2010 has the potential to be a vintage year for East Asia in terms of economic and political developments. But if the region’s leaders fail to seize the opportunities, the New Year could see the beginnings of a drift toward nationalism and possible conflict eventually. That would not be simply a missed chance but a tragedy for the region. The United States, which has underwritten the security of much of East Asia in the post-war period while also providing a market that enabled the region to grow economically, is overstretched. This fact would, in itself, justify Asian leaders taking a hard look at the future of their countries in a world where the sole remaining superpower is in a somewhat defensive mood and preoccupied with domestic problems, wars on two fronts in Afghanistan and Pakistan, as well as residual hostilities in Iraq. The retreat from aggressive power projection that characterises the Obama administration has coincided with the advent of a more assertive yet flexible government in Japan, following the landslide victory there of the Democratic Party of Japan (DPJ). This shift reflects the vision of Ichiro Ozawa, architect of the political revolution in Japan. Mr Ozawa saw long ago that Asia in general, and Japan in particular, could not remain forever under the security umbrella of the US. Thus, he built a successful political movement to break the mould of Japan’s US-dependent thinking and to guide the nation towards an alliance with East Asia.

Given these fundamental shifts, the stage is set for the dawn of a new era of regional cooperation in 2010. But the best of sets are of little use unless all the actors play their parts. Japanese Prime Minister and Ozawa-protege Yukio Hatoyama has made his debut with friendly overtures to Asia and now he needs support from the rest of the Asian cast. For China and South Korea, this is a golden opportunity to secure closer ties with Japan at a time when such developments are less likely to create friction with outside powers.

So, East Asia has an opportunity to institutionalise at the political level what is already a fact of life at the economic level: the high degree of interdependence that characterises regional trade and investment relations. This has been the case for a decade or more but the global recession has added major significance to regional economic interdependence. Asia’s trade with the US and Europe remains far below pre-recession levels and is likely to remain so in the foreseeable future. Intra-regional trade, on the other hand, is growing by leaps and bounds. Even if this cannot compensate in absolute terms for the loss of extra-regional demand (for now at least), the signs point to East Asia surpassing the level of intra-regional trade intensity even of the European Union.

But economic integration requires institutional underpinnings, as does security cooperation. Put simply, East Asia can seize greater control of its own destiny in 2010 if only it can demonstrate the will and maturity to make the effort.

Source: Business Times, 5 Jan 2010

ASIA is poised for a sharp economic recovery next year, even as developed economies in the West continue to struggle, according to Standard Chartered’s chief economist.

‘Our forecasts suggest the recovery will take the shape of an L or a U in the West and a V in the East,’ Gerard Lyons, who is also the group’s head of global research, says in a report published yesterday.

But open and export-dependent economies – Singapore, Hong Kong and Taiwan – are likely to grow below trend, due to sluggish exports to major markets in the West, the report says.

In Asia, growth will be centred on China, India and Indonesia, which have large domestic markets and relatively closed economies that cushion them from external shocks.

Overall, ‘2010 is likely to be the year of global recovery’, Mr Lyons says. ‘A double-dip recession would require either an external shock – most likely an event that drove oil prices sharply higher, such as an escalation of tension with Iran – or a policy-induced shock triggered by premature policy tightening in the West.

‘We are not predicting a double-dip, although we would not be surprised if a number of economies witnessed a negative quarter of growth at some stage.’

But even as Asia leads the global recovery, ‘we continue to stress the need to focus on levels’ – the dollar value of goods and services produced – rather than just growth rates, Mr Lyons says.

In 2008, the world’s economic output, measured by gross domestic product, was US$60.9 trillion, with advanced economies including the US, Japan, Germany, France and the UK accounting for more than half of global output, according to International Monetary Fund data.

‘If the West is not booming, the world will not boom. And the West is not going to boom,’ Mr Lyons says. ‘The US consumer, the key driver of the global economy for some time, faces a difficult outlook.’

He expects the world economy to grow 2.7 per cent next year, after shrinking an estimated 1.9 per cent this year.

Asia’s economic output is projected to expand 7 per cent in 2010, faster than this year’s estimated growth of 4.5 per cent.

Its biggest economic growth engines, China and India, are expected to expand 10 per cent and 7.5 per cent, respectively, compared with 8.5 per cent and 6.8 per cent in 2009.

