Consumer confidence in Q2 takes a tumble

Singapore trails Vietnam but leads Malaysia, China, Indonesia, Thailand

(SINGAPORE) Consumers in Singapore remain among the most optimistic in the region - despite a drop in consumer confidence in the second quarter.

The Consumer Confidence Index of Singapore, as measured by InsightAsia, fell 12 points to 126 in Q2 after witnessing a strong upward trend since the lowest point of the recession. Singapore is still far above the neutral point of 100.

Consumers were thrilled when the economy emerged from the recession sooner than expected and are now becoming accustomed to positive economic circumstances.

InsightAsia, a market research group specialising in the Asia-Pacific region surveyed 10,800 people across six Asian markets.Although economic growth in Singapore continues to accelerate, consumers expressed lower confidence in economic circumstances. The downward correction of the Consumer Confidence Index is in line with other countries in the region that are also showing healthy growth figures. China, Malaysia and Vietnam also saw a decrease in consumer confidence - even though their economies are in good shape and have GDP growth forecasts of 5-10 per cent in 2010.

An unexpectedly swift recovery from the recession led to increasing consumer optimism, which then dropped slightly in Q2. Consumers in these countries remain confident, but their initial enthusiasm has waned somewhat.

Consumers in Singapore still feel that the economy is improving, though not as strongly as before. They have also moderated their expectations for future economic growth. Singaporeans maintain a high level of satisfaction with their financial well-being, but have moderated their optimism about the coming year.

Overall, Singaporean consumers still have a very positive view of economic circumstances, resulting in a Consumer Confidence Index of 126.

Singapore trails slightly behind Vietnam (128) but leads Malaysia (118), China (114), Indonesia (93) and Thailand (83); all countries that are recording positive growth figures.

Singapore's recovery from the recession continued into Q2. A record year-on-year GDP growth of 19.3 per cent outstrips the 16.9 per cent growth recorded in Q1 and far exceeds growth figures of other economies in the region.

This very strong growth was driven by exports and tourism. Exports increased particularly through pharmaceuticals and electronics, while new attractions drew more tourists to the island state.

The year-on-year growth figures are calculated against a low base, as the beginning of 2009 was the low point of the recession. Growth in the remaining quarters of 2010 will be calculated against higher base figures. Therefore GDP growth is expected to decelerate in the second half of 2010 and full-year growth is expected to register at 13-15 per cent.

The robust economic growth of China has benefited many other economies in the region. The Chinese government is taking measures to reduce the risks of overheating the economy. Lower demand in China will reduce the exports of other countries in Southeast Asia.

Along with a debt crisis in the EU and the hesitant recovery of the US economy, this may slow growth in South-east Asia in the second half of 2010. However, analysts are positive about growth prospects in the region. The IMF estimates regional economic growth for 2010 and 2011 of around 6 per cent.

The writer is head of Consumer Confidence Index at InsightAsia Research Group

Source: Business Times, 26 Jul 2010

Asia recovering well but risks ahead: GIC

Turmoil in Europe, protectionist pressures may hurt world economy

ASIA is recovering well from the financial crisis but there are still risks to the world economy, including the turmoil in Europe and protectionist pressures in many countries, according to Dr Tony Tan, deputy chairman of the Government of Singapore Investment Corporation (GIC).

Dr Tan told the Swiss Re Forum Singapore yesterday that the global recovery is likely to continue into the next year but at a more moderate pace.

But he cautioned that the rebound is 'fragile' and 'negative shocks could push the global economy towards a recession sooner than expected'.

And while growth prospects are much better for Asia than for the developed world, Dr Tan does not see Asia 'aggressively challenging' the global order, which has benefited the region for decades.

'Asian countries, including China, generally share the view that a multilateral, rules-based international order is critical to their long-term growth and development,' said Dr Tan. 'Asia's rise therefore is not inevitably a zero-sum geopolitical game where the US and Europe must decline as Asian countries grow.'

Dr Tan flagged the turmoil in Europe, saying that growth there should be weaker at around 1 per cent.

According to some analysts, there are growing signs that Europe's sovereign debt crisis is feeding through into the

euro-area economy in the form of a sharp rise in unemployment and a slowdown in manufacturing recovery.

Dr Tan warned that 'protectionism also remains a risk despite the recovery, given high unemployment and what seems to be, for the first time in many years, increasing tensions between American and European businesses and the Chinese policy environment'.

Dr Tan's comments come at a time when investors are increasingly upbeat about Asia's growth outlook, but less bullish about the global economy.

Earlier this month, the Asian Development Bank raised its 2010 forecast for aggregate growth across Asia - embracing East Asia excluding Japan, South-east Asia, South and Central Asia as well as the Pacific island economies - from 7.5 per cent to 7.9 per cent.

Yet Citigroup forecast global growth to rise 3.7 per cent this year and 3.3 per cent next year, trimming its projections by 0.1 percentage points for each year.

Dr Tan said the post-crisis global economic and financial environment will be affected by three major trends.

The first is that the developed world will take a 'long time' to fully heal from the crisis.

The second is the increasing importance of the emerging economies, anchored by Brazil, Russia, India and China.

And the third major trend, as Dr Tan describes it, will be 'increased vulnerability' to negative events, and 'extreme reliance' on government policies for both support and far- reaching reforms over the next few years.

Dr Tan said: 'The challenge for policymakers in many developed economies will be to convince markets that they have credible plans to ensure sustainable public finances over the medium to long term, while minimising the negative short-term impact on growth.'

In the emerging economies, policy-makers will have to deal with rising inflation and possible asset price bubbles, he said.

Source: Straits Times, 24 Jul 2010

Time for Asia to halt stimulus: ADB

First normalise monetary policy, then adjust fiscal policy, it suggests

NOW that Asia is squarely on a V-shaped recovery path, it should be withdrawing the policy stimulus put in place during the recession, said the Asian Development Bank (ADB).

The Manila-based institution has upgraded its growth forecasts for the region in its latest twice- yearly Asian Economic Monitor, which it launched at the Singapore Marriott Hotel yesterday.

Growth in 'emerging East Asia', which the ADB defines as Asean, South Korea, China, Taiwan and Hong Kong, is now expected to come in at 8.1 per cent, up from the 7.7 per cent projected in April.

'The stronger-than-anticipated export rebound and much-improved consumer confidence have helped the region's economies recover faster than we expected,' said ADB's chief economist Jong-Wha Lee.

With the improved economic outlook, 'it is now time for the region to unwind the policy stimulus', said the ADB.

It recommended that the monetary policy be normalised first - that is, interest rates and exchange rates be raised to 'normal' pre-crisis levels - before the fiscal policy is adjusted.

This will allow economies in the region to continue using targeted fiscal measures to support domestic demand until it is clear that the private sector can take over, said Mr Srinivasa Madhur, senior director of ADB's office of regional economic integration, which produced the Monitor.

Economies such as Singapore, South Korea, Malaysia, Taiwan and Thailand have already begun tightening their monetary policy in recent months by raising their interest rates or, in Singapore's case, letting the exchange rate appreciate.

As DBS head of economics and currency research David Carbon said, the tightening of policy in the fast-growing region is 'bread and butter economics'.

'Output in Asia is now back far above pre-crisis levels. Inflation is nearly back to average and it is sure to rise above average in the coming few months,' he said in a recent report. 'But interest rates remain far below average. Central banks have much work to do.'

