|
Singapore
Singapore: Riding the Global Tide and Macro Rebalancing Singapore-Style April 29, 2010 By Deyi Tan, Chetan Ahya & Shweta Singh l Singapore| Raising Our 2010 and 2011 GDP Outlook The 13.1%Y 1Q10 advance GDP estimates released by MTI in early April were significantly stronger than what was embedded within our model, setting the macro trajectory at a higher entry point heading into 2Q10. Beyond the low base effect, sequential momentum, at 32.1%Q saar, has also been robust. The better-than-expected number was a result of global trade and asset market linkages, both of which had rebounded sharply courtesy of the global policy stimulus. Indeed, the actual March data recently released show IP averaging at 32.9%Y in 1Q10, higher than the 30.0%Y embedded in the advance estimate and posing further upside risks to headline GDP, all else equal. Unlike in the early phase of the recovery where momentum has been largely driven by the volatile biomed production, the recovery has now broadened out to the electronics segment as well. Similarly, services sectors such as financials have also done well, given the asset market rally and the beginning of a new credit cycle. While the macro recovery was externally led in terms of its origin, these external linkages have inadvertently spilled over to domestic demand. For starters, the relatively low level of job losses throughout the global recession has not hampered the unemployment rate from falling further, down to 2.1% in 4Q09, with implications for consumer spending. To be sure, part of this improvement is due to one-off factors such as the opening timing of the integrated resorts. Yet, the impact of cyclical recovery in external demand could be seen from the pick-up in manufacturing headcount. Also, with GDP returning to pre-crisis peak levels, capex expansion has since resumed in 4Q09 in the cyclical machinery and equipment segment. As a result, we are raising our GDP forecast to 9% in 2010 and to 6% in 2011, from 5% for both years. A 9% growth forecast would make this the strongest recovery following a contraction year compared to past cycles, taking growth back to the kind of levels we saw during the boom years of 2004-07. Much of the Annual Growth Is in the Bag... The strong 1Q10 GDP numbers imply that a significant portion of the annual growth is already in the bag. As a rough benchmark, given the 1Q10 numbers, even if sequential growth were to stay at 0%Q on a seasonally adjusted basis for 2Q-4Q10, headline GDP growth would still come to 8.6%Y by our calculations. The current run-rate looks very strong but quarterly GDP profile and the normalized growth trend are more important to gauge. A global double-dip recession is not our base case and we believe that the global macro fundamentals are on the mend. Yet, we think that the ~13%Y run-rate expected in 1Q10 has been augmented by one-off factors such as easy comparisons and the restocking surge. Hence, it is unlikely to be sustainable or repeated in coming quarters. Given the base effects, we believe that 1Q10 likely marked the peak in the quarterly percentage year-on-year growth trajectory for 2010 and 2011. Having said that, we expect the oncoming headline deceleration to be moderate as leading indicators such as the US ISM New Orders Index have not rolled off in a significant way; the US inventory-to-sales ratio still looks low, and global policy stimulus is unlikely to be pulled out abruptly. We think that the economy is likely to moderate to a still healthy pace of 6% or so by 4Q10. Deflation Concerns Behind Us; Should We Now Be Worried About Inflation? Although the economy plunged 9.5% from peak to trough during the global recession, the sharp recovery since and the overheating days in the last boom have prompted some to question whether inflationary risks are imminent. On a global basis, inflation pressures look set to accelerate at a much earlier stage of the current recovery cycle as compared to the last boom cycle when ‘Goldilocks' prevailed initially. In Singapore, inflation had averaged a subdued 0%Y in 1999 (versus -0.3% in 1998) and +0.5%Y in 2003 (versus -0.4%Y in 2002), the first year the economy managed to emerge from deflation. Yet this time round, inflation is likely to come round to our forecast of 2%Y in 2010 and 2011, from 0.6%Y in 2009. The difference between this recovery cycle and the past has been the strength of the rebound in asset markets and commodity prices. To the extent to which global policymakers overstay their presence in order to prevent a double-dip recession, we think that inflation risks for Singapore are skewed to the upside. Yet, we believe that Singapore policymakers still have some time buffer on their side before demand-pull pressures coalesce with the cost-push pressures to give rise to overheating concerns. For one, much in contrast to its modus operandi in 2007 and 2008, the MAS now seems determined not to fall behind the curve. The aggressive move of re-centering upwards the midpoint of the bandwidth as well as moving from a zero appreciation to a gradual appreciation slope will help circumvent import-led inflation, particularly in commodity prices. Some wonder if the quicker appreciation may be counter-productive as it attracts more capital inflows in expectation of further currency appreciation, hence injecting more liquidity into the system and fueling inflation. In