Asia Pacific

Economic
Outlook
October 2013

China
India
Singapore
Vietnam

the continued expansion of credit through the sale of wealth management products by banks is fueling investment in fixed assets. Ira Kalish Economy stabilizing The Chinese government says that the economy is showing signs of stabilizing and that the desired 7. suggesting that any improvement in China’s economy is coming from domestic rather than external demand.1 The shift above 50. Of course. industrial company profits were up 11.China: Signs of stabilization By Dr.0 percent from a year earlier. this was the biggest month-tomonth gain in the PMI in three years. The recent purchasing manager’s indices (PMIs) for manufacturing suggest that the manufacturing sector is rebounding after a period of uncertainty.5 percent rate of growth appears to be attainable. a sub-index of the PMI for export orders was in negative territory. However. the economy is suffering from weak export demand.7 in July to 50. the factors that are likely to sustain growth in the future include strong consumer demand.3 percent increase in June. On the other hand. in July. The biggest risk to the Chinese economy Asia Pacific Economic Outlook—October 2013 1 . government incentives for small businesses and infrastructure investment appear to be working. In addition. A PMI for manufacturing published by HSBC and Markit increased from 47.2 This was far better than the 6. Moreover. increasing urbanization.0 indicates modest growth of the sector after a period of decline. and a declining labor force. Moreover. There was yet another sign that the Chinese economy is stabilizing: It was reported that.1 in August. especially property. and catch-up growth in less developed regions of China. credit market difficulties. As for the stabilization of growth.0. an official PMI published by the government increased to a 16-month high of 51.

This is critically important because. Already local Asia Pacific Economic Outlook—October 2013 2 .While the government sees a huge potential positive return from urbanization. This slower pace is one reason that the government is likely to reform the hukou system. This will be an opportunity for the leadership to set the agenda for the next five years. there is growing concern about the potential costs of urbanization. in the last 20 years. reform of the household registration system (hukou). bank profit margins are very high as banks unload loans through securitization. is the excessive level of debt and the problems servicing that debt. While the government sees a huge potential positive return from urbanization. Yet the pace of migration has dwindled due to worker frustration with low wages. Yet more will be needed to sustain growth. the China Banking Regulatory Commission is encouraging banks to securitize troubled loans in order to remove them from bank balance sheets. over the next two decades. Meanwhile. poor living conditions. their productivity increases strongly. this may seem odd. This is widely anticipated especially because the government has signaled that it is more concerned with structural reforms than short-term stimulus. These securities will necessarily be priced at a discount. privatization of state-owned enterprises.8 trillion) to facilitate the migration of 210 million workers. It also says that the costs could be even higher if investments are undertaken to close the gap between migrants and others in terms of living standards. the urban share of China’s population increased from less than 30 percent to more than 50 percent. After all. The question arises as to how to fund this investment. This is expected to be the meeting at which the leadership will approve a detailed set of reforms. With respect to that issue. Thus boosting the urban labor force will require more migration. ultimately financial market pricing will have to be liberalized in order to prevent future imbalances from developing. A new report prepared jointly by the United Nations and a Chinese government think tank says that. there is growing concern about the potential costs of urbanization. the working-age population has stopped growing. The view is that when workers move from farms to factories or offices. Among the areas likely to be addressed are financial market liberalization. Still. due to the lagged impact of the one-child policy. thereby helping to drive strong economic growth. and labor market regulations. it will cost at least 41 trillion Chinese yuan ($6. One of the important drivers of economic growth that the leadership wants to promote is urbanization. Given that China has already engaged in massive urbanization. and second-class status owing to the hukou system. Urbanization The Chinese government has set November as the date for the Communist Party’s next plenary meeting.3 The study anticipates that China’s urban population will rise from 666 million in 2010 to 976 million in 2030.

