Asia Special Report


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 midperformers 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.

November 28, 2012 Principal authors Economics, Asia ex-Japan

Rob Subbaraman Chief Economist, AEJ
+852 2252 1370

FX strategy, Asia ex-Japan

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

Credit desk analyst

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

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.

Nomura | Asia Special Report

28 November 2012

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.


Nomura | Asia Special Report

28 November 2012

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. Rob Subbaraman
+852 2536 7435

Fig. 1: Asia ex-Japan’s total current account surplus
% of GDP 8 7 6 5 4 3 2 1 0 -1 -2 Jun-96

Fig. 2: Contribution to GDP growth (y-o-y), Q1-Q3 2012
p.p. 12 10 8 6 4 2 0 -2 -4 -6
Net exports Investment Consumption





Source: CEIC and Nomura Global Economics.

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
US Euro area Japan Asia ex Japan China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand 3Q12 2.0 -0.6 -3.5 5.9 7.4 1.3 5.4 6.2 5.2 7.1 0.3 1.6 1.0 3.0 4Q12 1.4 -1.6 -1.5 6.9 8.4 1.7 5.3 5.7 5.1 6.9 2.7 1.8 2.7 15.2 1Q13 0.7 -0.8 2.0 6.7 8.4 2.0 5.9 6.1 4.9 6.7 2.5 1.6 3.1 4.0 2Q13 1.2 -0.6 1.9 6.6 8.0 2.5 6.0 6.2 4.6 6.4 2.2 2.3 3.2 4.1 3Q13 2.3 -0.2 1.8 6.3 7.4 2.8 6.1 6.0 4.0 6.2 2.3 2.9 3.6 4.8 4Q13 2.7 -0.1 2.0 6.1 7.0 2.5 6.4 6.0 3.9 6.2 2.7 3.3 2.2 4.9 2012 2.1 -0.5 1.6 6.3 7.9 1.2 5.3 6.1 5.3 6.6 1.8 2.3 1.0 5.5 2013 1.5 -0.8 0.5 6.4 7.7 2.5 6.1 6.1 4.3 6.4 2.4 2.5 3.0 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


Hong Kong. and to stay above 8% in H1 2013. it has been very strong by global standards. Loose policies. Malaysia.4% y-o-y in Q3 to 8. adjusted for inflation. The growt h of China‟s consumption has not been weak. Indonesia. We expect GDP growth to rebound from 7. Note: Asia ex-China includes India.Nomura | Asia Special Report 28 November 2012 debt build-up. We forecast CPI inflation to rise sharply. Philippines.2% y-o-y GDP growth in H1 2013. two-thirds of US consumption is on services. in our view. Fig. it is just that investment growth has been even stronger. real policy rates are historically low across Asia. Source: CEIC and Nomura Global Economics. eclipsing new bank RMB loans – and slow progress in rebalancing from investment. Japan. Korea. frothy property markets and rising CPI inflation. Singapore. there was no single large-scale stimulus announcement as in late 2008. A renewed debt buildup outside the regulated banking sector – the sum of new trust loans. What is more. Taiwan and Thailand. Thailand and the Philippines have all cut policy rates this year and. India. 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%). Korea. or investor concerns over China‟s sustainable growth are likely to intensify. is that Asian policymakers fall behind the curve in normalising very accommodative macro policies. urgently require accelerated structural reforms (that can be painful in the short run). 4: Nominal retail sales in China and the US USD bn 400 350 Fig.1% y-o-y in H2 2013. This is the crux of our China story of two halves: 8. Malaysia. On our estimates. we have long held the view that China can experience a policy-led cyclical economic recovery despite its deep structural problems. China‟s much larger economy growing at a moderately slower pace is still a very powerful growth pole for the rest of Asia. which show that their combined budget 4 . but it is worth remembering that the size of China‟s economy (at market exchange rates) has almost doubled from USD4. 5: Asia ex-China’s exports to China+HK. compared to an average of 118% of GDP for the G20 advanced economies – and shifting to more expansionary fiscal policies. Either way. Indonesia. Thailand and the Philippines release timely monthly fiscal consumption-led growth. triggering policy tightening. which are less internationally tradable than goods. to average 5. 2012 is set to be the crossover year when the annual increase in nominal personal consumption in China (USD478bn) permanently surpasses the US (USD403bn). so much so that the rest of Asia‟s aggregate ex ports to China (and its entrepôt.2% in H2. Three growth engines We see three main factors supporting Asia‟s rapid economic rebalancing: China. US and EU USDbn 70 300 250 200 US China 60 50 40 China+HK EU US 150 100 50 0 Oct-92 Oct-96 Oct-00 Oct-04 Oct-08 Oct-12 30 20 10 Aug-03 Aug-05 Aug-07 Aug-09 Aug-11 Source: CEIC and Nomura Global Economics. But what is less appreciated is the extent of easing on the fiscal side: many other Asian governments are mimicking China. followed by 7. 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). The central banks in China. but add up all the measures and it is significant. in fact. However. Contrary to consensus.5trn in 2008 to an estimated USD8. Hong Kong) are now bigger than to the US and EU combined (Figure 5). GDP growth of 7% may seem weak by China‟s standards.2trn in 2012.4% in Q4. we expect a positive output gap and accelerating food prices to stoke inflation. entrusted loans and net issuance of bills and bonds has surged in recent months. The biggest risk. we expect GDP growth to slow to 7% y-o-y by Q4 2013. Fiscal policy easing really only started in earnest in July after the announcement that Q2 GDP growth had fallen below 8%.

buoyed by China‟s economic recovery.3% – and this is during a period of low inflation in the region (Figure 9). Note: Countries are China.Nomura | Asia Special Report 28 November 2012 deficit in the 12 months to September is almost as large as it was after the global financial crisis (Figure 6). Capital inflows. Low unemployment. in the space of just two and a half years since the crisis (Q1 2009 to Q2 2011). solid credit growth and positive wealth effects from buoyant property markets are conspiring with these loose macro policies to bolster domestic demand. both policies work together and are more effective. the fading of US fiscal cliff fears. or 2) likely FX intervention and central banks keeping interest rates lower than they would otherwise. In October. There certainly seems to be room for more inflows. But persistently negative real rates sow the seeds of overheating. Another large bout of net capital inflows would accelerate Asia‟s rebalancing via: 1) currency appreciation. The most comprehensive gauge. A glaring example is the widening gap between the shares of emerging Asia in world GDP and in the MSCI world equity index. more than the USD573bn in the five years prior. net capital inflows to Asia ex-Japan totalled a massive USD783bn. we estimate that the real interest rate was negative 19% of the time in China and 10% of the time elsewhere in Asia. 12-month rolling sum 100 USD bn. and Asia‟s real policy rate is likely to turn negative again as inflation rises. Using this measure (Figure 7). Philippines. From 1999 to 2005. and Singapore has refrained from fiscal easing as it focuses on raising productivity. There are. the real interest rate on 1yr bank deposits in China was 1. In our view. Thailand and the Philippines. we see that. 6: Government budget positions USD bn. Fig. was just 0. portfolio debt and equity flows. to promote domestic demand given the weakness of exports and to avoid provoking too-strong capital inflows. India. we expect another large bout of net inflows. respectively. some exceptions: India has limited room to use countercyclical policies due to high inflation and poor fiscal finances. LHS Rest of Asia. has spill-over effects on emerging markets by pushing investors into riskier assets). Korea‟s loose policies are being dampened by a household sector overburdened with debt. 12-month rolling sum 20 Fig. Source: CEIC. HK. Taiwan. is the financial account of the balance of payments. Malaysia. 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. however. Korea. weighted by GDP. Central banks justify erring on the side of laxity as insurance against the downside risks to global growth.3%. QE3 and the increasing search for yield. as well as cross-border foreign bank claims. thereby easing liquidity conditions and buoying asset markets. Overheating. 7: Asia ex-Japan’s net capital inflows US$bn 120 90 60 30 0 USD 573bn USD QE1 announced 783bn 50 0 -50 10 0 -10 -100 -150 -200 China. which crimps exports. 5 . Four risks The risk we are most concerned with is that some Asian economies may overheat. while in the rest of Asia the average real policy rate. Net foreign capital inflows to Asia have significant scope to intensify in 2013. loose monetary policies are being offset by fiscal austerity. “pulled” by Asia‟s relatively higher growth prospects and “pushed” by central bank quantitative easing in advanced economies (which. this grew to 57% and 43%. While volatile in recent quarters. Source: CEIC. despite Asia‟s superior economic fundamentals relative to the advanced world (Figure 8). Indonesia. which captures FDI. In the advanced world. Malaysia. through portfolio rebalancing. while from 2006 to 2012. RHS -20 -30 -60 QE2 announced -90 Jun-03 Dec-04 Jun-06 Dec-07 Jun-09 Dec-10 Jun-12 -30 -250 -40 Sep-03 Mar-05 Sep-06 Mar-08 Sep-09 Mar-11 Sep-12 Note: Rest of Asia is the aggregate fiscal balances of Hong Kong. in emerging Asia. Singapore and Thailand.

2) Feb 10. 2) competing use of available land due to biofuels. and 3) increasing uncertainty 6 . Centa Property. seller stamp duty hike to as high as 15% and cut LTV ratio. Guangzhou and Tianjin. could fuel another surge in global commodity prices. US CoreLogic and Nomura Global Economics. Source: MSCI and IMF. 10: Residential property prices in Asia and the US Index 210 190 Fig. Source: CEIC. particularly food prices. 8: Asia emerging market share in world GDP and MSCI Fig. Philippines. India. Commodity price surge. the US index covers 898 counties. Central banks ultimately find themselves behind the curve in tackling credit booms. Hong Kong is a case in point. 9: Real policy interest rates (deflated by headline CPI) % p. but the property market has yet to cool (Figure 11). Despite lacklustre growth in the advanced economies. Beijing. The global supply-demand equation for food remains tight. cut LTV ratio. cut loan-to-value (LTV) ratio. but we cannot rule out overheating in other countries.Nomura | Asia Special Report 28 November 2012 Fig. Dec-08 Kuala Lumpur. while t=number of years from the starting date (Jan 2000 for the US and Dec 2008 for Asia). Malaysia. 3) Aug 10. Dec-08 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 150 1 34 2 100 50 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Note: Wherever possible official property price measures have been used. Korea. Hong Kong seems most at risk. 1999=100 250 170 150 130 200 6 5 110 90 70 China. 6) Oct 12. Shenzhen. We see a danger in the likely increased use of macroprudential measures in an attempt to cool property markets and credit growth. Negative side effects are already emerging: credit has been growing faster than nominal GDP across the region. Dec-08 Singapore. Korea. Source: CEIC. Philippines. Note: 1) Oct 09. asset price bubbles and inflation. 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. they turn out to be a poor substitute for higher interest rates. the real policy rate is GDP weighted of Hong Kong. 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 Oct-00 % share 25 21 Asia EM share in world MSCI equity index Asia EM share in world GDP (at market exchange rates) IMF forecasts China's real bank deposit rate Rest of Asia's real policy rate 17 13 9 5 1 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12 Note: Asia EM is China. India‟s is the average of all major cities. China and Taipei are tracking above the US price bubble (Figure 10). Singapore and Taiwan. India. 4) Nov 10. 5) Jun 11. Jan-00 Taipei. India. cut LTV ratio. Dec-08 US. Indonesia. Indonesia. and property markets are frothy in many capital cities. Malaysia. urbanisation and industrialisation. including China. Singapore.a. China‟s index is the average of Shanghai. these measures may work for a while but over time. stamp duty hike to as high as 20% plus new buyer stamp duty of 15% for non-permanent residents. Indonesia. HKMA and Nomura Global Economics. India. Fig. it is striking that prices in Hong Kong. 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). Dec-08 India. Taiwan and Thailand. the global search for yield and strengthening demand in emerging economies (especially Asia). Data are either monthly or quarterly. Dec-08 HK. Source: Bloomberg and CEIC. Note: For the rest of Asia. Taiwan and Thailand. 11: Hong Kong polices to cool residential property price Index. The supply side of the food equation is being constrained by: 1) insufficient new investments for large agricultural productivity gains. as loopholes are found. stamp duty hike.

Malaysia). Recoupling. Fig. a full 5 percentage points (pp) higher than in advanced economies. real GDP is above its pre-global financial crisis peak by 41% in China. China risks.Nomura | Asia Special Report 28 November 2012 due potential for QE-driven commodity price speculation and more volatile weather due to global warming. 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. On the demand side. in terms of short-run dynamics. Those economies that are very open to trade (Hong Kong. Malaysia.3pp). China hard landing. Or put more starkly. have sizable current account deficits (India and Indonesia) or are structurally weak domestic economies (Korea) are most vulnerable. we published an Anchor Report. During 2008-09. the sensitivity of the demand for food to an increase in personal income is much greater for lower-income countries. Trend GDP growth in Asia ex-Japan is around 7%. as is the changing of diets toward a higher calorie intake. to become the world‟s largest.5pp in Korea. the global financial crisis has debunked any notion that Asia can decouple from advanced economies at times of extreme dislocation. 12: Long-run trends in real GDP growth of Asia ex-Japan vs advanced economies % 10 Long-run trends IMF forecasts 8 6 4 2 0 -2 -4 1980 1985 1990 1995 2000 2005 2010 2015 Major advanced economies (G7) Asia ex-Japan Source: IMF. While our base case is for China‟s GDP growth to average 7. From this vantage point. While relatively strong economic and policy fundamentals have helped buffer Asian economies against sub-par growth in the US and euro area. CEIC and Nomura Global Economics. A China hard landing would have a significant impact on the global economy.3% in the US and still 2. Taiwan and Thailand – all larger than the declines in the US (-6. 31% in India. in long-run trend terms there is a widening divergence between emerging Asia and the advanced world (Figure 12). Singapore. the relevance of the world‟s most populous countries being in the sweet spot of rapid economic development should not be underestimated. In November 2011. A surge in the global price of food items. 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 recent IMF study estimated that each percentage point decline of investment growth in China would lower GDP growth by more than 0. another deep recession in the advanced world would be a completely different story. For unlike other commodities. one in which Asia hits a tipping point where non-linear effects kick in from a collapse in exports and foreign capital flight. The size of the annual increase in China‟s personal consumption is about to overtake that of the US. Korea. but especially Asia. 7 . 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 2014.7% in 2012-14. However. 25% in Indonesia and 11% in Korea compared with 2.2pp) or euro area (-7. which we defined as real GDP growth averaging 5% y-o-y or less over four consecutive quarters.4% below in the euro area. which is a composite of 18 vulnerability indicators. This is important. Singapore. a trend that steepened after the global financial crisis. Taiwan and Malaysia. The CSI indicates that hard-landing risks have been on the rise since 2003. and the Philippines. notably in India. could lift Asia‟s CPI inflation sharply and hurt growth. the peak-to-trough decline in year-on-year real GDP growth was between 10pp and 17pp in Hong Kong. To help quantify the macro risks on an ongoing basis we developed the Nomura China Stress Index (CSI). which on average accounts for 31% of Asia‟s CPI basket versus 14% in the US. Indonesia.

Fig. We think month-on-month non-food inflation is a better indicator for determining the cyclical position of the economy. which would drive up inflation. in recent months. Indonesia.2 10 8 6 Sep-12 0.0 Labour demand/supply ratio % y-o-y 16 14 % m-o-m Real GDP growth. while China looks set to experience the sharpest slowdown in GDP growth in H2 2013. and recovered quickly after the government released its 2009 stimulus package.3trn in 8 .4% in Q3.chen@nomura.4% in Q3. we do not believe it fully reflects the underlying inflationary pressures as it is dominated by volatile food prices and base effects. Malaysia. While there is more focus on headline year-on-year CPI inflation.6trn in September and RMB 1. Several countries are likely to raise interest rates next year (China. 21 September 2011. 14: Non-food CPI inflation Wendy Chen +86 21 6193 7237 wendy.2%. policy easing will likely push growth to above its potential in Q4 and H1 2013. We presented seven structural reasons in our thematic report. These structural reasons remain valid for China‟s inflation outlook in 2013.0 July Aug Sept Oct Source: CEIC and Nomura Global Economics. rhs 0.1 0.6 Sep-03 12 0.4 2012 0. The case for structurally higher inflation in Ratio 1.7 0. Total social financing rose to RMB 1. China: Expect surprises on inflation. Some are more vulnerable to a sudden stop in capital inflows (India and Indonesia).5%. it quickly becomes apparent that Asia should not be treated as one homogeneous region. been running higher than its historical average (Figure 14).zhang@nomura.9 0. non-food inflation month-on-month has. two rate hikes in 2013 and a growth slowdown in H2 2013. interest rates and growth We highlight three out-of-consensus calls: inflation rises to higher than consensus. First. this ratio has consistently remained above 1.2% in 2013. 13: Labour demand/supply ratio and real GDP growth Fig. We are also concerned about inflation from a cyclical perspective.1% in Q1 2010 to 7. The fact that it is still running at a 3. Second. Despite GDP growth decelerating from 12. the labour market remains tight as the ratio of job openings to job seekers has stayed above 1 (Figure 13). 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.3 Historical average 0. With low quality unemployment data. Zhiwei Zhang +852 2536 7433 zhiwei. which suggests that the excess labour supply in China has been depleted and potential growth may have slowed to around 7.8 0. higher than the consensus forecast of 3. There are both structural and cyclical reasons behind higher inflation. The central government approved an estimated RMB1trn with of infrastructure projects last summer. Sep-06 Sep-09 Source: CEIC and Nomura Global Economics.0-7. If growth is currently running near its potential. we believe the economy is running close to its (slowing) potential growth rate for two reasons.1 1. While GDP growth has slowed to 7.Nomura | Asia Special Report 28 November 2012 Zooming in on the key themes and risks When one looks more specifically at the individual economies in the region. the Philippines and Taiwan) but not all face overheating risks (Korea).6% annualised rate in October suggests that the economy is running close to its potential. with implementation beginning in Inflation will rise to higher than the consensus forecast We believe inflation will rise to 4.

Two interest rate hikes in H2 2013 Unlike consensus.0 7.4bn in September and RMB144. which should drive GDP growth above 8%.0 6.5 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Source: CEIC and Nomura Global Economics. The inflation target for 2013 has not yet been set. Our cautious view is premised upon our aboveconsensus inflation forecast and consequent policy tightening. Moreover we believe the government has recently become more tolerant of slower growth and less tolerant of inflation. according to the 21st Century Business Herald. GDP growth slows down in H2 2013 We believe GDP growth in 2013 will be a story of two halves: averaging 8. 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. We expect overall investment growth in China to accelerate. which expects inflation to be mild and interest rates to remain unchanged throughout 2013. such as sharp rebound of housing prices and over-leverage in the financial system. but we believe it will remain unchanged at 4% at the Central Economic Working Conference in December. 9 . GDP growth will likely slow toward its potential of about 7. 15: Consensus versus Nomura forecasts for 2013 real GDP growth in China Fig.5bn in October (Figure 16). -30 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Source: CEIC and Nomura Global Economics. The government is well aware of these risks.5 Consensus forecast Nomura 240 210 180 150 8.2% in H2 2013. and more sensitive to constraint imposed by inflation”. about 40% of these loans went to infrastructural projects with an average guaranteed interest rate of 7-8%. as it tightened regulations on trust loans in the summer of 2011 to control the financial risks. as inflation should rise to above 4% by mid-year.2% in H1 2013. According to China Real Estate Journal. This was reflected in the Q3 monetary policy report. This differs from the consensus which expects growth to rise through most of 2013 (Figure 15). and expect the government to tighten regulations on trust loans again in H1 after the leadership transition is completed and growth recovers. and the government will probably have to rein in the rapid credit increases from trust loans at some point in H1 2013. We also believe that the current round of policy easing will lead to rising risks in the financial system. The planned railway infrastructure investments will also likely pick up to RMB530bn in 2013 from RMB516 in 2012.5 120 90 60 30 0 7. but then slowing noticeably to 7.0-7. Housing prices in October already rose month-on-month in 35 out of the 70 major cities surveyed by the government.0 8. The most recent rate hike cycle began in October 2010 when CPI inflation rose above 4%. Moreover the government may tighten policy if there are other signs of risk in the economy. New trust loans rose to RMB202. at least in H1 2013. Fig.Nomura | Asia Special Report 28 November 2012 October. we believe there will be two rate hikes in H2 2013. which added this new statement: “The economy has become less sensitive to the constraint imposed by employment. There have been positive leading indicators in the housing sector as well. 16: New trust loans since January 2011 RMB bn % y-o-y 9. up from 31 in September. Once the pace of credit supply growth normalises. but then had to loosen regulations in 2012 to prevent the economy from slowing further. 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.5%. We believe the current boom in trust loans is not sustainable.

