k asia central bank watch · 1 asia central bank watch ― jun ’19: hot iron & cold comfort...

1

Asia Central Bank Watch ― Jun ’19: Hot Iron & Cold Comfort ―

The recent flurry of rate cuts in EM Asia is a case of striking when the iron is hot.

Specifically, it is the coincidence of low inflation, soft growth, and a more unequivocally

dovish Fed (party as a consequence of renewed global trade risks), sweetened the ground for

regional central banks to ease.

Moreover, relatively stable FX/asset markets, barring sharp CNY-led sell-off since US-

China trade deal rupture in early-May, has also facilitated recent easing by EM Asia central

bankers. But this new lease of policy space may be no more than cold comfort.

Fact is, current Fed rate cut bets almost certainly overstate scope for near-term dovish

response; not just the Fed’s, but the consequent policy space that Asia’s central bankers have.

For one, global trade-related risks (or generalized “risk off”) tend to amplify EM Asia FX

shocks, curtailing the ability to cut rates; especially for twin deficit economies such as

India Indonesia and the Philippines. Above all, impaired policy transmission amid higher

leverage and widening credit spreads may dampen stimulus relief.

10 June 2019 Mizuho Bank, Ltd.

Asia & Oceania Treasury Department

Central Bank Policy Outlook

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

India RBI 2.0 - 6.0% 7.08% 6.50% 6.25% 5.75% 5.50% 5.50% 5.50% 5.50% 5.75% 5.75%

Korea BoK 1.5 - 2.5% 1.80% 1.75% 1.75% 1.75% 1.75% 1.50% 1.50% 1.50% 1.50% 1.50%

Singapore MAS* 1.0 -2.0% -

"Slightly"

steepen S$NEER

slope (~1% p.a)

Malaysia BNM 2.0 - 3.0% 3.10% 3.25% 3.25% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%

Indonesia BI^ 2.5 - 4.5% 5.52%^ 6.00% 6.00% 6.00% 5.75% 5.50% 5.25% 5.25% 5.25% 5.25%

Thailand BoT 1.0 - 4.0% 1.84% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 2.00% 2.00%

Philippines BSP** 1.0 - 3.0% 3.00%** 4.75% 4.75% 4.25% 4.00% 3.75% 3.75% 3.75% 3.75% 3.75%

Vietnam SBV 2.0 - 6.0% 6.69% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.50% 6.50%

Australia RBA 2.0 - 3.0% 2.11% 1.50% 1.50% 1.25% 1.25% 1.00% 1.00% 1.00% 1.00% 1.00%

* The MAS conducts monetary policy via FX. Specifically it adopts a trade-weighted SGD appreciation at "modest and gradual" (estimated to be 2% per annum) pace as

BI shifted to the 7 Day repurchase rate as the benchmark rate in August 2016. This by default constituted 125 bps reduction from the last policy rate

** BSP instituted an interest rate corridor policy in June 2016. The new effective policy rate is the overnight reverse repurchase rate.

2020

Status Quo

"Slightly" steepen S$NEER

slope (~1.5% p.a)Status Quo

Inflation

Target

Central

Bank

2013 - 2017

avgCountry End 2018

2019

Status Quo

Vishnu Varathan

Head, Economics & Strategy

[email protected]

Zhu Huani

Market Economist

[email protected]

2

Executive Summary

G3: Expressly dovish Fed signals rate cut; coy ECB doves flag two-way risks to

rates (mid- 2020); BoJ doves to dig in amid JPY rise and ahead of VAT hike.

EM Asia: Risks of global trade dislocations and distinctly dovish Fed catalyze

rash of pre-emptive easing; but wary of macro instability.

PBoC:US-China trade flare-up re-invigorates easing bias; but expressed via

targeted and nuanced RRR cuts, credit push and MLF; not CNY devaluation.

RBI: “Accommodative” stance despite a third (cumulative 75bp) cut suggests one

more cut in Q3 given INR/macro stability; more focus on policy transmission.

MAS: Calibrated slope steepening suspended amid downside risks/diminishing

output gap). Set to resume late-2020 if worst-case trade outcomes are averted.

BNM: A one-and-done 25bps rate cut to pre-empt downside risks. More easing

is less likely unless there is evidence that domestic demand will deteriorate further.

BI: Benign inflation and rising bets on Fed underscore easing bias, with two rate

cuts on the table; and sooner rather than later; subject to relative IDR stability.

BoT: The option to ease remains, despite having no necessity to cut, given ultra-

low policy rate; and a stronger THB could be the catalyst amid trade disruptions.

BSP: Further rate cuts are on the table barring inflation resurgence; especially as

the BSP has de-coupled RRR cuts (as liquidity calibration) from policy easing.

SBV: The SBV will prioritize VND stability, relying on liquidity/credit easing to

buffer against trade risks; especially as inflation creeps higher.

RBA: One more pre-emptive 25bps rate cut (lowering Cash Rate to 1.00%) to

insure against housing/consumption risks; as inflation remain benign.