3.org/content/dam/china/docs/Publications/ UNDP-CH_2013%20NHDR_EN. but many challenges remain. accessed September 11. Markit.8 trillion: Economy.mvc/ddf3bd97162247348ab421d1f65527fb. accessed September 3. bloomberg. 2013. increase job opportunities. UNDP China and Institute of Urban and Environmental Studies of Chinese Academy of Social Sciences.governments are awash in debt that they may not be able to service. 2013. create wealth for farmers. 2013.com/Survey/PressRelease. 2013. Premier Li Keqiang recently said.pdf. The challenge will be to use the positive return on migration to finance the cost of migration. 4. 2013. http://www.htm. accessed September 3. http://www. http://www. Bloomberg News.html. Asia Pacific Economic Outlook—October 2013 3 .markiteconomics. “HSBC China Manufacturing PMI. http://www. “China urban migrants’ cost seen at least $6. and bring benefits to the people. 2013. “Urbanization will usher in a huge amount of consumption and investment demand.” August 28.com/news/2013-08-28/china-urban-migrants-cost-seen-at-least-6-8-trillion-economy. National Bureau of Statistics of China.stats. accessed September 11. 2. Endnotes 1.” August 27. “Industrial profits from principal business increased from January to July. 2013.gov.cn/english/pressrelease/t20130827_402922433.” September 2.undp. China National Human Development Report 2013. including financing the infrastructure needed for migrants as well as dealing with the social disruption that comes from mass migration.”4 All true.

India: Policies and confidence crisis impact growth By Dr. events during May–June exposed new challenges to the growth outlook. This increase was primarily due to food inflation. and inflation had been trending down. reversed in June and rose to 5. which is measured by the wholesale price index. the economy was showing a few signs of improvement. Heading toward an unsustainable situation The last time we visited the Indian economic outlook in July. The GDP grew at a disappointing rate of 4. and capital account balance.4 percent year over year in Q1 of FY 2013–14. making the clouds of economic uncertainty murkier. and we expected that these changes would unequivocally increase domestic economic uncertainties.1 Fiscal and current account deficits were revised down for fiscal year (FY) 2012–13 from their earlier estimates.8 percent in July 2013. Rumki Majumdar T HE Indian economy experienced a downpour of economic events in June.2 However. the challenges intensified for the Indian economy. we had expressed doubts about the sustainability of these improvements. While a better-than-average and welldistributed monsoon in the following months brought some relief to planted crops across India.3 percent year over year in June. headline inflation. while fuel and Asia Pacific Economic Outlook—October 2013 4 . Consumer price inflation too moved back to double-digit growth of 10. The US Federal Reserve’s indication in late May that it was tapering its purchasing program sooner than expected led to a series of events that adversely impacted India’s equity market. The global economic scenario was rapidly changing. currency. Economic activities have been showing signs of weaknesses. After declining for three consecutive months. coinciding with the heavy early-monsoon rains. The growth fell primarily because of poor growth in the services and manufacturing sectors. The recent data releases indicate that our doubts were correct.

manufacturing. implementing these actions will not be easy for the new governor. barring consumer nondurables. reducing the requirements of banks to invest in government securities. As a result. non-food inflation declined.Perhaps India now needs more than just monetary policy to correct its course. Perhaps India now needs more than just monetary policy to correct its course. uncertain government policies. Raghuram Rajan. the pace of expansion was anemic. Most lead indicators point to continuing headwinds for manufacturing and services sector activity.5 percent year over year in June.3 percent year over year in Q1 of FY 2013–14 and is estimated to have widened to 11.5 percent in Q1 of FY 2013–14. Growth in industrial production declined by 3. while the governor is yet to elaborate on the policy stance that is to be announced on September 20. particularly from the debt segment. and poor perception of the government’s ability to manage its account among institutional investors—led to huge outflows of portfolio investment. However. These measures are likely to be repealed once the exchange rate stabilizes. 2013. Asia Pacific Economic Outlook—October 2013 5 . strengthening the monetary policy framework. This is also evident from the significant amount of funds being withdrawn by foreign institutional investors during the last couple of months. slower economic activity. given the current economic scenario. 2013. Although the manufacturing PMI improved modestly in June. and electricity registered respective growth of -4. At the time of this writing. As prompt as they were. He highlighted how competition among banks will be improved by granting new licenses to banks and increasing the participation of foreign banks. and 3.5 percent of GDP in Q1 of FY 2013 due to deteriorating export performance and increasing gold imports. who took over as the new governor of the RBI on September 4. experienced a contraction.2 percent.5 percent. The indices of mining. he stressed increasing the independence of banks in decision making. and all its constituent subsectors. and tighten liquidity in the economy. The business and consumer confidence index continued to remain low in Q1 of FY 2013–14. and generating financial development and inclusion. market participants have received his message positively. The trade deficit rose 9. The rising market expectations of the United States reducing its purchase of Treasury equivalents before the end of 2013 led to a rise in interest rates and rapid appreciation of the US dollar. announced his plans in his inaugural speech: stabilizing the currency. and improving efficiency in priority-sector lending requirements. Additionally. which has been under pressure for more than two years. these monetary measures have failed to contain the fall in currency—an indication that investors are probably losing faith in the Indian growth story. check speculations in the currency market. Contraction in the manufacturing and mining sectors since April 2013 reflects deteriorating investment conditions in the production sector. the equity market had fallen by nearly 4. the domestic exchange market came under stress. By the end of August. The objectives of these measures were to contain gold imports. -1. The Indian currency. Internal economic uncertainties—such as a rising trade deficit. nosedived 23 percent against the US dollar during April–August 2013.5 percent since the beginning of FY 2013–14. Monetary policy action The Reserve Bank of India (RBI) promptly instituted several measures post May to contain the exchange rate volatility and current account deficit.

