Asia Economic Outlook 09

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15 December 2008Nomura

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N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D

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Economics | A S I A P A C I F I C

Rob Subbaraman +8522252 6249 [email protected]

Tomo Kinoshita +852 2536 1858 [email protected]

Tug of w ar

2009 Asia economic outlook

Although Asia remains very exposed to the global recession and financial crisis, it

still has stronger economic fundamentals than other regions, in our view. Asia

stands to benefit over time from crashing commodity prices. Most importantly,

Asian policymakers have both the intent and scope to pursue very expansionary

monetary and fiscal policies. That said, policy responses need time to take effect,

while negative economic feedback loops are developing. We see a risk that the

shallow recovery we forecast for H2 2009 is delayed until 2010 under the strain of

second-round economic effects, such as increasing unemployment, rising non-

performing loans and bloated inventories. If Asia falters, we see Korea, Indonesia

and India as the most vulnerable economies. Encouragingly, interest rate cutsand fiscal stimulus packages, most notably in China, are coming thick and fast,

giving the region and the world economy the best chance of eventually

winning the tug of war.

China: Why 8% growth is still achievableIndia: Trying times aheadSouth Korea: fiscal stimulus a case for doubling up

TOPDOWN

E c o n o m i s t s

Tomo [email protected]

Robert Subbaraman

[email protected]

Mingchun Sun

[email protected]

Takayuki Urade

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Young Sun Kwon

[email protected]

Tetsuji Sano

[email protected]

Sonal Varma

[email protected]

Renee Chen

[email protected]

Stephen Roberts

[email protected]

Yuichi Izumi

[email protected]

Kota Hirayama

[email protected]

Takahide Kiuchi

[email protected]
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15 December 2008Nomura 1

Economic Outlook 2009ASIA PACIFIC

ContentsRegional Roundup 2

Tug of war 2Outlook 16

Australia: Growth almost stalls in 2009 16China: Three key changes lie ahead 17Hong Kong: First year of contraction in a decade 18

India: The cycle has turned 19Indonesia: Robust domestic demand, but still vulnerable 20Japan: Set for a prolonged recession 21Malaysia: Clear shift in policy focus to downside risk 22Philippines: Export-led slowdown through 2009 23Singapore: Bracing itself for the largest decline in Asia 24South Korea: A broader, deeper-than-usual downturn 25Taiwan: Facing a sharp economic contraction 26Thailand: The negative impact of political unrest 27Vietnam: Greater exchange rate flexibility 28

Focus Articles 29China: Why 8% growth is still achievable 29India: Trying times ahead 35South Korea: Fiscal stimulus a case for doubling up 40

Forecast Tables 44

N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D


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ECONOMICS | ASIA PACIFIC ECONOMIC OUTLOOK 2009


Rob Subbaraman [email protected] ROUNDUP Tomo Kinoshita [email protected] Roundup

Tug of w arAs the global economy continues to falter, we have taken the knife again to our GDP

forecasts. However, Asian policymakers still have plenty of room to ease macro policies.

Furthermore, plunging commodity prices will also be an important factor in reviving theAsian economies. These two tailwinds are gaining force, although they are currently no

match for plunging exports, falling asset prices and tightening credit standards, as well as

signs of nonlinear economic effects1. The risk is that Asias economic downturn in 2009 is

deeper and longer-lasting than we forecast, and our assessment is that Korea, Indonesia,

and India are among the most vulnerable economies to a worse-case scenario. By 2010,

we are more confident that the tailwinds will gain the upper hand and with better economic

fundamentals than other regions, we believe that Asia ex-Japan is well positioned to be the

first region to recover. Indeed, a strong home-grown economic recovery in high-saving Asia

is crucial if the world economy is to rebalance and avoid a collapse in aggregate demand.

Further downgrades

We slashed our 2009 GDP growth forecasts in early November, but the high-frequencydata have deteriorated so rapidly since then that we have taken the knife to our forecasts

again. For Asia as whole, we have cut our 2009 GDP growth forecast from 3.1% to 2.3%,

compared with an estimated 4.1% in 2008 (Exhibit 1). For Asia ex-Japan we have lowered

our 2009 GDP growth forecast from 5.7% to 4.9%.

While Asias economic fundamentals are in relatively good shape, the region is heavily

dependent on exports. The IMFs definition of global recession is world GDP growth of

below 3%, which now seems highly likely in 2009, despite aggressive and unconventional

global policy responses. Our Asian forecasts are linked to our global forecasts, in which our

New York and London-based colleagues expect US and euro area GDP to fall by 1.0% and

0.8%, respectively, in 2009. In 2010, they forecast shallow recoveries in the US and euro

area, but with GDP growth still below potential at 1.9% and 1.2%, respectively. Asiasfinancial linkages with the rest of the world have also increased, and so the negative

economic fallout from the worst financial crisis since the Great Depression should not be

underestimated. One bright spot for Asia is the plunge in commodity prices. Our oil and gas

team projects the Brent crude oil price to average $60/bbl in 2009 and $65/bbl in 2010.

Exhibit 1. GDP forecasts

Nomura Nomura Nomura

Estimates Old New Old New

GDP Growth (% y-o-y) 2007 2008 2009 2009 2010 2010

China 11.9 9.2 8.0 8.0 8.1 8.5

Hong Kong 6.4 2.8 0.5 (1.5) 4.2 3.7

India* 9.0 6.8 6.9 5.3 8.3 7.6Indonesia 6.3 6.0 4.5 3.6 6.0 5.5

Japan 2.4 (0.2) (1.1) (2.1) 0.7 0.6

Malaysia 6.3 4.7 2.0 1.5 5.3 4.8

Philippines 7.2 4.3 3.0 2.8 5.6 5.6

Singapore 7.7 1.7 0.3 (1.0) 5.0 3.5

S. Korea 5.0 4.0 2.7 1.3 5.0 5.0

Taiwan 5.7 1.8 0.6 (1.0) 5.0 4.2

Thailand 4.9 4.4 3.2 2.1 5.3 5.1

Vietnam 8.5 6.2 5.5 5.0 6.8 6.3

Asia 6.6 4.1 3.1 2.3 4.6 4.5

Asia ex-Japan 9.1 6.8 5.7 4.9 7.0 6.9

Australia 4.0 2.5 2.0 1.2 3.0 3.2

Note: * India figures are fiscal year, eg. 2008 is year to March 2009. Source: CEIC and Nomura estimates

1Nonlinear economic effects can take many forms, including negative feedback loops from falling asset prices andtightening credit standards to the real economy; spill-over and financial contagion effects from one economy toanother; and multiplier effects as a slump in exports forces firms to cut capex and jobs.

We have taken the knife to ourGDP forecasts again

Asia is heavily dependent on

exports and its financial linkages

have increased substantially


4/50



In Q3 2008, Hong Kong and Singapore entered technical recession (ie., two consecutive

quarters of negative quarter-on-quarter growth), and by Q1 2009 we forecast that Korea,

Taiwan and Thailand will join the recession club. In terms of year-on-year growth rates,

depending on the country, we forecast either Q1 or Q2 2009 to be the low point in the cycle.

We forecast Singapore, Hong Kong and Taiwan to be hardest hit, with the bottom in terms

of year-on-year growth at -4.6%, -4.2% and -2.7%, respectively. By contrast, we expect the

economies of China, India, Vietnam and Indonesia to register the highest growth rates next

year, in part because of their higher potential growth rates, but also because theireconomies are relatively closed. In the case of China, we expect the fiscal policy response

to be more significant than in any other major economy. In Japan, with already weak

domestic demand, we judge that the economy will experience a prolonged recession, with

GDP falling 2.1% in 2009, and further appreciation of the yen is a major downside risk. Our

base case forecast is that, at best, Asia will experience only a shallow economic recovery in

H2 2009, with a meaningful recovery only starting to take hold in 2010.

We expect the economic downturn in 2009 to be deeper than the 2001 dotcom crash for

China, Japan and the combined rest of Asia (Exhibit 2). In comparison with the 1997-98

Asian crisis, the troughs for China and Japan are likely to be similar, but for the rest of

Asia the countries at the epicentre of the Asian crisis we do not expect a 1998-style

collapse in GDP, because exchange rates are now more flexible, economic fundamentals

are stronger and the policy responses have been much more expansionary.

Exhibit 2. Real GDP in Asia

-4

-20

2

4

6

8

10

12

14

16

1984 1988 1992 1996 2000 2004 2008

China

Japan

Rest of Asia

% y-o-y

Forecast

Asian crisis

Dot com

SARS

Source: CEIC and Nomura estimates

Risk scenariosWe still see the risks to our 2009 GDP forecasts as tilted to the downside. Our risk scenario

analysis is based on developments in the US economy. Our US chief economist assigns a

60% probability to a base case of -1.0% GDP growth in the US in 2009, followed by a very

modest increase in the growth rate in H2 2009 and 1.9% growth in 2010 (Exhibit 3).

Exhibit 3. US real GDP growth rate assumptions under different scenarios

-10

-8

-6

-4

-2

0

2

4

6

Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10

%, annualised q-o-q

Optimistic scenario

Base casePessimistic scenario

Forecast

Source: Nomura estimates

We forecast Korea, Taiwan and

Thailand to join Singapore and

Hong Kong in recession

We expect the economic

downturn to be deeper than the

2001 dotcom crash

We still see the risks to our 2009

GDP forecasts tilted to the

downside


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We see a 30% probability of a downside scenario of US GDP growth of -2.5% in 2009 and

1.4% in 2010, even with expectations of a new fiscal package under the new administration.

