Monetary Policy Unchanged
January 26, 2007
By Chetan Ahya
and Deyi Tan
| Mumbai, Singapore
Monetary policy remains unchanged: The central bank (BSP) left monetary policy unchanged with the overnight lending rate at 9.75% and the overnight borrowing rate at 7.5%. The tiering system (7.5% for placements under PHP 5 billion, 5.5% for placements in excess of PHP 5 billion and 3.5% for placements in excess of PHP 10 billion) on bank placements with the central bank is also maintained.
Inflationary pressures generally subsiding: Inflation continued to decelerate to 4.3% YoY in December, driven primarily by lower energy prices, which have translated into lower utility/fuel prices. This brings inflation within the 4-5% inflation target for 2007, though 2006 full-year inflation still stood at 6.3% YoY, which is higher than the 2006 4-5% target. As a result of declining inflation, real rates have edged up to 3.2% as of December.
Excess liquidity results in sharp decline in short rates: A continued rise in foreign reserves has resulted in a sharp rise in excess liquidity in the last few months. Excess liquidity is represented by the outstanding stock of short paper (reverse repo) by the central bank to absorb excess liquidity. The stock of excess liquidity continues to rise, with the October data standing at US$4.5 billion from the US$3.0 billion as of January 2006. The rise in excess liquidity has resulted in the lowest rate (3.5%) of the tiered reverse repo rate structure being the effective floor for short rates. The 91-day bill has declined to 3.6% from 6.5% in June 2006.
Low rates should support a credit demand recovery: Following the sharp decline in government bond yields, banks’ lending rates have also started to decline over the past three months, triggering the first credit cycle after nine years. We believe that a sharp decline in the cost of capital is likely to result in a significant acceleration in credit growth (for commercial banks) over the next 12 months, to 15-18% from an average of 4.5% during 3Q06.
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Accelerating the Rate of Crawl of USD/CNY
January 26, 2007
By Stephen Jen
Summary and conclusions
I don’t believe that a modestly stronger CNY would materially alter the trend in the trade imbalances between the US and China, or that the USD/CNY parity deserves so much political attention in the US, for the real issue between the US and China is trade, not the exchange rate. However, I do believe that the best strategy for Beijing this year is to (i) continue to focus on the longer-term structural reforms that are critical to establishing a robust financial sector to complement the already strong real sector, and (ii) keep accelerating the pace of decline in USD/CNY to diffuse the unnecessary and unwanted political attention from a Democratic Congress. The pace of the USD/CNY crawl is too slow, relative to the pace of improvement of the external balance.
What Beijing has accomplished
Since July 2005, the CNY has appreciated by 6% against the dollar. While this may be the most visible and measurable accomplishment by Beijing, far more important in my view are the efforts China has made in other areas that are less visible, including structural reforms.
First, investors should appreciate the orderly manner in which the CNY was floated. I personally think that Beijing’s success in engineering such a feat is much more remarkable than the 6% nominal appreciation that seems to be the fixation of many observers.
Second, three of the four state banks — which account for 51% of China’s total deposits and loans — have been privatized. Privatisation is not just about the government divesting from the banking sector, but is also a necessary step towards a fundamental change in the philosophy behind bank lending and bank management.
Third, China has been taking steps to create a viable and liquid money and exchange rate market. China genuinely wants to create a market-based flexible exchange rate system, primarily because it recognizes the ultimate need to have its own independent monetary policy. However, the institutional framework in China is still too under-developed to allow interest rates or the exchange rate be determined fully by market forces. The currency market is a good example. Capital inflows are more liberal than capital outflows, and exports are encouraged over imports. If Beijing completely halts currency intervention today, USD/CNY would no doubt collapse. But where USD/CNY trades then is far from the ‘market-clearing’ parity had the asymmetric restrictions on capital outflows and imports been absent. At this point, China does not even have a yield curve that is liquid and meaningful. This makes it difficult for exporters and importers and investors to hedge, and difficult for the currency market to be liquid and balanced.
The key point here is that I believe China has the right strategy regarding ‘sequencing’ of reforms to establish a flexible exchange rate regime. Capital account liberalization does not need to be complete for the exchange rate to be more flexible, but it is prudent for China to gradually liberalize the capital account at the same time as it gradually allows greater currency flexibility. China is in the process of terminating the above-mentioned asymmetries, including the introduction of measures to liberalize capital outflows. It has also introduced new instruments (swaps, forward, derivatives) in both the money and the currency markets. More recently, a decision was made to encourage the development of the corporate bond market. It will take time for these markets to develop, but China is making the right structural changes, in my view, while allowing the CNY to be more flexible.
In addition to the question of sequencing, a related issue is a proper measure that can be used to track the progress China is making on structural reforms. I believe it would be useful for both Beijing and the US Treasury to focus on the following: (i) sorting out the import impediments and export subsidies; (ii) establishing a viable money market that can generate a meaningful yield curve; (iii) continuing to construct a foreign exchange market by introducing greater FX instruments; and (iv) permitting greater daily USD/CNY flexibility to encourage risk-taking/hedging.
Why Beijing has a case in this CNY debate
Focusing more on the specific debate on the CNY policy, I find Beijing’s case for a gradual move, rather than a maxi-step revaluation, in USD/CNY rather compelling. First, I believe that much of the imbalances in the world are a natural consequence of globalization. This has to do with fundamental savings-investment (S-I) imbalances and how financial globalization has accentuated these S-I trends. An exchange rate-based solution to these imbalances is fundamentally flawed.
Second, I have argued that agreeing to the Plaza Accord was one of the biggest policy mistakes Japan has made. With its financial system being even more under-developed than that of Japan two decades ago, Beijing made the right decision to reject demands for a maxi-CNY revaluation.
Third, a gradualist approach to CNY adjustment gives time for the exporters in China to be acclimated to an environment of flexible exchange rates, including enhancing the competitiveness of their operations as well as learning to use the hedging tools in the currency markets. A gradualist approach has also bought time for the Chinese authorities to implement the structural changes that I mentioned will be critical for the long run.
However, the pace of decline in USD/CNY is too slow
I make these points:
• Point 1. China can easily handle more currency strength. There are two popular arguments I’ve always thought were somewhat mutually inconsistent. On the one hand, many (including myself) argue that the trade elasticities with respect to price (exchange rate) changes have dramatically declined in recent years and that exchange rate movements may not lead to a meaningful change in the trade balances. On the other hand, many (including myself) argue that large currency appreciation could severely hurt exporters. One way to reconcile these two arguments is that the former is a point about real exports while the latter is about the profit margin of exporters.
