ANZ Emerging Asia Economics Monthly April 2009 - FINAL › documents › economics › ANZ...Lehman World, those economies with the greatest reliance on net exports for growth would

Global Markets – Asia Team :

[email protected]

Paul Gruenwald Chief Economist, Asia +65 6216 1814 [email protected]

Tamara Henderson Director, FX and Rates Strategy +65 6216 1845 [email protected]

Yeo Han Sia Associate Director, FX and Rates Strategy +65 6419 7930 [email protected]

Franklin Poon Economist, North East Asia +852 3929 5340 [email protected]

Chang Wei Liang Analyst, Economic Research +65 6216 1838 [email protected]

Research Interns:

Chong Jun Jie

Vimal Balasubramaniam

Zhou Hao

Naresh Navaratnarajah

2 April 2009

Emerging Asia Economics Monthly – April 2009

Our Vision:

For Economics & Markets Research to

be the most respected, sought-after

and commercially valued source of

economics and markets research and

information on Australia, New

Zealand, the Pacific and Asia.

Highlights • Our macro view remains unchanged from last month:

o The acute weakness of Q4 2008 has largely carried over into 2009; we expect only a modest improvement in Q1.

o An exception is China, where the massive stimulus effort continues to gain traction. However, we are still focussed on an inflection point—it is too early to declare a recovery.

o Any growth will be domestic-led this year, with fiscal stimulus plans beginning to help. The ASEAN group will continue to outperform the more export-dependent NIEs.

• USD-AXJ is expected to re-test cyclical highs, with USD-SGD breaking the 1.56 barrier after the MAS adjusts its policy band in April. KRW should out-perform in 2009, but the road ahead is filled with pot-holes.

• Asian rates will remain vulnerable to swings in risk appetite. Ample scope for more rate cuts and worries about supply maintain the bias for steeper curves generally.

Table of Contents Feature Article: NIE Exports – Worse than the Tech Bust……… 2

FX and Rates Strategy Overview: Risk Aversion Takes a (Brief) Breather……………………………………………………………………………….. 5

FX and Policy Rate Forecasts ………………………………………………………. 6

FX Cross Rate Forecasts ………………………………………………………………… 7

Long-Term Foreign Currency Government Bond Ratings ……… 8

Sovereign CDS Spreads ………………………………………………………………… 8

Country Updates & FX and Rates Strategy:

• China…………………………………………………………………………………………. 9

• Hong Kong…………………………………………………………………………………. 11

• India…………………………………………………………………………………………… 13

• Indonesia…………………………………………………………………………………… 15

• Malaysia……………………………………………………………………………………… 17

• Philippines…………………………………………………………………………………. 19

• Singapore…………………………………………………………………………………… 21

• South Korea………………………………………………………………………………. 23

• Taiwan………………………………………………………………………………………… 25

• Thailand……………………………………………………………………………………… 27

• Vietnam……………………………………………………………………………………… 29


Page 2

NIE Exports – Worse than the Tech Bust

The Newly Industrialised Economies (NIEs) have been hit hardest in emerging Asia by the global financial crisis, reflecting their openness to trade and their reliance on net exports for GDP growth. This feature note compares NIE export performance during the tech bust of 2001/02 and the current global recession. We find that NIE exports have performed significantly worse on a number of metrics during the current downturn. We also draw some implications for the road ahead, including that the ongoing slump in NIE exports likely has some way to go.

In emerging Asia, the Newly Industrialized Economies of Hong Kong, Korea, Singapore and Taiwan have been hardest hit by the global financial crisis. GDP growth in the NIEs declined first and the downturn has been steeper than elsewhere in the region. In the fourth quarter of 2008 the (unweighted) average GDP growth rate of these economies was –4.6% compared with 0.5% for all of emerging Asia.

China Vietnam India Indonesia Philippines Malaysia Hong Kong Korea Singapore Thailand Taiwan

Dec-08 6.8 5.5 5.3 5.2 4.5 0.1 -2.5 -3.4 -4.2 -4.3 -8.4

Sep-08 9.0 6.5 7.6 6.4 5.0 4.7 1.7 3.1 0.0 3.9 -1.1

Jun-08 10.1 5.8 7.9 6.4 4.4 6.7 4.3 4.3 2.5 5.3 4.6

Mar-08 10.6 7.5 8.8 6.2 4.7 7.4 7.3 5.5 6.7 6.0 6.3

Dec-07 12.5 9.4 8.9 5.9 6.4 7.3 6.9 5.7 5.5 5.7 6.4

Sep-07 12.8 8.7 9.1 6.6 7.1 6.7 6.7 4.9 9.5 5.1 7.0

Jun-07 13.9 8.0 9.1 6.6 8.3 5.7 6.1 5.3 9.1 4.4 5.5

Mar-07 13.0 7.7 9.7 6.0 7.0 5.5 5.6 4.5 7.0 4.4 3.8

The relatively weak performance of the NIEs reflects in large part their openness and their reliance on net exports for growth. As we have argued in our “Asian split” framework in Emerging Asia in a Post-Lehman World, those economies with the greatest reliance on net exports for growth would be the hardest hit by the global recession. Moreover, the sharp drop in global trade volumes has added an additional downside impetus to growth for the entrepot economies of Hong Kong and Singapore, which depend heavily on trade-related services.

Advanced Countries Growth and Imports from NIE (y/y)

-5

-4

-3

-2

-1

0

1

2

3

4

Mar-07

Jun-

07

Sep-

07

Dec-

07

Mar-08

Jun-

08

Sep-

08

Dec-

08

GD

P (

y/

y)

-25

-20

-15

-10

-5

0

5

10

15

20

Imp

orts

(y/

y)

Imports from NIEsUS GDPJapan GDPEU GDP

This feature note compares NIE export performance in the current downturn with that of the 2001/02 tech bust. There are several reasons for this approach. First, the NIEs are leading indicators for the region—that is, any demand shock transmitted from the rest of the world typically affects the NIEs more quickly. Second, the NIEs took a direct hit from the tech bust because of their export base, and therefore provide a good basis of comparison for the current global downturn. Third, data quality in the NIEs is the highest in emerging Asia, which allows us to drill down and examine the two episodes more thoroughly


Page 3

In terms of magnitude, the NIE export decline in 2008/09 has been quicker and is already more pronounced than during the tech bust. We analyse the two episodes by starting with the month when the export decline first appeared: March 2001 and October 2008. During the tech bust, the contraction in exports peaked in the seventh month of the episode, October 2001. During the current global recession, export growth appears to have bottomed in January 2009, only the fourth month of the episode. Moreover, the decline this time around is nearly twice as pronounced. The decline in NIE exports peaked at 19.6% (y/y) in September 2001 but reached 34.2% (y/y) by January 2009, partly reflecting a sharper slowdown in foreign demand but also the effects of a global credit crunch, which was absent in 2001/02.

A breakdown by NIE export products shows a much broader based decline in the current episode. Interestingly, the reduction in tech exports (ICT in the charts, which show the contribution to the overall decline in exports, not the y/y rates of the products themselves) is broadly similar to the tech bust: 28% at the peak in 2001 versus 37% at the peak in 2009. However, the decline in other sectors has been much larger. The machinery, chemical and fuel sectors contributed only 19% of the total decline in exports during the tech bust compared with around one-third during the current episode. Manufactured goods maintained its number two contribution ranking behind ICT products.

The destination data show a much larger contribution to the decline in NIE exports from China this time around. During the tech bust, China barely registered in the destination breakdown; in contrast, China accounts for the largest chunk of the NIE export decline in the current episode. This reflects two factors. First, unlike in 2001/02, the Chinese economy is now slowing (sharply), with the downturn centred on manufacturing. Given that the NIEs export a relatively large proportion of capital goods and intermediate goods to China, these shipments have fallen off considerably. Second, the deepening of the processing trade implies that goods that had previously been exported from the NIEs directly to end-users now pass through China as the final leg of the production chain. Thus, the decline in NIE exports to China is actually picking up a decline in ultimate demand elsewhere. (Disentangling these effects is beyond the scope of this note.)

NIE Exports y/y - by Product

-35

-30

-25

-20

-15

-10

-5

0

5

Mar-01

May-

01

Jul-0

1

Sep-

01

Nov-

01

Jan-

02

Mar-02

Oct-08

Dec-

08

Feb-

09

Manufactures

RawCommoditiesICT

Food

Fuel

Chemicals

Machinery &Transport

NIE Exports y/y - by Destination

-35

-30

-25

-20

-15

-10

-5

0

5

Mar-01

Apr-01

May-01

Jun-

01

Jul-0

1

Aug-

01

Sep-

01

Oct-01

Nov-01

Dec-01

Jan-

02

Feb-

02

Mar-02

Oct-08

Nov-08

Dec-08

Jan-

09

Feb-

09

USG7 ex-USChinaSE Asia


Page 4

The 2001/02 episode suggests that the current export downturn still has some way to go. The duration of the export slowdown associated with the tech bust was one year. However, that episode featured less demand destruction (via asset price declines and slower income growth), no banking crisis in the major trading partners of Asia, and China was still growing at a healthy pace. All of these “new” factors argue for the current NIE downturn to be longer than in 2001/02. The effects of the credit crunch are more ambiguous. While on impact the effect was clearly negative on NIE exports (for example, owing to difficulties in obtaining financing for the purchase of automobiles), it is unclear whether that demand was lost forever or was simply postponed and will come through as credit markets continue to normalise.

The most recent data do not signal an incipient export recovery for the NIEs. Indeed, export orders are one of the indicators that have shown little or no recovery in recent months. This is in contrast with a number of other components of purchasing managers’ indices (PMIs), which have begun to turnaround. It is important to distinguish the latter indicators—which include purchasing orders, new orders and inventory—which authorities can influence through their fiscal stimulus plans, from export orders, which are largely exogenous to the region.

We do not see major impediments to an export-led recovery for the NIEs once foreign demand does return. The productive capacity related to the export sector is still in place. Corporate balance sheets are apparently in good shape (although data availability remains an issue in some jurisdictions). Also, banks in the region (except for Korea) have ample scope to lend once the demand for credit picks up as evidenced by their low loan-to-deposit ratios and reportedly modest non-performing loan ratios. All of these factors suggest that once foreign demand recovers and export orders do start to come through, the NIEs will be able to respond.