In this case, the nonlinear and secondary economic effects would particularly hurt the Asian

newly industrialised economies (NIEs) and Malaysia, in our opinion. We would expect

growth rates for Hong Kong, Taiwan and Singapore to be below -3% in 2009 (Exhibit 4). On

the other hand, we would expect China to hold up relatively well, with 7.5% growth backed

by an even more intensive policy response than is currently unfolding.

On the other hand, we put only a 10% probability on an upside scenario of US GDP growth

of 0.8% in 2009 and 3.8% in 2010. In this case, we would expect China and India to grow

by at least 9.0% in 2010 and the Asia NIEs to register 6.9% growth.

Exhibit 4. Forecasts on Asian economies under different assumptions

Upside

scenarioBasecase

Downsidescenario

Difference frommain scenario

Difference frommain scenario

(%, y-o-y) 2009F (A) 2009F (B) 2009F (C) (A-B) (pp) (C-B) (pp)

Real GDP growth rate

Asian NIEs 2.5 0.2 (1.7) 2.2 (2.0)

Korea 3.0 1.3 (0.5) 1.7 (1.8)

Taiwan 1.8 (1.0) (3.2) 2.8 (2.2)

Hong Kong 1.3 (1.5) (3.8) 2.8 (2.3)

Singapore 2.5 (1.0) (3.0) 3.5 (2.0)ASEAN5 4.9 2.9 1.7 2.0 (1.2)

Indonesia 5.6 3.6 3.0 2.0 (0.6)

Malaysia 3.5 1.5 (0.2) 2.0 (1.7)

Philippines 4.3 2.8 1.0 1.5 (1.8)

Thailand 4.2 2.1 0.5 2.1 (1.6)

Vietnam 7.3 5.0 4.2 2.3 (0.8)

China 9.0 8.0 7.5 1.0 (0.5)

Above Total 6.4 4.9 3.9 1.5 (1.0)

Asian NIEs + ASEAN5 3.4 1.3 (0.4) 2.1 (1.7)

India 7.0 5.3 3.0 1.7 (2.3)

Australia 2.5 1.2 (0.5) 1.3 (1.7)

(%, y-o-y) 2010F (A) 2010F (B) 2010F (C)

Real GDP growth rate

Asian NIEs 6.9 4.5 3.3 2.4 (1.2)Korea 7.0 5.0 3.5 2.0 (1.5)

Taiwan 6.9 4.2 3.1 2.7 (1.0)

Hong Kong 6.6 3.7 3.0 2.9 (0.8)

Singapore 7.1 3.5 2.6 3.6 (0.9)

ASEAN5 7.2 5.4 4.5 1.8 (0.9)

Indonesia 7.2 5.5 5.0 1.7 (0.5)

Malaysia 6.8 4.8 3.6 2.0 (1.2)

Philippines 6.8 5.6 4.5 1.2 (1.1)

Thailand 7.2 5.1 4.0 2.1 (1.1)

Vietnam 8.5 6.3 5.5 2.2 (0.8)

China 9.5 8.5 8.1 1.0 (0.4)

Above Total 8.4 6.8 6.1 1.5 (0.7)

Asian NIEs + ASEAN5 7.0 4.8 3.7 2.2 (1.1)

India 9.0 7.6 5.5 1.4 (2.1)

Australia 4.4 3.2 1.0 1.2 (2.2)

Note: Figures for India are on fiscal year (April-March) basis. Source: Nomura estimates

High exposure to global woes

Asias economic fundamentals are in good shape relative to other regions, in our opinion,

but Asia is highly exposed to the global recession and financial crisis through two main

channels: its high dependence on exports, and increasingly powerful wealth and financial

decelerator effects. Asia ex-Japan holds many of the worlds most open economies, partly

a consequence of maintaining undervalued currencies. A common metric of openness is

the export-to-GDP ratio, which in 2007 stood at 231% in Singapore, 207% in Hong Kong,

110% in Malaysia and averaged 52% for Asia ex-Japan overall. Meanwhile, banks a

major source of funding for companies in the region are rationing credit, while negative

wealth, balance sheet and confidence effects from falling equity and property prices shouldnot be underestimated. The regions total equity market capitalisation, as a share of GDP,

tripled in the five years to 2007 from 63% in 2002 to 196% in 2007.

Negative wealth effects from

falling equity and property prices

should not be underestimated


6/50



Exhibit 5 plots exports against equity market capitalisation, both as a share of GDP,

comparing the situation in 2007 with 2000. The further toward the top-right quadrant, the

greater the exposure. It is striking how much these ratios have risen in Asia ex-Japan, with

Hong Kong off the chart.

Exhibit 5. Export exposure versus equity market capitalisation

China

India

Indonesia

Korea

M alaysia

Philippines

Singapore

Taiwan

Thailand

US

Japan

Germany

UK

0

50

100

150

200

250

0 20 40 60 80 100 120 140 160Export of goods and services (% GDP)

350

200 250

2000 2007

Equitymarketcapitalisation(%GDP) Ho ng Kong is an o utlier: in 2007:exports = 207% of GDP ; equity market cap.=1271% of GDP

Source: World Federation of Exchange Members, CEIC and Nomura

All Asian countries have released Q3 2008 GDP, and in the picture book that follows we

have decomposed the main drivers of growth for each country except China, for which a

quarterly breakdown is not available. Asias high exposure to the global economy is starting

to be borne out in the data. The net export contribution to growth is decreasing in nearly all

countries, and was a drag in Q3 in India, Malaysia and Singapore. As expected, the

contribution of final domestic demand to growth is fading, particularly in the economies that

are very open or have large financial hubs notably Hong Kong, Korea, Malaysia,

Singapore and Taiwan. By contrast, domestic demand was resilient in Q3 in the two most

closed economies, India and Indonesia. Inventories are also building in many countries.

The net export contribution to

GDP growth fell in nearly every

country in Q3 2008


7/50



Picture book: Contribution to year-on-year real GDP growth

Hong Kong India Indonesia

-5

0

5

10

15

Sep-03 Dec-04 Mar-06 Jun-07 Sep-08

% points

-5

0

5

10

15


% points

-9

-6

-3

0

3

6

9

12


% points

Domestic final demand Change in inventories Net exportsDomestic final demandDomestic final demand Change in inventoriesChange in inventories Net exportsNet exports

Korea Malaysia Philippines

-3

0

3

6

9


% points

-5

0

5

10

15


% points

-6

-3

0

3

6

9

12


% points


Singapore Taiwan Thailand

-15

-10

-5

0

5

10

15

Sep-03Dec-04 Mar-06 Jun-07 Sep-08

% points

-6

-3

0

3

6

9

12


% points % points

-6

-3

0

3

6

9

12

Sep-03Dec-04 Mar-06 Jun-07 Sep-08


Source: All charts CEIC and Nomura


8/50



Nonlinearities

The global financial crisis took a decisive turn for the worse in September, and in recent

months there have been increasing signs of nonlinear and second-round economic effects.

Lessons from past deep or cross-country economic recessions are that nonlinear economic

effects should not be underestimated. They can take many forms, including negative

feedback loops from falling asset prices and tightening credit standards to the real economy;

spill-over and financial contagion effects from one economy to another; and multiplier

effects as firms heavily geared to the tradable sector which is particularly the case in

Asia are forced to cut capex and jobs. For many incoming data it almost seems as if there

was a structural break in the time series in recent months:

Official leading economic indexes tend to lead GDP growth by one quarter. They

have fallen sharply in Korea, Taiwan, Thailand and Singapore, and are now in negative

growth territory (Exhibit 6).

The value of exports (in US$ terms) is falling outright in many countries. Chinas export

growth fell from 19.2% y-o-y in October to -2.2% in November, while the rate of declines

were even more extreme in Taiwan (-23%) and Korea (-18%). These data are not

officially seasonally adjusted. To get a better feel for the real-time pulse of Asian

export growth, we seasonally adjusted the data ourselves and calculated the 3-month-on-3-month growth rates. For Korea and Taiwan, growth rates in November were more

negative than during the 2001 dotcom crash or the 1998 Asian crisis (Exhibit 7).

Purchasing Managers Indexes have plummeted between October and November, to

well below the boom-bust 50 mark: from 44.6 to 38.8 in China; 43.1 to 38.8 in Hong

Kong; and 45.8 to 44.3 in Singapore.

Domestic motor vehicle sales have nose-dived in most countries, plunging in October

by -32% y-o-y in Taiwan, -23% in Hong Kong, -15% in Thailand, -14% in India and -13%

in Malaysia. In November, Koreas domestic motor vehicle sales fell -28% y-o-y.

The number of visitor arrivals, in terms of year-on-year growth, is slumping

everywhere, and in October had turned negative in China, Hong Kong, Singapore and

Thailand.

Exhibit 6. Official leading economic indexes Exhibit 7. Value of merchandise exports in US$

-12

-6

0

6

12

18

Jun-00 Jul-02 Aug-04 Sep-06 Oct-08

% growth Korea, % y-o-yTaiw an, % 6m annualisedThailand, % y-o-ySingapore, % y-o-y

-25

-20

-15

-10

-5

0

5

10

15

20

Nov-96 Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08

China

Korea

Taiw an

Seasonally adjusted, % 3m-on-3m

Source: CEIC and Nomura Source: CEIC and Nomura

Amid all the gloom and doom, it is important to recognise that two important tailwinds for

the Asian economies are gaining force. First, being a large net importer of raw materials,

Asia stands to benefit over time from the plunge in commodity prices. In H1 2008, when

prices of many commodities were at record highs, the profit margins of Asian producers

were under significant pressure. Some of the cost pressures were passed on, causing a

surge in CPI inflation, which eroded the purchasing power of Asian consumers, and forcedmany central banks to hike rates. With the crash in commodity prices, these processes are

now quickly reversing. The large gap between producer price inflation and CPI inflation is

closing rapidly, helping relieve some of the stresses on firms profit margins (Exhibit 8).

