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080908_CFO Asia Seminar_Asian Economic and Market Analysis

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  • 1. Asian Economic and Market Analysis Prepared for: CFO Asia Seminar (Workshop at APAC) Prepared by: Spire Research & Consulting Date: 8 September 2008Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 1
  • 2. Table of Contents Topic Page Economic Trends in Asia In Short: The Big Issues 3 The Developed Countries 4 Global Outlook 5 Demand Outlook 6 Fundamentals of Demand Growth 7 Domestic Demand 8 Demand Drivers 9 Asia Pacific Outlook 11 Inflation 13 Energy and Commodities 14 AP Conclusion 15Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 2
  • 3. In Short: The Big Issues Will AP economies be hit by a declining US, surging inflation & expensive oil? Scenario #1 (“disaster”): Stagflation in AP and WW similar to 1970s, triggered by deep & prolonged downturn in US real economy Scenario #2 (“slow-down”): Slow-down in AP growth but no collapse Scenario #2 is most likely: US consumer spending has held firm in spite of the sub-prime crisis & skyrocketing oil prices since 2007 Even if/when US consumer spending takes a hit in 2H08, plenty of Asian domestic demand to cushion against weaker exports Healthy levels of construction / fixed asset investment in AP, financed by governments with large reserves and surpluses Proactive moves by US Fed, US Treasury & ECB work against WW stagflation scenarioPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 3
  • 4. In Short: The Big Issues (cont’d) Slower growth will mean consumer & business spending will grow less, but will still grow Impact on consumer spending mostly on lower income brackets There will be a tendency for businesses to delay capex & seek “small-ticket” solutionsPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 4
  • 5. The Developed Countries EU (1.4% Q2) and Japan (1% Q2) now slowing much more than USA (1.8% Q2), due to collapsing domestic confidence as a result of inflation & other factors This has helped strengthen the dollar USA (US$15 trillion GDP*) Financial sector troubles will rumble on for a few years Impact on real economy so far not disastrous Inflation concerns dimming – Fed may cut interest rates again in late 08 or early 09 Risk of deep and long consumer recession from depressed property sector + high household debt? US economy has proved resilient to downturns, shares may be as important as property in shaping consumer confidence, there may be a confidence bounce from election of a new President in NovPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 5
  • 6. The Developed Countries (cont’d) EU (US$ 16 trillion GDP*) Main concern for the world economy now! Hit by credit crunch, property price dips in some markets Overall poor consumer confidence Japan (US$ 4.5 trillion GDP*) Political paralysis, government incompetence and weak exports have depressed growth But may bounce back in 2009, if political renewal takes places through fresh elections* Approximate values, at market exchange rates, 2007Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 6
  • 7. Global Outlook Growth to continue but at a slower rate in 2008 & 2009 World growth will slow to ~4% in 2008, with emerging markets remaining as lead growth drivers China, India & Russia made up almost half of global GDP growth in 2007 US GDP growth for 2008 will likely drop to 1.3% from 2.2% in 2007 Outlook for EU & JP is even poorer Real GDP Growth (Y-o-Y) Based on PPP Weights Current Projections Difference from Apr 2008 IMF Update 2006 2007 2008 2009 2008 2009 World Output 5.1 5.0 3.9* 3.7* 0.4 0.1 United States 2.9 2.2 1.3 0.7* 0.8 0.2 Euro Area 2.8 2.6 1.4* 0.9* 0.3 -- Germany 2.9 2.5 2.0 1.0 0.6 -- China 11.6 11.9 9.7 9.8 0.4 0.3 India 9.8 9.3 8.0 8.0 0.1 -- Russia 7.4 8.1 7.7 7.3 0.9 1.0 Source: IMF, World Economic Outlook, July 2008 * revised estimate 25 Aug 08* Approximate values, at market exchange rates, 2007Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 7
  • 8. Global Outlook Growth to continue but at a slower rate in 2008 & 2009 While weaker US demand and a weakening US$ will make a big impact on the more export dependent economies of SG, MY, TW & HK… … other growth drivers in the region - including healthy domestic demand, exports to Asia, foreign direct investment (FDI), and fixed asset investment (FAI) – remain on track 35 2006 2007 30 25 20 15 10 5 0 China India United Euro Russia Japan Brazil States area Source: IMF, World Economic Outlook, Oct 2007Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 8
