where are the risks?
domestic savings in Indonesia, as seen in its CAD, the rising         Upside/downside risks would stem from: (a) movements in US
LDR and the need to anchor inflation expectations amid                long yields; (b) China’s growth and commodity prices
currency depreciation all point to this – Indonesia’s real interest   movements; and (c) policy response/ policy mistakes.
rate not only has to keep in tandem, but in fact rise faster than
the global trend in order to maintain macro stability and to keep     Exhibit 23

a rein on external imbalances. In our view, Indonesia’s inflation     Indonesia Real Interest Rate Cannot Just Move In
is likely to normalize at 6.5%YoY in 2015 after the impact from       Tandem, But Needs To Rise Faster
the retail fuel price hike wears out. We think policymakers need                                                                                                                                                                                                                                                 5%
                                                                          6
to bring short-term real rates up to 2%, i.e., 8.5% based on a                                                                                                                                                                                                                                                   4%

normalized inflation rate of 6.5%. To be sure, we expect BI to            4
                                                                                                                                                                                                                                                                                                                 3%

only raise the policy rate by another 75bps to 7.75% as they                                                                                                                                                                                                                                                     2%

tend to have a dovish bias. However regardless of policy action,          2                                                                                                                                                                                                                                      1%

we think market conditions will force short-term real interest            0
                                                                                                                                                                                                                                                                                                                 0%

rates up to where they need to be. This is because as the                                                                                                                                                                                                                                                        -1%

currency continues to depreciate, the process of FX                       -2                                                                                                                                                                                                                                     -2%

intervention (selling USD and buying IDR) would withdraw                                                                                                                                                                                                                                                         -3%
                                                                          -4
liquidity from the system, leading market-oriented interest rates                                                                                                                                                                                                                                                -4%

to move up. To this point, we note that although the benchmark            -6
                                                                                 Jul-03
                                                                                                                                                                                                                                                                                                                 -5%
                                                                                          Jan-04

                                                                                                   Jul-04

                                                                                                                 Jan-05

                                                                                                                            Jul-05

                                                                                                                                     Jan-06

                                                                                                                                              Jul-06

                                                                                                                                                            Jan-07

                                                                                                                                                                       Jul-07

                                                                                                                                                                                Jan-08

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                                                                                                                                                                                                       Jan-09

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                                                                                                                                                                                                                                                  Jan-11

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                                                                                                                                                                                                                                                                      Jan-12

                                                                                                                                                                                                                                                                               Jul-12

                                                                                                                                                                                                                                                                                             Jan-13

                                                                                                                                                                                                                                                                                                        Jul-13
policy rate has been hiked by 125bps from May levels, 1M and
3M JIBOR have already moved up by 193bps and 182bps from                                                                    Indo 10Y real rates less US 10Y real rates (3MMA)
May-Aug (Exhibit 24).                                                                                                       Indo - CAB (Quarterly annualised, % of GDP) (RS)

                                                                      Source: Bloomberg, CEIC & Morgan Stanley Research
- Increased Urgency for Structural Reform 2.0
For the medium-term, we believe Indonesia still has one of the
more attractive structural stories in ASEAN. However, external        Exhibit 24
dampeners in the form of a structural China slowdown and its          JIBOR Has Moved Up Faster Than Policy Rates
collateral impact on commodity prices also now means that the           16                                                                                                                                                                                                                                       16
                                                                                                                                                                BI Policy Rate                                                                      Deposit Facility Rate
structural growth story in Indonesia cannot be seen in the same
                                                                        14                                                                                      Lending Facility Rate                                                               1M JIBOR                                                     14
light. Put differently, if the same structural growth drivers could                                                                                             3M JIBOR
deliver 6.5% or even higher GDP growth before, the changed              12                                                                                                                                                                                                                                       12
global environment now means that there is an increased
                                                                        10                                                                                                                                                                                                                                       10
urgency to undertake structural reform 2.0 to enhance growth
negatives inflicted by exogenous factors. Otherwise, Indonesia           8                                                                                                                                                                                                                                       8
could face lower growth and macro stability risks (See Asia
Insight: Why the Next Election is More Important Than the Last,          6                                                                                                                                                                                                                                       6

July 30).
                                                                         4                                                                                                                                                                                                                                       4


Indeed, structural reform 1.0 post AFC has run its course and            2                                                                                                                                                                                                                                       2
                                                                               Jan-06

                                                                                          Jul-06

                                                                                                        Jan-07

                                                                                                                          Jul-07

                                                                                                                                     Jan-08

                                                                                                                                                   Jul-08

                                                                                                                                                                     Jan-09

                                                                                                                                                                                Jul-09

                                                                                                                                                                                              Jan-10

                                                                                                                                                                                                                Jul-10

                                                                                                                                                                                                                           Jan-11

                                                                                                                                                                                                                                         Jul-11

                                                                                                                                                                                                                                                           Jan-12

                                                                                                                                                                                                                                                                      Jul-12

                                                                                                                                                                                                                                                                                    Jan-13

                                                                                                                                                                                                                                                                                                      Jul-13




served its purpose and structural reform 2.0 now needs to be
kick-started and should involve policy measures to improve
competitiveness of non-commodity segments by ensuring that
                                                                      Source: Bloomberg & Morgan Stanley Research
resources are spent on productive areas such as infrastructure
and education. Labour market regulations to ensure that wage
growth is consistent with productivity increases would also help
ensure cost competitiveness. Meanwhile, improving the
investment landscape to attract more FDI would help ensure a
bigger share of stable flows relative to short-term portfolio flows
and would mitigate funding volatility.