On the first point, China’s exports have continued to grow rapidly, despite the CNY appreciation. I think it is difficult to argue that the CNY’s appreciation has had a deleterious impact on real exports or GDP growth of China.
On the latter point, it has been argued that the profit margin of Chinese exporters is paper thin, which, in turn, would not permit further CNY appreciation. First, if there were a good market for currency hedging, part of this margin problem could be avoided, at least for some time for the exporters to adjust. Second, it is not clear that China should continue to encourage low value-added activities. Other Asian countries, including Japan, Korea and Taiwan, all went through this phase some time ago. What they learned was that the currency policy as regards trade is a sort of chicken-and-egg problem. If exporters are not ‘disciplined’ by competition and the market, they will not be compelled to work their way up the value-added ladder. Conversely, if there are entities that don’t have the capability to move up the value-added ladder, cheap currencies may offer temporary shelter. Beijing has to make a decision to sever the circularity.
• Point 2. A stronger currency has merits. All too often, the focus of debates on currency policies is the real sector/exports/jobs. A cheap CNY not only makes Chinese products cheap, but also makes Chinese companies cheap. In a way, Chinese enterprises are being offered to foreigners at discount prices. At the same time, the purchasing power of domestic investors looking to invest overseas is compromised by the cheap currency.
Moreover, while China has collectively accumulated foreign assets through years of running trade surpluses, most of the wealth is in the form of official reserves. Private sector holdings of foreign wealth are limited. In our note from last week, we pointed out that China’s gross holdings of foreign assets total only 53% of GDP, compared with 100% in Japan and 185% in Taiwan. Further, the private sector in China holds only some 30% of the total foreign assets of China — the rest being held by the government, mostly in the form of official reserves. Premier Wen announced this past Monday that, mainly because the PBoC now has more reserves than it needs for liquidity purposes, part of the official reserves will be invested in a more diversified portfolio of assets. The large balance of payments surplus and the current currency policy have led to the government/PBoC accumulating foreign wealth on behalf of the general population. It is not clear that this arrangement is optimal.
In any case, to me, the argument in favor of a competitive CNY is no longer clear-cut: a stronger currency has important merits for asset ownership, even though it may have negative real effects.
• Point 3. The official reserves are growing too rapidly. China’s official reserves expanded by another US$240 billion in 2006, with only about half of these reserves being sterilized. I will not belabor this familiar point, but only underscore that the situation has not improved, that persistently large BoP surpluses will continue to pose a challenge for the monetary authorities. Interest rates are kept low (negative in real terms) partly because Beijing does not want to create positive carry for the CNY. This easy monetary policy will continue to distort capital allocation.
• Point 4. The REER of the CNY has not changed since 2003. While many focus on the trajectory of USD/CNY, what matters more is the REER (real effective exchange rate) of the CNY. According to the BIS, the REER, measured both against a narrow and a broad set of currencies, has essentially not changed since 2003. The 6% decline in USD/CNY since July 2005 has essentially been offset by the USD’s weakness against the AXJ currencies and the European currencies.
• Point 5. The cost-benefit proposition does not justify confronting the US Congress over the USD/CNY parity. I don’t think that the costs to China from having a slightly faster rate of crawl of USD/CNY are that high, while the costs of not doing so have risen, now that the US has a Democratic Congress. I believe that China’s decision to de-peg the CNY in July 2005 and the subsequent down-trend in USD/CNY have indeed diffused a good deal of political tension in the US: just imagine what would have happened had China kept the USD/CNY peg in 2005. Similarly, I believe that most US politicians will continue to see USD/CNY as the most clear measure of progress by China. Guiding USD/CNY lower at a slightly faster pace has more benefits than costs, in my view.
I fully endorse the policies implemented by Beijing so far, in its march toward establishing a flexible currency regime. While the recent acceleration in the rate of CNY appreciation is encouraging, I believe that the cost-benefit trade-offs have shifted in favor of China further accelerating the rate of crawl of USD/CNY, to meaningfully break below 7.50 by year-end.
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Protectionist Threats: Then and Now
January 26, 2007
By Stephen S. Roach
| from Davos
America has been down this road before. In many respects, the Japan bashing of the late 1980s has an eerie, but encouraging, similarity with the China bashing of today. Most believe that the outcome of nearly 20 years ago is emblematic of what can be expected today -- a lot of bluster, but trade frictions that stopped far short of protectionism. That may be giving rise to a false sense of security. Unfortunately, some important complicating factors may draw this conclusion into serious question.
First of all, there is a major scale problem that raises a red flag for the protectionists. As of 3Q06, the US current account deficit stood at -6.8% of GDP -- double the -3.5% shortfall hit in 4Q86 when the external imbalance was at its worst in that earlier period. In both cases, the trade deficits were dominated by large bilateral imbalances with two major trading partners; Japan accounted for 37% of the peak US merchandise trade deficit in 1987 whereas the Chinese share is about 29% today. While the concentration factor was worse for Japan back in the 1980s, the scale implications paint a very different picture. China’s bilateral imbalance is currently about -1.9% of US GDP -- more than 50% larger than the peak -1.2% share of Japan back in the late 1980s.
Consequently, on the basis of this simple calculation, the China factor appears to be considerably bigger than the Japan factor -- stoking concerns of the protectionists who claim there is much more to fear from one trading partner today than was the case nearly 20 years ago. Yet that turns out to be a very superficial and dangerous conclusion -- especially when it gets in the hands of xenophobic politicians. Fixating on China as the culprit behind America’s trade deficit -- the imbalance that is widely identified in political circles as the source of pressures bearing down on American workers -- misses two key points: First, a saving-short US economy must import surplus saving from abroad in order to grow -- and run massive current account and trade deficits in order to attract the foreign capital. By sourcing the largest piece of the deficit with China, the US has access to low-cost, high-quality products. If Congress were to close down trade with China, the saving shortfall wouldn’t be altered nor would the concomitant multilateral trade deficit. Instead, the Chinese piece would just be sourced by higher-cost producers, and that would result in the functional equivalent of a tax on the American consumer.