  • 9. Demand Outlook Asia is so far holding steady Since mid-07, oil prices have surged & the sub-prime mortgage crisis has wounded the US financial & property sectors…but AP growth has only wobbled in some countries, not dipped The financial crisis has yet to impact the real economy in the US When this happens, AP will slow further, but not tip into crisis China and India are on track for 7.5-10% GDP growth in 2008 Singapore, Taiwan, Hong Kong, and to a lesser extent Korea, will be most affected by the US slow-down Likeliest scenario: a bottoming out of AP growth in 3Q08 or 4Q08 if the US downturn is short and shallow Real GDP Growth Rates (% change y-o-y) Countries Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 United States 2.1% 1.9% 2.8% 2.5% 2.5% 1.8% World Crude Pil Prices (Dollars Per Barrel) Australia 3.8% 4.3% 4.3% 3.9% 3.6% 2.7% 150 China 11.1% 11.5% 11.5% 11.2% 10.6% 10.1% Prices in US$ per Barrel 122.14 125 117.45 Hong Kong 5.7% 6.9% 6.2% 6.7% 6.8% 4.2% India 9.1% 9.3% 8.9% 8.9% 8.8% 7.9% 93.50 100 Indonesia 6.0% 6.3% 6.5% 6.3% 6.3% 6.4% 85.19 71.88 Japan 2.0% 2.3% 2.6% 1.4% 1.3% 1.0% 75 64.98 Malaysia 5.5% 5.7% 6.7% 7.3% 7.1% 6.3% 54.71 Singapore 7.0% 9.1% 9.5% 5.4% 6.7% 1.9% 50 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08* South Korea 4.0% 5.0% 5.2% 5.9% 5.7% 4.8% Taiwan 4.0% 5.1% 6.9% 6.5% 6.1% 4.3% Source: Energy Information Administration Note: Q308* is of 22 Aug 08Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 9
  • 10. Fundamentals of Demand Growth Asia-Pacific growth looks sustainable Asia-Pacific growth in the past five years has generally not hit the peaks seen in the pre-1997 period, with the notable exception of India This suggests that Asia-Pacific growth still has up-side potential and is sustainable, going by economic fundamentals Asia-Pacific GDP Growth Country 1992 - 1996 1997 - 2001 2002 - 2006 China 12.44 8.28 10.06 India 6.22 5.36 7.56 Singapore 9.12 4.36 6.12 Malaysia 9.56 3.04 5.64 Thailand 8.10 -0.10 5.64 Hong Kong 5.30 2.84 5.58 Philippines 3.46 3.16 5.18 Indonesia 7.36 0.28 5.10 South Korea 7.34 3.92 4.80 Taiwan 6.98 4.08 4.46 Source: IMF World Economic Outlook, April 2007Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 10
  • 11. Domestic demand Growth in Asia is largely led by domestic consumption Only TW, HK, SG are very dependent on exports Domestic Demand versus Net Exports are key to growth only in some countries Exports (GDP Growth, average of past four Even though AP stock markets have been mauled, quarters) AP financial and property sectors have not been badly hurt by the US crisis (no property bubble now in Asia, unlike pre-1997) Retail sales in AP have held steady over the past year, and in some countries are very healthy In no AP country do we see a 3 month dip in retail value sales below the 1 year trend line – except VN In China, retail sales are growing ~20% in 2008 to date, while in India, it is likely to be ~8% This masks some dip in volume sales, mainly due to cuts in non-necessary purchases & some “trading down” in reaction to inflation But all indicators suggest a small & slow rather than steep decline in consumer spending (outside VN) Source: UBSPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 11
  • 12. Demand Drivers Asia is China’s second biggest export market, after EU Exports to Non-US Markets remain healthy China has been less dependent on the U.S. market for exports since 2001, with EU and Asia becoming the key destination markets Trade liberalization will be a big fillip to intra-Asian exports Vietnam’s entry into WTO Jan 2007 China-ASEAN and India-ASEAN FTAs Loosening of tourist restrictions from China into Taiwan – trade relaxation may follow China’s Exports By DestinationPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 12
  • 13. Demand Drivers (cont’d) Asia is China’s second biggest export market, after EU Foreign Direct Investment (FDI) inflows into AP remain strong, especially from EU, JP & AP sources Indian FDI has been surging since 2006 and is likely to hit US$25-35b for 2008 China FDI will probably exceed US$70b for 2008 Vietnam’s FDI surge (~US$30b likely in 2008) continues unaffected by the inflationary crisis, due to continuing political stability & a likely easing of the Dong Intra-Asian investment is strong: China is a major source of FDI & tourists into HK and ASEANPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 13
