Deutsche Bank Asia Economics Monthly - China

Asia
Macro
14 October 2011
Global Markets Research
Asia Economics Monthly October 2011

CHINA: We reiterate our view that the cooling property market, slowing export demand, and inventory destocking will slow sequential GDP growth in the coming two quarters. Property sales declined by 40%yoy in past month in 35 major cities. CPI inflation remains on a deceleration track towards 4%yoy in December. Food, oil and some raw materials prices declined in recent weeks HONG KONG: The economy likely rebounded in Q3 from Q2s contraction led by continued strong retail sales growth and at least stable export volumes. Inflation has proved sticky and may continue to do so even with more moderate growth. Property market sentiment has softened appreciably, which could dampen both growth and inflation. INDIA: High frequency macro indicators point to lackluster growth but are far from suggesting growth weakening to levels seen in 2008/09. A likely shortfall in the disinvestment target, lower tax collection and higher fuel subsidies could compel the government to resort to further market borrowings in the later part of the fiscal year. INDONESIA: The economy continues to boom in all respects, with little downside visible despite a weaker outlook for commodities. MALAYSIA: Export growth has slowed to a crawl, but the 2012 budget offers less stimulus than expected. But inflation will likely be lower without subsidy cuts. PHILIPPINES: Trade is contracting, which poses downside risk to growth, but domestic economy remains resilient. SINGAPORE: We think the economy escaped recession in Q3, but theres hardly any growth in the economy as global growth stagnates. SOUTH KOREA: Assuming a sustained growth in the US, we rule out a recession in South Korea, although we expect its growth to remain below trend. SRI LANKA: Growth momentum still holding up, thanks to strong domestic demand and accommodative monetary policy stance but risks of policy error cloud the growth outlook for 2012. TAIWAN: While high frequency data point to a qoq contraction in Q3, we expect a rebound in Q4, if the US economy continues to expand. THAILAND: Data thus far point to a rebound in growth in Q3, but Thailand faces strong headwinds as floods and weaker G2 demand threaten growth, prompting the Bank of Thailand to pause. VIETNAM: Amid sustained growth rises, the State Bank of Vietnam (SBV) delivers a rate hike, prioritizing inflation, as the dong remains under pressure.
Economics
Table of Contents
Asia economic and financial forecasts ............... Page 2 China................................................................... Page 3 Hong Kong .......................................................... Page 6 India .................................................................... Page 8 Indonesia .......................................................... Page 14 Malaysia............................................................ Page 16 Philippines ........................................................ Page 18 Singapore ......................................................... Page 20 South Korea ...................................................... Page 22 Sri Lanka ........................................................... Page 26 Taiwan .............................................................. Page 28 Thailand ............................................................ Page 30 Vietnam ............................................................ Page 32 Interest rate and inflation charts ....................... Page 34 Asian economic indicators ............................... Page 38
Research Team
Michael Spencer, Ph.D

Chief Economist, Asia (+852) 2203 8305 michael.spencer@db.com
Jun Ma, Ph.D

Chief Economist, Greater China (+852) 2203 8308 jun.ma@db.com
Taimur Baig, Ph.D

Chief Economist, India (+65) 6423 8681 taimur.baig@db.com
Juliana Lee
Senior Economist (+852) 2203 8312 juliana.lee@db.com
Kaushik Das
Economist (+91) 22 6658-4909 kaushik.das@db.com
Economics
Deutsche Bank AG/Hong Kong All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 146/04/2011.
14 October 2011
Asia Economics Monthly
Asian Economics and Financial Forecasts

I. Macroeconomic Indicators
Real GDP Growth (YoY%) 2009 2010 2011F 2012F China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam Emerging Asia* EM Asia ex China&India* 9.1 -2.7 6.8 4.6 -1.6 1.1 -0.8 0.3 3.5 -1.9 -2.3 5.3 6.1 0.5 10.3 7.0 10.0 6.1 7.2 7.6 14.5 6.2 8.0 10.9 7.8 6.8 9.5 7.6 9.0 5.8 8.0 6.5 4.6 4.0 6.2 3.7 8.0 4.6 3.7 5.9 7.6 4.9 8.3 4.4 8.0 6.5 4.2 4.5 4.4 3.9 8.0 3.9 4.0 6.3 7.2 4.7 Inflation (YoY%) 2009 2010 2011F 2012F -0.7 0.6 2.4 4.9 0.7 3.3 0.6 2.8 3.6 -0.9 -0.8 6.8 1.0 2.8 3.3 2.3 9.6 5.1 1.7 3.8 2.8 3.0 6.2 1.0 3.3 9.2 4.6 3.6 5.3 5.4 9.4 5.5 3.2 4.8 5.1 4.4 7.0 1.4 3.9 19.1 6.0 5.0 2.8 5.0 6.4 6.1 2.6 3.7 2.2 3.4 6.0 1.3 4.5 15.9 4.1 4.5 Current Account (% of GDP) 2009 2010 2011F 2012F 6.0 8.6 -2.0 2.0 16.5 5.6 19.1 3.9 -0.5 11.4 8.3 -8.0 5.1 6.7 5.2 6.2 -3.1 0.8 11.5 4.2 22.2 2.8 -2.9 9.2 4.6 -4.2 4.0 5.2 4.4 5.7 -3.4 0.4 9.4 4.5 19.6 1.1 -5.0 7.7 4.7 -5.0 3.1 3.9 3.7 2.8 -3.5 0.3 6.7 4.0 15.1 0.0 -5.5 6.3 4.1 -4.9 2.4 2.7 Fiscal Balance (% of GDP) 2009 2010 2011F 2012F -2.9 1.6 -6.4 -1.5 -7.0 -3.6 -1.6 -1.7 -9.9 -4.5 -5.6 -9.0 -3.9 -2.9 -1.7 4.2 -4.7 -0.6 -5.6 -3.5 5.1 -0.2 -7.9 -3.7 -1.1 -6.5 -2.9 -1.0 -1.5 1.7 -5.5 -1.1 -4.9 -3.1 8.1 0.0 -7.5 -3.3 -3.3 -5.0 -2.3 -1.0 -2.3 3.5 -4.8 -1.5 -5.0 -2.9 5.0 -1.0 -6.5 -3.6 -4.4 -5.3 -2.9 -1.7
II. Exchange Rates (vs. USD) Forecasts vs Forward Rates

Spot 14-Oct China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam CNY HKD INR IDR MYR PHP SGD KRW NTD THB VND 6.36 7.78 49.3 8950 3.14 43.5 1.28 1167 30.4 30.8 20873 3-Month DB 6.31 7.80 48.0 8835 3.09 43.0 1.24 1150 29.8 30.2 20900 Forward 6.39 7.77 49.7 8957 3.15 43.4 1.27 1163 30.1 31.0 30.6 21945 6-Month DB 6.25 7.80 47.7 8790 3.07 42.6 1.23 1100 29.5 30.0 21000 Forward 6.40 7.76 50.2 9076 3.15 43.4 1.27 1166 30.0 31.1 30.8 22332 12-Month DB 6.17 7.80 47.1 8700 3.04 42.0 1.21 1080 28.5 29.2 22000 Forward 6.40 7.75 50.6 9294 3.17 43.4 1.26 1167 29.7 31.4 # 23232
III. Interest Rates (3-Month Interbank Rate)** Forecasts vs Implied Offshore Rates
3-Month 14-Oct China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand 3.50 0.20 8.45 6.50 3.30 2.89 0.40 3.60 0.80 3.60 DB 3.50 0.25 8.50 6.00 3.30 3.50 0.40 3.60 0.80 3.60 Implied 3.39 0.48 8.14 5.57 3.35 2.15 -0.02 3.47 1.06 2.49 6-Month DB 3.50 0.25 8.10 6.00 3.30 4.00 0.40 3.65 0.90 3.90 Implied 3.35 0.59 7.60 5.69 3.47 1.86 0.67 3.37 0.82 2.50 12-Month DB 3.50 0.25 7.90 6.50 3.50 4.55 0.40 3.85 1.10 4.40 Implied 3.43 0.56 7.32 5.64 3.11 2.32 0.39 3.38 0.89 2.86
Source: Bloomberg Finance LP, Reuters, DB Global Markets Research Note: * GDP (PPP) weighted. ** Except for China, 1-yr deposit rate; India and Philippines, 3-mth T-bill yield; Indonesia, 1-mth BI rate; Pakistan, 12-mth T-bill yield; South Korea, 3-mth CD rate; Taiwan, 3-mth CP rate; Thailand, 3-mth on-shore THB/THB swap rate.
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Deutsche Bank AG/Hong Kong
14 October 2011
China
We reiterate our view that the cooling property market, slowing export demand, and inventory destocking will slow sequential GDP growth in the coming two quarters. Property sales declined by 40%yoy in past month in 35 major cities. CPI inflation remains on a deceleration track towards 4%yoy in December. Food, oil and some raw materials prices declined in recent weeks. However, policy easing is not yet a consensus at the central government level, although local pressures for changes are growing. The reversal of Foshan government decision to relax HPRs is the most recent case of the policy stalemate. We think a combination of a sub-44 export orders index, a 30%yoy drop in property sales for a few more months, some visible contraction in construction activities, and a decline of yoy CPI inflation below 5% may trigger some significant policy relaxation. We reiterate our view that the cooling property market, slowing export demand, and inventory destocking will slow sequential GDP growth in the coming two quarters. In our last monthly, we published our forecast that qoq (saar) GDP growth would decelerate from 9.1% in Q2 to 8% in Q3, 7% in Q4, and 6.8% in Q1 next year. The most recent developments reinforced our conviction that this deceleration will occur: First, in September and the first week of October, property sales in 35 major cities declined by 40%yoy (compared with about zero growth in the first eight months of this year), according to Soufun. This reflected the growing reluctance of potential home owners to buy as expectations of further price cuts are reinforced by the worsening credit crunch for developers. We believe this will lead to a slowdown in construction activities and demand for materials in the coming months. Second, European manufacturing PMI continued to deteriorate, to 48.5 in September from 49 in August, indicating that Chinas export demand will likely weaken further, given that Europe is Chinas largest export market and the historical correlation between the EU and US economies was as high as 80%. Third, the decline in commodity prices in recent months will likely trigger another round of inventory destocking. This should in turn depress apparent demand for a while. week moving avg
60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
Aa3(Pos)/AA-/A+
Moodys/S&P/Fitch
Property sales volume in 35 cities, yoy% change, 5-
Source: Soufun.
CPI inflation remains on a deceleration track towards 4% in December. We expect yoy CPI inflation to decline from 6.1% in September to 5.3% in October, 4.4% in November and 4% in December. In recent weeks, the daily agriculture price index fell 4% from the peak of 199.5 (September 26) to the 191.3 on October 12. This partly reflected the seasonal pattern that after mid-autumn festivals food prices tend to decline. If the daily index is maintained at the current level for the remainder of this month, the mom change in this index will be a decline of 2.8% in October. This will knock off CPI by around 50bps. In addition, the cut in retail gasoline prices implemented on October 8 (by 3.5%) should reduce CPI by another 10bps. Daily wholesale agriculture price index
210 200 190 180 170 160 150
1-Jul-10 15-Jul-10 29-Jul-10 12-Aug-10 26-Aug-10 9-Sep-10 23-Sep-10 7-Oct-10 21-Oct-10 4-Nov-10 18-Nov-10 2-Dec-10 16-Dec-10 30-Dec-10 13-Jan-11 27-Jan-11 10-Feb-11 24-Feb-11 10-Mar-11 24-Mar-11 7-Apr-11 21-Apr-11 5-May-11 19-May-11 2-Jun-11 16-Jun-11 30-Jun-11 14-Jul-11 28-Jul-11 11-Aug-11 25-Aug-11 8-Sep-11 22-Sep-11 6-Oct-11
Source: Ministry of Agriculture
Pressures for policy easing have become more evident, but it will take time to reach policy consensus. Over the past month, several developments suggest that the government is becoming a bit more concerned on the downside risk to the economy arising from the SME sector. Premier Wen Jiabao paid a special visit to
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5/15/2011 5/22/2011 5/29/2011 6/5/2011 6/12/2011 6/19/2011 6/26/2011 7/3/2011 7/10/2011 7/17/2011 7/24/2011 7/31/2011 8/7/2011 8/14/2011 8/21/2011 8/28/2011 9/4/2011 9/11/2011 9/18/2011 9/25/2011 10/2/2011 10/9/2011
14 October 2011
Wenzhou where many cases of ran-away bosses (SME defaults) were reported and informal lending rates rose. Premier Wen suggested that banks should increase their NPL tolerance for small businesses, special financing facilities should be set up to serve micro firms, and more tax incentives should be offered to micro firms. However, it does not appear to us that any major policy changes will take place immediately to significantly change the operating environment for SMEs. Another case that illustrates the anxiety felt by local governments is the announcement by Foshan (a second tier city in Guangdong) municipal government to relax the home purchase restrictions (HPRs) in the morning of October 11. However, in the mid-night of the same day, the government decided to revoke this policy. We believe that the desire to relax the HPRs reflects the local governments concern on declining property sales, construction activities, and government revenue, but such a decision remains contradictory to central government policy and is opposed strongly by new home buyers. Overall, we believe that the macro policy stance will remain largely unchanged in the near future, as long as export growth remains over 15%yoy and inflation is still above 5%. Policy easing should take place when real economic growth deteriorates more significantly and inflation falls to a more comfortable level. As an illustrative example, we think the combination of the following may be sufficient to trigger some major policy relaxation: a sub-44 export orders index, a 30%yoy drop in property sales for a few more months, some visible contraction in construction activities, and a decline of yoy CPI inflation below 5%. Local government bonds to help mitigate banks risk to LGFV loans. Zhejiang provincial government announced that the Ministry of Finance has authorized it to issue RMB8bn in bonds independently as a pilot program for local finance reform. The issuance will consist of 50% 3-year bonds and 50% 5-year bonds. The proceeds will be used to fund transport infrastructure such as railway projects (RMB2.75bn, or 34% of total), public housing (RMB1.37bn or 17%), health care and education infrastructure (RMB1.7bn, or 21%), agriculture infrastructure (RMB0.49bn, or 6%) as well as others. The central government requires that the bond proceeds be used to support only on-going projects (rather than to start new projects). In our view, an important purpose of permitting local government bond issuance is to refinance some LGFV loans that are maturing. By refinancing these on-going projects, it helps avoid the potential defaults of some LGFVs on bank loans. It was also reported in local press (e.g., Daily Economics News on Sep 30) that three other provinces/cities (including Shanghai, Guangdong, and Shenzhen) were
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authorized to issue bonds independently soon. The total quota for these four provinces/cities may reach RMB2530bn. We expect that provincial government bond issuances will be formally authorized soon, i.e., many more provinces will be allowed to issue bonds from next year. Our assumption is that local government bond issuances may amount to RMB300bn per year over the coming years. As reported by the State Audit Office, total outstanding bank loans to local governments and LGFVs amounted to RMB8.5tn by the end of 2010. Market estimates of the potential NPL ratios, assuming no government support (refinancing or other forms of bailout) on these loans, range from 20-30%. In sum, we believe that the launch of independent local government bond issuances will form part of the resolution strategy for potentially non-performing LGFV loans. This will essentially turn part of banks' exposure to LGFVs to provincial governments' fiscal liabilities. It should be viewed as positive for banks over the medium term as it helps mitigate the banks' asset quality risk. Jun Ma, Hong Kong, (852) 2203 8308
14 October 2011
China: Deutsche Bank forecasts

