Asian policy makers eager to sustain growth in 2012 may put their economies at risk with interest- rate cuts or fiscal stimulus that some can ill-afford.
The likelihood of “policy mistakes” in 2012 may increase as a slowing global expansion puts pressure on officials to lower borrowing costs even as inflation remains elevated in some economies, said Lim Su Sian, a Singapore-based strategist at Royal Bank of Scotland Group Plc. In India, where the central bank has paused raising rates, monthly inflation has held above 9 percent; prices in China exceeded the government’s full-year target of 4 percent every month this year.
Asian nations from Thailand to Indonesia and Malaysia have reduced interest rates or left them unchanged in recent meetings to shield their economies from the protracted European debt crisis. Fitch Ratings raised its forecasts for price gains for the region for this year and next even as it lowered growth estimates, and said while many Asian economies have scope for policy responses, China and India are “exceptions.”
“There will be central banks that feel they have to cut but whether or not they can is an entirely different issue,” said Lim. “For some of these countries, they are going to feel a little challenged because on the one hand, growth is clearly slowing but on the other hand, inflation is still not yet coming off. That creates the potential for policy mistakes.”
Highlighting the risks from Europe’s debt crisis, South Korea’s industrial production unexpectedly fell in November for a second straight month. Output dropped 0.4 percent compared with October when it declined a revised 0.6 percent, Statistics Korea said today. The Bank of Korea refrained from raising interest rates for a sixth month in December to support growth.
Growth Estimates
Emerging East Asian economies may grow 7.2 percent next year after expanding 7.5 percent in 2011, the Asian Development Bank says. Fitch raised its 2011 inflation estimate for Emerging Asia by 0.3 percentage points to 5.9 percent and its 2012 price forecast to 4.9 percent from 4.7 percent.
Indonesia cut borrowing costs by 0.75 of a percentage point in October and November to a record low even as its economy grew more than 6 percent for a fourth straight quarter. India held off tightening in December after raising interest rates by a record pace.
China’s central bank cut the amount of cash that lenders must set aside as reserves for the first time since 2008 this month after inflation eased to the slowest in 14 months in November. China should be prepared for a possible inflation rebound next year, Xinhua News Agency said this month, citing Yang Weimin, vice chairman of the Office of the Central Leading Group on Financial and Economic Affairs.
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Italian Business Confidence Falls to Two-Year Low Amid Austerity Measures
Italian business confidence (ITBCI) fell to the lowest in two years in December as the economy probably entered its fourth recession in the last decade amid a wave of austerity measures designed to fight the sovereign debt crisis.
The manufacturing-sentiment index dropped to 92.5, the lowest since December 2009, from a revised 94 in November, Rome- based national statistics institute Istat said today. Economists had predicted a reading of 93.7, according to the median of 14 estimates (ITBCI) in a Bloomberg News survey. Istat originally reported a confidence reading of 94.4 in November.
The mood among executives mirrors Italian consumers’ pessimism as Prime Minister Mario Monti implements a 30 billion- euro ($39 billion) package of spending cuts and tax increases. Italian consumer confidence fell in December to the lowest in 16 years and the economy shrank in the third quarter. The government forecasts a further contraction in the current three- month period, meaning Italy is in its fourth recession since 2001.
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Italy Sells 7 Billion Euros of Bonds as Yields Fall
Italy auctioned 7.02 billion euros ($9 billion) of bonds, falling short of the target, as borrowing costs declined in its final debt sale of the year.
The Treasury in Rome sold 2.5 billion euros of securities due in 2014, less than the 3 billion euro maximum for the sale, to yield 5.62 percent, down from 7.89 percent at the previous sale on Nov. 29. The Treasury priced 2.5 billion euros of its 5 percent 2022 bond to yield 6.98 percent, compared with 7.56 percent on Nov. 29. Italy also sold about 2 billion euros of bonds due 2021 and a floating-rate security due 2018.
The sale, which aimed to raise 8.5 billion euros, came one day after Italy auctioned 9 billion euros in treasury bills for 3.251 percent. That was about half the rate from the previous auction on Nov. 25 after the European Central Bank last week offered euro-area banks unlimited funds for three years.
Market Reaction
Italian 10-year bonds (.IT10) stayed lower after the auction. The 10-year yield climbed 12 basis points to 7.12 percent at 10:33 a.m. London time. Three-year yields pared declines, dropping 4 basis points to 5.83 percent. They earlier fell to 5.68 percent. The euro weakened to a decade low against the yen after the auction, while European shares were little changed and U.S. equity-index futures gained.
Prime Minister Mario Monti held a press conference that began noon in Rome. He may outline measures aimed at boosting growth, including moves to open up closed professions, ease labor regulations and lower fuel prices. The economy contracted 0.2 percent in the third quarter and probably also shrank in the three months through December, meaning Italy may have entered its fourth recession since 2001.
Yesterday’s auction was Italy’s first since the ECB loaned 489 billion euros to European banks in a bid to keep credit flowing to the 17-nation economy while lawmakers tackle the sovereign debt crisis. Italian lenders borrowed 116 billion euros as part of the tender on Dec. 21, according to a person with direct knowledge of the loans.
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Worst Currency Lifts South African Exporters
The world’s biggest major-currency decline is benefiting South Africa’s largest companies as export earnings in dollars rise and commodity producers from AngloGold Ashanti Ltd. (ANG) to Sasol Ltd. (SOL) beat peers in the stock market.
The rand has fallen 19 percent this year to trade at 8.30 per dollar, the biggest slump among the 12 most-traded currencies tracked by Bloomberg, as Europe’s sovereign debt crisis led to a selloff in riskier assets. It may retreat 3.7 percent to 8.50 per dollar by the end of the first quarter, according to the median estimate of 25 analysts surveyed by Bloomberg.
South Africa’s Reserve Bank let the rand sink 15 percent against the dollar in the past four months after the currency’s advance to a four-year high in April led Trade & Industry Minister Rob Davies to say it was “overvalued’ and ‘‘debilitating’’ for manufacturers. Gold producer AngloGold Ashanti gained 8.3 percent since Sept. 1 as the rand’s drop increased the local-currency value of gold. Sasol shares rose to a 40 percent premium to the FTSE 350 Oil & Gas Producers (F3OILG) index.
Rand Decline
The South African rand is the world’s third-worst performing currency this year, after taking into account price swings, ahead of only the Argentine peso and Indian rupee, data compiled by Bloomberg show. Non-deliverable forward contracts, which provide a guide to investors’ expectations of currency and interest rate moves, show the rand extending its decline to 8.56 per dollar in 2012. The rand traded at 8.15 per dollar as of 9:54 a.m. in Johannesburg.
