Asia Economics Analyst

Transcription

1 May 3, 213 Issue No: 13/18 ASEAN s half a trillion dollar infrastructure opportunity Economics Research We estimate ASEAN s infrastructure needs through 22 to be US$55 bn, higher than current government estimates. This is driven by a low base, as well as rising per capita incomes and ongoing urbanization. The infrastructure build-out could have large macro implications in terms of driving overall investment growth. For instance, in the Philippines, infrastructure could account for nearly 2% of total investments. Infrastructure investments can potentially reduce current account surpluses, and decrease appreciation pressures on currencies. They can also contribute to global rebalancing. While fiscal deficits are likely to increase, our projections suggest that financing the infrastructure needs may not be very difficult. Implementation will be key, and will depend in part on individual governments prioritization of infrastructure. We think that political stability will be vital for successful implementation of infrastructure plans. Overall, we see a greater scope for a ramp-up in investments in the Philippines and Thailand, partly due to a low base, but mostly due to our perception of a renewed focus on infrastructure plans by their governments. Contents of this issue ASEAN's half a trillion dollar infrastructure opportunity page 2 Regional recap: Action in ASEAN page 11 Asia ex Japan economic calendar page 1 Forecast tables page 15 Andrew Tilton andrew.tilton@gs.com Goldman Sachs (Asia) L.L.C. Goohoon Kwon, CFA +82(2) goohoon.kwon@gs.com Goldman Sachs (Asia) L.L.C., Seoul Branch Tushar Poddar +91(22) tushar.poddar@gs.com Goldman Sachs India SPL Li Cui li.cui@gs.com Goldman Sachs (Asia) L.L.C. Yu Song +86(1) yu.song@ghsl.cn Beijing Gao Hua Securities Company Limited Mark Tan mark.tan@gs.com Goldman Sachs (Singapore) Pte MK Tang mk.tang@gs.com Goldman Sachs (Asia) L.L.C. Prakriti Shukla +91(22) prakriti.shukla@gs.com Goldman Sachs India SPL Sungsoo Chung +82(2) sungsoo.chung@gs.com Goldman Sachs (Asia) L.L.C., Seoul Branch Vishal Vaibhaw +91(8) vishal.vaibhaw@gs.com Goldman Sachs India SPL Hui Ying Chan huiying.chan@gs.com Goldman Sachs (Singapore) Pte Fiona Lake fiona.lake@gs.com Goldman Sachs (Asia) L.L.C. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research

2 May 3, 213 ASEAN s half a trillion dollar infrastructure opportunity I. Why is infrastructure important? ASEAN s need for infrastructure investment is apparent to a first-time visitor or long-time resident. As per capita incomes rise and urbanization ensues, the demand for infrastructure will likely continue to increase. Investments in infrastructure roads, power, port, airports, railways, water and sanitation can have several desirable effects not only for the ASEAN economies, but also more broadly. An infrastructure build-out can: Directly contribute to investment demand and therefore to GDP growth. Catalyze other investments in the economy. To the extent that power, road, airport capacities are increased, it helps increase manufacturing investment. Improve productivity growth by reducing travel times, freight costs, power costs, and communication costs, among others. It therefore acts to boost growth and reduce inflation by increasing the potential growth rate of an economy. Reduce current account surpluses in the ASEAN economies by using excess savings, and ease appreciation pressures on their currencies. Help global rebalancing, to the extent that the infrastructure build-out requires imports and FDI, it will help developed economies to export. In this piece, we estimate the infrastructure demand for each of the ASEAN- (Malaysia, Indonesia, Thailand, and the Philippines) through 22. We estimate the sectoral breakdown of investments required, and the aggregate amount for each country. We then project investment rates for the economy due to the infra build-out. We then assess the implications for their fiscal and current accounts due to the need for infrastructure. Lastly, we compare and contrast where the prospects of infrastructure are particularly encouraging. II. Mapping ASEAN s infrastructure needs According to the World Economic Forum, while individual economies in ASEAN, such as Malaysia and Thailand, have improved the quality of their infrastructure, others still have a large need for investments. Indonesia and the Philippines rank near the bottom of the scale for infra quality. Exhibit 1: The quality of infrastructure in ASEAN- is uneven Infrastructure quality score ( )* DM avg* South Korea Malaysia Thailand Russia China Turkey Mexico Brazil.. Indonesia India Philippines *Note: Ranges from 1-7, a score of 7 indicates the best score, DM avg. incl. Australia, Canada, France, Germany, Italy, Japan, Singapore, UK and US. Source: World Economic Forum. Goldman Sachs Global Economics, Commodities and Strategy Research 2

