Asia: A good year, for the brave heart. Growth will be more bumpy, slower, but still solid. As demand shifts and policy turns, volatility will increase. Intra-Asia and inter-developing region integration will rise.

Australia: Shifting focus
Bangladesh: Improved but weaknesses persist
China: A step closer to greatness
EU: Finally pulling its own weight
Hong Kong: Another boom year
India: Win some, lose some
Indonesia: Gradual recovery in real sector
Japan: Households, welcome back
Malaysia: Pre-election boom
New Zealand: Challenges ahead
Pakistan: PKR remains vulnerable
Philippines: Sustainable growth
Singapore: A two speed economy
South Korea: Slow but resilient
Sri Lanka: Vulnerabilities remain
Taiwan: Crunching time ahead
Thailand: Bracing for harder time ahead
US: Growth is slowing, not collapsing
Vietnam: A WTO bonanza

Economic Forecasts
Market Forecasts

ASIA

Nicholas Kwan
Regional Head of Research, Asia
+852 2821 1013
Nicholas,Kwan@hk.standardchartered.com

A good year, for the brave heart

- Growth will be more bumpy, slower, but still solid
- As demand shifts and policy turns, volatility will increase
- Intra-Asia and inter-developing region integration will rise

Calls of the Year
1. A bumpy boom year, albeit at slower growth pace, as many Asian economies enter their cyclical highs in asset prices and interest rates. Countries with relatively weak fundamentals could face rollercoaster rides as policy shifts and expectations change, moreso if compounded by poor policy. But strong fundamentals should cushion Asia from major crises and ensure solid, albeit slower, growth.

2. Accelerating Asia-centric trend, with China, India and Japan increasingly driving the region's expansion as US demand weakens. Those integrated more with the Asian powerhouses will hold better outlook. Those in trouble could turn more to their neighbours for support.

3. Shift from major to minor regions. Search for new capital, resources and markets will drive Asia closer to other emerging markets, such as the Middle East, Africa, given a slowing US and unexciting EU.

Key Risks
1. Asset bubbles. Overall leverage of most Asian economies remains contained with domestic credit and equity valuation generally lower than previous peaks. But liquidity has overstretched selected asset prices. Some corrections seem likely, but should be isolated given strong external positions and stronger institutions.

2. US shocks, either from much weaker demand or the USD. For the former, those with weak domestic demand, like Thailand and Taiwan, will suffer more. For the latter, those with a more open capital account and inflated asset prices could be in danger.

3. Policy and political mishap. Political transitions could be bumpy, even ugly, with the coup in Thailand, civil war in Sri Lanka, Party Congress in China, and elections in Pakistan, Philippines, Taiwan and Korea. But the broad market friendly policies and deregulation should stay.

Key Macro Trends
1. Growth driver shifts from external to domestic. The success and strength in such transition would determine one's growth performance.

2. Interest rates to trend lower, except for the big three. Led by lower inflation and expected Fed easing, most economies should start easing in H2-07.

3. Asian currency to stay generally strong, but with growing variance. Among the majors, the Yen could recover, the Yuan should maintain a steady up-path, but the Rupee could correct sharply.

AUSTRALIA

Frances Cheung
Economist, +852 2820 3609
Frances.Cheung@hk.standardchartered.com

Shifting focus

- Exports slow and investment tops
- Consumption to make up for the slack
- RBA to start easing as early as Q2-07

Call of the Year
1. AUD/USD to correct with weaker commodity prices and still large external deficits of the economy. We expect the AUD to weaken to 0.70 by end-Q3 before rebounding to 0.72 by YE-07.

2 RBA to cut rates as early as Q2-07. With no major upside risk to inflation, the RBA may start to cut rates as early as Q2-07 to support domestic consumption, especially when both exports and investments cool, and household debt burden hovers at high levels.

3. Consumption as a major growth driver given a strong labour market and expected election spending, especially if the RBA starts cutting rates as predicted. This helps offset any slack in trade and investment, leading the economy to grow by a moderate 2.5% in 2007.

Key Risks
1. Adverse developments in house prices or labour market. Households are leveraging up and saving less. So any unexpected adverse development that affects either wealth or income will have a big impact on consumption, which is a major growth pillar.

2. Volatility of AUD. Large current account deficits make the AUD vulnerable to any temporary shocks such as sharp falls in commodity prices, especially given the relatively thin trading volume of the currency.

3. Unfavourable weather conditions, which will affect not just the primary sectors, such as the farming and mining industries that account for less than 10% of GDP, but also many related industries.

Key Macro Trends
1. Terms of trade to weaken and investment tops. With commodity prices expected to ease along with cooling global demand, export prices will drop likewise and limit the growth in export earnings. Meanwhile, as the profit cycle tops, corporates are likely to focus more on production rather than investment.

2. Consumption to remain firm. Labour market conditions are largely supportive to spending. Going forward it will be an increasingly important force of economic growth as house prices consolidate.

3. Inflation to ease gradually. While employment growth has surprised on the upside, labour supply rose in tandem, curbing part of the supply-side inflationary pressure. Moreover, efforts on efficiency enhancement will help reduce unit labor costs.

