Nomura+Asia+2013+Outlook

Nomura

N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D

Asia Special Report NOMURA GLOBAL ECONOMICS

November 28, 2012

Principal authors Economics, Asia ex-Japan

Rob Subbaraman Chief Economist, AEJ +852 2252 1370

[email protected]

FX strategy, Asia ex-Japan

Craig Chan Head of FX strategy, AEJ +65 6433 6106

[email protected]

Credit desk analyst

Pradeep Mohinani, CFA Head of EM credit desk analysts +852 2536 7030

[email protected]

2013 outlook: Asia’s overheating risks

Buoyed initially by China, plus very loose policies and robust capital inflows, we expect Asia’s economies to remain resilient to a continued weak outlook in the advanced economies.

The biggest risk is that Asia overheats and central banks find themselves behind the curve in tackling credit booms, asset price bubbles and inflation. Watch for policy rate hikes in H2 in China, Taiwan, Malaysia, Indonesia and the Philippines.

In China we highlight three out-of-consensus calls for next year: CPI inflation rising to over 5% by Q4, interest rates being hiked twice, and GDP growth slowing from over 8% in H2 to 7% by Q4.

In Asia FX, we are long but expect more differentiation in H2. The outperformers are likely to be PHP and MYR; the mid-performers KRW, CNY, SGD and THB; and the underperformers INR, IDR and TWD. We offer seven trade recommendations.

In Asia rates, we are bullish on India bonds and positioned for further bear steepening in China. We remain received in Singapore and will position for paying Korea and Taiwan 5yr.

In Asia credit, we expect a bumpy road to tighter spreads, with high yield outperforming. Of Asian sovereigns, the Philippines is most likely to see a rating upgrade, whereas India, Sri Lanka and Vietnam are potential downgrade candidates.

Any portion of this report that has been prepared by a trading desk analyst is NOT a product of the Fixed Income Research Department and is NOT covered by the Research Analyst certification provided in Appendix A-1. For additional information concerning the role of Trading Desk Analysts, please see the important conflicts disclosures beginning at page 59 of this report. See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

mailto:[email protected]




Nomura | Asia Special Report 28 November 2012

2

Table of contents

Overview ....................................................................................................................... 3

Three growth engines ................................................................................................ 4

Four risks .................................................................................................................... 5

Zooming in on the key themes and risks .................................................................. 8

China: Expect surprises on inflation, interest rates and growth ................................. 8

South Korea: Rates on hold through 2013 ............................................................... 10

Hong Kong and Taiwan: property markets pose two-way risk ................................. 10

India: No more short-cuts ......................................................................................... 12

ASEAN: Spot the difference ..................................................................................... 15

Forecast summary ..................................................................................................... 18

Economic outlook ...................................................................................................... 19

China: Up in H1, down in H2 .................................................................................... 19

Hong Kong: Looming fiscal stimulus ........................................................................ 20

India: A year of consolidation ................................................................................... 21

Indonesia: Watch policies and politics ..................................................................... 22

Malaysia: Time for fiscal tightening .......................................................................... 23

Philippines: Still likely to shine ................................................................................. 24

Singapore: The (long) road to restructuring ............................................................. 25

South Korea: Growth to rebound from a very low base ........................................... 26

Taiwan: External demand holds the key .................................................................. 27

Thailand: New growth engines ................................................................................. 28

FX outlook: a story of two halves ............................................................................ 29

First half – appreciation ............................................................................................ 29

Second half – differentiation ..................................................................................... 30

Seven trade recommendations ................................................................................ 30

Six themes driving Asia FX in 2013 ......................................................................... 37

Rates outlook: Global factors to dominate early, local drivers emerge in H2 .... 41

Key recommendations for 2013: SGD, INR and CNY rates .................................... 42

Rates views across the region ................................................................................. 46

Credit outlook in the EM context .............................................................................. 53

Key macro drivers for EM credit in 2013 .................................................................. 53

Asia themes .............................................................................................................. 55

Asia trade ideas ....................................................................................................... 56

Recent Asia Special Reports .................................................................................... 58

This study was a collaborative effort by Nomura‟s Asia economists and fixed income strategists. Individual author‟s names and contact details are shown at the top of the sections to which they contributed. The authors would like to thank David Vincent and Kenneth Persing for editorial and Candy Cheung for research assistance.


3

Rob Subbaraman +852 2536 7435 [email protected]

Overview

Since the global financial crisis, Asia ex-Japan has been instrumental in helping to rebalance

the global economy. The region‟s total current account surplus has shrunk to 2% of GDP, a

level not seen since the Asian financial crisis 15 years ago (Figure 1). The shrinkage is not just

due to weak exports but also resilient Asian domestic demand (Figure 2). Unlike in 2008-09,

Asian exports have cooled but not collapsed, so the multiplier effects on domestic demand, via

job losses, have not been as significant, while Asia‟s already-lax policies have become looser.

Fig. 1: Asia ex-Japan’s total current account surplus

-2

-1

0

1

2

3

4

5

6

7

8

Jun-96 Jun-00 Jun-04 Jun-08 Jun-12

% of GDP

Source: CEIC and Nomura Global Economics.

Fig. 2: Contribution to GDP growth (y-o-y), Q1-Q3 2012

Note: All data are Q1-Q3 2012 average except India (H1). Source: CEIC and Nomura Global Economics.

To be sure, the ongoing healing process from balance-sheet recessions will keep the big,

advanced economies fragile in 2013, especially the euro area where we expect more bouts of

financial market turmoil and a slight GDP contraction in every quarter next year. In 2013, we

expect GDP to grow by 1.5% in the US, 0.5% in Japan, and to fall by 0.8% in the euro area

(Figure 3; see Global Annual Economic Outlook for more details of our global forecasts). While

cognizant of the downside risks to global growth, our base case is for the global economy to not

suffer another major heart attack, as it did in late 2008. This distinction is important, for without a

collapse in Asian exports or a mass exodus of foreign capital, non-linear multiplier effects on

domestic demand are unlikely to kick in.

Fig. 3: Nomura’s GDP growth forecasts

3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013

US 2.0 1.4 0.7 1.2 2.3 2.7 2.1 1.5

Euro area -0.6 -1.6 -0.8 -0.6 -0.2 -0.1 -0.5 -0.8

Japan -3.5 -1.5 2.0 1.9 1.8 2.0 1.6 0.5

Asia ex Japan 5.9 6.9 6.7 6.6 6.3 6.1 6.3 6.4

China 7.4 8.4 8.4 8.0 7.4 7.0 7.9 7.7

Hong Kong 1.3 1.7 2.0 2.5 2.8 2.5 1.2 2.5

India 5.4 5.3 5.9 6.0 6.1 6.4 5.3 6.1

Indonesia 6.2 5.7 6.1 6.2 6.0 6.0 6.1 6.1

Malaysia 5.2 5.1 4.9 4.6 4.0 3.9 5.3 4.3

Philippines 7.1 6.9 6.7 6.4 6.2 6.2 6.6 6.4

Singapore 0.3 2.7 2.5 2.2 2.3 2.7 1.8 2.4

South Korea 1.6 1.8 1.6 2.3 2.9 3.3 2.3 2.5

Taiwan 1.0 2.7 3.1 3.2 3.6 2.2 1.0 3.0

Thailand 3.0 15.2 4.0 4.1 4.8 4.9 5.5 4.5

Note: numbers in bold are actual data. For the US, euro area and Japan the growth rates are seasonally adjusted quarter-on-quarter annualised rates; For Asia ex-Japan the growth rates are year-on-year. Source: CEIC and Nomura Global Economics.

Hence, our core view is for emerging Asia to display resilience and for the rebalancing to

continue, with Asian domestic demand further increasing its contribution to GDP growth.

Despite slowing growth in the big advanced economies, we expect aggregate GDP growth in

Asia ex-Japan to rise from 6.3% in 2012 to 6.4% in 2013 (see the country outlook chapter for

details). Our over-arching theme for Asia next year is increasing symptoms of overheating, like

-6

-4

-2

0

2

4

6

8

10

12

p.p.Net exports

Investment

Consumption


http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=576932&appname=Email&cid=dWVuZGR6dW9iRU090


4

debt build-up, frothy property markets and rising CPI inflation. The biggest risk, in our view, is

that Asian policymakers fall behind the curve in normalising very accommodative macro

policies. This is the crux of our China story of two halves: 8.2% y-o-y GDP growth in H1 2013,

followed by 7.2% in H2.

Three growth engines

We see three main factors supporting Asia‟s rapid economic rebalancing:

China. Contrary to consensus, we have long held the view that China can experience a

policy-led cyclical economic recovery despite its deep structural problems. Fiscal policy

easing really only started in earnest in July after the announcement that Q2 GDP growth had

fallen below 8%; there was no single large-scale stimulus announcement as in late 2008, but

add up all the measures and it is significant. We expect GDP growth to rebound from 7.4%

y-o-y in Q3 to 8.4% in Q4, and to stay above 8% in H1 2013. However, we expect a positive

output gap and accelerating food prices to stoke inflation. We forecast CPI inflation to rise

sharply, to average 5.1% y-o-y in H2 2013, triggering policy tightening. A renewed debt

buildup outside the regulated banking sector – the sum of new trust loans, entrusted loans

and net issuance of bills and bonds has surged in recent months, eclipsing new bank RMB

loans – and slow progress in rebalancing from investment- to consumption-led growth,

urgently require accelerated structural reforms (that can be painful in the short run), or

investor concerns over China‟s sustainable growth are likely to intensify. Either way, we

expect GDP growth to slow to 7% y-o-y by Q4 2013.

GDP growth of 7% may seem weak by China‟s standards, but it is worth remembering that

the size of China‟s economy (at market exchange rates) has almost doubled from USD4.5trn

in 2008 to an estimated USD8.2trn in 2012. The growth of China‟s consumption has not been

weak; in fact, it has been very strong by global standards, it is just that investment growth has

been even stronger. On our estimates, 2012 is set to be the crossover year when the annual

increase in nominal personal consumption in China (USD478bn) permanently surpasses the

US (USD403bn). What is more, two-thirds of US consumption is on services, which are less

internationally tradable than goods. Narrowing the consumption comparison to nominal retail

sales shows that it will not be long before China is the world‟s biggest consumer of goods

(Figure 4). China‟s much larger economy growing at a moderately slower pace is still a very

powerful growth pole for the rest of Asia, so much so that the rest of Asia‟s aggregate exports

to China (and its entrepôt, Hong Kong) are now bigger than to the US and EU combined

(Figure 5).

Fig. 4: Nominal retail sales in China and the US

0

50

100

150

200

250

300

350

400

Oct-92 Oct-96 Oct-00 Oct-04 Oct-08 Oct-12

US

China

USD bn


Fig. 5: Asia ex-China’s exports to China+HK, US and EU

10

20

30

40

50

60

70

Aug-03 Aug-05 Aug-07 Aug-09 Aug-11

China+HK

EU

US

USDbn

Note: Asia ex-China includes India, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Source: CEIC and Nomura Global Economics.

Loose policies. The central banks in China, India, Indonesia, Korea, Thailand and the

Philippines have all cut policy rates this year and, adjusted for inflation, real policy rates are

historically low across Asia. But what is less appreciated is the extent of easing on the fiscal

side: many other Asian governments are mimicking China, taking advantage of their low debt –

this year public debt is below 50% of GDP in all emerging Asian countries except Malaysia

(53%) and India (68%), compared to an average of 118% of GDP for the G20 advanced

economies – and shifting to more expansionary fiscal policies. Hong Kong, Malaysia, Thailand

and the Philippines release timely monthly fiscal data, which show that their combined budget


5

deficit in the 12 months to September is almost as large as it was after the global financial crisis

(Figure 6). In the advanced world, loose monetary policies are being offset by fiscal austerity; in

emerging Asia, both policies work together and are more effective. Low unemployment, solid

credit growth and positive wealth effects from buoyant property markets are conspiring with

these loose macro policies to bolster domestic demand. There are, however, some exceptions:

India has limited room to use countercyclical policies due to high inflation and poor fiscal

finances; Korea‟s loose policies are being dampened by a household sector overburdened with

debt; and Singapore has refrained from fiscal easing as it focuses on raising productivity.

Capital inflows. Net foreign capital inflows to Asia have significant scope to intensify in 2013.

The most comprehensive gauge, which captures FDI, portfolio debt and equity flows, as well as

cross-border foreign bank claims, is the financial account of the balance of payments. Using this

measure (Figure 7), we see that, in the space of just two and a half years since the crisis (Q1

2009 to Q2 2011), net capital inflows to Asia ex-Japan totalled a massive USD783bn, more than

the USD573bn in the five years prior, “pulled” by Asia‟s relatively higher growth prospects and

“pushed” by central bank quantitative easing in advanced economies (which, through portfolio

rebalancing, has spill-over effects on emerging markets by pushing investors into riskier assets).

While volatile in recent quarters, we expect another large bout of net inflows, buoyed by China‟s

economic recovery, the fading of US fiscal cliff fears, QE3 and the increasing search for yield.

There certainly seems to be room for more inflows. A glaring example is the widening gap

between the shares of emerging Asia in world GDP and in the MSCI world equity index, despite

Asia‟s superior economic fundamentals relative to the advanced world (Figure 8). Another large

bout of net capital inflows would accelerate Asia‟s rebalancing via: 1) currency appreciation,

which crimps exports; or 2) likely FX intervention and central banks keeping interest rates lower

than they would otherwise, thereby easing liquidity conditions and buoying asset markets.

Fig. 6: Government budget positions

-40

-30

-20

-10

0

10

20

-250

-200

-150

-100

-50

0

50

100

Sep-03 Mar-05 Sep-06 Mar-08 Sep-09 Mar-11 Sep-12

China, LHS

Rest of Asia, RHS

USD bn, 12-month rolling sum USD bn, 12-month rolling sum

Note: Rest of Asia is the aggregate fiscal balances of Hong Kong, Malaysia, Thailand and the Philippines. Source: CEIC.

Fig. 7: Asia ex-Japan’s net capital inflows

-90

-60

-30

0

30

60

90

120

Jun-03 Dec-04 Jun-06 Dec-07 Jun-09 Dec-10 Jun-12

US$bn

QE2 announced

QE1 announced

USD 573bn

USD 783bn

Note: Countries are China, HK, India, Indonesia, Korea, Taiwan, Malaysia, Philippines, Singapore and Thailand. Source: CEIC.

Four risks

The risk we are most concerned with is that some Asian economies may overheat.

Overheating. In our view, there is too much reliance on countercyclical policies to counter weak

exports and not enough focus on structural reforms to boost the supply-side of economies. In

October, the real interest rate on 1yr bank deposits in China was 1.3%, while in the rest of Asia

the average real policy rate, weighted by GDP, was just 0.3% – and this is during a period of

low inflation in the region (Figure 9). Central banks justify erring on the side of laxity as

insurance against the downside risks to global growth, to promote domestic demand given the

weakness of exports and to avoid provoking too-strong capital inflows. From 1999 to 2005, we

estimate that the real interest rate was negative 19% of the time in China and 10% of the time

elsewhere in Asia, while from 2006 to 2012, this grew to 57% and 43%, respectively. But

persistently negative real rates sow the seeds of overheating, and Asia‟s real policy rate is likely

to turn negative again as inflation rises.


6

Fig. 8: Asia emerging market share in world GDP and MSCI

1

5

9

13

17

21

25

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Asia EM share in world MSCI equity index

Asia EM share in world GDP (at market exchange rates)

% shareIMF forecasts

Note: Asia EM is China, India, Indonesia, Malaysia, Korea, Philippines, Taiwan and Thailand. Source: MSCI and IMF.

Fig. 9: Real policy interest rates (deflated by headline CPI)

-5-4-3-2-101234567

Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12

China's real bank deposit rate

Rest of Asia's real policy rate

% p.a.

Note: For the rest of Asia, the real policy rate is GDP weighted of Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Source: Bloomberg and CEIC.

Negative side effects are already emerging: credit has been growing faster than nominal GDP

across the region, and property markets are frothy in many capital cities. If we overlay

residential property prices in the US (indexed to 100 in January 2000) on residential property

prices in several Asian countries or major cities (indexed to 100 in December 2008), it is striking

that prices in Hong Kong, India, China and Taipei are tracking above the US price bubble

(Figure 10). We see a danger in the likely increased use of macroprudential measures in an

attempt to cool property markets and credit growth; these measures may work for a while but

over time, as loopholes are found, they turn out to be a poor substitute for higher interest rates.

Hong Kong is a case in point. The Hong Kong Monetary Authority has progressively imposed

higher stamp duties on property transactions and tighter restrictions on mortgage lending on six

occasions since late 2009, but the property market has yet to cool (Figure 11). Central banks

ultimately find themselves behind the curve in tackling credit booms, asset price bubbles and

inflation. Hong Kong seems most at risk, but we cannot rule out overheating in other countries,

including China, India, Indonesia, Singapore and Taiwan.

Fig. 10: Residential property prices in Asia and the US

70

90

110

130

150

170

190

210

t t+1 t+2 t+3 t+4 t+5 t+6 t+7

Index

China, Dec-08HK, Dec-08India, Dec-08Kuala Lumpur, Dec-08Singapore, Dec-08US, Jan-00Taipei, Dec-08

Note: Wherever possible official property price measures have been used. Data are either monthly or quarterly, while t=number of years from the starting date (Jan 2000 for the US and Dec 2008 for Asia). China‟s index is the average of Shanghai, Beijing, Shenzhen, Guangzhou and Tianjin; India‟s is the average of all major cities; the US index covers 898 counties. Source: CEIC, Centa Property; US CoreLogic and Nomura Global Economics.

Fig. 11: Hong Kong polices to cool residential property price

Note: 1) Oct 09, cut loan-to-value (LTV) ratio; 2) Feb 10, stamp duty hike; 3) Aug 10, cut LTV ratio; 4) Nov 10, seller stamp duty hike to as high as 15% and cut LTV ratio; 5) Jun 11, cut LTV ratio; 6) Oct 12, stamp duty hike to as high as 20% plus new buyer stamp duty of 15% for non-permanent residents. Source: CEIC, HKMA and Nomura Global Economics.

Commodity price surge. Despite lacklustre growth in the advanced economies, the global

search for yield and strengthening demand in emerging economies (especially Asia), could fuel

another surge in global commodity prices, particularly food prices. The global supply-demand

equation for food remains tight. The supply side of the food equation is being constrained by: 1)

insufficient new investments for large agricultural productivity gains; 2) competing use of

available land due to biofuels, urbanisation and industrialisation; and 3) increasing uncertainty

50

100

150

200

250

Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11

Index, 1999=100

1

234

5

6


7

due potential for QE-driven commodity price speculation and more volatile weather due to

global warming. On the demand side, the relevance of the world‟s most populous countries

being in the sweet spot of rapid economic development should not be underestimated. The size

of the annual increase in China‟s personal consumption is about to overtake that of the US, to

become the world‟s largest. This is important. For unlike other commodities, the sensitivity of the

demand for food to an increase in personal income is much greater for lower-income countries,

as is the changing of diets toward a higher calorie intake. A surge in the global price of food

items, which on average accounts for 31% of Asia‟s CPI basket versus 14% in the US, could lift

Asia‟s CPI inflation sharply and hurt growth, notably in India, Indonesia, and the Philippines.

Recoupling. Trend GDP growth in Asia ex-Japan is around 7%, a full 5 percentage points (pp)

higher than in advanced economies. Or put more starkly, real GDP is above its pre-global

financial crisis peak by 41% in China, 31% in India, 25% in Indonesia and 11% in Korea

compared with 2.3% in the US and still 2.4% below in the euro area. From this vantage point, in

long-run trend terms there is a widening divergence between emerging Asia and the advanced

world (Figure 12). However, in terms of short-run dynamics, the global financial crisis has

debunked any notion that Asia can decouple from advanced economies at times of extreme

dislocation. During 2008-09, the peak-to-trough decline in year-on-year real GDP growth was

between 10pp and 17pp in Hong Kong, Korea, Malaysia, Singapore, Taiwan and Thailand – all

larger than the declines in the US (-6.2pp) or euro area (-7.3pp). While relatively strong

economic and policy fundamentals have helped buffer Asian economies against sub-par growth

in the US and euro area, another deep recession in the advanced world would be a completely

different story; one in which Asia hits a tipping point where non-linear effects kick in from a

collapse in exports and foreign capital flight. Those economies that are very open to trade

(Hong Kong, Singapore, Malaysia), have sizable current account deficits (India and Indonesia)

or are structurally weak domestic economies (Korea) are most vulnerable.

Fig. 12: Long-run trends in real GDP growth of Asia ex-Japan vs advanced economies

-4

-2

0

2

4

6

8

10

1980 1985 1990 1995 2000 2005 2010 2015

%

Major advanced economies (G7) Asia ex-Japan

IMFforecasts

Long-run trends

Source: IMF, CEIC and Nomura Global Economics.

China hard landing. In November 2011, we published an Anchor Report, China risks, in which

we analyzed China‟s structural challenges – ranging from overinvestment and increasing

shadow banking activities to over-privileged state-owned enterprises – and concluded that they

had become too big to ignore. While our base case is for China‟s GDP growth to average 7.7%

in 2012-14, we concluded that the macro risks were sufficiently large to assign a one-in-three

likelihood of China experiencing a hard economic landing before the end of 2014, which we

defined as real GDP growth averaging 5% y-o-y or less over four consecutive quarters. To help

quantify the macro risks on an ongoing basis we developed the Nomura China Stress Index

(CSI), which is a composite of 18 vulnerability indicators. The CSI indicates that hard-landing

risks have been on the rise since 2003, a trend that steepened after the global financial crisis.

The CSI remains near an all-time high and we therefore maintain our view of a one-in-three

likelihood of a hard landing. A China hard landing would have a significant impact on the global

economy, but especially Asia. A recent IMF study estimated that each percentage point decline

of investment growth in China would lower GDP growth by more than 0.5pp in Korea, Taiwan

and Malaysia.

http://go.nomuranow.com/research/globalresearchportal/GetPub.aspx?pid=471517

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=574358&appname=GRP&cid=TWFOV2I0UlFsMFE90


8

Zhiwei Zhang +852 2536 7433 [email protected]

Wendy Chen +86 21 6193 7237 [email protected]

Zooming in on the key themes and risks

When one looks more specifically at the individual economies in the region, it quickly becomes

apparent that Asia should not be treated as one homogeneous region. Several countries are

likely to raise interest rates next year (China, Malaysia, Indonesia, the Philippines and Taiwan)

but not all face overheating risks (Korea). Some are more vulnerable to a sudden stop in capital

inflows (India and Indonesia), while China looks set to experience the sharpest slowdown in

GDP growth in H2 2013.

China: Expect surprises on inflation, interest rates and growth

We highlight three out-of-consensus calls: inflation rises to higher than consensus, two

rate hikes in 2013 and a growth slowdown in H2 2013.

Inflation will rise to higher than the consensus forecast

We believe inflation will rise to 4.2% in 2013, higher than the consensus forecast of 3.2%. There

are both structural and cyclical reasons behind higher inflation. We presented seven structural

reasons in our thematic report, The case for structurally higher inflation in China, 21 September

2011. These structural reasons remain valid for China‟s inflation outlook in 2013.

We are also concerned about inflation from a cyclical perspective. While GDP growth has

slowed to 7.4% in Q3, we believe the economy is running close to its (slowing) potential growth

rate for two reasons. First, the labour market remains tight as the ratio of job openings to job

seekers has stayed above 1 (Figure 13). With low quality unemployment data, this ratio has

been useful in gauging labour market tightness – it dropped sharply in Q4 2008 after the global

financial crisis affected China‟s exporters, and recovered quickly after the government released

its 2009 stimulus package. Despite GDP growth decelerating from 12.1% in Q1 2010 to 7.4% in

Q3, this ratio has consistently remained above 1, which suggests that the excess labour supply

in China has been depleted and potential growth may have slowed to around 7.0-7.5%.

Second, non-food inflation month-on-month has, in recent months, been running higher than its

historical average (Figure 14). While there is more focus on headline year-on-year CPI inflation,

we do not believe it fully reflects the underlying inflationary pressures as it is dominated by

volatile food prices and base effects. We think month-on-month non-food inflation is a better

indicator for determining the cyclical position of the economy. The fact that it is still running at a

3.6% annualised rate in October suggests that the economy is running close to its potential.

Fig. 13: Labour demand/supply ratio and real GDP growth

6

8

10

12

14

16

0.6

0.7

0.8

0.9

1.0

1.1

Sep-03 Sep-06 Sep-09 Sep-12

% y-o-yRatio Labour demand/supply ratio

Real GDP growth, rhs


Fig. 14: Non-food CPI inflation

0.0

0.1

0.2

0.3

0.4

July Aug Sept Oct

% m-o-m

2012

Historical average


If growth is currently running near its potential, policy easing will likely push growth to above its

potential in Q4 and H1 2013, which would drive up inflation. The central government approved

an estimated RMB1trn with of infrastructure projects last summer, with implementation

beginning in Q4. Total social financing rose to RMB 1.6trn in September and RMB 1.3trn in



http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=463995&appname=GRP&cid=ZDI4dmJpOUNka3gxVHpROTA1


9

October. The planned railway infrastructure investments will also likely pick up to RMB530bn in

2013 from RMB516 in 2012, according to the 21st Century Business Herald. There have been

positive leading indicators in the housing sector as well. We expect overall investment growth in

China to accelerate, at least in H1 2013, which should drive GDP growth above 8%.

