Asia Quarterly Q32018 - Mizuho Bank · 2018-08-08 · Asia Quarterly – Q3 2018 - 1 - Executive...

Asia Quarterly ― Q3 2018: Deal or No Deal? ―

7th August 2018

Mizuho Bank, Ltd. Asia and Oceania Treasury Department

Vishnu Varathan Head, Economics & Strategy [email protected] Chang Wei Liang FX Strategist [email protected] Zhu Huani Market Economist [email protected]

Steering the global economy from a cyclical peak to a soft-landing is far from a done deal; as trade disruptions, policy bumps and geo-politics deal out uncertainty and volatility. Most worryingly, political miscalculations in US-China trade spat triggering a descent into all-out trade wars will deal a major blow to the global economy; most acutely to EM Asia. Trump’s delusory self-view as the ultimate deal-maker risks self-inflicted global economic ordeal if brinksmanship is overdone; claims of “method to madness” are shaky. And, global policy is complicated by an appreciably more hawkish Fed dealing with broad-based inflation pick-up and “strong” activity driven by fiscal stimulus; despite trade risks. Consequently, higher US rates, tighter USD liquidity converging with deferred global policy “convergence” accentuate market volatility and heighten EM pain (over and above trade). The table is set; the stakes are high. Now the world must deal with trade wild cards.

Asia Quarterly – Q3 2018

- 1 -

Executive Summary

• Late-cycle fiscal stimulus pumping growth and inflation higher deals the Fed a more hawkish hand. Intensifying the conundrum is mounting, but hard-to-quantify, trade war risks poised to deal a blow to the global economy.

• Thus, relief on US-EU trade talks hinting a deal is hollow. Amid peaking growth

the ECB is committed to end QE in 2018 (halving to EUR15bn/mth in Q4), but has kicked the rate hike can down “ through Summer” (not till Sep) of 2019”; given “ no-deal Brexit” will complicate matters for EU and the UK.

• Japan growth has eased (even if Q1 GDP contraction is a blip) amid peaking exports

and risks of a raw deal from trade disruption. And a steadfastly dovish BoJ sticks to QQE & YCC . Meanwhile, PM Abe must deal with LDP elections.

• Escalating US trade tariffs, on $50bn of Chinese imports and another $200bn in the

pipeline have prompted shifts in Beijing’s policy strategies. “De-leveraging” is de-prioritized (but not abandoned!) with fiscal largesse being tapped.

• Beijing wants a deal as equals and not beaten into submission. Meanwhile,

adverse supply chain effects from the trade wars will impact other EM Asia. • India’s solid growth recovery will be dampened by high oil prices, rising inflation

and RBI hikes. Political risks (pre-2019 GE), banks’ capital deficit and fiscal slippage pose challenges despite perceived buffer from trade war risks.

• Indonesia: Despite growth buffer from investments, “twin deficits” and financial risks require more tightening; especially on political risks into 2019 elections.

• South Korea’s partial consumption buffer from front-loaded fiscal stimulus/wage increments is not a panacea to wider trade risks. Fading exports lift for Vietnam amid resurgent inflation ups the SBV’s challenges in maintaining VND stability.

• Despite peaking external boost and trade risks, Singapore’s more even growth validates April’s “slight” S$NEER slope. Malaysia’s new government has the benefit oil buffer to re-engineer fiscal sustainability while industry is buoyed.

• Thai growth will be buoyed by extra infrastructure fill ip; barring worst-case

trade wars and political risks ahead of 2019 elections. Philippines’ boost from remittance pick-up and infrastructure spending may still be overshadowed by “twin deficits” and inflation; upping pressures on BSP and PHP.

• Australia : Benign inflation, elevated household leverage, trade risks (vis China conduit) restrain RBA normalization. But if China’s fiscal boost to counteract trade war risks kick in, positive ToT will reinforc e RBA to deal a hike sooner.

• AXJ pressured by intensifying trade conflict amid tightening global liquidity , inciting capital outflows; USD tempered by “convergence” to provide relief later.


- 2 -

AT A GLANCE

Yearly Economic Forecasts

Quarterly Outlook – Growth and Consumer Inflation Growth Forecasts

Consumer Inflation forecasts

GDP YoY CPI C/A (% GDP) GDP YoY CPI C/A (% GDP) GDP YoY CPI C/A (% GDP) GDP YoY CPI C/A (% GDP)

United States 1.6 1.3 -2.6 2.3 2.0 -2.7 2.9 2.4 -2.6 2.5 2.2 -2.6

Eurozone 1.8 0.2 3.4 2.0 1.5 2.9 2.4 1.6 3.2 2.0 1.7 3.0

Japan 1.0 -0.1 3.8 1.5 0.5 3.6 1.4 1.0 4.0 1.1 1.1 3.8

ASIA (ex-Japan) 6.1 2.5 2.1 6.1 2.4 1.8 6.2 2.9 1.5 6.3 2.9 0.9

ASEAN-6 4.7 2.2 3.2 5.2 3.1 2.5 5.2 2.8 1.9 5.2 3.0 1.9

China 6.7 2.0 1.7 6.8 1.6 1.9 6.6 2.6 1.7 6.7 2.4 1.5

India 7.1 4.5 -0.7 6.3 3.3 -1.3 7.2 4.4 -1.8 7.6 4.3 -2.4

Korea 2.8 1.0 7.0 3.1 1.9 6.1 3.0 1.5 5.6 2.9 1.6 5.5

Singapore 2.0 -0.5 19.0 3.6 0.6 19.5 3.2 1.1 19.5 3.3 2.1 19.0

Malaysia 4.2 2.1 2.4 5.9 3.8 2.9 5.3 2.6 2.3 5.0 2.8 2.1

Indonesia 5.0 3.5 -1.8 5.1 3.8 -1.8 5.2 3.2 -2.0 5.2 3.4 -1.9

Thai land 3.2 0.2 11.5 3.9 0.7 9.0 3.8 1.2 7.2 3.9 1.6 7.5

Phil ippines 6.9 1.8 0.2 6.7 3.2 0.0 6.6 4.1 -0.3 6.7 3.4 -0.5

Vietnam 6.2 2.7 4.1 6.8 3.5 0.5 6.8 3.2 0.9 7.4 3.6 1.2

Australia 2.5 1.3 -2.6 2.3 2.0 -4.1 2.8 2.2 -4.1 2.9 2.4 -4.0

Note: Asia (ex Japan) includes China, India, South Korea, Singapore, Hong Kong, Taiwan, Malaysia, Indonesia, Thailand, Philippines, VietnamThe forecasts in this table do not account for severe trade protectionism outcomes.

Country2016 2017 2018 2019

GDP Growth Forecasts

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China 7.3 6.8 6.8 6.7 6.7 6.7 6.6 6.6 6.7 6.6

India 6.9 6.3 7.7 7.3 7.1 7.3 6.9 7.5 7.3 7.7

Korea 2.8 3.1 2.8 2.9 2.5 2.9 2.8 2.5 2.9 2.6

Singapore 3.3 3.6 4.3 3.8 3.3 3.4 3.2 3.4 3.3 3.1

Malaysia 5.1 5.9 5.4 5.2 4.9 5.1 5.2 5.2 5.3 4.8

Indonesia 5.3 5.1 5.1 5.2 5.2 5.1 5.3 5.2 5.2 5.3

Thai land 3.5 3.9 4.8 4.3 4.0 4.4 4.1 4.5 4.8 4.6

Philippines 6.6 6.7 6.8 6.7 6.3 6.6 6.5 6.6 6.8 6.7

Vietnam 5.9 6.8 7.4 6.8 6.0 6.6 7.2 7.5 7.6 7.1

Austral ia 2.8 2.3 2.8 2.8 2.6 2.7 2.8 2.5 2.9 2.8

Country

2012-2016

avg 2017

2018

Note: Asia (ex Japan) includes China, India, South Korea, Singapore, Hong Kong, Taiwan,

2019

Inflation Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China 2.1 1.6 2.2 1.8 2.1 2.1 2.2 2.5 2.5 2.4 2.0 2.4

India 7.2 3.3 4.6 4.8 4.2 3.8 4.0 3.9 3.7 3.9 4.3 3.9

Korea 1.3 1.9 1.3 1.5 1.4 1.9 1.9 1.7 1.8 1.7 1.5 1.8

Singapore 1.4 0.6 0.2 0.3 0.8 1.1 1.6 2.0 2.2 2.3 0.6 2.0

Malaysia 2.2 3.8 1.8 1.3 1.4 1.6 2.9 3.4 3.0 2.9 1.5 3.1

Indonesia 5.3 3.8 3.3 3.3 3.6 3.8 3.6 3.6 3.5 3.5 3.5 3.6

Thailand 1.3 0.7 0.6 1.3 1.2 1.1 1.5 1.2 1.4 1.7 1.1 1.5

Philippines 2.7 3.2 3.9 4.6 4.4 4.1 3.5 3.0 3.3 3.4 4.3 3.3

Vietnam 4.8 3.5 2.8 3.8 4.0 3.8 3.7 3.8 3.9 4.4 3.6 4.0

Australia 1.9 2.0 1.9 2.1 2.2 2.3 2.4 2.3 2.5 2.4 2.1 2.4

Country 20182019

20192018

2012-2016 avg 2017


- 3 -

Central Bank Policy Outlook

FX Outlook .

Market Watch

Sources: Reuters, Mizuho Bank

Central Bank Policy Outlook

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China PBoC 1.5 - 3.5 5.49 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.60 4.60

India RBI 2.0 - 6.0 7.48 6.00 6.00 6.25 6.50 6.50 6.75 6.75 6.75 6.75

Korea BoK 1.5 - 2.5 2.20 1.50 1.50 1.50 1.75 1.75 2.00 2.00 2.25 2.25

Singapore MAS* 0.0 -2.0 - Status Quo

Malaysia BNM 3.0 - 4.0 3.10 3.00 3.25 3.25 3.25 3.25 3.50 3.50 3.50 3.50

Indonesia BI^ 2.5 - 4.5 5.52** 4.25 4.25 5.25 5.50 5.50 5.75 5.75 6.00 6.00

Thailand BoT 1.0 - 4.0 2.13 1.50 1.50 1.50 1.50 1.75 1.75 2.00 2.00 2.00

Phil ippines BSP** 2.0 - 4.0 3.00*** 3.00 3.00 3.50 3.75 4.00 4.00 4.25 4.25 4.25

Vietnam SBV 2.0 - 6.0 7.73 6.25 6.25 6.25 6.25 6.25 6.25 6.25 6.50 6.50

Australia RBA 2.0 - 3.0 2.55 1.50 1.50 1.50 1.50 1.50 1.75 1.75 2.00 2.00

Central

Bank

Inflation

Target

2019

Reinstate slope; albeit

calibrated "sl ight"

incline. (~0.5-1.0% p.a) Status Quo

2018Country

"Slightly" steepened

S$NEER slope (~1.00-

1.50% p.a) Status Quo

2012 -

2016 avg2017 Q4

7 Aug 18 Sep 18 Dec 18 Mar 19 Jun 19 Sep 19

USD/JPY 111 109 107 105 104 102

EUR/USD 1.16 1.17 1.17 1.16 1.16 1.17

USD/CNY 6.86 6.83 6.72 6.55 6.48 6.32

USD/INR 68.8 69.8 68.8 67.5 66.5 65.0

USD/KRW 1127 1140 1110 1060 1040 1020

USD/SGD 1.37 1.38 1.36 1.35 1.33 1.32

USD/IDR 14480 14500 14200 13800 13800 13600

USD/MYR 4.08 4.15 4.02 3.88 3.75 3.72

USD/PHP 52.9 54.5 52.8 51.0 51.5 52.0

USD/THB 33.3 33.5 33.0 32.6 32.3 31.9

USD/VND 23306 23450 23350 23300 23150 22800

AUD/USD 0.74 0.72 0.74 0.78 0.80 0.82

-15

-10

-5

0

5

10

Equities YTD Returns (%)

YTD (% in USD) YTD (% in lcl ccy)*As of 3 Aug 18

1.375

1.625

1.875

2.125

2.375

2.625

2.875

Aug 18 Sep 18 Nov 18 Dec 18 Jan 19 Mar 19 May 19 Jun 19

Market vs FOMC Expectations: Fed Funds Rate (%)

Market-implied Fed Funds Rate FOMC Median FFR Projection

*As of 3 Aug 18

-8

-7

-6

-5

-4

-3

-2

-1

0

1

FX YTD returns (%)

YTD spot w/ carry (%) YTD spot (%)*As of 3 Aug 18

-50

-25

0

25

50

75

100

125

150

10Y Yield YTD Changes (bps)

Change bps (10y)*As of 3 Aug 18


- 4 -

Table of Contents

1. Global Overview --------------------------------------------

5

Deal or No Deal?

2. Asia Outlook -------------------------------------------------

7

China Chills

3. China --------------------------------------------------------

8

Trade-Offs

4. India ---------------------------------------------------------

10

Dampened

5. South Korea-------------------------------------------------- 12

Consume or Crimp?

6. Singapore ---------------------------------------------------

14

Peaking, Not Plunging

7. Malaysia -----------------------------------------------------

16

Solid Consumption to Support

8. Indonesia ----------------------------------------------------

18

Robust Investment Sustains

9. Thailand -----------------------------------------------------

20

Growth Gaining Traction

10. Philippines ---------------------------------------------------

22

Growth Momentum Stays Robust

11. Vietnam -----------------------------------------------------

24

Cuts Both Ways

12. Australia ----------------------------------------------------- 26

Tentative or On Tenterhooks?


- 5 -

Global Overview: Deal or No Deal?

