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Singapore focus I:

Recalibrating the
UOB SGD NEER model

Singapore focus II:


Normalisation in the
negative SOR-SIBOR basis

China focus I:
Deposit insurance
scheme on track

China focus II:

Taking another look at


Chinas trade data

CONTENT
EXECUTIVE SUMMARY

03

FX & INTEREST RATE OUTLOOK

10

SINGAPORE FOCUS I:
RECALIBRATING THE UOB SGD NEER MODEL

11

SINGAPORE FOCUS II:


NORMALISATION IN THE NEGATIVE SOR-SIBOR BASIS

14

CHINA FOCUS I:
DEPOSIT INSURANCE SCHEME ON TRACK

16

CHINA FOCUS II:


TAKING ANOTHER LOOK AT CHINA'S TRADE DATA

18

OIL & GAS:


LOSING SHEEN

21

INDONESIA

25

MALAYSIA

26

SINGAPORE

27

THAILAND

28

INDIA

29

CHINA

30

HONG KONG

31

JAPAN

32

SOUTH KOREA

33

TAIWAN

34

EUROZONE

35

AUSTRALIA

36

UNITED KINGDOM

37

UNITED STATES OF AMERICA

38

FX TECHNICALS

39

Information as of 05 December 2014


2

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

EXECUTIVE SUMMARY

GROWTH MUDDLES, MONETARY POLICY DIVERGES,


AND POLITICS RUFFLES

The lacklustre global growth story of 2014 looks


set to continue in 2015. Japan and the Eurozone
continue to struggle in both trying to revitalize their
economies and ward off the deflation threat while
China surprised the markets with an interest rate
cut for the first time in more than 2 years to support
growth. The latest OECD Economic Outlook reduced their 2015 global GDP growth forecast from
3.9% to 3.7% with cuts to the growth outlook for
most of the major economies (except UK). Falling
oil prices a reflection of both rich global supply
and anemic demand for oil has been immensely
beneficial for oil-importing economies but a bane
for oil producers, especially those struggling with
their fiscal balances. It also makes the threat of
(headline) CPI deflation more real, and with the Eurozones November inflation easing further to just
+0.3%y/y, the common currency regions stands a
high chance to see headline CPI y/y deflation in the
coming months that pave the way for more aggressive ECB actions ahead.
In comparison, growth for the US economy has
been most impressive among the major economies so far in 2014. We remain positive for the US
growth outlook in 2015 (notwithstanding a possible
repeat of some nasty weather-related disruptions in
the coming weeks).
While the threat of inflation in US has remained
largely subdued and further moderated by falling
commodity and oil prices, wage growth has returned. It may still seem to run below the pre-recession increment pace, but service sector inflation
is now firmer and gathering pace (shown by core
CPI services sub-component at 2.4%y/y in October). Job creation is happening at an average of
200,000+ monthly pace for most of 2014.
Conditions are no longer justifiable for the Fed to
maintain record low interest rates at 0-0.25%. After
fully ending its quantitative easing (QE) program
in its October 2014 FOMC as widely telegraphed,
there is an intense attention on the Federal Reserve
for their confirmation of the Fed rate normalization
timeline. We believe that the Fed will give clearer
guidance on its rate normalization timeline as soon
as its 16/17 December 2014 FOMC meeting. We
still think US interest rate hike/normalization will
commence in mid-2015, with the Fed Funds Target
Rate at 1.25% by end-2015.
The different circumstances facing the US as opposed to other economies, especially Japan and
the Eurozone continues to put their respective central banks monetary policy stuck firmly in opposite
directions and the theme of monetary policy divergence among the major central banks will remain
true in 2015.

The most interesting to watch will be the European


Central Bank (ECB) where speculation is strife on
whether the significant worsening of growth and
inflation indicators in Europe may finally justify the
ECB to launch its own outright sovereign bonds
buying QE programme. We also expect more (targeted) interest rate/reserve requirement rate cuts
from China in 2015 to keep growth steady.
With the continuation of the theme of diverging
monetary policies, the broad strengthening of the
US dollar remains intact especially in anticipation
of the commencement of the Fed Reserves rate
normalization process, though one should also be
wary that market reaction could be unpredictable as
the Fed commences its policy normalization.
So what could go wrong in 2015? In the previous quarterly report, we highlighted the on-going
Ukraine-Russia conflict, rise of the Islamic State in
Iraq and Syria (ISIS) militants into rogue state, the
Ebola outbreak. So far these issues are still unresolved but fortunately none has proven to be fatal
or disruptive to asset prices. That said, we note that
the on-going sanctions and collapse in oil prices
(down nearly 40% since the peak in June 2014) is
putting a lot of strain on the Russian economy and
its domestic financial market, and that is something
we want to watch out for.
We think political risks also will be elevated in 2015
and could derail our best-thought out plans. The immediate political risk event will be the Japan 14 Dec
2014 Lower house snap elections. The base case
scenario is a straight-forward victory for Abe because of weak opposition and potentially low voter
turnout. But if he unexpectedly loses the elections,
then that will literally mean the end of Abenomics
and the consequent risk-off trade could send the
USD/JPY back below 110 in a blink.
Meanwhile, US politics may enter into a year of
high-drama in 2015. Republicans are set to gain
majority power in both House and Senate in the
new Congress in 2015. Of particular immediate
concern is whether the Republicans will respond
to US President Obamas recent executive action
on immigration by holding up a spending bill which
will force the US government to cease many of its
operations by 12 Dec 2014, reliving the 2013 government shutdown. The next issue that has global
implications is the US debt ceiling limit which is suspended until 15 March 2015. As there are no election concerns in 2015, US political brinkmanship
may once again push markets to the edge at some
point. And lastly, the UK will be the next major economy (after Japan) to go for general elections on 7
May 2015 which could see PM David Cameron &
his coalition getting the boot, with the Labour party

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

EXECUTIVE SUMMARY
back in power (according to latest Yougov electoral
calculus, 1 Dec 2014).
Happy holidays and have a good year in 2015!

SINGAPORE IN FOCUS I:
Recalibrating the UOB SGD NEER model

In the most recent MAS monetary statement (14 Oct


2014), the MAS reported that the SGD NEER had
fluctuated within the upper half of the policy band
over the past six months. However, our UOB SGD
NEER model was showing that the SGD NEER had
fluctuated within the lower half of the policy band. As
such, our assumption that the SGD NEER is appreciating at a 2.5% pa rate is on the bullish end. With
that, we updated our model with the assumption of
a 2.0% pa appreciation, where the SGD NEER is
currently trading around 0.15% below the midpoint,
rather than the 1.9% below midpoint in the older
model. We think that the 2.0% appreciation in the
SGD NEER is justified by the lesser-than-expected
core inflationary pressures domestically, as well as
an expectation that there will be a broad-base appreciation of the USD against Asian currencies (including the SGD).
We also took the opportunity to re-adjust the UOB
SGD NEER bilateral currency weights by incorporating Singapores latest trade data while using
econometric methods to reduce the tracking error
with the MAS-released SGD NEER. Our view on
the current trading bandwidth remains the same at
2%, both ways.
After the recalibration, our 2015 USD/SGD forecast
is adjusted too. Now, we see the USD/SGD moving
towards a high of 1.35/USD by 3Q 2015 (previous
forecast: 1.33), before coming lower to 1.33/USD
by 4Q 2015 (previous forecast: 1.31).

SINGAPORE IN FOCUS II:


Normalisation in the negative SOR-SIBOR basis

The end of QE in October (2014) established USD


strength as the new dominant narrative in minds of
investors. SOR rates have re-priced aggressively
higher due to the stronger USD and seasonal end
of year funding pressures.The discount between
SIBOR and SOR has normalized and we do not expect to revisit the average levels seen in the past
4 years as long as the expectation for Fed hikes in
2015 persists.
As seasonal funding pressure ebbs, SOR & SIBOR
should consolidate below end-2014 stressed highs.

CHINA IN FOCUS I:
Deposit insurance scheme on track

Laying the ground for a big step towards further


financial market reform, PBoC announced in late
Nov 2014 the draft regulations for a deposit insurance scheme, which is likely to be implemented

in 2015 along with further interest rate cuts. This


announcement suggests that the Chinese government is on track to accelerate financial market reforms after it removed lending rate controls in July
2013. The deposit insurance system should result
in better reflection of the true financing costs and
lowering of systemic risks in the financial sector
over the mid-to-long term, as it helps to level some
the playing field for smaller banks and broaden the
deposit base away from the largest banks. Overall,
it is a positive development for China.

CHINA IN FOCUS II:


Taking another look at Chinas trade data

Notwithstanding the soft macro backdrop domestically and diverging growth paths in developed economies, Chinas merchandise trade figures are again
showing some signs of unusual activities, with trade
balance hitting record highs in 3 months out of the
4 in the Jul to Oct period in 2014, underpinned by
strong performance in exports. A closer look at the
data show that exports over-invoicing appears to
be a repeat of the similar anomaly seen during in
2012 to 2013, before authorities clamped down on
such activities. Our calculations show that the extent of over invoicing comes to US$107.6bn, or
about 31% of Chinas trade balance of US$335.5bn
for the current period. In contrast, the previous
episode of exports over-invoicing totaled 48% of
Chinas trade surplus during that period. As such,
exports over-invoicing may be making a comeback,
albeit in a smaller scale compared to the one prior
to Jun 2013.

OIL IN FOCUS:
Losing sheen

Oil prices have tumbled more than 30% to a multiyear low with Brent <US$70/barrel (as of 03 Dec
2014). This marks a dramatic turnaround from the
spike earlier in the year to US$115/ barrel due to
geopolitical concerns in the Middle East.
On the supply side, surging global oil production
could outpace demand this year. Increased production from Libya and Angola alongside uninterrupted
supply from Iraq despite the ongoing war with ISIS
have pushed up OPECs total output to slightly under 31m barrels a day, 352,000 bpd higher compared to one year ago. Swelling US production on
the back of its Shale revolution has also fundamentally changed the global oil equation and resulted in more-than-ample global supply.
At the same time, demand has disappointed as
global growth sputters. The International Energy
Agency (IEA) estimated that the pace of expansion
in oil demand for 2014 & 2015 would be weaker
than expected. This year, it expects demand to rise
by 0.7m bpd to 92.4m bpd, 0.2m barrels less than
its previous forecast. Demand for next year is expected to come in at 93.5 mbd.

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

EXECUTIVE SUMMARY
The Dollar bull looks set to charge into 2015

That said, the story between the Asian currencies


against the US dollar is a bit more complex in part
due to the resilience of some currencies like the INR
(which has so far only depreciated slightly against
the USD by 0.1% YTD) while the depreciation of IDR
(-1.0% YTD) and THB (-0.7% YTD) & CNY (-1.6%
YTD) has been relatively modest when compared
to the declines suffered by SGD (-4.1% YTD) and
MYR (-5.6% YTD). The Asia dollar index (ADXY)
which indicates the general international value of
the USD by averaging the exchange rates between
the USD and 10 major Asian currencies (CNY, HKD,
INR, IDR, KRW, MYR, PHP, SGD, TWD and THB)
ended 2013 at 115.77 and by end-2Q 14, the ADXY
was higher at 116.18, and has since tapered off and
hovering at 113.42 (as of 3 December).

In October [2014], the market witnessed some of the


events that we have been calling for come to pass:
The Fed Reserve fully ended its quantitative easing
program in the October FOMC meeting while the
Bank of Japan (BOJ) finally added more monetary
stimulus on 31 October MPM policy meeting after
staying on pause for one and a half years.
The divergence in policy directions was especially
stark for these two central banks as the US recovery
(in both economy and jobs market) continues
unabated while Japans domestic economy suffered
under the weight of the April 2014 sales tax hike
and the BOJ grew increasingly concerned about
achieving its inflation target. Governor Kuroda
justified the latest QQE expansion to pre-empt such
a risk of shifts of deflation mindset from manifesting.
And the result of diverging policies is strength of the
USD against the major and emerging markets FX.

Outlook remains USD positive ahead

Looking ahead into end-2014 and 2015, we believe


more USD strength is likely when the Fed gives a
concrete rate hike timeline. The latest US 3Q 14
GDP numbers (at 3.9% growth) further strengthened
markets expectations for an earlier rate hike in spring
2015. There is potentially additional divergence from
Europe as the ECB is mulling more stimulus in 2015,
possibly sovereign bond purchases.

2014 US Dollar Index: A story of 2 halves

In 2014, the US dollar story is perhaps easiest


characterized into 2 halves. Our expectation (made
at the end-2013) for USD strength against major and
Asian FX did not play out in 1H-14 as the market
fully priced in the QE taper and eased back on Feds
interest rate hike timeline. The US dollar index (DXY)
which indicates the general international value of
the USD by averaging the exchange rates between
the USD and 6 major currencies (EUR, CAD, CHF,
GBP, SEK and JPY) ended 2013 at 80.79 and by
the time we reached end-2Q 14, the dollar actually
fell with the DXY lower at 79.78.

We remain positive on US outlook and we believe


that an above 3% growth is achievable in 2H 2014,
bringing 2014 GDP growth to 2.7%, and in 2015 at
3.2% with US housing market and US consumer
providing the out-performance factors. We reiterate
our view that the Fed rate normalization to take place
in 2Q-2015 (possibly starting in 16-17 June 2015
FOMC), bringing the FFTR to 1.25% by end-2015,
and to 3.25% by end-2016. We think the Fed may
change its key phrases at the 16-17 Dec FOMC
meeting for further clarity on rate lift-off guidance,
and that could spark another bout of USD strength
and volatility before the year is out.

But significant dollar strength started to materialize in


3Q (ending at 85.936, 6.4% higher YTD) and touched
a high of 88.96 on 3 December as the US economy
outperformed its peers in developed and emerging
markets while there were increasing concerns about
the Feds interest rate hike (normalization) timeline.
Major and Asian Currencies against USD (1H 2014)

NZD
AUD
GBP
KRW
INR
JPY
IDR
MYR
PHP
SGD
THB
CHF
TWD
EUR
HKD
VND
CNY
CNH
-3.00

-2.46
-2.48

-1.03

-1.00

Source: Bloomberg

2.40
2.33
1.80
1.66
1.62
1.38
0.21
0.15
0.05

1.00

3.97
3.80
3.46
3.43

3.00

5.86

5.00

Major and Asian Currencies against USD (3Q 2014)

CNY
THB
CNH
HKD
VND
TWD
SGD
MYR
PHP
GBP
KRW
IDR
INR
AUD
CHF
JPY
EUR
NZD

7.00

7.00

-9.00

-6.05
-6.27
-7.19
-7.36
-8.13
-7.00

-5.00

-0.16
-0.33
-1.34
-1.69
-2.06
-2.65
-3.23
-3.32
-4.20
-4.30

-3.00

-1.00

1.75
1.26
1.11

1.00

Source: Bloomberg

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

EXECUTIVE SUMMARY
Global FX

EUR/USD: Currently hovering around the 1.2370


region, the Euro continues to retreat as hopes are
high that the ECB will unveil a QE package early
next year. In fact, nothing has changed the underlying conditions that we expect will continue to put
downward pressure on the EUR/USD currency pair.
Factors include the weak growth/inflation backdrop
in the Eurozone, further ECB easing eventually, as
well as a constructive backdrop for the USD highlighted by continued improvement in growth, the
labor market and the gradual approach of the start
of Fed rate hikes. We are thus looking for the EUR/
USD pair to move towards 1.2100 by the end of this
year and thereafter towards the 1.190 region by the
end of 1Q15.
GBP/USD: GBP has seen a marked deprecia-

tion against the USD, falling more than 5% year to


date. Going forward, it looks like the weakness in
GBP/USD is here to stay. The BoE is likely to raise
rates later than the market currently anticipates, especially now that low inflation will allow the BoE to
wait-and-see longer. Besides, heightened political
risk around the May general election could weigh
on the currency. We have thus revised lower our
forecasts for GBP/USD into 2015, now looking for
an end-1Q target of around 1.550.

AUD/USD: Currently hovering below the


0.8400-figure, AUD/USD has spiked sharply downwards. The fall in the Australian dollar is a very welcome development for the RBA, giving the central
bank more scope to hike rates down the road amid
rising concerns about the elevated level of activity
in the housing market. It will also aid the economys
rebalancing, boosting growth and hiring in the nonmining sectors. We continue looking for a lower
AUD/USD into 2015. A large part of the currencys
weakness is expected to be due to increasing US
dollar strength, where the story of rising US interest
rates is likely to dominate currency trade. We are
penciling an end-1Q target of around 0.8100.
NZD/USD: TA pause in the RBNZ interest rate

raising cycle in response to very low inflation is


likely to see the NZD underperform. Although New
Zealands interest rate is far more generous than
any other major economy, with interest rates in the
US and possibly the UK expected to rise in 2015,
the yield advantage of New Zealand's financial assets diminishes. The RBNZs discontent with the
high level of the NZD, alongside further declines
in export commodity prices and continued slowing
economic momentum should also continue to encourage currency depreciation. With that, we see

the NZD/USD moving lower towards the 0.75 level


by end-1Q15.

USD/JPY: We see a period of possible yen con-

solidation amidst political uncertainty before 14 Dec


election. If PM Abe re-captures the parliament with
a stronger public vote, then that could send USD/
JPY to fresh multi-year highs. Conversely, if he unexpectedly loses the popular vote, then that could
see the yen weakness quickly unravel with the pair
easily heading below 110. Political risk in Japan will
be the dominant theme for now. Barring an unexpected snap election outcome, we expect the USD/
JPY pair to close 2014 at 120 and will head towards
125 by end-2Q 2015 as the Fed finally delivers
the first rate action which we expect in June 2015
FOMC.

Asian FX
USD/CNY: Our views remain intact with the unit

firming marginally to 6.03/USD by end-2015. Even


if it hit our target of 6.10/USD for end-2014 (spot:
6.1501 on 4 Dec), that would still be a full year decline of 0.8%, which would be the first annual decline since 2009. What is more important than the
currency level is that as RMB internationalization
accelerates, 2-way moves for the currency would
also be the new normal as it behaves more like a
global currency that is subject to both external and
domestic factors. This means that there could be
repeat of the bouts of depreciation, as seen during
the Jan-Apr period 2014. For 2015, our expectations for Fed interest rate normalization could see
USD strength pressuring the RMB as well. Having
said that, the risks of prolonged depreciation are
low, as the currency may need to maintain a largely
stable value at this early stage of internationalization.

