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Emerging Asia Pacific: Regional Economic Review 4Q 2012

January 24th, 2013

by Team

of Thomas White International

Slowing Inflation and Rebounding Exports Signal Better Days Ahead

Emerging Asia Pacific economies showed strong signals of a rebound in economic activity amidst generally rising exports and stabilizing inflation. While some major economies like China, which had cut interest rates throughout 2012 to stimulate the economy, saw a mild resurgence in inflation, many countries like South Korea, Taiwan, Malaysia and Philippines saw inflation stabilize significantly during the quarter. Still, India, the region’s second largest economy, continued to be troubled by rising prices despite high interest rates. Exports across many emerging Asia Pacific economies showed encouraging signs.

A rebound in China along with better-than expected economic performance across developed economies worldwide helped lift exports among countries like Taiwan, South Korea and Thailand. While exports did come under pressure in some countries like Indonesia, Malaysia and the Philippines, domestic consumption more than made up for the slump in overseas sales.

Most central banks in the region, which have erred on the side of growth thus far, are now more cautious on the price front. Many central banks in the region reported that guarding against inflation could be their main stance in the year ahead. They now feel that monetary stimulus measures such as ultra-low interest rates and quantitative easing in the developed world could drive up commodity prices to the detriment of their economies.


After recording seven continuous quarters of slowing growth, China’s economy showed signs of stabilizing. Although the third quarter of 2012 posted GDP growth of just 7.4 percent, the lowest in eight quarters, economic data gathered during September signaled China’s economy was gaining back some lost vigor. Industrial production, fixed-asset investment, and even retail sales registered higher growth during the month.

The surge in the Chinese economy comes after aggressive monetary easing from the country’s central bank, the People’s Bank of China (PBOC), which has cut interest rates and reduced bank reserve requirements since late 2011.

While the central bank has not cut interest rates since July 2012, the effects of gradual monetary easing has helped improve access to credit for many companies across the country. China’s strong economic performance has come at a time of widespread view that China will witness a hard landing in the wake of tight credit conditions, troubling prospects in the European Union, a slowing global economy, and weakening construction markets at home. However, several factors helped China overcome these challenges during the second half of 2012. While China managed to thaw the credit markets at home, global economic prospects improved much more than expected during the second half, helping Chinese exporters as well. In fact, data from the final quarter of 2012 reaffirmed China’s recovery.

While China engineered a once-in-a-decade leadership transition, replacing the head of state and other important political functionaries, the economy chartered its own course quietly. With factory output and export growth picking up, China’s state-owned industrial companies registered robust profits. Further, investment in the economy got a great boost with the country’s top economic-planning agency approving construction of major subway lines linking key industrial zones. As China’s steel mills hummed along with other factories, in November 2012 the HSBC-bank compiled Purchasing Manager’s Index (PMI), a gauge of manufacturing activity, showed its first expansion after several months.

Even China’s construction markets seemed back on their feet during the fourth quarter of 2012, supporting a recovery. New home prices climbed in 53 of the 70 major cities and prices fell in only 10 cities during November. These are the most optimistic figures that China’s residential market has shown in nearly 18 months. Nonetheless, inflation, which had treaded downwards for the greater part of 2012, is accompanying the recovery. The country’s coldest winter took a toll on livestock and vegetable production. This drove up vegetable prices, which in turn fueled consumer price inflation to a seven month high of 2.5 percent. Economists surveyed by Bloomberg opined that the spike in inflation could hinder further monetary easing in China.


India’s tight monetary policy is still taking a toll on the country’s economy. India’s central bank, the Reserve Bank of India (RBI), which started tightening monetary policy over two years ago in response to stubborn inflation, is holding its cards to the chest. Although the Indian government has repeatedly signaled it wants more benign interest rates, the RBI is not budging for want of clear signals that prices are falling. In fact, despite a constricting monetary policy, inflation in Asia’s third largest economy has remained well above the RBI’s target rate. Many economists have called India’s inflation structural – arising from supply chain bottlenecks and a lack of adequate investments in infrastructure. Furthermore, food and fuel prices have also treaded upwards. Although India’s wholesale-price inflation unexpectedly fell in November to 7.24 percent, core inflation, a key measure that largely decides interest rate hikes, was outside the comfort zone. According to one estimate compiled by Bloomberg, core inflation stood at around 5.19 percent in October.

However, even as the tight monetary policy’s effect on India’s inflation has remained mild, its effect on India’s investment and output has been outsized. High credit costs have sapped the energy out of many factories and industries across the country. Not surprisingly, India’s Index of Industrial Production dipped 0.1 percent in November as the mining sector contracted 5.5 percent and the consumer and basic goods sector weakened.

