Asia Quarterly - Mizuho Bank...Asia Quarterly ― Q1 2019: Cans & Cushions ― 6th March 2019 Mizuho Bank, Ltd. Asia and Oceania Treasury Department Vishnu Varathan Head, Economics

Asia Quarterly ― Q1 2019: Cans & Cushions ―

6th March 2019

Mizuho Bank, Ltd. Asia and Oceania Treasury Department

Vishnu Varathan

Head, Economics & Strategy

[email protected]

Chang Wei Liang

FX Strategist

[email protected]

Zhu Huani

Market Economist

[email protected]

Global financial markets pulled back from the brink of a meltdown on Christmas 2018;

uncannily timed for a “Santa rally”. But ostensible cheer has little to do with bona fide

optimism and far more a reflection of tail risks averted or mitigated …

… by kicking the can down the road and/or .... (policy) cushion against headline risks.

Specifically, US-China trade “truce”, with deferred tariff hikes and the tease of a “deal” that

will rollback tariff was at best a plush cushion for heightened global trade risks; but perhaps

in reality merely can-kicking on retaliatory tariffs while negotiations are on-going.

What’s more, the Fed turning “patient” clearly kicked the rate hike can down the road

(though markets have pushed the envelope with rate cut bets) while the prospect of QT being

“canned” at some point in 2019 is welcome cushion for hardening USD funding.

Meanwhile hopes of the “Brexit” (Article 50) can being kicked down the road, and China’s

fiscal and monetary policy cushion have also added to relief and backstop.

But to be sure, while financial markets have cheered, the reality is that impending economic

downturn will not be side-stepped completely (even if mitigated); though space for Asian

central banks to provide policy cushion is enhanced by the Fed’s can & cushion.

Asia Quarterly – Q1 2019

- 1 -

Executive Summary

US: Nascent soft spots heading into H2 fiscal fizzle, the Fed has turned “patient”;

but not dovish outright as jobs remain solid. Policy cushion from canning QT

later in 2019 may be most significant; but rate cut expectations look overdone.

EZ: If growth downturn is compounded by disruptive politics and “Brexit”, the

ECB may kick the (rate hike) can down the road. But so long as US trade

antagonism (auto tariffs!) is averted ECB may resume normalization in 2020.

Japan: Growing external headwinds and the threat of impending VAT hike (Oct

2019) snuffing out nascent consumption pick-up underscore the BoJ’s persistent

easing stance. Sensitivity to excessive JPY strength is also accentuated.

China: Slightly softer growth outlook (6.0-6.5%) masks emphatic fiscal efforts

(tax cuts and spending boost) alongside targeted monetary easing to ensure a soft-

landing that is particularly supportive of high-growth/tech industries and jobs.

De-escalation of the US-China trade spat should not be mistaken for a speedy and

comprehensive resolution. And lingering uncertainties will drag on Asia.

Elections uncertainties alongside fading Oil price relief will hamper India’s

growth; as structural impediments compound cyclical demand downturn amid

banking sector woes. RBI’s easing is on shaky ground amid fiscal slippage.

Indonesia: Measured easing by BI is subject to IDR stability. China’s commodity

demand and resilience of consumption may backstop growth slippage.

South Korea’s exports drag is set to intensify, but BoK will not rush a rate cut as

modest fiscal offset buys time to watch wider trade developments. Vietnam too is

subject harsher export headwinds; but stable VND policy will persist.

Singapore: Sharper growth slowdown as external demand lapse lacks sufficient

domestic offset; but MAS to look past the cycle if adverse trade outcomes are

averted; Malaysia’s consumption boost and firmer oil mitigate downside.

Exports dent remains the main worry though tail risks in politics also weigh on

Thailand’s outlook; but infrastructure plans such as EEC underpin. Philippines

may struggle with price stability and twin deficit risks amid external challenges.

Australia: Risk of consumption debt from falling home prices and highly

leveraged household in a climate of weak wage gains occupy the RBA’s mind; any

policy move this year is likely to be a cut though 2020 hike comes into play.

Front-loaded AXJ (and EM Asia assets) rallies leave limited headroom given UST

yield downside US-China trade optimism are already stretched; at least until peak

USD later in 2019.


- 2 -

AT A GLANCE

Yearly Economic Forecasts

Quarterly Outlook – Growth and Consumer Inflation

Growth Forecasts

Consumer Inflation forecasts

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

United States 2.2 2.1 -2.3 2.9 2.5 -2.6 2.5 2.2 -2.6 2.5 2.2 -2.6

Eurozone 2.4 1.5 3.2 1.9 1.8 3.2 2.0 1.7 3.0 2.0 1.7 3.0

Japan 1.9 0.5 4.0 0.7 1.0 3.5 1.1 1.1 3.8 1.1 1.1 3.8

ASIA (ex-Japan) 6.2 2.2 1.5 6.3 2.6 0.5 5.9 2.3 0.4 6.0 2.8 0.2

ASEAN-6 5.3 2.9 2.8 5.1 2.7 1.3 4.9 2.4 1.3 5.0 2.9 1.3

China 6.8 1.6 1.3 6.6 2.1 0.4 6.4 2.1 0.5 6.3 2.4 0.2

India -0.6 3.3 -1.5 7.3 3.9 -2.3 6.7 2.9 -2.8 7.2 4.0 -2.8

Korea 3.1 1.9 4.9 2.7 1.6 4.7 2.6 1.2 3.7 2.5 1.7 3.5

Singapore 3.9 0.6 16.0 3.2 0.4 17.7 2.6 1.3 19.0 2.9 2.1 19.0

Malaysia 5.9 3.8 2.9 4.7 1.0 2.4 4.7 1.2 2.1 4.7 1.4 2.0

Indonesia 5.1 3.8 -1.6 5.2 3.2 -3.0 5.1 3.1 -2.4 5.1 3.4 -2.2

Thailand 3.9 0.7 11.0 4.1 1.1 7.4 3.6 0.8 5.7 3.8 1.5 5.0

Philippines 6.7 3.2 -0.6 6.2 5.2 -2.7 6.4 3.4 -2.7 6.5 3.6 -2.2

Vietnam 6.8 3.5 2.5 7.1 3.8 2.2 6.4 3.1 1.8 6.9 4.2 2.6

Australia 2.3 1.9 -2.6 2.8 1.9 -2.2 2.5 1.9 -2.3 2.8 2.3 -2.6

Note: Asia (ex Japan) includes China, India, South Korea, Singapore, Hong Kong, Taiwan, Malaysia, Indonesia, Thailand, Philippines, Vietnam

The forecasts in this table do not account for severe trade protectionism outcomes.

2020Country

2017 2018 2019

GDP Growth Forecasts

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China 7.3 6.9 6.8 6.7 6.5 6.4 6.3 6.4 6.4 6.4 6.6 6.4

India 6.9 6.6 7.7 8.0 7.0 6.6 6.5 6.4 6.9 7.0 7.3 6.7

Korea 2.8 3.1 2.8 2.8 2.0 3.1 2.8 2.6 2.9 1.9 2.7 2.6

Singapore 3.7 3.9 4.7 4.2 2.4 1.9 2.1 2.4 2.8 3.1 3.2 2.6

Malaysia 5.1 5.9 5.4 4.5 4.4 4.7 4.7 4.9 4.7 4.2 4.7 4.6

Indonesia 5.3 5.1 5.1 5.3 5.2 5.2 5.2 5.1 5.1 5.1 5.2 5.1

Thailand 3.5 3.9 4.9 4.6 3.3 3.7 3.2 3.4 4.0 3.9 4.1 3.6

Philippines 6.6 6.7 6.6 6.2 6.0 6.1 6.2 6.4 6.5 6.5 6.2 6.4

Vietnam 5.9 6.8 7.4 6.9 6.8 7.3 6.7 6.2 6.5 6.3 7.1 6.4

Australia 2.8 2.2 3.2 3.1 2.7 2.3 2.3 2.4 2.6 2.8 2.8 2.5

2018 2019Country

2012-2016

avg 2017

2018

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

2019

Inflation Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China 2.1 1.6 2.2 1.8 2.3 2.2 1.8 2.3 2.2 2.2 2.1 2.1

India 7.2 3.3 4.6 4.8 3.9 2.6 2.4 2.5 2.9 3.6 3.9 2.9

Korea 1.3 1.9 1.3 1.5 1.6 1.8 0.8 1.1 1.3 1.2 1.6 1.1

Singapore 1.4 0.6 0.2 0.3 0.7 0.5 0.7 1.1 1.4 1.9 0.4 1.3

Malaysia 2.2 3.8 1.8 1.3 0.5 0.3 0.3 0.8 1.6 1.9 1.0 1.2

Indonesia 5.3 3.8 3.3 3.3 3.1 3.2 2.8 3.0 3.3 3.2 3.2 3.1

Thailand 1.3 0.7 0.6 1.3 1.5 0.8 0.7 0.6 0.5 1.3 1.1 0.8

Philippines 2.7 3.2 3.9 4.8 6.3 5.9 3.8 3.5 2.8 3.3 5.2 3.4

Vietnam 4.8 3.5 2.8 3.8 4.1 3.4 2.8 2.9 2.9 3.7 3.8 3.1

Australia 1.9 1.9 1.9 2.1 1.9 1.8 1.8 1.8 2.0 2.1 1.9 1.9

20192018 2019Country

2012-

2016 avg2017

2018


- 3 -

Central Bank Policy Outlook

FX Outlook .

Market Watch

Sources: Refinitiv, Mizuho Bank

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China PBoC 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35% 4.35%

India RBI 6.00% 6.25% 6.50% 6.50% 6.25% 6.00% 6.00% 6.00%

Korea BoK 1.50% 1.50% 1.50% 1.75% 1.75% 1.75% 1.75% 2.00%

Singapore MAS*

Malaysia BNM 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%

Indonesia BI^ 4.25% 5.25% 5.75% 6.00% 6.00% 6.00% 6.00% 5.75%

Thailand BoT 1.50% 1.50% 1.50% 1.75% 1.75% 1.75% 2.00% 2.00%

Philippines BSP** 3.00% 3.50% 4.50% 4.75% 4.75% 4.75% 4.75% 4.50%

Vietnam SBV 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%

Australia RBA 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%

* The MAS conducts monetary policy via FX. Specifically it adopts a trade-weighted SGD appreciation at "modest

"Slightly" steepen

S$NEER slope (~1.5%

p.a)

2019

Reinstate slope; albeit

calibrated "slight"

incline. (~0.5% p.a)

"Slightly" steepen

S$NEER slope (~1% p.a) Status Quo

Country2018Central

Bank

6 Mar 19 Mar 19 Jun 19 Sep 19 Dec 19 Mar 20

USD/JPY 112 109 108 107 105 101

EUR/USD 1.13 1.14 1.15 1.17 1.17 1.18

USD/CNY 6.71 6.72 6.78 6.70 6.68 6.65

USD/INR 70.5 71.5 70.6 69.5 68.5 68.0

USD/KRW 1128 1120 1140 1100 1090 1080

USD/SGD 1.36 1.35 1.35 1.36 1.34 1.33

USD/IDR 14135 14200 14100 14000 13800 13800

USD/MYR 4.09 4.12 4.15 3.90 3.85 3.85

USD/PHP 52.3 52.0 53.5 53.5 53.2 53.0

USD/THB 31.8 31.5 32.0 31.3 30.9 30.5

USD/VND 23200 23250 23350 23250 23100 23000

AUD/USD 0.70 0.72 0.74 0.78 0.80 0.82

-5

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5

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25Equities YTD Returns (%)

YTD (% in USD) YTD (% in lcl ccy)*As of 6 Mar 19

1.375

1.625

1.875

2.125

2.375

2.625

2.875

3.125

Mar 19 May 19 Jun 19 Jul 19 Sep 19 Oct 19 Dec 19

Market vs FOMC Expectations: Fed Funds Rate (%)

Market-implied Fed Funds Rate FOMC Median FFR Projection

*As of 6 Mar 19Sources: Refinitiv, Mizuho Asia & Oceania Treasury

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-1

0

1

2

3

4FX YTD returns (%)

YTD spot w/ carry (%) YTD spot (%)*As of 6 Mar 19

-75

-50

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25

10Y Yield YTD Changes (bps)

Change bps (10y)*As of 6 Mar 19


- 4 -

Table of Contents 1. Global Overview --------------------------------------------

5

Of Cushions & Cans

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

7

Dealing with a Slowdown

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

8

Emphatic Fiscal Backstop

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

10

Cyclical & Structural

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

Fiscal stimulus to support

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

14

Downturn, Not Hard-Landing

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

16

Moderating oil prices limit fiscal space

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

18

Solid Domestic Demand to Sustain

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

20

Stable Consumption to Offset Slowing Exports

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

22

Moderating Inflation to Boost Consumption

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

24

Downside Risks

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

Home to Roost


- 5 -

Global Overview: Of Cushions & Cans

Growth: Fading US fiscal sugar-high converging with global demand pullback (reflecting tech-cycle downturn

and lingering trade uncertainties) is set to deepen the

economic downturn in H2 2019. US’ slide from ~3% to

2.0-2.5% growth alongside German-led EZ pullback (to

mid-1%), Japan’s sub-1% waver (amid exports drag and

Oct VAT hike), and China’s slip to 6.3-6.4% conspire to

reinforce a broad-based global slowdown. US-China-

EZ-Japan (~0.2%-pts) drag on global growth is likely to

be amplified (to ~0.4% pts) via trade, investment and

financial channels. Ultimately, averting self-inflicted

damage from trade protectionism is the best way to-

cushion the downturn, and bottom by mid-2020.