3 May 3, 213 Exhibit 2: Per capita income may nearly double over this decade Exhibit 3: Potentially mn new urban residents by 22 US$, thousand US$, thousand Million Number of People Urbanizing from 212 to 22 Income per capita (21 US$) : Thailand Malaysia 8 8 Philippines 9 Indonesia 2 Philippines Indonesia Thailand Malaysia Source: World Development Indicator, Goldman Sachs Global ECS Research estimates. In the decade ahead, income growth and urbanization will drive infrastructure demand. We expect the ASEAN- s per capita GDP to nearly double between 21 and 22. This will increase demand for power, roads, airports, and water, among others. Rapid urbanization and population growth will add to the infrastructure needs of the economy. Despite some variation in the starting levels of urbanization (Malaysia has a rate of 75%, while Thailand has %), the process will likely continue over this decade. To estimate ASEAN s infrastructure needs, we used a model (see Box 1) which can project demand for each sector and country. The key macro determinants of infrastructure that we use are per capita GDP, urbanization, population, and trade volumes. We looked at six key infrastructure sectors which are typically included in the definition: power, paved roads and highways, railways, ports, airports, and water and sanitation. We derived demand for each sector based on the macro variables mentioned above. Thus, power and road demand are highly sensitive to the level of urbanization, air travel is sensitive to per capita income, while demand for ports is influenced by the volume of trade. Exhibit : ASEAN s infrastructure gap Exhibit 5: and its US$55 bn price tag Percent ASEAN-: Infrastructure Need - Between Now and 22 1 Percent 1 Projected Need for Infrastructure Spending: ASEAN , US$ billion 8 7 Projected gap Airports, 16 Ports, Railways, 119 Power, 228 Installed capacity Water & Sanitation, Roads, 128 Electricity KWh mn Air passengers traffic Roads KMs Ports traffic Water & sanitation Goldman Sachs Global Economics, Commodities and Strategy Research 3

4 May 3, 213 Box 1: Modeling infrastructure demand To estimate infrastructure demand we used an econometric model based on projected per capita income growth, urbanization and population, developed in previous global papers (see Global Economics Paper: Building the World: Mapping Infrastructure Demand, April 2, 28, and further applied in Global Economics Paper: India CAN Afford Its Massive Infrastructure Needs, September 16, 29). Our baseline model is based on pooled least squares, with each of five infrastructure sectors roads, ports, air travel, electricity installed capacity, water and sanitation as dependent variables. The independent variables are real GDP per capita for all sectors; urbanization as an independent variable for paved roads and electricity; population for air passengers and access to water & sanitation; and trade volumes for port traffic. For railways, we relied on government estimates. We use an unbalanced panel, with country fixed effects, to control for country-specific factors and differences. Real per capita income comes from our estimates, urbanization and trade volumes comes from the World Bank s World Development Indicators, population numbers come from the UN s population database. We have modeled water and sanitation and ports separately in this piece, using a sample of the main emerging market countries, as these sectors are more relevant to emerging markets. To assign dollar values to power, roads, and water and sanitation infrastructure spending, we rely on cost estimates from the World Bank, indexed for our world CPI inflation estimates and projections from For railways, ports, and airports, we project dollar values of demand based on government estimates adjusted by our real GDP growth assumptions for each country for the period As shown in the table below, we find that: A 1% increase in urbanization leads to a 1.8% increase in electricity installed capacity. The model also predicts that a 1% increase in income per capita would lead to a.5% increase in installed capacity. We find that air travel is most sensitive to income. In particular, a 1% increase in per capita income correlates with a 1.% increase in the number of air passenger travelers. Roads are considerably less sensitive to income compared to their sensitivity to urbanization. Ports have high sensitivity to trade volumes as we expected and their sensitivity to income is comparable to that of roads. Water and sanitation demand is highly sensitive to a rise in population. Its sensitivity to income is relatively less. Exhibit B1: Modeling infrastructure demand Exhibit B2: Breaking down infrastructure need by country and sector Model results* Estimation method Total electricity installed capacity (KW mn) Country fixed effects Roads, total network of paved roads (KM) Country fixed effects Water/sanitation (Number of people Ports traffic ( 2 with access) Foot eq. units) Country fixed effects Country fixed effects GDP per capita Urbanization Population 1.3 US$, billion Projected need for infrastructure spending : Ports Airports Railways Water & Sanitation Roads Power Total US$, billion Trade volume.6 Number of countries R squared 98% 99% 99% 98% *Dependent and independent variables in natural logarithms Indonesia Philippines Thailand Malaysia Goldman Sachs Global Economics, Commodities and Strategy Research