USD/SGD: We continue to believe that the MAS


will maintain the current stance of a modest and
gradual appreciation of the SGD NEER as the stilltight labour market may see higher wage costs filtering into higher core inflation. However, we expect
the interest rate normalization in the US to start in
June next year and would see a downward pressures in Asian currencies. This will see the USD/
SGD moving towards a higher of 1.35/USD by end
3Q 2015, before moving to 1.33/USD by end 4Q
2015.
USD/IDR: The budget for 2015 will be reviewed
following the fuel price hike. Fiscal improvement
and the orientation of the new government towards
higher spending on infrastructure, healthcare and
education are positive for the IDR. Nonetheless,

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

EXECUTIVE SUMMARY

we still see upside risk to USD/IDR in line with


broad USD strength. We expect USD/IDR to rise to
12,400 in 1Q15.

USD/KRW: JPY factors are expected to continue


to dominate and if the expectation of BoK easing
leads to a sharper upward momentum in USD/
KRW, this may reduce the risk of further rate cut by
the BoK. Other than the BoJ, the expectation of US
Feds monetary normalisation will also contribute to
higher USD/KRW. As such, we expect USD/KRW to
head up to 1,140 by end-1Q15.
USD/MYR: Sharp fall in global oil prices has unsettled markets. The governments heavy reliance
on oil-related revenue (around 30% of total revenue) and the countrys position as a net oil-exporter
have weighed heavily on MYR, particularly compared against the regional countries which are net
oil importers. Concern of narrowing current account
surplus in the fourth quarter has led to the rapid ascent in USD/MYR above 3.45 in early December.
Expectation of Fed interest rate normalization and
soft commodity prices are expected to keep USD/
MYR biased towards 3.50 in the first half of 2015.
USD/THB: The next Bank of Thailand monetary

meeting will be on 17 December and we still expect the BoT to maintain the current policy rate of
2.0%, supported by the lower inflationary trajectory.
With Thai interest rates expected to remain low going into 2015, and the expected normalization of the
US interest rates starting in 2H 2015, we maintain
our view that there would be downward pressure on
the THB going forward. We expect the THB to move
lower against the USD towards 33.50/USD by end
2014 from around the 32.90 level currently.

USD/INR: The Reserve Bank of India will be


watching closely on the impact of the expected interest rate normalization in the US on the INR in
2015. We recall the period of capital outflow after
the taper talk in May 2013 and the quick 22% depreciation of the INR from 53.9/USD towards 68.8/
USD. Thus, we keep our view that the RBI will keep
their current repo rate of 8% unchanged in 2015,
especially since recent months of trade deficits
have widened again. We predict that rates normalization in the US and continued trade deficits will
see a weaker INR towards 64.90 by middle of 2015.
Global Interest Rates
Fed Reserve: We believe the 16-17 December

FOMC meeting could move the USD materially as


there is a strong possibility the Fed adjusts its key
phrases during that meeting to provide clarity on

Feds lift-off timetable and that could spark another


bout of USD strength and volatility before the year
is out. We reiterate our view that we are still expecting the Fed rate normalization to take place in
2Q-2015 (possibly starting in the 16-17 June 2015
FOMC) bringing the FFTR to 1.25% by end-2015,
and to 3.25% by end-2016. Two issues will complicate the FOMC decision in 2015, data and US politics. An early assessment of the 2015 FOMC voters
suggests a more dovish group.

ECB: Although there wasnt any concrete action


from the ECB at the final Governing Council meeting of 2014, President Mario Draghi in his clearest
language yet, offered assurances that more aggressive stimulus was just around the corner, underlining the central banks commitment to support
the ailing economy of the 18-country bloc. It is clear
that the ECB wants to wait out a little longer to see
the current policy mix, including the take-up of the
upcoming TLTRO on 11 December. Besides, plunging oil prices is seen blurring the ECB outlook and
they will require more clarity before acting. But our
call for the ECB to implement a broad-based asset
purchasing plan including sovereign QE in the first
half of next year remains valid. Although there is
some resistance, it is obvious that Draghi is committed to using additional unconventional instruments,
at the same time, willing to live with some dissent in
a QE vote in order to ease the policy stance further
and deliver on the ECBs primary legal mandate.
BOE: Since August 2014, Martin Weale and Ian

McCafferty have continued to push for higher rates


but given the deterioration seen in economic conditions of late, the majority of the MPC remained
against raising interest rates. Some MPC members have noted concern over diminishing slack in
the economy and said low productivity could be a
source for potential wage pressures, which might
see inflation overshoot the 2% target. Besides, in
the current environment where weakness in the
Eurozone prevails and factoring in lower commodity prices, the risk for inflation overshooting the 2%
target would seem less pronounced than that of an
overshoot. We believe that the BoE will hold fire on
rates and have thus pushed back our rate hike expectations to 4Q15.

RBA: We think that the decline in the exchange


rate is not yet enough to offset the negative impact
on the economy and labour market, as well as the
ongoing weakness in commodity prices and slowing
Chinese growth. In fact, these factors have prompted some discussion that the RBAs next move could
be to cut rates. That said, the biggest sector holding

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

EXECUTIVE SUMMARY

the RBA from cutting interest rates is the property


market. The bank cannot ignore the risks associated with an overheated property market, yet we may
see the introduction of macro-prudential measures
aimed at preventing buyers from overleveraging,
similar to what the RBNZ did. We still see the next
RBA move as up, as growth continues to rebalance.
However, we have pushed back the hike towards
the end of 2015, with the risk for that rates could
stay unchanged for longer.

RBNZ: The October meeting culminated with the


RBNZ leaving the OCR unchanged at 3.50%. Unlike in September where the RBNZ had said it was
on pause, but explicitly referred to future policy tightening; the Octobers statement was vague and noncommittal. It highlighted that growth was expected
to moderate; the exchange rate was expected to
depreciate; inflation was expected to increase; and
the OCR was expected to remain unchanged for
a while. Although the central bank removal of any
explicit reference to future hikes was indeed a significant change, the RBNZ does expect that the
next OCR change will be up. This is in line with our
expectations. We believe that the OCR will remain
on hold for some time, especially given the subdued inflation backdrop, but will eventually move up
some time in the second half of 2015.
BOJ: After expanding its quantitative and qualita-

tive easing (QQE) program in October 2014, the


Bank of Japan (BOJ) kept its monetary stance unchanged in Nov and we believe the BOJ is unlikely
to do more in December or in 2015. We initially
factored another round of stimulus ahead of the
Oct 2015 sales tax hike, but the stimulus is now off
the table since the hike has been delayed till 2017.
However, the pace of CPI inflation has been easing since August with the continued decline in oil
prices, that will surely add more downside pressure
on inflation & puts BOJ in a tight spot in 2015 to
consider more monetary easing (to achieve its 2%
inflation target) but without the governments commitment to fiscal discipline.

Asian Interest Rates


PBoC: PBoCs surprise interest rate cuts an-

nounced on 21 Nov was the first reductions since


July 2012. On the surface it looks to be a shift towards easing policy. However after factoring in the
increase in deposit rate ceiling, there is virtually no
change to the deposit rates post-announcement,
whereas there is an outright reduction in borrowing
costs. In other words, the announcement is yet another targeted move like others that took place for
most this year. In case the message is lost, PBoC

followed up with the release of the draft regulations


for deposit insurance scheme one week later, on 30
Nov, for public consultation (please see our focus
piece on deposit insurance for more details). Once
the deposit insurance scheme is implemented, possibly by mid-2015, it is conceivable that the ceiling
on deposit rate will be removed as well. Meanwhile,
we expect PBoC to continue to lower lending rates
into the first half of 2015, as well as deposit rates
(raising ceiling limit at the same time), and reserve
requirement ratios (RRR) to ensure sufficient credit
in the system.

MAS: Singapores labour market continues to remain tight (3Q unemployment at a low of 1.9%) and
the risks of higher wage costs filtering into higher
core inflation remains a concern. Also, our view that
the US interest rate normalization starting in June
next year will see downward pressures on the SGD.
With that, we believe that the MAS will continue to
keep the current stance of a modest and gradual
appreciation of the SGD NEER unchanged. With
the SGD SIBOR positively correlated with the USD
LIBOR, our expectations that the US interest rate
normalization in June 2015 will see the SIBOR
moving on a higher trajectory in 2015. We expect
the 3M SGD SIBOR to move to 1.00% by end 2015.
BI: BI raised its policy rate by 25 bps to 7.75% at

an unscheduled monetary policy meeting on 18 November, a day after the government delivered on its
fuel subsidy cut, announcing Rp2,000 per litre or
31% hike in the fuel price. This was the first interest
rate increase in a year after the previous fuel price
hike in June 2013.
As a result of higher fuel prices, headline inflation
jumped to 6.2% y/y in November from 4.8% in October but core inflation only edged up slightly to 4.2%
y/y from 4.0% in October. We expect the headline
CPI to hit 8.0% in the middle of 2015 before easing
off by year-end to the top of BIs 3-5% target due
to base effect. As this will be close to the inflation
peak that we have seen in the previous fuel price
hike, it is unlikely to trigger an aggressive reaction
from the central bank, particularly as the positive
sentiment from the subsidy reform has driven Indonesian yields lower.
Monetary normalisation in the US could pressure
on the IDR in the coming months and with Indonesia expected to continue registering a current account deficit, we still see a possibility of another 25
bps hike in the BI rate in the short-term to prevent a
situation of negative real interest rates and to contain the capital outflow risks. The overnight deposit

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

EXECUTIVE SUMMARY

facility rate (FASBI) which was left unchanged at


5.75% in November could also be raised to effectively contain the inflationary pressure.

BOK: Easing monetary policy in Japan will pres-

sure the BoK to cut its base rate further especially if


the incoming economic data do not improve. Central to the worry was the decline in JPY/KRW rate
which poses challenges to South Korean exporters
especially those in the local car and steel industries
even as the diversification of the production bases
out of South Korea has helped to alleviate some of
the competitiveness concerns.
After a combined 50 bps interest rate cut in August
and October, the base rate is now at a record low of
2.00%, similar to its lowest during the Global Financial Crisis. The low domestic inflation suggests that
the base rate could go below 2.00% in the shortterm but a sustained period of extremely low interest rate runs the risk of fanning more debt build-up
which is an increasing concern for the households.
Our baseline expectation is for the base rate to remain at 2.00% in the first half of 2015.

BNM: Other than slower domestic growth, easy

monetary policies in Japan and Europe have reduced the probability of a 25 bps rate hike in Malaysia next year. The key risk is the MYR as further
depreciation in the currency could pose greater inflation risk and would probably increase the chance
of a rate increase. All in all, we still see some chance
of a 25 bps hike in the Overnight Policy Rate (OPR)
to 3.50% in 1Q15 before the GST implementation.
The next meeting has been scheduled on 27-28
January 2015. Bank Negara has kept to a slightly

hawkish bias in its November monetary policy statement, maintaining its view that inflation will continue to be above its long-term average next year due
to domestic cost factors but expects some mitigating effect from the lack of external price pressures
and more moderate demand conditions.

BOT: The next Bank of Thailand monetary meet-

ing will be held on 17 December and at this juncture, we still expect the BoT to maintain the current
policy rate of 2.0%, supported by the lower inflationary trajectory. Although we will likely see stronger
economic growth (our forecast: 4.0%) in 2015, that
would mainly be due to the low base this year. With
that, we think that a stronger confirmation of stronger consumption and investment demand needed to
be observed before any possibility of the BOT hiking the current policy rate in 2015.

RBI: The current favourable inflationary environ-

ment in India due to lower energy prices, stable


INR, and a lower trend in core inflation points to
some leeway for the Reserve Bank of India (RBI) to
pursue lower interest rates in 2015. Consumer prices certainly have more room to move lower and the
RBI governor, on 2 Dec, said there is possibility to
cut rates should inflation move lower. However, we
think that the RBI should also be wary that the US
will start their interest rate normalization and capital
outflow worries should be on their dashboard. We
recall the period of capital outflow and the quick depreciation of the INR during May 2013 when the US
Fed started the taper talk. As such, we maintain
our view that the RBI will keep their current repo
rate of 8% unchanged in 2015, especially since recent months of trade deficits have widened again.

Growth Trajectory
2012

2013

2014F

2015F

3Q14

4Q14F

1Q15F

2Q15F

3Q15F

4Q15F

China

y/y % change

7.7

7.7

7.4

7.2

7.3

7.5

7.1

7.2

7.3

7.3

Eurozone

-0.7

-0.4

0.8

1.1

0.8

0.6

0.7

0.9

1.2

1.4

Hong Kong

1.5

2.9

3.5

3.7

2.7

1.3

2.0

2.1

2.7

3.6

Indonesia

6.3

5.8

5.1

5.5

5.0

5.0

5.3

5.4

5.7

5.7

Japan

1.5

1.5

0.7

1.0

-1.2

1.4

-0.9

1.0

1.0

2.8

Malaysia

5.6

4.7

5.9

5.2

5.6

5.4

5.4

5.0

5.2

5.2

Philippines

6.8

7.2

6.0

6.5

5.3

6.2

6.8

6.5

6.4

6.3

India

4.8

4.7

5.4

5.8

5.3

5.8

5.7

5.9

6.2

5.3

Singapore

2.5

3.9

3.2

3.3

2.8

2.7

3.0

3.3

3.3

3.5

South Korea

2.3

3.0

3.4

3.9

3.2

3.2

3.3

3.8

4.0

4.2

Taiwan

2.1

2.2

3.6

3.5

3.6

3.0

3.3

3.0

3.3

3.2

Thailand

6.5

2.9

0.7

4.0

0.6

2.3

4.9

4.4

3.6

3.1

US (q/q SAAR)

2.3

2.2

2.7

3.2

3.9

3.2

2.7

4.2

3.2

-0.4

Source: CEIC, UOB Global Economics & Markets Research Estimates

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

FX & INTEREST RATE OUTLOOK

FX OUTLOOK

As of 05 Dec 14

End 1Q15F

End 2Q15F

End 3Q15F

End 4Q15F

USD/JPY

119.9

121.0

125.0

126.0

127.0

EUR/USD

1.24

1.19

1.17

1.17

1.16

GBP/USD

1.57

1.55

1.53

1.54

1.55

AUD/USD

0.84

0.81

0.80

0.78

0.78

NZD/USD

0.78

0.75

0.74

0.74

0.72

USD/SGD

1.31

1.33

1.34

1.35

1.33

USD/MYR

3.46

3.49

3.50

3.50

3.45

USD/IDR

12,300

12,400

12,500

12,500

12,400

USD/THB

32.86

34.1

33.7

33.5

33.4

USD/PHP

44.51

45.0

44.0

43.0

42.0

USD/INR

61.78

63.7

64.9

66.3

67.8

USD/TWD

31.07

31.6

31.8

31.9

31.8

USD/KRW

1,112

1,140

1,150

1,150

1,130

USD/HKD

7.75

7.75

7.75

7.75

7.75

USD/CNY

6.15

6.08

6.06

6.05

6.03

As of 05 Dec 14

End 1Q15F

End 2Q15F

End 3Q15F

End 4Q15F

0-0.25

0-0.25

0.50

1.00

1.25

EUR (Refinancing Rate)

0.05

0.05

0.05

0.05

0.05

GBP (Repo Rate)

0.50

0.50

0.50

0.50

0.75

AUD (Official Cash Rate)

2.50

2.50

2.50

2.50

2.50

NZD (OCR)

3.50

3.50

3.50

3.75

4.00

JPY (OCR)

0-0.10

0-0.10

0-0.10

0-0.10

0-0.10

SGD (3-Mth SIBOR)

0.43

0.39

0.40

0.60

1.00

IDR (BI Rate)

7.75

8.00

8.00

8.00

8.00

MYR (Overnight Policy Rate)

3.25

3.50

3.50

3.50

3.50

THB (1-Day Repo)

2.00

2.00

2.00

2.00

2.00

PHP (Overnight Reverse Repo)

4.00

4.00

4.00

4.00

4.00

INR (Repo Rate)

8.00

8.00

8.00

8.00

8.00

TWD (Official Discount Rate)

1.88

1.88

1.88

1.88

1.88

KRW (Base Rate)

2.00

2.00

2.00

2.00

2.25

HKD (Base Rate)

0.50

0.50

1.00

1.50

1.75

CNY (1-Yr Working Capital)

5.60

5.35

5.10

5.10

5.10

Source: Reuters, UOB Global Economics & Markets Research

INTEREST RATE TRENDS


US

(Fed Funds Rate)

Source: Reuters, UOB Global Economics & Markets Research

10

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

SINGAPORE FOCUS I

RECALIBRATING THE UOB SGD NEER MODEL

In the most recent MAS monetary statement (14 Oct 2014), the MAS reported that the SGD NEER had
fluctuated within the upper half of the policy band over the past six months. However, the UOB SGD
NEER model was showing that the SGD NEER had fluctuated within the lower half of the policy band.
As such, our assumption that the SGD NEER is appreciating at a 2.5% pa rate is on the bullish end.

We also took the opportunity to re-adjust the UOB SGD NEER bilateral currency weights by incorporating
Singapores latest trade data while using econometric methods to reduce the tracking error with the MASreleased SGD NEER. Our view on the current trading bandwidth remains the same at +/-2%.

Our updated model now assumes the SGD NEERs appreciation path at 2.0% pa, where the SGD NEER
is currently trading around 0.15% below the midpoint, rather than the 1.9% below midpoint in the older
model. We think that the 2.0% appreciation in the SGD NEER is justified by the lesser-than-expected
core inflationary pressures domestically, as well as the broad-base appreciation of the USD against Asian
currencies (including the SGD). With that, we see the USD/SGD moving towards a high of 1.35/USD by
3Q 2015, before coming lower to 1.33/USD by 4Q 2015.

