-
Inside:
Main article...............................1
Financial Markets Update............9
FX and Policy Rate Forecasts.....11
Macro Economic Forecasts ........12
LT FC Govt. Bond Ratings .........13
Country Updates .....................14
Authors:
Amy Auster Head of International Economics +61 3 9273 5417
[email protected]
Katie Dean Senior Economist, International +61 3 9273 5466
[email protected]
Jasmine Robinson Senior Economist, International +61 3 9273 6289
[email protected]
Dr. Alex Joiner Economist, International +61 3 9273 6123
[email protected]
Paul Braddick Head of Financial System Analysis +61 3 9273 5987
[email protected]
Mark Rodrigues Senior Economist, Australia +61 3 9273 6286
[email protected]
Sean Comber Economist, New Zealand +64 4 802 2286
[email protected]
January 2007
ANZ International Economics Monthly
Commodities expected to hold strong in 2007
Economics@ANZ
In our last edition, we detailed our global forecasts for 2007,
a year in which we expect global growth to remain strong and
consumer price inflation low. This month, we go through our
forecasts for commodity prices in the coming year, covering the
primary energy and metals sectors. Unsurprisingly, we view strong
global demand as likely to continue to feed through to demand for
hard commodities this year. Moreover, we believe that high global
liquidity levels, which have promoted commodities as an
increasingly traded product in the financial markets, are set to
continue throughout this year. Therefore, we believe commodity
prices will remain supported in this trading environment.
A recent weakening of oil and base metals has led to speculation
that the commodity price rally of the past few years is set to
fade. In the event, oil prices have since rebounded while some base
metal prices have pushed through to break new record highs.
Moreover, we believe it is important to differentiate between oil –
which is the most heavily traded commodity and prone to rapidly
changing events ranging from weather to geopolitical tensions – and
underlying demand for commodities arising from the global
production and investment cycles.
Among the major energy and metal commodities, we expect:
• Oil prices to continue to rise from recent lows, to average
US$63/bbl this year. In 2008, we expect constrained supply to drive
prices up further to an average of US$66/bbl.
• The return of gold as a favoured inflation hedge to underpin
further rises in the gold price in 2007 and 2008.
• Strong global demand to keep coal prices elevated through 2007
and 2008, albeit at slightly lower levels than the records achieved
in 2006.
• Iron ore prices to rise strongly again in 2007 before
increased global supply underpins a small price decline in
2008.
• Base metal prices to retreat from recent record highs in the
coming period, and to experience greater than usual volatility.
Energy and Metals Commodity Price Forecasts (end-period)
Current Jun 07 Dec 07 Dec 08 Long-term
Gold US$/oz 653 660 675 700 480
Aluminium US$/t 2815 2550 2100 2300 1800
Iron ore US$/t 75 82 82 78 40
Copper US$/t 5356 5350 5000 4200 3500
Nickel US$’000/t 39900 35000 30000 20000 15000
Zinc US$/t 3190 3300 2900 2500 1500
Lead US$/t 1615 1300 1100 800 750
Coking coal US$/t 115 98 98 85 80
Thermal coal US$/t 52.5 51 51 43 40
Crude oil (WTI) US$/bbl
58.9 64 64 67 65
Sources: Bloomberg, Reuters, Datastream, ABARE,
Economics@ANZ
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Economics@ANZ ANZ International Economics Monthly – January
2007
Page 2
Global soft landing in 2007
It is nearly official – global real GDP growth probably reached
5.1% YOY in 2006. This is a repeat of the stellar performance of
2004, and a global growth rate that had not previously been
recorded since 1988. Credit for the performance is due to the
rapidly developing economies in East Asia, South Asia and Eastern
Europe that together brought growth for the developing world to
7.6% as against only 2.7% YOY for industrialised economies.
In 2007, we project global real GDP will expand by 4.4% YOY,
still well above the historic trend of about 3.6%. Growth should
again be led by the developing world, which is forecast to expand
at a rate of 7% YOY while the industrialised world grows at a
below-trend rate of 2.1% YOY. In the industrialised world, the only
countries expected to grow at an above-trend rate are Greece and
Ireland.
Meanwhile, consumer price inflation is expected to decline.
Global headline CPI rose at a rate of 3.4% YOY in 2005 and 2006,
pushed along by tight labour markets, rising capacity constraints
and multiple factors that sent oil prices soaring above US$70/bbl.
With demand on the decline and oil prices softening, headline
inflation should moderate to just 3%. This is well below the
10-year average of about 4.3% for global CPI.
Global growth is strong amid low CPI
0
1
2
3
4
5
6
7
80 86 92 98 04
Real GDP % annual change ANZ
forecast
0
1
2
3
4
5
6
7
8
97 99 01 03 06 07
CPI % annual change ANZ
forecast
Note: GDP and CPI based on 50 countries aggregated using
‘purchasing power parity’ weights. Sources: Datastream, IMF and
Economics@ANZ.
Global annual growth
30 year average
Global annual headline CPI
10 year average
Asia’s expanding middle class….
The rise of developing economies as the global growth driver is
a major factor prompting the sustained rise in commodity demand.
Continued high rates of growth amid low inflation are supporting
the accumulation of household wealth, with GDP per capita rising
across the emerging world. Although this process is happening
gradually – with poverty still a tremendous problem – the
population density of large developing countries means that even a
relatively small shift in per capita GDP sends millions of people
into the ranks of the middle class. As shown in the chart below, in
an OECD economy such as Korea, 93% of the population is considered
middle class. This is about 44 million people. In China, the middle
class is
estimated to be only about 20% of the population, but this is
290 million people. India is believed to have only 9% of its
population in the middle class, but this is nearly 100 million
people. A paper from the University of Minnesota1 estimated that
the total size of the middle class in the largest 10 emerging
market countries as at the end of 2003 was roughly 630 million,
which is more than double the entire population of the Eurozone and
nearly equivalent to the G7’s total population of 719 mn.
0
10
20
30
40
50
60
70
80
90
100
IND INR CH PHIL MAL KOR
% of population
Sources: Senauer and Goetz, University of Minnesota, 2003.
Size of middle class in Asia
0
50
100
150
200
250
300
MAL PHIL INR KOR IND CH
Mns of people
….Demands more hard commodities
As the middle class grows, higher living standards imply
increased infrastructure and energy needs. Developing economies to
date have been far less efficient in commodities use than their
industrialised counterparts, as shown in the following chart. In
industrialised countries, one million tonnes equivalent of oil
(MTOE) produces about US$11.5 bn in gross domestic product. In
developing countries, only US$7.5 bn of GDP is achieved per MTOE.
The energy efficiency of East Asia is even lower, at only US$6.5 bn
of GDP/MTOE.
Low energy efficiency in developing world
0
2
4
6
8
10
12
14
16
18
20
US EUR JAP Asiaex-J
DevEcon
20022005
US$ bn
Note: Energy efficiency estimated as amount of GDP produced by 1
mn tonnesequivalent of energy. Sources: BP Statistical Yearbook,
IMF, Economics@ANZ.
Oil efficiency Primary energy efficiency
0
1
2
3
4
5
6
7
8
9
10
US EUR JAP Asiaex-J
DevEcon
20022005
US$ bn
Moreover, economies the world over are far less efficient in
their use of non-oil primary energy, such as coal and natural gas,
than in their use of oil. Again looking at the above chart, one
tonne of
1 Senauer, Benjamin and Goetz, Linda, “The Growing Middle Class
in Developing countries,” University of Arizona, February 2003
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 3
primary energy generates US$5.3 bn of GDP in the US and US$8.1
bn of GDP in the EU. Across all emerging economies, one tonne of
primary energy generates only US$2.2 bn of GDP, and in East Asia
only US$1.9 bn of GDP. China generates US$1.4 bn of GDP per tonne
of primary energy, reflecting its use of domestic coal for
electricity generation.
Other commodity inputs face the same story on the demand side,
with considerable infrastructure still to be built in the emerging
world. The below charts highlight the story in power and telecomms.
In the OECD economy of Korea, electricity consumption is 8,000
kilowatt hours per capita and there are 542 fixed telephone lines
installed per 1,000 people. In Asia’s other large economies -
China, India and Indonesia – those ratios are far lower. This trend
is repeated across all areas of hard infrastructure in the
industrialising world, implying decades of accelerated demand for
raw materials.
More infrastructure build to go
0
2,000
4,000
6,000
8,000
IND INR CH ML HK KR
Per capita kWH
Sources: World Bank Development Indicators, 2006.
Electricity consumption
0
300
600
900
1200
1500
INR IND CH ML HK KR
Fixed Mobile
# of lines/1,000 people
Telephone lines
Supply side is key driver of prices in future
Given the above, it is not surprising that commodity prices have
been driven sharply higher over the past few years as demand in
emerging economies has accelerated. Consensus that this trend will
continue has increased the popularity of commodities as traded
products in the financial markets. The charts below highlight how
prices for oil, gold, copper and iron ore are well above their
long-term averages.
Commodity prices at record highs
0
20
40
60
80
00 01 02 03 04 05 06
US$/bbl
Long term average
WTI oil
Source: Bloomberg, Economics@ANZ
Gold
0
3,000
6,000
9,000
00 01 02 03 04 05 06
US$/tonne
Long term average
Copper
0
20
40
60
00 01 02 03 04 05 06
US$/tonne
Long term average
Iron ore
0
200
400
600
800
00 01 02 03 04 05 06
US$/oz
Long term average
Assuming steady demand, the primary determinant for commodity
prices in the near- and medium-term will be the supply side
response. Among the various forms of primary energy and base
metals, the ability of a supply side response to meet demand varies
significantly. It is this demand-supply balance and likely price
response across specific commodities that is discussed through the
rest of this note.
Long-term oil prices will be high
The short- and medium-term price for crude oil is perhaps one of
the more obvious commodity prices to forecast because of the very
limited capacity for more supply to come on line. Although oil
prices fell in late 2006, we believe prices will rise through 2007
to average US$63/bbl. Further, we believe the long-term price for
oil is above US$60/bbl. This is because growth in global demand is
outpacing additional new supply. As can be seen in the charts
below, oil consumption has been higher than oil production since
the mid-1980s, while the pace of growth of proven reserves has
slowed markedly over that same time frame.
