asia quarterly - mizuho bank...asia quarterly ― q1 2019: cans & cushions ― 6th march 2019...
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Asia Quarterly ― Q1 2019: Cans & Cushions ―
6th March 2019
Mizuho Bank, Ltd. Asia and Oceania Treasury Department
Vishnu Varathan
Head, Economics & Strategy
Chang Wei Liang
FX Strategist
Zhu Huani
Market Economist
Global financial markets pulled back from the brink of a meltdown on Christmas 2018;
uncannily timed for a “Santa rally”. But ostensible cheer has little to do with bona fide
optimism and far more a reflection of tail risks averted or mitigated …
… by kicking the can down the road and/or .... (policy) cushion against headline risks.
Specifically, US-China trade “truce”, with deferred tariff hikes and the tease of a “deal” that
will rollback tariff was at best a plush cushion for heightened global trade risks; but perhaps
in reality merely can-kicking on retaliatory tariffs while negotiations are on-going.
What’s more, the Fed turning “patient” clearly kicked the rate hike can down the road
(though markets have pushed the envelope with rate cut bets) while the prospect of QT being
“canned” at some point in 2019 is welcome cushion for hardening USD funding.
Meanwhile hopes of the “Brexit” (Article 50) can being kicked down the road, and China’s
fiscal and monetary policy cushion have also added to relief and backstop.
But to be sure, while financial markets have cheered, the reality is that impending economic
downturn will not be side-stepped completely (even if mitigated); though space for Asian
central banks to provide policy cushion is enhanced by the Fed’s can & cushion.
Asia Quarterly – Q1 2019
- 1 -
Executive Summary
US: Nascent soft spots heading into H2 fiscal fizzle, the Fed has turned “patient”;
but not dovish outright as jobs remain solid. Policy cushion from canning QT
later in 2019 may be most significant; but rate cut expectations look overdone.
EZ: If growth downturn is compounded by disruptive politics and “Brexit”, the
ECB may kick the (rate hike) can down the road. But so long as US trade
antagonism (auto tariffs!) is averted ECB may resume normalization in 2020.
Japan: Growing external headwinds and the threat of impending VAT hike (Oct
2019) snuffing out nascent consumption pick-up underscore the BoJ’s persistent
easing stance. Sensitivity to excessive JPY strength is also accentuated.
China: Slightly softer growth outlook (6.0-6.5%) masks emphatic fiscal efforts
(tax cuts and spending boost) alongside targeted monetary easing to ensure a soft-
landing that is particularly supportive of high-growth/tech industries and jobs.
De-escalation of the US-China trade spat should not be mistaken for a speedy and
comprehensive resolution. And lingering uncertainties will drag on Asia.
Elections uncertainties alongside fading Oil price relief will hamper India’s
growth; as structural impediments compound cyclical demand downturn amid
banking sector woes. RBI’s easing is on shaky ground amid fiscal slippage.
Indonesia: Measured easing by BI is subject to IDR stability. China’s commodity
demand and resilience of consumption may backstop growth slippage.
South Korea’s exports drag is set to intensify, but BoK will not rush a rate cut as
modest fiscal offset buys time to watch wider trade developments. Vietnam too is
subject harsher export headwinds; but stable VND policy will persist.
Singapore: Sharper growth slowdown as external demand lapse lacks sufficient
domestic offset; but MAS to look past the cycle if adverse trade outcomes are
averted; Malaysia’s consumption boost and firmer oil mitigate downside.
Exports dent remains the main worry though tail risks in politics also weigh on
Thailand’s outlook; but infrastructure plans such as EEC underpin. Philippines
may struggle with price stability and twin deficit risks amid external challenges.
Australia: Risk of consumption debt from falling home prices and highly
leveraged household in a climate of weak wage gains occupy the RBA’s mind; any
policy move this year is likely to be a cut though 2020 hike comes into play.
Front-loaded AXJ (and EM Asia assets) rallies leave limited headroom given UST
yield downside US-China trade optimism are already stretched; at least until peak
USD later in 2019.
Asia Quarterly – Q1 2019
- 2 -
AT A GLANCE
Yearly Economic Forecasts
Quarterly Outlook – Growth and Consumer Inflation
Growth Forecasts
Consumer Inflation forecasts
GDP YoY CPI C/A (% GDP) GDP YoY CPI C/A (% GDP) GDP YoY CPI C/A (% GDP) GDP YoY CPI C/A (% GDP)
United States 2.2 2.1 -2.3 2.9 2.5 -2.6 2.5 2.2 -2.6 2.5 2.2 -2.6
Eurozone 2.4 1.5 3.2 1.9 1.8 3.2 2.0 1.7 3.0 2.0 1.7 3.0
Japan 1.9 0.5 4.0 0.7 1.0 3.5 1.1 1.1 3.8 1.1 1.1 3.8
ASIA (ex-Japan) 6.2 2.2 1.5 6.3 2.6 0.5 5.9 2.3 0.4 6.0 2.8 0.2
ASEAN-6 5.3 2.9 2.8 5.1 2.7 1.3 4.9 2.4 1.3 5.0 2.9 1.3
China 6.8 1.6 1.3 6.6 2.1 0.4 6.4 2.1 0.5 6.3 2.4 0.2
India -0.6 3.3 -1.5 7.3 3.9 -2.3 6.7 2.9 -2.8 7.2 4.0 -2.8
Korea 3.1 1.9 4.9 2.7 1.6 4.7 2.6 1.2 3.7 2.5 1.7 3.5
Singapore 3.9 0.6 16.0 3.2 0.4 17.7 2.6 1.3 19.0 2.9 2.1 19.0
Malaysia 5.9 3.8 2.9 4.7 1.0 2.4 4.7 1.2 2.1 4.7 1.4 2.0
Indonesia 5.1 3.8 -1.6 5.2 3.2 -3.0 5.1 3.1 -2.4 5.1 3.4 -2.2
Thailand 3.9 0.7 11.0 4.1 1.1 7.4 3.6 0.8 5.7 3.8 1.5 5.0
Philippines 6.7 3.2 -0.6 6.2 5.2 -2.7 6.4 3.4 -2.7 6.5 3.6 -2.2
Vietnam 6.8 3.5 2.5 7.1 3.8 2.2 6.4 3.1 1.8 6.9 4.2 2.6
Australia 2.3 1.9 -2.6 2.8 1.9 -2.2 2.5 1.9 -2.3 2.8 2.3 -2.6
Note: Asia (ex Japan) includes China, India, South Korea, Singapore, Hong Kong, Taiwan, Malaysia, Indonesia, Thailand, Philippines, Vietnam
The forecasts in this table do not account for severe trade protectionism outcomes.
2020Country
2017 2018 2019
GDP Growth Forecasts
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
China 7.3 6.9 6.8 6.7 6.5 6.4 6.3 6.4 6.4 6.4 6.6 6.4
India 6.9 6.6 7.7 8.0 7.0 6.6 6.5 6.4 6.9 7.0 7.3 6.7
Korea 2.8 3.1 2.8 2.8 2.0 3.1 2.8 2.6 2.9 1.9 2.7 2.6
Singapore 3.7 3.9 4.7 4.2 2.4 1.9 2.1 2.4 2.8 3.1 3.2 2.6
Malaysia 5.1 5.9 5.4 4.5 4.4 4.7 4.7 4.9 4.7 4.2 4.7 4.6
Indonesia 5.3 5.1 5.1 5.3 5.2 5.2 5.2 5.1 5.1 5.1 5.2 5.1
Thailand 3.5 3.9 4.9 4.6 3.3 3.7 3.2 3.4 4.0 3.9 4.1 3.6
Philippines 6.6 6.7 6.6 6.2 6.0 6.1 6.2 6.4 6.5 6.5 6.2 6.4
Vietnam 5.9 6.8 7.4 6.9 6.8 7.3 6.7 6.2 6.5 6.3 7.1 6.4
Australia 2.8 2.2 3.2 3.1 2.7 2.3 2.3 2.4 2.6 2.8 2.8 2.5
2018 2019Country
2012-2016
avg 2017
2018
Note: Asia (ex Japan) includes China, India, South Korea, Singapore, Hong Kong, Taiwan,
2019
Inflation Forecast
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
China 2.1 1.6 2.2 1.8 2.3 2.2 1.8 2.3 2.2 2.2 2.1 2.1
India 7.2 3.3 4.6 4.8 3.9 2.6 2.4 2.5 2.9 3.6 3.9 2.9
Korea 1.3 1.9 1.3 1.5 1.6 1.8 0.8 1.1 1.3 1.2 1.6 1.1
Singapore 1.4 0.6 0.2 0.3 0.7 0.5 0.7 1.1 1.4 1.9 0.4 1.3
Malaysia 2.2 3.8 1.8 1.3 0.5 0.3 0.3 0.8 1.6 1.9 1.0 1.2
Indonesia 5.3 3.8 3.3 3.3 3.1 3.2 2.8 3.0 3.3 3.2 3.2 3.1
Thailand 1.3 0.7 0.6 1.3 1.5 0.8 0.7 0.6 0.5 1.3 1.1 0.8
Philippines 2.7 3.2 3.9 4.8 6.3 5.9 3.8 3.5 2.8 3.3 5.2 3.4
Vietnam 4.8 3.5 2.8 3.8 4.1 3.4 2.8 2.9 2.9 3.7 3.8 3.1
Australia 1.9 1.9 1.9 2.1 1.9 1.8 1.8 1.8 2.0 2.1 1.9 1.9
20192018 2019Country
2012-
2016 avg2017
2018
Asia Quarterly – Q1 2019
- 3 -
Central Bank Policy Outlook
FX Outlook .
Market Watch
Sources: Refinitiv, Mizuho Bank
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
China PBoC 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35%
India RBI 6.00% 6.25% 6.50% 6.50% 6.25% 6.00% 6.00% 6.00%
Korea BoK 1.50% 1.50% 1.50% 1.75% 1.75% 1.75% 1.75% 2.00%
Singapore MAS*
Malaysia BNM 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%
Indonesia BI^ 4.25% 5.25% 5.75% 6.00% 6.00% 6.00% 6.00% 5.75%
Thailand BoT 1.50% 1.50% 1.50% 1.75% 1.75% 1.75% 2.00% 2.00%
Philippines BSP** 3.00% 3.50% 4.50% 4.75% 4.75% 4.75% 4.75% 4.50%
Vietnam SBV 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%
Australia RBA 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
* The MAS conducts monetary policy via FX. Specifically it adopts a trade-weighted SGD appreciation at "modest
"Slightly" steepen
S$NEER slope (~1.5%
p.a)
2019
Reinstate slope; albeit
calibrated "slight"
incline. (~0.5% p.a)
"Slightly" steepen
S$NEER slope (~1% p.a) Status Quo
Country2018Central
Bank
6 Mar 19 Mar 19 Jun 19 Sep 19 Dec 19 Mar 20
USD/JPY 112 109 108 107 105 101
EUR/USD 1.13 1.14 1.15 1.17 1.17 1.18
USD/CNY 6.71 6.72 6.78 6.70 6.68 6.65
USD/INR 70.5 71.5 70.6 69.5 68.5 68.0
USD/KRW 1128 1120 1140 1100 1090 1080
USD/SGD 1.36 1.35 1.35 1.36 1.34 1.33
USD/IDR 14135 14200 14100 14000 13800 13800
USD/MYR 4.09 4.12 4.15 3.90 3.85 3.85
USD/PHP 52.3 52.0 53.5 53.5 53.2 53.0
USD/THB 31.8 31.5 32.0 31.3 30.9 30.5
USD/VND 23200 23250 23350 23250 23100 23000
AUD/USD 0.70 0.72 0.74 0.78 0.80 0.82
-5
0
5
10
15
20
25Equities YTD Returns (%)
YTD (% in USD) YTD (% in lcl ccy)*As of 6 Mar 19
1.375
1.625
1.875
2.125
2.375
2.625
2.875
3.125
Mar 19 May 19 Jun 19 Jul 19 Sep 19 Oct 19 Dec 19
Market vs FOMC Expectations: Fed Funds Rate (%)
Market-implied Fed Funds Rate FOMC Median FFR Projection
*As of 6 Mar 19Sources: Refinitiv, Mizuho Asia & Oceania Treasury
-3
-2
-1
0
1
2
3
4FX YTD returns (%)
YTD spot w/ carry (%) YTD spot (%)*As of 6 Mar 19
-75
-50
-25
0
25
10Y Yield YTD Changes (bps)
Change bps (10y)*As of 6 Mar 19
Asia Quarterly – Q1 2019
- 4 -
Table of Contents 1. Global Overview --------------------------------------------
5
Of Cushions & Cans
2. Asia Outlook -------------------------------------------------
7
Dealing with a Slowdown
3. China --------------------------------------------------------
8
Emphatic Fiscal Backstop
4. India ---------------------------------------------------------
10
Cyclical & Structural
5. South Korea-------------------------------------------------- 12
Fiscal stimulus to support
6. Singapore ---------------------------------------------------
14
Downturn, Not Hard-Landing
7. Malaysia -----------------------------------------------------
16
Moderating oil prices limit fiscal space
8. Indonesia ----------------------------------------------------
18
Solid Domestic Demand to Sustain
9. Thailand -----------------------------------------------------
20
Stable Consumption to Offset Slowing Exports
10. Philippines ---------------------------------------------------
22
Moderating Inflation to Boost Consumption
11. Vietnam -----------------------------------------------------
24
Downside Risks
12. Australia ----------------------------------------------------- 26
Home to Roost
Asia Quarterly – Q1 2019
- 5 -
Global Overview: Of Cushions & Cans
Growth: Fading US fiscal sugar-high converging with global demand pullback (reflecting tech-cycle downturn
and lingering trade uncertainties) is set to deepen the
economic downturn in H2 2019. US’ slide from ~3% to
2.0-2.5% growth alongside German-led EZ pullback (to
mid-1%), Japan’s sub-1% waver (amid exports drag and
Oct VAT hike), and China’s slip to 6.3-6.4% conspire to
reinforce a broad-based global slowdown. US-China-
EZ-Japan (~0.2%-pts) drag on global growth is likely to
be amplified (to ~0.4% pts) via trade, investment and
financial channels. Ultimately, averting self-inflicted
damage from trade protectionism is the best way to-
cushion the downturn, and bottom by mid-2020.
