Beneath the surface - Standard Chartered

Global Research

Issuer of Report Standard Chartered Bank, Singapore Branch

Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2018 https://research.sc.com

Global Focus – Q4-2018

Beneath the surface

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Standard Chartered Global Research | 2 October 2018 2

Table of contents

Global overview 3

Executive summary 4 Distribution of world GDP growth 6 Global overview – Beneath the surface 10 Global charts 20

Geopolitical economics 22

US midterms – A looming risk for Trump 23

Economies – Asia 29

Asia – Top charts 30 Asia – Macro trackers 31 Australia – Boiling frog? 33 Bangladesh – A strong year likely; risks remain 35 China – Risks contained, despite downtrend 37 Hong Kong – A bumpier ride 39 India – Battling external headwinds 41 Indonesia – Playing defence 43 Japan – On a positive growth path 45 Malaysia – Will a single engine be enough? 47 Myanmar – Infrastructure projects needed 49 Nepal – Stable politics = better growth outlook 50 New Zealand – Dovishness is overdone 51 Philippines – More hikes to come 53 Singapore – Wait and see 55 South Korea – Between reality and ideals 57 Sri Lanka – Walking a tightrope 59 Taiwan – Growth momentum to slow 61 Thailand – About to move into election mode 63 Vietnam – Fast, not furious 65

Economies – Middle East, North Africa and

Pakistan 67

MENAP – Back to the future? 68 MENAP – Top charts 70 Bahrain – Funding for reform 71 Egypt – Steady progress 72 Iraq – Catching a break 73 Jordan – Just getting by 74 Kuwait – Getting back to growth 75 Lebanon – On hold until cabinet is formed 76 Oman – Some relief, but challenges remain 77 Pakistan – Fund, friends and financing 78 Qatar – Future tailwinds 80 Saudi Arabia – Adjusting reforms 81 Turkey – Of crises and policy responses 82 UAE – Policy support on the way 84

Economies – Africa 85

Africa – Navigating troubled waters 86 Africa – Top charts 88 Angola – Not just a summer fling 89 Botswana – A mining recovery 91

Cameroon – Coping with costly unrest 93 Côte d’Ivoire – Tomorrow is now 95 Ethiopia – New opportunities, old challenges 96 Gabon – Not there yet 97 Ghana – 25% bigger with recent rebasing 99 Kenya – Not such taxing times 101 Mozambique – Untying the Gordian knot 103 Nigeria – Politics, politics 105 Senegal – Losing its shine? 107 South Africa – Fears are overdone 108 Tanzania – Subdued outlook 110 Uganda – Rates steady for longer 111

Economies – Europe 112

Europe – Top charts 113 Euro area – Ending QE 114 Switzerland – Slowdown expected in H2 116 UK – Brexit to weigh on growth 117 Czech Republic – Risks of overheating 119 Hungary – Growth has likely peaked 120 Poland – Private consumption is key 121 Russia – Recovery remains intact 122

Economies – Americas 123

US and Canada – Top charts 124 Latin America – Top charts 125 US – Outlook remains positive 126 Canada – Internally solid, externally vulnerable 129 Brazil – Post-election hangover 130 Chile – Causes for concern 132 Colombia – Smells like animal spirits 134 Mexico – The shape of AMLO 136 Peru – Solid growth, fluid political backdrop 138

Strategy outlook 140

The return of the VaR shock 141

Forecasts and reference tables 148

Forecasts – Economies 149 Forecasts – FX 150 Forecasts – GDP 151 Forecasts – Rates 152 Forecasts – Commodities 153 Forecasts – Long-term 154 Forecasts – Selected interbank rates by tenor 156 Reference tables – Asia 157 Reference tables – MENAP 158 Reference tables – Africa 159 Reference tables – Europe 160 Reference tables – Americas 161

Authors 162


Global overview



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Executive summary

Beneath the surface

Global growth has been strong so far this year, and we maintain our 2018 global

growth forecast of 3.9%. We expect the same robust pace to be maintained in 2019.

The improved global outlook is largely premised on our upgraded US forecasts,

driven by the ‘sugar rush’ from fiscal stimulus.

But while global growth has been resilient so far, risks bubbling beneath the surface

have increased since the start of 2018. These include the escalating US-China trade

war; a break higher in oil prices; and tightening global liquidity conditions due to the

end of the QE era, trends in the USD, and US monetary tightening. These factors

have led to mounting external pressure on emerging markets with twin deficits,

resulting in more aggressive monetary tightening in these economies.

Emerging markets with twin deficits

are having to tighten monetary

policy more aggressively

China: China’s economy is likely to lose further momentum in the coming months

amid rising trade tensions with the US and slowing housing-market growth. The

government is committed, however, to achieving its 6.5% growth target for 2018,

using more proactive fiscal policy via tax cuts and infrastructure spending to boost

domestic demand. We see limited room to loosen monetary policy further. On the

Chinese yuan (CNY), we expect more efforts by the authorities to slow depreciation

and prevent USD-CNY breaking above 7.0 this year.

ASEAN: Slowing growth in China and worries about escalating US-China trade

tensions are already beginning to affect export growth sentiment in ASEAN countries.

However, the growth outlook remains benign and ASEAN economies have been more

resilient to EM risk aversion than those in EMEA or Latin America. Domestic demand –

especially government infrastructure spending – should support growth in Indonesia, the

Philippines and Thailand. The inflation picture is mixed in ASEAN. The Philippines

central bank has hiked rates aggressively to counter strong inflationary pressure.

Indonesia’s inflation is comparatively manageable; while Bank Indonesia has also

tightened policy aggressively, Indonesian rupiah (IDR) stability has been the main driver.

India: India is one of the fastest-growing EM economies. However, higher oil prices

are a key global risk to India’s economic outlook. Policy makers are likely to stay

focused on managing external headwinds through monetary policy tightening, direct

measures to narrow the deficit, and fiscal prudence.

US monetary policy is likely to

remain relatively benign despite

four more rate hikes in 2019

US: The near-term economic outlook has strengthened further on fiscal stimulus,

and we recently raised our 2018 GDP growth forecast to 2.9%. Given the strength of

real growth and the tight labour market, we have raised our expectation of the

terminal federal funds target rate to 3.50%. Despite pencilling in a higher terminal

rate, we expect the policy stance to remain relatively benign. The US midterm

elections in November are increasingly becoming the focus for investors, who view it

as a ‘practice run’ for the 2020 presidential race. The House appears more

vulnerable than the Senate to a Democratic takeover.

Europe: The euro-area economy continues to grow at an above-trend pace,

supported by household consumption and investment spending. Growth is likely to

moderate over the next couple of years, however, in the face of high energy prices,

reduced QE support and an uncertain trade outlook. Concerns about Italy’s fiscal

position are likely to persist, especially as QE ends. While the European Central

Bank is on track to end QE, it is likely to be slow to raise rates. Brexit negotiations will

continue to dominate sentiment in the UK, with rising concerns about a ‘hard’ Brexit.




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Africa: Commodity prices are key to the outlook. Higher oil prices have benefited

Nigeria and have been crucial in avoiding deeper economic crises in Angola and

Gabon. Among oil importers, Senegal’s fundamentals may deteriorate the most.

Further Fed tightening, trade-war concerns and EM vulnerabilities will shape the

external environment for Sub-Saharan Africa. Commitment to IMF programmes in

several countries will be crucial to maintaining investor confidence.

IMF programmes are important for

continued investor confidence for

several countries in SSA and

MENAP

MENAP: Higher oil prices improve the outlook for the GCC but raise risks for oil

importers. We forecast that growth in the Middle East, North Africa and Pakistan

(MENAP) region will accelerate to 3.5% in 2018 from our 3.2% estimate for 2017. For

GCC countries, higher oil prices will allow lower budget deficits despite an increase in

fiscal spending. We expect monetary policy to tighten across MENAP. Due to external

vulnerabilities, Egypt, Jordan and Iraq are in IMF programmes; Pakistan is likely to follow.

Latin America: Growth is diverging across economies. Peru, Colombia and Chile

are benefiting from increasing business confidence as incoming administrations try to

move to a pro-business reform agenda. Growth in Brazil and Argentina, on the other

hand, has underperformed Latam peers due to election-related risks (in Brazil) and a

currency crisis driven by a collapse in confidence over macro adjustment (Argentina).

Intensifying trade tensions and a stronger USD have affected local currencies.

Consequently, monetary policy is taking on a more explicit tightening bias, although

underlying inflation pressures are under control.

Where we differ from consensus

US: We see one more FOMC hike in 2018 (in December) and four in 2019, versus

the consensus call of three more hikes between now and end-2019. Our view is

premised on a strong US labour market and a positive output gap.

China: We forecast a faster deterioration in China’s current account (C/A) balance

than consensus. We expect the C/A surplus to turn to a deficit of 0.2% of GDP in

2019 from a surplus of 0.5% in 2018 as trade tariffs start to hurt exports.

Korea: We expect the BoK to hike rates in 2019, unlike the market consensus. Concerns

about rising wealth inequality and financial stability are likely to drive this decision.

Indonesia: We expect a wider current account deficit than market consensus, driven

by unfavourable commodity price movements.

MENAP: Egypt’s central bank is unlikely to cut rates, despite falling inflation, as it

seeks to protect against capital outflows. In Pakistan, we still think markets are

under-pricing monetary tightening. Pakistani rupee (PKR) adjustment amid higher oil

prices is likely to pressure CPI inflation higher. We expect the central bank to

respond with another 150bps of hikes.

Latin America: We think economic activity has already peaked in Chile, as it is

vulnerable to the current global combination of high oil prices and low metal prices. In

Mexico, we expect more aggressive rate cuts than consensus, as we see inflation

sharply undershooting consensus from Q2-2019. In Colombia, we expect growth to

be stronger than consensus, supported by domestic demand and higher oil prices.




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Distribution of world GDP growth

Figure 1: China is the third-largest economy and growing, nearly overtaking the euro area when measured by nominal

GDP at market exchange rates

Size represents 2018F percentage share of level of world GDP at market exchange rates; shade represents whether share is

increasing/decreasing vs past-5-year average

Source: IMF, Standard Chartered Research

Figure 2: We expect global growth to accelerate or remain steady in 2018 versus past 5Y levels; the UK and MENAP are

the only exceptions

Size represents 2018F ppt contribution to world GDP growth at market exchange rates; shade represents rate of contribution vs

past-5-year average; percentages represent estimated share of world GDP growth in 2018


China26%

Euro area9%

United States17%

AXCJ15%

Japan2%

Latin America4%

MENA3%

Africa1%Rest of World

20%

United Kingdom1%

Canada1%

Other Europe2%

Fast Neutral Slow

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China 16%

Euro area 16%

United States 24%

AXCJ 12%

Japan 6%

Latin America 6%

MENA 4%

Africa 2%

Rest of World 7%

United Kingdom 3%

Canada 2%

Other Europe 3%

Decreasing Increasing




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Figure 3: China is the largest economy and growing when measured by nominal GDP in PPP terms

Size represents 2018F percentage share of level of world GDP in PPP terms; shade represents whether share is

increasing/decreasing vs past-5-year average


Figure 4: China and AXJC contribute more to world growth in PPP terms than in market exchange rate terms

Size represents 2018F ppt contribution to world GDP growth in PPP terms; shade represents rate of contribution vs past-5-year

average; percentages represent estimated share of world GDP growth in 2018


China31%

Euro area6%

United States10%

AXCJ28%

Japan1%

Latin America4%

MENA4%

Africa2%

Rest of World8%

United Kingdom1%

Canada1%

Other Europe3%

Fast Neutral Slow

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China 19%

Euro area 11%

United States 15%

AXCJ 19%

Japan 4%

Latin America 6%

MENA 6%

Africa 2%

Rest of World 9%

United Kingdom 2%

Canada 1%

Other Europe 4%

Decreasing Increasing


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Global overview

Geopolitical economics

Asia

MENAP

Africa

Europe

Americas

Strategy outlook

Forecasts and references

Figure 5: Global economic trackers – Our indicators suggest that inflation has picked up globally

Selection of our preferred economic indicators for economies in the region

Indicator CN IN ID KR MY PH TH TW VN HK SG AU JP NZ US DE UK BR MX ZA TR

Economy

GDP (% y/y) 6.7↓ 8.2↑ 5.3↑ 2.8 4.5↓ 6.0↓ 4.6 3.3↑ 7.1 3.5 3.9↓ 3.4↑ 1.3↓ 2.8 2.9↑ 2.3↑ 1.3 1.0↓ 2.6↑ 0.4↓ 5.2↓

Credit growth (% y/y 3mma) 32.3↑ 9.5 10.7↑ 5.1↑ 17.7↓ 7.6↓ 5.2↑ 16.9↓ 5.6↑ 4.7↓ 2.1↑ 19.4↑ 1.9↓ 4.0↓ 2.5↑ 5.2↓ 11.9↓

MCI Tracker ↑ ↓ ↑ ↑ ↓ ↑ ↓ ↓ ↓ ↓ ↑ ↓ ↑ ↑ ↑ ↑

Stock market performance (% y/y 3mma) -14.0↓ 17.3↑ 1.3↓ -3.0↓ 0.0↓ -4.6↓ 5.3↓ 4.9↓ 24.1↓ 5.4↓ -0.3↓ 9.5↑ 13.6↓ 17.5↑ 14.5↑ 2.7 3.2↑ 14.5↓ -3.4 7.6↓ -10.0↓

Domestic

Manufacturing PMI (3mma) 51.3 52.4↑ 50.9 49.3 50.1↑ 51.9 50.1 53.5↓ 54.8↑ 48.1↓ 52.5↓ 52.6↓ 59.9↑ 55.5↓ 53.6↓ 50.5↓ 51.6↓ 47.4↓

Industrial production (% y/y 3mma) 6.0↓ 5.8 4.6↓ 0.6↑ 2.2↓ 12.0 3.5 2.2↓ 13.3↑ 1.6↑ 6.0↓ 3.5↓ 1.8↓ 4.1↑ 2.3↓ 1.1↓ 0.3↓ 0.6 1.5↑ 5.8↓

Capital goods imports (% y/y 3mma) 2.0↑ 26.7↑ 30.6↑ -15.7↓ 5.6↑ 32.1↑ -1.8↑ 16.2↑ 8.8↑ 13.0↑ 8.0 5.7 16.3↓ 8.0↓ 0.0↑ -9.3↑ 151.8↑ 14.0 -3.2↓

Retail sales (% y/y 3mma) 8.9 2.7 6.3 9.8↑ 7.1↑ 3.0↓ 11.0↑ 10.9↓ -0.1↓ 2.7 1.3 3.8↑ 6.5↑ 2.7↓ 5.7↑ 4.1 3.5↑ 2.0↓ 4.2↓

Inflation (% y/y 3mma) 2.1 4.3↓ 3.2↓ 1.5 0.6↓ 5.8↑ 1.5↑ 1.6↓ 4.4↑ 2.4 0.6↑ 2.1↑ 1.0 1.5↑ 2.8↑ 2.0↑ 2.5 4.4↑ 4.8 4.9↑ 16.4↑

Property market index (% y/y 3mma) 17.0 7.6 2.1↑ 1.9 4.1↓ 2.1↓ 5.7↓ 1.1↓ 16.3↑ 9.1↑ -0.6↓ 1.6↓ 5.2↑ 7.2↑ 2.2↓ -0.6↑ 10.1↑

External

Exports (% y/y 3mma) 12.1↑ 25.1↑ 21.4↑ 3.1↑ 7.0 5.9↑ 6.2↑ 6.3↓ 12.8 8.8 5.5 13.7↑ 6.0 9.8↑ 9.6↑ 4.6 5.2↑ 38.1↑ 17.8↑ 7.6↑ 39.3↑

Exports broadness index (destination) ↑ ↓ ↓ ↓ ↓ ↓ ↑ ↑ ↑ ↓ ↓ ↑ ↓ ↑ ↓ ↑ ↑ ↑ ↑

Tourist arrivals (% y/y 3mma) 4.4 11.8 26.6↑ -1.7↑ 7.4↓ 5.6↓ 3.3 14.9↓ 8.6↓ 8.3↑ 5.7↑ 8.1↓ -0.2↓ 2.8↓ 1.3↓ -2.5↓ 21.2↓

↓ Slower ↑ Faster

Fast Neutral Slow

Cell colours (medium-term performance): Metrics growing ‘fast’ compared to their 3-year average are coloured green; those growing ‘slow’ versus the 3-year average are red. Our threshold for ‘fast’ and ‘slow’ is the 3-year average +/- 0.5 standard deviations.

Arrows (near-term performance): Metrics growing faster than their 6mma are identified with an upward arrow (↑); those growing slower than the 6mma are marked with a downward arrow (↓); thresholds for ‘faster ()’ and slower ()’ are 6mma +/- 0.5 standard deviations.

*Thresholds for cell colours for GDP and the GDP tracker are 5-year average +/- 0.5 standard deviations, and for arrows are 6-quarter average +/- 0.5 standard deviations. Vietnam’s GDP growth tracker is YTD, as reported. We show Q2 GDP growth data here, as

it is already available.

^The Exports Broadness Index by destination indicates how ‘broad’ or ‘narrow’ exports are by destination of exports. If a few destinations account for a large share of exports, it is ‘narrow’. If exports are well diversified by destination, it is ‘broad’. ‘Broad’ is indicated

by a green cell and ‘Narrow’ by a red cell. The more diversified the exports, the better. Arrows indicate near term-performance versus the 6mma – for example, if exports are currently broad but getting narrower, this is indicated by a ↓ in a green cell. If exports are

currently narrow (highly concentrated on a few destinations) but getting broader, this is indicated by a ↑ in a red cell.

#The Monetary Conditions Index (MCI) indicates the ‘tightness’ or ‘looseness’ of monetary conditions. ‘Tighter’ is growth-negative, ‘looser’ is growth-positive. An upward arrow (↑) indicates loosening, and a downward arrow (↓) indicates tightening.

All indicators use the most recent publicly available data at the time of publication.

Source: Bloomberg, CEIC, Standard Chartered Research



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Figure 6: The MCI signalled rate hikes in India, Indonesia and Philippines

Conditions remain loose in India, Philippines, Thailand; we expect further hikes from these economies

2016 2017 2018

GCNA

CN

HK ↑

↑

↑

↑

↑

↑

TW ↓

↓

KR

↑

ASA

IN ↓

↓

↑

ID ↓ ↓ ↓

— ↓

↑↑

MY

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PH ↑ ↑

SG

TH

Majors

US ↑

↑

↑

↑

↑

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EA

UK — ↓

↑

AU

↓

JP

*Other EM

BR —

↓ ↓

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—

MX ↑

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↑ ↑

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ZA ↑

—

↓

TR

—

—

Source: CEIC, Bloomberg, Standard Chartered Research

Monetary policy action indicated by arrows. Down arrows signal policy easing (↓), up (↑) signals tightening. Non-consensus moves are indicated with thick arrows (/). Dashes ( — )

indicate no change in policy, when markets expected a policy move.

Shades of green (or red) indicate looser (tighter) conditions than in the past four years; darker shades show a stronger signal

Figure 7: MCI indicating tighter conditions while FCI indicating looser conditions

LHS: SCB US monetary conditions index; RHS: Bloomberg US financial conditions index (inverted, lagged 12 months)

Source: Bloomberg, Standard Chartered Research

*Our proprietary MCI estimates monetary conditions using real effective exchange rate (REER), real interest rates and money supply. The Bloomberg US financial conditions index is

constructed using US money market, US bond market and US equity market indicators

T ig ht est

0

Lo o sest

MCI

FCI (RHS - inverted)

-2.5

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Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Sep-18

QE tapering may have distorted the correlation of MCI with FCI. MCI would have gotten tighter but not necessarily FCI as US equity markets continued to perform strongly Normalising of Fed balance sheet may

have led to the divergence between MCI and FCI. We expect the indices to converge over the medium term

Tighter

Looser




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Global overview – Beneath the surface

Global growth remains robust... for now

Our 2018 global growth forecast of 3.9% is unchanged since the start of the year,

despite mostly negative news flow. We expect the same robust pace to be

maintained in 2019. Downgrades to our growth forecasts in Africa and Latin America

have been countered by our upgraded US forecasts, which are premised on the

‘sugar rush’ from fiscal stimulus. The euro-area economy is on track to keep growing

above trend (2.0% in 2018). We expect China’s policy response to help its economy

weather the US-China trade war, growing 6.6% in 2018 and 6.4% in 2019. But while

global growth and trade have been resilient so far, negative tail risks to our forecasts

have increased since the start of 2018 – when we were already cautioning to

‘Beware of the Dog’. A number of risks are bubbling beneath the surface.

Global growth resilience so far contrasts with a steady flow of negative news for

longer-term growth: the escalating US-China trade war; a break higher in oil prices;

and mounting external pressure on emerging markets with twin deficits, which has

forced more aggressive monetary tightening in these economies. The end of the QE

era is also part of the story this year, but trends in the USD and US monetary policy

are just as important for emerging markets with twin (fiscal and current

account) deficits.

Given the stronger cyclical performance of the US economy, we recently raised our

forecast for the terminal federal funds target rate (FFTR) to 3.5% at end-2019 (from

3.0%). We expect this to be reached at the current gradual pace of +25bps per

quarter. US labour-market tightness has reached a point where it should start leading

to higher wage pressure and inflation, bolstered by fiscal stimulus. But even as

FOMC policy rate expectations have moved higher, US financial conditions (shown in

Figure 1) have loosened – in contrast with tightening elsewhere, notably EM Asia.

This makes us more comfortable with the view that the FOMC will continue to tighten.

Meanwhile, emerging economies have had to tighten monetary policy to counter

external market pressure from a stronger USD and widening rate spreads versus the

US. This poses longer-term risks to their growth outlook.

Figure 1: Financial conditions loosen in the US but tighten in AXJ

Bloomberg financial conditions index


US

EA

AXJ

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Jan-12 Feb-13 Mar-14 Apr-15 May-16 Jun-17 Jul-18

In the US, a tight labour market and

positive output gap should allow

the Fed to keep hiking throughout

2019

Global growth is still solid, despite

bad news on global trade, oil prices

and US policy rates

David Mann +65 6596 8649

[email protected]

Global Chief Economist

Standard Chartered Bank, Singapore Branch




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China – A pause in the deleveraging push

At the start of 2018, we saw China’s deleveraging agenda as the main driver of

weaker sentiment among domestic investors. We are now less concerned about a

slowdown in China’s growth as the authorities scale back the pace of deleveraging

and the policy mix shifts towards fiscal policy as a growth stabiliser.

The recent Politburo meeting pledged more proactive fiscal policy via tax cuts and

infrastructure spending to boost domestic demand, along with a measured pace of

deleveraging. We now see room for fiscal policy to play a much bigger role without a

revision of the 2018 budget. According to our calculation, if the budget is fully

implemented, the fiscal deficit will be 0.9% of GDP (or CNY 1.1tn) higher than last

year (see China – Growth likely to beat target with fiscal expansion).

While the People’s Bank of China (PBoC) has removed its tightening bias, we see

limited room to loosen monetary policy further. The PBoC has already provided

ample liquidity to the interbank market via reserve requirement ratio (RRR) cuts and

the medium-term lending facility. Recent remarks by PBoC officials suggest a

preference for total social financing to grow at a similar pace to nominal GDP. The

challenge, however, is to unclog the transmission mechanism in order to channel

financing to the real economy. We maintain our call that the PBoC will lower the RRR

by another 2.5ppt in total before end-2019 to prevent a tightening of the

monetary stance.

Our confidence that China’s growth will remain robust throughout 2018-19 reflects

how important the growth target currently is for policy makers. Once the 2020 target

of doubling real GDP versus 2010 levels has been achieved, there may be less

emphasis on this target and more on broader social goals such as environmental

protection and tackling systemic risks from prior leverage excesses. Given that China

is the top trading partner for most EM economies in Asia and accounts for more than

30% of global growth (using PPP exchange rates), this makes us less optimistic on

longer-term growth.

Figure 2: US growth has been the biggest positive

surprise since the start of 2018

Revisions to growth forecasts since end-2017, ppt

Figure 3: US unemployment rate has fallen below NAIRU,

but participation rate remains low

Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Consensus

-0.4

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US CN EU IN ID US CN IN EU ID

2018F 2019F

Our forecast

U3 unemployment

rate

NAIRU

Participation rate (RHS)

62

63

64

65

66

67

0

2

4

6

8

10

12

Sep-02 Sep-06 Sep-10 Sep-14 Sep-18

China’s monetary policy is likely to

remain neutral

We have long expected China’s

growth to slow in the 2020s


https://research.sc.com/research/api/application/protected/rp/api/data/render/133756



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US-China trade war – Bad news for all

The US-China trade war is a lose-lose situation given the two economies’ heavy

interdependence, in our view. US demand now accounts for 3% of China’s GDP, less

than half the 6.3% contribution in 2006. China’s contribution to US GDP has tripled

over the same period to about 1.0%, by our estimates. The US itself is the fourth-

largest contributor to the supply chain for China’s exports to the US. We estimate that

already-announced US tariffs on China, including those due to take effect in early

2019, will reduce China’s GDP growth by a cumulative 0.6ppt in 2018 and 2019.

Modest policy support should be able to counter this impact. However, if the trade

dispute escalates further in 2019, it may make a more worrying dent in

China’s growth.

There are also potential winners from the US-China trade war as other economies

step in to meet US demand diverted from China due to tariffs. The top five winners in

terms of direct exports would be Vietnam, Malaysia, Mexico, Taiwan and South

Korea. However, most of these economies are also among the five biggest losers

due their role in the supply chain for China’s exports to the US: Taiwan, Malaysia,

Singapore, Vietnam and Korea. Only Mexico stands out as an outright winner. For

the others, the key question is whether they will receive more inward investment as

manufacturers seek to diversify their production locations. Anecdotally, this already

appears to be happening on the perception that the US-China trade war is unlikely to

end soon.

We do not rule out the possibility of a ‘grand bargain’ between US President Trump

and China’s President Xi that would end tariffs and pledge further opening up,

investment and trade. The November G20 meeting, after the US midterm elections,

could provide an opportunity for the leaders to strike such a deal. A similar sudden

positive reversal was seen in Trump’s approach to North Korea earlier this year.

Barring such a deal, however, the trade situation is not looking good.

Figure 4: US economic dependence on China and foreign demand is rising

Percentage of US and China economies driven by foreign demand, WIOD

Source: World Input Output Database, Standard Chartered Research

6.3%

3.0%

0.2%0.7%

8.9%

0%

2%

4%

6%

8%

10%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

US contribution to China’s GDP

Foreign demand contribution to US GDP

China’s contribution to US GDP

China’s contribution to US GDP has

tripled over the past decade

The ‘winners’ from US demand

diverted away from China are

Vietnam, Malaysia, Mexico, Taiwan

and South Korea

We do not rule out a sudden deal on

trade before end-2018, though this

may bring only a temporary lull in

trade tensions




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Risk of an oil price shock

Sustainable spare capacity declines

Our Commodities Research team recently revised up its oil price forecasts to reflect

expectations of a decline in sustainable spare capacity by end-2018 (see Oil Notes –

This house is haunted; raising forecasts). This is partly due to the decline in supply

from Iran and Venezuela. We still see a risk that prices may overshoot the new

forecasts. We see upside risks to our average Brent price forecasts – USD 82/barrel

(bbl) for Q4-2018 and USD 78/bbl for 2019 – from the likely reduction in Iran’s

exports, other geopolitical issues, and our forecast slowdown in US supply growth.

Risks to growth beyond 2019

We see several risks that could emerge by 2019, slowing global growth.

1. Oil prices could rally beyond our expectations if supply tightens and demand

holds up better than expected. The negative growth impact would take about a

year to affect growth, according to our estimates (see Quantifying the impact of

an oil shock, 12 June 2018).

2. By 2020, China’s policy makers may feel less pressure to keep GDP growth at

today’s levels. The authorities have often repeated their commitment to double

GDP by 2020 versus the 2010 level. If this is achieved ahead of schedule, other

priorities – including tackling systemic debt-related risks or other qualitative

objectives – may be prioritised over growth, leading to a sharper slowdown than

we currently expect. Our current long-term assumption is that China’s growth will

slow to an average 5.5% in the 2020s.

3. We expect the growth boost from US fiscal stimulus to fade by 2020. This is

already reflected in our forecasts, which see US growth slowing to 1.9% in 2020.

The US-China trade war, which could potentially raise the cost of all imports

from China, poses a downside risk to growth in 2020 and beyond.

Figure 5: Reduction in spare capacity implies upside oil price risks

OPEC spare capacity, % of global demand (LHS); Brent price, USD (RHS)

Source: EIA, Standard Chartered Research

OPEC spare capacity, LHS, % of

global demand

Brent price, USDbbl, RHS

0

20

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

OPEC cuts output after start of GFC

Start of OPEC/non-OPEC production deal

Our Commodities Research team

sees upside risks to oil prices due

to tightening sustainable spare

capacity and doubts about 2019 US

supply growth








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Where we differ from consensus and why

US – We expect 25bps FOMC hikes every quarter through end-2019

We see one more FOMC hike in 2018 (in December) and four in 2019, versus the

consensus call of three more hikes between now and end-2019. The strong US

labour market and the positive output gap support this call. We believe the Phillips

curve framework (the reverse relationship between unemployment and inflation/wage

growth) still features prominently in the FOMC’s assessment of the economy, and the

consensus view on the committee is that the Phillips curve has flattened compared to

previous cycles. But a ‘kink’ – an acceleration in wage growth below a certain

unemployment level – is possible. The FOMC is likely to want to avoid this for

financial stability reasons, as it would necessitate a more forceful policy response to

contain inflation expectations. A gradual but steady pace of tightening in 2019 should

help to accomplish that aim.

China – We expect the current account to turn to a deficit in 2019

We forecast a faster deterioration in China’s current account (C/A) balance than

consensus. China reported a C/A deficit of USD 28.3bn in H1-2018, the first half-year

deficit in 18 years. The US-China trade dispute is putting the export sector under

pressure. We estimate that additional US tariffs announced so far on China-made

goods will cause China’s exports to the US (currently c.USD 520bn per year) to fall

by 10% over the next 12 months. In contrast, China’s import growth is supported by

high oil prices, reduced import tariffs on consumer goods, and policies aimed at

boosting domestic demand. As a result, we expect the C/A surplus to turn to a deficit

of 0.2% of GDP in 2019 from a surplus of 0.5% in 2018.

We see substantial room for expansionary fiscal policy this year, without requiring a

revision of the budget. We calculate a broad budget deficit of 4.6% of GDP in 2018,

higher than the actual deficit of 3.7% in 2017. (Our deficit calculations, which are based

on international standards, combine the general public budget and the government

funds budget; we think this more accurately reflects the fiscal stance than the official

budget numbers.) In other words, if the 2018 budget is fully implemented, we think the

actual deficit will be 0.9% of GDP higher than in 2017. This is equivalent to fiscal

stimulus of CNY 1.1tn. We believe the authorities are under pressure to utilise this fiscal

headroom via tax cuts and accelerated infrastructure spending. As a result, we think

the 2018 GDP growth target of 6.5% is likely to be exceeded. (Based on China’s fiscal

track record, we assume that the budget will be mostly implemented and forecast an

actual deficit of 4.2% of GDP for 2018.)

Korea – Consensus underestimates Bank of Korea’s hawkish stance

We expect the Bank of Korea (BoK) to tighten policy in November and again in 2019.

For now, the market is only focused on this year’s expected hike, with not much

expected for next year. Some market participants believe that the BoK may not be

able hike at all, since key economic indicators peaked in Q2-2018. We think this view

underestimates the BoK’s hawkish stance and is based too narrowly on weak job-

market data and low inflation. Inequality and financial stability also need to be taken

into account when assessing the BoK’s policy stance, in our view. Apartment prices

in the Seoul area have risen rapidly this year, increasing wealth inequality. The ruling

party has attributed this to low interest rates and abundant liquidity. It appears to

believe that macro-prudential policies in the mortgage market would merely divert

flows into other assets, and that liquidity therefore needs to be controlled. This is

likely to put pressure on the BoK to tighten policy. The central bank will also want to

reduce the risk of sudden capital outflows triggered by US rate hikes in order to

preserve financial stability. We expect these considerations to override concerns

about the slowing economy.

We expect two more 25bps FOMC

hikes than consensus by end-2019

China’s current account is likely to

turn to a mild deficit in 2019

Fiscal policy may provide important

support to China’s growth

We do not think the peak in Korea’s

economic indicators in mid-2018

means the end of the BoK hiking

cycle




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Indonesia – BI likely to hike more in response to widening C/A deficit

We expect the C/A deficit to surprise the market to the upside. We forecast that the

2018 deficit will widen to 3.0% of GDP, versus the consensus forecast of 2.7%.

Unfavourable commodity price movements (higher crude oil and lower palm oil

prices) are likely to weigh on the commodity trade balance. The oil and gas trade

deficit widened to USD 1.6bn in August, the highest monthly figure since 2014.

Government measures to boost the trade balance may not be implemented

immediately or have a significant short-term impact, in our view. Plans to delay

infrastructure projects, for instance, are unlikely to affect projects that are already

underway. The effectiveness of some fiscal measures – such as the higher biofuel

requirement and import taxes on selected consumer goods – will depend on the

readiness of domestic industry to substitute for imports. We believe that Bank

Indonesia (BI) will have to respond to pressure on the exchange rate with higher

interest rates – particularly with the Fed now expected to hike throughout 2019. We

now forecast 25bps rate hikes every quarter from Q4-2018 through Q2-2019.

Egypt – CBE likely to delay easing

Markets are converging with our non-consensus view that the Central Bank of Egypt

(CBE) is unlikely to respond to slowing inflation with rate cuts in 2018. Although the

CBE’s CPI inflation target for Q4-2018 (13% +/- 3ppt) remains within reach, Egypt

has seen capital outflows from its LCY government debt market amid broader EM

weakness. This is likely to be a concern for policy makers given the rise in yields and

implications for the balance of payments. As such, we expect the CBE to delay the

next 100bps cut to Q2-2019. While the CBE’s strong FX reserves have helped to

preserve Egyptian pound (EGP) stability so far, we do not rule out a reversal of

previous easing should capital outflows intensify.

Pakistan – We expect more tightening than consensus and markets

The State Bank of Pakistan (SBP) has delivered the 200bps of hikes we expected for

Q3-2018, surprising consensus expectations. However, we still think markets are

under-pricing monetary tightening ahead. We expect policy makers to agree to an

IMF programme in Q4-2018. Conditions for a potential programme are likely to

include further Pakistani rupee (PKR) depreciation to address external imbalances, in

our view. PKR adjustment amid higher oil prices is likely to pressure CPI inflation

higher. We expect the SBP to respond with another 150bps of hikes, taking the policy

rate to 10% by Q2-2019.

Chile – We think economic activity has already peaked

Economic activity data picked up strongly in H1-2018, causing the consensus growth

forecast for the year to rise. Meanwhile, Banco Central de Chile (BCCh) has recently

turned hawkish as the output gap has closed faster than expected; this has led the

market to expect the start of a tightening cycle in late 2018. We are more downbeat

on the pace of economic recovery, as we see mounting headwinds. In our view, the

factors that cushioned Chile’s growth against the decline in copper prices in H1-2018

are likely to fade in the next few months: loose monetary policy, a favourable base

effect and an election-driven boost to business confidence. We expect Chile to return

to a lacklustre growth trend, in line with increasing slack in the labour market, which

has driven down wage inflation despite high headline GDP figures. Chile is

vulnerable to the current global combination of high oil prices and low metal prices.

Given increasing downside risks to growth, we think the central bank’s inflation

concerns are exaggerated.

Higher oil and lower palm oil prices

are likely to weigh on Indonesia’s

trade balance

The consensus is moving towards

our call for no monetary easing in

Egypt in 2018

We expect Pakistan’s policy rate to

rise to 10% by mid-2019

We expect Chile’s economy to

return to softer growth amid higher

oil and subdued metal prices




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Mexico – We see the monetary policy consensus as too hawkish

We are more dovish than the consensus on monetary policy expectations for Mexico.

We think the inflation uptick is driven by higher oil prices and Mexican peso (MXN)

depreciation, which are short-term factors. Underlying inflation measures have eased

consistently (although they remain above target). Still-elevated real rates provide further

support for the MXN. Base effects and fresh food inflation pressure may prevent a

sharp slowdown in inflation in the short term, but we expect it to significantly undershoot

consensus expectations from Q2-2019 onwards. This also implies that rate cuts will be

more aggressive than consensus expectations, in our view.

Colombia – We are turning bullish

We think the market is underestimating Colombia’s growth prospects. Robust

domestic demand drove H1-2018 growth, as reflected in strong activity in the

manufacturing, construction and financial sectors. Looking ahead, the lagged impact

of the recent monetary easing cycle should provide an additional boost to domestic

demand. At the same time, we think Colombia is better positioned than Andean

peers in the current risk-off global environment. Sustainably high oil prices should

mitigate the twin deficits, a key risk to the country. The new administration has

announced a technocratic staff and a pro-business reform agenda aimed at

encouraging productivity gains and accelerating potential GDP. The ruling coalition’s

ample majority in Congress should facilitate faster approval of tax and social security

reform proposals, allowing the government to address long-standing regulatory

hurdles to investment in key sectors such as natural gas.

Figure 6: Our SVAR model results – Impact of an oil shock on GDP growth, inflation and current account/GDP

Accumulated response to a 10% shock to (rise in) real oil prices, ppt

Country GDP Inflation CA/GDP

1 year 2 years 1 year 2 years 1 year 2 years

Australia 0.28% 0.29% 0.16% 0.02% -0.19% 0.04%

Brazil 0.27% -0.05% 0.40% -0.28% 0.02% 0.02%

Canada 0.64% 0.28% 0.15% 0.05% 0.18% 0.06%

Chile 0.70% 1.53% 0.10% -0.08% -0.02% 0.13%

China 0.02% 0.02% 0.03% -0.22% 0.00% -0.02%

Czech Republic 0.85% 1.04% 0.36% 0.23% 0.01% 0.09%

France 0.40% 0.11% 0.20% 0.07% -0.13% -0.11%

Ghana 0.06% 0.57% -0.42% -1.75% -0.16% -0.34%

Hong Kong 0.99% 0.70% -0.06% -0.23% -0.42% -0.33%

Hungary 1.15% 0.71% 0.71% 1.30% -0.42% -0.31%

Japan 1.21% -0.74% 0.49% 0.07% 0.21% -0.08%

Korea 0.75% 0.02% 0.14% -0.12% -1.30% -2.55%

Malaysia 1.21% 0.49% 0.50% 0.29% 0.28% 0.27%

Mexico 1.16% 0.10% 0.14% 0.11% 0.16% 0.13%

Peru 0.83% 0.67% 0.19% 0.17% -0.05% -0.11%

Philippines 0.06% -0.14% 0.61% 0.29% -0.38% -0.16%

Poland 0.91% 0.53% 0.90% 1.80% -0.30% -0.06%

Russia 2.72% 1.84% -0.72% -0.73% 0.13% -0.29%

Singapore 1.39% 2.22% 0.53% 0.85% -1.38% -1.49%

South Africa 1.00% 1.74% 0.32% 0.41% -0.10% -0.19%

Spain 0.40% -0.49% 0.41% 0.23% -0.03% 0.05%

Thailand 0.72% -0.47% 0.77% 0.40% -0.54% -0.59%

Turkey 0.09% -1.71% 0.60% -0.24% -0.13% 0.00%

United Kingdom 0.70% 0.28% 0.22% 0.16% 0.01% 0.02%

United States 0.22% -0.28% 0.34% 0.08% -0.03% -0.01%

Indonesia 0.16% -0.06% 1.07% 2.28% -0.08% -0.01%

Negative impact

Positive impact

Source: Standard Chartered Research

Mexico’s monetary loosening may

be more aggressive than the

consensus expects as real rates

continue to support the MXN

Sustained high oil prices should

help to mitigate Colombia’s twin

deficits


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Figure 7: Global leverage heatmap (key economies) – China’s corporate debt ratio has stabilised and household debt growth is slowing; DSRs are improving for

Malaysian households but worsening for Korean, Thai and Australian households

CN IN ID KR MY PH TW TH HK SG AU JP AR BR MX ZA TR US

Economy

Overall leverage indicator ↑ ↓ ↓ ↓ ↓ ↑ ↑ ↓

Total credit/GDP 246.4↑ 137.9↓ 71.4↑ 231.3↑ 236.3↓ 104.8↑ 142.8↑ 191.2↓ 302.8↑ 320.0↑ 247.5 393.1↑ 70.2↑ 151.7↑ 85.5↑ 126.3↑ 112.8↑ 243.7

Credit-GDP growth spread (5Y avg, bps) 543.0↓ 10.8↓ 399.9↓ 176.5↓ 38.3↓ 332.6↑ -27 120.2↓ 621.3↑ 331 315.1↓ 14.2↓ 516.6↑ 337.5 545.9 238.4↓ 384.2↑ 14.2

Credit impulse indicator (%)1 28.8 12.1↓ 6.2↓ 12.2↓ 13.5↓ 12.3↑ 4.6 7.6 41.7↑ 22.4↑ 10.4↓ 6.7 17.6 9.4↓ 5.4↓ 9.4↓ 17.7 9.2

> Private non-financial Total borrowings/GDP 188.8↑ 69.0↓ 42.2 193.1↑ 185.5↓ 70.8↑ 107.2↑ 150.0↓ 302.8↑ 201.3↑ 205.5↓ 160.8↑ 19.5↑ 68.6↓ 50.9↑ 71.4↓ 84.5↑ 148.8↑

DSR 17.9↑ 8.7↓ 4.2↓ 19.8 13.1↓ 8.6↑ 10.6↑ 9.8↓ 26.0↑ 20.3↑ 20.9↓ 14.5↑ 18.2↓ 5.0↑ 8.7↑ 15.8↑ 14.9↑

– Corporates

Business borrowings/GDP 139.8↑ 53.8↓ 25.2 98.3↓ 101.3 61.4↑ 61.5↑ 72.4↓ 232.2↑ 124.7↑ 75.3↓ 103.4↑ 13.1↑ 43.9↓ 35.2↑ 38.2↑ 67.2↑ 71.9↑

Debt/equity 79.4↓ 80.5↓ 62.6↓ 49.9↓ 56.1↓ 89.1↓ 51.6↑ 67.4↓ 54.7↓ 62.8↓ 53.3↓ 61.1↓ 128.1↓ 102.3↓ 76.1↓ 47.1↓ 83.9↑ 96.1

EBITDA/interest expense 7.8↑ 4.0 8.8↑ 14.2↑ 7.8 6.0 18.9↓ 10.5↓ 13.1↑ 7.1↑ 12.7↑ 30.3↑ 4.3↑ 3.5↑ 7.1↑ 9.9↑ 4.9 8.8↑

– Household

Household borrowing/GDP 49.0↑ 15.2↑ 17.0↑ 94.8↑ 84.2↓ 9.4↑ 45.6↑ 77.5↓ 70.6↑ 76.5↑ 130.3↑ 57.4↑ 6.4↑ 24.7↓ 15.7↑ 33.2↓ 17.3↓ 76.9↓

Borrowing/household income^ 112.2↑ 15.3↑ 29.9↓ 180.7↑ 194.3↓ 16.6↑ 71.5↑ 171.1↑ 176.3↑ 197 188.6↑ 129.5↑ 41.2 71.2↓

104.4↑

Debt service ratio (DSR) 12.3↑ 2.1↑ 4.8↓ 17.8↑ 20.5↓ 1.9↑ 6.4↑ 19.9↑ 16.0↑ 19.0↓ 20.7↑ 10.8

9.1↓

10.3↑

> Government Government debt/GDP 57.6↓ 68.9↑ 29.2↑ 38.2↑ 50.7↓ 34.0↓ 35.6↓ 41.2↓ 0.1↓ 118.8↑ 42.0↑ 232.3 50.7 83.1↑ 34.6 54.9↑ 28.3 94.9

Int. payments/govt revenue 7.2↑ 22.2↓ 11.7↑ 4.4↓ 12.5↑ 13.9↓ 4.2↓ 3.9↓ 0.0 0.0 4.3↑ 5.6↓ 10.2↑ 21.3 9.5↑ 9.8↑ 5.9↓ 7.7

> Private financial Tier 1 capital adequacy ratio 11.1 11.0↑ 22.7↑ 13.8↑ 14.3↑ 12.7↓ 11.8↑ 15.1↑ 16.6↑ 15.4↑ 12.4↑ 14.2↑ 14.5↑ 14.2↑ 15.4↑ 14.1↑ 13.5↑

Non-performing loan (NPL) ratio 1.7↑ 10.0↑ 2.6↓ 0.9↓ 1.5↓ 1.6↓ 0.3 3.1↑ 0.7↓ 1.4↑ 0.9↓ 1.2↓ 3.6 2.1↓ 2.8↓ 2.8↓ 1.1↓

External debt

Non-financial sector external debt/GDP 5.1↓ 14.4↓ 32.2 13.0↓ 42.0↓ 16.3↓ 31.1↓ 20.2↓ 92.5↑ 86.1↑ 45.2↓ 45.2↑ 32.8↑ 15.5↓ 36.3 31.9↑ 31.7↑ 71.4

Total ext. debt (incl. fin. sector)/GDP 11.7 20.1↓ 35.2↓ 23.9↓ 65.0↓ 21.9↓

27.9↓

93.5↓ 72.9↑ 33.8↑ 22.2↓ 38.5 38.9↑ 53.8↑ 86.7

FCY share of total external debt# 61.0 63.7↓ 79.0 73.5↓ 66.0 97.2

66.8↓

87.7↓ 74.5 75.5↑ 43.8 93.8

Non-financial sector external debt/FX reserves 0.2↑ 0.9↓ 2.5↓ 0.5 1.4 0.6↓ 0.4 0.5↓ 0.7↑ 1.0

4.1↓ 0.8↓ 2.5↑ 2.8↑ 3.1↑

↓ Slower ↑ Faster

Low Moderate/sustainable High

Note: Cell colours indicate leverage and potential stress. Arrows measure metrics growth with respect to trend. Metrics growing faster than their 3YMA are identified with an upward arrow (↑); those growing slower than the 3YMA are marked with a downward arrow

(↓); thresholds for ‘faster ()’ and slower ()’ are 3YMA +/- 0.5 standard deviations.

All numbers are as of end-2017

*The difference between 5Y CAGR of credit growth and 5Y CAGR of nominal GDP growth. A difference of more than 500bps is our threshold for a red flag 1 Indicator of incremental debt required to generate a unit of GDP

**Household disposable income is provided for CN, IN, KR, AU, BR, ZA and US #FCY share, as a % of gross external debt position

Source: Bloomberg, CEIC, BIS, IMF, national sources, Moody’s, Standard Chartered Research



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Figure 8: Historical evolution of G7 debt by sector;

government leverage is the main contributor

G7 economies, % of GDP

Figure 9: Historical evolution of EM Asia debt by sector;

corporate sector is the main contributor

EM Asia economies, % of GDP

Source: Bloomberg, BIS, CEIC, national sources, Standard Chartered Research Source: Bloomberg, BIS, CEIC, national sources, Standard Chartered Research

Figure 10: Historical evolution of AXJ debt by sector;


AXJ economies, % of GDP

Figure 11: Historical evolution of China’s debt by sector;


China, % of GDP

Source: Bloomberg, BIS, CEIC, national sources, Standard Chartered Research Source: Bloomberg, BIS, CEIC, national sources, Standard Chartered Research

Figure 12: Corporate debt is generally a significant portion of total debt

Debt distribution by sector, % of total debt

Source: BIS, Bloomberg, national sources, Standard Chartered Research

Corporate

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Dec-09 Dec-11 Dec-13 Dec-15 Dec-17

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HK SG RU TR PH CN FR TW MY KR EA MX IN TH ES ID UK DE AU ZA US IT BR JP AR

Government Households Corporates




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Figure 13: South Africa, Turkey flash more reds than other EM; Argentina, Malaysia EVIs stand out

Global external debt heatmap – Summary of selected EM economies

IN ID MY PH TH AR BR MX ZA TR

Current account/GDP (%) -1.9 -1.7 3.0 -0.8 10.6 -5.1 -0.5 -1.7 -2.4 -5.2

Fiscal balance/GDP (%) -6.9 -2.5 -3.0 -2.2 -3.5 -1.0 -8.9 -1.1 -4.4 -2.1

Non-financial sector external debt/GDP 14.4↓ 32.2 42.0↓ 16.3↓ 20.2↓ 32.8↑ 15.5↓ 36.3 31.9↑ 31.7↑

Total Ext. debt (incl fin. sector)/GDP 20.1↓ 35.2↓ 65.0↓ 21.9↓ 27.9↓ 33.8↑ 22.2↓ 38.5 38.9↑ 53.8↑

FCY share of total external debt (%) 63.7 79.0 66.0 97.2 66.8↓ 87.7↓ 74.5 75.5↑ 43.8↓ 93.8

External debt/FX reserves 0.9↓ 2.5↓ 1.4 0.6↓ 0.5↓ 4.1↓ 0.8↓ 2.5↑ 2.8↑ 3.1↑

M2/FX reserves 5.1↑ 3.1 4.1↑ 2.5↑ 2.9 1.8↓ 2.1↑ 2.6↑ 5.3↑ 5.2↑

Short term (<1Y) share of ext. debt (%) 42.7 16.0↓ 65.3 27.8↑ 49.1 33.5 20.5 14.9↓ 28.7 39.7↓

Private sector share of ext. debt 70.2↓ 43.9↓ 62.4↑ 37.2↓ 67.5↓ 20.6↓ 36.7 52.1↑ 37.9↓ 63.7↑

Moody's External Vulnerability Indicator 70.6 49.5↓ 146.5↑ 26.4↓ 42.9↓ 164.7↓ 43.4↓ 47.5↓ 94.9↑ 188.6↑

Note: Cell colours indicate leverage and potential stress. Arrows measure metrics growth with respect to trend. Metrics growing faster than their 3YMA are identified with an upward arrow (↑);

those growing slower than the 3YMA are marked with a downward arrow (↓); thresholds for ‘faster ()’ and slower ()’ are 3YMA +/- 0.5 standard deviations.

All numbers are as of end-2017

Source: Bloomberg, CEIC, BIS, IMF, national sources, Moody’s, Standard Chartered Research




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Global charts Figure 14: 2018 growth forecasts are above 10Y averages for advanced economies, below for developing economies

G20 GDP growth, % y/y


Figure 15: Global inflation is likely to stay benign, generally below 10Y averages

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Figure 18: Estimated rise in exports from China’s competitors due to US tariffs

on China; USD bn (LHS), % of GDP (RHS)

Vietnam, Malaysia and Mexico may

benefit the most as US buyers

source from alternative countries

to China

Source: CEIC, Standard Chartered Research

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Figure 17: Who would be indirectly affected if the US stopped all imports from China?

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Figure 19: Impact on Asia of a 1ppt change in y/y growth in the major economies (2005-17 sample)

Impact on % y/y GDP growth (accumulated response after one year)


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US midterms – A looming risk for Trump

Potential stakes – Impeachment, paralysis, trade policy

US voters will choose members of both houses of Congress (Senate and House of

Representatives) in the midterm elections on 6 November. The midterms are

increasingly being framed as a referendum on President Donald Trump and the

Republican majority in Congress.

Midterm elections, which are held two years into the four-year presidential term, are

often a concern for the sitting president. The president’s initial ‘grace period’ has

ended and his party typically loses seats. The stakes in the upcoming midterms may

be the highest in decades given the growing polarisation of the US electorate and the

turmoil surrounding Trump during his first two years in office. In an August interview,

Trump himself hinted at the possibility of impeachment should the Democrats win

control of the House – possibly a tactic to motivate Republican voter turnout. A key

determinant of the election outcome will indeed be turnout, which is generally weak

for midterms.

Even if the Democrats win the House – they are currently leading in polls – we think

the chances of Trump’s removal from office through impeachment are low. But the

stakes for Trump’s presidency are still high. Should the Democrats regain control of

the House, we see two key outcomes: (1) Congress could open a series of

investigations into Trump and his associates, backed by the power to issue

subpoenas. This could consume the White House and its ability to efficiently conduct

policy; meanwhile, a split Congress would compound the traditional legislative

gridlock, potentially leading to further paralysis. (2) The president’s trade agenda

could be challenged – either directly through efforts by Congress to regain authority

over trade, or due to a changing cost/benefit analysis of trade wars.

Figure 1: Democrat lead over Republicans has averaged c.8ppt since the start of 2018

Generic ballot for the midterms – Poll readings, % (LHS); Democrat lead (shaded in blue), ppt (RHS)

Source: FiveThirtyEight, Standard Chartered Research

Democrat lead (RHS)

Democrats

Republicans

Average Democrat lead (RHS)

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

Philippe Dauba-Pantanacce +44 20 7885 7277

[email protected]

Senior Economist, Global Geopolitical Strategist

Standard Chartered Bank

Midterms always tend to be difficult

for the sitting president; this time,

the stakes are even higher

for Trump

Democrat control of the House

could unleash multiple

investigations




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Midterms are never good for sitting presidents

The US midterms on 6 November will elect the full House of Representatives

(435 seats) and 34 of the Senate’s 100 seats.