Economies that have already begun to slowly unwind stimulus should continue in that direction, and those that have not may need to start soon, said the ADB.

China, however, should accelerate policy normalisation by letting the currency appreciate, among other things, it added.

Still, the pace of unwinding the stimulus must factor in risks facing the overall global economy, Mr Madhur said.

These include a marked increase in capital flows, which can be destabilising, and uncertainty about the sustainability of recovery in the United States and Europe.

On the bright side, the threat of steeply rising inflation has yet to materialise in Asia, despite rapid growth.

This is partly due to the time lag between a rise in output and the subsequent spike in hiring and wage costs, said Mr Madhur.

'Inflation is still manageable but don't be complacent because that condition may not last long as labour markets tighten,' he added.

'Although we don't see huge problems of inflationary pressures as of now, the signs are there... (It's) time to unwind now rather than wait for that day to arrive and then get panicky.'

Source: Straits Times, 21 Jul 2010

IMF warns of risks to Asian economies

Possible shocks from spillover of euro zone crisis and excessive capital flow

DAEJEON (SOUTH KOREA): Asia may be experiencing a sharp and quick rebound from the global financial crisis, but it has received a word of warning from the International Monetary Fund (IMF).

The region, said IMF chief Dominique Strauss-Kahn yesterday, should brace itself for possible further shocks, including being hit by a potential spillover from the euro zone crisis.

Or exuberant investors could pour so much capital into Asia that parts of the region could overheat, bringing about dangerous credit and asset bubbles.

The warning comes just after last week's growth forecast by IMF for all of Asia - a buoyant 7.5 per cent this year, well above the average 4.6 per cent worldwide. But the IMF managing director also sought to soften the blow, stressing that a global double-dip recession was unlikely as recovery remains on track.

'Asia's time has come, no one can doubt that Asia's economic performance will continue to grow in importance,' he said yesterday at the opening of a high- level economic forum in the central South Korean city of Daejeon.

'But downside risks - including the recent turmoil in Europe - mean that Asian policymakers need to remain attuned to negative shocks.'

The region also faces a real threat in the sharp rebound in capital flows that is likely to emerge as investors avoid Europe, the United States and Japan, where growth has been sluggish, for a burgeoning Asia. 'Such huge inflow of capital can create instability,' he warned.

To manage such a problem, Asian nations could consider measures such as currency revaluation and even temporary capital controls, he suggested.

Jointly organised by the IMF and South Korea, the two-day forum on Asia brings together senior policymakers and economists including Singapore's Finance Minister Tharman Shanmugaratnam and his Thai counterpart Korn Chatikavanij. Both men are due to take part in a round-table discussion today.

Yesterday, South Korea's Finance Minister Yoon Jeung Hyun echoed Mr Strauss-Kahn's concern, noting that developing countries were not doing enough to withstand external shocks from the high volatility of capital flows.

According to media reports, Seoul and the IMF are looking at a possible global financial safety net that would give nations quick access to funds, helping them stave off crises and also discouraging emerging market nations from hoarding foreign reserves. Details are expected to be unveiled in November when South Korea hosts the G-20 summit.

The warnings for Asia come amid emerging signs that the global economic recovery may be losing steam. China's economic growth appears to be slowing down, while the US has reported a stream of disappointing economic data.

Last week, an IMF report also warned that Europe's credit woes could hit bank funding and corporate financing elsewhere, especially Asian economies that are more dependent on foreign currency financing.

As if that was not enough, the European Central Bank and the Bank of England also sounded an alarm bell on a looming credit crunch.

Institutions worldwide, including banks and cash-strapped governments, will have to repay or roll over trillions of dollars they owe under short-term loans in the next two years. As they compete for the bond market's favour, it could squeeze the credit available for business and consumers, dampening economic growth.

Together, these risks pose a longer- term challenge for export-driven Asia, as Mr Strauss-Kahn and other speakers noted.

'It is a trigger for change,' he said.

Asia, he pointed out, needed to nurture a 'second engine of growth' by boosting domestic investment and consumption.

It is a strategy that some nations in the region are already pursuing, as they try to strengthen their social safety nets to boost private consumption, and introduce more flexible exchange rates.

China, for instance, recently raised the minimum wages of workers in the hope of revving up domestic consumption, a move hailed by Mr Victor Fung, honorary chairman of Hong Kong's International Chamber of Commerce.

He said: 'They are putting money into the hands of those who can actually spend.'

Source: Straits Times, 13 Jul 2010

Asia growth on track despite Western woes

Infrastructure works, personal spending enough to carry the day, says DBS chief

(SINGAPORE) Asia's robust growth will be affected but not derailed by what looks increasingly like a stalling of growth in the US and Europe, said DBS chief executive Piyush Gupta.

Infrastructural development and personal consumption in Asia will carry the region and take up much of the slack from the global economies, he said yesterday.

Asia today is pretty much like the US in the 1950s, with governments in the region spending on building dams, railroads and roads and there is also the rise of the middle classes, he said.

'Asian infrastructure investment is where it was in the US in the 1950s.'

Mr Gupta was speaking last night at the Singapore Indian Chamber of Commerce & Industry-DBS awards dinner.

'Asia's infrastructure spending will pump growth rates up. Between infrastructure spending and personal consumption, Asia will be able to generate its own demand.'

Between now and 2020, infrastructural spending is estimated to come to US$8 trillion.

Wealth creation in Asia is the fastest growing with reports of more millionaires being formed in the region than anywhere else in the world, he said. 'Asia is generating more of our own demand.'

The tipping point came this year, he said.

According to DBS economists, 20 years ago, for every dollar incremental growth in the US, Asia contributed less than 50 cents.

But today, for every dollar the US puts out, Asia will put out 102 cents, said Mr Gupta.

Asia's consumption rate is up 70 per cent compared with sub-one per cent in the rest of the world, he noted. 'While I am not overly sanguine of the global economies and credit expansion, I am sanguine about Asia.'

Last year, 138 Asian corporates were among the Fortune 500 companies and they were the fastest growing ones, he said

As for the silver tsunami which will hit Japan, China and Singapore, the ageing population will create demand and business opportunities in areas such as health care and financial planning and other related services, he said.

There are political risks to doing business in many Asian countries as they face challenges in the growing disparity between the poor and the rich, Mr Gupta said in answer to a question from the floor.

China faces significant challenges in managing its social equity, between its richer coastal areas and the poorer inland economies, and increasing pressure on wages, he said.

The financial crisis has also made borrowing in US dollars more expensive for Asian countries.

'Asian economies are dollarised significantly,' he said.

For instance, Chinese banks are borrowing US dollars in Hong Kong to lend onshore, pushing up US interest rates there by 100 basis points over the wholesale Libor rate, he said.

Indonesian banks are facing a similar situations, he said.

Source: Business Times, 6 Jul 2010

Asia economies strong amid euro zone crisis

SYDNEY: Asia's economies signalled they are best placed to weather Europe's debt crisis this week, as results released yesterday - from China's exports to job growth in South Korea and Australia - surpassed analysts' forecasts.

China's exports jumped the most in six years and property prices rose at a near-record pace, signs that the economy is withstanding the debt crisis in Europe and remains at risk of overheating.

Unemployment rates in South Korea and Australia fell last month, and Japan said its economy expanded more than previously estimated in the first quarter.