                                                                                                                                                                                                                                                                                                                       9
                                                                     MORGAN                                                   STANLEY                                                      RESEARCH

                                                                     September 3, 2013
                                                                     ASEAN Economics




Malaysia: Not Quite In The Same Boat As Indonesia
What’s new? How are we different from consensus?                     Exhibit 25

We are downgrading our 2013/2014 GDP growth numbers                  Forecast Revisions
                                                                                                                                                                                       2012                    2013O                        2014O                               2013E                     2014E                     2015E
from 4.8%YoY/4.8%YoY to 4.1%YoY/4.3%YoY respectively                 Real GDP growth                                                               %YoY                                  5.6                      4.8                          4.8                                 4.1                       4.3                       4.8
(Exhibit 25). Our first stab at 2015 looks for a growth pick up to   - Private consumption                                                         %YoY                                  7.7                      7.4                          7.4                                 6.8                       6.8                       7.5
                                                                     - Public consumption                                                          %YoY                                  5.1                      5.9                          3.0                                 4.8                       4.0                       4.0
4.8%YoY. Our numbers are below consensus, which stands at            - Gross capital
4.8%YoY/5.3%YoY for 2013/2014 respectively.                          formation                                                                     %YoY                                    22.3                    9.6                                    5.2                             7.3                     1.1                        2.8
                                                                     -- Gross fixed capex                                                          %YoY                                    19.9                   10.4                                    6.2                             6.9                     4.9                        5.5
                                                                     - Exports                                                                     %YoY                                    -0.1                    0.0                                    5.0                            -2.2                     4.5                        6.0
Key Points:                                                          - Imports                                                                     %YoY                                     4.7                    2.7                                    6.5                            -0.1                     5.0                        7.0
                                                                     - Domestic demand                                                             %YoY                                    11.3                    7.8                                    6.1                             6.7                     4.7                        5.6
                                                                     - Domestic demand (ex
- Why are we downgrading?                                            inventories)                                                                  %YoY                                    10.6                       8.1                                 6.4                               6.6                   5.8                        6.4

Our previous growth forecasts had been premised on a                                                                                               %YoY,
cross-current of macro trends, namely: (a) a pickup in                                                                                             period
                                                                     CPI                                                                           average                                  1.7                       2.3                                 2.5                               1.9                   2.4                        2.4
manufactured exports but with commodity exports still likely to                                                                                    %,
see subdued trend amid soft prices; (b) a moderation in                                                                                            period
                                                                     Policy rate                                                                   end                                      3.0                       3.0                                 3.0                        3.00                        3.00                  3.00
domestic demand as the pre-election boost tapers off and             Current account                                                               % of
policymakers embark on a fiscal consolidation stance post            balance                                                                       GDP                                      6.4                       5.4                                 5.7                               2.8                   2.5                        1.1
                                                                     Source: CEIC & Morgan Stanley Research; O=Original estimates; E=Current estimates
elections.
                                                                     Exhibit 26
                                                                     Pre-election boost to Domestic Demand Fading?
The storyline behind our revised numbers is the same. A still
                                                                        30
intact growth recovery in DM points to an export lift heading                                                                               Domestic demand (%YoY)
                                                                        25
towards 2014. On the other hand however, domestic demand                                                                                    Gross Fixed Capex (%YoY)
                                                                        20
momentum could be somewhat hampered by the following:
                                                                        15
Fitch’s recent downgrade to Malaysia’s outlook and recent
                                                                        10
rhetoric by policymakers suggest that fiscal consolidation is
underway. Meanwhile, with elections done and dusted, capex                 5

momentum had decelerated significantly from a peak of                      0

+29.3%YoY in 3Q12 to +8.9%YoY in 2Q13 (Exhibit 26). The                 -5

market had previously been sanguine regarding the continued            -10

capex strength on the back of ETP (Economic Transformation             -15
                                                                               Mar-06




                                                                                                                          Mar-07




                                                                                                                                                               Mar-08




                                                                                                                                                                                            Mar-09




                                                                                                                                                                                                                              Mar-10




                                                                                                                                                                                                                                                                       Mar-11




                                                                                                                                                                                                                                                                                                        Mar-12




                                                                                                                                                                                                                                                                                                                                    Mar-13
                                                                                           Jul-06

                                                                                                        Nov-06



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                                                                                                                                                                                                                                                                                               Nov-11