Risks: Clearly, global trade is a significant risk lever;
with progress (or lack of) on US-China trade talks, and
attendant tariff outcomes, poised to ease (compound)
global growth drag. But US-driven trade risks transcend
US-China spat. Overarching “America First” brand of
trade antagonism directed more broadly towards
Europe (auto tariffs etc) and even Japan reflect wider
risks ruled-based global trade. Perversely, kicking the can
down the road on global trade confrontation (e.g. US-
China trade talks), not unlike delaying “Brexit”, helps
avert imminent economic tragedy (albeit admittedly at
the cost of future stability and deferred uncertainty).
Policy: A “patient” Fed has dramatically knocked back
yields (and tightening expectations). But market bets on
no hikes (~75%) or one cut (~20%) is overdone; and at
odds with “Taylor conditions” (jobs and inflation), which
at best giving cause to pause, not cut. Instead, the case
for one more Fed hike in late-2019 remains on the table.
Whereas, an end to QT* within the year may be the real
policy cushion. In any case, policy cushion from a less
hawkish Fed aligns with the ECB’s can-kicking
(deferring implied hike in Q4) amid economic headwinds;
though far from reviving APP. And the BoJ is likely to
keep its foot on the pedal, given headwinds; particularly
sensitivity to avoid inadvertent JPY strength.
Asset Markets: Admittedly, at the margin, prospects of
QT being ended this year, alongside softer UST yields
will alleviate re-pricing pressures asset markets.
Nonetheless, tighter USD funding – as QT plays out for
most of 2019 against a backdrop of tighter banking capital
requirements – juxtaposed against deepening global
growth downturn (with spots of recession risks) are
likely to challenge uninterrupted bullish resumption –
notwithstanding positive turn in risk assets since
Christmas 2018. In all likelihood, risk appetite may be
suppressed, if not outright curtailed; as a consequence,
squaring with subdued global yields and equity valuations.
(1)
0
1
2
3
4
(1)
0
1
2
3
4
Mar-11 Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Dec-17 Sep-18
Global Growth: US out-performs on late-cycle fiscal stimulus but growth is moderating
in EZ & Japan; and trade tensions spook.(GDP; smoothed 2Q; % YoY)
EU US Japan G3
3.7
2.3
2.9
1.8
1.5
0.9
1.4
4.6
1.7
6.5
6.6
7.3
5.2
3.8
1.1
3.5
2.0 2
.5
1.6
1.3
1.1 1.5
4.5
3.7
6.3
6.2
7.5
5.1
0.7 2
.0
3.6
1.7 1.8
1.7
1.6
0.5 1
.6
4.9
3.7
6.4
6.2
7.7
5.2
2.4 2.5
0
1
2
3
4
5
6
7
8
9
IMF WEO Jan Update (Oct WEO) knocked down Global Growth forecasts led by downgrades to EZ forecasts; notably, US & China forecasts are unchanged; outlook stresses on downside risks
given trade uncertainties & tighter financial conditions.
2018 (LHS, % YoY) 2019 (LHS, % YoY) 2020 (LHS % YoY)Source: IMF WEO Jan 2019
(25)
(20)
(15)
(10)
(5)
0
5
10
15
20
45
46
47
48
49
50
51
52
53
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
China : Exports Slowdown Mainly Reflect electronics-led global demand downturbn; though downbeat New Exports Orders (Mfg PMI) may increasingly reflect US-China trade risks. (3mma)
PMI: Imports Exports Growth (3M Avg, % y/y; RHS)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
FFTR* 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
UST yields while off the highs on the Fed's more "neutral" shift, will probably bebackstopped given 9 hikes since end-2015.
(Yield Curve; %)
End-2013
Start-May 2013 (Pre-"Taper")
Nov-18
Latest (5 Mar-2019)
Sources: CEIC, Mizuho Bank* FFTR: Fed Fund Target Rate
After a hawkish hiking cycle (one hike per quarter) in 2018, pullback by Fed saw yields falling back
2013: "Taper" Bear Steepening
2015: 1 HikeDec
2016: 1 HikeDec
2017: 3 HikesMar ,Jun, Dec
2018: 4 HikesMar, Jun, Sep, Dec
31
22
15
13
6
19
12
9
3
6 5
0
-1
3
5
2
-1
23
0
-42
-30
-27
-21
-21 -2
0 -19
-19 -1
7
-16
-15
-11
-9
-9
-8
-7
-5
-4
-1
-24
-14-16
-10
-16
-5
-9
-12
-15
-11 -11 -11-10
-6
-4-6 -6
18
-1
29.7
7.6
10.4
6.65.3
9.6
4.8
1.4
5.8 6.24.9 5.5
4.6
14.2
5.2 4.8
7.8
11.1
6.1
(50)
(40)
(30)
(20)
(10)
0
10
20
30
40
(50)
(40)
(30)
(20)
(10)
0
10
20
30
40 2018 Asset Market Moves Suggest that Optimism Peaked & Bears Overtook Up till Christmas; But Emphatic Post-X'mas Rebound Begs the Question of "Bear Trap". (% Chg)
Post-X'mas Chg (%; up to 5-Mar) Chg from Peak to X'mas 2018 (%) Chg from 2018 Peak (%; up till 19-Feb) Peak Gain in 2018 (%)
*QT (Quantitative Tightening) is the Fed’s Balance Sheet reduction program (via bonds maturities not re-invested). Effectively, current pace of $50bn/mth QT roughly equates to removing $50bn of USD liquidity from the markets, thereby tightening monetary and financial conditions.
Asia Quarterly – Q1 2019
- 6 -
EUR/USD Outlook: The EUR has been hobbled by
expanded political uncertainty. Besides the Brexit
impasse and US auto tariffs threat, France also saw
intensified opposition to Macron’s reforms with
the breakout of the “Yellow Vest” mass protests.
Meanwhile, the Spanish government failed to pass
its budget, resulting in a call for snap elections in
April. Italy’s government soured relations with
the EU again after a public budget rancor,
criticizing its immigration policy and expressing
support for the “Yellow Vests”. It is little wonder
that activity weakened in Q4, as Italy entered into a
technical recession while Germany narrowly skirted
one. Given increased downside risks, ECB is
reportedly considering a new TLTRO in 2020,
which could cap EUR/USD upside for now even
with a dovish Fed.
Sources: Refinitiv, BIS, Mizuho Bank
USD/JPY Outlook: The dovish shift by the Fed in
January, as Powell underscored patience on rate
hikes, has weakened the yield attractiveness of
USD assets to Japanese investors. Alongside
increased risk aversion on softer global growth,
USD/JPY is seeing increased downside volatility,
with a flash crash towards 105 unnerving JPY
shorts at the start of 2019. With BoJ unlikely to
adjust policy settings amidst renewed growth
concerns, portfolio outflows should remain the
marginal driver for USD/JPY. Continued uncertainty
due to US-China trade risks and diminished external
demand suggests that risk aversion could resume,
which may prompt a further softening of
USD/JPY towards 108.
Sources: Refinitiv, BIS, Mizuho Bank
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
Fed Rate^ (%) 2.25 - 2.50 2.50-2.75 2.50-2.75 2.50-2.75 2.75-3.00 2.75-3.00
ECB Rate^ (%) -0.40 -0.40 -0.40 -0.40 -0.40 -0.30
BoJ Rate (%) -0.10 -0.10 -0.10 -0.10 -0.10 -0.10
EUR/USD*
1.1471 1.14 1.15 1.17 1.17 1.18
1.1218-1.1594
1.11 - 1.16 1.10 - 1.17 1.12 - 1.19 1.13 - 1.20 1.15 - 1.20
USD/JPY*
109.58 109 108 107 105 101
109.58-114.54
108 - 112 106 - 111 104 - 110 100 - 108 98 - 108
Brent Crude (US$/bbl)
50.57 67.8 73.0 71.5 68.8 72.5
50.57-86.47 52.5-72.5 61.5-82.0 62.5-78.5 61.5-75.5 64.5-82.0
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
95 97 99 01 03 05 07 09 11 13 15 17 19
EUR/USD: Long-term Model Value
EUR/USD EUR/USD Fair Value +/- 1 std deviation
Sources: BIS, Reuters, Mizuho Asia & Oceania Treasury
70
80
90
100
110
120
130
140
150
160
95 97 99 01 03 05 07 09 11 13 15 17 19
USD/JPY: Long-term Model Value
USD/JPY USD/JPY Fair Value +/- 1 std deviation
Sources: BIS, Reuters, Mizuho Asia & Oceania Treasury
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative. ^ Fed rates refer to the Fed Funds Target rate; ECB rates refer to the Deposit facility rate.
Asia Quarterly – Q1 2019
- 7 -
Asia Outlook: Dealing with a Slowdown
Output: The idea that a US-China trade “deal” will
dramatically reverse demand/exports downturn is
flawed. For one, the tech/semiconductor down-cycle
has some way to run; set to drag a large part of Asia’s
exports. Second, payback for front-loaded demand in
2018 (in anticipation of tariffs), with pan-Asia supply-
chain impact will also dampen. Crucially, as US-China
negotiations drag, uncertainty will tend to suppress
demand; as inventory trimming ripple via tight supply-
chains. In concert this may knock 0.2-0.4% off ASEAN
and North Asia’s growth. And to be sure,
fiscal/monetary offset provide only limited relief, not
a panacea. Upshot: Asia needs to deal with, and
cannot deal out of, demand downturn into 2020.
Inflation: The big picture view of inflation in Asia is
consistent with price pressures subdued for longer,
but not slumping into sustained dis-inflation. To
some extent, sharp pullback in (Brent) Oil price from
$86 peaks in early-Oct 2019, sets the stage for energy
dis-inflation impact to be feed through into Q3 2019.
But this energy dis-inflation will be shallow and short-
lived. In contrast, food inflation is poised to
gradually, but persistently, pick-up. And so,
inflation around 2% is understated and in reality, is
poised to settle higher ~3% by end-2020.
Policy: Scope for a dovish turn amongst Asian central
banks has been a function of both subdued inflation
and a distinctly less hawkish stance by the Fed. And
the latter is revealed in the sudden shift in stance in
2019. The RBI has led the dovish swing with a 25bp
rate cut in Feb; and could follow up with another cut in
Apr given ultra-low inflation. And it may just be a
matter of time before policy space is exploited (albeit
cautiously) by the likes of BSP and perhaps BI – both
hiked by 175bp in 2018. But given bottoming
inflation and relatively low (real) rates point, rate
cut(s) in 2019 is a matter of calibration not the start
of an easing cycle.
FX: The strong sweep of “un-carry” trades, which
hammered Asia FX (higher-beta currencies hit harder)
as US rate hikes overtook in 2018 has abated along
with a distinctly less hawkish Fed. What’s more, dial
back in US-China trade war pulling CNY back from
the brink diffuses pressures on AXJ in 2019.
Nonetheless, it would be remiss to ignore underlying
risks to Asia FX given; i) USD funding will tighten
until QT ends; ii) external headwinds persist, and; iii) a
host of political risks* lie ahead. And so, further AXJ
pick-up from post-Christmas relief rallies may be
limited and prone to “risk off” slippages.
47
48
49
50
51
52
53
54
(30)
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(10)
0
10
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30
40
11 12 13 14 15 16 17 18 19
China's PMI may be the proverbial canary in the coalmine for Asia's exports increasingly being exposed to US-China trade impact on top of fading inventory re-stocking as electronics-led
cyclical downturn bites. (Exports; 3m % y/y)
China Korea ASEAN-5** China PMI-Mfg (3mma; RHS)
* Newly Industrialized Economies: Korea, Hong Kong, Taiwan & Singapore.** ASEAN-5: Indonesia, Malaysia, Philippines, Thailand & Vietnam.
(20)
(10)
0
10
20
(30)
(20)
(10)
0
10
20
30 ASEAN-6+India+Korea: Global Demand Downturn May Be Exacerbated by "Friction" from US-China Trade Tensions; Drag on Asia's Growth a Question of Degree. (% YoY 2Qma)
Exports (LHS) Nominal GDP (RHS)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
IND IDN MYS PHL SGP THA VNM
Inflation remains within central bank's target for most of the countries (%)
Upper bound
Lower bound
Latest 3m avg
Lower and Upper bounds refer to the central bank's inflation target while the latest 3m shows actual inflation.
Source: CEIC, Mizuho Bank
(4)
(3)
(2)
(1)
0
1
2
3
4
5
6
(4)
(3)
(2)
(1)
0
1
2
3
4
5
6
07 08 09 10 11 12 13 14 15 16 17 18
Asia-US Real* Interest Rate Differentials (%; 12mma) are broadly softer. BSP may wait for a chance to ease. India's headline CPI overstates scope to ease.
India Indonesia
Malaysia Thailand
Australia Philippines
Korea
Sources: CEIC, Bloomberg, RBI, BoT, BSP, BNM, BI, BoK,
* Real interest rates are calculated by deflating nominal interest rates (in this case, policy rate) by consumer inflation. The differential is then obtained by subtracting real US rates from
LooseningConditons
TighteningConditions
0
2
4
6
8
10
0
2
4
6
8
10
12 13 14 15 16 17 18 19
Asia CBs: Is RBI a Trail-Blazer (Dovish Inflection), a Unique Case of Calibrated Cut or aPolicy Mistake? BSP Flags Reserve Cuts .. BI Bides Time. (Policy Rates, %)
BI (ID) BNM (MY) BSP (PH) BoT (TH) Fed (US)
PBoC (CH) RBA (AU) RBI (IN) BoK (KR)
Sources: CEIC, Bloomberg, RBI, BoK, BoT, BSP, BNM, BI, PBoC, RBA
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4(14)
(12)
(10)
(8)
(6)
(4)
(2)
0
2
4
6
Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19
Trade War Risk Premium Diminishes with the "Truce" Since Late-2018, helping Lift CNY & other AXJ; accentuated by softer UST yields from a "patient" Fed.