The bottlenecks to infrastructure and manufacturing investment must be addressed and removed promptly. http://dupress. aiming to ensure fair compensation to farmers. there is little the government can do. aiming to enhance transparency in company operations. Moreover. our answer to the question above is no. It is feared that some of these bills will raise the cost of business and delay investments.Analyzing public policies The government has the most important role in reviving economic growth. rising current account deficit. aiming to ensure nutritional security and thus improve living standards for the poor. the effectiveness of the government in undertaking reforms has been widely criticized. and checking the fiscal balance. Asia Pacific Economic Outlook—October 2013 6 . India’s currency predicament is similar to that of many other emerging economies experiencing a similar sell-off by foreign investors.8 percent of GDP this fiscal year. there will be no change in the mood of investors. which in turn will boost investment sentiments. 3. and the land acquisition bill. July 2013. But with elections just few months away. and India still has comfortable foreign exchange reserves.” which requires effective government actions to correct the external and fiscal balance. initiating meaningful reforms. the banking system is healthy and transparent. with the food security and land acquisition bills considered populist reform measures to appease voters with national government elections less than a year away. India is suffering from “a crisis of confidence. and investors’ recent questioning of India’s growth prospects. At the same time. which may impede containing deficits to 4. Falling growth is undoubtedly a concern. The government needs to effectively communicate its policies to contain the current account deficit and inflation. the passing of some bills is widely debated.” Asia Pacific Economic Outlook. Are we looking at another crisis like that of 1991? While the economic situation looks gloomy due to the sharply falling currency. Several important bills have been passed during this session of parliament to improve the investment climate: the company bill. It has undertaken some reforms in the last two months to revive foreign direct investment and has also worked on speeding the approval process. The exchange rate is now market-determined.com/articles/ asia-pacific-economic-outlook-july-2013-india. Endnotes 1. the food security bill is expected to increase the government’s expense on subsidies. The last bill has been passed by the lower house but is yet to be passed by the upper house. and growth will remain stagnant until after the elections. the food security bill.3 However. with over six months’ import cover. The fiscal year in India begins on April 1 of the year referred. 2. Rumki Majumdar. but India’s growth is still stronger than that of other emerging economies. Most likely. “India. Additionally.

