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With J.P. Morgan’s help, what’s in store for RP govt employees?

J.P. Morgan announced that it has been selected by Government Services Insurance System (GSIS) of the Philippines to serve as custodian for its US$1 billion overseas investment programme.

GSIS provides and administers social security benefits for government employees and offers insurance coverage to assets and properties having government insurable interests.
As part of this existing mandate, J.P. Morgan will provide custody and fund reporting, compliance monitoring and performance measurement services to GSIS, with both local client support from Manila and regional management support from Hong Kong.

“We are delighted to have been selected by a key public institution like GSIS to provide them with custodial and fund services. We believe that J.P. Morgan’s superior service delivery and financial strength, combined with its disciplined approach to risk management practices, enables the firm to help its clients minimise operational and financial risks,” said Laurence Bailey, Asia Pacific chief executive officer for J.P. Morgan Worldwide Securities Services.

J.P. Morgan holds market leading positions in the provision of global custody services in Asia Pacific, including in Australia – the largest market in the region. The firm’s ability to serve the specific needs of this industry combined with its track record in managing assets safely and securely were key factors in GSIS’ decision to appoint J.P. Morgan to safekeep their assets.
J.P. Morgan leverages the services and products of its Treasury Services division, as well as its Investment Bank and Asset Management lines of business, to provide its customers with one-stop solutions.

With J.P. Morgan providing global custody support to GSIS, are government employees in the Philippines set to expect leverage in the state fund’s services?

Why is South Korea on an Interest Rate Standstill?

The Bank of Korea unexpectedly kept its interest rate unchanged at a record-low 2 percent on 12 March, ending the nation’s most aggressive policy easing in a decade.

“We have lowered the benchmark interest rate at a rapid pace in a short period,” Governor Lee Seong Tae said in Seoul. “We’ll be monitoring the effects of the previous steps.”

South Korea’s currency and shares declined after the central bank said the economy is likely to remain in a recession amid “persistent weakness” in local and overseas demand. Lee has pared rates by 3.25 percentage points since 9 October, and Finance Minister Yoon Jeung Hyun plans to unveil an additional stimulus package this month to add to 51 trillion won ($34.7 billion) in tax cuts, handouts and infrastructure spending.

“They’ve cut very aggressively and are now taking a breather, but it is hardly a response to any better data,” said Jan Lambregts, head of Asian research at Rabobank International in Hong Kong. “I expect in the months to come that they will pick it up again. Many Asian central banks are going to cut rates close to zero percent.”

Just three of 15 economists surveyed expected the decision with the remainder predicting a cut. The six reductions since early October are the most aggressive easing since the Bank of Korea began setting a policy rate a decade ago.

The Kospi stock index fell 1.5 percent to 1,111.01 after the decision, snapping three days of gains and increasing its loss over the past year to 33 percent. Korea’s won dropped 1.1 percent to 1,486.7 per dollar in Seoul after last week reaching an 11-year low of 1,597.

Tumbling Currency
“The Bank of Korea probably felt pressure to keep rates unchanged as lower interest rates can prompt investors to take more money out of the country, weakening the won further,” said David Kim, head of research at Taurus Investment Securities in Seoul.

A falling won, Asia’s worst-performing currency in 2009, increases the cost of financing offshore loans for Korean companies and could fan inflation by pushing up import prices.

South Korea’s pause in easing follows the Reserve Bank of Australia, which last week left its rate unchanged for the first time in seven months. New Zealand central bank Governor Alan Bollard said he would reduce the pace of rate cuts in the future after 5.25 percentage points of easing since July.

Government Spending
South Korea’s government said it will provide cash, loans, school fees and other financial incentives valued at 6 trillion won to help those on lower incomes cope with rising unemployment. The aid package will use funds from the extra budget being proposed this month, the finance ministry said.

Bank of Korea Governor Lee said he expects the government to propose “a significant” extra spending package, financed through bond sales. The central bank will watch the effect of debt sales on financial markets as it decides whether to purchase bonds, he added.

“The Korean economy is likely to remain in recession due to the persistent weakness of both domestic and overseas demand,” the central bank said.

The World Bank this week forecast the global economy will shrink in 2009 for the first time since World War II and that trade will fall by the most in eight decades.

Exports of cars, ships, mobile phones and other goods, which make up more than 60 percent of South Korea’s gross domestic product, fell 17.1 percent in February.

Bank Aid
As well as boosting spending, South Korea has been widening efforts to aid banks by injecting $39 billion into the financial system to thaw credit markets, setting up a 20 trillion won fund to replenish bank capital as bad loans increase, and establishing another fund to buy distressed corporate bonds.

Bank profits almost halved last year on provisions for loans to struggling developers and shipbuilders. Kookmin Bank, the nation’s largest lender, posted its first loss in four years in the fourth quarter.

“Both the central bank and the government should continue to do what they can to help the economy,” said Ryu Seung Sun, an economist at HMC Investment Securities in Seoul. “There are global efforts to prop up economies. South Korea shouldn’t exclude itself from the moves.”

