navigating a vulnerable recovery

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Issuer of Report Standard Chartered Bank

Important disclosures and analyst certifications can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2021

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Global Research

Global Focus – Economic Outlook Q3-2021

Navigating a vulnerable

recovery

mailto:[email protected]

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Standard Chartered Global Research | 2 July 2021 2

Table of contents

Global overview 3

Navigating a vulnerable recovery 4

Where we differ from consensus 10

Global charts 12

Key elections to watch in the next 12 months 15

Geopolitical economics 16

EU-China relations – Frozen ground 17

Economies – Asia 22

Asia – Top charts 23

Asia – Macro trackers 24

Australia – Facing fresh COVID hurdles 26

Bangladesh – Gradual pick-up 28

China – Rebalancing act 30

Hong Kong – Fortunes turning, finally 32

India – Vaccinate to recover 34

Indonesia – A gradual recovery 36

Japan – Catching up 38

Malaysia – A bumpy ride 40

Nepal – A prolonged recovery process 42

New Zealand – RBNZ to start hiking in Q2-2022 43

Philippines – Still battling COVID headwinds 45

Singapore – Uneven recovery 47

South Korea – Robust economy, divided politics 49

Sri Lanka – Slower recovery likely 51

Taiwan – Speed bumps ahead 53

Thailand – Q3 critical to the recovery 55

Vietnam – Facing challenges 57

Economies – Middle East, North Africa

and Pakistan 59

Bahrain – Getting the balance right 60

Egypt – Holding steady 61

Oman – Battling a new wave 62

Pakistan – At a crossroads again 63

Qatar – Gaining momentum 65

Saudi Arabia – A stronger growth recovery 66

Turkey – Strong recovery, but can it last? 67

UAE – Recovery gaining momentum 69

Economies – Africa 70

Africa – Top charts 71

Angola – Still oil-dependent 72

Cameroon – Virus surge threatens recovery 73

Côte d’Ivoire – Counting on the rains 74

Ethiopia – When politics and economics collide 75

Gabon – Reducing the imbalances 76

Ghana – Addressing vulnerability 77

Kenya – Fiscal consolidation; eventful politics 78

Mozambique – A pause in LNG activity 79

Nigeria – FX liberalisation hopes 80

Senegal – Downside risks diminish 81

South Africa – Third wave, earlier tightening 82

Tanzania – Accelerated policy change 84

Uganda – Rising COVID cases weigh on outlook 85

Zambia – Looking to post-election reform 86

Economies – Europe 87

Europe – Top charts 88

Euro area – Almost out of the woods 89

Switzerland – Delayed recovery on the horizon 91

UK – Making up for lost time 93

Czech Republic – Pandemic under control 95

Hungary – A brighter year ahead 97

Poland – A brightening outlook 99

Russia – Heating up 101

Economies – Americas 103

US and Canada – Top charts 104

Latin America – Top charts 105

US – The talking starts 106

Canada – Overtaking 108

Argentina – Restructuring 110

Brazil – BCB leads the tightening cycle 111

Chile – Vaccinations and copper 113

Colombia – Volatile 115

Mexico – Benefiting from the US bonanza 117

Peru – Uncertain times 119

Strategy outlook 121

Parallel universe 122

Forecasts tables 128

Forecasts – Economies 129

Forecasts – FX 130

Forecasts – GDP 131

Forecasts – Rates 132

Forecasts – Commodities 133

Forecasts – Selected interbank rates by tenor 134

Authors 135


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Global overview

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Navigating a vulnerable recovery

Outlook improves for some, but sizeable risks remain

Entering H2-2021 in different gears

We expect global growth to rebound to 5.8% in 2021 from -3.3% in 2020 as economies

reopen and vaccination rollouts gain momentum. We see two key downside risks to the

outlook: (1) a more extensive resurgence of pandemic cases resulting from new variants,

which could force the extension or re-imposition of restrictions; and (2) a more sustained

surge in inflation that damages consumer confidence and forces a swifter tightening of

monetary policy. The two risks are linked, as current supply-chain pressures (and related

costs) could worsen if a COVID resurgence disrupts global production again.

Eighteen months on from the first COVID-19 cases, some parts of the world are

emerging from the pandemic, while others remain in the midst of a crisis. Global case

numbers so far this year are higher than for all of 2020, and many countries in Sub-

Saharan Africa (SSA), Asia, Latin America and the Middle East are experiencing

renewed surges with still-low vaccination rates. In most major developed economies,

by contrast, advanced vaccination programmes are containing the pandemic and

allowing restrictions to be eased.

Trend GDP already reached by some, still distant for others

Global GDP and trade volumes are recovering faster now than after the global financial

crisis (Figure 1). Thanks to successful pandemic containment, China’s GDP has

returned to trend (the level reached if growth had continued at the average pace seen

before the pre-pandemic peak); we continue to expect growth of 8% this year. Trade-

driven economies in Asia are also bouncing back strongly – Taiwan and Vietnam

posted positive GDP growth in 2020, and Korea had returned to pre-pandemic output

levels by Q1-2021. We expect strong growth in Vietnam to continue, and we have

upgraded our 2021 growth forecasts for Taiwan and Korea.

By contrast, activity elsewhere in Asia has turned lower again with a resurgence in

COVID cases. India, Singapore, Indonesia and Japan are unlikely to return to pre-

pandemic GDP levels until Q3-2021; Malaysia not before Q4-2021; and Thailand and

the Philippines not at all this year. Since our previous Global Focus in early April, we

have downgraded our 2021 GDP growth forecasts for these economies, with the

exception of Singapore, where activity has been resilient despite restrictions. Vaccination

rates are a key differentiator within this group. Well over half of Singaporeans have

Figure 1: Global IP, exports recover faster than post-GFC

CPB world industrial production and export volumes, index

Figure 2: Record-high order backlogs on disrupted supply

US PMI production and order backlogs; China export orders

Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Industrial production

Exports80

90

100

110

120

130

Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Apr-19 Apr-21

US production (LHS)

US backlog of orders (LHS)

China new export orders (RHS)

25%

30%

35%

40%

45%

50%

55%

60%

25%

35%

45%

55%

65%

75%

Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21

Sarah Hewin +44 20 7885 6251

[email protected]

Head of Research, Europe and Americas

Standard Chartered Bank

Christopher Graham +44 20 7885 5731

[email protected]

Economist, Europe


GDP and trade volumes have

recovered faster than after the

global financial crisis

Global pandemic case numbers are

higher so far this year than for all

of 2020

Activity has turned lower again in

many Asian economies


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received at least one vaccine dose, while the rate was below 25% in India, Indonesia,

Japan, Malaysia, Thailand and the Philippines as of 1 July (albeit rising rapidly).

Of the developed economies that were hardest hit by the pandemic, we expect the US

to return to trend GDP by late 2021 thanks to substantial fiscal support; we maintain

our 2021 GDP growth forecast of 6.5%. Although the euro area may not fully regain

output lost during the pandemic after having suffered a double-dip recession, we raise

our 2021 growth forecast to 4.5% given good vaccination progress, with over half of

the population having received at least one dose (catching up to, and now overtaking

the US). Similarly, we raise our GDP forecasts for the UK and Canada; around two-

thirds of their populations have received at least one vaccine dose.

For the GCC, the recovery in global oil demand and the potential for faster gains in

hydrocarbon output boost the growth outlook, while increased external issuance has

helped to calm currency de-peg fears. GCC countries have also reached high

vaccination rates. We raise our region-wide growth forecast for the MENAP region; in

Pakistan’s case, the improved outlook reflects fiscal support and strong global

demand. In Sub-Saharan Africa (SSA), the slow pace of vaccine administration is

becoming even more critical as the rapid spread of the Delta variant clouds the near-

term growth outlook. Increased multilateral focus on vaccine access is a positive, as

progress should create a firmer foundation for growth from 2022.

Global export volumes are now 3.9% higher than before the pandemic. Booming goods

trade has particularly benefited small export-oriented economies (such as Taiwan and

Vietnam) and commodity producers (such as Chile). We expect this dynamic to

continue, helped by pent-up consumer demand, as unemployment falls and savings

are deployed amid economic reopening.

In developed economies, the build-up of savings during the pandemic (Figure 4) has

raised the prospect of a spending surge once economies normalise and restrictions

are fully lifted. However, several factors may limit the full deployment of savings for

higher spending on goods and services. Households that have accumulated savings

tend to have high incomes and a lower marginal propensity (relative to low-income

households) to spend out of income or wealth. High financial and non-financial asset

prices – US housing prices rose 12.1% y/y in Q1-2021 and Germany’s residential

prices were up 9.4% – suggest that savings are being directed to assets. Precautionary

savings may stay high, particularly as households anticipate higher taxation to reduce

government debt levels. We expect a gradual rather than an abrupt return to ‘normal’

savings rates over the next couple of years.

Figure 3: Global inflation pressures are elevated

US PPI, China PPI, India WPI, % y/y

Figure 4: Surge in savings and asset prices

US household financial assets, house prices, % y/y


US

China

India

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Federal Reserve household financial assets

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A positive outlook for trade

Pent-up savings may be only

partially deployed as economies

open up

US to return to trend GDP by

late 2021

We raise our regional forecast for

MENAP


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Pandemic will continue to dominate the outlook

Struggle to reach herd immunity as variant risks persist

The pandemic continues to pose downside risks to the outlook. Despite a decline in

global cases and deaths since the most recent peak in late April, some countries –

including the UK, Australia, Indonesia, Malaysia, Thailand, South Africa, Oman,

Colombia, Russia and Kuwait (Figure 5) – are experiencing new waves, including the

more transmissible ‘Delta’ variant. In the UK, the Delta variant has delayed reopening

despite a relatively high vaccination rate. We see a risk that the UK experience will be

repeated in other countries in the coming months, particularly those still in the early

stages of vaccine rollout. In the EU, 90% of cases are expected to be of the Delta

variant by end-August.

The more recent emergence of the ‘Delta plus’ variant, which is potentially even more

transmissible, highlights that new variants will continue to pose a significant threat until

cases are brought down sufficiently on a global scale. Vaccination rates remain low

across a swathe of economies, and estimates of the point at which herd immunity is

reached have increased as new variants have emerged.

Achieving herd immunity against the Delta variant could require as much as 90% of

the population to be vaccinated (or to have gained antibodies via earlier infection).

While China and the EU are on track to approach such levels by September or October

(Figure 6), the recent slowdown in the US vaccination pace suggests that the 90%

level may not be reached until February 2022. Even in countries that made good

progress early on, complacency could lead to slowing vaccine take-up as economies

reopen. That said, as long as a large majority of people are vaccinated, containment

measures to halt further pandemic waves are likely to be much less restrictive than

during the past 18 months, especially if therapeutic remedies are also developed.

In South America and Asia, respectively, only 29% and 24% of people have received

at least one vaccine dose, notwithstanding positive outliers like Chile (66%) and

Singapore (56%). The pace of vaccination in these regions may pick up in the coming

months, but periodic supply disruptions cannot be ruled out. Asia and South America

are currently on track to reach 90% vaccination rates by February and April 2022,

respectively.

Figure 5: Pandemic cases are up again in some countries

New COVID-19 cases per million, smoothed

Figure 6: Vaccination rates vary

Dates by which 70% and 90% of populations are likely to be

fully vaccinated; assumes two doses per person and 30-day

trend through 30 June is maintained

% of population vaccinated

70% 90%

Europe Oct-21 Dec-21

o/w EU Sep-21 Oct-21

US Nov-21 Feb-22

Asia Dec-21 Feb-22

o/w China Aug-21 Sep-21

Singapore Aug-21 Oct-21

South America Jan-22 Apr-22

Oceania Jun-22 Oct-22

Source: Our World in Data, Standard Chartered Research Source: Our World in Data, Standard Chartered Research

Brazil

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Indonesia

Kuwait

Malaysia

Oman

Russia

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Thailand

UK

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New COVID-19 variants pose an

ongoing threat to the economic

recovery

The slowdown in the US vaccination

rate points to herd immunity being

reached only by early 2022


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In many African countries, vaccine rollout has barely begun due to slow progress on

the COVAX initiative; 88mn vaccines had been delivered globally via COVAX as of

mid-June, compared with a goal of 1.8bn and a total of 2.7bn vaccine doses

administered globally. In addition to the worrying consequences for public health and

economic activity in countries with low vaccination rates, the risk of more virulent

COVID-19 mutations and variants leaves all countries vulnerable. While the

commitment by G7 leaders in early June to provide another 870mn doses for poorer

countries is a step in the right direction, it is unlikely to be enough to get these countries

sufficiently close to herd immunity in 2022.

Seven COVID-19 vaccines have now been distributed in more than 20 countries

globally. Next-generation vaccines that target new variants are in development, and

are likely to be the longer-term answer to the threat from COVID mutations. However,

given that many of these vaccines are still in the early clinical trial stages, they are

unlikely to be available for distribution before late 2021 or early 2022. Scaling up

production could be a challenge given that many vaccine facilities will be at or near

capacity, though new production facilities will be coming online. These next-generation

vaccines are likely to see the same unequal distribution between high- and low-income

countries as the existing vaccines.

The debt challenge

Higher government debt raises vulnerability to inflation and rate hikes

One consequence of the pandemic-related collapse in activity – and the subsequent

extensive government support – is that government debt levels have risen to record

levels almost everywhere (Figure 7). In most countries, still-wide fiscal deficits will

further add to debt in 2021. There is little room for fiscal manoeuvre should higher

inflation become more permanent, driving interest rates higher than currently expected.

Supply and demand mismatches have driven up costs; producer price inflation is at the

highest levels in a decade or more in the US, China and India (Figure 3). So far, central

banks have attributed high inflation to transitory factors, including the commodity price

rebound in anticipation of stronger post-pandemic demand; supply-chain disruptions;

reopening pressures; and pandemic-related labour-market distortions. But with real rates

sharply negative in most economies (Figure 8), policy makers are starting to indicate that

they will soon be able to start normalising policy settings.

Figure 7: Government debt/GDP jumped in 2020

Government debt/GDP, change in 2019-20, ppt

Source: IMF, Standard Chartered Research

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Majors Asia MENAP Africa EmergingEurope

Latin America

Policy will no longer need to remain

on an emergency footing

Given slow vaccination progress,

Africa will take longer to get to

herd immunity

Next-generation vaccines may be

the answer to the threat from

COVID-19 mutations

High debt leaves governments with

little room for fiscal manoeuvre


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Talking about talking about tapering

In some countries, policy normalisation is already underway. Rates have started to rise

in Brazil, Mexico, the Czech Republic, Hungary and Russia. We expect Chile,

Colombia, Korea and Pakistan to hike in H2-2021, South Africa, Kenya, Uganda, New

Zealand and Peru in H1-2022, and Malaysia and India in Q3-2022 (Figure 9).

Meanwhile, the Fed has started to ‘talk about talking about’ tapering. We expect it to

start scaling back its current USD 120bn/month of QE purchases in Q1-2022, and to

deliver the first rate hike in H1-2023. We expect the central banks of Canada, the UK

and Indonesia to pre-empt Fed hikes by a few months, and China to start normalising

its policy rate in Q4-2023, once the Fed has raised rates meaningfully. Many of Africa’s

central banks may delay policy tightening given the persistent COVID threat and the

need for front-loaded fiscal consolidation. Ghana and Uganda (where real policy rates

remain highly positive) eased in Q2-2021 as their economies benefited from recovering

offshore portfolio flows.

Figure 8: Real policy rates are mostly negative

Policy rate minus latest CPI inflation, %

Source: Bloomberg, Standard Chartered Research

Figure 9: The rate-hike timetable

Timing and amount of first rate hike, actual and our forecasts, %

Source: National sources, Standard Chartered Research

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15.5

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US

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China

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Sri Lanka

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PakistanRussia

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Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023

We expect most central banks to

raise rates ahead of the Fed


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In 2013, Fed taper talk triggered problems for EM economies, particularly those reliant

on foreign capital flows. This time, the FOMC has committed to giving plenty of warning

before starting to remove policy accommodation, and its view that current inflation

pressures are transitory has kept long-end UST yields low. However, an inflation shock

triggering a renewed steepening of the UST yield curve could disadvantage EM

borrowers by making external debt issuance more expensive. This could leave

investors more reluctant to increase exposure, particularly to less liquid

emerging markets.

Our Icarus external vulnerability indicator shows that risks have risen in many

economies due to weaker fiscal and current account (C/A) positions brought on by the

pandemic. Brazil and Turkey have become more vulnerable, while India, Indonesia,

Thailand and Korea have moved into the ‘medium risk’ category. By contrast, Chile

and Mexico have entered the ‘low risk’ zone and are likely to stay there on the back of

stronger export and C/A performance.

External borrowing slowed in some countries during the pandemic, but issuance was

strong in others, including several MENAP countries. China’s foreign debt increased

significantly in 2020, mostly due to Renminbi bond purchases by foreign investors (FX-

denominated foreign debt increased only slightly). In SSA, a number of sovereigns

accessed international capital markets in H1-2021 in order to meet funding

requirements and lower refinancing risks; this followed considerable spread widening

with the onset of the COVID crisis in 2020.

Risks of an inflation shock

Policy makers continue to see high inflation as transitory, although they have

expressed this view with less conviction recently. While we believe most commodity

prices approached or reached their peak around mid-year, pass-through to producers

and consumers is likely to persist in Q3. In China, this pass-through has accelerated

since November 2020 amid growing supply shortages and an asymmetric recovery in

global demand and supply (we expect PPI inflation to average 6.8% in 2021, against

market consensus of 5.6%; see China – Higher and more enduring inflation). Another

shock to global supply chains cannot be ruled out if further pandemic waves of more

transmissible variants take hold in key exporting countries where vaccination rates are

still low.

The extent to which higher costs are reflected in persistently high inflation will depend

on labour-market developments and inflation expectations. In the US, higher wages

paid by companies such as Amazon and Walmart may have set an effective floor for

earnings, though there are no clear signs of accelerating wage growth in the economy

overall. The jump in US inflation expectations to 10-year highs raises the risk that

inflation pressures will persist for longer than expected. That said, there is still

substantial spare capacity: US employment is some 10mn below its trend level. While

we raise our US core PCE inflation forecast to 2.8% for 2021, we see it falling back to

2.4% in 2022 and 2.2% in 2023 given persistent spare capacity and a slow return to

full employment, which we do not expect before 2023. Among other major advanced

economies, we expect only Japan and Singapore to return to full employment by 2023;

this suggests persistent broad labour-market slack that should limit second-round

inflation effects.

Employment and inflation

expectations will be key

determinants of whether inflation

pressures endure

Plenty of warning before Fed

tapering starts

Fiscal and current account

deterioration has raised risks for

many countries




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Where we differ from consensus

China

Below consensus on GDP growth

Our 2021 GDP growth forecast of 8.0% is below the market consensus of 8.5%. Q1

GDP growth was 18.3% y/y, slightly below market expectations of 18.5%. We expect

growth to decelerate for the rest of 2021 on a fading base effect, slowing COVID-

related exports and credit policy normalisation; consumer spending and non-real

estate investment is likely to recover gradually. We expect y/y GDP growth to normalise

to 7.0% in Q2, 5.0% in Q3 and 4.8% in Q4. We see a slight upside risk to our forecast

if export growth or the housing market turns out to be more resilient than we expect.

Above consensus on PPI

Our 2021 PPI inflation forecast of 6.8% is well above the market consensus of 5.6%. We

believe the market is underestimating China’s inflation risk, despite the consensus PPI

forecast for 2021 having risen to 5.6% currently from 1.4% in February. PPI inflation

surged to 9% y/y in May from 0.3% in January. The pass-through of rising commodity

costs to manufacturing prices has accelerated since November 2020 amid growing

supply shortages (following delayed investment in 2020) and an asymmetric recovery in

global demand and supply (see China – Higher and more enduring inflation). We believe

that China’s surging PPI poses a greater upside risk to the global inflation outlook than

to China’s own (see China – Rising PPI poses asymmetric risks). Surging PPI inflation

and a strengthening currency are driving up China’s export prices rapidly.

Below consensus on C/A surplus

We forecast a 2021 C/A surplus of 1.2% of GDP, versus the market consensus of 1.8%

(the 2020 surplus was 1.9%). We expect the trade surplus to narrow on slowing exports

of COVID-related goods such as masks, computers and plastics; on the import side,

surging commodity prices and China’s strong demand for integrated circuits drove up the

2Y CAGR for import growth to 12.2% in May from 8.3% in January. The trade surplus

(rolling annual sum) moderated to USD 611bn as of May from USD 627bn as of April.

Hong Kong

Above consensus on GDP

Our 2021 GDP growth forecast of 6.9% is above the 6.1% consensus. We upgraded

our forecast following a surprisingly strong 7.9% y/y Q1 performance, which looks set

to put Hong Kong’s recovery on a higher trajectory. Our optimism relative to the market

stems from the city’s ability to benefit from both a broadening global recovery (via its

sizeable financial and export sectors) and an improving domestic economy (as vaccine

rollout and the unwinding of social distancing measures likely lower the unemployment

rate in the coming quarters). We see further upside risk to our forecast if international

and cross-border travel restrictions are significantly relaxed earlier than expected.

Korea

Below consensus on rate-hike expectations

We expect the Bank of Korea (BoK) to hike its interest rate twice within a short period,

but not by as much or as quickly as the market expects. The market expects the BoK

to hike the base rate five times by the end of 2023. We expect one hike per year until

2023. We think Korea’s terminal policy rate for this cycle will be lower than the current

market pricing of around 1.75-2.0%, and we expect any surge in growth driven by pent-

up demand to subside by 2022. We believe the current rise in inflation is transient, and

that inflation will stay below 2% in 2022 and 2023. The BoK's current tightening cycle

is driven more by concerns about financial imbalances and potential financial instability

than by inflation concerns, in our view.

Wei Li +86 21 3851 5017

[email protected]

Senior Economist, China

Standard Chartered Bank (China) Limited

Shuang Ding +852 3983 8549

[email protected]

Chief Economist, Greater China and North Asia

Standard Chartered Bank (HK) Limited

Kelvin Lau +852 3983 8565

[email protected]

Senior Economist, Greater China


Chong Hoon Park +82 2 3702 5011

[email protected]

Head, Korea and Japan Economic Research

Standard Chartered Bank Korea Limited




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These concerns are likely to prevent the BoK from hiking by as much as the market

expects, in our view. High household debt implies that rate hikes will weigh on

household spending and growth. While rising housing prices could result in financial

imbalances, too much monetary tightening could lead to a sudden fall in housing prices

(as households have borrowed money to invest in the housing market). A housing price

crash would pose a bigger risk to financial stability than rising prices.

Indonesia

Below consensus on C/A deficit

We expect a 2021 C/A deficit of 0.9% of GDP, smaller than the market expectation of

a 1.3% deficit. We expect the trade balance to remain in surplus in H2 given the relative

strength of the global demand recovery compared to domestic demand. Indonesia

recorded a trade surplus of USD 10bn in the first five months of 2021, which is almost

half of the 2020 trade surplus; the 2020 C/A deficit was 0.4% of GDP. Synchronised

price increases for commodities such as coal, palm oil, gas, and crude oil have

mitigated the impact of net oil imports on the trade balance. Indonesia recorded a net

oil trade deficit of 0.8% of GDP in 2020, but a net commodity trade surplus (including

oil) of 3%. We think ongoing structural reforms aimed at boosting domestic

manufacturing and processing capacity will support exports. Manufacturing exports

such as processed minerals, vehicles, electrical machinery and textiles have increased

to 80% of total exports from 75% over the past decade.

Taiwan

Below consensus on GDP

Our 2021 GDP growth forecast of 5.0% is below the market consensus of 5.5% (and

the government’s forecast). The recent COVID-19 outbreak is likely to dampen

consumer spending in H2, although the government’s TWD 260bn (c.1.5% of GDP)

relief package should partly mitigate the impact. We see downside risks to the official

PCE inflation forecast of 2.75% given softer consumer sentiment and a less sanguine

job-market outlook. Furthermore, Taiwan’s residential housing market – which

accounts for c.17% of GDP – is likely to slow after regulators introduced property-

market cooling measures including tighter credit controls. External demand has

remained generally robust, but several one-off factors that supported tech exports in

H2-2020 are unlikely to recur in 2021. The high base will likely further crimp y/y growth.

We therefore expect GDP growth to ease to c.2.0-2.5% y/y in H2 from c.7-8% in H1.

Australia

Non-consensus view on extension of the RBA’s QE programme

We expect the Reserve Bank of Australia (RBA) to move to an open-ended QE

programme at a lower pace of purchases (AUD 4bn/week). The RBA’s QE1 and QE2

programmes were both for a total amount of AUD 100bn at AUD 5bn/week. Market

expectations are split between a continuation of the same total purchase amount of

AUD 100bn, lower purchases of AUD 50bn or AUD 75bn, or a slower pace of

purchases. We believe that an open-ended purchase programme would give the RBA

flexibility to respond to the evolving recovery; a slower pace of purchases would

support the longevity of the programme. The RBA already owns over 20% of the bonds

it targets, after only eight months of QE; at the current pace, it would own c.45% of

eligible bonds outstanding by end-2021. We expect the RBA to regularly review its QE

programme, likely tapering purchases further if Australia’s recovery continues. We

expect the RBA to keep the April 2024 bond as its target for purchases, rather than

shifting to the November 2024 bond (a view we have held since February 2021);

market expectations have converged with this view.

Aldian Taloputra +62 21 2555 0596

[email protected]

Senior Economist, Indonesia

Standard Chartered Bank, Indonesia Branch

Tony Phoo +886 2 6606 9436

[email protected]

Senior Economist, NEA

Standard Chartered Bank (Taiwan) Limited

Chidu Narayanan +65 6596 7004

[email protected]

Economist, Asia

Standard Chartered Bank (Singapore) Limited


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Global charts Figure 1: Estimated CAGR for 2021-22 GDP is below 2019 growth and 10Y averages for all economies (GDP, % y/y)

*CAGR refers to compound annual growth rate; ^ for IN, 2020 GDP refers to fiscal year ending March 2021; Source: IMF, Standard Chartered Research

Figure 2: Higher inflation in 2021 in most economies on rising commodity prices, low base effects

Inflation, % y/y


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Figure 3: Saudi Arabia’s C/A balance to benefit from higher oil prices; India’s is set to deteriorate

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Figure 4: US to return to above pre-COVID levels by Q2-

2021; euro area by Q1-2022

GDP, indexed to pre-COVID levels (Q4-2019 = 100)

Figure 5: Global economic activity to remain c.5% below

trend GDP levels in 2021 and 2022

Global GDP, indexed to pre-COVID levels (2019 = 100)

Source: Standard Chartered Research *Trend GDP based on 10Y average; Source: IMF, Standard Chartered Research

Figure 6: EM vaccination rate lags DM

Doses administered per 100 people

Figure 7: South America has the highest new cases

New cases per million people, 7-day moving average

Source: OWID, Standard Chartered Research Source: OWID, Standard Chartered Research

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Figure 9: Financial conditions are accommodative in the

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Figure 10: Our inflation monitor is running hot in the US, getting hot in India

Our inflation monitor – the redder the shade, the hotter inflation is running, warranting central bank attention

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Figure 11: Government external borrowing rose in many countries in 2020

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Source: Moody’s, Standard Chartered Research

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Global overview

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Asia

MENAP

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Key elections to watch in the next 12 months Europe dominates the calendar; some EM elections will attract investor attention

Source: Official sources, Standard Chartered Research

Nothern Ireland5-May-22 | LeAssembly elections will take place amid political instability following Brexit and difficulties linked to the Northern Ireland Protocol. Polls show that the DUP, which favours British identity, has fallen far below Irish nationalist party Sinn Fein in voter support. This partly reflects perceptions that the DUP did not push back strongly enough against the Northern Ireland protocol. Today, the DUP and Sinn Fein control roughly the same share of the assembly, with a combined 56% of seats. However, current polls suggest that Sinn Fein could emerge for the first time as the largest party in the assembly. The risk is that tensions in could rise again in the near term.

HungaryMar-22 | LePolls point to a competitive race for the first time in years, showing similar support levels for the opposition alliance and the party of right-wing populist Prime Minister Viktor Orban. A decisive factor will be whether the opposition can coalesce around a consensus prime ministerial candidate. Increasing the chances of this, the six-party opposition alliance recently announced a joint primary election to select a candidate. Continuing cooperation would give the opposition a realistic chance of ousting Orban as PM, a post he has occupied since 2010. The elections will be closely followed in Brussels, as Hungary (along with Poland) has increasingly run afoul of EU norms.

South Africa27-Oct-21 | LGThe election will be a test of the popularity of President Ramaphosa and the ruling African National Congress (ANC) amid the economic and public-health challenges of the pandemic. Lower support for the ANC versus 2019 levels (58% support) could be seen as an indication of a possible leadership challenge within the party in 2022. Conversely, support exceeding the 2019 level would likely cement the president's position.

Hong-Kong19-Dec-21 | LeThe Legislative Council elections, which have been postponed twice, could attract international scrutiny. Arrests of opposition politicians and activists under the national security law since its July 2020 implementation have deterred protest activity. The risk of international backlash has risen again following the decision by China’s NPC to change Hong Kong’s electoral system to ensure that only “patriots” can govern the city. Raising the bar for pro-democracy candidates to qualify for (and win) future elections, and diluting their seats in the expanded election committee and legislative body, could keep opposition representation low in the upcoming elections.

Iraq10-Oct-21 | LeGiven the unstable domestic political situation, parliamentary elections could see increased street violence and protests. A wave of abductions and killings of journalists and pro-democracy activists has led to calls for a boycott. Pro-Iran militias have also contributed to instability. Iraq, the second-largest OPEC oil producer, has been trying to rebuild its institutions and return to a semblance of democracy since ISIS seized major parts of the country in 2014. Iraq plays an important role in Middle East geopolitics given its population size and its status as a major oil producer.

Russia19-Sep-21 | LeElections will be held as Russia's relations with the West remain very tense and as Putin's support has continued to erode. Putin’s ruling party, United Russia (UR), and its allies currently control c.90% of the assembly. Support for UnitedRussia has dropped to an eight-year low of around 30%. The Communist Party and the Liberal Democratic Party follow with 12% and 10% of support, respectively. Still, the election is unlikely to bring any surprises. UR is expected to retain its supermajority, with a possibility that Putin could exercise stronger control over the election outcome. There is a risk of domestic protests ahead of and during the polls.

FranceApr-22 | PrInvestors have started to build market positions for a potentially disruptive outcome. While polls suggest a repeat of the 2017 match-up between current President Emmanuel Macron and far-right candidate Marine Le Pen in the second round, polls are tighter this time. France’s presidential election system – where the two winners of the first-round vote face each other in a second-round run-off – brings the possibility of surprises. The two most likely market-adverse outcomes would be a victory for Le Pen or far-left candidate Jean-Luc Mélenchon, which could happen if Macron failed to advance to the second round.

Germany26-Sep-21 | LeThe outcome could prove tighter than originally expected given declining support for the ruling CDU/CSU in national opinion polls. The CDU’s new leader, Armin Laschet, will be the joint CDU/CSU candidate to replace Angela Merkel as chancellor; support for the CDU/CSU coalition has eroded since his appointment. It is unclear whether CDU/CSU will be able to form a working coalition. The Greens' support is now on par with the CDU/CSU alliance; it looks increasingly likely that the Greens will have to choose whether to form a working alliance with CDU/CSU (the most likely outcome, in our view) or push for a liberal or left-wing governing coalition.

Pr Presidential

Le Legislative

LG Local government


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EU-China relations – Frozen ground

Change of tone

During President Trump’s four-year mandate, US-China tensions regularly grabbed

headlines and moved markets. In the background, the relationship between China and

the EU – while less openly confrontational – was quietly deteriorating on various levels.

This deterioration has accelerated in the past year. The EU-China relationship is one

of the most important globally. Both are among the world’s largest trading blocs; China

became the EU’s biggest trading partner in 2020, and the EU is also China’s largest

trading partner. The change of US administration may partly explain rising EU-China

tensions. One of President Biden’s clearest foreign policy objectives is to tighten

cooperation with traditional US allies, partly with a view to restraining China more

effectively (see Biden’s democracy club). As relations between Washington and

Brussels improve under Biden, the EU is aligning itself more closely with the US

approach to China, although its stance remains more nuanced.

The derailing of the EU-China Comprehensive Agreement on Investment (CAI) is the

clearest example of this shift. The deal, which had been under negotiation since 2013,

had been hailed as a milestone in the EU-China economic relationship. In late May

2021, the EU parliament voted overwhelmingly (95%) to freeze its ratification. The

bloc’s trade chief, Valdis Dombrovskis, said that “the ratification process cannot be

separated from the evolving dynamics of the wider EU-China relationship”.

Politically, relations with China have faced a series of setbacks at both the EU-wide

and the country level. This culminated in March, when the EU joined Canada, the UK

and the US to impose sanctions on China (at the individual and entity level) over human

rights. This is the first time the EU has sanctioned China since the 1989 Tiananmen

events; the sanctions were imposed under the recently passed EU Magnitsky Act and

resulted in reciprocal sanctions from China. In May, an unidentified Chinese official

told Bloomberg that EU-China relations were at a critical juncture.

Figure 1: While political tensions are rising, the EU-China trade relationship has never been stronger

China is now the EU’s biggest trading partner (total merchandise trade with key partners, EUR bn and % of total)

Source: Eurostat, Standard Chartered Research

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Philippe Dauba-Pantanacce +44 20 7885 7277

[email protected]

Senior Economist

Global Geopolitical Strategist



[email protected]

Economist, Europe


The CAI was supposed to be the

culmination of the EU-China

economic rapprochement, but

political wrangling has derailed its

ratification



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An abrupt change

The EU’s change of tone on China has been evident in various initiatives, declarations

and events. It has also been relatively abrupt, gaining significant momentum only in

the past two years. At the start of Trump’s term, the EU distanced itself from his

abrasive rhetoric on China and preferred to conduct the delicate aspects of diplomacy

with China behind closed doors. A pragmatic and constructive approach was seen as

more productive, with a perception that China’s sheer size necessitated a more

nuanced approach. In addition, not all EU countries shared the same view on how to

approach China.

A 2019 EU paper referred to China as a “systemic rival” for the first time. This was a

step change in language, reflecting a clear shift in the balance of assumptions about

the EU’s relations with China. This hardening of the EU stance continued, and

accelerated sharply during the pandemic, when many scholars argued that Europe’s

long-standing assumptions about China as a reliable global actor in times of crisis had

changed. This was in stark contrast to European leaders’ general perception that

China’s handling of the 2008-09 GFC and its aftermath had been constructive. The EU

has since adopted an increasingly adversarial stance towards China in areas spanning

from supply-chain dependence and telecom security to ideological competition and

protections for key strategic sectors. In May, the European Commission suggested

new instruments to block takeovers by state-funded Chinese companies and to

repatriate semiconductor production.

Heavy media coverage of tensions with China has also contributed to a shift in public

opinion, creating a self-reinforcing loop. Opinion leaders and citizens are joining

politicians in demanding that the EU relationship with China become more transparent,

accountable and value-based, rather than being based solely on economic interests.

Meanwhile, politicians are leveraging the apparent rise in popular anti-China

sentiment. A Pew Research Center survey conducted in late 2020 showed a collapse

of China’s soft power in Europe, with two-thirds to three-quarters of citizens in key

countries (Italy, Spain, Germany, France and the UK) expressing negative views on

China. In the UK, Germany, Spain, the Netherlands and Sweden, negative views on

China were at the highest level since the poll started over a decade ago.

Change of tone in Europe's most Sinophile capitals

While the change of tone has been palpable at the EU institutional level, it has been

perhaps been more remarkable coming from some European countries that previously

took an even more conciliatory approach towards China.

As recently as 2019, Italy signed on to China’s Belt and Road Initiative (BRI) during a

state visit by President Xi Jinping, becoming the first G7 country do so. The populist

coalition government at the time had clashed repeatedly with the EU, and the move –

which was seen as a symbol of China’s increasing global power and influence – was

controversial in Brussels. Italy had been the top EU recipient of investment from China

(along with Germany) for years. But the new government of Mario Draghi has clearly

pivoted away from China, declaring Italy’s foreign policy stance as “strongly pro-

European and Atlanticist, in line with Italy’s historical anchors”. In March, Draghi’s

government issued a Council of Ministers decree to block major Chinese telecom

companies from acquiring an Italian firm, a move that was widely interpreted as

marking the end of the BRI deal.

Italy was previously at the forefront

of pursuing closer ties with China

Europe has moved from a

pragmatic and trade-oriented

approach to a more political – and

confrontational – stance towards

China


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Germany has also made a sharp turn in its approach to China. Chancellor Angela

Merkel was an essential supporter and promoter of the CAI, and China has been

Germany’s largest trading partner since 2017. However, Germany has adopted a more

hawkish stance in recent years, marking a shift from its typically pragmatic and

apolitical approach to foreign policy. What started as muted German criticism of some

of the terms of its commercial relationship with China has given way to vocal and

orchestrated calls for a full reassessment of these ties. Government officials and the

influential BDI, Germany’s biggest industry organisation, published a strongly worded

strategy paper urging the government and the EU to develop new legal instruments to

ensure fair competition from China. Armin Laschet, the ruling party’s nominee for

chancellor in Germany’s September elections, suggested in May that the EU

parliament would not ratify the CAI until China made the “first move”. Meanwhile, the

Green party could play an important role in a future German government coalition,

which would likely result in a much more hawkish German stance on China.

In Eastern Europe, China’s influence strategy is exemplified by its ‘17+1’, initiative,

which aims to promote business and investment relations with Central and Eastern

European (CEE) countries. Introduced in 2012, 17+1 has been viewed by some as an

extension of the BRI. It has elicited criticism from Brussels, which has accused Beijing

of playing EU members states off against each other in order to gain influence in the

region. 17+1 member countries have vetoed several EU motions to censure China

over the years, on the South China Sea and other issues. Hungary and Poland have

arguably leveraged their cooperation with China in their disputes with Brussels,

presenting it as an alternative strategic option.

However, the 17+1 initiative appears to have lost momentum in recent years. In early

2020, the Czech Republic announced that it would not attend the annual 17+1 summit

that year; President Milos Zeman, a long-standing advocate of closer ties with China,

said Beijing had “not done what it promised” in terms of investment. The summit ended

up being cancelled because of the pandemic.

Other CEE countries have followed in distancing themselves from China. In February 2021,

Lithuania’s parliament voted to leave 17+1. In May, Romania terminated its joint venture

with a Chinese company to build a nuclear plant. Latvia’s annual security assessment

called China a national security threat, with its national intelligence agency publicly

expressing concerns over cyberthreats. And in recent months, multiple CEE countries –

including Poland, Croatia, the Czech Republic, Estonia, Romania and Slovenia – have

launched initiatives to restrict or ban China’s telecom operators from their infrastructure.

Europe increasingly inserts itself into Asia’s geopolitics

In January, the EU Foreign Affairs Council (comprising the foreign ministers of member

countries) invited their Japanese counterpart to brief them on efforts to forge a “free

and open Indo-Pacific” – a concept often criticised by China as code for interference

in what it sees as its natural area of regional influence and/or sovereignty.

More concretely, several European countries – including the UK, Germany and France

– have sent, or plan to send, navy ships to the South China Sea to reinforce freedom

of navigation efforts. This is seen as a sign that Europe has become more willing to

join US efforts to assert its hard power in Asia. More generally, the EU is also adopting

a more forceful policy in the contested Indo-Pacific. Brexit may have facilitated this as

well, as the UK had been reluctant to embrace a unified and autonomous EU

geostrategic diplomacy.

The EU is increasingly participating

in difficult Asian geopolitical

conversations

The deployment of military assets in

the region could raise tensions

Germany’s change is notable

considering the size of its trade with

China and its usually pragmatic

foreign policy stance

Eastern Europe was previously

viewed as fertile ground for China’s

influence in the EU


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France was the first country to announce a clear strategy to enhance protection of

maritime security and the rules-based international order in Asia in 2018. Germany and

the Netherlands have followed in the past two years. The UK has formulated a similar

strategy. The EU is expected to release its ‘Indo-Pacific strategy’ later this year. India

quietly supported France’s entry to the Indian Ocean Rim Association (IORA) in

December 2020, making France the first member without a mainland presence in the

region (it does have overseas territories). China’s strategy of increased influence in the

Indian Ocean is viewed negatively in Delhi. The same month, the EU and ASEAN

agreed to upgrade their relationship to a strategic partnership.

As it seeks to counter China’s influence both at home and in Asia, Europe will have to

balance strategic goals and ideological competition against the reality of the scale of

its economic relationship with China – as detailed below.

The China-EU trade relationship

China is the biggest importer from EU-27

EU-China trade has surged in the two decades since China joined the WTO in 2001.

Goods exports to China (largely machinery/equipment and motor vehicles) increased

to around 11% of EU-27’s total exports outside the bloc as of early 2021, from just 3%

in early 2003. Imports from China (largely machinery/equipment and industrial and

consumer goods) grew even more dramatically over the period, to 24% from 8% of the

total, over the same period. As a result, China is now the EU-27’s most important

source of goods imports and its third-largest market for goods exports. Trade in

services, while smaller in scale (c.10% of EU goods imports from China and c.20% of

EU goods exports to China), has also grown.

Within this broad uptrend there is considerable variance between EU countries; this

helps to explain why they rarely agree unanimously on how to manage the EU-China

relationship. As of 2020, while China accounted for almost 17% of Germany’s exports

outside the EU, nine EU countries sent less than 5% of their total exports to China. A

similar spread is observed for imports, with Ireland importing just 8% of its total extra-

EU-27 imports from China as of 2020, while the CE3 countries all imported more than

30%. Even more notable is the near 4x increase in China’s share for Hungary and

Figure 2: EU trade deficit with China is widening

EU-27 trade with China (% of extra-EU-27 trade)


Exports, % of extra-EU27

Imports, % of extra-EU27

0%

5%

10%

15%

20%

25%

Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18 Jan-21

EU-China trading relationship has

grown significantly in the last

20 years


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Poland since 2000, and the more 5x increase for the Czech Republic over the same

period. Intra-EU trade still dominates, but the shift towards China in extra-EU-27 trade

nonetheless highlights the growing importance of the China trading relationship.

While EU-27 exports to all major trading partners have increased in nominal terms over

the past 20 years, China’s gain in market share has largely come at the expense of the

UK, which dropped from 23% of total extra-EU-27 exports in 2002 to 14% in 2020,

while the US dropped from 20% to 18%. A similar story has played out on the import

side, with the UK’s share falling from 18% in 2002 to 10% in 2020, and that of the US

dropping from 15% to 12%.

Owing to the widening differential between exports and imports, the EU-27’s trade

deficit with China has been expanding. One of the primary goals of the CAI for the

European Commission was to “create a better balance in the EU-China trade

relationship”. In the aftermath of the COVID-19 pandemic, there are also efforts via a

new industrial strategy to reduce the EU-27’s reliance on China (and other countries)

with respect to some key supply chains, including pharmaceutical ingredients and

semiconductors.

