After battling inflation for over a year, many emerging Asia Pacific economies are now facing challenges over stimulating growth. A year of persistent monetary tightening in emerging Asia Pacific has unfortunately coincided with slowing growth prospects in the developed world. The U.S. and the European Union are the largest trading partners for many export-dependent emerging Asian economies like South Korea, Taiwan and even China. With economic growth slowing in the U.S. and the European Union, many emerging Asian nations are rightly worried about their export prospects. Output from various export-based industries such as electronics, autos, and even ship-building showed some clear signs of strain in September. The Purchasing Manager’s Index (PMI) for Asian countries compiled by many private banks and governments started showing a reading below 50. A PMI level below 50 is generally considered a sign of contraction in manufacturing activity. In September, the PMI level in South Korea and Taiwan dipped to 47.5 and 44.5, respectively, and also dropped for other large Asian economies such as China and India.

The central banks of key emerging Asian nations, still worried about inflation and tightening interest rates until last month, suddenly shed their hawkish monetary policy as headwinds to growth amassed in the wake of a global slowdown. Central banks belonging to Taiwan, South Korea, the Philippines, and Malaysia refrained from hiking interest rates during September.

Still, the threat from inflation has not receded completely. As global investors shed their appetite for risk markedly during September, they increasingly sold emerging markets assets and sought safety in U.S. treasuries. With this, emerging Asian currencies, which were consistently strong for the most part of the year, fell substantially during September. The weaker currencies in fact worsened the condition by inflating oil bills for oil-importing countries. Consequently, even as oil prices eased somewhat during September, countries such as India, whose currency weakened substantially, ended up paying more for oil. With oil companies in India passing on some of the burden to customers, consumer price inflation continued to remain high in the country despite monetary tightening.

China: Stringent monetary policy helps rein in on inflation

China’s stringent monetary policy of the past one year, which included five hikes to benchmark interest rates and a steep rise in the bank reserve requirement ratio, began to impact the country’s persistent inflation.

Consumer price inflation for August eased a bit to 6.2% according to the country’s National Bureau of Statistics. Inflation in China had been stubbornly high for the greater part of the year, rising to a three-year high of 6.5% in July. China’s policymakers have been fighting inflation relentlessly even as their policies increasingly put a downward pressure on growth. Industrial output expanded 13.5% in August, the lowest pace of expansion in three months and down from 14.0% growth in July. But many economists surveyed by Dow Jones opined that industrial output figures in China are still robust. They noted that the current dip was quite mild and that the country would avoid a hard landing.

Food costs, the single major issue that persistently fueled inflation higher over the past year, still remains an issue of contention for Chinese authorities. Pork, an integral part of the Chinese staple diet, has steadily become more expensive in recent months. Over the past one year, pork prices have shot up nearly 45.5%. The rise in the price of pork caused food prices to jump 13.4% in August. Non-food inflation also accelerated to 3%. A strengthened domestic currency, the Chinese yen, helped bring down imported inflation to an extent. Nonetheless, despite these signs of cooling, China’s top ranking officials said that controlling inflation is their top priority even as threats to the country’s growth from global factors increased. In mid-September Chinese Premier Wen Jiabao commented that the slowdown in the pace of output was well within expectations.

Still, China’s domestic market showed some signs of vigor, despite a global slump in manufacturing. China imported substantially from both developed and developing countries in August to build roads and bridges and to invest in other fixed assets. Consequently, the country’s imports in August climbed to a record $155.6 billion, almost 30.2% higher than the year-ago period.

China’s tightening efforts in the property markets also showed more traction. The prices of new homes in the middle kingdom rose only moderately and only in a few cities. According to the country’s National Bureau of statistics, only 23 cities among 70 large and mid-sized cities registered increased prices of homes in August. A year ago, prices of homes in all 70 cities trended upwards. Dow Jones Newswires reported that prices of homes increased just 0.01% in August in comparison to July.

