Friday, December 17, 2010

Emerging Markets Briefer ( Malaysia , Philippines , Indonesia , India )

Malaysia Macro Outlook 
• As in most of the rest of Asia, the recovery has lost some steam in recent quarters and
GDP contracted slightly in Q3. The slowdown has been driven by weaker export
growth, while domestic demand has remained resilient. Growth is expected to
improve again in the coming quarters on the back of stronger exports.
• Inflation has only edged slightly higher in recent months and so far is no major
constraint on monetary policy.
• Malaysia has very healthy external balances with the current account surplus expected
to exceed 9% of GDP. However, public finances have started to deteriorate as the
easy fiscal policy has remained in place, possibly because the UMNO-led government
is preparing for a general election in 2011. The budget deficit could be close to 6% of
GDP in 2011.

 Monetary Policy Outlook 
• The Malaysian central bank was one of the early movers in Asia and has so far this
year increased its leading interest rate by 75bp. With real interest rates remaining
positive, it is one of the few central banks in Asia that cannot be accused of being
behind the curve. Partly because of the recent appreciation of MYR, the pace of
tightening will slow, and the next rate hike is not expected until Q2 11.

FX Outlook 
• The central bank has intervened in the FX market recently to stem the appreciation of
MYR, but has so far not resorted to capital controls and at this stage it looks unlikely
to do so. MYR remains supported by strong external balances and in the medium term
possibly by liberalisation of the economy, including easing access for foreign
• The political environment appears to be stable, albeit the governing Barisan Nasional
(BN) coalition is increasingly challenged by the opposition and failed to win a twothirds majority in connection with the general election in March 2008. However, there
is probably no credible political alternative to BN at present. Although the next
election is not scheduled until 2013, an election in 2011 looks increasingly likely,
because of the government’s current favourable approval ratings.
• While Malaysia has a stable regulatory environment, it has been lagging other Asian
countries on governance reforms and economic liberalisation. That said, Prime
Minister Najib recently announced some liberalisation of foreign direct investment
rules, easing requirements for co-Malay ownership.

Philippines Macro Outlook
• GDP growth has recovered strongly due to fiscal easing and a recovery in exports.
The pace of the recovery eased in Q3, but we expect it to accelerate again from Q4.
• Inflation has increased to the lower range of central bank’s 3-5% target range, mainly
due to lower energy and food prices. However, inflation should soon start to pick up
as the base effect of lower energy prices last year begins to recede.
• The fiscal deficit has deteriorated sharply due to fiscal easing. The central government
deficit is likely to increase to around 4% of GDP in 2010, from just 0.9% in 2008.

Monetary Policy Outlook 
• With interest rates relatively high compared with other Asian countries, BSP has not
started to tighten monetary policy. With inflation easing recently and increasing
concern about the strong PHP, it appears that BSP will not start to tighten monetary
policy until early Q2 11.

FX Outlook 
• BSP has intervened massively in the FX market to stem the appreciation of PHP.
While capital controls have so far not been introduced, they remains a possibility. The
Philippines has a very strong external position. The current account surplus exceeds
5% of GDP, not least because remittances from Filipinos working abroad have
continued at a high level. We expect the appreciation of PHP to continue, albeit shortterm potential is limited by intervention and possible capital controls.
• Senator Benigno Aquino III  from the Liberal party defeated the populist Joseph
Estrada in the presidential election in May 2010. Why this is positive, President
Aquino’s position in the parliament remains weak just as it was for his predecessors
and so far Aquino has failed to put forward a clear strategy for his economic policy.

Indonesia Macro Outlook 
• Indonesia is a comparatively closed economy and has therefore been less affected
than other Asian countries by the global financial crisis. Growth slowed slightly in
Q3, but overall remained resilient due to robust domestic demand. GDP growth is
expected to be 6% in 2010 and exceed 6% in both 2011 and 2012.
• With a current account surplus just above 1% of GDP, the surplus remains modest
compared with other Asian countries.
• Inflation has increased slightly in recent months and at 6.2% y/y remains just outside
the Bank of Indonesia’s (BI) target range for inflation in 2010. However, core
inflation remained subdued at just 4.3% y/y and headline inflation is expected to
decline within the target range in the coming months. The strong IDR appreciation
should continue to exert some downward pressure on inflation.

