Asia-Pacific

Markets Outlook 2010

Contacts:
Tom Schiller
Tokyo (813) 4550-8445
tom_schiller@
What’s Ahead
standardandpoors.com

Ian Thompson
For Growth, Development,
And Regional-Global
Melbourne (613) 9631-2100
ian_thompson@
standardandpoors.com

Lorraine Tan
Singapore (65) 6530-6563
lorraine_tan@
standardandpoors.com
Integration
MICA (P) 170/06/2009

PPS 1665/09/2010(028285)

March 2010
 Standard & Poor’s
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Introduction
STANDARD & POOR’S IS PLEASED TO PRESENT “Asia-Pacific
Markets Outlook 2010.” This is a twice-yearly update in which
we offer our views on what might be ahead for the region’s debt
and equity markets. We also share recent thought-leadership
articles by senior credit analysts and key commentators—our
contribution to the increasingly urgent global and regional
debates about post-crisis challenges and opportunities.
After a difficult 2009, Asia-Pacific governments’ fiscal
stimulus programs appear to have staved off the myriad worse-
case scenarios that haunted the collective imagination from late
2008. Going into 2010, the mood is more upbeat while also
cautious and necessarily wise to potential risks. Recent concerns
about Greece, for instance—and ongoing market uncertainty
about the sustainability of U.S. recovery and growth—remind
us that our region is part of a highly integrated whole.
We are well aware that the eyes of the world have turned
to the emerging markets of Asia for the ongoing growth
impetus that will eventually feed back into older developed
markets. Asia-Pacific has a crucial role to play in the
conversations that are now unfolding around the world as key
policymakers try to envisage the “new normal”. The call from
bodies such as the International Monetary Fund, the World
Economic Forum, the World Bank, and the G-20 has been for
nothing less than a rethinking of twentieth-century models of
capitalism. There is little patience for the old ways of extreme
speculation, arbitrage, and short-selling. Rather, there is a
strong sense of hope that the new normal will be about
environmentally responsible growth, poverty reduction, social
stability, global inclusion, and small-scale, targeted regional
and local development programs. There’s also hope that it will
be about the free flow of financial information and capital and
the wiser use of regulation that facilitates the mobilization of
capital within the region and enables its efficient allocation to
the sectors—starting with infrastructure—that contribute to
long-term growth. Capitalism, yes. But more humane,
reasonable, and sustainable. Our commentary “Resilience And
Dynamism: Achieving Sustainable Growth In Asia-Pacific In
The Wake Of The Global Economic Crisis,” explores the
importance of balance in all this.
But as the global economy gradually rebounds, will these
ideals be upheld? Or will the memories of difficult lessons
fade? For the long-term good of our region, market
participants must continue to strive for the former by actively
seeking ways to cement the best sort of new normal. And the
new normal must also be a shared normal. There’s no doubt
we will see an increased intensification of shared global
vulnerabilities and interdependences.
We have also focused on China in this publication. The
story of this immense and dynamic emerging market continues
to fascinate, even more so in its more recent role as an engine
for global recovery. In these pages we share some recent
commentaries about the challenges that lie ahead—for the
development of Shanghai as an international finance center,
and for the much-discussed future internationalization of the
Chinese renminbi.
Standard & Poor’s has been involved in China for many
years, starting when we issued a sovereign credit rating back in
early 1992. Today, we provide credit ratings on industrial,
banking, and insurance companies and recently signed a
technical services agreement with local credit rating agency,
Shanghai Brilliance. We are planning to establish a Greater
China headquarters in Shanghai to support China’s growing
capital markets as well as Shanghai’s emergence as a leading
global financial hub. We will also be expanding our teams in
Hong Kong and Beijing to meet the growing needs of financial
market participants in both cities.
As always, we welcome your comments and feedback on
our research and insights. We trust you will find this
publication useful as you prepare for 2010 and beyond.
TOM SCHILLER
EXECUTIVE MANAGING DIRECTOR AND HEAD OF ASIA-PACIFIC
STANDARD & POOR’S
 Contents
3 Introduction
by Tom Schiller, Executive Managing Director and Head of Asia-Pacific, Standard & Poor’s

6 Sino-U.S. Bridge Over Troubled Waters

by Harold McGraw III, Chairman, President, and CEO of McGraw-Hill Companies

8 Consistency In Credit Ratings

by Deven Sharma, President, Standard & Poor’s

10 ASIA-PACIFIC MACROECONOMIC OUTLOOK: As Recessionary Darkness Fades, Asia-Pacific

Is Poised To Rise And Shine Again
by Dharmakirti Joshi, Director and Principal Economist, CRISIL Ltd.

18 ASIA-PACIFIC CREDIT RATINGS OUTLOOK: Past Experience Stands Asia-Pacific In

Good Stead For 2010
by Ian Thompson, Managing Director and Senior Credit Officer, Standard & Poor’s Ratings Services

24 ASIA-PACIFIC EQUITY MARKETS OUTLOOK: 2010 Looks Positive For Asia-Pacific Equities Markets,
But Returns Will Be Lower
by Lorraine Tan, Director of Research, Standard & Poor’s Equity Research

33 Equities Outlook Glossary

35 Equities Outlook Disclosures and Disclaimers
36 The New Normal (The Future Isn’t What It Used To Be)
by David Wyss, Chief Economist, Standard & Poor’s

44 The Softer Side Of Building Shanghai As An International Finance Center

by Ping Chew, Managing Director and Head of Greater China, Standard & Poor’s

48 Why China’s Currency Won’t Replace The Dollar Anytime Soon

by KimEng Tan, Elena Okorotchenko, and William Hess

52 Resilience And Dynamism: Achieving Sustainable Growth In Asia-Pacific In The Wake

Of The Global Economic Crisis
by Tom Schiller, Executive Managing Director and Head of Asia-Pacific, Standard & Poor’s

52 Asian Sovereigns To Remain In Debt Markets

by William Hess

66 Asia-Pacific Office Locations

67 Asia-Pacific Regional Contacts

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 5

GLOBAL INSIGHT
Commentary
Sino-U.S. Bridge Over
Troubled Waters
AUTHOR:
HAROLD MCGRAW III
CHAIRMAN, PRESIDENT, AND CEO OF MCGRAW-HILL COMPANIES
EDITOR’S NOTE: THIS ARTICLE WAS ORIGINALLY PUBLISHED IN THE
TO MEET PRESIDENT HU JINTAO IN CHINA, U.S. President Barack
Obama had to cross the same ocean that former president
Richard Nixon did for his famous meeting with Chairman
Mao in 1972. Yet today, the distance seems nowhere as far.
In the years since that historic meeting, growing trade and
commerce ties have brought the two countries closer. And
despite all the uncertainties of the global economy, this much is
certain: The relationship between the U.S. and China is more
important than ever before.
The U.S. and China are the world’s largest and third largest
economies, accounting for nearly a third of the global GDP,
and the financial crisis has made the world look toward them
for leadership.
For the sake of global prosperity, the two countries must
answer this call together. They need to strengthen their
partnership around three pillars: fueling economic recovery,
fostering open markets and forging new economic relationships.
First, the U.S. and China have to continue working
together to lift the global economy out of the downturn. The
crisis has impacted both the countries very differently, but the
situation could have been far worse if leaders on both sides of
the Pacific had not responded with strong measures, including
the massive stimulus packages.
In the long run, the two countries need to build a more
sustainable model for lasting growth. In the U.S., families will
need to begin saving more and consuming less. Which means
China will not be able to depend as heavily on exports to the
U.S. for economic growth.
That will create an opportunity for China to diversify from a
mostly export-driven manufacturing economy to a more service-
based knowledge economy. The success of this effort will hinge
on two factors that have long underpinned America’s economic
growth—strong education and a robust financial market.
Education develops human capital and markets improve
the flow of financial capital. When countries bring these two
forms of capital together, they lay the foundation for growth
and prosperity. As the chief executive of a leading global
provider of financial and education services, I have seen this
foundation come together in China over the past few decades.
6 ASIA-PACIFIC MARKETS OUTLOOK 2010
CHINA DAILY ON NOVEMBER 18, 2009.
China has made enormous progress in education: the
number of teachers has soared and the illiteracy rate has
plunged. The country is now home to the world’s largest school
system with about a quarter billion students enrolled in
institutions of primary, secondary, and higher education.
China today faces the same question that the U.S. has long
struggled to answer: how best to prepare students for the
challenges of an increasingly competitive global economy. As
the number of jobs requiring advanced skills and critical
thinking has increased, so has the demand for post-secondary
education. In response, the two countries need to strengthen
higher education and professional development, and promote
online and digital learning because these technologies are
crucial to educational excellence in the 21st century.
China has made extraordinary progress in the financial
arena, too, because of which its stock and debt markets have
grown rapidly. Measured by total market capitalization, the
world’s three largest banks are now in China. Overall, Chinese
financial institutions have emerged from the recent crisis far
healthier than many of their counterparts in the West.
China has the unique opportunity to emerge as a global
leader as the U.S. and other Western economies rebuild their
financial systems. By undertaking key reforms, China can build
a financial system that is more transparent, better connected to
global markets and better equipped to serve the needs of
Chinese investors and entrepreneurs.
In the years ahead, restoring balance to the global economy
will require the two countries to do their part. These are
complicated issues, to address which their leaders will need to
continue coordinating closely.
Second, the U.S. and China will have to continue working
together to resist trade protectionism and to expand trade and
investment. Over the past 10 years alone, trade between the
U.S. and China has more than quadrupled, from less than $100
billion to more than $400 billion. While America has become
the largest market for Chinese exports, China has emerged as
the third largest market for U.S. exports.
It would be a terrible mistake to change course and veer
down the path of protectionism because of the financial crisis.
STANDARD & POOR’S

“China has the
unique opportunity
to emerge as a
global leader as the
U.S. and other
Western economies
rebuild their
financial systems.”
During times of economic challenge, it can be tempting for
nations to seek comfort behind tariffs and barriers against
other countries. History, however, shows the folly of this
course. When nations beggar their neighbors, they ultimately
beggar themselves.
Instead of retreating from the world, the two countries
need to open their economies further and continue welcoming
foreign investment. They need to reduce barriers to trade and
investment around the world by successfully completing the
Doha Development Round.
In recent months, China has taken positive steps in this
direction by promoting greater trade in areas from Asia to
Africa. As the chairman of the Emergency Committee for
American Trade, I have strongly urged my country, the U.S., to
follow suit. Global trade and investment are not the cause of
our problems. They are the solution.
Finally, the U.S. and China have to work together to build
new economic relationships at all levels. At the government
level, Obama and Hu took a welcome step by expanding the
Strategic and Economic Dialogue. This forum will give the two
countries’ leaders a platform to discuss critical issues.
At the business level, we know that new relationships can
lead to innovations. As Chinese companies begin developing
more of their own intellectual property, they will share a
growing interest with American companies in strong
protection for copyrights and patents. These types of
protection will be especially important as the two countries
work together to develop state-of-the-art clean energy
technologies to fight climate change.
In every sector of their economies, the two countries should
welcome fresh opportunities for partnership.
Over the years, the relationship between the U.S. and
China has come a long way—from the first seeds of commerce
to a flourishing era of growth to a terrible financial crisis.
Through these many changes, their relationship has emerged
stronger than before.
Though an ocean still separates the two countries, a bridge
of shared economic interests now joins them. And this is the
time to strengthen that bridge.
STANDARD & POOR’S
GLOBAL INSIGHT
Commentary
Standard & Poor’s is planning to establish a Greater
China headquarters in Shanghai to support China’s
growing capital markets as well as Shanghai’s emergence as
a leading global financial center. The company also plans to
expand its existing teams in Hong Kong and Beijing to meet
the growing needs of financial market participants in both
cities. To support the needs of its growing and increasingly
diverse customer base in China, the initial plans for Standard
& Poor’s Shanghai operations include:
 becoming an analytical hub for Standard & Poor’s credit
ratings business in Greater China,
 establishing dedicated teams to provide financial risk man-
agement solutions to both the private and public sectors,
 establishing a strong local sales and customer service
organization to work more closely with mainland clients, and
 creating strong corporate functions, such as
marketing, finance and human resources, to support the
company’s business operations throughout the country.
Looking ahead, Standard & Poor’s also will draw on China’s
rich talent base to provide data and analytical support for
Standard & Poor’s businesses worldwide. Shanghai offers
attractive outsourcing capabilities with a growing pool of
multilingual financial professionals that can help Standard &
Poor’s grow its regional and global businesses.
Standard & Poor’s has been doing business in China for more
than 16 years—first issuing a sovereign credit rating on the
People’s Republic of China in February 1992. Today, Standard
& Poor’s provides credit ratings on industrial, banking and
insurance companies in China, and recently signed a technical
services agreement with local credit rating agency, Shanghai
Brilliance, to share mutual knowledge and experience.
Applying its deep credit management and public sector
experience, Standard & Poor’s is also working with the World
Bank to conduct financial management assessments (FMAs)
and perform credit analysis on urban development and provin-
cial investment groups in China to support public sector
reform and fund raising.
In addition to its ratings business, Standard & Poor’s has been
actively providing data, information, and risk management
tools to support the growth of China’s domestic financial mar-
kets. In 2004, with its partner CITIC Securities, Standard &
Poor’s launched a series of leading stock market indices
including the S&P/CITIC 50, the S&P/CITIC 300, and the
S&P/CITIC China 30 to enable investors to better access
China’s rapid growth. In 2007, Standard & Poor’s Risk
Solutions expanded its presence in China to support top-tier
Chinese banks develop risk-management practices in
preparation for Basel II requirements. Today, Standard &
Poor’s Risk Solutions works with financial institutions in
China, including smaller regional banks, to help them better
manage their risks as they prepare for domestic loan growth
in line with the country’s fast-growing economic plans.
ASIA-PACIFIC MARKETS OUTLOOK 2010 7
GLOBAL INSIGHT
Commentary
Consistency In Credit Ratings
AUTHOR:
DEVEN SHARMA
PRESIDENT, STANDARD & POOR’S
EDITOR’S NOTE: THIS ARTICLE WAS ORIGINALLY PUBLISHED IN THE
MUCH HAS BEEN SAID AND WRITTEN about credit ratings firms in
the past year, but one fundamental question has tended to be
overlooked: what does the market want from ratings in the
future?
Standard & Poor’s has met with scores of investment
institutions recently and their response tends to be similar.
First, they want credit ratings to be relatively stable. Investors
appreciate that ratings can change during a cycle, as our view
of future creditworthiness evolves. But they wish to avoid
excessive volatility, especially of higher ratings.
In particular, they—like we—are disappointed with the
recent performance of ratings in certain classes of structured
finance. While most of our ratings have performed largely as
might be expected during the crisis, downgrades and defaults
of U.S. housing market-related securities have been
significantly higher than in the past.
Among the analytical steps to minimise such volatility in
the future, ratings can incorporate a measure of credit stability,
not just ultimate default risk. Under Standard & Poor’s new
criteria, for instance, we may feel that two securities have a
similar default risk, but if we believe one is more prone to a
sharp downgrade in periods of economic stress, it will be rated
lower initially.
Second, investors want ratings to behave as a consistent
benchmark of credit risk. That means all types of ratings
performing in a broadly comparable way, regardless of asset
class, geography or point in time.
Accordingly, Standard & Poor’s has published specific
economic scenarios for each rating category that illustrate the
level of stress that issuers or obligations rated in that category
should, based on our analysis, be able to survive without
defaulting. In the case of AAA ratings, for example, we are
applying a Great Depression-type scenario. Alongside other
factors, these stress scenarios are being used to help calibrate
ratings criteria and support the ongoing comparability of
ratings.
Third, investors want to be better placed to analyse and
evaluate ratings, rather than using them on faith. That requires
8 ASIA-PACIFIC MARKETS OUTLOOK 2010
FINANCIAL TIMES ON OCTOBER 1, 2009.
publishing more information about ratings assumptions, stress
tests and “what if” scenarios, so the market can see more
clearly what might cause ratings to change and can take a
deeper view of credit risk. If an institution, for example, has
different macro assumptions than Standard & Poor’s, they
should be able to determine how that could impact our—and
their—view of creditworthiness.
Finally, investors want ratings providers to compete, fairly
and freely (and regardless of their business model), on the basis
of the analytical value of their research and opinions, without
the potential distorting effects that can flow from the way in
which ratings are either included in regulation or overseen by
regulators.
Regulation of ratings firms can certainly play an important
part in building confidence in ratings, by demonstrating that
ratings businesses are being managed appropriately. All ratings
business models, whether funded by issuers, investors or the
public sector, carry potential conflicts of interest and offer
varying degrees of transparency. What is important to ratings
users—and a legitimate focus for regulators—is how effectively
these potential conflicts are managed. However, to support the
comparability that investors want from ratings, any regulatory
framework needs to be globally consistent and built on a set of
commonly accepted standards.
The importance of a level playing field has been accepted
by the G20, which has called for further convergence of
initiatives to regulate ratings firms. Good intentions, however,
are sometimes lost when it comes to implementation. From the
E.U. to Asia, we have seen new or proposed laws emerge that
create a myriad of conflicting requirements for ratings firms.
At best, this lack of coordination creates inefficiencies and
additional costs. At worst, it risks compromising the
consistency of ratings worldwide and adding to investor
confusion.
At the same time, we must be wary of including ratings as
benchmarks or triggers in securities and banking regulation in
a way that, inadvertently, encourages excessive reliance on
them.
STANDARD & POOR’S
 GLOBAL INSIGHT
Commentary

“In our mind, the principle is

clear. We have never advocated
the use of ratings in regulation
—and if ratings are to continue
to be referenced in rules, other
measures and benchmarks
should be used as well.”

The “hardwiring” of ratings in prudential regulation is

being considered by the U.S. Securites and Exchange
Commission and the Basel committee, among others. In our
mind, the principle is clear. We have never advocated the use of
ratings in regulation – and if ratings are to continue to be
referenced in rules, other measures and benchmarks should be
used as well.
Ratings are independent opinions about relative
creditworthiness and the likelihood of future default, based on
fundamental analysis. They are not investment guarantees or
stamps of approval. They are one tool among many available
to the market and should be considered alongside other inputs,
by both regulators and investors.
As investors today recognise, we should avoid regulatory
incentives that lead to undue focus on ratings to the exclusion
of other analysis. We should not use them for purposes for
which they were never designed.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 9