2009 National Income Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP (YoY%)1 Private consumption Government consumption Gross capital formation Export of goods & services Import of goods & services Prices, Money and Banking CPI (YoY%) eop CPI (YoY%) ann avg Broad money (M2) Bank credit (YoY%) Fiscal Accounts (% of GDP) Budget surplus Government revenue Government expenditure Primary surplus External Accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) CNY/USD Debt Indicators (% of GDP) Government debt2 Domestic External Total external debt in USD bn Short-term (% of total) General (YoY%) Fixed asset inv't (nominal) Retail sales (nominal) Industrial production (real) Merch exports (USD nominal) Merch imports (USD nominal) Financial Markets 1-year deposit rate 10-year yield (%) CNY/USD 4921 1364 3608 9.1 10.8 7.1 20.2 -10.8 -0.9 2010 5879 1374 4279 10.3 9.0 8.0 11.6 22.0 23.0 2011F 7031 1383 5084 9.0 8.4 9.0 10.5 12.0 14.0 2012F 8117 1389 5843 8.3 8.4 8.5 9.0 7.4 8.8
1.9 -0.7 29.0 31.0
4.6 3.3 19.7 19.9
4.0 5.3 14.5 15.0
2.8 2.8 15.0 16.5
-2.9 11.7 21.9 -1.5
-1.7 21.3 17.8 -1.2
-1.5 20.3 19.0 -0.9
-2.3 18.0 20.0 -1.3
1202.0 1578.0 1893.6 2083.0 1003.9 1395.0 1701.9 1889.1 198.1 183.0 191.7 193.9 4.0 3.1 2.7 2.4 297.0 306.0 311.7 303.9 6.0 5.2 4.4 3.7 150.2 214.4 265.0 220.0 2399.0 2847.0 3450.0 4100.0 6.83 6.59 6.32 6.12
21.0 20.2 0.8 7.4 360.0 60.0
20.3 19.6 0.7 5.9 340.0 50.0
19.6 19.0 0.6 4.4 300.0 50.0
18.7 18.2 0.5 3.1 250.0 50.0
30.1 15.5 11.0 -16.0 -11.2 Current 3.50 3.77 6.36
23.8 18.4 15.7 31.3 38.7 3M 3.50 3.85 6.31
23.0 16.5 13.0 20.0 22.0 6M 3.50 3.90 6.25
17.0 15.0 11.5 10.0 11.0 12M 3.50 3.90 6.17
Source: CEIC, DB Global Markets Research, National Sources Note: (1) Growth rates of GDP components may not match overall GDP growth rates due to inconsistency between historical data calculated from expenditure and product method. (2) Including bank recapitalization and AMC bonds issued
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14 October 2011
Hong Kong
The economy likely rebounded in Q3 from Q2s contraction led by continued strong retail sales growth and at least stable export volumes. Inflation has proved sticky and may continue to do so even with more moderate growth. Property market sentiment has softened appreciably, which could dampen both growth and inflation. No recession in Q3. There has been considerable speculation recently that the economy is in a technical recession that GDP contracted in Q3 as well as Q2. We dont think this has been the case. After a 2.1%QoQ(saar) decline in Q2, we think the economy likely posted growth of as much as 8.0% in Q3 led by continued strong consumption growth and a modest rebound in exports. Retail sales volumes fell 0.4%mom(sa) in August but this followed a 3.7% gain in July. Seasonally adjusted, the volume of retail sales in July/August was about 4.0% higher than the Q2 average and continues a string of six quarters of relatively robust sales. Retail sales volume (sa)
8 6 4 2 0 -2 -4 -6 05 06 07 08 09 10 11
Sources: CEIC and Deutsche Bank. 2011Q3 figure is based on July/August average.
Aa1(Pos)/AAA/AA+
Moodys/S&P/Fitch
Seasonally adjusted unemployment rate

9 8 7 6 5 4 3 2 1 0 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Sources: CEIC and Deutsche Bank. Note: there is a break in the series in Jan-07 but the old and new series differed by only 0.1% on that month.
%QoQ(sa)
The government is a little slow to report its trade volume indexes, but given the July figure of export volume growth of 1.0%yoy (versus -0.5% in Q2) and assuming the same deflator in August as was reported in July, we estimate August export volumes fell 1.8%. But, that actually translates into a better than 4%mom(sa) rise in export volumes in August. This puts the July/August average at about 0.5% higher than the Q2 average. Note that in Singapore we likewise estimate marginally positive growth in export volumes in July/August versus Q2. Export volume index
250 230 210 190 170 150 130 110 90 70 50 00 01 02 03 04 05 06 07 08 09 10 11
Sources: CEIC and Deutsche Bank. 2011Q3 figure is based on July and estimated August figures.
2000=100
Weve noted in the past the importance of tourists to the retail sales dynamics in Hong Kong and this certainly remains key. But with the unemployment rate (3.2%) at its lowest level since February 1998, negative real interest rates and reasonably strong income growth, it should be no surprise that consumption indicators remain strong. Exports are an important driver of income growth in Hong Kong and there the news seems to be better than most people appreciate.
Good news coming on inflation? In Hong Kong, as in China, inflation has surprised to the upside this year mainly because of higher than expected food price inflation. Our view remains that food inflation will fall over the next six to nine months as world food prices stabilize. Indeed, the IMFs food price index has fallen 7.9%(nsa) since April. The rate of inflation in this measure of food prices has fallen from 33% in June to
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14 October 2011
Asia Economics Monthly Hong Kong: Deutsche Bank Forecasts 2009 National Income Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP (YoY%) Private consumption Government consumption Gross fixed investment Exports Imports Prices, Money and Banking CPI (YoY%) eop CPI (YoY%) ann avg Broad money (M3) HKD Bank credit (YoY%) Fiscal Accounts (% of GDP)1 Fiscal balance Government revenue Government expenditure Primary surplus External Accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) HKD/USD Debt Indicators (% of GDP) Government debt1 Domestic External Total external debt in USD bn Short-term (% of total) General Unemployment (ann. avg, %) Financial Markets Discount base rate 3-month interbank rate 10-year yield (%) HKD/USD 209.3 7.0 29757 -2.7 0.7 2.3 -3.9 -10.1 -9.0 2010 224.5 7.1 31628 7.0 6.2 2.7 7.8 16.8 17.3 2011F 239.9 7.1 33601 5.8 8.5 1.8 3.7 5.6 5.2 2012F 252.9 7.2 35202 4.4 6.0 1.6 7.6 5.3 5.5
12% in September. That should soon deliver lower inflation in Hong Kong. Food prices in Hong Kong and internationally
60 50 40 30 20 10 0 -10 -20 -30 05 06 07 08 09 10 11
Sources: IMF and Deutsche Bank
%yoy
IMF (-3)
HK (rhs) %yoy
25 20 15 10 5 0 -5
1.5 0.6 8.7 0.3
2.9 2.3 7.6 -0.4
6.3 5.4 12.6 15.1
4.1 5.0 4.8 6.9
Michael Spencer, Hong Kong, (852) 2203 8305
1.6 19.2 17.7 1.6
4.2 21.1 16.9 4.3
1.7 22.0 20.3 1.7
3.5 21.3 17.8 3.5
321.9 348.7 -26.9 -12.8 18.0 8.6 -11.6 255.8 7.75
394.0 437.0 -43.0 -19.1 13.9 6.2 -7.2 268.7 7.76
436.5 492.2 -55.7 -23.2 13.7 5.7 3.5 273.2 7.80
472.5 534.2 -61.8 -24.4 7.1 2.8 2.5 264.1 7.80
1.4 0.7 0.7 319.4 668.5 74.3
2.2 1.6 0.6 357.9 803.5 78.0
2.6 2.0 0.6 298.0 715.0 75.0
2.8 2.2 0.5 286.7 725.0 75.0
5.2 Current 0.50 0.20 1.3 7.78
4.4 3M 0.50 0.25 1.40 7.80
3.4 6M 0.50 0.25 1.45 7.80
3.3 12M 0.50 0.25 1.50 7.80
Source: CEIC, DB Global Markets Research, National Sources Note: (1) Fiscal year data.
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14 October 2011
India
High frequency macro indicators point to lackluster growth but are far from suggesting growth weakening to levels seen in 2008/09. A likely shortfall in the disinvestment target, lower tax collection and higher fuel subsidies could compel the government to resort to further market borrowings in the later part of the fiscal year.
Baa2/BBB-/BBBMoodys/S&P/Fitch
Mixed signals on growth

Indias growth headwinds are being driven by both domestic factors (high inflation, rising interest rates, and political turmoil) and foreign ones (anemic G3 growth and financial market stress due to peripheral Europes debt crisis). Both the manufacturing and services PMI have been declining steadily (see chart below), industrial production growth has been anemic lately, and investment has been hurt by rising interest rates and a slowdown in reforms due to governance scandals. PMI, IP and core infra sector growth trending lower
3mma 65 60 55 50 45 40 2006 2007 2008 2009 2011
Source: Haver Analytics, CEIC, Deutsche Bank
Below trend IP growth and near doubledigit WPI inflation

A combination of below 5% industrial production growth and near 10% inflation reflects an undesirable macro environment, but that has unfortunately been the case for India lately. August industrial production was up 4.1%yoy, slightly above our expectations. Even when excluding the typically volatile capital goods series, the IP trend reported a similar outturn. For the fiscal year so far, industrial production has risen by 5.6%. The components of IP dont offer any major shift in trend. Mining (-3.4%yoy) remains lackluster, manufacturing is below trend (+4.5%yoy), and power production offers some relief (+9.5%yoy). Among the use based categories, some encouragement can be found in consumer goods production (+7.2%yoy). The industrial production data reflects an economy going in sideways direction. There is no upward momentum, but major downside tendencies are not being revealed either. Later in this piece we examine the fact that the present trend IP data is in contrast to the buoyant exports data. All in all, the production data is not indicative of an inflection point in the economy. Inflation and monetary policy outlook. While the year on year inflation rate for food (9.2% vs. 9.6%) and primary articles (11.9% vs. 12.6%) have eased a bit in September, fuel inflation rate has increased to 14.2%yoy, up from 12.8% in August, mainly reflecting higher prices of petrol, electricity and other non-administered fuel items. Assuming a +0.2% mom (7.7%yoy) rise in manufactured goods inflation, we forecast WPI inflation for September to remain sticky at last months level of 9.8%. While the softening in world commodity prices should have led to lower pressure on manufactured goods inflation in Sep, we note that the negative effect of a depreciating rupee (11% since August) will provide little respite and is likely to nudge RBI to hike the repo rate once again by 25bps in its 25 October monetary policy review.
Manufacturing PMI, lhs Services PMI, lhs IP, rhs Core infra, rhs
% yoy, 3mma 20 14 8 2 -4 -10
But caution is warranted in reading high frequency indicators bearing on growth. While manufacturing PMI and industrial production go hand in hand, and therefore the latest decline in the former suggests continued weakness for the latter, the manufacturing part of national accounts is only loosely related to these indicators. Over the past half decade, there have been several episodes when a decline in PMI did not lead to a weakening of manufacturing GDP. Same holds for industrial production. Indeed, in the April-June quarter both the PMI and IP weakened, whereas manufacturing sector GDP growth picked up. Of course we are not using this argument to suggest no relationship whatsoever among these variables. While recognizing that the economys inflection points are well captured by the PMI and IP series, we hasten to point out that neither the present level nor the pace of decline of these series are consistent with a major economic slowdown. There is similar room for caution in interpreting the reading from service sector PMI. The sharp decline in the indicator in 2008 was a useful early warning indicator for the subsequent slowdown in services GDP, but that was not the case in less extreme situations such as in early 2007 (when the PMI reading did not anticipate an upswing
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14 October 2011
in the service sector) or in mid 2010 (when it did not anticipate a sharp slowdown). Manufacturing PMI and GDP weak relationship
3mma 65 60 55 50 45 2006 2007 2008 2009 2010 2011 Manufacturing PMI, lhs Manufacturing GDP, rhs % yoy 18 15 12 9 6 3 0
Disconnect between IP and exports

% yoy, 3mma 20 15 10 5 0 -5 -10 2006 2007 2008 2009 2010 2011 5 -15 -35 IP, lhs Exports, rhs % yoy, 3mma 65 45 25
Service PMI and GDP series are tied rather loosely

3mma 65 60 55 50 45 40 2006 2007 2008 2009 2010 2011 Services PMI, lhs Services GDP, rhs % yoy 11 10 9 8 7
Outside of trade and IP, we can look at tax collection data as an indication of economic momentum. The chart below shows that real corporate income tax collection has been weakening for more than a year now, but is estimated to have rebounded lately. Again, this series is useful in picking up the economys inflection points; note however that the present outturn does not suggest further impending slowdown, nor does it support any likelihood of a rebound at this juncture. The situation appears to be somewhere in between, consistent with a real GDP growth rate of 7-8%. Growth and tax collection
% yoy 10 9 8 7 6 5 2007 2008 2009 2010 2011 Real GDP, lhs % yoy Real corporate tax collection, rhs 50 35 20 5 -10 -25
Indias exports data in fact has been starkly disconnected from the industrial production series. While IP growth has been lackluster since early 2010, the opposite has been the case with exports, which have been rising at a pace typically not seen in Indias history (despite the PMIs sub-component on export orders suggesting a sharp exports slowdown). This disconnect brings into question about the veracity of the two data series. We are inclined to rely on the latter as it is not survey based and is more comprehensive by definition. Since the national accounts methodology relies on trade data, the strong exports data suggest that at least that component of GDP would contribute positively to growth when the July-September data are released. Non-oil imports growth has been very strong in this cycle too, suggesting continued resilience of domestic demand. Since the capital goods component of the IP data show lackluster growth in investment goods production, were inclined to conclude that private consumption must be holding up well (despite high inflation and rising nominal interest rates).
Source: CEIC, Deutsche Bank
We conclude by looking at money and credit indicators, which are showing continued financial intermediation related activities in the economy (credit growth at 20%yoy), which is striking given the prolonged nature of the ongoing policy tightening cycle. Recent cement and auto sales data also corroborate this proposition. Further, a likely strong turnout from the farm sector in response to a good monsoon and reported resiliency in rural consumption due to the governments transfer policies, would also support the growth picture amid the various headwinds, in our view. All in all, the indicators examined above point to lackluster growth but are far from suggesting growth weakening to the level seen in 2008.
Page 9
14 October 2011
Fiscal troubles come to the fore

The central government announced a higher than anticipated market borrowing number (INR2.20trn versus INR1.67trn budgeted) for the second half of FY11/12 (October-March). The additional gross borrowing of INR529bn (0.6% of GDP; 12.7% higher than budgeted) is not for meeting fiscal slippages but to address potential shortfall in below the line financing items such as small savings (government estimates indicate a shortfall of INR350bn) and a likely lower cash surplus (INR160bn vs. INR330bn) than earlier anticipated. Proceeds from small savings are expected to fall short of the target on account of depositors reallocating their funds in favor of long-term bank deposits, which pays higher returns (in a rising interest rate environment) than that rendered by small savings instruments (which are typically capped at 8.5%). Gross market borrowing
1H actual Budgeted gross market borrowing Revised gross market borrowing Revised over budgeted (% change)
Source: Controller General of Accounts, Deutsche Bank
Both tax (in net as well as gross terms) and non-tax revenue collection are running at a lower rate compared to the previous two fiscal years, keeping overall receipts trend weaker compared to its past trend (it is however more constructive to compare the current fiscal position with that of FY09/10 as the FY10/11 fiscal position looks unusually better at this stage mainly due to the positive impact of large one off gains from 3-G revenues). Within taxes, direct tax collection across segments remain weak, while indirect taxes though faring better compared to its trend, may not sustain in the coming months as the full impact of the June fuel price measures (customs and excise duty cuts) start taking effect. Meanwhile, expenditure mainly non-plan expenditure is running at a higher rate than the comparable period in the last two years. Tax collection trend April-August
Items % of FY11/12 budget 25.8 18.1 14.3 26.0 35.3 41.6 29.1 36.0 136.4 % of FY10/11 actuals 27.0 22.5 19.7 28.5 32.3 36.5 29.3 30.2 34.2 % of FY09/10 actuals 26.9 23.1 20.4 28.5 31.9 37.3 27.3 32.4 42.7
2H est. 1.67 2.20 31.7
FY12 est. 4.17 4.70 12.7
Gross Tax Revenue Direct Taxes Corporate Tax Income Tax Indirect Taxes
2.5 2.5 0.0
While this announcement ostensibly is only a financing issue, and has nothing to do with fiscal risks, we see substantial likelihood of slippage. Latest fiscal data through August show that the fiscal deficit in the AprilAugust period has already touched 66.3% of budget estimates for FY11/12, significantly higher than its past trend in the comparable period. Fiscal position April-August
Items % of FY11/12 budget 23.9 21.8 34.8 18.4 59.9 2.9 23.5 % of FY10/11 actuals 36.6 24.2 68.8 15.4 26.4 9.3 35.7 % of FY09/10 actuals 27.4 23.4 43.3 11.6 21.2 8.2 26.6
Customs Excise Services Others
Below, we explain our assumptions regarding potential fiscal slippages in various categories: Disinvestments: Even if we assume that the government would be able to achieve 50% of its disinvestment target (INR400bn) through the course of this fiscal year (though equity market conditions remain severely weak), still there will be a shortfall of INR200bn in revenues. Fuel subsidy: Our calculation suggests that at current oil prices, the government would need to pay INR600bn as compensation to OMCs in FY11/12 (assuming that the government shares 50% of the overall under-recoveries), with only INR36bn left in the budget (as INR200bn has been exhausted to pay for last years losses). Consistent with past trend, it is very unlikely that the government will pay the entire cash subsidy in the current fiscal year itself. But even assuming that the government will push 50% of the payments to the next fiscal year, still the government will need to pay INR300bn in this fiscal year itself. Tax collection: Government estimates suggest that indirect taxes are likely to fall short by INR368bn in
1 2 3 4 5 6 7
Revenue Receipts (2+3) Tax Revenue (Net) Non-Tax Revenue Non-Debt Capital Receipts (5+6) Recovery of Loans Other Receipts Total Receipts (1+4)
8 9
Non-Plan Expenditure Plan Expenditure
41.7 29.9 37.5
37.9 36.2 37.3
34.0 32.3 33.5
10 Total Expenditure (8+9)
11 Fiscal Deficit (10 -7) 12 Revenue Deficit 13 Primary Deficit