The resilience may amplify American calls for Asian nations to reduce their reliance on exports and increase their contribution to a world recovery clouded by Europe's fiscal woes.

China has so far resisted letting its yuan rise against the United States dollar, seeking to shield its exporters, while Japan's central bank has flagged the recovery in refraining from stepping up injections of cash.

'These numbers are very positive,' said Mr Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. 'Asian countries have pretty strong fiscal positions and they've got growing domestic demand which will help insulate against any shocks out of Europe.'

Also, the 'sharp pick-up in China's trade surplus will not go unnoticed in Washington, where there will be more pressure on the US administration out of Congress to take a tougher line with China' on its currency, he said.

Regional stocks surged yesterday after Chinese shipments abroad climbed 48.5 per cent last month from the figure a year earlier. China's property prices also rose at the second-fastest pace on record last month, jumping 12.4 per cent from the figure a year earlier, a sign that the government crackdown on speculation has yet to avert the threat of an asset price bubble.

Japan's economy expanded at an annualised 5 per cent rate in the three months ended March 31, quicker than the 4.9 per cent rate reported last month, driven by exports and an upward revision to consumer spending.

Australia said yesterday its employers added 26,900 workers last month, more than the 20,000 forecast by analysts, pushing down the jobless rate to 5.2 per cent from 5.4 per cent - almost half the level in the US and Europe. Payrolls rose for the third straight month, underscoring the central bank's assessment that economic growth will accelerate this year as a mining investment boom stokes hiring.

Meanwhile, South Korea's unemployment rate declined last month to the lowest level since October 2008, as the strengthening economy prompted companies to hire.

The jobless rate fell to 3.2 per cent from 3.7 per cent in April, after reaching a 10-year high of 4.8 per cent in January, Statistics Korea said yesterday.

Asia's growth contrasts with several European nations that may see their gross domestic product shrink, with the risk of a double-dip recession, Mr Andrew Burns, lead writer of the World Bank's Global Economic Prospects 2010 report, said in a telecast from Washington on Wednesday. He did not single out European countries by name.

East Asia would not be unscathed by a return to recession in the advanced economies, he said. 'That's going to have important knock-on effects in East Asia, particularly because it is a very heavy trading region.'

Bank of Korea cited the European situation in keeping its benchmark interest rate at a record low 2 per cent yesterday.

Asia will continue to lead the global rebound, International Monetary Fund deputy managing director Naoyuki Shinohara said on Wednesday.

That brings its own challenges, with increasing capital inflows and the risk of overheating if policymakers fail to take 'appropriate' action, he said in a speech in Singapore.

BLOOMBERG

Source: Straits Times, 11 Jun 2010

Asia warned of spillover from Europe debt crisis

IMF urges govts to be ready to take appropriate action

(SINGAPORE) The International Monetary Fund (IMF) warned Asia yesterday of the potential spillovers of the European debt crisis, saying it could dampen trade, make capital flows volatile and overheat economies in the region.

'Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand,' IMF deputy managing director Naoyuki Shinohara told a forum in Singapore.

On the financial front, he said major credit problems could result in a 'significant spillover' through funding channels, especially where banks were dependent on wholesale funding.

There was also increased uncertainty and potential for volatility in the outlook for capital flows, Mr Shinohara said at the forum hosted by the Monetary Authority of Singapore.

He said Asia's bright growth prospects, together with low interest rates in major economies, would likely attract more capital that could 'lead to risks of overheating in some economies if appropriate policy action is not taken. 'On the other hand, further increases in global risk aversion could see capital flows change direction quickly.'

Mr Shinohara called on Asian governments to be wary of the potential risks and be prepared to take appropriate action.

'The key will be for policymakers to keep an eye on the bigger picture and be ready to act swiftly as developments unfold,' he said.

'With Asia's economic muscle growing, the policy choices made in this region will have an important impact on the global economy,' he added.

Greece is at the epicentre of a mounting debt crisis that threatens to spread across the eurozone and has pulled down the euro to four-year lows.

Asian markets have also been affected by the impact of the crisis.

Mr Shinohara said there was a risk that sovereign debt problems being experienced in some eurozone countries could spill over to others.

He said the strong fiscal position of most Asian economies provided the 'space' to respond flexibly to the European crisis.

'In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus,' he said. -- AFP

Source: Business Times, 10 Jun 2010

Slower growth ahead for Asia: RBS

ASIA'S economic growth could suffer in the next few quarters as exports to the West slow sharply due to sovereign-debt troubles in Europe and a lacklustre recovery in the US, Royal Bank of Scotland (RBS) analysts warned yesterday.

Growth in China, which has been a major engine of the recovery in Asia, is also likely to slow as the effects of its stimulus measures wear off, dragging down the pace of expansion elsewhere in Asia.

The result: A period of slower growth than in the boom years before the latest financial crisis, or in the rebound since late last year.

'One leg of Asia's growth is going to be chopped off in the coming months,' said Sanjay Mathur, head of research and strategy for non-Japan Asia at RBS. 'Exports are going to slow down.'

As a result, 'growth next year will start to slow', he said. A slower-growing Europe, coupled with a weaker euro, means demand for Asia's exports is likely to fall.

Even China is starting to look 'a lot shakier', he said. 'We are starting to see industrial activity show some kind of fatigue.'

The purchasing managers' index for China published by HSBC and Markit fell to 52.7 in May - the lowest reading in 11 months - from 55.2 in April, suggesting that while Chinese manufacturing activity is still expanding, the pace of growth is slowing.

In stock markets, the result could be a 'major downgrade in earnings expectations' as investors adjust to a slower growth outlook for the broader economy, Mr Mathur said. 'We are in for a fairly rough ride in the financial markets.'

But a period of slow growth in Asia could benefit the region by forcing policy-makers to make structural changes to their economies needed to sustain growth in the long term without relying heavily on private consumption demand in the West, he said. 'Once we see that growth is not going to be the same as what we're used to, we will see greater efforts towards improving domestic demand.'

That would include more efforts to promote small and medium enterprises, and more incentives to boost the services sector - reducing the reliance on manufactured exports for economic growth.

Source: Business Times, 9 Jun 2010

Asia may continue to lead global recovery

As outside demand will be low, Asia will have to search for stronger domestic driver of growth

AS THE world climbs out of the deepest recession in recent history, Asia is leading the global recovery. By end-2009, output and exports had returned to pre-crisis levels in most of Asia, including the hardest-hit economies.

In our recently released Asia-Pacific Regional Economic Outlook, we envisage that, on average, Asia will grow by 7 per cent this year and next, buoyed by growth in China, India and other countries (see Figure 1).

While activity in advanced countries remains held back by high unemployment and weak household and bank balance sheets, in Asia the picture is much more encouraging.

Singapore is a case in point. The economy has rebounded strongly from the recession, benefiting from the turnaround in global trade and financial markets as well as forceful counter-cyclical policies.

It is now firmly on a recovery path, although the external environment remains key to near-term prospects. Against this backdrop, monetary, fiscal and macro-prudential policies are appropriately aimed at curbing risks in the goods and asset markets - and exits from the extraordinary policy support of yesteryear are underway.

In the near term, we expect that Asia will continue to lead the global recovery. What underlies this robust growth picture? The recovery of demand in advanced economies, particularly the United States, is expected to fuel a re-stocking of inventories through most of 2010 that will boost Asian production and exports.

