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M O R G A N S T A N L E Y R E S E A R C HA S I A / P A C I F I C

Morgan Stanley Asia (Singapore) Pte.

Deyi Tan

[email protected]+65 (6 ) 6834 6703

September 2013

ASEAN ECONOMICS CHARTBOOK

For important disclosures, refer to the Disclosures Section, located at the end of this report.

Indonesia: Still in Disequilibrium; Too Early toTurn Constructive

We believe real exchange rate needs to be 10%-15%weaker from current levels and real interest rate need

to rise to 2%. Such adjustments would help Indonesiato macro-rebalance to a more sustainable near-termequilibrium of lower cyclical growth, narrower CAD anda less overvalued currency.

Malaysia: Not Quite in the Same Boat as Indonesia

Malaysia does not face the same short-term fundingsqueeze as Indonesia does, in our view. The bigger

similarity is in terms of what lower commodity priceswould mean for their medium-term growth prospects.

Singapore: Lower Trend Growth, SomewhatHigher Trend Inflation and a Less Easy Fed Policy

The economy continues to transition to a new normalof lower trend growth and somewhat higher trend

inflation, though the worst of the stagflation-typeenvironment is likely behind it. A less easy Fed policywould likely take some wind out of the leverage cycle.

Thailand: Next at Risk After Indonesia to Rising

Real Rate Trend

Weak current account balance, previously strong

credit growth cycle and elevated LDR increase itsvulnerability to the exogenous tightening from a lesseasy Fed policy, which could constrain howaggressive the fiscal policy stance in Thailand can be.

ASEAN Economics

What Do Cross-Currents of DM Recovery, Rising Real

Rates and China Slowdown Mean for ASEAN?

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M O R G A N S T A N L E Y R E S E A R C H

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ASEAN Chartbook

September 2013

Contents

Overview..3

Indonesia.....9

Malaysia.....19

Singapore..................................................................................................................27

Thailand..36

Macroeconomic indicators....45

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ASEAN Chartbook

September 2013

More Disparate Cross-Currents of Global Macro Forces: (1) Twilight to Daylight in DM

Source: CEIC & Morgan Stanley Research; E=MS estimates Source: CEIC & Morgan Stanley Research; E=MS estimates

A more clouded out look:Apart from idiosyncratic local factors, we think ASEAN economies face a more disparate cross-current ofglobal macro forces, namely: (a) DM recovery; (b) rising real rates in US from expectations of less easy Fed policy and; (c) furtherChina slowdown which would have implications not only on end-demand but also on commodity prices. (SeeASEAN Economics:What Does A Cross-Current of DM Recovery, Rising Real Rates & China Slowdown Mean For ASEAN? Sep 3rd)

Twilight to daylight in DM should buoy exports: DM growth looks set to accelerate, with US and Euro area registering1.6%/2.7%/2.6% and -0.5%/0.9%/1.2% for 2013/2014/2015 respectively, and the twilight-to-daylight call for DM economies stayaccording to script. ASEAN economies are some of the biggest export-oriented economies in AXJ and ASEAN export growth hasbeen on a downtrend since 2010 peak. A rising DM tide should help lift the ASEAN exporters boat and lend some beta to the exportgrowth cycle as we head into 2014.

Global GDP Growth: EM vs DM DM Economies: From Twilight to Daylight

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014E

EM %-pt contribution to global GDP growth

DM %-pt contribution to global GDP growth

MS estimates

-5

-3

-1

1

3

5

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013E

2014E

2015E

US Real GDP growth (%YoY)

Euro Area Real GDP growth (%YoY)

Global GDP growth (%YoY)
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September 2013

(1) Twilight to Daylight in DM

Source: CEIC & Morgan Stanley Research Source: CEIC & Morgan Stanley Research

However, whilst trajectory is up, export recovery is likely to be more subdued than previous ones: This is due to two factors:(a) global growth is likely to be lower than before as Europe navigates a still frustratingly slow and fragile recovery and EMeconomies such as China, sees dimmer growth prospects. MS estimates global GDP growth at 2.9%/3.5%/3.7% respectively (vs 5%CAGR in 2004-2007); (b) our US economics team points out that the uptick in US is primarily driven by a significant pickup inbusiness investment and residential investment, quite unlike the consumption boom which had driven ASEAN export cycle before.One could argue that ASEAN export segments e.g. electronics - PC & PC parts, office equipment & telcom products could still very

well cater to the investment pickup to meet office demand. However, the same could not be said for segments such as electricalappliances, consumer electronics and autos. Moreover, Malaysia and Indonesia, the two largest net commodity exporter (as % ofGDP) in AXJ, would also suffer from slower commodity exports amid the collateral impact from China slowdown as we would discussin subsequent slides.

AXJ: Export Orientation Export Momentum

020

40

60

80

100

120140

160

180

200

Hong

Kong

Singapore

M

alaysia

Taiwan

Thailand

Korea

China

Indonesia

Philippines

India

-10

-5

0

5

10

15

20

25Exports (% of GDP) (LS)

Current account balance (% of GDP) (RS)

As at 2012

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Indonesia exports

Malaysia exports

Singapore exports

Singapore non-oil domestic exports

Thailand exports

%YoY, 3MMA (US$ terms)

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September 2013

(2) Exogenous Tightening from Less Easy Fed Policy

Source: CEIC & Morgan Stanley Research; real rates are calculated using CPI and

nominal 3M T-bill rate for ASEAN and policy rate for US.

Source: CEIC & Morgan Stanley Research; Note that bank credit penetration number for

Singapore includes Housing development board loans

Implications from rising US real rates: Expectations of less easy Fed policy and rising real rates in US have imposed exogenoustightening effects on ASEAN and this is likely to have implications on domestic demand to varying degrees.

To be sure, we do not think th is is a repeat of 1998: This is because, the credit cycle this time is smaller compared to the lastwhich had taken place amid lax banking sector regulation and investment excesses. External debt (see next slide) was higherbefore the 1998 AFC amid pegged currency regimes which incentivise corporates to take unhedged foreign currency loans. Current

account deficits (see next slide) and LDR ratios are mostly less stretched now and the foreign reserve cushion is more comfortablein most cases today, than in the last cycle. (SeeASEAN Economics: Asia Insight: How Is This Leverage Cycle Different From TheLast, Sep 12th)

Real rates Leverage Cycle: 1998 vs Now

41%

29%

76%

8%

60%

139%

174%

161%

13%

39%

21%

33%

123%

33%

135%

118%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Indonesia Malaysia Singapore Thailand

Increase in bank credit: 1992-1997

Increase in bank credit: 2007-2012

Bank credit penetration: 1997

Bank credit penetration: 2012

% of GDP

-6

-4

-2

0

2

4

6

8

M

ar-94

M

ar-95

M

ar-96

M

ar-97

M

ar-98

M

ar-99

M

ar-00

M

ar-01

M

ar-02

M

ar-03

M

ar-04

M

ar-05

M

ar-06

M

ar-07

M

ar-08

M

ar-09

M

ar-10

M

ar-11

M

ar-12

M

ar-13

Indonesia MalaysiaSingapore ThailandUS

Short-term real interest rates
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September 2013

(2) Exogenous Tightening from Less Easy Fed Policy


Nonetheless, ASEAN will not be immune to this r ise in real rates and reversal in carry trade: Bigger tightening pressures andgrowth impact would be felt in economies which have weak current account balances and which has seen strong credit growth andrising LDR amid depressed low real interest rates before. Indeed, we believe to the extent to which current account deficit economiesdo not have excess savings to fund their own domestic demand, the rise in real rates in US mean that real rates in these CADeconomies not only need to rise in tandem but in fact, need to rise faster in order to attract liquidity and bring external imbalances tomore sustainable levels.

