HIGHLIGHTS

June 2018 trade

• Total trade growth eased in June on the back of fewer working days, while moderating import growth brought the trade balance back to a surplus of US$1.7bn.
• Export growth was supported by stronger volume growth, whereas price effect was the key driver of import expansion.
• With a quarterly trade deficit of US$1.3bn, we expect current account deficit to widen to US$6.7bn, or 2.6% of GDP in 2Q18.
• We project 2Q18 GDP growth to be a tad higher at 5.2% yoy, supported by positive contribution in net export volumes and stronger consumption.

Indonesia posted a trade surplus of US$1.7bn in June
Indonesia’s trade balance swung back to a surplus of US$1.7bn in June (CIMB forecast: +US$546m; Bloomberg consensus: +US$968m; May: -US$1.5bn) on the back of much subdued gross import growth at +12.7% yoy (CIMB forecast: +23.6% yoy; Bloomberg consensus: +29.1% yoy; May: +28.2% yoy). Gross exports grew +11.5% yoy during the month (CIMB: +10.6% yoy; Bloomberg consensus: +15.6% yoy; May: +13.1% yoy).

Weaker trade expansion due to a shorter working month…
In contrast to the Lebaran month in 2012-2017 which saw trade declining, total trade activity continued to expand in June 2018, on the back of resilient global trade activity and recovering domestic demand. The pace of expansion nonetheless eased (+12.0% yoy vs. +20.5% yoy in May) due to a shorter working month, as the government declared extra holidays surrounding the Lebaran festive season. There were 20% yoy fewer working days in June 2018 (12 vs. 15 in June 2017).

… but export volume growth quickened
Nonetheless, export volume growth accelerated despite fewer working days (+24.1% yoy in June vs +17.5% yoy in May). The acceleration may have been partly supported by a weaker currency, which improves export competitiveness, whereas higher O&G production in the country lifted O&G exports. On the flip side, the import growth was mainly led by price effects (+21.8% yoy in June vs. +17.0% yoy in May), compensating for the decline in import volume (-7.5% yoy vs. +9.7% yoy in May).

Imports of capital goods supported by delivery of train sets
By category, imports of consumption goods took a backseat at the end of 2Q18 after two months of robust growth (-9.5% yoy in June vs. +34.3% yoy in May), whereas imports of raw materials rose 14.6% yoy (+24.7% yoy in May). Imports of capital goods sustained their double-digit growth (+19.9% yoy vs. +43.1% yoy in May) due to the arrival of six train cars from South Korea for Jakarta LRT.

Trade deficit to translate into higher current account deficit
The large trade surplus in June was not sufficient to offset the deficit in Apr-May, resulting in a quarterly trade deficit of US$1.3bn in 2Q18 (+US$314m in 1Q18). Hence, we expect the current account deficit to widen to US$6.7bn, or 2.6% of GDP in 2Q18 (vs. deficit of US$5.5bn, or 2.1% of GDP in 1Q18). Meanwhile, net export volumes expanded 19.7% yoy in 2Q18 (+14.8% yoy in 1Q18), pointing to a potential positive contribution to GDP growth. Coupled with stronger retail and auto sales, we expect 2Q18 GDP growth to accelerate to 5.2% yoy. The 2Q18 GDP growth data will be released on 6 Aug 2018, and balance of payment on 10 Aug 2018.

Originally published by CIMB Research and Economics on 16 July 2018.

HIGHLIGHTS

2Q18 GDP growth (advance estimates)

• Singapore’s economy lost speed in 2Q18, expanding 3.8% yoy (+4.3% yoy in 1Q18) and 1.0% qoq SAAR (+1.5% qoq SAAR in 1Q18).
• While manufacturing remains a key engine of growth, we see headwinds gathering in 2H18 amid easing electronics demand and retaliatory tariffs by the US and China.
• Property cooling measures are a setback to our expectations of a quicker recovery in the construction sector, which extended its contraction streak to 8 straight quarters.
• Risks to the outlook are global trade tensions, tighter global financial conditions, slower growth in G3 and China as well as geopolitical uncertainty.
• We retain our forecast for MAS to maintain its current monetary policy stance, advocating a “gradual and modest” pace of appreciation for the S$NEER.

GDP growth slims down, marginally below expectations
Singapore’s economic expansion moderated to 3.8% yoy in 2Q18, based on the advance estimate from the Ministry of Trade and Industry (CIMB: +4.0% yoy, Bloomberg consensus: +4.1% yoy; +4.3% yoy in 1Q18). On a qoq seasonally adjusted annual rate (SAAR) basis, real GDP growth rose at a slower pace of 1.0% qoq, following a more robust reading of 1.5% qoq SAAR in the previous quarter.

and services sectors remain resilient
Production of electronics expanded by a slower 12.4% yoy in March (+17.9% yoy in February), on moderating growth for semiconductors (+18.8% yoy vs. +27.4% yoy in February), amid softening demand for smartphones. Output growth for computer peripherals remained stagnant (+0.2% yoy vs. +0.9% yoy in February) while contractions persisted in the data storage (-19.0% yoy vs. -21.8% yoy in February), consumer electronics (-7.7% yoy vs. -9.1% yoy in February) and other components (-0.5% yoy vs. -24.5% yoy in February).