A S I A - PA C I F I C M A C R O E C O N O M I C O U T L O O K

As Recessionary Darkness
Fades, Asia-Pacific Is
Poised To Rise
And Shine
Again
 A S I A - PA C I F I C M A C R O E C O N O M I C O U T L O O K
CONTACTS:
DHARMAKIRTI JOSHI, MUMBAI (91) 22 6758 8043 DJOSHI@CRISIL.COM
RADHIKA ANAND, NEW DELHI (91) 11 4250 5160 RANAND@CRISIL.COM
PARUL BHARDWAJ, MUMBAI (91) 22 6758 8019 PBHARDWAJ@CRISIL.COM
EDITOR’S NOTE: DHARMAKIRTI JOSHI IS DIRECTOR AND PRINCIPAL ECONOMIST AT CRISIL LTD., A STANDARD & POOR’S
ARTICLE REPRESENTS HIS OPINION, AND THOSE OF RADHIKA ANAND AND PARUL BHARDWAJ, ALSO OF CRISIL.
ASIA-PACIFIC ECONOMIES ARE ON THE REBOUND. Indeed, after
battling the repercussions of the global financial crisis for most
of 2009, all countries we rate in the region are headed for
growth in 2010. Among the reasons for our optimism: the
ongoing effect of monetary and fiscal support from Asia-
Pacific governments and central banks; the “locomotive” role
China is playing in the region; and a modest recovery in the
U.S. and European economies.
The second half of 2009 began well, building on the green
shoots that emerged in the second quarter. Most economies we
rate in Asia-Pacific—including Australia, China, India,
Vietnam, and Japan—recorded significant economic gains in
the third quarter. For most, we expect that this momentum will
continue in 2010. Still, a quick recovery won’t be easy or
widespread given the expected GDP declines in most Asia-
Pacific economies in 2009. 2010 is unlikely to reach the
growth rates of 2005–2008. That said, we believe that Asia-
Pacific’s more globally integrated economies will likely
produce the sharpest recoveries.
The change in sentiment has been relatively quick.
Widespread policy stimulus across Asia-Pacific has helped
bolster domestic demand and strengthen the recovery at a time
when global economic and financial conditions have largely
stabilized. For Asia-Pacific’s more-developed economies, signs of
stabilization and even turnaround have appeared sooner than
widely envisaged. Easing of monetary and fiscal policies played
a critical role in creating and leveraging domestic and regional
demand in 2009. The combination of sharp interest rate cuts,
liquidity injections, and the swift implementation of government
fiscal stimulus packages significantly revitalized economic
activity at a time when exports—so crucial to many of the
region’s economies—were performing very badly. Recent data
shows a sharp pick-up in exports and industrial production.
Some of this recovery is rooted in the robust recovery in China
where strong domestic demand is, in turn, creating more
demand for imports from the region. Asia-Pacific economies are
also benefiting from increasing intraregional trade.
Falling inflation rates played a part in the region’s recovery
in 2009. Domestic inflationary pressures evaporated rapidly
after the Lehman Brothers collapse in September 2008 amid
STANDARD & POOR’S
COMPANY. THIS
declining commodity prices and demand. Indeed, for much of
2009 inflation rates were at record low levels in inflation-prone
regional economies and even turned negative in the
traditionally low-inflation countries. But with economic
growth rates improving across the region, inflation is reversing
again in most economies, posing a potential risk for 2010.
Rising crude and commodity prices together with excess
liquidity are contributing to inflationary pressures.
The improving economic environment has already moved
governments and central banks to shift focus from managing
the crisis to managing the recovery. Australia and Vietnam
have recently raised rates and China and India have begun
withdrawing liquidity. Others are waiting for recovery to take
firmer hold before initiating exit strategies. There is a
widespread concern that premature exits from supportive
policies could undermine the ongoing recovery. This means
that both the magnitude and timing of stimulus withdrawals
and other monetary and fiscal policies will help determine the
pace, as well as the long-term sustainability, of the recovery.
Recent Growth Performance
And Drivers
A sharp fall in global demand, commodity prices, and credit
availability pushed some rated Asia-Pacific economies into
recession in the last quarter of 2008 (see chart 1). By the
following quarter, the entire region—like the rest of the
world—saw a more severe blow to economic activity as
uncertainty hit employment rates and capital and household
spending. Most of the more affluent economies in Asia-Pacific,
particularly Japan, suffered a significant blow given their
strong financial and trade links with the U.S. and Europe.
Japan’s GDP started to fall in mid-2008 because of continuing
weakness in domestic demand and deteriorating demand from
its major trade partners. Moreover, a rapid decline in
commodity prices significantly pared regional economies’
export earnings and, in some countries, the revenue to the
national exchequer.
On the other hand, relatively limited financial integration
with advanced economies and high dependence on domestic
ASIA-PACIFIC MARKETS OUTLOOK 2010 11
A S I A - PA C I F I C M A C R O E C O N O M I C O U T L O O K
Chart 1
Asia-Pacific Real GDP Growth
Q1 2009 Q2 2009 Q3 2009 Q4 2009
(% year-on-year)
10
(5)
(10)
Philippines Hong Singapore Indonesia Korea India
Kong
Source: Standard & Poor's Asia-Pacific economic research. Note: The fourth-quarter GDP growth estimates for Malaysia, Taiwan, and Thailand
were not released at time of publishing.
© Standard & Poor’s 2010.
demand helped China, India, Indonesia, and Vietnam better
weather the crisis. Prompt domestic monetary and fiscal
responses after the Lehman collapse supported domestic
industrial and household demand. In many economies,
government boosts to the property and construction sectors—
and to household consumption—significantly helped cushion
the blow of double-digit export declines and a sharp fall in
private investment. The third quarter of 2009 saw positive
surprises in China, India, Singapore, Korea, and Malaysia, as
they recovered much faster than previously forecast. In India,
Indonesia, and the Philippines government spending was
significantly higher than in the previous year with positive,
albeit modest, growth in investments in India and Indonesia.
The size of fiscal packages in China and Vietnam suggests that
government spending in these two countries played a crucial
role in increasing economic activity in the second half of the
year. Significant government spending in Singapore and
Malaysia in the fourth quarter also explains the better-than-
12 ASIA-PACIFIC MARKETS OUTLOOK 2010
“The overall improvement in Asia-
Pacific’s economic performance is
coinciding with a gradual—albeit
patchy—stabilization of the global
financial and economic system. In
our view, this situation warrants
careful policy configuration.”
Vietnam China Japan Malaysia Taiwan Thailand Australia New
Zealand
expected pick-up in economic activity in these countries.
India, Indonesia, Australia, and the Philippines were the only
countries to produce positive growth in private consumption.
What’s more, some countries—particularly Korea and
Australia—have also benefited from strong demand for
commodities and machinery from China; this is evidenced by
improving export data to China. The laggard in Asia-Pacific
continues to be Japan, where further policy support will be
required to mitigate recessionary conditions. Japan suffered
the most severe blow to private consumption and exports
during 2009.
The overall improvement in Asia-Pacific’s economic
performance is coinciding with a gradual—albeit patchy—
stabilization of the global financial and economic system. In
our view, this situation warrants careful policy configuration.
Although Asia-Pacific economies will continue to face the
challenge of offsetting slow external demand by creating
enough domestic demand for local goods, keeping interest
STANDARD & POOR’S
 A S I A - PA C I F I C M A C R O E C O N O M I C O U T L O O K

rates low for too long—or bringing in further fiscal stimulus—
could create heightened inflationary risks, asset price bubbles,
and fiscal worsening.
Balancing The Yin And Yang:
Monetary And Fiscal Policies Start
To Reverse
In some economies already on the path to recovery, central
banks have started to wind back monetary and fiscal policies
to prevent inflationary conditions that could arise from
considerable public spending. Australia was the first developed
economy to tighten its benchmark interest rate since the onset
of the crisis. With a faster-than-expected pick up in economic
growth (due to timely and successfully implemented fiscal
packages) the Reserve Bank of Australia increased its rate by a
total of 75 basis points (bps) in the final quarter of 2009.
Vietnam also raised its benchmark rate by 100 bps in
December. In January, India and China hiked their cash reserve
ratio by 75 bps and 50 bps, respectively.
In 2010, we expect monetary tightening in Korea, Hong
Kong, and Singapore—where asset-price volatility is becoming
a concern—and in India and China. Such tightening is less
likely for Japan.
Before the Lehman collapse in September 2008, high
commodity prices—thanks to a significant demand and supply
imbalance—were exacerbating inflationary pressures in most
parts of the region. Indeed, central banks had been hiking
interest rates consistently since early 2007, with Australia, India,
Indonesia, Taiwan, and Vietnam raising their rates until the first
half of 2008. However, most countries slashed their rates from
their peak levels after the onset of the crisis (see table 1).

Table 1: Changes In Asia-Pacific Monetary Policy Rates

Changes in policy rates Peak policy rate Last change
(percentage points) in 2008 (percentage points)
H108 H208 2009 Rate Month Rate cut from peak Change Month Prevailing rate %
Australia 0.50 (3.00) (0.50) 7.25 Mar-08 4.25 0.25 Dec-09 3.75
China 0.00 (2.16) 0.00 7.47 Aug-08 2.16 (0.27) Dec-08 5.31
India 0.75 (2.00) (1.75) 9.00 Sep-08 4.25 (0.25) Apr-09 4.75
Indonesia 0.50 0.75 (2.75) 9.50 Nov-08 3.00 (0.25) Aug-09 6.50
Japan 0.00 0.00 0.00 0.50 Sep-08 0.40 0.00 Dec-08 0.10
Korea 0.00 (2.00) (1.00) 5.25 Sep-08 3.25 (0.50) Feb-09 2.00
Malaysia 0.00 (0.25) (1.25) 3.50 Oct-08 1.50 (0.50) Feb-09 2.00
New Zealand 0.00 (3.25) (2.50) 8.25 Jun-08 5.75 (0.50) Apr-09 2.50
Philippines 0.00 0.75 (1.50) 8.00 Oct-08 2.00 (0.25) Jul-09 6.00
Taiwan 0.25 (1.63) (0.75) 3.63 Aug-08 2.38 (0.25) Apr-09 1.25
Thailand 0.00 (0.50) (1.50) 3.75 Oct-08 2.50 (0.25) Apr-09 1.25
Vietnam 5.75 (5.50) (1.50) 14.00 Sep-08 7.00 1.00 Dec-09 8.00
Notes
Source: Central banks’ data. Note: Rate cut from peak refers to the quantum of rate cuts from the peak level in 2008 in percentage points.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 13

A S I A - PA C I F I C M A C R O E C O N O M I C O U T L O O K

Given the 2008 crisis was primarily triggered by a lack of
financial liquidity, the immediate policy response by central
banks was monetary easing—through both rate cuts and
pumping money into domestic financial systems—to ensure
credit availability to businesses. The crucial supporting factor
was the drastic drop in inflationary expectations, which gave
central banks plenty of room to reduce rates. But the significant
lag involved in the transmission of monetary measures, the high
level of uncertainty, and the limitations in countering the sudden
plunge in external demand called for large and quick fiscal
stimulus from governments to aid real economic growth.
Fiscal responses have been ubiquitous since September
2008, with some governments rolling out multiple stimulus
packages. Some administrations have relaxed corporate and
individual taxes and funded large infrastructure projects while
Chart 2
Asia-Pacific Changes In Long-Term Interest Rates
Feb09-Oct09 Oct09-Feb10
others have provided one-off cash hand-outs and other
incentives to individuals and specific industries. The Japanese
government, which has been struggling to revive its economy,
unveiled a fourth fiscal package in December 2009 to bolster
domestic businesses and consumer spending, taking the total
to more than ¥29 trillion since September 2008. In Indonesia
and India, spending related to parliamentary elections
supported consumption in the first and second quarters of
2009. For India, many decisions made before the onset of the
crisis—such as salary increases for public administration
employees, rural employment guarantee schemes, and farm-
loan waivers—greatly helped to uphold consumer spending.
In China as well, direct stimulus to the larger rural
population, low-income earners, and pensioners—in the form
of subsidies to buy consumer durables—contributed
substantially to domestic demand. An increase in investments,
particularly by the Chinese government, was a significant
reason for China’s economic rebound; state-owned enterprises
increased fixed-asset investments by 38.5% between January
and November 2009.

Bond Yields Have Also Begun

Indonesia
To Rise
Taiwan
Meanwhile, increased government borrowing to finance fiscal
Japan deficits has been pushing up long-term government-bond yields,
Malaysia most notably in Australia, New Zealand, India, Hong Kong, and
Hong Kong Malaysia (see chart 2). The long-term yield declined sharply in
these countries from about October 2008 until about February
Singapore
2009. Thereafter, substantial government borrowing from the
Thailand market pushed rates higher. Indonesia is the one significant
India exception as its interest rates were very high in 2008.
New Zealand Although fiscal spending has been vital to compensate for
the decline in private investment, higher interest rates could
Australia
make lending to the private sector difficult in the future. As it
(200) (150) (100) (50) 0 50 100 150
is, companies’ creditworthiness will be assessed more
stringently. Higher interest rates may also attract capital flows
Source: Standard & Poor's Asia-Pacific economic research. and, in turn, have implications for exchange rate movements.
© Standard & Poor’s 2010.

14 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 A S I A - PA C I F I C M A C R O E C O N O M I C O U T L O O K

“Although fiscal spending has been vital to compensate

for the decline in private investment, higher interest
rates could make lending to the private sector difficult
in the future. As it is, companies’ creditworthiness will
be assessed more stringently.”

Table 2: Asia-Pacific Export Data: China Demand Aids Recovery

Exports to the world Exports to China as % Exports to China
(year-on-year %) of country’s (year-on-year %)
Q109 Q209 Q309 Q409 total exports Q109 Q209 Q309 Q409
Hong Kong (21.9) (12.9) (14.3) (2.0) 48.6 (23.5) (5.4) (8.0) 4.0
Taiwan (32.3) (25.8) (16.1) 15.2 25.7 (44.2) (28.4) (8.2) 44.1
Korea (25.2) (21.1) (17.6) 11.7 21.9 (25.1) (20.3) (6.9) 45.6
Japan (46.9) (38.5) (34.4) (8.0) 15.6 (38.3) (26.4) (22.9) 8.0
Australia 30.1 (10.9) (24.2) (30.2) 14.2 64.5 33.4 9.7 24.4
Philippines (36.8) (28.9) (21.5) 5.0 11.3 (49.7) (41.6) (57.6) (32.1)
Singapore (27.8) (25.4) (20.0) 4.9 9.4 (24.1) (21.7) (20.1) 20.7
Thailand 7.4 (22.9) (22.5) 10.7 9.4 (24.1) 0.8 (4.8) 49.7
Malaysia (20.0) (26.3) (22.4) 5.1 9.1 (1.8) (16.1) (2.8) 61.0
Indonesia (31.8) (26.2) (19.3) 23.8 8.5 (38.6) (0.2) (8.5) 50.4
India (20.2) (34.9) (24.2) 6.0 5.9 (34.9) (30.2) (7.3) N.A.

Notes
Source: Standard & Poor’s Asia-Pacific economic data. Note: Rate cut from peak refers to the quantum of rate cuts from the peak level in 2008 in
percentage points. Exports are in value terms and year-on-year growth rates have been estimated.

China Remains The Region’s Growth

Locomotive
In our view, the region’s strong links with China have been
critical in helping stabilize economic activity in the region.
Although regional exports and industrial production remain
considerably lower than in 2008, these key economic indicators
have improved substantially in recent months following the
November 2008-January 2009 slump (see table 2). The gains
are more apparent in commodity-exporting countries such as
Australia and in countries that have strong economic ties with
China such as Hong Kong, Taiwan, and Korea. China’s
growing demand for raw materials, commodities, machinery,
and high-tech capital goods has driven this.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 15

A S I A - PA C I F I C M A C R O E C O N O M I C O U T L O O K

“...2010 promises positive growth in all the Asia-Pacific economies we rate,

thanks to the combined influence of a modest recovery in the U.S. and Europe,
persistent effects of previous monetary and fiscal support, and gains in
intraregional trade thanks to increased local demand.”

Chart 3 Balance Of Payments Are

Asia-Pacific Exchange-Rate Reversals On The Upswing, As Exchange
(% change in exchange rate) Mar09-Nov09
(% change in exchange rate) Jul08-Feb09
Rates Rebound
The decline in exports during the crisis was more than offset by
VND/US$ reductions in imports, helping much of the region record
HK$/US$ higher current account surpluses. Thailand, New Zealand, and
RMB/US$ Korea saw a significant turnaround in their balances in 2009.
PHP/US$
Meanwhile, persistent current account surpluses, combined
NT$/US$
THB/US$
with a revival of capital inflows, have led to a reversal in
MYR/US$ regional currency movements (see chart 3). Most currencies
¥/US$ depreciated from July 2008 until March 2009 and since then
INR/US$ have strengthened again. Australia, New Zealand, Korea, and
S$/US$ Indonesia have seen significant appreciation—offsetting
IDR/US$
entirely the previous depreciation. The fact that these countries
KRW/US$
heavily export commodities and machinery, and are strongly
NZ$/US$
A$/US$ linked to China, partly explains the rebound in demand for
their local currencies. Other factors are improving business and
(30) (20) (10) 0 10 20 30 40 50
investor confidence in Asia-Pacific’s performance and the
Source: Standard & Poor's Asia-Pacific economic research. VND—Vietnamese dong. region’s relative resilience to the global slowdown. The
HK$—Hong Kong dollar. RMB—Chinese renmimbi. PHP—Philippine peso. NT$—new Vietnamese dong was an exception; it suffered immensely due
Taiwan dollar. THB—Thai baht. MYR—Malaysian ringgit. ¥—Japanese yen. INR—
Indonesian rupiah. KRW—Korean won. NZ$—New Zealand dollar. A$—Australian dollar.
to losses in export momentum and capital flows and pressures
Note: Negative change refers to appreciation in the currency and positive change refers to from fiscal financing. The Vietnamese government announced
depreciation. a formal devaluation (5%) in the dong in November 2009 and
© Standard & Poor's 2010. this has helped fuel external demand for its goods. Although
currency volatility has largely abated in recent months, some
countries are still experiencing depreciation—but further
appreciation may hinder the pace of export recovery.

16 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 A S I A - PA C I F I C M A C R O E C O N O M I C O U T L O O K

Regional Outlook And Risks: Table 3: Asia-Pacific Real GDP Growth Forecasts
China, India, Vietnam, Indonesia (y-o-y %) 2008 2009f 2010f 2011e
To Lead The Pack China 9.1 8.2-8.7 9.7-10.2 8.5-9.0
Despite a modestly improved global environment, and signs of Hong Kong 2.4 (3.0)-(2.5) 4.5-5.0 4.2-4.7
higher production and export levels in the region, Asia- India 7.5 6.3-6.8 7.5-8.0 8.0-8.5
Pacific’s fourth-quarter economic rebound will not fully offset Indonesia 6.1 4.5 5.2-5.7 5.8-6.3
the substantial contractions seen in the first half of 2009.
Japan (1.2) (5.0) 1.3-1.8 1.3-1.8
Seven of 14 major regional economies will likely see lower
GDP levels in 2009 than in 2008. But 2010 promises positive Korea 2.2 0.2 5.0-5.5 4.3-4.8
growth in all the Asia-Pacific economies we rate, thanks to the Malaysia 4.6 (3.0)-(2.5) 4.0-4.5 4.3-4.8
combined influence of a modest recovery in the U.S. and Philippines 3.8 0.9 3.5-4.0 4.2-4.7
Europe, persistent effects of previous monetary and fiscal Singapore 1.1 (2.1) 5.5-6.0 5.2-5.7
support, and gains in intraregional trade thanks to increased
Taiwan 0.7 (3.3)-(2.8) 4.5-5.0 4.0-4.5
local demand. Our baseline forecasts suggest that China,
India, Vietnam, and Indonesia will continue to lead the pack Thailand 2.5 (3.5)-(3.0) 3.0-3.5 3.8-4.3
in 2010 (see table 3). Vietnam 6.2 5.3 6.8-7.3 7.0-7.5
While things are looking up for the Asia-Pacific region, Australia 2.3 0.7-1.2 2.7-3.2 3.0-3.5
some risks will continue to haunt recovery. Inflationary New Zealand (0.1) (1.6)-(1.1) 2.5-3.0 3.0-3.5
concerns remain, due to oil and commodity prices and higher
asset prices—the latter having recently shown tendencies to Notes
surge beyond levels warranted by demand-supply conditions.
Source: Standard & Poor’s Asia-Pacific economic research.
Higher inflation may inspire faster rate hikes, which may in f—Forecast. e—Estimate.
turn jeopardize the pace of the growth rebound. Inflation may
also deter recovery in private investment. Finally, as the
economic recovery in the U.S. and Europe continues to be
fragile, global economic stability will be a crucial factor in
revival in Asia-Pacific.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 17

A S I A - P A C I F I C C R E D I T R AT I N G S
OUTLOOK
Past
Experience
Stands Asia-
Pacific In
Good Stead
For 2010
CONTACT:
IAN THOMPSON
MANAGING DIRECTOR AND SENIOR CREDIT OFFICER
STANDARD & POOR’S RATINGS SERVICES
MELBOURNE (613) 9631 2100 IAN_THOMPSON@STANDARDANDPOORS.COM
RESURGENT ECONOMIC CONDITIONS, stronger domestic markets,
and low interest rates underpin a more favorable earnings
outlook for Asia-Pacific’s corporate sector in 2010. The
improved outlook will encourage restocking and capital
expenditure (capex); both were somewhat measured in 2009.
As far as financial institutions are concerned, we believe stable
times are ahead. While loan portfolios will experience a rise in
nonperforming loans (NPLs) in 2010 (a lag effect of the
economic slowdown) they should be manageable within
current-year earnings. We expect the sector will remain
profitable. And the outlook for the region’s sovereigns is also
stable, for the most part. The contingent liability of the
financial system is declining as the region recovers, and higher
deficits incurred to fund fiscal stimulus packages are staying
within ratings tolerances.
Despite the global nature of the economic slowdown,
Asia-Pacific has performed better than other regions.
Opportunistic investment flows, the more conservative nature
of Asian banks’ balance sheets, and the lower exposure to
18 ASIA-PACIFIC MARKETS OUTLOOK 2010
This page: Ship entering the port of Singapore.
asset bubbles are all factors that have strengthened credit
dynamics in the region. We expect 2009’s fiscal stimulus
packages and infrastructure projects will continue to benefit
Asia-Pacific economies through 2010. Furthermore, in 2009
the growth slowdown fostered corporate prudence and a
degree of recapitalization and expense rationalization. As
such, the region’s corporate sectors have begun 2010 with
improved earnings outlooks, lower leverage, and historically
low interest rates.
But while 2010 is looking bright for the Asia-Pacific
region, many challenges remain. We believe that the policy
orientation of most governments will shift from crisis
management to ongoing recovery management. This shift will
likely entail moderating expansionary programs, raising
official interest rates, and gradually withdrawing fiscal stimuli
to avoid asset-price inflation. This will necessarily have a
negative effect on funding costs for the corporate,
infrastructure, and financial institutions sectors, and runs the
risk of stalling recovery if poorly executed.
STANDARD & POOR’S
 A S I A - P A C I F I C C R E D I T R AT I N G S
OUTLOOK