Oil consumption outpacing supply
20
30
40
50
60
70
80
90
1965 1975 1985 1995 2005
Production
Consumption
Mn barrels per day
Production and consumption Proven reserves
Source: BP 2006 World Energy Review
200
400
600
800
1000
1200
1400
1980 1990 2000
'000 million barrels
The reason why demand for oil has accelerated so suddenly in
recent years is almost entirely due to high growth in demand out of
Asia – specifically, China, which has contributed more than 40% of
the increase in global demand for oil in five out of the past six
years.
Asia driving global oil demand
Source: BP 2006 World Energy Review
Contribution to global oil demand
-40
-20
0
20
40
60
80
00 01 02 03 04 05
N AmericaEuropeAsia Pacific
%
-40
-20
0
20
40
60
00 01 02 03 04 05
USAChinaJapanIndiaGermany
%
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Economics@ANZ ANZ International Economics Monthly – January
2007
Page 4
Unlike other raw materials discussed further below, there is
limited scope for the world’s oil producers to switch on the crude
tap. Proven reserves are not rising as quickly as demand, perhaps
reflecting years of declining exploration when oil prices were low.
Even if new reserves are found in the next several years, it will
take time for these reserves to come to market. Further, refining
capacity is also limited, particularly in the northern
hemisphere.
In its annual outlook, the International Energy Agency states
outright that current trends in energy consumption, “are neither
secure nor sustainable – economically, environmentally or
socially.” The IEA forecasts that fossil fuels – including oil and
coal – will remain the dominant source of global energy through
2030, and will account for 83% of the overall increase in energy
demand through this horizon. In its forecasts, global oil demand
rises from 86 mn bpd in 2005 to reach 99 mn bpd by 2015 and a
whopping 116 mn bpd by 2030. This is assuming a rather conservative
1% per annum growth in population, and average real GDP growth of
3.4% over the next 25 years, which is slightly below our estimate
of 3.6% global trend growth.
World Primary Energy Demand (Mtoe)
1980 2004 2010 2030
Oil 3107 3940 4366 5575
Coal 1785 2773 3354 4441
Gas 1237 2302 2686 3869
Nuclear 186 714 775 861
Hydro 148 242 280 408
Biomass 765 1176 1283 1645
Other 33 57 99 296 Source: International Energy Agency
Of course, there is always scope for oil consumption to decline
with the takeup of new, less oil-intensive technologies. Continued
elevated oil prices will support a shift toward alternative fuels,
including biofuels. However, the takeup of these technologies is
likely to be slow, particularly in high-growth developing economies
where the costs can be prohibitive. Even a shift in the mix of
primary energy use, as shown below, does not substantially alter
the demand profile for oil, which remains the dominant form of
primary energy through 2030.
Finally, the continued role of OPEC in guiding price
expectations in the crude oil market cannot be ignored. Prior to
the runup in oil prices over the past few years, OPEC had indicated
a desire to maintain crude oil prices at between US$25 and US$30
per barrel. With oil-exporting countries having now experienced the
joys of windfall oil revenues, however, OPEC members appear to have
indicated their preference for oil at above US$50/bbl. Rapid
declines in spot oil prices in late 2006 saw OPEC announce quota
cuts for its members, a confirmation that US$50/bbl does seem to be
OPEC’s new target. Thus, even a marginal decline in oil demand may
not yield a similar decline in price.
Base metals seeking new equilibrium
The current global economic boom has underpinned one of the
biggest bull markets in base metals in history, with prices rising
for five consecutive years by a cumulative 280%. In 2006, market
euphoria reached new heights as global supply continued to lag
strong demand. Moreover, high global liquidity saw an increase in
financial investor activity in these markets, with investor
portfolios directing an increasing allocation of funds into
(high-yielding) commodities markets. The combination of these
factors drove price gains that were nothing short of spectacular.
From peak to trough nickel and zinc prices rose by 157% and 140% in
2006, lead increased by 72% and copper by 75%. Even the
‘underperformers’, aluminium, alumina and iron ore, still posted
strong gains of 27%, 18% and 17% respectively.
In 2007 and 2008 the bull run in base metal prices is expected
to be replaced by a search for ‘equilibrium’ as global supply
starts to catch up to global demand. While increased supply should
curb momentum for another sharp and sustained upswing in prices,
likewise continued strong and steady global demand should cap price
falls. As stated above, we are of the view that long-term real
growth rates in developing economies will remain high and that,
this, combined with growing real incomes in this expanding part of
the world does represent a medium-term structural shift up in
demand for hard commodities, base metals included. This in turn
indicates that the ‘equilibrium’ level, or at least the medium-term
average, in base metal prices has also shifted to a new higher
plain2.
Emerging economies will continue to drive strong metals
consumption
World metals consumption growth 2002-05
-2
0
2
4
6
8
10
Aluminium Copper Lead Nickel Steel Tin Zinc
Rest of world
Other major emergingmarketsChina
PPt contribution to annual change
Source: IMF World Economic Outlook September 2006Other Major
Emerging Markets are Brazil, India, Mexico and Russia
In the coming year two additional factors will also keep base
metal prices higher than the ‘traditional’ long-term average. The
first factor is the likelihood of ongoing delays in the supply
response. While high rates of investment in new mining capacity
will
2 That said, the new equilibrium price for base metals is
unlikely to be as high relative to the historical average compared
with the oil price. This is because overall reserves of base metals
are generally considered unlimited, unlike the world’s finite
reserves of hydrocarbons.
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Economics@ANZ ANZ International Economics Monthly – January
2007
Page 5
eventually provide a significant boost to base metals supply, it
is just not a matter of ‘turning on the tap’. Shortages persist
across most of the global mining industry, particularly in
supporting infrastructure, including transportation (on and
off-mine), mining-related equipment, skilled labour and, in some
cases, power and electricity. These shortages have already caused
significant delays in the process of turning initial investment
into physical market supply and will continue to do so over the
short-term. Related to these shortages, and the other factor that
will likely keep base metal prices elevated relative to historical
averages, is that production costs across the mining industry are
also now sharply higher.
Costs of production are higher
Cash Costs of Production for Base Metals
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Aluminium Copper Nickel
2002
2005
2006
Ratio of price to marginal cost
Source: Brook Hunt Metal Consultants; Deutsche Bank (2006) and
IMF staff calculations in IMF World Economic Outlook September
2006
Global financial conditions will also continue to impact base
metal prices in the period ahead. The current global liquidity
boom, which has been supported by high growth, low consumer price
inflation and low interest rates, shows no signs of abating. M0
growth remains around 10% YOY (in US$ terms) in the G7 (excluding
Japan) and M2 growth is still above 10% YOY in ex-Japan Asia. With
short-term global interest rates, which are already below
historical average levels, now nearing peak levels for this
business cycle, this liquidity will, as we have already seen, look
for yield in alternative investments. In this context, exchange
tradeable commodities, such as base metals, will continue to
attract attention as a short-term investment destination.
Despite some claims to the contrary, research suggests that
financial investors, while increasing their presence in the market,
are not powerful enough to drive the direction of base metal
prices. Indeed, IMF research concludes that increases in spot and
futures prices cause increased speculation in the copper market,
not, as has been speculated, vice versa3. That said, an increasing
presence of speculative short-term investment in commodity markets
will likely exaggerate movements in prices, up and down, in base
metals beyond which would
3 IMF, ‘The Boom in Non-fuel Commodity Prices: Can it Last?”,
World Economic Outlook September 2006.
otherwise be achieved by fundamental supply and demand market
balance. We are therefore likely to see a continued rise in
volatility around exchange traded base metal prices in the period
ahead.
As well as continued historically high prices and increasing
volatility, the other enduring theme for base metals in the coming
period is set to be the diverse performance of individual commodity
prices. In terms of price direction (and broad magnitude), it all
comes back to the short-term supply outlook. For base metals, the
extent to which increased production will be enough to match
continued strong and steady global demand, and thus the price
response, will vary across individual commodities in the coming
year. This has already been borne out by recent price movements.
While an increase in LME stock levels has seen copper prices drop
sharply in recent weeks, continued falls in LME stocks have in
contrast lifted nickel prices to all-time highs.
Low inventory levels a source of upward pressure on prices
Copper
Source: Datastream
Aluminium
Nickel Zinc
0100020003000400050006000700080009000
94 96 99 01 04 060
200000
400000
600000
800000
1000000
1200000US$/tn Mt
StocksPrice
0
500
1000
1500
2000
2500
3000
94 96 99 01 04 060
500000
1000000
1500000
2000000
2500000
3000000US$/tn Mt
Stocks
Price
05000
10000150002000025000300003500040000
94 96 99 01 04
06020000400006000080000100000120000140000160000US$/tn Mt
Stocks
Price
0
1000
2000
3000
4000
5000
94 96 99 01 04 060
200000
400000
600000
800000
1000000
1200000
1400000US$/tn Mt
Stocks
Price
In 2007, we expect growth in global supply to outstrip continued
strong demand in copper and aluminium, forcing stock levels up and
prices down further from current levels. In contrast, supply
increases are predicted to be more constrained in lead, nickel and
zinc. Inventory levels for these commodities are likely to remain
low with the zinc market set to remain in deficit. Markets for
these commodities will be more sensitive to unexpected supply
disruptions and this will support prices near or even above current
levels. Continued robust global industrial production meanwhile
will underpin a strong rise in iron ore prices or around 9.5% in
2007 with most price contracts for the year ahead now settled. In
2008, we expect world demand for base metals will remain robust but
that, as current high levels of investment come to fruition, global
production growth will be stronger. As such we expect prices of all
base metals to decline further by the end of this year, albeit to
levels still higher than historical averages.
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Economics@ANZ ANZ International Economics Monthly – January
2007
Page 6
Coal prices expected to fall slightly
Global demand for coal is expected to remain solid in the coming
years with the International Energy Agency forecasting a 32%
increase in coal use by 2015. In the thermal coal market, voracious
appetite is expected to remain in place from developing Asia,
particularly from India and China where coal is the major fuel for
electricity generation. This is expected to offset a potential
reduction in demand from some economies such as Japan, the world’s
largest coal importer, as it moves towards increasing the use of
other forms of energy sources, although coal-fired electricity
generation is expected to remain significant. The other big
importers, namely Korea and Taiwan, are expected to demand more
coal over 2007 with Korea, in particular, having invested heavily
in expanding its coal-fired electricity generation capacity.
Indonesia is also looking to expand its use of coal in generating
electricity with the government aiming to reduce its reliance on
oil.
On the supply side, China, the world’s largest producer of coal
and a net exporter of thermal coal is expected to continue to lift
output and increasingly divert its supply into the local market
through a reduction in export incentives. Consequently, exports are
likely to decline and import growth is expected to slow though the
latter is likely to stay in double-digits given the strong
demand.
