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KBank Capital Market perspectives Portugal in focus


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  • 1. KBank Capital Market Perspectives Market Updates Macro / FX / Rates Portugal in focus – problems, changes and possible impacts 23 April 2012 Summary of author’s views Nalin Chutchotitham • Portugal’s debt problem is a result of rigid regulations in the product and labor markets, leading to continued deterioration of productivity and competitiveness • Political risks are lower compared to other PIIGS and the new government indicated strong commitment to reforms • Significant changes had been made with economic structure to restore competitiveness to Portugal, but more time is needed • IMF assessed that existing financial assistance is adequate yet risks remain; additional funds from Europe could be warranted but funds are available • Market likely to be more prepared after experience with Greece but by rising bond yields suggest continued skepticism • Impacts on Thailand’s exports and financial market likely to be similar to the past – indirect negative impact on SET and Thai baht from global risk aversionStay worried about Spain but don’t forget PortugalThe market seemed to be somewhat forgetful. It is now worrying about Spain,which is the fourth largest economy in the eurozone with a huge housing markettrouble. Yet, the concerns in Portugal remained and it is worth noting as well,especially since the eurozone shares the same pool of limited emergencyfunding e.g. EFSF and ESM. We gather here facts and recent data for readers tounderstand the problems of the Portuguese economy better and finally reflect onwhat could be the impacts on the financial markets.First, we go back in time to review the Page 5 of the IMF’s report in June 2011(two months after Portugal officially sought financial assistance). The aspectsmentioned below clearly illustrated the weaknesses in Portugal’s economy andthe dire situation that it must overcome over the next decade. Towards the end ofthe report, we will discuss the IMF’s latest views reflected in its April 2012 report.First, the early findings on Portugal’s economy below:111
  • 2. Table 1. IMF’s report on Portugal’s economic structure and weaknesses Topic Findings Average GDP growth in Portugal during 2000-2010 is around 1.0%, compared to that Slow economic growth of the euro area’s 1.5% GDP per capita (income per head) rose very slowly during 2000-2010 period, falling Slow income growth behind the euro-area average and even Greece. Working-age population with upper secondary education and above is one of the Weaker labor force weakest in Europe. The percentage of such population is < 30% while the average of EU and OECD countries are well above 60%. (based on 2007 data) According to 2008 data, Portugal has one of least flexibility with regards to the Product and labor product market regulations and labor market regulations. Greece’s score is far worse market rigidity than Portugal under IMF’s study but Portugal’s score is a far cry from the rest. In this aspect, IMF showed that the PIIGS countries all have trouble, as real effective Real effective exchange exchange rate had been on a relatively steady rise since 1995, in contrast to the euro rate (based on unit area which fell. Higher REER means that exports are more costly and therefore less labor costs) competitive. Italy is the worst among the PIIGS, with Portugal in the second place. 1994-2007 data (excluding those after the financial crisis since 2008) for Increase in government’s primary expenditure showed that Portugal had been increasing its government’s spending expenditure by nearly 10% of GDP during the period, on par with Greece. Spain and Ireland saw declines of expenditure while Italy’s record was close to zero. Once debts of corporate sector (non-financial) and household sector are added to the government debt, Portugal’s indebtedness ranks among the worst-performing in Total debt to GDP the euro zone at 300% of GDP. Ireland performs worse than Portugal in this aspect but both are much worse off than Germany at 200% of GDP and France at 250% of GDP. A measure of banking sector’s indebtedness – loan-to-deposit ratio, indicates that Loan-to-deposit ratio Portugal is again among the worst performers. Portugal’s LDR is around 140% (June 2010) compared to most of the euro area