With investment demand sputtering, the capital goods segment also floundered. Now India’s government, burdened by a high fiscal deficit, is trying to highlight its inflation reduction efforts in a bid to win an interest rate cut from the central bank. The RBI’s policy meeting to decide on interest rates is scheduled for late January 2013. India’s lawmakers approved legislation to let foreign retailers like Wal Mart and Carrefour set up shop in India. The country is also mulling a move to amend a century-old land acquisition law to facilitate investments in infrastructure projects for ports, utilities, factories, and other large-scale projects. Amidst all the slowdown woes, India’s services sector has proved to be a much resilient economic engine over other areas in the economy. The HSBC Holdings’ PMI Index measuring service expansion jumped to 55.6 in December from 52.1 in the previous month.


Aided by a mild recovery in the global markets, a bout of interest rates cuts from the central bank, and a strong sales record by the country’s chaebols or conglomerates, South Korea’s economy recovered considerably during the final months of 2012 and made up for its sluggish performance during the initial months of the year. The country’s central bank, the Bank of Korea, which cut interest rates throughout the year, pared interest rates once again in October and pegged the benchmark interest rate at 2.75 percent.

Consequently, South Korea’s industrial production rose in September after for the first time in four months. This, along with improved global sentiments, helped South Korea register export growth in October and clock a record current account surplus. Typically, South Korea’s current account surplus rises on strong global demand for the country’s merchandise like ships, mobile phones and cars.

Adding to the cheer, South Korea’s inflation in December slowed to a four-month low. Economists surveyed by Bloomberg opined that inflation will continue to be subdued as South Korea’s potential demand has room to grow. Furthermore, Park Geun Hye, who was elected as the country’s first female president in December 2012, pledged to give the country a fiscal stimulus during 2013. Ms. Geun Hye has said that she will boost welfare spending to bridge the wealth gap between the country’s polities.

Despite the good news, improvements in both South Korean manufacturing and consumer confidence were hard to come by. While the consumer confidence sentiment index remained steady at 99 for December over November, manufacturing confidence has been slipping readily, with the measure falling for the second month during November. In recent months, the Korean currency, the won, has been strengthening much to the detriment of the country’s exporters. A consistent sixweek appreciation in the value of won at a time of a weakening yen, Japan’s currency, adds to the challenges of South Korea’s exporters. Japan and Korea compete for a global market share in the auto, electronics and heavy machinery industries.


Taiwan’s export-driven economy received a significant boost as large customers such as China and the U.S. lapped up Taiwan-made goods such as toys, sporting goods, and information and communications gear. While export orders, an indicator of future overseas sales, jumped 3.2 percent in October, actual exports grew 9 percent in December. Taiwan particularly benefited from rising manufacturing activity in China, which expanded at its fastest pace in 19 months during December. Typically boosting Taiwan’s export orders is China’s hunger for advanced machine components, parts, and base materials and chemicals. Even Taiwanese shipments to Europe climbed 11 percent during the month.

Taiwan’s rising export numbers come at a time of rising home currency. Despite the fact that the country’s central bank refrained from hiking interest rates for over a year, Taiwan’s dollar appreciated to a 16-month high in January. Thus far, Taiwan’s central bank has largely managed the country’s currency through the purchase of U.S. dollars. However, in order to keep the country’s export engine going, many private economists opined that Taiwan might soon start employing interest rates to manage the home currency. Meanwhile, Taiwan’s inflation, which for the most part of the year remained subdued, unexpectedly accelerated in December. While consumer price inflation of 1.61 percent in December was well within the 2 percent target of the central bank, economists widely interpreted that Taiwan’s slowing inflation could soon come to a halt and stabilize at current levels.

The rebound in export markets and low inflation for the greater part of the year boosted consumer confidence among Taiwanese. The consumer confidence index compiled by Taiwan’s Central University made up for a two-month slide in October, rising to a reading of 72.73. Improved labor market conditions in particular helped the index. CIER, a leading Taiwanese think tank has forecast 3.6 percent GDP growth for Taiwan amidst rising private consumption and falling fixed asset investment.


Indonesia, which for the past two years had successfully unleashed the strength of its currency to cushion inflation, saw its ammunition diminish substantially during the final months of 2012. The country‘s strong currency, the rupiah, helped cushion the effects of imported inflation due to oil and food purchases for the greater part of the past two years.

In recent months, however, Indonesia’s currency has substantially weakened against other major currencies, resulting in higher import costs and higher inflation. As of the end of 2012, the rupiah had declined nearly 6 percent, the second worst performing currency in the past year after the Japanese yen. A steadily declining currency, however, prevented the country’s central bank from providing a monetary stimulus to support growth. The country’s central bank had to keep borrowing costs unchanged for the past 10 straight meetings as inflation continued its upward trend throughout 2012.

Neither has a weak rupiah helped to improve Indonesian exports. Throughout 2012, Indonesian exports have largely proved to be a sore point, falling for nearly eight continuous months until November 2012. Economists have largely blamed slowing European demand for a slump in Indonesian exports during the year and even the Indonesian government has expressed pessimism about export growth going forward.