Finally, returning to the topic of GDP growth, a key structural challenge over the medium term, particularly for Korea and Taiwan, is to move toward a more domestic led growth model; only then will we see some significant decoupling from the global cycle. Both economies have the size and potential to generate a larger contribution to growth from consumption and investment, but have faltered for differing reasons. Korea has suffered from a (misguided, in our view) policy-induced construction slowdown, which curbed investment growth and spilled over to confidence and private consumption. Taiwan is facing a longer-term challenge of “hollowing-out” as production, including of export goods, has moved to Mainland China in order to take advantage of lower labour costs. Part of the solution may be deeper integration with the Mainland in other areas that could benefit Taiwan, such as tourism and transport services. Hong Kong and Singapore have less room for manoeuvre. Both are small, very open economies that rely heavily on financial services and trade flows for growth. As such, the potential for autonomous domestic demand is less than for Korea and Taiwan. Strong balance sheets across the public and private sectors, and across the financial and non-financial sectors, provide important buffers that serve to at least partially insulate these economies from the vagarities of global markets.

Paul Gruenwald and Chang Wei Liang


Page 5

FX and Rates Strategy Overview:

Risk Aversion Takes a (Brief) Breather

Market Outlook

Risk appetite recovered in March, buoyed by the US move to quantitative easing (both sooner and larger than the market had been expecting), the announcement of details for the US’s Public Private Investment Program, and signs of improvement in the financial sector. The S&P500 rallied 18% from its March low and the US dollar shed 2.8% against AXJ during the month.

As we all know, however, risk appetite can be quite fickle—begging the question, where do we go from here? Range trading seems highly likely in Q2. On the one hand, sporadic cracks in the “ice” are appearing both in the financial sector and in the data for the real economy. As fiscal stimulus programs gain traction, there will be more signs of stabilisation, if not outright improvement. This will buoy the optimists, capping fears to the downside.

On the other hand, global economic activity remains quite “frozen,” many challenging hurdles remain in getting the private sector back to “normal,” and further fallout is likely. This will buoy the pessimists, capping hopes to the upside. Altogether, such mixed signals should trap markets in a range. The high degree of uncertainty that persists means this range will no doubt be wide.

FX Strategy

The outlook for range-bound trading in equity markets in Q2 suggests that USD-AXJ will re-test recent cyclical highs. The ebb and flow of risk appetite during this financial crisis has seen USD-KRW lead the way in both directions, with the pair representing the more liquid vehicle for expressing general fear (and most recently, hope) within emerging Asia. Nevertheless, a re-test of 1,600 seems unlikely in Q2, given that “March crisis fears” failed to materialize, Korea’s current account surplus is back at levels not seen since February 1998, and the government has unveiled an ample supplementary budget to support domestic demand. The won should ultimately out-perform AXJ in 2009, but the ride will be bumpy.

Turning to Singapore, the MAS’s semi-annual policy meeting is fast approaching in early April, when we expect to have a re-centring of the S$NEER policy band. At current levels, a widening of the band becomes a much lower probability event. A band adjustment would pave the way for further gains in USD-SGD toward the 1.60 level—beyond the March high of 1.5581—and onward to the 1.66 level which is our target for the peak.

Finally, speculation surrounding a possible CNY devaluation has evaporated amid signs that China’s economy may have bottomed and a revealed preference (in terms of actions, not just words) on the part of authorities to keep USD-CNY stable—as our calculations suggest that the authorities were having to sell USD to maintain stability. We maintain the view that USD-CNY will remain in a holding pattern until the authorities are confident that sufficient growth momentum has been restored (unlikely to occur in 2009).

• Corporates: Hedge SGD and TWD export exposures and balance sheet risk (if HKD-, CNY- or USD-based).

• Real money funds with AXJ allocations: Under-weight SGD and TWD; use forays above/near the 1,500 level to over-weight KRW.

• Leveraged funds: Take advantage of dips to buy USD-SGD and USD-TWD forward outright. Take advantage of rallies to sell USD-KRW forward outright, but be mindful of episodes of opposing momentum if your time horizon is short.

Rates Strategy

Range-bound activity in equity markets would suggest similar conditions in emerging Asian rates markets, many of which are significantly affected by risk appetite. Asian rates already face cross-winds from the likelihood of further rate cuts by AXJ central banks combined with concerns about digesting extra supply from fiscal stimulus programmes. However, such conditions are mutually supportive of curve steepening—especially for Indian OIS. Quantitative easing has flattened the US and UK Treasury curves, but unlike the Federal Reserve and the Bank of England, most AXJ central banks have plenty of remaining ammunition to cut interest rates further, if necessary.

• Real money funds with emerging Asia in their benchmark should selectively favour bonds with shorter tenors. Allocations should be currency-hedged if investment horizons are shorter than six months.

• Leveraged funds can side-step the problem of negative carry in steepeners by taking on basis risk. For example, a front-end receiver position in Indian OIS could be paired with a long-end payer position in Hong Kong IRS.

Tamara Henderson


Page 6

Foreign Exchange and Policy Rate Forecasts

Current Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

China USD/CNY, eop 6.832 6.84 6.84 6.84 6.84 6.84 6.82

AUD/CNY, eop 4.743 4.20 4.00 3.70 3.70 3.80 4.00

PBoC base lending rate 5.31 5.04 4.77 4.50 4.50 4.50 4.50

USD/HKD, eop 7.750 7.76 7.76 7.76 7.76 7.77 7.79

AUD/HKD, eop 5.422 4.80 4.50 4.20 4.20 4.40 4.50

Hong Kong

HKMA discount rate 0.50 0.25 0.25 0.25 0.25 0.25 0.50

India USD/INR, eop 50.63 52.0 51.0 51.0 50.0 50.0 49.0

AUD/INR, eop 35.49 32.2 29.6 27.5 27.0 28.0 28.4

RBI repo rate 5.00 4.50 4.00 4.00 4.00 4.50 4.50

Indonesia USD/IDR, eop 11,610 12,000 11,900 11,600 11,600 11,300 11,000

AUD/IDR, eop 8,165 7,400 6,900 6,300 6,300 6,300 6,400

BI rate 7.75 6.75 6.00 6.00 6.00 6.00 6.00

Malaysia USD/MYR, eop 3.63 3.74 3.80 3.80 3.80 3.75 3.65

AUD/MYR, eop 2.54 2.32 2.20 2.05 2.05 2.10 2.12

BNM overnight rate 2.00 1.50 1.50 1.50 1.50 1.50 1.50

Philippines USD/PHP, eop 48.16 49.5 50.0 49.5 48.8 48.5 48.0

AUD/PHP, eop 33.75 30.7 29.0 26.7 26.4 27.2 27.8

BSP reverse repo rate 4.75 4.25 4.00 4.00 4.00 4.00 4.00

Singapore USD/SGD, eop 1.52 1.58 1.62 1.66 1.66 1.63 1.60

AUD/SGD, eop 1.04 0.98 0.94 0.90 0.90 0.91 0.93

3M SGD SIBOR 0.67 0.55 0.55 0.65 0.75 0.95 1.20

S Korea USD/KRW, eop 1,331 1,500 1,400 1,450 1,375 1,350 1,300

AUD/KRW, eop 931 930 810 780 740 760 750

BoK overnight call rate 2.00 1.50 1.00 1.00 1.00 1.50 2.00

Taiwan USD/TWD, eop 33.84 35.2 36.0 36.0 35.5 35.5 35.0

AUD/TWD, eop 23.70 21.8 20.9 19.4 19.2 19.9 20.3

CBC discount rate 1.25 1.00 0.50 0.50 0.50 0.50 1.00

Thailand USD/THB, eop 35.36 36.5 37.5 37.0 36.5 36.0 36.0

AUD/THB, eop 24.80 22.6 21.8 20.0 19.7 20.2 20.9

BoT repo rate 1.50 0.50 0.50 0.50 0.75 1.00 1.25

Vietnam USD/VND, eop 17,794 17,800 18,100 18,500 18,500 18,500 18,100

AUD/VND, eop 12,395 11,000 10,500 10,000 10,000 10,400 10,500

SBV base lending rate 7.00 6.00 6.00 6.00 6.00 6.00 6.00


Page 7

Foreign Exchange Cross-Rate Forecasts

ANZ Forecast Implied 12M % Change

Current

Spot Jun-09 Sep-09 Dec-09 Mar-10 Jun-10

Current 12M

Fwd or NDF

ANZ Forwards

CNY-HKD 1.13 1.13 1.13 1.13 1.13 1.14 1.14 0% 1%

CNY-INR 7.41 7.60 7.46 7.46 7.31 7.31 7.84 -1% 6%

CNY-IDR 1,700 1,750 1,740 1,700 1,700 1,650 1,920 -3% 13%

CNY-MYR 0.531 0.547 0.556 0.556 0.556 0.548 0.542 3% 2%

CNY-PHP 7.05 7.24 7.31 7.24 7.13 7.09 7.32 1% 4%

CNY-SGD 0.222 0.231 0.237 0.243 0.243 0.238 0.224 7% 1%

CNY-KRW 195 219 205 212 201 197 192 1% -1%

CNY-TWD 4.95 5.15 5.26 5.26 5.19 5.19 4.94 5% 0%

CNY-THB 5.18 5.34 5.48 5.41 5.34 5.26 5.38 2% 4% HKD-INR 6.53 6.71 6.58 6.58 6.44 6.44 6.88 -1% 5%

HKD-IDR 1,500 1,550 1,530 1,500 1,490 1,450 1,680 -3% 12%

HKD-MYR 0.468 0.482 0.490 0.490 0.490 0.483 0.475 3% 2%

HKD-PHP 6.21 6.38 6.45 6.38 6.29 6.24 6.42 0% 3%

HKD-SGD 0.196 0.204 0.209 0.214 0.214 0.210 0.197 7% 0%

HKD-KRW 172 193 181 187 177 174 169 1% -2%

HKD-TWD 4.37 4.54 4.64 4.64 4.57 4.57 4.33 5% -1%

HKD-THB 4.56 4.71 4.84 4.77 4.70 4.63 4.72 2% 3% INR-IDR 229 231 233 227 232 226 244 -1% 7%

INR-MYR 0.072 0.072 0.075 0.075 0.076 0.075 0.069 5% -3%

INR-PHP 0.95 0.95 0.98 0.97 0.98 0.97 0.93 2% -2%

INR-SGD 0.030 0.030 0.032 0.033 0.033 0.033 0.029 9% -5%

INR-KRW 26.3 28.8 27.5 28.4 27.5 27.0 24.5 3% -7%

INR-TWD 0.668 0.677 0.706 0.706 0.710 0.710 0.630 6% -6%

INR-THB 0.698 0.702 0.735 0.725 0.730 0.720 0.686 3% -2% IDR-MYR 0.00031 0.00031 0.00032 0.00033 0.00033 0.00033 0.00028 6% -9%

