Asian Insights

Highlights from the CAA Weekly Table

What has changed?

• Global economy: The latest purchasing manager surveys reflect a general slowing in the world economy including emerging Asian. However, there are pockets of resilience in Asia due to production relocation and trade diversion. With both the Federal Reserve and the European Central Bank signalling easier monetary policy, Asian central banks will have greater leeway to cut rates as well.
• Asian economies: As the Rupiah has shown resilience of late, we think that Bank Indonesia is becoming more confident about moving ahead with a rate cut in the next few months. Signs of a slowdown in the Indian economy all but guarantee another rate cut soon, but its ability to revive economic activity will be muted as the undercapitalized banking sector will not be able to step up lending. An uptick in exports is a positive for trade-reliant Malaysia, but is unlikely to last given the parlous outlook for global trade. A benign inflation outlook suggests more rate cuts are in store for the Philippine economy. With external demand in the doldrums, fiscal support will be key for the Thai economy to remain on an even keel. However, political infighting could jeopardize timely passage of the next budget.

Asian political risks: More worries about succession to Prime Minister Mahathir have surfaced: the resulting uncertainty will be yet another headwind for the economy.

Highlights from the CAA Weekly Table

• Global developments: The global trade outlook remains clouded by the intractable trade spat between US and China. Given the numerous failed attempts, China may wonder whether negotiating with the US would be useful at all. Cracks are appearing in the global economy as lead indicators continue their descent while emerging markets are not out of the woods yet. However, the US economy remains indefatigable.
• Asian politics: With the political ban partially lifted and the last two of ten organic bills required for elections royally endorsed, Thailand is set to head for the polling booths come February 2019. More political frictions are likely in Malaysia as PM-in-waiting Anwar Ibrahim will make his return to parliament soon via a by-election.
• Asian economies: In India, stability concerns plague the fast-growing economy, as prices are poised to surprise on the upside while the rapidly-weakening Rupee prompted a series of near-term countermeasures by the government. In the Philippines, the second package of tax reforms has been passed by the House but the Senate could be a hold-out in light of the looming mid-term elections in eight months’ time.

China: Focus is on spurring growth, stability could be sacrificed

• Chinese economic growth continues to trundle along, even as conflicting policy objectives of growth and deleveraging weigh on the minds of policymakers.
• As investment is a critical driver of economic growth, its sharp deceleration is a bad sign for future growth and stability. More aggressive policy actions are required.
• Chinese policymakers are faced with a stark choice between growth via stimulus or stability through painful but necessary reforms – two conflicting policy objectives.
• Reforms will take a back seat for now, to be rejuvenated when economic conditions are much kinder. The key risk is weakening sentiment regarding the Chinese economy which could lead to outflows from currency and asset markets – which why the government is keen to showcase solid growth impetus.

Indonesia: Key takeaways from our research trip

• First, policymakers are alert and cognisant of the souring risk environment.
• Second, the bandwidth of policymakers and technocrats is diverted toward maintaining macroeconomic stability in the face of substantial Rupiah weakness, with Bank Indonesia likely to follow through with a few more rate hikes in the remainder of 2018.
• Third, election-year spending is likely to offset the contractionary effects of tightening monetary policy while the weak pass-through between the currency and inflation suggests prices will remain largely benign.
• Last, more measures are needed to address the underlying problems, viz., a lower-than-desired savings rate alongside the dearth of FDI in export-oriented manufacturing.