By Win Thin
In the Asian EM space, central banks from Malaysia, the Philippines, Indonesia, and South Korea all meet this Thursday. We don’t see any change from these four central banks and in general we believe EM central banks have moved into dovish wait-and-see mode for now, with the obvious exception of Brazil and Turkey, who have both cut. At some point, more EM central banks are likely to cut if the global outlook worsens, but we think it is prudent, and likely, that most remain on hold for now. Markets are, however, punishing countries that have cut rates with an eye towards a weaker currency, Brazil and Turkey.
We do not think markets will punish these countries highlighted below that may cut rates late 2011/early 2012, as none have engaged in the sort of FX policies and rhetoric that Brazil and Turkey have, and have for the most part followed orthodox policies. We do remain defensive on EM in general due to the deteriorating global environment, but much of EM FX should hold up OK since EM fundamentals remain better than DM fundamentals.
Malaysia: Rates have been kept steady at 3% since May, and have been hiked 100 bp during this tightening cycle. During the crisis, it cut rates by 150 bp. Inflation eased to 3.4% y/y in July from the peak of 3.5% y/y in June. Real sector data is slowing, including IP, exports, and vehicle sales. Indeed, vehicle sales and IP have contracted y/y in recent months. The economy is very dependent on exports, with exports/GDP at almost 100%. As such, we are not surprised that the economy is slowing so much. With price pressures stabilizing near the highs, we think Bank Negara is on hold for now, but could ease aggressively by late 2011/early 2012 if conditions warrant.
Source: Bloomberg
Indonesia: Rates have been kept steady at 6.75% since February, which was the first and only 25 bp hike of its tightening cycle. During the crisis, it cut rates by 300 bp. Inflation accelerated to 4.8% y/y in August but remains well below the peak of 7.0% y/y in January. Core inflation rose to cycle high of 5.1% in August, however. Real sector data remains fairly robust, with exports and retail sales growth near the highs. The economy is not as dependent on exports as some of its regional neighbors, with exports/GDP at around 24%. As such, we are not surprised that the economy is holding up, and so we feel that BI does not have to ease in the coming months. For now, we see BI on hold and see limited risks of aggressive easing.
Source: Bloomberg
Philippines: Rates have been kept steady at 4.5% since May, and have been hiked 50 bp during this tightening cycle. It has also raised reserve requirements several times this past year. During the crisis, it cut rates by 200 bp. Inflation eased to 4.7% y/y in August from the peak of 5.2% y/y in June. Core inflation fell to 3.4% y/y in August vs. peak of 4.0% y/y in June. Real sector data is slowing, including IP, exports, and vehicle sales. Indeed, exports have contracted y/y for two straight months. The economy is not as dependent on exports as some of its regional neighbors, with exports/GDP at around 23%. As such, we are a bit surprised that the economy is slowing so much. With price pressures easing, we think BSP could ease aggressively by late 2011/early 2012.
Source: Bloomberg
Korea: Rates have been kept steady at 3.25% since June, and have been hiked 125 bp during this tightening cycle. During the crisis, it cut rates by 300 bp. Inflation accelerated to 5.3% y/y in August, the peak for this cycle. Core inflation also rose to cycle high of 4.0% in August. Real sector data is slowing, including IP, exports, and retail sales. The economy is very dependent on exports, with exports/GDP at almost 50%. As such, we are not surprised that the economy is slowing a bit. With price pressures rising, we think BOK is on hold for now, but could ease cautiously by late 2011/early 2012 if conditions warrant.
Source: Bloomberg