BANGLADESH

Shuchita Mehta
Economist, South Asia, +91 22 2268 3235
Shuchita.Mehta@in.standardchartered.com

Improved but weaknesses persist

- Growth set to slow, but current account still in surplus
- BDT to remain range bound, but interest rates need to rise
- Risks to central scenario significant

Calls of the Year

1. BDT to stay range bound in 2007 following significant volatility in the recent months, and any weakness should be gradual. Strong exports and remittance inflows have helped post a current account surplus in 2005/06 and in Q1 of 2006/07. We forecast BDT to weaken 3-4% in 2007.

2. Further tightening of monetary policy expected in face of strong private credit growth. Some further adjustment in fuel prices is also needed. We forecast 50bps hike in policy rates in H1-07.

3. Commitment to orderly development of foreign exchange and inter-bank/Treasury bill markets will remain high on agenda for the authorities.

Key Risks
1. Political tensions remain a concern as the opposition plans a boycott of elections to be held towards end January. The main concern will be the implications for investments, the structural reform process and aid flows.

2. Low FX reserve levels, at around 3.0 months of import cover, may lead to more significant currency weakness if oil prices remain elevated and global growth decelerates sharply. In turn, the inflationary implications of a weak BDT may require a tighter monetary policy than the domestic economy can withstand.

3. Poor infrastructure is a key bottleneck to growth, particularly given the state of the energy SOEs, sub-standard water and sewage facilities and poor transport network.

Key Macro Trends
1. Growth to slow in 2006/2007 against the backdrop of slower global growth, weaker investments due to ongoing political situation, rising power shortages and slowdown in farm sector following a rebound in 2005/06.

2. Inflation set to rise further before peaking as food prices remain high and credit growth remains elevated.

3. Current account surplus to narrow in 2006/07 as export growth decelerates on the back of slower global growth (75% of exports comprise readymade garments and textiles) and oil prices remain high. However, remittance inflows are expected to remain comfortable.

CHINA

Stephen Green
Senior Economist, +86 21 5887 1230 extn.5223
Stephen.Green@cn.standardchartered.com

A step closer to greatness

- Robust growth, excess liquidity and high asset prices
- Party Congress puts meat on bones of new centre-left politics
- Export slowdown and inflation are biggest threats

Calls of the Year
1. Asset prices to rise higher. China will continue to enjoy excess liquidity in 2007, with the current account expanding, and this means more cash chasing assets. The stock market will suffer a short-term correction when short-selling of index futures is allowed in H1, but will recover with robust profitability growth. Residential property prices, despite new taxes slated for Q1, will also likely strengthen.

2. The year of utility price rises. The government is readying itself to raise prices for coal, electricity, water, gas, waste disposal etc. and establish mechanisms for automatic price adjustment which reflect supply scarcity and environmental costs. The impact will be gradual, but will affect many business.

3. Party Secretary Hu Jintao will detail his social agenda and likely selects successor at the 17th Party Congress in September. After the sloganeering (Harmonious Society, et al.), a new provincial leadership, and much research, Mr. Hu will detail his plans for health, education and farming reform at the Congress. Expect a centre left approach to public finance. And a successor to be named.

Key Risks
1. A sharp export slowdown driven by a US consumer recession. Despite its low probability, such a scenario would still take 1-2ppts off China's growth, though it will hit other Asian exporters more than China, given its low costs. US protectionist sentiment to China will likely turn nastier.

2. Spiraling inflation. With food and utilities' prices strengthening, inflationary risks are now on the upside, with bank rate hikes not far behind.

3. Bigger anti-MNC backlash. Domestic interest groups are able to exploit nationalist feelings to beat up overseas competitors if government leaders let them.

Key Macro Trends
1. Investment growth at 20% y/y means the economy is still investment heavy, as it powers forward with another 9.7% y/y GDP growth.

2. Consumption rises to 12% y/y as middle class expands, house prices remain firm and professional wage inflation continues to cause challenges for companies.

3. CNY continues to strengthen, 3- 4%, against the USD over the year. With zero effect on the trade surplus.

EU

Gavin Redknap
Economist, +44 20 7280 6071
Gavin.Redknap@uk.standardchartered.com

Finally pulling its own weight

- Europe's recovery will continue, albeit slower, in 2007
- As such, the ECB will continue rate normalization
- With the US slowing, the weight of EU will increase

Calls of the Year
1. The European Central Bank (and others) still has more work to do. With the recovery likely to remain intact, the ECB will take rates higher from their current 3.5%. Other central banks in the region (BoE, SNB, Riksbank, etc) similarly have more to do to counter inflationary threats in the face of good economic growth.

2. The EUR will continue to shoulder the weight of a weaker USD early in 2007 before rate cuts from the Fed help the greenback stage a recovery later in the year.

3. With the US slowing, the pull of the EU will be noticed elsewhere. Asian export growth to the EU has started to outpace that of the US. With overall trade levels already comparable to that of the US, the EU will become an increasingly important source of demand for many Asian economies going forward.

Key Risks
1. Fiscal and monetary tightening could conspire to stall the recovery. The effect of the 150bp rate hike by the ECB is yet to be fully felt, and along with fiscal tightening in both Germany and Italy, it could potentially dent the recovery in the Eurozone and wider EU.

2. Emerging Europe has huge imbalances. While mostly to be expected, large current account deficits of Eastern European countries pose risks for currency stability.

3. Political handovers in focus. The election in France and the succession of PM Tony Blair in the UK will be the focus on another busy year for political developments.