In other developments, some of China’s largest banks have said that they plan to raise new capital to meet regulatory requirements. Notably, the Industrial and Commercial Bank of China Ltd (ICBC) announced that it could raise nearly $11 billion in the debt markets in the coming year. Fitch Ratings, a bond rating firm, said that concerns have abounded about the quality of loans that Chinese banks have extended to local governments during the 2009 and 2010 period.

India: Central bank’s inflation fight takes a toll on industrial output

India’ long-drawn battle with inflation is taking a toll on many fronts. The country’s central bank, the Reserve Bank of India, which has been extremely hawkish in its fight against rising prices, has raised interest rates 12 times since mid-March 2010 by a total of 350 basis points. The latest installment of the interest rate rise came in mid-September when the RBI hiked borrowing costs by 25 basis points to 8.25%.

The fight against inflation, however, has angered industries and businesses as rising borrowing costs have hit industrial production. Numbers from India’s Ministry of Statistics and Program showed marked deceleration in industrial output. The country’s industrial output growth, which measures the rise in output from factories, mines and utilities, inched up 3.3% in July, much below the forecasted figure of 6.1% and a steep fall from the 8.8% growth witnessed in June. The slowdown from India’s factories in particular was stark. Production of capital goods that include heavy machinery dropped 15.2%. Another report suggested that weakness in manufacturing continued in September. HSBC’s preliminary Purchasing Manager’s Index showed a reading of 50.4, the lowest reading since March 2009 and down from 52.6 in August. Any PMI reading below 50 indicates a contraction in manufacturing activity.

Despite these indications of a slowdown, the fight against inflation seems far from over. India’s wholesale price inflation during August jumped to a 13-month high of 9.78%. Even for the first week of September, India’s food and fuel prices inched up higher. Unfortunately, India’s currency is further fanning inflation. Although energy prices have eased a bit across the world in the wake of slowing global growth expectations, Indian consumers are not seeing any let up from fuel costs due to a weakening domestic currency. As of September, India’s currency, the rupee, had depreciated almost 10% against the U.S. dollar since the beginning of the year, and is the worst performing among a group of the ten-most traded Asian currencies according to Bloomberg. As India imports a substantial amount of its oil, the weak rupee has kept oil bills at elevated levels even though the dollar cost of oil has treaded downwards. Indian Oil Corporation, a state-owned oil company, increased the price of petrol for the second time in a span of two months.

Meanwhile, the rising cost of capital in the wake of higher interest rates is driving many Indian companies to raise funds abroad. Even India’s government, which regulates and caps the amount of funds that companies borrow from abroad, is going easy on regulations.

In fact, during mid-September, the government raised the cap on international borrowing by Indian companies by 50% to $750 million. Demand for capital from India’s infrastructure companies remains high, as the country strives to massively expand its road networks, ports, and airports. In an interview to Bloomberg Indian companies like GVK Power and Infrastructure opined that despite exchange rate fluctuations, borrowing abroad is cheaper than raising funds in India

On a different note, expectations for slower GDP growth in the wake of rising borrowing costs and inflation have also taken a toll on India’s capital markets. The country’s benchmark 30-stock index, the BSE Sensex, which lost 13% during the July-September quarter, recorded its worst quarterly performance since December 2008. The RBI has forecast GDP growth of 8% for India for the fiscal year ending March 2012.

South Korea: Output falls on dwindling demand for exports

In another sign of a slowdown in Asia’s export powerhouses, South Korea’s industrial output and exports grew at a slower-than-expected pace in August. According to Statistics Korea, the country’s industrial output fell 1.9% in August compared to July. A Bloomberg survey of 10 economists forecasted only a 0.3% drop in output.

Many of Korea’s large electronics and auto companies reported slower growth in output. With consumer spending across the world coming under pressure, the Korea-based LG Display Co., the world’s second-largest liquid-crystal display panel maker, said that it will spend less on expansion in the next year. Even Korea’s largest automaker Hyundai, despite buoyant car sales in the U.S., said that overall car sales slowed 5.1% in August compared to 9.2% and 13.0% growth in July and June, respectively. In all, sales of consumer goods in Korea tumbled 0.2% in August from the July level.

