Target risks

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See the important disclosures on pages 94 to 96.

N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D

Nomura Anchor Reports examine the key themes and value drivers that underpin our sector views and stock recommendations for the next 6 to 12 months.

ANCHOR REPORT

Economics | A S I A P A C I F I C

Tomo Kinoshita +852 2536 1858 kinoshita.tomo@hk.nomura.com

Target risks

Quarterly Asia-Pacific Economic Outlook

We have downgraded the assumptions underlying our Asian economic outlook in light of the knock-on impact of slowing global growth prospects. Our new assumptions reflect the likelihood of a growth recession (sub-0.5% growth in 1Q-2Q08F) in the US, and we project that in all the economies of Asia (except Thailand), growth rates for 2008F will be lower than those of 2007F, amid slower exports. Export weakness and inflationary pressure from China will likely prevent these economies from attaining full- scale expansion in 2009F.

We also conducted two risk scenario analyses: one assumes a “mild recession” in the US (0.4% growth in 2008F, and 0.9% in 2009F), while the other assumes a “deep recession” (-0.6% growth in 2008F, and -0.5% in 2009F).

z Under both scenarios, we see negative impacts on exports and investments in Asia while consumption should hold up well. The economies of Singapore, Taiwan and Malaysia would be hit hardest, in our view, with growth floating close to zero for both years under the deep recession scenario.

z The economies of China and India will also probably slow but are relatively resilient due to high potential growth rates and strong consumption trends.

Economists

Tomo Kinoshita +852 2536 1858 Takayuki Urade +65 6420 1902 Tetsuji Sano +81 3 5203 0935 Yuichi Izumi +81 3 5203 0426 Kota Hirayama +81 3 5255 1684 Tom Kenny +61 2 9321 3955 Takahide Kiuchi +81 3 5203 0445 TOP

DOWN

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Contact list for economists

Economic analysis and forecasts on Asian economies

Name Coverage Contact

Tomo Kinoshita (Hong Kong) Asia (ex-Japan), China, Hong Kong, +852 2536 1858

Indonesia kinoshita.tomo@hk.nomura.com

Urade Takayuki (Singapore) Singapore, Malaysia +65 6420 1902

urade.takayuki@sg.nomura.com

Tetsuji Sano (Tokyo) India, Korea, Thailand +81 3 5203 0935

t-sano@frc.nomura.co.jp

Yuichi Izumi (Tokyo) Philippines, Vietnam, Thailand +81 3 5203 0426

y-izumi@frc.nomura.co.jp

Kota Hirayama (Tokyo) Taiwan, structural issues in greater China region +81 3 5255 1684

k-hirayama@frc.nomura.co.jp

Tom Kenny (Sydney) Australia +61 2 9321 3955

tom.kenny@au.nomura.com

Structural analysis on Chinese economy

Name Coverage Contact

Takeshi Jingu (Beijing) China +86 10 6590 8200

jingu.takeshi@cn.nomura.com

Economic analysis and forecasts on global economies

Name Coverage Contact Takahide Kiuchi (Tokyo) Global economy including Japan +81 3 5203 0445

t-kiuchi@frc.nomura.co.jp

Daisaku Ueno (Tokyo) International finance and forex +81 3 5203 3623 (yen, euro, etc) d-ueno@frc.nomura.co.jp

Hajime Yoshimoto (New York) US +1 212 667 1159

hyoshimo@us.nomura.com

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Economics | A S I A P A C I F I C

Tomo Kinoshita +852 2536 1858 kinoshita.tomo@hk.nomura.com

Our view

Asia is under increasing risk of slowdown. If the US economy goes into recession, Asian economies are likely to suffer a slowdown in exports and investments. The economies of Singapore, Malaysia and Taiwan are likely to be hit hardest, while China and India should hold up well, due to consumption strength.

Anchor themes

With the US economy at risk of a downturn, we have adopted new assumptions for our economic outlook on Asia, under which the US slows in 1H08F to a very low growth rate, resulting in a “growth recession”. Under this main scenario, we would expect Asian economies to feel the pressure of slowing exports and investments, but still achieve decent growth levels due to strong economic momentum and accommodative fiscal policy.

Target risks

c

Base case — Asia’s growth will be lower but still decent

Assuming the US economy slows in 1H08F to a very low growth rate, resulting in a growth recession (sub-0.5% growth in 1Q-2Q08F), we would expect the 2008F growth rates of all the economies of Asia (except Thailand) to be lower than in 2007F, owing to slower exports. Despite the slowdown, Asian economies should continue to achieve decent growth as: 1) their economic momentum remains strong; and 2) Asian

governments are aggressively implementing infrastructure spending, especially in Asean and China. However, export weakness and inflationary pressure from China should prevent these economies from attaining full-scale expansion in 2009F.

d

Mild US recession scenario — Asia’s exports and investments are hit Our first risk scenario assumes the US economy is entering a “mild recession” (0.4%

growth in 2008F, and 0.9% in 2009F), such that Asian economies face slowing exports and investment as the global overcapacity issue is raised. The combined growth rate of Asia would fall by around 2pp from our base case rate, while the economies of Singapore, Taiwan and Malaysia would be hit hardest. The economies of China and India would suffer but should achieve 8%-plus growth for both 2008F and 2009F, on their robust growth potential and resilient consumption.

e

Deep US recession scenario — Asia enters growth recession Under the deep recession scenario for the US (-0.6% growth in 2008F, and -0.5% in 2009F), the slowdown in the global economy would hit Asia’s exports and investment even harder, resulting in a growth recession in Asia. The economies of Singapore, Taiwan and Malaysia would be severely hurt, the first two seeing close to zero growth, while China and India would remain reasonably resilient with growth rates of 7-8%.

f

Impact on stocks under coverage; quarterly updates

Many of Nomura’s earnings forecasts and stock ratings are in line with our base case scenario. While our analysts revisit assumptions and valuations to account also for our

“mild recession” and “deep recession” scenarios, we include a country-by-country snapshot of the companies deemed most and least vulnerable to a US recession. And we provide our regular updates on economic developments in China, Hong Kong, Taiwan, Korea, Singapore, Malaysia, Thailand, Indonesia, the Philippines and India.