Indeed, such global developments are already causing cash-flow problems in Indonesia, leading to currency depreciation and policyrate hikes. We think Thailand looks next most at risk within ASEAN. Additionally in Singapore, although Fed is unlikely to start hikingpolicy rates until mid-2015, an end to the zero-interest rate policy which is now closer than it was before is already causing Singaporebanks to start re-pricing longer tenure loans such as mortgages. Meanwhile, such exogenous tightening effects could also poseconstraints for fiscal policies in Malaysia and Thailand as well.

Current Account Balance Trends External Debt Ratios

-15%

-10%

-5%

0%

5%

10%

15%

20%

M

ar-94

M

ar-95

M

ar-96

M

ar-97

M

ar-98

M

ar-99

M

ar-00

M

ar-01

M

ar-02

M

ar-03

M

ar-04

M

ar-05

M

ar-06

M

ar-07

M

ar-08

M

ar-09

M

ar-10

M

ar-11

M

ar-12

M

ar-13

0%

5%

10%

15%

20%

25%

30%

Indonesia Malaysia

Thailand Singapore (RS)

Current accou nt balance (4Q trailing su m, % of GDP)

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Indonesia

Malaysia

Thailand

External debt, % of GDP

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September 2013

(3) Further China Slowdown and Its Collateral Impact on Commodity Prices

Source: CEIC & Morgan Stanley Research Source: World Bureau of Metals statistics, International Copper Study Group, BP Stats,

Wood Mackenzie Brook Hunt, Morgan Stanley Research

Direct and indi rect impact from China slowdown: Our China economist expects China GDP growth to slow further from 7.6%in 2013 to 7.1%/6.9% in 2014/2015. North Asian economies tend to have the largest trade linkages and the largest trade surpluswith China and would be most directly impacted from a China slowdown. However, for ASEAN, there is also the indirect impact toconsider i.e. the collateral impact that a China slowdown would have on commodity prices.

China slowdown & collateral impact on commodity pr ices: China is either the worlds largest or a key consumer for several

commodities such as iron ore, steel, aluminium, copper, oil, coal and CPO.

Who Has Bigger Trade Linkages with China? China: % Share of World Commodity Demand

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Taiwan Singapore Korea Malaysia Thailand Philippines Indonesia

-4%

-2%

0%

2%

4%

6%

8%

10%

Exports to China (% of GDP)

Trade balance with China (% of GDP) (RS)

2012 China's % Share of World Comm odity Demand (2012)

64

46 4540

50

11 12

25

35

29

36

53

76

912

15 15

8

15

11

2

9 11 9 12

21

2

30

0

10

20

30

40

5060

70

80

Iron Ore Steel Aluminum Copper Coal Oil CPO

China ROW Europe US

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September 2013

(3) Further China Slowdown and Its Collateral Impact on Commodity Prices

Source: World Bureau of Metals statistics, International Copper Study Group, BP Stats,

Wood Mackenzie Brook Hunt, Morgan Stanley Research

Source: CEIC & Morgan Stanley Research

ASEAN net commodity exporters would be impacted: China also accounts for more than 50% of the increase for many ofthese commodities. To that point, we note that Malaysia and Indonesia are the two largest net commodity exporters (% of GDP) in

AXJ. The reversal in commodity supercycle has already led Indonesia to see its most persistent stretch of current account deficitsince 1998 and Malaysias current account surplus to fall from double-digit territory in 2011 to 1.1% of GDP (quarterly annualised)in 2Q13. Continually soft or falling commodity prices would mean poor or poorer terms-of-trade for the commodity exporters.

In a nutshell:Amid this global context, we think the Indonesia economy is still in disequilibrium and its too early to turnconstructive. Thailand is next at risk after Indonesia to the rising real rate trend. We do not think Malaysia is not quite in the sameboat as Indonesia. Meanwhile, in Singapore, the transition to a new normal of lower growth and somewhat higher inflationcontinues. Overall, we believe growth risks are still skewed to the downside.

China: % Share of Increase in Global Demand AXJ: Whos the Largest Net Commodity Exporter?

China's % Contribution to World Demand Increase

64

98

5953

111106

0

20

40

60

80

100

120

2012Copper Iron Ore Aluminium Steel Oil Coal

2012 Trade Balance (% of GDP)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Ko

rea

Taiw

an

Hong

Kong

Singap

ore

In

dia

Ch

ina

Philippi

nes

Thailand

Indone

sia

M

alaysia

Food and live animals Beverages and tobacco

Crude materials Mineral fuels and lubricants

Animal and vegetable oils and fats All Commodities

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September 2013

Indonesia: Impossible Trio of 6% Growth, 2.5% CAD and Stable IDR Coming Undone

Source: CEIC & Morgan Stanley Research Source: Bloomberg & Morgan Stanley Research

Impossible Trio comes undone as: We have highlighted for a while that Indonesias uncomfortable current account deficit andstill healthy domestic demand do not go hand-in-hand with a stable IDR we called this the Impossible Trio. Macro stability is not inthe hands of policymakers given the uncomfortable external imbalances & dependence on external funding and further policytightening and currency depreciation are required to bring Indonesia to a more sustainable near-term equilibrium of lower cyclicalgrowth, narrower CAD and a less overvalued currency.

Global developments exposed macro vulnerability: Indeed, expectations of QE taper and rising real rates in US since late Mayhave exposed this macro vulnerability and forced policymakers hand in undertaking retail fuel price hike and a cumulative policy ratehike of 150bps since June. The reversal in carry trade has also led IDR/USD to depreciate by 16% ytd, even after policymakers spentUS$20bn in foreign reserves, of which US$12bn happened since May-13.

The Impossible Trio of High Growth,

Uncomfortable CAD. .And A Stable IDR

95

105

115

125

135

145

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sep-13

Korea IndonesiaSingapore TaiwanIndia Thailand

Malaysia PhilippinesChina

AXJ/USD (Indexed 1 Sep 2011=100)

De

reciation

A

reciation

-6%

-4%

-2%

0%

2%

4%

6%

8%

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Current account balance (Quarterly annualised, % of GDP)

Current account balance (4Q trailing sum, % of GDP)

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September 2013

Indonesia: Policy Adjustment Triggered, but Macro Rebalancing Process Is Not Over

Source: CEIC & Morgan Stanley Research Source: DMO, Bloomberg & Morgan Stanley Research

Macro adjustment process not over:Although the policy response has been triggered, we believe the macro rebalancingprocess is not over yet and it is still too early to turn constructive on the economy. The confluence of: (a) the longest stretch ofCAD since 1998, courtesy of the commodity supercycle reversal; (b) uncertainty with regards to Chinas growth story and thecollateral impact that may have on commodity prices and; (c) market adjustments to a less easy Fed policy, are risk factors towatch, with regards to the extent of interest rate tightening and currency depreciation required to take the economy to a moresustainable equilibrium by driving a growth deceleration in domestic demand and forcing current account deficit to a narrower

level. Downside risks on these fronts would introduce risks of a sharper policy adjustment within a compressed time-span.Overall, growth risks are still skewed to the downside in our view.

