Emerging Asia Pacific: Economic Review July 2011
Thomas White International
August 12, 2011
Emerging Asia Pacific economies witnessed a surge in inflation, with China, India, Taiwan and Philippines and other Asian economies seeing inflation accelerate to new highs in June. In most of these countries higher fuel costs and food prices were the primary culprits. While large economies such as India and China hiked interest rates aggressively, many countries increased bank reserve ratios to drain excess liquidity and rein in credit growth. The lone exception to the inflation-ridden scenario in Asia was Indonesia. The country has witnessed consistently slowing inflation for the past six months. Indonesia has successfully navigated inflationary pressures by allowing its domestic currency to strengthen strongly.
Although exports held up well within emerging Asia Pacific nations, Taiwan and South Korea, which also count Europe and the U.S. as some of their largest markets, witnessed export-growth slowing to single-digits in June. Political events such as a nation-wide election in Thailand and protests in Malaysia over electoral reforms also became significant events in June.
At a Glance
- China: China celebrated the 90th anniversary of the Communist Party of China in July amidst rising inflation and soaring property prices. China’s central bank hiked benchmark interest rates by 25 basis points.
- India: India’s central bank hiked interest rates by 50 basis points to combat stubborn inflation. The Index of Industrial production growth slowed to a nine month low of 5.8 percent.
- South Korea: Core inflation jumped to a 25-month high of 3.7 percent in June.
- Indonesia: Consumer price inflation fell to 4.8 percent in June from 5.5 percent in July.
- Taiwan: The Consumer Confidence Index jumped to 86.84 in July, the highest figure since 2001.
- Malaysia: Protests by activists demanding an overhaul of election rules turned violent in early July.
China: China prepares for leadership change in the year ahead
In early July 2011, China celebrated the 90th anniversary of the Communist Party with much fanfare. Top leaders of the Communist Party along with the 25-member strong Politburo were gathered in Beijing to commemorate the founding of the party.
The current anniversary precedes the 18th National Congress of the Communist Party of China that will be held in 2012. Major leadership changes are due in the 2012 National Congress in which China’s current president Hu Jintao will step aside and make way for a new President. China’s political transition comes at a time of some major economic and social changes. In recent times, China has witnessed sporadic but significant protests against corruption and inflation. An estimate by the Chinese Academy of Social Sciences has put the total number of “mass incidents” at around 127,000 in recent years. The Wall Street Journal reported that some of these protests had ethnic overtones although they were not coordinated or broad-based. Economic conditions such as accelerating inflation and ballooning property prices have also been cited as reasons behind the increase in the number of protests.
Meanwhile, in June consumer prices increased 6.4 percent, fueled by rising food prices. Despite some unconventional measures from China, such as releasing more grains and pork from its reserves, the country is struggling to control the price of essentials. Pork prices alone shot up 38 percent in the past year. A number of restaurant chains in China are correspondingly increasing the prices of their menus, with McDonalds being the latest to do so. Earlier this month, Unilever, a large manufacturer of fast-moving consumer goods such as soaps and shampoos, said that it might increase prices of its products due to soaring raw material costs and rising wages. These issues have sent the country’s policy makers scrambling to put a lid on prices. So far China had aggressively tried to rein in inflation by controlling the money supply. Basically, the country’s central bankers ordered commercial banks in the country to deposit more of their funds with the central bank to slow credit growth. But with limited results from such measures, the central bank moved in with a 25 basis point hike in July, raising interest rates to 6.56 percent. China has increased interest rates five times in the past eight months.
China is also making some fiscal policy changes to protect the group of low-income earners, who are affected the most by rising food inflation. In July, the country’s legislature increased the minimum threshold at which workers must start paying taxes by 500 yuan to 3,500 yuan. Although the country stands to lose nearly $22 billion in revenues from the new legislation, over 15 percent of people in the lowest income group are expected to benefit from it.
