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PP 7767/09/2010(025354)

Economic Highlights


21 April 2010

1 IMF Said Government Debt Poses Biggest Risk To Global


2 India Raised Interest Rate And Bank Reserves To Contain


3 China Tightened Rules On Uncompleted Home Sales

Tracking The World Economy...

Today’s Highlight

IMF Said Government Debt Poses Biggest Risk To Global Growth

The International Monetary Fund (IMF) cautioned that rising government debt has replaced financial industry stress as
the biggest threat to the global economy. While the global economic recovery has gained strength and risks to the
financial system have subsided, concerns are rising for sovereign debts that were issued by advanced countries to bail
out banks. “The deterioration of fiscal balances and the rapid accumulation of public debt have altered the global risk
profile and vulnerabilities now increasingly emanate from concerns over the sustainability of governments’ balance
sheets”, the IMF said. The spread of sovereign risk to banks and through the real economy threatens to undermine global
financial stability and economic recovery.

Separately, the IMF cut its estimate for asset writedowns by banks during the global credit crisis. It now projected that
global banks would book loses of US$2.28trn for 2007-10, 19% lower than US$2.81 trn projected in October last year.
About US$1.6 trn or 70% of losses have already been written off and banks should be able to cover the remaining through
their anticipated earnings. About 39% of the writedowns come from US banks, 29% from the Euroland and 20% from
the UK, the IMF said.

Meanwhile, Greece will begin talk on 21 April on activating a €45bn (US$61bn) emergency aid package from the European
Union and the IMF. The government needs to raise about €10bn before the end of May. The cost of insuring Greek
sovereign debt against default surged to a record on 20 April and the premium investors demand to buy 10-year Greek
government debt over benchmark German bunds rose to the most since before the euro’s debut. The European Union
needs to show that it can successfully bolster Greece to prevent the problem from spreading to other countries that have
stretched fiscal positions such as Spain, Portugal and Ireland.

Asian Economies

India Raised Interest Rate And Bank Reserves To Contain Inflation

◆ The Reserve Bank of India increased the repurchase rate by 25 basis points to 5.25% and the banks’
reserve required ratio to 6% from 5.75% previously. The hike in the key policy rate was the second time
in a month in a move to contain inflation. The Reserve Bank of India’s Governor described India’s inflation as
“worrisome” and is aiming to slow it by restraining consumer demand. Earlier in an unscheduled move, the central
bank unexpectedly raised its key policy rate by 25 basis points to 5.0%, as inflation exceeded its expectation.

Peck Boon Soon

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21 April 2010

India’s inflation rate, as measured by wholesale prices, held up at 9.9% yoy in March, the same rate of increase
as in February and from +9.4% in January. This was the highest in 17 months, as a pick-up in the costs of energy
such as power, fuel and light was offset by a more moderate increase in prices of primary articles such as food
and non-food articles as well as the prices of manufactured products.

◆ With economic growth expected to accelerate in the next year, capacity constraints will likely re-emerge. This is
expected to exert further pressure on prices. Also, rising cost of oil, which India imports to meet three-quarters
of its needs, and monsoon rains could exacerbate inflationary pressure. Indeed, India’s inflation is in part the result
of strained infrastructure. The nation produces about 10% less electricity than it needs, while roads, which account
for 65% of the nation’s cargo, are plagued by single lanes and irregular surfaces, boosting companies’ costs,
according to government estimates. The Planning Commission of India estimated last month the country needs
to more than double spending on infrastructure to US$1 trn in the five years to March 2017.

◆ Meanwhile, the Reserve Bank of India said that an interest rate move before the next monetary policy
meeting scheduled for 27 July cannot be ruled out. This suggests that the central bank will still likely to
raise its interest rate further in order to contain inflation.

China Tightened Rules On Uncompleted Home Sales

◆ China’s Ministry of Housing and Urban-Rural Development ordered developers not to take deposits for sales
of uncompleted apartments without proper approval and barred them from charging “abnormally high”
prices. The move suggests that the authorities are stepping up efforts to prevent a property bubble, as property
prices in 70 cities jumped by a record 11.7% yoy in March. Under the new requirement, developers must disclose
to the public all apartments available and prices, and start selling within 10 days of getting pre-sale approval.
Developers who fail to start selling within the required time, price homes at abnormally high levels, or artificially
create supply shortages by faking sale contracts, will be severely punished. The focus on developers’ sales tactics
adds to curbs on loans for third-home purchases, increased down payment requirements and higher mortgage rates
announced in the past week. We believe the measures introduced will likely have effects in cooling down property
prices in China but it risks being over done.

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