Key Macro Trends
1. Germany's recovery remains on track. Business optimism in Germany is at post-unification highs, and job vacancies are at a record. Despite rising tax, the recovery in the EU's economic motor remains on track and...

2. ...this is filtering out into the rest of the region, with business sentiment elsewhere following Germany's lead. Intra- and extra-EU trade is accelerating fast, reflecting improving economic conditions.

3. 2007: the year of the consumer. The last piece to the puzzle is the consumer. Sustained recovery requires lower unemployment and better wage growth - both are likely in 2007. A stronger consumer sector means good news for Asian exporters in particular as the US consumer slows.

HONG KONG

Tai Hui
Economist, +852 2821 1039
Hui.Cheung-Tai@hk.standardchartered.com

Another boom year

- Local interest rates to trend down
- USD/HKD peg to stay
- Revival of the property market

Call of the Year
1. Interest rates to trend down with ample liquidity, especially in H2-07 when US rates are expected to start easing. Yet, short-term fund flows driven by more volatile capital market movements may see a temporary spike in local rates, particularly in Q1-07.

2. USD/HKD peg to stay despite a stronger CNY. As the CNY continues to appreciate against the USD at the pace of 3-4% per year, the HKD/CNY will depart from parity by mid-07. Still, speculation on the peg will persist, keeping USD/HKD forward points in discount.

3. Growing activity in the property market. Lower interest rates, buoyant consumer/investor confidence, short supplies and lagged performance of the real estate sector relative to equities in 2006 suggest the property market could break out from its 2 year-long consolidation.

Key Risks
1. China economic slowdown remains the biggest risk for HK given its large exposure to China's trade and investment, even though we believe such risk is remote.

2. Greater polarisation in labour market has led to divergence in income growth, fueling social tension, raising demand for market intervention, and slowing public sector deregulation.

3. Investor optimism is running high with record equity prices. While the current valuation may not be consistent with a bubble, a period of consolidation, or even correction, should not be ignored given the backdrop of the slowing global and regional economy.

Key Macro Trends
1. Domestic-led growth running at full steam with strong performance in asset markets and lower jobless rate. This should help to maintain growth to our forecast of 5%.

2. Inflation to remain contained despite strong consumption. Stable rental prices of the past year should limit the increase in CPI, keeping real interest rates positive.

3. Fiscal position to remain healthy with strong tax revenue growth. While this will help to reinforce Hong Kong's sovereign ratings, it would increase public pressure on the government to spend more, or delay any new measures to broaden Hong Kong's tax base.

INDIA

Shuchita Mehta
Economist, +91 22 2268 3235
Shuchita.Mehta@in.standardchartered.com

Win some, lose some

- Still among the fastest, albeit a tad slower
- INR to weaken a bit, interest rates yet to peak
- Risk aversion and inflation remain key risks

Calls of the Year
1. Modest INR depreciation in 2007 Strong capital inflows, a weak USD and lower oil prices may sustain INR strength in the immediate near-term. But persistent current account deficit and overvaluation suggest a correction is likely, especially if the RBI starts unsterlised intervention at the beginning of the 07/08 borrowing program in April. We expect the INR to retrace by 3-4% during Q1-Q3 2007.

2. Interest rates to rise further as strong credit growth and inflated asset prices keep inflation at elevated levels. We expect another 25bps hike in the reverse repo rate in Q1-07, before the central bank pauses.

3. Potential upgrade of sovereign ratings to investment grade as fiscal position improves, growth momentum stays firm, and further reforms in financial and real sectors are introduced. This would open India to new class of investors.

Key Risks
1. Reversal in risk appetite given overstretched stock valuations and persistent current account deficit. A reversal in risk appetite could trigger portfolio outflows, leading to a weaker INR and higher yields.

2. Dramatic rise in inflation driven by higher wages and strong demand. Core inflation is now closer to 5%, and segments such as real estate have noted significant value appreciation. Any sharp rise in inflation and hence higher interest rates could upset the apple cart.

3. Potential for tardy pace of reforms given forthcoming state elections and coalition politics at the centre.

Key Macro Trends
1. Growth to slow in 2007/08. After a stellar performance over the past three years, growth is expected to slow against the backdrop of slower global growth and higher local rates. This should be welcomed as it allows the economy to address its growing imbalances and build a more solid growth base.

2. Inflation to peak in Feb-Mar and eases to 4-4.5% in 07/08 from 5.3% in 06/07 as base effects recede, food supplies improve and previous rate hikes curb growth.

3. Fiscal situation to improve as tax revenue grows with strong economic growth, and expenditure management improves with capital spending under control. The central government fiscal deficit should be cut to 3.3-3.4% of GDP in 2007/08. However, this might not necessarily imply a much lower borrowing program.

INDONESIA

Fauzi Ichsan
Senior Economist, +62 21 5799 9117
Fauzi.Ichsan@id.standardchartered.com
Lolita Subrata
Research Assistant, +62 21 5799 9974
Lolita.Subrata@id.standardchartered.com

Gradual recovery in real sector

- GDP growth to rise to 6.0% in 2007 from 5.5% in 2006
- IDR to strengthen vs USD to 8,700 in H1-07
- BI rate to fall to 8.5% by YE-07

Calls of the Year
1. Real sector recovery. Recovering from the sharp hikes in fuel prices and BI rate in 2005, as well as the government's slow fiscal stimulus in 2006, the real sector is likely to rebound in 2007, on the back of aggressive BI rate cuts, decelerating inflation, IDR stability and the government's ambitious infrastructure program. We expect GDP growth to rise from 5.5% in 2006 to 6.0% in 2007.