In other developments, the government’s effort to cool the country’s property sector is showing some results. According to China’s State Council, house prices that grew by double digit figures in 2010 have slowed substantially in 2011, growing only by low to mid-single digits so far this year. Further, the number of cities that recorded gains in house prices has fallen to 44 in June from 50 in May.
India: RBI hikes rates aggressively to tackle inflation
Amidst surging inflation and slowing growth, India’s central bank, the Reserve Bank of India (RBI), hiked interest rates by 50 basis points in late July. Although the country was expecting an increase in interest rates, the magnitude of rise in interest rates came as a surprise. Many economists had predicted only a 25 basis point hike in interest rates. None of the 22 economists surveyed by Bloomberg predicted a 50 basis point jump. The RBI has been quite hawkish in its monetary policy and has raised interest rates 11 times in the past 18 months.
Despite the aggressive interest rate hikes, inflation in India continues to soar. Even in June India’s benchmark wholesale-inflation accelerated to 9.44 percent on the back of high fuel costs and food prices. According to a Bloomberg survey, private economists expect inflation to remain at the 10 percent level until November. Even the RBI hiked its inflation target by one full percentage point to 7 percent for the financial year ending March 2012.
India’s fiscal policy, which has remained in favor of spending in the past three years, has largely been blamed for higher inflation. Bloomberg quoted the RBI’s governor finger-pointing the country’s “large fiscal deficit” as a reason behind high inflation. Although India’s government has said that it wants to bring down its budget deficit to a four year low in 2012, huge spending initiatives lie ahead. India plans to extend a nationwide health-insurance plan for workers in rural areas and to laborers in the asbestos and limestone manufacturing industries. It has also been planning a food security program that will provide subsidized wheat and rice supplies to the country’s poor. With this, the amount that the government plans to spend on food subsidies is expected to jump approximately 67 percent to $23 billion, according to India’s Food and Consumer Affairs Ministry. According to one of the RBI’s governors, these expenditures could fuel further inflation leading to more policy tightening.
On the other hand, India’s corporate sector, which has come under rising borrowing costs as a result of the RBI’s tight monetary policy, has complained vociferously against the tightening efforts. A group of banks last month appealed to the RBI for temporary relief, asking for a pause in interest rate hikes. The pace of credit growth in India is also declining. ICICI, one of India’s largest private-sector banks, reported slowing credit growth in June.
Slowing credit growth is in turn affecting both industrial production and consumption in the country. India’s Index of Industrial Production (IIP) grew by 5.8 percent in May, the slowest pace in nine months. The sales of consumer durables are also losing momentum. Sales of cars tumbled to a two-year low in June 2011. The central bank has said that further interest rate decisions will depend on factors such as domestic growth, commodity prices, and the economic conditions in overseas markets such as Europe and the U.S. Despite slowing growth in the corporate sector, the RBI said it does not see a major slowdown in India’s economic growth for the year. The IMF has forecast a GDP growth of 8.2 percent for India in 2011.
South Korea’s central bank is faced with the twin tasks of controlling inflation and a surging inflow of foreign capital. On the inflation front, however, the central bank has adopted a measured approach. During the bank’s July policy meeting, it kept the country’s benchmark lending rates unchanged at 3.25 percent.
The pause in interest rate hike comes amidst rising prices. Consumer inflation for the month of June rose to a three month high of 4.4 percent, above the central bank’s inflation target of 2-4 percent. Inflation in South Korea is being fueled by prices of fresh foods and future expectations of higher prices. Even core inflation, an important factor that decides the course of the monetary policy, has also been consistently high. It rose to a 25-month high of 3.7 percent in June. With the country’s demand situation in mind, South Korea’s central bank said it has refrained from hiking interest rates in June. South Korea is a large exporter of consumer durables and capital machinery to markets such as Europe and the U.S. The central bank has said that uncertainties in Europe arising from debt problems and weak growth in the U.S. were some of the reasons that led to a pause in interest rate hikes.