Two interest rate hikes in H2 2013

Unlike consensus, which expects inflation to be mild and interest rates to remain unchanged

throughout 2013, we believe there will be two rate hikes in H2 2013, as inflation should rise to

above 4% by mid-year. The inflation target for 2013 has not yet been set, but we believe it will

remain unchanged at 4% at the Central Economic Working Conference in December. The most

recent rate hike cycle began in October 2010 when CPI inflation rose above 4%. Moreover we

believe the government has recently become more tolerant of slower growth and less tolerant of

inflation. This was reflected in the Q3 monetary policy report, which added this new statement:

“The economy has become less sensitive to the constraint imposed by employment, and more

sensitive to constraint imposed by inflation”.

Moreover the government may tighten policy if there are other signs of risk in the economy,

such as sharp rebound of housing prices and over-leverage in the financial system. Housing

prices in October already rose month-on-month in 35 out of the 70 major cities surveyed by the

government, up from 31 in September. The sharp rise in total social financing suggests that

leverage is building in the corporate sector which will likely be a concern of regulators in 2013.

GDP growth slows down in H2 2013

We believe GDP growth in 2013 will be a story of two halves: averaging 8.2% in H1 2013, but

then slowing noticeably to 7.2% in H2 2013. This differs from the consensus which expects

growth to rise through most of 2013 (Figure 15). Our cautious view is premised upon our above-

consensus inflation forecast and consequent policy tightening. We also believe that the current

round of policy easing will lead to rising risks in the financial system, and the government will

probably have to rein in the rapid credit increases from trust loans at some point in H1 2013.

New trust loans rose to RMB202.4bn in September and RMB144.5bn in October (Figure 16).

According to China Real Estate Journal, about 40% of these loans went to infrastructural

projects with an average guaranteed interest rate of 7-8%. We believe such a rapid expansion

of credit to the infrastructure sector at such a high average interest rate is indicative of a

potential bubble and increased default risks. The government is well aware of these risks, as it

tightened regulations on trust loans in the summer of 2011 to control the financial risks, but then

had to loosen regulations in 2012 to prevent the economy from slowing further. We believe the

current boom in trust loans is not sustainable, and expect the government to tighten regulations

on trust loans again in H1 after the leadership transition is completed and growth recovers.

Once the pace of credit supply growth normalises, GDP growth will likely slow toward its

potential of about 7.0-7.5%.

Fig. 15: Consensus versus Nomura forecasts for 2013 real GDP growth in China

6.5

7.0

7.5

8.0

8.5

9.0

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

% y-o-yConsensus forecast

Nomura


Fig. 16: New trust loans since January 2011

-30

0

30

60

90

120

150

180

210

240

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12

RMB bn



10

Young Sun Kwon +852 2536 7430 [email protected]


Aman Mohunta +91 22 6617 5595 [email protected]

South Korea: Rates on hold through 2013

We expect the Bank of Korea to keep rates unchanged at 2.75% through 2013 as

GDP growth and CPI inflation should rise modestly from a very low base.

The KRW swap curve is pricing in -15bp of cuts in 12 months as of 27 November (see Asia

Local Market Rate Expectations, 28 November 2012). Based on a Taylor Rule-type monetary

policy reaction function – which we estimate from the policy responses to the output gap and

inflation gap since 2000 – our 2013 GDP growth (2.5%) and CPI inflation (2.7%) forecasts

suggest a 25bp cut in 2013, yet the Bank of Korea‟s (BOK) official GDP growth (3.2%) and CPI

inflation (2.7%) forecasts suggest no cut in 2013 (Figure 17).

Despite the Taylor Rule indicating a 25bp cut based on our GDP and CPI forecasts, we firmly

believe that the BOK will keep rates on hold at 2.75% through 2013. GDP growth and CPI

inflation should rise modestly, but only from a very low base, supported by inventory restocking

in Q4 and a modest recovery of foreign demand in 2013. Although our 2013 GDP growth

forecast is a below-consensus 2.5%, it is not as weak as it may first appear once allowance is

made for a very powerful base effect. Our quarter-on-quarter GDP growth forecast on a

seasonally adjusted annualised rate (saar) averages 3.3% in 2013. The discrepancy between

having an annual GDP growth forecast that is lower than average quarterly growth (saar)

forecast is explained by 2013 GDP starting from a very low base in H2 2012 (Figure 18).

We expect the BOK to focus on quarter-on-quarter growth and therefore to see little need to cut

rates further. We would only expect the BOK to cut rates should quarterly GDP growth fall far

below Q3 2012‟s 0.156% (sa, q-o-q), but this is not our base case. Between Q1 2000 and Q3

2012 (47 quarters) the historical probability of quarterly growth coming in below 0.156% is 11%.

In other words, over that period only five quarters have seen growth that low – and these were

associated with the dotcom bubble bursting in 2001, the credit card crisis in 2003 and the global

financial crisis in 2008. We do not expect growth to slump that badly, unless one of the major

downside risks to global growth (the US fiscal cliff; a renewed eurozone sovereign crisis; a

China hard landing) actually materialises, but none of these are held in Nomura Global

Economics‟ base case.

Fig. 17: Nomura’s Taylor Rule-type estimates for policy rate

1

2

3

4

5

6

Mar-00 Mar-04 Mar-08 Mar-12

Actual BOK policy rates

Fitted based on BOK forecasts

Fitted based on Nomura forecastsF

%

Note: Policy rate = neutral rate + a [output gap] + b [inflation gap] + policy rate (-1). Source: Nomura Global Economics estimates.

Fig. 18: Nomura’s Korea GDP, CPI and BOK policy forecast

0

1

2

3

4

5

6

Mar-11 Mar-12 Mar-13

GDP growth (seasonally adjusted annualized rate)

CPI inflation (y-o-y)

BOK policy rates

%

Forecast

Source: CEIC and Nomura Global Economics estimates.

Hong Kong and Taiwan: property markets pose two-way risk

We see the risk that property prices rise further due to very low interest rates and

ample liquidity.

Aside from the main external risks (the US fiscal cliff; a renewed eurozone sovereign crisis; a

China hard landing), property markets in Korea, Taiwan and Hong Kong may all turn out to be

sources of up- or downside risks to our growth outlook. Since 2009, house prices have surged




http://intranet.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=580106&appname=Email&cid=NTc5dkZmV1lJMms90

http://intranet.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=580106&appname=Email&cid=NTc5dkZmV1lJMms90


11

in Hong Kong and Taipei, while Seoul has seen house prices fall (Figure 19). As a result, Hong

Kong and Taiwan have tightened while Korea has eased property market regulations:

Hong Kong: The Hong Kong Monetary Authority (HKMA) introduced in September

2012 a new round of measures to strengthen risk-management in mortgage-lending.

For borrowers with multiple properties under mortgage, the debt servicing ratio (DSR)

limit was lowered from 50% to 40% and the maximum loan-to-value (LTV) ratio was

reduced from 40% to 30%. The financial secretary also announced a 15% buyer stamp

duty charged on all residential properties acquired by non-permanent residents,

including corporate owners.

Taiwan: In 2011, the Central Bank of China (CBC) tightened prudential measures to

stabilise the property market, including the introduction of a 60% LTV cap on second or

more housing loans for home purchases in specific areas (Taipei and some districts in

New Taipei City). Also, the ministry of finance imposed a Specifically Selected Goods

and Services Tax: a 10-15% levy on the sale price of non-self-use residences and city

land with building permits that were bought less than two years ago.

South Korea: In September 2012 the Financial Services Commission raised the debt-

to-income (DTI) ratio from 40% to 50% in the three Gangnam districts (known as

„speculative‟ zones). The government also cut the acquisition tax by 50% on all home

purchases and the transfer tax on unsold apartments purchased before end-2012.

Between June 2010 and July 2011, the BOK and the CBC hiked policy rates by 125bp and

62.5bp, respectively. Although Taiwan‟s GDP growth should slow from 4.0% in 2011 to 1.0% in

2012 – much sharper than that of Korea, from 3.6% to 2.3% – the CBC has kept rates

unchanged while the BOK has cut rates by 50bp. We believe that this is partly due to different

housing market conditions. Due to the USD/HKD peg, Hong Kong has had to keep short-term

rates extremely low, in line with the US Fed, despite surging property prices (Figure 20).

In 2013, our property analyst expects Hong Kong property prices to stall as home prices

become less affordable as household income growth slows (see Hong Kong property outlook

2013: Walking a tightrope, 21 November 2012). Taipei property prices should be stable too, but

Seoul house prices should continue to fall modestly.

However, the risk we see is that property prices rise further in Hong Kong and Taiwan due to

very low interest rates and ample liquidity. If this happens, both governments would likely

impose more administrative tightening measures and curb credit growth, as the ratio of

mortgage loans-to-GDP is high in Hong Kong (41% in 2011) and Taiwan (40%), compared with

Korea‟s 25%. An eventual policy-induced property market correction would have a large

negative impact on Hong Kong and Taiwan. Meanwhile, Korea‟s property market points to

potential upside risks to our growth outlook if the new government eases mortgage financing

regulations aggressively (but this is not our base case).

Fig. 19: House price index in Seoul, Taipei and Hong Kong

40

60

80

100

120

140

160

180

Sep-94 Sep-00 Sep-06 Sep-12

Hong Kong

Seoul

Taipei

2008=100


Fig. 20: Policy rates in Korea, Taiwan and Hong Kong

0

1

2

3

4

5

6

7

8

9

Oct-00 Oct-03 Oct-06 Oct-09 Oct-12

Hong Kong

South Korea

Taiwan

%

Note: Discount rate is for HK and Taiwan. 7day repo rate is for South Korea. Source: CEIC and Nomura Global Economics.

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=578862&appname=GRP&cid=Ny8xTWIxd29kTGs90

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=578862&appname=GRP&cid=Ny8xTWIxd29kTGs90


12

Sonal Varma +91 22 403 74087 [email protected]


India: No more short-cuts

Correcting fiscal finances will lead to medium-term gains; not doing so, will lead to

more pain. Either way, the economy will experience high inflation and slow growth.

India‟s GDP growth plummeted to a 10-year low of 5.3% y-o-y in 2012, due to weak global

demand, domestic policy paralysis and high interest rates. Recent reform announcements are

positive for market sentiment, but have yet to be implemented (see: India reforms (Part I): A

long way to go, 25 October 2012) and a lot hinges on whether the government corrects its fiscal

finances for real and not just on paper. Due to the close proximity to elections, we fear only the

latter, and so we expect a shallow recovery in 2013 (6.1%), below consensus, as supply-side

constraints, sticky inflation and weak exports combine to depreciate the rupee, which in turn

feeds into inflation and limits the extent of rate cuts. We set out five themes to watch in 2013.

A year of productivity growth

Lack of investment is one of the fundamental reasons behind India‟s slowing potential growth,

but falling productivity is also responsible (see India: Make or break, 2 May 2012). India‟s

incremental capital output ratio (ICOR), a measure of capital productivity, has risen from 3.6 in

2007 to above 5 in 2012, suggesting falling capital productivity (Figure 21). Slow

land/environment clearances are responsible for project delays and rising costs. In 2013, we

expect productivity to improve as the setting up of the National Investment Board and faster

approvals free many existing projects from bottlenecks that have thus far stymied progress.

However, we do not expect fresh investments to revive in 2013 as the conditions for an

investment take-off (as seen in 1994 and 2004) are not yet in place: low and stable inflation, a

sustained rise in profitability, low cost of capital, fiscal consolidation and higher global growth.

We believe that it will take time to raise potential growth again – it took the accumulation of over

a decade of reforms to lift potential growth in the mid-2000s. The government‟s diktat to public

sector undertakings (PSUs) to „use or lose‟ cash may not be able to offset the drag from weak

private investment as the private sector (corporates plus households) account for the bulk (70%)

of total investments and private sector corporate savings far exceed PSU savings (Figure 22).

Fig. 21: Incremental capital output ratio

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1993 1999 2005 2011

Incremental Capital Output Ratio (ICOR)

ICOR (5-year moving average)

Unit

Falling capital productivity

Note: ICOR (t+1) = Investment-to-GDP (t)/Real GDP growth (t+1). Source: CEIC and Nomura Global Economics estimates.

Fig. 22: Corporate savings: private versus government

0

2

4

6

8

10

1971 1976 1981 1986 1991 1996 2001 2006 2011

Private Corporate (non-financial)

Government companies & statutory corporations

% of GDP


The consumption binge is behind us

Despite a sharp investment slump since 2007, real private consumption remained resilient

during 2006-11, growing at an annual average of 8.0-8.5%, aided by expansionary fiscal policy

and rising wages. Some of the drivers are still in place (such as the 15-20% rise in rural wages

this year), but we do not see this consumption binge continuing for long as the government is

running out of fiscal bullets and persistently high inflation is squeezing purchasing power. We

expect consumption demand to remain in low-gear, growing at a more muted 4-5% y-o-y in

2013 (Figure 23).



http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=570244&appname=Email&cid=VlVxVWtPQ0VTN1k90


http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=514880&appname=GRP&cid=V1M3cFlVb0hXNUE90


13

The extent of future weakness in consumer demand depends on fiscal policy. If the government

substantially consolidates its fiscal finances through a cut in outlay on inclusive growth schemes

and a steep hike in fuel prices, then we would expect consumption growth to dive sharply.

However, even if it does not – which is our base case – the outlay on flagship programmes

should plateau due to tight fiscal constraints, and government spending would cease to be an

incremental driver of consumer demand. Moreover, the non-farm sector, which now constitutes

close to 70% of rural GDP, slowed sharply in 2011-12 and will have a lagged dampening effect

on rural demand. With urban demand already subdued due to high interest rates, high inflation

and weak job market prospects, we expect overall consumption growth to remain weak.

A year of currency weakness

For a fourth consecutive year, we expect India‟s current account deficit to remain above

sustainable levels at 3.8% of GDP in 2013. High inflation and domestic supply-side bottlenecks

are leading to import substitution in sectors such as rubber products, toys, electronics, electrical

equipment, capital goods, textiles and consumer goods. Energy demand remains largely

inelastic, despite recent fuel price hikes, due to a large arbitrage between petrol and diesel

prices and unavailability of gas. With global demand still weak, we expect India‟s trade deficit to

remain elevated. Moreover, invisibles no longer provide an offset to a worsening trade deficit as

services exports are growing at a slower pace and investment income outflows are on the rise.

India needs consistent capital inflows just to finance the deficit and to avoid digging into its FX

reserves. Already, import cover of foreign currency reserves has fallen below six months for the

first time since 1997, highlighting the growing external vulnerability (Figure 24). Global push

factors can lead to a sudden surge in capital inflows, but with domestic inflation still high, the

resultant real effective exchange rate appreciation will only eat into export competitiveness (see

India's chronic balance of payments, 3 September 2012). India needs aggressive reforms to de-

bottleneck investments plus tighter fiscal policy and/or higher interest rates. In their absence, we

expect the burden of adjustment to fall on the currency, with INR/USD depreciating to 60 in H2

2013, a new record high.

Fig. 23: Real private consumption growth

0

1

2

3

4

5

6

7

8

9

10

1988 1993 1998 2003 2008 2013

Private% y-o-y


Fig. 24: Import cover of FX reserves

2

4

6

8

10

12

14

16

18

Oct-92 Oct-96 Oct-00 Oct-04 Oct-08 Oct-12

Import cover of FX reserves

Months


Politics to drive fiscal policy in H2 2013

The threat of a credit rating downgrade suggests that the government will present a balanced

FY14 budget in February 2013. We expect the government to target a fiscal deficit of 4.8% of

GDP in FY14, in line with the Kelkar Committee recommendations (see India: New fiscal

consolidation roadmap lacks details , 29 October 2012). However, we expect this consolidation

to appear only on paper and not in practice – we forecast fiscal deficits of 5.8% and 5.2% of

GDP for FY13 and FY14 – as the political calendar gets busier, raising the risk of politics

dominating economics. After the Gujarat state elections in December, 10 other autonomous

states are due to hold assembly elections in 2013, two more in H1 2014 and then the general

election must be held by May 2014 (Figure 25). In the 2009 election, the government leveraged

the rural employment guarantee (MG-NREGA) and farm-debt waiver schemes to woo voters.

While the fiscal position is worse now, populist acts such as delaying tough decisions (like





14

raising fuel and fertilizer prices) or announcing new schemes (the Food Security Act) cannot be

ruled out, especially if state elections show the ruling UPA government losing its grip on power.

India cannot afford populist measures. Fiscal consolidation has historically been achieved via

higher revenues rather than less expenditure. Expenditure compression is difficult since

consumption (wages, salaries, services) and transfer payments (interest payments, grants,

subsidies, pensions) together account for 75% of total expenditure, and tends to rise in line with

inflation. In addition, we expect INR depreciation to raise the cost of imported oil, keeping the

subsidy bill elevated. Revenue gains due to the implementation of the goods & services tax and

cost savings by the direct cash transfer scheme are unlikely in 2013, in our view. With the

economic recovery set to be shallow, we expect only a slight uptick in tax buoyancy. As such,

the structural fiscal deficit will remain large and, more likely, the government will rely on asset

sales (disinvestment, land monetisation, telecom spectrum auctions) to plug the revenue hole.

Window for rate cuts closes in H2 2013

The Reserve Bank of India (RBI) has guided for a rate cut in Q1 2013, saying at its October

policy meeting that “the baseline scenario suggests a reasonable likelihood of further policy

easing in the fourth quarter of this fiscal year [Jan-Mar].” We concur. INR appreciation in

September due to the government‟s reform announcements and global liquidity easing, along

with a slight moderation in commodity prices, led to a surprise moderation in WPI inflation to

under 7.5% y-o-y in October, pushing core WPI inflation to a five-month low of 5.2%. We expect

a favourable mix of supply (lagged effect of INR appreciation, lower commodity prices, good

winter crop prospects), demand (negative output gap) and technical (base effects) factors to

moderate core inflation further in Q1 2013, paving the way for a 50bp repo rate cut in H1 2013.

However, we expect this window of easing to close in H2. By Q3 2013, upside pressures on

inflation are likely to build again. First, India‟s potential growth has fallen to under 7% and so it

does not take much of a GDP recovery for the output gap to quickly close and start exerting

upward pressure on inflation (Figure 26). Second, imported inflation is likely to build due to INR

depreciation in H2 2013, raising input costs and translating into higher output prices due to a

narrower output gap. Third, with an eye on the upcoming elections, we expect the government

to raise minimum support prices for food grains and enact the Food Security Act, adding to food

price inflation pressures. As a result, we expect inflation momentum to start to inch higher, core

inflation to inch back towards 5.5-6.0% by Q4 2013 and the RBI to stay on hold in 2H 2013.

We maintain our view that space for rate cuts remains very limited because of the persistence of

large twin deficits (fiscal and current account) and sticky inflation. Rate cuts in H1 should not be

interpreted as the start of an aggressive rate easing cycle. This time is, indeed, different.

Fig. 25: Election schedule

State/HouseEnd of

term

Rulling

party

Seats in Lok

Sabha

Gujarat Jan-13 NDA/BJP 25

Meghalaya Mar-13 UPA/INC 2

Tripura Mar-13 CPI (M) 2

Nagaland Mar-13 NPF 1

Karnataka Jun-13 NDA/BJP 28

Madhya Pradesh Dec-13 NDA/BJP 29

Mizoram Dec-13 UPA/INC 1

Delhi Dec-13 UPA/INC 7

Rajasthan Dec-13 UPA/INC 25

Chhatisgarh Jan-14 NDA/BJP 11

Sikkim May-14 SDF 1

Lok Sabha May-14 UPA/INC 545

Notes: UPA- United Progressive Alliance; INC- Indian National Congress; NDA- National Democratic Alliance; BJP- Bhartiya Janata Party; CPI (M) – Communist Party of India (Marxist); SDF- Sikkim Democratic Front. Source: Election Commission and Nomura Global Economics.

Fig. 26: Output Gap and WPI inflation

-2

0

2

4

6

8

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Q405 Q407 Q409 Q411 Q413

Output Gap, lhs Core-WPI, rhspp % y-o-y

F



15

Euben Paracuelles +65 6433 6956 [email protected]

Lavanya Venkateswaran +91 22 3053 3053 [email protected]

Nuchjarin Panarode, CNS Thailand +662 638 5791 [email protected]

ASEAN: Spot the difference

ASEAN has been resilient, but it is a diverse grouping of Southeast Asian countries,

with growth prospects and policy considerations that may diverge even more in 2013.

We expect ASEAN‟s growth to slow only moderately in 2013 after displaying notable resilience

this year to the volatile external environment.1 We forecast GDP growth for the region at 5.4% in

2012, before slowing only modestly to 5.1% in 2013. The resilience in 2012 was across the

board, and manifest itself even in the relatively open economies (Figure 27). However, we see

greater differentiation in 2013, and in some cases, the contrasts will be increasingly stark.

Indonesia and the Philippines: diverging momentum on reforms

We believe the domestically oriented economies of Indonesia and the Philippines will still lead

the pack and forecast 2013 GDP growth for both at 6% or more. However, this belies a key

distinction between the two: the Philippines is on a path toward a higher growth potential while

Indonesia is likely to underperform its medium-term growth target of 7% by 2014. The reason:

the momentum of structural reforms will likely remain strong in the Philippines but we judge it to

be waning in Indonesia. We expect the Philippines to progress into the next phase of fiscal

reforms, starting with the passage of the all important „sin‟ tax bill. The Aquino administration

has shown a strong commitment to pursue these reforms and, importantly, continues to have

the political capital to succeed (see Still strong approval ratings…, 12 November 2012).

Business sentiment has been buoyant, and as a result, we expect a virtuous investment cycle,

where reforms, investment, growth and confidence interact positively with each other.

In Indonesia, the political environment will likely heat up next year, ahead of the 2014 elections,

and we see the rising risk of a policy impasse, or worse, more nationalist/populist regulations

that could further restrict investment (see Asia Special Report: Indonesia: Policy swings, 2

August 2012). This is likely to add pressure to Indonesia‟s already weakening external position

and hence a headwind to Indonesia‟s quest for an investment grade rating at all three agencies

(S&P is still one notch below despite having a „positive‟ outlook since April 2011). Indonesia‟s

current account has turned to a deficit, causing a noticeable decline in its basic balance, which

could deteriorate further if FDI inflows start to slow (Figure 28). In the Philippines, by contrast,

given the durable current account surplus and the prospect of solid FDI inflows, we believe

market expectations of a sovereign credit rating upgrade to investment grade are likely to rise

sharply in 2013. Our credit research team believes an upgrade could come through as early as

H2 2013.

Fig. 27: Investment spending in ASEAN economies

-15

-10

-5

0

5

10

15

20

Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

Less export oriented

Export oriented% y-o-y

Source: CEIC, Nomura Global Economics.

Fig. 28: Basic balance (current account balance + net FDI)

-6

-4

-2

0

2

4

6

8

Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12

Indonesia

Philippines

USDbn


Singapore, Thailand, Malaysia: varying degrees of cyclical policy support

Among the more open ASEAN economies, the external environment will obviously remain a key

drag, but the economies that have the ability to maintain policy support to shore up domestic

demand will likely outperform, which we have already started to see in H2 2012.

1 ASEAN refers to the five countries in our coverage: Indonesia, Malaysia, Philippines, Singapore and Thailand.




http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=576367&appname=GRP&cid=YVVsNGRHWmplbXN4UnpBOTA1



16

Thailand stands out as having both the space and the sense of urgency to maintain very loose

monetary and fiscal policies following the 2011 floods. The Bank of Thailand has already cut its

policy rate by a total 75bp to 2.75%, but there is still room to reduce it further particularly if

exports remain depressed. More importantly, public debt, at 44.2% of GDP, is well below the

government‟s 60% ceiling. There is scope for the government to ramp up spending, particularly

infrastructure, and in the process crowd in more private investment that already benefits from

highly accommodative monetary policy and the post-flood recovery (see Asia Anchor Report:

Thailand: new growth engines, 24 September 2012). We forecast Thailand‟s GDP growth at a

solid 4.5% in 2013 from an average of 2.8% in 2011-12.

In contrast, Singapore is more constrained, and as long as our baseline „no heart attack‟

scenario for the global economy holds, we see few reasons to expect countercyclical policies.

The Monetary Authority of Singapore (MAS) is likely to remain focused on inflation, which is still

at historically high levels driven not only by accommodation costs and car prices but also by

wage pressures as a result of government policies. The government remains steadfast in its

resolve to restructure the economy toward one that is more productivity-driven and less reliant

on foreign labor. Two years into this restructuring agenda, productivity growth continues to

decline but policies that tighten the supply of workers are well underway. So the transition will

clearly take time and the economy will have to endure a low growth, high-inflation environment

in the short term until productivity increases are achieved to offset the decline in labor supply.

We therefore revised down our 2013 growth forecast to 2.4%, which is only a modest

improvement from growth of 1.8% in 2012, to reflect a slowdown in investment spending that is

increasingly dampened by external uncertainty and tight domestic policies.