5 May 3, 213 We used unit cost estimates for the construction of these sectors to derive values for the total financing need of each sector. By aggregating each sector, we look at the overall country demand for infrastructure. Indonesia has the largest absolute demand for infrastructure, at US$235 bn between 213 and 22, in our view. It is the largest country in the region both in terms of population and land and therefore its infrastructure needs are unsurprising. Its power and road capacity per capita is one of the lowest in ASEAN and, therefore, nearly 65% of infra demand can be from these two sectors. The Philippines could see the largest increase in demand for infrastructure as a percent of GDP. It has the lowest per capita income in the region, and ranks the weakest in infrastructure quality. The low base, and increases in per capita income and urbanization could drive demand across the board for a projected US$11 bn. Thailand would also need to increase infrastructure spending as a percent of GDP, also due to its more open economy and need to boost manufacturing. It would need US$15 bn, according to our projections. Malaysia has the highest quality infrastructure in the region, and therefore the base is high. Its infrastructure needs would therefore be lower than the rest of the countries, at US$1 bn, based on our projections. We compared our projections with those of their respective governments. While available government estimates are for different time periods, and include the telecom sector, our estimates are generally higher (Exhibit 6). Exhibit 6: Our estimates for infra needs are higher than government estimates Infrastructure spending (US$ billion) GS Estimates (213-2) Government Estimates Indonesia Malaysia 1 5 Philippines 11 7 Thailand ASEAN Note: Timeline for government estimates Indonesia: Economic master Plan ( ) Malaysia: Public spending on infra in the 1th Plan ( ) The Philippines: Thailand: Source: Local governments, Goldman Sachs Global ECS Research estimates. III. How will infrastructure impact investment rates? Infrastructure investments can rise sharply as a percentage of GDP, and can be a key driver of overall investment rates. Using our demand estimates from Section II above, we projected infra spending as a percentage of GDP through 22, if the required spending were to materialize. We find that increases in infra investment rates could potentially be most rapid for the Philippines where the ratio could rise from just over 2% to 5% of GDP, while for Thailand and Indonesia, the increases are more moderate. For Malaysia, infra investment rates remain fairly stable through our forecast horizon. Goldman Sachs Global Economics, Commodities and Strategy Research 5

6 May 3, 213 Exhibit 7: Infrastructure spending could see a jump in the Philippines 5 5 Infrastructure spending: Philippines Indonesia Thailand Malaysia Despite large increases, the ASEAN economies would still be spending a lower proportion of their GDP on infrastructure in 22 compared with what China and India are spending currently. Exhibit 8: though still lower than the current spending in China and India 1 Infrastructure Spending* China India Philippines Malaysia Thailand Indonesia *For China and India, data represent 29 and FY12 (Apr 211- Mar 212) respectively whereas for the ASEAN-, they are projections for 22. Overall fixed capital formation rates can be driven by infrastructure. Assuming that noninfra investments grow at a constant rate, our projections suggest that infra can contribute as much as 2% of the total investment rate in the Philippines till 22, and1% in Thailand. Thus, infra can be a critical driver of investment rates and can catalyze overall investment by reducing costs of production. Goldman Sachs Global Economics, Commodities and Strategy Research 6