Source: Business Times, 3 Dec 2009

Asia’s strong recovery means that higher interest rates and stronger currencies will be two key features in 2010

ASIA is rapidly approaching the end of its sharpest V-shaped recovery on record. It’s been quite a ride on both sides of the trough: two quarters of double-digit GDP contraction for most countries (ending in 1Q 2009), followed by two quarters of double-digit expansion. We are now halfway through the second of the upside quarters with Singapore, China and Korea having reported double-digit growth rates (in q-o-q, seasonally adjusted terms) in 3Q 2009. Malaysia, Thailand and Taiwan will likely report similar numbers over the next two weeks.

If the end is nigh – and it is – let’s not rush there just yet. There’s plenty of time to prepare for what’s coming and there’s little to fear anyway. Let’s first take a minute to consider how extraordinary the recovery has been. One way to get a sense of it is to look at Singapore.

Back in January, most government and private sector professionals expected to see a 2.4 per cent contraction in the Singapore economy in 2009. By May, those expectations had plunged a full five percentage points to an alarming -7.5 per cent. But only five months later, in October, expectations were right back where they were at the start of the year: to a contraction of 2.6 per cent. That’s how convincing the downward head fake was, that’s how sharp the V-shaped recovery was. We all would have come closer to the truth if we had left our 2009 forecasts untouched back in January.

Naturally, the ‘thought leaders’ who led consensus in predicting Armageddon in the first half of the year had more backtracking to do later on. One lesson they and everybody else learned this year is that it’s not about being ‘ahead of the curve’; it’s about being right at the end of the day. Not many were this year.

For Asia overall, the roller coaster was almost as wild as it was in Singapore. Industrial production – Asia’s economic backbone – peaked in the summer of 2008; not surprisingly, just before the Beijing Olympics in August. But the downturn continued with the collapse of Lehman Brothers in September 2008 and by January 2009, industrial production in the Asia-9 had fallen by 14 per cent. That’s twice the drop that occurred during the financial crisis of 1997/98 or the high-tech global recession of 2000/01.

Not surprisingly, exports led the collapse on the demand side of the GDP equation. In US dollar terms, Asia’s exports dropped by 40 per cent between July 2008 and January 2009. Like the drop in industrial production, the export drop was twice as big as what occurred during the global tech recession of 2000/01 and four times bigger than the export contraction in 1997/98.

What continues to surprise is that Asia’s export collapse had almost everything to do with China and almost nothing to do with the US, either directly or indirectly. Between July 2008 (when exports peaked) and January 2009 (when they hit bottom), Asia-8 exports to China fell by 45 per cent. To the US they fell by less than half that, or 21 per cent.

But the percentage drops don’t tell the real story, because China is a bigger buyer of Asia’s exports than the US. And it’s the dollar changes that make or break a business. In revenue terms, Asia-8 exports to China fell by US$111 billion between July 2008 and January this year. To the US, they fell by US$27 billion. In other words, in the revenue terms that matter, the export shock delivered by China was four times greater than the shock delivered by the US.

This explains why the countries hit the hardest were those with the closest links with China. And it helps explains why Asia was able to bounce back with no help from the US.

And bounce back it did. Exports and industrial production hit bottom in January and by July, Asia’s industrial production had fully recovered its pre-crisis levels. Six months down, six months back up – the very definition of ‘V’. By September, though, output had advanced another 2-3 per cent. So it’s no longer just a V-shaped recovery. We’ve passed that. Now it’s a V+.

V, V+, no matter. What is so amazing, to some, is that Asia pulled it off with no help from the US. Think about it: Asia’s industrial output recovered to pre-crisis levels by July while US imports turned north only in June. It’s a big deal. But is it really so surprising? Not when you remember that Asia’s export collapse was related to China, not the US.

Moreover, it isn’t the first time this has happened. Back in 2000/01, Asia beat the US in getting out of recession by a good four months. This fact – and the reasons behind it – is what allowed DBS to say, way back in December last year, that Asia would pull the same trick this time, but even more forcefully. This was when everyone else was saying that Asia would have to wait for the US to recover before it could.

Times change, and the biggest change underway in the global economy today is how much Asia contributes to global growth each year relative to how much the US does, or did. This structural shift – it’s been going on for 20 years and will go on for the next 20 – explains much of why Asia was able to pull off the V-shaped recovery with no help from the US.

