Emerging markets across Asia experienced flagging equity prices as fears of a global slowdown, triggered by the downgrade of the U.S. sovereign credit rating and concerns over the debt crisis in Europe, gripped markets. Stock markets in some of the emerging Asian economies flirted with yearly lows. The Asian Tigers including South Korea, Hong Kong, Taiwan, Malaysia, and Thailand reported slower growth for the second quarter ended June 2011. Even China, the world’s second largest economy, reported headwinds to growth. While the Japanese earthquake was one of the causes behind the decline in industrial production in countries such as Thailand, many other countries faced a slowdown in output due to a tight monetary policy. Although inflation continued to be elevated in many countries, economists surveyed by Bloomberg opined that inflation is close to peaking in large countries such as China. In India, central bank officials commented that the pace of consumer price inflation could slow by the end of the year. Nonetheless, central bankers in both China and India did not signal a change from their hawkish stance towards monetary policy.

On the other hand, exports in countries such as South Korea and Taiwan rebounded strongly from the lows of June. A slight easing in currency against the U.S. dollar and continued demand in emerging markets helped South Korea and Taiwan to increase their overseas sales. The one country that was less troubled by inflation in the region was Indonesia. Subsidies for oil and a strong Indonesian currency, the rupiah, kept domestic consumption growing.

China: Economy to avoid hard landing despite inflation and slowing growth

China’s aggressive efforts to tackle persistent inflation through a hawkish monetary policy had many economists worried about a marked slowdown in the country’s growth, leading to fears of a hard landing for the world’s second largest economy. However, new indicators point that China may indeed avoid a hard landing.

For instance, as China aggressively tightened money supply through a slew of interest rate hikes and bank reserve requirement ratios beginning in mid-2010, many small export-oriented companies faced challenges. Difficulty in getting credit and higher labor wages caused this sector to slow down since late 2010. Partly due to the pressure on small enterprises, Chinese industrial output had started to grow at a slower pace. However, in July, the preliminary HSBC China Manufacturing PMI, a measure that roughly gauges the state of growth in the economy, indicated a 28-month low of 48.9 in July. However, in August that reading rose to 49.8. Although any reading below 50 in the index indicates a contraction, the improved figures in the index came mainly due to increased output from small and medium-scale industries, according economists at the Standard Chartered Bank. Furthermore, retail sales growth in the country came around at a robust 17.2% for July. Excluding vehicle sales, the growth in retail sales was estimated at an even higher 18%, indicating resilience of China’s economy.

But despite such optimism, high inflation is still a concern for the country’s policy makers. Consumer prices in China jumped nearly 6.5% during July, the fastest pace in over three years. Food costs, fueled by a 57% jump in pork prices, accelerated 14.8%. Such elevated levels of inflation are making it difficult for the country’s authority to hold a benign monetary policy even as threats to China’s growth from the debt crisis in Europe and a slowdown in the U.S. are mounting. In August, amidst swooning equity markets, the country’s central bank, The People’s Bank of China said it was “too early” to loosen monetary policy.

But many private economists opine that inflation in China may have peaked. In a Bloomberg survey, economists from Standard Chartered and UBS have said that China’s inflation is likely to come down especially in the wake of slowing growth in industrial production. The survey has indicated an easing of consumer price inflation to 4% by the end of 2011 from the current 6.5%.

The country’s regulators are also worried about the country’s property sector ballooning further. Liquidity boosting and fiscal stimulus measures over the past two years had helped the country’s property sector grow unabated, and some regulators are concerned about a bubble in the sector. One of the country’s banking regulators, China Banking Regulatory Commission (CBRC), has instructed China’s commercial lenders to tread slowly in granting new credit facilities to property developers. It has also asked the banks to make lending requirements more stringent to commercial property developers. Some of the earlier corrective measures like raising the down payment requirement to buy an apartment and higher transaction taxes are starting to pay off. Home prices in China climbed at the slowest pace in over 11 months during July. Meanwhile, the CBRC said that the country’s property sector continues to be a worry. The regulatory agency commented that increased curbs on the residential home market have driven speculators to pump money into the commercial property sector of the country. CBRC noted that overseas funds flowing into the commercial property sector jumped almost 75% in the past one year even though construction activity has cooled down. In late August, Bloomberg reported that the demand for construction lands remained muted. The country’s effort to auction 353 parcels of land by August received lukewarm reception from the country’s developers.

