s&p asia outlook 2012

Asia-Pacific Markets Outlook 2012

Contact:Yu-Tsung Chang Tokyo (81) 3-4550-8724 yu-tsung_chang@ standardandpoors.com

Rising Global Risks Cloud Asian Outlook

MICA (P) 170/10/2011

December 2011

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IntroductionStandard & PoorS iS PleaSed to PreSent aSia-Pacific MarketS

outlook 2012, an annual update that offers insights into what lies ahead for the regions economies, markets, and credit conditions. this publication, which includes recent thought-leadership articles from many of our senior analysts and commentators, contributes to the ongoing discussion about global challenges and opportunities. its been another rollercoaster year for the worlds economies and financial markets, largely due to europes deep and ongoing sovereign debt crisis. although asiaPacific has been relatively resilient and economies have continued to grow, the regions ability to withstand the eurozones debt woes will remain a monumental challenge for policymakers and investors in 2012. Whatever the fallout, we believe the asia-Pacific region has a crucial role to play in helping revive market confidence and shaping the worlds road back to economic health. undeniably, global risks and the threat of contagion are hurting the outlook for asia-Pacific economies and the creditworthiness of issuers. Were now predicting slower economic growth for the majority of countries across asiaPacific in 2012 (see the article Growing Global Risks Eclipse Asia-Pacific Economic Growth In 2012). our view partly reflects slowing exports in the region, weaker financial markets and currencies, and the prospect of another recession in the u.S. and europe. countries with a significant reliance on exports and cross-border trade, including Hong kong, Singapore, Malaysia, thailand, korea, and Vietnam, are most vulnerable. even china, the largest economy in the region, is showing some signs of fatigue after a strong rebound from the 2008 global financial crisis. it remains unclear whether china and other asia-Pacific nations can remain resilient in the face of ongoing problems elsewhere. However, if the advanced western economies avoid another recession, a hard landing in asia can be avoided. Given the inter-bank lending freeze in europe, access to credit markets and funding will remain a significant issue for governments, corporations, and other issuers in 2012. in Standard & Poors opinion, asia-Pacific can play a pivotal role in providing some alternative funding solutions and investment options in these difficult times. in this publication, we share some recent commentaries on the

subject, including our views on the ongoing development of local bond markets (see Development Of Asias Local Bond Markets Is Still Assured). We also take an in-depth look at some options for local policymakers searching for funds to pay for massive infrastructure-related projects (see The Development Of Municipal Bond Markets, And Credit Cultures, May Help Fix Asias Infrastructure Conundrum and Will Islamic Finance Play A Key Role In Funding Asias Huge Infrastructure Task?). among the biggest challenges for local bond and funding markets is the ongoing development of a credit culture and debtmanagement practices that are robust enough to enable investors to make informed risk-and-return decisions. a significant development for the banking sector this year has been Standard & Poors updated bank criteria, which aim to provide greater transparency and consistency. the criteria update is a refinement of our analysis rather than a reinvention, and it builds on what we knew before the financial crisis and incorporates what we have learned about how banks, investors, and governments respond. our commentaries Banking At The Crossroads And The Role Of S&Ps New Rating Criteria and Most AsiaPacific Banks Are In Better Shape Than Their Global Peers For Basel III, But Some May Need To Toughen Up Against New Rules explore some of the key issues. this publication also examines the risks and opportunities facing the regions equity markets in 2012. a guest article by S&P capital iQ equity research (see Asian Equities Markets: Doomsday Fears Should Subside In 2012) argues that risks remain high to equities and earnings outlooks. But it also predicts that the performance of equity markets may turnaround next year, with any positive news having marked implications for returns once debt worries subside. as always, we welcome your comments and feedback on our research and insights. We trust you will find this publication useful as you prepare for 2012 and beyond.

Yu-tSung chang executive Managing director and head of aSia-Pacific Standard & PoorS ratingS ServiceS

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aSia-Pacific MarketS outlook 2012

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Contents3 6 13 introduction by Yu-Tsung Chang, Executive Managing Director Ratings Services, Asia-Pacific, Standard & Poors AsiA-PAcific Economic outlook: Growing Global risks eclipse asia-Pacific economic Growth in 2012 by Dharmakirti Joshi, Parul Bhardwaj and Dipti Saletore, CRISIL Ltd. AsiA-PAcific crEdit mArkEts outlook: a Slowdown in europe and china, and Sluggish exports Moderate asia-Pacific credit outlook in 2012 by Ian Thompson, Standard & Poors Ratings Services AsiA Equity mArkEts outlook: asian equities Markets: doomsday fears Should Subside in 2012 by Lorraine Tan, Vice President and Head of Asia Research, S&P Capital IQ Equity Research equities outlook Glossary equities outlook disclosures and disclaimers AsiA-PAcific Bond mArkEt And crEdit culturE dEvEloPmEnt commEntAry: despite Global Volatility, the development of asias local Bond Markets is Still assured by John Bailey and Yu-Tsung Chang, Standard & Poors Ratings Services the development of Municipal Bond Markets, and credit cultures, May Help fix asias infrastructure conundrum by Tom Schiller, Executive Managing Director, Standard & Poors Ratings Services Whats Behind the Stellar Growth of the dim Sum Bond Market? by Michael Petit and Ping Chew, Standard & Poors Ratings Services AsiA-PAcific rEgionAl PErsPEctivE commEntAry: Will islamic finance Play a key role in funding asias Huge infrastructure task? by Allan Redimerio and Andrew Palmer, Standard & Poors Ratings Services Banking at the crossroads and the role of S&Ps updated rating criteria by Ritesh Maheshwari, Standard & Poors Ratings Services Most asia-Pacific Banks are in Better Shape than their Global Peers for Basel iii, But Some May need to toughen up against new rules by Naoko Nemoto, Standard & Poors Ratings Services ratings impact of a Hypothetical reunification of the two koreas: a thought experiment by KimEng Tan and John Chambers, Standard & Poors Ratings Services can indias developing infrastructure keep Pace With economic Growth? by Rajiv Vishwanathan and Allan Redimerio, Standard & Poors Ratings Services asia-Pacific office locations asia-Pacific regional contacts 19 24 25 28

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Growing Global Risks Eclipse AsiaPacific Economic Growth In 2012Contributors: Dharmakirti Joshi, Mumbai, (91) 22-3342-8043; [email protected] Parul Bhardwaj, Delhi, (91) 11-4250-5138; [email protected] Dipti Saletore, Mumbai, (91) 22-3342-8019; [email protected] on RatingsDirect Global Credit Portal on Dec. 16, 2011

Editors Note: The authors of this article are Dharmakirti Joshi, Parul Bhardwaj, and Dipti Saletore, all of CRISIL Ltd., the Mumbai-based subsidiary of Standard & Poors. The thoughts expressed in this Guest Opinion article are those of the writers and do not necessarily reflect the views of Standard & Poors Ratings Services.eScalating riSkS in the advanced econoMieS have caSt a Pall on

growth in asia-Pacific. rising risks in europe, since august 2011, triggered capital outflows in most financial markets in asia-Pacific in the third quarter of 2011, followed by currency weakening. export prospects have also turned sluggish. We have scaled down our GdP forecasts for 2011 and 2012 for most economies in asia-Pacific. our outlook assumes that the european economic and Monetary union (eMu or eurozone) will grow at an anemic 0.4% in 2012, with a mild recession in the first half of the year. While we expect the u.S. economy to escape a recession, growth will be a tepid 1.8% in 2012. any further deterioration in the outlook for these countries would increase the downside risks to our growth outlook for asia-Pacific in 2012. Growth is the new watchword for most asia-Pacific economies. With inflationary pressures easing, central banks in the region have started softening their monetary stance. australia, new Zealand, and indonesia have cut interest rates. others have either paused rate hikes or are veering toward policy loosening. But inflation remains high in Vietnam and india. during its most recent rate hike in october 2011, indias central bank indicated that it would suspend further rate hikes because it expects inflation to moderate as a result of slowing domestic demand and global headwinds. While all countries in asia-Pacific will feel the heat of a sharp slowdown or a recession in europe and the u.S., those with greater reliance on exports and with strong trade linkages are most vulnerable. the countries include Hong kong, Singapore, Malaysia, thailand, korea, and Vietnam. GdP growth in these countries had fallen sharply during the global financial crisis in 2009. While growing interregional trade provides some buffer to asian economies, it is insufficient to offset global headwinds.

china, the regions largest economy, is showing some signs of fatigue after a strong rebound from the previous global financial crisis. We expect the countrys exportoriented and construction sectors to further slow down in 2012. We expect china to manage a soft landing with about 7.7%-8.0% growth in 2012. the rest of asia could avoid a hard landing if the eurozone can steer clear of a deep recession.

