Asia: A bumpy boom year, as predicted. Shocks from global risk re-pricing will linger, but the contagion is limited and no crisis is likely given Asia's small exposure to US sub-prime mortgages, ample liquidity, strong external payments and low levels of leverage.

Australia: Domestic drive
Bangladesh: Tough times ahead
China: The slowdown, not just yet
EU: Recovery still on track
Hong Kong: Strength from within
India: A two speed economy
Indonesia: Ambitious fiscal policy
Japan: Where are the consumers?
Malaysia: Steady it grows
New Zealand: High interest rates limit growth
Pakistan: Politics unsettling
Philippines: Shifting growth base
Singapore: Property boom undeterred
South Korea: Resilient and liquid
Sri Lanka: Further tightening
Taiwan: Politics gaining traction
Thailand: Light at the end of the tunnel
US: Fed cuts to be short and sweet
Vietnam: Building of excesses
Economic Forecasts
Market Forecasts

ASIA

Nicholas Kwan
Regional Head of Research, Asia
+852 2821 1013
Nicholas,Kwan@hk.standardchartered.com

A bumpy boom year, as predicted

- Market volatility to linger, but no crisis
- Risk re-pricing to prompt portfolio shifts, not exodus
- Slower growth, higher inflation, and stronger currencies

Call of the next 12 months
1. A bumpy ride, but no crisis. As predicted in Jan, 2007 is turning out to be a year of volatile but respectable growth for Asia. Shocks from global risk re-pricing will linger, but contagion is limited and no crisis is likely given Asia's small exposure to US sub-prime mortgages, ample liquidity, strong external payments and low leverage. Any sharp US rate cuts could buoy short-term regional liquidity and sentiment, though weaker US demand will curb real sector growth modestly.

2. Major portfolio shifts in response to risk re-pricing. Aside from a temporary sell-off driven by liquidity crunch outside the region, no mass exodus of funds out of Asia like the previous crisis is expected. To the contrary, Asia may attract more capital, both from outside and within the region, given its strong fundamentals. Asia's resilient investors, especially some sovereign funds, will also take advantage of the market turmoil to raise their investment in and outside the region.

Key Risks
1. Sharp fall in US home prices and consumer demand, which will aggravate financial market volatility and weaken demand for Asian exports, on top of rising protectionism in the run-up to the November 2008 US presidential election. Although demand from the EU and China stays strong, any recession in the US (not our base scenario) could still dampen Asia's growth prospects significantly. Asia is more resilient, but not yet fully decoupled from the US, especially for those open economies with weak domestic demand.

2. Policy mishap and asset bubbles are the largest domestic risks. Political transitions in China, Japan, Korea, Taiwan, Thailand, Pakistan, Bangladesh and Sri Lanka still carry significant uncertainty and may impede policy responses to challenges like rising inflation, brewing asset bubbles, weak investor confidence and others.

Key Macro Trends
1. Growth to ease but stay above norm, especially for those with strong domestic demand and less-open capital accounts like China, India and Vietnam.

2. Inflation to edge up, strong currency preferred to monetary tightening. Elevated food and energy prices and robust demand will create inflationary pressure across the region. No sharp tightening is likely given market uncertainties, except for China and India where monetary policies are less affected by external factors.

AUSTRALIA

Frances Cheung
Economist, +852 2820 3609
Frances.Cheung@hk.standardchartered.com

Domestic drive

- Strong domestic demand drives growth
- A tight labour market is pushing up prices
- The RBA is likely to hike again before year end

Call of the next 12 months
1. Domestic strength to continue, supported by the tight labour market and expansionary budget. This, together with an upbeat business sector and thus investment, will drive GDP growth higher to 3.8% this year. A diversified export structure limits the direct impact from a US slowdown. Only 5-6% of Australian merchandise exports go to the US, with 14% going to China, 19% to Japan, and 10% each to ASEAN and the EU.

2. RBA to hike. Inflationary risks from the buoyant labour and housing markets are likely to prompt the RBA to hike its OCR by 25bps again before year-end. After this, we see steady rates throughout 2008, with risks on the upside.

3. AUD/USD to stabilise at around 0.79-0.82 as high yield is counteracted by external deficits. Risks are on the upside should the RBA hike rates more aggressively than expected.

Key Risks
1. Carry trade unwinding. Given large external deficits and relatively thin trading volume of the currency compared to other majors, the AUD is vulnerable to shocks, especially if higher risk aversion leads to sharp reversal in carry trades.

2. Adverse development in the housing market. While rising income can justify part of the rise in house prices, households are gearing up and their burden is increasing. Property price-to-income ratio is at historically high level.

Key Macro Trends
1. Domestic activities have strengthened in the past few months. The labour market is tight, with a record low jobless rate of 4.3%. Manufacturing and services indices both pointed to expansionary activities. The housing market also seems to have shrugged off the previous rate hikes from the RBA, with rising rents and falling vacancy rates. We expect the tight labour market and the expansionary budget to support spending going forward.

2. Inflation to pick up. While headline CPI inflation for Q2 eased to 2.1% y/y, the RBA's preferred measure of trimmed mean stayed high at 2.7%. On the back of cost-push pressures and asset price inflation, we expect CPI inflation to pick up going into 2008.

