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					                                                                                                                                                                                                                                   ARAB TIMES, TUESDAY, JULY 19, 2011
    BUSINESS                                                                                                                                                                                                                                                                     38


                  Germany seeks skilled workers                                                                               HRE state aid cleared                                                          Spanish bank bad loans surge

    Germany is recruiting skilled                 The agency’s foreign and pro-                  The European Commission                   tees amounting to 145 billion                Spanish banks’ bad loans, a major              of 6.36 percent in April.
    workers from heavily indebted              fessional jobs department is                      gaves its blessing on Monday to           euros.                                       source of concern to the financial                Investors are concerned about the
    euro zone countries to help stave          specifically targeting engineers                  a massive German government                  In return, HRE will gradually             markets, surged to the highest level           state of Spanish banks, hard hit by
    off its own shortage of skilled            from Spain and doctors from                       bailout of the banking group              give up all commercial activities            for 16 years in May, the Bank of               the collapse of property bubble in
    labour, the federal employment             Greece, spokeswoman Beate                         Hypo Real Estate on condition             except for those in its core bank            Spain said on Monday.                          2008, an ensuing recession and a
    agency said on Monday.                     Raabe said.                                       of a drastic downsizing.                  Deutsche Pfandbriefbank.                        Bank loans considered to carry a            steep rise in the cost of raising money
       With its fast-growing economy              “We are seeing a high level of                    The European Union’s com-                 “Today’s decision brings one              risk of non-recovery amounted to               on financial markets in past months.
    and low unemployment, Germany              interest in Spain,” Raabe said.                   petition watchdog approved                of the most significant financial            117.59 billion euros ($165.44 billion),           The government and Bank of Spain
    has a shortage of some 36,000              “Unemployment is high there and                   capital injections of 10 billion          crisis state aid cases to a con-             or 6.498 percent of total assets, in           have forced a wave of consolidation
    engineers and more than 5,000              we’re exploring the possibility of                euros ($14 billion), an asset             structive close,” EU competition             May — the highest ratio since June             in the sector and are requiring banks
    hospital doctors, according to             some seeking work in Germany.”                    relief measure of about 20 bil-           commissioner Joaquin Almunia                 1995, the central bank said in a report.       to quickly increase the proportion of
    industry groups.                           (RTRS)                                            lion euros and liquidity guaran-          said. (AFP)                                     That compared to a bad loan ratio           rock-solid core capital. (AFP)




                                                                                             global economic weekly
                                                                                                                                                    Bank of America Merrill Lynch


Japan economic data show quake recovery
  This is the third part of Global             data and higher share prices. The current                                                                                                for the lower-than-expected Q1 GDP but              What also stands out for Indonesia is
Economic Weekly by Bank of America             account balance in May, after seasonal                                                                                                   it will note in the policy statement that        the relatively lower leverage and health-
Merrill Lynch. — Editor                        adjustments, stood at ¥391bn. The posi-                                                                                                  the economic data point to an economy            ier fiscal readings relative to China and
           ❑      ❑     ❑                      tive income balance was greater than the                                                                                                 in recovery in the future. The BoJ is like-      India. Domestic credit to GDP is only
                                               trade deficit and we continue to see little                                                                                              ly to cite overseas conditions and               about 28% in Indonesia vs. 50% in India
   While relatively high CPI inflation may     risk the current account will become                                                                                                     domestic political turmoil as downside           and 120% in China. Indonesia runs a
be eroding the real value of households’       negative.                                                                                                                                risks to the economy.                            smaller fiscal deficit. Public debt to
debt, that it weighs on real income is again      Economic downside in political tur-                                                                                                                                                    GDP is 26% in Indonesia vs. 63% in
important. It would be more beneficial for                                                                                                                                                          Emerging Asia
                                               moil                                                                                                                                                                                      India and 48% in China (inclusive of
debtors if – alongside low interest rates         Diet deliberations began with the joint                                                                                                  Indonesia: In a sweet spot, for now           local government debt). Vulnerability to
and high inflation – nominal wage growth       upper and lower house budget commit-                                                                                                     ■ Review: In Thailand, the July 3 gen-           a financial, fiscal or currency crisis,
was strong, not weak. In that event, house-    tee meeting. Government party delibera-                                                                                                  eral elections passed peacefully, with the       therefore, looks limited for Indonesia.