(% Cumulative Chg Since End-2017)
CNY INR
PHP IDR
SGD KRW
AUD MYR
TWD EUR
THB 10Y UST Yields (RHS, Inverted Scale)
Rising Yields
*Elections in Thailand, Indonesia, India and Philippines alongside India-Pakistan tension .
Asia Quarterly – Q1 2019
- 8 -
China: Emphatic Fiscal Backstop
Growth: The 13th NPC growth target of 6.0-6.5%, while
technically a downgrade (from “around 6.5%” in 2018),
masks emphatic backstop for the economy; led by
“proactive”, “stronger” and “more effective” fiscal
policy – comprising tax cuts and spending boost. Along
with “prudent” monetary policy tilted to effective easing
in real rates (including further targeted RRR cuts), Beijing is
poised to buffer against trade headwinds. Ultimately, the
objective is to pursue “higher quality” growth that is
consistent with reducing financial risks and undertaking
longer-term economic reforms. To be sure, growth is
expected to slow to 6.3-6.4%; but this is likely to be a
managed soft-landing.
Industry: Painful industrial restructuring, to tackle over-
capacity/obsolescence, is not new – dragging IP growth
from ~9% (2013-14) to ~6% (2017-18). But Beijing is
stepping up to avert collateral damage from US-China
trade fallout; in particular, blunting adverse jobs
impact and providing funding access for affected
manufacturers. The fiscal backstop and monetary
cushion are welcome, but risk being perceived as
“unfair” industrial practices – depending on execution –
and may inadvertently accentuate US-China flash points.
In any case, further re-constitution to new growth
industries (e.g AI, NEV, Biomed) will be emphasized. Growth dynamics: Targeting “steady” trade with
“improving quality” despite US-China trade friction
speaks of doubling down on high-growth, high-tech
industries; not regressing to mercantilism. And interim
support is from fiscal boost; led by CNY 2trln of tax
cuts (2% of GDP), including 3%-pt cut to VAT bracket
(hitting manufacturing) complemented by policies to
boost auto/appliance consumption. Growth is
backstopped by emphatic fiscal efforts to channel
money back to households and firms (potentially with
multiplier effects). And targeted RRR cuts and lower real
rates from monetary calibration could supplement
cushion for a soft landing.
Inflation: Price pressures are by and large subdued;
as food inflation recedes at the margin. And this is
likely to dampen inflation to the softer side of 2-3%;
possibly a tad below (sub-2%). Food and fuel are likely
to more prominent potential swing factors for headline
inflation; with some tariff impact also expected to feed-
through. Nonetheless, the underlying trend remains
consistent with gradual pick-up in core inflation back
above 2%. Prognosis of reasonably anchored price
pressures is corroborated by PMI price sub-index;
suggesting tariff cost-push on producer inflation is
unlikely to fan demand-pull inflation. And a stable
CNY policy reinforces the anchor.
11.0
9.99.2
7.8 7.78.5 8.3
9.1
10.0 10.1
11.4
12.7 14.2
9.7 9.4
10.6
9.5
7.9 7.87.3
6.9 6.7 6.8 6.6
0
2
4
6
8
10
12
14
16
0
2
4
6
8
10
12
14
16
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
China GDP: Arguably lowering growth targets from 1999 to 2004 (post-AFC/"DotCom Bust"/SARS) was a cyclical response whereas reflect structural factors since 2012.
Actual GDP GDP Target
35
40
45
50
55
60
65
70
(2)
0
2
4
6
8
10
12
14
16
06 07 08 09 10 11 12 13 14 15 16 17 18 19
China's growth resilience is also increasingly less dependent on industry, based on "new economy" of services & tertiary industry!
(%-points; YoY; LHS)
Services
Industry
Construction
Agriculture
% of Growth Contribution from Services (RHS)
Sources: CEIC, Mizuho Bank
(30)
(20)
(10)
0
10
20
30
40
50
(30)
(20)
(10)
0
10
20
30
40
50
12 13 14 15 16 17 18 19
China's Credit Growth, which was disproportionately driven by Shadow Credit since 2016, is now dragged by clamp down on "shadowy" finance, though targeted bank
loans and bonds offset. (Contribution to YoY Credit Growth, 6MAvg, %-pts)
Corporate bonds
"Shadow Credit" (ex-Bonds & BA)^
Bank Credit
Combined^ Shadow credit refers to Aggregate Financing less conventional bank loans. And this measure omits bond issuances as well as Bankers' Acceptance (BA).
Sources: CEIC, Mizuho Bank .
(1)
0
1
2
3
4
5
6
7
(1)
0
1
2
3
4
5
6
7
11 12 13 14 15 16 17 18 19
As food-driven inflation from earlier fades, subdued underlying price pressures; provide ample policy flexibility. Gradual core CPI pick-up to 2-3%.
Education & Recreation Healthcare
Tpt & Comm Others
Residence Food
CPI (% y/y) Core CPI
Sources: CEIC, Mizuho Bank.
(12)
(8)
(4)
0
4
8
12
25
30
35
40
45
50
55
60
65
70
75
80
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Despite sharp pick-up in Feb PMI Price Index (smoothed out by 3mma data), imaginably accentuated by tariff impact, price trends are consistent with fairly well-anchored
demand-pull presssures.
PMI Price Index
Producer Inflation (% y/y; RHS) Sources: CEIC, Mizuho Bank.
*NEV: New Energy Vehicle (which includes electric vehicles).
Asia Quarterly – Q1 2019
- 9 -
Policy: While headline stance of “prudent” monetary
policy is unchanged, liquidity management details
suggest far more accommodative setting in effect. For
one, explicit allusion to further targeted RRR cuts – in
particular aimed at boosting credit access for smaller and
medium-sized private sector firms – suggest liquidity
conditions that are conducive to buoying growth. What’s
more, the NPC also revealed a desire for lower real
interest rates via market-oriented mechanisms;
consistent with surgical open market operations. Apart
from targeted policy accommodation, improving policy
transmission and complementarity (with fiscal efforts
and financial risk management) remains critical.
External Position: Continued and chronic C/A
surplus erosion (to 0.4% of GDP in 2018 from 2.2%
2012-16) is an exaggerated version of more measured
pullback in good trade. What’s interesting is that this is
not driven by US-China trade tensions (China’s surplus
with US increased in 2018!). And so, with China set to
buy more US goods, net trade is set to slip further
accentuating the structural decline in C/A surplus –
led by increased net service (e.g tourism) consumption.
Two implications: First, BOP swings (between surplus
or deficit) will increasingly depend on capital flows
given vastly diminished C/A cushion. Second inherent
ability to accrue FX reserves is compromised.
FX: In turn, this reinforces the view that unlike during
the pre-2015 era of persistent and large C/A
surpluses (and attendant FX reserve build-up) the
argument for sustained CNY appreciation trend is
undermined. And so, the NPC’s reiteration of CNY
policy of “basically stable” at reasonable equilibrium
alongside increased flexibility, appears to suggest
more limited appreciation bias – especially given that
the spurt of CNY gains on improving US-China trade
negotiations have materially lifted CNY NEER back
to H2 2017 levels (when CNY was deemed to be on a
stronger footing). Accordingly, sustained sub-6.60
CNY gains (vs. USD) will require broad-based USD
pullback. Two-way volatility (flexibility) meanwhile.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
GDP (% y/y) 6.4% 6.3% 6.4% 6.4% 6.4% 6.5%
CPI (% y/y) 2.2% 1.8% 2.3% 2.2% 2.2% 2.5%
Policy Rate (%) 4.35% 4.35% 4.35% 4.35% 4.35% 4.35%
USD/CNY* 6.88 6.72 6.78 6.70 6.68 6.65
6.83 - 6.98 6.58 - 6.88 6.64 – 6.92 6.56 - 6.84 6.54 - 6.82 6.51 - 6.79
0
5
10
15
20
25
30
35
4
5
6
7
8
9
08 09 10 11 12 13 14 15 16 17 18 19
Tighter Weighted Loan premium (vs. benchmark rates) amid nuanced credit selection/pricing; helps with risk-adjusted credit growth.
Effective* (Weighted Avg) Lending Rate (LHS, %)
1Y Lending (LHS, %)
Weighted Premium Over Lending Rate (%, RHS)
*Asumes that the loans at a discount are mostly 10-20% below benchmark lending rate.
0
5
10
15
20
25
(4)
(2)
0
2
4
6
8
10
06 07 08 09 10 11 12 13 14 15 16 17 18 19
Steadying real rates & modest upside bias for money market rates amid external risks favour loosening liquidity & (nuanced) RRR cuts.
1-yr Lending (LHS) *Real interest rates (LHS) CPI (% y/y; LHS)
7-Day Repo (LHS) RRR (RHS) RRR - Small/Med banks (RHS)Sources: CEIC, Mizuho Bank
(80)
(40)
0
40
80
120
160
(80)
(40)
0
40
80
120
160
07 08 09 10 11 12 13 14 15 16 17 18 19
China: Merchandise Goods Balance Suggest Trade War is Not the Main Cource of Pressure on the C/A. Instead, deepening Service deficit has eroded C/A
surplus materially! Restoring "stable" capital inflows a priority. (US$bn, 4Qma)
Financial A/C Goods
Services C/A
(8)
(6)
(4)
(2)
0
2
4
6
8
10
(8)
(6)
(4)
(2)
0
2
4
6
8
10
09 10 11 12 13 14 15 16 17 18 19
"Hot" Outflows (% of Prev Qtr FX Reserves) are reined in; but structurally, C/A contribution to FX reserve building is severely compromised; accentuating volatility to capital flows!
Valuation Effect Deviation (Implied Hot flows)
C/A Investments
Chg in FX Reserves
China's C/A, struggles to be accretive for FX Reserves. This accentuates vulnerabilities to capital flow volatility; and that could potentially fan "hot" outflows.
80
85
90
95
100
105
110
115
120
85
90
95
100
105
110
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
CNY NEER has picked up 2.8% from X'mas Eve lows on US-China trade expectations; further and pronounced surge in CNY NEER though is at odds with "Basically Stable" CNY Policy
(Index end-2014=100)
CNY NEER
USD (DXY) index (RHS; rebased: Start-2008 = 100)
60 per. Mov. Avg. (CNY NEER)
Paradigm shift from "dirty" USD peg to NEER-based
Stabilization helped by capital curbs alongside couner-
cylcical FX fixing earlier. And so, the pertinent question
now is whether CNY NEER stability will be undermined by
the unabated slide.
5.90
6.00
6.10
6.20
6.30
6.40
6.50
6.60
6.70
6.80
6.90
7.00
7.10
5.90
6.00
6.10
6.20
6.30
6.40
6.50
6.60
6.70
6.80
6.90
7.00
7.10
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
PBoC reinstated 20% reserve requirements (3-Aug) for FX forwards position & counter-cyclical factor for CNY fix to dampen excessive speculative selling in CNY.
USD/CNY Lower Band Upper Band USD CNY Fix USD/CNH
Sources: Reuters, Mizuho Bank
Stronger CNY
11-Aug: 1.9% reference devaluation followed by a few sessions of self-reinforcing sell-off as fixing shifted to market-based mechanism. CNY sell-off quelled by PBoC intervention/clarification
May 2017: "Counter-
cyclical" factor
USD/CNY fixing first
introduced.
Jan 2018: Revocation
of "counter-cyclical" factor.
24 Aug 2018: Re-introduce "counter-cyclical" factor.
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
Asia Quarterly – Q1 2019
- 10 -
India: Cyclical & Structural Growth: Marked slowdown in growth to ~ mid-6%
from above 8% in Q1 2018 reflects a conspiracy of
cyclical down-draft and structural impediments.
Despite being less externally-oriented, India is not
immune to the synchronised demand slowdown (outside of the US). What’s more, oil prices off the
lows diminish growth backstop – eroding margins and
spending power. And while fiscal stimulus and the farm
rescue provide welcome offset, banks and NBFCs
working through NPAs impose a balance sheet
constraint; which the RBI’s rate cut(s) can do little
about. Growth recovery into 2020 is likely to be
restrained below 8-9% potential.
Industry: While excess capacity has not worsened
significantly, growth has capitulated; corresponding to
the overall growth downturn. And US action to revoke
India’s preferential trade status, while not a huge
trade negative, sours the mood. But in any case,
slowing exports demand – amid wider global demand
downturn –meanwhile could deepen industrial pain,
Admittedly, broad-based industrial pullback is at odds
with the pick-up in credit growth. But fact is low base
effects and post-demonetization distortions
inevitably overstate credit boost (inherently
constrained by banks’ NPLs).
Growth dynamics: With decline in banks’ (especially
public sector banks) asset quality – compounded by
NBFC balance sheet blowout – hobbling the ability to
catalyse credit-driven growth, cyclical global
headwinds cannot be buffered, or worse, may be
compounded. The pre-elections Budget packed with tax
cuts and a massive farm sector package will
admittedly provide some offset to growth; but at a
high current fiscal cost that is not without the risks of
“crowding out”. RBI’s NPL restructuring measures
buy time and avert an imminent squeeze while rate
cuts provide marginal relief. But pushing the policy
envelope is not without the risks of compromising on
macro stability.