BANGLADESH

Shuchita Mehta
Senior Economist; +9122 2268 3235
Shuchita.Mehta@in.standardchartered.com

Anubhuti Sahay
Economist; +9122 2268 3182
Anubhuti.Sahay@in.standardchartered.com

Tough times ahead

- Growth to slow down on politics and higher rates
- Twin deficits to widen in FY07/08
- BDT to weaken, albeit at a slow pace

Call of the next 12 months
1. More tightening likely. Inflation, driven primarily by food prices and strong consumer demand, is at a high of 9.2% y/y and growth in monetary aggregates is way ahead of Bangladesh Bank's tolerance range. Though private credit has slowed on political uncertainty, flush liquidity in the banking system warrants further tightening. The central bank also underlined the need for a revision in interest rate in shorter tenors through a Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR) hike. We expect a 50bps hike in both reverse repo rate (to 7.00%) & CRR (to 5.50%) in FY07/08 (started in July).

2. A weaker BDT in FY07/08. The Taka (BDT) has been relatively stable over the past six months. However, it is expected to depreciate gradually by mid-2008 as the current account surplus shrinks on a widening trade gap. A tougher global environment is also expected to keep the BDT risk premium high. But larger remittance inflows should prevent any sharp deterioration in the current account balance and hence the currency.

Key Risks
1. Persisting political uncertainty. In its bid to fight corruption, reform electoral rules and clean up factional politics, the care - taker government put two of the most influential political leaders, Begum Khaleda Zia and Sheikh Hasina, behind bars. While it sends a positive signal, political uncertainty will persist till the Dec 2008 general election. Business sentiment will suffer as the situation remains fluid.

2. Widening trade deficit. In FY06/07 export growth eased to 15.7% from 20% in the previous year, pushing the trade deficit to a high of USD 3.5bn, up 19% y/y. Although strong remittance inflows led to a 59% rise in FX reserves in FY06/07, a wider trade deficit and worse investment climate could undermine the external payments position.

Key Macro Trends
1. Slower growth. Devastating floods, higher interest rates and slower domestic business activity could curb economic growth. Indeed the government recently cut its FY06/07 growth forecast to 6.5% from 6.5%-6.8%.

2. Wider fiscal deficit. Fiscal deficit was contained at 3.7% of GDP in FY06/07, mainly by reducing development expenditure. Given low revenues, rising oil prices and the lack of reforms, the deficit is set to widen in FY07/08 and may exceed the official projection of 4.2% of GDP.

CHINA

Stephen Green
Senior Economist, +86 21 5887 1230 extn.5223
Stephen.Green@cn.standardchartered.com

Jason Chang
Economist; 86-21-5887 1230 x 5675
Jason.Chang@cn.standardchartered.com

The slowdown, not just yet...

- The US sub-prime turmoil has not impacted China...yet
- Growth to remain strong over the next six to nine months
- Inflation and asset price concerns to trigger more rate hikes

Call of the next 12 months
1. The direct impact on China from the on-going US sub-prime turmoil has been limited, thanks to China's controlled capital account. Sentiment remains bullish and the stock market plots new highs. Policy makers may use indirect measures to deflate prices.

2. Gradual 5-6% (annual) CNY appreciation despite growing trade surplus and inflationary pressure. Appreciation may accelerate in H1-08, but may pull back in H2 as growth eases and the trade surplus shrinks.

3. The 17th Party Congress in Oct-07 will not signal any fundamental economic policy change, and we could see accelerated social spending. A successor to Party Secretary Hu Jintao may surface.

Key Risks
1. Sharp sell-off in both equity and real estate markets. Although consumption and investment are probably not as tied to asset prices as in mature markets, a slump could still have serious psychological impact, hitting urban consumption and business confidence.

2. Sharp credit deterioration set off by weak exports. As the US and other export markets deteriorate, competition in the domestic market will rise. Producer margins may suffer and credit positions worsen.

3. US protectionism. The US Congress will likely pass legislation to label the CNY a "misaligned" currency in 2008. However, we do not believe the subsequent sanctions, if any, will be big enough to affect the broad swathe of China's exports to the US.

Key Macro Trends
1. Growth to remain over 11% in the next 6-9 months, but H2-08 may see the beginning of a slowdown as export growth eases, confidence dissipates, and corporate profits shrink. Global commodity markets may react negatively, but we expect China to achieve a soft landing.

2. The interest rate cycle to peak in Q2-08 as inflation and asset bubble concerns ebb in light of weaker overall growth momentum.

3. Fiscal policy will become more important in H2-08 as growth eases and a debate on how to stimulate the economy starts. Fiscal activism may kick in 2009.

EU

Gavin Redknap
Economist, +44 20 7280 6071
Gavin.Redknap@uk.standardchartered.com

Recovery still on track

- Europe continues to recover at a typically languid pace
- Rates across the continent to remain on hold for now
- Europe-Asia trade and investment continues to grow rapidly

Call of the next 12 months
1. Economic growth to remain (relatively) strong. The recovery in the key economies in Europe remains firmly on track, particularly in Germany. Meanwhile, growth in the UK remains fairly solid, despite growing evidence that the housing market is slowing. The weakness in the real estate sector in Spain is somewhat more pronounced, and should have a more serious impact on growth there, as it should in Ireland. Nevertheless, the aggregate picture on the continent remains sound.