A second reason why the China concentration ratio overstates the source of America’s trade problem is that a surprisingly small proportion of the goods shipped from China to the US reflect value added inside of China. Academic research by Stanford Professor Laurence Lau has, in fact, shown that only about 20% of Chinese exports to the US reflect domestic Chinese content; the rest consists of components and parts from China’s trading partners -- predominantly those elsewhere in Asia (see Lau’s testimony before the US Congressional Executive Commission on China, “Is China Playing by the Rules?” September 2003). It turns out that China is more of an assembler than a manufacturer. While it may send a disproportionate share of its finished goods exports to the United States, that’s more a reflection of China being the final point in the assembly line than anything else.
Notwithstanding a more careful assessment of the China factor that puts the US deficit concentration ratio in perspective, there can be no mistaking the intensity of the angst bearing down on the American workforce. I suspect something else may be at work here. As I have noted previously, at present, there is an extraordinary disparity between the capital and labor shares of US national income (see my 8 January dispatch, “The Power Shift”). The profits share currently stands at a 50-year high of 12.4%, whereas the labor compensation is just 56.3% -- back to levels last seen on a sustained basis in the late 1960s. It turns out that’s a very different juxtaposition of economic power relative to that which prevailed during the Japan bashing of the late 1980s. Back then, the shares of both capital and labor were under pressure: The profits share of about 7% was well below the 10% reading hit a decade earlier whereas the labor compensation share of about 58% was down markedly from the 60% reading hit in the early 1980s.
In my view, this underscores a key element of tension in America’s current backlash against globalization that was not evident in the late 1980s. Today, the pressures are being borne disproportionately by labor, whereas 20 years ago, capital and labor were in the struggle together. In the late 1980s, many of the once proud icons of Corporate America were fighting for competitive survival at the same time that US workers were feeling the heat of global competition. The pain was, in effect, balanced. Today, US companies, as seen through the lens of corporate profitability, are thriving as never before while the American workforce is increasingly isolated in its competitive squeeze. In essence, capital and labor are working very much at cross purposes in the current climate, whereas back in the late 1980s they were both in the same boat.
There are other differences between then and now that could also be intensifying the angst of the American worker today. Back in the late 1980s, the perceived adversary, Japan, was a wealthy developed country that paid its workers wage rates comparable to those in the US. Today, the fixation is over a poor developing country, China, where manufacturing workers are paid at about 3% the hourly rate of those in America. Moreover, the competitive pressures of the 1980s were the slow-moving variety bearing down on the manufacturing sector. Today, courtesy of IT-enabled outsourcing, the threat is intensifying at hyper-speed, while at the same time, spreading from manufacturing to once nontradable services. In other words, it is really not that difficult to understand why the fear factor of US workers is far more exaggerated today than it was during the late 1980s.
All this, of course, feeds into the political backlash that is now bubbling over in the newly-elected US Congress. Pro-labor Democrats have heard the message loud and clear. Middle-class American workers feel isolated as never before -- not only threatened by a rapidly changing competitive dynamic but also left far behind by the owners of capital. Consequently, in this climate, it pays to take the threat of protectionism far more seriously than was the case during the late 1980s. That’s good reason to worry that China bashing could end up being a good deal worse than the Japan bashing of some 20 years ago. For those with a keen sense of the lessons of history, protectionism seems almost unimaginable. Think again.
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Oil Update: Fast Forward
January 26, 2007
By Richard Berner
and Eric Chaney
| New York and London, New York and London
Oil prices have plunged earlier than we thought, essentially fast-forwarding our forecast for 2008 into 2007. On our new baseline, Brent crude quotes would average US$ 53.10/bl in 2007, 13% lower than in our November projection, and $54.40 in 2008, 6% higher than previously assumed. Two months ago, we thought that the medium-term trend in oil prices was down towards $50/bbl for both Brent and WTI, reflecting faster growth in supply than demand, but that a winter-induced, short-term rebound probably lay ahead (see “Oil Update: Short-Term Rebound Ahead,” Global Economic Forum, November 17, 2006).
Courtesy of a coming El Niño, we knew that the winter would be warmer than normal; however, little did we suspect in November that 2006 would see the warmest December in a century (see “Winter Weather: Cause for Concern?” Global Economic Forum, October 27, 2006). The aberrant weather helped to undermine prices faster. The unwinding of speculative positions also contributed: Oil producers seeking to hedge their inventory bought $50 puts and sold $80 calls, and as the puts came into the money, they forced the option sellers to cover their positions.
Now what? The analytics of the recent price slide matter: While balmy weather probably accelerated the price collapse, it was not the whole story. In fact, we continue to attribute this slide more to expanded supply than to weak demand. Less-tight product and crude markets thus imply lingering downside risks to price, but we think a $50-$60 trading range is likely for now, and that prices may begin to climb again in 2008. In the short run, US retail gasoline prices could fall to as low as $2/gallon, giving a near-term lift to growth (see “Implications of Lower Oil Prices,” Global Economic Forum, January 15, 2007)
Separating supply from demand effects on price is difficult; after all, many factors contributed to the price slide from $78/bbl. The brewing Pacific El Niño made December in the United States the warmest in 106 years of record keeping and affected other regions such as Europe. December’s level of heating degree-days — a composite indicating energy demand — was 14% below the 10-year average for that month.
While the effects on energy quotes of the aberrant weather will be mainly transitory, given that temperatures are returning to normal, some will linger. That’s because the "lost" heating days are gone and natural gas and distillate and US residual fuel oil inventories are commensurately higher — the latter 6.4% above year-ago levels, when the weather was also warmer than normal. In addition, the US Energy Information Administration (EIA) notes that the delayed winter “widened the inventory safety net [in propane, which is widely used for heating], or cushion, for any potential late season surges in demand, likely softening any possible price spikes over this period.” Although the cold weather has sharply reduced propane stocks in the past two weeks, data for the week ended January 19 still indicate a 33-day supply.
But there is a more important change underway in global oil markets: After four years of global demand growth outstripping supply, which made the supply-demand balance tighter and more vulnerable to shocks, supply is now starting to outstrip demand, alleviating the pressure on prices. Some of that reflects the long-awaited effect of higher prices on demand; we estimate that a 20% increase in price will trim demand by 1% after about 3 years. But global growth also drives energy demand, and it seems firm: Even with the warm weather, the US Energy Information Administration (EIA) estimates that global petroleum demand will increase by 1 mbd in the first quarter from a year ago. Looking ahead, the International Energy Agency is even more bullish, forecasting a rise of 1.6 mbd over the course of 2007.
