Group Economics

Emerging Markets

Emerging Asia Watch

Arjen van Dijkhuizen

Tel: +31 20 6288052
arjen.van.dijkhuizen@nl.abnamro.com

Still in the lead

09 October 2014

Emerging Asia continues to do relatively well among the emerging markets, with regional growth expected to
stay just above 6% in 2014 and 2015. Although domestic conditions vary strongly among countries, the pick-up
of exports to advanced economies is likely to remain a general tailwind. Still, after accelerating to 6.2% yoy in
Q2, we see signs of some setback more recently. The GDP-weighted regional Manufacturing PMI fell to a fivemonth low of 50.9 in September (August: 51.3). Although the China PMI indices have stabilised more or less,
the index came out below the neutral 50 mark in South Korea and Hong Kong.

Although we expect the gradual slowdown in China to continue reflecting the countrys ambitious reforms, the
authorities are likely to add targeted support to prevent the slowdown from becoming too fast. Meanwhile in
India, political dynamism has contributed to a pick-up in economic growth, although deeper reforms are needed
to reach a higher growth path. Still, despite some recent signs that the recovery is losing momentum, India has
become less vulnerable to market turmoil compared to a year ago thanks to prudent policies directed at
reducing its external deficits.

Main risks to our outlook stem from a faster-than-expected Fed tightening, with Indonesia still being relatively
vulnerable within emerging Asia, or from an unorderly deleveraging from high debt levels in some countries. Of
course, as recent developments in, for instance, Thailand, Indonesia and Hong Kong have shown, political
risks may cloud the outlook as well.

Contents: This publication will focus on emerging Asia, in particular on China, Hong Kong, India, Indonesia and
South Korea.

Main economic indicators/forecasts

GDP growth (%)
Emerging Asia
Emerging Europe
Latin America
Middle East/North Africa
Emerging markets total

2012
6.1
2.3
2.8
2.3
4.7

2013e
6.1
1.7
2.4
2.2
4.5

2014e
6.1
1.3
1.1
2.9
4.4

2015e
6.1
2.2
2.7
3.7
4.8

-0.6
2.3
3.2

-0.4
2.2
3.2

0.9
2.2
3.3

1.7
3.8
3.9

2012
-2.5
-1.6
-2.5
3.2

2013e
-2.5
-1.5
-2.5
0.5

2014e
-2.5
-0.5
-3.5
0.0

2015e
-2.5
-1.5
-3.0
-1.0

Eurozone
-3.7
-3.0
US
-6.8
-4.1
Source: EIU, ABN AMRO Group Economics

-2.6
-2.6

-2.0
-2.4

Eurozone
US
World
Budget balance (% GDP)
Emerging Asia
Emerging Europe
Latin America
Middle East/North Africa

Inflation (%)
Emerging Asia
Emerging Europe
Latin America
Middle East/North Africa
Emerging markets total
Eurozone
US
World
Current account (% GDP)
Emerging Asia
Emerging Europe
Latin America
Middle East/North Africa
Eurozone
US

2012
4.5
6.4
8.0
7.5
5.6

2013
4.6
5.4
8.6
11.5
6.0

2014e
4.1
5.8
12.2
6.9
5.8

2015e
4.3
5.3
10.1
6.9
5.5

2.5
2.1
4.1

1.3
1.5
4.0

0.5
2.0
4.0

1.0
2.2
3.9

2012
1.0
-0.6
-1.6
10.6

2013e
1.5
-1.5
-2.5
9.0

2014e
1.5
0.0
-2.5
7.5

2015e
1.0
-0.5
-2.5
6.0

1.8
2.6
2.7
2.6
-2.9
-2.4
-2.6
-2.9
* figures Emerging Markets regions are rounded

Emerging Asia Watch - Still in the lead - 09 October 2014

Emerging Asia
Economy
Economic growth and manufacturing PMI
real GDP, % yoy

index

12

60

10

55

50

45

40

35
08

09

10

11

12

Economic growth (lhs)

13

14

Manufacturing PMI (rhs)

Sources: Bloomberg, Thomson Reuters Datastream (China official PMI)

We expect economic growth in emerging Asia to remain at just over

6% in 2014 and 2015. In Q2 2014, emerging Asian growth gained
some momentum and rose to 6.2% yoy (Q1: 6.0%). This was partly
shaped by targeted stimulus supporting growth in China (at 7.5%
yoy). In Q2, we saw an upturn in other countries as well, particularly
in India, the Philippines and Taiwan. By contrast, annual growth in
Q2 slowed in Hong Kong, Singapore and South Korea. Over the
past quarter, we have seen more signs of a regional setback. The
GDP-weighted regional Manufacturing PMI fell from a cyclical peak
of 52.0 in July to 50.9 in September, the lowest level since April.
This is partly driven by China, although both the official and the
HSBC Manufacturing PMI stabilised in September (see below). The
Manufacturing PMI also fell in India, South Korea and Taiwan. In
South Korea and Hong Kong, the Manufacturing PMIs are now
below the neutral 50 mark. By contrast, the PMIs recovered to above
this neutral mark in Indonesia and Singapore.

China
Economy
Purchasing Managers indices
index

65
60
55
50
45
40
08

09

10

11

Manufacturing PMI

12

Services PMI

13

14

Composite output index

Sources: HSBC/Markit, Thomson Reuters Datastream.