The midterms are widely seen as a referendum on Trump and the Republican Party’s

majority in Congress. Republican voters’ support for Trump is consolidating. His approval

rating within the party has been hovering around 90%, and averaged 87% in September

(Gallup poll tracking). However, Republicans’ share of total voting intentions has eroded,

according to polls. Current polls suggest that the Democrats are likely to regain control

of the House, while the statistical odds favour the Republicans retaining control of

the Senate.

We think that turnout will be the decisive factor in these elections. The president’s party

typically loses seats in midterms, and this is likely to be the case in November; the

question is whether these losses will be enough for the Democrats to win control of either

chamber. The Democrats need to gain 24 seats to take the House (435 seats in total). In

the Senate (100 seats), of the 34 seats at stake, the Democrats are defending 26, while

the Republicans are defending eight; so the statistical risks are unfavourable for the

Democrats. Furthermore, of these 26 Democratic seats, 10 are in states that Trump won

in 2016, half of them by a wide margin.

The ‘generic ballot’ average of polls – which ask voters if they will vote for Democrats or

Republicans for Congress and is historically a good indicator of the House result – shows

an average Democrat lead of c.8ppt since the start of 2018 (Figure 1). As of 24

September, FiveThirtyEight, which specialises in analysing opinion polls, indicated 49.4%

for Democrats against 40.9% for Republicans.

In the current highly polarised political environment, turnout is likely to be a function of

how strongly Democrats seek to express their disapproval for Trump’s agenda, and

how strongly Republicans seek to express their approval. Which side can get more

supporters to polling stations on election day will be the key determinant of

the outcome.

US elections tend to have low turnout compared with other OECD countries. Just over

half (55%) of eligible voters cast ballots in the 2016 presidential election; on average,

turnout for midterms is about one-third lower than for presidential elections. The 2014

midterms had the lowest participation rate in 72 years, at 36%. A recent study by

FiveThirtyEight (‘Do Republicans Really Have a Big Turnout Advantage in Midterms?’)

showed that Republicans tend to have slightly higher turnout than Democrats in

midterms on average, although this advantage is less clear if the GOP already holds

the White House.

Could the midterms alter trade policy?

We think the midterms could weaken Trump’s trade agenda, regardless of who

controls Congress. There have already been some initiatives from within Congress –

including by Republican lawmakers – to restrain the president’s power on trade. We

think these efforts are likely to gain strength after the midterms. If Democrats take

control of the House, they might be able to push through legislation to curb Trump’s

trade powers. Meanwhile, Republican lawmakers who oppose Trump’s trade stance

are likely to be more emboldened to challenge it once the political exigencies of the

midterms are out of the way. This would increase the chances of a bipartisan effort to

rein in the Trump administration’s trade policies. We also think that as the economic

cost of trade wars increases, so will the political cost – incentivising lawmakers to

push for a change.

Polls have shown a consistent lead

for Democrats in the House since

the start of the year




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As part of his ‘America first’ approach, Trump has undermined the US’ most

important trade relationships and rejected the free-trade principles that have

traditionally been a cornerstone of Republican policy. Examples include imposing

tariffs on China and other trading partners; and withdrawing the US from the Trans-

Pacific Partnership (TPP), which was seen as a crucial element of US geopolitical

and commercial engagement with Asia.

While the president has the authority to negotiate international trade agreements,

Congress has sole constitutional authority over “the regulation of foreign commerce

and the imposition of tariffs”. In past decades, lawmakers have given presidents

special authority to negotiate trade deals within established parameters – notably in

the 1974 Trade Act. But the way this power is exercised by the president could be

challenged in courts, according to Jennifer Hillman, a Georgetown University law

professor and former WTO appellate judge.

Congressional pressure

Republicans have been at the forefront of initiatives to constrain Trump’s authority on

trade. The failure of these initiatives to gain traction may be partly explained by politics

– confronting Trump ahead of the midterms could anger his support base. This may

change after the midterms, given the conviction among many Republican lawmakers

that the party should continue to stand for free trade and that the president’s powers in

this sphere should be checked. In a recent media interview with Foreign Policy

magazine, Gary Hufbauer of the Peterson Institute for International Economics said, “I

think we’re getting closer to where Congress reasserts its authority on trade”.

In June, Bob Corker – a prominent Republican senator from Tennessee who has

been a vocal Trump critic and is not running for re-election – authored a bill that

would reform the 1974 Trade Act to remove the president’s unilateral authority on

trade and require congressional approval of all tariffs on national security grounds.

The Republican leadership did not bring the bill to a binding vote. In July, the Senate

backed another non-binding provision to give Congress more say on trade policy. It

was adopted with overwhelming bipartisan support of 88 votes to 11 (the Senate’s

current composition is 51 Republicans and 49 Democrats). Even if such a bill were to

pass, Trump could veto it; but it could precipitate a stand-off between the legislative

and executive branches.

Since the start of Trump’s presidency, there have been numerous calls – including

from Republicans – to roll back the delegation of trade powers to the president. Utah

Republican Senator Mike Lee, along with other senators from both parties, began

promoting The Global Trade Accountability Act in January 2017 to curb executive

authority on trade. The bill is supported by prominent Republican donors David and

Charles Koch; in March 2018, six Republican House representatives referred a

‘companion bill’ (which mirrored the Senate bill) to the House Committee on Ways

and Means and the House Committee on Rules for further review.

Economic cost, lobbying efforts could also bring change to the trade agenda

Against the backdrop of a booming US economy, corporate tax cuts and a strong

equity market, there has been little economic pressure on Trump to change his

confrontational trade policy, particularly with regards to China. This is likely to change

as corporate lobbying pressure and economic costs gradually rise. In response to

these pressures, we believe that the US will eventually reach a deal with China on

tariffs, defusing the trade war. However, we make a distinction between the issue of

Constitutionally, Congress has sole

authority over trade; but over the

years, it has delegated some of this

authority to the president

Senators have already taken

initiatives to restore Congress’

authority on trade

A deal with China could see a

‘rebalancing’ of the trade deficit;

resolving the IP issue would be

more difficult




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tariffs and trade deficit ‘rebalancing’ on one side, and broader US-China differences

on intellectual property (IP) and technological transfers on the other. This second set

of issues is unlikely to be resolved imminently, and there is broad consensus – in US

political circles and beyond – that the US needs to be tough on China in these areas.

Concerns among US business groups are a source of mounting pressure on

Congress members to act against tariffs. Multiple organisations have criticised

Trump’s trade policy, including the National Retail Federation, the Consumer

Technology Association, the US Chamber of Commerce, the Business Roundtable,

the US-China Business Council and the National Association of Manufacturers. US

farmers have been negatively affected by China’s retaliatory tariffs on US exports of

soybeans, corn and other crops, prompting the Trump administration to announce a

USD 12bn bailout programme.

Farmers’ reaction was of particular concern to Republican lawmakers. Bloomberg

reported that “"the package has offended the sensibilities of many farmers who

supported both Trump and a party that historically champions small government and

free trade". Quoting Dave Struthers, a soy farmer affected by the tariffs, “we would

prefer trade, not aid.” In September, a coalition of the National Retail Federation and

150 organisations told the Trump administration in an open letter that “tit-for-tat tariffs

are counterproductive and so far have only produced increased costs for American

business, farmers, importers, exporters and consumers.”

Economic costs – in terms of both corporate profits and jobs – are likely to surface

gradually as tariffs remain in place. Companies may increase their lobbying efforts

before that happens; this was a theme of our recent conversations with US corporate

clients. Analysis of previous US tariff episodes shows that they have destroyed jobs

and incurred costs for the economy as a whole. A widely cited 2003 study by

consulting firm Trade Partnership Worldwide found that steel tariffs imposed by the

G.W. Bush administration in 2002 cost 200,000 US jobs (more than total US steel

industry employment at the time). One in four job losses was in the steel-making

industry itself, while there were many more in steel-consuming industries. The report

also mentioned USD 4bn in lost wages in only nine months. A 2012 study by the

Peterson Institute for International Economics showed that President Obama’s tariffs

on China-made tyres in 2009 saved 1,200 jobs at the distorted cost of USD 900,000

each, and caused 2,500 job losses in retail due to higher prices.

Trump’s tariffs may come at a higher economic cost than previous episodes. The Tax

Foundation – a public non-partisan US tax policy analysis institute – estimates that

tariffs announced and enacted as of 18 September would eventually result in half a

million job losses, a 0.38% drop in US wages, and a total loss of USD 148bn of GDP,

corresponding to a 0,59% decline in long-run GDP. Eventually, the political benefit of

‘standing up to China’ to appeal to parts of the Republican base might be outweighed

by the economic cost of such policies and pressure from corporate America.

Studies have consistently shown

that tariffs end up costing

many jobs

Trump’s trade policies face growing

opposition from corporates and

other interest groups




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‘Investigation fever’ could bring paralysis

The US legislative system is structurally prone to gridlock. Democrat gains in the

midterms would exacerbate this – a Democrat-controlled House would likely move

forward with a series of subpoena requests that have been blocked by the current

Republican-controlled House. Trump and his associates (and former associates)

already face numerous investigations, claims and other potential litigation (see

Figure 2 for a summary).

If the Democrats gain control of the House, they will gain the power to issue

subpoenas. Subpoena power was granted to Congress to oversee the executive

branch. The Republican majority turned down 52 subpoena requests between the

start of Trump’s presidency and July 2018, according to Democrats on the House

Committee on Oversight and Government Reform. Michael Volkov – a former Deputy

Assistant Attorney General in the Department of Justice and legal counsel to the

Senate and House Judiciary committees – told CNBC, “All of these incidents that

have been a blur for us in terms of the news cycle are going to turn into inquiries”.

Even so, impeachment remains an unlikely prospect, as we explained in a recent

report. The Republicans are likely to retain control of the Senate; even if they lost

control, two-thirds of senators would ultimately need to vote to remove Trump – a

highly unlikely scenario. Even so, a proliferation of congressional inquiries would

likely divert time and energy from policy making for both the president and Congress.

This could further paralyse the legislative agenda in a Congress already gridlocked

by partisanship.

Figure 2: Legal challenges* to Trump and his associates (or former associates)

Investigation/event Lead

Investigation of possible collusion with Russia’s alleged interference in the 2016 presidential campaign Special counsel Mueller

Investigation of Paul Manafort, Trump’s former campaign manager, on “matters that may arise directly” from the Mueller investigation

Special counsel Mueller

Manafort was convicted on 21 August 2018 on eight counts. On 14 September he pleaded guilty to additional charges and agreed to cooperate with Mueller's investigation on “any and all matters”.

US District Court, special counsel Mueller

The New York Times reported in July that Mueller was looking into possible obstruction of justice related to Trump’s firing of FBI chief James Comey, based on Trump’s tweets

Special counsel Mueller

Michael Cohen, Trump’s former personal lawyer, pleaded guilty on 21 August to tax evasion, bank fraud and illegal campaign contributions “at the direction of a candidate for federal office”

New York federal prosecutors

Probe into whether people working at the Trump Organization broke campaign finance laws in relation to hush-money payments – ahead of the 2016 elections – to two women who claimed they had affairs with Trump.

US Attorney for Manhattan

Enquiry into alleged collusion with Russia during the 2016 presidential campaign (separate to Mueller’s investigation)

Senate Judiciary Committee

Investigation of Trump and three of his children for possible breach of fiduciary responsibilities related to the use of Trump’s charitable foundation to settle personal debts, benefit Trump's business, and boost his presidential campaign in violation of the state tax code

New York Attorney General

Linked to the above, a separate investigation of possible violation of the New York state tax code; could lead to a criminal referral for possible state prosecution

New York’s tax agency

Summer Zervos, a former contestant Trump’s The Apprentice TV show, is pursuing a defamation case arguing that he denied her allegations of sexual harassment

New York Judge Jennifer Schecter

*Not an exhaustive list; Source: Bloomberg, Standard Chartered Research

If the Democrats win the house,

they will gain subpoena power –

and would likely use it

Even with a proliferation of

investigations under a Democrat-led

House, Trump’s removal from office

by impeachment would be unlikely





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The US legislative system structurally fosters gridlock, as we explained in our Special

Report on the 2016 US presidential elections, but it has worsened substantially in

recent years. The authors of the Constitution created a gridlock-prone system in

order to encourage compromise. The Senate typically relies heavily on supermajority

(two-thirds majority) procedural votes, which are now virtually non-existent given the

disappearance of bipartisanship and ideological overlap in recent decades (see

Figure 3). Senators now tend to vote strictly along party lines.

We see the November midterms bringing significant changes to Washington,

particularly if the Democrats regain control of the House as expected. The executive

branch could be bogged down in multiple investigations, the risk of legislative

gridlock would increase, and Trump’s trade-war policy – particularly in the case of

China – is likely to be directly challenged.

Figure 3: Ideological overlap in Congress has disappeared in the past 30 years

Voting records show that the number of Congress members who shared votes

across the aisle has fallen to close to 0 since 1982

Source: National Journal analysis of voting records as reported by Mehlman Vogel Castagnetti; Standard Chartered Research

75%: 402 members

53%: 286 members

27%: 144 members

2.5%: 13 members

0.7%: 4 members

1982

1994

2002

2012

2013

Most liberal Republican Most conservative Democrat

Republican

Democrat

A more likely scenario is legislative

paralysis amid partisan politics




Economies – Asia



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Asia – Top charts Figure 1: GDP growth was firm in H1-2018

GDP, % y/y

Figure 2: China has stayed a key driver of exports in 2018

Share of increase in total exports accounted for by China (%)

Source: CEIC, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Figure 3: Inflation is a concern in Philippines, Indonesia

Inflation (% y/y)

Figure 4: Real policy rates have fallen on higher inflation

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Source: Bloomberg, Standard Chartered Research Source: Bloomberg, CEIC, Standard Chartered Research

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Figure 6: Indonesia, India, Philippines have twin deficits

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Source: Bloomberg, Standard Chartered Research Source: Bloomberg, CEIC, Standard Chartered Research

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Asia – Macro trackers Figure 1: USD export growth – Exports have moderated in 2018 from 2017 levels, with PH exports slowing significantly

Shades of green (or red) indicate better (worse) growth compared to the past three years; darker shades show a stronger signal


Figure 2: Local-currency export growth – Exports are softening for most of Asia, in line with our expectations

Shades of green (or red) indicate better (worse) growth compared to the past three years; darker shades show a stronger signal


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Figure 4: Headline inflation – Picking up across Asia, driven by higher global crude prices and weaker currencies

Shades of green (or red) indicate higher (lower) inflation compared to the past three years; darker shades show a stronger signal


Figure 5: Food inflation is still soft across most of Asia; sharply higher in the Philippines, Hong Kong



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ASEAN

2017 20182013 2014 2015 2016

Figure 6: Energy inflation is rising as the low base effect dissipates amid higher global crude prices



JP Highest

KR

CN

HK

TW

ID

MY

PH

SG

TH

AU

IN Lowest

NE Asia

Greater

China

ASEAN

2017 20182013 2014 2015 2016




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Australia – Boiling frog?

Economic outlook – Slow burn

We expect steady growth of 3.1% in 2018. Domestic consumption is likely to

support growth in the near term but edge lower in the medium term (see Australia –

Slow burn). High household leverage, subdued wage growth and declining housing

equity are headwinds to household consumption. While we expect job-market slack

to be reduced further in H2, wage growth is likely to stay subdued (despite the

minimum wage hike), keeping inflation low. We expect the Reserve Bank of

Australia (RBA) to keep policy rates unchanged until February 2020, when we

forecast a 25bps hike. Hurdles to a policy rate move in either direction remain high.

Retail trade is likely to remain lukewarm given moderate wage growth and continued

price pressure from increased competition. We also expect private investment to stay

subdued, well below the 2010 highs, despite low interest rates. Business investment

in the non-mining sector is likely to remain steady. Mining capex should edge mildly

higher on increased investment in LNG; we see limited near-term upside for iron ore

and coal mining capex, although it has likely bottomed. The latest quarterly survey by

the Australian Bureau of Statistics estimated total investment at AUD 102bn in FY19

(year ending June 2019); we expect annual investment of close to AUD 100bn for the

next few years.

We expect steady job creation in H2-2018 – faster than in H1 but slower than in

2017. Wage growth is likely to edge higher in H2, supported by the minimum wage

increase. We estimate that the 3.5% increase translates into a 0.2ppt boost to wage

growth, which we think is a better indicator of Australia’s labour market than job

creation (see Australia – Look for wage growth, not job creation). The unemployment

rate is likely to decline; demand for skilled labour should continue to rise, compared

with more slack in the unskilled labour market. Job creation was steady in January-

August 2018, with 175,000 jobs created, 105,000 of them full-time.

We expect inflation to remain low in H2-2018, picking up slightly to 2.1% y/y from

2.0% in H1 (average numbers). Inflation was below expectations for a seventh

consecutive quarter in Q2-2018. We expect it to remain muted near-term given soft

wage growth and subdued retail prices. Core inflation is likely to remain well below

the midpoint of the RBA’s 2-3% target range in 2018 and 2019, and will not be a

concern, in our view.

Figure 1: Australia macroeconomic forecasts Figure 2: Growth is likely to remain steady near-term

GDP contributions, ppt; GDP, % y/y

*end-period; **for fiscal year ending in June; Source: Standard Chartered Research Source: Australian Bureau of Statistics, Standard Chartered Research

2018 2019 2020

GDP grow th (real % y/y) 3.1 3.0 2.9

CPI (% annual average) 2.1 2.5 2.5

Policy rate (%)* 1.50 1.50 3.00

AUD-USD* 0.73 0.78 0.84

Current account balance (% GDP) -2.3 -2.1 -2.0

Fiscal balance (% GDP)** -1.1 -1.0 -0.3

GDP

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Net exports

Gross private investment

Household consumption

Wage growth is likely to get a one-

off boost from the July minimum

wage hike

Chidu Narayanan +65 6596 7004

[email protected]

Economist, Asia


Mayank Mishra +65 6596 7466

[email protected]

Macro Strategist


Domestic consumption, the biggest

growth driver, is likely to soften

further near-term







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Policy – Keep calm and carry on

We expect the RBA to keep the policy cash rate on hold at 1.50% until end-2019,

hiking only in February 2020. Subdued inflation, wage growth and private investment are

the key reasons for this view, along with the uncertain external environment. Governor

Lowe has reiterated a preference for keeping policy rates low, as inflationary pressure is

likely to remain subdued for longer on weak wage growth. The risk of an earlier-than-

expected rate hike has receded, in our view; markets are now pricing in a small

likelihood of near-term rate cuts. We believe that the hurdle to a move by the RBA in

either direction is high; conditions would have to change dramatically, in our view.

Stretched household leverage, and its impact on household consumption, remains

the RBA’s key concern. The household debt-to-income ratio rose to a record-high

190% in Q1-2018, making Australian households among the most indebted globally.

Households’ interest burden has risen to 9% of income, a 4.5-year high, despite low

interest rates. While the pace of growth in housing debt has eased in recent years,

wage growth has been even slower, increasing indebtedness. Australian households

are also the most vulnerable to interest rate increases; its debt service ratio, at 21%

of disposable income, is also the highest in Asia. We see a risk that excessive

household leverage could curtail household consumption.

We expect housing prices to fall further, increasing pressure on highly indebted

households and weighing on consumption. The central bank is likely to view the

continued steady moderation in prices as positive, as it reduces financial stability risks

and boosts affordability for home buyers who have been priced out of the market.

Credit growth to housing investors slowed to a nine-year low in Q2. This, combined

with falling housing price inflation, should provide some comfort to the RBA. Lending

standards are likely to remain tight following the Royal Commission investigation into

banks. Business credit growth, however, is still subdued. Business investment is

likely to stay soft in the medium term given uncertain demand. This further supports

the argument against premature tightening.

Politics – The circus continues

Scott Morrison became Australia’s sixth prime minister in eight years in August,

following a failed coup within the Liberal Party. The Liberal-National coalition remains in

power, retaining its one-seat majority in the Senate. Federal elections are due before

18 May 2019; we expect elections to be delayed to the latest possible date as Morrison

strives to reunite multiple factions within the Liberal Party. The latest polls show that

while the opposition Labor party is favoured 54% to 46% over the Liberals, Morrison

maintains a 45% to 21% lead as the preferred PM over Labor leader Bill Shorten.

Market outlook

We expect the Australian dollar (AUD) to continue to recover from oversold levels in

the short term given bearish FX positioning and stabilising risk sentiment. The AUD

has also benefited from the recent recovery in China equities given the strong

correlation between the two. However, we do not expect AUD-USD gains to extend

significantly in the short term given the RBA’s patient stance. We forecast the pair at

0.73 at end-2018, with prices range-bound in the subsequent quarters. We expect

further gradual gains in H2-2019 ahead of RBA policy normalisation in early 2020.

We forecast AUD-USD at 0.78 at end-2019.

We expect federal elections, due

before May 2019, to be held later

rather than sooner

RBA policy rates are likely to stay

lower for longer

RBA is concerned about still-high

household leverage and its impact

on consumption




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Bangladesh – A strong year likely; risks remain

Economic outlook – Mindful of risks as polls near

Growth is likely to remain strong despite election-related uncertainty. We raise

our GDP growth forecast for FY19 (year ending June 2019) to 7.2% from 7.0%

(FY18: 7.8%). We expect higher public spending on infrastructure projects, along

with improving exports and remittance inflows, to support the economy; a fragile

banking sector and a marginal dip in private investment are headwinds to growth. We

see downside risks to our forecast from disruptions to economic activity around the

January 2019 national elections. That said, we do not expect unrest on a similar

scale to the 2014 elections, when widespread protests affected growth.

Bangladesh’s competitiveness ranking improved by seven places, to 99 out of

137 countries, in the World Economic Forum’s 2017-18 Global Competitiveness

Report. However, the infrastructure deficit remains high, and Bangladesh ranks well

below other South Asian countries on this parameter. Modernising land policy,

improving infrastructure quality and developing technological infrastructure are key

conditions for boosting competitiveness, according to the report.

While near-term growth prospects are strong, growth sustainability will depend

critically on infrastructure improvements, where progress remains sluggish. Of the

eight projects prioritised under the government’s ‘fast-track’ initiative in FY16, only

the Padma bridge is nearly 60% complete (as of June 2018), while the rest are less

than 15% complete. There are also concerns about the quality of infrastructure

spending, particularly since projects developed in past years have been prematurely

declared complete.

We expect the balance of payments to remain in deficit in FY19 and FY20 on a wider

current account (C/A) deficit, driven by changing trade dynamics and slower

remittance growth. We revise our FY19 and FY20 C/A deficit forecasts to 3.2% and

3.0% of GDP, respectively (from 2.6% and 2.5%), to reflect a wider trade deficit. The

C/A deficit widened to 3.3% of GDP in FY18 as a c.25% rise in imports – mostly

capital goods related to infrastructure projects – caused the trade deficit to nearly

double to USD 18.3bn; export growth was modest at 6%. We expect these drivers to

remain unchanged in the near term as the government speeds up infrastructure

projects. Higher oil prices are also likely to keep the import bill high.

Figure 1: Bangladesh macroeconomic forecasts Figure 2: Higher imports put pressure on the trade deficit

% y/y, 3mma

Note: Economic forecasts are for fiscal year ending in June; *end-December;



FY18 FY19 FY20



Policy rate (%)* 6.00 6.00 6.00

USD-BDT* 86.00 90.00 92.00


Fiscal balance (% GDP) -4.0 -4.5 -5.0

Imports

Exports

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Growth is likely to remain strong in

FY19, but inadequate infrastructure

remains a concern

Saurav Anand +91 22 6115 8845

[email protected]

Economist, South Asia

Standard Chartered Bank, India

Nagaraj Kulkarni +65 6596 6738

[email protected]

Senior Asia Rates Strategist


Divya Devesh +65 6596 8608

[email protected]

Head of ASA FX research


We revise our C/A deficit forecasts

wider and expect the BoP to remain

in deficit in FY19 and FY20




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We expect overseas remittances to grow 8% in FY19 on higher crude oil prices, even

as the boost from increased transfers via official channels fades. Remittances grew

17% in FY18 as the government introduced measures to boost remittance flows via

official channels.

Policy – Bangladesh Bank to maintain status quo in FY19

Monetary indicators are broadly in line with Bangladesh Bank targets. We

expect the central bank to remain on hold in FY19. Average inflation is likely to be

only marginally above the target band of 5.4-5.8% (we forecast 6.0%), and private-

sector credit growth should remain at 16% – roughly in line with the 16.8% target.

A key reason for our status-quo policy view is that FY18 growth in money supply

(reserve money and broad money, or M2) was significantly below the target set

under the monetary programme, and we expect this to persist. This should offset

factors such as improving liquidity conditions following April policy rate cuts, elevated

inflation expectations, exchange rate pressure, and rising global interest rates.

Bangladesh Bank is working to upgrade its monetary policy framework. It currently

operates a quantity-based policy regime, aiming to keep broad money growth in line

with its inflation objective. It plans to move towards interest rate targeting over the

medium term to strengthen the monetary policy transmission mechanism. The new

regime is likely to emphasise (1) the importance of price stability as the central

bank’s primary objective, (2) the need for greater exchange rate flexibility to enhance

monetary policy autonomy, (3) the further development of financial markets, and

(4) the need for better forecasting of banking and government sector liquidity.

The banking sector remains plagued by high NPLs and deteriorating capital

adequacy. Banking sector NPLs are high at 10.8% of total loans; this does not

include restructured and rescheduled loans, which would increase the ratio

significantly. Capital adequacy for some banks is still below Basel III requirements,

and the likelihood of full Basel III implementation by 2019 appears low. The situation

is acute for state-owned banks, which have an NPL ratio closer to 30% and a

provisioning shortfall of c.0.4% of GDP.

Politics – Parliamentary elections in the limelight

Parliamentary elections are scheduled for late December 2018 or early January

2019. While there were sporadic demonstrations in early 2018, widespread and

violent protests like those around the previous election in January 2014 have been

avoided so far. Underlying tensions remain, however, and the risk of political unrest

could increase. Opposition demands for the release of opposition leader Begum

Khaleda Zia before the national elections and for the holding of the elections under a

neutral government are unlikely to be met. This could lead to rising tensions as the

election approaches in Q4.

Market outlook – BDT depreciation to continue

We maintain our Neutral outlook on BDT bonds. A combination of negative real

policy rates and rising crude oil prices (and their inflationary impact) should push

yields higher.

We expect continued depreciation pressure on the Bangladeshi taka (BDT) as a

result of a wider C/A deficit amid higher oil prices. We target USD-BDT at 86 at end-

2018 and at 90 at end-2019.

Bangladesh Bank is working on

upgrading its monetary policy

framework

Political unrest is likely to increase

in the run-up to elections

Bangladesh Bank is likely to keep

rates on hold in FY19




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China – Risks contained, despite downtrend

Economic outlook – Still no spark

As growth continues to slow, investor confidence remains low. China’s

economy is likely to lose further momentum in the coming months amid rising trade

tensions with the US and slowing housing-market growth. We expect GDP growth to

moderate to 6.5% y/y in Q3-2018 and 6.4% in Q4, from an average of 6.8% in H1.

For the full year, we forecast growth of 6.6%, down from 6.9% in 2017.

The contribution of investment to China’s GDP growth has fallen to 29% from 54%

five years ago. Fixed asset investment (FAI) remains sluggish; it grew only 0.9% y/y

in real terms in August, following 2.2% growth in Q2. Manufacturing investment

growth has stabilised. Large manufacturers, having benefited from China’s capacity

reduction campaign over the past two years, are now seeing decent profit growth and

rising capacity utilisation rates. However, tightening local government financing

conditions have squeezed infrastructure investment – it contracted 4.3% y/y in

August, compared with 20% growth in the past five years.

We expect the housing-market slowdown to last through early 2019 (see China’s

housing market outlook 2018-19 – Still sluggish). Growth in housing floor space sold

slowed to 2.8% y/y in August from an average 8.4% over the previous three months.

Headline growth in new housing starts and housing investment may look robust, but

mainly reflects strong land sales rather than actual construction activity (Figure 2).

The China Developers Sentiment Index (CDSI), based on our survey of developers,

dropped to a record low of 38.5 in mid-2018 due to strict property controls (see China

developer survey – Gloomiest ever).

Consumption is playing an increasing role as a growth stabiliser, contributing 71% of

GDP growth in H1, up from 46% five years ago. We expect decent household

consumption growth to continue in the coming months, reflecting a stable labour

market. The Individual Income Tax (IIT) revision bill passed in August, which lowers

the general tax burden on the public, may also boost consumption by 0.26% of GDP

in 2019 (see China – New tax reform favours low-income groups).

Inflation is gradually rising, in line with our expectations. CPI inflation edged up to

2.3% y/y in August – the highest in six months – from 2.1% in July. Food inflation

accelerated on a moderation in pork deflation and higher vegetable prices. Pig supply

Figure 1: China macroeconomic forecasts Figure 2: Housing investment inflated by land purchases

Breakdown of housing investment, % y/y, 3mma

*end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 1.50 1.50 1.50

USD-CNY* 6.92 6.82 6.53

Current account balance (% GDP) 0.5 -0.2 0.0

Fiscal balance (% GDP) -4.2 -4.0 -4.0-30%

0%

30%

60%

90%

120%

Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

Land purchase FAI

Construction FAI

Wei Li +86 21 3851 5017

[email protected]

Senior Economist, China

Standard Chartered Bank (China) Limited

Shuang Ding +852 3983 8549

[email protected]

Chief Economist, Greater China and North Asia

Standard Chartered Bank (HK) Limited

Eddie Cheung +852 3983 8566

[email protected]

Asia FX Strategist


Rising inflation is not a near-term

policy concern

Lower individual income tax could

boost personal spending

The downtrend in the housing

market continues









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tightened because of a swine fever outbreak and slower production due to hot

weather, leading to an increase in pork prices. Non-food inflation inched higher due

to rising fuel, rental and travel prices. We maintain our CPI inflation forecast of 2.2%

for 2018, and do not expect rising inflation to become a near-term policy concern

(see China – Rising inflation is not a near-term concern).

Policy – Fiscal expansion to curtail the downside

Amid growing downside risks to China’s economy, stabilising growth has replaced

deleveraging as the government’s top near-term priority. The recent Politburo

meeting pledged more proactive fiscal policy via tax cuts and infrastructure spending

to boost domestic demand, along with a measured pace of deleveraging. We see

room for fiscal policy to play a much bigger role without a revision of the 2018

budget. According to our calculation, if the budget is fully implemented, the fiscal

deficit will be 0.9% of GDP (or CNY 1.1tn) higher than last year (see China – Growth

likely to beat target with fiscal expansion). We see this policy shift as a clear signal

that the government is committed to achieving its 6.5% growth target for 2018.

While the People’s Bank of China (PBoC) has removed its tightening bias, we see

limited room to loosen monetary policy further. The PBoC has already provided

ample liquidity to the interbank market via reserve requirement ratio (RRR) cuts and

the medium-term lending facility (MLF). Recent remarks by PBoC officials suggest a

preference for total social financing (TSF) to grow at a similar pace to nominal GDP.

The challenge, however, is to unclog the transmission mechanism to channel

financing to the real economy. We maintain our call that the PBoC will lower the RRR

by another 2.5ppt in total before end-2019 to prevent a tightening of the

monetary stance.

Politics – No easy fix for the US-China trade dispute

The US raised tariffs on an additional USD 200bn of China-made products effective

24 September, on top of USD 50bn of goods subjected to higher tariffs in July and

August. The latest US tariff increase is initially 10% and will rise to 25% from

1 January 2019. We estimate that the impact of higher US tariffs on a total of

USD 250bn of Chinese imports will subtract about 0.6ppt from China’s GDP growth,

assuming all else is equal. China retaliated by adding 5-10% tariffs on USD 60bn of

imports from the US; this could prompt the US to raise tariffs on all imports from

China. We see a slim chance that trade tensions will ease before the US midterm

elections in November. A window for negotiations may open after the election, and

we expect the two sides to strike a partial deal to prevent further escalation.

Market outlook – CNY to steady into end-2018

While trade-war headlines and monetary policy divergence will continue to weigh on the

CNY, we expect more efforts by the authorities to slow CNY depreciation and prevent a

break above the 7.0 level this year. We forecast USD-CNY at 6.92 at end-2018.

Stabilising growth has become

China’s top priority

Monetary policy is likely to remain

neutral

The impact of higher US tariffs has

been limited so far, but is likely to

rise over time







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Hong Kong – A bumpier ride

Economic outlook – Trade concerns and more

We lower our 2018 GDP growth forecast to 3.6% from 3.8%. This reflects weaker-

than-expected Q2 growth, as well as the prolonged and unpredictable US-China

trade dispute. The dispute has yet to affect Hong Kong’s exports – they grew a solid

10.0% y/y in July, higher than the H1-2018 and H2-2017 averages – but the impact is

likely to be felt later this year. SME sentiment has been similarly resilient so far; our

SME sentiment tracker for Q3-2018 remained steady at 49.7, matching the Q2 print,

which was the highest in 13 quarters. However, the headline index has failed to

break above the neutral 50 level and the ‘financial and insurance’ sub-index

underperformed (-10.6pt) – a reminder that Hong Kong’s highly open economy

remains susceptible to increased market volatility and confidence shocks amid rising

trade concerns.

The expected export slowdown and the continued rise in interest rates are likely to

weigh on growth in the coming quarters; we also lower our 2019 GDP growth

forecast to 3.0% from 3.4%. Domestic demand is likely to continue to drive headline

growth thanks to a tight labour market (the unemployment rate is at 2.8%, the lowest

in more than 20 years). Private consumption expenditure remained the biggest

contributor (+4.3ppt) to Q2 headline GDP growth (3.5% y/y), followed by net services

exports (+1.7ppt). Services exports should receive a boost from China’s fiscal easing,

possibly offsetting the negative impact of a weaker Chinese yuan (CNY) on mainland

tourists’ purchasing power in Hong Kong.

We also trim our 2018 and 2019 inflation forecasts to 2.3% and 2.4%, respectively

(both 2.5% prior). The changes reflect slower growth, as well as the likelihood of

more short-term economic relief measures from the government amid rising trade

uncertainty and China’s slowdown. That said, we expect the persistent uptrend in

housing rents and steady wage growth to provide a floor.

Policy – Draining the Aggregate Balance

More upside risk to interest rates. Hong Kong has so far weathered the Fed’s

rate-hiking cycle well, thanks to strong domestic demand and ample liquidity in the

banking system. But by repeatedly defending the 7.85 weak-side Convertibility

Undertaking for USD-HKD (in Q2 and again in August), the Hong Kong Monetary

Authority (HKMA) has drained the Aggregate Balance – a proxy for interbank

Figure 1: Hong Kong macroeconomic forecasts Figure 2: Leaning more on domestic consumption

Contributions to real GDP growth, % y/y

*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research

2018 2019 2020



3M HIBOR* 2.60 3.40 3.20

USD-HKD* 7.84 7.83 7.80

Current account balance (% GDP) 3.5 3.5 3.5

Fiscal balance (% GDP)** 1.5 1.5 1.0

Headline

-6

-4

-2

0

2

4

6

8

10

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

PCE Investment Net exports of goods Net exports of services Others

Depleting liquidity cushion means

more sensitive HIBOR movements

Kelvin Lau +852 3983 8565

[email protected]

Senior Economist, Greater China



[email protected]

Asia FX Strategist


We downgrade our GDP forecast to

reflect looming trade challenges

and higher interest rates






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liquidity – to c.HKD 76bn from c.HKD 230bn at end-Q1. This has made HIBOR

more sensitive to short-term changes in Fed expectations, IPO demand and capital

flows. The quarter-end effect also helped HIBOR close the gap with USD LIBOR in

late September. In response, local banks finally hiked their prime rates (following

the Fed’s September rate hike) to preserve margins. Mortgages are the main type

of lending linked to prime rates, and their rates can be changed at individual

banks’ discretion.

The residential property market – which has remained too strong for comfort YTD –

should finally start to respond to higher mortgage costs and prior cooling measures,

including a vacancy tax on developers. Housing prices are up 13% YTD, the same as

the full-year 2017 increase, based on the Centa-City Leading Index. Monthly

transaction volume averaged a modest 5,600 units in 8M-2018, reflecting a quiet

secondary market, but they were higher than last year’s average of 5,100 units. Hong

Kong’s overall investment growth slowed to 0.4% y/y in Q2 from 4.2% in Q1, but this

was mostly due to the 8.0% y/y drop in public-sector building and construction;

private-sector investment fell a much more benign 0.4%. Machinery and equipment

investment grew a decent 4.7% y/y in Q2. All of this suggests room for economic

growth to slow from here given rising headwinds.

HIBOR is likely to go higher as long as the US Fed keeps hiking. We revise up our

HIBOR forecasts to reflect the recent revision of our Fed call to a more prolonged

hiking cycle and a higher terminal FFTR of 3.50%, to be reached by end-2019. We

now see 3M HIBOR at 2.60%, 3.40% and 3.20% at end-2018, 2019 and 2020,

respectively (up from 2.50%, 2.90% and 2.90% prior). In the event of a bigger-than-

expected interest rate shock, the HKMA has said it will “stand ready to calibrate the

issuance of Exchange Fund Bills (EFBs)” to release liquidity back into the system. It

also has sizeable fiscal reserves to fall back on. In the meantime, we see a limited

impact on household balance sheets given that years of property-market cooling

measures have prompted a careful build-up of leverage.

Offshore Renminbi (CNH) – Not too shabby

Renminbi internationalisation has held its own. Despite CNY depreciation,

China’s slowing economy, and worsening risk sentiment towards emerging markets,

the Standard Chartered Renminbi Globalisation Index (RGI) – our proprietary

measure of international Renminbi usage – rose for a third straight month in July to

1,856. Cross-border payments contributed 3.8ppt to headline growth, the most since

January 2014. Improvements were seen across all seven of our RGI centres. This

matches the strong rebound in Renminbi trade settlement, which rose to 12.6% of

China’s total goods trade in July from 11.8% and 11.7% for Q1 and Q2, respectively.

Northbound investor flows (including via Stock Connect) are also a bright spot,

despite the extended decline in onshore stock markets. This bodes well for Hong

Kong’s continuing role as a leading CNH centre.

Market outlook – Less drag on the HKD from interest rates

We expect HKD rates to rise in the months ahead, resulting in further US-HK rate

convergence. The HKMA is likely to smooth any pick-up in interest rate volatility

resulting from a much smaller Aggregate Balance by calibrating EFB issuance.

Despite the recent HKD rebound, Hong Kong may still see outflows amid weak EM

sentiment, but interest rates will likely be a less compelling driver of USD-HKD than

before. We forecast USD-HKD at 7.84 at end-2018.

CNH activity is holding up well

so far

We revise our HIBOR forecast to

reflect our view of more Fed hikes

in 2019

Residential property market and

investment could face more

headwinds in coming quarters

Interest rates will likely be a less

compelling driver of USD-HKD





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India – Battling external headwinds

Economic outlook – Higher oil prices, weak INR pose risks

We maintain our growth forecasts amid rising external risks. We expect GDP

growth of 7.2% in FY19 (year ending March 2019), despite much better-than-

expected Q1-FY19 growth of 8.2%. We see growth moderating as (1) the favourable

base effect that boosted the Q1 reading fades in the coming quarters; and (2) higher

oil prices and a weak Indian rupee (INR) affect economic sentiment, especially ahead

of a busy election cycle starting in December 2018. While CPI inflation is likely to

stay subdued at 4.6% in FY19, we expect it to edge up to 5.1% in FY20 and see

upside risks from higher oil prices and a weak INR.

Higher oil prices are a key global risk to India’s economic outlook. We expect the

average Indian crude basket (ICB) price to spike to USD 75/barrel (bbl) in FY19 from

USD 57/bbl in FY18. A further rise in oil prices poses risks to our macro projections –

we calculate that a USD 10/bbl increase in the ICB price adds 20-40bps to CPI

inflation, 0.1-0.5ppt of GDP to the fiscal deficit, and USD 14bn (0.5% of GDP) to the

current account (C/A) deficit. Given India’s high sensitivity to rising oil prices, we

expect the C/A deficit to widen sharply to USD 80bn (3.0% of GDP) in FY19 from

USD 48bn (1.9%) in FY18. Apart from oil, which explains most of the widening of the

trade deficit so far in FY19, the sharp rise in demand for non-oil, non-gold imports –

especially electronics – is hurting India’s external balances.

Financing the widening C/A deficit is getting more challenging in a weak global

funding environment. Inflows of ‘durable’ FDI and non-resident Indian (NRI) deposits

are likely to remain at c.USD 50bn in FY19, similar to last year. This would increase

India’s reliance on volatile foreign portfolio investor (FPI) flows and debt-creating

trade flows. The balance of payments turned to an estimated deficit of USD 15bn in

April-August 2018 as FPI outflows reached c.USD 9bn and policy measures led to

trade credit outflows. We expect the BoP deficit to rise further to USD 25 bn in FY19.

This is a fundamental cause of the recent slide in the INR, which is down c.12%

since March. We forecast USD-INR at 73 at end-FY19. Further currency weakness

would pose risks to the economy, as we estimate that every 10% INR depreciation

adds 30-40bps to CPI inflation and 0.1-0.5% of GDP to the fiscal deficit.

Figure 1: India macroeconomic forecasts Figure 2: Risks to the macro outlook have materialised

Note: Economic forecasts are for fiscal year ending in March; *end-December of previous

year; **central + state governments; Source: Standard Chartered Research

^ As of 27 September 2018; * April through mid-September 2018;


FY19 FY20 FY21



Policy rate (%) 7.00 7.00 7.00

USD-INR* 72.00 75.00 76.00



56.5

3.8

43.6

65.2

6.0

7.4

73.6

4.5

-15

72.6

6.5

8.0

Oil (USD/bbl) Inflation(% y/y)

BoP*(USD bn)

USD-INR^ Repo rate(%)

Gsec-10 yr^(%)

H2-2017H1-2018

Kanika Pasricha +91 22 6115 8820

[email protected]

Economist, India



[email protected]




[email protected]



Higher oil prices and weak INR pose

risks to macro dynamics

We forecast the FY19 C/A deficit at

3% of GDP, widening from 1.9%

in FY18

C/A deficit financing poses

challenges; BoP deficit is likely

to persist




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Policy – Focus on managing external risks Policy makers are likely to stay focused on managing external headwinds that are

affecting India via higher oil prices and INR weakness. A panic response is unlikely,

as evidenced by their reaction so far. While the INR is likely to remain the principal

shock absorber, we expect the following actions to anchor market expectations.

Rate hikes: The Monetary Policy Committee (MPC) faces a challenging task. While

recent sub-4% inflation readings – likely to be sustained in the coming months – do

not warrant rate hikes, higher oil prices and INR weakness pose upside risks to

inflation in the medium term. To cushion against these risks, we expect the MPC to

deliver a pre-emptive 25bps rate hike in October, followed by another 25bps hike in

December. We also expect a shift in the policy stance to tightening from neutral.

Steps to address the widening BoP deficit: The government has announced

measures to improve capital flows; it hiked customs duties on 19 non-essential items

with imports worth INR 860bn (c.USD 13bn) in FY18. However, with the FY19 import

bill projected at c.USD 540bn, we expect only a modest (at best) reduction in the import

bill as a result of higher duties. Given challenges in financing the C/A deficit, we believe

the option of tapping USD flows from NRIs is still on the table. This would shore up FX

reserves, which have declined by c.USD 25bn in FY19 to date, with c.40% of the loss

attributed to valuation effects. Further volatility in global markets could reduce reserves

further to USD 350bn (from c.USD 400bn currently), covering only eight months of

imports. As a result, we think the Reserve Bank of India (RBI) is unlikely to intervene

aggressively to support the INR. Meanwhile, given the widening BoP deficit, the RBI will

likely be required to provide banking-system liquidity via open-market operations

(OMOs) – we estimate c.INR 1.55tn worth of OMOs by end-FY19.

Fiscal prudence: Higher oil prices pose a risk to the budgeted FY19 fuel subsidy bill

of INR 250bn (0.13% of GDP). We also see rising risks to fiscal targets from lower-

than-expected GST revenues – which averaged c.INR 950bn monthly from April-

August 2018, versus the budget target of INR 1.05-1.10tn – as well as disinvestment

proceeds and pre-election spending. However, we think the government will strive to

meet its fiscal deficit target of 3.3% of GDP in FY19 in order to preserve macro

stability. The government’s push to merge three public-sector banks is a positive step

towards the medium-term goal of banking-sector consolidation.

Politics – Busy election cycle ahead Tight races are expected in the three state elections due in December 2018, with the

ruling party facing anti-incumbency. General elections due in H1-2019 are likely to

have a lasting effect on markets. The current consensus view is that the ruling BJP

party will return to power, albeit with a slimmer majority. While more extreme

scenarios are also being considered, the lack of a credible opposition and Prime

Minister Modi’s popularity are expected to keep the BJP in power.

Market outlook We maintain our 3M Neutral outlook on Indian Government Bonds (IGBs). While IGB

valuations are attractive and banks’ participation in the secondary market has picked

up, sentiment is weak, driven by FX market volatility. Broader EM sentiment is also

weak, especially towards twin-deficit economies. With rate-hike expectations back on

the table, IGBs are unlikely to gain significantly unless EM sentiment improves.

Elevated oil prices and further Fed rate hikes will continue to pose risks to the INR,

particularly amid heightened political uncertainty ahead of elections. Any relief rally

for the INR as a result of government measures is likely to be brief. We target

USD-INR at 72 at end-2018 and 74 in mid-2019.

Fed rate hikes and higher oil prices

are likely to pressure the INR ahead

of elections

BJP is widely expected to return to

power, albeit with a slimmer

majority

The option of tapping USD flows

from NRIs is not yet off the table

We expect the MPC to hike the repo

rate by another 50bps




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Indonesia – Playing defence

Economic outlook – Still steady

We trim our 2019 GDP growth forecast to 5.1% (from 5.2%) to reflect the impact

of stabilisation measures. We keep our 2018 (5.1%) and 2020 (5.3%) growth

forecasts unchanged. Higher interest rates and fiscal measures to contain the current

account (C/A) deficit are likely to affect growth next year at the earliest. Plans to

delay infrastructure projects (in order to reduce imports) are unlikely to affect ongoing

projects. The government may have greater flexibility to adjust domestic energy

prices following next year’s election. We expect inflation to edge higher, but to remain

within the Bank Indonesia (BI) target of 3.5 +/-1ppt.

Household consumption is likely to remain stable this year, as the pass-through of

tighter monetary policy will take time. Low inflation and higher social spending should

support household purchasing power. Farmers’ terms of trade continue to increase

gradually, rising 1% y/y in August. Government consumption is likely to remain solid

this year, backed by strong revenue collection growth, at 18% y/y as of August.

Government expenditure increased 9% y/y in August (versus 6% a year earlier), led by

subsidies and social spending. Investment, however, is likely to slow in H2 amid global

uncertainty and Indonesian rupiah (IDR) volatility. Growth in FDI inflows slowed to 3%

y/y in Q2 from 13% in Q1, led by slower investment in the manufacturing, trade, and

transportation and communication sectors. We expect public investment to remain

solid, supported by existing SOE-led infrastructure projects.

We revise our 2018 (C/A) deficit forecast wider, as we expect strong import growth to

keep the trade balance in deficit. We now expect a C/A deficit of 3.0% of GDP this

year, versus 2.7% previously. We expect the oil trade deficit to linger in line with

rising crude oil prices, while the trade surplus excluding oil and gas may be weighed

down by palm oil price declines and high capital-goods imports. Government

measures aimed at reducing imports – including higher import taxes on 1,147

consumer goods, increasing the biofuel component of industrial diesel, and

prioritising crude oil sales to domestic refineries – will take effect only with a lag. The

biofuel measure, for instance, will depend on domestic palm oil production and

refinery capacity to supply biofuel. If domestic industry is slow to substitute for

imported products, the measures may be less effective and result only in lower

exports or higher domestic prices.

Figure 1: Indonesia macroeconomic forecasts Figure 2: BI offers more FX swaps to lower hedging costs

Outstanding BI FX swaps, USD bn; implied forward yield, %

*end-period; Source: Standard Chartered Research Source: CEIC, BI, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 6.00 6.50 6.50

USD-IDR* 14,600 15,000 15,100



Outstanding BI FX swaps (USD bn),

LHS Implied 1M forward minus

1M JIBOR, RHS

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

0

1

2

3

4

5

6

7

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Tight monetary policy and

stabilisation measures to have a

lagged impact on growth

Aldian Taloputra +62 21 2555 0596

[email protected]

Senior Economist, Indonesia

Standard Chartered Bank, Indonesia Branch


[email protected]



We revise up our C/A deficit

forecast for 2018 on strong import

growth




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We maintain our average 2018 and 2019 inflation forecasts at 3.3% and 3.8%,

respectively. The government’s decision to keep regulated fuel and electricity tariffs

unchanged until end-2019 is likely to limit imported inflation, offsetting the inflationary

impact of c.8% IDR depreciation this year (BI estimates that 10% IDR depreciation

increases inflation by 0.7ppt). Adequate food supply and imports have helped to stabilise

food prices. The government’s rice stock recently reached 2.4mn tonnes (equivalent to

one month’s consumption), according to recent media reports – a level perceived as

adequate to keep rice prices stable. We expect inflation to edge higher in 2019 on larger

energy price increases than in 2018. We think the government will have more flexibility

to adjust energy prices following the general election in April. We estimate that a full

alignment of fuel prices with current market prices would add 110bps to inflation.

Policy – Staying hawkish

We now expect 25bps rate hikes every quarter from Q4-2018 through Q2-2019,

versus our previous call of no change. As a result, we now expect the BI rate to end

2018 at 6.0% (5.75% previously) and 2019 at 6.50% (5.75%). Our revised call

reflects our expectation of faster Fed rate hikes and higher inflationary pressure next

year. We recently revised our Fed call to four hikes in 2019 (from two previously).

A widening C/A deficit may also prompt BI to maintain a hawkish stance, as investors

are watching the deficit closely. That said, the pace of further monetary policy

tightening is likely be gradual; BI will want to avoid over-tightening as it responds to

investor sentiment and the impact of government measures to contain the C/A deficit.

To stabilise the IDR, BI introduced has alternative hedging instruments such as

domestic non-deliverable forwards (DNDFs) and improved its swap facilities. We

estimate that BI FX swaps reached USD 4.5bn in September. With fiscal

consolidation likely to remain on track (see Indonesia – Fiscal consolidation

continues), the government is likely to focus on improving the effectiveness of

spending by prioritising productive spending in areas such as infrastructure, health

care and education; optimising tax revenue to increase fiscal space; and improving

the investment climate by providing fiscal facilities for exports and investment.

Politics – Strong start for the incumbent

VP appointment strengthens Jokowi’s re-election prospects. The nomination of

Amin Maruf, the leader of Indonesia’s largest Islamic organisation, as vice

presidential candidate is likely to strengthen President Jokowi’s position ahead of

next year’s election. Jokowi has 52.2% support among voters, compared with 29.5%

for opposition candidate Prabowo, according to a recent LSI poll. He has formed a

solid team to coordinate his election campaign, consisting of senior politicians,

military officers and private-sector representatives. Some provincial governors and

regional heads have pledged to support Jokowi’s bid for a second term, including in

regions where Prabowo won in 2014, such as West Sumatra and West Java. The

campaign period will run from 23 September 2018 to 13 April 2019, with the election

to be held on 17 April.

Market outlook – Neutral

Hedging demand from foreign investors has weighed on the IDR in recent

months, even as domestic fundamentals remain stable. Given Indonesia’s persistent

C/A deficit, renewed portfolio inflows are likely to be needed before we see stability in

USD-IDR. We forecast USD-IDR at 14,600 at end-2018.

Fiscal policy is focused on

improving spending effectiveness

BI may have to hike more to stem

the C/A deficit amid heightened

IDR volatility

Inflation is likely to stay low as the

government keeps energy and food

prices steady






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Japan – On a positive growth path

Economic outlook

The economy is on track to expand 1.2% in 2018, the seventh consecutive year

of growth. Recent data shows that the economy has remained resilient, despite

natural disasters and rising trade tensions. Business confidence was firm in Q3, a

positive sign for manufacturing capex and hiring. Corporate earnings growth

rebounded sharply to 17.9% y/y in Q2 after being broadly flat in Q1, further boosting

the outlook. Japan’s prolonged economic recovery has broadened out to consumer

spending thanks to a sanguine job-market outlook. Household disposable income

grew 4.2% y/y in 7M-2018, accelerating sharply from 1.3% for full-year 2017. This

suggests that government pressure on employers to raise wages in order to re-inflate

the economy is having an effect.

Fiscal policy is likely to remain supportive of growth. Prime Minister Shinzo Abe has

said that the government plans to deliver a supplementary budget, largely for

reconstruction and relief following recent earthquakes and flooding. Budget requests

from government agencies and ministries are likely to reach a record-high JPY 102tn

for FY19 (year ending March 2019), according to local media reports. Failure to rein

in spending could delay the government’s fiscal consolidation efforts, despite the

planned consumption tax hike in October 2019 and a surge in tax revenue in FY17.

According to the latest projections from the Cabinet Office, the government is now

likely to achieve its target of a primary surplus only in FY27, versus an earlier

estimate of FY25.