India: Central bank remains cautious as credit growth remains strong

India’s central bank, The Reserve Bank of India has a tough job. On the one hand, the debt crisis in Europe and a slowdown in the U.S. are weighing heavily on India’s trade and growth prospects. On the other hand, India’s inflation has been quite high, tying the hands of the central bank to loosen monetary policy. In an interview to reporters, amidst tanking stock markets across the world, the RBI’s Governor, Duvvuri Subbarao, said that it was “too early to say” whether the central bank would change course from its current hawkish monetary policy.

The central bank has quite a number of reasons to be cautious. Despite several interest rate hikes, India’s industrial production in June rose quickly. Output across factories, mines and utilities rose 8.8% during June, up from 5.9% in May, and going way beyond the 5.5% growth predicted by economists surveyed by Bloomberg. Manufacturing grew 10%, while capital good production skyrocketed nearly 38%. The demand for a number of inputs such as steel and cement has also remained strong.

Furthermore, credit growth too has remained robust. Loan growth in ICICI Bank Ltd, India’s largest private sector bank, grew by almost 20% against expectations of 18%. All these factors have made the central bank extremely cautious before changing its direction away from a tight monetary policy despite certain moderating factors to growth. The central bank has hiked interest rates nearly 11 times since mid-2010. This along with other factors has resulted in the country’s widely tracked stock market index, the BSE Sensex, losing 14% since mid-July.

On the other hand, a deputy governor of India’s central bank said that inflation in India may be moderating towards the end of the year. In fact, inflation in July eased a bit to 9.2% from a high of 9.44% in June. But the bank official said that inflation may shoot up to 10% in August before moderating. Still, private economists surveyed by Bloomberg expect the RBI to tighten monetary policy and increase borrowing costs by another 50 basis points to 8.5% before holding steady.

South Korea: Exports rebound yet consumer and business sentiment sour

South Korea’s exports proved resilient amidst a downturn in the U.S. and Europe, which serve as the country’s largest export destinations. Exports, which account for almost half of the country’s GDP, rebounded from a 20-month low in June and jumped 27.3% to $51.4 billion in July. The growth in exports was way above the 17.3% consensus estimates predicted by economists in private banks surveyed by Bloomberg.

Sales of autos and auto ancillary parts in particular helped the country’s exports. Hyundai, the country’s largest auto maker and Kia, another auto maker in which Hyundai has a stake, helped push exports up, primarily due to strong demand for cars in the U.S. Korean automakers have benefited from declining competition from Japanese auto manufacturers who continue to face challenges arising from supply chain disruptions and a strong yen. Strength in auto sales also offset weakness in the shipment of electronics. Buoyed by the strong performance of the exports in July, South Korea has raised its forecast for full-year exports to $557 billion in 2012, much higher than the earlier prediction of $513 billion.

But despite the robust performance of the export sector, consumer and business sentiment within Korea remain weak. In fact, consumer sentiment index (CSI) measured by Bank of Korea fell to a 99 in August, down from 102 in July. Even during the Asian currency crisis of 1999 and the global financial crisis of 2008, the consumer sentiment index hovered around a reading of 100. The pessimism indicated by the index comes amidst persistently high inflation and a sharp fall in the country’s stock markets. South Korea’s widely tracked Kospi index had fallen almost 20% as of mid-August.

The country’s consumer price inflation in July jumped to 4.7%, the highest in four months and way above the 4% limit that the central bank has chalked out. Inflation in the country is largely being fueled by higher food prices. A torrential rain in South Korea’s agricultural basin in July destroyed crops and vegetable farms. Consequently, inflation is expected to remain outside the central bank’s mandate of 4%. According to a survey by Bloomberg, average inflation for 2011 is expected to be around 4.2%.

Nonetheless, contrary to expectations, the country’s central bank held interest rates steady at 3.25%. Although the Bank of Korea has said that inflation remains high, the bank expects further demand to be subdued due to economic strains in the developed world. Further, the bank cited falling equity markets and the subsequent dip in consumer sentiment as reasons for not hiking interest rates in its August meeting. The central bank has said that a softer outlook for oil prices should help alleviate inflation in the coming months.

In other developments, the South Korean government and the banking industry seem to be getting serious about household indebtedness. The country’s household debt at nearly $735 billion is being seen as quite high by the South Korean government. Although the country’s banking regulator, the Financial Services Commission, has said that it has not asked the commercial banks to tighten lending, many of the small and medium-sized banks are strengthening the screening procedures for lending and have started suspending some of their loan products. While lenders such as Woori Financial Holdings and Hana Financial Group said that they have made their screening procedures stringent, banks such as Nonghyup and Shinhan Financial Group said they have suspended some loan products.