2. Rates on hold as turbulence persists. The favorable growth picture and tight supply-side indicators certainly point to risks to inflation going forward, but it is not such an issue as to force central banks to continue to hike rates in the face of market turbulence. Indeed for the Bank of England, recent turbulence may rule out what looked likely to be one final hike. The ECB by contrast is simply holding rates steady for now, and intends to hike again at some point. The Swiss National Bank, with a target rate currently of just 2.5%, still has plenty to do following its hiatus.

Key Risks
1. Financial stability. In some ways financial market turbulence has been more pronounced in Europe than in the US, with the spread of short-term interbank rates over policy rates significantly higher. That reflects both less action to soothe markets in some places (the BoE has been particularly aloof) and worries concerning inadequate risk control at some European financial institutions. The risk is low, but there is still some chance that market turbulence currently could morph into financial instability.

Key Macro Trends
1. Europe has now surpassed the US in importance for Asian trade. We predicted earlier this year that Asian exports to Europe would soon overtake those to the US. Data from H1-07 showed that happening even sooner than we were anticipating. Growing trade with Europe should help alleviate pressure on Asian exporters from weaker export growth to the US.

2. European firms are leveraging off of EM. Europe has for some time been the foremost source of inward FDI for Asia (chart 2), a trend that may be reciprocated as Asian FX reserves are channeled into activist wealth funds.

HONG KONG

Kelvin Lau
Economist, +852 2821 1033
Kelvin.KH.Lau@hk.standardchartered.com

Strength from within

- Hibor to trend lower with US rates
- Capital inflows from China to gain traction
- Domestic demand supports growth

Call of the next 12 months
1. Elevated interest rates to gradually trend lower. Lingering US sub-prime concerns, which pushed up USD LIBOR, has kept HIBOR under upward pressure of late. But we expect HIBOR to eventually ease, once the Fed starts cutting and LIBOR follows lower. Only then will domestic banks have room to start cutting their prime rates.

2. Capital inflows from China to rise. China's pilot scheme to allow Mainland investors to directly invest in overseas equities, starting with Hong Kong stocks, will take time to materialise due to the lack of infrastructure and operating details. Given time, the scheme, along with QDII and others, could bring growing inflows.

3. Asset prices to remain elevated despite increased volatility in stock and money markets. More importantly, the lagging property market could gain further traction amid lower interest rates and still robust domestic fundamentals.

Key Risks
1. Extended squeeze and volatility in global credit and asset markets could erode local confidence and liquidity, undermining financial stability and growth prospects.

2. A full-fledged US recession as financial turmoil spills over to the real economy, prompting protectionism in the US and cutting export prospects for HK.

3. Aggressive Chinese austerity measures that may be introduced to rein in its super-speed economy. While a soft landing remains our base scenario, the risk of a hard/crash landing should not be overlooked and have its impacts underestimated.

Key Macro Trends
1. Growth to ease but remain modest, despite rising US macro risk and growing financial market volatility. While export growth may ease with weaker US demand, strong domestic momentum and exports to China/EU should support the economy. Low leverage and flush liquidity should cushion any serious external shocks.

2. Inflation to trend up in 2008, partly due to the base effect from property rate reductions this year, and partly due to higher import prices. While this is unlikely to become a serious macro concern, it may attract more noises from the underprivileged, reflecting widening disparity amid rapid restructuring of the economy and its labour market.

INDIA

Shuchita Mehta
Senior Economist; +9122 2268 3235
Shuchita.Mehta@in.standardchartered.com

Anubhuti Sahay
Economist; +9122 2268 3182
Anubhuti.Sahay@in.standardchartered.com

A two speed economy

- Domestic demand to hold the fort, as exports decelerates
- RBI to tighten, albeit with a lag
- INR to weaken in the near-term, but re-strengthen later

Call of the next 12 months
1. Monetary policy decoupling. The recent weakness in US data and the associated financial market risks might make the Reserve Bank of India (RBI) adopt a wait and see approach for now. However, strong domestic growth and potential for rekindling of inflationary pressures will prompt it to tighten again later. We expect 25bps hike in reverse repo and repo rates and 50bps hike in CRR in Q1-08.

2. INR to weaken in near-term. Although we are long-term INR bulls, near-term outlook will be clouded by perception of risk and capital inflows may flicker in response to the degree of bad news hitting the global scene. Hence, as rates remain stable in near term, INR may shed some of its recent gains as trade deficit and overvaluation concerns grip market attention.

3. Further liberalisation of capital account. RBI may introduce draft guidelines on onshore INR futures which could provide a platform to participants to hedge their currency exposure besides boosting the volume and depth in the forex market.

Key Risks
1. Political mishap. The markets might turn jittery on local political development. Though it is too early to envision the outcome of the current deadlock between the United Progressive Alliance (UPA) government and its left allies, uncertainty could prevail till their differences are sorted out.

2. Global shocks. Although India is less dependent on exports than its regional peers, a sharp worsening of the global economy could have a knock-on impact on growth via exports, investment and asset values.

3. Inflationary pressures. Strong growth in domestic demand and monetary aggregates, inflated asset prices, elevated oil prices and a much weaker INR could reignite inflationary pressures.

Key Macro Trends
1. Investment to drive economic expansion as exports eases with weaker global demand; structural positives should support investment and consumption.

