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!"# Global Investment Update !"# September 2006 !"# Global Market Outlook !"#$%&'() – China, Eurozone, The Philippines and Japan ! Investment Feature !"#$%&'=! Emerging Markets: Fall Back ... Summer Forward ! Mutual Funds Guide ! Foreign Currency Snapshot !"#$% – KRW, THB and AUD

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�� !"#

Global Investment Update ��� !"#� September 2006

��� !"# Global Market Outlook–�� !"# $%&'()– China, Eurozone, The Philippines and Japan

��� ! Investment Feature–�� !"#$%&'=�� !– Emerging Markets: Fall Back ... Summer Forward

��� ! Mutual Funds Guide

��� ! Foreign Currency Snapshot–�� !"#$%– KRW, THB and AUD

�� !"#Global Market Outlook

2

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ChinaChina’s trade surplus reached another record of $14.6bn in July, with export and import growth rates at22.6% and 19.7%, respectively. The large trade surplus has contributed to persistent, rapid FX reserveaccumulation, which is the ultimate source of liquidity creation. With no signs of an easing in moneygrowth, the risk of economic overheating remains heightened. The authorities appear to have recognized

more explicitly that external imbalances are part of the problem and allowing faster CNY appreciation will have tobe part of the solution. The CNY exchange can play a role in the policy package of addressing external imbalances.These statements are mentioned for the first time in monetary policy reports, suggesting that there is now a broadconsensus at the policymaking level on giving faster CNY appreciation a more prominent role to in the policypackage going forward, although sharp or one-time moves are extremely unlikely. Meanwhile, the CNY appreciationwas slower than expected in 1Q 2006 and took a “pause” in April-May (likely due to a major China-related IPO inHong Kong in early June) and only started to show a more meaningful appreciation since June. While we maintainour call for a faster CNY appreciation in the remainder of the year, it appears increasingly challenging that theUSD/CNY by year end in absence of a discrete jump in the CNY rate that would make up the slow move earlier.

EuroZoneThe Eurozone has taken the lead among the major developed countries. Recording its strongest growthin six years, the Eurozone managed to outperform the US, Britain and Japan last quarter. As the specialeffects fade and higher oil prices take their toll, growth will likely recede to 0.5% qoq in the currentquarter. However, the overall outlook remains benign. Although some expectation indicators such as

the German ZEW have eased significantly, the broader EU Commission indices of business and consumer confidenceremain very buoyant. We look for GDP growth rates to oscillate slightly above the 0.5% qoq trend rate for theforeseeable future.

The available evidence ranging from Eurozone retail sales to business confidence and a host of country datasuggests that domestic demand has become the prime engine of Eurozone growth. With hiring intentions at orclose to 5-year highs in the PMI surveys for manufacturing and services, robust business investment points tosome further acceleration in employment growth. Going forward, we expect core inflation to edge up slightly to1.7% later this year, partly because German shops will likely raise some of their prices in the expected late-2006shopping spree to beat the January 2007 VAT hike. In our view, neither a repeat of the recent oil price spikes nor afurther hike in indirect taxes of the same magnitude looks likely. While we expect further near-term EUR weaknessversus the USD on our belief that the US interest rate market has underestimated the degree of further Fed tighteningneeded in the months ahead, we do believe the EUR on the crosses, particularly versus the lower yielding currenciesshould remain strong as investors continue to focus on relative yield.

The PhilippinesThe Philippines central bank (BSP) maintained its overnight borrowing rate at 7.5% for August. July CPIgrowth moderated to 6.4% yoy from 6.7% in June and the core rate also eased to 5.4% yoy from 5.8% inJune, indicating benign demand side inflation. However, the BSP remains aware of upward cost sidepressures. The rebound in remittances growth since the start of 2006 looks set to sustain, on the back of

marketing efforts by banks and remittance agencies to make remittance services more accessible for Filipinosoverseas, and underpin domestic liquidity going ahead. Further expansion in money supply may stoke inflationexpectations and together with planned wage increases in October, balance of risks to the inflation outlookcontinues to tilt upwards. Bank of America’s IT leading index highlighted a subdued outlook for global electronicsexports in 2H 2006 implied ongoing risks to Philippine exports and overall growth prospects. The peso has recoveredto pre-EM sell-off levels, mainly on renewed appetite for high yields and increasing immunity to political noise.

