EM Central Banks: Caught off in a policy dilemma

Transcription

1 Jun-18 Policy Review: Thailand/Philippines Treasury Research Group EM Central Banks: Caught off in a policy dilemma Trade fears and hawkish Fed, resulting in EM capital outflows (USD bn) EM Equity flows EM Debt flows Contagion pressures remain potent : EMs continue to face multiple headwinds such as intensifying US-China trade conflict and a more hawkish Federal Reserve The Goldilocks scenario in Emerging Markets characterized by low interest rates globally, low inflation and ample liquidity looks to be hitting a roadblock. One of the biggest risks to EM assets performance is the resurgence of Dollar. The recently announced monetary policies of Federal Reserve and European Central bank have clearly indicated that the liquidity taps will be tightened that could get more pronounced by the end of was a year that witnessed the weakening of Dollar; thereby boasting investments in emerging markets for yield famished investors amidst the peak of risk-on trade and minimal volatility in currencies. However, fault lines have started developing as DXY strengthened more than 5% in barely in 2 months. Elevated dollarized debt levels in EMs has aggravated the stress even further. A full blown trade war between US and China is likely to hit EM assets hard. Commodities have been outperformers this year and tariffs are most likely to hammer commodity prices. Currencies of many commodity export oriented EMs such as the MYR, RUB, are most likely to experience significant depreciation in case commodity prices soften. All in all, the systemic risks to EMs have risen substantially and the ones managing their idiosyncratic risks with better fundamentals will outperform their peers in the times to come. Additional tightening by the Fed is likely to see a further policy response from EM countries. June 21, 2018 Sparsh Chabbra sparsh.chhabra@icicibank.com (+91-22) Yash Panjrath yash.panjrath@icicibank.com (+91-22) Some are already ahead such as Indonesia with back-to-back rate rises by the central bank which has led to bond inflows returning and have capped long-dated bond yields. Others, in particular LatAm, are in the spotlight too as regards policy. However, Brazil s central bank kept interest rates unchanged, as expected, refraining from hiking even after a sharp currency slide as policymakers highlighted the unclear impact of a nationwide protest by truckers in late May. Trade tensions have triggered EM outflows In the wake of the Fed rate hike, trade tensions have quashed the tentative upturn in EM non-resident portfolio outflows. Outflows since the June FOMC meeting amounted to some USD 5.5 billion USD 4.2 billion from equities and USD 1.3 billion from bonds. While flows to China were stable in the aftermath of the FOMC meeting, concerns about the impact of additional U.S. tariffs on Chinese imports have prompted a sharp reversal in flows to China with major potential ramifications for EM stocks. Looking ahead, the high level of uncertainty around the global trade backdrop and further escalation in China-U.S. trade tensions is most likely to prompt further investor caution, weighing on portfolio, banking and trade-related EM flows. Please see important disclaimer at the end of this report

2 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Sep-17 Oct-17 Jan-18 Feb-18 Mar-18 Jun-18 Thailand: Dynamics of Growth-inflation justified a policy status quo from BoT Growth has picked up but remains uneven Deteriorating external balance is posing threat to Thai Baht Accomodative monetary policy likely to facilitate the return of inflation to the target Economic growth at fastest pace in 5 years; domestic demand still soft Thailand's economic growth surged to a five-year high last quarter at 4.8%, beating all estimates as rebounding farm output added to gains from exports and private consumption. Four years after the military seized power, Thailand's economy is rebounding with growth sustained by a pick-up in exports and tourism. External trade balance widened to the largest since September 14 Thailand reported a trade deficit of USD 1.28 bn in April of 2018, compared to a surplus of USD 0.06 bn in the same month a year earlier. It was the first trade deficit since January and the largest since September 2014, mainly due to a jump in imports. In April, inbound shipments surged 20.4% from a year earlier to USD 20 bn, much faster than a 9.5% rise in a month earlier and beating consensus of 13%. Meanwhile, exports grew by 12.3% to USD bn, after a 7.1% gain in March and above forecasts of 11.25%. Considering the first four months of 2018, Thailand reported a surplus of USD 0.68 bn, much lower than a surplus of USD 4.12 bn in the same period the previous year. Headline inflation reached its highest level in 16 months Thai headline inflation rose on a sequential basis in May. On MoM basis, the headline consumer price inflation rose 0.56%, whereas the core rate came in at 0.17%. This was the most rapid rate of rise seen so far in 2018 for both measures. The upside surprise was in inflation components other than food and transportation. Prices of clothing, personal and healthcare costs as well as recreation rose at faster rates of 0.34% YoY, 0.71% YoY, and 0.52% YoY, respectively. The rise in food and transportation costs also accelerated to 0.74% YoY and 3.31% YoY, respectively. Headline inflation has now come in the official target band of 1% to 4% for a second straight month and is accompanied by a strong rebound in growth momentum. but growth outlook is still subject to external risks Thailand s growth outlook is still subject to external risks that have continued to warrant monitoring, including uncertainties pertaining to US economic and foreign trade policies, retaliatory measures from trading partners of the US, and geopolitical risks. No policy support required for Thai baht The lack of interest rate policy support and deteriorating external trade balance suggest that the Thai baht will remain under weakening pressure. Recent depreciation in Thai Baht has reversed the trend witnessed in the initial months of the year. But it's still an Asian outperformer; the 0.5% year-to-date depreciation compares favourably with its peers such as the Philippines, Indonesia and India - countries whose central banks moved to tighten recently. We don't think Baht performance is weak enough to necessitate central bank action yet. Baht s performance is not that weak to warrant hike in policy rate 36 USD/THB