2. Limited BI rate cuts. Having fallen from 17.1% y/y to 6.6% in 2006, inflation is likely to fall to only 5.5% in 2007. This will limit the scope of BI rate cuts (from 12.75% to 9.75% in 2006) in 2007. We expect BI rate to reach 8.5% (vs. our previous forecast of 9.0%) by YE-07.

3. IDR stability. Despite further BI rate cuts, we expect IDR to strengthen to 8,700 to USD in H1-07, before stabilizing at 9,000 by YE-07. Foreign portfolio inflows and strong payments position are likely to support the IDR.

Key Risks
1. Weak public spending. The lack of fiscal stimulus has limited the pace of recovery, especially given severe infrastructure bottlenecks.

2. Slow implementation of reforms to improve investment climate and foster FDI. Among the key changes needed are tax reforms, new investment law, labor law revision. But these would require parliamentary support for President Bambang Yudhoyono's fragile coalition government.

3. Terrorist attacks. While posing no serious security threat, such attacks could undermine investor confidence and deter the recovery of tourism.

Key Macro Trends
1. Consumption-led recovery. Interest rate cuts and growing fiscal stimulus would be the main growth driver. But an expected 6% GDP growth may not be sufficient to ensure a continual reduction in unemployment.

2. Still favourable payments position. Higher GDP growth may raise import demand and limit trade and current account surpluses to USD 30bn and USD 5bn in 2007, still providing good support to the IDR.

3. A relatively stable price and interest rate environment, after progressive decline in inflation and interest rate cuts. This should foster a more stable business operating environment to support economic recovery.

JAPAN

Frances Cheung
Economist, +852 2820 3609
Frances.Cheung@hk.standardchartered.com

Households, welcome back

- Investment momentum sustained
- Spending sets to rise
- BoJ to hike by a total of 75bps this year

Call of the Year
1. The JPY to recover on valuation. As the BoJ continues to normalize its monetary policy, portfolio outflows will slow, while the current account will be supported by the cheapest REER valuation in almost 20 years. But as interest rate differentials remain wide, we expect the JPY/USD to strengthen to 114 by YE-07.

2. Lift to consumption through wage rises. With business operating ratios at healthy levels and labour market conditions tight, corporate benefits will be passed onto households through wage rises, boosting spending.

3. The BoJ to hike by a total of 75bps this year. As prices continue on an uptrend and economic growth becomes more broad-based, the central bank will hike its O/N Call Rate further this year, to bring interest rates back to neutral.

Key Risks
1. Failure to reinforce consumer confidence, which remains at low levels due to subdued wage rises. This would dampen consumption and prevent a virtuous cycle of production, income and spending to be formed, affecting longer-term growth.

2. Sustained high commodity and oil prices, which may deter any wage increases. Corporates have been reluctant to raise contractual wages due to high input costs.

3. Excessive inventory build-up. If the expectation takes hold that interest rates will remain low for a long time, business investment may become excessive, leading to unnecessary stock build-up.

Key Macro Trends
1. Investment momentum sustained. With profit to sales ratios at historically high levels, and production capacity tight, business investment plans will continue to be upbeat.

2. Labour market supports spending. Low jobless rate, high job-to-applicant ratios, and the needs for corporates to hire mean wages will increase going forward, thus supporting consumption.

3. Prices continue on an uptrend. With household consumption making a comeback, and the fading effect of the change in the calculation method for CPI basket old items, we expect CPI inflation to trend higher and average 0.8% this year.

MALAYSIA

Joseph Tan
Economist, +65 6530 3464
Joseph.Tan@sg.standardchartered.com

Pre-election boom

- Economy to grow 6% with strong government spending
- USD/MYR set to break 3.50 on a sustained basis
- BNM to cut interest rates in H2 as inflation moderates

Call of the Year
1. Economy set to expand 6%. Given the likelihood that elections will be called in 2008, government spending is likely to increase in 2007 and we expect this to be a major growth contributor.

2. USD/MYR to break below 3.50 on a sustained basis. While we expect BNM to cut interest rates, MYR will benefit from broad USD weakness versus Asian currencies and is set to break below 3.50 on a sustained basis.

3. Bank Negara to cut interest rates in H2 2007. While real interest rates are now positive, we do not expect BNM to move ahead of the Fed in cutting interest rates as this can potentially weaken the MYR.

Key Risks
1. Major correction in commodities prices. Malaysia has benefited from the run up in commodities prices both in crude and palm oil. As the US economy slows, prices are at risk to a correction which would hit production and exports.

2. Major correction in the equity market. Similar to most other Asian equity markets, recent strong rallies of Malaysian equities have raised the risk of sharp corrections and growing volatility, which if coincided with deteriorating external environment, could undermine growth prospects.

3. Fiscal deficit. The government is heavily dependent on oil royalties for revenue. With the corporate tax rate cut by 1%, increased spending and falling oil prices, the deficit to GDP target of 3.4% could be missed and put pressure on Malaysia's sovereign ratings.

