ASIAN ECONOMIC PROSPECTS:COPING WITH RISING RISKS

Presentation to ECONOMICS SOCIETY OF SINGAPORE

Manu BhaskaranCentennial Group

25th July 2006

IN A NUTSHELL

Cyclical prospects under a cloud Geo-political risks oil price shock

US slowing: external demand?

Resilience to shocks is the key now External position more robust

Investment rates to rise

Bottom line: difficult times ahead But region can absorb shocks better

POLITICAL RISKS

Geo-political risks rising

Middle East: expanding conflict Oil prices, risk premium to surge

Korean peninsula Result: Sino-Japan ties worsen

Indo-Pakistan relations Mumbai bombings raise tensions

Thai, Malaysian risks - manageable

Global economic risks

Global demand growth murkier Lead indicators in OECD weaker a bit

Tech demand – so far, so good Electronics demand vital to SE Asia

Lagged effect of rising rates, oil prices Monetary conditions tighter

Oil prices nearing Oil Shock levels

ECONOMIC PROSPECTS

CYCLICAL PROSPECTS

OECD Total

-6

-4

-2

0

2

4

6

8

10

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

% y/y

OECD CLI

OECD lead indicators flash warning

United States

-8

-4

0

4

8

12

16

Jan

-0

0

Jan

-0

1

Jan

-0

2

Jan

-0

3

Jan

-0

4

Jan

-0

5

Jan

-0

6

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

OECD CLI

Conference Board BCI

CYCLICAL PROSPECTS (2)

Tech demand indicators fair

U S : N e w O r d e r s :

C o m p u t e r s & E l e c t r o n i c s

- 3 0

- 2 0

- 1 0

0

1 0

2 0

3 0

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

% y / y 3 M M A

US: CONCERNS RISING

Confluence of positives ending

Economy boosted by Unprecedented monetary, fiscal stimulus

Massive housing boom

Consumption likely to slow Housing boom ending

Jobs and incomes not enough to support

US: HOUSING BOOM WANES

•Inventory of homes at 6.5 months.•Housing-related employment easing•Mortgage applications decelerating

N AH B H ous ing M a rk e t Ind e x

30

35

40

45

50

55

60

65

70

75

Jun-

05

Jul-

05

A

ug-

05

Sep-

05

Oct-

05

N

ov-

05

D

ec-

05

Jan-

06

Feb-

06

M

ar-

06

A

pr-

06

M

ay-

06

Jun-

06

Jul-

06

US: SAVINGS RATE TOO LOW

US: Personal Savings as % Disposable Personal Income

-202468

1012

1990

1992

1994

1996

1998

2000

2002

2004

Savings rate lowest since 1933

Trigger for rise: end of housing boom

US: BACKLASH VS COMPANIES

U S : C o r p o r a te P r o f its % GD P

7

8

9

1 0

1 1

1990

1992

1994

1996

1998

2000

2002

2004

US profit/GDP ratio unusually high

Invites backlash against companies

US: CONSUMPTION DRIVES GDP

US GDP Growth

0

2

4

6

8

10

12

14

16

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05

US GDP Grow th

PCE

Investment

Investment fair but not enough

GLOBAL LIQUIDITY HIGH BUT …

Centennial excess liquidity: warning sign

G l o b a l E x c e s s L i q u i d i t y

- 1 5 .0

- 1 0 .0

- 5 .0

0 .0

5 .0

1 0 .0

1 5 .0

2 0 .0

Jan

-86

Jan

-89

Jan

-92

Jan

-95

Jan

-98

Jan

-01

Jan

-04

GLOBAL LIQUIDITY - NEGATIVE

US: Real Interest Rate

-1.0

-0.5

0.0

0.5

1.0

Jan

-02

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

% pa

US, Japan – more tightening

JP: Monetary Base Growth

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Jan

-02

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

% y/y

IMPACT ON ASIA

China

5

10

15

20

25

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

% y/y

OECD CLI

Regional lead indicators point to moderation

Korea

-15

-10

-5

0

5

10

15

20

25

30

% y/ y

LDCI

OECD CLI

IMPACT ON ASIA (2)

India

0

5

10

15

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

% y/y

OECD CLI

But others seem to be better off

Indonesia

-15

-10

-5

0

5

10

15

20

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

% y/y

OECD CLI

IMPACT ON ASIA (3)

But others seem to be better off

Taiwan

-15

-10

-5

0

5

10

15

20

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

% y/y

Composite Leading Index

Singapore

-15

-10

-5

0

5

10

15

20

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

% y/y

Composite Leading Index

IMPACT ON ASIA (4)

Malaysia and Thailand cloudy

Malaysia

-5

0

5

10

15

20

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

% y/y

Leading Index

Thailand

-5

0

5

10

15

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

% y/y

MOC Leading Index

Impossible to predict precise shock Initial hit – Asia is open will suffer Export diversity helps – markets, products Singapore, HK, Malaysia worst off

Amplifiers and shock absorbers Currency flexibility, capital flows Banks, corporates – financial strength

Ability to respond effectively Govt, companies, labour market flexibility

RESILIENCE IS THE KEY

Resilience has improved

Economies more diversified Japan’s recovery helps

New niches of activity expanding

Domestic demand has healed New investment cycle starting

Better policy: exchange rates flexible more anticipatory

HOW RESILIENT IS ASIA?

