EMERGING ASIA PACIFIC:
FOURTH QUARTER 2012 ECONOMIC REVIEW

Slowing inflation and rebounding exports signal better days ahead

Emerging Asia Pacific economies showed strong signals of a rebound in economic activity amidst generally rising exports and stabilizing inflation. While some major economies like China, which had cut interest rates throughout 2012 to stimulate the economy saw a mild resurgence in inflation many countries like South Korea, Taiwan, Malaysia and Philippines saw inflation stabilize significantly during the quarter. India, the region’s second largest economy, however, continued to be troubled by rising prices despite high interest rates. Exports across many emerging Asia Pacific economies showed encouraging signs. 

A rebound in China along with better-than expected economic performance across developed economies across the world helped lift exports among countries like Taiwan, South Korea and Thailand. While exports did come under pressure in some countries like Indonesia, Malaysia and Philippines, domestic consumption more than made up for the slump in overseas sales. Most central banks in the region, which had erred on the side of growth thus far, are now more cautious on the price front. Many central banks in the region reported that guarding against inflation could be their main stance in the year ahead. Many central banks now feel that monetary stimulus measures such as ultra-low interest rates and quantitative easing in the developed world could drive up commodity prices much to the detriment of their economies. 

China: Signs of inflation accompany a noticeable recovery

After recording seven continuous quarters of slowing growth, China’s economy showed signs of stabilizing. Although the third quarter of 2012 ended September, posted a GDP growth of just 7.4%, the lowest in eight quarters, economic data gathered during September signaled China’s economy was gaining back some lost vigor. Industrial production, fixed-asset investment, and even retail sales registered higher growth during the month.

The surge in the Chinese economy comes after an aggressive monetary easing from the country’s central bank, People’s Bank of China (PBOC), which had cut interest rates and reduced bank reserve requirements since late 2011. While the central bank has not cut interest rates since July 2012, the effects of gradual monetary easing had helped improve access to credit for many companies across the country. 

China’s strong economic performance has come at a time of widespread view that China will witness hard landing in the wake of tight credit conditions, troubling prospects in the European Union, slowing global economy, and weakening construction markets at home. However, several factors helped China overcome these challenges during the second half of 2012. While China managed to thaw the credit markets at home, global economic prospects improved much more than expected during the second half helping Chinese exporters as well. 

In fact, data from the final quarter of 2012 reaffirmed China’s recovery. While China engineered a once-in-a-decade leadership transition replacing the head of state and other important political functionaries, the economy chartered its own course quietly. With factory output and export growth picking up, China’s state-owned industrial companies registered robust profits. Further, investment in the economy got a great boost with the country’s top economic-planning agency approving construction of major subway lines linking industrial zone. As China’s steel mills hummed along with other factories, the HSBC-bank compiled Purchasing Manager’s Index (PMI), a gauge of manufacturing activity, showed its first expansion after several months in November 2013.

Even China’s construction markets seemed back on feet during the fourth quarter of 2012 supporting a recovery. New home prices climbed in 53 of the 70 major cities and prices fell in only 10 cities during November. This is the most optimistic figures that China’s residential market threw up in nearly 18 months. 

Nonetheless, inflation, which had treaded downwards for the most parts of 2012, is accompanying the recovery. The country’s coldest winter which took a toll on livestock and vegetable production drove up vegetable price, which in turn fueled consumer price inflation to a seven-month high of 2.5%. Economists surveyed by Bloomberg opined that the spike in inflation could hinder further monetary easing in China.

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India: Monetary tightening crimps output

India’s tight monetary policy is still taking a toll on the country’s economy. India’s central bank, Reserve Bank of India (RBI), which started tightening monetary policy over two years ago in response to stubborn inflation, is holding its cards to the chest. Although the Indian government has repeatedly signaled it wants more benign interest rates, the RBI is not budging for want of clear signals that prices is falling.