3 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Highlights from the statement: The Committee voted 5 to 1 to maintain the policy rate at 1.50%. One member voted to raise the policy rate by 0.25% point from 1.50 to 1.75%. Thailand s growth outlook gained further traction driven by merchandise exports and tourism which continued to improve in tandem with global economic growth, and by stronger momentum from domestic demand. Exports of goods and services continued to improve in tandem with global economic growth. Exports of goods and services continued to improve in tandem with global economic growth. Private investment picked up in light of public investment projects whose prospects became more certain, although their progress must be monitored. Government spending remained a driver of growth but there remained risks of delays in budget disbursement. Headline inflation was projected to rise at a slightly faster pace than previously assessed toward target on the back of increases in oil prices. Core inflation was projected to edge up given gradual build-up in demand-pull inflationary pressures. Moreover, structural changes, such as an expansion of e-commerce and rising price competition, still warranted monitoring as they might contribute to more persistent inflation than in the past. Meanwhile, the public s inflation expectations were largely unchanged. Overall financial conditions remained accommodative and conducive to economic growth with ample liquidity in the financial system. Overall government bond yields increased somewhat compared with the previous meeting, while real interest rates remained low. Such conditions allowed financing by the private sector to continue expanding with improvements seen in the amount of credit extended to SMEs and consumer loans. On exchange rates, the Baht depreciated against the US Dollar and experienced volatile movements due to the monetary policy outlook of advanced economies and increased concerns about trade protectionism measures as well as risks related to emerging market economies. Looking ahead, the baht would likely remain volatile. Thus, the Committee would closely monitor exchange rate developments as well as impacts on the economy going forward. Financial stability remained sound but there continued to be a need to monitor pockets of risks that might pose vulnerabilities to financial stability in the future. These included, in particular, the search-for-yield behavior in the prolonged low interest rate environment that might lead to underpricing of risks, and the deterioration in debt serviceability of households and SMEs, especially those affected by changes in structural factors and business models. Looking ahead, the Thai economy as a whole was projected to continue to gain further traction driven by both external and domestic factors. However, there remains the need to monitor the strength of the domestic demand and inflation developments in the period ahead, as well as impact of trade protectionism measures which remains highly uncertain. Hence, the Committee viewed that monetary policy should remain accommodative. (Source: Bank of Thailand policy statement) Inflation, now in the official target band of 1% to 4% Growth outlook, driven by robust export growth (% YoY) Inflation (% YoY) Export growth 3