Lessons from past deep or cross-

country recessions are that

nonlinear economic effects also

should not be underestimated

Amid all the gloom, it is important

to recognise that commodity

prices have plunged a major

positive for the region


9/50



Exhibit 8. Consumer and producer price inflation in Asia ex-Japan

-4

0

4

8

12

16

Oct-96 Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08

% y-o-y Producer price index

Consumer price index

Note: Data are GDP-weighted averages for China, Indonesia, Korea, Malaysia, Singapore, Taiwan and ThailandSource: CEIC and Nomura

Another tailwind of increasing force is the move to expansionary macro polices. With CPI

inflation falling sharply, central banks across the region have slashed their interest rates:Vietnam (400bp), Australia (300bp), India (250bp), Korea (225bp), China (189bp), Taiwan

(163bp), Thailand (100bp), Indonesia (25bp) and Malaysia (25bp).

Governments too are priming the fiscal pump. Chinas central government has announced

a RMB4tr (14% of GDP) stimulus package over the next two years; add to this the local

government stimulus plans, and the overall fiscal stimulus stands to be massive (see

China focus: Why 8% growth is still achievable). Elsewhere, Korea has pledged a

KRW33tr (3.3% of GDP) package in 2009 (see Korea focus: Fiscal stimulus a case for

doubling up); Taiwan has announced measures for 2009 worth NT$483bn (3.5% of GDP),

including NT$83bn of shopping vouchers; and Singapore is planning a very expansionary

budget in January, according to the Finance Minister, which will see the 2009 fiscal deficit

widen to more than three times the original projection.

At this juncture, the tailwinds from loosening macro policies and falling commodity prices

are no match for plunging export growth, falling asset prices, tightening credit standards

and sagging confidence.

In 2009, we still judge the risks to our revised GDP forecasts as stacked to the downside. In

Q1 2009, we believe the danger is that the nonlinear economic effects prove too powerful

as the policy responses take time to have effect, causing a deeper downturn than we

forecast. We expect the increasingly expansionary macro policies to gain traction in H2

2009, but the danger is that they will be largely offset by the emergence of second-round

economic effects, such as increasing unemployment, rising nonperforming loans and

bloated inventories. With this increasingly strenuous tug of war between headwinds and

tailwinds, forecasting the economic outlook is much more difficult and hence uncertain than usual, both in terms of depth and duration (Exhibit 9).

In the next few quarters, the risk is that the downturn becomes deeper than we forecast,

while further out the risk is that the shallow recovery we expect to see in H2 2009 is

delayed until 2010. We are more confident that an economic recovery will start taking hold

in 2010, as the tailwinds start to increasingly dominate the headwinds. Having said that,

with the export engine still not fully firing, the recovery is likely to be moderate, led by

domestic demand.

Aggressive interest rate cuts are

another growing tailwind

as are increasingly

expansionary fiscal policies

But they are no match for

plunging exports, falling asset

prices and tighter credit

although the tug of war looks

set to intensify

The risks are that the downturn is

deeper and longer-lasting than we

forecast


10/50



Exhibit 9. Tug of war between headwinds and tailwinds a sketch of the projected economic timeline for Asia

Headwinds

Tug of war

Tailwinds

Record high commodityprices

Interest rates rising

OECD demandweakening

Equity prices falling

Exports plunging

Asset prices falling

Credit standardstightening

Confidence sagging

Inventories piling upTrade credit drying up

Exports plunging

Asset prices falling

Tight credit standards

Confidence sagging

Inventories piling up

Unemployment rising

NPLs rising

Very weak exports

Low asset prices

Tight credit standards

Confidence at low ebb

High inventories

Unemployment rising

NPLs rising

Weak exports

High unemployment

High NPLs

Most Asian currenciesstrengthening

H1 2008 H2 2008 H1 2009 H2 2009 2010

Strong EMG demand

Tight labour markets

Lean inventories

Resilient domesticdemand

Commodity pricesslumping

Most Asian currenciesweakening

Central banks cuttingrates

Governments looseningfiscal policy

Low commodity prices

Most Asian currenciesweakening

Central banks cuttingrates



Stable Asian currencies

Low policy rates



Loose macro policies

Asset prices rising

Credit standards easing

Inventory overhangsubsiding

Confidence increasing

Source: Nomura estimates

Vulnerabilities and relativities

To assess whether some economies in Asia ex-Japan are more vulnerable than others to

the global financial crisis and economic recession, and to gauge how the region stacks up

relative to others, we examine five key factors: external vulnerability; domestic private debt;

health of the financial sector; exposure to the electronics cycle; and room for policy

responses. Our assessment is that if the downside risks to our base-case GDP forecasts

are realised, Korea (external vulnerability, high domestic leverage), Indonesia (external

vulnerability), and India (limited room for fiscal response) are among the most vulnerable

economies in the region. However, we also find that relative to other emerging markets,

Asia ex-Japans economic fundamentals stack up favourably, and that Asian countries

generally have more room for macro policy responses.

External vulnerability

On most metrics, Asia ex-Japan as a region overall appears to have low external

vulnerability compared with other emerging markets. One significant reason is that Asian

currencies do not appear significantly overvalued. In Exhibit 10 we plot real effective

exchange rates against current account balances for emerging market economies.

Exhibit 10. Current account balances versus real effective exchange rates

REERs in No vember 2008, % deviatio n fro m lo ng-run average (1994-2008)

(Lower value=weaker currency)

Israel

PolandHungaryTurkey

ChileM exico

BrazilSlovenia

EstoniaLithuania

Romania

ArgentinaSouth Africa

RussiaCzech Republic

Slovakia

Latvia

Iceland

IndiaIndonesia

ThailandPhilippines

Korea

Hong KongTaiwan

M alaysia

Singapore

China

-60

-45

-30

-15

0

15

30

45

60

75

-20 -15 -10 -5 0 5 10 15 20 25

Current acc ount in 2008, % GDP

Source: BIS, IMF, CEIC and Nomura

In a worse-case scenario, Korea,

Indonesia and India seem the

most vulnerable in the region

Relative to other regions, external

vulnerability indicators in Asia ex-

Japan look healthy


11/50



The worst position is the top-left quadrant current account deficits and overvalued

currencies which is mostly occupied by Eastern European countries. This is the opposite

of just before the 1997 Asian crisis, when most Asian countries were in the top-left quadrant.

Asian central banks (including Japan) have also saved for a rainy day, boasting a war chest

of FX reserves totalling US$4.2tr as at October 2008. This year, some Asian central banks,

notably in Korea, Malaysia and India, have been running down their FX reserves to avoid

too rapid currency depreciation and to repay external debt. This is in stark contrast to the1997-98 Asian crisis, when FX reserves were all but exhausted and many Asian central

banks had little choice but to hike rates as Iceland, Pakistan and Russia and have had to

do this year to defend their currencies. Moreover, despite the rundown of FX reserves,

the ratio of FX reserves to short-term external debt one of the best metrics for assessing

the risk of balance of payments crises remains well above the critical threshold of 1 for

most Asian countries, and higher than the ratios of most other emerging market economies

(Exhibit 11). The two notable exceptions in the region are Korea and Indonesia.

Exhibit 11. FX reserves/short-term external debt

0

2

4

6

8

Ch

ina-2006

Ch

ina-2008

In

dia-2006

In

dia-2008

Thaila

nd-2006

Thaila

nd-2008

Philippin

es-2006

Philippin

es-2008

Malay

sia-2006

Malay

sia-2008

Taiw

an-2006

Taiw

an-2008

Indone

sia-2006

Indone

sia-2008

Korea-2006

Korea-2008

Peru

Russia

Serbia

V

enezuela

C

olombia

SouthAfrica

Brazil

Mexico

Bulgaria

Croatia

Hungary

Romania

Ukraine

Chile

Turkey

Ka

zakhstan

Poland

Argentina

Estonia

Lithuania

Latvia

Ratio

Note: Data for non-Asian countries are for 2007. Source: BIS, IMF, CEIC and Nomura

Domestic private debt

The financial sectors in Asia ex-Japan have so far been hurt less by the global credit crunch

than those in the US and Europe, but as the global economic downturn deepens, banking

sectors in Asia are likely to face increasing stress. One important metric to assess a

countrys vulnerability to soaring delinquencies and, in the worst case, a banking crisis, is

the size of domestic private debt, which we measure broadly to include loans by financial

institutions to households and corporates, plus domestic corporate bonds outstanding

(Exhibit 12). Total domestic private debt, measured either as a percentage of GDP or per

capita, appears fairly large in China, Hong Kong, Korea, Malaysia, Singapore, Taiwan and

Thailand. But Asian economies are at varying stages of development and the more

advanced ones tend to have a larger stock of financial and real assets, which can provide a

buffer to higher leverage. To take this into account, we also show the ratios of domestic

private debt per capita and GDP per capita, as well as total private debt as a percentage of

GDP (bottom row of Exhibit 12). The results show that Hong Kong (145), Malaysia (147)

and Taiwan (149) have fairly high leverage, notably in the corporate sector, but the country

that really stands out is Korea (203) a ratio that is even higher than that of the US (172).

although FX reserve coverage

to short-term external debt has

dropped to low levels in Korea

and Indonesia

In terms of domestic leverage, the

country that really stands out is

Korea


12/50



Exhibit 12. Total domestic private debt in 2007

US$bn China HK India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand US

Households loans 431 108 123 48 850 42 3 72 205 44 13848

Corporate loans 3326 183 451 62 889 155 48 83 312 177 7019

Corporate bonds outstanding 104 9 10 5 231 79 2 6 54 41 2931

Total domestic private debt 3861 300 584 115 1970 275 53 161 572 263 23798

Total domestic private debt

per capita, US$(a) 2922 43201 517 511 40655 10136 601 35075 24894 4169 78561Nominal GDP

per capita, US$(b) 2483 29796 1014 1926 20021 6875 1624 35172 16690 4171 45790

Total domestic private debt,% of GDP (a/b)

118 145 51 27 203 147 37 100 149 100 172

Note: Domestic private credit is from the IMFs international financial statistics for all countries except the US and Korea where timely and more comprehensive flow offunds data are available. In Korea, using the IMF data, domestic private credit is a lower 108% of GDP. Source: IMF, BIS, CEIC and Nomura

Health of the financial sector

Financial sector health is crucial since an economy can enter a vicious circle if the financial

intermediation process breaks down. We see two potential problems: First, is the

deterioration in bank capital. Many countries were hurt this way during the Asian crisis, but

it seems lessons were learnt todays banking systems reflect the considerable progress

made in repairing balance sheets and tightening lending standards over the past decade.