our view, the more-aggressive-than-expected move may in fact be more effective in containing excessive inflows as it eases a further build-up of appreciation expectations with a big move right from the start. Separately, unlike past downturns when capex recessions tend to persist for much longer, capex levels (such as in real estate and machinery & equipment) have now gone back to pre-crisis peaks. Indeed, recall that supply-side expansion has been ongoing throughout the global recession, particularly on the real estate front, which means that there is slack to tap into. In our view, the key factor which will turn inflationary risk into a real threat is if the economy persistently grows above its potential growth of 5-6% beyond 2010. What Are the Longer-Term Issues? Aggressive policy stimulus has averted a prolonged global recession and enabled the high-beta economy to concomitantly ride the global tide in the upswing. Yet, cyclical rebound notwithstanding, longer-term macro rebalancing remains pertinent. Rather than slowing down, policymakers affirm that the macro rebalancing in Singapore has gained greater urgency. As highlighted in previous research (see ASEAN MacroScope: Macro-Rebalancing Singapore-Style, July 30, 2009), the small domestic demand base means that Singapore's rebalancing strategy is unlikely to conform to the strictest sense of the term - i.e., rebalancing from exports to domestic demand. Instead, an alternative variant of the export model where the rebalancing takes place in terms of the export sectors (from cyclical to secular), the end buyers (from consumers to corporates and governments) and the end destinations (from developed world to Asia) would be the strategy. Indeed, policymakers intend to capitalize on the three secular trends of urbanization, ageing and growing affluence, which would be manifesting most prominently in Asia. While Singapore may not yet have the solutions or products catering to such emerging trends in the region, the idea is to provide a platform in Singapore to bring together the public, quasi-public and private sectors to test-bed and co-develop relevant products, which is hopefully then scalable and exportable to global markets. While the strategy is laid out, issues still remain - policymakers need to develop the unique selling-point which would entice corporates to come to Singapore rather than to test-bed ideas elsewhere in Asia. Moreover, after the test-bedding phase, the difficulty also lies in identifying the part of the production value-chain which Singapore can fit in and profit from. Just as some of these mega trends are emerging, relevant industries in Singapore are also in the infant stages and where expertise is absent; it would have to be developed for the value to be milked. What Are the Risks to Our Outlook? Upside and downside risks to the near-term outlook are entirely global in nature. Downside risks stem from a global double-dip recession arising from premature policy exit. Upside risks come from global policymakers overstaying their presence. Such upside growth risks would correspondingly increase the risk of inflationary pressures progressively building up in Singapore.
Malaysia
Malaysia: Inflation Hedge, Structural Gaps and New Economic Model April 29, 2010 By Deyi Tan, Chetan Ahya & Shweta Singh l Singapore| Raising Our 2010 and 2011 GDP Outlook We are raising our GDP forecasts to 6.5% in 2010 and 5.0% in 2011, from 4.8% for both years. If one is optimistic about Singapore's cyclical recovery, one also has to be upbeat about Malaysia's cyclical prospects. Indeed, being the second most-open economy within ASEAN, Malaysia is, in our view, a less volatile version of the Singapore economy. High-frequency macro indicators in Malaysia are reflecting the strong 1Q10 GDP advance estimates announced in Singapore. Indeed, electricity sales have grown by 14.0%Y, 3MMA in February 2010 (versus +10.4%Y, 3MMA in January). Other domestic demand indicators such as motor vehicles sales, industrial production, business condition index, consumer sentiment and imports of capital, intermediate and consumer goods have also been on a similar rebound. Meanwhile, exports have also grown at a double-digit pace since December 2009. Export demand is still not showing any signs of potentially slowing down sharply in 2H10. The March US ISM New Orders Index leads Malaysian exports by around four months and provides a first glimpse into 2H10. It suggests that the moderation is likely to be mild. In order to take into account the strong momentum at the margin and the 1Q10 GDP - which is likely to be higher than what is embedded within our model - we are raising our GDP forecasts. How Are We Different from Consensus? Consensus is now standing at 5.5% for 2010 and 5.0% for 2011. Our upgrade to 6.5%Y will bring us above consensus for 2010. Indeed, with the upgrade on Singapore after the 1Q10 advance estimate, the disparity between the consensus outlook for Singapore and Malaysia GDP is widening. Given the similar export orientation of both economies, we think that the widening disparity probably reflects the fact that the market has not fully factored in the upside to Malaysia's growth numbers. We suspect that consensus numbers will likely be in need of upgrade. A Play on the Global Tide and an Inflation Hedge From a cyclical perspective, Malaysia offers both a play on the