Growth: “America First” resonates on many levels. For one, fiscal pump-priming is pushing US growth ahead of peers. Consequently, the Fed is ahead of the game, deferring “convergence”. Above all, US protectionism amplifies risks of trade-led global downturn. Worryingly, US-driven trade war risks, higher global interest rates and tightening liquidity , could conspire to materially dent global growth. The unknown is whether a deal may be struck with China to avert worst-case meltdown or “no deal” escalation of tit-for-tat protectionism triggers a spiral of demand compression and tariff inflation. How the Fed deals with distortions of fiscal stimulus and trade uncertainties will have far-reaching consequences.

Risks: The risks are three-pronged. One, peaking global economic cycle alongside high leverage, low rates, extended fiscal positions leave few low-hanging fruits for relief . Next, persistent and problematic divergence in global policy. A “ late-cycle” fiscal stimulus in US (tax cuts and spending boost), sets the Fed up for more rate hikes amid B/S reduction whereas other G4 central banks still lag. Resultant dissonance distorts asset markets and amplifies EM sell-off on rising yields and tighter USD liquidity. And EM central banks are forced to tighten for stability at the cost of growth. Finally, trade war risks amid more fragile geopolitics is the most significant threat.

Policy: Fed expectations assume a hawkish tilt with bets on four (instead of three) rate hikes this year mounting on late-cycle fiscal stimulus and “strong” activity; B/S reduction is headed to hit US$50bn/mth terminal velocity in Q4. In contrast, ECB safe-guards against downside risks despite growth optimism. While bond purchases will end in 2018, with Q4 halved to EUR15bn/mth, the ECB is set to keep rates on hold “through summer” (till Sep). The BoJ is unwaveringly dovish; with no plans for normalization in sight as of now. While the BoJ doubled the 0% 10Y JGB target range for YCC (to +/-0.2%), it has maintained JPY80trln QQE and warned of persistent shortfall in inflation expectations despite CPI uptick.

Asset Markets: A by-product of “ convergence” deferred (accentuated by a more hawkish Fed) is that USD appears to be finding some traction – despite lingering worries about mounting “twin deficits”. What’s more, trade war risks also appear to be playing out positively for USD insofar that it is triggering sharper sell-off in China and related markets – as is evident from equities. Partly, this may also reflect the “USD smile*”. And above all, with the Fed’s (solo) balance sheet, tighter USD funding is pushing up USD and hitting EM assets hardest. We look for some EUR-led reprieve from these dynamics into 2019 as ECB hikes come into view and trade uncertainty lift.

(1)

0

1

2

3

4

(1)

0

1

2

3

4

Mar-11 Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Dec-17

Global Growth: US out-performs on late-cycle fiscal stimulus but growth is

moderating in EZ & Japan; and trade tensions spook. (GDP; smoothed 2Q; % YoY)

EU US Japan G3

(0.5)

(0.4)

(0.3)

(0.2)

(0.1)

0.0

0.1

0.2

0.3

0.4

0.5

0

1

2

3

4

5

6

7

8

Global Advanced US EZ Japan UK EM Russia EM Asia China India ASEAN-5 EM

Europe

LatAm

IMF WEO July Update left Global, US & China Growth forecasts unchanged from April's WEO;

but warns of uneven growth and upsized downside risks from trade tensions.

2018 (LHS, % YoY) 2019 (LHS % YoY)

2018 Revision (RHS, %-pts) 2019 Revision (RHS, %-pts)

July' 18: 3.9%

0.8

1.2

1.6

2.0

2.4

2.8

3.22

3

4

5

6

7

8

9

10

11

12

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

US: Wage (inflation) catch-up response corresponding to falling unemployment

appears to be coming through; suggesting Phillips Curve traction (albiet lagged).

Reinforces confidence around "gradual tightening".

Unemployment Rate (LHS, %, inverted)

Wage-Core Inflation Composite (% YoY, RHS)

506

3416

200

256

130

3416

60

20

0

100

200

300

400

500

600

Total Subject to 25% tariffs Pending 25% tariffs

(imminent)

Fresh tariffs (10%/25%) Not yet Subject to fresh

Tariffs

China may not be able to match fresh $200bn tariffs. But the $60bn retaliation to US

suggesting tha the next $200bn may be subject to 255 tariffs (rather than 10% initially

proposed) escalates spillover risks! (bi-lateral imports, $bn)

US China

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

05 06 07 08 09 10 11 12 13 14 15 16 17 18

"Return of" Global CPI: US watched on the uptick, EZ off the peak, but uptrend not

derailed; UK though is exaggerated by imported pressures from GBP slump; but

Japan remains well off 2% tareget.G4 Composite CPI G4 Composite Policy Rate

G4 Composite Yield (10Y)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

08 09 10 11 12 13 14 15 16 17 18

G7 Central Banks: Impending Policy Rates Convergence interrupted by softer data

& some inflation slippage amid trade risks. Greater policy dilemma from Oil, but

"Convergence" revival delayed?.

EUR Deposit Rates Fed Funds Target Rate

BOJ IOER BOE Base Rate

BoC O/N Rate ECB-BOJ-BOE-BOC Avg

60

65

70

75

80

85

90

95

100

105

110

(150)

(100)

(50)

0

50

100

150

200

08 09 10 11 12 13 14 15 16 17 18

USD bounce only partly reflects Convergence Suspended: BoE has paused & ECB

is coy. Higher Oil into Q3 could revive ECB taper bets & dampen USD bounce;

watch for Volatility!

US-Other G7 Spread (Bps, LHS) USD Index (RHS)

(20)

(15)

(10)

(5)

0

5

10

15

(20)

(15)

(10)

(5)

0

5

10

15

01-Jan 17-Jan 02-Feb 18-Feb 06-Mar 22-Mar 07-Apr 23-Apr 09-May 25-May 10-Jun 26-Jun 12-Jul 28-Jul

Equities: India's out-performance appears to be a confluence of; i) relative trade

insulation; ii) high nominal (and real) and; iii) cheaper INR making it more attractive.

But given Oil and wider risks, this may be short-lived! Rest underperformed US!

Shanghai Comp (CH) SENSEX (IN) NIE-4 JKSE (ID) Nikkei Euro Stoxx S&P500

The “USD Smile” theory refers to the USD’s out-performance during periods of economic stress/uncertainty and during economic booms – explaining the upward (turn of a smile) at the two ends


- 6 -

EUR/USD Outlook: While the ECB will halve its asset purchases to a monthly pace of EUR 15bn from September, before completely stopping QE in 2019, this has not lifted EUR/USD much. Political uncertainty in the Eurozone has risen after Italy formed a populist government that seeks to increase welfare spending and lower taxes, potentially setting up for a Budget confrontation with Brussels. Activity indicators have also softened on the back of rising trade tensions with the US, with the manufacturing PMI languishing at 55.1 in July. Given prolong Italian uncertainty, we suspect any Eurozone reforms may be stalled and see EUR/USD restrained around 1.17 for now.

Sources: Reuters, BIS, Mizuho Bank

USD/JPY Outlook: BoJ tweaked some policy parameters in July, with the most noteworthy change being a wider ±20bps range around the 0% target for the JGB10y yield. It also introduced forward guidance, committing to keep interest rates very low for an extended period of time, which could arrest speculation that it could begin policy tightening soon. While the measures are to increase policy flexibility to yield shifts and support profitability of banks, they also support perceptions of quiet confidence amidst downward revisions in the Bank’s inflation forecasts. As such, the JPY could continue to strengthen into late 2018, as rising wage inflation may eventually support a paring of stimulus in 2019.

Sources: Reuters, BIS, Mizuho Bank

Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

Fed Rate^ (%) 1.75-2.00 2.00-2.25 2.00-2.25 2.25-2.50 2.25-2.50 2.50-2.75

ECB Rate^ (%) -0.40 -0.40 -0.40 -0.40 -0.40 -0.40

BoJ Rate (%) -0.10 -0.10 -0.10 -0.10 -0.10 -0.10

EUR/USD* 1.1684 1.17 1.17 1.16 1.16 1.17

1.151-1.241 1.13 - 1.18 1.12 - 1.19 1.11 - 1.20 1.13 - 1.21 1.14 - 1.22

USD/JPY* 110.76 109 107 105 104 102

105.7-111.4 108 - 113 104 - 110 101 - 108 100 - 107 98 - 106

Brent Crude (US$/bbl)

79.4 77.8 80.5 76.5 78.6 84.0

66.7 - 80.5 69.0-82.5 72.5-88.5 70.0-83.8 72.5-86.5 76.0-89.5

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

94 96 98 00 02 04 06 08 10 12 14 16 18

EUR/USD: Long-term Model Value

EUR/USD EUR/USD Fair Value +/- 1 std deviation

Sources: BIS, Reuters, Mizuho Asia & Oceania Treasury

70

80

90

100

110

120

130

140

150

160

94 96 98 00 02 04 06 08 10 12 14 16 18

USD/JPY: Long-term Model Value

USD/JPY USD/JPY Fair Value +/- 1 std deviationSources: BIS, Reuters, Mizuho Asia & Oceania Treasury

Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q2 2018 ranges are from Bloomberg and only indicative. ^ Fed rates refer to the Fed Funds Target rate; ECB rates refer to the Deposit facility rate.


- 7 -

Asia Outlook: China Chills

Output: Escalating US-China trade wars may multiply headwinds from peaking global trade cycle – with most of the adverse shocks feeding through as “China chills” . Admittedly, arguments that economies such as Malaysia, Thailand and Vietnam, could benefit as manufacturing migrates from China – in response to US-China trade spat ignore; i) timing lag; ii) dis-orderly nature of this trade war, and; iii) uncertainty around ad-hoc US measures that stall investment plans for longer. And the real danger is that China shocks not only impact via supply-chain trade linkages, but also transmit via credit and FX/asset channels, amplifying a downswing – but lack of clarity renders quantifying this slippery endeavor. Inflation: The big (inflation) picture is that has bottomed convincingly in most of Asia. But the pick-up spans a broad-spectrum from a rapid upswing (India Philippines etc.) to half-hearted traction (Singapore, Thailand etc.) and everything in-between. Nonetheless; significantly higher crude oil prices now compared to a year ago (and the consequent inflation impact expected to be material) coinciding with a more enduring pick-up in food prices and signs of wage increase, upside risks to inflation are set to mount. Crucially, demand-pull pressures may re-emerge more emphatically into 2019. Policy: At face value, measured but distinct hawkish shift, led by BoK and BNM last year and the MAS (in April), square with pre-empting gradually rising price pressures; thus being ahead of (or at least not falling behind) the proverbial curve. But more reactionary rate hikes from Bank Indonesia and BSP have been far more pronounced in the amplitude of hikes – to compensate for excess policy slack including late cycle (over-)easing by BI in Q3 last year. To be sure, most of the tightening this year is done. But with increased financial and FX instability risks , the danger is central banks may have to tighten more than may be optimal amid downside risks to growth. FX: FX drivers have shifted from intense “twin deficit” shake down, exacerbated by Oil’s surge – most acutely felt by PHP, INR, IDR, but initially leaving CNY and exports-boost currencies mostly unscathed – to trade war-driven risks. The latter has hit CNY and CNH most jarringly , with spillover to KRW, TWD, THB. The FX “China Chills” fret blunt trade tariffs with indiscriminate impact; also evident in China-led Asia equity market sell-off (India buffered). AUD is susceptible to China sell-off; but these risks should start to abate into 2019 as clarity on trade negotiations begin to emerge.

(20)

(10)

0

10

20

(30)

(20)

(10)

0

10

20

30 ASEAN-6+India+Korea : Global Demand Recovery Peaking; More accentuated risks from "trade wars" could cascade to Dent Asia's Growth (% YoY 2Qma)

Exports (LHS)

Nominal GDP (RHS)

32

.1

3.8

25

.4

13

.7

13

.0

12

.0

11

.0

11

.5

12

.4 1

8.1

26

.6

23

.1

16

.3 20

.9

14

.1 18

.8

21

.6

17

.3

20

.6 2

7.0

25

.0

19

.2

27.5

11.2

23.4

13.9

15.8 16.7

14.7 15.9

19.9

21.5 23.3

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

Australia India Korea Singapore Malaysia Indonesia Philippines Thailand Vietnam Japan Taiwan

In terms of China as an exports market Australia, Taiwan & Korea are most exposed whereas China

imports are most in demand is Vietnam & Japan. In totality, Australia, Korea & Taiwan are most

exposed (% of Total; 2015-17 Avg)

China's Share of Exports (% of Total) China's Share of Imports (% of Total) China's Share of Total Trade (% of Total)

0

1

2

3

4

5

6

7

SGP THA KOR AUS CHN MYS VNM IDN PHL IND

Inflationary build-up remain subdued; and by and la rge nowhere oi the vicinity of serious "overheating". But timely normalization

remains be a policy priority for most central banks (%, YoY)

Upper bound Lower bound Latest 3m avg

Lower and Upper bounds refer to the central bank's inflation target while the Latest 3M shows actual inflation.

