Economy Asia's inflation and monetary policy: still halfway through a tightening cycle - DBS Vickers

Our Quarterly Outlook isn’t due for publication until Friday but with all the attention on inflation lately it’s worth taking a preview / peek at where monetary policy stands in Asia . Our best guess is that we are about half way through a tightening cycle that began last March and should come to an end late this year orearly-2012. How does it stack up so far?

Malaysia and India kicked things off in March and continue to sit at the front of the curve in Asia . All told, the Asia-10 delivered some 22 rate hikes (or tightenings in currency regimes in the case of Singapore ) in 2010 and has delivered another 5 so far in 2011. With inflation still accelerating and interest rates still not back to normal, we expect another 34 hikes (or currency adjustments) by year-end (table below).That means we’re 27/61sts – call it a tad less than half – of the way through the cycle.

Who has the most yet to deliver? It’s pretty evenly spread, actually. Korea and Thailand have 5 hikes each to go, we think, what with rates still on the floor and inflation there still gathering steam (Korea’s inflation just jumped another half-point to 4.5% YoY in February. Most other countries have only reported Jan figures). But Indonesia and China each have 4 hikes to deliver and for that matter, so do, we reckon, India , Taiwan and the Philippines . By the end of the year, rates should be another 100-125bps higher than they are today in most countries in Asia .

Will that do the trick? So long as Asia delivers what is expected here, we think so. Inflation should peak in late-summer or early-autumn and begin to ease, though probably only modestly, in 3Q and 4Q of this year. In most countries, that would still leave inflation running a little above average at year-end and that, regular readers will recall, is where we think inflation is likely to stay in Asia for the next 5 years or so: noticeably but not dramatically above average.

Are we being complacent on the inflation front? Perhaps, but we don’t think so. After all, we’re the ones who said way back in Mar10 that Asia’s central banks were behind the curve and warned / projected regularly through the course of 2010 that inflation would soon become the issue that it is now (see, for example, “Asia: the kink in the curve”, 9Sep10). No doubt, Asia ’s central banks were – and are still –behind the curve. But we’re not talking crisis proportions, for one, and central banks are moving, for two. Bottom line? We’re halfway through a tightening cycle that could have and should have started 6 months earlier but nothing’s out of control and by mid-year we believe that will evident to all.

Chandra Asri Petrochemical: Not Rated; Rp3,725; TPIA IJ

Growth through capacity expansion and new product offering
Chandra Asri Petrochemical (CAP) has three expansion projects. They are: (1) broaden product offering by constructing US$100m butadiene factory with 100k tons capacity by 3Q2013. (2) construct LPG terminal with 1m tons of capacity by 2014. (3) expand production capacity of polypropylene to 480k tons (from 360k tons) and polyethylene from 320k tons to 360k tons in 4Q2011 (and 530k tons in 2014) through de-bottlenecking its production capacity. This year, CAP plans to spend US$75m on capex. Funding will be from its plans to increase public float to 20-25% from only 5.13% through rights issue.