High-frequency economic data confirm that domestic demand has

weakened due to the ongoing property market correction and the
curtailment of shadow banking, while the effects of previous targeted
stimulus have faded. This is also illustrated by an annual contraction
of imports in the past two months. Still, recent PMI data point to
some stabilisation. In September, the official and the HSBC
Manufacturing PMIs stayed at their August levels. The HSBC
Services PMI and the composite output fell somewhat from their 17months peaks reached in August, but remained relatively high.
Moreover, the pick-up in exports is a welcome tailwind. More
importantly, the authorities remain committed to add further targeted
stimulus to prevent the economic slowdown from becoming too fast
(e.g. liquidity injection into five largest banks, tax and loan subsidies
for SMEs, general easing of property restrictions). While we expect
the economy to have slowed somewhat in Q3, we keep our 2014
and 2015 growth forecasts at 7.5% and 7% so far.

Hong Kong
Politics, economy
Hang Seng stock index
level

30000
25000
20000
15000
10000
08

09

10

11

Sources: Thomson Reuters Datastream

12

13

14

Social protests intensified over the past weeks, after Beijng made
clear that only pre-approved candidates can run for the post of Chief
Executive in 2017. The turmoil seems to be easing this week, with
the number of protestors declining and the government and
protesters slowly moving towards talks. Meanwhile, the political
turbulence is not helpful for the economy, which already was slowing
before the turmoil intensified (partly reflecting lower import demand
from China). Annual growth fell to a two-year low of 1.8% yoy (Q1:
2.6% yoy), while quarterly growth was negative (-0.1% qoq). The
Manufacturing PMI has stayed just below the neutral 50 mark in
August and September. The political turmoil likely adds further
negative effects. Also reflecting developments in the first half of this
year, we have lowered our 2014 growth forecast to 2%, while
keeping our 2015 forecast at 2.5%.

Emerging Asia Watch - Still in the lead - 09 October 2014

India
Economy, politics
Economic growth and Manufacturing PMI
real GDP, % yoy

index

12

65

10

60

55

50

45

40
08

09

10

11

12

Economic growth (lhs)

13

14

Manufacturing PMI (rhs)

Sources: Bloomberg, Thomson Reuters Datastream.

In the aftermath of PM Modis victory in May, economic growth

accelerated to 5.7% yoy in Q2, the highest pace since Q1 2012.
More recently, the recovery seems to have lost some momentum.
Industrial production slowed to 0.5% yoy in July (average Q2: 4.2%
yoy). Moreover, the Manufacturing PMI dropped in the past two
months to 51.0 in September, a nine month low. While output and
new order flows lost steam, the growth of new export orders
accelerated. We expect economic growth to rise to 5% in 2014 and
5.5% in 2015, slightly above 2013/14 levels (4.7%). Still, these levels
are well below the average growth rates in 2003-2007 (8.9%) and
2009-11 (8.4%). Deeper reforms are needed to get India on a higher
growth path again, but the Modi-government has only presented
some piecemeal reforms so far. Meanwhile, thanks to prudent
monetary policy and (gold) import restrictions, the current account
deficit has fallen compared to late 2012 and FX reserves have risen,
reducing Indias vulnerability to a Fed tightening somewhat.

Indonesia
Economy, politics
Exchange rate and CDS premium
exchange rate (IDR/USD)

bps, 5 yrs USD

13000

350

12000

300

11000

250

10000

200

9000

150

8000

100
11

12
Exchange rate (lhs)

13

14
CDS premium (rhs)

Source: Bloomberg

Just as India, Indonesia has been hard hit in 2013 and early 2014 by
Fed tapering related concerns in combination with its external and
political vulnerabilities. The current account deficit has not fallen
much compared to the tapering dry-run episode. Moreover, there
are ongoing political concerns, despite the victory of the more-reform
minded Jokowi in the July presidential elections. These are not only
shaped by the post-election battle between the presidential
candidates, but also by the recent push-back of direct elections of
local leaders. Jokowi, who will take office in two weeks, has to find
coalition partners, as his PDI-P controls only 20% of the seats in
parliament. All this will complicate the implementation of reforms.
The respective concerns have contributed to renewed pressures on
the exchange rate and the CDS premium recently. All in all, we think
that, within emerging Asia, Indonesia will remain one of the countries
being relatively vulnerable to potential market upheaval stemming
from (faster-than-expected) Fed tightening.

South Korea
Economy, central bank
Economic growth and Manufacturing PMI
real GDP, % yoy

index

65

60
55

50
2

45

40

-2

35
08

09

10

11

Economic growth (lhs)

12

13

14

Manufacturing PMI (rhs)

Sources: Bloomberg, Thomson Reuters Datastream

Recent developments highlight the constraints of South-Koreas

export-oriented growth model. Export growth continues to
disappoint, given weaker demand from China and Japan and the
strength of the won versus the yen. Private consumption is suffering
from high debt levels, a depressed housing market and low wage
growth. Consumer and business sentiment deteriorated after the
Sewol ferry incident in April, but has improved after the government
presented a stimulus package of USD 40 bn (around 3% of GDP) in
July. However, in September the Manufacturing PMI fell back to
below 50 (48.8) once more. Moreover, annual growth industrial
production was negative in August (-2.8% yoy). Given weak
domestic demand conditions and with inflation having fallen to 1.1%
yoy in September, well below the 2.5-3.5% target range of the Bank
of Korea (BoK), we do not preclude further rate cuts after the BoK
lowered the policy rate by 25bps, to 2.25%, in August.

Emerging Asia Watch - Still in the lead - 09 October 2014

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