In fact, despite a constricting monetary policy, inflation in Asia’s third-largest economy has remained well above RBI’s target rate of inflation. Many economists have called India’s inflation structural – arising from supply chain bottlenecks and lack of adequate investments in infrastructure. Furthermore, food and fuel prices have also treaded upwards. Although, India’s wholesale-price index unexpectedly fell in November to 7.24%, core inflation, a key measure that largely decides interest rate hike was outside the comfort zone. According to one estimate compiled by Bloomberg, core inflation stood at around 5.19% in October. However, even as the tight monetary policy’s effect on India’s inflation has remained mild, its effect on India’s investment and output has been outsized.

High credit costs have sapped the energy out of many factories and industries across the country. Not surprisingly, India’s Index of Industrial Production dipped 0.1% in November as mining sector contracted 5.5% and consumer and basic goods sector weakened. With investment demand sputtering, capital goods segment also floundered. India’s government, burdened by high fiscal deficit, is trying to showcase its efforts to reduce inflation to win an interest rate cut from the central bank. India’s lawmakers approved a legislation to let foreign retailers like Wal Mart and Carrefour to set shop in India to encourage investments.

The country is also mulling amending a century-old land acquisition law to facilitate more investments in infrastructure projects like ports, utilities, factories, and other large-scale projects. Amidst all the slowdown woes, India’s services have proved to be a much resilient economic engine over other ones. The HSBC Holdings’ PMI Index measuring service expansion jumped to 55.6 in December from 52.1 in the previous month. The RBI’s policy meet to decide on interest rate is scheduled for late January 2013.

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South Korea: Recovery brings limited cheer

Aided by a mild recovery in the global markets, a bout of interest rates cuts from the central bank, and a strong sales record by the country’s chaebols or conglomerates South Korea’s economy recovered considerably during the final months of 2012 and made up for its sluggish performance during the initial months of 2012. The country’s central bank, Bank of Korea, which cut interest rates throughout the year, pared interest rate again in October and pegged the benchmark interest rates at 2.75%.

Consequently, South Korea’s industrial production rose in September after a gap of four months. This along with improved global sentiments helped South Korea register an export growth in October and register a record current account surplus. South Korea’s current account surplus typically goes up on strong global demand for the country’s merchandise like ships, mobile phones and cars. Further, adding to the cheer, South Korea’s inflation in December also slowed to a four-month low.

Economists surveyed by Bloomberg opined that inflation will continue to be subdued as South Korea’s potential demand still has room to grow. Furthermore, Ms. Park Geun Hye, who was elected as the country’s first female president in December 2012, has also pledged to give the country a fiscal stimulus during 2013. Ms Geun Hye has said that she will boost welfare spending to bridge the wealth gap between the country’s polities.

Despite the good news, improvements in both the South Korean manufacturing and consumer confidence were hard to come by. While consumer confidence sentiment index remained stagnant at 99 for December over November, manufacturing confidence has been slipping steadily, with the measure falling for the second month during November. In recent months, the Korean currency, won has been strengthening much to the detriment of the country’s exporters. A consistent six-week appreciation in the value of won at a time of a weakening yen, Japan’s currency, adds to the challenges of South Korea’s exporters. Japan and Korea compete for a global market share in the auto, electronics and heavy machinery industries. 

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Indonesia: Consumption and investment gains counter export slump

Indonesia, which for the past two years had successfully unleashed the strength of its currency to cushion inflation, saw its ammunition diminish substantially during the final months of 2012. The country‘s strong currency, the rupiah, helped cushion the effects of imported inflation arising out of oil and food purchases for the most part of the past two years.

In recent months, however, Indonesia’s currency had substantially weakened against other major currencies resulting in higher import costs and higher inflation. As of the end of 2012, rupiah had declined nearly 6%, the second worst performing currency in the past year after the Japanese yen. A steadily declining currency, however, prevented the country’s central bank from providing monetary ammunition to support growth. The country’s central bank had to keep borrowing costs unchanged for the past 10 straight meetings as inflation continued its upward trend even throughout 2012.