Australia’s productive capacity has expanded significantly with
heavy investment in coal mines and infrastructure over the past few
years, thanks to the lift in prices. Output of thermal coal is
estimated to reach 185 mn tonnes in 2007, up 6% from 2006, and
along with Indonesia, Australia will continue to dominate the
thermal coal market.
Indonesia, the world’s largest exporter of thermal coal, has
seen exports accelerate from around 40 mn tonnes in 1997 to over
150 mn tonnes in 2006. However, it may fail to fully capitalise on
the expanding domestic and external markets unless investment
accelerates. The government’s plans to increase its use of coal in
electricity generation could have consequences for exports over the
medium term unless investment takes off. It has tabled for
parliamentary approval laws aimed at giving foreign investors more
control over mining investments but concerns over the legislative
and implementation processes will mean that investors are likely to
remain cautious.
In the metallurgical coal market, global consumption of
metallurgical coal is expected to rise by 6% in 2007 following an
estimated 11% increase in 2006 according to the ABARE. Production,
on the other hand, while also growing at a slower rate of 7.2%
compared with 13% in 2006, is forecast to exceed total consumption
in 2007. Australia is expected to extend its lead as the world’s
largest exporter of coking coal with production forecast to rise by
a
further 7.7% in 2007 to over 140 mn tonnes following a 2.2%
increase in 2006.
Japan, and Korea, the two largest single-market importers are
only expected to increase their demand for metallurgical coal
slightly. However, rapid industrialisation in developing Asia,
particularly India and China, will continue to underpin increases
in demand for steel and, in turn, for coking coal. Both these
economies alone are expected to account for around 40% of the
increase in the volume of metallurgical coal imports in 2007.
Mild declines in 2007 underpinned by solid demand
Sources: ABARE, ANZ
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
Japan EU 25 Korea India Brazil Taiwan China
Mt
Thermal coal
Metallurgical coal
Expected change in import demandin 2007 compared with 2006
-2-1012345678
EU 25 Japan Korea Taiwan India China otherEurope
Expected change in import demandin 2007 compared with 2006
Mt
20
40
60
80
100
120
140
95 97 99 01 03 05 07f
US$/t
Australia Japan benchmark coal price
Hard coking coal
Thermal coal
In terms of pricing, Japan and increasingly China remain the
main players in negotiations with suppliers. With countries such as
Australia, China, Colombia and Indonesia lifting production,
benchmark prices for thermal coal are likely to soften marginally
but from a high base. Australia-Japan benchmark prices for 2007
have yet to be agreed. ANZ expects a small decline of around 4% for
the fiscal year beginning April 2007. In the metallurgical coal
market, negotiations at the end of 2006 saw Japan’s four biggest
steelmakers agree with Australia on a 15% reduction in the price of
hard coking coal to US$98/tonne for the fiscal year beginning April
2007.
Gold prices determined by market As with other hard commodities,
gold prices increased rapidly in 2006, peaking at US$714/oz in May
2006, or a 90% gain over the previous 12 months. Gold now trades at
around US$645/oz. In this section, we highlight some of the main
drivers of the gold price in recent years and how these factors are
expected to keep prices elevated in 2007.
Unlike most commodities, the recent run up in the price of gold
is arguably less due to supply and demand factors and more due to
the trading of gold as an asset, particularly one with intrinsic
value. This is evidenced by a relatively good balance between
supply of and demand for gold. Despite a deficit between mine
output and fabrication demand existing for some years, the
short-fall in “new” supply has been more than made up from other
sources, including scrap as well as sales from official
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Economics@ANZ ANZ International Economics Monthly – January
2007
Page 7
sources (most commonly central banks). In the year to September
2006, central banks sold around 400 tons of gold (around 10% of
supply), under the 500 tons limit set down by the Central Bank Gold
Agreement. Scrap sales were estimated at just over 1000 tons,
around one quarter of total supply. According to GFMS figures, the
supply of gold in the first three quarters of 2006 increased by 1%
over the same period of 2005.
While the overall supply of gold rose slightly, total demand for
gold fell around 15% YOY in the first three quarters of 2006. Of
total demand, fabrication demand accounts for about 82%. Demand for
jewellery fell significantly, with the volatility in prices at
levels above US$600/oz a deterrent to buyers in the Middle East and
Asia.
The lack of demand for gold for fabrication suggests that it is
gold’s role as a traditional hedge against uncertainty that is
leading to its increasing value in world markets. Gold has become
easier to trade as an asset, with an increased number of “exchange
traded funds” in Europe and Asia. These funds allow investors to
invest in gold without having to hold physical gold. The exchanges
themselves hold around 600 tons of gold.
Gold price & net non-commercial positions
0
100
200
300
400
500
600
700
85 87 89 91 93 95 97 99 01 03 05 07-100
-50
0
50
100
150
200
Average correlation 1985-90 = 44%
US$/oz net non-commercial contracts 000s, 12mma
Average correlation 1990-2000 = 77%
Average correlation 2000-06 = 92%
Gold price (LHS)
net no. of positions
net no. of positions 12mma
Source: Economics@ANZ, Bloomberg
The chart above highlights this trend by showing that the number
of non-commercial (non-deliverable) positions on gold has increased
in proportion with the price in recent years. Meanwhile, the
proportion of gold price to the net number of positions has
remained remarkably stable. Some cursory statistical analysis
indicates not only that the correlation between the number of
positions taken and gold prices has increased, but also that some
statistical causality exists between the two. Further, it is found
(over various lag lengths) that bidirectional causality exists
between the number of positions taken in gold in the market and the
gold price. This indicates that gold prices have risen due to
increased positions being taken, and vice-versa.
Gold is still the key inflation hedge The main fundamental
driver of increased market positioning in gold seems to be rising
oil prices and a weakening of the US dollar – that is, gold has
resumed its traditional role as a hedge against inflation. The
stabilisation of gold prices in late 2006 as shown in the above
chart coincided with both a reduction in the number of positions
taken on gold as well as a fall in oil price. Also there seems to
be some reestablishment of the inverse link between gold and the US
dollar with falls in gold prices from peak levels accompanied by
some US dollar strength.
The chart below shows that the relationship between oil and gold
prices at present is very similar to the relationship that was in
play during the 1970s oil shock. During the period 1970-1979,
changes in oil prices explained nearly 90% of the change in the
gold price. This relationship weakened significantly during the
1980s and 1990s, to the point where oil explained less than 20% of
gold price movements. However since 2000, the strong relationship
has returned with shifts in the oil price accounting for 81% of the
movement in gold prices.
Gold and Oil – Back to the Future?
Source: Economics@ANZ
Oil = 0.08Gold + 0.20R2 = 0.87
0
5
10
15
20
25
30
35
0 200 400 600
US$/oz
US$/bbl
1970-1979
Oil = 0.035Gold + 12.0R2 = 0.13
05
1015202530354045
0 200 400 600 800
US$/bbl
US$/oz
1980-1989
Oil = 0.03Gold + 9.4R2 = 0.089
05
10152025303540
0 200 400 600
US$/bbl
US$/oz
1990-1999
Oil = 0.12Gold - 7.2R2 = 0.81
01020304050607080
0 200 400 600 800
US$/bbl
US$/oz
2000-2007
A final factor that seems to have contributed to the run-up in
gold prices is the weakness of the US dollar in recent years. The
chart below shows the behaviour of the price of gold as against the
US CPI index and the US dollar trade-weighted index. From 1990
through 2004, the US dollar trade weighted index remained above the
level of the gold price, particularly during the late 1990s when
the global financial markets crisis brought about a
“flight-to-quality” to the US dollar. Since 2004, however, the US
dollar trade weighted index has softened, even as global inflation
concerns were rising on the back of higher oil prices. This is when
the gold price really began to accelerate, suggesting that gold has
come into favour as an alternative store of value to the US dollar
as the global reserve currency.
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 8
Nominal price of gold, US trade weight index and the implied
long-run price of gold 1987-2006
200
250
300
350
400
450
500
550
600
650
700
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
06
0
20
40
60
80
100
120
140
Gold price (LHS)
US$/oz
Inflation hedge price 1986- 2006 (LHS)
US Trade weighted index - inverted (RHS)
index
Inflation hedge price 2001- 2006
(LHS)
Source: Economics@ANZ, Bloomberg
What does all this mean for prices? Our forecast assumes that
demand for real (fabrication) gold will remain strong as per capita
incomes increase in Asia and the Middle East. Mining production is
expected to increase marginally in 2007, with higher production in
Australia, the United States and Latin America offsetting the
continued falls in production in South Africa. Central bank gold
sales are expected to decline in 2007, which may put some pressure
on supply. However, there is a great deal of uncertainty as to the
intention of some large central banks. Gold from Germany may add
significantly to supply, whereas there is speculation that the
People’s Bank of China will add to its gold reserves. Recently, it
has been suggested that the IMF could sell 400 tons of gold.
However, we expect the price of gold will still mainly be
affected by its perceived value as an inflation hedge. We expect
oil prices to remain high, and also expect the US dollar to remain
broadly neutral in 2007 and 2008, as this currency remains hostage
to the conflicting forces of a stronger US economy and continued
Asian (particularly Japanese yen) currency appreciation. These
factors should continue to support gold’s attractiveness as an
alternative store of value. As such we expect gold prices will
remain elevated, averaging above US$600/oz throughout 2007 and
2008.
Amy Auster Head of International Economics Email:
[email protected] Ph: +61 3 9273 5417
Katie Dean Senior Economist - International Email:
[email protected] Ph: +61 3 9273 5466
Jasmine Robinson Senior Economist - International Email:
[email protected] Ph: +61 3 9273 6289
Dr Alex Joiner Economist - International Email: [email protected]
Ph: +61 3 9273 6123
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 9
Financial Markets Update
Exchange rates, US$ per local currency unit, indexed
80
85
90
95
100
105
110
115
Jun-06 Aug-06 Oct-06 Dec-06
03 Jan 2005 = 100
Korea
Australia
Japan
China
New Zealand
India
97.5
102.5
107.5
112.5
117.5
Jun-06 Aug-06 Oct-06 Dec-06
03 Jan 2005 = 100
Indonesia
Singapore
Thailand
Philippines
Malaysia
Vietnam
Exchange rates
• With the BOJ bucking market expectations and remaining on hold
in recent months, support dropped for the yen, which traded above
USD/JPY 121 in January – or its weakest level in almost four
years.