0

2

4

6

8

10

0

2

4

6

8

10

08 09 10 11 12 13 14 15 16 17 18

Asia CBs: "Catch-up" moves partly pressured by Fed hikes & "risk off" from trade wars/oil/"twin deficits" pressuring FX (Policy Rates, % )

BI (ID) BNM (MY) BSP (PH) BoT (TH) Fed (US)

PBoC (CH) RBA (AU) RBI (IN) BoK (KR)

Sources: CEIC, Bloomberg, RBI, BoK, BoT, BSP, BNM, BI, PBoC, RBA

+50

+100

0

+25

+50

0 0

50

125

was a 25bp hike in 2017

25

0 0

25

(100)

(50)

0

50

100

150

200

250

(100)

(50)

0

50

100

150

200

250

RBI BI BoK BNM BSP BoT RBA

Gauge of Asian Central Banks Policy (Over-)Accommod ation (18-mths to End-2017)

Hikes in 2018

Policy Easing (Mid-2016 to end-2017)

Net Easing* (Mid-2016 to end-2017)

Augmented "Over-steer"^

* Net Policy Easing (in bps) considers policy action in the context of real rate shifts; expressed as the sum policy easing and the change in real rates (most recent 6M vs. 3Y avg). A high value may indicate policy that is too loose; such as BI & BSP.Augmented "Over-steer" takes into account tightenin g in 2018

^ Mean of; i) change from the peak since 2016 compared to most recent 6-mth average, and; ii) change from the 3-yr average to the most recent 6-mth average. Seperately the "real rate differentials" refer to s pread in real policy rates in Asia with real policy rate in US.

2.0 1.7

-0.6

-2.6

1.3 -0.3 0.0

-5.6

-0.5

1.3

-6.2-6.0 -5.7

-2.7

-3.9

-2.8

-2.3

-1.1

-0.9

-2.1 -2.4

0.2

-4.0 -4.0

-3.3

-6.5

-1.5

-2.6

-1.1

-6.4

-2.6

-1.0

-6.0

(10)

(8)

(6)

(4)

(2)

0

2

4

(10)

(8)

(6)

(4)

(2)

0

2

4

CNH CNY KRW IDR THB TWD SGD INR VND MYR PHP

While INR, PHP & IDR are down most YTD; slump in EM Asia FX since mid-June has been led by

CNH, CNY, IDR, THB & KRW suggesting trade war related blowout (% Chg vs. USD; YTD up till 24 Jul)

Mid-June to 24-Jul Jan to Mid-Jun YTD (till 3 Aug)


- 8 -

China: Trade-Offs Growth: Headline growth is misleadingly sanguine, with H1 2018 GDP at 6.8% setting up full-year growth to be on the stronger side of “around 6.5%”. But muted deceleration in H1 (buffered by the lag between threats and tariffs) is not to be confused for an absence of hard-landing risks from intensifying US-China trade spat. Fact is, if tariffs overwhelm negotiated outcomes, trade headwinds, insofar that trade comes off, will dent as some industries feel the blowback. But fiscal/tax stimulus could partly cushion. Crucially, easing up on de-leveraging/de-risking assumed as a necessary trade-off will be a key backstop for the Chinese economy.

Industry: Admittedly, this entails Beijing’s plans for restructuring being re-prioritized (but not necessarily derailed). And that is a trade-off that Beijing is willing to make. For one, some aspects of higher credit may be tolerated as long as credit easing is directed towards growth sectors and risks are appropriately recognized. The big picture: Industries of strategic importance such as robotics, AI, green technology/vehicles will not be abandoned; whereas other (de-risking) goals may be stretched out as trade-off for low-hanging fruits from relative credit relaxation to buy some buffer.

Growth dynamics: That said, allegations that China is regressing to credit-intensive growth models, and doubling down on “white elephant” projects are at best simplistic, at worst mis-informed. The truth is closer to the trade-off between urgent de-leveraging to avoid “Minsky moment” type risks and backstopping growth against trade protectionism that could be detrimental to longer-term strategic industrial progress. The inclination as it were is to press on with major infrastructure projects related to rail and new technologies as an enduring growth proposition.

Inflation : The big picture is consistent with benign inflation, with recovering, albeit not resurgent, inflationary pressures. To be sure, inflation has emphatically bottomed since early-2017, and is gradually normalizing in the vicinity of 2.0-3.0% range. Admittedly, retaliatory tariffs (on US soybeans) could drive up food inflation more than anticipated as it feeds (pun intended) through to pork prices. Nonetheless, even in the case of fairly broad-based pick-up in price pressures with food adding to fuel, absence of “follow-through” inflation acceleration amid subdued demand-pull pressures suggest that inflation uptick will still be long way off enduring and rapid overheating risks.

(10)

(5)

0

5

10

15

20

25

(10)

(5)

0

5

10

15

20

25

07 08 09 10 11 12 13 14 15 16 17 18

China's de-risking/re-balancing requires investment-driven growth to slow; displaced

by "new economy" growth drivers such as services. (contribution to nominal growth, %-pts YoY)

Growth ex-FAI FAI - Real Estate FAI ex-Real Estate Nom. GDP Growth GDP

(5)

0

5

10

15

20

25

30

35

40

4

6

8

10

12

14

16

06 07 08 09 10 11 12 13 14 15 16 17 18

China: Wider gauge of activity suggests non-industr ial growth drivers helping to buoy ; fiscal spending may be the decisive "stabilizer" fo r durable traction further down.

(% YoY, Qtrly)

GDP (LHS)

IP (RHS)

GDP Proxy* (RHS)Sources: CEIC, Mizuho Bank

* Mizuho's proxy of activity correlating to GDP -comprises weighted aggregate of freight, credit, electricity output and auto production.

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

09 10 11 12 13 14 15 16 17 18

China GDP: Sustained nominal GDP pick-up a pre-requisite to

growing out of debt; assuages concerns about credit intensity of

growth ...

Total Social Financing* (% YoY, Quarterly)

TSF ex Bankers Acceptance

Nom GDP YoY

*Total Social Financing comprises both Conventional and Shadow Banking.

(30)

(20)

(10)

0

10

20

30

40

(30)

(20)

(10)

0

10

20

30

40

12 13 14 15 16 17 18

China's Credit Growth disproportionately driven by Shadow Credit since 2016 met with

"tightening" aimed at rebalancing towards bank credit growth to maintain measured

(and monitored!) credit growth(Contribution to YoY Credit Growth, 6MAvg, %-pts)

"Shadow Credit" (ex-Bonds & BA)^

Bank Credit

Combined

^ Shadow credit refers to Aggregate Financing less conventional bank loans . And this measure omits bond issuances as well as Bankers' Acceptance (BA) .

Sources: CEIC, Mizuho Bank .

-30

-10

10

30

50

70

90

110

-30

-10

10

30

50

70

90

110

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

China's ability to manage credit gap, or the risk- & cycle- adjusted credit growth is

key; rather than mis-guided and self-defeating clamp down on credit.

(Cumulative Chg in Credit-to-GDP & Credit Gap since end-1999, %)

China Chg in Credit Ratio (%-pt of GDP)

China Chg in Credit Gap (%-pt of GDP)

Sources: BIS Quarterly Review (Mar 2018), Mizuho Bank

Main challenge is to manage the build-up in credit risksrather than to suffocate the economy of credit altogether. And to that end, reduction in "credit gap" provides reasssurances against elevated credit-to-GDP ratio .

Credit-to-GDP gap is defined as the difference between the credit-to-GDP ratio and its trend .

(1)

0

1

2

3

4

5

6

7

(1)

0

1

2

3

4

5

6

7

11 12 13 14 15 16 17 18

Core inflation driven narrowly by healthcare wherea s underlying inflation remains under wraps; provides policy flexibility (a bove 3%).

Education & Recreation Healthcare

Tpt & Comm Others

Residence Food

CPI (% y/y) Core CPI

Sources: CEIC, Mizuho Bank.

(12)

(8)

(4)

0

4

8

12

25

30

35

40

45

50

55

60

65

70

75

80

05 06 07 08 09 10 11 12 13 14 15 16 17 18

What's more, PMI Price Index pick-up is consistent with contained rather than resurgent producer inflation; cost-push is higher, but not accelerating (3mma)

Price Index

Producer Inflation (% y/y; RHS) Sources: CEIC, Mizuho Bank.


- 9 -

Policy: Confusion about PBoC’s stance derives from trying to oversimplify policy to fit into “conventional” inflation targeting mould based on a singular policy rate. Whereas PBoC’s multiple and nuanced policy objectives in the context of capital controls that trades off to managing; i) domestic liquidity; ii) credit and; iii) managed float of CNY. And while overall policy is neutral, liquidity operations assume easing bias (e.g. RRR cuts) to support growth. More so given scaling back on severity of de-leveraging amid protectionist risks – targeted, not unbridled easing. Above all, CNY devaluation is not deliberate policy motive; but rather FX reserve-efficient shock absorption).

External Position: Net exports improving significantly in Q2 should provide some boost for the C/A, though this perhaps does not distract from the wider trend of diminished trade surplus and growing service deficit, containing suppressing C/A surplus (cushion) below historical peaks – necessary trade-off for higher standards of living and addressing the savings investment imbalance. Crucially, capital outflows remain problematic, and could become acutely more so if signs of distress from trade wars intensify. But that is a key reason why the PBoC won’t resort to devaluation as retaliation to US protectionism.

FX: CNY is not a weapon of trade war !̂ Sure enough, a weaker CNY will provide some relief from tariffs, but cannot side-step 25% tariffs and/or quota-based protectionism. What’s more, a weaker CNY undermines Beijing’s technology leadership goals, and risks destabilizing FX-capital outflow-FX reserve dynamics (2015 sell-off). Thus, CNY sell-off is a reflection of USD strength and remains within wider stability parameters of CNY NEER. And the trade-off entailed in drawing down on FX reserves and stepping back on market reform, rather than a desire to devalue CNY, is why Beijing is not intervening aggresssively. But re-imposing reserve requirement for FX forwards underpins “7-3” (USD/CNY capped ahead of 7 and FX reserves supported at $3trln)

Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 6.7% 6.7% 6.7% 6.6% 6.6% 6.7%

CPI (% y/y) 1.8% 2.1% 2.1% 2.2% 2.5% 2.5%

Policy Rate (%) 4.35% 4.35% 4.35% 4.35% 4.35% 4.35%

USD/CNY* 6.62 6.83 6.72 6.55 6.48 6.32

6.26 - 6.64 6.61 - 6.99 6.56 - 6.88 6.40 - 6.72 6.33 - 6.63 6.17 - 6.48

0

5

10

15

20

25

30

4

5

6

7

8

9

08 09 10 11 12 13 14 15 16 17 18

Tighter Weighted Loan premium (vs. benchmark rates) as Beijing applies nuanced

credit selection/pricing; differentiates baby & bathwater.

Effective* (Weighted Avg) Lending Rate (LHS, %)

1Y Lending (LHS, %)

Weighted Premium Over Lending Rate (%, RHS)

*Asumes that the loans at a discount are mostly 10-20% below benchmark lending rate .

0

5

10

15

20

25

(4)

(2)

0

2

4

6

8

10

06 07 08 09 10 11 12 13 14 15 16 17 18

Steadying real rates and modest upside bias for mon ey market rates amid external risks favour looseninng liquidity; earlier (nuanced ) RRR cuts.

1-yr Lending (LHS) *Real interest rates (LHS) CPI (% y/y; LHS)

7-Day Repo (LHS) RRR (RHS) RRR - Small/Med banks (RHS)

Sources: CEIC, Mizuho Bank

(80)

(40)

0

40

80

120

160

(80)

(40)

0

40

80

120

160

07 08 09 10 11 12 13 14 15 16 17 18

China: Merchandise Net Exports slowing reveals cyclical peak rather than all-out

trade war risks, may keep pressure on C/A. Silver lining is that "official" capital

outflow are not excessive... (US$bn, 4Qma)

Financial A/C Goods Services C/A

Q2 2018 estimates

(8)

(6)

(4)

(2)

0

2

4

6

8

10

(8)

(6)

(4)

(2)

0

2

4

6

8

10

09 10 11 12 13 14 15 16 17 18

... though "Hot" Outflows (% of Prev Qtr FX Reserves) are picking up in 2018 ; of which the PBoC remains mindful of given it is exacerbated by (a s well as amplify) CNY wobbles!

Valuation Effect Deviation (Implied Hot flows)C/A InvestmentsChg in FX Reserves

China's C/A, while a tad softer remqins accretive f or FX Reserves . But capital account and "hot" outflows remain as the main drag factors potentially.

China's C/A, while a tad softer remqins accretive f or FX Reserves . But capital account and "hot" outflows remain as the main drag factors potentially.

Q2 2018 estimates

80

85

90

95

100

105

110

115

120

85

90

95

100

105

110

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

CNY NEER plunge to the base of the wider mid-2016-2017 "stability" range triggers

strong FX push-back kicking in; to avert sharper sell-off (instability) amid reflexivity

risks! (Index end-2014=100)

CNY NEERUSD (DXY) index (RHS; rebased: Start-2008 = 100)

60 per. Mov. Avg. (CNY NEER)

Paradigm shift from "dirty" USD peg to NEER-based

Stabilization helped by capital curbs alongside cou ner-cylcical FX fixing earlier. And so, the pertinent q uestion now is whether CNY NEER stability will be undermin ed by the unabated slide.

5.90

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

6.80

6.90

7.00

7.10

5.90

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

6.80

6.90

7.00

7.10Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

PBoC reinstates 20% reserve requirements for buying FX forwards; to highlight

discomfort with USD/CNY too close to the 7-figure.

USD/CNY Lower Band Upper Band

USD CNY Fix USD/CNH


Stronger CNY 11-Aug: 1.9% reference devaluation followed by a few sessions of self-reinforcing sell-off as fixing shifted to market-based mechanism. CNY sell-off quelled by PBoC intervention/clarification

Introduction of "counter-cyclical" factor for USD/CNY fixing.

Revocation of "counter-cyclical" factor .

Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q2 2018 ranges are from Bloomberg and only indicative.