So market fragility will remain for a few months yet, and Credit Outlook Improving In 2010
not all sectors will recover quickly. In particular, export-related Improving economic and credit conditions, coupled with the
industries such as manufactured goods will likely be slow to high volume of downward rating activity in 2009, has added
regain full health. Adding trouble to trouble, the existing stability to the rating portfolio. The percentage of ratings on
subdued demand for some export goods will be compounded negative outlook was down to 25% at Dec. 31, 2009, from a
by foreign-exchange and interest-rate movements. Access to peak of 32% in April 2009 (see chart 1). This favorable trend
funding remains selective, with speculative-grade entities likely is expected to continue through 2010 as improving economic
to feel constraints. Real estate investment, transport-related conditions start to ameliorate some credit-quality pressures.
industries, and nonbank finance are sectors likely to remain Nevertheless, lower-rated (speculative-grade) credits are
challenged through 2010. inherently vulnerable to stress and those in industries that are
subject to slower recovery are likely to feel pressured for a
Downgrades Quadruple Upgrades In 2009 while longer. Reflecting this, 43% of speculative-grade credits
Subdued economic growth in 2009 saw eight Asia-Pacific rated are on an outlook other than stable, versus a stable-outlook
sovereigns record negative GDP growth. This contributed to rate of 73% for the entire rating portfolio.
the overall credit portfolio recording a negative bias, peaking
Defaults To Fall In 2010, Maybe To 2008 Levels
at 32.0%, while defaults rose to 1.9%—the highest level since
As predicted in late 2008, defaults climbed to double digits in
the Asian crisis. Difficult economic and operating conditions
2009, peaking at 1.9% of Asia-Pacific’s ratings universe and
saw rating downgrades more than quadruple upgrades in
representing about 10% of Asia-Pacific speculative-grade credits.
2009, with 183 downgrades to only 42 upgrades (see table 1).
While this 10% constituted a sharp deterioration in regional
Weaker entities were more profoundly troubled by the harsh
operating conditions in 2009; about 20% of issuers’ ratings in
Asia-Pacific fall within the ‘BB’ and below rating band, and Table 1: Asia-Pac. Corporate & Government Ratings
they accounted for 53% of rating actions in 2009.
Activity 2006 2007 2008 2009
Corporate and infrastructure ratings tend to be lower than
Downgrades 37 24 122 183
those for financial institutions; in 2009 they incurred 65% of
the region’s downward rating activity, with 14% of rating Upgrades 98 152 58 42
actions being downgrades. Asia-Pacific financial institutions, on Defaults 2 2 8 15
the other hand, were less exposed to asset bubbles and volatile Negative Outlook 76 60 199 234
securitized assets than were their global peers, and recorded a Positive Outlook 107 116 33 44
more modest downgrade rate of 8%—overall accounting for
Stable 746 787 831 675
about 20% of the region’s downward actions. Mostly affected
CW-Developing 2 1 3 2
by parent-group actions and asset-quality issues, insurance-
sector downgrades represented 15% of all downward actions. CW-Negative 23 42 37 17
Post-Asian-crisis structural reforms by the region’s sovereigns in CW-Positive 23 11 3 7
the last decade supported domestic banking systems and Total 988 1018 1063 956
afforded some governments better flexibility to withstand the
global slowdown. Only 7% of rating actions on sovereigns and Notes
international public finance entities were downgrades. Source: Standard & Poor’s Ratings Services. CW—CreditWatch.

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A S I A - P A C I F I C C R E D I T R AT I N G S
OUTLOOK

“With the stronger economic outlook we anticipate default rates will decline in 2010.
However, defaults tend to lag recovery and, for some, the turnaround will come too late.”

performance, from a global perspective Asia-Pacific credits
performed well compared with the U.S. and Europe. Defaults,
while historically high in terms of absolute numbers, were lower
as a proportion of the portfolio than the levels experienced
during the Asian crisis of the late 1990s (see chart 2).
Defaults have been well spread (across eight rated
sovereigns in the region) and concentrated in entities with a
weaker credit standing. All were rated in the ‘BB’ category or
less one year prior to default. Sectors affected in 2009 included
transportation, telecommunications, nonbank financing,
manufacturing, and consumer discretionary. Features of
distressed entities were high leverage, group/contagion risk
issues, and rapid recent growth.
Most defaults took the form of distressed-debt exchanges,
whereby investors agreed to buy back (fully or partially) at
substantial discount any debt or bonds outstanding rather than
see the issuer formally declared bankrupt. The advantage of
this to the issuer is that it reduces debt burden and allows the
entity to continue to operate. For the investor, it liquefies their
position (albeit at a loss) and may provide a higher or quicker
return of funds than bankruptcy would. Standard & Poor’s
views distress exchanges as akin to defaults because of the
economic loss they create for the investor.
With the stronger economic outlook we anticipate default
rates will decline in 2010. However, defaults tend to lag
recovery and, for some, the turnaround will come too late. Our
base-case estimate is that default rates will decline in 2010 to
around the 2008 level of about 1.2% of the rating universe.
Table 2 illustrates the level of credit-rating risk we believe
various sectors face in 2010.
Corporate And Infrastructure Outlook
Corporate and infrastructure downgrades in 2009 were driven
mainly by pressures on earnings, cash flows, and refinancing.
Industry risk increased for sectors dependent on discretionary
consumer spending and for those in which high fixed-cost

Chart 1 Chart 2
Asia-Pacific Corporate And Government Ratings Asia-Pacific Rated Issuer Defaults 2005–2009
Portfolio Bias
2.0
Negative: Outlook or CreditWatch Positive: Outlook or CreditWatch
1.8
(%)
1.6
35
1.4
(default ratio %)

30 1.2
25 1.0
0.8
20
0.6
15 0.4
10 0.2

5 0
2005 2006 2007 2008 2009
0
Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Source: Standard & Poor's Ratings Services.

© Standard & Poor’s 2010.

Source: Standard & Poor's Ratings Services.

© Standard & Poor’s 2010.

20 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 A S I A - P A C I F I C C R E D I T R AT I N G S
OUTLOOK

Table 2: Asia-Pacific Corporate & Government Ratings Activity

High Risk Medium Risk Low Risk
Insurance Non-discretionary consumer
Consumer discretionary (hi-tech) Mining & metals Water, gas, electricity transmission
and distribution utilities
Construction Oil & gas Telecommunications
Building and construction materials Consumer discretionary Project finance—social
(gaming & entertainment)
Transportation (airlines, shipping) Real estate investment trusts Railroads
Finance companies Electricity generation Sovereigns
Automotive
Media Chemicals
Consumer discretionary (retail) Agriculture
Project finance—economic
Banks
Paper & packaging
Forest products
Notes
Source: Standard & Poor’s Ratings Services.

pressures couldn’t be passed on to consumers (such as autos,
airlines, and shipping).
The strong economic rebound across Asia-Pacific in 2010
will affect sectors differently. Specifically, we expect that the
construction and building materials sector—while experiencing
weakness—will benefit from the infrastructure and housing
investments that have been part of governments’ fiscal stimulus
packages. We also anticipate that the improved outlook will
encourage restocking and capex. We believe that challenges
will remain in the real estate sector and export and transport-
related industries and that these will likely be the slowest to
recover, given the overall global economic outlook.
Reflecting the improving outlook, the negative bias on the
corporate and infrastructure ratings portfolio should transition
to a more neutral range of 16%-18% toward mid-2010.
Financial Institutions Outlook Sees Banks Being
Profitable In 2010
In 2009, governmental support (in the form of funding
guarantees) reduced downward rating pressure on banks,
underpinning access to finance—albeit at a price—and
alleviating external funding pressure. Nevertheless, the sector
has not been immune from the asset-quality pressures
associated with the economic slowdown (including real estate
illiquidity in many markets), experiencing an increase in NPLs.
Nonbank lenders have been adversely affected by flights to
quality and market distortions associated with government
support for the banking sector.
The outlook for the financial institutions sector as a whole
continues to be difficult but manageable. This reflects the lagged
effect of the slowdown on asset quality and specifically loan

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A S I A - P A C I F I C C R E D I T R AT I N G S
OUTLOOK
portfolios. While credit losses will constrain earnings, we expect
the banking sector to remain profitable in 2010 as it focuses on
restoring or preserving balance-sheet strength. The banks will
explore further capital-raising initiatives after they are freed
from government funding and liquidity safety nets.
Funding and liquidity management will continue to be a
critical focus this year, with many Asia-Pacific entities facing
substantial debt-refinancing tasks. We expect corporate,
infrastructure, and financial institutions entities to remain risk
averse and pursue only moderate growth. Funding profiles
have shortened for many issuers after significant capital
raisings in 2009 to meet immediate funding requirements and
to deleverage aggressive balance sheets. We believe that
funding initiatives will focus on rolling over debt and
lengthening maturity profiles
Structured Finance Outlook 2010
Collateralized debt obligations, many of which had global
reference entities, represented the bulk of structured finance
downgrades and defaults in 2009. Conversely, regional assets
in securitizations (auto loans, consumer receivables, and
residential mortgage-backed securities) have proved resilient.
Given their relatively minor deterioration in 2009, we project
that Asia-Pacific securitization transactions in 2010 will
continue to perform within expectations and rating revisions
will be limited—some will be upward as portfolios season and
senior tranches are paid down. Some transactions will,
however, remain sensitive to the corporate credit recovery and
the ensuing refinancing conditions. New issuance volumes are
expected to remain subdued in 2010.
Commercial Mortgage-Backed Securities (CMBS)
We expect commercial real estate markets to remain under
some stress this year as loan maturities continue to create
refinancing challenges for issuers. The large maturities repaid
in 2009 in Australia and Singapore, coupled with the
recapitalization of several property groups and real estate
investment trusts, has reduced pressure on 2010 maturities.
22 ASIA-PACIFIC MARKETS OUTLOOK 2010
Improving investor sentiment, with emerging liquidity in small-
to-midsize real estate properties, is expected to stabilize values
and capitalization rates. Refinancing remains the key risk in
2010; in some cases programs may be forced to run beyond
expected maturity dates through to final maturity date. The
outlook for CMBS in Japan is worse, reflecting Japan’s weak
economic outlook relative to other sovereigns in the region,
constrained capacity of the alternative bank financing market,
and pressures on rental income. Key challenges for Japanese
CMBS include a refinancing peak in 2010 of maturing loans
backing CMBS and potential asset-quality issues that will
necessitate effective management of arrears and recovery of
delinquent and defaulted loans.
Asset-Backed Securities (ABS)
The ABS sector experienced some asset-performance
deterioration in 2009 as seen in increased arrears and losses. In
most markets the deterioration was from a low base and
negative rating actions were concentrated in mezzanine and
subordinated notes. The portfolios most troubled stemmed
from smaller stand-alone originators who were early victims of
recessionary conditions. We expect ABS portfolios will
Table 3: Structured Finance Rating Activity*, 2009
Rating Actions 5230
Active Ratings 2924
Affirmation (%) 53
Downgrades (%) 23
Upgrades (%) 4
Defaults (%) 1
New (%) 6
Matured/Withdrawn 13
Notes
Source: Standard & Poor’s Ratings Services. *By asset class.
STANDARD & POOR’S

“…we project that Asia-Pacific securitization transactions in 2010 will continue to perform
within expectations and rating revisions will be limited—some will be upward as portfolios
season and senior tranches are paid down. Some transactions will, however, remain sensitive
to the corporate credit recovery and the ensuing refinancing conditions.”
stabilize in 2010 as the rapid amortization profile of ABS,
coupled with the improving economic outlook, reduces the risk
of future significantly adverse rating actions. This may even see
some mezzanine classes upgraded. In Japan, ABS is expected to
recover more slowly than in other markets due to relatively
slower economic growth and the effect of regulatory reforms in
the consumer finance sector. The Japanese ABS portfolio
experienced a number of downward rating actions, including
some defaults, in 2009, due to asset-quality issues and
operational failures. A slowing in the momentum of
deterioration in credit quality should see the ABS sector
bottom-out in 2010 and stabilize.
Residential Mortgage-Backed Securities (RMBS)
RMBS as an asset class has performed well in the region—
reflecting strong underlying performance—with loan arrears
and foreclosure rates remaining very low. Policy stimulus and
interest-rate reductions have supported housing markets and
collateral-value declines have improved home affordability.
The asset class remains sensitive to employment rates and
interest-rate levels. In Australia, rating-transition risks for this
asset class are more likely to stem from counterparty risks
(such as lenders’ mortgage insurers) than asset deterioration.
The rating outlook for subprime RMBS (a very small
component of the market) is more mixed. The outlooks for
senior and mezzanine notes are expected to be stable, with
some potential upgrades. Conversely, deeply subordinated
notes remain vulnerable to negative rating transition as they
may be affected by adverse pool selection, increased borrower
concentration, and an increase in the weighted average
transaction costs as the portfolio balance diminishes. In some
portfolios, losses continue to be realized and arrears remain
high. The lower-rated classes of notes are more sensitive to
potential interest-rate and unemployment-rate rises.
Collateralized Debt Obligations
The CDO ratings outlook remains negative for the next 12
months, although the magnitude of negative transitions should
reduce. A significant portion of Australian CDOs is now
STANDARD & POOR’S
A S I A - P A C I F I C C R E D I T R AT I N G S
OUTLOOK
repackaged transactions directly linked to the performance of
underlying corporate obligations or swap counterparties. Most
of the portfolio-linked CDOs have already experienced
significant negative rating actions in an adverse global
corporate credit cycle and, as a result, CDO rating criteria has
changed. The outstanding ratings portfolio of arbitrage
synthetic CDOs saw many ratings migrate to the ‘CCC’
category at the end of 2009. At the low sub-investment-grade
level, such transactions have limited scope of available credit
enhancements to withstand further portfolio deterioration or
credit events, prior to maturity. Performance of outstanding
transactions will be heavily influenced by the performance of
global corporate ratings, with relatively limited exposure to
ABS assets.
A Brighter Future, But Not Without
Challenges And Residual Risks
While the outlook for 2010 is positive, several residual risks
remain and require careful management to ensure credit
dynamics are not impaired. These risks include:
 Governments withdrawing fiscal safety nets and
tightening monetary stance.
 Sizeable corporate refinancing as many term-debt
programs mature in 2010. Additionally, government
guarantees to support banking-sector funding programs
are also being wound back; the banking sector will also
need to manage capital adequacy associated with strong
asset growth and market perceptions.
 The emergence of asset bubbles in certain sectors and
markets fuelled by excess liquidity and low interest rates.
 Global recovery and the ongoing influence on Asian export
markets on the U.S. and European consumer sectors.
ASIA-PACIFIC MARKETS OUTLOOK 2010 23
A S I A - PA C I F I C E Q U I T Y M A R K E T S
OUTLOOK

2010 Looks Positive For

Asia-Pacific Equity Markets…
CONTACT:
LORRAINE TAN
DIRECTOR OF RESEARCH
STANDARD & POOR’S EQUITY RESEARCH
SINGAPORE (65) 6239 6348 LORRAINE_TAN@STANDARDANDPOORS.COM

IT IS PROBABLY SAFE TO SAY THAT with Asia-Pacific markets

posting a median gain of over 50% in 2009, we should see a
normalized return in 2010, as the economic recovery has
largely been priced in. While share prices are not as cheap as
they were in early 2009, forward price-to-earnings ratios
(PERs) remain undemanding. We also believe equities will
remain in favor among portfolio managers, given relatively
lower returns from holding cash and bonds. We expect
regional markets to post gains of 10%-20% in 2010 from end-
2009 levels on median EPS growth of 18%. Volatility is likely
to rise, however, with less room for disappointment.
Our end-2010 target for the S&P Asia 50 is 3,400, pricing
at 13x consensus (Bloomberg) 2010 EPS, and representing a
potential gain of 12% from the end-2009 close. In our view,
this is a comfortable upside supported by consensus median
EPS growth in Asia of 18% in 2010. The estimated 2010 gain
is higher than Standard & Poor’s Equity Research’s projected
upside for the S&P 500 at 10% and the S&P Euro 350’s 12%.
Given the relatively higher risks in Asia (with a substantial
emerging market component) for the global investor, a higher
return would be necessary to keep Asian markets attractive on
a relative basis.

24 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 A S I A - PA C I F I C E Q U I T Y M A R K E T S
OUTLOOK

…But Returns Will Be Lower

This indicates that we may not see Asia outperform
against the U.S. and European markets in 2010. If it does, it
will be by a smaller margin than in 2009. S&P Asia 50 closed
2009 with a 57% gain versus the S&P 500 and S&P Euro
350—23% and 26% rises, respectively. Notably, emerging
markets (as measured by the S&P Emerging Broad Market
Index [BMI]) jumped 80% in 2009. Part of the reason we see
lesser outperformance in 2010 is that Asia, ex-Japan, is
probably exiting from fiscal and monetary stimulus earlier
than the U.S. and Europe. The potential for tightening may
dampen market performance but we believe that this was
partly being priced into the consolidation in Asian markets in
January 2010. Also, valuations are back to historic averages
and no longer discounted, which means less buffer against
potential disappointment.
The January correction has, however, brought prices back
to more attractive levels with the S&P Asia 50 losing 7.6% as
of Jan. 29, 2010 from the Jan. 5, 2010 high. The sell-off was
triggered by a series of negative news events starting with
China’s tightening monetary policy and moving to southern
European sovereign debt concerns and U.S. banking-activity
and tax-policy uncertainty. In our view, the weak market
action represented a correction, bringing valuations back to
more comfortable levels and not an end to the bull market.
While we usually find that outperforming markets are
unlikely to be the best performers again the following year, we

Table 1: 2010 Asia-Pacific Index Targets And Recommended Weightings

Market Index 2010 Target 2009 close Upside (%) At Jan. 2010 Upside (%) Weightings
Australia S&P ASX 200 5,200 4,871 6.8 4,570 13.8 Underweight
China Shanghai Composite 3,900 3,277 19.0 2,989 30.5 Marketweight
China HS China Enterprise 16,000 12,794 25.1 11,498 39.2 Overweight
Hong Kong Hang Seng 26,000 21,873 18.9 20,122 29.2 Overweight
India S&P CNX 50 5,800 5,201 11.5 4,882 18.8 Marketweight
Indonesia Jkt Comp 3,100 2,534 22.3 2,611 18.7 Overweight
Japan Nikkei 225 11,000 10,546 4.3 10,198 7.9 Marketweight
Malaysia FBM KLCI 1,400 1,273 10.0 1,259 11.2 Marketweight
Philippines PComp 3,300 3,053 8.1 2,953 11.7 Underweight
Singapore FSSTI 3,100 2,898 7.0 2,745 12.9 Marketweight
South Korea KOSPI 2,000 1,683 18.9 1,602 24.8 Overweight
Taiwan TAIEX 8,800 8,188 7.5 7,640 15.2 Marketweight
Thailand SET 800 735 8.9 697 14.9 Underweight
Median 10.0 15.2
Asia S&P Asia 50 3,400 3,034 12.1 2,862 18.8

Notes
Source: Standard & Poor’s Equity Research.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 25

A S I A - PA C I F I C E Q U I T Y M A R K E T S
OUTLOOK

see limited alternatives to the domestic growth story in 2010 in
the region. For as long as U.S. growth remains sluggish and
there is risk of stalling, we believe fiscal strength and domestic
growth remain key to sustaining corporate earnings growth. In
this regard, China remains best poised. We continue to prefer
accessing Hong Kong’s H-shares, however, relative to direct
purchase of A-shares—although we also like the A-share
exchange-traded funds (ETFs) as an alternative. For the export
story, we like Korea best on valuation grounds. Should global
demand growth pick up faster than we expect, we see Korea’s
manufacturers benefiting given the mix of established brand
names with growing market shares and competitive costs. In
ASEAN, our near-term preference remains with Indonesia on
its relatively strong domestic growth and commodity plays,
although a rise in risk aversion, political wavering, or earnings
disappointment is likely to favor Singapore and Malaysia.
With a relatively larger portion of their economies
dependent on electronics, technology, and capital equipment
exports, we believe Korea and Taiwan have greater sensitivity
to a pick-up in U.S. consumption. As exports improve, we may
see more investors rotating funds into these markets,
particularly Korea given relatively attractive valuations, at the
expense of China issues. Japan will also be on most investor
radars and we see a neutral stance warranted. Although
strength in the yen is currently a limiting factor on export
confidence, while the lackluster domestic stimulus puts Japan
at risk for continued disappointment, we believe anyone who
wants to sell Japan has already done so. Singapore’s
outperformance would depend on the strength of the
integrated resorts’ performance. If the two casino resorts open
to a better-than-expected response, we believe this will provide
the market with a positive domestic story.