Current SGD NEER is probably


on a 2.0% pa appreciating trend

In the most recent MAS monetary statement (14 Oct


2014), the MAS reported that the SGD NEER had
fluctuated within the upper half of the policy band
over the past six months. However, the UOB SGD
NEER model was showing that the SGD NEER had
fluctuated within the lower half of the policy band in
the same period. As such, we concluded that our
assumption of the SGD NEER appreciating at a 2.5%
pa rate is on the bullish end.
The last time the MAS had tweaked the SGD NEER
was during the April 2012 monetary policy meeting
where the slope will be increased slightly, and there
will be no change to the level at which the band is
centered(while) restoring a narrower policy band.
Since our assumption that the policy slope was 2.0%
just before that announcement, we assumed that
the slight increase will bring the appreciation of the
SGD NEER to 2.5% pa.

With the MAS publishing the actual SGD NEER at


a higher frequency (weekly average at the start of
each month, rather than twice a year) since Oct
2012, we have been able to track and compare the
MAS SGD NEER and the UOB SGD NEER. Both
had trended quite well together until this year when
the assumption of a steeper 2.5% pa slope started
to break down. Looking back at the various
statements by the MAS on the movements and
directions of the MAS SGD NEER, we determine
that a slope assumption of 2.0% pa will best fit
the statements.
As such, we performed a retrospective adjustment
to our assumptions of the policy slope until the
monetary policy meeting of April 2011, where the
assumption of the policy slope was at 3.0% pa. Our
assumption of the current bandwidth at 2.0% (since
April 2012) remains unchanged. The chart below
shows the UOB SGD NEER and the assumptions
of both 2% and 2.5% slopes, while the chart above

UOB SGD NEER with 2.5% and 2.0% slope assumptions since April 2012

126

UOB SGD NEER


Old Midpoint
New Midpoint

124

2.5% slope

122
120
118
116
Apr-12

2.0% slope
Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

Jul-14

Oct-14

Source: CEIC

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

11

SINGAPORE FOCUS I

UOB SGD NEER with 2.0% slope and 2.0% bandwidth


UOB New SNEER
Mid-Point of Estimated Policy Band
Upper-end: 2%
Lower-end: 2%
130
125
120
115
110
105
100
2009

2010

2011

2012

2013

2014

Source: CEIC

shows the UOB SGD NEER with the midpoints and


the 2% bands.

Adjusting the UOB SGD NEER


currency pair components & weights

We also took the opportunity in the review of the UOB


SGD NEER to re-adjust the bilateral currency weights
by incorporating Singapores latest trade data.
There are basically two main steps involved in the
derivation of the new UOB SGD NEER. First, we
conducted a review of the most recent trade data of
Singapores trading partners. The member countries
in the list did not change much, and mostly were
just a shift in the positioning. However, we realized
that India had been moving up into the list over the
years and is currently Singapores top 12th trading
partner in 2013.
Latest 2013 trade data showed the importance of
India as a direct trading partner with Singapore.
During that year, Indias total trade with Singapore hit
US$16.1 billion, from US$3.4 billion just 10 years ago
(an annual compounded growth rate of nearly 19%).
With the optimism surrounding the recent election win
by Modi and the positive impact on economic growth
through a series of pro-business reforms centering
around foreign direct investments, land acquisition,
and labour market, we believe that there will be a lot
more bilateral trade between Singapore and India. In
fact, growing by the same annual rate will see total
trade with India growing to US$31 billion a year in
2030 (roughly Singapores total trade with Japan
currently). As the old version of the UOB SGD NEER
did not capture movements of the SGDINR, we have
decided to include this currency pair.
Second, although we could have used the trade
weights of each country to compute the UOB SGD
NEER, it may not be an ideal method, because

12

it ignores other important variables such as the


trading of services (which had been getting traction
in recent years) and bilateral investment flows. Both
are important determinants of the demand for each
currency pair, but will not be captured in a simple
trade-weighted SGD NEER model. As such, we
turned to econometric modeling to derive the optimal
bilateral currency weights that will determine each
days UOB SGD NEER, using the information from
day-to-day movements of all the specified currencies.

Performance evaluation

In any index derivation exercise, we need to ensure


that the newer index follows more closely to the actual
index (ie: reduce tracking error). Using a commonly
used performance evaluation methodology, we used
the Mean Average Percentage Error1 (MAPE) to
evaluate the deviation of our new model to the actual
MAS SGD NEER vs the older models deviation.
The larger the MAPE, the higher the tracking error.
In the sample testing period from Jan 2011 to Oct
2014 (using weekly data), we found that the new
UOB SGD NEER model performs better as it had a
much lower MAPE compared to the older model. The
table below shows the evaluation results:
Mean average percentage errors of both SGD NEER models
UOB SGD NEER

Mean average percentage error

New UOB SGD NEER

19.03 bps

Old UOB SGD NEER

26.12 bps

Source: UOB Global Economics & Markets Research

We provide a visual representation of both New and


Old models together with the actual MAS SGD NEER
data. Although we see all three moving in the same,
n A-F
t
t
1
M=
n A
t=1
t
1
where At is the actual value and Ft is the forecast value

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

SINGAPORE FOCUS I

New and old UOB SGD NEER and MAS SGD NEER

126

New UOB SGD NEER


MAS Actual SNEER
Old UOB SGD NEER

124
122
120
118
116
114
112
110
Jan-11

Jun-11

Nov-11

Apr-12

Sep-12

Feb-13

Jul-13

Dec-13

May-14

Oct-14

Source: CEIC

general direction, we can see that the Old UOB SGD


NEER experienced a few periods of deviation from
the MAS SGD NEER, while the New UOB SGD
NEER model tracked it more tightly (Chart above).

Implications for the USD/SGD

Our latest exercise in re-weighting the UOB SGD


NEER and the modified assumptions on the rate of
appreciation (to 2.0% pa) shows that the New UOB
SGD NEER is currently trading around 0.15% below
the midpoint (as of 26 Nov 2014), while the Old UOB
SGD NEER is trading at 1.9% below the midpoint.
We think that the 2.0% pa SGD NEER appreciation
assumption is justified as recent trends in Singapores
core inflation point to a weaker-than-expected
trajectory. With that, current levels of the USD/SGD

are trading tightly around the implied USGSGD from


our new SGD NEER model (Chart below).

USD/SGD in 2015

Going forward, we continue to expect a broad-base


appreciation in the USD against Asian currencies
due to the expected interest rate normalization in
the US in June 2015. As such, this will result in a
weaker-than-previously-forecasted SGD against
the USD. Moreover, our revised UOB SGD NEER
model has us moving our forecast of the USD/SGD
higher to reach 1.35/USD by the 3rd quarter of 2015,
rather than the 1.33/USD we had penciled before this
exercise. The USD/SGD will likely ease after the start
of the rate normalization and move lower to 1.33/USD
by 4Q 2015 (from our forecast of 1.31/USD earlier).

Implied USD/SGD from new SGD NEER model

1.35

USD/SGD (Actual)
Lower-End
Upper-End
Mid-Point (Implied)

1.30
1.25
1.20
1.15
Jan-12

Sep-12

May-13

Jan-14

Sep-14

Source: CEIC

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

13

SINGAPORE FOCUS II

NORMALISATION IN THE NEGATIVE SOR-SIBOR BASIS

Cummulative daily change in SOR-SIBOR


basis since Oct FOMC

SORF1M Index - SIBF1M Index

120

40

80

SORF1M Index - SIBF1M Index


SORF3M Index - SIBF3M Index
SORF6M Index - SIBF6M Index

30

40

20

10

-40

-80
-120
Nov 99

Nov 02

Nov 05

Nov 08

Nov 11

Nov 14

Source: Bloomberg

-10

Oct 14

Nov 14

Nov 14

Nov 14

Source: Bloomberg

When we look at the long term relationship between


SGD SOR and SIBOR, the relationship can be
divided into 3 distinct phases, delineated by the 2008
global financial crisis. Pre crisis, SORSIBOR basis
has been generally positive and tightly distributed
around 0. Crisis period, risk aversion and liquidity/
credit concerns caused volatility in the basis to
spike. Post crisis, as market volatility dampened
SORSIBOR basis settled in negative territory after
FED funds reached the zero bound. With FED rates
at zero, SIBOR also found a floor and lost impetus
to the downside, whilst SOR got dragged lower by
declining USD LIBORs and a weaker USD due to
the enactment of QE.
Since the QE ended in October, SOR-SIBOR basis
have started widening (getting less negative) led
by the shorter tenors. At the end of November, the
cumulative change in 1M SOR-SIBOR basis sums to
around +24bp, with 3M and 6M basis also registering
SOR curves

positive gains of +16bp and +8bp respectively.


Volatility has been most pronounced in the 1M SOR
due seasonal end of year funding stress, and this has
pushed 1M SOR to a high of 0.53% in November and
inverting the SOR yield curve. We do not foresee an
inverted SOR curve to persist much beyond the first
few weeks of December because end of year funding
pressures would have moved down the curve into the
shorter tenors relieving the stress seen in 1M SOR.
The catalyst for the uptick in SOR-SIBOR basis in
November has been the strengthening USD driven
by the end of QE. Further support for USD strength
was also provided by the BOJ and ECB who have
stepped in with their own monetary accommodation.
When USD/SGD broke higher in October, through
the 1.2800 shackles that contained it for much of
2014, this triggered better bidders in the USD/SGD
forwards looking to capitalize/hedge further upside
1M SOR pulled higher by USD/SGD

SORF1M Index
SORF3M Index
SORF6M Index

SGD Curncy (LHS)


SDO1M Curncy (RHS)

0.6

1.315

0.65

1.305

0.55

0.4

1.295

0.45

0.3

1.285

0.35

0.2

1.275

0.25

0.5

SOR curve inversion

0.1
Oct 14
Source: Bloomberg

14

Nov 14

Nov 14

Nov 14

1.265
Oct 14
Source: Bloomberg

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

Oct 14

Nov 14

Nov 14

Nov 14

0.15

SINGAPORE FOCUS II
in the USD/SGD.
SOR fixings have consequentially shifted higher
and look to remain so. After a prolonged period
of QE, positions and mindsets will need time to
grapple with the transition towards higher USD/SGD
and USD yields. This transition expected to keep
SOR supported on dips into 2015. We expected
the negative SOR-SIBOR basis to be whittled
away gradually by the combination of hedging
requirements and currency positioning with the latter
gaining dominance as the days roll on, when clarity
on the FED hike cycle improves. SOR repriced
aggressively higher in the last week of November,
realizing our call for normalization of the basis early.
Despite the early normalization, we do not expect
to revisit the discount seen in the last 4 years. We
continue to expect that the SOR-SIBOR basis up
to 6 months will fluctuate around 0 without any
systematic discount. Funding that has relied on the

relative stability of the discount in SOR rates for


the past few years are facing a limited shelf life. The
main risk to this view will be from a re-emergence
of credit fears, which could drive a disorderly surge
in demand for USD relative to SGD. However, the
severity of potential funding crunch is unlikely to be
as pronounced as in the past since current bank
balance sheets are in better shape.

Looking ahead, we expect the Fed to begin rate
normalization cycle during the June 2015 FOMC
and for SGD rates to move in tandem with US rates.
The current level in the USD LIBOR is near the zerobound, any movement higher will see both SOR and
SIBOR moving up accordingly at a measured pace.
However, as we continue to expect the SGD NEER to
remain on a modest and gradual appreciation trend,
the SOR and SIBOR rates will not match the moves
in the USD LIBOR one for one due to uncovered
interest parity and the gap that has already opened
between SIBOR/SOR and LIBOR.

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

15

CHINA FOCUS I

DEPOSIT INSURANCE SCHEME ON TRACK

PBoC announced the draft regulations for a deposit insurance scheme, which is likely to be implemented
in 2015 along with further interest rate cuts

This announcement suggests that the government is on track to accelerate financial market reforms after
it removed lending rate controls in July 2013

The deposit insurance system should result in better reflection of the true financing costs and lowering
of systemic risks in the financial sector over the mid-to-long term.

Draft deposit insurance regulations announced

Chinas central bank PBoC had on 30 Nov released


draft regulations on deposit insurance, requesting
for public consultation within 30 days, as the
country takes its final steps towards implementing a
scheme that has been in discussion since 1993. The
latest announcement shows that the governments
market reform plan remains on track and is taking
yet another step towards the opening of its capital
account as well as improving the transparency and
stability of the financial system, as smaller financial
institutions will have a better chance in competing
for customers deposits.
PBoCs surprise interest rate cuts announcement
recently on 21 Nov already hinted at more reform
measures ahead, as at that time it also lifted deposit
interest rate ceiling at that time to 1.2x of benchmark
rate, from 1.1x previously.
Once deposit insurance is in place, which is likely
to be around the first half of 2015 given the 30-day
feedback window, the ceiling on deposit interest rate
will also go the way of the lending interest rate floor,
which itself was abolished on 20 July 2013, or nearly
one and half year ago.
After the surprise move on 21 Nov from PBoC, we
expect another round of interest rate cuts along with
the implementation of deposit insurance scheme in
2015, with cuts to both deposit and lending rates, as
well as possible reductions in reserve requirement
ratios (RRR) in the first half of next year.

Market reform pace accelerating

As we mentioned back in April (please see our report


China: Pushing Ahead Financial Sector Reforms
dated 30 April 2014), the pace of financial market
reform in China has taken on greater urgency under
the administration of Xi Jinping/Li Keqiang.
After allowing the establishment of privately owned
banks with private capital to promote the opening of
the sector since the 18th session of the Third Plenum,
PBoC was already working on an accelerated
schedule to set up a deposit insurance scheme.
A deposit insurance scheme is a key component in
Chinas ongoing financial sector reform as it will form
a bedrock of consumer confidence once the financial

16

system is open to freer capital flows.


Such a scheme should also enhance transparency
and strengthen the stability of the financial system,
making it more resilient to shocks. This is because
smaller institutions will have a better chance in
competing for deposits and will also allow for the
spreading out of the deposit base, which would
otherwise bias towards the largest institutions that
are perceived to be safe.
Without a deposit insurance scheme, one potential
risk is that smaller financial institutions are more
exposed to deposit runs given that there is generally
less confidence due to their size. But at the same
time a high concentration of deposits in the largest
institutions could also raise the risks of the entire
system (i.e. systemic risk) should these financial
institutions fail for some reason. Thus a healthy
development of smaller financial institutions will
actually help to lower overall systemic risks as well as
funding and credit costs, and to extend the reach to
small and medium enterprise (SME) and agricultural
sectors, which are generally not as well served by
larger institutions.
According to the Q&A accompanying PBoCs
announcement, the proposed deposit insurance
scheme will insure deposits of up to RMB500,000
(approx. US$81,400) for both individual and
corporate depositors, an amount equivalent to 12x
Chinas per capita GDP in 2013. This ratio is relatively
high compared to the typical insured range of 2-5x
of per capita GDP, e.g. the ratio of 5.3x for the US,
3x for the UK, 2x for South Korea, and 1.3x for India,
with the rationale being that China is a high savings
country, PBoC said. Based on its calculations, it is
expected the insured amount of RMB500,000 would
cover 100% of deposits for more than 99.5% of all
depositors, including corporate depositors.
As a comparison, the table below shows various
deposit insurance schemes in the Asia Pacific region,
with Indias being the oldest in Asia and the insured
amount the smallest in absolute amount, consistent
with the per capita measure as pointed out by PBoC
in its Q&A.

Implications

After percolating for more than 20 years, the

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

CHINA FOCUS I
imminent implementation of a deposit insurance
scheme is a right direction for Chinas financial sector
in the mid to long term towards a healthier and more
resilient system, and the draft regulation suggests
that PBoC remains on track. As we expect the ceiling
for deposit interest rate to be removed at about the
same time of the implementation of the deposit
insurance, banks margins will be compressed further
as interest rates are fully liberalized and subject to
fiercer competition. This should help to reflect the
true funding costs for the system, thus allowing for
a more proper allocation of credit.
In the near term however, such a scheme is not
expected to have any significant effect on the broader
economy. We continue to maintain our projections
of 7.4% for 2014 (with 7.4% expansion already
achieved in the first three quarters of 2014) and
slowing slightly to 7.2% for 2015 as China continues
with its rebalancing and restructuring efforts. While

the slightly more accommodative monetary policy


would keep Chinas economic growth on track,
downside risks to our growth projections for 2015
remain significant.
As mentioned earlier, we also anticipate interest
rate and RRR cuts to be announced along with the
expected implementation of deposit insurance in
the first half of 2015, bringing the 1Y lending rate to
5.10% by end-2015 from 5.60% currently.
Our expectations remain that there is little room
for appreciation for the RMB going into 2015, and
instead more two-way volatility should be expected
for the currency with the US Federal Reserve poised
to normalize interest rates. We maintain our end2014 USD/CNY forecast at 6.10, and at 6.03 for
end-2015, keeping in mind the possibility of bouts of
depreciation for the currency as PBoC accelerates
financial market reform and RMB internationalization.

Comparison of Deposit Insurance System Across Asia Pacific


Established /
Operationalized

Type of system

Insured amount
(local currency)

USD equivalent
(current exchange rate)

Australia

1998

Government legislated and


administered

AUD $250,000

231,850

Brunei

2011

Government legislated and


privately administered

B$50k per depositor per institution

39,825

Chinese Taipei

1985

Government legislated and


administered

NTD3 million

99,438

HK

2006

Government legislated and


privately administered

HK$500,000 per depositor (individual or


business entity) per bank

64,488

India

1962

Government legislated and


privately administered

INR100,000 per depositor in same capacity and same right.

1,655

Indonesia

2004

Government legislated and


privately administered

IDR 2 billion

174,000

Japan

1971

Other Government legislated.