Neither has a weak rupiah helped improve Indonesian exports. Throughout 2012 Indonesian exports have largely proved to be sore point falling for nearly eight continuous months till November 2012. Economists have largely blamed slowing European demand for a slump in Indonesian exports during the year and even the Indonesian government has expressed pessimism about export growth going forward. Nonetheless, neither weakening currency nor falling export growth seem to have stopped Indonesia’s growth momentum. Consumption and investment, two key engines of Indonesia’s economic growth are still thriving. Indonesia’s GDP growth of 6.4% for 2012 is the second best amongst major Asian economies. Only China has posted better growth for full year 2012.

Many corporations are thronging Indonesia to grab a pie of the domestic consumption market and investment markets. Indonesia’s government is deploying billions of dollars toward huge infrastructure projects such as roads, ports, bridges and air terminals. Furthermore, rising wealth amongst Indonesians is fueling a boom in travel and tourism and consumer durables sector. Many hotel chains are betting on Indonesia. Accor, a large European hotel operator is increasing the number of hotels it is building in Indonesia to 94 over the next few years from 55 now.

Furthermore, with a majority of travel centered within the country, hotel chains are expanding into Indonesia’s secondary cities as well. Foreign investor’s enthusiasm over Indonesia rose as sovereign credit ratings agencies such as Fitch Ratings and Moody’s Investors upgraded Indonesia’s debt status. 

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Thailand: Fiscal and monetary stimulus ensure faster growth

Thailand’ economy, which gained traction beginning in the second half of 2012, continued its run into the third and the final quarter of 2012 as well. A well-timed fiscal and monetary stimulus has helped the economy recover from a once-in-a-generation flood a year-ago. The 2011 flood devastated industrial regions, shut out car and electronics factories, inundated the country’s capital city and killed 700 people during that year.

Thailand’s central bank, which cut interest rates immediately in the aftermath of the flood, continued to provide a healing stimulus. The central bank’s latest interest rate cut to keep the economy in the growth path came in October 2012. Lower borrowing costs have encouraged the reopening of many factories and businesses lost to floods a year ago. This in turn has facilitated a recovery in exports. Thailand exports jumped the most in November and its investments also surged. Nissan and Toyota, two key Japanese car makers with huge production facilities in Thailand, ramped up output. In fact, Nissan announced that it will open a second factory and Toyota said its sales will surge more than 70% during 2012 in the wake of tax breaks for first-time car buyers in Thailand.

On the fiscal side, Thailand’s Prime Minister, Mrs. Yingluck Shinawatra, who had raised minimum wages earlier this year, announced a further hike in minimum wages starting 2013. This coupled with infusion of cash into large infrastructure projects is largely expected to give a fiscal stimulus to Thailand in 2013 as well. However, even though core inflation remained below the central bank’s target rate of 3% Thailand’s consumer price inflation in December rose to a 13-month high amidst increasing wages and strong government spending. Thailand’s central bank is now moving more cautiously. It refrained from cutting interest rates in the past two policy meet, the latest of which was conducted in January.

Thailand’s finance ministry now expects the country’s GDP to grow 5% on robust consumption and rising exports. 

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Philippines: Strong peso and benign inflation support expansion

Philippines’ economy continued its dream run during the second half of 2012. With a GDP growth of 7.1% during the third quarter of 2012, Philippines registered the fastest growth amongst Southeast Asian economies. Rising consumer spending, benign inflation and robust investment expenditure helped Philippines register its fastest quarterly figures since 2010.

However, Philippine exports to major overseas customers such as European Union and the U.S. fell substantially during the last months of 2012. Exports such as apparel and mineral goods slipped nearly 13% and 22.4% during November contributing to an export growth of just 5.5%, down from October figures.

Nonetheless, Philippines’s economy felt little effect of the fall in exports. That is understandable since consumer spending accounts for nearly three-fourths of the $200 billion economy. Furthermore strong remittances also helped the Philippines economy during the third quarter.

On the other hand, despite the strong growth, inflation barely reared its head during the fourth quarter of 2012. Philippines’s inflation for December rose just 2.9% much lesser than the 3.1% inflation predicted by a survey of economists by Bloomberg. Food prices and fuel costs have tended to remain stable in Philippines as the country’s strong currency, the peso, has continued to strengthen. The peso, which has appreciated over 6.8% in 2012, is Asia’s second-best performing currency, among the 10 most traded Asian currencies, according to an analysis from Bloomberg. As of late January, the country’s currency had strengthened to its highest level against the U.S. dollar in nearly five years.