- 10 -

India: Dampened Growth: Hype about India as the fastest growing Asian economy is not technically flawed but growth is arguably flattered and set to peak. Admittedly, Q1 growth resurgence to 7.7% from (de-monetization/pre-GST) sub-6% slump mid-2017 was not solely from base effects but also owed to solid manufacturing lift in Q1 amid re-monetization and renewed fiscal boost. And nascent credit growth pick-up was a tailwind too. But oil’s surge, higher inflation eroding discretionary consumption, political risks GE and stubborn bank capital deficits square with dampened growth (to 7.0-7.5%), not unabated resurgence, in FY18-19. So longer-term growth potential of 8-9% is deferred.

Industry: Slowdown in industrial activity, while not alarmingly sharp, is fairly broad-based; reflecting (at least in part) petering out of pent-up demand that surfaced on “re-monetization”. And that is consistent with the bigger global picture of demand recovery moderating from recent highs. While the most recent PMIs were rather upbeat, this may be overstated by price effects and inventory-order adjustments. Whereas the trend in key primary industries point to cyclical tailwinds tapering with activity dampened; as oil price “friction” and global demand slowdown come through.

Growth dynamics: The confluence of higher oil process and global trade headwinds (including a lower profile US-India trade tiff) may be external dampeners for growth momentum. But signs of commitment to an amicable solution suggest worst-case US-India trade outcomes from will likely be averted; rendering India as a relative hedge to spillover from escalating Sino-US trade spat. Nonetheless, home-grown headwinds to growth are set to temper economic activity. For one, rapid and significant surge in inflation undermine (discretionary) consumption, a key driver of growth. Also, despite loans pick-up, sustained credit expansion may be hampered by double whammy of banks’ capital deficit and high corporate debt.

Inflation : Sharp inflation surge above 5% is worrying on four counts. First, with the government raising minimum support prices (MSP) for food materially, low food inflation (relief) is in borrowed time. Second, even with benign food inflation, acute energy inflation set to work through may turn out to be “sticky” . Third, putting aside food and energy price volatility, core inflation resurgence to 6.5% (May) is far more worrying in terms of inflation expectations amid rapidly diminishing spare capacity. Finally, it is difficult to ascertain the interaction and durabili ty of inflation expectations in the context of re-monetization, GST and recent public sector wage hikes.

(8)

(4)

0

4

8

12

16

(8)

(4)

0

4

8

12

16 India Growth Contribution : Post-Demonetization acceleration in Ivestments alongside consumption underpin solid growth momentu m; net exports drag.

(Contribution to Growth YoY %-pts)

Errors Net Exports Stocks & Valuables

Investments Govt Consumption

GDPSources: CEIC, Mizuho Bank

2

4

6

8

10

12

-10

-5

0

5

10

15

20

07 08 09 10 11 12 13 14 15 16 17 18

India GDP : Moderation in Q2 industrial activity squares with GDP easing from tyhe resurgence in Q1; but not collapsing per se; 2018 t o settle 7.-7.5% depending on

how Oil, Global Trade & Politics pan out. (Quarterly, % y/y)

IP (LHS) GDP (RHS)

GDP set to ease back from an emphatic resurgence in Q2 as the initial drag from slower industraial activity start filtering through. H

(9)

(6)

(3)

0

3

6

9

12

15

18

(6)

(4)

(2)

0

2

4

6

8

10

12

Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18

India: Activity pick-up appears to have peaked in Q 1 2018, with industrial indicators now consistent with moderation in headli ne growth . (3m Avg % y/y)

Ind Pdtn Consumer Durables Capital Goods (RHS)Sources: CEIC, Mizuho Bank .

Activity pick-up peaked in Q1

(10)

(5)

0

5

10

15

20

25

(10)

(5)

0

5

10

15

20

25

11 12 13 14 15 16 17 18

India's key primary industries, such as steel & electricity suggest easing

infrastructure as well as industrial activity. (3mma % YoY)

Infrastructure Industries Industrial Production Electricity Steel

48.625.7 22.9 25.8 20.6

5.2

299.0

449.8

-150.8

157.6

93.464.2

16.3

5.7

16.4

22.1

8.1

(10)

(5)

0

5

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15

20

25

(200)

(150)

(100)

(50)

0

50

100

150

200

250

300

350

400

450

500

Goods Exports Goods Imports Net Goods Services Exports Service Imports Net Services

India's Trade Imbalance with the US is mainly in Goods; and clearly India promising to

import more from US (including military goods) should ease tensions.

US ($bn, LHS) Total (($bn, LHS) US Share of Total (%)

60

62

64

66

68

70

72

74

76

78

80

0

5

10

15

20

25

30

35

07 08 09 10 11 12 13 14 15 16 17 18

Credit growth pick-up comes on the back of, and is flattered by, re-monetization; reversing the

de-monetization slump; this may peak soon, hampeing growth.(3mma % y/y)

Non-food credit (LHS) Deposits (LHS) Loans-to-Deposits Ratio (%; RHS)

Sources: Bloomberg, CEIC, Mizuho Bank

(2)

0

2

4

6

8

10

12

(2)

0

2

4

6

8

10

12

Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18

Sharp acceleration in core inflation (to 6.5%) upped urgency for back-to-back RBI

hikes; especially as price pressures broaden amid higher oil & MSP. (% y/y)

Food Fuel & Light

Clothing Housing

Misc CPI

RBI Policy (Repo) Rate CPI ex-Food, Fuel&Light


0

10

20

30

40

50

60

0

10

20

30

40

50

60Significant bump up in MSP (Minimum Support Prices) for crops suggest pipeline

pick-up in food inflation (% YoY)

Cereals Pulses Oil Seeds

2015-17 Avg

2018 Increase


- 11 -

Policy: After two successive hikes to 6.50%, RBI has officially adopted a “neutral” stance. But the unspoken bias appears hawkish. For one, food inflation, which has been conveniently low, is set to rise with higher MSP, coinciding with resurgent fuel inflation; potentially un-anchoring inflation expectations. What’s more, fiscal slippage risks amplified by acute exposure to oil vulnerabilities require the RBI to (unequivocally) re-focus on price stability. Finally, financial/currency risks from perceptions of compromised macro-stability objectives also require policy restraint . Arguably, 50bp of “pre-emptive” hikes have done most of the work; but another 25bp may be needed to polish off early-2019.

External Position: Along with oil prices, the trade deficit has swung wider – and consequently, the C/A deficit (which bottomed at 0.15 of GDP mid-2016) is set to approach 2.5% into Q2 and Q3. What’s more, the government’s increased levies on electronics (e.g. mobile devices) has done little to curb net imports of consumer electronics; which makes up 28-30% of trade deficit. Thus, India’s trade and C/A deficits are set to be structurally larger . Any enduring reprieve depends on industrial catch-up, which has been planned for (“Make in India”), but is still not within grasp – perhaps not in the 3 year horizon. Meanwhile, the silver lining is fairly solid capital inflows offer some offset.

FX: When we called for a cyclically bearish turn in the INR in Sep 2017, we had underestimated two things. First, is the real and present danger of “twin deficit” risks accentuated by elevated (albeit off high) oil prices compounded by fiscal pressures given pre-elections political posturing . Second, the extent and speed of inflation pick-up (on a confluence of factors, including oil). Admittedly, perceptions of India’s relative buffer from the US-China trade wars and oil coming off a boil have helped reinstate INR traction. But this does not negate lingering downside risks to INR. Thus, 69-70 breach is in view near-term before gradual INR pick up (sub-65 USD/INR) into 2019; watching election outcomes. Oil and the anti-CNY hedge factors continue to be in play for now.

Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 7.3% 7.1% 7.3% 6.9% 7.5% 7.3%

CPI (% y/y) 4.8% 4.2% 3.8% 4.0% 3.9% 3.7%

Policy Rate (%) 6.25% 6.50% 6.50% 6.75% 6.75% 6.75%

USD/INR* 65.1 68.8 67.5 62.8 66.5 65.0

62.1 - 65.3 67.1 - 70.5 65.8 - 69.2 61.0 - 64.8 64.9 – 68.1 63.4 - 66.6

(1)

0

1

2

3

4

5

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18

Even with RBI's second rate hike (to 6.50%), real interest rates barely meets RBI's 1.5-

2.0% target; and "core" real rates are a tad negative. Strong growth & fiscal slippage

risks underpin front-loaded hike in June. (%)

RBI Policy (Repo) Rate

Real Interest Rate (RHS, %)

Real "Core" Interest Rate (RHS, %)


RBI hikes by 25bp to 6.25% in early-June and again by another 25bps early-Aug (back-to-back hikes) amid g rowing inflationary risks and signs of further cyclical st rength.

2

4

6

8

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12

0

1

2

3

4

5

6

06 07 08 09 10 11 12 13 14 15 16 17 18

India: C/A Deficit upswing since 2017 accentuated by resurgent Oil - set to push

above 2% (of GDP); despite higher GDP growth dampening relative deficit (4Qma, % of GDP)

C/A Deficit (% of GDP)

Trade Deficit (% of GDP; RHS)

20

30

40

50

60

70

80(18)

(16)

(14)

(12)

(10)

(8)

(6)

(4)

(2)Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18

Despite easing off peaks, Oil prices remain buoyant . Underpins overall trade deficit, & in turn, this could push the C/A deficit higher into Q3. (3mma US$bn)

Trade DeficitIndia Crude Oil Basket (US$/bbl, 3mma; RHS)Sources: CEIC; Mizuho Bank

4

6

8

10

12

14

16

80

85

90

95

100

105

110

06 07 08 09 10 11 12 13 14 15 16 17 18

INR REER correction to moderate in line with FX res erve buffer. Further downside risks if Oil pressures increase and/or ri sk sentiment wobble; but

latent pressures not as sharp as in 2013 (not "frag ile five" risks).

INR REER (LHS; 2010=100)

Imports cover (months of imports FX Reserves cover, RHS, ratio)Sources: BIS, CEIC, Mizuho Bank



- 12 -

South Korea: Consume or Crimp? Growth : Q1 growth sustained at close to 3% lifted by improved private consumption (retail sales increased robustly across both durable and non-durable goods. Government spending also picked up as the administration front-loaded budget to support its job creation initiative. Investment growth slowed due to ongoing adjustments in the construction sector as well as a correction in the capex after last year’s stellar growth. What’s critical is whether fiscal stimulus and wage increments helps Korea consume it way out of trade (war) headwinds or increased corporate pressures from wages and trade risks crimps jobs and growth.

Industry: Exports growth continued to moderate across the board, partly reflecting last year’s high base effect. While semiconductor exports have so far held up relatively well, some mild moderation going forward seems inevitable following last year’s stellar growth. Likewise, manufacturing production has contracted on the year-on-year basis for fifth consecutive month and adjustment in construction also become more emphatically. Lingering trade war concerns amid new tariffs from both the US and China will adversely affect Korea via its deeply integrated supply chains and large export exposure to China.

Growth dynamics: While a jump in minimum wage since Jan 2018 has buoyed wage growth, employment growth started to moderate across industries, especially in construction. As business community has expressed wariness over higher wage due to the additional financial burdens it will impose, the government has responded with slower pace of planned wage hike, revised legislation in calculation method of minimum wage and extra budget to subsidize regular hire. This suggests that side effects of wage hikes could be larger than (and possibly different to) expected. And if productivity does not keep up, this may impede Korea’s competitiveness in the longer term.

Inflation: Headline inflation has edged up slightly to 1.5% on the back of pick up in food prices. While retail petroleum prices continued to increase, the impact on inflation has been rather measured so far. Core inflation remains stuck in the low-1% reflecting limited demand-pull inflationary pressure. While inflation seems to have bottomed, it is probably premature to conclude that it will sustain a clear upward trend going forward given that some higher base effect are expected drag the headline number down in Q3.

-3

-1

1

3

5

7

2012 2013 2014 2015 2016 2017 2018

Contribution to GDP (% -ppts)

Net exports Change in stocks GFCF

Govt spending Private consumption GDP

Source: CEIC, Mizuho bank

(20)

(15)

(10)

(5)

0

5

10

15

20

25

2014 2015 2016 2017 2018

Exports (YoY, 3mma) Others Panels & AppliancesAuto & Parts Wireless Dev.Semicon Petrochem/PetrolSteel & Machinery VesselsTotal Exports ex-Petrol


-1%

0%

1%

1%

2%

2%

3%

3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Growth of wage & employment (YoY, 12mma)

Wage Employment (RHS)

Source: CEIC, Mizuho Bank

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

2014 2015 2016 2017 2018

Contribution to CPI (%-ppts, 3mma)

Food Housing & utilitiseTransport EducationRestaurants & hotel OthersCPI Core CPI



- 13 -

Policy: Pre-emptive (25bp) hike last Nov and mild inflationary pressure validate BoK’s room to wait and watch (as it has done this year). With improving consumption though, the BoK has flagged potential need for further policy adjustment; and the question is more around timing as interaction between financial stability and trade war risks are mulled. With the Fed set to tighten further, assessing capital outflow risks accentuated by widening rate gap is dynamic; especially if global financial conditions tighten. On balance, we expect BoK to tighten again late-2018; striking a balance between supporting a self-sustaining growth and safeguarding financial stability.

External Position: Overall BoP balance turned positive in Q1 due to net inflows of other investments. Current account surplus sustained with narrowing services account deficit more than offset slight moderation in goods account surplus. Tourist arrivals have rebounded robustly on the back of improved relationship with China which has helped to boost services exports. Furthermore, Korean Peninsula geopolitical risks have receded after Trump-Kim summit , and this is likely to support capital inflows. While portfolio outflows have been relatively contained despite the recent sell-off of EM assets, narrowing real interest rate gap with the US still warrants some attention.

