Asian Economics

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Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix, and with the Disclaimer, which forms part of it.

Q4 2019

Economics | A

siaA

sian Economics

EconomicsAsia

Q4 2019By: Frederic Neumann and Qu Hongbin

Asian EconomicsBending, not breaking

Trade tensions and wobbly local demand are weighing on growth in China and elsewhere in Asia

But further policy easing, both fiscal and monetary, will strengthen resilience across the region…

…even if it may take a little while longer for growth to swing back

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Economics ● Asia Q4 2019

Things have been a little bumpier than expected across Asia, but the

region is firmly holding on to growth. Exports, the main fuel of Asia’s

economic engine, have dried up, with shipments falling for several

months. Trade tensions between the US and China are only partly to

blame: wobbly demand across developed and even many emerging

markets, as well as a tired electronics cycle, have equally weighed on

shipments. Hesitant easing in mainland China has further curtailed

growth, not only domestically, but more broadly across the region.

And yet, all considered, overall demand in Asia is ticking along at a

decent enough pace. To prevent a further slowdown, however, extra

easing, both monetary and fiscal, will be required. Even then, given

continued global headwinds, it will take a little while longer before

Asia swings back with its customary panache.

Not this time

Yes, things feel soggy. Look closely, however, and the region’s economies have arguably held up

better than many others, notably in the West. And yet, without extra stimulus, Asia, too, is bound

to slip further. Good news, then, that there is more easing in the pipeline.

That said, mainland China is not about to pull out the massive reflation investors got accustomed

to over previous cycles. It’s more about fine-tuning the stance, rather than pulling out all the stops:

incremental monetary and fiscal easing will have to do. As a result, HSBC’s Chief China Economist,

Qu Hongbin, expects growth to slow to 5.8% in 2020 from 6.2% this year.

That means that downward pressures on regional, if not global, trade will persist for a while, even

if trade tensions were to ease, say, because of a potential mini-deal between the US and China in

the coming weeks or months.

Further afield, the outlook for demand still looks shaky as well. As HSBC’s Group Chief Economist

Janet Henry and Global Economist James Pomeroy detail in a recent report: while there are lots

of attempts to ‘pump the air’ back into the global economy, growth in developed markets looks set

to slip further (see Global Economics Quarterly: putting the air back in, 26 September, 2019).

Which brings us back to the need for more stimulus. Almost all economies across Asia are

expected to ease monetary policy again in the coming months. Fiscal policy, meanwhile, has

turned more supportive as well, delivering an extra kick to growth from Korea to India, and the

Philippines to Singapore.

Executive summary

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As a result, growth in emerging Asia, excluding China, is expected to tick up from 4.1% in 2019 to

4.4% in 2020. This, of course, is still a disappointing pace by past standards, but it still highlights

the region’s resilience amid the global trade malaise.

The regional average naturally masks nuances. In Greater China, Hong Kong may pick up a little

steam after a sharp dip in growth this year, while Taiwan may slow at the margin given the continued

headwinds for global trade.

Japan faces a tougher outlook than many others in the region, with the latest VAT hike likely pushing

the economy into a mild recession and the Bank of Japan having less room to offer a cushion.

In Korea, another generous fiscal package should help offset the external drag, leaving growth

broadly unchanged.

Australia’s economy has lost a bit of steam this year, even as the labour market remains surprisingly

resilient and there are signs that housing demand is stabilising. With the RBA delivering swift cuts,

growth may tick up again next year. In New Zealand, too, the rapid pace of monetary loosening

should help lift growth at the margin in 2020.

Growth in India stumbled over the first half of 2019, partly due to election-related uncertainty, partly

as a result of earlier disruptions in credit transmission. However, a big tax cut and easing by the

Reserve Bank are expected to push growth back, even if at a still disappointing pace. Growth in

Sri Lanka is expected to trough this year, even if the recovery will be gradual, while Bangladesh

may top the region again in 2020.

Amid all the global turbulence, ASEAN continues to impress with its resilience. Indonesia’s growth

should hold at 5%, helped by some extra fiscal spending, while in the Philippines rebounding

infrastructure outlays should push growth again above 6% in 2020. However, the economies in

Thailand and Malaysia are expected to cool, amid a continued challenging outlook for exports and

a fading fiscal impulse. Singapore, too, will continue to be buffeted by global headwinds, but it has

the fiscal room to cushion the impact. And Vietnam, despite its surging competitiveness may slow

a little as global demand for its goods struggles to rebound.