Monetary Policy Outlook 
• Compared with other Asian central banks, interest rates have remained relatively high
during the global financial crisis and real interest rates have stayed positive. Hence,
there has been less urgency to tighten and BI has so far not started to tighten. With
inflation easing slightly recently and BI concerned about the recent appreciation of
IDR, it appears that BI is unlikely to start tightening until late Q1 11.

FX Outlook 
• BI has intervened strongly in the FX market to stem the appreciation of IDR. In
addition, BI has introduced a one-month holding period for foreigners’ purchases of
central bank bills. While further capital controls cannot be ruled out (there will
probably be an extension of the holding period), a tax on foreign holdings of
Indonesian bonds could also be introduced. IDR remains well supported by
Indonesia’s strong external position, but intervention limits short-term appreciation
potential. However, as a carry currency, it remains very sensitive to portfolio flows
and risk sentiment in global financial markets.
• Political stability is a positive for Indonesia. President Yudhoyono was re-elected in
June 2009 and his Democratic party improved its position considerably in the general
election. Yudhoyono is reform-minded and has signalled his intention to continue
fiscal consolidation. The re-election of Yudhoyono and the peaceful elections
underline that, despite the recent terror attacks, the favourable political development
continues. That said, the recent resignation of the highly regarded finance minister,
Sri Mulyani, has created uncertainty about the government’s ability and will to
continue its anti-corruption policy.

India Macro Outlook 
• As India is a relatively closed economy with considerable restrictions on capital flows 
it was not hit as hard as other Asian economies by the global financial cycle and 
domestic demand is the most important growth driver. However, a drought hit major 
parts of India in 2009 and it is expected to subtract 1pp from GDP growth this year. 
Still, GDP growth should exceed 8% in 2010 and 2011. 
• The drought added substantially to food price inflation earlier in 2010 with inflation 
exceeding 10% y/y in H1 10. However, because of a normal harvest in 2010, food 
prices have stabilised and the year-on-year inflation rate is expected to decline sharply 
in H2 10 and should reach about 5% y/y by the end of the year. 
• The current account deficit has deteriorated sharply due to much slower export growth 
and resilient domestic demand and it has become increasingly difficult to finance the 
current account deficit from foreign direct investments. The increasing current 
account deficit now close to 4% of GDP is a concern. 

 Monetary Policy Outlook 
• The Reserve Bank of India (RBI) has tightened monetary policy aggressively and has 
so far raised its leading repo-rate by 150bp to 6.25% since early 2010 on the back of 
the sharp increase in inflation. However, with inflation now slowing substantially, the 
pace of monetary tightening will slow in 2011. We expect the RBI to raise its leading 
interest rate by only 75bp in 2011 with the next rate hike likely in Q1 11. 

FX Outlook 
• INR has continued to appreciate on the back of renewed strong portfolio inflows and 
this picture is unlikely to reverse in the next three months. RBI has intervened in the 
FX market, but not in a scale similar to other Asian countries. India has extensive 
capital controls on foreign bond purchases but has substantial inflows into the stock 
market. India appears unlikely to introduce further capital controls. Because of the 
deteriorating current account deficit INR looks increasingly vulnerable, but longer 
term it will remain underpinned by continued strong FDI inflows and the strong 
external liquidity position. 
• Overall, India’s economic balances have deteriorated in recent years, and the public 
finances in particular remain a major concern.  Including off-balance items, the public 
budget deficit will probably exceed 9% of GDP in 2010. INR remains vulnerable to 
the current account deficit and possible lower portfolio and FDI inflows in a global 
deleveraging scenario.
Full report : Emerging Markets Briefer ( Malaysia   , Philippines  , Indonesia , India ) 

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