The banking industrys nonperforming loan ratio is lower than 5% in all countries except the

Philippines, Thailand and Indonesia (Exhibit 13). Moreover, the industry-wide capital

adequacy ratio is over 10% for all countries. Taken together, this suggests that a financial

crisis similar to that of 1997-1998 is unlikely.

Exhibit 13. Banking sectors nonperforming loan ratio and capital adequacy ratio

capital adequacy ratio

Indonesia

Hong KongSingapore

Thailand

Philippines

India

Malaysia

China

Taiw an

KoreaAustralia0

2

4

6

8

10

12

14

10 12 14 16 18 20 22 24

%

%

Non-performingloa

nratio

Note: NPL ratio is as of end-2007. Philippines figure represents nonperforming assets to loan ratio. CAR is latest data.China's CAR is average figure for six H-Share market listed banksSource: Nomura

However, a worsening of the downturn may exert significant stress on individual financial

institutions, which poses the second potential problem. Much more cautious lending

standards could in turn affect corporate finance and ultimately, economic growth. The risk

here should be higher in those economies where the level of domestic private debt is

relatively high, as discussed above. This risk should also be higher for those economies

that experienced a significant rise in property prices and in those where banks exposure to

property-related loans is relatively high. Such exposure is especially high in Hong Kong

(52.8%) and Australia (51.5%), although in Hong Kong the loan-to-value ratio for mortgages

was only 61.5% as of October 2008. Exhibit 14 shows that residential property prices

across Asia have risen considerably in recent years, which could be a source of stress to

banking systems if these prices fall abruptly.

Deterioration in banks capital and

high exposure to property loans

are two potential concerns

Residential property values

across the region have risen

considerably in recent years


13/50



Exhibit 14. Banking sectors exposure to the property sector

0

20

40

60

80

100

0 10 20 30 40 50 60

China

%

%Property loan/ total loan ratio (End-2007)

Hong Kong

Taiwan

Korea

Singapore

Malaysia

ThailandIndonesia

Philippines

Australia

Cumulativeresidentialpropertypriceincrease

(during2005-20

07)

0

20

40

60

80

100

0 10 20 30 40 50 60

China

%

%Property loan/ total loan ratio (End-2007)

Hong Kong

Taiwan

Korea

Singapore

Malaysia

ThailandIndonesia

Philippines

Australia

Cumulativeresidentialpropertypriceincrease

(during2005-20

07)

Note: Residential property price increases based on official data, except Thailand, where we rely on Jones LangLaSalle data. Source: Jones Lang LaSalle, CEIC and Nomura

Exposure to the electronics cycle

Another area of potential vulnerability lies in exposure, especially through exports, to the

electronics sector, where output can be notoriously volatile. In 2007, electronics accounted

for 33.6% of total exports from China, India, the Asean5 and the NIEs combined. While the

movement of non-electronics exports correlates well with that of output in advanced

economies, electronics exports tend to have their own cycle. As a result of the global

recession, electronics exports can be expected to contract considerably in 2009, which

would disproportionately affect those economies with a higher exposure to the cycle

(Exhibit 15), such as Malaysia (where the ratio of electronics exports to GDP was 41.6% in

2007), Singapore (29.4%), Taiwan (22.6%) and the Philippines (21.6%). A more relevant

metric is the value-added of electronics exports. While such data are not readily available

on a country-consistent basis, our judgment is that the results would show Malaysiasexposure to the electronics cycle to be similar to that of Singapore and Taiwan.

Exhibit 15. Ratio of electronics gross exports to GDP, 2007

0 5 10 15 20 25 30 35 40 45

India

IndonesiaJapan

Korea

China

Thailand

Philippines

Taiw an

Singapore

Malaysia

%

Source: CEIC and Nomura

Room for policy responses

It is encouraging that policymakers in most countries in Asia ex-Japan have wasted no time

in moving to an expansionary mode. It is also reassuring that their monetary and fiscal

arsenals are far from exhausted. CPI inflation is now falling across the region, and weexpect it to decelerate even more sharply in coming quarters. On top of plunging

commodity prices in most Asian countries, food and energy items combined comprise

over 40% of the CPI basket the economies are slowing to well below their growth

potential, opening up large negative output gaps (a measure of spare capacity) which we

Malaysia, Singapore, Taiwan and

the Philippines are most highly

exposed to the electronics sector

We forecast Hong Kong, India,

Japan, Taiwan and Thailand to

experience CPI deflation in 2009


14/50



estimate are unlikely to close until Q4 2010 (Exhibit 16). We forecast Hong Kong, India,

Japan, Taiwan and Thailand to experience CPI deflation in 2009, with some others

teetering very close.

Exhibit 16. Our measure of Asia ex-Japans output gap and CPI inflation

% points

-3

-2

-1

0

1

2

3

Dec-96 Dec-99 Dec-02 Dec-05 Dec-08

0

1

2

3

4

5

6

7

8

Output gap, lhs

CPI inflation, rhsForecast

% y-o-y

Note: the output gap is the deviation of actual GDP from its potential. We apply the Hodrick-Prescott filter to GDP toestimate potential. Source: CEIC and Nomura

The prospect of very low CPI inflation, or deflation, is a green light for central banks to

continue cutting rates aggressively, and unlike the US Fed, most Asian central banks still

have several hundred more basis points of rate cuts at their disposal (Exhibit 17). The

notable exceptions are Taiwan, Hong Kong and Singapore and for the latter two, besides

already low interest rates, the monetary authorities in both cities have little control over

interest rates as they target the exchange rate.

Exhibit 17. Current policy interest rates

%

0

2

4

6

8

10

12

14

1618

Turkey

Brazil

Russia

S.Africa

Vietnam

Hungary

Indonesia

Mexico

India

Philippines

China

NZ

Norway

Australia

Malaysia

Korea

Czech

Thailand

Euroarea

Israel

Slovakia

Singapore

Taiwan

Sweden

UK

HK

Canada

US

Switzerland

Japan

Average

Note: 3-month interbank rates are used for Hong Kong and Singapore and the 1-year lending rate for China. Source:Bloomberg, CEIC and Nomura

On the fiscal side too, Asian governments still have plenty of firepower to step up spending

and cut taxes. With the exception of India (see India focus: Trying times ahead), all

countries in the region have public debt-to-GDP ratios that are lower than the OECD

average and they are likely to be further below the OECD average in the coming years,

owing to government bank bailouts in the US and Europe (Exhibit 18). Without strong fiscal

finances, countries that start running large budget deficits may need to compensate

investors, either through higher government bond yields or a weaker currency, or face the

risk of their sovereign credit rating being downgraded. In Asia ex-Japan, only the

government of India (and possibly the Philippines) faces these threats, while at the other

end of the spectrum Australia, China and Korea are among the best positioned of theworlds major economies to prime the fiscal pump in 2009.

Asian central banks are cutting

rates aggressively, and have

room for more

on the fiscal side too,

governments still have plenty of

firepower


15/50



Exhibit 18. Gross public debt-to-GDP ratios in 2008

HongKong

Luxembourg

Australia

China

Iceland

NZ

Korea

Denmark

CzechRepublic

Taiwan

Korea

Ireland

Indonesia

Thailand

Slovakia

Vietnam

Finland

Spain

Sweden

Malaysia

Netherlands

UK

Poland

Switzerland

Austria

Philippines

Germany

Canada

US

France

Portugal

Hungary

India

Belgium

Norway

Greece

Italy

Japan

0

30

60

90

120

150

180

% GDP

OECD average

HongKong

Luxembourg

Australia

China

Iceland

NZ

Korea

Denmark

CzechRepublic

Taiwan

Korea

Ireland

Indonesia

Thailand

Slovakia

Vietnam

Finland

Spain

Sweden

Malaysia

Netherlands

UK

Poland

Switzerland

Austria

Philippines

Germany

Canada

US

France

Portugal

Hungary

India

Belgium

Norway

Greece

Italy

Japan

HongKong

Luxembourg

Australia

China

Iceland

NZ

Korea

Denmark

CzechRepublic

Taiwan

Korea

Ireland

Indonesia

Thailand

Slovakia

Vietnam

Finland

Spain

Sweden

Malaysia

Netherlands

UK

Poland

Switzerland

Austria

Philippines

Germany

Canada

US

France

Portugal

Hungary

India

Belgium

Norway

Greece

Italy

Japan

0

30

60

90

120

150

180

% GDP

OECD average

0

30

60

90

120

150

180

% GDP

OECD average

Source: IMF, OECD and Nomura

Its global rebalancing, stupid

In 2009, we still judge the risks to our revised GDP forecasts for Asia ex-Japan to be

stacked to the downside, both in terms of the depth of the downturn and its duration, and

we see Korea, Indonesia, and India as the most vulnerable to further downside. However,

amid all the gloom and doom it is important not to lose sight of three relative strengths and

advantages for Asia ex-Japan: the plunge in commodity prices; plenty of room for more

policy responses; and better economic fundamentals than other regions. Not only are

monetary and fiscal policies more effective when economic fundamentals are strong, but

also strong fundamentals vis--vis other regions leaves Asia ex-Japan well positioned to

attract substantial capital inflows once global risk aversion abates. Strong capital inflows

can help finance domestic investment, buoy asset markets and lead to significant Asian

currency appreciation, thereby further rotating the mix of GDP growth from net exports

toward domestic demand. The timing is uncertain, but we believe that Asia ex-Japan is well

positioned to be the first region to recover.