IDR-PHP 0.00415 0.00413 0.00420 0.00427 0.00421 0.00429 0.00382 3% -8%

IDR-SGD 0.00013 0.00013 0.00014 0.00014 0.00014 0.00014 0.00012 10% -11%

IDR-KRW 0.115 0.125 0.118 0.125 0.119 0.119 0.100 4% -12%

IDR-TWD 0.00292 0.00293 0.00303 0.00310 0.00306 0.00314 0.00258 8% -12%

IDR-THB 0.00305 0.00304 0.00315 0.00319 0.00315 0.00319 0.00281 5% -8% MYR-PHP 13.3 13.2 13.2 13.0 12.8 12.9 13.5 -3% 2%

MYR-SGD 0.419 0.422 0.426 0.437 0.437 0.435 0.414 4% -1%

MYR-KRW 367 401 368 382 362 360 355 -2% -3%

MYR-TWD 9.34 9.41 9.47 9.47 9.34 9.47 9.12 1% -2%

MYR-THB 9.75 9.76 9.87 9.74 9.61 9.60 9.93 -2% 2% PHP-SGD 0.032 0.032 0.032 0.034 0.034 0.034 0.031 7% -3%

PHP-KRW 27.6 30.3 28.0 29.3 28.2 27.8 26.3 1% -5%

PHP-TWD 0.703 0.711 0.720 0.727 0.727 0.732 0.675 4% -4%

PHP-THB 0.734 0.737 0.750 0.747 0.748 0.742 0.735 1% 0% SGD-KRW 876 949 864 873 828 828 858 -5% -2%

SGD-TWD 22.3 22.3 22.2 21.7 21.4 21.8 22.0 -2% -1%

SGD-THB 23.3 23.1 23.1 22.3 22.0 22.1 24.0 -5% 3% KRW-TWD 0.025 0.023 0.026 0.025 0.026 0.026 0.026 3% 1%

KRW-THB 0.027 0.024 0.027 0.026 0.027 0.027 0.028 0% 5% TWD-THB 1.04 1.04 1.04 1.03 1.03 1.01 1.09 -3% 4%


Page 8

Long-Term Foreign Currency Government Bond Ratings

Moody's S&P Fitch

Investment Grade

China A1 A+ A+

Hong Kong Aa2 AA+ AA

India Baa2 BBB- BBB-

Korea A2 A A+

Malaysia A3 A- A-

Singapore Aaa AAA AAA

Taiwan Aa3 AA- A+

Thailand Baa1 BBB+ BBB+

Sub-Investment Grade

Cambodia B1 B+ NR

Indonesia Ba3 BB- BB

Philippines B1 BB- BB

Vietnam Ba3 BB BB-

*denotes an upgrade;

# denotes a downgrade over previous month

Source: Bloomberg

Sovereign CDS Spreads

5Yr Sovereign CDS Spread (IG)

0

100

200

300

400

500

600

700

800

Jan-

08

Feb-

08

Mar-0

8

Apr-0

8

May-

08

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-

08

Dec-

08

Jan-

09

Feb-

09

Mar-0

9

China

Malaysia

Thailand

Korea

5Yr Sovereign CDS Spread (HY)

0

200

400

600

800

1000

1200

1400

Jan-

08

Feb-

08

Mar-0

8

Apr-0

8

May-

08

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-0

8

Nov-

08

Dec-

08

Jan-

09

Feb-

09

Mar-0

9

IndonesiaVietnamPhilippines

Source: Bloomberg Source: Bloomberg


Page 9

Country Update: China

The economy has stabilized as the stimulus plan gains further traction. Meanwhile, China has slipped into deflation. The trade surplus all but evaporated in February and it appears as if the authorities have been selling reserves. We expect GDP growth to reach the authorities’ 8% comfort level by year-end.

• Retail sales (nominal) rose by 15.2% in Jan-Feb combined, down from 19.1% in Dec. Vehicle sales rebounded sharply to 24.7% (y/y) after three straight months of double-digit decline. Industrial output rose to 11% in Jan-Feb, double the pace of Dec, led by cement and motor vehicles.

• PMI numbers improved in February and are now just below the neutral level of 50. Output and new orders categories suggest that business conditions are now improving modestly; however, export orders remain soft. Banking lending has continued to pick up as well.

• Trade continued to be weak in Feb. Export growth declined again, falling by 25.7% in Feb from -17.5% in Jan. Shipments to the US and EU fell by 23.9% and 30.2% respectively. The pace of import contraction reversed as growth rose from -43.1% to -24.1%.

• China’s trade surplus fell sharply to US$5bn in Feb from US$40bn previously. Given that USD-CNY remained stable during the month, the lower trade balance implies that the authorities may have sold reserves in Feb to support the Yuan.

• Deflation has returned. The CPI fell by 1.6% (y/y) in Feb, the first negative reading since late 2002. Services and non-food prices are now declining. Producer price deflation has become more entrenched with the index falling by 4.5% in Feb.

• The Chinese economy looks to have reached an inflection point—the decline in growth appears to be levelling off. We expect growth momentum to continue to build, but to remain below the authorities’ 8% comfort level for most of this year.

Paul Gruenwald

Economic Data – China Monthly data Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09

Industrial Production, % y/y 14.7 12.8 11.4 8.2 5.4 5.7 11.0 11.0 Retail Sales, % y/y 23.3 23.2 23.2 22.0 20.8 19.0 18.5 11.6 Consumer Price Index, % y/y 6.3 4.9 4.6 4.0 2.4 1.2 1.0 -1.6 Exports, % y/y 26.9 21.1 21.3 19.1 -2.2 -2.8 -17.5 -25.7 Imports, % y/y 33.6 22.9 20.9 15.4 -18.0 -21.3 -43.1 -23.8 Trade Balance, US$ bn 25.3 28.7 29.4 35.2 40.1 39.0 39.1 4.8 Quarterly data Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08

Real GDP, % y/y 13.0 14.0 13.0 12.0 10.6 10.1 9.0 6.8 -Primary Sector ytd 4.4 4.0 4.3 3.7 2.8 3.5 4.5 5.5 -Secondary sector ytd 14.6 15.0 14.8 14.7 11.5 11.3 10.6 9.3 -Tertiary sector ytd 12.7 13.5 14.0 13.8 10.9 10.7 10.5 9.5 Nominal GDP, RMB tn 5.3 11.2 17.4 25.7 6.3 13.5 20.8 30.1 Foreign Exchange Reserves, US$ bn 1,202.0 1,332.6 1,433.6 1,528.2 1,682.2 1,808.8 1,905.6 1,946.0 Current Account, US$ bn (semi-annual) N/A 162.9 N/A 371.8 N/A 191.7 N/A N/A Capital Account, US$ bn (semi-annual) N/A 1.5 N/A 3.1 N/A 1.7 N/A N/A Sources: CEIC

China - Inflation

-6

-4

-2

0

2

4

6

8

10

12

Jan-

06

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Consumer Prices

Producer Prices

China - Purchasing Managers Index

2530354045505560657075

Jan-

06

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

PMI

New Orders

Export Orders

China - Money and Credit Growth

10

12

14

16

18

20

22

24

Feb-

06

May-

06

Aug-

06

Nov-

06

Feb-

07

May-

07

Aug-

07

Nov-

07

Feb-

08

May-

08

Aug-

08

Nov-

08

Feb-

09

M2 (y/y) Bank Lending (y/y)


Page 10

China: FX and Rates Strategy

USD-CNY remains rock solid, while speculation surrounding a possible CNY devaluation has evaporated. The external backdrop remains challenging and real rates have risen in tandem with the drop in inflation—suggesting more rate cuts by the PBoC in 2009.

FX

USD-CNY continues to hold steady, marking time around the 6.84 level since July 2008. Meanwhile, market speculation about a possible devaluation has evaporated amid signs that China’s economy may have bottomed—reducing the “need” for a devaluation in the first place. At the same time, a collapse in China’s trade surplus in February revealed a clear preference (in terms of actions, not just words) on the part of authorities to keep USD-CNY stable—as our calculations suggest that the authorities were having to sell USD to maintain stability.

We maintain our view that USD-CNY will remain in a holding pattern until the authorities are confident that sufficient growth momentum has been restored. At such time (unlikely in 2009), a resumption in gradual CNY appreciation against the USD is anticipated. Adding to the case for a weaker USD over the longer-term, the PBoC stepped up efforts to enjoin support for the adoption of an international reserve currency alternative to the USD—possibly the IMF’s SDR. Notably, the weight of the USD in the SDR basket is 44% compared with an estimated share of at least 60% for China’s current USD reserve holdings.

Rates

The CNY curve continues to bear-steepen, with the market increasingly focused on the risk of inflation rebounding later in the year as the Chinese economy recovers. This has pushed 1-year swap spreads back into positive territory for the first time since July 2008. Nevertheless, the external backdrop remains challenging and real interest rates have risen sharply. As such, we expect more rate cuts from the PBoC, which should bring a bout of bull-steepening back to the CNY rates market.

Tamara Henderson

Market Forecasts – China FX Current Ytd(%) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

USD-CNY 6.832 0.1% 6.84 6.84 6.84 6.84 6.84 6.82 AUD-CNY 4.743 -1.1% 4.20 4.00 3.70 3.70 3.80 4.00 NZD-CNY 3.820 -3.3% 3.40 3.20 3.10 3.00 3.00 3.10 JPY-CNY 0.070 -7.0% 0.068 0.068 0.067 0.065 0.063 0.062 EUR-CNY 9.201 -3.5% 8.55 8.07 7.52 7.39 7.52 7.64 Rates Current Ytd(bps) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 PBOC's 1-year base lending rate 5.31 0 5.04 4.77 4.50 4.50 4.50 4.50 3-month SHIBOR 1.23 -54 1.0 0.7 0.7 0.7 0.7 0.8 2-year IRS (onshore vs 7-day repo fix) 1.40 33 1.1 0.9 0.9 0.9 0.9 1.0 10-year IRS 3.05 126 3.0 2.9 2.9 2.9 2.9 2.9 Sources: Bloomberg, ANZ

NDFs have finally capitulated

6.46.56.66.76.86.97.07.17.27.37.4

Jun-

08

Jul-0

8

Aug-

08

Sep-

08

Oct-08

Nov-

08

Dec-

08

Jan-

09

Feb-

09

USD-CNY 12M NDF

IRS Curve: More bear steepening in March (bps)

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10

Tenor

1M change

2s-10s IRS in a steep uptrend (bps)

020406080

100120140160180

Aug-

07

Nov-

07

Feb-

08

May

-08

Aug-

08

Nov-

08

Feb-

09


Page 11

Country Update: Hong Kong

Hong Kong’s economic outlook continues to weaken. The external sector has collapsed, more than offsetting any positive effects from stabilising stock and real estate markets after the financial tsunami in Q4 last year. The labour market continues to deteriorate, boding ill for both domestic consumption and the real estate market. Some positive signs could however emerge in H2 this year, when global restocking activities could start producing positive effects on the economy.

