Business Monitor Key Views on Asia's economic, political and infrastructure analysis

Asia-Pacific Outlook: Infrastructure Focus

June 2014

Cedric Chehab – Head of Asia Research

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Outline

1. Global Outlook: Strong Growth, Despite US Downgrade

2. Regional Outlook: Shifting To Lower Gear

3. China Reforms: Finding The Right Balance

4. India: Landslide Victory Bodes Well For Reform

5. Indonesia: Jokowi’s Ascent

6. Thailand: Economic Resilience Giving Way

7. Infrastructure Focus: Identifying Growth Opportunities

1. Global Outlook: Recovery Continues To Strengthen

• Global growth to accelerate to 3.1% in 2014 and 3.2% in 2015.

• Disinflation and deflation are a bigger risk than inflation in 2014.

• We have downgraded US growth to 2.4% in 2014 from 2.8%.

• Eurozone to grow by 1.1% in 2014 and 1.3% in 2015 driven by Germany.

• The UK economy will grow by 2.6% in 2014, and 2.2% in 2015.

• China to slow to 7.1% in 2014 and 6.0% in 2015.

2012 2013 2014 2015 2016 2017

US 2.4 1.9 2.4 2.6 2.4 2.4

China 7.7 7.7 7.1 6.0 5.8 5.8

EU -0.6 -0.5 1.1 1.3 1.3 1.5

Japan 1.4 1.6 0.9 0.8 0.7 0.7

Table: Growth Forecasts (% chg)

2014-2017 = BMI Forecasts

PMI Struggling In China

40

42

44

46

48

50

52

54

56

58

60

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

US China Eurozone

1. Global Outlook: Regional Forecasts

• From a regional perspective, Asia ex-Japan will be the fastest growing region:

• Emerging Asia will grow by 6.4% and 5.9% in 2014 and 2015, with a China-driven slowdown.

• Sub- Saharan Africa will grow by 5.4% in 2014 and 5.6% in 2015.

• Latin American growth will come in at 2.7% in 2014 and 3.3% in 2015.

• Emerging Europe will grow by 1.7% in 2014 and 2.4% in 2015.

Key Forecasts Relative To Consensus

Year Provider US Eurozone Japan Brazil China Russia

2014 Bloomberg Consensus 2.5 1.1 1.4 1.8 7.3 1.0

BMI 2.8 1.1 0.9 2.0 7.1 1.0

2015 Bloomberg Consensus 3.1 1.5 1.3 2.2 7.2 2.0

BMI 2.6 1.3 0.8 2.7 6.0 1.5

2. Regional Outlook: Shifting To Lower Gear

• Asia Pacific region to grow by 4.7% in 2014 and 4.5% in 2015.

• We remain below consensus with regard to China (7.1%), Japan (0.9%), Thailand (2.0%) and Australia (2.3%).

• India to overtake China in terms of GDP growth as of 2015.

• We see broad stability ahead, despite the regional slowdown.

• Regional growth to average 4.6% out to 2018.

• Inflation to average 3.0% over the same period.

.

2012 2013 2014 2015 2016 2017

China 7.7 7.7 7.1 6.0 5.8 5.8

India 6.0 4.4 5.6 6.3 6.6 6.6

Japan 1.4 1.6 0.9 0.8 0.7 0.7

Indonesia 6.3 5.8 5.1 6.0 6.3 6.5

PMI Readings Show A Slowdown

Table: Growth Forecasts (% chg)

2014-2017 = BMI Forecasts,

40

42

44

46

48

50

52

54

Vie

tnam

Ind

on

esia

Taiw

an

Ind

ia

Ch

ina

Jap

an

S. K

ore

a

Au

stra

lia

May

2. Frontier Markets: Growth Opportunities Abound

• Frontier Asia will outperform over the coming decade.

• The six countries account for USD500bn and will grow by 6-7% pa out to 2023.

• They will outpace other emerging market regions.

• Frontier Asia will offer a strong consumer market over the coming years.

• Macroeconomic stability will continue to improve over the next decade.

• Political risk profile to remain mixed, depending on the country.

Frontier Asia Real GDP Growth Forecasts (10-Year %)

0

1

2

3

4

5

6

7

8

Mya

nm

ar

Lao

s

Cam

bo

dia

Sri L

anka

Vie

tnam

Ban

glad

esh

Afr

ica

Asi

a

Mid

dle

Eas

t

Lati

n

Am

eric

a

Euro

pe

0

20

40

60

80

100

120

140

160

180

Vietnam Bangladesh Sri Lanka Myanmar Cambodia Laos

GDP USDbn

USD500bn Worth of GDP

pa = per annum

2. Regional Outlook: Political Risk On The Rise

• The political risk profile in Asia has changed in the past few months.

