Policy, Commodity Prices and Currencies
June 06, 2008
By Stephen Jen | London
Summary and Conclusions
I believe that the recent rhetoric by US officials – both Treasury Secretary Paulson and Fed Chairman Bernanke – is important, not just for the dollar against other G10 currencies, but also possibly for oil and some other commodity prices. Additionally, if commodity/oil prices are indeed capped by a falling EUR/USD, the USD’s rally could be much more broad-based than many may realise. Could the ECB’s 10th anniversary mark the peak in the EUR? Some Thoughts on Recent US Comments on the USD My colleagues (Sophia Drossos, Dick Berner and David Greenlaw) have all commented on Fed Chairman Bernanke’s explicit reference to the dollar in his speech on June 3, 2008. Here are some thoughts I have to add to this discussion: 1. Chairman Bernanke emphasised the costs of a weak dollar rather than its benefits; this is a dramatic shift in Fed policy. Throughout the rate cut cycle, the Fed, not just the chairman, has consistently highlighted net exports as being the only bright spot in the economy. While I believe that much of this outperformance in exports was due to strong external demand, just as German and Japanese exports have also remained strong, despite strong currencies, many Fed officials have credited the role of the weak USD, without proof – an opinion I have never found convincing. In any case, in this speech, Chairman Bernanke shifted the focus from the benefits of a weak USD (strong exports) to the costs of a weak dollar (high imported inflation and rising commodity prices). At a minimum, this implies that the Fed has no intention of cutting the FFR below 2.00% – consistent with the view of our US economists. Firming up the floor in the FFR should, all else equal, be positive for the dollar. 2. Secretary Paulson’s visit to the Middle East last weekend was a dollar-positive event. Chairman Bernanke’s comments on the USD should be seen in conjunction with Treasury Secretary Paulson’s visit to the GCC countries (Saudi Arabia, the UAE and Qatar). Secretary Paulson extracted an unconditional endorsement from Saudi Arabia and a conditional one from the UAE for the dollar pegs. Secretary Paulson said that this is a “sovereign decision”, stressing that the US Treasury would not pressure the GCC one way or another on the pegs. But this, from one perspective, is inconsistent with the US Treasury’s policy toward China’s currency regime. The Treasury’s stance toward China was far from ‘benign neglect’, in my view. Incidentally, the collective C/A surplus of the GCC (above US$500 billion) is on track to exceed China’s this year. Also, at current oil prices, the GCC could have a collective C/A surplus as large as 80% of the US C/A deficit, which continues to shrink. For the US to have such a soft stance on the GCC, despite their large C/A deficit, there might be a USD objective. (Having said this, it’s important to note that the GCC are much smaller in size (population and economy) than China. Currency movements could in theory induce ‘expenditure switching’ as the country with the strengthening currency effectively switches from exports to imports. But with the GCC economies so small, no matter how much their currencies strengthen, it would be virtually impossible to eliminate their C/A surplus. China is different, at least in theory.) 3. Joint interventions may not be necessary to engineer a turn in the USD. I have made the point that, since the breaking up of the Bretton Woods System in 1973, without exception, every turning point after multi-year moves in the major USD index has been accompanied by coordinated interventions. Thus, for the USD to turn, I have, for a while, been looking for outright joint interventions. While this may still happen, there is also the possibility that the world has changed and the FX markets are now so big (US$3.1 trillion in daily turnovers) that coordinated interventions may no longer work, and verbal interventions and other means, such as what Secretary Paulson achieved in the Middle East, may be more effective. The point here is that the G2 may be trying to engineer a turn in the USD without a joint intervention. 4. The Fed and the ECB remain key for future movements in EUR/USD. While the market has responded to the recent rhetoric from US officials, the decline in EUR/USD has been relatively modest, and it remains in a range of 1.52-1.60 since late February. Whether the dollar appreciates further, in my view, depends to a large extent on the evolution of the policy rates in the G10. I think that the Fed cannot ease further if the dollar is now a concern. Further dollar appreciation requires (i) a slowdown in Euroland and/or (ii) a recovery in the US that will make it possible for the Fed to contemplate rate hikes. At the ECB’s press conference earlier today, President Trichet’s tone was hawkish. We have had round-table discussions in the past couple of weeks. When the possibility of further ECB rate hikes was raised, it was summarily rejected by every client at these roundtables. I am not as confident as our investors and believe that an ECB rate hike cannot be completely ruled out. The key point here is that verbal interventions can augment and accentuate currency movements