Deloitte's Asia Pacific outlook august 2011
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Deloitte's Asia Pacific outlook august 2011

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The August 2011 edition of the Asia Pacific Economic Outlook gives a near-term outlook for China, Japan, Malaysia, Taiwan and Vietnam....

The August 2011 edition of the Asia Pacific Economic Outlook gives a near-term outlook for China, Japan, Malaysia, Taiwan and Vietnam.

CHINA: While China’s economy continues to hum, there are several questions being raised around the efficiency of large state-funded investment and also about the country’s economic model in general. It is likely that growth in 2011 will come in at a healthy pace, but slower than in 2010.

JAPAN: The worst seems to be over but the government’s policy response will likely determine the speed of Japan’s recovery. If electricity generation returns to normal, supply-chain issues are overcome and reconstruction spending is fast-tracked, Japan’s economy could stage a comeback in 2011.

MALAYSIA: Despite wavering international conditions, domestic demand in Malaysia has shown resilience. Favorable labor market conditions and accompanying income growth percolated down to robust consumer spending. While the outlook remains positive, inflationary pressures will likely intensify this year.

TAIWAN: Weak external demand put a damper on Taiwan’s otherwise bright outlook. Nevertheless, private consumption and investment will likely provide the necessary impetus for growth. The biggest risk is that consistently rising interest rates could encourage strong capital inflows thereby strengthening the local currency and hurting exports.

VIETNAM: The Vietnamese economy is growing, but so is inflation. As a result, the government’s focus has shifted from being predominantly pro-growth to ensuring macroeconomic stability and countering inflation. Amid tighter credit conditions, both consumer and investor confidence has waned. Yet, Vietnam is still on course to enjoy steady growth in 2011.

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Deloitte's Asia Pacific outlook august 2011 Deloitte's Asia Pacific outlook august 2011 Document Transcript

  • Asia Pacific Economic Outlook IN THIS ISSUE: China Japan Malaysia Taiwan VietnamAugust 2011
  • ChinaChina’s role in the world Chinese growth continuesIn the United States and Europe, the sizable deficits of While future challenges will likely arise, the economygovernments have been partly funded externally; to a continues to hum. Growth in the second quarter waslarge extent using funds provided by both the Chinese a pleasant 9.5 percent. Inflation, while now above 6private sector and the Chinese central bank. The United percent, is believed to be at a peak and many analystsStates and Europe now plan to substantially de-leverage. expect that the rate of inflation will soon abate. This willThat is, they intend to reduce their deficits. For this to take likely be the lagged result of tightening of monetary policyplace smoothly, reductions would be needed to China’s during the past year. In addition, the government hassurplus. That, in turn, would need to be driven by China’s allowed the currency to strengthen at a faster speed. Thisprivate sector saving less and spending more – especially suggests that it is more concerned about inflation thanits consumer sector. To create an conducive environment about the competitiveness of exports.for this happen China’s central bank would need toreconsider its practice of accumulating foreign assets and Going forward, it is likely that growth in 2011 will comeallow the Chinese currency to rise in value. If China fails in at a healthy pace, but slower than in 2010. For 2012,to do this, then the de-leveraging undertaken by U.S. and expect continued growth at a moderate pace. What, then,European governments could lead to financial market are the risks facing the Chinese economy in the mediumvolatility. term? Asia Pacific Economic Outlook — August 2011 2
  • First, the slowdown in the global economy will have an Europe and the United States, and especially higher interestimpact on China given its continued reliance on exports rates in those markets, could lead to large capital losses– especially to Europe and the United States. While China for China’s central bank as well as other Chinese financialcontinues to shift away from export driven growth, a large institutions.part of the economy (and employment) remains dependenton exports. This is especially true in the Pearl River and On the other hand, higher interest rates in the WestYangtze River deltas. would take away some of the upward pressure on China’s currency. Furthermore, slower global growth is likely toSecond, the continuing sovereign debt crisis in Europe, and dampen energy and other commodity prices that are ofthe possibility of further crises in the United States in 2013, critical importance to China. And indeed, this is alreadyposes challenges for China. Financial market turmoil in happening. Asia Pacific Economic Outlook — August 2011 3