Our quarter-on-quarter GDP growth forecast on a seasonally adjusted annualised rate (saar) averages 3. 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).2%) and CPI inflation (2. Source: Nomura Global Economics estimates. supported by inventory restocking in Q4 and a modest recovery of foreign demand in 2013. but only from a very low base. yet the Bank of Korea‟s (BOK) official GDP growth (3. CPI and BOK policy forecast % GDP growth (seasonally adjusted annualized rate) CPI inflation (y-o-y) BOK policy rates 5 4 Forecast 6 Fitted based on Nomura forecasts 5 F 6 4 3 3 2 2 1 0 Mar-11 1 Mar-00 Mar-04 Mar-08 Mar-12 Mar-12 Mar-13 Note: Policy rate = neutral rate + a [output gap] + b [inflation gap] + policy rate (-1).mohunta@nomura.75% through 2013. The KRW swap curve is pricing in -15bp of cuts in 12 months as of 27 November (see Asia Local Market Rate Expectations. q-o-q). but none of these are held in Nomura Global Economics‟ base case. but this is not our base case. over that period only five quarters have seen growth that low – and these were associated with the dotcom bubble bursting in 2001. it is not as weak as it may first appear once allowance is made for a very powerful base effect.75% through 2013 as GDP growth and CPI inflation should rise modestly from a very low base. we firmly believe that the BOK will keep rates on hold at 2. We expect the BOK to focus on quarter-on-quarter growth and therefore to see little need to cut rates 10 . We do not expect growth to slump that badly. Aman Mohunta +91 22 6617 5595 aman.3% in 2013.156% is 11%. In other words.5%.kwon@nomura. house prices have surged Young Sun Kwon +852 2536 7430 youngsun. 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. Despite the Taylor Rule indicating a 25bp cut based on our GDP and CPI forecasts.7%) forecasts suggest no cut in 2013 (Figure 17). 18: Nomura’s Korea GDP.156% (sa.5%) and CPI inflation (2. Although our 2013 GDP growth forecast is a below-consensus 2. a China hard landing) actually materialises.kwon@nomura. Aside from the main external risks (the US fiscal cliff. 28 November 2012).or downside risks to our growth outlook. unless one of the major downside risks to global growth (the US fiscal Fig. Taiwan and Hong Kong may all turn out to be sources of up. We would only expect the BOK to cut rates should quarterly GDP growth fall far below Q3 2012‟s 0. a China hard landing). Since 2009. the credit card crisis in 2003 and the global financial crisis in 2008. GDP growth and CPI inflation should rise modestly. property markets in Korea.7%) forecasts suggest a 25bp cut in 2013. 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.Nomura | Asia Special Report 28 November 2012 South Korea: Rates on hold through 2013 We expect the Bank of Korea to keep rates unchanged at 2. a renewed eurozone sovereign crisis. a renewed eurozone sovereign crisis. Source: CEIC and Nomura Global Economics estimates. 17: Nomura’s Taylor Rule-type estimates for policy rate % Actual BOK policy rates Fitted based on BOK forecasts Young Sun Kwon +852 2536 7430 youngsun. Between Q1 2000 and Q3 2012 (47 quarters) the historical probability of quarterly growth coming in below 0.

19: House price index in Seoul. 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%. 21 November 2012). but Seoul house prices should continue to fall modestly.   Between June 2010 and July 2011. Although Taiwan‟s GDP growth should slow from 4. compared with Korea‟s 25%. South Korea: In September 2012 the Financial Services Commission raised the debtto-income (DTI) ratio from 40% to 50% in the three Gangnam districts (known as „speculative‟ zones). Taiwan: In 2011. Also. both governments would likely impose more administrative tightening measures and curb credit growth. Source: CEIC and Nomura Global Economics. including corporate owners. Due to the USD/HKD peg. 20: Policy rates in Korea. respectively. the risk we see is that property prices rise further in Hong Kong and Taiwan due to very low interest rates and ample liquidity.3% – the CBC has kept rates unchanged while the BOK has cut rates by 50bp. Meanwhile.Nomura | Asia Special Report 28 November 2012 in Hong Kong and Taipei. Taipei and Hong Kong 2008=100 180 160 Hong Kong Seoul Taipei Fig. If this happens. Hong Kong has had to keep short-term rates extremely low. As a result. In 2013. 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). the BOK and the CBC hiked policy rates by 125bp and 62. Fig. 11 . 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). from 3. Taipei property prices should be stable too. 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.5bp. the Central Bank of China (CBC) tightened prudential measures to stabilise the property market.0% in 2011 to 1. The government also cut the acquisition tax by 50% on all home purchases and the transfer tax on unsold apartments purchased before end-2012. The financial secretary also announced a 15% buyer stamp duty charged on all residential properties acquired by non-permanent residents. An eventual policy-induced property market correction would have a large negative impact on Hong Kong and Taiwan.0% in 2012 – much sharper than that of Korea. in line with the US Fed. However. For borrowers with multiple properties under mortgage. despite surging property prices (Figure 20). 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. We believe that this is partly due to different housing market conditions. while Seoul has seen house prices fall (Figure 19). 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. Note: Discount rate is for HK and Taiwan. 7day repo rate is for South Korea. as the ratio of mortgage loans-to-GDP is high in Hong Kong (41% in 2011) and Taiwan (40%).6% to 2. Taiwan and Hong Kong % Hong Kong South Korea Taiwan 9 8 7 140 6 120 100 80 60 40 Sep-94 5 4 3 2 1 0 Sep-00 Sep-06 Sep-12 Oct-00 Oct-03 Oct-06 Oct-09 Oct-12 Source: CEIC and Nomura Global Economics.

but have yet to be implemented (see: India reforms (Part I): A long way to go.6 in 2007 to above 5 in 2012.5 4. sticky inflation and weak exports combine to depreciate the rupee. below consensus. aided by expansionary fiscal policy and rising wages.5 6. real private consumption remained resilient during 2006-11. 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. but falling productivity is also responsible (see India: Make or break. a sustained rise in profitability. Sonal Varma +91 22 403 74087 sonal. Some of the drivers are still in place (such as the 15-20% rise in rural wages this year).0-8.0 4 4. 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. We expect consumption demand to remain in low-gear.0 6. We set out five themes to watch in 2013. and so we expect a shallow recovery in 2013 (6. 2 May 2012). Slow land/environment clearances are responsible for project delays and rising costs. In A year of productivity growth Lack of investment is one of the fundamental reasons behind India‟s slowing potential growth. Due to the close proximity to elections. which in turn feeds into inflation and limits the extent of rate Aman Mohunta +91 22 6617 5595 aman.0 5. fiscal consolidation and higher global growth. as supply-side constraints. not doing so. suggesting falling capital productivity (Figure 21). 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).varma@nomura. Recent reform announcements are positive for market sentiment. 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.0 3. has risen from 3. However. Source: CEIC and Nomura Global Economics estimates.Nomura | Asia Special Report 28 November 2012 India: No more short-cuts Correcting fiscal finances will lead to medium-term gains.1%).0 1993 1999 2005 2011 0 1971 1976 1981 1986 1991 1996 2001 2006 2011 Note: ICOR (t+1) = Investment-to-GDP (t)/Real GDP growth (t+1). 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. India‟s incremental capital output ratio (ICOR). we fear only the latter.5 Incremental Capital Output Ratio (ICOR) ICOR (5-year moving average) Falling capital productivity Fig. will lead to more pain. 22: Corporate savings: private versus government % of GDP 10 Private Corporate (non-financial) Government companies & statutory corporations 7. Fig. 12 .5 2 3.5 8 6 5. India‟s GDP growth plummeted to a 10-year low of 5. growing at an annual average of 8. due to weak global demand. a measure of capital productivity. The consumption binge is behind us Despite a sharp investment slump since 2007. 21: Incremental capital output ratio Unit 7. low cost of capital.5%. the economy will experience high inflation and slow growth. Source: CEIC and Nomura Global Economics. Either way. 25 October 2012) and a lot hinges on whether the government corrects its fiscal finances for real and not just on paper. growing at a more muted 4-5% y-o-y in 2013 (Figure 23).mohunta@nomura.3% y-o-y in 2012. domestic policy paralysis and high interest rates.

even if it does not – which is our base case – the outlay on flagship programmes should plateau due to tight fiscal constraints.8% of GDP in 2013. With urban demand already subdued due to high interest rates. then we would expect consumption growth to dive sharply. the non-farm sector. A year of currency weakness For a fourth consecutive year.Nomura | Asia Special Report 28 November 2012 The extent of future weakness in consumer demand depends on fiscal policy. With global demand still weak. with INR/USD depreciating to 60 in H2 2013. slowed sharply in 2011-12 and will have a lagged dampening effect on rural demand. but with domestic inflation still high. we expect this consolidation to appear only on paper and not in practice – we forecast fiscal deficits of 5. we expect India‟s current account deficit to remain above sustainable levels at 3. and government spending would cease to be an incremental driver of consumer demand. Already. textiles and consumer goods. two more in H1 2014 and then the general election must be held by May 2014 (Figure 25). populist acts such as delaying tough decisions (like 13 . High inflation and domestic supply-side bottlenecks are leading to import substitution in sectors such as rubber products.8% of GDP in FY14. we expect overall consumption growth to remain weak. high inflation and weak job market prospects. However.2% of GDP for FY13 and FY14 – as the political calendar gets busier. despite recent fuel price hikes. highlighting the growing external vulnerability (Figure 24). Source: CEIC and Nomura Global Economics estimates. electrical equipment. due to a large arbitrage between petrol and diesel prices and unavailability of gas. After the Gujarat state elections in December. 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. 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. In the 2009 election. Moreover. which now constitutes close to 70% of rural GDP. electronics. India needs consistent capital inflows just to finance the deficit and to avoid digging into its FX reserves. 10 other autonomous states are due to hold assembly elections in 2013. in line with the Kelkar Committee recommendations (see India: New fiscal consolidation roadmap lacks details . toys. 24: Import cover of FX reserves Months 18 16 Private Import cover of FX reserves 8 7 14 12 10 8 6 6 5 4 3 2 1 4 0 1988 1993 1998 2003 2008 2013 2 Oct-92 Oct-96 Oct-00 Oct-04 Oct-08 Oct-12 Source: CEIC and Nomura Global Economics estimates. Moreover. a new record high. we expect the burden of adjustment to fall on the currency.8% and 5. 29 October 2012). we expect India‟s trade deficit to remain elevated. the resultant real effective exchange rate appreciation will only eat into export competitiveness (see India's chronic balance of payments. However. 3 September 2012). In their absence. Energy demand remains largely inelastic. If the government substantially consolidates its fiscal finances through a cut in outlay on inclusive growth schemes and a steep hike in fuel prices. Fig. raising the risk of politics dominating economics. import cover of foreign currency reserves has fallen below six months for the first time since 1997. 23: Real private consumption growth % y-o-y 10 9 Fig. India needs aggressive reforms to debottleneck investments plus tighter fiscal policy and/or higher interest rates. the government leveraged the rural employment guarantee (MG-NREGA) and farm-debt waiver schemes to woo voters. We expect the government to target a fiscal deficit of 4. Global push factors can lead to a sudden surge in capital inflows. While the fiscal position is worse now. capital goods.

along with a slight moderation in commodity prices. 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]. good winter crop prospects). indeed. raising input costs and translating into higher output prices due to a narrower output gap. India cannot afford populist measures. especially if state elections show the ruling UPA government losing its grip on power. rhs % y-o-y F 4 3 2 8 6 4 2 0 -2 Q413 1 0 -1 -2 -3 -4 -5 -6 Q405 Q407 Q409 Q411 Notes: UPA. core inflation to inch back towards 5.” We concur. However. the government will rely on asset sales (disinvestment. BJP. salaries. keeping the subsidy bill elevated. adding to food price inflation pressures. services) and transfer payments (interest payments. lower commodity prices. we expect INR depreciation to raise the cost of imported oil. 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. INR appreciation in September due to the government‟s reform announcements and global liquidity easing. we expect this window of easing to close in H2. CPI (M) – Communist Party of India (Marxist).0% by Q4 2013 and the RBI to stay on hold in 2H 2013. Source: Election Commission and Nomura Global Economics.United Progressive Alliance. Source: CEIC and Nomura Global Economics. upside pressures on inflation are likely to build again. we expect the government to raise minimum support prices for food grains and enact the Food Security Act. we expect inflation momentum to start to inch higher. 14 . grants. 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). INC. NDA. By Q3 2013. in our view. We expect a favourable mix of supply (lagged effect of INR appreciation.National Democratic Alliance. telecom spectrum auctions) to plug the revenue hole. As a result. paving the way for a 50bp repo rate cut in H1 2013. Third. Fiscal consolidation has historically been achieved via higher revenues rather than less expenditure. pensions) together account for 75% of total expenditure. imported inflation is likely to build due to INR depreciation in H2 2013. With the economic recovery set to be shallow. more likely. This time is.Indian National Congress. led to a surprise moderation in WPI inflation to under 7. pushing core WPI inflation to a five-month low of 5. and tends to rise in line with inflation. Expenditure compression is difficult since consumption (wages.Bhartiya Janata Party. SDF.Sikkim Democratic Front. lhs Core-WPI. In addition.5% y-o-y in October. we expect only a slight uptick in tax buoyancy. Window for rate cuts closes in H2 2013 The Reserve Bank of India (RBI) has guided for a rate cut in Q1 2013.Nomura | Asia Special Report 28 November 2012 raising fuel and fertilizer prices) or announcing new schemes (the Food Security Act) cannot be ruled out. with an eye on the upcoming elections. 26: Output Gap and WPI inflation pp Output Gap. Fig. different. As such.5-6. First. demand (negative output gap) and technical (base effects) factors to moderate core inflation further in Q1 2013. land monetisation. Rate cuts in H1 should not be interpreted as the start of an aggressive rate easing cycle. the structural fiscal deficit will remain large and. Revenue gains due to the implementation of the goods & services tax and cost savings by the direct cash transfer scheme are unlikely in 2013. subsidies. 25: Election schedule State/House Gujarat Meghalaya Tripura Nagaland Karnataka Madhya Pradesh Mizoram Delhi Rajasthan Chhatisgarh Sikkim Lok Sabha End of term Jan-13 Mar-13 Mar-13 Mar-13 Jun-13 Dec-13 Dec-13 Dec-13 Dec-13 Jan-14 May-14 May-14 Rulling party NDA/BJP UPA/INC CPI (M) NPF NDA/BJP NDA/BJP UPA/INC UPA/INC UPA/INC NDA/BJP SDF UPA/INC Seats in Lok Sabha 25 2 2 1 28 29 1 7 25 11 1 545 Fig. Second.2%.

causing a noticeable decline in its basic 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. the contrasts will be increasingly stark. by contrast.4% in 2012. we see greater differentiation in 2013. 1 ASEAN refers to the five countries in our coverage: Indonesia. 2 August 2012). Our credit research team believes an upgrade could come through as early as H2 2013. where reforms. Malaysia. ahead of the 2014 elections. with growth prospects and policy considerations that may diverge even more in 2013. Philippines. Source: CEIC. Euben Paracuelles +65 6433 6956 euben. we believe market expectations of a sovereign credit rating upgrade to investment grade are likely to rise sharply in 2013. 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 Nuchjarin Panarode. We expect the Philippines to progress into the next phase of fiscal reforms. given the durable current account surplus and the prospect of solid FDI inflows. continues to have the political capital to succeed (see Still strong approval ratings…. CNS Thailand +662 638 5791 Lavanya Venkateswaran +91 22 3053 3053 lavanya. In the Philippines. and in some cases. the external environment will obviously remain a key drag. We expect ASEAN‟s growth to slow only moderately in 2013 after displaying notable resilience this year to the volatile external environment.1% in 2013. Indonesia‟s current account has turned to a deficit. However. investment. Business sentiment has been buoyant. which we have already started to see in H2 2012. Nomura Global Economics.panarode@nomura. starting with the passage of the all important „sin‟ tax bill. Fig. or worse.venkateswaran@nomura. 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). 27: Investment spending in ASEAN economies % y-o-y 20 15 10 5 0 Less export oriented Export oriented Fig. Singapore and Thailand. The reason: the momentum of structural reforms will likely remain strong in the Philippines but we judge it to be waning in Indonesia. but it is a diverse grouping of Southeast Asian countries.Nomura | Asia Special Report 28 November 2012 ASEAN: Spot the difference ASEAN has been resilient. Singapore. more nationalist/populist regulations that could further restrict investment (see Asia Special Report: Indonesia: Policy swings. and as a result. 28: Basic balance (current account balance + net FDI) USDbn 8 Indonesia Philippines 6 4 2 0 -5 -10 -15 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 -2 -4 -6 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Source: CEIC. growth and confidence interact positively with each other. we expect a virtuous investment cycle. Nomura Global Economics. but the economies that have the ability to maintain policy support to shore up domestic demand will likely outperform. before slowing only modestly to 5. 12 November 2012). Malaysia: varying degrees of cyclical policy support Among the more open ASEAN economies. The resilience in 2012 was across the board.paracuelles@nomura. which could deteriorate further if FDI inflows start to slow (Figure 28). In Indonesia. However. importantly. the political environment will likely heat up next year. and we see the rising risk of a policy impasse. 15 . Thailand.1 We forecast GDP growth for the region at 5. The Aquino administration has shown a strong commitment to pursue these reforms and. and manifest itself even in the relatively open economies (Figure 27).

Malaysia) and tight labor markets (Singapore). at 44. ppt GDP (% y-o-y) PCE. our GDP growth forecasts are below consensus in Malaysia and Singapore but above consensus in Thailand. 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. Across the region. which is only a modest improvement from growth of 1. 29: Consensus and Nomura GDP estimates of open economies in ASEAN 6 5 Consensus Nomura 4 3 2 1 0 GDP (% y-o-y) PCE.3% from 4. the fiscal belttightening will not be accompanied by an unwinding of other government-led initiatives. ppt GFCF.75%. productivity growth continues to decline but policies that tighten the supply of workers are well underway. Upside inflation risks call for interest rate hikes in H2 Inflation is still relatively benign but we expect it to rise in 2013. The Bank of Thailand has already cut its policy rate by a total 75bp to 2. ppt GFCF. ppt GFCF. and as long as our baseline „no heart attack‟ scenario for the global economy holds. however. The government remains steadfast in its resolve to restructure the economy toward one that is more productivity-driven and less reliant on foreign labor.8% in 2011-12.4%. despite fiscal and external headwinds. is well below the government‟s 60% ceiling. while monetary policy has remained on hold. 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. So the transition will clearly take time and the economy will have to endure a low growth. In contrast. Malaysia should fall somewhere in between Thailand and Singapore. where we think the powerful forces underpinning private consumption and investment spending are still underappreciated (Figure 29). as lowering rates risks increasing domestic financial imbalances and stoking already high debt levels. we see few reasons to expect countercyclical policies. More importantly. we see the balance of risks as tilted to the upside for varying reasons. We therefore revised down our 2013 growth forecast to 2. Minimum 16 . to reflect a slowdown in investment spending that is increasingly dampened by external uncertainty and tight domestic policies. ppt Malaysia Singapore Thailand Source: Consensus Economics November 2012. It is for this reason that we have modestly raised our 2013 forecast to 4. In our view.Nomura | Asia Special Report 28 November 2012 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. That said. Singapore is more constrained. Bank Negara (BNM) remains cautious. the fiscal expansion is about to run its course – after the elections. particularly infrastructure. some food and energy subsidy adjustments (Indonesia. which we expect in March. the government will have to return quickly to its medium-term fiscal consolidation target.0%. There is scope for the government to ramp up spending. adding to the external drag in H2 that we see intensifying as China slows. public debt. including positive output gaps (Philippines. ppt GDP (% y-o-y) PCE.8% in 2012.5% in 2013 from an average of 2. Projects under the Economic Transformation Program (ETP) are already underway and will likely continue to be implemented in 2013. Nomura Global Economics. Thailand). Fig. Two years into this restructuring agenda.2% of GDP. The Monetary Authority of Singapore (MAS) is likely to remain focused on inflation. high-inflation environment in the short term until productivity increases are achieved to offset the decline in labor supply. In sum. but there is still room to reduce it further particularly if exports remain depressed. 24 September 2012). We forecast Thailand‟s GDP growth at a solid 4. Fiscal stimulus has been the main lever through which domestic demand has been supported. in some cases to the top end of official target ranges.

however. as central banks continue to keep an eye on external risks. The pace and extent of the tightening should. the circumstances are very different. we also expect the implementation of further macroprudential measures. it is not only growth differentials – which are clearly still wide in Asia relative to developed markets – that drive capital inflows. broad-based capital controls). In Thailand. We do not see potential for any drastic measures (i.Nomura | Asia Special Report 28 November 2012 wages have been raised substantially in Indonesia (by 44% in Jakarta). monetary tightening will likely begin next year. Malaysia and the Philippines. As we argued previously (see The case for capital controls in Asia. In this context. 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. especially among the vulnerable countries. In response.e. although similar pressures occurred in 2010.. 17 . 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. 1 November 2010). be gradual. as central banks have already learned that these tend to be counterproductive. Thailand and Malaysia. In addition. the risk of excessive capital inflows could complicate monetary policy and limit the scope for interest rate hikes. Fig. We see policy rate hikes starting in Q3 in Indonesia. In addition. but also interest rate differentials. 30: CPI inflation in ASEAN %y-o-y Indonesia Malaysia Nomura forecasts Philippines Singapore 14 Thailand 12 10 8 6 4 2 0 -2 -4 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Source: CEIC: Nomura Global Economics estimates. 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. which could stoke inflation expectations going into 2013.