Single Accounts=JPY 10 million

97,440

Korea

1996

Government legislated and


administered

KRW 50,000,000 per depositor, per


institution

48,500

Malaysia

2005

Government legislated and


administered

RM250,000 per depositor per institution

76,717

Philippines

1963

Government legislated and


administered

PHP 500,000 per depositor per institution

11,245

Singapore

2006

Government legislated and


privately administered

S$50,000 (per depositor per institution)

39,824

Thailand

2008

Government legislated and


administered

Baht 50,000,000 per depositor per institution*

1,550,550

Vietnam

1999

Government legislated and


administered

50 million VND

2,350

Jurisdiction

* The 50 million baht coverage will be implemented until 10 Aug 2015 before lowering to 25 million baht during 11 Aug 2015 to 10 Aug 2016. The 1 million baht
coverage as stipulated by the Act, will be implemented from 11 Aug 2016 onwards.
Source: International Association of Deposit Insurers (http://www.iadi.org/di.aspx?id=168), UOB Global Economics & Markets Research Estimates

For further details:


Deposit Insurance Regulation (Draft)

http://www.pbc.gov.cn/publish/main/527/2014/20141130165955327719569/20141130165955327719569_.html
Rationale For Deposit Insurance (Draft)

http://www.pbc.gov.cn/publish/main/527/2014/20141130170627847426506/20141130170627847426506_.html
PBoCs Q&A on Deposit Insurance Scheme

http://www.pbc.gov.cn/publish/main/527/2014/20141130171434519357762/20141130171434519357762_.html

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

17

CHINA FOCUS II

TAKING ANOTHER LOOK AT CHINAS TRADE DATA

Exports over-invoicing
making another comeback?

External trade (3-month moving average)

Notwithstanding the soft macro backdrop domestically


and diverging growth paths in developed economies,
Chinas merchandise trade figures are again showing
some signs of unusual activities.
Trade balance hit record highs in 3 months out of
the 4 in the Jul to Oct period in 2014. A new record
for Chinas trade balance was set in Aug 2014
at US$49.8bn, surpassing the previous high of
US$40.1bn in Nov 2008.Underpinning this was the
strong performance in exports, which rose 11.6%y/y
in Oct 2014, extending the 15.1% jump in Sep 2014.
As shown in the chart on the right, it is clear that,
on a 3-month moving average basis, exports have
accelerated strongly in the second half of 2014, while
accompanied by lackluster performance in imports.
This pattern is similar to that in 2012 and early 2013,
when exports over-invoicing was widespread until
SAFE and other authorities began cracking down on
such practice starting from 1 Jun 2013.
If the period immediately after 1 Jun 2013 to late
2013 with close scrutiny from the authorities is
considered to be normal, then the two periods
straddling this normal period look very unusual
indeed, with high exports growth coupled with low
imports momentum. In fact, after authorities came in
starting from 1 Jun 2013, imports growth was briefly
outperforming exports growth, suggesting that some
unwinding of the previous exports over-invoicing
may have taken place.
Drilling deeper into trade data between China and
its trade partners as well as exports trade originating
from various trade zones in China, there are signs
that export over-invoicing may be rearing its head
again. For this exports over-invoicing to be cost
effective, it typically involves goods that are small

40.0

China: "Exports to HK"


HK: "Imports: from China"
"Exports to HK" Trendline

50

20.0

40

15.0

30

10.0

20

5.0

10

0.0
-5.0
-10.0
Jan 12

Sep 12

May 13

Jan 14

Sep 14

-10

Source: CEIC, UOB Global Economics & Markets Research

and of high value, and the nearest exports destination


to minimize transportation costs and time. As such,
Hong Kong was the favourite destination in the
previous round. It appears that external trade data
over the one year show the same pattern is emerging
yet again.
As shown in the charts below, reported figures
by both China and Hong Kong authorities have
diverged widely in 2012-mid 2013, and again in
2014 after easing off from mid-2013 as a result of
official scrutiny.
To get a sense of the magnitude, the mathematical
differences between exports to Hong Kong (reported
by China) and Imports from China (reported by
Hong Kong) began to turn more pronounced in the
past six months, although the extent of which was
below the period seen at the peak in Mar 2013 before
the authorities stepped in. The discrepancy between

30
25

USD bn

20

USD bn

China's "Exports to HK" Less HK's


"Imports from China" (Monthly)

15

3 Std Dev

10

30.0

2 Std Dev
1 Std Dev

20.0

-5
-10

10.0

-15

.0
Jan-93

Jan-00

Jan-07

Source: CEIC, UOB Global Economics & Markets Research

18

25.0

Difference between China's "Exports to HK"


and HK's "Imports from China"

China and Hong Kong trade data

50.0

Exports %y/y change (LHS)


Imports %y/y change (LHS)
Trade Balance USDbn (RHS)

Jan-14

-20
Jan-93

Jan-00

Jan-07

Source: CEIC, UOB Global Economics & Markets Research

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

Jan-14

CHINA FOCUS II

Exports from exports processing zone

4500
4000

Exports from bonded area

Shanghai Caoheting
Shanghai Songjiang
Guangzhou
Shenzhen
30000

US$ mn, monthly

3500

25000

3000

20000

2500

US$ mn, monthly

15000

2000
1500

10000

1000

5000

500
0
Jan 08

Total Exports from Bonded Area


Shanghai Waigaoqiao Bonded Area
Guangzhou Bonded Area
Shenzhen Futian & Shatoujiao Bonded Area

Apr 09

Jul 10

Oct 11

Jan 13

0
Jan 98

Apr 14

Source: CEIC, UOB Global Economics & Markets Research

Apr 01

Jul 04

Oct 07

Jan 11

Apr 14

Source: CEIC, UOB Global Economics & Markets Research

the two reported figures peaked at US$13.5bn in


Sep 2014, about 3 standard deviations away, while
the Oct 2014 reading of US$9bn is at the 2 standard
deviations mark. These suggest that there is sign
of some kind of export over-invoicing taking place
between the China-HK route, although the extent
has been less aggressive than during peak in 2013.
Looking at exports figures from exports processing
zones (EPZ) and bonded areas in China, it is clear
that Shenzhen, which is the nearest to HK in terms
of distance among these various zones, has been
the main driver behind the volume in these areas.
For example, in bonded areas, Shenzhen accounted
for 51% of the volume in 2014, as shown in the
charts above.
Taking all these together, the differences reported
by the two statistical agencies remain significant,
as shown in the table below. Total difference for Nov
2013 to Oct 2014 comes to US$107.6bn (average of
US$8.7bn per month). Total trade surplus reported
by China for the same period is US$335.5bn. This
means that the difference of Chinas exports to HK
and HKs imports from China accounts for 31% of
Chinas trade balance. In contrast, during the Mar
2012 to Jun 2013 period when exports over-invoicing
was at its peak, the discrepancy amounted to a
total of US$166.0bn (average of US$10.4bn per
month), accounting for 48% of total trade surplus

of US$346.2bn for the period. As such, the current


round of trade discrepancy remains significant,
though at a slower run rate.
As a comparison, differences of Chinas exports
figures with other trade partners such as the US
and Taiwan appear to be more consistent based
on historic trend. Even if there are differences, the
amounts involved tend to much smaller, presenting
less of a puzzle to observers, as shown in the two
charts on next page.
It should be noted that prior to the RMB exchange rate
reform in 2005, differences of reported merchandise
trade figures between China and HK were mostly
against China, implying there was some extent of
under reporting of Chinas exports or overstating
of imports to facilitate movements of funds to
overseas given concerns of RMB depreciation (even
devaluation) risks and capital control concerns.
However, the trend then reversed since Chinas
exchange rate reform of 2005, as prospects of RMB
appreciation became more apparent.
Nevertheless, the differences looked largely normal
and tolerable as they were mostly confined within
+/- 1 SD. That is until March 2012 when differences
started to rise sharply just as the RMB trading band
was widened in mid-April 2012 with expectations
of more RMB liberalization measures ahead. After

Table of comparisons of exports "Over-Invoicing"


Months

Exports discrepancy*
(US$ mn)

Average per month

Trade balance for the period

As % of trade

(US$ mn)

(US$ mn)

balance

Mar 2012 to Jun 2013

16

166,038.0

10,377.4

346,230.3

48.0%

Nov 2013 to Oct 2014

12

104,575.5

8,714.6

335,470.6

31.2%

Period

* China's exports to HK (reported by China) less China's imports to HK (reported by HK)


Source: CEIC, UOB Global Economics & Markets Research

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

19

CHINA FOCUS II
Difference between China's "Exports to Taiwan"
and Taiwan's "Imports from China"
1,200

10

USD mn

3 Std Dev

800
400
0

Difference between China's "Exports to US"


and US' "Imports from China"

3 Std Dev
2 Std Dev

2 Std Dev

1 Std Dev

1 Std Dev
China's "Exports to Taiwan" less Taiwan's
"Imports from China" (Monthly)

-5

-400

-10

-800
-1,200
Jan 98

Jan 02

Jan 06

Jan 10

Jan 14

Source: CEIC, UOB Global Economics & Markets Research

the authorities scrutiny from Jun 2013, it appears


that funds are beginning to flow into China as the
government clamps down on shadow banking
activities and the bouts of depreciation in Jan-Apr
2014 period ended.

Exports over-invoicing
remains but at smaller scale

With differences in recent trade figures too big to be


ignored, there are signs that exports over-invoicing in
China may be making a comeback, albeit in a smaller
scale compared to the one prior to Jun 2013. With
the reporting gap between China and HK accounting
for 31% of Chinas trade balance between Nov 2013
and Oct 2014 or US$104bn for the period, this is too
significant an amount to be brushed off as statistical
errors.
Despite the bouts of RMB depreciation experienced
in earlier part of 2014, capital is still attracted to China
due to the relatively high yield onshore. Even after
PBoCs 40bps cut to the lending rate in Nov 2014, it
is still at a relatively attractive 5.6% onshore for the
1Y rate, compared to the nearly 0% for USD (and
HKD by implication). While the US Feds interest rate
normalization is looming by mid-2015, this is still a
window of opportunity given expectations that the

20

USD bn

-15
Jan 93

China's "Exports to US" less US'


"Imports from China" (Monthly)

Jan 00

Jan 07

Source: CEIC, UOB Global Economics & Markets Research

rate hikes would be gentle.


Perhaps more important is that high interest rate
onshore in China reflects the difficulty borrowers
getting access to credit, especially with the
clampdown in shadow banking activities. These
over-invoicing activities are one of channels to meet
the demand for credit.
As such, it is important for the Chinese government
to continue to push through reforms in financial
market to address the imbalance in demand and
supply of credit. It is indeed taking such a step with
the release of the draft deposit insurance scheme
for public consultation on 30 Nov 2014.
We expect the deposit insurance scheme to be
implemented by mid-2015 and would go toward
addressing at least some of the credit demand issues
as leveling the playing field for smaller banks (More
details on Chinas deposit insurance scheme are
discussed elsewhere in this issue of the Quarterly
report).

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

Jan 14

OIL & GAS


LOSING SHEEN

By Elaine Khoo & Wesley Chong From UOB Country & Credit Risk Management

Losing its sheen;


uneven impact on economies and industries

Oil prices have tumbled more than 30% to a multiyear low with Brent <US$70/barrel (as of 03 Dec
2014). This marks a dramatic turnaround from the
spike earlier in the year to US$115/ barrel due to
geopolitical concerns in the Middle East. Brent has
averaged ~US$110/barrel over the past three years
following the large GFC-induced slump. This sharp
about-turn can be explained by both supply and
demand side factors, as well as the strength in USD.
On the supply side, surging global oil production could
outpace demand this year. Increased production from
Libya and Angola alongside uninterrupted supply
from Iraq despite the ongoing war with ISIS have
pushed up OPECs total output to slightly under 31m
barrels a day, the highest this year and 352,000 bpd
higher YoY. Swelling US production on the back of its
Shale revolution has also fundamentally changed
the global oil equation and resulted in more-thanample global supply.
At the same time, demand has disappointed as
global growth sputters. The International Energy
Agency (IEA) estimated that the pace of expansion
in oil demand for 2014 & 2015 would be weaker than
expected. This year, it expects demand to rise by
0.7m bpd to 92.4m bpd, 0.2m barrels less than its
previous forecast. Demand for next year is expected
to come in at 93.5 mbd.

How will OPEC play its hand?


Holding cards close to its chest for now

Despite the sharp fall in prices, OPEC (which controls


c. 40% of global production) appears reluctant to cut
back production. Saudi Arabia, the largest OPEC
producer has traditionally been the swing producer
due to its large spare capacity and is thus seen
as a wild card that could influence the direction
of oil prices. It could choose to cut production to
Brent and WTI price trend

This could set the stage for deepening internal


rifts within OPEC as certain members, such as
Venezuela and Angola, are dependent on high oil
prices to balance their fiscal budgets (reportedly
US$120/barrel and US$98/barrel respectively vs.
US$85/ barrel for Saudi Arabia). Although sustained
lower prices could tilt Saudis budget into deficit, its
sizeable foreign exchange reserves could enable it
to withstand a period of reduced revenue.

Beginning of a new normal;


uneven impact on global economy

Market price expectations have fallen to US$80-90/


barrel next year and while prices are not expected
to collapse, the world is now entering into a lower oil
price environment over the next few years, in contrast
to oil prices of >US$100/barrel which the market has
grown accustomed to.
The economic and political consequences of the fall
in oil prices vary around the world. While the drop
in oil prices is negative for oil producing countries, it
would benefit consumers and oil importing nations
with the price reduction akin to a tax cut which could
help boost purchasing power. Overall, the impact on
the global economy should be a net positive, given
that net oil importers have the propensity to spend
more of their incomes than oil producing nations,
and this would have a knock-on impact on global
consumption.

Rest of NonOPEC
22%

US$/bbl

140

Latest comments seem to suggest that Saudi Arabia


is inclined to maintain its market share and may be
willing to tolerate lower prices to force Western oil
companies to cut back on less profitable production
and slow down US shale investments.

Global crude oil producers

Brent
WTI
160

increase prices or tolerate lower prices, which


could disproportionally impact Russia, Iran and ISIS
financially.

Saudi Arabia
11%
Iraq
4%
Iran
4%

120
100
80

Mexico
3%
Canada
5%

60
40
20
0
Jul 05

UAE
3%

Brazil
3%

China
5%
Jan 07

Jul 08

Source: Bloomberg, UOB

Jan 10

Jul 11

Jan 13

Jul 14

Kuwait
3%

Rest of OPEC
12%
Russia
12%

US
13%

Source: OPEC Monthly Oil Market Report, UOB

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

21

OIL & GAS


IMF in its recent World Economic Outlook report
estimated that the net effect of a US$20 decline in
oil prices would increase world GDP 0.5% alone,
and this figure could rise to about 1.2% if economic
confidence were improved as a result.
Falling oil prices could lead to significant revenue
shortfalls for some oil exporters, with the cashstrapped governments of Venezuela, Russia and
Iraq the most vulnerable. Although production costs
are low in these countries, government budgets are
based on oil prices of US$100 or more.
Venezuela for one depends on oil for 95% of its
export revenues, and lower oil prices are threatening
to choke off export dollars the country needs to pay
off its foreign debt. The fall in crude oil prices could
force the government to adjust spending to avoid
default, or print more money, but that would only
serve to fuel rampant hyper-inflation of >60%. This
has led to mounting expectations that Venezuela
could default on its foreign debt.
The plunge in global oil prices is also straining
Russias economy, which is heavily dependent on
oil exports. Oil revenues account for roughly 45%
of Russias budget. Russia is already teetering on
brink of recession due to the ongoing Ukrainian
crisis and Western sanctions. The government had
been setting its 3-year budget with expectations of
oil prices >US$100/bbl, and a continued fall in prices
could mean having to dig into its foreign exchange
reserves or cutting spending. The rouble has already
declined sharply this year and could be further
undermined by falling oil prices.
Sustained lower oil prices are also likely to push
Saudi Arabias budget into deficit, which faces a
break-even point of ~US$90/bbl. Nonetheless, Saudi
Arabia would be able to, and perhaps willing to, rideout a period of lower oil prices. Other gulf producers
such as United Arab Emirates and Kuwait have also
built up sizable foreign exchange reserves, which
mean that they would be able to run deficits for a
number of years if needed.
Other OPEC members e.g. Iran, Iraq, Nigeria could
however face more pressure, with greater budgetary
demands vis--vis their oil revenues. As at the
beginning of 2014, oil prices had already been
below break-even for these countries, and combined
foreign reserves of <US$200bn suggest relatively
limited headroom for manoeuvre.

US shale industry under threat


but average consumers should benefit

In the U.S., a drop in oil prices could crimp U.S.


shale oil producers profits, which would in turn lead
to cut back in capital spending and a slowdown in
U.S. oil production as drillers become more hesitant
to take on new development prospects. The cost of

22

extracting oil from U.S. shale formations is relatively


more expensive than conventional oil supplies, with
average breakeven costs of about US$75-85/bbl.
This could have knock-on effects on supporting
industries, including everything from pipeline builders
to cement makers.
Nonetheless, it could take some time before we see
a significant pullback in rig count and overall US
oil production, with most shale producers hedged
against lower prices in the short term. This could
be further delayed as oil companies move down the
experience curve in better-exploited shale formations
such as the Eagle Ford and Bakken, along with the
large sunk costs already poured into some at some
of the more pricey shale projects. Other high-cost
oil projects could be put on hold, including those in
deepwater, Arctic, international shale and Canadian
oil sands.
While cheaper oil is a bane for U.S. shale oil
producers across states like Texas and North Dakota,
it could well be a boon for the average American
consumer. Cheaper pump prices mean higher
disposable incomes, which in turn could encourage
spending and stimulate the economy. The fall in
oil prices could also be a welcome development
for beleaguered governments in Europes flagging
economies, which have been besieged with weak
growth (although deflationary pressures also mean a
tougher job for ECB as it attempts to raise consumer
prices).

Asian countries benefit the most;


Malaysia the exception

Asia is a net beneficiary as most countries are major


importers and the cost of fuel is heavily subsidised.
IEA estimates that the cost of government subsidies
for fossil fuels globally rose from US$311bn in 2009
to US$544bn in 2012. Indonesia spent around 3% of
GDP in 2012 on fuel subsidies, whereas in Thailand,
and Vietnam the bill came to >2%. Falling prices
have provided an opportunity to wean off costly
subsidies, which India, Indonesia and Malaysia have
recently done.
While Malaysia also subsidizes fuel prices, its
position as a net exporter amid a sea of importers
means that it losses on oil-related revenues
could more than offset lowered subsidy spending.
Oil-related revenues from national oil company
Petronas accounted for about a third of total
federal government revenue, and dividends to the
government could be impacted by falling oil prices.
China, the worlds largest net importer of oil,
should benefit which will keep manufacturing and
transportation costs down. Every US$1 drop in oil
prices saves it US$2.1bn per annum, which means
the recent fall could lower its import bill by US$60bn
or 3% if sustained.