Bilateral tariff talks with the US are the biggest source of uncertainty for Japan’s

economy, in our view. The US has threatened to impose additional tariffs of 25% on

auto imports from Japan (among other trading partners); bilateral talks on the matter

have made little progress so far. Motor vehicles and related equipment accounted for

nearly half of Japan’s 2017 exports to the US and 70% of its trade surplus with the

US. Additional US tariffs could severely impact Japan’s economy – we estimate that

the proposed tariffs, if implemented, would cut Japan’s GDP growth by c.0.2ppt.

The government’s 2% inflation target remains elusive. Headline CPI inflation

accelerated to 1.0% y/y in 8M-2017, doubling from the 0.5% pace in 2017. However,

the pick-up was driven mostly by rising food and energy prices; excluding these

components, it remained modest at 0.4% y/y. We expect food prices to stay elevated

Figure 1: Japan macroeconomic forecasts Figure 2: Recovery has broadened to household sector

HH income, % y/y (LHS); employed persons, % y/y (RHS)

*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research

2018 2019 2020



Policy rate (%)* -0.10 -0.10 -0.10

USD-JPY* 112.00 105.00 100.00



HH disposable income, % y/y 12mma (LHS)

No. of employed

persons, % y/y 12mma (RHS)

-3

-2

-1

0

1

2

3

-4

-3

-2

-1

0

1

2

3

4


The economy is on track to expand

for a seventh consecutive year;

bilateral tariff talks with the US are a

key uncertainty

Underlying inflationary pressure is

modest; government’s 2% target is

unlikely to be achieved soon

Tony Phoo +886 2 6603 2640

[email protected]

Senior Economist, NEA

Standard Chartered Bank (Taiwan) Limited


[email protected]

Economist, Asia





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in the next few months owing to the impact of recent heavy rains and flooding. A

higher base is likely to cap transport and communication price gains, however. We

see limited upside for inflation unless the Japanese yen (JPY) weakens sharply or

global commodity prices rise substantially. This echoes the Bank of Japan’s (BoJ’s)

view that the government's medium-term 2% price stability target remains distant.

Policy outlook

BoJ likely to maintain the status quo, keep 10Y target yield at c.0% for now. The

monetary policy tweaks announced in July do not signal a shift away from the BoJ’s

ultra-accommodative stance, in our view. Governor Kuroda recently said that the BoJ

will keep rates low for an extended period, even as the US and Europe tighten policy.

He also emphasised that domestic inflation remains far from the government’s 2%

medium-term price stability target. The BoJ’s July decision to widen the trading range

for the 10Y bond yield to +/-20bps (from +/-10bps) was chiefly aimed at allowing

more flexibility and improving policy sustainability. It also suggests that the BoJ will

continue to use ‘yield curve control’ (YCC) as its primary monetary policy tool.

There is growing debate among BoJ board members on the potential risks

associated with prolonged excessive policy easing (which could erode banks’

margins and crowd out private-sector investment). In addition, critics have pointed

out that the rise in yields that followed July’s policy adjustments is insufficient to

prompt Japanese funds to shift their offshore investments onshore. However, BoJ

board member Goushi Kataoka – seen as a key voice supporting Kuroda’s

preference for continued easing – has pointed out that concrete negative effects from

large-scale monetary easing have yet to emerge. On balance, we expect the BoJ to

remain committed to unprecedented monetary easing for now.

Politics

Abe was re-elected as chief of the Liberal Democratic Party (LDP). This will likely

allow him to serve as prime minister for another three years, given that the leader of

the majority party in the lower house almost always serves as PM. Abe won the party

leadership election by a comfortable margin, with 553 of 807 votes. This suggests

strong party support for him after he survived allegations related to land-sale

scandals earlier this year.

Abe’s most pressing task will be to establish a bilateral trade dialogue with the US,

and to exclude Japanese vehicles and parts from additional tariffs. Prior to the LDP

elections, Abe also pledged to work towards a constitutional amendment that would

formalise the legal status of the country’s Self Defence Forces. His strong support

has raised expectations that the LDP will retain its majority in the next upper house

elections, expected to take place before July 2019.

Market outlook

We forecast USD-JPY at 112 at end-2018. We do not expect the BoJ’s recent

policy tweaks to change bearish JPY flows in the short term. Additionally, current

Japanese Government Bond (JGB) yields are unlikely to prompt Japanese investors

to reverse their investment in foreign assets. Until market expectations of further

policy adjustments by the BoJ rise significantly, we expect Japanese investors’

foreign asset purchases to keep USD-JPY well supported (see Macro Strategy

Views, 24 August 2018).

Abe’s re-election as LDP chief

paves the way for another three-

year term

Recent policy tweaks do not signal

a shift away from the BoJ’s ultra-

accommodative stance






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Malaysia – Will a single engine be enough?

Economic outlook

We expect GDP growth to moderate to 4.8% in 2018 from 5.9% in 2017. We

maintain our view that growth drivers have shifted further towards private

consumption from investment. We expect private consumption to remain robust

thanks to a healthy labour market, with low inflation supporting real wages. In

contrast, the investment outlook is dim and external demand is moderating. Bank

Negara Malaysia (BNM) now projects GDP growth at c.5% in 2018, lower than its

previous forecast range of 5.5-6.0%.

Healthy labour-market conditions have made private consumption a pillar of support

for the economy. Employment rose 2.4% y/y in 7M-2018, accelerating from 1.8% a

year earlier. The zero-rating of the Goods and Services Tax (GST) from 1 June likely

boosted Q2 consumption and should continue to provide support in Q3. However,

consumer spending is likely to slow in Q4 following the implementation of the Sales

and Services Tax (SST) on 1 September, as consumers likely front-loaded

purchases during the three-month ‘tax-free’ period. Consumption also faces other

headwinds, including a falling ratio of job vacancies to active job seekers (1.02 as of

Q2-2018, down from 1.64x in Q3-2017), still-high household leverage and

moderating property prices.

The investment outlook is dim. Growth in the construction sector slowed to 4.7% y/y

in Q2, the slowest in 27 quarters, due to slowing residential property construction.

Residential construction work completed fell 7.6% y/y in Q2, the worst performance

in 32 quarters and the second consecutive quarter of negative growth. Furthermore,

the government has placed infrastructure mega-projects under review, citing a lack of

fiscal space. This has resulted in the cancellation of the East Coast Rail Link and the

postponement of the Kuala Lumpur-Singapore high-speed rail project. On the

external front, moderating growth in China and rising trade tensions may weigh on

exports, which also face an unfavourable base effect in H2.

Policy

Malaysia’s growth may fall below potential in 2019, increasing the likelihood of

monetary policy loosening. Private consumption – the only significant growth driver

– is expected to moderate in H2. Meanwhile, inflation is likely to exert less influence

on monetary policy in the near term due to expected volatility in inflation prints (as a

result of administrative measures) through late 2019.

Figure 1: Malaysia macroeconomic forecasts Figure 2: Growth may fall below potential in 2019

OPR, % (LHS): deviation from potential GDP growth, % (RHS)

*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 3.25 3.25 3.25

USD-MYR* 4.00 4.10 4.10



Deviation from potential GDP

OPR

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

2.5%

2.6%

2.7%

2.8%

2.9%

3.0%

3.1%

3.2%

3.3%

Dec-10 Jun-12 Dec-13 Jun-15 Dec-16 Jun-18 Dec-19

F/C

Private consumption is the primary

source of support

Growth may fall below potential

in 2019

Edward Lee +65 6596 8252

[email protected]

Chief Economist, ASEAN and South Asia


Jonathan Koh +65 6596 8075

[email protected]

Economist, Asia



[email protected]






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While BNM maintained a neutral stance at its September policy meeting, it adopted a

more cautious outlook on growth. The central bank dropped the phrase that

investment “will be supported by ongoing infrastructure projects” and cited downside

risks to growth, including heightened trade tensions, prolonged weakness in the

mining and agriculture sectors, domestic policy uncertainty and fiscal rationalisation.

Fiscal policy

We raise our budget deficit forecasts to 3% for both 2019 and 2020 (versus 2.4%

and 2.0% previously, respectively), as the loss of GST revenue is likely to make it

more difficult to keep fiscal consolidation on track.

The government budget announcement on 2 November 2018 will be in focus.

Markets will be looking for recurrent measures to replace the loss of GST revenue,

as the SST will still leave an annual revenue shortfall of c.MYR 2bn.

The government has cited concerns about the high level of public debt, and stated its

commitment to preserving fiscal discipline and rationalising expenditure. This has

resulted in the review, postponement and cancellation of some major infrastructure

projects. We estimate that spending rationalisation will cause government

expenditure growth (as calculated under GDP) to ease to 0.6% y/y in 2018 from 5.4%

in 2017.

Politics

Port Dickson by-election to pave the way for Anwar Ibrahim’s return to

parliament. Anwar is president-elect of the People’s Justice Party. According to local

media reports, he is slated to become the next prime minister. The by-election will be

held on 13 October 2018.

Market outlook

We are Neutral on the Malaysian ringgit (MYR) and expect range-bound trading in

USD-MYR. The MYR has depreciated in recent months amid external uncertainty

and risk-off sentiment. The currency remains undervalued and positioning is light

amid foreign portfolio outflows. Nevertheless, broad-based weakness in EM

sentiment may continue to weigh on the MYR.

We are constructive on long-end Malaysia Government Securities (MGS).

Onshore investor demand remains strong on high consumer and business

confidence, benefiting the bond market. Local long-term investors have high cash

levels and are likely to accelerate their allocation to long-end MGS.

Anwar Ibrahim to contest Port

Dickson by-election in October

2 November budget is in focus as

markets look for plans to replace

the GST revenue shortfall




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Myanmar – Infrastructure projects needed

Economic outlook – Positive despite domestic uncertainty

Agricultural sector brightens the outlook. We expect robust GDP growth of 8.7% in

FY19 (year ending March 2019), picking up from 6.4% in FY18. The economy started

to pick up in FY18 after a two-year slowdown, driven by a recovery in crop production.

That said, business sentiment has deteriorated, according to the Business Sentiment

Survey conducted by the Union of Myanmar Federation of Chambers of Commerce

and Industry. In addition to volatile commodity prices, domestic issues pose risks to

the outlook, in our view. The ongoing Rohingya crisis in Rakhine State has affected

foreign direct investment (FDI) flows into Myanmar; approved FDI fell last year to the

lowest since 2013.

A volatile exchange rate poses another challenge to the economy. Myanmar kyat

(MMK) depreciation against the USD has resulted in higher costs for imported raw

materials, affecting the manufacturing sector. Other concerns include limited access

to banking services such as credit facilities; high taxes and tariffs; and a slowing pace

of government reforms in areas including electricity supply, Companies Act

implementation, and public investment.

Policy – Resumption of Dawei SEZ construction

Developing Special Economic Zones (SEZs) will be crucial. The government has

been exploring ways to resume construction of the USD 8bn Dawei SEZ in

Tanintharyi. The Japan International Cooperation Agency (JICA) is finalising a draft

development survey for the Dawei deep-sea port project. The Thai government

agreed in 2015 to extend a THB 4.5bn loan to Myanmar – its biggest-ever loan to a

foreign government – to finance a 138km road linking the proposed port to Ban Phu

Nam Ron in Thailand’s Kanchanaburi province. Myanmar agreed to the loan terms (a

0.1% interest rate and a 20-year repayment window) in 2017, and construction work

on the road is currently underway.

Meanwhile, talks on a framework agreement for the Kyaukphyu SEZ in Rakhine State –

including the ownership ratio – are underway between the Myanmar authorities and a

consortium led by China’s CITIC, which won the tender to develop the SEZ. The current

plan is to build the port in four stages; the first stage would involve USD 1.3bn of

investment, out of the total investment of USD 7.2bn earmarked for the project.

Figure 1: Myanmar macroeconomic forecasts Figure 2: Agriculture recovers after 2016 floods

Contributions to % y/y GDP growth, ppt

Note: Economic forecasts are for fiscal year ending in March;


Source: World Bank, Standard Chartered Research

FY19 FY20 FY21





Agriculture

Industry

ServicesReal GDP

-1

0

1

2

3

4

5

6

7

8

9

FY14 FY15 FY16 FY17 FY18

Ongoing crisis in Rakhine State has

affected FDI flows

Agreement for Kyaukphyu SEZ are

being carried out

Tim Leelahaphan +66 2724 8878

[email protected]

Economist, Thailand

Standard Chartered Bank (Thai) Public Company Limited




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Nepal – Stable politics = better growth outlook

Economic outlook – Managing twin deficits will be key

Growth outlook is improving on political stability. Nepal’s economic outlook has

improved under the first stable government in more than a decade. The new coalition

government has a three-quarters majority in parliament, which raises prospects for

higher public- and private-sector investment. We raise our GDP growth forecast for

FY19 (year ending 15 July 2019) moderately to 5.0% from 4.5%; this compares with

average growth of 4% from FY11-FY17.

A key headwind to the economy is the likely increase in policy uncertainty as Nepal

shifts to a federal architecture. Nepal transitioned from a unitary government to a

federal structure in FY18. Sub-national governments are still grappling with basic

infrastructure, which could delay decision-making at the provincial level, delaying

investment activity. Weather-related shocks also pose a risk to the economy.

The outlook for industrial growth remains positive, driven by increased construction

activity. The services sector, however, is likely to be adversely affected by slowing

remittance growth. Other downside risks to the FY19 outlook arise from limited

experience in executing large infrastructure projects and challenges to the smooth

implementation of federalism.

Managing twin deficits to remain a key challenge

We raise our FY19 budget deficit forecast to 6% of GDP (from 5%) to reflect higher

spending and the weak revenue mobilisation capacity of newly formed local and

provincial governments. We also expect fiscal pressure from the cost of establishing

provincial governments and from fund transfers to sub-national governments.

We revise our FY19 C/A deficit forecast to 8% of GDP from 5% (FY18: 8.2%), as we

now believe that the drivers of C/A deficit widening in FY18 – a wider trade deficit

and slowing remittance growth – are unlikely to reverse in FY19. We expect the trade

deficit to widen to USD 12.5bn in FY19 from USD 11.6bn in FY18, led by fuel and

reconstruction-related capital-goods imports. Remittance growth is likely to slow to

5% (FY18: 8.6%) as fewer workers go abroad.

We expect inflation to rise gradually to c.5% in FY19 from an estimated 4.5% in FY18

due to rising global oil prices, and in line with India’s inflation.

Figure 1: Nepal macroeconomic forecasts Figure 2: Growth to remain strong in FY19

Ppt contributions

Note: Economic forecasts are for fiscal year ending in March; *NPR is pegged at 1.6x INR for

end-December of previous year; Source: Standard Chartered Research

Source: Nepal Rashtra Bank, Standard Chartered Research

FY19 FY20 FY21



Policy rate (%) – – –

USD-NPR* 115.20 120.00 121.60



GCF

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

FY15 FY16 FY17 FY18F FY19F FY20F

Private consumption Government consumption GCF Net exports

We revise our C/A and fiscal deficit

forecasts wider

Saurav Anand +91 22 6115 8845

[email protected]



We raise our GDP forecast on

political stability




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New Zealand – Dovishness is overdone

Economic outlook

We raise our 2018 GDP growth forecast to 2.7% from 2.5% to reflect strong Q2

growth of 2.8% y/y, which exceeded the central bank’s 2.3% forecast and beat

market expectations. While the growth outlook is softer than in previous years, the

Q2 reading supports our view that a sharp slowdown is unlikely. We therefore think

markets’ pricing in of rate cuts is premature (see New Zealand – The doves are here

to stay). However, we maintain a cautious outlook on the economy for H2 given the

mixed outlook for private consumption, weak business confidence and global

trade uncertainty.

Fiscal spending on transfers and allowances in H2 should provide some support for

domestic spending. The Reserve Bank of New Zealand (RBNZ) estimates that the

‘Families Package’ will increase annual household income by c.NZD 1.4bn. However,

falling net migration levels and a soft housing market may weigh on domestic

consumption. Annual net migration fell 12% y/y in August 2018 on higher outgoing

migration to Australia and China. Property prices have also moderated; the latest

residential median house price was NZD 549,000, the lowest in six months. Private

consumption growth of 3% y/y in H1-2018 was the slowest since 2014, despite a Q2

rebound (partly due to a favourable base effect).

The outlook for investment is a concern, as business confidence fell to a decade-low

in August and recovered only mildly in September. The decline was broad-based

across all sectors of the economy. Investment has already started falling – it

contracted 0.1% q/q (seasonally adjusted) in Q2, following five consecutive quarters

of growth. Machinery and equipment investment declined as 1.3%, offsetting

increases in residential buildings and telecommunications infrastructure investment.

We lower our average inflation forecast for 2018 to 1.6% from 1.7%, to reflect the

lower-than-expected H1 print of 1.3% y/y. We expect inflation to pick up in H2,

boosted by both the tradables and non-tradables components. The New Zealand

dollar (NZD) trade-weighted index averaged c.72.5 in Q3, down by about 6.5% y/y.

Higher oil prices should also support tradables inflation. Non-tradables inflation is

likely to receive support from a tighter labour market and a pick-up in wages (partly

driven by minimum wage hikes).

Figure 1: New Zealand macroeconomic forecasts Figure 2: GDP growth rebounded in Q2 but remains soft

Contributions to q/q growth by sector, ppt (LHS); GDP growth

(RHS)

*end-period; **for fiscal year ending in June; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 1.75 2.00 2.50

NZD-USD* 0.66 0.74 0.78


Fiscal balance (% GDP)** 0.9 0.9 1.6

GDP (RHS)2.0

2.5

3.0

3.5

4.0

4.5

5.0

-15

-10

-5

0

5

10

15

20

25

Mar-16 Sep-16 Mar-17 Sep-17 Mar-18

Private consumptionGovernment expenditureInvestmentsChange in inventoriesNet exports

The investment outlook is weak


[email protected]

Economist, Asia



[email protected]

Economist, Asia


Mayank Mishra +65 6596 7466

[email protected]

Macro Strategist


Private consumption should

continue to support growth, despite

headwinds






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Policy

We expect the RBNZ to remain on hold until Q4-2019. With growth and inflation

likely to exceed RBNZ forecasts in 2019, we expect the central bank to raise the

official cash rate by 25bps in Q4-2019 to 2.00%. We believe the current rate of

1.75% is highly accommodative. Growth and the output gap would have to fall

sharply to trigger a further rate cut, in our view, given that the current level is already

much lower than the estimated neutral policy rate of 3.5%.

The RBNZ maintained its cautious tone at the September meeting. The central bank

acknowledged the robust Q2 growth print, but highlighted downside risks to the

growth outlook. The RBNZ had previously forecast that the negative output gap

would bottom out at -0.3% in Q2 and rise gradually thereafter. Given stronger-than-

expected Q2-2018 GDP growth, however, growth may gradually rise above potential

in H2-2018 and 2019, leading to increased capacity pressure. Furthermore, the

RBNZ dropped the commentary on low business confidence affecting employment

and investment decisions in its September statement, potentially indicating that the

outlook turned less dovish.

We expect the RBNZ to raise its economic projections in the November policy

statement. We see upside risk to its Q3 inflation forecast of 1.4% y/y (data due on 16

October) from higher wages, a weaker NZD and higher oil prices. The RBNZ has

also acknowledged signs of core inflation moving towards the mid-point of its 1-3%

target range.

Market outlook

We think that NZD bearishness may be overdone. FX positioning is still very short

NZD, even after starting to recover from all-time lows in September; the money

market is still pricing c.7bps of RBNZ rate cuts over the next six months (down from a

high of 12bps). However, we expect NZD-USD gains to be limited in the short term

amid trade tensions and USD strength. We maintain our forecast of 0.66 for end-

2018. We expect NZD-USD to recover to 0.74 in 2019, when inflation

outperformance relative to the RBNZ’s forecasts is likely to push rate-hike

expectations higher.

Figure 3: Departures increase, arrivals moderate

‘000s of migrants

Figure 4: Dovish RBNZ weighs on the NZD

CFTC net speculative NZD positioning (USD bn) vs NZD

1Y1Y/3M money-market curve (%)

Source: RBNZ, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Arrivals

Departures

Net migration

-10

0

10

20

30

40

50

60

70

80

-100

-50

0

50

100

150

Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18

NZD positioning

(LHS)

NZD 1Y1Y/3M spread (RHS)

0.3

0.4

0.5

0.6

0.7

0.8

0.9

-2

-1

0

1

2

3

Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

We do not expect cuts from

the RBNZ

The RBNZ may revise up its growth

and inflation forecasts in November




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Philippines – More hikes to come

Economic outlook – Rising inflation is economy’s bugbear

Central bank’s response to rising inflation and a weaker currency will be in

focus. We see food inflation rising further in the near term on supply disruptions

exacerbated by Typhoon Mangkhut; headline inflation is likely to rise beyond 7% in

Q4, peaking at 7.4% in December. We expect Bangko Sentral ng Pilipinas (BSP) to

deliver two more 25bps rate hikes – following the 50bps increase in September – for

a total of 200bps this year (Philippines – Mangkhut to prompt more BSP hikes).

Domestic growth is likely to remain strong, supported by accelerating public

infrastructure investment, even as consumption slows due to higher inflation. We

forecast GDP growth of 6.2% in 2018.

Food inflation pushed CPI inflation to a 10-year high of 6.4% y/y in August, adding

3.3ppt to the headline number; VAT hikes, higher global oil prices and currency

weakness were also inflationary. We see food and broader CPI inflation rising further

in Q4 on supply disruptions exacerbated by Typhoon Mangkhut. September is

usually harvest season in the Philippines, and typhoon damage is likely to weigh on

supply for the rest of the year. While rice has historically been a more important

inflation driver, fish prices are now playing a bigger role. Rice and fish inflation (which

each added 0.7ppt to August inflation) are likely to remain high near-term, despite

government efforts to increase rice supply (through the rice tariffication bill) and the

removal of administrative and non-tariff barriers on fish and vegetables. We expect

inflation to average 5.5% y/y in 2018 and 4.8% in 2019, above the central bank’s

2-4% target. We see upside risks from higher oil prices and a weaker currency.

We expect softer but still-robust GDP growth in H2-2018. Typhoon-related

disruptions, slower consumption and the continued crackdown on mining activity are

likely to weigh on growth, despite still-strong infrastructure investment. Construction

(both public- and private-sector) is likely to remain strong in the near term.

Strong infrastructure activity should keep capital-goods imports elevated, weighing

on the trade balance and the current account (C/A). The monthly trade deficit

averaged USD 3.2bn in H1, up from USD 2.0bn in H1-2017; we expect monthly trade

deficits close to USD 3bn in Q4-2018 and in 2019. The wide trade gap is likely to

keep the C/A in deficit; we forecast a C/A deficit of 1.5% in 2018, up from 0.8% in

2017. While higher capital-goods imports are negative in the short term, they are

Figure 1: Philippines macroeconomic forecasts Figure 2: Inflation to edge higher on elevated food prices

Contributions to inflation, ppt; % y/y


2018 2019 2020



Policy rate (%)* 5.00 5.00 5.00

USD-PHP* 53.00 55.00 55.00



Headline inflation (y/y)

Core inflation

BSP forecast for 2018

-1%

0%

1%

2%

3%

4%

5%

6%

Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 Jul-17 Oct-18

Transport Housing Food Our forecast


[email protected]

Economist, Asia



[email protected]



Arup Ghosh +65 6596 4620

[email protected]



Inflation is likely to edge up further

and remain above BSP’s target

throughout 2018





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driven by domestic infrastructure activity and should support medium-term growth.

We would be more concerned about a trade deficit driven by higher consumer-goods

and fuel imports; the risk of the latter is increasing due to higher crude prices.

Overseas remittance growth is set to increase mildly in H2, supported by strong

inflows during the holiday season. Remittance growth moderated in the first seven

months of the year. Monthly remittances have been volatile and are likely to remain

so near-term, in line with volatility in the currency. We believe goods trade, services

exports and remittances are the most important drivers of the Philippines’ C/A; of the

three, the goods trade balance is the most volatile, making it the key swing factor

(see Philippines C/A – Peering into the crystal ball).

Policy – Pressure to deliver aggressive rate hikes

We expect BSP to respond to higher inflation with another 50bps of rate hikes

in Q4. The higher-than-expected August inflation print, combined with the inflationary

impact of Typhoon Mangkhut, has added to already-high inflation expectations. We

think BSP is keen to anchor inflation expectations, and will follow the 50bps rate hike

in September with two more 25bps hikes in November and December. This would

take real rates closer to 0% but they would still be negative. Our proprietary Monetary

Conditions Index for the Philippines suggests that conditions are among the loosest

in three years despite the hikes. Higher inflation, combined with a weak currency and

still-strong credit growth, is likely to loosen conditions further.

BSP has repeatedly raised its inflation forecasts since mid-2017. It now forecasts

average inflation of 5.2% in 2018 and 4.3% in 2019, edging closer to our own

forecasts. The 2019 forecast has moved above BSP’s target for the first time, and it

noted upside risks to its forecasts at its September meeting. The December policy

statement will be key to gauging future moves; a hawkish statement could indicate

future rate hikes, while a neutral one could point to the end of the hiking cycle.

Infrastructure proceeds further – ‘Build, build, build’

Infrastructure activity was much higher in H1-2018 than a year earlier; both public

and private investment picked up significantly. The Department of Budget and

Management forecasts that infrastructure spending will rise to 6.3% of GDP in 2018

from an average of 2.7% in 2011-15; it grew 5.0% in H1. Increased implementation of

planned projects poses upside risk to our 6.2% GDP growth forecast for 2018, but

could weigh on the current account due to higher import growth.

Market outlook

While a persistent trade deficit and low real yields are headwinds to the Philippine

peso (PHP), we see scope for a slight recovery ahead of year-end, driven by a

seasonal pick-up in remittances. We maintain our USD-PHP forecasts of 53 for end-

2018 and 55 for end-2019.

Republic of the Philippines Government Bonds (RPGBs) remain under pressure from

rising inflation, PHP weakness and a wider fiscal deficit. RPGBs are a consensus

underweight among foreign investors; PHP bonds have a low weight in the

benchmark index. We stay sidelined on RPGBs amid real yield erosion, likely further

BSP hikes, and local-currency (LCY) underperformance in countries with weak

external balances.

We expect another 50bps of hikes

from a hawkish BSP

Capital-goods imports may rebound

this year after growing 2.5% in 2017

We expect the strong pace of

infrastructure investment to

continue in H2

BSP is keen to anchor inflation

expectations





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Singapore – Wait and see

Economic outlook

We maintain our 2018 GDP growth forecast of 3.2%. Unfavourable base effects –

especially in externally oriented industries that were boosted by rising demand in H2-

2017 – are likely to slow H2 growth from H1’s robust 4.2% pace. However, we expect

domestic spending to remain firm in H2, supporting growth. Growth in 2018 has been

broad-based so far, in line with our expectations. The external sector accounted for

c.50% to H1 growth, while other components of expenditure – private consumption,

government expenditure and investment – also contributed. By industry,

manufacturing and services expanded, and weakness in the construction sector

faded. The government forecasts 2018 GDP growth at 2.5-3.5%.

Private consumption should continue to support the economy in H2, helped by an

improving labour market; private consumption growth accelerated to 3.3% y/y in H1-

2018 from 0.8% a year earlier. Net job creation has persisted for three consecutive

quarters. 10,200 jobs were added in H1-2018, compared with 14,100 lost in H1-2017.

The seasonally adjusted ratio of job vacancies to unemployed persons rose to 1.08 in

Q2-2018, the highest since Q4-2015. Retrenchments in H1-2018 (5,350) also

declined versus a year earlier. Real wage growth picked up to 3.5% y/y in H1 from

1.8% a year earlier on further absorption of labour-market slack. The Monetary

Authority of Singapore (MAS) has assessed that the remaining labour-market slack

has been absorbed, and this should lead to further upward wage pressure.

The H2 investment outlook is mildly positive. A pick-up in construction contracts

awarded towards end-2017 should support investment in the construction sector.

While recent property-market cooling measures may dampen investment in

residential building construction, this is more likely to play out over the medium term.

Investment growth recovered to 1.3% y/y in H1-2018 (-3.4% in H1-2017) on a pick-up

in private-sector investment, particularly in machinery and equipment.

The external sector may provide less support in H2 given the US-China trade

dispute, China’s moderating growth, and unfavourable base effects. We estimate that

tariffs already implemented by the US and China (25% on USD 50bn of goods by

both sides, plus US tariffs of 10% on another USD 200bn of Chinese goods) will

reduce Singapore’s GDP growth by c.0.15ppt, via its indirect exposure as a supply-

chain partner to China. While this amount is small, it does not account for second-

Figure 1: Singapore macroeconomic forecasts Figure 2: External sector still providing support

Contributions to y/y GDP growth by expenditure, ppt


2018 2019 2020

GDP growth (real % y/y) 3.2 2.5 2.2


3M SGD SIBOR* 1.80 2.40 2.30

USD-SGD* 1.36 1.38 1.38


Fiscal balance (% GDP) -0.1 0.2 0.2

H1-2017

H1-2018

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Net exports Private cons. Govt. cons. Change ininventories

InvestmentsGovt. consumption

Private consumption

We expect the external sector’s

contribution to growth to moderate

in H2

Edward Lee +65 6596 8252

[email protected]




[email protected]

Economist, Asia



[email protected]



The investment outlook is mildly

positive




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round effects on sentiment, investment and global growth. Should tensions escalate

further, we think the downside risk is much greater. We expect China’s growth to

moderate to 6.45% in H2-2018 from 6.75% in H1-2018. Based on our impulse

response analysis, a 1ppt decline in China’s GDP growth leads to a 1.4ppt reduction

in Singapore’s GDP growth.

We lower our 2018 average headline inflation forecast to 0.6% from 0.8% to reflect

lower-than-expected readings to date. 8M-2018 headline inflation stood at 0.4% y/y

as the contribution from private road transport fell sharply (to 0.01ppt from 0.58ppt in

the year-earlier period). Purchases of motor cars account for c.50% of the private

transport inflation basket; the average premium for vehicle certificates of entitlement

(COE) fell 27% y/y in 8M-2018, on lower demand for new vehicles due to the sale of

second-hand hire-purchase vehicles.

We raise our 2018 average core inflation forecast to 1.8% from 1.6%. Core inflation

has picked up faster than expected due to administrative measures (water price

hikes) and higher fuel prices, which may lead to further rises in electricity tariffs. The

MAS expects average 2018 headline and core inflation to be in the upper half of its

forecast ranges (0-1% for headline and 1-2% for core).

Policy

We expect the MAS to maintain the status quo in October. On the one hand,

growth is healthy and core inflation has been within (potentially rising faster than)

MAS expectations. On the other, deteriorating US-China trade relations cloud the

growth outlook. These opposing dynamics complicate the MAS’ decision. On

balance, we expect no change in the slope, centre or width of the Singapore dollar

nominal effective exchange rate (SGD NEER) policy band (see Singapore – Growth

over inflation).

Property

The government introduced a ninth round of measures in July 2018 to cool the

‘euphoric’ property market and keep price increases in line with economic

fundamentals. Macro-prudential measures include raising the additional buyer stamp

duty and lowering the loan-to-value ratio to keep household leverage at a

manageable level, especially against a backdrop of rising interest rates. Property

prices rose by 9.1% from end-Q3-2017 through Q2-2018, almost reversing four

consecutive years of gradual declines totalling 11.6%.

Market outlook

The SGD NEER is currently trading around 1.5% above the middle of the band,

according to our model, the strongest since mid-2016. Even if the MAS delivers

further policy tightening (not our base case), SGD upside is likely to be capped. If the

MAS keeps policy unchanged, in line with our expectations, we expect the SGD

NEER to trade lower towards the middle of the band. Given attractive risk-reward, we

remain biased towards a weaker SGD in the coming months and expect the currency

to underperform Asian peers. A further escalation of trade tensions or renewed broad

USD strength could also push the SGD NEER lower.

Headline inflation weighed down by

falling prices for private vehicle

ownership certificates

Core inflation has surprised to the

upside in recent months






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South Korea – Between reality and ideals

Economic outlook – Domestic and external challenges

We maintain our 2018 GDP growth forecast at 2.8%, but lower our 2019 forecast to

2.6% from 2.8%. The downward revision reflects a job-market weakness caused by

demographic changes and the negative impact of the US-China trade war. Leading

economic indicators suggest that Korea’s economy is entering a downtrend. The

coincident composite index and leading composite index declined in August to 99.1

and 99.8, respectively. The US-China trade dispute and uncertainty in emerging

markets due to Fed rate hikes are likely to put downward pressure on Korea’s

exports and GDP growth. Weak business sentiment as a result of the government’s

income-led growth policy is another near-term headwind to the economy. To reflect

the weak domestic consumption trend, we lower our 2018 inflation forecast to 1.6%

(from 1.7%) and our 2019 forecast to 1.9% (2.0%).

Recent unemployment data sends a worrying signal for the Korean economy, in our

view. The number of employed people increased by only 4,000 on average in July

and August, and we expect this trend to continue until the end of 2018. Employment

growth is at its lowest since the aftermath of the global financial crisis, according to

Statistics Korea. We see a possibility that the employment growth rate may be

negative for 2018 if the current job-market trend continues.

Despite external uncertainty, Korea’s export prospects remain positive for 2018, in

our view. The global manufacturing recovery, rising unit prices for Korea’s key export

products, and higher oil prices have supported strong export growth this year,

particularly for semiconductors (22.5% of the total) and petrochemical products.

However, we expect export growth to slow to less than 5% in 2019 due to the impact

of trade tensions and weaker global growth.

Monetary policy – Financial stability prioritised

We expect the Bank of Korea (BoK) to hike the policy rate in November, although

policy makers will need to strike a delicate balance between safeguarding financial

stability and boosting a weak economy. The BoK is likely to be heavily criticised if a

widening US-Korea rate spread results in sudden capital outflows. At the same time,

policy makers are under pressure to contain soaring housing prices, which have risen

due to excess liquidity amid low interest rates.

Figure 1: South Korea macroeconomic forecasts Figure 2: GDP growth and employment diverge

'000s, y/y change (LHS); %, y/y (RHS)

*end-period; Source: Standard Chartered Research Source: Statistics Korea, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 1.75 2.00 2.00

USD-KRW* 1,120 1,090 1,040



Increase in number of employed

persons (LHS)

Real GDP growth rate

(RHS)

2.0

2.5

3.0

3.5

4.0

50

100

150

200

250

300

350

400

3Q-

20…

4Q-

20…

1Q-

20…

2Q-

20…

3Q-

20…

4Q-

20…

1Q-

20…

2Q-

20…

Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18

Chong Hoon Park +82 2 3702 5011

[email protected]

Head, Korea Economic Research

Standard Chartered Bank Korea Limited


[email protected]

Asia FX Strategist


Arup Ghosh +65 6596 4620

[email protected]



We expect BoK to hike the policy

rate in November, prioritising

financial stability




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Prime Minister Lee Nak-yeon said recently that it is time to consider raising the base

rate; this sends a hawkish signal, as the prime minister rarely comments on monetary

policy. We think this signals that the government places a higher priority on

controlling the housing market and household debt than on addressing the weak job

market (which it may see as the result of longer-term structural issues and better

addressed via fiscal policy). However, we think the BoK will hike only if it sees signs

of a turnaround in the job market or an inflation pick-up, which we expect later this

year. For 2019, we forecast only one hike in Q3, the last one in this cycle. Declining

growth prospects and structural issues such as demographics are likely to lower

Korea’s neutral interest rate close to 0% in the near term.

Fiscal policy – Taxing and spending

The government has announced that it will increase its 2019 budget by 9.7%. This is

a much larger increase than this year’s 7.1% and the originally planned mid-7% rise,

and would take the 2019 budget to over KRW 470tn. The government has

announced that it will significantly increase social overhead capital (SOC) investment

and R&D spending to support its innovative growth strategy. Even with increased

government spending, we expect the fiscal deficit to narrow; we now forecast smaller

deficits of 1.4% of GDP in 2018 (versus 1.7% previously) and 1.2% in 2019 (1.8%

previously) because of increased tax revenue from middle- to high-income groups.

We are sceptical about whether the current fiscal policy will support the economy

given rising property and income tax collection. We think it will take several months

for the increased fiscal budget to be reflected in a rise in employment and the

broader economy.

Geopolitics – Denuclearisation in focus

At the third Inter-Korean summit of 2018, held from 18-20 September in Pyongyang,

North Korean leader Kim Jong-un expressed his willingness to denuclearise and

increase cross-border exchanges. The North pledged to permanently shut down the

Donchang-ri long-range missile test site and dismantle the Yongbyon nuclear

facilities in exchange for reciprocal measures by the US. We think the announcement

is a positive step, as the Yongbyon complex is viewed as a symbol of North Korea’s

nuclear development. The planned US-North Korea summit between Kim and

President Trump, still to be confirmed, could be a crucial turning point for North

Korea’s denuclearisation.

Market outlook

Supportive factors for Korea Treasury Bonds (KTBs) are largely priced in and yields

are likely to stay range-bound. We expect the swap curve to steepen in the belly as

markets price in some risk premium for an expected BoK hike amid financial-stability

concerns and an overheating housing market. Seasonal liquidity tightness in Q4 due

to higher debenture issuance is likely to put upward pressure on short-end rates.

That said, long-end KTBs remain anchored by local insurers’ asset-liability mismatch

and an inverted yield curve.

External and domestic factors have turned less positive for the Korean won (KRW).

The US-China trade war continues to weigh on risk sentiment and is unlikely to be

resolved soon. Soft domestic data is also a concern and may persist in the months

ahead. However, bond inflows remain strong and have offset equity outflows. We

have a Neutral FX weighting on the KRW.

The Pyongyang joint declaration

indicated that Kim Jong-un is

committed to denuclearisation

The government is increasing fiscal

spending in an effort to prop up the

economy




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Sri Lanka – Walking a tightrope

Economic outlook – Still subdued

We lower our 2018 growth forecast after a weak H1 performance. We revise down

our 2018 GDP growth forecast to 3.9% from 4.5% (2017: 3.1%) to reflect lower-than-

expected H1 growth of 3.6%. Political uncertainty affected both private and public

investment in H1. We expect a recovery in H2 on favourable monsoons, a softer

monetary policy stance, improving exports, and the fading impact of the VAT rate hike

implemented in November 2016. We also lower our 2019 GDP growth forecast to 4.4%

(from 4.7%), as private investment is likely to remain subdued ahead of the heavy

election calendar starting from end-2019. Higher direct taxes following the April 2018

implementation of the Inland Revenue Act (IRA), rising external vulnerabilities and

greater political uncertainty could pose further downside risks.

The reform process continues to move gradually in the right direction. The

implementation of the market-linked fuel pricing mechanism in May 2018 was a

positive step. However, the introduction of market-linked electricity prices is likely to

be delayed beyond the September deadline. Developments on two key reforms will

be in focus in Q4. The government plans to set medium-term targets for fiscal

consolidation and debt levels under a Fiscal Responsibility Act, which is due to be

finalised by December. Implementation would require parliamentary approval, and

the IMF may use the adoption of this framework as a qualitative benchmark. The

Central Bank of Sri Lanka (CBSL) is also likely to shift to an inflation-targeting

framework. This will require a change in the Monetary Law Act (MLA), which is now

expected in Q4-2018.

We expect the C/A deficit to remain wide at 2.5% of GDP in 2018 (2.6% in 2017) on

a wider trade deficit. Exports improved in H1-2018 on GSP+ reinstatement, but

import growth also accelerated on higher crude oil prices and rising non-oil, non-gold

imports. While measures to curb gold imports are likely to help in H2, we still expect

the trade deficit to widen to USD 11bn this year (2017: USD 9.6bn). Higher

remittances and tourism receipts should partly offset the wider trade deficit. We

forecast remittance growth at 3% in 2018, reversing a 1.1% decline in 2017, on

higher crude oil prices. Tourism is likely to grow c.12% in 2018, after rising only 3.2%

in 2017 due to airport maintenance and a dengue fever outbreak.

Figure 1: Sri Lanka macroeconomic forecasts Figure 2: External debt redemptions are bunched up

USD bn

*end-period; Source: Standard Chartered Research Source: CBSL, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 9.00 9.00 9.00

USD-LKR* 175.00 185.00 190.00


Fiscal balance (% GDP) -4.8 -4.5 -4.10.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2018 2019 2020 2021 2022

Sovereign bonds Syndicated loans

Bilateral and multilateral IMF

Private sector loans and bonds

Progress on CBSL inflation

targeting and the debt management

framework will be closely watched

in Q4

Saurav Anand +91 22 6115 8845

[email protected]




[email protected]




[email protected]



C/A deficit is likely to remain wide




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Policy – External vulnerabilities likely to increase

We now expect a 50bps policy rate hike in Q4 (versus our earlier call of no

change). This reflects rising external-sector vulnerabilities amid higher global yields,

large external debt repayments starting in 2019, and likely policy rate hikes by other

Asian central banks. However, we see a risk that the CBSL may defer the rate hike to

Q1-2019 on benign domestic factors – inflation, private-sector credit growth and

subdued economic growth. Private-sector credit growth is likely to remain near the

CBSL’s target of c.15%. We forecast average 2018 inflation at 5.0% – well below the

CBSL target of 4-6%, and down from 6.3% in 2017 – on benign food prices, even as

higher crude oil prices and imported inflation exert upward pressure.

The CBSL’s reserves are low, at c.USD 8.5bn as of August; they are likely to reach

USD 9bn (still only 4.5 months of imports) by end-2018, factoring in a USD 1bn

syndicated loan in Q4. The central bank has used policy measures, such as

increasing margin requirements for imports, to manage Sri Lankan rupee (LKR)

depreciation since mid-August, to limited effect. If depreciation pressure on the LKR

moderates, we see a risk that the central bank may defer a rate hike until Q1 given

benign domestic growth dynamics. Sri Lanka remains highly indebted and has

significant external financing needs of c.USD 15bn in 2019-22, of which USD 4bn is

up for repayment in 2019. The government’s ability to keep fiscal consolidation on

track and smooth out the repayment of external liabilities will be crucial to retaining

market access during periods of volatility.

The government will present its 2019 budget in November. We expect fiscal

consolidation to continue but at a slower pace, deviating from the deficit target of

3.6% agreed with the IMF for 2019. We forecast the 2019 deficit at 4.5% of GDP

(2018F: 4.8%) as the government tries to offset higher spending in a pre-election

year with a modest increase in revenue. We do not expect significant revenue-

enhancing measures via the introduction of new taxes in the upcoming budget.

Nearly 50% of the fiscal deficit is financed with foreign flows. Slowing balance-sheet

expansion by major global central banks and rising global yields could add to

vulnerabilities in 2019. For 2018, we expect the government to meet its primary

deficit target of 1% of GDP and its fiscal deficit target of 4.8% by limiting development

expenditure in case of a revenue shortfall.

Politics to start dominating headlines by end-2018

Politics are likely to start dominating headlines and sentiment ahead of upcoming

elections. Provincial elections are likely in Q1-2019, and the performance of the

ruling parties will be closely watched. We will also monitor populist political pledges in

the run-up to elections. After the elections, the focus should quickly shift to the

presidential election due in January 2020.

Market outlook – Revising USD-LKR forecasts higher

We remain Neutral on LKR bonds, as global sentiment towards EM remains weak.

LKR bonds have been resilient despite rising local-currency yields in regional high-

beta markets due to relatively small foreign investor participation.

In the FX market, the pace of LKR depreciation has been faster than we had

expected. A persistent C/A deficit, low FX reserves and rising oil prices will likely

remain strong headwinds to the LKR in the coming years. We raise our USD-LKR

forecasts to 175 for end-2018 (from 165 previously) and to 185 for end-2019 (175).

We revise up our USD-LKR forecast

to 175 for end-2018

We expect fiscal consolidation

to continue in 2019, but at a

slower pace

We expect the CBSL to raise policy

rates by 50bps in Q4




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Taiwan – Growth momentum to slow

Economic outlook

Growth momentum to slow after a strong H1; US-China trade dispute is a key

concern. While we expect full-year 2018 GDP growth to remain strong at 2.8%

(2.9% in 2017), this is largely due to a strong H1 performance – growth rebounded to

3.2% y/y, helped by a low base. Recent data, however, suggests that the growth

cycle has peaked and that momentum is likely to fade given the uncertain outlook for

global trade. Taiwan is heavily dependent on external trade, and China and the US

are among its largest export markets. Elevated US-China trade tensions pose risks to

local producers, given that China is the preferred offshore manufacturing base for

many Taiwanese exporters. In the worst-case scenario of a full blown US-China

trade war, we calculate that Taiwan’s GDP growth would be reduced by c.1.8ppt (see

Special Report, Trade tensions – Unintended consequences).

On the positive side, we expect domestic demand to remain supportive. The

unemployment rate remained at a two-decade low of 3.69% in August, while monthly

wages (up 4.1% y/y in 9M-2018) are on track for the fastest annual growth since

2010. Optimistic income expectations should support consumer confidence and

spending. Retail sales growth picked up to 4% y/y in 8M-2018 from 1.2% in 2017.

Overseas arrivals have also rebounded, growing 3.6% y/y in 8M-2018; this suggests

that efforts to attract tourists from Southeast Asia to offset falling arrivals from China

have paid off.

To help the economy better withstand trade uncertainty, the government has

introduced various initiatives to bolster domestic demand. They include amendments

to income tax laws that are expected to benefit 1.49mn people in 2019, and minimum

and hourly wage increases effective in January 2019. The government has also

announced plans to add more than 500 hectares of new land supply for industrial use

by end-2020. Land supply is one of several factors – along with manpower, water

and electricity supply – that have deterred Taiwanese investors from relocating back

to Taiwan.

Headline CPI inflation likely to hit a six-year high of 1.8% y/y in 2018. We believe

underlying inflation pressure is skewed to the upside. Core inflation – i.e., excluding

food and energy – was 1.4% y/y in 8M-2018, and is on track for the fastest full-year

gain since 2008. Wholesale price inflation – a robust leading indicator of core CPI

Figure 1: Taiwan macroeconomic forecasts Figure 2: Current growth cycle likely peaked in H1

Monitoring Indicators Index (LHS); real GDP, % y/y (RHS)


2018 2019 2020



Policy rate (%)* 1.38 1.38 1.38

USD-TWD* 30.60 30.30 30.00



Monitoring Indicators

Index, 3m fwd

-4

-2

0

2

4

6

8

0

5

10

15

20

25

30

35

40

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Real GDP % y/y (RHS)

Underlying inflation risk is skewed

to the upside

Growth momentum is likely to slow

after a strong H1; the government

has taken measures to cushion the

economy against the US-China

trade dispute

Tony Phoo +886 2 6603 2640

[email protected]




[email protected]

Asia FX Strategist






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inflation – rebounded sharply to 3.5% y/y in 8M-2018 from 0.9% in 2017, pointing to

underlying inflation pressure.

The government has recently taken steps to stabilise inflation, which are likely to cap

price gains in 2019. The state-owned power company reversed an earlier decision to

raise electricity prices in Q4, and the government announced a temporary freeze on

retail prices for propane and liquefied natural gas. The government has also said that

it will closely monitor vegetable and food prices after heavy rains and floods raised

fears of a price spike. However, we expect a low base to keep headline and core

inflation elevated in 2018.

Policy

We now expect the Taiwan central bank (CBC) to keep policy rates on hold,

after it kept the re-discount rate steady at 1.375% in September (against our non-

consensus call for a 12.5bps hike). The policy statement struck a more cautious tone,

prompting us to change our expectation of a Q4 hike. The CBC cited concerns over

escalating trade tensions and rising EM volatility. It also expects inflation to be

broadly stable given the negative output gap, and expects GDP growth and inflation

to ease gradually in 2019.

Notably, policy makers did not reiterate earlier comments (from the June quarterly

meeting) that rates would not stay low indefinitely and that the CBC stands ready to

move if market conditions permit. They highlighted that monetary policy in key

markets (Europe and Japan) remains accommodative and interest rates are relatively

low. This suggests that the CBC is inclined to maintain its accommodative stance,

and will await moves by the European Central Bank and the Bank of Japan before

normalising monetary policy.

Politics

The ruling Democratic Progressive Party (DPP) is expected to prevail in city

mayoral and local township elections due on 24 November. The latest opinion polls

show that DPP mayoral candidates in Tao-yuan, Tainan and Kaohsiung continue to

enjoy comfortable leads over opposition Nationalist (KMT) Party candidates. The

exception is Taipei, where incumbent Ko Wen-je, an independent, is leading in polls.

The mayoral races in Taichung and New Taipei City are seen as close. In Taichung,

polls show that KMT candidate Lu Shiow-yen is closing in fast on the DPP’s Lin Chia-

lung, the current mayor. In New Taipei, Su Tseng-chang – a DPP stalwart and former

mayor – is neck-and-neck with the KMT’s Hou You-yi, the incumbent vice mayor.

DPP victories in these two races would significantly boost its chances in the next

legislative and presidential elections in early 2020, when President Tsai Ing-wen is

likely to seek re-election.

Market outlook

We forecast USD-TWD at 30.60 at end-2018; maintain our Underweight short-

term weighting. Taiwan’s fundamentals are positive given its solid external

balances, while growth has been resilient and inflation is elevated. Even so, foreign

outflows have yet to reverse amid concerns about Taiwan’s high exposure to the US-

China trade war (see EM FX – Forecast updates, 26 September 2018).

We now expect no change to policy

rates for the rest of 2018; the latest

policy statement suggests the CBC

will stick with its pro-growth stance

The ruling DPP is favoured in

nationwide local elections in

November





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Thailand – About to move into election mode

Economic outlook – Domestic strength

Economic growth momentum is solid. We maintain our long-held GDP growth

forecast of 4.3% for 2018. The consensus forecast now exceeds ours, having risen to

4.4% from around 4.0% late last year. We remain optimistic on the outlook.

Consumer sentiment has improved significantly, particularly in the middle-income

group, as indicated by higher car sales (YTD: +20% y/y). Exports (YTD: +10%),

manufacturing (H1: +4%) and tourism arrivals (YTD: +9.9%) are also growing. That

said, we are watching for a potential adverse impact on the export sector from global

trade disputes, and whether the government can reverse a recent slowdown in

visitors from China following a fatal tourist boat accident in Phuket in July.

Inflation expectations are rising. Headline inflation accelerated in August to 1.6%, the

highest level in almost four years. It has been within the Bank of Thailand’s (BoT’s)

1-4% target range for five straight months, after being below the range since the BoT

adopted the target in 2015.

Progress on major infrastructure projects – particularly the THB 1.7tn Eastern

Economic Corridor (EEC) development – is likely to be a key growth driver in the

coming years. The EEC is a planned hub for advanced industries in Thailand’s

eastern provinces. One of the first planned mega-projects is a THB 225bn

(USD 6.9bn) high-speed train linking three international airports; the government is

expected to select a consortium to build the project by January 2019. About

31 companies – mostly from Thailand, China and Japan – have expressed interest in

investing in the project, according to the EEC Office. The project will be built under

the public-private partnership (PPP) model to lessen the government’s debt burden.

Policy – BoT prepares markets for a move

Hawkish outcome from the MPC. While our non-consensus call that the BoT would

start raising rates at a meeting in Q3 did not materialise, consensus is moving closer

to our view that rate hikes will start in 2018. In addition, there were some relatively

hawkish outcomes from the September policy meeting. Two of the seven Monetary

Policy Committee (MPC) members voted for a 25bps policy rate hike at the meeting,

up from one at the previous three meetings. The MPC statement said the need for

accommodative monetary policy would be gradually reduced.

Figure 1: Thailand macroeconomic forecasts Figure 2: Election likely to be held early next year

Q1-2018

Organic bills on MPs and senators cleared the parliament

May 2018 Constitutional court ruled that the laws are legal

Jun 2018 Bills were submitted for royal endorsement

Sep 2018 Bills were endorsed; ban on political activity was partially relaxed

Nov 2018 Bills likely to be enforced; elections will probably be called; parties select MP candidates

Dec 2018 Parties permitted to campaign for the election

24 Feb 2019 Earliest possible election date (within 150 days of the bills being enforced)

*end-period; **for fiscal year ending in September; Source: Standard Chartered Research Source: Local media reports, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 1.75 2.25 2.50

USD-THB* 32.50 33.50 33.50



Solid economic growth momentum,

rising inflation expectations

Consensus is moving closer to our

view that rate hikes will start in 2018

Tim Leelahaphan +66 2724 8878

[email protected]

Economist, Thailand



[email protected]






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With a stronger shift towards a tightening stance at the September meeting, we think

the BoT will start policy normalisation with a 25bps rate hike (to 1.75%) at the next

MPC meeting on 14 November. We continue to expect the policy rate to rise to at

least 2% over the course of the normalisation cycle, creating 50bps of room to

manoeuvre in case of an unforeseen economic shock in the future.

However, given recent BoT concerns about the pace of Thai baht (THB)

appreciation, we think back-to-back rate hikes are unlikely; we therefore expect the

policy rate to end 2018 at 1.75%. That said, we think the outlook for Federal Reserve

tightening could cause the BoT to accelerate the pace of normalisation.

Politics – Election campaigning likely to start in December

Progress towards elections would lift political expectations. We expect further

political clarity to emerge in Q4. The King has endorsed two laws required to hold a

general election, one on the election of members of parliament and one on the

selection of senators. This removes a key hurdle to holding long-delayed elections.

The current military government has said that the election is likely to be held on

24 February 2019 at the earliest.

An election can be called after talks between the National Council for Peace and

Order (NCPO), including Prime Minister General Prayuth Chan-o-cha, and party

leaders are completed.