that are below 120%. Source: IMFFurther illustrations of Portugal’s debt problemsFirst, let us look at the indebtedness of Portugal’s government. Portugal’s publicdebt as a share of its economy (debt-to-GDP on Fig 2) had usually been lowerthan that of the eurozone’s (EMU) average prior to the year 2007 with anaverage of 64.5% during 2000-2007 compared to 71.3% of the EMU. However,the ratio had significantly exceeded the EMU’s average afterwards and the mainreason was the government’s inability to reign in spending and fiscal budgetdeficits in the later years.In the year 2005 when it first missed the Maastricht Treaty’s deficit/GDP ratiotarget of 3%, Portugal had recorded a fiscal shortfall of 5.9% but this figurecontinued to rise to 9.8% in 2010 as a result of economic weakness. Clearly, the2008 global financial crisis had deepened the economy’s existing problems.Eventually, accumulated deficits led to a piling of debts until debt-to-GDP ratiorose to 93%, compared to the 85% average of the eurozone. Despite suchweakness of fiscal health, the government’s borrowing costs remained relativelyon par with the eurozone members and only saw significantly increases in theyear 2010, as suggested by the bond yields. This reflects that refinancing costsdid not become more pronounced until recently (Fig 3).222
  • 3. Fig 1. Deficit-to-GDP ratio % Portugal vs. eurozone Fig 2. Debt-to-GDP ratio % Portugal vs. eurozone deficit/GDP Debt/GDP 0 100 00 01 02 03 04 05 06 07 08 09 10 -2 90 80 -4 70 -6 60 -8 50 -10 40 -12 00 01 02 03 04 05 06 07 08 09 10 Portugal deficit/gdp ratio Eurozone deficit/GDP ratio Portugal debt/gdp ratio Eurozone debt/gdp ratioSource: Bloomberg, KBank Source: Bloomberg, KBankFig 3. 10-year government bond yields of Portugal Fig 4. Private sector debt as a % of GDP % Sovereign 10-year bond yields % % 350 40 40 Private sector debt as % of GDP (2010) 35 35 300 30 30 250 25 25 200 20 20 150 15 15 100 10 10 50 5 5 0 0 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 ly um l ain K. k ce en y d ce ay s ga ar an I ta l an nd U. ee an ed rw r tu Sp lgi nm rm r la Ir e Fr Gr No Sw Be Po De th e Ge Germany Spain Portugal Greece NeSource: Bloomberg, KBank Source: eurostat, KBank Apart from its government debt situation, Portugal’s private sector debt is also very high (Fig 4), crippling the household and business sector to provide stimulus to the economy and this also added to the banking sector’s weakness. (Recall ECON101: engines of growth of an economy include government’s spending, private consumption, private investment, and exports). Reuters reported in March 2012 that, citing Portugal’s central bank, total private sector debt is close to three times of the country’s GDP (Eurostat reported private sector debt at 249% of GDP in 2010. Increased risks also came from the EUR31bn of corporate debt due this year - its size about 40% of what Portugal have secured in terms of financial aid from EU/IMF, which is EUR78bn. In fact, the economy in Portugal was not always in such a dire state. Portugal did benefit from becoming part of the European Union (EU) and the European Monetary Union (EMU) as there were improvements in terms of both economic growth and stability prior to the global financial crisis in 2008. Later in April 2007, The Economist magazine had entitled a report on the Portuguese economy “A new sick man of Europe”. The labels were a result of underperforming numbers in Portugal as compared the euro zone neighbors as well as the whole of the European Union (EU). 33 3
  • 4. According to the U.S. government’s record: “Before the economic crisis, Portugals membership in the EU had contributed to stable economic growth, largely through increased trade fostered by Portugal’s low labor costs and an influx of EU funds for infrastructure improvements. Portugals subsequent entry into the EMU brought exchange rate stability, lower inflation, and lower interest rates. Falling interest rates, in turn, lowered the cost of public debt and helped the country achieve its fiscal targets. Until 2001, average annual growth rates consistently exceeded those of the EU average. However, a dramatic increase in private sector loans led to a serious external imbalance, with large capital account deficits that year. De- leveraging by Portuguese banks to meet the June 2011 EU requirement to increase core tier-one capital ratios above 9% has caused bank