  • JapanThe Japanese economy is showing signs of recovery. the post-quake recovery in the auto industry is better thanIndustrial production is trending upward. Auto-sector expected and automobile production grew at a staggeringoutput is also on the mend. Several automakers have rate in May.restarted production lines, with operations at near normallevels. Furthermore, exports are beginning to pick up but So far, government allocations of nearly 6 trillion yen werean appreciating yen is a potential dampener for the export largely spent on immediate relief efforts. A majority ofsector. While the worst seems to be over, the government’s the spending on reconstruction is expected to happenpolicy response will likely determine the speed of Japan’s over the second half of 2011 and well into 2012. Localrecovery. If electricity generation returns to normal, supply- governments will likely present their reconstructionchain issues are overcome and government spending on requirements by August. Thereafter, the governmentreconstruction is fast-tracked, Japan’s economy could stage will allocate a 13 trillion yen spending package towarda comeback during the second half of 2011. rebuilding.For some industries, the recovery has been faster than The other important question revolves around the financingexpected. Month-on-month, industrial production rose of reconstruction. Earlier, the government had indicated6.2 percent in May and 3.9 percent in June 2011 marking that it would like to increase the consumption tax fromthree straight months of growth post the earthquake. The 5 to 8 percent. However, the parliament is yet to reachShoko Chukin small business manufacturing survey index a consensus. Besides, the government could issue bondsrose sharply in June, to 45.4 from 36.9 in May and 36 in to finance reconstruction expenses. Ultimately, revenuesApril. A further gain is projected for July. Furthermore, the from subsequent tax hikes will likely be used to redeemearnings of major electronics companies for the quarter these bonds. Japan’s debt to GDP ratio is the highest amongending June were favorable. The recovery has also spurred developed countries. However, over 95 percent of Japan’sgrowth in the steel manufacturing industry. On the outstanding public debt is held by domestic residents. Sodownside, the production of cars, buses and trucks was far, Japan has no visible problems in financing its debt anddown nearly 14 percent compared to June last year. But Japan’s high debt levels do not pose an immediate risk. Asia Pacific Economic Outlook — August 2011 4
  • However, unless the government takes significant steps to ramping up investments in emerging markets. By setting upaddress the imbalance, Japan’s fiscal deficit could become manufacturing units overseas, several Japanese companiesunsustainable. Furthermore, Japan’s aging population will have tried to safeguard their competitiveness. As a result,add further strain on the country’s debt situation through there has also been a spurt in overseas M&A activity.lower private savings and higher government expenditures Furthermore, terms of trade for imports of oil, natural gason social security. and metals have become favorable. That is, a rising yen has reduced the domestic price of imported commodities.Meanwhile, the rise in the value of the yen has had mixedconsequences. The yen has appreciated from over ¥85/ The second half of 2011 will probably see acceleratedUS$ in April to under ¥77/US$ in July. The Japanese growth, yet for 2011 as a whole, GDP will likely contracteconomy depends heavily on exports and the yen’s sharp between 0.5 and 0.7 percent. Reconstruction andappreciation has thrown up a few challenges. While investment in the housing sector will likely boost GDPexporters were already grappling with infrastructure growth. However, a return to normal electricity generationbottlenecks and manufacturing disruptions following the appears to be an uphill task. Finally, how Japan’s industryearthquake, the appreciating currency has dealt a further copes with a rising currency could have significantblow to the export industry. As a result, the government implications on Japan’s exports and, therefore, theintervened in the foreign exchange market to stem the country’s growth prospects.rise of the yen and thereby protect Japanese exports.On the other hand, some multinational companies are Asia Pacific Economic Outlook — August 2011 5