The long-standing ban on political activity has been partially relaxed. The two largest

political parties – Pheu Thai and Democrat – will elect new leaders and name their

prime minister candidates; each party can nominate no more than three such

candidates ahead of the election. Prayuth has yet to announce whether he will run in

the election, and for which party. Political parties are likely to start their election

campaigns in December. Selection of senators is expected to be completed by the

end of this year; the majority of senators will be hand-picked by the NCPO.

Given current low expectations, clear progress towards elections in H1-2019 would

support the macroeconomic outlook and boost sentiment and local assets,

supporting inflows. This pattern was seen in August 2016, when the constitutional

referendum was conducted smoothly, and in late 2017, when a verdict against the

previous administration in the rice-pledging scheme did not lead to political turmoil. In

both cases, sentiment and inflows received a boost.

Market outlook – Fundamentals justify a strong THB

We maintain our positive view on the THB. Recent comments by the BoT were

aimed at containing the pace of THB appreciation. However, we do not think

investors are buying the THB because they expect an imminent hike; domestic

fundamentals justify buying the currency, in our view.

We expect the normalisation cycle

to take the policy rate to at least 2%

Sentiment and inflows are likely to

receive a boost from election

progress




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Vietnam – Fast, not furious

Economic outlook – A sustainable H2

We expect steady GDP growth in H2, with a focus on sustainability. We forecast

growth of 7.0% in 2018, moderating slightly from 7.1% y/y in H1, as the authorities

focus on sustainable medium-term growth. This focus is evident in quarterly prints so

far this year – Q3 growth slowed versus Q2 (and Q2 slowed versus Q1) for the first

time since the global financial crisis (see Vietnam – Fast, not furious, growth).

Manufacturing is likely to remain the primary driver, recording another year of double-

digit growth. We expect agriculture growth to continue to recover in H2, while

construction may slow due to a moderating real-estate sector. Inflation is likely to

edge higher, but we do not see it as a concern. Credit growth has slowed this year,

reducing our concerns about financial stability. Rising global trade tensions could be

the biggest risk to growth.

Strong electronics exports and declining capital-goods imports should lead to a trade

surplus for the rest of 2018. The January-September surplus was USD 6.1bn, versus

a USD 0.2bn deficit for the same period in 2017. Mobile-phone components,

particularly OLED displays, are likely to be a key export driver. We expect export

growth of around 18% in 2018. However, Vietnam is among Asia’s most exposed

economies to the US-China trade dispute – its trade/GDP ratio is c.200% and rising.

It could suffer due to its role in China’s supply chain for exports to the US, although it

also stands to benefit if it can absorb demand likely to be diverted to other locations

due to reduced exports from China to the US.

FDI inflows are set to remain high in 2018, albeit lower than in 2017; we expect

registered capital of c.USD 17bn, or c.7.5% of GDP. Of the USD 96bn of FDI inflows

to Vietnam since 2013, more than 50% has gone to manufacturing, predominantly

electronics; this trend is likely to continue in H2. FDI inflows had a strong start to the

year, with USD 14.1bn of registered capital and USD 13.3bn of implemented capital

in January-September – comparable to the same period in 2017. Vietnam has

benefited from its participation in regional trade pacts, a young and educated

population, a still-cheap and growing labour force, and geographical proximity to

China. This should continue to attract strong FDI inflows in the coming years.

Wages have increased sharply since 2015 on strong job creation in the FDI-

supported manufacturing sector. This should further boost retail sales, which have

Figure 1: Vietnam macroeconomic forecasts Figure 2: We expect robust GDP growth of 7.0% in 2018

Contributions (ppt), real GDP growth (% y/y)


2018 2019 2020



Policy rate (%)* 6.25 6.25 6.25

USD-VND* 23,400 23,300 22,700



6.8 7.0 6.9

-4

-2

0

2

4

6

8

10

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Net exports Consumption Change in stocks GFCFForecasts

GDP


[email protected]

Economist, Asia



[email protected]

Asia FX Strategist


Lawrence Lai +65 6596 8261

[email protected]

Asia Rates and Flow Strategist


Export growth is likely to remain

robust, driven by demand for

electronics and OLED displays

We expect FDI to remain high

in 2018





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been picking up since H2-2017. Tourism has rebounded strongly since end-2016 –

arrivals grew over 20% in both 2017 and 9M-2018 – and is likely to remain healthy

near-term. This should also boost retail sales, supporting consumption.

We forecast that inflation will remain soft in 2018, averaging 3.7% y/y versus 3.4% in

2017. Food and transport inflation edged higher in H1-2018 from a low base but are

unlikely to become a concern. Housing inflation is also likely to remain high, but lower

than in H2-2017. We expect inflation to pick up to 5% in 2019 due to a low base and

higher oil prices. We see core inflation (which excludes prices of food, energy, health

care and education services) staying below 2% in 2018, edging up slightly in 2019.

Policy

The State Bank of Vietnam (SBV) is likely to remain accommodative in the near term

to support growth, despite rate hikes by major central banks. We expect unchanged

policy rates in 2018 and a mild devaluation of the Vietnamese dong (VND).

Credit growth slowed to c.14% as of June 2018 from 18.2% in 2017; the SBV’s credit

growth target for 2018 is 17%, below the 2017 target. Growth in credit to the

construction sector rose more than 30% y/y in January-October 2017, the fastest in

at least four years. A sustained rapid rise in credit could lead to overleveraging,

raising financial stability risks and derailing the banking sector’s nascent recovery

from high NPLs. The SBV’s focus on reducing credit growth to the construction

sector provides comfort, however. Credit growth to the real-estate sector has been

capped at a lower rate, which should contain financial stability risks. The SBV has

also set limits on single-name exposure. These are prudent measures, in our view.

Other issues

Banking-sector NPLs have only just started to decline – to 2.18% of total loans as of

June 2018 from 3.6% in 2013, according to the Vietnam Asset Management

Company (VAMC). These exclude bad loans sold to the VAMC; the NPL ratio is

8.6% if these loans are included, according to the SBV. Still-strong credit growth has

increased the loan base, helping to reduce the NPL ratio. Lower NPLs and

implementation of the National Assembly’s resolution on bad debt settlement are

encouraging.

Market outlook

We expect steady growth momentum and strong trade performance to continue to

support the VND. Current account dynamics are positive, with the trade balance on

course to record a surplus in 2018. So far this year, the VND has weakened against

the USD and is flat against the EUR (Vietnam’s largest export market), while it has

strengthened against the CNY and KRW (Vietnam’s two largest import sources).

Market sentiment towards Vietnam Government Bonds (VGBs) has been broadly

stable despite deteriorating global risk sentiment. Onshore liquidity has turned less

flush given strong local credit growth. However, VGB yields have been largely range-

bound despite a tighter funding environment. We maintain our Neutral duration

outlook, as credit growth is unlikely to pick up significantly (positive for bond

demand). 5Y VGB yields increased 100bps in Q3 to 4.4% and we expect them to drift

higher, especially with global rates likely to keep rising amid the Fed hiking cycle.

While we see room for a further gradual rise in VGB yields, we do not expect

significant selling pressure, as a stable policy stance and low inflationary pressure

should continue to support the VGB market.

We expect the SBV to keep policy

unchanged in 2018

Slowing credit growth and prudent

regulatory measures provide

comfort

We expect mildly higher inflation in

H2, but do not see it as a concern


Economies – Middle East, North Africa and

Pakistan



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MENAP – Back to the future?

Economic outlook – Diverging

MENAP growth to accelerate, but sentiment to improve only gradually. We

forecast that growth in the Middle East, North Africa and Pakistan (MENAP) region will

accelerate to 3.5% in 2018 from our 3.2% estimate for 2017. However, performance

will continue to diverge between the region’s oil exporters and importers.

Higher oil prices improve the GCC outlook but raise risks for oil importers. We

recently raised our global oil price forecasts to USD 75/barrel (bbl) for 2018, USD

78/bbl for 2019 and USD 85/bbl for 2020 (Figure 1). Higher oil prices, and the

associated rise in crude output, should support growth in the region’s oil-exporting

economies and give the authorities room to use counter-cyclical fiscal policy. For oil

importers, in contrast, costlier energy imports risk widening twin deficits, limiting room

for fiscal and monetary policy manoeuvre against a backdrop of broader EM weakness.

Higher oil prices – A boon for the GCC

We expect the GCC to grow 2.4% in 2018 on higher oil prices. Most GCC oil

producers have increased output following the June decision by OPEC+ to ease

output curbs (Figure 2). We expect this trend to continue over the next few months,

with oil sectors supporting a pick-up in headline growth in the six-nation bloc.

Higher fiscal spending to support non-oil sectors. Saudi Arabia has revised its

fiscal plans to increase spending by more than budgeted this year and over the

medium term. In the UAE, the cabinet has approved a significantly larger federal

budget for 2019-21. This is likely to be accompanied by a coordinated rise in emirate-

level spending. Abu Dhabi has announced plans to front-load c.USD 5.5bn of its USD

13.6bn, three-year fiscal package (called ‘Tomorrow 21’) in 2019.

Deficits to narrow despite higher spending. Budgets across most GCC economies –

including Saudi Arabia, Kuwait and Qatar – are based on conservative oil price

assumptions of USD 50-55/bbl. As such, despite higher spending, we expect fiscal

deficits (and financing requirements) to narrow in these economies. At the same time,

current account surpluses are set to increase, supporting central bank FX reserves.

Oman and Bahrain are the exceptions – we expect them to continue to post twin

deficits despite higher oil prices. While Bahrain’s recent private issuance buys it time,

markets are awaiting the announcement of GCC financial support for the country.

Figure 1: Oil prices to help GCC growth recover

GCC weighted average growth, % y/y; Brent crude, USD/bbl

Figure 2: GCC producers have increased oil output

% change in oil output in Aug vs Q1-2018, based on

secondary sources

Source: IMF, national sources, Standard Chartered Research Source: OPEC, Standard Chartered Research

Growth (RHS)

Oil prices (LHS)

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Kuwait Qatar Saudi Arabia UAE

Bilal Khan +971 4508 3591

[email protected]

Senior Economist, MENAP


Fiscal deficits and financing

requirements to narrow in most

GCC economies

Policy makers are using counter-

cyclical fiscal policy to support

growth




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Reforms in the GCC – Adjusting, not backtracking

We think policy makers remain committed to reforms, despite higher oil prices.

With oil prices closer to fiscal breakeven levels for most GCC sovereigns, markets

will be watching for reform fatigue. Market and media attention has recently focused

on Saudi Arabia’s plans to delay the IPO of Aramco, a cornerstone of the country’s

diversification agenda, Vision 2030. We think policy makers remain committed to

reforms but are adjusting their policies to reflect the changing reality of significantly

higher oil prices. This is not the same as backtracking on reforms, in our view.

Monetary policy to tighten across MENAP

Tightening comes as the region’s business cycle is out of sync with that of the

US. We expect most GCC countries to follow 125bps of further Fed hikes through

end-2019.

Monetary policy to have a hawkish bias in Turkey, Pakistan and Egypt. We

expect Turkey’s central bank to maintain a hawkish stance (after surprising markets

with its 625bps hike in September) to reassert the credibility of its monetary policy

framework. In Pakistan, we expect the central bank to continue to hike rates more

than markets expect to cool aggregate demand amid persistent external-sector risks

(Figure 3). In Egypt, our base case is for inflation to decline and rates to remain on

hold in 2018 (Figure 4); however, we do not rule out the risk that the Central Bank of

Egypt may need to reverse earlier easing if capital outflows intensify.

IMF in the region – A mixed bag

Egypt, Jordan and Iraq are in IMF programmes; Pakistan is likely to follow. We

expect Egypt’s progress under its Extended Fund Facility (EFF) to continue;

however, meeting fiscal deficit targets is likely to prove challenging. Jordan’s

progress with the IMF has stalled and remains conditional on amendments to the

country’s income tax laws, a politically sensitive undertaking. In Iraq, an improving

fiscal position due to higher oil prices could pose risks to further structural reforms. In

Pakistan, although policy makers are trying to avoid an IMF programme by relying on

bilateral financial assistance, we think that this will be insufficient and IMF support will

be needed and sought.

Figure 3: Pakistan’s business cycle has peaked

Core inflation, % (LHS); non-oil imports, USD bn (RHS); both 12mma

Figure 4: Egypt’s inflation to decline only gradually

CPI inflation, % y/y; overnight deposit rate, %

Source: CEIC, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Imports

Inflation

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Forecasts

Pakistan may yet have to approach

the IMF for assistance

Saudi Arabia’s decision to delay the

Aramco IPO does not mean policy

makers are backtracking on reforms

We see a growing risk that the

Central Bank of Egypt may have to

reverse its earlier easing




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MENAP – Top charts Figure 1: Oil remains the region’s biggest growth driver

MENA real GDP per capita, 2011 international dollar (LHS);

Brent crude oil prices (RHS); both % y/y change

Figure 2: GCC growth to recover from a low base

Weighted average GDP growth for the GCC bloc, % y/y

Source: IMF, Standard Chartered Research Source: IMF, Standard Chartered Research

Figure 3: GCC debt levels to rise, some worse than others

Government gross debt, % of GDP

Figure 4: Egypt has weathered the EM storm well so far

USD-X, rebased (1 Jan 2018 = 100)

Source: IMF, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

GDP per capita

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Figure 5: Pakistan likely to seek IMF assistance soon

State Bank of Pakistan FX assets and liabilities, USD bn

Figure 6: Turkish lira among most vulnerable EM

currencies to changing global risk sentiment

Source: State Bank of Pakistan, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

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Bahrain – Funding for reform

Economic outlook – Growth has softened, as expected

Bahrain’s economy slowed in Q1-2018, in line with our expectations. Headline

GDP contracted 1.2% y/y, mostly due to a steep contraction in the oil sector due to

maintenance of the offshore field shared with Saudi Arabia. This supports our 2018

growth forecast of 3.0%, down from 3.8% in 2017. Infrastructure investment, funded

by the GCC Development Fund, will likely continue to underpin non-oil sector growth

for the rest of the year. As of Q2-2018, USD 1.7bn had been disbursed towards USD

3.5bn of projects underway. A sustained rise in disbursement should support project

implementation – the pipeline of tendered projects rose to USD 5.1bn in Q2.

We raise our 2018 inflation forecast to 2.5% (2.3% prior) given slightly higher-than-

expected inflation in the first seven months of the year. We factor in higher inflation in

2018 on higher oil prices, following subdued inflation of 1.4% in 2017. We raise our

2019 inflation forecast to 2.3 (1.8% prior), as we now think VAT implementation is

likely sometime in 2019 under the forthcoming fiscal programme. We raise our 2019

policy rate forecast to 3.75% (3.25%) given our revised Fed call.

Policy – Anchored by the forthcoming fiscal programme

Bahrain’s fiscal policy will likely be anchored by a fiscal programme, currently

being drafted in coordination with Saudi Arabia, the UAE and Kuwait. We expect the

measures to raise non-oil revenue, including VAT or possibly corporate income tax

(as suggested by the IMF). While further programme details are awaited, the recent

USD 500mn private placement will likely help Bahrain meet its short-term financing

needs. Combined with the USD 1bn sukuk in March, this still falls sort of Bahrain’s

2018 funding needs: we estimate a fiscal deficit of USD 3.5bn. The fiscal programme

should help Bahrain to re-tap international markets before year-end, unless it

contains enough aid to meet financing needs for the full year.

Politics – Elections could usher in policy changes

Legislative elections will likely be held in November, although the date has not yet

been confirmed. The main opposition group and secular opposition have been

suspended. Most candidates are likely to run as independents. The elections will take

place against a challenging economic backdrop; the timing will likely coincide with the

announcement of structural reforms as part of the fiscal programme.

Figure 1: Bahrain macroeconomic forecasts Figure 2: FX reserves benefited from Q1 sukuk and rising

central bank liabilities to commercial banks (USD bn)

*end-period; Source: Standard Chartered Research Source: CBB, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 2.75 3.75 3.75

USD-BHD* 0.38 0.38 0.38


Fiscal balance (% GDP) -9.5 -8.0 -7.90.0

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Both oil and non-oil sectors

contributed to slower growth in Q1

The programme will likely usher in

structural reforms and facilitate the

return to capital markets

Carla Slim +9714 508 3738

[email protected]

Economist, MENAP





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Egypt – Steady progress

Economic outlook – Stable amid global headwinds

We expect growth to accelerate but the policy backdrop to remain challenging.

We forecast GDP growth of 5.5% in FY19 (year ending June 2019), picking up from

an estimated 5.3% in FY18 (the government’s estimate based on actual data through

H1-FY18). Public investment is boosting growth, along with the competitiveness

boost to exports and tourism from Egyptian pound (EGP) weakness. This is helping

to offset a slowing contribution from private consumption, the economy’s main

engine. Rising gas output is another medium-term positive.

Inflation targets are within reach; central bank to remain on hold in 2018. We

expect CPI inflation to average 14.8% in FY19, putting the Central Bank of Egypt’s

(CBE’s) inflation target of 13% (+/- 3ppt) within reach. Nevertheless, we expect

interest rates to stay on hold in 2018 amid weak financial-market sentiment towards

emerging economies; foreign holdings of Egyptian treasury securities declined by

c.30% between March and July 2018 (Figure 2). Although the EGP has remained

stable so far, capital outflows will be a key monetary policy consideration, in our view.

We see a risk that monetary easing could be delayed beyond Q4-FY19 (our base

case). And while the CBE’s current FX reserves provide sufficient firepower, a reversal

of earlier easing cannot be ruled out should capital outflows intensify. We see higher

Federal Reserve interest rates as an additional headwind to further easing in Egypt.

Fiscal consolidation is progressing, but targets are ambitious. We expect the

fiscal deficit to narrow to 9.2% of GDP in FY19, slightly above the government’s 8.4%

target. We think the 2% primary fiscal surplus targeted under the IMF Extended Fund

Facility (EFF) will be difficult to achieve given that it would require subsidy cuts of

1.3% of GDP. Higher-than-expected global oil prices pose risks to our (and the

government’s) fiscal deficit forecasts. While the government has entered oil-price

hedging agreements to safeguard the budget (according to local media reports), we

think it is too early to assess the net impact on budget targets.

IMF programme is on track, but rising external debt remains a concern. The

third review of the EFF in June suggested that most performance targets had been

met. A narrower current account deficit and external borrowings have helped to

maintain FX reserves, which stood at USD 44.4bn at end-August. However, we are

concerned about external debt, which totalled c.USD 88bn in March 2018 – c.37% of

GDP. Half of this is government debt, which likely increased further following a recent

international issuance and the USD 2bn release of the IMF tranche in June.

Figure 1: Egypt macroeconomic forecasts Figure 2: FX reserves stable amid capital outflows

Foreign holdings of bills, EGP bn (LHS); FX reserves, USD bn

(RHS)



Source: Central Bank of Egypt, Standard Chartered Research

FY18 FY19 FY20



Policy rate (%) 16.75 15.75 11.75

USD-EGP* 17.50 17.55 17.60



Foreign holdings of EGP T-bills

CBE FX reserves (RHS)

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Bilal Khan +971 4508 3591

[email protected]



Investor sentiment towards

emerging markets is likely to be a

key monetary policy consideration

over the next few months

We are concerned by the rapid rise

in external debt

We see upside risks to our fiscal

deficit forecast from higher oil

prices




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Iraq – Catching a break

Economic outlook – Higher oil prices (and production)

Iraq is set to benefit from improved security (despite protests over public

services) and higher oil prices and oil output. Oil production exceeded 4.65

million barrels per day (mb/d) in August (Figure 2). Iraq has room to marginally

increase production given involuntary crude supply outages for some OPEC

producers; this was the highest monthly production since December 2016, just prior

to the OPEC deal. Our 2018 growth forecast of 3.0% also factors in improved

prospects for the non-oil sector following three years of contraction.

Policy – Much more comfortable

Fiscal and current account (C/A) balances are set to improve significantly on

higher oil prices and production. We therefore raise our 2018 fiscal and C/A balance

forecasts to 2.9% of GDP (0.6% prior) and 1.5% of GDP (-1.0%), respectively.

Improved liquidity will likely support reserves (estimated at USD 58bn in 2018). Barring

another sustained drop in oil prices, we think Iraq is unlikely to tap international markets

again soon. This should translate into lower government debt in the coming few years

(government debt is estimated at 55% of GDP in 2018 by the IMF).

As a more comfortable fiscal position lowers Iraq’s reliance on the IMF, this

could pose risk to structural reforms. We sense that the IMF has remained at

arm’s length, particularly since the May elections. The third and final disbursement

under the IMF’s Stand-by Arrangement is likely to be made following the formation of

a cabinet and the appointment of a new finance minister.

Politics

After the military victory against Daesh (the so-called ‘Islamic State’), the political

focus has turned to protests over public services. These erupted in Baghdad and

Basra after the May parliamentary elections because of water and electricity

shortages. Iraq is at a crossroads: we see this post-election phase as a window of

opportunity to put the country on the right path, with a focus on structural reforms.

Improving Iraq’s transparency and corruption metrics could further leverage foreign

interest in its USD 100bn reconstruction plans over the next decade. A coalition

government needs to be formed before policy makers can focus on further reforms

and reconstruction plans.

Figure 1: Iraq macroeconomic forecasts Figure 2: Higher oil prices and oil output provide some

relief for liquidity position

*end-period; Source: Standard Chartered Research Source: OPEC, Iraq oil marketing company (SOMO), Standard Chartered Research

2018 2019 2020



Policy rate (%)* 4.00 4.00 4.00

USD-IQD* 1,182 1,182 1,182


Fiscal balance (% GDP) 2.9 3.1 4.6

Oil production (mb/d, LHS)

OPEC cut (4.35mb/d,

LHS)

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We see some relief on the fiscal and

current accounts; liquidity to

continue improving

Iraq has come a long way from the

double-whammy of lower oil prices

and conflict with Daesh

Carla Slim +9714 508 3738

[email protected]

Economist, MENAP





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Jordan – Just getting by

Economic outlook – Challenging Growth is likely to remain sluggish in the near term. We lower our GDP growth

forecast for 2018 to 2.0% (2.2% prior). The economy grew only 1.9% in Q1; since

then, oil prices have risen further and the government’s political room for manoeuvre

has narrowed. A challenging domestic and external environment is compounded by

fiscal and monetary policy inflexibility, given the large public debt burden and

domestic interest rates that must track US hikes to preserve the USD-JOD peg.

These factors are likely to weigh on medium-term growth prospects; we also lower

our 2019-20 growth forecasts to 2.0% and 2.2% respectively (2.3% and 2.7% prior).

Progress on fiscal consolidation appears limited and politically difficult.

Despite recent measures to raise indirect taxes, the fiscal position remains under

pressure on both the revenue and spending sides. The H1-2018 fiscal deficit

(excluding grants) stood at c.JOD 1.5bn, roughly 4.9% of our nominal GDP forecast

for 2018 – in line with our expectations. Although the government has resumed

efforts to push through a new income tax law, building consensus on amendments

aimed at increasing the share of direct taxes is likely to remain politically difficult.

Without higher direct tax collection, reducing the public debt burden will remain a key

policy challenge (Figure 2).

GCC support could give the authorities time to implement more gradual and

politically palatable austerity measures; however, this is unlikely to address Jordan’s

underlying macroeconomic challenges, in our view. Policy makers see the USD-JOD

peg as fundamental to Jordan’s stability. However, without significant fiscal

adjustment, risks to the peg’s stability will continue to increase.

Regional cooperation could provide much-needed relief. Jordan recently signed

an agreement with Egypt to resume gas imports in 2019; they have been halted

since 2011. The energy minister has said substituting for Egyptian gas has cost

Jordan c.USD 7bn. Separately, the potential reopening of certain border crossings

with Syria could help to revive regional trade routes.

Keeping the IMF engaged will require reform commitment. While we expect

Jordan to enjoy continued support from the US and the GCC, progress on the IMF

programme is likely to be challenging. Although the IMF has reiterated its support for

Jordan, the second review of the programme remains outstanding; the first review

was completed a year ago. Progress with the IMF is unlikely unless it is preceded by

the passage of amendments to the income tax law, in our view.

Figure 1: Jordan macroeconomic forecasts Figure 2: The public debt burden remains a challenge

Public debt outstanding, % of GDP*

*end-period; Source: Standard Chartered Research *Based on our nominal GDP forecast for 2018; Source: Central Bank of Jordan,

Standard Chartered Research

2018 2019 2020



Policy rate (%)* 5.00 6.00 6.00

USD-JOD* 0.71 0.71 0.71



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Bilal Khan +971 4508 3591

[email protected]



Amending the income tax law is

likely to remain politically

challenging

Jordan plans to resume gas imports

from Egypt next year




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Kuwait – Getting back to growth

Economic outlook – Steadily improving

We expect growth to recover on higher oil prices. We raise our 2018 GDP growth

forecast to 2.6% (from 1.9% previously) as Kuwait increases oil output further. We

continue to expect higher oil output to boost growth to 3.1% in 2019, based on our

assumption of c.3% growth in the non-oil sector from 2018-20.

The budget is based on conservative assumptions. Policy makers appear to be

targeting a fiscal deficit of KWD 6.5bn for FY19 (ending March 2019); this is c.15% of

GDP, based on our nominal GDP forecasts. The FY19 budget projects revenue of

KWD 15bn (based on an oil-price assumption of c.USD 50/barrel) and spending of

KWD 21.5bn; this includes the annual transfer to the Future Generations Fund (FGF),

part of the country’s c.USD 524bn sovereign wealth fund, as required by law.

We lower our fiscal deficit forecasts further on higher oil prices. We now expect

smaller fiscal deficits (including FGF transfers) of 8.9% of GDP in FY19 and 4.7% in

FY20 (down from 9.5% and 5.3% prior, respectively). This reflects our revised oil

price forecasts of USD 75/bbl for 2018 (up from USD 71) and USD 78/bbl for 2019

(USD 75). Similarly, we lower our FY21 fiscal deficit forecast to 2.7% of GDP (from

3.3%), as we now expect oil prices to average USD 85/bbl in 2020, up from

USD 78/bbl previously. Against this backdrop, domestic public debt has been

declining as maturities have outpaced new issuance (Figure 2).

The government has struggled to win parliamentary approval for a new debt

law. This has kept Kuwait from issuing additional global debt after its USD 8bn

issuance in 2017. Although Kuwait does not need to borrow given its large pool of

financial assets, borrowing is intended to limit the drawdown of savings and establish

a sovereign benchmark. As such, if the debt law is passed, Kuwait could issue more

international debt in 2018 and 2019. However, pressure from the opposition could

increase in the coming months; another dissolution of parliament before the end of

2018 cannot be ruled out. This could further delay approval of the debt law.

We raise our current account (C/A) surplus forecasts on higher oil prices. We

now expect surpluses of 17.7% of GDP in 2018 and 18.4% in 2019 (14.9% and

16.4% prior, respectively) on higher oil export proceeds. We expect the surplus to

rise further to 21.6% in 2020 (17.2% prior). We also raise our Central Bank of Kuwait

policy (discount) rate forecasts for end-2019 and end-2020 to 4.0% (from 3.75%) to

reflect recent upward revisions to our Federal Reserve interest rate forecasts.

Figure 1: Kuwait macroeconomic forecasts Figure 2: Domestic debt stock is declining

Public debt, KWD bn

*end-period; **for fiscal year starting 1 April; Source: Standard Chartered Research Source: Central Bank of Kuwait, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 3.25 4.00 4.00

USD-KWD* 0.30 0.30 0.30



1

2

3

4

5

Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16 Apr-17 Jan-18

We now expect a fiscal deficit of

8.9% of GDP in FY19, versus the

budget projection of c.15%

Bilal Khan +971 4508 3591

[email protected]



The government could face

additional opposition pressure;

dissolution of parliament cannot be

ruled out




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Lebanon – On hold until cabinet is formed

Economic outlook – Mixed signals

We continue to expect 2018 growth of 2% as economic indicators send mixed

signals. The central bank’s coincident indicator – a weighted average of real-sector

indicators that mirrors economic activity – rose 2.7% y/y in June. Arrivals at Beirut

international airport have continued to rise, by 10% y/y in H1. However, we highlight

weakness in the property sector: construction permits issued in May and June shrank

to a multi-year low, while cement deliveries were broadly flat, suggesting lower future

investment in housing due to current weak dynamics. Under-investment will continue

to hinder growth prospects; the disbursement of USD 11bn of commitments by the

Economic Conference for Development through Reforms with the Private Sector

(CEDRE) has been delayed by the cabinet formation process.

Policy – Missing a cabinet in action

Fiscal policy is on hold amid ongoing cabinet formation since the May

elections. We raise our 2018 fiscal deficit forecast to 9.6% of GDP (8.5% prior). This

reflects our higher oil price assumption (which would feed through to transfers to

Electricité du Liban) and the slowdown in reform momentum initiated by the previous

cabinet, currently a caretaker government. We expect further reforms only upon

formation of the new cabinet, which will gradually unlock USD 11bn of CEDRE

commitments.

Commercial banks’ interest rates are rising to attract deposit inflows, despite Banque

du Liban remaining on hold (Figure 2). We therefore lower our 2018 policy rate

forecast to 10.0% (12.0% prior). Given higher oil prices than we had expected, we

raise our 2018 current account deficit forecast to 23.5% of GDP (21.2% prior) on a

higher oil import bill, and we raise our 2018 inflation forecast to 4.9% (3.0% prior).

Politics – Formation of the new cabinet is underway

The political roadmap will only be complete once the coalition cabinet is

formed. This is important for the resumption of fiscal policy making and foreign

affairs. Relations with Saudi Arabia stand to benefit, with 20 project agreements

pending the new cabinet’s signature. A rapprochement could pave the way for the

lifting of travel warnings on Lebanon from many Gulf states. Alongside the return of

refugees to safe areas in Syria, this should provide a much-needed boost to tourism.

Figure 1: Lebanon macroeconomic forecasts Figure 2: Commercial banks’ rates have been rising

despite the BdL repo rate staying unchanged (%)

*end-period; Source: Standard Chartered Research Source: BdL, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 10.00 10.00 10.00

USD-LBP* 1,508 1,508 1,508



2

4

6

8

10

12

14

0

2

4

6

8

Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

LBP average rate on deposits (LHS)

USD average rate on deposits (LHS)

Policy rate (RHS)

We still expect below-potential

growth in Lebanon given under-

investment, despite an

improvement in services activity

Carla Slim +9714 508 3738

[email protected]

Economist, MENAP


Fiscal policy and conventional

monetary policy should resume

upon the formation of a cabinet




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Oman – Some relief, but challenges remain

Economic outlook – Still slow

We expect Oman’s prospects to improve, despite a challenging growth

environment. Consumption remains weak, as reflected in the c.16% y/y decline in

new vehicle registrations in January-July 2018. This is likely a result of still-weak

consumer sentiment and a contracting expatriate population (down by 2% or

c.42,000 workers in H1-2018, across both the public and private sectors).

Policy – Narrowing twin deficits

Improved liquidity, driven by higher oil prices, should cap government debt.

This follows four years of rapid public debt accumulation (to 47% of GDP in 2018

from 5% in 2014, according to the IMF). The fiscal deficit was only USD 3.6bn in H1-

2018 (down c.40% y/y). However, it was still larger than we expected. Oil revenue

undershot our expectations as the discount of Oman’s official oil selling price to Brent

widened: Brent was 20% y/y higher than Oman’s oil price in Q2-2018. We expect this

gap to gradually close in H2-2018 (Figure 2). We raise our 2018 fiscal deficit forecast

to 6.9% of GDP (6.0% prior) since government spending overshot our expectations,

particularly on subsidies and oil & gas.

While liquidity has improved, this has yet to be reflected across the banking system.

The credit-to-deposit ratio (109.1% in June) remains elevated and reflects subdued

deposit growth (2.5% y/y); credit growth remained stable at 4%. Higher interest rates

will likely continue to weigh on liquidity. We raise our 2019 policy rate forecast to

4.0% (3.55% prior) to factor in our revised Fed call for four hikes in 2019.

Politics

Oman’s neutral stance, whether on the diplomatic dispute with Qatar or with global

powers, limits risks to political stability. This is reflected in the June decision by the

US Senate to give financial support to Oman to increase security along its border

with Yemen. We also expect investment from China to rise in the coming years given

the development of the Sino-Oman Industrial City at Duqm – Oman’s flagship

diversification project. Domestically, political risk will continue to centre on the

untested succession process, given the Sultan’s centralised role. Against a

challenging economic backdrop, popular movements and gatherings could put

pressure on the authorities and hamper government efforts to rein in spending.

Figure 1: Oman macroeconomic forecasts Figure 2: Discount to Brent weighed on government oil

revenue in H1-2018 (USD/bbl)


2018 2019 2020



Policy rate (%)* 3.05 4.00 4.00

USD-OMR* 0.39 0.39 0.39



Oman official oil price

Brent

20

30

40

50

60

70

80

90

May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18

Narrowing twin deficits should lead

to slower accumulation of

public debt

Carla Slim +9714 508 3738

[email protected]

Economist, MENAP


Banking-sector liquidity has yet

to improve




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Pakistan – Fund, friends and financing

Economic outlook – Stabilisation policies are needed

Credible policies are needed to preserve macroeconomic stability. We maintain

our 4.8% GDP growth forecast for FY19 (year ending June 2019), down from 5.8% in

FY18. While the new government hopes to strike a balance between growth and

stabilisation, we think stabilisation will take precedence. Our base case is that policy

makers will take the necessary macroeconomic adjustment measures, – including

further Pakistani rupee (PKR) weakness and tighter fiscal and monetary policy, likely

under an IMF programme – to address pressure on the external account from strong

aggregate demand. Delaying these steps to preserve growth would be a Faustian

bargain, in our view, as more aggressive measures would likely be required later.

Bilateral financial assistance is unlikely to substitute for IMF support. After over

a month of deliberations, the PTI-led government appears undecided on how to

resolve external financing challenges (see Pakistan – Decisions, decisions). Prime

Minister Imran Khan’s visit to Saudi Arabia and the UAE was intended to repair

bilateral ties and pave the way for financial support. Although bilateral financial

support from allies – such as credit facilities for oil purchases and central bank

deposits – could help to bridge near-term external financing gaps, it would not

address the underlying causes of the widening current account (C/A) deficit.

Furthermore, such assistance is unlikely to be welcomed by markets as a catalyst for

reform, the way a formal IMF programme would be. As such, we believe IMF support

is likely to be needed and sought.

The ‘mini budget’ – Necessary but insufficient

The PTI is targeting a 5.1% of GDP fiscal deficit in FY19. Finance minister Asad

Umar presented the PTI’s ‘mini-budget’ for FY19 in mid-September. This supersedes

the outgoing PML-N government’s budget. In his parliamentary speech, Umar said

the PML-N budget was “unrealistic” and that it would have caused this year’s fiscal

deficit to widen to 7.2% of GDP from 6.6% in FY18. While a greater focus on fiscal

consolidation is needed amid economic overheating, we think the PTI’s announced

budget cuts will be insufficient to address risks to external stability from growing

aggregate demand. We expect additional fiscal measures to be announced, likely

under an IMF programme.

Figure 1: Pakistan macroeconomic forecasts Figure 2: Further FX adjustment is likely to be needed

USD-PKR; Pakistan real effective exchange rate (REER)




FY18 FY19 FY20



Policy rate (%) 6.50 10.00 10.00

USD-PKR* 130.00 139.00 144.00



REERUSD-PKR

95

100

105

110

115

120

125

130

Aug-13 Apr-14 Dec-14 Aug-15 Apr-16 Dec-16 Aug-17 Apr-18

We expect further PKR weakness in Q4 to bring

REER into balance

Bilal Khan +971 4508 3591

[email protected]



The PTI’s fiscal cuts are insufficient

to address risks to macro stability

We maintain that IMF support is

likely to be needed, and sought





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External-sector challenges leave little room for manoeuvre Supporting FX reserves has caused central bank liabilities to rise sharply. We

focus on net international reserves (NIR) rather than gross FX reserves, as we think they

are a better indicator of the underlying FX reserve buffer given the central bank’s large

swap and forward positions with commercial banks. Accounting for FX liabilities, which

rose further after the State Bank of Pakistan (SBP) drew on the enhanced bilateral swap

line with the People’s Bank of China in Q2, we estimate that NIR declined to c.-USD

6.7bn in June. Gross FX reserves stood at USD 9.3bn as of 14 September.

C/A deficit to narrow on stabilisation focus. Umar has been quoted in the media

as saying that the FY19 C/A deficit would reach USD 21bn without the government’s

corrective measures through the mini-budget. This would translate into a deficit of

6.6% of GDP, based on our nominal GDP estimates. We expect further fiscal cuts,

along with tighter monetary policy and a weaker Pakistani rupee (PKR), to narrow the

C/A deficit. Although our C/A deficit forecasts for FY19 and FY20 remain unchanged

in USD terms, they now correspond to 4.9% of GDP for both years (versus 4.7% and

4.6% prior, respectively) due to revisions to our USD-PKR forecasts.

IMF support is likely to be agreed soon We expect Pakistan to seek an IMF programme, despite bilateral financial support

from the GCC and growing engagement with China. Based on Pakistan’s country

quota, a potential programme would be similar in size to the USD 6.6bn Extended

Fund Facility (EFF) concluded in September 2016. However, it could be significantly

larger should the IMF give Pakistan exceptional access to funding. This is likely to be

needed given the scale of Pakistan’s financing requirements. It is in the IMF’s interest

to play a role in Pakistan’s macroeconomic policy making, given its exposure to

Pakistan from the previous EFF.

We see further PKR weakness, higher inflation and tighter monetary policy. An

IMF agreement is likely to require further FX adjustment and greater exchange rate

flexibility. We see upside risks to our 130 forecast for end-2018 should a bigger

upfront FX adjustment be an IMF precondition. We raise our USD-PKR forecasts to

139 and 144 for end-2019 and 2020, respectively (135 and 140 prior). We also

recently raised our global oil price forecasts to USD 78/barrel (bbl) for 2019 and USD

85/bbl for 2020. A weaker PKR and higher oil import costs are likely to push domestic

inflation higher via first and second-round effects. Higher indirect taxes are likely to

put upward pressure on CPI inflation. To account for these factors, we raise our

average inflation forecasts for FY19 and FY20 to 6.9% and 7.6% (6.3% and 6.8%

prior). We expect rising inflation and the focus on stabilisation to lead to tighter

monetary policy. As such, we raise our SBP policy rate forecasts to 10% for end-

FY19 and FY20 (8.5% prior).

A geopolitical hotspot China and the US are vying for influence in Pakistan. The US has expressed

concerns about the implementation of the China-Pakistan Economic Corridor (CPEC)

in Pakistan. Secretary of State Mike Pompeo has warned that the US would not

support an IMF programme request by Pakistan if the funds were used to repay

Chinese lenders. While he subsequently said the US would not block an IMF bailout

request, we think greater transparency on CPEC agreements will be a key condition

for US support of an IMF programme request from Pakistan.

The scope, scale and conditions of potential Saudi financial support remain

unclear. Media reports suggest that Pakistan has invited Saudi Arabia to join CPEC. It

is unclear how this would fit with China’s plans in Pakistan. The conditions for Saudi

involvement in CPEC or other bilateral financial support to Pakistan are also unclear;

Khan pledged Pakistan’s commitment to Saudi security during his September visit.

We expect the C/A deficit to narrow

to 4.9% of GDP in FY19

The central bank’s net reserves

declined to -USD 6.7bn in June, by

our estimates

A potential IMF programme could

be larger than Pakistan’s country

quota suggests

Greater transparency on CPEC

projects is likely to be a key US

condition for supporting an IMF

programme




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Qatar – Future tailwinds

Economic outlook – Non-oil growth picks up speed

We see growth picking up in the coming months. Sluggish Q1 growth of 1.4%

was due to a contraction in oil-sector growth (-2.3% y/y). However, the non-oil-sector

grew a strong 4.9% y/y, the fastest since 2016. We see this as a sign that Qatar

continues to adjust to a new paradigm following the rift with neighbouring countries.

We maintain our 2018 growth forecast of 2.8%.

Policy – Liquidity set to continue improving

We expect policy to be geared towards greater self-reliance. On the domestic

front, Qatar is working to diversify its economic base amid the ongoing diplomatic

and trade dispute. The country is diversifying its export partners, which has

contributed to a better external position. We raise our 2018 current account (C/A)

surplus forecast to 7.0% of GDP (from 6.5%) to reflect our higher oil price assumption

and a higher-than-expected Q1-2018 C/A balance (USD 3.2bn, up 14% y/y). A larger

C/A surplus should bode well for FX reserves, which reached USD 45bn in July, up

c.USD 10bn from the post-dispute low in September 2017. Improved FX liquidity

should help to close the gap between the Qatari riyal (QAR) onshore and offshore

spot rates. While QAR offshore spot has converged back towards the onshore rate, it

has not yet returned to pre-crisis levels. We lower our 2018 policy rate forecast to

5.0% (5.5% prior), as the central bank has opted to raise only the deposit rate along

with Fed hikes this year.

We now expect the fiscal account to be balanced in 2018. We raise our 2018

fiscal balance forecast to 0% of GDP (from -2% previously) to account for our higher

oil price assumption as well as for the small surplus posted (USD 264mn) in Q1-2018

(Qatar’s first fiscal surplus since Q4-2015). The return to fiscal surpluses – albeit

small – will likely translate into a gradual decrease in government debt, which is

expected to reach 55% of GDP in 2018, according to the IMF.

Politics

A resolution of the stalemate between Qatar and the ‘quartet’ – Saudi Arabia, the

UAE, Egypt and Bahrain – seems unlikely in the near term, despite ongoing

mediation efforts by the US and Kuwait. Given the duration and gravity of the rift, it

will likely have enduring implications for intra-GCC relations.

Figure 1: Qatar macroeconomic forecasts Figure 2: FX reserves to benefit from growing C/A surplus

USD bn

*end-period; Source: Standard Chartered Research Source: QCB, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 5.00 5.50 5.50

USD-QAR* 3.64 3.64 3.64



32

34

36

38

40

42

44

46

48

May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18

FX reserves up by USD 10bn since

the low of the crisis

Carla Slim +9714 508 3738

[email protected]

Economist, MENAP


Both the fiscal and current account

are now back in surplus




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Saudi Arabia – Adjusting reforms

Economic outlook – Bottoming out

We expect a gradual growth recovery on higher oil output. We maintain our 2.2%

growth forecast for 2018, accelerating to 2.7% in 2019. Saudi Arabia has gradually

increased crude oil output in recent months, in line with our expectations, and we

expect a further increase in the coming months. While this is already factored into our

base case, we see potential upside risk to our growth forecasts from a larger-than-

expected increase in oil output, if warranted by global supply-demand conditions.

Policy makers are adjusting to higher oil prices, not backtracking on reforms.

The rise in oil prices has eased pressure on policy makers. The authorities recently

said that the long-awaited Saudi Aramco IPO had been put on hold. Markets had seen

the IPO as central to plans to transform the Public Investment Fund (PIF) into a

sovereign wealth fund. Policy makers now appear to be working on plans to raise debt

to substitute for the FX proceeds that would have been raised from the IPO. Although

this has raised concerns about policy credibility, we think policy makers remain

committed to the economic diversification goals set out in ‘Vision 2030’. However, we

think they are adjusting their original plans given the significant rise in oil prices.

Policy makers announced plans to increase fiscal spending further in the 2019

pre-budget statement. Although we now expect the 2018 fiscal deficit to narrow to 4.5%

of GDP in 2018 (5.1% prior) on higher-than-expected oil prices, we see larger deficits

over the medium term. We raise our 2019 and 2020 fiscal deficit forecasts to 4.5% and

2.0% of GDP, respectively (2.8% and 0.8% prior), despite recent upward revisions of

our average Brent oil price forecasts to USD 78/bbl (2019) and USD 85/bbl (2020). Still,

Saudi Arabia appears to be on track to achieve a balanced budget under the revised

Fiscal Balance Program (see Saudi Arabia – Uncharted territory; Figure 1). We lower

our 2018 inflation forecast to 3% (4.3% prior) given weaker-than-expected inflation in

8M-2018. We raise our policy (repo) rate forecast for end-2019 to 4.0% (from 3.5%) to

reflect recent upward revisions to our Federal Reserve rate forecasts.

The current account surplus is set to increase on higher oil-export proceeds. We

now see the 2018 and 2019 surpluses at 11.4% and 13.4% of GDP, respectively (9.8%

and 12.0% previously) on higher oil-export proceeds. While this is likely to ease pressure

on the Saudi Arabian Monetary Authority’s (SAMA’s) FX reserves, additional sovereign

and quasi-sovereign external financing is likely to be needed in 2019 – despite the smaller

fiscal deficit – as the PIF pursues its broadened mandate for overseas investments.

Figure 1: Saudi Arabia macroeconomic forecasts Figure 2: Higher oil prices to support twin balances

Average Brent crude prices, USD/bbl (RHS); fiscal and C/A

balances, USD bn (LHS)

*end-period; Source: Standard Chartered Research Source: SAMA, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 3.00 4.00 4.00

USD-SAR* 3.75 3.75 3.75



Fiscal

Current account

Oil prices

30

40

50

60

70

80

90

-100

-50

0

50

100

150

2017 2018F 2019F 2020F

Forecast

Bilal Khan +971 4508 3591

[email protected]



We forecast the 2018 fiscal deficit at

4.5% of GDP

We think policy makers are still

committed to the Vision 2030 goals

External financing is likely to be

needed as the PIF pursues its

overseas investment mandate





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Turkey – Of crises and policy responses

Economic outlook – Seat belts fastened

Even prior to Turkey’s currency crisis. we had expected growth to slow. We

now lower our 2018 forecast to 3.5% (4.6% prior) to factor in the effects of the crisis.

Real GDP growth slowed to 5.2% y/y in Q2-2018, the weakest since Q3-2016 –

reaffirming that growth likely peaked at 11.5% y/y in Q3-2017. The crisis is likely to

have weighed on household consumption during the summer as uncertainty and

imported inflation affected spending. Consumer confidence dropped to a three-year

low in September, and imports fell 7% y/y in July. We see unemployment rising

further in the coming months; we think it bottomed out in April and is set to re-test

highs of c.12% as the economic slowdown feeds through, albeit with a lag.

Turkey’s medium-term economic programme (MTEP) forecasts a growth slowdown

to 3.8% in 2018 and 2.3% in 2019 (from 7.4% in 2017), driven by tighter fiscal policy.

The 2018 and 2019 forecasts have been revised down from 5.5% for both years

previously. The MTEP aims to address the economic imbalances that have left

Turkey’s external sector vulnerable to changing risk sentiment by re-balancing the

economy towards exports and production from construction-fuelled growth.

Policy – Currency crisis ushers in tightening

We expect the central bank to maintain a hawkish bias, although aggressive

tightening may already be over. Turkey has proved to be one of the most vulnerable

emerging markets in 2018, as we had consistently warned. This has prompted a rise of

11.25% in the average cost of funding rate since the start of the year. At this stage of

the business cycle, we expect the Central Bank of the Republic of Turkey (CBRT) to

stay on hold for the rest of 2018 and 2019. We think the CBRT will look to cut rates as

soon as inflation permits; this might not be before 2020, as the MTEP foresees inflation

peaking at 20.8% at end-2018 and slowing to single digits only in 2020. We raise our

2018 average inflation forecast to 15.3% (11.0% prior) to factor in the pass-through to

the CPI basket from spiralling Turkish lira (TRY) depreciation.

We expect a coordinated tightening of monetary and fiscal policy by the CBRT

and the government. Large-scale infrastructure projects that have not yet been

tendered will be suspended, according to the authorities. This is in line with our

expectations, as we had already factored some fiscal tightening into our forecasts.

Figure 1: Turkey macroeconomic forecasts Figure 2: We expect CBRT to maintain a hawkish bias

%


2018 2019 2020



Policy rate (%)* 24.00 24.00 20.00

USD-TRY* 6.20 6.60 7.00



CPI y/y

3M Interbank rate

Average cost of funding rate

0

5

10

15

20

25

30

Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18

Carla Slim +9714 508 3738

[email protected]

Economist, MENAP


Philippe Dauba-Pantanacce +44 20 7885 7277

[email protected]



Hawkish and prudent monetary and

fiscal policy




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We maintain our 2018 current account (C/A) deficit forecast of 5.8% of GDP,

above the new MTEP target of 4.7%. The C/A deficit for January-July 2018 widened

27% y/y to USD 33bn as import growth outpaced export growth. We welcome efforts

to boost exports under the MTEP, although we think they will take about 18 months

to kick in.

Other issues – Banking-sector pressure points

Leverage had increased across Turkey’s banks, households and corporates; the

corporate sector is the most highly leveraged, at c.70% of GDP in 2017 (see Special

Report, Global leverage – Finding the weak links). Of particular concern is the

corporate foreign-currency debt burden (c.USD 200bn), which has long been a

source of vulnerability, particularly in the context of TRY depreciation. Measures

introduced in Q1-2018 to regulate unhedged FX borrowing by corporates are a

positive step towards reducing vulnerability. A presidential decree published in mid-

September that requires contracts between two local entities to be TRY-denominated

is also positive, in our view.

Corporate debt could spill over to banks’ balance sheets. Even before the crisis,

we expected NPLs to rise from the current low of 3% on economic overheating

fuelled by the Credit Guarantee Fund (TRY 250bn). Following monetary tightening,

we expect credit growth to slow further in the coming months – which might

exacerbate asset-quality deterioration. Concerns also persist over the banking

sector’s reliance on external funding and short-term refinancing risks.

Politics – International tensions ratchet up

Strained relations with the US have become even more acute as Washington

demands that Ankara release US citizen Pastor Andrew Brunson. The US claims that

he is being detained for “hostage diplomacy” purposes, with Turkey continuing to

demand the extradition of US-based preacher Fethullah Gülen.

There are several other points of contention between the two countries. The US has

passed sanctions against two Turkish ministers and imposed tariffs on Turkish

aluminium and steel. It is also proposing a Defence Bill to block the delivery of F-35

fighter jets to Turkey, to retaliate against Turkey’s pledge to buy a Russian S-400

anti-missile system. Moreover, the US is investigating allegations that Turkey – via

individuals and/or banks – evaded US sanctions on Iran. An executive of a Turkish

state bank was convicted in May, and the investigation continues.

Syria further underscores Turkey’s complicated diplomatic position. Ankara has

increased its tactical cooperation with Russia and Iran, but has been at odds with

these countries in Syria, most recently on the Idlib situation. Turkey is fighting Syrian

Kurds, who want an autonomous territory on the Turkish border, while Western allies

have supported them.

On balance, we expect Erdogan to try to engineer a de-escalation with both Europe

and the US. The reality is that Turkey has no real alternatives to these alliances. It is

the second-largest military power in NATO. Europe is by far its largest trading partner

(via the customs union), and indispensable capital flows come mostly from the US

and Europe. Recent aggressive tightening by the central bank – despite Erdogan’s

repeated opposition to high interest rates – suggests that policy makers still have a

capacity for pragmatism in response to external pressure, albeit with a lag.

Corporate debt is the primary

leverage concern

Points of contention with the West –

notably the US – have multiplied






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UAE – Policy support on the way Economic outlook – Sentiment to recover gradually Economic adjustment has further to run this year. We maintain our 2.6% GDP

growth forecast for 2018. The economy’s adjustment to excess capacity across a range

of sectors – including retail, hospitality and real estate – has further to go. Economic

momentum has been subdued so far this year; the Central Bank of the UAE (CBUAE)

reported a c.0.5% q/q contraction in total employment in Q2-2018.

Rising oil prices should mitigate downside risks to the medium-term outlook.

We raise our 2019 and 2020 GDP growth forecasts to 3.3% and 3.5% (from 3.1%

and 3.3%, respectively). This mainly reflects recent upward revisions to our annual

average oil price forecasts to USD 78/bbl and USD 85/bbl, from USD 75 and USD 78

prior. We expect higher prices, along with increased crude output, to support plans to

use fiscal policy to support the economy – particularly in Abu Dhabi.

Policy makers are using counter-cyclical measures to support economic activity,

alongside structural reforms. The cabinet has approved an AED 180bn three-year

federal budget. We expect a coordinated rise in emirate-level spending. Abu Dhabi

plans to spend AED 20bn of its three-year, AED 50bn fiscal stimulus plan – worth c.6%

of the emirate’s GDP – in 2019 to support demand (see UAE – Larger emirates

announce fiscal stimulus). Although we raise our UAE 2018 fiscal surplus forecast to

1.2% of GDP (from 1.1%) on higher oil prices, we see a smaller 2019 surplus of 0.1%

(1.5% prior) due to higher spending. Other policy initiatives are focused on lowering the

cost of doing business (e.g., recent power-tariff cuts for industrial consumers).

Structural reforms, including changes to immigration laws to allow extended-residency

visas for expatriates upon retirement, are also being rolled out.

A more accommodative fiscal stance – including investment spending in Dubai in

EXPO 2020 projects – could provide a much-needed boost to consumer sentiment

as the economy adjusts to VAT implementation and higher interest rates. We now

expect the CBUAE to raise its policy (repo) rate to 3.75% by end-2019 (3.25% prior),

in line with recent changes to our US Fed rate view.