up from 0. aided by strong contributions from transport engineering and electronics clusters. could dent export demand. Also. Healthy growth in Q2 2013. The quarter witnessed a nascent recovery in manufacturing.2 percent in Q1.5 percent during this period. with exports also reviving due to better economic activity in the West. given increasing restrictions on foreign workers and an aging population.Singapore: Cause for optimism By Akrur Barua E CONOMIC fortunes seem to be improving in Singapore. including a 6. positive news in manufacturing The economy picked up in Q2 2013. it was the reversal of fortunes in manufacturing that drew much attention.7 percent fall in Q1 2013. Manufacturing grew a mere 0. with output rising 2. Slowing growth in emerging markets. Meanwhile. The former.7 percent year over year.2 percent. posted growth for the first time in nine quarters. Growth in the segment was driven by higher electronics and biomedical production. Encouragingly.8 percent year over year. Q3 2013 growth in this segment is likely to decline. which accounts for onefourth of total exports. However. this was a turnaround from the contractions of the past three quarters. the uptick in manufacturing could prove short-lived if export orders decline due to slowing growth in Asian markets. the positive trend in manufacturing continued in July. the city-state will continue to face challenges— both cyclical as well as structural. growing 3. especially in Asia. While services growth more than doubled to 5. however. biomedical production is volatile in nature. the economy will encounter rising labor costs. domestic private consumption remains strong as households benefit from wage growth and low unemployment. In the medium to long term. with GDP in Q2 2013 expanding at its fastest pace in two years. Recent data highlight some of Asia Pacific Economic Outlook—October 2013 7 . On a cautionary note.

to counter labor supply restrictions.9 percent in March. with gross fixed capital formation declining 4. Equity prices have fallen since mid-May. Singapore’s Straits Times Index has shed 12 percent. Since then. Investments will benefit from planned government investments in infrastructure. way better than the above–15 percent declines in the Indian rupee and the Indonesian rupiah. According to the Monetary Authority of Singapore (MAS). including rebates to public housing. recovered in Q2 2013. the economy is expected to grow at 2. the Singapore dollar has fallen 2 percent against the greenback. partially offsetting gains in private consumption and exports. health.5. However. fixed capital formation in 2013 will dip relative to 2012. with the electronics PMI also rising. Overall. these concerns. however. a significant improvement from the 4. However.1 percent in June from 1. when the US Federal Reserve (Fed) first hinted about winding down its quantitative easing (QE) program. with the pace likely to pick up to 4. up from 2.0 percent.6 percent this year. the slowest pace of growth since February. higher government spending on infrastructure.1 percent decline in Q1.7 percent growth in Q2 2013). wage growth is likely to be about 3 percent in 2013.0–4. the impact of all these actions is likely to be felt more in 2014–15 than this year. Subdued external demand and a slowdown in civil construction are the likely key causes for this. Consequently. the scenario is expected to change.5 times the country’s GDP. could face pressure from slowing asset prices and a mild uptick in inflation in the second half of 2013. Although unemployment rose marginally to 2.5–3. firms are likely to invest more in enhancing productivity.8 percent year over year. which amount to more than 1. aided by wage gains due to a tight labor market. Consumers. the manufacturing purchasing manager’s index (PMI) for August came in at 50. In real terms. The government is encouraging this and has earmarked about $4 billion to aid firms in the process. albeit slowly. However. Meanwhile. exports growth will average only 0. Exports demand in the short to medium term will come up against two opposing forces: higher economic activity in the United States and Europe. they expanded 3. primarily transportation. reversal likely next year Investment was a drag on the economy in the first half of 2013. As Asia Pacific Economic Outlook—October 2013 8 . on the brighter side. private consumption growth in 2013 is likely to end up in the range of 2. private consumption continues to remain strong (2. and social welfare will aid wider GDP growth. Weak investments to weigh on growth in 2013.Since mid-May.3–2. For example. Exports revive even as consumption remains strong Exports. and slowing growth in China and other Asian economies. Consequently. Consequently.3 percent in 2012. export orders went up during the month. curbs on foreign workers are likely to keep wages high.5 percent in 2014.2 percent this year. Not surprisingly. House prices have also slowed this year due to a slew of government measures.1 percent. Also.7–1.