66.3 74.9 119.6
41.0 41.0 49.0
43.6 45.7 53.6
Page 10
14 October 2011
FY11/12 owing to fuel price measures (cut in excise and customs duty) announced in June 2011. Further, direct tax collection is also likely to fall short of target, given weak economic activities. We are factoring around INR300bn shortfall in overall tax revenues (direct and indirect taxes). Potential fiscal slippage from likely sources
Items Shortfall in disinvestment proceeds Shortfall in revenue collection Fuel subsidy bill overshoot Total potential fiscal slippage % of GDP
Source: Deutsche Bank
Balance of payments trend

USD bn 40 30 20 10 Current Account Capital Account Change in FX Reserves
INR bn 200 300 300 800 0.9%
0 -10 -20 2007 2008 2009 2010 2011
Source: CEIC, Deutsche Bank. Date ranges from Q1 2007 to Q2 2011.
Note that there are other likely sources of risks such as higher fertilizer and food subsidy bill, but the three items mentioned above could by themselves lead to a potential fiscal slippage of INR800bn (or 0.9% of GDP), which could push the fiscal deficit to 5.5% of GDP, from the budgeted estimate of 4.6% of GDP. While we acknowledge that some part of this slippage could be offset by the government cutting down expenditure on non-essential items (though it will be extremely challenging), the gap however is too large in our view to be removed completely. Moreover, even if we assume that some part of the fiscal slippage will manage to get financed through the additional borrowing announced recently, we still see risks of further market borrowings, given the size of the likely fiscal slippage.
In recent years, the movement of Indias current account appears to have been dominated by fluctuations of the trade deficit. Net balances of payments with respect to services, transfers, and income have been broadly stable (in USD terms), reflecting fairly even growth rates in the payments and receipts sides. But the trade deficit has fluctuated considerably, worsening sharply twice in the last five years when oil prices spiked. Key components of the current account
USD bn 20 10 0 -10 -20 -30 -40 2007
Source: CEIC, Deutsche Ban
Goods Transfers
Services Income
Will Indias resilient BOP sustain?

Data through the April-June 2011 quarter show that Indias current account deficit has begun to worsen on the back of rising trade deficit. But the rising current account deficit has been, through June, comfortably exceeded by a robust capital account surplus. Other than a brief period in 2008/09, when global risk aversion spiked, Indias capital account has remained firmly on the surplus territory, helping to keep the balance of payments resilient. Net BOP position has seldom been on the negative side. Balance of Payments trend in 2011 a snapshot
USD bn Trade balance (a) % of GDP Invisibles (b) Current account balance (a + b) % of GDP Capital account balance BOP balance
Source: RBI, Deutsche Bank
2008
2009
2010
2011
Jan-March -29.9 -6.1 24.5 -5.4 -1.1 8.2 2.0
April -June -35.5 -7.7 21.3 -14.2 -3.1 20.9 5.4
The chart below shows a clear relationship between oil price and the trade deficit. Indias exports sector has done rather well in recent years, growing by over 20%yoy for the past half decade. Still, the trade deficit has tended to be large owing to the economys growing demand for imports in general and oil imports in particular. Spikes in world oil price have coincided with the trade deficit, as has been the case in the last few quarters. With a slowdown in the world economy taking hold, and commodity prices beginning to ease, there may be some respite for the trade deficit in the coming months. Also noteworthy is that the nominal value of the trade deficit has not widened considerably in recent cycles; as a result the trade deficit has eased as a share of GDP (from about 10% of GDP in 2008 to a projected 7.5% of GDP this year).
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14 October 2011
Trade deficit and oil price

USD bn 0 -10 -20 -30 -40 2007 2008 2009 2010 2011 Trade deficit, left USD/barrel Oil price, right, reverse scale 0 20 40 60 80 100 120
Balance of payments and the rupee

USD bn 30 20 10 0 -10 -20 2007 2008 2009 2010 2011 Overall Balance, left INR/USD (inverted), right 38 40 42 44 46 48 50 52
Source: Oil price used here is Dubai crude. Bloomberg Finance LLP, CEIC, Deutsche Bank
Notwithstanding the vulnerability of the nominal value of the current account with respect to oil prices, financing of the current account has been orderly in recent years due a broadly robust capital account. Through the past economic cycles, India has been successful in drawing portfolio flows, foreign direct investment, external loans, and banking capital (see chart below). Data from the latest two quarters show that despite slowing growth both locally and globally, capital account flows have been resilient (with the obvious exception of portfolio flows). Going forward, the likelihood of portfolio flows resuming may be small, but other flows ought to continue. Global risk aversion and financial market stress could stem some flows temporarily, but the experience of the 2008 crisis suggests that flows tend to return to India. Key components of the capital account
USD bn 20 15 10 5 0 -5 2007
Source CEIC, Deutsche Ban
Clearly the exchange rate will be vulnerable as the balance of payments situation likely deteriorates in the coming months. Persistent inflation is yet another complicating factor, reducing the competiveness of the currency through real exchange rate appreciation. The rupee therefore has cyclical and structural headwinds. The saving grace could be a likely decline in commodity prices and a resumption of flows when global markets stabilize. Indias medium term growth potential makes it an attractive destination for foreign capital, and flows tend to return in sizeable quantities following selloffs. With this in mind, we are not expecting considerable stress to Indias BOP. There may well be some deterioration in the short term given global developments, but as long as Indias medium term potential is deemed intact, financing of the current account should be orderly. There is a case to be made for better quality financing, and clearly it would be desirable to see the capital account driven by FDI, which is typically stable, than portfolio, which can be volatile. For that switch to occur, the onus is on the Indian policy makers to create room for more stable flows. Balance of Payments forecast
USD bn 1. Exports 2. Imports 2010-11 250.5 380.9 -130.5 -7.6 86.2 -44.3 -2.6 57.3 3.3 13.1 2011-12F 296.8 445.7 -148.8 -7.5 91.3 -57.5 -2.9 50.0 2.5 -7.5 2012-13F 335.4 503.6 -168.2 -7.3 101.2 -66.9 -2.9 65.0 2.8 -1.9
FDI Portfolio Investment ECB Short Term Credit to India Banking Capital
2008
2009
2010
2011
3. Trade Balance (1-2) % of GDP 4. Invisibles, net 5. Current Account Balance (3+4) % of GDP 6. Capital Account Balance % of GDP 7. Overall BOP (5+6)
Source: RBI, CEIC, Deutsche Bank
The rupee has come under pressure lately as the oil import bill has mounted and portfolio flows have weakened. Since imports are captured in the current account and portfolio flows are in the capital account, the overall balance of the balance of payments ought to be a good indicator of the rupees movements. Indeed, the chart below shows that weakness in the BOP is a fairly adequate explanatory factor for the rupees direction.
Taimur Baig, Singapore, (65) 6423 8681 Kaushik Das, Mumbai, (91) 226658-4909
Page 12
14 October 2011
India: Deutsche Bank Forecasts

2009 National Income Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP (YoY %), FY Real GDP (YoY %), CY Private consumption Government consumption Gross fixed investment Exports Imports Prices, Money and Banking WPI (YoY%) eop WPI (YoY%) avg Broad money (M3) eop Bank credit (YoY%) eop Fiscal Accounts (% of GDP)1 Central government balance Government revenue Government expenditure Central primary balance Consolidated deficit External Accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) INR/USD Debt Indicators (% of GDP) Government debt Domestic External Total external debt in USD bn Short-term (% of total) General Industrial production (YoY %) Financial Markets Repo rate 3-month treasury bill 10-year yield (%) INR/USD 1269 1158 1096 9.1 6.8 7.2 13.7 2.3 -9.0 -7.9 2010 1645 1175 1400 8.7 10.0 8.4 5.1 12.6 14.0 11.6 2011F 1932 1200 1610 8.0 8.0 6.8 4.6 7.8 19.8 15.4 2012F 2190 1218 1798 8.0 8.0 7.1 6.0 12.3 17.2 17.2
FY09/10 FY10/11 FY11/12 FY12/13
7.1 2.4 16.9 13.4
9.5 9.6 16.5 23.2
7.5 9.4 16.7 16.9
6.0 6.4 19.1 19.0
-6.4 9.3 15.6 -3.1 -9.8
-4.7 10.5 15.2 -1.7 -7.6
-5.5 9.5 15.0 -2.5 -8.1
-4.8 10.1 14.9 -1.8 -7.4
168.2 275.2 -107.0 -8.4 -25.9 -2.0 19.7 283.3 46.7
225.7 357.9 -132.2 -8.0 -51.7 -3.1 10.0 296.5 44.8
268.2 418.8 -150.6 -7.8 -65.4 -3.4 25.0 281.1 48.0
303.0 473.2 -170.2 -7.8 -75.7 -3.5 32.5 270.4 46.5
69.8 65.9 3.9 18.8 238.0 18.0
64.9 61.3 3.6 15.0 247.0 17.0
61.2 58.0 3.1 13.7 265.0 17.0
60.2 57.3 2.9 13.7 300.0 18.0
9.5 Current 8.25 8.45 8.74 49.3
8.1 3M 8.50 8.50 8.50 48.0
3.7 6M 8.50 8.10 8.50 47.7
6.7 12M 7.50 7.90 8.00 47.1
Source: CEIC, DB Global Markets Research, National Sources Note: (1) Fiscal year ending March of following year, consolidated deficit includes state and central government finances, as well as bonds issued as payments to oil and fertilizer companies on account of the losses incurred from the provision of subsidies..
Page 13
14 October 2011
Indonesia
The economy continues to boom in all respects, with little downside visible despite a weaker outlook for commodities. The authorities are intervening in financial markets through various means, which could end up being counter-productive. Bank Indonesia could ignite a credit boom and asset price bubble through aggressive rate cuts. Recent interventions raise the risk of policy error. Since the global market sell-off hit Asia last month, the Indonesian authorities have intervened repeatedly to stem the decline in bond prices and the exchange rate. Bank Indonesia promptly became the key purchaser of bonds and the key seller of dollars in the economy. We fear that instead of calming markets, the actions of the authorities have given rise to greater discomfort among investors. Despite a decline of foreign reserves of about USD10bn last month and an exchange rate depreciation of about 6% (against the USD since the peak in early August), market participants have reasons to worry about the direction of policies in Indonesia. Major policy initiatives seem to be taking a backseat owing to various political factors; appetite to carry out subsidy reform appears to have vanished; and the monetary authorities are giving signals of boosting credit growth from the already high levels, which in our view could create an asset price bubble (seen in many EM economies in the past). Strong credit and money growth
%yoy, 3mma 20 15 10 5 2007 2008 2009 2010 2011 M2. lhs Bank credit, rhs %yoy, 3mma 40 30 20 10 0
Ba1/BB+(Pos)/BB+(Pos)
Moodys/S&P/Fitch
makers to keep their powder dry in case further weaknesses were to manifest. Instead, at the Board of Governors' Meeting on Oct 11, Bank Indonesia decided cut the policy BI rate by 25bps to 6.5%. The central bank officials are clearly comfortable with the trajectory of inflation (4.6% through September), expecting inflation to stay within the 4-6% target band this year and next, when the target will be 3.5-5.5%. Indeed, the policy statement expressed confidence that inflation would remain below 5% through 2012. We find the rate cut decision inconsistent with the central bank's past line of policy action. Through 2010 and 2011, the central bank advocated a policy of allowing exchange rate appreciation to fight inflation pressures. Along that line of logic, the fact that the rupiah has depreciated against the US dollar by 6% in the past month or so would imply a need to maintain a neutral stance or move to tighter policy. With the latest monetary policy move, the central bank has done exactly the opposite. The decision also seems curious given that credit, consumption, and investment indicators point to very strong demand, while the USD10bn or so decline in reserves in September suggests a need to maintain a stable policy stance. An economy not in need of a rate cut
%yoy 7.0 6.0 5.0 4.0 2006 2007 2008 2009 2010 2011 GDP growth, lhs Real BI rate, rhs % 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0
Monetary policy. There had been quite a bit of chat in Indonesia's policy circle in recent weeks about providing support to the economy in the face of rising uncertainty in the global economy. There had even been some mention of a rate cut by government officials, but we discounted such chatter as we saw the economy hardly being impacted by the slowdown, and expected the policy
Page 14
While global economic conditions have clearly weakened in recent months and policy makers need to take measures to protect their economies, the action by BI seems to be pushing the idea of a pre-emptive move to the limit. As noted above, the economy does not appear to need any boost at this moment (as seen in the large gap between real GDP growth and real interest rate). The best way to assuage foreign investor sentiment would be to demonstrate that the authorities remain committed to macroeconomic stability, but the latest measure, in our view, fails to meet that test.
14 October 2011
Asia Economics Monthly Indonesia: Deutsche Bank Forecasts 2009 National Income Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP (YoY%) Private consumption Government consumption Gross fixed investment Exports Imports Prices, Money and Banking CPI (YoY%) eop CPI (YoY%) ann avg Core CPI (YoY%) Broad money (M2) Bank credit (YoY%) Fiscal Accounts (% of GDP) Budget surplus Government revenue Government expenditure Primary surplus External Accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) IDR/USD Debt Indicators (% of GDP) Government debt Domestic External Total external debt in USD bn Short term (% of total) General Industrial production (YoY%) Unemployment (%) Financial Markets BI rate 10-year yield (%) IDR/USD 541.1 238.0 2274 4.6 4.9 15.7 3.3 -9.7 -15.0 2010 707.8 240.8 2939 6.1 4.6 0.3 8.5 14.9 17.3 2011F 824.0 243.7 3381 6.5 4.9 4.1 8.8 11.5 11.9 2012F 906.7 246.6 3676 6.5 6.1 4.9 7.8 8.5 8.8
Looking forward, with the central banks demonstrated intent, we see BI cutting rates again next month. The central bank could choose to cut the policy rate down to 6% by the end of this year, which would result in further rise in lending related activities. The risk is that fixed income investors will find these steps somewhat aggressively stimulatory and potentially inflationary. Attractiveness of Indonesian papers could become suspect as a result. Taimur Baig, Singapore, (65) 6423 8681
2.8 4.9 5.3 15.9 13.9
7.0 5.1 4.3 15.4 13.0
4.5 5.5 5.0 16.0 22.0
6.5 6.1 5.5 15.0 20.0
-1.5 14.9 16.4 0.2
-0.6 15.8 16.4 1.4
-1.1 15.7 16.8 0.9
-1.5 16.3 17.7 0.5
119.5 84.3 35.1 6.5 10.7 2.0 1.9 66.1 9400
158.1 127.4 30.6 4.3 5.6 0.8 10.7 95.0 8991
199.6 166.4 33.3 4.0 3.2 0.4 9.1 120.3 8850
223.6 190.9 32.7 3.6 3.0 0.3 9.1 131.7 8700
33.0 18.4 14.6 32.4 175.5 17.9
27.0 14.7 12.3 25.4 180.0 18.6
26.0 15.0 11.0 23.7 200.0 18.5
24.9 14.1 10.8 23.3 220.0 20.5
1.5 7.9 Current 6.50 6.60 8950
4.0 7.1 3M 6.00 7.00 8835
7.0 7.0 6M 6.00 7.20 8790
8.0 6.8 12M 6.50 7.40 8700
Source: CEIC, DB Global Markets Research, National Sources
Page 15
14 October 2011
Malaysia
Export growth has slowed to a crawl, but the 2012 budget offers less stimulus than expected. But inflation will likely be lower without subsidy cuts. Any further reduction in G3 growth forecasts could tip the economy into recession Q3 off to a weak start. Manufacturing production fell 0.7%yoy in July after falling at an average rate of 1.5% during Q2. We estimate that this implies a 3.8%mom(sa) decline in output, the largest decline since March 2009. The decline was concentrated in the export sectors, as production in primarily domestic-oriented sectors actually improved, rising 8.5%yoy, the strongest growth in four months. This decline in output seems to us to exaggerate the decline in final demand, as export growth has remained relatively stable albeit slow even through August. Seasonally adjusted, exports in MYR terms rose 0.9%mom(sa) in July although to a level still 1.3% below the Q2 average. So we think there is likely to be a rebound in activity in August. Export growth in value (MYR) and volume terms
50 40 30 20 10 0 -10 -20 -30 -40 2008
Sources: CEIC and Deutsche Bank
A3/A-/AIn the event, last weeks budget was less expansionary than we had expected and we have scaled back slightly our deficit forecast for 2012. The budget contained something for everyone as is to be expected from what is most likely a pre-election (likely to be held early next year) budget. But the sum total of the handouts was less than we had expected. Indeed, even the governments projections show a significant decline in spending as a share of GDP in 2012 and a decline in the deficit from 5.4% of GDP this year to 4.7% next year. With 2011 spending having been revised higher although we think it will be a challenge to spend as much as the budget forecasts in the next three months the fiscal stance in 2012 versus 2011 is essentially neutral. It appears that both the headline and primary fiscal deficits will be roughly the same in both years. This new budget projection will have little impact on the governments debt outlook, however. The 2009 recession saw Malaysias government debt/GDP ratio rise to 53% and it looks likely to remain at that level through this year and to rise slightly in 2012. We are not worried about debt sustainability at this time. Interest payments absorb just under 10% of revenues and with nominal GDP growth comfortably at least for now above the average interest rate on government debt, the forecast primary balance is about in line with the debt-stabilizing primary balance. But overall, the impression of the economic outlook is that it is in both growth and fiscal respects, somewhat precarious. Our forecast of slow, but positive, growth in the US and EU means the Malaysian economy will grow more slowly than it has in the past. The fiscal policy outlook suggests the debt/GDP ratio will rise but not alarmingly. But both growth and debt sustainability are both very sensitive to any further deterioration in the external growth outlook. While there wasnt as much stimulus in the budget as we had expected, we do think that the budget indicated that subsidy cuts will be suspended for the time being. These subsidies are expensive the budget estimates spending of MYR33.2bn (4% of GDP) and the government has been cutting them over the past two years. But with an election looming, further cuts seem to be off the table. The budget makes no statement about cutting subsidy costs. This means that inflation will probably be lower than we were expecting and we have lowered our 2012 inflation forecast to 2.3% from 2.8% previously. Note, though, that this implies potentially higher fiscal costs. Note that the benchmark price for exported Thai rice has risen 23%
%yoy
value
volume
2009
2010
2011
But the truth remains that external demand growth is very weak at best. The US and EU economies have settled into a slow-growth equilibrium while households, banks and governments try to reduce their debt burdens. For an export-sensitive economy like Malaysia real exports of goods and services were 110% of GDP last year this is an unsettling background. It was for this reason that when we lowered our growth forecast in August following the sharp downgrades to US and EU growth forecasts we increased our fiscal deficit projection, assuming not only weaker revenue growth but some degree of fiscal stimulus.
Page 16
14 October 2011
in the last four months and floods there and in Vietnam threaten even higher prices. The government did raise the rice price in 2008 by 38% after world prices tripled. A moderate increase in prices would likely be absorbed by the government in higher subsidy costs. Another rice crisis like 2008 would probably see price increases. Michael Spencer, Hong Kong, (852) 2203 8305
Malaysia: Deutsche Bank forecasts

