February 22, 2008

Asia Economics Analyst 08/04: China: Raising our 2008 inflation forecast significantly (Full document & disclosures in attached PDF file)

The latest developments in both domestic credit and FX inflows macro data have not only pointed to significant upside risks to inflation, but also have cast serious doubts on whether the current tightening package, which involves a lot of administrative controls but little change in the underlying economic incentives, will be effective.

Therefore, we have raised our 2008 inflation forecast substantially to 6.8%, compared with 4.5% previously. We believe the near-term inflation rise to high single-digit levels (even reaching double digits potentially in some months) will likely add significant policy risk premiums to China-related assets, and its eventual cure will likely entail some real pains in the economy.


India: Fiscal policy—It’s all downhill from here

India’s fiscal situation is in its best shape since the mid-1990s. After four years of high growth and buoyancy in tax revenues, the central and state finances have improved significantly. That is the good news.

The not-so-good news is that India’s fiscal deficit, at an estimated 6.8% of GDP remains one of the highest in the world, the government continues to live beyond its means and muscle in a disproportionate share of credit, and fiscal consolidation has stalled in recent years.

The bad news is that in our view, it only gets worse from here. Mounting fuel and fertilizer subsidies, an impending wage hike for government employees, and upcoming general elections with consequent spending pressures threaten to worsen the finances of the government and fritter away hard won gains.


Singapore: Weathering the maelstrom

The economy is heading into uncharted waters of record high inflation and slowing growth. This is posing fresh challenges to policymakers at a time when the US is heading into (or may already be in) recession.



Michael Buchanan
Hong Liang
Tushar Poddar
Mark Tan


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