75 3.7 2.00 3.2 2.75 59.50 0.8 -1.2 5.6 3.3 6.5 3.8 -2.5 6.3 7.3 3.2 4.0 -3.00 0.6 4.0 4.7 2.4 1.7 Asia ex-Japan 0.6 3.2 5.0 9800 2.6 1.2 2012 China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan 6.5 29.50 4.7 3.1 4.3 6.50 0.0 3.4 -0.2 1.48 2.2 -2.9 -2. ie.2 1.88 2014 6.5 3.00 6.5 -5.0 -0.4 -4.75 4.2 3.8 4.6 1.6 -0.9 29. Current Account (% of GDP) 2013 2014 1.9 2.26 7.0 4.2 5. Source: CEIC.3 3.5 4.8 -2.38 2.2 Note: All figures relate to the modal forecast.2 1.13 2012 6.92 39.5 2014 7.9 2.7 1.0 5.25 2.Nomura | Asia Special Report 28 November 2012 Forecast summary Real GDP 2013 7.9 1.0 9620 3.3 6.4 2.3 -2.2 4.75 56.3 -2.0 4.5 -3.15 7.5 -0.14 7.75 54.7 Note: * CPI refers to wholesale prices.5 -2.00 4.9 -3.40 8.25 3.40 7.0 2.3 Note: Fiscal balances are for fiscal years which differ from calendar years for Hong Kong (Apr-Mar). Nomura Global Economics.5 -5.6 4.75 2.0 -2.5 6.75 1.3 6.40 7. Bloomberg.3 9.50 6.7 1. Source: CEIC.0 2.50 0.4 4.0 2014 4.5 Asia ex-Japan 6.2 -4.1 5.13 Currency per US Dollar 2013 2014 6.4 1.3 -1.0 -1.5 5. Nomura Global Economics. Source: CEIC.75 2.0 Thailand 2.5 3.3 1. Fiscal data are for the central government and do not include off-budget.4 6.0 -4.2 0.2 -2.5 Fiscal Balance (% of GDP) 2013 2014 -1.0 9600 2. The ↑↓ arrows signify changes from last week.1 2.19 1050 28.7 -0.3 7.5 -1.4 -1.1 2.4 -2.7 6. Bloomberg. Bloomberg.9 16.75 3.2 -5.17 1040 28.0 7.9 4.2 1.02 40.2 0.1 4. India (Apr-Mar).5 Consumer Prices 2013 4.8 2.50 0.5 3.5 15.50 3.2 4.4 2. Nomura Global Economics. Official Policy Rate 2013 6.1 6.00 0.5 -0.9 -4.0 -2. Source: CEIC.2 1.22 1080 29.9 0.1 0.4 -0.5 6.84 38.25 30.6 4.6 2012 China Hong Kong India* Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand 7.0 2012 2. Nomura Global Economics.3 6. 18 . Singapore (Apr-Mar) and Thailand (Oct-Sep).6 -0.9 -0.9 -3.8 2.7 3.7 2012 -1.6 5.00 5.2 -2.9 5.7 2012 China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand 1.2 -2.2 2.0 7.6 3.7 17. the "most likely" outcome.

8 2.00 19.00 3.14 Notes: Numbers in bold are actual values.2 20.1 15. not the spot rate.1 2012 7.9 1.5 6. 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 H1.56 3.0 -16.5 6. Infrastructure investment has already picked up strongly from policy easing.4 2.Nomura | Asia Special Report 28 November 2012 Economic outlook China: Up in H1.0 21. We expect two rate hikes in H2 when inflation rises above 4%.9 1. Housing investment growth should pick up moderately in H1 2013 after falling over the first three quarters of 2012.7 2.5 6.2 2. 2) Global commodity prices have rebounded recently and will likely push up production costs in 2013.5 4.9 3.4 9.0 10.0 10.15 1Q12 8.00 19.1 3.8 3Q12 7.6 2.0 54.00 20. Risks: We see three key risks to our forecast.50 18.5 -0.5 14.1 4.2 15.5 Wendy Chen +86 21 6193 7237 wendy.0 Details of the forecast % y-o-y growth unless otherwise stated Real GDP Consumer prices Core CPI Retail sales (nominal) Fixed-asset investment (nominal.4 1.0 1.5 6.0 70. Zhiwei Zhang +852 2536 7433 zhiwei.8 8. All forecasts are modal forecasts (i.0 10. as the new leaders will need time to build the political capital required to push through tough reforms. We think that progress on reforms will likely be slow in 2013. the People‟s Bank of China stated that. The second risk is inflation.e.8 6.5 1.2 10. but more sensitive to constraint imposed by inflation” in its Q3 monetary policy statement.00 3.0 181.50 19.3 6.4 2.0 6.6 6.00 3. Interest rate and currency forecasts are end of period.6 7.4 15. other measures are period average.7 4.26 6.0 8.4 -1.3 21.0 20.5 13.5 6.00 19.0 6.50 3. others forecast.50 3.31 3. ytd) Industrial production (real) Exports (value) Imports (value) Trade surplus (US$bn) Current account (% of GDP) Fiscal balance (% of GDP) New increased RMB loans (CNYtrn) 1-yr bank lending rate (%) 1-yr bank deposit rate (%) Reserve requirement ratio (%) Exchange rate (CNY/USD) 6.0 5. The first and most important is policy uncertainty. as there could be political pressures to maintain the loose policy stance longer than we expect.4 3Q13 7.16 6.7 4.9 2. then slow in H2 toward 7% by Q4 2013.8 15.0 10. Given that a recovery in H1 would be driven by countercyclical policy easing and not an improvement in economic fundamentals. On monetary policy.5 9.zhang@nomura.50 3. Fixed asset investment should be a main driver of the H1 recovery.4 4Q13 7.9 20. the single most likely outcome).00 19.chen@nomura.15 2014 7.0 7.5 6.25 3.6 6.3 13.6 9.0 2Q13 8.7 -1. which suggests that it is more concerned with inflation than growth.6 2. This should result in the emergence of a positive output gap and lead to inflationary pressures. and its momentum will very likely continue in H1 2013.25 19.0 12.9 1.29 6.0 2. down in H2 We expect economic growth to be driven by cyclical policies since progress on structural reforms may be slow.0 10.35 6.8 1.5 1.0 6.0 16.25 20.50 19.9 21. which may return at a slower pace and delay policy easing.00 3.5 21. Source: CEIC and Nomura Global Economics 19 . Policy: 2013 is the first year of new leadership in China.4 79.5 6.6 22. when policy easing ends.22 6..5 4Q12 8.5 6.5 6.0 19.9 20.0 16.0 9.18 6.5 9.3 126.28 6. as there is still uncertainty over economic conditions in Europe.1 15.5 20. Activity: We expect GDP growth to recover strongly to above 8% y-o-y in H1 2013.0 9.6 1.0 6.5 10.5 14.1 2Q12 7. “The economy has changed to be less sensitive to the constraint imposed by employment.9 1.0 32. Table reflects data available as of 28 November 2012.5 6.6 2.5 8.6 4.5 6.9 11. The CNY/USD forecast is for the fixing rate. GDP growth should return to its potential rate in H2 2013.3 10.5 68.0 3.26 2013 7.0 9.8 22.50 20.00 3.1 1Q13 8.8 10.0 6.4 4.0 -1.0 5. The third risk is the global economy.

0 8. Hong Kong is importing the super loose monetary policy of the US.40 7.5 4.0 -1.5 6.40 7.0% in 2012 to 4.7 -20.8 2012 1.8% y-o-y in September from 3.2 9. An economic hard-landing in China would be especially detrimental through both trade and financial channels.7 4. open economy and financial hub.0 4.0 2. A modest recovery in the global economy should boost GDP growth further to 3.4 3.8 5.75 0.0 3.40 7.1 0.75 0.2 5.2 4.1 2.7 -2.5 5.2 4. Activity: Retail sales growth volume increased by 8.2 3.2 5. supported by a tight labour market.1 4. domestic fixed asset investment should remain strong supported by infrastructure works.8 3.6 3.40 7.40 7.75 0.5 4.40 7.5 -80.76 0.7 -0.2 -3.40 Aman Mohunta +91 22 6617 5595 aman.75 2013 2. 20 .2 3.7% in October on food prices.4 10.5 4.e.2 1.7 4.2 4.75 0.75 2014 3.4 4.8 5.5 from 49.2 3.9 -12.1 -3. Table reflects data available as of 28 November 2012.8 -5.2 7.8 0.5 3.3 12.0 -15.2% in August while the PMI rose to 50.kwon@nomura. Risks: As a small.2 -1. Inflation: CPI inflation ticked up to 3.4 11.8 5.5% in 2013. the single most likely outcome).4 3.4 4.0 -0.3 4.7 3.0 6.1 4.0 -0. annualised) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade (goods & services) Unemployment rate (sa.5 0.0 5.3 3. others forecast..8 3.0 10.4 4.8 5.5 0.2 2Q13 1.9 -18.2 3. positive wealth effects from buoyant property prices and increasing visitor numbers.5 3.5% y-o-y in September from 3.76 0.000 per person and a 14.2 2.5 -0.7 2.9 3.5 5. Further. Because of the USD/HKD peg.4 6.7 5.4 3.6 1.3 3.1 -2.2 0. This should continue to help stabilise inflation and support the job market.mohunta@nomura.2% in 2012 to 2.6 -2.3 -1.5% in 2014.5 -14.4 1.5 3.7 3.4 4.7 6.1 3.7 8.4 4.75 Source: Numbers in bold are actual values.3 2.3 -1.0 5.5 5. Inflation should rise through 2013.5 10.9 3.5 1.2 3.4 4.2 8.40 7.2 -1.4 5.5 0.7 -1. %) Consumer prices Exports Imports Trade balance (US$bn) Current account balance (% of GDP) Fiscal balance (% of GDP) 3-month Hibor (%) Exchange rate (HKD/USD) 1Q12 2.6. We expect CPI inflation to rise from 4. only partly offset by inflation-mitigating fiscal measures such as a temporary waiver of public housing rent and electricity subsidies.4 2. and it remains unclear whether tighter macro-prudential measures can provide a sufficient offset in the long run.8 5. Interest rate and currency forecasts are end of period.5 3.6 10.3 3.3 4Q13 1. such as hikes in stamp duty if house prices continue to rise.40 7.3 12. All forecasts are modal forecasts (i.3 -15.2 1Q13 3.4 Details of the forecast % y-o-y growth unless otherwise stated Real GDP (sa.3% in 2013. Young Sun Kwon +852 2536 7430 youngsun.4 -1.7 8. We expect fiscal stimulus and a moderate improvement in external demand to lift real GDP growth from 1.9 4.9 -0.7 2Q12 -0.8% increase in capital expenditure.1 3.1 10.7 5. Source: CEIC and Nomura Global Economics.2 7.1 7. We expect the FY13 budget to also be expansionary given that external demand remains weak.5 3. other measures are period average.7 5.6 3Q13 4.7 1.7 9. 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 HKD12.8 -0.5 4.75 0.0 -17.4 3.2 1.75 0.1 3.2 0. We expect private consumption to remain robust.6 -2.2 -1.7 -71. % q-o-q.0 3.5 12.9 -0.7 -1.9 4. although so far these piecemeal measures have had limited success in cooling the property market.Nomura | Asia Special Report 28 November 2012 Hong Kong: Looming fiscal stimulus We expect an expansionary FY13 budget given weak external demand. fuel and rent prices.6 7.1 4.3 2.0 2.1 -61.4 5.40 7.7 4.0 3.2 6. We would also expect the government to continue implementing more macro-prudential property tightening measures.9 3.4 6.3 10.3 10.2 0.6 4Q12 2.8 -0.0 1.5 -17. driven by higher food.7 10.9 3Q12 2. Hong Kong is one of the most vulnerable in Asia to weakness in the global economic outlook.40 7.8 4.4 4.

5 6.10 54.3 0.1 7.50 4.25 8.5 6.6 0. we expect the current account deficit to remain high at 3. Sonal Varma +91 22 403 74087 sonal.1 2.4 6.50 6.80 54. the number of new capex projects is unlikely to increase due to a higher cost of capital.1 0.5 7.3 6.2 4.4 7.2 5. Source: CEIC and Nomura Global Economics.1 0.50 4.0 -0.0 4Q13 Notes: Numbers in bold are actual values.50 6.0 6.00 7.50 7.4 5.8 9.3 5.54 51.0-7. for three reasons.00 7.00 7.7 8.8 -3.2% in 2012. the output gap will close quickly on any demand pick-up.3 3. we do not expect headline and core inflation to sustain levels below 7% and 5%.00 4.1 -1.Nomura | Asia Special Report 28 November 2012 India: A year of consolidation With macro imbalances slow to correct.00 7.6 5.0 6. we believe there will be a shallow recovery.3 0.1 4.1 3.0 4.5 5. Interest rate and currency forecasts are end of period.4 6.00 4.1 -0.1% in 2013.4 6.7 6.2 -3.0 0.8 6. annualised) Real GDP Private consumption Government consumption Fixed investment Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade Wholesale price index Consumer prices Current account balance (% GDP) Fiscal balance (% GDP) Repo rate (%) Reverse repo rate (%) Cash reserve ratio (%) 10-year bond yield (%) Exchange rate (INR/USD) 8.0 2Q12 5.8 7.3 9.0 Aman Mohunta Activity: Despite GDP growth falling to a 10-year low of 5. Risks: A sharp rise in oil prices.3 6.00 6.5 7.0 7. We expect a shallow growth recovery. Hence. Table reflects data available as of 28 November 2012.5 8.6 18. % q-o-q. 21 .0 1Q12 5.0 9.2 6.00 7. With binding supply-side constraints and high food inflation.5 4Q12 5. binding supply-side constraints and weak global demand.0 6.7 0.9 3Q12 5.9 9.5 7. First.3 -4.00 7.2% in 2013.2 5.4 4. pushing up core inflation and limiting the extent of monetary easing.00 56. Core inflation should moderate in H1 2013 because of the negative output gap. other measures are period average.00 4.0 0. We expect only existing shelved investments to be revived if land.0 7.1 -0. 2012 is for the year ending March 2013.8 7.0 8.1 4.2 9.9 4.50 59. Details of the forecast % y-o-y growth unless otherwise stated Real GDP (sa.2 -5.2 7.8 8.2 7. We expect high inflation to reduce India‟s export competitiveness and imports to remain elevated from domestic supply side constraints.8% of GDP in 2013 from an estimated 4.8 5. an uncertain demand outlook and the lagged impact/ implementation risks of the reforms that have been announced so far. but we expect INR depreciation and a narrowing output gap to push core inflation up again in H2 2013.6 5.9 8.6 9.0 7.6 6.6 0.6 9.6 2012 2013 2014 +91 22 6617 5595 aman.00 4. Policy: We expect the Reserve Bank of India to reduce the repo rate by 50bp in H1 2013 on lower core inflation.75 4. with headline inflation likely to remain in a 7.2 7.5-7.4 0.4 5.10 54.4 5.1 3.mohunta@nomura.50 4. coal and environmental issues are resolved.6% in 2012 to a still-high 7.2 -0.6 5.7 10.1 7.7 6.7 5. as potential growth has fallen to 6. a deeper and prolonged global slowdown and weather-related shocks are the key downside risks.50 6. we expect WPI inflation to moderate from an estimated 7.8 5.3 4.varma@nomura.0 7. e. we expect growth in Western economies to remain weak in 2013. Lower commodity prices.0 5. However.6 7.5 10. with growth rising to 6.00 7.3% in 2012.2 8.25 8.5 7. policy rates will likely remain on hold in 2H.1 7.g.0 6.1 0. Second.4 8. respectively.5% range in 2013 and core inflation likely to accelerate again in 2H 2013.9 6.15 52.0 1Q13 6.2 6.50 59.0 7.9 5.0 7.1 5.50 8.00 4.0 9.4 5.4 -5.7 10. 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 2014.0 6.1 6. Fiscal deficit is for the central government and for fiscal year.75 6.1 6.0 4.18 54.00 7.0 8. a stronger than expected global recovery and a quick investment revival are upside risks.50 4.50 4.0 2Q13 5.00 7.4 3.75 7.1 9.0 7. Inflation and trade: With sub-potential growth.3 0.0 5.8 -5.3 4.0 0.0%.8 6.0 3.5 6.50 6.75 8.4 10.0 7.2 0.2 0.2 -0.0 4.8 5. CPI is for industrial workers.2 3Q13 6.5 7.2 6. a quick rebound is unlikely.70 60. Third.75 8.80 56.5 4.1 7.0 0.3 6.1 10. others forecast.

4% this year.0 0.0 10.2 5.0 5.2 8. Source: CEIC and Nomura Global Economics.1 9.4 6.25 9800 2012 6.5 5.0 -1.3 -3.4 -3. All forecasts are modal ( Details of the forecast % y-o-y growth unless otherwise stated Real GDP (sa.0 8.8 -0.3 -1.0 -2.0 6.75 9146 2Q12 6.1% in 2013. Euben Paracuelles +65 6433 6956 euben.65% of GDP. both of which could damage already-fragile investor sentiment and slow FDI inflows.5 -7.4 6. Thus.6 5.5 5.8 8.1 0.4 5. Fiscal policy: We expect the 2013 fiscal deficit to overshoot the budgeted 1.9 6.4 1.6 8.5 3.7 5.3 5.2 10.0 5.0 9.5 9.0 8.5 8.75 9660 2Q13 6. affecting the balance of payments.3 0.0 6.9 6.2 10.5 -13.0 8.2 -1.0 8.3pp.4 9.2 Lavanya Venkateswaran +91 22 3053 3053 lavanya. 22 .5 -3.0 1.3 2.75 9600 Notes: Numbers in bold are actual values.0 2.4 5.7 5.8 6.7 0.0 8.0 6. other measures are period average.4 -3.0 6.9 5.6 8.8 0.6 10.2% y-o-y in 2013 from an estimated 4.25 9800 2014 6.7 -1. 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 2013.4 5.0 7.0 7.0 0.75 9591 4Q12 5. In the interim. Table reflects data available as of 28 November 2012.0 11.4 2.8 4.0 7. The large minimum wage increases to be implemented in 2013 pose further upside risks to inflation and inflation expectations.0 7.8 7.4 6. 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. August 2012).2 -1.3 4. Government expenditures should also contribute more positively ahead of the 2014 elections.0 0.0 5. % q-o-q.0 1.0 0.0 0.9 5.75 9620 1Q13 6. Inflation and monetary policy: We expect CPI inflation to rise to 5.6 -2.5 6..1 -2.2 7.1 4.3 0.1 -1. On the external front.0 9. the uncertain policy environment could add to concerns over FDI inflows (see Asia Special Report: Indonesia: Policy swings.6 10.2 5.0 5.3 5.0 14.1 5. we expect increased operating costs and subsidies to cause fiscal slippage of close to 0.5 5.e.2 4. driven mainly by resilient domestic demand.venkateswaran@nomura.5 10.1 6.7 -1.1 -2. as implementation of the budget improves.8 6. as we approach 2014.75 9433 3Q12 6.2 0. the single most likely outcome). Interest rate and currency forecasts are end of period.4 5. annualised) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade (goods & services) Consumer prices Exports Imports Merchandise trade balance (US$bn) Current account balance (% of GDP) Fiscal Balance (% of GDP) Bank Indonesia rate (%) Exchange rate (IDR/USD) 1Q12 6.0 5. a hard landing in China and large capital flow reversals also pose downside risks. 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.6 -1.75 9680 3Q13 6.3 -0. and improving US and EU growth in H2.3 21.75 9620 2013 6.paracuelles@nomura.1 -1.3 -3. we believe the current account deficit will likely narrow in 2013 supported by higher export growth to China in H1.0 6.5 -2. While the approved 2013 budget allows the government to raise fuel prices if deviations from macroeconomic assumptions occur.0 6.4 12.6 7.0 9.9 -1.2 -2.0 -0.0 -0.1 5.8 6.9 8.2 5. and in turn pressuring IDR.Nomura | Asia Special Report 28 November 2012 Indonesia: Watch policies and politics The policy environment is likely to remain challenging ahead of the 2014 elections. A deeper recession in the euro area.5 6.4 4.5 7. However.0 14.8 -0.8 -2.6 5.9 6.0 7. Growth in investment spending will likely moderate but that of private consumption should remain stable.5 5.8 -0. particularly on infrastructure (as opposed to this year‟s under-spending). driven by core inflation and supply-side factors such as the upward adjustments of electricity tariffs (approximately 4% each quarter).4 3. it is likely that BI will introduce administrative and macro-prudential measures if domestic demand remains strong and portfolio capital inflows persist.1 5.0 0. Activity: We expect GDP growth to remain stable at 6. we have not factored any changes to fuel subsidy policy into our baseline forecast because of the elections.1 8.7 2.3 8.0 0.2 5.1 8.1 5.5 2.0 5.9 -2.25 9730 4Q13 6.5 -1.6 -2. resulting in a 2013 deficit of 2% of GDP. others forecast.2 5.0 10.7 -3.7 3.3 -1.9 10.1 5.