  • MalaysiaMMalaysia’s private sector was the star performer recently. up from 6.4 percent recorded during the previous quarter.The sector demonstrated bullish growth, expanding at Public consumption also expanded at a robust pace of 6.1a pace of 6.6 percent during the quarter. Albeit exports percent during the first quarter. Moreover, implementationwere lower than last year, they continued to provide of planned investment projects kept gross fixed formationsupport to the domestic economy. Furthermore elevated, providing the necessary stimulus for the Malaysianstrong economic fundamentals and favorable rates of economy during the first quarter.return encouraged a surge of foreign direct investment(FDI) and provided an additional boost to the economy. Malaysia’s local industries were hit due to supplySimilar to the woes of its Asian peers, rising inflation disruptions in Japan but are now showing signs of revival.remains a key concern for Malaysia’s policymakers. Japan is amongst Malaysia’s top five export destinationsHowever in light of weak international demand conditions, and accounted for almost a third of Malaysia’s mineralthe central bank refrained from tightening rates in the fuel and petroleum exports last year. Given Japan’slatest monetary policy meeting in July. Supply disruptions reconstruction demands, total exports to the country grewin Japan and a slower Chinese economy have dampened by 9.5 percent in July. Overall, total outbound shipmentsregional demand for Malaysia’s exports. Nonetheless, if from Malaysia grew by 8.7 percent in July after a briefinternational conditions improve in the second half of the slowdown in May. Asia’s robust commodity demandyear, policymakers will have more room to tighten rates in continued to boost Malaysia’s palm oil, petroleum and LNGorder to maintain price stability. exports which accounted for 88 percent of revenue growth during the month.Despite wavering international demand, domestic demandin Malaysia has shown resilience. Favorable labor market Malaysia’s domestic industries also stand to benefit fromconditions and accompanying income growth percolated the surge of FDI seen of late. According to a UNCTADdown to robust consumer spending during the first report, Malaysia received the third highest level of FDIquarter. According to official statistics, private consumption amongst its South East Asian peers at the start of the year.grew 6.7 percent during the first three months of 2011, Within the first quarter alone, FDI inflows reached $3.7 Asia Pacific Economic Outlook — August 2011 6
  • billion, equivalent to 40 percent of the total FDI received pressures in the months to come. In June, consumer priceduring 2010. Manufacturing has traditionally attracted the inflation accelerated to 3.5 percent up from 3.3 percentlargest share of FDI, receiving 54.9 percent in 2010, while in May. This spike in prices was mainly attributed to aservices attracted 34.1 percent of the total FDI received rise in global food costs, with local food prices up 4.7during the year. Given the surge of inflows during the percent in June from a year ago. The central bank keptinitial months of the year, the government is estimating a its benchmark policy rate unchanged in July, choosing tototal inflow of $10 billion this year. This will likely provide remain supportive of growth. However, going forward itan additional boost to the country’s manufacturing sector will likely keep a close watch on international prices as wellwhich has seen sluggish growth in recent months. as domestic indictors as it normalizes its loose monetary policy stance this year.The country is also bracing for higher inflation this year. Inorder to reduce its burgeoning subsidy bill, the government Overall, the Malaysian economy will likely see a moderateincreased electricity tariffs and gas prices, effective June. expansion of 5 to 5.5 percent during 2011. Most of thisElectricity prices were raised by an average of 7 percent growth will probably be seen in the second half of the year.and gas prices were revised up by around 28 percent. This While the outlook remains positive, rising inflation andwill likely result in cost-push inflation, which combined with uncertainties around global developments pose downsiderobust domestic demand, is expected to induce inflationary risks to the Malaysian economy. Asia Pacific Economic Outlook — August 2011 7