• After hitting a 2-year high in early January, diminishing
expectations for a local interest rate rise has since weighed on
the AUD. Despite expectations for higher local rates, recent
carry-trade liquidation has seen the NZD also lose ground since the
start of the year.
• The CNY reached parity with the HKD in early January and has
since continued to appreciate against the USD underpinned by strong
trade surpluses and a strengthening in reserves.
• Following the introduction of capital controls in Thailand,
the Thai baht has been volatile with moves exaggerated by the thin
trading conditions.
90
95
100
105
110
115
120
125
130
135
140
Jun-05 Dec-05 Jun-06 Dec-06
Jan 2003=100
NZ
Australia
Korea
Japan
China
Taiwan
Real exchange rates, US$ per local currency unit, indexed
95
105
115
125
Jun-05 Dec-05 Jun-06 Dec-06
Jan 2003=100
Indonesia
Thailand
Philippines
Malaysia
Singapore
Real Exchange rates
• While price growth in South East Asia has eased considerably
in recent months, inflation still remains well above that in the
US. This, together with continued nominal currency appreciation,
has pushed up real exchange rates across most of South East
Asia.
• While this is eroding price competitiveness, continued strong
global growth means the impact of real exchange rate appreciation
on South East Asia’s exports, to date, has been minimal.
• Local currency appreciation as well as higher inflation
compared with the United States has also pushed up Australia and
New Zealand’s real exchange rate.
• In contrast, yen weakness and persistently low inflation is
capping the Japanese real exchange rate.
Policy rates
0
1
2
3
4
5
6
7
8
Jan-05
Apr-05
Aug-05
Nov-05
Feb-06
Jun-06
Sep-06
Jan-07
Korea
Taiwan
%
USAustralia
New Zealand
Japan
China
0
2
4
6
8
10
12
14
Jan-05
Apr-05
Aug-05
Nov-05
Feb-06
Jun-06
Sep-06
Jan-07
Thailand
Malaysia
Philippines
%
Singapore
Indonesia
Policy rates
• A run of weak data saw the Bank of Japan (BOJ) keep interest
rates on hold in January. We now expect the BOJ to raise its policy
interest rate, for only the second time since the move toward
normalisation of interest rates began, in March.
• Indonesia is well into its accommodative push with several
rate cuts since its peak of 12.75% in April 2006. Thailand has
followed with a cut in its policy rate, the 1-day repurchase rate,
to 4.75% from 4.9375% in January against the backdrop of a
moderation in economic activity and inflation. Malaysia and the
Philippines are also forecast to cut rates by the second half of
2007 as inflation pressures ease.
• Lower-than-expected CPI and a moderation in credit growth
should keep interest rates on hold in Australia in the near term.
Expectations for a further easing in price pressures suggest the
next move in interest rates is more likely to be a cut, possibly
before the end of this year.
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 10
Government Bond Index
1
2
3
4
5
6
7
8
9
Jun-05 Sep-05 Jan-06 Apr-06 Aug-06 Dec-06
US
Yield (on traded index)
Australia New Zealand
China
Japan
India
Korea
1
3
5
7
9
11
13
15
17
Jun-05 Sep-05 Jan-06 Apr-06 Aug-06 Dec-06
Indonesia
Thailand
Yield (on traded index)
Philippines
Malaysia
Singapore
Source: JPMorgan
Philippines’ index is the 10-year bond yield as there is no GBI
index.
Bond markets
• US yields have edged up as a recent run of stronger than
expected economic data highlights the Fed’s concerns about
inflation risks.
• Inflation pressures in India have ticked up with the Wholesale
price index reaching highs last seen in 2004. This has, in turn,
kept yields up.
• Bond yields in Indonesia, on the other hand, continue their
downward move underpinned by reduced inflation pressures as
illustrated by a lower-than-expected January CPI. An improvement in
the Fitch ratings outlook from stable to positive has also
supported a lower yield.
• Continued strong liquidity growth, including from
international investor flows, and easing inflation is also keeping
bond yields low across most other South East Asian nations.
50
100
150
200
250
300
350
400
Jun-06 Sep-06 Jan-07
Gold US$/Troy OunceJan 07 - US$652.8
Copper US$/MT Jan 07 - US$5,704
Oil (Tapis) US$/bbl Jan 07 - US$59.9
Jan 2004=100
Commodity Prices
0
50
100
150
200
250
300
350
Sep-05 Jan-06 May-06 Aug-06 Dec-06
Sugar UScents/lb Jan 07 - 10.71 cents
Jan 2004=100
Palm Oil US$/MT Jan-07 - US$597.5
Coffee (Robusta) cents/lbJan 07 - 81.5 cents
Source: Datastream
Commodities
• Oil prices dropped to be near US$50/bbl at the start of the
year as weather remained warmer than expected in the Northern
Hemisphere. More recently however winter has begun, the
temperatures have dropped and oil prices have jumped up to nearly
US$60/bbl in the last week.
• Most base metal prices have dropped sharply in the last month.
This move has partly been due to increases in supply as well as an
unwinding of speculative investor positions. In contrast, gold
prices have continued to rise.
• Palm oil prices are continuing to rise following India’s cut
in import duties on vegetable oils. India is the world’s third
largest vegetable oil importer.
Share price indices
100
120
140
160
180
200
Jun-06 Aug-06 Oct-06 Dec-06
1 Jan 2004 = 100
Japan
Korea
Taiwan
China
Hong Kong
75
100
125
150
175
200
225
250
275
Jun-06 Aug-06 Oct-06 Dec-06
1 Jan 2004 = 100
Singapore
Malaysia
Indonesia
Philippines
Thailand
Source: Datastream
Equity markets
• Investor interest in emerging markets, such as Asia, remains
strong as abundant global liquidity continues its search for
yield.
• The Philippines has been the stand out performer amongst South
East Asian equity markets, underpinned by strong local economic
growth and improving investor sentiment in light of ongoing local
fiscal and economic reform.
• Thailand has been the exception in the continued rally in
equity markets across Southeast Asia. The junta’s recent actions
over capital controls and foreign investment has only served to add
to investor confusion and clouded the business environment.
• Northeast Asian markets have seen some recent declines,
although these falls have been marginal compared with the strong
run through 2006.
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 11
Foreign Exchange and Policy Rate Forecasts Jan 07 Mar 07 Jun 07
Sep 07 Dec 07 Mar 08 Jun 08
China
USD/CNY, eop 7.77 7.71 7.62 7.53 7.45 7.43 7.40
AUD/CNY, eop 6.00 5.94 5.79 5.65 5.44 5.35 5.25
One year base lending rate 6.12 6.12 6.12 5.85 5.85 5.85
5.85
Hong Kong
USD/HKD, eop 7.81 7.80 7.79 7.78 7.74 7.74 7.75
AUD/HKD, eop 6.02 6.01 5.92 5.84 5.65 5.57 5.50
HKMA discount rate 6.75 6.75 6.50 6.00 5.75 5.75 5.75
India
USD/INR, eop 44.2 43.9 43.5 43.0 42.8 43.4 43.9
AUD/INR, eop 34.1 33.8 33.1 32.3 31.2 31.2 31.2
Reverse Repo rate 6.00 6.25 6.00 5.75 5.75 5.75 5.75
Indonesia
USD/IDR, eop 9,093 8,800 8,650 8,500 8,300 8,413 8,525
AUD/IDR, eop 7,014 6,776 6,574 6,375 6,059 6,057 6,053
BI rate 9.50 9.00 8.75 8.00 8.00 8.00 8.00
Korea
USD/KRW, eop 941 924 922 915 905 903 908
AUD/KRW, eop 726 711 701 686 661 650 645
Overnight call rate 4.50 4.50 4.50 4.50 4.50 4.25 4.25
Malaysia
USD/MYR, eop 3.50 3.48 3.45 3.43 3.40 3.43 3.45
AUD/MYR, eop 2.70 2.68 2.62 2.57 2.48 2.47 2.45
Overnight policy rate 3.50 3.50 3.25 3.25 3.25 3.00 3.00
Philippines
USD/PHP, eop 48.9 48.5 48.0 47.5 47.0 48.3 49.5
AUD/PHP, eop 37.7 37.3 36.5 35.6 34.3 34.7 35.1
Overnight Reverse Repo rate 7.50 7.25 7.25 7.00 7.00 7.00
7.00
Singapore
USD/SGD, eop 1.54 1.52 1.52 1.51 1.50 1.52 1.53
AUD/SGD, eop 1.19 1.17 1.16 1.13 1.10 1.09 1.09
3-month interbank rate 3.44 3.40 3.35 3.35 3.30 3.30 3.30
Taiwan
USD/TWD, eop 32.9 32.7 32.4 32.1 31.3 31.2 31.1
AUD/TWD, eop 25.4 25.2 24.6 24.0 22.8 22.5 22.1
Discount rate 2.75 2.87 2.87 2.87 2.87 2.87 2.87
Thailand
USD/THB, eop 34.6 32.5 34.0 35.5 36.0 36.5 37.0
AUD/THB, eop 26.7 25.0 25.8 26.6 26.3 26.3 26.3