Major revisions in pharma drags down headline IPI readings
Growth in the manufacturing sector remained healthy, albeit slower (+8.6% yoy vs. +9.7% yoy in 1Q18), on the back of strong performance in all segments within the sector, particularly led by electronics and biomedical manufacturing. Growth in the services sector eased to 3.4% yoy in 2Q18 (+4.0% in 1Q18), where momentum continued to be buttressed by wholesale and retail trade as well as the financial and insurance segments.

Property cooling measures to dampen construction turnaround
In contrast, the construction sector remained the underperformer as the sector contracted for the eighth consecutive quarter (-4.4% yoy vs. -5.2% yoy in 1Q18), weighed down by private sector construction activity due to the contraction in contracts awarded, which fell 67.5% yoy in May (+39.1% yoy in Apr). In a setback for the residential construction segment, the government recently announced property cooling measures, namely adjustments in the Additional Buyer’s Stamp Duty (ABSD) rates and Loan-to-Value (LTV) limits following a sharp rebound in land prices and en-bloc sales. Particularly for the developers, the additional 5% ABSD rate could raise the cost of land acquisition and reduce the bullishness of tender bids.

Growth outlook remains positive but downside risks gather
Singapore’s economy remains on track to meet our 3.2% GDP growth forecast for 2018, which is broadly in line with the Ministry of Trade and Industry’s (MTI) projection of 2.5% to 3.5%. We are wary of risks arising from disruptions to the trade cycle from incoming tariffs by the US and China, increased protectionist policies by major trade nations, higher interest rates and tighter financial conditions as a result of global monetary policy normalisation, geopolitical uncertainty, and a sudden loss of momentum in the advanced economies and China.

MAS to maintain monetary policy stance
Price pressures remain non-threatening as we forecast headline inflation to moderate to 0.6% in 2018F (+0.6% in 2017), aligned with MAS’s expected range of 0% to 1%. Headline inflation edged up to 0.4% yoy in May (+0.1% yoy in April) due to higher food prices as well as healthcare and education costs. As the balance of risks has tilted towards downside to growth, we expect MAS stay the course on its current guidance for a “gradual and modest appreciation” of the S$NEER at the upcoming Oct policy review. However, if global trade momentum slows sharply as the US and China step up trade threats, we expect MAS to stand ready to recalibrate policy settings to support the economy.

Originally published by CIMB Research and Economics on 13 July 2018.

HIGHLIGHTS

2019 Budget Consultation

• Fiscal reforms in Budget 2019 are aimed at promoting sustainable, equitable and inclusive growth while ensuring credibility, accountability and transparency.
• Cost cutting is not the government’s only focus, as economic expansion and wage gains for the B40 and M40 households are deemed equally crucial policy goals.
• The pro-consumer agenda and fiscal constraints mean businesses will have to play a key role in improving productivity and lowering costs in the economy.
• The government appears optimistic that the pain of reform adjustments can be shared without sacrificing economic growth (MOF: 5.0-5.5% in 2019 vs. CIMB: +5.0%)
• Delays in implementation and productivity gains may entail a trade-off between 1) economic growth, 2) near-term fiscal discipline or 3) a pared down reform agenda.

Fiscal reset to achieve sustainable and equitable growth
We attended the 2019 Budget Consultation today at Putrajaya, chaired by Finance Minister YB Lim Guan Eng (FM). Fiscal reforms in Budget 2019 are part of policies aimed at promoting sustainable, equitable and inclusive growth while ensuring credibility, accountability and transparency.

Key focus areas for reforms
The government’s top structural challenges were 1) incomprehensive social safety nets and rising costs of living, 2) stagnant productivity growth and low returns to labour, 3) insufficient high-skill, high income jobs for locals and a need for the labour force to adapt to technological disruptions and 4) non-inclusive and unbalanced economic development.

Government remains upbeat on economic prognosis
The FM believes robust economic growth provides the fiscal room for reforms. At this juncture, the FM expects Malaysia’s economic expansion to sustain at a pace of 5.5-6.0% in 2018 (CIMB: +5.2%) and 5.0-5.5% in 2019 (CIMB: +5.0%), though he acknowledged that the forecasts may be refined along the way up to the tabling of Budget 2019, tentatively slated for 2 November 2018. In particular, the government is monitoring external developments such as the global trade tensions, geopolitical uncertainty as well as volatile movements in the financial and commodity markets.

Room to manoeuvre limited by fiscal constraints
The FM intends to maintain fiscal discipline with the budget deficit to “remain low” without providing a target, and was keen to manage expectations on additional fiscal space for government expenditure. Public procurement processes would be improved to stem leakages and government tenders would be judged by financial viability. The government would consider projects that are not financially viable if they produce large positive externalities for the economy, but only under rigorous cost controls. The government expects to retain its credit rating and would engage with ratings agencies to explain the scope of its policies.