2 4.7 5.6 10. All forecasts are modal forecasts (i.1 6.0 -1.5 -1. Risks: With exports nearly 100% of GDP.8 8. other measures are period average. A weaker-than-expected coalition or a win by the opposition would raise questions about the political transition and the reform agenda.0 5.5 5.7 10.7 -0. Source: CEIC and Nomura Global Economics.5 6.0 3. We forecast the fiscal deficit at 4.50 2.2 -3.0 4.92 2014 4.3 6.paracuelles@nomura. a sharp drop in commodity prices and another global recession is the biggest downside risk.06 4Q12 5.7 1.1 8.5 6.02 1Q13 4.7% in 2012 due to factors such as minimum wage hikes. others forecast.8 6. and modest subsidy adjustments (e.2 9.1 6.00 3.0 0. External demand will likely remain subdued: as growth remains weak in the US and Europe in H1 and in China in H2. and as a result.5 4.9 11.00 3.9 9. We expect a total of 50bp hikes next year.95 3Q13 4.50%. 23 .2 -4. Hence we judge BNM‟s bias is still to normalise rates.9 -3.2 10.9 7.8 -1.Nomura | Asia Special Report 28 November 2012 Malaysia: Time for fiscal tightening We see significant fiscal consolidation after the elections.1 4. public debt has risen from 39.0 -2. adding to the external drag.3 -2.4 9. we think the elections in March will result in a win by Barisan Nasional.4 13. Interest rate and currency forecasts are end of period.1 10.6 6.0% of GDP from 4.0 1.2 -6. fueling an excessive build-up of public and household debt levels. we think this is ambitious because this implies a negative fiscal impulse and is based on high GDP growth assumptions (4.3% in 2013 from 5.9 6.8 3.8 10.3 8.18 3Q12 5.84 Note: Numbers in bold are actual values.8 4.2 20.1 3.8 0.9 0. we continue to expect Bank Negara Malaysia (BNM) to stay on hold throughout H1 2013.9 3.1 7. This should still bode well for the resumption of structural reforms.0 6.4 6. This suggests fiscal consolidation will have to be significant once the elections are over.8 3.50 2. In terms of the political outlook.0 3.6 8.8 7.25 2.2 1.7 6.5 7.e.0 3.0 -5.7 Lavanya Venkateswaran +91 22 3053 3053 lavanya.6 7.5 6.93 4Q13 3.1 -0.8 3.3 -0. Table reflects data available as 28 November 2012.2 2.4 2.0 18.9 3.3 22.1 11.2 9.00 2.0 1..6 7.8% of GDP in 2008 to 51.97 2Q13 4.0 -0.g.4% in 2013 higher than 1.9 5.06 2Q12 5. Against this backdrop.3 5.8% in 2011.4 6.00 2.9 3. In our base case.1 3.8 6.3 11.1 -3.5 8.1 9.7 8. Fiscal policy and political outlook: The 2013 budget aims to reduce the fiscal deficit to 4.7 3.6 6.2 5. Activity: We expect GDP growth to slow to 4. before hiking its policy rate by 50bp in H2 2013.3 7.5 -0.9 -4.2 4. Inflation and monetary policy: We estimate headline CPI inflation will average 2. we expect it to be held in March (before the April 2013 deadline).8 3.5% of GDP as a result.8 4.6 7.5 8.2 32.0 3.8 2.5 0.8 -1.1 3.0 5.00 2.0 3.00 3.6 12.2 9.8 2.7 2.5%).7 -4.5 2.5 3.2 -4.1 10.3 3.0 3.3 2.0 13.92 2012 5.3 6. but make the adjustment gradual.00 3.02 2013 4.5% in 2012 and suggests the government recognises the need to get its medium-term fiscal consolidation plans back on track.3 2.1 16.0 -0.0 4.2 -5.8 6.5 3.0 1.3% in 2012 as domestic and external demand weaken.1 9.1 8. sugar).5-5.4 2.9 Details of the forecast % y-o-y growth unless otherwise stated Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade (goods & services) Unemployment rate (%) Consumer prices Exports Imports Merchandise trade balance (USD bn) Current account balance (% of GDP) Fiscal Balance (% of GDP) Overnight policy rate (%) Exchange rate (MYR/USD) 1Q12 5.0 1.8 4. which would have a bigger impact on commodity exporters like Malaysia.7 -3.0 0.4 2.9 26.2 6.9 11. That said.1 19.3 10. but with a smaller majority (see Asia Insights: The Malaysian general election revisited.8 8. In our view another key policy consideration is the risk from keeping rates low for too long. the single most likely outcome).4 2.1 7.0 3. Fiscal policy has bolstered growth for two years.1 2.00 3. Euben Paracuelles +65 6433 6956 euben.9 3.5 2.7 3.3 3.4 5.0 6.6 8.venkateswaran@nomura. 8 November 2012). taking the policy rate to its pre-crisis level of 3.5 4.2 8. Nonetheless.4 9.5 5.2 8.6 5.6 3.4 -4. higher cost push pressures.0 2. new and existing investments under the Economic Transformation Programme (ETP) should continue to support growth.0 2.1 1.5 27.

24 .75 41.7 7..8 -2.00 42.8 11.5 -2.0 8.50 38. which reflects the lagged effects from significant monetary easing this year but also the strength of business sentiment from governance reforms. Gross government debt has fallen from 70.2 7. other measures are period average.6 0.2 7.1 20.2% 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.6 3.8 8.0 4.3 6.paracuelles@nomura. alcohol and tobacco).5 3.5 7.9 8.5% for the rest of 2012 and throughout H1 2013.8 6.7 -2. the single most likely outcome). We see the elections as a non-event because the status quo will likely be maintained.6 6. %) Reverse repo rate (%) Exchange rate (PHP/USD) 1Q12 10.0 0.0 4.9 8. Slower progress on reforms and infrastructure spending could also hurt growth.5 6.9 -3.7 1.3 10.6 5.2 2.1 0. others forecast.2 2012 6.7 6.2 6.5 4.venkateswaran@nomura.9 6.00 39.4 6.5 9.6 8.3 -1.8 5.3 12.8 3.7 4.2 7.9 -0.6 10.0 5.2 0.9 4.5 2.2 Notes: Numbers in bold are actual values.8 11. investment is set to become a bigger growth driver.5 1.0 14.0 13.4 8.3 Details of the forecast % y-o-y growth unless otherwise stated Real GDP (sa.2 4.7 4Q12 6.6 4Q13 6.9 9.1 7.3 12.3 6.5 -0.7 6.0 10.5 6.8 4.6 1.2 0..2% in 2012.6 4.3 7. Activity: We forecast 2013 GDP growth at an above-potential 6.5 0.6 8..2 -2. investment-led domestic demand should fully offset the weakness in exports.e.3 9.2 12.8 3Q13 4.9 6.5 15.8 14.9 -5. All forecasts are modal forecasts (i.3 -10.1 3. as demand side pressures strengthen.4 0.1 3Q12 5.1 7. and we expect more progress on fiscal policy reforms to broaden the tax base and improve tax collections (e.6 6.1 1.1 3. Inflation and monetary policy: We expect CPI inflation to rise to 4.6 2.2 -0.7 13.2 -1.6% of GDP from 2.00 42.50 40.0 4.2 -0. but it could temporarily disrupt the legislation of fiscal reforms and the bidding out of infrastructure projects.6 8.4%. we expect BSP to keep its policy rate unchanged at 3. 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.75 39.3 8.9 -2.2 8.8 6. But we see more notable improvement in investment spending.4 6.6 6.3 1.8 4.0 -18.9 3.2 6. % q-o-q.4 -7.8 1.4 2. Large capital inflows will remain a key consideration in BSP‟s policymaking and as such.2 -4.7 2.8 11.9 10.6 1Q13 9. Source: CEIC and Nomura Global Economics.8 -1.8 7.7 -14.4 7.3 7.1 6.6 15.0 11.4 6.4 8.0 -0.9 4.4 5.8 12.7 6.8 1. Fiscal policy: We expect the fiscal deficit to widen to 2.5 3.6 6.7 10.e.50 40.8 3.g.2 6.3 9.6 8.1 6.6 6. 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.2 8. Therefore. Table reflects data available as of 28 November 2012.50 39.Nomura | Asia Special Report 28 November 2012 Philippines: Still likely to shine Given the momentum of reform.6 6.5 4.6 0. Interest rate and currency forecasts are end of period.2 3. Risks: The main risk to our forecast is an external shock from Europe and the US fiscal cliff.00 39.0 3.8 8.0 11.2 2Q13 4. As a result.4 12.5 7.1 0.9 6.0 -2.1 2.8 10.2 -0. 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.2 5.0 2.5 3.5% of GDP in 2006 to 56%.7 6.8 7.50 40.2 6.3 5.6 -2.1 8.0 8.8 16.1 8.9 6.9 0.8 -2. the risk of more administrative and macro-prudential measures is likely to remain high.0 13.6 2013 6.9 2Q12 5.0 -4.9 7. Euben Paracuelles +65 6433 6956 euben. annualised) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contribution to GDP growth (% points) Domestic final sales Inventories Net trade (goods & services) Exports Imports Merchandise trade balance (US$bn) Current account balance (US$bn) Current account balance (% of GDP) Fiscal balance (% of GDP) Consumer prices (2006=100) Unemployment rate ( Lavanya Venkateswaran +91 22 3053 3053 lavanya.4 7.5 3.5 -2.1 4.2 6.9 -2.8 -4.0 15.2 -2.4 3.2 -1.8 7.6% in 2013 from 3.8 10.1 0.2 2014 5.2 2. before hiking it gradually in Q3 2013.7 6.6 3.0 6.0 13.

4 -4.9 0.5 -1.9 4. the US falling off the fiscal cliff. led by private transport and accommodation costs.paracuelles@nomura.4 2.4 15.4 4.1 -0.2 0.8 17. Interest rate and currency forecasts are end of period.3 0.0 0.1 2.21 2Q13 -0.0 0.7 -1. we expect growth to increase but remain subpar at 2.3 17. Source: CEIC and Nomura Global Economics.38 1. we think this policy decision complements its longer term economic objectives.9% in 2013 from 4.8 2.3 -0.6 6.7 0.1 2.5 2.0 4.48 1.5 -1. The Monetary Authority of Singapore (MAS) believes there are upside risks from rising global food prices.38 1.6 -4.9 2.0 5.23 4Q12 6. Inflation and monetary policy: We expect CPI inflation to remain elevated.6 14.1 3. others forecast. Pressure is mounting from small and medium enterprises (SMEs) which are asking the government to relax its foreign labor policy..6 2.1 3.2 2.2 4.3 -2. However.5 2.1 4. fueled by low interest rates.8 0.26 2Q12 0.0 -4.1 0.7 0.5 2.5 1.3 -1.7 3.7 2.2 -2. Another risk is domestic overheating.1 11.8 1.2 -0.0-3.2 15.1 6. underlying inflation should remain sticky as labour markets remain tight and wage pressures persist.3 4. Details of the forecast % y-o-y growth unless otherwise stated Real GDP (sa.8 0.3 1. % q-o-q.3 12.3 2.6 12.2 -3.19 2012 1.8 -3.7 16.2% in 2012.4 0. we expect the government to refrain from stimulus spending.1 -0.2 3.48 1.2 18.2 5.0 -3.8 1.4 1.2 8.1 3.0 5.5 -1.1 13.venkateswaran@nomura.2 0.” Fiscal policy: The fiscal stance should remain broadly neutral in 2013 with the government running a small deficit of 0. In addition.4 8. due to the on-going efforts to restructure the economy toward productivity-driven growth (which is less reliant on foreign labor).2 0.7 15.2% of GDP from a surplus of 0.8 7.2 4.2 1.8 -1. other measures are period average.0 1.1 3.38 1.2 2.1 2.0 0.8 2. as well as to upgrading public infrastructure.1 12.6 4.9 -0.5 2.5 4. the single most likely outcome).4 0.7 5.4 -2. it is increasing awareness among SMEs regarding fiscal schemes that have already been in place to boost productivity but have seen limited adoption.48 1.8 6.19 2014 4.5 2.22 2013 2.2 4.7 2.7 -0.20 4Q13 8.5 2.9 -2.7 7.3 -7.2 3. The MAS decision to maintain its S$NEER policy in October despite slowing growth suggests inflation will remain a key concern.e.8% in 2012. In addition.9 Lavanya Venkateswaran +91 22 3053 3053 lavanya.1 8. Instead.9 5.1 7.3 Lavanya Venkateswaran +91 22 3053 3053 lavanya.3 1.3 3. %) Consumer prices Exports Imports Merchandise trade balance (US$bn) Current account balance (% of GDP) Fiscal Balance (% of GDP) 3 month SIBOR (%) Exchange rate (SGD/USD) 1Q12 10.0 -1.5 2. We believe the government is firmly focused on encouraging the private sector to adopt productivity-enhancing measures rather than alleviating cyclical external risks.1 12. Private investment spending will also likely remain weak as business sentiment is affected by external uncertainty and tight domestic policies.7 10.8 1. or a hard landing in China would hit Singapore hard via knock-on effects from exports and capital outflows.3 2.4 2.3 5.1 -0.1 40. the economy will likely endure a low growth.1 4.0 2.2 4.9 6.4 0.1 2.8 3.3 Euben Paracuelles +65 6433 6956 euben.0 3.5 33.0 11.20 3Q13 -5.5 2. All forecasts are modal forecasts (i. 25 .8 8.0 11.8 1.2 19.0 1.0 2.0 -3.venkateswaran@nomura. Another risk flare up in Europe.5 2.2 4.9 0.8% in 2012.38 1.9 2.3 2.1 3.0% GDP growth. The improvement should be led by recovering growth in China in H1.3 1.9 -2.38 1.8 2. In the meantime.6 -2. We also expect higher budget allocations to social spending given the ageing population and widening income disparity. and the EU and US in H2.4 4.27 3Q12 -5.4 3.Nomura | Asia Special Report 28 November 2012 Singapore: The (long) road to restructuring The government is rightly sticking to its long-term goal of raising productivity.4 3.3 2.5 Notes: Numbers in bold are actual values. averaging 3.6 -4.0 2.1 0.9 0.9 -2.2 4.2 -5.22 1Q13 9.3 38. Singapore is the most vulnerable economy in South-east Asia to a major contraction in global GDP. Activity: In line with official projections of 1.1 3.38 1.3 8.1 0.1 4.9 2. Risks: With exports twice its GDP.0 1.0 2.17 Euben Paracuelles +65 6433 6956 euben. Table reflects data available as of 28 November 2012.3 11. but the government said there will be “no U-turn”.0 3. annualised) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade (goods & services) Unemployment rate (sa.48 1.1 5.50 1.1 1.4 0.paracuelles@nomura.4% y-o-y in 2013 from 1. high inflation environment. 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.

75 2. including a household sector overburdened in debt equivalent to 156% of personal disposable income.Nomura | Asia Special Report 28 November 2012 South Korea: Growth to rebound from a very low base We expect the Bank of Korea to keep rates unchanged at 2.3 -1.8 -0.2 3.8 2.00 2.9 -0.1 1.1 4Q13 3.1 0. Table reflects data as of 28 November Details of the forecast % y-o-y growth unless otherwise stated Real GDP (sa.2 0.4 3.80 2. So we maintain our below-consensus forecast of 2. But compared to past recoveries.8 -0.1 3.3 4.5% GDP growth in 2013 – far below our potential GDP estimate of 3.75 3. Source: Bank of Korea.1 -2.6 0.3 2.8% in 2013. but none of these are held in Nomura Global Economics‟ base case.4 3.1 7.3 1.5 3.10 1050 Notes: Numbers in bold are actual values.10 1050 3.0 0.4 1.7 0.2 3. the new government could formulate a supplementary budget in H1 2013.3 1.1 4.6 4Q12 2.1 4.9 0.e. CEIC and Nomura Global Economics. annualised) Real GDP (sa.1 0.9 3.0 -1. % q-o-q. others forecast.3 1.90 1080 2.2 4.7 3.3 2. given the headwinds on personal consumption from high household debt and falling house prices.6 6.1 3. as growth should increase slightly and CPI inflation should rise modestly.2 4. this one is tepid despite starting from a very low base.7 -9. a renewed eurozone sovereign crisis.6 0.1 5. a China hard landing) actually materialises..5 0.25 3.3 2.2 3.4 3.9 0.3 0.0 -1.00 3.2 1.2 0.75 3.75 3.5 2. An important reason is weak domestic demand.6 9.6 1. other measures are period average.1 3.75 2.50 1040 3.30 3.2 -1.90 1080 2.2 3.0 3.5 1.1 2Q13 3. %) Consumer prices Current account balance (% of GDP) Fiscal balance (% of GDP) Fiscal balance ex-social security (% of GDP) BOK official base rate (%) 3-year T-bond yield (%) 5-year T-bond yield (%) Exchange rate (KRW/USD) 1Q12 2Q12 3. All forecasts are modal forecasts (i.75% through 2013 as GDP growth and CPI inflation should rise modestly from a very low base.7 -0.90 1065 2.1 4. Inflation: A negative output gap and stable KRW should exert downward pressure on inflation.83 2.2 1. commodity prices and financial markets.2 2. We expect GDP growth to rebound to 0.4 3.5% for 2013-15.90 3.6 2. we would expect the BOK to cut rates if one of the major downside risks to global growth (the US fiscal cliff.5% q-o-q in Q4 (from 0.1 -0.1 3.8 5.2 2. Domestically.2% in 2012.00 3.7 -0.9 2.0 2.0 1.5 5.55 3. the single most likely outcome).0 0.5 2.6 5.0 -0.4 1.2 -0.1 1.6 0.25 3.5 2.9 2.8 2.1 2.8 -0. Korea is vulnerable to sudden changes in global economic conditions.kwon@nomura.5 3.6 2.05 1055 2.93 1118 2.9 -0.0 2.0 0.1 -3.0 4.80 2.4 3Q12 0.8 3.2 1.3 -6.2% in Q3) and to a sequential quarterly average of 0.5 0. Activity: September industrial output and October export numbers suggest that GDP may have bottomed out in Q3.0 2.2 1. held back by structural problems.0 3.7 1.3 2.80 2.9 2. 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 2.3 3.2 3.8 2012 2013 2014 2.9 3.75% through 2013. each from a very low base on a sequential basis. Risks: As a small.1 5.5 2.75 2.2 3.1 2. We expect business investment to remain weak as uncertainty surrounding the global outlook and new government reforms remain elevated.8 0.8 3Q13 3.5 2.42 1154 3. which we expect to be reached only in 2014. Young Sun Kwon +852 2252 1370 youngsun.5-3.3 2.2 3.1 4.5 1.1 1.5 2.6 3.25 3.0 4.8 0. although still below the midpoint of the BOK‟s new inflation target range of 2.5 2.9 3. Policy: We expect the BOK to keep rates at 2.9 0.2 2.6 0.7 4.2 2. The new government will likely increase social welfare spending.3 2. open.5%.1 0.6 1.0 0.30 3.0 -1.00 3.0 1. but this will only partly offset the export slump. which provides an upside risk to our domestic demand forecast.8 2.1 3. financially integrated economy.3 1.7 2. supported by inventory restocking in Q4 and a modest foreign demand recovery in 2013.5 3.1 5. 26 . Interest rate and currency forecasts are end of period.6 1.8 0.75 2.6 0. % q-o-q) Real GDP Private consumption Government consumption Business investment Construction investment Exports (goods & services) Imports (goods & services) Contributions to GDP growth (% points) Domestic final sales Inventories Net trade (goods & services) Unemployment rate (sa.3 3.0 3. That said.2 0.69 1133 3.2 2.2 3.7% in 2013 from 2.2 1.00 1060 2.1 0.8 1Q13 2.1 0.

55 28.2 Notes: Numbers in bold are actual values.6 9.3 3.7 9.Nomura | Asia Special Report 28 November 2012 Taiwan: External demand holds the key The economy should benefit from an upcycle in China's GDP and global electronic demand.9 4.64 1.0% in 2012 to 3.88 0.3 1.4 -0.7 3.0% in 2013 and further to 3.3 5.7 2012 1.4 2.7 -2.5 1.4 1.13 0.5 -0.5 3.2 7.29 28. Risks: Another deep recession in advanced economies would have a large impact on Taiwan‟s open economy. over time.9 8.55 28. inflation is unlikely to become a serious negative factor for growth through our forecast horizon.5 0.125% in H2 2013 as GDP growth and CPI inflation should rise.4 1. 27 .2 2. along with an improved cross-strait relationship.3 5.42 1.1 -10.4 -2.1 0. Taiwan‟s central bank and China‟s PBoC signed a Currency Settlement MOU in August.0 7.9 6.1 2.51 1.5 2. Improving cross-strait ties is a structural transformation that.88 0.6 3.2 4. Young Sun Kwon +852 2536 7430 youngsun.6 1.51 1.0 0.5 1.51 1.6 3.51 1. annualised) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP growth (% points) Domestic final sales Inventories Net trade (goods & services) Exports Imports Merchandise trade balance (US$bn) Current account balance (% of GDP) Fiscal balance (% of GDP) Consumer prices Unemployment rate (%) Discount rate (%) Overnight call rate (%) 10-year T-bond (%) Exchange rate (NTD/USD) 1Q12 5.3 1.3 1. Stronger demand from China and a gradual recovery in global demand for electronics should help lift Taiwan‟s GDP growth from 1.3 4.0% in 2012 due to higher food prices and consumption.0 2013 3.2 1.8 2.29 28.5 2Q12 -0. and deepening capital markets.3 3.0 7.7 7.8 3.2 3.76 1.5 10.27 29.2 4. following a 10.3 4.2 2.7 4Q13 -4.88 0.1 -1.4 -1.8 2.2 7. All forecasts are modal forecasts (i.7 -4.4 0.42 28.6 -0.e.23 29.5 6.6 2.9 2Q13 0. We view this as more a normalisation of very loose monetary policy.0 2.9 3.2 -3.2 4.13 0.76 1.7 -0.6 3.8 3Q12 3.3% in 2013 from 2. should unleash major benefits for Taiwan‟s economy through higher value-added trade and investment with China.13 0.1 -1.8 2.9 3.6 4.1 4.5 Aman Mohunta +91 22 6617 5595 aman. Cross-strait relationship: We expect economic linkages between Taiwan and China to continue to strengthen.2 2.0 1.9 9.7 34.6 4.2 0. Given that electricity tariff hikes will be implemented in multiple stages.9% y-o-y.4 -7. Table reflects data available as of 28 November 2012.7 8..2 3.29 29. We expect CPI inflation to rise to 2.7 2014 3.4 9.2 2.41 1. but from a low base.0 5.6 2.3 4.8 2.3 5.0 1.1 0.2 0. Source: CEIC and Nomura Global Economics.9 2.6 0.29 29.5 0.5 -7.1 1. We expect GDP growth to recover more visibly in Q4.2 0.875% to 2.0 1Q13 7.2 0.3 4.2 1.4 9.7 -2. Activity and inflation: Exports declined slightly in October.2 2.9 2. % q-o-q.9 -1.3 1.5% in 2014.4 2.9 0.6 1.3 3. as strengthening economic linkages with China start to increasingly benefit (see below).3 3.7 2.0 2.1 27.0 6.00 0.1 2.6 1.7 1.5 3.1 0.5 3.5 3.7 3Q13 5.0 0.4 7.38 1.2 2.51 1.5 4. other measures are period average. 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.0 4.2 0.9 5.19 29.88 0.88 0.0 4.8 1.6 0.6 2.0 40.0 3.8 0.5 0.1 3.1 -0.mohunta@nomura. others forecast.7 7.88 Details of the forecast % y-o-y growth unless otherwise stated Real GDP (sa. Interest rate and currency forecasts are end of period.5 5.0 4.6 2.2 2.0 4.1 1.8 7.0 2.3 1.7 -1.9 2. which should significantly boost RMB-related business in Taiwan‟s capital markets.0 2.3 4Q12 1.4 4.0 -5.kwon@nomura.0 2.3 5.1 4.9 -0.88 0.55 28.4% increase in September.4 1.3 5.3 -4.0 7.0 1. rather than a move to outright tightening.2 -2.5 0.0 2.8 7.8 -0.2 3.1 1. by 1.5 3.4 -0.1 5. Monetary policy: We expect the Central Bank of China (CBC) to hike discount rates from 1.5 0.5 1. the single most likely outcome). through further trade liberalisation under the Economic Cooperation Framework Agreement and an increase in tourist arrivals from China.5 3.5 -4.8 5.6 4.9 1.

