Asian Insights

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Accelerating global recovery boosts Asian exports, inflation risks contained; Singapore: Snag in succession points to deep weaknesses in political system

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Highlights from the CAA Weekly Table:

  • Global tax regime: There is a good chance of a global agreement that will prevent countries such as Singapore from using tax incentives to attract business headquarters.
  • Asian economic policy – more vexing policy dilemmas across Asia. In China, pipeline inflationary pressures are growing even as consumer spending remains weak: more administrative measures appear likely. In India, the central bank faces challenges in calibrating policy while in Indonesia, the president’s support for changes to Bank Indonesia’s mandate has revived fears for the continued independence of monetary policy. Froth in the housing market raises the risk of macro-prudential measures in Singapore. In the Philippines, critics worry that the revised deal with a utility undermines the rule of law and makes attracting foreign investment even more difficult.

Accelerating global recovery boosts Asian exports, inflation risks contained

  • The global recovery is gaining traction and feeding through strongly into more robust export growth in Asia. The forward-looking indicators for exports remain upbeat.
  • One risk to Asia’s growth is that new virus variants spark off further surges in COVID infections – but this risk is likely to be contained as vaccines are rolled out and improved vaccines are introduced.
  • A second risk to Asia is an unexpectedly strong revival in global inflation. However, we do believe the chances are low, so long as inflationary expectations remain well-anchored and the slack in the global economy and major labour markets persists. There is a growing risk though of an abrupt shift in Federal Reserve policy signals: we see a robust recovery making its ultra-easy policy stance increasingly untenable.

Singapore: Snag in Succession Points to Deeper Weaknesses in Political System

  • The political succession in Singapore has been thrown into disarray following the abrupt decision by Deputy Prime Minister Heng Swee Keat to step down. Prime Minister Lee Hsien Loong has announced that he will stay on for longer than planned as it might take two to three years before a new successor is ready. Trade and Industry Minister Chan Chun Sing seems to be in pole position to emerge as successor. A cabinet reshuffle in 2 weeks’ time may make the relative standing of likely successors clearer.
  • Strong political institutions and a consensual approach to politics provide considerable ballast to Singapore’s political stability. Nevertheless, the latest development reveal weaknesses in the political set-up which have raised political risks.
  • In essence, Singapore’s highly controlled political system may not have adapted to the changing rules of the game. The ruling party’s cadre members are less manageable than before while a more questioning electorate is pushing back more frequently against the government. The over-reliance on a narrow and select group of individuals at the highest echelons of power leaves the ruling party with little room for error.

Asian monetary policy: Policy rates have troughed

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Highlights from the CAA Weekly Table:

  • Political risks: China is testing Biden. Its intrusions into the air space and waters of Japan, Taiwan and the Philippines are designed to show up the US as a toothless tiger, unable to defend its allies. But China may have miscalculated and the result is higher risk of tensions.
  • Asian economies: Asian growth could see significant upside. Recent data show global demand for Asian exports firming. Massive investments by tech firms validate the view that tech demand will be powerfully boost Asian growth. In China, export demand will offset domestic weakness. New infection surges are hurting India and the Philippines. Thailand remains sickly. Robust exports and a likely upturn in investment will drive South Korea’s out-performance this year.

Asian monetary policy: Policy rates have troughed

  • The results of our updated Taylor Rule model for assessing the monetary policy outlook are presented below:
Policy Rate (%)

Conventional policy

Unconventional policy

China 2020: 2.16%
    • No change to key policy rates, the Loan Prime Rate (LPR) and the 7-day repo rate at this juncture.
    • Continued use of non-interest rate tools such as window guidance to spur lending to small firms.
2021e: 2.55%
India 2020: 4.00%
    • RBI to raise rates at end-2021 if recovery pans out
    • RBI not inclined toward unconventional Policy
2021e: 4.35%
Indonesia 2020: 3.75%
    • Rate hike likely in 2Q21 if downward pressure on Rupiah intensifies
    • Only macroprudential easing still on the table
    • BI still a standby buyer of G-sec in 2021, but policy continuity in 2022 unlikely
    • Mooted changes to BI’s mandate bear watching
2021e: 3.75%
Thailand

2020: 0.5%

    • Policy rate on hold until 2023; tourism accounts for most of the remaining gap between output and its pre-COVID trend, but a recovery is pushed out to 2022.
    • BOT more likely to use yield curve control and/or forward guidance should downside risks materialise.

2021e: 0.5%

Singapore 2020: –
    • Policy normalisation only from Apr 22 on account of a closing output gap and firming core inflation.
    • MAS is unlikely to enact unconventional policy.
2021e: –
Malaysia 2020: 1.75%
    • Policy rates have hit bottom, unlikely to budge anytime soon in either direction.
    • BNM is wary of unintended side-effects of un-conventional policy
2021e: 1.75%
The Philippines 2020: 2.0%
    • Expect monetary normalisation around early-2023 with the economic recovery in abeyance
    • Uncontroversial nature of deficit financing vis-à-vis debt monetisation means the govt likely to call upon the BSP in future crises.
2021e: 2.0%