1-day repo rate 4.75 4.50 4.25 4.25 4.00 4.00 4.00
Vietnam
USD/VND, eop 16,039 16,112 16,149 16,181 16,213 16,246
16,275
AUD/VND, eop 12,372 12,406 12,273 12,136 11,836 11,697
11,555
Japan
USD/JPY, eop 121.5 120.0 117.0 113.0 110.0 108.0 106.0
AUD/JPY, eop 93.7 92.4 88.9 84.8 80.3 77.8 75.3
Overnight call rate 0.30 0.50 0.75 1.00 1.00 1.00 1.00
Australia
AUD/USD, eop 0.77 0.77 0.76 0.75 0.73 0.72 0.71
Cash rate 6.25 6.25 6.25 6.25 6.00 5.75 5.75
New Zealand
NZD/USD, eop 0.68 0.70 0.68 0.64 0.62 0.60 0.58
AUD/NZD, eop 1.13 1.10 1.12 1.17 1.18 1.20 1.22
Overnight call rate 7.25 7.25 7.25 7.25 7.25 7.25 7.25
United States Fed Funds Rate, eop 5.25 5.25 5.25 5.25 4.75 4.75
4.75
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 12
Macro Economic Forecasts Real GDP Growth (%)
2005 2006e 2007f 2008f
Australia 2.8 2.4 2.6 3.7
Cambodia 13.4 8.1 7.6 7.7
China 9.9 10.7 9.6 8.8
Hong Kong 7.3 6.7 6.0 6.5
India+ 9.0 9.3 8.7 8.5
Indonesia 5.6 5.5 6.3 5.7
Japan 2.6 2.4 2.0 1.8
Korea 4.0 5.1 4.4 4.2
Malaysia 5.2 6.0 5.5 4.8
New Zealand 2.1 1.5 1.5 2.3
Philippines 5.1 5.4 6.0 5.5
Singapore 6.3 7.7 4.7 4.9
Taiwan 4.0 4.9 4.4 4.8
Thailand 4.4 4.9 5.0 6.1
United States 3.2 3.4 2.5 3.0
Vietnam 8.4 8.2 8.1 8.1
Nominal GDP (US$ bn)
2005 2006e 2007f 2008f
Australia 709.9 758.2 803.7 792.5
Cambodia 6.3 7.1 8.0 8.9
China 2233.7 2529.6 2888.9 3234.3
Hong Kong 177.7 188.7 203.2 221.2
India+ 753 872 1005 1150
Indonesia 281.2 336 375 420
Japan 4758.2 4882.2 5024.6 5181.5
Korea 787.2 845.6 913.8 985.5
Malaysia 130.8 144 156 168
New Zealand 108.5 103.9 106.0 94.3
Philippines 98.4 116.9 128.6 142.0
Singapore 116.6 127 134 142
Taiwan 346.2 355.5 376.3 402.1
Thailand 176.5 193 208 227
United States 12,456 13,254 13,821 14,516
Vietnam 53.1 61.3 70.1 80.2
Inflation (%)
2005 2006e 2007f 2008f
Australia 2.7 3.5 2.4 2.6
Cambodia 5.8 4.7 5.0 5.1
China 1.8 1.5 3.8 2.9
Hong Kong 0.9 2.0 1.7 2.3
India+ 4.2 6.0 6.0 5.5
Indonesia 10.5 13.3 5.2 5.5
Japan -0.2 0.0 0.6 1.0
Korea 2.87 2.7 3.3 3.5
Malaysia 2.9 3.6 3.0 2.5
New Zealand 3.0 3.4 1.9 2.6
Philippines 7.8 6.3 4.0 5.0
Singapore 0.5 1.0 0.9 0.7
Taiwan 2.3 0.6 1.5 2.0
Thailand 4.5 4.7 3.5 3.0
United States 3.4 3.2 1.5 2.0
Vietnam 8.2 7.5 6.9 6.7
Fiscal Balance (% of GDP)*
2005 2006e 2007f 2008f
Australia 1.2 1.7 1.5 1.2
Cambodia -5.6 -5.8 -6.0 -6.1
China -1.1 -2.0 -1.9 -2.1
Hong Kong -0.4 -0.2 -0.5 -0.5
India+ -4.2 -3.8 -3.6 -3.5
Indonesia -0.5 -1.0 -1.1 -1.0
Japan -6.2 -6.0 -5.8 -5.5
Korea -0.3 -0.8 -0.2 0.1
Malaysia -3.8 -3.5 -3.4 -3.3
New Zealand 4.1 7.3 3.8 3.4
Philippines -12.1 -4.9 -6.0 -4.0
Singapore 0.2 -1.3 0.1 0.1
Taiwan -2.5 -2.0 -2.6 -2.0
Thailand 0.1 -0.8 -2.0 -1.0
United States -3.0 -2.0 -1.8 -1.6
Vietnam -2.1 -1.8 -1.9 -1.8
Current Account (% of GDP)
2005 2006e 2007f 2008f
Australia -5.8 -5.1 -5.2 -5.9
Cambodia -10.9 -10.6 -10.3 -10.2
China 6.7 4.4 4.0 3.5
Hong Kong 11.4 9.0 8.0 8.5
India+ -0.9 -1.7 -2.3 -2.8
Indonesia 0.3 0.8 0.4 0.5
Japan 3.9 4.0 3.0 1.0
Korea 2.4 1.7 1.2 1.1
Malaysia 15.3 14.7 12.0 9.1
New Zealand -9.0 -8.9 -7.8 -7.7
Philippines 2.4 5.0 4.0 5.0
Singapore 28.4 29.9 23.5 18.3
Taiwan 4.7 5.8 5.5 6.0
Thailand -2.1 1.9 0.2 -1.6
United States -6.4 -6.4 -5.8 -5.6
Vietnam 0.9 1.5 1.7 1.9
Foreign Exchange Reserves (US$ bn)
2005 2006e 2007f 2008f
Australia 43.3 55.1 n/a n/a
Cambodia 0.94 1.09 1.2 1.3
China 818 1066 1400 1750
Hong Kong 147 154 160 162
India 131.0 170.2 195 215
Indonesia 33 41 45 50
Japan 828 865 880 900
Korea 215 225 230 234
Malaysia 69.3 81.7 89 95
New Zealand 9.1 13.1 n/a n/a
Philippines 18.5 22.3 23.0 24.0
Singapore 115.3 136.3 150 160
Taiwan 301 313 320 325
Thailand 50.5 65.1 70 75
United States 37.84 41.5 n/a n/a
Vietnam 7.0 8.9 12.9 16.5
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 13
Long Term Foreign Currency Government Bond Ratings Investment
Grade Sub-Investment Grade
Moody’s S&P Moody’s S&P
Aaa AAA Ba1 BB+ Australia Australia Costa Rica Egypt Canada
Canada Egypt El Salvador France France Morocco Morocco
Germany Germany Panama Peru Japan Singapore
New Zealand United Kingdom Ba2 BB Singapore United States Brazil
Colombia
United Kingdom Colombia Costa Rica United States Fiji Jordan
Aa1 AA+ Guatemala Panama Belgium Belgium Jordan Brazil
New Zealand Guatemala Vietnam
Aa2 AA Ba3 BB- Italy Hong Kong Peru Cook Islands Aa3 AA- Vietnam
Indonesia
Cayman Islands Japan Turkey Philippines Hong Kong Taiwan
Serbia
Kuwait Turkey Qatar Venezuela
Taiwan Ukraine UAE A1 A+
Czech Republic Italy Macau Kuwait B1 B+
Qatar Papua New Guinea Argentina Saudi Arabia Philippines Ghana
Suriname Pakistan
A2 A Ukraine Fiji China Chile Indonesia Uruguay Chile China
Pakistan
Cyprus Cyprus Uruguay Hungary Korea B2 B
Israel Oman Honduras Papua New Guinea Kuwait Venezuela
Poland
Saudi Arabia A3 A- B3 B-
Korea Czech Republic Argentina Bolivia Malaysia Hungary Bolivia
Lebanon
Oman Israel Lebanon Paraguay Malaysia
Baa1 BBB+ Mexico Bulgaria Caa1 and below CCC and below
South Africa Hungary Cuba Ecuador Thailand Poland Ecuador
Russia Nicaragua South Africa Paraguay Thailand
Baa2 BBB Mauritius Mexico Tunisia Tunisia Russia Russia
Baa3 BBB-
Bulgaria Romania India India
El Salvador Romania
At the end of May, Moody’s changed its ratings methodology and
established new country ceilings that are 1 or 2 notches above the
sovereign credit rating for many countries rated A and below.
Bloomberg’s CSDR page now shows the new country ceilings rather
than the old sovereign bond ratings. We are evaluating the change
and how we will interpret the new rating.
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 14
Country Update: Australia Inflationary pressures have peaked
0
1
2
3
4
5
Dec-00 Dec-02 Dec-04 Dec-06
Trimmed mean
Weighted median
Headline
% change from year earlier
Consumer price inflation(excl. GST)
Source: Westpac and Melbourne Institute
Demand for new finance is easing
17000
18000
19000
20000
21000
22000
Nov-05 Feb-06 May-06 Aug-06 Nov-06
$mHousing finance commitments
Seasonallyadjusted
Trend
Source: Australian Bureau of Statistics
• Inflation fell to -0.1% in the December quarter 2006 (3.3%
annual), driven by a reversal of earlier rises in petrol and banana
prices. However, the real surprise was the moderation in core
inflation, which was just 0.5% in the quarter (3.0% annual), down
from 0.9% in the June quarter and 0.8% in the September
quarter.
• Elsewhere in the economy, there is mixed evidence on the
extent to which monetary tightening in 2006 is impacting consumer
behaviour. Retail sales volumes rose by 1.3% in the December
quarter, with the annual rate running at a healthy 4.3%. Other
higher frequency indicators suggest that robust trading conditions
continued over the crucial Christmas holiday period.
• In contrast, demand for new finance clearly trended down in
the second half of 2006. The value of housing finance approvals
fell in each of the five months to November to be down over 10%
from the recent peak in June 2006. Personal finance approvals also
fell by 1.2% in November, continuing the downturn from mid 2006,
while commercial finance approvals remain broadly flat in trend
terms.
• The labour market remains tight and a source of upside risk
for wages and inflation. Employment grew by a further 44,600 in
December taking the total number of jobs created over 2006 to over
300,000. The unemployment rate held steady at a 30-year low of
4.6%.
• On balance, evidence of moderating inflation and demand for
new finance should be sufficient to keep the RBA on the interest
rate sidelines in the near term. Beyond that, our forecasts suggest
that recent sub-trend growth will further ease price pressures in
the economy. In this event it is likely the monetary policy debate
will begin to shift toward the possibility of rate cuts in the
latter part of this year and early in 2008. We have pencilled in a
25bp rate cut in November 2007 and another in February 2008.
