Emerging Markets Radar (November 28, 2011)

Emerging Markets Radar (November 28, 2011)

Strengths

• This week, the prices of most food products in China continued a declining trend; meat was down 1.2 percent from the prior week, aquatic products were down 0.3 percent and eggs were down 0.8 percent. The pork price, the biggest inflation contributor, declined 1.7 percent.
• China cut the reserve requirement ratio (RRR) by 50 basis points for five rural banks in Zhejiang Province, Reuters reported. The market expects People’s Bank of China (PBOC) to cut RRR across the board before the year-end.
• China’s Ministry of Railways sold 20 billion yuan of 10-year bonds and 10 billion yuan of even-year bonds. The Ministry is raising funds to continue uncompleted projects.
• Korean lawmakers passed the nation’s free-trade agreement with the U.S. and Europe, increasing free market access to two large global markets.
• The Korean government confirmed it will build six nuclear plants by 2016.
• Taiwan showed stable labor market conditions in October, with an unemployment rate of 4.3 percent, slightly higher than September’s 4.28 percent.
• This week Turkey’s central bank kept its one-week repo rate unchanged at 5.75 percent, despite rising inflation.  Roubini Global Economics reported that the bank will continue to use its discretion to set the rate at which local banks fund themselves between the repo rate and the lending rate, which was raised on October 20 to 12.5 percent to limit the weakening of the lira.  In order to stabilize the lira, the Turkish central bank has recently directly intervened with the foreign exchange market and reduced required reserve ratios.

Weaknesses

• The HSBC November flash Purchasing Manager’s Index (PMI) dropped to 48 from 51 in October. A PMI below 50 indicates the industrial activities are in contracting mode.
• Thailand’s exports grew 0.3 percent year-over-year in October, the slowest pace in two years due to the nation’s worst flood in 70 years. Imports rose 21.5 percent.
• Singapore’s third quarter GDP rose an annualized 1.9 percent quarter-over-quarter. The trade ministry said that the economy will grow 1-3 percent in 2012 after expanding 5 percent this year.
• Thailand’s third quarter GDP rose 3.5 percent year-over-year; however, the government predicted that the economy will shrink 3.7 percent in the fourth quarter and lowered the estimate for 2011 growth to 1.5 percent, down from as much as 4 percent earlier.
• Shanghai’s luxury home sales in October fell by more than half, confirming that the property market in the city is declining.
• Emerging Europe’s dependence on external funding has grown over the past three years, as shown in a chart from Morgan Stanley.  The 12-month external funding requirement reached $467 billion in 2011, a 13 percent increase compared to 2008.

• Hungary lost its investment-grade rating after 15 years after Moody’s Investors Service cut the country’s credit grade to Ba1 from Baa3, citing risks to budget deficit and public debt targets.

Opportunities

• India’s Cabinet has approved up to 51 percent foreign direct investment (FDI) in multi-brand retail and 100 percent FDI in single-brand retail.  FDI in multibrand retail would benefit capital-constrained retailers, accelerating the pace of investment in the supply chain to meet demand of increasing scale.
• In a report this week, Roubini Global Economics highlighted that, driven by China and India, Asia has displaced Europe as Africa’s largest trading partner, which is a trend that the European recession and balance sheet repair will exacerbate.  Africa’s center of gravity has shifted from reliance on links to Europe, with rising trade and investment flows from emerging markets, especially Brazil, Russia, India and China (BRIC).  Of the BRIC nations, China is the predominant contributor; in 2010 alone, China’s trade with Africa (including South Africa) amounted to US$123.3 billion (representing 64 percent of the BRICs’ total) while India reached close to US$40 billion.
• Seventy percent of Indonesia’s GDP is driven by domestic consumption, in which a growing number of middle class and growing spending power will provide opportunities for consumer goods and services. Indonesian consumers are moving up the J-curve from basic goods to intermediate goods and services, such as computers, mortgages, credit cards, milk, motorcycles, KFC stores and TV sets. Indonesia is expected to follow the growth pattern of China, where middle class is consuming a large share of global luxury goods.

Threats

• According to an index released this week, inflexible labor legislation and black economic empowerment are stifling small business growth in South Africa.  The CEO of SBP, the research company that compiled the index, reported, “major regulatory barriers identified by the index are inflexible labor laws, broad-based black economic empowerment (BBBEE) and SARS (SA Revenue Service) inefficiencies.”  Small businesses contribute more than half of South Africa’s gross domestic product and make up 77 percent of non-government jobs.
• With Venezuela’s inflation on course to be 27 percent this year, President Hugo Chavez will be extending price controls to curb inflation.  Under the price control law, officials will set prices after taking into account production costs including raw materials and wages.
• China is in the midst of a declining property market, slowing industrial activity, slower export growth and tight credit control. If this trend continues, employment and consumer spending power would be affected. We believe China will soon take measures to prevent a hard landing, including that for the property market.