panarode@nomura.8 4. These will be the new growth engines that help drive and rebalance the Thai economy.00 31.7 7. from 40. Table reflects data available as of 28 November Nuchjarin Panarode.6 1.75 30. Interest rate and currency forecasts are end of period.8 -4.2 4.3 2.7 7.7 -0.6 7.0 6. All forecasts are modal forecasts (i.3 2Q13 12.6 2.0 5. annualised) Real GDP Private consumption Public consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contribution to GDP growth (% points) Domestic final sales Inventories Net trade (goods & services) Exports Imports Merchandise trade balance (US$bn) Current account balance (US$bn) Current account balance (% of GDP) Fiscal balance (% of GDP.8 3Q12 5.0 4. As a result.0 7.7 6. the industrial sector upgrading production capacity after the floods. and domestically.5 1.7 5. Euben Paracuelles +65 6433 6956 euben. We believe domestic demand.27bn of mega-project investment – we forecast a “cash” deficit in FY13 of 3.8 7.0% of GDP in FY12.8 2.25 29.4 -5.2 8.5 2.7 2.0 -0.0 4.8 2Q12 11.1 4.7 4.6 5.7 -3. fiscal year basis) Consumer prices Unemployment rate (sa. while private investment should be bolstered by higher public infrastructure spending.1 2.75 29.8 -3.75 30.6 -3.6 3.8 10. from increased political uncertainty over the constitutional amendment and reconciliation bill.7 3.7 3.9 0.1 3Q13 7. other measures are period average.7 4.2 -1.6 -20.0 6. 28 . the monetary policy stance should remain accommodative for some time.9 2.5 -2.0 15. This implies negative real policy rates.3 2.0 -5.8 -1.6 -0.7 3.0% in 2013. Including non-budgetary spending – such as that on watermanagement infrastructure and the planned THB2.9 2014 5.9 2.2 1.6 5.5 1.2 -22.5 0.1 0.5 5.3 2.3 6.0 4Q13 -1.5% in 2012 after last year‟s floods.5 4.75 30. Private consumption should receive a boost from the sharp rise in real wages (the minimum wage was hiked by 40% this year.8 10.6 4.3 -0.5 2.5 5.7 3. Public debt to GDP has risen steadily since early 2012.7 4.1 -0.00 30.4 10.2 1.6 0. so there is plenty of scope to run expansionary fiscal policies.4 -2.4 0. Slow progress on infrastructure plans could weaken investment sentiment.7 -1.9 2. as the government utilizes subsidies to contain emerging price pressures.9 -4.1 15.5 -2.6 4.5% after recovering sharply to 5.6 2.2 15.6 5.5 3. we expect the Bank of Thailand (BOT) to keep the policy rate unchanged at 2.0 11.75 30.9 2.0 0.6 -2.6 -1.3 -2.5 3.2 4.2 0.0 3.2 14. from an estimated 2. putting upward pressure on overall wages as well). making it more resilient to external shocks.6 5.4 2. %) Overnight repo rate (%) Exchange rate (THB/USD) 1Q12 53.paracuelles@nomura.4 1.e.6 2.2 -4.2 -3.4 8.7 -1.9 3.9% in September.4 0.9 -0.2 -0.5% estimated in FY12.1 1.8 -0. There is room to cut further if the external outlook deteriorates sharply.2 -2. will mitigate the impact of weak exports.1 6.6 0.9 2.8 7.9 2.9 2.6 10.6 17.2 5.0 -5.6 3.4 0. Monetary policy and inflation: We expect inflation to remain stable at 3.3 -0.5% of GDP versus 2.0 6.9 0. or if domestic demand fails to strengthen fast enough to offset the export weakness.8 -0.9 0. % q-o-q. 24 September 2012). Risks: The downside risks to our forecasts stem from a deepening of the euro area recession.1 11.0 4.6 3.2 5.4 0. supported by accommodative monetary and fiscal policies.4% of GDP in FY13. and a relatively more stable political outlook (see Asia Special Report: Thailand: New growth engines.2 7.7 3.4 0.8 4.2 1. CNS Thailand +662 638 5791 nuchjarin.6% to Details of the forecast % y-o-y growth unless otherwise stated Real GDP (sa.6 2.0 4.9 3.0 -1. Source: CEIC and Nomura Global Economics.6 2.6 -3.7 2.7 -3. the single most likely outcome).9 -5.8 0.9 2012 5.75 29.8 -1. following a cumulative 75bp of cuts since the floods..9 7.9 2. Fiscal policy: The budget deficit is set at 2.3 0.7 0.7 1.9 3.2 4.7 -2.1 3.5 -0.Nomura | Asia Special Report 28 November 2012 Thailand: New growth engines Investment and consumption spending will provide a boost to GDP growth even as the external outlook remains uncertain.0 4.8 -1.8 4Q12 -2.1 -3. others forecast.1 0.4 4.7 3.1 5.4 -5.9 -5.7 2.1 4.7 13. spurred by loose monetary and fiscal policies. This is still well below the debt ceiling of 60%.0 0.1 0.9 5.5 0.6 -2.5 1Q13 1.5 -15.1 8.00 30.8 0.9 0.9 -2.2 Notes: Numbers in bold are actual values.4 5.6 0.3 7.5 2013 4.8 4.75% throughout 2013. and hence even with the BOT on hold.9 3.0 9.75 30.8 8. Activity: We forecast 2013 GDP growth at a solid 4.6 -0.

2 31. 29 .75 54.0 3Q13 6.9 28. but given rich FX valuations (the trade-weighted basket is close to the topside of the policy band).10 39.3 End-2014 6. we recommend being long currencies that are supported by structural flows and have relatively strong current account surpluses (see Figure 31 for our forecasts).0 Wee Choon Teo +65 6433 6107 weechoon.0 57. 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.1 31.pande@nomura. 31: Asia FX forecast 27-Nov-12 CNY Fwd HKD Fwd INR Fwd IDR Fwd MYR Fwd PHP Fwd SGD Fwd KRW Fwd TWD Fwd THB Fwd 30.7 30.8 1.18 6. For TWD.0 58.21 1.92 Prashant Pande +65 6433 6198 prashant.Nomura | Asia Special Report 28 November 2012 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.16 6.75 54.17 1.8 30.75 7.8 3.0 55.5 9680 9844 Source: Bloomberg.6 40.2 41. We are also optimistic on CNY appreciation into H1 2013 given signs of stabilising capital flows.teo@nomura.02 3.05 40. the appreciation priced into the NDF curve and the risk of macroprudential controls.5 30.chan@nomura. But given risks mainly from uncertainties in the global backdrop (namely from the eurozone and the US).0 29. Capital inflows are likely to keep USD/INR stable (at best) in H1.8 1.9 2Q13 6.27 7.22 1055 1099 28.3 30.15 38.75 7.30 7.20 1.22 40. remaining short S$NEER makes sense from a risk-reward basis as well as a hedge to our portfolio.5 9600 10700 2.75 56.7 28.6 29. we recommend being long USD/TWD as another hedge given the risk of the US fiscal cliff.22 1.20 1. Asia FX. especially KRW. Indeed.5 56.93 3.75 7. KRW and MYR are seeing strong inflows into local bond markets from central banks/sovereign wealth funds (CB/SWFs).9 9620 9632 3.22 1050 1101 28.7 28. As discussed in the opening letter by our Chief Asia Economist Rob Subbaraman.08 39. Nomura Economics‟ view of reduced concerns over the US fiscal cliff.44 7.9 30. First half – appreciation Specifically.0 31.6 7. stronger China growth. Nomura.8 1.2 40.22 6.2 40. while PHP continues to be supported by the strength of overseas worker remittances.14 6.8 9660 9728 2.8 1. Fig.0 30.22 1065 1091 28.97 3.75 6. our forecast of strong China economic recovery (against a pessimistic consensus) and rising local inflation. SGD should benefit from sovereign flows and any pick up in capital inflows.75 7.75 7.33 7.6 40.09 39.4 1.22 1040 1110 28. capital inflows to Asia and rising inflation should support our trading bias for 2013.22 1060 1095 28.04 9639 55.24 7.9 Craig Chan +65 64336106 craig.95 3.0 61.8 1Q13 6.75 56.15 6.8 1.7 28.29 End-2012 6.gupta@nomura. as investors lose patience with the government‟s efforts to address the fiscal deficit.1 1084 1.2 Prateek Gupta +65 6433 6197 prateek.2 End-2013 6.3 9730 9964 2. will benefit if our view of a pickup in net capital inflows in 2013 materialises.8 40.75 59.7 29.22 1080 1086 29.19 1.75 7.31 7.06 40.75 60.0 9800 10094 2.3 29.9 31.84 3.26 6.

as well as present risks to countries and currencies such as INR and IDR. KRW.750 convertibility undertaking to be frequently tested. we remain positive PHP given solid structural inflows (from remittances and business process outsourcing.2 by year-end.5% against 0. which we judge will be difficult ahead of the 2014 elections. We have been increasing our short USD/PHP position (initial position USD5mn. and the Euro area. a narrowing current account surplus and the economic slowdown in H2 could raise medium-term structural concerns.Policy swings. 2 August 2012 4 See Asia Special Report: Thailand: New growth engines. see China outlook for more details).5% y-o-y in H1) and our China Chief Economist Zhiwei Zhang‟s view of slower growth in China (7. However. This is also likely to lead to a slowdown in FDI inflows. 24 September 2012 5 See Asia Insights: PHP: Adding to our short USD/PHP position.8 by mid-2013 and 39. 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. In addition. fixing on 16 January 2013) with our optimism in the near-term partly coming from the remittance season in December. whilst SGD performance could be weighed down by the relatively weak global backdrop and JPY weakness. Seven trade recommendations 1) Short USD/PHP (fix 16 January 2013. 7 November and 27 November 2012. Economic and social pressure for a shift in FX regime would need to escalate for any near-term change. INR could depreciate (vs.50 spot – last around 40. higher inflation and rate hikes in the Philippines and Malaysia could further support their currencies. $15mn. strong macroeconomic fundamentals (our economist.Nomura | Asia Special Report 28 November 2012 Second half – differentiation Going into H2. These are likely to limit CNY appreciation. IDR will also face depreciation pressure from capital outflows (primarily bond related) if the government is unable to stem inflation pressures and a less conducive political environment3 ahead of elections in 2014. 7 November 2012 30 . entry on 16 October. for our broad view on opportunities in EM outperformance and differentiation trades. Higher inflation and overheating risks should support FX appreciation in most of Asia. targeting 40. Underperformers are likely to be TWD. in our view.0% in Q4 versus 8. though bottoming out. especially if there is no fiscal resolve. expects 50bp of rate hikes from Q3 2013. which could raise concerns about the performance of Asia FX. Japan. beyond the short-term seasonal support. but we expect strong capital inflows to lead to the strong side of the Hong Kong Monetary Authority‟s 7. In H2. and strong capital flows attributable to public and private investments4. Euben Paracuelles. Our analysis shows that over the past 10 years. see the Philippine outlook) and a favourable political backdrop that should sustain strong reform momentum. our G10 FX Strategy team forecasts USD/JPY at 88 by end-2013. See Global FX in 2013. 25 November 2012. We do not expect the USD/HKD peg to change in 2013. particularly as India and Indonesia both run current account deficits. developed economy growth2 (H2 2013 GDP at 1. INR and IDR are likely to face depreciation risk as inflation can be expected to have a negative effect on both currencies. Aside from some resilience to global/regional headwinds. which will face the brunt of slower China growth. KRW could face increased FX intervention risk as South Korea‟s current account surplus shrinks. CNY and SGD (if the S$NEER is not at the extreme strong side of the policy band) are likely to be mid-performers. 3 See Asia Special Report: Indonesia .95)5 We will remain short USD/PHP through 2013 given our spot USD/PHP forecast of 39. These developments could lead to sovereign rating upgrades in H2 2013 (see the Credit outlook section). we expect more differentiation in Asia FX. As for USD/THB. For China. USD) towards a record high of around the 60-figure level. But the performance of Asia FX may be weighed down by still relatively weak.4% in Q1 2013. but we believe this is unlikely given Nomura‟s view of steady growth and limited headline inflation. despite higher inflation. 2 US. we expect it to be a mid-performer in 2013 with appreciation driven by robust domestic economy. structural factors and current account surpluses. Figure 32). the still relatively weak global growth backdrop and a weak JPY. the outperformers are likely to be PHP and MYR.

6 -7.0 -1. 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.0 181.Nomura | Asia Special Report 28 November 2012 Fig. TWD 40.4 -16.4 138. a 10% of max deposit shift from Jun 1997 to Dec 1998. IN.5 0. 70% of ST external debt is rolled. TW.5 27.5 6.3 -0.Deposit shift out of local FX . 14 September 2012 See Asia Insights: Asia FX portfolio update – Short TWD and long PHP.6 5.8 2. Bloomberg. we expect net capital inflows to strengthen. for the first half of the year. 50% of the fall in FBH/Outstanding during the US financial crisis for KR.9 11.4 2.0 93.7 110. Additional positive CNY news into H1 is that there have been more indications of stabilising capital flows in China (Figure 36). H2 will be more tactical despite our forecast of 6.26 by year-end – fix last at 6.1 32.8 3.0 39. Source: CEIC.1 -22% 0% 26.3 260.5 -18% -9% -37% -48% 24. ID. 31 . 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).3 -23% 7.8 176.3 -2.0 -4.4 -0. Nomura. n.6 -1.7 142. Our outlook for a pick-up in domestic growth indicators and rising inflation implies more supportive cyclical drivers for CNY appreciation in H1.5% 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). IN and MY.4 -7. 50% of the avg fall in FBH for KR.6 -2.7 2. The main risk to being long PHP is macroprudential controls.1 11.9 -21% Notes: Current account is Nomura Economics‟ 2013 forecast.7 0.000 BoP: Current Account BoP: Business Process Outsourcing BoP: Overseas Worker Remittance 500 0 -500 -1.7 -11.2 0.0 -31. $30mn.a.2 -23.3 0. -21% n. and coupon payments on long-term external debt are estimated using a weighted average fixed coupons.8 -3. Net FDI is the last four quarters.5 -40.5 11.5 -8.7 3.7 -15.1 0. a 1.3 n.18 on the fix by mid-2013. Indeed.8 -42.4 81.4 -14.2902)6 Our bias in H1 is to remain short USD/CNY targeting 6.4 -32. 33: Financing gap analysis – PHP is relatively less vulnerable (USD bn) Current Account (Economist forecast 2013) Net FDI Net Equity Flows Net Bond Flows .4 -126.a. our regression analysis indicates that the forecast pick-up in growth and inflation should lead to more CNY appreciation7 (Figures 34 and 35).9 0. TH.6 323. THB PHP IDR INR -2.5 3285.6 -18. targeting 6.3 -6. ID. This view is also supported by the smooth passing of the US presidential elections (with President Obama‟s re6 7 See China primed to surprise on the upside. 32: Rising inflows from business process outsourcing and overseas worker remittances USD mn 2.7 0.000 1.4 -2.6 21.5 -72.4 -72.3 10. As confidence in China‟s economic cycle builds.5 -16. with a 15% fall assumed (assume 50% of the avg 30% experienced during the US financial crisis. MY applied on IIP debt positions for CN.5 -5.6 -18.1 17.0 0.000 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: CEIC.8 7.ST External Debt Maturing .1 399. Nomura.a.Coupon Payment on LT External Debt Financing Gap FX Reserves (Latest available as of 21 Nov 12) Financing Gap / FX reserves FX Fwd (Latest available as of 21 Nov 12) Financing Gap / (FX reseves + FX Fwd) KRW CNY 28.6 10. PH.1 -16% -9% -37% -51% M YR 15.9 0.a.15 given the less favourable local growth cycle. Fig. entry on 14 September and 7 November 2012. negative net FDI becomes less negative while positive net FDI becomes less positive).4 -3.500 1. 27 November 2012.2 -4% n.2 14.2 -14.3 0. However. 2) Short USD/CNY (fix 31 December 2012.

7 November 2012. Fig. targeting 3. USD (fix basis) in the last 10 trading sessions of the years: 2006 at -0. 2007. 35: China: industrial production and CNY appreciation China IP % y/y USDCNY (inverted) 6.5 USDCNY (inverted) 6.0 Fig.8 Specifically. 2010 at -0. USD/CNY fell by an average 49bp9.and 2.54%. CNY appreciation may slow in H2 as China‟s growth slowdown weighs against the relatively high inflation backdrop. 2010 and 2011. there is scope for an acceleration in CNY strength (against USD) in December to keep political pressures suppressed. entry on 11 September and 7 November 2012. 34: China: inflation and CNY appreciation China Inflation % y/y 10 8 6 4 2 0 -2 8. nonperforming loans and the vulnerability of the property market.5 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 -4 8. Source: Bloomberg. 9 Amount of CNY appreciation vs. The risk from slower growth is that investors increase their focus on medium-term concerns such as an over-reliance on investment.5 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Source: Bloomberg.0 6.5 8.0 7. Nomura.5 23% 21% 19% 17% 6.Nomura | Asia Special Report 28 November 2012 election seen as the more CNY-friendly result) and the transition to China‟s next generation of political leaders. 3) Short USD/MYR (fix 20 December 2012 and 7 January 2013. 8 Indeed. 32 .55%.0 7. 2011 at -0. Nomura. Beyond the short-term CNY-positive factors. Given that there has been limited CNY appreciation this year (17bp on the fix from 30 December 2011 to 28 November). $15mn. We will continue to build long MYR positions into Q3 given our USD/MYR forecasts of 2.13%. JPY weakness may also weigh marginally against lower USD/CNY fixes. 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”.95 by mid. Nomura. 10 See Asia FX: A post-election portfolio update. 2007 at 0. high debt levels.5 7.0445)10 Our conviction to be short USD/MYR remains strong.92 by end-2013. Fig. 36: Financial institutions net FX purchase position 100 Position for Forex purchase (m-o-m change. In addition.0 7. USD bn) 80 60 40 20 0 -20 -40 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Source: CEIC. we note that in the last 10 trading sessions of the year in 2006.02 by year-end – spot last around 3.74%.0 15% 13% 11% 9% 7% 5% 8.

partly because of China. with Barisan Nasional to retain a reduced majority of around 130 seats (from 137).8% 2. The risk to MYR remaining a strong performer in H2 is a slowdown in growth. 15 See Asia FX portfolio update – Long KRW and short S$NEER. a planned overseas holdings target of 19% and USD2. a solid current account surplus of 4. On the general elections13. KRW‟s trend appreciation path. On EPF-related outflows. Korea‟s FX intervention on 22 November and the 27 November announcement that it will reduce the ceiling on bank's FX derivative positions. entry on 22 November 2012. our estimates are of a monthly average of USD0.Nomura | Asia Special Report 28 November 2012 The market is relatively pessimistic on MYR. 27 November 2012. targeting 1065 by Q1)15 Despite FX intervention. in our opinion16. we believe a break of 1080 is likely in the near term. $20mn. 37: USD/MYR and palm oil prices m-o-m changes 40% Palm oil price (m-o-m change) -8% Fig. $5mn.0bn. and the market likely to begin pricing a tightening of monetary policy from Q3 should all continue to support MYR. Nomura. 23 October 2012. which is a significant slowdown from the market estimate of USD5bn transacted in June and July 2012 (see Figure 38). inverted) 30% 20% -6% -4% EPF asset allocation and overseas investm ent flow Q2-12 Q1-12 2011 2010 Loans and bonds (%) 33 32 33 32 MGS (%) Equities (%) Money market (%) Property (%) AUM (MYR bn) Overseas holdings Overseas investm ent during period (USD bn) Source: EPF. RHS. premium 37bp)14 and short 3M USD/KRW through cash (fix 22 February 2013. in H1. see Malaysia Outlook). 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. China‟s improving near-term economic outlook and the continued global policy stimulus are likely to be supportive of MYR in H1. Fig. 14 See Asia FX portfolio update: enter short USD/KRW through options. 4) Short USD/KRW through a seagull (1080/1100/1175.9 1.5bn of transactions in July. but not change. 13 See Asia Insights: The Malaysian general election revisited. mainly because of local factors.2bn over the past 12months). 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. or USD8. On palm oil prices. we continue to expect a reasonable outcome.3 -50% Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Source: CEIC. 16 See South Korea: ceiling on bank FX derivative contracts lowered. Strong growth in H1 (Euben Paracuelles forecasts GDP growth of 4. Nomura‟s Malaysia equity research team expects a price rebound in the coming months.0% 28 34 3 3 468. Externally. 38: EPF asset allocation and overseas investment flow USDMYR (m-o-m change. 8 November 2012.5 3. may slow. 5 October 2012. which are likely to be held during the school holidays in 23-31 March 2013. 10% 0% -2% 0% -10% -20% -30% -40% Palm oil exports: 7.9 9. fix 23 January 2013.2 5. Bloomberg.3% of total exports 2% 4% 6% 8% 10% 27 34 3 3 494. 2H could see slower appreciation with our end-2013 USD/KRW forecast at 1050.7bn12 of foreign currency purchases in the rest of the year. the Employment Provident Fund‟s (EPF) dollar purchase-related outflows and the upcoming general election.9 13. 22 November 2012. CB/SWF bond-related inflows.4% 27 35 5 0 445. In addition.7%. with the next key level at 1060.9% of GDP. we believe the statement made by Deputy Finance Minister Choi on 22 11 12 See MYR: Impact of the palm oil price slide. Estimated from end-June balance sheet and assuming H2 AUM increase the same amount as H1. 33 .5% 27 33 5 3 488. but we expect this to fade given limited negative implications from the fall in palm oil prices. but also on the government‟s fiscal consolidation drive. entry 23 October 2012. Nomura.9% of total exports Allied product: 3.3 14.8 15.

