Chart of the Week: Asia’s 2019 external funding needs; more challenging than 2018 for most


We find that adding up current account balance and debt due (on a residual maturity basis) provides a rather comprehensive sense of an economy’s hard currency needs in the relevant horizon.
Samuel Tse29 Oct 2018
Photo credit: AFP Photo


Chart of the Week: 2019 external funding needs

We find that adding up current account balance and debt due (on a residual maturity basis) provides a rather comprehensive sense of an economy’s hard currency needs in the relevant horizon. In 2013, the market sold the currencies of those economies with the lowest reserves to GFSR, and that has been the case in 2018 so far. IDR and INR have faced pressure like they did in 2013, but they have been followed by CNY and PHP this year. Both China and the Philippines have seen a sharp deterioration in our metric over the past 5 years as their current account surpluses have shrunk and external debt ballooned. The picture is equally, if not more, challenging for 2019, as per our forecasts. If rates keep going up in the US, expect these four currencies to face sustained pressure next year.



Source: CEIC, World Bank, DBS

These are the key events investors need to pay attention to:

Eurozone: 3Q18 GDP and September inflation are due this week. The first reading of the growth numbers is likely to register a slowdown to 2% YoY vs 1H18’s 2.3%. Nominal wages and negotiated wage growth improved, although higher energy prices likely dampened consumption at the margin. Retail sales slowed in July and August, signaling that the crucial boost from higher consumption eased in 3Q18. Industrial production eased despite better capacity utilisation rates. Factoring in softening lead indicators and global protectionist trade policies, the European Central Bank (ECB) staff projections for growth were lowered to 2% from 2.2% YoY earlier. October inflation is seen holding around the ECB target, at 2.1% YoY driven by firm energy prices, with core inflation to stay steady around 1%. While QE withdrawal plans remain on the cards, a rate hike from the ECB is unlikely in midst of Italian budgetary worries, Brexit uncertainty and easing growth momentum at home.

Japan: No policy action is expected from the Bank of Japan (BOJ) this week. Focus will be on its quarterly economic outlook report – whether the BOJ will further revise down growth and inflation forecasts for FY2018 (current: 1.5%, 1.1%). GDP growth should have slowed notably in 3Q18, due to the disruption of the typhoon/earthquake disasters and the weakening of export demand. While core CPI (excluding fresh good only) has picked up to 1% YoY in September from 0.8% in June, it was largely driven by the volatile energy items. The April-September inflation average remained below the 1% mark, at 0.8%. A downward revision in FY18 growth/inflation forecasts, combined with the prospects of a consumption tax hike in FY19 and weaker global economic conditions ahead, would dissuade the BOJ from normalising monetary policy (ending the negative rate policy and hiking the long-term yield target) in the next 6-12 months.

China: The manufacturing PMI is projected to fall to 50.7 in October from 50.8 in September. Industrial activities are expected to moderate further due to weakening domestic demand. New export orders are also set to decrease due to second round of tariffs imposed on Chinese exports by the US. Exports will be dampened should the US impose tariff on all Chinese exports in Jan 2019.

Hong Kong: Retail sales are expected to have increased by 9% YoY (6.7%) in value (volume) terms in September, a slower pace than 9.5% (8.1%) in August. Although local consumption sentiments are well supported by rising wages of low-skilled workers (3.8% YoY in 2Q18) amid full employment (unemployment rate at 20-year low of 2.8% in September), the outlook is clouded by the equity market correction amid an intensifying Sino-US trade war. Looking forward, tourist spending is also likely to moderate due to a weakening CNY that constrains the purchasing power of Chinese visitors.

Indonesia: Inflation for Indonesia are on tap this week, we expect a spike to 3.1% YoY from 2.88% YoY previously. The fuel price increase which has become effective on October 10 will be reflected in October headline inflation. The average increase – which accounts for less than 30% of consumption – was 16%. The impact will be limited as the biggest share of fuel – Gasoline 88 (Premium) and Gasoline 90 (Pertalite) – was unchanged. On another account, rice price has increased in the last two months after a continuous deflation since the beginning of the year contributing to this month figure. We believe that this year average inflation will remain stable as the government has committed to keep Premium and Pertalite prices fixed and rice price stable by allowing rice imports when needed to maintain adequate domestic supply.

South Korea: CPI inflation is projected to have eased to 1.6% YoY in October from 1.9% in September. Food prices should have retreated after the Chuseok Festival, helping to offset the inflationary effect of higher oil prices. Core CPI is expected to have remained subdued at 1%, thanks to the lackluster domestic demand and sluggish labour market conditions. Despite a benign inflation picture and a weakening growth prospect, the Bank of Korea is prioritizing the financial imbalance problems including property price increases and capital outflows. The hawkish board members will likely continue to push for a 25bps rate hike at the next policy meeting on 30 November.

Taiwan: The economy is expected to have grown 2.5% (YoY) in 3Q, a moderate slowdown compared to 3.3% in 2Q. But the sequential growth should have picked up slightly, to 2.4% (QoQ saar) from 1.6%. On the YoY basis, exports slowed in 3Q, as global demand softened and seasonal effect in the electronics sector was not as strong as last year. Consumption indicators also eased, amidst the sluggish stock market performance and the weakening consumer confidence. Investment growth appears to have picked up in 3Q, but largely helped by the low base effect. Thanks to the strong growth in 1H (3.2% YoY on average), our full-year GDP forecast of 2.7% should still be attainable. Considering that the US-China trade war may start to hurt the regional supply chain and the Fed tightening would cause more financial strains in global emerging markets next year, we expect lower GDP growth for Taiwan in 2019, at 2.2%.

Thailand: October CPI inflation likely ticked up to 1.36% YoY vs September’s 1.33%, holding near the lower end of the Bank of Thailand’s target range. Amongst the sub-components, transport has been the main contributor to headline CPI, while others including the heavy-weight food category remains relatively flat. While the BOT has signalled less complacency to global volatility and pressure to normalise rates from multi-year lows, we reckon that benign inflation lowers the need for imminent action. Nonetheless, we note that after a calmer 1H18, the Thai baht has joined the rest of the Asian FX space to pare gains in the face of US dollar strength and outflows.


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Samuel Tse

Economist - China & Hong Kong
samueltse@dbs.com

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