Figure 3: Increase masks wide variations by country

Exports to China by member state (% of country’s exports outside EU-27)


20002020

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Croatia

Lithuania

Latvia

Malta

Slovenia

Portugal

Romania

Poland

Cyprus

Estonia

Italy

Belgium

Czech Republic

Hungary

Netherlands

Spain

Luxembourg

Austria

France

Bulgaria

EU-27

Ireland

Sweden

Finland

Denmark

Slovakia

Germany


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Economies – Asia

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Asia – Top charts

Figure 1: Most Asian economies are on track to return to

pre-COVID levels by end-2021

GDP, % deviation from Q4-2019 levels

Figure 2: TW and SG have outperformed

CAGR of quarterly GDP growth, % (sorted by deviation of past

3Q growth from historical trend growth)

Source: Bloomberg, CEIC, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Figure 3: COVID-19 pandemic is still afflicting Asia

Daily change in confirmed cases, 7DMA

Figure 4: SG, CN, HK and MY to achieve herd immunity by

end-2021, based on current vaccination pace

% of population vaccinated*

Source: OWID, Standard Chartered Research *Calculated as total doses administered divided by total doses required, assuming two doses

required for full vaccination; Source: OWID, Standard Chartered Research

Figure 5: Unemployment rates have gradually improved

but remain broadly above pre-COVID averages

Unemployment rate, %

Figure 6: China has led the recovery in Asia’s exports,

which have surpassed pre-COVID levels

Export volume index, seasonally adjusted (2010 = 100)

Source: Bloomberg, CEIC, Standard Chartered Research *Emerging Asia ex-China includes HK, IN, ID, KR, MY, PK, PH, SG, TW, TH, VN

Source: CPB, Standard Chartered Research

-10%

-5%

0%

5%

10%

15%

CN TW IN AU NZ KR SG ID MY TH PH

Q4-2020 Q1-2021 Q2-2021F

Q3-2021F Q4-2021F

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

TW SG IN KR PH ID TH MY

2015-2019 Q3-20 to Q1-21 Q1-21

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


Indonesia MalaysiaPhilippines ThailandTaiwan South KoreaIndia (RHS)

44% 42%

24%

16%12% 11%

7% 6% 5% 3% 1%

84%

35%

54%

76%

32%

44%

25% 24%

14%

Herd immunity

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SG CN HK KR IN MY ID TH PH TW VN

Latest

End-2021 based on currentrun rate

0

5

10

15

20

25

IN PH ID HK MY SG KR TW VN TH

Pre-COVID Worst since Jan-2020 Latest

China

Emerging Asia excl China*

90

100

110

120

130

140

150

160

170

180

Apr-11 Apr-13 Apr-15 Apr-17 Apr-19 Apr-21


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Asia – Macro trackers Figure 1: USD export growth – Asia exports rebound strongly, should remain supported by global economic reopening

Shades of green (or red) indicate better (worse) growth compared to the past 3 years; darker shades show a stronger signal

Source: CEIC, Standard Chartered Research

Figure 2: Current account – Import normalisation likely to lead to a deterioration of trade balances in H2-2021

Shades of green (or red) indicate surplus (or deficit); darker shades show a stronger signal


Figure 3: Headline inflation has started to pick up across many economies, mainly due to base effects

Shades of red (or green) indicate higher (lower) inflation compared to the past 3 years; darker shades show a stronger signal


JP Highest

KR

CN

HK

TW

ID

MY

PH

SG

TH

AU

IN Lowest

NE Asia

Greater

China

ASEAN

2018 2019 2020 2021

JP Surplus

KR

CN

HK

TW

ID

MY

PH

SG

TH

AU

IN Deficit

NE Asia

Greater

China

ASEAN

2018 2019 2020 2021

0

JP Highest

KR

CN

HK

TW

ID

MY

PH

SG

TH

AU

IN Lowest

NE Asia

Greater

China

ASEAN

2018 2019 2020 2021


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Figure 4: Food inflation is still benign for now, but may increase further on higher global food prices



Figure 5: Energy inflation is the biggest contributor to headline inflation, driven by low base effects



JP Highest

KR

CN

HK

TW

ID

MY

PH

SG

TH

AU

IN Lowest

NE Asia

Greater

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ASEAN

2018 2019 2020 2021

JP Highest

KR

CN

HK

TW

ID

MY

PH

SG

TH

AU

IN Lowest

NE Asia

Greater

China

ASEAN

2018 2019 2020 2021


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Australia – Facing fresh COVID hurdles

Economic outlook – Slow vaccination risks derailing recovery

We expect the strong recovery to continue in H2, but the latest COVID spike risks

slowing its pace. We maintain our 2021 growth forecast of 4.8% for now, but we see

downside risks if the current COVID outbreak spreads further or continues for longer.

Buoyant consumption and robust residential construction are still likely to drive growth

this year (see Australia – Private sector to support robust recovery). A declining

savings rate and a strong labour market should further support consumption, and

services consumption is likely to improve as the economy opens up further. Non-

residential investment may pick up on declining spare capacity, while public spending

is likely to decline as private-sector growth picks up. We expect the Reserve Bank of

Australia (RBA) to maintain its accommodative monetary policy stance, but to reduce

the pace of bond purchases.

Consumer confidence has dipped sharply since its April peak. While it remains

positive, we expect a sharp decline in the near term following the recent spike in

infections in several states. A further increase in cases, leading to prolonged

lockdowns, could hurt sentiment and growth beyond H2-2021. Australia’s vaccination

rate is significantly below G7 peers’ (see Figure 2), amplifying the risk posed by new

infections. As of end-June, less than 25% of the population had received at least one

vaccine dose, and less than 6% were fully vaccinated.

The health of the labour market is a key priority for both the government and the RBA.

The job market has remained resilient despite domestic lockdowns and the end of the

government’s JobKeeper programme. The unemployment rate is back at pre-COVID

lows, even with the participation rate rising to all-time highs. We expect robust job

creation in H2, with a sharp decline in labour-market slack. International border

closures have reduced the supply of foreign workers, further tightening the labour

market; we see the risk of a sharp rise in wages in 2022 if borders remain closed. We

expect the unemployment rate to fall below 5% by end-2021.

Domestic consumption will be the biggest growth driver in H2, in our view, supported

by a resilient labour market and declining savings. Consumption has risen 14% from

the Q2-2020 low but remains 1.5% below the end-2019 high. The winding down of the

JobKeeper programme has had a smaller impact than initially expected: 31,000 jobs

were lost in April and May, well below the Treasury’s preliminary estimate of 100,000-

Figure 1: Australia macroeconomic forecasts Figure 2: Australia’s vaccination rate is well below peers’

Vaccinated population, % of total

2021 2022 2023

GDP growth (real % y/y) 4.8 3.3 3.0

CPI (% annual average) 1.6 2.3 2.3

Policy rate (%)* 0.10 0.10 0.10

AUD-USD* 0.82 0.82 0.82

Current account balance (% GDP) 1.9 0.4 -0.7

Fiscal balance (% GDP)** -9.4 -5.0 -4.6

*end-period; **for fiscal year ending in June; Source: Standard Chartered Research Source: OWID, Standard Chartered Research

23.6%

5.8%

0%

10%

20%

30%

40%

50%

60%

70%

UK US EU Canada Japan World Australia

At least 1 dose

Fully vaccinated


[email protected]

Economist, Asia


Mayank Mishra +65 6596 7466

[email protected]

Global FX and Macro Strategist


Unemployment is likely to edge

steadily lower as labour-market

slack declines

We see the savings rate falling in

the next few quarters, supporting

consumption





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150,000 job losses. Household savings fell to 11.6% in Q1 following a sharp increase

in 2020 (when savings tripled to AUD 187bn), despite rising household income. We

expect the savings rate to fall sharply in 2021 and 2022 to c.4% of disposable income

– below the five-year pre-COVID average of 5.25% – as households take comfort from

increased 2020 savings and a better growth outlook.

We expect residential construction to remain strong in H2, supported by rising housing

prices and ongoing projects (started in Q4-2020 and Q1-2021) supported by the

government’s HomeBuilder subsidies and similar state-level programmes. Building

approvals are a good leading indicator of residential construction activity, leading

actual construction activity by around 6-12 months. Approvals have continued to grow

sharply in the past year, pointing to accelerating construction until end-2021 at least.

Inflation should remain benign near-term. It is likely to moderate to 1.4% y/y in H2 following

a sharp increase in Q2 from a low base. We see inflation averaging 2.3% in 2022 and

2023; the RBA forecasts underlying inflation to remain below 2% until mid-2023.

Policy

The RBA is likely to slowly reduce its accommodation as the recovery continues.

We expect the RBA to move to an open-ended purchase programme at a slower pace

of AUD 4bn/week. It is likely to keep the policy cash rate (0.10%) and the 3Y yield

curve target (0.10%) unchanged until 2023. We maintain our view that the RBA will

keep the April 2024 bond as its target bond for yield curve control (YCC) purchases.

The RBA has stressed that wage growth would need to pick up to at least 3% for

inflation to return sustainably to its 2-3% target, and it believes this will not happen until

2024. Given the strong recovery and still-tight border controls, we believe labour-

market slack might decline more rapidly, pushing up wages. We expect wage growth

to pick up in H2-2021 as labour-market slack is reduced and temporary wage freezes

are unwound (starting in the public sector); we forecast that wage growth will reach

c.2% by end-2021, from 1.5% in Q1. We see the risk of a sharp increase in wages in

H2-2022 if international borders remain closed; if so, the RBA could hike policy rates

as early as 2022.

Other issues

Housing prices have risen to multi-year highs following declines in Q2 and Q3-2020.

The five-capital aggregate price index has risen 8.6% y/y in early June, up 13% since

end-2016; Sydney has experienced the sharpest increase, of over 14% from COVID

lows. We expect prices to pick up further in 2021 given accommodative monetary

conditions and improving sentiment. Regulators are likely to monitor the pace of credit

growth to housing investors; however, we do not expect macro-prudential limits to be

imposed in 2021.

Market outlook

We remain bullish on the Australian dollar (AUD) given the currency’s undervaluation

relative to Australia’s commodity export prices. Iron ore prices (up c.28% YTD) remain

close to multi-year highs, and are likely to keep the trade surplus near record highs.

We also expect the RBA’s policy tone to become more supportive of the AUD ahead.

A gradual rollback of unconventional stimulus measures could lift the AUD to better

align it with Australia’s terms of trade.

RBA is likely to remain

accommodative, but slowly reduce

support

We expect housing prices to remain

elevated throughout H2

We see strong residential

construction until at least end-2021


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Bangladesh – Gradual pick-up

Economic outlook – Resilience amid new COVID wave

Vaccinations are key to the growth recovery. We expect GDP growth to improve to

7.2% in FY22 (year starting July 2021) from 5.6% in FY21 as stronger global growth

spurs a rebound in export demand. Private consumption growth should be supported

by resilient remittance inflows, which helped to offset the impact of lost labour income

in FY21. Private investment, however, is likely to remain muted as excess capacity

persists. Public investment, which was slow in FY21 due to the absence of foreign

experts, should also accelerate if vaccination progress reduces COVID-related

concerns; this should support a rebound in construction.

Our FY21 growth forecast of 5.6% is lower than the government forecast of 6.1%, and

reflects the severe impact on economic activity of lockdowns in Q4-FY21. Industrial

growth slowed in Q4-FY21 with a sharp decline in ready-made garment (RMG)

manufacturing, while services-sector growth was weighed down by disruptions to

transport, retail, hotels and restaurants. Agriculture, which supported growth in FY20,

was severely impacted by floods in FY21.

We see significant downside risks to the outlook, particularly from delayed vaccination

rollout and issues in the financial sector. A national COVID vaccination campaign

began in February 2021, and was expected to accelerate as Bangladesh received

doses under the COVAX initiative. However, progress has been slow due to scarce

supply. Bangladesh had administered only 10mn vaccination doses as of 15 June,

against a requirement of nearly 200mn doses. While the government is in talks to

procure more supply, the delay has left the growth outlook vulnerable to further COVID

outbreaks and consequent risks to economic activity – similar to those seen during the

April-June periods in both 2020 and 2021.

The pandemic has exacerbated pre-existing risks to financial stability stemming from

high non-performing loans (NPLs), weak capital buffers, and poor bank governance

and risk management. Reduced profitability, weaker asset quality, and lower credit

growth could have large second-round effects on the real economy. Gross NPLs fell

to c.8% of total loans as of December 2020 (from 12% in September 2019) as a

moratorium on debt repayment and asset foreclosures was introduced from March-

December 2020. Although the moratorium has been lifted, Bangladesh Bank

Figure 1: Bangladesh macroeconomic forecasts Figure 2: Rising remittances have supported domestic

consumption and the C/A balance (remittances, USD bn)

FY21 FY22 FY23



Policy rate (%) 4.75 4.75 4.75

USD-BDT* 86.00 87.00 88.00

Current account balance (% GDP) 0.2 -2.0 -2.0

Fiscal balance (% GDP) -6.0 -6.2 -5.0

Note: Economic forecasts are for fiscal year ending in June; *end-December;

Source: Standard Chartered Research


Monthly

6mma

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7

May-15 May-16 May-17 May-18 May-19 May-20 May-21

Saurav Anand +91 22 6115 8845

[email protected]

Economist, South Asia

Standard Chartered Bank, India

Nagaraj Kulkarni +65 6596 6738

[email protected]

Senior Asia Rates Strategist


Divya Devesh +65 6596 8608

[email protected]

Head of ASA FX Research


Downside risks to the growth

outlook emanate from slower

vaccination and fragile banking

sector


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subsequently allowed banks to restructure loans for previously non-defaulted

borrowers. While this will reduce loan-loss provisioning requirements for banks, it will

defer the recognition of NPLs and losses, as well as adequate provisioning.

We maintain our C/A deficit of 2.0% of GDP for FY22 as imports recover and

remittance growth slows (albeit from a high base). The FY21 C/A balance was a

marginal surplus of 0.2% of GDP as remittances jumped c.33% to USD 24bn and the

trade deficit was contained amid lower imports in the first eight months of the year. We

expect the trade deficit to widen to USD 22bn in FY22 from USD 20bn in FY21 as

imports rise on improving economic activity. While remittances are likely to soften

slightly, we expect them to stay strong at USD 22bn. Remittance growth in FY21 has

been driven largely by COVID-related factors: the need for additional support to

remittance-receiving households, increased use of formal remittance channels amid

disruptions to informal channels, and government incentives (including a 2% cash

incentive). Taking these factors into account, we expect Bangladesh’s balance-of-

payments surplus to shrink to USD 1bn in FY22 from an estimated USD 8bn in FY21.

FX reserves are likely to rise to c.USD 45bn by end-FY22, nearly seven months of

import cover.

Policy – Growth to remain the priority

Bangladesh Bank is likely to maintain its accommodative policy stance. We

expect policy rates to stay on hold in FY22 after 125bps of cuts (along with 150bps of

CRR cuts) in FY21. The central bank is likely to stay accommodative as growth

remains below pre-COVID levels and pandemic risks persist. We expect inflation to

remain close to Bangladesh Bank’s target of 5.4% in FY22, allowing the Bangladesh

to remain accommodative. Despite monetary easing, growth in credit to the private

sector is at the lowest in 10 years; it slowed to 8.3% y/y in April and averaged 8.8% in

the first 10 months of FY21 – substantially below the central bank’s 11.5% target.

Fiscal policy is likely to remain growth-supportive. The fiscal deficit is budgeted to

widen to 6.2% of GDP in FY22 from 6.1% (revised estimate) in FY21, according to the

budget presented in June. We revise up our FY22 fiscal deficit forecast to 6.2% to

match the government’s target. Revenue targets are ambitious, in our view, but

spending cuts should compensate for a potential shortfall. Key budget announcements

included the lowering of tax rates by 2.5ppt for publicly listed corporates (except banks,

tobacco companies and mobile operators); and a 10-year tax holiday for onshore

manufacturing of three- and four-wheel vehicles and some home appliances, as well

as the setting up of hospitals outside four major cities. The government has also

proposed to set aside BDT 1.1tn (c.3% of GDP, up 13% y/y) for social safety

programmes. Cash incentives of 1% on the export value of textiles and 2% on

remittance receipts will continue in FY22.

Market outlook – We remain slightly bearish on the BDT

We have a Neutral outlook on BDT bonds. With money-market rates already below

1%, we see limited room for bond yields to decline further. The government’s FY22

issuance patten is heavy on short-end bonds, and we expect this to exert bear-

flattening pressure on the BDT bond yield curve.

In FX, we maintain our slightly bearish view on the Bangladeshi taka (BDT). As imports

normalise and trade deficit widens, we expect Bangladesh’s BoP surplus to decline. A

smaller BoP surplus and extended overvaluation should allow for slight BDT

weakness. We target USD-BDT at 86 at end-2021.

We forecast the FY22 fiscal deficit

at 6.2% of GDP

We expect the C/A balance to turn

to a deficit of 2% of GDP in FY22


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China – Rebalancing act

Economic outlook – Slower but more balanced growth

We expect growth to decelerate for the rest of 2021 on a fading base effect,

declining COVID-related demand and policy normalisation. We maintain our

growth forecasts of 8.0% for 2021 and 5.6% for 2022. This year, we expect y/y growth

to normalise to 7.0% in Q2, 5.0% in Q3 and 4.8% in Q4, following an 18.3% surge in

Q1 (inflated by last year’s low base). We see a slight upside risk to our forecast if export

growth or the housing market turns out to be more resilient than we expect.

The economy has become more balanced in 2021. Consumption is reasserting itself –

the two-year compound annual growth rate (2YCAGR) for retail sales improved to

4.5% y/y in May from 3.2% in January-February on recovering income growth and

better job-market conditions. The surveyed unemployment rate declined to 5.0% in

May from 5.4% in January. The government has effectively contained the spread of

COVID without causing major economic disruptions. Surging industrial profit growth

(2YCAGR of 22% y/y in January-April) and worsening supply shortages have also

prompted a rebound in manufacturing investment growth, to 3.7% y/y in May

from -3.4% in January-February. Infrastructure investment growth picked up to 2.8%

from -1.6% y/y over the same period as projects approved last year entered the

implementation stage.

In contrast, the 2YCAGR for housing sales slowed to 10.3% y/y in May from 12.6% in

January-February owing to tightening housing controls and slowing credit growth. The

2YCAGR for export growth decelerated to 11.2% y/y in May from 15.2% in January as

declines in COVID-related exports (e.g., plastic products, textiles and computers)

offset increases in investment-related exports (e.g., steel products and automobiles).

Recovering overseas production is expected to weigh on China’s share of global

exports in 2021, after it rose to 10.5% in 2020 from 9.6% in 2019.

The trade surplus is likely to narrow on slowing exports and re-accelerating imports.

Surging commodity prices and China’s strong demand for integrated circuits saw

import growth (2YCAGR) accelerate to 12.2% in May from 8.3% in January-February.

The trade surplus (rolling annual sum) eased to USD 611bn as of May from USD 627bn

as of April. We continue to expect China’s current account (C/A) surplus to narrow to

1.2% of GDP in 2021 from 1.9% in 2020.

Figure 1: China macroeconomic forecasts Figure 2: Pass-through from PPI to CPI is accelerating

PPI and CPI, % y/y

2021 2022 2023



Policy rate (%)* 2.95 2.95 3.05

USD-CNY* 6.58 6.50 6.60

Current account balance (% GDP) 1.2 0.6 0.0


*end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

CPI

PPI

Wei Li +86 21 3851 5017

[email protected]



Shuang Ding +852 3983 8549

[email protected]



Becky Liu +852 3983 8563

[email protected]

Head, China Macro Strategy


Despite a moderating trend, the

economy is becoming more

balanced in 2021

C/A surplus is likely to narrow to

1.2% of GDP in 2021 on re-

accelerating imports driven by

rising commodity prices and

recovering consumption


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Policy – Achieving greater economic balance

With GDP growth having rebounded close to its potential level, policy makers’

focus has shifted from recovery to rebalancing. The Politburo, China’s top

leadership body, called on 30 April for “achieving a higher degree of economic balance

while maintaining reasonable growth”. We expect the government to continue with

gradual policy normalisation throughout 2021 via (1) targeted support for small

companies still suffering from the COVID impact; (2) tighter housing controls; and (3)

slower total social financing (TSF) growth of 10-11% to stabilise the leverage ratio.

China is likely to under-implement its budget in 2021 due to revenue outperformance

and stagnating spending. The broad budget recorded a surplus of CNY 299bn in 5M-

2021, versus a deficit of nearly CNY 2.08tn in 5M-2020. As a result, we expect the

fiscal deficit to reach only 6.0% of GDP in 2021, versus the budgeted amount of 8.0%.

We expect the People’s Bank of China (PBoC) to keep the one-year medium-term

lending facility (MLF) rate unchanged at 2.95% through end-2022. The recovery in CPI

inflation has been limited so far, from -0.3% y/y in January to 1.3% in May – well below

the PBoC’s target of around 3%. However, sharp declines in pork prices have masked

the true scale of CPI inflation. Excluding pork, May inflation would have risen to 1.9%

y/y (instead of 1.3%), while food inflation would have accelerated to 2.9% (instead of

0.3%). We expect pork prices to stabilise in Q4 on increased policy support, including

increasing national pork reserves, and better demand-supply dynamics. We forecast

that CPI inflation will rise to 2.9% y/y by year-end, averaging 1.5% in 2021.

Surging commodity prices have become a growing concern for China. A series of

measures have been introduced to improve domestic commodity supply, including a

steel export tariff hike, domestic coal production increases, and penalties for

commodity hoarding. Even so, most industries have seen their margins fall since Q3-

2020, especially consumer-goods producers (see China – How commodity prices

affect industrial margins). PPI inflation surged to 9% y/y in May from 0.3% in January

(Figure 2). The pass-through of rising commodity costs to manufacturing prices has

accelerated since November 2020 amid growing supply shortages (following delayed

investment in 2020) and an asymmetric recovery in global demand and supply. We

expect PPI inflation to average 6.8% in 2021, against market consensus of 5.2% (see

China – Higher and more enduring inflation).

Politics – Lower risk of collision

The tough US position on China has bipartisan support and is unlikely to reverse

in the near term. That said, President Biden’s multilateral approach should increase

predictability, allow cooperation in some areas and reduce the risk of escalation

between the two countries.

Market outlook – Fundamentals are less compelling in H2

We expect the CNY to maintain its strength near-term against the CFETS basket

on strong exports, renewed capital inflows, and ultra-flush USD liquidity conditions. We

see more uncertainty in H2; we expect USD-CNY to rebound to 6.4-6.6 due to China’s

reduced growth premium over developed economies, a declining C/A surplus, a more

uncertain outlook for the USD upon the Fed’s tapering announcement, and a possible

increase in geopolitical tensions.

CNY is likely to trade mostly around

6.4-6.6 in H2 as growth moderates

and the current account surplus

declines

We expect the PBoC to slow TSF

growth to 10-11% in 2021 to

stabilise the leverage ratio

The broad fiscal deficit is likely to

undershoot in 2021 at 6% of GDP,

versus the budgeted 8%

We expect the PBoC to keep the

one-year MLF rate 2.95% through

end-2022

The pass-through from surging

commodity costs to consumer

prices has accelerated since

end-2020

Biden’s multilateral approach

reduces confrontation risk





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Hong Kong – Fortunes turning, finally

Economic outlook – Light at the end of the tunnel

Hong Kong’s economy is in the best shape in at least two years. GDP grew 7.9%

y/y in Q1-2021 after six straight quarters of contraction, thanks to a favourable base

and a strong boost from the export sector. More importantly, the recovery has

continued to broaden since then. Most notably, the unemployment rate improved to

6.0% in May from a recent peak of 7.2% in February (on a seasonally adjusted, 3mma

basis; Figure 2). This reflects recovering domestic activity – the ‘retail, accommodation

and food services’ and ‘construction’ sectors saw the biggest unemployment declines

(non-SA) over the period, enjoying the biggest boost as social distancing measures

were relaxed. The combination of improving domestic momentum and the broadening

global recovery supports our 2021 growth forecast of 6.9%, which is above the 6.1%

consensus.

Only c.17% of Hong Kong’s 7mn population had been fully vaccinated against COVID

as of 22 June, but the pace is finally picking up as businesses start to provide

vaccination incentives. This – along with recent sustained stretches of zero daily local

untraceable COVID cases – should help the jobless rate to edge lower in H2-2021,

supporting a further modest domestic recovery. That said, the next major boost to

growth could still be some quarters away, when international and cross-border travel

restrictions are likely to be significantly relaxed.

Given that Hong Kong is a services-oriented economy, local consumer prices are less

at risk of spillover from rising global commodity prices and supply-chain disruptions.

While the improving growth outlook poses upside risks to our 1.1% average inflation

forecast for 2021, key CPI components like private housing rents and miscellaneous

services remain benign for now; one-off government relief measures will also cap fees.

Policy – Support from persistently low interest rates

The residential property market is heating up again, taking YTD average price

gains to c.6%, according to the weekly Centa-City Leading Index. The index is now

only c.2% below the high seen in mid-2019, before the start of local social unrest and

COVID. Monthly residential property transactions exceeded 7,000 units for a third

straight month in May, rising from an average c.5,000 units in the 12 months prior.

Persistently low interest rates have helped to unleash pent-up demand for flats now

that economic prospects are improving. The Aggregate Balance (a measure of

Figure 1: Hong Kong macroeconomic forecasts Figure 2: Relaxation of social distancing measures has

driven the jobless rate lower (%)

2021 2022 2023



3M HIBOR* 0.25 0.40 1.00

USD-HKD* 7.80 7.80 7.80



*end-period; **for fiscal year starting in April; Source: Standard Chartered Research


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep

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Nov

-18

Jan-

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Mar

-19

May

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Jul-1

9

Sep

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Nov

-19

Jan-

20

Mar

-20

May

-20

Jul-2

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Sep

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Nov

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Jan-

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Mar

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May

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Headline unemployment rate (SA)

Construction (non-SA)

Retail, accommodation and foodservices (non-SA)

Kelvin Lau +852 3983 8565

[email protected]




[email protected]



Residential prices are now only

c.2% below the 2019 peak


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interbank liquidity) is still at a record-high HKD 457bn, and the US Fed is likely to hike

rates only in 2023; we expect this to anchor market sentiment and HIBOR near current

low levels, and keep HKD liquidity ample for the rest of 2021. This, in turn, should keep

mortgage servicing manageable and curb downside risks to the property market from

a potential taper shock (not our core scenario).

In contrast, residential rents are showing only nascent signs of bottoming out; the

official rental price index for private domestic units remains more than 11% below the

mid-2019 peak. Even when private rents rebound, this is likely to be reflected in the

CPI housing rental component with a lag. As a result, we expect upward pressure on

housing inflation to emerge only in 2022.

Hong Kong’s fiscal health is also set for a slow recovery. Government revenue

(on a 12M rolling sum basis) barely grew on a y/y basis as of April 2021, while

government expenditure grew 34% y/y due to stimulus measures. More such

measures are in the pipeline, including the impending rollout of a HKD 5,000 electronic

consumption voucher for every adult.

Politics – One-year anniversary of the NSL

It has been one year since the national security law (NSL) was enacted. During

this period, protests have been deterred, opposition politicians and activists arrested,

and the city’s electoral system overhauled. Electoral changes will make it more difficult

for pro-democracy candidates to qualify for (and win) the Legislative Council elections

scheduled for December; any seats they do win will be diluted as a result of the

overhaul. The Chief Executive election in March 2022 will also be closely watched,

starting with the September election of the Election Committee, which will select

candidates for the city’s top job .

Greater Bay Area (GBA) – What our clients say

We recently completed our 12th annual GBA manufacturing survey of 220+ clients

operating in the GBA. Their responses showed a recovery in orders, sales, hiring,

wages and capex in 2021. Larger manufacturers are operating closer to pre-COVID

levels and look set to outperform smaller companies. Beyond the expected y/y

improvements in performance metrics, however, our survey shows lingering labour-

market slack and weak appetite for investment in key innovations. Respondents are

less eager to move capacity overseas than they were a year ago, and they expressed

greater confidence in the long-term GBA outlook. We see the GBA benefiting from a

broad range of drivers, including a sizeable population and strong policy support in the

form of continued financial opening. Hong Kong is likely to be the main beneficiary of

such policies, cementing its role as China’s financial window to the rest of the world

and its dominance as the Renminbi’s biggest offshore centre.

Market outlook – Flows are the key driver of the HKD

USD-HKD has been resilient, staying close to 7.76 for much of Q2. We believe

capital flows have emerged as the key driver of USD-HKD in the absence of FX carry.

Our tracker of ETF-based equity flows suggests that outflows (amid weakness in China

and technology stocks) lifted USD-HKD spot off the lower end of the 7.75-7.85 band in

Q1-2021; this followed strong inflows from Q2 to Q4-2020, which had kept USD-HKD

near 7.75. Outflows slowed in Q2-2021, leading spot to consolidate near 7.76. Net flows

via the Stock Connect schemes have also been largely neutral, anchoring HKD stability.

All eyes on the Chief Executive

election in March 2022

Returning inflows are anchoring

the HKD

Higher private housing rents will

take time to start spilling over to

CPI inflation



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India – Vaccinate to recover

Economic outlook – A sure-footed recovery by Q4-FY22

Vaccination is key to a sustained recovery. We expect GDP growth to recover to

8.5% in FY22 (started April 2021) from -7.3% in FY21. The intensity of India’s second

COVID wave has eased sharply – the daily case count has fallen below c.50,000 from

a peak of c.410,000 in early May. However, economic activity is likely to remain

cautious until vaccination coverage improves in Q2 and Q3-FY22. Our base case is

that c.45-50% of the population will be vaccinated by end-2021 and c.65-70% by end-

March 2022. If these targets are met or exceeded, we expect a more decisive growth

recovery to start by Q4-FY22. Until then, activity is likely to remain vulnerable to further

mobility restrictions given the virus’ high transmissibility and the risk of a third wave.

Gradual improvement in leading indicators as states exit lockdown. Our daily

activity tracker has risen back to levels last seen at end-April. In May (peak of the

second wave), it had fallen to the lowest levels since September 2020 (peak of the first

wave). Google mobility trends are rising as most states have started to reopen. Other

leading indicators – fuel demand, electricity use, GST e-way bills and rail freight –

showed a sequential recovery in the first half of June. However, given the spread of

cases to rural areas (unlike last year), demand may remain under pressure for a

prolonged period amid record-low consumer confidence. In this context, potential fiscal

stimulus announcements – particularly targeted towards rural areas – and monsoon

trends will be closely watched. The Indian Meteorological Department has predicted a

normal monsoon this year; rainfall levels and distribution in the July-August period,

which accounts for 60% of annual sowing and rainfall, will be key to the macro outlook.

Yet another year of high inflation. We forecast FY22 inflation at 5.4%, following 6.2%

in FY21. The higher-than-expected May reading of 6.3% indicated that food prices

(especially edible oils and pulses) may not correct until H2-FY22; meanwhile, core

inflation may remain elevated throughout FY22 as inputs costs rise. Our forecast

assumes a partial reversal of price gains for some items as supply disruptions ease,

commodity prices correct, and/or data issues that boosted the May reading are

resolved. However, in an adverse scenario, FY22 inflation could rise to c.6.1% if food

supply is disrupted, excise duties on petrol/diesel are not cut, the May price spike is

not reversed, or domestic demand recovers more sharply than expected. Downside

inflation risks include contained food inflation and a stalled rally in global commodity

prices amid mixed global growth trends.

Figure 1: India macroeconomic forecasts Figure 2: Around 50% of adult population likely to be

vaccinated by end-2021 (% vaccinated)

FY21 FY22 FY23

GDP growth (real % y/y) -7.3 8.5 5.5


Policy rate (%) 4.00 4.00 4.50

USD-INR* 73.07 75.50 77.50



Note: Economic forecasts are for fiscal year ending in March; *end-December of previous

year; **central + state governments; Source: Standard Chartered Research

Scenarios based on a range of average daily vaccination rates from June 2021 to March

2022; Source: CEIC, Standard Chartered Research

4.5 mn doses

Current pace (3.2mn doses)

5.5mn doses

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

To date Jul-21 Sep-21 Nov-21 Jan-22 Mar-22

Vaccination pace, fiscal stimulus,

monsoon trends will be watched

Kanika Pasricha +91 22 6115 8820

[email protected]

Economist, India



[email protected]




[email protected]



A recovery is underway after the

peak of India’s second COVID wave

May 2021 inflation surprise has

ignited inflation worries


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We now expect a slightly smaller FY22 C/A deficit of 0.7% of GDP (0.8%

previously). This reflects lower imports amid slower domestic activity during the

second wave, stronger demand for services exports, and lower investment outflows.

Gold demand slipped in May (after being front-loaded in March/April), causing a

decline in imports, although higher commodity prices partly offset the impact.

Meanwhile, key export markets have seen a sharp demand recovery amid policy

support and improved vaccination coverage. We expect a marginal C/A surplus in Q1-

FY22 on a smaller goods trade deficit and continued strength in the invisibles surplus;

this should turn to a deficit for the full year as India’s growth gradually recovers. We

now expect a FY22 BoP surplus of USD 55bn (USD 47bn previously); the BoP for April

to mid-June 2021 is estimated at c.USD 20bn. Risks to the BoP include sharp oil price

moves, capital flow volatility on a Fed taper announcement, or a sharp deviation in

domestic growth from our forecast.

Policy – MPC to focus on growth despite higher inflation

Recent inflation surprise puts the policy makers in a tight spot. The spike in May

inflation above the Monetary Policy Committee’s (MPC’s) target range poses a key

challenge, given the policy focus on supporting growth amid COVID uncertainty.

We expect the MPC to stay focused on growth unless the inflation scenario turns

adverse. Monetary policy normalisation will start in Q3-FY22, in our view. We expect

a reduction in the liquidity surplus, followed by gradual increases in the reverse repo

rate – by 25bps in February 2022 and 15bps in April 2022 – taking the corridor back to

the pre-pandemic level of 25bps. Repo rate hikes are likely to start in Q2-FY23; we

expect a total 50bps of hikes to 4.5% by end-Q3-FY23. We maintain our view that the

MPC will normalise rather than tighten monetary policy, as tightening could dampen

growth momentum. Even after factoring in 50bps of repo rate hikes, the rate is likely to

remain below the pre-pandemic level of 5.15%. We would expect an earlier repo rate

hike only in an adverse inflation scenario, with FY22 inflation averaging above 6%.

We see fiscal slippage risks from stimulus and lagging stake sales. The central

government has already announced extra borrowing of c.INR 1.6tn in FY22 to

compensate states for a likely GST collection shortfall (although we think the fiscal

impact of this may be smaller than the government estimates). Beyond GST, we expect

limited slippage unless the divestment shortfall is large, as budget estimates for other

revenue sources are conservative. Spending on food and fertiliser subsidies could

result in slippage of 0.5-0.7% of GDP, though the impact may be offset by a higher

Reserve Bank of India (RBI) dividend and the prepayment of Food Corporation of India

arrears in FY21 (totalling c.0.5%). On balance, we see a risk of fiscal slippage of 0.5-

1.0% of GDP versus the budgeted FY22 deficit of 6.8%.

Market outlook

We maintain a Neutral outlook on IGBs. The RBI’s continued support for IGBs is

counter-balanced by elevated inflation, the end of the monetary easing cycle, and

unfavourable demand-supply dynamics.

We target USD-INR at 75.50 by end-December. The key drivers of our bearish INR

view are crowded long INR positioning, extended overvaluation and expectations of a

deteriorating trade balance. A key risk that could cause USD-INR to overshoot our

forecasts is a more hawkish-than-expected stance by the US Fed.

We are Neutral on IGBs and bearish

on USD-INR

We see fiscal slippage risk of 0.5-

1.0% vs the central government’s

deficit target in FY22

Policy normalisation is unlikely to

start before Q3-FY22, barring an

adverse inflation scenario

We revise our FY22 C/A deficit

forecast to reflect lower goods

imports and stronger invisibles


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Indonesia – A gradual recovery

Economic outlook

We lower our GDP growth forecasts to reflect Indonesia’s resurgence of COVID-19

cases, slower-than-targeted vaccination rollout and diminishing policy space. We now

forecast growth of 4.1% in 2021 (previously 4.5%) and 4.8% in 2022 (previously 5.0%).

Near-term growth should benefit from policy support, strong external demand and

improved confidence in the vaccination programme. However, the resurgence of cases

and the re-tightening of mobility restrictions may slow the pace of recovery, especially

for directly affected sectors such as tourism, transportation and accommodation.

Monetary and fiscal policy support is likely to be scaled back next year amid global

monetary policy normalisation and Indonesia’s fiscal consolidation push. We expect

investment to lag the broader GDP recovery, as the corporate sector’s capex cycle

hinges largely on household consumption and public investment, which is constrained

due to pandemic-related government spending (Figure 2).

Indonesia’s daily new COVID cases surged to a record 21,807 on 29 June, straining

the health system and forcing the government to tighten mobility restrictions further for

the 3-20 July period. The measures include a 100% working-from-home requirement

for non-essential sectors (the energy, financial, food, logistics, communication, and

export sectors can still operate on-site with capacity limitations), the closure of malls

and public facilities, and requirements of vaccination proof and negative COVID tests

for travellers. The recent restrictions are tighter than those in January but less strict

than in April-May 2020. We estimate that every one-month period of restrictions may

lower GDP growth by 0.5ppt. The government aims to accelerate the vaccination rate

and tracing and testing in hard-hit areas. We estimate that at the current rate (1mn

daily vaccinations), around 40% of the population would be fully vaccinated by end-

2021 and 60% at end-Q1-2022 (versus the government’s target of 70%); limited

vaccine stock remains a risk.

We lower our average 2021 CPI inflation forecast to 1.8% y/y from 2.2% to account for

low inflation to date, adequate food stocks and relatively subdued demand. We expect

well-anchored inflation expectations and a negative output gap to keep inflation low

this year, limiting commodity price pass-through to consumer prices. Capacity

utilisation was still running at 73% in Q1-2021, 5ppt below the pre-pandemic high,

according to Bank Indonesia (BI) data. The pass-through from higher crude oil prices

has been relatively limited, although it is likely to continue for the rest of the year.

Figure 1: Indonesia macroeconomic forecasts Figure 2: Loan demand recovery tends to lag GDP

Credit growth (LHS), GDP growth (RHS), % y/y

2021 2022 2023



Policy rate (%)* 3.50 3.75 4.00

USD-IDR* 14,600 14,840 15,070

Current account balance (% GDP) -0.9 -2.0 -2.0


*end-period; Source: Standard Chartered Research


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GDP (RHS)

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-4

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0

2

4

6

8

10

-10

-5

0

5

10

15

20

25

30

35

40

Mar-04 May-06 Jul-08 Sep-10 Nov-12 Jan-15 Mar-17 May-19

Mobility restrictions have been

re-tightened as cases rise

Aldian Taloputra +62 21 2555 0596

[email protected]




[email protected]



Below-potential growth and

adequate food supply are likely to

anchor inflation this year


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Government plans to increase the VAT rate and expand VAT coverage may contribute

to CPI inflation. There are no details yet on the new VAT scheme, but we estimate that

raising the rate to 12% from the current 10% would add around 1.5ppt to m/m inflation.

We maintain our 2022 average inflation forecast at 3.0%.

We lower our C/A deficit forecasts to reflect a wider YTD trade surplus, higher

commodity prices and a structural rise in value-added exports. We now expect deficits

of 0.9% of GDP in 2021 (1.8% previously) and 2.0% in 2022 (2.2%). The

outperformance of advanced economies versus emerging markets (due to faster

vaccine rollout) may keep the trade surplus wide by containing import demand.

Indonesia’s relatively diversified export product mix – including higher-value-added

products such as processed minerals, vehicles and basic manufactured goods – is

export-positive. Manufacturing exports have increased to 80% of total exports from

75% in the past decade. Commodity prices are also likely to stay elevated (albeit down

from this year’s highs), supporting Indonesia’s main exports of coal, palm oil and oil.

Policy – Diminishing room for policy support

We now forecast policy rate hikes of 25bps in Q4-2022 and Q1-2023; we

previously expected no change through 2023. We also now expect 150bps of

reserve requirement ratio (RRR) hikes in H1-2022, versus none previously. The

revisions reflect our view that Indonesia’s negative output gap will close in H1-2022,

and that the Fed will start tapering in H1-2022 before hiking rates by 50bps in 2023.

Indonesia’s stronger external position should allow it to weather the impact of global

monetary normalisation better this time than during the 2013 taper tantrum, allowing

BI to gradually normalise policy. A manageable C/A deficit (down from 4.2% of GDP in

Q2-2013), low foreign ownership of government bonds, and BI’s ample FX reserve

buffer (including domestic NDFs) should support currency stability. BI may start

normalising policy by allowing relaxations of macro-prudential regulations to lapse.

The government is committed to bringing the fiscal deficit back below 3% of GDP in

2023. It projects that the deficit will narrow gradually to 4.5-4.9% in 2022 and 2.7-3.0%

in 2023. Given the ongoing need for pandemic-related spending and political hurdles

to spending cuts, deficit reduction will need to come mostly from higher tax revenue.

The government has proposed tax measures including a higher VAT rate; VAT taxation

of necessities such as food, education, transportation, health services, and e-

commerce transactions; a new income tax bracket for high-income individuals; and a

carbon tax. We think the target of reducing the fiscal deficit below 3% in 2023 is

achievable, although tax reform will still need to be accompanied by lower spending.

Politics – Fiscal consolidation is the top priority

Government may face a tougher battle on fiscal reform. The draft new tax code,

which has been submitted to parliament, has received public pushback. While the

government still appears to have solid parliamentary support for the draft law, it may

need to compromise on some tax provisions, including tax rates. The BI law revision

may be delayed as the near-term focus shifts to fiscal consolidation.

Market outlook – Tactical bullish view on the IDR

We maintain our end-2021 USD-IDR forecast of 14,600, but we see the IDR

strengthening in the near term as UST yields consolidate. Indonesia’s relatively

attractive carry, light positioning, and strong reserve buffer make the IDR attractive to

investors during risk-on periods.

Manageable external position

should allow gradual monetary

policy normalisation

The fiscal impulse is set to ease in

2022 as the government enters a

period of fiscal consolidation

C/A deficit is likely to remain

manageable next year


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Japan – Catching up

Economic outlook – Vaccination to support the rebound

We lower our 2021 GDP growth forecast to 2.6% from 2.8%. The revision reflects

weaker-than-expected Q1 GDP performance and Japan’s fourth COVID wave in April-

May. We expect the economy to improve starting in Q3, supported by exports and

improving personal consumption as the vaccination rate increases. The external sector

supported growth during the emergency lockdown in Q1, expanding 2.3% q/q. We expect

this trend to continue as the US and China – Japan’s biggest export markets – lead the

global recovery. Also, auto production should accelerate in H2 as the global

semiconductor shortage eases. We raise our 2022 growth forecast to 2.3% from 1.8%,

as the slower pace of recovery should result in a bigger growth boost next year.

The ongoing pandemic is likely to limit the positive economic impact of the upcoming

Tokyo Olympics. Bank of Japan (BoJ) Governor Kuroda did not mention the games at

the 18 June policy meeting, implying reduced expectations of an Olympics-related

boost to the economy. Given low expectations, however, Japan’s successful hosting

of the games (starting on 23 July) should support consumer and business confidence,

in our view.

Private consumption will be influenced by near-term virus developments; concerns about

infections and the slow pace of vaccination may halt the recent rebound in consumer

sentiment. Retail sales fell 4.6% m/m in April, reversing a 1.2% gain in March, as Japan

extended its emergency lockdown. Household spending fell 0.6% m/m in April after rising

5.6% in March. While uncertainty around consumption is high, we expect a sharp

rebound in H2, as vaccine rollout accelerated in June.

Unlike the US and China, Japan is concerned about deflation rather than inflation.

Headline CPI inflation remained negative as of May, and core inflation excluding fresh

food was positive (0.1% y/y) for the first time since March 2020. We expect CPI inflation

to stay close to zero throughout Q3, capped by weak demand and mobile-phone fee

reductions under Prime Minister Suga’s welfare policy. The base effect is likely to fade

only in Q4. We lower our average 2021 inflation forecast to 0.1% from 0.2% to factor in

these downward pressures. We raise our 2022 forecast to 0.7% from 0.5% to reflect the

delayed economic rebound and pent-up demand. We expect a current account surplus

forecast of 3.5% of GDP in 2021, supported by a steady services surplus and a

widening trade surplus (due to improving exports).

Figure 1: Japan macroeconomic forecasts Figure 2: Japan’s exports rise on global demand;

domestic demand remains depressed amid COVID wave

Export growth (LHS) vs CPI inflation (RHS), % y/y

2021 2022 2023



Policy rate (%)* -0.10 -0.10 -0.10

USD-JPY* 108.00 105.00 104.00



*end-period; **for fiscal year starting in April; Source: Standard Chartered Research


CPI

Export growth (LHS)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-30

-20

-10

0

10

20

30

40

50

60

Jan-

18

Apr

-18

Jul-1

8

Oct

-18

Jan-

19

Apr

-19

Jul-1

9

Oct

-19

Jan-

20

Apr

-20

Jul-2

0

Oct

-20

Jan-

21

Apr

-21

The ongoing pandemic is delaying

Japan’s economic recovery for

longer


[email protected]



Tony Phoo +886 2 6606 9436

[email protected]




[email protected]




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Monetary policy – BoJ to maintain status quo for longer

The BoJ kept its policy rate on hold in June, as expected; we expect no change in

monetary policy settings until 2023 at the earliest. Unlike the Fed, the BoJ delivered a

dovish message. It extended a COVID programme that provides financing support to

pandemic-affected companies by six months to end-March 2022, and gave verbal

assurances that it would cut rates further if needed to boost the economy and meet the

2% inflation target. While Kuroda said that accelerated vaccination progress should

support the domestic market by unleashing pent-up demand, he did not specify when

he expected this to happen. He said that global inflationary pressure is not a concern

beyond this year, so its impact on Japan will be limited; he emphasised the need for

Japan to aim to achieve its 2% inflation target. Separately, the BoJ recently announced

plans for a new policy tool to address climate change, which will require companies to

meet environmental standards; more details will be announced at the next meeting.