China Slowdown & Implications on Commodity

Price Important to Watch Govt Securities: Foreign ownership & Long Yields

4Q12 1Q13 2Q13 4Q12 1Q13 2Q13

Impact from10% chg inrespectivecommodity

prices, allelse equal

% of GDP

Crude rubber,metalliferousores/metalscraps, iron &

steel & non-ferrous metals

0.5% 0.4% 0.2% 4.6 3.6 1.6 0.02%

Mineral fuels &lubricants - Coal

3.0% 2.9% 2.9% 26.4 25.6 25.5 0.29%

Mineral fuels &lubricants -

Petroleum &petroleum pdts

-3.1% -3.2% -2.8% -27.0 -28.3 -24.7 -0.28%

Mineral fuels &lubricants -Natural gas

1.6% 1.7% 1.7% 14.0 15.1 15.2 0.17%

Animal/Vegetable oils &fats (CPO)

2.4% 2.2% 2.2% 21.4 19.8 19.5 0.22%

Total 4.5% 4.0% 4.2% 39.4 35.7 37.1 0.42%

Commodity

related tradebalance quarterly annualised, %of GDP US$bn, quarterlyannualised

36.0%

28.3%

27%

28%

29%

30%

31%

32%

33%

34%

35%

36%

37%

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

M

ar-12

Apr-12

M

ay-12

Jun-12

Jul-12

Aug-12

Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

M

ar-13

Apr-13

M

ay-13

Jun-13

Jul-13

Aug-13

Sep-13

4.7

5.2

5.7

6.2

6.7

7.2

7.7

8.2

8.7

9.2

Foreign ownership of SBN (% of total outstanding), LS

Indonesia 10-yr bond yield (in reverse scale), RS

30.5%

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ASEAN Chartbook

September 2013

Indonesia: More Needed on Currency Adjustment


Currency adjustment far from over: The still incomplete currency adjustment process is a reason why we believe it is still tooearly to turn constructive on Indonesia. Although the IDR/USD has depreciated by 6% between Dec-12 & Jul-13 and by 18%from the strength in Aug-11 vs July-13, the real effective exchange rate (REER), the more relevant indicator to watch, hasappreciated by 6% between Dec-12 and Jul-13. Meanwhile, it has only marginally depreciated by -0.5% between Aug-11 and Jul-13. This is because Indonesias inflation tends to be higher compared to its trading partners and other nominal currency pairs

have depreciated to a lesser extent.

Real Exchange Rate Has Adjusted To Lesser Extent Fragile Five Currencies

50

60

70

80

90

100

110

120

130

140

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

IDR NEER

IDR REER

IDR/USD

Indexed Jan-2000=100

Appreciation

Depreciation

60

80

100

120

140

160

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Brazil Indonesia

South Africa Turkey

India

Real effective exch ange rate (Indexed 2000=100)

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September 2013

Indonesia: More Needed on Currency Adjustment


There needs to be two rounds of currency adjustment, in our view: The first phase of currency adjustment is to correct for whatlooks like an overvalued currency amid the persistent CAD & the lower new normal in commodity prices. Indeed, the IDR hadbehaved like a commodity currency. The REER had appreciated amid the commodity supercycle in past years and the non-commodity current account balance had deteriorated as a result. Hence, to account for the lower new normal in commodity prices, torestore competitiveness in the non-commodity segments and get CAD to a more comfortable level, we believe REER still needs todepreciate by ~10%-15% from current levels.

Once this overvaluation is corrected, we believe the second phase of currency adjustment would involve keeping realexchange rate stable so as not to again weaken competitiveness in non-commodity segments. This can be achieved either byraising productivity and hence lowering inflation or by engineering a steady rate of nominal FX depreciation to account for Indonesiasinflation differentials.

IDR Had Behaved Like a Commodity CurrencyNon-commodity CAB had deteriorated amid REER

Appreciation

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

40

50

60

70

80

90

100

110

120

CAB less commodities trade balance(4Q trailing sum, % of GDP)

REER (2010=100)

A

re

ciation

De

reciation

100

150

200

250

300

350

400

450

500

550

600

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

60

65

70

75

80

85

90

95

100

105

CRB Commodity Index (LS)

Indonesia REER (2010=100) (RS)

Appre

ciation

Depreciation

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ASEAN Chartbook

September 2013

Indonesia: Less FX Ammunit ion to Defend the Currency


Foreign reserve warchest has dwindled: Policymakers ammunition to defend the currency has been getting lower. Bilateralcurrency swap agreements have recently been arranged (e.g. US$12bn with BOJ) and more seems to be in the pipeline. In ourview, such swap arrangements may offer temporary comfort to market sentiment but is not a permanent fix and at best only helpsto buy time for policymakers to get down to the right policy mix. Policymakers may have concerns regarding the potentialdestabilising effects of a weaker currency given memories of 1998. However, we believe a weaker currency will not have thesame destabilising effect this time, to the extent that the currency depreciation would be significantly lower than during 1998

when NEER and REER depreciated by between 60-80% between mid-97 and mid-98. Moreover, external debt (% of GDP) hascome down from 48% of GDP in 1996 to 29% in 2Q13.

Foreign Reserves Foreign reserve: Number of Months of Import cover

0

20

40

60

80

100

120

140

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Foreign reserves (US$bn)

Foreign reserves less predetermined short-tern net drains (US$bn)

5.8

4.9

3

4

5

6

7

8

9

10

11

12

13

14

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Foreign reserves: Number of months of import cover

Foreign reserves less predetermined short-term net drains on foreignreserve assets: Number of months of import cover

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ASEAN Chartbook

September 2013

Indonesia: Rate Tightening Cycle Is Not Yet Completed

Source: Bloomberg, CEIC & Morgan Stanley Research Source: Bloomberg & Morgan Stanley Research

The rise in real rates in US, the lack of excess domestic savings in Indonesia as seen in its CAD, its rising LDR and the need to anchorinflation expectations amid currency depreciation all point to this - Indonesias real interest rate not only has to keep in tandem,but in fact rise faster than global trend in order to maintain macro stability & to keep a rein on external imbalances.

In our view, Indonesias inflation is likely to normalize at 6.5%YoY in 2015 after the impact from the retail fuel price hike wears out. Wethink policymakers need to bring short-term real rates up to 2%, i,e. 8.5% based on a normalized inflation rate of 6.5%. To besure, we expect BI only to raise policy rate by another 50bps to 7.75% as they tend to have a dovish bias. However regardless of

policy action, we think market conditions will force short-term real interest rates up to where it needs to be. This is because as currencycontinues to depreciate, the process of FX intervention (selling USD and buying IDR) would withdraw liquidity from the system, leadingmarket-oriented interest rate to move up. To this point, we note that although benchmark policy rate has been hiked by 150bps fromMay levels, 1M and 3M JIBOR has already moved up by 190-200bps. The rate tightening cycle would mean macro pain in the form ofa growth slowdown.

Indonesia Real Interest Rate Need To Rise at A

Faster Pace vs US JIBOR has moved up faster than pol icy rates

-6

-4

-2

0

2

4

6

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Indo 10Y real rates less US 10Y real rates (3MMA)

Indo - CAB (Quarterly annualised, % of GDP) (RS)

2

4

6

8

10

12

14

16

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

2

4

6

8

10

12

14

16

BI Policy Rate Deposit Facility Rate

Lending Facility Rate 1M JIBOR

3M JIBOR

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ASEAN Chartbook

September 2013

Indonesia: Increased Urgency for Structural Reform 2.0


Indonesia still has one of the more attractive structural stories in ASEAN: However, external dampeners from the Chinaslowdown & collateral impact on commodity prices now mean Indonesias structural growth story cannot be seen in the same light.If the same structural growth drivers could deliver 6.5% or higher GDP growth before, the changed global environment now meansthat there is an increased urgency to undertake structural reform 2.0 to offset the growth negatives inflicted by exogenous factors.Otherwise, Indonesia could face lower growth and macro stability risks.

How do external dampeners pose headwinds? The reversal in terms-of-trade would hamper the direct growth lift & multiplier

effect accorded by the commodity sector before. Meanwhile, the continued CAD & inability to generate excess savings and hencedeposits mean that the structural decline in capital cost, which had been an important growth driver, could be largely behind us.Meanwhile, risks of China slowdown and its collateral impact on commodity prices also mean Indonesias CAD may not be stable.That would perpetuate pressures for policy response beyond what has been undertaken & would come with growth implications.