N O M U R A I N T E R N A T I O N A L ( H K ) L I M I T E D

TOP DOWN

Economists Tomo Kinoshita +852 2536 1858 Takayuki Urade +65 6420 1902 Tetsuji Sano +81 3 5203 0935 Yuichi Izumi +81 3 5203 0426 Kota Hirayama +81 3 5255 1684 Tom Kenny +61 2 9321 3955 Takahide Kiuchi +81 3 5203 0445

Key forecasts

Real GDP growth 2008F (%)

Base case

Mild recession

Deep recession

Korea 4.9 3.1 2.2

Taiwan 4.0 1.4 0.3 Hong Kong 5.5 3.7 3.0

Singapore 6.6 2.2 0.5 Indonesia 6.2 4.9 4.2 Malaysia 5.4 3.4 1.7 Philippines 5.3 4.4 3.6 Thailand 4.8 3.5 2.5 China 10.1 8.3 7.4

India 8.9 8.2 7.5

Australia 3.5 3.3 2.5 Source: Nomura

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Economics | Asia Pacific Tomo Kinoshita

Asia under US recession scenarios

Tomo Kinoshita & Economics Team z New base case — growth recession in the US

z Scenario analysis 1 — “mild recession” in the US z Scenario analysis 2 — “deep recession” in the US

In this section, we look at our new base case assumptions for growth in the US, and do a scenario analysis on the impact in Asia from a more severe downturn in the US. The growth outlooks for the US under our base case and for the two scenarios are graphed below. Our current forecasts are detailed in Exhibits 2, 4 and 5, while the impact in Asia from the more severe assumptions is shown in Exhibits 10-12.

Exhibit 1. US growth rates under base case and two scenarios

(4) (3) (2) (1) 0 1 2 3 4 5 6

2004 2005 2006 2007 2008F 2009F

Base case, growth recession Mild recession scenario Deep recession scenario (%, annualised q-q)

Source: CEIC, Nomura International (Hong Kong) Limited

c

New base case — “growth recession” in the US

Our new base case when looking at the outlook for Asian economies is that the US slows in 1H08F to a very low growth rate, resulting in a “growth recession”, where the growth is much lower than potential, and labour market conditions worsen. Private consumption will be weak, reducing imports from Asia and elsewhere, in turn

moderately slowing the economies of Europe and Japan. Under this scenario, the US recovers only modestly in 2H08F, supported by a fiscal package and aggressive easing of monetary policy. We assume the Federal Funds rate will be cut to 2.5% by end-2008F. For 2009F, we expect a subdued recovery in the US, with growth remaining below potential. We put the probability of this scenario happening at 50%.

Asian GDP growth outlook. We have cut our GDP growth forecasts for 2008F for all the economies we cover in Asia, except China (unchanged at a below-consensus 10.1%, since we think China will be able to implement policy measures to support growth). We assume growth across Asia will be flat or lower than in 2007 (except in Thailand), and that Asia will see slower exports and private investment. Weaker exports to the US will have a greater impact on export-dependent open economies like Singapore and Malaysia. And with US growth likely to be below potential in 2009F, we do not expect a V-shaped recovery in exports, hurting the outlook for Asia in 2009F.

New base case assumes a very low growth rate in the US for 1H08F, and only a modest recovery there in 2H08F

Probability of this scenario = 50%

We have cut our GDP forecasts for 2008F for all the economies we cover in Asia, except China

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Another factor hurting growth will likely be inflation. Inflationary pressure in China is likely to intensify this year, with non-food prices rising on wage increases, a new labour law, and higher costs for borrowing and renting / buying properties. While price

controls were introduced in January, the effectiveness should be limited, as only large-scale producers and distributors need comply, and we think the measures are likely to be lifted within six months or so, given the potentially distorting impact on the economy. As a result of China’s domestic inflation and moderate appreciation of the renminbi, Asia and the rest of the world will likely receive inflationary pressure from China. Our GDP growth forecasts for Asia, including China, are generally lower in 2009F than in 2008F, partially due to the negative effects of inflation.

But we still see decent growth in Asia over 2008-09F, for two main reasons:

First, growth momentum in Asian economies remains quite strong. Despite increased volatility in financial asset prices, real economies are still growing well. Growth for 4Q07 announced so far in Asia, particularly in China, Korea, the Philippines and Singapore, all point to robust growth, driven primarily by domestic demand. Singapore slowed in 4Q07, growing by 6.0% y-y, versus 9.0% in 3Q07, but this slowdown was owing more to the impact from lumpy pharmaceutical output — excluding this, growth was pretty much in line with 3Q07. We believe private consumption will support the strength in many Asian economies, due to rising wages and tighter labour markets, as well as the wealth effect from higher property prices (if not from higher stock prices).

Abundant liquidity from forex market intervention should also support growth.

Second, Asian governments are implementing rather aggressive fiscal policies. This is lifting investment, with many Asian governments, including those in China and within Asean5, increasing infrastructure spending to reduce bottlenecks.