lending to tighten.” Source: We highlight further the degree of deterioration of the economy and competitiveness using the World Economic Forum’s Global Competitiveness Index. Portugal’s ranking has fallen from 22nd in the year 2005 (higher-ranked than Spain, Ireland, France and Hong Kong) to 40th (out of 131 countries) in the 2007-2008 ranking and finally 46th (out of 139 countries) in the 2010-2011 ranking.Fig 5. World Economic Forum’s Global Competitiveness Fig 6. Portugal’s GDP growth vs Eurozone’sIndex World competitiveness ranking % GDP Growth % yoy 90 Germany 8.0 80 6.0 Greece 70 4.0 60 Ireland 2.0 50 46 0.0 40 40 43 43 Italy 34 -2.0 30 24 Portugal -4.0 20 22 10 -6.0 Spain Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 0 04-05 05-06 06-07 07-08 08-09 09-10 10-11 Year Spain Portugal EurozoneSource: WEF, KBank Source: Bloomberg, KBank No quick fix for Portugal’s economy Household spending: Household fixed consumption level, at the end of 2011, had fallen to the same level observed in 2006. The pace of decline is more significant in recent quarters, with Q4/2011 consumption dipping 6.6% yoy, a fourth straight quarter of contraction. This is a stark contrast to the average growth rate of 0.7% per quarter since the year 2000 and 1.5% if we exclude the period after 2007. Yet, given the high level of household debt and low levels of saving rate, it seems that households’ balance sheets does not accommodate increased spending either. 44 4
  • 5. Fig 7. Household fixed consumption level and growth Fig 8. Household saving rate (2010) EUR mn % yoy % 20 28000 4 27000 2 15 26000 0 10 25000 -2 5 24000 -4 23000 -6 0 22000 -8 Es al S l an d S p re a rm ) xe c e S w ia d ep ds Un Hu nia S l ium C y ly ia A u rg Cz e th kia m in g y I re n Be ny P o b li c E u -27 F in s G e (2 lan g d K ar str e It a u en do u L u F ra n h R an rt u a ed pr a to N ova a in bo l it e ng EU lg u ov e c er l Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 ro m Household Fixed Consumption (LHS) Household consumption growth % yoySource: Bloomberg, KBank Source: Eurostat, KBank Wage growth slowed. Another factor that had been a drag on the household consumption was the pace of wage increase. Furthermore, the economic recession made unemployment rate surge quickly from 7.5% in the first half of 2008 to 14.0% as of the fourth quarter of 2011. During the period between 2001 and 2003, Portugal’s unemployment rate had been well below the 6% mark. Notice that the poor labor market conditions and economic recession had also led to slower pace of real wage growth during 2008-2010 period, before rebounding to modest growth in 2011. Confidence level is also low: Confidence indicators helped to reflect on the reasons why household consumption had been falling. Consumer confidence in the year 2011 hit levels below that of the level observed during the 2008 financial crisis, although it had since rebounded, reflecting a dismal outlook. Meanwhile, the overall outlook on the economy remained depressing with the economic sentiment index (which includes service sector, industrial sector, and the household) sliding quickly in the year 2011 to levels near to the 2009 recession.Fig 9. Real wage growth (using wage growth – inflation) Fig 10. Confidence levels near 2009 lows % 120 0 2.0 1.5 110 -10 1.0 -20 100 0.5 -30 0.0 90 -40 -0.5 80 -50 -1.0 70 -60 -1.5 -2.0 60 -70 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Difference between Portugals and eurozones inflation rate Portugal economic sentiment index (LHS) Portugal consumer confidence index (RHS)Source: Bloomberg, KBank Source: Bloomberg, KBank Improving exports and current account balance: There is some comfort in Portugal’s trade data and the current accounts. Exports had seen continued positive growth from 2010-2012 while imports had declined, allowing for the trade balance record lower deficits in recent months. The 6-month moving average of current account deficit was EUR500bn in January 2012 and the same measure for the trade balance deficit narrowed to EUR720bn in February 2012 – both indicators improved by more than two-folds from two years ago. 55 5