Still, interest rates are expected to be raised in the central bank’ next policy meet in August. Five of the 11 economists surveyed by Dow Jones Newswires expect the Bank of Korea to hike interest rates next month. The central bank, which has increased interest rates three times during this year, expects inflation to average 3.9 percent for 2011 with GDP growth of 4.5-5 percent.
In other developments, the high interest rate regime in South Korea has led to a strong inflow of foreign capital. To control such inflows, the central bank has imposed tighter rules on companies raising foreign-currency denominated loans. The central bank has also prohibited financial firms from subscribing to public offerings of foreign-currency denominated bonds popularly called the “Kimchi”. Foreign currency borrowing by Korean companies had almost surged 9 percent to $146 billion in the first quarter of 2011 from $135 billion in the fourth quarter of 2010.
South Korea’s financial authorities are also trying to ensure the stability of their domestic banking system that is heavily exposed to souring real-estate loans. The country’s Financial Services Commission said that it will study the asset qualities of 85 of the 98 savings banks that provide financial services to low-income group customers. Although South Korea does not expect any major problems to affect its broader financial system from the savings banks, the country is acting preemptively on these lenders to prevent a bank-run and to avert a panic among small investors.
Indonesia: Dip in inflation helps growth
Unlike other emerging Asian economies, where inflation has consistently risen, Indonesia’s inflation has remained under control over the past six months. Indonesia’s inflation in July slowed to 4.8 percent from 5.5 percent in June. The country has used a set of tools such as strengthening currency and fuel and power subsidies to control consumer price inflation. These strategies have largely been helpful in bringing down inflation over the past six months.
In turn, the slowing pace of inflation has helped the Indonesian central bank, Bank of Indonesia, to keep interest rates stable. The central bank has kept interest rates unchanged over the past five policy meetings in the last six months. This is in stark contrast with many other major emerging economies such as China and India, which have aggressively hiked interest rates.
The relatively benign interest-rate regime has kept borrowing costs stable for many Indonesian companies whose expansion has helped accelerate the country’s economic growth. Credit growth in Indonesia for 2011 has been quite strong compared to 2010. The president of PT Bank Central Asia said that commercial lending for 2011 is expected to jump by 25 percent, almost two percentage points higher than in 2010, and a bit higher than the central bank target of 24 percent.
While the country expects economic growth to come close to 6.8 percent, the IMF has predicted a 6.5 percent growth for Indonesia in 2011. Attracted by the strong rate of growth, foreign capital is pouring into Indonesia. Many credit rating agencies like Fitch have said that the country’s strong growth, along with its robust domestic consumption and a rich commodity-based export sector, will help attract foreign investments into the country. Some of Indonesia’s commercial banks are also trying to ride the country’s consumption boom. Indonesia’s largest lender by market value, Bank Central Asia, announced that its lending books will grow by 20-22 percent this year mainly due to higher demand for loans in the mortgage and automotive segments. In July, Fitch announced that Indonesia has more than a 50 percent chance to get a sovereign credit rating upgrade.
Thailand: July elections point to much-needed stability
Thailand’s nationwide election in July produced a clear winner. The country’s Pheu Thai party won a convincing majority of 265 seats of the 500-strong Thailand parliament. Yingluck Shinawatra, the leader of the Pheu Thai party, was close to forming a government in late July. Mrs. Shinawatra is the younger sister of Taksin Shinawatra, the former prime minister who was deposed from power by a military coup. The elections also marked the defeat of the ruling military-backed Democratic Party. The Pheu Thai majority is widely seen as a sign of stability in a country that has often seen military coups. Thailand’s stock market, which was performing poorly due to the lack of political stability over the past year, has marched northwards since the July elections. Soon after the elections, consumer confidence also climbed to a six-year high of 81.7, according to the University of Thai Chamber of Commerce.