BoK: Renewed trade risks and consequent growth shocks may warrant at least

25bp rate cut to complement fiscal stimulus; but balanced against KRW stability

Country

Next

meeting

Current

rate Last change Quantum

6M

cumulative

change

1Y

cumulative

Change

Real rate

(3mma)

Latest

inflation

(3mma)

Inflation

target^

Australia 02 Jul 1.25% 06/2019 -25 bps -25 bps -25 bps -0.1% 1.3% 2-3%

China N/A 4.35% 10/2015 -25 bps 0 bps 0 bps 2.3% 2.1% 1.5-3.5%

India 07 Aug 5.75% 06/2019 -25 bps -75 bps -50 bps 3.0% 2.8% 2-6%

Indonesia 20 Jun 6.00% 11/2018 +25 bps 0 bps +125 bps 3.4% 2.6% 2.5-4.5%

Korea 18 Jul 1.75% 11/2018 +25 bps 0 bps +25 bps 1.2% 0.5% 1.5-2.5%

Malaysia 09 Jul 3.00% 05/2019 -25 bps -25 bps -25 bps 3.0% 0.0% 2-3%

Philippines 20 Jun 4.50% 05/2019 -25 bps -25 bps +125 bps 1.1% 3.4% 2-4%

Thailand 26 Jun 1.75% 12/2018 +25 bps +25 bps +25 bps 0.5% 1.2% 1-4%

Vietnam N/A 6.25% 07/2017 -25 bps 0 bps 0 bps 3.4% 2.8% 2-6%

Singapore* Oct N/A 10/2018 Reinstate N/A N/A 1.5% 0.6% 1-2%

^ Where ranges are not explicit, we have assumed +/- 1% from inflation targets

3

G3 Central Bank Overview:

Federal Reserve (US)

Governor/ Board

Current Rate

Cumulative move since

2015* Last Move Next Move

Next Meeting

Target/ Decision

1

Jerome Powell 2.375% (Fed

Fund Rate) +225 bps

+ 25 bps -25 bps 20 Jun Dual

mandate

7 members Dec 2018 Q3 2019 6 Weekly Voting

QE

Status Pace of Expansion^ B/S (% of GDP)

Contractionary

B/S roll-off (QT) to be trimmed from US$50bn to $35bn per month (for May-Sep); and wound up end-Sep. So, QT plans for $600bn B/S reduction in 2019 (and into 2020), have been truncated; to $375bn in 2019. The Fed will maintain ~$3.7trln B/S (well above estimates for $2.0-3.0trln neutral B/S).

18.7%

Policy Bias

Dovish Dovish-neutral Neutral Hawkish-neutral Hawkish

^Fed started QE “taper” in Dec 2013, rate normalization in Dec 2015 and initiated B/S reduction in Oct 2017.

European Central Bank (Eurozone)

Governor/ Board

Current Rate



Next Meeting

Target/ Decision

Mario Draghi -0.40%/0% (Depo/Refina

ncing)

-20 bps / -5 bps

-10 bps / -5 bps

+10 bps 25 Jul Inflation

Targeting

6 members Mar 2016 Q4 2020 6 Weekly Voting

QE

Status Pace of Expansion B/S (% of GDP)

Neutral No more asset purchases for 2019. TLTRO III (2Y tenure) to commence in Sep 2019; …..

40.3%

Policy Bias


Bank of Japan (Japan)

Governor/ Board

Current Rate



Next Meeting

Target/ Decision

Haruhiko Kuroda

- 0.10% (Policy-Rate

Balance) -20 bps

-20 bps Reduce QQE 20 Jun Inflation

Targeting

9 members Jan 2016 Q2 2020 6 Weekly Voting

QE Status Pace of Expansion* B/S (% of GDP)

Expansionary JPY 80tn/year of JGBs to be purchased 102.1%

Policy Bias


*Policy commitment though actual amount may vary month to month

While not a done deal, the Fed’s is clearly predisposed to ease policy. Fact is, “solid” jobs gains are

offset by softening consumption and business investments. And crucially, re-escalation of US-China trade

darkens the outlook as fiscal tailwinds turn into headwinds. Markets are betting on 2-3 rate cuts by

early-2020; and June “Dor Plot” will be assessed for some of this dovish bias; chances are, a more

measured 1-2 rate cuts to be suggested by the Fed, with data-dependence caveats thrown in.

The ECB’s 2-yr TLTRO (III) (to start Sep) is arguably a reason for reining in outright dovish bias. Sp

prolonging rate hold to “at least” mid-2020 was arguably not a surprise, but re-introduction of two-way

risks to rates buys solid insurance for doves. And while the BoJ is not actively pursuing policy

easing, a perversely stronger (safe-haven) JPY and pipeline VAT hikes that threaten to dampen

consumption suggest need for fresh monetary policy easing – to both complement fiscal offset for

VAT and to blunt headwinds from inadvertent JPY strength. Merely a question of how and when.

1 Inflation targeting refers to central bank that uses an explicit inflation as target. Dual mandate refers to central bank with

objectives to control inflation and promote growth. Discretionary refers to central bank with no explicit target.

4

Australia

Central Bank Governor/

Board Current

Rate Last Move Next Move

Next Meeting

Target/ Decision

Reserve Bank of Australia

(RBA)

Philip Lowe 1.25% (O/N Cash)

-25 bps -25 bps 2 Jul Inflation

Targeting

9 members Jun 2019 Q3 2019 Monthly Voting

Policy Bias


2014-16

(Avg) 2017 2018 Q1 19

Ou

tlo

ok

Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 1.8% 1.9% 1.9% 1.3% 1.8% 1.8% 1.9% 2.0% 2.1%

GDP 2.5% 2.4% 2.8% 1.8% 2.2% 2.3% 2.4% 2.4% 2.5%

Policy Rate *

1.50% 1.50% 1.50% 1.50% 1.25% 1.00% 1.00% 1.00% 1.00%

*End of period | Forecast values in Italic

Inflation

While core inflation is not collapsing, chronic undershoot of headline inflation coupled with

inflation normalization (to 2-3% target) being pushed out substantially means that the RBA’s

legitimacy of the last rate cut June was never in question. With inflation likely to struggle to get up

above 2% this year, further easing, is more a “matter of when rather than if”; especially with

worryingly subpar wage inflation amid asset deflation risks from a housing market downturn.