And while public stimulus is being phased out in some countries, growth should be sustained by the momentum that has developed in private domestic demand. Private consumption is growing on the basis of high asset values, growing consumer confidence and good labour market prospects, and private investment is being boosted by increases in capacity utilisation to more normal levels.

At the same time, the fragile nature of the global recovery still poses a risk for Asia. The global risks remain tilted to the downside, and a turn for the worse in the outlook for advanced countries or renewed negative shocks in world financial markets would present problems for the recovery in Asia as well as other regions.

For the first time in recent history, Asia is leading a global recovery and contributing an increasing share to global growth (see Figure 2). Also historically unprecedented is the fact that, this time around, Asia's recovery is predominantly being driven by domestic demand.

Finally, capital inflows, which returned only slowly following previous downturns, are now surging into the region. These capital inflows partly reflect the extremely high levels of global liquidity, but are also a testament to Asia's improved resilience and growth prospects.

The strong capital flows do, however, carry risks that will need to be carefully managed. These inflows have the potential to lead to overheating in some economies and to an increase in vulnerability to asset price booms and busts, inflation and macroeconomic volatility.

Asset price inflation in most of Asia has so far been contained, but the increase in excess liquidity in many economies does raise some concerns. We, therefore, welcome the measures that many policymakers are continuing to take to ensure macroeconomic and financial stability against the build-up of imbalances in local asset and housing markets.

Still, more may be needed to be done in the future if the region's bright economic growth prospects and its widening interest rate differentials with advanced economies attract even more capital.

While the right package of measures varies across countries, in many of them it may be appropriate to allow more exchange-rate flexibility, which could forestall short-term inflows and help make financial conditions less accommodative.

Over the medium term, a key policy challenge for Asia will be to make private domestic demand a more prominent engine of growth and to rely less heavily on exports. In advanced countries, the recovery is likely to be sluggish by historical standards and domestic demand is likely to remain below pre-crisis levels for some time to come.

External demand will be smaller and Asia will have to search for a stronger domestic driver of economic growth. Since public stimulus cannot go on forever, that source will have to be private demand which will have to be nurtured through a package of policies, including many measures that are already being taken to strengthen and develop financial sectors, improve and widen social insurance systems and lessen the motivation behind precautionary saving.

Greater exchange-rate flexibility in the region should also be part of this package and would raise household incomes and consumption.

For our part, the International Monetary Fund (IMF) remains closely engaged with the region. Our policy dialogue with the Asian authorities is being deepened through initiatives such as a Regional Advisory Group which draws senior figures from Asia to advise us in our work in the region.

In addition, in July we will hold an important conference in Seoul, in partnership with the Korean government, to bring together senior figures from the region and draw lessons from Asia's success in managing this crisis for the future and for the rest of the world.

The writer is director of the IMF's Asia & Pacific Department

Source: Business Times, 19 May 2010

Many Asian markets near their peaks, warns ADB

It suggests capital controls to temper volatile fund inflows into region

THE Asian Development Bank took the unusual step yesterday of warning investors that many Asian stock and bond markets may be near their top following 'massive' inflows of capital into the region in the wake of the global financial crisis that erupted at the end of 2008.

Capital controls could be among the policy options needed to temper volatile capital inflows that could lead to instability and promote asset bubbles as well as creating more general inflationary pressure, the ADB suggested.

Emerging Asian equities yielded a stunning 73 per cent return overall in US dollar terms in 2009, the ADB said in its latest Asia Capital Markets Monitor. However, this strong performance 'limits the room for further gains', it added.

The report covers the 11 markets of China, Hong Kong, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore,Taiwan, Thailand and Vietnam.

Asian local-currency bonds as well as equities have found favour with foreign investors over the past year or more, leading to a 41 per cent jump in the amount of such bond issuance (mainly by governments) in 2009.

'The yield curve in local government bonds has steepened and that may continue on rising inflationary expectations and as monetary authorities increase official interest rates,' the ADB said.

'Foreign investors have rushed back into emerging Asian markets, attracted by the region's swift recovery from the global crisis, a return of risk appetite and very low returns on assets in developed economies.'

Following the Lehman Brothers crisis in September 2008 there were fears that Asia, along with other developing regions of the world, would suffer a serious capital drought. The reverse has proved to be true and instead Asia has enjoyed a capital glut.

Asia appears to have escaped relatively unscathed from the Greek crisis with few signs that buoyant capital inflows into the region are being adversely affected, the ADB said. However, it warned that there are downside threats posed by this windfall for Asia.

'While the return of capital flows is welcome, surges in short-term capital inflows could potentially leave countries vulnerable to a sudden reversal in portfolio investment and to sharp currency movements,' said Srinivasa Madhur, senior director of the ADB's Office of Regional Economic Integration.

Emerging Asian currencies have also strengthened against the US dollar under the impact of surging capital inflows. 'Appreciation pressures are likely to intensify as capital inflows continue, which may fuel volatility in some currencies,' the ADB report said.

'The use of capital controls may be appropriate in circumstances where capital inflows are transitory and are adding undue pressure on exchange rates and where effectiveness of macroeconomic policy measures to counter the inflows and the exchange rate movements is uncertain.

'Managing capital flows requires a wide array of policy measures; sound macroeconomic management, a flexible exchange rate regime, a resilient financial system and sometimes the use of temporary and targeted capital controls.'

Source: Business Times, 19 May 2010

Asian govts react to turmoil

TOKYO: Asian governments moved quickly yesterday to dampen the effects of the global turmoil triggered by the Greek debt crisis.

Japan's central bank said it would inject more than US$20 billion (S$28 billion) in liquidity to calm markets, while its counterparts in India and Indonesia intervened in the markets to shore up their sliding currencies.

The Malaysian and South Korean authorities vowed to defend exchange-rate stability amid concern that Europe's debt crisis will worsen.

In Singapore, the Monetary Authority of Singapore said it will respond to the market turmoil if there is a need. It 'continues to monitor international developments closely as well as their impact on our markets', a spokesman said in response to questions from Bloomberg News.

'We will take appropriate actions where necessary.'

The yen's surge and sharp falls in Tokyo share prices have alarmed Japanese policymakers.

The Bank of Japan offered 2 trillion yen (S$30.51 billion) in funds to financial institutions in an emergency market operation aimed at soothing market jitters.

Japanese Prime Minister Yukio Hatoyama said yesterday he was 'very worried' about the market moves and said the government will act accordingly if needed, without elaborating.

India's rupee fell to a two-month low yesterday.

'The Reserve Bank of India has supported the rupee intermittently since yesterday as things move from bad to worse in the global financial markets,' said Mr J. Moses Harding, a Mumbai-based executive vice-president at IndusInd Bank Ltd.

'I think the RBI is only trying to cushion currency weakness and check volatility rather than influence direction.'

Indonesia's rupiah had its worst week since June, dropping as much as 2.7 per cent against the US dollar yesterday before recouping its losses on speculation the central bank intervened.

Officials in Indonesia and the Philippines ruled out imposing capital controls in response to the market turmoil.

The Indonesian monetary authority 'is always in the market to smooth currency volatility', said Ms Lindawati Susanto, head of currency trading at PT Bank Resona Perdania in Jakarta.

Australia's central bank, meanwhile, warned that an escalation of Europe's debt woes may cause a 'sharp' global economic slowdown.