Key Macro Trends
1. Economy to grow at two speeds. Export related sectors are set to slow as the external environment moderates while the domestic sector should benefit from increased government spending ahead of elections.

2. Inflation to moderate further. We expect inflation to fall below 3% in Q1-07 as the high base of comparison (due to the 23% fuel price hike in Mar-06) is crossed. Furthermore, fuel and power price hikes are unlikely in 2007 as oil prices moderate.

3. Interest rates to trend lower in H2-07 as inflation stays below 3% on a sustained basis and the US Federal Reserve starts cutting rates. We expect the Overnight Policy rate to end 2007 at 3.0%.

NEW ZEALAND

Frances Cheung
Economist, +852 2820 3609
Frances.Cheung@hk.standardchartered.com

Challenges ahead

- Soft domestic demand to keep GDP growth weak
- RBNZ to start easing in Q2-07
- NZD to weaken on commodity prices and external deficits

Call of the Year
1. The NZD/USD to come under pressure on large current account deficits, especially when investors focus more on fundamentals rather than interest rate differentials. We expect the kiwi to weaken to 0.55 by end-Q3 before rebounding to 0.58 by YE-07.

2. Domestic demand to soften for both the household and business sectors. This should dampen inflationary pressures and expectations.

3. The RBNZ to cut rates in Q2-07. The weak economy can ill-afford another rate hike. Instead, easing inflationary pressure will give the central bank more room to cut rates. Money market rates, currently pricing in some chances of a rate hike, will trend lower in coming months.

Key Risks
1. Monetary overkill that unnecessarily depresses the economy. Upside risks in inflation from tight capacity may prompt the RBNZ to hike when domestic demand is softening, adding further burden to households, and also dampening exports.

2. Sharp ease in commodity demand. The economy is yet to transform itself from relying on the commodity industries for production, exports and employment.

3. The kiwi fails to weaken. Investors' focus on interest rate differentials may keep the kiwi at uncomfortably high levels which undermine export competitiveness and thus overall economic growth.

Key Macro Trends
1. Domestic demand remains weak. Employment has been growing faster than the general economy for some time, resulting in minimal productivity growth. We expect job growth to be flat this year. With debt servicing costs reaching record high levels and less favourable labour market conditions, consumption is to cool further.

2. Rebalance to exports continues. Rising input costs have resulted in poor exports performance in the manufacturing sector. But looking ahead, the expected weakening of the kiwi will help lift exports competitiveness.

3. Inflation to ease gradually. With softness in both the household and business sectors, and little labour productivity growth, we expect inflationary pressure to ease gradually. CPI inflation should average a benign 2.4% in 2007.

PAKISTAN

Steve Brice
Regional Head of Research, Middle East and South Asia, +9714 507 0607
Steve.Brice@ae.standardchartered.com

PKR remains vulnerable

- PKR to weaken ahead of October elections
- SBP expected to tighten policy one last time
- Growth to remain relatively strong, inflation to peak

Call of the Year
1. PKR weakness to continue in 2007. We expect the PKR to weaken before recovering somewhat in Q4 after the October parliamentary elections. A crucial assumption is that privatisation will become increasingly difficult to push through as the election approaches, leaving the rupee at the mercy of the current account deficit.

2. Further monetary tightening to come. We expect the State Bank of Pakistan (SBP) to tighten monetary conditions. Key on this timeline will be the semi-annual Monetary Policy Statement in January. We are looking for a 100bps tightening at this time, although the recent inflation data increases the risk that policy will remain on hold.

Key Risks
1. Currency risks are to the downside. While the domestic fundamentals are generally sound, still high inflation and a widening current account deficit leaves the currency vulnerable to a deterioration in global risk appetite. Our central scenario is risk appetite will remain firm in 2007 as the global economy experiences a soft-landing and Asia and the Middle East continue to generate massive amounts of surplus liquidity. However, were risk appetite to weaken significantly, the PKR would likely weaken more than we are currently anticipating. This would then lead to a need to hike interest rates to a degree that could be detrimental to the local economy in the short-term.

2. Politics to rise on the agenda. There are two major issues here. First, parliamentary elections are due to be held by October. Benazir Bhutto and Nawaz Sharif, both former prime ministers currently in exile, have promised to return to Pakistan before the general elections. If they were to join forces, something unthinkable in years gone by, this could provide a very stiff test of the government's support. There are rumours that, cognisant of this risk, President Musharraf is quietly engaging Bhutto in order to seek an alternative outcome. Second, the 'key man' risk remains. Political uncertainty is clearly likely to rise in 2007, but we believe this will not lead to serious political and policy uncertainty. Therefore, the fallout is seen as limited.

Key Macro Trends
1. Growth to remain strong, inflation to peak. Growth is expected to stay solid at 6% in the current fiscal year (ending in June) and then accelerate in FY 2007/08. Inflation is set to peak in Q1. The current account is expected to deteriorate further with strong infrastructure spending, which will increase the demand for imports.

PHILIPPINES

Frances Cheung
Economist, +852 2820 3609
Frances.Cheung@hk.standardchartered.com

Sustainable growth

- Growth to be sustained by firm domestic demand
- BSP to start easing in Q2-07 on tame inflation
- Investment should be supported by public projects

Call of the Year
1. The peso to outperform regional currencies on relative values and firm domestic strength. In the run-up to mid-term elections and with our USD forecast, the PHP/USD may correct mildly from Q2-07 onwards but strengthening back towards YE-07.