The question now is, will Asia’s double-digit GDP growth continue? The answer is, of course not, for any of a thousand reasons. Double digit growth will soon give way to sideways movement in output levels. Asia’s V-shaped recovery will turn into a ’square root’ shaped recovery: that is, a sharp drop, a sharp rise, and then a palpable turn sideways.

When will Asia hit the kink in the square root sign? Probably by the end of the year or early 2010. In terms of GDP growth, Asia will experience a second quarter of double-digit growth in 3Q 2009 that should drop to high single-digits (6-8 per cent) in the fourth quarter. By 1Q 2010, growth should be back to normal.

Three things will constrain growth very soon: demand, supply, and policy. On the demand side, growth is running at double-digit rates now only because it fell at double-digit rates earlier on. What Asia is experiencing is the snapback from a series of four to five one-off events in late 2008 that included, perhaps most notably, the shock from the collapse of Lehman Brothers in September 2008. That sharp downturn had a bottom. The sharp upswing will have a top. With speeds on both sides of the ‘V’ about equal, the upswing will last for as long as the downswing: two quarters. But only as long as the downturn, because the upturn is nothing but its flipside.

And if demand does manage to surge for longer, there’s the supply side to contend with. Output can grow as fast as demand does when there is excess capacity, as there is today. But with demand soaring back, excess capacity will soon vanish. And once demand hits the brick wall of capacity constraints, output can grow only as fast as those walls can be moved.

Finally, policy will have a hand in slowing growth, and probably sooner than most imagine. Because once excess capacity is exhausted – and it will be by year-end – double digit demand growth starts to imply double digit inflation in most countries. That’s too high. Policies will change.

Throughout Asia, monetary tightening will be a key feature of 2010, with higher interest rates and stronger currencies expected to share the burden about equally. In general, we expect tightening will begin in earnest around 2Q 2010, with a few exceptions. On the tighter side, Korea and India will move sooner, probably in January or February. On the slower side, Thailand seems unlikely to tighten until the third quarter.

For Asia overall, much will depend on China, where we expect rate hikes and currency appreciation to begin in 2Q 2010. We look for the benchmark one-year lending rate to rise by 81 basis points (to 6.12 per cent) by the year-end. We also expect the yuan to resume its appreciation vis-a-vis the US dollar in 2Q 2010 and to strengthen to 6.61 per dollar by the end of 2010. This will set the stage for currency appreciation elsewhere in Asia, allowing other currencies to rise more comfortably than if they went solo. Asia’s currencies have risen by 6-7 per cent on average against the dollar since the start of this year and we expect to see another 6-7 per cent appreciation by the end of 2010.

Other things being equal, currency appreciation and higher interest rates will help cool regional economies and keep a lid on imported inflation as well. The trouble is, higher rates and the prospect of local currency gains have the tendency to attract foreign inflows. And inflows have the tendency to wreak havoc with the best laid monetary plans. They drive interest rates back down and push currencies further north than authorities might have wanted. Raise interest rates again and you just get another round of inflow: Asia-vu.

The only ’solution’, if you can call it one, is to control inflows. Nobody likes controls and for good reason. They are clumsy and messy and have the awful tendency to change from week to week. But they do afford central banks a greater ability to control interest rates and currencies at the same time. And for this reason the controls debate always comes back when inflows are pounding on the door. Asia’s strong recovery means that higher interest rates and stronger currencies will be two key features of Asia in 2010. Capital inflows and another debate over controlling them seem likely to be two more.

DAVID CARBON – MD, Economics & Currency Research, DBS Bank Ltd


Source: Business Times, 1 Dec 2009

HONG KONG: China yesterday reported a batch of solid economic data for July, two major Asian central banks kept interest rates unchanged and business confidence rose to a two-year high in Australia – all news that showed the region is continuing its slow and onerous climb out of recession.

China has withstood the global economic turmoil better than most other countries, thanks to aggressive stimulus measures announced by Beijing last year, and in recent months it has frequently surprised even optimistic economic analysts with buoyant investment, spending and production data.

Data for July, released yesterday, showed industrial output, a key measure of wider economic growth, rose 10.8 per cent from a year earlier, at a slightly higher pace than in June. Retail sales rose 15.2 per cent.

Trade data published separately showed exports in July dropped 23 per cent from a year earlier, a slightly smaller decline than economists had expected.

The data cemented the view that the China’s giant economy is ploughing ahead steadily as government spending and a massive increase in lending by state-controlled banks during the first half of this year helped offset the negative fallout from collapsing demand for Chinese-made products in the United States and in Europe.