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

OIL & GAS

Arctic Region

by softening demand. Singapore imports oil from


other countries before refining them for further
use and re-exporting to other countries. 1H14 oil
exports amounted to S$66bn, accounting for 25%
of Singapores total exports and the oil industry
accounts for ~5% of GDP.

Ultra-Deepwater

Identifying the winners and losers

Offshore oilfield breakeven Brent prices

80
70

Simplistically, falling crude oil prices would benefit


industries in which oil is a key input (eg. transportation,
fertilizer) while negatively affecting companies
involved in oil and alternative energy production
where profitability is directly correlated with oil prices.

60
Ultra-Deepwater (US Gulf) Medium (N.Sea)
50
Ultra-Deepwater (Brazil Pre-Salt)
40

Shallow-Medium Water (SE Asia)

30
Shallow-Medium Water (Caspian Sea)
20
Source: Various sources, UOB

Lower oil prices also augurs well for India, which


imports 75% of its oil, and would result in lower
inflation, improvements in the fiscal and current
account balances, and higher growth. Lower inflation
would raise disposable incomes for households
and encourage discretionary spending, while falling
input costs would improve corporate margins and
spur investment. Meanwhile, an improvement in
the balance of trade could provide more latitude for
accommodative growth policies.
For Japan, the fall in crude oil prices is both a
blessing and a curse. The country paid around
US$160bn to import petroleum in the 12 months to
August, and the decline, while dampened somewhat
by a weakened Yen, would bring about a muchwelcomed improvement in the terms of trade. Japan
has seen more than three years of trade deficit as
energy imports surged to cover for the loss of nuclear
power following the Fukushima disaster. Lower
oil prices however are also throwing a spanner in
Prime Minister Shinzo Abes bid to rid the Japanese
economy of deflation that has paralyzed the country
for more than 20 years.
As a net oil importer, Singapore directly benefits
from lower prices but by a smaller extent v.s. its
neighbours. This is because its oil dependence
in production (amount of oil used as intermediate
inputs into production) has fallen >10% over the
past decade. In addition, Singapores overall
oil dependence (amount of oil used to produce
US$1 of real GDP) is one of the lowest regionally.
Furthermore, the share of oil-related consumption in
total household spending has risen only very slightly
over the past two decades.
In the nearer term, Singapores petroleum and
petrochemicals industry (top 3 globally and a
backbone of its economy) could however be affected

The upstream oil and gas industry, specifically


companies involved in E&P (exploration and
production) are likely to be most directly impacted
as falling prices erode margins and spur capex cuts.
The higher production costs (US$70-90 per barrel)
associated with unconventional resources such as
oil sands and shale make them most susceptible.
According to BG Group, 40% of oil from US shale
wells has a breakeven point between US$80-90/bbl.
Production costs of oil have generally seen a
substantial increase over the past decade. According
to Infield Systems, the breakeven cost for oilfield
developments range from US$20/bbl to US$80/bbl.
Shallow-medium water projects have the lowest
breakeven costs of US$20-30/bbl in the Caspian
Sea and US$30-40/bbl in Southeast Asia. In contrast,
deepwater developments are most costly with ultradeepwater breakeven at US$40-50/bbl for Brazil PreSalt, US$50-60/bbl for US Gulf and US$60-70/bbl for
West Africa. The highest cost structures are those in
the Arctic region, with breakeven cost of US$70-80/
bbl. Therefore, the top-end of ultra-deepwater capex
would be most at risk.
Apart from the oil producers, the drilling rig market
could also be similarly affected if capex slows.
There has historically been a correlation between
oil prices and rig demand, and lower oil prices could
dampen orders to yard and add further pressure on
rig utilization. Rig orders have already decelerated
this year after bumper orders in 2011-13, with total
orders for 27 drilling rigs YTD vs. 104 orders last
year. Nonetheless, sizable orderbooks for local rig
builders should help mitigate the lull in rig orders.
Dayrates and utilization of semi-submersible rigs and
drillships could be particularly vulnerable as ultradeepwater developments are more sensitive to oil
prices. Meanwhile, jack-ups could fare better given
lower break-even costs in shallow waters, though
the wave of newbuilds entering the market over the
next 2 years could weigh on rates. Retirements of
older jackups could nevertheless help balance the
market, and utilization and day-rates of premium rigs
have remained strong, especially in the South-east
Asia region.

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

23

OIL & GAS


The offshore support vessel (OSV) market would
also be impacted if O&G capex slows. Nonetheless,
the global OSV orderbook has normalized to 12% of
the existing fleet, vs. c.25% during the GFC peak.
This should help avoid a repeat of the 2008-10
charter rates crash where oil prices fell to as low
as US$40. We note however that the PSV market
is likely to face more pressure than AHTS vessels,
given a relatively larger order backlog.
OSV players in the region should show resilience
due to their exposure to Asian National Oil
Companies (NOCs), whose capex are more stable
vs. international oil companies during periods of oil
price weakness as energy independence remains
high on their agenda. Moreover, the regions E&P
activities are predominantly in shallow waters, which
are less impacted by weaker oil prices.
Even for newer initiatives such as marginal field
development and enhanced oil recovery, NOCs like
Petronas face a breakeven point of around US$60/
bbl, which could mean little impetus to cut back on
spending at current oil price levels. OSV owners who
have access to cabotage markets such as Indonesia
and Malaysia should be able to weather the soft
patch better. Those that serve mainly deepwater
oilfield activities such as those in the North Sea
however could be affected more adversely by capex
budget cuts.

Bio-fuels and other alternative


sources of energy could be hit

Falling oil prices could slow the drive towards


renewable technologies (eg. solar, wind) and
petroleum substitutes. The LNG industry, for
example, could be hit as LNG prices are linked to
oil which would affect Australia the most. Within
this region, crude palm oil (CPO) is particularly
vulnerable as its viability as a competitive source of
fuel is reduced. Our estimates show that biodiesel
conversion at current crude oil prices is not
economically viable in the absence of government
subsidies. In fact, at todays POGO (palm oil,
gas oil) spreads, the refining margin is negative.
Biodiesel take-up in both Indonesia and Malaysia
had fallen short of expectations and could continue
to disappoint into next year. With insufficient support
from biodiesel demand, palm oil prices could remain
under pressure.

Nonetheless, this could only be a short-term boost


as chemical prices are correlated with crude oil
and volumes in petrochemical value chains could
be challenged by a sluggish demand backdrop.
Furthermore, refiners could suffer inventory losses
from the value of their stockpiles accumulated when
prices were higher.
Gross refining margin for Asia refiners have been
weak and is expected to remain largely flat against
2013 levels of around US$6 per barrel as capacity
additions outstrip demand growth. The Singapore
complex gross refining margin weakened to US$4.8
in 2Q compared to US$6.2 in 1Q.
Total refining capacity in Asia may increase to as
much as 36m bpd by 2018, driven predominantly
by China and India. Pakistan and Vietnam are also
planning new additions over the next few years.
These new refineries are reportedly configured to
produce around 30-50% of middle distillates which
consist mainly of diesel and diesel margins could
thus be most affected.
Overcapacity could result in delays in refinery
projects and force plants to run at low rates as
companies try to calibrate demand/ supply. Refiners
could also close older, inefficient facilities as the case
in Japan and Australia.
On the other hand, lower oil prices will bring much
needed relief to the grossly oversupplied shipping
industry, with bunker prices falling in tandem with
Brent crude. Lower bunker costs for ship owners
translates to a boost to time charter earnings in the
short term, though the longer term outcome of weak
oil prices could be more difficult to gauge.
Cheap oil prices also mean a reduction in the
fuel bill and better margins for airlines, where jet
fuel costs could burn through 30-40% of revenue.
However if that spurs airlines to adding more routes
and scheduling more flights to gain market share
however, that could well plunge the industry back
into overcapacity.

Refiners could benefit ST although


ample capacity and sluggish demand
could weigh on margins

Downstream operations which refine crude oil into


gasoline and other petroleum products should
generally be more profitable when the feedstock is
cheaper as prices of refined products e.g. gasoline
typically do not fall as quickly as crudes. This could in
turn provide some buffer for integrated oil companies
from falling upstream profits.

24

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

INDONESIA

Headline inflation to peak at around 8.0% in 2015

Consumer confidence and FDI continued to improve

BI Rate (%)
FASBI Rate (%)
Headline CPI (y/y %)

FDI (US$bn)
Consumer Confidence Index
7.0

8.0

US$bn

120

6.0

7.0

5.0

6.0

4.0

115
110
105

3.0

5.0
4.0
3.0
Jan 10

125

8.0

9.0

Dec 10

Nov 11

Oct 12

Sep 13

Aug 14

Source: CEIC, UOB Global Economics & Markets Research

2.0

100

1.0

95

0.0
Jan 10

Dec 10

Nov 11

Oct 12

Sep 13

Aug 14

90

Source: CEIC, UOB Global Economics & Markets Research

No aggressive monetary tightening


but room for further interest rate hike

Bank Indonesia (BI) raised its policy rate by 25


bps to 7.75% at an unscheduled monetary policy
meeting on 18 November, a day after the government delivered on its fuel subsidy cut, announcing
Rp2,000 per litre or 31% hike in the fuel price. This
was the first interest rate increase in a year after the
previous fuel price hike in June 2013.
As a result of higher fuel prices, headline inflation
jumped to 6.2% y/y in November from 4.8% in October but core inflation only edged up slightly to 4.2%
y/y from 4.0% in October. We expect the headline
CPI to hit 8.0% in the middle of 2015 before easing
off by year-end to the top of BIs 3-5% target due
to base effect. As this will be close to the inflation
peak that we have seen in the previous fuel price
hike, it is unlikely to trigger an aggressive reaction
from the central bank, particularly as the positive
sentiment from the subsidy reform has driven Indonesian yields lower.
Monetary normalization in the US could pressure
on the IDR in the coming months and with Indonesia expected to continue registering a current account deficit, we still see a possibility of another 25
bps hike in the BI rate in the short-term to prevent a
situation of negative real interest rates and to contain the capital outflow risks. The overnight deposit
facility rate (FASBI) which was left unchanged at
5.75% in November could also be raised to effectively contain the inflationary pressure.
Indonesia Finance Minister Bambang Brodjonegoro expects the current account deficit to remain
within 2.5-3.0% of GDP in 2015, suggesting only a
minimal improvement resulting from the fuel price
adjustment. Although the rout in global oil prices is
exerting a positive impact as Indonesia turned net
oil importer, weaker commodity prices will continue

to weigh on export.
The budget for 2015 will be reviewed following
the fuel price hike. Fiscal improvement and the
orientation of the new government towards higher
spending on infrastructure, healthcare and education are positive for the IDR. Nonetheless, we still
see upside risk to USD/IDR in line with broad USD
strength. We expect USD/IDR to rise to 12,400 in
1Q15.

Downside risks to growth

Indonesias GDP grew at its slowest pace since


3Q09, moderating to 5.01% y/y in 3Q14 from 5.12%
in 2Q14. Exports continued to weigh on the economy as it contracted for the third consecutive quarter
in 3Q14. Fixed investment growth remained weak
but outlook is likely to improve in subsequent quarters as the new government pushes ahead with its
plans for more infrastructure spending. The bright
spot in 3Q14 was the private consumption.
Consumer confidence has continued improving
since the middle of the year after the presidential
election. However, the increase in the domestic fuel
prices and higher interest rates could dampen business and private consumption ahead. Weakness in
global commodity prices will diminish the prospect
of an export-led recovery in Indonesia as primary
exports account for more than half of the countrys
exports. We forecast 2015 GDP growth at 5.5%, up
from an expected 5.1% in 2014.
2012

2013

2014F

2015F

GDP

UOB Economic Projections

6.3

5.8

5.1

5.5

CPI (average, y/y %)

4.0

6.4

6.3

7.4

Unemployment rate (%)

6.1

6.3

6.2

6.1

Current account (% of GDP)

-2.8

-3.4

-3.0

-2.4

Fiscal balance (FY, % of GDP)

-1.9

-2.3

-2.4

-2.1

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

25

MALAYSIA
Decline in global oil and commodity prices
pressure on current account position

Weak CPO and rubber prices further weigh on growth


Palm oil price (lhs, RM/metric tonne)

Current Account (% of GDP)

Rubber price (sen/kg)

25

4000

1400

20

3500

1200

15

3000

1000

10

2500

800

2000

600

0
Mar 05

Jul 07

Nov 09

Mar 12

Jul 14

Source: CEIC; UOB Global Economics & Markets Research

Oil price plunge weighs on MYR

The governments removal of its subsidies on


RON95 petrol and diesel (effective December 1) is
expected to save MYR10-20 bn annually (1-2% of
GDP) and net revenue collection from GST in 2015
after accounting for the removal of Sales and Services Tax and assistance programmes is estimated
to bring in MYR0.7 bn. The positive impact on the
fiscal position will be offset partially but not totally
by an expected reduction in governments revenue
if the slump in global oil prices is prolonged. Petronas which contributes MYR10 bn annually to the
budget has warned that dividend payments to the
government may be cut. At this point, we are not
too worried about the government missing its fiscal
deficit target in 2015.
Nonetheless, the governments heavy reliance on
oil-related revenue (around 30% of total revenue)
and the countrys position as a net oil-exporter have
weighed heavily on MYR, particularly compared
against the regional countries which are net oil
importers. Concern of narrowing current account
surplus in the fourth quarter has led to the rapid ascent in USD/MYR above 3.45 in early December.
Expectation of Fed interest rate normalization and
soft commodity prices are expected to keep USD/
MYR biased towards 3.50 in 1H15.

Growth moderation ahead

Malaysias GDP growth moderated to 5.6% y/y in


3Q14 from 6.5% in 2Q14 partly due to a high base
effect. The key driver in the quarter was private
consumption while private investment and export
growth moderated. Nonetheless, net export was
supported by slower import growth.
Going forward, we expect 4Q14 GDP growth to
moderate further. For 2015, we expect a slower
growth at 5.2%, due to GST, higher interest rate
environment and soft commodity prices. Domestic

26

1500
Jan 12

Sep 12

May 13

Jan 14

Sep 14

Source: Bloomberg; UOB Global Economics & Markets Research

demand including private investment arising from


ETP projects are expected to continue driving the
growth next year.

Weaker growth reduces rate hike prospect

In the short-term, we expect little impact on inflation


resulting from the removal of subsidies on RON95
petrol and diesel in December as the price hike in
October had already brought it close to the unsubsidised rate. The impact on CPI would show up as
global oil prices rise.
The fuel hike in October has not had significant
impact on inflation which only edged up slightly to
2.8% y/y from 2.6% in September. We expect inflation of 3.3% and 4.3% in 2014 and 2015 respectively. The key upside risk is from weak MYR.
As for the monetary policy, we still see some
chance of a 25bps hike in the Overnight Policy Rate
(OPR) to 3.50% in 1Q15 before GST. Bank Negara
has kept to a slightly hawkish bias in its November
monetary policy statement, maintaining its view that
inflation will continue to be above its long-term average next year due to domestic cost factors but
expects some mitigating effect from the lack of external price pressures and more moderate demand
conditions. Further rise in USD/MYR could increase
rate hike prospects. Overall, the probability of a rate
hike has eased due to weaker growth outlook while
BoJs and ECB's actions also require some consideration.
UOB Economic Projections

2012

2013

2014F

2015F

GDP

5.6

4.7

5.9

5.2

CPI (average, y/y %)

1.7

2.1

3.3

4.3

Unemployment rate (%)

3.3

3.3

3.0

3.1

Current account (% of GDP)

5.8

4.0

4.6

3.6

Fiscal balance (FY, % of GDP)

-4.5

-3.9

-3.5

-3.0

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

400

SINGAPORE

Manufacturing is the only sector with faster year-to-date growth compared to 2013 growth

12

2014 YTD
2013

10.8
% y/y

10
8

7.2

6.1

4.2

Finance &
Insurance

2013 Share
of GDP

11%

6.1
3.0

1.7

2
0

4.1

4.3
2.5

2.5

3.2

4.5

4.3
2.4

1.1

Manufacturing

Construction

Business
Services

Wholesale &
Retail Trade

Transport &
Storage

Infocomms

20%

5%

13%

18%

8%

4%

Accomodation
& Food
Services
2%

Source: CEIC

2015 GDP growth to be steady,


despite global growth concerns

We forecast Singapores GDP to remain on a


steady growth path in 2015 to register a 3.3%
growth rate, slightly higher than the 3.2% estimated
rate in 2014. Latest 3Q 2014 GDP report showed
that on a year-to-date basis, growth was still seen
across all sectors in the economy, with the manufacturing, business services, and accommodation
& food services picking up pace. Although the construction sector grew 4.2% y/y, it experienced the
2nd consecutive quarter of q/q SAAR contraction
and we think that weaker private sector construction activities will continue into 2015.
Weakness in global economic indicators recently
affected confidence of Singapores 2015 growth
potential. We believe such concerns may be overplayed. In 2012, the simultaneous threat of a Eurozone breakup (and the Greek Crisis), a China
hard-landing, and the US and Japan economic
slowdown caused many to lose confidence in Singapores economic growth as well. This was because these countries are Singapores largest
trading partners and trade is still very much an important portion of our economy (being three times
the size of GDP). Nevertheless, Singapores GDP
still grew 2.5% that year. Going forward in 2015,
with uplift in the US economy, expectations for
more easy money policies from the ECB and BOJ
to prop up their economies, and China maintaining
a steady course even as the economy continues to
restructure, we believe that the external risks from
these countries will be manageable and Singapore
is poised to maintain another year of steady GDP
growth path.
Singapore should continue its own economic restructuring to improve the quality and value-add of
our goods/services, while tackling the labour crunch
issue. The restructuring of the manufacturing sec-

tor is on-going and we will see more manufacturing


firms specializing in even higher value added and
highly specialised products while moving into the
manufacturing-related services space. Firms which
are producing lower value added products will find it
increasingly unprofitable in such high business cost
environment. As such, they may continue their shift
out of Singapore and we may see a further shrinking of manufacturings share of GDP (from 20% today to around 15% in the medium term).

