Fiscal stimulus chatter picking up; Measured easing ahead from BI

Fiscal policy mulled to support monetary policy. BI to keep to easing stance.
Philip Wee, Eugene Leow21 Aug 2019
    Photo credit: AFP Photo

    FX: Fiscal stimulus chatter picking up

    Most currencies have been holding ground in last week’s ranges ahead of the Fed’s Jackson Hole meeting on 23 August. Global recession fears have heightened from the flight from equities into bonds. Since the Fed cut on July 31, New Zealand, India, Thailand and the Philippines have lowered rates. Singapore and Hong Kong have brought this year’s official growth forecasts down to 0-1% from 1.5-2.5% and 2-3% respectively. Like Singapore and Hong Kong, some of Europe’s largest economies (e.g. Germany and UK) also reported negative QoQ growth in 2Q19. Last week’s plunge in the Argentine peso was a stark warning on how fragile investor sentiment has become.

    Not surprisingly, more governments have started preparations for fiscal economic stimulus packages. For example, India is aware that its four rate cuts have not been effectively transmitted to its real economy. The government is now considering a stimulus package. Elsewhere, Thailand has announced a THB316bn stimulus package with subsidies for farmers, cash handouts for low-income earners and domestic tourists. In Europe, Germany has started to prepare for fiscal stimulus in the event of a recession, a scenario the Bundesbank no longer considered improbable. Lastly, US President Trump has also started to think about payroll tax cuts to keep the US economy growing into next year’s presidential election.

    Rates: Measured easing ahead from BI          

    We think that measured easing from Bank Indonesia (BI) over the coming quarters should continue supporting Indo govvies. Amid a persistently wide current account deficit (it has been in excess of 3% for two consecutive quarters), BI has been understandably reticent in easing policy compared to peers, cutting rates by just 25bps thus far this year. By contrast, the central bank hiked by a cumulative 175bps in 2018. A further unwind of tight monetary policy is in the offing but we suspect that BI would only be comfortable matching the same pace of rate cuts as the Fed for now. External funding risks is still a concern in the current volatile environment.

    Meanwhile, liquidity indicators are mixed. While interbank rates have been stable, implied rates (both onshore and offshore) appear slightly elevated. Moreover, system liquidity appears to be tight despite the fact that BI has been conducting less open market operations (OMO). This opens up the possibility of another reserve requirement ratio (RRR) cut at the policy meeting tomorrow.

    Foreign flows will generally be supportive in the current low-yield environment (foreign ownership of Indo govvies have increased by more than IDR 1000tn year to date). 10Y Indo govvies offer close to 600bps of premium over similar tenor US Treasuries. We think current spreads are on the high side with only two instances (the global financial crisis of 2008/09 and China devaluation fears in 2015) in recent memory where spreads blew much wider. We argue that BI’s focus on rupiah stability and efforts to smooth out volatility in bond prices should provide comfort for investors even if it means that quick gains (from aggressive easing) are not in the offing.

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

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