premium 63bp)19 We look to fade any rally in INR. % of GDP) -6% Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 -20% -30% Source: FSS. lhs) by CBs/SWFs by Private Sector CBs/SWFs holding (% of Total Foreign Holding. 14 November 2012.6 7.0% 30% 20% 2% 0% -2% 10 5 6. KRW has appreciated by around 2.51. The second theme is likely to be signs of the economy strengthening (recently in exports. 20 See Asia FX Insights: INR – The next few positive events to watch. but without fiscal reform. entry 3 September 2012. 69. 5) Short USD/INR through a USD put / INR call spread (55. Source: CEIC. Into 2013. including the 17 18 19 See South Korea: An Economic Democracy. with an opportunity possibly at the winter parliament session. fix 20-Dec.0 3.1 -5. 8 October 2012).3 13.6 7. % of GDP) -4% PI (12m rolling. Nomura. we believe that the time to fade our tactically optimistic view on INR is fast approaching. Beyond the long INR recommendation through options. we would begin to trade USD/INR from the long side given the risk of new record highs in 2013. we do not view this as a necessity as seen over the past two months. The third is capital inflows from CB/SWF inflows (Figure 39) and the current account surplus (Figure 40).5% of GDP for Q4 2013 from 3.5 12.5bn of net foreign equity outflows18. Nomura. which started on 22 November and runs until 20 December. Spot may stay around a 54-56 range into H1 2013. this could be a strong source of support for KRW appreciation. USD/INR cash position on 8 October (See First Insights: INR: Take profit on short USD/INR cash position. But a pickup in foreign equity inflows could be a doubleedged 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. 34 . we expect there to be a few themes leading to further KRW appreciation.5 10% 0% -10% 0 -5 -10 2009 2010 2011 CA (12m rolling.0.25/54. However. We booked profits on short. 3 September 2012.4% 17. we had established a tactical short USD/INR cash position. 40: Korea – balance of payments 6% 40% 4% 30.3% against USD (on a spot basis) because of current account and bond inflows. industrial production and a lower inventoryshipment ratio). % of GDP) FDI (12m rolling. If there is a pickup in net foreign equity inflows as Nomura Asia Economics expects. NDF ref 56. 39: Foreign CB/SWF net investment in Korean bonds Foreign investments in Korean bond (USD bn. As we highlighted in our September report on India‟s balance of payments20. potential global policy stimulus and authorities enacting more aggressive policies to attract capital inflows. From October start till 22 November. 25 September 2012.3bp. That said.1% 16. See Asia Special Report: India's chronic balance of payments.1% for Q4 2012). $10mn.Nomura | Asia Special Report 28 November 2012 November that the country is "more concerned with the pace of won gains than the level” supports our outlook. Fig. The winter session may see a number of important bills on the table (Figure 41).9 6. rhs) 20 15 Fig. we expected INR to rally all the way towards year-end because of the temporary narrowing of the current account deficit.7 15. 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. Despite USD1.

35 . the long road ahead in terms of implementing reforms 22. Although INR could see some support into 2013 from our economists‟ view of capital inflows into Asia. Fig.3 105. 25 October 2012.1 79. cut subsidies.5 12 -4.4 1.2 16.7 -3. 42: India’s balance of payments breakdown USD bn Current Account Merchandise Exports Imports Invisibles Capital Account o/w Foreign Direct Investment o/w Portfolio Investments o/w Commercial borrowings Overall Balance Current account (% of GDP) 2011 -63 -168 306. National Investment Board.1 9.1 -3. HCL. Improve supply chain and logistics to low er food inflation in the medium term Bridge the fiscal gap Low er cost of capital for infrastructure projects Fully Im pem ented √ X X √ X X √ X X X X √ Increase household savings in equity markets Improve the financial viability and reduce losses in the pow er sector Improve revenues Fiscal consolidation over the medium term (if implemented) Boost the insurance base and expand investable insurance products Reduce leakages and increase the effectiveness of Linking of all school grants to Unique Identification (UID) cash transfers Accelerate flow of long-term debt for infrastructure Cleared a tripartite agreement for setting up of Infrastructure Debt Fund projects once the fund is established To encourage retailers and prevent black marketeering Urea price increased by INR50/tonne (1%) and use of subsidised urea fertilizers for industrial purposes Require parliam entary approval Increase FDI limit in the insurance sector and allow foreign reinsurers' entry FDI in the pension sector and make Pension Fund Regulatory and Development Authority (PFRDA) a statutory body Companies Bill Competition Amendment Bill Approved Forw ard Contract Regulation Act (Amendment) Bill or FCR(A) Bill Increase capital in the insurance sector Develop the pension sector Corporate governance and corporate social responsibility Extension of the Competition Commission‟s jurisdiction Give more teeth to the Forw ard Market Commission X X X X X Source: PIB. right-size plan expenditure) Insurance sector (review the 75% stipulation in AAA instruments.8 475. increase disinvestments. Fig. the Land Acquisition Bill and the Direct Taxes Code Bill21. Nomura Global Economics.8 3. aviation (49%). NALCO.Nomura | Asia Special Report 28 November 2012 Insurance Laws Bill (increasing the foreign ownership cap to 49% from 26%). Nomura Global Economics. OIL) Withholding tax on long-term infrastructure bonds and external commercial borrow ings cut to 5% from 20% Launch Rajiv Gandhi Equity Savings Scheme Restructuring pow er discom liabilities (financial package for state governments/discoms w hich includes compulsory annual tariff hike) Resolving fuel-supply issues for pow er producers Kelkar Committee Report (tax measures.3 21. 41: Indian reforms announced so far Reform m easures announced so far Im pact Do not require parliam entary approval Fuel price hike (diesel by INR5/litre and capping of subsidised LPG cylinder) Reduce fiscal defict by 0. in broadcasting (74%) and pow er exchanges (49%) Disinvestment of government stakes in four public sector units (MMTC. reduce bureaucratic processes) Boost stable capital inflow s.2 16.8 -4.8 565 131.1 67.8 Source: CEIC.7 60. we believe the negative local fundamentals in India – the lack of fiscal consolidation.1 496. expand SPV criteria to non-PSUs.1pp FDI liberalization in multi brand retail (51% FI limit). and Introduction of a goods & services tax – see Asia Special Report: India reforms (Part I): A long way to go.7 17. Land Acquisition Rehabilitation and Resettlement (LARR) Bill.4 2012 -77 -194 302.2 2013 -72 -204 360. Direct electronic cash transfers through a Unique Identification (UID) scheme. high and sticky inflation and the large 21 22 See Asia Insights: India: A heated winter session of parliament.2 116.4 11 -5.5 26. 20 November 2012.

7 by end-H1 and 28. short USD/MYR (15%). unless there are solid steps taken by the government to tackle the fiscal deficit and improve the investment climate. 36 . short USD/INR (2%).Nomura | Asia Special Report 28 November 2012 current account deficit (Figure 42) – are likely to limit any INR performance against USD in H1. the positive carry (3M at +130bp. %) MAS Core inflation (y-o-y. Ahead. If a resolution to the US fiscal cliff emerges before end-2012.65 by end 2013. short USD/CNY (13%). recent TWD strength (against USD). annualised carry: 2. Source: CEIC. %) S$NEERmod S$NEERmid S$NEERup S$NEERlow Oct-12: Maintain the policy of a modest and gradual appreciation.7% y-o-y Oct-07 Jul-09 Apr-11 100 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 -4% Jan-06 Source: Bloomberg. short USD/THB (2%).3 standard deviations. entry 12 October 2012. The main reason for us to build on a short SGD against a basket recommendation is because of rich FX valuations. fix 14 January 2013. Nomura.8% annualised appreciation and at -2. and a hedge for our Asia FX portfolio. 43: Nomura’s S$NEER model 122 120 118 116 114 112 110 108 106 104 102 Apr-10: Appreciation bias and recentred S$NEER higher Oct-10: Increased appreciation slightly and widened policy band slightly Apr-12: Increased slope slightly and restored a narrower band Oct-11: Reduced the slope of policy band Jan-1999 = 100 Apr-11: Recentred midpoint higher but below prevailing S$NEER Fig. entry 11 September 2012. 44: Headline and core inflation 10% 8% 6% Headline inflation (y-o-y. short USD/JPY (11%). However. US$10mn. That said. fix 11 December 2012. short USD/KRW (5%). Into H2 2013. 23 Short S$NEER basket details: Long USD/SGD (100% of notional). 28 November). 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.7% y-o-y YTD Core: 2. to which we are skeptical given it is a pre-election year. US$10mn. short USD/IDR (8%). 6) Short SGD vs basket23 ($40mn total notional. the weaker JPY and still relatively soft global growth will weigh on SGD. we will unwind this hedge. riskreward continues to be in favour of being short S$NEER (Figure 43). Nomura. entry on 27 November 2012. Indeed. fix 22 February 2013. 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. Fig. 12 October 2012. 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.8%) This is another hedge to our portfolio into 2013. 4% 2% 0% -2% YTD Headline: 4. TWD is also likely to see negative forces from the slowdown in China in H2. 7) Long 3M USD/TWD ($5mn. long EUR/USD (11%). FX and rates views after MAS leaves policy unchanged. We forecast USD/TWD at 28. $20mn. We are short TWD as an additional hedge given the risk of the US fiscal cliff. short USD/PHP (2%). the appreciation priced into the NDF curve (3M NDF 2. fix 25 February 2013. entry level 28. long AUD/USD (3%) and long GBP/USD (3%) 24 See Asia FX Insights: Singapore: Economic. we will position tactically on USD/TWD through the year with a general bias to be long USD. still relatively weak global demand and a weaker JPY (Figure 46). our bias in 2013 (particularly in H2) will be to build on a long USD/INR position. short USD/TWD (4%). Figure 45) and risk of macroprudential controls.87. With S$NEER only 30bp from the top of the band and 370bp from the bottom.

There are some significant benefits from these flows for Asian currencies.7% 4.Nomura | Asia Special Report 28 November 2012 Fig. asset allocation by central banks and sovereign wealth funds (CBs/SWFs) into Korea.5% Avg -ve Rtn -1.7% 45. continued loose global monetary policies.2bn (Figure 47).2% 0.0% 2.3% Avg +ve Rtn 2. These include the belief that a global economic heart attack like 200809 is unlikely.1% -1. showing CBs/SWFs accounted for 6. from January to October 2012. 37 . including reduced vulnerability of local markets to global financial pressures. Korea‟s rating upgrade26 is likely to have improved perceptions of Korea as a safe destination for bond flows. 26 Moody‟s upgraded Korea from A1 to Aa3 on 27 August. we identify some specific drivers of Asian currencies: 1. Beyond these. Korea is where the data are more readily available. 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. Furthermore.8bn)25 by 2011.0% -0.g. but there has been much anecdotal evidence from official sectors (Norges Bank Investment Management and Swiss National Bank.5 SD -2 SD Total 239 98 26 14 Count +ve Rtn 95 45 14 9 Count -ve Rtn 141 52 12 5 Hit 39. 46: TWD – Vulnerable to China slowdown and JPY weakness Exports (12m rolling) (% of total exports) US 11% EU 6% China 27% Japan 6% (as % of GDP) 7% 4% 17% 4% BIS NEER Weights 13% 11% 27% 19% Source: Bloomberg. Fitch from A+ to AA. Source: BIS.7% 1. In particular. rising inflation and robust capital inflows leading to the risk of overheating.) that CB/SWF net investment is likely to have remained strong.8% 64. CEIC. the Korea Financial Supervisory Service (FSS) has not published data. for e. and other positive factors including fading concerns over the US fiscal cliff.6% -1.on 6 September and S&P from A to A+ on 14 September 2012. Nomura.8bn) of total foreign ownership in 2009 before increasing rapidly to 30. Singapore and Malaysia bonds After the US financial crisis and the emergence of the eurozone crisis in 2010.0bn. Structural inflows into Korea.8% Avg Rtn -0.7% 2. the FSS has said that the rating upgrade has been a factor contributing to strong net bond investment of USD1. For 2012.4% (USD2. but also authorities in the region have.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. despite slow global growth. Indeed. followed by Switzerland with USD2. a China rebound. Singapore and Malaysia picked up substantially. the two largest net buyers have been Norway. and are likely to be less reactive against such inflows. with net investment of USD3. The FSS in its 2012 monthly releases noted that net investment has been “mainly” from foreign central banks. 45: Compressed NDF curves provide opportunities to hold long USD/TWD positions Avg Rtn of a HTM strategy w hen 3M points are depressed If 3M pt If 3M pt If 3M pt If 3M pt low er than low er than low er than low er than 1Y Sample 1 SD 0 SD -1.9% 53.0% Fig. Nomura.0% 3.1% (USD21.

2bn ∆YTD : $0. with the sharpest falls in Q3 2011 and Q4 2011 (an average 10.Nomura | Asia Special Report 28 November 2012 Fig. the pace of deleveraging is likely to be gradual. versus 8. 47: Holdings of Korean bonds 12 ∆YTD : $1. ID.5% as of Q3 2012. 27 28 40% of total eurozone lending to Asia in Q2 2011. on a 12-month rolling average). The ratio for EU banks has since improved to 9. 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. 48: Current account trends in Asia 10 Korean bond holdings in USD bn Mar-11 Mar-12 Jun-11 Jun-12 Sep-11 Sep-12 Dec-11 Oct-12 Current Account as % of GDP 8 YTD (avg increase per country): USD1.3% in the US and 9.7% in Q2 2008). remain quite large.0% in Asia. From Q2 2011 to Q2 2012. Indeed. 38 . 3.4bn ∆YTD : $3. excluding these three countries (because of China‟s weight in Asia.2% q-o-q fall). to around 3. Source: CEIC. India and Indonesia because we are medium-term bearish and prefer to short these currencies). Note that the actual USD flow remains large at USD19. 2. 15 June 2012). 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. at 5. IN 0 Dec07 Jul08 Feb09 Sep09 Apr10 Nov10 Jun11 Jan12 Source: FSS Korea. European regulators on average ask their banks for higher minimal capital standards.7% of GDP in Q2 2008). 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. the breakdown provides further good news as the main source of deleveraging is the French banks27 (Figure 49). falling to 31% in Q2 2012. and not too far from precrisis levels (6. 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%. to USD329bn. compared with around 9% in both the US and Asia (see UK and European Banks presentation.0bn for Korea in the same period. Our European bank analysts expect most EU banks to be Basel 3 compliant by 2013 (see European Banks: Update.7% of GDP in Q2 2012 (Figure 48). That said.0bn Fig. Fully phased Basel III core Tier 1 ratios for the largest global banks at end-2011 stood at 8. Nomura.7bn 6 4 2 All Asia Ex CN. while smaller than four years ago. while South Korea‟s has continued to rise since the end of 2011. which will be key for Asia FX. but mainly because of the fall in China‟s surplus and sizable deficits in India and Indonesia. Nomura.4% of GDP in Q3 (from 16. 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 ratios28.1bn for Malaysia over the past 12-months and USD40. averaging 10% in this sample. However. current account surpluses in the rest of Asia.5% in Q2 2008). 16 November 2012).1bn 10 8 6 4 2 0 China Switzerland Kazhakstan Norway ∆YTD : $2. outstanding eurozone bank loans to Asia fell 21% (or USD85bn).6% of GDP in September (1. Malaysia‟s current account surplus has fallen to 6. Deleveraging may continue.9% in Europe.

Nomura | Asia Special Report

28 November 2012

Fig. 49: Eurozone banks claims on Asia

Fig. 50: FX valuations

India Thailand Indonesia Korea Hong Kong Philippines China Malaysia Singapore Taiwan

Raw Model Output FEER SEER Avg 15 20 18 1 5 3 -2 11 5 -5 -8 -6 -3 -7 -5 -12 -5 -8 -8 -6 -7 -4 -18 -11 -24 -18 -21 -34 -16 -25

Source: BIS, Nomura.

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 30

Reuters article “S.Korean authorities buy close to $1bln in intervention to curb won‟s rise, ” 22 November 2012. Bloomberg “S.Korea more concerned with pace of won gains than level,” Deputy FM Choi Jong Ku, 22 November 2012.


Nomura | Asia Special Report

28 November 2012

Fig. 51: Adjusted Asian FX reserve growth

Fig. 52: Estimated intervention

Adjusted Asian FX reserves growth (m-o-m change, USD bn)
Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 12m avg 3m avg INR 0.7 2.7 1.6 3.0 4.8 6.4 2.1 0.5 0.2 0.3 1.9 2.4 0.4 1.2 0.7 2.0 0.8 IDR 2.0 -8.3 -1.4 -2.0 -0.4 1.5 0.1 -1.6 5.7 -3.1 -5.6 0.6 1.8 0.5 0.1 -0.2 0.8 KRW 1.4 -2.5 4.5 0.2 0.7 3.8 3.9 0.3 0.6 -0.1 -0.5 4.0 0.5 2.8 1.2 1.5 1.5 MYR 0.9 -2.6 2.5 1.1 0.1 -0.1 0.4 1.0 0.1 2.5 -2.5 1.1 -0.4 1.6 0.8 0.5 0.6 PHP 4.1 -0.2 0.4 0.6 -0.6 1.9 -0.3 -0.8 0.3 0.0 -0.1 3.8 0.8 0.9 -0.3 0.5 0.5 SGD 0.2 -10.5 9.4 -2.4 -1.0 6.8 1.1 -3.3 2.3 -3.8 4.2 2.3 0.4 4.2 1.9 1.1 2.2 TWD -0.2 -3.0 0.2 -2.1 1.3 3.3 3.4 -0.3 0.9 1.5 -0.5 2.4 0.6 0.9 1.0 1.0 0.8 THB 0.8 -5.2 0.6 -2.6 -1.9 2.8 2.1 -0.9 -0.8 -4.8 2.3 1.3 3.0 3.3 -2.1 0.1 1.4 CNY 19.5 11.7 36.3 -22.9 -5.7 59.5 48.1 -3.1 3.9 -1.3 11.1 23.9 9.5 -13.6

Estimated Intervention - Adjusted Asian FX reserves growth + FX Forwards (m-o-m change, USD bn)
Date Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 INR 0.7 2.7 1.6 1.4 5.1 6.5 2.0 -1.2 0.0 -6.6 -1.9 2.0 0.8 1.3 IDR 2.0 -9.1 -1.9 -2.5 -0.7 1.8 0.7 -1.6 6.6 -3.5 -5.4 1.0 1.6 0.6 KRW -0.2 -7.4 -4.3 -2.8 1.1 0.7 3.9 -1.3 -1.2 -1.3 -1.0 4.0 -0.2 2.4 MYR 0.7 -5.0 -3.0 1.4 -0.8 0.2 1.1 2.8 0.0 2.2 -4.2 0.7 -0.5 2.7 PHP 1.0 -3.6 -1.3 0.6 -1.2 2.7 -0.5 -1.1 0.4 -0.1 0.3 0.9 -0.1 0.5 SGD 3.1 -11.7 7.4 -4.6 -2.7 4.3 1.4 -2.9 1.9 -6.0 0.3 1.9 -0.5 0.8 THB 1.4 -4.9 2.2 -0.8 -1.5 2.4 0.6 -0.9 0.3 -4.2 2.0 0.5 0.2 1.0

12.1 6.6

12m avg 3m avg

0.9 1.4

-0.3 1.0

0.0 2.1

0.2 1.0

0.1 0.4

0.1 0.7

0.2 0.6

Source: CEIC, Bloomberg, Nomura.

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 Fig. 54: Asia exports (rolling 12m)


Dollar 93% 98% 73% 73% 65% 71% 81% 60% 76% 73% 76%

Euro 6% 2% 32% 35% 60% 31% 28% 35% 26% 25% 28%

Yen 1% 0% -5% -8% -34% -8% -8% 0% 0% -2% -6%

R-Sq 98% 100% 58% 66% 46% 76% 74% 83% 69% 87% 76%
150 100

400 350
300 250 200

Exp -Japan



Exp - Asia ex China

50 Oct-02 Mar-04 Aug-05 Jan-07 Jun-08 Nov-09 Apr-11

Source: Bloomberg, Nomura.