…well, at least we’re still swinging, folks.

HSBC GDP growth forecasts (%, red denotes above consensus, grey denotes below consensus)

2018

2019f (old)

2019f (new)

2019f Consensus

2020f (old)

2020f (new)

2020f Consensus 2021f

Australia 2.7 2.2 1.9 1.9 2.6 2.3 2.5 2.7 New Zealand 2.9 2.5 2.1 2.3 2.6 2.4 2.4 2.3 Bangladesh* 8.1 7.6 7.7 7.2 7.7 7.8 7.2 7.7 Mainland China 6.6 6.5 6.2 6.2 6.3 5.8 5.9 5.8 Hong Kong 3.0 2.4 0.3 0.3 2.4 1.5 1.3 1.4 India* 6.8 6.8 5.9 6.1 6.8 6.5 6.8 6.5 Indonesia 5.2 5.0 5.0 5.0 5.1 5.0 5.1 5.2 Japan 0.8 0.7 0.9 1.0 -0.2 -0.1 0.2 0.7 Korea 2.7 2.3 2.0 1.9 2.2 2.2 2.2 2.2 Malaysia 4.7 4.5 4.5 4.5 4.3 4.1 4.2 4.3 Philippines 6.2 6.0 5.7 5.8 6.4 6.3 6.0 6.3 Singapore 3.1 1.6 0.4 0.7 1.9 0.9 1.5 1.6 Sri Lanka 3.2 2.7 2.7 2.8 3.2 3.3 3.5 3.7 Taiwan 2.6 2.1 2.1 2.1 2.0 1.9 1.8 2.0 Thailand 4.1 3.1 3.1 2.9 3.0 2.8 3.1 2.9 Vietnam 7.1 6.7 6.9 6.6 6.5 6.4 6.4 6.5

Asia ex JN 5.9 5.5 5.4 5.4 5.5 5.3 5.3 5.2 Asia ex JN & CN 4.9 4.5 4.1 4.1 4.5 4.4 4.5 4.4 Asia ex JN CN & IN 4.1 3.3 3.3 3.2 3.3 3.4 3.4 3.5

*Refers to fiscal year NB: GDP aggregates use chain weighted nominal USD GDP weights. Old forecasts refer to those published in the Asia Economics Quarterly: Keep on truckin’ (4 July 2019) Source: CEIC, Consensus Economics, HSBC