The Asia’s fourth-largest economy contracted 3.4 percent last quarter, the first decline in 11 years, as exports to the U.S., Europe and China dropped. Goldman Sachs this week forecast the economy will shrink 4.5 percent in 2009.

South Korea lost 103,000 jobs in January, the biggest decline since September 2003. Genworth Financial announced last month the closure of its South Korean business as it cuts costs globally. Industrial production plunged a record 25.6 percent in January.

LG Electronics, the world’s third-largest maker of mobile phones, says industry shipments will fall more than previously expected in 2009. Hyundai Heavy Industries, the world’s largest shipbuilder, said last month that orders dropped 54 percent in January from a year earlier.

With the Bank of Korea taking a breather in cutting rates, is it simply pacing its moves or about to take a sharp turn?

Why are Japanese banks swapping interest rates?

Japan’s banks are paying record premiums to exchange interest rates calculated in Tokyo for ones set in London as a slumping economy exacerbates concerns about the capacity of the nation’s companies to meet their obligations.

Banks paid as much as 49 basis points this week on top of the Tokyo Interbank Offered Rate, or Tibor, to receive the London Interbank Offered Rate, or Libor, for ten years. That’s the largest gap since at least May 1999, and exceeds levels following the banking crisis of the late 1990s when the so-called Japan premium forced domestic lenders to pay higher borrowing costs than their overseas counterparts.

The record spread “is driven by corporate credit risks,” said Tokuyoshi Takano, manager of the financial derivatives section at Mitsui Sumitomo Insurance in Tokyo. “Even if the credit problem doesn’t get solved, you can take a profit of 40 basis points over ten years.”

Six-month Tibor is little changed this year amid renewed demand for loans from companies, after falling about 14 basis points in the two weeks following its peak on 16 December at 0.92615 percent. The rate stood at 0.76692 percent on 4 March, from 0.78692 at the end of last year, according to the Japanese Bankers Association. A basis point is 0.01 percentage point.

Libor has declined to 0.79750 percent from 1.04375 percent, its recent high set on 9 December. Tibor, similar to Libor, is used as a benchmark to set corporate borrowing costs.

“Banks can lock in profits from the Tibor-Libor spread,” said Reiko Tokukatsu, a bond strategist in Tokyo at JPMorgan. “Risk takers should receive Tibor and pay Libor.”

Lending by Japan’s banks slowed for the first time in four months in January after the Bank of Japan said it would buy short-term bonds from companies and a global recession sapped demand for credit.

With Japanese banks opting to utilise the interest rates calculated in London, will the nation’s credit issue be resolved?

Will Indonesia’s $4 Billion Bond Sales Plan Boost Government Spending?

Indonesia’s parliament approved a 73.3 trillion rupiah ($6.1 billion) stimulus package and endorsed the 2009 budget, paving the way for the country to sell as much as $4 billion of dollar-denominated debt.

The parliament endorsed a 2.8 percent increase in the government’s fiscal stimulus spending from an initial proposal of 71.3 trillion rupiah, Suharso Monoarfa, deputy chairman of the budget committee, said. That includes raising the budget to fund infrastructure programs by 13 percent to 17 trillion rupiah, he said.

The approval by parliament will enable the government to sell debt overseas to help fund a budget deficit of 139.5 trillion rupiah, or 2.5 percent of gross domestic product. The government plans to boost spending to sustain Indonesia’s economic growth, which is forecast to weaken to 4.5 percent this year from 6.1 percent in 2008.

The price for the dollar bonds “will be high because people will only let go of their foreign currencies with the assurance that they will get a high price,” Finance Minister Sri Mulyani Indrawati said. “A stimulus package is about timing, targets and is temporary.”

The government met investors starting on 2 February to drum up interest for the sale of dollar-denominated debt. The extra yield that investors demand to own ten-year Indonesian bonds instead of U.S. Treasuries has widened 1.8 percentage points this month to 10.8 points.

Fiscal Stimulus
The stimulus is effective starting on 1 March, Sri Mulyani said. The parliament also endorsed a government plan to raise 1.1 trillion rupiah in additional debt, Monoarfa said, without elaborating.

“We view the government moves positively,” said Destry Damayanti, chief economist at PT Mandiri Sekuritas. “However, we remain concerned on the implementation and whether the government will be able to spend according to plan, considering that it did not manage well last year.”

Southeast Asia’s biggest economy posted a budget shortfall of 4.2 trillion rupiah or 0.1 percent of GDP last year, narrower than the 2.1 percent of GDP expected by the government after failing to spend as planned.

“We’re trying to soften the downward cycle, we’re trying to keep it from becoming too deep,” Sri Mulyani said.

The government may use 51.3 trillion rupiah unused from last year’s budget, sell 54.7 trillion rupiah of bonds and borrow 44.5 trillion rupiah to finance its shortfall, said Mandiri’s Damayanti.

