The unfolding year for Asian economies will fail to replicate the dynamo 2004, suggests Calyon in its, "Asia Economic and Credit Strategy Report 2005." But it says the decline in GDP numbers will not be too significant to warrant whispers of a sizable regional decline.
According the recently released report, Calyon believes cumulative Asian GDP will decelerate mildly in 2005, collectively growing 6.8% in 2005 versus the estimated 7.5% witnessed in 2004. The slight drop in regional GDP growth will move in line with its global expectations, which the French investment bank says will drop 4.7% in 2004 to around 4.0% at the conclusion of 2005.
In Asia, Calyon sees the drivers for GDP deceleration coming in the form of possible inflation pressures on regional economies, vulnerability in the face of the stagnated US consumer market, global monetary tightening and China's softer-than-expected economic landing. However, the investment bank is quick to point out that the collective Asian GDP growth will outperform other key economic regions in 2005 and estimates that the regional economy will rebound sharply in 2006 to 7.4% across the board.
On an individual economy level, Calyon forecasts that India and Indonesia will be the prime GDP movers in 2005. According to its research, India is expected to post 7.0% GDP growth for the year, improving on last year's estimated 5.9% numbers. Indonesia is forecast to marginally improve on the 2004 estimate of 4.9% to end the year at 5.2% growth.
Elsewhere across the region it expects Hong Kong's GDP to take a 2.8% hit to land at 5.3% in 2005, with Calyon attesting that the drop comes from a large base and that the SAR's significant 2004 recovery is still a work in progress. Calyon's downturning forecasts for GDP growth are also prevalent across the rest of the region, with significant plunges expected particularly in The Philippines, Malaysia and Singapore.
Although the investment bank expects the Korean export sector to be one of the region's outperformers, domestic demand and consumption will remain a problem for the economy. However, GDP growth is anticipated to head north in 2006, following its forecasted drop to 3.4% in 2005.
Confidence in the China story will remain in 2005, with Calyon bullish on the economy's soft landing prospects and currency revaluation. The GDP growth is forecast to decline from an estimated 9.2% in 2004 to around 8.0% this year and will be driven mainly by the contraction of credit, which has seen a drastic rise of the past three quarters and the minimal impact of a slowing export space. Domestically, continuation of strong retail sales will also cushion the soft landing and contribute to a GDP levelling into 2006.
Although rises in US interest rates are suggested as potentially damaging for Asian economies, Calyon's report stresses that the majority of central banks will not follow the moves of the Fed too closely. The investment bank believes that an aggregate Asian interest rate hike of 70bp will emerge over the year, compared to a forecasted 150bp rise in the U.S, which will be instituted to protect domestic investments.
On the credit side, Calyon sees the imminent rise in US Treasuries yields pushing credit spreads lower and making bonds less attractive than equity markets. According to the French firm, the 2005 rise in U.S Treasury yields will likely eradicate most coupon returns (7.9%) through a negative price return (-7.5%), leaving total returns at around 0.35%.
Within the report, Korean bonds, regional utilities and Singapore bonds are deemed the most likely classes to underperform, whereas its overperform forecast includes Philippines bonds, Malaysian Bonds, Hong Kong bonds and non investment-grade bonds. Corporates including Hutchison, HKLand, MISC, PCCW and Petronas are also earmarked by the bank to outperform, while Citic Pacific, CLP, CNOOC. MTRC, SingPower and SingTel are expected to underperform.
In terms of continued FX appreciation, Calyon also expects to see Asian currencies to continue the strength of 2004 on a trade-weighted basis. Across the region, an appreciation of around 5% in effective terms is expected to contribute to capping inflation concerns, spurring terms of trade and helping to support the domestic consumption base.
Calyon also points to the impending Chinese Yuan revaluation and the belief that the authorities will avoid a strong one-off recalculation as supporting the idea of regional currency appreciation.
The report stresses that if the USD begins its rebound following the first quarter, as the bank expects, and the authorities consider a possible move to a currency basket (similar to the MAS in Singapore), action on the repegging could take place sooner that later. Either way, the bank forecasts that by year's end the CNY will appreciate against the USD from 8.28 to 8.0, moving around 3.5%.
The impact of the revaluation of the CNY is not expected to impact the HKD peg, but Calyon suggests that the Hong Kong Monetary Authority (HKMA) may have to intervene massively to counter market pressure when it does occur.
Overall, Calyon's Asia Economic and Credit Strategy 2005 paints a fairly reasonably picture of the impending 12 months but points that the challenges of regional inflation, a widening in the US current account deficit and the eventual landing of China need to addressed before turning into a genuine problem.
To meet the challenges successfully and herald in a return to positive GDP growth in 2006, Calyon stresses regional economies must persist in the strategy of "shared tightening" whereas Asia would split the burden of tightening evenly between monetary policy and currency appreciation. Under this moniker, the investment bank stresses that order to meet the challenges of 2005, regional governments and central banks need to reduce the risk of a growing US external imbalance, for its own sake and to the extent it can influence it, cope with persistent inflation risk, confront possible speculative capital inflows, favour further capacity building, and deepen the domestic consumption base without jeopardising either the government's or the household balance sheet