South Korea’s exports, which grew at a robust pace for most part of the year thanks to increased Chinese demand, also slowed down from the previous months. In September, the country’s exports grew 19.6%, the slowest pace in nearly three months and down from the 25.9% growth in exports during August. South Korea, one of the world’s largest chipmakers, reported a 4.2% fall in shipments. Further, other heavy industries such as shipbuilding fared poorly during the month, with the shipment of oceangoing vessels plummeting 32.7% during September. Nonetheless, September’s 19.6% export growth was slightly higher than the 16.6% growth predicted by a group of 11 economists surveyed by Bloomberg. South Korean exports during September were helped by a substantially weaker currency, the won. During that month, the South Korean currency witnessed its sharpest monthly fall against the U.S. dollar, declining almost 9.45% against the greenback.

But many businesses do not expect the weak won to give a boost to exports indefinitely. The South Korean Manufacturer’s confidence index, a leading indicator of business optimism, touched a 21-month low in October. Further, in a survey of 500 companies by the Korean Chamber of Commerce and Industry, almost two-thirds of the companies said that they will fall short of export targets for the year.

On the other hand, a combination of weak currency and soaring food prices also pushed up consumer price inflation to 5.3% in August, the fastest pace of increase since August 2008. A 13.3% jump in the price of basic food commodities such as livestock, fisheries and other agricultural produce was the primary reason behind the rise in consumer price inflation. Further, core price inflation, which excludes energy and food price rises, also scaled to its highest level in more than two years.

Despite the rise in consumer price inflation, the country’s central bank, the Bank of Korea, refrained from hiking interest rates for the third straight meeting in September, citing fears over demand growth arising from “external” facts including a sovereign debt crisis in Europe. The IMF, however, cut its 2011 GDP growth rate forecast to 4% from 4.5%.

Meanwhile, the South Korean government made a commitment to cut the country’s deficit and strengthen its financial situation. In late September, the Korean government said that it will trim its fiscal deficit to $12.2 billion or 1% of GDP in 2012 from the current level of 2% of GDP. Officials further said that they will aim to balance the budget by eliminating any deficit by 2013. Although Korea’s debt-to-GDP ratio is only about 31.9% compared to a developed world’s average debt-to-GDP ratio of 97.6%, many economists have fretted over the indebtedness of Korea’s state-owned institutions, for which the government will ultimately be liable. Barclays Capital, an investment bank, said that Korea’s current preemptive efforts to bring down debt should assuage the bond markets.

Indonesia: Feeling the heat of investor’s diminished risk appetite

Fears about the world economy and the subsequent diminishing of risk appetite among international investors came around to haunt Indonesia in September. The country’s stock market, which was one of the star performers over the past two years, started swooning in early September. Since 2009, political stability, strong public finances, and robust domestic consumption helped Indonesia attract foreign investors by the droves. Consequently, since March 2009, the Jakarta Stock Market, quadrupled in value. However, as investors grew fearful about global growth, they moved to sell emerging market assets, including the ones they held in Indonesia. Still, this sell-off comes despite very little changes in the fundamentals of many of the emerging economies.

During the first two weeks of September, foreign investors sold nearly $2 billion in government bonds and the country’s stock market fell nearly 11%. As of September 20, foreign ownership of Indonesian government fixed-income securities slid 5.6%. Stocks of leading auto companies and banks fell substantially during the month. The Jakarta Composite Index (JCI), which peaked in August of this year, has fallen almost 19.7% as of late September. The sell-off in the bond and the stock markets has also taken a toll on Indonesia’s currency, the rupiah. The rupiah has almost fallen 3.9% since May this year, when it touched its highest level against the U.S. dollar.