Growth Begins To Lose Momentuma shaky external environment along with a policy-induced slowdown in china would impede growth rates across the region in 2012. after a strong start in the first quarter of 2011, growth in asia-Pacific began to decelerate sharply from the second quarter of 2011 (see chart 1). Strong domestic demand supported economic growth in the first quarter, and a weak global economy dented growth in the subsequent quarters. nevertheless, hardy domestic demand will enable countries to post respectablealbeit lower growth rates this year. Standard & Poors ratings ServicesChart 1

Real GDP Growth Begins To Decline10 8 6 4 2 0 -21Q 2011 2Q 2011 3Q 2011

*3Q 2011 data is an estimate. Sources: Standard & Poors Asia-Pacific economic research and CEIC database.

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has sharply lowered its 2012 growth forecasts for most economies in asia-Pacific because it expects the eurozones growth prospects to worsen in the first half of 2012. Growth rates in Japan, australia, and new Zealand will likely increase in 2012 due to the lag effects of governments reconstruction-related spending. the three countries have recovered well from the damage caused by natural calamities earlier this year. Japans GdP growth was strong in the third quarter of 2011 because of the restoration of supply chains and reconstruction activities. the Japanese governments generous fiscal stimulus also supported growth. australia has benefited immensely from the high prices and robust demand for commodities and has recovered smartly from the temporary blip in growth in the first quarter due to the floods. But the persistent weakness in non-mining activity and the slowing growth of trade partners could weaken the countrys otherwise healthy growth prospects. new Zealand too has benefited from strong dairy prices and the boost to growth from the rugby world cup that it recently hosted. a deteriorating global economy and weak domestic demand are likely to impede growth in china and india next year. these two factors also caused growth to moderate in india and china in 2011, even though the two countries are the fastest developing economies in the region. economic activity in india decelerated sharply to 7.5% in the first three quarters of 2011, from 8.9% in the same period last year. High interest rates and a lack of progress on domestic policy reforms have derailed indias growth engine to some extent. the chinese government has continued to take steps to avert overheating and to steer the economy toward a soft landing. While a mix of monetary and macro-prudential measures has slowed GdP growth in china, growth still remains robust due to strong consumer demand. a severe deterioration in the global economy could sharply lower growth in indonesia, Malaysia, thailand, the Philippines, and Vietnam in 2012 because these countries primarily depend on exports for growth. Strong domestic demand, particularly investment, has helped mitigate the slowdown in exports growth so far. the Philippines and Malaysia have already announced stimulus packages in the past few months as a pre-emptive measure to shield growth.

the recent floods in thailand could result in significantly lower growth in 2011. While domestic demand has held up growth in korea, Singapore, taiwan, and Hong kong until now, the countries high dependence on china and the developed economies has significantly increased the downside risks to growth.

Inflation Risks SubsideWe expect inflation to continue to decline next year, with an additional downward push from the lag effects of monetary tightening in most countries in 2011. While inflation was high for most of asia-Pacific in the first half of 2011 (see table 1), it has started to moderate in many countries in the region. india and Vietnam remain exceptions. although Japan moved out of the deflationary phase in July 2011, inflation still remains low. the current deceleration in inflation is mainly attributable to weaker domestic demand and some moderation in global commodity prices. Weak domestic demand will lower inflation in china, india, and Vietnam in 2012. inflation in china has been moderating since august 2011, after peaking in July 2011. it fell to 5.5% in october, from 6.5% in July. But despite the moderation, food inflation remains stubbornly high. Monetary policy tightening and moderating growth have ensured the retreat of inflation in china. in contrast, Vietnam and india are battling runaway inflation stemming from rising food prices and robust demand. inflation in Singapore and Hong kong has remained persistently high so far, underpinned by rising accommodation costs. inflation in australia and new Zealand is also likely to fall in 2012 due to policy reversal. the governments policy-led changes exerted upward pressure on inflation in these two countries in 2011. Based on data for the third quarter of 2011, inflation in indonesia, Malaysia, and the Philippines declined, albeit marginally, primarily due to a slowdown in food and non-food inflation. inflation remains elevated in thailand due to flood-related disruptions in the supply chain. Moderating inflation has prompted some central banks to reverse their tight monetary policy (see table 2). central banks in new Zealand, indonesia, thailand, and australia are now embracing an accommodative policy regime to counter a sharp dip in economic prospects. Going forward,

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Table 1: Asia-PacificInflation Trends 2011*Food inflation (%)Australia China Hong Kong India Indonesia Japan Korea Malaysia New Zealand Philippines Singapore Taiwan Thailand Vietnam

Non-food inflation 1H 20113.1 2.3 3.9 9.7 4.7 (0.4) 3.4 2.4 4.6 6.1 5.6 3.3 1.5 12.9

Total CPI-based inflation 1H 20113.5 5.4 4.5 8.9 6.4 (0.5) 4.3 3.1 4.9 4.8 5.0 1.5 3.6 16.1

1H 20115.2 11.8 6.0 8.2 12.3 (0.5) 9.5 4.7 5.9 4.1 2.8 (3.4) 7.0 20.6

3Q 20116.4 13.9 7.8 6.6 5.4 0.1 8.6 4.9 6.2 3.9 3.0 1.7 8.1 27.5

3Q 20112.9 2.5 5.9 11.7 4.4 (0.3) 4.1 2.7 4.2 6.7 6.2 1.2 1.7 19.2

3Q 20113.5 6.3 6.4 9.2 4.7 0.3 4.8 3.4 4.6 4.9 5.5 1.3 4.1 22.5

*Year-on-year growth. CPIConsumer Price Index. Sources: Standard & Poors Asia-Pacific economic research and CEIC database.

Table 2: Central Banks Changing Monetary Policy StanceTotal change in policy rates (%)Australia China India Indonesia Japan Korea Malaysia New Zealand Philippines Taiwan Thailand Vietnam

2009-0.50 0.00 -1.75 -2.75 0.00 -1.00 -1.25 -2.50 -1.50 -0.75 -1.50 -1.50

20101.00 0.50 1.50 0.00 0.00 0.50 0.75 0.50 0.00 0.38 0.75 1.00

2011-0.50 0.75 2.25 -0.50 0.00 0.75 0.25 -0.50 0.50 0.25 1.25 5.00

Prevailing rate4.25 6.56 8.50 6.00 0.00 3.25 3.00 2.50 6.50 1.87 3.25 14.00

Sources: Standard & Poors Asia-Pacific economic research and CEIC database.

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A shaky external environment along with a policy-induced slowdown in China would impede growth rates across the region in 2012.

we expect other countries in the region to follow suit given slowing growth and modest inflation. reserve Bank of new Zealand was the first central bank in asia-Pacific to cut interest rates, in March this year, to offset possible largerthan-expected effects of the floods on growth. indonesias central bank also slashed rates to support faltering growth in a softening inflationary environment. the bank has cut rates by a hefty cumulative 75 basis points (bps) so far in 2011. its most recent cut (50 bps) was in the first week of november. reserve Bank of australia too lowered its policy rate by a cumulative 50 bps in november-december to support growth given the manageable level of inflation. the latest policy rate cut comes from thailand, where the central bank slashed rates by 25 bps to counter the impact of flood-related damage on growth. the stance of central banks in the rest of asia-Pacific, barring india, has remained unchanged in the past few months. the banks are still assessing the evolving economic scenario in an environment where downside risks to growth have shot up because of deteriorating growth prospects in the eurozone. reserve Bank of india is probably the only central bank in the region that has increased ratesChart 2

aggressively to combat elevated inflationary pressures. But it too is likely to pause in its rate hikes in the wake of faltering growth and to assess the impact of previous rate hikes on the economy. central banks in Malaysia, korea, and the Philippines have refrained from announcing any further interest rate hikes in recent months, following sharp rate increases in the first half of the year. chinas central bank increased policy rates by a cumulative 75 bps in 2011 so far. But the bank cut its reserve requirement ratio by 50 bps in november 2011 in response to increasing downside risks to growth from global headwinds. in our opinion, this action marks the beginning of chinas first monetary easing since 2008.