FX: Given prospects of a US-China trade war and attendant RMB softening, it is no surprise that the KRW has faltered as markets price in spillover risks from China. Korea’s most important export destination is China, and a slowdown in Chinese growth or trade is likely to dampen exports of not just final goods, but also intermediate goods given Korea’s position as an upstream supplier. RMB depreciation could also push the KRW to become over-valued on a trade-weighted basis, which may discourage capital inflows. Notwithstanding continued moderate domestic growth, external uncertainty may keep USD/KRW supported above 1100, until trade tensions are resolved.


Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 2.9% 2.5% 2.9% 2.8% 2.5% 2.9%

CPI (% y/y) 1.5% 1.4% 1.9% 1.9% 1.7% 1.8%

Policy Rate (%) 1.50% 1.75% 1.75% 2.00% 2.00% 2.25%

USD/KRW* 1114 1140 1110 1060 1040 1020

1054-1124 1090 - 1180 1060 - 1150 1020 - 1110 1000 - 1070 980 - 1050

(2)

(1)

0

1

2

3

4

5

(2)

(1)

0

1

2

3

4

5

2011 2012 2013 2014 2015 2016 2017 2018

Policy Rate vs. Inflation, Real Interest Rate (%, 3mma)

Real interest rate Headline CPIPolicy rate Core CPI


-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

2012 2013 2014 2015 2016 2017 2018

Tourism sector (% YoY, 3mma)

Foreign visitors

Tourism revenue


700

800

900

1000

1100

1200

1300

1400

1500

94 96 98 00 02 04 06 08 10 12 14 16 18

USD/KRW: Long-term Model Value

USD/KRW USD/KRW Fair Value +/- 1 std deviationSources: BIS, Reuters, Mizuho Asia & Oceania Treasury



- 14 -

Singapore: Peaking, Not Plunging

Growth: Barring adverse and abrupt (negative) global shocks, Singapore’s growth is set to be buoyed ~ 3.6-4.0% for 2018 – as strong as or stronger than 3.6% in 2017. But this is not to be mistaken for an absence of risks. On the contrary, downside risks and uncertainty are accentuated; as Fed persists with tightening and US-China trade risks mount. Admittedly, waning exports boost, and moderation in manufacturing square with growth easing from ~4.0% in H1 to ~3.4-3.6% in H2, with further slowdown to 3.2-3.5% in 2019. But, this gradual, wane in exports tailwinds, service sector recovery tempered, not traumatized, by property curbs and abating construction drag sufficiently buffer for above-trend, despite peaking, growth.

Industry: Out-sized manufacturing strength led by the electronics sector will be hard to replicate into the latter half of 2018 and into 2019 for two reasons. First, the low-hanging fruits of inventory building into a sharp up-cycle in electronics have been mostly exhausted, and growth bonus is petering out. What’s more, US-China trade tensions ratcheting higher have dampened exports and manufacturing more broadly; and may persist in moderating industrial activity lower in the second half of 2018. And to be sure, recent pick-up in transport engineering is consistent with bottoming and convergence with peaking (electronics-led) manufacturing out-performance in 2017.

Growth dynamics: The good news is that even as manufacturing peaks, growth drivers are now appreciably more even (though far from uniform); with key services sector gathering welcome momentum. But with recent property cooling measures put in place to quell the rapid resurgence in prices, we expect that both transactions and prices could be set to peak; arguably more distinctly in prices. And this will inevitably have a wider spill-over to property-related services – an impediment to further (and unfettered) acceleration in in services. The upshot is that both domestic and external drivers to growth are peaking, not plunging; barring severe risks from trade, that is.

Inflation : In contrast, inflation is far from peaking . Point being, inflationary pressures remain mild, with lingering dis-inflationary forces from housing and transport – mainly car ownership certificate prices –the main sources of drag. Nonetheless, sequential price pressures are not declining . And along the current trajectory, headline CPI is rise to 1.5-2.0% into early-2019. Crucially, signs of brisk pick-up property prices, despite recent cooling measures, suggest that housing dis-inflation could fade sooner than anticipated. In any case, core already above 1.5% is on course for a gradual pick-up towards 2% in 2019. Upshot: While not instantaneous, inflation is on a gradual and sustained rise. .

1.6 1.8 1.8

0.5 0.50.9

2.3

2.7

1.9

1.8

2.7

3.8

-0.2 -0.2 -0.40.0

0.1

0.3

3.8

4.3

3.6

2.8

3.7

5.3

(1)

0

1

2

3

4

5

6

Q2 2018 Q1 2018 2017 3Y Avg (2015-17) 5Y Avg (2013-17) 1 0Y Avg (2008-17)

Singapore GDP: If Mfg contribution to growth "norma lizes" to 0.5-1.0% and Services is buoyed 2.3-3.0% over the next 4-6 quart erws; underlying growth

momentum settle between 2.8-3.8%; as construction d rag eases . (%-pts; YoY Growth)

Others Construction Services Mfg GDP

3.8

8.6

3.4

-4.4

4.3

9.7

4

-5.2

3.6

10.1

2.8

-8.4

2.8 2.9 2.6

-0.2

5.3

2.63.9

2.0

5.34.2 4.7

8.0

(10)

(5)

0

5

10

15

GDP Mfg Services Construction

Singapore: Q2 GDP flash at buoyant 3.8% (despite decelerating from 4.3% in Q1) as Services pick-up remains resilient & manufacturing peaks more gradually than

anticipated . H1 growth rate of 4.0-4.1% more rapid than 3.6% i n 2017. (% YoY)

Q2 '18 Flash Q1 2018 2017

3Y Avg (2015-17) 5Y Avg (2013-17) 10Y Avg (2008-17)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

25

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

25

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Singapore: Sharp electronics deceleration damps man ufacturing pace; consistent with moderation (after electronics peaked in 2017); global trade shocks pose downside risks . (% YoY

6mma)

Industrial Production (IP) IP ex-Biomed

Tpt Eng. Petrochem

Electronics Pharma

(18)

(16)

(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

(18)

(16)

(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18

Gradual property market correction over 15 consecutive quarters (from Q3 2019 peak)

been hijacked by the sharp resurgence in the last four quarters wiping out ~70% of the

correction. (Cumulative % Chg from Q3 2019)

Landed Non-Landed All Private Property

(4)

(2)

0

2

4

6

8

10

(4)

(2)

0

2

4

6

8

10

11 12 13 14 15 16 17 18

Growth Drivers: Peaking External Demand alongside C overging (but perhaps not sustainably surging) Domestic Demand point to p eaking growth out-run.

GDP % y/y

Domestic Demand* (% y/y; 4Qma)

External Demand* (% y/y; 4Qma)* Domestic demand comprises private consumption, government spending, residential construction and business investments.

Extrapolated

(2)

(1)

0

1

2

3

4

5

6

(2)

(1)

0

1

2

3

4

5

6

10 11 12 13 14 15 16 17 18

Headline CPI is understated but "core" and service s inflation validate policy response;, pace of inflation restoration allows for calibrated slope restoration.

CPI CPI ex-OOA* CPI ex-accom CPI Services ex-accommodation MAS Core

* CPI ex-OOA: CPI ex owner-occupied accommodation imputed rental.

(2)

(1)

0

1

2

3

(2)

(1)

0

1

2

3

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18

Underlying inflation remains on a recovery path und erpinned by solid core inflation pick-up; even if pick-up is gradual. (CPI contribution; %-pts; YoY)

Food Housing UtilitiesPetrol Pte Road Tpt ex-Petrol Public Road TptOthers Headline Core


* Core inflation, for Singapore, excludes accommodation and private road transportation. The latter mainly reflects COE dis-inflation effects.


- 15 -

Policy: This means two things. First, sustained growth and underlying inflation pick-up both validate calibrated tightening in April – engineered by restoring a “slight” slope for the S$NEER. Second, and crucially, it means that follow-up and gradual tightening is also in order. To be sure, this will probably not be anything dramatic or novel. Given a very calibrated and phased-in approach, it does not make sense to invoke a shift of the S$NEER mid-point higher – a policy response typically best-suited for abrupt step-up in overheating risks and/or price pressures entailing significant and enduring wage-price spiral risks. Instead, “more of the same”” in terms of further “slight” S$NEER slope steepening; but cumulatively still well short of 2% per annum appreciation gradient.

External: The marginal slippage in net trade, spilling over into C/A , while sustained since 2017, is neither a big worry nor inconsistent with longer-term trade surplus since 2010. Fact is, at over 18% of GDP, the C/A surplus is comfortably, if not obscenely large. Instead, the real risks posed are not derived from the external position per se, but the risk revealed in them. For one, softer financial account could at least partly flag up risks of adverse global financial triggers set off, and working their way through at a time of rising interest rates and tighter liquidity. Above all, trade war risks are yet to be captured in either the net goods trade of the dis-aggregated exports and imports. But external boost is peaking.

FX: SGD moves, we reiterate, are predominantly driven by broader USD trends – given relatively small effects of intra-S$NEER band moves. What’s more, a very calibrated S$NEER slope steepening means that additional SGD appreciation from steepening the slope further will be phased-in (gradual appreciation bias, not one-off appreciation). What’s more, the relative positioning of the S$NEER at the stronger side of the policy bands (as per our estimation) further accentuates the limitations of near-term S$NEER out-performance (which in turn, means that strong USD/SGD pullback must rely on USD moves rather than standout SGD strength). In particular global trade risks dragging CNY could lift USD/SGD to test 1.38 near-term before EUR revival in 2019 restores 1.32-1.34 ranges.

Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 3.8% 3.3% 3.4% 3.2% 3.4% 3.3%

CPI (% y/y) 0.3% 0.8% 1.1% 1.6% 2.0% 2.2%

FX Policy Reinstate slight

slope Status Quo “Slightly” steepened S$NEER slope Status Quo

USD/SGD* 1.36 1.38 1.36 1.35 1.33 1.32

1.31 - 1.37 1.35 - 1.41 1.33 - 1.39 1.32 - 1.38 1.30 - 1.36 1.29 - 1.35

101

102

103

104

105

106

107

108

109

110

101

102

103

104

105

106

107

108

109

110

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18

Restoring "modest and gradual appreciation"with a m easured "slightly" increased slope; S$NEER has been buoyed in the upper half of the pol icy band.

NEER

Mid-Point

Sources: MAS, Bloomberg, CEIC , Mizuho Bank

+/- 2% from S$NEER mid-pt

Stronger trade -weighted SGD

Apr '16: Surprise revocation of appreciation bias (to 0% slope) prompts knee-jerk, but short-lived S$NEER slip.

Oct '16: MAS invokes "neutral ... for extended period" dovish caveat.

Apr '17: MAS surprises (us) by retaining "neutral for extended period" dovish caveat.

Apr '18: MAS restores "slight" S$NEER slope.

(400)

(300)

(200)

(100)

0

100

200

300

400

(8)

(6)

(4)

(2)

0

2

4

6

8

05 06 07 08 09 10 11 12 13 14 15 16 17 18

S$NEER pick-up is front-running sustained (albeit g radual) inflation pick-up ; constitutes further defacto tightening after "slight" slope reinstatement.

CPI (% YoY; LHS) SGD NEER Mid-pt Deviation (bps, smoothed weekly, RHS)

Sources: Bloomberg, Mizuho Bank

Note: S$NEER tends to trade at the stronger side of the policy mid-point (+ve deviation) corresponding to inflation unless there are negative shocks to growth. So as inflation edges up, S$NEER is set to follow.

S$NEER above the policy mid-point

S$NEER above the policy mid-point

(10)

(5)

0

5

10

15

20

25

30

35

40

(10)

(5)

0

5

10

15

20

25

30

35

40

07 08 09 10 11 12 13 14 15 16 17 18

Despite net trade slippage, trade surplus is except ionally high; instead trade war risks are the real threat . Meanwhile financial

account slippage may reflect global risks. (% of GDP, 4Qma)

Goods ServicesIncome & Others BOPC/A


1.20

1.22

1.24

1.26

1.28

1.30

1.32

1.34

1.36

1.38

1.40

1.42

1.44

1.46

1.20

1.22

1.24

1.26

1.28

1.30

1.32

1.34

1.36

1.38

1.40

1.42

1.44

1.46Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18

USD strength amid trade wars have shifted S$NEER ba nds. Specifically, lifting USD/SGD range corresponding to S$NEER policy bands; with mid-poin t ~1.38

(based on Mizuho estimates)

SGD (Actual) SGD (Mid Pt)

Sources: Bloomberg, CEIC, Mizuho Bank

Stronger SGD

(5)

(4)

(3)

(2)

(1)

0

1

2

3

4

5(5)

(4)

(3)

(2)

(1)

0

1

2

3

4

5

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18

Post-MAS SGD drop mostly driven by USD index rise ; and to a small extent by S$NEER slip though still at the upper half of bands

SGD (LHS, % Chg vs. USD since end-2016)

S$NEER (LHS, % Chg since end-2016)

Dollar Index (RHS, Inverted; % Chg since end-2016)

MAS Meeting (Apr '18)



- 16 -

Malaysia: Solid Consumption to Support Growth : Despite moderating growth remains solid (at 5.4% in Q1), with consumption and oil likely to backstop convincingly; barring global trade fallout. Admittedly, softer output of commodities such as rubber and palm oil has pulled back overall growth slightly. And public consumption was largely muted by the new government reining in expenditure aid wider public finance stock-take (despite double-digit revenue growth due to oil and gas revenues). But net exports contributed significantly on moderation in capital goods imports while oil and manufacturing were positive. Crucially, going forward, private consumption is expected to be supported by fuel subsidies and zero-rated GST.