2. Infrastructure projects to boost investment. Government infrastructure plan will attract private sector participation and thus FDI. The construction and communications sectors will be given a boost.

3. The services sector remains the growth area. Buildings for call centers are up in prime sites, in response to huge demand from MNCs which continues to relocate back offices to lower-costs areas.

Key Risks
1. Politics, as always. Investors may require a higher risk premium in the run-up to the mid-term elections in May/June. The risk, which seems not particularly high though, is if Arroyo's hold of power turns more fragile leading to abrupt change in the government, then investor confidence could be negatively affected.

2. Regional risk appetite reversal. Historically, the Philippines is vulnerable to market volatility triggered by falling confidence in emerging markets, which may see higher volatility as global growth and interest rate cycles turn.

3. Sharp global slowdown. While the balance of growth will shift towards domestic demand from external, the economy will still be hit if the global slowdown is more severe than expected, as exports amount to 40% of GDP.

Key Macro Trends
1. Domestic demand to take the lead. Consumption will be sustained by expected continuing remittances inflows from overseas foreign workers (OFWs), with more workers being hired in professional jobs. Meanwhile, investment will be boosted by public projects.

2. Exports to decelerate. With over 60% of exports in electronic products, external trade performance will inevitably be affected by the peaking of the tech-cycle.

3. Inflation to ease gradually. With the effect of the EVAT fading, oil prices stabilising, and assuming no major supply disruption in agricultural products, headline inflation should edge down gradually, averaging 4.8% in 2007. We expect the BSP to start easing in Q2-07.

SINGAPORE

Joseph Tan
Economist, +65 6530 3464
Joseph.Tan@sg.standardchartered.com

A two speed economy

- Export sectors to slow while domestic sectors hold up
- Benign inflation could see a neutral monetary stance
- USD/SGD set to break 1.50 on a sustained basis

Call of the Year
1. USD/SGD to break 1.50. This currency pair is set to break below 1.50 due to broad USD weakness versus regional Asian currencies, especially as Singapore is expected to maintain solid growth momentum in 2007.

2. MAS to shift to a neutral stance on SGD as the inflation outlook remains relatively benign. This is especially so as the USD experiences broad weakness against regional currencies.

3. Economic growth to soften but still outperforms expectations. Despite a softening US economy, Singapore's growth momentum should be kept at about 5.5% - the upper half of the 4-6% official growth target - based on solid domestic demand.

Key Risks
1. Sharp deterioration in the US economy. This remains a key risk for the Singapore economy given its heavy dependency on the US market, both directly and indirectly.

2. Major correction in the equity market. While valuation of most Asian stock markets are still below their cyclical peaks, recent strong rallies of many Asian equities, Singapore inclusive, have raised the risk of sharp corrections and growing volatility, especially if confronted with less desirable external environment.

3. China slowdown. China has risen in importance in recent years and the links with Singapore are not just via trade but commodity prices and investment too. A major slowdown in China will have significant actual and psychological impact on Singapore's growth prospects.

Key Macro Trends
1. Economy to grow at two speeds. Export related sectors are set to slow as US demand moderates while domestic sectors should still benefit from strong labour market and rising prices of equity and property.

2. Benign inflation outlook despite possible tax hike. Goods and Services Tax will be raised to 7% from 5% but falling oil prices and softening economy should see inflation average a mere 1.2%, prompting a change in SGD stance.

3. Interest rates to stay in a tight range. Benign inflation picture coupled with expected rate cuts from the US Federal Reserve should see the 3M SGD SIBOR stay in a tight range of 3.00 to 3.375%.

SOUTH KOREA

Chongwoo Chun
Senior Economist, +822 3702 5045
Chongwoo.Chun@scfirstbank.com

Slow but resilient

- KRW to relative under-perform most Asian currencies
- Call rate to be freezed at 4.5%
- Regional cooperation to accelerate

Call of the Year
1. KRW to remain firm, but under-perform most Asian currencies. Sustained current account surplus and expected USD weakness should keep the KRW firm, and probably strengthen further to 910 versus the USD in Q1-07. However, excessive appreciation in 2006 should limit further gain in 2007, especially versus most other Asian currencies. We expect the KRW to trade at 950 by YE-07.

2. Call rate to be held at 4.5%. The recent hike in the reserve ratio that raised market CD rates by over 20bps should allow the Bank of Korea (BoK) to hold its benchmark call rate steady, especially given the likely moderation of consumer inflation.

3. The threat from North Korea will expedite regional cooperation, especially with China and Japan. While remaining an annoying factor, Pyongyang's security threat could drive Seoul to work closer with Beijing and Tokyo.

Key Risks
1. Sharp fall of KRW/JPY cross: While we expect a stronger JPY to ultimately raise JPY-KRW and preserve Korea's export competitiveness, any sharp weakening of the JPY could undermine Korea's export and growth momentum.

2. Monetary overkill if the BoK pushes rates much higher to curb real estate speculation, as suggested by the President in his New Year address. This could jeopardise highly indebted households and depress domestic demand.