holds’ real debts would have been eroded,      tions on revising the children’s                                                                                                         opposition Pheu Thai party winning an               Is inflation really beaten?
but the household debt/income ratio – not      allowance aimed at the passage of the                                                                                                    overall majority. The PBoC hiked 1-year             Headline inflation has been retreating
directly impacted by inflation – would         special government bond bill restarted,                                                                                                  benchmark deposit and lending rates by           since hitting a peak of +7% in January.
have fallen more swiftly over the last few     but there were no signs of agreement.                                                                                                    25bp, effective on 7 July.                       CPI inflation, at +5.5% in June, is now
quarters.                                      On 5 July, finance minister Yoshihiko                                                                                                    ■ Hot topic: Indonesia appears to be in          comfortably within the 4% to 6% infla-
   Moreover, households cannot borrow          Noda stated it was possible there would                                                                                                  a sweet spot, especially relative to its         tion target. We expect inflation to hover
at BoE interest rates. Spreads between         be a decision to slow down this financial                                                                                                large Asian BRIC counterparts, China             and stay within the 5% to 6% inflation
BoE rates and mortgage rates have              year’s     expenditures      starting    in                                                                                              and India. Growth is accelerating,               range for the rest of the year, provided
widened significantly in recent years:         September if the special government                                                                                                      despite the global soft patch and disrup-        fuel subsidies are not cut any time in the
both 2- year fixed and 2-year tracker          bond law is not passed. Prime Minister                                                                                                   tions from Japan’s earthquake. Inflation         second half.
mortgage rates are currently around            Naoto Kan abruptly announced stress                                                                                                      pressures are easing, with headline CPI             Bank Indonesia has set an even lower
3.50%, compared with BoE rates at              tests for nuclear power facilities, raising                                                                                              falling back to +5.5%, comfortably               inflation target zone for 2012, at 3.5% to
0.5%. Indeed, one of the reasons why           concern there may be delays in the                                                                                                       within Bank Indonesia’s (BI) inflation           5.5% (0.5% below current inflation tar-
nominal interest rates are so low (along       restarting of nuclear facilities shut down                                                                                               target zone of 4% to 6%. The Jakarta             get). Structurally lower inflation would
with £200bn of QE) is because of that          for inspection.                                                                                                                          Composite Index (JCI) is flirting with           benefit risky assets. Bank Indonesia’s
widening in spreads.                              Hot topic: Signs of an end to defla-                                                                                                  all-time highs.                                  credibility has been gradually built up
   Corporate sector: real rates only so        tion?                                                                                                                                       Contrast this with China and India,           over time and, arguably, these institu-
low if you’re raising prices                                                                                                                                                            where authorities have had to battle ele-        tional improvements have anchored
                                                  The nationwide core-core consumer                                                                                                     vated inflation and overheating pres-
   In the corporate sector, when assess-                                                                                                                                                                                                 overall inflation expectations at lower
                                               price index (CPI), which excludes ener-                                                                                                  sures. China and India’s markets have
ing the level of short-term real interest                                                                                                                                                                                                levels. Policy rates, as a result, need not
                                               gy and food, rose 0.1% in May.                                                                                                           languished as a result. BI, in contrast,
rates, we think it is more relevant to con-                                                                                                                                                                                              return or normalize to the historical
sider nominal interest rates relative to       Recently, however, the CPI has not nec-                                                                                                  can afford to leave policy rates
                                               essarily reflected actual price conditions                                                                                                                                                averages of around 8.5% (seen before
individual firms’ own output prices,                                                                                                                                                    unchanged next week for the fifth con-           2008 global financial crisis), but at sig-
rather than relative to aggregate CPI          due to the presence of many special fac-                                                                                                 secutive month. Postponement of fuel
                                               tors such as free high school tuition from                                                                                                                                                nificantly lower levels (possibly to
inflation. On that basis, with much of the                                                                                                                                              and electricity tariff adjustments to next       around 7.5%).