The real-estate sector remains under pressure. Residential property prices fell

5.8% y/y in Dubai and 6.9% in Abu Dhabi in Q2-2018, according to CBUAE’s latest

quarterly economic review. Excess supply continues to weigh on the rental market,

with rents declining 8.3% y/y in Dubai and 10.6% in Abu Dhabi (Figure 2).

We now forecast larger current account surpluses on higher oil prices, at 8.0%

and 7.4% of GDP, respectively, in 2018 and 2019 (7.0% and 6.7% previously).

Figure 1: UAE macroeconomic forecasts Figure 2: Property-market sentiment remains subdued on

lagged impact of lower oil prices

Residential rental prices, rebased Q2-2015=100 (LHS); Brent

crude, USD/bbl, avg for quarter a year ago (RHS)

*end-period; Source: Standard Chartered Research Source: Central Bank of the UAE, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 2.75 3.75 3.75

USD-AED* 3.67 3.67 3.67



Oil (RHS)

Dubai

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Bilal Khan +971 4508 3591

[email protected]



Higher oil prices to support fiscal

stimulus plans, particularly in the

emirate of Abu Dhabi

Higher oil prices should lead to

higher C/A and fiscal surpluses

Real-estate prices and rents fell in

Dubai and Abu Dhabi in Q2-2018




Economies – Africa



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Africa – Navigating troubled waters

Global uncertainty, differentiated local impact

A less certain global environment has implications for Sub-Saharan Africa (SSA) over

the coming quarter. Further Fed tightening, trade-war concerns and emerging-market

(EM) vulnerabilities will all shape the external environment for SSA. South Africa, the

most developed emerging market in the region, is traditionally more vulnerable to

portfolio outflows and has already faced significant currency volatility during the

recent EM sell-off. That said, South Africa is less vulnerable than other emerging

markets given its low share of its foreign currency-denominated debt, its refinancing

needs and banking-sector strength. Our base case is for South Africa to retain its

investment-grade rating from Moody’s, safeguarding World Government Bond Index

inclusion (see Beyond Turkey – EM contagion risks).

In frontier Africa, capital outflows have been limited so far. Ghana, Nigeria and

Zambia have large offshore holdings of local debt (see Africa – Top charts, Figure 4).

Ghana is potentially the most vulnerable to global risk conditions given a large

offshore presence. Outflows seem limited so far, but in September the government

had to postpone its rollover issue of a 5Y bond due to unfavourable market

conditions. Zambia’s vulnerability arises from an erosion of confidence because of

the absence of an IMF deal, although portfolio outflows may be limited by the lack of

fixed-income market liquidity. In Nigeria, there is limited concern about the central

bank’s ability to accommodate outflows and preserve FX stability given large FX

reserves and higher oil prices.

Global uncertainty is not to blame for the growth underperformance of key

economies. South Africa entered a technical recession in H1-2018, and Nigeria and

Angola both face a sluggish growth outlook. This is mostly due to domestic and

idiosyncratic factors. Net exports made a positive contribution to growth in all

three countries.

Commodity prices remain key to the outlook. While the escalation of trade wars

has impacted metal prices, for now the decline is much more modest than in 2015. In

frontier Africa, Zambia is the most exposed to falling metal prices given its

dependence on copper, but rising output has mitigated the recent decline in copper

prices. Namibia and Mozambique are also affected, but to a lesser extent. The key

difference with 2015 is that oil prices remain high (largely due to geopolitics). While

high oil prices will help oil-exporting countries, they will create challenges for others.

Oil, the IMF and politics

Oil – Winners and losers

So far, only Nigeria seems to be a clear winner. It has benefited the most from

higher oil prices, as highlighted by the significant rise in FX reserves (though this is

largely due to higher capital inflows following the FX regime change in 2016; greater

transparency in the management of oil earnings may also be helping at the margin).

Other traditional winners from higher oil prices in SSA are still struggling. In

Angola and Gabon, higher oil prices have been crucial in helping to avoid a deeper

economic crisis, and twin deficits will likely narrow. However, much remains to be

done in terms of adjustment and rebalancing, as highlighted by the fact that both

countries’ FX reserves have stagnated despite higher oil prices. Ghana and

Cameroon, which are modest oil exporters, should also see moderate gains in fiscal

and external balances (in Cameroon, the positive impact on higher fiscal revenues

tends to be offset partly by higher energy subsidies).

The key difference with the 2015

risk aversion episode is that the fall

in non-oil commodity prices is more

moderate this time, while oil prices

remain higher

Higher oil prices benefit all oil

exporters, but only Nigeria has seen

a clear improvement in its external

position

Global conditions can have a

greater impact on countries with

large offshore holdings of local debt

For oil importers, the impact of

higher oil prices remains

manageable for now

Victor Lopes +44 20 7885 2110

[email protected]

Senior Economist, Africa






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Among oil importers, Senegal’s fundamentals may deteriorate the most due to

higher oil prices, with twin deficits impacted by rising energy subsidies in the absence

of automatic fuel-price adjustment and higher oil imports. Kenya is one of the largest

oil importers, but private marketing of fuel and a cost-recovery regime typically shield

the fiscal balance from rising prices. For Kenya’s trade balance, declining capital

imports in line with the completion of the Standard Gauge Railway mitigate the

impact of higher oil imports. Côte d’Ivoire (CDI) is a modest oil importer and adjusts

its fuel prices more frequently than Senegal, so it is much less vulnerable. Oil prices

(coupled with FX weakness) will also influence monetary policy, given their impact on

inflation across the region. More tightening is in sight for key SSA oil importers. In

Francophone Africa, inflation is less of an issue given the peg to the EUR.

IMF – Here to help

Relations with the IMF have an important impact on investor confidence. The

markets reacted positively when Angola requested a funded programme recently,

while in Zambia, confidence continues to erode given the lack of detail on

negotiations towards a much-needed IMF programme. The government must

renegotiate its debt with China (among other things), but little has emerged on the

subject even after the Forum on China-Africa Cooperation in September.

Kenya stated in September that it is not renewing its stand-by precautionary

facility from the IMF, as the interest cap remains a key obstacle to any agreement.

Market reaction has been limited: this was only precautionary financing, and Kenya

does not face significant external pressure; in addition, it was already evident in

August that the parliament’s rejection of the interest cap removal entailed the risk of

non-renewal of the IMF facility.

For other countries under IMF programmes, implementation has been uneven.

Ghana’s performance so far has been satisfactory, but the government has

confirmed that it intends to ‘graduate’ from its current IMF programme in 2019, and

then seek only a non-funded programme such as a Policy Support Instrument. This

might raise questions on the strength of Ghana’s reform discipline without the anchor

of an IMF programme. CDI continues to perform well, while Cameroon’s and Gabon’s

latest reviews were mixed – especially in Gabon, where disbursement was delayed

because the government missed several targets. Both countries’ year-end IMF

reviews will be important to monitor.

Politics, as always

So far, political change has underscored improving investor confidence in

Angola, Ethiopia, South Africa and Zimbabwe. A busy electoral calendar in Q4-2018

and 2019 means that politics will continue to matter. Presidential elections in Cameroon

on 7 October will be closely monitored given increasing concerns over the risk of

escalating unrest in the Anglophone provinces. Local elections in CDI on 13 October

will also be an important test of strength for President Ouattara’s party, especially after

the recent split in his ruling coalition led to increased political uncertainty. Political risk

has affected the performance of CDI and Cameroon Eurobonds. In the run-up to

Nigeria’s general election in February 2019, the concern is that reform momentum

could take a backseat. Elections in Senegal, also in February, matter because of the

possible impact on fiscal policy during the electoral period.

The return of political risk premium

and a busy electoral calendar

Some countries have struggled to deliver under their IMF programmes

IMF relations matter for investor

confidence




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Africa – Top charts Figure 1: Frontier Africa elections in focus

Figure 2: Renewed pressure on SSA currencies

SSA FX (USD-local currency), rebased Jan 2018 = 100

Cameroon Presidential election on 7 October

Unrest in Anglophone provinces has increased this year

Côte d’Ivoire

Regional and mayoral elections on 13 October

The ruling coalition has fallen apart, increasing uncertainty ahead of the 2020 presidential election

Gabon Legislative and local elections on 6 and 27 October

Senegal Presidential election on 24 February 2019

Nigeria Presidential and National Assembly elections on 16 February 2019; governorship and State Assembly elections on 2 March

Source: Standard Chartered Research Source: Thomson Reuters Datastream, Standard Chartered Research

Figure 3: IMF and Africa

Figure 4: Significant foreign holdings of domestic debt

Non-resident holdings of total local currency public debt, %

Country Current status Amount

(USD mn) Date current

prog.

Angola In talks for ECF – –

Cameroon ECF 666 2017/20

Côte d'Ivoire ECF/EFF 899 2016/19

Gabon ECF 642 2017/20

Ghana ECF 918 2015/19

Kenya SBA/SCF

(precautionary) 1,500 Expired in 2018

Mozambique In talks 282.9 Cancelled in 2016

Senegal PSI* – 2015/18

Tanzania PSI* – 2014/18

Uganda In talks for PCI* – –

Zambia In talks – –

Source: IMF, Standard Chartered Research * non-funded programmes Source: Local Authorities, Standard Chartered Research

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Figure 5: Inflationary pressure has eased

Average CPI inflation, % y/y

Figure 6: Reform differentiation is key

Eurobonds, Z-spread, bps

Source: Thomson Reuters Datastream, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

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Angola – Not just a summer fling

Policy – Finally requesting an IMF funded programme

Angola announced in August that it had requested an IMF Extended Fund

Facility (EFF). A potential IMF programme has been on and off since 2016, when

the government first requested financial support. It subsequently withdrew the

request for political reasons (the August 2017 presidential election) and because oil

prices rebounded.

Talk of an IMF programme resurfaced following Joao Lourenco’s victory in the

2017 presidential election, especially given the new president’s reform agenda; he

and the Ministry of Finance (MoF) mentioned several times in the press that an IMF

programme might be possible. Our call last year was for an IMF deal in 2018, but the

rebound in oil prices and availability of external financing reduced the likelihood of a

funded programme. In April 2018, the government requested a Policy Coordination

Instrument (PCI). While this is not a funded programme, the announcement was well

received by the market given that it still represented a commitment to reform.

The government finally sought a funded programme in August, despite higher oil

prices and the availability of external financing (notably bilateral financing and

Eurobond issuance). The MoF statement mentions “slower economic growth” and the

“impact on the budget” (mainly due to lower oil production) as reasons for requesting

financial assistance. Angola’s oil production has fallen to a 12-year low of 1.4 million

barrels per day (mb/d), 14% lower than at end-2017. The decline is due to technical

issues, but also the maturing of some fields and a lack of investment. According to

the Energy Information Administration (EIA), Angola’s oil production should recover

to 1.6mb/d by year-end as technical issues are addressed and new projects start

(notably the Kaombo project).

Still-low non-oil revenues and lower oil production have prompted the

government to seek an EFF. We view this positively, as it will provide more

financing and a better policy anchor than a PCI programme would. It is also a

reminder that despite higher oil prices, Angola has yet to complete its rebalancing

and address serious ongoing issues.

Figure 1: Angola macroeconomic forecasts Figure 2: Lower oil production offsetting the beneficial

impact of higher oil prices

Thousands b/d

*end-period; Source: Standard Chartered Research Source: OPEC, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 16.00 14.00 14.00

USD-AOA* 325.0 345.0 360.0

Current account balance (% GDP) -0.4 2.5 2.5

Fiscal balance (% GDP) -1.0 -0.1 1.01,300

1,400

1,500

1,600

1,700

1,800

1,900


Better late than never: Angola

finally seeks financial assistance

from the IMF

Victor Lopes +44 20 7885 2110

[email protected]



The IMF request highlights that the

government is still struggling to

rebalance




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Angola’s FX reserves have not recovered as a result of the oil-price rebound, as

we noted in our previous publication (Global Focus – Fattening tail risks). FX reserves

improved to USD 18.9bn in May, mostly due to the USD 3bn Eurobond issuance, but

have since declined to USD 17.2bn (August 2018). Large external debt repayments

and, more recently, lower oil output have prevented a more significant improvement in

the balance-of-payments position.

The FX shortage seems to have improved, with increased Banco Nacional

de Angola (BNA) FX sales (BNA has sold EUR 3.6bn in the past three months). This

may also explain why FX reserves are not increasing. The economy has not fully

recovered from the imbalances accumulated in 2014-16. The Angolan kwanza (AOA)

depreciated more than anticipated in Q3-2018, losing 16.5% against the reference

currency, the EUR, since end-June; EUR-AOA is currently at 345. This compares

with only a 6.5% depreciation between end-January and end-May. It is unclear if the

prospect of an IMF programme was behind BNA’s decision to allow the currency to

depreciate more. Given the pace of depreciation, we revise our USD-AOA forecasts

to 325 in 2018 and 345 in 2019 (from 239 and 242 previously, respectively).

The IMF will return in October to discuss the EFF, so a programme is possible

by Q1-2019. Goodwill from the IMF and commitment on the government’s part have

led to expectations that negotiations will be more straightforward than with Zambia. If

an agreement is reached, this could lead to the second funded programme in

Angola’s history; the first was in 2009-11 in the aftermath of the global financial crisis.

In theory, an EFF can amount to 400% of a country’s IMF quota. In Angola’s case,

this would be c.USD 4.5bn over three years. In practice, however, programmes in

Africa generally average 170-180% of their quota, which would mean at least USD

1.8bn for Angola. The final amount will depend on the estimated external funding

gap, which is unclear at present.

The focus of any EFF programme is likely to be on fiscal adjustment, with

emphasis on the non-oil fiscal balance (something the government had already

highlighted in its 2018 budget). Angola’s wage bill is likely to feature prominently in

plans. Stabilising debt levels and dealing with banking-sector issues will be important

(high NPLs remain a key source of risk). Whether Angola has undergone a sufficient

FX adjustment will likely be part of the discussions. The IMF visit is in October, when

the government will start drafting the 2019 budget. IMF statements after previous

missions have sounded encouraging, with no particular sticking points. Unlike in

Zambia’s case, the debt owed to China has not been given prominence. Also in

contrast with Zambia, the IMF has noted the degree of fiscal adjustment that Angola

has already achieved. Angola may have already bilaterally negotiated some of its debt

service with China (possibly with Brazil too) but there is little information available.

The AOA exchange rate has

depreciated more than expected

More than the financing, an IMF deal

would help anchor fiscal policy and

confidence

In contrast with Zambia to date, we

expect Angola’s programme

discussions with the IMF to be

relatively smooth





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Botswana – A mining recovery

Economic outlook – Mining-led growth

Botswana’s economy is on track for accelerated growth in 2018, led by a

recovery in mining growth. H1 GDP growth was 5.1% y/y, the strongest half-year

expansion since 2013. The mining sector was the major contributor to headline

growth in H1, expanding 9.6% y/y, albeit from a low base. Diamond production by

Debswana, Botswana’s main diamond mining company, hit a four-year high in H1-

2018 and should remain robust in H2 given Debswana’s production target of 23.8

million carats (mc) for 2018 (from 22.7mc in 2017).

Risks to our growth forecast are tilted to the upside. 2018 GDP growth could be

higher than we currently expect given that the strong rebound in mining growth has

coincided with a planned multi-year record increase in government spending in FY19

(year ending March 2019). However, we maintain our 2018 GDP forecast of 4.4%

given Botswana’s history of budget under-execution, particularly of capital

expenditure, and the risk of softening global diamond demand amid ongoing trade

tensions and recent EM contagion concerns.

High banking-sector loan-to-deposit ratio limits private-sector credit growth.

The loan-to-deposit ratio remains high, at 87% in June from c.46% a decade ago,

reflecting weak deposit growth following a lending surge in the aftermath of the global

financial crisis. This has resulted in lower liquidity in the banking sector and has

affected banks’ ability to increase lending meaningfully, weighing on non-mining

growth. Banking-sector deposit growth is likely to remain sluggish, given weak

household wage growth and subdued private-sector activity.

Inflationary pressures will likely remain subdued. Headline inflation remains close

to the lower limit of the Bank of Botswana’s (BoB’s) objective range of 3-6%,

averaging 3.1% in the year to August. BWP-ZAR appreciation of c.7% YTD should

provide some cushion against rising inflationary pressure in South Africa, which

accounts for c.61% of Botswana’s total imports. However, elevated crude oil prices

against a backdrop of a strong USD increase the risk of a further rise in domestic fuel

prices; these were last raised in May. While any increase in fuel prices would put

upward pressure on inflation (given that transport is the largest component of the CPI

basket), we expect inflation to remain below the mid-point of the BoB’s

objective range.

Figure 1: Botswana macroeconomic forecasts Figure 2: Weak credit growth weighs on non-mining GDP

Private-sector credit (LHS), % y/y; non-mining GDP, % y/y

*end-period; **for fiscal year ending in March; Source: Standard Chartered Research Source: Thomson Reuters Datastream, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 5.00 5.00 5.00

USD-BWP* 10.56 10.26 9.77


Fiscal balance (% GDP)** 0.1 -2.4 -2.2

Credit

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Strong mining growth amid fiscal

stimulus raises upside risks to

growth

Emmanuel Kwapong, CFA +44 20 7885 5840

[email protected]

Economist, Africa


Inflation should remain close to the

lower bound of the 3-6% objective

range




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Botswana’s external position remains robust. While the trade surplus swung into

a deficit in Q1 on weak diamond sales, sizeable Southern African Customs Union

transfers ensured that the current account (C/A) remained in surplus. In September,

the IMF stated that Botswana’s C/A surpluses of 13.7% and 12.3% for 2016 and

2017, respectively, “could be up to 4ppts of GDP lower than currently reported”

following a review of the balance of payment data. Our present C/A deficit forecasts

are therefore only provisional, pending the release of official data revisions.

Policy – Fiscal stimulus to push budget into deficit

We maintain our 2.4% fiscal deficit forecast for FY19 but raise our FY20 deficit

forecast to 2.2% (from 0.2%). Botswana revised its budget deficit for FY19 to 2.3%

from the 1.8% target in the budget due to a revision in anticipated mineral revenues,

according to Reuters. We had previously highlighted that the FY19 revenue

estimates were too optimistic, being dependent on an unrealistic c.50% y/y surge in

mineral revenue (see Botswana – FY19 budget: Going for growth). The government’s

revised FY19 target brings it closer to our own forecast. Our revised FY20 forecast

reflects our view of a more measured pace of fiscal consolidation. Botswana’s fiscal

outlook remains robust, however, given sizeable fiscal buffers from years of running

surpluses and its plan to return to a sustainable fiscal position in the medium term.

We expect monetary policy to remain accommodative and see the bank rate on

hold at least until end-2020. While growth is likely to rebound in 2018, the negative

non-mining output gap is likely to persist unless meaningful structural reforms to

boost economic diversification are implemented. Inflationary pressure should also

remain subdued against a backdrop of sluggish domestic demand. We view the

current bank rate of 5.0%, already a record low, as appropriate.

Politics – Tensions within the BDP

Rifts within the ruling Botswana Democratic Party (BDP) could impact the

party’s performance in the 2019 election. Relations between the current president

and his predecessor have deteriorated, resulting in factionalism within the party. With

the 2019 elections set to be the toughest yet for the BDP, increasing factionalism

could boost the opposition’s chances next year.

Market outlook – FX pressures to ease

We recently revised our USD-BWP forecasts higher to 10.56, 10.26 and 9.77 for

end-2018, 2019 and 2020, respectively (10.38, 9.78 and 9.73 previously; see SSA –

The more open and crowded, the less shielded). Our revised forecasts largely reflect

current market dynamics given recent South African rand (ZAR) depreciation (the

ZAR accounts for 45% of the pula basket), in line with broad-based EM currency

weakness on EM contagion risk.

We view the current monetary

policy stance as appropriate

Botswana now expects a larger

fiscal deficit







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Cameroon – Coping with costly unrest

Politics – Low-intensity conflict, higher risk premium

Politics are in the spotlight in Cameroon given the Anglophone crisis and the

looming presidential election. Cameroon’s English-speaking minority accounts for

c.20% of the population and has historically felt marginalised. Pro-federalist or even

separatist groups have existed for some time, but secessionist attacks intensified

after a government crackdown in October 2016 on teachers opposed to the

increasing use of the French language rather than English in the education system.

Several leaders were arrested and the internet was shut down for several months in

Anglophone provinces. The crisis has continued to make headlines, with rising

casualties from attacks on the security forces (109, according to the government) and

reports of civilian casualties and the displacement of people (160,000 internally

displaced, according to the UN). Despite increasingly negative news headlines, this

remains a localised conflict.

The number of attacks has increased in the run-up to the presidential election

due on 7 October. The election per se is not a source of uncertainty, as President

Biya (in power since 1982) is favoured to win given his grip on power and the weak

opposition. The concern is that the election poses increased security risks given

separatist threats against voting stations. The government plans to reduce the

number of voting stations in some rural areas. Legislative and municipal elections

have been postponed until 2019, as the authorities say it would be difficult to

organise all three elections at the same time. The security situation probably played a

role in that decision. The fact that 2019 is another election year could add further to

implementation risks to the IMF programme, via added pressure on spending and/or

an impact on reform appetite.

The current security situation is negative given its economic and human cost.

It exacerbates the impact of the fight against Boko-Haram in the north and the influx

of refugees from the Central African Republic. The economic impact of the unrest is

difficult to assess, but it poses a risk to agriculture and cash crop exports (cocoa and

coffee). The security situation will continue to affect Cameroon’s public finances in

the near term. According to the IMF, the Anglophone crisis added 0.4% of GDP to

security spending in 2017 and could add c.0.2% in 2018; but the amount could be

higher if the unrest persists. Cameroon’s economy has been relatively resilient,

despite the challenging security situation – especially compared with the rest of the

Figure 1: Cameroon macroeconomic forecasts Figure 2: Challenging fiscal consolidation

Fiscal balance (commitment basis), % of GDP

*end-period; Source: Standard Chartered Research Source: IMF, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 3.20 3.20 3.20

USD-XAF* 570 547 475


Fiscal balance (% GDP) -4.0 -4.0 -3.5-7

-6

-5

-4

-3

-2

-1

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2012 2013 2014 2015 2016 2017 2018

IMF target

Victor Lopes +44 20 7885 2110

[email protected]



The Anglophone crisis has led to a

deteriorating security situation, and

has had human and economic costs




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Central African Economic and Monetary Community (CEMAC) region, which is still

struggling to recover from the previous oil-price decline.

Investors have been concerned about Cameroon’s political backdrop, and how

this might impact its ability to repay its external debt. These concerns are reflected in

the widening risk premia on its traded debt. In our view, Cameroon’s capacity to

repay external debt remains strong despite security issues. The IMF has expressed

concern about rapid debt accumulation in recent years, to an estimated 38.7% of

GDP in 2018 from 33.3% in 2016. However, debt-service metrics appear moderate,

with an interest-to-revenue ratio of 3.9% and total external debt service at 10.6% of

government revenue. Debt-service and debt-to-GDP ratios compare favourably with

the rest of SSA.

Policy – Delivering consolidation amid spending pressure

The security situation could make it more challenging to achieve the fiscal

deficit target of 2.6% of GDP in 2018 (as per the current IMF programme). The

second review of the programme in July was relatively negative, as the 2017 deficit

reached 5% of GDP (against a target of 3.5%). Fiscal deficit targets were missed due

to additional spending linked to security, as well as the 2019 Africa Cup of Nations

and payment of electricity arrears. This is unsurprising: fiscal adjustment in an

election year and against the current security backdrop was never going to be

straightforward. Cameroon faces challenges to reining in spending; besides security,

fuel subsidies and the hosting of the Africa Cup of Nations in June 2019 could be

additional sources of spending.

The government quickly rectified the 2018 budget proposal and the

disbursement of the USD 78mn IMF tranche was not delayed, unlike in Gabon.

The government plans to increase revenue by 0.5% of GDP via new taxes and better

revenue administration. Budgeted spending now takes into account extra security

spending, fuel and electricity subsidies, as well as election-related spending, which

was not the case in the initial budget.

On a more positive note, government revenue performance has improved on

better-than-expected non-oil revenues, highlighting the economy’s resilience (oil

revenues should also perform well even if the fuel subsidy partly offsets the positive

impact). On the external side, FX reserves increased to USD 3.4bn in March 2018

versus just over USD 2bn a year ago, suggesting that rebalancing is underway. The

twin deficits are narrowing (while the fiscal deficit is higher than the initial target, it is

lower than it was in 2016) as public spending and imports decline.

Significant risks to the implementation of the IMF programme remain. However, a

degree of IMF leniency is likely given that Cameroon is the key economy in the

CEMAC. The Anglophone crisis is a key concern but does not threaten overall

stability. Political uncertainty is likely to remain high in the medium to long term

because of questions around the post-Biya era, especially given Francophone

countries’ poor track record in managing transitions from long-standing presidencies.

The conflict remains localised, and

Cameroon’s capacity to service its

external debt is not in question

Politics poses a risk to the

implementation of the IMF

programme




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Côte d’Ivoire – Tomorrow is now

Politics – Political games

Political uncertainty has increased following the government reshuffle in July,

putting politics in focus well ahead of the 2020 elections. The reshuffle was a

consequence of growing tensions within the RHDP coalition, an alliance between

President Ouattara’s RDR and the PDCI led by former President Henri Konan Bedié.

Tensions relate to whether there should be a unified party and a common candidate

for the 2020 elections. Bedié’s faction of the PDCI wants a presidential candidate

from its own ranks, while Ouattara’s preferred potential successors appear to be from

the RDR, or he himself may seek a third-term mandate. The RHDP coalition has been

instrumental in preserving a peaceful political environment since 2011 (barring a

number of army mutinies over pay), so the split has raised concerns.

The reshuffle was a move by Ouattara to consolidate his authority and weaken

the PDCI. All ministers remained in the government (including the prime minister and

finance minister), and new ministries were created. Importantly, the PDCI ministers

are still part of the government, suggesting support for the idea of a unified party.

There is considerable dissent within the PDCI, as many support the idea of a unified

RHDP. In this context, regional and municipal elections on 13 October will be

important, as they could strengthen the RHDP’s position if it does well, and weaken

the PDCI faction that opposes a unified party. Notably, this faction has been unable

to nominate candidates in many regions and municipalities given a lack of support.

Questions about policy-making efficiency could arise given the increased

cabinet size (to 41 ministers from 34). This is unlikely to have a material impact on

spending in Q4 in our view, especially as the government remains committed to the

fiscal consolidation objective anchored by the current IMF programme (fiscal

performance was strong in H1). Uncertainty regarding the 2020 elections remains,

given that they may be more closely contested than last time and numerous

outcomes are possible (including a third term for President Ouattara). Reform

momentum may also slow ahead of the elections.

Figure 1: Côte d’Ivoire macroeconomic forecasts Figure 2: High growth and lower deficits

GDP growth (% y/y) and fiscal and C/A balance (% of GDP)


2018 2019 2020



Policy rate (%)* 4.50 4.50 4.50

USD-XOF* 570 547 475



Fiscal balance

C/A balance

GDP growth

-6

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-2

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2

4

6

8

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2010 2011 2012 2013 2014 2015 2016 2017 2018F

Victor Lopes +44 20 7885 2110

[email protected]



Increased political uncertainty does

not imply instability

The 2020 elections are already having an impact on politics, but

probably not on fiscal policy for now

Uncertainty could abate in the short

term if the ruling RHDP position

appears stronger following local

elections




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Ethiopia – New opportunities, old challenges

Economic outlook – Pushing ahead

New Prime Minister Abiy Ahmed continues to consolidate his reformist

reputation. The reversal of legislation restricting foreign participation in the logistics

sector in September is a positive sign for the anticipated opening up of other state-

owned sectors. Strong investment in response to reform momentum should drive

growth to c.8% in 2018. There have also been regional developments, most notably

the signing of a peace accord with Eritrea and the withdrawal of troops from the

border. Flights have resumed between Ethiopia and Eritrea, with the two countries

looking at joint investment projects.

Donor relationships are improving. Abiy said in August that the World Bank would

provide USD 1bn of direct budget support in “the next few months” (for the first time

since 2005). FDI is likely to pick up given reform momentum. The government plans

to attract USD 5.1bn of FDI in FY19 (year ending 8 July 2019), up from USD 3.2bn in

2016; investment projects include commissioning four Chinese-built industrial parks.

Given the announcement that China will extend the maturity of some of Ethiopia’s

debt, the sustainability of further funding from China will be in focus.

We revise our 2018 and 2019 inflation forecasts to 13.2% (from 12.5%) and 6.1%

(5.7%), respectively, given stronger inflationary pressure at the start of 2018.

Ethnically based attacks have continued, with protests and deaths reported.

Hopes for further reform and liberalisation could be disappointed. An attack at a rally

in support of Abiy in June highlights continued political risks to his reformist agenda.

Market outlook – Persistent challenges

The USD-ETB parallel market rate converged with the official market rate in Q2 but

has come under pressure again – it has widened to 35 versus the official rate of 27.7

in recent weeks given the large imbalance between Ethiopia’s exports and imports

(Q3-FY18 imports were 5x more than exports). FX reserves increased to 2.3 months’

import cover (USD 3.1bn) at end-March 2018, and may have increased since Abu

Dhabi deposited USD 1bn in the National Bank of Ethiopia (NBE) in June.

The NBE continues to favour gradual ETB depreciation. Since the 15% devaluation in

October 2017, the pace of depreciation has been slower than was the case

historically. As a result, we adjust our end-2018 USD-ETB forecast to 28.0 from 28.8.

Figure 1: Ethiopia macroeconomic forecasts Figure 2: Post-devaluation inflationary pressure

CPI, % y/y (LHS), USD-ETB (RHS)

*end-period; **for fiscal year ending 8 July; Source: IMF, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

2018 2019 2020

GDP grow th (real % y/y)** 8.0 8.5 8.0


3M T-bill (%)* 1.20 1.20 1.20

USD-ETB* 28.00 30.50 32.33

Current account balance (% GDP)** -9.0 -8.6 -7.8


CPI % y/y (RHS)

USD-ETB (RHS)

20

21

22

23

24

25

26

27

28

29

0

2

4

6

8

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14

16

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Sarah Baynton-Glen, CFA +44 20 7885 2330

[email protected]

Economist, Africa


Reform momentum has improved

donor and investor appetite

Renewed pressure on parallel-

market rates owing to structural

imbalances




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Gabon – Not there yet

Policy – Struggling to deliver

The government is struggling to implement IMF-backed fiscal adjustment.

Gabon was quick to negotiate an IMF programme (USD 642mn) in 2017; IMF board

approval in June came only three months after the official request, highlighting

international goodwill. The fact that a programme was agreed then, despite external

arrears, indicated a degree of leniency from the IMF and other international partners.

This is probably because the programme is part of a wider initiative to support the

Central African Economic and Monetary Community (CEMAC); Gabon is the bloc’s

second-largest economy. Implementation of the programme, however, has been

patchy.

The second IMF review was quite negative, and disbursement of a USD 101mn

tranche was delayed (to August from June). The nominal fiscal deficit was roughly

in line with the target, but at the cost of a slump in investment. Moreover, arrears

clearance objectives were not met. According to the IMF, total arrears stood at 6.6%

of GDP at end-2017, of which 5.2% of GDP was domestic and 1.4% external (mainly

commercial creditors). The arrears situation and risks around the IMF programme

had already prompted Moody’s to downgrade Gabon to Caa1 from B3 in June 2017.

The government agreed to corrective action to obtain the disbursement of the IMF

tranche, but risks to programme implementation remain high.

Much now depends on a rebound in fiscal revenue. Oil revenue is rebounding,

and the outlook is favourable given our forecast oil-price trajectory. An increase in oil

revenues is positive but not sufficient to comply with the IMF programme, as the non-

oil fiscal balance was a key performance criterion that was not met. Non-oil revenue

has been weak (it fell 15% in nominal terms in 2017), and sluggish growth will make

it more difficult for the government to meet the IMF targets. The IMF programme

envisions several measures to boost non-oil revenue by 1.5ppt of GDP, including

eliminating tax exemptions, revising tax rates and/or imposing new taxes. This

appears quite challenging.

Figure 1: Gabon macroeconomic forecasts Figure 2: Investment cut to cope with lower revenues

% of GDP


2018 2019 2020



Policy rate (%)* 3.20 3.20 3.20

USD-XAF* 570 547 475

Current account balance (% GDP) -1.5 -0.5 2.0

Fiscal balance (% GDP) -1.0 0.5 0.5

Non-oil revenues

Oil revenues

Public Investment

Current spending

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Victor Lopes +44 20 7885 2110

[email protected]



The second IMF review was delayed

as Gabon missed the main

programme targets




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On the spending side, further cuts are planned but may be difficult, especially

as the government must tackle the wage bill. There is virtually no public investment in

Gabon; at only 1.5% of GDP in 2017, the ratio is the lowest of any Sub-Saharan

Africa country. So far, the government has cut public capex (it has delayed some

projects, although the decline also reflects a lack of external financing). This allowed

the authorities to maintain low headline fiscal deficits, but as the IMF has noted, the

nature of this adjustment is “problematic”. The collapse in public investment and

large arrears remain key constraints to economic growth, which in turn complicates

the task of increasing non-oil revenue. As a result, we revise our 2018 GDP growth

forecast to 2% from 3%.

Recurrent spending will now bear the brunt of fiscal adjustment. Such an

adjustment is typically more difficult and politically sensitive, as it implies a reduction

in the public-sector wage bill. This stood at 8.4% of GDP in 2017 and the IMF

programme plans to reduce it to 6.9% this year. Legislative and local elections are

due in October; it remains to be seen whether they affect the willingness to reform.

We do not expect the same degree of controversy this time as was seen during the

2016 presidential election, as the opposition seems to have lost momentum and is

much less united now than in 2016.

There are still some oil subsidies (0.4% of GDP in 2017) to be reduced in 2018 and

eliminated in 2019. Also, the government plans to close some public agencies that

have had a material impact on spending (0.8% of GDP in 2017). Weak public

financial management appears to be one reason for Gabon’s poor performance

despite higher oil prices.

Gross financing needs for 2018, at 8% of GDP, are lower than in 2017 (10.7%).

More than half is to be covered by the IMF and other multilateral and bilateral donors.

Disbursement delays might have contributed to cash-flow pressures this year:

international donors are the key source of financing given Gabon’s limited

alternatives. In the past, the government relied on statutory advances from the

regional central bank (which still represent 29% of the domestic debt stock), but

Gabon has reached its borrowing limits. In any case, under IMF programmes in the

CEMAC region, the regional central bank (BEAC) is expected to eliminate such

advances. In 2018, Gabon has increased the amount of debt it issues in the regional

market, but the relatively shallow domestic market is not an alternative to external

support. As a result, the government had to use its deposits at the central bank for its

financing needs; this probably explains why the FX reserve trajectory has not

improved despite higher oil prices.

Pressure on public finances might ease following the IMF’s latest

disbursement. Further multilateral disbursements are also due in Q4: according to

the IMF, the World Bank and African Development Bank will disburse c.USD 430mn

in Q4-2018.

Implementation risks related to the IMF programme remain significant. Much

will depend on whether public financial management really improves, non-oil

revenues increase, the wage bill is addressed and arrears are repaid as agreed with

the IMF. Therefore, the third IMF review in December will be important for

the outlook.

Governance issues, delays in donor

disbursement and weak non-oil

revenues have led to cash-flow

pressure

Implementation risks related to the

IMF programme remain high




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Ghana – 25% bigger with recent rebasing

Economic outlook – Post-rebasing, growth still robust

Ghana has seen considerable changes in the past quarter as it prepares to

graduate from an IMF Extended Credit Facility in early 2019. The July mid-term

budget raised the top income tax rate by 10ppt to shore up underperforming revenue

and prevent further fiscal slippage. This was combined with a raft of measures aimed

at boosting tax administration and compliance. The authorities intervened in the

banking sector again in early August; we estimate the aggregate cost of the 2017

and 2018 interventions at c.4.1% of pre-rebased GDP (see On the Ground, 3 August

2018, SSA – Changing views). While intervention was necessary to strengthen

Ghana’s banking sector, it will add to the country’s debt stock.

The authorities revoked the licences of five undercapitalised financial

institutions with significant corporate governance shortcomings. The assets and

liabilities of these institutions were assumed by Consolidated Bank, a new bridge

bank capitalised with GHS 450mn of government funds; the authorities also issued a

GHS 5.8bn bond to compensate for the gap between the assets and liabilities of the

five institutions. In addition, support was pledged to other domestic banks to help

them meet an end-2018 minimum capital requirement. The full cost of the financial-

sector intervention will likely become clear when the 2019 budget is announced in

November.

The rebasing of Ghana’s GDP will lower the public debt-to-GDP ratio, however.

With the recent change in the base year to 2013 from 2006, Ghana’s 2017 GDP

increased 24.6% to c.GHS 257bn. As a result, the 2017 growth rate was revised

lower to 8.1% from 8.5%. Excluding oil, the economy grew only 4.6%. While the

rebasing will flatter some credit metrics, it is likely to highlight the inadequacy of

Ghana’s revenue mobilisation as a percent of GDP, despite the measures in the mid-

year budget. Given the risk of missing fiscal targets, the IMF’s September review

urged stronger expenditure discipline and tax compliance in the 2019 budget, with a

focus on ending tax exemptions.

We lower our growth forecasts to reflect the GDP rebasing and banking-sector

intervention. Given the higher base, future growth rates are likely to be lower than

we initially forecast. Moreover, higher oil prices and a weaker FX rate have meant

faster pass-through to domestic fuel prices (which are adjusted fortnightly), slower

Figure 1: Ghana macroeconomic forecasts Figure 2: IMF urges greater spending restraint

Fiscal revenue and expenditure (LHS); net domestic financing

(RHS), both as % of pre-rebased GDP

*end-period; Source: Standard Chartered Research Source: BoG, MOFEP, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 17.00 17.00 15.50

USD-GHS* 5.30 5.90 6.30



0

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10

15

20

25

30

35

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2014 2015 2016 2017 2018

Total revenue Total expenditure

Net domestic financing (RHS)

Razia Khan +44 20 7885 6914

[email protected]

Chief Economist, Africa and Middle East


Banking-sector intervention will add

to Ghana’s public debt stock

The IMF has urged stronger

expenditure discipline and a focus

on lifting tax exemptions

Confidence has weakened recently;

higher base triggers downward

revisions to our growth forecasts






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disinflation, and greater pressure on real disposable incomes. While the Bank of

Ghana’s (BoG’s) composite indicator for July still pointed to healthy real growth of

c.6.6%, consumer and business confidence measures have softened since then. We

still expect robust growth on rising oil production by end-2018, but lower our

forecasts for 2018 and 2019 to 5.7% and 6.3% (from 6.3% and 7.0% previously) to

account for the higher base, among other factors.

We now expect no further BoG policy easing in 2018 and 2019. Recent

pronounced Ghanaian cedi (GHS) weakness has implications for inflation. While

money supply growth is relatively well contained for now, supply-side shocks are

likely to drive inflation higher. We raise our average CPI inflation forecasts for 2019

and 2020 to 9.1% and 7.8% (8.3% and 7.5% prior) given our expectation of sharper

GHS depreciation, higher global oil prices, and an expected eventual pick-up in

private-sector credit growth following banking-sector consolidation.

Foreign investor participation in local markets appears to have declined

marginally; we think this has been driven by greater global risk aversion and

concern over the imminent end of Ghana’s IMF programme (see On the Ground,

SSA – The more open and crowded, the less shielded). Bond yields have risen to a

two-year high, and the authorities recently cancelled plans for a 5Y auction given

poor investor appetite. They may be forced to borrow in shorter tenors until risk

conditions improve.

The BoG’s September MPC statement said that recent developments would

“ordinarily... have warranted some adjustment in the policy rate”. While we do not

think the BoG will need to tighten monetary policy given ongoing fiscal adjustment,

we now expect the prime rate to be unchanged at 17% through end-2019 (versus our

previous call of 16.5% at end-2018 and 15.0% at end-2019). We expect the BoG to

resume its easing cycle in 2020, but now forecast only 150bps of further easing, with

the end-2020 policy rate at 15.5% (14.5% prior).

Greater dependence on short-term borrowing is likely to put renewed pressure on

3M T-bill yields. We forecast that the 91-day T-bill yield will rise gradually to 14.2% at

end-2018 and 13.9% at end-2019, before declining again in line with policy easing.

While Ghana has considered plans for a century bond to fund new infrastructure

investment (as well as refinancing existing external debt), we do not expect this to

reduce short-term borrowing significantly in the very near term.

We adjust our current account (C/A) and fiscal deficit forecasts to reflect the

GDP rebasing and higher oil prices. Ghana’s balance of payments is under pressure

from reduced cocoa output, softer gold prices and lower net capital inflows. However,

the GDP rebasing will result in smaller C/A deficits as a percentage of GDP. We now

expect C/A deficits of 4.5%, 5.5% and 5.0% in 2018, 2019 and 2020 (versus 5.4%,

5.8% and 5.5% previously).

Higher debt service costs are likely to pressure the fiscal balance. Moreover, the

positive impact of the tax measures introduced in July will only boost revenue

performance for part of the year. We now expect a 2018 larger fiscal deficit of 6.4%

of GDP (5.0% prior), reflecting weak revenue performance as well as banking-sector

intervention costs. This is partly offset by higher GDP. We see room for infrastructure

spending to increase in 2019 and 2020, even as the authorities adhere to a fiscal

deficit cap of 5% of GDP. We now expect smaller deficits of 4.5% of GDP in 2019

and 4.0% in 2020 (versus 4.9% and 4.8% previously), as the GDP rebasing offsets

increased public investment. Nonetheless, we expect public debt to be contained well

below the 70% of GDP threshold.

Rebased GDP should allow some

room to increase public investment,

while keeping public debt below the

70% threshold

Greater dependence on short-term

borrowing should see 3M T-bill

yields rise again

We now expect the policy rate to

stay on hold until 2020 on rising

risk aversion and FX weakness






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Kenya – Not such taxing times

Economic outlook – Growth more robust than expected

We raise our 2018 GDP forecast to 6.0% (5.0%, prior). This follows stronger-than-

expected GDP prints in H1-2018, largely driven by more favourable rainfall and

improved performance in agriculture. Other sectors of the economy have also

performed strongly, despite weak private-sector credit growth.

GDP growth accelerated to 5.7% y/y in Q1-2018 as the economy recovered after

the loss of almost half a year of activity in H2-2017 on prolonged election-related

uncertainty. Improved political risk perception, after the infamous ‘handshake’

between President Kenyatta and Raila Odinga in early March, likely solidified the

economic recovery. GDP growth accelerated further in Q2 to 6.3% y/y. Improving

weather supported agriculture and hydroelectricity generation, with growth in these

sectors accelerating to 5.6% and 8.6% y/y, respectively; strong growth was also seen

in the accommodation and food-services sector (15.7%) and the information and

communication sector (12.6%).

The key question is whether this strong pace of growth will be sustained.

Failure by parliamentarians to amend loan rate caps (although the floor on deposit

rates was removed in late August) suggests that a recovery in private-sector credit

may take longer than we initially estimated. (We still expect a repeal or amendment

of loan rate caps over time.) Further, as the government embarks on a more

ambitious medium-term fiscal consolidation exercise, public infrastructure investment

will likely slow compared with recent years. Beyond the completion of current

projects, only projects aligned with President Kenyatta’s Big Four agenda (health

care, affordable housing, manufacturing and agriculture) will likely be prioritised.

There are risks that deeper fiscal consolidation may curb growth in development

expenditure. With still-weak credit growth, private-sector investment may not be

ready to fill the gap just yet.

Higher global oil prices are a potential headwind to growth in the coming years.

Within SSA, Kenya – as a large regional oil importer – was a key beneficiary of the

late-2014 decline in oil prices as net exports made a less negative contribution to

growth. Rising global oil prices will likely add to the pressure; we recently raised our

average oil price forecasts to USD 75/bbl for 2018, USD 78 for 2019 and USD 85 for

2020. President Kenyatta’s recent decision to impose an 8% VAT increase on

Figure 1: Kenya macroeconomic forecasts Figure 2: Rising public debt levels are a concern

Domestic and external debt, % of GDP

*end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: KNBS, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 9.00 9.50 9.00

USD-KES* 102.90 106.20 106.00



Domestic

External debt

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50

60

2011 2012 2013 2014 2015 2016 2017

Razia Khan +44 20 7885 6914

[email protected]



Growth is stronger than we

expected; recovery in credit growth

is still needed to sustain this

performance

Rising oil prices pose a new

headwind to Kenyan growth




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petroleum products (less than the initially planned 16%), while still a much-needed

fiscal reform, nonetheless reinforces the impact of higher fuel prices on disposable

income growth.

We maintain our GDP forecasts for 2019 and 2020, at 5.6% and 5.8%,

respectively. The robust pace of 2018 growth, benefiting from a weak base, may not

be easy to sustain given greater global headwinds – higher oil prices and tighter

external financing conditions – in the coming years. However, trend growth is still

expected to remain within a 5.6-6.0% range.

We lower our 2018 current account (C/A) deficit forecast to 5.6% of GDP (5.9%

previously). Higher GDP is likely to be partly offset by a still-deteriorating trade

balance, reflecting the front-loading of infrastructure-related capital imports. The

establishment of direct Kenya-US flights is a longer-term positive for services,

supporting our expectation of a stable USD-KES FX rate. From this perspective, the

non-completion of a successful IMF review in September, and the subsequent

withdrawal of the IMF’s Stand-By Facility for Kenya, should not be a significant

influence on market developments. The IMF arrangement was useful in that it might

have anchored fiscal consolidation, boosting Kenya’s perceived creditworthiness. But

with FX reserves currently at a healthy level (USD 8.5bn, or 5.6 months of imports),

there is little need for recourse to emergency financing.

Monetary policy – CBR on hold until Q3-2019

While the retention of the loan rate cap has created renewed uncertainty over

monetary policy transmission, we do not expect this to be long-lasting. The

separation of the loan rate cap debate from the passage of the Finance Bill

(budgetary measures that were required) was politically astute, in our view, as it

allowed the approval of much-needed revenue generation measures without risking a

prolonged delay over the more contentious issue of banking-sector loan rates.

Given delayed full implementation of the 16% VAT on petroleum products,

previously incorporated into our inflation forecasts, we make the following changes.

We raise our average 2018 CPI inflation forecast to 5.1% (4.9% prior), partly

reflecting strong transport inflation prints recently. However, we lower our average

forecasts for 2019 and 2020 to 6.2% for both years (6.7% and 6.8% prior). With

inflation remaining largely within the Central Bank of Kenya’s (CBK’s) target band,

our central bank rate (CBR) trajectory is unchanged. We see a 50bps CBR hike in

late Q3-2019 to 9.5%, and a further hike to 10% in Q1-2020, as private-sector credit

recovers. However, a well-behaved inflation profile may allow easing later in 2020.

Fiscal policy – More consolidation

Our fiscal forecasts are little changed, except the deficit for FY19 (ends 30 June

2019), which we now expect to narrow to 6.3% of GDP (6.5% previously) on

improving growth. The authorities expect new fiscal measures – VAT on fuel, higher

taxation of money transfers, a new housing levy and spending cuts of KES 55bn – to

narrow the FY19 deficit to 5.9% of GDP, from the 5.6% initially estimated before the

reduction in fuel VAT. However, given traditional revenue undershooting, we maintain

our more conservative 6.3% forecast for now.

The end of the IMF stand-by

arrangement should have little

immediate implication for the KES

With backtracking on the 16% VAT

rate on fuel, we now see inflation

remaining within the CBK’s

target band

We lower our FY19 fiscal deficit

projection on higher growth




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Mozambique – Untying the Gordian knot

Economic outlook – Slow growth

Mozambique’s economic outlook is improving but remains challenging. GDP is

likely to accelerate in H2-2018 on robust coal and aluminium production, after it

slowed to 3.3% in H1 from 4.1% in H1-2017. Front-loaded monetary easing since

2017 and liquefied natural gas (LNG)-related investment should also support growth,

but it will likely stay low compared to the pre-2016 trajectory. We raise our 2018 and

2019 GDP growth forecasts to 3.5% and 3.9%, respectively (both from 3.0%) on a

more supportive commodity backdrop. We forecast 3.8% growth in 2020.

Resolving the debt crisis is critical to improving the medium-term outlook.

Mozambique remains in default on its external private debt, with little progress since

the initial debt restructuring proposal in March 2018. In August, a group of

Mozambique’s Eurobond creditors made a counter-proposal to the government that

included access to a share of future gas revenues. While media reports suggest that

an agreement with creditors might be reached before year-end, uncertainty remains.

Mozambique will need to restructure its debt and provide more information on the

audit of its ‘hidden debt’ if it is to re-enter an IMF programme, necessary to unlock

further donor support.

The external position has improved significantly. Mozambique’s current account

deficit narrowed sharply to c.19% in 2017 from c.40% in 2016, largely due to a surge

in coal and aluminium exports (up 123% y/y and 23% y/y, respectively) but also

because the government is not servicing part of its external debt. This helped FX

reserves to recover significantly to c.USD 3bn as of July 2018, from a low of c.USD

1.6bn in October 2016. Given the improved outlook for the coal and aluminium

sectors, we revise our C/A deficit forecasts to 21% for 2018 and 40% for 2019

(previously 40% and 59.4%). We forecast a 60% deficit in 2020, largely due to a rise

in LNG-related capital imports.

Policy – Monetary easing, fiscal consolidation

Monetary policy should remain accommodative thanks to lower inflation. A

sharp deceleration in inflation has allowed the Bank of Mozambique (BoM) to engage

in front-loaded easing, cutting its policy rate by a cumulative 475bps since April 2017

(250bps since the start of 2018). After peaking at 23.8% in November 2016, inflation

fell to a 32-month low of 2.3% in April, helped by tight monetary policy, improved

Figure 1: Mozambique macroeconomic forecasts Figure 2: USD-MZN supported by a recovery in reserves

Net international reserves, USD bn; USD-MZN (RHS)

*end-period; Source: Standard Chartered Research Source: Thomson Reuters Datastream, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 17.00 15.00 13.00

USD-MZN* 62.00 64.00 67.00



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3.3

3.5

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

USD-MZN (RHS)

Net international reserves

We expect 100bps of additional

monetary easing in Q4-2018

Mozambique remains in default on

its external private debt

Emmanuel Kwapong, CFA +44 20 7885 5840

[email protected]

Economist, Africa


We revise our 2018 current account

deficit forecast to 21% of GDP from

40% previously




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agricultural output and FX appreciation of c.29% since October 2016. Inflation has

since edged higher to 5% in August. Consequently, we lower our 2018 and 2019

forecasts to 4.3% and 5.7%, respectively (from 7.0% and 6.0%), largely reflecting the

faster-than-anticipated pace of disinflation in H1-2018; we forecast inflation at 5.8%

in 2020. With private-sector credit growth still negative and inflation within the BoM’s

target range of 5-6%, we see room for an additional 100bps of easing in Q4, most

likely at the October MPC meeting. We forecast further easing of 200bps each in

2019 and 2020.

Mozambique needs to intensify its fiscal consolidation efforts. The government

has implemented deficit-reducing measures, including removing fuel and wheat

subsidies and raising electricity and public transport prices. However, it needs to do

more if it is to attain a primary fiscal surplus, necessary to bring debt back to

sustainable levels. For now, FX appreciation has helped reduce the debt-to-GDP

ratio considerably, to c.112% at end-2017 from a peak of 128.3% at end-2016.

Politics – Election in focus

Municipal elections, scheduled for 10 October, will be in focus ahead of national

elections in October 2019. The outcome of the municipal elections will be seen as a

bellwether for the national elections, given that the ruling FRELIMO’s popularity has

been dented by difficult economic conditions and governance issues. We expect the

results to be close, with the main opposition, RENAMO, participating after boycotting

the 2013 municipal elections.

Significant progress has been made towards the peace process, despite the

death of long-serving opposition leader Afonso Dhlakama in May. The new RENAMO

leadership has agreed to implement the peace agreement reached in February. The

constitution was amended in May to enable greater decentralisation at the provincial

level, a key sticking point in the peace process. The two parties have also signed an

agreement on military affairs that will allow for the integration of RENAMO fighters

into the security forces. Terrorist-inspired violence has remained isolated in the north

and should not affect the country’s overall stability.

Market outlook – Moderate depreciation

We maintain our end-2018 USD-MZN forecast of 62.0 but raise our 2019 forecast

to 64 (60 previously). The Mozambique metical (MZN) has been one of the better-

performing SSA currencies this year, depreciating by c.3.6% YTD. Given the

improvement in FX reserves, we expect central bank intervention to continue to

support the currency against a backdrop of weak domestic demand.

The peace process remains on track

Municipal elections will be closely

contested

Fiscal consolidation is key to

returning debt to sustainable levels




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Nigeria – Politics, politics

Economy – Oil helps, but politics take centre stage

Politics will dominate the near-term outlook. Presidential elections are due in

February 2019, followed by state elections in March. These are likely to be hotly

contested, particularly after a number of high-profile defections from the ruling All

Progressives Congress (APC) to the opposition People’s Democratic Party (PDP).

The APC made history in the 2015 elections as the first party to unseat an incumbent

president since Nigeria’s 1999 transition to civilian rule. For the PDP, once Nigeria’s

unquestioned ruling party, another term in opposition might risk its perceived

relevance. Much is at stake in 2019.