Chart 1 Chart 2
Emerging Markets And Asia Outperform In 2009 Asia-Pacific Market Performances In 2009 And
From bear market low 2009
January 2010 Correction
(%) 2009 gain from March 9, 2009 2009 January 2010 correction
140

120 FBM KLCI

Jkt Comp
100
Philip Comp
80
SET
60 Nikkei 225
40 FSSTI
20 KOSPI
S&P ASX 200
0
S&P CNX 50
5

50

00

50

I
BM
22

20

P5

o3
sia
ei

SX

Shanghai Composite
ing
S&

ur
PA
kk

PA

PE

rg
Ni

S&

me
S&

S&

Twn Stk Exchange

PE
S&

Hang Seng
Source: Bloomberg. Note: Bear market closing lows for most developed markets were on HS China Enterprise
March 9, 2009, and on Oct. 27, 2008 for emerging markets and the S&P Asia 50.
(40) (20) 0 20 40 60 80 100 120
Source: Bloomberg. Standard & Poor's Equity Research, Asia.
© Standard & Poor’s 2010.
© Standard & Poor’s 2010.

26 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 A S I A - PA C I F I C E Q U I T Y M A R K E T S
“For as long as U.S. growth remains sluggish and there is risk of stalling,
we believe fiscal strength and domestic growth remain key to sustaining
corporate earnings growth. In this regard, China remains best poised.”
2009: Performance Recap
We are probably going to look back at 2009 and wish we had
bought more equities earlier. Early strength indicators came
from the Shanghai market, which started rising in first-quarter
2009 after consolidating in much of second-half 2008. Notably
for emerging markets, the bear market low was in fact Oct.
27–28, 2008 due to steep sell-offs by global funds that needed
to repatriate capital. For all the other markets it was a difficult
first-quarter 2009, however, with uncertainty and panic over
the prospects of the global banks and potential rights issues.
The watershed period was probably March 9–10, 2009, with a
number of regional banks posting 52-week lows. Thereafter, a
steady flow of positive news from U.S. banks on signs of profit
stability and benign stress-test outcomes enabled the markets
to rise, driven by a rebound in banks’ share prices with median
recovery from the March lows at around 100%. As such, 2009
full-year market recovery is 63%, slightly above past historical
rebounds following bear market lows.
The stock market recovery has been due to a gradually
improving economic outlook that encouraged an increased risk
appetite, financial system stability, and the ensuing
improvement in liquidity and, foremost, the attractive
valuations. Regional markets traded at a very attractive
median PER of 10.6x at end-2008, where they would normally
trade at 15x-17x (which is where we ended 2009).
Reviewing our expectations as of end-2008, the Asia-
Pacific markets’ 2009 performance beat our targets by a
median 15%. Taiwan well surpassed our expectation by 41%
on the back of cross-straits enthusiasm while Japan
underwhelmed by 14% on policy paralysis.
Key Drivers And Risks For 2010:
 To a large extent, the economic recovery is priced in, but
what may support equity values is the potential for
upward rerating as the demand outlook improves. Our
forecasts assume a median revenue growth of 9.4% in
2010, rebounding from an estimated contraction of minus
STANDARD & POOR’S
OUTLOOK
2.0% in 2009 for our coverage universe ex-financials.
2010 median EBITDA margins (ex-financials) are expect-
ed to widen by 100 bps leading to projected EPS growth
of 15.4% and return-on-equities ratios (ROE) of 12.4%.
 A benign inflation environment is a key positive, with
costs to remain manageable but prices to creep up,
boosting equity and asset values. This should enable
margins to remain healthy.
 While interest rates are expected to rise, we believe that
an up-to-75-basis-point (bps) rate rise has been discount-
ed in Asian earnings forecasts. Asia-Pacific interest rates
were cut an average of 144 bps from end-2007 to the cur-
rent level. Advanced economies have seen a reduction of
327 bps over the same period. As such, interest rates
should remain at historically low levels in 2010. Having
said this, a move to tighten monetary policy has been a
blow to market confidence early in 2010 on fears it may
impede earnings growth. We believe, however, that it has
had greater negative affect on sentiment than it has had
on actual earnings estimates.
 An improving corporate lending environment should help
boost M&A activity and reduce the need for companies
to raise capital from the equity markets.
 China’s loans growth will slow but is expected to remain
decent at around 16%-18%. We see this as a more
manageable level for the country’s banks, and one that is
economically prudent. Elsewhere in Asia, loans growth
should remain reasonable with pick-ups particularly in
Singapore and Hong Kong leading to an improving
environment for banks.
 As U.S. consumption improves, investor interest may
rotate from markets with strong domestic consumption to
export-led economies. We see relatively stronger EPS
growth in Taiwan and Korea due to the lower 2009 base
and greater sensitivity to a turnaround in capital-
equipment, auto, and technology earnings.
ASIA-PACIFIC MARKETS OUTLOOK 2010 27
A S I A - PA C I F I C E Q U I T Y M A R K E T S
OUTLOOK

Chart 3
S&P Global Broad Market Index Asia-Pacific 2009
Performance By Sector  Disappointment may come from falling margins. With
From October 2008 2009 excess capacity remaining in some sectors, pricing
pressure may stay high and lead to potential profit
Materials disappointment especially as raw material costs rise. 2009
Energy margins may not be sustainable if sales do not pick up.
Consumer Discretionary
 We anticipate a roughly 10% rise in fuel and raw
Information Technology
Financials
material costs and we believe that most of this can be
Industrials
passed on and more than offset by improved efficiency if
Consumer Staples volumes rise. A greater-than-10% cost rise for fuel and
Healthcare raw materials would warrant a more significant
Telecom Services reassessment of our earnings forecasts.
Utilities  If local currencies rise against the U.S. dollar, some Asian
Index
companies may again absorb some of the currency differ-
(20) (10) 0 10 20 30 40 50 60 ence if their goods are priced in dollars. If so, profit mar-
gins are likely to be reduced.
Source: Standard & Poor's Index Services.
 Another key risk is a sharper-than-expected decline in the
© Standard & Poor’s 2010.
U.S. dollar that increases commodity and energy prices. This
may raise costs without a commensurate rise in selling
prices. Also, a weak dollar may require the Fed to sell bonds
Chart 4 at higher yields, adding upward pressure to interest rates.
S&P Global Broad Market Index Asia-Pacific  Conversely, a turnaround in the dollar could trigger a
ex-Japan 2009, Performance By Sector repatriation of funds back to the U.S. market and out of
emerging Asia. The Hong Kong market (H-shares
From October 2008 2009
especially) is particularly sensitive to this, having been
Information Technology
a key destination of global portfolios.
Consumer Discretionary  Geopolitical and pandemic risks remain a possibility.
Materials Instability in Iran could build up uncertainty, sending
Energy
energy prices higher. A resurgent flu virus (whether
Industrials
A[H1N1] or another strain) could hurt fragile
Financials
consumer confidence.
Consumer Stables
Utilities  Unexpected defaults (along the lines of Dubai World) and
Healthcare worse-than-expected commercial-property debt troubles
Telecom may dampen financial-sector confidence and lower risk
Index appetite. Further sovereign downgrades, particularly of
(10) 10 30 50 70 90 110 130 150 170 190 larger countries, could trigger a tightening up in the
financial system and this will curtail global activity.
Source: Standard & Poor's Index Services.

© Standard & Poor’s 2010.

28 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 A S I A - PA C I F I C E Q U I T Y M A R K E T S
 Intensifying talk of higher tax rates and reduced fiscal
spending into 2011 may hurt market confidence in the
second half of 2010. Notably, the U.S. government has
indicated it may provide details on curtailing its budget
deficit in February 2010.
 Bubbles? Not yet but enjoy it while it lasts.
The Tide Is Still Rising
Overall, we maintain our view that the “easy” money has been
made. At current valuation levels, investors have discounted
the global economic recovery and are looking ahead to a
resumption of demand-led earnings growth in 2010. Stock
picking is likely to be more important in 2010, with fewer
bargains available particularly as headwind builds. Having
said this, with limited alternatives, equities are expected to
outperform and as they say, “a rising tide lifts all boats.”
Increased volatility is likely as prices rise, particularly as more
countries start to raise interest rates, bringing about concerns
of reducing liquidity and anxiousness to protect gains. Also,
while Shanghai corrected in August 2009 (falling 21.8%), we
did not see a meaningful correction yet for the other Asian
markets, so the January 2010 correction has been overdue. For
Asia 10%-15% corrections are possible at points throughout
2010 especially if valuations run up. On the whole, however,
improving consumer demand as global economic growth picks
up should help support full-year market gains particularly as
we head toward 2011.
History tends to favor a relatively decent second-year
recovery/bull-market performance for markets. While we have
not examined all Asia-Pacific markets, we note that Japan,
Hong Kong, Malaysia, and Singapore have generally posted
positive sophomore-year returns ranging from average returns
of 3% to 28%. The low end of the range generally saw
recoveries cut short by events such as SARS and Tianamen
Square. By comparison, the S&P 500 has averaged a 15%
return in its second-year recovery/bull market. This would be
close to our expectation for the S&P Asia 50 to post decent
returns of 12% in 2010. However, the risk may come from
STANDARD & POOR’S
OUTLOOK
“In addition to our expectation for a more
conducive business environment, we
continue to like Banks as we believe the
sector should see decent investor interest as
the leading driver of earnings growth.”
U.S. economic growth that will likely be slower at our
projected 2.6% in 2010, relative to past global recession
recoveries that averaged 5% in the first four quarters, which
may temper upside.
2010 Performance Will Likely Be Led
By Cyclical Issues
Based on market consensus and Standard & Poor’s Equity
Research estimates, Asia’s 2010 EPS growth is still going to be
driven by cyclical issues, notably banks, materials, energy and,
to some extent, technology.
Based on valuation grounds and growth prospects we are
Overweight in the Banks and Energy sectors in Asia. We are
Underweight in the Consumer Staples and Utilities sectors. The
changes to our recommended weightings since our mid-year
outlook are our reduction of Consumer Staples to Underweight
from Marketweight and moving Real Estate to a neutral
position from Overweight. We continue to believe that cyclical
sectors should outperform in 2010, in view of the recovering
global economy and benefits from ongoing regional
government stimulus.
We believe that the banks are likely to lead market-price
performance in 2010 in regional markets. On a relative value
and earnings growth basis, we see an improved lending
environment for banks (except perhaps for China and India).
Capital-raising concerns may still weigh on Japanese and
certain China and India banks, but elsewhere most banks look
comfortable. In addition to our expectation for a more
conducive business environment, we continue to like Banks as
we believe the sector should see decent investor interest as the
leading driver of earnings growth. While we note that the
Banks sector is outperforming in 2009, it has, in the past,
continued to outperform in the second year of a recovery after
a global market crash and recession. Also, while China’s loan
growth should slow in 2010, it will still be a relatively strong
16%-18% and remain supportive of decent average earnings
growth of 26% for China’s big banks. We also see recent
monetary policy tightening as prudent.
ASIA-PACIFIC MARKETS OUTLOOK 2010 29
A S I A - PA C I F I C E Q U I T Y M A R K E T S
OUTLOOK

“With our expectation for a pickup in

global activity—and for the bearish U.S.
dollar trend to continue over the medium
term—we like the Energy issues. We
expect oil and gas issues to see a better
performance in 2010, with valuations
remaining comfortable…“

30 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 A S I A - PA C I F I C E Q U I T Y M A R K E T S
OUTLOOK

With our expectation for a pickup in global activity—and
for the bearish U.S. dollar trend to continue over the medium
term—we like the Energy issues. We expect oil and gas issues
to see a better performance in 2010, with valuations remaining
comfortable and oil prices that should start moving up toward
end-2010 as excess supply is absorbed. We feel that the Energy
sector remains one of the best proxies to China’s growth, given
its focus on energy security and rapidly rising consumption.
As we see more selective performances among the
Materials companies, we remain Marketweight. We note,
however, that the more intensive use of building materials in
the second phase of infrastructure projects (after the planning
and preparation phase) should support demand regionally. We
note, however, that excess capacity remains and a risk of
pricing pressure means that companies producing a larger
proportion of higher value-added products should fare better.
We see promise in the Industrials sector although
performance is likely to be varied among the various sub-
industries in the near term. Excess capacity is likely to continue
to limit shipping-freight rate upside but we see improving
demand to help operating leverage in the transport segment
(including Airlines). We are currently Marketweight but
anticipate strengthening economic activity will help boost
sector performance in the second half of 2010 and into 2011.
We note that in terms of market confidence, the Real Estate
(Property) sector continues to be widely followed but we
anticipate that this sector may not see the same
outperformance in 2010. In our view, valuations already reflect
a 10%-15% property price gain in 2010, while policy news
flow is likely to remain negative. Most regional governments

Table 2: S&P Asia 50 Recommended Sector Weightings

Per 2010 EPS 2010 Div. yield PBV Actual sector Recommended
X (y-o-y %) est. % X % weightings S&P sector emphasis
Consumer Discretionary 13.0 14.6 1.7 3.1 6.6 Marketweight
Consumer Staples 17.2 6.6 2.6 2.4 1.9 Underweight
Energy 11.7 33.3 2.8 2.0 6.5 Overweight
Financials—Banks 14.7 38.8 3.7 2.5 18.8 Overweight
Financials—Insurance & Others 26.9 27.4 1.5 7.6 7.3 Marketweight
Financials—Real Estate 18.4 (2.9) 2.5 6.3 5.4 Marketweight
Industrials 15.1 12.8 2.9 1.4 5.5 Marketweight
Information Technology 12.3 28.8 2.0 2.4 26.5 Marketweight
Materials 13.8 40.0 2.5 1.6 8.5 Marketweight
Telecom Services 12.9 1.3 4.1 2.3 9.6 Marketweight
Utilities 12.7 46.1 2.5 1.0 3.5 Underweight
S&P Asia 50 14.1 25.3 2.5 2.8 100.0

Notes
Source: Bloomberg. Standard & Poor’s Equity Research. Overweight—Increased exposure to sector. Marketweight—No change in exposure.
Underweight—Decreased exposure to sector. PBV—Price: Book Value.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 31

A S I A - PA C I F I C E Q U I T Y M A R K E T S
OUTLOOK

will continue to target excessive property speculation and this beta issues and stronger growth prospects. Earnings growth
is likely to dampen confidence. Interestingly, the Hang Seng slowed in 2009, and in some instances declined year-on-year,
Property Index has historically consistently underperformed in amid weakened consumer spending and heightened
the second year of a market recovery. We do, however, find competition. We are neutral on the sector as we expect the
adequate fundamental support for the sector in terms of robust telecommunications industry to remain sidelined relative to
mass market housing demand that could lead to upside the broader market given its unexciting outlook, marred by
surprises. As such, we take a neutral stance. slowing subscriber growth, continual price pressure, and
Technology issues should see strong above-market EPS further margin compression. Nevertheless, dividend
growth in 2010, rebounding from an EPS decline in 2009. appreciation and prospects for M&A activity could prove to be
Overall, as demand for end-applications recovers along with a positive catalysts.
more benign macroeconomic environment, we expect the The utilities sector has underperformed in 2009, gaining by
stocks under our coverage to record 29% earnings growth 9% versus 53% for the S&P Asia Pacific ex-Japan BMI, as
(consensus S&P Asia 50 is looking at 20% growth) in 2010. investors continued to favor growth stocks and cyclical issues.
The robust growth on the bottom line is largely due to a low Overall, we are Underweight on the utilities sector. The
base in 2009. That said, we are Marketweight on the sector, outlook for the sector hinges on coal prices and potential tariff
with an anticipated recovery being largely reflected in the revisions for a full fuel-cost pass-through. Most Asian power
sector outperformance since March 2009. stocks are perceived to be defensive plays and share prices may
We feel similarly about the Consumer Discretionary sector. move in inverse direction with interest rates, but M&A activity
We expect the rebound in the economy to lead to a gradual may provide some individual interest.
increase in discretionary spending to previous growth rates
(estimate 20%) towards 2011. We are Marketweight for the
sector, however, although we note that the recent market
correction has sent sector values back to more reasonable levels.
The earnings recovery is uneven with some retailers performing
better than others. Given the mixed outlooks, we believe
current values are fair, with stocks in the S&P Asia 50 trading
at a 2010 PER of 13x, on weighted EPS growth of 16%.
Consumer Staples sector valuations are not compelling at
current levels, with weighted consensus 2010 PER of 17x and
only 2% EPS growth. We have an Underweight view on the
consumer staples sector, and our prior preference for China’s
dairy producers has wavered on a reemergence of health
concerns. We see value in Singapore-listed plantation/
agriculture trading companies. We expect agriculture crop
prices to hold up well as the global economy inflates.
Regionally, the telecommunications sector proved to be a
laggard in 2009, falling by 1% in 2009 versus the S&P Asia-
Pacific ex-Japan BMI gain of 53% as investors sought higher

32 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 A S I A - PA C I F I C E Q U I T Y M A R K E T S
Glossary
S&P STARS
Since January 1, 1987, Standard & Poor’s Equity Research
Services has ranked a universe of common stocks based on a
given stock’s potential for future performance. Under
proprietary STARS (STock Appreciation Ranking System),
S&P equity analysts rank stocks according to their individual
forecast of a stock’s future total return potential versus the
expected total return of a relevant benchmark (e.g., a regional
index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500
Index)), based on a 12-month time horizon. STARS was
designed to meet the needs of investors looking to put their
investment decisions in perspective.
S&P Quality Rankings (also known as S&P
Earnings & Dividend Rankings)
Growth and stability of earnings and dividends are deemed key
elements in establishing S&P’s earnings and dividend rankings
for common stocks, which are designed to capsulize the nature
of this record in a single symbol. It should be noted, however,
that the process also takes into consideration certain
adjustments and modifications deemed desirable in
establishing such rankings. The final score for each stock is
measured against a scoring matrix determined by analysis of
the scores of a large and representative sample of stocks. The
range of scores in the array of this sample has been aligned
with the following ladder of rankings:
A+ Highest B- Lower
A High C Lowest
A- Above Average D In Reorganization
B+ Average NR Not Ranked
B Below Average
S&P Issuer Credit Rating
A Standard & Poor’s Issuer Credit Rating is a current opinion
of an obligor’s overall financial capacity (its creditworthiness)
to pay its financial obligations. This opinion focuses on the
obligor’s capacity and willingness to meet its financial
commitments as they come due. It does not apply to any
specific financial obligation, as it does not take into account
the nature of and provisions of the obligation, its standing in
bankruptcy or liquidation, statutory preferences, or the legality
and enforceability of the obligation. In addition, it does not
take into account the creditworthiness of the guarantors,
insurers, or other forms of credit enhancement on the
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STANDARD & POOR’S
OUTLOOK
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ASIA-PACIFIC MARKETS OUTLOOK 2010 33
A S I A - PA C I F I C E Q U I T Y M A R K E T S
OUTLOOK
Required Disclosures And Disclaimers
S&P Global STARS Distribution
In North America
As of December 31, 2009, research analysts at Standard &
Poor’s Equity Research Services North America recommended
33.7% of issuers with buy recommendations, 54.3% with hold
recommendations and 12.0% with sell recommendations.
In Europe
As of December 31, 2009, research analysts at Standard &
Poor’s Equity Research Services Europe recommended 31.5%
of issuers with buy recommendations, 44.0% with hold
recommendations and 24.5% with sell recommendations.
In Asia
As of December 31, 2009, research analysts at Standard &
Poor’s Equity Research Services Asia recommended 35.6% of
issuers with buy recommendations, 51.4% with hold
recommendations and 13.0% with sell recommendations.
Globally
As of December 31, 2009, research analysts at Standard &
Poor’s Equity Research Services globally recommended 33.5%
of issuers with buy recommendations, 52.3% with hold
recommendations and 14.2% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform
the total return of a relevant benchmark, by a wide margin
over the coming 12 months, with shares rising in price on an
absolute basis.
4-STARS (Buy): Total return is expected to outperform the
total return of a relevant benchmark over the coming 12
months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely
approximate the total return of a relevant benchmark over the
coming 12 months, with shares generally rising in price on an
absolute basis.
2-STARS (Sell): Total return is expected to underperform the
total return of a relevant benchmark over the coming 12
months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to
underperform the total return of a relevant benchmark by a
wide margin over the coming 12 months, with shares falling in
price on an absolute basis.
34 ASIA-PACIFIC MARKETS OUTLOOK 2010
Relevant benchmarks: In North America, the relevant
benchmark is the S&P 500 Index, in Europe and in Asia, the
relevant benchmarks are generally the S&P Europe 350 Index
and the S&P Asia 50 Index.
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 A S I A - PA C I F I C E Q U I T Y M A R K E T S
OUTLOOK

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construed as a recommendation is intended for general
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circulation and does not take into account the specific
upon as such. With respect to reports issued to clients in Japan
investment objectives, financial situation or particular needs of
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responsible for any errors or omissions or for results obtained
For residents of Malaysia—All queries in relation to this report
from the use of this information. Past performance is not
should be referred to Alexander Chia, Desmond Ch’ng, or
necessarily indicative of future results.
Ching Wah Tam.
This material is not intended as an offer or solicitation for
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mentioned herein may not be suitable for all investors. Any
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may fluctuate. Where an investment or security is denominated

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 35

U.S. PERSPECTIVE
C O M M E N TA RY

The New Normal

(The Future Isn’t What It Used To Be)
CONTACT:
DAVID WYSS
CHIEF ECONOMIST, STANDAND & POOR’S
NEW YORK (1) 212 438 4952 DAVID_WYSS@STANDARDANDPOORS.COM
EDITOR’S NOTE: THIS ARTICLE WAS ORIGINALLY PUBLISHED ON
RATINGSDIRECT ON JAN. 13, 2010.