Two key factors enable us to identify increased supply as the key driver. At the refined products level, as we noted in November, refiners have invested in de-bottlenecking that has increased middle distillate (diesel and jet fuel) yields. And in crude markets, the EIA estimates that non-OPEC supply has increased by 1.5 mbd compared with a year ago. That may not sound like much for a world consuming 86.2 mbd, but it has more than offset the decline in OPEC supply.
A third supply factor comes from the producers, namely OPEC’s response to lower prices. In November we thought the just-announced OPEC production cut of 1.2 mbd would also help firm up the supply-demand balance. But enforcing cohesion among OPEC members is difficult in a declining market. No single member is willing to play the role of “swing” producer and give the gift of market share to those who cheat, especially against today’s geopolitical backdrop. Reflecting that dynamic, Kuwait's oil minister, Sheikh Ali al-Jarrah, this week said that there was no need for a further cut in output before OPEC’s March 15 meeting, "if [cuts] are fully implemented” — i.e., if there is no cheating.
OPEC just got some help from the Bush Administration: In his State of the Union speech, President Bush announced his intention to double the size of the US Strategic Petroleum Reserve over the next twenty years. More important, purchases could begin at a rate of 100,000 b/d as soon as this spring, in part to restock oil sold in the wake of Hurricanes Katrina and Rita in 2005. Market participants also think that China, India and South Korea may redouble their efforts to build up their strategic reserves; China began filling its reserve in October. This strategic bid may help put a floor under prices.
Looking further ahead to 2008, we expect that global demand will regain the upper hand in energy markets, but only by a narrow margin, promoting moderate price increases. With the US and Europe accelerating, and Asian demand firming, demand for refined products and thus crude should increase.
In the very long term, we believe that the price of crude oil will rise faster than inflation. As Columbia Professor Harold Hotelling showed in a famous paper (“The Economics of Exhaustible Resources,” Journal of Political Economy, 1931), the price of an exhaustible resource should rise at an annual rate equal to the producers’ discount rate, almost independently of the market structure (monopoly or perfect competition), if producers only sought to maximize their long-term income.
In the real world, the real price of oil has largely deviated from the Hotelling rule, with a period of excessively high prices (1974-1985) followed by a period of abnormally low prices (1992-1999). Last year’s peak at $78 was a significant overshooting compared to a reasonable Hotelling trajectory, and the correction since then probably brought back the price of crude oil more in line with fundamentals.
However, the long-term picture is not a mean reversion process for the fundamental reason discovered by Hotelling: the optimal production path should equalize the present value of tomorrow’s price to today’s price, other things being equal. Since producers give more value to today’s than to tomorrow’s income, this implies that the real price of oil should rise at a rate in line with long-term real interest rates. Since in the long run, real interest rates should not deviate significantly from the real growth rate of the real economy, we believe that the real price of oil should rise between 2% and 5%, which would imply a 4% to 7% growth rate for the nominal price.
We’re always mindful of the risks in forecasting oil prices, so, as has become our custom, we again look at several alternative scenarios. In the “hot” scenario, a collapse of Iraq’s production or an embargo vis-à-vis Iran exports might push the barrel to $90 or higher. Even a daily shortfall of 3 mbd could produce such an outcome. That’s because supply and demand for energy are both insensitive to price in the short run, so even a moderate shock can have a big impact. In the “cool” alternative, a significant economic slowdown in the US and China, with OPEC production unchanged, could cut prices to $40. Our “super-cool” scenario assumes a global economic slowdown combined with a market share strategy by Saudi Arabia, as in 1985-86. In that case, crude oil prices could drop to the low $20s.
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January 26, 2007
By Serhan Cevik
Global warming has already resulted in more extreme weather conditions. The global surface temperature has risen from an average of 13.9 degrees centigrade in the first half of the twentieth century to the peak of 15˚C last year, according to the data compiled by the Goddard Institute for Space Studies. Global warming of a few degrees may seem small compared to seasonal or even daily changes in weather, but such a degree of increase is in fact the fastest rate of change in the last 10,000 years. Furthermore, with rising temperatures around the world, the deviation from the long-term mean has surged at an accelerating pace to 0.96˚C in the past two years from an average of 0.52˚C in the 1990s and 0.11˚C in the previous two decades (see Stay Tuned to the Weather Channel, August 4, 2006). If greenhouse gas emissions remain unchecked, the latest projections suggest that the average global surface temperature would increase by 2˚C in the next 45 years and 5˚C by the end of the century. Since even marginal warming is enough to result in higher volatility in climatic conditions, the expected shift would dramatically intensify weather anomalies and have significant consequences for the environment and the global economy.
Climatic shifts have increasingly more pronounced effects on soft commodity prices. Meteorological conditions have obvious effects on agricultural production and therefore soft commodity prices. However, global warming is now a source of unpredictable changes in variability patterns, causing supply-side shocks and excruciating fluctuations in food prices. Take, for example, the sudden surge in grain and other soft commodity prices around the world. Although burgeoning demand has played a role, weather-related climatic oscillations are likely to have more extreme effects on environmental conditions and agricultural production cycles. While some countries may benefit from higher productivity due to increased carbon dioxide in the atmosphere, the overall long-term effect of increasing volatility and extreme weather would threaten macroeconomic stability and social wellbeing, especially in the developing world. In particular, net food-importing countries, like those in the Middle East and North Africa region, stand to suffer from global warming on growth and inflation fronts.
The rise in unprocessed food prices is a significant threat to price stability. In the last couple of years, we have witnessed a sustained rise in unprocessed food prices in a range of countries from Mexico to Israel and Turkey. Similar to the Israeli experience, food prices in Turkey’s consumer price index increased by 11.2% last year, up from 4.9% in 2005, and made a significant contribution to headline inflation. The reason behind such a divergence from seasonal patterns was not just demand pressures, but also the curious behavior of unprocessed food prices and its influence on other items. The year-on-year rate of increase in unprocessed food prices increased rapidly from an average of 1.7% in the first half of 2005 to the peak of 21.8% last July, when processed food prices posted a 5.4% increase. In our view, supply shocks due to adverse weather conditions were behind this increase in unprocessed food prices, which obviously put upward pressure on headline inflation (see The Mysterious Vegetarian Demand Bubble, June 19, 2006). Albeit showing some degree of normalization in recent months, the volatile nature of food prices still represents a threat to price stability.