Fiscal policy – Additional budget will be needed

On the fiscal front, the lower house approved a budget of JPY 106.6tn for the year

ending in March 2022 to fight the coronavirus. Government debt is set to rise in 2021,

as planned bond issuance to fund the deficit will be larger than last year. We also think

an additional budget will be needed given the uncertain economic environment. While

debt stood at a substantial c.256% of GDP in 2020 (according to the IMF), we do not

think this is a concern, as 90% of the debt is owned domestically by the BoJ, other

public institutions and banks. The incentive for increased government spending is likely

to be strong in an election year, particularly considering weak H1-2021 GDP growth

expectations. Japan will hold lower house elections by 22 October 2021.

Olympics will go on as scheduled

Japan plans to go ahead with hosting the Olympics from 23 July to 8 August, despite

concerns about the recent COVID surge. After a slow start, the rate of vaccination

accelerated in June; the share of the total population having received at least one

vaccine dose increased to 29.6% as of 29 June from 7.73% as of 31 May.

Market outlook – Bearish on the JPY

The JPY has underperformed G10 peers this year, as expected; we have been using

it as a funding currency since the start of the year on the view that yield differentials

are likely to move against the JPY in a reflationary environment. USD-JPY has been

driven higher by rising real yield differentials; 10Y US real yields are up c.20bps YTD,

while 10Y JPY real yields are down c.30bps due to a recovery in domestic inflation

expectations and nominal yields are anchored by the BoJ’s yield curve control (YCC)

policy.

We expect real yield differentials to remain supportive of USD-JPY, driving JPY

underperformance even during periods of broad USD weakness. We maintain our

USD-JPY forecasts of 110 for end-Q3-2021 and 108 for end-Q4-2021.

BoJ is likely to maintain its current

QE and interest rate settings,

supporting the recovery

JPY to remain a funding currency

The government is expanding fiscal

policy to support the recovery


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Malaysia – A bumpy ride

Economic outlook

We lower our 2021 GDP growth forecast to 4.7% (from 6.3%) to take the latest

lockdown into account. The encouraging growth recovery (Q1 GDP rose 2.7% q/q

SA) has been disrupted as the government materially tightened mobility restrictions in

June to address a third wave of infections. The ‘Full Movement Control Order’ (FMCO)

– which was extended on 28 June – is the most restrictive set of measures since

Malaysia’s first lockdown in Q2-2020. But we think that the economic impact will be

milder than in Q2-2020. More economic sectors are allowed to remain open this time,

including the key electrical and electronics manufacturing sector. Robust external

demand, ongoing government support measures, and improved remote working

capacity should also help. Once the economy reopens, Malaysia’s accelerated

vaccination rollout is likely to support the rebound. That said, no end date for the FMCO

‘phase 1’ restrictions had been announced at the time of writing, and new COVID cases

remain above 4,000 per day.

The government’s phased economic recovery plan sees the economy fully reopening

by end-October, contingent on the pandemic situation and vaccination progress. The

government targets fully vaccinating 60% of the population by October. While the

current vaccination rate (200,000 seven-day moving average) is lower than required to

reach the target, the pace is accelerating rapidly.

Given the phased reopening, the recovery is likely to remain uneven. We expect

external demand to remain a key source of support; in contrast, domestic demand may

be curtailed by weaker employment in affected sectors and social distancing

restrictions on consumer-facing businesses. Malaysia continues to benefit from strong

demand for electronics, commodities and rubber gloves. Ongoing infrastructure

projects should also support growth; the government’s allocation to development

expenditure rose 34% y/y in Q1.

Private consumption may remain cautious, as the labour-market recovery is still

gradual, intermittent and uneven. The unemployment rate eased gradually to 4.6% in

April from a high of 5.3% in May 2020 but remains above the pre-COVID level (3.2%).

The latest FMCO may have led to increased unemployment. Wage inflation should

remain subdued (excluding the Q2 boost from a low base) amid labour-market slack

Figure 1: Malaysia macroeconomic forecasts Figure 2: Still-affected sectors account for 32% of GDP

Hit to GDP growth* for every ppt fall in mobility (average of

transit and workplaces)

2021 2022 2023



Policy rate (%)* 1.75 2.50 3.00

USD-MYR* 4.00 4.00 4.05



*end-period; Source: Standard Chartered Research * Change in GDP growth is versus Q4-2019 levels; Source: Google mobility report,

Standard Chartered Research

-0.4

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0.0

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0.6

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Q2-2020 Q3-2020 Q4-2020 Q1-2021

The economic impact of the latest

lockdown is likely to be milder than

in Q2-2020

Edward Lee +65 6596 8252

[email protected]

Chief Economist, ASEAN and South Asia


Jonathan Koh +65 6596 8075

[email protected]

Economist, Asia



[email protected]



External demand may help to

mitigate effect of slow recovery in

domestic consumer


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and rising skills-related underemployment (13.7% of total employment versus 10.1%

in Q4-2019). Wage inflation has also been capped so far by fewer hours worked (c.3%

below pre-COVID levels). That said, earlier withdrawals from the national pension fund,

which totalled c.MYR 63bn YTD as of June, should boost consumption.

We raise our 2021 headline inflation forecast to 2.8% from 2.5%. This partly reflects

higher global oil prices, although the government is now placing a cap on diesel and

RON95 fuel prices (RON97 prices are not capped). Meanwhile, global food prices

continue to increase, rising almost 40% y/y in May. This may add to upward pressure

on local food prices. Due to the higher base and our lower global oil price forecast for

2022, we lower our 2022 headline inflation forecast to 1.6% from 1.8%.

Policy

Bank Negara Malaysia (BNM) may start normalising monetary policy in 2022.

Despite the rise in headline inflation, we expect core inflation to remain manageable at

1.0% in 2021. Core inflation was only 0.7% y/y in April, despite a 4.7% y/y headline

inflation rate, of which fuel costs alone contributed c.64% of the increase. Phased

economic reopening in H2-2021 may also delay a pick-up in demand-side inflation. As

a result, we expect BNM to remain biased towards growth. We estimate that the output

gap will close in Q4-2022. However, given that the policy rate is at a historical low, we

now expect BNM to start raising rates in Q3-2022 – two rate hikes of 25bps in Q3 and

another 25bps in Q4 – before pausing. (We previously expected no change in rates

through 2022.) This would take the overnight policy rate to 2.5% from 1.75% currently,

still below the 3.0% pre-COVID level. We see rate hikes resuming in H2-2023, taking

the policy rate to 3.00%.

Meanwhile, further fiscal support may be limited by the statutory debt ceiling of 60% of

GDP. Based on current official projections, statutory debt may reach 58.5% of GDP by

year-end, but this ratio may be higher due to lower-than-projected growth. The

government’s recent direct fiscal injection of MYR 15bn may add another c.1ppt to debt

(although how this may be funded remains unconfirmed).

Politics

The state of emergency imposed since 11 January is due to end on 1 August.

The measure was imposed to facilitate government efforts to tackle COVID; Malaysia’s

previous states of emergency were imposed due to security concerns. Parliament has

been suspended, and no elections are allowed during this period. The latest economic

recovery plan noted that parliament may reconvene only in September-October,

although there are growing calls for an earlier reopening of parliament.

Market outlook

We remain constructive on the Malaysian ringgit (MYR). The currency should

continue to benefit from rising commodity prices – LNG and crude palm oil prices were

up 86% and 50% y/y as of June, respectively. The trade surplus has remained robust

as a result, averaging MYR 20bn per month in 4M-2021, similar to H2-2020. The recent

re-imposition of restrictions may have caused import demand to slow again, while

external demand remains high; this is likely to sustain a large trade surplus until Q3.

However, we expect the surplus to narrow towards the end of 2021 as the economy

reopens further and imports pick up. Optimism over travel reopening in 2022 may

support the currency. Favourable MYR valuations on a real effective exchange rate

basis and strong FX reserves should also provide support. FX reserves (including

changes in the forward book) rose c.USD 12bn in the year to April.

Additional fiscal support may be

hampered by the 60% debt ceiling

Manageable core inflation should

allow BNM to refrain from

normalising monetary policy

until 2022


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Nepal – A prolonged recovery process

Economic outlook – Vaccine delays, politics are key risks

We lower our FY22 growth forecast to 5.0% (from 6.5%) to reflect the slow pace of

vaccination. While we still expect the economic recovery to improve in FY22, the pace is

likely to be more gradual than we earlier expected. We estimate growth of 2.0% in FY21

(year ending 15 July 2021). The improvement is likely to be driven by services as social

distancing rules are eased, and by agriculture on the back of recent favourable monsoons.

However, tourism – a key sector for Nepal – is likely to remain nearly non-existent, at least

in H1-FY22. Moreover, the lasting impact of the pandemic is not yet clear. According to a

World Bank COVID-19 monitoring survey, more than two of every five economically active

workers in Nepal reported a job loss or a prolonged work absence in 2020.

Nepal’s second COVID wave in April and May caused significant disruptions, and

highlights the risk to the economy from the slow pace of vaccination. Nearly 2.9mn

vaccine doses had been administered as of early June, compared with Nepal’s

requirement of nearly 40mn shots. Meanwhile, political uncertainty remains high after

the prime minister dissolved parliament in December 2020. The Supreme Court

reversed the decision in February, but the president dissolved parliament in May,

calling for elections in November as no party had a majority.

Fiscal and monetary policy is likely to remain accommodative. We forecast the FY22

fiscal deficit at 5.5% of GDP (widening from 4.0% in FY21) given higher COVID-related

expenditure. The central bank, Nepal Rastra Bank (NRB), has been using an interest

rate corridor since FY17 to manage volatility in short-term interest rates. We expect

NRB to keep interest rates stable after it cut the lower limit of the corridor by 1ppt (to

1%) and the upper limit by 0.5ppt (to 3%) to enhance liquidity. NRB is also likely to

deliver additional credit relief measures for the ailing private sector. While we expect

inflation to rise to 5.5% in FY22 (from 4.0% in FY21), driven by the economic recovery

and base effects, this is still below the NRB target of 6%.

We expect the C/A deficit to widen further to 6.0% of GDP in FY22, driven by a larger

trade deficit as the post-COVID resumption of economic activity boosts imports. We

forecast a C/A deficit forecast of 4.0% of GDP for FY21. Remittances were strong in

9M-FY21, growing 13% y/y, led by higher transfers to support local consumption and

greater use of financial channels. However, tourism – which contributed 1.7% of GDP

in FY20 – fell c.90% in 9M-FY21 and is likely to remain muted in FY22. FX reserves

are sufficient, at USD 10.9bn (c.12 months of imports) as of April.

Figure 1: Nepal macroeconomic forecasts Figure 2: Growth is likely to improve in FY22

ppt contributions to GDP (% y/y)

FY21 FY22 FY23



USD-NPR* 116.91 120.80 124.00



Note: Economic forecasts are for fiscal year ending 15 July; *NPR is pegged at 1.6x INR for

end-December of previous year; Source: Standard Chartered Research


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

FY16 FY17 FY18 FY19F FY20 FY21F FY22F

Private consumption Government consumption GCF Net exports

GDP (% y/y)

Saurav Anand +91 22 6115 8845

[email protected]



Vaccine supply and political

uncertainty are the key risks to our

FY22 outlook

Fiscal and monetary policy are

likely to remain growth-oriented


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New Zealand – RBNZ to start hiking in Q2-2022

Economic outlook

We expect GDP growth of 5.5% in 2021. We remain cautiously optimistic on the

economic outlook for the rest of the year, with leading indicators pointing to a continued

recovery. Global economic reopening amid rising vaccinations, the contained domestic

COVID situation, still-accommodative monetary policy and expansionary fiscal policy

should provide support.

Leading indicators bode well for the economic recovery ahead. Higher dairy prices and

improving external demand should continue to benefit the agriculture sector, although

floods are a downside risk. The manufacturing PMI was in expansionary territory for

11 of the 12 months through May; business confidence in the sector has been in

positive territory since November 2020. Construction activity should remain robust

amid buoyant housing demand; building consents issued rose 39% y/y in April on a

3mma basis. The labour shortage poses a risk to the construction sector, however.

While tourism-dependent sectors may benefit from travel bubbles in the coming

months, a return to pre-COVID levels is unlikely until late 2022 or early 2023 as border

restrictions are relaxed only gradually. The COVID-19 pandemic remains a key

downside risk to growth. While it has been contained domestically, the pace of

vaccination has been slow due to supply constraints; only 7.9% of the population had

been fully vaccinated as of 22 June. At the current pace of 16,400 doses administered

daily, we estimate that only c.40% of the population will be vaccinated by end-2021.

The labour-market recovery is likely to continue. The number of filled jobs has picked

up in recent months, rising on a m/m basis for three straight months through April. The

recovery has also become slightly more broad-based; as of April, filled jobs in c.67%

of industries had returned to above pre-COVID levels, up from c.50% in March. That

said, as of 4 June, c.170,000 jobs were associated with wage subsidies. The resilience

of the labour market as wage subsidies fade will be a key determinant of the outlook.

Policy

The Reserve Bank of New Zealand (RBNZ) is likely to begin normalising policy

in Q2-2022. We expect the first 25bps hike to the official cash rate (OCR) in May 2022,

followed by one hike each in Q3- and Q4-2022 and two more in 2023. We expect the

output gap to narrow gradually for the rest of 2021 before turning positive in Q1-2022.

Figure 1: New Zealand macroeconomic forecasts Figure 2: Output gap to turn positive in Q1-2022

Real GDP indexed to Q4-2019 at 100 (LHS); output gap, %

(RHS)

2021 2022 2023



Policy rate (%)* 0.25 1.00 1.50

NZD-USD* 0.75 0.75 0.75



*end-period; **for fiscal year ending in June; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Output gap (RHS)

Real GDP (Q4-2019 = 100)

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

85

90

95

100

105

110

Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22

Leading indicators bode well for the

economic recovery

We expect the first 25bps hike from

the RBNZ in May 2022


[email protected]

Economist, Asia



[email protected]




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A labour-market recovery and higher pricing intentions are likely to translate into higher

inflationary pressures. We forecast 2021 inflation at 2.0%; we raise our 2022 forecast

to 1.8% from 1.6% to account for a higher output gap.

Our rate-hike call also reflects the RBNZ’s hawkish turn at its May 2021 meeting. In its

monetary policy statement, the RBNZ incorporated two 25bps rate hikes in 2022 and

three in 2023. In addition, changes in its assessment of current conditions and

guidance on the maintenance of current stimulatory monetary settings suggest a

slightly pre-emptive stance towards tightening. This is a deviation from its previous

emphasis on a “least regrets” approach to normalising policy (see New Zealand –

RBNZ to begin hiking in May 2022).

The key risk to our call is a worsening of the pandemic situation, which could delay the

recovery and thereby delay policy rate normalisation. In addition, business lending

remains weak, despite the improvement in business confidence.

The central bank noted in May that of the monetary policy tools currently being

deployed, the OCR is the preferred tool to respond to future economic developments.

While the RBNZ may end its Large Scale Asset Purchase (LSAP) programme before

hiking rates, we do not see this as a necessity given that purchases are now smaller

due to reduced government bond issuance. Also, take-up of the Funding for Lending

programme has been low (NZD 3bn to date). This supports our view that the first rate

hike will take place in May 2022.

While we expect additional LSAP purchases to end by June, we do not expect balance-

sheet reduction. The RBNZ is likely to maintain the size of its balance sheet and

reinvest maturing holdings until the recovery is on a steadier footing and pandemic

uncertainty dissipates further, in our view.

Housing

Housing measures introduced in late March have capped speculative activity.

Mortgage loans to investors fell 6% m/m May; while median house prices remain high,

they appeared to have peaked in March-May. The RBNZ is exploring other macro-

prudential tools; debt-to-income (DTI) restrictions are likely to be the next tool to be

deployed, if necessary. In its May financial stability report, the central bank suggested

that DTI restrictions are effective in stabilising housing cycles, and that they are more

likely than loan-to-value ratio (LVR) restrictions to have a sustained effect over time.

The RBNZ also noted that DTI caps tend to impact investors and higher-income owner-

occupiers more since they borrow at higher DTI ratios, on average. Furthermore, the

central bank noted that ‘speed limits’ could mitigate the impact on access to credit for

first-home buyers.

Market outlook

We remain constructive on the New Zealand dollar (NZD). We expect commodity

strength and the RBNZ’s hawkish shift to support the NZD. The RBNZ has also

softened its FX rhetoric at recent meetings, dropping the comment that NZD strength

was offsetting support from stronger export prices. We believe that RBNZ concerns

about currency strength have eased due to the consolidation in the trade-weighted

NZD, despite price gains in New Zealand’s key commodity exports and the improving

domestic outlook.

RBNZ is studying using DTI

restrictions as a macro-prudential

tool




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Philippines – Still battling COVID headwinds

Economic outlook – Waiting for fiscal support to kick in

We expect subdued growth of 4.6% in 2021, following a 9.6% contraction in 2020.

The slow pace of COVID vaccination rollout and potential new waves of cases pose

risks to our forecast. Private-sector demand is likely to remain subdued on still-soft

consumer and business sentiment. We expect public infrastructure investment to pick

up only in mid-Q3, with a risk that it does not eventuate at all. Bangko Sentral ng

Pilipinas (BSP) is likely to maintain an accommodative monetary policy stance for the

rest of 2021 to support growth, while keeping policy rates unchanged.

New COVID infections declined following nationwide lockdowns in May, but they

remain elevated and above 2020 highs. New cases have increased recently following

the relaxation of restrictions; a sharp increase in the coming weeks could lead to the

re-imposition of lockdowns, further dampening sentiment and growth. The Philippines’

low vaccination rate increases the risk of new COVID waves. Less than 2% of the

population is fully vaccinated; only 4.3% of people have received at least one dose. At

the current rate of vaccination, the Philippines is unlikely to meet its target of reaching

herd immunity by end-2021. Domestic consumption is likely to remain modest for the

rest of 2021 amid subdued consumer sentiment.

We expect infrastructure investment to pick up in mid-Q3 at the earliest. While the

government has allocated PHP 1.1tn (c.5.4% of GDP) to its flagship ‘Build, Build,

Build’ infrastructure programme in 2021, implementation has been slow. We see a

risk that infrastructure investment does not happen at all if progress is not made by

end-Q3. With general elections due in May 2022, infrastructure investment may

become less of a focus for the government, particularly if new investments have not

started by early Q4.

The trade deficit is likely to remain contained in H2 as exports pick up only moderately

and import growth remains slow amid soft domestic activity. A pick-up in infrastructure

investment could boost growth in raw-material imports. While high oil prices and a low

base will boost crude oil imports, volumes are likely to remain low. We expect overseas

remittances to remain strong, supported by the global growth recovery; we also see a

rapid increase in business process outsourcing (BPO) services exports. Foreign tourist

receipts are likely to remain close to 2020 lows as travel restrictions continue. We

expect another current account surplus in 2021, supported by a subdued trade deficit

Figure 1: Philippines macroeconomic forecasts Figure 2: Growth is likely to stay soft on still-subdued

sentiment (growth, % q/q, seasonally adjusted)

2021 2022 2023



Policy rate (%)* 2.00 2.00 2.00

USD-PHP* 49.50 50.50 50.70



*end-period; Source: Standard Chartered Research Source: Philippine Statistics Authority, Standard Chartered Research

-20%

-15%

-10%

-5%

0%

5%

10%

GDP Consumption Agri Industry Services

Mar-20 Jun-20 Sep-20 Dec-20 Mar-21

We expect the current account to

remain in surplus in 2021


[email protected]

Economist, Asia



[email protected]



Arup Ghosh +65 6596 4620

[email protected]



Public infrastructure investment is

likely to start picking up only in

mid-Q3


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and strong remittance and BPO inflows. We forecast a C/A surplus of 2.0% of GDP in

2021, turning to a deficit of 0.5% in 2022.

Inflation is likely to slow in H2-2021 amid subdued activity, even as the low base from

2020 fades. We expect average inflation to moderate to 3.0% in H2 from 4.4% in H1.

Food inflation, the primary driver of the H1 inflation spike, has declined on lower

vegetable prices and is likely to remain modest in H2. A high base from 2020 should

cap transport inflation in Q3, despite expected high global crude prices; we expect a

further moderation in Q4. Risks to our inflation forecast are balanced; elevated

infections could slow activity and therefore inflation, while higher infrastructure

investment and global crude oil prices present upside risks.

Policy

BSP is likely to maintain its accommodative policy for the next few quarters to

support growth. Declining inflationary pressure should enable BSP to prioritise

growth, especially in the absence of substantial fiscal support. We expect it to keep the

policy rate at the current record low. Further cuts are unlikely in 2021, in our view; BSP

may wait for sentiment to improve before considering further rate cuts in order to

maximise the impact of any further easing.

Credit growth has turned negative this year despite accommodative monetary

conditions. Corporate credit extension fell 3.9% y/y in April, the biggest drop in 14

years; household credit fell even further, by 10.2%, the biggest decline in multiple

decades. We expect credit growth to remain soft for the rest of 2021 given subdued

business confidence and the uncertain demand outlook. An improvement in consumer

and business confidence is essential to reviving growth in corporate credit and

business investment; this is unlikely to happen in 2021, in our view.

Politics

Attention is likely to turn to the general election (slated for May 2022) in Q4. This may

cause the political focus to shift from infrastructure investment to election campaign

planning.

Market outlook

We maintain our Underweight medium-term FX weighting on the Philippine peso

(PHP). The rise in domestic COVID cases has curbed domestic demand and further

delayed a major infrastructure development push, leading to a stronger C/A balance.

However, we remain bearish on the PHP relative to both consensus and forwards. We

think PHP valuations remain extremely stretched. We also see signs of weakness in

the balance of payments as residents’ demand for foreign assets rises against a

backdrop of negative real rates.

RPGBs benefit from local investors’ search for carry. We expect 5Y-7Y RPGBs to

outperform on a steep curve, driven by the following factors: the Philippines’ subdued

growth outlook and slow vaccination pace; the expected moderation in inflation in H2;

BSP’s on-hold and accommodative policy stance; and locals extending slightly further

out the curve for yield pick-up and carry. 7Y RPGBs trade on the steepest part of the

curve and provide a c.150bps yield pick-up over the policy rate. That said, foreign

appetite for RPGBs could remain low as a still-negative real yield cushion and an

elevated PHP REER weigh on total-return expectations.

We expect BSP to remain

accommodative for the rest of 2021

to support growth

5Y-7Y RPGBs outperform on a

steep curve


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Singapore – Uneven recovery

Economic outlook

We raise our 2021 GDP growth forecast to 7.0% (from 6.3%) to reflect better-than-

expected external demand so far. The economy continues to benefit from relatively

successfully pandemic management, the reopening of global economies, targeted

fiscal support, and accommodative monetary policy. The government forecasts 2021

GDP at 4-6%. We lower our 2022 GDP growth forecast to 3.6% from 4.4% due to the

higher base.

Singapore faced a resurgence of COVID cases in Q2 that led to more stringent mobility

restrictions. However, we estimate that the percentage of sectors affected by mobility

measures is low, at c.24% (see ASEAN – Does mobility still matter?); the hit to full-

year growth from the one-month ‘Phase 2’ restrictions is likely to be minimal, at

c.0.4ppt. Also, cases have fallen as vaccination progresses. Based on the current run

rate, we expect Singapore to have fully vaccinated its population by mid-Q4.

Meanwhile, the economy continues to benefit from robust external demand. As of April,

industrial production had risen on a m/m basis for five out of six months; non-oil

domestic exports (ex-pharmaceuticals) expanded 8.7% y/y in 4M-2021. That said, both

the headline and the electronics manufacturing PMIs moderated in May. While a high

base effect may be coming into play in the semiconductor sector, the global chip

shortage should continue to sustain production.

The unevenness of Singapore’s growth recovery is likely to become even more

pronounced in the coming months. Externally oriented sectors (manufacturing,

wholesale trade) should benefit further from global economic reopening, and ‘modern

services’ (finance and insurance, information and communications) will remain

supported by digitalisation efforts and demand for payment solutions. In contrast,

consumer-facing and tourism-dependent sectors (transportation, accommodation and

food services, retail trade) and construction remain adversely affected by social

distancing measures and border closures.

We expect private consumption to return to close to pre-pandemic levels by end-2021.

The labour market continued its gradual recovery in H1-2021; the resident

unemployment rate fell to 3.9% in April (the lowest since Q2-2020) from a peak of 4.8%

in Q3-2020, though it remained above Q4-2019 level of 3.2%. Retrenchments also fell

Figure 1: Singapore macroeconomic forecasts Figure 2: Labour-market recovery has been uneven

% change from Q4-2019 levels (top and bottom 3)

2021 2022 2023



3M SGD SIBOR* 0.45 0.55 1.00

USD-SGD* 1.32 1.32 1.32


Fiscal balance (% GDP)** -0.5 1.2 1.5

*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research

-30%-25%-20%-15%-10%-5%0%5%

10%

IT &

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Unevenness of Singapore’s growth

recovery may become even more

pronounced

Edward Lee +65 6596 8252

[email protected]




[email protected]

Economist, Asia



[email protected]





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in Q1-2021 to 2,270, close to pre-COVID levels, and were down for a second

consecutive quarter. Investment may pick up, led by the private sector, as business

confidence improves in the manufacturing and services sectors. Loan growth, while

still weak on a y/y basis, is picking up sequentially. Government consumption is likely

to remain supportive, but we expect the fiscal impulse to fade as the government

returns to fiscal prudence.

Policy

We expect monetary policy normalisation to start only in April 2022, amid a

broader economic and labour-market recovery. But the risk of tightening has risen

since the April monetary policy meeting. While it is a close call, we expect the Monetary

Authority of Singapore (MAS) to keep monetary policy settings unchanged in October

for three key reasons (Singapore – Fine print opens the door). First, we expect core

inflation to stay subdued, averaging 0.7% for 2021. Headline inflation should moderate

in the months ahead as low base effects fade. That said, we raise our 2021 headline

inflation forecast to 1.7% from 1.2% to reflect higher-than-expected readings to date.

Second, the labour-market recovery is uneven. Historically, early signs of a broad-

based job-market recovery have emerged prior to monetary policy normalisation. In

April 2010, c.70% of industries were back at or above pre-crisis employment levels; in

April 2018, c.65% of sectors had returned to levels that preceded three quarters of job

losses. In contrast, as of Q1-2021, c.70% of industries remained below Q4-2019

employment levels. Furthermore, the quality of employment may be a concern. While

a government programme to link unemployed workers with available jobs had placed

76,000 residents into positions as of end-2020, 16,600 of those positions (accounting

for 0.7% of the resident labour force) were traineeships, which may not be permanent.

Third, significant pandemic-related uncertainty – particularly regarding variants and

slow vaccination rollout across the region – may keep the MAS cautious, despite

Singapore’s strong recovery and already loose monetary policy. We think it is unlikely

to tighten in October as long as inflation pressure is not entrenched. The MAS noted

in its April policy statement that 2021 growth was likely to exceed the 4-6% forecast

range. However, the government maintained that range in the final Q1 GDP report

(despite better-than-expected Q1 GDP) amid Singapore’s latest COVID wave.

Politics

Deputy Prime Minister Heng recently withdrew as successor to Prime Minister Lee,

citing concerns over his age as the pandemic delayed the handover. Heng was chosen

as the head of the ‘fourth-generation’ (4G) leadership in 2018 and was next in line to

become prime minister. A new leader-elect is expected to emerge before the next

general election, which has to be held by August 2025.

Market outlook

We remain slightly bullish on the SGD. The Singapore dollar nominal effective

exchange rate (SGD NEER) has traded in the upper half of the band since April, aided

by the global economic recovery and the MAS’ removal of its explicit commitment to

maintain an accommodative stance “for some time”. Strong external demand, rising

inflation and Singapore’s rapid vaccination pace should keep the SGD NEER in the

upper half of the policy band as the October MAS meeting approaches. USD-SGD

may, however, be range-bound due to concerns about Fed tapering and a more stable

CNY as China slows the pace of currency appreciation.

Risk of normalisation by the MAS

has risen since the April monetary

policy meeting

Manageable core inflation, uneven

labour-market recovery and

pandemic-related uncertainty may

keep the MAS on hold in October



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South Korea – Robust economy, divided politics

Economic outlook – Helped by tailwinds

We see more upside than downside risk. We raise our 2021 and 2022 GDP growth

forecasts to 4.2% (from 3.9%) and to 2.9% (from 2.6%), respectively, supported by

expansionary fiscal policy in H2-2021. The government has proposed a KRW 33tn

additional budget to support the SME and services sectors, along with plans to hand

out disaster support funds to 80% of the population. This should boost private

consumption in H2. The proposed extra budget will be fully funded by the tax surplus.

Korea’s exports have recovered strongly along with the global economy, and we

expect this trend to continue as more economies reopen in H2. While export growth is

likely to moderate as the base effect fades, still-strong exports should support Korea’s

economy. Improving global growth prospects should also keep investment strong.

Construction investment, which slowed in H1, is likely to pick up as supply disruptions

ease and the domestic market rebounds following reopening.

We expect the job market (as measured by the number of employed) to continue to

improve in H2, but at a slower pace. We see the number of employed rising by

c.200,000 per month on average in 2021. The number is unlikely to return to 2019

levels, as businesses are not expected to reopen fully by the end of the year. Labour-

market slack in the services sector may persist, and job losses driven by the rise of

online shopping are likely to rise in 2022.

We raise our 2021 CPI inflation forecast to 1.8% from 1.7% to account for higher-than-

expected prints in Q2. Supply shocks to agriculture products and commodities remain

sources of upside inflation risk. Demand-pull inflation may also pick up due to

increased government subsidies under the second additional budget. We also raise

our 2022 CPI inflation forecast to 1.6% from 1.5% to reflect the lingering inflationary

impact of fiscal support in H2-2021. However, we still expect the current pick-up in

inflation to be transitory, normalising in H2-2022.

We expect Korea’s current account surplus to moderate to 3.5% of GDP in 2021 from

3.9% in 2020 as investment increases with faster economic growth. The C/A surplus

reached 4.9% of GDP in Q1, but should gradually narrow in H2 as improving business

prospects spur higher imports of capital goods.

Figure 1: South Korea macroeconomic forecasts Figure 2: Asset prices have risen amid low interest rates

Housing prices vs KOSPI, normalised at January 2019 prices

2021 2022 2023



Policy rate (%)* 0.75 1.00 1.25

USD-KRW* 1,050 1,050 1,050



*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Housing prices (LHS)

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Economic upside is bigger than

downside risk


[email protected]



Arup Ghosh +65 6596 4620

[email protected]




[email protected]



We expect the pick-up in CPI

inflation to be transitory


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Policy – We expect rate hikes in November, January

We expect the Bank of Korea (BoK) to raise the base rate by 25bps in November

2021 and again in January 2022. BoK Governor Lee has indicated at recent events

that rates could be hiked as early as this year, and the minutes of the May Monetary

Policy Committee meeting showed that a majority of members think policy needs to be

normalised soon. With economic growth rebounding and inflation rising, we concur

with this view (We hear you).

Given further hawkish comments from the BoK, we now expect the second hike to

come earlier – in January 2022, versus our previous call of Q3-2022. We think the BoK

will want to contain risks to financial stability from current housing-market conditions.

Fiscal measures should partly offset the economic impact of BoK tightening as the

government continues to support COVID-affected SMEs and services sectors. After

hiking in January 2022, we expect the BoK to pause given Korea’s below-potential

GDP growth and weak SME sector. We expect the next hike to come in H1-2023.

Politics – Election amid social divisions

The younger generation poses a challenge to the status quo. Lee Joon Seok, age

36, recently became the youngest leader of the main opposition party in Korea’s

history. Voters in their 20s and 30s were a game-changer in recent mayoral elections

in Seoul and Busan, and we expect them to be the swing voters in the March 2022

presidential election. The younger generation are speaking out against Korea’s social

and economic inequality and demanding more opportunity; many are vocal critics of

the current government of President Moon amid rising housing prices and shrinking

job opportunities. Korea’s welfare system will also be a critical issue in the upcoming

election. Lee Jae-myung, the leading candidate for the liberal party, is campaigning on

the promise of a universal basic income. In contrast, the conservative party advocates

a more targeted welfare policy. How this debate is resolved will have a far-reaching

impact on the tax system and Korea’s corporate culture, and could exacerbate social

and economic tensions.

The ruling party has called for an extra budget of around KRW 33tn, including handouts

to 80% of Korean households; this could help to expand its support ahead of the

election. Considering that the ruling party controls the National Assembly and the

budget will be funded with the tax surplus, the opposition party is unlikely to be able to

block it, in our view.

Market outlook – Bullish on KRW; look to receive 2Y/1Y rates

We remain bullish on the Korean won (KRW); we expect the currency to benefit from

stronger exports driven by rising memory chip prices and recovering global growth. We

also think capital flows are turning more supportive of the currency, after acting as a

headwind since the start of the year. We maintain our USD-KRW forecasts of 1,080

for end-Q3-2021 and 1,050 for end-2021. We also remain short JPY-KRW.

A hawkish BoK stance and earlier lift-off are likely to lower the level of terminal rates

required to keep inflation within the BoK’s 2% target in the medium term. Korea money-

market and CD rates tend to rise in H2, as banks need to issue financial debentures

to refinance the maturing notes that they issued the previous year to manage their

liquidity coverage ratios. We shift further out the curve and prefer receiving 2Y/1Y

forwards or 5Y tenors on a rates back-up. 2Y/1Y forwards trade on the steepest part

of the curve, and the belly already implies a c.1.75-2.0% terminal level for BoK rates.

We expect the BoK to hike its base

rate before the end of 2021, and

again in January

The presidential election may pit the

younger generation against the

establishment and accentuate

social tensions

In the rates market, we will look to

receive 2Y/1Y forwards or 5Y bonds

on a rates back-up




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Sri Lanka – Slower recovery likely

Economic outlook – Vaccine availability is a key risk

We lower our 2021 GDP growth forecast to 4.0% from 4.5%. This primarily reflects Sri

Lanka’s third COVID wave, whose adverse economic impact likely peaked in Q2. The

country’s gradual pace of vaccination may slow the recovery process. The expected

reopening in Q3 is likely to be slow given the highly contagious nature of the virus and

Sri Lanka’s low vaccination coverage, which has been limited due to supply issues.

Nearly 3mn vaccine doses had been given as of 15 June, versus the government’s

target of 28-30mn. While the government is in talks with various vaccine

manufacturers, it could take another six to nine months to vaccinate a significant

portion of the population.

Investors remain concerned about Sri Lanka’s external financing risks in the absence

of engagement with the IMF. However, the government has arranged bilateral funding

sources given its lack of market access. It has secured a three-year, USD 1.5bn swap

line from the People’s Bank of China, a USD 500mn loan from China Development

Bank (already drawn down in May), and a USD 250mn swap with Bangladesh. The

government has also secured a concessional USD 500mn loan facility from Korea

Exim Bank to be used by 2022, and a USD 100mn line of credit from India. Further, Sri

Lanka’s central bank governor has indicated that it could access a USD 400mn swap

from the Reserve Bank of India in August. The arrangement, along with a possible new

Special Drawing Rights (SDR) allocation of c.USD 790mn, should boost reserves near-

term and help meet this year’s external financing needs. We estimate that Sri Lanka’s

external debt servicing is adequately covered in 2021, with FX reserves likely to remain

at USD 3.5-4.5bn by year-end (USD 4bn at the end of May).

Beyond 2021, however, the government has USD 4-5bn of external debt service

annually until 2026, with nearly USD 29bn to be paid between now and end-2026. This

will result in continued external financing pressure. A resumption of tourism and

increased FDI are critical to ensuring external debt sustainability from 2022 onwards.

We now expect a wider 2021 C/A deficit of 2.4% of GDP (USD 1.9bn), versus 1.4%

(USD 1.2bn) previously. This reflects lower tourism receipts, as we expect a tourism

recovery to be delayed to H2-2022. We now estimate a USD 7.2bn trade deficit this

year (versus USD 6.5bn earlier) due to lower-than-expected exports. Our import

estimate remains unchanged, as rising commodity prices are likely to be offset by

Figure 1: Sri Lanka macroeconomic forecasts Figure 2: Over USD 4bn of external debt to be serviced

annually (USD bn)

2021 2022 2023



Policy rate (%)* 5.50 5.50 6.00

USD-LKR* 210.00 215.00 220.00




Bonds

Other FX loans

Interest

SLDB

0

1

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2021F 2022F 2023F 2024F 2025F

Saurav Anand +91 22 6115 8845

[email protected]




[email protected]




[email protected]



We now expect a wider 2021 C/A

deficit of 2.4% of GDP

We expect FX reserves to be in a

range of USD 3.5-4.5bn by end-2021


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falling import demand amid reduced economic activity and weak consumer confidence.

We now expect tourism receipts of just USD 300mn in 2021 (USD 1.4bn earlier) as the

third COVID wave deters visitors. We expect FDI inflows to remain subdued at c.USD

800mn in 2021 – similar to 2019 but significantly better than USD 548mn in 2020.

Policy – CBSL likely to remain accommodative in 2021

We maintain our view that the Central Bank of Sri Lanka (CBSL) will keep policy rates

on hold for the rest of 2021. We expect it to keep the Standard Lending Facility Rate

(SLFR) at 5.5%, maintaining an accommodative stance. Average inflation is likely to

increase to 4.7% (2020: 4.2%) given improving economic activity, higher commodity

prices and excess liquidity; this is still well within CBSL’s target band of 4-6%. We

expect the central bank to continue with liquidity-enhancing measures and regulatory

forbearance, in line with policies already announced, to ensure financial stability and

monetary policy transmission.

We revise our 2021 fiscal deficit forecast to 10% of GDP (versus 8.9% previously and

11.1% in 2020) as slower growth leads to a revenue shortfall. We forecast revenue

growth of 17.6% in 2021 and a revenue-to-GDP ratio of 10% – below the budgeted

11.5%. We expect the government to cut expenditure to 20% of GDP (versus the

budgeted 20.4%). Public investment is likely to be reduced sharply to offset the rise in

revenue expenditure; we expect it to come in at 3.5% of GDP, below the budgeted

6.1%. We expect revenue expenditure to overshoot, at 16.5% of GDP versus 14.4%

in the budget. This is driven by higher salaries (including pensions) and interest

expenses.

Concerns about medium-term debt sustainability are likely to remain high amid a wider

fiscal deficit and rising debt levels. We expect public debt-to-GDP to rise to the 115-

120% range by end-2021 from 110% at end-2020 (including sovereign guaranteed

debt), keeping the interest costs-to-revenue ratio high at c.60%. This year’s primary

deficit is likely to be c.3.7% of GDP. Our estimates suggest that the government needs

a primary surplus of more than 2% and real GDP growth of more than 5.0% (nominal

growth: c.10%) to stabilise debt. This seems challenging in the near term given the

current strategy of keeping tax rates low.

Politics – Situation likely to remain stable

The current SLPP government has a nearly two-thirds majority in parliament. The

president and parliament are likely to work in close co-ordination to improve the

economic situation – something that was lacking between 2017 and 2020.

Market outlook

We maintain a Negative outlook on Sri Lankan rupee (LKR) bonds. The end of the

monetary easing cycle and medium-term debt sustainability are key concerns.

Although nominal yield levels are high, we see room for a further up-move.

On the FX front, we remain bearish on the LKR and maintain our USD-LKR target of

210 for end-2021. Depreciation pressure on the currency is likely to persist amid a

widening trade deficit, a weak tourism outlook, steep external financing requirements

and limited FX reserves.

We expect CBSL to continue with

accommodative monetary policy

Fiscal deficit likely to remain wide

at 10% of GDP in 2021

We maintain our USD-LKR target of

210 for end-2021


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Taiwan – Speed bumps ahead

Economic outlook

We raise our 2021 GDP growth forecast to 5.0% (from 4.4%) to reflect an

exceptionally strong Q1 performance; our forecast remains below the government’s

projection of c.5.5%. Taiwan’s exporters should continue to benefit from strong global

tech demand, the commodity/oil price recovery, and the reopening of major overseas

economies. Domestically, Taiwan’s recent COVID-19 outbreak has mostly affected the

services sector, leaving the manufacturing sector largely unscathed. Government

containment measures – including on-site mass-testing and tighter management of

migrant workers’ health status – have prevented the virus from spreading to major

industrial parks. Taiwan’s government recently doubled the COVID stimulus package

to TWD 840bn from the TWD 420bn approved in 2020; this should provide a cushion

against COVID containment measures. The authorities imposed ‘Level 3’ pandemic

restrictions (the second-highest level) in May in response to the outbreak.

However, Taiwan’s recovery faces speed bumps ahead. Consumer spending is likely

to remain weak until vaccine rollout improves significantly. The deteriorating job-

market outlook, particularly in the non-essential services sector, further dented

consumer confidence in June. While the tech-sector outlook for H2 is generally

positive, order cancellations (following over-ordering as overseas buyers have

sought to secure components amid longer lead times and a global chip shortage)

could pose downside risk.

We raise our 2021 CPI inflation forecast to 1.6% from 1.2%. Headline inflation

rebounded to 1.4% y/y in 5M-2021 from -0.2% for the whole of 2020, partly due to base

effects. Transportation costs contributed more than half the inflation gains, rising 5%

y/y in 5M-2021. Food price inflation, which is volatile in nature, is a key upside risk due

to the low base. In contrast, housing expenses – which account for nearly a quarter of

the CPI basket – are likely to moderate slightly in H2 on the government’s decision to

reverse a planned electricity price hike. We expect core CPI inflation to peak at 1.5%

y/y in Q3-2021 before easing to 0.9% in Q4.

We raise our current account (C/A) surplus forecasts. We now expect surpluses of

12% of GDP in 2021 (11% prior) and 11% in 2022 ( 9%). The trade surplus – which

accounts for the bulk of Taiwan’s C/A surplus – jumped 59% y/y to USD 26.7bn in 5M-

2021, supported by strong global demand for integrated circuit (IC) chips. This puts the

Figure 1: Taiwan macroeconomic forecasts Figure 2 Taiwan’s services PMI dipped in May

Index

2021 2022 2023



Policy rate (%)* 1.13 1.13 1.25

USD-TWD* 27.20 27.00 26.90




Svc PMI

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Tony Phoo +886 2 6606 9436

[email protected]




[email protected]



Inflation pressure is likely to ease

gradually in H2, but rising food

inflation is a risk

Recent COVID-19 outbreak has left

the manufacturing sector largely

unscathed


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2021 trade surplus on track to surpass last year’s USD 59.4bn. Additionally, the

services balance registered a surplus in Q1-2021 for a fourth straight quarter as the

delayed lifting of international border restrictions reduced outbound travel.

Policy

We expect the Taiwan central bank (CBC) to keep policy rates on hold for the

rest of 2021, in line with market consensus. Policy makers remained positive on the

external and domestic growth outlook at the June MPC meeting. The CBC raised its

2021 growth forecast to 5.08% from 4.53%, noting that robust exports and investment

should counter a temporary disruption to consumer spending due to the recent COVID

outbreak. The CBC also raised its 2021 headline and core CPI inflation forecasts to

1.6% (from 1.07%) and 1.11% (from 0.77%), respectively. However, it views the

current rapid rise in inflation as transitory – it expects headline inflation to ease to

1.46% in Q4 from a peak of 2.23% in Q2. Policy makers have also maintained several

credit control measures introduced in March to rein in speculative activity in the

residential housing market. We expect the CBC to start hiking rates only in 2023,

following the lead of major central banks.