Risks: Clearly, global trade is a significant risk lever;

with progress (or lack of) on US-China trade talks, and

attendant tariff outcomes, poised to ease (compound)

global growth drag. But US-driven trade risks transcend

US-China spat. Overarching “America First” brand of

trade antagonism directed more broadly towards

Europe (auto tariffs etc) and even Japan reflect wider

risks ruled-based global trade. Perversely, kicking the can

down the road on global trade confrontation (e.g. US-

China trade talks), not unlike delaying “Brexit”, helps

avert imminent economic tragedy (albeit admittedly at

the cost of future stability and deferred uncertainty).

Policy: A “patient” Fed has dramatically knocked back

yields (and tightening expectations). But market bets on

no hikes (~75%) or one cut (~20%) is overdone; and at

odds with “Taylor conditions” (jobs and inflation), which

at best giving cause to pause, not cut. Instead, the case

for one more Fed hike in late-2019 remains on the table.

Whereas, an end to QT* within the year may be the real

policy cushion. In any case, policy cushion from a less

hawkish Fed aligns with the ECB’s can-kicking

(deferring implied hike in Q4) amid economic headwinds;

though far from reviving APP. And the BoJ is likely to

keep its foot on the pedal, given headwinds; particularly

sensitivity to avoid inadvertent JPY strength.

Asset Markets: Admittedly, at the margin, prospects of

QT being ended this year, alongside softer UST yields

will alleviate re-pricing pressures asset markets.

Nonetheless, tighter USD funding – as QT plays out for

most of 2019 against a backdrop of tighter banking capital

requirements – juxtaposed against deepening global

growth downturn (with spots of recession risks) are

likely to challenge uninterrupted bullish resumption –

notwithstanding positive turn in risk assets since

Christmas 2018. In all likelihood, risk appetite may be

suppressed, if not outright curtailed; as a consequence,

squaring with subdued global yields and equity valuations.

(1)

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4

Mar-11 Dec-11 Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Dec-17 Sep-18

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

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

EU US Japan G3

3.7

2.3

2.9

1.8

1.5

0.9

1.4

4.6

1.7

6.5

6.6

7.3

5.2

3.8

1.1

3.5

2.0 2

.5

1.6

1.3

1.1 1.5

4.5

3.7

6.3

6.2

7.5

5.1

0.7 2

.0

3.6

1.7 1.8

1.7

1.6

0.5 1

.6

4.9

3.7

6.4

6.2

7.7

5.2

2.4 2.5

0

1

2

3

4

5

6

7

8

9

IMF WEO Jan Update (Oct WEO) knocked down Global Growth forecasts led by downgrades to EZ forecasts; notably, US & China forecasts are unchanged; outlook stresses on downside risks

given trade uncertainties & tighter financial conditions.

2018 (LHS, % YoY) 2019 (LHS, % YoY) 2020 (LHS % YoY)Source: IMF WEO Jan 2019

(25)

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0

5

10

15

20

45

46

47

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50

51

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53

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

China : Exports Slowdown Mainly Reflect electronics-led global demand downturbn; though downbeat New Exports Orders (Mfg PMI) may increasingly reflect US-China trade risks. (3mma)

PMI: Imports Exports Growth (3M Avg, % y/y; RHS)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

FFTR* 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

UST yields while off the highs on the Fed's more "neutral" shift, will probably bebackstopped given 9 hikes since end-2015.

(Yield Curve; %)

End-2013

Start-May 2013 (Pre-"Taper")

Nov-18

Latest (5 Mar-2019)

Sources: CEIC, Mizuho Bank* FFTR: Fed Fund Target Rate

After a hawkish hiking cycle (one hike per quarter) in 2018, pullback by Fed saw yields falling back

2013: "Taper" Bear Steepening

2015: 1 HikeDec

2016: 1 HikeDec

2017: 3 HikesMar ,Jun, Dec

2018: 4 HikesMar, Jun, Sep, Dec

31

22

15

13

6

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12

9

3

6 5

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0 -19

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7

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-11 -11 -11-10

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-4-6 -6

18

-1

29.7

7.6

10.4

6.65.3

9.6

4.8

1.4

5.8 6.24.9 5.5

4.6

14.2

5.2 4.8

7.8

11.1

6.1

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40 2018 Asset Market Moves Suggest that Optimism Peaked & Bears Overtook Up till Christmas; But Emphatic Post-X'mas Rebound Begs the Question of "Bear Trap". (% Chg)

Post-X'mas Chg (%; up to 5-Mar) Chg from Peak to X'mas 2018 (%) Chg from 2018 Peak (%; up till 19-Feb) Peak Gain in 2018 (%)

*QT (Quantitative Tightening) is the Fed’s Balance Sheet reduction program (via bonds maturities not re-invested). Effectively, current pace of $50bn/mth QT roughly equates to removing $50bn of USD liquidity from the markets, thereby tightening monetary and financial conditions.


- 6 -

EUR/USD Outlook: The EUR has been hobbled by

expanded political uncertainty. Besides the Brexit

impasse and US auto tariffs threat, France also saw

intensified opposition to Macron’s reforms with

the breakout of the “Yellow Vest” mass protests.

Meanwhile, the Spanish government failed to pass

its budget, resulting in a call for snap elections in

April. Italy’s government soured relations with

the EU again after a public budget rancor,

criticizing its immigration policy and expressing

support for the “Yellow Vests”. It is little wonder

that activity weakened in Q4, as Italy entered into a

technical recession while Germany narrowly skirted

one. Given increased downside risks, ECB is

reportedly considering a new TLTRO in 2020,

which could cap EUR/USD upside for now even

with a dovish Fed.

Sources: Refinitiv, BIS, Mizuho Bank

USD/JPY Outlook: The dovish shift by the Fed in

January, as Powell underscored patience on rate

hikes, has weakened the yield attractiveness of

USD assets to Japanese investors. Alongside

increased risk aversion on softer global growth,

USD/JPY is seeing increased downside volatility,

with a flash crash towards 105 unnerving JPY

shorts at the start of 2019. With BoJ unlikely to

adjust policy settings amidst renewed growth

concerns, portfolio outflows should remain the

marginal driver for USD/JPY. Continued uncertainty

due to US-China trade risks and diminished external

demand suggests that risk aversion could resume,

which may prompt a further softening of

USD/JPY towards 108.

Sources: Refinitiv, BIS, Mizuho Bank

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

Fed Rate^ (%) 2.25 - 2.50 2.50-2.75 2.50-2.75 2.50-2.75 2.75-3.00 2.75-3.00

ECB Rate^ (%) -0.40 -0.40 -0.40 -0.40 -0.40 -0.30

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

EUR/USD*

1.1471 1.14 1.15 1.17 1.17 1.18

1.1218-1.1594

1.11 - 1.16 1.10 - 1.17 1.12 - 1.19 1.13 - 1.20 1.15 - 1.20

USD/JPY*

109.58 109 108 107 105 101

109.58-114.54

108 - 112 106 - 111 104 - 110 100 - 108 98 - 108

Brent Crude (US$/bbl)

50.57 67.8 73.0 71.5 68.8 72.5

50.57-86.47 52.5-72.5 61.5-82.0 62.5-78.5 61.5-75.5 64.5-82.0

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

95 97 99 01 03 05 07 09 11 13 15 17 19

EUR/USD: Long-term Model Value

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

Sources: BIS, Reuters, Mizuho Asia & Oceania Treasury

70

80

90

100

110

120

130

140

150

160

95 97 99 01 03 05 07 09 11 13 15 17 19

USD/JPY: Long-term Model Value

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

Sources: BIS, Reuters, Mizuho Asia & Oceania Treasury

Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative. ^ Fed rates refer to the Fed Funds Target rate; ECB rates refer to the Deposit facility rate.


- 7 -

Asia Outlook: Dealing with a Slowdown

Output: The idea that a US-China trade “deal” will

dramatically reverse demand/exports downturn is

flawed. For one, the tech/semiconductor down-cycle

has some way to run; set to drag a large part of Asia’s

exports. Second, payback for front-loaded demand in

2018 (in anticipation of tariffs), with pan-Asia supply-

chain impact will also dampen. Crucially, as US-China

negotiations drag, uncertainty will tend to suppress

demand; as inventory trimming ripple via tight supply-

chains. In concert this may knock 0.2-0.4% off ASEAN

and North Asia’s growth. And to be sure,

fiscal/monetary offset provide only limited relief, not

a panacea. Upshot: Asia needs to deal with, and

cannot deal out of, demand downturn into 2020.

Inflation: The big picture view of inflation in Asia is

consistent with price pressures subdued for longer,

but not slumping into sustained dis-inflation. To

some extent, sharp pullback in (Brent) Oil price from

$86 peaks in early-Oct 2019, sets the stage for energy

dis-inflation impact to be feed through into Q3 2019.

But this energy dis-inflation will be shallow and short-

lived. In contrast, food inflation is poised to

gradually, but persistently, pick-up. And so,

inflation around 2% is understated and in reality, is

poised to settle higher ~3% by end-2020.

Policy: Scope for a dovish turn amongst Asian central

banks has been a function of both subdued inflation

and a distinctly less hawkish stance by the Fed. And

the latter is revealed in the sudden shift in stance in

2019. The RBI has led the dovish swing with a 25bp

rate cut in Feb; and could follow up with another cut in

Apr given ultra-low inflation. And it may just be a

matter of time before policy space is exploited (albeit

cautiously) by the likes of BSP and perhaps BI – both

hiked by 175bp in 2018. But given bottoming

inflation and relatively low (real) rates point, rate

cut(s) in 2019 is a matter of calibration not the start

of an easing cycle.

FX: The strong sweep of “un-carry” trades, which

hammered Asia FX (higher-beta currencies hit harder)

as US rate hikes overtook in 2018 has abated along

with a distinctly less hawkish Fed. What’s more, dial

back in US-China trade war pulling CNY back from

the brink diffuses pressures on AXJ in 2019.

Nonetheless, it would be remiss to ignore underlying

risks to Asia FX given; i) USD funding will tighten

until QT ends; ii) external headwinds persist, and; iii) a

host of political risks* lie ahead. And so, further AXJ

pick-up from post-Christmas relief rallies may be

limited and prone to “risk off” slippages.

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11 12 13 14 15 16 17 18 19

China's PMI may be the proverbial canary in the coalmine for Asia's exports increasingly being exposed to US-China trade impact on top of fading inventory re-stocking as electronics-led

cyclical downturn bites. (Exports; 3m % y/y)

China Korea ASEAN-5** China PMI-Mfg (3mma; RHS)

* Newly Industrialized Economies: Korea, Hong Kong, Taiwan & Singapore.** ASEAN-5: Indonesia, Malaysia, Philippines, Thailand & Vietnam.

(20)

(10)

0

10

20

(30)

(20)

(10)

0

10

20

30 ASEAN-6+India+Korea: Global Demand Downturn May Be Exacerbated by "Friction" from US-China Trade Tensions; Drag on Asia's Growth a Question of Degree. (% YoY 2Qma)

Exports (LHS) Nominal GDP (RHS)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

IND IDN MYS PHL SGP THA VNM

Inflation remains within central bank's target for most of the countries (%)

Upper bound

Lower bound

Latest 3m avg

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

Source: CEIC, Mizuho Bank

(4)

(3)

(2)

(1)

0

1

2

3

4

5

6

(4)

(3)

(2)

(1)

0

1

2

3

4

5

6

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

Asia-US Real* Interest Rate Differentials (%; 12mma) are broadly softer. BSP may wait for a chance to ease. India's headline CPI overstates scope to ease.