JapanBusiness investment is likely to remain the main driver for domestic demand growth. The strong corecapital goods orders readings are consistent with high growth readings in capital spending plan figuresin the June Bank of Japan Tankan. Banks’ renewed willingness to extend credit should also be supportivefor private investment. Total bank loans (including thrifts) rose by 2.0% yoy in July, the highest in ten

years and accelerating from 1.7% yoy in June. We continue to believe that Japanese market participants are probablyunderestimating prospective BoJ rate hikes going forward. We expect another 25bp rate hike on November 16, tobe followed by four 25-bp rate hikes during FY2007 (which will start in April 2007). Core inflation remains positiveafter the CPI rebenchmarking and to creep upwards over the next year. A softening of crude oil prices would leadto a renewed upward trend in the current account surplus. Despite expected some slowdown in demand growth inthe US and China, the cheapest real trade-weighted JPY since 1985 should be supportive for Japanese exports.Over the medium term, however, renewed concerns about structural global imbalances and faster CNY appreciationshould be supportive for the JPY.

3

�� !Investment Feature

Emerging Markets: Fall Back ... Summer ForwardEmerging Market (EM) currencies and assets will likely follow a pattern similar to the old

adage associated with the move to standard time from daylight saving time. In the case of

EM, currencies and assets will likely “fall back” after a “summer forward,” due to valuations,

the lure of yields and Fed policy. Many EM currencies remain overvalued, despite the recent

sell-off beginning in early May. A more dovish Federal Reserve and recent rate hikes in

key emerging economies will likely continue to stabilize EM currencies through the

remainder of the summer. Nonetheless, a more restrictive monetary stance on the part of

the Federal Reserve in coming weeks coupled with continually stretched valuations will

likely lead to another sell-off in EM currencies into the fall. The move to tighten credit

conditions by the majority of EM central banks certainly helped stabilize currencies.

Nonetheless, further rate hikes will likely prove less potent in the event of an additional

episode of EM currency depreciation. Turkey raised rates three times since the end of

May, pushing the policy rate up by 425 basis points to 17.50%. The efficacy of the central

bank response will likely prove most muted in selected countries in Eastern and Central

Europe, where recent episodes of currency depreciation are contributing to some challenges

in meeting inflation targets. In Hungary, expansionary fiscal policy coupled

with recent currency weakness will likely increase inflation pressures from the

present tepid inflation rate of 3%. Similarly, higher inflation in South Africa —

despite recent rate hikes — will likely raise further issues regarding the

achievement of inflation of 3%-6% in an environment of a weaker rand.

The monetary response in Emerging Asia will likely remain less a function of

responding to currency weakness and more closely adhere to individual country

responses to macro factors such as 1) the prospect for a slowing US economy,

2) a potential plateau in the technology cycle, and 3) the pass through from

higher oil prices to inflation. In other words, monetary conditions in Asia have

hardly changed, yet market conditions have clearly changed on balance. China

and movements of the CNY will likely prove pivotal for currency determination

in EM Asia. We revised our year-end forecast for USD/CNY from 7.63 to 7.75 in

part due to a temporary stall in the USD/CNY slip during April-May and a firmer

USD on a trade-weighted basis than originally anticipated. Nonetheless, the USD will likely

slip at a more rapid pace through year-end, as the exchange rate will likely become an

increasingly important tool for addressing domestic monetary imbalances.

Sentiment regarding the US over the next few weeks will likely remain unchanged, due to

a paucity of significant data releases between August and September. The Federal Reserve

will likely play a central role in the determination of EM currency values in coming days. A

trigger for a renewed rapid depreciation of EM currencies could present as market sentiment

shifts toward a realization that the Federal Reserve will more actively tighten the Federal

Funds rate than is presently being incorporated into present expectations. Inflation in the

US clearly remains a factor. In other words, higher inflation remains to be fully incorporated

into financial market expectations. Higher inflation will likely temper enthusiasm related

to the prospect for a peak in the Federal funds rate. Our US economics team anticipates

two 25-basis-point rate hikes by year-end. A pulse on upcoming inflation in the US will

likely prove key for EM. Markets likely become increasingly focused on the prospect for a

slowing US economy and a tilt toward higher inflation. The mix will likely prove of

importance for emerging economies, limiting the prospect for growth via exports to

industrialized nations and reducing capital flows with higher yields in the G3. In the near

term, a less hawkish stance will likely provide comfort for a further reach toward risk-

based assets. Despite some hawkish headlines, Fed officials are highlighting a moderation

in unit labor costs and inflation expectations. By early fall, moderation in output and an

accommodation of higher inflation will likely prove less favorable for emerging economies.