Terms-of-Trade Reverses Structural Decline In Capital Cost Is Largely Behind Us

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Commodities Trade balance

Non-commodities Trade balance

Total trade balance

3M trailing sum, annualised (% of GDP)

4

9

14

19

24

29

34

39

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Time Deposit Rate: 1Mth - Commercial Banks

Average Lending Rate: Working Capital - Commercial Banks

Policy Rate

% pa

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ASEAN Chartbook

September 2013

Indonesia: Increased Urgency for Structural Reform 2.0

Source: CEIC & Morgan Stanley Research Source: MSCI, Datastream & Morgan Stanley Research

What does structural reform 2.0 need to entail? Hence, apart from cyclical policy response to deal with immediate macroissues, structural policy response are also required to deal with the global headwinds: We believe the following is required: (a)Productivity and competitiveness in non-commodity sectors would need to be boosted to diversify growth drivers as commoditysupercycle unwind; (b) One way to achieve the former is to ensure that resources are spent on productive areas such asinfrastructure and education where Indonesia still lags; (c) Ensuring that the real exchange is stable would help to prevent thecurrency from becoming overvalued and crowding out the non-commodity sectors. (SeeAsia Insight: Why The Next Election IsMore Important Than the Last, July 30th)

When GDP growth got a structural upli ft. Market Had Re-rated

1

2

3

4

5

6

7

8

M

ar-01

Sep-01

M

ar-02

Sep-02

M

ar-03

Sep-03

M

ar-04

Sep-04

M

ar-05

Sep-05

M

ar-06

Sep-06

M

ar-07

Sep-07

M

ar-08

Sep-08

M

ar-09

Sep-09

M

ar-10

Sep-10

M

ar-11

Sep-11

M

ar-12

Sep-12

M

ar-13

GDP growth (%YoY)

GDP growth (%YoY, 8Q trailing average)

0

2

4

6

8

10

12

14

16

18

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

MSCI Indonesia: 12M Fwd PE
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ASEAN Chartbook

September 2013

Indonesia: 2014 Elections More Important than the Last


A need to ensure wage growth is in line wi th product ivi ty Bigger FDI share would mitigate funding volatility

0

5

10

15

20

25

3035

40

45

50

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Monthly minimum wage: National (% (YoY)Monthly minimum wage: Jakarta (%YoY)Monthly average wage (%YoY)

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Sep-04

M

ar-05

Sep-05

M

ar-06

Sep-06

M

ar-07

Sep-07

M

ar-08

Sep-08

M

ar-09

Sep-09

M

ar-10

Sep-10

M

ar-11

Sep-11

M

ar-12

Sep-12

M

ar-13

Financial & capital account: FDI

Financial & capital account: Portfolio investment

4Q trailing sum , % of GDP

What does structural reform 2.0 need to entail? (d) Labour market regulations/policies would be another avenue to ensurecompetitiveness of non-commodity sectors. Ensuring wage growth is consistent with productivity increases would help corporateskeep their bottom-line in check and ensure that cost competitiveness, particularly in the non-commodity sectors, does not geteroded; (e) Improving the investment landscape to attract more FDI inflows (which are more stable than portfolio flows) wouldalso help to mitigate funding volatility.

In this context, the next election is more important than the last: The 2009 elections were important because of what they

meant for political stability and longevity of the institution building process. Without them, Indonesias structural story would havefallen by the wayside. However, the 2014 elections now matter even more, not least because these foundation blocks remainimportant, but also because there is an increased urgency to undertaken structural reform 2.0 to offset global growth negatives.

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ASEAN Chartbook

September 2013

Malaysia: How Would the Three-Legged Growth Model Fare?

Source: CEIC and Morgan Stanley Research Source: CEIC and Morgan Stanley Research

Growth outlook premised on a cross-current of macro factors: Domestic demand had decoupled from exports in the past fewquarters amid the pre-election boost and the global soft patch. However, going into 2014, we think domestic demand could besomewhat hampered by the following: Fitchs recent downgrade to Malaysias outlook and recent rhetoric by policymakerssuggest that fiscal consolidation is underway. Meanwhile, with elections done and dusted, effects from pre-election boost wouldlikely fade. As it is, capex momentum had decelerated significantly from a peak of +29.3%YoY in 3Q12 to +8.9%YoY in 2Q13.

Markets had previously been sanguine regarding the continued capex strength on the back of ETP (Economic TransformationProgram) but we have been sceptical. Outside of the strategic push to ETP in the run-up to elections, a sustained inflexion pointfor investment depends critically on an improvement to the competitiveness of the workforce, which is still not evident yet in ourview.

Domestic demand had decoupled from exports but Is the pre-election boost now fading?

-15

-10

-5

0

5

10

15

20

M

ar-06

Jul-06

Nov-06

M

ar-07

Jul-07

Nov-07

M

ar-08

Jul-08

Nov-08

M

ar-09

Jul-09

Nov-09

M

ar-10

Jul-10

Nov-10

M

ar-11

Jul-11

Nov-11

M

ar-12

Jul-12

Nov-12

M

ar-13

Domestic demand (%YoY)

Exports (%YoY)

-15

-10

-5

0

5

10

15

20

25

30

M

ar-06

Jul-06

Nov-06

M

ar-07

Jul-07

Nov-07

M

ar-08

Jul-08

Nov-08

M

ar-09

Jul-09

Nov-09

M

ar-10

Jul-10

Nov-10

M

ar-11

Jul-11

Nov-11

M

ar-12

Jul-12

Nov-12

M

ar-13

Domestic demand (%YoY)

Gross Fixed Capex (%YoY)

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ASEAN Chartbook

September 2013

Malaysia: How Would the Three-Legged Growth Model Fare?


Non-commodity exports to get a lift from DM recovery: Momentum in Malaysias exports have been lacklustre for a while asthey suffered from a double whammy of global soft patch and commodity supercycle unwinding. We believe commodity exportsare still likely to see subdued trends. Indeed, oil trade balance has recently fallen into deficit territory for Malaysia. However,manufactured exports is likely to get cyclical support from the DM recovery.

Export Momentum Had Been Lacklustre Commodity Trade Balance Breakdown

-40

-30

-20

-10

0

10

20

30

40

50

60

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Non-commodity exports, %YoY, 3MMA

Commodity-Related Exports, %YoY, 3MMA

-2%

0%

2%

4%

6%

8%

10%

Sep-99

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Trade balance: Edible oils

Trade balance: Petroleum

Trade balance: Natural gas

3M trailing su m, annualised (% of GDP)

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ASEAN Chartbook

September 2013

Malaysia Does Not Face the Same Short-term Funding Squeeze as Indonesia

Source: CEIC and Morgan Stanley Research Source: CEIC, DMO & Morgan Stanley Research

Not qui te in the same boat as Indonesia: Markets have tried to decipher which economy could be next in terms of bearing thebrunt of the contagion effect in ASEAN. Some have highlighted similarities between Malaysia & Indonesia. Both are large netcommodity exporters & have seen reversal in terms-of-trade significantly weakening current account balance. Foreign ownership ofgovernment bonds for both economies are high. Foreign ownership of Malaysia government securities stand at 42.7% ofoutstanding in Jul-13. Including treasury bills & investment issues, foreign ownership is 28.3%, very similar to the 30.6% inIndonesia in Aug-13. However, we believe Malaysia does not face the same short-term funding squeeze as Indonesia. First,although Malaysias current account surplus has weakened significantly from 10.8% of GDP in 4Q11 (quarterly annualised) to 1.1%in 2Q13 and we would not be surprised to see it running a persistent CAD in the medium-term if no reforms are taken up, we stillthink it is likely to run a mild surplus of 2.8%/2.5%/1.1% of GDP for our forecast horizon of 2013/2014/2015.

Current account surplus dwindling Who Has High Foreign Ownership of Government Securities?