Reflecting growing optimism that the government’s tremendous leeway to stimulate growth has put China on a path to solid recovery, economists at Goldman Sachs on Monday raised their forecast for the country’s full-year growth this year to 9.4 per cent. This is up from the 8.3 per cent they had previously projected, and higher than the government’s target of 8 per cent. For 2010, the Goldman Sachs economists expect the Chinese economy to expand 11.9 per cent.

However, the pace of growth – and of exports in particular – remains significantly below where it was before the global economic crisis began to hit export- dependent Asia late last year.

China’s industry and retail data released yesterday, while good, was slightly lower than most economists had projected, and underlined that the economy remains hugely dependent on government spending programmes and bank lending to sustain growth. And the export decline was the ninth such fall in a row, showing that depressed exports are likely to remain a major drag on the economy for some time to come.

At the same time, a spike in stock markets and property prices in China has led many to worry that another bubble is in the making. The authorities now face the challenging balancing act of scaling back the pace of bank lending in a bid to deflate price spikes – but doing so without choking off economic growth.

Chinese stocks yesterday rose 0.46 per cent, ending a four-session losing streak, as economists said the country’s economic recovery still appeared intact after mixed economic data for July.

Turnover shrank sharply, however, as sentiment remained cautious after the recent pull-back spurred in part by concerns about tightening market liquidity that were confirmed by a sharp fall in new bank lending data for July.

A drop in new loans, to 356 billion yuan (S$75 billion) in July from 1.53 trillion yuan in June, was largely due to arm-twisting by the central bank, said Mr Paul Cavey, an economist at Macquarie Securities in Hong Kong.

But he said no real monetary tightening was under way because policymakers were waiting for proof of a full recovery.

Elsewhere in the region, the Bank of Japan policy board members voted unanimously to hold interest rates at 0.1 per cent, as widely expected, and South Korea kept its key interest rate unchanged at a record low of 2 per cent for the sixth month in a row as the nascent recovery there takes root.

In Australia, a key measure of business confidence jumped to its highest level in almost two years in July, adding to signs that its economy is rebounding.

NEW YORK TIMES, REUTERS

Source: Straits Times, 12 Aug 2009

S’pore growth for 2010 forecast at 3.5%, and the rest of Asean 4.2%

ASIAN economies appear to have turned the corner from the global recession and should be able to double next year the anaemic growth rates they are expected to post in 2009, the Asian Development Bank (ADB) said yesterday. But it warns in its latest Asia Economic Monitor that the road to full recovery is strewn with hazards.

Growth centre: China’s growth is expected to rise to 8 per cent in 2010 from 7 per cent this year
The biggest single threat to continuing recovery identified by ADB report is the danger that recession in the US and Europe, on which Asia relies heavily for export markets, will last longer then generally expected.

Singapore’s GDP growth rate is forecast by the report to reach 3.5 per cent in 2010, after an expected overall contraction of 5 per cent this year. The rest of Asean should recover from marginal growth of 0.7 per cent this year to 4.2 per cent expansion in 2010, ADB says.

China remains the region’s star performer, with growth expected to be maintained at a relatively high 7 per cent this year, rising to 8 per cent in 2010. Japan, on the other hand, is forecast to suffer a 5.8 per cent GDP contraction this year and recover to just 1.1 per cent growth in 2010.

South Korea and Hong Kong are forecast to recover to respective growth rates of 4 and 3 per cent in 2010 after sharp contractions this year, but Taiwan will remain one of the laggards of the region with growth recovering only to 2.4 per cent next year.

Recovery got under way in Asia during the second quarter of this year, the ADB report notes, fed largely by fiscal and monetary stimulus programmes. But while exports are showing some recovery as a result of inventory adjustment, underlying external demand remains weak.

Among the positive signs for Asia are ‘early indicators that the pace (of economic contraction) slowed in the second quarter of 2009′, while balance of payments positions have ‘turned positive’ again, stock markets have rebounded, several currencies have begun appreciating and inflation has eased.

Meanwhile, the region’s banking systems ‘appear capable of weathering the economic storm’, ADB says, ‘with prudential indicators strong and lending continuing to grow’ across much of the region.

Despite these positive indications, the report says: ‘The overall external environment for emerging East Asia remains difficult and uncertain, with the recession in advanced economies continuing and global financial conditions improving (but) still tight.’