strength of inflation being driven by          April 2010, and cigarette tax and casual-                                                                                                year, however, raises the question of
                                               ty insurance price hikes from October                                                                                                                                                        We highlight some of the possible
VAT, commodity prices and import                                                                                                                                                        whether BI can really meet the more              risks, despite the near-term positive out-
prices, the underlying increases in many       2010. Excluding these factors, the core-                                                                                                 ambitious lower 3.5%-to-5.5% inflation
                                               core CPI declined around 0.6% YoY,                                                                                                                                                        look. The reluctance to cut fuel subsidies
UK firms’ output prices are notably                                                                                                                                                     target set for 2012.                             and raise gasoline prices has kept infla-
lower than aggregate CPI inflation.            suggesting that deflation remains ongo-                                                                                                  ■ Preview: China GDP growth could
                                               ing (we estimate the figure would be                                                                                                                                                      tion in check. But market and subsidized
   As in the household sector, corporate                                                                                                                                                slow to 9.4% yoy in 2Q from 9.7% in              gasoline prices have diverged signifi-
borrowing rates are also notably higher        around -1% after rebasing, which is                                                                                                      1Q. June CPI inflation is expected to rise
                                               expected to have a downward effect on                                                                                                                                                     cantly; with the market prices now
than BoE rates. Rather than just consid-                                                                                                                                                to 6.3%, and we think this would mark            almost double that of the subsidized
ering short-term real interest rates, both     CPI calculations, is carried out in                                                                                                      the peak of 2011. Bank Indonesia will
                                               August). The output prices DI of large                                                                                                                                                    gasoline prices (Chart 20). Past deci-
households and firms are likely to con-                                                                                                                                                 likely leave the policy rate unchanged           sions or events to cut fuel subsidies – in
sider a somewhat longer timeframe              manufacturers ("rise" minus "fall") in                                                                                                   for a fifth consecutive month, while
                                               the Bank of Japan's June Tankan survey                                                                                                                                                    October 2005 and May 2008 – were
when making investment/spending deci-                                                                                                                                                   Bank of Thailand is expected to hike by          major inflation shocks. Subsidized
sions. In that context, the relatively low     released on 1 July was -8, confirming                                                                                                    25bp. It will be a close call for the rate
                                               that deflation is ongoing.                                                                                                                                                                prices were raised by about +88% on 1
levels of expected medium/longer-term                                                                                                                                                   decision in Korea, but the we think it is        October 2005 and +33% on 24 May
real interest rates are more relevant in          However, the output prices DI is                                                                                                      more likely than not that the BoK will
                                               becoming less negative, moving from -                                                                                                                                                     2008.
supporting the economy.                                                                                                                                                                 hike by 25bp.                                       Recent signals suggest that the gov-
   So overall, along with the swings in        12 in the previous March survey to -8 in                                                                                                    Indonesia appears to be in a sweet
                                               the June survey, and the three-month                                                                                                                                                      ernment will leave subsidized fuel prices
CPI inflation over the last few quarters                                                                                                                                                spot, especially relative to its large Asian     unchanged for the rest of the year. A
driving marked volatility in measured          forward forecast for September is -6.                                                                                                    BRIC counterparts, China and India.