                                                                                                                                                                                                                                                                                                                 Jul-12

                                                                                                                                                                                                                                                                                                                          Nov-12
Projects) but we had been sceptical. Outside of the strategic
push to ETP in the run-up to elections, a sustained inflexion
point for investment depends critically on an improvement to         Source: CEIC & Morgan Stanley Research
                                                                     Exhibit 27
the competitiveness of the workforce, which is still not evident
yet, in our view.
                                                                     Current Account Balance Trend
                                                                      25%

That said, a growth revision was necessary given: (a) a further       20%

China downgrade/EM growth downgrade and the collateral                15%

impact on commodity prices which would be negative for the            10%
largest net commodity exporter in AXJ; (b) a weaker level of
                                                                        5%
incoming growth trajectory heading into 2H13.
                                                                        0%

                                                                       -5%
- Malaysia Does Not Face the Same Funding Squeeze As                                                                                                                    Current account balance (4Q trailing sum, % of GDP)

Indonesia                                                             -10%                                                                                              Current account balance (Quarterly annualised, % of
                                                                                                                                                                        GDP)
With the developments in ASEAN, markets have tried to                 -15%
decipher which economy could be next in terms of bearing the          -20%
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                                                                                                                                                                                                                                                                                                                                       Mar-13




brunt of the contagion effect. Some have highlighted the


                                                                     Source: CEIC & Morgan Stanley Research




                                                                                                                                                                                                                                                                                                                                                   10
                                                                       MORGAN                                                        STANLEY                                                                 RESEARCH

                                                                       September 3, 2013
                                                                       ASEAN Economics




similarities between Indonesia and Malaysia. Both are large            Exhibit 28

commodity exporters and have seen the reversal in terms-of-            Who Has High Foreign Ownership of Domestic
trade significantly weakening CAB (Exhibit 27). Foreign                Government Securities?
ownership of government bonds for both economies are high.               40%
                                                                                         Foreign Ownership of Domestic Government debt securities (% of total)
Foreign ownership of Malaysia government securities stand at
                                                                         35%                                                    Indonesia                                       Malaysia                                         Thailand
42.7% of outstanding in Jul-13. Including treasury bills and
investment issues, foreign ownership is 28.3% in Jul-13, very            30%

similar to the 30.6% in Indonesia in Aug-13 (Exhibit 28).
                                                                         25%
However, we believe Malaysia does not face the same funding
squeeze and cashflow problems in Indonesia for the following             20%

reasons:
                                                                         15%


(a) Indonesia’s current account deficit has gone back to 1996            10%

levels and we expect CAD of -3.7%/-2.5%/-2.5% of GDP in
                                                                          5%
2013/2014/2015. Malaysia’s current account surplus has also
weakened significantly from 10.8% of GDP in 4Q11 (quarterly               0%




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                                                                                                                                                                                                                                                                                                                                                                              Jun-13
annualized) to 1.1% of GDP in 2Q13 from commodity price falls
and the pre-election boost and we would not be surprised to
                                                                       Source: CEIC & Morgan Stanley Research
see Malaysia running a persistent CAD in the medium-term if            Exhibit 29
no reforms are taken up. However, we think it is still likely to run   Comparing Credit Cycles
a mild current account surplus for our forecast horizon, at
                                                                         45
2.8%/2.5%/1.1% of GDP for 2013/2014/2015.
                                                                         40

                                                                         35                                                                                                                                                          Malaysia loan growth (%YoY)
(b) Malaysia did not have as strong a credit cycle as Indonesia.                                                                                                                                                                     Indonesia loan growth (%YoY)
                                                                         30
Credit growth (12M trailing average) stood at 10.8% for
                                                                         25
Malaysia in Jul-13 vs Indonesia’s 22.7% in Jun-13 (Exhibit 29).          20
Meanwhile, LDR ratios are more comfortable in Malaysia at                15
79% vs Indonesia’s 91% (Exhibit 30), suggesting that there is            10
still an internal buffer of liquidity to fall back in the event of        5
capital flight.                                                           0
                                                                                                          Jul-07




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(c) Real interest rates in Malaysia are highest in ASEAN at
1.0% vs Indonesia’s -1.8%. To the extent to which real rates           Source: CEIC & Morgan Stanley Research
were higher to begin with, it would be less vulnerable as the          Exhibit 30
yield carry trade unwinds.                                             Who Has More Comfortable Loan-To-Deposit Ratio?
                                                                        120%
                                                                                                                                                                                                                 Malaysia                                                                  Singapore
- The Similarity With Indonesia Lies More In Terms of What              110%                                                                                                                                     Thailand                                                                  Indonesia

Lower Commodity Prices Would Mean for Medium-term                       100%

Growth                                                                   90%
We believe the similarity between Indonesia and Malaysia lies            80%
more in that both would have to contend with what lower                  70%
commodity prices would mean for GDP growth going forward.                60%
We have highlighted for a long time that Malaysia’s structural           50%
story is not compelling as it suffers from a Dutch Disease of                                                                                                                                                                                                                             Loan to Deposit Ratio (%)
                                                                         40%
sorts. Benign demographic trends have provided the labour
                                                                         30%
inputs for growth. Meanwhile, commodity-related government
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revenue has provided the capital inputs for growth via fiscal
pump-priming. Together, these two factors have created a
comfortable growth buffer, leading policymakers to neglect             Source: CEIC & Morgan Stanley Research