36 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 U.S. PERSPECTIVE
C O M M E N TA RY

THE TURMOIL IN WORLD FINANCIAL MARKETS and economies

over the past 16 months has, in all probability, fundamentally
altered the global financial system. The problems have revealed
deep flaws in financial assumptions, behaviors, and regulation,
the consequences and solutions of which have changed our
view of the future. Economists recognized the potential for
many of these systemic problems before the crisis began. But
nearly everyone underestimated how much damage they could
cause, and how quickly.
The discussion that the 2007–2008 financial crisis
spawned over such matters has focused mostly on the
prospects for an economic recovery over the next few quarters.
The more important question, we think, is: What will happen
over the next few decades? In a nutshell, we believe it will be a
decade or more before the world and U.S. economies can hope
to grow as rapidly as they did during the half-century or so
preceding the recent crisis because they will have to bear
increasing burdens. These will likely include:
 High personal debt and lower wealth in the U.S., which—
combined with a rebounding though still-low saving
rate—will slow the consumer spending that has powered
much of U.S. and world growth.

 International trade and financial imbalances that are lead-

ing to a weaker dollar and a move away from
dollar reserves.

 Stricter but inconsistent financial and other government

regulation.

 A global financial system that has lost much of its capital

and will need to operate with lower leverage, restricting
loan availability.

 More risk-averse investors (some suddenly conservative

because of recent losses, others approaching retirement
and husbanding their wealth).

 Fiscal deficits in many countries, especially the U.S., the

deficit of which could grow larger as the retirement
wave hits.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 37

U.S. PERSPECTIVE
C O M M E N TA RY
“…if recent trends are a precursor, the global financial system could shift
its headquarters from New York and London toward Asia, especially if
changes in regulation make Asia more attractive as a headquarters for
financial companies.”
 Rising health care costs that threaten the competitiveness
of U.S. companies versus their overseas counterparts.
We expect that the world economy will recover (see chart).
But we think it’s likely that it will look different once it does.
For example, the events of the past two years likely have
accelerated the relative decline in U.S. economic influence, as
Asian economies have continued to grow while America’s has
contracted. In addition, the dollar’s position as the dominant
world reserve currency is under threat. In fact, if recent trends
are a precursor, the global financial system could shift its
headquarters from New York and London toward Asia,
especially if changes in regulation make Asia more attractive as
a headquarters for financial companies.
The Consumer Is No Longer King
We expect that consumer spending likely won’t be the main
engine of recovery that it was after the past few recessions.
American consumers are currently spent out because their
ability and willingness to take on more debt has been
weakened by their loss of wealth and by banks’ increased
caution in making loans. We expect that consumer spending
will rise, but it will trail rather than lead the rise in GDP and
household income.
A sluggish increase in consumer spending will likely mean
a sluggish improvement in the economy. The U.S. went into
this recession with a 1.7% saving rate in 2007, with household
debt at a record 136% of disposable income. From 1960 to
1990, the household saving rate averaged 8.9%. The economy
still grew at a healthy pace through most of that period, but the
structure of the economy differed. Consumer spending
averaged 63% of GDP, not the 71% of today’s America.
We do not expect a return to the pre-1990 saving rate. A
higher percentage of retirees suggests a lower saving rate
because retirees are spending down their previous savings. We
do believe that the saving rate could stabilize near its current
4.7% level, however, which would be near the average of the
1990s. Household debt, which has dropped for an
unprecedented five consecutive quarters, to 128% of
38 ASIA-PACIFIC MARKETS OUTLOOK 2010
disposable income in the third quarter of 2009, will likely
continue to decline, at least relative to income, limiting
Americans’ ability to live beyond their means. The higher
saving rate is healthy in the long run and necessary if the U.S.
is to reduce its reliance on foreign capital, though for the next
few years, it likely will significantly limit growth prospects.
The Burden Of Debt
In fact, economists almost all wish that Americans would save
more because nearly half of those approaching retirement are
underfinanced, according to the Center for Retirement
Research (CRR) at Boston College. The number of unprepared
near-retirees rose significantly with the recent dive in asset
prices (both homes and stocks). And baby boomers don’t have
much time to rebuild their wealth before they reach 65. Part of
the solution will be later retirement. The CRR reports that the
average boomer now expects to retire at age 65; two years ago,
it was at 63. But two more years of saving probably isn't
enough to retire on unless the saving rate is very high, especially
because the average U.S. life expectancy is now 79 years.
The assets of consumers will rise with the recoveries in
stock and housing prices. We expect household debt to
continue to decline relative to income, bringing the debt to
income ratio back below 120%, which would still be higher
than at any time before 2004. We think the higher saving rate,
though modest, will gradually lower the share of consumption
in GDP to 68% from its current 71%. Our base forecast
anticipates that a continued move of the trade account toward
balance plus a rise in capital spending, to more than 15% of
GDP by 2013 from 12% currently, will partly offset this
decline. But not entirely.
Debt, Equity, And Risk
Corporations are also likely to become less leveraged.
Regulatory changes will force some of the shift as the Federal
Reserve and Congress try to rein in overleveraged financial
firms. But in the long run, government borrowing will raise
financing costs, forcing firms to rely more on earnings to
STANDARD & POOR’S
 U.S. PERSPECTIVE
C O M M E N TA RY

Chart
A Simultaneous Recovery Follows
A Simultaneous Recession
2006 2007 2008 2009 2010 2011

(% change in real GDP)

10
8
6
4
2
0
(2)
(4)
(6)
(8)
U.S. Canada Eurozone U.K. Japan Eastern Other Latin Middle Sub-
Europe Asia- America East and Saharan
Pacific North Africa
Africa
Sources: Global Insight and Standard & Poor's projections.
© Standard & Poor’s 2010.

support capacity expansion. At the same time, however, an
aging population will demand more income from its
investments, potentially making it more difficult for firms to
retain earnings while still satisfying shareholders. The probable
result, we think, will be continued high leverage for the safest
nonfinancial firms but reduced leverage ratios for financial firms
(because of regulation) as well as for smaller, less creditworthy
firms (because of investors’ reduced appetite for risk).
This will force all but the most prosperous companies to
rely more on “vanilla” borrowing, such as bank loans and
corporate bonds, and less on securitizations and other more
complex types of borrowing. Regulatory changes will
determine how much financial activity will shift back to the
banks from the bond and securitization markets. But we think
the net result will probably be a rise in the effective cost of
capital to corporate borrowers, especially those that have
less-than-stellar repayment reputations.
As a result, businesses will likely have more equity and less
debt, even in traditionally highly leveraged sectors such as real
estate. We think the higher funding costs to small firms
probably will increase the cost of doing a startup, which will
probably slow economic growth: Most of the rise in private
employment has historically come from small and mid-sized
companies. We do not expect the impact to be enormous, but
the direction seems clear.
Returns And Risk
Financial returns over the next decade will likely be modest.
After the heady days of the 1980s and 1990s, when the stock
market returned 19% a year, returns were slightly negative

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 39

U.S. PERSPECTIVE
C O M M E N TA RY
during the past decade, which contained the two worst bear
markets in postwar history. We expect after-inflation returns to
remain weak during the new decade, reflecting excess world
savings and more sluggish economic growth. A flood of
liquidity in the market lowers returns because too much cash
will be chasing too few investment opportunities.
The move of baby boomers into retirement could
exacerbate this trend. We believe that retired Americans will
sell-off their assets to finance their retirements (which is, after
all, why they acquired the assets), which will depress asset
prices. They will also likely switch to safer, more liquid
investments, depressing stock prices. After all, investing for the
long term has a different meaning when you’re 80 than when
you’re 40. Not all of America’s 70 million baby boomers will
shift their investing patterns at once. But over the next 20
years, we expect that this transition will be significant.
Nominal returns in both the stock and the bond markets
will depend to a large extent on inflation, we believe. There
seems little near-term risk of high inflation; recessions are good
at keeping prices low. However, as the economy gradually
returns to lower unemployment, perhaps five years from now,
we believe that inflation will likely accelerate. The political
pressure for the U.S. to inflate its way out of high government
debt will be substantial, even though the rising interest rates
caused by higher inflation would make the tactic unlikely to
work. Higher inflation isn’t a sure outcome. In Japan, for
example, prices have continued to decline for two decades
despite government debt approaching 200% of GDP, showing
that deflation remains a risk. But the Federal Reserve has been
more aggressive in expanding credit than the Bank of Japan
was during that country’s economic crisis 15 years ago, which
slants the U.S. risk toward inflation.
The recent turmoil will also likely raise risk aversion for a
few years, we believe, which is a major change from the recent
past. The quest for yield and a quarter-century of relatively
calm markets had made investors complacent. The spread
between the yield on speculative-grade corporate bonds and
presumably safe U.S. Treasuries hit a record low 260 basis
40 ASIA-PACIFIC MARKETS OUTLOOK 2010
points (bps) in early 2007. The subprime mortgage problems
sent spreads back up to more normal levels, and then the
failures of Fannie Mae, Freddie Mac, Lehman Brothers, and
AIG sent them to a record high of 1,700 bps in October 2008.
Spreads have now come back down to under 700 bps, still well
above their historical average of 520 bps, but at a normal level
for recessions. We expect spreads to come back down to
normal as the economy recovers but not to go back to the
extremely low level of three years ago.
The Demographic Burden
The aging of the U.S. population is a recurring theme in our
view of the future, but it’s hard to exaggerate the profound
effect it will have on the new economy. The leading edge of the
baby boom is now 63 and beginning to retire. One reason we
expect the U.S. saving rate to remain well below its historical
average is that retirees generally spend more money than they
earn. So their negative saving rate will partially offset their
children’s positive saving rates.
The move of the baby boomers into retirement means that
20 years from now there will be only three workers in the U.S.
for every retiree, down from the current five. The need to feed
not only your own family but one-third of a retired family will
add to the pressures on workers. Living standards will be cut,
in our estimation, by the needed redistribution of income to the
elderly population.
Health care costs will be the biggest age-related issue, as
spending on health care will likely continue to rise much faster
than GDP (unless new health care legislation changes that).
The U.S. government already pays a higher percentage of GDP
(8%) on health care than Britain does. And this covers only
about 30% of the population (retirees, government employees,
and low-income Medicaid recipients), whereas Britain’s
spending covers nearly all of its citizens. With Washington
paying most of the health expenses of those over age 65, the
government’s share almost certainly will continue to rise
relative to both GDP and total health costs. Costs will
accelerate even more in about 20 years, when baby boomers
STANDARD & POOR’S

“The aging of the U.S. population is a recurring theme in our view of the future,
but it’s hard to exaggerate the profound effect it will have on the new economy.
The leading edge of the baby boom is now 63 and beginning to retire.”
start hitting their mid-80s and requiring long-term care. The
elderly now account for nearly two-thirds of Medicaid costs.
Such rising costs will make it even more difficult for
Washington to deal with fiscal imbalances. This will increase
the chances that government borrowing will start to crowd out
private investment over the longer run, thus reducing U.S. GDP
growth for a generation or more.
Fiscal Deficits And Government Debt
In fact, we worry that any reduction in debt for households
and corporations will be more than offset by higher
government borrowing. The $1.4 trillion U.S. deficit in fiscal
2009 and the similar deficit we expect in fiscal 2010 won’t
have much impact on interest rates because of the weak
economy. However, as the economy recovers and households
and firms try to borrow money again, probably by 2011 or
2012, we think that interest rates will be pushed higher.
In any case, we view the projected U.S. deficits as
unsustainable. We expect to see a combination of tax hikes and
cuts to entitlement programs as it becomes clear that the
government cannot continue to borrow the required sums
without major damage to the economy. The tax increases will
cause some economic damage—but less than continued deficits
would. Entitlement cuts could be either good or bad for total
growth. For example, raising the retirement age for full social
security benefits could actually increase growth by keeping
older workers in the labor force.
How much the deficit will damage growth and financial
markets will depend on how willing foreign investors are to
continue buying U.S. securities. The answer to that question in
turn affects the outlook for trade imbalances. Our assumption is
that foreign central banks will diversify their reserves, especially
toward the euro, but that the dollar will remain the dominant
reserve currency. Under those circumstances, we would expect
long-term Treasury bond yields to rise back to normal levels
relative to economic growth and inflation. We expect only a
small premium to be caused by the deficit, implying 10-year
Treasury yields at about 6.5% by 2012 versus 3.8% now.
STANDARD & POOR’S
U.S. PERSPECTIVE
C O M M E N TA RY
Higher government bond yields could carry a risk. One
danger we can imagine is that the Federal Reserve, perhaps
because of intervention by Congress, might keep the federal
funds rate too low for too long. We expect the Fed to raise the
funds rate late in 2010, when U.S. debt will be high relative to
GDP and interest payments will be high relative to the U.S.
budget. Especially if long-term interest rates start to rise, political
pressure on the Fed to keep rates low could prove overwhelming.
The result would be higher inflation over time, a weaker dollar,
lower foreign investment, and higher bond yields, perhaps even
reaching the double-digit rates of 30 years ago. The result would
be even higher interest costs for the government eventually—if
political short-sightedness runs rampant.
International Deficits And The Dollar
Bond yields are low at the moment, in part because of the
enormous international imbalances. The massive trade
surpluses of the oil-producing states and China and Japan have
created a large pool of essentially stateless money, which circles
the world in search of yield. The surpluses reflect high saving
rates in these countries.
Balancing these high savings countries are those with trade
deficits and low national saving rates. The U.S. still has the
world’s largest trade deficit, though this deficit has been cut
sharply, to our forecast of 3% of GDP in 2010 from 6% in
2006, by a combination of the U.S. recession, a weaker dollar,
and lower oil prices.
Many of the countries with trade surpluses are becoming
nervous about the share of their reserves that are held in
dollars, and they are thinking about diversifying. Their motive
would be to reduce risk. However, moving significant reserves
out of the dollar into the euro would cut the value of the dollar
and thus the value of their existing reserves. At the same time,
it would also raise the value of the euro, thereby making the
new reserves more expensive—and maybe artificially expensive
if the euro ultimately came back down.
The euro is really the only alternate candidate for a reserve
currency, in our view. The yen is problematic because Japanese
ASIA-PACIFIC MARKETS OUTLOOK 2010 41
U.S. PERSPECTIVE
C O M M E N TA RY
“Unless protectionism triumphs, we believe that the economic outlook for the next
decade is for continued low interest rates, continued trade deficits in the U.S. and
Europe, and surpluses in Asia and the oil-producing countries.”
bond yields are so low and Japan is running a trade surplus,
which makes it difficult to accumulate large quantities of yen.
The pound sterling is a possible alternative, but the market for
it is relatively small. The Chinese government has suggested the
Chinese renminbi, but a reserve currency needs to be fully
convertible into other currencies, and it seems unlikely that the
Chinese government would accept such a loss of control in the
medium term. We expect to see the mix of reserves held by
major governments shift toward fewer dollars and more euros,
with some increasing admixture of yen, pounds, and perhaps
renminbi. Although gold is a possible reserve asset, the costs of
storing it and the lack of new supplies make that unlikely.
However, the prospect of central banks buying more gold
could help keep gold prices high for a while.
If the euro were to become a more prominent reserve
currency, the impact on European economies would be
negative, in our view. Because a stronger currency lowers
import prices, it lowers inflation and raises the standard of
living. However, it also makes it harder to export, thus hurting
production and employment. And the problem most developed
countries face today is much more a lack of employment than
the threat of inflation.
We do have some concern that significant currency
adjustments could push politicians toward protectionism,
which is usually driven by job issues. When times are good and
unemployment low, voters don’t care about trade deficits; they
like cheap imported goods. But when layoffs begin, voters
blame imports for job losses. If Europe and the U.S. are both
suffering from high unemployment and trade deficits,
protectionist moves against the surplus countries would seem
to us to be a political danger.
There might be no easy way out for anyone, however, given
the current political and economic environment. One downside
for the U.S. of being the reserve currency nation is that its
balance of payments becomes the residual in the world trade
accounts. If the surplus countries invest their reserves in
dollars, the capital inflow of these reserves drives the dollar up
42 ASIA-PACIFIC MARKETS OUTLOOK 2010
and creates a trade gap that mathematically has to balance the
inflow of capital.
The positive side of this is that investment from Asia into
the U.S. has permitted strong capital spending despite low
personal and national saving rates. But this dependence on
foreign capital is potentially disruptive if foreign investors are
scared away from investing in the dollar. It isn’t clear how
much of the low U.S. saving rate stems from the inflow of
funds rather than the other way around, but the two seem
related.
Historically, this hasn’t been the case. Normally,
developing countries have been capital importers, usually
leaving the reserve country in balance or even surplus. Today,
however, the massive surpluses run up by the oil-producing
states and China and Japan amount to nearly $1 trillion. And
though the U.S. isn’t the only trade deficit nation, it has a
disproportionate share of the total deficit worldwide.
Assuming that the euro becomes a more popular reserve
currency, the Eurozone will bear some of this burden. If Europe
gains a capital surplus because of reserves being invested in
euro assets, it must mathematically generate a corresponding
trade deficit. With unemployment high and growth slow, the
political pressures for protectionism would increase in Europe
as they have in the U.S. So far, calmer heads have prevailed,
and actual protectionist moves have been limited. We think the
international institutions, such as the World Trade
Organization and the International Monetary Fund, that
promote free trade are strong enough to withstand these
pressures. But if unemployment continues to rise, politics could
overcome enlightened self-interest.
Unless protectionism triumphs, we believe that the
economic outlook for the next decade is for continued low
interest rates, continued trade deficits in the U.S. and Europe,
and surpluses in Asia and the oil-producing countries. We
think the dollar will likely dip below equilibrium while the
rebalancing of reserves is occurring but then return to a more
neutral level (about $1.30/euro) in the longer run.
STANDARD & POOR’S

Regulatory Risks
Of course, a wild card in any economic outlook at this point is
regulation. From the late 1970s through 2008, the world and
U.S. regulatory systems swung toward less regulation and free
markets. The recent crisis has reversed that trend, and the
pendulum now seems likely to swing toward more regulation.
The problem at the moment is that businesses don’t know how
much more. And when in doubt, most business leaders defer
investment and hiring, which could make an already slow
recovery even weaker.
We believe that new financial and other regulation will be
more evolutionary than revolutionary. But we think that in the
near term, adjusting to a new regulatory framework will slow
the economic expansion. The longer-term impact will depend
on how onerous the new rules are. If the health-care reform
raises employment costs more than we expect, or if financial
reform makes loans less available to small business, hiring will
slow. If climate-change legislation drains capital from
investment, the entire U.S. economy could suffer.
The systemic risks that the financial crisis laid bare are the
major issue for national regulators. The increased
interdependence of financial markets has rendered the current
regulatory system dysfunctional, in the view of many experts.
U.S. regulators have tended to look only at the institutions
under their direct supervision and not at the linkages between
those and other financial institutions. Especially as financial
institutions started operating in different markets, and
answering to multiple regulators, it became too easy to play
one regulator against another. We think that at a minimum, a
systemic regulator would be needed to solve this problem, one
with authority to monitor the entire system and address future
damage before events got out of hand. For better or worse,
neither of the current bills in Congress adequately addresses
this issue, in our view.
The globalization of financial markets makes the challenge
even more formidable because no one regulator can have
authority over the world’s markets. We think this increases the
STANDARD & POOR’S
U.S. PERSPECTIVE
C O M M E N TA RY
need for cooperation between countries. Unfortunately,
however, many of the proposed changes in financial regulation
would make it less rather than more consistent worldwide.
This will increase the incentive for financial firms to move
operations to countries with more friendly regulatory systems.
Slower Economic Growth
All of the new burdens on the economy will slow growth, we
believe. The question is: How much? Real U.S. GDP rose an
average of 3.4% per year from 1960 through 2007. We expect
growth to average only 2.6% over the coming decade.
The slowdown will come from two sources. The most
predictable one is the slower rate of growth of the labor supply
as baby boomers shuffle into retirement. We expect the labor
force to increase only 0.7% per year over the next decade
compared with 1.7% annually from 1960 through 2007.
Less predictable is the trend rate of productivity, which
depends both on capital spending and improvements in
technology. We expect that capital spending will slow because
of higher capital costs caused by heavy government borrowing
and regulatory changes. Environmental regulations could
divert some investment into spending on remediation, which
would depress the measured growth rate. Productivity growth
is unpredictable, but we anticipate a reversion to the mean
after two decades of strong growth. We expect output per hour
in the U.S. to rise at a 1.7% annual rate over the next decade
compared with 2.2% from 1991 through 2007.
We also anticipate that the road back to pre-credit-crunch
prosperity will be long and winding. The consumer seems
unlikely to lead a strong recovery. We expect U.S.
unemployment to drop back to about 5%, but not for some
time. The only sector really supplying strength to the economy
is the federal government, and it can’t continue to borrow at its
current pace.
In past decades, however, the U.S. and world economies
have proved resilient. So while the future isn’t as bright it
seemed during the bygone boom, neither is it as bleak as it
seemed only a year ago.
ASIA-PACIFIC MARKETS OUTLOOK 2010 43
CHINA PERSPECTIVE
C O M M E N TA RY

The Softer
Side Of
Building
Shanghai As
An
International
Finance
Center

This page: The

Shanghai World
Financial Center
(left) and Jin
Mao Tower.

