Asian Insights Conference 2018 Special

Transcription

1 Economics & Strategy Weekly Asian Insights Conference 2018 Special DBS Group Research 12 July 2018 Taimur Baig Chief Economist Ma Tieying Economist Please direct distribution queries to Violet Lee DBS s Asian Insights Conference 2018, Jubilee Edition, takes place on July 13 We are pleased to issue three major papers on the occasion of the conference Paper 1: we look at three scenarios for Singapore in 2030 BAU, reinvention, or decline Paper 2: Asia in 2030; projecting regional income with institutional and climate factors in mind Paper 3: digital currencies are changing banking profoundly; some relevant data and scenarios #DBSAIC2018 #ReimagineAsia2030 #DBSturns50 Outlines of the conference papers follow. Full papers will be released next week. Singapore in 2030: BAU, reinvention, or decline? In the decade ahead, to 2030, a series of structural dynamics will impact on the outlook for Singapore. For example, factors such as medium-term demographic and productivity trends, the impact of technology and regional integration, and the international trading system. Singapore s economic performance over the past several decades has been exceptional, and the country now sits at the income frontier. However, recent GDP growth rates are markedly lower than in the past few decades. This is consistent with the experience of small advanced economies that are close to the income frontier. Taking into consideration productivity and demographic trends and ongoing structural reforms, a baseline of ~2-2.5% GDP growth on average over the period to 2030 is a reasonable starting point: 1.5% labour productivity growth plus % labour force growth. This is low by Singapore standards, but is healthy compared to other countries at the income frontier. Strategies pursued by both China and the US are causing challenges to Singapore s traditional growth model, with trade frictions rising and regional supply chain facing risks of disruption or fragmentation. An ongoing wave of technological change, impacting a wide range of activities, from production to finance, will have a profound impact on Singapore. Policies to harness these changes are critical for the long-term prospect of Singapore, something the authorities are keen to pursue. Regional integration is a win-win for Singapore, and it should take a leadership role in the region to facilitate it. With aging and slowing of growth, considerable investment needs to maintain a tech-ready and environmentally sustainable infrastructure, fiscal resources need to be managed judiciously. Refer to important disclosures at the end of the report

2 We consider three possible scenarios for the next decade: (i) business as usual; (ii) reinvention, and (iii) global regime change. Under the first scenario, efforts to improve productivity continue, but rising costs and adverse demographics keep firm level profitability belowpar and the fiscal position under pressure. Growth slows toward 2%, in line with advanced economies at the income frontier. The second scenario envisions Singapore leveraging new opportunities from disruptive technologies, becoming an incubator of innovation and global best practices, with its firms expanding rapidly into international markets. Singaporean capital and knowhow place it in between China and India as a regional conduit of business, finance, and talent flow. Consequently, Singapore takes the top slot in global income rankings. In the third scenario, a series of setbacks in global trade and political order causes reduced market access, superpower rivalry, global market volatility, leaving Singapore with few viable options to maintain competitiveness. Growth slows, and per capita income growth stagnates. Given its buffers and a nimble economic model, Singapore should be well-positioned to deal with forthcoming challenges and opportunities. Taimur Baig, Chief Economist Irvin Seah, Senior Economist David Skilling, Director, Landfall Strategy Asia 2030: Balancing optimism with realism We believe in Asia s bright future because of its large population base, favourable demographic dynamic, high savings rate, world-dominating manufacturing base, macroeconomic and political stability, and an impressive track record of development in recent decades. Asia is also highly heterogenous, with a mix of aging and youthful societies, large and small nations, advanced and emerging economies, and those with strong macroeconomic shock absorption buffers and those without. All Asian economies however face some common factors climate change, rising inequality, worsening environment for trade, and technological disruption. Our Asia 2020 project, undertaken in 2011, had a reasonable general approach and conclusion a vibrant Asia was rising as the most important global economic force, and by the end of the decade, it was expected to provide the most growth, and the best market returns, in the world. But it turns out that the report s projections were too optimistic, expecting the gains from trade and openness of previous decades to continue, and underestimating the lingering drag from the 2008 Global Financial Crisis. Perhaps more critically, our Asia 2020 report focused excessively on measures such as income or GDP. Not only does this ignore the costs associated with environmental degradation and weak institutions, it also provides misleading signals for investors. While thinking about 2030, we have attempted to build on top of income projections, looking at institutional factors and social indicators. This is important as several structural challenges and opportunities are likely to emerge through the period until 2030 that will greatly impact the outlook for the Asian economies. Several dynamics that have supported the economic development of the Asian economies in recent decades are weakening, and there are many changes in the international environment. We consider aging, technology, human capital, climate change, and geopolitics over the next decade to imagine Asia in Taimur Baig, Chief Economist David Skilling, Director, Landfall Strategy Page 2

3 Digital currencies, banking, and central banking Considerable work is being done these days on digital currencies, catching the attention of the public and policy-makers alike. Ranging from cryptocurrencies backed by blockchain to the notion of central bank digital currencies, a new frontier has opened. The issues around digital and crypto currencies are fascinating but daunting. The basic concept of fiat money is formidable, with nontrivial underpinnings. The notion of digital currency entails consideration of payments system, banking, monetary policy, and financial stability. Add to that layers of computer science and cryptography necessary to understand cryptocurrencies, it is little wonder that misperceptions abound. Neither electronic payment nor electronic money is new. More than a century ago, banks and traders communicated in real time via telegraph, settling payments and executing trades. Central banks have been managing the issuance of reserves to banks electronically for many decades. Mobile payment and digital wallets have been around for nearly two decades. What has changed is mobile computer power and connection speed, making digitalisation ubiquitous. Is cash dying due to digitalization? We begin by looking at some data on usage of cash and noncash around the world. In the context of Singapore, we present some findings based on monthly data from DBS Bank s 4.9 million accounts. We don t see cash disappearing, for some good reasons. We then lay out some key elements of the crypto currency phenomenon and its potential use and limitations. We like the technology underlying cryptos, but see many limitations getting in the way of their wide proliferation. We conclude with the provocative concept of central bank digital currency, which is at once old and new. We imagine a world without cash, and conjure what that would mean for banks, nonbanks, and policy. Giving the people central bank accounts credited with digital currency could change finance, banking, and central banking fundamentally. These are very early days; we don t see any monetary authority rushing in this direction. Taimur Baig, Chief Economist Taojun Xie, Research Fellow, SMU Page 3