                                                                                                                                                                                                                                                                                                                                                                                                11
                                                                   MORGAN                                         STANLEY                                                          RESEARCH

                                                                   September 3, 2013
                                                                   ASEAN Economics




what’s needed on the competitiveness/ productivity. As a result,   Exhibit 31

FDI trends have been on a secular downtrend (Exhibit 31). Its      Malaysia: Secular Decline in FDI
global share of manufactured exports has fallen.
Non-commodity trade balance has been on a secular decline           27
                                                                                                                                    Malaysia                                                                                    Singapore
and is in deficit territory (Exhibit 32). Additionally, the
                                                                    22                                                              Thailand                                                                                    Indonesia
tertiary-educated makes up an increasing share of the
                                                                                                                                    Philippines
unemployed group, pointing to a degree of skills mismatch. In       17
this context, a sustained reversal in commodity terms-of-trade,
                                                                    12
without a corresponding improvement in productivity in other
non-commodity economic segments would constrain GDP                  7
growth prospects for Malaysia in the medium-term.
                                                                     2

- Global Developments Have Prompted Tentative Steps                 -3
towards Macro-rebalancing                                                              Net FDI, US$bn
                                                                    -8
The silver lining is that recent developments seem to have




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prompted more steps towards macro rebalancing. With
commodity revenue standing at 30-40% of government                 Source: CEIC & Morgan Stanley Research
revenue and public debt ratio pushing the 55% ceiling (Exhibit     Exhibit 32
33), policymakers have indicated plans to: (a) reduce fiscal       Non-commodity trade balance in Deficit
deficit to 4% of GDP in 2014 Budget (to be announced on 25th        20%
                                                                                                            Commodities trade balance (Mineral fuels, CPO, food & crude materials)
October) and then to 3% in 2015, (b) widen revenue base via a                                               Non-commodities trade balance
Goods & Service Tax and; (c) reduce unproductive                    15%
expenditure via subsidy rationalization. These measures
should have the longer-term impact of helping the economy to
                                                                    10%
deal with a new global environment of lower commodity prices.
Apart from these measures, we reiterate our view that
engineering a sustainable structural inflexion point in              5%

Malaysia’s growth story would require policymakers to address
issues pertaining to the quality of human capital. Growth            0%
momentum in mega investment plans such as the ETP and                              Trade balance (3M trailing sum, annualised, % of GDP)
Iskandar Development Region can only have longevity if              -5%
policymakers implement a critical mass of reforms on the “soft
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infrastructure front” i.e human capital.
                                                                   Source: CEIC & Morgan Stanley Research
Where are the risks and where we could go wrong?                   Exhibit 33

Upside/downside risks stem from: (a) pace of DM recovery; (b)      Public Debt Pushing the 55% Ceiling
movement in US long yields and the collateral impact that it         75%                                                                                                                                                                                                                                                -10%

would have on EM growth and hence commodity prices; (c)              70%                                                                                                                                                                                                                                                -8%
China growth story and implications for commodity prices; and        65%                                                                                                                                                                                                                                                -6%
(d) upcoming UMNO party elections and implications on                60%
                                                                                                                                                                                                                                                                                                                        -4%
leadership stability.                                                55%
                                                                                                                                                                                                                                                                                                                        -2%
                                                                     50%
                                                                                                                                                                                                                                                                                                                        0%
                                                                     45%
                                                                                                                                                                                                                                                                                                                        2%
                                                                     40%

                                                                     35%                                                                                                                                                                                                                                                4%

                                                                     30%                                                                                                                                                                                                                                                6%

                                                                     25%                                                                                                                                                                                                                                                8%
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                                                                                                             Government debt (% of GDP) (LS)
                                                                                                             Fiscal balance (4Q trailing sum, % of GDP) (RS) (Values in reverse order)


                                                                   Source: CEIC & Morgan Stanley Research




                                                                                                                                                                                                                                                                                                                                            12
                                                                       MORGAN                                 STANLEY                                         RESEARCH

                                                                       September 3, 2013
                                                                       ASEAN Economics




Singapore: Lower Trend Growth, Higher Trend Inflation & A Less
Easy Fed Policy
What’s new? How are we different from consensus?                       Exhibit 34