Malaysia should fall somewhere in between Thailand and Singapore. Fiscal stimulus has been

the main lever through which domestic demand has been supported, while monetary policy has

remained on hold. Bank Negara (BNM) remains cautious, as lowering rates risks increasing

domestic financial imbalances and stoking already high debt levels. In our view, however, the

fiscal expansion is about to run its course – after the elections, which we expect in March, the

government will have to return quickly to its medium-term fiscal consolidation target, adding to

the external drag in H2 that we see intensifying as China slows. That said, the fiscal belt-

tightening will not be accompanied by an unwinding of other government-led initiatives. Projects

under the Economic Transformation Program (ETP) are already underway and will likely

continue to be implemented in 2013. It is for this reason that we have modestly raised our 2013

forecast to 4.3% from 4.0%, despite fiscal and external headwinds.

In sum, our GDP growth forecasts are below consensus in Malaysia and Singapore but above

consensus in Thailand, where we think the powerful forces underpinning private consumption

and investment spending are still underappreciated (Figure 29).

Fig. 29: Consensus and Nomura GDP estimates of open economies in ASEAN

0

1

2

3

4

5

6

GDP (% y-o-y) PCE, ppt GFCF, ppt GDP (% y-o-y) PCE, ppt GFCF, ppt GDP (% y-o-y) PCE, ppt GFCF, ppt

Malaysia Singapore Thailand

Consensus Nomura

Source: Consensus Economics November 2012; Nomura Global Economics.

Upside inflation risks call for interest rate hikes in H2

Inflation is still relatively benign but we expect it to rise in 2013, in some cases to the top end of

official target ranges. Across the region, we see the balance of risks as tilted to the upside for

varying reasons, including positive output gaps (Philippines, Thailand), some food and energy

subsidy adjustments (Indonesia, Malaysia) and tight labor markets (Singapore). Minimum




17

wages have been raised substantially in Indonesia (by 44% in Jakarta), Thailand and Malaysia,

which could stoke inflation expectations going into 2013. In response, monetary tightening will

likely begin next year. We see policy rate hikes starting in Q3 in Indonesia, Malaysia and the

Philippines. The pace and extent of the tightening should, however, be gradual, as central

banks continue to keep an eye on external risks.

In addition, the risk of excessive capital inflows could complicate monetary policy and limit the

scope for interest rate hikes. As we argued previously (see The case for capital controls in Asia,

1 November 2010), it is not only growth differentials – which are clearly still wide in Asia relative

to developed markets – that drive capital inflows, but also interest rate differentials. In this

context, we also expect the implementation of further macroprudential measures, which has

thus far been the preferred tool among ASEAN central banks to address asset price pressures

that could be exacerbated by large capital inflows. We do not see potential for any drastic

measures (i.e., broad-based capital controls), as central banks have already learned that these

tend to be counterproductive. In addition, although similar pressures occurred in 2010, the

circumstances are very different, especially among the vulnerable countries. Indonesia has

shifted from a current account surplus to a deficit and will therefore be careful not to drive away

foreign capital that help finance this deficit. In Thailand, we feel the authorities are more tolerant

of a stronger currency as it helps support the ongoing upgrade of productive capacity (which

entails higher importation requirements) following the devastating floods in 2011.

Fig. 30: CPI inflation in ASEAN

Source: CEIC: Nomura Global Economics estimates.

-4

-2

0

2

4

6

8

10

12

14

Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13

Indonesia MalaysiaPhilippines SingaporeThailand

%y-o-yNomura forecasts



18

Forecast summary


2012 2013 2014 2012 2013 2014

China 7.9 7.7 7.5 2.6 4.2 4.0

Hong Kong 1.2 2.5 3.5 4.0 4.3 4.3

India* 5.3 6.1 6.5 7.6 7.2 6.9

Indonesia 6.1 6.1 6.2 4.4 5.2 5.1

Malaysia 5.3 4.3 4.6 1.7 2.4 2.5

Philippines 6.6 6.4 5.8 3.2 4.6 4.5

Singapore 1.8 2.4 4.2 4.8 3.9 3.6

South Korea 2.3 2.5 3.5 2.2 2.7 3.0

Taiwan 1.0 3.0 3.5 2.0 2.3 2.3

Thailand 5.5 4.5 5.0 3.0 3.0 3.1

Asia ex-Japan 6.3 6.4 6.6 3.7 4.6 4.5

Note: * CPI refers to wholesale prices. Source: CEIC, Bloomberg, Nomura Global Economics.

2012 2013 2014 2012 2013 2014

China 1.7 1.0 -0.4 -1.5 -1.5 -1.6

Hong Kong 1.9 -0.9 -2.5 -0.2 -0.5 -0.5

India -4.2 -3.8 -3.4 -5.8 -5.2 -5.0

Indonesia -2.2 -1.9 -1.6 -2.4 -2.0 -2.2

Malaysia 5.9 4.7 4.2 -4.9 -4.5 -4.2

Philippines 2.5 1.9 1.7 -2.2 -2.6 -2.2

Singapore 15.7 16.1 17.0 0.2 -0.2 0.4

South Korea 3.3 2.3 2.0 1.3 1.0 1.0

Taiwan 9.1 7.9 7.4 -1.8 -1.9 -2.0

Thailand 0.7 -0.7 -0.7 -2.5 -3.5 -3.7

Asia ex-Japan 0.9 0.4 -0.3 -2.3 -2.2 -2.3

2012 2013 2014 2012 2013 2014

China 6.00 6.50 6.50 6.26 6.15 6.14

Hong Kong 0.40 0.40 0.40 7.75 7.75 7.75

India 8.00 7.50 7.00 54.0 59.0 56.0

Indonesia 5.75 6.25 6.75 9620 9800 9600

Malaysia 3.00 3.50 4.00 3.02 2.92 2.84

Philippines 3.50 4.00 4.50 40.6 39.2 38.2

Singapore 0.38 0.48 0.50 1.22 1.19 1.17

South Korea 2.75 2.75 3.25 1080 1050 1040

Taiwan 1.88 2.13 2.13 29.0 28.7 28.2

Thailand 2.75 2.75 3.25 30.5 29.9 29.2

Note: All figures relate to the modal forecast, ie, the "most likely" outcome. Source: CEIC, Bloomberg, Nomura Global Economics.

The ↑↓ arrows signify changes from last week.

Real GDP Consumer Prices

Official Policy Rate Currency per US Dollar

Note: Fiscal balances are for fiscal years which differ from calendar years for Hong Kong (Apr-Mar), India (Apr-Mar), Singapore (Apr-Mar) and

Thailand (Oct-Sep). Fiscal data are for the central government and do not include off-budget. Source: CEIC, Bloomberg, Nomura Global

Economics.

Current Account (% of GDP) Fiscal Balance (% of GDP)


19

Zhiwei Zhang +852 2536 7433 [email protected]

Wendy Chen +86 21 6193 7237 [email protected]

Economic outlook

China: Up in H1, down in H2

We expect economic growth to be driven by cyclical policies since progress on

structural reforms may be slow.

Activity: We expect GDP growth to recover strongly to above 8% y-o-y in H1 2013, then slow in

H2 toward 7% by Q4 2013. Fixed asset investment should be a main driver of the H1 recovery.

Infrastructure investment has already picked up strongly from policy easing, and its momentum

will very likely continue in H1 2013. Housing investment growth should pick up moderately in H1

2013 after falling over the first three quarters of 2012. Given that a recovery in H1 would be

driven by countercyclical policy easing and not an improvement in economic fundamentals,

GDP growth should return to its potential rate in H2 2013, when policy easing ends.

Inflation: Inflation should rise to above 4% y-o-y by mid-2013 for two reasons: 1) Headline GDP

growth will be pushed above 8% y-o-y by policy easing in H1. This should result in the

emergence of a positive output gap and lead to inflationary pressures. 2) Global commodity

prices have rebounded recently and will likely push up production costs in 2013.

Policy: 2013 is the first year of new leadership in China. We think that progress on reforms will

likely be slow in 2013, as the new leaders will need time to build the political capital required to

push through tough reforms. On monetary policy, the People‟s Bank of China stated that, “The

economy has changed to be less sensitive to the constraint imposed by employment, but more

sensitive to constraint imposed by inflation” in its Q3 monetary policy statement, which suggests

that it is more concerned with inflation than growth. We expect two rate hikes in H2 when

inflation rises above 4%.

Risks: We see three key risks to our forecast. The first and most important is policy uncertainty,

as there could be political pressures to maintain the loose policy stance longer than we expect.

The second risk is inflation, which may return at a slower pace and delay policy easing. The

third risk is the global economy, as there is still uncertainty over economic conditions in Europe.

Details of the forecast

% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 8.1 7.6 7.4 8.4 8.4 8.0 7.4 7.0 7.9 7.7 7.5

Consumer prices 3.8 2.9 1.9 2.0 2.8 3.7 4.6 5.6 2.6 4.2 4.0

Core CPI 1.5 1.3 1.5 1.8 2.0 2.1 2.4 2.1 1.5 2.2 2.0

Retail sales (nominal) 14.9 13.9 13.5 15.0 16.2 15.9 15.5 15.6 14.3 15.8 16.0

Fixed-asset investment (nominal, ytd) 20.9 20.4 20.5 21.0 20.8 21.2 21.3 22.0 21.0 22.0 20.0

Industrial production (real) 11.6 9.5 9.1 12.0 10.9 10.7 10.5 10.3 10.6 10.6 10.5

Exports (value) 7.6 10.5 4.5 5.0 3.0 4.0 6.0 6.0 6.8 4.8 6.0

Imports (value) 6.9 6.5 1.4 9.0 7.0 8.0 9.0 9.0 6.0 8.3 10.0

Trade surplus (US$bn) 1.1 68.8 79.5 32.1 -16.0 53.4 70.4 19.1 181.5 126.9 54.5

Current account (% of GDP) 1.7 1.0 -0.4

Fiscal balance (% of GDP) -1.5 -1.5 -1.6

New increased RMB loans (CNYtrn) 8.0 9.0 9.0

1-yr bank lending rate (%) 6.56 6.31 6.00 6.00 6.00 6.00 6.25 6.50 6.00 6.50 6.50

1-yr bank deposit rate (%) 3.50 3.25 3.00 3.00 3.00 3.00 3.25 3.50 3.00 3.50 3.50

Reserve requirement ratio (%) 20.5 20.0 20.0 19.5 19.5 19.5 19.5 19.5 19.5 19.5 18.5

Exchange rate (CNY/USD) 6.29 6.35 6.28 6.26 6.22 6.18 6.16 6.15 6.26 6.15 6.14

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. The CNY/USD forecast is for the fixing rate, not the spot rate. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 28 November 2012. Source: CEIC and Nomura Global Economics




20



Hong Kong: Looming fiscal stimulus

We expect an expansionary FY13 budget given weak external demand.

Activity: Retail sales growth volume increased by 8.5% y-o-y in September from 3.2% in

August while the PMI rose to 50.5 from 49.6. We expect private consumption to remain robust,

supported by a tight labour market, positive wealth effects from buoyant property prices and

increasing visitor numbers. Further, domestic fixed asset investment should remain strong

supported by infrastructure works. We expect fiscal stimulus and a moderate improvement in

external demand to lift real GDP growth from 1.2% in 2012 to 2.5% in 2013. A modest recovery

in the global economy should boost GDP growth further to 3.5% in 2014.

Inflation: CPI inflation ticked up to 3.8% y-o-y in September from 3.7% in October on food

prices. Inflation should rise through 2013, driven by higher food, fuel and rent prices, only partly

offset by inflation-mitigating fiscal measures such as a temporary waiver of public housing rent

and electricity subsidies. We expect CPI inflation to rise from 4.0% in 2012 to 4.3% in 2013.

Policy: Hong Kong's fiscal policy is expansionary as the budget for FY12 (year starting April)

includes not only inflation-mitigating measures but also an income tax reduction for individuals

of up to HKD12,000 per person and a 14.8% increase in capital expenditure. This should

continue to help stabilise inflation and support the job market. We expect the FY13 budget to

also be expansionary given that external demand remains weak. We would also expect the

government to continue implementing more macro-prudential property tightening measures,

such as hikes in stamp duty if house prices continue to rise, although so far these piecemeal

measures have had limited success in cooling the property market. Because of the USD/HKD

peg, Hong Kong is importing the super loose monetary policy of the US, and it remains unclear

whether tighter macro-prudential measures can provide a sufficient offset in the long run.

Risks: As a small, open economy and financial hub, Hong Kong is one of the most vulnerable

in Asia to weakness in the global economic outlook. An economic hard-landing in China would

be especially detrimental through both trade and financial channels.



Real GDP (sa, % q-o-q, annualised) 2.1 -0.2 2.5 2.7 3.1 1.3 4.0 1.7

Real GDP 0.7 1.2 1.3 1.7 2.0 2.5 2.8 2.5 1.2 2.5 3.5

Private consumption 6.4 3.1 2.8 4.5 3.2 3.4 3.6 4.5 4.2 3.7 4.4

Government consumption 2.5 3.5 3.7 3.2 3.5 3.7 3.8 4.2 3.2 3.8 4.4

Gross fixed capital formation 12.6 5.7 8.7 6.0 5.8 5.8 5.7 5.8 8.1 5.8 6.1

Exports (goods & services) 1.4 5.5 8.7 1.9 4.5 5.0 5.0 5.5 4.4 5.0 7.2

Imports (goods & services) 4.2 0.9 10.7 3.0 5.1 5.5 6.2 6.9 6.2 5.9 7.7

Contributions to GDP (% points)

Domestic final sales 7.4 3.7 4.3 4.7 3.8 4.0 4.2 4.8 5.0 4.2 4.8

Inventories -1.8 -1.4 -1.1 -0.6 -0.7 -0.3 1.1 0.6 -1.2 0.2 -0.2

Net trade (goods & services) -5.4 -3.2 -3.3 -2.2 -1.0 -1.3 -2.3 -2.7 -3.5 -1.9 -1.1

Unemployment rate (sa, %) 3.4 3.3 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.2

Consumer prices 5.2 4.2 3.1 3.6 3.7 4.3 4.5 4.6 4.0 4.3 4.3

Exports -1.2 2.0 4.4 7.0 9.2 10.4 10.1 10.4 3.1 10.0 12.3

Imports 0.9 2.3 5.0 8.0 9.5 10.5 10.9 11.7 4.1 10.7 12.5

Trade balance (US$bn) -12.7 -15.9 -15.6 -17.2 -14.2 -17.6 -18.3 -20.8 -61.4 -71.0 -80.7

Current account balance (% of GDP) 1.9 -0.9 -2.5


3-month Hibor (%) 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40

Exchange rate (HKD/USD) 7.76 7.76 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75

Source: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 28 November 2012. Source: CEIC and Nomura Global Economics.




21

Sonal Varma +91 22 403 74087 [email protected]


India: A year of consolidation

With macro imbalances slow to correct, binding supply-side constraints and weak

global demand, a quick rebound is unlikely. We expect a shallow growth recovery.

Activity: Despite GDP growth falling to a 10-year low of 5.3% in 2012, we believe there will be

a shallow recovery, with growth rising to 6.1% in 2013, for three reasons. First, we expect

growth in Western economies to remain weak in 2013. Second, as potential growth has fallen to

6.5-7.0%, the output gap will close quickly on any demand pick-up, pushing up core inflation

and limiting the extent of monetary easing. Third, the number of new capex projects is unlikely

to increase due to a higher cost of capital, an uncertain demand outlook and the lagged impact/

implementation risks of the reforms that have been announced so far. We expect only existing

shelved investments to be revived if land, coal and environmental issues are resolved.

Inflation and trade: With sub-potential growth, we expect WPI inflation to moderate from an

estimated 7.6% in 2012 to a still-high 7.2% in 2013. Core inflation should moderate in H1 2013

because of the negative output gap, but we expect INR depreciation and a narrowing output

gap to push core inflation up again in H2 2013. With binding supply-side constraints and high

food inflation, we do not expect headline and core inflation to sustain levels below 7% and 5%,

respectively. We expect high inflation to reduce India‟s export competitiveness and imports to

remain elevated from domestic supply side constraints. Hence, we expect the current account

deficit to remain high at 3.8% of GDP in 2013 from an estimated 4.2% in 2012.

Policy: We expect the Reserve Bank of India to reduce the repo rate by 50bp in H1 2013 on

lower core inflation. However, with headline inflation likely to remain in a 7.0-7.5% range in 2013

and core inflation likely to accelerate again in 2H 2013, policy rates will likely remain on hold in

2H. We also expect the fiscal deficit to remain above 5% of GDP in FY14 (year ending March

2014) due to slow growth and an inability to cut subsidies ahead of the elections in 2014.

Risks: A sharp rise in oil prices, a deeper and prolonged global slowdown and weather-related

shocks are the key downside risks. Lower commodity prices, a stronger than expected global

recovery and a quick investment revival are upside risks.



Real GDP (sa, % q-o-q, annualised) 5.9 5.3 5.2 5.8 6.8 5.9 6.2 6.8

Real GDP 5.3 5.5 5.4 5.3 5.9 6.0 6.1 6.4 5.3 6.1 6.5



Fixed investment 3.6 0.7 3.6 4.5 6.2 7.0 6.5 6.0 3.1 6.4 6.6





Inventories 0.0 0.0 0.1 0.1 0.0 0.1 0.2 0.1 0.0 0.1 0.2

Net trade 4.0 -0.2 -1.0 -0.1 0.4 -0.5 -0.1 0.1 0.8 0.0 -0.3

Wholesale price index 7.5 7.5 7.8 7.7 7.4 7.0 7.1 7.3 7.6 7.2 6.9

Consumer prices 7.2 10.1 9.8 10.1 10.5 9.8 9.7 9.3 9.3 9.8 9.2

Current account balance (% GDP) -4.2 -3.8 -3.4

Fiscal balance (% GDP) -5.8 -5.2 -5.0

Repo rate (%) 8.50 8.00 8.00 8.00 7.75 7.50 7.50 7.50 8.00 7.50 7.00

Reverse repo rate (%) 7.50 7.00 7.00 7.00 6.75 6.50 6.50 6.50 7.00 6.50 6.00

Cash reserve ratio (%) 4.75 4.75 4.50 4.25 4.00 4.00 4.00 4.00 4.25 4.00 4.75

10-year bond yield (%) 8.54 8.18 8.15 8.10 7.80 7.80 7.70 7.50 8.10 7.50 7.00

Exchange rate (INR/USD) 51.2 54.0 52.7 54.0 54.5 56.0 60.0 59.0 54.0 59.0 56.0

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. CPI is for industrial workers. Fiscal deficit is for the central government and for fiscal year, e.g, 2012 is for the year ending March 2013. Table reflects data available as of 28 November 2012. Source: CEIC and Nomura Global Economics.




22



Indonesia: Watch policies and politics

The policy environment is likely to remain challenging ahead of the 2014 elections.

Activity: We expect GDP growth to remain stable at 6.1% in 2013, driven mainly by resilient

domestic demand. Growth in investment spending will likely moderate but that of private

consumption should remain stable. Government expenditures should also contribute more

positively ahead of the 2014 elections, as implementation of the budget improves, particularly

on infrastructure (as opposed to this year‟s under-spending). The risk of nationalist and populist

policies is also likely to increase in 2013 as the incumbents focus on the 2014 parliamentary

and presidential elections. On the external front, we believe the current account deficit will likely

narrow in 2013 supported by higher export growth to China in H1, and improving US and EU

growth in H2. However, as we approach 2014, the uncertain policy environment could add to

concerns over FDI inflows (see Asia Special Report: Indonesia: Policy swings, August 2012),

affecting the balance of payments, and in turn pressuring IDR.

Inflation and monetary policy: We expect CPI inflation to rise to 5.2% y-o-y in 2013 from an

estimated 4.4% this year, driven by core inflation and supply-side factors such as the upward

adjustments of electricity tariffs (approximately 4% each quarter). The large minimum wage

increases to be implemented in 2013 pose further upside risks to inflation and inflation

expectations. For these reasons we expect Bank Indonesia (BI) to maintain its tightening bias

and eventually hike the policy rate by a cumulative 50bp in H2 2013. In the interim, it is likely

that BI will introduce administrative and macro-prudential measures if domestic demand

remains strong and portfolio capital inflows persist.

Fiscal policy: We expect the 2013 fiscal deficit to overshoot the budgeted 1.65% of GDP.

While the approved 2013 budget allows the government to raise fuel prices if deviations from

macroeconomic assumptions occur, we have not factored any changes to fuel subsidy policy

into our baseline forecast because of the elections. Thus, we expect increased operating costs

and subsidies to cause fiscal slippage of close to 0.3pp, resulting in a 2013 deficit of 2% of GDP.

Risks: The key risk for next year is a lack of progress on structural reforms and the

implementation of more protectionist policies ahead of the elections, both of which could

damage already-fragile investor sentiment and slow FDI inflows. A deeper recession in the euro

area, a hard landing in China and large capital flow reversals also pose downside risks.



Real GDP (sa, % q-o-q, annualised)

Real GDP 6.3 6.4 6.2 5.7 6.1 6.2 6.0 6.0 6.1 6.1 6.2


Government consumption 5.9 7.4 -3.2 5.0 7.0 8.0 10.0 10.0 3.6 9.0 7.0


Exports (goods & services) 7.9 2.2 -2.8 5.5 6.0 6.0 7.0 8.0 3.1 6.8 10.0

Imports (goods & services) 8.0 10.9 -0.5 6.0 6.5 7.0 5.5 14.0 6.0 8.4 11.9



Inventories 2.0 2.3 -0.1 -1.0 0.0 0.0 0.0 0.2 0.8 0.0 -0.3

Net trade (goods & services) 0.7 -3.1 -1.2 0.4 0.4 0.0 1.3 -1.5 -0.8 0.1 0.2

Consumer prices 3.7 4.5 4.5 4.7 5.0 5.1 5.3 5.4 4.4 5.2 5.1

Exports 5.3 -7.6 -13.0 2.8 6.0 9.0 8.0 9.0 -3.6 8.0 8.0

Imports 21.4 8.9 -0.3 6.2 7.0 7.0 8.0 10.5 8.8 8.1 14.4

Merchandise trade balance (US$bn) 1.7 -1.3 0.6 -1.1 1.6 -1.1 2.7 -3.5 -0.8 -2.5 -3.3

Current account balance (% of GDP) -1.5 -3.1 -2.4 -1.6 -1.3 -2.2 -1.8 -2.4 -2.2 -1.9 -1.6

Fiscal Balance (% of GDP) -2.4 -2.0 -2.2

Bank Indonesia rate (%) 5.75 5.75 5.75 5.75 5.75 5.75 6.25 6.25 5.75 6.25 6.75

Exchange rate (IDR/USD) 9146 9433 9591 9620 9660 9680 9730 9800 9620 9800 9600

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal (i.e., the single most likely outcome). Table reflects data available as of 28 November 2012. Source: CEIC and Nomura Global Economics.



http://intranet.nomuranow.com/research/globalresearchportal/GetPub.aspx?pid=539652


23



Malaysia: Time for fiscal tightening

We see significant fiscal consolidation after the elections, adding to the external drag.

Activity: We expect GDP growth to slow to 4.3% in 2013 from 5.3% in 2012 as domestic and

external demand weaken. Fiscal policy has bolstered growth for two years, and as a result,

public debt has risen from 39.8% of GDP in 2008 to 51.8% in 2011. This suggests fiscal

consolidation will have to be significant once the elections are over. In our base case, we expect

it to be held in March (before the April 2013 deadline). That said, new and existing investments

under the Economic Transformation Programme (ETP) should continue to support growth.

External demand will likely remain subdued: as growth remains weak in the US and Europe in

H1 and in China in H2, which would have a bigger impact on commodity exporters like Malaysia.

Inflation and monetary policy: We estimate headline CPI inflation will average 2.4% in 2013

higher than 1.7% in 2012 due to factors such as minimum wage hikes, higher cost push

pressures, and modest subsidy adjustments (e.g. sugar). Against this backdrop, we continue to

expect Bank Negara Malaysia (BNM) to stay on hold throughout H1 2013, before hiking its

policy rate by 50bp in H2 2013. In our view another key policy consideration is the risk from

keeping rates low for too long, fueling an excessive build-up of public and household debt levels.

Hence we judge BNM‟s bias is still to normalise rates, but make the adjustment gradual. We

expect a total of 50bp hikes next year, taking the policy rate to its pre-crisis level of 3.50%.

Fiscal policy and political outlook: The 2013 budget aims to reduce the fiscal deficit to 4.0%

of GDP from 4.5% in 2012 and suggests the government recognises the need to get its

medium-term fiscal consolidation plans back on track. Nonetheless, we think this is ambitious

because this implies a negative fiscal impulse and is based on high GDP growth assumptions

(4.5-5.5%). We forecast the fiscal deficit at 4.5% of GDP as a result. In terms of the political

outlook, we think the elections in March will result in a win by Barisan Nasional, but with a

smaller majority (see Asia Insights: The Malaysian general election revisited, 8 November 2012).

This should still bode well for the resumption of structural reforms.

Risks: With exports nearly 100% of GDP, a sharp drop in commodity prices and another global

recession is the biggest downside risk. A weaker-than-expected coalition or a win by the

opposition would raise questions about the political transition and the reform agenda.