that are consistent with the underlying monetary and economic paths, but not reverse them. 5. Other considerations favour the dollar, even in the absence of the recent US rhetoric. Before this round of verbal intervention, we already had the view that the USD should eventually reassert itself. Regular readers should know our basic argument. But just as an update, the US C/A deficit continues to shrink and could reach 4.5% of GDP by year-end, down from 6.7% in 4Q05. At the same time, the USD is very undervalued. EUR/USD’s median fair value, according to our valuation framework, is 1.24. Impact on Oil and Other Commodity Prices The direct impact of the latest round of verbal interventions on the USD may be well-recognised. However, I believe that the more important implication is that a determined USD rally could cap the rise in crude oil. As we have argued in the past, the dollar’s weakness has helped to propel oil prices higher, through both the numeraire effect and speculative activities. In turn, high dollar prices of oil conveyed the impression that inflation is higher than it was, and much of the rest of the world has reacted with a more hawkish monetary stance. The resulting yield differential further depressed the dollar, setting off another round of this vicious circle. I believe that the dollar has grossly undershot, and suspect that oil has overshot. If the bottom in the USD indeed coincided with the top in oil and other commodity prices, then all the commodity-exporting currencies should suffer. In earlier notes (see DEFCON-3 on Some Emerging Market Currencies, May 15, 2008 and Four Fall-Lines of Dominos: An Ordinal Ranking, May 1, 2008), we ranked currencies according to the net trade position in commodities. On this measure, CLP, NOK, AUD, NZD, ZAR, TRY and ARS look vulnerable. Clearly, a stabilisation or a correction in general commodity prices would have much broader implications beyond the currency markets. AXJ Currencies Are Vulnerable I still believe that the risks to USD/AXJ are biased to the upside. For much of the past two years, AXJ currencies rallied against the dollar, propelled by strong economic fundamentals. However, I suspect that, in coming months, AXJ currencies will have a much more difficult time against the dollar. In Dollar Smirks in Asia (May 1, 2008), I argued that, when pressed, Asia would always choose to protect growth rather than stabilise inflation. The stagflationary conditions would be particularly challenging for the AXJ and other EM policymakers. First, inflation targeting, as a regime, will be stress-tested and many EM central banks will not pass this test. Inflation targeting (IT) has attained a ‘politically correct’ status. Other models of monetary policies – including the dual mandate framework of the Fed – are considered unorthodox, and the general view is that it will be only a matter of time until most central banks adopt IT. I remain skeptical, and believe that IT will be severely stress-tested in the period ahead, and the first breakage will occur in EM. Many EM economies have 30-50% of their CPI weights in food and energy. If most of the inflationary pressures in these categories are global in nature, it would not be credible if EM central banks were to tell the world that they will drive the non-food non-energy sectors into a recession just to offset international inflation in commodities? As I have argued in the past, when pushed, AXJ and many other EM economies will almost always choose to protect growth rather than inflation. This could either mean that the policymakers no longer welcome currency appreciation, and/or the monetary authorities have a ‘moratorium’ on IT, just as the ECB has looked the other way on its M3 growth target. This ‘forgive-but-not-forget’ stance on the M3 growth target would jeopardize EM central banks’ credibility. I don’t believe that their currencies will be rewarded. Second, the partial and gradual removal of energy and food subsidies will lead to more persistent stagflationary pressures in the EM economies, but would be ‘Goldilocksy’ for the developed economies. We first made this point in Enjoy the Energy Subsidies While You Can (May 22, 2008). This process also shifts the balance in favour of the developed currencies and against the EM currencies. Third, a generalised recovery in the USD against the majors, as discussed above, will likely spill over to also affect the likes of USD/CNY and USD/SGD and, in turn, the rest of USD/AXJ. Some AXJ currencies will rally on some days and weaken on others in the near future. My point is that the structural downtrend in USD/AXJ will be interrupted in the coming weeks. With the negative carry in most cases, such positions are no longer interesting. Bottom Line Verbal interventions by Secretary Paulson and Chairman Bernanke have direct implications for the dollar, but also indirect – and possibly more powerful – USD implications through commodity prices. We continue to believe that the USD will reassert itself, but the process will be hesitant and asynchronous against different currencies. But the latest developments suggest that such a USD recovery could become more broad-based, as some commodity exporters’ currencies and AXJ currencies are becoming vulnerable against the dollar.