Inflation: A confluence of factors – from sharp drop in
vegetable prices alongside softer oil prices – has
conspired to push inflation to 2% lows (lowest since
mid-2017). But the wider point is that inflation is set
to bottom sooner rather than later. Fact is, short
vegetable cycle means that food deflation is set to fade
in coming quarters, and possibly abruptly if El Nino
effects hit. What’s more, oil dis-inflation will also fade
(past Q3 base effects). Crucially, “sticky” core
inflation, reveal firmer underlying pressures, which
are likely to be accentuated by elections spending, and
wider fiscal deficit; 4+/-2% normalization unfettered.
0
2
4
6
8
10
12
14
(35)
(30)
(25)
(20)
(15)
(10)
(5)
0
5
10
15
20
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Capacity Utilization: Capitulation in GDP (since mid-2018) unravels post-monetization rebound; reflects both cyclical and structura; impediments to
growth; to fall short of 8-10% growth potential in 2019/20 (RBI Survey)
Capacity Constraint (Current) Capacity Constraint (Next Qtr) GDP (% y/y, RHS)
Sources: CEIC, Mizuho Bank
Overheating Risks
Below Potential
After post-denometization/GST undershoot, GDP re-accelerating rapidly warranted RBI response; especially with capacity constraints kicking in. But "relapse" since mid-2018 reflects less upbeat prospects; and RBI cut in Feb reflects this in part.
(9)
(6)
(3)
0
3
6
9
12
15
18
(6)
(4)
(2)
0
2
4
6
8
10
12
Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18
India: Activity pick-up appears to have peaked in H1 2018 with re-monetization & post-GST distortions fading; whereas drag from external headwinds hit.
(3m Avg % y/y)
Ind Pdtn Consumer Durables Capital Goods (RHS)Sources: CEIC, Mizuho Bank .
Activity pick-up peaked in H1; with pent-up post-GST demand for customer durables fading too.
60
62
64
66
68
70
72
74
76
78
80
0
5
10
15
20
25
30
35
07 08 09 10 11 12 13 14 15 16 17 18 19
Credit resurgence is flattered by, re-monetization as well as boosted by earlier ramp-up in NBFC lending. Thus, NBFC stress may once again dampen credit growth.
(3mma % y/y)
Non-food credit (LHS) Deposits (LHS) Loans-to-Deposits Ratio (%; RHS)
Sources: Bloomberg, CEIC, Mizuho Bank
48.625.7 22.9 25.8 20.6
5.2
299.0
449.8
-150.8
157.6
93.4
64.2
16.3
5.7
16.4
22.1
8.1
(10)
(5)
0
5
10
15
20
25
(200)
(150)
(100)
(50)
0
50
100
150
200
250
300
350
400
450
500
Goods Exports Goods Imports Net Goods Services Exports Service Imports Net Services
India's Trade Imbalance with the US is mainly in Goods & India could offer to import more from US (including military goods); but sticky issues over farm, IT services
amongst other points may prolong tensions.
US ($bn, LHS) Total (($bn, LHS) US Share of Total (%)
(2)
0
2
4
6
8
10
12
(2)
0
2
4
6
8
10
12
Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19
India CPI: While headline CPI has dropped sharply, this is due to transient food deflation and softer energy inflation. Whereas core inflation is "stickier". (% YoY)
Food Fuel & Light
Clothing Housing
Misc CPI
RBI Policy (Repo) Rate CPI ex-Food, Fuel&Light
Sources: CEIC, Mizuho Bank
^ NBFC: Non-banking financial companies in India, the source of credit surge in the recent past.
Asia Quarterly – Q1 2019
- 11 -
Policy: Two successive, and pre-emptive rate hikes (to
6.50%) have earned a policy pause; especially with
unexpectedly softer headline CPI and oil prices. But the
RBI’s policy dilemma is understated. In particular,
sharply divergent headline-core inflation reveals latent
inflationary pressures amid, broad-based wage hikes
and effectively closed output gap. Crucially, while real
rates exceed “neutral” real rates target (of 1.5-2.0%),
“neutral” real core rate falling short may be the more
decisive policy barometer. This underpins further
(albeit very measured) tightening. Especially if fiscal
and INR slippage begin to mount. That said, recent oil
price drop may extend the window for the pause.
External Position: India’s C/A deficit (CAD) is set to
widen going into 2019 and 2020 as the softer oil price
impact will likely prove to be rather shallow and short-
lived, and this should see the CAD go north of 2% (to
around 2.5-3.0%) in coming quarters as the exports
slowdown is not met with proportional import
compression – despite import curbs. What’s more
worrying is that wavering capital inflows may be
insufficient to cover the C/A gap if EM sentiments
worsen again and/or UST yields pick sharply in coming
quarters. In any case, wider CAD, with greater BOP
volatility around capital flows is a risk to watch.
FX: The seduction of medium-term potential for
India and attendant INR catch-up are hard to deny;
but equally, near-term under-performance on a tragic
confluence of negatives are hard to ignore. First, oil
regaining traction revives “twin deficit” woes. And
this worry is compounded by fiscal slippage (likely to
miss even the wider deficit targets) colliding with a
dovish RBI. Political uncertainties, US trade risks and
heightened geopolitical tensions further undermine near-
term rupee pressures, which can amplify if UST yields
and/or oil prices lurch higher. 72.5-74.5 are USD/INR
upside risks if wrong-footed by global risk appetite and
domestic pitfalls; but sub-68 potential into 2020
beckons if post-elections uncertainty dissipates.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
GDP (% y/y) 6.6% 6.5% 6.4% 6.9% 7.0% 7.1%
CPI (% y/y) 2.6% 2.4% 2.5% 2.9% 3.6% 3.9%
Policy Rate (%) 6.50% 6.25% 6.00% 6.00% 6.00% 6.00%
USD/INR* 69.8 71.5 70.6 69.5 68.5 68.0
69.6 - 74.5 69.4 – 73.6 68.6 - 72.6 67.5 - 71.5 66.5 - 70.5 66.0 - 70.0
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19
RBI Real Rates: Despite "bonus" inflation relief from oil, "real" rates are not unequivocally sharply higher if "core" measures are used. Moreover, fiscal slippage &
softer rupee may argue for pause, rather than more easing. (%)
RBI Policy (Repo) Rate Real Interest Rate (6mma RHS, %) Real "Core" Interest Rate (6mma RHS, %)
Sources: CEIC, Mizuho Bank
Neutral Real Rate Target
(4)
(2)
0
2
4
6
8
10
12
(4)
(2)
0
2
4
6
8
10
12
06 07 08 09 10 11 12 13 14 15 16 17 18
India: C/A Deficit may be trimmed in Q4 (to ~1.8-2.3% from 3.0% in Q3) due to Oil, but risks of negative "Net Balance" persists in the context of weakening capital inflows. Consequently, INR relief from Oil may prove shallow and short-lived.
Net Balance* (% of GDP) C/A Deficit (CAD; 2Qma; % of GDP)
Capital Account Surplus (2Qma, % of GDP) Net Balance* (2Q ma, % of GDP)
* Net Balance refers to the sum of Capital Account and the Current Account Balance; or put in notation, it is simply K/A+C/A.
4
6
8
10
12
14
16
80
85
90
95
100
105
110
06 07 08 09 10 11 12 13 14 15 16 17 18 19
INR REER: Despite substantial catch-down to Oct-2018, INR REER remains buoyant on on Oil's slide & softer UST yields. However, risk of further Oil pick-up, twin deficit risks
& political uncertainties reveal INR vulnerabilities near-term.
INR REER (LHS; 2010=100) Imports cover (months of imports FX Reserves cover, RHS, ratio)
Sources: BIS, CEIC, Mizuho Bank
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
Asia Quarterly – Q1 2019
- 12 -
South Korea: Fiscal stimulus to support
Growth: GDP growth picked up to 3.1% YoY in Q4
partly resulting from more favorable base effect on top
of a step-up in fiscal stimulus. Private consumption
continued to grow steadily on the back of supporting
measures such as fuel tax cut. However, slowing
employment growth and elevated household debt are
expected to constrain further improvement in private
consumption. Ongoing correction in investment will also
continue especially for capex due to slowing
semiconductor industry. Stagnated imports resulted in a
positive contribution from net exports. Going forward,
growth is likely to moderate further in 2019 where
fiscal stimulus is expected to buttress downside risks.
Industry: Exports growth contracted on a YoY basis as
exports of electronic products fell amid slowdown in
semiconductor cycle. Advance exports data based on
first 20 days suggest there could be more pain ahead. On the other hand, exports of vessels have stopped
fallen further and steady increase in vessel orders
could help to mitigate further contraction in exports
growth. Stronger vehicle production amidst the
temporary consumption tax cut of passenger cars helped
to lift industrial production towards the end of 2018.
Despite some recent optimism surrounding US-China
trade talks, slowing external demand points to
moderating exports and production growth.
Growth dynamics: Labour market will continue to be
the center of attention as an uptick in unemployment rate
in Jan reflects challenging employment condition. After
creating just half of the number of jobs projected this
year, employment growth this year could stay
sluggish as SMEs struggle to cope with higher labour
costs. The ongoing correction in construction sector will
drag down construction-related employment and
manufacturing employment could continue to slip further
amid moderation in export-oriented sectors. Retail trade
and business services sectors will also come under
pressure given that these sectors are dominated by
SMEs.
Inflation: Headline inflation fell towards low-1% due to
slower food inflation on top of lower transportation
prices. Prices of petroleum products are expected to
stay soft in 1H given modest crude oil prices and fuel
tax cut. Core inflation remains stuck at around 1%
reflecting tepid underlying inflationary pressures as
domestic demand moderates. Furthermore, with inflation
expectation falling to a new low, inflation is expected to
undershoot BoK’s 2% target again this year.
-3
-1
1
3
5
7
2012 2013 2014 2015 2016 2017 2018
Contribution to GDP (% -ppts)
Net exports Change in stocks
GFCF Govt spending
Private consumption GDP
Source: CEIC, Mizuho bank
(20)
(10)
0
10
20
30
2014 2015 2016 2017 2018 2019
Contribution to export growth(3mma, ppts, %)
ChemicalsMachineryEEPassenger CarVesselsCrude materials/fuelsOtherExports, YoY
Source: CEIC, Mizuho Bank
0
100
200
300
400
500
600
700
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Projected vs. Actual Employment Increase (person thousands)
Govt forecasts Actual
Source: CEIC, Mizuho Bank
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2011 2012 2013 2014 2015 2016 2017 2018
Inflation measures (%YoY, 3mma)
Inflation expectation
Headline inflation
Core inflation
Source: CEIC, Mizuho Bank
Asia Quarterly – Q1 2019
- 13 -
Policy: Given slowing exports, employment growth on
top of low inflation, BoK is expected to stay cautious.
Whilst BoK has ruled out a rate cut for now, further
tightening is likely to be postponed given that the output gap has turned slightly negative. Growth
momentum is not expected to pick up significantly this
year as investment will continue to moderate on top of
challenging exports outlook. In addition, inflation is
likely to stay tepid as well given lackluster demand-pull
inflationary pressure. As a result, we think BoK will
pause for a while in order to assess the strength of
growth, especially how labour market condition and
fiscal stimulus affect domestic demand.
External Position: Current account surplus narrowed
slightly as exports slowed across most of the product
categories on the back of slowing global growth and
semiconductor industry. Nonetheless, as imports
growth also slowed thanks to lower oil prices and less
machinery imports, goods account surplus has sustained.
With tourist arrivals continuing to grow in double-digit
YoY, this helped to contain services deficit from further
widening. Given South Korea’s solid fundamentals,
capital inflows continued despite relatively low policy
rate. Going forward, progress of trade negotiation
between the US and China could be one of the main
factors driving foreign capital flows.
FX: Progress on US-China trade negotiations has
capped trade tensions and supported the KRW, given
Korea’s large exposure to Chinese final and intermediate
supply-chain demand via extensive trade links. Still, the
macro backdrop is deteriorating. Global demand
growth has slipped amidst a Chinese slowdown, and
we think this could weigh on Korean exports and growth
in 1H 2019. As such, we maintain our cautious view
on the KRW, and see a rebound in USD/KRW to 1140
in Q2. More durable easing towards 1100 may have to
await an eventual US-China trade deal and a rebound in
global demand, which could possibly happen only in 2H
2019.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
GDP (% y/y) 3.1% 2.8% 2.6% 2.9% 1.9% 2.3%
CPI (% y/y) 1.8% 0.8% 1.1% 1.3% 1.2% 2.1%
Policy Rate (%) 1.75% 1.75% 1.75% 1.75% 2.00% 2.00%
USD/KRW* 1116 1120 1140 1100 1090 1080
1105-1145 1080 - 1150 1000 - 1170 1060 - 1140 1050 - 1120 1040 - 1110
(2)
(1)
0
1
2
3
4
(2)
(1)
0
1
2
3
4
2013 2014 2015 2016 2017 2018 2019
Policy Rate vs. Inflation, Real Interest Rate (%, 3mma)
Real interest rate Headline CPI
Policy rate Core CPI
Sources: CEIC, Mizuho Bank
(6)
(4)
(2)
0
2
4
6
8
10
12
14
2014 2015 2016 2017 2018
Current Account (USD bn, 3 mma)
Goods ServicesPrimary income Secondary incomeC/A
Source: CEIC, Mizuho Bank
700
800
900
1000
1100
1200
1300
1400
1500
95 97 99 01 03 05 07 09 11 13 15 17 19
USD/KRW: Long-term Model Value
USD/KRW USD/KRW Fair Value +/- 1 std deviation
Sources: BIS, Refinitiv, Mizuho Bank Asia & Oceania Treasury
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
Asia Quarterly – Q1 2019
- 14 -
Singapore: Downturn, Not Hard-Landing
Growth: The exports-led downturn, reflecting global trade
friction and coincident tech down-cycle, are set to knock back
growth from ~3% in 2018 to below 2.5% this year (MTI
flagging risks of growth mid-point of 1.5-3.5% outlook).