Emerging East Asia – which excludes Japan and the newly-industrialised economies (NIEs) of South Korea, Taiwan, Hong Kong and Singapore – ‘could see a V-shaped recovery’, with growth dipping sharply in 2009 before recovering next year to its pace in 2008.

But this scenario could change for the worse if there is a more prolonged recession than forecast in advanced economies, with export demand remaining depressed longer than expected. Premature fiscal or monetary tightening could also damage the prospects for a V-shaped economic recovery in Asia.

And falling inflation could turn into deflation in some economies of the region, says ADB, noting that Singapore and Taiwan, whose economies have contracted most sharply among the NIEs in the current recession, have been ‘experiencing deflation over the past few months’.

Given the tentative nature of the expected recovery, ‘it is critical that authorities stay the course in supporting domestic demand and growth’ through fiscal and monetary stimuli, the ADB report adds.

Source: Business Times, 24 July 2009

BEIJING: China’s economy grew a surprisingly strong 7.9 per cent in the second quarter as it charged ahead of other major economies in the dash out of the global recession.

It looks set to hit its full-year growth target of 8 per cent, fuelling hope that the world economy could also be emerging from its worst crisis in 80 years.

But the government yesterday cautioned against any premature celebration, saying that the surge was unstable and uneven across different sectors and regions in the world’s third-largest economy.

‘Maybe many of you have actually felt and experienced this economic recovery, but some other groups, industries, enterprises have not,’ said Mr Li Xiaochao, a spokesman for the state statistics bureau.

He added there were still a number of uncertainties, pointing in particular to declining external demand, which fell by 21.8 per cent in the first half of the year.

But a string of data from the government showed that the export slump had been offset by an increase in domestic demand, aided by the 4 trillion yuan (S$850 billion) stimulus package announced late last year to combat the crisis.

Mr Li highlighted the strength of China’s car and property markets. In recent months, car showrooms in Beijing have reported brisk sales and long waiting lists for new cars.

But analysts said that the main push behind the growth was investment in infrastructure projects by state-owned companies, backed by record bank lending.

‘We now expect total new lending in 2009 to reach 9 trillion yuan, a speed of re-leveraging unprecedented in China’s history,’ said economist Wang Tao, head of the UBS Securities’ China economic research.

Experts, who had forecast 7.5 per cent growth for the second quarter, have now raised their projections for the full year.

Most are now looking at 8.2-8.5 per cent annual growth, a far cry from just a few months ago, when predictions of 8 per cent were seen as wildly optimistic.

‘China’s recovery is real, strong, and sustainable,’ said Merrill Lynch economist Lu Ting.

The 8 per cent growth target has taken on almost mythical importance in Chinese economics and politics, with the Chinese Communist Party believing that it is the rate of growth required to create jobs and wealth to keep the country stable.

The party has been repeating the ‘Protect 8′ mantra in the past six months, as it looks ahead to the planned massive 60th National Day celebrations on Oct 1.

Major incidents of social unrest have erupted this year, with the July 5 riots in Xinjiang seen as the worst in decades.

The rebound would give the government confidence that the economy has turned a corner, especially after it overtook Japan as the world’s second-largest stock market by value on Wednesday.

The Shanghai Composite Index closed down 0.15 per cent yesterday, after shares stayed in positive territory for most of the day following the announcement of the 7.9 per cent growth.

Source: Straits Times, 17 July 2009

Minister’s remarks come ahead of Apec meeting

(SINGAPORE) The worst may seem to be over for economies across Asia, but a recovery in trade will be some way off, said Trade and Industry Minister Lim Hng Kiang.

‘We don’t expect trade flows to be restored to previous levels . . . until the later stages,’ he told reporters yesterday, noting that trade tends to contract far more sharply than the general economy in a downturn.

He was speaking ahead of a two-day meeting here next week of Asia-Pacific Economic Cooperation (Apec) trade ministers. The meeting is one of several in the run-up to the main Apec ministerial conference in November which Singapore – as the current chair of the 21-member group – will be hosting.

The Apec trade ministers will review their responses to the economic downturn and see what else can be done to spur recovery. Another key job is to ensure – as far as possible – that protectionism does not rear its head and further impede trade.

It’s ‘very natural’ that domestic pressures to protect local industry and save jobs mount during a downturn, Mr Lim said.

But Apec leaders at their Lima, Peru summit last year had come out strongly against protectionist sentiments, saying that there should be a standstill in measures that effectively thwart trade or investment flows.

‘What we need to do is to shine the spotlight on some of these measures and put peer pressure on one another to abide by our leaders’ exhortations not to succumb to protectionist pressures,’ Mr Lim said.

But there could be ‘grey areas’ – for instance, if calls to ‘buy local’ are mere urgings without any clear discriminatory effect against imported goods.

There has to be a collective will not to embark on tit-for-tat measures, and a political will to resist domestic pressures, he said.

The Apec trade ministers will also focus their minds and efforts to restarting the stalled Doha Round of trade talks. World Trade Organization chief Pascal Lamy will be on hand to update the ministers on developments in this area.

Asked about his view on the US stance on free trade, Mr Lim said that he found, from a visit to Washington in June, that the Obama administration has a ‘very ambitious, very crowded’ domestic agenda, with big-ticket items such as healthcare reforms and energy initiatives, on top of dealing with a crisis.

In such circumstances, ‘how do you sell the trade story?’ Mr Lim said. There isn’t a ‘very natural constituency’ that would rally behind calls to keep the trade borders open, yet the US must keep global free trade on its agenda, he said. ‘This is something we’re watching.’

Not least, the Apec trade ministers convening here next week will also seek to move forward on regional economic integration, which would be one solution towards overcoming the global economic crisis.

Apec has long explored as a long-term goal the prospect of a Free Trade Area of the Asia-Pacific (FTAAP).

Source: Business Times, 16 July 2009

EQUITY markets have bottomed out and there is growing evidence to support the ‘green shoots theory’ that is gaining momentum, according to BlackRock’s global equities head.

Mr Bob Doll, vice-chairman and chief investment officer of global equities at the investment firm, said yesterday at a media briefing in Singapore that equity markets were up more than 30 per cent since the last low of March 6, when the Standard & Poor’s 500 index dropped to 666 points.

And, there was only ‘at most a 20 per cent chance’ of the S&P falling below that level from now on, he said.

Mr Doll explained there were three factors indicating the latest bear market rally was different from the four previous abortive ones.

First, the current surge has been marked by strong momentum and expanding volume.

Second, more cyclical areas of the market, such as consumer spending and technology, have been outperforming – trends that tend to occur when recoveries begin.

And third, earnings estimates during the other four rallies had continued to come down, whereas they are currently stabilising or moving slightly higher.

Mr Doll said it was, however, premature to call the start of a new bull market.

Over the coming months, he predicted that the United States would outperform Europe and emerging markets would outperform developed ones.

Policy responses to the credit crisis had been stronger and more rapid in the US than in other markets, he noted, with US stocks tending to be less volatile than those in most other markets.

But do not expect a consumption-led recovery, he said, as the US consumer’s savings rate had upped from zero to 5 per cent, and may rise further to 8 or 10 per cent.

‘There is a prospect that we will witness the start of an economic recovery by the end of the year, and that could lead into sub-par, but positive growth in 2010,’ added Mr Doll.

Compared with western economies, he could see ‘particular pockets of strength in Asia’ driven by the Chinese consumer sector, which is being fuelled by the country’s massive stimulus programme.
The property market in Hong Kong is showing signs of stabilisation, thus providing opportunities there, he added.

As for green shoots, Mr Doll cautioned: ‘There is evidence for better things coming. But green shoots mean the majority of what we’re looking at is brown.’

Source: Straits Times, 19 May 2009

The most bearish forecast to date says slide could touch 10%

Singapore, Taiwan and Korea are expected to be the worst-hit economies in Asia, a report from CLSA said this week.

Singapore could lose a tenth of its $245 billion economy, while Taiwan is expected to shrink 11 per cent and Korea 7 per cent in 2009, the Hong Kong- based research house said.

The forecast is the most bearish yet issued on the local economy. The Ministry of Trade and Industry last month downgraded its prediction for the year to between -5 per cent and -2 per cent and most private sector forecasts have come within the official range, with Credit Suisse (-5 per cent) and Deutsche Bank (-4.5 per cent) the most pessismistic.

Asianomics economist Jim Walker told Time magazine this month that Singapore and Taiwan could see GDP sink by 5 per cent to 10 per cent.

CLSA argued that key data points have swung in ‘extreme fashion’ in the last quarter of 2008. Based on its newly revised estimates, Singapore could suffer a ‘dramatic halt’ in personal consumption, coupled with double-digit declines in fixed investment and collapsing exports, the house said.

That is despite a record budget deficit and a $20.5 billion ‘Resilience’ package announced by the Singapore government in January. ‘We expect the bulk of the money to be saved,’ CLSA said.

Export volumes in Singapore are seen contracting a fifth in 2009, while collapsing domestic demand will likely mean a similar drop in imports. The MTI said that 2008 non-oil domestic exports fell 7.9 per cent and is expected to fall between 9 and 11 per cent this year.

CLSA said exports here have already dropped a seasonally adjusted 32.1 per cent from its July peak.

Manufacturers in both China and the US are now reducing inventories and this is likely to hurt economies that had expected to benefit from new orders. ‘China’s demand for parts and materials is still shrinking at an accelerating rate,’ CLSA noted.

OCBC economist Selena Ling said the surprise in the present downturn was not the contraction in manufacturing and exports, which have been poor for some time now. ‘What is relatively new is the speed of the drop-off in services growth, which are a huge part of GDP and employment,’ Ms Ling said.

CLSA said Hong Kong’s economy is also expected to contract, but by a less sharp 5 per cent this year. ‘The absence of a highly cyclical manufacturing industry and the absence of a physical property overhang means that Hong Kong will perform ‘better’ than Singapore,’ CLSA said.
Yesterday, Standard & Poor’s economist Subir V Gokarn said in a report that Singapore’s GDP could contract between 4.5 per cent and 5 per cent if the US economy shrinks 3.8 per cent in the worse case.

‘Strong external links, particularly to the US economy, will lead to a sharp contraction in 2009 as external demand slows down rapidly. A fiscal stimulus will help contain the slowdown, but in a limited way,’ he said.

Source: Business Times – 6 Feb 2009

Asia property stocks are definitely out of fashion in 2009, but brave contrarian investors may find dabbling in Japanese landlords or Chinese developers could pay off.

Asia property markets are slumping in the same way they did after the 1997-98 financial crisis and probably will not recover until 2010, with home prices in Singapore and Hong Kong forecast to slide 20-25 per cent this year as the global economy weakens.

But a strong rebound in property counters across the region towards the end of 2008, even as developers reported slumps in home sales, suggests investors will buy if they see deep value.

More bad economic news in Asia, such as waning exports, would spark flurries of broad market selloffs, but also give investors with longer-term investment views a chance to hunt for bargains.
‘The market’s divided on whether stock prices will make new lows in 2009, but we expect volatility to continue,’ said Adam Upton, who helps manage the JF Asia Property Fund in Hong Kong.

‘In this environment the fund will look to take advantage of near-term trading opportunities.’ The JF Asia Property Fund is keen to trade volatile Chinese property stocks, but is underweight on Australia and mostly neutral on other markets in the region.

Asian property stocks have risen more than 30 per cent from lows in late 2008. Chinese shares led the way with a 70 per cent surge after Beijing unveiled measures to aid the ailing sector, even though many analysts believe government efforts to build mass-housing will undercut listed developers.

Investment house CLSA is neutral or negative on all Asian property markets but likes Hong Kong property trust Link Reit and some property trusts in Japan, as well as office landlord NTT Urban Development Link Reit has been billed as recession-proof because many retailers in its shopping malls sell necessities ranging from rice to toothpaste, unlike swanky new malls where retailers are struggling as consumers cut spending on expensive items. Tokyo’s office market, seen by some as the last stronghold for property investors in the recession-hit economy, is expected to stay resilient because of a shortage of top-notch buildings.

Even with vacancies creeping up, rents for existing contracts will decline only slightly, and not until 2010, according to CLSA. Landlords reacted slowly to a climb in office values in the last four years and are still able to nudge rents up this year. Asian developers learnt the lessons of overbuilding in the 1997-98 crisis, and only Singapore has a large supply of new office blocks coming onto the market in the next few years.

‘We have less of an issue of supply,’ said Frankie Lee, fund manager with Henderson Global Investor in Singapore. ‘It’s all about demand and whether the growth will pick up later this year, after all the government stimulus take effect.’

Analysts warn investors to steer clear of Hong Kong and Singapore office landlords as both cities will be hit hard by the global trade slowdown and upheaval in financial markets.

Source: Business Times – 28 Jan 2009