7 May 3, 213 IV. How will infrastructure impact the current account? ASEAN s rising infra spending can act to reduce current account surpluses. Given that the current account is the difference between domestic savings and domestic investments, a current account surplus suggests an excess of savings. To the extent that greater investments in infra will increase overall investment rates, it can help absorb excess savings and therefore reduce current account surpluses. Two of the four ASEAN- economies are running somewhat large current account surpluses. Malaysia has the largest surplus, followed by the Philippines. These two economies have the scope for increasing their investment ratios, which could help reduce their current account surpluses and appreciation pressure on their currencies. Thailand, which runs a small surplus currently, could likely go into deficit due to the need to ramp up spending on infrastructure. Therefore, as infra spending ramps up, there could be less appreciation pressures on the baht. Indonesia, which is running a current account deficit, may need to continue to attract foreign capital to meet its infrastructure needs. However, since the increase in infra spending is not large as a percentage of GDP, we do not see a significant strain on the external balance of payments due to infrastructure investments. Therefore, in general, we think that infrastructure investments can be useful in helping rebalance the external sectors in ASEAN. Exhibit 9: Infrastructure spending can help reduce current account surpluses ASEAN- in 212: Gross National Savings 3 Current Account 25 Investment Rate Indonesia Malaysia Thailand Philippines -5 Source: IMF, CEIC. V. Can ASEAN finance its infrastructure needs? Our assessment of funding needs and fiscal balances suggests that financing of infrastructure may not be a critical constraint. The government is the key source of funding for infrastructure, as elsewhere in the emerging market world. Our projections show the additional fiscal burden to be largely manageable. Government spending on infrastructure over the last few years ranges from around 1%-2% of GDP for ASEAN-. We use our projections of infrastructure needs in Section I and the share of government financing of projects over the past few years to obtain estimates of infrastructure spending by individual governments going forward. Goldman Sachs Global Economics, Commodities and Strategy Research 7

8 May 3, 213 We project government spending on infra to be largely stable at around 1.5% of GDP for Malaysia from 213 to 22. It has already embarked on a large-scale national infrastructure program and we expect the pace of spending here to be maintained. Thailand and the Philippines have just begun, or are about to ramp-up on their mega infrastructure spending programs. Government spending is projected to rise to %-5% of GDP towards the end of the forecast horizon from about 2% currently for the Philippines and 2%-3% for Thailand and Indonesia from about 1% of GDP currently. We expect this level of fiscal spending to be manageable, especially since their public debt ratios remain relatively low in the region compared to elsewhere (Exhibit 1), partly a function of extensive deleveraging of government balance sheets that occurred post the 1997 Asian financial crisis. Exhibit 1: Public debt ratios are relatively low in the region Exhibit 11: The government will likely be the main source of infra spending 12 Public Sector Debt (212) 12 Infrastructure spending (average of ):* Government Private USA Euro area Malaysia Philippines India Thailand Taiwan Korea Indonesia Philippines Thailand Indonesia Malaysia * Our assumption of government's share in infrastructure spending for the Philippines, Thailand, Indonesia and Malaysia are 9%, 8%, 65% and 5% respectively. This includes state-owned enterprises share and based on projected share in national plan reports. Source: CEIC, Goldman Sachs Global ECS Research estimates. We believe there is also room for improvement in fiscal efficiency across ASEAN, both in terms of reducing expenditure on subsidies as well as broadening the revenue base. Governments in the region maintain extensive subsidies on energy and certain staples, especially in the case of Malaysia (.7% of GDP) and Indonesia (3.% of GDP). The need for infrastructure can add urgency for further subsidy reforms. There is also further scope for broadening the tax revenue base, such as the long delayed introduction of the Goods and Services Tax in Malaysia. The small tax base and inefficient collection in places like the Philippines and Indonesia also leave room for improvement. Private savings rates are generally high in ASEAN. In the countries which are running current account surpluses (Malaysia and the Philippines), potentially there are excess savings available for investment. For Indonesia, the government share is projected to reduce, but the overall spending by the private sector remains under 1% of GDP, similar to our estimate of current spending on infrastructure. Therefore, we do not expect an increase in funding requirements as a percentage of GDP. Thailand is probably the economy which faces some potential funding constraints due to the need to increase private sector spending. There may be a potential need for external flows to fund the increase in infrastructure. Multi-lateral sources, such as the ASEAN Infrastructure Fund, can also help in this regard. Goldman Sachs Global Economics, Commodities and Strategy Research 8