Higher volatility in food prices makes the implementation of inflation-targeting more challenging. Climatic supply shocks have already led to higher volatility in (unprocessed) food prices, and global warming could make the magnitude of such shocks even worse. For example, the Ministry of Agriculture estimates that a 1˚C increase in the average temperature would reduce grain production by 10% in Turkey. Although the country’s trade surplus in agriculture provides a reasonable cushion in the shorter term, inflationary consequences would still make the implementation of inflation targeting more challenging. In our opinion, the situation could get even more difficult for net food-importing countries in the region that heavily subsidize food prices.
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Monetary Policy – Expect Tightening Mode to Continue
January 26, 2007
By Chetan Ahya
and Mihir Sheth
| Mumbai, Mumbai
Another rate hike or pause?
The Reserve Bank of India (RBI) is scheduled to announce its quarterly monetary policy statement on January 31. To the extent that we believe that low real rate-sponsored credit-funded spending is at the heart of the current growth cycle, monetary policy remains the single most important issue for the macro outlook. We believe that both domestic demand, as well as the global interest rate environment, warrant another tightening move by the central bank in the coming monetary policy statement.
Is the economy overheating?
If realized growth is running above potential growth, the economy is said to be overheating. As the RBI’s last monetary policy statement explained, in today’s globalized world, estimating potential output is difficult, particularly for an emerging market like India where large unemployment/underemployment of resources exists. In its last monetary policy statement, the RBI had conveyed that “while there is no conclusive evidence of overheating in the Indian economy at the current juncture, the criticality of monitoring all available indicators that point to excess aggregate demand is perhaps more relevant now than ever before”. However, it also mentioned in the same statement “nevertheless, recent developments, in particular the combination of high growth and consumer inflation coupled with escalating asset prices and tightening infrastructural bottlenecks, underscore the need to reckon with dangers of overheating and the implications for the timing and direction of monetary policy setting”.
We believe that India has witnessed an unusually loose monetary policy over the last three years, which increased the country’s credit outstanding by US$210 billion to US$400 billion. Unusually low global interest rates and large capital inflows into India (and emerging markets in general) have been the anchor to this loose monetary policy. Initially, credit-funded spending was driving growth without causing any excesses as the domestic productive capacity was underutilized. However, we believe that over the last 12-18 months, signs of overheating are evident.
Unlike China, India’s response for productive capacity creation has tended to be weak. This has resulted in India’s absorption of liquidity for productive capacity being less than optimal, resulting in excess aggregate demand. The adverse impact of these macroeconomic conditions has clearly been a cause of concern for the RBI, as reflected in a number of measures taken to reduce the side effects of the less-than-optimal absorption of liquidity in the financial system.
However, we believe that these efforts haven’t yet fully addressed the concerns of overheating.
First, inflation pressures have continued to mount. Inflation, as measured by the new CPI Index, has witnessed a significant rise in recent months. The three-month moving average CPI inflation for industrial workers has increased to 7.1% as of November 2006 (last data point available) compared with an average of 4% in 2005. Although the RBI still targets inflation as measured by the wholesale price inflation index or WPI (due to absence of a reliable long-term series of country-wide CPI-based inflation measures), we believe that the accuracy of WPI as a measure for excess aggregate demand is low considering that global commodity-related intermediate products (not final consumption goods) account for 37% of the index. In any case, even the WPI has recently crossed the RBI’s comfort target of 5-5.5%.
Second, the current account deficit has continued to widen. In an open economy environment, excess aggregate demand would not necessarily be reflected in pricing pressure, particularly for manufactured products which face competition from imports. The current account deficit widened to US$6.9 billion (3.3% of GDP, annualized) during quarter ended (QE) Sept-06, driven by an all-time high trade deficit.
Third, the banking sector balance sheet is stretched and reflects the constraints of maintaining current levels of demand growth. The gap between credit and deposit growth has been a key cause of concern for the RBI. Although credit growth has moderated to 30% from the peak of 33%, it remains significantly higher than the deposit growth rate of 22.5%. In the annual monetary policy statement announced in April 2006, the RBI indicated a target of 20% YoY for total commercial bank credit (including non-food bank credit, investments in bonds/debentures/shares of public sector undertakings and private corporate sector and commercial paper) in F2007 (YE March 2007). However, total commercial credit (bank credit plus corporate bonds) growth has remained strong at 29.5% as of January 2007, compared with 29.6% in April.
The trailing one-year incremental credit-deposit ratio is also very high at 93%. The RBI has already taken a number of measures to slow credit growth over the past 2.5 years, including a 150 bp hike in policy rates. However, we believe that the RBI has been relatively slow in withdrawing its accommodative stance, which has in turn left more room for the banks to pursue credit growth in an aggressive manner. Indeed, the current credit cycle has been one of the longest that India has witnessed in the past 35 years.
Fourth, lending behavior in the banking sector, although improving, is still a concern. Apart from the high credit growth, the quality of the credit being disbursed is also a worry. Banks have not only been lending more to riskier segments, but have also been mis-pricing the credit. The RBI is clearly concerned with the strong credit growth creation in the retail and real estate sectors. Although the RBI has initiated administrative measures to reduce the bias towards funding consumption and less productive sectors, we believe that the mix of incremental credit disbursement is still less than optimal. The issue of mis-pricing is evident from the fact that banks have created over 50% of their current loan book during the past three years, a period during which their lending rate pricing risk curve has been flattening (i.e., banks were lending for two-wheeler purchases at a rate not far from 10-year bond yields). We believe that many major banks have not been pricing credit risk adequately and many of them are also not fully equipped with the right risk management systems to match the aggressive retail loan growth pursued.
Fifth, asset prices have been flying high. The property market has continued to witness a euphoric trend. As discussed earlier, excess liquidity without an adequate supply response in the form of absorption of productive capacity creation is resulting in rising asset prices. In the case of the property market, prices have risen by 100-300% in major cities over the past two years.
Last, the dependence of high aggregate demand on global liquidity inflows, which are inherently less stable, has been rising. Cumulatively, over the last 3.5 years, India has seen capital inflows of US$87 billion versus US$35 billion in the preceding 3.5 years. Low real interest rates globally and the consequent rise in risk appetite have driven this disproportionate increase in capital inflows into India.
Global environment turning less supportive
The global interest rate environment has been one of the key factors influencing Indian monetary policy. When the RBI last announced its monetary policy on October 31, market expectations discounted the US fed funds rate to start declining in April 2007. However, Fed Futures contracts for July maturity are now almost pricing out any possibility of a rate cut. The ECB and Bank of England have also tightened monetary policy further over the last three months.