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Mar-94

Mar-95

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Current account balance (4Q trailing sum, % of GDP)

Current account balance (Quarterly annualised, % of GDP)

Foreign Ownership of Domestic Government debt securities (% of total)

30.6%

28.3%

16.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Indonesia Malaysia Thailand

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ASEAN Chartbook

September 2013

Malaysia Does Not Face the Same Short-term Funding Squeeze as Indonesia

Source: CEIC and Morgan Stanley Research Source: CEIC & Morgan Stanley Research

Credit growth was not as strong and LDR ratios are more comfortable: Second, Malaysia did not have as strong a creditgrowth cycle as Indonesia. Credit growth (12M trailing average) stood at 10.8% for Malaysia in Jul-13 vs Indonesias 22.7% inJun-13. Meanwhile, LDR ratios are more comfortable in Malaysia at 79% vs Indonesias 91%, suggesting that previous excesssavings are still providing an internal buffer of liquidity to fall back on in the event of capital flight. Third, real interest rates inMalaysia are highest in ASEAN at 1.0% vs Indonesias -1.6%. To the extent to which real rates are higher to begin with, it wouldbe less vulnerable as the yield carry trade unwinds.

Comparing Credit Growth Cycles Who Has A More Comfortable LDR Buffer?

0

5

10

15

20

25

30

35

40

45

Jan-

07

Apr-

07

Jul-07

O

ct-07

Jan-

08

Apr-

08

Jul-08

O

ct-08

Jan-

09

Apr-

09

Jul-09

O

ct-09

Jan-

10

Apr-

10

Jul-10

O

ct-10

Jan-

11

Apr-

11

Jul-11

O

ct-11

Jan-

12

Apr-

12

Jul-12

O

ct-12

Jan-

13

Apr-

13

Jul-13

Malaysia loan growth (%YoY)

Indonesia loan growth (%YoY)

Loan to Deposit Ratio (%)

79%

100%

95%91%

89%

66%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

Nov-96

Nov-97

Nov-98

Nov-99

Nov-00

Nov-01

Nov-02

Nov-03

Nov-04

Nov-05

Nov-06

Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Malaysia Singapore

Thailand Indonesia

Philippines

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ASEAN Chartbook

September 2013

Malaysia: Similarity with Indonesia Lies More in Terms of What Lower Commodity Prices

Would Mean for Medium-term Growth

Source: CEIC and Morgan Stanley Research Source: CEIC & Morgan Stanley Research

We believe the similarity between Malaysia & Indonesia lies more in that both would have to contend with what lower

commodity prices would mean for GDP growth going forward. We have highlighted for a long time that Malaysias structuralstory is not compelling as other ASEAN economies because it suffers from a Dutch disease of sorts. Benign demographic trendshave provided the labour inputs for growth. On the other hand, with commodity-related revenue making up 35% of governmentrevenue, that has provided the capital inputs for growth via fiscal pump-priming. Together, these factors have created acomfortable growth buffer, leading policymakers to neglect for some time whats needed on the competitiveness/ productivity front.

Commodity Cash Cow On The Reversal? Who Makes Up An Increasing Share of the Unemployed?

0

5

10

15

20

25

30

35

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

54

56

58

60

62

64

66

68

70

72

No formal education

Primary education

Tertiary educationSecondary education (RS)

% of unemployed, by educatio n level

10

15

20

25

30

35

40

45

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2

3

4

5

6

7

8

9

10Commodity-related Federal Govt Revenue (% ofrevenue) (LS)

Commodity-related Federal Govt Revenue (% ofGDP) (RS)

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ASEAN Chartbook

September 2013

Malaysia: Similarity with Indonesia Lies More in Terms of What Lower Commodity Prices

Would Mean for Medium-term Growth


Symptoms are showing:As a result, FDI has been on a secular downtrend. Malaysias global share of manufactured exportshas fallen. Non-commodity trade balance has been on a secular decline and is in deficit territory. Additionally, the tertiary-educated makes up an increasing share of the unemployed group, pointing to a degree of skills mismatch in the labour market. Inthis context, a sustained reversal in the commodity terms-of-trade, without a corresponding improvement in productivity in othernon-commodity economic segments would constrain growth prospects for Malaysia in the medium-term.

Secular Decline in FDI Non-commodity trade balance on the decline

-8

-3

2

7

12

17

22

27

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Malaysia Singapore

Thailand IndonesiaPhilippines

Net FDI, US$bn

-5%

0%

5%

10%

15%

20%

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Commodities trade balance (Mineral fuels, CPO, food & crude materials)

Non-commodities trade balance

Trade balance (3M trailing sum, annualised, % of GDP)

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ASEAN Chartbook

September 2013

Malaysia: Global Developments Have Prompted Tentative Steps towards Macro

Rebalancing


The silver lining is. that recent developments seem to be prompting steps towards macro-rebalancing. With commodity revenuestanding at 35% of government revenue and public debt pushing the 55% ceiling, policymakers have implemented steps to roll backon fuel subsidies and are indicating plans to: (a) reduce fiscal deficit to 4% of GDP in 2014 budget; (b) widen revenue base via aGoods & Services tax to reduce dependence on commodities revenue. These measures should have the longer-term impact ofhelping the economy deal with a new global environment of lower commodity prices.

A need to focus on soft infrastructure:Apart from these measures, we reiterate our view that engineering a sustainable structuralinflexion point in Malaysias growth story would require policymakers to address issues pertaining to the quality of human capital.Growth momentum in mega investment plans such as ETP and Iskandar Development Region can only have longevity ifpolicymakers implement a critical mass of reforms to improve the soft infrastructure i.e. human capital.

Public Debt Pushing the 55% Ceiling A Need To Focus on Soft Inf rastructure Again

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

Dec-91

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Government debt (% of GDP) (LS)

Fiscal balance (4Q trailing sum, % of GDP) (RS) (Values in reverse order)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

GFCF: Private

GFCF: Public

Government Development Expenditure on Education (% of GDP) (RS)

% of GDP

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ASEAN Chartbook

September 2013

Singapore: Rising DM Tide Lifts the Exporters BoatUS ISM New Orders Leading Indicator for NODX

Source: CEIC and Morgan Stanley Research Source: CEIC and Morgan Stanley Research estimates

Domestic Demand Strongly Correlated With Exports

A cyclical upli ft for the small open economy: US ISM New Orders, a leading indicator for non-oil domestic exports have turnedupward, heralding a likely improvement in export momentum for Singapore. To the extent to which domestic demand is stronglycorrelated with exports, we believe that GDP growth momentum for 2014 (+3.6%YoY) is likely to edge up from the momentumseen in 2013 (+2.9%YoY).

-35

-25

-15

-5

5

15

25

35

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

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Jan-10

Jan-11

Jan-12

Jan-13

25

30

35

40

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50

55

60

65

70

75

NODX (YoY%, 3MMA) (LS)

US ISM New Orders Index (3MMA) (4M Lead) (RS)

S$ Terms, YoY%, 3MMA

-25

-15

-5

5

15

25

35

Mar-76

Mar-80

Mar-84

Mar-88

Mar-92

Mar-96

Mar-00

Mar-04

Mar-08

Mar-12

Exports of Goods & Services

Domestic Demand (ex inventories)

%YoY

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ASEAN Chartbook

September 2013

Singapore: From Goldilocks to a New NormalFrom Goldilocks To A New Normal

Source: CEIC and Morgan Stanley Research Source: CEIC and Morgan Stanley Research; E=MS estimates

A Global Demand Shock As Global Growth Goes

Lower

Shift to Lower Growth Normal Underway: Cyclical uplift aside, we believe that the broader picture for Singapore remains one ofan economy which is transitioning from a Goldilocks period of high growth and extremely benign inflation seen in the run up to2007, to one where growth is likely to settle at newer lower normal whilst inflation is likely to average somewhat higher than the1.5%-2.0% historical trend average. This is due to both global developments and idiosyncratic issues at home. On the growthfront, GDP growth has trended down from the 8.5% CAGR seen in 2004-2007 to what looks likely to be a 3%-4% range goingforward. Indeed, this is on the back of the fact that global macro rebalancing (first in DM, and now in EM) point to a global growth

level which would be lower than the 5% CAGR seen during 2004-2007.