Apart from electronics-led manufacturing slowdown, a
cooling property market (with softer transaction volumes)
and oil’s volatility pose further challenges. Being small and
open Singapore will feel headwinds that major trading
partners (e.g. China, Europe, Japan, ASEAN) grapple with.
But a hard-landing will be averted so long as worst case
trade outcomes are averted and the Fed’s less hawkish
stance helps dial back financial risks.
Industry: The bigger picture is that manufacturing growth
is set to pullback to low single digit pace from super-charged
growth rate of over 10%. This slowdown partly reflects the
exaggerated swings of a tech super-cycle past its peak.
Barring worst-case outcomes headwinds should begin to
subside into 2020 as global demand downturn bottom. But
the lingering tail risk is that US-driven trade antagonism
could deepen and prolong this downturn, if nascent signs of
US-China negotiations fall through (and/or US-Europe trade
friction escalates on auto tariffs). While direct impact on
Singapore is likely to be limited, indirect trade and
investment channel reverberations will not be negligible
Growth dynamics: With manufacturing set for a sustained
and sharper pullback, the burden of growth will shift to
services, and in particular domestically-oriented service
sectors. But convincing offset to compensate for
manufacturing downturn will probably elude. Partly because
there are aspects of trade and manufacturing services that
permeate the service sector, and this are not immune from
external headwinds. In addition, continued cooling in the
property market will drag related services - including real
state, conveyancing and mortgage service. The silver lining
is that a less hawkish Fed dials down associated risks of
financial shocks. And this should help avert a hard-landing.
Inflation: Headline inflation will be restrained at sub-1% in
near-term as of softer oil prices, contained food inflation
and price competition from utility sector liberalisation are
likely to dampen the pace and force of price escalation, but
this will not materially impede underlying normalisation
in price pressures to 1.0-1.5% by late-2019 and around 2%
into 2020. Especially as dis-inflation from low COE
(vehicle ownership quota) prices fade and property dis-
inflation diminishes. What’s more, firmer wage pick-up
could induce tighter inflation feed-through dynamics.
Upshot: Inflation may be softer for a little longer, but this
is a cyclical delay, not structural deficiency.
1.9
5.1
1.8
-1
2.43.5
2.7
-2.3
4.3
10.7
3.4
-4.5
3.9
10.4
3.2
-10.2
3.1 3.0 3.1
-1.7
3.72.7
4.2
1.2
4.6 4.34.9
7.6
(15)
(10)
(5)
0
5
10
15
GDP Mfg Services Construction
Singapore: Q4 GDP disappoints but does not derail 2018 (at 3.2%). Mfg "normalization" from unsustainable 10+% growth in 2017 & H1 to low- to mic-single digit. 2019 growth ~2.6%.
Q4 '18 Q3 '18 H1 2018 2017 3Y Avg (2015-17) 5Y Avg (2013-17) 10Y Avg (2008-17)
Sources: CEIC, Mizuho Bank Singapore .
0
20
40
60
80
100
120
140
0
1
2
3
4
5
6
7
8
12 13 14 15 16 17 18 19
Singapore: Services contribution is recovering in line with its ~2/3share of economy, while Manufacturing's "super-cycle" is fading in line with peaking global demand, and
set to decline further. (Growth; %YoY; 2Qma)
Services GDP Services Share of GDP Contribution (%, RHS)
* This slump in Service share of growth contribution reflects the surge in Manufacturing growth (led by electronic super-cycle).
(40)
(30)
(20)
(10)
0
10
20
30
40
50
60
(40)
(30)
(20)
(10)
0
10
20
30
40
50
60
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Singapore's Exports Demand by Region: Sharp slump acorss markets reflects the tech down-cycle compounded by global trade tensions. (% Yoy 3M Avg) ...
NODX
Malaysia, Indonesia & Thailand
Korea, Taiwan & Japan
China incl HK
US & EU
Sources: Bloomberg, CEIC, Mizuho Bank
(25)
(20)
(15)
(10)
(5)
0
5
10
15
20
25
(25)
(20)
(15)
(10)
(5)
0
5
10
15
20
25
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
Singapore Manufacturing Downturn": Electronics cycle downturn catches down with M&O engineering, which has bottomied. Further slowdown in exports/manufacturing to Drag.
(% YoY 6mma)
Industrial Production (IP) IP ex-Biomed
Tpt Eng. Petrochem
Electronics Pharma
(10)
(5)
0
5
10
15
(6)
(4)
(2)
0
2
4
6
8
13 14 15 16 17 18 19
Waning External Demand to be compensated for by "digitization"-induced investments as well as diminishing drag from residential construction; BUT domestic services cannot fully offfset!.
(Growth Contribution, YoY; %-points)
Pte. Consumption Govt. Spending
Residential Construction Business Investments
Net Exports adjusted for stocks External Demand* (% y/y)
Domestic Demand* (% y/y) GDP % y/y
* Domestic demand comprises private consumption, government spending, residential construction and business investments. And external demand is all else for Singapore's "open" model.
(18)
(16)
(14)
(12)
(10)
(8)
(6)
(4)
(2)
0
(18)
(16)
(14)
(12)
(10)
(8)
(6)
(4)
(2)
0
Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18
Gradual property market correction over 15 consecutive quarters (from Q3 2013 peak) mostly undone (~75% reversed out) over last five quarters. Cooling measures temper but could still
gently nudge services higher. (Cumulative % Chg from Q3 2019)
Landed Non-Landed All Private Property
Cooling measures put in place have tempered, not unravelled, property market pick-up. This should add to some service sector tailwinds via ancillary activities.
(2)
(1)
0
1
2
3
4
5
6
(2)
(1)
0
1
2
3
4
5
6
10 11 12 13 14 15 16 17 18 19
Headline CPI is understated but "MAS core" pick-up is exaggerated by utilities/fuel; whereas services inflation reverals moderated pick-up; squares with calibrated
"slight" slope steepening.
CPI CPI ex-OOA* CPI ex-accom CPI Services ex-accommodation MAS Core
* CPI ex-OOA: CPI ex owner-occupied accommodation imputed rental.
(2)
(1)
0
1
2
3
(2)
(1)
0
1
2
3
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19
Underlying inflation remains on a recovery path though strength of core inflation surge is overstated by fuel/utilities. (CPI contribution; %-pts; YoY)
Food Housing Utilities
Petrol Pte Road Tpt ex-Petrol Public Road Tpt
Others Headline Core
Sources: CEIC, Mizuho Bank
* Core inflation, for Singapore, excludes accommodation and private road transportation. The latter mainly reflects COE dis-inflation effects.
Asia Quarterly – Q1 2019
- 15 -
Policy: The MAS has reason, but no urgency, to “slightly”
steepen the S$NEER slope again given the pick-up in
underlying inflation mechanics; and signs of tightening in
wage-price dynamics. Admittedly, given the two rounds of
slight slope steepening in 2018 (April and October meets) the
urgency for a third tightening in series diminishes.
Especially given slowing global growth. But equally, the fact
that slope increments have been finely calibrated
(estimated 1% per annum appreciation bias) and well below
pre-GFC norms (of 2%), and that S$NEER is already very
richly valued another calibrated tightening will help reinstate
greater policy flexibility. US-China trade deal shape up will
lift odds of April tightening to 2-in-3; it is now evenly split.
External: Notwithstanding the pullback in Q4 C/A (to ~14%
from over 20% in Q3), the overall C/A position remains
exceedingly strong ~17% of GDP; suggesting that while
global trade disruptions are a key risk (to manufacturing
and economic growth), the C/A buffer is not the foremost
concern. Instead, the largest fluctuations to the overall
external position (BOP) is more likely than not to turn up in
the financial account – given Singapore’s status as financial
hub and regional HQ. And so any flare up in capital flow
volatility is more likely to be disruptive to SGD than
perhaps a slowdown in exports per se.
FX: Contrary to popular misconceptions, whether the MAS
tightens policy (via calibrated S$NEER slope increment)
in April or October, will be of very little (near-term)
consequence to SGD. Reason being, with S$NEER already
richly valued, (upper most quadrant of policy bands), scope
for SGD to outperform the (trade) basket of currencies is
fairly limited - and a slope increment creates no
appreciable (pun not intended) headroom for S$NEER instantaneously. That is, increasing S$NEER slope incline
from 1% to 1.5% merely lift incremental appreciation
potential of 1bp (0.01%) per week! So our call for upside
risks to 1.38 for USD/SGD near-term reflect risks of trade
disappointments and China/“Brexit”/EZ risks while
pullback to 1.32-1.33 into 2020 bets on peak USD.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
GDP (% y/y) 1.9% 2.1% 2.4% 2.8% 3.1% 2.5%
CPI (% y/y) 0.5% 0.7% 1.1% 1.4% 1.9% 2.1%
FX Policy
“Slightly” steepened S$NEER
slope
Status Quo “Slightly” steepen S$NEER
slope (~1.5% p.a) Status Quo
USD/SGD* 1.36 1.35 1.35 1.36 1.34 1.33
1.36 - 1.39 1.32 - 1.38 1.32 - 1.38 1.33 - 1.38 1.31 – 1.37 1.30 – 1.36
101
102
103
104
105
106
107
108
109
110
101
102
103
104
105
106
107
108
109
110
Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19
"Rich" S$NEER in the top quartile after second "slightly" increased slope estimated S$NEER slope now ~1% p.a (half of defacto "modest & gradual" 2% appreciation).
NEER
Mid-Point
Sources: MAS, Bloomberg, CEIC , Mizuho Bank
+/- 2% from S$NEER mid-pt
Stronger trade-weighted SGD
Apr '16: Surprise revocation of appreciation bias (to 0% slope) prompts knee-jerk, but short-lived S$NEER slip.
Oct '16: MAS invokes "neutral ... for extended period" dovish caveat.
Apr '17: MAS surprises by retaining "neutral for extended period" dovish caveat.
Apr '18: MAS restores "slight" S$NEER slope. We estimate ~0.5% per annum
S$NEER rise within "neutral" 0% policy slope was recognised as defacto tightening; supporting longer policy hold.
Defacto tightening from S$NEER rise totop quartile, diminishes scope for further tightening within bands; but potential for effective easing accentuated.
S$NEER drop effectivelyachieves further easingdespite no additional policy moves.
Oct '18: MAS "slightly" increases S$NEER slope gradient. We estimate to ~1.0% per annum
(10)
(5)
0
5
10
15
20
25
30
35
40
(10)
(5)
0
5
10
15
20
25
30
35
40
07 08 09 10 11 12 13 14 15 16 17 18 19
Despite trade slippage, trade surplus is exceptionally high; instead trade war risks are the real threat. Meanwhile financial account
slippage may reflect global risks. (% of GDP, 4Qma)
Goods Services Income & Others BOP C/A
Sources: Bloomberg, Mizuho Bank
1.20
1.22
1.24
1.26
1.28
1.30
1.32
1.34
1.36
1.38
1.40
1.42
1.44
1.46
1.20
1.22
1.24
1.26
1.28
1.30
1.32
1.34
1.36
1.38
1.40
1.42
1.44
1.46
Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19
Correspondingly, SGD is richly valued vis-a-vis implied policy bands. Thus, scope for immediate S$NEER outperformance & attendant
USD/SGD downside is constrained unless USD turns independently bearish. (based on Mizuho estimates)
SGD (Actual) SGD (Mid Pt)Sources: Bloomberg, CEIC, Mizuho Bank
Stronger SGD
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
Asia Quarterly – Q1 2019
- 16 -
Malaysia: Moderating oil prices limit fiscal space
Growth: Q4 GDP YoY growth picked up to 4.7% after
moderating for four consecutive quarters. Growth of
private consumption remains steady supported by
continuous wage growth on top of low inflation,
which has boosted real income. Investment growth has
moderated as the public sector scaled back investment on
the back of fiscal consolidation. Slowdown in export-
oriented manufacturing sector has also dragged down
capex. Contribution from net exports swung to positive
as lower imports of capital and intermediate goods
boosted trade surplus. Going forward, private
consumption is likely to be the main driver as
investment could be lackluster with simultaneous
slowdown in capex and construction.
Industry: Exports have been growing at a moderated but
still respectable pace at around 7% YoY thanks to
relatively resilient electrical and electronic products
(EE). Exports of petrochemical products also continued
to grow steadily despite softer crude oil prices.
Manufacturing production has largely sustained its
momentum as higher production of domestic
consumption goods has helped to offset the slowdown
in external-oriented sectors. Nonetheless the durability
of the strength in domestic demand is somewhat
uncertain given growing downside risks.
Growth dynamics: Budget deficit widened to 3.7% of
GDP in 2018 as expenditure growth accelerated in Q4
whilst revenue growth moderated on the back of lower
crude oil prices. Given that the Brent price has so far
fallen behind the government’s budget assumption
for this year ($72), the risk of fiscal slippage should
not be overlooked. Furthermore, less oil-related
revenue will also limit the extent of fiscal stimulus since the government looks to further trim budget deficit
to 3.4% of GDP in 2019.
Inflation: Headline inflation remains very soft, even
after the re-introduction of SST since Sept last year, due
to lower oil prices and muted inflationary pressure.
Given a larger list of goods under SST exemption, this
will somewhat help to contain underlying pricing
pressure. Furthermore, as the government adopts an
Automatic Pricing Mechanism with a lower price cap
for RON95 retail fuel, this effectively caps upside
risks to inflation. With more than 90% of items in the
CPI basket posting inflation less than 2%, inflation is set
to undershoot for some time.