• For the first two months of the year, Hong Kong exports fell by 22.4% (y/y), much worse than the 11.4% decrease for Dec last year. At the same time, imports dropped by 22.8%.

• The unemployment rate continued rising, climbing 0.4ppt to 5.0% in Feb. We expect the labour market to deteriorate further. When Hong Kong was in recession in 2003, the jobless rate reached a high of 7.9%.

• Retail sales grew 7.4% (y/y) in Jan after 1.1% growth in Dec. In terms of volume, retail sales rose 5.4% in Jan, compared with the 0.5% contraction in Dec. Part of the rebound was due to the fact that the Chinese New Year fell in Jan this year and in Feb last year. Although retail sales have indeed recovered somewhat from the doldrums in Oct last year when both stock and real estate prices collapsed, we expect an overall weakening trend along with the above-mentioned worsening in trade and labour statistics.

• Inflation averaged 2.0% for Jan-Feb, compared to the 2.1% increase in Dec. Netting out the government’s one-off relief measures, inflation came down to 3.3% from 4.6%. The deceleration has been due to a moderation of increases in food prices and private housing rentals.

• Hong Kong will likely remain in recession for most of 2009. Nevertheless, there could be a mini mid-cycle recovery by the middle of the year on the back of possible global restocking activities. Nevertheless, we remain cautious about Hong Kong’s economic outlook over the coming 6-12 months.

Franklin Poon

Economic Data – Hong Kong Monthly data Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09

Retail Sales, % y/y 13.6 10.4 7.2 0.4 1.3 1.1 7.3 N/A Composite Consumer Price Index sa, % y/y 6.3 4.5 3.1 1.7 3.1 2.1 2.7 1.1 Exports, % y/y 11.1 1.9 3.6 9.4 -5.3 -11.4 -21.8 N/A Imports, % y/y 15.4 1.5 3.9 11.3 -7.9 -16.2 -27.1 N/A Trade Balance, US$ bn -2.5 -1.6 -2.1 -1.8 -1.1 -1.5 0.9 N/A Foreign Exchange Reserves, US$ bn 153.3 153.2 153.7 149.3 160.5 178.1 174.4 N/A Quarterly data Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08

Industrial Production, % y/y -1.6 -2.3 -2.0 -0.3 -4.4 -4.2 -6.7 -10.3 Real GDP, % y/y 5.6 6.1 6.7 6.9 7.3 4.3 1.7 -2.5 -Private consumption 5.3 7.6 11.3 9.7 7.6 3.5 0.0 -3.2 -Government consumption 2.5 3.8 2.4 3.3 0.6 3.2 2.0 2.6 -Gross fixed capital formation 0.3 6.5 -1.1 8.0 10.1 4.9 3.2 -17.3 Nominal GDP, HKD bn 373.6 378.1 415.4 447.9 410.6 401.6 429.9 436.4 Current Account, US$ bn 8.4 3.2 7.8 6.1 6.6 4.0 9.7 10.4 Capital & Financial Account, US$ bn -10.2 -5.1 -9.6 -8.3 -4.3 -2.6 -11.9 -8.9 Sources: CEIC

Hong Kong - Trade

-4,000-3,000-2,000-1,000

01,0002,000

Jan-

07

Apr-

07

Jul-0

7

Oct

-07

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

-30

-20

-10

0

10

20

Trade Balance (USD m)(LHS)Exports (y/y)Imports (y/y)


Page 12

Hong Kong: FX and Rates Strategy

In the wake of the US move to QE, the HKMA has had to flood the money market with liquidity in order to keep USD-HKD within its trading band. With the global economy still in a tailspin, we expect the HKMA to narrow further the gap with the Fed funds target, bringing the policy rate to 0.25% by mid-year.

FX

USD-HKD remains pinned to the floor of the 7.75-7.85 trading range with the HKMA having to intervene, buying USD in order to keep the pair within the convertibility zone. In the wake of the Lehman Brothers bankruptcy last September, USD-HKD was pinned down by a mass unwinding of carry trades. Risk appetite improved significantly in March, but the US move to quantitative easing (QE)—which was both earlier and larger than markets had expected—has helped shake out generally crowded long USD positions, further weighing on USD-HKD.

Meanwhile, forwards continue to trade below the floor, anticipating a shift in the trading band. In the current environment, however, the risk of a revaluation of the HKD is close to zero. Hong Kong is highly exposed to the global economy, both in terms of trade and financial links, and the climb-out for the global economy, along with a return to more normal levels of risk appetite, will not be swift.

USD-HKD should remain near the lower end of the band throughout 2009—weighed by: 1/ bouts of USD weakness (as seen currently), and 2/ continued unwillingness to take on meaningful risk.

Rates

In order to maintain the viability of the USD-HKD currency peg, HKMA monetary policy must mirror that of the Fed. The Fed has had to resort to QE, but the HKMA still has room to cut its base rate. Look for a further 25bps of narrowing in the gap with the Fed Funds target by mid-year. Even if the HKMA stands pat, we still like receiver positions in HKD IRS over a 6-month horizon.

Tamara Henderson

Market Forecasts – Hong Kong FX Current Ytd(%) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

USD-HKD 7.750 0.0% 7.755 7.755 7.755 7.760 7.770 7.790 AUD-HKD 5.422 -0.4% 4.8 4.5 4.2 4.2 4.4 4.5 NZD-HKD 4.410 -1.8% 3.8 3.6 3.5 3.4 3.4 3.5 JPY-HKD 0.079 -7.3% 0.078 0.077 0.076 0.074 0.072 0.071 EUR-HKD 10.534 -2.7% 9.7 9.2 8.5 8.4 8.5 8.7 Rates Current Ytd(bps) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 HKMA's discount rate 0.50 0 0.25 0.25 0.25 0.25 0.25 0.50 3-month HIBOR 0.88 -7 0.6 0.6 0.6 0.6 0.6 0.8 2-year IRS (onshore versus 3M 1.40 -9 1.2 1.2 1.2 1.2 1.2 1.3 10-year IRS 2.53 60 2.4 2.4 2.4 2.4 2.4 2.5 Sources: ANZ, Bloomberg


Page 13

Country Update: India

India - Industrial Production

-10-505

10152025303540

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Industrial Production (y/y)Consumer Durables (y/y)Passenger car sales (y/y)

India - Trade

-30

-20

-10

0

10

20

30

40

50

60

70

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

-16000

-14000

-12000

-10000

-8000

-6000

-4000

-2000

0

Trade Balance (rhs)Imports (y/y)Exports (y/y)

$

India - Lending rates

3

5

7

9

11

13

15

17

19

21

23

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

91 day TbillMIBOR (overnight)SBI Prime Lending Rate

The decline in industrial production has moderated, reflecting improved consumer durables production. However, the PMI index continues to signal contraction and exports continue to fall. The drop in wholesale prices gives the RBI scope for further rate cuts to bolster the economy.

• Consumer durables production grew by 2.5% (y/y) in Jan, suggesting improved domestic consumption. Industrial production fell 0.5% (y/y) in Jan against a 2.0% contraction in Dec.

• Manufacturing PMI improved to 47.0 in Feb from 46.7 in Jan. However, with the level still below 50, the index continues to signal contraction. This PMI reading also implies that domestic demand is firm or improving as external trade numbers remain poor.

• Exports contracted by 16.0% (y/y) in Jan and imports fell by 18.2%. As a result, the trade deficit dropped from $7.5bn in Dec to $6.1bn in Jan.

• WPI inflation reached a new low of 0.27% (y/y) in the week ended 14 Mar from over 5% at the start of this quarter. Lower fuel and commodity prices accounted for the sharp decline.

• The RBI lowered its repo rate by 50bps to 5.00% in Mar, for a cumulative 400bps cut since Sep 2008. With inflation pressures cooling rapidly and gloomy global prospects, the RBI has scope to reduce rates further to support growth.

• Looking ahead, domestic demand should continue to sustain growth in the economy, and thus any monetary stimulus from the RBI will also depend on the response in retail lending rates to repo-rate cuts. The prime lending rate remains in double-digits.

Vimal Balasubramaniam

Economic Data – India Monthly data Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

Industrial Production, % y/y 6.4 1.7 6.0 0.1 1.7 -0.6 -0.5 N/A Automobile Sales, % y/y 15.3 11.7 15.2 -9.3 -10.4 -11.8 -6.0 10.0 Wholesale Price Index, % y/y 12.5 12.9 12.1 10.7 8.2 5.9 5.0 3.1 Exports, % y/y 37.1 26.1 11.0 -13.1 -9.9 -1.1 -15.9 N/A Imports, % y/y 58.5 46.6 55.4 5.8 6.1 8.8 -18.2 N/A Trade Balance, US$ bn -12.0 -13.1 -12.6 -9.7 -10.1 -7.6 -6.1 N/A Foreign Exchange Reserves, US$ bn 295.9 286.1 277.3 244.0 239.0 246.6 238.9 N/A

Quarterly data Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Real GDP, % y/y 9.8 9.1 9.1 8.9 8.9 7.9 7.6 5.3 -Agriculture 5.3 4.4 4.4 6.9 3.1 3.0 2.7 -2.2 -Industry 12.4 9.9 10.0 8.7 7.0 7.5 6.5 2.0 -Services 10.5 10.8 10.3 10.2 11.9 10.0 9.6 9.9 Nominal GDP, INR tn 10.4 9.9 9.9 11.4 12.0 11.6 11.7 13.0 Current Account, US$ bn 4.2 -6.7 -4.3 -4.5 -1.5 -9.8 -12.5 N/A Capital Account, US$ bn 15.8 17.8 33.2 31.0 26.0 11.8 8.2 N/A Sources: CEIC


Page 14

India: FX and Rates Strategy

Improvement in global risk appetite failed to push USD-INR out of the 50.0-52.0 range in March. We expect range-bound trading to persist. Supply concerns continue to weigh on the rates market, and the monetization of public debt is a real risk in the coming months.

FX

Improvement in risk appetite following the announcement of further quantitative easing and details of the Public Private Investment Program failed to nudge USD-INR out of the 50.0-52.0 range in March. While improving portfolio flows alongside a narrowing trade deficit are supportive of the INR, a meaningful break below 50.0 and a return to sub-50 trading ranges appear unlikely in the near-term. Foreign investors will also likely be mindful of political and policy uncertainty ahead of the April/May general election. As such, range-bound trading should persist.

