Emerging Markets Diary (June 28, 2010)
Strengths
- China unpegged its currency from the U.S. dollar one week ahead of the June 26-27 G-20 meeting in Toronto in order to reintroduce more flexibility to the exchange rate after a two-year moratorium. The yuan strengthened by more than 0.5 percent against the U.S. dollar this week.
- Moody’s Investors Service raised the outlook on Indonesia’s local and foreign currency sovereign ratings to “positive” from “stable,” saying it expects the country to post sustained strong growth and further improvements in financial and debt position.
- Taiwan’s unemployment rate declined to a 17-month low of 5.2 percent in May, better than market expectations and lower than April’s 5.4 percent. Technology manufacturers grew more confident of the economic outlook and increased hiring.
- South Korea’s consumer confidence rose to 112 in June from 111 in May, a second month of advance, reflecting the strengthening economy and improving job market.
- Singapore’s industrial production unexpectedly accelerated to 58.6 percent in terms of year-over-year growth from April’s 49.7 percent surge, driven by the electronics industry.
Weaknesses
- China canceled export tax rebates for a long list of products of polluting and high energy-consuming industries, including steel, nonferrous metals and chemicals.
- Taiwan’s central bank unexpectedly raised the benchmark interest rate by 12.5 basis points to 1.375 percent, after keeping it at the record low 1.25 percent for 15 months, in a pre-emptive move to bring the rate toward a neutral level.
- Philippines’ budget deficit widened in May to 30.5 billion pesos from 11.38 billion pesos in May 2009. Cumulative government expenditure in the first five months increased 14.3 percent year over year while revenue rose only 9.6 percent.
- Singapore’s consumer prices increased 3.2 percent year over year in May, more than market expected, as a result of higher prices for food, housing, and automobiles.
Opportunities
- Indonesia remains one of the major beneficiaries of an appreciating Chinese currency, thanks to the commodity-heavy nature of its exports to China. Coal and palm oil are key categories. During the three years from mid-2005 to mid-2008, when the yuan was unpegged from the U.S. dollar and saw appreciation, Indonesian equities more than doubled in U.S. dollar terms, making them the second-best performer in Asia after Chinese equities. In addition, the government’s improving fiscal status highlights a prudent Indonesia where public sector debt declined to 31 percent of GDP in 2009 from 102 percent in 1999, a confidence booster in a world of apprehensions over sovereign indebtedness.
Threats
- The lagging impact of weakening European demand and a potentially rising yuan on Chinese exports may combine with a considerable policy-induced slowdown in fixed asset investment to eclipse growth in private consumption in China in the second half of this year. Macroeconomic headwinds could continue to challenge investor sentiment towards China in the near term.
