Maybank Kim Eng sees US recovery

Maybank Kim Eng sees US recovery
Business & Markets 2013
Written by Assif Shameen of theedgesingapore.com
Tuesday, 09 April 2013 10:02


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Currency traders and market watchers called the move “stunning” and “unprecedented” — words you would not normally hear describing the monetary policy of any country, let alone the world’s third largest economy. But the Bank of Japan’s (BoJ) new governor Haruhiko Kuroda’s aggressive move on April 4 was just that, and more. The BoJ vowed to double Japan’s total monetary base from ¥135 trillion (RM4.2 trillion) to a whopping ¥270 trillion by March 2015, mainly by buying more long-term government bonds.

The Japanese central bank is redoubling efforts to spur inflation by increasing the pace of monetary easing to achieve a 2% inflation target “at the earliest possible time” to end the country’s prolonged slump.

The quantitative easing in Japan, on-going recovery in the US, stabilisation in Europe and a growing China are all likely to help Asian economies, says Pransenjit Basu, chief Asia economist for Maybank Kim Eng Group in Singapore. Basu, a graduate of the University of Pennsylvania, has covered regional economies for more than two decades.

Basu worked for Wharton Econometrics, UBS and Credit Suisse as an economist for years and was head economist for Malaysian sovereign wealth fund Khazanah Nasional in Kuala Lumpur before joining Daiwa Securities Capital as its chief Asia economist.

Last year, he moved to Maybank Kim Eng, the regional investment banking arm of the Malaysian banking giant. He recently spoke to The Edge Singapore. Here are excerpts from the interview

How does the global economy look to you from where you sit? You agree with consensus view that the US is recovering, and Europe still has serious issues as recent events in Cyprus show, but the rest of the world seems to be chugging along nicely?
My view is the US economy is clearly on a sound recovery track with upturn in housing. Japan for the first time in years is clearly on a path out of its long deflationary spiral and Europe is nearly stagnant, which is [a] big improvement on what we had last year when it was pulling the world into its own abyss.

Unfortunately, in the past month, Europe has dug a new hole for itself with the mishandling of the crisis in Cyprus. The consequence of Cyprus is that risks in Europe have increased significantly. If another banking system anywhere in Europe is in trouble, there is likely to be [a] run on large uninsured deposits.

The overall of this global backdrop is modestly positive for Asia because the US remains a very important market for Asian exporters and the clear recovery there is helping Asia.

Talk about Japan, where quantitative easing and a weaker yen are finally helping to boost growth. What does a rebound in Japan mean for the rest of the region?
That’s right. I think in the year ahead, Japan should begin to pull out of its long night of deflation and show some real growth. Japan’s rebound helps Asia, and in particular the Asean economies, because of all the economies, the ones which still have some dependence on Japan as a market for their exports are the Southeast Asian economies.

About one-sixth of Indonesian exports go to Japan, 15% of Philippine exports go to Japan and most of [the] other Asean countries have anything between 10% and 15% of their exports going to Japan.

The one long-term story that wasn’t disturbed much by Japan’s economic troubles was its huge investments or FDIs [foreign direct investments] into Asean.

However, a substantially weak yen might reduce the flows of FDIs coming out of Japan as manufacturing becomes more viable inside Japan. One must balance that by looking at how Japanese manufacturers who are looking at alternatives to China might divert more of the flows now to Indonesia, Thailand, the Philippines, Vietnam as well as India.

Let us move to the elephant in the room, China. Will Beijing need to rein in speculative spending and property once again? What do you make of the rebound so far?
It’s very, very mild. It was slightly weak for the first two months and the numbers for March suggest that [the] entire first quarter was about as strong as the last quarter of 2012. It is clear that China is trying to rein in property prices and trying to bring about the shift from an investment-led to consumption-led growth model. Clearly, that transition is going to mean slower growth in China.

I believe the first quarter was probably the peak of the current cycle in China and we will see slower growth in the second half as China reins in lending growth and indeed even anticipate raising rates towards the end of the year. So, we are going to see a tighter monetary policy in China.

So, is it fair to say while you don’t anticipate a hard landing anytime soon, you see growth in China slowing to 7% and 7.5% per year than the 8%-plus that some of your peers are forecasting?
That’s right. The era of 8% to 11% growth is clearly over. I believe 7% to 7.5% is a more sustainable pace of growth for China though I think it will probably be closer to 7% than 7.5%.

China has just installed a new leadership and more precise contours of policies will only emerge over the next few months and that will help determine whether China has a more volatile mix of growth over the next few years or whether it will genuinely begin a smooth transition to a slower trajectory of growth.

My hunch is that Chinese policymakers are already reining things in and working towards effecting a transition to a less investment-intensive growth model. The fact that exports have recovered has been a great help because it has enabled policymakers to focus their attention on rebalancing the economy away from investments by boosting domestic demand.