Currencies Likely To Remain Under Pressure Until Early 2012; Capital Inflows Could Return In The Second HalfWe expect foreign capital inflow into asia-Pacific to remain weak in early 2012 mainly due to weak global cues. this is based on the assumption that the eurozone will suffer a mild recession in the first half of 2012 and a moderate recovery thereafterin line with Standard & Poors projections. capital inflows could therefore return to the region in the second half of 2012, causing domestic currencies to appreciate. in Japan, new Zealand, and australia, safe haven investments could cause domestic currencies to appreciate more sharply and earlier than in the rest of the region. countries in asia-Pacific have witnessed strong capital outflows, especially since the eurozone sovereign debt crisis intensified in mid-2011. Much of the gains from currency appreciation in the first half of 2011, therefore, were trimmed in the second half of the year, particularly in indonesia, Malaysia, and thailand (see chart 2). this has again highlighted the regions vulnerability to events in advanced economies. in contrast, a flight to safety caused a surge in capital inflows in Japan, new Zealand, and australia, causing domestic currencies to appreciate sharply against the u.S. dollar. the Japanese yen appreciated by 5.1% in the third quarter of 2011, from 0.9% in the first half of 2011, causing the Japanese central bank to intervene on three

Exchange Rate Movements 2011: Regional Currencies Versus The U.S. DollarJanuary-June July-September

Australian dollar New Taiwan dollar Korean won New Zealand dollar Singapore dollar India rupee Chinese renminbi Malaysian ringgit Japanese yen Philippine peso Hong Kong dollar Indnesian rupiah Thai baht Vietnamese dong -8 -6 -4 -2 0 2 4 6 8 10Note: A negative change implies appreciation of the currency against the U.S. dollar and a positive change refers to depreciation. Sources: Standard & Poors Asia-Pacific economic research and CEIC database.

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occasions so far in 2011. Bank of Japan sold yen in the domestic market to protect the sharp appreciation in the currency, which could further harm export earnings. the new Zealand dollar too appreciated, by 4.1% in the third quarter of 2011, from 5.2% in the first half of 2011, as demand for the currency remained strong. the australian dollar, on the other hand, saw relatively lesser appreciation of 1.2% in the third quarter of 2011, from 7.2% in the first half of 2011. this was possibly due to the central banks policy rate cuts in response to falling inflation. the Singapore dollar has until now been on an appreciating trend, with the central bank adopting a mild appreciation stance until october 2011. the currency strengthened by about 1.2% in the third quarter of 2011, from 4.9% in the first half of the year. therefore, we expect the pace of appreciation to slow in the fourth quarter of the year. Meanwhile, the Philippine peso appreciated by a modest 1.1% against the u.S. dollar in the third quarter of 2011, compared with 0.9% in the first half of the year, as private remittances remained strong and net portfolio inflows surged on the back of recent credit rating upgrades. the chinese renminbi appreciated by 1.8% compared with 2.3%. nevertheless, currencies of several countries depreciated sharply in the third quarter of 2011. the korean won depreciated the most, by 10.5% during this time compared with an appreciation of 5.9% in the first half of the year. the Vietnamese dong fell sharply due to the central banks repeated devaluation. in india, the rupee fell by 8.9% during the third quarter of 2011 largely as a consequence of dollar piling by domestic corporate entities to repay huge foreign currency loans due in the year. Sharp foreign capital outflows pushed the Malaysian ringgit down 5.6% and the taiwanese dollar down 5.0%, compared with an appreciation of 2.0% and 6.3%, respectively. in indonesia, central bank intervention capped the fall of the rupiah to 2.6%. the rupiah had appreciated by 4.4% in the first half of 2011. the thai baht fell by 1.4%, compared with 2.0%. the baht was affected not only by the european crisis, but also by the worsening economic outlook due to the impact of the recent floods.

the risk of a prolonged recession in the eurozone and weaker growth in other advanced economies increases the risk of sudden and further capital outflows from markets in asia-Pacific and therefore steeper currency depreciation in these countries, at least in the next six months.

Vulnerability To Eurozone Slowdown Remains HighStandard & Poors recently revised its 2012 growth forecast for the eurozone down to 0.4% from 1.5%. lower growth in the eurozone could mean another round of foreign capital outflows, weaker trade, and further currency depreciation in asia-Pacific. in addition, domestic woes such as stubborn inflation in some countries, already depreciated currencies, and reversal of government stimulus threaten to sharply lower growth in asia-Pacific. the global economic crisis of 2008 clearly refuted the decoupling theory and affirmed the existing and growing dependency between the asia-Pacific economies and theChart 3

Synchronized Economic Cycles But Divergent Growth TrendsAdvanced economies: actual growth Advanced economies: growth trend Asia-Pacific economies: actual growth Asia-Pacific economies: growth trend

(% year-on-year growth) 8 6 4 2 0 -2 -4

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Sources: Standard & Poor's Asia-Pacific economic research and International Monetary Fund.

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We expect GDP growth rates in 10 out of the 14 Asia-Pacific economies to fall in 2012.

Table 3: High Correlation With Growth In Advanced Economies, Europe, And The U.S.Growth correlation Average growth from 2000 to 2010 (%)Australia China Hong Kong India Indonesia Japan Korea New Zealand Philippines Singapore Taiwan Thailand Vietnam Sources: Standard & Poor's Asia-Pacific economic research and CEIC database. advanced economies of the u.S., the eMu, and Japan (see chart 3). data show that although higher trade interaction within the asia-Pacific region provides some intermittent buffer, the eventual trade exposures of china, korea, Japan, and the five countries that form a sub-group of the association of Southeast asian nations (aSean), known as aSean-5indonesia, Malaysia, the Philippines, thailand, and Vietnamwith the advanced countries remain high. the region itself has cycles which are well synchronized with advanced economies. only the extent of the impact is lower. this implies that any sharp deterioration in the growth of advanced economies will affect asia-Pacific as well. However, longer-term data also suggest that growth in the advanced economies is on a declining trend, while that in asia-Pacific is on a steady uptrend. While the region remains vulnerable to a slowdown in the advanced economies, the extent of vulnerability differs across countries. Growth in asia-Pacific is highly correlated (over a 10-year period) with growth in the advanced economies, especially the u.S. and europe (see table 3). Japans correlation with the u.S. and europe is the highest, while that of india and china is the lowest. among the aSean-5 economies, correlation with growth in the eurozone is highest for Malaysia (0.77), followed by Vietnam, thailand (0.71), and the Philippines (0.66); indonesia shows the lowest correlation (0.32). Hong kongs growth shows the highest correlation (0.81) with the eMu, followed by korea (0.76), Singapore (0.59), and taiwan (0.59). australia and new Zealand show a correlation of 0.64 with the eurozone. countries where growth shows a higher correlation with the eurozone than with the u.S. are Vietnam, china, indonesia, and india. 3.1 10.3 4.4 7.3 5.2 0.9 4.6 2.5 4.7 6.0 4.1 4.4 7.2

Advanced economies0.7 0.3 0.9 0.3 0.3 1.0 0.8 0.7 0.7 0.7 0.8 0.8 0.7

Europe0.6 0.3 0.8 0.2 0.3 0.9 0.8 0.6 0.7 0.6 0.6 0.7 0.7

The U.S.0.6 0.2 0.9 0.3 0.3 1.0 0.8 0.8 0.7 0.7 0.8 0.9 0.7

Growth Could Plummet, But Inflation Might Go Down As Welleconomic growth in asia-Pacific could fall sharply in 2012, in line with lower growth forecasts for the u.S. and a mild recession in the eurozone. in addition to dampening export demand, moderation in domestic private consumption and

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Table 4: Asia-Pacific Growth And CPI Inflation ForecastsAnnual real GDP growth (%)Australia China Hong Kong India Indonesia Japan Korea Malaysia New Zealand Philippines Singapore Taiwan Thailand Vietnam

Annual CPI inflation 2012f2.2-2.7 7.7-8.2 2.5-3.0 6.8-7.3 6.0-6.5 1.5-2.0 2.8-3.3 4.4-4.9 1.8-2.3 4.0-4.5 2.0-2.5 2.3-2.8 3.5-4.0 5.0-5.5

20091.3 9.1 (2.8) 6.8 4.5 (5.2) 0.2 (1.7) 0.1 1.1 (1.3) (1.9) (2.2) 5.3

20102.7 10.3 7.0 8.9 6.1 4.0 6.2 7.2 1.7 7.6 14.5 10.9 7.8 6.8

2011f1.8-2.3 8.8-9.3 4.3-4.8 7.3-7.8 6.1-6.6 (1.0)-(0.5) 3.5-4.0 4.2-4.7 1.0-1.5 4.1-4.6 4.3-4.8 4.0-4.5 2.6-3.1 5.6-6.1

20091.8 (0.7) 0.5 10.9 4.9 (1.4) 2.8 0.6 2.1 3.2 0.6 (0.9) (0.9) 6.9

20102.8 3.3 2.3 12.0 5.1 (0.7) 2.9 1.7 2.3 3.8 2.8 1.0 3.3 9.2

2011f3.2-3.7 5.1-5.6 5.3-5.8 8.7-9.2 5.2-5.7 (0.5)-0.0 4.2-4.7 3.1-3.6 4.0-4.5 4.4-4.9 4.8-5.3 1.2-1.7 3.4-3.9 18.4-18.9