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No Need to Panic
June 06, 2008
By Sharon Lam | Hong Kong
Summary and Conclusions As we had expected, Korea has proven to be defensive against the US slowdown, as its export growth reaccelerated to +21% during the first five months of this year, up from +14% in 2007. Yet, recent concerns over inflation and oil prices are causing investors to turn skeptical about Korea again. Its net oil-importing position is also stirring up worries over its GDP growth this year. We have been relatively positive on the Korean economy as indicated in our above-consensus GDP forecasts, but are we too bullish? We do agree that inflation is on the upside, and we are raising our 2008 CPI forecast from 3% to 4.3%. Nevertheless, we expect inflation to peak in 3Q due to a slightly stronger KRW at 1,000 going forward, peaking but not slowing crude oil prices, slower food price hikes and on top of that a higher base effect from a year ago. We expect inflation to be above 5% in 3Q, and ease to the 4% area in 4Q before it falls to within the Bank of Korea’s inflation target range of 2.5-3.5% in 1Q09. Consequently, we are changing our interest rate call from rate cuts in 2H08 to be delayed until 1H09. We see a very low possibility of rate hikes, as Korea is still maintaining a positive real interest rate while it has room on the fiscal side to help fight inflation, such as subsidies if it needs to. Not everyone is hurt by the recent round of inflation. Consumers are no doubt the losers, but Korea’s food & beverage (F&B) producers have very strong pricing power, while certain exporters are benefiting from high oil prices through exporting to oil wealth markets. We fine-tuned our economic forecasts to reflect lower consumption growth but an upside surprise on export volume. We are lowering our 2008 GDP forecasts marginally from 4.9% to 4.7%, which is still above consensus forecast of 4.4%, and keeping 2009 forecast unchanged at 5.3%. How Does Korea Manage to Keep Inflation Relatively Well Contained Even Though it Is a Net Oil Importer? Latest consumer inflation in Korea registered a seven-year high at 4.9% in May, certainly very unpleasant data. No doubt, we are all concerned about inflation in the region; yet, I think it is unfair to be more bearish on Korea when the situation is, in fact, relatively well contained. On a year-to-date basis, Korea’s inflation rate is at 4.1%, making it the third-lowest in the region after Malaysia and Taiwan. On a cumulative basis since 2003 (when the current oil boom started), Korea’s inflation has risen 17%, which is also below the regional average of 22%. How does Korea manage to keep inflation under control amid high-flying oil prices? Currency appreciation helped in the last three years and, most importantly, the structure of Korea’s retail gasoline price makes Korea’s CPI relatively insensitive to changes in international oil prices. The tax burden accounts for 50% of the total retail gasoline price. If crude price rises 10% from the current level (Dubai at US$123/bbl), the retail gasoline price in Korea will rise 5.65%, assuming the same exchange rate, so the retail price elasticity is around 0.57, i.e., less than proportionate. Yet, now the question is how will the KRW depreciation exacerbate the inflationary pressure? First, the impact of currency on CPI is not too significant. Based on a regression run using currency, oil price and wage growth against CPI (R2=0.91), we find that every 1% depreciation in KRW will hike CPI by 0.1%. Second, we do not expect the KRW to depreciate further from here, as we forecast current account deficit to narrow in 2H08. Korea’s current account is affected by seasonality: January/February usually see deficits as Chinese New Year slows down exports yet increases imports for festive demand, while March-May sees huge outflow on dividend payments (captured in current account’s income balance) to foreign investors. Korea normally imports almost an equal amount of crude oil in volume terms between 1H and 2H of the year. In our base case scenario where crude oil averages US$125/bbl in 2H08, up from a possible US$105/bbl in 1H08, this will hike Korea’s import by US$8 billion; yet, it will be offset by seasonally high export sales in 4Q and no dividend outflow in 2H. Therefore, we expect the 2H08 current account deficit to narrow to US$4 billion from a possible US$8 billion in 1H08, and thereby help the KRW to stabilize. Most importantly, because this inflationary pressure is mainly coming from the external side, we believe that the authorities will not tolerate the KRW to depreciate further. On top of this, the delayed rate cut expectation and, to a certain extent, market speculation regarding rate hikes will also help to reverse the recent sharp depreciation in the KRW. We expect USD/KRW to average 1,000 for the rest of this year, which is still a level supportive enough for its exporters. Due to its high tax burden in retail gasoline prices and our expectation that the KRW will appreciate mildly from its current level, we therefore do not expect the crude oil price increase to cause Korea’s