Rates

The rates market will remain under pressure on supply concerns in the coming months. The INR 2.41tn issuance calendar for the fiscal first half announced on 26 March hints at gross issuance exceeding the INR 3.6tn budgeted amount for FY09/10. If the domestic recovery fails to materialize in 2H09 as the government has projected, the new administration will likely opt for more fiscal stimulus, subjecting the domestic currency sovereign debt rating to greater risk. The monetization of government debt is a clear risk going forward despite the government dismissing the need for private bond placements with the RBI. That said, the RBI still has some leeway to adjust existing policy tools. Raising the statutory liquidity ratio (24%) and cutting the cash reserve ratio (5%) are options in the near-term.

The lack of fiscal flexibility and the rapid drop in WPI inflation continues to support the case for further rate cuts in the near-term. We expect the RBI to cut benchmark policy rates by another 150bps this year. With risk clearly skewed towards further slippage in fiscal consolidation, however, we continue to favour steepeners.

Yeo Han Sia

Market Forecasts - India FX Current Ytd(%) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

USD-INR 50.63 3.7% 52.0 51.0 51.0 50.0 50.0 49.0 AUD-INR 35.49 3.8% 30 29 28 27 28 28 NZD-INR 29.23 3.7% 23 22 21 21 22 22 JPY-INR 0.52 -3.7% 0.52 0.50 0.50 0.48 0.46 0.45 EUR-INR 68.75 1.1% 65 61 56 54 55 55 Rates Current Ytd(bps) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 RBI's repo rate 5.00 -150 4.50 4.00 4.00 4.00 4.50 4.50 3-month MIBOR 7.65 -124 6.9 6.4 6.4 6.4 6.9 6.9 2-year IRS (versus NSE MIBOR) 4.46 2 3.7 3.2 3.2 3.2 3.7 3.7 10-year IRS 6.30 147 6.0 5.9 5.9 5.9 6.0 6.0 Sources: Bloomberg, ANZ

USD-INR to stay above 50 level for now

35

40

45

50

55

60

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov-

08

Jan-

09

Mar

-09

USD-INR12M NDF

2s-10s IRS to steepen further (bps)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov-

08

Jan-

09

Mar

-09

Govt bond issuances to surge (INR bn)

0100200300400500600700800

Jan-

07

Apr-

07

Jul-0

7

Oct-07

Jan-

08

Apr-

08

Jul-0

8

Oct-08

Jan-

09

Apr-

09

Jul-0

9

Projected


Page 15

Country Update: Indonesia

Indonesia continues to face negative headwinds from the ongoing global crisis. Exports show no sign of recovery, which may imperil jobs in export-oriented industries and result in a deterioration of sentiment and consumption going forward. The good news is that investment remains strong and inflation has come off significantly, which should give the BI scope for further rate cuts to support the economy.

• Domestic consumption indicators are mixed. Auto sales fell 27.4% (y/y) in Feb, down from a decline of 23.5% in Jan. However, consumer confidence improved to a reading of 96.4 in Feb, up from 92.8 previously.

• Cement sales contracted by 6.2% (3mma y/y) in Feb, reflecting tepid construction and development activity.

• Investment spending is still robust, with foreign direct investment up by 60.3% (y/y) in Jan compared with 43.7% growth for the whole of 2008. Domestic investment is holding up too, registering 33.1% (y/y) growth in Jan. Foreign equity portfolio inflows have eased, but are still at a higher level compared with other countries in the region.

• Exports plummeted 35.5% (y/y) in Jan, down from a 20.0% decline in Dec as global trade volumes contracted and commodity export prices came under pressure. However, imports fell by 32% (y/y) in Jan, buffeting the impact of lower shipments on net exports.

• Inflation eased to 8.6% (y/y) in Feb, down from 9.2% in Jan. Our short-term 3m/3m ‘momentum’ measure dipped into negative territory, signalling that inflation pressures have abated for now.

• Bank Indonesia lowered its benchmark interest rate by 50bps to 7.75% in Mar for a cumulative 175bps of cuts since Dec 2008. However, lending rates were little changed and state banks have been urged by the government to adjust their rates in line with the BI rate cuts. With inflation receding, the BI would appear to have further scope to ease monetary policy.

• Indonesia is now in the midst of political campaigning, with parliamentary elections slated for 9 April. All the main parties have promised to welcome foreign investment and political risk to growth should remain minimal going forward.

Chang Wei Liang

Economic Data – Indonesia Monthly data Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09

Industrial Production, % y/y 2.8 2.9 -0.8 6.1 0.6 -3.2 -6.1 N/A Retail Sales Index, % y/y 6.5 13.7 3.2 -15.5 -26.3 -5.0 2.9 N/A Consumer Price Index, % y/y 11.9 11.8 11.9 11.6 11.5 11.1 8.2 8.2 Exports, % y/y 24.8 29.9 29.0 4.7 -1.8 -20.6 -36.1 N/A Imports, % y/y 68.8 45.4 38.5 40.3 -5.6 -8.0 -31.1 N/A Trade Balance, US$ bn 1.8 2.4 2.9 2.0 2.5 2.4 2.0 N/A Foreign Exchange Reserves, US$ bn 58.0 55.9 54.6 48.4 47.8 49.2 48.3 47.9 Quarterly data Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08

Real GDP, % y/y 6.0 6.6 6.6 5.8 6.2 6.4 6.4 5.2 -Private consumption 4.7 4.7 5.1 5.5 5.7 5.5 5.3 4.8 -Government consumption 3.7 3.8 6.5 2.0 3.6 5.3 14.1 16.4 -Gross fixed capital expenditure 7.6 7.6 9.7 12.4 13.7 12.0 12.2 9.1 Nominal GDP, IDR tn 918.9 964.8 1,030.8 1,034.9 1,117.6 1,229.6 1,332.5 1,274.3 Current Account, US$ bn 2.6 2.3 2.2 3.4 2.8 -1.0 -0.9 -0.2 Capital & Financial Account, US$ bn 1.8 2.0 -0.9 0.7 -1.4 2.5 0.9 -3.8 Sources: CEIC


Page 16

Indonesia: FX and Rates Strategy

Foreigners have become less pessimistic about the IDR in tandem with a general improvement in risk appetite. Meanwhile, the authorities have enhanced ability and willingness to hold the line at 12,000 in USD-IDR.

FX

The recent improvement in risk appetite helped the IDR out-perform within AXJ in March—gaining 3% against the USD, second only to the KRW. Indonesia’s growth prospects remain among the more promising in the region as the economy is more insulated from external shocks, supporting the IDR in relative terms on a fundamental basis. The bottoming in commodity prices is an added positive for Indonesia, which is a net exporter of natural resources. In addition, Indonesia has upgraded its currency swap arrangements with Japan and China (to $12bn and $15bn, respectively), and the World Bank approved a $2bn contingency loan (part of a $5.5bn facility with participation from Australia, Japan and the ADB as well)—providing more direct sources of stability for the rupiah.

However, risk appetite is in the driver’s seat for USD-IDR movements, and this is likely to persist over the next quarter, if not longer. Although some cracks in the “ice” have emerged, global economic activity remains quite frozen. Moreover, there are a number of hurdles to clear before a recovery can be declared. Hence, a revisiting of the 12,000 level in USD-IDR is highly likely. With Spring elections fast approaching, the authorities have not only increased ability but also increased incentive to keep a tight reign on the IDR—which means that attempts above the 12,000 level are likely to be met with strong resistance in Q2.

Rates

Although spooked by supply worries and risk aversion thus far, we remain bullish on IDR rates in 2009. BI has more rate cuts in the pipeline, the government is in a better financing position, and IDR bonds offer relatively good value and attractive yields. The curve bull-steepened in March—appeased in part by a larger than expected BI rate cut, but more so by the improvement in risk aversion.

Tamara Henderson

Market Forecasts - Indonesia FX Current Ytd(%) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

USD-IDR 11,610 4.4% 12,000 11,900 11,600 11,600 11,300 11,000 AUD-IDR 8,165 2.6% 7,400 6,900 6,300 6,300 6,300 6,400 NZD-IDR 6,728 2.6% 5,900 5,600 5,200 5,100 5,000 5,000 JPY-IDR 119 -4.8% 120 120 110 110 100 100 EUR-IDR 15,821 0.0% 15,000 14,000 12,800 12,500 12,400 12,300 Rates Current Ytd(bps) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 BI's bank rate 7.75 -150 6.75 6.00 6.00 6.00 6.00 6.00 3-month JIBOR 9.31 -282 8.6 8.1 8.1 8.1 8.2 8.3 2-year IRS (versus IDR fix) 13.25 -75 12.5 12.0 12.0 12.0 12.1 12.3 10-year IRS 9.00 -50 8.8 8.6 8.6 8.6 8.6 8.7 Sources: Bloomberg, ANZ


Page 17

Country Update: Malaysia

Malaysia’s second fiscal stimulus plan was unveiled amidst a sharp decline in the export-oriented economy and the impending handover to Prime Minister-designate Najib Razak. Najib takes over the reins under tense political scrutiny and faces the daunting task of guiding the economy through its worst slump since the Asian financial crisis.

• Manufacturing sales plunged by 22.7% (y/y) in Jan, the third straight monthly decline, after registering a contraction of 21.0% in Dec. Sales are likely to contract further amid declining overseas demand for electronics.

• Industrial production dropped for the fifth straight month falling by 20.2% (y/y) in Jan, following a 15.9% drop in Dec. Output is likely to contract further with companies such as Intel planning to close plants in Malaysia. If sales and output continue to decline, we could see the unemployment rate rising—it has remained constant at 3.1% from Q3 to Q4.

• Exports in Jan experienced the largest drop in nearly 15 years at 27.8% (y/y), following a 14.9% decline in Dec. Imports contracted at an even faster pace of 32% compared with a 23% decline a month earlier, contributing to a trade surplus of $2.4bn in Jan.

• The CPI rose at the slowest pace in the past 10 months at 3.7% (y/y) in Feb. This outturn reflected lower food inflation, which fell by ½ ppt to 9.2%, as well as the easing of commodity prices.

• The expected second stimulus plan was unveiled with MYR67bn (US$ 18.4 bn) in spending, equity investments and tax incentives over the next two years. As a result, the budget deficit for 2009 is expected to increase to 7.6% of GDP, the largest since 1987.

• Datuk Najib, who was formally declared UMNO President in an unopposed party contest, reiterated the need for a new economic model for the trade-dependent economy to focus more on services and their contribution to GDP.

• BNM Governor Zeti announced that the economy may suffer a “significant” contraction in the first half of the year before improving in the second half. We expect the stimulus package to have a modest impact on this export-orientated economy, projecting annual growth to fall to around 1% in 2009.