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�� !Mutual Funds Guide

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�� ! Growth Funds �� !"# Aggressive Growth Funds�� ! Bond Funds

�� !"Lipper�� 2006�8�31�� !"#$%&'()*+,-�./01234Sources: Lipper, as of 8/31/2006, USD percentage return, bid to bid, gross income reinvested.

�� !"#$%&'()*+,-./01 !23456789:;<!=>?@A+,BCD.<EFG2�� !HIJK/'(LMN+,)*-.;<�� !"Sharpe ratio is a ratio to measure mutual fund’s risk-adjusted performance. It is calculated using standard deviation and excess return to determine reward per unit ofrisk. The higher the Sharpe ratio, the better the fund’s historical risk-adjusted performance.

�� The U.S.�� !"

�� ! Cumulative �� !Fund Size Return(%) Sharpe Ratio

�� �� ! 1� 3 � 5 � 3��� ! / �� Fund Name/ Sector Currency USD million 1 Year 3 Years 5 Years 3 Years

�� ! Bond Funds�� !"#$%&' Franklin US Government USD $985.5 1.52 8.46 17.56 -0.03Sector Average $184.6 1.01 9.15 19.39 -0.01

�� ! High Yield Bond�� ! – �� !"#$ Fidelity Funds – US High Yield USD $368.5 5.57 29.04 – 0.38Sector Average $585.7 4.20 24.53 35.10 0.32

�� ! Equity Funds�� !"#$%&' Franklin Mutual Beacon USD $1,494.2 12.57 43.35 37.40 0.41Sector Average $527.4 6.14 30.54 14.16 0.18

�� ! Smaller Companies�� !"#$% – �� !"# Schroder ISF US Smaller Companies USD $265.9 13.48 59.46 68.01 0.30Sector Average $193.4 6.84 36.89 37.19 0.17

�� ! Latin America�� !"

�� ! Cumulative �� !Fund Size Return(%) Sharpe Ratio

�� �� ! 1� 3 � 5 � 3��� ! / �� Fund Name/ Sector Currency USD million 1 Year 3 Years 5 Years 3 Years

�� ! Equity Funds�� ! – �� !"# Fidelity Funds – Latin America USD $756.7 48.70 223.16 241.40 0.48Sector Average $980.9 43.94 221.78 246.89 0.47

�� International�� !"

�� ! Cumulative �� !Fund Size Return(%) Sharpe Ratio

�� �� ! 1� 3 � 5 � 3��� ! / �� Fund Name/ Sector Currency USD million 1 Year 3 Years 5 Years 3 Years

�� ! Bond Funds�� !"#$%& Templeton Global Bond USD $1,326.9 6.94 31.36 69.63 0.25Sector Average $176.5 1.09 17.70 40.30 0.11

�� ! High Yield Bond�� !"#$% INVESCO Global High Income USD $432.4 6.80 34.27 73.70 0.37Sector Average $198.1 5.63 35.43 66.97 0.31

�� ! Global Balanced�� !"# – �� !"# Investec GSF Global Strategic Managed USD $228.7 13.04 45.08 58.19 0.36Sector Average $319.3 10.55 39.13 42.74 0.35

�� ! Equity Funds�� !"# – �� !"#$% Investec GSF Global Strategic Value USD $1,404.7 21.97 104.94 121.92 0.53Sector Average $339.0 16.58 59.76 48.86 0.36

�� ! Smaller Companies�� !"#$%&'( Templeton Global Smaller Companies USD $134.2 13.42 67.46 89.31 0.37Sector Average $172.2 12.73 62.59 63.96 0.31

�� !"#$ Them

�� ! / �� Fund Name/ Sector

�� ! Information TechnologyJF�� !"#$ JF Pacific Technology FundSector Average

�� ! Natural Resources�� !"# INVESCO EnergySector Average

�� ! Healthcare�� ! – �� !"# Fidelity Funds – Health CareSector Average

�� Telecommunications�� ! – �� ! Fidelity Funds – TelecommunicationsSector Average

�� ! Financial Services�� ! – �� !"� Fidelity Funds – Financial ServicesSector Average

�� Others�� ! – �� ! Fidelity Funds – IndustrialsNo Ranking

�� !"#$%& Hedge and Managed FuturesMan Hedge Diversified LtdNo Ranking

��

�� ! / �� Fund Name/ Sector

�� ! Bond Funds�� ! European Bond�� !"# – �� !"# Investec GSF European BondSector Average