• We have downgraded Thailand, Vietnam and Mongolia. The most pressing case is Thailand, which could descend into a civil war (10-15% probability).

• We have upgraded India and China, and could upgrade Indonesia. The landslide victory by Narendra Modi in India will provide a stronger mandate for the pro-reform Prime Minister.

• We would look to upgrade Indonesia on the back of a win by Joko Widodo in July.

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Latest

China 77.3 77.3 77.3 77.3 77.3 80.2

India 62.3 62.3 62.3 62.3 62.3 76.5

Thailand 62.5 62.5 62.5 62.5 62.5 60.8

Indonesia 68.8 68.8 68.8 68.8 68.8 68.8

Table: Short-Term Political Risk Ratings


0

10

20

30

40

50

60

70

80

90

Ch

ina

Old

Ch

ina

New

Ind

ia O

ld

Ind

ia N

ew

Vie

tnam

Old

Vie

tnam

New

Mo

ngo

lia O

ld

Mo

ngo

lia N

ew

Thai

lan

d O

ld

Thai

lan

d N

ew

Change In Short-Term Political Risk Ratings

2. Regional Outlook: Banking Sector Opportunities

• The maturity and depth of Asia’s banking sector remains mixed, but opportunities remain.

• China, Taiwan and Singapore all display assets to GDP above 250%, with Malaysia and Australia and Japan around 200%.

• Potential outperformers include: India, Indonesia and the Philippines, as they have an underpenetrated banking sector.

• Frontier markets such as Sri Lanka and Pakistan can provide significant opportunity, but have by high levels of risk.

2012 2013 2014 2015 2016 2017

China 19.8 19.5 15.0 12.2 9.5 7.1

Malaysia 10.4 9.8 9.6 9.1 7.3 6.9

India 17.2 17.3 18.1 17.1 17.4 18.4

Indonesia 17.4 17.6 17.6 18.1 17.4 18.0

Table: Banking Sector Asset Growth (5- Year CAGR,%)


0

50

100

150

200

250

300

Ch

ina

Taiw

an

Sin

gap

ore

Mal

aysi

a

Au

stra

lia

Jap

an

Sou

th …

Thai

lan

d

Vie

tnam

Ind

ia

Ban

glad

e…

Ph

ilip

pin

es

Ind

on

esia

Sri L

anka

Pak

ista

n

Assets To GDP (%)

3. China Reforms: Finding The Right Balance

• The Chinese leadership faces a critical crossroads in economic policy-making

• Credit growth has fallen to a nearly decade-low, and leaders must decide whether or not to reignite lending.

• We believe that the Xi Jinping and Li Keqiang administration is more hawkish than previous leaders, and is willing to allow growth to slow somewhat.

• While we see scope for targeted monetary and fiscal easing measures, we believe efforts will be relatively muted compared to the past as authorities look to tame credit and investment excesses.


2012 2013 2014 2015 2016 2017

Real GDP Growth (%) 7.7 7.7 7.1 6.0 5.8 5.8

Inflation % 2.7 2.6 2.6 2.8 2.7 2.7

Budget Balance % of GDP -1.5 -1.1 -0.9 -0.5 -0.2 0.0

Current Account % of GDP 2.4 2.4 1.7 1.0 0.8 0.6

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Jan

-03

Au

g-0

3

Mar

-04

Oct

-04

May

-05

Dec

-05

Jul-

06

Feb

-07

Sep

-07

Ap

r-0

8

No

v-0

8

Jun

-09

Jan

-10

Au

g-1

0

Mar

-11

Oct

-11

May

-12

Dec

-12

Jul-

13

Feb

-14

Total Social Financing, % chg y-o-y

Table: Key Macroeconomic Forecasts

4. India: Landslide Victory Bodes Well For Reform

2012 2013 2014 2015 2016 2017

Real GDP Growth (%) 4.6 4.7 5.6 6.3 6.6 6.6

Inflation (%, Average) 8.1 7.0 5.8 4.5 4.0 4.0

Budget Balance (% of GDP) -6.6 -7.0 -7.0 -6.1 -5.4 -7.0

Current Account (% of GDP) -4.3 -3.5 -3.8 -3.7 -3.6 -3.4

• We are above consensus on India’s real GDP growth for FY2014/15 at 5.6%

• Pro-business Bharatiya Janata Party (BJP) won a clear majority (52%) in the Lok Sahba with 282 seats.