-10

-5

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20

25

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ar-00

M

ar-01

M

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M

ar-03

M

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M

ar-07

M

ar-08

M

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M

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M

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M

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M

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GDP growth (%YoY)

Inflation (%YoY)

-2

-1

0

1

2

3

4

5

6

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013E

2014E

2015E

Global GDP growth (%YoY)

2004-2007 CAGR: 5%

2013-2015

CAGR:3.4%

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ASEAN Chartbook

September 2013

Singapore: From Goldilocks to a New Normal Labour Supply Shock From Slower ImmigrationGoing Forward


Tight Labour Market Puts Floor to Wage Costs

The idiosyncratic domestic factor affects growth.:Additionally, whats different in this cycle is that not only is Singaporecontending with the secular global demand shock, it is also contending with domestic issues of its own - essentially a laboursupply shock. An ageing population and a need to wean the economy from dependence on foreign labour giveninfrastructure/political constraints mean that policymakers have undertaken steps to slow down the growth of foreign labour. Tothe extent to which aggressive immigration policy had lifted labour inputs and driven growth before, a slowdown in working agepopulation would also slow down potential GDP growth.

and inflation:A cutback in foreign labour, together with the still tight labour market would also affect inflation as it would likelyput a floor to labor costs despite the subdued growth momentum. We expect inflation to hover in the mid 2% territory goingforward, somewhat higher than the 1.5%-2.0% range seen during the Goldilocks period.

0

5

10

15

20

25

30

35

40

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-10

-5

0

5

10

15

20

25Non-resident labour (% of labour force) (LS)

Non-resident population (%YoY) (RS)Policymakers want to maintain foreign

labour share at ard 1/3

-6

-4

-2

0

2

4

6

8

10

12

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

0

1

2

3

4

5

6

Average monthly earnings (%YoY) (LS)

Unemployment rate (sa) (RS) (Values in reverse order)

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ASEAN Chartbook

September 2013

Singapore: But the Worst of Stagflation-Type Environment Is Likely Behind UsInflation Trends


Inflation trends

Worst of stagflation-type environment likely behind us: Yet that said, the worst of the stagflation-type environment is likelybehind us. Indeed, headline inflation has decelerated from an intra-year peak of 4.9%YoY in Feb-13 to 1.9%YoY in Jul-13.Courtesy of the loose monetary conditions imported from DM, housing and transport (car prices) has previously been the two keysources of inflation. However, macro-prudential measures in auto finance in terms of LTV caps and maximum tenures have led tosoftening car prices. A slower pace of property price rise from the multiple rounds of property cooling measures have also filteredinto CPI with a lag. Additionally, the exogenous tightening inflicted from a less easy Fed policy also looks likely to soften property

prices further. Our property analysts, Sean Gardiner & Wilson Ng, expects private residential prices to fall by 5% in 2014.

-3

-2

-1

0

1

2

3

4

5

6

7

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Tradables inflation (ex private transport) (%YoY)

Non-tradables inflation (ex accomodation) (%YoY)

MAS core inflation (%YoY)

-2

1

3

5

7

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Food Clothing & Footwear

Housing Transport & communications

Education and Stationery Healthcare

Recreation & Others Inflation (YoY%)

%-pt contribution of segments to headline inflation

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ASEAN Chartbook

September 2013

Singapore: Exogenous Tightening to Take Some Wind Out of the Leverage CycleShort-term interest rate stays low but.


Long Yields have already moved up

Our US team expects the Fed to begin raising rates in mid-2015, taking i t to 1.5% by 2015 year-end. On the back of that, weexpect 3M SGD SIBOR to rise to 1% by 2015 year-end from ~0.4% currently. Singapore will not be immune to the exogenoustightening effects from a less easy Fed policy. Resident lending has increased by 50% of GDP in the period 2007-2Q13 to reach159% of GDP amid depressed SIBOR rates and this has buoyed asset prices. As it is, although the Fed has not begun to tightenrates yet, the end of the zero-interest rate policy being sooner than it has been before, has already led long yields to rise. Indeed,in Singapore 10Y bond yield has risen 120bps from May levels, similar to the 120bps increase in US 10Y bond yield for the same

period.

0

1

2

3

4

5

6

7

Feb-01

Aug-01

Feb-02

Aug-02

Feb-03

Aug-03

Feb-04

Aug-04

Feb-05

Aug-05

Feb-06

Aug-06

Feb-07

Aug-07

Feb-08

Aug-08

Feb-09

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

3M S$SIBOR

FFTR

3M US$LIBOR

%

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

US 10Y

SG 10Y

%

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ASEAN Chartbook

September 2013

Singapore: Exogenous Tightening to Take Some Wind Out of the Leverage Cycle

Bank Leverage Has Picked up for


Both households & non-households

Not Immune to a less easy Fed policy:Anecdotally, banks have already started to reprice SIBOR-plus mortgage loans. Webelieve the exogenous tightening effects from a less easy Fed policy would potentially create headwinds for selected segments ofthe economy, such as property and interest-rate sensitive spending.

60%

80%

100%

120%

140%

160%

180%

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013latest

Bank credit: Domestic Banking units (% of GDP)

Bank credit: Resident lending (Domestic banking

units + Asian currency units) (% of GDP)

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2006 2007 2008 2009 2010 2011 2012 2013latest

Total system resident lending (ACU + DBU) (% of GDP)Total system resident lending: Personal loansTotal system resident lending: Non-personal loans

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ASEAN Chartbook

September 2013

Singapore: For the Medium Term, Macro Rebalancing Singapore-Style Is Needed

Source: CEIC, Morgan Stanley Research

Singapore Consumer Dwarfed by External Demand

Source: CEIC, Morgan Stanley Research

Urbanisation and Silver Tsunami

Rebalancing needed: Overall, for the medium-term, macro rebalancing to tap higher growth export segments/export destinationsand improving productivity to offset the drag from ageing population is the only sustainable panacea to raise growth prospects andrein in inflation. On the former, an export-growth model will remain the growth strategy but policymakers will likely continue to focuson reshaping the export machine to cater to demand from secular trends of urbanisation, ageing and growing affluence (particularlyin Asia) and capitalise on growth themes such as health urban solutions and wellness and lifestyle services & products.

Policymakers will also likely implement measures to help companies expand their top-line via introduction of new products, adeparture from previous strategy of helping companies to manage their bottomline via more cost-effective production.

35

45

55

65

75

85

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006

2011

100

120

140

160

180

200

220

240Private Consumption (% of GDP) (LS)

Exports of Goods & Services (% of GDP) (RS)

10

20

30

40

50

60

70

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

40

45

50

55

60

65

70

75

80

85AXJ Urbanisation Rate (%) (LS)

AXJ Age Dependency Ratio (%) (RS)

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ASEAN Chartbook

September 2013

Singapore: Can Mr Productivity Fight the Silver Tsunami ?

Source: UN Population database and Morgan Stanley Research

Working Age Population Growth Will Dip

Significantly in Singapore

Source: UN Population database and Morgan Stanley Research

Dependency Ratio Will Rise More Sharply for Singapore

-2

-1

0

1

2

3

4

5

2010

2015

2020

2025

2030

2035

2040

2045

2050

China India Korea Singapore

Malaysia Indonesia Thailand Philippines

Working-age popu lation (%YoY)

Amid the greying populat ion and str icter immigration policies, raising product iv ity wil l also need to be a medium-term

growth strategy to be undertaken. Indeed, working age population is likely to slow from 4.1% CAGR in 2005-2010 period to 1.1%CAGR in 2010-2015. Based on our calculations, it poses a drag on potential growth of ~1.3ppt, all else equal. Without measures toaggressively increase labour inputs, the panacea for sustaining potential growth would be to raise total factor productivity (TFP)gains. Yet, it may difficult to fully close this growth shortfall so quickly. Trend TFP has averaged ~1.4ppt in the past five years and

would need to almost double to compensate for the greying population. In this regard, we think deterioriating demographics likelypoint to a structurally lower potential growth trend ahead until productivity catches up to close the gap.

