Drivers of a weak SGD and THB outlook
The Singapore dollar nominal effective exchange rate or SGDNEER has reasons to retreat from the ceiling towards the mid-point of its policy band. Yesterday the Ministry of Trade and Industry downgraded Singapore’s full-year growth for 2019 to 1.5-2.5% from its original 1.5-3.5% forecast. This followed the downward revisions in CPI-All Items inflation to 0.5-1.5% from 1-2% in February, and core inflation to 1-2% from 1.5-2.5% in April.
On a relative basis, it should not come as a surprise that the SGD has returned this year’s appreciation against the US dollar this month. At 1.2% YoY in 1Q19, Singapore’s GDP growth has fallen below its new official growth forecasts; US growth is above at 3.2%. Similarly, Singapore’s CPI inflation has been holding near the floor of its official forecasts; US has been closer to its 2% target.
The mid-point of our implied USDSGD policy band has risen from this year’s 1.3700 low at end-January to 1.3950 this morning. This has been consistent with the rise in the USD Indices in the Developed Markets and Emerging Asia. The relative strength of the USD was also evident in the performances of Singapore’s non-oil domestic exports to its trading partners. For example, the South Korean won has been the worst performer in Emerging Asia. Looking ahead, we remain comfortable with our forecast for USDSGD to rise towards 1.40 in 3Q19 on renewed global trade tensions.
Thailand: BOT likely to face pressure to reverse last year's hike
Thai 1Q19 GDP slowed to 2.8% YoY from a revised 3.6% in 4Q18. Slowdown was broad-based, with domestic demand moderating ahead of the election risks, while net trade stayed a drag and contribution from inventories faded. We had expected a slow 1H and better 2H as easing election-led uncertainly would have lifted consumption/ investments. A stimulus package worth USD650mn and extension of the visa waiver was also doled out in 2Q. But risks are still to be addressed. Parliament resumes office next week, but it is still unclear which party will govern. The latest count by the Election Commission reinforced expectations that the ruling PM Prayut will return for a second term as the Prime Minister. While the opposition parties struggled to reach a consensus, one of the parties, Future Forward’s leader signaled his intention to lead a new coalition to challenge the pro-junta party.
Add to this, the external trade environment has turned more challenging after an escalation in the US-China trade dispute and imposition of higher tariffs. This is likely to circle back into Thailand by way of slower global growth and slower purchases from the region by China; the latter amongst the biggest export destinations for Thailand, accounting for 12% of shipments in 2018.
These risks coupled with a weak start to the year will make it an uphill task to meet our full-year target of 3.8% YoY for this year. The National Economic and Social Development Council revised down the growth projection to 3.3-3.8% from the previous 3.5-4.5%, led by a weak export sector.
Pressure will build on the BOT to reverse the token rate hike undertaken in late-2018. The central bank might revise down its current growth forecast from 3.8% and shift guidance to dovish. THB is still the best performer in the region (+1.9%/USD) but flat this month and in red this quarter as weak risk-uptake spurs outflows from the region, Thailand included. We look for the USDTHB to drift up through the year to 32.80 by end-year. Rate cut expectations are still to filter through the markets, as risk-off concerns dominate, which saw 2Y yields rise from 1.75% in March to 1.86% this month.
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