” The manner in which the government tackles such criticism will determine the future course of politics in the country.4–3. and equality. economic growth might not be enough to quell political and social discontent. Arguments have become sharper after a February 2013 white paper discussed the government’s proposal to increase the population. to 6. house prices. although a tight labor market poses risks. The latter fell 1.3 percent in Q2 2013. infrastructure. since mid-May. The currency has remained fairly unscathed relative to Asian peers post the Fed’s hint of winding down QE.9 percent in July. This has stoked fears of an influx of foreigners. compared to a 9. MAS is likely to review its strategy as unabated currency strengthening will lead to a loss in export competitiveness. a return to growth above 5 percent. the Singapore dollar has fallen 2 percent against the greenback. MAS likely to encourage currency stability A new challenge for the PAP Price pressures have eased since Q2 2013. thanks to government intervention to counter housing and transportation costs. and MAS is likely to continue supporting the currency. with negative impact on wages. GDP growth is likely to move up to 3. as witnessed in the previous decade. A stable Singapore dollar has also helped counter inflation. Inflation edging lower. is not likely before 2016–17. However. Although the PAP is likely to hold on to power.3 million. way better than the above–15 percent declines in the Indian The ruling People’s Action Party (PAP) is likely to face increasing questions about its economic agenda. For example.8 percent. However.5–6. rupee and the Indonesian rupiah.investments recover in 2014 and exports gather pace.8 million by 2030 from the current 5. Critics have also argued that the decline in the share of citizens in the population will dilute the “Singapore identity. as inflation is reined in and there is greater clarity on QE tapering.7 percent rise in Q1 owing to tighter conditions for vehicle loans and higher taxes on luxury cars. Asia Pacific Economic Outlook—October 2013 9 . Inflation fell from an average 4 percent year over year in Q1 to 1.

but more so by the sluggish pace of domestic economic reforms. Lending conditions remain tight as the banking sector Asia Pacific Economic Outlook—October 2013 10 .Vietnam: Not out of the woods yet By Navya Kumar T HE Vietnamese economy was a shade better in Q2 2013. On a half-yearly basis.3 percent. such as double-digit growth in exports and growing inflows of foreign direct investment (FDI).9 percent. with real consumption for the first half of 2013 expanding only 4.2 percent. Growth has been affected in part by slowing domestic consumption expenditure. driven by a slightly better performance in manufacturing and services. with the International Monetary Fund now projecting full-year growth for 2013 at 5.0 percent year over year in Q2 2013. The few bright spots that Vietnam appears to enjoy. Growth subdued by domestic and external hurdles Vietnam registered real GDP growth of 5. a touch better than the 4. Slow reforms have significantly affected the country’s banking sector. also reveal challenges upon closer examination. real GDP growth for the first half of 2013 was 4. but not what it used to be—it is still expected to register one of the lowest rates of annual growth in 14 years. thus hindering economic growth.4 percent in the first half of 2012. with persistently high rates of inflation eating into purchasing power.7 percent for the first half of 2012. the improvement does not signal any sharp pickup in the near term. lower than its initial estimate of 5. July and August do not appear to have ushered in any marked improvement on this front. Consumption also has likely been hit by credit constraints.8 percent and far lower than the previous decade’s average of 7. which remains mired in bad debt and wary of lending. against 6. However. just a small increase over the first quarter’s growth of 4. The situation is driven in part by global factors.8 percent.9 percent year over year.

the government’s spending on “investment development. Agro exports were hit by various factors. or 41.7 billion. compared to the State Bank of Vietnam’s (SBV) target of 12 percent for this year. Adding to Vietnam’s growth hurdles. At the same time. Total credit by commercial banks grew a mere 3–5 percent year over year in the first half of 2013.3 percent year over year. while other mining and quarrying operations shrank 6.” which includes “capital construction. has widened the deficit. with inflation averaging 7. as well as infrastructure and policy challenges have hampered investments. as well as infrastructure and policy challenges have hampered investments. restricted the growth of Vietnam’s industrial production index for the first eight months of 2013 to 5. which sustain Vietnam’s export industries. the loose monetary and fiscal policy appears to have stoked a price rise.4 percent in July and August 2013.Rising land and labor costs. The loss in pace was due mainly to an 8 percent decline in agro-fishery exports (15–19 percent of total exports) and a 15. In particular. Industry and foreign investment face challenges Weakness in the mining and quarrying sector. and electronic and telephone components. skill shortages.6 percent fall in exports of coal. On the investments front. In such a scenario. In addition. while realized FDI for the first seven months of 2013 grew a comfortable 6. and oil products (8–11 percent of total exports). which reached $733 million in the first seven months of 2013—13 times the value for the same period last year. fabrics.4 percent year over year for the first seven months of 2013. However. This is in contrast to the manufacturing and utilities sectors.9 billion has been registered in Vietnam. coal exports have been affected by policies to divert fuel to meet local energy needs.4 percent year over year. the Asia Pacific Economic Outlook—October 2013 11 . including bad weather. but realized FDI stands at only $59. especially in coal and crude oil extraction. a steep rise in imports has substantially worsened Vietnam’s trade deficit. FDI worth $143. From 2008 to the first half of 2013. farmers withholding stock for better global prices. exports have also decelerated. which expanded 6–9 percent. crude oil. Monetary and fiscal easing to spur growth To boost the economy. the government has sought to provide fiscal stimulus by increasing its spending by 6. remains burdened with substantial amounts of bad debt.” actually declined 7 percent year over year in the first seven months of 2013.4 percent. while oil exports were hurt by a fall in global prices. This was the central bank’s seventh rate cut totaling 800 basis points since January 2012. Rising land and labor costs. the overall trend has been highly volatile in recent years. A double-digit rise in the imports of raw materials such as chemicals. the SBV reduced the key interest rate in May 2013 by 100 basis points to 7 percent. Of even greater concern is the wide gap between registered and realized FDI. Exports for the first seven months of this year grew 14. Coal extraction fell 3. compared to 19 percent in the same period last year.3 percent year over year. skill shortages. Meanwhile. and soft demand from slowdown-hit Western markets.4 percent.6 percent.5 percent of the amount registered. the outlay for socioeconomic development and defense (71 percent of total fiscal expenditure) grew 11.