20

30

40

50

60

70

80

90

100

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

China Hong KongIndia JapanKorea SingaporeIndonesia Thailand

Malaysia Philippines

Dependency ratio (Ratio of dependants to working

age population) (%)

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ASEAN Chartbook

September 2013

Thailand: Technical Recession Amid Stimulus Payback

Source: CEIC & Morgan Stanley Research Source: CEIC and Morgan Stanley Research

Sequential Momentum Has Softened

What next after the technical recession? Post flood in 2012, domestic demand and export momentum had diverged as exportproduction capacity got crimped whilst domestic demand got a boost from stimulus program. In 1H13, a technical recessionensued because domestic demand had pulled back more significantly than expected when stimulus programs expired. At thesame time, goods export momentum had stayed patchy at subdued levels. Heading into 2014, we suspect both domestic demand(+4.1%YoY vs +3.7%YoY in 2013) and exports (+4.1%YoY vs +2.3%YoY in 2013) momentum are likely to converge. Both arelikely to show a cyclical uptick. However, the pace of acceleration will likely be more marked in exports as exogenous tightening

inflicted by unwinding of overeasy monetary policy in US puts a rein on how quickly domestic demand would pick up.

GDP Pulls Back As Stimulus Programs Expire

60

70

80

90

100

110

120

130

140

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

80

85

90

95

100

105

110

115

120

125Private investment index (sa)

Export value index (sa)

Private consumption index (sa) (RS)

Indexed Jan-08=100

86

91

96

101

106

Sep-11

Nov-11

Jan-12

M

ar-12

M

ay-12

Jul-12

Sep-12

Nov-12

Jan-13

M

ar-13

M

ay-13

Thailand real GDP sa (Indexed Sep11 = 100)

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ASEAN Chartbook

September 2013

Thailand: DM Recovery to Provide Some Export Growth Beta, but

Source: CEIC & Morgan Stanley Research Source: CEIC and Morgan Stanley Research

Which Export Destinations Have Been Weaker?

Exports to improve: Compared to other ASEAN economies, Thailand has a relatively more balanced dual-track economy ofexports and domestic demand. A US growth rebound and a less bad Europe which is happening according to script would help toprovide some growth beta on the export front.

US ISM & Euro PMI: On An Improving Trend

25

30

35

40

45

50

55

60

65

70

75

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

US ISM: New Orders Index (3MMA)

Euro PMI (3MMA)-20

-15

-10

-5

0

5

10

15

20

25

30

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Total exports Exports: China

Exports: AXJ-ex-China Exports: US

Exports: Japan Exports: EU27

%YoY, 3MMA

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ASEAN Chartbook

September 2013

Thailand: DM Recovery to Provide Some Export Growth Beta, but

Source: WTO & Morgan Stanley Research Source: WTO & Morgan Stanley Research

Manufactured Global Export Share On Uptrend

Thai exporters are competitive: Indeed, despite the global growth soft patch seen earlier this year, Thailand has still managedto eke out an export growth (in US$ terms) better than some other ASEAN counterparts due to its composition of the exportbasket (less commodity centric). Moreover, Thailands manufactured exporters have been competitive and their global marketshare has been increasing.

Manufactured Exporters Have Stayed Competit ive

% share of

global

exports in

respective

segments

Overall

manu-

factured

goods

Iron &

steel

Chemicals Off ice &

telcom

equipment

Aut omot ive Text ile Clo thing

1990 0.61% 0.13% 0.16% 1.18% 0.03% 0.89% 2.61%

1995 1.11% 0.31% 0.51% 1.93% 0.11% 1.27% 3.16%

2000 1.10% 0.63% 0.70% 1.93% 0.42% 1.26% 1.90%

2005 1.16% 0.52% 0.81% 1.88% 0.87% 1.36% 1.47%

2012 1.42% 0.66% 1.18% 2.17% 1.87% 1.23% 1.01%

% sharegain (2000

to 2012) 0.32% 0.04% 0.49% 0.24% 1.45% -0.03% -0.89%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Thailand Agriculture exports (% share of global agriculture exports)

Thailand Manufactured exports (% share of global manufactured exports)

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41

ASEAN Chartbook

September 2013

Thailand: Exogenous Tightening from Rising US Real Rates to Constrain DomesticDemand Where Excesses Have Built Up


LDR ratios in elevated territory

Low real rates have supported strong credit growth & rising LDR: Indeed, leverage as evident in bank credit penetration (%of GDP) has been increasing at ~8% of GDP each year in the period 2007-2012, driven by both households and non-householdssegments. Indeed, bank leverage for both households and non-households in Thailand, adjusted for GDP per capita, are higherthan the regional trend average and LDR ratios has been rising and are in elevated territory.

Leverage Has Picked Up In Both Households & Non-

Households

0%

20%

40%

60%

80%

100%

120%

140%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

latest

Bank credit: Households

Bank credit: Non-households

Total household debt

% of GDP

60

70

80

90

100

110

120

130

140

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Indonesia - Loan to deposit ratioMalaysia - Loan to deposit ratioThailand - Loan to deposit + bills of exchange ratioThailand - Loans to deposit + bills of exchange ratio (excluding interbank)Singapore - Loan to deposit ratio (DBU)


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ASEAN Chartbook

September 2013

Thailand: Exogenous Tightening from Rising US Real Rates to Constrain DomesticDemand Where Excesses Have Built Up

Source: BoT & Morgan Stanley Research Source: CEIC & Morgan Stanley Research

Recent Policy Easing Has Not Fil tered Into Market Rates

Unwinding of overeasy Fed pol icy impose exogenous tightening effects: Now however, capital flows are unwinding.Foreign ownership of government bonds has fallen from 17.7% of outstanding in April-13 to 16.7% in July amid US$2.7bn ofoutflows. Given that Thailand is likely to see current account deficits for 2013/2014/2015 at -0.9%/-0.5%/-0.9% of GDP, reflectinga lack of excess savings in the system, we believe the economy looks vulnerable to the exogenous tightening inflicted by the risein real rates in US and this is likely to constrain how quickly domestic demand could pick up despite the export growth support. Asit is, elevated LDR ratios already means that the recent policy rate cuts have seen limited pass-through to lending and deposit

rates.

Capital Flows Unwinding

0

1

2

3

4

5

6

7

8

9

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Policy rate

Savings deposit rate

3M time deposit

Minimum loan rate

%

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

M

ar-03

Sep-03

M

ar-04

Sep-04

M

ar-05

Sep-05

M

ar-06

Sep-06

M

ar-07

Sep-07

M

ar-08

Sep-08

M

ar-09

Sep-09

M

ar-10

Sep-10

M

ar-11

Sep-11

M

ar-12

Sep-12

M

ar-13

Sep-13

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Thailand monthly net foreign bond buying (US$bn) (LS)

Thailand Foreign ownership of govt bonds (%) (RS)


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ASEAN Chartbook

September 2013

Thailand: Growth Alpha from Fiscal Policy Also Faces Headwinds from ExogenousTightening


Public Debt Ratios

Public infrastructure investment delayed till 2014: With the Bht2trn infrastructure funding bill still in Parliament and the waterinfrastructure projects still needing environmental and health impact assessment before they can proceed, implementation of publicinvestment projects is further pushed back into 2014. This pick-up in non-budgetary expenditure would be offset to a certain extent by asmaller budget deficit of Rp250bn for FY2013/2014 (vs Rp300bn for FY2012/2013. Net-net, we are expecting public investment projectsto lend a growth stimulus to the tune of ~0.6%-pt to 2014 GDP growth, assuming a 50% implementation rate of infrastructure projects.