Source: CEIC, Bloomberg, Nomura.


See Asia Insights: Impact of a weaker JPY on Asia FX, 21 November 2012.


Nomura | Asia Special Report

28 November 2012

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 deeperthan-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. Kewei Yang
+65 6433 6246

Advin Pagtakhan
+65 6433 6555

Vivek Rajpal
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The SGD 3fwd 1yr and SGD 4fwd 1yr currently slide positively by 17bp and 21bp over 6M. the targeted annualised appreciation slope for the S$NEER is of most interest to rates investors. the regression-weighted spread between SGD 5fwd 5yr to 0. 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).     Singapore: remain received where there is attractive volatility-adjusted slide.50) of USD 5fwd 5yr. At the back end of the curve. INR and CNY rates We start by highlighting our high conviction trade recommendations for the year ahead. though 42 . compared to the negative slide on an equally weighted spread. Key recommendations for 2013: SGD. China: position for further bear steepening. We then provide our thoughts on individual country markets. In addition. respectively (Figure 55) and remain favourable to receive when we adjust this forward rate slide by both realised and implied volatility. we also intend to explore occasional relative value opportunities in markets closely linked with the US. given the curve‟s strong relationship with the USD curve and the Fed‟s extended low-rates guidance.4) slides positively by 7bp over 6M. Receive the back end of the SGD IRS curve (5fwd 5yr) against a regression-weighted amount (0. when we adjust the carry/roll by realised volatility. 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. For those interested in spot tenors. 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 Singapore. In terms of policy tools. this should also serve to dampen volatility in the SGD curve and improve the overall ex-ante Sharpe ratio. we maintain our recommendations to receive SGD 3fwd 1yr and SGD 4fwd 1yr. closer to the front end of the SGD IRS curve. In terms of the fundamental backdrop. A positive slope (hawkish stance) for the S$NEER path puts downward pressure on the 6M SOR fix. USD 3fwd 3yr and USD 3fwd 2yr are also robust and carry positively if beta-adjusted. Currently. Lastly.50 * USD 5fwd 5yr (existing recommendation uses a weight of 0. Alternative combinations involving SGD vs. Malaysia and Thailand): capital inflows caused by QE in developed markets. India: bullish on bonds and maintain a received bias on the 3-5yr part of the curve. a better EM outlook and higher EM yields should help bonds outperform swaps locally and US Treasuries internationally (on a relative basis). 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. In other cash bond space (mainly Korea. such as Hong Kong (HKD peg to USD) and Singapore (SGD NEER policy regime and the swap offer rate (SOR) fix mechanism). Singapore: receive where there is favourable volatility-adjusted slide   Receive 3fwd 1yr and 4fwd 1yr IRS which are carry trades with high rolldown-tovolatility ratios. we maintain our rolled down recommendations to receive SGD 5fwd 5yr against USD 5fwd 5yr and look to add should valuations become favourable. 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. to diversify risk and add less-correlated returns to our Asian rates portfolio. as it is this measure that feeds into consumers‟ inflation expectations. 6 November 2012).Nomura | Asia Special Report 28 November 2012 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. followed by small open economies like Taiwan. given the supportive MAS policy stance and what we see as good risk-reward properties (see Asia Insights: Singapore: remain received SGD IRS.

45 100 1.30% levels. IGB 8. % 5% 4% 3% 2% 1% 0% -1% 08 09 4fwd 1yr . We believe that below-trend growth. These are the three most liquid on-the-run government bonds. Target 7. 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. Look to exit ahead of the first rate cut. Reassess 8. 1fwd 2s5s steepener.29 1.Nomura | Asia Special Report 28 November 2012 we eschew allocating fresh risk capital to them because on a relative value basis we see these pairs at fair value. India: stay bullish going into 2013  Long bonds.61 1. 56: SGD IRS curve over the past 6M.09 0. this may well occur in the 20yr part of the IRS curve (liquidity permitting). regulatory-driven demand and.19%) and IGB 8. Fig. RHS) Swap offer rate 6M . which would result in a rise in the SGD 6M SOR fix pushing up the front end of the curve. Nomura.7%. We recommend IGB 8.   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. Receive 3-5yr (ND) OIS. the main risk comes from the global backdrop. Source: Bloomberg. global risks. As we move into H2 2013.76 0. to some extent. We are comfortable that we will be able to maintain these views over the medium term. That said.annual slide (bp. as some insurers look to synthetically recreate duration exposure.31%).64 0.5 0. 43 . We would expect the 5yr to outperform once the RBI begins to cuts rates. and/or when liquidity conditions ease.0 1. 3s10s. and as the substantial positive slide also augments the holding power of the trade.% SGD IRS 4fwd 1yr .% 125 2. Earn the carry in the front end while the RBI is on hold and there is a liquidity deficit. given the robust relationship with the USD rates curve.5 75 Percent 1.91 50 25 0 bp 1. In terms of where we may see the manifestation of this synthetic demand.0 1yr 2yr 3yr 4yr 5yr 6yr 7yr 8yr 9yr 10yr Source: Bloomberg. given the stated policy and economic backdrop.56 0.33% 2026 (14yr) (Current 8.17%. this should result in regulatory-driven demand. the rolling flattening dynamic in the IRS curve should keep yields in this part of the SGD rates curve low. the potential for stronger sequential growth in advanced economies could weigh on our directional recommendation to receive SGD 5fwd 5yr.15% 2022 (10yr) (Current 8. We expect the 10yr and 14yr to outperform on the curve on open market operations (OMOs).56 -25 10 11 12 0. though the relative value trade should be more insulated and provide more alpha. This additional demand for sovereign duration is also likely to result in receiving interest in the back end of the IRS curve. slide and SOR fix Fig.37%). (ND) OIS 3s7s. Tactical: Pay 1yr or 1s5s flattener. which we believe will start in January.54 0. 55: SGD 4fwd 1yr. Below we discuss the reasons for our bullishness and our key recommendations. Any sharp deterioration in the global growth outlook could see the market price in a more dovish MAS. which we expect to resume soon. Nomura.73 1. As Singapore moves towards updating its risked-based capital framework for insurers. We recommend scaling into receive belly trades at or above 7. We recommend entering into steepeners once rate cuts arrive.07% 2017 (5yr) (Current 8.0 0.

which will be consistent with its stance of keeping liquidity at +/-1% of NDTL. We expect the 10yr to reach 7. 57: SLR. before starting a gradual downward trajectory again to end 2014 at 7. banks continue to hold nearly 30% of their NDTL33 in their portfolio (Figure 57). Not only that.  We believe both these factors will continue in 2013 and hence. Nomura. Fig. In terms of the yield curve. and the RBI in the form of it OMOs. which is being spurred on by the government‟s poor fiscal position. Non-food credit. 22 August 2012. 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. which has led to 100bp fall in average MIBOR fixings. We note that this easing is consistent with our economists' view of inflation peaking in Q4 12 and shifting to a downtrend thereafter. Nomura. 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. We would not be surprised if the RBI becomes even more proactive and brings liquidity in the banking system to neutral levels.7trn through OMOs since the start of the calendar year. By conducting these various liquidity measures. with inflation peaking. policy rates 35% SLR/NDTL (LHS) Non Food Credit y-o-y (RHS) 30% 10% 9% 33% 31% 25% 20% 8% 7% 6% 5% 29% 27% 25% 10 11 12 13 Source: Bloomberg.1trn has been injected into the system via a cumulative 175bp of cuts in the cash reserve requirement ratio (CRR) and approximately INR1. The RBI's willingness to inject liquidity in the form of OMOs.8% in Q1 2013 before consolidating in Q2 (which is typically a high issuance quarter). 44 . the RBI has eased money market conditions significantly this year. 58: MIBOR. Despite the mandatory 23% SLR requirement. Our economics team. 15% 10% 4% 3% 2% 10 11 MIBOR O/N Repo rate Reverse Repo 1M AVG OF MIBOR 12 Source: Bloomberg. 32 33 India Rates: Time to initiate longs. expect yields to find new lows. NDTL = Net Demand and Time Liabilities (~ aggregate deposits of banking system). continues to outweigh supply. y-o-y Fig. we expect a limited steepening on our expectation of only 50bp of repo rate cuts while OMOs should keep the longer end rich. we expect this easing of monetary conditions to continue. expects 50bp of repo rate cuts in H1 and another 25bp of cuts to the CRR (see India outlook). 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. As we head into 2013. We expect the RBI's efforts on this front to only increase over time as it becomes more overt in supporting growth.Nomura | Asia Special Report 28 November 2012 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 2012.5%. while we expect OMOs to continue. Not only has the repo rate been reduced by 50bp. Sonal Varma and Aman Mohunta. but approximately INR1.

we expect volatility in the 7d repo fixings to be significantly reduced. we believe it will become common for MIBOR fixings to fall below the repo rate (Figure 58). we have argued. However. Once rate cuts arrive and/or liquidity conditions ease. 45 . while the RBI is on hold and there is a liquidity deficit. since 2012 (especially in H2). As mentioned above. receiving the front end of the (ND) OIS curve is a significantly negative carry/roll trade and. the macroeconomic outlook and liquidity (see China: Dissociation of policy rate expectations and liquidity premium. we published a report (China: Dissecting interbank liquidity. 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. 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. 2) key leading indicators (M2 and total social financing (TSF)) began to show improved 34 35 The nondeliverable overnight index swap curve. 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. we would expect front end to outperform on the curve and curve to bull steepen. From a timing perspective. as this is the time of year when currency flows back into the banking system (and combined with a somewhat quieter credit season).Nomura | Asia Special Report 28 November 2012 (ND) OIS. in the near term. Owing to aggressive pricing. when the market was deeply bearish on China‟s outlook. therefore. their influence has been quite different. and hence is pricing in a combination of repo rate cuts and easy liquidity conditions. March 2012) that described in detail the PBoC‟s OMOs. liquidity supply/demand and the various monetary policy mechanisms available in China. that the importance of the liquidity premium is gradually shrinking because of the PBoC‟s fine-tuning of policy. which poses significant mark-to-market risk for investors positioning in China IRS (mainly IRS indexed to the 7-day repo fixing).35 we believe that the (ND) OIS market is also assigning the possibility that overnight rates may fall below the repo rate. However. If such a scenario develops. China stands out as the one market in which we have consistently paid since mid-2012. As the market is not as liquid as other developed rates market in Asia ex-Japan. India Rates: Analysing OIS pricing and liquidity conditions. we believe one should express the receive bias better in the belly of the (ND) OIS curve. Maintain paying bias on the back end and look to pay on dips until we see financing growth reversing its upward trend. positioning on the basis of macro fundamentals can easily be knocked out by a short-term liquidity shock. As the PBoC can flexible use either or all of the reverse repo. 18 February 2011). We also note that. one can tactically put on flatteners or front-end paid positions to earn carry/roll. From this starting point. PBoC bills and the required reserve ratio (RRR) as policy tools. liquidity has also been very important as it can dominate the macro outlook for months. Hence we expect the importance of the macroeconomy to naturally rise because the impact of the liquidity factor becomes transitory and short-lived. 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). 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). This thus leads us to focus more on the macro side and we started our out-of-consensus paying bias recommendations in mid-2012. firstly. China: continued bear steepening   Maintain 2s5s and 3s5s curve steepeners. 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). which should benefit from both an improving economic outlook and potential liquidity easing to support social financing. 3 October 2012. 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. we believe this is most likely to occur in CY Q3. The 3m average has been very stable in H2 12 as the PBoC extensively utilizes reverse repos to fine-tune liquidity. Of the two main drivers of the China rates curve. repo. This is why many investors often refer to the China rates curve as a “liquidity curve”. As we have written before.

suggesting that pricing has returned to neutral. and 2) the gradual stabilisation of the economic outlook.5% -1.0% -0. Above-potential growth and higher inflation suggest that there might even be room for rate hikes in H2 2013 (Our China economist. we continue to hold our bear steepening view on China repo IRS. This represented a very loose monetary stance priced into the curves. driven by the back end of the curve as the market starts to build in rate hike expectations in 2013.5% 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).0% 2. which was inconsistent with the prudent monetary policy stance. Nomura. with the PBoC well armed with its OMO tools. Although China rates have sold off by more than 100bp across the curve since July. In the near term. which was good news for an economy driven so heavily by credit in recent years. 59: The recent sell-off was led by reduced rate cut expectations… Fig.5% 1y deposit current mid Jul-2012 liquidity premium . Fig. We therefore expect any liquidity squeeze into year-end to be very temporary. We believe it more likely that tactical opportunities will present themselves around the Lunar new year. As such.1y 1. At the moment.0% 2008 2009 2010 2011 2012 Source: Bloomberg. On these expectations of deep rate cuts.0% 0. The strong fiscal and monetary supports from the government have shown signs of stabilising growth. the more fundamental macro factors are again likely to become the most important driver going forward. the liquidity premium based on our framework was deeply negative at around -25bp (the low since 2009 and not far from the 2008 low).Nomura | Asia Special Report 28 November 2012 growth. though we will admit to the fact that the improvement in real economic activity arrived a bit later than we expected.0% 3. 1. The bear steepening trend in H2 2012 is driven by: 1) the normalisation of monetary conditions from temporary looseness back to neutral. Nomura. Again. 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. Although China rates have sold off by more than 100bp or so across the curve since July. expects two rate hikes in H2 2013. as we believe the PBoC will maintain a neutral level of interbank liquidity via its fine-tuning operations.5% 0.0% Dec-05 Apr-07 Sep-08 Jan-10 Jun-11 Oct-12 Mar-14 Source: Bloomberg. the IRS indexed to the 1yr deposit rate priced in a rate cut from 3.70% by the end of 2013 and 25bp of liquidity premium. the China curves are pricing in a 1yr deposit rate at 2.5% 4. the market has just recently started to turn a bit positive on China‟s economic outlook. see China outlook). the back end of the China rates curve has exhibited a very strong directional relationship with financing growth. Furthermore. This is expected as activity data is showing signs of stabilisation. 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. 46 . there is still room for them to move higher.5% 2. 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. Zhiwei Zhang. Rates views across the region China: rates continue to bear steepen In Asian. 60: … as well as rising liquidity risk premium 4. the calendar new year as well as the Lunar new year (which falls in January this year) may see a liquidity squeeze. As such we expected these conditions to be only temporary. For example.

0 4. Taiwan stands to benefit as economic linkage with China continues to strengthen. Nomura. Given the policy rate is kept at a very low base and liquidity in the system will remain abundant. has been determined by the back end reflecting the macro outlook. then. we do not expect overall conditions to change dramatically as Taiwan remains a small. we continue to note the reduced importance of liquidity dynamics as a rates market driver into 2013. 61: the macro outlook drives broad rates trends Fig. especially related to the global market. see Taiwan outlook). PBoC Bills and the RRR as policy tools. This is the main reason why policy rate tightening has usually been partially passed through to CP fixing. as a function of a relatively low policy rate and abundant interbank liquidity. Source: Bloomberg. 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. which should also widen swap spreads As China‟s outlook improves. and sometimes provides relative value opportunities.0 CPI+IP 2y 5y 2012 5% 4% 2. 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. in our view (our economist Young Sun Kwon.0 9% 8% 7d repo fixing bill/repo 3m (withdrawal) reverse repo 7d (injection) 20% 15% 10% 5% 0% 2007 2008 2009 2010 2011 7% 6% 3.5bp hikes in H2 2013.0 1. Nomura. 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. 47 . 62: A more stable 7d repo fixing 30% 25% 5. expects two rate 12. 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. In Q1 and Q2 reports. Taiwan: rates are likely to bear steepen. Swap spreads will also tend to widen as bond yields are kept stable by domestic demand and abundant liquidity.0 2013 3% 2% 2011 2011 2011 2011 2012 2012 2012 2012 2013 Source: Bloomberg. the PBoC started to put more emphasis on fine-tuning operations and mentioned specifically reverse repo and repo rates. This is evidenced by language changes in quarterly monetary policy reports as well as increasingly flexible OMOs. The curve. Fig.Nomura | Asia Special Report 28 November 2012 Other than the macro outlook. Although the Central Bank of China (CBC) continues to sterilise liquidity in the system. 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. the rates curve is likely to steepen to price in rate hike expectations in mid-2013. export-driven open economy.

However. Source: Bloomberg. the curve has priced in an even lower CD fixing and we see a marginal probability of another rate cut. 66: USD-HKD rate spread has less room to tighten 7. bp 5y. which points to abundant liquidity and outperformance of HKD back-end rates over USD rates (i. we would expect the Korean curve to also face pressure to bear steepen. We would like to position for this when the back end spread is close to zero. bp 10y. bp (rhs) 70 60 50 40 30 20 10 0 2011 2012 2013 Source: Bloomberg. 64: The curve shape remains driven by China and the US 6% 5% 4% 3% 2% 1% 0% 2000 2002 2004 2006 2008 discount rate 90D CP fixing 5y NDIRS 6% 5% 4% 3% 2% 1% 2008 2010 2012 2009 2010 100 10y IRS (USD) 90 5y NDIRS (CNY) 80 2s5s.60 2000 2002 2004 2006 2008 2010 2012 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 225 3m fixing. 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. allowing the Bank of Korea (BOK) to leave rates unchanged (see Korea outlook). Our economist expects GDP growth and CPI inflation to rise only modestly in 2013. which limits room for Libor-Hibor spreads to move even more negative. Nomura. Nomura. along with 48 . in our opinion. because Libor-fed funds basis has already reached quite a low level.e. Once the US rates curve starts to rise. as we expect domestic drivers to be less significant in 2013. The Korean rates curve is more likely to move along with global risk sentiment.85 7.90 7. though biased to edge higher Korea rates have become very stable since the last rate cut in October. Korea: stable rates. The spread between Libor and Hibor is not expected to widen further. even a wider USD-HKD spread). 63: rate hike expectation is likely to steepen the curve Fig. We interpret such pricing as reflective of asymmetric global risk and the potential impact on the Korean economy. Hong Kong: expect outperformance relative to USD rates Hong Kong will also benefit from a stronger-than-expected China rebound. As capital inflows. Currently. Source: Bloomberg. supported by a better economic outlook in H2. Nomura. 65: HKMA intervention adds downward pressure on rates Fig.65 7. bp 175 125 75 25 -25 -75 2000 2002 2004 2006 2008 2010 2012 Source: Bloomberg. Nomura.Nomura | Asia Special Report 28 November 2012 Fig. which is also not against the view of outperformance of HKD rates. 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.70 7. Fig. the impact on the HKD rates curve is slightly different from Taiwan‟s due to the currency peg to USD and low interbank rates.75 7. bp 2y.80 HKD HKD 12M fwd HKD 2y IRS (rhs) HKD 10y IRS (rhs) 7.

remain supportive of our bullish rates view. In our view. while the RBI is on hold and there is a liquidity deficit. which points to a wider swap spread and narrower KTB-UST spread. 69: Indian bond yield curve Fig.Nomura | Asia Special Report 28 November 2012 strong domestic demand. In terms of yield trajectory.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. support KTBs.79 2021 8. 68: capital inflows are likely to help KTBs outperform 8% 7% 6% 5% 4% 400 3m CD fixing Base rate 300 200 100 0 2000 -100 -200 Source: Bloomberg.17 2015 8. We also note that. consistent with our weak growth outlook. In (ND) OIS as well.15 2022 9. along with our view that the RBI will proactively manage liquidity conditions should aid this bullish bias further.2% 8. we expect the 10yr to reach 7.15 2024 8. The expected recovery in activity data should also aid the steepening of the (ND) OIS curve in H2 2013 (see India outlook). should outweigh supply pressures emanating from the government's high fiscal deficit. bp KRW-USD policy rate spread. 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.26 2027 8. one could tactically put on flatteners or front-end paid positions to earn carry/roll. which will be consistent with its stance of keeping liquidity within +/-1% of NDTL. Fig. allowing the RBI to ease further.19 2020 8. Fig. the most likely timing of easy liquidity conditions is Q2 and Q3 of the calendar year. 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). we would look to switch into steepeners as we would then expect front-end (ND) OIS to outperform on the curve. Nomura 49 . This.83 2041 8.4% 8. in the near term. We would not be surprised if the RBI becomes more proactive and brings liquidity in the banking system back to neutral levels. 2002 2004 2006 2008 2010 2012 KTB-UST 10y spread. 1m average 8.33 2026 8. more importantly. However.Repo Rate (in bps)) 100 50 0 bp 0 -10 -20 8. 70: MIBOR-repo rate spread. Nomura Source: Bloomberg. combined with demand from the RBI in the form of its OMOs.8% -100 -150 10 11 12 Source: Bloomberg.0% Hundreds 20 10 bp 3 Month Change 1 Month Change Latest Yield Curve (RHS) 150 1M Avg (MIBOR .5%. aimed at injecting liquidity into the system. 67: Korean curve still prices in a slight rate cut Fig.28 2032 -50 7. 3% 2% 1% 0% 2000 2002 2004 2006 2008 2010 2012 2014 Source: Bloomberg. This.33 2036 7. once rate cuts arrive and/or.07 2017 8.97 2030 8. We believe the RBI‟s easing of monetary conditions and liquidity dynamics to remain the key drivers of rates in India in 2013. we expect they will outperform swaps and US Treasuries under our baseline view for 2013. we believe low credit demand in the economy. will keep demand for cash bonds in the banking system strong. From a cash bonds perspective. liquidity conditions ease. Nomura. Nomura.

we believe the policy backdrop will remain conducive to receive. bringing foreign ownership of Malaysian government bonds (MGS) to 42. Unless there is a general bout of risk aversion. While the below-trend growth outlook and regulatory-driven demand in Singapore should put downward pressure on the IRS and SGS curves. In terms of what part of the curve is attractive. We do not expect any dramatic policy-induced moves in the MYR IRS curves in H1 given the challenging external backdrop. 2026 and 2032 bonds are cheap to the curve (Figure 74).6% a year earlier (Figure 73). bp 60 40 20 2% 0 1% 0% -1% 08 09 10 11 12 Source: Bloomberg. 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 a change in policy stance is unlikely. 72: SGD IRS 10yr vs USD IRS 10yr is fairly valued. As a result.1% in September from 34. x:USD 10yr. as a means of diversification given the ongoing difficulties in many European sovereign debt markets. However. bp 5% 4% 3% Swap offer rate 6M SGD IRS 3yr SGD IRS 5yr SGD IRS 7yr 80 Residuals . we expect this to continue into 2013 amid continued investor and FX reserve-manager allocations to emerging market debt. as hawkish monetary policy translates into low front-end rates via the swap offer rate (SOR) construction (Figure 71).y:SGD 10yr. Still. the forward curve suggests that the biggest cushion to add duration lies beyond the 10yr part of the MGS curve. the risks to these views come from the robust historical relationship with the USD curve. From here. While recent activity data have disappointed. as this results in modest positive carry and captures the underlying relationship between the two curves. 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. given the negative carry of holding a 2s5s steepener (-8bp over 6M) and the near-term hurdles from advanced economies. Nomura Malaysia: continued foreign interest in the government bond market In Malaysia. that does not preclude us from tactically looking at steepening trades should the 2s5s spread once again approach historical lows. we do not believe this will significantly affect the MAS‟s assessment of the domestic growth outlook. foreign investor interest in the domestic market has been robust for the last three years. 71: SGD SOR 6M and selected IRS . our government bond spline suggests that each of the 2025. using our government bond relative value analytics.Nomura | Asia Special Report 28 November 2012 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. with the associated pickup in the economic backdrop. Against this backdrop and with headline inflation remaining well above its long-term historical average. Nomura -20 -40 -60 08 09 10 11 12 Source: Bloomberg. we believe that this dynamic will remain largely intact unless we see a substantial surprise to the upside in terms of tighter monetary policy. we would expect to see steepening pressure on the curve. As we approach the timing of our forecast rate hike in Q3.% Fig. We maintain our recommendation to receive the back end of the SGD curve against a regression-weighted (0. Fig. 50 . 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. That said. Should the “Phase 1” scenario mentioned above of a positive environment for riskier assets be realised.5) amount of USD. 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.