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Executive summary 1

Key forecasts 4

Monetary policy assumptions 5

Still slippin’ 6

Mainland China: Moderate

stimulus, slower growth 20

Indicators 27

GDP 28

Inflation 29

Industrial production & unemployment 30

Consumption & saving 31

Investment 32

Trade 33

Economy profiles 35

Australia 36

Bangladesh 40

Mainland China 44

Hong Kong 48

India 52

Indonesia 56

Japan 60

South Korea 64

Malaysia 68

New Zealand 72

Philippines 76

Singapore 80

Sri Lanka 84

Taiwan 88

Thailand 92

Vietnam 96

Disclosure appendix 101

Disclaimer 104

Contents


4

Key forecasts

% y-o-y Asia Average AU CH BA HK IN ID JN KR MA NZ PH SI SL TA TH VN

Real GDP%† 2018 5.0 2.7 6.6 8.1 3.0 6.8 5.2 0.8 2.7 4.7 2.9 6.2 3.1 3.2 2.6 4.1 7.1 2019f 4.5 1.9 6.2 7.7 0.3 5.9 5.0 0.9 2.0 4.5 2.1 5.7 0.4 2.7 2.1 3.1 6.9 2020f 4.3 2.3 5.8 7.8 1.5 6.5 5.0 -0.1 2.2 4.1 2.4 6.3 0.9 3.3 1.9 2.8 6.4 2021f 4.4 2.7 5.8 7.7 1.4 6.5 5.2 0.7 2.2 4.3 2.3 6.3 1.6 3.7 2.0 2.9 6.5 Real Private consumption† 2018 6.3 3.1 9.1 5.4 5.5 8.1 5.0 0.3 2.8 8.0 3.3 5.6 2.7 2.3 2.0 4.6 7.3 2019f 4.8 1.9 7.0 7.2 0.9 4.2 5.0 0.7 2.0 7.5 2.7 6.0 3.2 2.5 1.3 4.3 4.2 2020f 4.6 2.2 6.6 7.3 2.0 6.8 4.8 -0.8 1.9 6.3 2.7 5.8 2.2 3.0 1.1 3.5 6.4 2021f 4.9 2.4 6.7 7.1 2.4 6.7 5.1 0.7 1.5 6.9 2.5 5.8 3.5 3.5 1.2 3.3 6.5 Real Fixed investment*† 2018 5.3 3.2 7.1 8.2 2.0 10.0 6.7 1.1 -2.4 1.4 3.7 12.9 -4.0 -0.5 2.5 3.8 8.6 2019f 2.5 -1.9 3.1 8.6 -8.7 4.0 4.8 1.7 -2.4 -1.5 2.3 -0.3 1.2 3.0 6.2 2.1 5.7 2020f 3.3 0.7 3.0 7.0 3.5 6.3 6.6 1.0 2.3 1.9 1.0 6.3 2.0 4.6 5.6 4.4 7.4 2021f 3.4 2.6 3.1 7.1 1.8 6.8 7.3 1.2 2.1 2.5 1.3 9.5 2.4 4.8 4.2 5.9 5.5 Current account balance**† (% of GDP) 2018 1.4 -2.1 0.4 -2.3 4.3 -2.1 -3.0 3.5 4.3 2.1 -3.9 -2.4 17.9 -3.2 12.2 6.4 2.8 2019f 1.8 0.1 1.5 -2.3 4.7 -1.9 -2.7 3.0 2.7 3.1 -3.3 -2.2 17.5 -3.0 12.2 5.9 2.1 2020f 1.3 -1.1 0.9 -2.6 1.7 -2.0 -2.8 2.4 2.3 3.0 -3.5 -2.4 16.6 -3.0 11.9 5.8 0.5 2021f 1.0 -1.2 0.5 -2.5 0.9 -2.0 -2.9 2.0 2.0 2.5 -3.4 -2.1 16.0 -3.0 11.8 5.3 1.7 CPI‡ (period average) 2018 2.3 1.9 2.1 5.5 2.4 3.4 3.2 1.0 1.5 1.0 1.6 5.2 0.4 4.3 1.3 1.1 3.5 2019f 2.4 1.6 2.6 5.6 2.8 3.5 3.2 0.7 0.5 0.6 1.5 2.7 0.6 4.1 0.5 0.9 2.6 2020f 2.5 1.8 2.4 5.5 2.5 3.7 3.2 0.9 1.6 1.6 1.9 3.0 0.7 4.0 0.7 1.1 3.0 2021f 2.2 2.1 1.9 5.5 2.3 3.8 3.3 0.1 1.5 1.9 1.9 2.9 0.7 4.0 0.8 1.0 3.2 Policy rate^ (%, year-end) 2018 n/a 1.50 4.35 6.00 2.75 6.50 6.00 -0.10 1.75 3.25 1.75 4.75 1.00 8.00 1.375 1.75 6.25 2019f n/a 0.75 4.00 6.00 2.00 4.90 5.00 -0.10 1.25 2.75 0.75 4.00 0.50 7.00 1.375 1.25 6.00 2020f n/a 0.50 3.75 6.00 2.00 4.90 4.75 -0.10 1.25 2.50 0.25 3.75 0.00 6.50 1.375 1.25 5.75 2021f n/a 0.50 3.75 6.00 2.00 4.90 4.75 -0.10 1.25 2.50 0.25 3.75 0.00 6.50 1.375 1.25 5.75 Exchange rate (vs. USD, year-end) 2018 n/a 0.72 6.86 83.90 7.83 69.79 14481 110.4 1118 4.14 0.65 52.72 1.36 182.7 30.73 32.71 23175 2019f n/a 0.68 7.20 86.00 7.80 70.00 14600 105.0 1220 4.30 0.62 54.00 1.38 189.0 31.60 31.80 23550 2020f n/a 0.68 7.30 86.00 7.80 71.50 14600 105.0 1240 4.30 0.62 55.00 1.38 195.3 31.60 31.80 23550 2021f n/a 0.68 7.30 86.00 7.80 71.50 14600 105.0 1240 4.30 0.62 55.00 1.38 196.0 31.60 31.80 23550