Amidst a strong performance and strengthening currency, Philippines’s central banks ruled out more interest rate cuts from its current rate of 3.5% anytime soon. 

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Malaysia: Domestic market rescues economy from an export  slump

Malaysia’s economy continued its strong performance during the third quarter of 2012 as well. During the third quarter, Malaysia’s GDP surged 5.2%, the fifth consecutive quarter of above-5% growth. The country’s economic performance was far better than the median 4.8% growth predicted by a group of 22 economists in a Bloomberg survey. Many economists had predicted that the country’s output could be hampered by a slowdown in global markets and that Malaysia’s exports would be crimped.

While the economists got their prediction on Malaysia’s exports right – exports did slip 3% during the quarter – they surely underestimated the strength of Malaysia’s domestic economy. With Malaysia’s national election approaching fast, the country’s Prime Minister, Mr. Najib Razak, had delivered a number of budget concessions and subsidies. Mr. Razak had announced generous raises to civil servants, delayed rolling back state subsidies on essential goods, and provided significant tax breaks for investment. Consequently, the boost initiated a wave of construction projects and strong consumer spending. While services in general jumped 7% during the quarter, construction sector surged 18.3%. The GDP growth was also spurred by strong consumer spending during the quarter.

Furthermore, the surge in growth has also not been accompanied by any spurt in inflation. Unlike some other central banks in the region, Malaysia’s central bank largely refrained from using its monetary measures to stimulate the economy. Bank Negara Malaysia, the country’s central bank, had held interest rates for the past nine consecutive policy meets at 3%. Not cutting interest rates early this year is certainly helping Malaysia in the price front now. Consumer price inflation in Malaysia stood at just 1.3% in November, the lowest amongst Southeast Asian nations.

Some of the country’s commercial banks have forecast a steady interest rate scenario for Malaysia through 2013. Furthermore, Malaysian exports, which troubled the country during the third quarter of 2012 also showed signs of a turnaround. For instance, after declining markedly during the third quarter and October 2012, Malaysia’s exports jumped 3.3% in November. A strong recovery in China, which is purchasing raw materials and components from its neighbors at a rapid clip, is pushing exports up at many Southeast nations and Malaysia has also been a beneficiary of the trend. The country expects trade to grow 5% and GDP growth to range between 4.5% and 5.5% in 2013.

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Taiwan: Confidence up on bright export growth

Taiwan’s export-driven economy got a significant boost as large customers such as China and the U.S. lapped up Taiwan-made goods such as toys, sports goods, and information and communication gear. While export orders, an indicator of future exports, jumped 3.2% in October, actual exports grew 9% in December. Taiwan particularly benefited from rising manufacturing activity in China which expanded at its fastest pace in 19 months during December. China imports advanced machine components, parts, and base materials and chemicals from Taiwan typically boosting the country’s export orders. Even Taiwanese shipments to Europe climbed 11% during the month.

Taiwan’s rising exports comes at a time of rising home currency. Despite the country’s central bank refraining from hiking interest rates for over a year, Taiwan’s dollar appreciated to a 16-month high in January. Thus far Taiwan’s central bank has largely managed the country’s currency through purchase of U.S. dollars. However, many private economists opined that Taiwan might soon start employing interest rates to manage the home currency in order to keep the country’s export engine going.

On the other hand, however, Taiwan’s inflation, which for the most part of the year remained subdued unexpectedly accelerated in December. While the consumer price inflation of 1.61% in December was well within the 2% target of the central bank, economists widely interpreted that Taiwan’s slowing inflation could soon come to a halt and stabilize at current levels.

Meanwhile, the rebound in export markets and low inflation for most parts of the year boosted consumer confidence amongst Taiwanese. Consumer confidence index compiled by Taiwan’s Central University made up for a two-month slide in October rising to a reading of 72.73. Improved labor market conditions in particular helped the index. CIER, a leading Taiwanese think tank has forecast a 3.6% GDP growth for Taiwan amidst rising private consumption and falling fixed asset investment.

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