President Muhammadu Buhari has been confirmed as the APC’s presidential

candidate. The focus will now be on the PDP’s choice of presidential candidate and

the party’s ability to rally around a single figure. PDP primaries are expected in early

October. Several political heavy hitters have put their names forward for the PDP

presidential nomination, including Senate President Bukola Saraki, former Senate

President David Mark, former Vice President Atiku Abubakar, former Governor of

Kano state Rabiu Kwankwaso, and Sokoto state Governor Aminu Tambuwal. While

Kwankwaso and Tambuwal enjoy some support in the north, to win the presidential

election in the first round, the victor must get more than 50% of the national vote and

at least 25% of the vote in two-thirds of states. The alliance between the north and

the southwest is still seen as a key factor favouring the ruling APC coalition.

The near-term risk is that politics will detract from the much-needed economic reform

outlined in Nigeria’s Economic Recovery and Growth Plan. Differences between the

National Assembly and the executive resulted in delayed passage of the 2018

budget. A record NGN 9.1tn budget was eventually signed in June; the president’s

plans to amend it (cutting some of the additional projects inserted by National

Assembly members) may be difficult given the contentious political backdrop ahead

of elections. Politics may also put at risk the execution of 2018 capital expenditure

plans, although implementation of 2017 investment projects continues. Nigeria has

increased the share of capital expenditure in the budget in recent years to revive

growth, but the political backdrop has often delayed budget execution.

Rising oil prices are a key source of support, but Nigeria’s growth is weak. Real

GDP growth slowed to 1.5% y/y in Q2 from 1.95% in Q1; weakness in the agriculture

and oil sectors was to blame. While we do not see a risk of another recession – oil

Figure 1: Nigeria macroeconomic forecasts Figure 2: Rising oil prices to support economic activity

FAAC disbursements, NGN bn; crude oil, USD/bbl

*end-period; Source: Standard Chartered Research Source: NBS, Thomson Reuters Datastream, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 14.00 14.00 14.00

USD-NGN* 370.0 380.0 383.0



FAAC disbursements

Crude oil (RHS)

0

20

40

60

80

100

120

0

200

400

600

800

1,000

1,200

Jan-

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Jul-1

4

Oct

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Jan-

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Jul-1

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Jan-

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-16

Jul-1

6

Oct

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Jan-

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-17

Jul-1

7

Oct

-17

Jan-

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Apr

-18

Jul-1

8

Razia Khan +44 20 7885 6914

[email protected]



Political party primaries in October

will be a key focus

The election backdrop may prevent

faster progress on growth-

enhancing reforms

H1-2018 growth disappointed, but

Nigeria should benefit from higher

oil prices




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prices and output have since improved – we lower our 2018 GDP growth forecast to

1.8% (from 2.4%) to reflect the weaker starting point. This brings our forecast in line

with the Central Bank of Nigeria’s (CBN’s) projection. We expect a gradual economic

recovery in 2019 and 2020, and leave our growth forecasts unchanged at 3.0% and

3.5%, respectively. We recently revised up our average oil price forecasts to USD

75/barrel (bbl) in 2018, USD 78/bbl in 2019, and USD 85/bbl in 2020. While this

should support Nigeria’s growth, significant potential headwinds remain.

The government has announced a plan to clear fiscal arrears at the state and

local government level by issuing local currency-denominated debt (arrears are

estimated at 2-3% of GDP). The plan awaits national assembly approval, however,

and progress ahead of the elections may be doubtful. Higher oil prices also highlight

the pace of under-recovery of imported fuel, and its fiscal implications. Fuel is now

primarily imported by the state-owned oil company. The regulated domestic fuel price

of NGN 145/litre remains lower than the landing cost of imported fuel. This precludes

more private-sector participation in fuel imports. There is no direct budget allocation

for the fuel subsidy. Instead, costs are extracted from state-owned oil company

remittances back to the Federation account (revenue belonging to the government),

so all three tiers of government share in the cost of the fuel subsidy. Continued oil

price gains will likely require revision of regulated fuel prices after the elections.

Higher oil prices should result in a healthier current account (C/A) surplus. We

adjust our C/A balance projections for 2018-20 to surpluses of 2.5%, 2.0% and 1.1%,

respectively (from 0.0%, -1.0% and -1.8% previously). The changes reflect our higher

oil price expectations, as well as weak growth in the near term. The C/A surplus is

likely to narrow in the years ahead, despite forecast higher oil prices, as domestic

demand recovers and capital budget execution improves.

We now see formal monetary policy tightening in 2019

A majority (six out of 10 MPC members) voted for some form of tightening at

the September Monetary Policy Committee (MPC) meeting. The benchmark

monetary policy rate (MPR) was kept on hold, as only three members favoured hiking

the MPR, while the other three advocated further tightening the cash reserve ratio

(CRR). Nonetheless, we see the outcome of the meeting as a signal of the MPC’s

future tightening intent amid renewed concerns about the reversal of capital inflows.

We raise our CPI inflation forecasts for 2018-20 to reflect recent NIFEX and

NAFEX exchange rate harmonisation, likely post-election fuel-price adjustment in

2019, and tighter policy in the interim to provide reassurance on FX stability. We now

forecast inflation at 12.0% in 2018 (11.4% prior), 10.1% in 2019 (8.0%) and 7.7% in

2020 (6.1%). We now expect a 25bps MPR hike to 14.25% in March 2019 (ahead of

likely fuel price deregulation), versus our previous forecast of an unchanged MPR

through 2019, with a reversal of this hike likely only in November 2019.

Near-term, the central bank is likely to rely on higher open-market operation (OMO)

rates to attract capital inflows to Nigeria. While higher Federal Accounts Allocation

Committee (FAAC) disbursements have recently driven interbank rates lower,

stepped-up tightening through OMOs and the asymmetric application of the CRR

should support T-bill yields. We raise our 3M T-bill yield forecasts to 13.3% at end-

March 2019, decelerating to c.12% by end-2019 and 10.5% by end-2020 (from

10.8%, 9.7% and 9.5%, previously).

Clearance of fiscal arrears and fuel

price deregulation may be on hold

until after the election

September MPC vote signals a

tightening intent; the MPC is

concerned about the risk of capital

outflows




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Senegal – Losing its shine?

Economic outlook – Oil, rebasing and politics

Senegal is one of the most vulnerable SSA countries to higher oil prices. It

remains a growth outperformer, but several fundamental metrics are deteriorating,

mainly due to higher oil prices. Senegal’s fiscal deficit is set to widen in 2018, ending

five years of fiscal consolidation. This is partly due to higher oil prices, which lead to

increased energy-related subsidies. The fiscal deficit target has been revised to 3.5%

of GDP from an initial target of 2.7%. H2 data from the Ministry of Finance shows that

the government is on target (the deficit was XOF 303.2bn in H1 compared to a target

of XOF 304.4bn). The fiscal deficit remains moderate compared to many other SSA

countries and is not yet a source of concern, as financing needs are covered by the

USD 2.2bn Eurobond issued in May. On the external front, the current account deficit

is likely to deteriorate further to 8% of GDP as oil imports (17% of total imports)

continue to increase. The trade balance deteriorated in H1 due to higher oil prices

and capital imports.

GDP rebasing (GDP up by 30%) has improved some metrics. Twin deficits are

lower than would otherwise have been the case, but GDP rebasing does not change

their widening trajectory. Also, Senegal’s revenue base now appears to be even

lower, at only 17% of GDP (compared with 22% previously). Finally, while debt to

GDP is lower at 48% (previously above 60%), other debt indicators are less

favourable. Notably, external debt service increased to 27% of revenue, higher than

for Francophone peers such as Côte d’Ivoire or Cameroon.

Senegal’s next presidential election is scheduled for 24 February 2019.

President Macky Sall remains the favourite thanks to a sound economic track record

and a relatively divided opposition. There has been some noise around the

convictions (on corruption charges) of his main opponents, Karim Wade and Khalifa

Sall, which the opposition views as politically motivated in order to bar them from

running in the presidential race. We are not too worried about political noise in the

coming months. However, political considerations (along with higher oil prices) have

probably contributed to a higher fiscal deficit this year. Salary increases in the

education sector following protests earlier this year, and higher energy subsidies,

likely reflect the government’s desire to prevent social discontent ahead of the

election.

Figure 1: Senegal macroeconomic forecasts Figure 2: Wider twin deficits

% of GDP


2018 2019 2020



Policy rate (%)* 4.50 4.50 4.50

USD-XOF* 570 547 475


Fiscal balance (% GDP) -3.5 -3.3 -3.0-9.0

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

2014 2015 2016 2017 2018 F

Fiscal balance

Current account balance

Higher oil prices are starting to bite,

though the negative impact remains

manageable

Victor Lopes +44 20 7885 2110

[email protected]



GDP rebasing cannot mask

vulnerabilities

In the SSA context, the upcoming

election presents little risk,

although it may influence fiscal

policy




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South Africa – Fears are overdone

Economic outlook – Temporary factors drove H1 recession

GDP surprised negatively in H1-2018, and the economy entered a technical

recession. We lower our GDP forecast for 2018 to 0.8% (from 1.8%), largely to

reflect the contraction that has already taken place. The Q2 contraction was worse

than the market had expected (-0.7% q/q SAAR, following -2.6% in Q1). While we

expect a gradual recovery in H2, high-frequency data suggests that Q3 performance

may be soft. A clearer recovery may not emerge until Q4, when the base effect is

likely to be less favourable. Our 2018 growth forecast is marginally higher than the

South African Reserve Bank’s (SARB’s) recently revised forecast of 0.7%. We still

expect growth to recover to 2.2% in 2019 and 2.6% in 2020, although we lower our

forecasts (from 2.4% and 3.0%, respectively) to reflect the more challenging external

environment and softer-than-expected momentum in some sectors. Risks to these

forecasts remain to the upside.

The key question is how much to make of past growth weakness. We believe

the weak momentum in H1 was temporary (Figure 2). A strong base was one reason

for the slowdown – the economy outperformed expectations in 2017 as agriculture

recovered from a severe drought. As a result, 2018 growth has seen a significant

drag from agriculture so far. But this is largely a technical factor and may not be long-

lasting. While the ongoing drought in the Western Cape has also probably weighed

on agriculture-sector performance this year, the recent debate over land reform is

unlikely to have had a significant impact, in our view.

Mining has already recovered from a temporary setback in Q4-2017 and Q1-2018,

with growth turning positive in Q2. August trade data showed a further improvement

in manufacturing, buoyed by recovering vehicle exports, despite recent electricity

supply concerns. Manufacturing production rose to the highest level in more than two

years in July, and further gains are likely. The unexpected technical recession in H1-

2018 was at odds with rising confidence fuelled by the country’s political transition

under the new leadership of the ruling African National Congress (ANC). There is

little to suggest that growth will be persistently weak.

Medium-term growth should receive a boost from the recently announced

fiscal stimulus plan, which will reallocate ZAR 50bn of spending from

underperforming government departments, and the establishment of an infrastructure

Figure 1: South Africa macroeconomic forecasts Figure 2: H1-2018 growth contracted from a strong base

GDP growth rates q/q, SAAR

Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18

Primary sector 15.4 13.9 13.8 5.2 -17.0 -4.6

Agriculture 25.6 36.9 41.7 39.0 -33.6 -29.2

Mining 12.6 7.8 6.2 -4.4 -10.3 4.9

Secondary sector -3.7 2.8 1.5 3.1 -5.0 0.5

Manufacturing -4.1 2.9 3.7 4.3 -6.7 -0.3

Tertiary sector -1.7 1.2 1.1 2.7 0.3 -0.6

Non-primary sector1 -2.1 1.6 1.2 2.7 -0.9 -0.3

Non-agricultural sector2 -1.0 2.1 1.6 2.1 -1.7 0.1

Total -0.5 2.9 2.3 3.1 -2.6 -0.7

*end-period; **for fiscal year ending 31 March; Source: Standard Chartered Research Source: Stats SA, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 6.75 7.00 7.75

USD-ZAR* 14.20 13.70 13.00



Razia Khan +44 20 7885 6914

[email protected]



Agriculture has been a significant

drag on growth, largely for technical

reasons

We still expect a recovery in 2019

and 2020




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fund. Further details will be revealed in the Medium Term Budget Policy Statement

(MTBPS) on 24 October. We expect South Africa’s negative output gap to narrow in

the coming years, with structural reforms raising potential output only gradually. This

has implications for monetary policy.

Policy – SARB to hike in November; fiscal fears overdone

We maintain our view that the SARB will hike rates in November, despite H1

growth weakness. At its September meeting, which followed a significant EM sell-off

and a rise in global oil prices, the Monetary Policy Committee (MPC) voted 4-3 to

keep the repo rate on hold at 6.50%. Brian Kahn, whom many consider a relatively

dovish MPC member, retires before the November meeting. It is not yet known if a

new member will join before then; this suggests the possibility of a split MPC, with

the SARB governor having the deciding vote. However, the reasons for our

November tightening view are more fundamental than technical; the expected closing

of the negative output gap is a key argument for policy normalisation. The SARB

considers the current level of interest rates to be accommodative.

The SARB kept its 2019 and 2020 growth forecasts broadly unchanged at its

September MPC meeting. It still expects the negative output gap to close by the end

of 2020. The SARB’s quarterly projection model (QPM), which is based on a point

inflation target of 4.5%, now implies five rate hikes of 25bps each by end-2020, in line

with our current forecasts (we see a hike at the November MPC meeting, a further

hike in March 2019, and three hikes of 25bps each in 2020).

SARB officials have been clear on the short-term trade-off between inflation and

growth, emphasising their price stability mandate even as they wait for the second-

round effects of currency weakness and fuel shocks to emerge. We now expect a

faster pick-up in CPI inflation in the coming years, to an average of 5.4% in 2019

(previous forecast: 5.1%) and 5.3% in 2020 (5.2%). This reflects our latest USD-ZAR

and oil price forecasts, both of which were recently revised higher. Our inflation

forecasts are still lower than the SARB’s projections of 5.6% and 5.4%, respectively.

We lower our 2018 average inflation forecast slightly to 4.6% from 4.7% to reflect the

benign impact of the VAT rate hike effective in April 2018.

Fears of fiscal slippage appear overdone. The Treasury is likely to lower its 2018

growth forecast to 0.7% from 1.5% in the upcoming MTBPS, to reflect the H1

contraction. We expect lower growth to have only a limited impact on fiscal receipts.

We revise our fiscal deficit projection for FY19 (year ending 31 March 2019) to 3.9%

of GDP from 3.6% (which was the Treasury’s FY19 forecast made in February 2018).

Our forecasts for fiscal consolidation in subsequent years are unchanged.

The deficit stood at ZAR 131.4bn in April-August 2018, narrowing from ZAR 141.4bn a

year earlier, when growth was much firmer. The government had initially forecast a

FY19 deficit of ZAR 180.5bn. This may not be far from the eventual outcome, if receipts

accelerate for the rest of the year on seasonal factors and growth picks up as we

expect (revenue rose 40% m/m in August and typically strengthens in the second half

of the fiscal year). The Treasury has a track record of adhering to its expenditure

ceiling, but in recent years, it achieved this by cutting capital expenditure. Given the

upcoming stimulus plan, sharp capex cuts may not be possible. Even so, we do not

expect a sizeable increase in the domestic borrowing requirement.

The November MPC meeting could

see a split decision; we expect

a hike

SARB projections now incorporate

five rate hikes through to end-2020

Growth forecasts may be halved,

but substantial fiscal slippage is

unlikely




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Tanzania – Subdued outlook

Soft private investment weighs on the outlook

Confidence remains weak. Private-sector credit extension has improved marginally,

but not meaningfully compared to historical averages (up 4% y/y in June). Q2 credit

extension patterns also point to still-weak private-sector activity in areas that drove

growth in 2017 (including mining, manufacturing, trade and transport), in some cases

turning negative. Our Africa business surveys indicate that sentiment in Tanzania is

the weakest among the economies we cover (see Standard Chartered Africa

Business Insight surveys). President Magufuli’s criticism of international oil and gas

companies (he has accused them of profiting at the expense of Tanzania’s

development) will likely add to foreign investor concerns following recent mining-

sector investigations. This may constrain foreign investor appetite. We expect growth

to slow to 5.7% in 2018 from 7.1% in 2017. A stronger acceleration in credit

extension is an upside risk to our forecast, although high NPLs are likely to be a

constraint.

Tanzania’s current account deficit is likely to remain wide as higher oil prices have

continued to add pressure (oil accounts for 20% of imports), although the services

account surplus has benefited from higher tourism earnings.

Policy – Weak execution

Inflation was more muted than expected in H1-2018 but is likely to accelerate again

in Q4. CPI inflation was at 3.3% y/y in August as weak domestic demand fed through

to lower food, recreation and communication prices, despite higher fuel prices. As a

result, we lower our CPI inflation forecasts to 3.8% for 2018 (from 4.6%), 5.2% for

2019 (from 5.7%), and 6% for 2020 (from 5.5%). The Bank of Tanzania plans to

introduce a benchmark policy interest rate in FY19 (year ending June 2019).

Although fiscal policy in the current fiscal year is expansionary, expenditure is likely

to continue to underperform targets; the FY19 budget deficit is likely to remain below

3% of GDP.

Market outlook – Depreciation to continue

We expect Tanzanian shilling (TZS) depreciation to continue in H2-2018, in line with

a weakening trend since the start of the year. FX reserves are adequate, at USD

5.5bn at end-June (5.6 months’ import cover), from USD 5bn at end-June 2017.

Figure 1: Tanzania macroeconomic forecasts Figure 2: Inflation to pick up from historical lows

CPI, % y/y

*end-period; **ends 30 June (includes donor assistance);



2018 2019 2020



3M T-bill (%)* 4.00 5.00 7.00

USD-TZS* 2,320 2,400 2,430


Fiscal balance (% GDP)** -2.1 -2.9 -2.53.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

Weak private-sector confidence

continues to weigh on the outlook

Sarah Baynton-Glen, CFA +44 20 7885 2330

[email protected]

Economist, Africa


Depreciation pressure to continue






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Uganda – Rates steady for longer

Economic outlook – Gradually improving growth

We expect growth to remain robust, accelerating from 5.5% in 2018. A more

expansionary budget and faster execution of capital expenditure are likely to support

growth, despite a delay in the start of oil production. With final investment decisions

by joint venture partners still pending, first oil may not be seen until 2021 at the

earliest. However, we expect rising global oil prices to be a supportive factor. Lower

food inflation suggests that agriculture growth may be improving, although the sector

(along with trade) is still contributing to non-performing loans in the banking sector.

We see growth improving steadily to 5.8% in 2019 and 6.2% in 2020.

We now expect the policy rate to stay on hold at 9% through end-2018 as the

Bank of Uganda (BoU) seeks to support the recovery in private-sector credit growth

(Figure 2). We had previously expected front-loaded rate hikes in August, October

and December, taking the central bank rate (CBR) to 11% at year-end. While the

current 9% CBR is a cycle low (the BoU did not tighten in August), the still-wide

spread between the policy rate and lending rates argues for a longer period of policy

accommodation. The BoU thinks that lending standards are still tight, and credit

growth remains below its historic trend despite the low CBR.

Moreover, Ugandan shilling (UGX) depreciation has calmed since Q2, helped by

rising market rates. We recently revised our UGX forecasts to reflect a more modest

depreciation path (see On the Ground, 28 September 2018, SSA – The more open

and crowded, the less shielded). The global rise in oil prices and tighter external

financing conditions pose a risk to this profile, as would a faster-than-expected

closure of Uganda’s negative output gap. But given recent favourable food-price

trends, we lower our CPI inflation forecasts for 2019 and 2020 to 5.8% (from 7.0%)

and 6.6% (7.2%), respectively. We now forecast the year-end CBR at 9.0%, 11.5%

and 13.0% in 2018, 2019 and 2020 (from 11.0%, 14.0% and 14.0% previously).

While coffee exports have slowed in recent months and rising oil imports are

expected to pressure Uganda’s external balances, we keep our current account

deficit forecasts unchanged for now. Implementation risks to the budget for FY19

(ends 30 June 2019) will be closely monitored for signs of a slowdown in public

infrastructure projects and related imports.

Figure 1: Uganda macroeconomic forecasts Figure 2: Rates on hold to allow credit growth to recover

CBR (%), private-sector credit extension (% y/y), CPI (% y/y)

*end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: Reuters Datastream, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 9.00 11.50 13.00

USD-UGX* 3,890 4,150 4,230



CBR

CPI

PSCE

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0

5

10

15

20

25

30

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

Razia Khan +44 20 7885 6914

[email protected]



The CBR is at a historic low, but the

BoU is concerned about still-tight

lending standards

We now forecast slower UGX

depreciation




Economies – Europe



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Europe – Top charts Figure 1: Signs of stabilising euro-area growth

Euro-area purchasing managers’ indices (PMI)

Figure 2: Euro-area core inflationary pressures remain

muted (HICP, % y/y)

Source: Bloomberg, Standard Chartered Research Source: Eurostat, Standard Chartered Research

Figure 3: Italy-specific concerns remain

10Y bond spreads vs Bunds, bps

Figure 4: UK business confidence holding steady for now

GfK consumer confidence, situation in next 12 months, Lloyds

business barometer, % balance


Manufacturing

Services

Composite

46

48

50

52

54

56

58

60

62

Jan-14 Dec-14 Nov-15 Oct-16 Sep-17 Aug-18

HICP, all items

HICP, core

Target 'close to but lower than 2%'

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0

1

2

3

4


Spain

Italy

Portugal

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20

40

60

80

Jan-12 Feb-13 Mar-14 Apr-15 May-16 Jun-17 Jul-18

Lloyds business barometer, % balance

Consumer confidence: situation in next

12 months

Figure 5: High vacancies and low unemployment point to

an increasingly tight UK labour market

Vacancies, ’000s; and unemployment rate, %

Figure 6: Risks of overheating in parts of CEE

GDP growth, % y/y

Source: ONS, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

400

450

500

550

600

650

700

750

800

850

3.5

4.5

5.5

6.5

7.5

8.5

9.5

Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18

Vacancies, 000s (RHS)

Unempl.rate, % (LHS)

Hungary

Poland

Czech Republic

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0

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Euro area – Ending QE

Economic outlook – Strong domestic demand

The economy continues to grow at an above-trend pace. Growth has slowed

since the start of the year, but we expect GDP figures to show a slight pick-up in

activity in H2-2018. Continued employment growth and rising wages should boost

household consumption, although higher energy prices will continue to act as a

headwind. We also expect gross fixed capital formation to remain well supported by

improving financing conditions; loans to non-financial companies are growing at the

fastest pace since mid-2009.

We do, however, think that growth is likely to moderate over the next couple of years

in the face of high energy prices, reduced QE support and lingering uncertainty over

the trade outlook. As such, we shave our 2018 forecast for real GDP growth to 2%

(previously 2.1%), and continue to see 1.8% in 2019 and 1.7% in 2020.

In terms of the balance of risks, concerns about a US-EU trade war have abated

following negotiations in late July, although the potential for an escalation of global

trade disruptions remains a key risk to the European economy. Italian politics is also

a risk, particularly related to the government’s ongoing budget negotiations with the

European Commission. We do not rule out fresh elections and European Central

Bank (ECB) emergency action in case of renewed financial-market volatility, but we

think they remain tail risks for now.

Policy – Some stimulus remains, despite QE wind-down

The ECB will likely be slow to raise rates once QE ends. With underlying inflation

expected to converge on ECB targets over the next couple of years, the ECB

Governing Council (GC) anticipates that, subject to upcoming data, QE net

purchases will cease at the end of this year, after halving to EUR 15bn/month from

October. But the rate-hiking cycle is not expected to start for some time: the GC

expects rates to remain unchanged at least “through the summer of 2019”. We

forecast the first deposit-rate hike (to -0.3% from -0.4%) in September 2019, with

another 10bps hike in December 2019.

Policy makers have become more convinced that underlying inflation is building, with

wage settlements starting to pick up as the unemployment rate moves towards the

non-accelerating inflation rate (NAIRU). But policy will remain stimulatory even after

Figure 1: Euro area macroeconomic forecasts Figure 2: Lending continues to rise

Euro-area financial institutions’ loans, by sector, % y/y


2018 2019 2020



Policy rate (%)* 0.00 0.05 0.25

EUR-USD* 1.15 1.20 1.38



Households

-4

-3

-2

-1

0

1

2

3

4

5

Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Corporates (adjusted for sales and securitsiation)

Growth is likely to moderate over

the next couple of years

QE net purchases will cease at the

end of 2018

Sarah Hewin +44 20 7885 6251

[email protected]

Chief Economist, Europe


Nick Verdi +44 20 7885 8929

[email protected]

Head of G10 FX Strategy


An escalation of trade wars remains

a key risk




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the ending of QE. The reinvestment of some EUR 200bn of maturing securities will

ensure that the ECB remains active in euro-area government bond markets in 2019.

An ‘operation twist’-style of reinvesting could be deployed to support longer-term

securities in the euro-area periphery, but ECB President Draghi has said that

purchases would continue according to the capital key that has been used in the QE

programme so far.

Fiscal consolidation is being helped by buoyant growth rates and low borrowing

costs. We expect the euro area’s fiscal deficit to stay below 1% in 2018 and 2019,

with most countries expected to report deficits below 2% of GDP in 2018, except

Spain (2.6%) and France (2.3%). That said, Italy’s new government wants to ease

budgetary constraints, and will likely aim for a higher deficit in 2019. Overall fiscal

policy is likely to be mildly stimulatory this year and next. We expect the euro-area

debt/GDP ratio to fall to 87% in 2018, although debt in Greece, Italy, Belgium and

Portugal remains above 100%.

Politics – Italy, trade wars and Brexit in focus

Populism presents challenges for EU cohesion. Elections over the past two years

have tended to reflect increased support for populist parties. Consequently,

governments are alert to risks to EU cohesion. Within the euro area, Italy’s coalition

between the populist anti-establishment Five Star Movement and the nationalist Lega

presents the biggest challenge. The government has dialled back its anti-euro stance

but wants to expand spending and cut taxes, running up against EU rules on fiscal

deficits. We expect Brussels and Rome to come to agreement in the current budget

round. But rising support for Lega may encourage the party to break away from the

governing coalition and call new elections in 2019, with potentially damaging

consequences for market confidence.

In Germany, the focus is on Bavaria’s regional elections on 14 October, when the

nationalist Alternative für Deutschland (AfD) may prevent the ruling Christian Social

Union (CSU) from gaining a majority, forcing the CSU to enter into a coalition,

possibly with the Greens. Horst Seehofer, leader of the CSU, looks vulnerable. There

are also questions over Merkel’s place at the helm of the CDU, and she may

consider stepping down in the coming months (while staying on as Chancellor), with

a view to seeking the presidency of the European Council when Donald Tusk’s term

ends in November 2019.

The broader EU also faces testing geopolitical times, particularly the threat of

disruptions to trade with two important markets, the UK and the US. For now,

Washington and Brussels have dialled back from a trade confrontation, with both

parties working towards reducing tariffs and increasing trade flows. But the threat that

the US could impose tariffs on EU car exports remains. The Brexit transition should

allow EU-UK trade flows to continue, but cliff-edge risks – either in 2021 or in Q2-

2019 in case of a Brexit ‘no deal’ – may weigh on business sentiment.

Market outlook – US outperformance lingers

EUR drivers turn more positive beyond 2018. While euro-area economic activity is

solid, the ECB’s gradualist approach and ongoing US economic outperformance

could undermine EUR-USD in the near term. Beyond 2018, medium-term positive

drivers for the euro area point to a recovery in EUR-USD, particularly if trade war

concerns diminish.

Government deficits are low, but

debt remains high

Early elections cannot be ruled out

in Italy

For now, Washington and Brussels

have dialled back from a trade

confrontation




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Switzerland – Slowdown expected in H2

Economic outlook – Exports still vulnerable

Consumption and exports drive Q2 growth. Switzerland’s economic recovery

remains robust, with headline GDP growth of 0.7% q/q in Q2-2018, following revised

growth of 1.0% in Q1. While we anticipate a slowdown in H2, we nonetheless raise

our 2018 growth forecast to 2.5% from 2.1% on account of the stronger expected

outturn in H1. We maintain our growth forecasts of 1.8% for 2019 and 1.6% for 2020.

Private consumption (+0.3% q/q) and exports (+0.5% q/q) were the key growth

drivers in Q2. While consumer confidence has been falling since the start of the year,

we expect private consumption to increase further as wage growth picks up.

However, Swiss franc (CHF) appreciation since the summer means that net export

growth is likely to be tempered going forwards.

Recent manufacturing PMI data have been encouraging and indicative of continued

foreign demand. But the broader KOF economic barometer (a composite of 25

indicators) has declined since the start of the year, suggesting a more reserved

growth outlook.

Policy – SNB to hold tight

We still expect the SNB to take its cues from the European Central Bank (ECB).

Despite the recent economic strength, domestic demand inflationary pressures

remain subdued, with core inflation at just 0.5% y/y. With the CHF also appreciating

since the summer, we expect the Swiss National Bank (SNB) to maintain its

expansionary monetary policy stance well into 2019, gradually removing policy

accommodation in Q4-2019 alongside the ECB. We continue to forecast modest

budget surpluses in 2018, 2019 and 2020 equivalent to 0.2% of GDP.

Market outlook – Watching the SNB watch the ECB

CHF stability to persist. We expect a very modest rally in USD-CHF to around 0.97

by mid-2019 and a similarly modest rally in EUR-CHF to 1.13. Absent more hawkish

SNB policy, the recent slide in EUR-CHF appears overdone.

Figure 1: Switzerland macroeconomic forecasts Figure 2: Mixed signals from leading indicators

KOF composite leading indicator & manufacturing PMI


2018 2019 2020



Policy rate (%)*-1.25 to

-0.25

-1.00 to

0.00

-0.75 to

0.25

USD-CHF* 0.96 0.98 0.85



35

40

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55

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65

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80

85

90

95

100

105

110

115

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

KOF leading indicator (LHS)

Manufacturing PMI (RHS)

Mixed signals from economic

indicators

Christopher Graham +44 20 7885 5731

[email protected]

Economist, Europe


Nick Verdi +44 20 7885 8929

[email protected]



Domestic demand inflationary

pressures remain subdued




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UK – Brexit to weigh on growth

Economic outlook – Quarterly growth reaches its ceiling

The recovery is unlikely to accelerate further. We continue to expect growth of

1.4% in 2018, slowing to 1.2% in 2019. Q2-2018 growth recovered to 0.4% q/q, after

seasonal factors acted as constraints in Q1, with construction and services

performing particularly well. Data from these sectors suggest that GDP growth is

likely to hold steady in Q3-2018.

Elsewhere, there are mixed signals from sentiment and activity indicators. Retail

sales improved strongly in July, and unemployment fell to 4.0%. However, house

price growth has weakened to its lowest rate in five years, according to the Office for

National Statistics, and consumer confidence has clearly dipped since the mid-point

of the year. With households’ savings ratio at a very low level, leaving little scope for

savings to be drawn down to support spending, we do not see private consumption’s

contribution to growth increasing going forward.

We also expect the UK’s growth trajectory to remain capped by Brexit-related

uncertainty over the medium term, with investment spending unlikely to recover

strongly. Indeed, even if the UK brokers a deal with the EU and successfully

manages to gain parliamentary ratification, the subsequent transition period (out to

end-2020) will provide continued uncertainty as the UK and EU begin hammering out

the details of a future economic relationship.

Policy – BoE hesitant to hike again

Brexit uncertainty gives the MPC pause for thought. The Bank of England’s

(BoE’s) monetary policy committee (MPC) held rates steady in September, following

a unanimous decision to hike by 25bps in August. We forecast one further rate hike

in H2-2019 taking the base rate to 1.00%, and a further single 25bps hike in 2020.

The domestic economy continues to strengthen and the labour market has tightened

further, with nominal wage growth (ex-bonuses) hitting 2.9% in the three months to

July. Inflation has also crept up since June, rising to 2.7% in August. However, we

think the MPC will hold off from further near-term rate hikes, primarily due to

uncertainty surrounding Brexit negotiations but also owing to growing downside risks

from the global economy, which the latest MPC minutes alluded to.

Figure 1: UK macroeconomic forecasts Figure 2: Second referendum outcome too close to call

‘If there was another referendum, how would you vote?’ %

*end-period; Source: Standard Chartered Research Source: WhatUKthinks.org, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 0.75 1.00 1.25

GBP-USD* 1.35 1.42 1.47



Remain

Leave

0%

10%

20%

30%

40%

50%

60%

Jun-17 Jan-18 May-18 Sep-18

Don't know/undecided

Household consumption and

investment growth capped

Next rate hike forecast for H2-2019


[email protected]

Economist, Europe


Sarah Hewin +44 20 7885 6251

[email protected]



Nick Verdi +44 20 7885 8929

[email protected]






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The UK Treasury continues to make solid progress in reducing the fiscal deficit, and

we now expect it to shrink to 1.8% in 2018 (previously 2.1%), though future progress

may be slow if we are right about subdued GDP growth post-Brexit. The autumn

budget has been brought forward to 29 October in order to avoid it getting mixed up

with any Brexit legislation arriving in parliament in November.

Chancellor Philip Hammond had previously targeted eliminating the fiscal deficit by

the mid-2020s, but we think this will be difficult considering the government’s

commitment to inject GBP 20bn more per year into the National Health Service by

2023-24. In the case of a ‘no deal’ Brexit, the Treasury would likely be forced to relax

its fiscal stance considerably, which could see the deficit widen substantially from

current levels.

Politics – Brexit deadline approaches

There are fewer than 200 days until Brexit day (29 March 2019) and a mammoth

task still faces the UK government. Not only must Prime Minister (PM) Theresa

May reach an agreement with the European Commission – no simple task given how

intractable the Northern Ireland backstop issue is proving – but also, the much harder

job of getting the deal through the UK legislative branch will begin.

The key hurdle to finalising the Withdrawal Agreement remains the Northern Ireland

backstop. The EU has advocated a backstop that would allow Northern Ireland to

stay in the customs union, as well as parts of the Single Market but the UK has

rejected this given concerns over constitutional and geographic integrity. The UK has

instead advocated that the backstop should be ensured via a comprehensive

customs arrangement, whereby the UK remains aligned with the EU customs union

beyond the transition period; but the EU has noted that this prejudges the result of

negotiations on the future relationship.

Our core view remains that a deal will eventually be brokered between the UK and

EU, but this deal will likely depart from the government’s current Chequers plan.

More likely is that the UK government will make further concessions to the EU,

leading ultimately to a softer Brexit. Assuming a deal is reached between the UK and

EU, the harder task will arguably be to get the legislative branches to ratify the

agreement. In the UK, PM Theresa May cannot currently guarantee the required

support of a majority of Members of Parliament.

A ‘no deal’ Brexit would heighten the risk that the UK crashes out of the EU on WTO

terms, whereby trade tariffs and customs checks are applied from day one. A second

referendum looks a low probability, though cannot be completely ruled out, possibly

following an early general election. Polls show the two main parties, Conservatives

and Labour, neck-and-neck.

Market outlook – Brexit dominates the GBP outlook

Brexit risk premium remains but a positive outcome to negotiations would

drive the GBP higher. We remain bullish on GBP-USD. A withdrawal deal with the

EU passed by parliament after the UK presumably makes further concessions to the

EU would boost the GBP and front-end rate expectations in short order. Investors

expecting the outlines of a UK-EU trade deal later this year should prepare for more

hawkish monetary policy messaging from the BoE.

Even if a Brexit deal is agreed

between the UK government and

the EU, the UK parliament may

reject it

Northern Ireland backstop remains

the key hurdle to a deal

‘No deal’ Brexit could cause the

Treasury to relax the fiscal stance




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Czech Republic – Risks of overheating

Economic outlook – Robust domestic demand

Wage pressures point to overheating risk. We expect the Czech economy to

remain strong in late 2018 and throughout 2019. We forecast annual growth of

3.6% this year, easing to 3.0% in 2019 as capacity constraints continue to bite.

Q2-2018 growth was revised up to 0.7% q/q (from 0.5%) and was largely driven by

investment and household consumption; this dynamic is likely to continue in the

coming quarters, with public-sector investment largely driven by EU funding for

infrastructure. The Czech Republic has one of the tightest labour markets in the

EU, with unemployment at just 3.1% and wage pressures continuing to build.

Inflation stood at 2.3% in July and remains on course to average 2.2% in 2018. As oil

price base effects diminish, this should help cap upside inflation risks; nonetheless,

we envisage consumer price inflation remaining above 2.0% in 2019 owing to strong

wage growth and capacity constraints.

Policy – Slightly faster policy tightening

The central bank should continue to hike rates. The Czech National Bank (CNB)

has raised interest rates four times since the start of the year, to 1.50%. Therefore, we

now expect rates to reach 1.75% by year-end (previously 1%), with a 25bps hike in Q4.

Growing pressure on inflation from rising wages will keep the CNB hawkish and we

expect two further hikes of 25bps in 2019 to keep inflation close to its 2% target.

While government finances are set to remain in surplus in 2019 and 2020 given the

strong performance of the domestic economy, the surplus will nonetheless decline as

spending on wages increases – the Czech government recently agreed to an 8%

average increase in wages for state employees in 2019.

Market outlook – EUR-CZK should grind lower

We forecast EUR-CZK at 25.00 at year-end 2019. Euro-area growth continues to

tighten wage and inflation conditions in the Czech Republic. As a result, we expect

the CNB to use both rates and FX to gradually tighten policy.

Figure 1: Czech Republic macroeconomic forecasts Figure 2: Tightest labour market in EU?

Unemployment rate, %

*end-period; Source: Standard Chartered Research Source: Eurostat, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 1.75 2.25 2.75

USD-CZK* 22.09 20.83 17.39

Current account balance (% GDP) -0.2 0.1 0.2


Czech Republic

EU

0

2

4

6

8

10

12


CNB likely needs to hike again

in 2018


[email protected]

Economist, Europe


Geoff Kendrick +44 20 7885 6175

[email protected]

Global Head, Emerging Markets FX Research


CZK has upside potential




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Hungary – Growth has likely peaked

Economic outlook – EU funds driving investment

Growth has likely peaked. Q2-2018 growth was the highest since 2004, at 4.8%

y/y. This prompts us to raise our 2018 growth forecast to 4.1% (3.8% previously). We

still expect growth to moderate over the coming quarters as capacity constraints

continue to bite and the effects of administrative wage hikes fade. We forecast that

headline growth will slow to 3.4% in 2019 and 2.8% in 2020.

Growth has largely been driven by private consumption and investment in the past

few quarters; investment has been well supported by strong absorption of EU funds,

a dynamic we expect to moderate slightly going forwards. The contribution from

private consumption is also likely to weaken; indeed, despite strong wage growth

consumer confidence has fallen in recent months.

Policy – Rates to remain low

Interest rates should remain low throughout 2019. Inflation stands at 3.4%, within the

central bank’s tolerance range, but has risen from around 2.0% in the first few months of

2018. Nonetheless, we expect the National Bank of Hungary (NBH) to look through

higher inflation for now and maintain its dovish stance. We expect the policy rate to stay

at 0.9% this year, before rising to 1.3% by end-2019 and 1.6% by end-2020.

Following elections in early 2018, we expect the Hungarian government to pursue

modest fiscal tightening over the medium term; we forecast the fiscal deficit to

decline from 2.4% of GDP in 2018 to 2.3% in 2019 and 2.1% in 2020.

Market outlook – EUR-HUF to trade around 325

FX unexciting, rates markets more attractive. The NBH remains ultra-dovish,

despite gradually increasing wage and inflation pressures. As a result, we have a

bias to pay front-end HUF rates as markets continue to challenge the NBH’s stance.

Figure 1: Hungary macroeconomic forecasts Figure 2: Investment is the key growth driver

Hungary’s gross fixed capital formation, % y/y

*end-period; Source: Standard Chartered Research Source: Eurostat, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 0.90 1.30 1.60

USD-HUF* 283 271 203



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15

20

25

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Bias to pay front-end HUF rates

Dovish stance to remain intact

for now


[email protected]

Economist, Europe



[email protected]






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Poland – Private consumption is key

Economic outlook – Growth to begin moderating

Domestic demand continues to drive robust growth in Poland. We raise our

2018 growth forecast to 4.7% (from 4.3% previously) given the robust growth

recorded in the first half of the year, despite our expectation of slowing momentum

over the coming quarters; we keep our 3.8% growth forecast in 2019. Growth

remained very strong in Q2-2018 despite easing slightly to 5.1% y/y, from 5.2% in

Q1. Private consumption remains the primary growth driver, supported by high

consumer confidence and strong wage growth. Nevertheless, we expect the

contribution to growth from private consumption to fall as further employment gains

are held back by a lack of available labour.

Investment disappointed slightly in Q2, but has potential to pick up in future quarters,

particularly as public investment will be well supported by the continued absorption of

EU funds. Net exports made a positive contribution to growth in Q2, but global trade

tensions are likely to moderate demand for Poland’s exports in the coming quarters,

while import demand is likely to remain strong. As a result, we forecast that the

current account deficit will widen to 0.5% of GDP in 2019 from 0.2% in 2018.

Policy – Policy to remain broadly accommodative

Rates to remain on hold. Interest rates remain at 1.5%, and National Bank of

Poland (NBP) Governor Glapinski reiterated in early September that they could stay

there until 2020. We forecast one rate hike towards the end of 2019, taking the

reference rate to 1.75%; this is in line with our view that the European Central Bank

(ECB) will begin hiking towards the end of next year. Inflation has held steady at

2.0% since June and is unlikely to rise far above 2.5% (the mid-point of the NBP’s

inflation target) for the foreseeable future, supporting the NBP’s dovish stance. We

forecast a slight widening of the fiscal deficit to 2.2% of GDP in 2019 (from 1.9% in

2018) due to higher public spending and investment.

Market outlook – Bias to pay rates and sell EUR-PLN

We forecast EUR-PLN at 4.00 at end-2019. Euro-area growth continues to provide

a tailwind for CE3. We think this will eventually see NBP dovishness give way,

allowing front-end rates to move higher and the Polish zloty (PLN) to strengthen.

Figure 1: Poland macroeconomic forecasts Figure 2: Headline growth has likely peaked

Poland real GDP growth, % y/y


2018 2019 2020



Policy rate (%)* 1.50 1.75 2.00

USD-PLN* 3.65 3.33 2.86



1

2

3

4

5

6

Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

NBP to begin hiking alongside the

ECB in late 2019


[email protected]

Economist, Europe



[email protected]






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Russia – Recovery remains intact

Economic outlook – Healthy private consumption

Domestic demand is holding up, despite external headwinds. As expected,

Russia’s hosting of the World Cup helped to boost real GDP growth to 1.8% y/y in

Q2-2018, largely via higher private consumption. This supports our full-year growth

forecast of 1.8% for 2018. Consumer confidence has increased steadily in recent

quarters as unemployment gradually falls and real wages improve. This should help

private consumption continue to support headline growth. The central bank’s surprise

hike in mid-September could raise concerns over further monetary tightening, but by

itself should not derail the economic recovery.

On the external front, the economy will continue to struggle against international

sanctions and wider EM concerns; at the same time, rising oil prices and crude

production should support broader investment and public-sector spending.

Policy – Holding steady for now

External dynamics and inflation justify CBR move. A likely pick-up in inflation,

combined with a weakening currency and the impact of US sanctions, prompted the

Central Bank of the Russian Federation (CBR) to hike rates by 25bps in mid-

September. Another rate hike in the coming months cannot be ruled out if the

external environment deteriorates further, either via a more aggressive ramping up of

international sanctions on Russia or a renewed bout of EM market volatility. Our core

view is for rates to stay on hold for the rest of 2018, before being cut to 7.00% by

end-2019.

Market outlook – Sanctions aside, we are constructive

Global EM conditions are starting to improve. The Russian rouble (RUB) has

been hurt by global EM contagion and US sanctions. USD-RUB is unlikely to trade

much lower as long as sanctions remain in place, but we note that global conditions

are improving.

Figure 1: Russia macroeconomic forecasts Figure 2: Consumption dynamics looking positive

Consumer confidence and unemployment, %


2018 2019 2020



Policy rate (%)* 7.50 7.00 6.75

USD-RUB* 65.0 63.0 63.0



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Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Consumer confidence (RHS)

Unemployment, %(LHS)

Rising oil prices could provide a

much-needed boon

No more rate hikes pencilled in


[email protected]

Economist, Europe



[email protected]




Economies – Americas



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US and Canada – Top charts Figure 1: US output gap is in positive territory

Output gap, % of potential GDP

Figure 2: Initial jobless claims indicate tight labour market

4-wk average, IJC as % of US workforce, age 15-64

Source: IMF, OECD, Standard Chartered Research Source: Bloomberg, Standard Chartered Research

Figure 3: US wages pressures are building

Employment cost index, % q/q; AHE, % y/y

Figure 4: Canada’s capacity utilisation tightens

Capacity utilisation, selected sectors, %


EU

Japan

US

-8

-6

-4

-2

0

2

4

6


Current

%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

Sep-83 Sep-90 Sep-97 Sep-04 Sep-11 Sep-18

ECI W&S

Avg hourly earnings % y/y

1

2

3

4

5

Jul-02 Jul-06 Jul-10 Jul-14 Jul-18

50

60

70

80

90

100

110


Manufacturing Construction Electricity

Mining Forestry

Figure 5: Canada’s housing starts decelerate

SAAR, units/person, ‘000s, 4mma

Figure 6: Canada’s output gap has likely closed

Output gap, % potential GDP


Average housing starts,

2007-2018

Housing starts,

'000s,4mma

100

150

200

250

300

Aug-07 May-10 Feb-13 Nov-15 Aug-18

IMF output gap measure,

% potential GDP

BoC output gap measure,

% potential GDP

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-1

0

1

2

3

Jan-99 Jan-04 Jan-09 Jan-14 Jan-19




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Latin America – Top charts Figure 1: Brazil’s fiscal accounts remain strained

% of GDP

Figure 2: Mexico’s real rates have risen rapidly

Interest rates, % p.a.; inflation, % y/y


Figure 3: Colombia’s twin deficits and oil prices

Crude oil USD/bbl (LHS); % of GDP (RHS)

Figure 4: Copper is the key driver of Chile’s economy

Copper USD/metric tonne (LHS); monthly GDP, % y/y (RHS)


Budget deficit (LHS)

Public gross debt (RHS)

45

50

55

60

65

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75

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0

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4

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Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Real rate (base rates minus core

CPI)

Overnight rate

Core CPI

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Budget balance (RHS)

Current account (RHS)Oil (LHS)

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y/y (RHS)

Copper (LHS)

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6

7

8

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Figure 5: Argentina’s trade deficit has barely improved

Trade balance, USD mn (LHS), % change y/y (RHS)

Figure 6: BCRP has tapped reserves to boost the PEN

Trade-weighted PEN index (LHS); reserves, USD bn (RHS)


Trade balance

Exports (RHS)

Imports (RHS)

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BCRP int'l reserves (RHS)

PEN trade-weighted

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62

64

66

68

70

105

107

109

111

113

115

117


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US – Outlook remains positive

Economic outlook – Fiscal policy steps on the gas

The near-term economic outlook has strengthened further on fiscal stimulus.

US data has been strong so far in 2018, buoyed by fiscal stimulus, solid business

investment and ongoing labour-market strength. Global trade tensions have not

palpably affected US businesses, and progress on discussions with major trading

partners has supported business sentiment. We expect this momentum to extend

into 2019. We recently raised our 2018 GDP growth forecast and our 2019 core PCE

forecasts (see On the Ground, 19 September, ‘US economic strength calls for

steeper policy path’). Our core PCE forecast for 2018 remains 2.0%. We see the

terminal federal funds target rate (FFTR) at 3.50% in the current business cycle, and

expect 25bps rate hikes in September and December 2019.

A key question for investors is how far beyond 2019 the US business cycle will

extend, and whether the Fed will be able to engineer a ‘soft landing’. So far, there are

fewer signs of significant imbalances in the real economy compared to previous

business cycles, though these may be increasing. Business spending and residential

investment, which had heated up significantly in the run-up to the two previous

recessions, have been relatively tepid for most of the current cycle. Bank balance

sheets have been significantly de-risked as well. But if capex spending picks up

notably on tax incentives, or deregulation incentivises greater financial risk-taking,

risks to financial stability could quickly re-emerge.

We believe that the composition of business investment will provide important clues

on the evolution of the business cycle: Should capital expenditure continue to rise

and broaden beyond the energy sector to computer equipment and other

productivity-enhancing areas, the business cycle may have more room to run. A

sustained increase in the labour participation rate would be another encouraging sign

of cycle extension, but we do not consider this a strong probability. Labour

participation has been affected by structural dynamics in the labour force (an ageing

population on the one hand, and lower participation among younger cohorts on the

other), which are unlikely to reverse anytime soon.

Figure 1: US macroeconomic forecasts Figure 2: US output gap in positive territory

Output gap, % potential GDP

*FFTR: upper-end of expected range; **end-period; ***for fiscal year ending in September;


Source: OECD, Standard Chartered Research

2018 2019 2020


Core PCE (% annual average) 2.0 2.2 1.8

Fed funds target rate (%)* 2.50 3.50 3.50

10Y UST yield (%)** 3.10 3.00 2.50


Fiscal balance (% GDP)*** -4.0 -4.5 -4.5

EU

Japan

US

-8

-6

-4

-2

0

2

4

6


Current

%

Composition of business

investment will be key to

cycle’s length

Sonia Meskin +1 212 667 0786

[email protected]

US Economist, The Americas

Standard Chartered Bank NY Branch

John Davies +44 20 7885 7640

[email protected]

US Rates Strategist


US growth outlook has

strengthened further






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Policy – Onwards and upwards

So far, FOMC policy has been largely accommodative of fiscal stimulus. This

has been the case even though growth has surprised on the upside so far in 2018.

Based on the FOMC’s own upgraded GDP outlook for 2018-19, most policy rules,

including variants of the Taylor rule, would recommend c.100bps of additional

cumulative FFTR tightening beyond what was already planned. But the June

Summary of Economic Projections (SEP) indicated roughly half of this pace of

tightening. Given the strength of real growth and tight labour markets, we expect the

policy stance to remain relatively benign, even if the terminal rate moves to 3.50% as

we expect.

The FOMC’s main challenge now is to stabilise real growth and the labour market

without tipping the economy into a sharp recession. With unemployment significantly

below most estimates of the neutral level (3.9% versus 4.5%) and still on a declining

trajectory, a deceleration in real growth is required for the economy to achieve

equilibrium. For the Fed to manage a ‘soft landing’ – the stabilisation of

unemployment around 4.0-4.5% – real growth must decelerate to below 2%. Given

our expectation that fiscal stimulus will fade in 2020, we think only a mildly restrictive

policy may be sufficient to stabilise employment and mitigate financial-stability risks.

Core inflation has stayed near the FOMC’s 2% objective in 2018, but we see

moderate upside risks to 2019 on higher medical-services and core-goods prices,

among other factors. We believe, along with the Fed, that the Phillips curve is flatter

than in previous business cycles but is relevant. If the output gap moves further into

positive territory, wage growth should accelerate (barring a labour-participation

spike). The FOMC would likely tolerate a modest inflation overshoot (we believe up

to c.2.3%), partly because this would help the committee start the next easing cycle

with higher nominal rates. But a sustained acceleration in wage growth could unmoor

inflation expectations – a risk we believe the FOMC is unwilling to take.

The biggest downside risk to our outlook for Fed tightening would be less buoyant

business activity. H1-2018 brought the threat of a global trade war. However, trade

tensions have not sapped real activity or sentiment in the US so far, and with the US-

EU and NAFTA dialogue ongoing, this risk appears to be receding. Increased

political pressure on policy makers is a further risk to our view, but we believe Fed

officials will prioritise the credibility of the institution over political expedience.

Politics – All eyes on the midterms

US midterm elections are increasingly becoming the focus for investors.

Commentators have increasingly described the 8 November midterms as a ‘practice

run’ for the 2020 elections. It is not uncommon for the incumbent’s party to lose its

majority in Congress (in at least one chamber) in the first midterm election. However,

the combination of a strong labour market and the president’s increased popularity,

according to recent polls, may help the Republican party in November.

We believe that the House is more vulnerable than the Senate to a Democratic

takeover. In the Senate, more Democratic seats are up for re-election than

Republican, and many of these are not traditionally Democratic strongholds. In the

House, almost 50 seats are considered competitive, but the Democrats would need

to flip 24 Republican seats (and keep their current 194 seats) to gain a majority.

FOMC’s challenge is to stabilise

growth without tipping the economy

into recession

We believe the House is more

vulnerable than the Senate to

Democratic takeover




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A veto-proof Democratic Congress post-November 2018 looks highly implausible,

and a Democratic takeover of the Senate is unlikely, as far fewer Republican than

Democratic seats are up for re-election. But market participants may interpret a

decisive Democratic takeover of the House as increasing the likelihood of a 2020

Democratic takeover of all three chambers. If the Democrats won all three chambers

of government in 2020, they would likely seek to reverse the president’s domestic

agenda, specifically the Tax Cuts and Jobs Act (TCJA). No Democrat in the House or

Senate voted in favour of the Republican tax bill in 2017. If Democrats win a majority

in one chamber in 2018 and corporations see this as a precursor to the 2020 results,

they may begin to prepare for a TCJA reversal as early as late 2018 and 2019. This

could mean, among other things, accelerated capex investment limited to tax-

advantaged sectors and a shortened business cycle.

