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SMU Political-Economic Exchange


ISSUE 3 10 October 2011

- The ASEAN Infrastructure Fund - An Update on the Woes of the American Economy - Opportunities in Unexpected Territory (Africa) Part 2 of 2

The Fortnight In Brief ( 26 September to 7 October )

Global markets continued to display tremendous levels of volaitlity, plunging earlier in the fortnight over fears that the Greek debt crisis could not be contained. This was subsequently followed by a strong rally, on the back of positive US data and hopes that European leaders would find a solution to their debt woes. US: Boring for once Better than expected demand for US durable goods (increased the most in 3 months) and jobs data (unemployment rate at 9.1%) were positive data highlights of the fortnight. Long-term treasury yields declined the most since 2008, in anticipation of Operation Twist and reflecting extremely strong risk-averse attitudes. The US government took a strong stance against Chinese trade policy, with Obama blasting China for artificially propping up the yuan and the US Sentate advancing a bill for retaliation. EU: Same problem, different day.. again European debt concerns took centrestage in investors minds this fortnight, with the Greek government and EU urgently seeking to prevent a Greek debt default slated to happen in a few weeks. Tangible measures included the introduction of a Greek austerity package worth 6.6bn euros and an announcement by European finance ministers to recapitalize the banking sector. Discussions of a breakup of Belgian lender Dexia are also underway, sparked by the writing down of its Greek debt leading to a record 4bn euro loss in Q211. Asia Pacific ex-Japan: Mixed Bag While Asian markets were following the movements of their Eurozone counterparts closely, the region saw some interesting developments as well. Vulnerabilities in the Chinese property sector were highlighted by S&P, which conducted a stress test with unsatisfactory results (30% sales decline cannot be absorbed by most developers). The South Korean government announced plans to cut its budget deficit in 2012, reflecting more active sovereign debt control in light of the European debt crisis. Singapores Industrial Production levels surged 21.7% yoy, due to strong output from the pharmaceuticals sector.



The ASEAN Infrastructure Fund

By Ben Lim, Singapore Management University On paper, the concept of a unified and cohesive economic bloc was fascinating. Think about it: with a vast hinterland, large working population and proximity to major markets (India and China), ASEAN has all to gain from increasing her connectivity to the world, and the world to the region (note: refer to SPEX Issue 1 for an introduction to the ASEAN bloc) Thus in order to promote and enable herself to be a go-to destination for the untapped (mostly) market of ASEAN with all the aforementioned benefits, ASEAN has to develop her member states into a more connected entity- be it physically, such as building bridges, tunnels and airports- or financially, such as facilitating easier access to capital markets for member states to raise funds required for undertaking developmental projects. Amidst its myriad of ethnic, cultural and social diversity across the region, ASEAN is now a step closer in realising its end-goal of full economic integration. Recently, on 24th September in Washington D.C., the ASEAN Infrastructure Fund (AIF) was signed among ASEAN member states. With an initial startup capital of US$485.2 million, the fund is the first of its kind for member states to draw capital from at affordable rates in the region for infrastructural projects. Such a milestone in the integration of ASEAN shall be applauded not just for the economic and political circles throughout ASEAN, but for the benefit of the global economy as well. Surely with better market access to almost nine percent of the world population, there is some reason- economic or otherwise- to begin interactions at some level with the bloc. Effectively summing up ASEANs sentiments, "Our community is now being built with speed. This is a milestone," ASEAN Secretary-General Surin Pitsuwan was quoted as saying by AFP. Forging Ahead The AIF is one of the many initiatives undertaken by the bloc to achieve the blocs stated vision of economic integration. As seen from the table below, East Asias major economies, ASEANs five biggest economies and Indias 2007 domestic saving and foreign exchange reserves are shown. The vast amount of reserves held by the ASEAN-5- US$409 billion- highlights the immense underutilised amount of resources not being poured into domestic investment projects. In addition, with the Asian Development Bank (ADB) as the fund administrator, there can be possible complementary effects with other initiatives such as the Credit Guarantee Investment Facility, a trust fund managed by the ADB within the ASEAN+3 bloc, as well as other ADB managed pan-Asian financing initiatives.
Country/region GDP PRC Japan East Asia-5 ASEAN-5 India ASIA-11 3239 4403 9173 1091 1085 11349 2007 (US$ billions) Saving 1384 1311 3207 457 329 3992 Reserves 1434 923 3034 409 267 3710