USD/SGD to reach the highest 1.35 mark by


3Q2015 before easing to 1.33 by end 2015

We believe that the MAS may continue to keep to


its current stance of a modest and gradual SGD
NEER appreciation during the upcoming April 2015
policy meeting. Singapores labour market continues to remain tight (3Q unemployment at a low of
1.9%) and the risks of higher wage costs filtering
into higher core inflation remains a concern. Additionally, our view that the start of the US interest
rate normalization in June next year will see further downward pressures on the SGD in 2015. Our
forecast for the USD/SGD remains at 1.34/USD
as of end 2Q 2015, from the 1.31 level currently.
With the SGD SIBOR positively correlated with the
USD LIBOR, our expectations that the US interest
rate normalization in June 2015 will see the SIBOR
moving on a higher trajectory in 2015. We expect
the 3M SGD SIBOR to move towards 1.00% by
end 2015.
UOB Economic Projections

2012

2013

2014F

2015F

GDP

2.5

3.9

3.2

3.3

CPI (average, y/y %)

4.6

2.4

0.9

0.9

Unemployment rate (%)

1.9

1.9

2.0

2.1

Current account (% of GDP)

17.5

18.3

19.0

18.5

Fiscal balance (FY, % of GDP)

2.0

1.3

1.3

1.4

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

27

THAILAND

3Q2014 Report card: Weak domestic sectors year to date

14
10
6

2014 YTD
2013

12.2

10.1
5.8

8.0
3.9

2.4 1.4

1.9 0.9

0.1

-2

Finance

Share of
5%
2013 GDP

Tpt, Storage,
Comms

Agriculture

Utilities

10%

8%

4%

1.0

0.1
-0.7

-6
-10

4.5

3.2

-1.7

-4.1

-5.8

Wholesale & Real Estate Manufacturing Hotels &


Construction
Retail
Restaurants

13%

4%

38%

5%

2%

Source: CEIC

Poorer growth prospects as exports slumped

in August. Export growth projection is also cut to


0%, from 2.0% earlier. 2015 GDP growth forecast
is maintained at 3.5-4.5%. Meanwhile, the Bank of
Thailand predicted GDP growth of 1.5% in 2014
and 4.8% in 2015, although we think there could be
a downward revision.

On a positive note, 3Q GDP saw stronger growth


in private consumption (+2.24% y/y) demand, as it
clocked the best growth rate since 2Q 2013. Additionally, investment demand also picked up in the
same quarter and grew 2.86% y/y, reversing four
quarters of consecutive contraction. The pickup in
consumption and investment demand showed that
the bid to kick-start Thailands economy since the
military coup on 22nd May had provided some form
of confidence and certainty to consumers and the
investment community. In fact, after reaching a recent low of 67.8 in April this year, Thai consumer
confidence had risen steadily to 80.1 in October.
However, weakness in Thailands 3Q GDP growth
this time came from the export sector, where net
exports fell 15.5% y/y.

We had earlier revised our 2014 Thailand GDP


growth forecast to 0.7% from 1.5% on 17 November, as we believe the economic growth in 2H
would not come in strong enough to reduce the
drag from 1H. Although there are some signs of optimism from the capacity utilization index, we do not
think that there will be a material improvement in
the manufacturing sector to boost 4Q GDP growth.
Domestic sectors will likely be held up by local consumption demand, as tourism demand continued to
remain weak. Year-to-date tourist arrivals are still
10.3% below 2013. Our forecast for GDP growth
in 2015 is currently at 4.0%.

Thailands 3Q GDP grew 0.6% y/y, slightly higher


than the 0.4% y/y growth in 2Q, but still lower than
consensus estimates of a 1.0% y/y growth rate. On
a q/q SA basis, GDP growth gained 1.1%, a similar
rate to that in 2Q.

Although Thailands manufacturing sector remained


weak and continued the 6th quarter of consecutive
contraction (-0.67% y/y) in 3Q, the sector is seeing
some signs of improvement. Year-to-date industrial production still contracted by 5.3% y/y, but the
slowly improving capacity utilization rate (61.1 in
September 2014 vs the years low of 56.41 in April)
is signaling some cautious optimism amongst manufacturers. However, the tourism sector remains
weak and the hotels & restaurants sector continued
the third quarter of consecutive contraction and registered a 4.6% y/y decline in 3Q, from the 4.7% y/y
decline a quarter ago.
The National Economic & Social Development
Board (NESDB) trimmed its 2014 GDP growth
forecast to 1.0% from the 1.5-2.0% forecast made

28

The next Bank of Thailand monetary meeting will be


held on 17 December and at this juncture, we still
expect the BoT to maintain the current policy rate of
2.0%, supported by the lower inflationary trajectory.
With Thai interest rates expected to remain low going into 2015, and the expected normalization of the
US interest rates starting in 2H 2015, we maintain
our view that there would be downward pressure
on the THB going forward. We expect the THB to
move lower against the USD towards 34.10/USD
by 1Q2015 from around the 32.80 level currently.
UOB Economic Projections

2012

2013

2014F

GDP

6.5

2.9

0.7

4.0

CPI (average, y/y %)

3.0

2.2

2.0

2.1

Unemployment rate (%)

0.7

0.7

0.9

1.0

Current account (% of GDP)

-0.4

-0.5

1.8

1.4

Fiscal balance (FY, % of GDP)

-4.9

-2.6

-2.6

-2.5

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

2015F

INDIA
Slow manufacturing growth in quarter ending
September puts drag on GDP

Trade deficit widened in recent months


Trade Balance (USD million) - RHS

India GDP at Factor Cost

GDP share
(2013)

Exports 3mma %y/y

2014 YTD
2013

20% Finance/Real Est/Biz Svcs


2%

Utilities

13%

Community/Social

14%
26%

Agri
Trade/Hotels/Tpt/Comms

8%

Construction

2%
15%

Mining
Mfg

10.8%
12.6%
8.7%
4.4%
7.2%
5.4%
4.6%
3.5%
3.5%
3.3%
3.3%
2.1%
1.1%
0.6%
0.5%

% y/y

-2.6%

-10%

Imports 3mma %y/y

0%

10%

20%

80

60

-4,000

40

-8,000

20

-12,000

-16,000

-20

-20,000

-40
1991

2002

2013

-24,000

Source: CEIC

Source: CEIC

Weak manufacturing sector


dampened GDP growth potential

Indias GDP grew at a slower pace of 5.3% y/y (previous: 5.7% y/y) in the three months ended September 2014, as the manufacturing sector saw almost no growth (+0.1% y/y), compared to a 3.5%
y/y growth in 2Q. Nevertheless, both 2Q and 3Q
GDP averaged 5.5% growth that bucked the trend
that saw eight consecutive quarters of sub-5%
growth before this.
Although there was a pick-up in project clearances
over the past six months, the corporate sector did
not manage to pull up GDP growth as investments
contribution to GDP growth was flat (compared
to 2.3% pts in previous quarter). There was also
plenty of spare capacity in the manufacturing sector
as capacity utilization fell to around 70% in 2Q this
year, compared with almost 85% just three years
ago.
Weaker-than-expected
manufacturing
growth
caused doubts to plans by the Modi-led government
to boost the output of millions of factories and raising the share of manufacturing to GDP from 15% to
25%. Although the government had gone all out to
attract foreign investors with a list of initiatives such
as Make in India to turn India into a manufacturing
powerhouse, bureaucratic issues were still a common hindrance to investment confidence. Another
hindrance to investment demand is the high borrowing costs facing firms. This had led to slower
credit growth registering a 13-year low in Sep 2014.

RBI pressure to cut rates, but concerns of


capital outflow in 2015 counter such pressures

TThe current favourable inflationary environment


due to lower energy prices, stable INR, and a lower
trend in core inflation points to some leeway for the
Reserve Bank of India (RBI) to pursue lower interest rates in 2015. For example, India's retail infla-

tion fell to a three-year low of 5.52% y/y in October,


while wholesale inflation rate plunged to five year
low of 1.77% y/y, aided by a sharp drop in vegetable and petrol prices. However, we think that the
RBI should also be wary that the US will start their
interest rate normalization and capital outflow worries should be on their dashboard. We recall the period of capital outflow and the quick depreciation of
the INR during May 2013 when the US Fed started
the taper talk. As such, we maintain our view that
the RBI will keep their current repo rate of 8% unchanged in 2015, especially since recent months of
trade deficits have widened again. We predict that
rates normalization in the US and continued trade
deficits will see a weaker INR towards 64.90 by
middle of 2015.

2015 & Beyond:


Reforms, reforms, and more reforms

After the election win by Modi, Indian firms are


pressing for a series of reforms on rules such as
the Land Acquisition Act, labour reforms, foreign direct investment in the insurance sector, as well as
the introduction of GSTs. It is estimated that India
will see around 100 million young Indians entering
the workforce over the next decade and many will
look to Modi fulfilling his promise during the elections to lift the lowest living standards in the country
by creating jobs for them. Reforms will not be overnight, but we remain optimistic that it will help India
achieve the next economic leap.
UOB Economic Projections

2012

2013

2014F

2015F

GDP

4.8

4.7

5.4

5.8

CPI (average, y/y %)

9.3

10.9

7.5

6.8

Unemployment rate (%)

9.9

8.8

8.6

8.4

Current account (% of GDP)

-5.4

-2.8

-1.7

-2.1

Fiscal balance (FY, % of GDP)

-5.9

-5.9

-4.8

-4.5

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

29

CHINA

Despite China's better than expected 3Q14 headline GDP growth of 7.3%y/y (data released in Oct),
there is a discernible slowdown from the 7.4-7.5%
pace seen in 1H14. Of note also is that on a q/q basis, activities expanded by 1.9%q/q seasonally adjusted in 3Q14, vs. average pace of 1.97% during
2011-2013. While this difference looks negligible, it
is magnified once the figures are annualized. This is
translated to an annualized pace of 7.8% for 3Q14,
compared to the annualized rate of 8.1% based the
average in 2011-2013.
By mid-December, there will be further confirmation
that China is shifting into a new normal growth environment when the annual Economic Work Conference gets underway to set the economic policy tone
for 2015 (reportedly to begin on 9 Dec). It is widely
expected to lower the countrys growth target to 7%
for 2015 from 7.5% currently.
The speed of recent measures such as RMB internationalization (for instance, the number of offshore
RMB centers appointed this year has far exceeded the number between 2010 to 2013) and financial market reforms (impending implementation of
deposit insurance, Shanghai-HK Stock Connect
scheme, among others) suggest that the current
government is committed and determined to the rebalancing and restructuring of the Chinese economy. Keeping these factors in mind, we are trimming
slightly our 2015 GDP forecast to 7.2% (from 7.5%
previously), while maintaining our projection for
2014 at 7.4%, implying a 4Q14 growth of 7.5%y/y,
which is still achievable with PBoC taking increasingly proactive approach in its interest rate policy.

Interest rate cuts in Nov not a policy shift

The surprise interest rate cuts announced on 21


Nov, with lowering of 25bps in deposit rate and
40bps on lending rate and the lifting of deposit rate
ceiling to 1.2x of benchmark from 1.1x previously,
was the first reductions since July 2012. On the surface this looks to be a shift towards easing policy.
However after factoring in the increase in deposit
rate ceiling, there is virtually no change to the deposit rates post-announcement, whereas there is
an outright reduction in borrowing costs. In other
words, the announcement is yet another targeted
move like others that took place for most 2014. In
case the message is lost, PBoC followed up with
the release of the draft regulations for deposit insurance scheme one week later, on 30 Nov, for public
consultation (please see our Focus piece on deposit insurance for more details). Once the deposit
insurance scheme is implemented, possibly by mid2015, it is conceivable that the ceiling on deposit
rate will be removed as well. Meanwhile, we expect
PBoC to continue to lower lending rates into the first
half of 2015, as well as deposit rates (raising ceiling
limit at the same time), and reserve requirement ra-

30

Real GDP growth

12%

%y/y

Forecast

10%

7.30%
7.50%
7.10%
7.20%
7.30%

Entering the New Normal environment

8%
6%
4%
2%
0%

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

Source: CEIC, UOB Global Economics & Markets Research Estimates

tios (RRR) to ensure sufficient credit in the system


(see table below for our forecasts).
Interest rate and RRR forecasts (%)
Indicator

4Q14 1Q15 2Q15 3Q15 4Q15

1-year Best Lending Rate

5.60

5.35

5.10

5.10

5.10

1-year Deposit Rate

2.75

2.50

2.25

2.25

2.25

Reserve Requirement Ratio 20.00 19.50 19.00 19.00 19.00


Source: UOB Global Economics & Markets Research

As for the RMB, our views remain intact with the unit
firming marginally to 6.03/USD by end-2015. Even
if it hit our target of 6.10/USD for end-2014 (spot:
6.1501 on 4 Dec), that would still be a full year decline of 0.8%, which would be the first annual decline since 2009. What is more important than the
currency level is that as RMB internationalization
accelerates, 2-way moves for the currency would
also be the new normal as it behaves more like a
global currency that is subject to both external and
domestic factors. This means that there could be
repeat of the bouts of depreciation seen during the
Jan-Apr period 2014. For 2015, our expectations
for Fed interest rate normalization could see USD
strength pressuring the RMB as well. Having said
that, the risks of prolonged depreciation are low, as
the currency may need to maintain a largely stable
value at this early stage of internationalization.

UOB Economic Projections

2012

2013

2014F

GDP

7.7

7.7

7.4

7.2

CPI (average, y/y %)

2.7

2.6

2.0

2.1

Unemployment rate (%)

4.1

4.1

4.1

4.1

Current account (% of GDP)

2.6

1.9

2.0

1.6

Fiscal balance (FY, % of GDP)

-1.7

-1.9

-2.0

-2.2

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

2015F

HONG KONG

3-month HIBOR vs. LIBOR

Retail sales

3M USD LIBOR
3M HKD HIBOR

25

20

15

10

-5

-10

0
Jan 99

Jan 02

Jan 05

Jan 08

Jan 11

Source: CEIC; UOB Global Economics & Markets Research

Jan 14

%y/y change

-15
Jan 12

Sep 12

May 13

Jan 14

Sep 14

Source: CEIC; UOB Global Economics & Markets Research

Strong rebound in 3Q14 but outlook clouded


Hong Kongs 3Q14 GDP growth came in much
stronger than expected, at 2.7%y/y gain vs. expectation of 2.0% and 1.8% pace in 2Q14. Overall
momentum has also picked up sharply, at 1.7%q/q
SA, on the back of the negative 0.1% seen in 2Q14
and ahead of expectation of 0.9%. The strong performance in 3Q14 was boosted by both external
and domestic demand, with private spending rising
a sharp 3.2%y/y in 3Q14, more than doubling the
average 1.35%y/y pace in first half of the year.
However, outlook for the 4Q14 is clouded by the
Occupy Central protest movement that took place
all of October and November and still continuing in
sporadic manner, as businesses in the affected areas of Central attempting to regain some normalcy
as public support for the protests dwindles.
It is obvious that both tourist arrivals, retail sales,
F&B, hotel, transport, and related activities were
severely affected during the occupy period. Services accounted for 93% of HKs GDP in 2013, which
is nearly 10% point higher from 84% share in 2000,
while manufacturing sector accounted for only 1%
share in 2013, down from 5% share in 2000.
Within services sector, wholesale & retail, accommodation, financial, transport, and other professional services in all accounted for 61% of GDP in
2013. In addition, retail sales accounted for 23.3%
of GDP in 2013 vs. 14% in 2000. For the labour
force, more than 75% are employed with services
sector (including public administration), or 2.96 million workers out of a total workforce of 3.91 million.
All these figures mean that business activities HK
was severely impacted by the Occupy movement,
and finance chief John Tsang has just warned economic growth this year could come in below an earlier forecast of 2.2%. We expect the services sector

continue to be dragged down into early 2015 by the


uncertainty created by the Occupy movement. We
look for HKs economic growth at 2.1% for 2014,
slightly below official forecast of 2.2%, with an implied 1.3%y/y expansion in 4Q14, to account for the
disruption. For 2015, we expect activities picking up
in the second half along with improvements in sentiment for China, for a full year growth of 2.6%.

Interest rate outlook hinging on


Feds normalization

Against the backdrop of US Feds tapering and expectation for US rate hike cycle ahead, the HKD
interbank rates continue to be steady at the 0.360.38% level for 3-month. We do not expect domestic interest rates to move higher until early 2015
when the US rate hike cycle becomes more visible.
We look for the 3-month HIBOR to edge up marginally to 0.4% by end-2014, vs. 0.375% currently,
and to 0.65% by end-2015, assuming the US Fed
begins to tighten by mid-2015.
As for the HKD, we do not anticipate any change to
the peg to USD any time soon. The commencement
of the much-delayed Shanghai-HK Stock Connect
or Through Train on 17 Nov ushered in another
new step for China to continue on its market reforms/RMB internationalization path, which should
help enhance competitiveness for HK financial markets, as the RMB20,000 daily currency-conversion
cap for Hong Kongs permanent residents was also
abolished along with Through Train.
2012

2013

2014F

2015F

GDP

UOB Economic Projections

1.5

2.9

2.1

2.6

CPI (average, y/y %)

4.1

4.3

4.4

3.6

Unemployment rate (%)

3.2

3.2

3.3

3.3

Current account (% of GDP)

1.6

1.9

1.8

2.5

Fiscal balance (FY, % of GDP)

2.7

2.7

0.5

0.7

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

31

JAPAN
Little reprieve, if any, in 2015

Japans 3Q-14 GDP contracted 1.6%q/q SAAR


(from 2Qs -7.3%) and sent the economy into a
technical recession as its domestic economy suffered a bigger & more sustained backlash from its
April 2014 sales tax hike. We expect Japans full
year growth to be a low 0.7% in 2014 even as we
factor in some rebound in late 2014. We are concerned that 4Q may continue to disappoint especially if the external environment weakens further
and erodes Japans external demand contribution
to growth. Japans latest set of monthly data continued to point to weak bias. CPI inflation is ticking lower (headline at 2.9%y/y in Oct, from the high
of 3.7% in April while core has been hovering at
2.3%y/y since April 2013) The BOJ-calculated inflation (which excludes the April sales tax hike effect) was lowered to 0.9%, (from 1.25% previously)
and is in danger of slipping further below 1% on the
back of declining energy prices. Industrial production provided a glimmer of hope as it grew for the
2nd straight month by 0.2%m/m (-1%y/y) in October after 2.9%m/m (0.8%y/y) in September. Jobless
rate edged lower to 3.5% but the domestic demand
continued to be dismal with the continued collapse
in household spending (-4% in Oct, -5.6% in Sep)
and housing starts (-12.3% in Oct, -14.3% in Sep)
while real wages continued to decline, underscores
lingering domestic weakness following the sales tax
hike and dampens hope of any imminent consumption recovery.
And while Japan remains mired in a trade deficit
that has persisted since July 2012, October trade
deficit eased to JPY710bn from -JPY960.6bn in
Sep, helped by cheaper oil. Despite the persistent
trade deficit which is at a hefty JPY11.2trn for the
first 10 months of 2014, the current account has
fortunately turned around and it is in a JPY1.21trn
surplus for first 9 months of 2014, as the depreciation of the yen boosted yen-denominated returns
on overseas assets. And so the yen weakness is
a double-edged sword as it raises the cost of oil
imports but it helps boost exports & the returns
of overseas assets. It is still immensely difficult to
reverse the trade deficit unless Japan restarts its
nuclear power plants. That said, cheaper crude oil
prices in coming months could lower the import bill
and narrow the trade deficit.
The malaise in consumer weakness could persist
into 2015 while external demand remains anemic.
Political uncertainty adds to the downside risk.
We consequently revised our 2015 GDP growth
much lower to 1% (from 2%).