  • 6. Still, the major trading partners, both import and exports, of Portugal are the EU nations. Stricter fiscal spending rules within Europe this year and going forward poses risks to trading activities to Portugal and the region as a whole. Portugal’s improvement in its competitiveness, be it in terms of higher labor productivity or lower labor costs, would have to compensate for risks on its exports’ exposure to Europe as well and this depends heavily on the government to implement structural changes to the labor and product markets. In fact, Fig 13 below shows that the growth in labor cost (including costs for hiring workers other than wages) had slowed in the past couple of years, pointing to a favorable change. However, recent labor costs may be reflecting the consequences of the rising unemployment rate instead of significant adjustments in the labor market’s regulatory system. In any case, the IMF gave a positive comment on this change on Page 6 of its March 2012 report (after a Third Review of Portugal’s financial aid program): Competitiveness indicators have improved, albeit at a moderate pace. Wage moderation and higher productivity per worker have allowed for more favorable unit labor costs developments in Q4. There are also signs that the real exchange rate depreciation trend may be accelerating, while market shares of exports have remained broadly stable through September 2011. Fig 12. Closing gaps – deficits in current accountFig 11. Exports outpacing imports growth balance EUR bn 30 0 20 -500 10 0 -1000 -10 -1500 -20 -30 -2000 -40 -2500 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Portugal imports % yoy Portugal exports % yoy Current account balance (6m moving average) Trade balance (6m moving average)Source: Bloomberg, KBank Source: Bloomberg, KBank Fig 14. Labor cost adjustment had begun but onlyFig 13. Labor cost growth and unemployment rate slightly % yoy % 110 10 16 8 14 100 6 12 90 4 10 2 8 80 0 6 70 -2 4 -4 2 60 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Labour cost growth % yoy (LHS) Unemployment rate (RHS) Eurozone Ireland Spain PortugalSource: Bloomberg, KBank Source: Bloomberg, KBank 66 6
  • 7. Table 2. Key fiscal austerity measures undertaken under the agreement of EU-IMF loan Sector Description - opening up of protected professions - Increased working hours by 30 minutes a day (for private sector) without increase in pay.(2012-2013) - Some bank holidays removed and some shifted to Mondays - Summer and Christmas bonuses (usually about a month’s pay) abolished for employees earning more than EUR1,000 a month. Labor market (2012-2013) - Overtime pay to be halved - Reduce restrictions on worker dismissal for redundancy and unsuitability - Align severance payments to EU average - Introduced some decentralization in the wage-bargaining process. - Improve competition law and empower the Portuguese Competition Authority - Prices and rents in the product market have to be dealt with to Product and service improve productivity in the economy. The government is assessing market barriers to entry and excessive rents in network industries, especially electricity and telecommunications - Provision of healthcare are moved to larger and more specialized Healthcare centers. - More contribution by patients - Portugal has 98 state-owned companies and accounts for 4.6% of GDP, 3.6% of the work force. Improving the efficiencies of the sector and improving their balance sheets are key to a reduction of government debt burden as well - public sector’s entities to be privatized or made into stand-alone Public sector corporations to improve efficiency - Examples: sale of government’s stake in a major player in the electricity sector – Energias de Portugal – which raised EUR2.7bn. sale of 40% stake in an energy network company REN at a premium, raising about EUR0.6bn. - value-added tax increase in several products - several tax benefits removed Taxation - increase resources for audit - enhance focus on large taxpayersSource: EIU, Bloomberg, IMFPolitical will for austerity and political risks aheadAmong the many debt-laden eurozone countries, e.g. PIIGS, several governmentscontinued to be faced with political threats from the public and their political oppositionbut for the current situation in Portugal, such risks are mitigated after the June 2011election. The present ruling parties in the government are the Social Democratic Party(PSD) and the Popular party (CDS-PP). They came in to power after Jose Socrate’sSocialist party’s defeat in Portugal’s general election back in June 2011 (the election wastriggered by Socrates’ resignation after his government failed to persuade the parliamentto pass its fiscal austerity package). Given such a recent election, major news agencieshad mentioned that they expect the two parties to see positive cooperation and remain inthe coalition for the next two years at least. The leader of the PSD and current primeminister, Pedro Passos Coelho, also said that his government would carry on theimplementation of fiscal austerity measures and make sure that Portugal honor the termsof its bail-out.777