Growth

Growth slipping below 2% in Q1, with only a weak recovery in sight for the rest of 2019 creates the

worry of weak growth – amid external headwinds working through China risks – catalyzing a

negative feedback loop to household consumption and negative wealth effects. Evolving labour

and housing market conditions alongside global trade uncertainties mean that the growth outlook is

both downbeat and unpredictable. But PM Morrison’s supportive housing policies may be a relief.

FX

A softer AUD, accentuated by dovish RBA shift, only partly mitigates external trade-related risks;

but does very little to backstop domestic pressures resulting from soft wage pick-up and housing

market conditions. Moreover, a dovish Fed and buoyant iron ore prices may limit sustained AUD drop.

Policy

Upshot being, the RBA has legitimate reasons to ease policy further, and arguably should! But

that said, we are circumspect about aggressively dovish views on the street peddling three more rate

cuts to lower the cash rate to 0.50%. This single-minded focus on monetary spigots ignores potential

for fiscal (including housing targeted) cushion, China backstop, and global infrastructure push,

backstopping the commodity sector. Instead, we look for a variation of “one and done”. No, not

stopping at the first cut for 2019 in June, but rather putting through one more 25bps rate cut in Q3

to lower the cash rate to 1.00% (one) before a prolonged pause into 2020 (and done).

0.0

1.0

2.0

3.0

4.0

5.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Australia (%)

CPI Core CPIPolicy Rate Lower BoundUpper Bound

Source: Bloomberg, Mizuho Bank

5

China


Board Current Rate Last Move Next Move

Next Meeting

Target/ Decision

The People's Bank of China

(PBoC)

Yi Gang 4.35% (1-Y Lending)

-25 bps -15bp - Dual

Mandate

13 members Oct 2015 Q3 2020 - Consensus

Policy Bias


2014-16

(Avg) 2017 2018 Q1 19

Ou

tlo

ok

Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 1.8% 1.6% 2.1% 1.8% 2.5% 2.3% 2.4% 2.7% 2.4%

GDP 7.0% 6.7% 6.7% 6.4% 6.2% 6.3% 6.3% 6.2% 6.1%

Policy Rate*

4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35%


Inflation

Even with the threat of “pork-flation”, cost-push pressures from food will not be an impediment to

the PBoC’s policy flexibility. Not only because transitory food cost-push ought to be ignored

amid greater risks of negative output gap from trade shocks but also because, headline CPI is

unlikely to breach 3% upper target. Instead, underlying dis-inflationary impact from demand

short-fall underpin the policy tightrope between policy accommodation and currency stability.

Growth

Admittedly, a lot of the growth cushion for China will be engineered from targeted fiscal pain

relief led by the CNY2trln (21.02% of GDP) worth of tax cuts; and in particular the 3%-pt reduction

to sales and manufacturing VAT (from 16% to 13%). Nonetheless, renewed and ramped-up US trade

antagonism ensnaring Huawei heighten the risk of demand seizures. And to mitigate hard-landing

risks, precautionary liquidity/credit buffer will go a long way to insure 6.0-6.5% growth.

FX

Since US-China trade tensions re-escalated in May, CNY has tumbled 2.5-3.0%; with CNY NEER

down ~2.9%. This is anything but a not a retaliatory mercantilist response from China. In fact, the

PBoC is set to lean against excessive CNY drop as a relatively “stable” CNY is critical to policy.

Policy

So, expect more jaw-boning to help backstop CNY slide, with spots of market “guidance” to

reinforce the rhetoric. Meanwhile, expect further targeted loosening of liquidity with MLF

infusions and RRR cuts conditioned on lending to SMEs and other productive sectors –

effectively easing credit conditions by improving access. To be sure, even as shadow banking is

curtailed, PBoC has unequivocally recanted on indiscriminate de-leveraging. And “prudent”

monetary policy is consistent with growth-supportive credit; so long as risks are in check.

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

China (%)

CPI, 3mma Core CPI, 3mma Policy RateLower Bound Upper Bound


6

India

Central Bank

Governor/ Board

Current Rate

Last Move Next Move Next

Meeting Target/

Decision

Reserve Bank of India

(RBI)

Shaktikanta Das 5.75% (Repo)

-25 bps - 25 bps 7 Aug Inflation

Targeting

6 members Jun 2019 Q3 2019 2 monthly Consensus

Policy Bias


2014-16

(Avg) 2017 2018 Q1 19

Ou

tlo

ok Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 5.5% 3.3% 3.9% 2.5% 2.8% 3.2% 3.8% 4.1% 4.3%

GDP 7.5% 6.3% 7.3% 5.8% 6.0% 6.6% 6.9% 6.7% 7.2%

Policy * 6.25% 6.00% 6.50% 6.25% 5.75% 5.50% 5.50% 5.50% 5.50%


Inflation

As headline inflation bottoms, now set to shift back above 3%, the RBI is turning its attention to the downward convergence in core CPI (slipping to mid-4% from being “sticky” near-6%). The bigger picture though is that unnaturally (and unsustainably) low headline inflation (near-2%) is in the rear-view and CPI looks set to to creep up to 4% by end-2019, with 4-5% range appearing in 2020 as the effects of fading food dis-inflation seep through. And though oil’s volatility clouds the outlook, fact is, it is a stretch to suggest that renewed dis-inflation will trigger further RBI cuts.