(8)
(4)
0
4
8
12
(8)
(4)
0
4
8
12
2012 2013 2014 2015 2016 2017 2018 2019
GDP Contribution (%-points; YoY)
Net Trade Investments
Stock Govt Spending
Consumption GDP
Sources: CEIC, Mizuho Bank
(10)
(5)
0
5
10
15
20
25
30
2014 2015 2016 2017 2018
Contribution to exports growth (3mma, %, ppt)
Other Natural gas
Petroleum products EE
Rubber Palm Oil
Exports
Source: CEIC, Mizuho Bank
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-80
-70
-60
-50
-40
-30
-20
-10
0
Budget deficit (% of GDP)
in RM
Base case (Brent at $72) (RHS)
Brent at $50 (RHS)
Brent at $90 (RHS)
Source: CEIC, Mizuho Bank
(2)
(1)
0
1
2
3
4
5
6
2012 2013 2014 2015 2016 2017 2018
CPI Contribution (YoY, % -pts)
Food Housing & utilities
Transport Others
CPI
Sources: CEIC, Mizuho Bank.
Asia Quarterly – Q1 2019
- 17 -
Policy: We expect BNM to stay put throughout 2019
given tepid inflation outlook as inflation is likely to
stay at sub-2% level despite fading high-base effect. On the other hand, growth starts to face more downside
risks given slowing global growth. Moreover, space for
expansionary fiscal space is limited given relatively
lower oil prices (Budget 2019 assumption: Brent crude
oil price of US$72) and the government’s goal to further
trim budget deficit. As a result, maintaining an
accommodative monetary stance would be
appropriate for the time being as along as growth
continues to hum along steadily. Should growth
comes under pressure, BNM could shift towards an
easing bias.
External Position: Current account surplus moderated
marginally on the back of narrowed goods account
surplus. As imports growth also moderates alongside
exports due to less intermediate goods imports,
current account surplus is expected to sustain at
around 2% of GDP. Overall BoP position continued to
slip gradually as net FDI inflows have fell slightly. On
the other hand, net portfolio investment outflows have
lessened in Q4 as sentiment towards EM improved.
Going forward, C/A surplus is likely to sustain whist
moderating crude oil prices could weigh on investor
sentiment and subsequently drag down portfolio
investment inflows.
FX: EM FX, including the MYR, has benefited from a
more dovish Fed stance on rate hikes. A recovery in
Q4 growth has also supported sentiment, but headwinds
from an external demand slowdown remain palpable.
MYR could thus see some give-back in the short term,
given vulnerability from Malaysia’s heavy dependence
on trade-related sectors. Still, a bottoming in oil prices
has greatly reduced the likelihood of a rating
downgrade, and we think MYR losses are more likely
to be modest than extended. On a longer-term basis,
MYR valuation remains cheap. There is thus scope for
USD/MYR to ease towards 3.90 in 2H 2019, if global
demand stabilizes on the back of policy support.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
GDP (% y/y) 4.7% 4.7% 4.9% 4.7% 4.2% 4.7%
CPI (% y/y) 0.3% 0.3% 0.8% 1.6% 1.9% 1.9%
Policy Rate (%) 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%
USD/MYR* 4.13 4.12 4.15 3.90 3.85 3.85
4.13 - 4.20 3.99 - 4.25 4.02 - 4.28 3.78 - 4.15 3.73 - 3.97 3.73 - 3.97
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2013 2014 2015 2016 2017 2018 2019
CPI (% YoY) vs Policy Rate (%)
Real interest rate (RHS)
CPI, 3mma
CPI excl. transport, 3mma
Policy rate
Sources: CEIC, Mizuho Bank.
-15%
-10%
-5%
0%
5%
10%
15%
2012 2013 2014 2015 2016 2017 2018
BoP (% of GDP, 4Qma)
Errors Others
Portfolio Investment FDI
C/A BoP
Source: CEIC, Mizuho Bank
2.40
2.60
2.80
3.00
3.20
3.40
3.60
3.80
4.00
4.20
4.40
4.60
95 97 99 01 03 05 07 09 11 13 15 17 19
USD/MYR: Long-term Model Value
USD/MYR USD/MYR Fair Value +/- 1 std deviation
Sources: BIS, Refinitiv, Mizuho Bank Asia & Oceania Treasury
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
Asia Quarterly – Q1 2019
- 18 -
Indonesia: Solid Domestic Demand to Sustain
Growth: Growth stabilized at 5.2% YoY in Q4 as
domestic demand remained solid. Well-contained
inflation has helped to support private consumption amid
upbeat consumer confidence. Growth of investment has
moderated marginally, but still sustained at a solid pace
lifted by both capex and construction-related activities.
Government spending remained supportive led by
generous subsidies and current expenditure during the
election campaign period. Net exports exerted a smaller
drag on growth as imports growth slowed further relative
to exports. Going forward, domestic demand is
expected to be supported ahead of the election on the
back of income-supporting measures and
infrastructure projects.
Industry: Exports growth contracted YoY recently
largely resulting from pricing effect as prices of
Indonesia’s main commodities have been soft.
Momentum in industrial production has stayed
relatively buoyant on the back of construction
activities. As loan growth to manufacturing sector
continued to pick up, this reflects fairly upbeat
business sentiment. Furthermore, as China’s growth
momentum to improve later this year amid more
stimulus measures, this could potential lend support to
export-oriented commodities sectors.
Growth dynamics: Despite incumbent Joko Widodo
leading the opinion polls by a comfortable margin in the
upcoming presidential election, foreign investors still
dialed back ahead of the election. Foreign investment
fell in 2H 2018 as investors weighed uncertainties
surrounding economic policies. Whilst fiscal deficit
shrank to the narrowest in seven years of 1.75% of GDP
last year thanks to tax reform effort, the government has
resorted to nationalistic policies such as higher energy
subsidies. Going forward, more effort is needed to boost
the competitiveness of its export-oriented sectors
including consistency of policy making and reduction of
red tape.
Inflation: Inflation remained well-contained at low-3%
as lower crude oil prices further pushed down pump
prices with Pertamina lowering the prices of non-
subsidized fuel. Food price inflation was also low as
the government deploys task forces to ensure stable
food prices and adequate stocks. Steady core inflation
suggests that underlying inflationary pressure was also
well-behaved. Furthermore, a rebound in IDR is
expected to reduce imported inflation. Going forward,
inflation is expected to stay at sub-3.5% in 1H.
(4)
(2)
0
2
4
6
8
2013 2014 2015 2016 2017 2018
Contribution to GDP growth (%, ppts)
Hhd consumption GFCFGovt consumption Change in stockNet exports Statistical discrepancyGDP
Source: CEIC, Mizuho Bank
-30%
-20%
-10%
0%
10%
20%
30%
2013 2014 2015 2016 2017 2018 2019
Exports growth (% YoY, 3mma)
In volume terms
In value terms
Source: CEIC, Mizuho Bank
0
1
2
3
4
5
6
7
8
9
10
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Foreign Investment Realization (USD bn)
Source: CEIC, Mizuho BankRed-colored bars are when general election took place
-1
1
3
5
7
9
2015 2016 2017 2018 2019
Contribution to CPI (-ppt, % YoY)
Food Processed food
Electricity, gas and fuel Clothing
Health Education, recreation
Transport CPI, YoY
Source: CEIC, Mizuho Bank
Asia Quarterly – Q1 2019
- 19 -
Policy: BI has scaled back its degree of hawkishness in
its latest policy meeting due to several factors. For one,
external stability has improved with IDR rebounding
strongly on the back of a more dovish Fed. Furthermore,
positive progress from the US-China trade talk also lifted
investor sentiment towards EM and helped to spur
portfolio investment inflows. Secondly, inflation remains
well-contained. If this low inflation trend can be
sustained, this is likely to eventually open door for an
easing bias should external stability is maintained.
Nonetheless, C/A deficit remains a source of concern
and therefore BI is expected to remain vigilant and
prudent for now despite improving financial stability.
External Position: C/A deficit widened to 3.5% of GDP
in Q4 as goods account recorded a much larger deficit.
Government’s non-monetary measures to curb C/A
deficit have yielded little result so far as imports
continued to growth in solid pace despite stagnating
exports. Lower crude oil prices can help to
temporarily narrow deficit among O&G products
while the government looks to develop industrial
sector in order to boost non-O&G manufactured
exports. Overall BoP returned to positive as portfolio
investment inflows rebounded substantially towards the
end of 2018. FDI dipped in Q4 as investors scaled back
prior to the general election.
FX: The IDR has been strengthening since Nov 2018,
helped by reduced Fed rate hike expectations and
increased EM fund inflows. Still, the current account
deficit remains a bugbear, and BI could need to maintain
its pre-emptive policy stance for some time in order to
anchor IDR stability. Presidential elections in April
could introduce some volatility, but we think scope of
an electoral upset for Jokowi to be rather small.
Higher oil prices may pose some headwinds for the trade
deficit, but we expect this to be offset by steady EM
inflows amidst lower UST yields. USD/IDR is thus
likely to consolidate within current levels around 14000,
before easing more durably in 2H 2019 if risk appetite
picks up as we expect.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
GDP (% y/y) 5.2% 5.2% 5.1% 5.1% 5.1% 5.2%
CPI (% y/y) 3.2% 2.8% 3.0% 3.3% 3.2% 3.5%
Policy Rate (%) 6.00% 6.00% 6.00% 6.00% 5.75% 5.75%
USD/IDR*
14390 14200 14100 14000 13800 13800
14215 – 15284
13700 - 14600
13600 - 14500
13500 - 14400
13300 - 14200
13300 - 14200
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,00060
70
80
90
100
110
120
2013 2014 2015 2016 2017 2018 2019
Exchange Rate
NEER
REER
USDIDR (RHS, inverted)
Source: CEIC, Mizuho Bank
-5%
-3%
-1%
1%
3%
5%
2012 2013 2014 2015 2016 2017 2018
C/A (% of GDP, 4QMA)
Goods
Services
Primary income
Secondary income
C/A
Source: CEIC, Mizuho Bank
2000
4000
6000
8000
10000
12000
14000
16000
95 97 99 01 03 05 07 09 11 13 15 17 19
USD/IDR: Long-term Model Value
USD/IDR USD/IDR Fair Value +/- 1 std deviation
Sources: BIS, Refinitiv, Mizuho Bank Asia & Oceania Treasury
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
.
Asia Quarterly – Q1 2019
- 20 -
Thailand: Stable Consumption to Offset Slowing Exports
Growth: Growth rebounded slightly in Q4 as net exports
exerted a smaller drag on growth on top of stable
domestic demand. Private consumption is supported
by continuous and broad-based improvement in both
farm and non-farm household income on top of
supporting measures ahead of the election. Growth of
government spending stayed steady with a bias towards
social welfare-related expenditure. Furthermore, tourism
sector has been recovering at a faster-than-expected pace
as decline in Chinese tourists has moderated. Going
forward, domestic demand is likely to gain further
traction and mitigate downside risks to growth from
slowing exports.
Industry: Exports growth has slowed substantially due
to lower demand for Thailand’s main manufactured
goods including electronics and automotive. As external
demand continues to cool, exports growth is set to stay at
a subdued level. The trend of capacity utilization level
has also been falling for consecutive months
reflecting cooling manufacturing momentum. With
external-oriented growth drivers moderating, domestic
demand is expected to buttress further downside
risks with pick up in construction activities on the
back of more PPP projects for infrastructure
development.
Growth dynamics: As trade tension between the US and
China escalated last year, Thailand was expected to reap
some benefits as companies look to relocate their
production base. FDI application, in value terms, jumped
significantly towards the end of the year even though
arguably this could be skewed due to the large
investment value of a few deals. In volume terms, the
number of FDI application has also been climbing
steadily reflecting Thailand’s appeal as an alternative
given its well-developed production base, continuous
improvement in infrastructure and the government’s
desire to modernize the economy through its flagship
“Thailand 4.0” initiative.
Inflation: Headline inflation retreated to sub-0.5% due a
sharp plunge in pump prices following the fall in crude
oil prices. Nevertheless, core inflation stabilized -
despite at a relatively low level of sub-1%, reflecting
underlying inflationary pressure remains steady, though
tepid. There are nascent sign that food price inflation
begins to pick up alongside higher prices for
agricultural goods at the producer level. However, a
strong Baht could add to the difficulty of the low
inflation battle in the near future.
(10)
(5)
0
5
10
15
20
(10)
(5)
0
5
10
15
20
2013 2014 2015 2016 2017 2018 2019
Contribution to GDP growth (%YoY; -ppts)
Pte Consumption Govt Spending
Investments Stocks
Net Exports GDP % y/y (RHS)
Sources: CEIC, Mizuho Bank
40
45
50
55
60
2014 2015 2016 2017 2018 2019
Business Sentiment Index (3mma)
Order book
Investment
Production
Source: CEIC, Mizuho Bank
0
50
100
150
200
250
300
2010 2011 2012 2013 2014 2015 2016 2017 2018
FDI application (THB bn, 4QMA)
FDI, applied
FDI, approved
FDI, promotion certs issued
Sources: CEIC, Mizuho Bank
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
2014 2015 2016 2017 2018 2019
Contribution to inflation (% YoY, -pts, 3mma)
Transport
Food
Core
Sources: CEIC, Mizuho Bank
Asia Quarterly – Q1 2019
- 21 -
Policy: The latest BoT policy meeting decided to
maintain the policy rate with a vote split of 4-2 (2
voted to raise the rate by 25bps) suggests that a rate
hike is still on the card despite recent retreat of
headline inflation. Several factors support further
tightening including the building up of vulnerabilities in
the financial system and continuous expansion in
economic growth led by domestic demand. However,
rate hike is likely to be gradual as uncertainties
surrounding the general election and recent gains in
Baht call for patience in the near future. Should
growth continues to expand alongside stabilized
inflation, we expect BoT to hike by 25bps in 2H.
External Position: C/A surplus continued to narrow as
slowing exports squeezed goods account surplus. In the
meantime, services account surplus was largely
sustained as tourism receipt underwent a steady recovery
thanks to government’s supporting measures and safety
assurances. Trade surplus is likely to shrink further as
exports stagnated on waning external demand while
imports is likely to grow steadily, despite at a
moderated pace due to lower crude oil prices.