Indonesia: Low inflation and subsidies keep consumption engine going

Indonesia’s economy is growing at a healthy pace aided by strong consumption, rising investments and declining inflation.

For the second quarter ended June 2011, the country’s GDP grew at 6.49%. This was the third consecutive quarter of more than 6% growth. Indonesia partially achieved this growth by holding inflation low and keeping interest rates steady even as many of its neighboring economies continued to fight soaring inflation with interest rate hikes. The country’s central bank has held interest rates steady since February 2011, which in turn has helped stimulate consumer spending.

The country’s government for its part has helped cushion the effects of high oil prices through a mix of generous subsidies and a strong domestic currency, the Indonesian rupiah. The Indonesian rupiah, the second-best performing currency in the region after the Singapore dollar, has risen close to 4% against the U.S. dollar in 2011 and has kept imported inflation low. Furthermore, as domestic consumption accounts for a greater share of the Indonesian economy, the country has weathered the effects of the downturn in developed markets such as the U.S. and the European Union in a better way than export-oriented economies such as Malaysia and Singapore.

Being a commodity exporter is also helping the country. Many emerging markets that are still growing relatively strongly such as China and India are buying energy and metal commodities from Indonesia. For instance in July, Indonesia’s exports of refined tin jumped 15% from June figures. Indonesia expects tin production to touch 90,000 tons for 2011, up from 78,965 tons in 2010.

The Wall Street Journal reported that with strong growth and low public debt, Indonesia is just shy of getting its first investment-grade credit rating in its history. The country expects GDP to grow at 6.8% in 2011 up from 6.1% in 2010. Attracted by such growth, foreign investors seem to be lining up investments. During the second quarter ended June, foreign direct investments to the country jumped 21.1% to $5 billion.

Thailand: Inflation remains high amidst slowing output

Amidst rising inflation and faltering exports, Thailand’s economic growth for the second quarter of 2011 ended June, tumbled to 2.6% from 3.2% growth in the first quarter of 2011. Slowing manufacturing output amidst supply-chain disruptions in Japan and a subsequent easing on exports have been cited as some of the reasons behind declining output.

Thailand’s Industry Ministry reported that July’s manufacturing output fell 6.74% when compared to June figures. The major setback to output came from the electronics industry and the auto industry. Some of the world’s largest automakers such as GM and Toyota, which operate manufacturing and assembly plants in Thailand, were forced to scale back production due to unavailability of parts. Auto output during the three months between April and June 2011 slid more than 19%.

Furthermore, many private economists and the central bank expect exports to come under further strain in the months ahead. On the domestic front, however, inflation is eating into the spending power of Thailand’s citizens. During July, consumer-price inflation hovered above 4%, the fourth consecutive time that inflation had breached the central bank’s mandate of 3%.

During its August policy meeting, the central bank raised interest rates by 25 basis points to 3.5% to prevent consumer-price inflation spreading to other inputs. Currently the country’s core inflation stands at around 2.59%. The central bank, which has hiked interest rates nine times since 2010, hinted that it was close to ending its monetary tightening given the headwinds Thailand’s economy faces due to global growth.

Nonetheless, many economists surveyed by Bloomberg fret that inflation could continue to be high. Government spending for instance is widely predicted to have a cascading effect on prices across the country. The country’s newly elected Prime Minister Yingluck Shinawatra has announced plans to boost minimum wages for workers, hike rice prices by 50% to help farmers, cut corporate taxes, and distribute tablet computers to school students. These factors have widely been termed as inflationary by the Bank of Thailand.

Given these factors, the country’s state planning agency expects the country’s GDP to expand only between 3.5% and 4% for the year 2011, down from its earlier expectation of GDP growth of more than 4.5%.

Philippines: Sagging exports rob momentum from economy

Rising inflation and sagging exports are weighing heavily on the Philippines’s economy. The country’s first quarter GDP growth registered at 4.9%, the slowest since the third quarter of 2009. But growth figures in the second quarter are likely to be even less. Growth rates measured monthly were the lowest in May and June over the past 12 months.

Weakened by slowing consumer spending and exports, the country’s GDP for the second quarter of 2011 is expected to rise only by 4.1% according to a survey of private economists by Bloomberg. The National Economic and Development Authority (NEDA), however, expects growth to range between 4.5% and 5.5% during the June quarter this year.