2012f2.3-2.8 3.7-4.2 2.5-3.0 5.8-6.3 5.2-5.7 (0.5)-0.0 2.3-2.8 2.8-3.3 1.5-2.0 4.2-4.7 2.1-2.6 1.0-1.5 3.5-4.0 9.9-10.4

CPIConsumer Price Index. fForecast. Sources: Standard & Poor's Asia-Pacific economic research and CEIC database. investment (due to reversal of fiscal stimulus) and lagged impact of tighter monetary policy (to tackle high inflation) will likely bring down growth. accordingly, we expect GdP growth rates in 10 out of the 14 asia-Pacific economies to fall in 2012 vis--vis 2011. We anticipate growth in Japan and new Zealand to rebound in 2012, mainly due to higher government expenditure and reconstruction (for earthquake damage), which will promote higher consumption and investment. our inflation forecasts for 2012, however, have also been sharply revised downward for all asia-Pacific economies (see table 4) on the back of the global slowdown and some respite from global commodity prices. the impact of past rate hikes in several economies will also be felt on consumption. Given that these conditions hold, inflation in most economies could fall steadily, inviting monetary policy reversal. nevertheless, upside risks to our inflation forecast arise from continued depreciation of currencies, which could keep imported inflation at elevated levels. clearly, the risks to forecasts are higher and rising on the downside, given the limited tools that governments and central banks have at their disposal to evade a severe impact of an unanticipated global shock. Hence most of the forecasts for growth and inflation apply to our basecase scenario of a eurozone recession in the first half of 2011 and a modest recovery thereafter. a prolonged period of eurozone recession or an unexpected global shock could yield much lower growth and inflation in 2012.

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A Slowdown In Europe And China, And Sluggish Exports Moderate Asia-Pacific Credit Outlook In 2012Contact: Ian Thompson, Managing Director, Chief Credit Officer, Asia-Pacific, Melbourne (61) 3-9631-2100; [email protected] on RatingsDirect Global Credit Portal on Dec. 20, 2011

global

riSkS have SteadilY increaSed over the Year, with

economic growth marked down. Brittle market confidence is manifesting in liquidity and funding pressures, particularly in the european economic and Monetary union (eMu or eurozone), with a knock-on effect on the rest of the world. While emerging markets are holding up, the base case is for weak growth in the u.S. and a mild recession in the eurozone in the first half of 2012. this has led to greater dependency on chinas growth. in Standard & Poors ratings Services opinion, the eurozone crisis poses risk, albeit indirect, to sovereigns and banks in asia-Pacific. nevertheless, the inherent strengths of the regional governments and financial institutions partly mitigate the risk. Meanwhile, the slowdown in the global economy and china is likely to continue to affect export-dependent companies in asia-Pacific. in contrast, the infrastructure and utility subsectors are poised for growth, which demographic needs will partly propel. We expect the structured finance sector to maintain its stable asset performance into 2012. the deleveraging process continues in advanced economies, with the eurozone mired in a sovereign debt crisis and government austerity measures further dampening growth. Global banks are generally becoming increasingly risk adverse, tightening credit standards, lending less, and being more aggressive on problem exposures. Given previous fiscal spending, bank bail-outs, and low interest rates, the capacity of Western governments to fight off recessionary pressures is limited. in stark contrast, economic growth fundamentals and government fiscal positions in asia-Pacific are generally sound. the region, however, cannot remain immune to the problems in the advanced economies given that europe is an important trading partner. export growth is likely to weaken in early 2012, although the region should remain cost-competitive, notwithstanding some pressures such as wage growth in markets such as china, Vietnam, and thailand. domestic demand and intraregional trade is holding up and inflationary pressures are easing given commodity prices that are lower than they were a year

ago. as a consequence, we expect monetary tightening to reverse, as is already the case in some markets, such as australia, china, and indonesia. issues to watch for in asia-Pacific in 2012: eurozone instability: Volatile surges in capital inflows and rapid reversals are likely as investors vacillate between higher returns and increased safety. Surging capital flows may reignite inflationary pressures, distort currency values, and create asset bubbles. chinas growth: While we expect chinas growth to moderate to a sustainable 8% in 2012, a hard landing in china would have a significant impact on the regions growth outlook. the resilience of domestic demand in the context of weakening exports will be critical. export softening: exports could fall sharply as demand in the developed markets remains constrained. the risks are higher for korea, taiwan, and Singapore.

Eurozone Crisis Could Pressure Sovereign RatingsMounting challenges across the globe could severely test the resilience of sovereigns in asia-Pacific. the uncertainty over sovereign debt and banking sector stability in the eurozone is by far the biggest of these challenges. unless sentiments are stabilized by appropriate policy actions, the confidence crisis in europe could significantly affect asia-Pacific sovereigns through tighter funding conditions, persistent risk aversion, and volatile capital flows, or a credit freeze. a recession in europe and slower growth in the u.S. would lower demand for exports from asia-Pacific. of the 22 sovereigns that we rate in asia-Pacific, 16 have stable outlooks on their ratings. indonesia, Mongolia, the Philippines, and Sri lanka have a positive outlook, and only two sovereign ratings are on negative outlooks: Japan, and Vietnam (see table 1). However, should the extreme eurozone-related risks materialize, ratings on a number of highly-indebted sovereigns and sovereigns vulnerable to weaker external funding conditions will come under pressure.

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Mounting challenges across the globe could severely test the resilience of sovereigns in Asia-Pacific.

Governments in export-driven economies would have to provide more fiscal and monetary stimulus to support growth and employment, and avoid social tensions. Such an impetus may prompt a surge in capital inflows, fueling inflationary pressures. a balancing act, then, may be challenging. additionally, some governments in the region are yet to address the longer term issues of aging populations, rebalancing growth, and broader financial reforms.

Table 1: Asia-Pacific Sovereign Ratings*CountryAustralia Bangladesh Cambodia China Cook Islands Fiji Hong Kong India Indonesia Japan Korea Malaysia Mongolia New Zealand Pakistan Papua New Guinea Philippines Singapore Sri Lanka Taiwan Thailand Vietnam

Foreign currency ratingAAA/Stable/A-1+ BB-/Stable/B B/Stable/B AA-/Stable/A-1+ B+/Stable/B B/Stable/B AAA/Stable/A-1+ BBB-/Stable/A-3 BB+/Positive/B AA-/Negative/A-1+ A/Stable/A-1 A-/Stable/A-2 BB-/Positive/B AA/Stable/A-1+ B-/Stable/C B+/Stable/B BB/Positive/B AAA/Stable/A-1+ B+/Positive/B AA-/Stable/A-1+ BBB+/Stable/A-2 BB-/Negative/B

Events In Europe Pose Indirect Risk To Asia-Pacific Banksthe speed and effectiveness with which the european debt crisis is alleviated will determine the 2012 outlook for banking systems in asia-Pacific. Banks in asia-Pacific generally have little direct exposure (largely short-term trade finance) to the eurozone. However, european banks have been reducing their significant exposures in parts of asia-Pacific. consequently, the indirect impact of a dislocation in global funding markets and an economic slowdown in europe could negatively affect these banks. the regions strong economic performance over the past few years has been the biggest supporting factor for the credit profile of asia-Pacific banking systems. economic performance has not only bolstered revenue growth, but also underpinned asset quality. as eurozone weakness dampens global and regional growth, nonperforming loans and credit provisioning are likely to increase. this trend could be more pronounced in banking systems exposed to: high inflation, such as india and Vietnam; and the recent high credit growth, such as china and Hong kong. in addition, banking sector earnings are likely to weaken to reflect a dip in business volumes associated with slower economic activity. contagion from europe could unleash more anxiety in the already jittery credit markets in asia-Pacific. Banks and other lenders in the region are already paying more to insure their debt financing, as reflected in the widening credit default spreads. that said, most banking systems in the region have strong retail deposit bases, which provide a buffer against volatility in wholesale funding markets.

*Ratings as of Dec 19, 2011. Unsolicited rating. dependent banking systems such as australia and korea will likely incur higher funding costs if the eurozone crisis leads to a squeeze in the funding markets. increased domestic funding and a moderation in credit growth could help offset shrinking access to the wholesale funding market. a tightening of credit underwriting standards and lower lending among asia-Pacific banks would challenge the regions corporate sector given the sectors high dependence on bank funding, including that from european banks.