9 May 3, 213 VI. Can there be an improvement in implementation? While the need for better infrastructure has existed in the region for several years, there have been disappointments in the past due to weak implementation. We think that political stability is vital for the successful implementation of infrastructure investment plans. Thailand provides a case in point where the political volatility from 26 to 211 coincided with a period of declining public and private fixed investment ratios. This also resulted in a deterioration of the quality of infrastructure across the country (Exhibit 12). In contrast, the relative stability enjoyed by Indonesia over the last several years (relative to its turbulent past few decades) has allowed renewed focus on infrastructure development, which has accompanied a significant rise in fixed investment ratios. Exhibit 12: Thailand s infrastructure quality has been deteriorating Thailand Infrastructure Quality Ranking Change in rank Roads Railroad Port Air Transport Overall Source: Global Competitiveness Survey, World Bank. Over the last two years though, Thailand has seen relative stability in government: the current administration has been in place since the summer of 211, in contrast to the many changes in government, coups and large-scale protests in the preceding several years. With this renewed stability, the current administration has focused its attention to rolling out its mega-infrastructure plans from now till 22. In the Philippines, the current president has made tackling corruption and reducing red tape a key focus of his administration. The president currently enjoys approval ratings of over 7% and the strong showing in the recent mid-term elections (where his coalition won 2/3 of senate seats) bolsters his mandate to further implement national plans, including the National Development Program, where infrastructure roll-out is a key focus. The administration plans to increase infrastructure spending to around 5% of GDP going forward from the current level of just over 2%. Indonesia has seen consistent spending on infrastructure over the last several years. The president, in his tenure of a decade, has presided over key initiatives such as the passage of the land acquisition bill and introduction of the MP3ei (national development plans till 225). This has been reflected in the recovery in its investment ratios as mentioned above. In the next year or so, the country will see presidential polls and a transition of leadership. Similarly for Malaysia, consistent infrastructure investment in the previous national plans have resulted in higher quality of infrastructure overall as seen in the World Economic Forum Infrastructure surveys. Malaysia has just concluded a very tightly contested general election with key ruling party internal elections still to come. Overall, we expect the pace of infrastructure spending to be maintained over the medium term for Malaysia and Indonesia while we expect an increase in spending and greater scope for improvement in implementation for Thailand and the Philippines. This is especially so given the lack of implementation in these countries previously and our perception of renewed focus on these plans now. Goldman Sachs Global Economics, Commodities and Strategy Research 9

10 May 3, 213 VII. A good time for infrastructure The last few years have been exciting years for the ASEAN economies. They have witnessed relatively high GDP growth with manageable inflation that has largely fallen within targets. Infrastructure investments can continue to underpin that growth and boost productive capacity, in our view. Clearly, the amount of investments actually achieved may differ from the infrastructure need. Capacity constraints, problems in land acquisition and environmental clearances, and regulatory constraints may delay the pace of infrastructure construction. Therefore, we see our estimates for the overall need for infrastructure as an upper bound for actual spending. That said, we think that the current environment is particularly conducive for infrastructure investments in the region for several reasons: Abundant liquidity due to the actions of global central banks and easier financing conditions precipitated by the low interest rate environment. Cost of funding has declined, driven by a combination of a compression of the risk premia (exemplified by the upgrades from the ratings agencies) and generally declining inflation levels. Global commodity prices have been more benign, reducing externally driven price pressures. A deleveraging of government balance sheets since the 1997 Asian financial crisis resulting in generally lower debt ratios since, creating greater fiscal room. Malaysia may be the exception where public debt ratios have risen over the last few years, partly driven by large fiscal stimulus enacted during the global financial crisis. Private sector participation both in construction and financing is growing. To the extent that public-private partnerships can be improved, they can provide a further catalyst for investments. There appears to be more of a political consensus that infrastructure is a major constraint on growth and bottlenecks need to be removed. The increase in infrastructure investment will open up opportunities for infrastructure suppliers. The private financing needs can be a catalyst for the further development of bond markets in the region. Infrastructure investments will also have an impact in reducing income inequality, raising the quality of human capital in the economies, and further integrate them into the global economy through transportation and communication networks. Tushar Poddar, Mark Tan, Vishal Vaibhaw, Hui Ying Chan Goldman Sachs Global Economics, Commodities and Strategy Research 1