4 Strategy FX: Old worries have not gone away Currencies have not shaken off the baggage from the selloff in June. The Trump administration lost no time in holding China s feet to the fire on trade. On July 10 th, it published a list of tariffs on an additional USD200bn of Chinese imports into America. This followed closely the 25% tariff US imposed on USD34bn worth of Chinese imports on July 6 th. The trade war lull that markets had been looking for to focus on stronger US corporate earnings turned out to be wishful thinking. Instead, a full-blown US-China trade war has now become a credible threat ahead of the US mid-term elections in November. Apart from the Chinese yuan, commodity currencies (especially the Australian dollar) and exportled Asian NIE currencies (the Korean won and the Singapore dollar) are considered more vulnerable to a deteriorating global trade outlook. Things aren t going well in the United Kingdom either. The sterling s attempt to rally on a soft-brexit Chequers deal last Friday was derailed by the resignations of David Davis as Brexit minister and Boris Johnson as foreign minister. Instead, the pound is now confronted with a further erosion in British PM Theresa May s political support that lessens her odds of winning a Brexit vote in parliament. The latest domestic political drama and global trade uncertainties have scope to offset the recent improvement in UK data and upset the Bank of England s push to hike rates at its next meeting on August 2 nd. We see GBP/USD eventually returning below 1.30 this year. Looking ahead, the US dollar will be looking for reassurances from Fed Chairman Jerome Powell s semiannual congressional testimonies on the US economy and monetary policy on July 17 th. For now, the Fed is likely to consider Trump s protectionist policy as a risk and not an imminent threat to its optimistic US outlook. It is too early for the Fed to pull back the four rate hikes it flagged at its last FOMC meeting for this year. On the other hand, the European Central Bank governing council members are still divided over whether to deliver its first hike in summer or autumn next year. With the rate differential outlook favouring the US, the DXY Index is expected to rise into a higher range later this year. Philip Wee Rates: Yields stuck in range The risk-on mood was soured mid week when Trump announced that the next round of tariffs that apply to USD200bn worth of imported goods from China is now on the table. Before the tariffs come into effect, there would be a two-month deliberation. In any case, this marks another escalation in the ongoing trade war, putting an end to the nascent rise in US yields. 10Y yields have not been able to push above 3% since late May as trade concerns weigh. However, Fed hike expectations have thus far held firm as US economic data continue to be strong. The impact on Asia rates is mixed. Growth concerns suggest that central banks would be more accommodative in the coming few quarters until there is greater clarity on the trade front. It is perhaps unsurprising that Malaysia and Korea kept policy rates on hold this week. Rate hike expectations (as measured by interest rate swaps) have been pared down significantly over the past few months. On balance, foreign interest in shorter-term govvies in these economies is likely to stay strong (despite weaker risk sentiment) as cross currency basis swaps stay favourable. Govvies in twin deficit economies may not fare as well. As USD strength persists, concerns on the rupiah, rupee and the peso (leading to higher hedging costs) is likely to prompt caution for local govvies. In particular, we are worried about PHP assets. While yields have already spiked, the market does not appear convinced that the central bank has taken enough action to bolster confidence in the peso. News that the budget deficit may touch 6% of GDP (after a court ruling on national taxes) will not help matters. Highlights of the week: Eugene Leow Indonesia: External shocks and domestic politics Page 4

5 GDP growth, % YoY Key Forecasts CPI inflation, % YoY, ave f 2019f f 2019f China Hong Kong India* Indonesia Malaysia Philippines** Singapore South Korea Taiwan Thailand Vietnam Eurozone Japan United States*** * refers to year ending March ** new CPI series *** eop for CPI inflation Policy interest rates, eop 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 China* India Indonesia Malaysia Philippines Singapore** South Korea Taiwan Thailand Vietnam*** Eurozone Japan United States * 1-yr lending rate; ** 3M SOR ; *** prime rate Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Thailand Vietnam Australia Eurozone Japan United Kingdom Australia, Eurozone and United Kingdom are direct quotes Exchange rates, eop Page 5

6 Group Research Economics & Strategy Taimur Baig, Ph.D. Chief Economist - G3 & Asia taimurbaig@dbs.com Nathan Chow Strategist - China & Hong Kong nathanchow@dbs.com Joanne Goh Regional equity strategist joannegohsc@dbs.com Neel Gopalakrishnan Credit Strategist neelg@dbs.com Eugene Leow Rates Strategist - G3 & Asia eugeneleow@dbs.com Chris Leung Economist - China & Hong Kong chrisleung@dbs.com Radhika Rao Economist - Eurozone & India radhikarao@dbs.com Irvin Seah Economist - Singapore, Malaysia, & Vietnam irvinseah@dbs.com Samuel Tse Economist - China & Hong Kong samueltse@dbs.com Duncan Tan FX and Rates Strategist - Asean duncantan@dbs.com Philip Wee FX Strategist - G3 & Asia philipwee@dbs.com Ma Tieying Economist - Japan, South Korea, & Taiwan matieying@dbs.com Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations). Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore Tel: Company Registration No E. Page 6