Growth

But that said, downside risks to growth might – prompt further, pre-emptive easing). For one, more

pernicious external headwinds dent activity. What’s more, banking sector NPL constraints and the

NBFC funding squeeze have driven credit costs up (tightening credit conditions). So sub-6% growth

in Q1 may not be a one-off and crucially, restoration to 7-8% may take far longer (into 2020).

FX

Since end-April, INR has been the EM Asia FX out-performer after THB; reflecting perceptions of

relative trade insulation and political optimism (BJP’s sweeping majority). But the danger is that

rupee’s inherent vulnerabilities to “twin deficits” are understated. Consequently, positive rupee

response to rate cuts – via portfolio inflow channels – may be getting stretched.

Policy

In turn, unexpected rupee sell-off may impair the RBI’s scope for unfettered easing; especially

after June’s 25bp rate cut taking cumulative rate cuts fir H1 2019 to 75bps. What’s more growing

risks of fiscal slippage also curtails room to cut, with oil price volatility a double-edged sword

rather than a free pass for more easing. Nonetheless, shift to “accommodative” stance (from

“neutral”) suggests a propensity to ease further, with another 25bps cut to 5.50%, in Q3 if core CPI

slips further. But more needs to be done for policy transmission*; as scope for rate cuts wear thin.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

India (%) CPI, 3mmaCore CPI, 3mmaPolicy RateLower BoundUpper Bound


*Please refer to Mizuho Flash – Pitfalls of an “Accommodative” RBI, 6 June 2019

https://www.mizuhobank.com/singapore/macro/ad-hoc/pdf/MF190424_RBA_and_CPI.pdf

7

Indonesia

Central Bank

Governor/ Board

Current Rate


Meeting Target/

Decision

Bank Indonesia

(BI)

Perry Warjiyo 6.00% (7-D Reverse

Repo)

+25 bps -25 bps 20 Jun Inflation targeting

6 members^ Nov 2018 Q3 2019 Monthly Consensus*

Policy Bias


*Assumed consensus in the absence of minutes or vote count split.

^This number reflects the number of Board of Governors.

2014-2016

(avg) 2017 2018 Q1 19

Ou

tlo

ok

Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 5.4% 3.8% 3.2% 2.6% 3.0% 3.2% 3.1% 3.5% 3.3%

GDP 5.0% 5.1% 5.2% 5.1% 5.1% 5.2% 5.1% 5.3% 5.2%

Policy Rate*

4.75% 4.25% 6.00% 6.00% 6.00% 5.75% 5.50% 5.25% 5.25%


Inflation

Inflation is likely to tick up to around 3% in near future as seasonality factor is expected to push

up food prices during Ramadan period. As the government has already deployed mitigating

measures including ramping up food imports, the uptick will probably be mild. Given that

inflation expectation continues to trend lower on top of stable core inflation, these suggest that

underlying inflationary pressure remains well-contained.

Growth

Household consumption will remain as the main pillar of growth though a relatively tight monetary

stance has begun to weigh down consumption of durable goods such as motor vehicles - which

have been decreasing since 2019. Government expenditure may moderate in 2H given lower-

than-expected revenue growth amid weaker trade and manufacturing activities. Capex growth

could stay also modest given sluggish exports outlook.

FX

IDR softened alongside other AxJ currencies given risk-off sentiment amidst waning portfolio inflows.

Though rating upgrade from S&P could boost confidence, it is unlikely to spare IDR from

further external pressure amidst a prolonged trade tensions. Renewed pressure from potential

widening of its twin deficits also means that any further dip in USD/IDR could be shallow.

Policy

BI has kept policy rates unchanged on the back of renewed pressure on EM assets due to heightened

trade tensions. Although benign inflation and a dovish-leaning Fed open door for easing, BI is

expected to stay cautious given concerns on external stability. For one, current account deficit is

unlikely to narrow as much as expected due to a widening O&G trade deficit.

2.0

4.0

6.0

8.0

10.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Indonesia (%)

CPI, 3mma Core CPI, 3mma Policy RateOld policy rate Lower Bound Upper Bound


8

Korea

Central Bank

Governor/ Board

Current Rate


Meeting Target/

Decision

Bank of Korea (BoK)

Lee Ju-Yeol 1.75% (7-D Repo)

+25 bps -25 bps 18 Jul Inflation targeting

7 members Nov 2018 Q4 2019 6 Weekly Voting

Policy Bias


2014-2016

(avg) 2017 2018 Q1 19

Ou

tlo

ok

Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 1.0% 1.9% 1.5% 0.5% 0.7% 0.7% 0.6% 1.5% 1.3%

GDP 3.0% 3.1% 2.7% 1.7% 1.9% 2.4% 2.0% 2.8% 2.4%

Policy Rate*

1.25% 1.50% 1.75% 1.75% 1.75% 1.75% 1.50% 1.50% 1.50%


Inflation

Headline inflation slipped to around 0.5% on soft food and fuel prices. In addition, core inflation

dropped to new lows of sub-1% as underlying inflationary pressure has been falling consistently since

2015. Though prices at producer level seem to bottom out, limited demand side pressure and

higher base effect are expected to cap inflation at sub-1% for the rest of the year.