BLOOMBERG, REUTERS, AGENCE FRANCE-PRESSE

Source: Straits Times, 8 May 2010

Asia should watch for tidal waves of cash coming its way

IT feels a lot like 1996. It was then, a year before the region plunged into chaos, when investors were rushing to Asia with nary a concern about hot money overwhelming developing economies. It ended in tears for governments, households and financiers alike. The good news is that Asia is standing its ground amid the global crisis. The bad news is that Asia is home to the next great asset bubble as tidal waves of capital rush its way. Expect lots of interest- rate volatility as central banks search for a balance between healthy growth and too much. And don't be surprised if capital controls are a big part of the process.


Yes, that bane of investors' existence is coming at least moderately into vogue. That was clear in Tashkent this week as policymakers at the International Monetary Fund (IMF) and Asian Development Bank (ADB) appeared less hostile to the idea of limiting the movement of money.

As Asia goes full circle from the late 1990s when capital controls were the financial equivalent of a mortal sin, investors are left with no choice but to adapt. That may not be as big a problem as many think. Anything that provides a shock absorber to keep Asia from overheating will be welcome.

'I, as an investor, loathe capital controls in all forms, but we will certainly see more of them,' Robert Parker, London-based senior adviser at Credit Suisse Group, told me in Tashkent, where the ADB held its annual meeting.

When I asked Naoyuki Shinohara, deputy managing director of the IMF, he admitted the institution is now more open to such barriers on capital. The key, of course, is not to go too far by inhibiting growth and scaring off foreign investment that's needed to support it. It's a breathtaking sea change when you consider how the IMF was militantly against controls 12 years ago. Back then, Malaysian prime minister Mahathir Mohamad was an international pariah for implementing them. In late 2006, investors chastised Thailand for slapping controls on markets.

The shift speaks to Asia's predicament over the next couple of years. Asia has weathered the financial crisis, as just about anyone visiting Tashkent agreed. China and India beat the odds and continue to grow strongly. South Korea confounded the sceptics anew, as did Indonesia. Japan's persistent malaise aside, Asia is hot and getting hotter. The trouble is, all this good press means Asia may have too much of a good thing on its hands. As the United States grapples with unemployment, the euro area is trying to avoid disintegration. Greece's woes are reverberating through markets. There's little confidence in Asia that a recent US$146 billion bailout will be the last in Europe. The buzz in Asia is who's next? Even if concerns about contagion from Europe are overdone, Asia must brace itself for the opposite: fast-accelerating capital flows from West to East. With official interest rates in the euro area, UK, US and Japan close to zero, world markets are awash in liquidity searching for higher yields.

For many, that means Asia. Emerging markets need to take 'urgent action' on the surge of liquidity and capital flowing into their economies because they could spur inflation and trigger another crisis, according to a report last week by Standard Chartered plc. One area for concern is debt markets. While vastly improved since the 1990s, Asia still hasn't built the deep, liquid bond arenas needed to stabilise growth. It means that lots of the capital flowing Asia's way will end up in stocks and property. In a perfect world, investors would move into bonds as asset prices get frothy. The lack of dynamic secondary debt markets means many may just leave Asia, as opposed to diversifying into the region's fixed-income investments. It makes Asia more volatile than it should be in 2010.

Capital controls could help ameliorate the problem. One way to go is to implement 'targeted controls', says Masahiro Kawai, head of the Tokyo-based Asian Development Bank Institute. He points to Brazil as an example. In 2009, Brazil implemented a tax on foreign purchases of stocks and fixed-income investment in a bid to stem the currency's advance. Markets took the step much better than Thailand's 2006 moves, which sent stocks plunging.

A point lost on few is that China and India, which have more conservative regulations than the West, weathered the crisis. With the G-20 nations dragging their feet on crafting a safer global financial system, governments will feel pressed to do what they can to tame markets.

Unlike in 1996, Asia knows a tsunami of cash is coming its way and that it comes with risks. Carefully employed, capital controls could siphon some of the heat from Asia's latest hot-money challenge. Free-market champions are unlikely to concede that any curbs on money flows are appropriate. Smart people can, and will, debate this issue. It's inevitable, though, and the sooner markets learn to live with it, the better.

William Pesek is a Bloomberg News columnist.

The opinions expressed are his own

Source: Business Times, 7 May 2010

Greek woes 'won't hit Asia much'

ADB chief economist says region's higher interest rates will keep drawing capital

Tashkent (Uzbekistan) - Capital inflows into Asia will not be significantly affected by European debt woes due to the region's higher and faster-rising interest rates, the Asian Development Bank's (ADB) chief economist said yesterday.

'It's true that the risk aversion is growing, but capital flows into Asia will not be significantly affected unless the European banking system as a whole gets hit,' Mr Lee Jong Wha told Reuters on the sidelines of the ADB's annual meetings here.

Asia's economies have been recovering much faster than the rest of the world from the global financial crisis, resulting in interest rates in the region rising faster than elsewhere, providing better investment returns without any increase in risk, he said.

Concerns about debt problems in Greece and several other euro zone economies have rattled global financial markets since late last year, sparking concerns of a repeat of massive capital flight from Asian emerging markets.

A European Union-International Monetary Fund deal to rescue Greece from its crippling debt crisis will be announced today, a Greek government source told Agence France-Presse yesterday.

'The deal is not yet signed but it will be concluded by Sunday,' the source said. 'It will be announced during (a) Cabinet meeting on Sunday...then presented in detail during a press conference by Finance Minister George Papaconstantinou.'

Greece is preparing severe measures to slash its budget deficit by 24 billion euros (S$44 billion) and unlock EU and IMF aid of up to 120 billion euros over three years. French Finance Minister Christine Lagarde also said yesterday the rescue package is expected to total between 100 billion and 120 billion euros.

Investors hope the aid deal will stop the crisis from sinking other fragile EU economies.

But the Greek government faces a battle with unions, which have been angered by the scale of the cutbacks, and social unrest could prevent Prime Minister George Papandreou from pushing through the austerity measures.

Thousands of people were gathering in Athens yesterday to protest against the spending cuts and new taxes. The public sector union has also called a four-hour strike for Tuesday, on top of a nationwide strike already set for Wednesday.

More than half of Greeks say they will take to the streets if the government agrees to the new austerity steps, according to a poll released last Friday by the newspaper Proto Thema.

ADB president Haruhiko Kuroda, echoing Mr Lee's view at a news conference in Tashkent yesterday, said contagion to Asia from Greece's debt crisis 'has been limited or almost nil'.

Mr Lee said Japan and a few other fiscally weak economies in the region may come under closer scrutiny from investors, but high domestic savings and stronger current account positions kept them in better shape than the southern European economies.

Source: Sunday Times, 2 May 2010

Strong growth puts Asia at risk of overheating: IMF

WHILE the European Union grapples with the risk of a contagious sovereign debt crisis and Japan with deflation, most Asian economies are growing at a rate where their very success is threatening them with problems of possible overheating and inflation, according to the International Monetary Fund.


For the first time, Asia's contribution to global economic recovery has outstripped that of other regions, the IMF said in its latest Regional Economic Outlook for Asia and the Pacific.

The stark contrast between Asia's performance (led by China, India and Indonesia but excluding Japan) is underlined by looming fiscal crises in Europe and also by high unemployment, weak household balance sheets and anaemic bank credit in advanced economies, the IMF noted.