Exhibit 2. Economic outlook for Asia-Pacific

Real GDP growth (%) CPI inflation (%) Current account balance (US$bn) 2005 2006 2007 2008F 2009F 2005 2006 2007 2008F 2009F 2005 2006 2007 2008F 2009F Asian NIEs 4.8 5.4 5.5 4.9 5.0 2.2 1.7 2.2 3.4 2.9 79.8 86.5 107.5 104.0 119.5

Korea 4.2 5.0 4.9 4.9 5.0 2.8 2.2 2.5 3.6 3.0 15.0 5.4 6.0 (8.8) (9.9) Taiwan 4.2 4.9 5.9 4.0 4.9 2.3 0.6 1.8 1.8 2.0 16.0 24.7 31.1 25.5 28.0 Hong Kong 7.1 6.8 6.1 5.5 4.8 0.9 2.0 2.0 4.5 4.1 20.2 20.2 26.5 28.0 34.2 Singapore 6.6 7.9 7.5 6.6 5.2 0.5 1.0 2.1 5.1 3.1 28.6 36.3 43.9 59.3 67.2 Asean4 5.1 5.5 5.9 5.5 5.4 7.1 8.2 4.0 4.8 4.3 14.6 43.5 61.0 59.1 68.6 Indonesia 5.7 5.5 6.3 6.2 5.5 10.5 13.1 6.4 6.4 6.2 0.3 9.9 11.2 16.5 20.0 Malaysia 5.0 5.9 6.1 5.4 5.2 3.0 3.6 2.1 3.5 2.7 20.0 25.5 28.9 33.3 37.5 Philippines 4.9 5.4 7.3 5.3 5.6 7.7 6.3 2.8 4.1 3.7 2.0 5.9 6.0 5.5 7.1 Thailand 4.5 5.1 4.5 4.8 5.0 4.5 4.6 2.2 3.5 2.6 (7.6) 2.2 14.9 3.8 4.0 China 10.4 11.1 11.4 10.1 8.7 1.8 1.5 4.8 4.5 3.6 160.8 249.9 330.7 374.4 413.6 Above total 7.5 8.1 8.4 7.5 6.8 2.9 2.7 3.7 4.2 3.5 254.9 380.0 497.7 537.5 601.6 Asian NIEs + Asean4 4.9 5.5 5.7 5.1 5.1 3.8 3.8 2.8 3.9 3.3 94.1 130.1 167.0 163.1 188.0 India 9.4 9.6 9.0 8.9 9.3 4.4 5.4 4.2 4.9 5.0 (9.2) (11.1) (21.4) (40.5) (46.8) Australia 2.8 2.8 3.9 3.5 3.2 2.7 3.5 2.3 3.3 2.7 (42.8) (40.6) (48.6) (52.3) (54.6) Notes: 1) In aggregating real economic growth for various groups of countries, the weight assigned to each economy is based on 2004 nominal GDP in US dollars

2) As of this publication, the composite index is used for inflation in Hong Kong

3) India’s figures are on a fiscal year basis, covering April-March. WPI is used instead of CPI for India

Source: Nomura Singapore, Nomura International (Hong Kong) Limited, Nomura Securities’ FERC and official statistics of the economies concerned

Asian currency and interest rate outlook. Asean currencies fell against the US dollar in 2007 (see Exhibit 3) when the sub-prime issues first hit, as foreign investors sold Asian assets. The currencies later gained ground as those funds then returned to Asia. We believe Asian currencies will remain influenced by foreign investments into Asian equities and bonds, and expect similar volatility to return if global markets are hit by more sub-prime events.

Inflation partly responsible for weakness continuing into 2009F

Two factors supporting growth:

1) Asian growth is still robust

2) Asian governments are spending aggressively

We believe Asian currencies will remain influenced by foreign investments into Asian equities and bonds, with the sub-prime issues to play a key role

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Exhibit 3. Forex movements in 2007

90 95 100 105 110 115 120

China (RMB)

Hong Kong (HK$)

Taiwan (NT$)

Korea (W)

Singapore (S$) Exchange rate against US$ (beginning of 2007 = 100)

Currency appreciation

Beginning of 2007

20 July, 2007 — just before first round of sub-prime issues Low post 20 July, 2007

9 November, 2007 — second round of sub-prime issues 31 December, 2007

25 January, 2008

90 95 100 105 110 115 120

Malaysia (RM)

Thailand (THB)

Indonesia (IDR)

Philippines (Peso)

India (Rupee) Exchange rate against US$

(Beginning of 2007=100)

Beginning of 2007

25 January, 2008 90

95 100 105 110 115 120

China (RMB)

Hong Kong (HK$)

Taiwan (NT$)

Korea (W)

Singapore (S$) Exchange rate against US$ (beginning of 2007 = 100)

Beginning of 2007

25 January, 2008

90 95 100 105 110 115 120

Malaysia (RM)

Thailand (THB)

Indonesia (IDR)

Philippines (Peso)

India (Rupee) Exchange rate against US$

(Beginning of 2007=100)

Beginning of 2007

25 January, 2008

Barring substantial shocks to Asian markets by sub-prime developments, we believe Asian currencies will remain on a moderate appreciation trend, for two key reasons:

1) except for Korea, India and Australia, Asian economies should continue to have current account surpluses over 2008-09F; and 2) Asia should receive net capital inflows, as the FDI inflows should remain substantial, especially for Asean and India.

In terms of where the authorities stand, China is likely to continue to allow the renminbi to rise against the US dollar — we assume by 6.9% this year. This will allow Asean authorities to also let their currencies appreciate against the US dollar (though we think the rupiah will remain at its current level given likely capital outflows). We think the Korean won and Taiwan dollar, which tend to track the yen, might come under more appreciation pressure — since the narrower interest rate gap between the US dollar and the yen (as a result of either rate cuts in the US or hikes in Japan) could see the yen move higher against the US dollar. We think the Australian dollar should benefit from the higher prices for the commodities it exports.

We assign a 10% probability to a soft landing in the US, but the following scenario analyses focus on downside risks.