Boosting labour’s share of income alongside cost of living cuts
A recurring theme during the event was the need to raise Malaysia’s labour share of income, which stood at 35% of GNI (vs. ~40% in advanced economies). In the FM’s view, reforms are needed to improve income growth for the B40 and M40 groups as the trickledown economics approach of the previous regime has worked too slowly. However, he acknowledged that wage growth has to go hand-in-hand with higher productivity. Addressing market inefficiencies and distortions such as monopolies, price floors/ceilings or government subsidies were also means to reducing the cost of living.

Squaring the circle via productivity growth and private sector
With government finances pinched, the FM said the onus falls on greater efficiency and productivity from the corporate GLC and private sector to drive the economy. Participants from the floor raised concerns that businesses are bearing the burden of economic adjustments through higher costs of doing business and domestic policy uncertainty, particularly surrounding tax and foreign labour. Inevitably, reducing market distortions and improving the cost of living requires both lower deadweight losses and compressed producer surpluses.

Achieving ideal outcome rests on implementation
The Budget Consultation did not reveal further details on specific policies, which is understandable as many Cabinet ministers have only recently taken over their portfolios. Proposals are likely to crystallise as the budgetary process continues in the next three months. Our key takeaway is that the government appears optimistic that the pain of adjustments to reforms can be shared without sacrificing growth. If implementation timelines slip or reforms take longer to bear the fruits of productivity gains, then policymakers may have to be prepared to sacrifice 1) economic growth, 2) near-term fiscal discipline and the budget deficit target or 3) pare down its reform agenda.

Originally published by CIMB Research and Economics on 12 July 2018.

HIGHLIGHTS

July MPC meeting: Staying the course

• The Overnight Policy Rate (OPR) was held at 3.25% for the third meeting in a row, policy continuity was signalled under new BNM governor Datuk Nor Shamsiah.
• The MPC statement was broadly neutral with a dovish tilt in a nod to domestic policy uncertainty and external risks from global trade tensions and rising global yields.
• The anticipated inflation slippage over the short term, resulting in widening real policy rate spreads with the US, has given BNM the policy space to remain accommodative.
• We maintain an end-2018 OPR forecast of 3.25%, implying no further hikes this year.

OPR left unchanged at 3.25%
The Monetary Policy Committee (MPC), chaired by new Bank Negara Malaysia (BNM) Governor Datuk Nor Shamsiah Mohd Yunus, extended the pause in Overnight Policy Rate (OPR), which remained at 3.25% for the third straight meeting. The decision was well anticipated by us and all analysts surveyed by Bloomberg.

Policy continuity under new Governor
It was a homecoming for the new Governor who will serve a term of five years until 30 Jun 2023 as she was previously the BNM Deputy Governor responsible for areas including banking, insurance, and Takaful supervision, financial intelligence and enforcement until her departure in November 2016. She signalled no dramatic departures from the monetary policy stance pursued by predecessor Tan Sri Muhammad Ibrahim.

Slight caution on growth outlook from external risks
BNM maintained its assessment of Malaysia’s economic outlook for 2018, following the raft of policy reforms introduced by the new Pakatan Harapan government. BNM expects Malaysia to remain on a steady growth path (CIMB: +5.2% yoy in 2018F), which will be further supported when the government provides greater certainty in domestic policy in the coming months. The MPC statement reflected the central bank’s view that economic and financial conditions remain supportive in the post-election environment. Nonetheless, BNM cautioned against downside external risks, particularly the escalating trade tensions and ongoing monetary policy normalisation.

Reduction in inflation risks…
BNM expects headline inflation to trend below its earlier forecast range of 2.0% to 3.0% in 2018 (CIMB: +1.3%), following the reduction in the Goods and Service Tax (GST) rate and fixing of RON95 and diesel fuel prices. The central bank expects headline inflation to turn negative in some months and remain low in 1H19 as a result of the aforementioned policy measures, and normalise once the transitory effects lapse. In May, headline inflation ticked higher to 1.8% yoy while core inflation was steady at 1.5% yoy.

… creates policy space to keep the OPR on hold
Regionally, interest rate cycles are turning positive to keep up with the US Federal Reserve’s policy rate hikes. Despite narrowing nominal policy rate spreads, the slowdown in Malaysia’s short-term inflation outlook has increased the real spread between the OPR and US Fed Funds rate, allowing BNM to keep policy rates accommodative until next year, in our view. While OPR cuts are an option, it would mean swimming against the tide of regional central banks and potential spillovers to the currency, unless the GDP growth and inflation outlooks deteriorate more sharply. We expect BNM to tread with caution and reiterate our end-2018 OPR forecast of 3.25%, implying no further hikes this year, with the next OPR hike anticipated in 2H19F.

Originally published by CIMB Research and Economics on 11 July 2018.