Inflation Moves the Exchange Rate

November 18, 2010


Retail sales climbed 4.7% y-o-y in September, bringing the 9m10 figure to 4.4%. Although growth decelerated slightly in y-o-y terms (from 6.7% and 6.5% in July and August, respectively) the anticipated hike in budget spending in 4Q10 will spur domestic consumption, and the annual figure should come in at around 5.0%.

Meanwhile, investment was strong, rising 9.4% y-o-y in September and 3.8% in 9m10. Given the recovery on the credit market, investment growth should be relatively strong in 4Q10, while the annual figure could be close to 5.0%.

The agricultural sector, however, put in a poor showing due to the summer drought, output falling 10.1% y-o-y in 9m10. At the same time, the economy did not face shortages in the food industry, as it continued performing steadily (up 5.3% y-o-y in 9m10) due to an increase in imports.

All in all, we reiterate our basic macroeconomic projections for 2010, expecting GDP growth of
around 5%. However, macroeconomic performance may deteriorate in 2011. Increased budgetary spending will spur money supply growth and inflation, while the government’s aggressive borrowing will inevitably crowd out the private sector from the financial markets.

Between October 19 and 25, the CPI rose 0.1%, w-o-w inflation returning to 0.1% after almost three months at 0.2%. Over the first 25 days of October, inflation was 0.5%, bringing the y-o-y figure to 7.5% from 7.0% at the beginning of the month. Thus, y-o-y inflation continued to accelerate despite the slowdown in w-o-w inflation. The YTD tally is 6.8%. We reiterate our view that inflation will be around 8.0% this year and 8.0-9.0% next year, with the increased budgetary spending in 4Q10 and 2011 being the major driver.