Sunday, September 6, 2009

UBS : Indonesia & South East Asia May Remove Stimulus In 2010

By Shamim Adam

Sept. 4 (Bloomberg) -- Policy makers in Southeast Asia’s biggest economies may begin to remove monetary stimulus in their financial systems as early as the second quarter of 2010 as growth resumes, according to UBG AG. Singapore may shift its currency stance to one that allows for a modest and gradual appreciation of its exchange rate, while Thailand, Indonesia and the Philippines may start raising interest rates in the quarter ending June, UBS economist Edward Teather wrote in a report published yesterday. Malaysia will raise rates by 50 basis points next year, Credit Suisse predicts.

Central banks across Asia have started to signal they may soon need to raise borrowing costs as stimulus spending worth more than $950 billion revitalizes economies and threatens to stoke consumer prices. Credit Suisse yesterday raised its growth forecast for some Asian nations including Singapore and Thailand. “Discretionary monetary policy easing in Southeast Asia appears to be at an end,” Teather wrote. “Our forecast removal of policy stimulus is driven by an expected improvement in GDP growth, credit growth and inflation. Because of the shocks each economy has received in the last 18 months, any removal of stimulus will be both cautious and tentative and likely to be halted if growth moderates.”

Indonesia’s central bank yesterday refrained from cutting its benchmark rate for the first time in 10 months, judging faster inflation is now a bigger risk than slowing growth.

‘Earlier’ Tightening
“We conclude that Bank Indonesia has good reason to keep policy rates on hold until at least year end,” Teather said. “In 2010, we expect the reacceleration in inflation already underway will be very clear, and with it, inflation expectations. Monetary loosening in terms of lower interbank rates should continue, even with policy rates unchanged.” Bank Indonesia will probably raise rates 1.5 percentage points to 8 percent by the end of 2010, UBS and Credit Suisse said. Morgan Stanley, in a report today, said the risk of an “earlier policy tightening” is higher in Indonesia compared with other Asian economies.

Bank of Thailand Deputy Governor Atchana Waiquamdee said Aug. 31 it’s unlikely the central bank will cut rates further as the economy starts to recover from its first recession since the Asian financial crisis. Policy makers kept the rate unchanged at 1.25 percent last month for a third straight meeting after 2.5 percentage points of cuts between December to April. The Thai central bank may raise rates by 50 basis points in the second quarter before leaving borrowing costs unchanged for the rest of the year, Teather predicts. Credit Suisse expects the rate to be at 2.25 percent by the end of 2010.

De Facto Devaluation
The Monetary Authority of Singapore in April said it would adjust the trading range for the island’s dollar, a move economists said was a de facto devaluation of the currency. Singapore should return to a policy of allowing the currency to strengthen once the economy recovers from its deepest recession since independence in 1965, the International Monetary Fund said this week.

UBS foresees a “real possibility of a tightening move” by the central bank at its April review amid rising inflation expectations and credit growth, after earlier predicting no such move next year. Goldman Sachs Group Inc. yesterday said Singapore will allow more room for a stronger currency in 2010.

The Philippines will raise its benchmark rate to 4.5 percent in the second quarter of 2010 from 4 percent now, Teather said. Credit Suisse is predicting it will be at 5 percent by the end of next year.

Bangko Sentral ng Pilipinas reduced rates six times from December to July before keeping borrowing costs unchanged last month. The monetary policy stance “remains appropriate at this time,” Governor Amando Tetangco said today.

Bank Negara Malaysia will be the only one of the region’s five biggest economies to leave its monetary policy unchanged next year, UBS’ Teather predicts. Morgan Stanley and Credit Suisse economists are more bullish, with the latter expecting rates to be raised to 2.5 percent by end-2010 from 2 percent now.

Shamim Adam in Singapore at sadam2@bloomberg.net

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