Real GDP 5.1 5.6 5.2 5.1 4.9 4.6 4.0 3.9 5.3 4.3 4.6




Exports (goods & services) 2.8 2.1 -3.0 -0.4 1.4 2.2 1.7 2.8 0.3 2.0 7.2




Inventories -0.2 -1.2 2.2 0.0 -0.1 -1.0 0.9 -1.0 0.2 -0.3 0.0

Net trade (goods & services) -3.1 -4.9 -6.8 -5.0 -3.9 -2.3 -3.8 -1.6 -5.0 -2.9 -0.8

Unemployment rate (%) 3.0 3.0 3.0 3.2 3.3 3.3 3.4 3.4 3.0 3.4 3.4

Consumer prices 2.3 1.7 1.4 1.5 2.1 2.6 2.5 2.5 1.7 2.4 2.5

Exports 3.3 -0.3 -4.7 8.2 4.6 7.3 6.9 5.6 1.6 6.1 8.4

Imports 6.2 5.5 3.9 9.2 8.8 10.0 11.7 7.7 6.2 9.5 13.1

Merchandise trade balance (USD bn) 9.7 6.8 5.5 10.6 8.2 6.0 3.5 10.1 32.7 27.8 19.9

Current account balance (% of GDP) 8.0 4.1 4.0 7.5 5.0 4.8 2.0 6.0 5.9 4.7 4.2

Fiscal Balance (% of GDP) -4.9 -4.5 -4.2

Overnight policy rate (%) 3.00 3.00 3.00 3.00 3.00 3.00 3.25 3.50 3.00 3.50 4.00

Exchange rate (MYR/USD) 3.06 3.18 3.06 3.02 2.97 2.95 2.93 2.92 3.02 2.92 2.84

Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as 28 November 2012. Source: CEIC and Nomura Global Economics.



http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=575199&appname=GRP&cid=aUl4dGZjemsxRzA90


24



Philippines: Still likely to shine

Given the momentum of reform, investment is set to become a bigger growth driver.

Activity: We forecast 2013 GDP growth at an above-potential 6.4%, driven by more progress in

infrastructure projects under the public-private partnership (PPP) scheme and higher fiscal

spending ahead of the mid-term elections in May 2013. We expect private consumption to

remain robust with resilient remittances and buoyant consumer sentiment. But we see more

notable improvement in investment spending, which reflects the lagged effects from significant

monetary easing this year but also the strength of business sentiment from governance reforms.

As a result, investment-led domestic demand should fully offset the weakness in exports.

Inflation and monetary policy: We expect CPI inflation to rise to 4.6% in 2013 from 3.2% in

2012, as demand side pressures strengthen. This is still within the Bangko Sentral ng Pilipinas

(BSP) 3-5% target but risks are to the upside with above-trend growth and measures pending

such as legislation to increase taxes on „sin‟ products (i.e., alcohol and tobacco). Therefore, we

expect BSP to keep its policy rate unchanged at 3.5% for the rest of 2012 and throughout H1

2013, before hiking it gradually in Q3 2013. Large capital inflows will remain a key consideration

in BSP‟s policymaking and as such, the risk of more administrative and macro-prudential

measures is likely to remain high.

Fiscal policy: We expect the fiscal deficit to widen to 2.6% of GDP from 2.2% this year given

the mid-term elections and the strong bias to use the available fiscal space to improve the pace

and quality of spending. Gross government debt has fallen from 70.5% of GDP in 2006 to 56%,

and we expect more progress on fiscal policy reforms to broaden the tax base and improve tax

collections (e.g., the „sin‟ tax bill is likely to be passed soon) which will put the country‟s

sovereign credit rating on track for an upgrade to investment grade within the next two years.

Risks: The main risk to our forecast is an external shock from Europe and the US fiscal cliff.

Slower progress on reforms and infrastructure spending could also hurt growth. We see the

elections as a non-event because the status quo will likely be maintained, but it could

temporarily disrupt the legislation of fiscal reforms and the bidding out of infrastructure projects.




Real GDP 6.3 6.0 7.1 6.9 6.7 6.4 6.2 6.2 6.6 6.4 5.8





Imports (goods & services) -3.2 10.3 8.3 7.6 16.4 11.2 12.6 8.9 5.8 12.2 13.0

Contribution to GDP growth (% points)


Inventories -7.2 -0.2 0.5 -0.9 2.8 1.2 0.8 -0.3 -1.8 0.9 0.0

Net trade (goods & services) 7.1 -0.8 -0.7 -0.4 -4.3 -2.1 -2.7 -1.7 1.2 -2.6 -2.3

Exports 4.8 10.5 6.2 8.4 6.8 7.0 7.3 6.1 7.5 6.8 9.0

Imports -1.5 2.2 0.8 12.0 14.2 11.2 12.6 8.9 3.3 11.7 13.0

Merchandise trade balance (US$bn) -2.6 -1.4 -2.0 -4.6 -4.0 -2.1 -2.9 -5.3 -10.6 -14.3 -18.4

Current account balance (US$bn) 0.8 2.8 2.1 0.4 0.5 2.6 0.7 1.7 6.2 5.6 5.5


Fiscal balance (% of GDP)

-2.2 -2.6 -2.2

Consumer prices (2006=100) 3.1 2.9 3.5 3.4 4.2 4.6 4.7 4.9 3.2 4.6 4.5


Reverse repo rate (%) 4.00 4.00 3.75 3.50 3.50 3.50 3.75 4.00 3.50 4.00 4.50

Exchange rate (PHP/USD) 42.9 42.1 41.7 40.6 40.2 39.8 39.6 39.2 40.6 39.2 38.2

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 28 November 2012. Source: CEIC and Nomura Global Economics.




25





Singapore: The (long) road to restructuring

The government is rightly sticking to its long-term goal of raising productivity. In the

meantime, the economy will likely endure a low growth, high inflation environment.

Activity: In line with official projections of 1.0-3.0% GDP growth, we expect growth to increase

but remain subpar at 2.4% y-o-y in 2013 from 1.8% in 2012. The improvement should be led by

recovering growth in China in H1, and the EU and US in H2. However, due to the on-going

efforts to restructure the economy toward productivity-driven growth (which is less reliant on

foreign labor), we expect the government to refrain from stimulus spending. Private investment

spending will also likely remain weak as business sentiment is affected by external uncertainty

and tight domestic policies.

Inflation and monetary policy: We expect CPI inflation to remain elevated, averaging 3.9% in

2013 from 4.8% in 2012, led by private transport and accommodation costs. In addition,

underlying inflation should remain sticky as labour markets remain tight and wage pressures

persist. The Monetary Authority of Singapore (MAS) believes there are upside risks from rising

global food prices. The MAS decision to maintain its S$NEER policy in October despite slowing

growth suggests inflation will remain a key concern. In addition, we think this policy decision

complements its longer term economic objectives, as the MAS explicitly stated that the decision

was in line with containing inflationary pressures but also with “keeping the economy on a path

of restructuring towards sustainable growth.”

Fiscal policy: The fiscal stance should remain broadly neutral in 2013 with the government

running a small deficit of 0.2% of GDP from a surplus of 0.2% in 2012. We believe the

government is firmly focused on encouraging the private sector to adopt productivity-enhancing

measures rather than alleviating cyclical external risks. Pressure is mounting from small and

medium enterprises (SMEs) which are asking the government to relax its foreign labor policy,

but the government said there will be “no U-turn”. Instead, it is increasing awareness among

SMEs regarding fiscal schemes that have already been in place to boost productivity but have

seen limited adoption. We also expect higher budget allocations to social spending given the

ageing population and widening income disparity, as well as to upgrading public infrastructure.

Risks: With exports twice its GDP, Singapore is the most vulnerable economy in South-east

Asia to a major contraction in global GDP. Another risk flare up in Europe, the US falling off the

fiscal cliff, or a hard landing in China would hit Singapore hard via knock-on effects from exports

and capital outflows. Another risk is domestic overheating, fueled by low interest rates.



Real GDP (sa, % q-o-q, annualised) 10.1 0.5 -5.9 6.9 9.1 -0.5 -5.5 8.3

Real GDP 1.6 2.5 0.3 2.7 2.5 2.2 2.3 2.7 1.8 2.4 4.2


Government consumption -4.2 -1.2 -0.9 3.1 1.8 2.1 -7.1 3.4 -1.1 0.1 4.0

Gross fixed capital formation 18.5 4.9 -0.9 4.6 2.0 2.7 4.2 4.3 6.4 3.3 5.7

Exports (goods & services) 2.2 2.2 -2.3 -2.1 -1.9 -0.9 5.1 5.8 0.0 2.0 10.1

Imports (goods & services) 4.7 2.8 -1.1 -0.6 -2.9 -2.1 3.3 6.0 1.4 1.0 11.1



Inventories 0.6 1.2 3.2 4.0 -1.4 -2.1 -4.2 -1.3 2.3 -2.3 0.8

Net trade (goods & services) -4.0 -0.5 -3.0 -3.7 1.4 2.0 4.9 1.5 -2.8 2.5 1.3


Consumer prices 4.9 5.3 4.2 5.0 4.4 4.0 3.8 3.4 4.8 3.9 3.6

Exports 6.0 -0.5 -5.8 -3.0 0.1 3.5 8.8 8.2 -1.2 5.3 12.1

Imports 11.7 2.6 -3.1 -4.3 0.1 2.3 7.0 8.3 1.5 4.3 13.1

Merchandise trade balance (US$bn) 7.2 6.7 8.8 11.6 7.1 8.1 11.2 12.3 33.4 38.7 40.3


Fiscal Balance (% of GDP) 0.2 -0.2 0.4

3 month SIBOR (%) 0.38 0.38 0.38 0.38 0.38 0.48 0.48 0.48 0.38 0.48 0.50

Exchange rate (SGD/USD) 1.26 1.27 1.23 1.22 1.21 1.20 1.20 1.19 1.22 1.19 1.17







26


South Korea: Growth to rebound from a very low base

We expect the Bank of Korea to keep rates unchanged at 2.75% through 2013 as

GDP growth and CPI inflation should rise modestly from a very low base.

Activity: September industrial output and October export numbers suggest that GDP may have

bottomed out in Q3. We expect GDP growth to rebound to 0.5% q-o-q in Q4 (from 0.2% in Q3)

and to a sequential quarterly average of 0.8% in 2013, supported by inventory restocking in Q4

and a modest foreign demand recovery in 2013. But compared to past recoveries, this one is

tepid despite starting from a very low base. An important reason is weak domestic demand, held

back by structural problems, including a household sector overburdened in debt equivalent to

156% of personal disposable income. So we maintain our below-consensus forecast of 2.5%

GDP growth in 2013 – far below our potential GDP estimate of 3.5%, which we expect to be

reached only in 2014. The new government will likely increase social welfare spending, but this

will only partly offset the export slump, given the headwinds on personal consumption from high

household debt and falling house prices. We expect business investment to remain weak as

uncertainty surrounding the global outlook and new government reforms remain elevated.

Inflation: A negative output gap and stable KRW should exert downward pressure on inflation,

but higher food prices and fading favourable base effects (from a one-off decline in school fees

and expenses) should push CPI inflation up to 2.7% in 2013 from 2.2% in 2012, although still

below the midpoint of the BOK‟s new inflation target range of 2.5-3.5% for 2013-15.

Policy: We expect the BOK to keep rates at 2.75% through 2013, as growth should increase

slightly and CPI inflation should rise modestly, each from a very low base on a sequential basis.

Risks: As a small, open, financially integrated economy, Korea is vulnerable to sudden

changes in global economic conditions, commodity prices and financial markets. That said, we

would expect the BOK to cut rates if one of the major downside risks to global growth (the US

fiscal cliff; a renewed eurozone sovereign crisis; a China hard landing) actually materialises, but

none of these are held in Nomura Global Economics‟ base case. Domestically, the new

government could formulate a supplementary budget in H1 2013, which provides an upside risk

to our domestic demand forecast.




Real GDP (sa, % q-o-q) 0.9 0.3 0.2 0.5 0.7 0.9 0.8 0.9

Real GDP 2.8 2.3 1.6 1.8 1.6 2.3 2.9 3.3 2.3 2.5 3.5



Business investment 9.1 -3.5 -6.0 -0.9 -9.2 -1.5 5.1 5.1 -0.2 -0.4 7.7

Construction investment 2.1 -2.1 -0.1 -0.6 1.6 3.0 3.9 4.1 -1.2 3.1 4.1



Contributions to GDP growth (% points)


Inventories -0.1 0.1 -0.1 -0.4 -0.4 -0.3 0.5 0.0 0.1 0.2 0.2

Net trade (goods & services) 0.1 1.4 1.0 1.2 1.2 0.8 0.2 0.3 0.7 0.6 0.3


Consumer prices 3.0 2.4 1.6 1.8 2.1 2.8 3.1 2.8 2.2 2.7 3.0

Current account balance (% of GDP) 3.3 2.3 2.0

Fiscal balance (% of GDP) 1.3 1.0 1.0

Fiscal balance ex-social security (% of GDP) -1.2 -1.3 -1.0

BOK official base rate (%) 3.25 3.25 3.00 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.25

3-year T-bond yield (%) 3.55 3.30 2.83 2.80 2.80 2.90 3.00 3.00 2.80 3.00 3.30

5-year T-bond yield (%) 3.69 3.42 2.93 2.90 2.90 3.00 3.05 3.10 2.90 3.10 3.50

Exchange rate (KRW/USD) 1133 1154 1118 1080 1065 1060 1055 1050 1080 1050 1040

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data as of 28 November 2012. Source: Bank of Korea, CEIC and Nomura Global Economics.



27



Taiwan: External demand holds the key

The economy should benefit from an upcycle in China's GDP and global electronic

demand, along with an improved cross-strait relationship.

Activity and inflation: Exports declined slightly in October, by 1.9% y-o-y, following a 10.4%

increase in September. We expect GDP growth to recover more visibly in Q4, but from a low

base. Stronger demand from China and a gradual recovery in global demand for electronics

should help lift Taiwan‟s GDP growth from 1.0% in 2012 to 3.0% in 2013 and further to 3.5% in

2014, as strengthening economic linkages with China start to increasingly benefit (see below).

We expect CPI inflation to rise to 2.3% in 2013 from 2.0% in 2012 due to higher food prices and

consumption. Given that electricity tariff hikes will be implemented in multiple stages, inflation is

unlikely to become a serious negative factor for growth through our forecast horizon.

Cross-strait relationship: We expect economic linkages between Taiwan and China to

continue to strengthen, through further trade liberalisation under the Economic Cooperation

Framework Agreement and an increase in tourist arrivals from China. Taiwan‟s central bank and

China‟s PBoC signed a Currency Settlement MOU in August, which should significantly boost

RMB-related business in Taiwan‟s capital markets. Improving cross-strait ties is a structural

transformation that, over time, should unleash major benefits for Taiwan‟s economy through

higher value-added trade and investment with China, and deepening capital markets.

Monetary policy: We expect the Central Bank of China (CBC) to hike discount rates from

1.875% to 2.125% in H2 2013 as GDP growth and CPI inflation should rise. We view this as

more a normalisation of very loose monetary policy, rather than a move to outright tightening.

Risks: Another deep recession in advanced economies would have a large impact on Taiwan‟s

open economy. Positive risks include a stronger-than-expected recovery in the global

electronics cycle and a faster-than-expected liberalisation of trade and investment with China.



Real GDP (sa, % q-o-q, annualised) 5.6 -0.4 3.9 1.6 7.3 0.3 5.6 -4.1

Real GDP 0.6 -0.1 1.0 2.7 3.1 3.2 3.6 2.2 1.0 3.0 3.5


Government consumption 2.1 2.5 -0.7 1.5 3.0 3.5 3.0 2.6 1.3 3.0 3.4

Gross fixed capital formation -10.2 -7.7 -0.5 0.0 7.0 5.0 4.0 4.5 -4.6 5.1 4.5

Exports (goods & services) -3.4 -2.5 1.8 2.5 2.8 3.4 4.0 2.2 -0.4 3.1 3.3

Imports (goods & services) -7.2 -4.1 1.2 3.0 2.2 2.2 2.0 2.4 -1.8 2.2 3.5

Contributions to GDP growth (% points)

Domestic final sales -2.4 -1.1 0.0 2.5 3.8 3.2 4.4 1.9 0.6 4.1 3.2

Inventories 1.5 0.5 0.5 0.1 -0.4 0.0 -0.4 0.1 0.2 -0.5 0.2

Net trade (goods & services) 1.7 0.5 0.6 0.3 0.8 1.3 1.9 0.3 0.7 1.1 0.5

Exports -4.0 -0.5 4.3 5.0 5.3 5.9 6.5 4.7 -1.7 5.6 6.3

Imports -5.9 0.3 5.7 7.2 3.7 3.7 3.5 3.9 -2.1 3.7 5.0

Merchandise trade balance (US$bn) 5.7 5.6 8.4 7.8 7.0 7.4 10.9 8.8 27.4 34.2 40.0



Consumer prices 1.3 1.6 2.9 2.1 2.1 2.2 2.5 2.2 2.0 2.3 2.3

Unemployment rate (%) 4.1 4.2 4.3 4.3 4.3 4.2 4.2 4.2 4.3 4.2 4.2

Discount rate (%) 1.88 1.88 1.88 1.88 1.88 1.88 2.00 2.13 1.88 2.13 2.13

Overnight call rate (%) 0.42 0.51 0.38 0.51 0.51 0.64 0.41 0.51 0.51 0.76 0.76

10-year T-bond (%) 1.27 1.23 1.19 1.29 1.29 1.29 1.42 1.55 1.29 1.55 1.55

Exchange rate (NTD/USD) 29.5 29.8 29.3 29.0 28.9 28.7 28.7 28.7 29.0 28.7 28.2





28


Nuchjarin Panarode, CNS Thailand +662 638 5791 [email protected]

Thailand: New growth engines

Investment and consumption spending will provide a boost to GDP growth even as the

external outlook remains uncertain, spurred by loose monetary and fiscal policies.

Activity: We forecast 2013 GDP growth at a solid 4.5% after recovering sharply to 5.5% in

2012 after last year‟s floods. We believe domestic demand, supported by accommodative

monetary and fiscal policies, will mitigate the impact of weak exports. Private consumption

should receive a boost from the sharp rise in real wages (the minimum wage was hiked by 40%

this year, putting upward pressure on overall wages as well), while private investment should be

bolstered by higher public infrastructure spending, the industrial sector upgrading production

capacity after the floods, and a relatively more stable political outlook (see Asia Special Report:

Thailand: New growth engines, 24 September 2012). These will be the new growth engines that

help drive and rebalance the Thai economy, making it more resilient to external shocks.

Monetary policy and inflation: We expect inflation to remain stable at 3.0% in 2013, as the

government utilizes subsidies to contain emerging price pressures. As a result, we expect the

Bank of Thailand (BOT) to keep the policy rate unchanged at 2.75% throughout 2013, following

a cumulative 75bp of cuts since the floods. This implies negative real policy rates, and hence

even with the BOT on hold, the monetary policy stance should remain accommodative for some

time. There is room to cut further if the external outlook deteriorates sharply, or if domestic

demand fails to strengthen fast enough to offset the export weakness.

Fiscal policy: The budget deficit is set at 2.4% of GDP in FY13, from an estimated 2.0% of

GDP in FY12. Public debt to GDP has risen steadily since early 2012, from 40.6% to 43.9% in

September. This is still well below the debt ceiling of 60%, so there is plenty of scope to run

expansionary fiscal policies. Including non-budgetary spending – such as that on water-

management infrastructure and the planned THB2.27bn of mega-project investment – we

forecast a “cash” deficit in FY13 of 3.5% of GDP versus 2.5% estimated in FY12.

Risks: The downside risks to our forecasts stem from a deepening of the euro area recession,

and domestically, from increased political uncertainty over the constitutional amendment and

reconciliation bill. Slow progress on infrastructure plans could weaken investment sentiment.



Real GDP (sa, % q-o-q, annualised) 53.3 11.7 5.0 -2.2 1.8 12.4 7.7 -1.7

Real GDP 0.4 4.4 3.0 15.2 4.0 4.1 4.8 4.9 5.5 4.5 5.0


Public consumption -0.2 7.6 9.0 -1.1 0.8 -3.6 -5.8 7.2 4.1 -1.0 -0.8


Exports (goods & services) -3.2 1.1 -2.8 17.4 4.9 2.6 5.0 3.9 2.6 4.1 5.0

Imports (goods & services) 4.3 8.6 -1.8 8.6 3.6 1.1 4.9 2.7 4.7 3.1 5.0

Contribution to GDP growth (% points)


Inventories 2.9 2.8 -3.8 0.7 -1.5 -2.1 0.4 1.2 0.7 -0.5 -0.1

Net trade (goods & services) -4.7 -4.2 -1.1 7.2 1.5 1.2 0.7 1.3 -0.9 1.2 0.7

Exports -1.4 0.0 -3.8 14.8 4.9 4.2 7.7 -0.9 2.3 5.0 6.9

Imports 10.4 11.9 -1.7 8.8 3.2 4.4 13.0 5.9 6.5 6.6 7.2

Merchandise trade balance (US$bn) -5.2 -5.2 -1.6 -3.9 -4.4 -5.5 -5.0 -5.8 -15.9 -20.6 -22.9

Current account balance (US$bn) 1.4 -2.4 2.7 0.6 0.6 -2.3 -0.3 -0.6 2.4 -2.6 -2.8

Current account balance (% of GDP) 1.6 -2.7 3.1 0.7 0.6 -2.3 -0.3 -0.6 0.7 -0.7 -0.7

Fiscal balance (% of GDP, fiscal year basis) -2.5 -3.5 -3.7

Consumer prices 3.4 2.5 2.9 3.4 3.1 2.9 2.7 2.9 3.0 3.0 3.1


Overnight repo rate (%) 3.00 3.00 3.00 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.25

Exchange rate (THB/USD) 30.8 31.8 30.8 30.5 30.3 30.1 30.0 29.9 30.5 29.9 29.2




http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=562565&appname=Email&cid=RWhBVmJXQjAyYjQ90



29

Craig Chan +65 64336106 [email protected]

Wee Choon Teo +65 6433 6107 [email protected]

Prateek Gupta +65 6433 6197 [email protected]

Prashant Pande +65 6433 6198 [email protected]

FX outlook: a story of two halves

We maintain our broadly long Asia FX portfolio into 2013 and are likely to add or roll the majority

of our current positions through the first half of next year. As discussed in the opening letter by

our Chief Asia Economist Rob Subbaraman, Nomura Economics‟ view of reduced concerns

over the US fiscal cliff, stronger China growth, capital inflows to Asia and rising inflation should

support our trading bias for 2013. But given risks mainly from uncertainties in the global

backdrop (namely from the eurozone and the US), we recommend being long currencies that

are supported by structural flows and have relatively strong current account surpluses (see

Figure 31 for our forecasts).

Fig. 31: Asia FX forecast

Source: Bloomberg, Nomura.

First half – appreciation

Specifically, KRW and MYR are seeing strong inflows into local bond markets from central

banks/sovereign wealth funds (CB/SWFs), while PHP continues to be supported by the strength

of overseas worker remittances. Asia FX, especially KRW, will benefit if our view of a pickup in

net capital inflows in 2013 materialises. We are also optimistic on CNY appreciation into H1

2013 given signs of stabilising capital flows, our forecast of strong China economic recovery

(against a pessimistic consensus) and rising local inflation.

Capital inflows are likely to keep USD/INR stable (at best) in H1, as investors lose patience with

the government‟s efforts to address the fiscal deficit. Indeed, once we exit our remaining long

INR position (positioned through options and held since 3 September) we are likely to begin

trading INR with a short bias. SGD should benefit from sovereign flows and any pick up in

capital inflows, but given rich FX valuations (the trade-weighted basket is close to the topside of

the policy band), remaining short S$NEER makes sense from a risk-reward basis as well as a

hedge to our portfolio. For TWD, we recommend being long USD/TWD as another hedge given

the risk of the US fiscal cliff, the appreciation priced into the NDF curve and the risk of

macroprudential controls.

27-Nov-12 End-2012 1Q13 2Q13 3Q13 End-2013 End-2014

CNY 6.29 6.26 6.22 6.18 6.16 6.15 6.14

Fwd 6.27 6.24 6.30 6.31 6.33 6.44

HKD 7.75 7.75 7.75 7.75 7.75 7.75 7.75

Fwd 7.75 7.75 7.75 7.75 7.75 7.75

INR 55.6 54.0 54.5 56.0 60.0 59.0 56.0

Fwd 55.9 56.8 57.5 58.3 59.0 61.5

IDR 9639 9620 9660 9680 9730 9800 9600

Fwd 9632 9728 9844 9964 10094 10700

MYR 3.04 3.02 2.97 2.95 2.93 2.92 2.84

Fwd 3.05 3.06 3.08 3.09 3.10 3.15

PHP 40.8 40.6 40.2 39.8 39.6 39.2 38.2

Fwd 40.8 40.8 40.8 40.8 40.8 41.4

SGD 1.22 1.22 1.21 1.20 1.20 1.19 1.17

Fwd 1.22 1.22 1.22 1.22 1.22 1.22

KRW 1084 1080 1065 1060 1055 1050 1040

Fwd 1086 1091 1095 1099 1101 1110

TWD 29.1 29.0 28.9 28.7 28.7 28.7 28.2

Fwd 29.0 28.9 28.8 28.7 28.6 28.3

THB 30.7 30.5 30.3 30.1 30.0 29.9 29.2

Fwd 30.8 30.9 31.0 31.2 31.3 31.9






30

Second half – differentiation

Going into H2, we expect more differentiation in Asia FX. Higher inflation and overheating risks

should support FX appreciation in most of Asia, as well as present risks to countries and

currencies such as INR and IDR. But the performance of Asia FX may be weighed down by still

relatively weak, though bottoming out, developed economy growth2 (H2 2013 GDP at 1.5%

against 0.5% y-o-y in H1) and our China Chief Economist Zhiwei Zhang‟s view of slower growth

in China (7.0% in Q4 versus 8.4% in Q1 2013; see China outlook for more details). In addition,

our G10 FX Strategy team forecasts USD/JPY at 88 by end-2013, which could raise concerns

about the performance of Asia FX.