�� ! Euro Bond�� ! – �� !"# Fidelity Funds – Euro BondSector Average

�� ! Sterling Bond�� ! – �� !"# Fidelity Funds – Sterling Bond�� !"# – �� !"# Investec GSF Sterling BondSector Average

�� ! High Yield Bond�� !"#$% Franklin High Yield EuroSector Average

�� ! Equity Funds�� !"#$%&' European Equity (including the UK)�� ! – �� !"# Fidelity Funds – European AggressiveSector Average

�� !"#$%&'( European Equity (excluding the UK)�� !"#$% Baring European GrowthSector Average

�� !" Euro Zone Equity�� !"#$% – �� ! Schroder ISF EURO Active ValueSector Average

�� ! Smaller Companies�� !"#$%& INVESCO Pan European Small Cap EquitySector Average

�� !"# European Emerging Market�� !"#$ Templeton Eastern EuropeSector Average

�� The UK�� !"#$% INVESCO UK EquitySector Average

�� Asia�� !"

�� ! Cumulative �� !Fund Size Return(%) Sharpe Ratio

�� �� ! 1� 3 � 5 � 3��� ! / �� Fund Name/ Sector Currency USD million 1 Year 3 Years 5 Years 3 Years

�� ! Bond Funds�� !"#$% – �� ! Schroder ISF Asian Bond USD $280.3 5.07 20.58 60.89 0.19�� !"#$% – �� !"# First State Asian Bond USD $16.6 5.22 – – –Sector Average $91.7 4.42 18.89 50.31 0.19

�� ! Equity Funds�� !"#$% Asia (including Japan)GAM Star �� !"# GAM Star Asia – Pacific Equity EUR $838.7 25.45 88.69 105.65 0.49Sector Average $473.9 23.68 84.25 91.13 0.45

�� !"#$%& Asia (excluding Japan)�� ! – �� !" Fidelity Funds – South East Asia USD $1,567.7 33.12 93.54 146.75 0.33JF�� ! JF ASEAN Fund USD $452.4 36.54 105.33 189.20 0.34�� !"# – �� !"# Investec GSF Asian Equity USD $139.3 28.40 92.81 – 0.35Sector Average $386.9 25.05 80.66 128.85 0.32

�� ! Smaller CompaniesJF�� !"#$% JF Eastern Smaller Companies Fund USD $270.3 12.14 76.84 198.82 0.25Sector Average $134.6 16.55 67.97 146.84 0.28

�� ! Single Country�� Japan�� !"# INVESCO Japanese Equity USD $771.8 25.11 73.01 72.71 0.29Sector Average $606.9 21.23 62.28 45.66 0.31

�� !"# Japan Smaller CompaniesJF Japan Smaller Companies (Yen) Fund JPY $791.0 10.34 54.33 43.35 0.14Sector Average $533.4 3.55 67.92 53.32 0.21

�� Greater China�� !"#$% – �� !"#$ First State Greater China Growth USD $262.7 24.46 98.99 – 0.37Sector Average $457.7 26.19 80.46 157.73 0.31

�� China�� !"#$% AD HSBC GIF Chinese Equity AD USD $2,463.4 36.03 100.41 195.41 0.26�� ! – �� !"# Fidelity Funds – China Focus USD $2,248.7 44.74 116.11 – 0.30�� !"#$% – �� !"# First State China Growth USD $802.9 39.69 141.52 305.74 0.39Sector Average $817.3 37.50 103.28 207.84 0.27

�� Hong Kong�� !"# Allianz GIS RCM Hong Kong USD $294.3 22.32 102.99 145.74 0.39�� !"#$% – �� ! Schroder ISF Hong Kong Equity HKD $144.0 25.97 108.32 151.18 0.51Sector Average $111.8 21.82 93.06 125.59 0.38

�� TaiwanJF�� JF Taiwan USD $211.9 24.52 38.37 64.43 0.14Sector Average $143.5 18.62 35.58 58.32 0.14

�� Korea�� !"# Baring Korea GPB $398.8 35.57 117.63 267.68 0.22�� !"# Allianz GIS RCM Korea USD $66.9 40.32 138.97 289.99 0.26Sector Average $157.1 29.46 104.52 227.59 0.19

�� ThailandJF�� ! JF Thailand Fund USD $270.7 19.40 64.89 172.25 0.16Sector Average $276.9 12.81 58.54 173.03 0.15

�� Australia�� ! – �� ! Fidelity Funds – Australia AUD $692.5 24.83 126.07 170.13 0.48Sector Average $360.4 26.29 126.66 158.32 0.53

�� IndiaJF�� ! JF India Fund USD $598.2 37.92 230.90 349.31 0.46Sector Average $1,773.2 29.95 185.46 372.45 0.39

�� ! Emerging Markets�� !"