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Table 2: Asia-Pacific Corporate: Business, Performance, And Rating Trends In 2012Business conditions IndustryHome Builders/Property developers REITs Autos Auto components Capital goods Transportation Consumer products Retail Hi-tech Media/Entertainment Gaming Telecommunications Chemicals Oil and gas upstream Oil and gas downstream Mining and metals Steel Banking Infrastructure/Utilities* Building materials

Relative Performance business trends metrics 2011 versus 2012No change Stable Slight improvement Slight improvement Stable No change Stable Stable

Expected ratings trend 2011 versus 2012

Industry outlook Next 12 monthsNegative Stable Stable Stable Stable Negative Stable Stable Negative Stable to negative Stable Stable Stable Stable Stable Stable to negative Negative Stable to negative Stable Stable

2011Weak Satisfactory Weak Weak Satisfactory Weak Satisfactory Satisfactory Weak Satisfactory to weak Strong Strong Strong Strong Satisfactory Satisfactory Weak Satisfactory Satisfactory Satisfactory

2012Weak Satisfactory Satisfactory Satisfactory Satisfactory Weak Satisfactory Satisfactory Weak Weak Strong Strong Satisfactory Strong Satisfactory Satisfactory Weak Weak Satisfactory Weak

2011 versus 2012

Somewhat weaker Negative Stable Slight improvement Slight improvement No change No change Stable Stable Stable Stable to negative Stable to negative Stable Stable to negative Stable Stable Stable to negative

Somewhat weaker Slight improvement

Somewhat weaker Somewhat weaker Stable to negative Stable Stable Stable Stable Stable Somewhat negative No change No change Stable Stable Stable Stable Stable Somewhat negative No change No change Stable Stable Stable Stable Stable Negative Negative Stable

Somewhat weaker Somewhat weaker Stable to negative Somewhat weaker Somewhat weaker Stable

*The outlook on Japanese utilities is negative

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Asia-Pacific Corporates: Exporters Vulnerable To Global Slowdownour 2012 credit outlook for the asia-Pacific corporate sector is generally stable with patches of weakness (see table 2). economic growth prospects in the region are still resilient despite a softer u.S. economic outlook and the uncertainty surrounding european sovereign risks. asian economies are also showing signs of slowing down. export growth in major export-oriented countries has been losing steam for the past few months. While a double-dip recession in developed economies is not our base-case scenario, it would have a deeper and more prolonged impact on asia-Pacific economies compared with previous global crises. exports and export-dependent industries in korea, Japan, taiwan, and china would suffer heavily from such a recession. We assess the credit outlook for selected mining and metals, transportation, high technology, and consumer electronic sectors in asia-Pacific to be negative in 2012. our opinion is based on the weaker export outlook stemming from subdued global consumer demand, overcapacity in specific industries, and high fuel prices. our outlook on the chinese real estate sector is also negative. the chinese governments initiatives to bring down economic growth to more sustainable levels, and control asset bubbles, in particular in its property market, underpins our view. the conditions for chinese residential property developers are the toughest faced by players in the asiaPacific real estate markets. chinese companies continue to face liquidity risks and weak sales prospects. the smaller players are likely to be vulnerable in the next six to 12 months due to their limited financial flexibility, small scale, and project concentration. chinas (managed) economic slowdown at a time when the global economy is in the doldrums is contributing to negative pricing trends for steel, nickel, aluminium, and possibly coking coal. the steel industries in china, korea, and Japan face the most difficulty as demand from enduse sectors in china weakens on the back of reduced government stimulus for infrastructure and a weakening real estate construction market. Steel producers are therefore likely to realize lower capacity utilization and cut

prices. the ratings on steel producers have little cushion for weaker cash flow coverage. in 2012, transportation-related companies will still face the common challenges of high fuel prices and lower demand stemming from a weakening global economy. for airlines, subdued passenger demand growth, high jet fuel prices (since the third quarter of 2011), and potential additional capacity from a new generation of low-cost carriers in asia-Pacific will pose problems. for the shipping industry, oversupply, high bunker fuel prices, and emerging environmental requirements, point to an unfavorable outlook. High technology and consumer electronics companies will continue to suffer from weak global demand; intense competition; and commoditization of key products such as flat-panel tVs, mobile handsets, and digital cameras. excess capacity in products such as tVs, lcd panels, and draM, add to companies woes. Supply disruptions of electronic products and components due to largescale flooding in thailand have also hindered companies performance. But we expect these disruptions to moderate by the first quarter of 2012. We believe that major investment-grade-rated companies should be able to cope with the more challenging year ahead, and be better placed to take advantage of accelerating consolidation. companies operating in china may continue to face rising wages and higher interest rates. these factors could constrain profit growth compared with that in the past few years. the corporate sectors debt maturities are not likely to be heavy in 2012, reflecting companies efforts to spread maturities. nevertheless, some sectors and entities could face reduced access to funding. refinancing requirements are manageable for asia-Pacific corporate entities with investment-grade ratings. However, liquidity and refinancing will remain dominant credit drivers for lowerrated entities.

Infrastructure And Utilities Will Build On Growth Despite Challengesnotwithstanding the effects of a slowdown in the u.S. and europe, we expect asia-Pacifics public as well as private

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Long-term funding will continue to lag long-term demand for infrastructure investment in the region.

infrastructure sector to continue to expand in 2012. Strong demand, broad-based economic activity, significant ongoing capital expenditure requirements, and favorable demographics should continue to fuel growth in several sectors. these include power, transportation, and social infrastructure. We anticipate that companies will use bank debt as a primary source of funding. We also expect companies to raise debt via bonds and hybrid issuances as and when opportunities arise. Several utilities in asia-Pacific issued hybrid instruments for the first time in 2011 and we expect this instrument to be important in the corporate structure both from a credit perspective and also the benefit of not diluting equity. long-term funding will continue to lag long-term demand for infrastructure investment in the region. Most of the infrastructure and utility companies we rate in the region, barring the utilities sector in Japan, will remain stable in 2012. nevertheless, the uncertainty of a prolonged global slowdown and its impact on GdP rates across asia-Pacific could pose credit risks for some companies. Some economies in the region, such as Singapore, thailand, and the Philippines, rely heavily on export driven income, and any slowdown in global growth may affect their economic growth. But for countries that have sizable domestic economies, such as india, china, and indonesia, the impact of another slowdown may not be as much. across the region, the effects of government and regulatory actions on utilities will vary depending on: (1) the tariff framework and domestic inflation in a particular country, which may delay tariff increases; (2) the availability of, and ability to, secure fuel sources domestically amid rising competition (e.g. Japan, korea, Hong kong, Singapore, the Philippines, thailand, and india); and (3) the extent of government subsidies to electricity producers such Pt Perusahaan listrik negara (Persero) (BB/Stable/) in indonesia and tenaga nasional Bhd. (BBB+/negative/; axa+/axa-1) in Malaysia.

Stable Asset Performance Supports Structured Finance Stabilitythe stable performance of assets underlying securitization transactions in asia-Pacific, with the exception of Japanese commercial real estate, will likely continue in 2012, in our opinion. Modest macroeconomic growth forecasts, low regional unemployment rates, easing monetary policy, and well-seasoned asset portfolios underpin our view. We expect Japanese commercial real estate-backed transactions to continue to underperform in 2012 reflecting the ongoing refinancing challenges that commercial real estate borrowers in Japan and elsewhere in the world continue to face. Stable asset performance and continued build up of credit enhancement in many residential mortgage-backed securities (rMBS) and asset-backed securities transactions (as underlying asset pools pay down) will support rating stability in 2012. conversely, counterparty exposures may pose a risk to rating stability in 2012. Many securitization transactions in asia-Pacific contain interest rate or currency exposures or both to u.S. and european financial institutions. Standard & Poors therefore believes that the regions structured finance sector will remain largely stable in 2012, subject to global sovereign and banking credit performance and issuers response, should we downgrade key transaction counterparties. in 2012, our ratings on a small number of transactions could also be affected by the application of the revised counterparty criteria, published in december 2010 and expanded in June 2011, as well as the updated australian rMBS criteria, published in September 2011. the sectors overall performance in 2011 was in line with our expectation for continued stable performance in most asset classes with the exception of expected weakness in Japanese commercial real-estate related transactions. this is despite the impact of the global economic uncertainty and localized catastrophes during the year, such as the earthquake and tsunami in Japan, floods in australia, and the earthquake in new Zealand. delinquency and default

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rates in asia-Pacific have largely remained low and tracked historical norms for most asset classes. and although delinquency rates in certain pockets have spiked from time to time, they have tended to revert to trend. reflecting the more positive regional macroeconomic fundamentals, regional banks and corporate entities have also generally performed well over the past three years.

