VINACHEM

Central banks in Southeast Asia maybe forced to abandon this year’s monetary easing and raiseinterest rates before their north Asian peers in 2013, as risinginflation risks overshadow the current economic gloom.

Thailand, Malaysia, the Philippines and Indonesia willprobably raise rates next year, HSBC Holdings Plc, UBS AG, andAustralia & New Zealand Banking Group Ltd. predict, even as interest-rate swaps show investors expect little or notightening. The banks expect China to refrain from changing itsmonetary policy stance and India to cut borrowing costs.

“In Southeast Asia, local demand is still humming,” said Frederic Neumann, co-head of Asian economic research at HSBC in Hong Kong. “The region is gliding through the global exportdownturn on the back of rising credit growth, buoyant consumer spending, and generous fiscal support. Before long, however,price pressures, already bubbling away beneath the surface, willerupt again.”

The region’s prospects stand out in contrast to thechallenges threatening the economies of China and Japan, with government spending and younger populations supporting domesticdemand and luring investment even as global expansion weakens.While Thailand’s unexpected rate cut this week underscores theimmediate risks to growth, Singapore’s central bank this monthrefrained from policy easing as elevated inflation trumpedworries about a shrinking economy.

The Indonesian rupiah, Thai baht, Philippine peso andMalaysian ringgit are forecast to rise the most after India’srupee by the end of 2013, according to Bloomberg surveys.

Growth Differential

“The growth differential and interest-rate differentialwill attract capital flows and strengthen currencies,” said Aninda Mitra, a Singapore-based economist at Australia & NewZealand Banking Group. “Southeast Asia will have another yearof fairly robust growth in 2013, and that alone will start tobring up core inflation pressures, which warrants more monetarycaution.”

The Asian Development Bank predicts growth of more than 6percent for Indonesia this year and more than 5 percent for thePhilippines and Thailand, compared with 1.7 percent in Taiwanand 2.7 percent in South Korea. Inflation in Southeast Asia mayaccelerate to 4 percent in 2013, compared with 3.3 percent inEast Asia, the ADB said.

“Starting first quarter of next year, we can expectcentral banks in Southeast Asia to start taking the plunge andraise interest rates to guard against inflation,” said Neumann.“Central banks in South Korea, Taiwan and China, and India willwait before tightening the screws because growth” in thoseeconomies “is more fragile,” he said.

Indonesian Inflation

Price gains in Indonesia surged to an 11-month high inAugust before easing last month while in the Philippines, thecentral bank has raised inflation forecasts for 2012 and 2013.

Bank Indonesia kept its berchamark rate unchanged at arecord-low 5.75 percent for an eighth month in October. Malaysiamaintained borrowing costs for an eighth meeting in Septemberand has refrained from joining its neighbors in cutting ratesthis year. Bank Negara Malaysia Governor Zeti Akhtar Aziz saidthis month while slowing growth is a bigger threat thaninflation, monetary policy is already “quite accommodative.”

Investors and some economists expect further rate cuts inparts of Southeast Asia in the coming months. While five ofeight economists surveyed by Bloomberg News expect BangkoSentral ng Pilipinas to hold interest rates at a record-low 3.75percent next week, three predict a reduction.

Swap Rates

Thailand’s one-year onshore interest-rate swaps, the fixedcost needed to receive a floating payment, dropped 19 basispoints, or 0.19 percentage point, to 2.73 percent this week,below the benchmark rate of 2.75 percent, according to datacompiled by Bloomberg. The rate in Indonesia stood at 5.72percent versus the policy rate of 5.75 percent and that in thePhilippines was 1.3 percent compared with the overnightborrowing rate of 3.75 percent. Only Malaysia’s swap rate isabove the benchmark rate of 3 percent, trading at 3.155 percent.

Thailand’s central bank cut interest rates on Oct. 17,four days after Governor Prasarn Trairatvorakul said no easingwas needed, underscoring concern Asia’s outlook has worsened.The Bank of Thailand’s monetary policy committee voted 5-2 tolower its one-day bond repurchase rate by a quarter of apercentage point to 2.75 percent.

China yesterday reported growth eased for a seventhstraight quarter as the global slowdown crimps demand for Asia’sexports. Malaysia’s shipments dropped the most since 2009 andPhilippine exports fell in August, while Thailand and SouthKorea have recorded three straight months of declines inoverseas sales.

Migration Gains

Elsewhere in the Asia-Pacific region today, New Zealandgovernment figures today showed permanent migration rose for thefirst time in three months in September. Arrivals exceededdepartures by 90 people, Statistics New Zealand said inWellington today.

In Europe’s day ahead, a report may show German producerprice growth slowed in September to 0.3 percent from a monthearlier from a 0.5 percent increase in August, according to themedian estimate in a Bloomberg survey of economists.

In the U.S., a National Association of Realtors report mayshow September sales of existing homes at a 4.74 million annualpace, compared with a 4.82 million rate a month earlier, aBloomberg survey of economists showed.

Government Boost

Governments in Southeast Asia have loosened fiscal policiesto spur growth. Philippine President Benigno Aquino isincreasing spending to a record and seeking more than $16billion of investments in roads and airports, and MalaysianPrime Minister Najib Razak is also boosting outlays.

The region’s growth prospects are helping lure companies, with Japan’s foreign direct investment in Southeast Asia surpassing that in China. Japan’s investment in the Association Southeast Asian Nations more than doubled to$19.6 billion in 2011 from the previous year, according to JapanExternal Trade Organization’s figures using finance ministrydata. In the same period, FDI in China and Hong Kong rose 52percent to $14.2 billion.

Japan’s Tsuneishi Shipbuilding Co. said earlier this yearit is considering Indonesia, the Philippines and Myanmar foranother shipyard. Japan, South Korea and China are among thefastest-aging countries in the world, while developing nationsin Southeast Asia are among the youngest in the region.

“Confidence domestically is high everywhere in SoutheastAsia,” said Edward Teather, a Singapore-based economist at UBS.“We’re beginning to see indicators bottoming out and improving.That can get things heated up fairly quickly.”