Politics

Taiwan will hold a nationwide referendum on 18 December on various issues

championed by the Democratic Progressive Party (DPP) government, including the

construction of a controversial natural gas project, nuclear energy policy, and whether

to reinstate a ban on US pork imports containing ractopamine. The referendum is

widely seen as a mid-term test of support for the ruling DPP ahead of local government

and mayoral elections in November 2022. President Tsai Ing-wen’s approval rating

has dropped by c.20ppt in recent months, falling below 40% in June for the first time

since she was re-elected in January 2020, according to recent polls by TVBS.

Market outlook

We forecast USD-TWD at 27.50 at end-Q3-2021 and 27.00 at end-Q1-2022. The

TWD has been supported by strong exports and CNY gains in recent months, following

a period of weakness in March when equity outflows and a stronger USD weighed on

the currency. We expect a strong trade rebound driven by robust semiconductor

demand to continue to support the currency. Equity outflows have slowed in recent

months after USD 12bn of outflows in Q1, reducing a headwind to the TWD. Rich

valuation remains a concern for policy makers; this is likely to keep the pace of TWD

gains in check (see Macro Strategy Views, TWD – Gradual gains, underperformance

vs peers).

The December referendum will be

seen as a test of support for the

DPP government ahead of local

elections in 2022

CBC remains positive on the

external and domestic outlook, sees

recent rise in inflation as transitory


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Thailand – Q3 critical to the recovery

Economic outlook – Still far from potential

We maintain our below-consensus GDP growth forecasts of 1.8% for 2021 and

3.1% for 2022. Q3-2021 could see a turnaround in consumer and business sentiment,

but the pace will depend on whether mass vaccination rollout goes as planned; around

70% of the population is targeted for full inoculation by year-end. Phuket’s planned

reopening to tourists – still scheduled to start in July, despite Thailand’s current COVID

spike and a nationwide state of emergency – will also be crucial to gauging prospects

for a broader reopening in Q4. The tourism sector has contributed negatively to

Thailand’s GDP growth since the pandemic started early last year.

We expect the current account (C/A) surplus to narrow to 1.0% of GDP in 2021 from

3.3% in 2020. This reflects a smaller trade surplus as imports rise sharply, offsetting

the improving export outlook. That said, the slow pace of Thailand’s growth recovery

may delay import normalisation. We also maintain our 2021 headline inflation forecast

at 1.0%, the lower end of the Bank of Thailand’s (BoT’s) 1-3% target range. Domestic

demand remains subdued and government measures are reducing households’ cost

of living during the ongoing pandemic. The low base effect that pushed up inflation in

Q2 may fade. 5M-2021 average inflation stood at 0.8%.

The tourism reopening plan should help to reignite sentiment in Q3; however, the actual

number of visitors is likely to remain low until Q4 at least. We continue to expect Thailand’s

economic growth to remain far below potential through next year. Even after the current

COVID outbreak is brought under control and wider vaccination rollout allows tourists to

return, the number of arrivals is unlikely to rise to pre-COVID levels soon. Many tourism

businesses have shut down during the pandemic and supply will have to be rebuilt.

Policy – BoT may face pressure as peers tighten

We expect the policy rate to stay on hold at 0.5% until at least end-2023. The BoT

now expects the economy to take longer to recover to pre-COVID levels (in early 2023

rather than H2-2022). This supports our view of low interest rates for longer. The

benign inflation outlook should also allow a supportive stance. Even if inflation rises

faster than expected, we believe growth will remain the top priority in setting monetary

policy. Moreover, the BoT has not recently expressed concerns about risks to financial

stability from a prolonged low-interest-rate environment, despite rising household debt.

Figure 1: Thailand macroeconomic forecasts Figure 2: Fiscal spending has started to slow; household

debt has risen

Fiscal expenditure (LHS); household debt (RHS)

2021 2022 2023



Policy rate (%)* 0.50 0.50 0.50

USD-THB* 31.00 31.30 31.70



*end-period; **for fiscal year ending in September; Source: Standard Chartered Research Source: BoT, Standard Chartered Research

Fiscal expenditure (% y/y, 4qma, LHS)

Household debt (% of GDP, 4qma RHS)

70

72

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76

78

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82

84

86

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Q1-2018

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Q1-2020

Q1-2021

C/A surplus to remain below

average; inflation outlook is benign

amid subdued demand

Economic growth is the BoT’s

current priority, not inflation or

financial stability

Tim Leelahaphan +66 2724 8878

[email protected]

Economist, Thailand and Vietnam

Standard Chartered Bank (Thai) Public Company Limited


[email protected]



Tourism will likely take time to

recover fully, as supply has been

hit hard


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We do not rule out a further rate cut, as the economic and pandemic situation remains

unclear. However, we believe room to stay accommodative will narrow as global

central banks move closer to normalising policy. In our view, the key challenge for the

BoT over the next 12 months will be to maintain a relatively loose stance to support

the domestic economy against a changing global monetary policy backdrop. Given the

slow pace of the domestic recovery and the lack of clarity on turnaround factors, the

BoT may lack the flexibility to turn even slightly hawkish. We also believe that Thai

businesses and households are not ready for a change in Thailand’s monetary policy

stance. The longer it takes for Thailand to recover fully, the more capital outflows

should be expected, leading to a wider interest rate differential with the US.

Fiscal policy – Shrinking fiscal policy room

We expect further fiscal stimulus, but we are unsure of its efficacy. Given the

BoT’s limited space to loosen monetary policy further, fiscal measures are likely to be

the main tool to support the economy this year and next. The government has been

authorised to borrow another THB 500bn (3% of GDP) until September 2022 to fund

stimulus; the previous THB 1tn borrowing plan introduced in April 2020 has been

mostly completed. According to the Public Debt Management Office (PDMO), around

20% of the planned new borrowing is expected by September 2021. We therefore do

not expect a significant fiscal boost in the short term; larger stimulus is likely in Q4 or

next year. However, public debt is approaching the legal limit, potentially constraining

the government’s ability to deliver stimulus.

More targeted and effective measures may be needed to stimulate the economy,

especially post-COVID. Earlier pandemic relief measures consisted mainly of cash

handouts and subsidies to households; these failed to significantly boost consumption,

even before the latest surge in local cases. In our view, measures to support business

and investment are equally important as measures to boost consumption.

Thailand’s fiscal room is shrinking; the PDMO expects public debt to rise close to the

ceiling of 60% of GDP later this year. While raising the debt limit is a possibility, it has

not been officially proposed. The budget for FY22 (starting in October 2021) forecasts

a deficit of THB 700bn, up 15% from the current fiscal year. In our view, this indicates

that more effective fiscal spending is needed to avoid an adverse impact on Thailand’s

credit rating. We maintain our fiscal deficit forecasts of 4.5% of GDP for FY21 and

4.0% for FY22 (narrowing from 5.2% in 2020) due to slow budget disbursement. See

Thailand – Shrinking fiscal policy room.

Politics – A swing factor for Q4

The political situation will be closely watched, especially once the pandemic is

under control. Anti-government protests have been banned amid the ongoing COVID

outbreak; protesters had earlier gathered outside parliament to call for the resignation

of Prime Minister General Prayut Chan-o-cha and the rewriting of the constitution.

Protesters have recently criticised the government’s handling of the pandemic. Political

activities could resume in Q4 as the economic recovery gains traction and the

pandemic situation is brought under control; they were largely peaceful last year.

Market outlook – A challenging path for the THB

We maintain a cautious outlook on the THB. The path to normalisation for the

tourism sector remains highly uncertain. Meanwhile, given the rise in commodity prices

and the subsequent deterioration in Thailand’s trade balance, we think the path ahead

for the THB remains challenging. We target USD-THB at 31 by year-end.

BoT is likely to face increasing

pressure as monetary policy is

tightened globally

More investment-focused stimulus

measures are needed to boost

growth, in our view

Political protests are on hold for

now, but could resume once the

current COVID wave is contained

The government now has less fiscal

room than during the pre-COVID

period; further borrowing still likely



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Vietnam – Facing challenges

Economic outlook – COVID to drive short-term prospects

We still expect strong growth this year and next, but the current COVID outbreak

poses downside risks. We lower our 2021 GDP growth forecast to 6.5% (from 6.7%)

to incorporate slower-than-expected H1 growth of 5.6%; that said, manufacturing

growth was robust at 11.4% y/y. We maintain our 7.3% growth forecast for 2022, as

we continue to expect a post-COVID economic acceleration. In the near term, the

country’s pandemic management will be crucial to the outlook amid the current wave,

which has brought record cases. While Vietnam’s economy has continued to expand

during past waves of the pandemic, vaccination rollout has been slow so far.

Domestically oriented sectors have been the main economic drivers since last year.

These sectors – including retail sales – are likely to be the hardest-hit if the current

COVID wave persists. The focus now is on whether the impact on the industrial sector

will be temporary or more long-lasting.

While the global pandemic has weighed on Vietnam’s economy via reduced tourism,

supply-chain disruptions and weaker overseas demand, external indicators are showing

a strong recovery. H1 exports rose 28.4% y/y and imports rose 36.1%. That said, exports

of telephones, electronics, computers and parts (c.30% of total exports) slowed in June.

Vietnam recorded a trade deficit of USD 1.5bn in H1. Pledged FDI – an indicator of future

investment – fell 2.6% y/y in H1, and disbursed FDI rose 6.8%. Lingering global COVID-

19 uncertainty may dampen investment sentiment and therefore FDI flows to Vietnam. A

plan to reopen the tourism sector to foreign tourists remains tentative.

Policy – Expansionary amid rising inflation

Inflation is becoming a concern, in our view. Inflation has stayed high despite the

pandemic, and a further rise could pose a risk to Vietnam’s recovery. We think inflation

is on a rising trend; we expect CPI inflation to accelerate to 3.8% in 2021 and 4.2% in

2022, on average, from 3.2% in 2020 and 2.8% in 2019.

Our expectations of faster inflation are premised on Vietnam’s accelerating growth and

the global economic recovery, along with higher prices for oil, logistics, food (40% of

the CPI basket), agricultural and aquaculture products, and land (amid rising demand

from overseas investors). Domestic steel prices have risen by 30-40% since end-2020,

according to the Vietnam Steel Association; it forecasts continued price gains until the

Figure 1: Vietnam macroeconomic forecasts Figure 2: Ongoing COVID wave may slow the recovery

% y/y; 6mma

2021 2022 2023



Policy rate (%)* 4.00 4.00 4.00

USD-VND* 22,850 22,500 22,000




Exports

Retail sales (YTD)


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Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21

COVID-19 in Vietnam:

1st wave: Mar-Apr 2020

2nd wave: Jul-Aug 2020

3rd wave: Jan-Feb 2021

4th wave: From 27 Apr 2021

Vietnam may need to focus more on

price stability

Strong economic growth may result

in high inflation, together with

supply-push factors

Tim Leelahaphan +66 2724 8878

[email protected]




[email protected]



The external environment is turning

more supportive of Vietnam’s

economy


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end of Q3-2021 given low supply of intermediate goods for steel production from China

and India. Steel costs typically account for 10-30% of the costs for a construction

project, so major price fluctuations pose challenges for Vietnam’s contractors. That

said, Vietnam’s current COVID wave could pose downside risks to inflation. The

authorities have introduced targeted measures to control inflation; Vietnam’s medium-

term economic objectives appear to prioritise growth over price stability.

Fiscal and monetary policy remains expansionary. Rising inflation reduces the likelihood

of further interest rate cuts, in our view. We also do not expect rate hikes, despite

improving economic and credit growth since Q4-2020 (credit expanded 5.5% YTD as of

21 June); we expect the State Bank of Vietnam (SBV) to keep its refinancing rate at 4.0%

through end-2023 to support credit growth. According to the SBV, support for businesses

during the post-pandemic period is a key priority for the banking sector in 2021. The

possibility of a rate hike may gradually emerge if inflation and growth accelerate faster

than expected. We expect an ongoing fiscal deficit, widening to around 6.0% of GDP this

year; the government aims to reduce the deficit to 3.4% by 2025.

Medium-term outlook – No room for complacency

We believe Vietnam is moving towards its goal of becoming a regional supply-chain

hub, a modern industrial economy and a high-income country in the future. All three

international rating agencies have revised their outlook on the country to positive this

year. However, Vietnam’s policy focus appears to be on growth in both the short and

medium term; we believe more emphasis is needed on price stability to achieve

sustainable economic growth.

Vietnam managed the COVID situation well in 2020, further enhancing its appeal to

foreign investors; the country had already benefited from the ongoing supply-chain shift

in recent years. In order to maintain its attractiveness, Vietnam will need to manage

the current outbreak in a way that provides confidence to the global investment

community, in our view.

Vietnam’s current coronavirus outbreak threatens to disrupt investment and trade

activity. Factories – including suppliers for global tech firms such as Apple and

Samsung – are operating below capacity, with small suppliers more affected than large

ones. We believe longer-term plans are needed to smooth operations, as the pandemic

is unlikely to fully subside soon, even with greater vaccine availability.

The current global shortage of semiconductors – a key input to Vietnam’s

manufacturing production – could pose a near-term risk to the economic recovery. Few

Vietnamese producers can make a chip from start to finish, so they are reliant on

imported inputs, which are becoming more expensive amid the supply shortage. It

remains unclear whether the chip shortage will ease soon; that will depend on the

ongoing global pandemic as well as the US-China technology dispute. Vietnam’s

dependence on imported chips is not just an issue for the short term, in our view.

Market outlook – Turning more constructive on the VND

We lower our USD-VND forecasts to 22,900 at end-Q3-2021 (from 23,100) and to

22,850 at end-2021 (23,000). Our end-2022 forecast remains unchanged at 22,500.

The balance of payments remains highly supportive of the currency, with strong

exports and high net FDI inflows. We also see the central bank as increasingly tolerant

of a stronger currency, which should allow the USD-VND downtrend to persist.

Heavy external dependence may

affect Vietnam’s medium-term

outlook

SBV is likely to stay on hold, but we

do not rule out a policy rate hike

The outlook for exports and

industrial production will depend

partly on the COVID situation


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Economies – Middle East, North Africa

and Pakistan

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Bahrain – Getting the balance right

Economic outlook – Fast vaccine rollout to support recovery

We raise our 2021 growth forecast to 3.0% (from 1.8%) as we now expect a faster

non-oil recovery. While a resurgence in COVID-19 cases in H1-2021 and the

subsequent reintroduction of restrictions weighed on growth, the economic impact is

likely to have been milder than we had initially expected, with households and

businesses adapting to the restrictions. Data from the central bank shows that e-

commerce transactions rose 107% y/y in the first four months of 2021. We expect the

non-oil recovery to gain momentum in H2 as a sharp drop in coronavirus cases since

early June and a high vaccination rate (more than 55% of the population has been fully

vaccinated) allow the relaxation of restrictions. A three-month extension of the

government’s economic stimulus package, to August, should also help.

Policy – Funding outlook improves

Focus will likely remain on Bahrain’s financing needs. Having seen a substantial

widening of its twin deficits as a result of the COVID shock, Bahrain still needs to

implement more fiscal reforms to put debt on a declining path. However, higher oil

prices should provide some near-term fiscal relief (oil contributes more than 60% of

revenue) and enable more support to the non-oil sector. The improved liquidity position

of GCC neighbours lowers the likelihood of slow GCC disbursements. These remain

key to Bahrain meeting its financing needs. Bahrain is also likely to return to

international capital markets in H2-2021, following its January issuance; media reports

suggest the authorities are in talks with banks on new external issuance. While the

extension of the economic stimulus package, estimated at USD 1.28bn, will add to

fiscal pressures, this should be partly offset by higher revenue. Consequently, our

7.5% fiscal deficit forecast for 2021 remains unchanged.

A recovery in FX reserves should ease peg sustainability concerns. FX reserves

rose to USD 3.46bn in April from USD 764mn a year earlier, boosted by an increase

in external debt including GCC loans and Eurobond issuance. Higher oil prices, further

GCC disbursements and new external issuance in H2-2021 should support FX

reserves. Bahrain should also benefit from a new SDR allocation; it could receive USD

540mn by end-August. However, rising external debt maturities over 2021-24 will likely

limit the upside to FX reserves. Fiscal reform remains important to reduce public debt,

estimated at c.133% of GDP.

Figure 1: Bahrain macroeconomic forecasts Figure 2: Eurobond, GCC flows to support reserves

FX reserves, USD bn

2021 2022 2023



Policy rate (%)* 1.00 1.00 1.50

USD-BHD* 0.38 0.38 0.38



*end-period; Source: Standard Chartered Research Source: CBB, Standard Chartered Research

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Access to international capital

markets and GCC support are key

to maintaining the USD peg

Funding pressures have eased

Emmanuel Kwapong, CFA +44 20 7885 5840

[email protected]

Economist, Africa


Razia Khan +44 20 7885 6914

[email protected]

Head of Research, Africa and Middle East



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Egypt – Holding steady

Economic outlook – Downside risks

We expect growth to rebound to 5.5% in FY22 (ends June 2022). However, risks to

this view have increased. Much of the growth recovery may take place only in H2-FY22

due to a slow global tourism recovery and weak domestic demand. Egypt’s PMI has

been in contraction for six months (48.6 in May), reflecting weak private-sector

sentiment. Nonetheless, Egypt was one of the few countries that avoided a growth

contraction in 2020. GDP growth picked up to 2% y/y in Q4 from 0.7% in Q3.

The pace of vaccine rollout has underperformed much of the region but should

accelerate. Egypt aims to vaccinate 40% of its population by end-2021 and is due to

start production of the Sinovac vaccine (40mn doses in the first year of production).

COVID-related restrictions imposed for much of May following a surge in cases were

lifted on 1 June, which should help to stimulate activity.

Policy – On hold

We expect the Central Bank of Egypt (CBE) to keep its policy rate at 8.25%

throughout FY22. Headline CPI inflation rose to 4.8% y/y (0.7% m/m) in May from

4.1% in April, driven by higher food inflation. Inflation is likely to increase further on

higher global oil and food prices, while remaining within the CBE’s 7% +/- 2ppt range.

The CBE will likely keep real rates firmly positive given investor positioning in local-

currency (LCY) debt and the CBE’s focus on currency stability. Egypt’s expected

GBI-EM inclusion at year-end should anchor investor sentiment, but foreign investors’

ownership of LCY debt is already high; additional inflows may therefore be limited.

External inflows are set to support the CBE’s FX reserves; gross reserves

recovered to USD 40.47bn as of end-May 2021 from USD 36bn a year earlier. Egypt

has received USD 1.6bn from the IMF after the second and final review of the Stand-

By Arrangement (SBA), and is likely to receive USD 2.78bn from a new Special

Drawing Rights allocation. This, along with strong remittance flows and foreign-

currency borrowing, should allow Egypt to avoid a disorderly FX adjustment, despite a

large current account deficit (we forecast 3.6% of GDP in FY22). We see USD-EGP

gradually depreciating to 16.2 by 2022.

Figure 1: Egypt macroeconomic forecasts Figure 2: FX reserves to be supported by inflows from IMF

Gross reserves, USD bn

FY21 FY22 FY23



Policy rate (%) 8.25 8.25 8.25

USD-EGP* 15.80 16.20 18.78





Source: CBE, Standard Chartered Research

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Sarah Baynton-Glen, CFA +44 20 7885 2330

[email protected]

Economist, Africa


We think the CBE’s easing cycle

has ended


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Oman – Battling a new wave

Economic outlook – A slow recovery

A new wave of COVID-19 cases raises downside risks to the economic recovery.

The resurgence has been driven by new variants against the backdrop of a low

vaccination rate (only c.4% of Oman’s population had been fully vaccinated by late

June). While the authorities lifted restrictions at the start of June, a subsequent sharp

rise in cases forced a re-tightening from 20 June, including the reintroduction of night-

time curfews. The new restrictions are not as tight as those imposed in late March and

early April, despite new infections exceeding previous peaks. May’s public protests

were triggered by elevated unemployment, worsened by COVID-related restrictions.

Our 2021 GDP growth forecast remains 0.0% for now as we monitor the impact of the

new surge on economic activity.

Policy – Balancing fiscal reform and social pressures

Oman has shown a strong commitment to its Medium-Term Fiscal Plan (MTFP

2021-25), with the authorities implementing VAT on 16 April as planned. While the VAT

is expected to boost non-oil government revenue by c.USD 1bn annually, a soft

consumption recovery may weigh on receipts, particularly given the significant decline

in foreign workers. Over 200,000 expatriate workers (c.4% of the total population) have

left Oman since March 2020. Plans to introduce a personal income tax for high earners

in 2022 are also underway. However, increasing social pressures raise the risk that

the pace of fiscal adjustment might slow; the government decided to create more than

32,000 jobs in 2021 following protests in May.

The fiscal position should improve significantly in H2-2021. Preliminary fiscal data

for the first four months of 2021 showed a sharp deterioration. However, this was

largely driven by a c.30% fall in hydrocarbon revenue, reflecting the three-month delay

in the oil price used to calculate hydrocarbon revenue. The pass-through from higher

oil revenues from Q3 should ease fiscal pressures and create some fiscal space to

support the non-oil sector. Recent external borrowing should also help Oman meet its

financing needs.

Omani riyal (OMR) devaluation risks remain low, in our view. While FX reserves

declined to USD 30.4bn (including SWF assets) in March 2021 from USD 33.3bn at end-

2020, they still support the peg. We expect higher oil prices and improved capital inflows

to support the external position and ease de-peg concerns. In addition, Oman may receive

c.USD 740mn under an IMF Special Drawing Rights allocation, likely in late August.

Figure 1: Oman macroeconomic forecasts Figure 2: FX reserves remain on a downward path

Government foreign reserves, USD bn

2021 2022 2023



Policy rate (%)* 0.50 0.50 1.00

USD-OMR* 0.39 0.39 0.39



*end-period; Source: Standard Chartered Research Source: Ministry of Finance, Standard Chartered Research

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2015 2016 2017 2018 2019 2020 Mar-21

Central Bank of Oman OIA

Rising social pressures could

impact the pace of fiscal adjustment


[email protected]

Economist, Africa



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Pakistan – At a crossroads again

Economic outlook – We remain bullish on growth

Economic recovery is faster than expected but needs to be sustained. We raise

our GDP growth forecast for FY22 (year starting July 2021) to 4.5% from 4.0%; this is

still below the official 4.8% projection. Preliminary estimates show that FY21 growth

was 3.9%, above our 1.5% estimate. Recent news on the slowing spread of COVID,

both domestically and globally, is positive. Pakistan’s lower new case numbers and

faster vaccine rollout provide hope that any further containment measures may have a

more limited economic impact. The central bank kept its policy rate at 7.0% at end-

FY21; monetary policy is likely to remain accommodative near-term. The recently

announced FY22 budget proposes higher development spending and no significant

new taxes. These factors are likely to provide a stronger growth impetus than we

previously expected.

Policy – SBP to tighten gradually amid demand pressures

Policy remains accommodative, but demand-side pressures are emerging. We

raise our CPI inflation forecasts – to 8.9% (from 8.5%) for FY21 and to 8.2% (from

7.7%) for FY22 – to reflect higher global oil prices and demand-side pressures from a

faster-than-expected economic recovery. We still expect the State Bank of Pakistan

(SBP) to look through any near-term acceleration in CPI, which is likely to be food

price-driven and transitory. However, we now expect the SBP to start hiking the policy

rate sooner in response to domestic (output and inflation) and external (trade balance)

pressures. We now forecast the first 25bps hike in H1-FY22, versus H2-FY22

previously. We also now expect more cumulative tightening, with the policy rate rising

to 8.5% by end-FY23 (7.5% previously).

Capital and financial account flows will be key to covering a widening C/A deficit. We

raise our C/A deficit forecast for FY22 to 2.5% of GDP from 2.0% to reflect a wider

trade deficit (via higher imports) due to the post-COVID resumption of economic

activity, higher oil prices and import tariff exemptions for raw materials. Remittances

have been on a historic upward trend, increasing 30% y/y during the July-April period.

This contributed to a C/A surplus during this period for the first time in 17 years. We

now forecast the FY21 C/A deficit at 1.0% of GDP (2.1% earlier) on higher remittance

growth. However, we expect remittance growth to moderate in FY22 as COVID

Figure 1: Pakistan macroeconomic forecasts Figure 2: An improving economic recovery

Real lending rate, using y/y CPI (LHS); trade deficit, USD bn

(LHS); industrial production (RHS); all 3mma

FY21 FY22 FY23



Policy rate (%) 7.00 7.50 8.50

USD-PKR* 165.00 175.00 185.00






Real lending rateTrade balance


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External sector remains vulnerable

to a potential slowdown in

remittances

Demand-side pressures are likely to

speed up the tightening cycle

Farooq Pasha +92 21 3245 7859

[email protected]

Economist, MENAP

Standard Chartered Bank (Pakistan) Limited


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subsides and travel restrictions are gradually eased. FX reserves have increased

recently due to IMF disbursements and new Eurobond issuance of USD 2.5bn. We

expect the PKR to depreciate gradually to 165 against the USD by end-2021.

Fiscal policy has a pro-growth tilt

The recently proposed FY22 budget is growth-centric, with ambitious revenue and

spending targets, while still targeting fiscal consolidation. The budget aims to narrow

the fiscal deficit further to 6.3% of GDP in FY22 from a revised estimate of 7.1% for

FY21. In our view, however, the budget’s pro-growth focus may come at the cost of

fiscal consolidation. We maintain our fiscal deficit forecast of 7.0% of GDP for FY22.

The budget projects a 24% increase in revenue, despite the absence of new taxation

measures. Indirect taxes and non-tax revenues are projected to contribute most of the

revenue increase. Sales tax and customs duties account for almost 58% of the

projected increase in federal revenue, while non-tax revenue is also expected to rise

sharply via a petroleum levy and the Gas Development Infrastructure Cess. We see

significant downside risks to the revenue plan. In particular, the budgeted 30%

increase in sales tax and further increase in petroleum levy are unlikely to materialise

given past experience and the likely political cost of such measures.

On the spending side, the government is investing in development in FY22. The budget

includes one-off funds for vaccine procurement (USD 1bn) and emergency COVID

funds (PKR 100bn). Development expenditure is targeted to rise 42% to support

education, health care and infrastructure projects, with a view to generating

employment and supporting growth. However, as in the past, development expenditure

could be cut if revenue growth is lower than budgeted.

The pro-growth budget is likely lead to a delay in the release of the sixth tranche of the

Extended Fund Facility (EFF) programme with the IMF. The proposed FY22 budget

deviates from the headline targets for the fiscal deficit and the primary balance agreed

with the IMF in April. Finance Minister Shaukat Tarin, who took charge after the last

IMF review was completed in March, has resisted further increases in power-sector

tariffs and new taxation measures. We expect the IMF to combine the sixth review

(originally scheduled for June) and the seventh review (scheduled for September), and

to renegotiate both quantitative and structural benchmarks. We currently expect the

IMF programme to continue. In comments following the budget presentation, Tarin

ruled out quitting the programme.

A delay in IMF disbursement is unlikely to create external financing challenges in the

near term, as Pakistan’s current external position remains comfortable. However,

persistent delays of the IMF review could prevent the completion of the programme. It

is scheduled to end in September 2022; the likelihood of extension beyond that is low

given parliamentary elections scheduled for the summer of 2023.

Budget’s focus on growth could put

recent fiscal consolidation at risk

The IMF programme sixth review is

likely to be delayed


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Qatar – Gaining momentum

Economic activity to pick up in H2

Improved growth prospects in H2-2021. A new wave of coronavirus cases that

began in Q1-2021 has been largely contained, helped by new restrictions as well as a

rapid vaccine rollout (c.50% of the population has been fully vaccinated). The fall in

new infections allowed the authorities to relax some restrictions in mid-June; a full lifting

is planned for end-July. More significantly, the start of construction activity on the North

Field gas expansion (NFE) project in H2, following the final investment decision in

February, should boost growth. The national oil and gas company commenced the sale

of USD 12.5bn of bonds at end-June for the execution of the NFE project, which should

also have a significant medium-term impact, raising Qatar’s liquefied natural gas (LNG)

production capacity by c.64% over 2025-27.

Policy – Focus on debt repayment on improved liquidity

Qatar’s return to fiscal surpluses should ease public debt concerns. Higher

hydrocarbon prices, alongside spending restraint, should significantly strengthen the

fiscal position, with Qatar likely to record fiscal surpluses over the medium term. This

should allow the authorities to implement a debt repayment strategy. Along with the

rebound in nominal GDP, this should put the public debt-to-GDP ratio on a declining

path from 2021.

Convergence between onshore and offshore spot USD-QAR has yet to

materialise, despite the improving external situation. While the recovery in

hydrocarbon prices should support the upward trend in FX reserves (USD 56.4bn), FX

liquidity in the banking system is likely to remain tight, reflecting the sector’s large net

foreign liability (NFL) position (USD 124bn). This will likely constrain offshore and

onshore USD-QAR spot convergence. Nonetheless, Qatar’s substantial FX reserves

(including sovereign wealth fund liquid assets) and the likely return to current account

surpluses from 2021 minimise de-peg risks, in our view.

Politics – Elections in focus

The first-ever Advisory Council elections are due in October. Citizens will be

allowed to elect 30 members of the 45-member Advisory Council; the appointed

Advisory Council’s term expired at the end of June.

Figure 1: Qatar macroeconomic forecasts Figure 2: Banks’ large NFL position limits FX convergence

Banks’ NFL, USD bn (LHS); USD-QAR spot spread (RHS)

2021 2022 2023



Policy rate (%)* 2.50 2.50 3.00

USD-QAR* 3.64 3.64 3.64


Fiscal balance (% GDP) 4.2 2.4 2.9


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[email protected]

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Razia Khan +44 20 7885 6914

[email protected]




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Saudi Arabia – A stronger growth recovery

Economic outlook – Non-oil growth is back

We raise our 2021 growth forecast to 2.8% from 1.9% given strong non-oil private

investment and expectations of higher oil production as OPEC+ production cuts are

tapered. We expect global oil demand to return to pre-COVID levels by the end of

2021, with much of the improvement likely in the near term. Saudi Arabia’s stance to

date has been to wait for evidence of increased oil demand before responding with

higher oil production.

Saudi Arabia’s non-oil economy returned to growth in Q1-2021, although overall

GDP still contracted 3.0% y/y due to oil production cuts. While the oil sector shrank

11.7% y/y, the non-oil economy grew 2.9%, expanding for the first time since Q1-2020.

Private-sector growth rebounded strongly to 4.4% y/y in Q1, and private-sector credit

extension has accelerated (+15% y/y in April 2021).

PMI readings have stayed above 50 for six consecutive months, rising to 56.4 in May;

higher inventories signal that firms are preparing for a demand recovery. Authorities

have unveiled an investment programme (‘Shareek’) aimed at increasing the private

sector’s contribution to GDP to 65% by 2030; this is expected to facilitate c.USD 40bn

of private-sector investment annually in 2021-22. Growth should also be supported by

partial border reopening and a rebound in consumer spending. Point-of-sale

transactions rose 140% y/y in April, reflecting the economy’s recovery from COVID.

While overseas Hajj pilgrims will still be banned this July, 60,000 Saudi pilgrims will be

allowed, marking a tentative normalisation.

Inflation is likely to slow sharply from July given the high base from the tripling

of the VAT rate to 15% in July 2020. Inflation rose to 5.7% y/y in May, still pressured

by higher taxes. Higher consumer spending and rising domestic demand may continue

to exert upward pressure on inflation, but we expect this to be offset by the pronounced

base effect. We expect CPI inflation to average 2.9% in 2021.

Policy – A significantly smaller fiscal deficit

Tax reforms have had a favourable impact on Saudi Arabia’s fiscal position, with

non-oil revenue rising 39% y/y in Q1 and the deficit narrowing to SAR 7.44bn from SAR

34bn a year earlier. A c.50% cut in capital expenditure in Q1 also helped. The budget

assumes an oil price of USD 62/bbl and production of 9mb/d in 2021. Authorities have

lowered their full-year fiscal deficit forecast to SAR 102bn (3.3% of GDP). However,

we think the deficit is likely to be smaller (2.1%) given higher oil prices.

Figure 1: Saudi Arabia macroeconomic forecasts Figure 2: Higher VAT boosts revenue

Taxes on goods and services, SAR bn

2021 2022 2023



Policy rate (%)* 1.00 1.00 1.50

USD-SAR* 3.75 3.75 3.75



*end-period; Source: Standard Chartered Research Source: MoF, Standard Chartered Research

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Razia Khan +44 20 7885 6914

[email protected]




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Turkey – Strong recovery, but can it last?

Economic outlook – Growth amid rising risks

The economy continues to grow, but clear policy direction is needed for stability.

We raise our 2021 GDP growth forecast to 5.0% (from 4.5%) to reflect the faster

reopening of European economies, a pick-up in Turkey’s vaccine drive ahead of the

summer tourism season, and a weak GDP base (2020 growth was only 1.8%).

The upward growth trend is likely to continue in H2, supported by domestic and

external demand. On the domestic front, the manufacturing sector is showing signs

of a robust recovery. Industrial production (adjusted for working days) grew 66% y/y in

April, and capacity utilisation remained above 75% in both April and May. Foreign

tourist arrivals jumped in April and should further support economic growth going

forward. Exports also picked up in April and May, increasing by 109% and 66% y/y,

respectively. We expect this trend to continue should global trade and economic

activity recover as expected in H2-2021.

We raise our 2022 growth forecast to 4.0% (from 3.5%) to reflect the carry-over

from a stronger-than-expected rebound in H2-2021. However, we still expect

growth to slow relative to 2021 on moderating external demand growth and a higher

base. Domestically, we expect the lagged effect of monetary tightening to be felt

through a deceleration in credit growth and domestic economic activity in H1-2022.

Policy – CBRT to resist pressure to cut rates

We expect the Central Bank of the Republic of Turkey (CBRT) to maintain a tight

monetary stance near-term, easing only in Q4-2021. We recently raised our 2021

CPI inflation forecast to 15.2% (from 14.2%) on higher-than-expected inflation to date,

rising global oil prices and significantly elevated producer prices. CPI will not start to

show a clear disinflationary trend until Q4-2021, in our view. In the near term, a post-

lockdown acceleration in GDP growth and higher inflation expectations may offset the

impact of tight monetary policy to some extent. We expect CPI inflation to remain above

15% y/y through end-Q3.

We forecast that the CBRT will keep the policy rate at 19.0% throughout Q3-2021.

The central bank may be under increased scrutiny over the next few months due to

President Erdogan’s statement on the desired monetary policy direction and recent

changes in the central bank’s management. The messaging from the next few policy

Figure 1: Turkey macroeconomic forecasts Figure 2: External and domestic pressures pose major

risks to economic recovery

2021 2022 2023



Policy rate (%)* 16.00 14.00 14.00

USD-TRY* 9.00 10.00 9.80




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Farooq Pasha +92 21 3245 7859

[email protected]

Economist, MENAP


Philippe Dauba-Pantanacce +44 20 7885 7277

[email protected]

Senior Economist

Global Geopolitical Strategist


Economic recovery is stronger

than expected, but policy support is

needed to sustain it


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meetings, more than the expected ‘on hold’ decisions, will shape perceptions of the

monetary policy trajectory, in our view.

We expect the C/A deficit to narrow to 4.0% of GDP in 2021 on the recent recovery

in the trade balance, despite the expected loss of tourism FX inflows. The trade

balance has improved in 2021 so far, despite higher global oil prices, thanks to a robust

pick-up in exports. Exports rose 38% y/y in 5M-2021, driven by economic recoveries

in major trading partners, particularly the euro area; we expect them to remain robust

in H2. Tourism has been hit hard, with international tourist arrivals down 35.6% y/y in

the first four months of the year. We expect 2021 tourism revenue to be closer to the

level seen in COVID-impacted 2020 (USD 12.6bn) than pre-COVID levels (USD 23bn

in 2019). This is negative for the tourism sector, the C/A balance, the currency and the

overall economy.

The Turkish lira (TRY) has weakened by more than 11% against the USD since the

start of 2021, making it one of the worst-performing currencies of the year so far.

Further pressure on the trade balance or other sources of FX flows could lead to further

currency depreciation. Gross FX reserves have declined by more than 40% since the

start of 2020, and the TRY remains prone to further weakness from external shocks.

In our view, external-sector stability is the key to a sustainable economic recovery.

Politics – External appeasement, domestic challenges

On the international front, President Erdogan appears to have softened his stance

on various issues, including Turkey’s relations with Greece, France and its NATO

partners in general. Erdogan’s first meeting with US President Biden at the NATO

leaders’ summit in June appears to have gone smoothly, although Erdogan said his

position on the S-400 anti-missile system remained unchanged; this point of contention

with the US could resurface at any time. In the meantime, Turkey might continue to

keep the system inactive to avoid a potential escalation.

Domestically, Erdogan faces mounting political challenges. Support for the

president and the ruling AKP is at record lows amid rising unemployment, unorthodox

economic policies and criticisms of the government’s pandemic management. The

political temperature has risen further amid recent online allegations of crimes tied to

the ruling party and other people close to the government, which have captured the

national debate.

Erdogan appears to be taking a less

confrontational approach to foreign

policy; domestically, challenges

abound

TRY remains under pressure, and is

likely to weaken further


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UAE – Recovery gaining momentum

Economic outlook – Vaccine rollout is a key strength

Rapid progress on vaccine administration boosts recovery prospects. Almost

80% of the UAE’s population has now been fully vaccinated, and over 85% of the

vulnerable population. This has allowed the economy to remain largely open, even

though new cases persist. The recent surge in the Delta variant in key tourism markets

including the UK and India may weaken near-term growth performance. However,

Dubai’s hosting of the delayed Expo 2020 in October is likely to boost economic

momentum in Q3. The authorities are targeting 25mn visitors to Expo from October

2021 to March 2022. Even if the target is not fully achieved, the event should still drive

a substantial y/y recovery in the tourism sector, after Dubai’s tourist arrivals dropped

to 5.5mn in 2020 from 17mn in 2019. As a result of the pandemic, Dubai’s flag carrier

also recorded a loss of USD 5.5bn, its first in 33 years.

We expect the UAE’s recovery to gain momentum in H2. Recent PMI readings

have pointed to softer performance, with the May reading declining to 52.3 from 52.7.

Business activity expanded at its slowest pace since February, and the employment

sub-index contracted for a fourth month. However, the future output reading has

steadily increased as Expo is expected to boost activity in H2. Dubai’s PMI also

dropped in May to 51.6 from 53.5, reflecting weakness in travel and tourism. Credit

extended to the private sector is still down on a y/y basis but has started to recover

(rising 0.4% m/m in April). While expatriate population growth has slowed, it did not

contract in 2020 as initially feared. Policies aimed at attracting expatriates, including

the liberalisation of residency requirements, should support UAE population growth in

the years ahead. In line with improving fundamentals, we expect property prices to

recover gradually.

Higher oil production as OPEC cuts are relaxed should support growth in H2,

providing fiscal space for spending on social infrastructure and other construction

projects to boost economic activity. In Q1, oil production increased 4.3% q/q, in line

with the OPEC agreement (although it fell 17.6% y/y). We forecast a moderate fiscal

deficit of 1.6% of GDP this year, and a current account surplus of 5.1%. Debt levels

are likely to stay elevated; debt-to-GDP was c.77% in 2020. External liquidity remains

a key strength. The UAE’s foreign assets increased to AED 393.8bn in April from a low

of AED 350.7bn in June 2020.

Figure 1: UAE macroeconomic forecasts Figure 2: UAE central bank foreign assets have increased

Central bank total foreign-currency assets, AED bn

2021 2022 2023



Policy rate (%)* 0.60 0.60 1.10

USD-AED* 3.67 3.67 3.67



*end-period; Source: Standard Chartered Research Source: Central Bank of the UAE, Standard Chartered Research

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[email protected]

Economist, Africa


Razia Khan +44 20 7885 6914

[email protected]



We expect a stronger recovery in

H2, helped by delayed Expo 2020

and higher oil production


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Africa – Top charts Figure 1: A multi-speed recovery

GDP, % y/y (our forecasts for 2021)

Figure 2: Third wave threatens near-term growth

Confirmed COVID cases to 22 June 2021, 7DMA; thousands

Source: IMF, National sources, Standard Chartered Research Source: OWID, Standard Chartered Research

Figure 3: Frontier SSA likely to be more resilient to a taper

SSA FX, rebased (Jan 2020 = 100), USD-LCY

Figure 4: Spreads have tightened; market access restored

SSA Eurobonds, mid Z-spread

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Figure 5: Uganda and Ghana cut rates on credit growth

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Figure 6: IMF SDR allocations to boost FX reserves

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Angola – Still oil-dependent

Economic outlook – Oil prices, China restructuring help

Stronger oil prices and reduced debt service after China debt restructuring are

big positives. Angola has confirmed its participation in the extended Debt Service

Suspension Initiative and is eligible for USD 400mn of additional relief in H2-2021.

GDP growth is set to turn positive in 2021 for the first time since 2014, with current

account and fiscal surpluses. We expect 2021 budget revisions given the initially

budgeted oil price of USD 39/bbl. While debt sustainability has improved, we see

medium-term risks when China debt relief unwinds from 2023. This may be

exacerbated by oil production declines (Angola – Not yet in the clear). COVID cases

appear to be falling after rising in Q2, but the slow pace of vaccine rollout remains a risk.

Angola’s IMF programme ends this year, and the Ministry of Finance has indicated that

discussions on future IMF engagement are underway. Following a USD 772mn (SDR

531.5mn) disbursement from the IMF in June with the fifth review of the Extended Fund

Facility, Angola should receive the same amount again with the final review; it could

also receive USD 1.2bn from an eventual SDR allocation. This should support FX

reserves, which recovered to USD 15.1bn at end-June, having fallen to USD 14.1bn

before the IMF disbursement.

Politics – Election due in 2022

The next election is due in August 2022. We expect an MPLA win, with João Lourenço

as president; the result may be closer than in the past given a protracted economic

slowdown and the high cost of living (inflation is above 25%, and likely to remain high

at c.20% at end-2021). The MPLA’s share of the vote declined to 61% in 2017 from

82% in 2008. The main opposition parties (UNITA and CASA-CE, which won 27% and

5% of the vote in 2017) may field a single candidate, likely either Abel Chivukuvuku of

CASA-CE or Adalberto Costa Junior of UNITA. Angola’s first local elections, cancelled

in 2020 as a result of COVID, look unlikely to take place ahead of the general election.

Market outlook – Good FX liquidity

Banco Nacional de Angola (BNA) will likely continue to favour tight monetary

policy to support the Angolan kwanza (AOA) and contain inflation. While we

expect recent AOA stability to continue, we see a mild depreciation trend in H2-2021;

we lower our end-2021 forecast to 660 (from 680). FX liquidity has improved, and the

demand backlog has been cleared. The parallel-market USD-AOA rate has dropped

to 705 from a high of c.800 in 2020.

Figure 1: Angola macroeconomic forecasts Figure 2: FX reserves have continued to decline

Brent, USD/bbl (LHS); gross FX reserves, USD bn (RHS)

2021 2022 2023



Policy rate (%)* 17.50 17.50 15.00

USD-AOA* 660.0 680.0 714.0



*end-period; Source: Standard Chartered Research Source: Bloomberg, BNA, Standard Chartered Research

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The election due in 2022 is likely to

be closer than past elections


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Economist, Africa




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Cameroon – Virus surge threatens recovery

Economic outlook – COVID resurgence to test resilience

Downside risks to Cameroon’s economic recovery have risen. The country has

been battling a resurgence of COVID-19 infections, with total confirmed cases more

than doubling since the start of 2021. While the authorities have so far not implemented

tighter restrictions, high vaccine hesitancy (only c.16% of vaccines received have been

dispensed) raises the risk that the new wave could persist for some time. Such a

scenario would weigh significantly on the economic recovery and pose substantial risks

to our 2021 growth forecast, which remains unchanged at 3.2% for now as we monitor

the health situation.

Policy – New IMF programme to strengthen fiscal reforms

Cameroon’s new IMF programme will anchor fiscal policy reforms. The authorities

reached a staff-level agreement with the IMF on a successor three-year funded

programme in May 2021, with IMF Executive Board approval likely by end-July. Fiscal

reform will be a key component of the programme, with a focus on strengthening

revenue mobilisation and improving public financial management systems. Greater

prominence will likely be given to improving fiscal transparency following recent

allegations of misappropriation and embezzlement of IMF emergency loans provided

in 2020.