We are upgrading our 2013 GDP growth from 2.3% to 2.9%                 Forecast Revisions
                                                                                                                                                                       2012              2013O                 2014O              2013E                   2014E             2015E
and downgrading our 2014 GDP growth from 4% to 3.6%                    Real GDP growth                                               %YoY                                1.3                2.3                   4.0                2.9                     3.6               4.0
                                                                       - Private consumption                                         %YoY                                2.2                2.3                   4.0                2.5                     3.6               4.0
(Exhibit 34). Our first stab at 2015 looks for a mild uptick to 4%.    - Public consumption                                          %YoY                               -3.6                5.0                   3.5                9.3                     3.5               3.5
Our 2013/2014 forecasts are more or less in line with                  - Gross capital formation                                     %YoY                               26.8                3.0                   4.4                4.6                     3.4               3.0
                                                                       -- Gross fixed capex                                          %YoY                                6.6                2.0                   6.3               -0.3                     5.5               5.8
consensus which stands at 2.7%/3.7%.                                   - Exports                                                     %YoY                                0.3                0.5                   6.5                1.7                     6.0               8.0
                                                                       - Imports                                                     %YoY                                3.2                0.4                   7.0                2.1                     6.3               8.5
                                                                       - Domestic demand                                             %YoY                                9.7                2.9                   4.1                4.2                     3.5               3.5
Key points:                                                            - Domestic demand (ex
                                                                       inventories)                                                  %YoY                                     2.9              2.6                    4.7                  2.4                    4.3             4.6
                                                                                                                                     %YoY,
- Why are we revising our numbers?                                                                                                   period
                                                                       CPI                                                           average                                  4.6              3.6                    3.6                  2.4                    2.5             2.6
Our upward revision to 2013 takes into account a                                                                                     %, period
stronger-than-expected 1H13 GDP growth and the carry over              3M SGD SIBOR                                                  end                                      0.4              0.4                    0.4                  0.4                    0.4             1.0

effect this may have on 2H13 GDP growth. Our downward                  Current account balance                                       % of GDP                            18.6                 16.1               16.4                     18.1              18.5                17.6
                                                                       Source: CEIC & Morgan Stanley Research; O=Original estimates; E=Current estimates
revision for 2014 incorporates the downward revision that the
global team envisages for EM economies as markets adjust to            Exhibit 35
a less easy Fed policy. Moreover, the exogenous tightening is          From “Goldilocks” To A New Normal
also likely to take the wind out of the previously strong credit        25
growth cycle in Singapore.
                                                                        20                                                          GDP growth (%YoY)
                                                                                                                                    Inflation (%YoY)
- Shift To Slower Growth Normal Well Underway                           15
Our thesis on Singapore remains broadly unchanged. The                  10
economy is transitioning from a “Goldilocks” period of high
growth and extremely benign inflation seen in the run-up to               5

2007, to one in which growth is likely to settle at a newer lower         0
normal whilst inflation is likely to trend higher (Exhibit 35). This
                                                                         -5
is both due to global developments and idiosyncratic issues at
home. On the growth front, growth has trended down from                 -10
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8.5% CAGR seen in 2004-2007 to what looks likely to be a
3%-4% range going forward. Indeed, macro-rebalancing (first
in DM and now also EM) point to a global growth which would            Source: CEIC & Morgan Stanley Research
be significantly lower than the 5% CAGR seen since                     Exhibit 36

2004-2007. MS Global economics team expects                            “Labour Supply Shock” From Slower Immigration
2013/2014/2015 global GDP growth at 2.9%/3.5%/3.7%                     Going Forward
                                                                                                                                                                    Non-resident labour (% of labour force) (LS)
respectively. Given that domestic demand is hardly domestic in           40                                                                                         Non-resident population (%YoY) (RS)                                                                     25
                                                                                  Policymakers want to maintain foreign
nature for the small open economy, the spillover growth                           labour share at ard 1/3
                                                                         35                                                                                                                                                                                                 20
implications for Singapore are already being felt.
                                                                         30
                                                                                                                                                                                                                                                                            15
Additionally, what is different in this cycle is that not only is        25
                                                                                                                                                                                                                                                                            10
Singapore contending with secular global demand shock, it is             20
also contending with domestic issues of its own – essentially “a                                                                                                                                                                                                            5
                                                                         15
labour supply shock” (Exhibit 36). An ageing population and a
                                                                                                                                                                                                                                                                            0
need to wean the economy from dependence on foreign labour               10

given infrastructure/political constraints means that                     5                                                                                                                                                                                                 -5

policymakers have undertaken steps to slow down the growth
                                                                          0                                                                                                                                                                                                 -10
of foreign labour. To the extent to which an aggressive
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immigration policy had lifted labour inputs and driven growth
                                                                       Source: CEIC & Morgan Stanley Research




                                                                                                                                                                                                                                                                                        13
                                                                     MORGAN                                           STANLEY                                         RESEARCH

                                                                     September 3, 2013
                                                                     ASEAN Economics




before, a slowdown in working age population would also drive        SIBOR-plus mortgage loans. We believe the exogenous
down potential growth.                                               tightening effects from a less easy Fed policy would potentially
                                                                     create headwinds for selected segments of the economy such
- Inflation To Trend Above Old Normal; But Worst of                  as property and interest-rate sensitive spending.
Stagflation Likely Behind Us As …
Meanwhile, we expect inflation to hover in the mid 2% territory      Where are the risks & where we could go wrong?
going forward, somewhat higher than the 1.5%-2.0% range              Upside/downside risks would stem from (a) global growth; (b)
seen during the Goldilocks period. This is because the still tight   movement in US long yields; and (c) longer-term structural
labour market and adjustments to a cut back in foreign labour        reform measures to enhance growth drivers and productivity.
will likely put a floor to labor costs despite the more subdued
growth momentum going forward. Yet that said, the worst of the       Exhibit 37