2009 National Income Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP (YoY%) Private consumption Government consumption Gross fixed investment Exports Imports Prices, Money and Banking CPI (YoY%) eop CPI (YoY%) ann avg Broad money (M3) Bank credit (YoY%) Fiscal Accounts (% of GDP) Federal government surplus Government revenue Government expenditure Primary fed. gov't fiscal External Accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) MYR/USD Debt Indicators (% of GDP) Government debt Domestic External Total external debt in USD bn Short-term (% of total) General Industrial production (YoY%) Unemployment (%) Financial Markets Overnight call rate 3-month interbank rate 10-year yield (%) MYR/USD 193.0 27.9 6918 -1.6 0.7 3.9 -5.6 -10.5 -12.2 2010 238.4 28.3 8438 7.2 6.5 0.5 9.8 9.9 15.1 2011F 275.3 28.6 9619 4.6 6.6 9.4 3.9 4.3 6.4 2012F 289.6 29.0 9991 4.2 4.8 5.4 4.8 4.7 4.8
1.0 0.7 7.4 5.8
2.1 1.7 8.3 10.7
3.3 3.2 9.8 10.3
2.3 2.6 5.9 6.6
-7.0 23.3 30.3 -4.9
-5.6 20.8 26.5 -3.6
-4.9 22.1 27.0 -2.7
-5.0 21.0 26.0 -2.8
157.7 117.5 40.3 20.9 31.8 16.5 -6.6 96.7 3.41
199.4 157.7 41.8 17.5 27.4 11.5 -4.4 106.5 3.13
227.4 185.6 41.8 15.2 25.8 9.4 2.6 141.1 3.09
244.5 202.7 41.8 14.4 19.5 6.7 -3.0 144.1 3.03
53.3 51.3 2.0 34.3 68.1 33.4
53.1 51.0 2.2 29.5 73.4 35.1
53.1 51.5 1.6 28.7 79.0 36.7
55.2 53.8 1.4 27.8 80.0 35.0
-8.2 3.5 Current 3.00 3.3 3.69 3.14
8.9 3.3 3M 3.00 3.3 3.80 3.09
1.7 3.2 6M 3.00 3.3 3.70 3.07
2.7 3.0 12M 3.25 3.5 3.70 3.04
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14 October 2011
Philippines
Trade is contracting, which poses downside risk to growth, but domestic economy remains resilient. Further unrest in global financial markets and additional downside to G3 demand could hurt trade and investment, which in turn could affect consumption. Manageable downside risks. The Philippine economy continues to face headwinds from adverse global economic dynamic, as trade continues to weaken. Data through August shows exports contracting by 15.1%yoy, with electronics, the main export item, declining by 30.6%yoy. While the situation is not as dire as it was in the last financial crisis (electronics exports were down by about 50%yoy in January 2008), there is no question about the negative impact of the ongoing decline in trade on investment, consumption, and ultimately, growth. Sharp decline in trade, but still not like 2008/09
%yoy, 3mma 50 40 30 20 10 0 -10 -20 -30 -40 2006 2007 Exports Imports
Diffusion index 40 30 20 10 0 -10 -20 -30 2006 2007 2008 2009 Next Q
Ba2/BB/BB+
Moodys/S&P/Fitch
Consumer expectations show lingering optimism

Next 4 Qs
2010
2011
Philippines has not escaped the regional sell-off of the past month, but the stock markets year to date performance (-2.2%yoy) has been the best among its peers. Long term bond yields jumped temporarily, but have eased in the past couple of weeks. The governments decision to buy back some of the existing stock of issuance should also be supportive of the market. Net capital flows remained positive through August, helping the peso to remain as one of few currencies to have experienced appreciation against the USD this year. Net flows remain positive despite the global turmoil
USD bn, 3mma Net portfolio inflows, lhs Peso/USD, rhs 55 50 45 40 2006 2007 2008 2009 2010 2011
2008
2009
2010
2011
1.0 0.5 0.0 -0.5
Given our expectation of no recession in the US, and only a single quarter of negative growth in the Euro area, it would be reasonable to expect a better GDP outturn in the Philippines this year and next compared to the 2008 global financial crisis. Indeed, a host of indicators suggest that to be the likely scenario. Domestic sentiments have not been impacted the global developments, with latest surveys indicating that consumers see a stable or improving outlook. This has been helped by the fairly benign inflation (4.8% through August), and a broadly stable exchange rate. Recent floods and trade weakness could well hurt those expectations later this year, but we expect the downside to be limited as long as inflation and remittances (up 6.7%yoy through July) remain stable.
Source: CEUC, Deutsche Bank
Similarly, there has been no let up in domestic financial market intermediation. Latest data through August show that private sector credit to trade, real estate, manufacturing, and finance was growing robustly (see chart on the next page). Domestic liquidity remains ample, with M2 up 9.4%yoy through August, helped by sustained flow of external flows. Given this, we dont think BSP would consider easing monetary policy anytime soon, although if commodity prices decline further and external conditions exacerbate more, a rate cut could become part of the central banks consideration in early 2012. For the
Page 18
14 October 2011
Asia Economics Monthly Philippines: Deutsche Bank Forecasts 2009 National Income Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP (YoY%) Private consumption Government consumption Gross fixed investment Exports Imports Prices, Money and Banking CPI (YoY%) eop CPI (YoY%) ann avg Core CPI (YoY%) Broad money (M3) Bank credit1 (YoY%) 167.9 90.2 1861 1.1 2.3 10.9 -8.7 -7.8 -8.1 2010 199.5 92.5 2158 7.6 3.4 4.0 31.6 21.0 22.5 2011F 228.5 94.8 2411 4.0 4.0 0.0 15.0 1.8 5.5 2012F 255.4 97.1 2630 4.5 4.5 2.0 12.5 5.0 8.0
time being though, the monetary authorities seem to be taking a backseat to ongoing developments. The governments fiscal plans are expected to provide a percent of GDP boost to the economy without increasing the deficit. Whether or not this heroic ambition is achieved, we see only a moderate slowdown in the economy. Strong credit growth
%yoy, 3mma 30 20 10 0 -10 -20 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
Source: BSP, Deutsche Bank
Agriculture Trade Real Estate
Manufacturing Finance
4.3 3.3 4.1 13.2 12.5
3.1 3.8 3.7 9.8 8.9
4.5 4.8 4.2 9.7 10.3
4.0 3.7 4.5 10.1 11.1
Taimur Baig, Singapore, (65) 6423 8681
Fiscal Accounts (% of GDP) National government surplus Government revenue Government expenditure Primary surplus External Accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) PHP/USD Debt Indicators (% of GDP) Government debt2 Domestic External Total external debt in USD bn Short-term (% of total) General Industrial production (YoY%) Unemployment (ILO) (%) Financial Markets BSP o/n repo BSP o/n reverse repo 3-month treasury bill 10-year yield (%) PHP/USD
-3.6 13.9 17.5 -0.2
-3.5 13.4 16.9 -0.2
-3.1 14.1 17.2 0.3
-2.9 14.6 17.5 0.3
37.6 46.5 -8.8 -5.3 9.4 5.6 1.6 44.0 46.4
50.7 61.1 -10.4 -5.2 8.5 4.2 1.2 58.4 43.9
52.2 67.7 -15.5 -6.8 10.3 4.5 1.3 77.7 43.0
55.5 74.5 -19.0 -7.4 10.4 4.0 0.5 89.2 42.0
62.9 33.6 29.3 39.3 68.0 16.8
57.6 30.4 27.2 34.1 70.0 16.8
58.2 31.4 26.8 32.2 72.0 16.5
55.2 30.6 24.7 29.5 76.0 16.0
12.2 8.3 Current 6.50 4.50 2.89 6.08 43.5
15.6 8.1 3M 6.50 4.50 3.50 6.25 43.0
3.0 7.9 6M 6.50 4.50 4.00 6.10 42.6
6.0 7.7 12M 6.50 4.50 4.55 6.00 42.0
Source: CEIC, DB Global Markets Research, National Sources Note: (1) Deposit money bank credit to the private sector. (2) Incl. guarantees on SOE debt.
Page 19
14 October 2011
Singapore
We think the economy escaped recession in Q3, but theres hardly any growth in the economy as global growth stagnates. Exports will continue to set the tone for growth, but inflation is proving stickier than expected. No recession, just weak growth. After declining 6.5%QoQ(saar) in Q2, we think the economy is on track for modest growth in Q3. Industrial production rose 3.9%mom(sa) in August, the third consecutive monthly increase. This took July/August production to a level only 2.9% higher than the Q2 average, but an increase nonetheless. Given the historical relationship between industrial production and GDP this suggests Q3 GDP growth could be about 6.8%QoQ(saar). Industrial production and GDP
50 40 30 20 10 0 -10 -20 04 05 06 07 08 09 10 11
Sources :CEIC and Deutsche Bank
Aaa/AAA/AAA
Moodys/S&P/Fitch
Seasonally adjusted real exports

50 45 40 35 30 25 20 03 04 05 06 07 08 09 10 11
2006 SGDbn
%QoQ
IP
GDP QoQ(saar)
Retail sales data are available only through July, which saw a 1.8%mom(sa) increase, similar to Junes rise. Its too early to say, clearly, but this suggests Q3 sales could also rise from Q2 even after the previous quarter saw a very punchy 35%QoQ(saar) rise in retail sales volumes. So, overall, we think the data support our forecast that the economy will post a modest recovery in Q3 after Q2s decline. Importantly, while growth is weak, the economy is not in the same dire straits it was in three years ago when the economy had contracted for two consecutive quarters and, with trade collapsing, was expected to remain in recession. Hence, we dont think the real economy data support a shift in monetary policy all the way to a flat NEER target band. Inflation is sticky Meanwhile, inflation has risen higher than we had expected, hitting a three-year high of 5.7%. Worryingly, the inflation impulse measured as the 3m/3m seasonally adjusted change in the CPI has risen over the last couple of months to 5.9%. True, the core inflation rate is much lower at 2.2%yoy inflation is still mostly in accommodation and private transportation costs but we think it would be unwise for the MAS to signal that they are not concerned about inflation when inflation is as high as it is. Hence, we think they will retain a positive slope to the policy band after this weeks policy review. With the currency trading near the bottom of the band, though, we think they could provide a modicum of support to growth by recentering the band around the current level as they have done four times in the last four years.
That is, the IP data suggest the level of GDP in Q3 could end up essentially where it was in Q1 and about 7% up from a year ago with almost all of that growth coming in the first quarter of this year. Thats better than a recession, but indicative of how weak global growth is. We see the same pattern in the export data. Seasonally adjusted, real exports have essentially stagnated over the past year. Inflation adjusted exports rose 2.8%mom(sa) in August bringing the July/August level of real exports to a level 0.4% higher than the Q2 average and also 0.4% higher than a year ago. As the chart below shows, exports have essentially just fluctuated within a narrow band around this level over the past year.
Page 20
14 October 2011
Consumer prices
10 8 6 4 2 0 -2 -4 00 01 02 03 04 05 06 07 08 09 10 11
Singapore: Deutsche Bank Forecasts