2. Inflation to hit a near-term trough. In coming weeks inflation could drop below 3.5% y/y before rebounding above 4% due to base effects.

3. Another year of external payment surplus given strong inward remittances and capital inflows that would outstrip a widening trade deficit.

INDONESIA

Fauzi Ichsan
Senior Economist; +62-21 5799 9117
Fauzi.Ichsan@id.standardchartered.com

Ambitious fiscal policy

- More expansionary fiscal policy before 2009 elections
- BI rate to hold steady amid higher volatility and inflation
- IDR also to ease near-term before piercing 9,000 in 2008

Calls of the next 12 months
1. Faster GDP growth as the economy further recovers from the steep hikes in domestic fuel prices and BI rate in H2-05. We expect GDP to rise by a real 6.1% in 2007 (the highest since the Asian financial crisis) and 6.3% in 2008 on the back of lower interest rates, additional fiscal stimulus and more public infrastructure spending.

2. BI rate cuts to slow amid growing market volatility triggered by the US sub-prime turmoil. We expect rate cuts to resume with lower US rates, extending the 450bps cut between May-06 and July-07.

3. IDR appreciation to slow in the rest of 2007 due to rising financial market volatility and a narrowing USD/IDR interest rate differential. However, given accelerating growth and improved external payments, the IDR should resume its appreciation trend in 2008 and reach sub-9,000 levels.

Key Risks
1. Ineffective fiscal policy that fails to provide necessary support to growth, especially in infrastructure and local spending. This is important as the election year of 2009 gets closer. The government is aiming to accelerate GDP growth by increasing its budget deficit from 1.0% of GDP in 2006 to 1.6% in 2007 and 1.7% in 2008.

Key Macro Trends
1. Consumption and investment recovery. Lower interest rates have helped stimulate household consumption and investment. Policy reforms (new tax and investment laws, etc.) and the government's USD 150bn infrastructure program are also likely to boost investment in H2-07 and 2008.

2. Solid external payments position as strong commodity prices boosted exports by 14% to USD 53.6bn, raising the trade surplus of H1-07 to USD 19.7bn from USD 16.6bn in H1-06. Although imports also rose by 16% to USD 33.7bn in H1-07 and is expected to stay robust with the revival of real investment and growing consumption, we believe the current account balance should remain in surplus in 2008, supporting the IDR and cushioning the economy from future external shocks.

JAPAN

Frances Cheung
Economist, +852 2820 3609
Frances.Cheung@hk.standardchartered.com

Where are the consumers?

- Consumer spending softens as wages fail to rise
- But cost-push pressures are building
- The BoJ is to hike next year when prices pick up more

Call of the next 12 months
1. Consumer confidence to return. This development has been much delayed, though it is relatively unrelated to the US sub-prime issue. With the favourable employment outlook and a still healthy corporate sector, wages are set to rise, boosting consumer confidence.

2. Prices to rise. Production capacity and the labour market are tight, as suggested by both the data and Tankan surveys. Cost-pull inflationary pressures are likely to lead to higher consumer price inflation in coming quarters.

3. We expect the BoJ to hike next year to bring interest rates back to neutral. We believe the BoJ will act upon the gradual pick-up in inflation, albeit slowly and somewhat cautioned by the US sub-prime issue. Once the fear of going back to deflation is gone, economic growth stays positive and markets stabilise, the BoJ will act.

Key Risks
1. Political and policy malaise as the ruling LDP continues to be mired by scandals, election defeats, and leadership problems. There could be further delay in passing bills for reforms given obstacles from the opposition.

2. Credit and carry trade shocks. A rise in risk aversion that triggers more abrupt unwinding of carry trades could lead to sharp currency movements and undermine business confidence. As over one-fifth of Japanese exports goes to the US, exporters are vulnerable to any sharp deterioration in the US economy.

Key Macro Trends
1. Improving labour market. While headline wages may have been held down by the retirement of expensive staff, starting salaries for graduates are rising. The labour market is getting tighter, with the jobless rate down to a fresh 9-year low of 3.6% in Jul.

2. Business stays positive but households are uncertain. Industrial output rebounded to 3.2% y/y in Jul while exports rose by 12.7% y/y in the Jan-Jul period. However, retail sales fell by 2.2% y/y in Jul, the largest drop since Feb-05. Household consumer confidence also fell to 44.4 in Jul, the lowest since Dec-04. A more sustainable recovery supported by both business and consumers is yet to evolve.

MALAYSIA

Tai Hui
Regional Head of Economic Research, SE Asia
+65 6530 3464
Tai.Hui@sg.standardchartered.com

Steady it grows

- MYR internationalisation to go slow amid global turmoil
- BNM expected to keep rates stable
- Government to pump prime ahead of elections

Call of the next 12 months
1. MYR internationalisation to go slow and steady. The looming general election, concerns about domestic growth momentum and global financial market stability, the complexity of the currency internationalisation process and the lack of clear consensus within the government suggest that moves in this direction are likely to be slow and steady.

2. BNM to keep rates steady. Inflation is expected to pick up in late 2007 and 2008, preventing the central bank from cutting rates. Meanwhile, external uncertainty should also caution BNM from hiking rates, especially given the US sub-prime turmoil.

3. Government to pursue expansionary fiscal policy ahead of election. To ensure steady growth momentum and positive sentiment amid growing external uncertainty, the government is likely to keep its pro-growth policy bias.