Mark Rodrigues
Economic data – Australia Monthly data May 06 Jun 06 Jul 06 Aug
06 Sep 06 Oct 06 Nov 06 Dec 06 Building Approvals, 000’s 12.8 13.1
14.2 12.6 13.1 12.2 12.6 12.4 Retail Sales, % YOY 5.5 5.7 6.1 5.4
6.1 6.8 6.6 6.3 Exports, % YOY 10.6 23.2 14.2 18.5 15.9 16.6 14.2
4.5 Imports, % YOY 16.4 14.9 10.6 11.6 10.9 17.2 5.3 8.1 Trade
Balance, AUD bn -2.02 -0.44 -0.43 -0.39 -0.76 -1.49 -0.90 -1.34
Foreign Exchange Reserves, US$ bn 51.3 47.4 52.4 51.1 46.2 50.1
51.3 55.1 Quarterly data Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06
Sep 06 Dec 06 Real GDP, % YOY 2.0 3.0 2.9 3.2 3.2 2.2 2.2 n/a -
Private consumption 3.6 3.4 2.7 2.4 2.8 2.6 2.8 n/a - Government
consumption 3.8 3.8 2.8 3.5 2.6 4.6 5.3 n/a - Gross fixed capital
expenditure 3.4 8.1 9.3 9.9 10.4 6.2 3.1 n/a Consumer Price Index,
% YOY (nsa) 2.4 2.5 3.0 2.8 3.0 4.0 3.9 3.3 Current Account, AUD bn
-15.0 -11.8 -13.0 -14.3 -13.3 -13.3 -12.1 n/a Capital Account, AUD
bn (nsa) 14.2 10.6 15.1 14.3 13.1 11.3 14.3 n/a
Sources: Australian Bureau of Statistics, RBA Note: data
seasonally adjusted unless otherwise statedNote: data seasonally
adjusted unless otherwise stated
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 15
Country Update: Cambodia
GDP Growth to moderate in 2006
8.1
5.45.7
5.0
12.6
8.4
7.76.2
8.6
10.0
13.4
-2
0
2
4
6
8
10
12
14
16
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
%
Agriculture, Fisheries & Forestry Industry Services Taxes on
Products less Subsidies
Forecast
Source: Cambodia National Institute of Statistics,
Economics@ANZ
Inflation falls due to lower food prices
-2
0
2
4
6
8
10
12
14
16
Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06
Dec-06
All Items
Transport & communications
Food, beverages & tobacco
YOY %
Inflation
Source: Cambodia National Institute of Statistics
• The performance of the Cambodian economy has surprised many in
recent years. GDP growth came in at 13.4% in 2005 and averaged a
very strong 9.5% for the period 1999-2005. In 2006, it is expected
that some “normalcy” will return to GDP growth rates which are
forecast at 7½-8½% for the year. This moderation of growth is based
on several factors. The agricultural sector is unlikely to expand
at the same rate in 2006 as it did in 2005 in which favourable
weather conditions drove an exceptionally strong expansion. This
slowing in growth is despite improvements in efficiency and
irrigation techniques in the sector.
• The tourism-based services sector will continue to expand on
the back of the significant rise of tourist arrivals. In 2006 and
2005, tourist arrivals increased by 19.6% and 43% respectively,
reaching just over 1.7 million visitors last year. This increase in
tourist numbers has driven significant increases in receipts in
recent years, officially reaching US$840mn in 2005, up around 40%
from 2004. This figure would be expected to increase by around 20%
in 2006. Going forward, it may be that the expansion in tourist
arrivals will be increasingly difficult to sustain, with
infrastructure around Cambodia’s key tourist sights coming under
increased pressure as tourism expands.
• The third major sector, manufacturing, will remain reliant on
garment exports. This industry has benefited from productivity
enhancements and improvements in labour conditions to maintain its
overseas market share. The garments-based external trade sector
experienced dramatic growth in 2006. According to IMF Direction of
Trade statistics, exports and imports expanded by 139% and 234%
respectively in the 9 months to September, compared with the same
period last year. Tourism and garments look as if they will remain
the only significant drivers of growth in the economy in the
short-term with the development of other sectors relatively limited
at this stage. This lack of economic diversification remains the
key risk to the Cambodian economy.
• Inflation fell significantly in 2006 falling to 2.8% YOY in
December. Inflation averaged 4.7% in 2006 compared with 5.8% in
2005. Inflation fell in the latter half of 2006 on the back of much
lower food prices. It is expected that going forward the food-heavy
inflation index will continue to be heavily influenced by the
supply/demand of agricultural production and foodstuffs.
Alex Joiner Economic data – Cambodia Monthly data May Jun 06 Jul
06 Aug Sep 06 Oct 06 Nov Dec 06 Consumer Price Index, % YOY 4.9 3.8
5.1 5.1 4.4 4.1 3.2 2.8 -Transport & Communication 10.5 10.1
11.2 10.5 8.6 6.2 6.7 7.4 -Food & Beverages 7.2 4.3 6.3 6.1 5.0
4.9 2.9 2.0 Exports, % YOY 30.6 24.1 30.4 21.4 23.1 n/a n/a n/a
Imports, % YOY 21.1 27.2 18.4 18.6 43.7 n/a n/a n/a Trade Balance,
US$ mn -149.6 -117.2 -51.8 -13.1 -105.3 n/a n/a n/a Foreign
Exchange Reserves, US$ mn 1,007.3 1,026.8 1,034.8 1,022.0 1,007.5
1,050.1 1,082.1 n/a Tourist Arrivals, % YOY 19.3 20.7 9.7 12.6 23.2
18.8 n/a n/a GDP Composition 2005 Trading Partners Exports Imports
Real GDP, % YOY 13.4 2005 % share US 60.0 Thail’ 24.7 -
Agriculture, % YOY 5.1 Germany 11.5 China 16.3 - Industry, % YOY
3.3 UK 4.6 HK 13.4 - Services, % YOY 4.5 Vietnam 4.5 Vietn’m 12.8
Nominal GDP, US$ bn 5.5 Cananda 3.9 Sing’ 8.2
Sources: Datastream, National Institute of Statistics of
Cambodia
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 16
Country Update: China Fixed asset investment slowing,
exports
picking up
0
10
20
30
40
50
60
01 02 03 04 05 06
Industrial production
Fixed asset investment
% YOY
Exports
Key growth indicators
Sources: Datastream
External surpluses continue to grow
Trade surplus + FDI
Sources: Bloomberg, Datastream
Foreign exchange reserves
-10
-5
0
5
10
15
20
25
30
35
40
01 03 05 07
FDI
Tradebalance
US$ bnANZforecast
0
300
600
900
1200
01 02 03 04 05 06
US$ bn
• Real GDP was reported to have risen 10.4% YOY in the fourth
quarter, bringing full-year growth for 2006 to 10.7%. This was
slightly above both consensus and the government’s projections. At
the same time, CPI rose 2.8% YOY in December, the highest rate of
annual inflation since early 2005. These results prompted
speculation that the PBOC will further raise interest rates to cool
growth.
• However, we do not expect a further hike in interest rates as
growth is clearly moderating. Industrial production rose 14.9% YOY
in November, down from an average annual growth pace of 17.5% in H1
2006. More importantly for the PBOC, fixed asset investment growth
slowed to 26.5% YOY in October and November (annual cumulative) as
against growth of 29-30% in the first three quarters. While there
is no doubt that inflation is trending higher – across durables,
food and housing – we expect any further tightening by PBOC to be
in reserve requirements and not in interest rates, as higher
interest rates would put further upward pressure on the RMB.
• External surpluses are massive, as the trade surplus reached
US$177 bn in 2006, up from US$101 bn in 2005. FDI was steady at
US$59 bn last year versus US$58 bn in 2005. Foreign exchange
reserves have risen by US$247 bn over 2006, suggesting at least
US$11 bn of “other” inflows. The pace of reserve accumulation
accelerated in Q4 2006, averaging an increase US$26 bn per month as
against US$18 bn per month over the first three quarters. Although
export growth is expected to decelerate in 2007, we expect falling
import growth to leave a surplus of US$254 bn for 2007. This with
steady FDI suggests FX reserves could reach US$1.4 trillion by
end-2007.
• The Financial Work Meeting, which occurs every five years to
set financial sector policy decisions, was held in January. One
decision out of the meeting seems to be the creation of a new
agency to manage China’s FX reserves, similar to Singapore’s GIC or
Korea’s KIC. If so, there would be a stronger probability that
China will use its foreign exchange reserves to acquire strategic
energy assets.
Amy Auster
Economic data – China Monthly data May 06 Jun 06 Jul 06 Aug 06
Sep 06 Oct 06 Nov 06 Dec 06 Industrial Production, % YOY 17.9 19.5
16.7 15.7 16.1 14.7 14.9 n/a Retail Sales, % YOY 14.2 13.9 13.7
13.8 13.9 14.3 14.1 14.6 Consumer Price Index, % YOY 1.4 1.5 1.0
1.3 1.5 1.4 1.9 2.8 Exports, % YOY 25.1 23.3 22.5 32.7 30.6 29.5
32.8 24.86 Imports, % YOY 21.7 18.9 19.7 24.5 21.9 14.7 18.3 14.06
Trade Balance, US$ bn 13.0 14.4 14.57 18.81 15.31 23.81 22.93 20.71
Foreign Exchange Reserves, US$ 925.0 941.1 954.6 972.0 987.9 1009.6
1038.8 1066.3 Quarterly data Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun
06 Sep 06 Dec 06 Real GDP, % YOY 9.9 10.1 9.8 9.9 10.4 11.5 10.6
10.4 - Primary sector 4.6 5.0 5.0 5.2 4.5 5.1 4.9 5.0 - Secondary
sector 10.9 11.0 10.9 11.7 12.5 13.2 13.0 12.5 - Tertiary sector
9.7 9.8 10.0 10.5 8.9 9.4 9.5 10.3 Nominal GDP, US$ bn 511.2 532.5
563.9 638.1 593.7 626.5 640.6 n/a Current Account, US$ bn 148.7
155.8 168.3 170.5 182.2 205.0 221.5 236.6 FDI (actual), US$ bn*
13.4 28.6 43.3 60.3 14.3 28.4 42.6 63.0 Sources: Datastream,
Bloomberg * - Quarterly sum
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 17
Country Update: Hong Kong The external sector continues to
improve
Visitor arrivals
-12
-7
-2
3
8
13
18
23
28
02 03 04 05 06
% yearly change 3mma
4
Exports
Source: Datastream, Economics@ANZ
0.0
0.5
1.0
1.5
2.0
2.5
02 03 04 05 06
Mn persons 12mma
The HKD is now weaker than the CNY
7.60
7.65
7.70
7.75
7.80
7.85
7.90
7.95
8.00
8.05
Jun-06 Jul-06 Sep-06 Nov-06 Jan-07
USD
USD/HKD
USD/CNY
Hong Kong and Chinese currencies
Source: Bloomberg
• Recent economic developments confirm that the Hong Kong
economy is expanding at a solid pace. Consumer spending remains
well supported by an improving labour market and wealth gains from
the booming property and equity markets. The external sector is
also performing well with visitor arrivals continuing to rise as
Chinese tourism accelerates and other exports are also showing
signs of a pick up in recent months. Inflation meanwhile continues
to slowly accelerate, rising 2.3% YOY in December, partly due to
rising house prices.
• As anticipated, the steadily appreciating USD/CNY reached
parity with Hong Kong’s pegged exchange rate in the first few weeks
of 2007. Since then, the CNY has continued to appreciate,
surpassing the HKD to be stronger relative to the USD.