The recent Eurobond financing should strengthen debt sustainability. Cameroon

issued a c.EUR 685mn Eurobond at end-June following the modification of the 2021

finance bill in May, allowing external non-concessional debt issuance, mainly to

refinance the country’s existing USD Eurobond. As we highlighted earlier this year

(Cameroon – Debt worries seem overdone), Cameroon’s ‘high risk of debt distress’

classification was largely due to elevated external debt service from 2023-25 on

maturing Eurobond payments. The rollover of this debt should improve Cameroon’s

debt metrics and ease concerns around debt sustainability. The EUR issuance should

also reduce exchange rate risk given the euro peg.

Politics – Succession back in focus

While the next presidential election is not scheduled until 2025, President Biya’s

advanced age (88) and limited clarity on succession add to political risks. The

president’s son, Franck, has gained more media attention recently as a possible

candidate for the ruling party in the 2025 election.

Figure 1: Cameroon macroeconomic forecasts Figure 2: Recovery threatened by new wave of infections

Confirmed coronavirus cases to 9 June 2021, 7DMA; ’000s

2021 2022 2023



Policy rate (%)* 3.25 3.50 3.50

USD-XAF* 521 521 521




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distress risk

A new IMF programme has been

agreed, with a focus on improving

public financial management


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Côte d’Ivoire – Counting on the rains

Electricity disruptions, poor rains pose risk to recovery

Côte d’Ivoire remains on track for a strong growth rebound in 2021, but

downside risks have risen significantly. The country experienced a prolonged dry

spell until mid-June despite the onset of the rainy season in April, posing risks to

agricultural output. Poor rains also impacted hydroelectric production; this, along with

technical issues surrounding thermal production (c.70% of electricity output), has

forced power rationing since April. Côte d’Ivoire, West Africa’s power export hub, has

also had to significantly scale back electricity exports to neighbouring countries.

We lower our 2021 growth forecast to 6.0% from 6.7% given that the authorities

expect the load-shedding exercise to persist until July, which will likely weigh on

domestic output. A slightly higher base, with 2020 growth performing better than we

had expected (2.4% versus our 1.8% forecast), also contributes to our downward

growth revision. Risks to our forecast remain tilted to the downside, as agricultural

output could be weaker than we currently expect if the late rains disappoint.

We raise our 2021 inflation forecast to 3.3% from 2.0%. Headline inflation breached

the West African Economic and Monetary Union’s 3% threshold in February 2021,

reaching 4.2% in May, the highest in at least eight years. This was driven largely by

higher food prices. We expect inflation to fall below the 3% threshold by Q4-2021 as

food supply improves with the start of the harvest season in Q3.

We raise our 2021 current account deficit forecast to 3.5% (from 2.7%), mainly

on deteriorating terms of trade. Cocoa prices (c.40% of exports) have fallen c.5%

since end-December, weighed down by record global production and a sluggish

recovery in demand. Higher-value processed cocoa exports will also be affected, as

power cuts have hampered cocoa bean processing. Higher oil prices will also weigh

on the current account position given that Côte d’Ivoire is a net oil importer.

Political tensions continue to ease with the focus on reconciliation. Former

President Gbagbo returned to Côte d’Ivoire in June after the International Criminal

Court upheld his acquittal in March 2021 following an appeal. Gbagbo was not arrested

despite facing a 20-year jail term in Côte d’Ivoire, in line with President Ouattara’s

reconciliation agenda. With Gbagbo still commanding significant support, his return will

likely contribute to further political reconciliation.

Figure 1: Côte d’Ivoire macroeconomic forecasts Figure 2: Inflationary pressures have risen sharply

Headline inflation, % y/y

2021 2022 2023



Policy rate (%)* 4.00 4.00 4.00

USD-XOF* 521 521 521



*end-period; Source: Standard Chartered Research Source: Refinitiv Datastream, Standard Chartered Research

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[email protected]

Economist, Africa


Higher food prices push inflation to

a multi-year high

We downgrade our 2021 growth

forecast, as power disruptions will

likely weigh on output

We now expect a wider current

account deficit in 2021


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Ethiopia – When politics and economics collide

Economic outlook – Political risk is running high

We expect the economy to recover in H2-2021, but see significant political risks.

The budget for FY22 (year ending July 2022) envisages a growth rebound to 8.7%.

Progress has been made on telecoms liberalisation, with the sale of a new licence to

a consortium of investors; expressions of interest have also been requested for a

minority stake in the state-controlled telecoms company.

Political developments are a risk to the outlook. International concern over suspected

human rights abuses in the Tigray region has increased, amid early warning signs of a

potential famine. Food price inflation has pushed Ethiopia’s headline inflation to c.20%

y/y. The US has halted all non-humanitarian aid, and the EU has said it is unlikely to

provide budget support until it sees improvements in the situation in Tigray. Egypt has

appealed to the UN in its dispute over the Grand Ethiopian Renaissance Dam ahead of

expected filling during the 2021 rainy season (June-September). Elections, held on 21

June after being postponed twice, are unlikely to resolve regional tensions. Polling did

not take place, or was delayed, in several constituencies (including Tigray) and all major

opposition parties boycotted the election.

Debt restructuring under the G20 Common Framework will remain the focus in

Q3. The IMF is working on a Debt Sustainability Analysis (DSA), which will provide the

basis for creditor negotiations. While the Ethiopian authorities’ stance on private-

creditor participation is clear – they view private-creditor restructuring as a last resort

and will continue paying Eurobond coupons – it is unclear if this will be compatible with

the ‘comparable treatment’ requirement. Debt treatment is likely to involve flow

rescheduling (the IMF has indicated Ethiopia’s risk of debt distress could then improve

to ‘moderate’ from ‘high’), and private creditors may avoid a haircut. Ethiopia, although

eligible for over USD 900mn in debt service relief from May 2020 to June 2021 under

the DSSI, has received less than USD 200mn so far, according to the Finance Ministry.

The Ethiopian birr (ETB) has come under renewed pressure. Ethiopia has chronic FX

shortages, and while the currency has been allowed to depreciate at a faster rate than

previously, the gap between the official and parallel-market rates has widened (official

USD-ETB rate: 43.7; parallel-market rate: 54-58). Given faster-than-expected

depreciation this year, we revise our end-2021 forecast to 47.2 from 43.7.

Figure 1: Ethiopia macroeconomic forecasts Figure 2: More pronounced depreciation may continue

USD-ETB

2021 2022 2023

GDP growth (real % y/y)** 2.8 8.5 8.2


3M T-bill (%)* 1.20 2.00 2.00

USD-ETB* 47.20 51.00 55.00

Current account balance (% GDP)**

-5.0 -5.0 -5.0


*end-period; **for fiscal year ending 8 July; Source: IMF, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

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[email protected]

Economist, Africa



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Gabon – Reducing the imbalances

Economic outlook – A soft recovery

We lower our 2021 growth forecast to 1.5% from 1.9%, reflecting our downward

revision to non-oil growth. New coronavirus infections have started to taper off since

the start of the more pronounced second wave in January, and the pace of the

vaccination rollout has improved. However, strict COVID-related restrictions, including

nationwide curfews and restricted domestic movement, will likely remain into Q3. This

may weigh significantly on full-year non-oil output. In addition, the revised budget cut

public investment spending by c.27% versus the initial projection. This is contrary to

our expectation of increased public investment on the back of the authorities’ recently

announced Transformation Acceleration Plan (PAT 2021-23). As a result, we now

expect softer investment growth in 2021.

Improving external position. We now see Gabon recording a small current account

(C/A) surplus in 2021 (0.1% of GDP versus -4.6% previously). Given Gabon’s track

record of overproducing relative to its OPEC+ production quota, and a still-elevated

production target in the revised budget, we now assume compliance with OPEC

production cuts will remain weak. Consequently, we raise our export receipts

projection. We have also lowered our capital-goods import projection to reflect the

weaker public investment budget. We expect the C/A balance to swing back to a deficit

in 2022, premised on lower average oil prices and rising imports as economic activity

recovers. Nonetheless, we now expect smaller deficits in 2022-23 – 0.4% and 0.7%,

respectively (from 3.1% and 3.8%) – mainly to reflect our higher export projections.

Revised budget puts Gabon on faster consolidation path

The revised 2021 budget prioritises fiscal consolidation. While revenues have

been revised lower and current expenditure higher (mainly on COVID-related

spending), this is offset by the significant cut to capital expenditure (to 3.7% of GDP

from c.5%), helping to ease fiscal pressures. Consequently, we lower our 2021 fiscal

deficit forecast to 1.9% from 2.6%. Nonetheless, financing needs are set to rise as the

authorities now plan to issue debt on the international capital markets, which we think

will mainly be used to refinance existing debt. A staff-level agreement was reached for

a new three-year IMF funded programme in June, with IMF Executive Board approval

likely by end-July; this should help Gabon meet its funding needs and also serve as a

catalyst for additional concessional funding.

Figure 1: Gabon macroeconomic forecasts Figure 2: Fiscal and external adjustments are underway

Fiscal and external balance, % of GDP

2021 2022 2023



Policy rate (%)* 3.25 3.50 3.50

USD-XAF* 521 521 521


Fiscal balance (% GDP) -1.9 -1.7 0.0

*end-period; Source: Standard Chartered Research Source: IMF, BCEAO, Standard Chartered Research

Current account

Fiscal balance

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[email protected]

Economist, Africa


The C/A balance should swing to a

small surplus in 2021

We now expect a faster pace of

fiscal consolidation in 2021


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Ghana – Addressing vulnerability

Economic outlook – Policy pivot to fiscal consolidation

Ghana’s economic recovery appears to be on track following growth of only 0.4%

in 2020. GDP growth accelerated to 3.1% y/y in Q1-2021; the weak base should result

in faster growth in the quarters ahead. The Bank of Ghana’s (BoG’s) Composite Index

of Economic Activity grew 26.8% y/y in March 2021, driven by domestic consumption.

Nonetheless, Q1-2021 data suggests that revenue still fell short of targets, and the

outlook remains vulnerable to potential new waves of COVID. Ghana has encountered

significant vaccine supply bottlenecks; initial plans to have two-thirds of the population

inoculated by end-2021 now look likely to be delayed.

Ghana’s handling of the COVID crisis has received plaudits but has substantially

weakened fiscal metrics and exacerbated pre-existing debt vulnerabilities. IMF data

suggests that public debt reached 78% of GDP at the end of 2020, including energy-

sector liabilities and financial-sector bailout costs. The 2021 budget introduced in

March front-loaded fiscal consolidation measures, raising the VAT rate by 1ppt

(effective in May) and imposing new levies, including on the financial sector. Despite

this, spending remains elevated and will increase c.14 y/y in 2021. Debt service as a

percentage of budgeted revenue is high; budget estimates suggest that it could reach

50.5% excluding grants in 2021, from c.46% last year. The IMF has urged a fiscal

consolidation effort centred on a reduction in debt service payments. Unaddressed

cost recovery in the energy sector, and a failure to renegotiate ‘take or pay’ contracts

with independent power producers, remain key fiscal risks.

The BoG surprised markets by cutting its policy rate 100bps to 13.5% in May,

citing still-weak private-sector credit growth. With y/y food inflation slowing after a

pronounced COVID-related shock, headline inflation eased to 7.5% in May, giving the

BoG room to ease. But despite still-elevated real spreads, we expect the BoG to be

cautious about further easing, to avoid discouraging new portfolio inflows into LCY debt

(only front-end yields are likely to react meaningfully to a cut). Based on new series

data, we update our average CPI inflation forecasts to 8.7% y/y in 2021 and 7.3% in

2022; this would allow more room for eventual easing, but only gradually and after

more significant fiscal consolidation. Given lower inflation, we now see the policy rate

at 13.0% at end-2022 and 12.5% at end-2023 (both 14.0% prior). Despite a shift in

focus to Fed tapering, we expect relative Ghanaian cedi (GHS) stability to persist, with

FX reserves likely to be supported by an IMF SDR allocation and planned green bond

issuance of c.USD 1bn over the coming quarter.

Figure 1: Ghana macroeconomic forecasts Figure 2: BoG surprised with a 100bps rate cut in May

Ghana CPI, % y/y; BoG policy rate, %

2021 2022 2023



Policy rate (%)* 13.50 13.00 12.50

USD-GHS* 6.05 6.45 6.80




CPI, % y/y

Policy rate, %

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We now see rates on hold until

Q4-2022, following a surprise rate

cut in May

Razia Khan +44 20 7885 6914

[email protected]



Fiscal vulnerabilities persist; high

debt service costs need to be

addressed


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Kenya – Fiscal consolidation; eventful politics

Economic outlook – COVID uncertainty persists

Despite persistent COVID-related uncertainty, we expect Kenya’s economic

growth to accelerate to 5.3% in 2021 from c.0.6% in 2020. Our GDP forecast is below

the government’s (6.6%) and the IMF’s (6.3%, revised from 7.6%). The IMF projections

attribute the recovery largely to a normalisation of activity, including the reopening of

schools, from a weak base last year. We maintain our cautious outlook given rising

cases in Kenya amid a new variant (neighbouring Uganda has already announced new

containment measures). The Q1 GDP data release has been delayed pending

publication of a rebased GDP series. However, private-sector credit data points to

momentum in transport and communications, with loan growth at 13.3% y/y in April,

lending to agriculture up 10.0%, and consumer durables up 19.3%. Given the slow

pace of vaccine administration, we do not expect tourism to recover fully through our

2023 forecast horizon. Elections due in 2022 – with the holding of a constitutional

referendum still unresolved – may also be a source of uncertainty, potentially weighing

on near-term investment plans.

Stabilising Kenya’s public debt ratio and getting debt service to more manageable

levels will be key areas of focus in the years ahead. Kenya’s recently negotiated three-

year IMF programme is likely to anchor fiscal credibility. In June, the IMF Executive

Board approved the release of an additional USD 407mn for Kenya under the first

review, citing the authorities’ strong commitment to reforms including the completion

of COVID-related spending audits. The IMF programme makes allowances for near-

term economic uncertainty, deferring more significant fiscal consolidation and a

primary fiscal surplus to the later years of the programme. The IMF is encouraged by

the 1.6ppt-of-GDP decline in the primary deficit targeted for FY22 (ends 30 June).

While authorities project a 7.5% fiscal deficit in FY22, we see growth and revenue risks

to this outcome. Containing spending ahead of 2022 elections may be difficult. More

meaningfully, adoption of some of the recommendations of Kenya’s Building Bridges

Initiative (even outside of a referendum) could result in an increased 35% allocation of

revenue to county governments, exacerbating structural fiscal pressures.

Given the focus on fiscal deficit reduction, we expect monetary policy to remain

accommodative, with the policy rate on hold until Q2-2022. Our inflation forecasts

reflect newly available base year data for the updated CPI series.

Figure 1: Kenya macroeconomic forecasts Figure 2: IMF programme an anchor for fiscal policy

Kenya fiscal balance (% of GDP, FY13-FY20)

2021 2022 2023



Policy rate (%)* 7.00 8.00 8.50

USD-KES* 108.60 112.00 115.00



*end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: The National Treasury of Kenya, Standard Chartered Research

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Razia Khan +44 20 7885 6914

[email protected]



IMF programme should support

fiscal consolidation, but higher

revenue allocation to counties may

add to pressure


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Mozambique – A pause in LNG activity

Economic outlook – Coordinated response needed

A halt to LNG activity after the attack by radical insurgents on Palma is the main

downside risk to Mozambique’s outlook. We now expect a weaker recovery in 2021

GDP growth to 1.1% (2.3% previously). The boost to growth from LNG production,

previously expected from 2024, will be delayed by at least a year. We now expect GDP

growth to accelerate to 8% only in 2025, rising to 11% in 2026. The Southern African

Development Community has set out plans to send 3,000 troops to Mozambique to

help quell the insurgents; international partners including Portugal and the US have

offered support, but little concrete action has been taken yet. The final investment

decision on a second large LNG project is expected to be delayed beyond 2022.

The pause in LNG activity has implications for debt sustainability. While

Mozambique is currently in debt distress, the IMF considers its debt to be sustainable

on a forward-looking basis given expected LNG production. Any indication of a more

prolonged delay may have implications for how the IMF views Mozambique’s debt.

Mozambique’s restructured Eurobond was arranged with consideration of expected

LNG production, with the coupon increasing from 5% to 9% from 2023. The authorities

expect a fiscal deficit of 6.5% of GDP in 2021, but security spending will add pressure.

Policy – Inflation concerns have not materialised

USD-MZN depreciation is likely to continue, reversing its appreciation to c.55 in April

from 75 in February. The gains reflected 300bps of tightening by Banco de

Moçambique (BdM) in January, and a February central bank circular clarifying the

obligation for exporters to convert 30% of export revenues into local currency. To

reflect this, we revise our end-2021 USD-MZN forecast to 77 from 80. Even with

reduced LNG-related capital-goods imports, Mozambique has a large current account

deficit. FX reserves are USD 4bn, and should be supported by an SDR allocation

(c.USD 310mn) and an extended Debt Service Suspension Initiative.

We lower our 2021 CPI inflation forecast to 5.1% (from 8.2%) to reflect FX appreciation.

Following BdM’s surprise 300bps hike in January on inflation concerns, we do not

expect any further hikes. BdM now expects prices to fall in the coming months on good

harvests, weak domestic demand and currency appreciation.

Figure 1: Mozambique macroeconomic forecasts Figure 2: USD-MZN depreciation is back

USD-MZN

2021 2022 2023



Policy rate (%)* 13.25 10.50 9.00

USD-MZN* 77.00 82.40 84.00




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[email protected]

Economist, Africa


The growth outlook and debt

sustainability are at risk following a

shutdown of LNG activity


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Nigeria – FX liberalisation hopes

Economic outlook – Slow improvement

Higher global oil prices raise the likelihood of FX market reforms; this could lift

Nigeria’s economic prospects. We still expect growth of 2.5% in 2021 after a 1.9%

contraction last year. Q1 GDP rose 0.5% y/y, signalling still-weak momentum, but this

was the second consecutive quarter of positive y/y growth since the COVID shock.

While the non-oil economy grew only 0.8% y/y, the oil sector contracted 2.2% y/y in

real terms, reflecting compliance with OPEC+ production cuts. With global oil demand

set to accelerate near-term, a sharper tapering of OPEC+ production cuts seems likely

in H2, favouring a return to positive oil-sector growth. The passage of long-awaited oil-

sector legislation in H2 should create more certainty on fiscal terms, unlocking new oil

investment.

Despite higher oil prices, FX reserves remain pressured, falling to USD 33.4bn in

June. A number of factors likely explain this. The C/A remains in deficit, with few

offsetting flows (although the deficit narrowed to USD 1.75bn in Q1-2021 from USD

5.4bn in Q4-2020, reflecting higher oil prices and reduced imports due to limited FX

availability). With oil exports still constrained by the OPEC quota, recent data suggests

that import demand has been rising faster than exports. Rising spending on fuel

subsidies since January 2021 likely played a significant role. Subsidies have also

reduced state-owned oil company remittances to the Federation Account – the usual

source of FX reserve replenishment.

Several measures point to a possible ‘reopening’ of the FX market. The Central

Bank of Nigeria (CBN) has allowed yields on OMOs to rise, but these would have to

adjust higher to attract portfolio inflows. Inflation has started to stabilise y/y and should

slow to c.12% by end-2021 on base effects. In May, the CBN confirmed that it had

effectively devalued the official USD-NGN FX rate (previously 380); it will now be set at

the Investors & Exporters (I&E) rate, currently c.412. This should boost fiscal receipts.

The requirement that banks record all I&E trades on a Reuters platform has created more

transparent pricing and is a likely precursor to more comprehensive FX liberalisation,

with greater price discovery on the I&E window. Authorities have enquired about the

extent of the FX demand backlog backed by official certificates of capital importation; an

increase in FX supply following any boost to FX reserves seems likely. The planned SDR

allocation (USD 3.4bn) and any external issuance (at least USD 3bn) would give

authorities the confidence to increase FX supply more meaningfully, in our view.

Figure 1: Nigeria macroeconomic forecasts Figure 2: FX reserves pressured, despite higher oil price

Nigeria Bonny Light, USD/bbl; FX reserves, USD bn (RHS)

2021 2022 2023



Policy rate (%)* 11.50 11.50 11.50

USD-NGN* 440.0 460.0 480.0



*end-period; Source: Standard Chartered Research Source: Bloomberg, Reuters, Standard Chartered Research

FX reserves (RHS)

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Despite rising oil prices, FX

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however, some respite from an IMF

SDR allocation and external

borrowing

A number of indicators signal FX

liberalisation intent

Razia Khan +44 20 7885 6914

[email protected]




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Senegal – Downside risks diminish

Economic outlook – Recovery to pick up speed in H2

Senegal’s economic recovery should gain momentum in H2-2021 as downside

risks ease. This year’s recovery is likely to be driven by the secondary and tertiary

sectors, after robust agricultural output led to an upside growth surprise in 2020 (1.9%

versus the government’s projection of -0.7%). Services activity should pick up with the

containment of the second wave of infections that started in December, enabling the

easing of restrictions. High-frequency data also points to a strong rebound in industrial

production driven by the extractive and manufacturing sectors. Nonetheless, we lower

our 2021 growth forecast to 4.0% from 4.9%, mainly to reflect the higher base.

Political tensions have eased considerably following widespread protests

against the government in March. With elevated youth unemployment seen as a

major factor behind the protests, the government’s recently announced emergency

youth employment programme should lower the risk of further social unrest near-term.

Nevertheless, the trial of Ousmane Sonko, the opposition figure whose arrest triggered

the March protests (see Senegal – Flaring tensions), will be followed closely to gauge

the risk of renewed protests.

The planned start of hydrocarbon production in 2023 supports Senegal’s

medium-term outlook. Work on the Greater Tortue Ahmeyim (GTA) LNG project was

58% complete at end-Q1 and should be 80% complete by end-2021. A final investment

decision on the project’s second phase is expected in 2022. Improved execution of the

GTA LNG and Sangomar oil field projects following COVID-related delays in 2020

should allow for first hydrocarbon production from these fields in 2023. However, we

now see the projects providing a smaller boost to medium-term growth than we initially

expected, partly because of the investment delays. We lower our 2022-23 growth

forecasts to 6.1% and 11.2%, respectively (from 8.0% and 13.7%), to reflect this.

Policy – Rising fiscal pressures

We raise our 2021 fiscal deficit forecast to 5.4% of GDP from 5.0%, bringing it in

line with the government’s revised projection. New spending, including on the

emergency youth employment programme and vaccine procurement, will add to fiscal

pressures. Rising energy subsidies are also likely to weigh on the fiscal position.

Nonetheless, we expect the authorities to intensify efforts to boost revenue mobilisation

under their IMF-supported Medium-Term Revenue Strategy; this should allow Senegal

to achieve its 3% fiscal deficit target by 2023.

Figure 1: Senegal macroeconomic forecasts Figure 2: Second wave of infections is tapering off

Confirmed COVID cases to 08 June 2021, 7DMA; ‘000s

2021 2022 2023



Policy rate (%)* 4.00 4.00 4.00

USD-XOF* 521 521 521




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Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21

Hydrocarbon-related activity should

support the medium-term outlook

Senegal will now target a slightly

wider deficit than initially projected


[email protected]

Economist, Africa


Political risks have receded



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South Africa – Third wave, earlier tightening

Third wave sets in, but mining to provide a sustained boost

A pronounced third wave of COVID has created greater uncertainty for the near-

term growth outlook. Notwithstanding third-wave concerns, we raise our 2021 GDP

growth forecast to 4.2% (from 3.6%), as we expect the economic recovery to continue.

Our 2022 and 2023 forecasts remain 2.4% and 2.5%. South Africa announced a strict

countrywide ‘Level 4’ lockdown on 27 June following a positivity rate of over 33% in

the economically important province of Gauteng. The new restrictions include school

closures, an extended overnight curfew, and bans on alcohol sales, sit-down

restaurant meals, and leisure travel into and out of Gauteng. The measures were put

in place for 14 days initially (until 11 July), and may be extended.

Given the greater transmissibility of the new Delta variant (now the dominant variant in

South Africa), we see a significant risk that containment measures will be extended.

However, this year’s measures have had a less significant impact on economic activity

than those in 2020, as more economic activity has been preserved. While growth may

slow near-term, we expect the economic recovery to continue, barring the need for a Level

5 lockdown (the highest level, partly responsible for last year’s 7.0% GDP contraction).

Mining exports are benefiting from a demand recovery in the rest of the world and a

structural shift in favour of greener technologies, which have boosted commodity prices

(see South Africa – In search of secular positives). Q1 GDP growth surprised positively

at 4.6% q/q SAAR. Although gross capital formation contracted, we expect firm

commodity prices to boost activity. The current account (C/A) has also benefited from

the combination of export strength and weak domestic demand. We raise our 2021

C/A surplus forecast to 3.0% of GDP (from 1.5%). We now expect the C/A to remain

in surplus in 2022 (1.0% of GDP, versus -0.8% prior).

Structural reforms, including the lifting of restrictions on self-generation of electricity,

should provide some support to medium-term growth. But outside of mining,

momentum has come largely from economic reopening; the sustainability of the upturn

is still in question. Despite the positive Q1-2021 growth surprise, data on South Africa’s

formal-sector businesses (Figure 2) shows that turnover decreased in six of the eight

sectors surveyed between Q4-2020 and Q1-2021; increases were recorded only in the

mining and personal services sectors. As of May 2021, private-sector credit growth

had turned negative y/y, pointing to demand challenges ahead.

Figure 1: South Africa macroeconomic forecasts Figure 2: Total business turnover declined in Q1

Turnover in the formal business sector, % q/q, Q1-2021

2021 2022 2023



Policy rate (%)* 3.50 4.00 5.00

USD-ZAR* 13.00 13.50 13.60



*end-period; **for fiscal year ending 31 March; Source: Standard Chartered Research Source: Stats SA QFS, Standard Chartered Research

-8% -6% -4% -2% 0% 2% 4% 6% 8% 10%

Mining

Personal services

Business services

Trade

Manufacturing

Electricity & Water

Transport & Communication

Construction

Razia Khan +44 20 7885 6914

[email protected]



South Africa’s third wave poses a

near-term risk to growth, but is

unlikely to derail the recovery

Mining has outperformed, boosting

growth and the C/A surplus



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An improved pace of vaccine administration may brighten prospects. Although the

vaccination drive started late because of difficulties procuring supplies, c.5.0% of the

population had received at least one dose by end-June. South Africa targets

inoculating two-thirds of its population by February 2022. In addition, International

Finance Corporation funding for domestic production of 500mn vaccine doses has

been secured. Half of these doses will be produced by end-2021, with 30mn reserved

for domestic use. We think the pick-up in vaccine administration will be important to

the economic outlook; it remains a key factor for monetary policy decisions.

SARB normalisation underway; risk is of earlier tightening

We now expect SARB hikes of 25bps in January and May 2022, instead of July

and November. This still leaves our end-2022 repo rate forecast at 4.0%, but with

tightening front-loaded. SARB output gap models have long suggested the need for

earlier tightening; its Quarterly Projection Model (QPM) incorporates two rate hikes in

2021. At its May Monetary Policy Committee (MPC) meeting, the SARB emphasised

its output gap models, highlighting the need for tightening (see South Africa –

Continued accommodation, for now). While the third wave makes tightening in 2021

less likely, we think that the SARB will still want to normalise rates quickly, causing it

to front-load tightening in 2022.

The last two MPC meetings, in March and May, saw unanimous 5-0 decisions to keep

rates on hold. SARB communications have stressed that early tightening would likely

mean the need for fewer hikes over the cycle. According to the SARB, policy will remain

accommodative, even allowing for rate hikes. Our forecasts support this: we project

that inflation will average 3.8% in 2022 and 4.5% in 2023, and see the end-year repo

rate at 4.0% and 5.0% respectively. The prime rate, at which banks typically lend, is

set at 350bps over the repo rate.

With the SARB focused on inflation outcomes in 18-24 months, the current third wave

is unlikely to affect projections much. Deputy Governor Naidoo said in late June that

the SARB may still raise its growth forecast at the July MPC meeting given the upside

Q1 GDP growth surprise. This would imply a faster closing of the negative output gap,

and the SARB – keen to lower its inflation target eventually from the current mid-point

of 4.5% – will likely need to react to this by tightening.

The key risk to our repo rate view is that market conditions might prompt the SARB

to tighten even earlier, in 2021. This is not our core scenario, however, despite QPM

projections. For now, with the C/A in surplus and an improving fiscal outlook, domestic

markets should be more resilient to any talk of a Fed taper compared with 2013.

Fiscal vulnerability is also lower

We revise our fiscal projections to reflect the mining-led economic improvement. The

main budget deficit for FY21 (ended 31 March) was a better-than-expected 11.2% of

GDP, the result of a 2.8ppt-of-GDP revenue outperformance versus October 2020

projections and public-sector pay restraint. While the court ruling on public-sector pay

may still be challenged, National Treasury has already cut planned local-currency bond

issuance in FY22. This should result in meaningful debt service savings. Given this,

along with continued revenue buoyancy, we now see fiscal deficits of 7.8% of GDP in

FY22 (9.2% prior) and 6.3% in FY23 (6.8%).

We now expect the SARB to front-

load tightening in January and May

2022 as it seeks to normalise

quickly

South Africa’s C/A surplus may

reduce its vulnerability to a

Fed taper




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Tanzania – Accelerated policy change

Economic outlook – More open to foreign investment

The pace of policy change has accelerated under new President Samia Suluhu

Hassan. A COVID committee has been set up and has recommended accessing

vaccines under the COVAX initiative (Tanzania has yet to roll out vaccines). We expect

statistics on COVID cases and deaths to be published – a pre-requisite for IMF

emergency financing to help with the pandemic response under the Rapid Financing

Instrument (RFI). Tanzania could receive USD 571mn under the RFI.

Better business sentiment should be positive for H2 activity. The budget for FY22

(ends June 2022) forecasts GDP growth of 5.6% in 2021. Discussions have resumed

on LNG production and the Host Government Agreement, with construction targeted

to start mid-2023. Hassan has indicated that a large iron ore mine project, in discussion

since 2011, will also be fast-tracked. There are early signs of accelerating private-

sector credit extension (to 4.8% in April from 2.3% in March). While the authorities

expect a fiscal deficit of 1.8% of GDP in FY22 (narrowing from 2.6% in FY21), this is

premised on a large (9.2%) increase in revenue, which looks optimistic. Spending on

the COVID response and vaccine rollout may exacerbate pressure on public finances.

The authorities have signalled that they may issue a Eurobond in FY22 and would

like to secure a credit rating. While Tanzania is rated B2 with a stable outlook by

Moody’s, the rating was unsolicited. Strong historical growth (Tanzania achieved GDP

growth close to 5% even in 2020), a relatively diversified economy and a debt ratio

below those of many regional economies (c.40% of GDP) are likely to be credit

positives; they are offset by high external debt (76.5% of total debt), budget

underperformance and low GDP per capita. Capital account opening to investors

beyond the East African Community may come back into focus, having stalled for

several years.

Tanzania has seen a sharp decline in tourism earnings, which fell to USD 700mn

in the year to April 2021 from USD 2.2bn the previous year. While a rapid turnaround

looks unlikely, tourism weakness has been partly offset by strong mining performance

(USD 3bn in the year to April 2021 from USD 2.4bn the year prior). FDI is likely to pick

up on stronger business sentiment and expected progress on large mining projects.

We expect a gradual USD-TZS depreciation trend in H2-2021.

Figure 1: Tanzania macroeconomic forecasts Figure 2: Divergent goods and services export

performance (USD mn, year ending April)

2021 2022 2023



3M T-bill (%)* 3.50 3.50 3.50

USD-TZS* 2,335 2,350 2,400



*end-period; **ends 30 June (includes donor assistance);


Source: BoT, Standard Chartered Research

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[email protected]

Economist, Africa


Eurobond issuance appears to be

under consideration again, having

been last discussed in 2016


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Uganda – Rising COVID cases weigh on outlook

Economic outlook – Near-term uncertainty

We lower our 2021 GDP growth forecast to 4.0% (from 5.0%) to reflect greater

economic uncertainty following a renewed COVID surge. The economy contracted

1.1% in 2020. While agriculture is showing significant momentum, the outlook is now

less certain. With a final investment decision (FID) on oil likely in the months ahead,

Uganda’s transition to oil-producer status should support medium-term growth. The

Bank of Uganda (BoU) estimates that infrastructure projects in the lead-up to oil

production could add 0.5ppt annually to growth; actual production could raise the

growth rate by 2-3ppt. A ramp-up to production of c.230kb/d by 2025 is anticipated.

Executive Board approval of a new three-year, USD 1bn IMF facility was reached

in June. Revenue deterioration following the COVID shock and large fiscal deficits

(estimated at 9.9% of GDP in FY21, ended 30 June) increased public debt to 49.8%

at end-2020. The IMF programme aims to raise fiscal revenue gradually to 15% of

GDP, improve the transparency and efficiency of public spending, and stabilise debt

at c.50% of GDP. The FY22 budget envisages narrowing the deficit to 6.4% of GDP,

with spending falling slightly to UGX 44.8tn from UGX 45.5tn in FY21. Domestic

borrowing is set to decline to UGX 2.9tn from a record UGX 6.3tn in FY21, when BoU

advances to the government exceeded 10% of the previous year’s fiscal revenue.

While the IMF programme will likely safeguard fiscal consolidation, our fiscal balance

forecasts are less optimistic than the authorities’, largely reflecting growth uncertainty.

We now see deficits of 6.9% in FY22 and 5.4% in FY23 (from 7.5% and 7.0%). The

authorities see the deficit narrowing to 3.8% of GDP in FY23.

The BoU cut its policy rate in June to 6.5%, an all-time low, following the release

of a new CPI series. We update our CPI forecasts in line with the new series; we now

see inflation at 2.2% in 2021 (3.7% prior), 3.5% in 2022 (4.4%) and 4.0% in 2023

(4.1%). The BoU is concerned that NPLs could spike when COVID relief measures

end, later in 2021. Private credit growth has also been weak, with little room for fiscal

stimulus given the IMF-led consolidation. Given this, we now see the policy rate

remaining at 6.5% until Q2-2022. The BoU’s concern is that rising foreign investor

participation in local-currency debt markets might raise vulnerability to external shocks.

Fed tapering could influence the timing of future tightening; we now see the policy rate

at 7.5% at end-2022 (9.0% prior) and 8.0% at end-2023 (10.0% prior).

Figure 1: Uganda macroeconomic forecasts Figure 2: IMF programme aims to cap public debt growth

Uganda’s public debt to GDP, % (forecasts from 2020)

2021 2022 2023



Policy rate (%)* 6.50 7.50 8.00

USD-UGX* 3,550 3,620 3,800



*end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: IMF, Standard Chartered Research

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Forecasts

Razia Khan +44 20 7885 6914

[email protected]



IMF programme should safeguard

fiscal consolidation, even as

Uganda becomes an oil producer

We amend our CPI forecasts in line

with the new series with updated

weights; policy rate is likely to stay

on hold until Q2-2022


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Zambia – Looking to post-election reform

Economic outlook – IMF progress likely to follow election

Elections scheduled for 11 August will be the key driver of Zambia’s near-term

outlook. Authorities expect GDP growth of 6.0% in 2021 following a 3.3% contraction

in 2020. Our own forecast of 3.0% is more conservative, given persistent COVID

uncertainty and the deepening impact of macroeconomic imbalances. The Bank of

Zambia’s (BoZ’s) composite indicator showed negative q/q growth across most sub-

indices in Q1-2021 amid a COVID second wave. In June, with a third wave threatening,

Zambia saw one of the biggest rises in per-capita COVID cases globally, with schools

shut for three weeks. Election campaigning was suspended in Lusaka and three other

districts because of both COVID and the threat of political violence.

In our view, a smooth election is necessary for Zambia to secure an IMF agreement.

After the election, an IMF deal will be a priority, but Zambia will need to deliver on fiscal

reforms first. An IMF Debt Sustainability Analysis will form the basis of creditor

negotiations under the Common Framework. But this can only happen following a staff-

level agreement with the IMF. With parliament in recess ahead of the election, progress

is slow; there are few visible signs that reforms are being pursued. Higher copper

prices have increased mining royalties, helping to stabilise the Zambian kwacha (ZMW)

while reducing a backlog of FX demand, but spending – including on a farmer input

support programme and fuel subsidies – remains elevated. Our fiscal projections are

only estimates pending the publication of updated data.

Despite elevated inflation, the BoZ kept its policy rate at 8.5% in May, arguing that

improved food harvests and newfound ZMW stability would moderate inflation. We think

that more meaningful policy tightening is a pre-requisite for an IMF programme. We now

expect rate hikes of 200bps each at the end-August and November MPC meetings, with

more tightening early in 2022. Reflecting the lower starting point due to the BoZ’s failure

to tighten meaningfully earlier, we now forecast a policy rate of 12.5% at end-2021 (from

14.5%) and 14.5% at end-2022 (14.0%). Despite improved subscription at T-bill and

bond auctions, market interest rates remain at a premium to the policy rate.

Copper production likely slowed in H1-2021 from record levels in 2020, but higher

prices more than offset this. The BoZ estimates a current account (C/A) surplus of

15.9% of GDP in Q1-2021. In line with this, we raise our 2021 surplus forecast to 15.0%

(from 3.0%); we expect a moderation to 6.0% in 2022 (previously 2.0%) and 3.0% in

2023 (previously 1.5% prior) as imports resume. Despite the C/A surplus, FX reserves

remain pressured, but should be boosted by an IMF SDR allocation at end-August.

Figure 1: Zambia macroeconomic forecasts Figure 2: C/A surplus makes little difference to reserves

Zambia FX reserves (LHS); USD-ZMW (RHS)

2021 2022 2023



Policy rate (%)* 12.50 14.50 12.00

USD-ZMW* 24.00 24.50 26.00




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Razia Khan +44 20 7885 6914

[email protected]



Zambia remains in default on its

external debt; an IMF programme is

needed for debt restructuring talks

under the Common Framework to

progress

Significant C/A surplus and yield-

seeking inflows help to stabilise

the ZMW


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Economies – Europe

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Europe – Top charts Figure 1: A varied Q1 recovery

Q1-2021 GDP, % q/q, countries in Europe

Figure 2: Services recovery gains speed

Euro-area PMIs

Source: Eurostat, Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Figure 3: Prices spike on base effects and supply issues

UK, EA, Switzerland CPI, % y/y (LHS); Brent oil price (RHS)

Figure 4: Hard data points to a mixed Q1 recovery

Euro area IP, construction output and retail sales, index


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Figure 5: UK unemployment falls, services rebound

Unemployment rate, % (LHS); retail sales, % m/m (RHS)

Figure 6: Greece to benefit most from EU RRF funding

EU Recovery and Resilience Facility (grants + loans), % GDP


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Euro area – Almost out of the woods

Economic outlook – Vaccine rollout drives the recovery

We modestly upgrade our 2021 growth outlook. We raise our 2021 GDP growth

forecast to 4.5% from 4.3% following a milder-than-expected Q1 contraction (-0.3%

versus Eurostat’s expectation of -0.6%). Growth is likely to be well supported by the

region’s progress on COVID-19 vaccine rollout. We continue to expect growth to ease

slightly to 4.0% in 2022, but we raise our 2023 growth forecast slightly to 1.6% (from

1.3%) on account of stronger fiscal policy support.

Pandemic case numbers remain well under control at the time of writing, despite Delta

variant cases being identified in various euro-area countries. In addition, the region’s

vaccine rollout has continued to pick up pace, with 50% of the population having

received the first dose and 31% receiving all required doses. This bodes well for

continued economic reopening in the coming months. Moreover, with the European

Commission’s aim of vaccinating 70% of the EU’s adult population by late September

remaining on target (with potential to be reached by late July), the risk of another wave

later in the year has diminished further.

The Q1 GDP performance, while confirming a double-dip recession, also reinforced

our view that companies and households are managing lockdown restrictions better as

the pandemic has evolved. A host of survey indicators have also trended higher,

signalling growing optimism on the recovery. We expect 1.7% q/q growth in Q2, picking

up to 2.1% in Q3 as lingering lockdown restrictions are eased further.

Supply bottlenecks are a potential concern as the pandemic remains prevalent in other

regions, and led to a surprise decline in Germany’s industrial production in April. Such

disruptions have likely also contributed to the rise in inflation, but the constraints should

prove transitory as supply chains return to normal. A supportive fiscal and monetary

policy mix should provide a further tailwind for growth over the medium term.

Policy – ECB to favour wait-and-see approach

Headline inflation heads higher, but ECB should look through this. HICP inflation

fell back to 1.9% y/y in June from 2.0% y/y in May; we expect inflation to be at or above

target for most of this year, reaching a nine-year high of 2.6% in Q4. Moreover, signs

of supply-chain disruptions in Q2 suggest potential for some stickiness in prices.

However, we think many of the factors driving inflation higher will prove transitory, and

Figure 1: Euro area macroeconomic forecasts Figure 2: ZEW sets a 20-year record

ZEW expectations of economic growth

2021 2022 2023



Policy rate (%)* 0.00 0.00 0.00

EUR-USD* 1.26 1.26 1.26




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On course for herd immunity by Q3

Inflation spike is likely to be largely

transitory, although we see scope

for stickiness


[email protected]

Economist, Europe


Geoff Kendrick +44 20 7885 6175

[email protected]

Global Head, Emerging Markets FX Research


Survey indicators point to strong

Q2 and Q3 performance


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should begin to fade heading into H1-2022, continuing into 2023. We therefore

maintain our view that average inflation will fall back to 1.3% in 2022 from 1.9% in

2021. Thereafter, we expect it to edge up more gradually than we previously expected,

and we now forecast inflation at 1.5% in 2023 (from 1.8%).

In light of this, while hawks on the ECB Governing Council (GC) are likely to favour

ending QE purchases sooner rather than later, we expect the majority opinion will be

to maintain accommodative policy until at least early 2022, while monitoring economic

data closely for evidence of stronger demand-driven inflation. We continue to expect

rates to stay on hold over through end-2023 at least. At the current pace, the EUR

1.85tn ‘envelope’ will be fully utilised by early March 2022, which will be on target.

Policy makers have indicated that it may be too early to wind back QE stimulus, but

are likely to emphasise Pandemic Emergency Purchase Programme (PEPP) flexibility

and reduce purchases once the economy is on a more secure footing. While another

PEPP extension is possible, we currently think it is a close call, given that more

hawkish GC members will be reluctant to extend emergency policy support.

On the fiscal front, progress continues on unlocking funds from the Recovery and

Resilience Facility (RRF). All countries have passed necessary legislation to enable

the European Commission to collectively borrow on their behalf. While recovery plans

still need to be agreed between the Commission and member states, RRF

disbursements should begin by around mid-July; this should support national economic

recoveries, largely via increased green and digital investments, particularly as

governments begin to scale back employment and business support schemes.

Politics – Germany and France take centre stage

CDU/CSU-Greens coalition government the most likely outcome in Germany.

German and French elections will dominate European politics for the next 12 months,

given their potential impact on both intra-EU and external relations. In Germany, as

expected, the CDU has increased its lead over the Greens again as vaccine rollout

progresses, but the race still looks tight ahead of the September federal elections. A

CDU/CSU-Greens coalition remains the most likely outcome, with implications for both

environmental commitments and Germany’s foreign policy (see On the Ground,

12 April, ‘Germany – Shifting political sands).

Investors have started to build market positions for a potentially disruptive outcome in

the French presidential election. While polls suggest a repeat of the 2017 run-off

between current President Emmanuel Macron and far-right candidate Marine Le Pen

in the second round, polls are tighter this time. France’s presidential election system –

where the two winners of the first-round vote face each other in a second-round run-

off – brings the possibility of surprises. The two most likely market-adverse outcomes

would be a victory for Le Pen or far-left candidate Jean-Luc Mélenchon, which could

happen if Macron failed to advance to the second round.