Industry: Growth of industrial production has moderated following last year’s robust performance. Trade surplus was largely unchanged due to simultaneous slowdown in both exports and imports. Electronics and electrical exports still managed to grow, albeit at a moderated pace while exports of other goods contracted on a year-on-year basis. Given imports of intermediate goods continued to trend lower, the mild downward trend in manufacturing growth could continue. Furthermore, agricultural production also continued to slow on the back of lackluster palm oil and rubber prices.

Growth dynamics: While a newly-elected government initially unsettled investors with fiscal uncertainty, solid economic plans and leadership mitigate some fiscal misgivings. Admittedly zero-rating GST and raising fuel subsidies raises justifiable concerns about erosion of a solid revenue base and “sticky” subsidy burden. We are not fans of the latter but SST offset mitigates the former while oil offers interim relief. Crucially, longer-term debt management and expenditure control are positive. Especially if complemented by growth impetus led by the “Council of Elders”. Political transitions in the next 3-5 years though remain a wild card. Inflation: Headline inflation slowed further to sub-1.5% dragged down by muted transport price increases. Retail fuel prices have been kept unchanged since Mar 2018 while crude oil prices increased around 10% during the same period suggest that the government might already started subsidizing retail fuel implicitly. Given the government’s plan to freeze RON95 and diesel prices with RM3bn allocated for fuel subsidies for the rest of the year, this is likely to cap some upside risk to inflation .

(8)

(4)

0

4

8

12

(8)

(4)

0

4

8

12

2012 2013 2014 2015 2016 2017 2018

GDP Contribution (%-points; YoY)

Net Trade InvestmentsStock Govt SpendingConsumption GDP


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2014 2015 2016 2017 2018

Industrial production (YoY, 3mma)

Export-oriented Industries

Domestic-oriented Industries

Sources: CEIC, Mizuho Bank .

0

5

10

15

20

25

Revenue loss Compensatingsources (conservative

case)

Compensatingsources

Alternative sources to make up the foregone GST revenue (RM bln)

Petroleum-related revenueSales and services taxGST


(2)

(1)

0

1

2

3

4

5

6

2012 2013 2014 2015 2016 2017 2018

CPI Contribution (YoY, % -pts)

Food Housing & utilitiesTransport OthersCPI



- 17 -

Policy: After lifting its policy rate by 25bps in Jan 2018 in a pre-emptive move, we expect BNM to hold policy rate unchanged for the rest of the year. Inflation continues to slow and continuous moderation in core inflation suggests that inflationary pressure remains limited. Capital outflows have been contained despite recent rout in EM assets thanks to higher real interest rates and strong growth prospect. Since the fuel subsidies are expected to cap upside risk to inflation, this gives BNM plenty of room to wait and assess the situation given some concerns surrounding the sustainability of future fiscal policy on top of the government calling off some infrastructure projects.

External Position: Current account surplus continued to increase for the fourth consecutive quarter on the back of higher goods account surplus. Overall BoP position also improved due to steady portfolio investments on top of relatively persistent FDI inflows. Elevated oil prices and decent real interest rate are likely to support portfolio investment. Nonetheless, equities outflows have intensified post-election given some lingering uncertainty surrounding the fiscal policy. Bond outflows could be under pressure again on the back of heightened global volatility and trade tension given Malaysia’s increasing export exposure to China.

FX: Equity and bond outflows have picked up since May, with investors’ sentiment negatively impacted by the surprise electoral victory for PH, on top of a global retreat from EM assets. That said, USD/MYR volatility has been smoothed by BNM, which reported a $4.2bn fall in FX reserves for May. For now, positive oil prices could buffer the MYR, but concerns over a potential credit rating downgrade and ongoing trade tensions are likely to keep MYR sentiment subdued. Furthermore, the Malaysian economy is highly exposed to trade, and risks of a global trade contraction will linger in the short term. We see USD/MYR possibly testing 4.12 for Q3, with scope for a retracement lower if trade risks dissipate.


Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 5.2% 4.9% 5.1% 5.2% 5.2% 5.3%

CPI (% y/y) 1.3% 1.4% 1.6% 2.9% 3.4% 3.0%

Policy Rate (%) 3.25% 3.25% 3.25% 3.50% 3.50% 3.50%

USD/MYR* 4.04 4.15 4.02 3.88 3.75 3.72

3.85-4.05 4.01 - 4.29 3.89 - 4.15 3.75 - 4.02 3.62 - 3.88 3.60 - 3.84

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2012 2013 2014 2015 2016 2017 2018

CPI (% YoY) vs Policy Rate (%)

Real interest rate (RHS)CPI, 3mmaCPI excl. transport, 3mmaPolicy rate


-15%

-10%

-5%

0%

5%

10%

15%

2012 2013 2014 2015 2016 2017 2018

BoP (% of GDP, 4Qma)

Errors OthersPortfolio Investment FDIC/A BoP


2.40

2.60

2.80

3.00

3.203.40

3.60

3.80

4.00

4.20

4.40

4.60

94 96 98 00 02 04 06 08 10 12 14 16

USD/MYR: Long-term Model Value

USD/MYR USD/MYR Fair Value +/- 1 std deviation




- 18 -

Indonesia: Robust Investment Sustains Growth : Q1 growth steadied at around 5.1% led by robust investment and solid private consumption. Investment growth continued to accelerate lifted by both capex and construction investment as government looks to push infrastructure spending. There are also nascent signs that household consumption has started to pick up and this is expected to be further lifted by disbursement of 13th-month and holiday bonus to civil servants during Q2. Growth of government spending has moderated and is expected to stay modest as the government looks to contain fiscal deficit on top of swelling energy subsidies.

Industry: Strong imports, led by raw materials for industries, continued to suppress trade balance as exports growth moderated partly due to price effect. Nevertheless, solid growth in real exports, steady industrial production on top of robust sentiment, with the manufacturing PMI hitting the highest in almost two years suggest that positive momentum is likely to sustain in near term. With high frequency indicators continuing to reflect robust outlook for investment led by construction and primary industries, strong investment is likely to fuel growth amid continuation of government infrastructure programs.

Growth dynamics: Investment growth continues to accelerate on the back of robust construction activities and capex. Strong imports of capital goods and industrial raw materials square with robust pipeline investment. While government revenue collection has been improving given higher oil prices and enhanced tax administration, higher fuel subsidies has limited the resource for infrastructure projects. To alleviate the problem, the government has recently established an infrastructure investment fund to encourage participation of private sectors. But political uncertainties ahead of elections next year could interrupt investment plans.

Inflation: Despite a mild rebound in food prices, headline inflation remains comfortably within the target range thanks to price controls on administered goods. While price freezes of subsidized fuel capped upside risk of inflation , it has exerted significant pressure on fiscal account as fuel subsidies YTD increased more than five-folds from the same period last year. Going forward, inflationary pressure is expected to be contained given incentives ahead of upcoming election, as the government has determined to keep retail fuel price at their current level through 2019.

(4)

(2)

0

2

4

6

8

2013 2014 2015 2016 2017 2018

Contribution to GDP growth (%, ppts)Hhd consumption GFCFGovt consumption Change in stockNet exports Statistical discrepancyGDP


46

47

48

49

50

51

52

53

54

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18

Industrial production

IPI, YoY 3mma

Nikkei PMI (RHS)


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0%

2%

4%

6%

8%

10%

12%

2011 2012 2013 2014 2015 2016 2017 2018

Investment-related Indicators (YoY, %)

InvestmentsCapital goods importsTruck sales (RHS)


-1

1

3

5

7

9

2015 2015 2016 2016 2017 2017 2018

Contribution to CPI (-ppt, % YoY)

Food Processed foodElectricity, gas and fuel ClothingHealth Education, recreationTransport CPI, YoY



- 19 -

Policy: BI has raised its policy rate by a cumulative 100bps in two months including a larger-than-expected 50bps hike in Jun meeting as a reiteration that it will act pre-emptively and to stay ahead of the curve. Despite inflation continues to moderate with utilities and transport prices under control, BI’s clear shift to prioritize exchange rate stability means that more rate hikes could be on the table should IDR comes under pressure again amid escalating trade war risks and downbeat EM sentiment. Given that C/A deficit is likely to widen again amid falling goods account surplus, rate hikes may be needed to reassure international investors, given heavy foreign positioning.

External Position: C/A deficit continued its widening trend to around 2% of GDP on the back of deteriorating goods account balance. Overall BoP also dropped due to a dip in portfolio investment inflows as a result of heighted global financial volatility and a recent rout in EM assets. On the other hand, FDI inflows have been relatively unscathed as government rolls out more fiscal incentives such as tax holidays for new investments. As imports of capital goods and raw materials are likely to stay elevated, C/A deficit is expected to sustain at above 2% of GDP.

FX: IDR has been pressured by portfolio outflows amidst increased EM risk aversion, with Indonesia seeing a cumulative bond outflow of $2.0bn in Q2. To its credit, BI has been proactive in keeping IDR depreciation pressures in check. It has intervened actively to slow USD/IDR ascendency, on top of raising its policy rate by a cumulative 100bps since May. While the trade deficit has become a source of concerns due to infrastructure related imports, we think higher real yields on offer could anchor the IDR once the broader USD/AXJ complex stabilizes.


Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 5.2% 5.2% 5.1% 5.3% 5.2% 5.2%

CPI (% y/y) 3.3% 3.6% 3.8% 3.6% 3.6% 3.5%

Policy Rate (%) 5.25% 5.50% 5.50% 5.75% 5.75% 6.00%

USD/IDR* 14,330 14500 14200 13800 13800 13600

13740-14415

14000 - 14900

13700 - 14600

13300 - 14200

13300 - 14200

13100 - 14000

-4

-3

-2

-1

0

1

2

3

2

3

4

5

6

7

8

9

2012 2013 2014 2015 2016 2017 2018

Policy rates v.s. real interest rates (%)

Real rates (RHS)Old policy rateNew policy rateHeadline CPI, 3mma Source: CEIC, Mizuho Bank

(10)

(5)

0

5

10

15

2011 2012 2013 2014 2015 2016 2017 2018

Balance of Payments (4QMA; USD bn)

C/A FDIPortfolio flows Other invesmentsOverall BoP


2000

4000

6000

8000

10000

12000

14000

16000

94 96 98 00 02 04 06 08 10 12 14 16 18

USD/IDR: Long-term Model Value

USD/IDR USD/IDR Fair Value +/- 1 std deviationSources: BIS, Reuters, Mizuho Asia & Oceania Treasury

Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q2 2018 ranges are from Bloomberg and only indicative. **As from Aug 2016, BI implemented a new policy framework with the 7-day repurchase rate at the new benchmark rate. .


- 20 -

Thailand: Growth Gaining Traction Growth : GDP surged to 4.8% y/y; the fastest in more than five years boosted by robust manufacturing activities and tourism-related services. Strong performance in export-oriented sectors continued to lift manufacturing activities and related capex. Private consumption also firmed up amid gradual pick up in durable goods sales. Agricultural production also turned around from Q4’s contraction led by high level of output amid favourable weather conditions. Pipeline disbursement of extra budget for 2H on top of more infrastructure investment ahead of 2019 elections, should buoy growth ahead – barring global trade wars.

Industry: Manufacturing growth continued to hum along steadily amid pick up in refined petroleum production, on the back of higher oil prices, and continuous improvement in motor vehicle production. Growth of electronics production and exports continued to moderate partly reflecting high base effect. Capacity utilization continues to improve for most of the product categories. Recent mild depreciation in THB is likely to further support exports so long as trade war risks don’t overtake. Given recent tick up in manufacturing PMI to the highest level in more than two years, positive momentum is expected to sustain led by government’s infrastructure push and improved budget disbursement.

Growth dynamics: Whilst the government looks to propel growth with expansionary fiscal policies, the new procurement law has somewhat dampened public spending with lower budget disbursement from local administrations. With election expecting to take place in 1H of next year, the government continues to ramp up spending on social protection in a bid to help people from lower income groups. Expenditure is expected to pick up further in the last quarter of the FY due to disbursement from the additional budget by Sept 2018.

Inflation: Headline inflation rebounded from low-1% partly due to low base effect from last year as well as pick up in retail fuel prices. Despite this moderate uptick, core inflation remains subdued at sub-1% as inflation expectation is also little changed suggesting inflationary pressure in near term remains minimal. Given the government’s intention to cap diesel price at 30 baht per litre (current: 29 baht), this is expected to contain some inflationary pressure from higher energy costs and probably keep inflation below the midpoint of the target range.

(10)

(5)

0

5

10

15

20

(10)

(5)

0

5

10

15

20

2012 2013 2014 2015 2016 2017 2018

GDP Expenditure Contribution (YoY; %-points)

Pte Consumption Govt SpendingInvestments StocksNet Exports GDP % y/y (RHS)


60

62

64

66

68

70

72

74

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2014 2015 2016 2017 2018

Industrial production (YoY, 3mma)

Capacity utilization, 2011=100, 12mma (RHS)in valuein volume


-8%

-4%

0%

4%

8%

12%

-8

-4

0

4

8

12

2014 2015 2016 2017 2018

Expenditure by function (%ppt, 12mma)

Public services SocialEducation HealthEcon affairs Expenditure (RHS)


-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2014 2015 2016 2017 2018

Contribution to inflation (YoY, %-ppts)

Food HousingHealthcare Transport & commsOthers Inflation (RH-scale)Core inflation



- 21 -

Policy: BoT bucks the trend by keeping interest rates on hold even as some regional central banks have embarked on a tightening path. We think BoT is likely to stay put for an extended period given that inflation is expected to stay below the mid-point of BoT’s target range of 1%-4%. Furthermore, subdued core inflation suggests that the spillover from stronger growth momentum on labour market and wage has not been sufficiently strong to unleash demand-pull inflationary pressures. That said, despite largely contained risks of from capital outflows (so far), BoT is expected to assess financial stability including potential build-up of vulnerabilities in the household debt segment.