Key Risks
1. The US sub-prime turmoil and weak IT exports present the greatest immediate threat to Malaysia's growth prospects. While this can be partly offset by growth in commodity exports and demand from Asia and Europe, a highly open economy allows little room for complacency.

2. Sizeable fiscal deficit that may crowd out the private sector and undermines the country's sovereign rating. While this has been kept at a modest 3.5% of GDP, the government's inability to shrink it further at a time of good economic growth implies that further improvement will be difficult going forward, especially given the need to pump prime ahead of elections.

Key Macro Trends
1. Strong consumer confidence boosted by favourable job market and income growth. This should remain the main growth driver in 2008.

2. Rising inflation, reflecting strong demand and higher wages. This would prevent BNM from cutting rates. Also, we have raised our 2008 inflation forecast to 2.5%.

3. MYR to strengthen gradually along with other Asian currencies and sustained capital inflows. This may help contain import inflation, while avoiding severe erosion of export competitiveness versus other Asian exporters.

NEW ZEALAND

Frances Cheung
Economist, +852 2820 3609
Frances.Cheung@hk.standardchartered.com

High interest rates limit growth

- High interest rates to dampen spending and GDP growth
- But concern over inflation means no quick rate cut
- NZD/USD to consolidate in coming months

Call of the next 12 months
1. High interest rates to hurt. A series of rate hikes have hit exports, and more recently affected domestic spending as well. We expect more feed-through in coming quarters. Growth should remain subdued before picking up in Q3-08.

2. No near-term rate cut. The RBNZ remains concerned about the medium-term inflationary risks from the still vibrant housing and labour markets. Given the threat of slowing growth, the best strategy for now would be to keep rates steady.

3. Limited scope for NZD to strengthen. With investors being more aware of the risks of carry trade and the still large current account deficit, we see NZD/USD consolidating in coming months. NZD is likely to under-perform AUD due to economic fundamentals.

Key Risks
1. Re-pricing of risks. Shocks that trigger abrupt changes in investor risk appetite would threaten the strength and stability of carry currencies like NZD. While a weaker currency is supportive for external trade, too rapid a move may damage sentiment and capital flows.

2. A sharp US slowdown that further undermines NZ exports, which has been slowing already. The US accounts for around 13% of NZ exports.

Key Macro Trends
1. Consumption to slow, following exports. Exports dropped by 0.3% y/y in the first seven months of this year, compared with the 12.4% growth in 2006. Consumption has been surprisingly resilient so far, but there are early signs that spending is losing steam. Retail sales dropped m/m in two of the three months in Q2-07. We expect higher interest rates, which have led to higher mortgage rates, to dampen consumption, counteracting the positive impact from the tight labour market.

2. Current account deficit to remain large. There could be some improvement in the trade account on the back of reviving exports in the latter part of 2008. But the income account deficit is likely to remain wide, with high debt service payment and repatriation of profits, making any improvement in the overall current account position moderate.

PAKISTAN

Ahsan Chishty
Economist; 92-21244 2008
ahsan-javed.chishty@pk.standardchartered.com

Politics unsettling

- Politics takes centre stage, but risk remains in check
- Persistent resource gap to keep investment cycle vulnerable
- Peaking of the interest rate cycle as growth concerns rise

Call of the next 12 months
1. Domestic politics to dominate, key man risk to fall. The political climate will remain fluid as President Musharraf navigates elections in the face of an emboldened opposition and an activist judiciary. 'Who will ride shotgun to the President' will remain the question of the year. Expect politics of compromise to prevail as the military's influence is diluted, reducing the 'key man' risk of personal politics.

2. Modest PKR depreciation. With savings still insufficient to cover investment, the USD/PKR will be under depreciation pressure. However, as about half of the current account deficit is covered by growth-insensitive capital inflows, we expect USD/PKR depreciation to be limited to 1-2% for FY08.

3. Interest rates have peaked. We expect the next move by the central bank to be down due to increasing risks to growth from political uncertainty and a tight monetary environment. The first cut will probably be in mid-2008.

Key Risks
1. Sharp deterioration in investor confidence. A worsening of the political condition (e.g. martial law) and/or a monetary overkill could significantly deter investment and keep the USD/PKR vulnerable. Both are of low probability.

2. Resurgence in food inflation. A tumultuous monsoon ending close to the month of Ramadan might trigger another round of price hikes in food items. A similar chain of events transpired in FY07 - the only difference is that this time it will happen amid a significant agriculture surplus.

Key Macro Trends
1. Economic acceleration post-elections. Significant reforms and structural improvements made over the years may see growth momentum accelerates post-elections. Policy continuity and consistency will support investor confidence.

2. Power shortages to remain. The estimated gap between operational capacity and demand ranges between 750MW to 2000MW. While new capacity is expected to come onstream steadily, the first surplus may not appear until 2008-09.

3. Inflation to ease. Over the year, inflation expectations are likely to level off as (1) aggregate demand eases with restrictive credit growth, and (2) prices of key food items stablise.

PHILIPPINES

Frances Cheung
Economist, +852 2820 3609
Frances.Cheung@hk.standardchartered.com

Shifting growth base

- Growth shifting from exports to domestic demand
- Improving fiscal position allows some pump-priming
- Benign inflation makes room for interest rate cut by end-07

Call of the next 12 months
1. Central bank to cut rates by end-07 once inflation eases further with the fading of near-term upside risks. Inflation eased to 2.4% y/y in Aug-07 and money supply growth fell below 20%.