inflation to spin out of control unless oil prices exceed US$150/bbl and remain there or above. Food Inflation in Korea Is Caused by Aggressive Pricing Power by Domestic Food & Beverage Producers We believe that rising global food prices should not have hit Korea too much since food imports only account for 1% of Korea’s GDP, and it is quite self-sufficient in its agricultural supply. Yet, we were puzzled to see that food and eating out contributed 25% to Korea’s consumer inflation in May, or 20% on a year-to-date basis. We found that food price increases in Korea are more reflective of domestic pricing power by agricultural suppliers and food manufacturers. First, by looking at price changes of major food items, the items that have increased the most were actually not import items. So far this year, prices of vegetables and potatoes have skyrocketed, and they accounted for approximately 2% in the CPI basket. Yet, Korea does not rely on imports of these items. Without any severe bad weather to disrupt supply in Korea in the last few months, the price increase in this local produce means pricing power for the farmers. We were initially worried that the price growth of grains in the international market could hurt Korea as it relies on imports of grains. Prices of rice and barley in Korea, however, have not seen any major increases, perhaps because grain prices in Korea are already much higher than international prices. Leveraging on heated concerns over global ‘agriflation’, Korea’s food manufacturers have responded quickly by raising their product prices when in fact the production cost has not risen that much. Certainly, some producers are more affected than others, such as those that rely on vegetable oil and wheat flour imports; yet, the price hike in consumer F&B products are across the board and by more than enough. This is evident in the negative agricultural price growth for producers (-3.4% YTD) but positive price growth for manufactured food & beverage products (+5.6% YTD). Restaurants are also marking up menu prices quickly to reflect the rising cost of ingredients. This certainly hurts consumers’ spending power, particularly among the lowest income groups, and represents a wealth transfer from consumers to F&B producers. However, since most manufacturers increased their product prices at the start of the year even before any significant increase in input cost from agricultural prices, we believe that further upside on food prices could be rather limited in the near term. Demand Push Inflation Is Also Not Apparent in Korea Double-digit money supply growth is cited as another indication of higher inflation ahead. Korea’s M2 growth has risen more than 10%Y since September 2006. The latest reading came at +13.1% in March, down from +14.3% in February, but still strong. The increase in money supply can be attributed to credit growth that has accelerated since 4Q06; yet, a look at the breakdown prompts us to believe that this credit growth should not be causing too much inflationary pressure. The pick-up in loan growth since 2006 was concentrated in corporate loans. This is because Korea’s capex has been disciplined despite strong demand, and resulted in tight capacity as evident in capacity utilization rate hovering around its historical high. Therefore, the increase in corporate loan growth and the subsequent increase in capex should, in fact, be seen as dis-inflationary, in our view. On the other hand, non-mortgage household credit growth has not seen any upside, while mortgage loan growth has slowed since the beginning of 2007 until signs of a mild bottoming out started to show recently. There was asset price inflationary pressure during 2006-07, but such pressure is not as big now, as the anti-speculation measures implemented by the previous government have taken a toll on property investment. Although we have seen slight upside in property prices this year, we believe that another round of prices heating up is not likely unless there is a dramatic change in policies along with an influx of capital. Meanwhile, inflation driven by too much consumer spending is also apparently not significant in Korea. In fact, year-to-date inflation in the non-food and energy-related sectors is tamer than overall inflation, except in the case of education, where persistently strong demand for private tuition keeps driving up prices. Revising our Inflation Forecasts In our base case scenario, we forecast Dubai crude oil to average US$130/bbl in 3Q and ease to US$120/bbl going forward. We expect the KRW to be at 1,000 against USD for the aforementioned reasons, and food prices to rise 0.3% every month, which is in line with the average growth in 2007. In our base case scenario, Korea’s CPI growth will exceed 5% in 3Q but decline to the 4% area in 4Q08 and down to within the central bank’s target range in 1Q09, which then will provide room for rate cuts. 2008 CPI growth is expected to average 4.3%. We also draw two risk cases, both to the upside in inflation. Risk case 1 represents a gradual increase in crude oil prices to reach US$150/bbl in 1Q09, and risk case 2 incorporates a huge jump in