44 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S


CONTACT:
PING CHEW
MANAGING DIRECTOR AND HEAD OF GREATER CHINA
HONG KONG (852) 2533 3532
PING_CHEW@STANDARDANDPOORS.COM
EDITOR’S NOTE: THIS ARTICLE WAS ORIGINALLY PUBLISHED ON
RATINGSDIRECT ON SEPT. 18, 2009. A CHINESE-LANGUAGE
VERSION OF THE ARTICLE APPEARED IN THE SEPT. 14, 2009,
EDITION OF THE CAIJING FINANCE SERIES.
CHINA PROBABLY WON’T FACE A SHORTAGE of capital during its
efforts to turn Shanghai into an international financial center
(IFC). What it will have to contend with, however, is a shortage
of information.
Many cities aspire to develop an international role for their
domestic capital markets. The sharp increase in the number of
such cities has prompted researchers—and in certain cases even
the cities themselves—to develop a range of criteria against
which to rank the aspirants. One such study, published by the
City of London, segments the competitive dynamics of
individual financial centers into five broad categories: people,
the business environment, market access, infrastructure, and
general competitiveness. In their most recent report, Shanghai
placed 35th, a ranking that would appear to show that the
level of financial market development in China is at odds with
the country's role as the world's largest sovereign creditor and
soon-to-be second-largest economy of the world. Participants
in the same survey, however, when asked which centers are
likely to become more significant in the next few years, voted
Shanghai second. China generally already has many
prerequisites necessary to be an IFC: a robust economy, a large
pool of private financial assets, and a strong government. But
what else will it need?
For China and Shanghai, the challenges and preconditions
are certainly daunting: improving the legal framework and the
transparency of the regulatory system; liberalizing interest
rates; and easing restrictions on China’s capital account,
STANDARD & POOR’S
CHINA PERSPECTIVE
C O M M E N TA RY
including convertibility of the local currency, to name a few.
Regulatory complexities, the low level of financial literacy, and
a shortage of financial-services workers, as well as market-
infrastructure constraints, are also potentially prohibitive
barriers for firms on both sides of the supply-and-demand
equation in Shanghai’s financial-services sector.
Equally as important for any financial centre, however—
and especially in the Chinese context—will be the rapid
development of the financial information services industry and
free flow of information to drive market activity. The
magnitude of such flows is harder to quantify than it is to
intuit, and is thus not easily captured in conventional measures
of competitiveness for IFCs. Nevertheless, progress in this area
will be one of the key components of China's transition into a
future in which firms stamp both their goods and their
financial securities as “Made in China.”
Financial information is the grease that keeps market
mechanisms and trading systems functioning efficiently.
Financial markets—domestic or international—enable
participants to trade in “financial goods.” A successful
financial centre enables these financial trades to be conducted
in the most effective and efficient manner, providing a balance
of risk and return that participants find most appropriate.
Government editorial involvement in the information that
smoothes this process will thus not sustain a financial center.
The next phase of financial market development in
Shanghai, however, will probably focus on improving the scope
and quality of services available to domestic firms, particularly
those related to shipping and trade. Historically, financial
centers have naturally developed around major centers for
trade, and in this respect Shanghai—home to the world’s
second-largest container port by volume in 2008—might be
seen as a natural candidate for IFC status. Domestic needs for
capital-market reform go far beyond trade credit, however, and
capital constraints continue to limit the development of
corporate China.
As has been well documented in government studies, debt
and equity markets remain inaccessible to most firms despite
ASIA-PACIFIC MARKETS OUTLOOK 2010 45
CHINA PERSPECTIVE
C O M M E N TA RY

policy goals to increase the proportion of direct financing in

Chart
China’s financial economy. As shown in the chart, China’s
Comparative Size Of East Asian Local Currency capital markets—including both debt and equity markets—still
Bond Markets (% of GDP, 2008) comprise a relatively small share of total financial assets. One
Corporate Government implication of shallow markets is that inefficient allocation of
(%)
capital supports only limited improvements to efficiency in the
200
corporate sector and national economy more broadly.
180
Notwithstanding the complexities of China’s regulatory
160 infrastructure, enhancing the effectiveness of Shanghai’s
140 financial markets in allocating capital according to demand,
120 supply, and investors’ risk preferences will be an important
100 preparatory step for an international role. If Shanghai is able
80 to take this step, it will join the list of cities around the world
60 that harbor aspirations to become an IFC after accumulating
40 concentrated capital surpluses during the past decade
20 The Chinese government has repeatedly shown that it can
0 deliver on its commitments to build the hard infrastructure
PRC

Hong Kong

Indonesia

South Korea

Malaysia

Philippines

Singapore

Thailand

Vietnam

Japan

necessary for the development of a particular industry. The

commitment by the municipal government in Shanghai to build
a financial information building in Liujiazui is a recent case in
Sources: Asia Bond Monitor 2009, Asian Development Bank, First Quarter 2009. point. What regulators will most need to deliver, however, is the
© Standard & Poor’s 2010. free space necessary for the collection, packaging, analysis,
repackaging, buying, and selling of financial information and
related services without interference. Additionally, each kilobyte
of information, like each yuan of capital in the marketplace,
must rest on equal legal footing. Financial markets not only
need to help make money change hands, but also build the trust
that lead to the way these money changed hands.
Currently, markets in China often appear to trade on
incomplete information, inside information, or perceived
inside information, and the reality of this asymmetry increases
market risk. For investors, information flows are crucial to
their trust in market-pricing mechanisms and their own ability
to measure risk. Doubts raise the premium on risk. On the
other side of the deal, issuers ultimately pay for this in the form
of lower valuations or higher interest rates. Providers of
financial data and information must be allowed to offer these
services and increase the degree of confidence that market

46 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 CHINA PERSPECTIVE
C O M M E N TA RY

“What regulators will most need to deliver…is the free space necessary for
the collection, packaging, analysis, repackaging, buying, and selling of
financial information and related services without interference.”

players have in the basis for their trades. While indicators such reside there. During the development of many industries in
as the total capitalization and average trading volume of China, government planners have focused on achieving
markets are important quantifiable elements of quantitative output targets, in many cases putting scale
competitiveness, corresponding flows of financial information considerations ahead of quality. In the context of the financial-
are equally as important to the efficient pricing of a broad services industry, investors buy securities that are only as
range of securities. In the face of increasing global competition valuable as the quality of the information inputs that went into
for deals, exchanges around the world will have to compete on them: the true financial condition of a company, market-based
the basis of available pricing. As Shanghai’s markets gradually comparisons, assumptions about industry dynamics, and
open to the world, the management of its exchanges will face potentially myriad other data points. The catch here is that the
the competitive reality that market uncertainty driven by a lack more predictable the content of information becomes, the less
of available information services can be as costly to issuers and valuable it is. Regulators have to accept the fact that
investors as illiquidity. competitive information-services providers generate economic
Increasing the volume of financial information traded daily value that contributes to overall market stability by delivering
in Shanghai would also be beneficial for market stability. new insights that require markets to adjust. In other words,
China could increase the depth of its capital markets relatively unlike the manufacturing sector, the information-services
quickly. Far more difficult, but nonetheless essential, will be sector in China will not generate value by simply increasing the
the deepening of corresponding markets for financial supply of products that are more or less the same.
information. Simply put, any regulatory steps to prevent or Demographics and the volume of accumulated savings in
limit the release of market information that might be deemed China will easily make Shanghai’s financial markets big. In an
destabilizing may be counter productive: the deepening of increasingly competitive global marketplace, however,
information markets promotes order, and at the same time enhanced competitiveness for Shanghai's capital markets will
increases diversity of trading options available to market not come from scale alone.
participants that will allow capital markets to evolve in a
healthy way.
As China’s own recent experience has shown, shallow
markets are more volatile, and making more data consistently
available to market players would limit the impact of new
information—good or bad—on broader price levels. Market-
relevant information can come in many forms: a study on
climate change that affects commodity prices, a sell-order by a
prominent analyst, an assessment of a bank’s asset quality. Bad
news is still news, and removing or preventing the release from
public view of information that is derived or delivered in good
faith and which might cause market instability will eventually
hurt the aspiration of a financial centre.
In order to be a world-leading financial center Shanghai
will have to create an ecosystem of financial information
services providers that can feed the financial institutions that

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 47

CHINA PERSPECTIVE
C O M M E N TA RY

Why China’s Currency Won’t Replace

The Dollar Anytime Soon
CONTACTS:
KIMENG TAN, SINGAPORE (65) 6239 6350 KIMENG_TAN@STANDARDANDPOORS.COM

ELENA OKOROTCHENKO, SINGAPORE (65) 6239 6375 ELENA_OKOROTCHENKO@STANDARDANDPOORS.COM

WILLIAM HESS, HONG KONG (852) 2533 3595 WILLIAM_HESS@STANDARDANDPOORS.COM
EDITOR’S NOTE: THIS ARTICLE WAS ORIGINALLY PUBLISHED ON RATINGSDIRECT ON JAN. 14, 2010.

“HOW MUCH IS THAT IN RENMINBI?” is a question that could
increasingly arise in future international transactions. At least
that’s what China’s recent moves appear to target. Standard
& Poor’s Ratings Services believes that an increased
awareness of foreign exchange risks among China’s
policymakers is one reason for Beijing’s push to
internationalize the country’s currency. Despite the greater
political willingness in China to see it through, major
obstacles stand in the way of widespread international use of
the currency. Although global economies are adjusting
themselves to a “new normal” for trade and money markets,
we believe the renminbi is unlikely to feature prominently as
a currency for international exchange for a considerable time.
A Conscious Effort To Keep The
Renminbi Within China’s Borders
At the moment, the Chinese currency is conspicuously absent
in international trade or financial transactions. Yet the
International Monetary Fund forecasts that China will
overtake Japan to be the world’s second-largest economy in
2010. Unlike the currencies of other major economies—the
U.S. dollar, the euro, or the yen—the renminbi is rarely used
beyond China’s borders. In fact, the currencies of several
markedly smaller economies, including those of Australia,
Switzerland, and the U.K., are more commonly exchanged
internationally (see chart 1).

48 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 CHINA PERSPECTIVE
C O M M E N TA RY

China’s approach to financial and monetary policies partly

Chart 1
explains the limited international use of the renminbi. The
Asian financial crisis of 1997–1998 shaped the cautious attitude
Renminbi Not Among The Most Traded Currencies
Top Currencies By Foreign Exchange Turnover In April 2007
of Chinese policymakers toward liberalizing the financial sector.
Although the country has thrown its doors wide open to Daily average turnover
international trade and direct investment, strict capital controls
(Bil. US$)
ensure that its currency is used almost entirely for domestic
3,000
transactions. Only a small amount of its external trade—mainly
with neighbors such as Laos, Myanmar, North Korea, and 2,500
Vietnam—are denominated in the Chinese currency.
2,000

A Change Of Mind 1,500

That said, the volatility in the international financial markets 1,000

in the past two years has not had the impact that some would
500
have expected. Instead of reining back further financial
liberalization, China appears to be forging ahead more 0
confidently. Since 2008, it has announced measures to deepen U.S. dollar Euro Japanese Sterling Swiss Australian Renminbi
yen franc dollar
domestic bond market developments, such as easing
restrictions on the sale of papers in the interbank market and Sources: Bank for International Settlements Triennial Central Bank Survey of Foreign
possibly allowing foreign companies to sell renminbi bonds, Exchange and Derivatives Market Activity in 2007.
and to ease cross-border financial investments. In our view,
© Standard & Poor’s 2010.
these moves are likely to be at least partly related to the push
to expand the international role of the Chinese currency.
The Chinese government has recently made serious moves
toward internationalizing the renminbi, several years after the banking activities to facilitate trade settlement. The Chinese
idea first came under public discussion. Since late 2008, the government has also expanded the list of institutions allowed
People’s Bank of China has signed bilateral currency swap to issue renminbi bonds in Hong Kong to include the mainland
agreements with other central banks in countries that include subsidiaries of Hong Kong banks. Previously, only mainland
Argentina, Belarus, Indonesia, Malaysia, and South Korea. In banks were allowed this fund-raising option. In September
some cases, China's counterparties wanted these agreements in 2009, the Chinese government itself sold renminbi bonds in
order to ease the impact of the international liquidity crunch in Hong Kong for the first time.
2008–2009. But the facilities could also provide renminbi for
use in bilateral trade in these countries. In April 2009, the The Benefits And Costs Of An
Chinese government announced that it would allow renminbi
settlement for specific cross-border trading activities in five International Renminbi
coastal cities on a pilot basis. The impetus for China’s decision to begin the process of
China has also broadened its experiment to build a renminbi internationalization despite the severe global
renminbi financial system in Hong Kong. As part of the pilot financial volatility, in our opinion, was increased concerns over
trial of cross-border trade settlement, banks in Hong Kong exchange rate risks. A number of governments that issue
have been allowed to expand their renminbi commercial internationally used currencies are projecting sharply higher

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 49

CHINA PERSPECTIVE
C O M M E N TA RY

debt levels in the next few years. The risk that large currency international investor base. The costs of financing the country's
depreciations or high inflation in these countries could erode foreign exchange reserves could also decline in the long term. As
Chinese holdings of foreign currency assets has risen as a more traders use the renminbi and more investors hold the
result. In our view, reducing the foreign exchange exposure of currency on a long-term basis, an increasing share of the money
the Chinese economy by increasing the use of the renminbi supply will circulate outside the Chinese economy. The
could limit the risks for Chinese traders, investors, and renminbi money supply could grow significantly more than
financial institutions. Chinese GDP with less risk of excess liquidity sparking high
Internationalizing the Chinese currency could bring other inflation. This means a lower level of central bank bill issuance
benefits to the country. Renminbi-denominated financial (and lower interest costs) for “sterilization” purposes—i.e.
instruments that non-residents issue would provide Chinese excess money market liquidity created by its foreign exchange
savers with a greater variety of investment options while interventions—at a given level of foreign exchange.
addressing the risks of currency fluctuations. Chinese bond The flip side is a weakening of control over domestic
issuers may also benefit from having access to a more diverse monetary conditions. Internationalizing the renminbi means
China would have to significantly ease capital controls, in our
opinion. With a large pool of renminbi funds abroad, changes
in domestic or international market conditions would likely
cause strong capital flows. The result could markedly reduce
Chart 2 the effectiveness of Chinese monetary or credit policy actions.
Limited Use Of the Euro For International Trade China’s current interest rate controls, for instance, would
Outside The E.U weaken to some extent if foreign holders of renminbi are
Proportion Of Exports Invoiced Or Settled In Euro In Selected willing to lend at a different rate from the policy rates. Setting
Non-E.U. Countries macroeconomic policy in the country would become an even
more complex task, in our view.
Indonesia Thailand Ukraine
(%)
10 Internationalization Is A Long And
9
8 Difficult Process
7 Even if China believes that the benefits of currency
6 internationalization outweigh the costs, major hurdles lie
5 ahead. The most important of these is that the renminbi
4
remains non-convertible and subject to strict capital controls.
3
The Chinese market will always be the largest and most liquid
2
market for renminbi funds. If non-residents cannot easily buy
1
and sell the currency and if non-resident financial flows are
0
strictly regulated, the costs and liquidity risks of holding the
2003 2004 2005 2006 2007
renminbi would likely deter widespread international use.
Note: Regular data for the share of invoicing currency outside the E.U. is available only China’s developing financial markets are largely
from Indonesia, Thailand, and Ukraine. Source: European Central Bank.
inaccessible to non-residents, a further impediment to
© Standard & Poor’s 2010. internationalizing the currency. An internationalized renminbi

50 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S


“As with other changes in China, we believe that policymakers will
gradually make the requisite changes to facilitate cross-border renminbi
use. International confidence in the predictability and transparency of
Chinese policies will also take time to build.”
requires non-residents to be willing to hold a large amount of
the currency. If they are unable to invest these funds in liquid
and relatively safe instruments that offer a reasonable rate of
return, non-residents are unlikely to hold the currency.
Financial derivative markets in China are also insufficiently
developed for efficient and cheap hedging against foreign
exchange and interest rate risks.
Another issue is that many people consider the policy
environment in China to be opaque and difficult to predict.
International investors and traders would likely be concerned
about abrupt changes that affect their interests for some time to
come despite ongoing policy environment improvements. We
expect this to be another factor that will deter non-residents
from long-term holdings of the currency. Until these conditions
improve significantly, in our view, large-scale international use
of the Chinese currency won’t become a reality.
The experiences of the euro and Japanese yen portend a
challenging time for renminbi internationalization. Conditions
were in many ways much more favorable at the birth of the
euro about a decade ago for that currency to play a big
international role:
 The Eurozone’s combined economic output was
comparable to that of the U.S.
 The predecessor currencies of the euro were in
widespread international use.
 Major financial markets in the Eurozone are well
developed, relatively deep, and highly accessible to
international investors.
 Important policies in the currency union are made within
codified frameworks and are, therefore, predictable and
transparent.
Yet, while the euro has strengthened its position as a key
international currency in the past 10 years, it remains a distant
second to the greenback. Within the European Union, the euro
has become the currency of choice for cross-border trade and
financing. Outside of the European Union, however, the use of
the euro has either shown only small gains or even declines in
STANDARD & POOR’S
CHINA PERSPECTIVE
C O M M E N TA RY
the eight years to the end of 2007. The use of the euro as an
invoicing currency for merchandise trade, for instance,
accounted for less than 10% of international trade outside
Europe (see chart 2).
Similarly, Japan’s efforts to internationalize the yen from the
1980s to early 2000s had little lasting impact on the currency’s
international use. Despite significant liberalization of
regulations on the financial sector and capital accounts, the
yen's share of cross-border merchandise and financial
transactions has remained little changed over the period.
Academic studies (1) suggest that factors such as network
effects, history, and inertia affect the choice of an international
currency much more than government policies. Some also
suggest that the prolonged economic weakness in Japan
contributed to the lack of progress in internationalizing the yen.
Widespread Usage Will Take Time
China’s strong economic potential and the very limited
international use of the renminbi today suggest to us that its
internationalization efforts will be more successful than that of
the Japanese yen. However, we do not expect international use
of the Chinese currency to exceed that of the yen in the coming
decade. As with other changes in China, we believe that
policymakers will gradually make the requisite changes to
facilitate cross-border renminbi use. International confidence in
the predictability and transparency of Chinese policies will also
take time to build. Thus, the day when traders need to quote
renminbi prices for a significant part of their sales and purchases,
especially outside East Asia, still appears a long way off.
Related Research
(1) Fukuda, Shin-ichi and Masanori Ono, 2006, “On the
Determinants of Exporters’ Currency Pricing: History vs.
Expectations,” Journal of the Japanese and International
Economies, Vol. 20, 548–568.
ASIA-PACIFIC MARKETS OUTLOOK 2010 51
ASIA PERSPECTIVE
C O M M E N TA RY

Resilience And
Dynamism:
Achieving
Sustainable
Growth In
Asia-Pacific In
The Wake Of
The Global
Economic
Crisis
WITH GLOBAL ECONOMIC RECOVERY (however modest) looking
likely, governments, regulators, and indeed all market
participants are looking for ways forward—for strategies that
will ensure the free flow of capital through the world’s
financial markets while also putting in place regulatory
frameworks that will help prevent future breakdowns. In the
wake of recent dislocations, Asia-Pacific finds itself at a
historical turning point; a leadership role beckons as the global
focus shifts from the traditional G-7 or G-8 viewpoint to
emerging economies such as China, India, and Korea and the
increasing likelihood that they will lead a global recovery.