2. Fiscal deficit this year may be slightly larger than the official target of PHP 63bn, probably by PHP 8bn. While we maintain that the government's fiscal target is too ambitious, we are less pessimistic than the market. On top of recent improvements in tax collection, privatisation projects, if successfully concluded, would also bring additional proceeds to cover the revenue shortfall.

Key Risks
1. Risk appetite reversal. Lingering concerns over the US sub-prime/credit issues may trigger further decline in investor risk appetite, triggering massive capital outflows from emerging markets, including the Philippines.

2. Falling OFW (overseas foreign worker) remittances if the US economy slows down. While the Philippines' trade linkage with the US is not particularly strong compared to many other Asian neighbours, over half of its OFW remittances come from the Americas, essentially the US. Total remittances amount to 12% of GDP and are a key force behind consumption.

Key Macro Trends
1. Export growth to stay soft and uneven. In line with our full year forecast of 6.8%, export growth eased to 6.6% y/y in H1-07 from 15% in 2006. While exports to the US is weak, it was partly offset by strong exports to China and HK. This trend is likely to continue in the near future, especially if the latest market turmoil dent US consumer spending.

2. Domestic demand to grow in importance. Private consumption, government spending and domestic investment all rose strongly in Q2-07. A favourable job market, especially services, should support private consumption, especially if OFW remittance inflows are undisrupted. An improving fiscal position should also encourage the government to spend more, particularly on infrastructure projects with private sector participation.

SINGAPORE

Tai Hui
Regional Head of Economic Research, SE Asia
+65 6530 3464
Tai.Hui@sg.standardchartered.com

Property boom undeterred

- Property boom to persist despite sub-prime turmoil
- SGD to stay strong to keep inflation in check
- Polarisation of workforce and income may worsen

Call of the next 12 months
1. Property market boom to persist with low real interest rates and strong income growth. Despite the US sub-prime problem and sharp swings in equity and credit markets, property demand stays strong. The price-income ratio and rental yield of residential property are still at benign levels. The wildcard is whether the government will take measures to curb prices.

2. SGD NEER is expected to maintain its gradual appreciation trend. Despite greater global uncertainty, inflationary pressure should persuade the MAS to adhere to the policy of modest and gradual appreciation of the SGD.

3. Further polarisation of the labour market driven by rapid growth of high value-added services but stagnant low-end industries. This, if unattended, could cause income disparity to widen, undermining growth sustainability and social stability.

Key Risks
1. Rising labour and rental costs that threaten to undermine competitiveness. While general consumer prices are likely to remain well contained, higher rentals and salaries could increasingly undercut Singapore's cost advantage and competitiveness.

2. Prolonged weakness of the IT sector, which remains the bellwether of the economy. Poor IT exports has kept Singapore among the region's worst export performers in 2007. While the drag was partly offset by strong performance of other sectors like pharmaceuticals, this may not be sustained if the current weakness of the IT sector is prolonged.

Key Macro Trends
1. Tight labour market trend to continue. Strong economic growth will support employment growth and keep the jobless rate low. A significant proportion of the new jobs will be created in the service sector as manufacturing performance continues to lag. While imported talent may resolve part of the problem, this should be complemented by efforts to upgrade and re-train the local workforce so as to reduce the risk of a growing labour market mismatch and widening income disparity.

2. Inflation to stay elevated, but still mild. Due to demand pull factors, higher public charges and taxes, consumer price inflation could break above 2%. As a result we have raised our full year inflation forecast to 1.5% and 2.2% for 2007 and 2008 respectively.

South Korea

Chongwoo Chun
Senior Economist; +822 3702 5045
Chongwoo.Chun@scfirstbank.com

Eunhye Yoon
Research Assistant, +822 3702 5072
Eunhye.Yoon@scfirstbank.com

Resilient and liquid

- Strong growth despite the sub-prime saga
- Domestic liquidity remains buoyant
- MPC to hold now, and hike in 2008

Call of the next 12 months
1. Growth momentum stays solid despite the US sub-prime problems and turmoil in the major financial markets. Domestic demand stays strong and exports remains robust, which could push GDP growth slightly higher in 2008.

2. MPC to hold and hike later. While the uncertainties in global financial markets may keep the MPC on hold in the near term, rates are likely to trend higher in 2008 once the financial situation stabilises and inflation pressure builds with higher economic growth.

3. KRW to stay strong, given sustained capital inflows and solid economic growth in 2008.

Key Risks
1. Sharp decline in US demand triggered by the sub-prime problems. While no lasting contagion effect on the Korean financial markets is expected, the sub-prime issue could dampen US consumer demand and undercut Korean exports.

2. Monetary overkill if the MPC raises interest rates too fast too much, being too preoccupied by the threat of domestic inflation and too complacent about the negative impact of the US sub-prime issue.

3. Squeeze in liquidity, either due to a less favourable current account surplus, or high oil prices, or a more substantial contagion effect from the US sub-prime issue.