Monetary policy will have to wait

After expanding its quantitative and qualitative easing (QQE) program in October 2014, the Bank of
Japan (BOJ) kept its monetary stance unchanged
in Nov and we believe the BOJ is unlikely to do

32

more in Dec or in 2015. We initially factored another


round of stimulus ahead of the Oct 2015 sales tax
hike, but the stimulus is now off the table since the
hike has been delayed till 2017. However, the pace
of CPI inflation has been easing since August with
the continued decline in oil prices, that will surely
add more downside pressure on inflation & puts
BOJ in a tight spot in 2015 to consider more monetary easing (to achieve its 2% inflation target) but
without the governments commitment to fiscal discipline.

Politics may be key risk just before 2015

Japan will go for snap election before the year runs


out even though Prime Minister Shinzo Abe has 2
more years in office and majority in both upper and
lower chambers of the Diet. Abes ruling party Liberal Democratic Party (LDP) showed a strong lead in
opinion polls on 24 Nov with 35% saying they would
vote for Abes and its candidates in 14 December
lower house election, while 9% supported main
opposition Democratic Party of Japan (DPJ). 45%
were undecided. But a majority of 51% of respondents disapproved of Abes economic policies with
just 33% endorsing it. Early December polls all suggest the LDP is set to win around 300 seats in the
next parliament's 475-seat lower house. A straightforward victory for Abe is the base case scenario
amidst weak opposition and potentially low voter
turnout, but the concern is that if Abe chooses to
campaign on contentious issues (restart of nuclear
power plants & revision of the pacifist constitution)
then the outcome is uncertain.

JPY in consolidation till the Fed hikes

We see a period of possible yen consolidation


amidst political uncertainty before 14 Dec election.
If PM Abe re-captures the parliament with a stronger public vote, then that could send USD/JPY to
fresh multi-year highs. Conversely, if he unexpectedly loses the popular vote, then that could see the
yen weakness quickly unravel with the pair easily
heading below 110. Political risk in Japan will be
the dominant theme for now. Barring an unexpected snap election outcome, we expect the USD/JPY
pair to close 2014 at 120 but will only break comprehensively above 120 by end-2Q 2015 towards
125 when the Fed finally delivers the first rate action which we expect in June 2015 FOMC.

2012

2013

2014F

2015F

GDP

UOB Economic Projections

1.5

1.5

0.7

1.0

CPI (average, y/y %)

0.0

0.4

3.2

1.0

Unemployment rate (%)

4.3

4.0

3.6

4.0

Current account (% of GDP)

1.0

0.7

0.2

0.1

Fiscal balance (FY, % of GDP)

-9.5

-10.0

-7.5

-7.0

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

SOUTH KOREA

Weak manufacturing outlook

59

JPY/KRW at more than 6-year low

HSBC PMI (LHS)


Industrial Production (3mma, y/y %)
Exports (3mma, y/y %)

57
55
53
51
49
47
45
Mar-10

Sep-11

Mar-13

JPY/KRW (lhs)
USD/KRW
40
35
30
25
20
15
10
5
0
-5
-10
Sep-14

Source: CEIC; UOB Global Economics & Markets Research

12.5

1,180

12.0

1,160
1,140

11.5

1,120

11.0

1,100

10.5

1,080
1,060

10.0

1,040

9.5

1,020

9.0
Jan 13

Jun 13

Nov 13

Apr 14

Sep 14

1,000

Source: Bloomberg

South Koreas GDP growth momentum strengthened to 0.9% q/q in 3Q14 from 0.5% in 2Q14,
led by improvements in private consumption and
construction fixed investment. However, downward pressure was seen coming from facilities investments and exports which contracted from the
second quarter. Weaker demand from China and
strong KRW were the key factors behind the slowdown in exports during the quarter. China is South
Koreas largest export market accounting for 26%
of its exports, which means that a structural slowdown in China could continue to weigh on South
Koreas outlook. On a y/y basis, growth has moderated to 3.2% y/y in 3Q14 from 3.5% in 2Q14. The
economy grew 3.5% in the first three quarters of the
year, on track for BoKs revised growth forecast of
3.5% for this year. In October, the central bank also
revised lower its 2015 growth to 3.9% from 4.0%.

Tame domestic inflation

The prolonged weak inflationary environment has


become a concern as headline CPI has been coming in below the BoKs target range of 2.5-3.5% since
mid-2012. This raises the prospect that the central
bank may consider changing its inflation target.
The headline CPI was at 1.0% y/y in November
(October: 1.2%) while core CPI moderated to 1.6%
y/y from 2.2% y/y in 3Q14. Weak demand and decline in the global oil prices will continue to cap price
gains but inflation is likely to rise gradually next year
while the real estate market has shown improvements since bottoming out in late-2013. We expect
the headline inflation to average 1.3% and 1.6% in
2014 and 2015 respectively.

Monetary policy remains in focus


to revive growth

Domestic demand is an important driver for growth


next year given the lack of an external catalyst. The
government is expected to continue to focus on the

recovery in consumer sentiment and the housing


market. And taking into account of the easing monetary policy in Japan, there will certainly be pressure
for the BoK to cut its base rate further especially if
the incoming economic data do not improve. Central to the worry was the decline in JPY/KRW rate
which poses challenges to South Korean exporters
especially those in the local car and steel industries
even as the diversification of the production bases
out of South Korea has helped to alleviate some of
the competitiveness concerns.
After a combined 50bps interest rate cut in August
and October, the base rate is now at a record low of
2.00%, similar to its lowest during the Global Financial Crisis. The low domestic inflation suggests that
the base rate could go below 2.00% in the shortterm but a sustained period of extremely low interest rate runs the risk of fanning more debt build-up
which is an increasing concern for the households.
Our baseline expectation is for the base rate to remain at 2.00% in the first half of 2015.

More upside to USD/KRW

JPY factors are expected to continue to dominate


and if the expectation of BoK easing leads to a
sharper upward momentum in USD/KRW, this may
reduce the risk of further rate cut by the BoK. Other
than the BoJ, the expectation of US Feds monetary
normalization will also contribute to higher USD/
KRW. As such, we expect USD/KRW to head up to
1,140 by end-1Q15.
2012

2013

2014F

2015F

GDP

UOB Economic Projections

2.3

3.0

3.4

3.9

CPI (average, y/y %)

2.2

1.3

1.3

1.6

Unemployment rate (%)

3.0

3.0

3.2

3.1

Current account (% of GDP)

4.2

6.1

6.0

5.5

Fiscal balance (FY, % of GDP)

-1.1

-1.8

-1.7

-2.1

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

33

TAIWAN
A minor set back by food scandals in 3Q14

Taiwans 3Q14 GDP growth final reading came in at


3.63%y/y, lower than advance estimate of 3.78%,
and a revised 3.87% pace in 2Q14. On a seasonally adjusted basis, activities slowed somewhat to
2.65%q/q annualized rate in 3Q14, slower compared to the 3.47% pace in 2Q14 which is the second fastest in 8 quarters.
Looking at the details, the food scandal that engulfed the island during the quarter was the main
culprit. This is reflected in the sharp deceleration in
private spending to 1.2%q/q annualized, just about
a quarter of the 4.85% annualized in 2Q14. However other areas of spending were not as severely
affected as government spending and private investment stepped in to fill some of the gaps. This
resulted in domestic demand expanding 5.08%q/q
annualized, more than doubling the 2.54% pace
in 2Q14. The other bright spot was the continued
support from external demand, which saw exports
rising 9.69%q/q annualized in 3Q14, from 7.15% in
2Q14 and the best performance in two years.
Going into 2015, we expect the US economic
growth to remain intact, though the developments
in Eurozone and Japan could offset the gains in
the US. Nevertheless, the declines in commodities
prices especially crude oil will be boon for Taiwan.
In addition, latest exports orders data are encouraging, with an increase of 13.4%y/y in Oct, from
12.7% rise in Sep, driven by strong orders from the
US and Europe, as seasonal demand picked up.
As such, Taiwans economic growth prospects
should remain positive in 2015, as we pen in a 3.2%
forecast, vs. estimated 3.5% in 2014, with an implied 4Q14 growth of around 3% pace.

Monetary policy on watch for Feds move

Despite a steady pick up in economic activities,


inflationary pressure in Taiwan remains largely absent, averaging just 1.3%y/y in the first 10 months
of 2014, despite a low base of 0.8% rise in all of
2013. We expect Taiwans inflation rate at around
1.3% for the full year, and only marginally higher at
1.5% in 2015 as private spending recovers from the
one-off food scandal and boosted by pre-election
spending as the island heads to the 2016 legislative (Jan) and presidential (Mar) elections. The
recent 9-in-1 city, county, and local elections (29
Nov) saw the ruling KMT party losing its traditional
strongholds of Taipei and Taichung, suggesting that
it would be a major tussle in 2016 with the DPP.
The lack of price pressure is likely to persist in Taiwan amidst the declines in commodities prices. In
particular, the 40% plunge in crude oil price (WTI)
since Jun which signals a major correction for the
commodity. The recent news that OPEC insisting
on keeping its output in the face of declining prices

34

Taiwan: Real interest rate*


4
*Taiwan rediscount rate less headline inflation (%)

3
2
1
0
-1
-2
Jan 09

Jun 10

Nov 11

Apr 13

Sep 14

Source: CEIC, UOB Global Economics & Markets Research

is likely to see supply flowing to the market at a time


when China is tilting towards a moderate growth
mode and major oil users such as Japan and Eurozone are facing an uncertain economic outlook.
This means that for the CBC, status quo is expected for the upcoming 4Q14 interest rate meeting on
18 Dec, with its policy rate unchanged at 1.875%. In
fact, Taiwans real interest rate has stayed elevated
for more than two years as inflationary pressure
eased. This suggests that Taiwans central bank
may not follow the Feds footstep when the latter is
poised to normalize its interest rate into mid-2015.
One key consideration for CBC is that a domestic
interest rate hike could have a strengthening effect
on the TWD amidst a backdrop of weakening Japanese yen. Since mid-2011, the TWD has firmed from
0.40 TWD per yen to 0.26 TWD per yen, more than
40% gain, while the KRW rose from 15.6 per JPY to
9.39 currently, an appreciation of 66% against the
JPY. As all these three economies rely on external
demand as a key driver, the domestic currency is a
key policy factor. This means that CBC is unlikely to
make any change in its policy stance anytime soon.
On our part, we look for the TWD to be kept at bay
against the USD. Our forecast is for USD/TWD to
grind gradually higher towards end-2015, to 31.80,
from current level of 31.05 (1 Dec).

2012

2013

2014F

2015F

GDP

UOB Economic Projections

1.5

2.1

3.5

3.2

CPI (average, y/y %)

1.9

0.8

1.3

1.5

Unemployment rate (%)

4.2

4.1

3.9

3.9

Current account (% of GDP)

10.4

11.8

13.1

10.6

Fiscal balance (FY, % of GDP)

-1.5

-1.2

-1.4

-1.1

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

EUROZONE

Why is the ECB so adamant about inflation?


%
5

Real Interest Rates - Eurozone

0
-5
1998
%
10

2000

2002

2004

2006

2008

2010

2012

2008

2010

2012

Inflation Rates - Western World


United States

Eurozone

United Kingdom

5
0
-5
1998

2000

2002

2004

2006

Source: Bloomberg, UOB Global Economics & Markets Research

Draghi lays the ground for QE

Although there wasnt any concrete action from the


ECB at the final Governing Council meeting of 2014,
President Mario Draghi in his clearest language yet,
offered assurances that more aggressive stimulus
was just around the corner, underlining the central
banks commitment to support the ailing economy
of the 18-country bloc. It is clear that the ECB wants
to wait out a little longer to see the current policy
mix, including the take-up of the upcoming TLTRO
on 11 December. Besides, plunging oil prices is
seen blurring the ECB outlook and they will require
more clarity before acting. But our call for the ECB
to implement a broad-based asset purchasing plan
including sovereign QE in the first half of next year
remains valid. Although there is some resistance,
it is obvious that Draghi is committed to using additional unconventional instruments, at the same
time, willing to live with some dissent in a QE vote
in order to ease the policy stance further and deliver
on the ECBs primary legal mandate. This strongly
indicates that Draghi would not allow opposition
from Germany or anyone else to stop it.

Grim outlook for Eurozone economy

And the reason for QE is simple. The threat of deflation and recession combined with stubbornly high
unemployment across the 18-country Eurozone
looms large. And consumer prices are expected
to soften further after the sharp drop in oil prices.
Responding to low inflation damped by oil prices is
complicated for the ECB. Although the lower costs
depress inflation further below the banks target,
they may also help the economy by freeing up disposable income for households and businesses to
spend and invest. However, the risk is that European households and businesses may not see falling
energy prices as a temporary windfall but rather the
continuation of an ultra-weak price trend that will
persist far into the future. This could prompt com-

panies to put off investment and hiring. Indeed, new


forecasts by the ECB predicted the bloc's economy
would grow just 1.0% next year rather than the
1.6% predicted just three months ago. Inflation is
seen at just 0.7% in 2015, down from a September
forecast of 1.1% and way below the target of just
under 2.0%.

Downside pressure in Euro mounts

Currently hovering around the 1.2370 region, the


Euro continues to retreat as hopes are high that
the ECB will unveil a QE package early next year.
In fact, nothing has changed the underlying conditions that we expect will continue to put downward
pressure on the EUR/USD currency pair. Factors
include the weak growth/inflation backdrop in the
Eurozone, further ECB easing eventually, as well as
a constructive backdrop for the USD highlighted by
continued improvement in growth, the labor market
and the gradual approach of the start of Fed rate
hikes. We are thus looking for the EUR/USD pair
to move towards 1.2100 by the end of this year and
thereafter towards the 1.190 region by the end of
1Q15.

UOB Economic Projections

2012 2013 2014F 2015F

GDP

-0.7

-0.4

0.8

1.1

CPI (average, y/y %)

2.5

1.3

0.5

0.8

Unemployment rate (%)

11.3

12.0

11.7

11.4

Current account (% of GDP)

1.4

2.0

2.4

2.5

Fiscal balance (FY, % of GDP)

-3.6

-2.9

-2.6

-2.3

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

35

AUSTRALIA
Economy faces challenges ahead

Australias 3Q GDP growth missed expectations,


with output expanding by 0.3% for the quarter. The
outcome was worse than the 0.7% increase expected and lower than the 0.5% growth rate in the second quarter. Growth for the year held at 2.7%, well
short of the 3.1% expected, and seemed certain to
slow given the gloom hanging over commodity markets, a rude awakening after years of plenty for the
resource-rich nation. We continue to expect Australias economic momentum to remain dampened
by declines in mining investment and renewed fiscal tightening; although growth should continue to
rebalance, with the low interest rate backdrop expected to support rising household consumption
and dwelling investment. We are looking for a GDP
growth of 2.8% next year, down from an estimated
3.0% in 2014, as the economy continues to search
for new growth drivers.

RBAs next move is shifting to the downside

It has been an uneventful year for the RBA. The


final meeting of the year contained little surprises
again, with the cash rate unchanged at a record low
of 2.50%, and the central bank keeping to its stance
that the most prudent course is likely to be a period
of stability in interest rates. This observation has
now been made in each of the past eleven postmeeting statements. We think that the decline in the
exchange rate is not yet enough to offset the negative impact on the economy and labour market, as
well as the ongoing weakness in commodity prices
and slowing Chinese growth. In fact, these factors
have prompted some discussion that the RBAs next
move could be to cut rates. That said, the biggest
sector holding the RBA from cutting interest rates
is the property market. The bank cannot ignore the
risks associated with an overheated property market, yet we may see the introduction of macro-prudential measures aimed at preventing buyers from
overleveraging, similar to what the RBNZ did. We
still see the next RBA move as up, as growth continues to rebalance. However, we have pushed back
the hike towards the end of 2015, with the risk for
that rates could stay unchanged for longer.