                                                  The output prices DI and the CPI                                                                                                                                                       healthier fiscal position is providing
short-term real interest rates, we do not                                                                                                                                               Growth is accelerating, despite the glob-        more fiscal latitude for the government
think they give a particularly useful met-     (core-core basis excluding food and                                                                                                      al soft patch and disruptions from
                                               energy and special factors, YoY) exhibit                                                                                                                                                  to maintain subsidies (and bad policies
ric of the underlying stance of monetary                                                                                                                                                Japan’s earthquake (Chart 16). Second            unfortunately). Some eventual fuel price
policy at present.                             a close correlation, with the DI leading                                                                                                 quarter GDP growth may come in as
                                               the CPI by roughly two quarters.                                                                                                                                                          adjustment is, however, likely, if not
   Preview: Food to push up CPI infla-                                                                                                                                                  strong as or even stronger than the first
                                               Assuming the output prices DI improves                                                                                                   quarter (+6.5%). Most other Asian                later this year, then early next year.
tion in June?                                                                                                                                                                                                                               The government has proposed that
   CPI inflation may have edged up from        to -6 as forecast, we see a strong likeli-                                                                                               economies, in contrast, are seeing a
                                               hood that the CPI will gradually become                                                                                                  slowdown because of weaker manufac-              this year’s subsidies budget be increased
4.5% in May to 4.6% in June, in our                                                                                                                                                                                                      to Rp244.5tn from the current
view. We expect core inflation to have         less negative even if this does not mean                                                                                                 turing and exports, and monetary tight-
                                               an immediate departure from deflation (-                                                                                                 ening.                                           Rp187.7tn, a +30.3% increase.4 Most of
remained broadly flat at 3.3%. However,                                                                                                                                                                                                  the subsidy, or Rp187.2tn, will be for
both the BRC survey and the BofA               0.2% before rebasing, -0.5-0.6% after                                                                                                       Inflation is retreating in Indonesia.
                                               rebasing).                                                                                                                               Headline CPI inflation fell to +5.5% in          energy subsidies – Rp120.8tn for fuel
Merrill Lynch Global Research Food                                                                                                                                                                                                       and Rp66.4tn for electricity. This is
Retail survey suggest that food price             One reason for the narrowing negative                                                                                                 June from +6% in May. This is comfort-
                                               score for the output prices DI is that                                                                                                   ably within the central bank’s inflation         based on the revised budget assumption
inflation has picked up again of late,                                                                                                                                                                                                   of US$95 Indonesia Crude Price (ICP)
which may have pushed up aggregate             surging prices of crude oil and other                                                                                                    target zone of 4% to 6%. And unless fuel
                                               commodity prices have begun to affect                                                                                                    subsidies are cut, headline inflation            (from $80) and fuel consumption of 38.9
CPI inflation a touch in June. With fur-                                                                                                                                                                                                 to 40.5 million kilolitres (from 38.6 kilo-
ther sizeable increases in utility prices      the core-core CPI, which is not neces-                                                                                                   looks set to stay below 6% for the rest of
                                               sarily a welcome factor as it means                                                                                                      the year. India and China, in contrast,          litres). This will likely push the fiscal
remaining likely, in our view, we contin-                                                                                                                                                                                                deficit to about 2.1% of GDP (from ear-
ue to expect CPI inflation to rise to          higher costs are just pushing the prices                                                                                                 continue to face elevated inflation pres-
                                               of final products.                                                                                                                       sures (Chart 17).                                lier projected 1.8%).