11 May 3, 213 Regional recap: Action in ASEAN Markets throughout the Asia region have reacted in recent weeks to signs of better US growth and speculation of Fed tapering in coming months. Over this period, ten-year US Treasury yields rose 5bp, from a low of 1.66% on May 2 to 2.16% as of May 29, at which point our Fixed Income Strategy team closed a short recommendation. Key Asian rates markets have followed suit (Exhibit 1), selling off in May after the rally in the first four months of the year. Most currencies have also weakened against the dollar, with the notable exception of the Chinese renminbi (Exhibit 2). The consistency of the decline across currencies with very different characteristics, for example the INR (Indian rupee) and KRW (Korean won) makes plain that this is a move driven by the dollar rather than regional news. Exhibit 1: A turnabout in regional yields Basis points 5 3 Change in 5-year swap rates: January 1 to May 2 May 2 to Date Basis points US China India Korea Malaysia Thailand Taiwan -5 Exhibit 2: and in most currencies Index Foreign exchange rates (January 1 = 1.): MYR SGD PHP CNY KRW THB TWD INR IDR Index Appreciation Jan Feb Mar Apr May Jun.92 Goldman Sachs Global Economics, Commodities and Strategy Research 11

12 May 3, 213 In terms of new information from within the region, most of the action has been in ASEAN. In general, both growth and inflation in ASEAN economies had surprised to the downside in recent weeks. We discussed the reasons for first-quarter GDP growth disappointments in the region in a comment earlier this week (see Emerging Markets Macro Daily: ASEAN soft patch stronger than meets the eye, May 29, 213). Briefly, these involve possible seasonal distortions in Thailand (and possibly elsewhere) related to the 211 floods, a surge in imports in Malaysia, and some moderation in domestic demand in Indonesia. The latter was arguably welcome, given a burgeoning current account deficit and signs of inflation pressure. Just when it seemed a pattern was developing, however, the first-quarter GDP figures from the Philippines came in far higher than expectations (+7.8% versus consensus of +6.%; Exhibit 3). The main drivers appear to have been a turn in the inventory cycle and strong government spending; private consumption and external demand were relatively soft. Exhibit 3: Diverging growth surprises in ASEAN Year-over-year percent change Year-over-year percent change Surprise* in Q1 213 Real GDP Growth: Philippines Indonesia Thailand Malaysia -2. * Calculated as actual year-over-year real GDP growth less the Bloomberg consensus forecast. Source: CEIC, Bloomberg. The other major news item from ASEAN was the Bank of Thailand s (BOT) 25bp rate cut. Markets had moved to price this in recent weeks, given the disappointing Q1 GDP report and calls for a cut as large as 5bp from government officials, and the bank s Monetary Policy Committee voted unanimously for the cut. We view underlying momentum as significantly stronger than the GDP figures suggest, and expect inflationary pressures to build over the course of the year. Therefore, we do not expect further cuts, and in fact we believe the BOT will choose to swing into tightening mode in the fourth quarter, with other ASEAN central banks following in early 21. In the largest economies of emerging Asia, it has been a quiet week for macroeconomic data: In China, we await the release of several purchasing managers indices (PMIs) over the coming week the official manufacturing PMI (Saturday), the official nonmanufacturing PMI (Monday), the final May Markit manufacturing PMI (Monday), and the Markit services PMI (Wednesday). Given last week s poor Markit flash manufacturing PMI, market expectations are subdued for the manufacturing releases (see data calendar in next section for details). Goldman Sachs Global Economics, Commodities and Strategy Research 12

13 May 3, 213 In India, GDP for the first quarter of 213 will be released Friday. We and the Bloomberg consensus expect moderate growth of.7% yoy and.8% yoy respectively, up slightly from.5% yoy in Q 212 (these forecasts imply somewhat better sequential growth in the neighborhood of 6% annualized). In Korea, industrial production (IP) was slightly stronger than expected in April, up.8% on the month. Overall, however, the trend of IP has been flattish, up only 1.7% over the past year (Exhibit ). Over the coming week we will have news on trade, consumer prices and the manufacturing purchasing managers index. Exhibit : Subdued trend in Korean IP Percent change, annualized 8 Percent change, annualized 8 6 Korea industrial production: 3-month change 12-month change Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13-8 Source: Korea National Statistics Office. Andrew Tilton Goldman Sachs Global Economics, Commodities and Strategy Research 13