global tide and an inflation hedge. Our growth framework for Malaysia rests on three legs: manufactured exports, commodities and the large public sector economy. For 2010 and 2011, we think that the public sector economy is likely to take a back seat to the other two legs. Policy exit on the fiscal and even on the monetary policy front is underway. Indeed, these will be the main drivers of the economy: manufactured exports, commodities, and the positive terms of trade from elevated commodity prices, which will then spill over to domestic demand such as private consumption and capex. Despite the structural pressures on the manufactured exports front over the past few years, the rebound in Malaysian exports at 24.7%Y, 3MMA in February 2010 has been roughly in line with the 20-28% seen elsewhere in the ASEAN region so far. Specifically, non-fuel-related exports have risen at a greater extent at 29.5%Y, 3MMA in February 2010 (versus +23.6% in January) compared to fuel-related (mineral fuels and edible oils) which rose 12.1%Y, 3MMA (versus +1.2%Y in January). Since Malaysia is the largest net commodity exporter in the region, this exposure helps to offer an inflation hedge. At the same time, we think that inflationary pressures may also be lower here compared to elsewhere in the region. On one hand, like Indonesia, Malaysia has the benefit of an appreciating currency, being one of the first movers on hiking rates in the region, and the impact of that on import-led inflation. Also, retail fuel prices are subsidized and the timeline for a rationalization of price levels still looks indefinite at this point, meaning that while other economies are experiencing commodity price pass-through, the pass-through for Malaysian consumers is delayed. Furthermore, in Singapore housing cost increases are in the pipeline amid property market reflation and rental resets, but this is less of an issue for Malaysia. We are leaving our inflation forecasts unchanged at 1.7%Y for 2010 and 1.9%Y for 2011, and we continue to expect policy rates to reach 3% by 2010 year-end. Still Waiting for the Structural Inflexion Point While we are optimistic with regard to a cyclical recovery, we maintain a relatively cautious stance on the structural front (see Malaysia: Where Are the Structural Gaps? April 22, 2009). As we highlighted in our previous note (see ASEAN MacroScope: New Economic Model: Making the Right Noise, March 31, 2010), the New Economic Model announced by PM Najib has taken the critical step in terms of identifying the problems faced by Malaysia. Tricky issues which received less overt discussion previously were touched upon in fairly strong language. However, we believe that effective implementation remains a crucial step. Given Malaysia's uneven track record for reform, we think that market participants would need to see more tangible and orchestrated change before believing that a real structural turnaround is coming. We would watch out for a critical mass of reforms on the education front as a signpost for Malaysia's structural inflexion point. It is one area that helps to address Malaysia's root problem without being politically charged. What Are the Risks to Our Outlook? Cyclical upside and downside risks to our Malaysia outlook would arise from global demand and commodity prices. From a medium-term structural perspective, any upside surprise would come from reform momentum gathering pace.
Indonesia
Indonesia: On India's Trail April 29, 2010 By Deyi Tan, Chetan Ahya & Shweta Singh l Singapore| Raising Our 2010 and 2011 GDP Outlook We are maintaining our bullish call on Indonesia. Indeed, like other ASEAN economies, the cyclical turnaround had begun in Indonesia with 4Q09 GDP registering 5.4%Y (versus the trough of 4.1%Y in 2Q09). High-frequency domestic demand indicators - such as motor vehicle sales, cement sales and imports of capital & consumer goods - are pointing towards growth acceleration. Meanwhile, external demand is also lifting Indonesia's exports to 55.5%Y, 3MMA in February 2010. As part of the ASEAN GDP review which we are currently undertaking, we are lifting our GDP forecast to 6.0% from 5.5% in 2010 and to 6.5% from 6.3% in 2011 to mark to market recent macro developments. The revisions today will bring Indonesia earlier towards achieving what we see as its potential growth level of 6-7%Y. Indeed, we had been bullish on Indonesia; back in 2Q09, we argued that it could potentially add another ‘I' to the ‘BRICs' story (see Indonesia: Adding Another ‘I' to the BRIC Story, June 12, 2009). It had become clear that political stability was likely to continue with President SBY winning his second presidential mandate, with a bigger parliamentary seat share. To be sure, Indonesia's story was not without risks. The risks we saw for Indonesia were via the currency conduit. Despite the reduction in external debt over the years, the composition of external debt within its macro balance sheet was still higher than in other ASEAN economies, leaving Indonesia relatively more vulnerable to capital flows volatility and the spillover impact of that onto the currency, inflation and monetary policy. However, the reduction of the tail risks of the global economic crisis and the return of risk appetite, coupled with the ongoing macro balance sheet improvement, helped Indonesia avoid such disruptive macro instability at the trough of the