Since the new millennium, a substantial gap has opened up between the aggregate GDP

growth rate of the advanced economies and that of emerging economies (Exhibit 19). The

IMF expects this gap to persist and we believe that Asia ex-Japan will continue to be the

biggest driver of this gap in years to come, importantly led by domestic demand.

Exhibit 19. GDP trends in advanced and emerging economies

% y-o-y

-2

0

2

4

6

8

10

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 20072009F

Emerging and

developing economies

Advanced

economies

Source: IMF and Nomura estimates

The global recession and financial crisis have most likely ended the borrowing binge by

households in the US, the UK, Australia and some other advanced economies. The

household sectors in these countries have lived beyond their means for several years, and

will now have to start rebuilding savings. In the short run, to help ease the economic pain

governments are replacing private sectors as borrowers. But that cannot last forever. In the

The region has three relativestrengths and advantages

The timing is uncertain, but we

believe that Asia ex-Japan is well

positioned to be the first region to

recover

It is unlikely that the US can

address its investment/savings

imbalance in isolation without a

collapse in global demand


16/50



long run, the US economy in particular will need to increase gross domestic saving relative

to investment. And since, by accounting identity, the excess of gross domestic investment

over savings is the current account deficit, it means that the US must reduce its still large

current account deficit. However, given the sheer size of the US economy, it is unlikely that

the US can address its investment/savings imbalance in isolation without a collapse in

global aggregate demand.

To illustrate just how important it is for the global economy to rebalance, we have plottedgross domestic savings against household consumption, both expressed as a percentage

of GDP (Exhibit 20). We have selected the worlds top 12 economies in terms of household

consumption expenditure measured in US dollars at current exchange rates plus all the

economies in Asia ex-Japan, which together comprise 82% of global household

consumption. The size of the bubbles represents the share of each countrys consumption

out of total world consumption. The US bubble is striking, not only because it sits in the far

bottom-right of the scatter plot, but also because of its oversize. US household consumption

makes up one-third of the world total or put differently, total household consumption in the

state of California is about the same as that in China, while total household consumption in

the state of Texas is about the same as that in India.

Exhibit 20. Domestic savings versus household consumption, 2006

Australia

Spain

Germany

France Italy

Brazil

Canada

Russia

UKUS

Indonesia

Taiwan

HK

ThailandIndia

Japan

China

Singapore

Malaysia

Korea

0

10

20

30

40

50

60

35 40 45 50 55 60 65 70 75

Household consumption (% GDP)

Grossdomesticsavings(%GDP)

Global

rebalancing

Note: The size of the bubbles represents the share of each countrys consumption out of total world consumption(measured in US dollars at current exchange rates) in 2006. Source: World Bank, OECD, CEIC and Nomura

To avoid a collapse in global aggregate demand, policymakers in countries with large gross

domestic savings, particularly China, must no longer rely on exports for growth and do all

that they can to stimulate domestic demand. Encouragingly, policymakers in Asia ex-Japan

increasingly appear to be on the case. Interest rate cuts and fiscal stimulus packages are

coming thick and fast, giving the region and the world economy the best chance of

eventually winning the tug of war.

Policymakers in countries with

large gross domestic savings,

particularly China, must do all

that they can to stimulate

domestic demand

Encouragingly, policy measures

are coming thick and fast, giving

the region and the world

economy the best chance of

winning the tug of war


17/50



OUTLOOK Stephen Roberts [email protected]

Aust ra l ia: Grow th a lmos t s ta l l s in 2009Expansionary policies should counter a rolling slowdown in household spending, exports and business

investment spending in 2009, but it will be a close run race, in our view.

Australian policymakers have responded to the global credit crunch in a substantial and timely fashion which should, in

our view, lay the groundwork for a rebound in economic growth in 2010. In H1 2009 we expect weak household

spending to weigh on growth after a fiscal policy-induced lift in Q4 2008 the government is handing out A$8.7bn by

way of a one-off transfer payment to low-income families and pensioners in December. Export growth is expected to

slow through much of 2009, affected particularly by weaker demand from Asia. Business investment spending, the

mainstay of growth in 2008, is likely to contract in 2009, particularly as mining companies cut back, or delay, major

projects in the wake of a precipitous decline in commodity prices. We have revised down our 2009 GDP growth

forecast to 1.2% from 2.0%, but see a rebound to 3.2% in 2010 as Asian growth recovers, the lagged impact of some

of the governments fiscal spending is felt and an expansionary monetary policy is maintained.

In our opinion, the risks to our below-consensus 2009 growth outlook are to the downside. Household spending could

retrench more than we expect in 2009 as a preference for savings grows in response to rising unemployment and a

decline in household wealth through 2008 due to a lower equity market and house prices. In addition, sliding growth

prospects in Asia could see exports and business investment growth weaken by more than we expect. Australiascommodity exports (accounting for 60% of total) look highly vulnerable, particularly those of coal and iron ore, the two

biggest export categories. The bleak commodities picture is also likely to stymie the major mining companies

investment expansion plans and may lead to an even greater retrenchment than we forecast.

On the positive side for Australian growth in 2009, policymakers have plenty of room to respond with even more

expansionary policy settings. The government has said that it is ready to spend more and has just announced that it will

bring-forward infrastructure spending, including new spending amounting to 0.5% of GDP in 2009-10. The government

is in a solid position to do even more given it is free of net debt. Although the RBA has already aggressively cut the

cash rate by 300bp between September and December 2008 to a seven-year low 4.25%, we expect further cuts to a

terminal rate of 3.00% by mid-2009. The rate-cutting process is likely to be helped as inflation is set to fall much more

sharply than the RBA allowed for in its November forecasts, in our opinion. We see annual inflation falling below the

RBAs 2-3% target band in H2 2009, assisted by sharply lower petrol prices, falling financial service charges, increased

discounting by retailers and moderating housing costs (including previously fast-inflating housing rental charges).

A weaker Australian dollar is also likely to support growth in 2009 since the currency was floated it has acted as a

shock absorber by falling and boosting growth when global activity slows and conversely, rising and dragging on

growth when the global economy picks up. The prospect of further commodity price weakness, more monetary easing

and still-elevated risk aversion point to AUD trading below USD0.60 in H1 2009. Thereafter, we believe the currency is

likely to gain ground as prospects for commodities improve with a projected pick-up in Chinas economic growth.

The outlook at a glance

% y-o-y growth unless otherwise stated 1Q08A 2Q08A 3Q08A 4Q08F 1Q09F 2Q09F 3Q09F 4Q09F 2007A 2008F 2009F 2010F

Real GDP 3.3 2.9 1.9 1.8 0.8 0.7 1.4 1.8 4.0 2.5 1.2 3.2Household consumption 3.5 2.7 1.7 1.2 0.8 0.8 1.3 1.0 4.3 2.2 1.0 2.5Government (total spending) 6.2 4.7 6.4 6.2 6.5 6.3 6.0 5.0 2.7 5.9 6.0 5.0

Investment (private) 8.4 9.5 7.5 7.6 2.5 (0.5) (1.8) (2.0) 10.1 8.2 (0.5) 2.5Exports 4.1 6.5 5.0 5.6 3.8 2.5 1.8 4.5 3.3 5.3 3.1 6.0Imports 11.9 14.3 13.2 10.6 7.7 5.9 2.9 1.9 11.1 12.5 4.3 5.0

Contributions to GDP:Domestic final sales 5.1 4.5 4.1 3.8 2.5 1.7 1.7 1.2 5.4 4.5 1.8 3.2Inventories 0.4 0.0 (0.3) (0.7) 0.0 0.0 0.0 0.0 0.4 (0.3) 0.0 0.0Net trade (goods and services) (2.2) (1.8) (1.9) (1.3) (1.7) (1.0) (1.3) 0.6 (1.8) (1.7) 0.3 0.5

Unemployment rate, (% labour force) 4.1 4.3 4.3 4.7 5.1 5.6 6.0 6.5 4.4 4.3 5.8 6.3Average monthly employment, ('000) 12.8 11.5 9.2 10.0 5.0 (5.0) (5.0) 5.0 19.0 13.2 0.0 5.0Consumer prices 4.2 4.5 5.0 3.7 2.9 1.9 1.1 1.8 2.3 4.3 2.1 2.8RBA's trimmed mean 4.10 4.30 4.60 3.50 2.80 2.00 1.30 2.00 3.00 4.10 2.00 2.90

Fiscal balance, (% of GDP) 1.60 1.70 0.20 (1.00)Current account balance, (% of GDP) (6.10) (4.80) (4.30) (4.60)

Official cash rate (%) 7.25 7.25 7.00 4.25 3.50 3.00 3.00 3.00 6.75 4.25 3.00 4.50

3-year bond yield (%) 6.19 6.71 5.09 3.60 3.30 3.10 3.10 3.30 6.88 3.60 3.30 4.8010-year bond yield (%) 6.05 6.45 5.39 4.60 4.40 4.00 4.00 4.10 6.33 4.60 4.10 5.00Exchange rate (AUD/USD) 0.91 0.96 0.79 0.65 0.61 0.58 0.60 0.60 0.88 0.65 0.60 0.65

Notes: Quarterly national accounts figures are % y-o-y. Annual figures are % y-o-y changes. Unemployment is % of labour force at end-of-period.Interest rates and currency are end-of-period; other measures are period averages. Fiscal year runs Jul-Jun. Table last revised on 15 December2008. Source: Australian Bureau of Statistics, Reserve Bank of Australia and Nomura


18/50



Tomo Kinoshita [email protected] Mingchun Sun [email protected]: Three k ey c hanges l ie aheadExport slowdown, increased role of government and industrial consolidation to change growth profile

The global economic downturn is exerting heavy downward pressure on the Chinese economy. In our view, this is

likely to bring three key changes to Chinas economic growth profile. Firstly, exports are set to decline in 2009. Thisis a phenomenon that China has not experienced since 1983, and it can be expected to have a considerable

negative effect on the economy, which has become increasingly dependent on exports, with an export-to-GDP ratio

of 37.1% in 2007. Exporters are having to adjust their mindsets to acknowledge lower expectations. In fact, faced

with dwindling foreign orders, some exporters appear to have already responded by cutting production or have even

exited the market. Affected by the slowdown in both exports and domestic demand, the inventory adjustment

process may well continue until sometime in Q2 2009. The rate of export growth, -2.2% y-o-y in November, is likely

to decelerate further. We forecast a 6% decline in Chinas exports in 2009.