stagflation-type environment is likely behind us. Indeed,            Inflation Trends
headline inflation has decelerated from an intra-year peak of         7
4.9%YoY in Feb-13 to 1.9%YoY in Jul-13 (Exhibit 37).                  6                                     Tradables inflation (ex private transport) (%YoY)
Courtesy of the loose monetary conditions imported from DM,                                                 Non-tradables inflation (ex accomodation) (%YoY)
                                                                      5
                                                                                                            MAS core inflation (%YoY)
housing and transport (car prices) have previously been the           4
two key sources of inflation. However, macroprudential
                                                                      3
measures in auto finance in terms of LTV caps and maximum
                                                                      2
tenures have led to softening car prices. A slower pace of
property price rises from the multiple rounds of property cooling     1

measures has also filtered into CPI with a lag. In addition, the      0
exogenous tightening inflicted from a less easy Fed policy (as        -1
we elaborate below) also looks likely to soften property prices       -2
further. Our property analysts, Sean Gardiner & Wilson Ng,            -3
expects private residential prices to fall by 5% in 2014.
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Overall, for the medium-term, macro rebalancing to tap higher
growth export segments/export destinations and improving             Source: CEIC & Morgan Stanley Research

productivity to offset the drag from ageing population is the only   Exhibit 38
sustainable panacea to raising growth prospects and reining in       SG Long Yields Have Moved Up
inflation.                                                            7.0
                                                                                         %
                                                                                                                                                                                                                            US 10Y
- … Exogenous Tightening To Take Some Wind Out of The                 6.0                                                                                                                                                   SG 10Y
Credit Cycle
Our US team expects the Fed to begin raising rates in                 5.0
mid-2015, taking it to 1.5% by 2015 year-end. On the back of
that, we expect 3M SGD SIBOR to rise to 1% by 2015 year-end           4.0
from ~0.4% currently. Singapore will not be immune to the
exogenous tightening effects from a less easy Fed policy.             3.0
Resident lending has increased by 50% of GDP in the period
2007-2Q13 to reach 159% of GDP amid depressed SIBOR                   2.0

rates and this has buoyed asset prices. As it is, although the
Fed has not begun to tighten rates yet, the end of the                1.0
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zero-interest rate policy being sooner than it has been before,
has already led long yields to rise. Indeed, in Singapore 10Y
bond yield has risen 140bps from May levels, compared to the         Source: Bloomberg & Morgan Stanley Research

110bps increase in US 10Y bond yield for the same period
(Exhibit 38). Anecdotally, banks have already started to reprice




                                                                                                                                                                                                                                                                                                  14
                                                                      MORGAN                                                               STANLEY                    RESEARCH

                                                                      September 3, 2013
                                                                      ASEAN Economics




Thailand: Next At Risk After Indonesia To Rising Real Rate Trend
What’s new? How are we different from consensus?                      Exhibit 39

We are downgrading our 2013/2014 GDP growth numbers                   Forecast Revisions
                                                                                                                                                                      2012     2013O     2014O        2013E     2014E        2015E
from 4.7%YoY/5.3%YoY to 3.7%YoY/4.4%YoY (Exhibit 39).                 Real GDP growth                                                                %YoY               6.5       4.7       5.3          3.7       4.4          4.8
Our first stab at 2015 looks for further growth pickup to             - Private consumption                                                          %YoY               6.7       4.2       4.5          2.4       2.6          3.0
                                                                      - Public consumption                                                           %YoY               7.5       6.0       6.0          5.0       5.0          6.5
4.8%YoY. August consensus for 2013/2014 stands at                     - Gross capital formation                                                      %YoY              16.8       6.0       7.7          6.1       7.1          8.9
4.3%YoY/4.9%YoY respectively.                                         -- Gross fixed capex                                                           %YoY              13.2       8.7       9.7          3.4       6.6          7.6
                                                                      - Exports                                                                      %YoY               3.1       6.7       7.0          2.3       4.1          5.0
                                                                      - Imports                                                                      %YoY               6.2       7.3       7.6          2.0       3.6          5.5
Key points:                                                           - Domestic demand                                                              %YoY               9.4       4.9       5.6          3.7       4.1          5.1
                                                                      - Domestic demand (ex
                                                                      inventories)                                                                   %YoY              8.4         5.6        6.1        3.0          3.9        4.7
- Why are we downgrading?
                                                                                                                                                     %YoY,
Our downgrade takes into account the following: (a) the                                                                                              period
technical recession in 1H13 as payback from stimulus program          CPI                                                                            average           3.0         3.4        3.4        2.3          2.6        2.5
                                                                                                                                                     %,
was more significant than expected; (b) delay in                                                                                                     period
implementation of government investment plans from 2H13 to            Policy rate                                                                    end               2.8         3.3        3.5        2.5          3.5        3.5
                                                                                                                                                     % of
2014; (c) exogenous tightening effects as overeasy monetary           Current account balance                                                        GDP               0.0         0.3        0.3        -0.9        -0.5        -0.9
policy in US starts to unwind. Post flood in 2012, domestic           Source: CEIC & Morgan Stanley Research; O=Original estimates; E=Current estimates
                                                                      Exhibit 40
demand and export momentum has diverged as export
production capacity got crimped and domestic demand got a             Household Debt (% of GDP)
                                                                                                            100%
boost from stimulus program. Meanwhile, 2013 saw a pullback
                                                                                                                     90%
in domestic demand as stimulus program expired whilst goods
                                                                                                                                                  Malaysia
export momentum stayed patchy at a more subdued level.                                                               80%
                                                                       Household debt (% of GDP) (2012)




