Emerging Markets Radar (June 18, 2012)

Emerging Markets Radar (June 18, 2012)

Strengths

• China new loans rose to Rmb 793.2 billion in May, beating consensus estimate of Rmb 750 billion; M2 growth rose to 13.2 percent, higher than market expectation of 12.6 percent; China export jumped to 15.3 percent, and import also far exceeded market expectation to rise 12.7 percent in May; China’s May Producer Price Index (PPI) declined 1.4 percent, and CPI rose 3 percent (a 23-month new low), providing space for further monetary easing.
• China’s passenger vehicle sales rose 22.6 percent to 1.38 million units in May, higher than expected. In addition, China will give as much as RMB 18,000 in subsidies for each vehicle trade-in this year to boost consumption spending, the Ministry of Finance said.
• The Chinese government may ease policies on lending to local government financing vehicles and property developers, according to 21st Century Business Herald.
• Korea’s unemployment rate in May declined to a four-month low of 3.2 percent as hiring in the service sector continued to increase.
• The Thailand, Philippines, Korea and Indonesia central banks are all keeping their benchmark rates unchanged recently as policy stance switched to growth risk from inflationary risk.
• Philippines overseas remittances rose 5.3 percent year-over-year to $1.7 billion in April, and unemployment declined to 6.9 percent in the three months to April from 7.2 percent the previous quarter. Philippine exports increased 7.6 percent in April, far exceeding expectations for a 0.5 percent gain due to rising demand for apparel and minerals.
• Polish budget deficit is projected to decline to 3 percent of GDP from 5 percent last year.
• Turkey has added 4 million new jobs in the last 3 years, going from 19 million to 23 million today.

Weaknesses

• China’s fixed asset investment (FAI) for the first five months this year rose 20.1 percent, in a declining trend year to date, however with accelerating infrastructure project approval by the government and improving sales by developers, FAI is expected to pick up.
• China’s May industrial production grew 9.6 percent (versus estimate 9.8 percent), in a slower growth trend; China’s power consumption grew 5.2 percent in May up from 3.7 percent in April, but still showing slower growth.
• Hopes for consolidation in the Polish banking sector are unlikely to materialize anytime soon, as the potential takeover targets contain “poison pill” 2008 and prior vintage euro and Swiss franc loans.
• There is a substantial slowdown in loan growth across the region. Loan growth is down to single digit percentage growth in Poland and to low double digit growth in Russia and Turkey. Loan growth is negative in Hungary.
• Regulatory changes in Turkey will have a negative impact on reported net income this year. For consumer loans a 1 percent provision and for general purpose loans a 4 percent provision must be made in the quarter when new loans are originated. And, fees and commissions generated at origination now have to be amortized over the life of the loan.

Opportunities

• Greentown China transactions show deep value in the real estate sector in China. Hong Kong conglomerate Wharf Holdings Ltd. invested HK$5.1 billion buying HK$2.55 billion of new shares and HK$2.55 billion of convertible securities from Greentown China Holdings Ltd., a high end property developer in China. After the share purchase, Wharf will own 24.6 percent of Greentown, and its ownership in Greentown can go up to more than 30 percent. The transaction indicates there are investment opportunities in the property market due to extremely cheap valuation.
• Bond placement as planned by Polish banks could lead to less reliance on retail funding and rationalization of competition for deposits.

Threats

• Recent commodity price drop and government policy uncertainty in commodity export taxes had resulted in current account deficits in Indonesia. U.S. dollar liquidity conditions in the country are also deteriorating, which has adverse consequences for the Indonesia Rupiah. If the eurozone crisis continues to intensify, the Indonesia equity market will be adversely affected through currency outflow.
• Minority shareholders in the state-owned companies within the Russian utility sector are at risk of significant dilution in case of proposed capital injection by the government.
• The financial transaction tax as proposed by Hungarian Prime Minister Orban would have a negative impact on banks' fees and commission income. The fact that Brussels likes the idea could make this a dangerous precedent within the European Union.