0–6. to 101. and exceeding the SBV’s target range of 6. the VAMC is only a first and already overdue step.5 percent. Asia Pacific Economic Outlook—October 2013 12 . As a result. with further banking reforms related to bad debt reporting and provisioning delayed until June 2014. much remains to be accomplished. which are estimated to account for nearly half of the banking sector’s bad debts. the state-owned Vietnam Asset Management Company (VAMC) was put into action in July 2013 to absorb banks’ bad debts for a fixed time period. The VAMC plans to acquire $474 million worth of bad debt by October as it begins to address the country’s bad-loan problem worth $5 billion. In addition. But with shares sold in only 12 of the 93 divestitures targeted for 2012. further rate cuts may be off the table in the near term. and intends for SOEs to exit from noncore (and risky) operations such as real estate. in the first seven months of 2013. Still a long road ahead for structural reforms In an attempt to aid the struggling banking sector and boost lending. Little headway has been made on restructuring state-owned enterprises (SOEs). the government intends to divest its stake in several SOEs. As part of its 2011–15 SOE restructuring plans.9 trillion Vietnamese dong. However.5 percent year over year. the government fiscal deficit has widened 11.highest in 12 months.

com Akrur Barua Deloitte Research Deloitte Services LP Tel: +1 678 299 9766 E-mail: abarua@deloitte. please contact John Shumadine. Ira Kalish Deloitte Research Deloitte Services LP Tel: +1 213 688 4765 E-mail: ikalish@deloitte.com.com Dr.com Additional resources Global Economic Outlook Q3 2013 China.com. India. For more information about Deloitte Research. Deloitte Research. Ira Kalish is director of global economics at Deloitte Research. Navya Kumar Deloitte Research Deloitte Services LP Tel: +1 678 299 7123 E-mail: knavya@deloitte.About the economists Editor Contributors Dr. United Kingdom.deloitte. and social trends on the global business environment.1800 or via e-mail at jshumadine@deloitte. United States. Rumki Majumdar Deloitte Research Deloitte Services LP Tel: +1 615 209 4090 E-mail: rmajumdar@deloitte. Director. Brazil Deloitte Review Issue 13 Courting the candidate-customer: The unlikely art of attraction Data as the new currency: Government’s role in facilitating the exchange Disegno di Pininfarina: An hour with Paolo Pininfarina The open talent economy: Beyond corporate borders to talent ecosystems Please visit www. part of Deloitte Services LP. Asia Pacific Economic Outlook—October 2013 13 .com Managing Editor Aditi Rao Deloitte Research Deloitte Services LP Tel: +1 615 209 3941 E-mail: aditirao@deloitte.251.com Dr.com/research for the latest Deloitte Research thought leadership or contact Deloitte Services LP at: research@deloitte. Japan. at +1 703. He is an expert on global economic issues as well as the effects of economic. Russia. demographic. Eurozone.

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