• Positive base effects and efforts to fast track infrastructure projects should help lift real GDP growth in FY2014/15.

• We expect the implementation of any major reform plans to begin earliest in the BJP’s second year in office (FY2015/16).

• A weak monsoon and high subsidies present upside risks to our dovish outlook for inflation and interest rates.

Bharatiya Janata Party,

282

Indian National

Congress, 44

All India Anna Dravida

Munnetra Kazhagam,

37

All India Trinamool

Congress, 34 Others, 146

Seats Won In Lok Sabha

2014-2017 = BMI Forecasts, Fiscal Year ends in March

Waiting On Reforms


5. Indonesia: Jokowi Ascent?

• We are generally positive on Joko Widodo’s candidacy, and believe that he will win the upcoming July election.

• Markets clearly back Jokowi, who we view as the more progressive candidate compared to Prabowo.

• Crucially, Jokowi has elucidated a plan to cut the government’s costly fuel subsidy scheme, which we believe has exacerbated Indonesia’s current account deficit.

• Should Jokowi’s plan come into force, we could see a faster stabilisation of the economy.


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f

Current Account Balance, % GDP

2012 2013 2014 2015 2016 2017

Real GDP Growth (%) 6.3 5.8 5.1 6.0 6.3 6.5

Inflation % 4.3 8.4 5.5 5.0 5.0 5.0

Budget Balance % of GDP -1.8 -1.7 -1.8 -1.8 -1.8 -1.8

Current Account % of GDP -2.8 -3.3 -2.6 -1.8 -1.4 -1.2


6. Thailand: Economic Resilience Giving Way

• The intervention of the military provides another layer of uncertainty in Thailand’s ongoing political crisis, with the economy losing its long-held resilience.

• The Thai military took power in May, reducing the threat of an escalation of violence in the near term.

• However, the lack of clarity on an eventual handover of power, and the threat of a Red Shirt backlash, are undermining investor confidence.

• The junta has proposed a series of policies to boost the economy, including releasing public funds for infrastructure projects, which should allow the economy to avoid recession.


2012 2013 2014 2015 2016 2017

Real GDP Growth (%) 6.5 2.9 2.0 4.1 4.0 4.0

Inflation % 3.6 1.7 2.6 2.4 2.5 2.5

Budget Balance % of GDP -4.3 -2.4 -2.5 -1.9 -1.3 -0.7

Current Account % of

GDP -0.4 -0.7 0.8 1.4 1.8 2.1

60

70

80

90

100

110

120

May

-01

Dec

-01

Jul-

02

Feb

-03

Sep

-03

Ap

r-0

4

No

v-0

4

Jun

-05

Jan

-06

Au

g-0

6

Mar

-07

Oct

-07

May

-08

Dec

-08

Jul-

09

Feb

-10

Sep

-10

Ap

r-1

1

No

v-1

1

Jun

-12

Jan

-13

Au

g-1

3

Mar

-14

Consumer Confidence At Multi-Year Low

Consumer Confidence Index


Infrastructure Focus

Asia Infrastructure: Bountiful Opportunities

2013 2014 2015 2016 2017 2018

China Construction Industry Value 604 657 699 744 795 850

Japan Construction Industry Value 286 293 306 304 312 321

Asia Construction Industry Value 1,399 1,480 1,586 1,683 1,799 1,929

Global Construction Industry Value 3,730 3,882 4,090 4,319 4,616 4,931

• Asia-Pacific region forecast to have the largest concentration of construction opportunities over the next five years.

• 40% of global construction industry value is projected to come from Asia.

• China, Japan, India and Indonesia are expected to be among the top 10 largest construction markets in the world by 2018.

• China to remain the largest construction market in Asia.

• India forecast to overtake Japan as the second largest construction market in Asia by 2022.

Table: Construction Industry Value Forecasts (USDbn)

2013-2017 = BMI Estimates/Forecasts

China 44%

Japan 17%

India 13%

Indonesia 8%

Australia 6%

South Korea 4%

Others 8%

Asia Construction Value, % Of Total, 2018

Asia Infrastructure: Developed States Favoured

2013 2014 2015 2016 2017 2018

China Construction Real Growth 6.6 5.1 4.7 4.2 4.2 4.2

Japan Construction Real Growth 4.4 4.4 2.3 -1.5 0.2 0.4

Asia Construction Real Growth 5.1 4.6 4.5 3.7 4.1 4.1

Global Construction Real Growth 2.4 3.2 3.4 3.2 3.4 3.5

• Asia-Pacific construction forecast to slow to 4.6% in 2014 from 5.1% in 2013.