Standard & Poors (Australia) Pty. Ltd. holds Australian financial services licence number 337565 under the Corporations Act 2001. Standard & Poors credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

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a S i a - Pa c i f i c e Q u i t Y M a r k e t S outlook

Asian Equities Markets: Doomsday Fears Should Subside In 2012Contact: Lorraine Tan, Vice President and Head of Asia Research, S&P Capital IQ Equity Research, Singapore (65) 6239-6348; lorraine_tan@ standardandpoors.com an eye to some cyclical issues in order to participate in any confidence and earnings recoveries. the S&P asia 50 is presently trading on around 1.5x PBV, not far from the financial crisis trough of 1.3x. Given the uncertainty surrounding earnings, we prefer to refer to the PBV to provide the benchmark entry levels for the market. nonetheless, we note that the S&P asia 50 is trading on a relatively attractive 9.6x 2012 Per given that ePS growth is anticipated to be 11.0% year-on-year based on S&P capital iQ market consensus estimate. our yearend target is 3,500 points, indicating a return of around 12.9% from the nov. 18 close of 2,991.9 points. this prices the S&P asia 50 at 1.8x 2012 PBV and 10.9x 2012 Per, which stays on the low end of its historical trading range. on a specific country basis, our preference is Hong kong (which includes the china H-shares) and korea. We are overweight these two markets largely on valuation grounds, given that they are trading close to their trough PBV levels. With our view that the global economic outlook will improve through 2012, we believe higher beta markets Editors Note: This guest article represents the views of S&P Capital IQ Equity Research, a separate division from Standard & Poors Ratings Services.S&P caPital iQ eQuitY reSearchbelieveS that riSkS reMain

high to equities as 2012 rolls around but the doomsday fears should subside as the year unfolds and this should underpin equity market performance. We see positive catalysts coming from more accommodative monetary policy, reduced cost pressures and resilience in u.S. consumer spending. our view is also based on our expectation for the u.S. to avoid a recession. also we expect more conducive policy developments in the eurozone over the next six months. While risks remain to earnings outlooks, share prices have been beaten down and price-to-book value (PBV) ratios for some markets are not far from historical trough levels. With S&P asia 50 earnings per share (ePS) projected to grow a weighted average 10%-11% in 2012, we believe asia-Pacific markets should see returns ranging from 10%-15% in 2012. as a result, we think a neutral stance is warranted with one foot on defensives but with

Table 1: Recommended 2012 Market Weightings And TargetAs of Nov. 18Australia China-A China-H Hong Kong India Indonesia Japan Malaysia Philippines Singapore South Korea Taiwan Thailand S&P ASX 200 Shanghai Composite HS China Enterprise Hang Seng S&P CNX 50 Jkt Comp Nikkei 225 FBM KLCI PComp FSSTI KOSPI TAIEX SET S&P Asia 50 Source: S&P Capital IQ Equity Research, BloombergStandard & PoorS aSia-Pacific MarketS outlook 2012 19

YTD Return-12.0% -13.9% -21.5% -19.7% -20.0% 1.4% -18.1% -4.2% 2.4% -14.4% -10.3% -19.4% -4.7% -15.1%

2012 Target4,800 2,900 12,400 21,800 5,600 4,300 9,400 1,660 4,800 3,100 2,200 8,400 1,100 3,500

Upside from Recommended Current Weighting14.9% Marketweight 20.0% Marketweight 24.5% Overweight 17.9% Overweight 14.2% Marketweight 14.5% Underweight 12.2% Marketweight 14.1% Underweight 11.6% Underweight 13.5% Marketweight 19.6% Overweight 16.1% Marketweight 11.8% Underweight 17.0%

4,177 2,417 9,957 18,491 4,906 3,755 8,375 1,454 4,302 2,730 1,839 7,234 984 2,992


We believe a bit of positive news will have a marked impact on the equity markets.

should see a better year-end performance. obviously, for 1Q, the defensive markets may continue to lead. We believe there is value in Japan also but among developed markets, the u.S. may be preferred by investors. Sector-wise, we are overweight consumer Staples, energy and Banks. Given lingering risks, we are taking a neutral stance in the sector weightings. We regard consumer Staples as the more attractive defensive sector with active mergers & acquisitions activity to sustain interest and falling raw material costs to boost margins. energy remains a favorite with potential geo-political risks and diminishing excess inventories in the u.S. to support the oil price. the prospect of monetary expansion may also keep interest in energy as an inflation hedge. Banks is our preferred high-beta bet. near term sentiment is skittish but relaxation of restrictive lending and broad monetary policies in the region provides a potential boost while positive trends in interest margins should help offset the risk of increased provisions.

interest rate cuts and further accommodative monetary policy in the eurozone; a resolution or settling of new financial system regulations and requirements so that banks can focus back on the business of lending; continued strength/uptick in asian domestic activity; a pick up in u.S. jobs creation; and, Breakthroughs in eurozone debt policies including: (i) a successful leveraging of the efSf; and (ii) passage of growth-centric reforms in italy. any of the above should provide a confidence boost although we suspect that latter two would have more significant impacts on global equities. to some extent the relaxation of monetary policy is now expected and so the initial moves may see limited reaction. nonetheless, falling interest rates will tend to support equities ultimately improving the relative attraction of stocks to bonds and cash and also augurs favorably in terms of liquidity in the system that can be channelled to the stock market.

Positive Catalysts Will Go A Long WayBecause the markets have been consolidating for much of 2H11, we see limited selling pressure. although the capitulation that normally denotes the bottom of a market has not been seen, investors have endured a wave of bad news with periodic shake-outs and high volatility. as such, we believe a bit of positive news will have a marked impact on the equity markets. in any case, we believe positive u.S. GdP growth should underpin global demand and help lift asian markets once headline debt worries subside. the prospect for interest rate cuts is going to be a key driver of resilience for markets in asia. in addition, although we see asian consumers holding back in the near term which could lead to disappointing christmas and lunar new Year spending relatively low debt levels and still comfortable liquidity should signal a quick rebound once sentiment recovers. upticks may be triggered by the following: relaxation of monetary policy in this region notably, cuts in chinas banks reserve requirement ratios; reversal of prohibitive residential property purchase policies in china, Hong kong and Singapore;

But Near-Term Risks Are Amplenear-term risks remain significant with no respite to the eurozone debt worries and the high eurozone bond yields. an escalation of the debt contagion may well lead to a financial crisis and a global recession. Besides the global growth and eurozone debt uncertainty, its hard to know what mother-nature will throw at us, but the following could be some of the other potential risks that may give us another down year in returns. Prolonged uncertainty in eurozone debt policy that leads to continued elevated bond yields and banking system stress; Bankruptcy or similar financial stress by a global financial institution that may be the result of ongoing debt stress in europe coupled with income shortfalls; disappointing u.S. economic activity; Geopolitical flare-up notably surrounding irans nuclear program. any supply side shock to crude oil could send markets down sharply; and, Slow responses by asian governments and central banks to sliding domestic activity.

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Chart 1

Chart 2

Asian Markets Price-to-Book Value vs. Return On Equity30 25 Return on Equity (ROE) 20 15 10 5 0 Relatively Expensive 0 0.5 1.0 1.5 2.0 2.5 3.0Price-to-Book Value (PBV)Source: Bloomberg, S&P Capital IQ Equity Research.

Relatively Attractive China-H Singapore Hong Kong Thailand

Indonesia India Philippines

Some Asian Markets Trading Close To Historical Trough Level Price-to-Book ValueS&P/ASX 200 Jakarta Comp Shanghai Comp Nikkei 225 Hang Seng KOSPI S&P CNX 50

7 6 5 4 3 2 1 0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11Source: Bloomberg.

Malaysia Taiwan China-A

Au str

ali

Korea Japan

at this stage S&P economists do not anticipate that the u.S. will slip into a recession but the risks stay high at 35%. S&P capital iQ equity research also notes that the potential for a recession in europe is high given continued weakness in PMi data. Should the u.S. economy turn in a series of disappointing numbers, we see investors returning to the sidelines and a ratcheting down of earnings expectations.

China Banks Risks ManageableBecause of rampant lending in 2009 and 2010 in the aftermath of chinas cnY4.4 trillion financial crisis stimulus, there as been much fear built around risks to chinas banks. S&P capital iQ equity research believes that the continuous decline in non-performing loan values in absolute terms gives greater levels of comfort that the local government debt concern is still well-contained. all eyes will undoubtedly be on the creditworthiness of the cnY2.63 trillion that matures this year, the first real test for the banking system following the lending binge over the last two years. the property market is showing some early signs of strain, but well within expectations given the multiple

a

headwinds of rising mortgage rates, tightening liquidity and a series of restrictive measures. Banks indicated average loan-to-value ratios of 60% for the property segment will see earnings shaved by about 30%-40% on a 50% fall in collateral values, an instance which will be painful for banks no doubt, but not catastrophic. S&P capital iQ equity research real estate analyst expects only a 15%20% decline in home prices in the medium term.

