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Southeast Asia Seen Leading Rate Increases Next Year: Economy

Central banks in Southeast Asia may be forced to abandon this year’s monetary easing and raise interest rates before their north Asian peers in 2013, as rising inflation risks overshadow the current economic gloom.

Thailand, Malaysia, the Philippines and Indonesia will probably raise rates next year, HSBC Holdings Plc, UBS AG, and Australia & New Zealand Banking Group Ltd. predict, even as interest-rate swaps show investors expect little or no tightening. The banks expect China to refrain from changing its monetary policy stance and India to cut borrowing costs.

“In Southeast Asia, local demand is still humming,” said Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong. “The region is gliding through the global export downturn on the back of rising credit growth, buoyant consumer spending, and generous fiscal support. Before long, however, price pressures, already bubbling away beneath the surface, will erupt again.”

The region’s prospects stand out in contrast to the challenges threatening the economies of China and Japan, with government spending and younger populations supporting domestic demand and luring investment even as global expansion weakens. While Thailand’s unexpected rate cut this week underscores the immediate risks to growth, Singapore’s central bank this month refrained from policy easing as elevated inflation trumped worries about a shrinking economy.

The Indonesian rupiah, Thai baht, Philippine peso and Malaysian ringgit are forecast to rise the most after India’s rupee by the end of 2013, according to Bloomberg surveys.

Growth Differential

“The growth differential and interest-rate differential will attract capital flows and strengthen currencies,” said Aninda Mitra, a Singapore-based economist at Australia & New Zealand Banking Group. “Southeast Asia will have another year of fairly robust growth in 2013, and that alone will start to bring up core inflation pressures, which warrants more monetary caution.”

The Asian Development Bank predicts growth of more than 6 percent for Indonesia this year and more than 5 percent for the Philippines and Thailand, compared with 1.7 percent in Taiwan and 2.7 percent in South Korea. Inflation in Southeast Asia may accelerate to 4 percent in 2013, compared with 3.3 percent in East Asia, the ADB said.

“Starting first quarter of next year, we can expect central banks in Southeast Asia to start taking the plunge and raise interest rates to guard against inflation,” said Neumann. “Central banks in South Korea, Taiwan and China, and India will wait before tightening the screws because growth” in those economies “is more fragile,” he said.

Indonesian Inflation

Price gains in Indonesia surged to an 11-month high in August before easing last month while in the Philippines, the central bank has raised inflation forecasts for 2012 and 2013.

Bank Indonesia kept its benchmark rate unchanged at a record-low 5.75 percent for an eighth month in October. Malaysia maintained borrowing costs for an eighth meeting in September and has refrained from joining its neighbors in cutting rates this year. Bank Negara Malaysia Governor Zeti Akhtar Aziz said this month while slowing growth is a bigger threat than inflation, monetary policy is already “quite accommodative.”

Investors and some economists expect further rate cuts in parts of Southeast Asia in the coming months. While five of eight economists surveyed by Bloomberg News expect Bangko Sentral ng Pilipinas to hold interest rates at a record-low 3.75 percent next week, three predict a reduction.

Swap Rates

Thailand’s one-year onshore interest-rate swaps, the fixed cost needed to receive a floating payment, dropped 19 basis points, or 0.19 percentage point, to 2.73 percent this week, below the benchmark rate of 2.75 percent, according to data compiled by Bloomberg. The rate in Indonesia stood at 5.72 percent versus the policy rate of 5.75 percent and that in the Philippines was 1.3 percent compared with the overnight borrowing rate of 3.75 percent. Only Malaysia’s swap rate is above the benchmark rate of 3 percent, trading at 3.155 percent.

Thailand’s central bank cut interest rates on Oct. 17, four days after Governor Prasarn Trairatvorakul said no easing was needed, underscoring concern Asia’s outlook has worsened. The Bank of Thailand’s monetary policy committee voted 5-2 to lower its one-day bond repurchase rate by a quarter of a percentage point to 2.75 percent.

China yesterday reported growth eased for a seventh straight quarter as the global slowdown crimps demand for Asia’s exports. Malaysia’s shipments dropped the most since 2009 and Philippine exports fell in August, while Thailand and South Korea have recorded three straight months of declines in overseas sales.

Migration Gains

Elsewhere in the Asia-Pacific region today, New Zealand government figures today showed permanent migration rose for the first time in three months in September. Arrivals exceeded departures by 90 people, Statistics New Zealand said in Wellington today.

In Europe’s day ahead, a report may show German producer price growth slowed in September to 0.3 percent from a month earlier from a 0.5 percent increase in August, according to the median estimate in a Bloomberg survey of economists.

In the U.S., a National Association of Realtors report may show September sales of existing homes at a 4.74 million annual pace, compared with a 4.82 million rate a month earlier, a Bloomberg survey of economists showed.

Government Boost

Governments in Southeast Asia have loosened fiscal policies to spur growth. Philippine President Benigno Aquino is increasing spending to a record and seeking more than $16 billion of investments in roads and airports, and Malaysian Prime Minister Najib Razak is also boosting outlays.

The region’s growth prospects are helping lure companies, with Japan’s foreign direct investment in Southeast Asia surpassing that in China. Japan’s investment in the Association of Southeast Asian Nations more than doubled to $19.6 billion in 2011 from the previous year, according to Japan External Trade Organization’s figures using finance ministry data. In the same period, FDI in China and Hong Kong rose 52 percent to $14.2 billion.

Japan’s Tsuneishi Shipbuilding Co. said earlier this year it is considering Indonesia, the Philippines and Myanmar for another shipyard. Japan, South Korea and China are among the fastest-aging countries in the world, while developing nations in Southeast Asia are among the youngest in the region.

“Confidence domestically is high everywhere in Southeast Asia,” said Edward Teather, a Singapore-based economist at UBS. “We’re beginning to see indicators bottoming out and improving. That can get things heated up fairly quickly.”

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