Key Macro Trends
1. Stable growth momentum supported by solid domestic demand and still robust exports. While it may be too early to tell the actual impact of the US sub-prime issue on the real economy, the firing of both export and domestic growth engines should keep the Korean economy running at reasonable speed in the next 6-12 months, more so given growing pre-election spending.

2. Still ample domestic liquidity despite some shortages in foreign funding, which is partly driven by the policy to reduce short-term foreign borrowings as a way to stabilize the KRW.

3. Rising inflation pressure, especially in service charges and asset prices. Both cost push and demand pull forces are in play, which will ultimately force the BoK to resume hiking in 2008.

SRI LANKA

Shuchita Mehta
Senior Economist; +9122 2268 3235
Shuchita.Mehta@in.standardchartered.com

Anubhuti Sahay
Economist; +9122 2268 3182
Anubhuti.Sahay@in.standardchartered.com

Further tightening

- Growth set to ease further in 2007
- High inflation makes rate hikes inevitable
- LKR to weaken with large trade deficit

Call of the next 12 months
1. Further monetary tightening. Fuelled by aggregate demand pressures, higher food prices, reduced fuel subsides, and rapid expansion in monetary aggregates, double-digit inflation is likely to prompt another 50bps tightening in the remainder of 2007.

2. LKR to weaken as trade deficit remains large and political turmoil undermines inflows of tourist and investment. The US sub-prime sage and a more volatile global financial market are not helpful either.

Key Risks
1. Grim political outlook. The political situation remains fragile as the rebels have declared their aim to cripple the island's economy with major attacks on military and economic targets. Despite international efforts, hopes of peace were hit by comments by the Tiger's political wing leader that peace was "not possible" with President Mahinda Rajapaksa. Recent resignations by the Ceylon Worker's Congress (CWC) members, a minor coalition partner, from the cabinet have also raised questions about the stability of the government, and undermined tourism and business confidence. Tourism, highly significant from an employment perspective, suffered a 24% drop in arrivals in H1 2007.

2. Worsening fiscal deficit. Given a high fiscal deficit to GDP ratio of 8.4% in 2006 (9.2% budgeted for 2007), the fiscal situation is likely to worsen with mounting defense spending. Both the composition and funding of the deficit are worrisome. Current expenditure outweighs capital outlay and recent reports suggest that public investment has been axed by 25%. As the deficit is mainly financed domestically, this crowds out private investment.

Key Macro Trend
1. Slowing economic growth. Slower global growth and monetary tightening are likely to curb GDP growth in 2007. Real GDP growth has already eased to 6.1% y/y in Q1-07, the lowest in two years and down from 7.9% in Q1-06. This was primarily driven by the poor performance of the agriculture sector and slower growth in services. Heightened political concerns are also expected to dampen investment sentiment.

TAIWAN

Tony Phoo
Economist; 886-2-6603 6338
Tony.Phoo@tw.standardchartered.com

Politics gaining traction

- Concern over key elections on agenda
- Protracted weakness in US housing a key threat
- Growth supported by rebound in domestic demand

Call of the next 12 months
1. Rising tension, shifting policy. With the Legislative Yuan and Presidential elections scheduled for Jan-07 and Mar-07, the ruling party is expected to stir up nationalistic and anti-Beijing sentiment in a bid to shore up political support and voter turn-out. This would raise socio-political tensions but is unlikely to undercut broad stability. Instead, it may underpin major policy shifts in the post-election period.

2. Mild appreciation of TWD expected. With the US Fed seen opting for rate cuts into 2008, the narrowing yield gap will keep the TWD supported. Also, the US sub-prime fallout should reduce appetite for risk seeking activities overseas and help deter capital outflows.

Key Risks
1. Protracted weakness in electronics demand and US housing. The US sub-prime fallout had at one point cut 17% off Taiex, but caused no systemic distress. The longer term impact will depend on US import demand, especially electronics, which is Taiwan's key growth driver. Any serious slowdown in US housing and consumer markets could dent Taiwan's growth outlook badly.

2. Stalemate in elections. Only convincing wins by the same party (DPP or KMT) in both the legislative and presidential elections will end the current deadlock between the legislative and executive arms of the government. If not, expect continuing political bickering and policy blockage that will undermine Taiwan's medium- to long-term growth prospects.

Key Macro Trends
1. Domestic demand picks up pace. With the impact from the charge/credit card debacle abating, consumption is likely to pick up pace amid improving labor market conditions. This will cushion slowing external demand.

2. Inflationary risks building up. Hard pressed by falling margins and sustained high raw materials and oil prices, producers are looking to pass on costs to consumers. Also adding to upside risks to inflation are rising asset prices, especially equity and housing.

3. CBC stays vigilant. Given upside risk to prices and the need to narrow the TWD yield gap with other currencies to stem capital outflows, the central bank is expected to keep its current tightening stance for the rest of H2-07 until major central banks opt for monetary easing.

THAILAND

Usara Wilaipich
Senior Economist, +662 724 8878
Usara.Wilaipich@th.standardchartered.com

Light at the end of the tunnel

- Growth prospects improve as political tension eases
- THB to turn weaker as current account deteriorates
- Capital controls to fall due to rising funding needs

Call of the next 12 months
1. THB to weaken. The Thai baht is expected to reverse its strengthening trend to become weaker, less because of the global financial turmoil but more due to domestic development. The current account surplus, which has been supporting the THB, will shrink with growing import demand as investment accelerates.