                                                                                                                                                                      Korea                                          Singapore

Heading in 2014, we suspect domestic demand momentum                                                                 70%
                                                                                                                                                                  Taiwan
                                                                                                                                         Thailand                                            Hong Kong
(+4.1%YoY) and export momentum (+4.1%YoY) are likely to                                                              60%

converge. Both are likely to show a cyclical uptick. However,                                                        50%

the pace of acceleration will likely be more marked in exports                                                       40%

as exogenous tightening inflicted by the unwinding of overeasy                                                       30%                 China

monetary policy in US puts a rein on how quickly domestic                                                            20%
                                                                                                                                  Indonesia
demand would pick up.                                                                                                10%       India
                                                                                                                                 Philippines
                                                                                                                     0%
                                                                                                                           0               10,000            20,000           30,000         40,000         50,000           60,000
- Export recovery to provide some growth beta but…
                                                                                                                                                               GDP per capita (US$) (2012)
Compared to other ASEAN economies, Thailand has a
                                                                      Source: CEIC & Morgan Stanley Research
relatively more balanced dual-track economy of exports and            Exhibit 41
domestic demand. A US growth rebound and a less bad                   Bank Credit to Non-Households (% of GDP)
Europe which is happening according to script would help to                                                 140%
provide some beta on the growth front. Indeed, despite the
global growth soft patch seen earlier this year, Thailand has still                                         120%
                                                                       Non-household bank credit (% of GDP) (2012)




                                                                                                                                                                                             Hong Kong

managed to eke out an export growth (in US$ terms) better                                                   100%
than other ASEAN counterparts due to the composition of its                                                                              China

export basket (less commodity centric). Moreover, Thailand’s                                                         80%               Thailand                   Taiwan                                             Singapore


manufactured exporters have been competitive and increasing                                                          60%
                                                                                                                                                                      Korea

their global market share.                                                                                                                        Malaysia
                                                                                                                               India
                                                                                                                     40%
                                                                                                                                Philippines
- ….Exogenous tightening from rising US real rates to                                                                20%
                                                                                                                                  Indonesia
constrain domestic demand where excesses have built up
On the domestic demand front, the picture is somewhat less                                                           0%
                                                                                                                           0               10,000            20,000           30,000         40,000         50,000           60,000
straight forward. We highlighted in an earlier report that in                                                                                                  GDP per capita (US$) (2012)

                                                                      Source: CEIC & Morgan Stanley Research




                                                                                                                                                                                                                                        15
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                                                                      September 3, 2013
                                                                      ASEAN Economics




ASEAN, Thailand is next most vulnerable after Indonesia to the        Exhibit 42

exogenous tightening effects from expected QE taper and               Drifting into Current Account Deficits
rising US real rates (See Thailand Economics: After Indonesia          20%

& India, Who Next to Watch for Risks?, July 19). Strong capital        15%
flows as evident in the increase in foreign ownership of
                                                                       10%
government bonds have helped to keep real interest rate low
despite its deteriorating current account balance, strong credit           5%
growth and rising LDR. This has likely helped to further sustain
                                                                           0%
the credit cycle amid government stimulus programs and
bolstered growth.                                                          -5%

                                                                       -10%
Indeed, credit growth has been strong at ~8% of GDP each
                                                                       -15%
year in the past 5 years between 2007-2012, driven by both




                                                                                    Jan-05

                                                                                                 Jul-05

                                                                                                            Jan-06

                                                                                                                        Jul-06

                                                                                                                                    Jan-07

                                                                                                                                                 Jul-07

                                                                                                                                                               Jan-08

                                                                                                                                                                             Jul-08

                                                                                                                                                                                               Jan-09

                                                                                                                                                                                                                 Jul-09

                                                                                                                                                                                                                                   Jan-10

                                                                                                                                                                                                                                                 Jul-10

                                                                                                                                                                                                                                                               Jan-11

                                                                                                                                                                                                                                                                            Jul-11

                                                                                                                                                                                                                                                                                        Jan-12

                                                                                                                                                                                                                                                                                                    Jul-12

                                                                                                                                                                                                                                                                                                               Jan-13

                                                                                                                                                                                                                                                                                                                         Jul-13
households and non-households segment. Bank leverage for
both households and non-households in Thailand, adjusted for
                                                                                                            Current acct balance (Monthly annualised, % of GDP)
GDP per capita, are higher than the regional trend average                                                  Current acct balance (3M trailing sum, annualised % of GDP)
(Exhibit 40 & 41) and LDR ratio has risen to 95%.
                                                                      Source: CEIC & Morgan Stanley Research