Naresh Navaratnarajah

Economic Data – Malaysia Monthly data Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

Industrial Production, % y/y 2.4 1.2 -1.7 -2.8 -8.2 -15.9 -20.2 N/A Manufacturing Sales, % y/y 16.2 13.4 8.6 2.1 -1.9 -21.0 -22.7 N/A Consumer Price Index, % y/y 8.5 8.5 8.2 7.6 5.7 4.4 3.9 3.7 Exports, % y/y 25.3 10.7 15.0 -2.6 -4.9 -14.9 -27.8 N/A Imports, % y/y 15.0 4.4 11.4 -5.3 -8.6 -22.8 -32.0 N/A Trade Balance, USD bn 4.4 3.7 4.3 2.7 3.2 3.3 2.4 N/A Foreign Exchange Reserves, US$ bn 119.3 116.9 104.5 94.9 92.1 85.7 85.9 85.3

Quarterly data Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Retail Sales, % y/y 25.3 33.0 39.7 35.7 19.8 23.8 25.4 16.5 Real GDP, % y/y 5.5 5.7 6.7 7.3 7.4 6.7 4.7 0.1 -Private consumption 7.6 12.3 13.0 10.2 11.7 9.0 8.1 5.3 -Government consumption 7.3 10.4 6.0 4.2 14.7 10.9 6.9 13.8 -Gross fixed capital formation 9.5 6.0 12.8 10.2 6.0 5.6 3.1 -10.2 Nominal GDP, MYR bn 144.6 154.3 166.3 176.7 175.4 189.4 198.7 177.3 Current Account, US$ bn 5.7 7.3 8.6 8.0 7.5 11.3 11.2 8.8 Sources: CEIC

Malaysia - Trade Developments

-40-30-20-10

0102030

Jan-

06

Apr-

06

Jul-0

6

Oct-

06

Jan-

07

Apr-

07

Jul-0

7

Oct-

07

Jan-

08

Apr-

08

Jul-0

8

Oct-

08

Jan-

09

024681012141618

Trade Balance (rhs) Exports y/y Imports y/y

MYR Bn

Malaysia - Activity Indicators

-25-20-15-10

-505

10152025

Jan-

06

Apr-

06

Jul-0

6

Oct-0

6

Jan-

07

Apr-

07

Jul-0

7

Oct-0

7

Jan-

08

Apr-

08

Jul-0

8

Oct-0

8

Jan-

09

Industrial Production y/y Manufacturing Sales y/y

Malaysia - Unemployment Rate (q/q)

00.5

11.5

22.5

33.5

4

Mar-0

5

Jun -

05

Sep-

05

Dec-0

5

Mar-0

6

Jun -

06

Sep-

06

Dec-0

6

Mar-0

7

Jun -

07

Sep-

07

Dec-0

7

Mar-0

8

Jun -

08

Sep-

08

Dec-0

8


Page 18

Malaysia: FX and Rates Strategy

The former USD-MYR peg level of 3.80 is in sight on worsening trade performance. Larger-than-expected fiscal stimulus adds to supply concerns in the bond market, but the timely revision to the issuance calendar should avoid further steepening in the curve.

FX

The worsening pace of contraction in monthly trade numbers continues to bode ill for the MYR. With the BNM projecting a steep 25% fall in exports and zero growth in 2009, the central bank will likely continue to tolerate MYR weakness to support economic growth and to maintain competitiveness within the region. The MYR should continue to track the SGD, its highly trade dependent neighbour. However, given the relative out-performance in growth and easing portfolio outflows, we see scope for SGD-MYR to ease from the upper end of the 2.20–2.40 trading range in the post-peg period. We continue to target a peak of 3.80 on USD-MYR—the former level of the peg.

Rates

The MYR60bn fiscal stimulus package announced on 10 March surprised on the upside, adding to supply concerns. The sizeable deficit could have implications on sovereign ratings, but any downward revision will likely be confined to the domestic currency rating given Malaysia’s strong foreign reserve position. Bank Negara’s unexpected revision to the 2009 issuance calendar on 20 March should lead to a slight curve flattening. BNM scaled back considerably the supply of long-dated bonds, instead targeting a larger amount of issuance at the front-end of the curve.

Prospects for further OPR rate cuts and comfortable liquidity conditions should set the stage for bull flattening in the curve, notwithstanding the shift in supply structure toward the front-end. We expect the BNM to cut the OPR by 50bps to 1.5% by mid-year.

Yeo Han Sia

Market Forecasts - Malaysia FX Current Ytd(%) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

USD-MYR 3.63 4.6% 3.74 3.80 3.80 3.80 3.75 3.65 AUD-MYR 2.54 4.7% 2.1 2.1 2.1 2.1 2.1 2.2 NZD-MYR 2.09 4.6% 1.6 1.6 1.6 1.6 1.6 1.7 JPY-MYR 3.70 -11.8% 3.6 3.7 3.7 3.6 3.5 3.4 EUR-MYR 4.92 2.0% 4.6 4.5 4.2 4.1 4.2 4.2 Rates Current Ytd(bps) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 BNM's overnight policy rate 2.00 -125 1.50 1.50 1.50 1.50 1.50 1.50 3-month KLIBOR 2.11 -126 1.6 1.6 1.6 1.8 1.9 1.9 2-year IRS (versus 3M KLIBOR) 2.18 -63 1.7 1.7 1.7 1.8 2.0 2.0 10-year IRS 3.78 28 3.3 3.2 3.2 3.3 3.5 3.5 Sources: Bloomberg, ANZ

MYR closely tracking the SGD

80

85

90

95

100

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov-

08

Jan-

09

Mar

-09

USD-SGD indexUSD-MYR index

(22-Jul-2005=100)

2s-10s IRS eased on shift in supply structure (bps)

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov-

08

Jan-

09

Mar

-09

Portfolio flows in deficit (MYR bn)


Page 19

Country Update: Philippines

`

The Philippines is seeing a moderation in the pace of activity but is outperforming the region due to strong domestic consumption growth. The effect of the credit crunch is also limited by the fact that the economy is mostly cash-based and wealth effects are smaller. Liquidity conditions are good and the BSP has scope to ease further if necessary.

• Consumption appears to have slowed in Q1. The consumer expenditure index came down to 40.7 in Q1 from 44.9 in Q4 last year, indicating that the pace of moderation has increased. Passenger car sales growth fell to 1.3% (y/y) in Feb from 14.2% in Jan.

• Remittances continue to slip, rising just 0.1% (y/y) in Jan from 0.8% in Dec. This may dampen consumption going forward but spending should remain stable as the Philippines has a smaller proportion of discretionary consumption given its low per capita income.

• Exports fell 40.6% (y/y) in Jan, down from a 40.3% decline in Dec. Imports also deteriorated in line with exports, falling 34.5% (y/y) in Jan compared with a 34.0% fall previously. This shows the high import content of exports, which had buffeted the impact of declining trade on net exports. Electronics shipments were the worst performing sector, falling 48.4%.

• Manufacturing production dropped 16.9% (y/y) in Jan (from a 7.6% fall in Dec) as the export-linked manufacturing sector faces fewer orders in light of the slowdown in global demand. However, other important sectors such as call centre activity are reportedly holding up and should provide support to income.

• Inflation surprisingly picked up, climbing to 7.3% (y/y) in Feb from 7.1% in Jan. Food and fuel prices bucked recent declines, rising 1% (m/m) in Feb, signalling that demand for staples remains strong.

• The BSP lowered the policy rate by only 25bps to 4.75% in Mar, indicating that they are mindful of inflation pressures. There is still plenty of room for the central bank to continue easing should downside risks to growth and inflation materialise.

Chang Wei Liang

Economic Data – Philippines Monthly data Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09

Manufacturing Production Value-add, % y/y 10.4 6.3 14.5 10.7 2.4 -7.6 -16.9 N/A Passenger Car Sales, % y/y 31.0 20.6 12.3 -5.9 2.0 -19.5 14.2 1.2 Consumer Price Index, % y/y 12.3 12.4 11.8 11.2 9.9 8.0 7.1 7.3 Exports, % y/y 4.4 6.6 1.1 -14.8 -11.4 -40.3 -40.6 N/A Imports, % y/y 16.0 1.1 2.5 -11.1 -31.5 -34.0 -34.5 N/A Trade Balance, US$ bn -1.4 -0.6 -0.4 -0.6 0.0 -0.6 -0.8 N/A Foreign Exchange Reserves, US$ bn 32.4 32.5 32.3 31.8 32.4 32.6 34.1 N/A Quarterly data Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08

Real GDP, % y/y 7.0 8.3 7.1 6.4 4.7 4.4 5.0 4.5 -Private consumption 5.9 5.6 5.7 6.2 5.2 4.1 4.4 4.5 -Government consumption 9.5 11.9 6.4 4.6 1.9 -1.5 13.4 4.7 -Gross fixed capital formation 10.3 20.9 8.8 6.7 2.9 3.0 7.0 1.9 Nominal GDP, peso bn 1,524.1 1,618.6 1,613.8 1,891.8 1,668.0 1,837.9 1,864.9 2,126.8 Current Account, US$ bn 1.9 1.7 1.0 1.7 0.9 0.8 -0.5 N/A Capital & Financial Account, US$ bn 0.5 -0.4 3.3 -0.5 0.7 0.5 0.5 N/A Sources: CEIC


Page 20

Philippines: FX and Rates Strategy

The peso continues to outperform its peers, but slowing remittances and negative news flow on the fiscal front should see a retest of the 50.0 level. In the rates market, supply pressures continue to dominate any beneficial effects from monetary easing.

FX

Year-to-date, the PHP continues to outperform its peers, finding support from its relatively low trade dependence and sustained consumption growth. Remittance flows played a large part in the Philippines’ growth resilience, and the evolution of flows will likely remain topical in the coming months. The risk of more negative news flow on the fiscal front should add to the list of concerns going forward. While proceeds from external borrowing and privatization to fund the deficit should support the BoP in 2009, fiscal sustainability remains a medium-term issue. We expect USD-PHP to drift higher on slowing remittances, but see a peak around the 50.0 mark in 3Q09. The Presidential election scheduled for May 2010 will be a significant risk factor toward year-end.

Rates

The low per capita income level limits the potential impact from declining discretionary spending and negative wealth effects, but the balance of risks to growth is clearly skewed to the downside. The disinflationary environment also provides room for further monetary easing, notwithstanding Governor Tetangco’s recent comments on potential price pressures from oil price and peso volatility. We expect the overnight rate to fall to 4% by 3Q09.

However, supply pressures should continue to dominate any beneficial effects from rate cuts over the near-term. Socio-economic Planning Chief Recto’s warning of a much wider budget gap of PHP 257bn resonates with market concerns over the government’s ability to meet its fiscal deficit and domestic borrowing targets of PHP 177bn and 442bn, respectively.

