brexit / trump… · indon sri vn in ph mng • using a relative “catch-up” model to gauge how...

September 2017

ING Asia Research team

Asean-5 overview

Photo source: Somodevilla/Getty Images

2

Growth relative to “expected”

y = -1.322ln(x) + 15.15

R² = 0.8248

0

1

2

3

4

5

6

7

8

1000 10000 100000

Asia - relative GDP per capita (latest)

Outperformance

UnderperformanceAus

Sing

HKJP

SK

TW

MAL

CH

TH

SRI

INDON

VN

IN

PHy = -1.106ln(x) + 13.198

R² = 0.7176

0

1

2

3

4

5

6

7

8

1000 10000 100000

Asia - relative GDP per capita (4Y avg)

Outperformance

UnderperformanceAusSing

HK

JP

SK

TW

MAL

CH

TH

SRIINDON

VN

IN

PH

MNG

• Using a relative “catch-up” model to gauge how fast ASEAN countries should grow:

• Singapore, and the Philippines have grown on track

• Malaysia has slightly exceeded expected growth

• Indonesia, has slightly undershot expectations

• Thailand has noticeably undershot expectations

• Looking at the most recent growth rates:

• Philippines, Singapore and Malaysia are growing at about expected rates

• Indonesia, has slipped slightly further below expectations

• Thailand remains well below expected growth

3

ASEAN 5 - Export competitiveness

• Real effective Exchange rates (REERs) measure the relative competitiveness of an economy.• We see IDR and THB as having lost the most competitiveness – opens the door for CB easing to

deliver nominal exchange rate depreciation• SGD and MYR are slightly soft on a 12M basis. For the MYR, it could imply some eventual

tightening, for SGD, we don’t see a near-term MAS response.• PHP has seen a substantial real depreciation, and has room to tighten, given imported inflation

concerns

90

92

94

96

98

100

102

104

106

108

01/2016 04/2016 07/2016 10/2016 01/2017 04/2017 07/2017

ASEAN-5 REER (12M)

Indon

Thai

Malay

Sing

Philipp

4

ASEAN 5 - Export competitiveness

• A more direct way to look at competitiveness, and room for CB policy changes is export growth • To some extent, 2017 YTD export strength is a function of 2016 weakness. • Philippines has room to hike given relative export strength• Malaysia too• The export story for Singapore is less impressive - suggests policy on hold for some time• Indonesia’s exports are not the problem – it is cutting for other reasons

-15

-10

-5

0

5

10

15

20

Thai Sing Malay Phil Indon

Export Growth (YTD (sa) %YoY)

2016 2017

5

Inflation – a mixed bag

• Opportunistically, BI recently cut rates 25bp on declining inflation (but the rate is still high)• Malaysian inflation also coming down, but still high, next move for them is likely a hike• Philippine inflation also high, and moving higher on a weaker PHP – next move for them too is

tightening. • Singapore inflation still heading lower, but turning point approaching – MAS to leave policy

unchanged• Thai inflation low, partly due to strong THB, cuts appropriate for them

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17

ASEAN-5 inflation YoY%

Indon

Malay

Philipp

Sing

Thai

6

Real policy rates – how much policy leeway?

• Real short term policy rates may indicate where a CB has room to move• At either extreme, Indonesia looks to have greater scope for easing…• While Malaysia has quite a lot of scope for higher rates• Philippines could still find a small hike without real rates being too high…• …and Thailand could cut a little too without real rates becoming negative

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17

Real policy rates (room to move?)

Thai

Indon

Philipp

Malay

policy rate minus

headline inflation

7

Regional demand - China

China: The economy is not going to blow up

8

Deleveraging is a double-edged sword Interest rates are rising but no funding crunch

Regulators urge bank to clean bad loansCapital outflow was history

It results in less money going into:

1. overcapacity sectors. Supply side reform could be successful after a few years

2. real estate development

Deleveraging by imposing tighter regulations has pushed up interbank rates.

Corporates find it expensive to issue in the bond market, especially so for roll over needs. This would put write-off risks on banks.

Foreign reserves have picked up due to valuation effect as dollar weakened and strong yuan

Yuan would be stronger by two forces:

1. Market forces that sell dollar and buy yuan

2. PBoC fixing yuan stronger day by day

The People’s Bank of China (PBoC) raised 10bps twice on 7D reverse repo rate in Q1. This prevents yuan assets losing attractiveness

As interbank rates have rise, PBoC may struggle to consider whether to follow Fed if there is a hike in December.

It has kept liquidity enough to avoid spikes in interbank rates

Interest rates are rising, which poses risks to slower growth. But so far rates are rising only gradually.

