Emerging Markets Briefer ( Taiwan , South Korea , Thailand )

Taiwan Macro Outlook 
• The recovery lost some momentum in Q2 and Q3 mainly because of a sharp
slowdown in exports to China. Domestic demand – particularly private consumption –
has remained resilient. With growth in China expected to accelerate in the coming
quarters, Taiwan’s GDP growth should improve considerably over the same period.
• Inflation is expected to edge up slightly in the coming months, partly due to higher
food prices. However, inflation remains below the central bank’s medium-term 2%
inflation target.
• Liberalisation of economic ties with China could be a major positive for Taiwan.
Tourism, transport and regulation of foreign direct investments for financial
institutions have recently been liberalised. In addition, Taiwan and China have
concluded a trade agreement. This is very positive news for Taiwan.

Monetary Policy Outlook 
• Taiwan’s central bank started cautious monetary tightening by raising its leading
interest rate by 12.5bp in June and September. The leading interest rate is currently
1.5%. In our view, Taiwan’s central bank is still slightly behind the curve in its
monetary tightening, but in light of the recent slowdown it can afford to remain
cautious for now. We expect Taiwan’s central bank to raise its leading interest rate by
12.5bp each quarter, but possibly increase the pace of tightening from Q3 11.

FX Outlook 
• TWD remains well supported by a strong current account position (C/A surplus 10%
of GDP). Despite its recent appreciation, the currency remains substantially
undervalued. The central bank has intervened heavily in the FX market. Capital
controls prohibiting foreigners’ TWD time deposits were introduced in November
2009 and a rule barring foreigners from investing more than 30% of local funds in
short-term government bonds and money market products was recently reactivated.
We expect TWD to appreciate further supported by continued CNY appreciation.
However, intervention limits short-term potential.
• Ma Ying-jeou from the Kuomintang party won a landslide victory in the presidential
election in 2008. The Kuomintang has a majority in parliament and hence the
domestic political situation is stable. The political agenda has shifted from
independence to an economic agenda including liberalisation of economic ties with
mainland China. Political tensions between Taiwan and China have eased
considerably, and this is currently a major positive for Taiwan. The next election will
be held in 2012.


South Korea Macro Outlook 
• The South Korean recovery slowed in Q2 and Q3, driven not least by slower export
growth to China, South Korea’s by far most important export market. Overall South
Korea’s recovery has been strong and industrial production is now above its pre-crisis
level. Domestic demand remains strong and growth should improve again in the
coming quarters on the back of some recovery in exports to China.
• The current account has returned to a substantial surplus that is expected to exceed
3% of GDP in 2011.
• Inflation in November declined within Bank of Korea’s 3.0% +/-1pp target range, but
inflationary pressure remains. While recent KRW appreciation is likely to prevent a
sharp near-term acceleration in inflation, we expect it to remain in the upper part of
the central bank’s target range in H2 10.

 Monetary Policy Outlook 
• Despite the output gap closing fast, short-term real interest rates have remained
negative and the Bank of Korea (BoK) has, in our view, been one of the central banks
in Asia most behind the curve. BoK raised its leading interest rate by 25bp in July and
by another 25bp in November.
• Despite being more cautious, we think BoK will continue to guide its leading interest
rate towards a neutral level next year. All in all, we expect BoK to increase its leading
interest rate by 100bp next year starting in Q1 11.

FX Outlook 
• KRW remains undervalued and is currently well supported by a favourable current
account position, portfolio inflows and a strong international liquidity position, with
FX reserves substantially exceeding short-term debt. BoK has been intervening in the
FX market recently to stem the appreciation of KRW and the introduction of capital
controls such as a tax on foreigners’ bond holdings cannot be ruled out. However, we
think that intervention will gradually ease as focus slowly turns to inflation and China
continues to appreciate CNY.
• Geopolitical risks have increased following the exchange of artillery fire between
South Korea and North Korea in November. The political situation in North Korea
looks increasingly unstable as North Korean leader Kim Yung Il attempts to secure
the transfer of his leadership to his  youngest son. Status quo in North Korea
increasingly looks like not being an option for the surrounding countries. However,
the impact on KRW has been modest.


Thailand Macro Outlook 
• In line with the rest of Asia, Thailand’s recovery slowed substantially in Q2 and Q3
mainly because of a significant slowdown in Thailand’s export growth. Quarter-onquarter GDP contracted slightly in Q3. However, domestic demand has improved
significantly as the domestic political turmoil earlier in the year has subsided.
• Headline inflation eased to 2.6% y/y in November and inflation excluding food and
energy has remained stable just above 1% y/y in recent months, comfortably within
the Bank of Thailand’s 0.5-3.0% target range for core inflation.
• Thailand has very healthy balances with the current account surplus expected to
exceed 4% of GDP in 2011 and the budget deficit just around 2.5% of GDP.

Monetary Policy Outlook 
• With the economy recovering, inflation back in positive territory and political turmoil
receding, BoT has started cautious monetary tightening. Since spring 2010, BoT has
raised its leading interest rate by 75bp to 2.0%. BoT will continue the normalisation
of monetary policy. However, BoT is one of the few Asian central banks that are
currently not behind the curve in tightening. With core inflation subdued and the
output gap again increasing, BoT can afford to be relaxed and is not expected to raise
its leading interest rate again until Q2 11.

FX Outlook 
• BoT has intervened massively in the FX market to stem the appreciation of THB. In
addition, a 20% withholding tax on foreign investors’ interest rate payments has been
announced. Further capital controls or possible liberalisation of capital outflows
cannot be ruled out. Nonetheless, THB will continue to be supported by very strong
external balances. Because portfolio inflows have been modest and Thailand’s
external liquidity position is very strong (FX reserves exceeding total foreign debt by
a wide margin), THB should continue to perform well in a more risk-averse market.
• Political uncertainty remains a major negative, despite some calm having returned
since the announcement of a state of emergency and crackdown on the ‘red shirts’ in
the spring. One short-term uncertainty was removed when the constitutional court
declined to dissolve the ruling Democratic party and ban current Prime Minister
Abhisit from politics on the back of corruption charges against the government. The
next major hurdle is the general election to be held no later than November 2011.
Should the opposition win, it could pave the way for the return of the fugitive former
prime minister Thaksin and renewed political turmoil. Finally, because monarchy is
an extremely important political institution in Thailand, the accession question when
the current extremely popular king dies is a major uncertainty.
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Full report: Emerging Markets Briefer ( Taiwan , South Korea , Thailand )