**Hong Kong: Current account refers to visible and invisible trade balance only †On a fiscal year basis for India and Bangladesh ‡On a fiscal year basis for India ^Singapore: Slope of SGD NEER band Note: Australia and New Zealand are not included in the Asia aggregate. Aggregates use chain nominal GDP (USD) weights, except for inflation which uses nominal GDP (PPP) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. FX rates for year-end 2021 is assumption and not forecasts. N/a = not applicable Source: CEIC, HSBC forecasts

GDP (% y-o-y) CPI (% y-o-y)

Source: CEIC, HSBC forecasts (nominal GDP USD weights) Source: CEIC, HSBC forecasts (nominal GDP PPP weights)

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Monetary policy assumptions Monetary policy

Period end % 3Q19 4Q19f 1Q20f 2Q20f 3Q20f 4Q20f 1Q21f 2Q21f

Australia RBA Cash Target rate 1.00 0.75 0.50 0.50 0.50 0.50 0.50 0.50 Bangladesh Repo rate 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 Mainland China 1 year Loan Prime Rate 4.20 4.00 3.90 3.80 3.75 3.75 3.75 3.75 Hong Kong Base Rate 2.25 2.00 2.00 2.00 2.00 2.00 2.00 2.00 India Repo rate 5.40 4.90 4.90 4.90 4.90 4.90 4.90 4.90 Indonesia 7-day Reverse Repo rate 5.25 5.00 4.75 4.75 4.75 4.75 4.75 4.75 Japan Overnight Call rate -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 Korea 7-day Repo rate 1.50 1.25 1.25 1.25 1.25 1.25 1.25 1.25 Malaysia Overnight rate 3.00 2.75 2.75 2.75 2.50 2.50 2.50 2.50 New Zealand RBNZ Cash rate 1.00 0.75 0.25 0.25 0.25 0.25 0.25 0.25 Philippines Reverse Repo rate 4.00 4.00 3.75 3.75 3.75 3.75 3.75 3.75 Singapore Slope of SGD NEER band 1.00 0.50 0.50 0.00 0.00 0.00 0.00 0.00 Sri Lanka Reverse Repo rate 7.00 7.00 7.00 6.50 6.50 6.50 6.50 6.50 Taiwan Discount rate 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 Thailand 1-day Repo rate 1.50 1.25 1.25 1.25 1.25 1.25 1.25 1.25 Vietnam Refinancing rate 6.00 6.00 6.00 5.75 5.75 5.75 5.75 5.75

Source: CEIC, HSBC forecasts

Headline inflation

% y-o-y Target (2020) 2Q19 3Q19e 4Q19f 1Q20f 2Q20f 3Q20f 4Q20f 1Q21f

Australia 2.0 to 3.0 1.6 1.7 1.6 1.9 1.8 1.7 1.7 1.9 Bangladesh 5.5 5.6 5.6 5.6 5.5 5.5 5.4 5.6 5.4 Mainland China 3.0 2.6 2.8 3.1 3.3 2.7 2.1 1.7 1.6 Hong Kong 2.5 3.0 3.2 3.0 2.9 2.7 2.3 2.1 2.1 India 4.0 3.1 3.3 3.7 3.9 3.7 3.8 3.7 3.7 Indonesia 2.0 to 4.0 3.1 3.5 3.6 3.7 3.2 3.0 3.2 3.2 Japan 2.0 0.8 0.3 1.4 1.2 1.1 1.1 0.1 0.1 Korea 2.0 0.7 0.1 0.5 1.5 1.5 1.9 1.4 1.5 Malaysia 0.7-1.7 0.6 1.3 0.9 1.5 1.5 1.6 1.7 1.8 New Zealand 1.0 to 3.0 1.7 1.4 1.5 1.9 1.9 1.9 2.0 2.0 Philippines 2.0 to 4.0 3.0 1.8 2.0 2.9 3.1 3.2 2.9 2.9 Singapore 0.5 - 1.5 0.7 0.5 0.7 0.8 0.6 0.6 0.6 0.6 Sri Lanka Mid-single digits 4.4 3.6 4.3 4.3 3.9 3.9 4.0 3.9 Taiwan 0.82 0.8 0.5 0.4 0.7 0.6 0.7 0.7 0.9 Thailand 1.0 to 4.0 1.1 0.8 1.1 1.4 1.0 1.2 1.0 1.0 Vietnam Less than 4.0 2.7 2.2 2.7 3.3 3.0 3.1 2.8 2.8