The fall in the value of the domestic currency poses substantial challenges to Indonesian policymakers. Thus far, Indonesia’s central bank used the strong rupiah to combat imported inflation arising from oil prices. However, with the rupiah losing its value, the central bank had to intervene in the currency markets to shore up the value of the currency during mid-September.

During September, inflation in the country fell to 4.61% down from 4.79% August. The relatively low level of inflation has helped Indonesia conduct a monetary policy in favor of growth for the greater part of 2011. The country’s central bank kept its benchmark lending rate unchanged at 6.75% for the seventh consecutive month in September. With inflation under control, Perry Warjiyo, the central bank’s director of economic research, said that the central bank is ready to “adjust the rate and mix monetary policy toward loosening”.

Thailand: Central bank still feels inflation is a concern

Thailand’s inflation during September fell to 4.03% thanks to a fall in energy costs and a relatively strong domestic currency, the Thai baht. Inflation in Thailand over the past six months has stayed persistently high and the country’s central bank hiked interest rates six times this year to 3.5% to combat inflation. Thailand’s current interest rates are at their highest level in nearly three years. During September, Thailand, under its new prime minister Yingluck Shinawatra, cancelled a levy on petrol and diesel that ultimately resulted in lower fuel prices. Nonetheless, food prices continued to stay high.

Despite the fall in inflation, Thailand’s central bank continues to keep a keen watch on the price situation in the country. In contrast to many other Asian economies such as South Korea, the Philippines and Indonesia, which have hinted at a more accommodative monetary policy, Thailand’s central bank said that the country faces a great threat from inflation than from a possible collapse in demand arising from concerns over global growth.

Thailand’s new government, which came to power in August this year, announced a slew of measures including a pledge to almost double the current level of minimum wages for daily-wage laborers. It has also promised to procure rice from farmers at a price that is nearly 40% that of the market rates. The country’s cabinet approved a government plan to spend 15.2 trillion baht over the next four years.

For the second quarter ended June, Thailand reported GDP growth of 2.6%, the slowest pace of expansion since the third quarter ended September 2009. The slow pace of growth during the second quarter of 2011 was mainly blamed on the earthquake in Japan that disrupted output in Thailand as well. Due to the fall in output during the second quarter, Thailand has revised its growth forecast sharply downwards for the rest of the year. The country’s Finance Ministry expects 2011 GDP to grow only around 4.0%, from its earlier growth forecast of growth between 4.0% - 5.0%. The country’s central bank also forecasted GDP growth of 4.1% for 2011.

Philippines: Weakness in electronics pulls the plug on export engine

Philippines’s exports have come under pressure due to economic troubles in the European Union and the U.S. According to data from the National Statistics Office, Philippine exports during the first seven months of 2011 inched up just 3.3%, down significantly from the 26% growth witnessed during the same period in 2010. Weakness in the electronics sector, which accounts for nearly 50% of all exports in the country, was the sore point. Revenues from electronics during the first seven months of 2011 fell 12.6% to $14.9 billion from $17.0 billion in the year-ago period. Although other merchandise exports such as woodcraft, mineral and textiles continued to grow, the weakness in the electronics and the auto segment hindered export growth for the year.

Following such weak data, the country’s Export Development Council, convened a meeting of policy makers and exporters to revise the current target of 10% export growth for 2011. Earlier international institutions, such as the Asian Development Bank and United Nations Center for Economic and Social Development, had trimmed the outlook for Philippines’s exports.

On the other hand, the lukewarm growth in demand has resulted in lower inflation. During August, inflation fell to a four-month low of 4.7% even as the country’s currency, the peso, weakened substantially. As of the first week of October, the peso tumbled to an eight-month low against the U.S. dollar. A central bank official cited by Bloomberg said that a partial reversal of capital inflow was the main reason behind the fall in the peso.