Note: East Asia 5=PRC; Hong Kong, China, China; Japan; Republic of Korea, Taipei,China; ASEAN 5=Indonesia, Malaysia, Philippines, Singapore,Thailand;ASIA-11=EastAsia-5,ASEAN5,andIndia. Sources: (Taken from ADBI Working Paper Series) ADB 2007, 2008; IMF 2007; and World Bank 2008b

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With the implementation of the AIF, member states can be more certain in their borrowing costs involved prior to engaging in domestic infrastructure developmental projects. As stated in its Financial Analysis document from the Report and Recommendation of the President (RRP) to the Board of Directors of the ADB report, the AIFs stated goals for borrowing costs are to keep it low by maintaining the high investment-grade rating from major international rating agencies. With this priority set by the ADB, there can be more transparency in the loan process from the fund as well as proper accounting of funds utilisation. Projected Infrastructure Requirements in ASEAN 20062015 (US$ billions)
Sector Power Transport Water and Sanitation Telecom Total New Capacity 170.3 95.6 98.8 30.9 395.6 Maintenance 46.0 61.2 60.6 32.7 200.5 Total 216.3 156.8 159.4 63.6 596.1

Source: Goh Ching Yin 2008 and Nangia 2008

From the table above, the projected infrastructure requirements for ASEAN for the years 2006 to 2015 are shown. A burgeoning middle class amongst its populace as well as the region constitutes an increase in aggregate demand of normal and luxury goods and services. Due to this, ASEAN states are faced with the increasing need to maintain and upgrade domestic railway lines and roads, as well as expanding ports and airports. Thus, the implementation of the AIF is timely for such changes. Hurdles to Overcome With the implementation of the AIF, ASEAN nations are able to pool resources together to address infrastructure inequality, poverty reduction and trade integration between member states. As shown in the table below, vast disparities still exist between the ASEAN member states. For an equitable growth of the region, imbalances in basic infrastructure among member states should be addressed. With equitable growth across the region, social and political instability can be addressed, and this leads to further improvement in investor sentiment for the region, leading to further growth. Infrastructure Access Indicators in Selected ASEAN Member Countries (% of total population) Infrastructure Electricity Water Sanitation Teledensity Road Density (population) Road Density (area) Cambodia 10.0 34.0 16.0 38.0 1.0 70.0 Indonesia 80.0 78.0 52.0 127.0 1.7 203.0 Myanmar 5.0 80.0 73.0 8.0 Viet Nam 60.0 73.0 41.0 88.0 1.2 287.0

Notes: Electricity: Access to electricity network; Water: access to improved water sources; Sanitation: access to improved sanitation; Teledensity: telephone subscribers per thousand population; Road density (population): road km/ 1,000 people; Road density (area): road km/ 1,; -- where data is not available. Source: Estache and Goicoechea 2005

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The cause of such imbalance in infrastructure between member states stem not just from political indecisiveness, but also in the unequal (and sometimes unfair) allocation of the costs and benefits involved in infrastructure projects between member states. Such unequal allocation of costs and benefits include the need for landlocked countries such as Laos to spend more resources to transport materials from maritime trade routes into its border. Furthermore, mountainous regions of certain countries are more prone to natural disasters such as landslides, leading to additional spending on infrastructure projects. As such, the AIFs funds usage have to be managed prudently to enable proper distribution to the members that need it the most, yet maintaining an optimal usage of resources. Note of Optimism

In conclusion, it is noteworthy that ASEAN is one step closer in realising its vision of full economic integration. However, there exists hurdles in the form of enabling inclusive growth within the region. Myanmar, one of the poorer nation of the bloc, has opted out of the AIF for the time being. An effective tool such as the AIF is able to greatly benefit the poorer countries and equalise the imbalance in development in the region. Malaysian Prime Minister Najib Razak, whos country has the greatest equity contribution to the fund (US$150 million), has stated his belief in the need for infrastructure spending. "A 1-per-cent increase in infrastructure spending in Asia can increase private consumption by 1 per cent to 2 per cent of GDP (gross domestic product), and will benefit the wider investment community as well as ASEAN nations and their people," he was quoted as saying by The Star. Also, ASEAN should remember the greater picture. China, India and even Europe are looking to engage ASEAN on a deeper level. Aside from regional integration of the bloc, the grouping should not forget to continuously strengthen and grow its international links, all the while navigating the tumulus political and economic landscape of the global economy. An intergovernmental agreement between member states of a certain region, with the stated goals of reduction in barriers to trade and freer flow of goods and services. Refers to the quality of a company or funds credit which depends on amount of debt owed , performance and outlook, among other factors. Overall economic growth where everyone benefits from, and not just a selected few. Sources: and related articles, and related articles. 4 Copyright 2011 SMU Economics Intelligence Club