We believe that domestic macro trends warrant the RBI hiking policy rates by another 25bp. The risk to our view arises from the fact that the RBI has in the past chosen to be more accommodative and gradual in hiking rates.
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Protectionism and Currencies
January 26, 2007
By Stephen Jen
Summary and conclusions
In this note, I present some of my basic thoughts on how protectionism may affect currencies. Looking at the political landscape in the US this year, I believe that protectionism is a genuine risk, and if this risk materializes, USD/Asia (including USD/JPY) would come under intense downward pressure.
A generalized framework on protectionism
I believe it is important to first of all acknowledge that there are different types of protectionist measures. All too often, when we mention the word ‘protectionism’, we think about Senator Schumer and China. I don’t think this is correct, or at least this is only a part of the story.
I see three distinct types of protectionism: real sector/trade, financial and labor. To me, protectionist measures are, in the current context, reactions to different kinds of globalization. Real sector globalization has led to global imbalances and downward pressure on the wages of developed economies. Financial globalization has also triggered sharp reactions in the countries receiving the inflows. It is important not to underestimate financial globalization, as it is the necessary counterpart to real sector globalization. From the perspective of the external balance, real sector globalization is captured by the C/A balance, while financial globalization is captured by the capital account balance: they are two sides of the same coin. Incidentally, I believe that the main reason why many who believed that the dollar would crumble under the weight of the US C/A deficit held that belief was because they underestimated the importance of capital flows.
In addition to trade and financial protectionism, I also list a third category: labor protectionism. This is, in my view, a new risk that some may not be familiar with. So far in the globalization process, by and large, capital has migrated to meet labor. In the current phase of globalization, capital has been super-mobile, from an international perspective, while labor has not been, at least not relative to capital flows.
However, in the last two years, labor migration within Europe has become an event with meaningful economic consequences. The large immigration to the UK has helped cap inflationary and wage pressures, until recently. In fact, for a long while, policy makers and analysts were puzzled by the lack of wage pressures despite the low inflation rate and output gap. Similarly, in the Nordic countries (Norway and Sweden in particular), immigration has also become an important positive supply-side shock that has rendered the traditional output gap-based analysis less than useful. In Switzerland, we have also seen substantial immigration of highly skilled workers (particularly from Germany). This supply shock has also altered the way the SNB thinks about its monetary policy. In any case, some time in the future, it is possible that labor protectionism becomes an issue in some parts of the world.
Impact on the currency markets
I have three thoughts on how protectionism could affect currencies.
1. Any protectionist measure imposed by the US will be USD-negative. A key reason why the US has enjoyed such high productivity growth since the mid-1990s, in my view, has to do with the effectiveness with which the US multinational corporations capitalized on real sector globalization. Specifically, they have succeeded in capturing the major portion of value-added through outsourcing. High productivity growth has underpinned high profit growth and headline GDP growth, which has in turn made USD assets attractive to foreign investors. If the US imposes trade protectionist measures, it would essentially be destroying the very model that made the economy strong. This would be USD-negative, in my view.
2. No contagion in emerging markets from protectionism. Similar to my argument above, for emerging markets, any unilateral measure to impose restrictions on capital inflows (e.g., Thailand, Russia, Venezuela) would be negative only for their own currencies, ceteris paribus. The negative spillover effects on the neighboring countries should be minimal. If anything, I believe that there should be more of a substitution effect, whereby foreign investment would be diverted to other countries that are seen as substitutes. The example of Thailand shows that portfolio flows into the AXJ economies have been sustained, unabated. A key reason why there is minimal contagion is that most countries continue to implement policies that try to capitalize on the benefits of globalization, rather than resisting globalization. China and Korea are good examples, where they have continued to liberalize capital outflows.
3. Shifting financial power: not just geographic. There is a lot of angst about how financial power has shifted from the US toward Asia and the Middle East. While I am sympathetic to this basic notion, I think that the underlying tensions in this globalized world also run in dimensions other than the geographic, and protectionist pressures may emerge from these non-geographic pressure points.
First, there is the existing tension along the labor-capital axis. This is something Stephen Roach and I have talked about for some time. Protectionist pressures in the US, China, Euroland and elsewhere will be a function of the tug-of-war between capital and labor within each economy, not across national borders.
Second, there is the tension along the real-financial axis. Asia and the Middle East may have run large net savings positions, but they still had no choice but to invest in the developed financial markets. It is far from clear that financial power is derived only from exports; the US and the UK derive a great deal of financial power through their attractive financial markets. The large exporting countries in Asia and the Middle East earn risk-free returns on their foreign investments, while the US earns substantially higher returns from its foreign investments, with FDI accounting for the largest portion of US foreign investment. In short, Asia may have a comparative advantage in the goods market, but the US has an absolute and comparative advantage in the financial sector.
Third, there is also mounting tension along the public-private axis. One area in which this is particularly acute is in how the outsized official reserves and the ‘sovereign wealth/alpha funds’ may compete with the private sector flows. The former are not regulated, and are massive in size. As they continue to grow, the balance of financial power will also shift in favor of the public sector.
4. Need to also consider the political dimension. Protectionism is rarely only about economics. In fact, few protectionist measures make sense from a purely economic, ‘general equilibrium’ perspective. For example, while Democrats tend to be in favor of a protectionist stance against China, I just wonder if the recent missile test conducted by China (that shot down an aging satellite) could energize the conservative base in support of protectionist measures against China. Often, protectionist measures that don’t seem to make economic sense may be justified by geopolitics.
Protectionism is about various economies’ reactions to different forms of globalization. I see three distinct types of protectionism: real sector/trade, financial and labor. It is important not to be fixated on Schumer-versus-China when thinking about ‘protectionism’. Further, it is important to recognize that globalization has led to mounting tensions along different axes. The shifts in global financial power are happening in dimensions other than the geographic.
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Drifting Policy Rate
January 26, 2007
By Takehiro Sato
BoJ normalization efforts handcuffed by declining prices
Domestic and overseas economies overcame mid-2006 sluggishness and rebounded in Oct-Dec, and risk is mostly to the upside in contrast to lingering bearishness. Yet a dip by Japan’s core CPI rate into negative territory has surfaced as the main scenario rather than a risk. We expect Japan’s core CPI rate to stay at a negative level through F3/08 based on a more conservative view of prices. This reality is likely to restrict BoJ rate-hike action in 2007 to a single move at most in the Feb-Mar timeframe. The rate-hike pace might slightly accelerate in 2008 as prices recover. Below we review revisions to our policy rate outlook based on the outlook for domestic and overseas fundamentals.