  • TaiwanTaiwan’s strong growth seen during the last few quarters is A sluggish export sector had a negative impact on localnow showing signs of slowing down. Weak demand from industries in recent months. The industrial production indexChina, coupled with supply disruptions in Japan, is expanded by 3.6 percent year-over-year in June, comparedputting downward pressure on Taiwan’s export- to 7.6 percent growth logged in May. This was the slowestdependent economy. Following 6.6 percent expansion in nearly two years. Manufacturing output,expansion during the first three months of the year, the which accounts for almost 90 percent of Taiwan’s factorycountry’s annual GDP growth rate decelerated to under output, increased by 3.5 percent, down from 7.5 percent5 percent by mid-year. Going forward, the outlook for recorded during the previous month.Taiwan is expected to improve as private consumptionand investment continues to prop up the economy. The On the bright side, domestic consumption continues togovernment expects the economy to grow at 5 percent be a major driver of the Taiwanese economy. During thethis year. However, the actual pace of growth is dependent second quarter, private consumption expanded by 3.2on the global recovery and the performance of Taiwan’s percent. Registrations of new cars, a strong indicator ofexternal sector. domestic consumption, nearly tripled during the first half of the year. Improvements in labor market conditions areThe month of June saw subdued export orders which grew likely to further bolster private consumption this year. The9.2 percent year-over-year, compared to 11.5 percent unemployment rate fell marginally in recent months. Angrowth logged during the previous month. With monetary upcoming government wage hike will likely encouragepolicy tightening taking effect in China, orders from consumption spending further. Consumer sentimentTaiwan’s neighbor grew at a modest pace of 4.8 percent. already touched record levels in July reaching 86.84 in July,Demand from Japan compounded matters, as orders its highest level since 2001. Thus, consumer sentiment willcontracted by 15.6 percent from a year ago. Despite the likely power domestic demand, which is expected to play aslowdown, demand for Taiwan’s hi-tech exports remained crucial role in propelling the economy during the latter halfstrong and is likely to strengthen further as the high season of the year.approaches. Moreover as the Japanese pipeline opens upand global economic conditions improve, Taiwan’s export A downside risk to consumer confidence arises from the growingsector is expected to rebound in the latter half of the year. inflation in the Taiwanese economy. Inflation rose to 1.9 percent in June, up from 1.6 percent in the previous month. Asia Pacific Economic Outlook — August 2011 8
  • Prices of fuel and food items rose 10.8 percent and Overall, weak external demand put a damper on Taiwan’s3.3 percent respectively. Core inflation rose to otherwise bright outlook. With global conditions expected1.2 percent in June. Rising inflation and surging property to improve along with resilient demand for the country’sprices prompted the central bank to raise interest rates in hi-tech electronics exports, Taiwan’s export performanceits policy meeting in June. It raised its benchmark policy rate will likely improve during the second half of the year.by 12.5 basis points to 1.875 percent this June. However, Nonetheless, the economic recovery will also depend ongiven the elevated prices of international raw materials and the extent of monetary policy tightening by the centralthe potential risk of imported inflation, the central bank bank as it keeps a close eye on inflation. Consistentlyis expected to continue tightening policy rates through rising interest rates could encourage strong capital inflows2011. The government estimates inflation to climb to 2.8 thereby strengthening the local currency and hurtingpercent during the second half of the year and settle with exports. Hence, the next two quarters are crucial for thean average of 2.1 for the entire year. Taiwanese economy this year both from a monetary policy standpoint as well as from the external sector perspective. Asia Pacific Economic Outlook — August 2011 9