An Update on the Woes of the American Economy

By Gabriel Tan, Boston University The current state of affairs of the U.S. economy can be summed up in three major headlines in the news: Ben Bernankes plea to Congress to do more for the economy, the protests in New York against Wall Street and the push by the senate to punish China for its undervalued currency. Bernanke stood in front of Congress on the 4th of October and warned legislators that economic recovery was close to faltering. His comments stemmed from his view that investors had not yet recovered from the debt crisis and that the reduction of US$1.5 trillion in federal debt was an inadequate move. He also addressed concerns of unemployment lingering above the 9% mark and the fact that the U.S. could only watch Europe from the sidelines but would feel a dramatic impact of a widespread Euro-zone default. Bernankes appeal to Congress seems to highlight the Feds exhaustion of its capabilities. The Fed has done a considerable amount to spur economic growth in the past years but it seems that it has no more tricks left in its hat. The Fed has kept interest rates near to zero and plans to continue to do so until 2013. It has also launched two rounds of government bond purchases (also known as quantitative easing, QE). When asked about the Feds plans to launch another round of QE, Bernanke responded by saying that it was not at the forefront of their plans to do so. It thus seems that the Fed has exhausted most of its capabilities within its power- and, Bernankes realization of this is worrisome. With that being said, it seems the Fed is continually trying to improve the economy with its recent announcement that it will be readjusting its portfolio to hold more long-term debt to keep credit cheap. This is expected to decrease the yield curve for long-term bonds, as shown below. However, the extent to which this will spur economic recovery is minimal.

U.S. Govt. Bond Yield (Long-Term)

5.5 5 4.5 4 3.5 3 2.5 2 01-Aug-06 01-Jul-07 01-Jun-08 01-May-09 01-Apr-10 01-Mar-11

Source: CEIC Database

Bernanke has requested that Congress work on legislation that targets the following areas: improving the housing sector, promoting trade and improving an overly complex tax code, creating jobs, planning for the government owned Fannie Mae and Freddie Mac, increasing the ease in refinancing mortgages and making it easier for banks to rent out properties they have come to own on defaulted mortgages. 5 Copyright 2011 SMU Economics Intelligence Club

As important as the domestic factors are to the U.S recovery, the considerable pressures of the undervalued Chinese currency and Europes debt crisis still loom over investor confidence in the U.S. The push for punishment of the Chinese undervaluation of the Yuan is rooted in the fact that a cheaper currency makes trade with that currency more attractive, thereby crowding out other exporters. Bernanke highlighted that this could be a serious threat to a global economic recovery. Of course such legislation has been highly debated and has caused international animosity. However, the outcome of the legislation is not as important as the concern it highlights: Chinas Yuan is a major opposing factor on the recovery of the global economy. Finally, the Euro-zone crisis continues to cause investor shakiness in the U.S. especially with the most recent news of the possible government-backed break up of one the largest banks in Europe, Dexia SA. Due to the unpredictability of the outcome of the Euro-zone situation, as seen from the graph below, equity markets have been spiking and dropping based purely on speculation. It seems that volatility is the only commonality in the contemporary economy. This instability and the distress Americans are facing are embodied in the protests against Wall Street. With unemployment at these levels and little being done to improve the situation, one can only sympathize with these individuals.