  • 14. Demand Drivers FAI from government projects will provide a big push to growth FAI: Construction & Infrastructure is a huge growth driver in AP Government-led infrastructure and construction projects have become a significant growth driver, resulting in tight markets for building materials in AsiaPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 14
  • 15. Demand Drivers (cont’d) FAI from government projects will provide a big push to growth China is seeing double digit FAI growth with more infrastructure investment being pumped into the Western (roads, pipelines) and Southern (Kunming- Singapore highway) regions India’s government has allocated US$101 Bn for its infrastructure development over the next 5 years, staring in 2008. This does not include the 300 retail mall projects in India due to launch in 2008 Malaysia is investing ~US$20b in the Iskandar Development Region & investing heavily in Northern Corridor Economic Region Singapore is seeing a construction boom, led by the Integrated Resorts, MRT construction and private property construction for locals, expatriates and PRs Hong Kong announced a clutch of large, multi-billion dollar infrastructure projects in Oct 2007 Australia’s private and public construction is growing at 14%Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 15
  • 16. Asia Pacific Outlook US dollar, weak in the mid-term but will recover slightly in late 2008 Stock market instability and a weak US dollar Asian stock markets started to plunge as early as Jan 2008, after growing (and overblown) speculation that the U.S. economy was sliding into recession A steady stream of bad news from the US financial sector has kept AP equities weak Some of the movements were natural corrections, e.g. China A shares, India/SENSEX shares Aggressive Fed rate cuts in 2H07/1H08 and concerns about the US economy led to the dollar plumbing historic lows… …but it has since bounced back and will continue to gain to 4Q08Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 16
  • 17. Asia Pacific Outlook (cont’d) US dollar, weak in the mid-term but will recover slightly in late 2008 2008 Asian Currency Movement Against US Dollar 1.2 RMB 1.1 TWD JPY AUD INR IDR 1 MYR THB SGD KRW 0.9 0.8 1st Jan 1st Feb 1st Mar 1st Apr 1st May 1st June 1st July 1st Aug 1st Sep Note: Indices show currency movement and are using base rates for each country as per 1st Jan 2008 Currency units, per USD RMB TWD JPY AUD INR IDR MYR THB SGD KRW 2007 7.74 33.1 117 1.25 43.8 9,155 3.50 32.9 1.53 942 2008 (Apr 2008) 7.08 30.7 98.2 1.08 40.5 9,185 3.17 31.2 1.38 1,014 2008 (2 Sep 2008) 6.84 31.7 108.2 1.17 44.2 9,234 3.41 34.6 1.42 1,115 Source: Oanda, 2008Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 17
  • 18. Asia Pacific Outlook Almost all AP economies set for slower growth in 2008 Asia Pacific economic 9 GDP Growth (Developed Countries) development 8 GDP Growth (% Change) In 2008, China & India will 7 6 register high growth (7.5-10%) 5 ASEAN will see moderate 4 growth (4-6%, with VN, ID & 3 MY higher at ~6%) 2 1 0 2007 2008 2009 2010 2011 2012 HK JP KR TW AU NZ SG GDP Growth (Emerging Countries) 14 GDP Growth (% Change) 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 2012 CN TH VN IN MY ID PH Source: EIU, Countries’ 5-year forecast table, Aug/Jul 2008Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 18
  • 19. Asia Pacific Outlook US dollar, weak in the mid-term but will recover slightly in late 2008 In 2008 and 2009, inflation will hurt but not derail Asian growth % Change in Jul Jul The big exception is Japan which is hardly affected consumer price index 2008 2007 by inflation Australia** 4.5 2.1 China may begin to export inflation to the region China 6.3 4.4 Hong Kong 6.3 1.4 Inflation is being driven by basic demand-supply India* 7.7 6.6 imbalances: high Asian economic growth, income “tipping points” in China & India + energy and Indonesia 11.9 5.1 food scarcity Japan* 2.0 0 The removal of government oil subsidies in many AP countries has stoked price rises Korea 5.9 2.5 Malaysia 8.5 1.4 Inflation is likely to fall in 2009, but not to pre-2008 Singapore 6.5 1.3 levels Taiwan 5.9 0.1 Commodity & possibly energy prices will still rise Thailand 9.2 1.9 …but sustained price increases on the same scale as 2008 are unlikely – inflation rises if prices keep Source: Economist Intelligence Unit increasing, not if they stay high Note: * Jun 2008 ** Q208Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 19