Secondly, the role of the government in economic growth is expected to increase substantially in 2009. We believe

that the RMB4tr fiscal package and related measures will contribute substantially to growth. Fiscal plans at the local

government level should also support growth, although we would expect only part of the RMB30tr spending

announced to be implemented due to funding and approval issues. As a result, the driver of investment growth

should shift to infrastructure investment. For the past several years, investment growth has been driven by the

manufacturing and real estate sectors, but next year, while these private investments are likely to slow substantially,

we expect a sizable increase in investment in public projects. We expect real fixed asset investment to grow by

16.3% in 2009 almost matching the 16.5% growth we estimate for 2008.

And third, we see 2009 as a year of consolidation for China. Many non-viable business entities have survived for

several years under favourable macroeconomic conditions, but the global economic downturn is likely to force

competition for survival, which naturally leads to price competition. Considering this and the declining trend of food

prices, we forecast a 1.0% rate for CPI inflation rate in 2009. On the monetary policy front, with inflation no longer a

concern, we expect the Peoples Bank of China to lower the benchmark 1-year lending interest rate by a further

54bp to 4.50% by June 2009.

Given our expectation of further substantial policy stimulus, especially on the fiscal side, we maintain our GDP

growth rate forecast of 8.0% for 2009, a slump in exports notwithstanding. In the short run, however, we expect the

growth rate to drop to 6.5% y-o-y in Q1 2009 due to inventory adjustment and the decline in exports, recovering to

7.6% y-o-y in Q2. The biggest risk, in our opinion, lies in external demand given Chinas high dependency on

exports. Other risks include a delay in the implementation of public investment projects; sharply lower property-

related local government revenue, which would thus constrain fiscal spending; and a greater-than-expected rise in

unemployment. On the currency front, we maintain our view that RMB is likely to appreciate against USD on the

back of a large current account surplus and political pressure from trading partners, especially the US government.



Real GDP 10.6 10.1 9.0 7.0 6.5 7.6 8.5 9.5 11.9 9.2 8.0 8.5

Retail sales (nominal) 20.6 22.2 23.2 17.9 12.0 10.9 12.6 13.8 16.7 20.8 12.4 14.4

Fixed asset investment (nominal, ytd) 24.6 25.5 27.0 25.2 12.4 13.5 15.9 17.7 24.8 25.2 17.7 24.8

Industrial production (real) 16.4 15.9 13.0 4.1 2.7 9.3 12.7 17.0 18.5 12.4 10.4 11.3

Exports 21.4 22.4 17.2 7.1 (8.1) (8.0) (7.1) (1.0) 25.7 18.1 (6.0) 8.8

Imports 28.6 32.4 26.4 5.2 (4.4) (2.5) 1.2 7.8 20.8 22.3 0.6 16.5

Trade account (US$ bn) 41.4 58.2 83.3 86.6 28.4 36.9 50.4 61.2 262.0 269.6 176.9 102.6

Current account (US$ bn) 87.5 104.3 125.3 128.5 71.4 79.9 92.4 103.2 371.8 445.5 346.9 291.6

Current account (%, GDP) 10.2 10.5 12.1 9.6 7.4 7.2 7.9 6.7 11.3 10.6 7.2 5.2

Fiscal balance (% of GDP) 0.7 0.1 (3.5) (4.5)

Consumer prices 8.0 7.8 5.3 2.9 0.0 0.2 1.2 2.6 4.8 6.0 1.0 3.5

1-yr bank lending rate (%) 7.47 7.47 7.20 5.04 4.77 4.50 4.50 4.50 7.47 5.04 4.50 5.31

1-yr bank deposit rate (%) 4.14 4.14 4.14 1.98 1.71 1.44 1.44 1.44 4.14 1.98 1.44 2.25

Exchange rate (CNY/USD) 7.09 6.86 6.82 6.80 6.74 6.68 6.61 6.55 7.30 6.80 6.55 6.25

Note: Interest rates and currency are end-of-period; other measures are period averages; fiscal balance is on combined central and local governmentbasis; table last revised on 15 December 2008Source: National Statistical Bureau, People's Bank of China, Ministry of Commerce, CEIC and Nomura


19/50



OUTLOOK Renee Chen [email protected] Kong: Fi rs t year o f cont rac t ion in a decadeRising unemployment and tight credit mark the outlook; fiscal stimulus and Chinas support offer silver lining

Hong Kongs economy has slipped into recession and will likely contract further into mid-2009 before seeing a tepid

recovery from H2 onwards. As a regional financial centre and an international trade entrept and logistic centre

(particularly for Chinas trade; primarily for Guangdong/Pearl River Delta), Hong Kong is highly exposed to the globaleconomic downturn, Chinas export slowdown and financial market jitters. We expect the economy to contract by

1.5% in 2009, the first decline since the 1998 Asian financial crisis. Sluggishness will likely be evident on all fronts

with retreats in exports, private consumption and capital investment. The recession and financial sector distress are

expected to have a significant impact on the labour market we forecast the unemployment rate to climb to a near-

five-year high of 7% in Q4 2009 before steadily heading down in 2010.

Shrinking corporate profits and prospects of depressed consumer spending are set to heighten the financing

difficulties of SMEs (including those operating in Guangdong). As such, companies are expected to cut capex and

trim payrolls. Job losses and payroll cuts would in turn dampen income growth and weigh on consumption, which is

already strained by the wealth destruction caused by the stock market crash and a housing market correction.

Adding to the pressure on both the corporate and consumer sectors is the fact that banks are tightening their lending

standards. October data show a cutback in bank loans already. The economic slowdown and tight credit conditions

look set to reinforce each other, with the risk that this develops into a vicious spiral.

The situation calls for decisive policy action, but we see limited scope for monetary easing. Because HKD is pegged

to USD, Hong Kongs monetary policy is essentially dictated by the US Fed, leaving fiscal policy as the counter-

cyclical policy tool. Local banks have little leeway to lower lending rates, even if the US Fed were to cut rates to zero

given that their deposit rates are already close to zero. Meanwhile, the Hong Kong Monetary Authority has injected

large amounts of liquidity into the banking system, but credit growth is still likely to slow significantly. On the fiscal

front, the government has rolled out stimulus measures aimed at creating jobs, mainly by speeding up infrastructure

projects, encouraging civil service recruitment, enhancing credit support to businesses (mainly SMEs) and seeking

economic support from China (in areas such as RMB business, tourism and offering help to Hong Kong businesses

in China). These measures should help at the margin, but are unlikely to stop unemployment from rising or give the

economy a substantial boost, in our opinion. We expect more fiscal stimulus measures to feature in the 2009-10

budget, which will be unveiled in February. As a result, the fiscal balance looks set to deteriorate in 2009, as on topof increased fiscal spending, government revenue is likely to plummet government receipts from stock- and

property-market transactions, investment income and profit/salaries taxes are all due to drop.

We expect inflation to come off in 2009, as faltering domestic demand, lower oil and other commodity prices, falling

private housing rents and a favourable exchange rate pass-through (especially in H1 2009) help add to the effect of

the governments inflation-relief measures. We forecast a 1.1% decline in headline CPI inflation in 2009.