Growth

Growth continues to face increasing downside risks as weak external environment is

compounded by slowing domestic demand. Tepid employment growth and elevated household

debt will continue to weigh on private consumption whilst investment could also stay sluggish given

ongoing correction in construction and capex. In the meantime, government spending via

supplementary budget is expected to be the main buffer to offset softness in growth.

FX

As pressure on BoK to ease pilling up amid soft growth prospect and prolonged trade war, any

dip in USD/KRW may be shallow in the near term. On the other hand, as foreign investors piled

into Korean bonds in search for haven assets amid trade war, this may help to buffer further

excessive weakness in KRW.

Policy

Despite a confluence of factors from declining exports to moderating domestic demand which all

bolster the case for a rate cut, BoK has resisted the lure of easing as some members still foresee a

potential recovery in semiconductor industry in 2H. Furthermore, BoK assesses that despite softening

momentum, growth is expected to evolve around its potential level. Whilst the supplementary

budget buys BoK some time, we think a rate cut in 2H is likely if growth fails to show

improvement in the coming months.

0.0

1.0

2.0

3.0

4.0

5.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Korea (%) CPI, 3mmaCore CPI, 3mmaPolicy RateLower BoundUpper Bound


9

Malaysia


Board Current


Next Meeting

Target/ Decision

Bank Negara Malaysia (BNM)

Nor Shamsiah Mohd Yunus

3.00% (O/N

Policy)

-25 bps +25bps 9 Jul Implicit inflation

targeting

6 members May 2019 Q1 2021 6 weekly Consensus*

Policy Bias


*Assumed consensus in the absence of minutes or vote count split

2014-2016 (avg)

2017 2018 Q1 19

Ou

tlo

ok

Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 2.4% 3.8% 1.0% -0.3% 0.6% 1.5% 1.8% 2.2% 1.6%

GDP 5.1% 5.9% 4.7% 4.5% 4.8% 4.7% 4.4% 4.7% 4.5%

Policy Rate*

3.00% 3.00% 3.25% 3.25% 3.00% 3.00% 3.00% 3.00% 3.00%


Inflation

Headline inflation has returned to positive territory as high-base effect of fuel prices dissipates. Going

forward, headline inflation is set to pick up more significantly to above 1% in 2H of the year

once the impact of zero-rating GST is gone. Nonetheless, given stable core inflation and benign

pricing pressure at the producer level, inflation is likely to stay at sub-2%.

Growth

Growth momentum has softened but domestic demand has been relatively resilient so far.

Headwinds on exports and related capex are likely to sustain and therefore weigh on

manufacturing activities. Private consumption also faces some downside risks with moderating

wage growth and sharp decline in property price growth. As the government looks to implement

around 20 new infrastructure projects this year, these are expected to lend some support to growth.

FX

MYR was not spared from the spillover from heightened US-China trade tension given its large

exposure to regional supply chains. Though further rate cut from BNM seems unlikely at this juncture,

several factors could still weigh on the currency including softer oil prices, negative sentiment towards

risk assets and concerns surrounding exclusion from the FTSE World Government Bond Index.

Policy

BNM cut its policy rate in a pre-emptive move to buttress potential further downside risks to growth.

We think this is more likely to be a one-and-done rate cut and BNM is unlikely to ease further

unless there is evidence suggesting that private consumption will deteriorate further. In

addition, a slew of infrastructure projects are also expected to underpin growth on top of bottoming

inflation, these give BNM less reason to cut further.

-1.0

1.0

3.0

5.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Malaysia (%)

CPI, 3mma Core CPI, 3mma Policy Rate

Lower Bound Upper Bound


10

Philippines


Board Current


Next Meeting

Target/ Decision

Bangko Sentral ng Pilipinas

(BSP)

Benjamin Diokno

4.50% (O/N Reverse Repo)

-25 bps -25 bps 20 Jun Inflation

Targeting

7 members May 2019 Q2 2019 6 weekly Consensus*

Policy Bias


^While not an explicit cut, the change of policy rate constitutes a reduction in policy rate alongside lower corridor.

2014-2016 (avg)

2017 2018 Q1 19

Ou

tlo

ok

Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 1.8% 3.2% 5.4% 3.8% 2.7% 2.0% 2.1% 2.6% 3.0%

GDP 6.4% 6.7% 6.3% 5.6% 5.9% 6.3% 6.1% 6.5% 6.3%

Policy Rate*

3.00% 3.00% 4.75% 4.75% 4.25% 4.00% 3.75% 3.75% 3.75%


Inflation

Both headline and core inflation continue to recede as underlying inflationary pressure moderates.

Inflation is likely to stay within the central bank’s target range (2%-4%) for the rest of the year

and softer growth momentum may also limit inflationary pressure from the demand side. On

the other hand, higher oil prices remain one of the main upside risks to inflation.

Growth

Q1 growth slowed to the weakest level in four years as investment was dragged down by delayed

budget approval on top of lackluster electronic exports. Whilst ban on public construction works ahead

of election could still affect Q2 growth somewhat, construction activities are set to pick up more

prominently in 2H as government ramps up infrastructure projects. Receding inflation is also

expected to keep private consumption and domestic-oriented manufacturing supported.

FX

PHP has been largely range bound given that its relatively domestic-oriented economy may be less

affected by the trade war. Furthermore, receding inflation and increasing government spending are

expected to bolster growth momentum in the 2H. However, as BSP Governor Diokno promises

more cuts on the way, downside of USD/PHP may be limited at mid-51.