We believe Asian currencies will remain on a moderate

appreciation trend

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Exhibit 4. Forex rates (against the US dollar)

28-Jan-2008 1Q08F 2Q08F 3Q08F 4Q08F 1Q09F 2Q09F 3Q09F 4Q09F

Korean won 946 (910-960) (910-960) (910-960) (910-960) (910-960) (910-960) (910-960) (910-960) Taiwan dollar 32.3 (31.0-34.0) (31.0-34.0) (31.0-34.0) (31.0-34.0) (31.0-34.0) (31.0-34.0) (31.0-34.0) (31.0-34.0) 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 Hong Kong dollar 7.81

(7.75-7.80) (7.75-7.80) (7.75-7.83) (7.75-7.83) (7.75-7.83) (7.75-7.83) (7.75-7.83) (7.75-7.83)

1.42 1.41 1.4 1.39 1.38 1.37 1.36 1.35

Singapore dollar 1.42

(1.41-1.44) (1.40-1.43) (1.39-1.42) (1.38-1.41) (1.37-1.40) (1.36-1.39) (1.35-1.38) (1.34-1.37) 9,250 9,300 9,300 9,350 9,350 9,350 9,400 9,400 Indonesian rupiah 9,335

(9,050-9,450) (9,100-9,500) (9,100-9,500) (9,150-9,550) (9,150-9,550) (9,150-9,550) (9,200-9,600) (9,200-9,600) Malaysian ringgit 3.24 (3.20-3.40) (3.15-3.35) (3.15-3.35) (3.10-3.30) (3.10-3.30) (3.05-3.25) (3.05-3.25) (3.00-3.20) 41.5 41.5 40.5 40.5 39.5 39.5 38.5 38.5 Philippine peso 40.8

(39.0-44.0) (39.0-44.0) (38.0-43.0) (38.0-43.0) (37.0-42.0) (37.0-42.0) (36.0-41.0) (36.0-41.0)

33.0 33.0 33.0 33.0 33.0 33.0 33.0 33.0

Thai baht 33.1

(31.0-35.0) (31.0-35.0) (31.0-35.0) (31.0-35.0) (31.0-35.0) (31.0-35.0) (31.0-35.0) (31.0-35.0) Chinese renminbi 7.20 7.18 7.05 6.93 6.80 6.71 6.63 6.54 6.45 Indian rupee 39.39 (38.0-44.0) (38.0-43.0) (38.0-43.0) (38.0-43.0) (37.0-42.0) (37.0-42.0) (37.0-42.0) (37.0-42.0) Australian dollar 0.89 0.90 0.87 0.85 0.83 0.82 0.82 0.81 0.80 Source: Nomura Singapore, Nomura International (Hong Kong), Nomura Securities’ FERC, Bloomberg

Exhibit 5. Interest rate forecasts

28-Jan-2008 1Q08F 2Q08F 3Q08F 4Q08F 1Q09F 2Q09F 3Q09F 4Q09F Korea (overnight call rate target) 5.00 5.00-5.50 5.00-5.50 5.00-5.50 5.00-5.50 5.00-5.50 5.00-5.50 5.00-5.50 5.00-5.50 Taiwan (overnight call rate) 2.08 2.00-2.30 2.07-2.37 2.13-2.43 2.15-2.55 2.21-2.61 2.28-2.68 2.34-2.74 2.40-2.80 Hong Kong (3-month HIBOR) 2.35 2.00-2.25 2.00-2.25 1.75-2.00 1.75-2.00 2.00-2.25 2.00-2.25 2.25-2.50 2.25-2.50 Singapore (3-month SIBOR) 1.50 1.50-2.00 1.50-2.00 1.50-2.00 1.50-2.00 1.75-2.25 1.75-2.25 1.75-2.25 1.75-2.25 Indonesia (1-month SBI rate target) 8.00 8.00 7.75-8.00 7.75-8.00 7.75-8.00 7.75-8.00 7.75-8.00 7.75-8.00 7.75-8.00 Malaysia (overnight policy rate) 3.50 3.25-3.75 3.25-3.75 3.25-3.75 3.25-3.75 3.25-3.75 3.25-3.75 3.25-3.75 3.25-3.75 Philippines (91D T-bill rate) 4.04 3.50-5.50 3.50-5.50 3.50-5.50 3.50-5.50 3.50-5.50 3.50-5.50 3.50-5.50 3.50-5.50 Thailand (1D repo rate) 3.25 3.25 3.25 3.25-3.50 3.25-3.50 3.25-3.75 3.25-3.75 3.25-3.75 3.25-3.75 China (1Y standard lending rate) 7.47 7.47-8.01 7.47-8.01 7.74-8.28 8.01-8.28 8.01-8.55 8.01-8.55 7.74-8.55 7.74-8.55 India (reverse repo rate) 6.00 6.00 5.75-6.25 5.75-6.25 5.75-6.25 5.75-6.25 5.75-6.25 5.75-6.25 5.75-6.25 Australia (official cash rate) 6.75 7.00 7.00 7.00 7.00 6.75 6.50 6.50 6.50 Note: End of the period figures. Indonesia’s 1-Month SBI rate target is known as the BI (Bank Indonesia) rate

Source: Nomura Singapore, Nomura International (Hong Kong), Nomura Australia, Nomura Securities' FERC

d

Scenario analysis 1 — “mild recession” in the US

Our first scenario analysis is that the US enters a “mild recession”. This assumes the US economy falls on a q-q basis for three consecutive quarters over 9M08F, before recovering to positive growth from 4Q08F. A sharp fall in house prices would lead to lower private consumption and imports, with the Federal Funds rate being cut to around 1.5% to support the economy, since the fiscal stimulus policy may not be enough to get the economy back on track. This level of a slowdown would weaken growth in Europe and Japan, as well as in Latin American economies with strong economic links to the US. We put the probability of this scenario happening at 30%.