In H2, the outperformers are likely to be PHP and MYR, in our view. Aside from some resilience

to global/regional headwinds, structural factors and current account surpluses, higher inflation

and rate hikes in the Philippines and Malaysia could further support their currencies. KRW, CNY

and SGD (if the S$NEER is not at the extreme strong side of the policy band) are likely to be

mid-performers. KRW could face increased FX intervention risk as South Korea‟s current

account surplus shrinks, whilst SGD performance could be weighed down by the relatively weak

global backdrop and JPY weakness. For China, despite higher inflation, a narrowing current

account surplus and the economic slowdown in H2 could raise medium-term structural concerns.

These are likely to limit CNY appreciation.

Underperformers are likely to be TWD, which will face the brunt of slower China growth, the still

relatively weak global growth backdrop and a weak JPY. INR and IDR are likely to face

depreciation risk as inflation can be expected to have a negative effect on both currencies,

particularly as India and Indonesia both run current account deficits. INR could depreciate (vs.

USD) towards a record high of around the 60-figure level, especially if there is no fiscal resolve,

which we judge will be difficult ahead of the 2014 elections. IDR will also face depreciation

pressure from capital outflows (primarily bond related) if the government is unable to stem

inflation pressures and a less conducive political environment3 ahead of elections in 2014. This

is also likely to lead to a slowdown in FDI inflows.

We do not expect the USD/HKD peg to change in 2013, but we expect strong capital inflows to

lead to the strong side of the Hong Kong Monetary Authority‟s 7.750 convertibility undertaking to

be frequently tested. Economic and social pressure for a shift in FX regime would need to

escalate for any near-term change, but we believe this is unlikely given Nomura‟s view of steady

growth and limited headline inflation. As for USD/THB, we expect it to be a mid-performer in

2013 with appreciation driven by robust domestic economy, and strong capital flows attributable

to public and private investments4.

Seven trade recommendations

1) Short USD/PHP (fix 16 January 2013, $15mn, entry on 16 October, 7 November

and 27 November 2012, targeting 40.50 spot – last around 40.95)5

We will remain short USD/PHP through 2013 given our spot USD/PHP forecast of 39.8 by

mid-2013 and 39.2 by year-end.

We have been increasing our short USD/PHP position (initial position USD5mn, fixing on 16

January 2013) with our optimism in the near-term partly coming from the remittance season in

December. Our analysis shows that over the past 10 years, the average spot USD/PHP rate in

the first two weeks of December has been on average 90bp lower than in the last half of

November. However, beyond the short-term seasonal support, we remain positive PHP given

solid structural inflows (from remittances and business process outsourcing; Figure 32), strong

macroeconomic fundamentals (our economist, Euben Paracuelles, expects 50bp of rate hikes

from Q3 2013; see the Philippine outlook) and a favourable political backdrop that should

sustain strong reform momentum. These developments could lead to sovereign rating upgrades

in H2 2013 (see the Credit outlook section).

2 US, Japan, and the Euro area; See Global FX in 2013, 25 November 2012, for our broad view on opportunities in EM

outperformance and differentiation trades. 3 See Asia Special Report: Indonesia - Policy swings, 2 August 2012

4 See Asia Special Report: Thailand: New growth engines, 24 September 2012

5 See Asia Insights: PHP: Adding to our short USD/PHP position, 7 November 2012

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=579595





31

Fig. 32: Rising inflows from business process outsourcing and overseas worker remittances

-1,000

-500

0

500

1,000

1,500

2,000

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

BoP: Current Account

BoP: Business Process Outsourcing

BoP: Overseas Worker Remittance

USD mn

Source: CEIC, Nomura.

The main risk to being long PHP is macroprudential controls. However, these may target local

asset markets (real estate) as well as measures to allow for greater outflows via the

liberalisation of FX regulations. Other risks include a pickup in FX intervention as well as

possible earlier external debt repayments, but we believe all of these are still only likely to be a

temporary offset against the structural and non-cyclical strength of the current account surplus

(primarily from overseas worker remittances).

Fig. 33: Financing gap analysis – PHP is relatively less vulnerable

(USD bn) KRW CNY TWD THB PHP IDR INR M YR

Current Account (Economist forecast 2013) 28.0 93.4 40.5 -2.6 5.6 -18.4 -72.0 15.8

Net FDI -16.7 142.5 -8.7 -1.9 0.6 10.2 14.5 -3.4

Net Equity Flows -16.8 -42.7 -11.6 -5.4 -3.3 -6.6 -18.6 -7.2

Net Bond Flows -15.3 -2.7 -1.5 -2.0 -4.4 -2.3 -0.7 -23.9

- Deposit shift out of local FX 0.1 0.0 0.1 0.3 0.0 0.2 0.1 0.3

- ST External Debt Maturing 39.8 176.5 32.3 17.7 2.1 11.5 27.8 10.4

- Coupon Payment on LT External Debt 11.8 7.5 0.4 2.7 3.9 11.6 21.4 2.0

Financing Gap -72.5 6.6 -14.1 -32.6 -7.5 -40.4 -126.0 -31.4

FX Reserves (Latest available as of 21 Nov 12) 323.5 3285.1 399.2 181.4 81.7 110.3 260.5 138.3

Financing Gap / FX reserves -22% 0% -4% -18% -9% -37% -48% -23%

FX Fwd (Latest available as of 21 Nov 12) 26.3 n.a. n.a. 24.8 3.4 -0.2 -14.1 7.9

Financing Gap / (FX reseves + FX Fwd) -21% n.a. n.a. -16% -9% -37% -51% -21%

Notes: Current account is Nomura Economics‟ 2013 forecast; Net FDI is the last four quarters, with a 15% fall assumed (assume 50% of the avg 30% experienced during the US financial crisis; negative net FDI becomes less negative while positive net FDI becomes less positive); a 1.5% fall in the latest total foreign equity holdings as % of market cap (50% of the avg 3% fall in FEH/Mkt cap during the US financial crisis); 50% of the fall in FBH/Outstanding during the US financial crisis for KR, ID, IN and MY; 50% of the avg fall in FBH for KR, ID, IN, MY applied on IIP debt positions for CN, TW, TH, PH; a 10% of max deposit shift from Jun 1997 to Dec 1998; 70% of ST external debt is rolled; and coupon payments on long-term external debt are estimated using a weighted average fixed coupons. Source: CEIC, Bloomberg, Nomura.

2) Short USD/CNY (fix 31 December 2012, $30mn, entry on 14 September and 7

November 2012, targeting 6.26 by year-end – fix last at 6.2902)6

Our bias in H1 is to remain short USD/CNY targeting 6.18 on the fix by mid-2013. H2 will

be more tactical despite our forecast of 6.15 given the less favourable local growth cycle.

Our outlook for a pick-up in domestic growth indicators and rising inflation implies more

supportive cyclical drivers for CNY appreciation in H1. Indeed, for the first half of the year, our

regression analysis indicates that the forecast pick-up in growth and inflation should lead to

more CNY appreciation7 (Figures 34 and 35). Additional positive CNY news into H1 is that there

have been more indications of stabilising capital flows in China (Figure 36). As confidence in

China‟s economic cycle builds, we expect net capital inflows to strengthen. This view is also

supported by the smooth passing of the US presidential elections (with President Obama‟s re-

6 See China primed to surprise on the upside, 14 September 2012

7See Asia Insights: Asia FX portfolio update – Short TWD and long PHP, 27 November 2012.




32

election seen as the more CNY-friendly result) and the transition to China‟s next generation of

political leaders. Given that there has been limited CNY appreciation this year (17bp on the fix

from 30 December 2011 to 28 November), there is scope for an acceleration in CNY strength

(against USD) in December to keep political pressures suppressed.8 Specifically, we note that in

the last 10 trading sessions of the year in 2006, 2007, 2010 and 2011, USD/CNY fell by an

average 49bp9.

Fig. 34: China: inflation and CNY appreciation

6.0

6.5

7.0

7.5

8.0

8.5-4

-2

0

2

4

6

8

10

Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

China Inflation % y/y USDCNY (inverted)


Fig. 35: China: industrial production and CNY appreciation

6.0

6.5

7.0

7.5

8.0

8.55%

7%

9%

11%

13%

15%

17%

19%

21%

23%

Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

China IP % y/y USDCNY (inverted)


Fig. 36: Financial institutions net FX purchase position

-40

-20

0

20

40

60

80

100

Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12

Position for Forex purchase (m-o-m change, USD bn)


Beyond the short-term CNY-positive factors, CNY appreciation may slow in H2 as China‟s

growth slowdown weighs against the relatively high inflation backdrop. The risk from slower

growth is that investors increase their focus on medium-term concerns such as an over-reliance

on investment, high debt levels, nonperforming loans and the vulnerability of the property

market. In addition, JPY weakness may also weigh marginally against lower USD/CNY fixes.

3) Short USD/MYR (fix 20 December 2012 and 7 January 2013, $15mn, entry on 11

September and 7 November 2012, targeting 3.02 by year-end – spot last around

3.0445)10

Our conviction to be short USD/MYR remains strong. We will continue to build long MYR

positions into Q3 given our USD/MYR forecasts of 2.95 by mid- and 2.92 by end-2013.

8 Indeed, the US Treasury report on FX policy released on 27 November refrained from labelling China a currency

manipulator but said that CNY remains “significantly undervalued” and that there has been an “insufficient degree of appreciation”. 9 Amount of CNY appreciation vs. USD (fix basis) in the last 10 trading sessions of the years: 2006 at -0.13%, 2007 at -

0.74%, 2010 at -0.55%, 2011 at -0.54%. 10

See Asia FX: A post-election portfolio update, 7 November 2012.



33

The market is relatively pessimistic on MYR, mainly because of local factors, but we expect this

to fade given limited negative implications from the fall in palm oil prices, the Employment

Provident Fund‟s (EPF) dollar purchase-related outflows and the upcoming general election.

Externally, China‟s improving near-term economic outlook and the continued global policy

stimulus are likely to be supportive of MYR in H1.

On palm oil prices, Nomura‟s Malaysia equity research team expects a price rebound in the

coming months, while our analysis highlights the minimal impact on trade and equity related

flows11

relative to total exports (with palm oil exports at USD18bn against total exports of

USD228bn over the past 12 months) and the basic balance (USD15.2bn over the past 12-

months). On EPF-related outflows, our estimates are of a monthly average of USD0.7bn12

of

foreign currency purchases in the rest of the year, which is a significant slowdown from the

market estimate of USD5bn transacted in June and July 2012 (see Figure 38). On the general

elections13

, which are likely to be held during the school holidays in 23-31 March 2013, we

continue to expect a reasonable outcome, with Barisan Nasional to retain a reduced majority of

around 130 seats (from 137).

Fig. 37: USD/MYR and palm oil prices m-o-m changes

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12

Palm oil price (m-o-m change)

USDMYR (m-o-m change, RHS, inverted)

Palm oil exports: 7.9% of total exportsAllied product: 3.3% of total exports

Source: CEIC, Bloomberg, Nomura.

Fig. 38: EPF asset allocation and overseas investment flow

Q2-12 Q1-12 2011 2010

Loans and bonds (%) 33 32 33 32

MGS (%) 27 27 28 27

Equities (%) 34 33 34 35

Money market (%) 3 5 3 5

Property (%) 3 3 3 0

AUM (MYR bn) 494.8 488.3 468.9 445.9

Overseas holdings 15.5% 14.0% 13.4% 9.8%

Overseas

investment during

period (USD bn)

2.9 1.2 5.5 3.3

EPF asset allocation and overseas investment flow

Source: EPF, Nomura.

Strong growth in H1 (Euben Paracuelles forecasts GDP growth of 4.7%; see Malaysia Outlook),

a solid current account surplus of 4.9% of GDP, or USD8.0bn, in H1; CB/SWF bond-related

inflows; and the market likely to begin pricing a tightening of monetary policy from Q3 should all

continue to support MYR. The risk to MYR remaining a strong performer in H2 is a slowdown in

growth, partly because of China, but also on the government‟s fiscal consolidation drive.

4) Short USD/KRW through a seagull (1080/1100/1175, fix 23 January 2013, $20mn,

entry 23 October 2012, premium 37bp)14

and short 3M USD/KRW through cash

(fix 22 February 2013, $5mn, entry on 22 November 2012, targeting 1065 by Q1)15

Despite FX intervention, we believe a break of 1080 is likely in the near term, with the

next key level at 1060. 2H could see slower appreciation with our end-2013 USD/KRW

forecast at 1050.

Korea‟s FX intervention on 22 November and the 27 November announcement that it will

reduce the ceiling on bank's FX derivative positions, may slow, but not change, KRW‟s trend

appreciation path, in our opinion16

. This is because the main sources of inflows are SWF/CB

purchases of local debt and the strong current account surplus – flows that are considered as

less volatile. In addition, we believe the statement made by Deputy Finance Minister Choi on 22

11

See MYR: Impact of the palm oil price slide, 5 October 2012. 12

Estimated from end-June balance sheet and assuming H2 AUM increase the same amount as H1, a planned overseas holdings target of 19% and USD2.5bn of transactions in July. 13

See Asia Insights: The Malaysian general election revisited, 8 November 2012. 14

See Asia FX portfolio update: enter short USD/KRW through options, 23 October 2012. 15

See Asia FX portfolio update – Long KRW and short S$NEER, 22 November 2012. 16

See South Korea: ceiling on bank FX derivative contracts lowered, 27 November 2012.







34

November that the country is "more concerned with the pace of won gains than the level”

supports our outlook.

Into 2013, we expect there to be a few themes leading to further KRW appreciation, including

the political desire to implement an “Economic Democracy” This should continue to create some

market speculation of KRW appreciation (even after the presidential election on 19 December)

despite our Korea economist Young Sun Kwon‟s view that addressing income inequality will be

pursued more by fiscal policy than FX policy17

. The second theme is likely to be signs of the

economy strengthening (recently in exports, industrial production and a lower inventory-

shipment ratio). The third is capital inflows from CB/SWF inflows (Figure 39) and the current

account surplus (Figure 40).

Fig. 39: Foreign CB/SWF net investment in Korean bonds

17.0 15.6 6.53.3 7.6 12.113.7 7.9

-5.5

6.4%

16.0%

30.1%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-10

-5

0

5

10

15

20

2009 2010 2011

Foreign investments in Korean bond (USD bn, lhs)

by CBs/SWFs

by Private Sector

CBs/SWFs holding (% of Total Foreign Holding, rhs)

Source: FSS, Nomura.

Fig. 40: Korea – balance of payments

-6%

-4%

-2%

0%

2%

4%

6%

Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12

CA (12m rolling, % of GDP)

PI (12m rolling, % of GDP)

FDI (12m rolling, % of GDP)


If there is a pickup in net foreign equity inflows as Nomura Asia Economics expects, this

could be a strong source of support for KRW appreciation. That said, we do not view this as a

necessity as seen over the past two months. Despite USD1.5bn of net foreign equity

outflows18

, KRW has appreciated by around 2.3% against USD (on a spot basis) because of

current account and bond inflows. But a pickup in foreign equity inflows could be a double-

edged sword as the risk is that FX intervention as well as macroprudential controls may rise –

especially in H2 with our view of a narrower current account surplus (2.5% of GDP for Q4

2013 from 3.1% for Q4 2012).

5) Short USD/INR through a USD put / INR call spread (55.25/54.0, fix 20-Dec, NDF

ref 56.51, $10mn, 69.3bp, entry 3 September 2012, premium 63bp)19

We look to fade any rally in INR. Spot may stay around a 54-56 range into H1 2013, but

without fiscal reform, we would begin to trade USD/INR from the long side given the risk

of new record highs in 2013.

As we highlighted in our September report on India‟s balance of payments20

, we expected INR

to rally all the way towards year-end because of the temporary narrowing of the current account

deficit, potential global policy stimulus and authorities enacting more aggressive policies to

attract capital inflows. Beyond the long INR recommendation through options, we had

established a tactical short USD/INR cash position. However, we believe that the time to fade

our tactically optimistic view on INR is fast approaching, with an opportunity possibly at the

winter parliament session, which started on 22 November and runs until 20 December. The

winter session may see a number of important bills on the table (Figure 41), including the

17

See South Korea: An Economic Democracy, 14 November 2012. 18

From October start till 22 November. 19

See Asia Special Report: India's chronic balance of payments, 3 September 2012. 20

See Asia FX Insights: INR – The next few positive events to watch, 25 September 2012. We booked profits on short. USD/INR cash position on 8 October (See First Insights: INR: Take profit on short USD/INR cash position, 8 October 2012).






35

Insurance Laws Bill (increasing the foreign ownership cap to 49% from 26%), the Land

Acquisition Bill and the Direct Taxes Code Bill21

.

Fig. 41: Indian reforms announced so far

Reform measures announced so far Impact Fully Impemented

Fuel price hike (diesel by INR5/litre and capping of subsidised LPG cylinder) Reduce fiscal defict by 0.1pp √

FDI liberalization in multi brand retail (51% FI limit), aviation (49%), in

broadcasting (74%) and pow er exchanges (49%)

Boost stable capital inflow s. Improve supply chain and

logistics to low er food inflation in the medium termX

Disinvestment of government stakes in four public sector units (MMTC,

NALCO, HCL, OIL)Bridge the f iscal gap X

Withholding tax on long-term infrastructure bonds and external commercial

borrow ings cut to 5% from 20%Low er cost of capital for infrastructure projects √

Launch Rajiv Gandhi Equity Savings Scheme Increase household savings in equity markets X

Restructuring pow er discom liabilities (f inancial package for state

governments/discoms w hich includes compulsory annual tariff hike)

Improve the f inancial viability and reduce losses in the

pow er sectorX

Resolving fuel-supply issues for pow er producers Improve revenues √

Kelkar Committee Report (tax measures, increase disinvestments, cut

subsidies, right-size plan expenditure)

Fiscal consolidation over the medium term (if

implemented)X

Insurance sector (review the 75% stipulation in AAA instruments, expand

SPV criteria to non-PSUs, reduce bureaucratic processes)

Boost the insurance base and expand investable

insurance productsX

Linking of all school grants to Unique Identif ication (UID)Reduce leakages and increase the effectiveness of

cash transfersX

Cleared a tripartite agreement for setting up of Infrastructure Debt Fund Accelerate f low of long-term debt for infrastructure

projects once the fund is establishedX

Urea price increased by INR50/tonne (1%)

To encourage retailers and prevent black marketeering

and use of subsidised urea fertilizers for industrial

purposes

√

Increase FDI limit in the insurance sector and allow foreign reinsurers' entry Increase capital in the insurance sector X

FDI in the pension sector and make Pension Fund Regulatory and

Development Authority (PFRDA) a statutory bodyDevelop the pension sector X

Companies BillCorporate governance and corporate social

responsibilityX

Competition Amendment Bill Extension of the Competition Commission‟s jurisdiction X

Approved Forw ard Contract Regulation Act (Amendment) Bill or FCR(A) Bill Give more teeth to the Forw ard Market Commission X

Do not require parliamentary approval

Require parliamentary approval

Source: PIB, Nomura Global Economics.

Fig. 42: India’s balance of payments breakdown


Although INR could see some support into 2013 from our economists‟ view of capital inflows

into Asia, we believe the negative local fundamentals in India – the lack of fiscal consolidation,

the long road ahead in terms of implementing reforms 22

, high and sticky inflation and the large

21

See Asia Insights: India: A heated winter session of parliament, 20 November 2012. 22

Land Acquisition Rehabilitation and Resettlement (LARR) Bill, Direct electronic cash transfers through a Unique Identification (UID) scheme, National Investment Board, and Introduction of a goods & services tax – see Asia Special Report: India reforms (Part I): A long way to go, 25 October 2012.

USD bn 2011 2012 2013

Current Account -63 -77 -72

Merchandise -168 -194 -204

Exports 306.8 302.1 360.8

Imports 475.3 496.2 565

Invisibles 105.7 116.1 131.1

Capital Account 60.3 79.2 67.7

o/w Foreign Direct Investment 21.8 16.5 17.2

o/w Portfolio Investments 3.4 26.1 16.5

o/w Commercial borrowings 11 9.4 12

Overall Balance -5.1 1.8 -4.7

Current account (% of GDP) -3.4 -4.2 -3.8





36

current account deficit (Figure 42) – are likely to limit any INR performance against USD in H1.

Indeed, unless there are solid steps taken by the government to tackle the fiscal deficit and

improve the investment climate, to which we are skeptical given it is a pre-election year, our

bias in 2013 (particularly in H2) will be to build on a long USD/INR position.

6) Short SGD vs basket23

($40mn total notional; US$10mn, fix 11 December 2012,

entry 11 September 2012; $20mn, fix 14 January 2013, entry 12 October 2012;

US$10mn, fix 22 February 2013, entry 22 November 2012)24

One of the main hedges to our Asia FX portfolio that we will continue to use is S$NEER –

especially if it remains near the extreme strong side of the policy band.

The main reason for us to build on a short SGD against a basket recommendation is because of

rich FX valuations, the positive carry (3M at +130bp, 28 November), and a hedge for our Asia

FX portfolio. With S$NEER only 30bp from the top of the band and 370bp from the bottom, risk-

reward continues to be in favour of being short S$NEER (Figure 43). Into H2 2013, the weaker

JPY and still relatively soft global growth will weigh on SGD. That said, the probability of a policy

shift towards easing in 2013 remains low as inflation remains relatively high (Figure 44) and

capital inflows may lead to further asset price inflation.

Fig. 43: Nomura’s S$NEER model

100

102

104

106

108

110

112

114

116

118

120

122

Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12

S$NEERmod

S$NEERmid

S$NEERup

S$NEERlow

Jan-1999 = 100

Apr-10： Appreciation

bias and recentred S$NEER higher

Oct-10： Increased

appreciation slightly and widened policy band slightly

Apr-11：Recentred

midpoint higher but below prevailing S$NEER

Oct-11： Reduced

the slope of policy band

Apr-12： Increased

slope slightly and restored a narrower band

Oct-12： Maintain the

policy of a modest and gradual appreciation.


Fig. 44: Headline and core inflation

-4%

-2%

0%

2%

4%

6%

8%

10%

Jan-06 Oct-07 Jul-09 Apr-11

Headline inflation (y-o-y, %)

MAS Core inflation (y-o-y, %)

YTD Headline: 4.7% y-o-yYTD Core: 2.7% y-o-y


7) Long 3M USD/TWD ($5mn, fix 25 February 2013, entry on 27 November 2012,

entry level 28.87, annualised carry: 2.8%)

This is another hedge to our portfolio into 2013. Ahead, we will position tactically on

USD/TWD through the year with a general bias to be long USD. We forecast USD/TWD at

28.7 by end-H1 and 28.65 by end 2013.

We are short TWD as an additional hedge given the risk of the US fiscal cliff, recent TWD

strength (against USD), the appreciation priced into the NDF curve (3M NDF 2.8% annualised

appreciation and at -2.3 standard deviations; Figure 45) and risk of macroprudential controls. If

a resolution to the US fiscal cliff emerges before end-2012, we will unwind this hedge. However,

if the fiscal cliff is unresolved towards year-end, this trade is likely to perform as the seasonal

year-end remittance from insurance corporations may weaken. TWD is also likely to see

negative forces from the slowdown in China in H2, still relatively weak global demand and a

weaker JPY (Figure 46).

23

Short S$NEER basket details: Long USD/SGD (100% of notional), short USD/MYR (15%), short USD/CNY (13%), short USD/JPY (11%), long EUR/USD (11%), short USD/IDR (8%), short USD/KRW (5%), short USD/TWD (4%), short USD/THB (2%), short USD/INR (2%), short USD/PHP (2%), long AUD/USD (3%) and long GBP/USD (3%) 24

See Asia FX Insights: Singapore: Economic, FX and rates views after MAS leaves policy unchanged, 12 October 2012.