3. Policy malaise caused by political transition as the next presidential election closes in towards end 2007. While major economic policies are unlikely to change, approvals and implementations may be withheld or slowed before the new president is in office.

Key Macro Trends
1. Current account surplus to continue as oil prices moderate, cutting the import bill. This should prevent any sharp growth moderation amid the US slowdown.

2. Inflation to be well contained as oil prices stabilise and growth moderates, but asset prices may be volatile.

3. Economic linkages to diversify further, especially in exports to and investment in China. Slower US growth and heightened competition should drive for more diversified economic linkages with emerging markets like China, South America and Russia.

SRI LANKA

Steve Brice
Regional Head of Research, Middle East and South Asia, +9714 507 0607
Steve.Brice@ae.standardchartered.com

Vulnerabilities remain

- Growth set to slow from its stellar performance
- LKR to weaken, interest rates have peaked
- Risks to central scenario significant

Calls of the Year
1. LKR to weaken further in 2007 following its significant decline in Q4-06. High inflation, low FX reserves and a still high current account deficit suggest the only question in 2007 is the pace of depreciation of the rupee, not its direction. We forecast a 5-6% weakening.

2. Interest rates to rise higher given strong credit growth. With inflation expected to peak in H1-07, we believe the central bank will raise rates by another 100bps before it pauses towards mid-07.

Key Risks
1. Security situation remains a concern, especially as violence escalates after the collapse of talks in Geneva. The main concern will be the implications for the tourism industry and the fiscal balance. Security concerns may also dissuade some investors from looking favourably at relatively low valuations available in the stock market.

2. Low FX reserve levels, at 2.5 months of import cover, may lead to more significant currency weakness given the backdrop of a current account deficit of around 6% of GDP. In turn, the inflationary implications of a weak LKR may require a tightening in monetary policy more than the domestic economy, on its own, would warrant.

3. Challenging fiscal woes with a 90% debt to GDP ratio and a fiscal deficit at 8.7% of GDP (7.5% if stripped out tsunami-related expenditures). While significant progress has been made in debt reduction, the expiration of the Paris Club moratorium will raise external financing requirements, while the maturity profile of the country's external debt is lumpy. To improve public finances, it needs to broaden the tax base further.

Key Macro Trends
1. Growth to slow in 2007 against the backdrop of slower global growth and weaker investment due to increased security and continued fiscal concerns.

2. Inflation set to peak as the higher base from May should bring average inflation levels down. However, recent inflation data has been worryingly high and strong credit growth suggests it is likely to remain elevated in 2007.

TAIWAN

Tai Hui
Economist, +852-2821 1039
Hui.Cheung-Tai@hk.standardchartered.com

Crunching time ahead

- Slower exports and weaker investment to curb growth
- Domestic political stalemate to stifle cross-strait relations
- More rate hikes but limited TWD gain

Call of the Year
1. Moderation in the IT sector could weigh on export growth in 2007. Semi-conductor book-to-bill ratio is currently in neutral zone just below one, though an expected soft landing of the US and a strong Chinese economy should help to avoid a collapse in export demand.

2. Intensifying competition, especially those from the mainland, could erode Taiwan's export prospects further. For example, China will begin producing its own 12-inch wafer, which is a niche product of Taiwanese chipmakers.

3. Cross-strait economic relations to remain inhibited by domestic political stalemate, as hinted by the President's New Year speech. Material relaxation in cross-straits direct investment or tourist flows would remain strongly resisted by the executive arm of the government.

Key Risks
1. Sharp decline in exports is the biggest economic risk, since exports is the single engine supporting the island's growth. A hard landing of the US economy, albeit with low probability, could trigger such dire scenario.

2. Weak business confidence, stifled by local politics or global slowdown, could undermine investment and job growth.

3. Tensions among political parties are likely to stay high with the Legislative Yuan election due in Dec-07 and the Presidential election due in Mar-08.

Key Macro Trends
1. Consumer sentiment could rebound mildly with the credit card debt problem gradually fading and jobless rate falling. This should partially offset an expected export slowdown but unlikely to bring stronger GDP growth.

2. Further rate hikes toward mid-2007. The central bank raised rediscount rate by another 12.5bps to 2.5% in Q4-06, but CBC said rates were still below neutral despite tame inflation and soft consumption. This could see further rate hikes in H1-07 unless there is a sharp falloff in economic growth.

3. Current account surplus to shrink from an estimated 6.5% of GDP in 2006 to 5% due to moderation in exports and stronger growth in imports. This may curb domestic liquidity and limit the appreciation of TWD.

THAILAND

Usara Wilaipich
Senior Economist, +662 724 8878
Usara.Wilaipich@th.standardchartered.com

Bracing for harder time ahead

- Recent events signal a harder time ahead
- We see weaker GDP, earlier rate cut, and a weaker THB
- Political developments still hold the key

Call of the Year
1. A sharp THB correction in Q2-Q3 of 2007 to the 37-38 levels. After being one of the best performers in 2006, the THB could be pressured by large capital outflows under the newly introduced unremunerated reserve requirement (URR) measures and the latest political uncertainties.

2. An early interest rate cut as political uncertainties and capital outflows dampen economic growth more than expected. Other factors like much weaker export demand would also prompt the BoT to act early. With core inflation easing and headline inflation clearly peaked, the BoT should have more freedom to act now. We believe the BoT could start cutting its benchmark interest rate in Q2-07.