  • 8. In its February 2012 report, the Economist Intelligence Unit said it believes “thegovernment will have the will to see through the reform programme but… …politicalstability will come under pressure, given the expected steep drop in living standards.Violence at demonstrations is unusual in Portugal, but could flare up.” Theabovementioned suggests that while there is an absence of uncertainty of a change ofthe government in Portugal, unlike several countries in the eurozone this year (France,Spain, Greece, just to name a few), political stability risks would unlikely disappear beforethe economy and living standards see significant improvement.IMF’s Third Review and recent concerns in the marketPortugal sought financial assistance from the IMF and EU back in March 2011. Last year,Portugal was successful in cutting its deficit from 9.8% of GDP in 2010 to about 4.0% (vs.initial target of 5.9%) but it will face increased pressure due to economic recession. Still,the IMF remained optimistic that Portugal would meet its 4.5% deficit-to-GDP ratio in theyear 2012.With regards to financing for Portugal, the IMF’s staff commented that the existingprogram (EUR78bn) is adequate, given the positive structural reforms carried out in theeconomy. Nevertheless, there are uncertainties with regards to the timing that Portugalcan return to the market for funding, especially after the recent downgrades of its creditrating by the three key rating agencies (now non-investment grade by all three agencies).The IMF’s report stated that “should recovery of market access in fact be delayed, it maybecome necessary to call upon the pledges by European leaders to continue to provideadequate support to Portugal as long as the program is on track”. We believe that suchstatements of uncertainties and worries had been the cause of the recent up-tick inPortugal’s bond yields, especially during the periods when yields of other countries suchas Spain and Italy, had been falling due to ECB’s LTRO (long-term refinancingoperations).Table 3. IMF’s Projections of Portugal’s economy 2012-2017 (page 37 of report) - GDP may contract by 3.3% in 2012 vs. 2011’s contraction of 1.5%. However, GDP will return to growth by 2013 but that growth would GDP stay low at 1.5-1.9% going forward - Output gap is likely to return to positive territory only in 2016 - Exports are projected to see positive growth rates of range 4.0-5.5% through 2017 - Imports are likely to see slightly slower growth, thus an improvement Exports and imports in the trade balance and current account balance is expected. - Still, trade and current account balances are expected to remain in the red of about 3-4.5% of GDP through 2017 - Productivity expected to see positive growth from 2013-2017 but Labor productivity and increases would be moderate at 0.7% - 1.1% costs - Unit labor costs are expected to see an average of 0% growth going forward - Public debt-to-GDP ratio is expected to peak in 2013 at 115%. A Government debt steady but slow decline is likely to follow with the ratio projected at 109% in 2017.Source: IMF888
  • 9. Assessment for Portugal Credit Rating Scale Moodys S&P FITCH Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AA- AA- A1 A+ A+ investment grade A2 A A A3 A- A- Baa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBB- BBB- Ba1 BB+ BB+ Ba2 BB BB Ba3 BB- BB- B1 B+ B+ B2 B B non-investment grade B3 B- B- Caa1 CCC+ CCC+ Caa2 CCC CCC Caa3 CCC- CCC- Ca CC CC C C C Color codes *Red: Current rating * Blue: end-2011 *Black: end-2010 Source: Bloomberg Moreover, the banking system remained a concern, given high levels of private sector debt (households and non-financial corporate) and the declining in values of sovereign bonds’ on their balance sheets. Fig 15 shows that Portuguese banks are heavily reliant on the ECB’s cheap loans (source: IMF) and they have not been able to make adequate repayments, causing them to increase the tenors of the loans and a huge chunk of the loans were from the ECB’s 3-year LTRO.Fig 15. Composition of Portugal’s banks borrowings Fig 16. Portugal’s loan-to-deposit ratio is among thefrom ECB (EUR bn): large increases in long-term loans worst in Europeafter LTRO LDR ratio 180 160 140 120 100 80 60 40 20 0 Loans-to-deposit ratio (domestic banks) Loans-to-deposit ratio (all banks)Source: IMF Third Review report Source: ECB, KBank 99 9