  • VietnamThe Vietnamese economy is growing, but soThe Vietnamese economy is growing, but so is inflation. During second quarter, Vietnam’s GDP expanded by nearlyInflation has accelerated for 11 straight months and 5.7 percent, faster than growth achieved at the start ofis among the highest in Asia. As a result, the the year. Industrial output rose 9.6 percent in July from agovernment’s focus has shifted from being predominantly year earlier, while the month-on-month increase registeredpro-growth to ensuring macroeconomic stability and at 6.1 percent. Mining and quarrying, manufacturing,countering inflation. Amid tighter credit conditions, both power, and water and gas all contributed to industrial growthconsumer and investor confidence has declined. Overall, in Vietnam. Despite concerns of slowing global demand,the economy will likely grow at a still-healthy pace of over manufacturing growth is expected to hold up in the6 percent in 2011. second half of 2011. A spike in manufacturing activity may boost employment and private consumption. Furthermore,Vietnam’s struggle against rising inflation continues. The higher remittances and rising wages may help in alleviatingcentral bank imposed a slew of rate hikes through the first concerns stemming from rising food prices and tighterhalf of the year to counter inflation. However, on July 5, credit market conditions. However, recent monetarythe central bank lowered its reverse repo rate by 100 basis tightening will likely dampen GDP growth to some extentpoints to 14 percent. This move was surprising against during the latter half of 2011.the backdrop of rising inflation. Meanwhile, in July, CPIrose 1.2 percent month-on-month, and nearly 22 percent Meanwhile, agriculture continues to play an important rolecompared to July last year. The reason for the increase in in Vietnam. The share of agriculture in the economy hasinflation was a 3.2 percent surge in the prices of food. been rising since 2005 and now stands at over 20 percentFurthermore, demand-supply mismatches in several food of GDP. During the first seven months of 2011, exports ofcategories have caused a steep hike in prices. The central agricultural products were estimated at $8.1 billion, up 45bank revised its inflation target to a range between 15 and percent over last year. Furthermore, agricultural exports17 percent. However, keeping inflation within that target are likely to grow steadily over the remainder of the year.range is likely to be quite a challenge, unless the central Given the rising prices of Vietnam’s agricultural exportsbank tightens policy further. Asia Pacific Economic Outlook — August 2011 10
  • such as cashew nuts, coffee, pepper and rice, the sector lead in attracting FDI after Malaysia’s Jaks Resource Berhadhas the potential to grow further. agreed to develop a $2.26 billion coal-fired power plant in the province. With this project, Hai Duong has attractedDespite strong exports from the agriculture sector, nearly $2.5 billion in foreign investment in the first sevenVietnam’s trade deficit will likely widen in 2011. During months of this year. Furthermore, the government is alsothe first seven months, Vietnam’s trade deficit stood at offering incentives to boost investments in the automotiveUS$6.64 billion. Moreover, imports, supported by rising sector. Companies from South Korea and Thailand madedomestic consumption, are expected to outweigh exports investments in the auto, electronics components andin the coming months. In addition, the services sector animal feed processing sectors. Vietnam has set a target ofwill likely also record a net deficit. Vietnam now imports achieving $20 billion in FDI this year, up from $18.6 billionall kinds of goods, including vegetables and seafood to last year.equipment and hi-tech devices. The country’s dependenceon imported crude oil could worsen the deficit further. Inflation is the country’s immediate challenge and theFurthermore, manufacturers have stepped up imports of government is prioritizing its policies accordingly. How wellmaterials and machinery, even if domestic and external the government manages rising inflation will shapedemand is unable to keep pace, perhaps, anticipating macroeconomic stability in Vietnam. A rising trade deficitimport prices to go up in the future. and reduced confidence in the local currency could potentially increase the country’s vulnerability to externalMeanwhile, after a slow start, foreign direct investment shocks. Yet, Vietnam is expected to enjoy steady growth(FDI) bounced back in July, reaching approximately $1 in 2011.billion. Vietnam’s northern province of Hai Duong took the Asia Pacific Economic Outlook — August 2011 11