Yeo Han Sia

Market Forecasts - Philippines FX Current Ytd(%) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

USD-PHP 48.16 1.3% 49.5 50.0 49.5 48.8 48.5 48.0 AUD-PHP 33.75 1.3% 28.7 28.0 26.7 26.4 27.2 27.8 NZD-PHP 27.81 1.3% 22.3 21.5 20.3 20.5 20.9 21.1 JPY-PHP 0.49 -5.9% 0.495 0.495 0.485 0.465 0.449 0.436 EUR-PHP 65.39 -1.3% 61.9 60.0 54.5 52.7 53.4 53.8 Rates Current Ytd(bps) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 BSP's overnight reverse repo rate 4.75 -75 4.25 4.00 4.00 4.00 4.00 4.00 3-month PHIBOR 4.50 -75 4.3 4.0 4.1 4.1 4.1 4.2 2-year IRS (versus 3M IB ref rate) 4.20 13 4.0 3.7 3.8 3.8 3.8 3.9 10-year IRS 5.73 -38 5.6 5.7 5.7 5.7 5.7 5.6 Sources: Bloomberg, ANZ

Budget deficit could widen further (PHP bn)

-40

-20

0

20

40

60

Jan-

07

Apr-

07

Jul-0

7

Oct-0

7

Jan-

08

Apr-

08

Jul-0

8

Oct-0

8

Jan-

09


Page 21

Country Update: Singapore

Minister Mentor Lee Kwan Yew predicted that the Singapore economy may contract by as much as 10% in 2009 if exports continue to plunge. Job losses may also rise to an unprecedented level. Inflation has eased giving the MAS more room to weaken the currency. As the economic slump deepens, consumer and business sentiment are expected to remain low for the rest of the year.

• Non-oil domestic exports dropped 23.7% (y/y) in Feb after contracting 34.9% in Jan as global demand for electronics and pharmaceuticals collapsed. Correspondingly, cargo-box traffic handled by Singapore port terminals was 19.8% lower than a year earlier. Electronic shipments plunged 31.9% and non-electronic shipments, including petrochemicals and pharmaceuticals, fell 18.3%. The government expects overseas shipments to fall by as much as 11% in 2009.

• Inflation slowed to 1.9% (y/y) in Feb from 2.9% in Jan giving the MAS room to allow the currency to weaken further to support economic growth. Food prices rose by 4.3%, while transport and communication costs fell by 5%.

• As unemployment climbed to 2.6% in Q4 from 2.2% in the previous quarter, consumers purchased fewer cars, household and luxury goods. The retail sales index dropped by 12.2% (y/y) from 1.6% in Dec. Declining tourist arrivals will also add to the woes of the retail sector.

• On a positive note, equities staged a mini-rally from 23 Mar, led by bank stocks as investors reacted positively to the US government’s latest plan to buy US$500bn worth of toxic assets. Nevertheless, consumer and business sentiment are expected to remain weak for the rest of the year.

• Given its openness, we expect Singapore to be one of the worst performing economies this year. Our revised forecast has output contracting by about 5%.

Ivy Tan

Economic Data – Singapore Monthly data Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09

Industrial Production, % y/y -22.0 -11.9 3.1 -12.2 -6.6 -12.8 -29.1 N/A Retail Sales, % y/y 11.3 3.9 7.0 -3.5 -3.1 -1.2 -12.2 N/A Consumer Price Index, % y/y 6.5 6.4 6.7 6.4 5.5 4.3 2.9 1.9 Domestic Exports (Non-oil), % y/y -5.8 -13.9 -5.7 -15.5 -17.5 -20.8 -34.9 -23.7 Imports (Non-oil), % y/y 4.3 0.1 12.6 -2.2 -12.4 -14.0 -29.0 -17.3 Trade Balance, US$ bn 1.5 A2.6 1.5 0.4 1.0 0.7 0.5 0.8 Foreign Exchange Reserves, US$ bn 175.6 171.5 169.1 162.5 165.8 168.9 169.2 166.0 Quarterly data Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08

Real GDP, % y/y 7.6 8.6 9.5 5.5 6.7 2.5 0.0 -4.2 -Private consumption 2.7 5.8 6.3 5.8 4.1 4.4 2.7 -1.2 -Government consumption -1.6 3.4 -0.6 9.5 10.4 9.0 9.9 2.7 -Gross fixed capital formation 19.7 25.7 15.4 17.0 30.5 25.0 14.9 -9.9 Nominal GDP sa, SGD bn 59.2 61.8 64.2 66.5 66.0 64.3 64.5 62.8 Current Account, US$ bn 11.5 9.8 11.5 6.3 8.1 6.7 7.7 4.5 Capital & Financial Account, US$ bn -11.9 -3.1 -8.0 0.7 2.0 -3.8 -8.6 -1.1 Sources: CEIC

Straits Times Index

10001500

20002500

30003500

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov-

08

Jan-

09

Mar

-09

Singapore - Trade Statistics

-50-40-30-20-10

010203040

Jan-

07Ap

r-07

Jul-0

7Oc

t-07

Jan-

08Ap

r-08

Jul-0

8Oc

t-08

Jan-

09

%

50000550006000065000700007500080000850009000095000

(in mil)

Exports (y/y)Imports (y/y)Trade Balance (in mil)

Singapore - Inflation (y/y)

-10

-5

0

5

10

Jan-

07

Apr-

07

Jul-0

7

Oct-0

7

Jan-

08

Apr-

08

Jul-0

8

Oct-0

8

Jan-

09

%

CPIFoodTransport & Communication


Page 22

Singapore: FX and Rates Strategy

USD-SGD upside still intact

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov-

08

Jan-

09

Mar

-09

70

75

80

85

90

95USD-SGDDXY index (rhs)

3M SIBOR nearing decade lows

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

2s-10s IRS on a downtrend (bps)

50

75

100

125

150

175

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov-

08

Jan-

09

Mar

-09

While recent USD-SGD price action does not provide a strong indication of a policy ease, we continue to see scope for the MAS to lower the S$NEER midpoint in April. Our target for the peak in USD-SGD in 2009 continues to be in the 1.66 area.

FX

Worsening economic indicators continue to fuel market expectations of a policy ease in April, despite the MAS reiterating on several occasions the appropriateness of its neutral S$NEER policy stance. A recent warning by Minister Mentor Lee of a contraction far worse than the official forecast of a 2%-5% decline also hints at yet another GDP downgrade in late-May, when the government releases its 1Q09 economic report.

The labour market appears to be holding up reasonably well, but this lagging indicator provides no respite for the pessimistic economic outlook. While 1Q09 labour data will only be released in late-April, recent retail sales data suggest the slide in domestic demand is gaining pace, not least because of falling tourist arrivals.

Inflation concerns have also given way to deflation worries with the CPI now at 1.9%. With base effects dominating in 1H09 and a trough in economic activity still some way off, inflation will likely slide into negative territory before 2Q09 is over.

We continue to expect the MAS to re-centre the S$NEER policy band in April, even though recent USD-SGD price action does not provide a strong indication of an ease. A band widening is now a lower probability event; moreover, it was adopted only once in the past decade in reaction to volatile market conditions post 9/11. The balance of risks remains firmly skewed towards USD-SGD upside in view of the broad USD strength and S$NEER trajectory.

Rates

We continue to target 0.56% in 3-month SGD SIBOR, which was the low during the 2001/03 downturn. Ample fiscal reserves should limit the impact on 2s-10s (GOV and IRS) even if a supplementary budget is proposed in the coming months.

Yeo Han Sia

Market Forecasts - Singapore FX Current Ytd(%) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

USD-SGD 1.519 6.2% 1.58 1.62 1.66 1.66 1.63 1.60 AUD-SGD 1.039 3.4% 0.98 0.94 0.90 0.90 0.91 0.93 NZD-SGD 0.857 3.4% 0.77 0.76 0.75 0.73 0.72 0.72 JPY-SGD 1.547 -1.8% 1.58 1.60 1.63 1.58 1.51 1.45 EUR-SGD 2.009 0.5% 1.98 1.91 1.83 1.79 1.79 1.79 Rates Current Ytd(bps) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 3-month SIBOR 0.67 -28 0.55 0.55 0.65 0.75 0.95 1.20 2-year IRS (onshore versus 6M SOR) 1.84 28 1.6 1.5 1.5 1.6 1.8 2.1 10-year IRS 2.52 26 2.3 2.1 2.0 2.2 2.6 2.9 Sources: Bloomberg, ANZ


Page 23

Country Update: South Korea

Signals out of Korea continue to be negative on balance. Consumption looks to be softening again and the balance of payments surplus hit an 11-year high on tepid domestic demand. Overall, the first quarter appears to have been quite weak, and the leading indicator suggests limited improvement ahead.

• After a strong Jan, consumption turned down in Feb. Department store sales fell fractionally for the month while discount store sales plunged by 20% (y/y).

• On the trade front, the contraction in exports moderated to 17.1% (y/y) in Feb while the fall in imports remained high at 30.9%. Shipments to Japan fell by almost 20%, while those to China rose by 3.3%.

• The trade surplus improved sharply to $3.3bn from a deficit of roughly the same amount in Jan. The balance of payments also returned to surplus in February, registering a seasonally adjusted 11-year high.

• Inflation unexpectedly picked up in Feb, rising to 4.1% (y/y) from 3.7% in Jan. Food and transportation prices led the rise. Core inflation remained at 5.2%. PPI inflation fell to 4.4%, down 0.3ppt from Jan.

• The Bank of Korea surprised markets by keeping the base rate unchanged at 2.00% at its Mar meeting. The BOK said it is assessing the impact of its previous, aggressive cuts. A weaker won has also contributed to looser monetary conditions.

• The government announced an additional stimulus plan equivalent to 1.9% of GDP, aimed at raising growth by 1.5ppts. The focus will be on cash transfers, subsidized loans and infrastructure.

• Activity in Korea will remain weak until foreign demand recovers, which is likely to be late 2009 at best. We now forecast GDP to decline by around 4%-5% this year.