3. Economy to bottom out in H2-07 when political uncertainty is cleared with the introduction of a new constitution and a new government formed after a fresh general election. Accelerated public spending would be supported by revival in consumer and investor confidence.

Key Risks
1. Resurging political tension following series of bomb blasts on New Year's Eve in Bangkok that underlined growing internal conflicts within the army. Besides, the drafting of a new Constitution and conduction of fresh general elections would be an uphill task.

2. Any sharp slowdown in the US. Although Thailand's exposure to the US economy has steadily reduced over time, it is unlikely to escape fully from a US downturn.

3. Renewed surge in crude prices. Thailand is still quite sensitive to oil prices given that it has one of the most oil-intensive economies, probably due to the relative low price of retail petrol and heavy dependence on road transport.

Key Macro Trends
1. Continual dominance of politics. The maintenance of delicate political balance and the search for a more sustainable political structure will dominate Thailand's development in 2007. However, broad political stability should remain with the King as the ultimate stabiliser.

2. Growth sets to slow as weak confidence undermines domestic demand and the end of tech-cycle dampens exports. We now look for a slower growth of 4.4% in 2007.

3. Lower interest rates and a weaker THB should cushion the downturn, more so if public spending accelerates.

US

Doug Smith
Chief Economist, Americas, +1 212 667 0564
Douglas.Smith@us.standardchartered.com

Growth is slowing, not collapsing

- Consumption and exports will contribute more than expected
- The Fed will cut rates but not before Q3-2007
- USD weakness and oil price spike pose the biggest risk

Call of the Year
1. The US consumer will remain afloat as long as credit remains available. The housing market slowdown will not lead to a collapse in consumer spending as long as credit remains inexpensive. That will help the consumer weather any further housing-driven wealth losses. Despite the Fed's tightening, monetary conditions remain relatively easy.

2. Exports will be another source of US growth. Growth outside of the US and to a lesser extent the weakness in the USD mean that net exports will also make a positive contribution to growth in 2007.

3. The market is expecting too much/too soon from the Fed in 2007. Our view remains that the Fed will cut in 2007, but not before Q3. We will need to see a significant rise in the unemployment rate before the Fed will cut rates in 2007 and we do not see that happening soon.

Key Risks
1. Significant USD weakness which raises US interest rates. This would be the case if foreign capital inflows slowed significantly due to fear of overexposure to US assets. We see this as a low probability event in 2007.

2. A sustained spike higher in oil and retail gasoline prices. This raises the risk of higher inflation at the same time as a decline in real spending.

3. The possibility of another rate hiking cycle. Recent Fedspeak has highlighted the upside risk to inflation in the US. Most likely, one more rate hike would not scare the market into thinking that a series of rate hikes was imminent. However, strong labour market data in the face of inflation pressures could force the Fed to move.

Key Macro Trends
1. Growth will slow to below trend by end-2007. That slowing is driven primarily by lower residential investment and lower consumption.

2. Over time, the slower growth means that there will be more slack in the labour market. That will translate into less concern over wage-driven price pressures. The timing remains the key question.

3. Business investment will remain solid going forward. Rising equity prices, high capacity utilization, and stronger balance sheets mean that firms can continue to invest.

VIETNAM

Joseph Tan
Economist, +65 6530 3464
Joseph.Tan@sg.standardchartered.com

A WTO bonanza

- Economic growth to accelerate, not moderate
- VND likely to reverse multi-year depreciation trend
- WTO entry should see increased FX liberalization

Call of the Year
1. VND to break multi-year depreciation trend and appreciate versus the USD. Recent regulatory changes now see the pair trading in a +/- 0.5% range. Increased exports boosted by the WTO entry should see improving current account balance and strengthen the VND.

2. Further liberalisation to the currency regime as the WTO entry accelerates trade and investment deregulation, including more relaxed, albeit gradual, capital controls.

3. Economic growth to accelerate to 8.8% in 2007. Increased market access supported by the WTO entry should benefit Vietnam with higher levels of production and exports, defying the region's trend of slowing growth.

Key Risks
1. Formation of asset bubbles. Strong growth and capital inflows have fueled asset prices to record levels, especially given limited breadth and depth of local capital markets. The lack of clear indicators measuring property market inflation could exacerbate the issue.

2. Lack of competitiveness of state enterprises (SOEs). Increased competition from foreign enterprises allowed by the WTO entry could endanger the viability of SOEs, which still account for the bulk of Vietnam's employment, bank loan, tax revenues and output.

3. Inability to manage FX volatility. Increased FX liberalisation can lead to a rise in volatility and challenges Vietnam's ability to manage its external sector stability, especially given a relatively small FX reserves of about USD 12 bn.

Key Macro Trends
1. Economy to maintain strong growth momentum. WTO entry and a low base of comparison should see the economy expand in excess of 8% in the foreseeable future.

2. Inflation to moderate further in 2007. Lower oil prices reduce the chance of fuel price hikes. Barring any major adverse weather conditions, food prices should also come off, cutting inflation from 7.5% in 2006 to around 5% in 2007.

3. Interest rates to trend lower in H2. A benign inflation outlook should allow the State Bank of Vietnam, the central bank, to drive interest rates modestly lower in 2007.