However, Mrs. Shinawatra’s populist policies, which secured her a number of votes from large swathes of Thailand’s rural areas, are widely expected to result in increased government spending. In the Pheu Thai election manifesto, the party promised to increase minimum wages for workers, raise support price for grains like rice, and distribute one million tablet computers to school children. These policies have been criticized as inflationary by Thailand’s opposition leaders. Inflationary pressures in Thailand had been on the rise even before Mrs. Shinawatra’s victory in the general elections. In mid-June, Thailand’s central bank had hiked interest rates for the sixth straight time this year by 25 basis points.
On the other hand, Mrs. Shinawatra’s stance on raising minimum wages has been accepted with some disapproval from Thailand’s’ major business syndicates. Two trade organizations, the Board of Trade of Thailand and the Federation of Thai Industries expressed worries over the increase in production costs, and complained that the proposed wage rules would hit foreign investment by almost 25 percent.
Thailand’s agro-based exports such as rice are also expected to come under pressure due to competition from other rice-producing nations. For the greater part of the decade, Thailand has been the largest rice exporter to South Africa. However, Thailand’s position is likely to be challenged by Brazil, whose rice producers have formed a union called Sindarroz mainly to compete with Thai rice in the South African market. Over 42 rice mills that form a part of Brazil’s rice producer’s union said they plan to increase rice production by 30 percent to compete with Thai rice in South Africa. The Bangkok Post reported that further rice supplies from Vietnam and Cambodia could also erode Thailand’s strong position in the African rice markets.
Philippines: Central bank hikes reserve ratio to contain inflation
Like many other Asian economies, the Philippines is also witnessing soaring inflation. The country’s central bank, which had already hiked its interest rates to a two-year high of 4.5 percent in the earlier policy meets this year, left rates unchanged during its July meeting. However, the central bank raised the reserve ratio requirement for commercial banks to pre-crisis levels of 21 percent. Increasing the reserve requirement ratio reduces the amount of funds available for commercial banks to lend.
Central bank officials now expect the tightening measures to take hold over the next few months. The bank’s governor, Amando Tetangco, said that inflationary pressures for the rest of 2011 are likely to be milder than what the central bank had predicted in its earlier policy meetings.
The past monetary tightening measures had already increased the interest rate differentials between the Philippines and many Western economies, where interest rates still remain low. As a result, capital has continued to pour into the Philippines over the past two years. This has led to a strengthening of the country’s currency, the peso. In July 2011, the Philippine peso touched 42.11 against the U.S. dollar, the highest value since May 2008.
Although the strengthened Philippine peso has helped eased inflation arising from food and oil prices, it has caused some headaches for the country’s export sector. With the Chairman of the Philippine Senate Committee forecasting that the peso will strengthen to 34 per U.S. dollar, many exporters are demanding state aid to compete in the international markets. The country’s president, Benigno Aquino, had earlier created an export support fund (ESF) with an initial funding of 100 million pesos ($2.6 million) to provide financial assistance to exporters affected by a strong peso.
But many export-oriented industries in the country have called for more support from the state. The Philippine Food Exporters and Processors Organization has complained that their competitiveness in the Asian processed food markets has been eroded due to a strong peso. Nonetheless, despite the headwinds, the association of exporters in the Philippines, Philexport, has said that it will focus on meeting an export target growth of 10 percent for 2011.
Despite the pressure from the export-oriented industries, both the World Bank and the IMF have forecasted strong economic prospects for the Philippines for the rest of 2011. The World Bank has said that the country’s drive to eliminate corruption and improve infrastructure will help the Philippines to achieve a 5 percent growth for the year. The World Bank also opined that a boost from tourism and a buoyant micro and small enterprise sector could help the Philippines slash its current poverty level from 30 percent. Some foreign donors are also increasing the funds to build infrastructure in the Philippines. In July, South Korea increased its loan commitment by 67 percent to $500 million to support irrigation and renewal energy projects in the Philippines.