global recession. How Are We Different from Consensus? Our new GDP forecasts are higher than consensus forecasts of 5.8%Y for 2010 and 6.0%Y for 2011. Benign demographics, elevated commodity prices and political stability are positive factors driving Indonesia. Yet, in our view, the most important of all lies in what we see as the structural decline in cost of capital for Indonesia. Indonesia on India's Trails Indeed, as we had been reiterating, we see Indonesia likely to emerge as a story more similar to India rather than China (see Indonesia on India's Trail: Structural Cost of Capital Decline Story Is Intact, April 20, 2010). In the past, a weak political environment, high ratios of public and external debt to GDP and poor corporate balance sheets have caused Indonesia's exchange rate to remain highly volatile since the 1997 crisis. This in turn resulted in higher inflation and higher policy rates. Moreover, unlike India and China, Indonesia has a relatively open capital account for its resident population. When an external event caused some exchange rate volatility, residents have only added to that volatility by moving their rupiah bank deposits into dollar deposits. Exchange rate volatility and frequent macro shocks meant higher credit costs for the banking system. Banks have been persistently maintaining high net interest margins, partly to cover for high credit costs and uncertainty in the interest rate environment. Now, the improved political environment, along with steady repair and restructuring of the government, banking sector and corporate sector balance sheets are helping to reduce the exchange rate volatility and cost of capital on a structural basis. This should further lead to a virtuous cycle of confidence among international investors and non-resident Indonesians. Capital inflows and remittances are likely to continue to improve, which would help to reduce cost of capital further. Indeed, India has shown a similar economic evolution, in which structural reforms following the 1991 balance-of-payments crisis led to a clean-up of the macro balance sheet. The cost of capital fell. Banks' lending rates followed, opening up a big gap between corporate sector ROE and cost of capital. The upshot is a boost in corporate profits, more investments and a higher potential GDP growth trend. This is what we believe is currently underway in Indonesia. Inflation - A Beneficiary of Improved Macro and Lower Exchange Rate Volatility On the inflation front, the medium-term trend of core inflation has been steadily declining with lower troughs and peaks. The recent positive surprises on the inflation front allude to the continuation of the structural story we have highlighted above. Core inflation has again decelerated to 3.6%Y in March 2010 (versus 4.4%Y a couple of months ago and a recent high of 7.4%Y in February 2009) amid the lower exchange rate volatility, the impact of currency appreciation and the pass-through of that to headline CPI. To be sure, Indonesia's inflation outlook is an interplay of cyclical demand-pull pressures and the erosion of base effects on one hand and the benign impact of stable currency trends on the other. We still think that cyclical inflationary pressures will take hold and be on the rise as the economy remains on a path of expansion. Increases in WPI will likely be passed through to the consumer level. Yet, this cyclical rise in inflation should be seen in the broader context of a structural decline in inflation trend over the medium term. The upside risk lies in whether there could be an unforeseen bout of currency volatility if another round of global risk-aversion were to materialize. Yet, this is not our base case. Commodity prices are another risk factor but, at US$84/bbl, we think that oil prices remain in a sweet spot: elevated and improving the terms of trade for net commodity exporters, but not high enough to compound overheating risks and debilitate the current account balance as domestic demand accelerates, thereby putting pressure on the currency. As such, we trim our inflation forecast to 5.0% from 6.0% for 2010 and to 5.7% from 6.5% for 2011. Meanwhile, given the monetary tightening from currency appreciation, the benign impact of that tightening on import-led inflation, and the dovish tone in the monetary policy statement so far, we are pushing back our expectations of the first rate hike from July to September. We expect the policy rate to go from the current 6.5% to 7.5% by year-end instead of the original 8%. What Are the Risks to Our Outlook for Indonesia? They are likely to stem from three sources: • Commodity prices: As we highlighted above, this a double-edged sword for Indonesia: prices that are neither too low (negative terms of trade) nor too high (overheating risks) would be benign for Indonesia. • Central bank monetary policy management: Subdued inflation pressures together with tightening via the currency tool are allowing the central bank to delay policy rate hikes. With a typically dovish stance, risks could also stem from the central bank overstaying its presence with policy rates that are too accommodative. • The political environment: In particular, watch with regard to the Bank Century bailout incident, the implications of that on related key decision-makers, and the dynamics between President SBY and the various coalition parties in the government. |