Market outlook – Grinding higher

We expect EUR-USD to rise to 1.26 by end-2021, with the euro (EUR) benefiting

from faster-than-expected vaccination progress. While we do not expect an immediate

rollback of ECB balance-sheet expansion, the pace of buying could slow at some point.

We expect rates to stay on hold

throughout the forecast period

In France, polls suggest a repeat of

the 2017 run-off between Macron

and Le Pen




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Switzerland – Delayed recovery on the horizon

Economic outlook – Consumer demand to pick up from H2

We raise our 2021 growth forecast to 3.3% from 3.0% on a pick-up in vaccination

rates and positive survey data. COVID-19 case rates rose from February to April,

halting the easing of restrictions and causing GDP to contract 0.5% in Q1. We see a

strong economic recovery in H2 on further loosening of restrictions, increased vaccine

rollout, and a pick-up in industry and services data. The new, more transmissible

COVID variant and the ongoing negative impact of global supply-chain disruptions on

Switzerland’s manufacturing industry pose downside risks to the outlook.

Hard economic data showed a mixed picture in the first months of 2021. Industrial

production slumped 6.2% q/q in Q1 after rebounding 14.6% q/q in Q4-2020; electrical

equipment and chemical product manufacturing saw the greatest declines. Further,

retail sales fell 4.4% m/m in April after increasing 22.3% m/m in March as restrictions

that had been loosened in March were re-imposed. Still, we believe there is cause for

optimism, as demonstrated by recent survey data. The manufacturing and services

PMIs rose to 69.9 and 58.8, respectively, in May, while the KOF leading indicator

stayed elevated at 133.4 in June. We expect a strong rebound in consumer demand

from June onwards as restrictions are eased and travel gradually resumes. A solid

industrial recovery is likely to take longer than we initially expected, owing to ongoing

chip shortages and supply-chain disruptions, which we see extending into early 2022.

Switzerland’s daily new COVID cases have continued to fall, prompting the

government to further relax containment measures in recent weeks. As of 31 May,

restaurants can open both indoors and outdoors, the work-from-home requirement has

been downgraded to a recommendation, and public events can be held with larger

numbers of people. Vaccinations have accelerated to over 1 per 100 people per day,

overtaking inoculation rates in both the UK and US. At the current rate of vaccination,

herd immunity (70% of the population fully vaccinated) should be achieved by the end

of summer; around 50% of the population has received at least one dose so far. As is

the case across Europe, the new Delta variant increases the risk of a further wave and

poses a clear downside risk to our economic outlook.

Figure 1: Switzerland macroeconomic forecasts Figure 2: Pandemic cases fall and vaccinations increase

Daily new COVID-19 cases per million (LHS); share of people

who have received at least one vaccine dose, % (RHS)

2021 2022 2023



Policy rate (%)* -1.25 to

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USD-CHF* 0.89 0.91 0.88


Fiscal balance (% GDP) -3.0 -1.0 0.5

*end-period; Source: Standard Chartered Research Source: Our World in Data, Standard Chartered Research

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Emiko Bowles +44 20 7885 6409

[email protected]

Research Associate



[email protected]



Vaccination rate accelerates after a

slow Q1 start


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Policy – Monetary policy to remain accommodative

We expect the Swiss National Bank (SNB) to keep rates on hold for the

foreseeable future, continue with FX intervention when necessary. The SNB is

likely to keep the deposit rate at -0.75% through end-2023; SNB President Thomas

Jordan noted recently, “if the SNB were to raise interest rates… then we would have a

much stronger franc, we would have negative inflation, and I don’t think that would

benefit anyone”. The SNB will also likely continue to use FX intervention to contain

Swiss franc (CHF) strength. FX reserves reached an all-time high in March.

Headline inflation rose to 0.6% y/y in May after turning positive in April for the first time

since January 2020. Increasing cost pressures are beginning to feed into producer

prices; this, along with base effects, is likely to drive inflation temporarily towards 1%

in the coming months. Thus, we raise our 2021 CPI forecast to 0.3% (from 0.0%), still

significantly below the SNB’s target of “less than 2% per annum”. We maintain our

average 2022 and 2023 CPI forecasts of 0.5% and 0.8%, respectively, to reflect easing

cost pressures and base effects.

We expect fiscal policy to remain highly accommodative in 2021. Due to the prolonged

second wave, measures to cushion the economic impact, including the short-time work

scheme, have been extended. Further, a new subsidy programme has been introduced

to support the most affected companies. That said, we expect government revenue to

stay resilient in 2021 on ongoing labour-market tightening: unemployment fell to 3.0%

in May from a peak of 3.5% between November and January. We therefore maintain

our 2021 fiscal deficit forecast of 3.0%. We still expect the deficit to narrow in 2022 and

2023 as COVID-related fiscal support programmes are withdrawn. However, we revise

our 2022 forecast to -1.0% from +0.2% to reflect more accommodative post-COVID

fiscal support; we maintain our 2023 forecast of a 0.5% surplus.

Politics – Bern pulls out of Swiss-EU treaty negotiations

Negotiations between Switzerland and the EU on reviving the stalled bilateral

treaty came to a halt on 26 May. The Swiss Federal Council concluded that

“substantial differences” remained between Switzerland and the EU on key aspects of

the agreement. The framework was supposed to bring together 120 treaties and

arrangements with Brussels, which would have formalised ties between Switzerland,

a non-member state, and the bloc. However, final ratification had been delayed by

Swiss concerns regarding the Citizen’s Rights Directive (CRD), wage protection and

state aid provisions.

While the existing agreements governing the bilateral relationship will remain, they

will eventually weaken as the EU gradually amends its own rules. We do not see

talks resuming anytime soon; instead, Switzerland is likely to look to non-EU

countries such as the UK and China for further cooperation as trade barriers with the

EU gradually increase.

Market outlook – EUR-CHF to strengthen further

We think EUR-CHF will grind higher over the next 12 months to an eventual high

around 1.15; the SNB is likely to defend 1.08 on the downside, and the Swiss yield

curve is likely to remain flat. However, we see USD-CHF at 0.89 at end-2021 and 0.91

at end-2022, reflecting a gradual pace of increase along with EUR-USD strengthening.

Cost pressures to support inflation

in the medium term

Swiss-EU relations are likely to

weaken after bilateral treaty

negotiations fail

SNB to keep the policy rate negative

for foreseeable future


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UK – Making up for lost time

Economic outlook – Stellar bounce-back expected

We still expect a strong growth bounce in 2021 and 2022. We raise our 2021

growth forecast to 7.0% (from 6.4%) to reflect the milder-than-expected Q1 contraction

of 1.5%, alongside better-than-expected economic activity in Q2. We maintain our

2022 growth forecast of 5.5%. The virus remains the biggest risk to growth in the next

few quarters, in particular the potential for new variants to limit the effectiveness of

existing vaccines. The development of new targeted vaccines, and the UK’s early

orders for those vaccines, should mitigate longer-term risks.

Hard economic data already shows a significant improvement in economic activity; the

seasonally adjusted retail sales index has already surpassed pre-pandemic levels,

while industrial production is less than 5% below pre-pandemic levels (Figure 2).

Forward-looking indicators are similarly encouraging, with the composite PMI above

60 since April. We therefore expect strong GDP growth in Q2 (c.4.5% q/q), slowing

slightly in Q3 (c.3.8% q/q) as employment support schemes are scaled back;

unemployment is likely to rise by year-end, although not beyond 5.5-6.0% (4.7%

currently). We expect a drawdown of household excess savings as consumer

confidence improves, and higher investment owing to supportive government policy;

both should help to sustain growth heading into next year.

The UK’s vaccine rollout is one of the most advanced in the world: almost 50% of the

population has received all required doses of the regimen, and nearly 70% has

received at least the first dose. The Delta variant remains the primary concern given

its higher risk of hospitalisation and high transmissibility, but vaccines still appear to

have high efficacy against severe disease. International travel restrictions could remain

in place well into 2022, delaying the recovery in tourism.

Policy – BoE can afford to wait

First rate hike is unlikely until late 2022. CPI inflation rose to 2.1% y/y in May –

above the Bank of England’s (BoE’s) 2.0% target – and is likely to rise further in the

coming months. Wage growth as measured by average weekly earnings also hit 5.6%

in April, the highest reading since 2007. However, we think this measure is being

distorted by the effects of the furlough scheme introduced last year (with many workers

dropping to 80% wages), and by the fact that most people who have lost their jobs are

from lower-income sectors. While these factors could send the measure even higher

Figure 1: UK macroeconomic forecasts Figure 2: Retail sales already fully recovered

Index values for retail sales and IP (volume, 2016=100)

2021 2022 2023



Policy rate (%)* 0.10 0.25 0.50

GBP-USD* 1.43 1.45 1.42



*end-period; **for fiscal year ending 5 April; Source: Standard Chartered Research Source: Bloomberg, ONS, Standard Chartered Research

IP

Retail sales

70

75

80

85

90

95

100

105

110

115


Hard economic data points to Q2

growth of 4-5%

Wage growth is being distorted


[email protected]

Economist, Europe



[email protected]



Vaccine rollout and vaccine pipeline

look solid


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over the coming months, we think the BoE will be looking more for signs of

improvement in underlying wage growth.

We expect CPI inflation to fall back to the BoE’s target in early 2022. We raise our

average 2021 forecast slightly to 1.9% (from 1.8%) on account of stronger-than-

expected inflationary pressures in Q2; we see average CPI inflation at 2.0% in 2022

and 2023. While supply disruptions (from COVID-19 and Brexit) could pose upside

risks, we think the MPC will look through elevated inflation in H2, and we do not expect

the first 15bps rate hike until Q4-2022.

As for the QE programme, the slowing of weekly purchases in early May leaves more

of the GBP 875bn Gilt target still to be bought (c.GBP 65bn given that Gilt purchases

stood at GBP 807bn in late May). While a further slowing of purchases could be

announced in August, we expect the programme to be completed by end-2021 and no

expansion to be announced in the coming months.

Fiscal policy is set to tighten gradually over the medium term as emergency support

measures are scaled back this year and taxes rise in 2022 and 2023. The budget deficit

(measured on a fiscal-year basis, and on a current basis – i.e., not including the

government’s net investment spending) is set to narrow from 12.0% of GDP in FY21

(ends 5 April) to 9.5% in FY22 and 5.0% in FY23.

Politics – Brexit and Scotland (again)

The post-Brexit EU relationship and Scotland’s calls for another referendum will

dominate the government’s domestic agenda. The UK government aims to

distinguish itself as a leader on climate change at COP 26 in Glasgow later this year,

but Brexit and Scotland are likely to continue to dominate domestic politics. Brexit

tensions are likely to persist amid the ongoing UK-EU dispute over implementation of

the Northern Ireland (NI) protocol. This issue could spill over to further tensions within

NI itself. While we expect an eventual compromise, political overreaction by either side

could lead to a more significant economic escalation further down the line, particularly

with separate disputes over fishing, state aid and financial services still to be resolved.

Pro-independence parties won a majority of seats in Scotland’s May elections; the

Scottish Nationalist Party (SNP) claims that this provides a mandate for another

independence referendum. However, a formal request from SNP leader Nicola

Sturgeon is unlikely until after the pandemic has subsided (likely in 6-12 months). Boris

Johnson is likely to use this time to win back soft pro-independence voters via his

‘levelling-up’ strategy (with commitments to increase infrastructure funding for Scotland)

and the offer of increased devolved powers. However, his popular support is low north

of the border. When Sturgeon eventually issues a formal request, we expect this to

become the primary issue in UK politics (see Not all roads lead to IndyRef2).

Market outlook – Grinding higher

We expect GBP-USD to rise to 1.43 at end-2021 and 1.45 at end-2022. Solid

economic momentum supports the British pound (GBP), despite concerns over EU-UK

trade tensions. However, with other positives (Brexit concluded and UK vaccine rollout)

already in the price, we expect any further move in GBP-USD to be a slow grind.

QE set to end this year

UK government keen to

demonstrate leadership on climate

change at COP 26 in Glasgow



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Czech Republic – Pandemic under control

Economic outlook – A muted 2021 recovery

We lower our 2021 growth forecast to 3.3% (from 3.5%) owing to the negative

impact of weak supply chains on Czech Republic’s industrial sector. Q1 GDP

contracted 0.3% q/q as prolonged restrictions kept retail and services closed. We

expect both services and industry to have remained muted in Q2 on lingering

restrictions, weak consumer confidence and subdued manufacturing. Key industrial

sectors continue to suffer from global supply-chain disruptions. Economic reopening

and wider vaccine rollout should foster renewed consumer spending, which is likely

to drive stronger economic growth in H2-2021.

Industrial production grew 1.9% m/m in April, versus 2.6% in March. Supply shortages

– arising from overburdened global supply chains – continue to weigh on

manufacturing; producer prices rose 5.1% y/y in May, the biggest increase since

November 2011. The automotive industry, which accounts for c.10% of GDP, and the

computer and consumer electronics sector have been hardest hit. Retail sales grew

0.7% m/m in April after contracting 0.8% in March; we expect a gradual but sustained

pick-up in consumption in H2-2021 as containment measures ease and pent-up

savings are gradually drawn down.

We see industry and services reverting to robust growth in 2022 as supply-chain issues

and pandemic uncertainties fade. Improved business sentiment, alongside funding

from the EU Recovery and Resilience Facility (RRF), should help to fuel investment

from next year onwards. We therefore raise our 2022 and 2023 growth forecasts to

4.0% (from 3.7%) and to 3.5% (from 2.2%), respectively.

The pandemic situation continues to improve: daily new cases have fallen 99% to just

12 per 1mn population since the third wave peaked in early March. Daily vaccinations

have accelerated to 0.9 per 100, up 36% in the last month. Some 31% of the population

has been full vaccinated; at the current rate of vaccination, herd immunity (70% of the

population fully vaccinated) should be achieved by end-August. Still, new and more

transmissible variants pose an ongoing threat to economic recovery. Household and

corporate sentiment is likely to remain subdued until most of the adult population is

inoculated.

Figure 1: Czech Republic macroeconomic forecasts Figure 2: Vaccination pace accelerates

Daily COVID-19 vaccine doses per 100 people

2021 2022 2023



Policy rate (%)* 0.75 1.25 1.50

USD-CZK* 19.84 19.84 19.80



*end-period; Source: Standard Chartered Research Source: Our World in Data, Standard Chartered Research

Czech Republic

EU

UK

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21

x 10

000

We raise our 2022 and 2023 growth

forecasts on likely improvements in

household and corporate sentiment

Emiko Bowles +44 20 7885 6409

[email protected]

Research Associate



[email protected]



Vaccination pace accelerates after a

very slow Q1 start

Global supply-chain issues

continue to weigh on manufacturing


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Policy – Accommodative fiscal policy in 2021

We expect another 25bps rate hike from the Czech National Bank (CNB) in H2-

2021. The CNB remains hawkish on inflation despite muted growth. We therefore

expect a further 50bps of hikes in 2022, in line with the domestic and global demand

recovery. Given the increased risk of another surge in COVID cases, risks to our rates

outlook are to the downside; the CNB may delay the next hike to 2022 in the event of

another wave.

We maintain our 2021 average inflation forecast of 2.5%. Headline inflation slowed

slightly to 2.9% y/y in May from 3.1% in April. We expect inflation to remain elevated

in Q3 before softening towards the end of the year as fuel price base effects and global

supply-chain issues ease. We see inflation gradually heading towards the CNB’s target

of 2.0% in 2022 as monetary policy tightens.

Fiscal policy is likely to remain highly accommodative for the rest of 2021 given the

prolonged third wave. Government compensation schemes aimed at protecting jobs in

pandemic-affected sectors and supporting household incomes, combined with the

personal income tax reduction introduced at the start of 2021, should support

consumer demand this year. Most domestic fiscal support measures should be phased

out in 2022, as expected.

The Czech Republic is likely to receive EUR 7.1bn in grant funding from the EU’s

RRF between 2021 and 2026. The European Commission has until early August to

assess the country’s RRF plan, after which the European Council will have four

weeks to adopt the Commission’s proposal for a Council Implementing Decision.

Given that the government was late in submitting its plan, disbursements are unlikely

until Q4-2021 at the earliest.

Politics – 2021 legislative elections

Legislative elections are scheduled for 8 and 9 October. All 200 members of the

Chamber of Deputies will be elected, alongside a leader of the resulting government,

who will become prime minister. Support for Andrej Babiš’ ruling ANO party has

continued to fall since the start of the pandemic. According to recent polling data,

support for the minority government is down to 20% (ANO won 29.6% of the vote in

2017), while the opposition alliance between the Pirate Party and the Mayors and

Independents party (STAN) is at 27.5%. Babiš is unlikely to regain support by October,

in our view; ANO’s popularity has failed to recover despite increasing vaccinations and

the gradual easing of restrictions.

Market outlook – EUR-CE3 outlook unchanged

Terms of trade have improved across CE3 as the region benefits from the global post-

pandemic recovery. At the same time, central banks have turned more hawkish; the

Czech Republic and Hungary have already delivered rate hikes. We expect further

improvement, with a relative preference for the Czech koruna (CZK), followed by the

Polish zloty (PLN) and the Hungarian forint (HUF), based on relative terms of trade

and the potential for further central bank normalisation. We maintain our end-2021 and

2022 forecasts for EUR-CE3 crosses, and we see EUR-CZK at 25.0 at end-2022.

Inflation to remain in Q3 on base

effects and higher producer prices

We expect one more rate hike

in 2021


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Hungary – A brighter year ahead

Economic outlook – Optimistic amid early reopening

We raise our 2021 GDP growth forecast to 5.5% (from 4.0%) on solid Q1 growth,

fast vaccine rollout and early economic reopening. GDP grew 2.0% q/q in Q1 on

the back of strong exports, industrial-sector resilience and supportive government

spending. Though the resurgence of COVID cases in early 2021 meant much of March

and April was spent in lockdown, we expect the economic rebound to have resumed

in Q2. We raise our 2022 growth forecast to 4.5% (from 4.0%) and our 2023 growth

forecast to 3.5% (from 2.7%) to reflect expansionary fiscal policy being maintained

through 2023 and funding via the EU Recovery and Resilience Facility (RRF).

Industrial production fell 3.2% m/m in April after a weak 0.1% increase in March.

However, recent survey data suggests cause for optimism: the manufacturing PMI

turned expansionary in April and rose to 52.8 in May. We see industrial activity

improving in H2-2021 given the lifting of almost all restrictions by end-May and higher

external demand. Retail sales also suffered in April, contracting 1.0% m/m. However,

the services sector is likely to rebound strongly in H2-2021 as pent-up savings are

spent and tourism returns.

Hungary’s pandemic situation continues to improve. After a rapid resurgence of COVID

cases in February and March, daily new cases have fallen to less than 10 per million

people. Further, c.57% of the population has already received a first vaccine dose,

above the EU average of c.50%. At the current rate of vaccination, herd immunity

should be achieved by end-August. That said, we remain cautious of further COVID

outbreaks given the government’s early reopening programme and the spread of the

new, more transmissible COVID variant throughout Europe.

Policy – Monetary tightening, accommodative fiscal policy

We see another 60bps of rate hikes from the National Bank of Hungary (NBH) by

end-2021, taking the base rate to 1.5%. The NBH raised the base rate by 30bps in

June (to 0.90%), the first hike since the start of the pandemic. The central bank has

communicated that in order to “prevent the lasting effects of inflation risks and to

anchor inflation expectations”, it will assess the need to “further tighten monetary

conditions in a data-driven manner at its monthly policy meeting”. The pace of rate

hikes will depend mostly on inflation dynamics in the coming months as more transient

Figure 1: Hungary macroeconomic forecasts Figure 2: Activity dipped in April on COVID spike

Industrial production and retail sales, % m/m

2021 2022 2023



Policy rate (%)* 1.50 0.90 0.90

USD-HUF* 286.00 286.00 290.00




Retail sales

IP

-30

-25

-20

-15

-10

-5

0

5

10

15

20

May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21

Industry and services to exhibit

robust recovery in H2-2021

Emiko Bowles +44 20 7885 6409

[email protected]

Research Associate



[email protected]



Hungary’s vaccination campaign is

well ahead of the EU’s


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drivers (i.e., higher commodity prices versus last year) fade. However, we believe the

NBH will be proactive, front-loading rate hikes in Q3 before taking a more incremental

approach to tightening in Q4.

Headline inflation remained elevated at 5.1% y/y in May, driven by increases in fuel

prices and excise taxes. We expect inflation to remain close to the NBH’s upper

tolerance band of 4% (target rate: 3% +/- 1ppt) in H2-2021 as demand continues to

outstrip supply, domestic and external consumption resumes, and global supply-chain

issues linger. Producer prices rose 11.3% y/y in May as supply shortages continued to

pass through to domestic prices. As such, we raise our 2021 inflation forecast to 4.2%

(from 4.0%). We expect a gradual softening of prices in 2022 and 2023 as supply

issues ease and the drawdown of pent-up savings diminishes. We maintain our

inflation forecasts of 3.0% for both 2022 and 2023.

On the fiscal front, Hungary’s finance minister has communicated that post-COVID

government spending will remain expansionary through 2023. Hungary is also likely to

receive EUR 7.2bn (c.5% of GDP) in grant funding from the EU RRF between 2021 and

2026. Policy reforms will be structured around the green transition, health care and

digitalisation; projects will include investments in sustainable transport and the energy

transition. We maintain our fiscal deficit forecasts given that earlier-than-expected

reopening should offset early-year fiscal underperformance. We see risks of a larger

deficit, especially given greater economic uncertainty due to the new Delta variant.

We continue to expect the current account surplus to gradually improve for the rest of

2021 as improving external demand leads to higher exports. Further, increased

investment as a result of ongoing fiscal support and future RRF funding should add to

output capacity, supporting the current account in the medium term.

Politics – 2022 parliamentary elections

Parliamentary elections are scheduled for spring 2022; at stake are 199 seats

in the National Assembly. 106 seats are elected through constituencies via first-

past-the-post voting and the remaining 93 via nationwide proportional

representation. Support for the ruling Fidesz-KDNP Party Alliance, led by Prime

Minister Victor Orbán, has slipped since the 2018 election; recent polling data

suggests 47% support. Leaders of the six opposition parties have agreed to form an

alliance in an attempt to defeat the incumbent. The ‘United Opposition’ alliance,

including the Movement for a Better Hungary, or Jobbik (which has attempted to

transition from the far right towards the centre of the political spectrum) and the

Hungarian Socialist Party (MSZP), together poll at 48% support. The ruling

nationalist party is likely to maintain strong fiscal support in order to regain popularity

and retain its supermajority next year.








2022 forecasts for EUR-CE3 crosses; we see EUR-HUF at 360 at end-2022.

Supply-side disruptions to keep

inflation elevated for the rest

of 2021


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Poland – A brightening outlook

Economic outlook – Solid H2-2021 recovery ahead

We raise our 2021 GDP growth forecast to 4.0% from 3.5% on expectations of a

robust H2 consumer demand recovery and accommodative monetary and fiscal policy.

GDP grew 1.1% q/q in Q1 on the back of increased private spending and strong

investment (gross capital formation grew 17.5% q/q). Economic activity dipped in April

as a result of deteriorating pandemic conditions. However, we remain optimistic for a

sustained economic recovery starting in late Q2 as containment measures are eased

and household consumption picks up.

Retail sales grew 8.4% m/m in May (sales of clothing and footwear were up 92.6%

m/m) after falling 27.3% m/m in April on renewed lockdown restrictions. We see

services activity accelerating in H2-2021 on pent-up domestic demand and a further

global demand recovery. Industrial production grew 0.6% m/m in May following a 0.2%

contraction in April. The manufacturing PMI strengthened to 57.2 in May, a record high,

as growth in both output and new orders accelerated. However, global supply-chain

disruptions due to the pandemic continue to affect Poland’s industrial sector. Suppliers’

delivery times increased to record highs in May, reflecting ongoing supply-side

shortages. The gradual easing of supply-chain issues from end-2021 should support

Poland’s automotive industry and boost export growth from 2022 onwards.

Restrictions continue to be eased across Poland as daily new cases fall to less than 5

per million population. As of early June, all non-essential businesses, restaurants

(albeit with capacity limits) and schools are open. Poland’s vaccination rate has

increased threefold since March, rising to over 0.7 doses per 100 people per day. Over

40% of the total population has received at least one dose of a COVID-19 vaccine; at

the current vaccination rate, herd immunity should be achieved by early September.

Still, vaccine scepticism remains high in Poland. In May, a survey by state-owned

research centre CBOS indicated that 25% of respondents do not intend to receive a

vaccine when offered. Given the spread of the more transmissible Delta variant, low

take-up poses a significant threat to economic reopening and a return to normalcy.

Figure 1: Poland macroeconomic forecasts Figure 2: Inflation picks up while policy rate stays steady

CPI, % y/y (LHS) and NBP policy rate, % (RHS)

2021 2022 2023



Policy rate (%)* 0.10 0.50 1.00

USD-PLN* 3.33 3.33 3.35




Inflation, % (LHS)

Policy rate, % (RHS)

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1

2

3

4

5

6

7

-4

-2

0

2

4

6

8

10

12

14

May-07 May-09 May-11 May-13 May-15 May-17 May-19 May-21

Services and industrial recovery is

likely to accelerate in H2-2021

Emiko Bowles +44 20 7885 6409

[email protected]

Research Associate



[email protected]



Vaccine scepticism poses an

ongoing threat to sustained

economic reopening


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Policy – Accommodative through 2021

We expect the National Bank of Poland (NBP) to leave rates unchanged in 2021.

NBP President Glapinski has stressed that it is “way too early” to consider monetary

policy normalisation given prevailing pandemic uncertainty. He has commented that

monetary tightening cannot be justified until forecasts reflect higher GDP growth in the

coming years, persistent inflation and a strong labour market. As such, we forecast no

rate hikes in 2021; we expect 40bps of hikes starting around mid-2022 as Poland’s

economy returns to trend. In addition to keeping the policy rate steady, the NBP has

said it will continue to purchase government assets in the secondary market to maintain

favourable liquidity conditions. The central bank has also reiterated its willingness to

intervene in the foreign exchange market if necessary.

Headline inflation rose to 4.7% y/y in May from 4.3% in April on commodity price base

effects (fuel prices were up 33.0% compared to a year ago) and food price increases.

Temporary supply-chain disruptions also continue to bolster inflation: producer price

inflation spiked to 6.5% y/y in May, having remained largely negative in 2020. We see

inflation staying close to the upper band of the NBP’s inflation target (2.5% +/- 1ppt)

for the rest of 2021 on longer-than-expected supply shortages and strong industrial

demand. As a result, we raise our 2021 inflation forecast to 3.5% (from 3.0%). We

expect inflation to gradually soften towards the target in 2022 as temporary drivers

fade; we maintain our CPI inflation forecasts of 2.5% for both 2022 and 2023. We think

the perception that inflationary factors are temporary will keep the NBP from tightening

policy this year.

Domestic fiscal policy is likely to remain accommodative for the rest of 2021, with

support targeted to sectors most affected by subsequent pandemic waves. Further,

Poland is expected to received EUR 23.9bn in grants and EUR 12.1bn in loans – c.7%

of GDP – under the EU Recovery and Resilience Facility (RRF). As in euro-major

countries, green transformation features heavily in Poland’s plan. Projects include

measures to reduce air pollution and develop energy-efficient buildings, sustainable

energy sources and zero-emission transport, and are expected to be financed over the

entire 2021-26 RRF period. We expect disbursements to begin sometime in Q3-2021.

Poland’s current account surplus increased to 3.7% of GDP in March on positive trade

dynamics. Goods exports and imports were up 27.7% and 24.6% y/y, respectively. We

expect the current account surplus to moderate in H2-2021 as a consumer demand

recovery leads to higher imports. Nevertheless, we revise our 2021 current account

forecast up slightly to 2.5% (from 2.2%) to reflect our expectation of resilient

external demand.








2022 forecasts for EUR-CE3 crosses and see EUR-PLN at 4.20 at end-2022.

We raise our 2021 CPI inflation

forecast to 3.5% on temporary

factors

Monetary policy normalisation is

not expected until 2022


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Russia – Heating up

Economic outlook – Trade and demand support recovery

We maintain our 2021 GDP growth forecast of 3.2% on a shallower-than-

expected Q1 contraction, delayed vaccine rollout and mixed economic data.

GDP contracted by 0.7% y/y in Q1 due to weak retail sales and lingering COVID-19

restrictions; the H2-2021 recovery should be supported by strong exports, booming

domestic demand and favourable fiscal spending ahead of parliamentary elections in

September. Slow vaccine rollout and the potential dampening effect of rising inflation

on consumer demand are downside risks to our outlook.

Exports remained strong in April – having returned to trend – with support from growing

global demand and a weaker Russian ruble (RUB). Exports of autos, copper, and

machinery and equipment saw the biggest increases versus March. The industrial-

sector recovery has been subdued so far; industrial production grew 1.1% m/m in May

following a weak 0.1% expansion in April. We believe global supply-chain disruptions

– and the corresponding 35.3% y/y jump in producer prices in May – are keeping

industrial production growth subdued. Retail sales growth slowed to 0.3% m/m in April

from 9.2% in March. Inflation dynamics are likely to play a key role in sustaining the

consumer demand recovery. On a more optimistic note, survey indicators continue to

improve, with both the manufacturing and services PMIs edging higher since the

beginning of 2021.

On the COVID front, only c.15% of the population has received at least one vaccine

dose (source: Our World in Data); this is concerning given the global spread of the

new, more contagious Delta variant. Daily COVID-19 cases and deaths have picked

up after a prolonged period of stability. Cases in Moscow surged in June to the highest

level since mid-January, prompting authorities to reimpose work-from-home

restrictions. Since the start of the pandemic, the Kremlin has resisted re-imposing strict

containment measures in favour of keeping the economy open. We see a significant

risk that this strategy will allow the Delta variant to become widespread, which could

curb growth in the coming quarters.

Policy – Monetary policy tightening to continue

The Central Bank of Russia (CBR) is likely to hike rates by another 100bps this

year. At its June meeting, the CBR increased the key rate by 50bps to 5.50% in

response to accelerating inflation in May.

Figure 1: Russia macroeconomic forecasts Figure 2: Inflationary pressures strengthen

CPI (% y/y) and key rate (%)

2021 2022 2023



Policy rate (%)* 6.50 6.00 5.75

USD-RUB* 70.0 68.0 71.4




CPI, %

Key rate, %

0

2

4

6

8

10

12

Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21

Exports and services continue to

fuel the economic recovery

Another 100bps of hikes expected

this year, assuming no further

lockdowns in H2

Emiko Bowles +44 20 7885 6409

[email protected]

Research Associate



[email protected]



Slow vaccination rollout poses a

clear downside risk to our outlook


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The CBR also maintained its hawkish tone, noting that increased inflationary pressure

– driven by a faster-than-expected domestic and global recovery and supply-chain

disruptions – “creates the necessity of further increases in the key rate at upcoming

meetings”. We think the next 50bps hike will come in July, followed by a 25bps hike in

September. We expect another 25bps hike in December, provided that the recent pick-

up in cases does not lead to widespread closure of the economy. This would take the

key rate to 6.50% by end-2021.

Headline inflation accelerated to 6.0% y/y in May – well above the CBR’s 4.0% target

– on stronger domestic demand and ongoing global supply-chain disruptions. The pace

of food price inflation has prompted the government to impose temporary price caps

on key products, including sugar. We expect inflationary pressures to persist in Q3

amid rising inflation expectations, which have reached their highest level in four years,

as well as elevated government spending ahead of the September elections. We

maintain our 2021 average inflation forecast of 5.2%, in line with consensus. We expect

inflation to soften to 4.2% in 2022 and 3.5% in 2023 as global commodity prices and

global supply-chain issues ease.

We expect fiscal policy to remain accommodative ahead of the September elections,

but we raise our 2021 fiscal balance forecast to 0.0% of GDP (from -2.5%) to reflect

higher non-oil revenue (mostly VAT receipts) and lower health expenditure. The federal

budget surplus was RUB 312.1bn in May, versus a deficit of RUB 273.7bn a year

earlier. The Kremlin is likely to proceed with fiscal policy normalisation in 2022 and

2023, leading to a narrower fiscal balance. We therefore raise our 2022 fiscal balance

forecast to 0.5% from -0.5%; we keep our 2023 forecast at 0.5%.

Politics – Russia-US relations unlikely to improve

Biden and Putin held a widely anticipated summit in June. Short of an

improvement in relations, the meeting raised hopes that the two sides might establish

‘rules of the road’ to avoid confrontation in areas such as cyberattacks. Expectations

are low – on both the US and the European side – that relations with Putin’s Russia

will improve materially.

Legislative elections are scheduled for mid-September; at stake are 450 seats in the

lower house of the Federal Assembly. Putin’s ruling party, United Russia (UR), and its

allies currently control c.90% of the assembly. Support for UR has dropped to an eight-

year low of around 30%. The Communist Party (CPRF) and the Liberal Democratic

Party (LDPR) follow with 12% and 11% of support, respectively. Still, the election is

unlikely to bring any surprises. We expect UR to retain its supermajority, with a

possibility that Putin could exercise stronger control over the election outcome (see

2021 – Electoral heatmap).

Market outlook – RUB staying strong

We are constructive on the RUB. Concerns over sanctions have eased, with

restrictions limited to new OFZ issuance, and we think RUB strength can continue.

Inflation accelerates on strong

domestic demand and supply-chain

disruptions

Low hopes for improving relations

with the West; legislative elections

are unlikely to bring surprises



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Economies – Americas

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US and Canada – Top charts Figure 1: Inflation is the highest since the early 1990s

US core CPI and core PCE, % y/y

Figure 2: Incomes and spending are back above

pre-pandemic levels; savings rate is twice as high

US household saving rate, %; consumption and income, USD bn


Figure 3: Inflation expectations have risen

U Mich inflation expectations during next 1Y and 5-10Y, %

Figure 4: Investment has picked up strongly

US capital-goods new orders, non-defense ex aircraft, USD bn


Core PCE

Core CPI

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


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Personal income, chained 2012 USD (RHS)Personal spending,

chained 2012 USD (RHS)

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Tho

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Figure 5: Employment is still c.10mn below trend

US total employment (mn) and pre-pandemic trend

Figure 6: US GDP to return to pre-pandemic level by Q2-

2021; Canada by Q3-2021

US* & Canada** GDP in domestic currency value, tn

Source: Bloomberg, Standard Chartered Research *Chained 2012 prices; **chained 2007 prices; Source: Bloomberg, Standard Chartered Research

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140

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Canada (RHS)

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Latin America – Top charts Figure 1: Vaccination rates are low, except in Chile

Share of population vaccinated (one or more doses), %

Figure 2: Inflation is taking off in some countries

CPI, % y/y

Source: Our World in Data, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Figure 3: Exports have recovered well

Latin America and world export volume index

Figure 4: Real policy rates are set to turn less negative

Real policy rate, %


Brazil

Chile

Colombia

Mexico

Peru

0

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Brazil Chile Peru Mexico Colombia

Figure 5: After Peru’s radical swing, potential for more

regional political change in next 15 months

Upcoming elections

Figure 6: Copper price driven by demand and USD moves

LME copper price (LHS) vs DXY dollar spot index (RHS)

Country Election type Date

Chile Presidential (run-off) 21 Nov (19 Dec) 2021

Colombia Presidential 29 May 2022

Brazil General and

presidential 2 October 2022

Source: National sources, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

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DXY USD Index (RHS)

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Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21


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US – The talking starts

Economic outlook – Employment is catching up

Stronger job growth should sustain economic momentum. We expect 2021 GDP

growth of 6.5%, reflecting substantial fiscal stimulus and the reopening of the economy

on positive vaccination progress. While employment has recovered at a slower pace

than we expected, we think job growth will accelerate in Q3, sustaining buoyant

quarterly GDP growth. We now expect Q4-2021 y/y growth of 6.7% (previously 6.0%),

with stronger momentum driving full-year 2022 growth of 3.5% (3.0%). We expect 2023

growth to slow to 2% as the economy normalises after the pandemic-related bust and

boom. We expect both Q4-2022 and Q4-2023 y/y growth to be 2.0%.

Labour demand is strong, but employers report worker shortages despite

unemployment being well above the 3.5% rate associated with full employment.

Factors limiting the take-up of jobs – including nervousness over pandemic risks, child-

care issues and enhanced unemployment benefits – may ease in H2-2021. Higher

unemployment benefits end in early September, and a number of states are

increasingly ceasing these benefits earlier. Good progress has been made on

vaccinations, with 54% of the population having received at least one dose by 27 June.

That said, the pace has slowed since end-April, leaving a sizeable minority unprotected

against the more transmissible COVID-19 Delta variant, which may become the

dominant variant in Q3.

Consumer spending likely stayed strong in Q2, though momentum slowed after the

impact of March’s pandemic-related payments faded, and consumers have become

more nervous about headwinds from higher inflation. Stronger job growth, the receipt

of child tax credits, and the deployment of savings accumulated during lockdowns

should further boost spending in H2. Investment spending is also likely to be a growth

driver, underpinned by low interest rates. But earlier strong momentum in residential

investment has waned in the face of shortages of building materials and lower buyer

interest amid weaker affordability. While exports are rising on the back of a broader

global recovery, we expect import growth to outpace export growth. In Q1-2021, the

current account (C/A) deficit deteriorated to 3.2% of GDP, the worst level since 2009.

We expect a 2021 C/A deficit of 3.5% of GDP, improving to 3.0% in 2022 and 2.8% in

2023 as US domestic demand slows.

Figure 1: US macroeconomic forecasts Figure 2: Inflation set to stay well above target in H2-2021

Services and durable goods PCE deflators, % y/y

2021 2022 2023


Core PCE (% annual average) 2.8 2.4 2.2

Fed funds target rate (%)* 0.25 0.25 0.75

10Y UST yield (%)** 2.00 1.80 1.80



*FFTR: upper-end of expected range; **end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Durable goods PCE deflator (LHS)

Services PCE deflator (RHS)

1.0

1.5

2.0

2.5

3.0

3.5

-4

-3

-2

-1

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May-11 May-13 May-15 May-17 May-19 May-21

Labour shortages despite high

unemployment

Sarah Hewin +44 20 7885 6251

[email protected]



John Davies +44 20 7885 7640

[email protected]

US Rates Strategist


Investment is strong, and spending

should be boosted by rising

employment, tax credits and

savings drawdowns


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Policy – Tapering moves into view

We expect the Fed to start tapering QE purchases in Q1-2022 and raising rates

in H1-2023. With an increasing share of the population vaccinated against COVID-19

and the economy likely to be back at trend GDP later this year, the need to keep

monetary policy on an emergency footing is waning. But policy makers have committed

to maintaining QE at the current USD 120bn/month until substantial progress has been

made towards their goal of maximum employment and inflation that has reached 2%

and is on track to modestly exceed 2% for some time.

While we expect job gains to accelerate in H2-2021, an increase in the labour force

and higher labour participation rates are likely to slow the decline in the unemployment

rate. Consequently, full employment (an unemployment rate of 3.5%) may not be

reached until 2023. Even so, a decline to 4.5-5.0% by end-2021 may be sufficient

progress towards the Fed’s employment goal to allow tapering to start in 2022.

Inflation is currently well above the 2% target, with the core PCE deflator reaching 3.4%

y/y in May. Much of the acceleration in inflation in H1-2021 was due to higher

commodity prices, pandemic-related supply disruptions and economic reopening as

pandemic restrictions were eased. We raise our 2021 core PCE deflator forecast to

2.8% (previously 2.2%) but now expect 2022 to slow to 2.4% (2.1%); we still see 2023

at 2.2%. We expect Q4 y/y inflation of 3.2% in 2021, 2.2% in 2022 and 2.1% in 2023.

We see a risk of core PCE reaching c.4% by Q4 if commodity prices and supply-side

constraints do not ease as we expect in H2. Inflation expectations are high, at 4.2%

over a 1-year horizon and 2.8% over a 5-10 year horizon; policy makers are concerned

that elevated inflation expectations could embed higher inflation in wage-setting.

The fiscal deficit is likely to stay wide in 2021, after reaching 15.6% of GDP in 2020.

We now expect a 2021 deficit of 15% of GDP (previously 12%), narrowing to 8% in

2022 and 6% in 2023. In Q1, households and individuals received USD 1.9tn via the

American Rescue Plan (enhanced unemployment benefits and direct payments);

further funds for individuals and households may be forthcoming if economic

momentum slows. An infrastructure package of some USD 1tn, the ‘American Jobs

Plan’ (new funding and renewal of existing infrastructure funding) over the next five

years has received bipartisan support from a group of senators. President Biden also

hopes that Congress will pass the ‘American Families Plan’, c.USD 1.8tn of welfare

and climate-related spending and tax credits over 10 years (funded by tax hikes on

wealthy Americans), although this bill is likely to rely solely on Democratic support in

Congress via the reconciliation process.

UST market outlook – Consolidation continues

Q2 data, while strong overall, did not beat market expectations, and the 10Y UST yield

was unable to sustain the Q1 uptrend. Broad consolidation has therefore been the key

theme; in Q3, we expect the 10Y yield to stay mostly within the c.1.50-1.75% trading

range that has dominated price action in recent months. We maintain our end-2021

10Y UST forecast of 2.0% for now, but see growing downside risks; we recently

lowered our end-2022 forecast to 1.8% from 2.25% (see Macro Strategy Views). While

we expect the Fed to start raising rates in 2023, inflation should be drifting down

towards target by then, and we see growth slowing towards potential. This is likely to

limit market pricing for the overall Fed hiking cycle; we therefore also lower our end-

2023 10Y UST yield forecast to 1.8% from 2.25%.

The need to keep monetary policy

on an emergency footing is waning,

assuming ongoing progress in

tackling COVID-19

We expect core PCE inflation to

average 2.8% in 2021

Our base case is that the c.1.50-

1.75% range for the 10Y UST yield

will hold in Q3

The fiscal deficit is likely to narrow

only slightly in 2021

Full employment may not be

reached until 2023



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Canada – Overtaking

Economic outlook – Vaccinations to deliver growth boost

H2 growth is likely to be strong as the economy pulls out of a third pandemic

wave. We raise our forecast for 2021 GDP growth to 6.4% (previously 5.5%), and 2022

to 4.5% (3.5%). A third pandemic wave struck in April and May, but cases have come

down sharply; meanwhile, under an accelerated vaccination programme, 68% of the

population had received at least one dose by 27 June. We expect the economy to

bounce back in H2-2021, after subdued Q2 growth, as COVID restrictions are eased

over the summer. Strong activity in H2-2021 should provide a solid base for 2022;

thereafter, we see growth slowing to a more ‘normal’ pace of 2.5% in 2023.

After growth of 5.7% q/q SAAR in Q1, driven by strong household spending, the

economy slowed in Q2-2021 with the re-introduction of pandemic restrictions. Some

275,000 jobs were lost in the third wave of the pandemic in April and May, more than

in the second wave over the winter months; the unemployment rate rose to 8.2% in

May. High-frequency data point to employment recovering swiftly with the reopening

of the economy, though employers face labour shortages that may be partly due to

pandemic unemployment benefits. Bank of Canada (BoC) Governor Tiff Macklem said

that employment would need to return to c.200,000 above the pre-pandemic level to

get back on trend and reduce unemployment back below 6% (Figure 2).

Exports should help to drive the recovery, supported by high prices for oil and other

commodity exports and increased US demand (Canada sends 75% of its exports to

the US). The trade balance was in surplus for three of the first four months of the year

(albeit partly due to a 22% drop in vehicle imports in April as semiconductor shortages

led to shutdowns in the auto industry). We expect the current account deficit to narrow

to 0.8% of GDP in 2021 from 1.8% in 2020.

We raise our 2021 inflation forecast to 3.1% (previously 2.1%). As elsewhere, inflation

has accelerated on base effects, higher commodity prices and supply constraints. In

Canada, the impact of economic reopening has also contributed to higher prices, along

with building costs and demand for housing. CPI inflation rose to 3.6% y/y in May (well

above the 1-3% BoC target) from 0.7% in December 2021, while the average of core

inflation measures rose to 2.3%. The BoC views inflation pressures as transitory, with

underlying price pressures remaining weak due to economic slack.

