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