The decline in inflation along with slowing exports has prompted the country’s central bank to leave its benchmark overnight interest rates untouched at 4.5% in September. The central bank, which had joined other Asian nations in the fight against inflation by raising interest rates during mid 2011, has said that it will now hold a “flexible” monetary policy. The central bank’s governor Amando Tetangco also said that the country’s banks “have a lot of room to increase lending to support the domestic economy”.

Malaysia: Consumption and investment to help the economy in 2011

Like in most other Asia nations, Malaysia’s inflation fell for the second consecutive month in August to 3.3%, as the prices of many goods including food and fuel rose at a much slower pace. Even the prices of other goods such as clothing, non-alcoholic beverages and footwear climbed at a slower pace. With inflation cooling down, Malaysia’s central bank refrained from hiking interest rates in September. Malaysia has raised interest rates four times since March 2010 and the latest hike came in May 2011. Malaysian central bank governor, Zeti Akhtar Aziz, opined that further “domestic sources of inflationary pressures could be less” going forward.

Malaysia’s export-dependent economy is currently feeling the heat of a growth slowdown in the developed world. Malaysia counts the European Union, the U.S. and Japan as some of its largest trade partners, and the slowdown in these economies is hitting the country. Malaysia’s second quarter GDP of 4% was the slowest pace of quarterly expansion since September 2009.

Despite the slowdown, Malaysia expects a relatively strong economic performance during the second half of 2011, primarily due to strong support from domestic consumption and foreign investment. In a testimony to strong domestic consumption, retail sales in Malaysia during the second quarter of 2011 grew 9.1% up from 5.8% during the second quarter of 2010. The country’s consortium of retail chains has forecasted 10.1% sales growth for the third quarter of 2011, with fashion retailing growing 11.5%.

Furthermore, foreign direct investment (FDI) growth has also been robust thus far. The country’s Prime Minister Mr. Najib Razak said that FDI for the first six month of 2011 zoomed almost 75% from the first six months of 2010.

Taiwan: Export orders slump in the wake of a global slowdown

A slowdown in demand across the developed world, monetary policy tightening in China and a fall in exports to Japan conspired to knock the wind out of Taiwan’s exports during August. Taiwan’s exports, which account for almost two-third of the country’s economy, showed definite signs of slowdown during August.

Export orders for Taiwan, which indicate the demand for shipments over one to three months, rose at the slowest pace in nearly two years during August on the back of slumping global demand across the world. Taiwan’s Ministry of Economic Exports reported that export orders were up just 5.26% in August, the slowest pace since October 2009 and almost six percentage points less than the 11.12% growth achieved during July.

Some of Taiwan’s large electronics contract manufacturing firms are paring down the size of their workforce as they adjust to lower business orders from customers in the developed world. For instance, Bloomberg reported that the Taiwan-based Quanta Computer Inc, which manufactures and assembles notebooks and smartphones, had announced a plan to reduce headcount by 1,000 in the face of sliding orders from Research in Motion Ltd, the manufacturer of Blackberry smartphones.

Furthermore, the slowdown in Taiwanese manufacturing was punctuated by the Taiwanese Purchasing Manager’s Index (PMI) compiled by HSBC. Taiwan’s reading of 44.5 in September down from 45.2 in August was one of the lowest among Asian economies. Any PMI reading below 50 is considered as an indicator of contraction in activity. Further, the consumer confidence index compiled by the Research Center for Taiwan Economic Development also fell 1.31 points to 85.58 in September down from 86.89 in August, primarily due to higher volatility in the domestic stock market.

This, along with headwinds to global growth, prompted Taiwan’s central bank to refrain from raising interest rates in its September policy meeting. The country’s central bank left the 10-day discount rate for banks untouched at 1.875%. The bank, which had hiked interest rates for the past five consecutive quarters, noted that inflation in the island would remain subdued.

Taiwan cut its GDP growth forecast for 2011 to 4.81% from 5.01% and expects inflation to trend downwards to 1.59% for 2011 from its earlier forecast of 1.89%.

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