Figure 1: Canada macroeconomic forecasts Figure 2: Employment has recovered but is still below trend

Employment, mn; unemployment rate, %

2021 2022 2023



Policy rate (%)* 0.25 0.50 1.00

USD-CAD* 1.15 1.14 1.15



*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Actual employment

(LHS)

Trend employment (LHS)

Unemployment rate (RHS)

5

7

9

11

13

15

17

16

17

18

19

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2016 2017 2018 2019 2020 2021

Sarah Hewin +44 20 7885 6251

[email protected]



Steve Englander +1 212 667 0564

[email protected]

Head, Global G10 FX Research and North America Macro

Strategy

Standard Chartered Bank NY Branch

Exports should benefit from

stronger US demand

Employment is recovering, though

employers complain of labour

shortages

Inflation has risen to well above the

BoC’s 1-3% target


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Policy – Gradually removing emergency support

Further tapering; we now see a rate hike in 2022. BoC Deputy Governor Timothy

Lane indicated on 10 June that if the economy recovers in line with, or faster than, the

BoC’s expectations, it will not need as much support over time. “Given the reopenings

happening in many parts of Canada, we expect to learn more over the coming weeks

to further inform that assessment,” he said. Following a tapering of bond purchases in

April, we expect another reduction in QE purchases in July to CAD 2bn/week from the

current pace of CAD 3bn/week. We see further gradual tapering over the next 12

months, down to zero by mid-2022.

Policy makers have committed to holding rates low until the damage from the pandemic

is fully repaired. We expect the BoC to start raising rates ahead of the Fed; we now

forecast that it will deliver first 25bps move in H2-2022 (instead of 2023), taking the

policy rate to 0.5% (instead of keeping it on hold at 0.25%). We now forecast two further

hikes in 2023, taking the policy rate to 1.0% (rather than 0.75%).

The 2021 budget, published in April, committed to maintaining support for households

and businesses, prolonging emergency benefits via a number of schemes (including

the Canada Emergency Wage Subsidy and the Canada Recovery Benefit), and

introducing an additional wage-bill subsidy, the Canada Recovery Hiring Program.

Some CAD 101bn in new spending was committed over three years. We expect the

fiscal deficit to narrow to 6.5% of GDP in 2021 from 10.7% in 2020 as revenues recover

and the need for support declines; we forecast further deficit reduction to 3.5% of GDP

in 2022 and 2.0% in 2023.

Politics – Early elections?

While the next federal election is not due until October 2023, an early election in

2021 cannot be ruled out. The ruling Liberal party – which holds 157 seats, short of

a majority in the 338-seat lower house – may be tempted to capitalise on the success

of the accelerated vaccination programme by going for an early vote in September or

October. This could allow Prime Minister Justin Trudeau to build a majority so that he

no longer needs to rely on the Bloc Québecois and the New Democratic Party, which

currently hold the balance of power. That said, opinion polls do not suggest a clear-cut

victory for the Liberals, so Trudeau may be cautious about triggering a new vote.

Canada-US relations have improved under the Biden administration. US President

Biden’s first bilateral meeting with a foreign leader was with Trudeau; they agreed to

work together on areas of mutual interest, including the pandemic, post-pandemic

recovery and action on climate change. In addition, the countries are aligned on foreign

policy, including relations with China and Russia.

Market outlook – CAD up on rates outlook and commodities

We expect the Canadian dollar (CAD) to strengthen against the USD. We see

USD-CAD at 1.17 at end-Q3-2021, 1.15 at end-Q4-2021, 1.14 at end-Q1-2022 and

1.14 at end-Q2-2022. Canada’s vaccination programme is picking up sharply,

accelerating expectations of economic reopening. By contrast, US reopening has

provided limited USD support, even when surprising to the upside. The BoC appears

far more eager to normalise rates than the Fed, and we expect strong US demand and

firm commodity prices to support the CAD.

The budget deficit should narrow as

revenues build and the need for

emergency support declines

Trudeau may be tempted to go for

an early vote to build a majority in

parliament

We expect a reduction of bond

purchases in July and the first rate

hike in H2-2022

CAD is supported by accelerating

vaccinations, high commodity

prices and prospect of higher rates


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Argentina – Restructuring

Economic outlook – Recovering after prolonged recession

The economy is set to rebound strongly from a weak base. We raise our 2021

GDP forecast to 6.8% (from 1.9%). This would be the first year of positive growth since

2017, albeit mostly a bounce-back from the deep recession in 2020, when the economy

contracted by 9.9%. Price controls, an overvalued exchange rate and limits on exports

remain headwinds to growth; we now expect 2022 GDP growth to slow to 3.0%

(previously 2.5%) and still see 2023 growth at 2.5%.

GDP likely contracted in Q2 after strong growth in Q4-2020 and Q1-2021. Economic

activity fell 1.2% m/m in April due to pandemic-related restrictions and a farmers’ strike

to protest a temporary ban on beef exports. Mobility restrictions may be needed until

late 2021 or early 2022. As of 27 June, 35% of Argentines had received one or more

vaccine doses; the pace of vaccinations picked up sharply in June after a third-wave

peak in May. In H2, investment and consumer spending is likely to be supported by

negative real interest rates. Higher agricultural prices have boosted exports, and we

now expect current account surpluses of 1.5% of GDP in 2021 and 0.5% in 2022

(previously deficits of 1.0% and 1.5%). We expect a return to deficit in 2023 (-1.5%

versus -2.5% previously).

Policy – Aiming for IMF and Paris Club deals by Q1-2022

Annual inflation accelerated to 49% in May, the fastest pace since the pandemic hit

last year. We raise our inflation forecasts to 48% (from 34%) for 2021, 42% (29%) for

2022, and 35% (10%) for 2023. Banco Central de la República Argentina (BCRA) has

kept the policy rate at 38% since March 2020, leaving real rates deeply negative. To

limit the rise in inflation, policy makers have used a combination of capital controls,

price controls, export controls (for example on beef exports) and allowing currency

appreciation in real terms. We expect policy rate tightening to 40% in 2022 once debt

restructuring has been concluded.

Negotiations with the IMF continue, with the aim of reaching an agreement on an

Extended Fund Facility by March 2022. The government announced that it would make

a partial USD 430mn payment to the Paris Club before the end of July to avoid a

default, after failing to meet a USD 2.4bn maturity in May. Argentina has until end-

March 2022 to complete debt restructuring with the Paris Club.

Figure 1: Argentina macroeconomic forecasts Figure 2: GDP growth to turn positive for the first time

since 2017 (GDP, % y/y)

2021 2022 2023



Policy rate (%) 38.00 40.00 32.00

USD-ARS* 120.00 140.00 101.00




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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F

GDP likely contracted in Q2 given

pandemic-related restrictions

Real rates are deeply negative

Sarah Hewin +44 20 7885 6251

[email protected]




[email protected]



Argentina has until end-March 2022

to complete Paris Club debt

restructuring


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Brazil – BCB leads the tightening cycle

Economic outlook – Stronger growth

The economy has recovered faster than expected, despite a high number of

pandemic cases and fatalities. We raise our forecast for 2021 GDP growth to 4.0%

(previously 3.7%), helped by the carryover from buoyant activity in Q4-2020. We

expect growth to slow to 2.5% in 2022 and 2023. Q1 growth was stronger than

expected at 1.2% q/q, after a 3.2% bounce in Q4-2020, supported by booming

agriculture and sustained strong investment. The pick-up in activity came despite a

surge in the virus, tighter pandemic restrictions, and a delay in emergency cash

handouts for poorer people that contributed to falling household consumption.

Pandemic cases have stayed elevated since March. Spending should pick up in H2 as

restrictions are eased and the vaccination rate accelerates; 34% of the population had

received at least one dose by 27 June, and the share is rising swiftly. While rising

unemployment (14.4% in Q1-2021, up from 11.3% pre-pandemic) is likely to weigh on

incomes, we expect households to draw on savings accumulated during 2020,

supporting stronger consumption. That said, the risk of a third wave of the pandemic

should not be underestimated.

Tighter monetary policy is likely to act as a brake on consumer and investment activity

amid sharply higher borrowing rates, while accelerating inflation is damaging real

household incomes. IPCA inflation rose to 8.1% y/y in the first half of June, well above

the 3.75% target. Political uncertainty ahead of next year’s presidential election may

start to weigh on investment activity in 2022.

Higher commodity prices and strong external demand (particularly from China) for food

and minerals are boosting exports and the trade surplus; we now expect only a small

current account deficit of 0.8% of GDP in 2021 (formerly 1.7%), though we forecast a

widening deficit (1.3%) in 2022; we now see the 2023 deficit at 1.5% (formerly 2.5%).

That said, the impulse to economic activity from stronger net exports is likely to be

limited, since trade is a relatively small part of Brazil’s economy.

Figure 1: Brazil macroeconomic forecasts Figure 2: More rate hikes to come as inflation takes off

IPCA CPI, % y/y, SELIC rate, %

2021 2022 2023



Policy rate (%)* 6.50 7.00 8.00

USD-BRL* 4.80 6.00 5.05




0

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4

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14

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IPCA CPI

SELIC rate

Spending should pick up in H2,

assuming no further pandemic

wave

Sarah Hewin +44 20 7885 6251

[email protected]




[email protected]



Exports are booming

Headwinds from tighter monetary

policy and higher inflation


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Policy – Rates up

Monetary policy is being tightened to counter rising inflation. Banco Central do

Brasil (BCB) raised the SELIC rate by 225bps in H1 from a historical low of 2%; we

expect another 225bps of hikes to 6.5% by end-2021. Underlying inflation has picked

up sharply since end-2020 as a result of global cost pressures and currency

depreciation; we now expect 2021 CPI inflation to average 6.0% (previously 5.3%),

before slowing to 4.0% in 2022 and 3.5% in 2023. We think policy rate normalisation

will continue in 2022, with the SELIC rate reaching a neutral level of 7% by mid-2022.

More favourable inflation base effects and the upcoming presidential election could

create a window for BCB to pause its hiking cycle, before tightening further in 2023.

The National Monetary Council has confirmed inflation targets of 3.5% in 2022 and

3.25% in 2023, and has set a 3% target for 2024.

Fiscal policy poses upside risks to our interest rate forecasts. We do not expect

the fiscal ceiling to be breached this year (although some BRL 100bn, c.1% of GDP,

of pandemic-related spending is excluded from the fiscal spending cap). Some fiscal

slippage is likely next year, as the Bolsonaro administration will be pressured to spend

ahead of the 2022 elections. We expect the deficit to narrow to 7.9% of GDP this year

from 14.9% in 2020, and to stay relatively wide (7.1%) in 2022 before narrowing further

to 5.5% in 2023. Privatisations could provide a one-off offset to the fiscal deficit; the

lower house has cleared the path for the privatisation of Eletrobras in early 2022.

General government debt rose to 89% of GDP in 2020, though lower debt-servicing

costs, stronger GDP growth and prepayment of a BRL 100bn treasury loan from the

BNDES development bank should lower the debt/GDP ratio slightly in 2021.

Politics – Looking ahead to 2022

The 2022 presidential elections are already dominating political discussion.

Elections take place on 2 October 2022 (also covering the national congress, state

governors and state legislative assemblies). A second round of voting for the

presidency will be held on 30 October in the event of no clear first-round winner. At this

point, the leading candidates are incumbent Jair Bolsonaro and former President Lula

da Silva. Lula has pulled ahead in opinion polls in recent months; his corruption

convictions were annulled, allowing him to run for political office. Mounting protests

about Bolsonaro’s handling of the pandemic have raised the prospect that he could be

removed from office ahead of next year’s elections; 57% of the population backs his

impeachment. Separately, markets are watching the fortunes of Economy Minister

Paulo Guedes, whose reform efforts have hit political and interest-group barriers.

Market outlook – Favourable differentials vs risky politics

The outlook for the Brazilian real (BRL) may finally be starting to improve. BCB’s

aggressive rate hikes have driven more favourable BRL yield differentials versus both

the USD and most EM FX peers, and should allow real rates to re-enter positive

territory in Q4-2021. At that point, we expect external inflows to pick up and the BRL

to see another leg of appreciation. That said, the removal from office of either

Bolsonaro or Guedes would likely lead to substantial BRL weakening, although this

remains a risk rather than an immediate threat to markets. As markets start to look

ahead to potential outcomes of the 2022 presidential election, Brazilian assets may

face additional pressure.

Opinion polls show Lula in the lead

BCB is expected to continue hiking

until mid-2022, before pausing

ahead of elections

The political backdrop is the main

downside risk to the BRL

Fiscal deficit is likely to stay wide

this year and next


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Chile – Vaccinations and copper

Economic outlook – Post-pandemic bounce

Chile is one of a handful of economies to have recovered to pre-pandemic GDP

levels. We expect 2021 GDP growth of 6.9%, and we now see a milder slowdown to

3.8% in 2022 (instead of 3.5%). Chile is facing another rise in pandemic cases, which

peaked in April, and tight restrictions have been in place since March. That said, the

impact on activity has been less than in 2020; businesses have adapted and extensive

policy support is available for both households and firms. Some 66% of the population

had received at least one vaccine dose by 26 June, and business and consumer

sentiment has improved as vaccinations have risen. Fiscal support and pension

drawdowns have underpinned retail spending; once the economy opens up, spending

on hospitality and recreation services should pick up.

Meanwhile, record-high copper prices are delivering a sizeable terms-of-trade bonus.

Exports and investment are likely to remain the engines of growth; in 2019, exports to

China accounted for some 10% of GDP and exports to the US and euro area

accounted for a further 5% of GDP. We expect a current account surplus of 0.3% of

GDP in 2021, moving back into deficit in 2022 (-0.9%) and 2023 (-2.5%).

Policy – Reducing policy accommodation

We expect 100bps of rate hikes this year, given accelerating inflation. Monetary

policy has stayed highly accommodative – policy rates have been held at a record low

of 0.50% since March 2020, and a range of unconventional measures have been

deployed to support credit expansion. Banco Central de Chile (BCCh) risks falling

behind the curve as inflation picks up. We expect rates to be raised 100bps in H2-2021

to 1.5%, another 200bps in 2022 to 3.5%, and to 5.0% in 2023.

Fiscal support equal to c.13% of GDP has been extended in 2020 and 2021, with

pandemic relief measures (cash transfers for poorer households, a job retention

scheme, hiring subsidies and public guarantees for SMEs) strengthened in response

to the recent pandemic wave. Fiscal revenues have been buoyed by higher copper

prices; that said, the possibility of further pension system withdrawals is nontrivial, and

the government faces pressure to spend more ahead of the elections. We expect fiscal

accounts to remain under pressure, with deficits of 4.5% of GDP in 2021, 3.5% in 2022

and 2.8% in 2023.

Figure 1: Chile macroeconomic forecasts Figure 2: Copper is king

Copper exports, USD mn; copper price, LME 3m, USD/t

2021 2022 2023



Policy rate (%)* 1.50 3.50 5.00

USD-CLP* 750 700 770




Copper exports (LHS)

Copper price(RHS)

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jun-19 Dec-19 Jun-20 Dec-20 Jun-21

Rates are likely to rise sharply after

November elections

Sarah Hewin +44 20 7885 6251

[email protected]




[email protected]



Sudakshina Unnikrishnan +44 20 7885 6583

[email protected]

Commodities Analyst


High copper prices provide a terms-

of-trade boost

Pressure for pre-election spending


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Politics – Elections and a new constitution

Chileans will vote in presidential, parliamentary and regional elections on 21

November. Incumbent President Sebastián Piñera is ineligible for re-election. The left

looks energised: Daniel Jadue, backed by the Communist party, is leading in opinion

polls on a platform of reducing Chile’s dependence on copper, raising taxes to increase

social welfare spending, and nationalising pensions, copper and water. Other

candidates include Pamela Jiles of the left-leaning Humanist Party and Joaquin Lavin

of the right-wing Independent Democratic Union (UDI). The right may gain more

momentum as the economy reopens, and the left may end up divided, as in previous

elections. For now, no candidate is polling higher than 20%, pointing to a second-round

vote in December.

Beyond the November elections, the focus is on the constitutional assembly to replace

the current constitution. Following street protests, President Piñera agreed to draft a

new constitution to replace the one introduced in 1980 by Augusto Pinochet. In voting

in May, independent and radical candidates won 88 of the 155 seats on the body that

will draft the new constitution. Including seats reserved for indigenous people, over

two-thirds of participants will be independent, above the majority needed to approve

the wording of the new constitution. Piñera’s centre-right coalition failed to win the one-

third of seats it expected, depriving it of a veto. Once the rules of the process have

been defined, delegates could spend up to 12 months drafting the new constitution

before it is presented for a vote.

Copper outlook

We expect copper prices to remain elevated. Copper prices doubled in the 12

months to May 2021 to a record high above USD 10,000/tonne (t), underpinned by a

supportive macro backdrop, demand recovery and risks to supply. While we remain

positive on fundamentals, we expect prices to remain choppy, with risk appetite,

inflation expectations and USD moves the key drivers of price direction. Even with

slower demand growth from China for the rest of the year, we expect prices to average

USD 9,411/t in 2021 – still well above pre-pandemic levels, albeit lower than in Q2-

2021. We expect average prices of USD 8,590/t in 2022 and USD 8,000/t in 2023.

Demand optimism in the US and Europe has firmed, and fiscal stimulus packages have

a strong renewable, electric vehicle (EV) and clean energy bias, boding well for

medium-term copper demand. Even in China, after softening near-term, demand is

likely to receive a boost from the decarbonisation goal, with extensive copper use in

EVs, EV charging stations, ultra-high voltage transmission lines and electrification.

That said, supply risks remain, ranging from labour disputes to mine renegotiations to

the potential for higher copper taxes and royalties. A larger-than-usual number of

contract wage renegotiations are due this year at mines in Chile, including at the

world’s largest copper mine, Escondida.

Market outlook – CLP boosted by copper boom

The Chilean peso (CLP) is being driven by two competing crosswinds. On the

one hand, the substantial terms-of-trade boost is a clear tailwind for economic and

asset-market performance; on the other, the political backdrop continues to worry

investors. In the near term, we believe the terms-of-trade factor is more important, with

copper prices likely to stay elevated. In the medium term, political developments may

lead to a less-market-friendly environment.

New constitution may be presented

to voters in 2022

We expect copper prices to stay

well above pre-pandemic levels

Labour disputes may disrupt

production

The left is energised but may split

the vote in November

Investors may become concerned

over challenges to Chile’s neo-

liberal model


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Colombia – Volatile

Economic outlook – Momentum carries through

We raise our 2021 GDP growth forecast to 7.0% (previously 5.6%), supported by

momentum from late 2020 and early 2021, and an expected recovery in H2. The

economy recovered well after the first wave of the pandemic hit in Q2-2020, and GDP

growth surprised to the upside in Q1-2021 (2.9% q/q), supported by a strong rebound

in household spending. However, leading indicators suggest a downturn in Q2, with

consumer sentiment down and activity hit by local virus-related lockdowns and

restrictions on mobility, which were re-introduced in April and May.

Social protests and supply-chain disruptions have exacerbated the slowdown in

activity. Political uncertainty is likely to remain a headwind to the investment recovery,

though significant infrastructure investment and strong housebuilding activity should

help. We now expect growth to moderate to 3.7% in 2022 (previously 4.1%) on

uncertainty over the 2022 elections, and to 3.3% in 2023.

Colombia’s pandemic cases are the highest in the region as a share of the population,

reaching a new peak in June. Vaccinations have picked up speed, but from a very low

base. As of mid-June, only 22% of the adult population had received at least one

vaccine dose; this is up from 2% in mid-March.

Stronger commodity prices and improving economic prospects in Colombia’s main

trading partners should buoy external demand and strengthen the export recovery. We

now see a smaller 2021 current account deficit of 3.5% of GDP (4.0% prior) on robust

global demand, and we expect the deficit to narrow to 3.0% in 2022 and 2023.

Policy – Slow to act

Higher inflation is likely to trigger a rate hike in H2-2021. We now expect just one

25bps hike this year, taking the minimum repo rate/overnight lending rate to 2.0% in

Q4-2021 (previously 2.25%). We raise our 2021 CPI inflation forecast to 3.2% from

2.9%. That said, Colombia’s inflation dynamics appear to be the most benign among

the major Latam economies. This creates room for Banco de la República (BanRep),

which currently has a neutral policy bias, to lag behind Latam peers in embarking on a

hiking cycle.

Figure 1: Colombia macroeconomic forecasts Figure 2: Sentiment weakens on protests and new

restrictions (business and consumer confidence)

2021 2022 2023



Policy rate (%)* 2.00 3.50 5.00

USD-COP* 3,700 3,800 3,870




-50

-40

-30

-20

-10

0

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20

Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21

Consumer confidence

Business confidence

Tentatively raising rates

Sarah Hewin +44 20 7885 6251

[email protected]




[email protected]



Vaccinations were low when the

pandemic third wave hit

The economy struggled in Q2-2021

after a better-than-expected

performance in Q1


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The fiscal deficit widened to c.9% of GDP in 2020 as a result of the pandemic-induced

recession, and debt/GDP rose to over 60% from c.45% before the pandemic. Fiscal

support has underpinned the economy to a limited extent, but the cost of supporting

some 2mn refugees from Venezuela remains a drag on public finances.

The failure of fiscal reform (see below) is a major setback and likely will raise borrowing

costs for potential investments; the prospect of meaningful reform to address the

widening deficit appears low. Consequently, the likelihood of a rating downgrade to

non-investment grade has risen. In May, Standard & Poor’s cut Colombia’s rating to

non-investment grade; Fitch has Colombia’s BBB-rating on negative outlook, while

Moody’s has Colombia at Baa2, two notches above non-investment grade.

Politics – Protests ahead of next year’s elections

The Duque administration appears to be losing authority. Popular frustration has

built up over extended lockdown restrictions, alongside long-standing grievances over

the lack of economic opportunities and allegations of government corruption. These

frustrations led to widespread street protests in April, when the government announced

a tax reform aimed at plugging a hole in government finances. Civil unrest looks unlikely

to dissipate given widespread discontent and low government approval ratings.

Presidential elections are still a year away. As elsewhere in the region, the possibility of

populist candidates (who have been gaining support in opinion polls) may be a source of

uncertainty for investors, as well as an increasing hurdle to the economy.

Presidential elections will take place on 29 May 2022; if no candidate receives a

majority, a second round of voting will follow. Opinion polls show left-wing Gustavo

Petro, ex-mayor of Bogota, comfortably ahead. Petro, a former guerrilla, is generally

considered to be a radical who is antipathetic to business.

Market outlook – COP slipping behind

We remain downbeat on the Colombian peso (COP). We continue to see it

primarily as a funder for other EM FX longs. Several factors underpin our pessimism.

First, yield differentials remain unattractive relative to both Latam peers and the

USD. This limits the COP’s appeal from a carry standpoint. Relatively low inflation

allows BanRep to maintain its dovish tone even as other central banks in the region

move towards policy tightening. As such, we expect low carry to remain a persistent

disadvantage for the COP.

Second, the fiscal outlook remains challenging, and the election calendar, civil unrest

and lingering refugee issues are likely to keep investors concerned for the foreseeable

future. Further, the rising rates environment globally threatens to exacerbate

Colombia’s fiscal strain. In the wake of the government’s latest failure to advance tax

reform, Colombia’s CDS rose to an eight-month high; we expect these concerns to

continue to exert an upward pull on USD-COP. The case for owning the COP is

uncompelling, in our view. Low liquidity relative to Latam peers serves as an additional

deterrent for risk allocators.

Risk of another rating downgrade

Government approval ratings

are low

Low carry likely to remain a

persistent disadvantage for the COP


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Mexico – Benefiting from the US bonanza

Economic outlook – Exports lead the way

Trade is likely to remain the primary growth driver in 2021 and 2022. We raise our

2021 GDP growth forecast to 6.2% (from 5.8%), and our 2022 forecast to 3.1% (2.9%)

on improved export prospects; we expect 2023 growth to slow to 2.2%. Manufacturing

exports hit record-high levels in March and April, benefiting from the US economic

recovery and stimulus measures, which are supporting the consumption of imported

autos and appliances from Mexico. The US takes around 80% of Mexico’s exports,

equivalent to c.28% of Mexico’s GDP in 2019. Overall, net exports contributed 2.8ppt

to GDP in 2020; we expect this to moderate to c.1.8ppt in 2021 as imports recover, but

export growth to continue to outpace import growth. Strong exports underpin our

forecast of a current account surplus of 1.6% of GDP in 2021; we expect the surplus

to shrink to 0.5% of GDP in 2022 and 0.2% in 2023.

Domestic demand remains a laggard but will likely pick up as the impact of COVID-19

eases and the labour market recovers. Mexico successfully contained the pandemic

after a peak in cases in January, though the economy is vulnerable to a further wave

given the relatively slow pace of vaccination. As of 26 June, only 23% of the population

had received at least one vaccine dose. We expect investment spending to pick up,

partly boosted by infrastructure projects. Underinvestment (even prior to the pandemic)

and competitiveness gains versus China are tailwinds for firmer investment spending.

Policy – Fiscal discipline and monetary tightening

Higher inflation prints will likely pressure Banco de México (Banxico) to hike

again in Q4-2021. Banxico raised the TdF rate by 25bps to 4.25% in June 2021. We

expect rates to rise by a further 25bps to 4.5% in Q4-2021, with policy tightening

continuing in 2022 (to 5.0%) and 2023 (to 6.0%). CPI inflation accelerated to 5.9% in

May from 3.2% at end-2019, driven by base effects, higher commodity prices and the

impact of supply disruptions; Mexico’s CPI is particularly sensitive to higher food prices.

In addition, as the economy opens up further, we expect services inflation pressure to

build. We recently raised our 2021 CPI inflation forecast to 5.2% (3.6% prior), well

above Banxico’s 3% (+/- 1ppt) target. We expect inflation to slow to 3.8% in 2022 and

3.5% in 2023.

Figure 1: Mexico macroeconomic forecasts Figure 2: US demand to support Mexico’s export growth

Mexico’s exports to US, FOB, USD bn, 3mma

2021 2022 2023



Policy rate (%)* 4.50 5.00 6.00

USD-MXN* 19.25 18.50 19.90




15

20

25

30

35

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Exports hit record levels in March

and April on rising US demand

Accelerating inflation will likely

pressure rates higher in H2

Sarah Hewin +44 20 7885 6251

[email protected]




[email protected]




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Banxico Governor Diaz de Leon’s term ends at the end of December; he will be

replaced by current Finance Minister Arturo Herrera, who will in turn be replaced by

Rogelio Ramirez de la O.

Fiscal rectitude is a core conviction of President Lopez Obrador (AMLO). Mexico’s

spending to mitigate the impact of the pandemic was a fraction of what other Latin

American countries spent, and most support has been in the form of small business

loans rather than grants. Revenues were resilient in 2020, limiting the deterioration in

the budget deficit to 3.9% of GDP. Government debt rose to 61% of GDP at end-2020

from 53% in 2019 as a result of the wider budget deficit, GDP contraction and the

decline in the value of the peso (MXN). The 2021 budget aims to reduce the deficit to

3.3% of GDP. Spending plans are set to remain heterodox but contained. There are

no plans to raise taxes, but tax collection has improved. Pensions and the minimum

wage have also been improved. Fiscal reform will aim to achieve tax efficiencies,

expand the tax base and close loopholes.

Politics – Challenging the courts

The 6 June mid-term elections have curtailed AMLO’s ability to make

constitutional changes. AMLO’s Morena party maintains a majority in both houses

of congress thanks to the support of coalition partners, and won 11 out of 15 governor

seats. But the ruling coalition lost its supermajority in the lower house, which limits

AMLO’s ability to amend the constitution. Investors anticipate that the president will

therefore be prevented from giving aid to state-owned companies such as Petroleos

Mexicanos (Pemex) and Comision Federal de Electricidad (CFE), since he needs a

supermajority to overturn court decisions suspending such aid.

AMLO continues to challenge the integrity of Mexico’s institutions. in April, he

controversially endorsed a two-year extension of the supreme court president’s term,

raising concerns that the move could set a precedent for extending other terms,

including the six-year presidency (AMLO’s term is due to end in 2024). He has also

threatened to get rid of independent institutions that make rulings with which he

disagrees. That said, the judiciary has so far acted as a constraint on some of AMLO’s

more controversial proposals.

Market outlook – MXN maintaining its lead

The Mexican peso (MXN) exceeds Latam peers on a carry basis. This is the

primary reason for our optimism on the currency on a relative-value basis. With EM FX

volatility declining across the board, the MXN continues to look particularly attractive

versus peers on a carry/volatility basis.

Further, we believe risks to the inflation outlook are skewed to the upside, and we

believe that the TIIE curve may be under-pricing Banxico’s pace of monetary policy

adjustment. We therefore expect the tailwind of favourable yield differentials to persist.

Higher inflation prints may be a source of volatility for the MXN in the short term, but in

the medium term they are likely to lead Banxico to tighten monetary policy. We would

expect markets to respond positively to this.

With the mid-term elections now out of the way, we think the MXN has further room to

catch up to global high-yield peers.

The ruling coalition lost its

supermajority in April’s mid-term

elections

MXN looks particularly attractive

versus peers on a carry/volatility

basis

Pandemic-related government

spending has been limited


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Peru – Uncertain times

Economic outlook – Recovering lost ground

The economy is bouncing back, but the outlook is uncertain following the

election. Far-left candidate Pedro Castillo gained the most votes; if his victory is

confirmed, policy is likely to swing left, with higher taxation and public spending. Public

investment may pick up, but private-sector investment has been dampened by

uncertainty over the direction of government policy. That said, we expect the economy

to grow strongly in 2021 after a severe downturn in 2020, while remaining below the

pre-pandemic level until well into 2022. Peru suffered the biggest GDP drop of any

Latam economy in 2020 – down 11%, the worst downturn in three decades – so scope

for recovery is substantial. We expect 2021 GDP growth of 9.4%, and we raise our

2022 growth forecast to 4.6% (previously 4.1%); we still see 2023 growth at 3.3%.

Peru has had the fifth-highest number of deaths from COVID-19 globally, at over

190,000, and the highest deaths as a share of population, at 5,086 per million (as of

26 June) – more than twice Brazil’s death rate. Pandemic cases are declining slowly,

having peaking during a second wave in April. But vaccinations have reached only a

small number of people, with only 13% of the population (as of 26 June) having

received at least one dose.

GDP growth recovered to 3.8% y/y in Q1 from -1.7% y/y in Q4-2020. The

unemployment rate peaked at 16.5% in September 2020, and has since come down

to 12% (May 2021), still well above the pre-pandemic level of c.6%. Leading indicators

suggested increasing economic activity in May, helped by improving global growth.

Stronger external demand and high commodity prices are significant tailwinds; Peru

has experienced a substantial terms-of-trade boost given the doubling of copper prices

in the year to May 2021. Exports rebounded strongly in 2020, though volumes were

down 5.5% y/y in Q1-2021; imports rose 5.0% y/y in Q1, recovering from a collapse in

domestic demand in early 2020.

We expect copper prices to remain elevated (see our Copper outlook), but Castillo

plans to raise mining taxes, which has implications for longer-term supply growth. The

current account moved into surplus in H2-2020; we continue to expect a small surplus

of 0.2% of GDP in 2021, falling back into deficit in 2022 and 2023.

Figure 1: Peru macroeconomic forecasts Figure 2: Export recovery followed by firmer imports

BCRP trade balance: Exports and imports, USD bn

2021 2022 2023



Policy rate (%)* 0.25 2.00 3.00

USD-PEN* 4.10 3.70 4.20




Exports

Imports

1

2

3

4

5

Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Apr-19 Apr-21

Peru has suffered the highest

pandemic fatality rate in the world

Sarah Hewin +44 20 7885 6251

[email protected]




[email protected]



Stronger external demand and high

commodity prices are significant

tailwinds

Copper prices to stay elevated, but

higher taxes on mining companies

may damage supply longer-term


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Policy – Staying very accommodative

BCRP will likely be slow to raise rates given concerns over the durability of the

recovery. Banco Central de Reserva del Perú (BCRP) cut rates to an all-time low of

0.25% during the first wave of the pandemic in April 2020. It looks likely to lag other

central banks in the region in tightening policy given concerns over ongoing headwinds

from the pandemic. We now expect rates to stay on hold at 0.25% in 2021 (we

previously expected hikes to 1.25%). We expect the first hike of 50bps in Q2-2022,

rising to 2.00% by end-2022 (3.00% previously) and 3.00% by end-2023 (4.5%).

Lima inflation jumped to 2.68% in January 2021 from 2.0% in December 2020, but it

has stayed in a 2.4-2.7% y/y range since the start of the year, coming in at 2.45% in

May. While core inflation rose to 1.8% in May from 1.7% in April, it remained below the

midpoint of the 2.0% +/- 1ppt target.

Inflation expectations have picked up to 2.5% for end-2021 and 2.4% for end-2022,

according to the central bank’s June survey. But policy makers believe that current

inflation pressures are transitory: they indicated at their June meeting that they expect

inflation to remain within the target range near-term and fall back below 2% in 2022

due to remaining economic slack. We maintain our forecast of 3.1% average inflation

in 2021; we lower our 2022 and 2023 forecasts to 2.5% (previously 4.0% and 3.0%) to

reflect the declining impact of transitory cost pressures such as commodity prices.

The budget deficit exceeded 8% of GDP in 2020, and we expect fiscal policy to stay

generous under the new government, limiting the deficit to 5.8% in 2021 even as the

economy recovers. We expect deficits of 4.0% in 2022 and 2.5% in 2023.

Politics – Into the unknown

Pedro Castillo has the edge; policy proposals lack detail. After elections on 6 June,

the result showed the far-left candidate Castillo ahead of right-wing populist Keiko

Fujimori by 44,058 votes, taking c.50.1% of the votes. At the time of publishing, the

final result awaited an electoral court ruling on disputed ballots. Castillo, a former

teacher and union leader, has backed away from earlier extensive nationalisation

plans, appointed mainstream economists as advisors, and expressed support for the

independence of the BCRP and its president, Julio Velarde. But higher taxation of

mining companies, wealth redistribution and spending on social programmes remain

key policy pledges. No matter who wins, the new president’s relationship with the

legislative branch is likely to remain poor and meaningful reform appears distant.

Market outlook – PEN whipsaws

Peruvian nuevo sol (PEN) could recover next year. The PEN, and Peruvian assets

more broadly, flagged on expectations of a Castillo victory. However, BCRP has

intervened heavily, so the FX move has been less dramatic than may have otherwise

been the case. We expect intervention to continue and expect USD-PEN to trade at

4.10 by end-2021.

The PEN is heavily undervalued on a real effective exchange rate (REER) basis due

to BCRP’s active management in recent years. Should BCRP take a more hands-off

approach, we would see substantial scope for the PEN to rebound versus peers once

election-related risk premium has been added to Peruvian assets. Given medium-term

undervaluation, we expect the PEN to recover to 3.70 by end-2022.

Castillo has backed away from

nationalisation plans

We expect BCRP to lag other

regional central banks in tightening

policy

Policy makers believe current

inflation pressures are transitory


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Strategy outlook

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Parallel universe

• The Q3 outlook for financial markets hinges on global inflation and

the prospect of Fed tapering

• US rates may struggle to break previous highs, suggesting UST yield

curve steepening is already complete

• CNY appreciation may slow, but ongoing resilience should provide

an anchor for AXJ FX

• We remain bearish on the USD and we prefer FX exposure over local-

currency bonds in Asia

• Commodities consolidate but remain cheap versus financial assets

The moment of truth

Throughout Q2-2021, we argued that US exceptionalism was overpriced in the US

rates market and that US rates would consolidate (SMS – The three R’s of recovery).

The yield consolidation has seen 10Y UST yields decline by more than 30bps and 10Y

UST inflation expectations fall by 25bps, all while US inflation has reached the highest

level in 30 years (Figure 1). From current levels, we believe UST yields may see one

more push higher in H2-2021, but we see an increasing risk that 10Y yields will struggle

to break the YTD highs of 1.77%. Further, we believe risks to our Q4-2021 forecast of

2.0% are to the downside.

The US rates market still has two significant hurdles to overcome in H2. The first is the

threat of US inflation sustaining or even exceeding current levels. The second is the

prospect of the Fed’s announcement of asset purchase tapering. The decline in

inflation breakevens should reassure the Fed that inflation expectations have not

become unanchored, and the lack of money velocity supports the notion that inflation

will not become entrenched in the economy (Figure 2). Still, sustained upside inflation

surprises over the summer may challenge the Fed’s view that inflation is transitory. We

expect a detailed discussion of tapering plans by the September or November FOMC

meeting, but until then, markets will wrestle with the question of whether tapering –

when it comes – will push yields higher or lower. We suspect that the answer might

be ‘lower’.

Figure 1: Transitory or not?

US core PCE (% y/y) vs 10Y UST inflation expectations (%)

Figure 2: A clue to the inflation debate

US fiscal deficit (% GDP), M2 and loan growth (% y/y), 12MMA

Source: Bloomberg, Standard Chartered Research Source: Bloomberg, St. Louis Federal Reserve, Standard Chartered Research

US core PCE y/y %

10Y UST BE, %0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


M2Loans

Fiscal deficit-5%

0%

5%

10%

15%

20%

25%

Feb-71 Feb-81 Feb-91 Feb-01 Feb-11 Feb-21

Eric Robertsen

[email protected]

Global Head of Research

Chief Strategist




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The world is round, not steep

The US yield curve-steepening trend that was so pervasive between March 2020 and

March 2021 is complete, in our opinion. In fact, the spread between 5Y and 30Y UST

maturities has already narrowed by c.45bps (Figure 3). We see a risk that this

steepening will continue to reverse in H2-2021. Temporary bouts of steepening are

possible if the market pushes long-dated yields higher in reaction to inflation or growth

data, but we think US curves are unlikely to re-steepen to new wides. Further, we

believe that as the market shifts its focus from the timing of Fed tapering to the timing

of rate hikes, any increase in yields is likely to occur at the front end of the yield curve,

rather than the long end.

The recent decline in long-term yields and interest rate forwards may already reflect

reduced anxiety about the risk of inflation and early Fed tapering. USD 5Y5Y OIS has

already declined from a peak of 2.40% on 30 March to recent lows of 1.55%. Notably,

the surge in USD 5Y5Y rates between 2020 and 2021 has already exceeded the

increase seen during the 2013 taper tantrum. As term premium is reduced for long

maturities, as we expect, we see scope for the US yield curve to flatten. The question

will shift from “how high can 10Y yields go to reflect the US economic recovery?” to

“how many rate hikes should be priced in for this cycle?”. 80bps of hikes are currently

priced in by December 2023. Further rate hikes could be built in to the curve, but we

also suspect that the Fed will struggle to deliver the 250bps of rate hikes implied by its

long-term dot-plot forecast.

Even at peak anxiety about US rates, 10Y UST real yields remained deeply negative.

The consolidation in yields in Q2 has pushed 10Y real yields back to the bottom of the

range, near -1.0%. We also note that during the recent 25bps decline in 10Y inflation

breakevens, 10Y real yields were largely unchanged – so the full decline in breakevens

has passed through to nominal yields. We expect real yields to remain depressed in

H2-2021, and this contributes to our bearish outlook on the USD (Figure 4). Both the

USD index and UST real yields are currently testing important technical support, but

as anxiety about Fed tapering subsides, we expect negative real yields to weigh heavily

on the USD.

Figure 3: Time to prepare for yield curve flattening

UST 5Y/30Y curve, bps (LHS) vs USD 5Y5Y OIS, % (RHS)

Figure 4: The USD threatens multi-year support

USD index (LHS) vs 10Y UST real yield, % (RHS)


USD 5Y5Y OIS (RHS)

5Y/30Y UST yield curve (LHS)

0

1

2

3

4

5

6

0

50

100

150

200

250

300

350


USD index (LHS)

10Y UST real yield (RHS)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

800

900

1,000

1,100

1,200

1,300

1,400


UST real yields remain deeply

negative and should continue to

weigh on the USD

Yield curve flattening is a greater

risk than steepening, in our view


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Tale of two cities

The CNY has delivered the strongest performance YTD among Asian currencies, with

gains of 1.0% and 2.5% in spot and total-return terms, respectively. While CNY

performance has lagged EM currencies outside of Asia, the CNY has been among the

best performers on a volatility-adjusted basis. It has strengthened to three-year highs

against the USD and a basket of currencies, prompting questions about whether

China’s policy makers have any appetite for further appreciation (Figure 5). We believe

a strong CNY contributes to the stability of CNY-denominated assets and helps to

attract foreign capital inflows. So while policy makers may resist further substantial

appreciation, we do not believe they seek a depreciation of the currency. A stable

currency at relatively strong levels is likely seen as the ideal outcome.

We believe that the CNY will participate as the USD continues to depreciate. But we

also believe that the leadership role in the currency rally will shift from the CNY to other

Asian currencies, such as the KRW and SGD. Concerns about USD-CNY include the

narrowing growth differential between the US and China as the US economy reopens.

In addition, the rate differential between UST and CGB yields has narrowed and

become less supportive of CNY strength against the USD. Finally, concerns about Fed

tapering and rising US interest rates have dented sentiment towards USD shorts. But

despite these concerns, we believe that China’s economic recovery remains on solid

ground, and that its policy makers will shift their focus from recovery to rebalancing

(China – From recovery to rebalancing). This rebalancing should contribute to the

sustainability of China’s recovery and to the ongoing resilience of the CNY.

CNY stability should support continued inflows to onshore assets, especially China

CGBs. The prospect of Fed tapering of asset purchases (expected to be announced

in Q4-2021) has kept term premium elevated for USTs and other major government

bond markets so far in 2021. However, we believe that both UST and CGB yields could

decline more meaningfully once the uncertainty around the tapering announcement is

out of the way (SMS – The great escape). In 2013, the December announcement of

the Fed’s tapering plans coincided with a significant top in both UST and CGB yields

(Figure 6). CNY stability would provide meaningful supportive for further inflows to

China’s bond market.

Figure 5: CNY strength provides stability

USD-CNY (LHS) vs SC CNY CFETS index (RHS)

Figure 6: Could China CGBs become a safe haven?

10Y China CGB yield, %


CFETS index (RHS)

USD-CNY (LHS)

86

88

90

92

94

96

98

100

6.0

6.2

6.4

6.6

6.8

7.0

7.2

May-17 Nov-17 May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21

Fed tapering starts

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

The Fed tapering announcement

may provide an opportunity to

increase exposure to China CGBs

CNY is likely to remain stable at the

strong end of its recent range, but

the leadership role will likely shift to

other AXJ currencies




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Give it away

We have held a long bias in AXJ currencies for most of 2021 (Sell USD vs AUD, SGD,

CNH and MXN; Sell JPY-KRW). This has been driven by a desire to hold FX exposure

to the drivers of the global economic recovery, including the resurgence of global trade

and manufacturing and the rise in commodity prices. But while these economic themes

remain intact, the USD is broadly unchanged YTD. Of the currencies we recommended,

only the CNH has generated a positive performance against the USD; the rest of the

basket is roughly unchanged. We expect CNH resilience to persist, acting as an anchor

for our basket and for Asian currencies more generally. We expect further USD

depreciation before year-end, especially as anxiety related to Fed tapering subsides.

The KRW remains one of our top picks for H2, given its exposure to the global trade

recovery and strength in key technology sectors. KRW performance against the USD

has been underwhelming YTD, though our recommendation to be long KRW against

the JPY has generated positive returns since 3 February (Sell JPY-KRW). Korea’s

recovery has been driven by an export rebound, with the technology, shipbuilding and

automobile sectors all contributing (SMS – Chips and boats). We have a 9.50 target

for JPY-KRW for end-2021, and we expect USD-KRW to reach 1,050 by then.

We argued in early April that US rates would experience a period of consolidation, as

they already priced in much of the good news on the US economic recovery (SMS –

The three R’s of recovery). US rates have certainly consolidated over the last two

months, but UST term premium remains elevated. 10Y UST term premium has

increased by 130bps since 4 August, mirroring the rise in term premium during the

2013 taper tantrum (Figure 8). We believe the persistently high term premium has

weighed on higher-yielding currencies such as the IDR. Indonesia offers the highest

real yields in Asia, but the uncertainty reflected in UST term premium levels has clearly

prevented a stronger IDR recovery. As we approach the Fed’s announcement of its

tapering plans in H2, some of this uncertainty should subside, paving the way for better

IDR performance. Traditional high-yield currencies such as the ZAR and RUB have

already logged strong recoveries, and we expect the IDR to narrow the performance

gap in H2.