Falling exports in particular have been a sore point for the Philippines. Exports, which account for nearly 30% of the economy fell 9.4% in July, the steepest monthly fall since September 2009. Despite this slowdown, inflation has not budged in the country. Fueled by high food prices, and oil and transportation costs, consumer prices jumped 5.2% in June, a 26-month high. Many consumer staple and restaurant companies reported intense pressure on profit margins with the prices of agricultural commodities rising. As inflation has coincided with a much duller outlook for trade, the country’s central bank is moving cautiously to control inflation. In July, the central bank had ordered commercial banks to set aside more funds with the central bank as reserves, to control liquidity and inflation. On a positive note, however, news of record agricultural output in the second quarter is widely expected to impede the pace of inflation, with the NEDA reporting a 5.5% growth in agricultural output.

Meanwhile, the Philippines government has taken up some contentious economic issues head-on. The government has reduced the budget deficit from nearly 230 billion pesos ($5.3 billion) in July 2010 to nearly 43.7 billion pesos ($1 billion) this July. This brought down the yields on Philippines government debt by almost one percentage point during early August. Furthermore, the country’s accumulation of foreign reserves is also expected to help the government deal with volatile capital markets. The country’s foreign reserves touched nearly $71 billion during July, a record figure. The country’s central bank reported that it had reserves to cover imports bills for almost 11 months.

Malaysia: GDP growth moderates on lukewarm manufacturing output

Buffeted by external factors such as disruptions in the global manufacturing supply chain and an overall weakness in demand in developed countries, Malaysia’s economy during the second quarter ended June 2011 grew at its slowest pace since the fourth quarter ended December 2009. GDP growth during the quarter moderated to 4% down from 4.9% in the first quarter of 2011. The country’s central bank blamed the manufacturing sector for the decline in growth.

A slowdown in the output of electrical parts and electronic goods, which account for nearly 23% of the manufacturing output and 40% of the country’s exports, were cited as the main reasons behind the manufacturing slowdown. Growth in the manufacturing segment slowed to 2.1% during the second quarter from 5.5% in the first quarter. Even the construction segment, which grew by 3.8% in the first quarter, expanded only 0.6% during the second quarter. However, resilience in the services sector, which grew by 6.3%, lent support to the economy.

On the other hand, inflation in July cooled to 3.4% down from a two-year high in June 2011. Economists from the Bank Islam Malaysia suggested that slowing demand was behind the declining inflation. Slowing inflation also allows some leeway for the Malaysian central bank to hold interest rates steady. Thus far, the central bank has hiked interest rates only once in 2011, while it raised interest rates three times in 2010.

Malaysia’s central bank now expects the country’s economy to expand between 5% and 6% in 2011 after a 7.2% growth in 2010. The central bank also warned that the country’s growth to be near the lower end of its forecast. While the bank expects the export segment to underperform, investment and domestic consumption are likely to lend a helping hand. The central bank also expected the strong ringgit, Malaysia’s currency, to help dampen imported inflation.

Taiwan: Annual growth forecast revised down despite strong exports

Taiwan’s economy grew 5.02% for the second quarter of 2011 ended June. This was much higher than the preliminary figure of 4.88% that the Taiwanese government had forecasted a month ago. A surge in exports in June had given a boost to the country’s GDP.

Despite souring prospects for the global economy, Taiwan’s exports to developed and emerging economies grew strongly during the second quarter. Even during July, Taiwan’s export orders rebounded briskly, growing 11.2% higher than the 9.2% gain in June. The country’s export industries seem to be weathering the slowdown in the European Union and the U.S. nicely. Asian markets such as China and Hong Kong have raised their imports from Taiwan in recent months. Exports to China and Hong Kong in July climbed 6.5%, driven by petrochemical and plastics exports. Demand for information technology and communication products too surged 21.8%, thanks to support from the U.S. technology sector. The total value of export orders rose to $37.6 billion during July.

On the other hand, Taiwan’s monetary tightening is helping curb the pace of inflation as well. The island’s consumer price inflation slowed to 1.9% in July down from 1.93% in June. Consumer-prices, which take into the effect of rising prices of oil and food, tumbled to 1.32% in June.

Despite a fall in inflation and headwinds to growth, Taiwan is expected to increase borrowing costs in the year ahead, primarily to curb the appreciation of house prices. Property and house prices in Taiwan have consistently been high over the past two years. Measures such as increasing the down payment required to buy a home and higher transaction costs when buying property have not helped the authorities control the rising cost of owning a home. Consequently, Taiwan’s policy makers are keeping interest rates elevated to keep mortgage rates high. Private economists surveyed by Bloomberg expect Taiwan’s central bankers to hike interest rates from the current level of 1.875% in September. Still, despite considerable strength in Taiwanese exports, the country expects its economy to expand by 4.81% lower than its preliminary estimates of 5.01%, primarily due to monetary tightening.

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