Debt from Indonesia, which raised $4.2 billion from dollar-denominated bond sales last year, is rated BB-, three levels below investment grade, by Standard & Poor’s. Fitch Ratings ranked the proposed debt BB, or two levels below investment grade. The government had planned to sell the bonds in phases anytime in the next three years, according to S&P.

Considering Indonesia’s government spending last year, will the sale of dollar-denominated debt help address the country’s weakening economic growth?

Is Rate Cut the Answer to Taiwan’s Contracting Economy?

Taiwan’s central bank cut interest rates to a record low after the economy shrank an unprecedented 8.36 percent in the fourth quarter as exports and business investment tumbled.

Governor Perng Fai-nan and his board pared the discount rate on ten-day loans to banks to 1.25 percent from 1.5 percent in Taipei on 18 February, the seventh reduction since late September. The decline in gross domestic product from a year earlier was the biggest since official records began in 1952, and exceeded the 6.82 percent drop forecast in a Bloomberg survey of economists.

Taiwan entered its first recession since the technology bubble burst in 2001 as the global economic slump reduced demand for Taiwan Semiconductor Manufacturing computer chips and Quanta Computer laptops. The central bank will pump money into the economy if Taiwan’s lenders fail to provide more credit to businesses, Perng said.

“The steep contraction of the economy needs much stronger measures than cutting interest rates,” said Chuang Rehong, head of economic research at Sinopac Securities in Taipei. “Lowering borrowing costs won’t provide an immediate boost to the economy since the banks have been cautious in giving out credit.”

Taiwan’s economy will shrink 2.97 percent this year, the government forecast on 18 February, reversing its November estimate of 2.12 percent growth.

Relief Efforts The central bank alone can’t stimulate the economy, Perng said, adding the government is doing its part. “The government is implementing expansionary fiscal policies while the central bank is pursuing loose monetary policy.”

President Ma Ying-jeou’s administration plans stimulus spending of NT$858.5 billion ($25 billion) over four years, equivalent to about 6 percent of GDP, on infrastructure projects, consumer grants and tax cuts. It handed out NT$82.9 billion of shopping vouchers last month, which the statistics bureau forecasts added 0.66 percentage points to GDP.

Pressure is increasing on Asia’s policy makers to step up relief efforts as the region’s export-dependent economies falter.

Japan’s economy contracted an annualised 12.7 percent last quarter, the biggest drop since 1974. The Bank of Japan will detail its plan of buying corporate bonds and may prolong lending programs in place to avert a shortage of credit from deepening the worst postwar recession, economists said. Singapore’s GDP declined by a record 16.9 percent annualised rate in the fourth quarter. The government is cutting corporate taxes, giving cash grants to companies to retain workers and plans to spend S$20.5 billion ($13.4 billion) to help businesses and citizens.

Currency Declines Taiwan’s rate decision and GDP report were released after the close of trading on the island’s stock exchange. The Taiex stock index, which tumbled 46 percent in 2008, rose 0.2 percent to 4,498.37 on 18 February. Taiwan’s currency dropped to NT424.682, the lowest level in more than five years against the U.S. dollar.

“This is going to go on for some time, not just for Taiwan but for Asian currencies in general,” said Mitul Kotecha, Hong Kong-based head of global foreign-exchange strategy at Calyon, the investment-banking unit of French bank Credit Agricole SA. “There’s a sense that the economic numbers are going to get worse in the next few months.”

Exports, which are equivalent to 70 percent of GDP, will decline 20.1 percent in 2009 and business investment will tumble more than 28 percent, it predicted. The economy won’t return to growth until the fourth quarter, the government added.

‘Most Exposed’ “Taiwan is among the most exposed economies in Asia,” said Frederic Neumann, a Hong Kong-based economist at HSBC Global Research. “The island’s economy is unlikely to see a significant rebound until consumers in the West decide to go out and spend again.”

The island, which has been ruled separately from China since 1949 and is home to 23 million people, is increasingly reliant on trade with the mainland to drive its economy. China and Hong Kong combined bought about 41 percent of its exports in 2007, up from 26.6 percent in 2001.

Electronics makers send parts to China that are re-exported as finished computers, televisions and mobile phones to consumers in the U.S. and Europe.

In response to the slump, Taiwan’s companies are cutting capital spending, closing factories and firing employees. Retail sales fell 9.8 percent in December, the largest drop since records began in 1999. The unemployment rate rose to 5.01 percent in December, the highest since 2003, amidst job cuts by companies including Hon Hai Precision Industry, which makes iPhones for Apple.

Quanta Computer, the world’s biggest maker of notebook computers, said this week shipments will decline more than 30 percent this quarter. Taiwan Semi in December forecast its first quarterly loss since 1990 as customers including Texas Instruments reduce orders.

With the measures being undertaken by the government and other institutions, is Taiwan set to bounce back in the near future?