UST market outlook – Fed hikes remain a curve flattener

The short end of the US curve continues to under-price our view of the terminal Fed

policy rate and that implied by the ‘dot-plot’ (staff projections). However, as long as

the median longer-run policy rate projection – the Fed’s broad view of the neutral

policy rate – does not rise back above 3%, we see little upside for the 10Y US

Treasury benchmark yield beyond the 3.25% peak implied by our forecasts for the

next 6-12 months. Ongoing quarterly rates hikes, combined with well-behaved

inflation, are likely to underpin the curve-flattening trend, but there is a risk of outright

inversion in 2019.

Investors and corporates may

extrapolate 2018 midterm results

into 2020




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Canada – Internally solid, externally vulnerable

Economic outlook – Strong momentum, vulnerable on trade

Economic data has moderated recently, but underlying momentum remains

strong. Canada’s economy has performed well in 2018, despite the overhang from

global trade tensions. We expect above-trend growth to continue this year and into

2019, barring major trade disruptions. We nudge up our 2019 GDP growth forecast to

2.1% (from 2.0%) to reflect strength in the energy sector and receding – though not

eliminated – risks from trade tensions. We downgrade our 2020 forecast to 1.7%

(from 2.0), as we expect the positive output gap to diminish by then.

Businesses have reported rising capacity and price pressures in 2018. Household

leverage appears to have stabilised and the housing sector has absorbed macro-

prudential measures without major fallout. Employment dynamics remain solid, and

businesses point to a tight labour market amid strong domestic demand. Wage

growth and core inflation have remained robust, indicating capacity constraints.

Risks to business sentiment and investment from protracted NAFTA

negotiations have receded but not disappeared. Under the latest agreement among

the US, Canada and Mexico, the parties have 60 days to finalise the agreement and

the US International Trade Commission has until 15 March 2019 to release its

assessment – required before congressional approval. There is a risk of Democratic

opposition to the deal if the Democrats gain a majority in at least one chamber of

Congress in the midterm elections. We believe a deal will ultimately be reached, but

the road might be bumpier than the initially buoyant market reaction indicates.

Policy – We expect further hikes from the BoC

Ongoing labour-market tightening, strong wage growth and upbeat business

sentiment call for continued policy tightening, in our view. Trade-related tensions

have not disrupted real activity so far, though US tariffs on Canadian imports such as

autos could hit real activity. This is not our base-case scenario; we believe that the

Bank of Canada (BoC) will raise rates twice more in 2018 at its October and

December meetings, taking the policy rate to 2.0% by year-end.

Market outlook – Modest post-NAFTA USD-CAD sell-off likely

BoC strikes a confident tone. USD-CAD downside could continue near-term,

although modest downside is more likely than a large move, in our view. BoC rate-

hike pricing is already quite rich, and a sell-off in USD-CAD downside ahead of the

trade deal suggests much of this risk premium was already priced out.

Figure 1: Canada macroeconomic forecasts Figure 2: Core inflation accelerates but stays within band

BoC’s upper and lower inflation bands, CPI, wages, %

*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 2.00 1.75 1.50

USD-CAD* 1.36 1.28 1.10



CPI, trimmed mean core

Av hourly wages, perm

workers

Upper

Lower

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

We expect the BoC to raise the

policy rate to 2.0% by year-end

Sonia Meskin +1 212 667 0786

[email protected]



Nick Verdi +44 20 7885 8929

[email protected]



Tight labour market points to

capacity constraints

Risks from trade tensions have

receded but not disappeared




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Brazil – Post-election hangover

Economic outlook – Politics hinders recovery

The pace of economic recovery slowed in H1-2018. GDP growth declined to 1.2%

y/y in Q1 and 1.0% in Q2 from 2.1% y/y in December 2017. This was initially caused

by adverse base effects and increasing risk-off sentiment, but the impact of political

uncertainty ahead of the 7 October election has become clearer. Confidence

indicators declined across the board (for both business and consumers) in Q2,

moving back to early 2017 levels. Household consumption – which accounts for 63%

of GDP and has been the key driver of the recovery so far – and investment (16% of

GDP) responded accordingly in Q2. Household consumption growth slowed to 0.1%

q/q (from 0.4%), and investment contracted 1.8% (versus +0.3%).

Weak economic activity data can be partly attributed to the truckers’ strike in

late May. On the demand side of GDP, the strike seems to have hit exports

particularly hard (-5.5% q/q in Q2-2018) given the logistical challenges involved in

moving goods to the ports. On the supply side, the impact was mostly felt in industrial

production (-0.6% q/q) and related sectors such as transportation (-1.4% q/q) and

commerce (-0.3% q/q). Q3-2018 indicators suggest an improvement, although

sustaining this trend in Q4, particularly for investment, will depend on confidence

indicators moving back into expansionary territory.

We slightly lower our 2018 GDP growth forecast to 1.5% (from 1.8%), based on

weaker-than-expected performance so far. We also adjust our expectations for the

external accounts in line with our short-term growth outlook; we now expect a smaller

C/A deficit of 1.0% of GDP in 2018 (previously 1.2%). With the electoral debate

moving towards populist alternatives (Brazil – Presidential race moving to extremes),

we now doubt the new administration will be able to push through a productivity-

enhancing reform agenda. This implies trend growth closer to 2.0% in the long run.

Policy – BRL depreciation creates room for early tightening

Inflation outlook has deteriorated given BRL depreciation in Q2- and Q3-2018.

The Brazilian real (BRL) has depreciated 22.4% YTD; this would in theory drive CPI

inflation 1.6ppt higher on a 12-month basis, considering the 7% pass-through

coefficient. Inflation expectations did move higher after the BRL’s Q2-2018 decline

but have been largely stable since then, suggesting that market participants still

expect the latest BRL move to be temporary. A shift in this perception could trigger a

Figure 1: Brazil macroeconomic forecasts Figure 2: Gross debt under different scenarios

% of GDP

*end-period; Source: Standard Chartered Research Source: Central Bank of Brazil, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 6.50 7.75 8.75

USD-BRL* 3.80 3.75 3.20



60

80

100

120

140

160

180

2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036

Primary result turns into surplus of 2.0% of GDP in 2024(fiscal consolidation)

Primary deficit of -2.0% of GDP and 1.8% of trend growth

Inflation expectations have lagged

BRL headline

An investment recovery will depend

on confidence moving back to

expansionary levels

Daniel Sinigaglia +55 11 3073 7055

[email protected]

Latam Economist

Standard Chartered Bank (Brasil) S/A Banco de

Investimento

We are less convinced the new

government will push a broad-

based productivity-enhancing

reform agenda





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significant uptick in market consensus inflation forecasts for 2019. In fact, Banco

Central do Brasil (BCB) indicated an above-target inflation forecast for 2019 amid a

stable BRL in its Q3-2018 inflation report. In this scenario, we think BCB would likely

deliver some rate hikes starting in Q4-2018.

However, our base case is that the USD-BRL moves back to 3.80 at end-Q4-

2018, which would give BCB room to maintain rates until June next year, when we

expect it to start a gradual tightening cycle of 25bps hikes per meeting.

We see upside risks to our inflation forecasts if minimum freight-price

regulation is implemented in 2019. However, this could depend on the election

outcome. We revise our 2018 average CPI inflation forecast to 3.6% (from 3.5%); this

would mean 4.2% y/y at year-end, based on higher short-term CPI headline

readings. We now expect average 2019 CPI inflation of 4.5% (from 4.0% previously),

or 4.4% y/y at year-end. For 2020 we raise our average inflation forecast to 4.4%

(from 4.0%), or 4.1% y/y at year-end. Minimum freight prices could push these

figures up due to high food inflation, but the characteristics and implementation of

such a measure have yet to be decided.

Politics – Fiscal tightening of 4% of GDP is needed

Beyond elections lies the need for a 4%-of-GDP fiscal improvement. Our

simulations suggest that fiscal policy needs to be tightened by 4% of GDP to ensure

progress towards public debt solvency, which could be achieved via a combination of

higher revenue and lower expenditure. Regardless of the election outcome, market

participants’ assessment of the winning candidate’s proposals and the likelihood of

implementation will be the key driver of Brazil’s assets.

The starting point will be social security reform, which seems more likely under a

right-wing government. The polarising campaign and anti-establishment sentiment

have not only reduced the predictability of the election outcome, but are also likely to

create post-election social division and doubts about the legitimacy of the future

government. We expect low approval ratings for, and relentless political opposition

to, the incoming administration, creating a difficult environment for a structural reform

agenda to be passed in Congress.

Market outlook – Room for a post-election relief rally

Political uncertainty will likely continue to put downward pressure on Brazil’s

assets. In the short term, we would hesitate to own Brazil’s assets, as the run-up to

the elections will likely be marked by confusing news flow, volatile voter intentions

and high political uncertainty. However, we think the balance of risks is skewed

towards a post-election relief rally, as we highlighted in Latam strategy look ahead –

17-Sep-2018. Some constructive statements or political gestures are likely in Q4-

2018 as the winning candidate moves towards the centre to assuage market fears.

Consensus among politicians that some form of pension reform is needed has

hardened. We expect practical discussions to take place in the next few months.

Limitations on the approval of new proposals and the impact on prices are only likely

to become apparent in the medium term.

After elections, all eyes will likely

turn to social security reform

We expect BCB tightening to

resume in late H1-2019

Establishment of minimum freight

prices is the main upside risk to our

inflation forecast






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Chile – Causes for concern

Economic outlook – GDP growth has probably peaked

We raise our 2018 GDP growth forecast to 4.0% (from 3.2%), based on the

upside growth surprise in H1. Q2 GDP growth of 5.3% y/y was the strongest since

Q2-2012. The jump in y/y growth in H1 was initially explained by a favourable base

effect, given the strikes that hindered copper extraction in Q1-2017. GDP

performance became more broad-based in Q2, driven by a surge in domestic

demand growth (to 6.0% in Q2 from 4.0% in Q1). Household consumption growth

picked up to 4.5% (from 3.8%) and investment growth to 7.1% (from 3.1%).

Chile has posted steady growth since Q1-2017, benefiting from a combination of

improving terms of trade (2016-17), increasing business confidence, and the lagged

impact of loose monetary policy. At the same time, we see growing headwinds. The

country is particularly vulnerable against a global backdrop of rising oil prices and

declining metal prices (see Latam strategy look ahead – 9-Jul-2018). Increased trade

friction and the eventual slowdown in China’s growth, although not our base case,

suggest fattening tail risks to growth (China’s share of Chile’s exports is 30.5%).

Policy – Too hawkish, too soon?

Monetary policy is moving to a less expansionary stance; Banco Central de Chile

(BCCh) has signalled a rate hike around end-2018. The recent shift in

communication (at the September meeting) was triggered by buoyant H1 growth and

increasing confidence that the output gap is closing faster than anticipated. Headline

CPI inflation picked up to 2.6% y/y from 2.2% between January and August; most of

the increase was due to short-term cost pressures, particularly higher fuel and fresh

food prices resulting from a weaker Chilean peso (CLP) compared to historical

standards. This gives little indication of higher demand pressure on prices so far.

Figure 1: Chile macroeconomic forecasts Figure 2: Declining wage inflation to support low core CPI

%, y/y

*end-period; Source: Standard Chartered Research Source: Bloomberg, Macrobond, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 2.75 3.75 3.50

USD-CLP* 690 740 580



CPI

Core-CPI

Nom. wage

Inf. target

0

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Despite a strong H1-2018, we see

tail risks to economic growth

fattening ahead

Depreciated CLP to drive inflation

up in the short term


[email protected]

Latam Economist


Investimento

Ilya Gofshteyn +1 212 667 0787

[email protected]

FX and Global Macro Strategist






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We think BCCh’s inflation concerns are overdone, as we expect demand

pressure to moderate ahead under more restrictive domestic and global conditions.

Core CPI is still anchored at the bottom of the inflation target range (3.0% +/-1ppt),

while wage growth has reached its lowest level since the data series began (2.6% y/y

in August). Wage inflation has reflected increasing slack in the labour market, as the

unemployment rate kept rising despite strong economic growth in H1. We do not

think the economy is cyclically well positioned for a tightening move yet, although

short-term inflation pressure may warrant a cautious BCCh stance.

Further headwinds may come from business confidence, which started to decline in

Q3 after reaching a five-year high in Q2. This was largely due to the fading impact of

the transition to President Piñera’s new administration, which now faces the

challenge of approving a pro-business agenda. Structurally, high household (60% of

GDP) and non-financial corporate (110%) leverage further limit growth in private

consumption and investment. To reflect this, we lower our 2019 GDP growth forecast

to 2.5% (from 2.9%), and our 2020 forecast to 2.2% (2.4%). Given the more

challenging outlook for copper prices, we now expect a current account deficit of

1.7% of GDP in 2018 (from 1.2%) and 2.2% of GDP in 2019 (from 1.7%).

Short-term inflation will likely be pressured by further CLP depreciation, but we see

less upside for inflation in the medium term. We raise our average CPI inflation

forecast for 2019 to 3.3% (from 3.0%) given the carryover from likely higher Q4-2018

inflation; but we lower our 2020 forecast to 3.0% (from 3.7%). We also now expect

BCCh to raise rates 25bps to 2.75% by end-2018 (versus our previous forecast of

2.5%), followed by an additional 100bps of hikes in 2019. This would take the base

rate to 3.75% at end-2019 (previous forecast: 3.50%). We no longer expect further

hikes into 2020. Instead, we now see a 25bps cut in Q4-2020 to 3.50%.

Market outlook – CLP to reflect economic slowdown

We have become more downbeat on Chilean assets on mounting risks to

growth. Lower copper prices and the resulting hit to terms of trade are likely to

dampen Chile’s market performance for the rest of 2018 and beyond. Meanwhile,

relatively high external debt magnifies Chile’s vulnerability to global rates volatility.

We think these factors will put downward pressure on the CLP relative to regional

peers. Similarly, the steep rate-hiking path currently priced into the CAMARA curve is

unlikely to materialise in an environment where core inflation remains at low levels.

Nevertheless, we prefer to remain on the sidelines for rates given BCCh’s

persistently hawkish rhetoric.

Declining wage inflation reflects

increasing slack in the labour

market

Based on the downbeat outlook for

growth, we have revised several

forecasts in our scenario for Chile

Piñera faces renewed challenges to

approving his pro-business agenda




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Colombia – Smells like animal spirits

Economic outlook – Rallying business confidence

The Duque administration kicked off with a strong uptick in business

confidence. Sentiment has rallied as the new government has announced a list of

technocratic appointments with pro-business agendas. The line-up includes Alberto

Carrasquilla, former finance minister under President Uribe; it has support within

Congress from a broad coalition of parties, which have subscribed to a series of

productivity-boosting proposals. Signs of improved economic activity were already

apparent in Q2-2018, when consumer and business confidence moved into

expansionary territory. GDP grew 2.8% y/y in Q2, picking up from 2.2% in Q1 and

1.8% y/y in Q4-2017. Strengthening household consumption and private investment

have supported the accelerating economic recovery.

We still expect 2.7% GDP growth for 2018, but we raise our forecasts for 2019 to

3.5% (from 3.0%) and for 2020 to 4.0% (3.0%), based on higher expected

productivity gains and lower downside risk to oil prices. We see Colombia as less

vulnerable to a deceleration in the global economy or an intensification of the EM

sell-off than Latam peers. Supply restrictions ahead should support oil prices, further

narrowing the trade deficit. Improving terms of trade (13.2% in 2017 and 1.3% in

2018 YTD) have supported the narrowing of the current account (C/A) deficit from

4.2% in 2016, although vulnerabilities associated with the country’s twin deficits

remain. Based on H1-2018 results and our new growth outlook, we now expect C/A

deficits of 3.0%, 3.3% and 3.6% of GDP, respectively, in 2018, 2019 and 2020 (from

3.3%, 3.0% and 2.9%). We see higher fiscal deficits of 2.4% of GDP in 2019 (from

2.8%) and to 2.2% in 2020 (2.7%).

We estimate Colombia’s potential GDP growth to be close to 3.5%. Total factor

productivity gains from broad reforms could take this closer to 4.0%. This is already

reflected in our forecasts. Additionally, the consolidation of the peace process with

the Revolutionary Armed Forces of Colombia (FARC) and the eventual pacification of

the country could support potential growth in the medium term.

Figure 1: Colombia macroeconomic forecasts Figure 2: Manufacturing growth and business confidence

Confidence, ppt (LHS) and manufacturing, % y/y (RHS)

*end-period; Source: Standard Chartered Research Source: BBG, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 4.25 5.00 5.75

USD-COP* 2,900 3,000 3,200



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Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18

Industrial production growth

(%, y/y RHS)

Conf. in industrial sector (ppt, LHS)

Supportive conditions for global oil

prices are likely to narrow the

C/A deficit


[email protected]

Latam Economist


Investimento

Consolidation of peace process

could lead to productivity gains




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Policy – COP outperformance has reduced inflation risks

BanRep will likely keep the base rate stable at 4.25% until the final three meetings

of 2019, when we expect the start of a 150bps tightening cycle. The EM currency

sell-off in Q2 and Q3-2018 has raised inflation risks across the region. Currency

depreciation has halted food deflation in many countries and pushed energy prices

up. Local central banks previously in cutting mode have removed their easing biases

(Colombia and Brazil) or sent more hawkish signals (Chile).

Colombia’s inflation is also bottoming. Headline CPI inflation has been hovering

tightly around the 3.0% target since December 2017, as a result of low tradables

inflation and still-declining core inflation. Downside risks to inflation are associated

with core inflation, reflecting the still-wide output gap. However, signs of a bottoming

in the more volatile CPI components have become more evident. Lower-than-

expected Q2 inflation leads us to lower our 2018 forecast to 3.3% (from 3.5% prior).

In the medium term, we expect inflation pressure on core components to intensify

given the faster pace of recovery.

We think the combination of above-target core inflation measures and a bottoming of

more volatile inflation components (below target) suggest the need for a more

conservative monetary policy stance. With its dovish reputation, BanRep has

downplayed inflation risks based on the widening output gap, which we expect to

close sooner rather than later. The current y/y level of core components will likely

provide a high starting point for a 2019 CPI inflation upturn. We think a quick reversal

of the comfortable food inflation backdrop is most relevant short-term risk to CPI.

Politics – The Duque pull

The new administration has prioritised reducing fiscal imbalances via a two-

pronged plan: pension and tax reform. While only a few guidelines for pension

reform have been disclosed so far, the tax reform proposal is likely to be approved in

the next few months. This aims to increase government revenue by broadening

personal income tax, which currently only applies to high-income segments. If

approved, the tax would apply to all individuals earning 1.5 times the national

average wage.

Higher expected revenue would pave the way for corporate income tax cuts, in line

with a more general global trend. Changes in 2016 established a progressive decline

in tax rates. The new proposal aims to reduce the tax burden on companies by

allowing taxes levied by local entities to be subtracted from corporate income tax.

The main challenge is to ensure credible offsets for tax cuts, which markets would

otherwise perceive as negative.

Market outlook – Bullish on COP and fixed income assets

We are bullish on the COP and fixed income assets. Positive sentiment after

Duque’s victory has slowly turned to scepticism; we believe this scepticism is

overdone. The new administration has an effective plan to pursue fiscal reform and

reduce this key vulnerability. We therefore maintain our constructive bias on both the

COP and Colombia fixed income (see Colombia – Increasingly constructive.)

Colombia’s CPI has been hovering

tightly around the 3.0% inflation

target

The new administration has

targeted corporate income tax

so far

The main challenge is to ensure

offsets for proposed cuts





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Mexico – The shape of AMLO

Economic outlook – Domestic drivers to feed growth

The q/q GDP contraction in Q2 was likely transitory, driven by electoral

uncertainty and Mexican peso (MXN) depreciation. After the July elections, the MXN

appreciated sharply and businesses confidence reacted positively to the new

administration’s conciliatory statements. The speedy and unexpected agreement on

Mexico-US trade negotiations in late August added to the already constructive post-

election environment. Altogether, risks of MXN depreciation have declined sharply,

paving the way for a decline in CPI inflation and, consequently, for monetary easing.

Based on these factors, we raise our 2018 GDP growth forecast to 2.1% (from 2.0%).

Markets did not perceive the Q2 GDP contraction (-0.2% q/q) as negative, because

most of the deceleration in household consumption was already priced into high-

frequency indicators. More importantly, external demand continued to support H1

growth. Net exports have shown strong sequential growth since Q3-2017, following

the stronger USD. Looking ahead, US GDP growth is likely to remain above trend,

which should sustain strong headline GDP figures across the southern border.

In 2019 and 2020, we expect the domestic demand components of GDP to play a

stronger role. The new administration plans to boost public investment and push up

private-sector wages through a minimum wage hike. Real wages, combined with

declining inflation and low unemployment, are likely to boost household consumption.

To reflect the combination of stronger domestic demand and resilient external

demand, we raise our 2019 GDP growth forecast to 2.5% (from 2.3%) and our 2020

forecast to 2.3% (2.1%).

Policy – Countdown to cutting season

We now expect Banco de México (Banxico) to start an easing cycle at its first

2019 meeting, versus our previous expectation that it would start in December 2018.

A pick-up in fresh food inflation due to adverse weather should keep headline CPI at

higher levels longer than we previously expected, delaying Banxico’s move.

However, we have a more dovish view than consensus on monetary policy, as the

inflation risks that pushed the MXN to historically low levels have faded. We now

expect average CPI inflation of 4.8% in 2018 (prior forecast: 4.2%), ending the year

at 4.4% y/y; and 3.8% in 2019 (prior forecast: 3.3%), ending the year at 3.3% y/y.

Figure 1: Mexico macroeconomic forecasts Figure 2: GDP growth (external vs internal demand)

%, y/y

*end-period; Source: Standard Chartered Research Source: Macrobond, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 7.75 6.00 5.50

USD-MXN* 18.00 18.25 17.50



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External demand

Internal demand

GDP

We move to a more dovish view on

monetary policy

Net exports have maintained strong

sequential growth


[email protected]

Latam Economist


Investimento

We see consistent domestic

demand drivers in 2019-20




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We think Mexico’s inflation upturn is driven by a combination of higher oil prices and

MXN depreciation. Underlying inflation measures, while above target, have

consistently declined. Base effects may prevent inflation from dropping too quickly,

but we see significant y/y declines from Q2-2019 onwards.

Politics – New government, old doubts

Andres Manuel Lopez Obrador (AMLO) will take office in December. Strong

popular support and a broad congressional base (62% in the lower house and 54% in

the senate) imply that constitutional changes are within his reach. So far, AMLO has

tried to signal economic policy continuity. He has also disclosed an extensive list of

proposals, ranging from a minimum wage hike and strict austerity for public

administration to increasing penalties for many felonies, including corruption charges.

We believe that the implications of such proposals boil down to two questions: (1) To

what extent could AMLO’s intent to increase income transfer programmes and public

investment jeopardise Mexico’s fiscal policy stance? (2) Could his approach, based

on new forms of direct-participation democracy (e.g., more frequent public

consultations, possibly recalling politicians in the middle of their mandates)

compromise Mexico’s institutions?

While (2) will remain an open question in the coming quarters, we already see

some hints regarding (1). AMLO’s team has unveiled 25 priorities to be included in

the 2019 budget. In his first year in office, he will seek to increase infrastructure

spending – including a new refinery, a railway line in southern Mexico, rural roads,

earthquake reconstruction, universities, and mining development programmes –

which could be positive for future potential growth. Social initiatives include adult

pension programmes, income support for youngsters, and discretionary transfers to

local entities. In all, this would be a 3.4%-of-GDP expenditure boost next year,

partially offset by 1.8% of GDP in savings from more efficient public administration

management and austerity measures.

Even if such these goals can be achieved, there is still a fiscal gap of 1.6% of GDP to

be filled, either through higher revenues or by sharing the burden of public

investment with the private sector via public-private partnerships. We therefore revise

our fiscal deficit forecasts to 2.7% of GDP for 2019 (from 2.0%) and to 2.5% for 2020

(from 2.0%).

Market outlook – We stay constructive on the MXN

Mexico’s assets are still on solid ground. Elevated real rates support MXN

performance, while strong external demand could allow Mexico to outperform Latam

peers. Even if G10 yields rise, MXN would likely be less exposed than peers. Higher

front-end yields as the Fed continues to tighten could curb Banxico easing. However,

thus far, markets have overestimated the Fed tightening cycle (see Latam strategy

look ahead 6-Aug-2018).

Deterioration in Mexico’s fiscal

policy stance is the main risk ahead

We expect moderately looser fiscal

policy in the first year of the new

administration

We see downside risks to the fiscal

target of 2.0% of GDP






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Peru – Solid growth, fluid political backdrop

Economic outlook – Domestic demand drives recovery

Economic activity looks set to accelerate sharply in 2018. Peru’s economy has

enjoyed the steadiest growth in Latin America, similar to Chile’s. But Peru’s GDP

expansion has been more broad-based, allowing the country to sustain high growth

rates despite weaker metal prices. GDP expanded 5.4% y/y in Q2-2018, driven by

accelerating household consumption and private-sector investment. While precious-

metal mining was the key driver of growth in 2016 and early 2017, manufacturing (up

10.8% y/y in Q2-2018), construction (up 7.4%), agriculture (10.2%) and fishing

(29.2%) are now in the spotlight. High growth rates in these sectors reflect a pick-up

in public and private investment and more favourable weather conditions, which

improved output in natural resource sectors.

Domestic demand has benefited from real wage gains on decelerating inflation, low

unemployment, expanding credit and the temporary confidence boost from a

government transition that promised to end the political unrest that marked former

President Kuczynski’s term. Gross fixed investment growth reached 14.5% y/y in Q2-

2018, following persistently negative growth rates from Q4-2013 to Q4-2017.

We raise our 2018 GDP growth forecast to 4.2% (from 3.7%), reflecting more

favourable domestic demand growth in H1-2018. We slightly lower our forecasts

for 2019 to 3.7% (4.0%) and for 2020 to 3.4% (4.0%), as we now expect a more

negative contribution from net imports, tighter fiscal policy, and a less favourable

outlook for metal exports. Peru’s export-based economy remains vulnerable to shifts

in international risk aversion and declining demand from Asia for metals, especially

copper, zinc and gold. Peru could suffer if China’s GDP decelerates, a potential

consequence of current trade friction (see our Latam strategy look ahead – 9-Jul-

2018 for details).

Despite these risks, recent EM underperformance has affected the Peruvian nuevo

sol (PEN) only moderately; it depreciated 1.2% in August-September, versus the

10.0% average of Latam peers (5.7% ex-Argentina). Low PEN volatility reflects the

narrow current account deficit, supported by the 3.2% improvement in terms of trade

versus the 2017 average, resilient FDI inflows (3.0% of GDP on average in 2018), the

central bank’s strong international reserves (27.0% of GDP), and low short-term

external debt (3.4% of GDP).

Figure 1: Peru macroeconomic forecasts Figure 2: Inflation outlook remains comfortable

CPI, % y/y; interest rate, % p.a.

*end-period; Source: Standard Chartered Research Source: National Institute of Statistics (INEI), BCRP, Standard Chartered Research

2018 2019 2020



Policy rate (%)* 2.75 3.50 4.00

USD-PEN* 3.36 3.30 3.10



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1

2

3

4

5

6

May-12 Mar-13 Jan-14 Nov-14 Sep-15 Jul-16 May-17 Mar-18

Core CPINon-core CPIInflation targetPolicy rate

Stronger consumption and

domestic investment have

sustained high GDP growth rates,

despite lower metal prices


[email protected]

Latam Economist


Investimento

PEN outperformance versus EM

peers has underlined the country’s

strong external-sector

fundamentals






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Policy – Inflation risks remain contained

CPI inflation has hovered at comfortable levels due to persistent food deflation

and still-moderating services inflation. Lima’s CPI inflation reached 1.1% y/y in

August (1.3% national CPI), slightly above the lower bound of the target range.

These figures are below our forecasts, so we lower our average CPI forecast to 1.4%

for 2018 (from 1.8%), equivalent to 2.2% y/y at year-end. We see moderate upside

risks to inflation, which will likely allow Banco Central de Reserva del Perú (BCRP) to

pursue expansionary monetary policy until later in 2019, when we expect the

tightening cycle to resume.

Given remaining slack in the labour market and the ongoing disinflation trend in core

components, we see food as the main inflation driver. However, risks are moderate:

grain inventories (2018/19) are expected to remain high for most crops, while

international supply conditions for wheat, sugar and rice will likely contain

international prices.

Tax reform bill expected in Q4-2018. Despite similarities with tax reform proposals

in other Andean economies, Peru’s version focuses more on increasing tax collection

and hence improving the government’s fiscal balance. The first leg of the proposal

will tackle exemptions, while the second aims to increase property and real-estate

taxes. The idea is to make taxes less dependent on VAT revenue, which accounts for

c.60% of total revenue. Official sources expect a 1ppt-of-GDP increase in the fiscal

balance due to tax reform over three years. A third stage, aimed at tax simplification,

is also expected; this will seek to reduce the informal economy and broaden the

current tax base.

Politics – Vizcarra to push for tax and political reforms

Controversy over political reform proposals has strained relations between

President Vizcarra and congress. The main proposal is to reinstate the two

chambers of congress – a senate with 30 members and a lower house with 100

representatives – reversing President Fujimori’s 1992 dissolution. Proposals also

include single-term limits for elected officials and several changes to the judiciary

system and public administration to include anti-corruption mechanisms. Vizcarra’s

independent stance and recovering approval ratings have not been enough to move

the bills from congress to popular consultation so far. Lack of support for the current

administration has led to congressional gridlock.

A legislative shift towards tax reform may eventually resonate with the right-wing-

dominated congress. Early elections remain possible, as Vizcarra may propose a

confidence vote to ensure congress supports his political bills. If the motion fails

twice, the cabinet is obliged to resign and Vizcarra can call new parliamentary

elections. Given popular opposition to corruption, new elections could reduce the

strength of Fujimori’s Fuerza Popular (FP) party, which currently has 47% of seats.

BCRP to maintain expansionary

monetary policy stance amid

decelerating core inflation

Tax reform to strengthen the

country’s fiscal stance

Controversy about political reform

has increased the chances of early

elections


Strategy outlook



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The return of the VaR shock

• EM volatility continues as the VaR shock shifts to Turkey

• A perfect storm drives the USD further into overvalued territory

• CNY suffers from rate differentials as much as trade tensions

• EM valuations are attractive, but the catalyst for a turn is missing

I need a hero

For those who like birds, 2018 has been an exceptional year. We’ve had our fair

share of hawks, doves and swans. The FOMC leads the hawks with its campaign to

normalise monetary policy and reduce its balance sheet. We also have some

reluctant ‘hawks’, like the central banks of Mexico and Indonesia, which have

tightened monetary policy to support their currencies. The Bank of Japan and the

European Central Bank have surprised markets with their reluctance to adopt a more

hawkish stance. And then we have the People’s Bank of China, which has migrated

into the dovish (or less hawkish) camp as it seeks to shore up its domestic economy

against slowing growth momentum due to deleveraging and trade-war fears.

By far the most interesting bird in 2018 has been the swan – the black swan. After

several years of wondering what it would take to lift cross-asset volatility from

historically low levels, markets have been hit by a number of surprises in 2018. Some

of these black swans, like the VIX VaR shock in early February, caught people

completely by surprise (Figure 1). Equally surprising was the fact that the VIX had

virtually normalised after only one month. Other VaR shocks, like the TRY crisis,

have been building slowly. The factors plaguing the currency had long been well

known to markets, so perhaps it was the timing that was the real shock.

There have been other, smaller shocks along the way; some of these, like the one in

Argentina, have been extensions of existing challenges. There is no common thread

to these events. Some have been sparked purely by domestic concerns, while

others, like the moves in RUB and CNY, have been triggered by a variety of factors

such as trade tensions and interest rate divergence (Figure 2). The question is, when

will it stop, and when can we buy EM again?

Figure 1: The VIX has normalised; can the TRY?

VIX, % (LHS) vs USD-TRY (RHS)

Figure 2: What happened to the EM FX rally of 2017?

USD versus ARS, TRY, RUB, BRL, ZAR (Jan-14=100)


VIX

USD-TRY (RHS)

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

5

10

15

20

25

30

35

40

Jan-18 Mar-18 May-18 Jul-18 Sep-18

ARS

TRY

ZAR

RUB

BRL

10

30

50

70

90

110

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Eric Robertsen +65 6596 8950

[email protected]

Global Head, FXRC Research and

Head, Global Macro Strategy


Black swans have reasserted their

influence on markets again in 2018

2018 is proving to be the year of the

rolling VaR shock




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As good as it gets

A critical factor determining when we can buy EM again is when the USD will peak.

The USD is the one asset that has benefited both from global risk factors and a

positive set of domestic factors. In many ways, the USD has benefited from a perfect

storm; said another way, it seems to be capturing both extremes of the ‘dollar smile’.

Not only is the USD deriving support from US economic outperformance and rising

US interest rates, but risk aversion across many parts of EM has driven safe-haven

flows back into the USD. This combination of positive domestic factors and global

risk aversion has pushed USD overvaluation higher (Figure 3). The question we

should be asking, then, is whether the good news for the US and the USD is already

reflected in the price.

The problem with this line of questioning is that even if we conclude that these USD-

positive factors are already priced in, predicting the timing of the next period of USD

weakness is another step altogether. The USD can stay overvalued for an extended

period. It is tempting to assume that the answer to this question lies in predicting the

end of the US business cycle, but we are wary of this line of reasoning. The FOMC

has raised the FFTR by 100bps over the past 12 months; during this period, 2Y swap

rates in the US have risen 130bps. So even if you believe that the FOMC will stop

raising rates in 2019, 2Y USD rates will still maintain a significant premium of roughly

200bps over G10 peers. If the short-term cyclical narrative remains USD-supportive,

what will be the catalyst for the next leg of USD weakness?

We believe that this next leg of weakness is more likely to result from capital

returning to EM assets than from a slowdown in US cyclical momentum. Large parts

of the EM universe have cheapened considerably over the course of 2018 (Figure 4).

Attractive valuations in the form of high yield are a necessary, but insufficient,

condition for an EM recovery. We need a catalyst. The catalyst could be an

improvement in China’s economic momentum, combined with a softening of Trump’s

trade rhetoric around the US midterm elections. It could also be an indication by the

FOMC that it is willing to pause its rate-hiking trajectory in response to tightening

financial conditions. But at the end of the day, investors need to believe that the

volatility of EM assets will subside before they feel they can start harvesting the

higher yields and cheaper valuations that are now available.

Figure 3: Historical real USD misvaluation

Based on latest index weights; average misvaluation

Figure 4: Degree of misvaluation – EM currencies

As of 22 August 2018; average misvaluation


-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

USTW$ Index(% Misval)

USTWBROA Index(% Misval)

DXY Index(% Misval)

18

Overvalued

-130%-125%-40%-35%-30%-25%-20%-15%-10%

-5%0%5%

10%15%20%

TR

Y

MY

R

PLN

ZA

R

BR

L

CLP

MX

N

CO

P

CN

Y

IDR

PE

N

TW

D

PH

P

INR

TH

B

HU

F

CZ

K

KR

W

SG

D

RU

B

HK

D

Overvaluation

Undervaluation

It is premature to try to time the end

of the US business cycle

An EM recovery would be a critical

factor driving renewed USD

weakness




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To pause or not to pause – The FOMC’s dilemma

The latest burst of volatility in EM, has led to increased discussion of whether the

FOMC might pause its rate-hiking cycle, or stop it altogether. So far, the FOMC has

given no indication that it would respond to EM volatility by postponing its projected

rate hikes. The FOMC raised the federal funds target rate by 25bps at the September

meeting and expects to do the same in December. We believe that financial

conditions would have to tighten more significantly for the FOMC to consider a

‘pause’. While the USD has strengthened, long-term US interest rates remain low.

Further, US equities are near their recent highs; more specifically, US financial stocks

show no signs of increased stress due to financial-market volatility.

For EM investors, a more interesting question than whether the FOMC might pause

is whether it might lower its estimate of the neutral policy rate – and how far above

this level it is willing to push the FFTR. Markets are currently pricing in a peak FFTR

at around 2.85% in December 2019 (Figure 5). Assuming 2.0% inflation, this implies

a peak in the real FFTR between 0.50% and 1.0%. This is consistent with the Fed’s

estimate of r* but leaves the peak FFTR well below the level implied by the FOMC’s

projected rate hikes.

The gap between FOMC forecasts and market pricing is especially pronounced in

2019-20, when the market expects the rates cycle to peak. The market is currently

pricing in almost two 25bps rate hikes in 2019 and virtually no hikes in 2020, versus

the FOMC’s forecast of three hikes in 2019 and an additional hike in 2020 (Figure 6).

Any indication that the FOMC’s forecasts for 2019 and 2020 were converging with

the market’s forecast could be a significant positive catalyst for EM. Put differently, if

the FOMC lowered its estimate of r* – or its estimate of how far above r* it planned to

take the FFTR – this would be enormously reassuring to EM.

The gap between market pricing and FOMC forecasts could also be resolved in a

less friendly way to EM. US equities have been resilient and US financial conditions

accommodative, thanks in part to market expectations that US rates will plateau in

2019. If the market were forced to adjust its pricing towards the FOMC’s dots and

raise its estimate of the peak FFTR, EM would likely suffer further as the prospect of

support from the FOMC diminishes.

Figure 5: Will the FOMC keep raising rates?

FOMC dots vs market implied yields, %

Figure 6: Rates markets already see the peak of rate hikes

EDZ8-EDZ9 vs EDZ9-EDZ0


Current Fed fund mid

FOMC dots

Market implied yields

2.00

2.25

2.50

2.75

3.00

3.25

3.50

Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22

EDZ8-EDZ9

EDZ9-EDZ0

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18

Rather than looking for a pause,

maybe we should be asking if the

FOMC will lower its estimate of the

neutral rate

EM could benefit from a

convergence of the FOMC’s dots

towards market pricing




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Soul to squeeze

We do not expect the FOMC to back away from its intention to raise rates once more

in 2018, and we believe it is still committed to its longer-term policy normalisation

trajectory. But we see potential for a significant shift in market positioning should the

FOMC start to waver on these commitments. Speculative positioning (as measured

by CFTC data) shows record short positions in 10Y UST futures as well as gold. We

believe there is significant convexity to market pricing in both gold and USTs should

the FOMC start to soften its language on projected rate hikes. 10Y UST yields have

risen 160bps since July 2016, and spot gold (XAU) is down nearly 15% from the level

that prevailed at that time (USD 1,380/oz). We believe both underlying spot markets

are vulnerable to a significant short squeeze.

We expect the UST yield curve to flatten to 0bps by end-2018, in line with the curve-

flattening view we have held since mid-2017. What would cause a reversal of this

flattening trend and a change in our view? UST market positioning suggests that the

market believes a steeper curve will be led by the long end of the curve – in other

words, a ‘bear steepening’ (Figure 7). We disagree with this assessment. We think

the curve will start to steepen only once the market believes the FOMC is close to the

end of its rate-hiking cycle and hints at the start of a rate-cutting cycle. In other

words, curve steepening will be led by the front end. As we highlight in Surprising

yield curve/labour market causality, the curve will steepen only when the market

starts to anticipate a loss of economic momentum, and this is likely to be associated

with increased pressure on the FOMC to pause.

We have been surprised by the persistent weakness in gold prices. While gold tends

to be negatively correlated with the USD and US yields, US yields stopped rising in

May; 5Y and 10Y UST yields look especially vulnerable to further downside from

current levels. This is especially true if extended short positioning in USTs is

reduced. Like UST positions, gold positions are at record short levels (Figure 8). Spot

gold prices could squeeze, especially if UST yields decline meaningfully from current

levels. A pause in FOMC rate hikes, though not our imminent forecast, could

accelerate the potential unwinding of crowded short positions in both USTs and gold.

Crowded positions have suffered throughout 2018 – gold and UST short positions

could be next.

Figure 7: Speculators are very short 10Y UST...

10Y UST, % (LHS) vs CFTC speculative positions, contracts,

(inverted, RHS)

Figure 8: ...and holding record shorts in gold

Spot gold (XAU), USD/oz (LHS) vs speculative positions,

contracts (RHS)


10Y UST (LHS)

Net spec position (RHS)

-800,000

-600,000

-400,000

-200,000

0

200,000

400,000

600,0001.0

1.5

2.0

2.5

3.0

3.5

Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

Spot gold, XAU (LHS)

Net spec position (RHS)

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

1,400

1,450

Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

An FOMC pause would bull steepen

the UST yield curve

Gold positions appear vulnerable to

a short squeeze






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By the way

If the USD has benefited from a perfect storm of supportive news, then the CNH (as

well as China equities) has had the polar opposite experience. US President Trump

has targeted China in a campaign designed to level the playing field in US-China

trade relations. But to suggest that Chinese assets have suffered purely at the hands

of trade tensions is to miss the broader narrative. China’s growth is slowing; we

expect GDP growth of 6.6% in 2018, down from 6.9% in 2017. The loss of economic

momentum is largely a function of the deleveraging push onshore. But the growth

slowdown, coming at a time of heightened trade tensions, has forced policy makers

to shift their monetary policy bias towards neutral from marginally hawkish in an effort

to support domestic demand.

The tightening of financial conditions and the high cost of funds for corporate

borrowers is juxtaposed against excess liquidity in the interbank market. This excess

liquidity is evident in the sharp decline in 3M SHIBOR to a recent low of 2.8% from a

high of 4.8% in January. At the same time, USD 3M LIBOR has increased by 60bps

to 2.3%, causing US-China rate differentials to narrow dramatically. We believe this

260bps narrowing has been the critical driver of CNH weakness (Figure 9).

The nature of the sell-off partly explains why we think rate differentials have been a

more important driver of CNH weakness than trade tensions. In 2015, USD-CNH

rallied 9.0% in five months, causing 12M points to more than double to over 3,500

and 6M implied vol to surge to 10.75% from 3.25%. In 2018, USD-CNH has rallied

nearly 11%, yet 12M points have collapsed and 6M vol has risen relatively modestly

to 5.6% from 4.25% (Figure 10). In other words, the panic and capital outflows

associated with the 2015 CNH sell-off have been notably absent this time.

The loss of economic momentum, along with still-flush liquidity in the interbank

market, suggests to us that the monetary transmission mechanism may not be

working effectively. We therefore expect policy makers to increase efforts to shore up

domestic demand. We believe this is more likely to entail fiscal stimulus than explicit

monetary easing, as policy makers will not want to put further pressure on the

currency. We expect an increase in infrastructure investment, as there is substantial

room to expand fiscal stimulus without revising the budget.

Figure 9: CNH trades on rates, not on fear

USD-CNH (LHS) vs 3M SHIBOR minus 3M USD LIBOR, %

(RHS)

Figure 10: Forward curve diverges from spot volatility

USD-CNH (LHS) vs 12M CNH points (RHS)


USD-CNH (LHS)

0

1

2

3

4

5

6

75.8

6.0

6.2

6.4

6.6

6.8

7.0

7.2

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

SHIBOR - USD 3M LIBOR

(inverted, RHS)

USD-CNH (LHS)

12M CNH points (RHS)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

6.0

6.2

6.4

6.6

6.8

7.0

7.2

Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18

CNH is suffering more from rate

differentials than trade tensions

The nature of the CNH sell-off has

been much different in 2018, and

offers clues to its recovery




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Scar tissue

The USD has rallied roughly 7% from the Q1-2018 lows, retracing approximately

50% of its 2017 losses. But these statistics fail to tell the full story of the dramatic

divergence between EM and G10 FX markets. Most G10 currencies have lost c.5%

against the USD (total returns). G10 FX volatility has been tepid in 2018, with our

volatility index for DM currencies remaining below 8% and 1M realised volatility stuck

in a range of 5-6%. The gap with EM FX volatility grew to the widest levels in over 10

years, before starting to normalise a bit recently (Figure 11).

The gap between EM and DM currencies, in terms of both performance and volatility,

reinforces the notion that the USD will peak only when capital returns to EM. Many of

the currencies in our coverage universe are now cheap according to our valuation

models (Figure 4), but capital will not return until the factors driving the volatility

subside. Asian currencies have avoided the double-digit YTD losses that have

afflicted the likes of the TRY (30%), ARS (40%), BRL (14%) and ZAR (8%), but they

have still weakened considerably from their peak levels in March and April. The CNH,

for example, has declined nearly 10% against the USD since its March peak.

We believe EM FX weakness is coming to an end. Valuations are compelling and

positioning has gotten much cleaner. In fact, our positioning indicators suggest that

investors’ long USD positions are the most stretched since January 2017, at the peak

of the USD rally. Further, many of the exogenous factors that drove EM weakness in

H1 – such as the rise in 10Y UST yields and oil prices – appear to have stabilised.

But we still need a catalyst.

The importance of EM FX stability to overall EM returns can be seen by breaking

down the total return of an EM LCY bond index into its FX and rates components

(Figure 12). The overall index plunged nearly 9% from late April until end-June, and

high-volatility declines in EM FX were a significant driver. Incidentally, 10Y UST

yields were broadly unchanged (even declining a touch) over the same period. For

the EM asset class to recover, we need EM FX volatility to stabilise and the current

period of USD strength to reverse.

Figure 11: EM FX vol premium over G7 remains elevated

Ratio of our EM FX vol index to G7 FX vol index, 3M volatility

Figure 12: FX is the primary driver of EM LCY returns

1-month trailing return (%) FX and rates components of

Barclays EM LCY index


0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18

FX

Rates

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18

The divergence between EM and DM

has been especially pronounced

in FX

Many of the exogenous factors that

hurt EM FX have calmed down

considerably




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Searching for Oscar Wilde

FX markets also help us understand where the true value lies in EM LCY debt

markets. Valuations look compelling after six months of EM weakness, but how do

we know what is good value versus a value trap? EM real yields are at the widest

spread to DM in over 10 years (Figure 13). Further, many of the traditional high-

yielders – such as India, Indonesia, Russia and Brazil – are offering real yields above

3.0% across the entire yield curve. But when we add the cost of hedging back to

USD, for example, the universe of ‘attractive’ candidates shrinks.

The point we are trying to illustrate is that some EM LCY debt markets have

cheapened so much that they are offering attractive yields even after the cost of FX

hedging. For example, Brazil, Russia and South Africa all offer attractive 10Y yields

even when adjusted for the cost of hedging back to USD (Figure 14). Debt flows to

EM have shown a strong correlation with FX-hedged yield spreads over USTs (EM

debt prism – Flows track FX hedged yields, 17 September).

Our current recommendations in EM LCY rates markets reflect an attempt to harvest

value. We have a received position in Mexico (TIIE 2Y) to position for monetary

easing. Mexico rates may not screen well on a currency-hedged basis, but we have a

constructive view on the currency from current levels, targeting 18.0 by year-end. We

think Brazil is attractive, but political uncertainty has pushed us to the sidelines. We

are long 5Y THB bonds, 15Y Singapore Government Securities and 20Y Malaysia

Government Securities in Asia, and 5Y COP debt in Latam. All of these look

attractive on our FX hedged yield screen, offering higher yield than USTs on a

hedged basis (Figure 14).