These developments affect Asia through the following three main routes:

1) Exports. Asia’s exports would slow, leading to inventory adjustments. Singapore and Malaysia would be the most severely affected by this, since they have the highest export-to-GDP ratios (see Exhibit 6). For most Asian economies, the share of exports to the US over total exports is 10-20% (see Exhibit 7), though this rises to 20-30% if we include indirect exports to the US that go mainly through China, indicating that the US remains a key destination for exports from Asia.

First scenario is that the US enters a “mild recession” — contraction on a q-q basis for the three quarters over 9M08F, before recovering to positive growth from 4Q08F

Three key ways Asia is affected:

1) Slower exports

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Exhibit 6. Exports over GDP (2006)

108.3 107.9 63.0

27.7 40.2 36.9 36.7

56.5 15.2

14.8 7.8

0 20 40 60 80 100 120

Singapore Malaysia Thailand Indonesia Philippines China Korea Taiwan India Japan US

(%)

Note: Only domestic exports are accounted for in the case of Singapore Source: CEIC, Nomura International (Hong Kong) Limited

Exhibit 7. Export destination

To

China Korea Taiwan Singapore Malaysia Thailand Indonesia Philippines US Japan EU Others Total China N/A 5.5 2.5 2.8 1.7 1.2 1.2 0.7 25.0 11.3 22.4 25.8 100 Korea 27.2 N/A 4.0 2.9 1.6 1.3 1.5 1.2 13.3 8.2 12.5 26.4 100 Taiwan 41.8 3.4 N/A 4.4 2.3 2.1 1.2 2.1 15.2 7.6 10.4 9.5 100 Singapore 19.9 3.2 3.5 N/A 13.1 4.2 3.7 1.9 9.9 5.5 11.9 23.3 100 From Malaysia 12.0 3.6 2.7 15.4 N/A 5.3 2.5 1.3 18.8 8.8 12.1 17.4 100 Thailand 14.5 2.0 2.6 6.4 5.1 N/A 2.6 2.0 15.0 12.7 13.0 24.1 100 Indonesia 10.0 7.6 2.7 8.9 4.1 2.7 N/A 1.4 11.1 21.6 11.4 18.5 100 India 9.9 1.9 0.7 5.0 1.1 1.1 1.5 0.5 15.4 2.3 14.2 46.4 100 Philippines 17.5 3.0 4.2 7.3 5.5 2.8 0.8 N/A 18.2 16.3 18.0 6.5 100 Source: CEIC, Nomura International (Hong Kong) Limited

That said, we think the effects of a slowdown in exports would be smaller than during the 2000-01 slowdown in the US, when Asia saw significant declines in exports. In this case, the US does not have as much inventory on hand as it did in 2000, and exports to the US from Asia have already decelerated in 2007.

2) Investments. A more severe slowdown in the US would raise the question of global overcapacity, and companies in Asia would likely become more cautious with their investments. This would weaken capital goods exports from Asia, hurting especially the economies of Korea, Taiwan and Singapore.

3) Private consumption. Lower or subdued stock prices would hurt private consumption, especially in Singapore and Hong Kong, which would also be hurt by reduced

transaction volumes in financial markets.

Asian GDP growth outlook. Compared to our main scenario, this scenario suggests that the combined real GDP growth of “Asian economies” will be around 2pp lower, as the projected global slowdown hurts exports and private investment. Private

consumption should hold up well. Of the individual economies, we expect Singapore, Malaysia and Taiwan to be hit quite hard by a mild US recession, given their high export dependency, relatively high per-capita incomes and relatively large capital markets. However, even under this mild recession scenario, we would expect China and India to maintain relatively high 2008F growth rates of 8.3% and 8.2%,

respectively. Domestic demand, especially private consumption and infrastructure spending, would stay relatively solid. Consumption would be supported by the fact that per-capita income is still lower than in most Asian economies, meaning spending on necessities would not be hurt too much by weaker consumer sentiment. Such strong growth in these two economic powers would effectively anchor Asian growth.

2) Lower investment spending

3) Decelerating private consumption

Strong growth in China and India would anchor Asian growth

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Australia would be affected even less by a mild US recession, on our numbers, with growth falling by only 0.3pp to 3.3%. The economy would be supported by relatively solid commodity prices, even if the world economy slows. Indonesia and the Philippines would also be less vulnerable to a US downturn, due to the relatively limited exposure to exports, and lower per-capita income reducing the impact from weaker consumption.

In terms of policy responses to weakness, we think fiscal policy would be the most effective. The economies that could implement aggressive fiscal policies are China, India, Korea, Malaysia and Thailand (we note that the Philippines announced a stimulus package to support private consumption in January). Korea’s new president would be likely to move fast, together with the Parliament. However, Indonesia’s weaker fiscal condition would hamper efforts at a stimulus package. Any packages in Singapore may not work as fully intended — new construction projects would see more foreign workers hired and the consumption of more imported materials, and income tax cuts or other transfer programmes may just boost savings rather than spending.

On the other hand, the effectiveness of monetary policies should be limited in Asia, except in Korea and India, as there is already abundant liquidity in other markets. Also, moderately rising inflationary pressure could make it difficult for central banks in Asia to lower interest rates, because inflationary pressure, especially that emanating from higher food prices, would not recede, even if the US went into recession.

Asian currency outlook. In a mild recession scenario, the direction of the currencies against the US dollar would vary, with the renminbi, Korean won and Taiwan dollar the most likely to rise. China would still have huge trade account surpluses under this scenario (albeit lower than under the base-case scenario), meaning there would still be pressure from the US and the EU for it to revalue its currency (especially if a mild recession lead to more protectionist sentiment in the US). The Korean won and Taiwan dollar would likely be influenced by moves in the yen, which as in the base case, might come under pressure to appreciate owing to a narrower interest rate gap between the US dollar and the yen.