  • 10. Fig 17. Portugal’s debt maturity profile (annual) Fig 18. Portugal’s debt maturity profile (monthly) EUR mn EUR mn 25,000 12,000 Principal Principal 10,000 20,000 8,000 15,000 6,000 10,000 4,000 5,000 2,000 0 0 Aug-12 Feb-13 Aug-13 Feb-14 May-12 Nov-12 May-13 Nov-13 May-14 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2026 2027 2030 2037 2049Source: Bloomberg, KBank Source: Bloomberg, KBank Going forward and possible impacts on the global financial market Current government debt outstanding of Portugal is EUR127.5bn and financing is covered from the EU-IMF bailout package until September 2013 when the initial plan was for Portugal to return to the market (Greece’s debt after haircut stays at EUR143bn while Ireland’s debt stood at around EUR84bn). Given the relatively small size of the economy and share of debt in the eurozone (Fig 20.), the impacts on the global financial markets could well be limited even if there is increased stress on Portugal’s financing. This is especially so since the European financial safety nets are now better-established and better-understood (EFSF and ESM). In addition, the “surprise” element has reduced with Greece’s debt haircut out of the way (recall: bond swap deal with investors in March 2012), the market is likely to have a better idea of what could happen next in a haircut situation for a small economy. Nevertheless, risks remain with regards to Portugal’s banking sector and its economic growth. While the government has managed to regain some control over its spending, further losses in the financial sector could trigger a government’s bailout of the banks, thus effectively transferring a substantial amount of debt from the private sector into the public sector, a perfect case for Portugal’s bond yields to spike. The current three-year financial assistance program from the EU/IMF may have to be extended or more money would have to be provided to ease Portugal’s financial strains.Fig 19. Government debt in nominal terms Fig 20. Public debt of Portugal as a share of eurozone’s EUR bn Government debt in nominal values 30% 2,500 Share of eurozones 2007 2010 25% 2,000 20% 1,500 15% 1,000 500 10% 0 5% 0% e l ce d ain e um y ly ga ag lan an c I ta an ee rtu Sp lgi er rm Ire Fr Gr av Be Po Ge e l ce d a in ce y um ly ga on lan an It a an ee rtu z Sp lg i rm ro Ire Fr Gr Be Po Eu GeSource: Bloomberg, KBank Source: Bloomberg, KBank 1010 10
  • 11. Fig 21. Comparison of financial safety net to PIIGS’ Fig 22. Thailand’s trade (exports + imports) to EU anddebt repayment until end-2103 Portugal % of total trade % of total trade Combined lending ceiling of the ESM and the 16 0.12 14 0.10 12 0.08 10 Bonds and loans due by end-2013 8 0.06 6 0.04 4 0.02 2 EUR bn 0 0.00 0 100 200 300 400 500 600 700 800 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ireland Greece Portugal Spain Italy EU-27 (left axis) Portugal (right axis)Source: Bloomberg, KBank Source: BoT, KBank Concerns for Thailand: Financial stress in Portugal or any other smaller European economies would have indirect but significant impacts on Thailand’s financial markets but limited impacts on the real sector. In terms of exports, Portugal is not a major trading partner of Thailand but the European Union is. In the past three years, Thai exports managed to continue growing despite of several adversities and the decline in European markets’ exports had also been made-up for with exports growth in other markets. The financial impacts would come via impacts on the Thai baht and the stock market. According the EUR/THB data since mid-2009 to April 2012, the currency pair had moved from a minimum level of 38.9 to as high as 50.3 (standard deviation of 3.16). This reflects significant risks for exporters and imports alike, especially during periods when the correlation between USD/THB and EUR/USD movements seem to fluctuate i.e. sometimes highly-correlated movements, and sometimes positive/negative correlation is observed. We