Malaysia: Protests over election reforms rock the country
Malaysia’s capital city, Kuala Lumpur, witnessed an unexpectedly large protest during the second week of July. The protests organized by various human rights groups called for an overhaul of Malaysia’s election rules. The protests, which witnessed some violence and the arrest of more than 200 activists, have put pressure on Malaysia’s ruling government headed by Prime Minister Najib Razak.
For the greater part of the past six decades, since Malaysia’s independence in 1957, the country has been ruled by the majority ethnic Malay community. Malaysia’s citizens belonging to ethnic Chinese and Indian origins have complained of discrimination by the country’s majority rule.
The protests movement known as Bersih, a Malaysian abbreviation that translates into Coalition for Clean and Fair Elections, saw an attendance of more than 20,000 people in the country’s capital. The protestors, who belonged to non-governmental organizations and human-rights groups, demanded fair and equal media coverage for opposition candidates and strict rules against electoral malpractices that appear to keep the ethnic Malay community in power.
The Malaysian government’s handling of the protests, which involved firing tear gas and water cannons, attracted sharp international criticism. Amnesty International, a human-rights group, condemned the government response to the protestors. Quoting many political analysts, The Wall Street Journal reported that the government’s handling of protests had galvanized the opposition parties of Malaysia. Malaysia must call for general elections before spring 2013.
Meanwhile, on the economic front, the country’s currency, the ringgit, climbed to its strongest level in almost 14 years. Inflation in Malaysia touched a 27 month high of 3.5 percent in June, fueled by food prices. Malaysia’s food imports have grown sharply in recent years, including a 13 percent jump in food imports in 2010. According to a Bloomberg survey, the country’s central bank, which held interest rates at 3 percent in its July meeting, is likely to hike interest rates by 25 basis points in its September meeting to combat inflation.
Malaysia’s government also came up with new measures to combat the rise in food prices. It has started rationing almost 250 grocery items. These grocery items, which typically include the nation’s staple foods, are likely to be sold at a 30-40 percent discount over market prices to keep inflation in check.
Taiwan: GDP to gain on rise in private consumption
Taiwan’s export-oriented economy is facing twin challenges of slowing output and higher inflation. In June, Taiwan’s export orders grew at the slowest pace in four months. Although Taiwan’s exports to mainland China have been fairly resilient, the country’s exports to developed markets have come under pressure due to debt problems in Europe and the slow-pace of recovery in the U.S. Even Taiwan’s traditionally strong exporting industries are expected to slow according to the country’s Ministry of Economic Affairs (MOEA). The MOEA reported that uncertainties in integrated chip manufacturing and electronics component manufacturing would pose significant challenges to the export industry. Corroborating this trend, one of the world’s largest chip companies, the Taiwan Semiconductor Manufacturing Company, posted its lowest quarterly profits in two years.
On the other hand, despite slowing growth, inflation on the island seems to be on the rise. In late June, Bloomberg reported that bond prices slid in anticipation of an interest rate rise from Taiwan’s central bank. Taiwan’s inflation hit a 15-month high of 1.66 percent in June. While inflation was primarily fueled by increasing fuel and food prices, higher rents also contributed to rising prices. The Taiwan Institute of Economic Research has forecasted inflation of 2.41 percent for 2011. Economists surveyed by Bloomberg have forecasted a 0.125 basis point hike in interest rates to 1.875 percent in August. Taiwan’s central bankers have raised interest rates at all of the past four policy meetings.
On the brighter side, private domestic consumption is widely expected to support the country’s economy, offsetting a slump in export growth. Incidentally, Taiwan’s Consumer Confidence Index jumped to 86.84 in July, the highest in many years. The Research Centre for Taiwan Economic Development cited an upturn in the labor market, a healthy household economy, and better government finances as factors that could fuel consumption in the Asian economy. The agency forecasted Taiwan’s economy will grow 5.06 percent in 2011.
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