crude prices to US$150/bbl immediately while the KRW also depreciates. Under both scenarios, we do not anticipate any rate cuts in the foreseeable future. We believe that our forecasts are cautious enough, and we should remind investors that there are also equally likely downside risks, as oil prices could decline on any reversal in speculation activities or overestimated demand strength. Redefining Korea’s Growth Sensitivity to Oil Prices Korea imports roughly 800 million barrels of crude oil each year, making it the fifth-largest net importer of oil in the world. Korea imports mainly Dubai crude oil, and every US$10 increase in crude oil prices will cut Korea’s nominal GDP growth by 0.8ppt by raising imports, holding other factors constant. Yet, other factors are not constant. In particular, Korea’s exports are also benefiting from high oil prices as well as by selling to the oil wealth economies. Exports to the Middle East contributed 13% to Korea’s total export growth, and we expect this to go up to 17% this year (i.e., US$28 billion increase from last year). This should be enough to offset a 70% increase in the oil import bill this year (assuming Dubai crude oil averages US$118/bbl in 2008). In our view, the market has only focused on the oil impact on imports, but has missed the export strength to oil countries and, therefore, we believe that the impact on Korea will turn out to be much smaller than consensus expectations. Growth in exports to the Middle East is only one example of how Korea is leveraging this commodity boom while being a commodity importer. In fact, its exports to all commodity regions, namely ASEAN, Latam and Russia, have been growing at a robust pace. Some argue that the export strength could be inflated by a price effect. In fact, Korea’s export growth in volume terms (+17%Y in 1Q07) is in line with US dollar value terms, which have been accelerating quickly since 4Q07. When converted back into KRW terms, Korea’s export growth is even faster at +20% in 1Q due to KRW depreciation. This implies that the Korean exporters are enjoying more volume and currency upside. Since the US subprime crisis started in August 2007, we have argued that Korea will be defensive against a US slowdown, and it was an out-of-consensus call back then (see A New Defensive Korea, August 27, 2007). Yet, so far, Korea’s export strength has only continued to exceed our already bullish forecasts, thanks to its strength in penetrating emerging markets and particularly the commodity wealth economies. We expect such a trend to continue, as surging commodity prices have only allowed the commodity countries to further expand their domestic demand, and Korea’s exports of machinery, equipment and consumer electronics fit their demand needs exactly. Maintaining Our GDP Forecasts at Above Consensus We reckon that higher inflation will hurt consumption through purchasing power and sentiment. We have therefore revised down our private consumption forecasts to 3.8% in 2008, from a 4.5% gain in 2007. Nevertheless, we feel that risks are to the upside, as we have been very cautious in our CPI forecasts without taking into consideration potential supportive policies from the new government to boost growth. In any case, we do not expect consumption to crash under higher inflation due to the lack of over-consumption in the last few years and resilient export growth that supports company earnings and the labor market. On the other hand, we have also revised up forecasts on exports in line with the YTD outperformance. The upside in export volume translates into stronger GDP growth, as import volume growth is relatively more timid due to weaker domestic demand. Combining all factors, we revised down our GDP forecast marginally for 2008 to 4.7% (versus consensus 4.4%) from 4.9%, but are keeping our 2009 forecast unchanged. We see more upside than downside to our forecasts. Biggest downside risks are oil prices exceeding US$150/bbl and/or a hard landing in the China economy. Yet, if oil prices stay above US$150/bbl, the global economy could slow significantly and thereby drag down oil demand and prices. Meanwhile, demand from China still appears solid, particularly with infrastructure needs following the deadly earthquake in Sichuan. Upside risk to the Korean economy could come from government stimulus measures. In fact, if the Korean economy continues to be hit by uncertainties, that could prompt the new government to speed up stimulus plans. Most importantly, Korea has the means to do so. In our view, Korea sees the least urge to raise interest rates among others, given that its real interest rate level is already the highest in the region. It is also the only country in the region that has run straight years of fiscal surplus since 2000. Its fiscal surplus widened to 3.8% of GDP in 2007 from 0.4% in 2006. We hold onto our view that Korea’s fundamentals are solid and that its growth is to continue despite external uncertainties through its successful product and market diversification, lack of excessives in the domestic economy that need to be adjusted and plenty of room for supportive measures if needed.
