Emerging Markets Sovereign Research / Asia, Pacific

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Bear, Stearns & Co. Inc.

Fixed Income Research Analysts:

John Stuermer 

Daniel Fan (in Hong Kong)

Lili Fan (in Hong Kong)

Raza Agha

Carl Ross 212.272.9040 cwross@bear.com
      

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ASIA OUTLOOK FOR 2008

Summary

1.                  n                                                                                    Asian GDP growth will remain robust in 2008—but so will inflation.
  China’s GDP growth rate, at worst, will fall to levels around 10% from 11% or higher in 2007, while GDP growth for most other countries in the region will range between 6% and 8%. This robust growth outlook, however, is being accompanied by rising inflationary pressures in most Asian countries. The most dramatic example of this China, where November inflation rose to 6.9%. Inflation would be a more serious problem in the region if exchange rates for most Asian countries were not appreciating so rapidly against the U.S. dollar.

2.                  n                                                                                    We remain bullish on the Indian rupee and Philippine peso for 2008. We are adding the Chinese renminbi as well as the Malaysian ringgit to our list of outperforming currencies for 2008. We believe that all four currencies will benefit from a combination of rising—or already high—interest rates as well as continued large capital inflows.

3.                  n                                                                                    The election calendar will be an important point to watch in 2008. Following today’s presidential election in Korea, in which “Bulldozer” Lee Myung Bak was elected, and the parliamentary elections in Thailand on December 23, President Musharraf has announced that parliamentary elections in Pakistan will occur on January 8, while snap elections in Malaysia and India could occur sometime during the first half of the year. Taiwan also will hold parliamentary elections in January, to be followed by a highly contentious presidential election in March.

4.                  n                                                                                    We have a generally positive outlook for Asian corporates and financial institutions. Their underlying fundamentals have not been seriously affected by the recent volatility of the international credit markets, although we expect to see the number of downgrades to increase in 2008, which we regard as a normalization process after a sharp drop over the last ten years.
  

5.                  n                                                                                    Many countries and industrial sectors in Asia will be on an upturn in 2008, even as the U.S. economy weakens. This will provide attractive opportunities. However, we still will need to focus on investments with strong credit profiles as well as credits with attractive yield spreads relative to their ratings, credit profile, and comparable indicators. We also will look at credits in terms of their risk reduction strategies as well as their value as capital structure plays.

6.                  n                                                                                    Most Asian banks still have liquid balance sheets. The major exception to this statement are some of the Korean banks, which have experienced rapid loan growth that has far outstripped their deposit growth, resulting in loan/deposit ratios well above 100% and overall less-liquid balance sheets. An additional financial sector concern has been CDO exposure. Among the banks covered in this report, Woori Bank in Korea, ICICI Bank in India and DBS in Singapore have all reported some moderate CDO exposures of US$3 billion or less. We view these banks as being well enough capitalized to deal with these exposures.

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