'Asia's faster recovery relative to the rest of the world seems to mark a break from the past. Although Asia's GDP trend growth has exceeded that of advanced economies over the last three decades, this is the first time that Asia's contribution to a global recovery has outstripped that of other regions.

'In past recessions Asia's recovery generally was driven by exports, this time it has also been reinforced by resilient domestic demand, particularly household consumption.'

Asia is expected to continue leading the global recovery, the IMF said. The global and domestic inventory cycle is likely to boost Asia's industrial production and exports further for most of 2010 as demand finally recovers in advanced economies.

In many Asian economies, 'private domestic demand appears to have sufficient momentum to sustain near-term growth, as high asset values, strong consumer confidence, and a gradual improvement in employment conditions are expected to sustain consumption.'

Meanwhile, net capital inflows to the region have surged, the IMF said. This is 'a reflection of extremely high levels of global liquidity but also a testament to Asia's improved resilience and economic framework.'

But it warned that 'Asia's relatively strong cyclical position may pose near-term risks, particularly if bright growth prospects and widening interest rate differentials with advanced economies lead to further capital inflows to the region.

'These could lead to overheating in some economies and increase their vulnerability to a strong upswing in the credit and asset price cycles, with the propensity for a subsequent abrupt reversal.

'Although asset-price inflation in Asia has so far been generally contained, the increase in excess liquidity in many regional economies over the course of 2009 raises concerns' especially in asset and housing markets.'

The IMF report added that over the medium term, Asia's main policy challenge will be to ensure that private domestic demand becomes a more prominent engine of growth.

Source: Business Times, 30 Apr 2010

IMF warns of overheating risks in Asia

SHANGHAI: The International Monetary Fund (IMF) warned yesterday that Asian economies are at risk of overheating as strong capital inflows increase inflationary pressures and raise the risk of damaging bubbles.

It urged regional leaders to return to 'more normal' monetary policies after the global financial crisis, and increase the flexibility of their exchange rates to counter speculative funds flowing into their economies.

'For China, like in other economies in the region, the risk is to ensure that the boom we see in asset flows does not, like in the past, lead to a cycle of boom and bust,' Mr Anoop Singh, director of the IMF's Asia-Pacific department, told a news conference.

In its latest report on the regional outlook, the IMF said brighter economic growth prospects and widening interest rate differentials with developed economies 'are likely to attract more capital to the region'.

'This could lead to overheating in some economies and increase their vulnerability to credit and asset price booms with the risk of subsequent abrupt reversals,' the report said.

The IMF raised its growth forecasts for Asia to 7.1 per cent for both this year and next, higher than its prediction last week when it estimated regional economies would expand an average 6.9 per cent this year and 7 per cent next year.

But the fund warned that export-driven Asia remains vulnerable to a slower-than-expected recovery in the West, and urged governments to reduce their reliance on overseas shipments and boost domestic consumption.

'It will be important to implement reforms that boost the productivity and the competitiveness of the services sector,' IMF senior economist Olaf Unteroberdoerster told reporters.

The IMF said Asian policymakers need to safeguard against the build-up of imbalances in asset and housing markets caused by 'excess liquidity', and one way to do this was to adopt more flexible exchange rates.

'Letting the exchange rate appreciate can forestall short-term inflows,' the fund said, without specifically referring to China.

The IMF said last week a stronger yuan was 'essential' for both the Chinese and world economies, heaping more pressure on Beijing to revalue its currency, which has been effectively pegged at 6.8 to the US dollar since mid-2008.

Critics say the policy has given Chinese manufacturers an unfair advantage by making their exports cheaper.

Source: Straits Times, 30 Apr 2010

2010: a year of regional opportunities

2010 has the potential to be a vintage year for East Asia in terms of economic and political developments. But if the region's leaders fail to seize the opportunities, the New Year could see the beginnings of a drift toward nationalism and possible conflict eventually. That would not be simply a missed chance but a tragedy for the region. The United States, which has underwritten the security of much of East Asia in the post-war period while also providing a market that enabled the region to grow economically, is overstretched. This fact would, in itself, justify Asian leaders taking a hard look at the future of their countries in a world where the sole remaining superpower is in a somewhat defensive mood and preoccupied with domestic problems, wars on two fronts in Afghanistan and Pakistan, as well as residual hostilities in Iraq. The retreat from aggressive power projection that characterises the Obama administration has coincided with the advent of a more assertive yet flexible government in Japan, following the landslide victory there of the Democratic Party of Japan (DPJ). This shift reflects the vision of Ichiro Ozawa, architect of the political revolution in Japan. Mr Ozawa saw long ago that Asia in general, and Japan in particular, could not remain forever under the security umbrella of the US. Thus, he built a successful political movement to break the mould of Japan's US-dependent thinking and to guide the nation towards an alliance with East Asia.


Given these fundamental shifts, the stage is set for the dawn of a new era of regional cooperation in 2010. But the best of sets are of little use unless all the actors play their parts. Japanese Prime Minister and Ozawa-protege Yukio Hatoyama has made his debut with friendly overtures to Asia and now he needs support from the rest of the Asian cast. For China and South Korea, this is a golden opportunity to secure closer ties with Japan at a time when such developments are less likely to create friction with outside powers.

So, East Asia has an opportunity to institutionalise at the political level what is already a fact of life at the economic level: the high degree of interdependence that characterises regional trade and investment relations. This has been the case for a decade or more but the global recession has added major significance to regional economic interdependence. Asia's trade with the US and Europe remains far below pre-recession levels and is likely to remain so in the foreseeable future. Intra-regional trade, on the other hand, is growing by leaps and bounds. Even if this cannot compensate in absolute terms for the loss of extra-regional demand (for now at least), the signs point to East Asia surpassing the level of intra-regional trade intensity even of the European Union.

But economic integration requires institutional underpinnings, as does security cooperation. Put simply, East Asia can seize greater control of its own destiny in 2010 if only it can demonstrate the will and maturity to make the effort.

Source: Business Times, 5 Jan 2010

Asia is poised for V-shaped recovery next year

ASIA is poised for a sharp economic recovery next year, even as developed economies in the West continue to struggle, according to Standard Chartered's chief economist.

'Our forecasts suggest the recovery will take the shape of an L or a U in the West and a V in the East,' Gerard Lyons, who is also the group's head of global research, says in a report published yesterday.

But open and export-dependent economies - Singapore, Hong Kong and Taiwan - are likely to grow below trend, due to sluggish exports to major markets in the West, the report says.

In Asia, growth will be centred on China, India and Indonesia, which have large domestic markets and relatively closed economies that cushion them from external shocks.

Overall, '2010 is likely to be the year of global recovery', Mr Lyons says. 'A double-dip recession would require either an external shock - most likely an event that drove oil prices sharply higher, such as an escalation of tension with Iran - or a policy-induced shock triggered by premature policy tightening in the West.

'We are not predicting a double-dip, although we would not be surprised if a number of economies witnessed a negative quarter of growth at some stage.'

But even as Asia leads the global recovery, 'we continue to stress the need to focus on levels' - the dollar value of goods and services produced - rather than just growth rates, Mr Lyons says.

In 2008, the world's economic output, measured by gross domestic product, was US$60.9 trillion, with advanced economies including the US, Japan, Germany, France and the UK accounting for more than half of global output, according to International Monetary Fund data.