• While these currency developments have had a symbolic impact
on local markets, the practical impact has been minimal. The
stronger CNY is unlikely to prompt the Hong Kong Monetary Authority
to abandon its 23-year USD currency peg in favour of a CNY peg. The
economies of China and Hong Kong share few similarities such that
pegging the HKD to the CNY would link Hong Kong to a very different
business cycle than its own. Moreover, while Hong Kong is a leading
global financial market centre, Chinese financial markets remain
underdeveloped and tightly controlled. While we would eventually
expect greater currency integration between Hong Kong and China,
significant further economic and market development in China,
including for example a fully-convertible CNY, is required before
this can take place.
• The economic impact to Hong Kong of the stronger RMB will in
the short-term be small, but mixed. As Hong Kong imports most of
its food and raw materials from China, the weaker HKD will both
reduce local purchasing power and put some upward pressure on
inflation. Providing some offset to this is that Hong Kong’s
exports will now be more price competitive.
Katie Dean
Economic data – Hong Kong Monthly data May 06 Jun 06 Jul 06 Aug
06 Sep 06 Oct 06 Nov 06 Dec 06 Visitor Arrivals, %YOY 7.3 8.3 5.7
11.2 2.4 2.5 1.0 n/a Retail Sales, % YOY 3.6 3.4 5.2 6.5 5.9 5.2
5.0 8.2 Consumer Price Index, % YOY 2.1 2.1 2.3 2.5 2.1 2.0 2.2 2.3
Exports, % YOY 0.4 6.9 10.7 9.8 4.5 7.5 13.8 n/a Imports, % YOY 3.0
10.1 11.5 12.2 7.9 10.8 15.9 n/a Trade Balance, US$ bn -1.9 -1.8
-0.7 -1.2 -1.5 -0.4 -1.1 n/a Foreign Exchange Reserves, US$ bn
127.0 127.0 127.0 129.0 130.0 131.0 133.0 133.0 Quarterly data Dec
04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Real GDP, % YOY
7.5 5.6 7.2 8.4 7.9 7.9 5.4 7.0 - Private consumption 6.0 4.0 2.0
4.0 3.0 5.0 5.0 4.0 - Government consumption -2.0 -5.0 -2.0 -2.0
-4.0 1.0 -1.0 -1.0 - Gross fixed capital expenditure -2.0 0.0 5.0
3.0 8.0 8.0 5.0 13.0 Nominal GDP, US$ bn 42.1 42.7 44.3 44.9 45.8
46.3 46.9 48.0 Current Account, US$ bn 7.5 5.1 4.5 4.6 6.0 4.7 1.9
6.6 Capital Account, US$ bn -0.1 -0.3 -0.2 -0.1 -0.1 -0.1 0.1 n/a
Source: Datastream
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 18
Country Update: India Inflation pressures persist
Source: Datastream
CPI and WPI
Real credit growth
Stockmarket
0
2
4
6
8
10
01 02 03 04 05 06
%YOY
CPI
WPI
2000400060008000
10000120001400016000
01 02 03 04 05 06
05
1015
20253035
01 02 03 04 05 06
BSE-30 Sensitive
%YOY
Index
10203040
50607080
01 02 03 04 05 06
Oil prices (WTI)US$/bbl
Current account remains in deficit but reserves improve thanks
to capital inflows
External balances
60
80
100
120
140
160
180
03 04 05 06
US$ bn
Foreign Exchange Reserves
Source: Datastream
-20000
-15000
-10000
-5000
0
5000
10000
02 03 04 05 06
US$ mn
Current account
Trade balance
services balance
transfers
• Buoyant domestic demand has raised inflation pressures.
Wholesale prices have resumed their upward climb to 6.12% YOY on 6
January 2007, the highest rate since December 2004. In terms of
asset price inflation, India is in uncharted territory with equity
and real estate prices continuing to accelerate. Real credit growth
continues to be robust, rising by an average 22% YOY during
January-September 2006. Against this backdrop, the RBI is expected
to maintain its tightening bias, which it has held since late 2004.
The reverse repo rate has been raised by 125 bps since October 2004
to 6% while the repo rate has been lifted by 275 bps to 7.50%. In
December 2006, the RBI announced that it would raise the cash
reserve ratio (CRR) for domestic banks by 50 bps, to 5.5%, in two
stages (first 25 bps hike was on 23 December and the next 25 bps
increase took effect from 6 January). Inflation risks are likely to
persist as domestic demand stays strong.
• The current account remains in deficit. However, constraints
on the balance of payments have been alleviated by strong capital
inflows. According to the Institute of International Finance, FDI
inflows, which averaged US$2-3 bn pa. in the 1990s, are now around
US$6-7 bn pa and are expected to climb. Portfolio capital flows
have been more substantial in recent years, averaging US$11 bn per
year between FY2003/04-FY2005/06.
• In India, parliamentary elections are not due until 2009 but
the pressures of coalition politics are likely to ensure that
progress on economic reform remains slow. However, the Indian
National Congress-led United Progressive Alliance (UPA) coalition
has been given a lift in the recently-released survey by the Centre
of Developing Societies. Results showed that Congress party
president Sonia Gandhi received the highest percentage of support
and the government led by Prime Minister Manmohan Singh is in
stronger shape than when elected in 2004. This will bode well for
the ruling Congress-led coalition in key state elections due this
year.
Jasmine Robinson
Economic data – India Monthly data May 06 Jun 06 Jul 06 Aug 06
Sep 06 Oct 06 Nov 06 Dec 06 Industrial Production, %YOY 11.5 9.5
12.9 10.1 11.3 4.4 14.1 n/a Passenger car sales, % YOY 27.7 24.3
20.9 13.2 20.4 15.5 25.2 24.7 Consumer Price Index, % YOY 5.9 7.3
6.3 6.0 6.4 6.9 6.0 n/a Exports, % YOY 29.6 40.2 40.7 41.1 41.2
19.0 57.1 19.5 Imports, % YOY 21.7 24.0 42.8 32.2 49.1 39.3 60.3
41.8 Trade Balance, US$ bn -3.8 -3.8 -4.0 -3.5 -5.3 -6.2 -6.2 -5.7
Foreign Exchange Reserves, US$ bn 156.0 156.0 157.0 159.0 158.0
161.0 168.0 170.0 Quarterly data Dec 04 Mar 05 Jun 05 Sep 05 Dec 05
Mar 06 Jun 06 Sep 06 Real GDP, % YOY (at factor cost) 7.0 8.6 8.5
8.4 7.5 9.3 8.9 9.2 - Agriculture 8.1 6.8 9.5 6.3 7.0 7.9 9.7 10.5
- Industry -1.2 1.5 3.4 4.0 2.9 5.5 3.4 1.7 - Services 9.4 11.4 9.8
9.7 8.2 10.8 3.7 11.1 Nominal GDP, US$ bn 171.9 175.9 168.4 168.3
191.1 196.4 183.6 180.8 Current Account, US$ bn -5.8 4.1 -3.6 -5.0
-3.8 1.8 -4.8 -6.9 Capital Account, US$ bn 11.7 12.4 4.4 10.0 -0.6
10.9 10.7 8.6 Source: Datastream, Bloomberg
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 19
Country Update: Indonesia Consumption improves as inflation
moderates
0
2
4
6
8
10
12
14
16
18
20
03 04 05 06
% YOY
-60
-40
-20
0
20
40
60
80
02 03 04 05 06
Auto Vehicle sales
Motorcycle sales
Sources: Bloomberg, Datastream
%YOY, 3-mth mvg avg
InflationMotorcycle and vehicle sales
CPI
External balances strengthen
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
97 98 99 00 01 02 03 04 05 06
Services and income balance
Trade balance
Current acc. balance
US$ bn
-8
-6
-4
-2
0
2
4
6
04 05 06
Other inv
Portfolio invDirect inv
Financial & Capital acc balance
US$ bn
• Bank Indonesia continued with monetary easing. We expect
further rates cuts through the year, bringing the BI rate to 8% by
end-2007. Inflation has moderated to the 5-6.5% YOY level and is
expected to stay in this range barring further cuts in fuel
subsidies. The Indonesian rupiah is also expected to contain
imported inflation with a steady appreciation of a further 5-6%
forecast against the US dollar by end-2007.
• The economy is estimated to have expanded by 6.6% YOY in Q4
2006, making it the strongest growth performance in seven quarters.
Domestic demand is likely to gain momentum this year assisted by
lower interest rates although exports are likely to moderate.
Partial indicators suggest a pick-up in private consumption
although investment remains weak but more tax incentives and
reforms are expected in the coming months. In early January, the
Ministry of Finance announced that 15 industries including
pharmaceuticals, electronics, and chemicals would be granted tax
concessions in an effort to lift both domestic and foreign
investment.
• Indonesia’s external balances strengthened considerably in
2006, with the current account posting an estimated surplus of
US$9.7 bn, up from just US$307 mn in 2005. The surplus, however, is
forecast to narrow in 2007 reflecting a weaker trade profile as
imports pick up with a recovery in domestic demand while export
growth slows as global growth moderates. Capital inflows, however,
are expected to rise as macroeconomic conditions improve.
• First-ever local elections held in Aceh on 11 December 2006,
saw former separatist rebel Irwandi Yusuf elected governor of the
province in an overwhelming victory. He has indicated that he will
not push for independence and remains committed to the peace
agreement signed in 2005, which has served to allay concerns over
the potential for renewed separatist conflicts.
