Asian Insights

Highlights from the CAA Weekly Table

• Geopolitics – watch North Korea: The US and South Korea are increasingly divided over the approach to North Korea. Moreover, the US-China trade spat gives China less incentive to enforce sanctions on North Korea and so reduces the US ability to pressure the North.
• Global economy: Risks to oil prices are tilted firmly to the upside, with supply-side disruptions on the horizon. Asian economies could suffer from dearer oil prices through worsening external accounts and growing fiscal pressures.
• Asian politics: In Malaysia, there is a growing suspicion of a rift between PM Mahathir and the man he has promised to hand power to, Anwar Ibrahim. The political honeymoon that prevailed after the May election is likely to end soon.

The US poses two risks for Asia

• The political threat to the Trump presidency has grown sharply, making it more likely that Trump will seek a distraction as the noose tightens around him. Key flashpoints such as trade tensions and geopolitical tussles could be aggravated.
• On monetary policy, the Fed’s potentially overly cautious stance could lead to a bigger shock later as we believe that there are more upside rather than downside risks to US growth and inflation. Failure to address this upside risk could lead to a much more abrupt shift in policy.

Thailand: Solid growth, monetary tightening and greater political clarity

• Thailand’s economy looks to be on track for a solid year in 2018, even though 2H18 should see some moderation. Growth will be supported by robust exports, rising domestic demand and concerted government spending.
• Consequently, the Bank of Thailand will probably have to start raising policy rates by end-2018.
• On the political front, the timeline for the upcoming election is now clearer but the junta is going after the emerging political star Thanathorn. He and two party colleagues face police charges. Furthermore, Gen Prem, a stalwart of the royalist establishment, appears to be in declining health, causing the vacuum left by the late King Bhumibol to grow ever larger.

Indonesia: Budget 2019 – A mix of conservative and populist budgeting

• President Jokowi submitted Budget 2019 to the parliament in his annual Independence Day address. The budget assumptions are more realistic, given modest estimates of growth while factoring in a weaker Rupiah and higher oil prices.
• The budget prioritises stability above all else, given the narrower budget deficit, alongside curtailed spending growth in infrastructure investment. That said, the government is expanding social spending to shore up the incumbent’s political base ahead of the 2019 Presidential elections.
• The fiscal stance remains mild, though further attempts to rein in spending remain possible if there is further depreciation of the Rupiah.

Highlights from the CAA Weekly Table

• Asian economies: In China, the economic deceleration, deleveraging push and regulations on bad loans have intensified financial stresses, resulting in a precarious situation fraught with more pronounced policy dilemmas. In India, growth is returning but so are stability concerns about the economy, as elevated oil prices are weighing on the external accounts. In Indonesia, the central bank stays ahead of the curve by raising rates to rein in the turmoil and volatility that has afflicted the Rupiah. In the Philippines, President Duterte struggles to channel his popularity into political momentum for his legislative agenda.
• Asian politics: The outlook for the election remains uncertain in Thailand with a new date of May 2019 being bandied about. PM Prayuth will clarify his future position in politics in due course but the military looks unlikely to relinquish its leading role in Thai politics even post-election. In Singapore, PM Lee used his National Day Rally speech to announce a modest strengthening of social safety nets while also beginning to address the prickly issue of the 99-year leases on public housing flats. The flurry of measures appears to be setting the stage for early elections in late-2019.

Global economy: Darkening clouds but the US economy remains a beacon

• There are unambiguous signs of an economic slowdown across the world and things could get worse, albeit from a relatively high base. Several forward-looking indicators are foreshadowing a moderation in growth in production and trade for the rest of the year. This darkening outlook is further compounded by the uncertainty fomented by ill-tempered negotiations over trade spats.
• Thus, developing Asia faces a more fraught global environment. Export-oriented economies will take a hit as global demand moderates. This is compounded by investors more finely-attuned to risk premia as financial conditions tighten and who would need a lower hurdle now to depart from EM asset classes. However, the proactive policymaking of Asian central banks has shored up their credibility and will provide a buffer.

Malaysia: Slower but steadier as she goes

• The Malaysian economy eased further in 2Q18 from the blockbuster growth in 2017, as private investment remains languid, given the lingering uncertainty posed by the government’s stance on China-backed infrastructure projects.
• Malaysia is poised to ride through the storm posed by a confluence of scarcer liquidity and a brewing US-China trade spat, given its solid external accounts alongside a buoyant economic outlook going forward.
• The first 100 days of the Pakatan Harapan government have been marked by bold policy moves to improve political accountability and transparency in Malaysia, alongside the re-imposition of the SST, of which the latter is a necessary evil.