Turning to other big economy in the region, India. It seems that the euphoria from last year’s reform measures has turned into more hand wringing. Will India go back to its 8% optimal growth rate soon or will it take a while with more reforms and adjustments?
I think it will take a while. It is interesting to note that India’s average growth rate over the past 10 years or so has been close to 8% despite the fact that in the latest 12 months, India barely managed 5% growth.

I actually believe that India is at a phase when it really should be growing close to 10%. India is about 15 years behind China and its demographics are actually 25 years behind China and it is up at a point where its economy should be growing like 10% to 12% a year, the way China was growing a few years ago. Instead, it has slowed to 5%.

That’s a dismal performance but it is not catastrophic because you might remember China about 23 years ago went through a similar phase when its economy slowed to 3% growth immediately after Tiananmen and had classic overheating issues such as high current account deficit, high inflation and so on.

I would say that [University of Chicago economist and economic policy adviser] Raghuram Rajan has brought some important reformist policy changes. India has opened up several sectors for FDIs including aviation, insurance, single- and multi-brand retailing. Secondly, India has also reformed the subsidy regime and cut oil subsidies quite sharply. Such reforms will contribute somewhat to boosting growth.

Unfortunately, India has a serious problem in that the current Congress Party-led coalition [government] is focused on populism. If that coalition lasts another 14 months and completes its term, it will be disastrous for India.

It can actually undo all the good that has come from the recent reforms because of their populist policies. The good news for India is that it is very likely that this government will fall within the next six months and we will have another elections there. At the very minimum, Congress will not be the dominant party in any new government and, as a consequence, reform will likely make substantially greater progress, specially because most of the state governments are already very growth oriented.

Asean economies have been the big surprise of the last two years as China and India slowed. How do you see the region over the next two years? You see the boom in Thailand, the Philippines and Indonesia continuing?
I believe Asean will remain a major growth driver in Asia over the next few years. Within the region, a number of countries have made economic and political progress, having made the necessary difficult adjustments. With the Asean Economic Community starting to take shape by 2015, this region will continue to see strong growth.

There is an investment boom right across Southeast Asia. Indonesia probably began the soonest and FDIs there have hit records in four of the last five years. Even in Malaysia, for the last nine quarters, private investment spending has grown 15% year-on-year. Thailand is seeing the beginning of a huge turnaround in investment spending. After the Asian financial crisis, there was a 10- to 15-year lull in investment spending which is only now turning.

In the near term, the focus will still be on the Philippines. It now has eight years of current surpluses, which have allowed external liquidity to improve dramatically and with foreign reserves of more than US$85 billion (RM260 billion), short-term external debt is now less than 8% of the total external reserves. The Philippines is now a net creditor and it is only a matter of time before the other rating agencies, Moodys and S&P, follow Fitch and grant it an investment-grade rating.

Unlike Indonesia, the Philippines’ macro-economic situation continues to improve. The Philippines had 6.6% growth last year and will likely grow close to 7% this year as well, so, it is a terrific turnaround story. I will actually make the point that the story is ongoing.

Indonesia has had a great run for five or six years but now faces some serious headwinds. Its currency has underperformed the rest of Asia over the past year and their decision not to raise oil prices is now starting to hurt them because their twin deficits are widening quite sharply. Coupled with the fact that there is an election next year means that the window for dealing with the subsidy issue is closing within the next two months or so. They need to bite the bullet or prepare to deal with a slightly worse economic situation.

Though politics is beginning to heat up a bit in Thailand, the stimulative fiscal policy has had a hugely positive impact there. The caveat in Thailand is that there is political stability and for this government not to succumb to conservative forces that are beginning to become restless again.

What do see for Singapore? Do we just adjust to a lower growth model — 2.5% to 3.5%?
Clearly, the government is choosing slower growth because immigration has become a hot potato issue and the influx of foreign workers over the past decade is becoming politically and socially untenable. My view is that there is room for slightly faster growth because the government has had a bonanza of revenues from its property cooling measures such as additional stamp duty on buyers and sellers.

As property prices have continued to rise, there has been a huge revenue bonanza, which the government has chosen not to give back in the form of large rebates that might have provided a boost to households and businesses, and help encourage spending. Instead, the government has retained larger fiscal surpluses.

It does appear that in areas such as electronics manufacturing, Singapore is going through another transition and losing out to competitors in the region such as Taiwan, South Korea, even China. Segments such as petrochemicals and pharmaceutical manufacturing, and other capital- and skill-intensive sectors however, remain the growth engines for Singapore. — The Edge Singapore


This article first appeared in The Edge Financial Daily, on April 9, 2013.