External Position: Current account surplus narrowed on a trend basis marginally but remains sizeable at around 13% of GDP. While goods account surplus is expected to moderate gradually due to higher imports of fuel and intermediate goods, bumper tourism exports are likely to partially offset the negative impact on C/A balance and keep the surplus comfortably large. Despite recent bout of financial volatility and increased pressure on EM assets, portfolio outflows have been largely contained thanks to the large C/A surplus and record high FX reserves.

FX: Rising trade tensions between the US and China have led to a paring of long positions in Asian currencies, with THB also suffering a loss of 6.5% for Q2. Net FX reserves have fallen by about $10bn since peaking in March, with THB weakness turning more acute after Trump confirmed import tariffs on Chinese goods in mid-June. Given Thailand’s high exposure to external demand, THB may underperform as long as trade tensions persist. Nevertheless, Thailand’s persistent current account surplus and ample reserves should cushion against excessive losses. USD/THB may bump higher to 33.5 in Q3, but we see scope for easing if there is relief on the trade front.


Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 4.3% 4.0% 4.4% 4.1% 4.5% 4.8%

CPI (% y/y) 1.3% 1.2% 1.1% 1.5% 1.2% 1.4%

Policy Rate (%) 1.50% 1.50% 1.75% 1.75% 2.00% 2.00%

USD/THB* 33.1 33.5 33.0 32.6 32.3 31.9

31.1-33.2 32.7 - 34.3 32.2 - 33.8 31.8 - 33.4 31.6 - 33.0 31.2 - 32.6

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

-2.5%

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

4.5%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Inflation vs Policy rate (%)

Real interest rate (RHS) Inflation, 3mmaCore inflation, 3mma Policy rate


-15

-10

-5

0

5

10

15

20

2011 2012 2013 2014 2015 2016 2017 2018

BOP (% of GDP; 4QMA)

C/A - GdsC/A - SvcsDirect InvstmtPortfolio InvstmtOther Investmt


20

25

30

35

40

45

50

94 96 98 00 02 04 06 08 10 12 14 16 18

USD/THB: Long-term Model Value

USD/THB USD/THB Fair Value +/- 1 std deviation




- 22 -

Philippines: Growth Momentum Stays Robust Growth : Growth accelerated in Q1 led by solid consumption and investment on top of a pickup in government expenditure. Whilst elevated inflation might have dampened purchases of food staples, steady consumption of durable goods suggests that consumer confidence remains largely intact. Furthermore, remittances may recover given the removal of a deployment ban to Kuwait in May and higher remittances from Asian countries. Government expenditure surged 27% y/y, lifted by a 42% increase in capital outlays. The continuous rollout of infrastructure projects has supported related investment in transport equipment and construction.

Industry: Growth of industrial production surged to a multi-year high led by both solid domestic demand and favourable external environment. Strong growth in food manufacturing suggests that demand for consumer staples remains steady while electrical machinery production continues to expand. With capacity utilization edging up to new highs, inflationary pressure could become more entrenched. Growth of capital goods imports has rebounded in tandem with a bounce in infrastructure spending. As exports growth continued to moderate, trade deficit is expected to sustain at its current level or widen slightly.

Growth dynamics: Growth of capital spending has picked up again on the back of robust infrastructure activities. Despite bumper government revenue lifted by higher internal tax collection, budget deficit has sustained at a relatively wide level due to a corresponding increase in expenditure. With plans to lift the budget deficit ceiling to 3.2% of GDP next year, the building boom is expected to continue fueling growth momentum. The aggressive infrastructure program also highlights the importance to continue its tax reform initiatives, which are expected to shore up government coffers.

Inflation: Headline inflation continued to edge up to 4.6% led by higher transport prices. While inflation momentum seems to be moderating slightly, it remains elevated and is subject to more upside risks from potential adjustments in electricity rates and wages. With core inflation moving in tandem, underlying inflationary pressures are clearly present. The government’s renewed efforts to contain food prices via suggested retail prices and higher imports of food staples may help to mitigate rising prices to some extent.

(15)

(10)

(5)

0

5

10

15

(15)

(10)

(5)

0

5

10

15

2013 2014 2015 2016 2017 2018

GDP Expenditure Contribution (YoY; %-pts)

Pte Consumption Govt SpendingGFCF StocksNet exports ErrorsGDP % y/y Sources: CEIC, Mizuho Bank

-100

-50

0

50

100

150

200

250

-30

-20

-10

0

10

20

30

40

50

2013 2014 2015 2016 2017 2018

Industrial Production Index, vol (YoY, 3mma)

TotalFoodElectrical machineryChemical products (RHS)


-10%

0%

10%

20%

30%

40%

50%

2013 2014 2015 2016 2017 2018

Government Expenditure (YoY, 12mma)

Total

Capital outlays


-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

2013 2014 2015 2016 2017 2018

Contribution to CPI (%-ppts, 3mma)

OhersTransportHousing & utilitiesFoodCPICore CPI



- 23 -

Policy: BSP has hiked its policy rate in two consecutive meetings by 50bp cumulatively in a bid to rein in inflationary pressure. Despite BSP lowering its inflation forecasts marginally, there are still upside risks to inflation, ranging from potential wage increase to the implementation of additional excise tax hikes in 2H. Furthermore, PHP could stay on the back foot after two hikes given negative real rates. With oil prices sustaining at a relatively high level, imported inflation may rise further. Therefore, we think BSP is still likely to follow with more tightening in order to keep inflation anchored.

External Position: Current account deficit narrowed slightly in Q1 as stronger services exports, led by tourism receipts and business activities, have helped to mitigate the widened goods account deficit. Nevertheless, given the large magnitude of goods account deficit on top of rising capital and intermediate goods imports, C/A deficit is expected to remain under pressure. Despite falls in approved FDI, actual net inflows of direct investment have sustained alongside mild improvement in portfolio investments inflows. Despite a cumulative of 50bp rate hikes, real rates remain in the negative territory. Given “twin deficit” concerns, portfolio outflow concerns may linger.

FX: Overheating risks have come to the fore as inflation overshoots the BSP’s target band amidst strong second-round effects from tax reforms. With BSP stirred into action and hiking rates twice in Q2, we see scope for USD/PHP to stabilize if the BSP moves further on rate hikes, but RRR cuts could fan perceptions of easing and trigger a test of 54.5. That said, PHP had been less adversely affected by the recent wave of EM outflows for two reasons: sentiment was already fairly negative, while foreign investor positioning is also small. Medium-term risks for the PHP stems from a possible growth slowdown, in order to re-anchor inflation expectations to a lower level. This could hobble any PHP gains for 2019, with USD/PHP likely to remain supported above 51.


Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 6.7% 6.3% 6.6% 6.5% 6.6% 6.8%

CPI (% y/y) 4.6% 4.4% 4.1% 3.5% 3.0% 3.3%

Policy Rate (%) 3.50% 3.75% 4.00% 4.00% 4.25% 4.25%

USD/PHP* 53.3 54.5 52.8 51.0 51.5 52.0

51.5-53.6 53.0 - 55.7 51.6 - 54.5 49.8 - 52.8 50.3 - 52.7 50.8 - 53.2

(1)

0

1

2

3

4

5

6

2013 2014 2015 2016 2017 2018

CPI and policy rate (% YoY, 3mma)

Real interest rate (RHS) Headline CPICore CPI Upper boundLower bound Policy rate


interest rate corridor framework was introduced

-4

-3

-2

-1

0

1

2

3

4

-15

-10

-5

0

5

10

15

2012 2013 2014 2015 2016 2017 2018

Balance of payments (USD bn, 4QMA)

Transfer IncomeServices GoodsC/A (RHS) BoP (RHS)


22

27

32

37

42

47

52

57

62

94 96 98 00 02 04 06 08 10 12 14 16 18

USD/PHP: Long-term Model Value

USD/PHP USD/PHP Fair Value +/- 1 std deviationSources: BIS, Reuters, Mizuho Asia & Oceania Treasury



- 24 -

Vietnam: Cuts Both Ways Growth: Trade-fuelled growth resurgence in Vietnam has come through resoundingly, as we anticipated; with smart pick-up in exports-led growth in 2017. And while 7.3% growth kick-off in Q1 2018 may be flattered by a low base, it does not detract from underlying momentum from industrial boost – benefitting from cyclical and coordinated global exports recovery. Manufacturing pick-up, in turn underpins investments, while subdued inflation helps buoy consumption; bolstering growth. But, binary risks around growth are intensifying as a protectionist US puts the key exports engine at the risk of sputtering abruptly . Industry: Electronics and mobile devices, from being a source of stellar growth in manufacturing and exports has now turned becoming a culprit for exports slowdown – revealing how such industrial champions can cut both ways. To be sure, the slowdown partly reflects trade war risks, but is equally compounded by the cyclical peaking in electronics demand. The “concentration” is not just about sector risks – electronics – but also pertains to firm-specific exposure. Specifically, Samsung being a disproportionately large driver of electronics/mobile device manufacturing and exports means that the volatility in the industry could continue to be high and firm-related/reliant.

Growth dynamics: To be clear, despite inevitable near-term electronics/mobile device volatility, electronics as an enlarged part of the manufacturing landscape is a positive development – just one that needs further deepening and broadening. We expect that longer term boost to inward investments into Vietnam remains a compelling proposition; as the natural “flow down” of industries from China is hastened by trade war risks. But in the near-term, trade tensions and lack of visibility over spill-over effects could paralyze investments, adversely impacting Vietnam. Especially as tighter USD funding may compromise credit and hence growth.

Inflation : By Despite accelerating above 4.5% in June and July (Jan-Apr average: 2.8%), inflation is reasonably well-contained. For one, recent pick-up is mostly driven by food – accounting for a 0.9%-pt bump-up in headline inflation – whereas broader non-food inflationary impulse remains fairly benign. What’s more, inter-Ministry coordination to manage food, transport, education and healthcare costs should also rein in inflation; helping to anchor; quelling any acceleration in inflation towards 5%. In fact, we expect that inflation will ease back to sub-4% into late-2018; but meanwhile risks to VND stability may be accentuated.

6.1

2.5

9.6

8.4

6.56.8

2.9

14.4

8.7

7.47.1

3.9

13.0

7.9

6.9

0

2

4

6

8

10

12

14

16

GDP Farm Mfg Construction Services

Vietnam GDP: While GDP momentum appears better in H 1 2018, manufacturing deceleration & peaking services reflect

underlying demand slowdown/trade risks (% YoY)

2013-2017 (Avg)

2017

H1 2018 YTD

(4)

(2)

0

2

4

6

8

10

12

14

16

18

20

(4)

(2)

0

2

4

6

8

10

12

14

16

18

20

06 07 08 09 10 11 12 13 14 15 16 17 18

Net Trade (US$ bn): Exports resurgence in 2017, with some $2.1bn surplu s was positive. But despite trade surplus surge, 2018YTD exports dip le d by electronics is worrying .

Trade Balance Exports Imports

2006: -$4.61bn

2007: -$9.97bn

2008: -$16.38bn

2009: -$12.38bn

2010: -$12.60bn

2011: -$8.85bn

2012: $0.75bn

2013: $0.07bn

2014: $2.37bn

2016: $1.78bn

2015: -$3.55bn

2017: $2.1bn

Jan-Jul 2018: $3.6 bn

(10)

(5)

0

5

10

15

20

25

30

(10)

(5)

0

5

10

15

20

25

30

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Electronics & Mobile Devices (such as Phones - think Samsung!) drive Vietnam's Ex ports strength; but recent plunge highlights trade war worries .

Others Veg, Pepper, Nuts & Coffee AquaRice Textiles & Footwear Crude OilPhone & Spare Parts Electronics Total Exports

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

16

18

20

2010 2011 2012 2013 2014 2015 2016 2017

Strong FDI from Japan & Korea square with electronic s/mobile exports/manufacturing ramp-up

Other US Thailand Taiwan China (incl. HK) Singapore Korea Japan Total

Jan-Oct 2017

0

1

2

3

4

5

6

0

5

10

15

20

25

30

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Tight Foreign Currency (USD) Supply not adequately abated by FX reserve pick-up; latent presssures may remain.

Ratio of FC to LC Deposits (%; LHS)

Proxy* of overall FC liquidty to LC liquidity (%; RHS)

* Adjusted for money multiplier effects, calculated using applicable reserve requirements.

(5)

0

5

10

15

20

(5)

0

5

10

15

20

12 13 14 15 16 17 18

While hospital fee hike impact is fading , inflation has picked up led by food and fuel ; concerted government efforts should subdue price

pressures to around 5% before easing; VND risks watched !(Inflation Contribution; %-pts)

Food Housing

Transport Others

Healthcare CPI (% y/y)

Non-food CPI (% y/y)



- 25 -

Policy: The “late-cycle” rate cut in mid-2017 revealed the SBV’s slight bias for accommodative calibration as inflation bump-up (to 4.5-5.0%) from healthcare costs subsided back below 3%. And in 2018, defacto tightening from stronger VND with supply-side cost containment may have been deemed adequate to defer policy (rate) hikes; and spur further recovery in credit and alleviate tighter liquidity. But the recent step-up in FX market volatility denting VND accentuates policy dilemma for the SBV. Consequently, the SBV may be forced to hike policy rate if VND stability is deemed compromised. Base case for SBV rate hold, but a 1-in-3 chance of a 50bp hike in Q4 or Q1 2019 is notable.