India Indonesia

Malaysia Thailand

Australia Philippines

Korea

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

* Real interest rates are calculated by deflating nominal interest rates (in this case, policy rate) by consumer inflation. The differential is then obtained by subtracting real US rates from

LooseningConditons

TighteningConditions

0

2

4

6

8

10

0

2

4

6

8

10

12 13 14 15 16 17 18 19

Asia CBs: Is RBI a Trail-Blazer (Dovish Inflection), a Unique Case of Calibrated Cut or aPolicy Mistake? BSP Flags Reserve Cuts .. BI Bides Time. (Policy Rates, %)

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

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

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

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

2

4

6

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19

Trade War Risk Premium Diminishes with the "Truce" Since Late-2018, helping Lift CNY & other AXJ; accentuated by softer UST yields from a "patient" Fed.

(% Cumulative Chg Since End-2017)

CNY INR

PHP IDR

SGD KRW

AUD MYR

TWD EUR

THB 10Y UST Yields (RHS, Inverted Scale)

Rising Yields

*Elections in Thailand, Indonesia, India and Philippines alongside India-Pakistan tension .


- 8 -

China: Emphatic Fiscal Backstop

Growth: The 13th NPC growth target of 6.0-6.5%, while

technically a downgrade (from “around 6.5%” in 2018),

masks emphatic backstop for the economy; led by

“proactive”, “stronger” and “more effective” fiscal

policy – comprising tax cuts and spending boost. Along

with “prudent” monetary policy tilted to effective easing

in real rates (including further targeted RRR cuts), Beijing is

poised to buffer against trade headwinds. Ultimately, the

objective is to pursue “higher quality” growth that is

consistent with reducing financial risks and undertaking

longer-term economic reforms. To be sure, growth is

expected to slow to 6.3-6.4%; but this is likely to be a

managed soft-landing.

Industry: Painful industrial restructuring, to tackle over-

capacity/obsolescence, is not new – dragging IP growth

from ~9% (2013-14) to ~6% (2017-18). But Beijing is

stepping up to avert collateral damage from US-China

trade fallout; in particular, blunting adverse jobs

impact and providing funding access for affected

manufacturers. The fiscal backstop and monetary

cushion are welcome, but risk being perceived as

“unfair” industrial practices – depending on execution –

and may inadvertently accentuate US-China flash points.

In any case, further re-constitution to new growth

industries (e.g AI, NEV, Biomed) will be emphasized. Growth dynamics: Targeting “steady” trade with

“improving quality” despite US-China trade friction

speaks of doubling down on high-growth, high-tech

industries; not regressing to mercantilism. And interim

support is from fiscal boost; led by CNY 2trln of tax

cuts (2% of GDP), including 3%-pt cut to VAT bracket

(hitting manufacturing) complemented by policies to

boost auto/appliance consumption. Growth is

backstopped by emphatic fiscal efforts to channel

money back to households and firms (potentially with

multiplier effects). And targeted RRR cuts and lower real

rates from monetary calibration could supplement

cushion for a soft landing.

Inflation: Price pressures are by and large subdued;

as food inflation recedes at the margin. And this is

likely to dampen inflation to the softer side of 2-3%;

possibly a tad below (sub-2%). Food and fuel are likely

to more prominent potential swing factors for headline

inflation; with some tariff impact also expected to feed-

through. Nonetheless, the underlying trend remains

consistent with gradual pick-up in core inflation back

above 2%. Prognosis of reasonably anchored price

pressures is corroborated by PMI price sub-index;

suggesting tariff cost-push on producer inflation is

unlikely to fan demand-pull inflation. And a stable

CNY policy reinforces the anchor.

11.0

9.99.2

7.8 7.78.5 8.3

9.1

10.0 10.1

11.4

12.7 14.2

9.7 9.4

10.6

9.5

7.9 7.87.3

6.9 6.7 6.8 6.6

0

2

4

6

8

10

12

14

16

0

2

4

6

8

10

12

14

16

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

China GDP: Arguably lowering growth targets from 1999 to 2004 (post-AFC/"DotCom Bust"/SARS) was a cyclical response whereas reflect structural factors since 2012.

Actual GDP GDP Target

35

40

45

50

55

60

65

70

(2)

0

2

4

6

8

10

12

14

16

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

China's growth resilience is also increasingly less dependent on industry, based on "new economy" of services & tertiary industry!

(%-points; YoY; LHS)

Services

Industry

Construction

Agriculture

% of Growth Contribution from Services (RHS)

Sources: CEIC, Mizuho Bank

(30)

(20)

(10)

0

10

20

30

40

50

(30)

(20)

(10)

0

10

20

30

40

50

12 13 14 15 16 17 18 19

China's Credit Growth, which was disproportionately driven by Shadow Credit since 2016, is now dragged by clamp down on "shadowy" finance, though targeted bank

loans and bonds offset. (Contribution to YoY Credit Growth, 6MAvg, %-pts)

Corporate bonds

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

Bank Credit

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

Sources: CEIC, Mizuho Bank .

(1)

0

1

2

3

4

5

6

7

(1)

0

1

2

3

4

5

6

7

11 12 13 14 15 16 17 18 19

As food-driven inflation from earlier fades, subdued underlying price pressures; provide ample policy flexibility. Gradual core CPI pick-up to 2-3%.

Education & Recreation Healthcare

Tpt & Comm Others

Residence Food

CPI (% y/y) Core CPI

Sources: CEIC, Mizuho Bank.

(12)

(8)

(4)

0

4

8

12

25

30

35

40

45

50

55

60

65

70

75

80

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Despite sharp pick-up in Feb PMI Price Index (smoothed out by 3mma data), imaginably accentuated by tariff impact, price trends are consistent with fairly well-anchored

demand-pull presssures.

PMI Price Index

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

*NEV: New Energy Vehicle (which includes electric vehicles).


- 9 -

Policy: While headline stance of “prudent” monetary

policy is unchanged, liquidity management details

suggest far more accommodative setting in effect. For

one, explicit allusion to further targeted RRR cuts – in

particular aimed at boosting credit access for smaller and

medium-sized private sector firms – suggest liquidity

conditions that are conducive to buoying growth. What’s

more, the NPC also revealed a desire for lower real

interest rates via market-oriented mechanisms;

consistent with surgical open market operations. Apart

from targeted policy accommodation, improving policy

transmission and complementarity (with fiscal efforts

and financial risk management) remains critical.

External Position: Continued and chronic C/A

surplus erosion (to 0.4% of GDP in 2018 from 2.2%

2012-16) is an exaggerated version of more measured

pullback in good trade. What’s interesting is that this is

not driven by US-China trade tensions (China’s surplus

with US increased in 2018!). And so, with China set to

buy more US goods, net trade is set to slip further

accentuating the structural decline in C/A surplus –

led by increased net service (e.g tourism) consumption.

Two implications: First, BOP swings (between surplus

or deficit) will increasingly depend on capital flows

given vastly diminished C/A cushion. Second inherent

ability to accrue FX reserves is compromised.

FX: In turn, this reinforces the view that unlike during

the pre-2015 era of persistent and large C/A

surpluses (and attendant FX reserve build-up) the

argument for sustained CNY appreciation trend is

undermined. And so, the NPC’s reiteration of CNY

policy of “basically stable” at reasonable equilibrium

alongside increased flexibility, appears to suggest

more limited appreciation bias – especially given that

the spurt of CNY gains on improving US-China trade

negotiations have materially lifted CNY NEER back

to H2 2017 levels (when CNY was deemed to be on a

stronger footing). Accordingly, sustained sub-6.60

CNY gains (vs. USD) will require broad-based USD

pullback. Two-way volatility (flexibility) meanwhile.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

GDP (% y/y) 6.4% 6.3% 6.4% 6.4% 6.4% 6.5%

CPI (% y/y) 2.2% 1.8% 2.3% 2.2% 2.2% 2.5%

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

USD/CNY* 6.88 6.72 6.78 6.70 6.68 6.65

6.83 - 6.98 6.58 - 6.88 6.64 – 6.92 6.56 - 6.84 6.54 - 6.82 6.51 - 6.79

0

5

10

15

20

25

30

35

4

5

6

7

8

9

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

Tighter Weighted Loan premium (vs. benchmark rates) amid nuanced credit selection/pricing; helps with risk-adjusted credit growth.

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

1Y Lending (LHS, %)

Weighted Premium Over Lending Rate (%, RHS)

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

0

5

10

15

20

25

(4)

(2)

0

2

4

6

8

10

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

Steadying real rates & modest upside bias for money market rates amid external risks favour loosening liquidity & (nuanced) RRR cuts.

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

7-Day Repo (LHS) RRR (RHS) RRR - Small/Med banks (RHS)Sources: CEIC, Mizuho Bank

(80)

(40)

0

40

80

120

160

(80)

(40)

0

40

80

120

160

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

China: Merchandise Goods Balance Suggest Trade War is Not the Main Cource of Pressure on the C/A. Instead, deepening Service deficit has eroded C/A

surplus materially! Restoring "stable" capital inflows a priority. (US$bn, 4Qma)

Financial A/C Goods

Services C/A

(8)

(6)

(4)

(2)

0

2

4

6

8

10

(8)

(6)

(4)

(2)

0

2

4

6

8

10

09 10 11 12 13 14 15 16 17 18 19

"Hot" Outflows (% of Prev Qtr FX Reserves) are reined in; but structurally, C/A contribution to FX reserve building is severely compromised; accentuating volatility to capital flows!

Valuation Effect Deviation (Implied Hot flows)

C/A Investments

Chg in FX Reserves

China's C/A, struggles to be accretive for FX Reserves. This accentuates vulnerabilities to capital flow volatility; and that could potentially fan "hot" outflows.

80

85

90

95

100

105

110

115

120

85

90

95

100

105

110

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19

CNY NEER has picked up 2.8% from X'mas Eve lows on US-China trade expectations; further and pronounced surge in CNY NEER though is at odds with "Basically Stable" CNY Policy

(Index end-2014=100)

CNY NEER

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

60 per. Mov. Avg. (CNY NEER)

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

Stabilization helped by capital curbs alongside couner-

cylcical FX fixing earlier. And so, the pertinent question

now is whether CNY NEER stability will be undermined by

the unabated slide.

5.90

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

6.80

6.90

7.00

7.10

5.90

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

6.80

6.90

7.00

7.10


PBoC reinstated 20% reserve requirements (3-Aug) for FX forwards position & counter-cyclical factor for CNY fix to dampen excessive speculative selling in CNY.

USD/CNY Lower Band Upper Band USD CNY Fix USD/CNH

Sources: Reuters, Mizuho Bank

Stronger CNY

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

May 2017: "Counter-

cyclical" factor

USD/CNY fixing first

introduced.

Jan 2018: Revocation

of "counter-cyclical" factor.

24 Aug 2018: Re-introduce "counter-cyclical" factor.

Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q4 2018 ranges are from Bloomberg and only indicative.


- 10 -

India: Cyclical & Structural Growth: Marked slowdown in growth to ~ mid-6%

from above 8% in Q1 2018 reflects a conspiracy of

cyclical down-draft and structural impediments.

Despite being less externally-oriented, India is not

immune to the synchronised demand slowdown (outside of the US). What’s more, oil prices off the

lows diminish growth backstop – eroding margins and

spending power. And while fiscal stimulus and the farm

rescue provide welcome offset, banks and NBFCs

working through NPAs impose a balance sheet

constraint; which the RBI’s rate cut(s) can do little

about. Growth recovery into 2020 is likely to be

restrained below 8-9% potential.

Industry: While excess capacity has not worsened

significantly, growth has capitulated; corresponding to

the overall growth downturn. And US action to revoke

India’s preferential trade status, while not a huge

trade negative, sours the mood. But in any case,

slowing exports demand – amid wider global demand

downturn –meanwhile could deepen industrial pain,

Admittedly, broad-based industrial pullback is at odds

with the pick-up in credit growth. But fact is low base

effects and post-demonetization distortions

inevitably overstate credit boost (inherently

constrained by banks’ NPLs).

Growth dynamics: With decline in banks’ (especially

public sector banks) asset quality – compounded by

NBFC balance sheet blowout – hobbling the ability to

catalyse credit-driven growth, cyclical global

headwinds cannot be buffered, or worse, may be

compounded. The pre-elections Budget packed with tax

cuts and a massive farm sector package will

admittedly provide some offset to growth; but at a

high current fiscal cost that is not without the risks of

“crowding out”. RBI’s NPL restructuring measures

buy time and avert an imminent squeeze while rate

cuts provide marginal relief. But pushing the policy

envelope is not without the risks of compromising on

macro stability.