YoY 3m/3m (saar)
2009 National Income Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP (YoY%) Private consumption Government consumption Gross fixed investment Exports Imports Prices, Money and Banking CPI (YoY%) eop CPI (YoY%) ann avg Broad money (M2) Bank credit (YoY%) Fiscal Accounts (% of GDP) Fiscal balance Government revenue Government expenditure External Accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) SGD/USD Debt Indicators (% of GDP) Government debt Domestic External Total external debt in USD bn Short-term (% of total) General Industrial production (YoY%) Unemployment (%) (eop) Financial Markets 3-month interbank rate 10-year yield (%) SGD/USD 183.3 5.1 36112 -0.8 0.2 3.5 -2.9 -8.1 -11.0 2010 222.7 5.2 43007 14.5 4.2 11.0 5.1 19.2 16.6 2011F 2012F 252.5 251.7 5.3 5.5 47336 45380 6.2 6.2 1.6 1.8 3.0 2.4 4.4 3.6 8.6 -2.4 4.8 4.5
Michael Spencer, Hong Kong, (852) 2203 8305
-0.5 0.6 10.6 5.3
4.6 2.8 8.5 9.6
4.6 5.1 10.5 23.7
1.7 2.2 10.0 12.8
-1.6 19.3 20.9
5.1 21.1 16.0
8.1 24.5 16.4
5.0 21.0 16.0
274.0 244.6 29.4 16.0 35.1 19.1 -3.1 187.8 1.40
358.5 311.7 46.8 21.0 49.5 22.2 19.1 225.8 1.31
424.6 374.4 50.1 19.9 49.5 19.6 19.8 257.3 1.25
480.2 441.3 38.8 15.4 38.0 15.1 10.0 274.0 1.21
109.3 109.3 0.0 171.0 455.9 73.5
105.8 105.8 0.0 169.1 513.6 74.8
109.8 109.8 0.0 237.7 600.0 75.0
119.9 119.9 0.0 258.2 650.0 75.0
-4.2 3.0 Current 0.4 1.63 1.28
29.7 2.2 3M 0.4 1.60 1.24
4.7 2.2 6M 0.4 1.60 1.23
2.5 2.2 12M 0.4 1.80 1.21
Source: CEIC, DB Global Markets Research, National Sources Note: includes external liabilities of ACU banks.
Page 21
14 October 2011
South Korea
Assuming a sustained growth in the US, we rule out a recession in South Korea, although we expect its growth to remain below trend. Stability of the Korean economy and its currency remain tied to the stability of the G2 economies and their financial systems. Domestic demand data mixed High frequency data pointed to a relatively slower growth in domestic demand in Q3. In particular, the equipment index fell 3.3%yoy in July/August, vs. 4.8% growth reported in Q2, pointing to weaker investment growth in Q3. The trade reports confirmed this deterioration trend in investment growth, albeit not as severe. That is, capital imports growth decelerated to 10.2% in July/August from. 12.9% in Q2. Retail sales growth stable, while investment weaken
%yoy 3mma
%yoy 3mma
A1/A/A+
Moodys/S&P/Fitch
IP growth weakens while services strengthen
40 30 20 10 0 -10 -20 -30 2007 2008
IP
Services (rhs)
14 12 10 8 6 4 2 0 -2
2009
2010
2011
Sources: CEIC and Deutsche Bank CIB Research
Index of Equipment Investment Retail sales (rhs)
80 60 40 20 0 -20 -40 2007 2008
25 20 15 10 5 0 -5 -10 2011
2009
2010
Mixed production data Reflecting weaker export growth, industrial production rose at a slower pace of 4.4%yoy in July/August vs. 7.2% in Q2. Worse still, the inventory to shipment ratio continued to rise, pointing to sustained weakness in industrial production ahead. The ratio (sa) rose further in August, to 1.1 from 0.98 in Q2 and 0.94 in Q1, as inventory growth accelerated while shipment growth slowed. In contrast, reflecting resilient private consumption, services production rose at a faster pace of 4.3%yoy in July/August, vs. 3.3% in Q2. High frequency data thus far suggest a below trend GDP growth of 3.5%yoy in Q3, vs. 3.4% in Q2, with risks to the downside. Inventory to shipment ratio bodes ill for IP
ratio
Meanwhile, retail sales growth moved sideways, from 5.7% in Q2 to 5.3%yoy in July/August. This growth was supported by steady payrolls growth of 1.7% in July/August, unchanged from Q2. By sector, this growth was led services payrolls, which rose 3% in July/August vs. 2% in Q2. In contrast, manufacturing payrolls barely increased by 0.2% in July/August vs. 2.8% growth in Q2 reflecting weakness in exports. while export growth moderates... Exports growth slowed to 19.6%yoy in September, from 25.9% (revised) reported in August, led by a 40.1% fall in exports to Latin America, along with 21.7%, 15.2% and 1.6% dips in exports to the EU, the US and China, in September, vs. Augusts -9%, 12%, 7.6% and 21.2%, respectively. In contrast, import growth remained largely unchanged at 30.5%yoy in September vs. 28.9% (revised) in August, reflecting relatively resilient private consumption. On a positive note, the trade account surplus widened to USD1.4bn in September vs. USD0.5bn in August.
Inventory to shipment ratio Industrial production (rhs)
%yoy
1.4 1.3 1.2 1.1 1.0 0.9 0.8 2006
-40 -20 0 20 40
2007
2008
2009
2010
2011
Downside risks rise Our previous adjustment was relatively small in the context of South Korean growths sensitivity to G2 growth, due to sustained growth in private consumption amid payrolls gain and easy monetary policy conditions (negative interest rates). However, if the G2 economies slip into recession again, South Korea consumers could be deterred from spending further, which in turn would entail a relatively sharp cut to
Page 22
14 October 2011
our current growth forecast. In this regard, we have become more cautious with our Euroland economists now expecting a mild recession in the region. On a positive note, we have yet to hear from our US economists calling for a recession in the US. BoK to continue to pause as inflation falls
6 5 4 3 2 1 0 2009 2010 2011 2012 % CPI Call
that MSBs pose a systemic risk as they constitute only 2% of total assets of the financial system and 2.4% of total loans. Loan growth remains limited
%yoy 3mma
40 30 20 10 0 -10 -20 -30 2000 2002
Loans of Commercial/Specialized Banks loans Non-Bank Financial Corporations loans Total
2004
2006
2008
2010
Sources: CEIC and Deutsche Bank CIB Research Sources: CEIC and Deutsche Bank CIB Research
while inflation eases CPI inflation fell more than expected to 4.3% in September, from 5.3% in August. This was led by a sharp fall in food price inflation, to 4.6% in September vs. 11.4% reported in August, followed by a slower pace of increase in housing and recreation costs, which rose 5% and 1.1%, respectively, in September , vs. 5.5% and 1.6% in August. Meanwhile, communication costs continued to fall, at an accelerated rate of 2.2% in September vs. 1.1% in August. In contrast, we saw the cost of transportation and miscellaneous items rise at a faster pace of 8.6% and 9.9%, respectively, in September vs. 7.8% and 8.6% previously. Note that despite the fall in international fuel prices, local fuel prices have failed to adjust accordingly. Meanwhile, the core rate also fell in September, to 3.9% from 4% in August. keeping the Bank of Korea on the sidelines until mid-2012 We expect inflation to decelerate modestly in coming months, helping the Bank of Korea (BoK) remain on the sidelines until mid-2012. Meanwhile, we expect the authorities to maintain their vigilance over loan growth, which stood at 6.9% in July vs. 5.9% in June, while addressing the weakness of the financial sector. In particular, the authorities pushed ahead with the restructuring of mutual savings banks (MSBs). MBSs remained focused on real estate-related loans, including PF loans, which constituted 42.8% of their total loans by Q1 2011, albeit down from 44.7% at end-2010. According to the Financial Supervisory Services, as of end-March 2011, the delinquency ratio of MSBs stood at 15.8%, up from 14.8% at end-2010. Earlier the government suspended 8 MSBs (one sold to a commercial bank now), leaving 98 MSBs in operation until September, when they suspended another seven. The government plans to end its review of most MSBs by year-end. We do not think
In contrast, the delinquency ratio of commercial and specialized banks (CSBs), which account for 79.8% of total loans and 64% of total assets, stood relatively low. The ratio stood low, at 1.2% in August, albeit up from 1.1% at end-Mach and 0.9% at end-2010. However, its foreign currency liabilities, which account for 11.4% of total liabilities, reflects CSBs vulnerable to the stability of the G2 financial system. KRW/Kospi correlation recovers
2,400 2,200 2,000 1,800 1,600 1,400 1,200 1-Mar
Kospi
KRW/USD (rhs)
900 1100 1300 1500
8-Aug
15-Jan
24-Jun
as it limits the wons volatility... Foreign investors and lenders disengaged from South Korea as the sovereign debt crisis in Europe deepened, threatening a banking crisis there and a global recession. Consequently, the won depreciated 10.4% against the US dollar in September, vs. 5.9% fall in the Kospi. This is in sharp contrast to the previous month, when the KRW depreciated only 1.2% against the US dollar vs. the Kospi fell 11.9%. Note that the KRW/USDs correlation with the Kospi fell to its lowest level in nine months in early September, before rising sharply thereafter. Moreover, in the context of its own history, the won remained relatively
Page 23
14 October 2011
stable. The chart shows that the depreciation rates of the won against the US dollar in recent weeks were about 2.0 standard deviations (calculated using data from 2007 to present) away from the historical mean, still lower than that in mid-2010. KRW/USD, not too volatile, against its own history
z-score of weekly % change against USD
Other investment moves sideways

USD bn, cumulative
350 300 250 200 150 100 50 0 1996 1999
Other Investment Liabilities Portfolio Investment Liabilities
8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 2006 2007 2008 2009 2010
2002
2005
2008
2011
Despite the larger war chest, i.e. FX reserves (covered 203% of short-term debt in Q2 2011 vs. 126% in Q3 2008.) and improved external debt composition (shortterm share of total stood at 37.6% in Q2 2011 vs. 51.9% in Q3 2008), the won remains vulnerable to the state of the global economy and its financial system. That is, if there is a recession in the US or a banking crisis in Euroland, we expect to see a notable adjustment in the won against the US dollar, reflecting a weaker BoP support for the won, despite the improvement in the composition of external liabilities. South Koreas FX reserves fell to USD303.4bn in September, from USD312.2bn in August, as the BoK responded to the increasing pressure on the won. as the BoP support wanes. Adding to investors concerns, foreign investors commitment to the Korean bond market waned in September, with their net investment falling by USD2.5bn in September, after their net investment fell to KRW134bn in August from KRW2,903bn in July. Meanwhile, foreign investors continued sell equities, unloading KRW1,314bn-worth of local stocks in September, albeit down from KRW5,924.5bn in July.
This shift in foreign investment behavior was also apparent in the BoP data. Although South Korea reported no notable change in the headline, again reporting a financial account deficit of USD2.4bn in August, vs. USD2.5bn in July, there was a meaningful change in its composition. In particular, the portfolio account balance turned negative, to a deficit of USD2.9bn vs. a surplus of USD9.3bn, led by foreign sale of local stocks. There was a net outflow of USD5.8bn in foreign investment in local stocks in August, more than reversing the net inflow of USD2.5bn reported in July. Meanwhile, foreign flows into the local debt market slowed, to a surplus of USD1.7bn in August, vs. USD6.5bn in July. In contrast, the other investment account balance improved sharply, which reported a net surplus of USD4.0bn in August, vs. USD6.6bn deficit in July, reflecting increase in Korea's FX debt. On the latter, we expect a notable fall in other investment, including external debt, in September, due to dislocation in the European financial markets. Current account surplus narrows
USD bn
10 8 6 4 2 0 -2 -4 -6 -8 -10 2007 2008
Trade balance Exports Imports
%yoy
80 60 40 20 0 -20 -40 -60
2009
2010
2011
South Korea reported a smaller current account surplus of USD0.4bn in August, vs. USD3.8bn in July, as the trade account surplus fell to USD0.5bn from USD4.7bn in the same period. While we expect the current account balance to improve in September, with South Korea reporting a larger trade surplus of USD1.4bn in September vs. USD0.5bn in August, we expect further weakness in
Page 24 Deutsche Bank AG/Hong Kong
14 October 2011
G2 growth to depress the account in coming quarters, without further fall in import prices and/or weaker domestic demand. Juliana Lee, Hong Kong, (852) 2203 8312
South Korea: Deutsche Bank forecasts

2009 National income Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP (YoY%) Private consumption Government consumption Gross fixed investment Exports Imports Prices, money and banking CPI (YoY%) eop CPI (YoY%) ann avg Broad money (M3) Bank credit (YoY%) Fiscal accounts (% of GDP) Central government surplus Government revenue Government expenditure Primary surplus External accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) KRW/USD Debt indicators (% of GDP) Government debt1 Domestic External Total external debt in USD bn Short-term (% of total) General Industrial production (YoY%) Unemployment (%) Financial markets BoK base rate 91-day CD 10-year yield (%) KRW/USD 835 48.7 17153 0.3 0.0 5.6 -1.0 -1.2 -8.0 2010 1015 48.8 20799 6.2 4.1 3.0 7.0 14.5 16.9 2011F 1134 48.9 23182 3.7 2.8 2.0 -1.7 10.2 7.6 2012F 1224 49.0 24980 3.9 2.9 2.5 4.5 7.0 7.4
2.8 2.8 10.2 7.8
3.5 3.0 9.5 3.4
3.8 4.4 8.0 6.8
4.2 3.4 8.0 7.0
-1.7 24.0 25.7 -0.5
-0.2 22.6 22.8 1.1
0.0 21.9 21.9 1.6
-1.0 21.1 22.1 0.6
358.2 320.3 37.9 4.5 32.8 3.9 -14.9 270.0 1165
464.3 422.4 41.9 4.1 28.2 2.8 -19.4 297.1 1135
550.5 527.8 22.6 2.0 12.4 1.1 -12.0 305.8 1150
621.8 609.4 12.3 0.9 -0.6 0.0 -13.0 311.0 1080
35.4 34.3 1.1 41.4 345.4 43.2
37.4 36.5 0.9 35.8 360.0 37.5
34.4 33.5 0.9 32.1 371.0 36.7
33.1 32.3 0.8 29.4 390.0 35.9
0.1 3.6 Current 3.25 3.60 3.80 1167
17.3 3.7 3M 3.25 3.60 4.00 1150
8.5 3.5 6M 3.25 3.65 4.10 1100
9.0 3.3 12M 3.50 3.85 4.20 1080
Source: CEIC, Deutsche Bank Global Markets Research, National Sources Note: (1) FX swap funds unaccounted for. (2) Includes government guarantees..
Page 25
14 October 2011
Sri Lanka
Growth momentum still holding up, thanks to strong domestic demand and accommodative monetary policy stance but risks of policy error cloud the growth outlook for 2012. The central banks stance of intervening in the FX market to prevent depreciation of the rupee could lead to stress on the balance of payments.
B+(Pos)/BBS&P/Fitch
Rising discontentment over FX policy