Notes: Australia and New Zealand data are quarterly. Japan’s target is the Bank of Japan core inflation (excluding fresh food) targe t. Mainland China's target is the government target for 2019, we assume it to remain unchanged for 2020. Hong Kong’s target is the government forecast from the 2019-20 Budget. India’s inflation target is 4% +/- 2%. Inflation target for Malaysia is the government’s forecast for 2019. Taiwan’s target is the Directorate General of Budget’s forecast for 2020. Singapore’s target is a forecast for 2019 by the MAS. Sri Lanka does not have a specific target number. Vietnam target is for 2019 Source: Various official sources, CEIC, HSBC forecasts

Foreign exchange rate

2-yr Average 1Q19 2Q19 3Q19 4Q19f 1Q20f 2Q20f 3Q20f 4Q20f

Australia 0.74 0.71 0.71 0.69 0.68 0.68 0.68 0.68 0.68 Bangladesh 83.91 84.25 84.50 85.50 86.00 86.00 86.00 86.00 86.00 Mainland China 6.74 6.73 6.87 7.10 7.20 7.25 7.25 7.30 7.30 Hong Kong 7.83 7.85 7.81 7.80 7.80 7.80 7.80 7.80 7.80 India 68.62 69.17 68.92 71.00 70.00 70.00 71.00 71.00 71.50 Indonesia 14213 14,244 14,141 14,200 14,600 14,600 14,600 14,600 14,600 Japan 109.6 110.8 107.6 105.0 105.0 105.0 105.0 105.0 105.0 Korea 1126 1,138 1,157 1,220 1,220 1,225 1,230 1,235 1,240 Malaysia 4.08 4.08 4.14 4.20 4.30 4.30 4.30 4.30 4.30 New Zealand 0.67 0.65 0.64 0.63 0.62 0.62 0.62 0.62 0.62 Philippines 52.42 52.78 51.36 52.60 54.00 54.00 54.40 54.80 55.00 Singapore 1.35 1.36 1.35 1.37 1.38 1.38 1.38 1.38 1.38 Sri Lanka 169.4 176.1 176.5 184.0 189.0 193.0 196.0 196.0 196.0 Taiwan 30.46 30.83 31.07 31.00 31.60 31.60 31.60 31.60 31.60 Thailand 31.87 31.74 31.10 30.50 31.80 31.80 31.80 31.80 31.80 Vietnam 23111 23,189 23,301 23,450 23,550 23,550 23,550 23,550 23,550

Source: Bloomberg, HSBC forecasts


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Some steadier than others

Rough summer. The headlines came hard and fast. The customary seasonal lull that investors

and policymakers once enjoyed seems now part of a cherished past. Tariff tensions escalated

in a matter of days before easing once again; financial markets, not surprisingly, gyrated in a

correspondingly ferocious manner; and the broadly darkening flow of economic data was fitfully

interrupted by tender green shoots.

It’s important to cut through the noise, therefore. Take a look at our first chart. This shows

headline manufacturing PMIs, a useful proxy for economic momentum more broadly, for

emerging Asia and developed markets. The former has indeed slid over the past year, with the

latest reading just holding around the water line. Note, however, that by this measure the overall

deceleration has not been as stark as the headlines about trade tensions and the demand

wobble in China suggest: growth had already ticked along at a somewhat uninspiring pace for a

number of years. By contrast, the much bigger stumble occurred in developed markets, with the

manufacturing sector slowing more rapidly in the US, Japan, and especially Europe.

That’s the big picture. Nuances apply, of course. A closer look, for example, reveals that much of

Asia, too, has seen a significant dip in growth. Chart 2 shows the difference in headline GDP growth

Still slippin’

Despite some tender green shoots, exports are likely to continue to

decelerate, buffeted by weak demand and ongoing trade tensions

The trade malaise risks weighing further on local consumption and

investment spending amid signs of lower manufacturing employment

Further monetary easing is still warranted across the region, but fiscal

stimulus will have to play a greater role in supporting overall demand

Chart 1: Manufacturing PMIs (index)

Source: Markit, HSBC

Frederic Neumann Co-head of Asian Economics Research The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 4556

Abanti Bhaumik

Associate

Bangalore

The manufacturing slowdown

in emerging Asia has been

less pronounced than in

developed markets

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EM Asia developed markets

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between the second quarter of this year and the last quarter of 2018 (in % y-o-y terms). Almost

all economies across the region have decelerated (further) over the first half of 2019, with India,

Thailand, Singapore, and Korea slipping the most. By contrast, New Zealand, Malaysia, Taiwan, and

Japan picked up a little steam. In the latter, this reflects a divergence: while the manufacturing sector

is buffeted by weak exports, local demand has been surprisingly robust. Taiwan, meanwhile, is

bucking the trend partly because of supply chain tweaks that prompted the move of some production

and, thus, investment, back onshore.