�� ! Cumulative �� !Fund Size Return(%) Sharpe Ratio

�� �� ! 1� 3 � 5 � 3��� ! / �� Fund Name/ Sector Currency USD million 1 Year 3 Years 5 Years 3 Years

�� ! Bond Funds�� !"#$%&'() ABN AMRO Global Emerging Markets Bond EUR $819.6 26.48 94.74 – 0.42Sector Average $521.6 13.27 51.37 – 0.34

�� ! Equity Funds�� ! – �� !"# Fidelity Funds – Emerging Markets USD $1,013.0 38.53 132.02 188.31 0.38Sector Average $401.2 30.88 113.67 170.86 0.36

me & Hedge Funds�� !"

�� ! Cumulative �� !Fund Size Return(%) Sharpe Ratio

�� �� ! 1� 3 � 5 � 3�Currency USD million 1 Year 3 Years 5 Years 3 Years

USD $131.9 24.84 36.83 86.70 0.18$108.7 11.11 17.80 2.44 0.05

USD $271.2 15.53 147.71 157.03 0.37$1,371.2 13.09 153.40 154.02 0.39

EUR $430.9 9.35 41.41 17.40 0.34$222.7 4.76 33.00 11.24 0.21

EUR $355.2 21.78 65.21 43.26 0.34$228.5 16.70 53.80 17.34 0.29

EUR $186.8 28.78 87.64 81.33 0.46$204.6 21.86 75.53 73.69 0.38

EUR $361.0 24.64 106.76 115.00 0.41

USD $34.5 8.27 – – –

5

� Europe�� !"

�� ! Cumulative �� !Fund Size Return(%) Sharpe Ratio

�� �� ! 1� 3 � 5 � 3�Currency USD million 1 Year 3 Years 5 Years 3 Years

EUR $18.1 3.22 27.47 66.38 0.08 $184.3 2.96 29.14 71.16 0.11

EUR $1,100.2 3.11 30.31 76.79 0.15 $754.3 3.05 27.10 69.39 0.05

GPB $304.3 7.76 38.32 69.95 0.01GPB $68.3 7.75 39.67 68.64 0.03

$143.3 7.57 35.67 60.67 -0.08

EUR $45.6 10.21 52.29 98.85 0.30 $157.1 7.94 46.90 93.13 0.31

EUR $3,835.9 25.36 127.15 159.01 0.50 $1,734.6 23.22 90.31 73.48 0.44

GPB $281.0 36.07 108.19 79.91 0.45 $129.9 26.56 92.24 67.22 0.41

EUR $941.8 26.39 114.19 – 0.59 $1,136.8 22.63 93.51 74.46 0.41

EUR $498.1 28.41 138.23 105.24 0.51$625.6 23.88 124.80 109.96 0.45

EUR $1,515.1 37.60 200.09 411.95 0.46$1,466.3 37.76 194.29 460.45 0.37

GPB $82.5 22.14 87.40 87.55 0.35$194.1 20.91 83.06 66.93 0.32

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THB: Strong Currency a Drag on Export Performance

The baht staged a mild correction in mid August following heightened Bank of Thailand (BOT)

intervention risk and prospects for sizeable dividend outflow in the near term. The

modest correction in THB strength is unlikely to benefit exports due to the increased

dependency on external demand to sustain growth momentum. We expect growth

support from the external balance to weaken in 2H 2006, posing further downside

risk to the currency with USD/THB ending the year at 40.0.

Although nominal export growth held up in 1H 2006 despite significant THB

appreciation, we believe a large part of this resilience was at the expense of margins

KRW: Slowing Growth Momentum Puts KRW at Risk

Recent economic indicators continue to highlight the downside risk to growth. Slowing global

demand and deterioration in the current account balance will likely trigger a broad-based

economic slowdown in 2H06 and into 2007. In view of the subdued growth outlook and

capital outflows from a sustained decline in corporate profitability, we believe that

current KRW levels remain too strong relative to fundamentals. We maintain that

there is room for further upside in USD/KRW toward 985 by end 3Q06 and 990 by

end 4Q06. The sharp decline in July industrial output growth to 4.4% yoy from

10.9% in June is indicative of a broader slowdown on top of one-off distortions in

July – August.