Source: Dow Jones

As we move forward, we should be watching moves by Congress and what legislation will be created to fuel the economy, specifically, job creation and the housing market. We should also be watching the Feds actions and the slim possibility of a third round of QE. Finally, we should be watching Europe and China carefully as the consequences of their actions weigh heavily on the American economy. A monetary policy used by a central bank to inject money into an economy in order to stimulate it to engage in more investment and consumption. Financial obligations and loans lasting more than one year. Using Purchasing Power Parity calculation method, the Yuan is calculated as being too cheap with respect to the U.S. dollar. Sources: Bloomberg, Wall Street Journal 6 Copyright 2011 SMU Economics Intelligence Club

Africa: Opportunities in Unexpected Territory

By George Lee, Singapore Management University
The final of two parts, this article is a contribution by our guest writer, George Lee, a year 3 Economics student who is currently doing his exchange at the University of Southern California. George is an exemplary student who has done his internship at the Ministry of Trade and Industry as an Analyst in the Emerging Markets Division. Friction has increased amongst Africans as corrupt officials take the lions share of the profits from foreign investments. However, it has also increased between Africans and companies investing in Africa. Chinese companies undertake many infrastructure projects in Africa, often paid for in oil or in loans from China. Some of these companies have been accused of producing sub-standard infrastructure, and the closure of a Chinese-built hospital in Angola a few months after its opening is an often cited example of such ill-conceived infrastructure. Chinese firms have also been accused of hiring mostly Chinese workers and ill-treating Africans in one case 2 Chinese managers fired shotguns at workers protesting poor working conditions1. United States increasing focus on Africa Under represented in Africa is the worlds largest economy. The United States has been accused by African nations of offering aid and trade opportunities with too many conditions. For instance, the Africa Growth and Opportunity Act signed in 2000 to allow African goods greater access to US markets is only applicable to countries deemed to support market- based economies, the rule of law, and protection of human rights. In reality, more than 90% of Africas US-bound exports under AGOA are oil and oil-related products. Specific industries, such as the sewing industry in Lesotho, have benefitted but export opportunities to the US remain limited. US companies have also begun venturing into Africa, targeting larger markets like Nigeria, Angola and South Africa. However, Chinas comparatively larger presence in Africa and its involvement in many public projects have provoked US Secretary of State, Hillary Clinton, to urge greater scrutiny of Chinas deals in Africa. Growth is not uniform, and its benefits are not always shared In the same way that starvation, violence, and political upheaval are not uniformly distributed in Africa, growth too has not been seen by all countries in Africa. Amongst the 48 countries in sub-Saharan Africa, 23 of the worst performing countries from 1995-2010 have averaged no growth in that period. Compare that to the average 4.9% growth in the same period in a group of 17 countries identified by the IMF as the great takeoff countries and it is clear that there are vast differences between the countries in Africa. Countries such as Angola, Gabon, and Equatorial Guinea have been plagued by political problems and oil riches from these countries have not trickled down to its people. In contrast, Botswana has ably managed its diamond windfall and actively seeks economic diversification
1 The Chinese in Africa: Trying to pull together. The Economist. April 2011.

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through developing itself as a land port for the region and moving upstream into processing of diamonds. Rwanda, a country with no natural resources, is today one of the best managed countries in Africa, achieving 4.1% growth in 2009 under a government with popular support. Africas future growth path Whilst foreign investment remains primarily resource-driven, the development of infrastructure and the influx of capital into Africa should reduce the costs of doing business. Better managed countries with lower levels of corruption will be more likely to attract non- resource related industries. Similarly, increased urbanization itself the result of growth will make it easier for manufacturers to find workers and for businesses to reach a critical mass of consumers. The responsibility is on the various levels of government within each African state to adopt the right policies to support future growth. Those who seek to write themselves into Africas growth story would do well to remember the diversity of Africa and be selective about where they go. And those who stick to the view of a homogenous Africa mired in poverty and violence will be overlooking what is likely to be the fastest growing region in the world. A monetary policy used by a central bank to inject money into an economy in order to stimulate it to engage in more investment and consumption. Financial obligations and loans lasting more than one year. Using Purchasing Power Parity calculation method, the Yuan is calculated as being too cheap with respect to the U.S. dollar.

Sources: Ernst and Young, Harvard Business Review, UNCTAD Stat Database, The Economist 8 Copyright 2011 SMU Economics Intelligence Club

In the next issue of SPEX

About the Federal Reserve & much more

The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large- cap common stocks actively traded in the United States. It has been widely regarded as a gauge for the large cap US equities market The MSCI Asia ex Japan Index is a free float-adjusted market capitalization index consisting of 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The STOXX Europe 600 Index is regarded as a benchmark for European equity markets. It represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Correspondents Shane Ai Changxun Singapore Management University Singapore Kwan Yu Wen (Designer) Singapore Management University Singapore George Lee Singapore Management University Singapore

Ben Lim Singapore Management University Singapore Gabriel Tan Boston University USA

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