While the Sri Lankan economy seems to be doing reasonably well on an overall basis, its FX policy has however faced criticism in recent months from none other than the IMF. One of the pre-conditions for awarding monetary assistance to Sri Lanka under the IMF Stand-By Arrangement (SBA) was that the Sri Lankan authorities would be willing to accept increased two-way flexibility in the currency movement, with the final intention of making the rupee market determined. However, the CBSL has actively intervened in the FX market since July onwards by selling Dollars, thereby preventing any meaningful depreciation of the rupee. Latest data shows that the CBSL has sold USD615mn Dollars in July and August, thereby preventing the rupee from heading significantly above 110. This compares with USD1.7bn Dollar sold between Sep-08 and March-09, post the Lehman crisis. FX intervention by CBSL
LKR/USD 118 116 114 112 110 108 106 2007 2008 2009 2010 2011 - Sale of USD Net purchase(+)/sale(-) of USD,rhs LKR/USD, lhs USDmn 1100 800 500 200 -100 -400 -700
So far, so good
2011 has turned out to be extremely disappointing for equity markets worldwide, thanks to the re-emergence of heightened global risk aversion, triggered by rising European sovereign debt risks and fears of an impending double-dip recession in G-3 economies. In this adverse global backdrop, Sri Lanka has emerged once again as the best performing equity market among its regional Asian peers. Year to date, Colombo All Share Index is up +0.4% (in USD terms), while all other Asian indices are in the negative territory (see chart below). Recall that even in 2010, the Sri Lankan equity market outperformed all other Asian markets, rising a whopping 102.5% in Dollar terms through the course of the year. Sri Lankan equity market has outperformed in 2011
% CNY HKD THB PHP TWD SGD IDR MYR KRW INR LKR
Source: Bloomberg Finance LP, Deutsche Bank
+ Purchase of USD
-26
YTD performance in USD (1st Jan 2011 - 12 Oct 2011) -22 -18 -14 -10 -6 -2 2
Source: Bloomberg Finance LP, Deutsche Bank
The relative outperformance of the Sri Lankan equity market is not surprising though. The end of the three decade long civil war with LTTE rebels in mid 2009 unleashed a golden opportunity for the economy to function at its full potential, supported by peace dividend and a stable government at the centre. Indeed, Sri Lankas growth momentum picked up sharply in 2010, which has been sustained at 8% till the first half of 2011, providing impetus for the relative stock market outperformance. The governments focus on fiscal consolidation (leading to a recent credit upgrade by rating agencies) and recent moderation in inflation also helped support investor sentiments to a great extent.
Page 26
The USD selling resulted in a liquidity shortage in the money market as equivalent amount of rupee liquidity gets sucked out, in case of an unsterilized intervention. This in turn pushed up overnight call money rate towards reverse repo rate of 8.5%, which led CBSL to re-introduce reverse repo auction (to infuse rupee liquidity into the system) in order to put a lid over rising interest rates. The Sri Lankan authorities have defended their FX policy stance on the following grounds: a) there is adequate foreign exchange reserves to defend the rupee without risking any balance of payments crisis; b) the policy is geared towards putting a lid on imported inflation, as the Sri Lankan economy remains a highly import dependent economy; and iii) such policy intervention is likely to be temporary as the authorities expect robust capital flows in the remaining period of this calendar year, which should help reduce strong depreciating pressure on the rupee.
14 October 2011
Last time when the CBSL had tried to defend the rupee by running down its foreign exchange reserves, it almost led to a default in the balance of payments, which was narrowly averted, thanks to the IMFs intervention through the SBA-loan programme. In March 2009, gross official reserves had fallen to USD1.3mn, barely sufficient to cover even one months imports. Finally, when the CBSL stopped intervening in April 2009, the rupee shot up to 120 from 114 in the previous month. Since then Sri Lankas reserves position has improved appreciably, with gross official reserves having risen to USD8.1bn by end of August 2011. But note that this high level of reserves gives an illusory comfort, as bulk of these reserves has been obtained through loans (Eurobonds, IMF disbursements, and foreign holdings of Treasuries). Net reserves, which are non-borrowed reserves, or earned FX reserves have been falling (reflecting FX sales by CBSL) and are currently around USD700mn, even lower than the USD900mn reserves that Sri Lanka held in mid 2009. This is indeed a worrisome situation and could pose a destabilizing impact on Sri Lankas macroeconomic stability and robust growth outlook. If the CBSL continues to intervene in the FX market and capital flows do not pick up as anticipated, then the balance of payments could come under severe stress in the coming months. On the other hand, if the CBSL stops active intervention in the FX market, then one could expect a sharp depreciation of the Sri Lankan rupee (assuming Dollar continues to remain strong globally), given that the currency has faced hardly any depreciation pressure (thanks to central bank intervention), in stark contrast to other Asian currencies in this bout of global risk aversion cycle. While this outcome may be favorable for exporters on the margin, imported inflation will likely rise (assuming no sharp collapse in global oil prices), complicating monetary policy decisions. FX performance in Asia between July-October 2011
% CNY HKD THB PHP TWD SGD IDR MYR KRW INR LKR
Source: Bloomberg Finance LP, Deutsche Bank. Note: (-) sign indicates depreciation against USD
Sri Lanka: Deutsche Bank Forecasts

2009 National Income Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP (YoY %) Total consumption Total investment Private Government Exports Imports Prices, Money and Banking CPI (YoY%) eop CPI (YoY%) avg Broad money (M2b) eop Bank credit (YoY%) eop Fiscal Accounts (% of GDP) Central government balance Government revenue Government expenditure Primary balance External Accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) LKR/USD Debt Indicators (% of GDP) Government debt Domestic External Total external debt in USD bn Short-term (% of total) General Industrial production (YoY %) Unemployment (%) Financial Markets Reverse Repo rate LKR/USD 42.1 20.5 2058 3.5 4.1 1.3 -2.1 14.5 -12.3 -9.1 2010 49.6 20.7 2395 8.0 8.6 8.0 7.0 12.0 9.0 10.0 2011F 58.8 20.9 2809 8.0 8.8 10.0 10.0 10.0 8.0 11.0 2012F 68.6 21.2 3244 8.0 8.2 10.8 11.0 10.0 9.0 11.0
5.0 3.6 18.6 -5.8
6.8 6.2 15.8 25.1
5.0 7.0 17.0 22.0
7.5 6.0 15.0 15.0
-9.9 15.0 24.9 -3.5
-7.9 14.9 22.9 -1.7
-7.5 15.1 22.6 -1.3
-6.5 15.5 22.0 -0.5
7.1 10.2 -3.1 -7.4 -0.2 -0.5 0.4 6.8 114.4
8.3 13.5 -5.2 -10.5 -1.4 -2.9 0.4 8.3 111.0
10.0 16.9 -6.9 -11.7 -2.9 -5.0 0.8 9.3 110.0
11.5 20.0 -8.5 -12.3 -3.8 -5.5 1.0 10.0 108.0
-10
FX performance vs. USD (1st July 2011 - 12 Oct 2011) -8 -6 -4 -2 0 2
86.2 49.8 36.5 49.8 20.9 13.5
81.9 45.8 36.1 50.1 24.8 13.5
79.0 44.5 34.4 45.5 26.9 13.5
75.3 42.5 32.8 39.5 27.5 13.5
9.2 5.8 Current 8.50 110.2
10.4 4.9 3M 8.50 110.0
2.5 4.8 6M 8.50 110.0
7.4 4.7 12M 8.50 108.0
Kaushik Das, Mumbai, (91) 226658-4909

Deutsche Bank AG/Hong Kong Page 27
14 October 2011
Taiwan
While high frequency data point to a qoq contraction in Q3, we expect a rebound in Q4, if the US economy continues to expand. A G2 recession points to a recession in Taiwan and a notably weaker TWD. The CBC to remain on the sidelines As expected, the Central Bank of China (CBC) left the policy rate unchanged at the September meeting, ending its monetary tightening that began mid-2010, and adopted a neutral stance. The CBCs comments were decisively dovish, noting that "a stronger local currency is reducing inflationary pressure" and that its previous actions to ease mortgage loan growth are having effect. On the latter, the CBC added that banks have improved mortgage risk management. On growth, the CBC raised its concern, noting that production and export order growth are easing. We expect the CBC to stay on the sidelines until mid-2012 in response to rising risks to growth. In fact, high frequency data suggests that the Taiwanese economy contracted in Q3, on qoq basis, on the back of weaker external demand. as growth slows The leading economic index continued to fall in August, to 2.2%yoy 3mma, down from 3.3% in Q2, pointing to a further slowdown in economic activities in Q3. On the demand front, we attribute much of this slowdown to weaker exports and investment. In fact, the machinery and electrical equipment investment index fell sharply, by 7.6%yoy 3mma in August, vs. 2.6% growth in Q2. Worse still, capital imports continued to fall 24.7% in September, leaving Q3 growth at -14%, vs. +11.3% in Q2. Meanwhile, retail sales growth was relatively stable, rising 3.5%yoy 3mma in August, vs. 4% growth in Q2. Consumer goods imports rose 21.8% in Q3, vs. 19.2% in Q2. Note that our growth revision in September assumed relatively stable private consumption as long as the G2 economies were expanding, albeit at muted levels. However, this benign outlook is at risk now with our Euroland economists expecting a mild recession in the region. If the US economy follows suit, we expect it to prompt a notable slowdown in private consumption in Taiwan, pushing the latter to a recession. Meanwhile, exports continued to expand at a slower pace of 9.9%yoy in September, leaving Q3 growth at 11.6%, down from 14.9% in Q2, boding ill for overall growth. Weakness in exports points to sustained weakness in industrial production, which rose 3.8%yoy 3mma in August, down from 5% in July and 6.2% in Q2. Worse still, the trade data suggest sustained weakness in the inventory to shipment ratio, which continued to trend upward, to 0.97 (sa 3mma) in August from 0.96 in Q2, after bottoming at 0.84 in Q2 2010.
Page 28
Aa3/AA-/A+
Moodys/S&P/Fitch
amid a benign inflationary environment Headline inflation remained largely unchanged at 1.35%yoy in September vs. 1.34% in August, as lower core prices countered the impact of higher food and transport prices. Food and transportation costs rose 1.9% and 1.7% respectively in September, up from 1.6% and 1.4% in August, while clothing and medical price inflation fell to 2.6% and 1.8% in September, from 3.2% and 2.4% in August, respectively. Meanwhile, housing inflation was largely unchanged at 1.1% during the month. The core rate stood at 1.2% in September, down from 1.3% in August. We expect inflation to remain contained in coming months, led by falling energy prices. TWDs volatility rises sharply
4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 2006 2007 2008 2009 2010
while limiting the TWD volatility. The TWD depreciated 5.1% against the US dollar in September, albeit far less than the KRWs 10.5% depreciation. However, against its own historical trend, the TWDs volatility rose sharply, depreciating 3 standard deviation (calculated using the data from 2006 to date) away from the mean in mid-September, its highest since May 2008. Meanwhile, Taiwans FX reserves fell again in September, to USD389.2bn from USD400.3bn in August, as the CBC responded to the increasing pressure on the TWD. Despite the fall in FX reserves, Taiwan has more than enough to cover its FX liabilities. Taiwans FX reserves (USD392.6bn) covered 364% of total external debt reported in Q1. Also note that, when there was a severe financial market dislocation in 2008, Taiwanese investors brought their investment funds back home, countering the impact of foreign investment outflows and thereby reducing the pressure on the TWD. Hence, barring a US recession or a banking crisis in Euroland, we expect a relatively stable TWD, against its peers.
14 October 2011
Taiwan is a net investor to the world

USD bn
Taiwan: Deutsche Banks forecasts

2009 National Income Nominal GDP (USD bn) Population (m) GDP per capita (USD) Real GDP (YoY%) Private consumption Government consumption Gross fixed investment Exports Imports Prices, money and banking CPI (YoY%) eop CPI (YoY%) ann avg Broad money (M2) Bank credit1 (YoY%) Fiscal accounts (% of GDP) Budget surplus Government revenue Government expenditure Primary surplus External accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) TWD/USD Debt indicators (% of GDP) Government debt2 Domestic External Total external debt in USD bn Short-term (% of total) General Industrial production (YoY%) Unemployment (%) Financial markets Discount rate 90-day CP 10-year yield (%) TWD/USD 377.0 23.1 16318 -1.9 1.1 3.9 -11.0 -8.7 -12.8 2010 433.2 23.2 18674 10.9 3.7 1.8 23.4 25.7 28.2 2011F 475.8 23.3 20420 4.6 3.4 -0.1 -2.4 5.1 0.5 2012F 497.3 23.4 21251 3.9 3.0 1.0 1.5 5.8 3.5
15 10 5 0 -5 -10 -15 -20 1998
Financial assets
Financial liabilities
2000
2002
2004
2006
2008
2010
Juliana Lee, Hong Kong, (852) 2203 8312
-0.2 -0.9 7.0 -0.5
1.2 1.0 4.5 5.3
1.4 1.4 6.0 5.8
1.7 1.3 6.0 5.0
-4.5 16.9 21.4 -3.4
-3.7 15.8 19.5 -1.7
-3.3 16.0 19.3 -1.1
-3.6 15.8 19.4 -1.3
203.4 172.7 30.8 8.2 42.9 11.4 -2.0 348.2 31.5
273.8 247.3 26.5 6.1 39.9 9.2 -9.1 382.0 30.3
311.0 290.3 20.7 4.3 37.3 7.7 -9.0 397.0 29.8
348.5 331.6 16.9 3.3 32.9 6.3 -10.0 409.4 28.5
41.3 39.7 1.6 21.7 82.0 83.3
41.7 39.8 1.9 23.4 101.6 68.9
43.9 42.0 1.9 23.5 111.7 65.3
46.2 44.5 1.7 21.5 111.7 65.3
-5.7 5.8 Current 1.88 0.80 1.31 30.4
28.5 5.0 3M 1.88 0.80 1.30 29.8
8.5 4.4 6M 1.88 0.90 1.40 29.5
8.0 4.3 12M 2.13 1.10 1.40 28.5
Source: CEIC, Deutsche Bank Global Markets Research, National Sources Note: (1) Credit to private sector. (2) Including guarantees on SOE debt.
Page 29
14 October 2011
Thailand
Data thus far point to a rebound in growth in Q3, but Thailand faces strong headwinds as floods and weaker G2 demand threaten growth, prompting the Bank of Thailand to pause. Inflation is likely to rebound, temporarily, led by higher food prices. Temporary relief before the slowdownHigh frequency data thus far pointed to a rebound in growth in Q3. In fact, exports rose 31.1%yoy in August, vs. 38.3% in July and 19.8% in Q2, led by agricultural goods exports (64.3% in August vs. 53.5% in July). In contrast, exports of electronics (9.3% vs. 15.6%) and electrical equipment (5.2% vs. 12.3%) slowed during the month. Meanwhile, imports rose at a robust pace of 44% in August, vs. 13.5% in July and 29.3% in Q2, marking its fastest pace of expansion since May 2010, reflecting sustained expansion in domestic demand. The private consumption index rose 3.7%yoy 3mma in August, albeit down from 4.4% in Q2, while the private investment index continued to expand at 7.5% vs. 10.8% in the same period. On the production front, manufacturing production growth surprised to the upside, expanding 7.0%yoy in August, vs. the 0.7% (revised) decline reported in July, as auto production recovered. On a seasonally adjusted mom basis, manufacturing output rose 3.9% in August, vs. 4.8% fall in July. However, further recovery is threatened by heavy rain and floods that left 269 dead thus far since the monsoon season began late July. The Thai authorities estimates of the cost of flood damage range between THB60bn to THB120bn, about 0.6%-1.2% of GDP. Earlier, the finance ministry revised down its growth forecast for the year, to 3.7% from 4%. This, however, may be revised down further as floods threaten not only agricultural production but also industrial production. We will revisit our forecast after we get more September data. while inflation easeHeadline inflation unexpectedly eased to 4% in September, from 4.3% in August, driven by lower energy prices. Energy prices rose at a sharply slower pace of 4.8% in September, vs. 9% in August. Despite the heavy rain, however, raw food price inflation unexpectedly stood relatively stable at 7.9% in September vs. 7.5% in August. Meanwhile, the core rate stood at 2.9% in September, largely unchanged from last month. Looking forward, we expect headline inflation to rebound, temporarily, due to flood-related supply shocks, albeit falling short of the upper limit of the (suggested) new inflation target of the Bank of Thailand headline inflation of 1.5-4.5% vs. core inflation of 0.5-3%. On the other
Baa1/BBB+/BBB
Moodys/S&P/Fitch
hand, the government-led wage hike policy is likely to be scaled down, helping to check inflationary expectations. suggesting no rate hike by the Bank of Thailand Despite the upside risks to inflation in the near term, we expect deteriorating growth outlook to prompt the Bank of Thailand (BoT) to stay on the sidelines until next year. During an interview at the IMF meeting, the BoT governor hinted at a downward revision to the BoTs growth forecast, while noting that "inflation expectations aren't likely to increase and the BoT has closed the gap somewhat on normalizing borrowing costs." Later in Thailand, the governor noted that BoTs willingness to use the monetary policy to boost the economy if necessary, reflecting its shift to a neutral stance from tightening bias. Volatile THB/USD
4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0
2006
2007
2008
2009
2010
while it responds to the bahts volatility. While it remained relatively stable against its peers, depreciating only 4.2% in September, in the context of its own history, the THB/USD volatility rose sharply in September. That is, the baht depreciated 2.7 standard deviations away from the historical mean (using data from 2003 to date) in the last week of September, reaching its highest level since May 2008. As the BoT responded to limit the bahts volatility, Thailands FX reserves fell to USD180.1bn in September, from USD188.3bn in August. Despite the fall, the country has more than sufficient FX reserves to cover its external debt. Note that in Q2 this year, FX reserves at USD184.9bn covered 173% of total external debt, vs. 130% in Q3 2008. Moreover, in case of further dislocation in global financial system, we expect Thai investors to bring their funds back home, as they did in 2008, countering the impact of withdrawal of foreign investments from Thailand. Note that Thai assets rose relatively sharply in recent months, while foreign flows into Thailand waned. Hence, we expect the baht to remain relatively stable, against its peers.
Page 30
14 October 2011
Asia Economics Monthly Thailand: Deutsche Bank Forecasts 2009 National Income Nominal GDP (USDbn) Population (m) GDP per capita (USD) Real GDP (YoY%) Private consumption Government consumption Gross fixed investment Exports Imports Prices, Money and Banking CPI (YoY%) eop CPI (YoY%) ann avg Core CPI (YoY%) Broad money Bank credit1 (YoY%) Fiscal Accounts2 (% of GDP) Central government surplus Government revenue Government expenditure Primary surplus External Accounts (USDbn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USDbn) FX rate (eop) THB/USD Debt Indicators (% of GDP) Government debt2,3 Domestic External Total external debt in USDbn Short-term (% of total) General Industrial production (YoY%) Unemployment (%) Financial Markets BoT o/n repo rate 3-month Bibor 10-year yield (%) THB/USD (onshore) 263.7 63.5 4153 -2.3 -0.9 6.1 -9.2 -12.5 -21.2 2010 318.8 63.9 4989 7.8 4.8 6.4 9.4 14.7 21.5 2011F 360.7 64.2 5618 3.7 3.3 2.2 5.3 9.0 9.2 2012F 400.8 64.6 6205 4.0 3.3 6.1 5.4 6.1 6.0
Foreign inflows fall while Thai overseas flows rise