Healthier domestic and overseas economic fundamentals
Domestic and overseas economies are headed upward after overcoming mid-2006 sluggishness. Japan’s corporate sector has firmed in recent months as indicated by industrial production and machinery orders data, and the household sector is recovering, albeit not dramatically, from a slump in mid-2006. In fact, corporate inventories for IT-related goods declined for the first time in seven months according to November production data. This contrasts with the bearish premise of a negative trend for IT-related goods inventories. We think that healthy sales of home electronics equipment during the US Christmas season helped move along inventory adjustments for IT goods. Overseas machinery orders reached a new peak, though partially aided by a surge in shipbuilding orders, according to November Machinery Orders. We expect new orders in Jan-Mar 2007 for expansion of automobile production lines and other projects. The December BoJ Tankan reported a prompt return to positive corporate land-purchasing plans at the all-industries level, confirming a pick-up in land purchases as well as the prospect of firm capital investment demand. The lagging household sector recorded a robust 2.8% QoQ increase in real consumption spending during Oct-Nov, albeit partially as a reaction from weak Jul-Sep spending, even tough real wages are still stuck at a negative rate. Supply-side consumption data such as retail sales and consumption good shipments were also reasonable.
The US economy’s slowdown from correction of the housing bubble is turning out to have been a temporary setback limited to Jul-Sep 2006 in contrast to most forecasts. Employment and other data for December already show healthy job, income and consumption conditions, and January data risk is mostly to the upside since the survey was conducted prior to the arrival of the recent wave of colder weather. While the housing bubble was a primary driver of US consumption through last year, recent strong wage and job gains should support normal consumption growth fuelled by income advances, even if consumption is modestly restricted by higher savings rates. We conclude that risk is mostly to the upside in Japan and abroad in contrast to lingering bearishness. These fundamentals should support the BoJ’s normalization initiative. Prices are a hurdle, however.
Sluggish prices are a hurdle
Policymakers face a challenge in Japan with a dip in the core CPI rate into negative territory surfacing as the main scenario, rather than a risk, from a faster decline in oil prices than previously expected. The core CPI rate might turn negative as early as when March data for the Tokyo area is released at the end of March and the nationwide March data is released at the end of April. This development is unlikely to reignite deflation since lower energy prices have the same economic effect as a tax cut of enhancing consumers’ real purchasing power. We are also anticipating the restoration of a positive GDP deflator in Apr-Jun, a symbolic event, since a decline in the import deflator raises the GDP deflator. However, investors and government officials are unlikely to be comfortable with negative CPI data. Japan’s nationwide CPI data for March might be announced on the same day as the release of the BoJ Outlook Report on April 27 (though the exact date for the announcement has not been finalized yet). We think that the issuance of CPI data that moves into negative territory on the morning of the day when the BoJ Outlook Report is being released will have a sizable impact on the direction of monetary policy in F3/08. The BoJ will need to revise its price outlook lower in the report, in our view. The ‘core of core CPI’ would have to register a 0.085pp YoY increase every month from its current level of -0.16% to reach the BoJ’s existing core CPI outlook (+0.5% in F3/08), assuming that oil prices stay at the present level. However, this is unrealistic, judging from the stalled core of core. Japan’s core CPI rate might even remain negative throughout F3/08 without a notable improvement in the core of core. This outlook is steadily becoming a reality, rather than simply posing a risk, as explained above. We estimate a negative average core CPI rate (-0.1% YoY) in F3/08 with oil prices unchanged even if the ‘core of core CPI’ registers a 0.05pp YoY improvement every month during the year. Projected core CPI drops to -0.2%YoY with a flat core of core.
No rate hike in F3/08 under these conditions
The BoJ’s opportunities to implement an additional rate hike are clearly retreating following the decision to postpone rate action until at least February in order to have a closer look at consumption and price trends. We think that the BoJ is likely to lose the window of opportunity beyond the Feb-Mar timeframe once F3/08 begins. Our forecast for a January rate hike misjudged the resolve of Mr. Fukui to press forward with the normalization of monetary policy, and it will be tougher to justify an additional rate hike as time passes due to political and economic fundamental factors. Japan’s policy rate could be stalled throughout F3/08. We still discount for a 0.25% rate hike in the Feb-Mar timeframe but remove the projected July 2007 rate hike. This puts the policy rate at 0.50% at the end of 2007 and the end of F3/08.
Meanwhile, downward pressure on the CPI rate from oil prices will be exhausted in F3/08 if oil prices remain flat, enabling ‘core of core CPI’ improvement to lift the core CPI rate in F3/09. We discount for an accelerated rate-hike pace in F3/09 based on this dynamic, though oil prices are a risk. We believe that the BoJ should implement rate hikes at a pace of roughly once every six months in F3/09, raising the policy rate to 1.0% at the end of 2008 and the end of F3/09.
Japan’s monetary condition is becoming even more accommodative with the retreat of the BoJ’s policy normalization efforts and yen weakness on a real, effective basis. Reflationary macro policy should sustain the tailwind for property and other asset markets. The bond market, meanwhile, has lost the catalyst of higher interest rates. There is a chance of sharp upswings in asset prices or excessive yen weakness putting upward pressure on interest rates. Yet this view is not very realistic, since it would take extreme cases for these factors to affect the long-term rate. The ideal combination of a moderate upward trend in asset prices, low and stable long-term interest rates, and yen weakness on a real, effective basis is ironically continuing amid diminished confidence in the BoJ.
The above scenario relies heavily on oil prices. We think that an unexpected rebound in oil prices might encourage the BoJ to accelerate the rate-hike pace just as the return to a positive core CPI rate on higher oil prices prompted the reversal of quantitative easing. However, it would take extremely high prices of above US$80/barrel to put the core CPI rate back in positive territory only on the oil factor, considering flat momentum for core of core CPI and strong oil prices in the previous year.
Mr. Fukui has commented that the price decline from lower oil prices improves the terms of trade and has a favorable impact on the economy. In fact, lower energy prices have the same economic effect as a tax cut of enhancing real consumer purchasing power and are not necessarily deflationary. The BoJ might start making this argument to explain a rate hike even if prices are falling. However, we expect considerable resistance from the Abe administration and top LDP officials to monetary tightening when the price trend is negative, given their emphasis on reflation and the threat of weaker popular support. While some observers suggest that it will be easier to conduct rate hikes once political pressure retreats following the Upper House election in July, we think that resistance will continue.