Most Asean central banks could move rather opportunistically. Slowing exports would result in a natural move towards depreciation — these central banks may then leave the exchange rate to the market, effectively allowing depreciation, which would be good for export competitiveness. However, things would be tougher in Singapore, where the authorities maintain a currency basket-based exchange rate system. As the currencies of its major trading partners (China, Europe and Japan) would rise against the US dollar, the Singapore dollar would come under pressure to follow. But to maintain export competitiveness, we expect the Monetary Authority of Singapore would shift the S$NEER band to keep the Singapore dollar fairly steady.

e

Scenario analysis 2 — “deep recession” in the US

Our second scenario analysis is that the US enters a “deep recession”. This assumes housing prices fall substantially, consumer sentiment is severely damaged, and even low-risk borrowers, corporations and/or consumers are sometimes unable to obtain credit for normal economic activities due to a credit crunch. This scenario assumes the US economy sees negative q-q growth for five consecutive quarters from 1Q08F, with the first three quarters seeing growth below -2% on an annualised q-q basis, and the economy beginning to recover only moderately from 2Q09F. We put the probability of this scenario at 10%.

Fiscal policy would be the most effective policy response

Direction of the currencies against the US dollar would vary

Second scenario is that the US enters a “deep recession” — contraction on a q-q basis for five quarters from 1Q08F, before recovering to moderate growth from 2Q09F

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The rest of the world would be affected significantly, with even commodity prices hit hard, hurting economies relying on export commodities and natural resources. Overall world trade should also shrink. The impact on Asian economies would be the same as in the first scenario (slower exports, and weaker investment and consumption), except more severe. While the response would be more aggressive fiscal and monetary policies, we would still expect regional economies to see low growth for both 2008F and 2009F.

Again, the economies that would be hurt most would be Singapore, Taiwan and Malaysia, with the first two seeing growth fall close to zero. China and India would also be hurt, but due to the higher level of potential growth rates and the expected fiscal stimulus policies, growth in these two economies would likely still be in the mid-7%

range, suggesting these two could still support growth across the region.

Exhibit 8. Direction of currencies

Currency Base case Mild recession Deep recession

China Up Up Up

Hong Kong Pegged Pegged Pegged

Taiwan Moves in the range Up Up

Korea Moves in the range Up Up

Singapore Up Stable Down

Malaysia Up Down Down

Thailand Up Down Down

Indonesia Stable Down Down

Philippines Up Down Down

India Up Stable Down

Australia Up Up Stable-down

Source: Nomura International (Hong Kong) Limited

Exhibit 9. Direction of interest rates

Economy Base case Mild recession Deep recession

China Higher Lower Lower

Hong Kong Lower Lower Lower

Taiwan Higher Lower Lower

Korea Higher Lower Lower

Singapore Stable Lower Lower

Malaysia Stable Lower Lower

Thailand Higher Lower Lower

Indonesia Stable Lower Lower

Philippines Stable Lower Lower

India Stable Lower Lower

Australia Higher Higher Lower

Source: Nomura International (Hong Kong) Limited

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Exhibit 10. GDP growth forecasts for Asia under different assumptions

Difference from Difference from Base case Mild recession Deep recession base case (B-A) base case (C-A)

(% y-y) 2007 2008F (A) 2008F (B) 2008F (C) (pp) (pp)

Real GDP growth rate

Asian NIEs 5.5 4.9 2.7 1.7 (2.2) (3.2)

Korea 4.9 4.9 3.1 2.2 (1.8) (2.7)

Taiwan 5.9 4.0 1.4 0.3 (2.6) (3.7)

Hong Kong 6.1 5.5 3.7 3.0 (1.8) (2.5)

Singapore 7.5 6.6 2.2 0.5 (4.4) (6.1)

Asean4 5.9 5.6 4.2 3.2 (1.4) (2.3)

Indonesia 6.3 6.2 4.9 4.2 (1.3) (2.0)

Malaysia 6.1 5.4 3.4 1.7 (2.0) (3.7)

Philippines 7.3 5.3 4.4 3.6 (0.9) (1.7)

Thailand 4.5 4.8 3.5 2.5 (1.3) (2.3)

China 11.4 10.1 8.3 7.4 (1.8) (2.7)

Above total 8.4 7.5 5.6 4.6 (1.9) (2.8)

Asian NIEs + Asean4 5.6 5.1 3.2 2.2 (1.9) (2.9)

India 9.0 8.9 8.2 7.5 (0.8) (1.5)

Australia 3.9 3.5 3.3 2.5 (0.3) (1.0)

(% y-y) 2009F (A) 2009F (B) 2009F (C)

Real GDP growth rate

Asian NIEs 5.0 3.8 2.1 (1.2) (2.9)

Korea 5.0 3.8 2.4 (1.2) (2.6)

Taiwan 4.9 3.1 0.4 (1.8) (4.5)

Hong Kong 4.8 4.4 3.7 (0.4) (1.1)

Singapore 5.2 4.5 2.3 (0.7) (2.9)

Asean4 5.3 4.8 4.0 (0.6) (1.4)

Indonesia 5.5 5.2 4.9 (0.3) (0.6)

Malaysia 5.2 4.2 3.3 (1.0) (1.9)

Philippines 5.6 4.8 3.6 (0.8) (2.0)

Thailand 5.0 4.4 3.3 (0.6) (1.8)

China 8.7 8.5 7.9 (0.2) (0.8)

Above total 6.8 6.2 5.1 (0.6) (1.6)

Asian NIEs + Asean4 5.1 4.1 2.7 (1.0) (2.4)

India 9.3 8.7 7.6 (0.6) (1.7)

Australia 3.2 2.7 2.0 (0.5) (1.2)

Note: Figures for India are on fiscal year (April-March) basis.