noticed also that Thai media often report the value of the Thai baht in terms of the greenback alone and so there is reduced attention of the EUR/THB movements. This seems to suggest that perhaps businesses dealing with the euro and European partners would have to be more alert on the changes in the market’s sentiments as well. Impacts from global risk aversion due to renewed concerns of Portugal’s and Spain’s debt problems could also lead to a decline in investment appetite for the local stock market. In fact, this is not surprising or limited to the SET index alone but also the majority of emerging markets. While local economic fundamental supports a steadier movement of the SET index vs the euro stoxx 600 index, it cannot be denied that major corrections in the global equity market could cause damages to equity value here as well. All in all, continued monitoring of European debt situation is warranted, despite of the size of individual economies’ sizes or trading relationship with the local business.Fig 23. Impacts of USD/THB from EUR/USD volatility Fig 24. SET index vs. Euro Stoxx 600 index Euro Stoxx 600 index SET index 35 52 Greeces 300 1300 34 bailout 50 1200 Portugals Greeces 280 Irelands 48 33 bailout haircut 1100 bailout 260 46 1000 32 44 240 900 31 800 42 220 30 700 40 200 600 29 38 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 180 500 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 USD/THB EUR/THB (RHS) Euro Stoxx 600 index SET indexSource: Bloomberg, KBank Source: Bloomberg, KBank 1111 11
  • 12. Table 3. Monthly Key Economic Indicators Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan-12 Feb-12 Mar-12Manufacturing index 195.9 188.2 132.7 101.2 141.1 166.0 180.9 % YoY 6.8 -0.3 -30.1 -47.3 -25.3 -15.0 -3.4Industrial capacity utilization rate (%) 65.0 65.5 46.5 40.5 51.9 58.5 62.3Retail sales (% YoY) 23.6 20.3 -1.7 -10.8 3.4 6.4 n.a.Total vehicle sales (units) 79,043 87,012 42,873 25,664 54,575 76,246 90,461 110,928Motorcycle sales (units) 194,586 168,783 126,339 124,031 133,300 153,732 195,918Unemployed labor force (000 persons) 270 295 219 322 172 314 n.a.Unemployment rate 0.7 0.8 0.6 0.8 0.4 0.8 n.a.Consumer prices (% YoY) 4.29 4.03 4.19 4.19 3.53 3.38 3.35 3.45 core consumer prices 2.85 2.92 2.89 2.90 2.66 2.75 2.72 2.77Producer prices (% YoY) 6.0 5.6 4.2 3.5 4.5 3.6 1.8 1.8External Accounts (USD mn, unless specified otherwise)Exports 20,940.0 21,259.0 17,019.0 15,287.0 16,856.0 15,520.0 18,621.0 % YoY 28.5 18.4 -0.2 -13.1 -2.1 -6.1 1.2Imports 20,235.0 18,840.0 16,006.0 15,068.0 17,094.0 14,998.0 16,569.0 % YoY 45.9 42.6 20.6 -1.9 19.6 -2.5 8.2Trade balance 705.0 2,419.0 1,013.0 219.0 -238.0 522.0 2,052.0Tourist arrivals (000) 1,725 1,500 1,415 1,220 1,780 1,950 1,845 % YoY 36.0 23.0 4.0 -18.7 -3.3 7.7 1.3Current account balance -697.0 404.0 39.0 -136.0 1,940.0 981.0 1,092.0Balance of payments -556 -1,674 -1,886 -1,506 -1,029 -160 2,089FX reserves (USD bn) 189.4 180.1 183.9 176.4 175.1 178.4 180.6Forward position (USD bn) 26.3 27.3 28.9 30.4 31.2 31.1 29.7Monetary conditions (THB bn, unless specified otherwise)M1 1,345.2 1,328.0 1,361.9 1,362.7 1,414.3 1,400.5 1,421.6 % YoY 13.9 13.0 13.3 10.3 8.6 5.6 5.6M2 12,874.3 12,912.3 13,151.1 13,330.5 13,566.0 13,693.4 13,807.6 % YoY 17.4 16.2 16.1 15.9 15.2 15.9 13.6Bank deposits 11,152.5 11,080.5 11,363.3 11,461.7 11,634.5 11,810.5 11,964.3 % YoY 11.3 9.8 11.3 10.3 9.9 11.4 10.4Bank loans 10,899.7 11,079.9 11,209.6 11,309.8 11,558.9 11,702.4 11,789.4 % YoY 17.2 17.5 17.0 16.0 16.2 16.3 15.5Interest rates (% month end)BOT 1 day repo (target) 3.50 3.50 3.50 3.25 3.25 3.00 3.00 3.00Average large banks minimum lending rate 7.19 7.25 7.25 7.25 7.25 7.22 7.13 7.13Average large banks 1 year deposit rate 2.28 2.41 2.41 2.41 2.41 2.41 2.38 2.38Govt bond yield 1yr 3.48 3.57 3.32 3.20 3.10 3.04 3.08 3.13Govt bond yield 5yr 3.42 3.60 3.23 3.26 3.16 3.12 3.39 3.64Govt bond yield 10yr 3.51 3.75 3.38 3.42 3.35 3.21 3.58 3.83Key FX (month end)DXY US dollar index 74.12 78.55 76.17 78.38 80.18 79.29 78.74 79.00USD/THB 29.93 31.19 30.71 30.87 31.55 30.99 30.46 30.83JPY/THB 39.06 40.50 39.29 39.80 41.02 40.63 37.54 37.18EUR/THB 43.01 41.76 42.56 41.51 40.90 40.55 40.58 41.13Source: Bloomberg121212
  • 13. Disclaimer For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained herein. Further information on the securities referred to herein may be obtained upon request.131313