'If the West is not booming, the world will not boom. And the West is not going to boom,' Mr Lyons says. 'The US consumer, the key driver of the global economy for some time, faces a difficult outlook.'

He expects the world economy to grow 2.7 per cent next year, after shrinking an estimated 1.9 per cent this year.

Asia's economic output is projected to expand 7 per cent in 2010, faster than this year's estimated growth of 4.5 per cent.

Its biggest economic growth engines, China and India, are expected to expand 10 per cent and 7.5 per cent, respectively, compared with 8.5 per cent and 6.8 per cent in 2009.

Source: Business Times, 3 Dec 2009

What’s in store next year

Asia’s strong recovery means that higher interest rates and stronger currencies will be two key features in 2010

ASIA is rapidly approaching the end of its sharpest V-shaped recovery on record. It’s been quite a ride on both sides of the trough: two quarters of double-digit GDP contraction for most countries (ending in 1Q 2009), followed by two quarters of double-digit expansion. We are now halfway through the second of the upside quarters with Singapore, China and Korea having reported double-digit growth rates (in q-o-q, seasonally adjusted terms) in 3Q 2009. Malaysia, Thailand and Taiwan will likely report similar numbers over the next two weeks.

If the end is nigh – and it is – let’s not rush there just yet. There’s plenty of time to prepare for what’s coming and there’s little to fear anyway. Let’s first take a minute to consider how extraordinary the recovery has been. One way to get a sense of it is to look at Singapore.

Back in January, most government and private sector professionals expected to see a 2.4 per cent contraction in the Singapore economy in 2009. By May, those expectations had plunged a full five percentage points to an alarming -7.5 per cent. But only five months later, in October, expectations were right back where they were at the start of the year: to a contraction of 2.6 per cent. That’s how convincing the downward head fake was, that’s how sharp the V-shaped recovery was. We all would have come closer to the truth if we had left our 2009 forecasts untouched back in January.

Naturally, the ‘thought leaders’ who led consensus in predicting Armageddon in the first half of the year had more backtracking to do later on. One lesson they and everybody else learned this year is that it’s not about being ‘ahead of the curve’; it’s about being right at the end of the day. Not many were this year.

For Asia overall, the roller coaster was almost as wild as it was in Singapore. Industrial production – Asia’s economic backbone – peaked in the summer of 2008; not surprisingly, just before the Beijing Olympics in August. But the downturn continued with the collapse of Lehman Brothers in September 2008 and by January 2009, industrial production in the Asia-9 had fallen by 14 per cent. That’s twice the drop that occurred during the financial crisis of 1997/98 or the high-tech global recession of 2000/01.

Not surprisingly, exports led the collapse on the demand side of the GDP equation. In US dollar terms, Asia’s exports dropped by 40 per cent between July 2008 and January 2009. Like the drop in industrial production, the export drop was twice as big as what occurred during the global tech recession of 2000/01 and four times bigger than the export contraction in 1997/98.

What continues to surprise is that Asia’s export collapse had almost everything to do with China and almost nothing to do with the US, either directly or indirectly. Between July 2008 (when exports peaked) and January 2009 (when they hit bottom), Asia-8 exports to China fell by 45 per cent. To the US they fell by less than half that, or 21 per cent.

But the percentage drops don’t tell the real story, because China is a bigger buyer of Asia’s exports than the US. And it’s the dollar changes that make or break a business. In revenue terms, Asia-8 exports to China fell by US$111 billion between July 2008 and January this year. To the US, they fell by US$27 billion. In other words, in the revenue terms that matter, the export shock delivered by China was four times greater than the shock delivered by the US.

This explains why the countries hit the hardest were those with the closest links with China. And it helps explains why Asia was able to bounce back with no help from the US.

And bounce back it did. Exports and industrial production hit bottom in January and by July, Asia’s industrial production had fully recovered its pre-crisis levels. Six months down, six months back up – the very definition of ‘V’. By September, though, output had advanced another 2-3 per cent. So it’s no longer just a V-shaped recovery. We’ve passed that. Now it’s a V+.

V, V+, no matter. What is so amazing, to some, is that Asia pulled it off with no help from the US. Think about it: Asia’s industrial output recovered to pre-crisis levels by July while US imports turned north only in June. It’s a big deal. But is it really so surprising? Not when you remember that Asia’s export collapse was related to China, not the US.

Moreover, it isn’t the first time this has happened. Back in 2000/01, Asia beat the US in getting out of recession by a good four months. This fact – and the reasons behind it – is what allowed DBS to say, way back in December last year, that Asia would pull the same trick this time, but even more forcefully. This was when everyone else was saying that Asia would have to wait for the US to recover before it could.

Times change, and the biggest change underway in the global economy today is how much Asia contributes to global growth each year relative to how much the US does, or did. This structural shift – it’s been going on for 20 years and will go on for the next 20 – explains much of why Asia was able to pull off the V-shaped recovery with no help from the US.

The question now is, will Asia’s double-digit GDP growth continue? The answer is, of course not, for any of a thousand reasons. Double digit growth will soon give way to sideways movement in output levels. Asia’s V-shaped recovery will turn into a ’square root’ shaped recovery: that is, a sharp drop, a sharp rise, and then a palpable turn sideways.

When will Asia hit the kink in the square root sign? Probably by the end of the year or early 2010. In terms of GDP growth, Asia will experience a second quarter of double-digit growth in 3Q 2009 that should drop to high single-digits (6-8 per cent) in the fourth quarter. By 1Q 2010, growth should be back to normal.

Three things will constrain growth very soon: demand, supply, and policy. On the demand side, growth is running at double-digit rates now only because it fell at double-digit rates earlier on. What Asia is experiencing is the snapback from a series of four to five one-off events in late 2008 that included, perhaps most notably, the shock from the collapse of Lehman Brothers in September 2008. That sharp downturn had a bottom. The sharp upswing will have a top. With speeds on both sides of the ‘V’ about equal, the upswing will last for as long as the downswing: two quarters. But only as long as the downturn, because the upturn is nothing but its flipside.

And if demand does manage to surge for longer, there’s the supply side to contend with. Output can grow as fast as demand does when there is excess capacity, as there is today. But with demand soaring back, excess capacity will soon vanish. And once demand hits the brick wall of capacity constraints, output can grow only as fast as those walls can be moved.

Finally, policy will have a hand in slowing growth, and probably sooner than most imagine. Because once excess capacity is exhausted – and it will be by year-end – double digit demand growth starts to imply double digit inflation in most countries. That’s too high. Policies will change.

Throughout Asia, monetary tightening will be a key feature of 2010, with higher interest rates and stronger currencies expected to share the burden about equally. In general, we expect tightening will begin in earnest around 2Q 2010, with a few exceptions. On the tighter side, Korea and India will move sooner, probably in January or February. On the slower side, Thailand seems unlikely to tighten until the third quarter.

For Asia overall, much will depend on China, where we expect rate hikes and currency appreciation to begin in 2Q 2010. We look for the benchmark one-year lending rate to rise by 81 basis points (to 6.12 per cent) by the year-end. We also expect the yuan to resume its appreciation vis-a-vis the US dollar in 2Q 2010 and to strengthen to 6.61 per dollar by the end of 2010. This will set the stage for currency appreciation elsewhere in Asia, allowing other currencies to rise more comfortably than if they went solo. Asia’s currencies have risen by 6-7 per cent on average against the dollar since the start of this year and we expect to see another 6-7 per cent appreciation by the end of 2010.