37

Fig. 45: Compressed NDF curves provide opportunities to hold long USD/TWD positions

Avg Rtn of a HTM strategy w hen 3M points are depressed

1Y Sample

If 3M pt

low er than

1 SD

If 3M pt

low er than

0 SD

If 3M pt

low er than

-1.5 SD

If 3M pt

low er than

-2 SD

Total 239 98 26 14

Count +ve Rtn 95 45 14 9

Count -ve Rtn 141 52 12 5

Hit 39.7% 45.9% 53.8% 64.3%

Avg +ve Rtn 2.0% 2.7% 4.0% 3.5%

Avg -ve Rtn -1.6% -1.1% -1.0% -0.8%

Avg Rtn -0.2% 0.7% 1.7% 2.0%


Fig. 46: TWD – Vulnerable to China slowdown and JPY weakness

BIS NEER

Weights

(% of total

exports)

(as % of

GDP)

US 11% 7% 13%

EU 6% 4% 11%

China 27% 17% 27%

Japan 6% 4% 19%

Exports (12m rolling)

Source: BIS, CEIC, Nomura.

Six themes driving Asia FX in 2013

The view from Nomura Economics into 2013 suggests a bullish backdrop for Asia FX at least in

the first half of the year. These include the belief that a global economic heart attack like 2008-

09 is unlikely, despite slow global growth, and other positive factors including fading concerns

over the US fiscal cliff, continued loose global monetary policies, a China rebound, rising

inflation and robust capital inflows leading to the risk of overheating. Beyond these, we identify

some specific drivers of Asian currencies:

1. Structural inflows into Korea, Singapore and Malaysia bonds

After the US financial crisis and the emergence of the eurozone crisis in 2010, asset allocation

by central banks and sovereign wealth funds (CBs/SWFs) into Korea, Singapore and Malaysia

picked up substantially. There are some significant benefits from these flows for Asian

currencies, including reduced vulnerability of local markets to global financial pressures, but

also authorities in the region have, and are likely to be less reactive against such inflows. Korea

is where the data are more readily available, showing CBs/SWFs accounted for 6.4%

(USD2.8bn) of total foreign ownership in 2009 before increasing rapidly to 30.1%

(USD21.8bn)25

by 2011. For 2012, the Korea Financial Supervisory Service (FSS) has not

published data, but there has been much anecdotal evidence from official sectors (Norges Bank

Investment Management and Swiss National Bank, for e.g.) that CB/SWF net investment is

likely to have remained strong. The FSS in its 2012 monthly releases noted that net investment

has been “mainly” from foreign central banks. In particular, from January to October 2012, the

two largest net buyers have been Norway, with net investment of USD3.0bn, followed by

Switzerland with USD2.2bn (Figure 47). Furthermore, Korea‟s rating upgrade26

is likely to have

improved perceptions of Korea as a safe destination for bond flows. Indeed, the FSS has said

that the rating upgrade has been a factor contributing to strong net bond investment of

USD1.3bn in September.

25

We have made the conservative assumption that foreign government institutions held zero Korean bonds prior to 2009 in estimating the percentage of total foreign holdings. 26

Moody‟s upgraded Korea from A1 to Aa3 on 27 August, Fitch from A+ to AA- on 6 September and S&P from A to A+ on 14 September 2012.


38

Fig. 47: Holdings of Korean bonds

0

2

4

6

8

10

12

China Switzerland Kazhakstan Norway

Korean bond holdings in USD bn

Mar-11 Jun-11 Sep-11 Dec-11

Mar-12 Jun-12 Sep-12 Oct-12

∆YTD : $1.1bn

∆YTD : $2.2bn

∆YTD : $0.4bn

∆YTD : $3.0bn

YTD (avg increase per country): USD1.7bn

Source: FSS Korea, Nomura.

Fig. 48: Current account trends in Asia

0

2

4

6

8

10

Dec07 Jul08 Feb09 Sep09 Apr10 Nov10 Jun11 Jan12

Current Account as % of GDP

All Asia Ex CN, ID, IN


2. Current account surpluses are still relatively strong in some countries

Current account surpluses in the region have fallen since the US financial crisis (to 2% of GDP

as of Q2 2012, on a 12-month rolling average), but mainly because of the fall in China‟s surplus

and sizable deficits in India and Indonesia. However, excluding these three countries (because

of China‟s weight in Asia, India and Indonesia because we are medium-term bearish and prefer

to short these currencies), current account surpluses in the rest of Asia, while smaller than four

years ago, remain quite large, at 5.7% of GDP in Q2 2012 (Figure 48), and not too far from pre-

crisis levels (6.7% of GDP in Q2 2008). Malaysia‟s current account surplus has fallen to 6.4% of

GDP in Q3 (from 16.5% in Q2 2008), while South Korea‟s has continued to rise since the end of

2011, to around 3.6% of GDP in September (1.7% in Q2 2008). Note that the actual USD flow

remains large at USD19.1bn for Malaysia over the past 12-months and USD40.0bn for Korea in

the same period.

3. Deleveraging may continue, but is likely to be gradual

The data on outstanding eurozone bank loans to Asia is encouraging in that there has already

been rapid deleveraging. From Q2 2011 to Q2 2012, outstanding eurozone bank loans to Asia

fell 21% (or USD85bn), to USD329bn, with the sharpest falls in Q3 2011 and Q4 2011 (an

average 10.2% q-o-q fall).

Indeed, the breakdown provides further good news as the main source of deleveraging is the

French banks27

(Figure 49). French bank lending to Asia fell by 39% (-USD64bn) from Q2 2011

to Q2 2012 and was led by a reduction in loans to South Korea which fell 39%, or by USD15bn

from Q2 2011 to Q2 2012.

Although the improvement in credit conditions in Q1 2012 (after the ECB‟s 3yr LTRO) and in Q3

(after the ECB announcement of OMTs in September) may have led to a stabilisation in

eurozone bank lending to Asia, but the risk of further deleveraging remains intact as European

and US banks have yet to reach minimum capital standards to meet Basel III core Tier 1 ratios28

.

That said, the pace of deleveraging is likely to be gradual, which will be key for Asia FX.

27

40% of total eurozone lending to Asia in Q2 2011, falling to 31% in Q2 2012. 28

Fully phased Basel III core Tier 1 ratios for the largest global banks at end-2011 stood at 8.9% in Europe, versus 8.3% in the US and 9.0% in Asia. European regulators on average ask their banks for higher minimal capital standards, averaging 10% in this sample, compared with around 9% in both the US and Asia (see UK and European Banks presentation, 15 June 2012). The ratio for EU banks has since improved to 9.5% as of Q3 2012. Our European bank analysts expect most EU banks to be Basel 3 compliant by 2013 (see European Banks: Update, 16 November 2012).

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=527281&appname=GRP&cid=L0dSdVI1ODA4c1U90



39

Fig. 49: Eurozone banks claims on Asia

Source: BIS, Nomura.

Fig. 50: FX valuations

FEER SEER Avg

India 15 20 18

Thailand 1 5 3

Indonesia -2 11 5

Korea -5 -8 -6

Hong Kong -3 -7 -5

Philippines -12 -5 -8

China -8 -6 -7

Malaysia -4 -18 -11

Singapore -24 -18 -21

Taiwan -34 -16 -25

Raw Model Output

Note: Valuations based on data up to Q2 2012. Source: Bloomberg, CEIC, Nomura.

4. Broadly favourable FX valuations

Despite currency appreciation this year, FX valuations in Asia remain broadly favourable, with

an average undervaluation of around 5.8% based of our FEER (current account-based) and

SEER (stock flow-based) models. Excluding IDR and INR, which are 4.5% and 17.6%

overvalued (the two currencies we are biased to be short in 2013), Asia‟s average FX

undervaluation deepens to around 10%. Our views to be long PHP, MYR, KRW and CNY are

supported by our FEER and SEER models (Figure 50). While TWD remains the most

undervalued currency in Asia at 25.1%, we believe its performance will be limited by

intervention/macroprudential control risks and the appreciation priced into the NDF forward

curve.

5. FX intervention and/or macroprudential controls

The risk of FX intervention and/or macroprudential controls will continue to rise, the most recent

evidence coming from Korea, where on 22 November, authorities intervened heavily on

USD/KRW29

and announced that further restrictions on banks‟ FX derivative positions were an

option. The authorities have since cut the ceiling on FX derivative contracts held by local banks

from 40% of capital to 20% and for foreign bank branches, from 200% to 150%, effective 1

January 2013. However, as highlighted by Deputy Finance Minister Choi30

, this was to address

more the pace of KRW appreciation rather than the actual level of USD/KRW. In our view, aside

from KRW remaining competitive, the authorities are likely to allow for gradual FX appreciation

in the coming months partly because the structure of inflows since October has been primarily

current account- and CB/SWF-related, but also because of recent large current account

surpluses. Furthermore, the semi-annual US Treasury report on FX policies released on 27

November has continued to press the Korean authorities to limit their FX interventions to

exceptional circumstances.

However, the risk ahead is that as capital inflows into Asia pickup in 2013, the overarching risk

for Asia, as highlighted by our economists, is overheating and rising inflation later in 2013. This

suggests increased Asia FX appreciation pressure and increased risk of FX intervention

(Figures 51 and 52) and macroprudential controls in the region. That said, we still expect

authorities to lean on, rather than stem, FX appreciation, while macroprudential controls are

likely to target the source of capital inflows that is most viewed as volatile or speculative.

29

Reuters article “S.Korean authorities buy close to $1bln in intervention to curb won‟s rise, ” 22 November 2012. 30

Bloomberg “S.Korea more concerned with pace of won gains than level,” Deputy FM Choi Jong Ku, 22 November 2012.


40

Fig. 51: Adjusted Asian FX reserve growth

INR IDR KRW MYR PHP SGD TWD THB CNY

Aug-11 0.7 2.0 1.4 0.9 4.1 0.2 -0.2 0.8 19.5

Sep-11 2.7 -8.3 -2.5 -2.6 -0.2 -10.5 -3.0 -5.2 11.7

Oct-11 1.6 -1.4 4.5 2.5 0.4 9.4 0.2 0.6 36.3

Nov-11 3.0 -2.0 0.2 1.1 0.6 -2.4 -2.1 -2.6 -22.9

Dec-11 4.8 -0.4 0.7 0.1 -0.6 -1.0 1.3 -1.9 -5.7

Jan-12 6.4 1.5 3.8 -0.1 1.9 6.8 3.3 2.8 59.5

Feb-12 2.1 0.1 3.9 0.4 -0.3 1.1 3.4 2.1 48.1

Mar-12 0.5 -1.6 0.3 1.0 -0.8 -3.3 -0.3 -0.9 -3.1

Apr-12 0.2 5.7 0.6 0.1 0.3 2.3 0.9 -0.8 3.9

May-12 0.3 -3.1 -0.1 2.5 0.0 -3.8 1.5 -4.8 -1.3

Jun-12 1.9 -5.6 -0.5 -2.5 -0.1 4.2 -0.5 2.3 11.1

Jul-12 2.4 0.6 4.0 1.1 3.8 2.3 2.4 1.3 23.9

Aug-12 0.4 1.8 0.5 -0.4 0.8 0.4 0.6 3.0 9.5

Sep-12 1.2 0.5 2.8 1.6 0.9 4.2 0.9 3.3 -13.6

Oct-12 0.7 0.1 1.2 0.8 -0.3 1.9 1.0 -2.1

12m avg 2.0 -0.2 1.5 0.5 0.5 1.1 1.0 0.1 12.1

3m avg 0.8 0.8 1.5 0.6 0.5 2.2 0.8 1.4 6.6

Adjusted Asian FX reserves growth

(m-o-m change, USD bn)


Fig. 52: Estimated intervention

Date INR IDR KRW MYR PHP SGD THB

Aug-11 0.7 2.0 -0.2 0.7 1.0 3.1 1.4

Sep-11 2.7 -9.1 -7.4 -5.0 -3.6 -11.7 -4.9

Oct-11 1.6 -1.9 -4.3 -3.0 -1.3 7.4 2.2

Nov-11 1.4 -2.5 -2.8 1.4 0.6 -4.6 -0.8

Dec-11 5.1 -0.7 1.1 -0.8 -1.2 -2.7 -1.5

Jan-12 6.5 1.8 0.7 0.2 2.7 4.3 2.4

Feb-12 2.0 0.7 3.9 1.1 -0.5 1.4 0.6

Mar-12 -1.2 -1.6 -1.3 2.8 -1.1 -2.9 -0.9

Apr-12 0.0 6.6 -1.2 0.0 0.4 1.9 0.3

May-12 -6.6 -3.5 -1.3 2.2 -0.1 -6.0 -4.2

Jun-12 -1.9 -5.4 -1.0 -4.2 0.3 0.3 2.0

Jul-12 2.0 1.0 4.0 0.7 0.9 1.9 0.5

Aug-12 0.8 1.6 -0.2 -0.5 -0.1 -0.5 0.2

Sep-12 1.3 0.6 2.4 2.7 0.5 0.8 1.0

12m avg 0.9 -0.3 0.0 0.2 0.1 0.1 0.2

3m avg 1.4 1.0 2.1 1.0 0.4 0.7 0.6

Estimated Intervention - Adjusted Asian FX reserves

growth + FX Forwards (m-o-m change, USD bn)

Source: CEIC, Bloomberg, Nomura, IMF.

6. JPY depreciation

JPY depreciation (vs. USD) to 88 by end-2013 as forecast by Nomura‟s G10 FX Strategy team

may raise some concerns over the potential negative impact on Asia FX. However, our analysis

of single variable sensitivity analysis, multivariate analysis (Figure 53) and trade-basket

weightings suggests that the impact will be limited.31

Combine this with the competitiveness

some Asia economies (namely Korea and Taiwan; Figure 54) have gained over the past 10

years along with the broad undervaluation of Asia FX, and there is less reason to be concerned

about the implications for local FX policy.

In addition, given the positive risk environment and strong capital inflows into Asia in H1 2013,

JPY depreciation will become even less of an issue for Asia FX, in our view. However, into H2,

persistent JPY depreciation could become a more significant factor given the expected

slowdown in China, a still-soft global growth backdrop and a possible slowdown in capital

inflows.

Fig. 53: HFP test results

Currency Dollar Euro Yen R-Sq

CNY 93% 6% 1% 98%

HKD 98% 2% 0% 100%

IDR 73% 32% -5% 58%

INR 73% 35% -8% 66%

KRW 65% 60% -34% 46%

MYR 71% 31% -8% 76%

PHP 81% 28% -8% 74%

SGD 60% 35% 0% 83%

THB 76% 26% 0% 69%

TWD 73% 25% -2% 87%

Average 76% 28% -6% 76%


Fig. 54: Asia exports (rolling 12m)

50

100

150

200

250

300

350

400

Oct-02 Mar-04 Aug-05 Jan-07 Jun-08 Nov-09 Apr-11

Exp -Japan Exp-Korea

Exp-Taiwan Exp - Asia ex China


31

See Asia Insights: Impact of a weaker JPY on Asia FX, 21 November 2012.



41

Kewei Yang +65 6433 6246 [email protected]

Advin Pagtakhan +65 6433 6555 [email protected]

Vivek Rajpal +91 22 403 74438 [email protected]

Rates outlook: Global factors to dominate early,

local drivers emerge in H2

Nomura‟s view of the global economic outlook for 2013 is that it remains weak, with global

growth of 3.0% in 2013, unchanged from this year and below the trend rate, even though central

banks will try to offset weak growth by adopting yet more unorthodox monetary policies. The

main reasons for the weakness include deleveraging/deeper financial sector regulation, the

ongoing eurozone crisis and pro-cyclical fiscal austerity in developed countries. However,

outperformance by emerging markets, especially Brazil and China, is expected to partially offset

the negative contributions to growth from developed markets (DM).

Given such a backdrop, we still expect global risk sentiment to be a dominant factor driving

global asset performance. Capital inflows, attracted to Asia by a brighter growth outlook and

higher interest rates, should help local-currency fixed income assets outperform DM

benchmarks from a total return perspective (due to spread compression over USD rates,

currency appreciation and reduced credit premium). We expect a range-bound market to

experience a number of major phases in 2013 as DM dynamics continue to weigh on risk

sentiment:

Phase 1: Once a solution to the US fiscal cliff is found, it is likely that risky assets will

perform while the rates market sells off, early in the year. Furthermore, we expect

growth in China in Q1 2013 to exceed 8% y-o-y, and in the US, the Fed to replace

Operation Twist with the outright buying of about USD40bn of USTs a month.

Phase 2: The risky asset rally might not last long as US macroeconomic data are not

expected to improve much in Q1 2013, while the eurozone may be led into a deeper-

than-expected recession by fiscal tightening, financial deleveraging and sovereign debt

market tensions. Our European economics team expects another bout of market

turbulence once Spain is forced to seek a bailout, and even when the ECB‟s open

market transaction (OMT) mechanism is triggered, we believe it will be quickly seen by

market participants as underwhelming.

Phase 3: In H2 2013, we expect US economic growth to accelerate as emerging

markets continue to grow, which might put pressure on some Asian central banks to

tighten policy to reduce the risk of economic overheating. Our US rates strategy team

expects the 10yr UST yield to reach 2.2% by end-2013 while our Asian economics

team forecasts rate hikes in China, Taiwan, Indonesia, Malaysia and the Philippines in

H2. Our US rates and Asian economic outlook for H2 suggest that paying interest may

emerge in Asia as most rates curves in the region have only priced in a marginal rise in

yields. We believe Taiwan will be the best market to position for this view due to its

fairly close relationship with USD rates and as its economy is expected to benefit more

from China‟s above-trend growth in H1 2013. Even though the Bank of Korea is not

expected to hike rates in 2013, we believe Korean rates will exhibit movements similar

to Taiwan rates.

Even though we expect a range-bound market with upward pressure on rates in the year ahead,

we are positioning ourselves in Asian rates markets cautiously at the beginning of 2013, while

closely monitoring global risk sentiment (related to the US economic recovery and Euro debt

crisis) and regional growth drivers (such as China). We also remain mindful of idiosyncratic

dynamics in various countries, especially India, where rates markets are less correlated with the

rest of the world.

Our portfolio is currently positioned as follows:

China and Taiwan: We have a paying and steepening bias as we expect above-trend growth in

China. For Taiwan, the regional and domestic recovery, and rising USD rates, should put bear

steepening pressure on the curve.

Singapore: We stay received front-end rates as a balanced way to express our bullish view on

the local economy and concerns over global risk sentiment.





42

Korea: We maintain a tactical paying bias to position for shifts in global risk sentiment given the

Korean market‟s relative depth and low transaction costs.

India: We continue to hold a receive bias on OIS and a bullish stance on government bonds as

we expect the RBI to continue to ease and inject liquidity into the system through OMOs.

In other cash bond space (mainly Korea, Malaysia and Thailand): capital inflows caused by

QE in developed markets, a better EM outlook and higher EM yields should help bonds

outperform swaps locally and US Treasuries internationally (on a relative basis).

Lastly, to diversify risk and add less-correlated returns to our Asian rates portfolio, we also

intend to explore occasional relative value opportunities in markets closely linked with the US,

such as Hong Kong (HKD peg to USD) and Singapore (SGD NEER policy regime and the swap

offer rate (SOR) fix mechanism), followed by small open economies like Taiwan.

Key recommendations for 2013: SGD, INR and CNY rates

We start by highlighting our high conviction trade recommendations for the year ahead. We then

provide our thoughts on individual country markets.

Singapore: remain received where there is attractive volatility-adjusted slide.

India: bullish on bonds and maintain a received bias on the 3-5yr part of the curve.

China: position for further bear steepening.

We would position for our medium-term outlook into H2 2013 by paying Taiwan and

Korea 5yr (in spot and/or the forward space) and manage short-term risk through

tactically hedging with USD rates.

Singapore: receive where there is favourable volatility-adjusted slide

Receive 3fwd 1yr and 4fwd 1yr IRS which are carry trades with high rolldown-to-

volatility ratios.

Receive the back end of the SGD IRS curve (5fwd 5yr) against a regression-weighted

amount (0.50) of USD 5fwd 5yr.

In Singapore, closer to the front end of the SGD IRS curve, we maintain our recommendations

to receive SGD 3fwd 1yr and SGD 4fwd 1yr, given the supportive MAS policy stance and what

we see as good risk-reward properties (see Asia Insights: Singapore: remain received SGD

IRS, 6 November 2012). The SGD 3fwd 1yr and SGD 4fwd 1yr currently slide positively by 17bp

and 21bp over 6M, respectively (Figure 55) and remain favourable to receive when we adjust

this forward rate slide by both realised and implied volatility. In addition, given the curve‟s strong

relationship with the USD curve and the Fed‟s extended low-rates guidance, this should also

serve to dampen volatility in the SGD curve and improve the overall ex-ante Sharpe ratio. For

those interested in spot tenors, when we adjust the carry/roll by realised volatility, we see that

SGD 7yr and 6yr IRS have the best risk-reward characteristics in this space. Both our current

recommendations and these spot alternatives should also benefit from the rolling flattening of

the IRS curve in an environment of stable and low SOR fixes (Figure 56).

In terms of the fundamental backdrop, we believe high headline inflation relative to its long-term

historical average is supportive of our view of no loosening in the MAS policy stance (even amid

below-trend growth), as it is this measure that feeds into consumers‟ inflation expectations. In

terms of policy tools, the targeted annualised appreciation slope for the S$NEER is of most

interest to rates investors. A positive slope (hawkish stance) for the S$NEER path puts

downward pressure on the 6M SOR fix, as the SOR fix is a function 6M USD Sibor (USD Libor

fixed in Singapore) less the amount of annualised SGD appreciation reflected in the USD/SGD

6M FX forwards.

At the back end of the curve, we maintain our rolled down recommendations to receive SGD

5fwd 5yr against USD 5fwd 5yr and look to add should valuations become favourable.

Currently, the regression-weighted spread between SGD 5fwd 5yr to 0.50 * USD 5fwd 5yr

(existing recommendation uses a weight of 0.4) slides positively by 7bp over 6M, compared to

the negative slide on an equally weighted spread. Alternative combinations involving SGD vs.

USD 3fwd 3yr and USD 3fwd 2yr are also robust and carry positively if beta-adjusted, though




43

we eschew allocating fresh risk capital to them because on a relative value basis we see these

pairs at fair value.

We believe that below-trend growth, global risks, regulatory-driven demand and, to some extent,

the rolling flattening dynamic in the IRS curve should keep yields in this part of the SGD rates

curve low. As Singapore moves towards updating its risked-based capital framework for

insurers, this should result in regulatory-driven demand. We believe implementation of the

proposed changes – which is a similar concept to the Solvency II framework in Europe –

provides an incentive for insurers to increase their government bond holdings given higher

charges for holding equities and corporate bonds. This additional demand for sovereign

duration is also likely to result in receiving interest in the back end of the IRS curve, as some

insurers look to synthetically recreate duration exposure. In terms of where we may see the

manifestation of this synthetic demand, this may well occur in the 20yr part of the IRS curve

(liquidity permitting).

Fig. 55: SGD 4fwd 1yr, slide and SOR fix

-25

0

25

50

75

100

125

-1%

0%

1%

2%

3%

4%

5%

08 09 10 11 12

bp

4fwd 1yr - annual slide (bp, RHS)Swap offer rate 6M - %SGD IRS 4fwd 1yr - %


Fig. 56: SGD IRS curve over the past 6M, %

0.56 0.54 0.560.64

0.760.91

1.09

1.291.45

1.611.73

0.0

0.5

1.0

1.5

2.0

1yr 2yr 3yr 4yr 5yr 6yr 7yr 8yr 9yr 10yr

Pe

rce

nt


We are comfortable that we will be able to maintain these views over the medium term, given

the stated policy and economic backdrop, and as the substantial positive slide also augments

the holding power of the trade. That said, the main risk comes from the global backdrop. Any

sharp deterioration in the global growth outlook could see the market price in a more dovish

MAS, which would result in a rise in the SGD 6M SOR fix pushing up the front end of the curve.

As we move into H2 2013, the potential for stronger sequential growth in advanced economies

could weigh on our directional recommendation to receive SGD 5fwd 5yr, given the robust

relationship with the USD rates curve, though the relative value trade should be more insulated

and provide more alpha.

India: stay bullish going into 2013

Long bonds. We recommend IGB 8.07% 2017 (5yr) (Current 8.17%; Target 7.7%;

Reassess 8.37%), IGB 8.15% 2022 (10yr) (Current 8.19%) and IGB 8.33% 2026 (14yr)

(Current 8.31%). These are the three most liquid on-the-run government bonds. We

expect the 10yr and 14yr to outperform on the curve on open market operations

(OMOs), which we expect to resume soon. We would expect the 5yr to outperform

once the RBI begins to cuts rates, which we believe will start in January.

Receive 3-5yr (ND) OIS. We recommend scaling into receive belly trades at or above

7.30% levels.

(ND) OIS 3s7s, 3s10s, 1fwd 2s5s steepener. We recommend entering into steepeners

once rate cuts arrive, and/or when liquidity conditions ease. Tactical: Pay 1yr or 1s5s

flattener. Earn the carry in the front end while the RBI is on hold and there is a liquidity

deficit. Look to exit ahead of the first rate cut.

Our view on Indian rates has been bullish since the end of 2011 and we see few reasons to

change our minds as we enter 2013. Below we discuss the reasons for our bullishness and our

key recommendations.