Portfolio investment inflows have returned in Q4 given
Thailand’s solid fundamental as well as improving
sentiment towards EM assets.
FX: The THB has rallied strongly since Dec, helped by
the first BoT rate hike since 2011 as the output gap
finally closes. FDI has also been a key driver for THB
gains, with inward FDI in the first 3 quarters of 2018
already exceeding full year inflows of the preceding four
years. In our view, Thailand is an attractive
investment destination for manufacturers diversifying from China, as the threat of US tariffs
loom. Meanwhile, elections, scheduled for 24 Mar, are
not expected to produce any hiccup after the King
stated that the royal family should not be involved in
politics. Still, any unexpected softening in exports
could see a pause of THB gains in the interim, given
Thailand’s high dependence on trade.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
GDP (% y/y) 3.7% 3.2% 3.4% 4.0% 3.9% 4.2%
CPI (% y/y) 0.8% 0.7% 0.6% 0.5% 1.3% 1.5%
Policy Rate (%) 1.75% 1.75% 1.75% 2.00% 2.00% 2.00%
USD/THB* 32.5 31.5 32.0 31.3 30.9 30.5
32.2 - 33.3 30.8 - 32.3 31.3 – 32.7 30.6 - 32.0 30.2 - 31.6 29.8 - 31.2
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
2014 2015 2016 2017 2018 2019
Inflation vs Policy rate (%)
Real interest rate (RHS) Inflation, 3mma
Core inflation, 3mma Policy rate
Source: CEIC, Mizuho Bank
-10
-5
0
5
10
15
20
2013 2014 2015 2016 2017 2018
BOP (% of GDP; 4QMA)
C/A - Gds
C/A - Svcs
Direct Invstmt
Portfolio Invstmt
Other Investmt
Sources: CEIC, Mizuho Bank
20
25
30
35
40
45
50
95 97 99 01 03 05 07 09 11 13 15 17 19
USD/THB: Long-term Model Value
USD/THB USD/THB Fair Value +/- 1 std deviation
Sources: BIS, Refinitiv, Mizuho Bank Asia & Oceania Treasury
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
Asia Quarterly – Q1 2019
- 22 -
Philippines: Moderating Inflation to Boost Consumption
Growth: Growth rebounded slightly in Q4 on the back
of pick up in private consumption as lower inflation
boosted real purchasing power. As inflation continues
to moderate, this is expected to further support
domestic consumption on top of boost from election-
related spending. Investment growth is likely to stay
lackluster in 1H as slowing external demand will drag
down capex. Furthermore, as the government has been
running on a re-enacted 2018 budget so far, this plus
the ban on public works prior to election in May, will
weigh on government spending in 1Q. Net exports are
expected to exert a drag on growth too as exports are
likely to slow given peaking semiconductor cycle.
Industry: Growth of industrial production has plunged
sharply as both domestic- and external-oriented segment
moderated. Food production growth contracted YoY as
elevated food inflation in 2H 2018 dragged down
demand. On the export-oriented segment, electronics
production and exports have slowed against the
backdrop of peaking semiconductor cycle. Going
forward, as external demand further softens on top of
less capital outlays for infrastructure projects during
1Q, as evidenced by the fall in capital goods imports,
industrial production growth may stay tepid.
Growth dynamics: Fiscal deficit widened to 3.2% of
GDP in 2018 as expenditure growth continued to
outpace revenue, which also grew at its fastest rate in a
decade thanks to newly-introduced excise tax. Growth
of government spending is off to a soft start this year
as the government has been working on a reenacted
budget as of end-Fed. A mandatory ban on public
works ahead of the May election could further weigh on
capital spending, though the government is trying to
exempt those big-ticket infrastructure projects from the
ban. Given the government debt level remains steady
at around 42% on top of moderating borrowing cost,
medium credit outlook remains stable.
Inflation: Headline inflation has returned to mid-4% on
the back of slower food price inflation. Despite the
implementation of second excise tax hike in fuel since
Jan, YoY growth of pump price has moderated due
to lower crude oil prices. Core inflation also moderated
for two consecutive months now suggesting that
underlying inflationary pressure is gradually tapering
off. With the Rice Tariffication Bill finally being signed
into law, this should further help to bring down food
prices. Should oil prices continue to stay relatively
soft, inflation is expected to come back to BSP’s
target range of 2%-4%.
(15)
(10)
(5)
0
5
10
15
(15)
(10)
(5)
0
5
10
15
2013 2014 2015 2016 2017 2018
GDP Expenditure Contribution (YoY; %-pts)
Pte Consumption Govt Spending
GFCF Stocks
Net exports Errors
GDP % y/y Sources: CEIC, Mizuho Bank
-30
-20
-10
0
10
20
30
40
50
2013 2014 2015 2016 2017 2018
Industrial Production Index, volume (%YoY, 3mma)
Total
Food
Electrical machinery
Source: CEIC, Mizuho Bank
-140
-120
-100
-80
-60
-40
-20
0
20
-6%
-5%
-4%
-3%
-2%
-1%
0%
1% Fiscal balance (4QMA)
PHP bn (RHS)
% of GDPSources: CEIC, Mizuho Bank
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2013 2014 2015 2016 2017 2018 2019
Contribution to CPI (%-ppts, 3mma)
Ohers
Transport
Housing & utilities
Food
CPI
Core CPI
Sources: CEIC, Mizuho Bank
Asia Quarterly – Q1 2019
- 23 -
Policy: With inflation retreating towards BSP’s
target range, we expect BSP to scale back its degree
of hawkishness on the back of tightened monetary
conditions. Nonetheless, BSP is unlikely to shift to an
easing mode for now either given that PHP remains
at a multi-year weak level despite some rebound.
Furthermore, the relatively low oil prices could also
subject to some upside risks, which could threaten price
stability. Given that credit conditions have tightened
substantially following consecutive rate hikes last
year, BSP is expected to resume its medium-term
plan to reduce its reserve requirement ratio once
inflation stabilizes.
External Position: Current account deficit narrowed
slightly in Q3 compared to Q2 as widened goods account
deficit was partly offset by larger services account
surplus, led by business services exports. Goods
account deficit may not narrow much in near term as
exports are likely to stagnate given slowing external
demand while imports continue to grow, albeit at a
moderated pace. Lower remittances from the Middle
East continued to weigh down remittances growth,
which provides a substantial buffer for C/A. Actual FDI
inflows stayed fairly resilient in Q3 despite falling FDI
approvals due to uncertainties surrounding the pending
tax reform on corporate tax perks.
FX: Falling headline inflation may support PHP strength
in the short-term on the back of higher real rates.
However, a still positive output gap and continued
fiscal expansion suggest that latent risks to inflation
remain. Any rebound in inflation may thus precipitate
PHP selling again, once the initial effects from allowing
rice imports fade out. Furthermore, remittance growth is
slated to ease with Mid-East demand for labor reacting
with a lag to lower oil prices. As both the fiscal and trade
deficits look set to sustain, we still expect a challenging
medium-term outlook for the PHP.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
GDP (% y/y) 6.1% 6.2% 6.4% 6.5% 6.5% 6.6%
CPI (% y/y) 5.9% 3.8% 3.5% 2.8% 3.3% 3.8%
Policy Rate (%) 4.75% 4.75% 4.75% 4.75% 4.50% 4.50%
USD/PHP* 52.6 52.0 53.5 53.5 53.2 53.0
52.2 - 54.4 50.9 - 53.1 52.0 - 54.7 52.3 - 54.7 52.0 - 54.4 51.8 - 54.2
(1)
0
1
2
3
4
5
6
7
2013 2014 2015 2016 2017 2018 2019
CPI and policy rate (% YoY, 3mma)
Real interest rate (RHS) Headline CPI
Core CPI Upper bound
Lower bound Policy rate
Sources: CEIC, Mizuho Bank
interest rate corridor framework was introduced
-20%
-15%
-10%
-5%
0%
5%
10%
15%
2012 2013 2014 2015 2016 2017 2018
Balance of payments (% of GDP, 4QMA)
Other incomes & transferServicesRemittancesGoodsC/AC/A excl. remittances
Source: CEIC, Mizuho Bank
22
27
32
37
42
47
52
57
62
95 97 99 01 03 05 07 09 11 13 15 17 19
USD/PHP: Long-term Model Value
USD/PHP USD/PHP Fair Value +/- 1 std deviation
Sources: BIS, Refinitiv, Mizuho Bank Asia & Oceania Treasury
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
Asia Quarterly – Q1 2019
- 24 -
Vietnam: Downside Risks Growth: Given large Korean, Taiwanese and Japanese
manufacturing - as presence in Vietnam– many impacted
by the tech downturn – risks of an outsized downside
below 6% growth remain non-negligible; and are
highly correlated to the global tech demand pull-back and US-China trade negotiation outcomes. Offset from
the domestic farm sector though is a double-edged sword
as the vagaries of the weather could swing either way.
The good news is that high sensitivity to the electronics
cycle could help place a bottom on growth into mid-
2020. And in any case, prospects for inward FDI into
manufacturing remains upbeat – underpinning longer
term prospects. But Trump’s restive trade policies in
Asia are unsettling in terms of sticky downside risks.
Industry: Surge in electronics exports, which lifted
manufacturing in 2017/early-2018 is now extracting
payback; corresponding to the electronic/mobile device
demand slump worldwide. The good news is that
Vietnam remains attractive for investments to build
on the manufacturing and supply-chain eco-system. But
near-term pullback in production as Korea, Taiwan,
Japan amid China face exports/industrial downturn is
hard to avoid. That said, exports/manufacturing are set
to start picking up later in 2020; contingent on US not
turning hostile to Vietnam’s outsized trade surplus
against the US – downside risks indeed linger.
Growth dynamics: With the manufacturing downturn,
economic growth will be dampened in coming quarters.
But the bigger risk for Vietnam is not so much a
cyclical downturn in exports as it is the structural
USD liquidity shortfall in a climate of tightening USD
liquidity on a global basis – but that underlines
financial stability risks. Whereas, continued inward
investments given Vietnam’s growth prospects and
manufacturing ecology (boasting inexpensive labour
and improving logistic network) means that foreign
inward investments over the medium-term will underpin
growth – so long as trade war cross-hairs are avoided. Inflation: Inflation is by and large under wraps (under
3%); and set to be contained in the 2.5-4.0% (3.0-4.5%)
range in 2019 (into mid-2020). While and El Nino risks
may further underpin supply-side food price pressures,
coordinated of food supply buffer/price controls
ought to check the strength of food-driven inflation
pick-up.. What’s more, softer oil inflation effects for
the year should help to damp inflationary pressures ahead of 4%, before edging a tad more in 2020. The
good news is that non-food inflation remained
subdued, consistent with demand-pull pressures
remaining dormant as risk of negative output gap rises
in the near-term amid external headwinds.
6.1
2.5
9.6
8.4
6.5
6.8 2.9 14.4 8.7 7.47.1 3.8 13.0 9.2 7.0
7.4
4.1
13.6
7.5
6.7
0
2
4
6
8
10
12
14
16
0
2
4
6
8
10
12
14
16
GDP Farm Mfg Construction Services
Vietnam GDP: Growth momentum, while still robust, is susceptible to sharper drop if external headwinds buffet
Manufacturing, which is the key driver. (% YoY)
2013-2017 (Avg)
2017
2018
Q1 2018
(4)
(2)
0
2
4
6
8
10
12
14
16
18
20
22
(4)
(2)
0
2
4
6
8
10
12
14
16
18
20
22
06 07 08 09 10 11 12 13 14 15 16 17 18 19
Net Trade (US$ bn): E$6.8bn surplus in 2018; but latest three-months (Dec-Feb) slip in to a deficit of $0.90bn alongside a slump in electronics/mobile exports.
Trade Balance Exports Imports
2006: -$4.61bn
2007: -$9.97bn
2008: -$16.38bn
2009: -$12.38bn
2010: -$12.60bn
2011: -$8.85bn
2012: $0.75bn
2013: $0.07bn
2014: $2.37bn 2016: $1.78bn
2015: -$3.55bn2017: $2.1bn
2018: $6.83bn
Dec '18-Feb '19: -$0.9bn
(10)
(5)
0
5
10
15
20
25
30
(10)
(5)
0
5
10
15
20
25
30
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
Electronics & Mobile Devices (such as Phones - think Samsung!) stregnth from earlier reverses in a payback on the tech cycle turn.
Others Veg, Pepper, Nuts & Coffee Aqua
Rice Textiles & Footwear Crude Oil
Phone & Spare Parts Electronics Total Exports
0
4
8
12
16
20
24
0
4
8
12
16
20
24
2010 2011 2012 2013 2014 2015 2016 2017 2018
Strong & sustained FDI inflows led by Japan and Korea continue to backstop underlying momentum (US$bn)
Others
Germany
US
Thailand
Singapore
Taiwan
China (incl.HK)
Korea
Japan
Total
(4)
(2)
0
2
4
6
8
10
12
(4)
(2)
0
2
4
6
8
10
12
13 14 15 16 17 18 19
Despite Food inflation pick-up, concerted government efforts have subdued price pressures (2-3%); especially with significantly
softer Oil! (Inflation Contribution; %-pts)
Food Housing Transport
Others Healthcare CPI (% y/y)
Non-food CPI (% y/y)
Sources: CEIC, Mizuho Bank
Asia Quarterly – Q1 2019
- 25 -
Policy: The SBV in theory has more room to ease
amid external headwinds and well-anchored
inflation; but our sense is that the central bank will
refrain from using the main policy (rate) levers,
instead preferring targeted liquidity provision as the
preferred mode of counter-cyclical buffer. For one,
not unlike China, policy transmission rather than
headline rate adjustments may be more efficacious.