Inflation: A confluence of factors – from sharp drop in

vegetable prices alongside softer oil prices – has

conspired to push inflation to 2% lows (lowest since

mid-2017). But the wider point is that inflation is set

to bottom sooner rather than later. Fact is, short

vegetable cycle means that food deflation is set to fade

in coming quarters, and possibly abruptly if El Nino

effects hit. What’s more, oil dis-inflation will also fade

(past Q3 base effects). Crucially, “sticky” core

inflation, reveal firmer underlying pressures, which

are likely to be accentuated by elections spending, and

wider fiscal deficit; 4+/-2% normalization unfettered.

0

2

4

6

8

10

12

14

(35)

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Capacity Utilization: Capitulation in GDP (since mid-2018) unravels post-monetization rebound; reflects both cyclical and structura; impediments to

growth; to fall short of 8-10% growth potential in 2019/20 (RBI Survey)

Capacity Constraint (Current) Capacity Constraint (Next Qtr) GDP (% y/y, RHS)


Overheating Risks

Below Potential

After post-denometization/GST undershoot, GDP re-accelerating rapidly warranted RBI response; especially with capacity constraints kicking in. But "relapse" since mid-2018 reflects less upbeat prospects; and RBI cut in Feb reflects this in part.

(9)

(6)

(3)

0

3

6

9

12

15

18

(6)

(4)

(2)

0

2

4

6

8

10

12

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

India: Activity pick-up appears to have peaked in H1 2018 with re-monetization & post-GST distortions fading; whereas drag from external headwinds hit.

(3m Avg % y/y)

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

Activity pick-up peaked in H1; with pent-up post-GST demand for customer durables fading too.

60

62

64

66

68

70

72

74

76

78

80

0

5

10

15

20

25

30

35

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

Credit resurgence is flattered by, re-monetization as well as boosted by earlier ramp-up in NBFC lending. Thus, NBFC stress may once again dampen credit growth.

(3mma % y/y)

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

Sources: Bloomberg, CEIC, Mizuho Bank

48.625.7 22.9 25.8 20.6

5.2

299.0

449.8

-150.8

157.6

93.4

64.2

16.3

5.7

16.4

22.1

8.1

(10)

(5)

0

5

10

15

20

25

(200)

(150)

(100)

(50)

0

50

100

150

200

250

300

350

400

450

500

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

India's Trade Imbalance with the US is mainly in Goods & India could offer to import more from US (including military goods); but sticky issues over farm, IT services

amongst other points may prolong tensions.

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

(2)

0

2

4

6

8

10

12

(2)

0

2

4

6

8

10

12

Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19

India CPI: While headline CPI has dropped sharply, this is due to transient food deflation and softer energy inflation. Whereas core inflation is "stickier". (% YoY)

Food Fuel & Light

Clothing Housing

Misc CPI

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


^ NBFC: Non-banking financial companies in India, the source of credit surge in the recent past.


- 11 -

Policy: Two successive, and pre-emptive rate hikes (to

6.50%) have earned a policy pause; especially with

unexpectedly softer headline CPI and oil prices. But the

RBI’s policy dilemma is understated. In particular,

sharply divergent headline-core inflation reveals latent

inflationary pressures amid, broad-based wage hikes

and effectively closed output gap. Crucially, while real

rates exceed “neutral” real rates target (of 1.5-2.0%),

“neutral” real core rate falling short may be the more

decisive policy barometer. This underpins further

(albeit very measured) tightening. Especially if fiscal

and INR slippage begin to mount. That said, recent oil

price drop may extend the window for the pause.

External Position: India’s C/A deficit (CAD) is set to

widen going into 2019 and 2020 as the softer oil price

impact will likely prove to be rather shallow and short-

lived, and this should see the CAD go north of 2% (to

around 2.5-3.0%) in coming quarters as the exports

slowdown is not met with proportional import

compression – despite import curbs. What’s more

worrying is that wavering capital inflows may be

insufficient to cover the C/A gap if EM sentiments

worsen again and/or UST yields pick sharply in coming

quarters. In any case, wider CAD, with greater BOP

volatility around capital flows is a risk to watch.

FX: The seduction of medium-term potential for

India and attendant INR catch-up are hard to deny;

but equally, near-term under-performance on a tragic

confluence of negatives are hard to ignore. First, oil

regaining traction revives “twin deficit” woes. And

this worry is compounded by fiscal slippage (likely to

miss even the wider deficit targets) colliding with a

dovish RBI. Political uncertainties, US trade risks and

heightened geopolitical tensions further undermine near-

term rupee pressures, which can amplify if UST yields

and/or oil prices lurch higher. 72.5-74.5 are USD/INR

upside risks if wrong-footed by global risk appetite and

domestic pitfalls; but sub-68 potential into 2020

beckons if post-elections uncertainty dissipates.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

GDP (% y/y) 6.6% 6.5% 6.4% 6.9% 7.0% 7.1%

CPI (% y/y) 2.6% 2.4% 2.5% 2.9% 3.6% 3.9%

Policy Rate (%) 6.50% 6.25% 6.00% 6.00% 6.00% 6.00%

USD/INR* 69.8 71.5 70.6 69.5 68.5 68.0

69.6 - 74.5 69.4 – 73.6 68.6 - 72.6 67.5 - 71.5 66.5 - 70.5 66.0 - 70.0

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19

RBI Real Rates: Despite "bonus" inflation relief from oil, "real" rates are not unequivocally sharply higher if "core" measures are used. Moreover, fiscal slippage &

softer rupee may argue for pause, rather than more easing. (%)

RBI Policy (Repo) Rate Real Interest Rate (6mma RHS, %) Real "Core" Interest Rate (6mma RHS, %)


Neutral Real Rate Target

(4)

(2)

0

2

4

6

8

10

12

(4)

(2)

0

2

4

6

8

10

12

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

India: C/A Deficit may be trimmed in Q4 (to ~1.8-2.3% from 3.0% in Q3) due to Oil, but risks of negative "Net Balance" persists in the context of weakening capital inflows. Consequently, INR relief from Oil may prove shallow and short-lived.

Net Balance* (% of GDP) C/A Deficit (CAD; 2Qma; % of GDP)

Capital Account Surplus (2Qma, % of GDP) Net Balance* (2Q ma, % of GDP)

* Net Balance refers to the sum of Capital Account and the Current Account Balance; or put in notation, it is simply K/A+C/A.

4

6

8

10

12

14

16

80

85

90

95

100

105

110

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

INR REER: Despite substantial catch-down to Oct-2018, INR REER remains buoyant on on Oil's slide & softer UST yields. However, risk of further Oil pick-up, twin deficit risks

& political uncertainties reveal INR vulnerabilities near-term.

INR REER (LHS; 2010=100) Imports cover (months of imports FX Reserves cover, RHS, ratio)

Sources: BIS, CEIC, Mizuho Bank



- 12 -

South Korea: Fiscal stimulus to support

Growth: GDP growth picked up to 3.1% YoY in Q4

partly resulting from more favorable base effect on top

of a step-up in fiscal stimulus. Private consumption

continued to grow steadily on the back of supporting

measures such as fuel tax cut. However, slowing

employment growth and elevated household debt are

expected to constrain further improvement in private

consumption. Ongoing correction in investment will also

continue especially for capex due to slowing

semiconductor industry. Stagnated imports resulted in a

positive contribution from net exports. Going forward,

growth is likely to moderate further in 2019 where

fiscal stimulus is expected to buttress downside risks.

Industry: Exports growth contracted on a YoY basis as

exports of electronic products fell amid slowdown in

semiconductor cycle. Advance exports data based on

first 20 days suggest there could be more pain ahead. On the other hand, exports of vessels have stopped

fallen further and steady increase in vessel orders

could help to mitigate further contraction in exports

growth. Stronger vehicle production amidst the

temporary consumption tax cut of passenger cars helped

to lift industrial production towards the end of 2018.

Despite some recent optimism surrounding US-China

trade talks, slowing external demand points to

moderating exports and production growth.

Growth dynamics: Labour market will continue to be

the center of attention as an uptick in unemployment rate

in Jan reflects challenging employment condition. After

creating just half of the number of jobs projected this

year, employment growth this year could stay

sluggish as SMEs struggle to cope with higher labour

costs. The ongoing correction in construction sector will

drag down construction-related employment and

manufacturing employment could continue to slip further

amid moderation in export-oriented sectors. Retail trade

and business services sectors will also come under

pressure given that these sectors are dominated by

SMEs.

Inflation: Headline inflation fell towards low-1% due to

slower food inflation on top of lower transportation

prices. Prices of petroleum products are expected to

stay soft in 1H given modest crude oil prices and fuel

tax cut. Core inflation remains stuck at around 1%

reflecting tepid underlying inflationary pressures as

domestic demand moderates. Furthermore, with inflation

expectation falling to a new low, inflation is expected to

undershoot BoK’s 2% target again this year.

-3

-1

1

3

5

7

2012 2013 2014 2015 2016 2017 2018

Contribution to GDP (% -ppts)

Net exports Change in stocks

GFCF Govt spending

Private consumption GDP

Source: CEIC, Mizuho bank

(20)

(10)

0

10

20

30

2014 2015 2016 2017 2018 2019

Contribution to export growth(3mma, ppts, %)

ChemicalsMachineryEEPassenger CarVesselsCrude materials/fuelsOtherExports, YoY


0

100

200

300

400

500

600

700

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Projected vs. Actual Employment Increase (person thousands)

Govt forecasts Actual


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2011 2012 2013 2014 2015 2016 2017 2018

Inflation measures (%YoY, 3mma)

Inflation expectation

Headline inflation

Core inflation



- 13 -

Policy: Given slowing exports, employment growth on

top of low inflation, BoK is expected to stay cautious.

Whilst BoK has ruled out a rate cut for now, further

tightening is likely to be postponed given that the output gap has turned slightly negative. Growth

momentum is not expected to pick up significantly this

year as investment will continue to moderate on top of

challenging exports outlook. In addition, inflation is

likely to stay tepid as well given lackluster demand-pull

inflationary pressure. As a result, we think BoK will

pause for a while in order to assess the strength of

growth, especially how labour market condition and

fiscal stimulus affect domestic demand.

External Position: Current account surplus narrowed

slightly as exports slowed across most of the product

categories on the back of slowing global growth and

semiconductor industry. Nonetheless, as imports

growth also slowed thanks to lower oil prices and less

machinery imports, goods account surplus has sustained.

With tourist arrivals continuing to grow in double-digit

YoY, this helped to contain services deficit from further

widening. Given South Korea’s solid fundamentals,

capital inflows continued despite relatively low policy

rate. Going forward, progress of trade negotiation

between the US and China could be one of the main

factors driving foreign capital flows.

FX: Progress on US-China trade negotiations has

capped trade tensions and supported the KRW, given

Korea’s large exposure to Chinese final and intermediate

supply-chain demand via extensive trade links. Still, the

macro backdrop is deteriorating. Global demand

growth has slipped amidst a Chinese slowdown, and

we think this could weigh on Korean exports and growth

in 1H 2019. As such, we maintain our cautious view

on the KRW, and see a rebound in USD/KRW to 1140

in Q2. More durable easing towards 1100 may have to

await an eventual US-China trade deal and a rebound in

global demand, which could possibly happen only in 2H

2019.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

GDP (% y/y) 3.1% 2.8% 2.6% 2.9% 1.9% 2.3%

CPI (% y/y) 1.8% 0.8% 1.1% 1.3% 1.2% 2.1%

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

USD/KRW* 1116 1120 1140 1100 1090 1080

1105-1145 1080 - 1150 1000 - 1170 1060 - 1140 1050 - 1120 1040 - 1110

(2)

(1)

0

1

2

3

4

(2)

(1)

0

1

2

3

4

2013 2014 2015 2016 2017 2018 2019

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

Real interest rate Headline CPI

Policy rate Core CPI


(6)

(4)

(2)

0

2

4

6

8

10

12

14

2014 2015 2016 2017 2018

Current Account (USD bn, 3 mma)

Goods ServicesPrimary income Secondary incomeC/A


700

800

900

1000

1100

1200

1300

1400

1500

95 97 99 01 03 05 07 09 11 13 15 17 19

USD/KRW: Long-term Model Value

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

Sources: BIS, Refinitiv, Mizuho Bank Asia & Oceania Treasury



- 14 -

Singapore: Downturn, Not Hard-Landing

Growth: The exports-led downturn, reflecting global trade

friction and coincident tech down-cycle, are set to knock back

growth from ~3% in 2018 to below 2.5% this year (MTI

flagging risks of growth mid-point of 1.5-3.5% outlook).

Apart from electronics-led manufacturing slowdown, a

cooling property market (with softer transaction volumes)

and oil’s volatility pose further challenges. Being small and

open Singapore will feel headwinds that major trading

partners (e.g. China, Europe, Japan, ASEAN) grapple with.