8 6 4 2 0 -2 -4 -6
USD bn
Financial assets
Financial liabilities
2005
2006
2007
2008
2009
2010
2011
Juliana Lee, Hong Kong, (852) 2203 8312
3.5 -0.8 0.3 8.2 3.2
3.0 3.3 0.9 8.0 8.4
4.4 3.9 2.1 8.0 8.0
4.5 4.5 2.5 8.5 8.0
-5.6 15.6 21.2 -3.4
-1.1 16.8 17.9 -0.8
-3.3 16.5 19.8 -2.3
-4.4 16.6 21.0 -3.4
150.7 131.4 19.4 7.4 21.9 8.3 0.9 138.4 33.0
193.7 179.6 14.1 4.4 14.8 4.6 1.0 172.1 30.6
230.7 216.7 14.0 3.8 17.3 4.7 -1.3 186.7 30.2
261.1 247.2 13.9 3.4 16.5 4.1 2.8 209.5 29.2
38.2 35.4 2.8 27.3 72.0 40.3
35.0 31.2 3.8 23.8 76.0 39.5
36.0 32.2 3.8 21.8 81.0 39.5
38.0 34.5 3.5 21.4 86.0 41.9
-6.4 1.5 Current 3.50 3.60 3.57 30.8
15.5 1.1 3M 3.50 3.60 3.60 30.2
6.0 1.0 6M 3.75 3.90 3.70 30.0
7.0 1.0 12M 4.25 4.40 3.80 29.2
Source: CEIC, DB Global Markets Research, National Sources Note: (1) Depository institutions credit to the non-government sector; (2) Fiscal year ending September. (3) Including guarantees on SOE debt.
Page 31
14 October 2011
Vietnam
Amid sustained growth rises, the State Bank of Vietnam (SBV) delivers a rate hike, prioritizing inflation, as the dong remains under pressure. Weaker G2 growth poses downside risks to growth and the dong. Growth accelerated in Q3 The Vietnamese economy expanded at a faster pace of 6.1% yoy in Q3, vs. 5.7% in Q2, but was weaker than our forecast of 6.3% growth. With the exception of the industry sector, all sectors reported stronger growth in Q3 vs. Q2. In particular, the former rose 7.3% in Q3, down from 8.2% in Q2. In contrast, the agricultural sector expanded 3.2% in Q3 vs. 2.2% in Q2, while services rose 6.5% in Q3 vs. 6.0% in Q2. Moreover, despite ongoing concerns about the market, the construction sector expanded at a faster pace of 5.0% in Q3 vs. 4.2% in Q2. We attribute its strength to public-sector activities. As a result, the economy expanded 5.7%ytd in Q3 vs. 6.6% in the same period last year. supported by resilient domestic and external demand Retail sales growth remained strong, rising 20% in Q3, albeit slowing modestly from 21.3% in Q2. By sector, this was a broad-based moderation in growth, with the exception of households, retail sales of which rose at a faster pace of 20.2% in Q3 vs. 19.8% in Q2. Export growth accelerated to 41.9% yoy in Q3 from 29.3% in Q2. Meanwhile, imports continued to underperform vis--vis exports on the back of government measures to limit consumer goods imports. Imports rose 27.9% in Q3, up from 26.7% in Q2. As a result, the trade deficit was limited to USD0.4bn vs. USD2.9bn in Q2. In fact, this years trade balance has been better than expected thus far, prompting us to expect a narrower trade deficit of USD10bn this year vs. USD11.5bn expected earlier. The trade deficit stood at USD6.8bn ytd in September, vs. USD8.4bn a year earlier. but likely to miss the earlier growth target. We now expect the sovereign debt crisis in Euroland to push the region into a mild recession, starting Q4 this year. Moreover, we have cut our 2H 2011 and 2012 US growth forecast by 0.5ppts and 0.6ppts, respectively, to 1.8% and 2%. Vietnams historical beta (sensitivity) to G2 growth stood relatively low at 0.4 (2000-10) vs. the regions average of 0.9. However, it is higher than Chinas 0.3, and India and Indonesias 0.2 and 0.1, respectively. We expect muted G2 growth to limit Vietnams growth, leaving the latters 2011 and 2012 GDP growth at 5.9% and 6.3%, respectively, with risks to the downside. Note
B1(Neg)/BB-(Neg)/B+
Moodys/S&P/Fitch
that the government again adjusted down its 2011 GDP growth target to 6% from 6.5%. Trade balance improves, temporarily
%yoy 3mma 80 60 40 20 0 -20 -40 -60 Trade Balance (rhs) Exports Imports USD bn 4 3 2 1 0 -1 -2 -3
2004 2005 2006 2007 2008 2009 2010 2011

However, as the dong remains under pressure In connection, we expect the pressure on the dong to worsen in coming months, as trade deficits to widen on the back of weaker external demand, while imports remain relatively stable on the back of gold imports and rising consumer demand ahead of holidays. If the US slips back into recession or there is a banking crisis in Europe, we expect the dong to depreciate notably. Meanwhile, the dong remains under pressure also due to high inflation and FX loan repayment needs. Note that FX loan growth remained high, at 22.2%ytd in June, while VND loans rose 2.7%, pointing to rising FX related risks to the soundness of banks assets. On a positive note, total loan growth stood at 7.1%, suggesting that the new credit growth target of 17% (vs. 20% earlier) will be met. The SBV also asked banks to reduce the non-productive sector (e.g. real estate) loans share of total loans to 16% by end-2011, from 22% in 1H. Inflation still high
30 25 20 15 10 5 0 2006 2007 2008 2009 2010 2011
Refinancing rate Headline inflation
and inflation remains high CPI inflation remained high at 22.4% in September, albeit down slightly from 23.0% in August. Food and transportation price inflation stood at 33.4% and 19.9%, respectively, in September, down from 34.1% and 21.5% in August. Despite lower
Page 32
14 October 2011
Asia Economics Monthly Vietnam: Deutsche Bank Forecasts 2009 National Income Nominal GDP (USD bn) Population (m) GDP per capita (USD) Real GDP (YoY%) Private consumption Government consumption Gross fixed investment Exports Imports Prices, Money and Banking CPI (YoY%) eop CPI (YoY%) ann avg Broad money (M3) Bank credit (YoY%) Fiscal Accounts1 (% of GDP) Federal government surplus Government revenue Government expenditure Primary fed. govt surplus 92.9 86.0 1079 5.3 3.7 7.6 8.7 -5.0 -9.0 2010 103.4 86.9 1190 6.8 6.1 6.0 11.6 10.0 12.8 2011F 119.2 87.9 1356 5.9 5.2 5.5 5.7 7.0 6.8 2012F 142.2 88.8 1601 6.3 6.2 6.3 6.0 6.8 6.2
international fuel prices, we remain concerned about headline inflation due to bad weather conditions, which we expect to keep food prices high. Note that the food share of the CPI basket stands at 40% vs. transportations 8.9% and housings 10%. Meanwhile, housing price inflation remained also high, at 22.5% in September, up from 22% in August. We attribute high inflation in Vietnam, not only to high raw-material prices and negative interest rates, but also to inefficient investments. Note that the countrys incremental capital output ratio (the marginal amount of investment capital necessary to generate the next unit of output, also called ICOR) continued to worsen in recent years, with its 5-year average at 5.7 in 2010, twice the level of Thailands, Inefficient investment
5 yr moving avg
6 5 4 3 2 1 0
ICOR
4.6 6.8 31.6 38.0
11.7 9.2 25.0 27.0
20.6 19.1 19.0 17.0
13.7 15.9 30.0 22.0
-9.0 26.7 35.7 -7.8
-6.5 28.1 34.6 -5.2
-5.0 27.6 32.6 -3.5
-5.3 28.2 33.5 -3.8
1995 1997 1999 2001 2003 2005 2007 2009

the State Bank of Vietnam delivers a rate hike. The State Bank of Vietnam (SBV) unexpectedly reversed its course and hiked the refinancing rate by 100bps to 15%, effective 10 October. This rate hike in refinancing rate follows a 100bps cut to 14% in the repo rate in July, which the SBV left unchanged this time. We think the repo rate was left unchanged to sustain its liquidity support for financial institutions struggling to attract deposits or at least give them time to adjust. To address the latter issue, the SBV has reiterated its time deposit (more than one month) rate cap of 14%, while threatening to impose sanctions against violating credit institutions. The SBV also capped the rate on demand and time deposits below one month at 6%. At the same time, the SBV has asked credit institutions to lower their lending rates for the production sector to 17-19% from 18-22%, to limit loan defaults. These administrative measures reflect the problem of monetary policy transmission in Vietnam. Regardless of the existing problem, we support the SBVs rate hike, which signals the Vietnamese authorities policy priority in limiting inflationary pressure and stabilizing the dong. Juliana Lee, Hong Kong, (852) 2203 8312
External Accounts (USD bn) Merchandise exports Merchandise imports Trade balance % of GDP Current account balance % of GDP FDI (net) FX reserves (USD bn) FX rate (eop) VND/USD Debt Indicators (% of GDP) Government debt Domestic External Total external debt in USD bn Short-term (% of total) General Industrial production (YoY%) Unemployment (%) Financial Markets Refinancing rate 14-day repo rate VND/USD
57.5 68.0 -10.5 -11.3 -7.4 -8.0 6.9 16.8 18479
72.5 81.0 -8.5 -8.2 -4.3 -4.2 7.0 12.5 19500
80.0 90.5 -10.5 -8.8 -6.0 -5.0 7.0 14.5 21000
93.0 105.0 -12.0 -8.4 -7.0 -4.9 7.0 15.5 22000
51.0 20.0 31.0 39.8 37.0 1.1
52.0 21.0 31.0 40.6 42.0 1.2
53.0 21.0 32.0 41.1 49.0 1.6
53.0 20.0 33.0 39.4 56.0 1.4
6.8 5.0 Current 15.00 14.00 20873
14.0 4.7 3M 15.00 14.00 20900
11.0 4.7 6M 13.00 12.00 21000
14.0 4.5 12M 11.00 10.00 22000
Source: CEIC, DB Global Markets Research, National Sources Note: (1) Fiscal balance includes off budget expenditure, while revenue and expenditure include only on budget items.
Page 33
14 October 2011
China Inflation (CPI)

%yoy 8 6 4 2 0 -2 2009 2010 2011 2012
China One-year Deposit Rate

% 4.0 3.5 3.0 2.5 2.0 1.5 1.0 2009 2010 2011 2012 3.50
Source: DB Global Markets Research
Next CPI release: Nov 9 Next policy meeting: N.A. India Inflation (WPI)
%yoy 12 10 8 6 4 2 0 -2 2009 2010 2011
DB Forecast (Previous): 5.2%yoy (6.1%) DB Rate Call: No change in rate expected India Repo Rate
9 8 7 6 5 4 % 8.50
2012
2009
2010
2011
2012
Next WPI release: Oct 14 Next policy meeting: Oct 25 Indonesia Inflation (CPI)
%yoy 10 8 6 4 2 2009 2010 2011
DB Forecast (Previous): 9.8%yoy (9.8%) DB Rate Call: 25bps rate hike in Oct Indonesia One-month SBI Rate
9 8 7 6.00 6 5
2012
2009
2010
2011
2012
Next CPI release: Nov 1 Next policy meeting: Nov 10
DB Forecast (Previous): 5.0%yoy (4.6%) DB Rate Call: 25bps rate cut in Nov
Page 34
14 October 2011
Malaysia Inflation (CPI)

%yoy 5 4 3 2 1 0 -1 -2 -3 2009 2010 2011 2012
Malaysia Overnight Policy Rate

3.5 3.0 2.5 2.0 1.5 2009 2010 2011 2012 % 3.00
Next CPI release: Oct 21 Next policy meeting: Nov 11 Philippines Inflation (CPI)
%yoy 8 6 4 2 0 2009 2010 2011
DB Forecast (Previous): 3.3%yoy (3.3%) DB Rate Call: No change in rate expected Philippines Overnight Repo Rates
% 8 7 6 5 4 3 2012 2009 2010 2011 2012 4.50 6.50
Repo Rev repo
Next CPI release: Nov 4 Next policy meeting: Oct 20 South Korea Inflation (CPI)
%yoy 6 5 4 3 2 1 2009 2010 2011
DB Forecast (Previous): 5.1%yoy (4.8%) DB Rate Call: No change in rate expected South Korea Overnight Call Rate Target
4 % 3.25 3
1 2012 2009 2010 2011 2012
Next CPI release: Nov 1 Next policy meeting: Nov 11
DB Forecast (Previous): 3.9%yoy (4.3%) DB Rate Call: No change in rate expected
Page 35
14 October 2011
Sri Lanka Inflation (CPI)

%yoy 12 10 8 6 4 2 0 2009 2010 2011 2012
Sri Lanka Reverse Repo Rate

13 12 11 10 9 8 2009 2010 2011 2012 8.50 %
Next CPI release: Oct 31 Next policy meeting: Nov 8 Taiwan Inflation (CPI)
%yoy 4 3 2 1 0 -1 -2 -3 2009 2010 2011
DB Forecast (Previous): 5.6%yoy (6.4%) DB Rate Call: No change in rate expected Taiwan Discount Rate
% 2.50 1.875
2.00
1.50
1.00 2012 2009 2010 2011 2012
Next CPI release: Nov 7 Next policy meeting: Dec 30 Thailand Core Inflation (CPI)
%yoy 4 3 2 1 0 -1 -2 2009 2010 2011
DB Forecast (Previous): 1.3%yoy (1.3%) DB Rate Call: No change in rate expected Thailand 1-day Repurchase Rate
5 4 3 2 1 0 2012 2009 2010 2011 2012 % 3.50
Next core CPI release: Nov 1 Next policy meeting: Oct 19
DB Forecast (Previous): 2.1%yoy (2.9%) DB Rate Call: No change in rate expected
Page 36
14 October 2011
Vietnam Inflation (CPI)

24 20 16 12 8 4 0 2009 2010 2011 2012
Vietnam Discount rate

% 16 13.0 13 10 7 4 2009 2010 2011 2012
%yoy
Next CPI release: Oct 24 Next policy meeting: N.A. Hong Kong Inflation (CPI)
8 6 4 %yoy
DB Forecast (Previous): 22.8%yoy (22.4%) DB Rate Call: 100bps rate cut in Dec Hong Kong Base Rate
% 0.60 0.55 0.50 0.50
2 0 -2 2009 2010 2011 2012 0.45 0.40 2009 2010 2011 2012
Next CPI release: Oct 21 Singapore Inflation (CPI)