Paul Gruenwald

Economic Data – South Korea Monthly data Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09

Industrial Production, % y/y 8.6 1.8 6.3 -1.9 -13.8 -18.7 -25.6 N/A Retail Sales, % y/y 12.7 11.1 4.9 1.9 -0.5 -1.2 -1.1 N/A Consumer Price Index, % y/y 5.9 5.6 5.1 4.8 4.5 4.1 3.7 4.1 Exports, % y/y 35.6 18.1 27.6 7.8 -19.5 -17.9 -34.2 -18.3 Imports, % y/y 47.0 36.4 45.4 10.3 -15.0 -21.6 -31.5 -30.9 Trade Balance, USD bn -2.0 -3.8 -2.1 1.0 0.0 0.5 -3.6 2.9 Foreign Exchange Reserves, US$ bn 247.9 243.4 240.4 212.8 201.0 201.0 201.6 N/A Quarterly data Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08

Real GDP, % y/y 4.0 4.9 5.1 5.7 5.8 4.8 3.8 -3.4 -Private consumption 4.1 4.4 4.8 4.6 3.4 2.3 1.1 -4.4 -Government consumption 6.3 6.9 4.5 5.6 3.9 4.0 4.4 4.9 -Gross fixed capital formation 7.2 5.5 1.3 2.9 0.5 0.1 1.4 -8.4 Nominal GDP, KRW tn 204.8 221.6 226.9 247.9 218.7 241.1 242.6 N/A Current Account, US$ bn -1.9 1.1 2.0 -0.8 -0.1 1.8 -1.3 0.9 Capital & Financial Account, US$ bn 4.7 -0.3 -3.9 0.3 0.4 -3.6 -4.4 -4.8 Sources: CEIC

South Korea - Store Sales

-8-6-4-202468

101214

Feb-

06

May

-06

Aug-

06

Nov-

06

Feb-

07

May

-07

Aug-

07

Nov-

07

Feb-

08

May

-08

Aug-

08

Nov-

08

Feb-

09

Department stores 3mma Discount stores 3mma

South Korea - Indicators (m/m)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep-

07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Leading Coincident

South Korea - Trade Developments

-40-30-20

-100

102030

405060

May

-06

Jul-0

6

Sep-

06

Nov-

06

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep-

07

Nov-

07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov-

08

Jan-

09

Exports y/y Exports 3mmaImports y/y Imports 3mma


Page 24

South Korea: FX and Rates Strategy

The won led USD-AXJ lower amid a spike in global risk appetite, gaining 9% against the USD in March. We expect the won to out-perform in 2009 overall, but the ride will be bumpy as the global environment remains challenging.

FX Global risk appetite improved in March, supported by the US move to quantitative easing and some encouraging signals from the financial sector. As global equity markets rallied, the FX market took the opportunity to unwind a crowded long USD position. Being the most liquid of AXJ currencies, the won easily out-performed during the down-move in USD-AXJ (just as it heavily under-performed during the sharp up-move following the Lehman bankruptcy). There were other positives for the KRW during the month as well, including the failure of Korean “March crisis” fears to materialize as well as the swing back into surplus for the current account (which at $4.2bn in February was the largest in 11 years). In addition, the government proposed a large supplementary budget of $20.8bn, aimed at lifting GDP growth by 1.5ppts and creating half a million new jobs. We noted last month that the foray toward 1,600 in USD-KRW offered an attractive opportunity to position for KRW out-performance. At the 1,400 level presently, however, the risk is more skewed to the up-side over the near-term—if nothing else but because this 9% move in KRW is sure to require a period of consolidation. Although we expect the won to out-perform in 2009, the ride will be bumpy. The global environment will remain challenging, while at the same time more positive signals will appear as aggressive monetary and fiscal policy stimuli from around the world start to bear fruit. As the most liquid currency in AXJ, the KRW will be caught in the middle of fierce cross-currents. Rates A combination of supply worries from the supplementary budget and an unexpected pause by the BoK trumped the beneficial impact from a retreat in risk aversion, with the belly of the KRW IRS curve rising over 25bps in March. Nevertheless, we still favour steepeners—looking for the 2s-10s spread to widen above 100bps.

Tamara Henderson

Market Forecasts – South Korea FX Current Ytd(%) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

USD-KRW 1331 5.7% 1500 1400 1450 1375 1350 1300 AUD-KRW 931 5.2% 930 810 780 740 760 750 NZD-KRW 765 4.9% 740 660 650 610 590 590 JPY-KRW 13.61 -1.9% 15.0 13.9 14.2 13.1 12.5 11.8 EUR-KRW 1809 2.8% 1880 1650 1600 1490 1490 1460 Rates Current Ytd(bps) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 BOK's overnight call rate 2.00 -100 1.50 1.00 1.00 1.00 1.50 2.00 3-month KORIBOR 2.42 -153 2.1 1.7 1.7 1.7 1.8 2.0 2-year IRS (versus 91D KRW CD) 3.19 -10 2.8 2.5 2.5 2.5 2.6 2.7 10-year IRS 3.91 34 3.8 3.7 3.7 3.7 3.7 3.8 Sources: Bloomberg, ANZ


Page 25

Country Update: Taiwan

An array of indicators for Taiwan point to a slower pace of decline. However, it is still too early to say a recovery is in store. Prospects look bleak for 2009, or until global demand recovers.

• Commercial sales showed some slowing of downward momentum, dropping by “only” 8.2% (y/y) in Feb as compared with a 19.1% decline in Jan. But retail sales fell by 9.6% in contrast with a 0.4% drop in Jan, mirroring weak consumer confidence.

• The pace of deterioration in the trade balance showed some signs of slowing. Exports declined 28.6% in Feb from a year earlier, falling more slowly than Jan's record plunge. Imports slipped 31.6% in Feb, improving from -56.5% in Jan.

• The CPI posted a y/y decline of 1.3% in Feb, the lowest outturn in six years. Inflation fell partly due to the continuing decline in the price of electronic goods.

• Industrial production tumbled by 27.1% (y/y) in Feb, after contracting 43.3% in Jan. Export orders registered a year-on-year 22.3% decline, better than the market expected. Both indicators have shown a slower pace of decline in Feb, but remain exceptionally weak.

• Consumer confidence fell to 48.2 in Feb, 0.5ppt lower than Jan. This is in line with the historically high jobless rate, which reached 5.6% in Feb. Nonetheless, some chip makers started to increase production in Mar due to rush orders from China.

• The stock market rallied in the past few weeks, with the TAIEX posting a year-to-date gain of 12.8% as of end-Mar.

• Prospects for Taiwan look bleak in 2009, or until global demand recovers. We expect the economy to contract by 5%, although the first signs of a regional recovery should appear here.

Zhou Hao

Economic Data - Taiwan Monthly data Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09

Industrial Production, % y/y 1.9 0.7 -1.2 -12.5 -28.3 -32.0 -43.3 -27.1 Retail Trade Index, % y/y -10.0 -7.3 -7.8 -6.1 -9.0 -11.3 -1.9 -8.3 Consumer Price Index, % y/y 5.8 4.7 3.1 2.4 1.9 1.3 1.5 -1.3 Exports, % y/y 7.9 18.2 -1.6 -8.3 -23.3 -41.9 -44.1 -28.6 Imports, % y/y 11.6 39.3 9.9 -7.4 -13.7 -44.6 -56.5 -31.6 Trade Balance, US$ bn -0.4 0.0 0.8 2.9 1.5 1.8 3.3 1.6 Foreign Exchange Reserves, US$ bn 290.9 282.1 281.1 278.2 280.7 291.7 292.7 294.2 Quarterly data Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08

Real GDP, % y/y 3.8 5.5 7.0 6.4 6.2 4.6 -1.0 -8.4 -Private consumption 2.3 2.2 3.1 1.6 2.1 0.5 -2.1 -1.7 -Government consumption 0.0 0.7 1.7 1.1 1.3 -0.2 1.2 2.2 -Gross fixed capital formation -0.3 4.7 3.8 -0.8 3.7 -8.0 -11.8 -23.2 Real GNP, % y/y 4.1 6.2 6.4 6.1 6.8 3.1 -0.5 -8.4 Nominal GDP, TWD tn 2.6 2.5 2.8 2.9 2.7 2.6 2.7 2.6 Current Account, US$ mn 9,410.0 5,905.0 6,477.0 11,183. 8,494.0 6,744.0 1,867.0 7,919.0 Capital Account, US$ mn -26.0 -19.0 -33.0 -18.0 -271.0 -20.0 -32.0 -11.0 Sources: CEIC

Taiwan-Domestic Demand

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Taiwan-Inflation

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Page 26

Taiwan: FX and Rates Strategy

The recent drop in USD-TWD is viewed as an opportunity to re-enter long positions at more attractive levels. Ultimately, we see scope for a test of the 36.0 level in H2.

FX Global risk appetite has recently improved in tandem with a 18% rally (from the March trough) in US equities. However, we view this rally as a temporary phenomenon, as the global economy has a number of hurdles to clear before conditions for a sustainable recovery are in place. Meanwhile, the 8.4% (y/y) contraction in Taiwan’s Q4 GDP was unprecedented, and the outlook for H1 remains just as dire. At the same time, the onset of deflation in February has pushed real interest rates considerably higher, and with the policy rate at 1.25% the CBC’s scope for further rate cuts is becoming more and more limited. Even though Taiwan is one of the more exposed economies to global demand dynamics, in y/y terms the TWD remains an out-performer within AXJ. As such, the currency market presents an attractive vehicle for easing monetary conditions, and true to form the authorities have continued to intervene, selling TWD in the FX market. The recent drop in USD-TWD is viewed as an opportunity to re-enter long USD-TWD positions at more attractive levels, with the recent USD sell-off having shaken loose what had become a crowded long USD-TWD position. Ultimately, we see scope for a test of the 36.0 level in H2. Rates The CBC left its policy rate unchanged at 1.25% in March, keeping its limited powder dry for the bumpy road ahead. As we still expect more rate cuts to come, front-end receiver positions remain attractive over a 6-month horizon.

Tamara Henderson

Market Forecasts - Taiwan FX Current Ytd(%) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10

USD-TWD 33.84 3.2% 35.2 36.0 36.0 35.5 35.5 35.0 AUD-TWD 23.70 2.8% 21.8 20.9 19.4 19.2 19.9 20.3 NZD-TWD 19.48 2.5% 17.2 16.9 16.2 15.6 15.6 15.8 JPY-TWD 0.346 -4.3% 0.352 0.356 0.353 0.338 0.329 0.318 EUR-TWD 45.94 0.2% 44.0 42.5 39.6 38.3 39.1 39.2 Rates Current Ytd(bps) Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 CBC's discount rate 1.25 -75 1.00 0.50 0.50 0.50 0.50 1.00 3-month CP 0.55 -53 0.5 0.5 0.5 0.5 0.6 0.7 2-year IRS (versus 3M CP) 1.02 -3 0.8 0.6 0.6 0.6 0.6 0.8 10-year IRS 1.84 40 1.8 1.7 1.7 1.7 1.7 1.8 Sources: Bloomberg, ANZ


Page 27

Country Update: Thailand

Domestic demand continues to weaken, and economic uncertainties dominate consumer sentiment. Inflation continues to decline. However, some bright spots were seen last month as net exports improved and a s

ANZ Emerging Asia Economics Monthly April 2009 - FINAL › documents › economics › ANZ...Lehman World, those economies with the greatest reliance on net exports for growth would

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