around 5% in the summer.                                                                                                                                                                                                                    In addition, domestic demand remains
   After only very soft GDP growth over           But it could be also reflective of                                                                                                       Bank Indonesia is, as a result, sitting
                                               another factor. In our view, emerging                                                                                                    pretty. Policy rates were raised just once       strong and could push inflation higher
the last few months, and with near-term                                                                                                                                                                                                  gradually. Our estimate of the output gap
prospects having faded somewhat of late,       economies' currencies and wages contin-                                                                                                  this year, in February, bringing the poli-
                                               ue to rise and are becoming a source of                                                                                                  cy rate to 6.75%. Falling inflation,             has turned positive since early 2010. Core
we expect employment growth in the                                                                                                                                                                                                       inflation had been creeping higher in the
three months to May to have slowed from        both global growth and inflation.                                                                                                        helped by falling food prices and an
                                               Looking back at the output prices DI                                                                                                     indefinite deferment of fuel subsidy             earlier part of the year, but has been hold-
the rapid pace over the last year. As a                                                                                                                                                                                                  ing at +4.6% in recent months. Credit
result, the unemployment rate could have       over a longer term, the DI declined                                                                                                      cuts, has allowed Bank Indonesia to stay
                                               sharply after the collapse of Lehman                                                                                                     on hold since. Bank Indonesia meets on           growth remained strong at +23.3% in
nudged up to 7.8%, in our view, with                                                                                                                                                                                                     May. M1 growth – a leading indicator for
changes in social benefit eligibility poten-   Brothers but did not fall as low as the DI                                                                                               Tuesday, 12 July, and is likely to main-
                                               in the late-1990s or early 2000. And it                                                                                                  tain policy rates for the fifth consecutive      core inflation – rose to +18.2% in May
tially adding further to the Claimant                                                                                                                                                                                                    from +17.4% in April, pointing to higher
Count measure of unemployment.                 looks the DI is heading toward zero even                                                                                                 month.
                                               with the yen remaining high at 80 to the                                                                                                    Contrast this to China and India, where       core inflation (Chart 21).
                  Japan                        dollar. We suspect the recent improve-                                                                                                   the central banks have had to battle infla-         The government is setting a higher
   Signs of an end to deflation?               ment in the output prices DI (the nar-                                                                                                   tion and overheating pressures (Chart            GDP growth target for 2012, to as high
■ Review: Economic data such as May            rowing of negative score) could be par-                                                                                                  18). China has had to raise the reserve          as 7%, according to the head of the par-
machinery orders indicated the economy         tially due to the less deflationary (or                                                                                                  requirements 11 times to 21.5% for big           liament’s budget committee. This will
is starting to recover but we see potential    more inflationary) global environment.                                                                                                   banks and hiked the benchmark policy             largely be driven by investments and
risks to the economy stemming from                The output prices DI needs to improve                                                                                                 rates by +125bp (from 5.31% to current           exports. That may, however, stoke infla-
political disarray.                            from zero to positive territory, as it did                                                                                               6.56%) since January 2010 (Chart 19).            tion pressures, given infrastructure bot-
■ Hot topic: The output prices DI in           from 2H 2006, in order for the core-core                                                                                                 China has had to introduce several rounds        tlenecks and an already positive output
Bank of Japan’s Tankan survey, which           CPI to move out of negative territory on                                                                                                 of property measures to rein in surging          gap. Supply bottlenecks will have to be
exhibits a close correlation with the CPI,     a YoY basis. Foreign exchange rates will                                                                                                 prices, including requiring higher mini-         dealt with more urgently to curb pres-
is getting less negative. Whether this         play an important role. We see a correla-                                                                                                mum downpayments on second homes                 sures. The government plans to double
trend will continue or not would depend        tion between the rate of change in the                                                                                                   and restricting property purchases by            spending on infrastructure, including
upon yen’s FX rates.                           yen's effective exchange rate (nominal                                                                                                   nondomestic buyers. India has had to             roads, ports and airports, to US$140bn
■ Preview: Fiscal and monetary policy          basis) and the output prices DI, with the                                                                                                double policy rates (from 3.25% to cur-          by 2014, but implementation has been
will be in focus. We see a low possibili-      output prices DI improving when yen                                                                                                      rent 6.5%) since January 2010 (and hike          slow.