44

RBI to continue to 'ease' further

Despite the RBI's hawkish rhetoric (which we believe receives undue attention or emphasis) a

closer look at the RBI‟s actions suggests that it has been easing monetary conditions since the

beginning of 2012. Not only has the repo rate been reduced by 50bp, but approximately

INR1.1trn has been injected into the system via a cumulative 175bp of cuts in the cash reserve

requirement ratio (CRR) and approximately INR1.7trn through OMOs since the start of the

calendar year. Not only that, but other RBI measures such as cutting the statutory liquidity ratio

(SLR) and the export credit refinance facility have made banking system access of liquidity

easier. By conducting these various liquidity measures, the RBI has eased money market

conditions significantly this year, which has led to 100bp fall in average MIBOR fixings.

As we head into 2013, we expect this easing of monetary conditions to continue. Our

economics team, Sonal Varma and Aman Mohunta, expects 50bp of repo rate cuts in H1 and

another 25bp of cuts to the CRR (see India outlook), while we expect OMOs to continue. We

note that this easing is consistent with our economists' view of inflation peaking in Q4 12 and

shifting to a downtrend thereafter.

Sovereign bonds to rally further as demand continues to outweigh supply

Indian sovereign bonds have rallied since the end of 2011 as demand, especially from the

banking system, and the RBI in the form of it OMOs, continues to outweigh supply, which is

being spurred on by the government‟s poor fiscal position. We believe this demand is due to two

factors (which we have written about before32

) that are our key reasons to be bullish Indian

sovereign bonds:

Banking system demand remains strong in a low credit growth environment. Despite

the mandatory 23% SLR requirement, banks continue to hold nearly 30% of their

NDTL33

in their portfolio (Figure 57).

The RBI's willingness to inject liquidity in the form of OMOs. We expect the RBI's

efforts on this front to only increase over time as it becomes more overt in supporting

growth, with inflation peaking. We would not be surprised if the RBI becomes even

more proactive and brings liquidity in the banking system to neutral levels, which will

be consistent with its stance of keeping liquidity at +/-1% of NDTL.

We believe both these factors will continue in 2013 and hence, expect yields to find new lows. We

expect the 10yr to reach 7.8% in Q1 2013 before consolidating in Q2 (which is typically a high

issuance quarter), before starting a gradual downward trajectory again to end 2014 at 7.5%.

In terms of the yield curve, we expect a limited steepening on our expectation of only 50bp of

repo rate cuts while OMOs should keep the longer end rich.

Fig. 57: SLR, Non-food credit, y-o-y

10%

15%

20%

25%

30%

25%

27%

29%

31%

33%

35%

10 11 12 13

SLR/NDTL (LHS)

Non Food Credit y-o-y (RHS)


Fig. 58: MIBOR, policy rates

2%

3%

4%

5%

6%

7%

8%

9%

10%

10 11 12

MIBOR O/N

Repo rate

Reverse Repo

1M AVG OF MIBOR


32

India Rates: Time to initiate longs, 22 August 2012. 33

NDTL = Net Demand and Time Liabilities (~ aggregate deposits of banking system).

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=545228&appname=GRP&cid=d1JkZ3NpTm1MYmc90


45

(ND) OIS. Keep the receive bias in the belly (3-5yr tenors) and look to shift to steepeners once rate cuts arrive and/or liquidity eases further

The (ND) OIS34

curve has been pricing in 100bp of MIBOR fixing change in 1 year. As we have

written before,35

we believe that the (ND) OIS market is also assigning the possibility that

overnight rates may fall below the repo rate, and hence is pricing in a combination of repo rate

cuts and easy liquidity conditions. As mentioned above, we believe it highly likely that the RBI

will become more proactive in bringing liquidity to neutral levels as it becomes more overt in

supporting growth. If such a scenario develops, we believe it will become common for MIBOR

fixings to fall below the repo rate (Figure 58). From a timing perspective, we believe this is most

likely to occur in CY Q3, as this is the time of year when currency flows back into the banking

system (and combined with a somewhat quieter credit season).

Owing to aggressive pricing, receiving the front end of the (ND) OIS curve is a significantly

negative carry/roll trade and, therefore, we believe one should express the receive bias better in

the belly of the (ND) OIS curve. Once rate cuts arrive and/or liquidity conditions ease, we would

expect front end to outperform on the curve and curve to bull steepen.

We also note that, in the near term, while the RBI is on hold and there is a liquidity deficit, one

can tactically put on flatteners or front-end paid positions to earn carry/roll.

China: continued bear steepening

Maintain 2s5s and 3s5s curve steepeners, which should benefit from both an

improving economic outlook and potential liquidity easing to support social financing.

Maintain paying bias on the back end and look to pay on dips until we see financing

growth reversing its upward trend.

Our view on China still sees higher rates and a steeper curve on the back of a more positive

macro outlook (although this has been an out-of-consensus call).

Of the two main drivers of the China rates curve, the macroeconomic outlook and liquidity (see

China: Dissociation of policy rate expectations and liquidity premium, 18 February 2011), their

influence has been quite different. The macroeconomy has always been the fundamental driver

of the rates curve and determines the medium-term trend of rates and curve shape (in quarters).

However, liquidity has also been very important as it can dominate the macro outlook for

months, which poses significant mark-to-market risk for investors positioning in China IRS

(mainly IRS indexed to the 7-day repo fixing). As the market is not as liquid as other developed

rates market in Asia ex-Japan, positioning on the basis of macro fundamentals can easily be

knocked out by a short-term liquidity shock. This is why many investors often refer to the China

rates curve as a “liquidity curve”.

However, since 2012 (especially in H2), we have argued, firstly, that the importance of the

liquidity premium is gradually shrinking because of the PBoC‟s fine-tuning of policy. From this

starting point, we published a report (China: Dissecting interbank liquidity, March 2012) that

described in detail the PBoC‟s OMOs, liquidity supply/demand and the various monetary policy

mechanisms available in China. As the PBoC can flexible use either or all of the reverse repo,

repo, PBoC bills and the required reserve ratio (RRR) as policy tools, we expect volatility in the

7d repo fixings to be significantly reduced. As the fixing is settled every three months, we tend

to focus more on a 3m average of the 7d repo fixing as the key proxy for realised front-end

fixing in IRS. The 3m average has been very stable in H2 12 as the PBoC extensively utilizes

reverse repos to fine-tune liquidity. Hence we expect the importance of the macroeconomy to

naturally rise because the impact of the liquidity factor becomes transitory and short-lived. This

thus leads us to focus more on the macro side and we started our out-of-consensus paying bias

recommendations in mid-2012.

Although the global risk backdrop was not in favour of paying trades (and we did have a general

receiving bias in our rates portfolio in 2012), China stands out as the one market in which we

have consistently paid since mid-2012, when the market was deeply bearish on China‟s outlook.

Our confidence came mainly from: 1) the knowledge that 2012 is a key leadership transition

year with a high priority put on the maintenance of “stability” in both political and economic

circles; 2) key leading indicators (M2 and total social financing (TSF)) began to show improved

34

The nondeliverable overnight index swap curve. 35

India Rates: Analysing OIS pricing and liquidity conditions, 3 October 2012.



http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=564628&appname=GRP&cid=d1JkZ3NpTm1MYmc90


46

growth, which was good news for an economy driven so heavily by credit in recent years.

Furthermore, the back end of the China rates curve has exhibited a very strong directional

relationship with financing growth; and 3) the gradual approval of large investment projects and

the potential to front-load projects under the 12th Five-Year Plan further bolstered our

conviction.

Although China rates have sold off by more than 100bp across the curve since July, the market

has just recently started to turn a bit positive on China‟s economic outlook. This is expected as

activity data is showing signs of stabilisation. The bear steepening trend in H2 2012 is driven by:

1) the normalisation of monetary conditions from temporary looseness back to neutral; and 2)

the gradual stabilisation of the economic outlook. For example, the IRS indexed to the 1yr

deposit rate priced in a rate cut from 3.00% to 2.00% in July (there is a technical reason why the

market has some special dynamics but we would not emphasize that here as we do not believe

it critical to our analysis). On these expectations of deep rate cuts, the liquidity premium based

on our framework was deeply negative at around -25bp (the low since 2009 and not far from the

2008 low). This represented a very loose monetary stance priced into the curves, which was

inconsistent with the prudent monetary policy stance. As such we expected these conditions to

be only temporary, though we will admit to the fact that the improvement in real economic

activity arrived a bit later than we expected.

At the moment, the China curves are pricing in a 1yr deposit rate at 2.70% by the end of 2013

and 25bp of liquidity premium, suggesting that pricing has returned to neutral. Again, as we

believe the PBoC will maintain a neutral level of interbank liquidity via its fine-tuning operations,

the more fundamental macro factors are again likely to become the most important driver going

forward. Above-potential growth and higher inflation suggest that there might even be room for

rate hikes in H2 2013 (Our China economist, Zhiwei Zhang, expects two rate hikes in H2 2013;

see China outlook). As such, we continue to hold our bear steepening view on China repo IRS.

In the near term, the calendar new year as well as the Lunar new year (which falls in January

this year) may see a liquidity squeeze, though we are less concerned about the calendar new

year as trillions of RMB of liquidity is expected to be released through government spending in

November and December. We therefore expect any liquidity squeeze into year-end to be very

temporary, with the PBoC well armed with its OMO tools. We believe it more likely that tactical

opportunities will present themselves around the Lunar new year.

Fig. 59: The recent sell-off was led by reduced rate cut expectations…

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Dec-05 Apr-07 Sep-08 Jan-10 Jun-11 Oct-12 Mar-14

1y deposit

current

mid Jul-2012


Fig. 60: … as well as rising liquidity risk premium

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2008 2009 2010 2011 2012

liquidity premium - 1y


Rates views across the region

China: rates continue to bear steepen

In Asian, one of Nomura‟s long-held out-of-consensus views is that of China experiencing a

policy-led cyclical economic recovery despite its deep structural problems. The strong fiscal and

monetary supports from the government have shown signs of stabilising growth. Although China

rates have sold off by more than 100bp or so across the curve since July, there is still room for

them to move higher, driven by the back end of the curve as the market starts to build in rate

hike expectations in 2013.


47

Other than the macro outlook, we continue to note the reduced importance of liquidity dynamics

as a rates market driver into 2013. We have confidently argued since mid-2012 that macro

fundamentals will become the main driver of China rates as the PBoC continues to fine-tune

operations. This is evidenced by language changes in quarterly monetary policy reports as well

as increasingly flexible OMOs. In Q1 and Q2 reports, the PBoC started to put more emphasis

on fine-tuning operations and mentioned specifically reverse repo and repo rates, PBoC Bills

and the RRR as policy tools. In its Q3 report released in November it added phrases such as

“… enhance preemptive-tuning and fine-tuning…” and “focus on maintaining interbank liquidity

conditions stable…” We expect the PBoC to neutralise the impact of liquidity from the balance of

payments via reserve accumulation and other supply/demand factors such as loan expansion

and government deposits with the PBoC and ensuring sufficient liquidity to support credit and

social financing growth at a reasonable pace.

Fig. 61: the macro outlook drives broad rates trends

1.0

2.0

3.0

4.0

5.0

0%

5%

10%

15%

20%

25%

30%

2007 2008 2009 2010 2011 2012 2013

CPI+IP

2y

5y


Fig. 62: A more stable 7d repo fixing

2%

3%

4%

5%

6%

7%

8%

9%

2011 2011 2011 2011 2012 2012 2012 2012 2013

7d repo fixing

bill/repo 3m (withdrawal)

reverse repo 7d (injection)


Taiwan: rates are likely to bear steepen, which should also widen swap spreads

As China‟s outlook improves, Taiwan stands to benefit as economic linkage with China

continues to strengthen. Given the policy rate is kept at a very low base and liquidity in the

system will remain abundant, the rates curve is likely to steepen to price in rate hike

expectations in mid-2013, in our view (our economist Young Sun Kwon, expects two rate

12.5bp hikes in H2 2013, see Taiwan outlook). Swap spreads will also tend to widen as bond

yields are kept stable by domestic demand and abundant liquidity.

Taiwan‟s rates curve has been largely driven by the back end as the front end and commercial

paper (CP) fixing has stayed at rather accommodative levels compared to pre-2008 crisis levels,

as a function of a relatively low policy rate and abundant interbank liquidity. This is the main

reason why policy rate tightening has usually been partially passed through to CP fixing.

Although the Central Bank of China (CBC) continues to sterilise liquidity in the system, we do

not expect overall conditions to change dramatically as Taiwan remains a small, export-driven

open economy.

The curve, then, has been determined by the back end reflecting the macro outlook, especially

related to the global market. This enhances the link between the back end of the curve and US

rates when the swap fixing spread (between the Taiwan CP fixing and USD Libor) is stable, and

sometimes provides relative value opportunities. We will continue to explore outright and RV

rates opportunities based on the influence of China and the global market (such as the US) on

Taiwan‟s outlook.


48

Fig. 63: rate hike expectation is likely to steepen the curve

0%

1%

2%

3%

4%

5%

6%

2000 2002 2004 2006 2008 2010 2012

discount rate

90D CP fixing

5y NDIRS


Fig. 64: The curve shape remains driven by China and the US

0

10

20

30

40

50

60

70

80

90

100

1%

2%

3%

4%

5%

6%

2008 2009 2010 2011 2012 2013

10y IRS (USD)

5y NDIRS (CNY)

2s5s, bp (rhs)


Hong Kong: expect outperformance relative to USD rates

Hong Kong will also benefit from a stronger-than-expected China rebound. However, the impact

on the HKD rates curve is slightly different from Taiwan‟s due to the currency peg to USD and

low interbank rates. A better economic outlook is likely to attract inflows into HKD and possibly

push the Hong Kong Monetary Authority (HKMA) to defend the peg again in 2013, which points

to abundant liquidity and outperformance of HKD back-end rates over USD rates (i.e. even a

wider USD-HKD spread). We would like to position for this when the back end spread is close to

zero. Our US rates team forecasts higher rates in 2013 and HKD rates have lagged in sell-offs

as a function of the better growth outlook and abundant systemic liquidity.

The spread between Libor and Hibor is not expected to widen further, which is also not against

the view of outperformance of HKD rates, because Libor-fed funds basis has already reached

quite a low level, which limits room for Libor-Hibor spreads to move even more negative.

Fig. 65: HKMA intervention adds downward pressure on rates

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

7.60

7.65

7.70

7.75

7.80

7.85

7.90

2000 2002 2004 2006 2008 2010 2012

HKD

HKD 12M fwd

HKD 2y IRS (rhs)

HKD 10y IRS (rhs)


Fig. 66: USD-HKD rate spread has less room to tighten

-75

-25

25

75

125

175

225

2000 2002 2004 2006 2008 2010 2012

3m fixing, bp

2y, bp

5y, bp

10y, bp


Korea: stable rates, though biased to edge higher

Korea rates have become very stable since the last rate cut in October. Our economist expects

GDP growth and CPI inflation to rise only modestly in 2013, allowing the Bank of Korea (BOK)

to leave rates unchanged (see Korea outlook). Currently, the curve has priced in an even lower

CD fixing and we see a marginal probability of another rate cut. We interpret such pricing as

reflective of asymmetric global risk and the potential impact on the Korean economy. The

Korean rates curve is more likely to move along with global risk sentiment, in our opinion, as we

expect domestic drivers to be less significant in 2013.

Once the US rates curve starts to rise, supported by a better economic outlook in H2, we would

expect the Korean curve to also face pressure to bear steepen. As capital inflows, along with


49

strong domestic demand, support KTBs, we expect they will outperform swaps and US

Treasuries under our baseline view for 2013, which points to a wider swap spread and narrower

KTB-UST spread.

Fig. 67: Korean curve still prices in a slight rate cut

0%

1%

2%

3%

4%

5%

6%

7%

8%

2000 2002 2004 2006 2008 2010 2012 2014

3m CD fixing

Base rate


Fig. 68: capital inflows are likely to help KTBs outperform

-200

-100

0

100

200

300

400

2000 2002 2004 2006 2008 2010 2012

KTB-UST 10y spread, bp

KRW-USD policy rate spread, bp


India: maintaining a bullish bias

We continue to maintain our bullish bias on Indian rates given our expectation of continued

monetary easing into 2013. Our economists‟ expectations of inflation to peak in Q4 2012 and for

a very shallow recovery in 2013 (see India outlook), allowing the RBI to ease further, remain

supportive of our bullish rates view. This, along with our view that the RBI will proactively

manage liquidity conditions should aid this bullish bias further.

We believe the RBI‟s easing of monetary conditions and liquidity dynamics to remain the key

drivers of rates in India in 2013. From a cash bonds perspective, we believe low credit demand

in the economy, consistent with our weak growth outlook, will keep demand for cash bonds in

the banking system strong. This, combined with demand from the RBI in the form of its OMOs,

aimed at injecting liquidity into the system, should outweigh supply pressures emanating from

the government's high fiscal deficit. We would not be surprised if the RBI becomes more

proactive and brings liquidity in the banking system back to neutral levels, which will be

consistent with its stance of keeping liquidity within +/-1% of NDTL. In terms of yield trajectory,

we expect the 10yr to reach 7.8% in Q1 2013 before consolidating in Q2 2013 (which is typically

a high issuance quarter) and starting a gradual trajectory lower to end 2014 at 7.5%.

In (ND) OIS as well, the weak domestic growth outlook and RBI OMOs should keep the

market‟s receive bias in the belly (3-5yr) of the (ND) OIS curve. We also note that, in the near

term, while the RBI is on hold and there is a liquidity deficit, one could tactically put on flatteners

or front-end paid positions to earn carry/roll. However, once rate cuts arrive and/or, more

importantly, liquidity conditions ease, we would look to switch into steepeners as we would then

expect front-end (ND) OIS to outperform on the curve. In our view, the most likely timing of easy

liquidity conditions is Q2 and Q3 of the calendar year. The expected recovery in activity data

should also aid the steepening of the (ND) OIS curve in H2 2013 (see India outlook).

Fig. 69: Indian bond yield curve

7.8%

8.0%

8.2%

8.4%

-20

-10

0

10

20

7.1

7 2

015

8.0

7 2

017

8.1

9 2

020

8.7

9 2

021

8.1

5 2

022

9.1

5 2

024

8.3

3 2

026

8.2

6 2

027

8.9

7 2

030

8.2

8 2

032

8.3

3 2

036

8.8

3 2

041

Hu

nd

red

s

bp

3 Month Change1 Month ChangeLatest Yield Curve (RHS)

Source: Bloomberg, Nomura

Fig. 70: MIBOR-repo rate spread, 1m average

-150

-100

-50

0

50

100

150

10 11 12

bp

1M Avg (MIBOR - Repo Rate (in bps))



50

Singapore: remain received

As stated earlier in this section, we maintain our bias to receive SGD IRS rates in tenors which

offer favourable volatility-adjusted carry or slide. While recent activity data have disappointed,

we do not believe this will significantly affect the MAS‟s assessment of the domestic growth

outlook. Against this backdrop and with headline inflation remaining well above its long-term

historical average, we believe a change in policy stance is unlikely. As a result, we believe the

policy backdrop will remain conducive to receive, as hawkish monetary policy translates into low

front-end rates via the swap offer rate (SOR) construction (Figure 71).

While the below-trend growth outlook and regulatory-driven demand in Singapore should put

downward pressure on the IRS and SGS curves, the risks to these views come from the robust

historical relationship with the USD curve. Should the “Phase 1” scenario mentioned above of a

positive environment for riskier assets be realised, then the risk to outright received positions in

the back end of the curve would be from the steepening of the USD curve and be transmitted to

the SGD curve via the strong historical beta. We maintain our recommendation to receive the

back end of the SGD curve against a regression-weighted (0.5) amount of USD, as this results

in modest positive carry and captures the underlying relationship between the two curves. That

said, we eschew adding to these positions at this stage as valuations suggest the SGD 10yr is

fairly valued to its USD counterpart (Figure 72) and instead wait for the SGD curve to cheapen

before adding.

Fig. 71: SGD SOR 6M and selected IRS - %

-1%

0%

1%

2%

3%

4%

5%

08 09 10 11 12

Swap offer rate 6M

SGD IRS 3yr

SGD IRS 5yr

SGD IRS 7yr


Fig. 72: SGD IRS 10yr vs USD IRS 10yr is fairly valued, bp

-60

-40

-20

0

20

40

60

80

08 09 10 11 12

Residuals - y:SGD 10yr; x:USD 10yr, bp


Malaysia: continued foreign interest in the government bond market

In Malaysia, foreign investor interest in the domestic market has been robust for the last three

years, bringing foreign ownership of Malaysian government bonds (MGS) to 42.1% in

September from 34.6% a year earlier (Figure 73). Unless there is a general bout of risk

aversion, we expect this to continue into 2013 amid continued investor and FX reserve-manager

allocations to emerging market debt, as a means of diversification given the ongoing difficulties

in many European sovereign debt markets. Even with Nomura economist Euben Paracuelles‟

forecast of 50bp of policy rate hikes by Bank Negara Malaysia (BNM) in H2 2013 (see Malaysia

outlook), we believe that this dynamic will remain largely intact unless we see a substantial

surprise to the upside in terms of tighter monetary policy. In terms of what part of the curve is

attractive, using our government bond relative value analytics, the forward curve suggests that

the biggest cushion to add duration lies beyond the 10yr part of the MGS curve. From here, our

government bond spline suggests that each of the 2025, 2026 and 2032 bonds are cheap to the

curve (Figure 74).

We do not expect any dramatic policy-induced moves in the MYR IRS curves in H1 given the

challenging external backdrop. As we approach the timing of our forecast rate hike in Q3, with

the associated pickup in the economic backdrop, we would expect to see steepening pressure

on the curve. However, given the negative carry of holding a 2s5s steepener (-8bp over 6M)

and the near-term hurdles from advanced economies, we believe the best course of action is to

wait for these hurdles to be cleared (or realised) before putting on a steepener postion that we

would intend to hold for a long time. Still, that does not preclude us from tactically looking at

steepening trades should the 2s5s spread once again approach historical lows.


51

Fig. 73: Increased foreign interest in MGS

-5

5

15

25

35

45

05 06 07 08 09 10 11 12

Foreign ownership of MGS - %


Fig. 74: Rich(-)/Cheap(+) MGS market, bp


Thailand: bias to be long bonds

We maintain our constructive view of the bond market in the medium term as there remains a

substantial cushion to extend duration from the 7yr part of the curve (Figure 75). Our forecast of

stable inflation and no rate changes from the Bank of Thailand in 2013 offer support. This view

also benefits from Craig Chan‟s bullish THB view over the medium term (see FX outlook), so

bonds can also be used as an overlay to FX positions. We believe that both the asset allocation

shift to higher quality Asian sovereigns (Figure 76), as well as local demand driven by the

demographic outlook, will continue to contribute to the attractiveness of the Thai bond market,

with light foreign involvement at 15.9% minimising its external vulnerability.

However, there is a market concern regarding additional bond issuance due to fiscal expansion

and this has manifest itself in a 5s10s steepening of the IRS curve. That said, we believe that if

additional funds are needed then alternative sources that will not weigh on the yield curve – we

would expect retail savings bonds or promissory notes directly to the private sector (which has

substantial excess liquidity) to be used. Moreover, the public debt-management office has been

within 0-5% of its benchmark issuance target over the past four years, so it does possess a

level of credibility.

We expect a largely range-bound environment in THB IRS going into 2013, as there are no rate

changes reflected in the curve, which is in line with our forecast for no changes in policy settings

through the whole of next year. As we alluded to earlier, there has been a significant steepening

of the 5s10s slope from 25bp to 45bp over the past three months and given our view that there

will be little deviation from the announced benchmark issuance plan, we expect the slope to

normalise. However, as the slope has yet to show any signs of flattening and may continue its

steepening momentum in the near term, we avoid entering a THB 5s10s flattener until we see

clearer signs that the near-term steepening has abated.

Fig. 75: Cushion to add duration from 7yr and out

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

0 5 10 15 20 25 30

Par Cpn Curve

Forward Curve

Spot Curve


Fig. 76: THB bond foreign ownership less crowded- %

0%

10%

20%

30%

40%

50%

07 08 09 10 11 12

Hu

nd

red

s MalaysiaIndonesiaKoreaThailand


-15

-10

-5

0

5

10

15

De

c-1

2

Ma

y-1

3

Ju

l-1

3

Ap

r-1

4

Oct-

14

Au

g-1

5

Oct-

15

Fe

b-1

7

Oct-

17

Fe

b-1

8

Oct-

18

No

v-1

9

Ju

l-2

1

Ju

l-2

5

Se

p-2

6

Ma

y-2

7

Ap

r-3

0

Ap

r-3

2

Rich(-) / Cheap (+)

Median of MGS spread (past 3M)


52

Indonesia: high beta helps early in 2013, but H2 rate hikes to squeeze out risk premium

The performance of IDR government bond positions will be largely dependent on the global

risk environment given the high-beta nature of the asset class, in our view (Figure 77). While

Korea, Thailand and Malaysia have experienced an increase in foreign interest in their local

government bond markets, foreign ownership of IDR government bonds has remained stable

over the past year, near its October 2012 reading of 30.0% (Figure 78). This relative stability

in the bond market is reassuring for existing bondholders, as the benign risk environment

allows for the realisation of the high coupons on the curve while minimising mark-to-market

risk. Should we see a positive resolution to the issues which continue to weigh on developed

markets, then there is further scope for capital gains as we remain below the peaks in foreign

ownership seen in 2011. One potentially limiting factor for new investors (as existing holders

likely have accumulated gains to act as a cushion) is the lack of term premium in the bond

curve. At current levels, there is no term premium in the curve out to the FR40s (Sep 2025)

and if we add our economist Euben Paracuelles‟ end-2013 forecast for the BI rate of 6.25%

(see Indonesia outlook), then the first signs of term premium do not show up until the FR45s

(May 2037).

