Asia Week Ahead: Spotlight On Indonesia And Thailand

Indonesia’s central bank policy decision and Thailand’s second-quarter GDP report are the standouts in an otherwise light economic calendar.

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Indonesia monetary easing pause

Bank Indonesia (BI), Indonesia’s central bank, holds its monetary policy meeting next week. The decision due on Thursday, 22 August, is unlikely to include another cut in the policy rate, though that doesn’t quite qualify it to be a non-event against a backdrop of accelerated central bank easing in the region.

BI eased by 25 basis points (bp) just a month ago. Not that it can’t do a back-to-back cut though. Indeed, economic data since the last BI meeting has shown GDP growth stuck at about 5% and inflation below the 3.5% policy target (mid-point of the 2.5%-4.5% target range) – both supporting expectations for more rate cuts using the huge buffer created by a total of 175bp hikes in 2018.

But throwing a spanner in the works is the heightened currency (IDR) volatility from the escalation of the US-China trade war into a currency war. The IDR’s 1.6% month-to-date depreciation reasserts its vulnerability in times of emerging market contagion. After all, behind aggressive policy tightening in 2018 was a search for currency stability after economic crises in Argentina and elsewhere jolted emerging markets. This time is no different and we don't think BI will want to risk more IDR depreciation by cutting rates next week. Nor do we rule out it returning to an easing path later in the year.   

Thailand growth grinds lower

Thailand’s economic report card for the second quarter arrives on Monday, 19 August. GDP growth hit a four-year low of 2.8% in 1Q19. Weak exports and manufacturing and slower tourist arrivals amid elevated political uncertainty foreshadow a further slowdown in 2Q. We recently cut our growth forecast for the quarter to 2.3% from 3.0%, and that for the full year 2019 to 2.8% from 3.1%, putting it well below the official 3.3% forecast for the year.

We don’t think the Bank of Thailand’s (BoT) 25bp rate cut earlier this month is the last this year. This merely reverses a hike in late 2018. With rising global headwinds to growth and slow progress on domestic fiscal stimulus, the BoT will have to do all the heavy lifting in supporting growth. We have already penciled in one more 25bp rate cut in the fourth quarter but don’t quite rule out more as the global central bank easing cycle is likely to gather speed in the rest of the year.

Meanwhile, the government is due to submit the THB 170 billion (about 1% of 2018 GDP) stimulus package for cabinet approval on Monday. Besides measures to boost tourism, the package will reportedly contain measures to support farmers, middle-income earners, and small businesses.

What else?

Singapore’s consumer price index (CPI) for July is likely to show a further dip in headline inflation (to 0.5% from 0.6% in June) as a lower housing component due to the quarterly rebate of services and conservancy charges (S&CC) for public housing more than offset a 6.4% hike in electricity tariffs for the current quarter. We also see core inflation slowing to 1.0% from 1.2% in June, raising odds of an imminent central bank (MAS) easing. Just as the government this week cut its growth outlook for the year to 0% to 1%, the MAS dashed hopes of an off-cycle easing. Probably, something big is in the pipeline in the October semi-annual statement.

Hong Kong's July CPI will also be an interesting observation as disruption to both supplies and demand from the anti-government protest will have contributed to higher inflation. However, political uncertainty should have also weighed on housing inflation by depressing rents. That said, our house forecast has inflation rising to 3.5% in July from 3.3% in the previous month.  

Finally, in Taiwan, we will be looking for July figures on export orders and manufacturing for what it says about the island’s GDP growth coming into the third quarter. Positive growth of electronics exports in three months through July is a hopeful sign of electronics-driven slowdown bottoming out. More such green shoots will be positive for markets.