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Global Inflation: Consumer’s Bane
June 06, 2008
By Deyi Tan, Chetan Ahya | Singapore & Shweta Singh | Mumbai
Real Income Shrinking Higher inflation is putting pressure on consumers’ disposable income. Compared to a few quarters ago when the economy was overheating, global commodity inflation is now a bigger concern compared to domestic inflation. While non-tradables remained elevated at 5.3%Y in April 2008, tradables (such as food) inflation rose at an even quicker pace of 7.3%Y. Global commodity inflation is a greater bane for the Singapore consumer, in our view, as it is less clear whether this would be offset by income growth. At 0.2%Y, real income growth was nearly flat in 4Q07. With the latest inflation number reaching a record high of 7.5% in April 2008, the average consumer is most likely to see their real income shrink. Where Do Singapore Consumers Stand Relative to Their Peers? As Singapore is a relatively richer economy, food and energy expenditures typically have lower weights in the consumption basket compared to lower per-capita economies. However, this is offset by the fact that 90% of food requirements are imported and the retail fuel price is fully marked to market. There is full exposure to gyrations in global supply-demand dynamics, and food and energy inflation here are generally on the higher side compared to elsewhere in the region. On a net basis (based on inflation levels in the past six months), this leaves Singapore somewhere in the middle of the bunch in terms of the impact on purchasing power from food and energy inflation (about 3.1%, versus the 1.5-5.3% range in region). Hurting the Poor Disproportionately Having said that, we note that tradables inflation tends to hurt the lower income group more as such items as food and energy constitute a bigger share of their consumption basket. Additionally, such price pressures are coming on the heels of what has been a belated income recovery in the lower-income groups. While the economy has registered six straight years of economic expansion, including four with above-trend growth at 7-9%, real income growth for the lower income deciles has only started to catch up in the last 2-3 years. This is because the structural shift in the economy had led to a squeeze in jobs in the middle/lower-income rungs, and while such jobs were the first to go in a downturn, they have been slow to rebound when the economy picked up. 2007 data are not available, but we believe it is very likely that the real income of the lowest 20% income decile has picked up only marginally relative to 1997 levels. High inflation, together with likely softening labour market conditions going forward, is now again threatening to pare back their real income levels. Consumer Slowdown Underway In an environment of negative real income growth, retail sales are likely to face further downward pressures. Retail sales ex-autos (volume terms) have already decelerated from 11.9%Y, 3MMA in July 2007 to 4.9%Y, 3MMA in March 2008. Discretionary spending is taking the first hit as consumers cut back purchases of recreational goods, furniture & household equipment and watches & jewellery. Correspondingly, consumer discretionary stocks have underperformed MSCI Singapore by 11% since mid-March 2008. The ‘staples’ segment, such as supermarket and departmental store sales, has held up so far. Policy Response Shifts Incrementally to Fiscal Measures High inflationary pressures have led the central bank to tighten first in October 2007, by steepening the currency appreciation slope, and then in April 2008, by re-setting the midpoint of the bandwidth (which amounts to a one-off 2%+ appreciation). The S$NEER has appreciated by 4.5% since October 2007 (annualized rate of 7.2%) and the SGD against the USD by 7.9% (annualized rate of 11.9%). We believe that currency appreciation is the more effective tool in dealing with tradables inflation. However, commodity prices such as oil (WTI) and food (CRB-Food Index) have risen by 57% and 26%, respectively, in the same period, a level that the tool of currency appreciation will not be able to fully contain. Given that there is a limit to how aggressively the exchange rate can be used without adversely affecting growth, our base case is for the central bank to maintain the status quo in the October 2008 policy review. Indeed, we believe that the policy response towards inflation will incrementally shift from exchange rate policy to fiscal policy if oil prices move towards US$150/bbl and remain there. The government could incrementally take the inflation fight for lower-income groups onto its balance sheet through one-off measures. In that regard, we note that the government recently announced an inflation bonus of S$100-300 for civil servants, with lower-ranked officers getting more. The National Wage Council has made the same recommendation to the private sector. However, we believe that this might not be easy to come through as corporates, already facing higher costs and margin pressures, would be hard-pressed to raise operating costs at a time when volume growth seems likely to slow going forward. Having said that, if we are wrong on the exchange rate policy call and the MAS opts to tighten further in October 2008, we believe that a widening of the bandwidth and/or a reset of mid-point are the more likely options.
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