Figure 13: Unlocking value in EM LCY debt

Nominal and real yield spreads, EM minus DM, bps

Figure 14: Ranking EM LCY debt on USD-hedged yields

10Y USD-hedged yields vs real yields (on 2019 inflation

consensus estimate), %

Source: Bloomberg, Standard Chartered Research *9Y TRY; ᵻinflation-indexed bond yields; Source: Bloomberg, Standard Chartered Research;

EM/DM real yield spread

EM/DM nominal yield

spread

0

100

200

300

400

500

600

700


-6

-3

0

3

6

9

TR

Y*

IDR

MX

N

CN

H

INR

US

Dᵻ

PH

P

JPYᵻ

SG

D

KR

W

MY

R

EU

Rᵻ

TW

D

ZA

R

PLN

TH

B

RU

B

CZ

K

CLP

CO

P

HU

F

BR

L

10Y USD-hedged yields 10Y real yields

FX has a significant impact on how

we ascertain value in EM LCY debt

markets

Our EM rates recommendations are

focused on Latam and Asia




Forecasts and reference tables



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Forecasts – Economies Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP)

Country 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020

Majors 1.6 2.2 2.3 2.1 1.7 0.9 1.5 1.8 1.9 1.8 -0.1 0.1 -0.1 -0.2 -1.4

US^ 1.5 2.3 2.9 2.6 1.9 1.8 1.6 2.0 2.2 1.8 -2.4 -2.3 -2.8 -3.0 -2.8

Euro area 1.8 2.4 2.0 1.8 1.7 0.2 1.5 1.8 1.7 1.8 3.3 3.5 3.3 3.2 3.0

Japan 1.0 1.7 1.2 1.0 1.0 -0.1 0.5 1.0 1.3 1.5 3.8 3.7 3.8 3.8 3.8

UK 1.9 1.7 1.4 1.2 1.2 0.7 2.7 2.5 2.1 2.0 -5.8 -3.9 -3.6 -3.2 -2.8

Canada 1.5 3.0 2.4 2.1 1.7 1.4 1.6 1.9 1.9 1.8 -3.3 -2.5 -2.0 -2.0 -2.3

Switzerland 1.6 1.6 2.5 1.8 1.6 -0.4 0.5 0.5 0.8 1.3 9.9 9.5 10.2 10.6 10.3

Australia 2.6 2.2 3.1 3.0 2.9 1.3 1.9 2.1 2.5 2.5 -3.3 -2.6 -2.3 -2.1 -2.0

New Zealand 4.0 2.8 2.7 3.1 3.2 0.6 1.9 1.6 2.0 1.8 -2.7 -2.8 -2.8 -2.7 -2.8

Asia 6.1 6.3 6.2 6.1 6.2 2.6 2.3 2.9 3.2 3.3 2.1 1.4 0.5 -0.1 -0.1

Bangladesh* 7.1 7.3 7.8 7.2 7.2 5.9 5.4 5.8 6.0 6.0 1.5 -0.5 -3.3 -3.2 -3.0

China 6.7 6.9 6.6 6.4 6.3 2.0 1.6 2.2 2.5 2.5 1.8 1.3 0.5 -0.2 0.0

Hong Kong 2.0 3.8 3.6 3.0 3.0 2.4 1.6 2.3 2.4 2.8 4.6 4.0 3.5 3.5 3.5

India** 7.1 6.7 7.2 7.5 7.6 4.5 3.6 4.6 5.1 5.1 -0.7 -1.9 -3.0 -3.0 -2.7

Indonesia 5.0 5.1 5.1 5.1 5.3 3.5 3.8 3.3 3.8 3.8 -1.8 -1.7 -3.0 -2.7 -2.5

Malaysia 4.2 5.9 4.8 5.0 4.9 2.1 3.8 1.3 2.5 3.0 2.4 3.0 3.0 3.4 4.0

Philippines 6.9 6.7 6.2 6.4 6.5 1.8 3.2 5.5 4.8 4.2 0.2 -0.8 -1.5 -1.3 -1.0

Singapore 2.0 3.6 3.2 2.5 2.2 -0.5 0.6 0.6 1.7 1.7 19.0 19.3 19.0 18.0 16.0

South Korea 2.8 3.1 2.8 2.6 2.8 1.0 1.9 1.6 1.9 2.0 7.6 5.6 4.5 4.0 4.0

Sri Lanka 4.4 3.1 3.9 4.4 4.5 4.0 6.3 5.0 5.0 5.0 -2.0 -2.6 -2.5 -2.5 -2.5

Taiwan 1.5 2.9 2.8 2.5 2.2 1.4 0.6 1.8 1.3 1.3 13.4 14.0 12.0 10.0 8.0

Thailand 3.3 3.9 4.3 4.5 5.0 0.2 0.7 1.5 2.3 3.0 11.7 10.6 9.0 7.0 3.0

Vietnam 6.2 6.8 7.0 6.9 6.9 2.7 3.4 3.7 5.0 5.3 4.1 4.1 3.7 3.1 3.0

MENAP 5.2 3.2 3.5 3.5 3.8 5.2 7.6 9.3 7.9 6.4 -3.8 -1.7 1.1 1.5 2.5

Bahrain 3.2 3.8 3.0 2.5 2.7 2.8 1.4 2.5 2.3 2.0 -4.6 -4.0 -2.6 -2.3 -2.0

Egypt* 4.3 4.2 5.3 5.5 5.8 10.2 24.9 21.6 14.8 9.1 -5.9 -6.6 -3.4 -2.5 -2.4

Iraq 11.0 1.0 3.0 4.0 4.0 0.4 0.2 1.0 1.5 1.5 -8.7 -4.5 1.5 2.0 3.0

Jordan 2.0 2.0 2.0 2.0 2.2 -0.8 3.3 4.2 3.8 3.0 -9.5 -10.6 -11.0 -11.3 -10.9

Kuwait 3.5 -3.5 2.6 3.1 3.1 3.0 1.5 3.2 3.0 2.5 0.6 6.3 17.7 18.4 21.6

Lebanon 1.0 1.5 2.0 3.2 3.8 -0.8 4.5 4.9 4.5 4.0 -18.9 -22.5 -23.5 -23.2 -23.0

Oman 2.1 0.6 1.9 2.3 3.0 1.1 1.6 1.2 1.6 2.0 -18.6 -10.5 -5.0 -3.1 -2.2

Pakistan* 4.5 5.4 5.8 4.8 5.0 2.9 4.2 4.0 6.9 7.6 -1.7 -4.0 -5.8 -4.9 -4.9

Qatar 2.2 1.6 2.8 2.9 3.5 2.7 0.4 0.8 1.2 1.5 -5.5 3.8 7.0 7.6 9.9

Saudi Arabia 1.4 -0.7 2.2 2.7 3.0 3.5 -0.2 3.0 3.5 3.3 -4.3 2.5 11.4 13.4 16.4

Turkey 3.2 7.4 3.5 2.5 3.0 7.8 11.1 15.3 12.5 10.0 -3.8 -5.0 -5.8 -5.4 -5.1

UAE 3.0 0.8 2.6 3.3 3.5 1.6 2.0 3.2 3.4 4.3 3.7 6.9 8.0 7.4 7.2

Africa 0.9 2.4 2.7 3.6 4.0 11.9 11.6 9.1 7.8 6.8 -2.1 -1.3 -1.3 -1.4 -1.6

Angola -0.7 1.5 2.0 2.0 2.0 32.4 31.7 28.0 14.0 14.0 -5.1 -4.8 -0.4 2.5 2.5

Botswana 4.3 2.4 4.4 3.8 4.2 2.8 3.3 3.3 3.4 3.3 13.7 12.3 10.5 9.6 9.1

Cameroon 4.7 3.2 4.0 4.2 4.5 0.9 0.7 1.1 1.5 2.0 -3.6 -3.5 -3.0 -2.5 -2.5

Côte d’lvoire 7.7 7.8 7.5 7.0 7.0 0.7 1.0 2.0 2.0 2.0 -1.1 -2.1 -2.0 -2.0 -2.0

The Gambia 2.2 4.0 4.5 5.0 5.3 7.2 7.5 7.5 6.0 5.9 -8.9 -10.0 -10.0 -12.3 -11.7

Ghana 3.4 8.1 5.7 6.3 6.8 17.5 12.4 10.0 9.1 7.8 -6.6 -4.6 -4.5 -5.5 -5.0

Kenya 5.8 4.7 6.0 5.6 5.8 6.3 8.0 5.1 6.2 6.2 -6.6 -6.2 -5.6 -6.0 -6.3

Nigeria -1.6 0.8 1.8 3.0 3.5 15.6 16.5 12.0 10.1 7.7 0.7 2.0 2.5 2.0 1.1

Sierra Leone 6.1 3.5 4.5 5.1 5.8 10.8 18.2 14.4 12.5 6.7 -19.7 -21.5 -22.5 -19.4 -13.6

South Africa 0.3 1.3 0.8 2.2 2.6 6.3 5.3 4.6 5.4 5.3 -3.3 -2.5 -3.8 -3.6 -3.2

Tanzania 6.9 7.1 5.7 6.2 6.5 5.2 5.5 3.8 5.2 6.0 -4.6 -3.5 -6.0 -5.6 -5.5

Uganda 3.3 5.0 5.5 5.8 6.2 5.5 5.6 3.1 5.8 6.6 -3.4 -5.4 -6.1 -8.6 -8.8

Zambia 3.4 3.7 4.4 4.6 4.8 18.2 6.6 7.7 7.9 6.7 -3.6 -3.0 -2.4 -2.0 -1.6

Emerging Europe 0.7 2.4 2.6 2.3 2.2 5.0 3.2 3.2 3.7 3.5 1.7 2.0 2.1 1.9 1.8

Czech Republic 2.6 4.3 3.6 3.0 2.8 0.7 2.5 2.2 2.1 2.0 1.1 1.0 -0.2 0.1 0.2

Hungary 2.2 4.0 4.1 3.4 2.8 0.4 2.3 2.8 3.1 3.0 6.2 3.2 2.0 1.8 2.0

Poland 2.9 4.6 4.7 3.8 3.4 -0.6 2.0 2.0 2.6 2.5 -0.3 0.2 -0.2 -0.5 -0.2

Russia -0.2 1.5 1.8 1.7 1.7 7.1 3.7 3.7 4.2 4.0 1.9 2.2 4.2 4.0 3.8

Latin America -0.5 1.7 2.3 2.6 2.5 9.3 6.4 5.1 4.7 5.1 -2.1 -1.8 -1.8 -2.2 -1.5

Argentina -2.2 3.0 3.6 3.2 3.0 36.0 25.0 15.0 10.0 15.0 -2.7 -3.1 -3.2 -3.4 3.7

Brazil -3.6 1.0 1.5 2.2 2.1 8.7 3.4 3.6 4.5 4.4 -1.3 -0.9 -1.0 -1.5 -1.7

Chile 1.6 1.5 4.0 2.5 2.2 3.8 2.0 2.4 3.3 3.0 -1.4 -1.4 -1.7 -2.2 -2.5

Colombia 2.0 1.8 2.7 3.5 4.0 7.5 4.2 3.3 3.7 4.2 -4.2 -4.0 -3.0 -3.3 -3.6

Mexico 2.3 2.0 2.1 2.5 2.3 2.8 5.5 4.8 3.8 3.5 -2.2 -1.7 -2.2 -2.5 -2.3

Peru 4.0 2.5 4.2 3.7 3.4 3.6 2.8 1.4 2.5 2.8 -2.7 -2.7 -1.3 -1.6 -1.9

Global 3.2 3.9 3.9 3.9 4.1 3.0 2.9 3.2 3.3 3.3

^ US: Core PCE deflator used for inflation

* Bangladesh, Egypt, and Pakistan: Figures are for fiscal year ending in June of year shown in column heading

** India: Figures are for fiscal year starting in April of year shown in column heading





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Forecasts – FX

Country Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 2018 2019 2020 2021 2022

Majors

Euro area 1.15 1.16 1.17 1.18 1.20 1.15 1.20 1.38 1.40 1.40

Japan 112.0 110.0 108.0 106.0 105.0 112.0 105.0 100.0 95.00 95.00

UK 1.35 1.38 1.40 1.42 1.42 1.35 1.42 1.47 1.49 1.50

Canada 1.36 1.34 1.32 1.30 1.28 1.36 1.28 1.10 1.09 1.08

Switzerland 0.96 0.96 0.97 0.97 0.98 0.96 0.98 0.85 0.84 0.84

Australia 0.73 0.74 0.75 0.76 0.78 0.73 0.78 0.84 0.80 0.80

New Zealand 0.66 0.68 0.70 0.72 0.74 0.66 0.74 0.78 0.74 0.74

Asia

Bangladesh 86.00 87.00 88.00 89.00 90.00 86.00 90.00 92.00 94.00 96.00

China 6.92 7.02 7.00 6.85 6.82 6.92 6.82 6.53 6.04 6.00

CNH 6.93 7.03 7.00 6.85 6.82 6.93 6.82 6.53 6.04 6.00

Hong Kong 7.84 7.84 7.84 7.83 7.83 7.84 7.83 7.80 7.77 7.77

India 72.00 73.00 74.00 74.50 75.00 72.00 75.00 76.00 77.00 78.00

Indonesia 14,600 14,700 14,800 14,900 15,000 14,600 15,000 15,100 15,200 15,300

Malaysia 4.00 4.05 4.05 4.10 4.10 4.00 4.10 4.10 4.20 4.20

Philippines 53.00 53.50 54.00 54.50 55.00 53.00 55.00 55.00 56.00 56.00

Singapore 1.36 1.37 1.37 1.38 1.38 1.36 1.38 1.38 1.39 1.39

South Korea 1,120 1,130 1,120 1,100 1,090 1,120 1,090 1,040 1,000 1,000

Sri Lanka 175.0 177.0 180.0 182.0 185.0 175.0 185.0 190.0 192.0 194.0

Taiwan 30.60 30.70 30.50 30.40 30.30 30.60 30.30 30.00 29.10 29.00

Thailand 32.50 33.00 33.00 33.25 33.50 32.50 33.50 33.50 34.00 34.00

Vietnam 23,400 23,500 23,400 23,400 23,300 23,400 23,300 22,700 21,500 21,300

MENAP

Bahrain 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38

Egypt 17.50 17.55 17.55 17.55 17.55 17.50 17.55 17.60 17.70 17.90

Iraq 1,182 1,182 1,182 1,182 1,182 1,182 1,182 1,182 1,182 1,182

Jordan 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71

Kuwait 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30

Lebanon 1,508 1,508 1,508 1,508 1,508 1,508 1,508 1,508 1,508 1,508

Oman 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39

Pakistan 130.0 133.0 135.0 137.0 139.0 130.0 139.0 144.0 147.0 150.0

Qatar 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64

Saudi Arabia 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75

Turkey 6.20 6.30 6.40 6.50 6.60 6.20 6.60 7.00 4.10 4.20

UAE 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67

Africa

Angola 325.0 330.0 335.0 340.0 345.0 325.0 345.0 360.0 244.5 249.4

Botswana 10.56 10.50 10.44 10.37 10.26 10.56 10.26 9.77 9.62 9.77

Cameroon 570.4 565.5 560.6 555.9 546.6 570.4 546.6 475.3 468.5 468.5

Côte d’lvoire 570.4 565.5 560.6 555.9 546.6 570.4 546.6 475.3 468.5 468.5

The Gambia 53.40 55.80 56.30 56.30 57.30 53.40 57.30 59.00 61.00 63.00

Ghana 5.30 5.37 5.55 5.65 5.90 5.30 5.90 6.30 6.60 6.90

Kenya 102.9 104.2 104.9 106.0 106.2 102.9 106.2 106.0 107.0 107.5

Nigeria 370.0 375.0 377.0 378.0 380.0 370.0 380.0 383.0 385.0 388.0

Sierra Leone 8,559 8,645 8,703 8,927 9,160 8,559 9,160 10,296 10,656 10,901

South Africa 14.20 14.10 14.00 13.90 13.70 14.20 13.70 13.00 12.50 12.70

Tanzania 2,320 2,340 2,350 2,380 2,400 2,320 2,400 2,430 2,450 2,490

Uganda 3,890 3,950 4,020 4,080 4,150 3,890 4,150 4,230 4,270 4,300

Zambia 12.70 13.00 12.80 12.70 12.60 12.70 12.60 12.90 13.00 13.20

Emerging Europe

Czech Republic 22.09 21.81 21.54 21.27 20.83 22.09 20.83 17.39 17.14 17.14

Hungary 283.0 280.0 278.0 275.0 271.0 283.0 271.0 203.0 196.0 196.0

Poland 3.65 3.58 3.50 3.43 3.33 3.65 3.33 2.86 2.79 2.79

Russia 65.00 64.50 64.00 63.50 63.00 65.00 63.00 63.00 55.00 56.00

Latin America

Argentina 40.00 42.00 45.00 50.00 50.00 40.00 50.00 26.50 28.00 30.00

Brazil 3.80 3.50 3.40 3.75 3.75 3.80 3.75 3.20 3.50 3.75

Chile 690.0 700.0 710.0 725.0 740.0 690.0 740.0 580.0 575.0 600.0

Colombia 2,900 2,800 2,850 2,950 3,000 2,900 3,000 3,200 3,400 3,600

Mexico 18.00 17.50 17.25 18.00 18.25 18.00 18.25 17.50 18.00 18.50

Peru 3.36 3.40 3.40 3.25 3.30 3.36 3.30 3.10 3.36 3.30





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Forecasts – GDP

Country Real GDP growth (% y/y, unless otherwise stated)

Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20

Majors

US* 2.7 2.2 2.4 2.3 2.0 1.4 2.0 1.7

Euro area 1.6 1.6 1.8 1.9 1.8 1.8 1.8 1.8

Japan* 0.8 1.0 1.0 0.9 1.0 1.0 1.0 1.0

UK 1.3 1.4 1.2 1.2 1.0 1.0 1.1 1.2

Canada* 2.3 2.0 1.9 1.7 1.7 1.6 1.7 1.7

Australia 3.1 3.1 3.1 2.9 2.9 2.8 2.7 3.1

New Zealand 2.7 3.0 2.9 3.1 3.3 3.3 3.4 3.2

Asia

China 6.4 6.3 6.3 6.4 6.6 6.4 6.3 6.3

Hong Kong 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0

India 7.0 6.7 7.2 7.3 7.6 7.9 7.9 7.7

Indonesia 5.1 5.2 5.1 5.1 5.1 5.3 5.3 5.3

Malaysia 4.5 4.5 5.5 4.9 5.2 5.0 4.9 4.9

Philippines 6.1 6.6 6.3 6.3 6.4 6.3 6.3 6.2

Singapore 2.1 2.4 2.7 2.4 2.5 2.2 2.3 2.4

South Korea 3.0 2.6 2.6 2.8 2.4 2.8 2.8 2.8

Sri Lanka 4.5 4.6 4.7 4.7 4.8 5.0 5.0 5.0

Taiwan 2.5 2.8 2.4 2.4 2.4 2.3 2.2 2.1

Thailand 4.3 4.5 4.5 4.5 4.5 5.0 5.0 5.0

Vietnam 7.0 6.4 6.6 6.7 6.9 6.4 6.3 6.3

Latin America

Brazil 1.8 2.6 2.5 2.2 1.7 1.6 1.9 2.2

Chile 2.9 1.7 2.3 1.5 2.4 2.0 3.5 3.2

Colombia 3.2 3.5 3.8 3.5 3.2 3.6 4.0 4.3

Mexico 2.2 0.9 3.6 2.7 2.7 2.2 3.6 1.7

Peru 3.4 3.8 2.4 3.8 3.4 3.4 3.1 3.2

* q/q SAAR; Source: Standard Chartered Research




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Forecasts – Rates End-period Current Q4-18 Q1-19 Q2-19 Q3-19 Q4-19

United States Policy rate 2.25 2.50 2.75 3.00 3.25 3.50

3M LIBOR 2.40 2.75 3.00 3.25 3.45 3.60

2Y bond yield 2.27 3.10 3.25 3.25 3.30 3.25

5Y bond yield 2.62 3.10 3.25 3.25 3.20 3.10

10Y bond yield 2.82 3.10 3.25 3.25 3.10 3.00

Euro area Policy rate 0.00 0.00 0.00 0.00 0.00 0.05

3M EURIBOR -0.32 -0.35 -0.30 -0.30 -0.20 -0.10

10Y bond yield 0.52 0.75 1.00 1.10 1.20 1.20

United Kingdom Policy rate 0.75 0.75 0.75 0.75 1.00 1.00

3M Libor 0.80 0.80 0.85 0.90 1.05 1.10

10Y bond yield 1.42 1.70 1.80 2.00 2.00 2.00

Australia Policy rate 1.50 1.50 1.50 1.50 1.50 1.50

3M OIS 1.50 1.55 1.57 1.60 1.65 1.70

China Policy rate 1.50 1.50 1.50 1.50 1.50 1.50

7-day reverse repo rate 2.55 2.60 2.60 2.60 2.60 2.60

10Y bond yield 3.68 4.05 4.00 4.00 3.80 3.60

Hong Kong 3M HIBOR 2.27 2.60 2.80 3.05 3.25 3.40

10Y bond yield 1.41 2.50 2.50 2.60 2.50 2.50

India Policy rate 6.50 7.00 7.00 7.00 7.00 7.00

91-day T-bill rate 7.17 7.25 7.25 7.25 7.25 7.00

10Y bond yield 8.07 8.00 7.80 7.80 7.60 7.60

Indonesia Policy rate 5.75 6.00 6.25 6.50 6.50 6.50

FASBI rate 5.00 5.25 5.50 5.75 5.75 5.75

10Y bond yield 8.19 7.50 7.50 7.25 7.25 7.25

Malaysia Policy rate 3.25 3.25 3.25 3.25 3.25 3.25

3M KLIBOR 3.69 3.70 3.70 3.70 3.70 3.70

10Y bond yield 4.09 4.00 4.00 4.00 4.30 4.60

Philippines Policy rate 4.50 5.00 5.00 5.00 5.00 5.00

SDA rate 4.00 4.50 4.50 4.50 4.50 4.50

10Y bond yield 6.76 6.30 6.40 6.50 6.60 6.60

Singapore 3M SGD SIBOR 1.50 1.80 1.95 2.10 2.25 2.40

10Y bond yield 2.52 2.70 2.90 2.90 2.95 3.00

South Korea Policy rate 1.50 1.75 1.75 1.75 2.00 2.00

91-day CD rate 1.65 1.90 1.90 1.90 2.15 2.15

10Y bond yield 2.38 2.90 3.10 3.10 3.15 3.20

Taiwan Policy rate 1.38 1.38 1.38 1.38 1.38 1.38

3M TAIBOR 0.66 0.66 0.66 0.66 0.66 0.66

10Y bond yield 0.86 1.30 1.30 1.30 1.50 1.80

Thailand Policy rate 1.50 1.75 2.00 2.00 2.25 2.25

THFX6M 1.42 2.00 2.25 2.50 2.75 3.00

10Y bond yield 2.86 2.90 3.00 3.00 3.10 3.10

Vietnam Policy rate (Refi rate) 6.25 6.25 6.25 6.25 6.25 6.25

Overnight VNIBOR 2.60 3.50 4.50 0.90 1.20 3.00

5Y bond yield 4.45 7.00 7.00 6.50 6.50 7.00

Ghana Policy rate 17.00 17.00 17.00 17.00 17.00 17.00

91-day T-bill rate 13.28 14.20 14.60 14.80 14.50 13.90

5Y bond yield 21.50 22.00 21.50 22.00 21.00 21.00

Kenya Policy rate 9.00 9.00 9.00 9.00 9.50 9.50

91-day T-bill rate 8.15 7.20 7.80 7.90 8.30 8.80

10Y bond yield 12.67 12.60 12.50 12.45 12.40 12.35

Nigeria Policy rate 14.00 14.00 14.25 14.25 14.25 14.00

91-day T-bill rate 11.11 13.20 13.30 12.80 12.60 12.20

10Y bond yield 15.23 15.20 14.60 14.50 13.80 13.55

South Africa Policy rate 6.50 6.75 7.00 7.00 7.00 7.00

91-day T-bill rate 7.11 7.29 7.31 7.33 7.35 7.45

10Y bond yield 9.08 8.95 8.85 8.75 8.70 8.70

Tanzania 3M T-bill 4.07 4.00 4.20 4.40 4.70 5.00

10Y bond yield 14.50 15.00 15.30 15.50 15.50 15.50





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Forecasts – Commodities

Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 2018 2019

Energy

Crude oil (nearby future, USD/bbl)

ICE Brent 82 81 76 77 78 82 75 78

NYMEX WTI basis Cushing, Oklahoma 73 74 70 72 75 79 68 73

Dubai 79 78 73 74 75 79 71 75

US natural gas (nearby future, USD/mmBtu)

NYMEX basis Henry Hub Louisiana 2.80 3.00 2.80 2.70 3.20 3.50 2.73 2.93

Metals

Base metals (LME 3M, USD/t)

Aluminium 2,200 2,300 2,200 2,100 2,200 2,400 2,193 2,200

Copper 6,850 6,900 6,950 7,100 7,250 7,100 6,788 7,050

Lead 2,300 2,250 2,250 2,200 2,150 2,200 2,377 2,213

Nickel 14,000 14,200 14,500 15,000 15,200 15,000 13,940 14,725

Tin 20,500 21,000 21,500 21,500 22,000 21,500 20,542 21,500

Zinc 2,900 2,900 2,800 2,800 2,700 2,700 3,048 2,800

Precious metals (spot, USD/oz)

Gold 1,290 1,280 1,285 1,340 1,375 1,375 1,294 1,320

Palladium 975 990 1,010 1,020 1,040 1,100 979 1,015

Platinum 900 920 950 1,000 1,020 1,075 911 973

Silver 16.0 16.3 16.5 16.8 17.8 18.0 16.3 16.8





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Forecasts – Long-term

Short-term strength; long-term growth unchanged

We expect strong global growth of 3.9% in 2018 and 2019, but we expect this

strength to be short-lived, as we see a number of risks bubbling beneath the surface.

Our long-term forecasts are broadly unchanged; emerging markets are still set to

capture an increasing share of the global GDP pie, led by Asia – particularly China.

Emerging markets’ growth is supported by more favourable demographics, rapid

urbanisation and the rise of the middle class. Asia and Africa should benefit from

their demographic dividend (young populations) relative to other regions in the

coming decade. India’s economy is set to expand by more than 8.0% p.a. on average

for the next 15 years. Even countries facing ageing populations – such as China and

countries in Southeast Asia and Eastern Europe – are likely to use digital

technologies to offset the drag from a shrinking workforce and boost growth.

Different kinds of reform needed in emerging and developed markets

Emerging markets’ ability to realise stronger growth momentum from these structural

factors will depend on the strength of reforms in these economies. Reforms in

emerging markets must focus on building infrastructure and institutions to support

growth. Improving reform momentum in India, Indonesia, Philippines, South Africa,

Ghana and Saudi Arabia should sustain long-term growth prospects in these

countries. Steady progress on the ASEAN Economic Community (AEC) and new

reforms could pose upside risk to our forecasts. Other countries, such as Nigeria and

Kenya, need to do more to realise their growth potential.

Ageing populations are more of a constraint on trend growth for developed markets

than for emerging markets. In addition, high levels of leverage, weak productivity

growth (despite technological progress), and the impact of rising inequality imply that

growth will remain subdued. In these economies, structural reforms to encourage

higher female participation in the workforce and raise the retirement age are needed

to bolster the labour force. Higher immigration would also be an effective policy to

raise labour-force participation rates, but growing anti-immigration sentiment in the

West poses a threat to labour-force growth.

Key challenges to the long-term growth outlook

The global economy currently faces several key challenges, which history suggests

may be bad for growth in the long term. These include a slide back into protectionism

and an unequal sharing of the potential benefits of globalisation. The anti-

globalisation trend and rising protectionism pose a threat to global growth potential –

particularly for emerging markets. Concerns about a full-blown global trade war have

come to the fore with the current US-China trade dispute and tit-for-tat retaliation. US

disengagement with the rest of the world may become even more disruptive in the

medium term, though we do not expect the current dispute to escalate into a full-

blown trade war. Over a longer-term horizon, the key concern is whether any other

economy, potentially China, can replace the US as the main engine of import

demand (see Global trade: Trade first! (Avoiding an own goal) and Trade tensions –

Unintended consequences).

Madhur Jha +91 124 617 6084

[email protected]

Head, Thematic Research


Reforms aimed at improving

infrastructure and institutions are

needed to boost EM growth

A full-blown trade war would have a

lasting impact on EM and global

growth







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Our long-term forecasts

Real GDP growth (%) Inflation (yearly average, %) FX

Country 2018 2019 2020 2021 2022 2021-25 2026-30 2018 2019 2020 2021 2022 2021-25 2026-30 2018 2019 2020 2021 2022 2025 2030

Majors

US^ 2.9 2.6 1.9 1.8 1.8 1.8 1.8 2.0 2.2 1.8 1.6 1.6 1.6 1.6

Euro area 2.0 1.8 1.7 1.5 1.3 1.3 1.1 1.8 1.7 1.8 1.8 1.8 1.8 1.8 1.15 1.20 1.38 1.40 1.40 1.40 1.40

Japan 1.2 1.0 1.0 1.0 1.0 1.1 1.2 1.0 1.3 1.5 1.2 1.0 1.0 1.0 112.0 105.0 100.0 95.0 95.0 90.0 90.0

UK 1.4 1.2 1.2 1.6 1.6 1.6 1.5 2.5 2.1 2.0 2.0 2.0 2.0 2.0 1.35 1.42 1.47 1.49 1.50 1.55 1.55

Canada 2.4 2.1 1.7 1.7 2.0 1.9 2.0 1.9 1.9 1.8 1.8 1.8 1.8 1.8 1.36 1.28 1.10 1.09 1.08 1.08 1.08

Switzerland 2.5 1.8 1.6 1.6 1.6 1.6 1.6 0.5 0.8 1.3 1.3 1.3 1.3 1.3 0.96 0.98 0.85 0.84 0.84 0.84 0.83

Australia 3.1 3.0 2.9 3.3 3.3 3.3 3.1 2.1 2.5 2.5 2.3 2.3 2.3 2.2 0.73 0.78 0.84 0.80 0.80 0.76 0.72

New Zealand 2.7 3.1 3.2 2.8 2.8 2.8 2.8 1.6 2.0 1.8 2.3 2.3 2.3 2.2 0.66 0.74 0.78 0.74 0.74 0.70 0.65

Asia

Bangladesh* 7.8 7.2 7.2 7.3 7.0 7.1 7.0 5.8 6.0 6.0 6.0 6.0 6.0 5.2 86.00 90.00 92.00 94.00 96.00 98.00 100.00

China 6.6 6.4 6.3 6.0 5.7 5.7 5.0 2.2 2.5 2.5 2.5 2.5 2.5 2.5 6.92 6.82 6.53 6.04 6.00 5.95 5.92

Hong Kong 3.6 3.0 3.0 3.0 3.0 3.0 3.0 2.3 2.4 2.8 2.8 2.8 2.8 2.8 7.84 7.83 7.80 7.77 7.77 7.76 7.76

India** 7.2 7.5 7.6 7.7 7.9 8.0 8.0 4.6 5.1 5.1 5.3 5.5 5.3 5.0 72.00 75.00 76.00 77.00 78.00 80.00 85.00

Indonesia 5.1 5.1 5.3 5.5 5.6 5.7 5.8 3.3 3.8 3.8 3.5 3.5 3.5 3.5 14,600 15,000 15,100 15,200 15,300 15,500 16,000

Malaysia 4.8 5.0 4.9 5.0 5.0 5.0 4.8 1.3 2.5 3.0 2.3 2.3 2.3 2.3 4.00 4.10 4.10 4.20 4.20 4.25 4.30

Philippines 6.2 6.4 6.5 6.3 5.5 5.7 5.5 5.5 4.8 4.2 4.0 2.5 2.8 2.5 53.00 55.00 55.00 56.00 56.00 58.00 60.00

Singapore 3.2 2.5 2.2 2.2 2.5 2.4 2.5 0.6 1.7 1.7 1.8 1.8 1.8 1.8 1.36 1.38 1.38 1.39 1.39 1.40 1.40

South Korea 2.8 2.6 2.8 3.0 3.0 3.0 2.7 1.6 1.9 2.0 2.0 2.0 2.0 1.9 1,120 1,090 1,040 1,000 1,000 980 980

Sri Lanka 3.9 4.4 4.5 5.0 5.2 5.3 5.5 5.0 5.0 5.0 5.0 4.5 4.4 4.5 175.0 185.0 190.0 192.0 194.0 200.0 200.0

Taiwan 2.8 2.5 2.2 2.5 2.7 2.4 2.2 1.8 1.3 1.3 1.3 1.3 1.3 1.3 30.60 30.30 30.00 29.10 29.00 28.80 28.80

Thailand 4.3 4.5 5.0 5.0 5.0 4.7 4.5 1.5 2.3 3.0 3.0 3.0 3.0 3.0 32.50 33.50 33.50 34.00 34.00 35.00 35.00

Vietnam 7.0 6.9 6.9 6.9 6.9 6.9 6.8 3.7 5.0 5.3 5.4 5.4 5.5 5.7 23,400 23,300 22,700 21,500 21,300 20,900 20,100

MENAP

Bahrain 3.0 2.5 2.7 3.0 3.0 3.0 3.1 2.5 2.3 2.0 1.8 1.8 1.8 1.8 0.38 0.38 0.38 0.38 0.38 0.38 0.38

Egypt* 5.3 5.5 5.8 6.0 6.0 6.3 6.6 21.6 14.8 9.1 8.0 8.0 8.0 8.0 17.50 17.55 17.60 17.70 17.90 19.40 21.80

Iraq 3.0 4.0 4.0 4.5 4.5 4.9 6.0 1.0 1.5 1.5 1.5 1.5 1.8 2.5 1,182 1,182 1,182 1,182 1,182 1,182 1,182

Jordan 2.0 2.0 2.2 3.0 3.0 3.0 4.0 4.2 3.8 3.0 2.6 2.6 2.6 2.6 0.71 0.71 0.71 0.71 0.71 0.71 0.71

Kuwait 2.6 3.1 3.1 3.0 3.0 3.2 3.5 3.2 3.0 2.5 2.5 2.5 2.5 2.5 0.30 0.30 0.30 0.30 0.30 0.30 0.30

Lebanon 2.0 3.2 3.8 4.0 4.0 4.0 4.0 4.9 4.5 4.0 4.0 4.0 4.0 4.0 1,508 1,508 1,508 1,508 1,508 1,508 1,508

Oman 1.9 2.3 3.0 3.5 3.5 3.8 4.0 1.2 1.6 2.0 2.0 2.0 2.0 2.0 0.39 0.39 0.39 0.39 0.39 0.39 0.39

Pakistan* 5.8 4.8 5.0 6.0 6.0 6.0 6.0 4.0 6.9 7.6 7.0 6.0 6.2 6.0 130.0 139.0 144.0 147.0 150.0 160.0 170.0

Qatar 2.8 2.9 3.5 3.5 3.5 3.8 4.3 0.8 1.2 1.5 2.0 3.0 2.8 3.0 3.64 3.64 3.64 3.64 3.64 3.64 3.64

Saudi Arabia 2.2 2.7 3.0 3.5 3.5 3.6 4.0 3.0 3.5 3.3 3.2 3.3 3.1 2.0 3.75 3.75 3.75 3.75 3.75 3.75 3.75

Turkey 3.5 2.5 3.0 4.0 4.0 4.0 4.0 15.3 12.5 10.0 8.0 7.0 6.7 5.7 6.20 6.60 7.00 4.10 4.20 4.50 5.00

UAE 2.6 3.3 3.5 3.2 3.5 3.4 3.5 3.2 3.4 4.3 3.9 3.5 3.3 3.0 3.67 3.67 3.67 3.67 3.67 3.67 3.67

Africa

Angola 2.0 2.0 2.0 2.5 3.0 3.5 4.0 28.0 14.0 14.0 10.0 10.0 8.2 6.5 325.0 345.0 360.0 244.5 249.4 264.6 292.2

Botswana 4.4 3.8 4.2 4.5 4.5 4.5 4.5 3.3 3.4 3.3 3.7 3.9 3.8 3.7 10.56 10.26 9.77 9.62 9.77 10.15 10.36

Cameroon 4.0 4.2 4.5 5.3 5.3 5.3 5.3 1.1 1.5 2.0 2.0 2.0 2.0 2.0 570.4 546.6 475.3 468.5 468.5 468.5 468.5

Côte d’lvoire 7.5 7.0 7.0 6.5 6.5 6.5 6.5 2.0 2.0 2.0 2.0 2.0 2.0 2.0 570.4 546.6 475.3 468.5 468.5 468.5 468.5

The Gambia 4.5 5.0 5.3 5.0 5.3 5.5 6.0 7.5 6.0 5.9 5.6 5.6 5.8 6.0 53.40 57.30 59.00 61.00 63.00 69.00 82.00

Ghana 5.7 6.3 6.8 6.6 6.3 6.4 6.0 10.0 9.1 7.8 8.0 8.0 8.0 8.0 5.30 5.90 6.30 6.60 6.90 8.00 9.50

Kenya 6.0 5.6 5.8 5.4 5.5 5.5 5.3 5.1 6.2 6.2 6.1 6.5 6.4 6.0 102.9 106.2 106.0 107.0 107.5 109.5 113.5

Nigeria 1.8 3.0 3.5 3.9 4.0 4.0 5.0 12.0 10.1 7.7 9.0 8.0 8.2 10.0 370.0 380.0 383.0 385.0 388.0 405.0 460.0

Sierra Leone 4.5 5.1 5.8 6.0 6.6 6.0 5.5 14.4 12.5 6.7 6.5 7.7 7.1 6.2 8,559 9,160 10,296 10,656 10,901 11,389 11,894

South Africa 0.8 2.2 2.6 3.8 4.2 4.1 4.9 4.6 5.4 5.3 4.4 4.5 4.5 4.5 14.20 13.70 13.00 12.50 12.70 13.20 14.20

Tanzania 5.7 6.2 6.5 6.8 6.8 6.7 6.5 3.8 5.2 6.0 5.5 5.5 5.2 5.0 2,320 2,400 2,430 2,450 2,490 2,560 2,640

Uganda 5.5 5.8 6.2 9.0 8.4 7.0 5.5 3.1 5.8 6.6 6.5 6.5 5.6 5.0 3,890 4,150 4,230 4,270 4,300 4,460 4,600

Zambia 4.4 4.6 4.8 4.7 4.6 4.6 5.0 7.7 7.9 6.7 7.7 7.0 7.7 8.6 12.70 12.60 12.90 13.00 13.20 14.60 18.00

Emerging Europe

Czech Republic 3.6 3.0 2.8 2.2 2.2 2.2 2.0 2.2 2.1 2.0 2.0 2.0 2.0 2.0 22.09 20.83 17.39 17.14 17.14 17.14 17.14

Hungary 4.1 3.4 2.8 2.7 2.7 2.7 2.4 2.8 3.1 3.0 3.0 3.0 3.0 2.6 283 271 203 196 196 196 196

Poland 4.7 3.8 3.4 2.8 2.7 2.7 2.5 2.0 2.6 2.5 2.5 2.5 2.5 2.2 3.65 3.33 2.86 2.79 2.79 2.79 2.79

Russia 1.8 1.7 1.7 1.7 2.2 2.1 2.2 3.7 4.2 4.0 4.0 3.0 3.2 3.0 65.00 63.00 63.00 55.00 56.00 59.00 64.00

Latin America

Argentina 3.6 3.2 3.0 5.0 5.0 5.0 5.0 15.0 10.0 15.0 10.0 10.0 10.0 10.0 40.00 50.00 26.50 28.00 30.00 35.00 40.00

Brazil 1.5 2.2 2.1 3.5 3.5 3.5 3.5 3.6 4.5 4.4 4.8 4.8 4.8 4.8 3.80 3.75 3.20 3.50 3.75 4.50 5.50

Chile 4.0 2.5 2.2 4.0 4.0 4.0 4.0 2.4 3.3 3.0 3.5 3.5 3.5 3.5 690 740 580 575 600 650 800

Colombia 2.7 3.5 4.0 4.0 4.5 4.4 4.5 3.3 3.7 4.2 4.0 4.0 4.0 4.0 2,900 3,000 3,200 3,400 3,600 4,000 4,500

Mexico 2.1 2.5 2.3 3.0 5.0 4.0 4.0 4.8 3.8 3.5 3.5 3.5 3.5 3.5 18.00 18.25 17.50 18.00 18.50 21.00 25.00

Peru 4.2 3.7 3.4 3.0 3.0 3.0 3.0 1.4 2.5 2.8 3.0 3.0 3.0 3.0 3.36 3.30 3.10 3.36 3.30 4.10 4.50

* Bangladesh, Pakistan, and Egypt: Figures are for fiscal year ending in June of year shown in column heading; FX forecasts are for calendar year periods

** India: Figures are for fiscal year starting in April of year shown in column heading; FX forecasts are for calendar year periods

^ Inflation: Core PCE deflator used for US





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Forecasts – Selected interbank rates by tenor

2018 2019 2020

End-period Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

USD LIBOR

FFTR 2.50 2.75 3.00 3.25 3.50 3.50 3.50 3.50 3.50

1M 2.55 2.80 3.05 3.30 3.55 3.50 3.50 3.45 3.40

3M 2.75 3.00 3.25 3.45 3.60 3.55 3.50 3.45 3.35

6M 3.00 3.25 3.45 3.60 3.60 3.60 3.50 3.40 3.30

12M 3.30 3.50 3.60 3.65 3.60 3.60 3.50 3.35 3.20

SGD SIBOR

1M 1.65 1.80 1.95 2.05 2.25 2.25 2.25 2.20 2.15

3M 1.80 1.95 2.10 2.25 2.40 2.40 2.40 2.35 2.30

6M 1.90 2.05 2.20 2.35 2.50 2.50 2.50 2.45 2.40

12M 2.10 2.25 2.40 2.50 2.65 2.60 2.60 2.55 2.50

HIBOR

1M 2.40 2.60 2.80 3.10 3.35 3.30 3.30 3.25 3.20

3M 2.60 2.80 3.05 3.25 3.40 3.35 3.30 3.25 3.20

6M 2.75 3.00 3.25 3.45 3.45 3.45 3.35 3.25 3.15

12M 3.05 3.25 3.40 3.50 3.50 3.45 3.35 3.20 3.10





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Reference tables – Asia

Economy

Size

(USD bn) Population

(mn)

Private consumption (% of GDP)

Government spending

(% of GDP)

Investment (% of GDP)

Exports of goods

(% of GDP)

Imports of goods

(% of GDP)

FX reserves (USD bn, latest)

Bangladesh 260.7 160.2 65.9 5.8 34.2 15.4 21.2 32.9

China 12,244.8 1,390.1 39.1 14.5 44.4 18.5 15.0 3,115.0

Hong Kong 341.7 7.4 67.0 9.8 22.0 157.4 164.4 424.9

India* 2,600.0 1,316.0 59.1 11.4 30.6 19.0 22.0 400.5

Indonesia 932.7 261.9 55.5 8.2 32.2 20.9 19.3 117.9

Malaysia 314.7 31.7 55.4 12.2 25.3 71.5 64.5 103.9

Philippines 304.3 104.2 73.7 11.2 23.8 27.5 36.1 77.8

Singapore 324.0 5.6 35.6 10.9 24.8 173.4 149.1 289.5

South Korea 1,580.0 51.6 47.8 14.7 31.9 48.1 42.3 401.1

Sri Lanka 87.4 21.4 64.1 11.6 33.9 18.3 27.0 8.5

Taiwan 529.6 23.3 52.8 14.3 20.9 62.8 50.7 459.8

Thailand 406.8 68.9 48.8 16.4 23.2 51.6 44.6 205.5

Vietnam 223.8 92.7 68.0 6.4 30.9 100.8 101.5 64.0

*Estimated values for FY18 (ending Mar-2018); Source: National statistics offices, CEIC, Bloomberg, Standard Chartered Research

Policy

Politics and fiscal policy Monetary policy

Date of next

election Type of election

Date of next budget

announcement

Policy objectives

Explicit inflation target

Key monetary policy tools

Bangladesh Jan-2019 Parliamentary Jun-2019 Promoting growth and ensuring price stability

5.4-5.8% (FY19)

Repo and reverse repo rates

China Late 2022 Party Congress Mar-2019 Stable economic growth and

structural reforms 3.0%

1Y benchmark deposit rate

Hong Kong 2020 Legislative Council Q1-2019 Exchange rate stability NA Linked Exchange Rate

System

India May-2019 Parliamentary Feb-2019 Price stability, while

maintaining focus on growth 4+/-2% in

medium term Repo rate, CRR

Indonesia 2019 Parliamentary and

presidential H2-2018 Price stability 2.5-4.5%

7-day reverse repo rate, overnight deposit facility rate (FASBI),

overnight lending facility (repo) rate

Malaysia 2021

(expected) State Nov-2018

Sustainable growth and monetary stability

NA Overnight policy rate

Philippines Mid-2019 Local/senatorial Q4-2018 Low and stable inflation and

sustainable economic growth

2-4% (2016, 2017,

2018)

Overnight repo, reverse repo and special deposit account rates

Singapore 2020 Parliamentary 2019 Price stability and

sustainable economic growth

NA SGD NEER policy

band

South Korea 2020 Legislative Dec-2018 Price stability and financial stability

2.0% 7-day repo rate

Sri Lanka 2020

(expected) Presidential Nov-2018

Promoting growth and ensuring price stability

Inflation in mid-single digits

Repo and reverse repo rates

Taiwan Nov-2018 Local government Q4-2018 Promoting growth and ensuring price stability

NA Rediscount rate

Thailand Feb-2019 (expected)

Parliamentary Oct-2019 Price stability 1-4% 1-day repo

Vietnam 2021 National Party

Congress Nov-2018 (est.) Price stability About 5% Refinance rate





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Reference tables – MENAP

Economy

Size (USD bn)

Population (mn)

Government debt

(% of GDP)

Fiscal balance

(% of GDP)

FX reserves (months of

imports)

Exports of goods

(% of GDP)

Imports of goods

(% of GDP)


Bahrain 31.9 1.3 82.1 -15.5 2.0 43.0 43.3 2.1

Egypt 336.3 91.5 96.9 -10.9 6.0 5.7 17.4 36.7

Iraq 171.5 36.1 66.8 -12.0 9.5 28.3 29.0 41.4

Jordan 38.7 9.8 95.1 -6.2 6.4 20.9 48.4 11.0

Kuwait 110.9 4.3 18.5 -17.5 7.1 48.5 23.9 30.2

Lebanon 51.9 6.0 148.7 -9.5 21.3 7.2 35.2 41.6

Oman 66.3 3.9 33.6 -18.5 12.5 43.2 33.6 17.4

Pakistan 304.0 207.8 67.5 -4.4 3.3 9.1 17.1 12.8

Qatar 152.5 2.6 56.5 -9.0 9.0 44.5 17.7 40.0

Saudi Arabia 646.4 31.7 13.1 -12.3 27.0 27.4 18.9 506.5

Turkey 857.7 79.8 30.0 -2.6 5.2 17.8 23.2 86.5

UAE 348.7 9.9 20.7 -4.3 3.1 93.0 66.0 92.0

Source: National sources, US Census Bureau, World Bank, IMF, Standard Chartered Research

Social indicators and monetary policy

Social indicators (latest available) Monetary policy

Female participation (% of female working-age population)

Youth unemployment rate (% of total labour force aged 15-24)

Unemployed with tertiary education

(% of total unemployed)

Exchange rate regime Key monetary policy tools

Bahrain 39.4 10.9 32.0 Conventional peg 1-week depo facility; overnight repo rate

Egypt 24.0 42.0 31.1 Managed float Overnight deposit, lending

rate

Iraq 14.5 34.6 NA Conventional peg Policy rate

Jordan 16.0 28.8 NA Conventional peg 1-day repo/deposit

Kuwait 43.4 19.4 9.6 Conventional peg to a

basket Discount rate

Lebanon 24.0 20.7 29.7 Stabilised arrangement 21-day repo

Oman 28.3 19.0 NA Conventional peg 1-day repo

Pakistan 25.0 10.8 NA Other managed

arrangement (IMF) SBP target rate

Qatar 51.8 1.3 24.0 Conventional peg Overnight deposit, lending

rate; repo rate

Saudi Arabia 17.7 29.5 43.6 Conventional peg Reverse repo/repo rate

Turkey 28.1 17.7 13.9 Freely floating 1-week repo

UAE 46.0 10.0 33.2 Conventional peg Repo rate

Source: World Bank, IMF, Standard Chartered Research




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Reference tables – Africa

Economy

Size

(USD bn) Population

(mn)

Government spending

(% of GDP)


Exports of goods/services

(% of GDP)

Imports of goods/services

(% of GDP)

FX reserves (USD mn,

latest)

Angola 124.2 28.2 22.1 26.5 30.0 29.4 12,660

Botswana 17.2 2.2 32.3 28.1 55.4 42.2 7,147

Cameroon 34.0 24.3 19.2 24.3 18.6 23.4 3,417

Côte d’Ivoire 40.4 25.0 23.4 21.1 32.4 20.2 3,150

The Gambia 1.0 2.1 34.3 27.7 24.0 41.9 163

Ghana 47.0 28.3 23.5 13.6 40.7 47.9 6,693.1

Kenya 79.5 46.7 27.2 17.0 14.6 23.4 8,464

Nigeria 376.3 188.7 11.7 12.9 9.2 16.9 44,000

Sierra Leone 3.6 7.4 24.3 19.1 23.7 51.9 507

South Africa 349.3 56.5 32.9 18.6 30.3 30.1 49,848

Tanzania 51.7 50.0 18.6 27.9 19.5 22.6 5,484

Uganda 26.3 37.7 19.0 25.0 18.6 28.6 3,439

Zambia 25.5 17.2 25.2 41.9 35.1 38.4 1,820

Source: IMF WEO, World Bank, Central Banks, Standard Chartered Research

Policy


Date of next

election

Type of

election

Date of next

budget

announcement

Policy

objectives

Explicit

inflation target

Key monetary

policy tools*

Angola 2022 Presidential and

legislative Dec-2018 Price stability Single digit

Reserve requirement,

liquidity facilities, OMOs

and FX intervention

Botswana 2019 Presidential and

legislative Feb-2019 Price stability 3-6%


standing facilities, OMOs

Cameroon Oct-2018 Presidential Nov-2018 Price stability – Reserve requirement,

liquidity facilities

Côte d’Ivoire Oct-2020 Presidential and

legislative Nov-2018 Price stability 2% +/-1ppt


liquidity facilities, OMOs

The Gambia Dec-2021 Presidential Nov-2018 Price stability – –

Ghana 2020 Presidential and

legislative Nov-2018 Price stability 8% +/-2ppt


OMOs, FX swaps

Kenya 2022 Presidential Jun-2019 Price stability 5% +/-2.5% Discount window rate,

OMOs, cash reserve ratio

Nigeria 2019 Presidential and

legislative Dec-2018 Price stability Single digit

Discount window rate,

OMOs, cash reserve ratio

Sierra Leone 2023 Presidential Nov-2018 Price stability – Reserve requirement

South Africa 2019 Presidential Feb-2019 Price stability 3-6% OMOs, cash reserve ratio

Tanzania Oct-2020 Presidential and

legislative Jun-2019 Price stability 0-5%


OMOS, intraday liquidity

facility

Uganda 2021 Presidential and

legislative Jun-2019 Price stability 5%+/-3ppt

OMOs, rediscount rate,

cash reserve requirement

Zambia Aug-2021 Presidential Sep-2019 Price stability 6-8% OMOs, cash reserve ratio

* In addition to policy rate (note no policy rate for Tanzania); Source: EISA, National authorities, Standard Chartered Research




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Reference tables – Europe

Economy

Nominal

GDP (EUR bn)

Population (mn)

10-year avg GDP growth

(2008-17)

Public debt, % of GDP

(2017)

Fiscal balance, % of GDP

(2017)

Household debt, % of income

(latest available)*

C/A balance,

% of GDP, (2017)

Exports of goods and services, % of GDP (2017)

Austria 369.9 8.8 0.9 78.4 -0.7 91.6 1.9 53.9

Belgium 437.2 11.3 0.9 103.1 -1.0 116.4 -0.2 85.1

Czech Republic 191.6 10.6 1.6 34.6 1.6 69.2 1.1 79.5

Finland 223.8 5.5 0.0 61.4 -0.6 133.1 0.7 38.6

France 2,291.7 67.1 0.7 97.0 -2.6 109.0 -0.8 30.9

Germany 3,277.3 82.7 1.2 64.1 1.3 93.4 8.0 47.2

Greece 177.7 10.7 -2.8 178.6 0.8 111.6 -0.8 33.2

Hungary 123.5 9.8 1.1 73.6 -2.0 50.6 2.8 90.1

Ireland 294.1 4.8 4.5 68.0 -0.3 171.0 12.5 120.0

Italy 1,716.9 60.5 -0.5 131.8 -2.3 86.8 2.8 31.3

Netherlands 737.0 17.1 0.9 56.7 1.1 254.5 10.2 86.5

Poland 465.6 38.4 3.3 50.6 -1.7 63.5 0.3 53.4

Portugal 194.6 10.3 -0.1 125.7 -3.0 131.8 0.5 43.1

Russia^ 1,363.8 144.0 1.5 17.4 -1.7 – 2.5 28.1

Spain 1,166.3 46.5 0.3 98.3 -3.1 118.0 1.9 34.1

Switzerland 601.3 8.4 1.4 42.8 1.1 212.8 9.8 65.0

UK 2,327.8 66.0 1.1 87.7 -1.9 153.8 -4.1 30.5

Source: EU Commission unless otherwise indicated; *OECD, ^IMF




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Reference tables – Americas

Economy

Nominal GDP

(USD bn)

Population (mn)

Private consumption (% of GDP)

Government spending

(% of GDP)


Exports of goods

(% of GDP)

Imports of goods

(% of GDP)


United States 20,412 326.8 68.7 17.8 17.9 12.0 14.7 42.3

Canada 1,989 36.9 57.4 20.8 24.3 30.9 33.2 81.2

Argentina 610 44.1 63.7 19.3 16.0 13.2 13.9 49.6

Brazil 2,019 207.7 62.5 20.6 15.8 13.9 12.7 380.7

Chile 299 18.4 64.9 14.1 22.0 27.7 28.5 36.8

Colombia 330 49.3 63.3 18.8 26.3 13.5 22.8 126.7

Mexico 1,196 123.5 69.6 12.3 22.6 36.1 38.8 173.6

Peru 220 31.8 62.8 13.6 23.5 22.3 23.6 60.3

Source: IBGE, DANE, INE, BCCh, INEI, BCRP, BCRA, INEGI, Banxico, IMF, World Bank, BEA, St Louis Fed, Census Bureau, STCA, Bloomberg, Standard Chartered Research

Policy


Date of next

election Type of election

Date of next budget

announcement

Policy objectives

Explicit inflation target

Key monetary policy tools

United States Nov-2018 Congressional

midterms Feb-2019

Maximum employment and

price stability

Long-run target of 2% (PCE inflation)

Federal funds target rate, unconventional

policy (QE)

Canada Oct-2019 Parliamentary Q1-2019 Inflation target 2% target, midpoint of

1-3% range Overnight

interest rate

Argentina Oct-2019 General Q3-2019

Monetary stability, full employment,

equitable economic development

Currency FX band 7-day notes rate

Brazil Oct-2020 Mayoral Apr-2019 Inflation target and financial stability

4.50% (+/-1.0%) 4.25% for 2019 4.00% for 2020 3.75% for 2021

SELIC rate

Chile Oct-2020 Mayoral and

Gubernatorial Q3-2019 Inflation target 3% Overnight rate

Colombia Oct-2019 Mayoral and

Gubernatorial Q3-2019 Inflation target 3% Intervention rate

Mexico Jul-2021 National

Congress Q3-2019 Inflation target 3% Overnight rate

Peru Apr-2021 General Q3-2019 Inflation target 2% Reference rate





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Authors David Mann

+65 6596 8649

[email protected]

Global Chief Economist


Philippe Dauba-Pantanacce

+44 20 7885 7277

[email protected]



Chidu Narayanan

+65 6596 7004

[email protected]

Economist, Asia


Mayank Mishra

+65 6596 7466

[email protected]

Macro Strategist


Saurav Anand

+91 22 6115 8845

[email protected]



Nagaraj Kulkarni

+65 6596 6738

[email protected]



Divya Devesh

+65 6596 8608

[email protected]



Wei Li

+86 21 3851 5017

[email protected]

Senior Economist, China

Standard Chartered Bank (China) Limited

Shuang Ding

+852 3983 8549

[email protected]

Chief Economist, Greater China and North Asia


Eddie Cheung

+852 3983 8566

[email protected]

Asia FX Strategist


Kelvin Lau

+852 3983 8565

[email protected]

Senior Economist, Greater China


Kanika Pasricha

+91 22 6115 8820

[email protected]

Economist, India


Aldian Taloputra

+62 21 2555 0596

[email protected]

Senior Economist, Indonesia

Standard Chartered Bank, Indonesia Branch

Tony Phoo

+886 2 6603 2640

[email protected]



Edward Lee

+65 6596 8252

[email protected]



Jonathan Koh

+65 6596 8075

[email protected]

Economist, Asia


Tim Leelahaphan

+66 2724 8878

[email protected]

Economist, Thailand


Arup Ghosh

+65 6596 4620

[email protected]



Chong Hoon Park

+82 2 3702 5011

[email protected]

Head, Korea Economic Research

Standard Chartered Bank Korea Limited

Lawrence Lai

+65 6596 8261

[email protected]

Asia Rates and Flow Strategist


Bilal Khan

+971 4508 3591

[email protected]



Carla Slim

+9714 508 3738

[email protected]

Economist, MENAP





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Victor Lopes

+44 20 7885 2110

[email protected]



Emmanuel Kwapong, CFA

+44 20 7885 5840

[email protected]

Economist, Africa


Sarah Baynton-Glen, CFA

+44 20 7885 2330

[email protected]

Economist, Africa


Razia Khan

+44 20 7885 6914

[email protected]



Sarah Hewin

+44 20 7885 6251

[email protected]



Nick Verdi

+44 20 7885 8929

[email protected]



Christopher Graham

+44 20 7885 5731

[email protected]

Economist, Europe


Geoff Kendrick

+44 20 7885 6175

[email protected]



Sonia Meskin

+1 212 667 0786

[email protected]



John Davies

+44 20 7885 7640

[email protected]

US Rates Strategist


Daniel Sinigaglia

+55 11 3073 7055

[email protected]

Latam Economist

Standard Chartered Bank (Brasil) S/A Banco de Investimento

Ilya Gofshteyn

+1 212 667 0787

[email protected]

FX and Global Macro Strategist


Eric Robertsen

+65 6596 8950

[email protected]

Global Head, FXRC Research and Head, Global Macro Strategy


Lemon Zhang

+65 6596 9498

[email protected]

Macro & FX Strategist


Madhur Jha

+91 124 617 6084

[email protected]

Head, Thematic Research





Disclosures appendix

Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Chong Hoon Park is/are employed as an Economist(s) by Standard Chartered Bank Korea and authorised to provide views on Korean macroeconomic topics only.

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SCB does not represent or warrant that this information is accurate or complete. While reasonable care has been taken in preparing this document and data obtained from sources believed to be reliable, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. This document does not purport to contain all the information an investor may require and the contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may not be realised. 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