Real GDP 7.3 4.2 1.7 (1.2) (4.2) (3.0) (1.6) 2.4 6.4 2.8 (1.5) 3.7[sa, % q-o-q] 2.1 (1.4) (0.5) (1.3) (1.0) (0.2) 1.1 2.5

Private consumption 7.9 3.2 0.2 (3.2) (5.2) (4.5) (2.4) 2.1 7.8 1.8 (2.5) 3.8Government consumption 0.3 3.0 2.3 3.2 3.3 2.5 3.1 2.4 2.3 2.1 2.8 1.0Business investment 9.9 3.5 3.0 (7.5) (16.2) (14.6) (10.7) 1.0 4.2 1.9 (10.2) 5.6Exports (goods & services) 8.7 5.1 2.2 (0.7) (11.0) (9.1) (4.4) 1.1 8.0 3.5 (5.7) 5.5Imports (goods & services) 8.6 4.7 2.2 (1.5) (12.5) (10.7) (5.7) 0.6 8.8 3.2 (6.9) 5.7

Contributions to GDP:Domestic final sales 6.8 3.0 0.9 (3.2) (6.3) (5.9) (3.4) 1.6 5.7 1.7 (3.4) 3.4Inventories (0.4) 0.2 0.5 0.4 0.5 0.2 (0.2) (0.2) 1.2 0.2 0.1 0.0Net trade (goods & services) 1.0 1.0 0.3 1.6 1.6 2.7 2.0 1.0 (0.5) 1.0 1.8 0.3

Unemployment rate (sa, %) 3.4 3.3 3.3 3.8 5.0 6.1 6.7 6.9 4.1 3.5 6.2 5.8Consumer prices 4.9 5.7 4.6 1.3 (1.3) (3.2) (2.4) 2.5 2.0 4.0 (1.1) 4.8Exports 10.7 8.1 5.6 1.0 (11.5) (10.9) (7.4) 0.4 8.8 6.1 (7.2) 7.6Imports 11.8 9.4 6.9 1.2 (12.0) (11.9) (8.5) (0.1) 10.0 7.0 (8.0) 7.9Trade balance (US$bn) (6.6) (8.7) (6.2) (7.0) (5.4) (6.7) (4.6) (6.5) (23.5) (28.5) (23.3) (26.2)Current account (US$bn) 28.0 25.9 24.1 23.4Current account (% of GDP) 13.5 11.8 10.7 9.6

Fiscal balance (% of GDP) 7.5 (1.6) (3.0) 0.23-month Hibor (%) 1.98 2.31 3.66 1.50 1.00 1.00 0.75 0.50 3.45 1.50 0.50 1.50Exchange rate (HKD/USD) 7.78 7.80 7.76 7.75 7.75 7.8 7.8 7.8 7.80 7.75 7.80 7.80

Notes: Interest rates and currency are end-of-period; other measures are period averages. Headline CPI reflects the effects of the government'sinflation-relief measures. Fiscal year runs Apr-Mar. Table last revised on 15 December 2008. Source: CEIC and Nomura


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OUTLOOK Sonal Varma [email protected] ia : The cyc le has turnedAn aggressive policy response is required to counter the investment and export-led slowdown

The ongoing credit crisis, a global recession, sharp declines in asset prices and falling consumer and business

confidence have hit Indias growth momentum. After a robust 9.0% y-o-y GDP growth rate in FY08 (year ending

March 2008) led by rising investments, booming exports and massive capital inflows, we expect GDP growth tomoderate to 6.8% in FY09 and slump to 5.3% in FY10. We expect the economy to trough in Q2 2009 at 4.5% y-o-y.

Funding constraints have led firms to shelve fresh investments in both the manufacturing and real-estate sectors.

Inventories are piling up due to flagging domestic and external demand, leading to production cuts. We expect the

slump in the value of exports to be exacerbated by falling commodity prices and difficulty in accessing trade credit.

To some extent, consumption should get a boost from the farm-loan waiver, civil service pay hikes and still-robust

rural demand, but some moderation in discretionary durable and services consumption seems inevitable. Further,

rising negative feedback loops from higher nonperforming assets, tightening lending standards, property price falls

and further job losses have increased the risk of a sharper economic downturn.

We expect this slump in economic growth to exert a powerful disinflationary force in the coming quarters, aided by

falling commodity prices and a high base effect. We expect to see a brief patch of deflation between July and August

2009. On average, we expect wholesale price index inflation to ease from 9.2% in FY09 to 2.6% in FY10.

Falling commodity prices are a big positive for a large commodity importer like India. However, with the

simultaneous drop in software services exports due to the global recession, and a projected drop in private

remittances, we expect the current account deficit to double to 3.0% of GDP in FY09 from 1.5% in FY08, before

narrowing to 1.4% of GDP in FY10 due to slowing imports. The capital account position is more precarious in FY09,

with global risk aversion resulting in large net capital outflows. We expect a balance of payment deficit of US$39bn

in FY09 due to portfolio, loan and banking net capital outflows.

With inflation easing, growth has become a priority and we expect policymakers to use both conventional and

unconventional tools to bolster the economy. On the monetary side, we pencil in another 250bp cut in the cash

reserve ratio to 3.0%, a cumulative 150bp repo rate cut to 5.0% and a 100bp cut in the reverse repo rate to 4.0%, all

by mid-2009. Despite limited space for an aggressive fiscal stimulus, the government has already announced a

fiscal stimulus of 0.5% of GDP in FY09 and we expect a much larger fiscal stimulus to be announced next year tooffset the fall in private investment. To boost dollar liquidity, we expect capital account restrictions to be further

relaxed and we do not rule out overseas bond issuance by the government for non-residents.


% y-o-y growth unless otherwise stated 1Q08A 2Q08A 3Q08A 4Q08F 1Q09F 2Q09F 3Q09F 4Q09F FY08A FY09F FY10F FY11F

Real GDP 8.8 7.9 7.6 6.2 5.6 4.5 4.8 5.5 9.0 6.8 5.3 7.6

Agriculture 2.9 3.0 2.7 2.0 2.5 3.0 3.0 3.0 4.5 2.5 3.0 3.0

Industry 7.6 6.9 6.1 4.2 2.8 3.0 3.8 4.7 8.5 4.9 4.3 7.6

Services 11.2 10.0 9.6 8.9 7.9 5.7 5.6 6.8 10.8 9.0 6.5 8.9

Industrial production 7.0 5.3 4.5 2.4 2.8 2.6 3.4 4.2 8.5 3.7 3.9 7.5

M3 money supply 22.5 21.5 19.8 19.1 17.1 16.0 15.7 15.2 21.8 19.3 15.4 17.0Non-food credit 23.6 25.6 25.3 27.4 24.4 21.9 20.7 14.5 24.2 25.6 17.7 17.7

Wholesale prices 5.8 9.6 12.5 9.2 5.7 2.4 0.1 3.3 4.7 9.2 2.6 5.3

Consumer prices 6.3 7.8 9.0 10.4 9.5 6.9 4.4 3.3 6.2 9.2 4.5 5.3

Exports 37.3 42.4 22.9 (5.3) (5.1) (11.7) (6.5) 11.7 26.3 11.5 1.8 19.3

Imports 48.6 36.8 47.7 8.3 0.5 (8.4) (11.9) (5.4) 33.3 22.0 (4.5) 16.7

Merchandise trade balance (% GDP) (6.9) (7.3) (8.7) (9.4) (9.7) (9.9) (9.5) (8.5) (6.9) (9.7) (7.9) (7.3)

Current account balance (% GDP) (1.5) (1.8) (2.4) (2.8) (3.0) (2.8) (2.3) (1.8) (1.5) (3.0) (1.4) (1.1)

Fiscal balance (FB) (% GDP) (2.8) (2.1) (3.0) (3.9) (3.7) (3.5) (4.0) (3.9) (2.8) (3.7) (4.0) (3.1)

FB including off-budget items (% GDP) (3.7) (5.2) (4.2)

Repo rate (%) 7.75 8.50 9.00 6.50 5.50 5.00 5.00 5.00 7.75 5.50 5.00 6.00

Reverse repo rate (%) 6.00 6.00 6.00 5.00 4.00 4.00 4.00 4.00 6.00 4.00 4.00 5.00

Cash reserve ratio (%) 7.50 8.25 9.00 5.00 3.50 3.00 3.00 3.00 7.50 3.50 3.00 5.00

10-year bond yield (%) 7.64 8.65 8.72 6.40 6.00 5.50 5.00 5.25 7.64 6.00 5.50 6.75Exchange rate (INR/USD) 40.0 43.0 46.9 50.0 50.5 49.0 48.0 46.5 40.0 50.5 45.9 43.5

Note: All annual figures are for fiscal year, e.g. FY08 is year ending March 2008. Interest rates and currency are end-of-period; other measures areperiod averages. Consumer price index is for industrial workers. Fiscal deficit is for the central government. Table last revised on 15 December 2008Source: CEIC and Nomura


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OUTLOOK Takayuki Urade [email protected] ia: Robust dom est ic demand, but s t i l l vu lnerableAnother large bout of net capital outflows could be destabilising for the economy

Macroeconomic performance in Indonesia has been relatively robust compared to other countries in the region, on

the back of stable domestic demand as well as better-than-expected external demand so far. Private consumption

has been sustained by a large demand base; relatively stable wage increases (particularly for the natural resourcesector); and still strong consumer credit growth. We believe these factors are also likely to underpin overall growth of

the economy in 2009. Investment and government consumption should also remain high on the back of an

expansionary budget. While exports are likely to be hurt by the slowdown in global demand, we believe the negative

impact will be somewhat limited. Firstly, Indonesias exports of goods and services account for 30% of its GDP, the

second-lowest ratio in the region (after India), and secondly, the US and euro area account for a relatively small

proportion of its exports. Our forecast assumes the contribution of exports to GDP growth will fall from 0.6pp in 2008

to -1.4pp in 2009. We therefore maintain our view that the Indonesian economy remains among the least vulnerable

to the global downturn, with the caveat that in a worse-case scenario the balance of payments position is somewhat

exposed to large-scale net capital outflows.

On the fiscal front, the draft 2009 budget announced on August 15 was an expansionary one, with a 13.4% increase

in total expenditure from the revised budget for 2008. This is to be financed by a revenue increase of 14.3%,

particularly through an increase in tax revenue on the back of robust domestic demand boosting income tax and

VAT. On the expenditure side, the burden of subsidies, particularly for oil, is expected to decline sharply as

international oil prices come down. A large part of the budget is likely to be allocated to extra stimulus measures on

top of those already announced by the current administration, such as the plan for human resource development. As

a net result, we estimate the fiscal deficit will expand from 2.1% of GDP in 2008 to 3.0% in 2009.