But a hard-landing will be averted so long as worst case

trade outcomes are averted and the Fed’s less hawkish

stance helps dial back financial risks.

Industry: The bigger picture is that manufacturing growth

is set to pullback to low single digit pace from super-charged

growth rate of over 10%. This slowdown partly reflects the

exaggerated swings of a tech super-cycle past its peak.

Barring worst-case outcomes headwinds should begin to

subside into 2020 as global demand downturn bottom. But

the lingering tail risk is that US-driven trade antagonism

could deepen and prolong this downturn, if nascent signs of

US-China negotiations fall through (and/or US-Europe trade

friction escalates on auto tariffs). While direct impact on

Singapore is likely to be limited, indirect trade and

investment channel reverberations will not be negligible

Growth dynamics: With manufacturing set for a sustained

and sharper pullback, the burden of growth will shift to

services, and in particular domestically-oriented service

sectors. But convincing offset to compensate for

manufacturing downturn will probably elude. Partly because

there are aspects of trade and manufacturing services that

permeate the service sector, and this are not immune from

external headwinds. In addition, continued cooling in the

property market will drag related services - including real

state, conveyancing and mortgage service. The silver lining

is that a less hawkish Fed dials down associated risks of

financial shocks. And this should help avert a hard-landing.

Inflation: Headline inflation will be restrained at sub-1% in

near-term as of softer oil prices, contained food inflation

and price competition from utility sector liberalisation are

likely to dampen the pace and force of price escalation, but

this will not materially impede underlying normalisation

in price pressures to 1.0-1.5% by late-2019 and around 2%

into 2020. Especially as dis-inflation from low COE

(vehicle ownership quota) prices fade and property dis-

inflation diminishes. What’s more, firmer wage pick-up

could induce tighter inflation feed-through dynamics.

Upshot: Inflation may be softer for a little longer, but this

is a cyclical delay, not structural deficiency.

1.9

5.1

1.8

-1

2.43.5

2.7

-2.3

4.3

10.7

3.4

-4.5

3.9

10.4

3.2

-10.2

3.1 3.0 3.1

-1.7

3.72.7

4.2

1.2

4.6 4.34.9

7.6

(15)

(10)

(5)

0

5

10

15

GDP Mfg Services Construction

Singapore: Q4 GDP disappoints but does not derail 2018 (at 3.2%). Mfg "normalization" from unsustainable 10+% growth in 2017 & H1 to low- to mic-single digit. 2019 growth ~2.6%.

Q4 '18 Q3 '18 H1 2018 2017 3Y Avg (2015-17) 5Y Avg (2013-17) 10Y Avg (2008-17)

Sources: CEIC, Mizuho Bank Singapore .

0

20

40

60

80

100

120

140

0

1

2

3

4

5

6

7

8

12 13 14 15 16 17 18 19

Singapore: Services contribution is recovering in line with its ~2/3share of economy, while Manufacturing's "super-cycle" is fading in line with peaking global demand, and

set to decline further. (Growth; %YoY; 2Qma)

Services GDP Services Share of GDP Contribution (%, RHS)

* This slump in Service share of growth contribution reflects the surge in Manufacturing growth (led by electronic super-cycle).

(40)

(30)

(20)

(10)

0

10

20

30

40

50

60

(40)

(30)

(20)

(10)

0

10

20

30

40

50

60

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Singapore's Exports Demand by Region: Sharp slump acorss markets reflects the tech down-cycle compounded by global trade tensions. (% Yoy 3M Avg) ...

NODX

Malaysia, Indonesia & Thailand

Korea, Taiwan & Japan

China incl HK

US & EU

Sources: Bloomberg, CEIC, Mizuho Bank

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

25

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

25


Singapore Manufacturing Downturn": Electronics cycle downturn catches down with M&O engineering, which has bottomied. Further slowdown in exports/manufacturing to Drag.

(% YoY 6mma)

Industrial Production (IP) IP ex-Biomed

Tpt Eng. Petrochem

Electronics Pharma

(10)

(5)

0

5

10

15

(6)

(4)

(2)

0

2

4

6

8

13 14 15 16 17 18 19

Waning External Demand to be compensated for by "digitization"-induced investments as well as diminishing drag from residential construction; BUT domestic services cannot fully offfset!.

(Growth Contribution, YoY; %-points)

Pte. Consumption Govt. Spending

Residential Construction Business Investments

Net Exports adjusted for stocks External Demand* (% y/y)

Domestic Demand* (% y/y) GDP % y/y

* Domestic demand comprises private consumption, government spending, residential construction and business investments. And external demand is all else for Singapore's "open" model.

(18)

(16)

(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

(18)

(16)

(14)

(12)

(10)

(8)

(6)

(4)

(2)

0

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

Gradual property market correction over 15 consecutive quarters (from Q3 2013 peak) mostly undone (~75% reversed out) over last five quarters. Cooling measures temper but could still

gently nudge services higher. (Cumulative % Chg from Q3 2019)

Landed Non-Landed All Private Property

Cooling measures put in place have tempered, not unravelled, property market pick-up. This should add to some service sector tailwinds via ancillary activities.

(2)

(1)

0

1

2

3

4

5

6

(2)

(1)

0

1

2

3

4

5

6

10 11 12 13 14 15 16 17 18 19

Headline CPI is understated but "MAS core" pick-up is exaggerated by utilities/fuel; whereas services inflation reverals moderated pick-up; squares with calibrated

"slight" slope steepening.

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

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

(2)

(1)

0

1

2

3

(2)

(1)

0

1

2

3

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19

Underlying inflation remains on a recovery path though strength of core inflation surge is overstated by fuel/utilities. (CPI contribution; %-pts; YoY)

Food Housing Utilities

Petrol Pte Road Tpt ex-Petrol Public Road Tpt

Others Headline Core


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


- 15 -

Policy: The MAS has reason, but no urgency, to “slightly”

steepen the S$NEER slope again given the pick-up in

underlying inflation mechanics; and signs of tightening in

wage-price dynamics. Admittedly, given the two rounds of

slight slope steepening in 2018 (April and October meets) the

urgency for a third tightening in series diminishes.

Especially given slowing global growth. But equally, the fact

that slope increments have been finely calibrated

(estimated 1% per annum appreciation bias) and well below

pre-GFC norms (of 2%), and that S$NEER is already very

richly valued another calibrated tightening will help reinstate

greater policy flexibility. US-China trade deal shape up will

lift odds of April tightening to 2-in-3; it is now evenly split.

External: Notwithstanding the pullback in Q4 C/A (to ~14%

from over 20% in Q3), the overall C/A position remains

exceedingly strong ~17% of GDP; suggesting that while

global trade disruptions are a key risk (to manufacturing

and economic growth), the C/A buffer is not the foremost

concern. Instead, the largest fluctuations to the overall

external position (BOP) is more likely than not to turn up in

the financial account – given Singapore’s status as financial

hub and regional HQ. And so any flare up in capital flow

volatility is more likely to be disruptive to SGD than

perhaps a slowdown in exports per se.

FX: Contrary to popular misconceptions, whether the MAS

tightens policy (via calibrated S$NEER slope increment)

in April or October, will be of very little (near-term)

consequence to SGD. Reason being, with S$NEER already

richly valued, (upper most quadrant of policy bands), scope

for SGD to outperform the (trade) basket of currencies is

fairly limited - and a slope increment creates no

appreciable (pun not intended) headroom for S$NEER instantaneously. That is, increasing S$NEER slope incline

from 1% to 1.5% merely lift incremental appreciation

potential of 1bp (0.01%) per week! So our call for upside

risks to 1.38 for USD/SGD near-term reflect risks of trade

disappointments and China/“Brexit”/EZ risks while

pullback to 1.32-1.33 into 2020 bets on peak USD.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

GDP (% y/y) 1.9% 2.1% 2.4% 2.8% 3.1% 2.5%

CPI (% y/y) 0.5% 0.7% 1.1% 1.4% 1.9% 2.1%

FX Policy

“Slightly” steepened S$NEER

slope

Status Quo “Slightly” steepen S$NEER

slope (~1.5% p.a) Status Quo

USD/SGD* 1.36 1.35 1.35 1.36 1.34 1.33

1.36 - 1.39 1.32 - 1.38 1.32 - 1.38 1.33 - 1.38 1.31 – 1.37 1.30 – 1.36

101

102

103

104

105

106

107

108

109

110

101

102

103

104

105

106

107

108

109

110

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19

"Rich" S$NEER in the top quartile after second "slightly" increased slope estimated S$NEER slope now ~1% p.a (half of defacto "modest & gradual" 2% appreciation).

NEER

Mid-Point

Sources: MAS, Bloomberg, CEIC , Mizuho Bank

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

Stronger trade-weighted SGD

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

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

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

Apr '18: MAS restores "slight" S$NEER slope. We estimate ~0.5% per annum

S$NEER rise within "neutral" 0% policy slope was recognised as defacto tightening; supporting longer policy hold.

Defacto tightening from S$NEER rise totop quartile, diminishes scope for further tightening within bands; but potential for effective easing accentuated.

S$NEER drop effectivelyachieves further easingdespite no additional policy moves.

Oct '18: MAS "slightly" increases S$NEER slope gradient. We estimate to ~1.0% per annum

(10)

(5)

0

5

10

15

20

25

30

35

40

(10)

(5)

0

5

10

15

20

25

30

35

40

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

Despite trade slippage, trade surplus is exceptionally high; instead trade war risks are the real threat. Meanwhile financial account

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

Goods Services Income & Others BOP C/A

Sources: Bloomberg, Mizuho Bank

1.20

1.22

1.24

1.26

1.28

1.30

1.32

1.34

1.36

1.38

1.40

1.42

1.44

1.46

1.20

1.22

1.24

1.26

1.28

1.30

1.32

1.34

1.36

1.38

1.40

1.42

1.44

1.46

Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19

Correspondingly, SGD is richly valued vis-a-vis implied policy bands. Thus, scope for immediate S$NEER outperformance & attendant

USD/SGD downside is constrained unless USD turns independently bearish. (based on Mizuho estimates)

SGD (Actual) SGD (Mid Pt)Sources: Bloomberg, CEIC, Mizuho Bank

Stronger SGD



- 16 -

Malaysia: Moderating oil prices limit fiscal space

Growth: Q4 GDP YoY growth picked up to 4.7% after

moderating for four consecutive quarters. Growth of

private consumption remains steady supported by

continuous wage growth on top of low inflation,

which has boosted real income. Investment growth has

moderated as the public sector scaled back investment on

the back of fiscal consolidation. Slowdown in export-

oriented manufacturing sector has also dragged down

capex. Contribution from net exports swung to positive

as lower imports of capital and intermediate goods

boosted trade surplus. Going forward, private

consumption is likely to be the main driver as

investment could be lackluster with simultaneous

slowdown in capex and construction.

Industry: Exports have been growing at a moderated but

still respectable pace at around 7% YoY thanks to

relatively resilient electrical and electronic products

(EE). Exports of petrochemical products also continued

to grow steadily despite softer crude oil prices.

Manufacturing production has largely sustained its

momentum as higher production of domestic

consumption goods has helped to offset the slowdown

in external-oriented sectors. Nonetheless the durability

of the strength in domestic demand is somewhat

uncertain given growing downside risks.

Growth dynamics: Budget deficit widened to 3.7% of

GDP in 2018 as expenditure growth accelerated in Q4

whilst revenue growth moderated on the back of lower

crude oil prices. Given that the Brent price has so far

fallen behind the government’s budget assumption

for this year ($72), the risk of fiscal slippage should

not be overlooked. Furthermore, less oil-related

revenue will also limit the extent of fiscal stimulus since the government looks to further trim budget deficit

to 3.4% of GDP in 2019.

Inflation: Headline inflation remains very soft, even

after the re-introduction of SST since Sept last year, due

to lower oil prices and muted inflationary pressure.

Given a larger list of goods under SST exemption, this

will somewhat help to contain underlying pricing

pressure. Furthermore, as the government adopts an

Automatic Pricing Mechanism with a lower price cap

for RON95 retail fuel, this effectively caps upside

risks to inflation. With more than 90% of items in the

CPI basket posting inflation less than 2%, inflation is set

to undershoot for some time.