Non-performing loan ratio has gone down marginally and write-offs have increased

Regulator is examining off-balance sheet items. In the near future, off-balance sheet should shrink

Further write-off of bad loans during the deleveraging process means banks may need to raise capital.

Tighter regulations to shrink off-balance sheet and interbank products dampen profitability of mid- and small-size banks

Would inflow be too strong? Speculative inflow today would easily become outflows in the future when yuan becomes more volatile

9

China: Consumption to drive growth

Consumption• Contributed 63% to GDP

growth

• Retail sales +10.4%

Investment• Contributed 33% to GDP

growth

• Fixed asset investment +8.3% YoY

1H17

YTD 2017

• Deleveraging put more pressure on investment than consumption

• Increase in consumption has changed growth structure of the Chinese economy from manufacturing driven to service driven

• We project that consumption would increase its contribution to GPD growth to above 70% in 2017

Main risk that could hurt consumption (though very unlikely)

• credit crunch that causes massive unemployment

• asset bubble burst reducing wealth accumulation

• Though we do not think a housing bubble burst is a likely scenario, credit deterioration in the manufacturing sector and the complex relationship between corporate bonds & loans and wealth management products should be a concern if deleveraging is either too fast or too slow

Forecasts China GDP to grow 6.8% in 2017 and 6.7% in 2018 because we expect the service sector would continue to outgrown investment.

10

Asean-5 country slides

11

Indonesia: Need to Accelerate Growth…

• Economic growth has been steady at 5% since 2014 likely also a result of drastic cuts in energy subsidies and global commodity price weakness

• Liquidity growth moderated to single digits last year and remains relatively tight for the economy growing at an average of 5% and with inflation at 6.4% in 2014 and 2016

• Loan growth too has slowed significantly• Jokowi government’s 15 policy reforms have not generated a significant push so far

0

5

10

15

20

25

0

1

2

3

4

5

6

1Q

14

2Q

3Q

4Q

1Q

15

2Q

3Q

4Q

1Q

16

2Q

3Q

4Q

1Q

17

2Q

3Q

F

M2 &

Lo

an

s (

% C

H Y

oY

)

Real

GD

P (

% C

H Y

oY

)

GDP M2 (rhs) Loan (rhs)

12

Indonesia: …Measured Monetary Easing

• BI has stepped in to stimulate the economy as it did in 2016 with a total of 150bps cut • Easier monetary policy only when inflation outlook is favorable as it was in 2016• Window for resumption of easier monetary policy has emerged with slower inflation in July and

followed with slight moderation in August• BI expects inflation to trend lower in the absence of significant administered price increases• BI expects inflation to trend to below 3.5% over the policy horizon • Follow-through easing likely within the year

2

3

4

5

6

7

8

9

Jan-1

4

Ma

r-1

4

Ma

y-1

4

Jul-1

4

Sep-1

4

No

v-1

4

Jan-1

5

Ma

r-1

5

Ma

y-1

5

Jul-1

5

Sep-1

5

No

v-1

5

Jan-1

6

Ma

r-1

6

Ma

y-1

6

Jul-1

6

Sep-1

6

No

v-1

6

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7F

No

vF

17

F

Pol Rate CPI

13

Philippines: Weaker External Payments

• Domestically driven economy strengthens and leads to surge in imports and a wider trade deficit• GDP growth during the Duterte administration: average of 6.5% (government's target is 7-8%)• From 14 years of current account surpluses to near balance • But BSP expects deficits starting this year• OFW remittances previously more than covered the trade gap – times have changed• Our current account forecast of near balance relies of strength of outsourcing revenues seen to

grow by an average of 8% in the next few years while annual OFW remittance growth is at a steady 4-5%

14

Philippines: BSP tightening likely

• Two factors drive BSP monetary policy: priority is inflation and then growth• No compelling reason in the near term: BSP forecasts inflation of 3.2% in 2017 and 2018 and 3.1%

in 2020 –within the inflation target range of 2% to 4% over policy horizon• Economic growth is likely to remain strong supported by fiscal stimulus, household spending and

investments • Risk of overheating: beginnings of overheating as imbalances pile up• Pre-emptive tightening while also providing some support for PHP as global central banks tighten

0

2

4

6

8

10

12

J08

J08

J09

J09

J10

J10

J11

J11

J12

J12

J13

J13

J14

J14

J15

J15

J 1

6

J16

J17

J17

J18F

J18F

% C

h Y

oY

; %

p.a

.

