Asian Insights

A summary of “Asian Insights” weekly update is published here. The full version is available through paid subscription. Please click here to register your interest. Our executive will get in touch with you.


US-China: New dynamic of action-reaction escalation bodes ill; Weaker USD heralds extended upturn for selected Asian currencies

post_img

What has changed – highlights from recent developments:

  • Asian economies need more vigorous policy responses: India’s Reserve Bank has used its annual report to plead for more structural reforms especially in land and labour markets. The RBI injected a sense of urgency into its plea by warning that India’s potential growth could be undermined otherwise. In Indonesia, crucial labour market reforms made further headway in parliament but improvements to the tax regime needed to expand the tax base do not seem feasible. The Philippines is likely to see further monetary easing in October but more fiscal support is also needed for the economy.
  • Asian political risks: Despite substantial efforts over 20 years to contain it, terrorism remains a risk in Southeast Asia. Two suicide blasts killed 15 people in the Philippines. In Indonesia, however, timely action by security forces nipped a potentially serious attack in the bud. In the Philippines, there is more speculation about President Duterte’s health.

US-China: A new dynamic of action-reaction escalation bodes ill for regional stability

  • In recent weeks, the US and China have engaged in military and political actions which risk triggering an escalation, each reacting against perceived mischief-making by the other.
  • Regional countries are responding to China’s increased assertiveness. Alliances are forming against China – the US, Japan and Australia in one clear alliance which India and Taiwan are likely to discreetly support while Vietnam and India appear to be cooperating more closely. Malaysia and the Philippines, which had initially tried to be friendly with China have recalibrated their approaches in different ways to adopt a more robust stance towards China.

A weaker USD heralds an extended upturn for Asian currencies with strong fundamentals

  • We maintain our above-consensus view on the CNY and expect recent weakness in the MYR, THB and KRW to be short-lived.
  • Sustained US Dollar weakness is unlikely to be a salve for the INR, IDR and the PHP which remain vulnerable due to their less-than-favourable fundamentals.
  • The region’s safe haven currencies, the TWD and the SGD, are also poised for further gains.

Forecast table for currencies against the USD

Economy

2019

2020f

2021f

Vulnerability Metric

YTD (%)

Local currency versus US Dollar

Indonesia

13,866

14,500

14,300

-1.28

-5.52

India

71.4

74.0

73.5

-0.98

-2.83

Philippines

50.7

49.0

49.5

-0.82

4.32

China

6.96

6.85

6.78

-0.63

1.40

Malaysia

4.09

4.1

4.0

-0.20

-1.78

South Korea

1,158

1,180

1,130

-0.17

-2.48

Vietnam

23,173

23,120

23,010

0.08

0.03

Hong Kong

7.79

7.78

7.78

0.28

0.53

Thailand

29.7

31.0

30.2

0.44

-4.69

Taiwan

30.0

29.7

29.4

1.07

1.93

Singapore

1.35

1.36

1.34

2.20

-0.91

 

Why we remain positive about an economic upturn; Respite for Asian currencies may turn out to be fleeting

post_img

Key themes in recent developments:

  • A new front opens in Asian political risks: Sino-Indian border tensions persist after five rounds of talks. With China perceived by the Indian public as having seized Indian territory, pressure on Indian Prime Minister Modi to counter China will grow but his options are limited. He will seek a face-saving compromise to avoid a near term escalation. But this incident will serve to harden India’s approach to China, which could lead to longer term conflicts. Malaysia appears headed for an early general election as Prime Minister Muhyiddin’s position is increasingly untenable.
  • Asian economies: India, Malaysia, Indonesia and the Philippines are reaching new lows in economic activity, confirming that second quarter growth will be exceedingly poor. Although there are some small signs of possible improvement such as the better outlook for Indian agriculture as a result of a relatively good monsoon, these are few and far between.

Why we remain positive about an economic upturn

  • While we expect abysmal numbers for Asian growth in 2Q20, we believe that four key factors will work for a relatively good recovery thereafter – the easing of restrictions, the resilience of businesses and consumers, the lagged impact of the most powerful policy response seen in recent times and one-off factors such as the outlook for exports of technology goods.
  • The key risk is of new waves of infection. We have assumed that these will happen but our view is also that in most cases, these can be contained, as China and Korea have shown with the secondary waves they have managed. New therapies will also reduce morbidity and mortality rates, making the disease less dangerous.

2020

Growth

(%)

Inflation

(%)

CA

(% of GDP)

Currency

(vs. USD)

Policy Rate

(%)

China

2.2

2.3

0.8

7.1

2.75*

Hong Kong

-4.5

1.5

5.8

7.78

India

0.5

3.8

-0.6

73.5

3.60

South Korea

-0.6

0.4

4.8

1,180

0.50

Taiwan

1.0

0.2

8.1

29.7

0.875

Singapore

-6.1

-0.5

14.8

1.36

Thailand

-7.5

-1.5

5.2

31.0

0.50

Vietnam

3.0

2.2

0.7

23,120

4.50

Indonesia

1.9

2.4

-1.6

14,500

3.50

The Philippines

0.5

2.1

-0.8

51.0

2.50

Malaysia

-1.8

-0.8

3.0

4.1

1.75

Respite for Asian currencies may turn out to be fleeting

  • In the short term, the trajectory of currencies can be traced to the perception of risk to growth and stability. Over the longer-term, the currency should reflect the macroeconomic fundamentals and potential vulnerabilities, especially in the external economy.
  • The currencies in Asia which concern us most according to the metrics we look at would be the Indian Rupee, Indonesian Rupiah and the Malaysian Ringgit.