Recommended Market WeightingsGiven our expectation for some reversion to mean, and for risk appetite to recover, our market weighting recommendations are skewed towards those markets that have fallen more in 2011. Market Per, potential ePS growth, PBV and return on equity ratios are also considered. We also favour markets trading closer to historical trough PBV levels given the uncertain earnings outlooks. Based on these factors, we are overweight Hong kong, china H-shares and korea. We also see a potentially robust uptick for some Japanese stocks although we

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Table 2: Asian Markets Consensus Estimate PER And EPS GrowthCountryAustralia China-A China-H Hong Kong India Indonesia Japan Malaysia Philippines Singapore South Korea Taiwan Thailand Median S&P Asia 50 Source: Bloomberg maintain a neutral stance on the market as a whole due to the likely investor preference for u.S. shares among the developed market space and the potential for a larger bounce in the S&P euro 350. Market valuations have compressed in asia given the broad weakness experienced in 2011. this means that markets that have traditionally traded at premium Pers including Japan, china and india are now hovering close to the regional average. Given this valuation compression coupled with a narrowing in economic growth expectations, S&P capital iQ equity research believes there is a potential for fairly robust performance all around. for our preferred market picks, therefore, S&P capital iQ equity research sees china managing to land softly, and the Hong kong market and H-shares staying the best proxy to china growth. our preference for Hong kong is also due to it trading close to its historical low trough PBV, which we believe indicates that a fair degree of risk is reflected in current prices. We note that Japan is trading near its historical trough PBV level also, which makes for a compelling entry point for Japanese shares at this juncture. However, we see greater full year potential for korea. in addition, we believe koreas electronics and technology firms should continue to outperform its neighbours, Japan and taiwan, due to relatively better returns on investments and lesser excess capacity. We are underweight the aSean sub-region given the relative outperformance in 2011. We believe that investors will gravitate towards beaten down markets where share price rebounds are potentially more sizeable as risk appetite returns. Valuations for aSean are less compelling especially since GdP growth should slow to the sub-5% level and disruptions from the thailand floods will also hit activity. We see risk to some earnings numbers from the region as a result. 2,992

IndexS&P ASX 200 Shanghai Composite HS China Enterprise Hang Seng S&P CNX 50 Jkt Comp Nikkei 225 FBM KLCI PComp FSSTI KOSPI TAIEX SET

As of Nov. 184,177 2,417 9,957 18,491 4,906 3,755 8,375 1,454 4,302 2,730 1,839 7,234 984

2011 PER x11.4 11.4 8.3 10.1 13.9 14.7 15.5 14.1 14.2 12.9 9.7 15.1 11.5 12.9 10.3

2012 PER x10.2 9.6 7.4 9.2 11.9 12.3 12.7 13.2 12.6 12.0 8.6 12.6 10.1 11.9 9.3

2011 EPS Growth43.1% 33.7% 15.9% 8.5% 8.3% 44.5% 8.2% 18.2% -1.6% -20.7% 36.2% -15.9% 25.5% 15.9% 16.9%

2012 EPS Growth11.1% 19.9% 12.1% 9.3% 17.0% 19.1% 22.3% 6.7% 12.5% 7.0% 13.1% 19.4% 13.9% 13.1% 10.6%

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Table 3: Recommended 2012 Sector Weightings Ratios Based On S&P Capital IQ Consensus EstimatesYTD Rtn %Consumer Discretionary Consumer Staples Energy Financials Banks Financials Insurance Financials Real Estate Industrials Information Technology Materials Telecom Services Utilities Source: S&P Capital IQ 13.3 (1.9) (3.6) (23.2) (27.2) (26.1) (19.3) (4.6) (17.9) (0.3) 5.6

PER 2012 X9.8 12.8 8.5 6.5 12.9 11.1 12.0 10.8 9.8 10.4 15.3

EPS 2011 YoY %9.9 41.3 38.1 39.7 131.4 (10.5) 1.7 (11.8) (17.3) 25.7 8.3

EPS 2012 Div Yld 2012 PBV 2012 Recommended % est. % X Weighting11.3 13.7 6.3 9.1 38.9 (25.4) 1.4 17.7 21.2 3.1 25.3 1.3 2.4 4.2 6.2 2.1 3.8 3.3 2.7 6.1 4.7 3.2 0.91 Marketweight 1.74 Overweight 1.36 Overweight 1.17 Overweight 1.87 Marketweight 0.70 Marketweight 1.15 Marketweight 2.01 Marketweight 1.28 Marketweight 1.79 Underweight 1.94 Underweight

Preference For Consumer Staples, Energy & BanksWe stay with a relatively neutral sector stance for 2012 in order to find a balance between potential turnaround and growth potential as well as to mitigate near-term risks. We recommend that investors continue to stay defensive in the short-term but a 10% or so drop in december 2011 or in 1Q12 may present buying opportunities, in our view. our preferred christmas shopping list would include consumer Staples and energy issues while Banks present a higher beta option to hold through 2012. We see more limited positive catalysts for telcos and utilities given relatively high valuations. despite being fundamentally defensive, asian consumer staples are anticipated to see continued robust ePS growth. 2012 income should be underpinned by improved profit margins from lower raw material costs with soft commodity price pressures easing. Merger & acquisition interest should also keep interest high in the sector. While we see a more benign oil price environment, valuations of energy issues are still relatively comfortable, trading on 8.5x 2012 Per and 1.4x PBV. although ePS growth should fall to 6.3%, upside potential is likely as global demand recovers.Standard & PoorS

also, we find upstream companies to be a decent hedge against geopolitical risks and a potentially weaker uSd. We are neutral on Materials issues, as excess capacity in some segment may dampen performances, although we note that select metalsnotably copper issuesmay also benefit from a similar rebound as the oil & gas companies. We see asian banks as presenting a compelling high beta play despite global investor avoidance of financials as a whole. We believe that at 6.5x 2012 Per, 9.1% ePS growth and 1.2x PBV, a fair degree of risk has been reflected in current share prices. asian banks have limited direct exposure to european banks. even those with direct activity in the eurozone, such as HSBc, are seen to have manageable risks. loans growth in asia should slow but relatively robust net interest margins should help offset increased provisions. Given our expectation for markets to turnaround in 2012, we are underweight the telecommunications and utilities sectors. Valuations are not particularly compelling after the outperformance in 2011 and we see limited upside catalysts. the S&P asia 50 utilities ePS growth looks high for 2012 at 25.3% but this is skewed by korea electric Power company, which is coming off a low base.aSia-Pacific MarketS outlook 2012 23


Equity Markets GlossaryS&P STARSSince January 1, 1987, Standard & Poors equity research Services has ranked a universe of u.S. common stocks, adrs (american depositary receipts), and adSs (american depositary Shares) based on a given equitys potential for future performance. Similarly, Standard & Poors equity research Services has used StarS methodology to rank asian and european equities since June 30, 2002. under proprietary StarS (Stock appreciation ranking System), S&P equity analysts rank equities according to their individual forecast of an equitys future total return potential versus the expected total return of a relevant benchmark (e.g., a regional index (S&P asia 50 index, S&P europe 350 index or S&P 500 index)), based on a 12-month time horizon. StarS was designed to meet the needs of investors looking to put their investment decisions in perspective. data used to assist in determining the StarS ranking may be the result of the analysts own models as well as internal proprietary models resulting from dynamic data inputs.

the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation.

S&P Core EarningsStandard & Poors core earnings is a uniform methodology for adjusting operating earnings by focusing on a companys after-tax earnings generated from its principal businesses. included in the Standard & Poors definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&a related expenses and unrealized gains/losses from hedging activities. excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.

S&P 12 Month Target Pricethe S&P equity analysts projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics, including S&P fair Value.

S&P Quality Rankings (also known as S&P Earnings & Dividend Rankings)Growth and stability of earnings and dividends are deemed key elements in establishing S&Ps earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. it should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. the final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. the range of scores in the array of this sample has been aligned with the following ladder of rankings: a+ Highest Blower c lowest a High aabove average d in reorganization B+ average nr not ranked B Below average

Standard & Poors Equity Research ServicesStandard & Poors equity research Services u.S. includes Standard & Poors investment advisory Services llc; Standard & Poors equity research Services europe includes Standard & Poors llc- london; Standard & Poors equity research Services asia includes Standard & Poors llcs offices in Singapore, Standard & Poors investment advisory Services (Hk) limited in Hong kong, Standard & Poors Malaysia Sdn Bhd, and Standard & Poors information Services (australia) Pty ltd.