Since September, IDR/USD has been depreciating fairly sharply, prompting the government to announce a series of

new measures on October 28, including: 1) requiring state companies to repatriate export proceeds; 2) requiring

state companies to issue weekly reports on their FX needs; 3) eliminating the 2.5% export duty on crude palm oil; 4)

prohibiting state companies from moving funds among banks for higher gains; and 5) buying back bonds issued by

the government. On November 13, Bank Indonesia (BI) introduced a new FX regulation that requires the submission

of relevant documents for purchasing foreign currency, or currencies, of more than US$100,000/month through

banks. Despite the authorities intension to show that they are committed to monitoring speculative flows, these newregulations could trigger unnecessary outflows, in our opinion, which may otherwise not have materialised. With little

buffer in terms of a current account surplus, the economy and IDR are potentially vulnerable to another large bout of

net capital outflows.

On monetary policy, BI joined other central banks in cutting its policy interest rate in December by 25bp to 9.25%,

having raised it for six consecutive months until October. While CPI inflation has not decelerated by as much as in

other countries in the region, and there still remains concern over a weakening IDR, it looks to us as if BI has

decided to take pre-emptive action before the economy starts to slow sharply. We also believe that BI thinks that a

high interest rate alone is no longer enough to defend IDR, and hence is shifting its policy focus from inflationary

pressure to downside risks to the economy. We forecast BI to cut rates by a further 100bp by June 2009.



Real GDP 6.3 6.4 6.1 5.1 3.4 3.6 3.7 3.8 6.3 6.0 3.6 5.5Private consumption 5.7 5.5 5.3 4.6 4.3 4.3 4.4 4.4 5.0 5.3 4.4 5.1Government consumption 3.6 5.5 16.9 12.0 6.7 6.3 6.3 6.7 3.9 9.9 6.5 6.2Gross fixed capital formation 15.6 13.0 12.0 11.0 8.3 7.6 9.5 7.7 9.2 12.8 8.3 9.4Exports (goods & services) 15.5 15.9 14.3 4.8 3.2 2.4 2.0 2.6 8.0 12.5 2.5 4.8Imports (goods & services) 17.8 16.7 11.9 10.0 7.8 6.2 6.2 6.2 8.9 14.0 6.6 6.4

Contributions to GDP:Domestic final sales 6.9 6.5 7.0 6.5 4.9 4.7 5.2 5.2 5.2 6.7 5.0 5.8Inventories 0.4 0.9 (0.3) 0.3 0.1 0.2 0.0 0.0 (1.5) 0.3 0.1 0.1Net trade (goods & services) 0.7 1.3 2.1 (1.7) (1.5) (1.3) (1.5) (1.3) 0.4 0.6 (1.4) (0.3)

Consumer prices 7.6 10.1 12.0 11.8 9.5 7.5 5.3 5.0 6.4 10.4 6.8 6.4Exports (1.9) (6.2) (12.0) (10.0) 2.6 6.2 9.6 10.3 13.2 21.2 (6.8) 9.0Imports 2.3 (2.5) (12.0) (7.5) 8.6 11.2 13.4 11.8 22.0 39.1 (4.4) 11.6Merchandise trade balance (US$bn) 9.3 8.9 6.9 5.6 8.3 8.3 6.6 5.8 39.6 34.7 29.7 29.8

Current account balance (% of GDP) 2.1 (1.0) (0.4) 2.1 1.0 (1.9) (1.6) 1.0 2.4 0.6 (0.4) (0.3)Fiscal Balance (% of GDP) (1.1) (2.1) (3.0) Bank Indonesia rate (%) 8.00 8.50 9.25 9.25 8.75 8.25 8.25 8.25 8.00 9.25 8.25 8.75Exchange rate (IDR/USD) 9217 9225 9300 12500 12000 11500 11300 11000 9419 12500 11000 9800

Notes: Interest rates and currency are end of period, other measures are period averages. Table last revised on 15 December 2008Source: CEIC and Nomura


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OUTLOOK Takahide Kiuchi [email protected]: Set for a pro longed recess ionWe expect the Bank of Japan to return to a zero interest rate policy

The effects of the global financial crisis on the Japanese economy have already been severely felt. Fallout from the

crisis has already passed through stage one, with companies cutting output and inventories as a preventative

measure, and stage two, where production slumped further amid falling exports, particularly to the US and Europe.Now in the third stage, production cutbacks are triggering a serious labour market correction. We expect this

correction to extend the economic downturn as it further depresses consumer spending. Job cuts, particularly

among non-permanent staff and the annulment of informal new-graduate hiring agreements have surfaced as a

serious social issue. We expect the unemployment rate to rise rapidly from about 4.0% to an historical high of about

5.5% in 2010. Once full-scale job cuts start, the economic recession could be further prolonged.

Japans real GDP shrank 1.8% q-o-q annualised in Q3 2008, the second straight quarterly decline following the

3.7% contraction in Q2, confirming that a recession has set in. We forecast that real GDP will contract 0.2% in CY08

and 2.1% in CY09. We project that Japans economy will see its first growth in five quarters only in Q2 2009, as the

benefits of fiscal spending both at home and abroad show through. We estimate that stimulus measures adopted by

the government will provide a 0.5pp impetus to real GDP growth in 2009, with the biggest boost in Q2 2009.

Nonetheless, with exports and private domestic demand both weak, we do not expect a full-scale recovery until H2

2010, supported by a turnaround in overseas economies. Under this scenario, the recession will last about three

years more than twice the 16-month average for post-war recessions.

We assume that consumer prices will turn down year-on-year from April or May 2009 and continue to decline for at

least two years, placing Japan back in a deflationary environment. We doubt that Japan will fall into a deflationary

spiral, however, because the supply-demand gap suggests that price declines will be more moderate than in the

past two recessions.

We expect the relative stability of the Japanese economy compared to other advanced economies to become

clearer once the global economic climate normalises after the financial crisis. Factors that could lead to a protracted

recession, which would prevent the Japanese economy from displaying its relative stability, include sharp yen

appreciation, financial system destabilisation and further severe credit contraction. Although we do not anticipate

serious disruption to the domestic financial system, we think that the government and the Bank of Japan need totake every precaution to achieve stability. With that in mind, we think that the BOJ could well lower its policy rate

further and return to a zero interest rate policy. This is also expected to reduce the risk of sharp yen appreciation,

which would pose another big threat to the economy in the short run.



Real GDP 1.4 0.7 (0.5) (2.3) (3.7) (2.4) (2.2) (0.4) 2.4 (0.2) (2.1) 0.6

[sa, % q-o-q] 0.6 (1.0) (0.5) (1.5) (0.8) 0.4 (0.3) 0.4

Private consumption 1.6 0.3 0.5 0.4 (0.5) 1.2 0.0 0.3 0.7 0.7 0.3 0.1

Government consumption 2.7 0.2 0.4 (1.5) (0.8) 0.4 1.0 1.2 2.0 0.5 0.4 1.0

Business investment (0.5) 0.8 (3.9) (5.4) (7.8) (7.5) (6.5) (5.4) 5.8 (2.2) (6.9) (1.3)

Residential investment (16.7) (15.9) (4.7) 4.5 (1.3) 2.9 0.0 3.0 (9.3) (8.7) 1.2 2.1

Exports (goods & services) 11.0 6.0 4.3 (3.2) (10.6) (9.8) (9.1) (3.9) 8.4 4.3 (8.4) 2.7

Imports (goods & services) 2.8 (1.7) 1.1 3.7 0.9 1.9 (0.9) (5.0) 1.5 1.5 (0.8) (0.5)

Contributions to GDP:

Domestic final sales 0.2 (0.4) (0.8) (0.9) (1.5) (0.2) (0.6) (0.2) 1.0 (0.2) (1.0) 0.3

Inventories (0.2) (0.2) (0.3) (0.4) (0.2) (0.3) (0.1) (0.1) 0.3 (0.3) (0.2) 0.0

Net trade (goods & services) 1.4 1.3 0.6 (0.9) (1.9) (1.8) (1.4) (0.1) 1.1 0.3 (0.9) 0.3

Unemployment rate (sa, %) 3.9 4.0 4.1 4.1 4.4 4.7 5.1 5.4 3.9 4.0 4.9 5.5

Employment ('000 y-o-y) 10 (13) 40 (122) (72) (194) (326) (504) 516 (21) (274) (238)

Consumer prices 1.0 1.4 2.2 1.1 0.4 (0.3) (1.4) (0.9) 0.1 1.4 (0.5) (0.3)

Core CPI 1.0 1.4 2.4 1.1 0.4 (0.3) (1.4) (0.8) 0.0 1.5 (0.5) (0.4)

Current account balance (% of GDP) 5.2 3.0 3.3 1.1 2.3 1.1 2.1 1.3 4.8 3.1 1.7 2.0

Fiscal balance (% of GDP) (4.9) (7.0) (7.4)

Money supply (M2) 2.3 2.1 2.2 1.6 0.8 0.5 (0.1) 0.0 1.6 2.0 0.3 0.2

BOJ official base rate (%) 0.50 0.50 0.50 0.10 0.00 0.00 0.00 0.00 0.50 0.10 0.00 0.0010-year T-bond yield (%) 1.28 1.67 1.46 1.30 1.20 1.10 1.00 0.95 1.50 1.30 0.95 1.30

Exchange rate (JPY/USD) 99.9 106.2 105.9 92.5 95.0 95.0 97.5 100.0 111.7 92.5 100.0

Notes: Interest rates, house prices and currency are end of period, other measures are period averages. Fiscal year runs Apr-Mar. Table last revised


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OUTLOOK Takayuki Urade [email protected] ia : Clear sh i f t in po l icy foc us to dow ns ide r iskLarge-scale fiscal stimulus and rate cuts are in place

In Malaysia, both domestic and external demand are likely to be affected by the global downturn. Of particular note,

the slump in electronics exports is likely to deepen and the slowdown in commodities exports (Malaysia is one of the

few countries in Asia that is a large net exporter of oi

Documents

Asia Economic Outlook 09