Infl 3Mo Rate Policy Rate Infl Scenario @3.2% 2017; 3.2% 2018

Inflation Target Range

15

Malaysia – Strong trade, strong GDP growth

• Recovery in commodity prices since 2016 supported an uptrend in Malaysia’s trade

• There was a large positive swing in USD exports growth to +12.3 in 1H17 from -4.8% in 2016…

• … and an even larger swing in import growth to +14.5% from -4.2%,

• … thanks to strong domestic demand and the high import content of exports

• Strong trade and GDP growth lifted investor sentiment toward the MYR with 5% YTD appreciation against the USD

• But this this hasn’t done much to reverse 15% MYR-REER depreciation in the commodity crash

• The best of the trade growth looks over but the undervalued MYR will continue to support exports

• Rising external risks a threat to trade growth

16

Malaysia – Why BNM should / should not move

Reasons for BNM tightening…

• Accelerating GDP growth - 5.7% in 1H17 is up from 4.2% in 2016. ING forecast 5.4% for full-year 2017.

• Elevated CPI inflation – at 4.1% YTD in July it’s above the BNM’s 3-4% policy target

• Negative real interest rates and undervalued currency

Reasons for BNM staying pat…

• Increased external risks: North Korea nuclear crisis

• Virtually stable G-7 monetary policy: reduced tailwind from the US Fed tightening

• Increasingly populist economic policy framework ahead of the 2018 general elections

17

Thailand – A low growth-low inflation trap…

• A modest pick up in GDP growth to 3.5% in 1H17 from 3.2% in 2016 is an inventory story

• Private consumption contribution to GDP remains steady but much-touted infrastructure spending is missing in action

• The inventory story too lacks substance without obvious pick-up in manufacturing…

• … and it means overstocking will be a drag on future GDP growth

• Export performance has improved but not an exception given the trend elsewhere

• And manufacturing hasn’t really benefitted from exports

• Against such backdrop, lifting of GDP growth above the 3% average pace it had been on since 2011 could be transitory…

• … unless supported by a recovery in domestic demand

18

Thailand – … warrants further policy easing

• The economy is flirting with deflation, again –after mild CPI inflation for about a year, deflation returned in May and June this year

• A rebound in farm production, up 10% YoY in GDP in 1H17 vs. 0.6% in 2016, is keeping food prices (36% in CPI weight) in check

• And appreciating THB is keeping imported inflation at bay

• The BoT’s 1-4% inflation target looks optimistic

• Re-pricing of the THB for large external surpluses has run it’s course – the trade surplus has halved to US$7bn in 7M17 from year ago

• The THB’s 8% YTD appreciation against the USD appears excessive against Thailand’s weak economic fundamentals.

• The slow growth-low inflation trap and appetite for some currency weakness are grounds for the BoT to cut rates. We forecast a 25bp rate cut before the end of the year

19

Singapore – inflation looks worse than it is

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17

Singapore inflation- headline and accommodation

Headline index

2 per. Mov. Avg.(Private rental index)

YoY%

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17

Inflation ex-accommodation and MAS core

Ex-accommodation

MAS core measure

YoY%

• At 0.6%YoY, it looks as if inflation is still running too low

• But the heavily weighted accommodation index is clearly the main factor keeping inflation low

• And that is beginning to turn the corner, even if it is still negative YoY

• Stripping out accommodation, or looking at the MAS core measure, inflation looks quite normal, and stable…

• …no hint at any need to change policy

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2012 2013 2014 2015 2016 2017

3 month SIBOR%

20

Singapore – SGD NEER

110

112

114

116

118

120

122

124

126

128

130

2012 2013 2014 2015 2016 2017

SGD NEERIndex• The SGD NEER is the MAS’ main tool for

balancing the economy• We have seen that the export backdrop is

fairly ordinary, though overall growth at 2.9% is reasonable.

• The currency too is close to the mid-point of its NEER range maybe a little stronger, and shows few signs of veering from this…

• …or needing a policy change to nudge it back into line

• We expect nothing from the MAS at the October policy meeting

• However, one thing that is puzzling us a little, is the recent rise in short-term interest rates

• This picked up in July, and would be consistent with the MAS buying SGD and selling USD – preparation for a change in the target?