Policy

With risks to inflation outlook being more balanced, this gives BSP more assurances to cut policy rate

given falling credit growth, tighter liquidity conditions and softening growth momentum. Should core

inflation continue to retreat alongside headline inflation, BSP is likely to further reduce policy

rates by possibly another 75bps accumulatively by the end of the year. RRR is also expected to

be further reduced in order to boost liquidity in the banking system.

-1.0

1.0

3.0

5.0

7.0

9.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Philippines (%)

CPI, 3mma Core CPI, 3mma Policy Rate

Lower Bound Upper Bound


Interest rate corridorframework was introduced

11

Thailand

Central Bank

Governor/ Board

Current Rate


Meeting Target/

Decision

Bank of Thailand

(BoT)

Veerathai Santiprabhob 1.75% (1-D

Repurchase)

+25 bps +25 bps 26 Jun Inflation

Targeting

7 members Dec 2018 Q3 2020 6 weekly Voting

Policy Bias


2014-2016 (avg)

2017 2018 Q1 19

Ou

tlo

ok

Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 0.4% 0.7% 1.1% 0.7% 1.2% 1.1% 1.5% 1.4% 1.1%

GDP 2.4% 3.9% 4.1% 2.8% 3.0% 3.8% 3.6% 4.1% 3.7%

Policy Rate*

1.50% 1.50% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75%


Inflation

Higher food prices have pushed headline inflation to above 1%. As producer prices of agricultural

goods rebound further partly due to drought, this might further boost fresh food prices in near

future. On the other hand, core inflation remains stuck at around 0.5% and with inflation expectation

continuing to slip, inflation is expected to stay at the lower bound of BoT’s target range.

Growth

Q1 GDP growth moderated as weak exports dragged down manufacturing activities and private

sector also held back investment ahead of the election. Going forward, it is crucial that a coalition

government will be formed soon in order to clarify government policy stance in development

plans as well as to prevent further delay in public investment projects. Should political

uncertainty lingers longer this could also start to weigh on private investment and consumption.

FX

THB bucked the trend of softer AxJ currencies by eking out a minor gain in May supported by

returning portfolio inflows. Solid fundamentals including large C/A surplus and abundant reserves

have helped to shield the currency from souring sentiment towards EM assets. However, as coalition

talks continue, lingering political uncertainty may start to affect timeline of major infrastructure projects

and weigh on sentiment going forward.

Policy

Given softer growth outlook and benign inflation, BoT is set for a long pause. Despite increasing

headwinds on exports-oriented sectors, this may not necessitate rate cut at this juncture given

that domestic demand is holding steady on top of already accommodative settings. Arguably

there is still need to address remaining vulnerabilities in the financial system, but this could be done

by utilizing macro-prudential measures in order to keep overall monetary policy accommodative.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Thailand (%)

CPI, 3mma Core CPI, 3mmaPolicy Rate Lower BoundUpper Bound


12

Vietnam


Board Current Rate Last Move Next Move

Next Meeting

Target/ Decision

State Bank of Vietnam (SBV)

Le Minh Hung 6.25% (Refinancing)

-25 bps +25 bps - Dual

Mandate

6 members^ Jul 2017 Q1 2021 - Consensus

Policy Bias


^This number reflects the number of Board of Governors.

2014-16

(Avg) 2017 2018 Q1 19

Ou

tlo

ok

Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 2.5% 3.5% 3.5% 2.6% 2.8% 2.9% 3.7% 4.6% 4.3%

GDP 6.2% 6.8% 7.1% 6.8% 6.5% 6.3% 6.2% 6.3% 6.7%

Policy Rate*

6.50% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%


Inflation

Inflation uptrend will probably persist but will arguably be measured; with a gradual pick-up above

4% by late-2019/early-2020 before peaking mid-2020. And so, while base effects and cost-push

impulses (via food and energy) limit scope for the SBV to engage in unbridled easing, the SBV will

not be hard-pressed to tighten in response either. For one, inflation steadying a tad higher will be

within policy threshold. What’s more, government price measures are likely to dampen cost pressures.

Growth

Insofar that global trade (including tech exports) is adversely impacted by the prolonged US-

China trade spat, with spillover to other major exporters, Vietnam’s growth will be dented from

manufacturing supply-chain spillover. Meanwhile, tighter USD funding conditions and threat of US

trade action (being cited in the US Treasury Report for May) also cast a pall; with risks of sub-6% slide.

FX

VND is highly correlated to CNY; but with lower volatility. In other words, a dampened version of

CNY moves. Hence, while the CNY (CNY NEER) has fallen 2.5% (-2.9%) since end-Apr, VND (VND

NEER) is down only 0.5% (-0.1%). This counter-cyclical buffer of VND NEER requires steady rates.

Policy

And so, our sense is that the SBV will not “burn the candle on both ends”, trying to emulate rate

cuts elsewhere in EM Asia as that will undermine VND NEER buffer against excessive currency

volatility. Instead, holding the policy rate steady provides the best policy mix and options as the SBV

can alternate between a stable VND for the externally-driven manufacturing sector while taking the

opportunity to build FX reserves on instances of USD slippage. PBoC-style targeted liquidity

buffers for the economy though will probably run parallel to the FX policy anchor.