(8)

(4)

0

4

8

12

(8)

(4)

0

4

8

12

2012 2013 2014 2015 2016 2017 2018 2019

GDP Contribution (%-points; YoY)

Net Trade Investments

Stock Govt Spending

Consumption GDP


(10)

(5)

0

5

10

15

20

25

30

2014 2015 2016 2017 2018

Contribution to exports growth (3mma, %, ppt)

Other Natural gas

Petroleum products EE

Rubber Palm Oil

Exports


-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-80

-70

-60

-50

-40

-30

-20

-10

0

Budget deficit (% of GDP)

in RM

Base case (Brent at $72) (RHS)

Brent at $50 (RHS)

Brent at $90 (RHS)


(2)

(1)

0

1

2

3

4

5

6

2012 2013 2014 2015 2016 2017 2018

CPI Contribution (YoY, % -pts)

Food Housing & utilities

Transport Others

CPI



- 17 -

Policy: We expect BNM to stay put throughout 2019

given tepid inflation outlook as inflation is likely to

stay at sub-2% level despite fading high-base effect. On the other hand, growth starts to face more downside

risks given slowing global growth. Moreover, space for

expansionary fiscal space is limited given relatively

lower oil prices (Budget 2019 assumption: Brent crude

oil price of US$72) and the government’s goal to further

trim budget deficit. As a result, maintaining an

accommodative monetary stance would be

appropriate for the time being as along as growth

continues to hum along steadily. Should growth

comes under pressure, BNM could shift towards an

easing bias.

External Position: Current account surplus moderated

marginally on the back of narrowed goods account

surplus. As imports growth also moderates alongside

exports due to less intermediate goods imports,

current account surplus is expected to sustain at

around 2% of GDP. Overall BoP position continued to

slip gradually as net FDI inflows have fell slightly. On

the other hand, net portfolio investment outflows have

lessened in Q4 as sentiment towards EM improved.

Going forward, C/A surplus is likely to sustain whist

moderating crude oil prices could weigh on investor

sentiment and subsequently drag down portfolio

investment inflows.

FX: EM FX, including the MYR, has benefited from a

more dovish Fed stance on rate hikes. A recovery in

Q4 growth has also supported sentiment, but headwinds

from an external demand slowdown remain palpable.

MYR could thus see some give-back in the short term,

given vulnerability from Malaysia’s heavy dependence

on trade-related sectors. Still, a bottoming in oil prices

has greatly reduced the likelihood of a rating

downgrade, and we think MYR losses are more likely

to be modest than extended. On a longer-term basis,

MYR valuation remains cheap. There is thus scope for

USD/MYR to ease towards 3.90 in 2H 2019, if global

demand stabilizes on the back of policy support.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

GDP (% y/y) 4.7% 4.7% 4.9% 4.7% 4.2% 4.7%

CPI (% y/y) 0.3% 0.3% 0.8% 1.6% 1.9% 1.9%

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

USD/MYR* 4.13 4.12 4.15 3.90 3.85 3.85

4.13 - 4.20 3.99 - 4.25 4.02 - 4.28 3.78 - 4.15 3.73 - 3.97 3.73 - 3.97

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2013 2014 2015 2016 2017 2018 2019

CPI (% YoY) vs Policy Rate (%)

Real interest rate (RHS)

CPI, 3mma

CPI excl. transport, 3mma

Policy rate


-15%

-10%

-5%

0%

5%

10%

15%

2012 2013 2014 2015 2016 2017 2018

BoP (% of GDP, 4Qma)

Errors Others

Portfolio Investment FDI

C/A BoP


2.40

2.60

2.80

3.00

3.20

3.40

3.60

3.80

4.00

4.20

4.40

4.60

95 97 99 01 03 05 07 09 11 13 15 17 19

USD/MYR: Long-term Model Value

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




- 18 -

Indonesia: Solid Domestic Demand to Sustain

Growth: Growth stabilized at 5.2% YoY in Q4 as

domestic demand remained solid. Well-contained

inflation has helped to support private consumption amid

upbeat consumer confidence. Growth of investment has

moderated marginally, but still sustained at a solid pace

lifted by both capex and construction-related activities.

Government spending remained supportive led by

generous subsidies and current expenditure during the

election campaign period. Net exports exerted a smaller

drag on growth as imports growth slowed further relative

to exports. Going forward, domestic demand is

expected to be supported ahead of the election on the

back of income-supporting measures and

infrastructure projects.

Industry: Exports growth contracted YoY recently

largely resulting from pricing effect as prices of

Indonesia’s main commodities have been soft.

Momentum in industrial production has stayed

relatively buoyant on the back of construction

activities. As loan growth to manufacturing sector

continued to pick up, this reflects fairly upbeat

business sentiment. Furthermore, as China’s growth

momentum to improve later this year amid more

stimulus measures, this could potential lend support to

export-oriented commodities sectors.

Growth dynamics: Despite incumbent Joko Widodo

leading the opinion polls by a comfortable margin in the

upcoming presidential election, foreign investors still

dialed back ahead of the election. Foreign investment

fell in 2H 2018 as investors weighed uncertainties

surrounding economic policies. Whilst fiscal deficit

shrank to the narrowest in seven years of 1.75% of GDP

last year thanks to tax reform effort, the government has

resorted to nationalistic policies such as higher energy

subsidies. Going forward, more effort is needed to boost

the competitiveness of its export-oriented sectors

including consistency of policy making and reduction of

red tape.

Inflation: Inflation remained well-contained at low-3%

as lower crude oil prices further pushed down pump

prices with Pertamina lowering the prices of non-

subsidized fuel. Food price inflation was also low as

the government deploys task forces to ensure stable

food prices and adequate stocks. Steady core inflation

suggests that underlying inflationary pressure was also

well-behaved. Furthermore, a rebound in IDR is

expected to reduce imported inflation. Going forward,

inflation is expected to stay at sub-3.5% in 1H.

(4)

(2)

0

2

4

6

8

2013 2014 2015 2016 2017 2018

Contribution to GDP growth (%, ppts)

Hhd consumption GFCFGovt consumption Change in stockNet exports Statistical discrepancyGDP


-30%

-20%

-10%

0%

10%

20%

30%

2013 2014 2015 2016 2017 2018 2019

Exports growth (% YoY, 3mma)

In volume terms

In value terms


0

1

2

3

4

5

6

7

8

9

10

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Foreign Investment Realization (USD bn)

Source: CEIC, Mizuho BankRed-colored bars are when general election took place

-1

1

3

5

7

9

2015 2016 2017 2018 2019

Contribution to CPI (-ppt, % YoY)

Food Processed food

Electricity, gas and fuel Clothing

Health Education, recreation

Transport CPI, YoY



- 19 -

Policy: BI has scaled back its degree of hawkishness in

its latest policy meeting due to several factors. For one,

external stability has improved with IDR rebounding

strongly on the back of a more dovish Fed. Furthermore,

positive progress from the US-China trade talk also lifted

investor sentiment towards EM and helped to spur

portfolio investment inflows. Secondly, inflation remains

well-contained. If this low inflation trend can be

sustained, this is likely to eventually open door for an

easing bias should external stability is maintained.

Nonetheless, C/A deficit remains a source of concern

and therefore BI is expected to remain vigilant and

prudent for now despite improving financial stability.

External Position: C/A deficit widened to 3.5% of GDP

in Q4 as goods account recorded a much larger deficit.

Government’s non-monetary measures to curb C/A

deficit have yielded little result so far as imports

continued to growth in solid pace despite stagnating

exports. Lower crude oil prices can help to

temporarily narrow deficit among O&G products

while the government looks to develop industrial

sector in order to boost non-O&G manufactured

exports. Overall BoP returned to positive as portfolio

investment inflows rebounded substantially towards the

end of 2018. FDI dipped in Q4 as investors scaled back

prior to the general election.

FX: The IDR has been strengthening since Nov 2018,

helped by reduced Fed rate hike expectations and

increased EM fund inflows. Still, the current account

deficit remains a bugbear, and BI could need to maintain

its pre-emptive policy stance for some time in order to

anchor IDR stability. Presidential elections in April

could introduce some volatility, but we think scope of

an electoral upset for Jokowi to be rather small.

Higher oil prices may pose some headwinds for the trade

deficit, but we expect this to be offset by steady EM

inflows amidst lower UST yields. USD/IDR is thus

likely to consolidate within current levels around 14000,

before easing more durably in 2H 2019 if risk appetite

picks up as we expect.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

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

CPI (% y/y) 3.2% 2.8% 3.0% 3.3% 3.2% 3.5%

Policy Rate (%) 6.00% 6.00% 6.00% 6.00% 5.75% 5.75%

USD/IDR*

14390 14200 14100 14000 13800 13800

14215 – 15284

13700 - 14600

13600 - 14500

13500 - 14400

13300 - 14200

13300 - 14200

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,00060

70

80

90

100

110

120

2013 2014 2015 2016 2017 2018 2019

Exchange Rate

NEER

REER

USDIDR (RHS, inverted)


-5%

-3%

-1%

1%

3%

5%

2012 2013 2014 2015 2016 2017 2018

C/A (% of GDP, 4QMA)

Goods

Services

Primary income

Secondary income

C/A


2000

4000

6000

8000

10000

12000

14000

16000

95 97 99 01 03 05 07 09 11 13 15 17 19

USD/IDR: Long-term Model Value

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



.


- 20 -

Thailand: Stable Consumption to Offset Slowing Exports

Growth: Growth rebounded slightly in Q4 as net exports

exerted a smaller drag on growth on top of stable

domestic demand. Private consumption is supported

by continuous and broad-based improvement in both

farm and non-farm household income on top of

supporting measures ahead of the election. Growth of

government spending stayed steady with a bias towards

social welfare-related expenditure. Furthermore, tourism

sector has been recovering at a faster-than-expected pace

as decline in Chinese tourists has moderated. Going

forward, domestic demand is likely to gain further

traction and mitigate downside risks to growth from

slowing exports.

Industry: Exports growth has slowed substantially due

to lower demand for Thailand’s main manufactured

goods including electronics and automotive. As external

demand continues to cool, exports growth is set to stay at

a subdued level. The trend of capacity utilization level

has also been falling for consecutive months

reflecting cooling manufacturing momentum. With

external-oriented growth drivers moderating, domestic

demand is expected to buttress further downside

risks with pick up in construction activities on the

back of more PPP projects for infrastructure

development.

Growth dynamics: As trade tension between the US and

China escalated last year, Thailand was expected to reap

some benefits as companies look to relocate their

production base. FDI application, in value terms, jumped

significantly towards the end of the year even though

arguably this could be skewed due to the large

investment value of a few deals. In volume terms, the

number of FDI application has also been climbing

steadily reflecting Thailand’s appeal as an alternative

given its well-developed production base, continuous

improvement in infrastructure and the government’s

desire to modernize the economy through its flagship

“Thailand 4.0” initiative.

Inflation: Headline inflation retreated to sub-0.5% due a

sharp plunge in pump prices following the fall in crude

oil prices. Nevertheless, core inflation stabilized -

despite at a relatively low level of sub-1%, reflecting

underlying inflationary pressure remains steady, though

tepid. There are nascent sign that food price inflation

begins to pick up alongside higher prices for

agricultural goods at the producer level. However, a

strong Baht could add to the difficulty of the low

inflation battle in the near future.

(10)

(5)

0

5

10

15

20

(10)

(5)

0

5

10

15

20

2013 2014 2015 2016 2017 2018 2019

Contribution to GDP growth (%YoY; -ppts)

Pte Consumption Govt Spending

Investments Stocks

Net Exports GDP % y/y (RHS)


40

45

50

55

60

2014 2015 2016 2017 2018 2019

Business Sentiment Index (3mma)

Order book

Investment

Production


0

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015 2016 2017 2018

FDI application (THB bn, 4QMA)

FDI, applied

FDI, approved

FDI, promotion certs issued


-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2014 2015 2016 2017 2018 2019

Contribution to inflation (% YoY, -pts, 3mma)

Transport

Food

Core



- 21 -

Policy: The latest BoT policy meeting decided to

maintain the policy rate with a vote split of 4-2 (2

voted to raise the rate by 25bps) suggests that a rate

hike is still on the card despite recent retreat of

headline inflation. Several factors support further

tightening including the building up of vulnerabilities in

the financial system and continuous expansion in

economic growth led by domestic demand. However,

rate hike is likely to be gradual as uncertainties

surrounding the general election and recent gains in

Baht call for patience in the near future. Should

growth continues to expand alongside stabilized

inflation, we expect BoT to hike by 25bps in 2H.

External Position: C/A surplus continued to narrow as

slowing exports squeezed goods account surplus. In the

meantime, services account surplus was largely

sustained as tourism receipt underwent a steady recovery

thanks to government’s supporting measures and safety

assurances. Trade surplus is likely to shrink further as

exports stagnated on waning external demand while

imports is likely to grow steadily, despite at a

moderated pace due to lower crude oil prices.

Portfolio investment inflows have returned in Q4 given

Thailand’s solid fundamental as well as improving

sentiment towards EM assets.