Source: Nomura

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Exhibit 11. Private consumption growth forecasts for Asia under different assumptions

(% y-y) 2007 2008F (A) 2008F (B) 2008F (C) (pp) (pp)

Real private consumption growth

Asian NIEs 4.4 4.5 3.6 3.0 (1.0) (1.5)

Korea 4.4 5.0 4.0 3.5 (1.0) (1.5)

Taiwan 2.6 3.0 2.4 2.1 (0.6) (0.9)

Hong Kong 7.8 5.7 4.3 3.4 (1.4) (2.3)

Singapore 4.6 3.9 2.9 2.3 (1.0) (1.6)

Asean4 5.3 4.7 3.9 3.6 (0.8) (1.1)

Indonesia 4.9 4.8 4.1 3.8 (0.7) (1.0)

Malaysia 10.6 5.8 4.6 4.1 (1.2) (1.7)

Philippines 6.0 5.4 4.3 3.8 (1.1) (1.6)

Thailand 1.6 3.5 3.0 2.8 (0.5) (0.7)

China 11.9 13.3 12.0 11.3 (1.3) (2.0)

Above total 8.1 8.7 7.6 7.0 (1.1) (1.7)

Asian NIEs + Asean4 4.7 4.6 3.7 3.2 (0.9) (1.4)

India 6.3 6.5 5.9 5.5 (0.7) (1.0)

Australia 4.0 3.5 3.3 2.5 (0.3) (1.0)

(% y-y) 2009F (A) 2009F (B) 2009F (C)

Real private consumption growth

Asian NIEs 4.6 4.1 3.2 (0.5) (1.4)

Korea 5.0 4.5 3.5 (0.5) (1.5)

Taiwan 3.5 3.2 2.5 (0.4) (1.1)

Hong Kong 4.4 3.9 2.9 (0.5) (1.5)

Singapore 5.2 4.6 4.2 (0.7) (1.0)

Asean4 5.0 4.5 4.0 (0.4) (1.0)

Indonesia 5.1 4.7 4.1 (0.4) (1.0)

Malaysia 5.7 5.2 4.9 (0.6) (0.9)

Philippines 5.3 4.8 3.7 (0.5) (1.6)

Thailand 4.0 3.7 3.2 (0.3) (0.8)

China 11.5 11.0 10.5 (0.5) (1.0)

Above total 7.9 7.4 6.8 (0.5) (1.1)

Asian NIEs + Asean4 4.7 4.3 3.5 (0.5) (1.2)

India 6.0 5.7 5.1 (0.3) (0.9)

Australia 3.0 2.7 2.2 (0.3) (0.8)

Source: Nomura

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Exhibit 12. Gross fixed capital formation forecasts for Asia under different assumptions

(% y-y) 2007 2008F (A) 2008F (B) 2008F (C) (pp) (pp)

Real gross fixed capital formation growth rate

Asian NIEs 5.3 5.6 4.1 3.0 (1.6) (2.6)

Korea 4.1 6.4 4.5 3.2 (1.9) (3.2)

Taiwan 3.0 2.5 1.6 1.0 (0.9) (1.5)

Hong Kong 4.9 3.9 3.5 3.1 (0.4) (0.8)

Singapore 18.1 12.5 9.4 7.5 (3.1) (5.0)

Asean4 6.8 10.3 8.8 8.2 (1.5) (2.2)

Indonesia 8.4 12.9 11.0 10.3 (1.9) (2.6)

Malaysia 9.0 6.6 5.6 4.6 (1.0) (2.0)

Philippines 9.5 8.0 7.0 6.7 (1.0) (1.3)

Thailand 2.4 10.2 8.7 8.2 (1.5) (2.0)

China 14.1 13.1 10.5 8.5 (2.6) (4.6)

Above total 9.7 10.0 7.9 6.5 (2.1) (3.5)

Asian NIEs + Asean4 5.8 7.2 5.6 4.7 (1.6) (2.5)

India 14.0 15.0 12.0 10.5 (3.0) (4.5)

Australia 8.4 6.6 5.0 4.0 (1.6) (2.6)

(% y-y) 2009F (A) 2009F (B) 2009F (C)

Real gross fixed capital formation growth rate

Asian NIEs 6.5 6.5 5.2 0.0 (1.3)

Korea 7.3 7.7 6.4 0.4 (0.8)

Taiwan 5.4 4.9 2.7 (0.5) (2.7)

Hong Kong 5.6 5.3 4.8 (0.3) (0.8)

Singapore 6.4 5.8 5.5 (0.5) (0.8)

Asean4 7.6 7.2 7.4 (0.4) (0.2)

Indonesia 8.6 8.2 9.8 (0.4) 1.2

Malaysia 5.5 5.2 4.9 (0.3) (0.5)

Philippines 6.8 6.5 5.5 (0.3) (1.4)

Thailand 8.0 7.6 6.4 (0.4) (1.6)

China 10.2 9.5 9.1 (0.7) (1.1)

Above total 8.4 8.1 7.4 (0.4) (1.0)

Asian NIEs + Asean4 6.9 6.8 6.0 (0.1) (0.9)

India 15.0 15.2 12.0 0.2 (3.0)

Australia 5.0 3.0 2.0 (2.0) (3.0)

Source: Nomura

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Overview charts — 1

Exhibit 13. Real GDP growth rates for Northeast Asia Exhibit 14. Real GDP growth rates for Asean5

(5) 0 5 10 15

99 00 01 02 03 04 05 06 07

China Korea

Taiwan Hong Kong

Japan (% y-y)