• Although we think the bias to MAS policy is ultimately a tightening, we are surprised if this will be the case as soon as October…

• …though the REER has depreciated…

21

Forecast summary – Indonesia, Philippines

Indonesia 2016 1Q17 2Q17 3Q17F 4Q17F 2017F 2018F 2019F

Real GDP (% YoY) 5.0 5.0 5.0 5.2 5.2 5.1 5.4 5.8

CPI (% YoY) 3.5 3.6 4.3 3.9 3.6 3.9 3.6 3.6

BI 7D reverse repo rate (%, eop) 4.75 4.75 4.75 4.50 4.25 4.25 4.25 4.25

3M interbank rate (%, eop) 7.46 6.87 7.01 5.50 5.20 5.20 4.90 5.20

IDR per USD (eop) 13473 13322 13348 13335 13350 13350 13440 13375

Philippines 2016 1Q17 2Q17 3Q17F 4Q17F 2017F 2018F 2019F

Real GDP (% YoY) 6.8 6.4 6.5 6.6 6.7 6.5 6.6 6.7

CPI (% YoY) 1.8 3.2 3.1 3.0 3.0 3.1 3.5 3.6

BSP o/n borrowing rate (%, eop) 3.00 3.00 3.00 3.00 3.25 3.25 3.75 4.25

3M T-bill rate (%, eop) 2.08 3.00 2.81 2.20 2.40 2.40 3.00 3.50

PHP per USD (eop) 49.60 50.30 50.47 51.00 51.00 51.00 51.40 51.90

Sources: ING, Bloomberg

22

Forecast summary – Singapore, Malaysia

Singapore 2016 1Q17 2Q17 3Q17F 4Q17F 2017F 2018F 2019F

Real GDP (% YoY) 2.0 2.5 2.9 3.4 1.0 2.4 2.6 2.8

CPI (% YoY) -0.5 0.6 0.8 0.5 0.5 0.6 0.7 1.3


SGD per USD (eop) 1.447 1.397 1.376 1.340 1.330 1.330 1.310 1.300

Malaysia 2016 1Q17 2Q17 3Q17F 4Q17F 2017F 2018F 2019F

Real GDP (% YoY) 4.2 5.6 5.8 5.0 5.0 5.4 4.8 4.5

CPI (% YoY) 2.1 4.3 4.0 3.3 3.0 3.6 2.5 2.5

BNM o/n policy rate (%, eop) 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00


MYR per USD (eop) 4.49 4.43 4.29 4.21 4.19 4.19 4.05 3.80


Thailand 2016 1Q17 2Q17 3Q17F 4Q17F 2017F 2018F 2019F

Real GDP (% YoY) 3.2 3.3 3.7 3.5 3.6 3.5 3.5 3.5

CPI (% YoY) 0.2 1.3 0.1 0.2 0.5 0.5 1.0 1.8

BOT 1D repo rate (%, eop) 1.50 1.50 1.50 1.25 1.25 1.25 1.25 1.50


THB per USD (eop) 35.84 34.35 33.93 33.20 33.30 33.30 32.80 32.50

23

Forecast summary – Thailand


24

Disclaimer

This publication has been prepared by ING (being the wholesale and invest banking business of ING Bank NV and certain of its subsidiarycompanies) solely for the information of clients of ING. It is not intended as an offer or solicitation for the purchase or sale of any financialinstrument. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time ofpublication, ING makes no representation as to its accuracy or completeness. The information contained herein is subject to changewithout notice. ING and any of its officers or employees may, to the extent permitted by law, have a position or otherwise be interested(including purchasing from or selling to its clients on a principal basis) in any transactions, in any investments (including derivatives) directlyor indirectly the subject of this publication. ING may perform investment banking or other services (including acting as adviser, manager orlender) for, or solicit investment banking or other business from, any company mentioned in this publication. Neither ING nor any officer oremployee of ING accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.Copyright and database rights protection exists in this publication and it may not be reproduced, distributed or published by any person forany purpose without the prior express consent of ING. All rights are reserved.

Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and may notbe suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changesin exchange rates. Past performance is not indicative of future results. Investors are expected to make their own investment decisionswithout relying on this publication. Only investors with sufficient knowledge and experience in financial and business matters to evaluate therelevant merits and risks should consider an investment in any issuer or market discussed herein.

This publication is for distribution in the United Kingdom only to persons of the kind described in Article 11(3) of the Financial Services Act1986 (Investment Advertisements) (Exemptions) Order 1996 of the United Kingdom and is not intended to be distributed or passed on,directly or indirectly, to any other class of persons (including private investors) in the United Kingdom. Clients should contact analysts at,and execute transactions through, an ING entity in their home jurisdiction unless governing law permits otherwise.

ING Corp., which is a member of the SIPC, and which is part of ING, has accepted responsibility for the distribution of this report in theUnited States under applicable requirements.

Additional information is available on request.

brexit / trump… · indon sri vn in ph mng • using a relative “catch-up” model to gauge how...

Documents