0.0

5.0

10.0

15.0

20.0

25.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Vietnam (%)CPI, 3mma

Core CPI, 3mma

Policy Rate

Lower Bound

Upper Bound


13

Singapore

Central Bank

Governor/ Board

Current Policy


Meeting Target/

Decision

Monetary Authority of Singapore

(MAS)

Ravi Menon “Slight”

S$NEER appreciation

“Slightly” steepen

slope

“Slightly” steepen

slope Oct 2019

Dual Mandate

Oct 2018 Oct 2020 Bi-annual Consensus

Policy Bias


2014-16

(Avg) 2017 2018 Q1 19

Ou

tlo

ok

Q2 19 Q3 19 Q4 19 Q1 20 Q2 20

Inflation 1.0% 0.6% 0.4% 0.5% 0.6% 0.8% 1.3% 1.7% 1.9%

GDP 3.3% 3.7% 3.1% 1.2% 1.3% 2.5% 2.9% 1.7% 2.6%

Policy Rate*

N.A. Status Quo

Tighten^

Status Quo

Status Quo

Status Quo Status Quo

*End of period | ^ “slight” slope increments in Apr ’18 and Oct ’18 leave S$NEER slope” (~1.0%); maintained in Apr ’19

Inflation

Softer core inflation outlook this year (knocked down to 1.0-2.0% from 1.5-2.5%) corresponding to

the 0.5%-pt cut in headline inflation to 0.5-1.5% earlier is reinforced by larger than expected electricity

dis-inflation from energy market liberalization. In any case, the bigger picture is that the coincidence of

dampened cost-push, subdued wage pressures, and diminished (albeit positive) output gap are

expected to set back the restoration of inflation; warranting the intermission to policy normalization.

Growth

Especially given that threat of external headwinds to growth amplified by re-escalation of US-

China trade tensions amid wider uncertainties to global demand. Sharp growth deceleration from 4.4%

in H1 2018 to 1.2% in Q1 2019 underpins cautious downgrade to 2019 growth forecast to 1.5-2.5%

(2018: 3.1%). Even within this forecast, downside risks to growth remain significant; but hard to

quantify given uncertainties around global trade outcomes. Even averting worst case scenarios is

only likely to gradually restore growth to 2-3%.

FX

Meanwhile, S$NEER strength relative to policy bands further validates MAS pause. But for now,

SGD remains volatile on USD swings and CNY wobbles; alternating on trade war and Fed cut triggers.

Policy

The interim policy pause (leaving the S$NEER slope at ~1% per annum appreciation) is

appropriate for the rest of 2019; and probably into early 2020. This fairly accommodative, but

not outright dovish, stance is warranted; to help the economy navigate through the risks of

prolonged soft patch, with pronounced further downside risks, in the next 6-12 months. If worst

case global trade outcomes are averted, “slight” slope increments may resume in Oct 2020. But

precarious headline risks leave policy on the knife’s edge; with two-way risks to the next move.

-2.0

0.0

2.0

4.0

6.0

8.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Singapore (%)CPI, 3mma

Core CPI, 3mma


14

EM Asia FX Dynamics

EM Asia/G3 FX Outlook

FX Forecasts Jun 19 Sep 19 Dec 19 Mar 20 Jun 20

USD/JPY108 - 113

(109)

106 - 111

(108)

103 - 109

(105)

100 - 107

(102)98 - 106 (100)

EUR/USD1.10 - 1.15

(1.13)

1.11 - 1.16

(1.14)

1.11 - 1.17

(1.15)

1.12 - 1.18

(1.16)

1.13 - 1.19

(1.17)

USD/CNY6.70 - 7.09

(6.94)

6.83 - 7.13

(6.98)

6.73 - 6.86

(6.88)

6.64 - 6.92

(6.78)

6.58 - 6.86

(6.72)

USD/INR67.4 - 72.6

(69.6)

68.2 - 73.8

(70.2)

67.0 - 72.0

(68.5)

66.2 - 70.8

(68.0)

65.3 - 70.5

(68.5)

USD/KRW1110 - 1220

(1180)

1120 - 1200

(1160)

1110 - 1190

(1150)

1100 - 1180

(1140)

1090 - 1170

(1130)

USD/SGD1.34 - 1.40

(1.37)

1.36 - 1.39

(1.39)

1.33 - 1.39

(1.36)

1.31 - 1.37

(1.34)

1.30 - 1.36

(1.33)

USD/IDR13900 - 14700

(14300)

14000 - 14800

(14400)

13800 - 14600

(14200)

13400 - 14200

(13800)

13400 - 14200

(13800)

USD/MYR4.06 - 4.38

(4.25)

4.05 - 4.31

(4.18)

3.99 - 4.25

(4.12)

3.95 - 4.21

(4.08)

3.93 - 4.17

(4.05)

USD/PHP51.6 - 54.0

(52.8)

51.8 - 54.2

(53.0)

52.0 - 54.4

(53.2)

51.8 - 54.2

(53.0)

51.8 - 54.2

(53.0)

USD/THB31.1 - 32.7

(32.0)

31.1 - 32.5

(31.8)

30.8 - 32.2

(31.5)

30.3 - 31.7

(31.0)

30.2 - 31.6

(30.9)

USD/VND23200 - 23700

(23450)

23100 - 23800

(23600)

23300 - 23800

(23550)

22900 - 23300

(23400)

22800 - 23200

(23350)

AUD/USD0.67 - 0.74

(0.68)

0.69 - 0.73

(0.70)

0.71 - 0.75

(0.72)

0.74 - 0.77

(0.74)