• Growth slowdown is due to political risk (India, Indonesia, Thailand) and weaker fiscal positions among major economies (China, Japan).

• However, the region will outperform the global construction sector.

• More developed markets offer the best business environment to realise rewards (Australia, Korea, Singapore).

• Emerging markets offer long term growth potential due to superior demographics (Indonesia, Vietnam).

Table: Construction Growth Forecasts (% chg, y-o-y)

Australia

South Korea

Singapore

Japan

China India

Hong Kong

Indonesia

Malaysia

Vietnam

Taiwan

Philippines

Thailand

Pakistan

Myanmar

Cambodia

20

30

40

50

60

70

80

90

100

25 35 45 55 65 75

Infr

astr

uct

ure

Ris

ks R

atin

gs

Infrastructure Rewards Ratings

Asia Infrastructure Risk vs Reward Ratings


$140bn

$29bn

$54bn

$189bn

$25bn $28bn

Pre-Tender In Tender Awarded Under Construction Completed Delayed/Cancelled

Projects By Stage, USDbn

Australia Infrastructure: From Mining To Public

2013 2014 2015 2016 2017 2018

Infrastructure Industry Value, USDbn 30 28 27 28 29 32

Infrastructure Real Growth (%) -8.3 1.8 3.2 4.6 5.1 5.2

Construction Real Growth (%) 0.2 2.4 2.7 3.6 4.0 4.1

Construction Industry, % of GDP 7.7 7.7 7.7 7.8 7.9 8.0

• Australia’s infrastructure sector is forecast to recover to 1.8% in 2014.

• The mild recovery will be driven by an improvement in project execution for public infrastructure projects.

• The public sector will play a greater role in driving infrastructure growth as mining-related investment slows.

• The removal of the federal debt ceiling and recent success with public asset sales have increased funds available for public infrastructure.

• Best Risk/Reward score in Asia indicates best market to gain rewards.

Table: Infrastructure Forecasts (% chg, y-o-y)


$34bn

$10bn

$54bn

$4bn $1bn



Singapore Infrastructure: The Safest Market

2013 2014 2015 2016 2017 2018

Infrastructure Industry Value, USDbn 2.0 2.1 2.4 2.6 2.8 3.0

Infrastructure Real Growth (%) 2.9 6.1 6.0 4.4 4.0 3.9



• Singapore’s infrastructure sector is forecast to recover to 6.1% in 2014.

• Recovery primarily driven by public expenditure on urban rail/ airport infrastructure.

• However, the current pace of recovery is not expected to last given longer construction periods for new projects.

• The government’s commitment to infrastructure development keeps the project pipeline relatively sizeable.

• Best risk score in Asia indicates very high probability for investors to realise the country’s rewards.



$917bn

$0.3bn $58bn

$472bn

$101bn

$5bn



China Infrastructure: Still Has Plenty To Offer

2013 2014 2015 2016 2017 2018





• China’s infrastructure sector is forecast to moderate to 5.7% in 2014.

• The moderation is due to weaker fiscal position and growing emphasis on private consumption as a driver of economic growth.

• However, the project pipeline remains huge due to infrastructure shortages in certain areas.

• Infrastructure investment is still the government’s favourite tool to prop up economic growth.

• Ongoing liberalisation/privatisation initiatives are a long-term positive.



$483bn

$52bn $66bn

$138bn

$28bn

$97bn



India Infrastructure: Political Change Improves Outlook

2013 2014 2015 2016 2017 2018





• India’s infrastructure sector is forecast to recover to 4.7% in 2014.

• The recovery is due to greater certainty over government policy following the landslide victory by pro-reform Narendra Modi.

• However, India’s precarious fiscal position and elevated borrowing costs will cap near-term spending on infrastructure.

• The sector outlook dependent on the government’s success with garnering private sector support.

• Growth potential far from maximised given value of projects at pre-tender.



$187bn

$17bn

$46bn

$25bn

$8bn $12bn



Indonesia Infrastructure: Potential Yet To Be Maximised

2013 2014 2015 2016 2017 2018





• Indonesia’s infrastructure sector forecast to moderate to 6.5% in 2014.

• Growth slowdown due to elevated borrowing costs, policy uncertainty, and a misallocation of public finances towards expensive fuel subsidies.

• Growth potential far from maximised given value of projects at pre-tender.

• Difficulties with translating project awards to construction works indicate huge barriers to project execution (land acquisition, permit issuance).

• Sector outlook dependent on July 2014 presidential elections.



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