%yoy 6 5 4 3 2 1 0 -1 2009 2010 2011
DB Forecast (Previous): 5.7%yoy (5.7%) Singapore 3m SGD Sibor

0.75 0.65 0.55 0.45 0.35 0.25
2012
0.40
2009
2010
2011
2012
Next CPI release: Oct 24
DB Forecast (Previous): 5.2%yoy (5.7%)
Page 37
14 October 2011
Asian Economic Indicators

2010 (%YoY unless stated) Policy rates (%) China (1yr depo) HKMA (base rate) India (repo) Indonesia (28-day SBI) Malaysia (overnight) Philippines (repo) Singapore (3mo SIBOR) South Korea (o/n call) Sri Lanka (rev repo) Taiwan (rediscount) Thailand (o/n repo) Vietnam (refinancing) Consumer prices China Hong Kong India (WPI) Indonesia Malaysia Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam Credit China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Sri Lanka Taiwan Thailand Exports China Hong Kong India Indonesia Malaysia (USD) Philippines Singapore (USD) South Korea Sri Lanka Taiwan Thailand Vietnam
2011 Nov 2.50 0.50 6.25 6.50 2.75 6.00 0.44 2.50 9.00 1.50 1.75 9.00 Dec 2.75 0.50 6.25 6.50 2.75 6.00 0.44 2.50 9.00 1.63 2.00 9.00 Jan 2.75 0.50 6.50 6.50 2.75 6.00 0.44 2.75 8.50 1.63 2.25 9.00 Feb 3.00 0.50 6.50 6.75 2.75 6.00 0.44 2.75 8.50 1.63 2.25 11.00 Mar 3.00 0.50 6.75 6.75 2.75 6.25 0.44 3.00 8.50 1.63 2.50 12.00 Apr 3.25 0.50 6.75 6.75 2.75 6.25 0.44 3.00 8.50 1.75 2.75 13.00 May 3.25 0.50 7.25 6.75 3.00 6.50 0.44 3.00 8.50 1.75 2.75 14.00 Jun 3.25 0.50 7.50 6.75 3.00 6.50 0.44 3.25 8.50 1.75 3.00 14.00 Jul 3.50 0.50 8.00 6.75 3.00 6.50 0.44 3.25 8.50 1.88 3.25 14.00 Aug 3.50 0.50 8.00 6.75 3.00 6.50 0.35 3.25 8.50 1.88 3.50 14.00 Sep
Aug 2.25 0.50 5.75 6.50 2.75 6.00 0.54 2.25 9.00 1.38 1.75 8.00
Sep 2.25 0.50 6.00 6.50 2.75 6.00 0.51 2.25 9.00 1.38 1.75 8.00
Oct 2.50 0.50 6.00 6.50 2.75 6.00 0.44 2.25 9.00 1.50 1.75 8.00
6.75 3.00 6.50 3.25
3.5 2.4 8.9 6.4 2.0 4.5 3.3 2.6 5.0 -0.5 3.3 8.2
3.6 1.9 9.0 5.8 1.8 4.0 3.7 3.6 5.7 0.3 3.0 8.9
4.4 2.5 9.1 5.7 1.9 3.1 3.5 4.1 6.5 0.6 2.9 9.7
5.1 2.8 8.2 6.3 1.9 3.4 3.8 3.3 6.9 1.5 2.8 11.1
4.6 2.9 9.5 7.0 2.1 3.4 4.6 3.5 6.8 1.2 3.0 11.8
4.9 3.5 9.5 7.0 2.4 4.1 5.5 4.1 6.3 1.1 3.0 12.2
4.9 3.6 9.5 6.8 2.9 4.7 5.0 4.5 7.2 1.3 2.9 12.3
5.4 4.4 9.7 6.7 3.0 4.8 5.0 4.7 7.7 1.4 3.1 13.9
5.3 4.6 9.7 6.2 3.2 4.7 4.5 4.2 8.8 1.3 4.0 17.5
5.5 5.3 9.6 6.0 3.3 5.1 4.5 4.1 8.1 1.7 4.2 19.8
6.4 5.6 9.5 5.5 3.5 5.2 5.2 4.4 7.1 1.9 4.1 20.8
6.5 7.9 9.2 4.6 3.4 5.1 5.4 4.7 7.4 1.3 4.1 22.2
6.2 9.8 4.8 4.7 5.3 7.0 1.3 4.3 23.0
18.6 24.1 18.5 21.0 9.5 9.8 9.0 2.9 13.7 6.2 9.7
18.5 25.9 18.3 22.8 8.8 10.2 10.9 2.7 17.4 5.9 10.5
19.3 29.5 20.4 22.3 10.9 9.1 12.3 3.3 22.7 6.3 11.6
19.8 25.9 22.3 22.9 11.6 10.3 12.9 3.8 26.1 6.4 11.7
19.9 28.6 27.2 24.1 9.7 8.9 13.4 3.2 27.8 6.4 12.3
18.5 30.0 22.7 22.9 9.9 12.4 13.6 4.3 30.1 8.0 13.9
17.7 29.8 22.7 22.7 9.5 13.6 14.9 4.3 31.3 7.9 14.5
17.9 30.9 21.3 23.5 10.2 16.8 15.4 4.1 32.0 8.4 14.5
17.5 27.5 21.7 23.0 10.0 18.0 17.2 4.4 32.7 8.0 15.0
17.1 32.4 21.7 23.2 11.0 19.3 18.0 3.4 35.1 7.9 15.0
16.9 28.0 20.2 22.6 12.7 20.5 18.8 3.6 35.9 7.5 15.4
16.6 27.6 18.0 23.7 10.7 23.6 19.6 4.4 7.0 15.5
16.4 20.1
34.3 35.5 24.1 30.2 24.2 37.5 33.4 26.0 7.0 26.6 23.9 51.6
25.1 23.9 24.6 23.8 20.0 46.8 26.1 16.2 16.7 17.5 21.2 34.2
22.8 13.9 21.4 17.6 10.9 27.8 28.1 27.6 27.6 21.9 15.7 23.9
34.9 16.4 44.1 45.1 12.8 11.5 19.4 21.4 36.0 21.8 28.5 41.7
17.9 12.3 60.0 26.1 16.3 26.5 20.0 22.6 33.9 19.0 18.8 37.2
37.7 27.1 58.4 26.0 16.5 11.8 27.1 44.7 70.2 16.6 22.3 41.5
2.3 24.4 75.7 29.1 18.9 8.3 21.7 16.5 36.8 27.2 31.0 29.6
35.8 21.2 51.9 28.1 12.6 4.1 24.4 28.8 59.5 16.6 30.6 33.2
29.8 4.0 34.4 37.5 19.5 19.1 16.1 23.5 37.2 24.6 25.0 39.5
19.3 10.3 56.9 44.9 13.8 -3.1 23.2 22.0 34.3 9.4 17.6 14.6
17.9 9.3 46.4 49.1 18.2 -9.4 20.1 11.2 16.9 10.8 16.8 33.9
20.3 8.9 81.8 39.5 15.5 -1.7 16.8 25.2 17.6 38.3 54.6
24.4
27.1 7.2 21.0
Page 38
14 October 2011
Asian Economic Indicators (contd)

2010 (%YoY unless stated) Retail sales (real) China Hong Kong India (motor veh & bikes) Indonesia Malaysia (motor veh.) Philippines (pass. cars) Singapore South Korea Taiwan Thailand Vietnam Industrial production China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Sri Lanka Taiwan Thailand (manuf) Vietnam FX Reserves (USD bn) China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam Real GDP China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Sri Lanka Taiwan Thailand Vietnam
2011 Nov 14.0 14.5 14.7 18.8 -0.8 9.5 -1.2 6.2 3.8 12.3 11.3 Dec 15.0 15.1 27.8 21.8 14.9 -0.1 -1.2 4.0 2.1 10.5 -0.1 Jan 16.2 14.7 19.8 20.0 8.6 3.7 -5.6 9.0 14.7 12.3 13.8 Feb 7.3 13.0 22.5 18.0 -0.7 -14.3 -7.4 1.5 0.7 10.0 8.8 Mar 12.8 20.9 19.7 16.4 12.7 -1.7 -1.7 5.2 7.7 10.5 11.0 Apr 12.4 22.4 24.8 16.0 4.4 -17.0 5.8 5.1 5.6 6.1 1.6 May 12.0 21.3 14.9 16.0 -9.5 -35.6 8.3 5.7 4.4 5.7 3.1 Jun 11.9 22.6 14.1 19.9 -22.6 -28.2 9.2 5.5 4.8 8.4 -2.6 Jul 11.1 22.7 11.8 22.9 -6.0 Aug 11.0 15.1 Sep
Aug 15.4 14.9 24.8 32.0 13.7 34.1 -3.0 8.8 9.4 14.6 24.8
Sep 15.8 15.0 21.3 21.1 -5.8 29.9 1.1 5.9 5.1 13.6 24.4
Oct 14.7 18.9 44.9 18.5 13.5 18.2 -2.9 3.6 6.6 8.6 10.7
5.7 4.2 -3.7
13.9 4.5 4.7 4.1 25.6 6.9 15.9 8.5 23.5 8.4 15.2
13.3 5.4 6.2 0.8 5.8 15.7 26.0 2.9 8.3 12.1 8.1 15.1
13.1 11.4 4.9 2.6 17.0 29.6 13.4 12.3 14.4 6.0 13.5
13.3 6.4 4.7 4.2 17.0 41.2 11.2 11.4 19.6 5.7 14.3
13.5 5.8 8.1 7.1 4.4 15.6 8.8 10.7 10.4 18.9 -3.4 16.2
14.9 7.5 7.4 0.5 13.3 11.6 13.6 10.7 17.4 4.1 16.1 6.7 2.1 4.5 10.1 5.2 9.0 9.9 12.9 -3.0 17.7
14.8 3.6 9.4 7.5 2.4 9.1 30.3 9.1 10.2 13.7 -6.7 14.2
13.4 5.3 4.1 -0.2 1.8 -9.1 6.9 8.5 7.2 -8.1 14.3
13.3 5.9 5.3 -5.6 1.8 -16.2 8.2 8.6 7.6 -3.7 14.2
15.1 8.8 4.9 1.2 -0.2 10.7 6.5 8.3 3.8 3.8 15.2
14.0 3.3 5.7 -0.6 7.4 3.8 3.9 -1.1
13.5
2547.8 2648.3 2760.9 2767.8 2847.3 2931.7 2991.4 3044.7 3145.8 3166.0 3197.5 261.4 266.1 267.1 266.1 268.7 273.2 272.7 272.6 276.9 275.9 277.2 283.1 292.9 298.0 292.4 297.3 299.2 301.6 305.5 313.5 305.5 315.7 81.3 86.6 91.8 92.8 96.2 95.3 99.6 105.7 113.8 118.1 119.7 99.2 100.7 104.5 103.4 106.6 109.0 111.0 113.9 132.2 133.3 134.5 49.9 53.8 57.2 60.6 62.4 63.5 63.9 66.0 68.5 68.9 69.0 206.2 214.2 220.5 218.1 224.4 225.8 230.2 234.0 241.5 240.3 242.0 285.4 289.8 293.3 290.2 291.6 296.0 297.7 298.6 307.2 305.1 304.5 5.7 6.2 6.7 6.6 6.6 6.6 6.7 7.0 7.2 7.0 7.5 372.1 380.5 383.8 379.3 382.0 387.1 390.7 392.6 399.5 398.7 400.3 155.2 163.2 171.1 168.0 172.1 174.0 179.5 181.6 189.9 185.5 184.9 14.5 12.9 12.7
278.8 319.1 122.7 138.6 71.9 249.0 311.0 8.1 400.8 187.6
124.6 138.3 75.6 248.6 312.2 400.3 188.3
9.6 6.9 8.9 5.8 5.3 7.3 10.5 4.4 8.0 10.7 6.6 7.4
9.8 6.4 8.3 6.9 4.8 6.1 12.0 4.7 8.6 7.1 3.8 7.2
9.7 7.5 7.8 6.5 4.9 4.6 9.3 4.2 7.9 6.2 3.2 5.4
9.5 5.1 7.7 6.5 4.0 3.4 0.9 3.4 5.0 2.6 5.7
Page 39
14 October 2011
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Page 40
14 October 2011
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14 October 2011
Appendix 1
Important Disclosures Additional information available upon request
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Michael Spencer/Jun Ma/Taimur Baig/Juliana Lee/Kaushik Das
Page 42
14 October 2011
Regulatory Disclosures 1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan is specifically designated in the name of the entity. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.
Risks to Fixed Income Positions

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.
Page 43
David Folkerts-Landau
Managing Director Global Head of Research Stuart Parkinson Chief Operating Officer Guy Ashton Global Head Company Research Asia-Pacific Michael Spencer Regional Head Marcel Cassard Global Head Fixed Income Strategies and Economics Americas Steve Pollard Regional Head
Germany Andreas Neubauer Regional Head Principal Locations

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Asia

Global Markets Research

Asia Economics Monthly October 2011

Michael Spencer, Ph.D

Jun Ma, Ph.D

Taimur Baig, Ph.D

Asia Economics Monthly

Asian Economics and Financial Forecasts

II. Exchange Rates (vs. USD) Forecasts vs Forward Rates

Deutsche Bank AG/Hong Kong

Asia Economics Monthly

Property sales volume in 35 cities, yoy% change, 5-

Deutsche Bank AG/Hong Kong

Asia Economics Monthly

Deutsche Bank AG/Hong Kong

Asia Economics Monthly

China: Deutsche Bank forecasts

1.9 -0.7 29.0 31.0

4.6 3.3 19.7 19.9

4.0 5.3 14.5 15.0

2.8 2.8 15.0 16.5

-2.9 11.7 21.9 -1.5

-1.7 21.3 17.8 -1.2

-1.5 20.3 19.0 -0.9

-2.3 18.0 20.0 -1.3

21.0 20.2 0.8 7.4 360.0 60.0

20.3 19.6 0.7 5.9 340.0 50.0

19.6 19.0 0.6 4.4 300.0 50.0

18.7 18.2 0.5 3.1 250.0 50.0

30.1 15.5 11.0 -16.0 -11.2 Current 3.50 3.77 6.36

23.8 18.4 15.7 31.3 38.7 3M 3.50 3.85 6.31

23.0 16.5 13.0 20.0 22.0 6M 3.50 3.90 6.25

17.0 15.0 11.5 10.0 11.0 12M 3.50 3.90 6.17

Deutsche Bank AG/Hong Kong

Asia Economics Monthly

Seasonally adjusted unemployment rate

1.5 0.6 8.7 0.3

2.9 2.3 7.6 -0.4

6.3 5.4 12.6 15.1

4.1 5.0 4.8 6.9

Michael Spencer, Hong Kong, (852) 2203 8305

1.6 19.2 17.7 1.6

4.2 21.1 16.9 4.3

1.7 22.0 20.3 1.7

3.5 21.3 17.8 3.5

321.9 348.7 -26.9 -12.8 18.0 8.6 -11.6 255.8 7.75

394.0 437.0 -43.0 -19.1 13.9 6.2 -7.2 268.7 7.76

436.5 492.2 -55.7 -23.2 13.7 5.7 3.5 273.2 7.80

472.5 534.2 -61.8 -24.4 7.1 2.8 2.5 264.1 7.80

1.4 0.7 0.7 319.4 668.5 74.3

2.2 1.6 0.6 357.9 803.5 78.0

2.6 2.0 0.6 298.0 715.0 75.0

2.8 2.2 0.5 286.7 725.0 75.0

5.2 Current 0.50 0.20 1.3 7.78

4.4 3M 0.50 0.25 1.40 7.80

3.4 6M 0.50 0.25 1.45 7.80

3.3 12M 0.50 0.25 1.50 7.80

Deutsche Bank AG/Hong Kong

Asia Economics Monthly

Mixed signals on growth

Below trend IP growth and near doubledigit WPI inflation

% yoy, 3mma 20 14 8 2 -4 -10

Asia Economics Monthly