  • 20. Energy and Commodities Oil prices will stay high and volatile but its economic impact will be far less than in the 70s or 90s Commodity prices have surged on structural demand-supply imbalances; in the next 1-2 years prices will rise further but to a lesser degree Oil prices will vary in the band of US$100-150, though there is a small possibility of a rise to hit US$200 There are serious demand-supply imbalances for oil, with hardly any excess capacity left globally Speculation and Middle-East political tensions (fears of a US-Iran war, Turkish incursions into Northern Iraq) have driven prices up However oil now makes up a much smaller % of global GDP than in the 1970s, and alternative energy sources are growing Dear oil will not lead to a global recession as in 1973, 1979 or 1991 But high energy prices will be bad for Asia in generalPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 20
  • 21. Energy and Commodities (cont’d) Oil prices will stay high and volatile but its economic impact will be far less than in the 70s or 90s There are almost no net oil exporters left in Asia Rising fuel prices will spark political tension, as seen in Indonesia (2006, 2008), Malaysia (May 2008) and Myanmar (2007)Prepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 21
  • 22. Demand Drivers (cont’d) Asia is China’s second biggest export market, after EU Foreign Direct Investment (FDI) inflows into AP remain strong, especially from EU, JP & AP sources Indian FDI has been surging since 2006 and is likely to hit US$25-35b for 2008 China FDI will probably exceed US$70b for 2008 Vietnam’s FDI surge (~US$30b likely in 2008) continues unaffected by the inflationary crisis, due to continuing political stability & a likely easing of the Dong Intra-Asian investment is strong: China is a major source of FDI & tourists into HK and ASEANPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 22
  • 23. Asia Pacific Conclusions Asian economic growth will slow in 2008 and 2009 before going up again in 2010 China’s growth will slow to the 9-10% range, India’s to 7-8% and ASEAN’s in 4-6% (with Indonesia a decent 5.5%-6%); Singapore will be hardest hit within ASEAN Domestic demand is still robust in China, India & Indonesia but will slow in Australia, Korea, Thailand & Malaysia Inflation will continue to be high but will moderate substantially in 2009 as commodity & energy price increases start to taper off Chronic wage-price spiral inflation in AP is unlikely JP is the exception to the AP trend, expecting low inflation through 2008 & 2009 Stagflation and recession scenarios highly unlikely Interest rates may go down as growth concerns trump inflation concernsPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 23
  • 24. Asia Pacific Conclusions (cont’d) Risks? Dark spots: Myanmar, North Korea, Pakistan Vietnam? Political crisis in Thailand? Prolonged, deep consumer recession in US? Sectors set to hold or grow: Infrastructure (government-led) Financial services, insurance & investment products in high-savings countries (China, India) Manufacturing FDI in Vietnam (& Bangladesh) Consumer sector in China, India & Indonesia Alternative energy (bio-fuels, solar, wind) & environmental technologyPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 24
  • 25. Asia Pacific Conclusions (cont’d) Sectors at risk Consumer sector in Singapore, Hong Kong, Taiwan, Vietnam, Pakistan Business sector in Thailand, Japan Inflation will reduce discretionary consumer spending on non-necessity items while inducing some “trading down” in terms of brand and product, but… ..this will disproportionately impact lower income groupsPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 25
  • 26. Asia Pacific Conclusions (cont’d) Slower growth, high fuel prices, inflation and (for exporters) the weaker USD is dampening spending by businesses This will manifest as delays in capex, “trading down” and increasing demand for high value/small-ticket solutions But the easing of oil prices, US dollar appreciation and the prospect of falling inflation is helpingPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 26
  • 27. Tel: (65) 6838 5355 Fax: (65) 6838 5855 78 Shenton Way #20-01 Singapore 079120 sg.info@spireresearch.com www.spireresearch.comPrepared for: CFO Asia Seminar (Workshop at APAC) Date: 8 September 2008 Page 27