External Position: Continued improvement in the net trade position is likely to feed in as C/A buoyancy; as the (lagged) data releases catch up. With 2017 trade turning a surplus of $2.8bn and so long as global trade recovery is not hijacked by trade protectionism, the net exports surplus trend in Q1 could extend. But despite robust exports growth and corresponding merchandise trade surplus driving anticipated C/A boost, FX reserves build-up continues to me modest and very gradual, with imports cover of ~2.5X still well below the ASEAN/Asia benchmark of 6-8X; and this may be a glaring bug bear if risk sentiments turn south sharply

FX: The depth of recent VND slippage has intensified in recent weeks on three counts. First, the sharp tumble in CNY is beginning to drag VND, which is guided by a double-edged trade basket (heavy on CNY) that cuts both ways. Second, the tight USD liquidity situation and decline in exports are beginning to pressure VND despite strong FX reserve accumulation earlier this year. Finally, inflation heading higher also adds to VND pressures insofar that the late-cycle rate cut in (May) 2017 may be unsettle VND. In all likelihood, VND pressures could build with a test above 23,500 on the cards before sub-23,000 on CNY recovery layer in 2019.

Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 6.8% 6.0% 6.6% 7.2% 7.5% 7.6%

CPI (% y/y) 3.8% 4.0% 3.8% 3.7% 3.8% 3.9%

Policy Rate (%) 6.25% 6.25% 6.25% 6.25% 6.25% 6.50%

USD/VND* 22,938 23,400 23,200 23,200 23,000 22,750

22735 - 22943

22900 - 23600

22900 - 23400

22900 - 23400

22700 - 23200

22500 - 23000

(15)

(10)

(5)

0

5

10

15

(15)

(10)

(5)

0

5

10

15

07 08 09 10 11 12 13 14 15 16 17 18

Real interest rates are tempered post-SBV rate cut and i n any case "core" real rates while suppressed are not exceptionally low.

Refinancing Rate

Real (Re-financing) RateAverage Real rates (2009-2013)

Real Rate based on "Core" (non-food) inflationSources: SBV, CEIC, Mizuho Bank Sources: SBV, CEIC, Mizuho Bank

(4)

(2)

0

2

4

6

8

10

(4)

(2)

0

2

4

6

8

10

Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18

USD Liquidity Squeeze is intensifying pressures on VND; but trade-weighted VND (NEER)

remains fairly supported. But if VND NEER declines continue, SBV may run out of options.

VND CNY VND NEER CNY NEER

(10)

(8)

(6)

(4)

(2)

0

2

4

6

(10)

(8)

(6)

(4)

(2)

0

2

4

6

06 07 08 09 10 11 12 13 14 15 16 17 18

Net Exports slowing at the Margin Point to C/A Diminishing down the line ;and correspondingly, diminished VND buffer . ($bn; Qtrly)

C/A (LHS) Net Exports (3m Rolling RHS)


(3000)

(2000)

(1000)

0

1000

2000

3000

05 06 07 08 09 10 11 12 13 14 15 16 17 18(3000)

(2000)

(1000)

0

1000

2000

3000

Imports cover pick up to ~3.0X is welcome, but stil l below EM Asia norms. And FX Reserves while booosted by net exports earlier, may be subdued by

softening net trade position . (US$ mn, 3mma)

FX Reserves Chg Trade BalSources: CEIC, Mizuho Bank

20,500

21,000

21,500

22,000

22,500

23,000

23,500

20,500

21,000

21,500

22,000

22,500

23,000

23,500

Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18

VND slide (vs. USD) in recent weeks reveals the pre ssures from tight USD liquidity & reserves required to maintain stable (t rade-weighted) VND;

devaluation fears may arise if VND falls more sharp ly.

VND (Monthly Avg)

SBV Reference Rate

Sources: CEIC, Reuters Mizuho Bank

Weaker VND

Three episodes of 1% devluation each in 2015:1) Jan (7th) from 21,246 to 21,458; 2) May (7th) to 21,673; 3) Aug (19) to 21,890

Annual devaluation of 1% each in Jun 2013 and Jun 2014.

12 Aug 2015: USD/VND trading bands doubled to +/-2% from +/-1%19 Aug 2015: USD/VND trading bands widened (again!) to +/-3%. And VND mid-point devlaued 1% to 21,890.



- 26 -

Australia: Tentative or On Tenterhooks? Growth: Australia was tentatively poised for some pick-up in growth as commodity prices picked up from the bottom. What’s more, strong full-time jobs recovery in 2017 added to the narrative of durable pick up in consumption in the pipeline. But jobs have since softened, while stretched household balance sheets alongside weak wage gains and cooling property market may started to dampen underlying growth momentum. What’s more a tighter fiscal stance also threatens to add to headwinds. Above all, the confluence of risks amplified by escalating US-China trade wars may have the Australian economy on tenterhooks. Industry: To be sure slip in actual capital expenditure is not a tragic sign of capitulation, given capex intentions are more encouraging. Nonetheless, further industrial recovery may be tentative. In particular as global up-cycle (peaking 2017) has wavered; if not resoundingly waned. For one, cyclical peak of the global cycle and higher oil prices conspire to soften demand. Most worryingly, unabated rise in US-China trade tensions. But despite trade tenterhooks not all outcomes are unequivocally bad. Ability to substitute for US’ farm products is a consolation. And if China ramps up infrastructure to counter US trade war risks, boost to commodities could counter-intuitively buoy industry.

Growth dynamics: That said, in all fairness, the RBA is desirous of re-balancing growth away from mining. So a China-inspired rush for ores and coal may not be the ideal growth revival scenario for the RBA. But, if a commodity-driven boost is the path of least resistance to inspire growth, the RBA will look the other way. Point being, stretched household balance sheets (levered on mortgage) amid a cooling property market, weak wage gains and rising global interest rates have the economy on financial/banking/consumer tenterhooks. And while welcome, fiscal tightening risks wrong-foot the economy risk and amplifying unexpected downturns.

Inflation : Despite the uptick in Q2 CPI to 2.1%, Australia’s inflation pick-up is tentative; far from imminent signs of broad-based acceleration. Fact is, as of Q2, the upturn in price pressures are exclusively driven by energy/fuel inflation whereas ex-energy inflation remains benign. And revealingly, services inflation is muted even into the recovery. To be sure, underlying inflation is regaining (rather than losing) traction ; but is only set for gradual rise in the 2-3% range. Crucially, soft wages gains suggest that despite further upside risks from energy pass-through, second round, demand-pull inflation risks are kept at bay. All said, inflation pick-up remains well under wraps.

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

Australia Q1 GDP: Buoyed, Not Exuberant as Public s ector buffer & net exports boost offset soft spots in pri vate demand.

(GDP Contribution- %-pts; QoQ s-adj)

Inventory & Errors Net Exports GFCF Public

GFCF Pte Non-Dwelling GFCF - Pte Dwellings Govt

Consumption GDPSources: CEIC, Mizuho Bank

0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

35

40

45

50

06 07 08 09 10 11 12 13 14 15 16 17 18

Actual Private Sector Capex - Mining investments remain so ft (~7-year lows) though bottoming in non-mining is encouraging. (A$bn)

Mining Manufacturing Others Total


(6)

(5)

(4)

(3)

(2)

(1)

0

1

2

3

0

5

10

15

20

25

30

05 06 07 08 09 10 11 12 13 14 15 16 17 18

Australia's Commodities (Coal, Ores & Mineral) buoy Total & Net Exports (A$bn; 3mma)Rural & Others

Other MfdMachinery & Tpt EqptOther Mineral FuelCoalMetal & OresTotal ExportsNet Exports (3mma, RHS)


100

120

140

160

180

200

40

60

80

100

120

140

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

As household balance sheet risks are compounded by h ousing markets risks and rising global interest rates, vulnerability to shocks is amplified ...

Housing Debt to Disposable Income

Owner Occupied Housng Debt to Disposable Income

Debt to Disposable Income (RHS)

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

05 06 07 08 09 10 11 12 13 14 15 16 17 18

Australia: Weak wages growth not only struggles to meaningfully beat inflation, but is also challenged by heavier debt burden.

Wage Index Mfg Public Sector Private sector Mining

(2)

(1)

0

1

2

3

4

5

6

(2)

(1)

0

1

2

3

4

5

6

05 06 07 08 09 10 11 12 13 14 15 16 17 18

While headline CPI has picked up (modestly), this is mostly driven by

energy inflation whereas inflation ex-energy has been very contained. (%-pt contribution, YoY)

Automotive Fuel H/H Energy Total Housing ex-energy

Tpt-ex Fuel Services Alcohol & Tobacco

Food Inflation ex-Fuel & Energy CPI


- 27 -

Policy: First things first. Our long-standing view that the next move is more likely to be a hike than a cut remains unchanged – admittedly braving the global trade/China risks. That said, the RBA is no particular rush to get; underpinning a “prolonged pause” until early-2019. For one, inflation remains benign. What’s more, downside risks to growth (from global trade war risks and domestic dampeners) deter. Finally, restrictive fiscal stance squares with slower withdrawal of monetary accommodation. Especially given elevated household debt, banking sector risks and property market vulnerabilities render the economy more sensitive to rate hikes and caution against aggressive hiking cycle.

External Position: While there has been some erosion in the net trade position, commodity price support alongside increased Australian production – for exports – have helped to keep the trade account in a surplus. But this has not been enough to prevent C/A slippage given that primary income outflows continue to overwhelm – as investment income repatriation continues. The wider point is that initial “J-curve” effect – since AUD collapsed from above 1.05 in 2013 to 0.70 lows in 2015 – marked by narrowing C/A deficit have been exhausted. Mainly because commodity exports exaggerated the trade surplus. C/A deficit should stabilize 2.5-3.0% off lows below 2% in 2016. FX: Our bullish AUD call further out (into late-2019) to entrench above 0.82 may appear to be rather optimistic in the face of global trade war risks that filter through China. Nonetheless, insofar that commodity prices derive support from on-going infrastructure projects – perhaps even get a boost from China’s infra-skewed fiscal stimulus to lean against US trade risk – the AUD could catch up with terms of trade and capex pick-up, which are expected as a corollary. What’s more, as the RBA turns less circumspect and shifts to hawkish mode into 2019, AUD traction may be reinforced. And if this resonates with EUR pick-up from ECB convergence ripples, AUD at 0.82 may not be a stretch; perhaps even easy.

Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019

GDP (% y/y) 2.8% 2.6% 2.7% 2.8% 2.5% 2.9%

CPI (% y/y) 2.1% 2.2% 2.3% 2.4% 2.3% 2.5%

Policy Rate (%) 1.50% 1.50% 1.50% 1.75% 1.75% 2.00%

AUD/USD* 0.74 0.72 0.74 0.78 0.80 0.82

0.73 - 0.78 0.69 - 0.75 0.71 - 0.77 0.74 - 0.81 0.77 - 0.83 0.79 - 0.85

(50)

0

50

100

150

200

250

300

350

400

450

(50)

0

50

100

150

200

250

300

350

400

450

08 09 10 11 12 13 14 15 16 17 18

Australia: While not set to collapse, the pullback i n Full-time jobs is suffcient cause for pause for the RBA; especially given soft wage gains. Dampens AUD

boost from RBA policy expectations.FT Emp. Chg. (000's; 12m sum; LHS)PT Emp. Chg. (000's; 12m sum LHS)Emp. Chg. (000's; 12m sum; RHS)


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

Cyclically-adjusted Fiscal Impulse Suggests Tightening amid fiscal consolidation; this may hamper growth, and buys the RBA time on Normalization

Cyclically-adjusted Fiscal Impulse^ (%-pts of GDP, LHS) Growth (% 2Q/2Q, annualized, RHS)

^ Cyclically-adjusted Fiscal Impulse refers to the change in fiscal stimulus that takes into account the growth-cycle. We have assumed 20% pass-through on positive growth turn to taxes and a 30% pass-through on negative growth turn.

Fiscal impact negativeto growth

Fiscal impact positiveto growth

(25)

(20)

(15)

(10)

(5)

0

5

10

(25)

(20)

(15)

(10)

(5)

0

5

10

06 07 08 09 10 11 12 13 14 15 16 17 18

Softer AUD has only gently reined in C/A deficit (Limited J-curve benefits) . And the commodity price bounce ha s

helped with the merchandise trade surplus.(% of GDP; 4Qma)

Secondary Income Primary Income

Services Goods

C/A BOPSources: CEIC, Mizuho Bank

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

(15)

(10)

(5)

0

5

10

15

06 07 08 09 10 11 12 13 14 15 16 17 18 19

While Upturn in Mining Capex Expectation is less pr onounced, it is consistent with AUD above 0.80; especially if commodity buoyancy su stains. AUD dynamics

reflect mining driving wider confidence . (QoQ; 4Qma)

Mining Capex Expectations (LHS, advanced 3Q)

AUD Levels (RHS, 2Qma)Sources: CEIC, Mizuho Bank

20

40

60

80

100

120

140

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18

Further iron ore & Capex recovery coinciding with hawkish RBA shift will be the in capex

squares with AUD buoyancy further out; barring worst-case "trade war" outcomes.

AUD Iron Ore


Despite surging iron ore prices AUD drops sharply on higher UST yields but resumes positive correlation with iron ore in early-2017 albeit remaining subdued.

Higher UST yields and trade war risks dampen. But expectations for ToT pick-up and capex recovery should turn AUD more sure-footed into 2019; coinciding with more distinctly hawkish turn by the RBA.



- 28 -

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Asia Quarterly Q32018 - Mizuho Bank · 2018-08-08 · Asia Quarterly – Q3 2018 - 1 - Executive...

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