Abbreviations Used in S&P Equity Research ReportscaGr compound annual Growth rate caPeX capital expenditures cY calendar Year dcf discounted cash flow eBit earnings Before interest and taxes eBitda earnings Before interest, taxes, depreciation and amortization ePS earnings Per Share eV enterprise Value fcf free cash flow ffo funds from operations fY fiscal Year P/e Price/earnings PeG ratio P/e-to-Growth ratio PV Present Value r&d research & development roe return on equity roi return on investment

S&P Issuer Credit Ratinga Standard & Poors issuer credit rating is a current opinion of an obligors overall financial capacity (its creditworthiness) to pay its financial obligations. this opinion focuses on the obligors capacity and willingness to meet its financial commitments as they come due. it does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. in addition, it does not take into account

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a S i a - Pa c i f i c e Q u i t Y M a r k e t S outlookroic return on invested capital roa return on assets SG&a Selling, General & administrative expenses Wacc Weighted average cost of capital dividends on american depository receipts (adrs) and american depository Shares (adSs) are net of taxes (paid in the country of origin). research reports are prepared by Standard & Poors investment advisory Services llc (SPiaS). in the united States, research reports are issued by Standard & Poors (S&P); in the united kingdom by Standard & Poors llc (S&P llc), which is authorized and regulated by the financial Services authority; in Hong kong by Standard & Poors investment advisory Services (Hk) limited, which is regulated by the Hong kong Securities futures commission; in Singapore by Standard & Poors llc, which is regulated by the Monetary authority of Singapore; in Malaysia by Standard & Poors Malaysia Sdn Bhd (S&PM), which is regulated by the Securities commission; in australia by Standard & Poors information Services (australia) Pty ltd (SPiS), which is regulated by the australian Securities & investments commission; and in korea by SPiaS, which is also registered in korea as a cross-border investment advisory company. the research and analytical services performed by SPiaS, S&P llc, S&PM, and SPiS are each conducted separately from any other analytical activity of Standard & Poors. Standard & Poors or an affiliate may license certain intellectual property or provide pricing or other services to, or otherwise have a financial interest in, certain issuers of securities, including exchange-traded investments whose investment objective is to substantially replicate the returns of a proprietary Standard & Poors index, such as the S&P 500. in cases where Standard & Poors or an affiliate is paid fees that are tied to the amount of assets that are invested in the fund or the volume of trading activity in the fund, investment in the fund will generally result in Standard & Poors or an affiliate earning compensation in addition to the subscription fees or other compensation for services rendered by Standard & Poors. a reference to a particular investment or security by Standard & Poors and/or one of its affiliates is not a recommendation to buy, sell, or hold such investment or security, nor is it considered to be investment advice. indexes are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. it is not possible to invest directly in an index. Standard & Poors and its affiliates provide a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, brokerdealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address.

Required Disclosures and Disclaimersin contrast to the qualitative StarS recommendations covered in this report, which are determined and assigned by S&P equity analysts, S&Ps quantitative evaluations are derived from S&Ps proprietary fair Value quantitative model. in particular, the fair Value ranking methodology is a relative ranking methodology, whereas the StarS methodology is not. Because the fair Value model and the StarS methodology reflect different criteria, assumptions and analytical methods, quantitative evaluations may at times differ from (or even contradict) an equity analysts StarS recommendations. as a quantitative model, fair Value relies on history and consensus estimates and does not introduce an element of subjectivity as can be the case with equity analysts in assigning StarS recommendations.

S&P Global STARS DistributionIn North Americaas of September 30, 2011, research analysts at Standard & Poors equity research Services north america recommended 42.2% of issuers with buy recommendations, 54.2% with hold recommendations and 3.6% with sell recommendations.

In Europeas of September 30, 2011, research analysts at Standard & Poors equity research Services europe recommended 34.4% of issuers with buy recommendations, 49.4% with hold recommendations and 16.2% with sell recommendations.

In Asiaas of September 30, 2011, research analysts at Standard & Poors equity research Services asia recommended 48.4% of issuers with buy recommendations, 45.7% with hold recommendations and 5.9% with sell recommendations.

Globallyas of September 30, 2011, research analysts at Standard & Poors equity research Services globally recommended 41.5% of issuers with buy recommendations, 52.6% with hold recommendations and 5.9% with sell recommendations. Additional information is available upon request.

Other Disclosuresthis report has been prepared and issued by Standard & Poors and/or one of its affiliates. in the united States,

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a S i a - Pa c i f i c e Q u i t Y M a r k e t S outlookfor a list of companies mentioned in this report with whom Standard & Poors and/or one of its affiliates has had business relationships within the past year, please go to: http://www.standardandpoors.com/products-services/ articles/en/us/?assetID=1245187982940 and undertakes no duty of due diligence or independent verification of any information it receives. Standard & Poors keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. as a result, certain business units of Standard & Poors may have information that is not available to other Standard & Poors business units. Standard & Poors has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. Standard & Poors ratings Services did not participate in the development of this report. Standard & Poors may receive compensation for its ratings and certain creditrelated analyses, normally from issuers or underwriters of securities or from obligors. Standard & Poors reserves the right to disseminate its opinions and analyses. Standard & Poors public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal. com (subscription), and may be distributed through other means, including via Standard & Poors publications and third-party redistributors. additional information about our ratings fees is available at www.standardandpoors. com/usratingsfees. this material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investors currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. the information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. this material is not intended for any specific investor and does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

DisclaimersWith respect to reports issued to clients in Japan and in the case of inconsistencies between the english and Japanese version of a report, the english version prevails. With respect to reports issued to clients in German and in the case of inconsistencies between the english and German version of a report, the english version prevails. neither S&P nor its affiliates guarantee the accuracy of the translation. assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not necessarily indicative of future results. Standard & Poors, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness or adequacy of this material, and S&P Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of the information provided by the S&P Parties. S&P PartieS diSclaiM anY and all eXPreSS or iMPlied WarrantieS, includinG, But not liMited to, anY WarrantieS of MercHantaBilitY, SuitaBilitY or fitneSS for a Particular PurPoSe or uSe. in no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages. capital iQ is a business of Standard & Poors. ratings from Standard & Poors ratings Services are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. Standard & Poors assumes no obligation to update its opinions following publication in any form or format. Standard & Poors ratings should not be relied on and are not substitutes for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. Standard & Poors rating opinions do not address the suitability of any security. Standard & Poors does not act as a fiduciary. While Standard & Poors has obtained information from sources it believes to be reliable, Standard & Poors does not perform an audit

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a S i a - Pa c i f i c e Q u i t Y M a r k e t S outlookthis document does not constitute an offer of services in jurisdictions where Standard & Poors or its affiliates do not have the necessary licenses. For residents of the U.K.: this report is only directed at and should only be relied on by persons outside of the united kingdom or persons who are inside the united kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in article 19(5) or article 49(2) (a) to (d) of the financial Services and Markets act 2000 (financial Promotion) order 2005, respectively. For residents of Singapore: anything herein that may be construed as a recommendation is intended for general circulation and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. advice should be sought from a financial adviser regarding the suitability of an investment, taking into account the specific investment objectives, financial situation or particular needs of any person in receipt of the recommendation, before the person makes a commitment to purchase the investment product. For residents of Malaysia: all queries in relation to this report should be referred to Weng Jin ching. For residents of Indonesia: this research report does not constitute an offering document and it should not be construed as an offer of securities in indonesia, and that any such securities will only be offered or sold through a financial institution. For residents of the Philippines: the securities being offered or sold have not been registered with the Securities and exchange commission under the Securities regulation code of the Philippines. any future offer or sale thereof is subject to registration requirements under the code unless such offer or sale qualifies as an exempt transaction. Standard & PoorS, S&P, S&P 500, S&P europe 350 and StarS are registered trademarks of Standard & Poors financial Services llc.

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a S i a - P a c i f i c B o n d M a r k e t & c r e d i t c u lt u r e d e V e l o P M e n t commentary

Despite Global Volatility, The Development Of Asias Local Bond Markets Is Still AssuredContacts: Yu-Tsung Chang, Executive Managing Director, Tokyo (81) 3-4550-8724; [email protected]; John Bailey, Managing Director, Melbourne (61) 3-9631-2020; [email protected] on RatingsDirect Global Credit Portal on Nov. 16, 2011

itS

been another rockY few MonthS for global caPital

markets. deepening concerns about eurozone economies and a flight to liquidity have lured investors away from some markets and into safe havens such as u.S. treasuries. asias bond markets havent been immune, with issuance in the regions G3 bond markets at a virtual standstill. But others such as asias local-currency bond markets have remained open for business, providing alternative funding and investment options for issuers and investors. indeed, asias local-currency bond markets have continued to expand in recent months, albeit at a moderately slower pace in some markets. although the recent volatility in global capital flows underlines one of the challenges facing asias emerging capital markets, we believe the long-term development of local-currency bond markets is still assured. Several factors contribute to our optimism. regional policymakers, recognizing the value of building home-grown bond markets as a way to more efficiently stimulate economies, have undertaken regulatory changes and other reforms to help address long-standing concerns about liquidit

s&p asia outlook 2012

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