0.76 - 0.76

(0.73)

15

Appendix

Inflation – Growth Snapshot

Exchange Rate – Equities Snapshot

Growth Outlook

Inflation Outlook

Country

Next

meeting

Current

rate

Latest

inflation

(3mma)

Inflation

target^

CPI 12m

trend

3Y rolling

avg

Latest core

inflation

(3mma)

Latest GDP

growth

3Y rolling

avg

Australia 02 Jul 1.25% 1.3% 2-3% 1.7% 1.6% 2.1% 2.6%

China N/A 4.35% 2.1% 1.5-3.5% 1.8% -0.4% 6.4% 6.7%

India 07 Aug 5.75% 2.8% 2-6% 3.8% 4.6% 5.8% 7.7%

Indonesia 20 Jun 6.00% 2.6% 2.5-4.5% 3.3% 3.0% 5.1% 5.1%

Korea 18 Jul 1.75% 0.5% 1.5-2.5% 1.4% 0.7% 1.7% 2.8%

Malaysia 09 Jul 3.00% 0.0% 2-3% 1.9% 0.4% 4.5% 5.0%

Philippines 20 Jun 4.50% 3.4% 2-4% 3.4% 3.6% 5.6% 6.5%

Thailand 26 Jun 1.75% 1.2% 1-4% 0.8% 0.6% 2.8% 3.8%

Vietnam N/A 6.25% 2.8% 2-6% 3.4% 1.9% 6.8% 6.7%

Singapore* Oct N/A 0.6% 1-2% 0.3% 1.4% 1.2% 3.1%

^ Where ranges are not explicit, we have assumed +/- 1% from inflation targets

Country

Next

meeting

Current

rate Currency

FX 1m

change

FX YTD

change

NEER YTD

change Stock Exchange

1m

change

YTD

change

Australia 02 Jul 1.25% AUD -0.1% -1.0% -1.5% ASX -0.1% 12.1%

China N/A 4.35% CNY -2.1% -0.5% 2.5% Shanghai SE -7.0% 14.8%

India 07 Aug 5.75% INR 0.2% 0.7% 1.4% Sensex 2.8% 11.1%

Indonesia 20 Jun 6.00% IDR -0.1% 0.8% 1.7% JCI -1.7% 0.2%

Korea 18 Jul 1.75% KRW -1.1% -5.7% -2.6% Kospi -5.9% 1.3%

Malaysia 09 Jul 3.00% MYR -0.7% -1.0% 0.5% KLCI 0.4% -2.7%

Philippines 20 Jun 4.50% PHP 0.3% 1.5% 0.8% PSE -0.3% 6.4%

Thailand 26 Jun 1.75% THB 2.3% 3.9% 1.9% SET -2.4% 4.8%

Vietnam N/A 6.25% VND -0.5% -1.0% Ho Chi Minh SE -2.4% 6.6%

Singapore* Oct N/A SGP -0.4% -0.4% 0.3% STI -7.4% 2.4%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China 6.4 6.2 6.3 6.3 6.2 6.1 6.2 6.1 6.6 6.2 6.1

India 5.8 6.0 6.6 6.9 6.7 7.2 6.7 6.8 7.3 6.3 6.9

Korea 1.7 1.9 2.4 2.0 2.8 2.4 1.9 2.3 2.7 2.0 2.4

Singapore 1.2 1.3 2.5 2.9 1.7 2.6 2.0 3.4 3.1 2.0 2.5

Malaysia 4.5 4.8 4.7 4.4 4.7 4.5 4.7 4.8 4.7 4.6 4.7

Indonesia 5.1 5.1 5.2 5.1 5.3 5.2 5.1 5.2 5.2 5.1 5.2

Thailand 2.8 3.0 3.8 3.6 4.1 3.7 3.3 3.5 4.1 3.3 3.7

Philippines 5.6 5.9 6.3 6.1 6.5 6.3 6.4 6.3 6.3 6.0 6.4

Vietnam 6.8 6.5 6.3 6.2 6.3 6.7 6.9 6.9 7.1 6.5 6.7

Australia 1.8 2.2 2.3 2.4 2.4 2.5 2.6 2.9 2.8 2.2 2.6

2020

20202018 2019Country

2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China 1.8 2.5 2.3 2.4 2.7 2.4 2.4 2.4 2.1 2.3 2.5

India 2.5 2.8 3.2 3.8 4.1 4.3 4.2 3.8 3.9 3.1 4.1

Korea 0.5 0.7 0.7 0.6 1.5 1.3 1.4 1.5 1.6 0.6 1.4

Singapore 0.5 0.6 0.8 1.3 1.7 1.9 1.9 1.9 0.5 0.8 1.8

Malaysia -0.3 0.6 1.5 1.8 2.2 1.6 1.3 1.1 1.0 0.9 1.6

Indonesia 2.6 3.0 3.2 3.1 3.5 3.3 3.2 3.2 3.2 3.0 3.3

Thailand 0.7 1.2 1.1 1.5 1.4 1.1 1.6 1.3 1.1 1.1 1.4

Philippines 3.8 2.7 2.0 2.1 2.6 3.0 3.4 2.7 5.2 2.7 2.9

Vietnam 2.6 2.8 2.9 3.7 4.6 4.3 4.3 3.9 3.5 3.0 4.3

Australia 1.3 1.8 1.8 1.9 2.0 2.1 2.3 2.4 2.0 1.7 2.2

20192019Country

20202018 2020

16

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