Fig. 77: Rolling correlation of returns remains high

-0.8

-0.6

-0.4

-0.2

0.0

0.2

06 07 08 09 10 11 12

Rolling 6M correlation between IDR 20yr bond vs S&P 500, inverted scale


Fig. 78: Foreign ownership of bonds stable in Indonesia

0

5

10

15

20

25

30

35

05 06 07 08 09 10 11 12

Non resident holdings of IDR government bonds as % of total market cap



53

Asia Corporates Desk Analysts

Pradeep Mohinani +852 2536 7030 [email protected]

Annisa Lee

+852 2536 7054 [email protected]

William Mak, CFA


Agnes Wong +852 2536 7434 [email protected]

Gourav Dhavale


Abhimanyu Talwar


Credit outlook in the EM context

A bumpy road to tighter spreads is how we would characterise our expected path of emerging

market (EM) credit performance in 2013. Achieving a similar return as in 2012 (EMBIG YTD

returns at 16% and CEMBI at 15%) will be very difficult with yields, particularly in EM high grade

(HG), already so low. Much of the outperformance will have to come from EM high yield (HY),

where yields still offer a pick up over US HY. Relative to an average of 70-80bp of tightening in

EM corporate HG in 2012 and 180-230bp in HY, we expect another 30-50bp of tightening in HG

cash and 90-120bp in HY corporate cash by year-end 2013. This is based on the expectation of

HG ending the year on average about 180bp from the current 230bp (using JACI as a reference

guide) and HY at 470bp from 570bp.

The key factors driving our bullish view on EM credit spreads are:

Very supportive technicals given a low-yield environment and wider spreads relative to

US credit, which is likely to offset heavy issuance.

Better fundamentals and growth prospects in EM relative to developed markets (DM)

make investing in EM credit an attractive value proposition and relative safe haven.

Kicking off 2013, we believe LatAm credit offers the best value proposition due to stronger

technicals with wider spreads levels alongside – relative to Asia – a comparable size of

redemptions in terms of principal and coupons. Asia remains subject to heavy issuance and

comparatively tighter spreads. Central and Eastern Europe, the Middle East and Africa

(CEEMEA) has the widest spreads of the three regions, but is subject to geopolitical risks in the

Middle East and volatility transmitted from the eurozone to Eastern Europe, and similarly,

governance risks in Russia and Ukraine.

Fig. 79: Principal and coupon redemption and average spreads

(In US$ bn) AEJ LatAm CEEMEA

2012 48.7 42.1 62.7

2013 48.8 43.1 63.1

Avg Spd

Current* 289 404 334

YE2011 402 475 472

Chg -113 -71 -138

Note: *CS EM Corporate bond spreads. Source: Bloomberg, Dealogic and Nomura.

Key macro drivers for EM credit in 2013

Dim growth outlook for DM and brighter for EM – Nomura Economics‟ house view is for US

GDP growth to weaken in 2013 (from 2.1% in 2012), while the European recession is expected

to deepen, with GDP contracting by 0.76% in 2013 (from -0.4% for 2012). EM growth, on the

other hand, being increasingly driven by domestic demand, is expected to pick up slightly to

5.6% in 2013 (from 5.4% in 2012) due to upticks in LatAm and EEMEA. The key concern with

the US and Europe remains fiscal tightening causing a drag on growth. However, the

transmission in market volatility (using VIX and VStoxx) is likely to remain constrained, with the

belief that central banks remain ever-ready to inject liquidity into markets, offset by tighter bank

lending, particularly in the EU.

This portion of the Report has been prepared by a Desk Analyst and is NOT a research report under U.S.

law. The desk commentary portion of this report is NOT a product of the Fixed Income Research

Department and is NOT covered by the research analyst certification provided in Appendix A-1.

To our U.K. clients: this portion of the Report has been produced by and for the primary benefit of a

trading desk.

As such, we do not hold out this Desk Commentary as being impartial in relation to the activities of this

trading desk.

For additional information concerning the role of trading desk analysts, please see the important

conflicts disclosures beginning at page 59 of this report.








54

EM remains flush with liquidity, with more to come – most EM countries with a reasonable

fiscal balance sheet have maintained supportive fiscal spending programs and monetary

policies that are either loose or neutral, which has for the most part attracted capital inflows. We

believe such trends are unlikely to change meaningfully in 2013, though there is an upward bias

to raising policy rates to counter any pick-up in inflationary trends. Exceptions where rates are

expected to be lowered include India, Hungary and South Africa. This backdrop should be

conducive to generating additional inflows into EM credit.

China remains the wild card growth in both DM and EM – while China‟s growth has

accelerated recently, benefiting from higher infrastructure spending, its sustainability remains in

question. Our economists forecast quarterly GDP growth of 8.4% in 4Q 2012 slowing to 7.0% by

4Q 2013. The equations around fixed assets investment-to-GDP and total social financing

relative to bank financing are stretched on an absolute basis, compared to the size of the

economy – and nonperforming loan (NPL) levels are creeping higher. The growth implications

for the rest of the world are deep, and weaker US and European demand for commodities and

consumer goods should, in turn, also affect China‟s growth engines. The second-order impact

will be reflected in capital flows, including portfolio and FDI inflows, as well as external M&A and

purchases of UST.

Mixed commodity price outlook with base metals higher, energy and food lower –

commodities, a central driver in EM as most economies are either major exporters or importers,

are certain to realise the effects of China‟s growth trajectory, particularly if the slowdown turns

out to be deeper than expected. In any event, forecasts currently appear to be much more

optimistic relative to futures. Nonetheless, precious and base metals (gold, aluminum, zinc)

point to an upward trajectory, with copper being the exception declining from mid-2013

onwards. In terms of energy, oil and gas are projected to fall over the next 12 months, with a

similar direction for food (corn, wheat, soybeans). Coal is the exception in the energy space

having fallen sharply in 2012 and looks set for a rebound. The implications are that non-core

inflationary inputs should be contained.

Technicals should remain supportive – with a US policy rate and 10-year UST projected

through 2013 at 2.5% by our US rates strategists, additional liquidity supplied by the Fed

through QE3 and possibly by the ECB via its OMT program, the pressure to increase risk is

likely to remain, resulting in additional flows into EM credit. Further supporting this thesis,

general credit rating trends are likely to remain benign though with a slight negative bias and

global HY default rates are also expected to remain roughly unchanged at around 3.0%

according to Moody‟s in 2013. At the investor level, real money and private banks are likely to

end 2012 with a reasonable cash position, with real money at around 4% cash levels and still

seeing inflows. We would also note that the fund flows into EM compared to US HY have been

steadier, suggesting spread performance should also be steadier, with pick up in favor of EM

over US HY.

Issuance to remain high, but we are not concerned just yet given the technical backdrop

– following record issuance YTD of US$310bn – split between Asia with US$105bn, CEEMEA

with US$111bn and LatAm with US$93bn – we expect a similar, if not higher level of issuance

in 2013. There are a number of key drivers to consider, which were reflected in 2012 issuance

and that are, in our view, likely to repeat in 2013. Sovereign issuance accounted for only

US$61bn of this YTD total, while EM benchmarked inflows should continue to be skewed in

favor of the EMBIG, implying that sovereigns are likely to be better supported through volatile

markets. With the phasing-out of old-style LT2/T1 capital, senior bonds should continue to

dominate bank issuance, but also at reduced levels following sizeable issuance in 2012 and

relatively low maturities in 2013. We could start to see Asian banks (including Australian and

Japanese banks) opportunistically issue new-style capital. Similarly, with loan-to-deposit ratios

having risen over past years across EM – resulting in EM banks generally tightening lending

standards and European banks reducing their exposure as part of their deleveraging – we

expect corporate issuance to be higher in 2013. Other features of issuance that are likely in

2013 include issuance due to M&A activity, with the E&P sector involving the likes of CNOOC

with its Nexen acquisition, Petronas with Progress Energy and TNK-BP with Rosneft. We note

that principal and coupon redemptions in 2013 are estimated at US$155bn, similar to the

amount redeemed in 2012.


55

Asia themes

Sovereigns

Downgrade pressure on selective sovereign ratings is rising, the Philippines being the

exception: With the slower growth in EM Asia in 2013, we expect the sovereign upgrade trend

to slow and a greater focus on downgrade risks instead. The Philippines is the most likely

candidate for further upgrades to come through in 2H, which will be a function of the

improvement in a broadening/deepening of fiscal revenues to GDP, continued infrastructure

investment and the reduction of public debt to GDP. India, Sri Lanka and Vietnam are potential

downgrade candidates, with India being a 50/50 probability, in our view.

Key regional macro stories to track: The main issues that will prevent an Indian downgrade

are the political will to carry through with announced reforms; political stability maintained

through the parliamentary process; the external balance sheet not deteriorating; inflation being

contained and the fiscal balance sheet not deteriorating sharply. In Vietnam, the focus is on

bank NPLs and potential drag on the sovereign‟s balance sheet while the government attempts

to resuscitated growth without inflation rising. For Sri Lanka, the external balance will be key

given low FX reserves and the high trade deficit. In terms of political change, besides

challenges to the central government, India has a heavy state election year. Other countries

where the winds of political change may blow include Indonesia in the run up to the presidential

election due to be held in 2014 and Malaysia, where national elections are now expected to be

held by March 2013.

Corporates

Corporate earnings for 2013 are likely to moderate versus the trough a year back, driven by

higher sales volume, product prices and margin improvements reflecting the economic recovery.

The exception will be commodity companies likely reporting flat or lower earnings.

Capex requirements in 2013 will largely depend on the M&A risk appetite of IG corporates

while HY issuers will likely have limited capex to complete expansion plans.

Leverage may slightly improve due to better earnings, the working capital situation may not

improve, particularly among HY corporates, especially for Chinese issuers with SOE customers.

That said, we acknowledge that most issuers have considerable bills receivables which reduces

non-payment risk of their end customers.

Despite a benign corporate outlook, credit ratings will likely be skewed to a downgrade

bias with IG corporates such as China Metallurgical, Yanzhou Coal, Sinochem, KT Corp, SK

Telecom and Noble Group potentially being downgraded by the ratings agencies. In the HY

space, we may see some upgrades (mainly Outlook changes) among China property names

like Shimao, Yanlord and Country Garden, while selective commodities, industrials and property

names such as Bumi Resources, China Oriental, West China Cement, Fufeng, Mongolian

Mining Corp, SPG Land, Renhe and Powerlong may experience negative rating actions.

Beyond issuers with bonds maturing in 2013 with refinancing needs, we will be watching for

credits trading above their call price adding another wave of refinancing.

Banks

Asset quality deterioration in India and Vietnam: Indian banks‟ average NPL ratio has

deteriorated to 3.6% in September (from just under 3% in March) and could rise further to over

4% by March 2013, as India‟s economic growth has yet to bottom out and the NPL cycle

generally lags by a few quarters. Vietnam is the banking system in Asia that will face the most

severe asset quality challenges, as understated NPLs start to surface with loan growth having

slowed to 3% YTD (from >30% previously). We expect Vietnam‟s systemic NPL ratio to rise to

over 10% in 2013 (from 8.8% in Sep 12).

FC liquidity improvement in Korea, Australia and Singapore: Korean banks‟ FC

loan/deposit ratio (LDR) improved to 315% in June (from 419% in December 2010), and they

have increased their FC liquidity buffers and committed credit lines. They have also diversified

their FC funding into other local markets, with the proportion of FC debt denominated in ex-G3

currencies rising to 15.6% in June (from 11.2% in December 2009). As Australian bank deposit

growth has outpaced loan growth over the past few years, FC funding had fallen to 17.5% of


56

total liabilities in June (from 25.0% in December 2006). Singaporean banks have also sharply

slowed their USD loan growth recently, resulting in a lower USD LDR of 120-130% in

September (from 150-160% in December 2011).

Senior supply expected to be lower than in 2012: With significantly lower refinancing needs

in 2013 and improving FC liquidity, we expect supply from Korea ($3-4bn) and Singapore ($1-

2bn) to be fairly manageable. We believe Indian and Thai banks are likely to issue more USD

bonds ($9-10bn and $2-3bn, respectively) to fund overseas loan growth. We factor in another

$5-6bn from southeast Asian, Chinese, Hong Kong and Mongolian banks, taking our total

expected senior issuance from Asian (ex Japan) banks to around $20-25bn in 2013.

Asia trade ideas

Short PTTEPT 21s at T+205bp, target T+225bp

Short PTTEPT 42s at T+200bp, target T+240bp

Short PCCW 2022s at T+292bp, target T+325bp

Short SINOCH 2040s at T+230bp, target T+285bp

Short LIHHK 2017s at T+265bp, target T+290bp

Short LIHHK 2022s at T+276bp, target T+320bp

Short RILIN 2040s at T+260bp, target T+325bp

Short RILIN 2020s at T+240bp, target T+280bp

Short RILIN 2022s at T+260bp, target at T+300bp

Long YLLG 2017s at 104 ask at 8.2%, target 7.6% and Long SHIMAO 2018s at 110.6 ask

8.1%, target 7.6%

Long GEMDAL 17s at 100 ask 7.1%, target 6.5%

Long AGILE new 17s at 108.75 ask 7.5%, and AGILE old 17s at 105 ask 7.2%, target 7% and

6.7%

Long CHINSC 16s at 96.5 ask 12% and CHINSC 17s at 99.9 ask 11.6%, target 11.2% and

10.8%

Short SUNAC 17s at 105 ask 11.1%, target 14%

Long CSMAU 2016s at 84 at15% YTW, target 89 with 13% YTW

Long ATIAU 2018s at 74 at 19.7% YTW, target 84 with 16% YTW

Long VEDLN 2018s at 110 at 7.3%, target 113 at 6.7%

Long VEDLN 2021s at 104.12 at 7.6%, target 107 at 7.2%

Long FMGAU 2019s at 102 at 7.75% ask-YTW, target 104.50 at 7.15% ask-YTW

Long BTELIJ 15s at 46.25 at 53.1% ask-YTW, target 61.25 at 36.8% YTW

Long GJTLIJ 14s at 100.6 ask, target at 100 at 10.25% YTW

Long HYVANL 16s at 94 at 10.8% ask, target at 96 at 10% YTW

In banks, we are Overweight old-style bank capital relative to senior:

Long a basket of Australian bank T1s including NAB USD 5.486% Pnc15 (5.0% ask;

target 4.0%) and NAB GBP 5.62% Pnc18 (6.7% ask; target 5.5%)

Long CHIFIN UT2 5.625% Pnc15 (5.1% ask; target 4.0%)

Like Asian old-style LT2s in general, but would suggest a barbell strategy:

Long WSTP LT2 3.625% 23nc18 (Z+243bp ask; target Z+220bp)


57

Long CINDBK LT2 3.875% 22nc17 (Z+325bp or 99.45 ask; target Z+300bp) vs Short

BNKEA LT2 6.375% 22nc17 (Z+255bp or 112.98 bid; target Z+275bp)

Be selective in Asian bank seniors by focusing on laggards and guaranteed deals with attractive

pick-up:

Long DAEHIM senior 42nc17 (Z+267bp or 99.31 ask; target Z+235bp) with credit

facilities from KDB/Woori/ Hana

Long CHRESO 2017 (Z+164bp ask; target Z+140bp) with standby LC from DBS

Long BCHINA (Aviation) senior 2017 (Z+263bp or 97.80 ask; target Z+240bp; BBB-/A-)

vs Short CIIH senior 2022 (Z+274bp or 98.42 bid; target Z+290bp; BBB-/BBB)

Long RHBCMK senior 2017 (Z+218bp ask; target Z+200-205bp)

Long BOBIN senior 2016 (Z+295bp ask; target Z+270bp) vs Buy SBIIN 5yr senior CDS

(280bp ask; target 305-310bp)

Long TDBM senior 2015 (8.8% or 99.375 ask; target 7.9%) vs Short CTGVN senior

2017 (9.1% or 96.125 bid; target 10.0%)


58

Recent Asia Special Reports

Date Report Title

14-Nov-12 South Korea: An Economic Democracy

25-Oct-12 India reforms (Part I): A long way to go

11-Oct-12 Introducing NESII – The Nomura Economic Surprise Index for India

24-Sep-12 Thailand: New growth engines

14-Sep-12 China primed to surprise on the upside

5-Sep-12 Better hedges for a China hard landing

3-Sep-12 India's chronic balance of payments

7-Aug-12 Asia's inflation wildcard

2-Aug-12 Indonesia: Policy swings

31-Jul-12 India: A poor monsoon and its impact (Q&A)

9-Jul-12 South Korea: Prolonged low growth, inflation and rates through 2013

31-May-12 Pan-Asia: Inventory cycle threatens a slow recovery

29-May-12 China's peaking FX reserves

2-May-12 India: Make or break

23-Apr-12 The China compass

16-Apr-12 Korea: Uncomfortable trade-off

11-Apr-12 India: Four cyclical tailwinds to watch

27-Mar-12 Capital account liberalisation in China

9-Mar-12 India budget preview: Fiscal cheer

1-Mar-12 Asia: What if oil prices keep rising?

23-Feb-12 Philippines – Fiscal space to maneuver

16-Jan-12 Decoding India‟s stubbornly high inflation

20-Dec-11 Implications from North Korea

18-Nov-11 A cold winter in China

3-Nov-11 Thailand: Dealing with another disaster

31-Oct-11 China Risks

19-Oct-11 Korea: Falling, converging bond yields

21-Sep-11 China: The case for structurally higher inflation

8-Aug-11 Global market turbulence: Implications for Asia

7-Jun-11 Indonesia: Building momentum

10-Mar-11 Vietnam: Prioritizing macro stability

3-Mar-11 South Korea‟s demographic sweet spot

14-Jan-11 India's 2011 outlook: Rising symptoms of a supply-constrained economy

1-Nov-10 The case for capital controls in Asia

11-Sep-10 The coming surge in food prices

6-Aug-10 Another step towards becoming an offshore RMB centre

28-May-10 The heat is on

26-May-10 Brinkmanship returns to the Korean peninsula

9-Nov-09 China: Not just an investment boom

19-Oct-09 What Japan‟s 1980s experience means for China

8-Sep-09 South Korea: Household debt: Myths and reality

23-Jul-09 China & Hong Kong: RMB trade settlement: New opportunities, new risks


59

Important Conflicts Disclosures Relating to Trading Desk Material

Investors should be aware that Nomura engages or may engage in the following activities, which present conflicts of

interest:

♦ The person distributing trading desk material may have previously provided any ideas and strategies discussed in it

to Nomuras traders, who may already have acted on them.

♦ Nomura does and seeks to do business with the companies referred to in trading desk materials. Nomura and its

officers, directors, partners and employees, including persons involved in the preparation or issuance of this material

(subject to company policy), may from time to time maintain a long or short position in, or purchase or sell a position

in, hold or act as market-makers or advisors, brokers or commercial and/or investment bankers in relation to the

products discussed in trading desk materials or in securities (or related securities, financial products, options,

warrants, rights or derivatives), of companies mentioned in trading desk materials or be represented on the board of

such companies. For securities or products recommended by a member of a trading desk in which Nomura is not a

market maker, Nomura usually provides bids and offers and may act as principal in connection with transactions

involving such securities or products. Nomura may engage in these transactions in a manner that is inconsistent with

or contrary to any recommendations made in trading desk material.

♦ Members of a trading desk are compensated based on, among other things, the profitability of Nomura‟s

underwriting, sales and trading activity in securities or products of the relevant asset class, its fixed income

department and its overall profitability.

♦ The person who prepares trading desk material and his or her household members are not permitted to own the

securities, products or financial instruments mentioned.

♦ Nomura, through different trading desks or its fixed income research department, may have issued, and may in the

future issue, other reports that are inconsistent with, and reach different conclusions from the information presented.

Those reports reflect the different assumptions, views and analytical methods of the persons who prepared them and

Nomura is under no obligation to bring them to the attention of recipients of this communication.

Disclaimer Relating to Trading Desk Material

This material has been compiled by a Nomura Group sales or trading desk, and is made available to you through one

of Nomura Group‟s global securities affiliates. “Nomura Group” is the global marketing name of Nomura Holdings, Inc.

(Tokyo) and its direct and indirect subsidiaries worldwide. This information is neither investment research nor a

research recommendation, and may not be relied upon as such. The desk‟s opinions may differ from views of

Nomura Group's research department. This material is: (i) for your private information only, and we are not soliciting

any action based upon it; (ii) not to be construed as an offer to sell or a solicitation to buy any security or financial

instrument in any jurisdiction where such offer or solicitation may be illegal; and (iii) is based upon information that we

consider reliable, however it should not be relied upon as such. All projections, valuations and statistical analyses are

provided to assist the recipient in the evaluation of the matters described herein and, to the extent that they are based

on historical information, should not be relied upon as an accurate prediction of future performance. Any prices, yields

and opinions expressed are current opinions as of the date appearing on this material only and are subject to change

without notice. Additional, important disclaimer information should be reviewed by following this link:

http://www.nomura.com/americas/fi-disclaimer.shtml.

http://www.nomura.com/americas/fi-disclaimer.shtml


60

Disclosure Appendix A-1

ANALYST CERTIFICATIONS

Each research analyst identified herein certifies that all of the views expressed in this report by such analyst accurately reflect his or her personal views about the subject securities and issuers. In addition, each research analyst identified on the cover page hereof hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. ADDITIONAL DISCLOSURES REQUIRED IN THE U.S. Principal Trading: Nomura Securities International, Inc and its affiliates will usually trade as principal in the fixed income securities (or in related derivatives) that are the subject of this research report. Analyst Interactions with other Nomura Securities International, Inc. Personnel: The fixed income research analysts of Nomura Securities International, Inc and its affiliates regularly interact with sales and trading desk personnel in connection with obtaining liquidity and pricing information for their respective coverage universe. Valuation Methodology - Global Strategy A “Relative Value” based recommendation is the principal approach used by Nomura‟s Fixed Income Strategists / Analysts when they make “Buy” (Long) “Hold” and “Sell”(Short) recommendations to clients. These recommendations use a valuation methodology that identifies relative value based on: a) Opportunistic spread differences between the appropriate benchmark and the security or the financial instrument, b) Divergence between a country‟s underlying macro or micro-economic fundamentals and its currency‟s value and c) Technical factors such as supply and demand flows in the market that may temporarily distort valuations when compared to an equilibrium priced solely on fundamental factors. In addition, a “Buy” (Long) or “Sell” (Short) recommendation on an individual security or financial instrument is intended to convey Nomura‟s belief that the price/spread on the security in question is expected to outperform (underperform) similarly structured securities over a three to twelve-month time period. This outperformance (underperformance) can be the result of several factors, including but not limited to: credit fundamentals, macro/micro economic factors, unexpected trading activity or an unexpected upgrade (downgrade) by a major rating agency. Disclaimers This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. („NIHK‟), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. („NFIK‟), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. („NSL‟), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. („NAL‟), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia („PTNI‟), Indonesia; Nomura Securities Malaysia Sdn. Bhd. („NSM‟), Malaysia; NIHK, Taipei Branch („NITB‟), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited („NFASL‟), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034); NIplc, Madrid Branch („NIplc, Madrid‟) and NIplc, Italian Branch („NIplc, Italy‟). „CNS Thailand‟ next to an analyst‟s name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited („CNS‟) to provide research assistance services to NSL under a Research Assistance Agreement. CNS is not a Nomura entity. THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP. Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice. Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative

http://www.nomuranow.com/research

http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx

[email protected]

[email protected]

http://dis.kofia.or.kr/


61

instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (as defined within Financial Services Authority („FSA‟) rules in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor‟s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Any MSCI sourced information in this document is the exclusive property of MSCI Inc. („MSCI‟). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates. Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a number of different types of research product including, among others, fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and services from the research department depending on their individual requirements. Clients outside of the US may access the Nomura Research Trading Ideas platform (Retina) at http://go.nomuranow.com/equities/tradingideas/retina/ Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. The securities described herein may not have been registered under the US Securities Act of 1933 (the „1933 Act‟), and, in such case, may not be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura entity in your home jurisdiction. This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc, which is authorized and regulated by the FSA and is a member of the London Stock Exchange. It does not constitute a personal recommendation, as defined by the FSA, or take into account the particular investment objectives, financial situations, or needs of individual investors. It is intended only for investors who are 'eligible counterparties' or 'professional clients' as defined by the FSA, and may not, therefore, be redistributed to retail clients as defined by the FSA. This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. This document has not been approved for distribution in the Kingdom of Saudi Arabia („Saudi Arabia‟) or to clients other than 'professional clients' in the United Arab Emirates („UAE‟) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or to any person located in Saudi Arabia or to clients other than 'professional clients' in the UAE. By accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are a 'professional client' in the UAE and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia. NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright © 2012 Nomura International (HK) Limited. All rights reserved.

http://go.nomuranow.com/equities/tradingideas/retina/

http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx

Nomura+Asia+2013+Outlook

Documents

Transcript of Nomura+Asia+2013+Outlook