14 May 3, 213 Asia ex-japan Economic Calendar India GDP (May 31): GDP growth momentum may have improved a tad this quarter compared with the previous quarter, as seen by our Current Activity Indicator (Q 212: 5.5% qoq s.a. ann., Q1 213: 6.% qoq s.a. ann.). On a yearon-year basis, a small pick-up in agriculture is likely to help the GDP reading. For the industry sector, while the monthly Index of Industrial Production (IIP) readings in Q1 213 have shown a slight pick-up sequentially, on average, Q1 213 is likely to show slower growth due to the presence of a spike in the October IIP in Q 212. China manufacturing PMI (Jun 1): We expect the official manufacturing PMI to moderate from April s level. The HSBC/Markit manufacturing PMI s flash reading suggests weak underlying growth though discrepancy between the two indexes is common. Historically, the official PMI has a clear tendency to fall in May. Korea exports (Jun 1): We expect Korean exports to rebound strongly in May, rising 5% yoy, compared with Bloomberg consensus expectations of a.9% yoy decline. Sequential momentum should be positive, both on a per-day and on a full-month basis. Date Country Indicator/Event Period Forecast Previous Time (HKT) GS Bloomberg Consensus Fri May 31 13:3 India GDP 1Q +.7% yoy +.8% yoy +.5% yoy 15:3 Thailand Exports Apr +.2% yoy 15:3 Thailand Imports Apr -12.5% yoy Sat Jun 1 8: Korea Exports May +5.% yoy -.9% yoy +.% yoy 8: Korea Imports May -1.% yoy -.3% yoy 9: China Manufacturing PMI May Mon Jun 3 7: Korea CPI May +1.3% yoy +1.2% yoy +1.2% yoy 9:5 China HSBC/Markit Manufacturing PMI May : Indonesia CPI May +5.7% yoy +5.6% yoy 12: Indonesia Exports Apr -13.% yoy 12: Indonesia Imports Apr -1.% yoy 12: Thailand CPI May +2.2% yoy +2.% yoy 13: India Manufacturing PMI May 51. * Indonesia Consumer Confidence Index May Wed Jun 5 8:3 Taiwan CPI May +.7% yoy +1.% yoy 9: Philippines CPI May +2.8% yoy +2.8% yoy +2.6% yoy 9:5 China HSBC/Markit Services PMI May 51.1 Fri Jun 7 12: Malaysia Exports Apr -3.% yoy -2.9% yoy 12: Malaysia Imports Apr +3.5% yoy +7.% yoy 16: Taiwan Exports May -1.% yoy -1.9% yoy 16: Taiwan Imports May -2.2% yoy -8.2% yoy * Release dates uncertain, date shown is the first possible date: Indonesia Consumer Confidence Index (Jun 3-1) Source: Bloomberg, GS Global ECS Research estimates. Goldman Sachs Global Economics, Commodities and Strategy Research 1

15 May 3, 213 Forecast Tables Real GDP Growth (year-over-year) 212 GS Consensus GS Consensus Asia ex-japan China India 6.2** 5.** 5.** 6.** 6.1** South Korea Hong Kong Taiwan ASEAN Singapore Malaysia Thailand Indonesia Philippines USA Euro area Japan *GS estimates for annualized growth rate of potential output from **Fiscal year basis Source: Consensus Economics, GS Global ECS Research Estimates Potential Growth* 8. 7.** Consumer Prices (year-over-year) Inflation GS Consensus GS Consensus Target/Range Asia ex-japan China India 9.* 7.3* 7.* 6.* 6.* 5.* South Korea Hong Kong Taiwan ASEAN Singapore Malaysia Thailand ** Indonesia Philippines USA Euro area *** Japan *WPI for India on fiscal year basis; inflation objective rather than target **Core inflation target ***ECB aims to maintain inflation rates "below, but close to, 2% over the medium term" Source: Consensus Economics, GS Global ECS Research Estimates Goldman Sachs Global Economics, Commodities and Strategy Research 15