There is also the scheduled replacement of the BoJ governor and two deputy governors in March 2008. Political maneuvering to select the new leadership should begin after the July Upper House election. If the Abe administration and current LDP officials remain in control after the election, they might select a reflation advocate instead of promoting Deputy Governor Muto to the top spot. This factor raises uncertainty for the rate-hike outlook from March 2008.
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January 26, 2007
By Eric Chaney
The decline of the Ifo index to 107.9 that took markets by surprise (but not our seasoned German economy expert, Elga Bartsch) was probably the tipping point that we were expecting. Here is the story: at the end of 2006, German consumers advanced their planned purchases of durable goods such as cars, brown and white goods, TV sets, etc., anticipating that price tags would probably go up more than usual this year, because of the bold 3-percentage-point VAT rate hike implemented by the government in order to balance its books. Note that this is independent of the actual rise in retail prices, since consumers took their decision before it. Because Germany is by far the largest market in Europe, this cheered up not only German producers, but also exporters to Germany such as French, Italian and Asian manufacturers, at the end of last year. As individual consumers do not buy cars, fridges, TV sets or computers so frequently, a slowdown in demand was due and the only relevant question was its magnitude. In this regard, the answer provided by euro area manufacturers, as synthesised by the Ifo, Insee, BNB and Dutch January surveys out this week, is that the slowdown is quite modest. Only the Italian Isae survey is missing, but it is unlikely to change the big picture, according to Vladimir Pillonca, our in-house expert on the Italian economy.
I believe that the correction is not over, and that February, maybe even March surveys might send a slightly more negative signal. However, even so, the probability of a ‘smooth transition’ we signaled in last month’s Business Cycle Watch now looks even higher.
A correction, with demand still red hot in Germany …
Demand and production indicators declined in perfect sync in all countries under review, causing a modest slowdown in the aggregate production index. In Germany, demand, although not as white-hot as in December, was still red-hot, at 2.5 standard deviations above the long-term average. By no means is this the correction that one would expect, if one believed in probability laws. As Elga Bartsch pointed out in her Ifo comment, January discount sales might have been more aggressive than usual, as producers and retailers might have waited until after this period to pass (partially at least) the increase in the value added tax. That is why I believe that the correction is likely to deepen in the next few months, as a result of the overhang in purchases of durable goods. One important observation supports this idea. Even though production plans were slightly upgraded while demand was downgraded, the gap between these two indicators is still one standard deviation, something quite unusual. Until July 2006, the gap was consistent with what we observed in previous recoveries, but then it widened considerably until December. Although actual demand growth remained stubbornly stronger than anticipated, producers refused equally stubbornly to upgrade production plans in a commensurate manner. My interpretation is that producers are convinced that demand will slow more than what we have seen in January. For that matter, I would trust them.
… but not a downturn
Our quantitative models took the correction serenely. The Surprise Gap Index slipped to the neutral zone, indicating neither acceleration nor deceleration in the near future. The manufacturing production indicator is calling for a slowdown from 1.4%Q in 4Q to 0.8%Q in 1Q. And our early GDP indicator is now predicting 0.7%Q GDP growth in 1Q (2.9% annualised, after a 2.8% estimate for 4Q). Before jumping to conclusions, please note this: our new GDP indicator is positively influenced by the slope of the yield curve. Consequently, the recent steepening of the curve, compounded with some acceleration in construction, annihilated the expected deceleration in manufacturing. This could be easily reversed. For that reason, we take the GDP indicator with a grain of salt, at this stage, and rather believe that growth should decelerate, not accelerate in 1Q.
Watch February surveys carefully
Looking forward, February surveys, especially the Ifo tally, will tell us more about the magnitude of the slowdown. The Belgian inventory indicator, for instance, is signaling a further reversal of the euro area inventory cycle. Indeed, the real surprise would be an acceleration in February (Ifo index going up, for instance), not a slowdown, in my view.
The ECB is unlikely to be impressed
Barring a dramatic downturn in the next round of business surveys, ECB hawks are unlikely to be impressed by the January correction, which is still consistent with above-trend GDP growth. Doves might argue that the full picture is still largely uncertain and that headline inflation is slowing. Hence, President Trichet might refrain from pre-announcing a rate hike in March as clearly as he did before the December Council meeting. Nevertheless, a rate hike in March remains by far the most likely outcome, as we have assumed in our central scenario for quite some time.
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Industrial Production Deceleration Continues
January 26, 2007
By Deyi Tan
and Chetan Ahya
| Singapore, Mumbai
Ending 4Q on a relatively weak note: Industrial production rose 5.1% YoY (versus 15.5% YoY in November), bringing 4Q06 industrial growth to 7.7% YoY. This is slightly higher than the 7.3% YoY advance estimate put out by the government earlier this month, but lower than the 9.5% YoY increase in 3Q06. For 2006, manufacturing production rose 11.5% YoY (versus +9.5% YoY in 2005).
Electronics deceleration continues: Electronics remains the main drag on production momentum, contracting 8.0% YoY (versus -0.9% YoY in November), and bringing 4Q06 growth to -6.2% YoY (versus 3.8% YoY in 3Q06). This is likely due to the lackluster performance in computer peripherals (-1.3% YoY in December versus +5.5% YoY in November), data storage (-30.1% versus -21.2%) and infocomms (-29.5% versus -10.4%). However, semiconductors, the key electronics sub-segment, held up relatively well at 13.9% YoY (versus +8.6% in November).
The chemicals segment contracted 1.7% YoY in December (versus +4.2% YoY in November) on plant shutdowns and lower refining production. Specifically, petroleum and petrochemicals contracted 0.2% YoY and 0.5% YoY, respectively, (versus +1.0% YoY and +3.8% YoY in November).
Transport and biomedical segments were the better-performing segments: Although the slowdown was mostly broad-based, transport and biomedical were the better-performing segments. Transport engineering rose 26.6% YoY in December (versus +25.7% in November), bringing 4Q06 growth to 24.8%. Biomedical rose 18.7% YoY (versus +45.9% in November), bringing 4Q06 growth to 27.0% YoY. Excluding biomedical, manufacturing rose at a slower 2.1% YoY (versus +8.0% in November).
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