Additionally, the Leading Index continues to point to a slowing economy, with the

July index declining for the 6th consecutive month, to 4.3% from 4.8% in the previous

month. The index leads manufacturing output by 2 months, which suggests performance in

the goods sector will likely remain soft in coming months. The external balance will likely

remain weak, with global demand slowing and the risk of the current account missing BoK’s

US$4 billion target for 2006 has certainly increased. While the BoK reiterated that the full-

year target is attainable despite likely deficits in July – August on weaker goods balances,

we believe the risk is for the current account to underperform in coming months. Additionally,

the compression in exporters’ margins triggered by the sharp KRW appreciation in late-2005

could also limit improvements in the external balance.

The combination of higher cost base and lower prices received would be indicative of limited

pass-through in production costs to export prices, and a consequent compression in export

margins. With global demand likely to slow, sustaining the export growth momentum in 2H06

will likely require further compression in margins to boost shipment volume, which may not

be sustainable. While the finance ministry remains optimistic regarding the official growth

target of 5.0% – 5.1% in 2006, there is nevertheless increasing concerns over the dimming

economic prospects next year. Based on our estimates, KRW has strengthened on a REER

basis, trading around 13% higher than the 1990-2005 average in July. While month-end

export settlements will likely keep USD/KRW heavy in the short run, we believe that USD/

KRW strength will resurface once the seasonal flows are over and investors’ focus returns to

weaker Korean fundamentals.

AUD: Data to Show Solid Economic Momentum

The main driver of higher global risk appetite in 3Q 2006 to date has been the downgrade of

expectations for Fed tightening in this cycle. Support for the AUD from this source has been

accentuated because expectations for RBA rates have moved in the opposite direction; in

the quarter to date the AUD bill market estimate of the end point for RBA tightening has

increased by 15 bps – this due to higher prints on 2Q inflation and June spending, credit

and housing related figures.

However, the AUD TWI has retreated from its recent high, due to: (a) softer Australian

consumer sentiment numbers, and questions about whether the housing market

can sustain its 1H 2006 “second wind” in light of the two rate hikes; and (b)

commodity prices, as measured by the CRB index, have pulled back in recent days.

Looking ahead, risk appetite measures will be affected by Iran-induced geopolitical

uncertainty and US data releases affecting expectations for further Fed tightening.

However also important for AUD will be the imminent round of 2Q 2006 economic

data, this is backward looking, but goes to the momentum that the Australian

economy had at the end of fiscal year 2005-06 – and just prior to the August 2 rate hike.

The build up to the level and composition of Australian 2Q GDP will also be important in the

sense that, while the RBA unlikely to change rates again as soon as its September 6 meeting,

there is a bunching of other G10 central bank decisions within a week of that date, including

by dollar bloc peers Canada and NZ. A GDP outcome of 0.9% qoq would take the fiscal year

growth rate to 2 %, higher than the 2 % estimate made by Treasury at budget time, providing

a strong starting point for the new fiscal year. Notwithstanding any noise associated with

shifts in risk appetite and Fed tightening expectations, underlying support for AUD upside

should remain in place under current policy settings; the official interest rate is only at its

long term average after-inflation, and the currency is cheap relative to terms of trade gains

of the past three years.

7

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in order to sustain overseas shipment volume amid deteriorating domestic demand

conditions. But with exporters’ margins already weakened in 1H and the increase in

production cost likely to be sustained by high domestic price inflation and elevated oil prices,

maintaining export growth momentum in 2H 2006 would likely require further margin

compression that may prove to be unsustainable. In fact, the Federation of Thai Industries’

(FTI) has proposed to the government earlier August that USD/THB be maintained in the

38.0 – 39.0 range to support exporters. Although the proposal was swiftly dismissed by the

BoT Governor who described it as “wishful thinking,” it is warranted by the sustained margin

pressure from excessive THB strength that has been rapidly eroding exporters’ price

competitiveness and profitability. We continue to expect excessive THB strength to be a

drag on export performance in 2H06 and 2007. Export growth momentum will likely falter in

coming months, exacerbating the growth slowdown led by deteriorating domestic demand.

QP

ON

43

21

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