Crucially, the SBV may be acutely aware that cutting
rates could potentially be at the cost of VND stability,
compromising the FX regime. As such, prolonged
policy rate hold with broadly stable, but lower beta
VND looks like the preferred policy combination.
External Position: Sharp pullback in exports and net
trade flipping to a deficit has cut into the C/A buffer
that Vietnam has. In turn, the weaker C/A position will
impede build up in FX reserves. This is not merely to
boost the central bank’s reserves of foreign currency for
its own sake, but rather to supplement Vietnam’s
“emergency cash buffer” given that at 3.0-3.5X imports
cover, Vietnam’s coverage ratio falls short of regional
standards of (6-8X) imports cover is deficient. And so,
sensitivity to capital flow volatility may be heightened
in a weaker net exports and C/A cycle, potential totally
challenging the stable VND policy.
FX: The SBV has few reasons to deviate from its FX
policy of market-based VND valuation referenced off a
basket of currencies - featuring USD, EUR, CNY, JPY,
KRW, THB etc. And unsurprisingly the correlation
with CNY, not just from sensitivities, but from policy
mechanics remains tightest. Accordingly, we expect
relatively stable VND NEER. VND fluctuations are
also likely to be more subdued - both ways - than CNY.
Risks though are asymmetric as shortfall of FX reserves
means that downward pressures on VND during
episodes of acute USD strength will be harder to fend
off. Near-term upside risks to 24,000 to be damped to
23,000 and below into mid-2020.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020
GDP (% y/y) 7.3% 6.8% 6.8% 6.5% 6.3% 6.3%
CPI (% y/y) 3.4% 2.9% 3.0% 3.0% 3.8% 4.4%
Policy Rate (%) 6.25% 6.25% 6.25% 6.25% 6.25% 6.50%
USD/VND*
23,175 23,250 23,350 23,250 23,100 23,000
23,175 - 23,363
23,000 - 24,000
23,100 - 23,500
23,000 - 23,400
22,900 - 23,200
22,800 - 23,100
(15)
(10)
(5)
0
5
10
15
(15)
(10)
(5)
0
5
10
15
07 08 09 10 11 12 13 14 15 16 17 18 19
Real interest rates suggest sufficient "normalization" to hold back on imminent rate hikes; with case "core" real rates consistent with 2015-16 levels.
Refinancing Rate
Real (Re-financing) Rate
Average Real rates (2009-2013)
Real Rate based on "Core" (non-food) inflationSources: SBV, CEIC, Mizuho Bank Sources: SBV, CEIC, Mizuho Bank
(4)
(2)
0
2
4
6
8
10
(4)
(2)
0
2
4
6
8
10
Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19Mar-19
Ultra-low VND volatility amid VND NEER slip helps FX reserve accumulation. Further VND Shifts to Follow Cues from CNY/CNY NEER Cues.
VND CNY VND NEER CNY NEER
(10)
(8)
(6)
(4)
(2)
0
2
4
6
(10)
(8)
(6)
(4)
(2)
0
2
4
6
06 07 08 09 10 11 12 13 14 15 16 17 18 19
Net Exports coming under pressure square with eroded C/A support (despite decelerating); correspondingly, tallies with diminished C/A & FX reserve.
($bn; Qtrly)
C/A (LHS) Net Exports (3m Rolling RHS)
Sources: CEIC, Mizuho Bank.
(3000)
(2000)
(1000)
0
1000
2000
3000
05 06 07 08 09 10 11 12 13 14 15 16 17 18
(3000)
(2000)
(1000)
0
1000
2000
3000
Imports cover pick up to ~3.0X is welcome. But FX Reserves boost may fall short of robust buffer as net exports moderate at the margin.
(US$ mn, 3mma)
FX Reserves Chg Trade BalSources: CEIC, Mizuho Bank
20,500
21,000
21,500
22,000
22,500
23,000
23,500
24,000
20,500
21,000
21,500
22,000
22,500
23,000
23,500
24,000
Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19
VND pick-up since Oct, follows CNY lead, but is low-beta/volatiility, supported by low-inflation; guarding against low (USD) liquidity risks
& opportunistically building on low FX Reserves.
VND (Monthly Avg)
SBV Reference Rate
Sources: CEIC, Reuters Mizuho Bank
Weaker VND
Three episodes of 1% devluation each in 2015:1) Jan (7th) from 21,246 to 21,458; 2) May (7th) to 21,673; 3) Aug (19) to 21,890
Annual devaluation of 1% each in Jun 2013 and Jun 2014.
12 Aug 2015: USD/VND trading bands doubled to +/-2% from +/-1%19 Aug 2015: USD/VND trading bands widened (again!) to +/-3%. And VND mid-point devlaued 1% to 21,890.
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
Asia Quarterly – Q1 2019
- 26 -
Australia: Home to Roost Growth: Risk of growth slip to (or below) 2.5% (2018:
2.8%) have risen, but ironically coincides with much
stronger iron ore prices (which typically lift growth via
increased output/exports and boost to mining investments).
Growth prospects are mired as housing woes at the
epi-centre come home to roost. Specifically, via
adverse feedback between; i) falling home prices (home
equity/collateral value) ii), household balance sheets
hobbled by record high leverage and; iii) banks’ asset
undermined by home price declines. What’s more,
China slowdown, political uncertainties and tighter
fiscal stance challenge growth.
Industry: Despite softening trade and attendant drag
on overall industry, the mining sector has surprise
positively, led by a lift in iron ore prices and fairly
resilient (albeit softening) coal prices – Newcastle coal
prices have been knocked back by reports of import bans
imposed by Beijing. Overall, terms of trade are positive
and Capex pick up (albeit a tad cautiously), will feed in
positively to construction at some point. Nonetheless,
prospects across various industries remain uneven,
and broad-based recovery could elude given global
demand shortfall and global trade friction. China’s fiscal
impetus remains critical for the resource sectors.
Growth dynamics: Despite fairly strong jobs, the
uneven economic conditions juxtaposed against the
global downturn/China risks justifiably warrants RBA
misgivings about turning too upbeat prematurely. Weak
wages are one reason for reservation. Most worrying,
high household leverage will come home to roost as
insufficient wage gains grate against higher mortgage
rates (banks nudge up rates despite RBA hold) and softer
home prices (adversely home equity/collateral impact).
Pullback in consumption from being blindsided by
sudden jobs downturn and/or negative wealth effects
keeps the RBA up and fidgety.
Inflation: Inflation looks set to remain benign, with
softer oil prices since late-2018 (though now off the
lows) likely to dampen pick-up above 2%; keeping
price pressures well within the 2-3% target. Spare
capacity and latent shortfall in consumer demand will
be the key issues that the RBA looks to assess –
especially given worries about weak wage gains
alongside falling home prices, which could weaken
demand-pull linkages; which is corroborated by soft
services and ex-food price pressures. To be sure,
inflation restoration back towards 2.5% is expected into
2020. But interim risks of demand shortfall impeding
price pressures remain on the radar.
(2.5)
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
(2.5)
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18
Australia GDP: Softer domestic demand led by weaker H/H consumption & weak housing (home construction) dragging; government offset may fade.
(GDP Contribution- %-pts; QoQ s-adj)
Inventory & Errors Net Exports GFCF Public
GFCF Pte Non-Dwelling GFCF - Pte Dwellings Govt
Consumption GDP GDP (2Q/2Q %)
Sources: CEIC, Mizuho Bank
(6)
(5)
(4)
(3)
(2)
(1)
0
1
2
3
0
5
10
15
20
25
30
35
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Australia's Commodities (Coal, Ores & Mineral) buoy Total & Net Exports. Economy is uneven, but not broken; retards broad-based recovery. (A$bn; 3mma)
Rural & Others
Other Mfd
Machinery & Tpt Eqpt
Other Mineral Fuel
Coal
Metal & Ores
Total Exports
Net Exports (3mma, RHS)
Sources: CEIC, Mizuho Bank
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
06 07 08 09 10 11 12 13 14 15 16 17 18 19
Actual Private Sector Capex - Mining investments remain soft despite bottoming; but non-mining pick-up is encouraging. (A$bn)
Mining Manufacturing
Others Total
Sources: CEIC, Mizuho Bank
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Australia: Weak (albeit bottomied) wages growth in the context of heavier household debt burden justifies the RBA's restraint on hawkish bias. (% YoY)
Wage Index Mfg Public Sector Private sector Mining
(4)
(2)
0
2
4
6
8
10
(4)
(2)
0
2
4
6
8
10Australia's Housing Market Downturn, if Sustained, may "wrong-foot" Over-
leveraged Households; given B/S &potential negative wealth Impact. (% Chg QoQ)
Sydney Melbourne Weighted Average
(2)
(1)
0
1
2
3
4
5
6
(2)
(1)
0
1
2
3
4
5
6
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Australia CPI: Inflation is Bottoming though perhaps not aggressively so leaves RBA space. Nontheless, softer energy cost-push understates CPI,
thereby overstating RBA's propensity to re-engage easing. (%-pt contribution, YoY)
Automotive Fuel H/H Energy Total Housing ex-energy
Tpt-ex Fuel Services Alcohol & Tobacco
Food Inflation ex-Fuel & Energy CPI
Asia Quarterly – Q1 2019
- 27 -
Policy: Accordingly, the RBA’s “short game” is likely
to be dovishly inclined; particularly sensitive to signs
of consumption shortfall from adverse household B/S
impact weak wages and/or more accentuated housing
market slump. So the default stance of a prolonged
pause in 2019 is geared more for a rate cut should
conditions sour. In contrast, the RBA’s policy focus
will shift meaningfully towards tightening into 2020,
when it will start to grow concerned about being
behind the curve on policy normalisation. And so the
chances of a rate hike by mid-2020 will start to
harden. For now, a softer AUD offsets tighter fiscal
impulse to helps buy the RBA time to assess global trade
and domestic balance sheet risks.
External Position: Commodities-led boost to
Australia’s goods balance is a sold platform on which the
merchandise goods surplus has soared to A$26.7bn in
2018 (1.4% of GDP), almost doubling from a surplus of
A$13.8bn (0.8% of GDP) in 2017. But the C/A deficit
has only narrowed from A$46.4bn (2.6% of GDP) in
2017 to A$40.8bn (2.2% of GDP) in 2018. The Goods-
C/A disparity points to limitations of the “J-Curve”
benefits to the trade account; but not the wider services
and income account – partly a reflection of the
unevenness of the external sector. And so effectiveness
of softer AUD in re-balancing must be assessed.
FX: The glaring disparity between buoyant iron ore
prices and flagging AUD is hard to miss, though the
justification based on China risks, housing market
gloom, and consequently dovish-leaning RBA (near-
term) are hard to refute. We concur that near-term
AUD risks tilt down with test to 68cents (and perhaps
with a fleeting drop below). But with; i) mining Capex
picking up; ii) 2020 RBA hikes appearing on the cards,
and; iii) global infrastructure push likely to prop up
iron ore prices more durably, contrarian view of AUD
surprising with a rally towards 80cents (12-18mths
out) is seductive. Avoiding adverse global shocks and
UST yields reined in are pre-conditions for this though.
Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q2 2020
GDP (% y/y) 2.3% 2.3% 2.4% 2.6% 2.8% 2.6%
CPI (% y/y) 1.8% 1.8% 1.8% 2.0% 2.1% 2.1%
Policy Rate (%) 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
AUD/USD* 0.71 0.71 0.73 0.76 0.79 0.81
0.67 - 0.73 0.67 - 0.74 0.69 - 0.75 0.71 - 0.79 0.74 - 0.82 0.76 - 0.84
(3)
(2)
(1)
0
1
2
3
(3)
(2)
(1)
0
1
2
3
Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19
Recent drop in jobless , insofar it is mostly driven by job creation more than offsetting higher participation, validates the RBA's prolonged pause (rather an imminent cut).
Net Employment Effect Labour Force Participation Impact Net Unemployment Chg
Unemployment RisingParticipation Rising ==> All else Equal, Lifts Unemployment
Employment Falling ==> All else Equal, Lifts Unemployment
Unemployment FallingParticipation Falling ==> All else Equal, Reduces Unemployment
Employment Rising ==> All else Equal, Reduces Unemployment
100
120
140
160
180
200
40
60
80
100
120
140
160
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Household B/S risks are compounded by housing soft spots & rising global rates; amplifying banking-H/H negative feeedback loops; and wage gains far from offset
household debt burden. (%)
Housing Debt to Disposable Income
Owner Occupied Housng Debt to Disposable Income
Debt to Disposable Income (RHS)
(25)
(20)
(15)
(10)
(5)
0
5
10
(25)
(20)
(15)
(10)
(5)
0
5
10
06 07 08 09 10 11 12 13 14 15 16 17 18 19
Softer AUD has only gently reined in C/A deficit suggesting limited J-curve benefits. Buoyant commodity prices help lift
merchandise trade surplus. (A$bn; 4Qma)
Secondary Income Primary Income Services Goods C/A BOP
Sources: CEIC, Mizuho Bank
30
40
50
60
70
80
90
100
110
120
130
140
150
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
AUD Bears ruling the roost since 2013 have been unchallenged in terms of underlying trends. But insofar that Fed-RBA policy gap diminishes sharply & China averts worst-case trade
outcomes, AUD could turn around more sustainably. Iron Ore smiles at AUD!
AUD Iron Ore AUD Iron Ore
Sources: Bloomberg, Mizuho Bank
Since mid- 2013: Post-taper (Fed winding down QE)
Since mid-2014: Commodity Bust (led by Oil's Collapse late-2014) followed by the China sell-off in 2015.
Since mid-2017/start-2018: Fed launches QT (quantitative tightening/B/S Reduction) in Q4 2017 alongside; i) relatively dovish/laggard RBA and; ii) US-China traderisks.
Sources: Bloomberg, Mizuho Bank
Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.
Asia Quarterly – Q1 2019
- 28 -
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