Nonetheless, neither weakening currency nor falling export growth seem to have stopped Indonesia’s growth momentum. Consumption and investment, two key engines of Indonesia’s economic growth, are still thriving. Indonesia’s GDP growth of 6.4 percent for 2012 is the second best among major Asian economies. Only China has posted better growth for the full 2012 year. Many corporations are thronging to Indonesia to grab a piece of the domestic consumption pie and investment markets. Indonesia’s government is deploying billions of dollars toward huge infrastructure projects such as roads, ports, bridges and air terminals. Furthermore, rising wealth among Indonesians is fueling a boom in travel and tourism and the consumer durables sector. Many hotel chains are betting on Indonesia. Accor, a large European hotel operator, is increasing the number of hotels it is building in Indonesia from 55 now to 94 over the next few years. Furthermore, with a majority of travel centered within the country, hotel chains are expanding into Indonesia’s secondary cities as well. Foreign investor enthusiasm over Indonesia rose as sovereign credit ratings agencies such as Fitch Ratings and Moody’s Investors upgraded Indonesia’s debt status.


Thailand’s economy, which gained traction beginning in the second half of 2012, continued its run into the third and the final quarter of 2012 as well. A well-timed fiscal and monetary stimulus has helped the economy recover from a once-in-a-generation flood a year ago. The 2011 flood devastated industrial regions, shut down car and electronics factories, inundated the country’s capital city, and killed 700 people.

Thailand’s central bank, which cut interest rates immediately in the aftermath of the flood, continued to provide a healing stimulus. The central bank’s latest interest rate cut to keep the economy in the growth path came in October 2012.

Lower borrowing costs have encouraged the reopening of many factories and businesses lost to floods a year ago. This in turn has facilitated a recovery in exports. Thailand exports jumped the most in November and its investments also surged. Nissan and Toyota, two key Japanese car makers with huge production facilities in Thailand, ramped up output. In fact, Nissan announced that it will open a second factory and Toyota said its sales will surge more than 70 percent during 2012 in the wake of tax breaks for first-time car buyers in Thailand.


The Philippines economy continued its dream run during the second half of 2012. With a GDP growth of 7.1 percent during the third quarter of 2012, the Philippines registered the fastest growth among Southeast Asian economies. Rising consumer spending, benign inflation and robust investment expenditure helped the Philippines register its fastest quarterly figures since 2010. However, Philippine exports to major overseas customers such as European Union and the U.S. fell substantially during the last months of 2012.

Exports such as apparel and mineral goods slipped nearly 13 percent and 22.4 percent during November contributing to an export growth of just 5.5 percent, down from October figures. Nonetheless, the Philippine economy felt little effect of the fall in exports. That may be understandable since consumer spending accounts for nearly three-fourths of the $200 billion economy. Furthermore strong remittances also helped the Philippine economy during the third quarter.

Meanwhile, despite the strong growth, inflation barely reared its head during the fourth quarter of 2012. Inflation in the Philippines for December rose just 2.9 percent, much less than the 3.1 percent inflation predicted by a survey of economists by Bloomberg. Food prices and fuel costs have tended to remain stable in the Philippines as the country’s strong currency, the peso, has continued to strengthen.


Malaysia’s economy continued its strong performance during the third quarter of 2012 as well. During the third quarter, Malaysia’s GDP surged 5.2 percent, the fifth consecutive quarter of above-5 percent growth. The country’s economic performance was far better than the median 4.8 percent growth predicted by a group of 22 economists in a Bloomberg survey. Many economists had predicted that the country’s output could be hampered by a slowdown in global markets and that Malaysia’s exports would be crimped.

While the economists got their prediction on Malaysia’s exports right – exports did slip 3 percent during the quarter – they surely underestimated the strength of Malaysia’s domestic economy. With Malaysia’s national election approaching fast, the country’s Prime Minister, Najib Razak, has delivered a number of budget concessions and subsidies. Mr. Razak has announced generous raises to civil servants, delayed rolling back state subsidies on essential goods, and provided significant tax breaks for investment. Consequently, the boost initiated a wave of construction projects and strong consumer spending. While services in general jumped 7 percent during the quarter, the construction sector surged 18.3 percent. GDP growth was also spurred by strong consumer spending during the quarter.

Notably, the surge in growth has not been accompanied by any spurt in inflation. Unlike some other central banks in the region, Malaysia’s central bank largely refrained from using its monetary measures to stimulate the economy. Bank Negara Malaysia, the country’s central bank, has held interest rates at 3 percent for the past nine consecutive policy meetings. It appears that not cutting interest rates early this year is certainly helping Malaysia on the price front now. Consumer price inflation in Malaysia stood at just 1.3 percent in November, the lowest among Southeast Asian nations.

Some of the country’s commercial banks have predicted a steady interest rate scenario for Malaysia through 2013. Furthermore, Malaysian exports, which troubled the country during the third quarter of 2012, are showing signs of a turnaround. For instance, after declining markedly during the third quarter and October 2012, Malaysia’s exports jumped 3.3 percent in November.

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