FX: The THB has rallied strongly since Dec, helped by

the first BoT rate hike since 2011 as the output gap

finally closes. FDI has also been a key driver for THB

gains, with inward FDI in the first 3 quarters of 2018

already exceeding full year inflows of the preceding four

years. In our view, Thailand is an attractive

investment destination for manufacturers diversifying from China, as the threat of US tariffs

loom. Meanwhile, elections, scheduled for 24 Mar, are

not expected to produce any hiccup after the King

stated that the royal family should not be involved in

politics. Still, any unexpected softening in exports

could see a pause of THB gains in the interim, given

Thailand’s high dependence on trade.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

GDP (% y/y) 3.7% 3.2% 3.4% 4.0% 3.9% 4.2%

CPI (% y/y) 0.8% 0.7% 0.6% 0.5% 1.3% 1.5%

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

USD/THB* 32.5 31.5 32.0 31.3 30.9 30.5

32.2 - 33.3 30.8 - 32.3 31.3 – 32.7 30.6 - 32.0 30.2 - 31.6 29.8 - 31.2

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2014 2015 2016 2017 2018 2019

Inflation vs Policy rate (%)

Real interest rate (RHS) Inflation, 3mma

Core inflation, 3mma Policy rate


-10

-5

0

5

10

15

20

2013 2014 2015 2016 2017 2018

BOP (% of GDP; 4QMA)

C/A - Gds

C/A - Svcs

Direct Invstmt

Portfolio Invstmt

Other Investmt


20

25

30

35

40

45

50

95 97 99 01 03 05 07 09 11 13 15 17 19

USD/THB: Long-term Model Value

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




- 22 -

Philippines: Moderating Inflation to Boost Consumption

Growth: Growth rebounded slightly in Q4 on the back

of pick up in private consumption as lower inflation

boosted real purchasing power. As inflation continues

to moderate, this is expected to further support

domestic consumption on top of boost from election-

related spending. Investment growth is likely to stay

lackluster in 1H as slowing external demand will drag

down capex. Furthermore, as the government has been

running on a re-enacted 2018 budget so far, this plus

the ban on public works prior to election in May, will

weigh on government spending in 1Q. Net exports are

expected to exert a drag on growth too as exports are

likely to slow given peaking semiconductor cycle.

Industry: Growth of industrial production has plunged

sharply as both domestic- and external-oriented segment

moderated. Food production growth contracted YoY as

elevated food inflation in 2H 2018 dragged down

demand. On the export-oriented segment, electronics

production and exports have slowed against the

backdrop of peaking semiconductor cycle. Going

forward, as external demand further softens on top of

less capital outlays for infrastructure projects during

1Q, as evidenced by the fall in capital goods imports,

industrial production growth may stay tepid.

Growth dynamics: Fiscal deficit widened to 3.2% of

GDP in 2018 as expenditure growth continued to

outpace revenue, which also grew at its fastest rate in a

decade thanks to newly-introduced excise tax. Growth

of government spending is off to a soft start this year

as the government has been working on a reenacted

budget as of end-Fed. A mandatory ban on public

works ahead of the May election could further weigh on

capital spending, though the government is trying to

exempt those big-ticket infrastructure projects from the

ban. Given the government debt level remains steady

at around 42% on top of moderating borrowing cost,

medium credit outlook remains stable.

Inflation: Headline inflation has returned to mid-4% on

the back of slower food price inflation. Despite the

implementation of second excise tax hike in fuel since

Jan, YoY growth of pump price has moderated due

to lower crude oil prices. Core inflation also moderated

for two consecutive months now suggesting that

underlying inflationary pressure is gradually tapering

off. With the Rice Tariffication Bill finally being signed

into law, this should further help to bring down food

prices. Should oil prices continue to stay relatively

soft, inflation is expected to come back to BSP’s

target range of 2%-4%.

(15)

(10)

(5)

0

5

10

15

(15)

(10)

(5)

0

5

10

15

2013 2014 2015 2016 2017 2018

GDP Expenditure Contribution (YoY; %-pts)

Pte Consumption Govt Spending

GFCF Stocks

Net exports Errors

GDP % y/y Sources: CEIC, Mizuho Bank

-30

-20

-10

0

10

20

30

40

50

2013 2014 2015 2016 2017 2018

Industrial Production Index, volume (%YoY, 3mma)

Total

Food

Electrical machinery


-140

-120

-100

-80

-60

-40

-20

0

20

-6%

-5%

-4%

-3%

-2%

-1%

0%

1% Fiscal balance (4QMA)

PHP bn (RHS)

% of GDPSources: CEIC, Mizuho Bank

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2013 2014 2015 2016 2017 2018 2019

Contribution to CPI (%-ppts, 3mma)

Ohers

Transport

Housing & utilities

Food

CPI

Core CPI



- 23 -

Policy: With inflation retreating towards BSP’s

target range, we expect BSP to scale back its degree

of hawkishness on the back of tightened monetary

conditions. Nonetheless, BSP is unlikely to shift to an

easing mode for now either given that PHP remains

at a multi-year weak level despite some rebound.

Furthermore, the relatively low oil prices could also

subject to some upside risks, which could threaten price

stability. Given that credit conditions have tightened

substantially following consecutive rate hikes last

year, BSP is expected to resume its medium-term

plan to reduce its reserve requirement ratio once

inflation stabilizes.

External Position: Current account deficit narrowed

slightly in Q3 compared to Q2 as widened goods account

deficit was partly offset by larger services account

surplus, led by business services exports. Goods

account deficit may not narrow much in near term as

exports are likely to stagnate given slowing external

demand while imports continue to grow, albeit at a

moderated pace. Lower remittances from the Middle

East continued to weigh down remittances growth,

which provides a substantial buffer for C/A. Actual FDI

inflows stayed fairly resilient in Q3 despite falling FDI

approvals due to uncertainties surrounding the pending

tax reform on corporate tax perks.

FX: Falling headline inflation may support PHP strength

in the short-term on the back of higher real rates.

However, a still positive output gap and continued

fiscal expansion suggest that latent risks to inflation

remain. Any rebound in inflation may thus precipitate

PHP selling again, once the initial effects from allowing

rice imports fade out. Furthermore, remittance growth is

slated to ease with Mid-East demand for labor reacting

with a lag to lower oil prices. As both the fiscal and trade

deficits look set to sustain, we still expect a challenging

medium-term outlook for the PHP.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

GDP (% y/y) 6.1% 6.2% 6.4% 6.5% 6.5% 6.6%

CPI (% y/y) 5.9% 3.8% 3.5% 2.8% 3.3% 3.8%

Policy Rate (%) 4.75% 4.75% 4.75% 4.75% 4.50% 4.50%

USD/PHP* 52.6 52.0 53.5 53.5 53.2 53.0

52.2 - 54.4 50.9 - 53.1 52.0 - 54.7 52.3 - 54.7 52.0 - 54.4 51.8 - 54.2

(1)

0

1

2

3

4

5

6

7

2013 2014 2015 2016 2017 2018 2019

CPI and policy rate (% YoY, 3mma)

Real interest rate (RHS) Headline CPI

Core CPI Upper bound

Lower bound Policy rate


interest rate corridor framework was introduced

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2012 2013 2014 2015 2016 2017 2018

Balance of payments (% of GDP, 4QMA)

Other incomes & transferServicesRemittancesGoodsC/AC/A excl. remittances


22

27

32

37

42

47

52

57

62

95 97 99 01 03 05 07 09 11 13 15 17 19

USD/PHP: Long-term Model Value

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




- 24 -

Vietnam: Downside Risks Growth: Given large Korean, Taiwanese and Japanese

manufacturing - as presence in Vietnam– many impacted

by the tech downturn – risks of an outsized downside

below 6% growth remain non-negligible; and are

highly correlated to the global tech demand pull-back and US-China trade negotiation outcomes. Offset from

the domestic farm sector though is a double-edged sword

as the vagaries of the weather could swing either way.

The good news is that high sensitivity to the electronics

cycle could help place a bottom on growth into mid-

2020. And in any case, prospects for inward FDI into

manufacturing remains upbeat – underpinning longer

term prospects. But Trump’s restive trade policies in

Asia are unsettling in terms of sticky downside risks.

Industry: Surge in electronics exports, which lifted

manufacturing in 2017/early-2018 is now extracting

payback; corresponding to the electronic/mobile device

demand slump worldwide. The good news is that

Vietnam remains attractive for investments to build

on the manufacturing and supply-chain eco-system. But

near-term pullback in production as Korea, Taiwan,

Japan amid China face exports/industrial downturn is

hard to avoid. That said, exports/manufacturing are set

to start picking up later in 2020; contingent on US not

turning hostile to Vietnam’s outsized trade surplus

against the US – downside risks indeed linger.

Growth dynamics: With the manufacturing downturn,

economic growth will be dampened in coming quarters.

But the bigger risk for Vietnam is not so much a

cyclical downturn in exports as it is the structural

USD liquidity shortfall in a climate of tightening USD

liquidity on a global basis – but that underlines

financial stability risks. Whereas, continued inward

investments given Vietnam’s growth prospects and

manufacturing ecology (boasting inexpensive labour

and improving logistic network) means that foreign

inward investments over the medium-term will underpin

growth – so long as trade war cross-hairs are avoided. Inflation: Inflation is by and large under wraps (under

3%); and set to be contained in the 2.5-4.0% (3.0-4.5%)

range in 2019 (into mid-2020). While and El Nino risks

may further underpin supply-side food price pressures,

coordinated of food supply buffer/price controls

ought to check the strength of food-driven inflation

pick-up.. What’s more, softer oil inflation effects for

the year should help to damp inflationary pressures ahead of 4%, before edging a tad more in 2020. The

good news is that non-food inflation remained

subdued, consistent with demand-pull pressures

remaining dormant as risk of negative output gap rises

in the near-term amid external headwinds.

6.1

2.5

9.6

8.4

6.5

6.8 2.9 14.4 8.7 7.47.1 3.8 13.0 9.2 7.0

7.4

4.1

13.6

7.5

6.7

0

2

4

6

8

10

12

14

16

0

2

4

6

8

10

12

14

16

GDP Farm Mfg Construction Services

Vietnam GDP: Growth momentum, while still robust, is susceptible to sharper drop if external headwinds buffet

Manufacturing, which is the key driver. (% YoY)

2013-2017 (Avg)

2017

2018

Q1 2018

(4)

(2)

0

2

4

6

8

10

12

14

16

18

20

22

(4)

(2)

0

2

4

6

8

10

12

14

16

18

20

22

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

Net Trade (US$ bn): E$6.8bn surplus in 2018; but latest three-months (Dec-Feb) slip in to a deficit of $0.90bn alongside a slump in electronics/mobile exports.

Trade Balance Exports Imports

2006: -$4.61bn

2007: -$9.97bn

2008: -$16.38bn

2009: -$12.38bn

2010: -$12.60bn

2011: -$8.85bn

2012: $0.75bn

2013: $0.07bn

2014: $2.37bn 2016: $1.78bn

2015: -$3.55bn2017: $2.1bn

2018: $6.83bn

Dec '18-Feb '19: -$0.9bn

(10)

(5)

0

5

10

15

20

25

30

(10)

(5)

0

5

10

15

20

25

30


Electronics & Mobile Devices (such as Phones - think Samsung!) stregnth from earlier reverses in a payback on the tech cycle turn.

Others Veg, Pepper, Nuts & Coffee Aqua

Rice Textiles & Footwear Crude Oil

Phone & Spare Parts Electronics Total Exports

0

4

8

12

16

20

24

0

4

8

12

16

20

24

2010 2011 2012 2013 2014 2015 2016 2017 2018

Strong & sustained FDI inflows led by Japan and Korea continue to backstop underlying momentum (US$bn)

Others

Germany

US

Thailand

Singapore

Taiwan

China (incl.HK)

Korea

Japan

Total

(4)

(2)

0

2

4

6

8

10

12

(4)

(2)

0

2

4

6

8

10

12

13 14 15 16 17 18 19

Despite Food inflation pick-up, concerted government efforts have subdued price pressures (2-3%); especially with significantly

softer Oil! (Inflation Contribution; %-pts)

Food Housing Transport

Others Healthcare CPI (% y/y)

Non-food CPI (% y/y)



- 25 -

Policy: The SBV in theory has more room to ease

amid external headwinds and well-anchored

inflation; but our sense is that the central bank will

refrain from using the main policy (rate) levers,

instead preferring targeted liquidity provision as the

preferred mode of counter-cyclical buffer. For one,

not unlike China, policy transmission rather than

headline rate adjustments may be more efficacious.