U.S. And Japan: The Influences Of

Resilience And Dynamism
Looking briefly at the world’s two largest economies—and
how they have experienced recent shocks—gives us the chance
to reflect on how an economy’s resilience and/or dynamism can
influence (for better or worse) how that country copes both
with very good times and very tough times. For, as we have

52 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S


CONTACT:
TOM SCHILLER
EXECUTIVE MANAGING DIRECTOR AND HEAD OF ASIA-PACIFIC
TOKYO (81) 3 4550 8445
TOM_SCHILLER@STANDARDANDPOORS.COM
seen, booms need as much careful management as busts. As we
search for ways to sustainably and responsibly reinvent the
ways global markets operate, we believe the roles of resilience
and dynamism in Asia-Pacific are well worth exploring. While
we wish to avoid stereotyping, we find that recent U.S.-style
dynamism and Japanese-style resilience afford us a useful
starting point for a discussion about future directions for Asia-
Pacific economies. That said, we are also mindful of the myriad
and significant differences that set many of the economies of
the Asia-Pacific region apart from both the U.S. and Japan.
Key economic indicators convey a picture of, on the one
hand, a sudden negative shock to dynamic growth in the U.S.
and, on the other, a continuation of economic stagnation for
Japan and its preference for resilience and forbearance even at
the expense of growth. In the U.S. a sense of dislocation and
urgency accompanied responses that straddled a change of
administrations. The previous five-or-so years of prosperity
only heightened the country’s sense of shock when the real
estate bubble burst in 2007 and when subprime mortgages
deteriorated in 2008 and global financial markets unraveled.
The U.S. Treasury and the Federal Reserve responded to the
mortgage crisis by bailing out the likes of Bear Stearns, Fannie
Mae, Freddie Mac, and American International Group. The
Federal Reserve made several large injections of funds into
global credit markets via institutions such as the European
Central Bank. The Obama administration finally got to pass
the American Recovery and Reinvestment Act of 2009 into law
in February 2009 to provide for nominally $787 billion worth
of stimulus, mostly in the form of tax relief for individuals and
companies, education, healthcare, infrastructure investment,
and aid to low-income workers and the unemployed.
If we’re to properly appreciate Japan’s response, we’re best
served first looking at how it navigated its own crisis, which
unraveled during 1989–1991 and lasted a decade. The
government was slow to react; where it took the U.S. Fed just
16 months to slash interest rates from their peak to close to
zero percent, it took the Bank of Japan nine years. And Japan
rode out its banking crisis for eight years before injecting
STANDARD & POOR’S
ASIA PERSPECTIVE
C O M M E N TA RY
public money into recapitalizing its banks; to do the same, the
U.S. waited just one year after its real-estate bubble burst. But
Japan’s slow reaction times must be seen in context—that
during the first few post-bubble years growth slowed but was
still in positive territory. Japan did not suffer the shock of
sudden recession the way the U.S. did. And back then, as now,
Japanese households relied far less on mortgage funding than
their U.S. counterparts (buying a house in Japan requires a
much larger down payment) and—again unlike the U.S.—did
not extract equity from their homes via additional bank loans.
This conservative approach to household debt protected the
Japanese consumer when the real-estate bubble burst and
diluted the pain of the decade-long slump that followed—at
least for households, if not so much for the corporate and
banking sectors. Japan’s more even distribution of household
net worth also meant that shocks were spread through the
whole household sector, whereas in the U.S. the brunt has been
borne by people in the lowest two income quintiles (who are
the least able to absorb shocks).
Fast-forwarding to 2008–2009, Japan initially experienced a
sense of distance from the general turmoil. The 1990s had
instilled a sense of caution in all—from individuals to banks—
and a desire to shore-up funds as a buffer to future shocks. The
International Monetary Fund calculated Japan’s exposure to the
subprime fallout was a mere $8 billion out of a global pool of
losses in the order of $1 trillion. Household savings were at $14
trillion. Japan’s risk-averse banks had enough cash to cushion
Japan from liquidity crises happening elsewhere. While the
government has announced various stimulus measures—notably
a $150 billion package in April 2009 aimed at generating jobs
and giving loan guarantees to small companies—there has not
been the need to bail out major corporations as most were
extremely well capitalized in response to the domestic economic
strain of the 1990s. This is not to say that Japan has been spared
the pain of a slump in global demand; exports, industrial
production, corporate profits, and investment have all taken a
beating in a country in which recent growth has been stimulated
mainly by external demand.
ASIA-PACIFIC MARKETS OUTLOOK 2010 53
ASIA PERSPECTIVE
C O M M E N TA RY
Resilience And Dynamism: Their
Place In Asia-Pacific’s Economies
In our opinion, resilience and dynamism can both be seen as
positive traits that might inform the direction of the global
economy and its financial markets. While acknowledging that
the economies of Asia-Pacific face, to varying degrees, different
challenges to those faced by the U.S. and Japan, we have drawn
on their examples to remind ourselves that too much of one or
the other is not sustainable in the long term. Japan has seen
growth slow, consumer demand weaken, and (albeit well-
capitalized) banks shy away from securitization and keep nearly
all credit risk on their own books. Corporate deleveraging and
other constraints such as Japan’s recent drawn-out political
stalemate (which ended with the election of the new government
on Aug. 30, 2009) have weighed on growth momentum and
precluded the country’s opportunities for dynamism. But the
U.S., on the other hand, has shown us what can occur when
financial innovation is under-regulated and when credit is too
easy and asset values are unchecked and overpriced. In weighing
up these two examples, governments, regulatory bodies, and
other market participants must ask: How much of each is
enough, and how much is too much? Is resilience simply a more
attractive term for stagnation and inflexibility? Is dynamism
merely unfettered recklessness in disguise?
For Asia-Pacific economies contemplating how best to
achieve sustainable long-term economic growth, the challenge
will be to pick a path that leads to a balance between dynamism
and resilience. One approach might be to encourage a vibrant
domestic consumer market—so as not to leave economies over-
exposed to the vicissitudes of export-driven growth (as has
happened in Japan and Korea)—while also protecting
individuals and entities from the dangers of unfettered and
unsustainable consumption and debt. We note, however, that
Asia’s emerging economies have fundamental differences when
compared with mature markets such as the U.S. and Japan, and
each country’s resilience-dynamism balance will require policy
and regulatory solutions that make sense when applied to that
country’s institutional, legal-regulatory, and cultural context.
54 ASIA-PACIFIC MARKETS OUTLOOK 2010
Key Issues For A Dynamic And
Resilient Asia-Pacific To Address
How much globalization should Asia-Pacific embrace,
and how can its economies improve their resilience to
global shocks?
For Asia-Pacific’s blend of emerging and developed countries,
it’s a matter of how insulated or exposed economies are going
to be to future external shocks and whether they have the
buffers in place to cope with such events. Japan is feeling the
pain of having a high level of exposure to dramatic shifts in
global demand—in its auto industry, for example. India, by
contrast, is far less reliant on exports and is looking instead to
achieve sustained domestic demand by providing stimulus in
areas such as its wide-reaching public service and its
agriculture sector. For all Asia-Pacific countries, the
importance of building up a vibrant and sustainable domestic
consumer economy cannot be overstated.
Apropos of this, protectionism is and will continue to be a
key agenda item for meetings of bodies such as the World
Economic Forum (WEF) and the G-20. Free and open
intraregional trade will become increasingly important to
maintaining Asia-Pacific growth momentum—not to replace
the region’s trade links with the West, but to become an ever-
more significant part of the picture. In a recent WEF
publication, four possible long-term scenarios are described—
the least desirable of which is “fragmented protectionism”
where global division, conflict, and currency controls only
deepen the long-term effects of the financial crisis. The WEF’s
preferred scenario of “rebalanced multilateralism” describes a
future in which barriers to cross-border coordination are
overcome, global thought-sharing and collaboration
predominate, and geo-economic power rapidly shifts in favor
of emerging economies, particularly the BRIC countries.
Protectionism has no place in this scenario.
In Asia, protectionist measures such as domestic
regulations that make it difficult for foreign companies to do
business, and barriers to cross-border flows of funds and
STANDARD & POOR’S

“…governments, regulatory bodies, and other market participants must ask: Is
resilience simply a more attractive term for stagnation and inflexibility? Is
dynamism merely unfettered recklessness in disguise?”
services, can only prove a constraint on the region’s long-term
growth. In our opinion, Asia’s governments and industry
regulators will be better served with policies and legislation
that free-up the cross-border flow of goods and services. Trade
agreements that are inclusive, rather than exclusive, will also
serve the region well as long as such agreements are not
weighed down by complex and discriminatory “fine-print"
rules. Taiwan’s decision to open its borders to allow companies
from mainland China to invest is a recent example of a
government reform that provides bilateral growth momentum.
How much and what kind of regulation does the
region need?
The challenge that all governments and regulatory bodies face
is to find a way to channel money flows more responsibly and
systematically—with due discipline and market efficiency—
while balancing a global consistency of approach with local
and regional needs. Commentators who remember the 1960s
and 1970s—in the U.S. at least—caution against overly-stifling
regulation lest it act as a dampener to growth. The question of
how much, and what kind, of regulation is one that will be
heard in economic forums for a while to come, particularly
around capital standards and risk concentration. Of course,
financial-market regulation is not new; it has been an ongoing
process. Several years ago in Asia-Pacific, regulators,
governments, and market participants started working
together to open up the region’s once-outdated and
structurally-limited financial markets and, in doing so, enabled
growth where it had previously been constrained.
In light of recent shocks, we believe that it’s a question of
quality, not necessarily quantity, of regulation and that
regulation is a concept that should always be considered in the
wider context of governance and transparency. Another truism
is that regulations will only be as effective as those entrusted to
enforce them—for the long-term good of the market and not
simply for the short-term gain of its participants. With
appropriate governance, the region will continue to strengthen
and meet the international investment community’s ever-
increasing demand for global and diversified funding sources.
STANDARD & POOR’S
ASIA PERSPECTIVE
C O M M E N TA RY
Importantly, it will also encourage the region’s investors to
invest funds within Asia, which will maintain its growth
momentum and fund the infrastructure development that’s
essential to sustained growth. When we talk about achieving a
balance between dynamism and resilience this is the direction in
which, in our opinion, all regulatory efforts should be striving.
What sort of new institutions, initiatives, and markets
would help Asia-Pacific strike the balance between
resilience and dynamism?
Meetings of bodies such as the G-20, the Financial Stability
Board, and the WEF will be focusing on the question of what
sort of new institutions and markets will serve the requirements
of a growing Asia. These include the development of an Asian
bond market and an Asian Monetary Fund that does not
replace the IMF but, rather, builds on its strengths and
addresses the needs of the region. The notion of a single
currency for Asia—which has been talked about, on and off, for
a few years—also resurfaced recently when the president of the
Asian Development Bank called for a common currency as a
measure to promote regional stability.
In our opinion, Asia-Pacific most needs institutions and
initiatives that recognize the necessity for greater regional
integration and that enable individual economies to achieve
crucial “quality of life” goals (such as carbon-emission limits,
health- and aged-care reform). The IMF’s recently proposed
Green Fund is an example of an innovative approach to helping
developing countries finance their own adaptation and
mitigation efforts around reducing emissions. To better integrate
the region, institutions such as a proposed East Asian
Community—which would see China, Japan, Korea, and
ASEAN form a free-trade community—are a positive step,
provided such bodies are not weighed down by political
stagnation or bureaucracy. We note with interest the IMF’s
recently-stated intention to deepen its engagement with Asia and
give emerging economies in general a greater voice in its
proceedings. With more than one billion people living in poverty
in our region, the imperative for all policymaking bodies is to
work toward promoting the sustainable growth that will give
ASIA-PACIFIC MARKETS OUTLOOK 2010 55
ASIA PERSPECTIVE
C O M M E N TA RY
this vast group a hand up. The seismic global demographic
trends affecting our region over the next 40 or so years will see
the ascendancy of institutions that are focused on microfinance.
How can policymakers and financial markets respond to
demographic trends, in order to promote long-term
economic resilience?
Noting that the health of any economy depends on people
having jobs, we believe that the region’s governments will need
to play a key role in labor markets’ mid-to-long-term
restructuring—mainly by spurning policies that help prop-up
unsustainable “zombie” companies, and that use public funds to
keep people in otherwise redundant jobs. A greater awareness,
regionally, of demographic trends is also imperative. Recent
Global Insight data showed that most of the region’s
incremental working-age population growth will come from
India, with Pakistan, Indonesia, and China also contributing.
Across the region, the challenge for policymakers will be to
design adequate social welfare nets to avoid the social instability
that can come from large numbers of workers being displaced.
Fiscal spending that also channels more funds into basic
education and healthcare will help dismantle the biggest barriers
experienced by the poor: ill health and lack of education.
Understanding labor market movements goes hand-in-
hand with addressing the needs of Asia’s aging population,
especially at a time when emerging economies are seeking to
create vibrant domestic consumer markets. While South Korea,
Japan, and China in particular will see their ranks of senior
citizens swell in the next few decades, it’s a region-wide
phenomenon from which no country is exempt. Challenges for
policymakers and the private sector include: deciding whether
to raise the retirement age, thereby unlocking a huge additional
source of productivity; creating financial products and services
that cater to the needs of an aging population; looking for
ways to leverage the potential of this ever-growing consumer
group; and educating people on financial planning for
retirement and preventative measures for preserving health
(with cancer and diabetes in danger of spiraling upward).
56 ASIA-PACIFIC MARKETS OUTLOOK 2010
Conclusion
We have observed a significant shift in the global economy
and its financial markets toward a more inclusive focus that
acknowledges the rise of emerging markets in Asia, and
elsewhere, such that bodies like the G-20, or possibly a G-14,
are increasingly being seen as more representative of the
new directions the markets are taking. As a uniquely multi-
dimensional region, Asia-Pacific is playing an evermore
significant role in the global market as it includes major
drivers of global economic growth, multiple key financial
centers, and an array of emerging and established national
financial markets. While globalized financial markets are key
to continued economic development and growth, and robust
and diversified investment returns, it is imperative that
regional markets cultivate their own intraregional links. In
Asia-Pacific there’s a critical need to develop the region’s
markets at a local level, and achieve greater stability and value
through regional integration.
In the wake of recent upheavals, developed and emerging
economies have been weighing up approaches to adopt to
ensure long-term sustainability of their financial markets. In
our opinion, the U.S. and Japan represent two different
economic attitudes. From the U.S., we’ve seen that fast-
growing, under-regulated markets are not sustainable—but
we’ve also seen that dynamic and open market conditions can
lead to great rewards. And, on the other hand, while Japan’s
ethos of resilience and risk-avoidance has helped buffer it
against shocks, the scenario of political stagnation along with
low/no growth does not sit comfortably with the will to
maximize growth potential that galvanizes Asia-Pacific’s
developing and emerging markets. In the search for a
sustainable way forward, we believe Asia-Pacific’s economies
will be best served by embracing the characteristics of
dynamism and resilience and finding a sustainable balance
between the two, tailored to each country’s specific needs and
with an eye to promoting cross-border flows of funds, goods,
and services.
STANDARD & POOR’S
 ASIA PERSPECTIVE
C O M M E N TA RY

This page: Ho Chi Minh City. Vietnam is one of the

sovereigns in the region that has looked to rapid
expansion of domestic credit against the economic cycle
in support of stabilization and stimulus agendas.

Asian Sovereigns
To Remain In
Debt Markets
CONTACT: WILLIAM HESS, HONG KONG (852) 2533 3595
WILLIAM_HESS@STANDARDANDPOORS.COM

EDITOR’S NOTE: THIS ARTICLE WAS ORIGINALLY PUBLISHED ON

RATINGSDIRECT ON DEC. 16, 2009.

IT IS OFTEN SAID THAT AN ORDERLY RETREAT from battle is in

many ways harder to orchestrate than an advance. As
sovereigns in Asia consider exit strategies from economic
stimulus programs, Standard & Poor’s Ratings Services
anticipates that they will seek to strike a balance to prevent a
derailing of the still-nascent recovery. In our view, governments
will need to retreat from economic stimulus in a measured
fashion while keeping administrative controls in place to avoid
potential asset price bubbles and inflation. In addition, almost
all sovereigns in the region have borrowed in order to support
their stimulus programs, but some have also relied on credit-
based measures as a partial substitute for larger amounts of
direct sovereign borrowing. We believe that the potential onset
of a second broad global economic slowdown could constrain
available policy options at the same time that renewed support
measures would become necessary.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 57

ASIA PERSPECTIVE
C O M M E N TA RY

Table 1: Debt, Deficits, And Interest

Net debt/GDP (%)* Govt. balance/GDP (%) Interest exp./GDP (%)
Rating 2008 2009e 2010f 2011f 2008 2009e 2010f 2011f 2008 2009e 2010f 2011f
Median AAA 21.8 18.9 17.4 18.8 1.2 (1.6) (2.6) (1.5) 1.5 1.7 1.9 1.8
Australia AAA (4.9) (1.2) 3.5 2.8 1.3 (1.6) (2.6) (2.4) 0.5 0.3 0.5 0.8
Singapore AAA (81.8) (81.7) (76.9) (76.5) 2.0 (2.0) 3.0 5.0 0.0 0.0 0.0 0.0
U.K. AAA 49.4 66.8 78.5 86.1 (5.4) (11.3) (12.5) (10.3) 2.3 3.0 3.9 4.5
USA United States AAA 45.1 55.8 66.9 74.8 (4.9) (14.7) (11.6) (9.2) 3.0 3.1 3.8 4.6
Median AA (2.4) 11.0 15.2 19.9 (0.3) (5.1) (4.0) (3.2) 1.1 0.9 1.0 1.4
Hong Kong AA (31.2) (32.4) (30.9) (29.3) 0.5 (4.0) (3.4) (1.1) 0.0 0.0 0.0 0.0
Japan AA 85.2 94.5 100.3 104.4 (5.1) (8.2) (8.4) (7.5) 2.7 3.1 3.6 4.2
Taiwan AA- 36.2 43.8 45.7 46.3 (1.4) (5.1) (3.5) (3.1) 1.1 0.8 1.0 1.4
Median A 23.6 27.9 31.2 33.0 (2.2) (4.3) (3.5) (2.8) 1.7 1.9 2.1 2.3
China A+ 15.4 17.6 19.3 20.0 (1.1) (3.4) (3.2) (2.7) 0.5 0.4 0.5 0.5
Korea A 13.5 16.7 16.1 14.6 1.3 (3.1) (0.5) 0.6 1.3 0.6 0.8 0.9
Malaysia A- 31.7 40.4 44.9 48.0 (5.0) (8.2) (7.7) (7.0) 2.0 2.1 2.4 2.6
Median BBB 24.6 29.2 37.1 37.3 (1.3) (4.4) (3.5) (2.0) 1.6 1.8 1.8 2.5
Thailand BBB+ 24.9 28.2 27.3 24.5 1.6 (1.9) (0.1) 1.2 1.1 0.9 1.4 1.5
India BBB- 74.7 76.9 78.2 77.9 (11.4) (11.1) (11.2) (10.8) 5.7 6.1 6.2 6.3
Median BB 24.2 30.3 30.1 29.6 (0.8) (3.5) (2.9) (1.9) 2.1 1.6 1.7 1.6
Vietnam BB 25.1 28.8 29.4 29.0 (3.2) (6.7) (4.1) (3.2) 1.0 1.2 1.1 1.2
Indonesia BB- 31.7 30.3 28.2 26.3 (2.3) (2.0) (1.8) (1.8) 2.2 2.0 1.7 1.6
Mongolia BB- 24.9 30.4 30.1 29.6 (3.6) (6.0) (3.5) (3.0) 0.0 0.5 0.5 0.5
Philippines BB- 39.1 38.2 36.1 33.7 0.4 (2.4) (1.0) (0.5) 3.6 3.5 3.4 3.1
Median B 25.5 32.6 34.6 33.7 (2.2) (3.4) (3.2) (2.2) 1.2 1.0 1.1 1.1
Sri Lanka B 79.9 78.9 76.5 72.5 (7.2) (7.5) (6.6) (6.0) 4.8 5.4 5.0 4.4
Pakistan CCC+ 48.2 45.3 45.0 44.1 (7.2) (4.4) (3.5) (3.0) 4.7 5.1 4.1 4.0

Notes
*A negative number indicates a net asset position. E—Estimate. F—Forecast. exp—Expenditure. Source: Standard & Poor's Sovereign Risk
Indicators. Ratings correct at Jan. 22, 2010.