ty that the BoJ will change its policy rate    appreciation eases (the yen's effective                                                                                                  cash reserve requirements to 6% from 5%             There are already some signs that infla-
or the size of its asset purchase program      rate declines). A stable yen will further                                                                                                over the same period).                           tion may intensify next year, given all the
at its Policy Board meeting scheduled          improve corporate sentiment, and we                                                                                                         More aggressive monetary tightening           postponements of price adjustments.
for 11-12th. We are more concerned with        will closely monitor whether it leads to                                                                                                 has taken a toll on China and India’s            Electricity tariffs, for example, will be
delays in the budget process and confu-        an end to deflation. The corollary to this                                                                                               stock markets. The Shanghai Composite            increased by between +10% to +15% next
sion in energy policy.                         is that a resurgence of yen appreciation                                                                                                 Index is down some 15% from its recent           year to trim the power subsidy. Gasoline
   Review: Strong data and political           would diminish the prospects for an end                                                                                                  peak (of 3307 on 11 January 2010). The           subsidies will also likely be cut next year.
risk                                           to deflation and would require a                                                                                                         Sensex is trading some 11% below its             Pertamina is raising the LPG prices of 50
   Economic data point to earthquake           response by the Japanese government                                                                                                      recent peak late last year (of 21,109 on 5       kg cylinder gas used by commercial and
recovery                                       and Bank of Japan.                                                                                                                       November 2010). In contrast, the Jakarta         industrial firms in July (and probably 12
   Economic data point to a recovery              Preview: Policy action in focus                                                                                                       Composite Index (JCI) is flirting with           kg slightly later); while prices for 3 kg
from the Tohoku earthquake in the                 Fiscal and monetary policy will be in                                                                                                 all-time highs and up some +260% from            cylinders will likely be raised next year.
Japanese economy. May core machinery           focus. We see a low possibility that the      potential downside risks to the Japanese       maintain the general outlines of its mon-   its low reached during the 2008 global           Latent price pressures are brewing, but
orders rose 3.0% MoM. Early June trade         Bank of Japan will change its policy rate     economy.                                       etary policy at its Policy Board meeting    financial crisis. Year-to-date, the JCI is       will eventually show up. These postpone-
data shows exports were down 3.9%              or the size of its asset purchase program        Macroeconomic data due for release          on the 11-12th. The central bank is         up some +5.9% versus negative 1.4%               ments raise the question whether Bank
YoY while imports rose 10.9%. The              at its Policy Board meeting scheduled         include June M2 (11th), the Consumer           scheduled to do an interim review of its    for the SHCOMP and negative 8.4% for             Indonesia can really achieve the more
pace of decline in exports eased from the      for 11-12th, given that recent economic       Confidence Index (11th), the Corporate         economic outlook for 2011 and 2012.         the Sensex.                                      ambitious lower inflation target range of
-10.3% recorded in May, indicating             data point toward recovery and the yen's      Goods Price Index (12th), and the May          The policy statement and post-meeting          Currency-wise, the Indonesia rupiah           3.5% to 5.5% set for 2012. There likely
exports are recovering as supply chain         effective exchange rate is stabilizing. We    Tertiary Industry Activity Index (12th). We    press conference with Governor              is the second-best performing year-to-           will be doubts, unless the government
disruptions ease. May leading economic         are more concerned that delays in the         expect limited reaction by the markets.        Masaaki Shirakawa will also merit           date (after the Korean won), appreciat-          holds back fuel subsidy adjustments yet
indices at 99.8 (up 3.6pt MoM) rose for        budget process due to political turmoil,         BoJ watch: Likely to maintain mon-          attention. It is widely believed the cen-   ing some +5.2% against the US dollar,            again next year. Enjoy the sweet spot for
the first time since March thanks to           and confusion in energy policy, could be      etary policy as is                             tral bank would revise down its growth      versus +2.2% for the RMB and +0.7%               the rest of this year, for now.
improved corporate sentiment related           considered in the financial markets as           We believe the Bank of Japan will           outlook for FY 2011 making allowance        for the Indian rupee.                                    To be continued tomorrow

				
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