Figure 7: Looking for USD weakness in low-yield FX

USD-KRW (LHS) vs USD-SGD (RHS)

Figure 8: High-yield FX needs lower term premium

USD-IDR (LHS) vs 10Y UST term premium, % (RHS)


USD-KRW (LHS)

USD-SGD (RHS)

1.25

1.30

1.35

1.40

1.45

1.50

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350


10Y UST term premium (RHS)

USD-IDR (LHS)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

18,000

Jan-13 Jan-15 Jan-17 Jan-19 Jan-21

IDR could tactically outperform if

UST term premium declines

We believe that KRW participation

in the USD sell-off will increase

in H2








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Watching and waiting

EM LCY rates markets have struggled YTD amid supply concerns and domestic

inflation fears. The increase in UST term premium (reflecting Fed tapering expectations

and the Q1 increase in nominal UST yields) has also left us reluctant to increase our

duration exposure in Asia LCY markets. As we enter H2-2021, we maintain a cautious

stance on these markets. We see tactical opportunities to receive rates at the front end

of yield curves that have priced in early policy rate hikes, and at the back end of

markets where yield curve steepening in H1 now provides attractive opportunities to

earn carry. But broadly speaking, we remain hesitant to add Asia LCY duration, as

risks persist and the real yield cushion has narrowed (EM LCY – Cautious on duration).

The global economic recovery remains uneven so far, but in economies where

fundamentals are seeing a sustained improvement, rate hikes are now priced into

money-market curves. In most cases, rate hikes are expected to start between 12-24

months from now. In China and Korea, hikes are priced for the next 12 months

(Figure 9). The risk is that policy makers start to talk more openly about policy

normalisation; this has already happened in Korea, with Bank of Korea (BoK) officials

suggesting that initial rate hikes would not represent policy tightening and that the first

hike could potentially come in 2021. We expect the BoK to raise rates for the first time

in November 2021 (South Korea – We hear you).

The additional challenge faced by EM LCY markets is the erosion of their real yield

premium over DM markets. Indonesia, China and India are the only markets in Asia

that offer positive real yields for 10Y maturities (Figure 10). Given the challenges EM

LCY debt markets have faced in 2021, which catalysts would prompt us to turn more

constructive? First, we believe that as markets get greater clarity on the timing of Fed

tapering plans, UST term premium should decline, reducing the probability of an

externally driven yield shock. This should also increase confidence in USD

depreciation. The continuing recovery in global growth should take some pressure off

of local budgets and reduce supply risk in local markets. The combination of these

factors would make us more comfortable with the risk-reward of increasing our

exposure to EM LCY duration later in 2021.

Figure 9: AXJ yield curves start pricing in rate-hike cycle

Market-implied rate hikes for next 12, 24 months

Figure 10: Not much real yield available in Asia EM LCY

2Y and 10Y real yield, % (CPI used to calculate real yield)


Using O/N MIBOR

12M

Using FX-implied fixing

Using 7D Repo

24M

0

20

40

60

80

100

120

140

INR MYR THB CNY KRW

2Y real yield

10Y real yield

-4

-3

-2

-1

0

1

2

3

4

5

6

IDR INR MYR SGD PHP THB CNY KRW

EM LCY debt markets have seen

their real yield cushion narrow

Rates markets in Asia have started

pricing in rate hikes; we believe this

presents opportunities




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Midnight oil

A broad commodity index hit new highs in early June, extending the YTD rally to just

over 20%; the recovery from the 22 April 2020 lows reached as high as 60%. We

remain positive on commodities as an asset class, though price action could become

increasingly noisy in H2-2021 as commodities face more scrutiny from regulators and

policy makers. The macro fundamentals for commodities remain constructive,

including accommodative monetary policy, fiscal stimulus packages with a green

emphasis, and the economic recovery as the world emerges from COVID-related

lockdowns (Base and precious metals outlook – Tidal waves). Oil has led the

commodities rally since May as metals such as copper have consolidated after

reaching new highs earlier in the year. We believe this rotation is healthy. We also

believe that commodities remain cheap relative to financial assets, even though the

broad commodity basket has started to claw back some of its underperformance of the

last 13 years (Figure 11).

We expect rising commodity prices to attract increasing scrutiny from regulators and

policy makers in H2-2021. Strong commodity prices are fuelling heightened concerns

about inflation; this is increasing demand for hedges against future inflation, and thus

further propelling demand for commodities. Central bank officials have argued that

inflation is transitory; for now, the biggest official threat to commodities is from regulators

trying to dampen speculation, as we have seen in China. China’s PPI inflation recently

reached 9.0% y/y, with oil and metals demand contributing to the increase. Global policy

makers have so far refrained from tightening monetary policy in response to commodity

prices as core inflation remains benign, but this is a risk for H2.

US core PCE rose above 3.0% in April for the first time since July 1992 (Figure 12);

the surge was driven partly by base effects and partly by the rally in commodities. The

FOMC believes that the increase in inflation is transitory. As supply chains normalise

later in the year and base effects fade, the FOMC believes inflation will return towards

a more sustainable trend around 2.0%. Market-implied inflation expectations have

recently declined by c.20bps. As long as inflation expectations remain anchored, the

FOMC will have the flexibility to be patient. But a continued surge in commodity prices

could jeopardise that balancing act.

Figure 11: Commodities still cheap vs financial assets

Ratio of Bloomberg commodity index/S&P 500

Figure 12: Oil rally fuels inflation fears

US core PCE (LHS) vs Brent oil (RHS), % y/y


0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20


US core PCE (LHS)

Brent y/y % (RHS)-100%

-50%

0%

50%

100%

150%

200%

250%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

May-06 May-09 May-12 May-15 May-18 May-21

Commodity markets could

challenge the FOMC in H2

Commodity prices and inflation

expectations are reinforcing each

other



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Forecasts tables

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Forecasts – Economies Economy Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP)

2020 2021 2022 2023 2020 2021 2022 2023 2020 2021 2022 2023 Major# -5.1 5.4 3.7 1.8 0.7 1.7 1.6 1.7 US^ -3.5 6.5 3.5 2.0 1.4 2.8 2.4 2.2 -2.9 -3.5 -3.0 -2.8

Euro area -6.8 4.5 4.0 1.6 0.3 1.9 1.3 1.5 2.1 2.0 2.3 2.5

Japan -4.7 2.6 2.3 1.1 0.0 0.1 0.7 1.0 3.2 3.5 3.5 3.0

UK -9.9 7.0 5.5 1.5 0.9 1.9 2.0 2.0 -3.8 -4.0 -4.0 -3.5

Canada -5.3 6.4 4.5 2.5 0.7 3.1 2.0 2.1 -1.8 -0.8 -1.0 -1.0

Switzerland -3.0 3.3 2.4 1.6 -0.6 0.3 0.5 0.8 10.3 10.0 9.7 9.4

Australia -2.4 4.8 3.3 3.0 0.8 1.6 2.3 2.3 2.5 1.9 0.4 -0.7

New Zealand -2.9 5.5 3.8 2.9 1.7 2.0 1.8 2.0 -3.1 -2.9 -2.6 -2.7 Asia# -1.0 7.1 5.3 5.2 1.9 2.8 2.8 2.9 Bangladesh* 2.0 5.6 7.2 7.3 5.7 5.6 5.6 5.5 -1.6 0.2 -2.0 -2.0

China 2.3 8.0 5.6 5.5 2.5 1.5 2.5 2.5 1.9 1.2 0.6 0.0

Hong Kong -6.1 6.9 3.0 2.5 0.5 1.1 2.3 2.3 4.0 4.0 4.0 4.0

India** -7.3 8.5 5.5 5.5 6.2 5.4 4.2 4.0 1.0 -0.7 -1.3 -1.8

Indonesia -2.1 4.1 4.8 5.0 2.0 1.8 3.0 2.5 -0.6 -0.9 -2.0 -2.0

Malaysia -5.6 4.7 5.0 4.6 -1.1 2.8 1.6 1.7 3.6 1.7 1.8 2.0

Philippines -9.6 4.6 6.6 5.9 2.6 3.9 3.0 2.7 3.6 2.0 -0.5 -1.2

Singapore -5.4 7.0 3.6 2.7 -0.2 1.7 1.2 1.1 16.5 16.5 16.0 15.0

South Korea -1.0 4.2 2.9 2.5 0.5 1.8 1.6 1.8 3.9 3.5 3.5 3.0

Sri Lanka -3.6 4.0 4.2 4.5 4.2 4.7 4.5 4.5 -1.3 -2.4 -2.5 -2.5

Taiwan 3.1 5.0 2.5 2.0 -0.2 1.6 1.0 1.0 14.0 12.0 11.0 9.0

Thailand -6.1 1.8 3.1 4.5 -0.9 1.0 1.5 3.0 3.3 1.0 3.0 -0.5

Vietnam 2.9 6.5 7.3 6.7 3.2 3.8 4.2 5.5 1.8 2.2 2.9 2.9 MENAP# -1.6 3.2 3.8 4.4 9.6 11.5 4.7 3.9 Bahrain -4.0 3.0 2.5 3.0 -3.0 1.0 1.5 1.5 -11.0 -2.0 -2.5 -2.0

Egypt* 3.6 2.0 5.5 6.5 5.2 4.6 5.5 6.0 -2.4 -3.8 -3.6 -2.0

Iraq -12.0 1.7 3.6 5.0 0.6 3.0 2.0 1.5 -15.5 -6.0 -5.0 -6.0

Jordan -1.5 2.3 1.5 3.0 1.3 0.6 1.0 2.0 -6.7 -4.2 -3.8 -6.0

Kuwait -6.3 2.5 3.4 3.0 1.2 0.8 2.5 2.5 -8.5 8.4 4.2 4.0

Lebanon -25.0 -10.0 -5.0 0.0 84.0 95.0 15.0 5.0 -13.0 -10.0 -12.0 -15.0

Oman -5.0 0.0 2.6 3.5 0.5 2.5 2.0 2.0 -13.5 -7.6 -6.0 -6.0

Pakistan* -0.5 3.9 4.5 5.0 10.8 8.9 8.2 7.5 -1.4 -1.0 -2.5 -3.0

Qatar -3.5 3.0 3.3 4.0 -2.5 0.5 1.5 2.0 -2.5 4.1 0.5 2.6

Saudi Arabia -4.1 2.8 2.7 3.5 3.4 2.9 2.2 3.3 -4.8 3.0 4.0 3.5

Turkey 1.8 5.0 4.0 4.0 12.3 15.2 12.0 11.0 -5.0 -4.0 -3.0 -2.5

UAE -5.5 2.5 3.0 3.5 1.4 2.7 3.0 3.0 0.0 5.1 5.8 6.6 Africa# -2.6 3.7 3.6 4.1 7.9 8.8 6.8 5.5 Angola -5.1 2.3 2.0 3.0 22.2 22.3 12.4 8.8 -6.0 5.0 2.0 1.8

Botswana -7.9 8.0 5.6 3.9 1.9 4.4 3.7 2.6 -14.2 -5.2 -4.4 -3.7

Cameroon 0.8 3.2 4.6 4.5 2.0 2.0 2.0 2.0 -4.0 -3.8 -3.6 -3.5

Côte d’lvoire 2.4 6.0 6.5 6.7 2.4 3.3 2.0 2.0 -3.4 -3.5 -2.9 -2.8

The Gambia -2.1 6.0 5.9 6.1 4.9 5.8 6.6 5.7 -11.8 -10.9 -10.1 -9.8

Ghana 0.4 4.9 5.0 4.9 9.9 8.7 7.3 6.6 -3.2 -3.2 -3.8 -4.0

Kenya 0.6 5.3 4.5 5.1 5.4 6.3 5.6 6.2 -4.9 -5.4 -5.7 -5.5

Nigeria -1.9 2.5 3.1 4.0 13.1 16.1 10.2 9.3 -3.3 -2.5 -2.0 -2.0

Sierra Leone -2.7 4.0 4.5 5.2 14.4 11.1 10.8 7.5 -12.6 -11.9 -11.1 -11.7

South Africa -7.0 4.2 2.4 2.5 3.3 4.1 3.8 4.5 2.2 3.0 1.0 -0.2

Tanzania 4.8 5.3 6.5 5.5 3.2 3.3 4.3 3.5 -1.0 -4.1 -5.5 -5.5

Uganda -1.1 4.0 6.0 7.0 3.8 2.2 3.5 4.0 -9.8 -8.7 -9.0 -9.5

Zambia -3.3 3.0 3.0 4.6 15.7 24.5 15.6 8.4 2.7 15.0 6.0 3.0

Zimbabwe -10.0 3.0 0.8 5.5 619.2 133.6 5.0 5.4 5.0 -0.4 -1.2 -1.5

Emerging Europe# -3.3 3.5 3.0 2.6 3.3 3.9 2.9 2.8 Czech Republic -5.5 3.3 4.0 3.5 3.2 2.5 2.0 2.0 3.0 1.0 0.5 0.5

Hungary -4.8 5.5 4.5 3.5 3.3 4.2 3.0 3.0 0.1 0.3 1.0 1.5

Poland -2.7 4.0 4.0 3.5 3.3 3.5 2.5 2.5 3.2 2.5 1.5 1.0

Russia -3.1 3.2 2.5 2.2 3.3 5.2 4.2 3.5 1.5 2.0 3.0 3.5 Latin America# -6.7 5.7 3.0 2.6 9.3 11.5 9.9 8.6 Argentina -9.9 6.8 3.0 2.5 42.0 48.0 42.0 35.0 0.8 1.5 0.5 -1.5

Brazil -4.1 4.0 2.5 2.5 3.2 6.0 4.0 3.5 -1.5 -0.8 -1.3 -1.5

Chile -5.8 6.9 3.8 3.2 3.1 3.6 3.3 3.0 1.3 0.3 -0.9 -2.5

Colombia -6.8 7.0 3.7 3.3 2.5 3.2 4.0 4.0 -3.3 -3.5 -3.0 -3.0

Mexico -8.2 6.2 3.1 2.2 3.4 5.2 3.8 3.5 0.1 1.6 0.5 0.2

Peru -11.0 9.4 4.6 3.3 1.8 3.1 2.5 2.5 0.4 0.2 -1.2 -1.5 Global# -3.3 5.8 4.2 3.5

^ US: Core PCE deflator used for inflation

* Bangladesh, Egypt, and Pakistan: Figures are for fiscal year ending in June of year shown in column heading

** India: Figures are for fiscal year starting in April of year shown in column heading # Global and regional GDP forecasts are calculated by taking the weighted average of economies’ GDP in PPP terms, while regiona l inflation forecasts are calculated by taking the simple

average of economies’ inflation



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Forecasts – FX End-period Q3-21 Q4-21 Q1-22 Q2-22 Q3-22 2021 2022 2023 2024 2025 Majors

Euro area 1.24 1.26 1.26 1.26 1.26 1.26 1.26 1.26 1.25 1.25

Japan 110.0 108.0 106.0 105.0 105.0 108.0 105.0 104.0 104.0 103.0

UK 1.42 1.43 1.43 1.44 1.44 1.43 1.45 1.42 1.42 1.41

Canada 1.17 1.15 1.14 1.14 1.14 1.15 1.14 1.15 1.15 1.15

Switzerland 0.90 0.89 0.90 0.90 0.91 0.89 0.91 0.88 0.88 0.88

Australia 0.80 0.82 0.82 0.82 0.82 0.82 0.82 0.82 0.81 0.81

New Zealand 0.74 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.74 0.74 Asia Bangladesh 85.50 86.00 86.50 86.50 86.75 86.00 87.00 88.00 89.00 90.00

China 6.60 6.58 6.50 6.55 6.55 6.58 6.50 6.60 6.65 6.70

CNH 6.60 6.58 6.50 6.55 6.55 6.58 6.50 6.60 6.65 6.70

Hong Kong 7.81 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80

India 74.50 75.50 75.50 76.50 77.00 75.50 77.50 79.50 81.00 83.00

Indonesia 14,500 14,600 14,700 14,800 14,800 14,600 14,840 15,070 15,320 15,590

Malaysia 4.05 4.00 4.05 4.10 4.05 4.00 4.00 4.05 4.05 4.10

Philippines 49.00 49.50 50.00 50.25 50.50 49.50 50.50 50.70 50.80 51.00

Singapore 1.33 1.32 1.33 1.34 1.33 1.32 1.32 1.32 1.32 1.32

South Korea 1,080 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,060

Sri Lanka 200.0 210.0 215.0 215.0 215.0 210.0 215.0 220.0 225.0 230.0

Taiwan 27.50 27.20 27.00 27.00 27.00 27.20 27.00 26.90 26.80 26.70

Thailand 31.25 31.00 30.50 31.00 31.00 31.00 31.30 31.70 32.00 32.30

Vietnam 22,900 22,850 22,800 22,700 22,600 22,850 22,500 22,000 21,500 20,900 MENAP Bahrain 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38

Egypt 15.80 15.80 15.80 15.90 16.10 15.80 16.20 18.78 18.95 19.40

Iraq 1,460 1,460 1,460 1,460 1,460 1,460 1,460 1,460 0.00 0.00

Jordan 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71

Kuwait 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30

Lebanon 0.00 0.00 0.00 0.00 0.00 6,000 7,000 8,000 0.00 0.00

Oman 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39

Pakistan 163.0 165.0 167.0 170.0 172.0 165.0 175.0 185.0 190.0 200.0

Qatar 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64

Saudi Arabia 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75

Turkey 8.75 9.00 9.25 9.50 9.75 9.00 10.00 9.80 10.15 10.51

UAE 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 Africa Angola 650.0 660.0 660.0 665.0 670.0 660.0 680.0 714.0 736.0 750.0

Botswana 10.39 10.32 10.23 10.23 10.39 10.32 10.38 10.30 10.53 10.67

Cameroon 529.0 520.6 520.6 520.6 520.6 520.6 520.6 520.6 524.8 524.8

Côte d’lvoire 529.0 520.6 520.6 520.6 520.6 520.6 520.6 520.6 524.8 524.8

The Gambia 54.00 54.59 54.90 55.05 55.97 54.59 56.02 58.10 60.61 63.45

Ghana 5.90 6.05 6.15 6.25 6.40 6.05 6.45 6.80 6.44 6.42

Kenya 108.2 108.6 108.5 109.0 110.0 108.6 112.0 115.0 116.5 113.0

Nigeria 420.0 440.0 450.0 455.0 458.0 440.0 460.0 480.0 525.0 500.0

Sierra Leone 10,818 11,025 11,291 11,407 11,743 11,025 12,008 12,989 14,005 15,049

South Africa 13.30 13.00 13.10 13.20 13.30 13.00 13.50 13.60 14.00 14.30

Tanzania 2,330 2,335 2,335 2,340 2,340 2,335 2,350 2,400 2,550 2,530

Uganda 3,540 3,550 3,560 3,580 3,600 3,550 3,620 3,800 4,270 4,150

Zambia 23.40 24.00 23.70 23.90 24.20 24.00 24.50 26.00 25.50 21.00

Zimbabwe 99.00 104.0 104.4 106.0 107.0 104.0 108.2 112.5 117.0 121.7 Emerging Europe Czech Republic 20.16 19.84 19.84 19.84 19.84 19.84 19.84 19.80 19.80 19.80

Hungary 286.0 286.0 286.0 286.0 286.0 286.0 286.0 290.0 293.0 295.0

Poland 3.39 3.33 3.33 3.33 3.33 3.33 3.33 3.35 3.36 3.37

Russia 71.00 70.00 69.50 69.00 68.50 70.00 68.00 71.40 72.20 73.10 Latin America Argentina 111.0 120.0 130.0 135.0 140.0 120.0 140.0 101.0 109.3 118.3

Brazil 4.90 4.80 5.00 5.30 5.60 4.80 6.00 5.05 5.15 5.25

Chile 730.0 750.0 730.0 720.0 710.0 750.0 700.0 770.0 780.0 790.0

Colombia 3,650 3,700 3,725 3,750 3,775 3,700 3,800 3,870 3,960 4,050

Mexico 19.50 19.25 19.00 18.75 18.50 19.25 18.50 19.90 20.25 20.60

Peru 4.00 4.10 4.00 3.90 3.80 4.10 3.70 4.20 4.25 4.30



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Forecasts – GDP

Economy Real GDP growth (% y/y, unless otherwise stated)

Q3-21 Q4-21 Q1-22 Q2-22 Q3-22 Q4-22 Q1-23 Q2-23

Majors

US 6.6 6.7 5.7 3.7 2.8 2.0 1.8 2.1

Euro area 2.7 4.7 5.8 4.7 3.1 2.3 1.9 1.6

Japan 3.2 1.5 3.0 3.2 1.5 1.5 1.1 1.5

UK 8.0 8.4 10.9 6.5 3.0 2.0 1.7 1.5

Canada 5.6 4.0 4.0 3.3 3.3 3.3 3.1 2.7

Australia 5.8 4.0 3.7 3.3 3.4 2.8 3.1 3.4

New Zealand 1.8 3.8 3.3 4.0 4.0 3.9 3.4 3.1

Asia

China 5.0 4.8 5.2 5.6 5.7 5.7 5.6 5.5

Hong Kong 6.0 6.5 2.3 3.5 3.3 2.8 2.2 2.3

India 6.5 5.6 4.6 5.0 5.3 5.5 6.2 5.8

Indonesia 5.3 4.7 4.6 4.8 5.0 4.9 5.0 5.0

Malaysia 0.5 5.2 3.4 7.4 5.9 3.6 3.9 4.5

Philippines 8.0 5.0 6.6 6.8 6.5 6.4 6.3 6.1

Singapore 8.6 5.2 3.0 5.7 2.7 2.9 2.5 2.5

South Korea 4.6 4.3 3.2 3.0 2.8 2.5 2.4 2.4

Sri Lanka 1.5 1.7 3.9 6.0 3.0 4.0 4.3 4.3

Taiwan 2.5 1.8 1.5 2.5 3.0 3.0 2.0 2.0

Thailand 0.5 4.5 3.5 6.0 2.0 1.0 4.5 4.5

Vietnam 5.5 8.2 7.4 8.1 8.1 6.1 6.7 6.7



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Forecasts – Rates

End-period Current Q3-21 Q4-21 Q1-22 Q2-22 Q3-22

United States Policy rate 0.25 0.25 0.25 0.25 0.25 0.25 3M LIBOR 0.18 0.20 0.25 0.25 0.25 0.30 2Y bond yield 0.26 0.25 0.35 0.40 0.40 0.50 5Y bond yield 0.89 1.00 1.20 1.30 1.20 1.35 10Y bond yield 1.45 1.75 2.00 2.00 1.90 1.90

Euro area Policy rate 0.00 0.00 0.00 0.00 0.00 0.00 3M EURIBOR -0.54 -0.50 -0.45 -0.50 -0.50 -0.50 10Y bond yield -0.24 -0.30 -0.20 -0.20 -0.20 -0.10

United Kingdom Policy rate 0.10 0.10 0.10 0.10 0.10 0.10 3M Libor1 0.08 0.15 0.20 – – – 10Y bond yield 0.70 0.85 1.00 1.00 1.10 1.10

Australia Policy rate 0.10 0.10 0.10 0.10 0.10 0.10 3M OIS 0.03 0.04 0.04 0.04 0.04 0.04

China Policy rate2 2.95 2.95 2.95 2.95 2.95 2.95 1Y deposit rate 1.50 1.50 1.50 1.50 1.50 1.50 RRR (major banks) 12.50 12.50 12.50 12.50 12.50 12.50 10Y bond yield 3.13 3.30 3.20 2.90 3.00 3.00

Hong Kong 3M HIBOR 0.17 0.20 0.25 0.25 0.30 0.35 10Y bond yield 1.40 1.40 1.70 1.70 1.80 1.80

India Policy rate 4.00 4.00 4.00 4.00 4.00 4.25 91-day T-bill rate 3.47 3.50 3.75 4.00 4.25 4.50 10Y bond yield 6.05 6.20 6.60 6.75 6.75 7.00

Indonesia Policy rate 3.50 3.50 3.50 3.50 3.50 3.50 FASBI rate 2.75 2.75 2.75 2.75 2.75 2.75 10Y bond yield 6.54 6.50 6.75 7.00 7.25 7.50

Malaysia Policy rate 1.75 1.75 1.75 1.75 1.75 2.25 3M KLIBOR 1.94 1.95 1.95 2.05 2.25 2.60 10Y bond yield 3.28 3.20 3.30 3.40 3.60 3.70

Philippines Policy rate 2.00 2.00 2.00 2.00 2.00 2.00 Standing overnight deposit rate 1.50 1.50 1.50 1.50 1.50 1.50 10Y bond yield 3.66 4.40 4.60 4.70 4.90 4.90

Singapore 3M SGD SIBOR 0.40 0.45 0.45 0.45 0.50 0.50 10Y bond yield 1.53 1.70 1.90 2.00 2.10 2.10

South Korea Policy rate 0.50 0.50 0.75 1.00 1.00 1.00 91-day CD rate 0.66 0.65 0.90 1.15 1.15 1.15 10Y bond yield 2.07 2.20 2.40 2.40 2.60 2.60

Taiwan Policy rate 1.13 1.13 1.13 1.13 1.13 1.13 3M TAIBOR 0.48 0.45 0.45 0.45 0.45 0.45 10Y bond yield 0.43 0.80 0.80 0.90 0.90 1.00

Thailand Policy rate 0.50 0.50 0.50 0.50 0.50 0.50 THFX6M 0.48 0.50 0.50 0.50 0.50 0.50 10Y bond yield 1.83 1.70 1.90 2.00 2.20 2.20

Vietnam Policy rate (Refi rate) 4.00 4.00 4.00 4.00 4.00 4.00 Overnight VNIBOR 1.13 1.00 1.00 1.00 1.00 1.00 5Y bond yield 1.13 2.90 2.90 3.00 3.00 3.10

Ghana Policy rate 13.50 13.50 13.50 13.50 13.50 13.50 91-day T-bill rate 12.62 12.60 12.60 12.55 12.50 12.40 5Y bond yield 17.78 18.25 18.35 18.50 18.55 18.80

Kenya Policy rate 7.00 7.00 7.00 7.00 7.50 8.00 91-day T-bill rate 6.86 6.60 6.60 6.70 6.80 6.90 10Y bond yield 12.30 12.25 12.20 12.20 12.20 12.40

Nigeria Policy rate 11.50 11.50 11.50 11.50 11.50 11.50 91-day T-bill rate 2.50 3.00 4.00 4.50 5.00 5.80 10Y bond yield 12.76 12.75 12.90 13.05 13.15 13.30

South Africa Policy rate 3.50 3.50 3.50 3.75 4.00 4.00 91-day T-bill rate 3.82 3.90 3.95 4.10 4.18 4.24 10Y bond yield 9.34 9.30 9.30 9.20 9.20 9.00

Tanzania 91-day T-bill 3.30 3.30 3.50 3.50 3.50 3.50 10Y bond yield 11.60 12.20 12.00 12.40 12.50 12.50 1 Absence of forecasts from Q1-2022 onwards reflects IBA’s proposed cessation of rate publication at end-2021 2 1Y medium-term lending facility (MLF) rate



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Forecasts – Commodities Q3-21F Q4-21F Q1-22F Q2-22F Q3-22F Q4-22F 2021F 2022F

Energy Crude oil (nearby future, USD/bbl)

ICE Brent 67 56 57 58 59 60 65 59

NYMEX WTI 65 54 55 56 56 57 63 56

Dubai 66 55 56 56 57 57 64 55

US natural gas (nearby future, USD/mmBtu)

NYMEX basis Henry Hub Louisiana 2.40 2.30 2.50 2.30 2.30 2.30 2.40 2.40

Metals

Base metals (LME 3m, USD/t)

Aluminium 2,410 2,320 2,260 2,200 2,170 2,160 2,310 2,198

Copper 9,970 9,300 9,000 8,760 8,500 8,100 9,411 8,590

Lead 2,050 2,000 2,002 1,990 1,965 2,005 2,054 1,991

Nickel 17,800 17,000 16,950 17,200 16,800 16,300 17,458 16,813

Tin 28,000 26,000 24,000 23,400 23,100 23,000 26,685 23,375

Zinc 2,905 2,900 2,870 2,770 2,810 2,800 2,882 2,813

Precious metals (spot, USD/oz)

Gold 1,920 1,940 1,900 1,825 1,750 1,700 1,869 1,794

Palladium 2,850 3,000 2,800 2,700 2,600 2,400 2,790 2,625

Platinum 1,190 1,250 1,200 1,175 1,250 1,300 1,206 1,231

Silver 29.0 30.0 28.0 26.0 24.0 22.0 28.4 25.0



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Forecasts – Selected interbank rates by tenor 2021 2022

End-period Q3 Q4 Q1 Q2 Q3 Q4

USD LIBOR

FFTR 0.25 0.25 0.25 0.25 0.25 0.25

1M 0.15 0.20 0.15 0.15 0.15 0.20

3M 0.20 0.25 0.25 0.25 0.30 0.35

6M 0.25 0.30 0.30 0.30 0.35 0.45

12M 0.35 0.40 0.40 0.45 0.50 0.65

SGD SIBOR

1M 0.30 0.30 0.30 0.35 0.40 0.45

3M 0.45 0.45 0.45 0.50 0.50 0.55

6M 0.60 0.65 0.65 0.70 0.70 0.70

HIBOR

1M 0.10 0.15 0.15 0.15 0.15 0.20

3M 0.20 0.25 0.25 0.30 0.35 0.40

6M 0.30 0.35 0.35 0.35 0.40 0.50

12M 0.40 0.45 0.45 0.50 0.55 0.70



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Authors Sarah Hewin

+44 20 7885 6251

[email protected]



Christopher Graham

+44 20 7885 5731

[email protected]

Economist, Europe


Wei Li

+86 21 3851 5017

[email protected]



Shuang Ding

+852 3983 8549

[email protected]



Kelvin Lau

+852 3983 8565

[email protected]



Chong Hoon Park

+82 2 3702 5011

[email protected]



Aldian Taloputra

+62 21 2555 0596

[email protected]



Tony Phoo

+886 2 6606 9436

[email protected]



Philippe Dauba-Pantanacce

+44 20 7885 7277

[email protected]

Senior Economist | Global Geopolitical Strategist


Chidu Narayanan

+65 6596 7004

[email protected]

Economist, Asia


Mayank Mishra

+65 6596 7466

[email protected]



Saurav Anand

+91 22 6115 8845

[email protected]



Nagaraj Kulkarni

+65 6596 6738

[email protected]



Divya Devesh

+65 6596 8608

[email protected]



Becky Liu

+852 3983 8563

[email protected]

Head, China Macro Strategy


Kanika Pasricha

+91 22 6115 8820

[email protected]

Economist, India


Edward Lee

+65 6596 8252

[email protected]



Jonathan Koh

+65 6596 8075

[email protected]

Economist, Asia


Arup Ghosh

+65 6596 4620

[email protected]



Tim Leelahaphan

+66 2724 8878

[email protected]



Emmanuel Kwapong, CFA

+44 20 7885 5840

[email protected]

Economist, Africa


Razia Khan

+44 20 7885 6914

[email protected]




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Sarah Baynton-Glen, CFA

+44 20 7885 2330

[email protected]

Economist, Africa


Farooq Pasha

+92 21 3245 7859

[email protected]

Economist, MENAP


Emiko Bowles

+44 20 7885 6409

[email protected]

Research Associate


Geoff Kendrick

+44 20 7885 6175

[email protected]



John Davies

+44 20 7885 7640

[email protected]

US Rates Strategist


Steve Englander

+1 212 667 0564

[email protected]

Head, Global G10 FX Research and North America Macro Strategy

Standard Chartered Bank NY Branch

Sudakshina Unnikrishnan

+44 20 7885 6583

[email protected]

Commodities Analyst


Eric Robertsen

[email protected]

Global Head of Research | Chief Strategist


Entering H2-2021 in different gears

We expect global growth to rebound to 5.8% in 2021 from -3.3% in 2020 as economies

reopen and vaccination rollouts gain momentum. We see two key downside risks to

Contents

Overview

Where we differ from consensus




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Disclosures appendix

Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Chong Hoon Park is/are employed as an Economist(s) by Standard Chartered Bank Korea and authorised to provide views on Korean macroeconomic topics only.

Global Disclaimer: Standard Chartered Bank and/or its affiliates (“SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document (including market data or statistical information). The information in this document, current at the date of publication, is provided for information and discussion purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price. SCB does not represent or warrant that this information is accurate or complete. While this research is based on current public information that we have obtained from publicly available sources, believed to be reliable, but we do not represent it is accurate or complete, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. This document does not purport to contain all the information an investor may require and the contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections and price target(s), if any, contained in this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to update on a reasonable basis the information and opinions contained herein, we are under no obligation to do so and there may be regulatory, compliance or other reasons that prevent us from doing so. Accordingly, information may be available to us which is not reflected in this document, and we may have acted upon or used the information prior to or immediately following its publication. SCB is acting on a principal-to-principal basis and not acting as your advisor, agent or in any fiduciary capacity to you. SCB is not a legal, regulatory, business, investment, financial and accounting and/or tax adviser, and is not purporting to provide any such advice. Independent legal, regulatory, business, investment, financial and accounting and/or tax advice should be sought for any such queries in respect of any investment. SCB and/or its affiliates may have a position in any of the securities, instruments or currencies mentioned in this document. SCB and/or its affiliates or its respective officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document and on the SCB Research website or have a material interest in any such securities or related investments, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments and may have received compensation for these services. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private business functions to help ensure confidential information, including ‘inside’ information is not disclosed unless in line with its policies and procedures and the rules of its regulators. Data, opinions and other information appearing herein may have been obtained from public sources. SCB expressly disclaims responsibility and makes no representation or warranty as to the accuracy or completeness of such information obtained from public sources. SCB also makes no representation or warranty as to the accuracy nor accepts any responsibility for any information or data contained in any third party’s website. You are advised to make your own independent judgment (with the advice of your professional advisers as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging or investment decision. SCB accepts no liability and will not be l iable for any loss or damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary damages) from the use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services. This document is for the use of intended recipients only. In any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professional and institutional investors. This communication is subject to the terms and conditions of the SCB Research Disclosure Website available at https://research.sc.com/Portal/Public/TermsConditions. The disclaimers set out at the above web link applies to this communication and you are advised to read such terms and conditions / disclaimers before continuing. Additional information, including analyst certification and full research disclosures with respect to any securities referred to herein, will be available upon request by directing such enquiries to [email protected] or clicking on the relevant SCB research report web link(s) referenced herein. MiFID II research and inducement rules apply. You are advised to determine the applicability and adherence to such rules as it relates to yourself.

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Market-Specific Disclosures – This document is not for distribution to any person or to any jurisdiction in which its distribution would be prohibited. If you are receiving this document in any of the market listed below, please note the following:

Australia: The Australian Financial Services Licence for Standard Chartered Bank is Licence No: 246833 with the following Australian Registered Body Number (ARBN: 097571778). Australian investors should note that this communication was prepared for “wholesale clients” only and is not directed at persons who are “retail clients” as those terms are defined in sections 761G and 761GA of the Corporations Act 2001 (Cth). Bangladesh: This research has not been produced in Bangladesh. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED IN BANGLADESH AND MAY NOT BE OFFERED OR SOLD IN BANGLADESH WITHOUT PRIOR APPROVAL OF THE REGULATORY AUTHORITIES IN BANGLADESH. Any subsequent action(s) of the Recipient of these research reports in this area should be subject to compliance with all relevant law & regulations of Bangladesh; especially the prevailing foreign exchange control regulations. Botswana: This document is being distributed in Botswana by, and is attributable to, Standard Chartered Bank Botswana Limited, which is a financial institution licensed by Bank of Botswana under Section 6 of the Banking Act CAP 46.04 and is listed on the Botswana Stock Exchange. Brazil: SCB disclosures pursuant to the Securities Exchange Commission of Brazil (“CVM”) Instruction 598/18: This research has not been produced in Brazil. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL AND MAY NOT BE OFFERED OR SOLD IN BRAZIL EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS AND IN COMPLIANCE WITH THE SECURITIES LAWS OF BRAZIL. China: This document is being distributed in China by, and is attributable to, Standard Chartered Bank (China) Limited which is mainly regulated by China Banking and Insurance Regulatory Commission (CBIRC), State Administration of Foreign Exchange (SAFE), and People’s Bank of China (PBoC). European Economic Area: In Germany, Standard Chartered Bank AG, a subsidiary of Standard Chartered Bank, is authorised by the European Central Bank and supervised by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht-“BaFin”) and the German Federal Bank (Deutsche Bundesbank). This communication is directed at persons Standard Chartered Bank AG can categorise as Eligible Counterparties or Professional Clients (such persons constituting the target market of this communication following Standard Chartered Bank AG’s target market assessment) as defined by the Markets in Financial Instruments Directive II (Directive 2014/65/EU) (“MiFID II”) and the German Securities Trading Act (“WpHG”). No other person should rely upon it. In particular, this is not directed at Retail Clients (as defined by MiFID II and WpHG) in the European Economic Area. Nothing in this communication constitutes a personal recommendation or investment advice as defined by MiFID II and WpHG. Hong Kong: This document is being distributed in Hong Kong by, and any part hereof authored by an analyst licensed in Hong Kong is attributable to, Standard Chartered Bank (Hong Kong) Limited

渣打銀行（香港）有限公司 which is regulated by the Hong Kong Monetary Authority. India: This document is being distributed in

India by Standard Chartered Bank, India Branch (“SCB India”). SCB India is a branch of SCB, UK and is licensed by the Reserve Bank of India to carry on banking business in India. SCB India is also registered with Securities and Exchange Board of India in its capacity as Merchant Banker, Depository Participant, Bankers to an Issue, Custodian, etc. For details on group companies operating in India, please visit https://www.sc.com/in/important-information/india-result/. Indonesia: Standard Chartered Bank, Jakarta Branch is a banking institution duly registered with and supervised by the Indonesian Financial Service Authority. The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration. Future changes in such laws, rules, regulations, etc., could affect the information in this document, but SCB is under no obligation to keep this information current or to update it. Expressions of opinion are those of SCB only and are subject to change without notice. Japan: This document is being distributed to Specified Investors, as defined by the Financial Instruments and Exchange Act of Japan (Act No.25 of 1948, known as “FIEA”), for information only and not for the purpose of soliciting any Financial Instruments Transactions as defined by the FIEA or any Specified Deposits, etc. as defined by the Banking Act of Japan (Act No.59 of 1981). Kenya: Standard Chartered Bank Kenya Limited is regulated by the Central Bank of Kenya. The information in this document is provided for information purposes only. The document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. Korea: This document is being distributed in Korea by, and is attributable to, Standard Chartered Bank Korea Limited which is regulated by the Financial Supervisory Service and Financial Services Commission. Macau: This document is being distributed in Macau Special Administrative Region of the Peoples' Republic of China, and is attributable to, Standard Chartered Bank (Macau Branch) which is regulated by Macau Monetary Authority. Malaysia: This document is being distributed in Malaysia by Standard Chartered Bank Malaysia Berhad only to institutional investors or corporate customers. Recipients in Malaysia should contact Standard Chartered Bank Malaysia Berhad in relation to any matters arising from, or in connection with, this document. Mauritius: Standard Chartered Bank (Mauritius) Limited is regulated by both the Bank of Mauritius and the Financial Services Commission in Mauritius. This document should not be construed as investment advice or solicitation to enter into securities transactions in Mauritius as per the Securities Act 2005. New Zealand: New Zealand Investors should note that this document was prepared for “wholesale clients” only within the meaning of section 5C of the Financial Advisers Act 2008. This document is not directed at persons who are “retail clients” as defined in the Financial Advisers Act 2008. NOTE THAT STANDARD CHARTERED BANK (incorporated in England) IS NOT A “REGISTERED BANK” IN NEW ZEALAND UNDER THE RESERVE BANK OF NEW ZEALAND ACT 1989, and it is not therefore regulated or supervised by the Reserve Bank of New Zealand. Pakistan: The securities mentioned in this report have not been, and will not be, registered in Pakistan, and may not be offered or sold in Pakistan, without prior approval of the regulatory authorities and/or relevant governmental statutory body(ies) in Pakistan. Philippines: This document may be distributed in the Philippines by Standard Chartered Bank (Philippines) (“SCB PH”) to Qualified Buyers as defined under Section 10.1 (L) of Republic Act No. 8799, otherwise known as the Securities Regulation Code (“SRC”), other corporate and institutional clients only. SCB PH does not warrant the appropriateness and suitability of any security, investment or transaction that may have been discussed in this document with respect to any person. Nothing in this document constitutes or should be construed as an offer


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to sell or distribute securities in the Philippines, which securities, if offered for sale or distribution in the Philippines, are required to be registered with the Securities and Exchange Commission unless such securities are exempt under Section 9 of the SRC or the transaction is exempt under Section 10 thereof. SCB PH is regulated by the Bangko Sentral ng Pilipinas (BSP) (e-mail: [email protected]). Any complaint in connection with any product or service of, or offered through, the Bank should be directed to the Bank’s Client Services Group via e-mail at [email protected] (or any other contact information that the Bank may notify you from time to time). Singapore: This document is being distributed in Singapore by Standard Chartered Bank (Singapore) Limited (UEN No.: 201224747C) only to Accredited Investors, Expert Investors or Institutional Investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact Standard Chartered Bank (Singapore) Limited (as the case may be) in relation to any matters arising from, or in connection with, this document. South Africa: Standard Chartered Bank, Johannesburg Branch (“SCB Johannesburg Branch”) is a Registered Credit Provider in terms of the National Credit Act 34 of 2005 under registration number NCRCP4. Thailand: This document is intended to circulate only general information and prepare exclusively for the benefit of Institutional Investors with the conditions and as defined in the Notifications of the Office of the Securities and Exchange Commission relating to the exemption of investment advisory service, as amended and supplemented from time to time. It is not intended to provide for the public. UAE: For residents of the UAE – Standard Chartered Bank UAE does not provide financial analysis or consultation services in or into the UAE within the meaning of UAE Securities and Commodities Authority Decision No. 48/r of 2008 concerning financial consultation and financial analysis. UAE (DIFC): Standard Chartered Bank, Dubai International Financial Centre (SCB DIFC) having its offices at Dubai International Financial Centre, Building 1, Gate Precinct, P.O. Box 999, Dubai, UAE is a branch of Standard Chartered Bank and is regulated by the Dubai Financial Services Authority (“DFSA”). This document is intended for use only by Professional Clients and is not directed at Retail Clients as defined by the DFSA Rulebook. In the DIFC we are authorized to provide financial services only to clients who qualify as Professional Clients and Market Counterparties and not to Retail Clients. As a Professional Client you will not be given the higher retail client protection and compensation rights and if you use your right to be classified as a Retail Client we will be unable to provide financial services and products to you as we do not hold the required license to undertake such activities. United Kingdom: SCB and or its affiliates is authorised in the United Kingdom by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority (“FCA”) and the PRA. This communication is directed at persons SCB can categorise as Eligible Counterparties or Professional Clients (such persons being the target market of this communication following SCB’s target market assessment) as defined by the FCA Handbook. In particular, this communication is not directed at Retail Clients (as defined by the FCA Handbook) in the United Kingdom. Nothing in this communication constitutes a personal recommendation or investment advice as defined by the FCA Handbook. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Exchange Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities North America, LLC, 1095 Avenue of the Americas, New York, N.Y. 10036, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. Any documents relating to foreign exchange, FX or global FX, Rates or Commodities to US Persons, Guaranteed Affiliates, or Conduit Affiliates (as those terms are defined by any Commodity Futures Trading Commission rule, interpretation, guidance, or other such publication) are intended to be distributed only to Eligible Contract Participants are defined in Section 1a(18) of the Commodity Exchange Act. Zambia: Standard Chartered Bank Zambia Plc (SCB Zambia) is licensed and registered as a commercial bank under the Banking and Financial Services Act Cap 387 of the laws of Zambia and as a dealer under the Securities Act, No. 41 of 2016. SCB Zambia is regulated by the Bank of Zambia, the Lusaka Stock Exchange and the Securities and Exchange Commission.

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11:45 GMT 02 July 2021

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