Asian equities, currencies and bonds have taken a beating over the last few months after the U.S. Federal Reserve hinted it would halt its nearly five-year policy of flooding markets with cheap cash, points out Reuters in its release on its Asia Business Sentiment survey
Business sentiment among Asia's top companies deteriorated in the third quarter, interrupting three consecutive quarters of an improvement, with global economic uncertainty remaining the biggest concern for the region's firms, the latest Thomson Reuters/INSEAD Asia Business Sentiment survey showed. The Thomson Reuters/INSEAD Asia Business Sentiment Index fell to 66 in the third quarter from 71 in the second quarter when it reached the highest level in more than a year. An index reading above 50 indicates an overall positive outlook. The survey showed that shipping and financial sectors were the most negative with a third-quarter score of 50, a sharp drop from the shipping industry's reading of 80 and financials' reading of 78 in the second quarter.
Asian equities, currencies and bonds have taken a beating over the last few months after the U.S. Federal Reserve hinted it would halt its nearly five-year policy of flooding markets with cheap cash, points out Reuters in its release on its Asia Business Sentiment survey.
Some of the weakest readings came from north Asia's export-orientated economies of China, South Korea and Taiwan, and regional trading hub Singapore, all of which turned in readings of 50 – highlighting the impact of a stuttering global economy. “Asian companies are still maintaining a relatively cautious outlook regarding their earnings growth prospects,” said Fan Cheuk Wan, chief investment officer for the Asia-Pacific region at Credit Suisse's private banking and wealth management unit. “It could be partly related to the recent volatility across the emerging economies over the past three months.”
As recently as a month ago, investors were worried that China's economy was slipping into a deeper-than-expected downturn. But policymakers have stepped in with measures to steady the economy, from quicker railway investment and public housing construction to introducing policies to help smaller companies with financing needs, according to Reuters.
The poll conducted by Thomson Reuters News in association with INSEAD, a global business and management school, surveyed more than 100 executives in 11 Asia-Pacific countries across sectors including autos, financials, resources, food and retail.
Of the 90 companies that replied to the poll, held from 2 September 2013 to 13 September 2013, two-thirds reported a neutral outlook, just less than one-third were positive on their prospects and about 1% reported a negative outlook.
The 'no taper' decision of the US Federal Reserve has led to a spike in oil and gold prices, which will start to impinge on both the import bill and inflation. Policymakers may be lulled into a sense of complacency and slow the reform momentum, warns Nomura Asia Insights in its research note
The US Federal Reserve's decision to not taper asset purchases at its 17-18 September FOMC (Federal Reserve's open market committee) meeting should be positive for Asia's current account deficit countries in the near term. It will come as a big respite to Indian policy makers, who have been battling the currency since taper-talk started in May, says Nomura Asia Insights in its research note. A resurgence of flows into emerging markets could provide India with some breathing room, as balance of payment pressures ease, and allow the RBI (Reserve Bank of India) to start to gradually reverse its recent liquidity tightening measures.
Nomura forecasts that at its 20 September policy meeting, RBI will keep all policy rates (repo, CRR) unchanged, in line with consensus; sound hawkish on near-term inflation risks due to supply shocks (emanating from food and INR); and start a calibrated reversal of recent liquidity tightening measures. This includes: a reduction in the CRR balance requirement for banks, currently at 99%; an increase in net borrowing by banks to 1% from 0.5% of net demand and time liabilities under the liquidity adjustment facility; and a 50-100bp cut in the marginal standing facility rate (from the current 10.25%).
However, Nomura analysts hasten to caution that the 'no taper' decision has led to a spike in oil and gold prices, which will start to impinge on both the import bill and inflation. Policymakers may be lulled into a sense of complacency and slow the reform momentum. Additionally, if the currency starts to appreciate, imports will become cheaper again, and in the absence of a domestic supply response, this would result in imports starting to substitute domestic production. Therefore, we expect India's current account deficit to start to widen again and imported inflation (through higher commodity prices) to rise.
If the caution is not observed by the government, India's macro imbalances should start to worsen again and the fundamentals (weak growth and sticky inflation) remain bad. Therefore, Nomura’s negative outlook on a six-month horizon remains unchanged from previous research notes.
Nomura estimates that the austerity measures announced yesterday can lead to a saving of 0.3%-0.4% of GDP, in its research note on fiscal slippage
To address the fiscal risks, the Finance Ministry yesterday announced a set of austerity measures, including:
(a) A mandatory 10% cut in non-plan expenditure for all departments, excluding spending on interest and debt repayment, defence capital, salary, pension and grants to states.
(b) Restrictions on holding seminar/conferences, domestic/foreign travel and a ban on the purchase of vehicles and the creation of new posts for government departments.
(c) Not more than 33% of the budgeted spending may be spent in the last quarter (Jan-Mar) and spending will be limited to 15% during the month of March.
According to a research note by Nomura First Insights on fiscal slippage, the austerity measures announced can lead to a saving of 0.3%-0.4% of GDP. This is important to the government as the fiscal deficit during the first four months of FY14 (year ending March 2014) reached 63% of the full year's budgeted target. Recent trends of slowing tax revenues, sluggish asset sales and a rising subsidy burden (oil, food and fertiliser) had raised doubts about the government's ability to meet its budgeted fiscal deficit target of 4.8% of GDP in FY14.
Nomura argues that the austerity measures announced today should partly enable the government to plug the fiscal gap. A hike in fuel prices (diesel and LPG) is already pending; the government should announce this soon to lower the oil subsidy burden. More spending cuts may become necessary during the course of the year depending on the revenue trends and the outlook on currency and oil prices.
Nomura cautions that finally, the spending cuts will adversely impact growth. High government spending was one of the main drivers of real GDP growth of 4.4% y-o-y in Q2 2013. With spending likely to be slashed and financial conditions much tighter starting July, we expect private demand to slow down further. Nomura expects real GDP growth at 4.2% y-o-y in FY14 versus 5% in FY13, despite better agriculture performance.