Crucially, the SBV may be acutely aware that cutting

rates could potentially be at the cost of VND stability,

compromising the FX regime. As such, prolonged

policy rate hold with broadly stable, but lower beta

VND looks like the preferred policy combination.

External Position: Sharp pullback in exports and net

trade flipping to a deficit has cut into the C/A buffer

that Vietnam has. In turn, the weaker C/A position will

impede build up in FX reserves. This is not merely to

boost the central bank’s reserves of foreign currency for

its own sake, but rather to supplement Vietnam’s

“emergency cash buffer” given that at 3.0-3.5X imports

cover, Vietnam’s coverage ratio falls short of regional

standards of (6-8X) imports cover is deficient. And so,

sensitivity to capital flow volatility may be heightened

in a weaker net exports and C/A cycle, potential totally

challenging the stable VND policy.

FX: The SBV has few reasons to deviate from its FX

policy of market-based VND valuation referenced off a

basket of currencies - featuring USD, EUR, CNY, JPY,

KRW, THB etc. And unsurprisingly the correlation

with CNY, not just from sensitivities, but from policy

mechanics remains tightest. Accordingly, we expect

relatively stable VND NEER. VND fluctuations are

also likely to be more subdued - both ways - than CNY.

Risks though are asymmetric as shortfall of FX reserves

means that downward pressures on VND during

episodes of acute USD strength will be harder to fend

off. Near-term upside risks to 24,000 to be damped to

23,000 and below into mid-2020.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020

GDP (% y/y) 7.3% 6.8% 6.8% 6.5% 6.3% 6.3%

CPI (% y/y) 3.4% 2.9% 3.0% 3.0% 3.8% 4.4%

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

USD/VND*

23,175 23,250 23,350 23,250 23,100 23,000

23,175 - 23,363

23,000 - 24,000

23,100 - 23,500

23,000 - 23,400

22,900 - 23,200

22,800 - 23,100

(15)

(10)

(5)

0

5

10

15

(15)

(10)

(5)

0

5

10

15

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

Real interest rates suggest sufficient "normalization" to hold back on imminent rate hikes; with case "core" real rates consistent with 2015-16 levels.

Refinancing Rate

Real (Re-financing) Rate

Average Real rates (2009-2013)

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

(4)

(2)

0

2

4

6

8

10

(4)

(2)

0

2

4

6

8

10

Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19Mar-19

Ultra-low VND volatility amid VND NEER slip helps FX reserve accumulation. Further VND Shifts to Follow Cues from CNY/CNY NEER Cues.

VND CNY VND NEER CNY NEER

(10)

(8)

(6)

(4)

(2)

0

2

4

6

(10)

(8)

(6)

(4)

(2)

0

2

4

6

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

Net Exports coming under pressure square with eroded C/A support (despite decelerating); correspondingly, tallies with diminished C/A & FX reserve.

($bn; Qtrly)

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


(3000)

(2000)

(1000)

0

1000

2000

3000

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

(3000)

(2000)

(1000)

0

1000

2000

3000

Imports cover pick up to ~3.0X is welcome. But FX Reserves boost may fall short of robust buffer as net exports moderate at the margin.

(US$ mn, 3mma)

FX Reserves Chg Trade BalSources: CEIC, Mizuho Bank

20,500

21,000

21,500

22,000

22,500

23,000

23,500

24,000

20,500

21,000

21,500

22,000

22,500

23,000

23,500

24,000

Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19

VND pick-up since Oct, follows CNY lead, but is low-beta/volatiility, supported by low-inflation; guarding against low (USD) liquidity risks

& opportunistically building on low FX Reserves.

VND (Monthly Avg)

SBV Reference Rate

Sources: CEIC, Reuters Mizuho Bank

Weaker VND

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

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

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



- 26 -

Australia: Home to Roost Growth: Risk of growth slip to (or below) 2.5% (2018:

2.8%) have risen, but ironically coincides with much

stronger iron ore prices (which typically lift growth via

increased output/exports and boost to mining investments).

Growth prospects are mired as housing woes at the

epi-centre come home to roost. Specifically, via

adverse feedback between; i) falling home prices (home

equity/collateral value) ii), household balance sheets

hobbled by record high leverage and; iii) banks’ asset

undermined by home price declines. What’s more,

China slowdown, political uncertainties and tighter

fiscal stance challenge growth.

Industry: Despite softening trade and attendant drag

on overall industry, the mining sector has surprise

positively, led by a lift in iron ore prices and fairly

resilient (albeit softening) coal prices – Newcastle coal

prices have been knocked back by reports of import bans

imposed by Beijing. Overall, terms of trade are positive

and Capex pick up (albeit a tad cautiously), will feed in

positively to construction at some point. Nonetheless,

prospects across various industries remain uneven,

and broad-based recovery could elude given global

demand shortfall and global trade friction. China’s fiscal

impetus remains critical for the resource sectors.

Growth dynamics: Despite fairly strong jobs, the

uneven economic conditions juxtaposed against the

global downturn/China risks justifiably warrants RBA

misgivings about turning too upbeat prematurely. Weak

wages are one reason for reservation. Most worrying,

high household leverage will come home to roost as

insufficient wage gains grate against higher mortgage

rates (banks nudge up rates despite RBA hold) and softer

home prices (adversely home equity/collateral impact).

Pullback in consumption from being blindsided by

sudden jobs downturn and/or negative wealth effects

keeps the RBA up and fidgety.

Inflation: Inflation looks set to remain benign, with

softer oil prices since late-2018 (though now off the

lows) likely to dampen pick-up above 2%; keeping

price pressures well within the 2-3% target. Spare

capacity and latent shortfall in consumer demand will

be the key issues that the RBA looks to assess –

especially given worries about weak wage gains

alongside falling home prices, which could weaken

demand-pull linkages; which is corroborated by soft

services and ex-food price pressures. To be sure,

inflation restoration back towards 2.5% is expected into

2020. But interim risks of demand shortfall impeding

price pressures remain on the radar.

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

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

Australia GDP: Softer domestic demand led by weaker H/H consumption & weak housing (home construction) dragging; government offset may fade.

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

Inventory & Errors Net Exports GFCF Public

GFCF Pte Non-Dwelling GFCF - Pte Dwellings Govt

Consumption GDP GDP (2Q/2Q %)


(6)

(5)

(4)

(3)

(2)

(1)

0

1

2

3

0

5

10

15

20

25

30

35

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Australia's Commodities (Coal, Ores & Mineral) buoy Total & Net Exports. Economy is uneven, but not broken; retards broad-based recovery. (A$bn; 3mma)

Rural & Others

Other Mfd

Machinery & Tpt Eqpt

Other Mineral Fuel

Coal

Metal & Ores

Total Exports

Net Exports (3mma, RHS)


0

5

10

15

20

25

30

35

40

45

50

0

5

10

15

20

25

30

35

40

45

50

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

Actual Private Sector Capex - Mining investments remain soft despite bottoming; but non-mining pick-up is encouraging. (A$bn)

Mining Manufacturing

Others Total


0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Australia: Weak (albeit bottomied) wages growth in the context of heavier household debt burden justifies the RBA's restraint on hawkish bias. (% YoY)

Wage Index Mfg Public Sector Private sector Mining

(4)

(2)

0

2

4

6

8

10

(4)

(2)

0

2

4

6

8

10Australia's Housing Market Downturn, if Sustained, may "wrong-foot" Over-

leveraged Households; given B/S &potential negative wealth Impact. (% Chg QoQ)

Sydney Melbourne Weighted Average

(2)

(1)

0

1

2

3

4

5

6

(2)

(1)

0

1

2

3

4

5

6

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Australia CPI: Inflation is Bottoming though perhaps not aggressively so leaves RBA space. Nontheless, softer energy cost-push understates CPI,

thereby overstating RBA's propensity to re-engage easing. (%-pt contribution, YoY)

Automotive Fuel H/H Energy Total Housing ex-energy

Tpt-ex Fuel Services Alcohol & Tobacco

Food Inflation ex-Fuel & Energy CPI


- 27 -

Policy: Accordingly, the RBA’s “short game” is likely

to be dovishly inclined; particularly sensitive to signs

of consumption shortfall from adverse household B/S

impact weak wages and/or more accentuated housing

market slump. So the default stance of a prolonged

pause in 2019 is geared more for a rate cut should

conditions sour. In contrast, the RBA’s policy focus

will shift meaningfully towards tightening into 2020,

when it will start to grow concerned about being

behind the curve on policy normalisation. And so the

chances of a rate hike by mid-2020 will start to

harden. For now, a softer AUD offsets tighter fiscal

impulse to helps buy the RBA time to assess global trade

and domestic balance sheet risks.

External Position: Commodities-led boost to

Australia’s goods balance is a sold platform on which the

merchandise goods surplus has soared to A$26.7bn in

2018 (1.4% of GDP), almost doubling from a surplus of

A$13.8bn (0.8% of GDP) in 2017. But the C/A deficit

has only narrowed from A$46.4bn (2.6% of GDP) in

2017 to A$40.8bn (2.2% of GDP) in 2018. The Goods-

C/A disparity points to limitations of the “J-Curve”

benefits to the trade account; but not the wider services

and income account – partly a reflection of the

unevenness of the external sector. And so effectiveness

of softer AUD in re-balancing must be assessed.

FX: The glaring disparity between buoyant iron ore

prices and flagging AUD is hard to miss, though the

justification based on China risks, housing market

gloom, and consequently dovish-leaning RBA (near-

term) are hard to refute. We concur that near-term

AUD risks tilt down with test to 68cents (and perhaps

with a fleeting drop below). But with; i) mining Capex

picking up; ii) 2020 RBA hikes appearing on the cards,

and; iii) global infrastructure push likely to prop up

iron ore prices more durably, contrarian view of AUD

surprising with a rally towards 80cents (12-18mths

out) is seductive. Avoiding adverse global shocks and

UST yields reined in are pre-conditions for this though.

Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q2 2020

GDP (% y/y) 2.3% 2.3% 2.4% 2.6% 2.8% 2.6%

CPI (% y/y) 1.8% 1.8% 1.8% 2.0% 2.1% 2.1%

Policy Rate (%) 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%

AUD/USD* 0.71 0.71 0.73 0.76 0.79 0.81

0.67 - 0.73 0.67 - 0.74 0.69 - 0.75 0.71 - 0.79 0.74 - 0.82 0.76 - 0.84

(3)

(2)

(1)

0

1

2

3

(3)

(2)

(1)

0

1

2

3

Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19

Recent drop in jobless , insofar it is mostly driven by job creation more than offsetting higher participation, validates the RBA's prolonged pause (rather an imminent cut).

Net Employment Effect Labour Force Participation Impact Net Unemployment Chg

Unemployment RisingParticipation Rising ==> All else Equal, Lifts Unemployment

Employment Falling ==> All else Equal, Lifts Unemployment

Unemployment FallingParticipation Falling ==> All else Equal, Reduces Unemployment

Employment Rising ==> All else Equal, Reduces Unemployment

100

120

140

160

180

200

40

60

80

100

120

140

160

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

Household B/S risks are compounded by housing soft spots & rising global rates; amplifying banking-H/H negative feeedback loops; and wage gains far from offset

household debt burden. (%)

Housing Debt to Disposable Income

Owner Occupied Housng Debt to Disposable Income

Debt to Disposable Income (RHS)

(25)

(20)

(15)

(10)

(5)

0

5

10

(25)

(20)

(15)

(10)

(5)

0

5

10

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

Softer AUD has only gently reined in C/A deficit suggesting limited J-curve benefits. Buoyant commodity prices help lift

merchandise trade surplus. (A$bn; 4Qma)

Secondary Income Primary Income Services Goods C/A BOP


30

40

50

60

70

80

90

100

110

120

130

140

150

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10


AUD Bears ruling the roost since 2013 have been unchallenged in terms of underlying trends. But insofar that Fed-RBA policy gap diminishes sharply & China averts worst-case trade

outcomes, AUD could turn around more sustainably. Iron Ore smiles at AUD!

AUD Iron Ore AUD Iron Ore


Since mid- 2013: Post-taper (Fed winding down QE)

Since mid-2014: Commodity Bust (led by Oil's Collapse late-2014) followed by the China sell-off in 2015.

Since mid-2017/start-2018: Fed launches QT (quantitative tightening/B/S Reduction) in Q4 2017 alongside; i) relatively dovish/laggard RBA and; ii) US-China traderisks.




- 28 -

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Documents

Asia Quarterly - Mizuho Bank...Asia Quarterly ― Q1 2019: Cans & Cushions ― 6th March 2019 Mizuho Bank, Ltd. Asia and Oceania Treasury Department Vishnu Varathan Head, Economics