36

Yet more disappointment for AUD/USD

Currently hovering below the 0.8400-figure, AUD/


USD has spiked sharply downwards. Of late, tides
have appeared to change as economic difficulties
in China coupled with bear markets in metals and
many commodities, have created a more opaque
picture of the future of Australia's financial prospects. That said, the fall in the Australian dollar is
a very welcome development for the RBA, giving
the central bank more scope to hike rates down the
road amid rising concerns about the elevated level
of activity in the housing market. It will also aid the
economys rebalancing, boosting growth and hiring in the non-mining sectors. We continue looking
for a lower AUD/USD into 2015. A large part of the
currencys weakness is expected to be due to increasing US dollar strength, where the story of rising US interest rates is likely to dominate currency
trade. We are penciling an end-1Q target of around
0.8100.
RBAs forecasts (percentage change over year to quarter shown)
Indicator

Dec-14

Jun-15

Dec-15

Jun-16

Dec-16

2.75-3.75

2.75-3.75

Forecasts as published by RBA in November 2014 SMP


GDP

2.50

2-3

2.5-3.5

Headline CPI

1.75

1.5-2.5

2.5-3.5

2.5-3.5

2.25-3.25

Underlying inflation

2.25

2-3

2.25-3.25

2.25-3.25

2.25-3.25

2.5-3.5

2.75-3.75

2.75-3.75

Forecasts as published by RBA in August 2014 SMP


GDP

2.50

2-3

Headline CPI

2.00

1.75-2.75

2.5-3.5

2.5-3.5

2.25-3.25

Underlying inflation

2.25

1.75-2.75

2.25-3.25

2-3

2-3

Source: RBA, UOB Global Economics & Markets Research


UOB Economic Projections

2012

2013

2014F

2015F

GDP

3.6

2.3

3.0

2.8

CPI (average, y/y %)

1.8

2.5

2.6

2.4

Unemployment rate (%)

5.2

5.7

6.1

5.9

Current account (% of GDP)

-4.4

-3.3

-2.9

-2.5

Fiscal balance (FY, % of GDP)

-3.0

-1.4

-3.0

-1.8

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

UNITED KINGDOM
Recovery unbalanced

UKs GDP grew 0.7% during the third quarter, unchanged from the preliminary estimate. That was
down from 0.9% in the second quarter, the joint
highest quarterly rate in four years. Year-on-year,
GDP grew 3.0%, confirming Britain is one of the
world's fastest-growing rich economies this year.
That said, business investment fell by 0.7% for
the quarter, its first drop in more than a year and
a sharp slowdown from the second quarter's 3.3%.
By contrast, consumer spending once again the key
contributing factor to the UKs steady growth rate,
expanded by 0.8% on the quarter. Whilst growth
generally remains on track, we remain cautious on
the recovery. After all, trade is still proving to be a
drag on the economy, especially with slowing global
growth emanating from Japan and particularly the
Eurozone.

Rate hike expectations pushed back

The BoE held its benchmark interest rate at 0.5% in


December and kept its asset purchase programme
target at GBP375bn. The minutes will be published on 17 December. Since August 2014, Martin
Weale and Ian McCafferty have continued to push
for higher rates but given the deterioration seen
in economic conditions of late, the majority of the
MPC remained against raising interest rates. Some
UOB Economic Projections

2012

2013

2014F

2015F

GDP

0.7

1.7

3.0

2.6

CPI (average, y/y %)

2.8

2.6

1.5

1.6

Unemployment rate (%)

8.0

7.6

6.3

5.6

Current account (% of GDP)

-3.8

-4.2

-4.1

-3.5

Fiscal balance (FY, % of GDP)

-7.5

-5.9

-5.2

-4.0

MPC members have noted concern over diminishing slack in the economy and said low productivity could be a source for potential wage pressures,
which might see inflation overshoot the 2% target.
Besides, in the current environment where weakness in the Eurozone prevails and factoring in lower
commodity prices, the risk for inflation overshooting
the 2% target would seem less pronounced than
that of an overshoot. We believe that the BoE will
hold fire on rates and have thus pushed back our
rate hike expectations to 4Q15.

Further weakness in GBP/USD likely to ensue

GBP has seen a marked depreciation against the


USD, falling more than 5% year to date. This occurred despite generally better than expected data
throughout the month of November, largely driven
by the BoEs inflation report on 12 November, where
growth forecasts were slashed and the central bank
said inflation could fall below 1% within months as
a renewed slump in the Euro area weighs. Going
forward, it looks like the weakness in GBP/USD is
here to stay. The currency is likely to move in line
with interest rate expectations. In this regard, the
BoE is likely to raise rates later than the market currently anticipates, especially now that low inflation
will allow the BoE to wait-and-see longer. Besides,
heightened political risk around the May general
election could weigh on the currency. The Scottish independence referendum in September 2014
clearly demonstrated the risk of politics, and the repercussions for GBP for this could be far greater
than the Scottish referendum, especially when the
diminishing dominance of the main two political parties in the UK means another coalition government
has become increasingly likely. We have thus revised lower our forecasts for GBP/USD into 2015,
now looking for an end-1Q target of around 1.550.

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

37

UNITED STATES OF AMERICA


2015 Positive growth, painful politics

US 3Q-2014 GDP growth was revised higher to


3.9%q/q SAAR (from first estimate of +3.5%) from
2Qs 4.6%, boosted by higher personal consumption & gross private domestic investment and a
smaller negative inventory contribution, even as
the trade deficit have widened slightly with exports
growing at a slower pace while the imports contraction was reduced slightly. 2Q & 3Q together recorded the strongest US growth in a decade.
And the latest October/November data still suggest
continued US economic improvement albeit at a
more subdued trajectory. Positive durable goods
growth, strong services, healthy retail sales, lower
but still-buoyant US consumer confidence, sustained improvement in US labor market conditions
amidst mixed housing data, makes us still confident
this US GDP growth streak could sustain into 2015.
A net positive for the US is the structural change
in its oil equation (turning from net importer to becoming one of the biggest energy producers thanks
to shale oil & gas). While the decline in oil prices
is hurting the oil & gas sector, it significantly lowers business operating cost in US (especially for
energy-intensive industries) and it also puts more
disposable income back to US consumers.
Two exogenous factors pose concern for US economy: 1) weak external environment & a stronger
US dollar hurting US exports and 2) the return of
extreme weather disrupting US domestic economic
activity (recall late 2013 and 1Q 2014). That said,
exports make up just 13% of US GDP, the lowest
among OECD countries while the stronger USD
helps to mitigate the cost of imports. Oil imports are
also markedly reduced given the rich US oil production. And while weather may cause a hiccup in
growth, the effect is largely transient and we can
expect a decent rebound after the storm passes.
We continue to be positive on US growth outlook
and keep our forecast for 2014 GDP growth at 2.7%
but we are mindful that our 3.2% for 4Q assumes
no weather-related shock in December. For 2015,
we expect 3.2% growth with the US housing market, and the US consumer providing the out-performance factors.
A key domestic risk factor is US politics which may
enter into a year of high-drama in 2015. US President Obama issued executive orders on immigration despite the strong protests from Republicans,
and now we wait for the Republican response.
Republicans are set to gain majority power in both
House and Senate in the new Congress in 2015.
Of particular immediate concern is that the Republicans will retaliate by holding up a spending bill
which will force the US government to cease many
of its operations by 12 Dec 2014, reliving the 2013
government shutdown. The next issue that has
global implications is the US debt ceiling limit which

38

is suspended until 15 March 2015. As there are no


election concerns in 2015, political brinkmanship
may once again push markets to the edge at some
point.

FOMC: June 2015 rates lift-off likely

We believe the 16-17 December FOMC meeting


could move the USD materially as there is a strong
possibility the Fed adjusts its key phrases during
that meeting to provide clarity on Feds lift-off timetable and that could spark another bout of USD
strength and volatility before the year is out.
We reiterate our view that we are still expecting the
Fed rate normalization to take place in 2Q-2015
(possibly starting in the 16-17 June 2015 FOMC)
bringing the FFTR to 1.25% by end-2015, and to
3.25% by end-2016. Two issues will complicate the
FOMC decision in 2015, data and US politics. An
early assessment of the 2015 FOMC voters suggests a more dovish group.

A flatter UST yield curve view in 2015

The 10-year UST yield is at 2.3% (03 Dec 14) well


away from the 3% forecast we started 2014 with
despite the tapering and eventual termination of QE
in Oct 2014. In 2015, we expect several reasons to
keep long-end yields well anchored: 1) Fed will not
be UST seller to reduce its balance sheet, 2) UST
supply is lower due to improving US fiscal position,
3) QE from BOJ & ECB will re-direct buyers into
UST, and 4) geo-political risk to boost safe haven
demand for UST. The UST yield curve may flatten
further once rate hike expectations crystalized by
late-2014, which will drive up short-end yields. 2Y
UST at 0.55% (03 Dec 14) could be at 1.3% while
10Y at 2.8% by mid-2015.

USD on top of the currency pack

Looking ahead into end-2014 and 2015, we believe


significant dollar strength will materialize further
when the Fed gives a concrete rate hike timeline
before the year is up. The divergence in policy directions will be especially stark between US and
BOJ-ECB, and the result of the diverging policies
is the strength of the USD against the majors and
emerging markets currencies.

2012

2013

2014F

2015F

GDP

UOB Economic Projections

2.3

2.2

2.7

3.2

CPI (average, y/y %)

2.1

1.5

1.7

2.3

Unemployment rate (%)

7.9

6.7

5.7

5.2

Current account (% of GDP)

-2.7

-2.3

-1.5

-1.3

Fiscal balance (FY, % of GDP)

-7.0

-4.1

-2.8

-1.8

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

FX TECHNICALS
EUR/USD: 1.2470

EUR/USD is clearly oversold going into


the end of 2014 and the movement suggests that this pair could be in the early
stages of a bottoming process. The current price action is likely tracing out a
falling wedge formation and another leg
lower towards 1.2235 is likely before a
sustained rebound can be expected.
1.2235 is the trend-line support connecting the 1.1876 low in June 2010 and the
1.2050 low in July 2012. Overall, we
expect 1.2860 to act as a very strong
resistant going into the next quarter but
further EUR weakness is not expected
move significantly below 1.2235. Even a
move below this level is not expected to
break below the major support at 1.2050.

GBP/USD: 1.5735

Despite severely oversold conditions, it


is premature to expect GBP to bottom
just yet. Based on the momentum indicators, GBP weakness could extend
towards 1.5430 but the next support at
1.5102 is likely out of reach during the
first quarter of 2015. Major resistant is at
1.5945.

AUD/USD: 0.8400

AUD/USD continues to make fresh lows


going into end 2014 and the trend is expected to persist in 1Q15. A move below
the major support at 0.8310 will not be
surprising but a break of the 2010 low of
0.8065 is not likely in view of the severely
oversold conditions. Previous instances
of extreme oversold conditions led to a
rebound but only a break above 0.8800
would indicate the start of a recovery
phase. Otherwise, AUD is expected to
be on the defensive in the early part of
2015.

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

39

FX TECHNICALS
NZD/USD: 0.7780

NZD traded in a well-defined range of


0.7660 and 0.8035 since early October
2014. The key level is obviously near
0.7660/70 as this level was tested several times in 2013 as well as in November 2014. The sideway trading within
the 0.7660/0.8035 range is expected to
lead to an eventual move lower towards
the 2012 low of 0.7450. That said, waning downward momentum suggests any
down-move to be slow and grinding. A
sustained move above 0.8035 is not expected in 1Q15.

USD/JPY: 118.80

Strong momentum is expected to trump


the current overbought conditions and
lead to further USD gains in the first quarter of next year. A move above 119.85
will not be surprising but the 2007 peak
of 124.14 is likely out of reach. Only a
move back below 112.57 would indicate
a mid to long-term top is in place.

USD/SGD: 1.3060

USD continues to outperform and the


strong monthly close in November broke
above the falling trend-line resistant connecting the peaks of 1.7065 and 1.5580.
Upward momentum is still very strong
and the obvious target is at the 2011 high
of 1.3200. A move above this level will
shift the focus towards the major resistant at 1.3453 (confluence of low in 2008
and trend-line from the 1.8557 high).
Critical support is at the previous breakout point of 1.2860.

40

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

FX TECHNICALS
USD/MYR: 3.4150

The explosive rally in the first of December 2014 signals that this pair could be
in the early stages of a trending phase
which could last for several weeks. Unless there is a move back below the
previous break-out point at 3.3460, USD
may extend towards the top of the rising
channel near 3.5100 by end of 1Q2015.

EUR/SGD: 1.6250

The major key support at 1.6000/05 was


tested several times in October and November but held. The break of the falling
trend-line coupled with weekly MACD
crossing into positive territory suggests
that an interim low is in place. However,
a sustained up-move is likely only upon
a break above the major resistant at
1.6480. Otherwise, expect broad trading
range between 1.6000 and 1.6480 in the
early part of 1Q15 but this should eventually lead to a move towards 1.6650.

GBP/SGD: 2.0505

GBP traded in a well defined range


against the SGD and the key levels at
2.0185 and 2.0955 will likely remain
intact in 1Q15. Waning downward momentum suggests limited downside risk
for now but conversely, a move above
2.0955 is not expected. Overall, further range trading between 2.0185 and
2.0955 is likely in 1Q15.

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

41

FX TECHNICALS
AUD/SGD: 1.1010

As of the time of writing, AUD/SGD


is holding just above the 2014 low of
1.0995/00. The down-move is gaining momentum rapidly and further AUD
weakness towards 1.0730 is likely by
end of 1Q15. The minor peak of 1.1385
is a strong resistant but only an unlikely
break above the key mid-term resistant
at 1.1520 would indicate a sustained
AUD recovery has started.

JPY/SGD: 1.1095

Despite severely oversold conditions,


there is no indication that JPY/SGD has
found a low. That said, any further weakness will likely be at a slower pace and
the major support at 1.0700 is not expected to yield so easily. On the upside,
the previous low at 1.1585 is acting as
a very strong resistant and this level is
expected to hold for 1Q15.

42

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

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Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

43

OUR INTERNATIONAL NETWORK


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44

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Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

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(a subsidiary)
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Phone: (86)(21) 6247 6228
Fax: (86)(21) 6289 8817
Email: postmaster@UOBVM.com.cn
SZVC-UOB Venture Management Co. Ltd
(an associate)
FL. 11 Investment Building
No. 4009 Shennan Road
Futian Centre District
Shenzhen 518048
Phone: (86)(755) 8291 2888
Fax: (86)(755) 8291 2880
Email: master@szvc.com.cn
Ping An UOB Fund Management
Company Ltd
(an associate)
8/F Great China International Trading Plaza
Fuhua 1st Road, Futian District
Shenzhen 518048
Phone: (86)(755) 2262 2289
Fax: (86)(775) 2399 7878

OUR INTERNATIONAL NETWORK


France
UOB Global Capital SARL
(a subsidiary)
40 rue La Perouse
75116 Paris
Phone: (33)(1) 5364 8400
Fax: (33)(1) 5364 8409
Indonesia
UOB Venture Management
Private Limited
Representative Office
UOB Plaza, 22nd Floor
Jalan M.H. Thamrin No. 10
Jakarta Pusat 10230
Phone: (62)(21) 2938 8442
Email: info@UOBVM.com.sg
Japan
UOB Asset Management (Japan) Ltd
(a subsidiary)
Sanno Park Tower, 13F
2-11-1 Nagatacho, Chiyoda-ku
Tokyo 100-6113, Japan
Phone: (81)(3) 3500 5981
Fax: (81)(3) 3500 5985
Malaysia
UOB Asset Management (Malaysia)
Berhad
(a subsidiary)
Vista Tower, The Intermark, Level 22
348 Jalan Tun Razak
50400 Kuala Lumpur, Malaysia
Phone: (60)(3) 2732 1181
Fax: (60)(3) 2732 1100
Email: UOBAM.feedback@UOB.com.my

Taiwan
UOB Investment Advisor (Taiwan) Ltd
(a subsidiary)
Union Enterprise Plaza, 16th Floor
109 Minsheng East Road, Section 3
Taipei 10544
Phone: (886)(2) 2719 7005
Fax: (886)(2) 2545 6591
Email: UOBAM.TW@UOBGroup.com
Thailand
UOB Asset Management (Thailand)
Company Limited
(a subsidiary)
Asia Centre Building, 23A, 25th Floor
173/27-30, 32-33 South Sathon Road
Thungmahamek
Sathon, Bangkok 10120
Phone: (66)(2) 786 2000
Fax: (66)(2) 786 2370-74
Website: www.UOBAM.co.th

United States of America


UOB Global Capital LLC
(a subsidiary)
UOB Building
592 Fifth Avenue
Suite 602
New York, NY 10036
Phone: (1)(212) 398 6633
Fax: (1)(212) 398 4030
Email: dgoss@uobglobal.com
MONEY MARKET
Australia
UOB Australia Limited
(a subsidiary)
United Overseas Bank Building
Level 9, 32 Martin Place
Sydney, NSW 2000
Phone: (61)(2) 9221 1924
Fax: (61)(2) 9221 1541
SWIFT: UOVBAU2S
Email: UOB.Sydney@UOBGroup.com
STOCKBROKING
Singapore
UOB-Kay Hian Holdings Limited
(an associate)
8 Anthony Road, #01-01
Singapore 229957
Phone: (65) 6535 6868
Fax: (65) 6532 6919
Website: www.uobkayhian.com

Disclaimer
This analysis is based on information available to the public. Although the information contained herein is believed to be reliable,
UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect
our opinion as of date of the analysis and area subject to change without notice. UOB Group may have positions in, and may effect
transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance
upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its
contents are proprietary information and products of UOB Group and may not be reproduced or otherwise.

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

45

GLOBAL ECONOMICS & MARKETS RESEARCH


Jimmy Koh
Head of Research
(65) 6539 3545
Jimmy.KohCT@UOBgroup.com
Alvin Liew
Senior Global Economist
(65) 6539 8930
Alvin.LiewTS@UOBgroup.com
Lee Sue Ann
Treasury Economist
(65) 6539 3549
Lee.SueAnn@UOBgroup.com
Suan Teck Kin, CFA
Senior Asian Economist
(65) 6539 3922
Suan.TeckKin@UOBgroup.com
Ho Woei Chen
Asian Economist
(65) 6539 3948
Ho.WoeiChen@UOBgroup.com
Francis Tan
Asian Economist
(65) 6539 3923
Francis.TanTT@UOBgroup.com
Quek Ser Leang
Market Strategist
(65) 6539 8993
Quek.SerLeang@UOBgroup.com
Victor Yong Tze Chow
Interest Rate Strategist
(65) 6539 8737
Victor.YongTC@UOBgroup.com

More reports available on:


URL: www.uob.com.sg/research
Email: GlobalEcoMktResearch@UOBgroup.com
Bloomberg: UOBR
MCI (P) 006/01/2014

46

Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

United Overseas Bank Limited


Head Office
80 Raffles Place UOB Plaza Singapore 048624
Company Registration No.: 193500026Z
Telephone: (65) 6533 9898
Facsimile: (65) 6534 2334
Website: www.uob.com.sg
Quarterly Global Outlook 1Q2015 UOB Global Economics & Markets Research

47