Now, capital flows are unwinding. Foreign ownership of                Exhibit 43
government bonds have fallen from 17.7% of outstanding in             Recent Policy Easing Has Not Filtered Into Market
April to 16.7% in July amid US$2.7bn of outflows. Given that          Rates
Thailand is likely to see current account deficits (Exhibit 42) for    9
                                                                                    %
                                                                                                                                                                                                                     Policy rate
                                                                                                                                                                                                                     Savings deposit rate
2013/2014/2015 at -0.9%/-0.5%/-0.9% of GDP, rather than                8                                                                                                                                             3M time deposit
                                                                                                                                                                                                                     Minimum loan rate
current account surplus, reflecting a lack of excess savings in
                                                                       7
the system, we believe the economy looks vulnerable to the
                                                                       6
exogenous tightening inflicted by the rise in real rates in US
and this is likely to constrain how quickly domestic demand            5

could pick up despite the export growth support. As it is, the         4
high LDR ratio of 95% already means that recent policy rate
                                                                       3
cuts have seen limited pass-through to lending and deposit
                                                                       2
rates (Exhibit 43).
                                                                       1

- Growth alpha from fiscal policy also face headwinds                  0
                                                                           Jan-05

                                                                                        Jul-05

                                                                                                   Jan-06

                                                                                                               Jul-06

                                                                                                                           Jan-07

                                                                                                                                        Jul-07

                                                                                                                                                      Jan-08

                                                                                                                                                                    Jul-08

                                                                                                                                                                                      Jan-09

                                                                                                                                                                                                        Jul-09

                                                                                                                                                                                                                          Jan-10

                                                                                                                                                                                                                                            Jul-10

                                                                                                                                                                                                                                                          Jan-11

                                                                                                                                                                                                                                                                        Jul-11

                                                                                                                                                                                                                                                                                     Jan-12

                                                                                                                                                                                                                                                                                                 Jul-12

                                                                                                                                                                                                                                                                                                             Jan-13

                                                                                                                                                                                                                                                                                                                        Jul-13
from exogenous tightening
The pick-up in public infrastructure investment is a theme we
have been watching out for since 2H13. However, with the              Source: CEIC & Morgan Stanley Research
Rp2trn infrastructure funding bill still in Parliament and the
water infrastructure projects needing further environment and         On the fiscal front, we believe the exogenous tightening from a
health impact assessments before they can proceed,                    less easy Fed policy could also put a lid on how aggressive
implementation of public investment projects is further pushed        policymakers can be with its fiscal stimulus as this could further
back into 2014. For the Bht2trn infrastructure plan,                  weaken the current account which is already in deficit territory.
policymakers expect Bht154bn/Bht307bn to be implemented in            This would mean that policymakers would have to tap external
2014/2015 (Exhibit 44). This pick-up in non-budgetary                 funding which would likely come at a higher interest cost or a
expenditure would be offset to a certain extent by a smaller          further tightening of domestic liquidity conditions and a
budget deficit of Rp250bn for FY2013/2014 (vs Rp300bn for             crowding out of private investment.
FY2012/2013). Net-net, we are expecting public investment
projects to lend a growth stimulus to the tune of ~0.6%-pt to         We would also note that with elections due by July 2015, any
2014 GDP growth, assuming a 50% implementation rate of the            policy preference to fall back on quick-and-easy consumption
infrastructure projects.                                              type of fiscal measures rather than investment type of
                                                                      spending in 2014 would risk worsening the fiscal burden and
                                                                      current account without any commensurate growth or



                                                                                                                                                                                                                                                                                                                                  16
                                                                 MORGAN                STANLEY       RESEARCH

                                                                 September 3, 2013
                                                                 ASEAN Economics




productivity returns in future. Indeed, we believe that the      Exhibit 44

following factors of: (a) ageing demography and higher           Bht2trn Infrastructure Plan: Expected Disbursement
social/healthcare expenditure going forward; (b) reduced tax     Timeline
revenue base from corporate/personal income tax; (c) legacy        450
                                                                              Bht bn                  Expected disbursement

of populist policy measures; and (d) current account deficits,     400
point to an increasing need for policymakers to efficiently        350
manage the fiscal mix.                                             300

                                                                   250
Where are the risks and where we could go wrong?
                                                                   200
Upside/downside growth risks would stem from: (a) the pace of
                                                                   150
DM growth recovery; (b) movements in US long yields; (c)
political climate in the run-up to 2015 elections                  100

                                                                    50

                                                                     0
                                                                          2013         2014   2015   2016      2017      2018   2019   2020


                                                                 Source: PDMO & Morgan Stanley Research




                                                                                                                                              17
                                                                                             MORGAN           STANLEY            RESEARCH

                                                                                             September 3, 2013
                                                                                             ASEAN Economics




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                                                                                             September 3, 2013
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Description: Rising Real Rates & China Slowdown Mean for ASEAN?