Jasmine Robinson
Economic data – Indonesia Monthly data May 06 Jun 06 Jul 06 Aug
06 Sep 06 Oct 06 Nov 06 Dec 06 Industrial Production, %YOY -4.0
-0.7 0.4 0.7 5.5 0.2 24.2 n/a Motor cycle sales, % YOY -23.1 -28.0
-21.6 -12.8 9.1 -29.8 49.7 27.1 Consumer Price Index, % YOY 15.6
15.5 15.2 14.9 14.6 6.3 5.3 6.6 Exports, % YOY 16.1 26.1 26.2 26.4
19.0 12.3 30.7 17.4 Imports, % YOY 1.9 20.2 11.8 4.0 15.5 -6.2 45.0
3.1 Trade Balance, US$ bn 3.3 2.8 3.4 3.3 3.1 4.2 3.1 4.6 Foreign
Exchange Reserves, US$ bn 42.1 38.3 39.2 40.3 40.7 38.2 39.9 n/a
Quarterly data Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep
06 Real GDP, % YOY 7.0 6.3 5.7 5.8 4.7 4.8 5.1 5.6 - Private
consumption 3.9 3.4 3.8 4.4 4.2 2.9 3.0 3.0 - Government
consumption -2.2 -7.0 -5.7 14.9 32.7 11.2 26.7 1.5 - Gross fixed
capital expenditure 16.3 13.9 14.7 9.1 2.7 1.5 1.4 0.0 Nominal GDP,
US$ bn 66.0 67.7 69.2 69.7 74.6 83.0 87.9 92.8 Current Account, US$
bn 0.5 0.3 0.4 -1.2 0.8 1.6 0.6 4.0 Capital & Financial
Account, US$ bn 2.4 -0.6 0.5 -3.3 3.6 2.2 -0.1 -0.7 Sources:
Bloomberg, Datastream, Bank Indonesia
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 20
Country Update: Japan All inflation measures have turned
down
Price trends Interest rates
Sources: Datastream, Economics@ANZ
-3
-2
-1
0
1
2
3
4
01 02 03 04 05 06
Corporategoods price
index
% YOY
Headline CPI
Core CPI
0
1
2
3
01 02 03 04 05 06
10-year bond rate
% pa
3-month interbank rate
Households still feeling blue Industrial production
-8
-6
-4
-2
0
2
4
6
8
01 02 03 04 05 06
% YOY
Retail sales
Disposable income
Households
Sources: Datastream, Economics@ANZ
-20
-15
-10
-5
0
5
10
15
20
01 02 03 04 05 06
% YOY Machinery orders
Industrial production
• The Bank of Japan left interest rates on hold in January after
rising speculation that rates would be lifted. Expectations
followed a spate of solid data, rising credit growth and comments
from unnamed BOJ officials that the BOJ was ready to move. The fact
that the BOJ did not raise rates led to concern that the BOJ bowed
to pressure from the government. However, subsequent data has been
surprisingly weak. Core inflation fell 0.1% MOM in December, while
retail sales fell 0.3% YOY and household consumption fell 1.9%
YOY.
• The weak inflation data were a surprise to us, and the fact
that consumption still has not gained traction is a concern. The
fourth quarter GDP deflator is the only important data release
between now and the BOJ’s next policy meeting on 20 February. As
such, we have removed our forecast for the BOJ to raise rates by 25
bps in February and delayed it until the 21 March meeting. However,
the call remains data dependent and another negative core CPI
reading would further delay our next forecast rate hike. It is
worthwhile to note that interbank interest rates continue to rise
on falling liquidity, as the monetary base shrank by 21% YOY in
January.
• A disappointed market pushed the yen to USD/JPY121.95 at the
end of January, its weakest level in 4 years. We expect the yen to
remain weak; as long as rates remain this low, the carry trade will
remain in play. However, a weak yen will continue to bolster
exports, while the import bill will decline on lower oil prices.
Net exports could make a significant contribution to growth this
quarter, as the trade surplus reached ¥94 trillion last year and
appears likely to expand in the first half of this year. We have
revised our yen forecast to current trading levels in the near
term, although we expect the currency to strengthen later this
year.
• The true unknown in the BOJ equation is the political fortunes
of the administration of Shinzo Abe, whose popularity has been
falling steadily to only 40.7% in the latest polls. Political
uncertainty could feed into consumer pessimism and prevent strong
corporate activity from translating into higher consumption.
Amy Auster
Economic data – Japan Monthly data May 06 Jun 06 Jul 06 Aug 06
Sep 06 Oct 06 Nov 06 Dec 06 Industrial Production, %YOY 2.8 5.1 5.0
5.8 4.9 6.1 4.9 4.4 Retail Sales, % YOY 0.1 0.2 -0.1 1.1 0.7 0.1
-0.2 -0.3 Consumer Price Index, % YOY 0.1 0.5 0.3 0.9 0.6 0.4 0.3
0.3 Exports, % YOY -1.7 8.6 10.5 12.2 9.4 8.0 13.3 10.8 Imports, %
YOY 8.6 12.2 13.1 10.8 11.0 13.8 8.6 8.6 Trade Balance, US$ bn 3.4
7.0 7.4 1.7 8.6 5.1 7.8 9.5 Foreign Exchange Reserves, US$ bn 842.8
844.0 850.6 857.9 861.1 865.6 875.9 874.6 Quarterly data Dec 04 Mar
05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Real GDP, % YOY 1.1
0.7 1.8 2.2 2.9 2.7 2.2 1.7 - Private consumption 0.4 0.6 1.3 1.7
2.7 1.9 1.5 -0.1 - Government consumption 1.3 2.1 1.5 2.5 0.7 -0.8
0.6 0.1 - Gross fixed capital formation -0.5 1.1 2.2 3.9 2.6 3.5
3.5 1.9 Nominal GDP, US$ bn 4513.9 4679.7 4770.4 4815.7 4767.0
4757.5 4732.5 4702.2 Current Account, US$ bn 170.2 170.9 167.9
165.5 167.4 200.4 190.5 157.1 Capital Account, US$ bn -2.5 -7.0
-4.7 -2.7 -1.4 -11.9 -11.0 -5.2 Source: Datastream
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 21
Country Update: Korea Fourth Quarter GDP weakens on PCE and
exports
-4
-2
0
2
4
6
8
10
12
14
2000 2001 2002 2003 2004 2005 2006
Government Expenditure
GFCF
Net Exports
Private Consumption Expenditure
% YOY, contributions to growth rate
May vary from actual GDP growth rate as statistical discrepancy
not included
Source: Datastream, Economics@ANZ
Inflation remains in check, other signals mixed
0
1
2
3
4
5
6
01 02 03 04 05 06 07
CPI
% YOY
Core
Inflation Unemployment and LEI
0
1
2
3
4
5
01 02 03 04 05 06 07-4
-2
0
2
4
6
8
10
12
14
16
Unemploymentrate (LHS)
% YOY% sa
Leading EconomicIndicator (RHS)
Source: Datastream, Economics@ANZ
• Korea’s economy slowed in the fourth quarter of 2006 due to
weaker exports and the continued moderation in consumer spending.
GDP growth came in at a softer-than-expected 4.0%YOY in Q4.
Consumption expenditure slowed to 3.7%YOY with consumers remaining
under a heavy debt burden. This was reflected in the consumer
sentiment index that continued to fall in December, down 9.2%YOY.
Net export growth also slowed to 12.9%YOY, as the appreciation of
the won late last year, especially against the yen, hurt the
competitiveness of exports.
• Industrial production was weaker in December, contracting by
3.9%MOM, due largely to strikes in the auto sector and a slowdown
in the electronics sector. This dragged the YOY result down to
2.3%. Industrial production will most likely strengthen in January
in the lead up to Lunar New Year and consequently soften in
February. Despite the general weakness of the economy in late 2006,
January has seen exports jump 21.4%YOY. This result was assisted by
the relative weakness in the won in the year thus far.
• In 2007, the government will support economic growth by
front-loading 56% of its budget expenditure in the first half, up
from 53% in 2006. The government will also take steps to implement
property market policies aimed at bolstering housing supply in
order to ease soaring house prices.
• The government also intends to “…react pre-emptively against
risks in the financial and foreign exchange markets”. It was
reported that the BoK intervened in the market several times last
year to rein in the appreciation of the won.
• Apart from this, the BoK may have little to do in 2007 with
policy interest rates widely tipped to remain unchanged at 4.5%
throughout 2007. Inflation remains largely in check, with headline
inflation falling to 1.7%YOY in January and the core measure stable
at 2.1%YOY.
Alex Joiner
Economic data – Korea Monthly data May 06 Jun 06 Jul 06 Aug 06
Sep 06 Oct 06 Nov 06 Dec 06 Industrial Production, %YOY 12.2 11.5
6.6 10.7 11.0 11.9 6.2 4.9 Retail Sales, % YOY 5.7 6.7 4.2 6.8 2.5
6.1 5.0 2.9 Consumer Price Index, % YOY 2.3 2.4 2.4 2.7 2.5 2.2 2.1
2.1 Exports (US$), % YOY 20.8 17.9 11.0 16.9 21.0 10.7 18.7 12.6
Imports (US$), % YOY 23.6 22.2 18.7 22.9 22.0 13.2 12.2 13.7 Trade
Balance, US$ bn 1.8 1.9 0.2 0.3 1.9 2.4 3.9 1.4 Foreign Exchange
Reserves, US$ bn 224.3 224.0 225.3 226.6 227.8 228.6 233.7 238.4
Quarterly data Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec
06 Real GDP, % YOY 2.6 3.3 4.5 5.3 6.0 5.4 4.8 4.0 - Private
consumption 1.7 3.1 4.0 4.1 4.9 4.4 4.0 3.7 - Government
consumption 3.2 4.2 5.1 4.8 5.3 5.2 5.8 6.5 - Gross fixed capital
expenditure 0.4 2.0 1.9 4.2 3.9 0.8 3.8 4.5 Nominal GDP, US$ bn
192.4 197.6 197.7 199.6 211.7 220.6 223.2 n/a Current Account, US$
bn 5.3 2.4 2.2 5.2 -1.1 0.7 0.4 6.1 Capital Account, US$ bn -0.5
-0.7 -0.7 -0.5 -0.7 -0.8 -0.7 -0.9 Source: Datastream
-
Economics@ANZ ANZ International Economics Monthly – January
2007
Page 22
Country Update: Malaysia Inflation expected to moderate, giving
scope for
interest rates to fall in 2007
Inflation
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
01 02 03 04 05 06
% pa
Real interest rates
Sources: Bloomberg, Datastream
0
1
2
3
4
5
01 02 03 04 05 06
CPI
%YOY
Commodity prices give added support to Ringgit
60
80
100
120
140
160
180
200
220
3/01/05 6/07/05 6/01/06 11/07/06 11/01/07
Tin (26 Jan 07: US$12,260/mt)
Rubber (26 Jan 07:714 MYR cents/kg)
Palm oil(26 Jan 07 US$600/mt)
3 Jan 2005=100
Sources: Bloomberg, Datastream
• Malaysia has been hit by its heaviest rainfall in more than 50
years, causing widespread flooding particularly in the south,
resulting in the displacement of many. Infrastructure repairs are
estimated to cost around RM350 mn (US$100 mn) with bridges, roads
etc damaged by landslides. The Meteorological Department has warned
of a third wave of floods.
• On the economic front, inflation continue