4 May-17 Jun-17 Jul-17 Sep-17 Oct-17 Jan-18 Feb-18 Mar-18 Jun-17 Jul-17 Sep-17 Oct-17 Jan-18 Feb-18 Mar-18 Jun-18 Philippines: Two consecutive hikes curtailing inflationary pressures Peso weakness due to hawkish Fed and EM capital outflows USD/PHP Recent inflation prints crossing BSP s target range, but momentum easing (% YoY) CPI Inflation The Bangko Sentral ng Pilipinas (BSP) raised its benchmark overnight lending rate by 25 basis points to 3.5% on 20 th June 2018, second consecutive rate hike this year June s hike is a reflection of more challenging external developments, even though inflation pressures have eased. Still, domestic economic conditions will remain a priority for the BSP We do not expect further hikes this year, given easing inflationary momentum. However, Peso volatility and any soike sin core inflation would be risks to watch for The BSP delivered its second 25 basis points policy rate hike for the year on 20 th June 2018, taking the reverse repo rate (RRP) to 3.50%. The reserve requirement ratio (RRR) was not mentioned in the meeting and hence remains unchanged at 18%. The BSP lowered its 2018 headline CPI forecast from 4.6% to 4.5% and its 2019 forecast from 3.4% to 3.3%. The June hike was driven by the external environment. The rate hike in May was primarily domestically-driven and was done to curb inflation and inflation expectations. But June hike was also driven by the external environment. The Fed's recently more hawkish stance amidst an already-strong US dollar environment prompted the BSP to hike a second time. BSP Governor Nestor Espenilla said prior to the meeting that the Fed is relevant to the Philippines as a "small, open economy" and that the BSP is "sensitive" to both Peso volatility and the pace of its depreciation in recent weeks (Bloomberg, 20 June 2018). The BSP expects that the June rate hike could further curb inflation expectations Consumer prices rose by 4.6% YoY in May 18, after a 4.5% gain in the previous month, but below markets expectations of 4.9%. It is the highest inflation rate since November Core consumer prices in Philippines increased by 3.60% YoY in May, compared to a 5% YoY gain in preceding month. For 2018, the central bank have set inflation target range of between 2%-4%. The BSP expects that the June rate hike could do its part to further curb inflation expectations following the rate hike in May. This is particularly significant given mounting pressure for wage hikes domestically. But it's also worth noting that inflationary pressures have started to ease. For instance, the May inflation print came in notably lower than market expectations as food and housing prices declined sequentially after consecutive months of high growth. Both Governor Espenilla and BSP Deputy Governor Diwa Guinigundo noted this at the briefing. Meanwhile, the other components of CPI outside the reaches of the tax reform have stopped rising above their historical trend contrary to previous months. 4

5 Continued coordination of minimum wage hikes would help contain demand-pull inflation and ease pressure for further monetary tightening. Any significant increases in minimum wages and/or broad-based wage hikes across the board would likely trigger even higher prices that would prompt the BSP to hike rates further. However, the recently passed minimum wage hikes in the Visayas region have all been within the BSP's forecast range. Continued coordination of minimum wage hikes with other regions, particularly in the National Capital Region (NCR), would help contain demand-pull inflation and ease pressure for further monetary tightening. Ending quantitative restrictions on rice imports should put downward pressure on headline prices Meanwhile, passage of a government proposal to end quantitative restrictions (QR) on rice imports should put downward pressure on headline prices and help curb inflation expectations. Food has the largest weighting in the Philippine CPI basket at 36.3%, and rice accounts for about a quarter of that weighting. The BSP estimates that ending QR could reduce headline inflation by 0.4 percetange points this year if implemented by the third quarter or by 0.2 percentage points if implemented by the fourth quarter. Moreover, the BSP estimates that ending QR could reduce headline inflation by up to 0.6 percenatge points in (Philstar, 14 May 2018) Looming downward pressure on rice prices, therefore, should put a lid on inflation and ease pressures for the BSP to tighten rates further. We expect no further hikes to monetary policy this year. Highlights from the statement: Monetary Board Raises Policy Interest Rate by 25 Basis Points At its meeting on monetary policy on 20 th June 2018, the Monetary Board decided to raise the interest rate on the BSP s overnight reverse repurchase (RRP) facility by 25 basis points to 3.50%. The interest rates on the overnight lending and deposit facilities were raised accordingly. In deciding to raise the BSP s policy interest rate anew, the Monetary Board noted that inflation expectations remained elevated for Moreover, the Board noted the risks from international oil and commodity price movements on overall inflation. Given these considerations, the rate hike enables the BSP to reinforce its signal on safeguarding macroeconomic stability in an environment of rising commodity prices and ongoing normalization of monetary policy in advanced economies. The Board also noted that inflation expectations remain within the target range for Also, it had lowered its 2018 headline CPI forecast from 4.6% to 4.5% and its 2019 forecast from 3.4% to 3.3%. Both BSP Governor Espenilla and Deputy Governor Diwa Guinigundo noted at the briefing that the May inflation print came in notably lower than market expectations. The Monetary Board also reiterated its support for carefully coordinated efforts with other government agencies in implementing non-monetary measures to mitigate the impact of supply-side factors on inflation. (Source: BSP policy statement) 5

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