16 May 3, 213 Forecast Tables (continued) Policy Interest Rates (percent) Current May 3 1Q 2Q 3Q Q 1Q 2Q 3Q Q Asia ex-japan China India South Korea Hong Kong Taiwan ASEAN Singapore Malaysia Thailand Indonesia Philippines USA Euro area Japan Policy interes t rates : China: 1-year lending rate, India: repo rate; Korea: 7-day repo; Malays ia: overnight policy rate; Thailand: 1-day repo, Philippines: repo rate, Indonesia: 1-month SBI rate, Taiwan: rediscount rate; USA: Fed funds effective rate; Euro Area: Main refinancing operations : fixed rate; Japan: Overnight call rate. Source: GS Global ECS Research Estimates. Exchange Rates (local currency units per USD) Current 3-Month Horizon 6-Month Horizon 12-Month Horizon May 3 Forward Forecast Forward Forecast Forward Forecast Asia ex-japan China India South Korea Hong Kong Taiwan ASEAN Singapore Malaysia Thailand Indonesia Philippines Euro area* Japan * USD per Euro Source: GS Global ECS Research Estimates Goldman Sachs Global Economics, Commodities and Strategy Research 16

17 May 3, 213 Highlights of Recent GS ECS Research Asia ex Japan Asia-US swap rate differentials have narrowed too far May 27, 213 Abenomics: In search of its Asian spillover channels May 16, 213 A redesigned MAP of emerging Asia data May 1, 213 Domestic demand influencing interest rate differentials between Asia s small open economies Mar 5, 213 Measuring growth in emerging Asia Mar 1, 213 Greater China Global Economics Paper: China: More efficient cities key to a brighter growth path May 21, 213 China: A structural improvement in 1Q? Not exactly May 22, 213 China: Is credit losing its cyclical growth impact? May 21, 213 The Hukou system: Holding back China's rebalancing May 1, 213 Explaining strong credit and weak growth in China Apr 3, 213 Korea Could under-hedging by Korean exporters give rise to KRW strength? Apr 23, 213 Revision of our macro forecasts for Korea on aggressive monetary easing in Japan Apr 16, 213 Korea: Cutting the Gordian knot a large supplementary budget to be unveiled soon Apr 3, 213 Changes in our won view on persistent yen weakness and elevated geopolitical tensions Mar 16, 213 Recent yen-won movements a manageable headwind for Korean exports Feb 1, 213 India India: The INR s improving fundamentals May 1, 213 India: Reforms: Inching forward May 2, 213 India: Five reasons for a gradual pickup in growth Apr 18, 213 What level of current account deficit can India sustain? Jan 28, 213 Can India s balance sheets support growth? Jan 18, 213 ASEAN ASEAN soft patch stronger than meets the eye May 29, 213 Malaysia 213 Elections: Incumbent BN wins, but with a narrower majority May 6, 213 Coping with capital inflows in ASEAN Apr 29, 213 ASEAN beneficiaries of yen weakness Mar 15, 213 Singapore Budget 213: At the crossroads Feb 26, 213 Japan (this section is provided by our Japan Economics Team based in Tokyo) Global Economics Paper: Sustainability of debt financing in Japan and the JGB enigma Aug 1, 212 Japan: Lessons from pre-war Takahashi policy: Risk BOJ can t stop large-scale JGB purchases May 2, 213 Japan: Will the first two Abenomics arrows hit the mark? Pointers from Takahashi policy May 22, 213 Japan: A guide to Takahashi fiscal policy, the model for Abenomics May 16, 213 Japan: Modest macro wealth effect from equities but strong luxury impact Apr 1, 213 Goldman Sachs Global Economics, Commodities and Strategy Research 17

18 May 3, 213 Disclosure Appendix Reg AC We, Goohoon Kwon, CFA and Sungsoo Chung, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. We, Andrew Tilton, Tushar Poddar, Li Cui, Yu Song, Mark Tan, MK Tang, Prakriti Shukla, Vishal Vaibhaw, Hui Ying Chan and Fiona Lake, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships. Disclosures Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. 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