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.% 35 25 15 5 -5 05 06 07 08 09 10 11 12 Source: CEIC. 10% 0% 07 08 09 10 11 12 Source: CEIC. This view also benefits from Craig Chan‟s bullish THB view over the medium term (see FX outlook). 75: Cushion to add duration from 7yr and out 5.Nomura | Asia Special Report 28 November 2012 Fig. 74: Rich(-)/Cheap(+) MGS market. with light foreign involvement at 15.% 10 5 0 -5 -10 -15 Rich(-) / Cheap (+) Median of MGS spread (past 3M) Dec-12 May-13 Jul-13 Apr-14 Oct-14 Aug-15 Oct-15 Feb-17 Oct-17 Feb-18 Oct-18 Nov-19 Jul-21 Jul-25 Sep-26 May-27 Apr-30 Apr-32 Source: Bloomberg.5% 3. 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. will continue to contribute to the attractiveness of the Thai bond market. bp 45 15 Foreign ownership of MGS .0% 4. we avoid entering a THB 5s10s flattener until we see clearer signs that the near-term steepening has abated. Nomura. Nomura. as well as local demand driven by the demographic outlook.5% 4. Nomura. 73: Increased foreign interest in MGS Fig.0% Par Cpn Curve Forward Curve Spot Curve Hundreds 5. However. We believe that both the asset allocation shift to higher quality Asian sovereigns (Figure 76). we expect the slope to normalise.5% 0 5 10 15 20 25 30 Source: Bloomberg. 51 . which is in line with our forecast for no changes in policy settings through the whole of next year. We expect a largely range-bound environment in THB IRS going into 2013.0% 2. as there are no rate changes reflected in the curve.5% 50% 40% Malaysia Indonesia Korea Thailand 30% 20% 3. the public debt-management office has been within 0-5% of its benchmark issuance target over the past four years. as the slope has yet to show any signs of flattening and may continue its steepening momentum in the near term.9% minimising its external vulnerability. 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). so bonds can also be used as an overlay to FX positions. so it does possess a level of credibility. 76: THB bond foreign ownership less crowded. As we alluded to earlier. However. Fig. Moreover. Our forecast of stable inflation and no rate changes from the Bank of Thailand in 2013 offer support. Nomura. 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. That said. Fig.

While Korea.Nomura | Asia Special Report 28 November 2012 Indonesia: high beta helps early in 2013.0 0.8 -0. This relative stability in the bond market is reassuring for existing bondholders. Nomura. 78: Foreign ownership of bonds stable in Indonesia -0. At current levels. 20 15 10 5 0 05 06 07 08 09 10 11 12 Source: CEIC. in our view (Figure 77). 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. as the benign risk environment allows for the realisation of the high coupons on the curve while minimising mark-to-market risk.0% (Figure 78). Fig.2 0. 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. 52 . near its October 2012 reading of 30.4 -0. then the first signs of term premium do not show up until the FR45s (May 2037). Nomura. 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. Thailand and Malaysia have experienced an increase in foreign interest in their local government bond markets.6 Rolling 6M correlation between IDR 20yr bond vs S&P 500. then there is further scope for capital gains as we remain below the peaks in foreign ownership seen in 2011. inverted scale 35 30 25 Non resident holdings of IDR government bonds as % of total market cap -0. foreign ownership of IDR government bonds has remained stable over the past year.2 06 07 08 09 10 11 12 Source: Bloomberg. 77: Rolling correlation of returns remains high Fig. Should we see a positive resolution to the issues which continue to weigh on developed markets.25% (see Indonesia outlook).

6% in 2013 (from 5. Relative to an average of 70-80bp of tightening in EM corporate HG in 2012 and 180-230bp in HY. particularly in EM high grade (HG).S. already so low. EM growth. clients: this portion of the Report has been produced by and for the primary benefit of a trading desk. Central and Eastern Gourav Dhavale +852 2536 1309 gourav. 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. is expected to pick up slightly to 5.mak@nomura. offset by tighter bank lending. law.talwar@nomura.8 289 402 -113 LatAm 42. 79: Principal and coupon redemption and average spreads (In US$ bn) 2012 2013 Avg Spd Current* YE2011 Chg AEJ 48. Source: Bloomberg. 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. To our U. 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 2.4% for 2012). the Middle East and Africa (CEEMEA) has the widest spreads of the three regions. Asia Corporates Desk Analysts Pradeep Mohinani +852 2536 7030 pradeep.1 43. Dealogic and Nomura. 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. 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. Fig. being increasingly driven by domestic demand. where yields still offer a pick up over US HY. 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. we expect another 30-50bp of tightening in HG cash and 90-120bp in HY corporate cash by year-end 2013. 53 .Nomura | Asia Special Report 28 November 2012 This portion of the Report has been prepared by a Desk Analyst and is NOT a research report under U. the transmission in market volatility (using VIX and VStoxx) is likely to remain constrained. governance risks in Russia and Ukraine.4% in 2012) due to upticks in LatAm and EEMEA. with GDP contracting by 0.mohinani@nomura.7 William Mak. but is subject to geopolitical risks in the Middle East and volatility transmitted from the eurozone to Eastern Europe. and Annisa Lee +852 2536 7054 annisa.1% in 2012). we do not hold out this Desk Commentary as being impartial in relation to the activities of this trading Agnes Wong +852 2536 7434 agnes. The key concern with the US and Europe remains fiscal tightening causing a drag on growth.dhavale@nomura. on the other hand.76% in 2013 (from -0. Much of the outperformance will have to come from EM high yield (HY). particularly in the Note: *CS EM Corporate bond spreads. Asia remains subject to heavy issuance and comparatively tighter spreads.7 48. As such.1 404 475 -71 CEEMEA 62.1 334 472 -138 Abhimanyu Talwar +852 2536 7065 abhimanyu. CFA +852 2536 7059 william.lee@nomura. which is likely to offset heavy issuance.wong@nomura. with the belief that central banks remain ever-ready to inject liquidity into markets. Achieving a similar return as in 2012 (EMBIG YTD returns at 16% and CEMBI at 15%) will be very difficult with yields. please see the important conflicts disclosures beginning at page 59 of this Kicking off 2013. 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. However. For additional information concerning the role of trading desk analysts. while the European recession is expected to deepen.

The equations around fixed assets investment-to-GDP and total social financing relative to bank financing are stretched on an absolute basis. with a similar direction for food (corn. Other features of issuance that are likely in 2013 include issuance due to M&A activity. 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. similar to the amount redeemed in 2012. zinc) point to an upward trajectory. With the phasing-out of old-style LT2/T1 capital. Technicals should remain supportive – with a US policy rate and 10-year UST projected through 2013 at 2. In terms of energy. a central driver in EM as most economies are either major exporters or importers. 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. particularly if the slowdown turns out to be deeper than expected. soybeans). The second-order impact will be reflected in capital flows. and weaker US and European demand for commodities and consumer goods should. energy and food lower – commodities. likely to repeat in 2013. CEEMEA with US$111bn and LatAm with US$93bn – we expect a similar. aluminum. We note that principal and coupon redemptions in 2013 are estimated at US$155bn. Hungary and South Africa. which has for the most part attracted capital inflows. Petronas with Progress Energy and TNK-BP with Rosneft. forecasts currently appear to be much more optimistic relative to futures. compared to the size of the economy – and nonperforming loan (NPL) levels are creeping higher.4% in 4Q 2012 slowing to 7. Similarly. which were reflected in 2012 issuance and that are. senior bonds should continue to dominate bank issuance. implying that sovereigns are likely to be better supported through volatile markets. with the E&P sector involving the likes of CNOOC with its Nexen acquisition. Sovereign issuance accounted for only US$61bn of this YTD total. though there is an upward bias to raising policy rates to counter any pick-up in inflationary trends. with real money at around 4% cash levels and still seeing inflows. Our economists forecast quarterly GDP growth of 8. with copper being the exception declining from mid-2013 onwards. Exceptions where rates are expected to be lowered include India.Nomura | Asia Special Report 28 November 2012 EM remains flush with liquidity. Coal is the exception in the energy space having fallen sharply in 2012 and looks set for a rebound. but also at reduced levels following sizeable issuance in 2012 and relatively low maturities in 2013. 54 . wheat. if not higher level of issuance in 2013.5% by our US rates strategists. benefiting from higher infrastructure spending. Further supporting this thesis. There are a number of key drivers to consider. This backdrop should be conducive to generating additional inflows into EM credit. additional liquidity supplied by the Fed through QE3 and possibly by the ECB via its OMT program. its sustainability remains in question. We would also note that the fund flows into EM compared to US HY have been steadier. with pick up in favor of EM over US HY. 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. but we are not concerned just yet given the technical backdrop – following record issuance YTD of US$310bn – split between Asia with US$105bn. At the investor level. in turn.0% by 4Q 2013. real money and private banks are likely to end 2012 with a reasonable cash position. The growth implications for the rest of the world are deep. while EM benchmarked inflows should continue to be skewed in favor of the EMBIG. suggesting spread performance should also be steadier. Mixed commodity price outlook with base metals higher. including portfolio and FDI inflows. also affect China‟s growth engines. in our view. precious and base metals (gold. The implications are that non-core inflationary inputs should be contained. We could start to see Asian banks (including Australian and Japanese banks) opportunistically issue new-style capital. as well as external M&A and purchases of UST. In any event. Issuance to remain high. We believe such trends are unlikely to change meaningfully in 2013. China remains the wild card growth in both DM and EM – while China‟s growth has accelerated recently. oil and gas are projected to fall over the next 12 months. resulting in additional flows into EM credit. the pressure to increase risk is likely to remain. are certain to realise the effects of China‟s growth trajectory. Nonetheless.0% according to Moody‟s in 2013.

Leverage may slightly improve due to better earnings. which will be a function of the improvement in a broadening/deepening of fiscal revenues to GDP. FC liquidity improvement in Korea. SK Telecom and Noble Group potentially being downgraded by the ratings agencies. the external balance sheet not deteriorating.2% in December 2009). They have also diversified their FC funding into other local markets. That said. credit ratings will likely be skewed to a downgrade bias with IG corporates such as China Metallurgical. driven by higher sales volume. Beyond issuers with bonds maturing in 2013 with refinancing needs.Nomura | Asia Special Report 28 November 2012 Asia themes Sovereigns Downgrade pressure on selective sovereign ratings is rising. where national elections are now expected to be held by March 2013. Mongolian Mining Corp. Vietnam is the banking system in Asia that will face the most severe asset quality challenges. with India being a 50/50 probability. The exception will be commodity companies likely reporting flat or lower earnings. SPG Land. 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. Corporates Corporate earnings for 2013 are likely to moderate versus the trough a year back. West China Cement. For Sri Lanka. Despite a benign corporate outlook. the Philippines being the exception: With the slower growth in EM Asia in 2013. we acknowledge that most issuers have considerable bills receivables which reduces non-payment risk of their end customers. Banks Asset quality deterioration in India and Vietnam: Indian banks‟ average NPL ratio has deteriorated to 3. in our view. Sri Lanka and Vietnam are potential downgrade candidates. As Australian bank deposit growth has outpaced loan growth over the past few years. product prices and margin improvements reflecting the economic recovery. as understated NPLs start to surface with loan growth having slowed to 3% YTD (from >30% previously). 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. India has a heavy state election year. the external balance will be key given low FX reserves and the high trade deficit. we will be watching for credits trading above their call price adding another wave of refinancing. we expect the sovereign upgrade trend to slow and a greater focus on downgrade risks instead. political stability maintained through the parliamentary process.5% of 55 . Renhe and Powerlong may experience negative rating actions. In terms of political change. 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. FC funding had fallen to 17. as India‟s economic growth has yet to bottom out and the NPL cycle generally lags by a few quarters. we may see some upgrades (mainly Outlook changes) among China property names like Shimao. We expect Vietnam‟s systemic NPL ratio to rise to over 10% in 2013 (from 8. especially for Chinese issuers with SOE customers.6% in September (from just under 3% in March) and could rise further to over 4% by March 2013. In the HY space. Australia and Singapore: Korean banks‟ FC loan/deposit ratio (LDR) improved to 315% in June (from 419% in December 2010). with the proportion of FC debt denominated in ex-G3 currencies rising to 15. particularly among HY corporates. inflation being contained and the fiscal balance sheet not deteriorating sharply. continued infrastructure investment and the reduction of public debt to GDP. besides challenges to the central government. Sinochem. KT Corp. China Oriental.6% in June (from 11. industrials and property names such as Bumi Resources. the working capital situation may not improve. In Vietnam. The Philippines is the most likely candidate for further upgrades to come through in 2H. India. and they have increased their FC liquidity buffers and committed credit lines. Yanlord and Country Garden. while selective commodities. Fufeng.8% in Sep 12). 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. Yanzhou Coal.

Asia trade ideas Short PTTEPT 21s at T+205bp. target 84 with 16% YTW Long VEDLN 2018s at 110 at 7. target 7. target Z+220bp) 56 . resulting in a lower USD LDR of 120-130% in September (from 150-160% in December 2011).5% Long AGILE new 17s at 108.25% YTW Long HYVANL 16s at 94 at 10. target 89 with 13% YTW Long ATIAU 2018s at 74 at 19.75 ask 7.1%.12 at 7. but would suggest a barbell strategy:  Long WSTP LT2 3. target 14% Long CSMAU 2016s at 84 at15% YTW. we are Overweight old-style bank capital relative to senior:   Long a basket of Australian bank T1s including NAB USD 5.1% ask-YTW. target T+320bp Short RILIN 2040s at T+260bp. Chinese. target 7. taking our total expected senior issuance from Asian (ex Japan) banks to around $20-25bn in 2013. Senior supply expected to be lower than in 2012: With significantly lower refinancing needs in 2013 and improving FC liquidity.0%) and NAB GBP 5.2% and 10. target T+280bp Short RILIN 2022s at T+260bp.7% Long VEDLN 2021s at 104.2% Long FMGAU 2019s at 102 at 7.15% ask-YTW Long BTELIJ 15s at 46.6 ask. target T+325bp Short SINOCH 2040s at T+230bp.625% Pnc15 (5.5%.486% Pnc15 (5.7% YTW.6 ask 8.75% ask-YTW.7% ask. We factor in another $5-6bn from southeast Asian. target 5.0% ask. target 6.25 at 36. target 4.8% YTW Long GJTLIJ 14s at 100. Hong Kong and Mongolian banks. respectively) to fund overseas loan growth.6%. target 104.6% Long GEMDAL 17s at 100 ask 7.7% Long CHINSC 16s at 96.3%.25 at 53. target 113 at 6. target 61.6%. target at T+300bp Long YLLG 2017s at 104 ask at 8.9 ask 11.1% ask.50 at 7. target T+290bp Short LIHHK 2022s at T+276bp.1%.62% Pnc18 (6.6% and Long SHIMAO 2018s at 110. target T+225bp Short PTTEPT 42s at T+200bp. target 7% and 6. We believe Indian and Thai banks are likely to issue more USD bonds ($9-10bn and $2-3bn.Nomura | Asia Special Report 28 November 2012 total liabilities in June (from 25. and AGILE old 17s at 105 ask 7.8% Short SUNAC 17s at 105 ask 11. we expect supply from Korea ($3-4bn) and Singapore ($12bn) to be fairly manageable. target T+285bp Short LIHHK 2017s at T+265bp.0% in December 2006).1%.625% 23nc18 (Z+243bp ask.5%) Long CHIFIN UT2 5.2%. target T+325bp Short RILIN 2020s at T+240bp. target 11.0%) Like Asian old-style LT2s in general.8% ask.2%. target 4. target at 100 at 10. target 107 at 7. target T+240bp Short PCCW 2022s at T+292bp. Singaporean banks have also sharply slowed their USD loan growth recently. target at 96 at 10% YTW In banks.5 ask 12% and CHINSC 17s at 99.

BBB-/A-) vs Short CIIH senior 2022 (Z+274bp or 98. BBB-/BBB) Long RHBCMK senior 2017 (Z+218bp ask. target Z+200-205bp) Long BOBIN senior 2016 (Z+295bp ask.80 ask. target 305-310bp) Long TDBM senior 2015 (8.Nomura | Asia Special Report 28 November 2012  Long CINDBK LT2 3.1% or 96.45 ask. target Z+240bp.42 bid.98 bid. target 10. target Z+270bp) vs Buy SBIIN 5yr senior CDS (280bp ask.125 bid.0%) 57 . target Z+235bp) with credit facilities from KDB/Woori/ Hana Long CHRESO 2017 (Z+164bp ask.9%) vs Short CTGVN senior 2017 (9. target Z+300bp) vs Short BNKEA LT2 6. 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.375 ask.375% 22nc17 (Z+255bp or 112.8% or 99. target Z+290bp. target 7. target Z+140bp) with standby LC from DBS Long BCHINA (Aviation) senior 2017 (Z+263bp or 97.875% 22nc17 (Z+325bp or 99.

converging bond yields China: The case for structurally higher inflation Global market turbulence: Implications for Asia Indonesia: Building momentum Vietnam: Prioritizing macro stability South Korea‟s demographic sweet spot India's 2011 outlook: Rising symptoms of a supply-constrained economy The case for capital controls in Asia The coming surge in food prices Another step towards becoming an offshore RMB centre The heat is on Brinkmanship returns to the Korean peninsula China: Not just an investment boom What Japan‟s 1980s experience means for China South Korea: Household debt: Myths and reality China & Hong Kong: RMB trade settlement: New opportunities. inflation and rates through 2013 Pan-Asia: Inventory cycle threatens a slow recovery China's peaking FX reserves India: Make or break The China compass Korea: Uncomfortable trade-off India: Four cyclical tailwinds to watch Capital account liberalisation in China India budget preview: Fiscal cheer Asia: What if oil prices keep rising? Philippines – Fiscal space to maneuver Decoding India‟s stubbornly high inflation Implications from North Korea A cold winter in China Thailand: Dealing with another disaster China Risks Korea: Falling.Nomura | Asia Special Report 28 November 2012 Recent Asia Special Reports Date 14-Nov-12 25-Oct-12 11-Oct-12 24-Sep-12 14-Sep-12 5-Sep-12 3-Sep-12 7-Aug-12 2-Aug-12 31-Jul-12 9-Jul-12 31-May-12 29-May-12 2-May-12 23-Apr-12 16-Apr-12 11-Apr-12 27-Mar-12 9-Mar-12 1-Mar-12 23-Feb-12 16-Jan-12 20-Dec-11 18-Nov-11 3-Nov-11 31-Oct-11 19-Oct-11 21-Sep-11 8-Aug-11 7-Jun-11 10-Mar-11 3-Mar-11 14-Jan-11 1-Nov-10 11-Sep-10 6-Aug-10 28-May-10 26-May-10 9-Nov-09 19-Oct-09 8-Sep-09 23-Jul-09 Report Title South Korea: An Economic Democracy India reforms (Part I): A long way to go Introducing NESII – The Nomura Economic Surprise Index for India Thailand: New growth engines China primed to surprise on the upside Better hedges for a China hard landing India's chronic balance of payments Asia's inflation wildcard Indonesia: Policy swings India: A poor monsoon and its impact (Q&A) South Korea: Prolonged low growth. new risks 58 .

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