On the fiscal front, we believe the exogenous tightening from a less easy Fed policy could also put a lid on how aggressive policymakerscan be with its fiscal stimulus as this could further weaken the current account which is already in deficit territory. This would mean thatpolicymakers would have to tap external funding which would likely come at a higher interest cost or face a further tightening of domesticliquidity conditions and a crowding out of private investment.

Bht2trn Infrastructure Plan: Expected Disbursement

154

308

381 386

356

228

187

0

50

100

150

200

250

300

350

400

450

2013 2014 2015 2016 2017 2018 2019 2020

Expected disbursementBht bn

57% 56%

54%

49%48%

46%

40%

37%38%

44%42%

41%

44%

30%

35%

40%

45%

50%

55%

60%

65%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Public debt ratio (% of GDP)


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ASEAN Chartbook

September 2013

Thailand: Growth Alpha from Fiscal Policy Also Faces Headwinds from ExogenousTightening

Source: CEIC & Morgan Stanley Research Source: UN Population database & Morgan Stanley Research

Dependency Ratio To Deteriorate

A need to manage f iscal resources ef ficient ly: We would also note that with elections due by July 2015, any policypreference to fall back on quick-and-easy consumption-type fiscal measures rather than investment-type of spending in 2014would also risk worsening fiscal burden and current account without any commensurate growth or productivity returns in future.Indeed, we believe that the following factors of: (a) ageing demography and likely higher social/healthcare expenditure goingforward; (b) reduced tax revenue base given recent corporate/personal income tax cuts; (c) legacy of populist policy measuressuch as rice mortgage scheme and; (d) current account deficits reflecting a lack of excess savings in the system, point to an

increasing need for policymakers to manage its fiscal mix more efficiently.

Rice Mortgage Scheme: Counting The Costs

1.6%

2.2%

1.7%

1.4%

3.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2008 2009 2010 2011 2012

Special Financial Institutions (SFIs)guaranteed debt (% of GDP)

20

30

40

50

60

70

80

90

100

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

China SingaporeIndonesia ThailandMalaysia Philippines

Dependency ratio (Ratio of dependants to working age population) (%)


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ASEAN Chartbook

September 2013

Indonesia Macroeconomic Indicators

Source: CEIC & Morgan Stanley Research E = Morgan Stanley Research estimates

Indonesia 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

GDP at real 2000 prices Rp trn 1,657 1,751 1,847 1,964 2,082 2,179 2,314 2,465 2,618 2,766 2,908 3,068

GDP at current market prices Rp trn 2,296 2,774 3,339 3,951 4,949 5,606 6,447 7,423 8,242 8,926 9,667 10,440

GDP US$bn 257 286 364 432 511 539 709 846 878 881 867 926

Growth rates (Note: Prices rebased to Yr 2000 from Yr1993 from 2000 onwards)

GDP YoY% 5.0 5.7 5.5 6.3 6.0 4.6 6.2 6.5 6.2 5.6 5.1 5.5

Private Consumption YoY% 5.0 4.0 3.2 5.0 5.3 4.9 4.7 4.7 5.3 4.9 4.2 4.6

Government Consumption YoY% 4.0 6.6 9.6 3.9 10.4 15.7 0.3 3.2 1.2 2.9 4.0 4.0

Gross capital formation YoY% 6.9 12.4 1.3 1.9 12.4 2.4 8.8 10.5 16.9 3.3 2.2 7.5Gross fixed capex YoY% 14.7 10.9 2.6 9.3 11.9 3.3 8.5 8.8 9.8 4.5 3.4 6.3

EXPGS YoY% 13.5 16.6 9.4 8.5 9.5 -9.7 15.3 13.6 2.0 4.8 6.3 6.5

IMPGS YoY% 26.7 17.8 8.6 9.1 10.0 -15.0 17.3 13.3 6.6 0.7 2.8 6.5

Domestic demand YoY% 5.4 6.3 3.2 4.1 7.6 5.2 5.4 6.1 8.2 4.2 3.6 5.4

Domestic demand (ex inventories) YoY% 7.0 5.8 3.6 6.0 7.5 5.4 5.3 5.7 6.2 4.6 3.9 5.0

Interest Rates

30D SBI (Benchmark Rate) % pe 7.43 12.75 9.75 8.00 9.25 6.50 6.50 6.00 5.75 7.75 7.75 7.75

Prices

Consumer Price Index YoY% 6.1 10.5 13.1 6.4 9.8 4.8 5.1 5.4 4.3 7.3 7.6 6.5Wholesale Price Index YoY% 7.4 15.2 14.1 13.8 25.7 -0.6 4.8 7.5 5.1 na na na

Current Account

Exports (Goods) US$bn 71 87 104 118 140 120 158 201 188 183 192 204

Imports (Goods) US$bn 51 69 74 85 117 89 127 166 180 182 182 194

Trade Balance US$bn 20 18 30 33 23 31 31 35 8 1 9 10

Net services, income and transfers US$bn -19 -17 -19 -22 -23 -20 -25 -33 -33 -34 -31 -33

Current Account Balance % of GDP 0.6 0.1 3.0 2.4 0.0 2.0 0.7 0.2 -2.8 -3.7 -2.5 -2.5

Financial Account

Net FDI US$bn -1.5 5.3 2.2 2.3 3.4 2.6 11.1 11.5 14.4 na na naFinancial Account US$bn 1.9 0.0 2.7 3.0 -2.1 4.8 26.6 13.5 24.9 na na na

Reserves

International Reserves US$bn 36.3 34.7 42.6 56.9 51.6 66.1 96.2 110.1 112.8 na na na

International Reserves Imports Months 8.6 6.0 6.9 8.0 5.3 8.9 9.1 8.0 7.5 na na na

Exchange rates

Average Exchange rate IDR/USD 8,928 9,705 9,164 9,139 9,692 10,408 9,087 8,776 9,384 10,384 11900 --

Year-End Exchange rate IDR/USD 9,223 9,857 9,087 9,334 11,325 9,457 9,023 9,088 9,646 11,400 12200 --External Debt

External Debt % of GDP 53.6 45.9 36.3 32.7 30.6 31.9 28.5 26.6 28.7 na na naPublic Finance

Fiscal Deficit: Central Govt % of GDP -1.0 -0.5 -0.9 -1.3 -0.1 -1.6 -0.7 -1.1 -2.2 -2.2 -1.5 -1.5

Govt Total Debt % of GDP 56.6 47.3 39.0 35.2 33.1 28.4 26.0 24.4 24.2 na na na


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ASEAN Chartbook

September 2013

Malaysia Macroeconomic Indicators

Source: CEIC & Morgan Stanley Research E = Morgan Stanley Research estimates

Malaysia 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E

GDP at real 2005 prices RM$bn 516 544 574 610 640 630 677 711 751 782 816 855

GDP at current market prices RM$bn 487 544 597 665 770 713 795 881 938 957 1,010 1,081

GDP US$bn 128 144 163 194 231 202 247 288 304 306 311 333

Growth rates

GDP YoY% 6.8 5.3 5.6 6.3 4.8 -1.5 7.4 5.1 5.6 4.1 4.3 4.8

Private Consumption YoY% 9.8 9.1 6.6 10.4 8.7 0.6 6.9 6.8 7.7 6.8 6.8 7.5

Government Consumption YoY% 7.6 6.5 5.5 6.6 6.9 4.9 3.4 15.8 5.1 4.8 4.0 4.0

Gross capital formation YoY% 3.1 6.0 8.6 9.1 1.8 -9.4 25.3 2.3 22.3 7.3 1

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