ASIAN RESILIENCE BETTER

NPL Ratios

5

10

15

20

25

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

%

0

10

20

30

40

50

% (TH)

Malaysia

Philippines

Thailand

Fiscal Balance-GDP Ratio

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

2001 2002 2003 2004 2005

%

Indonesia

Thailand

Financial sectors stronger, fiscal balance restored

CHINA: RISKS REMAIN

Short term strength Massive monetary easing, now reversing

Over-investment via bad lending Huge excess capacity in more sectors

Big increase in illegal lending

Corporate sector under pressure Pricing power falling, cashflows hurt

Financial stresses emerging

CHINA: TRIGGER FOR SLOWING?

Timing of slowing unpredictable

External shock could be trigger Unexpected downturn US/global demand

Policy dilemmas rising Exchange rate vs interest rate vs admin

Domestic shock possible Political: rising social tensions

Financial: signs of more stresses

INDIA: HOW SUSTAINABLE?

Short term risks, long term surge

Monetary policy behind the curve Rates to rise, credit growth too high

External accounts deteriorated, inflation

Vulnerable to oil prices, capital outflows

Long term: acceleration Easing constraints, new growth areas…

Manufacturing competitiveness to rise

INDONESIA: BACK ON TRACK

Despite the bad news

Confidence returning, stabilising New economics team

Reforms – slow but cumulatively strong

Monetary policy is easing Rates cut, more cuts likely

Govt spending to rise

Risks: Avian flu is getting serious

INDONESIA: FALLING INFLATION

Core Inflation Momentum

0.0

5.0

10.0

15.0

20.0

25.0

Mar

-05

May

-05

Jul-

05

Sep

-05

No

v-0

5

Jan

-06

Mar

-06

% pa

Allowing interest rates to fall, spurring growth

Bank Indonesia Policy Rate

8.0

9.0

10.0

11.0

12.0

13.0

Jun-

05Ju

l-05

Aug-

05Se

p-05

Oct

-05

Nov-

05De

c-05

Jan-

06Fe

b-06

Mar

-06

Apr-

06M

ay-0

6Ju

n-06

Jul-

06

%

Vulnerable to global demand cycle but:

9MP spending to be ramped up

Policy changes boost supply side Restructuring GLCs, subsidy cuts

Offshore services: highly competitive 3rd ranked globally after India, China

Fall in private investment reversing ROEs improving, capacity utilisation too

MALAYSIA: STRONGER

Some positives but worries growing:

Niches: education, transport, health

Large oil findsBUT

Political uncertainty a negative Short and long term issues

Long term risk – competitiveness

MALAYSIA: LONG TERM

Restructuring producing benefits

New sources of growth emerging

Extraordinary resilience to oil prices

Reversal of previous negatives

Regional recovery

Property, construction turnaround

Job market booming: boosts demand

SINGAPORE: REBOUNDING

Promising areas of growth

Pharmaceuticals: Diversifying from electronics

Services Financial: wealth management

Oil related services/manufacturing

IT services: computer animation

Creative industries

SINGAPORE: GROWTH AREAS

Sharp slowdown in 4Q06

Investment to fall, public invt down

Exports holding up

Offset by 2005 negatives disappearing

Avian flu, drought, tsunami effects

Politics the key risk: turning point near

Tensions high, compromise soon?

THAILAND: WEAKER

Competitive niches emerging

Manufacturing autos, auto parts, appliances

Services Healthcare, regional HQs, …

Re-balancing rural vs urban

More policies to improve balance

THAILAND: STRUCTURAL POSITIVES

Despite bad news, growth has recovered Strong remittances Agri output risingMajor structural fault lines Fiscal deficit better, still a drag Manufacturing competitiveness? Political risks likely to intensify President has narrow window

PHILIPPINES: HOLDING UP BUT …

CONCLUSION

External – confluence of negatives

Geo-political risks unpredictable

Imbalances crunch point?

Economic prospects

Ex-oil risks are rising – US etc

Asian resilience has improved

SE Asia could surprise well in 2007