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Broadgate: Weekly Briefing 2/12

2 December 2013

Japan – Consumer prices in Japan rose at the fastest pace in five years in October, suggesting policymakers’ attempts to end years of deflation are working.

Consumer prices, excluding food, rose 0.9% from a year earlier. Prices have now risen for five months in a row. Japan has been battling deflation, or falling prices, for best part of the past 20 years.

It is seen as a major drag on its economy and policymakers have unveiled a series of measures to end the cycle.

While falling prices may sound good to those experiencing inflation, they hold back economic growth as consumers and businesses tend to put off purchases in the hope of getting a cheaper deal in the future, which hurts domestic demand.

Brazil – Brazil’s central bank has raised its benchmark interest rate to 10% from 9.5%, the sixth time in a row that it has put up borrowing costs.

The latest rise has taken the key rate to the highest level since March 2012.

The rises come as Brazil has been trying to rein in inflation. Consumer prices in the country rose by 5.8% in October from a year earlier, above policymakers’ 4.5% target.

U.S. – The Federal Reserve will probably focus on assuring investors it will maintain low interest rates as it prepares to reduce bond purchases, according to Stephen King, chief global economist at HSBC Holdings Plc.

The increased effort aims in part to avoid a repeat of the sell-off in global assets this year after Fed officials signaled they may soon start to taper the monthly $85bn in bond purchases, which King said was more “violent” than the central bank had expected.

“They’ll be very keen to say, ‘Look, we might be tapering but we want to offer other ways of demonstrating our monetary support’ for the economy,” King said in an interview in Dubai on Thursday. “That effectively means you’re replacing an actual transaction approach to monetary policy with a verbal commitment. Verbal commitment wasn’t really on offer back in May and June.”

Spain – The economic outlook for Spain has improved, says ratings agency Standard and Poor’s (S&P).

The debt-laden country, whose banks came under severe pressure during the financial crisis, has been struggling to improve its public finances. S&P raised its assessment from negative to stable and re-affirmed its BBB- long-term sovereign credit rating.

However, S&P cut its credit rating for the Netherlands from the top-level AAA rating to AA+.

This demotion leaves only Germany, Luxembourg and Finland as the remaining eurozone countries with the top rating of AAA, according to S&P.

Africa – Kenya has formally launched a new, Chinese-financed railway which should extend across East Africa to reach South Sudan, Congo and Burundi.

The first section will link the Kenyan port of Mombasa to the capital, Nairobi, reducing the journey time from 15 hours to four.

It is said to be the country’s biggest infrastructure project since independence 50 years ago. The cost of the railway will be $5.2bn – mostly funded by China.

“What we are doing here today will most definitely transform… not only Kenya but the whole eastern African region,” President Kenyatta told crowds at the ceremony, calling it an “historic milestone”.

Spotlight on: The ASEAN EC, a new diverse investment universe?

In-Bok Song, senior research analyst at Matthews Asia, explores the challenges of integrating ten Asian economies to establish the first ‘ASEAN Economic Community’ by 2015.

Earlier this year, central bank governors in the 10-member bloc of the Association of South East Asian Nations (ASEAN) declared their intention to integrate their economies and to establish the ASEAN Economic Community (AEC) by 2015.

They plan to create a single market and production base, transforming South East Asia into a more integrated region with liberalised trade for goods and services, investment and skilled labour, and a freer flow of capital.

So what does greater economic integration mean for investors in Asia? How much progress has already been made? And what steps does ASEAN need to take to capitalise upon the AEC’s potential?

Long-term plans

Anecdotal evidence from meeting with companies in South East Asia suggests they are increasingly positioning their long-term investment plans under the framework of the AEC. This includes exploring ways to expand their home market footprint into neighbouring countries.

From a broader perspective, member countries hope to create a more globally competitive economic bloc, and to leverage the region’s advantages such as its demographic base.

The ASEAN countries boast a combined population of approximately 600 million, nearly half the size of China. The average age in South East Asia is 30, compared to 38 for China and 44 for Japan.

This is encouraging in terms of prospective labour force growth. By purchasing power, ASEAN’s middle class comprises roughly 18% of its overall population, and is expected to surpass 25% by 2015.

The desire amongst ASEAN countries to work together has been there for a long time. Since ASEAN was established in 1967, several key trading agreements have been developed including the ASEAN Free Trade Agreement in 1992. However, despite these pacts, member countries have grown less dependent on each other.

Over the last four decades, GDP per capita of the five ASEAN founding members – Indonesia, Malaysia, the Philippines, Singapore and Thailand – has expanded by at least ten times, and in some cases as much as 70 times.

However, against that backdrop, intra-ASEAN trade has increased by only 15%-25%. This may seem low compared to 54% for the European Union, and 48% for the trilateral trade bloc which makes up the North American Free Trade Agreement.

The reasons for ASEAN’s slow integration may be attributed to cultural and political diversity and wide disparity in economic development. Cross-border integration

So what do the ASEAN nations need to do ahead of the AEC’s establishment in 2015 and beyond? Better infrastructure will be the first, crucial move towards cross-border supply chain integration. Every ASEAN country has varying resources and competitive advantages.

In order for these countries to act as a single production base at a competitive cost, dependable roads, railways and airports are essential.

Secondly, the AEC framework is supported by two other pillars: the ASEAN Political-Security Community, and the ASEAN Socio-Cultural Community.

These two other communities aim to address issues such as strengthening democratic processes and human rights, enhancing governance and developing human resources – all critical for smooth interregional flow of services and skilled labour.

Under these two pillars, a special court system has been proposed to adjudicate disputes, and efforts to foster the adoption of universal access to primary education and widespread use of the English language are being promoted. These initiatives are particularly welcomed by business owners and workers on the ground, as they are eager to improve their own competitiveness.

Another step in the process would be to allow a better flow of capital to tap access to money beyond the current channels of foreign direct investment. This would bode particularly well for investors by enlarging ASEAN’s investable universe. Easier flow of capital might be implemented through an integrated capital market involving equities, bonds and currencies.


Perhaps not surprisingly, along with these loftier goals come bigger challenges. One immediate challenge is enforcement power. The AEC emphasises consensus building and non-interference in order to maintain stability.

ASEAN, so far, has not pursued the type of tight unified block found among European Union members. Rather, it seems to prefer a looser structure. Without enforcement power, members may find it difficult to advance their objectives given their wide-ranging stages of economic development.

For example, some member nations may seek to remove trade tariffs while others are seeking to protect important domestic industries by categorising them as ‘strategic or economically ‘sensitive’.

Malaysia has done this with its auto-industry, and Indonesia has endeavoured to protect its mining industries from tariff removals. ASEAN’s financial sector, especially banks, may face even greater integration challenges. Laws which limit ownership of domestic banks and other regulations restricting the opening of foreign bank branches in each country are difficult to change.


The wide gap in development between the ASEAN countries makes enforcement more challenging, particularly when member countries are incentivised to consider protectionism first.

This is reinforced by the wide dispersion in competitiveness among the ASEAN countries. According to the World Economic Forum’s Global Competitiveness Report 2012-2013, Singapore was in second position out of a sample of 144 countries, Indonesia lies in 50th place, while Cambodia is at 85. Despite the hurdles, one of the key benefits in the AEC initiative is the opportunity it presents for member countries to rethink their competitiveness.

Just how much additional GDP growth can be achieved with a system such as the AEC is arguable. However, the impact on growth could clearly be meaningful. More importantly, as countries prepare for integration, we can expect the development of a more sophisticated and diverse investment universe to become one of the key benefits of the AEC.


The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.