(10) (5) 0 5 10 15

99 00 01 02 03 04 05 06 07

Philippines Singapore Malaysia Thailand Indonesia

(% y-y)

Source: CEIC, Nomura International (Hong Kong) Limited Source: CEIC, Nomura International (Hong Kong) Limited

Exhibit 15. Recent export performance in Asian economies

China Taiwan Korea Singapore Malaysia Thailand Indonesia Philippines India Japan Total exports (US$, % y-y)

Oct-06 29.4 5.3 10.5 4.2 (0.9) 19.7 9.6 15.8 13.7 8.0 Nov-06 32.7 8.0 18.5 12.7 22.8 20.3 29.5 11.0 34.3 13.1

Dec-06 24.8 8.5 12.3 (7.1) 12.9 18.5 18.3 (3.6) 12.7 11.1 Jan-07 33.3 17.3 20.8 16.5 19.1 17.6 10.1 12.8 19.0 13.9

Feb-07 51.7 (3.8) 10.3 (7.4) 3.6 17.7 10.8 7.8 16.1 7.4 Mar-07 6.9 10.1 13.2 5.0 1.4 16.6 20.9 7.3 11.3 10.3

Apr-07 26.6 5.2 17.0 10.4 7.5 18.2 16.6 5.1 28.1 6.7

May-07 28.7 3.7 11.1 2.9 9.5 18.0 17.2 6.1 21.9 6.3

Jun-07 27.0 11.2 14.5 0.1 6.3 17.7 13.0 1.5 14.1 8.5 Jul-07 34.1 8.1 17.2 11.0 6.5 6.3 13.0 4.3 18.5 6.3

Aug-07 22.7 10.5 13.6 6.6 6.3 17.9 7.7 (4.0) 18.9 13.6

Sep-07 22.8 11.3 (1.1) 9.4 7.8 10.4 7.6 4.6 19.3 8.3

Oct-07 22.2 14.9 22.9 22.5 24.3 26.7 17.6 10.5 35.6 16.7 Nov-07 22.7 12.8 17.1 13.2 14.7 24.4 10.0 (2.0) 26.8 15.7 Dec-07 21.6 19.8 15.5 N/A N/A N/A N/A N/A N/A N/A Electronics exports (US$, % y-y)

Oct-06 25.9 7.3 10.7 4.4 (3.4) 23.1 (10.8) 9.4 18.7 3.8 Nov-06 31.9 6.2 13.3 (0.1) 13.4 22.3 4.9 2.7 52.1 7.1 Dec-06 16.8 6.5 9.9 (12.2) 7.2 15.6 (10.4) (12.1) 14.6 6.9

Jan-07 34.5 6.6 13.9 8.6 16.4 8.6 9.3 20.6 35.7 8.6

Feb-07 29.2 (7.1) 7.7 (11.5) 0.7 20.9 (1.8) 6.3 38.0 2.4 Mar-07 16.1 7.5 7.3 (12.1) (6.7) 21.2 10.1 8.7 10.7 9.6

Apr-07 17.1 2.2 8.1 (4.6) (5.5) 13.4 12.8 1.2 20.4 0.5 May-07 19.6 0.9 3.2 (11.6) 4.1 15.7 7.6 11.8 17.9 1.2

Jun-07 19.6 8.5 7.8 (8.5) (5.5) 14.9 (21.0) (1.7) 1.9 0.3 Jul-07 27.2 8.9 17.5 (4.1) (2.8) 14.6 8.8 5.1 25.7 (0.3)

Aug-07 23.3 8.6 11.7 2.9 0.4 12.5 (8.1) (4.0) N/A 7.6

Sep-07 22.3 9.4 (2.2) (4.2) (1.1) 8.0 (9.5) (0.2) N/A 4.2

Oct-07 24.2 12.3 19.1 (0.5) 9.4 13.1 N/A 9.4 N/A 7.7

Nov-07 19.2 12.6 N/A (1.2) 7.7 10.1 N/A (4.5) N/A 8.4

Dec-07 N/A 10.9 N/A N/A N/A N/A N/A N/A N/A N/A

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Overview charts — 2

Exhibit 16. Oil prices and Asia’s CPI inflation rate Exhibit 17. CPI inflation rate in Northeast Asia

0 1 2 3 4 5 6

00 01 02 03 04 05 06 07 08

0 10 20 30 40 50 60 70 80 90 Asean + Asian NIEs' CPI (LHS) 100

Oil Price (Dubai) (RHS)

(% y-y) (US$/barrel)

(8) (4) 0 4 8 12 16

96 97 98 99 00 01 02 03 04 05 06 07

Korea Taiwan

Hong Kong China Japan

(% y-y)

Note: CPI calculated using nominal GDP weightings in 2004 Source: CEIC, Nomura International (Hong Kong) Limited

Exhibit 18. CPI inflation rate in Asean4 Exhibit 19. CPI inflation in Indonesia

(4) 0 4 8 12 16

96 97 98 99 00 01 02 03 04 05 06 07

Malaysia Thailand

Philippines Singapore

(% y-y)

(10) 0 10 20 30 40 50 60 70 80 90

96 97 98 99 00 01 02 03 04 05 06 07

(% y-y)

Exhibit 20. Current account to GDP ratio in Asean economies

Exhibit 21. Current account to GDP ratio in Northeast Asia

(20) (10) 0 10 20 30 40

96 97 98 99 00 01 02 03 04 05 06 07

Singapore Malaysia

Thailand Indonesia

Philippines (% GDP)

(10) (5) 0 5 10 15 20

96 97 98 99 00 01 02 03 04 05 06 07

Hong Kong Korea

India Taiwan

(% GDP)

Target risks

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d

e

f

Contents

Asia under US recession scenarios

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d

e

Overview charts — 1

Overview charts — 2