  • About the EconomistsEditor Contributors Pralhad Burli Deloitte Research Dr. Ira Kalish Deloitte Services LP Deloitte Research India Tel: +91 40 6670 1886 Deloitte Services LP E-mail: pburli@deloitte.com Tel: +1 213 688 4765 E-mail: ikalish@deloitte.com Neha Jain Deloitte Research Deloitte Services LPDr. Ira Kalish is Director of Global Economics at Deloitte India Tel: +91 40 6670 3133Research. He is an expert on global economic issues E-mail: nehajain59@deloitte.comas well as the effects of economic, demographic andsocial trends on the global business environment.Managing EditorChandra GajjarDeloitte ResearchDeloitte Services LPIndia Tel: +91 40 6670 1622E-mail: chgajjar@deloitte.comAbout Deloitte ResearchDeloitte Research, a part of Deloitte Services LP, identifies, thought leadership. In boardrooms and business journals,analyzes, and explains the major issues driving today’s Deloitte Research is known for bringing new perspective tobusiness dynamics and shaping tomorrow’s global real-world concerns.marketplace. From provocative points of view aboutstrategy and organizational change to straight talk abouteconomics, regulation and technology, Deloitte Research For more information about Deloitte Research,delivers innovative, practical insights companies can use please contact:to improve their bottom-line performance. Operatingthrough a network of dedicated research professionals, Dan Latimoresenior consulting practitioners of the various member firms Global Director, Deloitte Researchof Deloitte Touche Tohmatsu, academics and technology Deloitte Services LPspecialists, Deloitte Research exhibits deep industry Tel: +1 617 437 3410knowledge, functional understanding, and commitment to E-mail: dlatimore@deloitte.com Asia Pacific Economic Outlook — August 2011 12
  • Contact informationChinese Services Group LeadersGlobal Chinese Services Group U.S. Chinese Services GroupLawrence Chia Chris CooperDeloitte Touche Tohmatsu CPA Ltd Deloitte & Touche LLPChina Tel: +86 10 8520 7758 USA Tel: +1 408 704 2526E-mail: lawchia@deloitte.com.cn E-mail: chriscooper@deloitte.comJapanese Services Group LeadersGlobal Japanese Services Group U.S. Japanese Services GroupYoichiro Ogawa John JeffreyDeloitte Touche Tohmatsu Deloitte LLPJapan Tel: +81 3 6213 1009 USA Tel: +1 212 436 3061E-mail: yoichiro.ogawa@tohmatsu.co.jp E-mail: jjeffrey@deloitte.comGlobal Industry LeadersConsumer Business ManufacturingLawrence Hutter Hans RöhmDeloitte LLP Deloitte & Touche GmbHUK Tel: +44 20 7303 8648 Germany Tel: +49 711 16554 7130E-mail: lhutter@deloitte.co.uk E-mail: hroehm@deloitte.deEnergy & Resources Public SectorPeter Bommel Greg PellegrinoDeloitte Netherlands Deloitte Consulting LLPNetherlands Tel: +31 6 2127 2138 USA Tel: +1 571 882 7600E-mail: pbommel@deloitte.com E-mail: gpellegrino@deloitte.comFinancial Services Telecommunications, Media & TechnologyChris Harvey Jolyon BarkerDeloitte LLP Deloitte LLPUK Tel: +44 20 7007 1829 UK Tel: +44 20 7007 1818E-mail: caharvey@deloitte.co.uk E-mail: jrbarker@deloitte.co.ukLife Sciences & Health CareRobert GoDeloitte Consulting LLPUSA Tel: +1 313 324 1191E-mail: rgo@deloitte.com Asia Pacific Economic Outlook — August 2011 13
  • U.S. Industry Leaders Banking & Securities And Financial Services Power & Utilities and Energy & Resources Robert Contri John McCue Deloitte LLP Deloitte LLP USA Tel: +1 212 436 2043 USA Tel: +216 830 6606 E-mail: rcontri@deloitte.com E-mail: jmccue@deloitte.com Consumer & Industrial Products Telecommunications, Media & Technology Craig Giffi Eric Openshaw Deloitte LLP Deloitte LLP USA Tel: +1 216 830 6604 USA Tel: +1 714 913 1370 E-mail: cgiffi@deloitte.com E-mail: eopenshaw@deloitte.com Health Plans and Health Sciences & Government John Bigalke Deloitte LLP USA Tel: +1 407 246 8235 E-mail: jbigalke@deloitte.com Asia Pacific Industry leaders Consumer Business Life Sciences & Health Care Yoshio Matsushita Ko Asami Deloitte Touche Tohmatsu Deloitte Touche Tohmatsu Japan Tel: +81 3 4218 7502 Japan Tel: +81 3 4218 7419 E-mail: yomatsushita@tohmatsu.co.jp E-mail: koasami@deloitte.com Energy & Resources Manufacturing Kappei Isomata Kumar Kandaswami Deloitte Touche Tohmatsu Deloitte Touche Tohmatsu Japan Tel: +81 9 2751 0931 India Tel: +91 44 6688 5401 E-mail: kappei.isomata@tohmatsu.co.jp E-mail: kkumar@deloitte.com GFSI Telecommunications, Media & Technology Dr. Philip Goeth Yoshi Asaeda Deloitte Touche Tohmatsu CPA Ltd. Deloitte Touche Tohmatsu China Tel: +86 10 8520 7116 Japan Tel: +81 3 6213 3488 E-mail: phgoeth@deloitte.com.cn E-mail: yoshitaka.asaeda@tohmatsu.co.jpDisclaimerThis publication contains general information only and Deloitte Services LP is not, by means of this publication, rendering accounting, business,financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services,nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that mayaffect your business, you should consult a qualified professional advisor. Deloitte Services LP its affiliates and related entities shall not be responsiblefor any loss sustained by any person who relies on this publication.About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms,each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure ofDeloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure ofDeloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.Copyright © 2011 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited