３rd Quarter Report
June 2001
Nomura Research Institute, Ltd.
Asian Economic Research Unit
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Contents
Forecasts on Growth Rates, Foreign Exchange Rates, and Interest Rates ................2
Overview: Asia (ex-Japan): Economic situation in the NIEs and the ASEAN-4 continues to
worsen...............................................................................................................3
South Korea: Worsening IT industry and enduring old-economy..........................................14
Taiwan: Gathering the pace of slow down ..........................................................................20
Hong Kong: Growth Forecasts lowered.............................................................................25
Singapore: Economy Faces Downward Pressure ..............................................................30
Malaysia: Expectation of Ringgit Devaluation Remains in the Market..................................34
Indonesia: MPR to reconvene on August1 to impeach president..........................................38
Philippines: Philippine politics start to settle down...............................................................42
Thailand: Economic Situation Continues to Worsen ............................................................46
China: Recovery Momentum Maintained............................................................................51
Cut-off date for calculations and forecasts was June 15, 2001.
Nomura Research Institute, Ltd.
Asian Economic Research Unit
Tomo Kinoshita
Hiroyuki Nakai
Suiyo Li
Tetsuji Sano
Head of Asian Economic Research,
Indonesia, Phlippines
South Korea, Taiwan
China, Hong Kong
Malaysia, Singapore, Thailand
While all reasonable care has been taken in the preparation of this publication, no liability is accepted by the publishers nor by any of the authors
of the contents of the publication, for any loss or damage caused to any person relying on any statement or mission in the publication.
All rights reserved; no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means,
electrical, mechanical, photocopying, recording, or otherwise without the prior written permission of the publisher.
1
Short-term Economic Outlook for Northeast Asia and ASEAN Economies
1998
Northeast Asia
South Korea
Taiwan
Hong Kong
Real economic growth(%)
1999
2000 2001（
F）2002(F)
1998
Inflation rate(CPI) (%)
1999
2000 2001（
F）2002(F)
1998
Current account balance (US$ billion)
1999
2000
2001（
F） 2002(F)
-2.6
-6.7
4.6
-5.3
7.7
10.7
5.4
3.1
8.3
8.8
6.0
10.5
3.5
3.6
2.8
3.5
5.2
5.0
4.1
4.8
4.8
7.5
1.7
2.8
-0.2
0.8
0.2
-4.0
1.0
2.3
1.3
-3.7
2.5
4.4
0.2
-0.4
1.9
2.5
0.5
1.7
43.5
40.4
3.4
-3.0
41.4
24.5
8.4
8.5
27.6
11.0
8.9
7.7
27.3
10.3
11.6
7.5
26.8
10.1
11.1
8.2
-8.2
-13.1
-7.4
-0.6
0.1
-10.8
3.5
0.8
6.1
3.4
5.9
4.2
5.7
4.8
8.3
4.0
9.9
4.3
3.0
3.8
3.0
3.3
3.0
1.2
4.6
5.2
5.7
3.9
5.2
3.3
22.5
58.4
5.3
9.7
-0.3
8.1
7.8
20.5
2.7
6.7
0.5
0.3
2.6
3.7
1.6
4.3
1.4
1.6
4.6
8.9
1.4
6.5
2.0
2.3
3.0
4.7
1.5
4.6
2.1
2.6
50.2
4.1
9.6
1.3
20.3
14.3
59.3
5.8
12.6
7.2
21.8
12.5
56.6
7.8
8.4
9.4
21.8
9.2
44.0
3.3
8.0
6.6
18.1
7.4
39.3
2.7
7.5
5.4
15.9
7.0
China
Total
7.8
-1.0
7.1
6.4
8.0
7.5
7.7
4.7
8.1
5.9
-0.8
7.9
-1.4
1.6
0.4
1.3
1.5
2.7
2.0
2.2
29.3
123.0
15.7
116.4
20.5
104.7
17.2
88.5
15.8
81.9
Asian NIEs + ASEAN4
Asian NIEs
ASEAN4
Japan
United States
-4.8
-2.4
-9.5
-1.1
4.4
6.1
7.6
3.2
0.8
4.2
7.3
8.4
5.1
1.5
5.0
3.3
3.5
3.0
0.8
1.6
5.0
5.2
4.5
1.4
2.5
11.6
4.4
25.9
0.6
1.6
2.9
-0.1
8.9
-0.3
2.2
1.6
1.0
2.8
-0.6
3.4
3.3
2.4
4.9
-0.3
3.3
2.3
1.9
3.1
-0.4
2.8
93.7
64.5
29.2
120.7
-217.1
100.7
62.6
38.0
106.9
-331.5
84.2
49.4
34.8
116.9
-435.4
71.3
45.0
26.4
88.6
-435.9
66.1
42.1
23.9
93.5
-447.8
ASEAN5
Indonesia
Malaysia
Philippines
Singapore
Thailand
Notes: (1)Each economies weight in the aggregate figures for real economic growth was calculated on the basis of its GDP for 1992 in US
dollars; (2)"Asian NIEs" refers to South Korea, Hong Kong, Taiwan, and Singapore ,while "Asean4"refers to Malaysia, Indonesia, Thailand, and
the Philippines; (3)Data and forecasts as of June 15, 2001
Source: Nomura Research Institute, from official statistics of the economies concerned. Forecasts are by Nomura Research Institute.
Foreign Exchange Rates against USD
Japanese Yen
2001/6/12
121.7
South Korean Won
1,290
7.80
Hong Kong Dollar
3.8
Malaysian Ringgit
1.82
Singapore Dollar
Indonesian Rupiah
11,238
Thai Baht
Chinese Renminbi
Taiwan Dollar
Philippine Peso
45.3
8.28
34.1
51.3
2001/Q2
122.0
(116.0〜128.0)
1,300
(1,250〜1,350)
7.80
(7.77〜7.90)
3.8
2001/Q3
125.0
(119.0〜131.0)
1,275
(1,225〜1,325)
7.80
(7.77〜7.90)
3.8
2001/Q4
125.0
(119.0〜131.0)
1,275
(1,225〜1,325)
7.80
(7.77〜7.90)
3.8
2002/Q1
125.0
(119.0〜131.0)
1,275
(1,225〜1,325)
7.80
(7.77〜7.90)
3.8
1.80
(1.78〜1.82)
11,200
(10,425〜12,000)
45
(43.0〜47.0)
8.28
(8.25〜8.30)
33.5
（32.0〜34.5)
50.5
(49.6〜52.5)
1.80
(1.78〜1.82)
10,500
(9,500〜13,000)
45.0
(43.0〜47.0)
8.28
(8.22〜8.33)
34.5
(33.5〜35.5)
49.3
(47.3〜51.8)
1.80
(1.78〜1.82)
10,000
(9,000〜13,000)
45.0
(43.0〜47.0)
8.28
(8.22〜8.33)
34.5
(33.5〜35.5)
48.0
(45.0〜51.0)
1.80
(1.78〜1.82)
10,000
(9,000〜13,000)
45.0
(43.0〜47.0)
8.28
(8.20〜8.35)
34.5
(33.5〜35.5)
47.8
(44.8〜50.8)
Note: Upper figures refer to period-average
Source: Forecasts are by Nomura Research Institute
Interest Rates
USA（FF Rate）
2001/6/12
2001/Q2
2001/Q3
2001/Q4
2002/Q1
4.0
3.5〜4.0
3.5〜4.0
3.5〜4.0
3.5〜4.0
South Korea
（
Overnight Call）
5.1
4.5〜5.25
4.5〜5.25
4.5〜5.25
4.5〜5.25
Hong Kong (3M HIBOR)
3.85
3.25〜3.75
3.25〜3.75
3.25〜3.75
3.25〜3.75
Malaysia（3M KLIBOR）
3.3
3.0〜3.5
3.0〜3.5
3.0〜3.5
3.0〜3.5
Singapore (3M SIBOR)
2.3
2.00〜2.50
1.75〜2.50
1.75〜2.50
1.75〜2.50
Indonesia(Overnight JIBOR）
14.8
14.0〜15.3
14.0〜15.5
13.0〜14.5
13.0〜14.5
Thailand （14D Repo)
2.5
1.5〜2.5
2.5〜3.0
2.5〜3.0
2.5〜3.0
China
（
1Y Lending Rate for Working Capital）
5.85
5.85
5.85
5.9
5.85〜6.0
Taiwan(3M CP Rate)
3.90
3.5〜4.5
3.5〜4.5
3.5〜4.5
3.5〜4.5
8.5〜9.5
8.5〜9.5
8.5〜9.5
8.5〜9.5
Philippines (91D T Bill Rate)
9.2
Note: Rates refer to end-period.
Source: Forecasts are by Nomura Research Institute
2
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Asia(ex-Japan): Economic situation in the NIEs and
the ASEAN-4 continues to worsen
The unexpectedly sharp fall in US demand for IT-related goods and equipment
obliges us to take a more pessimistic view of the economic outlook for Asia in 2001.
We are therefore lowering our forecast of real GDP growth in the NIEs economies
(Taiwan, Hong Kong, Korea and Singapore) in 2001 from 4.4% to 3.5%, and in the
ASEAN-4 (Malaysia, Indonesia, Thailand and the Philippines) from 3.9% to 3.0%.
According to the latest figures, exports have declined sharply. For the NIEs and
the ASEAN-4 as a whole, year-on-year export growth in April was negative (see table
below). In May the decline in export growth continued, as can be seen from the
figures for Korea and Taiwan (Korea: -6.9%; Taiwan: -22.6%).
The decline in exports continues to be led by electronics-related goods and equipment. Although inventory adjustment of computer-related goods is now expected to
be completed quite soon, there is a growing consensus that inventory adjustment of
wireless communications-related items (such as mobile phones) and network-related items will take longer than expected. As Asia is the main production center for
IT hardware, it is particularly vulnerable to the effects of such inventory adjustment. The increasing use of supply chain management by manufacturers of elec-
Real GDP growth rates
（YOY,%）
2000
2001
Q1
12.6
7.9
14.1
9.8
11.7
5.3
4.2
3.3
8.1
Korea
Taiwan
Hong Kong
Singapore
Malaysia
Thailand
Indonesia
Philippines
China
Q2
9.7
5.4
10.7
8.4
8.0
6.4
5.2
4.3
8.3
Q3
9.2
6.6
10.8
10.4
7.6
2.9
4.4
4.6
8.2
Q4
4.6
4.1
6.9
11.0
6.3
3.2
5.2
3.8
7.4
Q1
3.7
1.1
2.5
4.5
3.2
1.8
4.0
2.5
8.1
Source:Nomura Research Institute, official statistics
YOY increase in exports from Asia
Korea
Taiwan
（YOY in USD, ％）
Singapore Malaysia
Thailand
Indonesia Philippines
China
Total exports
Jan-01
Feb-01
Mar-01
Apr-01
May-01
4.6
5.2
-1.8
-9.9
-6.9
-17.2
11.9
-1.9
-11.3
-22.6
9.1
5.2
-3.5
-4.1
-4.8
10.3
4.6
-6.9
-5.0
ＮＡ
-3.8
-3.0
3.9
-6.7
ＮＡ
11.3
-1.3
5.5
-4.2
ＮＡ
6.3
-3.3
-4.0
-15.8
ＮＡ
0.9
29.9
14.9
11.1
3.5
Jan-01
Feb-01
Mar-01
Apr-01
May-01
-5.1
0.4
-7.9
-18.6
ＮＡ
-13.0
13.7
-2.3
-17.2
-25.7
1.2
-0.6
-10.3
-10.4
ＮＡ
14.3
3.2
-10.5
-10.8
ＮＡ
-4.1
-1.5
6.6
-13.7
ＮＡ
71.3
ＮＡ
ＮＡ
ＮＡ
ＮＡ
2.1
-7.0
-10.2
-28.0
ＮＡ
18.1
54.6
17.1
23.4
ＮＡ
11.7
8.1
1.9
-4.5
ＮＡ
-19.5
10.9
-1.7
-7.8
-20.9
18.4
12.1
4.6
3.5
ＮＡ
5.4
6.5
-1.9
3.2
ＮＡ
-3.6
-3.7
2.6
-3.2
ＮＡ
4.5
ＮＡ
ＮＡ
ＮＡ
ＮＡ
12.9
1.9
5.5
0.0
ＮＡ
-4.3
22.8
14.2
7.4
ＮＡ
Exports of electronics goods
Exports of non-electronics goods
Jan-01
Feb-01
Mar-01
Apr-01
May-01
Source:Nomura Research Institute, official statistics
3
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
tronic goods and equipment is another major factor in the decline in export growth—
particularly in the current environment of falling demand. Given the pressure supply chain management puts on manufacturers of final goods to minimize inventories, manufacturers of electronic parts have not only had to rapidly increase their
production capacity in order to meet any future increase in demand, but they have
also had to carry larger inventories.
As a result, while parts manufacturers are able to maintain their inventories at
a certain level when demand is growing steadily, they find themselves holding very
large inventories once demand begins to fall off. Therefore those economies where
components(such as semiconductors) account for a large proportion of electronics
exports are particularly affected in terms of both volume and price. This is presumably why the latest figures for exports of electronic goods and equipment from the
Philippines, Korea and Taiwan show a year-on-year decline of about 20%.
The decline in exports of non-electronics-related goods and equipment has been
more moderate. As a result, the decline in overall export growth in countries (such
as Korea) where non-electronics-related items such as autos, steel and ships account
for a relatively large proportion of exports has been quite modest and demonstrates
the advantages of export diversification.
The slowdown in exports of electronics-related goods and equipment has made
manufacturers of such items more cautious about investing in plant and equipment. Gone are the hopes for a V-shaped recovery in US demand for IT goods and
equipment that some observers were expressing three months ago, and there has
been an increase in cancellations of orders for equipment—especially by semiconductor manufacturers. Prices for basic materials such as steel and chemicals have
also been under pressure, and this has depressed domestic demand. In order to
ascertain how strongly the economies of Asia are currently growing, we produced an
index that compares quarterly real (seasonally adjusted) GDP with the average
figure for real GDP for the preceding four quarters.
The share of semiconductors out of the exports of electronics goods in
various Asian countries (2000)
China
Philippines
Thailand
Malaysia
Singapore
Taiwan
Korea
0%
20%
40%
60%
80%
Semiconductor
Electronics exports of other than
semiconductors
Source:Nomura Research Institute, official statistics
4
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
100%
For example, when the average GDP for 2000 is rebased to 100, the index for the
first quarter of 2001 equals the GDP for 2001 as a whole if the average GDP for the
second, third and fourth quarters is at the same as that for the first quarter. The
index (see graph below) shows that all the NIEs economies and the ASEAN-4 (except
for Indonesia) are rapidly losing momentum. If there is no economic recovery and
their average GDP for the next three quarters remains unchanged, growth will be a
meager 0%-2% except in Indonesia.
"Economic momentum" index
Index at period t
=
(
Real GDP at period t
Avarage real GDP from period (t-1) through period (t-4)
)*
100
110.0
105.0
100.0
95.0
マレーシア
インドネシア
フィリピン
タイ
90.0
1Q01
3Q00
1Q00
3Q99
1Q99
3Q98
1Q98
3Q97
1Q97
85.0
110.0
105.0
100.0
95.0
Korea
Taiwan
Singapore
HongKong
90.0
1Q01
3Q00
1Q00
3Q99
1Q99
3Q98
1Q98
3Q97
1Q97
85.0
Note:Index at 1Q2001 equals to the level of GDP in 2001 when the level of GDP in 2000 is 100
in case average GDP from Q2 to Q4 stays at the same level as in Q1.
Source:Nomura Research Institute from official statistics. Seasonally adjustment of real
GDP in Indonesia, Malaysia, and Taiwan is made by Nomura Research Institute.
5
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Economic growth to recover gradually by the end of 2001
Although the economies of Asia have slowed more than we expected, we still expect them to bottom out and recover gradually by the end of 2001. This is because we
expect the benefits of fiscal spending to feed through and US demand for IT goods to
bottom out by then. In 2002 we expect higher asset prices to have a positive secondary effect on private demand as business confidence in the United States continues
to improve and economic recovery in Asia becomes more apparent.
However, the pace of economic recovery in Asia is likely to be slower than we
expected three months ago. This is because it is likely to take longer than we expected for demand and supply to adjust in the semiconductor industry. According to
a 31 May report by the Nomura Securities, demand for semiconductors generally
will not exceed its supply until the fourth quarter of 2002. This is a negative factor
for exports, corporate earnings and capital investment in Korea and Taiwan, which
have a strong semiconductor production base for wafer process.
2003 is likely to see a full-scale economic recovery in Asia. First, there is likely to
be a robust recovery in demand for electronics-related goods and equipment with all
the positive knock-on effect and, second, private consumption should benefit from
pent-up demand from 2001-2002.
China maintains high level of economic growth
In contrast to the economic slowdown in the economies of NIEs and the ASEAN4 in the first quarter of 2001, real GDP in China has held up extremely well, growing by 8.1% in the first quarter. China’s customs-cleared exports for January-April
were up 13.6% year on year—in marked contrast to the slowdown in exports in the
rest of the region. This was driven mainly by a 26.4% increase in exports of electronics-related goods and components during this period; but even exports of non-electronics-related goods and components were up 9.7%. Customs-cleared exports for
May were up only 3.5% on the previous year; but this was still much better than the
sharp slowdown in export growth experienced by Korea and Taiwan. There would
appear to be two main factors behind the strength of China’s exports of electronicsrelated goods and components: first, direct investment in this area has been
Forecasts on world-wide semiconductor market
00
34.6
61.5
49.2
32.4
10.6
1.1
30.5
9.8
17.6
204.4
37.0%
MOS Logic
MOS Micro
MOS Memory
DRAM
Flash
Digital Bipolar
Analog
Optoelectronics
Discrete
Total
Growth Rate
01(F)
30.0
52.3
35.0
17.9
11.5
0.6
26.6
9.7
15.1
169.3
-17.0%
（US$bil）
02(F)
35.2
57.9
33.1
17.0
10.7
0.5
32.9
10.9
17.6
188.0
11.0%
Source: Nomura Securities.
6
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
03(F)
44.7
69.2
36.9
19.5
11.5
0.5
42.1
13.6
21.7
228.6
22.0%
accelarated recently and new capacity has come on stream; second, the fact that
final goods account for a higher proportion of exports than in the NIEs and the
ASEAN-4 (where semiconductors and other electronics-related parts dominate) means
that China has not been seriously affected by excess inventories of parts. Although
export growth will almost inevitably slow, we expect it to remain still at quite a high
level since, first, direct investment in China’s electronics industry have accelarated
on a contracted basis and the realized investment is expected to rise and, second,
there has been a tendency for foreign manufacturers of electronic goods and components to invest more in China and less in the rest of the region.
Meanwhile, domestic demand is still robust as a result of the government’s expansionary fiscal policy and heavy residential investment. Although we expect slower
export growth and a weaker impact from fiscal spending to lead to slower economic
growth in the second half of 2001, growth of 7.7% for the year as a whole should still
be possible. In 2002 China’s economy should grow by 8.1% as the US economy recovers gradually and the Chinese government maintains its stimulative fiscal policy.
Changing inflationary pressures: global deflation and a
realignment of regional currencies
There has been a major change in the inflationary pressures on the region since
the beginning of 2001. This is the result, first, of global deflation produced by the
slowdown in the United States and, second, of a realignment of regional currencies.
The first has exerted strong deflationary pressures throughout the region. The
global economic slowdown stemming from the slowdown in the United States has
hit demand, thereby producing deflationary pressures on a global scale. In Asia,
prices have been falling across the board (not just for electronics-related products),
and commodity prices (excluding electronics-related products) have fallen by more
than 20% since last autumn (see graph next page).
Direct investments toward China in the area of electronics and
communication related equipments
（
US$mil）
4,500
4,000
3,500
3,000
Contracts
to be
realized
2,500
Investments contracted
2,000
1,500
1,000
Investments
realized
500
Source:Nomura Research Institute from official statistics
7
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
1Q01
4Q00
3Q00
2Q00
1Q00
4Q99
3Q99
2Q99
1Q99
0
The second is the result of a weakening by those Asian currencies that float against
the dollar in response to the weakness of the yen that lasted until the beginning of
April and the increasingly uncertain political outlook for a number of countries in
Price of non-electronics raw materials
130
120
110
100
90
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Oct-98
Jul-98
Apr-98
80
Notes:Average price in USD for the following 22 items: Polyethylene resin, Polypropylene
resin, Polystyrene, Styrene-acrylonitrile, Vinyl chloride resins, Wide flange beam, Stainless
steel, Hot-rolled coil, Steel scrap, Pig iron, Styrene monomer, Ethylene, Tetrachloroethylene,
Benzene, Acrylonitrile, Fine paper, Fine coated paper, Pulp for paper, Polyester filament fibers, Polyester staple fibers, Acrylic staple fibers,Pakistani Cotton. Apr 98=100.
Values of Asian currencies against USD
(Indexed at Jan,2000=100)
110.00
Korean won
New Taiwan dollar
100.00
Singapore dollar
90.00
Japanese yen
80.00
Indonesian rupiah
Philippine peso
70.00
Thai baht
Note:Index decreases as the currency weakens against USD.
Source:Nomura Research Institute from official statistics.
8
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
May-01
Apr-01
Mar-01
Feb-01
Jan-01
Dec-00
Nov-00
Oct-00
Sep-00
Aug-00
Jul-00
Jun-00
May-00
Apr-00
Mar-00
Feb-00
Jan-00
60.00
the region. The currency that weakened most against the dollar has been the rupiah, which (as of 12 June) has declined 25.7% from its average rate against the
dollar for 2000 (see table below), while the Korean won, Thai baht and Philippine
peso have weakened to roughly the same extent as the yen (i.e., 11.5%). On the other
hand, Chinese renminbi, Hong Kong dollar and the ringgit remain pegged to the US
dollar.
In order to measure the impact of such changes in foreign exchange rates on
inflation, we calculated the percentage change in total domestic supply costs (defined as “the change in import values generated by the change in the foreign exchange rate as a percentage of GDP”) (see graph below). For the sake of convenience,
we have assumed (1) that all these countries’ imports from Japan are in yen terms
and all their imports from elsewhere in US dollar terms and (2) that the percentage
Comparison of the exchange rate against USD from last year
Korean Won
New Taiwan Dollar
Hong Kong Dollar
Singapore Dollar
Malaysia Ringgit
Thailand Bahts
Indonesia Rupiah
Philippine Peso
Chinese RMB
Japanese Yen
The forex rate against USD
The latest rate
Average in 2000
（
June 12, 2001）
1,130
1,290
31.2
34.1
7.76
7.80
1.73
1.82
3.80
3.80
40.2
45.3
8,346
11,238
44.2
51.3
8.3
8.3
107.8
121.7
Declining
Rate(％）
12.4
8.5
0.5
4.8
0.0
11.3
25.7
13.8
0.0
11.5
Note:In the Philippines, the rate on June 11is applied since June 12 is a holiday.
Source:Nomura Research Institute
Change in total domestic cost of supply relative to GDP resulting from
exchange rate movements
(%)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
China
Philippines
Indonesia
Thailand
Malaysia
Singapore
HongKong
Taiwan
Korea
-1.5
Notes:(1)Fugures are computed on the basis of 2000 statistical fugures.(2)For a definition,
refer to the text.
Source:Nomura Research Institute
9
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
changes in the exchange rates are as in Table ??. In calculating the change in total
domestic supply costs, we exclude the effects of change in the foreign exchange on
the price of intermediate goods used to produce exports since the effects are assumed
to pass onto the export price. The increase in supply costs has to be borne by someone in the country concerned. If the entire increase is passed on in the form of higher
prices for finished goods, the consumer will bear most of the costs; but any increase
that cannot be passed on will have to be borne largely by the corporate sector. Whether
or not this inflationary (or deflationary) pressure manifests itself will depend on how
effective the price adjustment mechanism of the country concerned is.
The combined pressure of these two factors (global deflation and the percentage
change in total supply costs) can be regarded as the price pressure currently faced
by the economies of Asia. As can be seen in table below, this pressure is inflationary
in Indonesia, Korea, Thailand and the Philippines but deflationary in Hong Kong,
China and Malaysia, and largely neutral in Singapore and Taiwan.
Effect of these changes in inflation and foreign exchange rates on
corporate earnings and monetary policy
This realignment of foreign exchange rates and subsequent changes in inflationary pressure have a distinct impact on corporate earnings and monetary policy in
these countries. The graph (see graph next page) shows where each country stands
in terms of currency depreciation (horizontal axis) and inflationary pressure (vertical axis). The rate of depreciation of a currency can be taken as a proxy of the
country’s export competitiveness: the higher the rate, the more competitive that
country’s exports are likely to be. The figure can be used to gauge the impact of
these changes in inflation and foreign exchange rates on corporate earnings and
monetary policy. The current phase of the business cycle indicates that the actual
level of earnings for the corporate as a whole is likely to deteriorate significantly.
However, in relative terms, a company’s earnings (whether it is an exporter or a
domestic demand-oriented company) will depend on what is happening to the currency and inflation. The following observations assume that factors other than inflation and the foreign exchange rate are unchanged.
Inflationary pressures in Asian region
Pressure on the
Pressure on the
prices by the change Combined pressure
prices by the global
in domestic total
on the prices
supply-demand gap
cost of supply
(A+B)
(A)
(B)
Korea
Taiwan
HongKong
Singapore
Malaysia
Thailand
Indonesia
Philippines
China
Deflationary
Deflationary
Deflationary
Deflationary
Deflationary
Deflationary
Deflationary
Deflationary
Deflationary
Inflationary
Weakly inflationary
Deflationary
Weakly inflationary
Deflationary
Inflationary
Strongly inflationary
Inflationary
Deflationary
Source:Nomura Research Institute
10
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Inflationary
Almost neutral
Deflationary
Almost neutral
Deflationary
Inflationary
Inflationary
Inflationary
Deflationary
In the first group of countries (Korea, Thailand and the Philippines: “Group A”),
currency depreciation is likely to benefit exporters in relative terms. During a cyclical downturn, however, domestic demand-oriented companies will find it difficult to
pass on all of their increased import costs in the form of higher prices and are likely
to find their margins being squeezed. As Group A countries are quite vulnerable to
inflation, a tight monetary policy seems to prove effective at first sight. However,
that is not the case. As most of this inflationary pressure comes from the supply
Movements of price indices (December 2000 = 100)
105
104
Thailand
103
Indonesia
102
Philippines
101
Korea
100
HongKong
99
Singapore
98
Malaysia
97
96
Taiwan
95
Dec-00
Jan-01
Feb-01
Mar-01
Apr-01
May-01
Notes:Price indices used are following: Malaysia, Thailand:PPI, Hong Kong, Indonesia,
Philippines:CPI, Taiwan:WP, Singapore:DSPI.
Source:Nomura Research Institute from official statistics
Changing export competitiveness and pressure on the prices
Downward Pressure←
Prices
→Upward pressure
3.0
Korea
2.0
Thailand
1.0
Indonesia
Group A
Singapore
Philippines
0.0
Group C
China
-1.0
Taiwan
Hong Kong
Malaysia
-2.0
Group B
-3.0
0.0
5.0
10.0
15.0
20.0
25.0
Rate of decline in exchange rates against USD
Down← Export competitiveness
→Up
Source:Nomura Research Institute
11
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
30.0
（
％）
side, a tight monetary policy would be unlikely to stem inflation. In this respect, the
monetary policy being pursued by the Philippine government (i.e., of cutting interest rates in line with US monetary policy) should be just appropriate.
In Korea, there appears to be a difference of opinion between the government,
which would like to ease monetary policy to assist economic recovery, and the Bank
of Korea, which has adopted a neutral policy in order to keep inflation at bay. The
fact that inflationary pressures in Korea are greater than in either of the other two
countries in Group A might be taken as giving credence to the Bank’s neutral policy.
However, the problems facing the financial system mean that a more accommodative monetary policy would not necessarily lead to more bank lending. As a result,
the things would not change substantially between having an accommodative monetary policy and a neutral monetary policy.
In Thailand, a weak demand would, under normal circumstances, call for the
kind of low interest rates seen recently. However, under its new governor, the Bank
of Thailand has adopted a tight stance in order (1) to stem capital outflows and
thereby stop the baht from weakening, and (2) to push up deposit rates and thereby
transfer income to depositors. There is a risk that higher interest rates may have a
negative effect on the economy.
The second group of economies (Hong Kong, China and Malaysia: “Group B”),
which effectively peg their currencies to the US dollar, is unquestionably at a disadvantage compared with Group A countries, whose currencies have depreciated, in
terms of export competitiveness, and exporters’ earnings are vulnerable. Also, the
fact that wages are rising while prices are falling means that the earnings of domestic-oriented companies are also vulnerable, although as the price adjustment mechanism in all three economies appears to function imperfectly, there is probably a limit
to how far prices can fall. Nevertheless, in a deflationary situation where some
prices are falling, there is a risk that an increase in non-performing assets could
exacerbate the problems facing the financial system. In such a situation, an accommodative monetary policy is best, and, in fact, all three economies have maintained
low-interest-rate policies. However, in Malaysia, it would be difficult to reduce rates
further because of strong fears of capital outflows, so any advantages from monetary
policy are probably limited.
In the third group of economies (Singapore and Taiwan: “Group C”), the fact that
inflation is quite low suggests that the earnings of domestic demand-oriented companies are unlikely to be seriously affected. In terms of export competitiveness, however, they are unlikely to benefit as much as Group A countries. The fact that inflation is quite low also means that there is probably little need to change monetary
policy. However, it would appear that the Taiwanese authorities are prepared to
contemplate a certain degree of depreciation in order to boost export competitiveness, which has declined. As a result, they will probably maintain their accommodative stance. In contrast, the Singapore authorities’ traditional emphasis on combating inflation means that they will probably continue to allow the currency to appreciate gradually.
Finally, Indonesia. Indonesia has enjoyed the biggest improvement in export competitiveness, but has also been the most affected by higher import prices. The weakness of the currency is the main reason that Bank Indonesia is pursuing a tight
monetary policy. However, the fact (1) that inflation is caused mainly by supply-side
factors and (2) that higher interest rates have a serious effect on public finances and
12
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
bank margins indicates that tightening of the monetary policy is not necessarily the
best option and could even act as a drag on economic growth.
Risk factors—-US demand for IT goods remains a main risk factor
The main risk factor remains the possibility that US demand for IT goods may
take longer to recover than expected. As far as the political issue is concerned, one
key political issue will be whether Sino-American relations improve under the Bush
administration. If Asia is to enjoy stability, it is important that China joins the
World Trade Organization and plays a more active role in the international community. In Thailand, confidence in the Thaksin administration is declining among
foreign invest ment community—which might result in negative consequences. Finally, although Indonesia is still a risk factor in the region, the course of action that
will lead to President Wahid’s dismissal in August is gradually becoming clearer.
Tomo Kinoshita
13
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
South Korea:Worsening IT industry and enduring
old-economy
The Korean economy still has to contend with a large number of negative factors.
Prices for electronics goods and components (especially semiconductors and mobile
phones) are still falling, and reform of Korean industry has stalled. The focus here
has been on Hyundai Engineering and Construction (HEC). Although a debt-equity
swap has been carried out, a start has only just been made on changing the way
company is run. In addition, the number of corporate bond redemptions is due to
South Korea: Summary table of forecasts
1999
2000
Real GDP (YoY, %)
Private Consumption
Govt. Consumption
Fixed Capital Formation
(Private Facility Investment)
Change in stock (Contribution)
Export
Import
CPI (YoY, %)
Current A/C Balance (bil. US$)
(weight to GDP, %)
Unemployment Rate (%)
Overnight Call Rate (%)
Won/US$ (Average)
10.9
10.7
1.3
4.2
38.6
5.4
17.0
29.7
0.8
24.5
6.0%
6.3
5.0
1,188
8.8
7.0
1.2
9.8
31.1
-0.9
20.5
19.6
2.3
11.0
2.4%
4.1
5.1
1,130
2001
(F)
3.6
3.4
1.6
-0.3
-2.5
0.6
2.3
0.7
4.4
10.2
2.3%
4.1
5.0
1,281
2002
(F)
5.0
5.6
2.0
4.3
4.4
0.5
4.6
5.7
2.5
10.1
2.1%
4.0
4.9
1,275
Source: Department of Statistics, Nomura Research Institute
Industrial Production Indexes
80%
(YOY of
3mths MAV)
Total
Computers related
Auto
Machineries
70%
60%
50%
40%
30%
20%
10%
0%
Source:Nomura Research Institute, from official statistics
14
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Apr-01
Mar-01
Feb-01
Jan-01
Dec-00
Nov-00
Oct-00
Sep-00
Jul-00
-20%
Aug-00
-10%
rise sharply during the second half of this year, and there is still speculation that
some companies may experience funding difficulties.
In contrast, traditional industries such as machine manufacturing are enjoying
relatively better export demand and have been spared the kind of large-scale decline
experienced by manufacturers of electronic goods and components. Moreover, business and consumer confidence continues to improve. This, together with financial
assistance to companies to minimize unemployment, is helping to support private
consumption in some degree.
We are lowering our forecast of real GDP growth for 2001 from 4.1% to 3.6% to
reflect the above factors. Although we have lowered our forecasts for nearly all components of GDP (except for imports), the downward revision for private consumption
was less than those for exports and private capital investment.
Finally, the prices of electronic goods and components, and economic developments in the United States and Japan continue to be the focus of attention as downside risk factors.
Inflation and the currency
The fact that oil prices have been persistently high and that there has been a
drought until recently indicates that upward pressure on consumer prices is likely
to continue for time being. Because of this persistent inflationary pressure, we
expect consumer inflation to be 4.4% in 2001 (compared with our earlier forecast of
4.5%). Being pressed by requests from industries and the government, BOK cut
policy rate for 25bp in July 5 with suggestion that another action might be possible.
If inflation would be tamed as we foresee (our forecast for 1st half is +4.8% while
+4.0% is for 2nd half), we expect another cut might be achievable. But, considering
poor external demand or malfunction of financial system, positive effect of rate cut
would be limited.
The won’s foreign exchange rate is likely to remain sensitive to the stock market.
Breakdown of inflation
6.0%
(YOY)
Others
Fuel
Education
Transportation
Medical
5.0%
4.0%
3.0%
2.0%
1.0%
Source:Nomura Research Institute, from official statistics
15
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
0.0%
Although there are a few factors that are positive for the won (e.g., the country’s
current account surplus and the fact that the interest rate differential with the
United States now favors the won), the fact that foreign investors own 30.2% of the
value of the stock market (as of March 2001) means that portfolio investment flows
are the main factor determining the exchange rate and that there is a close correlation between the stock market and the foreign exchange rate. There is also a close
correlation between the won and the yen. Given NRI’s view that there is unlikely to
be any major change in the yen’s exchange rate (apart from minor short-term fluctuations), we believe that the yen’s potential to influence the won’s exchange rate is
limited.
North Korean economy continued to grow in 2000
According to estimates released by the Bank of Korea on 28 May, North Korea’s
GDP grew by 1.3% year on year in 2000—the second year in a row that it has
achieved positive growth. Although the agricultural sector suffered a slump because
of bad weather, sectors such as mining, services and construction expanded, and, as
a result, overall GDP growth is estimated to have been positive.
Moreover, figures released by the Korea Trade-Investment Promotion Agency
(KOTRA) for North Korean imports and exports in 2000 indicate that, whereas
imports surged year on year by 46.5%, exports increased by only 8.0%. An analysis
of imports shows that, in addition to a sharp increase in imports of cereals as a
result of the slump in the agricultural sector, imports of capital goods such as machinery and automobiles also increased. Taken together with the fact that the construction sector expanded, this indicates that North Korea is in the process of rebuilding its industrial infrastructure. Commercial trade between China and North
Korea also appears to be expanding, and there were media reports that the trade fair
North Korea's real GDP growth rate (YOY)
Total
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
1990-2000
accumulated
growth
-3.7%
-3.5%
-6.0%
-4.2%
-2.1%
-4.1%
-3.6%
-6.3%
-1.1%
6.2%
1.3%
Agriculture
-10.2%
2.8%
-2.7%
-7.6%
2.7%
-10.4%
0.5%
-3.8%
4.1%
9.2%
-1.9%
Manufacturing
-1.5%
-13.4%
-17.8%
-1.9%
-3.7%
-5.2%
-8.9%
-16.8%
-3.1%
8.5%
0.9%
-24.5%
-17.7%
-49.5%
Source:Nomura Research Institute, from Bank of Korea statistics
16
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
in Pyongyang at the beginning of May attracted several hundred participants from
China.
Taking these facts into account, the North Korean economy has overcome its
phase of negative growth and is now in the process of trying to rebuild its infrastructure—admittedly with the help of imported food and materials. What matters
most to North Korea in this situation is reliable sources of imported food and materials, and the means to finance the resulting trade deficit. North Korea does not
publish any trade statistics itself, and it has to be remembered that the import
figures include official development assistance. With these provisos, it would seem
that North Korea has an annual trade deficit of several hundred million dollars.
The lion’s share of this deficit has probably been financed by payments from
South Korea (e.g., the $144 million a year paid by the Hyundai Group for its franchise to develop the area around Mt. Kumgang in North Korea as a tourist resort).
The Hyundai Group is in arrears on these payments, but it has been reported (on 11
North Korea's trade
US$ mil.
3,000
2,500
2,000
Imports
1,500
Trade deficit
1,000
500
Exports
Source:Nomura Research Institute, from KOTRA statistics
North Korea's import
2000
Composition
12.8%
6.3%
12.2%
7.7%
4.8%
12.2%
6.1%
14.6%
10.4%
13.0%
1,413
Grain
Groceries
Mineral / Fuel
Chemicals
Plastics
Textile
Base metals
Machineries
Automobile
Others
Total - mil. US$
YOY
Growth
77.8%
53.1%
22.0%
13.1%
33.2%
35.8%
45.0%
51.9%
43.7%
97.9%
46.5%
Source:Nomura Research Institute, from KOTRA statistics
17
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
June) that in negotiations with North Korea the HEC Group has indicated that it is
prepared to pay roughly half of the amount on which it is in arrears (i.e., $40 million) in exchange for being allowed land access to Mt. Kumgang and a reduction in
its franchise payments by linking them to the number of tourists using the resort.
This reflects the realization by North Korea that its economic stability depends
largely on capital inflows from South Korea and that it needs to ensure that payments by the Hyundai Group and by the South Korean government as part of its
assistance program continue.
Reemergence of food problem
Among North Korea’s economic risks, food problem is attracting most attention
at the moment. The Korean Peninsula is suffering from the severest drought in 90
years, and rainfall between March and the middle of June was only 10% to 20% of
the average for that time of the year. As North Korea’s main crop-growing area is in
the center of the peninsula (i.e., the south of the country), where the drought is
worst, and irrigation is inadequate, the rice-planting season appears to have been
quite seriously affected. As a result, the 2001 harvest is almost certain to be a failure, although much will depend on the weather between now and then. Another
cause of concern is the effect of the drought on North Korea’s electricity supplies as
the country depends on hydroelectric power for 59.8% of its needs (as of 1994).
North Korea is suffering from a chronic food shortage, but the situation is likely
to become even worse following two bad harvests in a row (this year and last). So far,
only 300,000-400,000 tons of food assistance (i.e., the amount left over from the
1999-2000 crop year) has been pledged for the 2000-2001 crop year, and the UN Food
and Agricultural Organization estimates that 300,000 tons is urgently needed already. As this year’s failed harvest will affect the amount of food needed in the 20012002 crop year, North Korea is unlikely to be able to make ends meet without a large
increase in imports even if domestic demand is controlled (e.g., by rationing), and
much of this will probably have to be provided in the form of assistance.
North Korea's food supply
1997/98
Domestic Demand(A)
4,130
Food
3,730
Seed/Feed
400
(Unit : 1,000t)
1998/99 1999/2000
4,835
4,765
3,925
3,814
910
951
2000/01
4,785
3,871
914
Domestic Supply (B)
2,160
3,481
3,472
2,920
Shortage (B-A)
1,970
1,354
1,293
1,865
Import
1,970
1,000
970
1,354
300
1,054
1,293
300
300
993
300
Commercial
Aid
Notes:Food year starts November and ends October of next year. Therefore, for food year
2000/01, supply came from calendar year 2000 harvest while consumption is mainly made
in 2001.
Source:Nomura Research Institute, from FAO statistics
18
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
North Korea’s food shortage is therefore likely to become even more chronic, but
the risk to the South Korean economy is limited, provided the countries and international agencies involved take appropriate action. North Korea’s diplomatic relations
are also better than they were when President Bush took office. One example of this
is the reopening of talks with the United States (on 13 June). However, given the
nature of North Korean politics, it is doubtful whether even a serious food shortage
would make North Korea much more willing to compromise over foreign policy. If a
food shortage threatened its economy once again, North Korea might very well prove
uncooperative and try to put the blame on those countries involved in the KEDO
project (to build a light-water nuclear power station in North Korea) by saying that
they were responsible for the delays in the construction causing economic catastrophes.
Meanwhile, the domestic political situation in South Korea is becoming increasingly unclear as next year’s presidential election approaches. President Kim Daejung has tried to take the credit for the improvement in relations with the North
(e.g., last year’s Inter-Korean Summit); but the recent cooling in relations between
the two countries, the economic slowdown at home and the fact that his term in
office ends next year have taken some of the shine off his reputation. Recently, there
have even been calls from within the government party for reform of the party’s
structure.
A worsening of the economic situation in North Korea and of the country’s foreign
relations could therefore (if combined with domestic factors in South Korea) undermine political and economic stability in the South, depending on how the North
chooses to deal with other countries. To that extent, the North’s food shortage should
be regarded as a risk factor.
Hiroyuki Nakai
19
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Taiwan:Gathering the pace of slow down
Taiwan is currently facing a serious slowdown in both external and domestic
demand. The slowdown in exports is becoming increasingly clear as the US economy
slows and the electronics sector stagnates. During the second quarter of 2001, the
slowdown in both the electronics and non-electronics sectors has accelerated. With
little prospect of short-term recovery in demand for electronic goods and with
demand forecasts still being lowered in some areas, there still remains a downside
risk.
Taiwan: Summary table of forecasts
1999
Real GDP (YoY, %)
Private Consumption
Govt. Consumption
Fixed Capital Formation
(Private Facility Investment)
Stock (Contribution)
Export
Import
CPI (YoY, %)
Current A/C Balance (bil. US$)
(to GDP, %)
Unemployment (%)
3 mths. CP Rate (%)
NT$ / US$
2000
5.4
5.4
-6.5
1.8
-0.7
-0.9
11.9
4.4
0.2
8.4
2.9
2.9
4.9
32.3
6.0
5.5
1.9
7.7
13.7
-1.1
17.3
14.9
1.3
8.9
2.9
3.0
4.9
31.2
2001
(F)
2.8
2.1
-2.3
-3.1
-8.1
0.5
-7.0
-11.5
0.2
11.6
3.9
4.2
4.2
33.8
2002
(F)
4.1
3.8
1.6
2.2
2.5
0.0
5.1
3.3
0.5
11.1
3.8
4.2
3.9
34.5
Source: Department of Statistics, Nomura Research Institute
Export falls down
YoY(%)
40
Contribution by Electronics
Contribution by Others
Export Total
30
20
10
0
-10
-20
Note:US$ nominal base
Source:Nomura Research Institute, from official statistics
20
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
May-01
Apr-01
Mar-01
Feb-01
Jan-01
Dec-00
Nov-00
Oct-00
Sep-00
Aug-00
Jul-00
-30
Domestic demand is even weaker. Sluggish overseas demand and a credit crunch
at home have led to a rapid deterioration in the outlook for so-called “traditional”
industries in Taiwan. This has been the main cause of unemployment. In addition,
export industries (such as electronics) that have been the pillars of the Taiwanese
economic growth are now experiencing negative wage growth. As a result of these
factors, private consumption growth in the first quarter of 2001 stood at 2.0% year
on year, which is much weaker than we had been forecasting and the lowest in
current statistics series. We are therefore lowering our forecast of real GDP growth
for 2001 to 2.8%. (This compares with 4.6% previously, allowing for a 0.5% contribution from fiscal stimulus.) We have revised down the contribution from virtually
all GDP components, but especially that of private consumption and exports. We
have also lowered our forecast of public demand to reflect the low level of budget
expenditure in the first quarter, even though the Legislative Yuan has passed a
supplementary budget designed to boost the economy. Similarly, we have lowered
our forecast of real GDP growth for 2002 to 4.1% (compared with 5.3% previously) to
reflect the fact that the weakness in domestic demand is likely to continue for some
time.
Inflation, the currency and monetary policy
We have lowered our forecast of consumer price inflation for 2001 to 0.2% (compared with 1.2% previously) to reflect the fact that the deflationary impact of weak
domestic demand is likely to offset the inflationary impact of a stubbornly high oil
price and a weaker currency. As far as the currency is concerned, we expect the
Central Bank of China would allow the Taiwanese dollar to depreciate gradually in
order to boost corporate earnings in nominal terms and ease some of the deflationary
pressure in the economy. We also expect monetary policy to be eased in line with the
accommodative stance adopted by the US Federal Reserve.
US - Taiwan interest rate gap and NT$ rate
12.0
34.5
Official Discount Rate
US FF Rate - Taiwan O/N call Rate (L)
NT$ / US$ (R)
10.0
34
8.0
33.5
％
6.0
33
4.0
32.5
2.0
32
0.0
31.5
Source:Nomura Research Institute, from Bloomberg data
21
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Jun-01
May-01
Apr-01
Mar-01
Feb-01
Jan-01
Dec-00
Nov-00
31
Oct-00
-2.0
However, boost effect to the real economy from a weaker currency and an accommodative monetary policy is likely to be limited. Since Taiwan is such a big player in
the global electronics industry , a weaker currency is unlikely to provide increase of
export volumes. Also, the banking sector’s mountaining non-performing loans suggest that, in spite of the government’s initiative to increase banks’ lending, it is
unlikely to induce them to oblige.
Incomes and employment as a constraint on consumer spending
Consumer spending growth in Taiwan is currently at a historical low. In the
following we shall examine the factors behind this in terms of incomes and employment. We shall consider these factors in terms of whether an industry is, relatively
speaking, in a good shape (e.g., electronics), a neutral situation (especially services)
or in a recession (e.g., traditional industries such as construction and light engineering).
First, employment. Employment is either growing more slowly or actually declining in all sectors of the economy for cyclical reasons, but especially in those that are
in a recession. During the last economic slowdown (1998-1999), employment in those
industries reached a trough of -4.2% year on year (in the fourth quarter of 1998).
During the current slowdown, however, this level has been exceeded in the first
quarter of 2001 (-4.8%). The same applies to industries in a neutral situation. The
trough in employment reached during the previous slowdown (-0.9%) has also been
exceeded during the first quarter of 2001 (-1.6%). Moreover, the fact that 57% of the
workforce is employed in such neutral industries is also probably one of the reasons
why unemployment this time is worse than it was in last time.
Employment growth, classified by business sentiment of each industry
(YoY, %)
6
Recession
Moderate
Good
4
2
0
-2
-4
Source:Nomura Research Institute, from official statistics
22
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
01/1Q
00/4Q
00/3Q
00/2Q
00/1Q
99/4Q
99/3Q
99/2Q
99/1Q
98/4Q
98/3Q
98/2Q
98/1Q
97/4Q
97/3Q
97/2Q
97/1Q
-6
For incomes are concerned, the biggest declines have been in those industries
that are in a good shape (e.g., electronics). The fact that some of wages are paid in
the form of stock distribution would suggest that the actual percentage decline in
income has been even bigger as a result of the recent stock market correction.
As a result,there is a considerable risk of losing one’s job if one works in an
industry in recession or neutral situation, while the biggest declines in income are
shown in industries with relatively good shape. This would suggest that employees
in most sectors, regardless of where those sectors are positioned, are under pressure
to reduce consumption. Although we have consistently pointed out the risk to private consumption from weak business in Taiwan’s traditional industries and a slump
in its electronics industry, the actual effect has been much greater than we expected.
Effect of unstable political situation on the economy
Taiwan’s unstable political situation has also had a negative impact on the economy
in terms of both confidence and actual growth. Public demand was a major negative
contributor (-1.4%) to year-on-year economic growth in the first quarter of 2001,
even though the government was aware of the need for fiscal stimulus. This would
appear to have been the result not only of the fact that spending on reconstruction
work following the September 1999 earthquake has nearly finished, but also of the
fact that the confrontation between the government and the opposition over the
construction of a new nuclear power station have resulted in the budget for fiscal
2001 not being passed until earlier this year. In particular, the 2001 budget is the
first based on a calendar year (previous fiscal years ran from July to the following
June), and delay in passing the budget left little time to plan its implementation
and exacerbated the confusion caused by the change.
Salary growth of employees, classified by business sentiment of
each industry
(YoY, %)
12
Recession
Moderate
Good
10
8
6
4
2
0
-2
-4
-6
-8
Source:Nomura Research Institute, from official statistics
23
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
01/1Q
00/4Q
00/3Q
00/2Q
00/1Q
99/4Q
99/3Q
99/2Q
99/1Q
98/4Q
98/3Q
98/2Q
98/1Q
97/4Q
97/3Q
97/2Q
97/1Q
-10
Confrontations between the government and the opposition brought the Legislative Yuan session to be expired on 7 June with a number of important bills pending.
This has had a negative effect on the real economy. Total amount of fiscal stimulus
proposed by the government in its supplementary budget bill (NT$80.0 billion) was
cut to NT$61.6 billion, and a number of conditions were attached that may further
reduce the amount that would be actually spent. Moreover, all the financial legislation before the Legislative Yuan (e.g., the Financial Holding Company Law and the
Financial Reconstruction Fund Law) had to be shelved.
Although some of financial legislations were passed in the special session at June
end , the next parliamentary election is to be held at the beginning of December,
and there is little prospect of relations between the two sides improving. The political situation has also become confused, since former president Lee Teng-hui has
resumed his political activities after returning from a visit to Japan in April, and
appears to be aiming to realign the political forces in Taiwan by seeking a rapprochement with President Chen Shui-bian.
There is therefore a risk that little progress will be made in the debate on the
remaining financial legislation and other bills related to the economy in next Legislative Yuan session. The process may have to be initiated again when parliament
with new representatives opens after the December election. This unfortunately
means that the current unstable political situation in Taiwan is likely to delay the
process of economic recovery.
Hiroyuki Nakai
Status of bills on economic matters, presented to Legislative Yuan
session ended on June 7
Passed in normal session ended June 7
○
○
○
Additional budget for compensation to 4th Nuclear Power
Plant contractors
Request to Control Yuan to clarify the responsibility of
Prime Minister and Minister of Economic Affairs on 4th
Nuclear Power Plant matters
Budget for fiscal stimulation (Deducted to NT$ 61.6 bln.
from original NT$ 80.0bln., with some additional conditions)
Passed in special session ended June 27
○ Financial Holding Company Act
○
Financial Restructuring Fund Act (Fund for buying Nonperforming Loans from local financial institutions)
○ Amendment for Business Tax Law
○ Amendment for Central Deposit Insurance Corporation Act
Expected to be passed in next session
○
Organization law for Financial Supervisory Commission
(Integration of supervisory functions from Central Bank,
MOF, Securities and Futures Commission)
Source:Nomura Research Institute, from media reports
24
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Hong Kong:Growth Forecasts lowered
First-quarter growth drops to 2.5%
The slowdown in the Hong Kong economy has become more marked. In the first
quarter of this year real GDP grew by only 2.5% year on year—significantly less
than the 6.9% recorded in the fourth quarter of last year. Although domestic demand has held up quite well, a sharp slowdown in export growth has led to a lower
rate of economic growth.
Hong Kong: Summary table of forecasts
Real GDP
(Contribution of domestic demands)
Private consumption
Government consumption
Gross domestic fixed capital formation
Machinery and equipment
Construction etc. *
Changes in inventories (contribution to GDP)
(Contribution of external demands)
Exports
Imports
Trade balance(US$ billion ）
Trade and invisible trade balance (US$ billion ）
(as of GDP, %)
Composite CPI
3-month interbank interest rate (period-average, %)
Best lending rate (period-average, %)
98
99
2000
-5.3
(-10.3)
-7.4
0.8
-7.6
-8.2
-6.8
-3.1
(5.0)
-4.0
-6.3
-10.9
-0.3
-0.2
2.8
8.43
9.94
3.1
(-5.1)
0.7
3.3
-17.5
-19.4
-15.3
0.5
(8.1)
3.9
-0.2
-6.0
8.5
5.4
-4.0
5.97
8.50
10.5
(9.3)
5.4
2.1
9.8
25.8
-7.3
3.2
(1.2)
16.7
16.7
-11.4
7.7
4.7
-3.7
6.25
9.22
2001
(F)
3.5
(2.9)
2.6
2.5
8.3
11.6
3.6
-1.1
(0.7)
4.8
4.6
-13.4
7.5
4.5
-0.4
3.91
7.24
（
YOY,％）
2002
(F)
4.8
(3.6)
3.1
2.5
5.4
6.5
3.8
0.1
(1.2)
5.6
5.3
-14.0
8.2
4.5
1.7
3.50
6.75
Note: * including real estate developer's margin, and transfer costs of land and buildings.
Source: Nomura Research Institute, from Hong Kong Census and Statistics Department.
Contribution to real GDP growth
（
YOY,%）
15
10
5
0
-5
Net exports
Change in stocks
Gross fixed capital formation
Government consumption
Private consumption
Real GDP
-10
-15
-20
96
97
98
99
2000
2001
Source: Nomura Research Institute, from Hong Kong Census and Statistics Department.
25
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
On the domestic demand front, consumer and business confidence (as reflected in
consumer spending and private construction investment) has improved as a result
of (1) the three interest rate cuts in the first quarter that took real interest rates
from 11.3% in December to 9.3% in March and (2) measures to boost the property
market (e.g., the government’s decision to reduce the amount of land it releases for
development and to ease some of the restrictions on property speculation). Private
capital investment also grew strongly (by 22.5% year on year) in the first quarter as
a result of strong productivity enhancement demand and the interest rate cuts.
However, there have been no more big inventory increases of the kind seen last year,
and inventories contributed -1.8% to economic growth in the first quarter.
In contrast to domestic demand, the contribution from external demand in the
first quarter was negative (-1.5%)—the first time this has happened since the fourth
quarter of 1997. This reflects (1) the fact that Hong Kong’s re-exports have grown
more slowly as China’s export growth has slowed and (2) the fact that domestic
export growth has declined by 12.8% as a result of slower growth in export markets
and the increase in the effective rate of the Hong Kong dollar that has occurred since
the second half of last year.
Slower export growth
One of the key factor determining the outlook for the Hong Kong economy is the
state of world economy. With world economic growth (especially in the United States)
expected to slow and prices for semiconductors and IT goods and components expected to decline, demand for re-exports from Hong Kong, which account for some
90% of the total exports, is expected to continue to weaken. Most of these re-exports
(61% as of 2000) originate in China and are destined for third countries and regions.
Re-export by country of origin
YOY,%）
（
35
China
25
Japan
Taiwan
15
5
-5
-15
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Oct-98
Jul-98
Apr-98
Jan-98
Oct-97
Jul-97
Apr-97
Jan-97
-25
Source: Nomura Research Institute, from Hong Kong Census and Statistics Department.
26
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
The second and third major sources of Hong Kong’s re-exports are Japan and Taiwan (with shares of 9.9% and 6.3%, respectively). Whereas China’s main destination for re-exports is the United States, the main destination for re-exports originating in Japan and Taiwan is China. This is because China imports capital goods from
Japan and Taiwan via Hong Kong, then processes and assembles them as finished
goods, which it exports to the United States—also via Hong Kong. As Taiwanese
electronic companies have accelerated to shift their production base to southern
China since the late 1990’s, Taiwan’s exports to China via Hong Kong have soared.
However, reflecting the decline in prices for semiconductors and IT goods and components from last year, re-exports from Taiwan sharply down by a year-on-year
8.3% in the first quarter of this year.
Domestic exports have also grown more slowly as a result not only of weaker
growth in export markets but also of the high effective rate of the Hong Kong dollar,
which is pegged to the US dollar.
Poor prospects for a recovery in property prices
Another important factor in determining the outlook for the Hong Kong economy
is asset (and especially property) prices, as these are a major determinant of consumer spending and private construction investment. Although there was a brief
pick-up in property transactions in February-March after the rate cut and the
government’s measures to stimulate the property market, this was offset by a sharp
correction in the stock market, which depressed any bullishness among potential
property purchasers as well as sharply reducing liquidity. The problem of “negative
equity” in the residential flats market remains unsolved. In addition, the recent
increase in the number of people purchasing residential property in neighboring
Shenzhen has only delayed any improvement in the balance of demand and supply
in Hong Kong’s own residential property market. There is therefore still no sign of a
sustained recovery in the Hong Kong property market.
Effective exchange rate index for HK dollar
(Nov83=100）
145
140
135
130
125
120
Mar-01
Sep-00
Mar-00
Sep-99
Mar-99
Sep-98
Mar-98
Sep-97
Mar-97
Sep-96
Mar-96
Sep-95
Mar-95
115
Source: Nomura Research Institute, from Hong Kong Census and Statistics Department.
27
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Nevertheless, there is little risk of a collapse in property prices. First, residential
property prices are already about half of their 1997 peak level. Second, there is room
for a further cut in interest rates in the second half of this year. Third, property
developers have been offering incentives to buyers (e.g., zero deposits).
Property prices
1989=100 ）
（
450
400
Residential Flats
Offices
350
300
250
200
150
100
50
90
91
92
93
94
95
96
97
98
99
00
01
Source: Nomura Research Institute, from Hong Kong Census and Statistics
Real interest rate is declining
（％）
11
US Prime rate
HK Prime rate
10
9
8
（％）
16
14
12
10
8
6
4
2
0
97
7
Real interest rate
98
99
00
01
Note: Real interest rate = HK Prime rate - CPI
Source: Nomura Research Institute, from Hong Kong Census and Statistics Department.
28
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Forecasts for 2001 and 2002 lowered
Given unfavorable factors both at home and abroad, we expect Hong Kong’s
economy to continue to slow until the middle of 2001, but to pick up in the second
half. This recovery is likely to be driven partly by an economic recovery in the
United States and partly by an increase in the number of tourists, following the
decision by China’s State Tourism Bureau to raise its daily limit on the number of
tourists from the mainland from 1,500 to 2,000 from September 2001. This is expected to provide a not insignificant boost to Hong Kong’s economy as tourists from
the mainland account for 30% of Hong Kong’s revenues from tourism.
We have lowered our forecast of real GDP growth for 2001 from 4.6% to 3.5% to
reflect the unexpectedly sharp slowdown in the economy, but are leaving our forecast for 2001 unchanged at 4.8%. However, we are lowering our forecast of Hong
Kong’s current account balance for both 2001 and 2002 from a surplus of $8.8 billion
to $7.5 billion for 2001 and from $9.1 billion to $8.2 billion for 2002.
We are also lowering our forecast of Hong Kong’s consumer price inflation for
2001 from +0.3% to -0.3% to reflect the current slowdown in both domestic and
external demand. However, we are sticking to our forecast for 2002 as we expect
consumer price inflation to start to rise again in that year.
Suiyo Li
29
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Singapore : Economy Faces Downward Pressure
Growth forecasts lowered
For a number of reasons the negative forces acting on the Singapore economy are
increasing. We are lowering our growth forecasts for 2001 (from 5.4% to 3.0%) and
2002 (from 6.3% to 5.2%) for the following reasons in spite of the fact that NRI expects
the US economy to begin a gentle recovery in the second half of 2001.
First, export growth is slowing. In April, exports declined 2.3% year on year in
US dollar terms (worse than the 0.3% decline recorded in March) as the US economy
and demand for electronics goods and components slowed. In April, local exports
declined by 4.0% (compared with a decline of 3.6% in March), with the biggest contribution coming from electronic goods and components. Although NRI expects demand for electronic goods and components to begin to recover in 2002, the recovery
is likely to be a slow one. Given that electronic goods and components are one of
Singapore’s major exports, the negative impact on the Singapore economy is likely
to continue for the foreseeable future.
The second reason the negative forces acting on the Singapore economy are increasing is that consumption is slowing. Worries about future pay cuts and job
security are affecting consumer confidence. At the same time, the number of tourists (especially from Indonesia) is falling. As a result, consumption of services is
declining, and this has had a negative effect on private consumption. In addition,
Singapore’s market interest rates have trended sideways since March—contrary to
our expectation that they would decline in line with US rates. We are therefore
forecasting that rates will be 50 basis points higher than our previous forecast and
estimate that this will depress real private consumption by 0.9 percentage points.
The third reason is that we are lowering our forecast for private capital investment. Singapore’s Economic Development Board has announced that its investment
target for 2001 is S$9.0 billion—less than the figure of S$9.2 billion for 2000. Con-
Singapore: Summary table of forecasts
2000
Real GDP
Private Consumption
Government Consumption
Gross Fixed Capital Formation
Change in Stocks (contribution)
(Contribution of Domestic Demand)
(Contribution of External Demand)
CPI
Current Account (US$bn)
(as of GDP, %)
SGD/US$
9.9
9.4
13.7
5.9
1.8
9.0
0.9
1.4
21.8
23.6
1.73
Source: Department of Statistics, Nomura Research Institute
30
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
2001
(f)
3.0
5.5
4.7
4.0
-0.8
3.2
-0.2
2.0
18.1
19.4
1.79
(YoY)
2002
(f)
5.2
6.5
5.0
6.6
0.1
5.6
-0.3
2.1
15.9
15.9
1.79
trary to our expectation that increased capital investment in the petrochemical and
biotech industries would offset any decline in investment in the electronics industry,
actual capital investment in “other industries” (including electronics) has fallen
sharply.
Although export growth has slowed, a parallel decline in imports suggests that
Singapore’s trade surplus is likely to increase slightly in 2001 to $11.9 billion from
$11.4 billion in 2000. In 2002 we expect the surplus to decline slightly to $9.8 billion
as imports recover. Our forecast for Singapore’s current account is a surplus of
$18.1 billion in 2001 and of $15.9 billion in 2002. The reason we expect the current
account surplus to decline in 2001 from its level in 2000 is that the decline in income
from invisibles such as tourism is likely to offset the increase in the trade surplus.
Electronics pushes down exports
2000
3Q
25.2
19.8
7.4
6.8
1.7
4.0
33.2
Total exports
Domestic exports
Electronics
Mineral fuels
Chemicals
Others
Re-exports
2001
1Q
7.3
3.2
-2.0
2.8
0.5
1.8
13.1
4Q
14.7
7.6
-1.4
6.0
1.1
1.8
25.5
（
％）
2001
April
-2.3
-4.0
-5.6
1.7
0.3
-0.4
0.0
Note:(1)All figures are calculated using figures in USD;(2)figures of "Total Export", "Domestic
exports" and "Re export" are growth rate in YOY basis;(3)figures of respective item are contribution rate from the previous year.
Source:TDB
Growth rate by sector
Travel
receipts
97
98
99
2000
2000 ３Q
４Q
2001 1Q
Number of
arrivals
-10.5
-12.9
7.0
13.0
11.6
10.9
-4.5
Real retail
sales
-1.3
-13.3
11.5
10.5
10.9
7.6
1.8
Note:Data are based on YOY.
Source:EDB, MAS
31
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
0.2
-6.0
16.2
25.3
23.2
21.9
22.1
Nominal retail
sales
2.9
-14.3
12.4
23.7
20.7
13.9
7.6
Rising import costs as a result of a weaker Singapore dollar lead us to expect
slightly higher rates of inflation for 2001 (2.0%) and 2002 (2.1%) than we were
previously forecasting.
MAS to maintain its foreign exchange rate policy
There is no market consensus on what the Monetary Authority of Singapore’s
foreign exchange rate policy is. On 27 July 2000 MAS announced that its policy was
to allow the Singapore dollar to appreciate gradually against a basket of currencies.
However, the severe slowdown in exports (especially of electronic goods and equipment) has led to speculation that MAS may change its stance to one of using the
exchange rate as a means of making the country’s exports more competitive (i.e.,
that it may countenance a weaker currency). This view has been reinforced by the
fact that in May the Singapore dollar reached its lowest level against the US dollar
($1 = S$1.82) since July 1990.
MAS is due to publish its annual report in July, when it is also expected to comment on its foreign exchange rate policy. Given the extent of the US economic slowdown and the fall in demand for electronic goods and products, any attempt to use
currency depreciation as a means of boosting export volumes is unlikely to be successful. We therefore believe MAS is likely to stick to its existing foreign exchange
rate policy.
Investment into Singapore declines in 2001
(S$ bn)
10.0
8.0
（S$9.2bn
Others
（S$7.8bn) （S$8.0bn)
Chemicals
&
Engineering
6.0
4.0
Electronics
2.0
0.0
98
99
2000
Note:(1)Data include Singaporean enterprises, whose investment amounts to S$2.6bn in
98, S$1.8bn in 99, and S$2.0bn in 2000;(2)investment for biotechnology in 2000 amounts
toS$0.8bn in 2000;(3)Estimated amount in 2001 is S$9.0bn.
Source:EDB
32
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Our view that MAS has stuck to this policy so far appears to be borne out by
reports that it intervened to support the Singapore dollar on 9 May of this year.
Between January and May of this year the Singapore dollar (in effective exchange
rate terms calculated by NRI) was in a steady downtrend, and the rate on 9 May
(101.2) approached the level recorded on 27 July 2000 when MAS announced that its
policy was to allow the Singapore dollar to appreciate slowly against a basket of
currencies. Since 9 May, the Singapore dollar has been rising. As NRI is forecasting
that the yen will weaken and the euro will strengthen slowly this year and next, we
expect the Singapore dollar will trade steadily against the US dollar. Our forecast is
an average rate of S$1.79 in 2001 and of S$1.79 in 2002.
Tetsuji Sano
MAS continues gradual appreciation policy
（January 99=100）
MAS might intervene in markets
（
9th May 2001:101.2）
104
103
102
101
100
99
98
97
96
95
Appreciation
MAS announced the gradual appreciation policy
（27th July 2000:101.0）
99
2000
2001
Note:(1)Nominal effective foreign exchange rate based on trade data in 99;(2)the latest index
is 102.4 on 15th June 2001.
Source:MAS, Nomura Research Institute
33
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Malaysia : Expectation of Ringgit Devaluation
Remains in the Market
Growth forecasts lowered
In the first quarter of 2001 Malaysia’s real GDP growth slowed to 3.2% from 6.3%
in the fourth quarter of 2000. The government has kept its forecast of 5.0%-6.0% for
2001, but will seem to be forced to do so eventually. We are lowering our forecast for
2001 from 5.4% to 3.0% and for 2002 from 6.6% to 5.7%. Although we still believe
that Malaysia’s economy will recover by 2002 (assuming that the US economy recovers in 2002), we have lowered our forecasts for the following three reasons.
First, we have lowered our forecast for exports. Although we expect the demand
for electronics goods and components to begin to recover in 2002, the process is likely
to be a slow one. As electronics goods and equipment account for a significant share
of Malaysia’s exports, export growth is likely to remain under pressure for the foreseeable future. However, the fact that import growth has slowed sharply as a result
of a sharp slowdown in domestic demand means that we are actually raising our
forecast for the contribution to GDP growth from net exports for 2001 and 2002.
Singapore: Summary table of forecasts
2000
Real GDP
Private Consumption
Government Consumption
Gross Fixed Capital Formation
Change in Stocks (contribution)
(Contribution of Domestic Demand)
(Contribution of External Demand)
Exports
Imports
CPI
Current Account (US$ bn)
(as of GDP, %)
MYR/$
8.3
12.2
1.2
24.1
1.0
13.0
-4.8
16.0
24.1
1.6
8.4
9.4
3.80
2001
(f)
3.0
3.3
10.9
5.6
-1.2
3.3
-0.3
3.3
3.9
1.4
8.0
8.5
3.80
(YoY)
2002
(f)
5.7
3.5
10.0
9.7
0.3
6.2
-0.4
5.9
6.9
1.5
7.5
7.4
3.80
Source: Department of Statistics, Nomura Research Institute
Electronics pushes down exports
2000
Total export
(YoY, %)
Electronics
Others
98.3
16.3
10.7
5.6
(US$ bn, %)
2001
1Q
22.7
2.0
2.5
-0.5
April
7.2
-5.0
-6.3
1.3
Note:(1)All data are converted to US$ from Malaysian Ringgit;(2)figures for items are a
contribution rate.
Source:Department of Statistics
34
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Second, we have lowered our forecast for private consumption. According to
Malaysia’s statistics for real GDP in the first quarter of 2001, private consumption
has slowed to a year-on-year increase of 4.1% from the 9.9% recorded in the fourth
quarter of 2000. The dampening effect on growth of the sharp slowdown in exports is
leading to a growing sense of job insecurity in the household sector. The fact that
market interest rates in Malaysia have not fallen in spite of the decline in US interest rates has also had a negative effect on consumption. With Malaysia’s central
bank apparently convinced that interest rates are low enough, there is no prospect
of a boost to consumption from further rate cuts.
Third, we have lowered our forecast for capital investment. As export growth is
slowing more rapidly than when we published our last forecast, we expect to see
investment cuts in the second half of 2001.
Malaysia’s current account surplus should remain in surplus in 2001 and 2002.
The rate at which the surplus is shrinking should slow this year as imports slow in
line with exports, and we expect it to decline from $8.4 billion in 2000 to $8.0 billion
in 2001and $7.5 billion in 2002. With import growth slowing and import costs stabilized by a fixed exchange rate, there is little risk of inflation. Our forecast of consumer price inflation is 1.4% in 2001 and 1.5% in 2002.
Continuing risk of a ringgit devaluation
Malaysia’s foreign exchange reserves are still declining after reaching a peak of
$34.5 billion in April 2000. As of end-May 2001 they stood at $25.9 billion. If this
trend continues, expectations that the central bank may abandon the country’s
dollar peg will increase. NRI’s view, however, is that this is unlikely to happen
because (1) the current account is still in surplus, (2) we do not envisage a largescale depreciation of Asian currencies (including the yen), and (3) the Malaysian
government has signed a currency swap agreement with Japan.
International reserves declining
(US$ bn)
35
（April : US$ bn34.5）
(May : US$25.9)
34
33
32
31
30
29
28
27
26
25
1999
2000
Source:Bank Negara Malaysia
35
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
2001
However, this situation could change, and a devaluation of the ringgit cannot be
ruled out. The current outflow of capital could also be accelerated by political factors
in a flight to quality.
In this context, the resignation of the Finance Minister, Daim Zainuddin, is interesting. On 19 April 2001 the Prime Minister, Dr. Mahathir, announced that Daim
would be recuperating for two months. However, Dr. Mahathir announced that Mr.
Daim was resigning from all his political posts, including that of Minister of Finance on 1 June. Many believe that there was a political disagreement between the
Prime Minister and the Finance Minister and that the conflict between the two
could undermine the Prime Minister’s authority. Many companies are reported to
have been protected by the government’s cronyism, and, if Dr. Mahathir’s authority
was undermined, investors might disinvest from them.
If Malaysia’s foreign exchange reserves continue to decline, the Malaysian government will have a number of policy options. Assuming Malaysia maintains the
same level of regulation on capital transactions as at present, there are probably
three foreign exchange policy options open to it: (1) to peg the ringgit to the dollar at
a lower rate; (2) to adopt a fluctuation band; or (3) to adopt a floating rate system.
If the government chose the first option, there is a risk that investors might lose
confidence in the central bank, which until now has announced to maintain the peg.
Those who have no confidence might sell Malaysia Ringgit furthermore. Alternatively, if the government chose the second option, the central bank might be forced
to widen the band and eventually devalue the ringgit by more than it had originally
intended.
Malaysian ringgit faces less export competitiveness
110
（Jun97=100）
100
90
80
70
60
Indonesian rupiah
Malaysian ringgit
Philippine peso
Singapore dollar
Thai baht
50
40
appreciation
30
Note:All data are based on monthly real effective exchange rate.
Source:JP Morgan
36
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
2001
2000
99
98
97
20
If Malaysia makes any change to its foreign exchange policy (whether it be to peg
the ringgit to the dollar at a lower rate or to adopt a fluctuation band), it runs the
risk of eventually having to adopt the third option of moving to a floating rate system. However, such a system could create a cycle of depreciation whereby speculation that the currency will weaken discourages capital inflows and encourages capital outflows, thereby weakening the currency further.
Alternatively, Malaysia might decide to maintain its peg at its current level and
discourage capital outflows by tightening the capital controls it. However, such action would dissuade foreign investors to pour their money into Malaysia again and
decelerating capital inflow might impede the country’s economic growth in the medium to long term.
Tetsuji Sano
37
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Indonesia:MPR to reconvene on August 1 to
impeach president
Indonesia has taken a further step towards deposing its president, Abdurrahman
Wahid. On May30, the 500-seat House of Representatives (DPR) voted by 365 to 4 to
hold a special session of the People’s Consultative Assembly (MPR) to impeach the
president. While the military faction (TNI), which holds 38 seats, abstained, the
president’s own party, the National Awakening Party (PKB), refused to take part.
Several thousand of the president’s supporters tried to enter the Assembly, but were
stopped by police firing blanks.
When DPR met on 1 February and 30 April, it voted by a majority for two separate memoranda of understanding censuring the president, thereby bringing the
impeachment process nearer to completion. If a majority vote is in favor at the
special session on 1 August, the president will be deposed and his place taken by the
vice president, Megawati Sukarnoputri, in accordance with the constitution.
The president has only two options left if he wants to avoid this. He can either
declare a state of emergency, dissolve parliament and call a general election or reach
a compromise by using his supporters in East Java to try to force his opponents to
compromise. On 1 June the president dismissed his Coordinating Minister for Political, Social and Security Affairs, Susilo Bambang Yudhoyono, who was opposed to
the idea of declaring a state of emergency, and replaced him with a former general
and Transport and Communications Minister, Agum Gumelar. As the new Coordinating Minister has also indicated that he is opposed to this, the first option is
becoming an increasingly remote possibility. At the same time, the fact that on 8
June the president told a four-man ministerial team that included Coordinating
Minister Agum to try to reach a compromise with the opposition suggests that talks
between the two sides may gather momentum in the run-up to the special session on
1 August.
However, the fact that most of the main parties in the MPR other than the
president’s own party (the National Awakening Party) and the military faction agree
Indonesia: Summary table of forecasts
Real GDP
Private Consumption
Gov. Consumption
Capital Formation
Export
Import
Contribution by domestic
demand
Contribution by foreign
demand
CPI
Current Account (US$bil.)
(% GDP)
Rupiah/US$
（YOY, ％)
2001
2002
(F)
(F)
3.8
5.2
3.9
4.0
5.7
1.5
8.2
6.1
5.9
5.7
18.3
8.3
98
99
-13.1
-6.2
-15.4
-33.0
11.2
-5.3
0.8
4.6
0.7
-19.4
-31.6
-40.7
2000
(E)
4.8
3.6
6.5
17.9
16.1
18.2
-18.0
-2.1
4.6
6.5
5.8
4.8
3.0
0.1
-2.7
-0.6
58.4
4.1
4.6
10,073
20.5
5.8
4.0
7,800
3.7
7.8
5.4
8,346
8.9
3.2
2.2
9,250
4.7
2.7
1.5
8,690
Source:Nomura Research Institute
38
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
that he should be deposed leads us to stick to our view that impeachment is the most
likely scenario. Although there is no denying that the president’s supporters rioted
in East Java or that a repetition of the situation that occurred on 29 April, when
several tens of thousands of his supporters from East Java staged rallies in Jakarta,
might lead to increased political tension, we think that this is unlikely to determine
the political and economic situation in the country as a whole (unless rioting spreads
to the capital) and doubt whether the president has decided to go as far as supporting rioting in the capital.
Financial markets appear to have reacted favorably to the events that are leading
to the president’s removal. Both the rupiah and the stock market rose when it was
announced that the special session of the MPR would take place, and we expect the
foreign exchange and stock markets to continue to remain sensitive to political developments in the run-up to the special session.
Even if Megawati Sukarnoputri does become president in August, it would be
unrealistic to expect to see a completely normal political situation in Indonesia. This
is because her party, the Democratic Party of Struggle (PDI-P), does not have a
majority in the MPR even though it is the biggest party. However, the political
situation in Indonesia would undoubtedly be more stable if she became president,
and we would expect the rupiah, which until now has reacted mainly to political
factors, to head towards a rate of $1 = Rp10,000 by the end of 2001.
Impeachment procedure for President Abdurrahman Wahid
April30
DPR approved the second memorandum
May30
DPR decided to call the MPR special session to
impeach the president
August1
Special MPR session is expected to be held to
discuss the impeachment of the president,in
which the President is required to make an
accountability speech
During August
MPR decides whether to impeach the President
(majority votes are required to impeach)
Notes: President Wahid insists that presidents are required by the constitution to make the
accountability speech only at the end of his term , although he intends to attend the MPR
special session if held.
Source: Nomura Research Institute
39
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Macroeconomic situation still favorable: decoupling of politics and
economics to continue
The unstable political situation in Indonesia has led some observers to take a
pessimistic view of the economic outlook for the country, and, generally speaking, it
is true to say that political instability is bad for a country’s economy. Nor is there
any doubt that Indonesia faces serious difficulties in many areas, including the
question how the Indonesian Bank Restructuring Agency (IBRA) should dispose of
the assets it is holding; what the public and private sectors should do about their
foreign debt; and how best to devolve fiscal powers.
However, Indonesia has enjoyed a rapid recovery in domestic demand (albeit later
than its neighbors and less rapid this year) that is still holding up well.
According to Indonesia’s national income statistics, investment grew by 10.2%
year on year in the first quarter of this year. The biggest difference from the situation a year ago is the progress that has been achieved in the debt-restructuring
talks between the banks and the private sector. The talks are on course to removing
the biggest obstacle to economic recovery since the Asian currency crisis began.
Small and medium-sized businesses also appear to be investing firmly, and recent
imports of capital goods indicate that investment remains at a very high level.
With private-sector wages likely (according to interviews we had with a number
of companies) to have risen 20%-30% in 2000 and to rise by as much again in 2001
as a result of higher minimum wages and pay rises in the public sector, private
consumption is still buoyant. Consumer prices are expected to rise by 8.9% in 2001
as a result of a 30% average increase in petrol prices on 16 June and big increases in
electricity and telephone charges in the near future—all in response to the budget
deficit. In spite of this, however, real incomes should rise. We therefore believe that
the recovery in domestic demand driven by buoyant private consumption and investment can be sustained for the foreseeable future, in spite of the increasing political uncertainty, unless the security situation deteriorates seriously.
Growth in domestic demand in ASEAN5
（YOY , ％）
30.0
20.0
10.0
0.0
-10.0
Thailand
Indonesia
Malaysia
Philippines
Singapore
-20.0
-30.0
Source:Nomura Research Institute from official statistics
40
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
01Q1
00Q4
00Q3
00Q2
00Q1
99Q4
99Q3
99Q2
99Q1
98Q4
98Q3
98Q2
98Q1
97Q4
97Q3
97Q2
97Q1
-40.0
External demand, on the other hand, is increasingly subject to the slowdown in
the US economy. Although electronic goods and equipment account for only a small
proportion of Indonesia’s exports and it is therefore less vulnerable to worsening
external factors than its neighbors, it cannot escape their impact altogether. To
reflect this, we have lowered our forecast of real GDP for 2001 from 4.0% to 3.8%.
Our forecast of 5.2% real GDP growth for 2002 remains unchanged.
Tomo Kinoshita
Indonesian imports
（3MMA , YOY ,％）
120.0
100.0
Overall imports
80.0
Capital goods imports
60.0
40.0
20.0
0.0
-20.0
-40.0
-60.0
Aug-00
Sep-00
Oct-00
Jun-00
Jul-00
Apr-00
May-00
Feb-00
Mar-00
Dec-99
Jan-00
Sep-99
Oct-99
Nov-99
Aug-99
Jul-99
May-99
Jun-99
Mar-99
Apr-99
Jan-99
Feb-99
-80.0
Source:Nomura Research Institute from official statistics
Indonesian GDP growth by demand items
2000
1Q
2.5
2Q
3.3
3Q
4.0
(YOY,%)
2001
4Q
1Q
4.7
4.8
Gov.Consumption
2.9
0.3
11.7
12.1
6.0
Capital Formation
13.1
20.7
22.3
15.8
10.2
Increase in inventory
(Contribution to GDP growth)
-2.9
-5.4
-2.8
3.1
1.9
Exports
15.1
21.2
14.1
14.2
11.7
Imports
5.0
3.9
20.1
44.2
34.1
Private Consumption
Source: Nomura Research Institute from official statistics
41
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Philippines:Philippine politics start to settle down
The Philippines has taken an important step towards political stability. The Commission on Elections (Comelec) announced that the People Power Coalition (PPC)
led by President Gloria Macapagal-Arroyo won eight out of the 13 seats up for reelection at the mid-term election to the Senate held on 14 May. The announcement
of the President that the PPC had the support of six of the 11 senators up for reelection indicates that she can now count on the support of a majority in the Senate.
Arroyo’s supporters also appear to have a majority in the House of Representatives.
The victory of the Arroyo camp in the election, which was very much a vote of
confidence in her government, has removed the biggest obstacle to political stability
The Philippines: summary table of forecasts
98
99
（YOY, ％ )
2001 2002
(F)
(F)
3.3
3.9
4.0
4.0
0.8
0.7
0.9
6.0
Real GDP
Private Consumption
Gov. Consumption
Capital Formation
External Demand
(Contribution to
-0.6
3.4
-1.9
-11.2
3.4
2.6
6.7
-2.3
2000
(F)
4.0
3.5
-1.1
0.0
-1.6
3.0
5.3
-1.1
0.0
Real GNP
Net Factor Income
from Abroad
CPI
Current Account (US$bil.)
(% GDP)
Peso/US$
0.4
3.7
4.5
3.8
4.0
23.9
10.1
12.7
10.6
5.4
9.7
1.3
2.0
40.9
6.7
7.2
9.4
39.1
4.3
9.3
12.5
44.2
6.5
6.6
8.9
50.5
4.6
5.4
6.5
50.5
Source:Nomura Research Institute, official statistics
Results of the Senate election on May 14 ,2001
Elected candidates
Votes( '000)
Affiliation
Former positions
De Castro,Nori L.
16,154
Independent Newscaster
De Castro,Nori L.
11,658
PPC
Incumbent
OsmenaⅢ,Sergio D
11,529
PPC
Incumbent
Drilon,Franklin M.
11,198
PPC
Incumbent
Magsaysay,Ramon Jr.B.
11,155
PPC
Incumbent
Arroyo,Joker P.
11,129
PPC
Former Congressman
Villar,Manuel Jr.B.
11,050
PPC
Former Soeaker of the House
Pangilinan,Roberto M.
10,855
PPC
TV caster
Angara,Edgardo J.
10,752
PnM
Former Executive Secretary
Lacson,Panfilo M.
10,580
PnM
Former National Police Chief
Ejercito Maria Luisa P.
10,457
PnM
Former first lady
Honasan,Gregorio B.
10,356
PnM
Incumbent
Recto,Ralph G.
10,355
PPC
Former Congressman
Notes:PPC stands for “Peoples Power Coalition” where as PnM represents “Puwersa ng
Masa”. Although Mr.De Castro is independent ,he was supported by PnM. Preliminary results.
Source: Nomura Research Institute from various sources
42
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
in the country. Business confidence, which declined after its peak when the administration changed in January, is on the rise again. The passing of the Power Sector
Reform Bill in June is also likely to boost confidence in the government’s ability to
implement its policies. The economy is also enjoying a recovery in confidence following the results of the mid-term election.
Although the recent kidnapping and murder of foreign tourists in Palawan by the
extremist Islamic group Abu Sayaf have had a negative effect on potential foreign
investment in the Philippines, President Arroyo has started to change her consistently hard line on this issue, and some sort of agreement seems likely. On the one
hand, the government’s negotiations with the Moro Islamic Liberation Front (MILF),
the most powerful militant group, are making progress, while, on the other, Vice
President Guingona is sticking to his commitment to develop Mindanao. Therefore
although the security situation has worsened in the short term, it is likely to improve in the medium term.
External factors worsen markedly in the short term
Just because the political situation in the Philippines has improved does not necessarily mean that all the country’s problems are solved. Export growth is slowing
faster than expected as a result of the inventory adjustment that has accompanied
the slowdown in demand for IT goods and equipment in the United States. In US
dollar terms, year-on-year growth in exports in the first quarter of this year declined
by 0.5% and fell by a record 15.8% in April. The sharp slowdown in exports in April
reflects a 28.0% fall in exports of electronic goods and components. Electronic components such as semiconductors and hard disks account for a large share of exports
from the Philippines. It means that the country’s exports probably face a greater
challenge than those in Malaysia.
Marchandise trade
（YOY,％）
50.0
（mn$）
Trade balance（Right axis）
Export
Import
1,500
40.0
1,200
30.0
900
20.0
600
10.0
300
0.0
0
-300
-20.0
-600
-30.0
-900
-40.0
-1,200
-50.0
-1,500
Jan-95
Apr-95
Jul-95
Oct-95
Jan-96
Apr-96
Jul-96
Oct-96
Jan-97
Apr-97
Jul-97
Oct-97
Jan-98
Apr-98
Jul-98
Oct-98
Jan-99
Apr-99
Jul-99
Oct-99
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
-10.0
Source:Nomura Research Institute, official statistics
43
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
We expect Asian electronic exports, including those from the Philippines, to bottom in the third and fourth quarters of this year. However, they are likely to remain
at a lower level than last year for the rest of this year, and we are forecasting a yearon-year decline of 8.5% for 2001 as a whole.
Electronics exports from the Philippines are thought to have an import content of
at least 80% . This suggests means that imports can be expected to slow in line with
exports. We therefore expect the Philippines’ current account to remain in surplus
at about 8.9% of GDP.
Growth forecasts lowered
The first quarter of 2001 probably marked a turning point for the Philippine
economy. At the beginning of the quarter, the economy was losing momentum rapidly as a result of the slowdown in the United States and negative factors (such as a
weak peso, high interest rates and falling share prices) marking the end of the
Estrada government. Since the change of government on 20 January, however, interest rates have gradually been lowered, and consumer confidence has improved
considerably.
Real GDP growth in the first quarter of 2001 slowed to 2.5% year on year (-0.5%
quarter on quarter), reflecting the existence of two forces, one of which is acting to
slow the economy and another acting to boost it. An analysis of demand components
shows that it was fixed capital formation and exports that acted to slow the economy,
the former declining by 5.7% year on year and the contribution from the latter
declining by 3.5%. Although the decline in fixed capital formation was also the result of a decline in investment in electronics plant and equipment, another major
factor was the fact that companies became cautious about investing when interest
rates were expected to start falling.
Exports by major items in 2000 (Total US$38bn)
Micro Circuits
8%
Others
39.9%
Semiconductors
31.1%
Input-Output
peripherals
8.7%
Other electronic
goods
9.4%
Source:Nomura Research Institute, official statistics
44
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
From the second half of his year, the outlook should improve. First, the political
stability achieved as a result of the mid-term Senate election in the second quarter
has improved the outlook for private consumption. Second, exports should begin to
pick up in the third and fourth quarters, and investment should receive a gradual
boost from lower interest rates and increased confidence. We expect the economy to
continue to recover during the rest of this year. We are lowering our growth forecast
for 2001 from 3.6% to 3.1% to reflect our expectation that demand for electronic
goods and services will now recover more slowly than our original forecast. For 2002
we are forecasting growth of 3.9% to reflect (1) the shortage of semiconductors expected in the fourth quarter of that year and (2) the growth in exports of electronic
goods and equipment and the pick-up in investment expected as a result.
The peso is currently edging lower against the dollar—partly as a result of the
kidnappings by Abu Sayaf. However, we expect the rate to head towards $1 = P48 by
the end of this year, reflecting (1) the fact that the current account is expected to
remain in surplus; (2) our assessment that the kind of capital outflows seen during
the closing weeks of the Estrada government should decline as the political situation
stabilizes; and (3) our expectation that the government is expected to issue foreigncurrency bonds to fund the budget deficit.
Tomo Kinoshita
Business confidence index
150.0
Inauguration of President Arroyo
130.0
110.0
Revelation of
President's scandal
90.0
70.0
50.0
Source: Philippine Business World
45
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
3-Apr-01
3-May-01
24-May-01
29-Nov-00
28-Dec-00
31-Jan-01
1-Mar-01
28-Feb-00
4-Apr-00
5-May-00
29-May-00
30-Jun-00
31-Jul-00
7-Sep-00
17-Oct-00
3-Nov-00
10.0
20-Jul-99
14-Aug-99
27-Sep-99
26-Oct-99
26-Nov-99
28-Dec-99
28-Jan-00
30.0
Present Situation Index
Future Expectations Index
Business Confidence Index
Thailand : Economic Situation Continues to
Worsen
Growth forecasts lowered
The economic outlook for Thailand is worsening, and we are lowering our growth
forecast for 2001 from 3.1% to 1.2%. Although we are still assuming that the Thai
economy will stage a gradual export-led recovery in the course of 2002 on the back of
a gradual recovery by the US economy in the second half of 2001, we have lowered
our growth forecast for 2002 from 4.5% to 3.3% to reflect the powerful negative
forces at work.
Our first reason for lowering our forecast is the unexpectedly severe contraction
in export growth. In April, goods exports were down 8.7% year on year in volume
terms—an even sharper slowdown than the 3.5% decline recorded in the first quarter. Although we are still assuming that exports will begin to recover gradually in
the second half, we are lowering our growth forecasts for both 2001 and 2002. The
high (64%) proportion of real GDP accounted for by exports of goods and services in
2000 indicates that, if export growth slows, the economic outlook will worsen. The
slowdown in exports will also have a negative knock-on effect on inventory and
capital investment. In addition, companies are expected to redouble their restructuring efforts, and the resulting downward pressure on incomes will also lead to a
slowdown in private consumption. However, we are raising our forecast for the contribution of net exports to the real GDP growth in 2001 (from -0.4% to +0.3%) to
reflect the fact that, even though exports are faltering, the import volumes is decreasing as a result of weaker domestic demand.
Thailand: Summary table of forecasts
2000
Real GDP
Private Consumption
Government Consumption
Gross Fixed Capital Formation
Change in Stocks (contribution)
(Contribution of Domestic Demand)
(Contribution of External Demand)
Exports
Imports
CPI
Current Account (US$bn)
(as of GDP, %)
THB/$
4.3
4.5
7.4
5.7
1.5
5.7
0.5
15.4
20.4
1.6
9.2
7.6
40.2
2001
(f)
1.2
2.2
8.4
-2.0
-0.9
0.8
0.3
1.0
0.6
2.3
7.4
6.5
43.5
(YOY,%)
2002
(f)
3.3
3.5
8.2
2.3
0.2
3.4
-0.2
5.1
7.3
2.6
6.9
5.8
45.0
Note:Domestic and external contributions do not necessarily add to real GDP growth rate
due to statistical discrepancy.
Source:NESDB, Bank of Thailand, Nomura Research Institute
46
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Our second reason for lowering our growth forecast for 2002 is the likely impact of
higher interest rates. On 8 June the Bank of Thailand raised the official interest
rate (the 14-day repo rate) from 1.5% to 2.5%. Although the Prime Minister, Thaksin
Shinawatra, has made it clear that he disapproves of the increase in lending rates,
higher market interest rates are likely to mean higher costs for those seeking to
borrow money in a direct finance market. This is likely to prove a major disincentive to investment. Although the Prime Minister thinks that the rise in interest
rates will lead to a recovery in consumption via an increase in household interest
income, it may simply produce a higher savings rate. In any case, the fact that the
government intends to raise direct taxes may mean that the after-tax increase in
interest income may not be that significant.
Export volume declining rapidy
(YOY, %)
Export price
Export volume
Export value
40
30
20
10
0
-10
3Q
4Q
2001Q
2Q
3Q
4Q
20011Q
April
3Q
4Q
20001Q
2Q
3Q
4Q
20011Q
April
2Q
991Q
4Q
3Q
2Q
981Q
4Q
3Q
2Q
971Q
-20
Import price remains high
(YOY, %)
2Q
991Q
4Q
2Q
981Q
4Q
3Q
2Q
971Q
3Q
Import price
Import volume
Import value
50
40
30
20
10
0
-10
-20
-30
-40
-50
Note:Prices and values are in terms of US dollars.
Source:Bank of Thailand
47
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Although the economy is slowing, inflationary pressures continue because of the
effect of a weaker baht on import costs. In addition, we estimate that the increase in
the tax on commodities such as cigarettes and alcohol that came into effect on 28
March 2001 will raise consumer prices by 0.4 percentage points a year. We are
raising our forecast of consumer price inflation from 1.2% to 2.3% for 2001 and from
1.3% to 2.6% for 2002 to allow for higher inflation. The core inflation rate (consumer
inflation excluding food and fuel), which is a key determinant of monetary policy,
rose only a modest 1.2% during January-May 2001. The Bank of Thailand’s target
for core inflation in 2001 is 1.5%-2.0%, and we expect the actual rate to be within
this range. We expect the current account balance to be more or less in line with our
previous forecast as imports slow at the same time as exports, thereby preventing a
further deterioration in the balance.
Stimulative fiscal policy to continue
The government has declared its intention to continue its stimulative fiscal policy.
Expenditure in fiscal 2002 is budgeted to increase by 12.4% to Baht 1,023 billion,
while a deficit of Baht 200 billion is expected—roughly twice as much as in fiscal
2001. The deficit for fiscal 2001 is increasing because of revenue deterioration. Between October 2000 and April 2001, revenue declined by 1.9% year on year—much
less than the 7.3% increase that had been budgeted for. As expenditure during this
period rose by 2.2% year on year, this produces a budget deficit of Baht 194.1 billion
on an annual basis. As the actual deficit has already exceeded what has been budgeted for, the shortfall will probably have to be financed by issuing government
bonds. Under the Fiscal Law, the budget deficit for fiscal 2001 cannot exceed Baht
191.7 billion. However, this applies only to the initial budget and is unlikely to have
much deterrent effect on actual fiscal spending. In fact, the government is believed
to want to reduce the rate at which the national debt is increases by reducing the
fiscal deficit. On 28 March of this year the government raised the commodity tax on
alcohol and cigarettes, and the Ministry of Finance expects this to lead to an increase in revenue of Baht 7.47 billion a year. According to the Bangkok Post, it is
Fiscal budget for FY 2001 and 2002 on focus
Revenue budget
Expenditure budget
Balance
Ceiling of fiscal deficit
Actual fiscal balance
(as of GDP, %)
FY 99
8,000
8,250
-250
-1,693
-1,116
-2
2000
7,500
8,600
-1,100
-1,779
-1,024
-2
2001
8,050
9,100
-1,050
-1,917
-1,941
NA
(Baht bn)
2002
8,230
10,230
-2,000
NA
NA
NA
Note:(1)FY2000 starts in Oct 99;(2)fiscal budget for FY2001 was made into law during Chuan
cabinet;(3)ceiling of fiscal deficit is defined as 20% of revenue budget plus 80% repayment
of principal;(4)Thaksin cabinet plans to implement tax cut and to expand further expenditures
worth at least THB 88.8bn;(5)actual fiscal balance for FY 2001 is annualized by using the
data from Oct 2000 to April 2001;(6)Government can borrow up to US$2.3bn in FY 2001
without approval of Parliament.
Source:MOF, CEIC
48
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
planning to increase the coverage of direct taxes and expects this to increase revenue by Baht 100 billion. Considering Baht 805 billion in revenue is budgeted for
fiscal 2001, we suspect that the government might plan a big increase in taxes.
Confidence in the Bank of Thailand declines
On 29 May the governor of the Bank of Thailand, Chatu Mongol Sonakul, was
dismissed and replaced on 4 June by Pridiyathorn Devakula. By advocating that the
Bank of Thailand should continue its policy of low interest rates, Chatu Mongol had
increasingly come into conflict with the government, which wanted the Bank to
raise interest rates. He had set up a monetary policy committee with an inflation
target to ensure that the Bank’s monetary policy was transparent. Under this arrangement, the Bank was only allowed to alter policy if the core inflation rate (consumer inflation excluding food and fuel) diverged from the 1.5%-2.0% range set for
2001 or the medium-term range of 0.0%-3.5%.
However, Pridiyathorn went ahead and raised the official interest rate (the 14day repo rate) from 1.5% to 2.5% on 8 June without waiting for the Monetary Policy
Committee to meet as planned on 12 and 19 July. By (1) ignoring the Committee and
(2) raising rates without even referring to the inflation picture, the new governor, in
effect, ignored the target for inflation.
The obvious lack of transparency in the decision-making process and the lack of
consistency damaged the Bank’s standing. If the Prime Minister intervenes in this
way again, the Bank’s standing will be damaged further.
By advocating higher interest rates, the Prime Minister hoped not only to boost
interest income and, thereby, consumption, but also to reduce capital outflows. Although a narrower interest rate differential with the United States should help the
baht, the damage to the Bank of Thailand’s standing is likely to lead to a build-up of
selling pressure in the medium to long term. Another point is that a rise in market
interest rates raises the cost of funding for the Financial Institution Development
Fund (FIDF). If the FIDF’s final loss increases, the fiscal cost will also be affected.
The deficit for fiscal 2001 is rising much faster than has been budgeted for, and the
original limit for government bond issuance during the current fiscal year will have
to be raised. Such a situation is a breeding ground for speculation that the Bank of
Thailand may one day be required to purchase government bonds. We are forecasting a baht-dollar rate of $1 = Baht 44.5 for 2001 and of $1 = Baht 45.0 for 2002. In
any case, the baht is likely to remain under selling pressure.
Thaksin remains a force to be reckoned with
The Constitutional Court is currently hearing the case against the Prime Minister for having made a false declaration of assets. Thaksin is due to make his final
statement on 18 June, and the verdict is due to be announced at the end of September 2001. As the Constitutional Court is reputed to be sensitive to public opinion,
Thaksin could still be found innocent. Even if he is found guilty and barred from
holding public office for five years, as he was elected by a party list , his party, the
Thai Rak Thai Party, would have the same number of seats. If barred from public
office, Thaksin would probably still control the party by virtue of the fact that he is
a major benefactor. Nor is it likely that the party would split even if Thaksin left it.
49
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Under the Thai political system, a politician who leaves his party in violation of its
rules will lose his status as a Representative. However, the Thai Rak Thai Party,
which has an overall majority in the House of Representatives, is unlikely to allow
individual members to leave if that were to undermine its dominant position in the
House. Therefore the Constitutional Court’s verdict is unlikely to lead to any change
in party policy even if Thaksin is barred from public office.
Tetsuji Sano
50
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
China:Recovery Momentum Maintained
In the first quarter of 2001 real GDP grew by no less than 8.1% year on year, but
is expected to edge lower in the second half.
The latest figures indicate that the economy has already begun to slow. Real yearon-year retail sales growth in April (8.1%) was slightly lower than in the first quarter (9.6%), while export growth in April and May (11.2% and 3.5%, respectively) was
significantly lower than in the first quarter (14.7%).
Export growth declines
China’s customs-based exports in the first quarter of 2001 continued to grow at a
robust rate—in contrast to those of other countries in the region, which all slowed
China: Summary table of forecasts
1998
1999
2000
（YOY,％）
2002
(F)
2001
(F)
Real ＧＤＰ
7.8
7.1
8.0
7.7
8.1
Real value-added industrial production
8.9
8.5
11.4
10.6
12.0
Nominal fixed-asset investment of
19.6
6.1
9.2
12.0
13.5
Real retail sales
state-owned enterprises
7.6
8.2
11.4
8.8
9.3
Consumer price
-0.8
-1.4
0.4
1.5
2.0
Customs-cleared export
0.5
6.1
27.8
8.7
10.7
Customs-cleared import
-1.3
18.1
35.8
11.4
12.8
Customs-cleared trade balance（$ billion）
43.6
29.2
24.1
20.0
16.7
Current account（$ billion）
29.3
15.7
20.5
17.2
15.8
(as % of GDP)
One-year lending rate for working capital
3.1
6.39
1.6
5.85
1.9
5.85
1.5
5.85
1.2
5.6-6.0
8.279
8.279
8.277
8.22-8.33
8.20-8.35
RMB/US$ (year-end)
Source: Nomura Research Institute, from Chinese official statistics.
China's two big export items
(YOY,%)
50
Machinery & Electrical
Equipment
Textiles & Textile Articles
40
30
20
10
0
-10
-20
Note: three-month moving average.
Source: Nomura Research Institute, from Chinese official statistics.
51
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Oct-98
Jul-98
Apr-98
Jan-98
Oct-97
Jul-97
Apr-97
Jan-97
-30
significantly. There are two main reasons for this. First, exports of machinery and
electronic goods and equipment by foreign companies held up well; second, downstream items, which are less affected by inventory adjustment than intermediate
items such as semiconductors, accounted for the lion’s share of exports of electronic
goods and equipment. There has been a sharp recovery in foreign direct investment
in China (on a contracted basis) since the beginning of last year—especially in areas
such as electronic and telecommunications equipment, general machinery and specialized machinery. As most of this investment is in export production, it helps to
boost exports as soon as it is carried out. An item-by-item analysis of exports in the
first quarter shows that, although there was a marked slowdown in exports of other
items, machinery and electronic goods and equipment grew by no less than 26.9%
year on year. In April the figure was 21.7%.
However, our expectation (1) that the economic slowdown in China’s export markets is likely to become increasingly apparent and (2) that the high level of exports
in the second half of last year (in US dollar terms) is likely to produce a high basis of
comparison leads us to conclude that export growth can be expected to slow significantly.
Domestic demand remains strong
While export growth is expected to slow significantly, domestic demand is likely
to remain strong.
Consumer spending in the first quarter of 2001 held up well. First, the announce-
Exports by type of enterprise
(YOY, %)
50
Chinese Enterprises
40
Foreign-invested Enterprises
30
20
10
0
-10
Note: Three-month moving average.
Source: Nomura Research Institute, from Chinese official statistics.
52
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Oct-98
Jul-98
Apr-98
Jan-98
Oct-97
Jul-97
Apr-97
Jan-97
-20
ment that the shopping vouchers state-owned enterprises had issued their employees would cease to be valid after February triggered a spending spree. Second, there
was a wealth effect from a rising stock market. The market, which had been rising
since last year, continued its rise in the first quarter, and B shares skyrocketed as
soon as domestic individual investors were allowed to purchase them from 28 February. Between the end of February and the end of March, B shares listed in Shanghai
rose by 140.1%, while those listed in Shenzhen rose by 71.6%. Although until then B
shares could only be purchased officially by non-residents, in fact about 70% of all
sales and purchases of these shares are thought to have been conducted on behalf of
domestic investors by friends and relatives in Hong Kong. Therefore the wealth
effect of such sharp gains in share prices is likely to have been significant. The third
reason consumer spending in the first quarter of 2001 held up so well is that farming incomes rose. Per capita cash incomes among the farming population rose by
4.8% year-on-year in the first quarter. This compares with an annual increase of
2.1% in the whole 2000. This is largely the result of the government’s price support
for foodstuffs and its policy of encouraging farmers to convert farming land to forest,
which have helped to balance demand and supply for cereals and enabled foodstuff
prices to recover. Another factor was the trial reform of rural taxes and levies, which
helped to reduce the burden these place on the farming population.
The effect of the first of these factors (i.e., the spending spree triggered by the
rush to use shopping vouchers) will inevitably wear off. As for rural taxes and levies,
a nationwide program of reform is due to start this year following last year’s trials.
However, it remains to be seen whether the fiscal problems facing local authorities
in the provinces will allow such a program to be carried out as planned and, even if
it does go ahead, whether it will achieve very much. We therefore do not expect this
FDI to China's manufacturing sector
Manufacturing Sector
(Contracted amount)
99Q1
5,777
Q2
6,892
Q3
5,717
Q4
6,946
(US$ million)
Chemical
raw
materials &
Chemical
Products
Medicine
291
242
297
369
352
471
442
494
191
144
102
256
173
222
183
327
109
165
136
334
851
1,045
780
1,267
Textile
Electronics,
Ordinary Special- use communicaMachinary equipment
tion
equipment
00Q1
Q2
Q3
Q4
7,754
9,132
9,739
17,628
385
483
382
738
480
693
453
968
216
168
278
251
163
467
201
799
210
355
178
323
1,895
1,921
3,932
3,609
01Q1
11,706
653
792
306
559
329
3,226
(Utilized amount)
99Q1
Q2
Q3
Q4
00Q1
4,621
6,361
5,646
5,976
224
321
340
487
282
522
403
712
148
179
186
171
269
320
212
176
54
119
134
203
621
657
846
1,022
4,290
6,727
5,507
9,319
257
348
306
456
249
398
282
867
88
128
103
204
122
260
167
494
76
128
120
203
783
1,172
1,199
1,440
5,507
380
377
89
257
104
1,110
Q2
Q3
Q4
01Q1
Source: Nomura Research Institute, from Chinese official statistics.
53
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
year’s cuts in rural taxes and levies to be as much as last year’s.
Consumer spending in urban areas, however, is likely to hold up well as a result
of (1) wage rises (of 30% a year) for civil servants and (2) increased purchases of
residential property in response to housing reform. Taken as a whole, these factors
suggest that consumer spending is likely to grow steadily with no major swings in
either direction.
Investment has been strong, with fixed investment by state-owned enterprises up
15.1% year on year in the first quarter of 2001, reflecting (1) increased spending on
public works as part of the government’s fiscal policy, (2) investment in new and
better equipment in order to raise productivity, and (3) increased residential investment. In April and May, fixed investment continued to grow at about the same rate.
We expect this trend to continue and to help to bolster the economy.
All this suggests that in the second half of 2001 export growth will slow but
domestic demand remain robust. In the second half we also expect real GDP growth
to slow to 7.0%-7.5% year on year, while in 2002 we expect the economy to pick up as
the US economy recovers and the Chinese government maintains its pro-active fiscal policy. We are leaving our forecasts of real GDP growth and consumer price
inflation for 2001 and 2002 unchanged. However, we are raising our forecast for the
current account balance in 2001 and 2002 because the actual figure for 2000 exceeded our expectation.
With investment strong, the risk that the economy might slow sharply in 2001 is
small. However, if there was any threat of this happening, the government would
probably increase its spending on public works by issuing bonds as it did in 19982000. This is another reason why we rate the chances of this happening as quite
small.
Suiyo Li
Retail sales in urban and rural areas
(YOY, %)
12
10
8
6
Urban
4
Rural
2
te: Three-month moving average.
Source: Nomura Research Institute, from Chinese official statistics.
54
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Oct-98
Jul-98
Apr-98
Jan-98
0
Fixed-asset investment by type
(YOY, %)
70
Capital construction
60
50
Technical updating &
transformation
40
Real estate
30
20
10
0
Note: Three-month moving average.
Source: Nomura Research Institute, from Chinese official statistics.
55
Copyright (C) 2001 Nomura Research Institute, Ltd. All rights reserved. No reproduction or republication without written permission.
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Oct-99
Jul-99
Apr-99
Jan-99
Oct-98
Jul-98
Apr-98
Jan-98
Oct-97
Jul-97
Apr-97
Jan-97
-10