58 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S


“In Standard & Poor’s view, the strong economic rebound in Asia
compared with other regions should eventually prove to be a boon for
sovereign fiscal trends. This recovery faces risks though.”
Standard & Poor’s expects that sovereign commercial
issuance in Asia during 2010 will likely outpace 2009 levels by
5%, as fiscal improvement lags the nascent economic recovery
and policy support remains necessary. This follows a jump in
the overall average deficit for the region in 2009, which we
estimate to be about 5% for the year, up from nearly 3% in
2008. According to Standard & Poor’s survey of borrowing
and debt, sovereign requirements for 2010 are likely to bring
commercial issuance in the region to US$2.2 trillion.
Sovereign Fiscal Deficits May
Soon Peak
In Standard & Poor’s view, the strong economic rebound in Asia
compared with other regions should eventually prove to be a
boon for sovereign fiscal trends (see tables 2 and 3). This
recovery faces risks though. Among them, a reversal in
perceptions of emerging market risk because of events outside of
the region and potential fiscal demands above forecast deficits.
Despite increased sovereign commercial borrowing in 2010, we
expect the average forecast deficit to drop from a cyclical peak
of just over 5% to just under 4% for the year (see table 1).
Excluding the outsize contribution of Japan to the total, we
expect commercial issuance from the rest of Asia to be about
US$471 billion. This will raise the overall total of outstanding
short-term and long-term commercial debt of Asia-Pacific
governments to an estimated US$7.1 trillion. We believe that
the test for sovereigns in the coming year will be managing
macroeconomic crosscurrents while stimulus-based policies are
still in place, despite worries over asset and consumer price
trends. Longer term, the prospect of lingering deficits,
combined with the significant downside risks of a second
slowdown in global growth, raises questions about debt
sustainability for a number of sovereigns in the region and the
implications of borrowing plans on ratings.
The sovereign borrowing story in Asia has always varied
depending on whether one includes or excludes Japan from the
calculations. We expect Japan’s debt issuance to account for
about 80% of the regional total for 2009 and 2010. Some
STANDARD & POOR’S
ASIA PERSPECTIVE
C O M M E N TA RY
Chart 1
Gross Medium- And Long-Term Commercial
Borrowing In Asia (2010)
BBBs BBs
Bs
(6%) (1%)
As (0%)
(13%)
AAs
(79%)
Source: Standard & Poor's Sovereign Borrowing Survey.
© Standard & Poor’s 2010.
might point to structural similarities in the industrial economies
in the rating category of sovereigns that have been active issuers
during the past year, such as Korea and China. However, these
countries’ respective fiscal trajectories do not, thus far, presage
a Japan-style outcome. Excluding Japan, we expect issuers in
the ‘A’ to ‘AAA’ rating category to account for 62% of medium-
and long-term sovereign commercial issuance during 2010.
We expect ‘A’ rated sovereigns to issue a majority of regional
debt during 2010. We estimate China and Korea’s portion at
39% and 17%, respectively, of the total market. However, ‘BBB’
rated sovereigns should make up a larger portion of debt
issuance, with projected gross commercial borrowing increasing
by 39% compared with 2009 levels. We expect that ‘BBB’ rated
sovereigns’ debt issuance will account for 26% of the overall
market by the end of 2010, excluding Japan. As a result, future
rating outcomes in this category will have an impact on the
overall size of Asia’s investment-grade market.
ASIA-PACIFIC MARKETS OUTLOOK 2010 59
ASIA PERSPECTIVE
C O M M E N TA RY

“A key question for the region is whether

the effect of borrowing trends for 2009 and
2010 will shift perceptions of sovereign risk
should the global economic recovery falter.
Another important dimension is the path of
the U.S. dollar…“

Standard & Poor’s believes that ultra-loose monetary

policies from major central banks around the world have helped
fuel high domestic liquidity. We expect this trend to continue
through at least the middle of 2010, and renewed appetite for
emerging market risk has amplified the effect of these policies.
This has helped to lower sovereign spreads relative to U.S.
Treasuries and those for corporate issuers perceived to have
strong ties to government. Higher levels of inflation or risks to
the nascent recovery could reverse these trends, however, and
make funding in 2010 more costly than during 2009.
According to the Asian Development Bank (ADB),
sovereign issuance in the region tilted in favor of shorter
maturities earlier this year to take advantage of favorable
pricing at the shorter end of the yield curve, an advantage that
went away in many markets during recent months as curves
have flattened. If expectations on inflation shift and result in
policies that cloud the outlook for the regional and global
recovery, both funding availability and the fiscal outlook for
sovereigns in the region could change significantly.
A key question for the region is whether the effect of
borrowing trends for 2009 and 2010 will shift perceptions of
sovereign risk should the global economic recovery falter.
Another important dimension is the path of the U.S. dollar,
which has generally weakened as a function of improving
sentiment in Asia and elsewhere and has helped to fuel the
search for yield in the region.
In Search Of The Right Policy Mix
The apparent contradiction between the words and actions of
regulators in the region reflects unique global monetary
circumstances. In our opinion, the recovery remains fragile,
and steps are still necessary to prevent inflation, asset price
bubbles, and unproductive investment.
Thus far, regulators in the region have favored
administrative measures to interest rate increases in order to
target inflation and asset prices while maintaining a policy
stance that supports real economies. This is perhaps most
apparent in India, where the Reserve Bank of India (RBI) has
Chart 2
Gross Medium- And Long-Term Commercial
Borrowing In Asia ex-Japan (2010)
Bs
BBs Bs
(7%) (0%)
(4%)
BBBs
(27%)
As
(63%)
Source: Standard & Poor's Sovereign Borrowing Survey.
© Standard & Poor’s 2010.
increased the proportion of deposits that commercial banks
must put into holdings of government securities, increased
provisioning requirements for loans issued to real estate
companies, and suspended several special refinance facilities.
China’s recent implementation of increased provisioning
requirements for commercial banks, sector-specific lending
controls, and other administrative measures to direct the flow
of credit despite the stated need for sustained policy support
for the coming year reflects similar concerns.
Given that sovereign debt issuance is likely to remain active
during the coming year, if not managed properly, the
prudential policy mix could run the risk of crowding domestic
intermediaries into government debt, and in the process
partially crowd out private issuers and borrowers whose
investment has helped to drive the recovery thus far. The extent
of liquidity on financial institutions’ balance sheets has been
one area of focus for reforms to prudential regulation

60 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 ASIA PERSPECTIVE
C O M M E N TA RY

Table 2: Asia Gross Sovereign Medium- And Long-Term Commercial Borrowing

(Bil. US$)* 2009f % of total 2010f % of total % change
AAA 16 0.8 11 0.50 (32.0)
Singapore 16 0.8 11 0.50 (32.0)
AA 1,677 80.9 1,722 79.10 3.0
Hong Kong 1 0.0 1 0.00 0.0
Japan 1,661 80.1 1,705 78.40 3.0
Taiwan 15 0.7 16 0.70 2.0
A 263 12.7 292 13.40 11.0
Korea 65 3.1 83 3.80 27.0
China 171 8.2 190 8.70 11.0
Malaysia 28 1.3 19 0.90 (31.0)
BBB 88 4.3 123 5.60 39.0
India 69 3.3 100 4.60 46.0
Thailand 20 0.9 22 1.00 13.0
BB 29 1.4 30 1.40 4.0
Philippines 12 0.6 12 0.60 (2.0)
Indonesia 13 0.6 14 0.70 12.0
Mongolia 0 0.0 0 0.00 N/A
Vietnam 4 0.2 4 0.20 (7.0)
B 0 0.0 (1) 0.00 N/A
Pakistan 0 0.0 0 0.00 N/A
Sri Lanka 0 0.0 (1) 0.00 N/A
Total 2,074 2,176 5.0
Total ex. Japan 413 19.9 471 21.60 14.0

Notes
*US$ values calculated based on spot exchange rates for Nov. 9, 2009. f--Forecast. N/A--Not applicable. Source: S&P Sovereign Borrowing
Survey, S&P Sovereign Group estimates.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 61

ASIA PERSPECTIVE
C O M M E N TA RY
(regulation that aims to ensure the safety of depositors’ funds
and keep the stability of the financial system). Proposals that
would require banks, and potentially other financial
institutions, to maintain minimum levels of liquid assets, have
already surfaced. Under general zero-risk weighting formulas,
sovereign or quasi-sovereign debt would probably be an easy
means to meet such a requirement.
However, one unintended consequence of such regulations
might be that under a reasonable stress scenario—a
combination of economic recession and rising sovereign
deficits—price volatility for concentrations of “risk-free”
assets on domestic financial institutions’ balance sheets could
cancel out the intended benefits of this aspect of tighter
scrutiny. Overall, the potential for moral hazard resulting from
regulatory-induced demand and a stronger feedback loop
between sovereign finances and domestic financial sector
health cannot be ignored. Such a relationship was likely one
element of the dysfunction of the credit channel in Japan
during the “lost decade.”
Corporate Debt Markets In The
Region Remain Small
The sustained decline in reference sovereign bond spreads has
been a welcome trend for corporate issuers in the Asia-Pacific
region during much of this year, though domestic buyers
continue to dominate these markets. For developed and
emerging market sovereigns in the region alike, a
combination of explicit and implicit support for corporate
issuance—combined with high liquidity stemming from low
policy rates and strong increases in yield-seeking foreign
capital inflows—has helped to keep domestic capital markets
open to key corporate issuers. In many markets, this includes
state-owned enterprises (SOE) or conglomerates with strong
government backing. As the ADB recently noted, corporate
issuance rose 30.3% year-over-year at the end of the third
quarter in local-currency terms to support infrastructure
projects, bank capitalization increases, and a range of
investment programs (see table 4).
62 ASIA-PACIFIC MARKETS OUTLOOK 2010
In the years leading up to the current crisis, many
sovereigns in East Asia pursued varying degrees of fiscal
consolidation as well as debt issuance targeted toward
establishing more reliable benchmarks against which they
could price corporate debt. By the end of 2009, Hong Kong
will join Singapore as the second highly rated government in
the region to issue debt for the express purpose of creating a
benchmark yield curve as part of efforts to establish regional
bond market hubs. According to the ADB, issuance of G3
currency bonds in the region has rebounded during 2009,
though in the absence of related data, anecdotal reports
indicate that domestic buyers dominated these sales despite
strong external demand for higher-yielding G3-denominated
issues. Similarly, foreign holding of local currency issues in the
region remained in single digits in all markets except Indonesia.
The surge in issuance during 2009 has not significantly
increased the external exposure of sovereigns in the region.
Despite these efforts, corporate debt markets in the region
remain small relative to government ones. Given this
imbalance, market responses to sovereign fiscal trends and
funding needs have had a disproportionate effect on corporate
funding channels. A rebound in corporate issuance and related
investment has been a key component of the region's economic
recovery, and the outcome of sovereign funding needs and
reform to prudential regulations could affect the sustainability
of this trend.
The Implications For Debt
Sustainability
The eventual outcomes of actual borrowing levels are far from
certain and, based on Standard & Poor’s survey of sovereigns
in the region, it is hard to generalize about the impact of near-
term borrowing plans and debt sustainability. For many
sovereigns, the cyclical fiscal impact of the global slowdown
has been within expectations, and for others it has exacerbated
negative structural trends that were arguably present before
they felt the full impact of the crisis. In our view, the latter
group includes India, Taiwan, Japan, Pakistan, and Sri Lanka.
STANDARD & POOR’S
 ASIA PERSPECTIVE
C O M M E N TA RY

“…the potential for moral hazard resulting from regulatory-induced

demand and a stronger feedback loop between sovereign finances and
domestic financial sector health cannot be ignored.

For others, including Thailand, Korea, and

Indonesia, painful fiscal consolidations earlier in
Table 3: Asia Total L-T And S-T Commercial Sovereign Debt
the present decade served to return overall debt to (Bil. US$)* 2009f % of total 2010f % of total
more manageable levels and should, we believe,
AAA 16 0.1 199 1.2
help reduce the need for the deep consolidations the
Singapore 16 0.1 199 1.2
International Monetary Fund (IMF) has recently
noted will be necessary for most Organization for AA 9,583 59.2 10,135 59.2
Economic Cooperation and Development (OECD) Hong Kong 3 0.0 7 0.0
sovereigns in the coming years. Japan 9,422 58.2 9,957 58.1
Looking at the distribution of sovereign ratings Taiwan 157 1.0 171 1.0
for Asia Pacific relative to individual sovereigns (see A 1,300 8.0 1,417 8.3
table 1), it is generally the case that lower-rated
Korea 300 1.9 323 1.9
sovereigns carry lower net debt burdens than more
highly rated peers. This perceived discrepancy
China 895 5.5 975 5.7
between the overall ratings of many OECD Malaysia 105 0.6 120 0.7
sovereigns and their rapidly growing debt burdens BBB 4,995 30.8 5,075 29.6
has attracted great attention. Excluding Singapore Thailand 78 0.5 94 0.5
and Hong Kong (both governments have India 4,916 30.4 4,981 29.1
accumulated significant net asset positions) from
BB 226 1.4 233 1.4
the discussion, net debt levels and comparative
Philippines 88 0.5 89 0.5
interest burdens as a share of GDP for most of the
rest of the region look moderate compared with the Indonesia 103 0.6 107 0.6
U.K. and the U.S. The latter two have experienced Mongolia N.A 0.0 N.A 0.0
large increases to debt measured on a relative basis. Vietnam 35 0.2 37 0.2
Japan stands out as a regional peer that has B 71 0.4 70 0.4
accumulated and maintained an enormous
Pakistan 48 0.3 48 0.3
government debt burden despite having sustained
Sri Lanka 23 0.1 22 0.1
external surpluses for decades.
In general, developed sovereigns have shown Total 16,191 17,129
themselves to be better able to withstand economic Total ex. Japan 6,769 41.8 7,172 41.9
shocks than lower rated peers. This is not only as a
Notes
result of a larger stock of accumulated national
wealth, but also as a function of more predictable *US$ values calculated based on spot exchange rates for Nov. 9, 2009. f—
income flows that give the sovereign a broader, Forecast. N.A.—Not available. L-T—Long term. S-T—Short term. Source: S&P
Sovereign Borrowing Survey, S&P Sovereign Group estimates.
more flexible, and more stable base of revenue
sources than exist in most emerging markets. In
terms of our sovereign ratings criteria, the related
factors of higher-per-capita GDP and greater fiscal
flexibility backed by deep domestic capital markets,

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 63

ASIA PERSPECTIVE
C O M M E N TA RY

“…as history has shown, an orderly and selective retreat from market support
measures and accommodative policy—especially during times of increasing
economic uncertainty—takes far greater skill than the initial advance.”

among others, can support a higher debt burden over time. A Tricky 2010
Such flexibility is never without limit, but for many the
For many sovereigns in the Asia-Pacific region, 2010 will bring
demonstrated ability to withstand economic cycles that have
the difficult task of controlling inflation and asset price
included world wars, banking crises, stagflation, or other
appreciation at the same time that economic support measures
domestic turmoil is a powerful predictor of the future.
and borrowing needs remain significant. To date, some
A sovereign's debt trajectory is generally dependent on
governments’ reliance on directed lending and government-
nominal economic growth. Many sovereigns in emerging East
supported corporate borrowing in place of more direct fiscal
Asia have higher expected trend rates of growth than those of
stimulus measures has helped to stabilize growth. However,
more developed peers. Based on our current estimates, for most
one potential economic scenario for the coming year would
governments in the region deficits, direct indebtedness and
involve strong support for asset prices as a function of loose
contingent liabilities could peak in 2010. Nevertheless, the
monetary policy amid a weakening recovery. Such an outcome
medium-term implications of stimulus programs will quickly
could test the fiscal and monetary flexibility of numerous
run up against longer-term obligations, including a range of
regional sovereigns as funding costs rise and tension between
social welfare programs where unfavorable demographics will
the policy demands of supporting the real and financial
prompt costs.
economies increases.
In addition to direct borrowing, some sovereigns in the
Although the borrowing increase we expect during 2010 is
region have looked to rapid expansion of domestic credit
below that expected for year-end 2009, we believe that
against the economic cycle in support of stabilization and
sovereigns in the region are not yet ready to retreat from
stimulus agendas. Unsurprisingly, this trend is most notable for
capital markets either for their own funding purposes or for
those markets that have relied on a combination of lending by
general economic support programs. However, as history has
state-owned commercial or policy banks, as well as
shown, an orderly and selective retreat from market support
government-supported bond issues, to prop up their respective
measures and accommodative policy—especially during times
economies. China stands out as a prime case in point, with
of increasing economic uncertainty—takes far greater skill
India, Vietnam, and the Philippines as other ready examples. In
than the initial advance. For sovereigns in Asia during 2010,
contrast, sovereigns with more market-based monetary
this could mean remaining active issuers in markets that they
systems have seen the pace of domestic credit growth shrink or
may otherwise like to tame, with the result of this balancing act
even contract, with the central government reporting a far
important for medium-term fiscal trends.
larger proportion of the cost of stimulus measures on its own
balance sheet. Although a fuller elaboration in this area is
beyond the scope of this report, it is important to note that
directed lending, like direct borrowing, is often a large
contributor to Standard & Poor's estimation of the contingent
financial sector liabilities that would weigh on sovereign
finances in the event of significant economic and fiscal stress.

64 ASIA-PACIFIC MARKETS OUTLOOK 2010 STANDARD & POOR’S

 ASIA PERSPECTIVE
C O M M E N TA RY

Table 4: Size And Composition Of Local-Currency Bond Markets

LC bond market size and composition LC bond market growth
3Q08 3Q09 3Q08 3Q09
(bil. US$) (% share) (bil. US$) (% share) (% y-o-y) (% y-o-y)
China
Total 2,114 100 2,415 100 38.1 14.2
Government 1,901 90 2,015 83.4 36.0 6
Corporate 212 10 400 16.6 60.7 88.2
Hong Kong
Total 92 100 129 100 (5.2) 39.3
Government 19 20.2 54 41.8 7.0 187.8
Corporate 74 79.8 75 58.2 (7.9) 1.6
Indonesia
Total 77 100 90 100 (14.2) 17.2
Government 69 89.4 82 90.9 (14.8) 19.2
Corporate 8 10.6 8 9.1 (8.7) 0.5
Korea
Total 850 100 1,001 100 (17.7) 17.7
Government 387 45.5 460 45.9 (24.0) 18.9
Corporate 464 54.5 542 54.1 (11.5) 16.8
Malaysia
Total 173 100 181 100 10.4 4.7
Government 97 56.1 101 55.6 2.2 3.9
Corporate 76 43.9 80 44.4 22.9 5.8
Philippines
Total 56 100 59 100 5.1 6.3
Government 52 92.8 53 88.9 3.2 1.8
Corporate 4 7.2 7 11.1 40.2 63.9
Singapore
Total 128 100 153 100 14.2 19.6
Government 71 55.3 87 56.9 8.6 23
Corporate 57 44.7 66 43.1 22.1 15.3
Thailand
Total 147 100 172 100 12.6 17
Government 119 81.1 136 79.2 15.3 14.4
Corporate 28 18.9 36 20.8 2.2 28.6
Vietnam
Total 13 100 12 100 34.7 (4.9)
Government 12 95.8 11 93.7 32.7 (7.0)
Corporate 0.5 4.2 0.8 6.3 107.1 43.8
Japan
Total 8,112 100 9,838 100 9.8 21.3
Government 7,286 89.8 8,834 89.8 9.7 21.2
Corporate 826 10.2 1,003 10.2 10.6 21.5

Notes
*Source: ADB Asia Bond Monitor, November 2009. LC—Local currency.

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 65

 asia-pacific office locations
Beijing
Suite 1601, 16/F Tower D, Beijing CITC
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Chaoyang District
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Tel: (86) 10 6569 2909
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Tel: (91) 22 6691 3001
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66 ASIA-PACIFIC MARKETS OUTLOOK 2010
Singapore
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Singapore 049712
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O UR S UBSIDIARIES I N A SIA :
Mumbai
CRISIL Limited
CRISIL House—Plot No 121/122
Andheri–Kurla Road, Andheri (East)
Mumbai, India, 400 093
Tel: (91) 22 6691 3001
Taipei
Taiwan Ratings Corp. (TRC)
49th Floor, Taipei 101 Tower
No. 7, Xinyi Road
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Taiwan R.O.C.
Tel: (8862) 8722 5800
STANDARD & POOR’S
 regional contacts
Tom Schiller Roopa Kudva
Executive Managing Director and Managing Director and Chief Executive
Head of Asia-Pacific Officer, CRISIL
Tokyo (813) 4550 8445 Mumbai (91) 22 6691 3001
tom_schiller@standardandpoors. rkudva@crisil.com

John Bailey Hwa-Ping Chang

Managing Director President & CEO
and Head of Australia and New Zealand Taiwan Ratings Corp.
Mebourne (613) 9631 2020 Taipei (8862) 8722 5898
john_bailey@standardandpoors.com hwaping_chang@taiwanratings.com.tw

Yu-Tsung Chang
Jung-Tae Chae
Executive Managing Director
Managing Director
Asia Pacific Ratings
and Head of Korea
Tokyo (813) 4550 8724
Seoul (82) 2 2022 2301
yu-tsung_chang@standardandpoors.com
jungtae_chae@standardandpoors.com

Ping Chew
Managing Director
and Head of Greater China
Hong Kong (852) 2533 3530
ping_chew@standardandpoors.com

STANDARD & POOR’S ASIA-PACIFIC MARKETS OUTLOOK 2010 67

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