Other things being equal, currency appreciation and higher interest rates will help cool regional economies and keep a lid on imported inflation as well. The trouble is, higher rates and the prospect of local currency gains have the tendency to attract foreign inflows. And inflows have the tendency to wreak havoc with the best laid monetary plans. They drive interest rates back down and push currencies further north than authorities might have wanted. Raise interest rates again and you just get another round of inflow: Asia-vu.

The only ’solution’, if you can call it one, is to control inflows. Nobody likes controls and for good reason. They are clumsy and messy and have the awful tendency to change from week to week. But they do afford central banks a greater ability to control interest rates and currencies at the same time. And for this reason the controls debate always comes back when inflows are pounding on the door. Asia’s strong recovery means that higher interest rates and stronger currencies will be two key features of Asia in 2010. Capital inflows and another debate over controlling them seem likely to be two more.

DAVID CARBON – MD, Economics & Currency Research, DBS Bank Ltd


Source: Business Times, 1 Dec 2009

Data shows Asia's slow climb out of recession

HONG KONG: China yesterday reported a batch of solid economic data for July, two major Asian central banks kept interest rates unchanged and business confidence rose to a two-year high in Australia - all news that showed the region is continuing its slow and onerous climb out of recession.

China has withstood the global economic turmoil better than most other countries, thanks to aggressive stimulus measures announced by Beijing last year, and in recent months it has frequently surprised even optimistic economic analysts with buoyant investment, spending and production data.

Data for July, released yesterday, showed industrial output, a key measure of wider economic growth, rose 10.8 per cent from a year earlier, at a slightly higher pace than in June. Retail sales rose 15.2 per cent.

Trade data published separately showed exports in July dropped 23 per cent from a year earlier, a slightly smaller decline than economists had expected.

The data cemented the view that the China's giant economy is ploughing ahead steadily as government spending and a massive increase in lending by state-controlled banks during the first half of this year helped offset the negative fallout from collapsing demand for Chinese-made products in the United States and in Europe.

Reflecting growing optimism that the government's tremendous leeway to stimulate growth has put China on a path to solid recovery, economists at Goldman Sachs on Monday raised their forecast for the country's full-year growth this year to 9.4 per cent. This is up from the 8.3 per cent they had previously projected, and higher than the government's target of 8 per cent. For 2010, the Goldman Sachs economists expect the Chinese economy to expand 11.9 per cent.

However, the pace of growth - and of exports in particular - remains significantly below where it was before the global economic crisis began to hit export- dependent Asia late last year.

China's industry and retail data released yesterday, while good, was slightly lower than most economists had projected, and underlined that the economy remains hugely dependent on government spending programmes and bank lending to sustain growth. And the export decline was the ninth such fall in a row, showing that depressed exports are likely to remain a major drag on the economy for some time to come.

At the same time, a spike in stock markets and property prices in China has led many to worry that another bubble is in the making. The authorities now face the challenging balancing act of scaling back the pace of bank lending in a bid to deflate price spikes - but doing so without choking off economic growth.

Chinese stocks yesterday rose 0.46 per cent, ending a four-session losing streak, as economists said the country's economic recovery still appeared intact after mixed economic data for July.

Turnover shrank sharply, however, as sentiment remained cautious after the recent pull-back spurred in part by concerns about tightening market liquidity that were confirmed by a sharp fall in new bank lending data for July.

A drop in new loans, to 356 billion yuan (S$75 billion) in July from 1.53 trillion yuan in June, was largely due to arm-twisting by the central bank, said Mr Paul Cavey, an economist at Macquarie Securities in Hong Kong.

But he said no real monetary tightening was under way because policymakers were waiting for proof of a full recovery.

Elsewhere in the region, the Bank of Japan policy board members voted unanimously to hold interest rates at 0.1 per cent, as widely expected, and South Korea kept its key interest rate unchanged at a record low of 2 per cent for the sixth month in a row as the nascent recovery there takes root.

In Australia, a key measure of business confidence jumped to its highest level in almost two years in July, adding to signs that its economy is rebounding.

NEW YORK TIMES, REUTERS

Source: Straits Times, 12 Aug 2009

Asian recovery looks to be on track: ADB

S'pore growth for 2010 forecast at 3.5%, and the rest of Asean 4.2%

ASIAN economies appear to have turned the corner from the global recession and should be able to double next year the anaemic growth rates they are expected to post in 2009, the Asian Development Bank (ADB) said yesterday. But it warns in its latest Asia Economic Monitor that the road to full recovery is strewn with hazards.

Growth centre: China's growth is expected to rise to 8 per cent in 2010 from 7 per cent this year
The biggest single threat to continuing recovery identified by ADB report is the danger that recession in the US and Europe, on which Asia relies heavily for export markets, will last longer then generally expected.

Singapore's GDP growth rate is forecast by the report to reach 3.5 per cent in 2010, after an expected overall contraction of 5 per cent this year. The rest of Asean should recover from marginal growth of 0.7 per cent this year to 4.2 per cent expansion in 2010, ADB says.

China remains the region's star performer, with growth expected to be maintained at a relatively high 7 per cent this year, rising to 8 per cent in 2010. Japan, on the other hand, is forecast to suffer a 5.8 per cent GDP contraction this year and recover to just 1.1 per cent growth in 2010.

South Korea and Hong Kong are forecast to recover to respective growth rates of 4 and 3 per cent in 2010 after sharp contractions this year, but Taiwan will remain one of the laggards of the region with growth recovering only to 2.4 per cent next year.

Recovery got under way in Asia during the second quarter of this year, the ADB report notes, fed largely by fiscal and monetary stimulus programmes. But while exports are showing some recovery as a result of inventory adjustment, underlying external demand remains weak.

Among the positive signs for Asia are 'early indicators that the pace (of economic contraction) slowed in the second quarter of 2009', while balance of payments positions have 'turned positive' again, stock markets have rebounded, several currencies have begun appreciating and inflation has eased.

Meanwhile, the region's banking systems 'appear capable of weathering the economic storm', ADB says, 'with prudential indicators strong and lending continuing to grow' across much of the region.

Despite these positive indications, the report says: 'The overall external environment for emerging East Asia remains difficult and uncertain, with the recession in advanced economies continuing and global financial conditions improving (but) still tight.'

Emerging East Asia - which excludes Japan and the newly-industrialised economies (NIEs) of South Korea, Taiwan, Hong Kong and Singapore - 'could see a V-shaped recovery', with growth dipping sharply in 2009 before recovering next year to its pace in 2008.

But this scenario could change for the worse if there is a more prolonged recession than forecast in advanced economies, with export demand remaining depressed longer than expected. Premature fiscal or monetary tightening could also damage the prospects for a V-shaped economic recovery in Asia.

And falling inflation could turn into deflation in some economies of the region, says ADB, noting that Singapore and Taiwan, whose economies have contracted most sharply among the NIEs in the current recession, have been 'experiencing deflation over the past few months'.

Given the tentative nature of the expected recovery, 'it is critical that authorities stay the course in supporting domestic demand and growth' through fiscal and monetary stimuli, the ADB report adds.

Source: Business Times, 24 July 2009