2. Liquidity to tighten. An improving political situation could prompt an early pick-up in investment, to be led by state enterprises. Higher funding needs would then reduce surplus liquidity and push up market interest rates.

3. Likely removal of the remaining capital controls. Since most public investment is funded by bonds, which are still subject to the 30% URR restriction, the BoT may have to lift its remaining capital controls to reduce funding costs.

Key Risks
1. Sharp deterioration in export demand, which is now Thailand's prime growth driver. Risk is high if US demand drops sharply due to the sub-prime issue, worse if there is any collateral damage in demand from China.

2. Reversal in risk appetite that leads to abrupt portfolio outflows. This could risk depressing Thai asset prices, raising financial market volatility and undercutting investor confidence and demand.

3. High oil prices, which could erode Thailand's trade balance and push up inflation given the economy's high dependency on oil imports.

Key Macro Trends
1. Improving economic outlook as political uncertainty subsides. This could pave the way for a gradual recovery in domestic demand in 2008.

2. Public spending should lead the recovery, supported by a larger 1.9% (of GDP) budget deficit for FY2008. Infrastructure spending of state-enterprises could jump-start private investment, especially capital-intensive industries which are under severe capacity constraints.

3. Limited room for further policy rate cuts in 2008 after a series of cuts in 2007. This is especially so if growth prospects improve and inflation concern rises with a weaker THB and high oil prices.

US

Doug Smith
Regional Head of Research, the Americas
+1 212 667 0564
Douglas.Smith@us.standardchartered.com

Fed cuts to be short and sweet

- The Fed may have to raise in 2008 after aggressive cuts
- Consumer confidence to depend on the labour market
- Protectionism rises ahead of the 2008 presidential election

Call of the next 12 months
1. Fed cuts will be quick and shallow to boost market sentiment, probably by 100bps before end-07. The risk is that the Fed needs to reverse course and tighten in 2008 as the economy picks up steam and inflation pressures do not abate.

2. Consumer confidence to worsen with the labour market. While the future expectations component of consumer confidence has held up despite all the negative housing news, recent weakness in the labour market may see consumer confidence worsen in coming months.

Key Risks
1. Sharp deterioration in home prices. The news from the housing market will remain weak into 2008. But while home prices are no longer rising strongly, they have not really fallen y/y. A significant y/y price decline would further damage consumption and delay any recovery in residential investment - posing a risk to our growth outlook.

2. Rising protectionism. The November 2008 presidential election is not far off, and many politicians are taking a populist stance over middle-class job losses. Arguments that US markets are open while foreign markets are closed to US goods and/or that misaligned currencies make US exports less competitive appeal to an anti-trade audience.

3. Significant USD weakness which drives up US interest rates. This could occur if foreign capital inflows slow significantly over fears of overexposure to USD assets. This is not a high probability event in 2008.

Key Macro Trends
1. Growth will remain below trend for the rest of 2007 and the beginning of 2008. Residential investment will continue to be a negative for growth at least through the first quarter of 2008. Consumption will depend on the labour market outlook which has deteriorated in recent months.

2. Exports to lead near-term growth. Helping to offset the weakness in residential investment, growth in the rest of the world will continue to aid net exports as a source of growth. Consumption, however, may weaken with the labour market if the deteriorating trend revealed by the August payroll data continues. This may drag GDP growth to a sub-par 1.5% in 2007 and 2.3% next, still some distance from recession.

VIETNAM

Tai Hui
Regional Head of Economic Research, SE Asia +65 6530 3464
Tai.Hui@sg.standardchartered.com

Building of excesses

- Pursuit of high growth to continue
- Rising threat of inflation
- VND to stay weak, exports to remain strong

Call of the next 12 months
1. High growth strategy reinforced. Similar to China, a controlled and under-developed capital account cushioned Vietnam from any obvious impact from the US sub-prime shock. If anything, concerns about the potential falloff in US demand may reinforce the government's pursuit of its pro-growth policy, despite the growing threat on inflation.

2. More active money market operations to absorb excess liquidity. Barring higher interest rates and before the development of a more comprehensive monetary framework, the central bank would have only limited tools.

3. VND depreciation trend intact, with further buildup of forex reserves. The government is expected to continue its gradual VND depreciation policy to support exports. A current account surplus and FDI inflows would therefore boost forex reserves further. This may invite greater inflation and more VND appreciation pressure.

Key Risks
1. Runaway inflation. With a weak VND, large capital inflows, high food prices, and strong demand spurred by pro-growth policies, both consumer and asset prices are likely to rise higher and could destabilise the economy.

2. Supply side bottlenecks. As the economy continues its high-speed expansion and investment explodes, demand for physical and institutional infrastructure will rise and present major challenges to the government. Failure to keep up with such demand could seriously undermine longer-term growth prospects.

Key Macro Trends
1. GDP growth to remain high as investment and consumption stay buoyant. The economy is expected to expand by 8.5% in each of 2007 and 2008 given robust domestic demand and a pro-growth policy stance.

2. The trade deficit should remain small amid the rapid growth of exports and imports. Vietnam's trade deficit is likely to remain contained in the next 12-18 months, given strong growth momentum of both exports and imports. While imports may grow with strong investment demand, Vietnam's WTO membership should boost its export growth, especially given its relatively small export sector and low cost base.

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