Emerging Markets Radar (October 15, 2012)
Strengths
- Korea cut its benchmark interest rate by 25 basis points to 2.75 percent this week to boost a weak economy affected by weak global demand and deteriorating domestic consumption.
- China’s Ministry of Railway raised its 2012 railway infrastructure investment target by 4 percent to Rmb 516 billion, or up 12 percent from 2011. The 2011-2015 railway infrastructure fixed-asset investment target is now officially set at Rmb 2.3 trillion, down from the previous Rmb 2.8 trillion target, normalizing to a better level than the market expected.
- China Huijin, a state asset management entity, is buying bank shares to help stock prices, and China State Council canceled the administrative approval process needed for stated-owned companies to buy back shares.
- Thailand’s loan growth expanded 2.8 percent in August, bringing year-to-date loan growth to 11 percent. Thailand continued to see business and individual loans grow steadily, driven by manufacture capacity expansion and consumption growth in mortgages and automobiles. Deposits grew 3.6 percent month-over-month, allowing for further loan growth.
- Bank Indonesia (BI), the central bank, kept the benchmark rate unchanged at 5.75 percent. BI highlighted that it will continue to focus on managing the external balance as well as providing support for domestic growth.
- Singapore’s third-quarter GDP grew 1.3 percent, higher than the estimated 1.1 percent, in spite of contraction in exports and industrial productivities.
Weaknesses
- China’s bank lending was Rmb 623 billion in September; lower than Rmb 704 billion in August and the market expectation for Rmb 700 billion, showing tightness in liquidity. On the People’s Bank of China (PBOC) side, Rmb 650 billion worth of reverse repos will mature this month, bringing liquidity pressure to the market, which may force the PBOC to cut its bank reserve ratio to release liquidity into the economy.
- Philippine loan growth eased to 14 percent in August from 16 percent in July, negatively impacted by contraction in mining and farm loan demand. Real estate loans still grew 24.7 percent on a year-over-year basis.
- Bank of Korea, the central bank, cut 2012 GDP growth to 2.4 percent from 3 percent previously forecasted in July.
Opportunities
- The graph above shows the bank reserve ratio requirement among the Asian central banks. With 18 percent reserve ratio, and consequently lower loan-to-deposit ratio in the Philippines, the potential easing in monetary policy, such as further reserve ratio reduction, can help bank loan growth, which should bode well for both banking and housing markets.
- Any slowdown in China’s trend growth and capex accumulation should lower the prices of commodities and capital equipment globally, giving a boon to India.
- The seasonal pattern of monetary liquidity increases in Russia has been skewed toward the last months of the year—when balance of the budget funds are appropriated – thus setting a stage for a New Year equity rally.
Threats
- The Shanghai Composite Index responded to the two interest cuts since early June by falling 6.37 percent, and is still down 1.84 percent year-to-date. The retail accounts in China, historically accounting for more than 75 percent of the trading volume, dropped to 56 million, just a little more than half of the number in the stock market peak in early 2008. With retail investors leaving, the market liquidity has dropped sharply. Nevertheless, the retail investors’ market enthusiasm probably is a reliable contrarian indicator, which might imply a market rebound in Shanghai soon.
- October 14 is the date of the local governor elections in Russia. One of the key demands of the protesters last year was to return to Yeltsin-era local elections. (To consolidate his power, Putin appointed local governors directly in 2004.) Some of these local elections could generate more negative headlines.
- Improvement in Turkey’s trade balance resulted from a contraction in import demand. Imports of consumer goods led the decline, showing that domestic consumers are hitting the brakes.