All about exports

Much of the growth deceleration, though not all, can be traced to the global trade malaise -- although,

again, not all economies have been hit equally hard. Chart 3 shows average nominal export growth

for the fourth quarter of last year and the latest available three months. Note the drop in shipments in

Korea, Indonesia, Singapore, Hong Kong, Japan, Malaysia, New Zealand, and Thailand. By contrast,

Australia and Vietnam continued to see solid gains, followed by Sri Lanka and the Philippines.

The fall in shipment values partly reflects price declines, with volumes often holding up much better.

In Korea, for instance, the fall in semiconductor prices has pulled down headline export growth,

while underlying shipments are roughly flat on the year (chart 4). In Indonesia, too, the drop in coal

and palm oil prices has depressed export earnings even as volumes have remained positive so

far (chart 5). While the relative resilience of shipment volumes blunts the immediate impact of the

Chart 2: Difference between 2Q 2019 and 4Q 2018 real GDP growth (ppt, y-o-y terms)

Source: CEIC, HSBC; NB: CH refers to mainland China

Chart 3: Nominal export growth (% y-o-y)


Nominal exports have fallen

in most economies

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global trade malaise on GDP growth, a persistent fall in export revenues still represents a material

drag on broader demand, with lower corporate profits curtailing investment and wage growth in the

external sector, while accentuating potential exchange rate and financial volatility via a wider current

account deficit (or lower surplus).

A major reason for the slowdown in regional trade, of course, is the continued ‘tariff tiff’ between

the US and China, although disentangling the precise effects on individual economies is tricky.

Bilateral trade between the two protagonists has collapsed: exports from the US to China, and

vice versa, have dropped at a solid double-digit rate (Chart 6). Unless a deal can be reached in

the next several weeks, even if only partial, tariffs are set to increase substantially again before

year-end. According to a study by the Peterson Institute for International Economics, the average

tariff on all goods shipped between the two economies will top 25%, up from single digits in 2017

(Chart 7). And, increasingly, non-tariff barriers are being applied, such as restrictions on FDI and

technology transfers, whose impact is harder to quantify, but which curtail bilateral trade further.

For Asia more broadly, there is evidence of shifting trade patterns: while exports from China to

the US are down substantially, those from other economies have accelerated markedly. Chart 8

shows the growth of exports to the US for individual markets over the first 7 months of 2019 (black

columns) and that for the same period last year (red columns). Shipments have picked up steam

in Vietnam, Cambodia, Taiwan, Bangladesh, Australia, Korea, and Sri Lanka; however, they have

slowed in the Philippines, Japan, Singapore, and Thailand, and are down outright in Malaysia, New

Zealand, and Indonesia. From this perspective, then, one might think of the former as being

relative ‘winners’ from trade tensions between the US and China.

Chart 4: Korea exports (% y-o-y) Chart 5: Indonesia exports (% y-o-y)

Source: CEIC, HSBC Source: CEIC, HSBC

Trade between China and the

US is down sharply, with

tariffs set to rise further

Chart 6: US-China trade (% y-o-y) Chart 7: Average tariff rate (%)

Source: CEIC, HSBC; NB: based on US Customs data Source: Peterson Institute for International Economics, HSBC

Some economies in Asia have

gained market share against

China in the US …

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However, as we have already indicated in Chart 5, almost all markets have seen an overall fall in

shipments of late. In part, this is because exports to China have fallen in many cases over the same

period, either because of the overall slowdown in local demand (in part because of the trade

tensions), or because of the decline in re-exports from China to the US. Take a look at Chart 9. With

the exception of Bangladesh, shipments to China have decelerated sharply everywhere, with outright

contractions in Korea, Japan, Indonesia, Taiwan, India, Vietnam, the Philippines, and Singapore.

Where it hurts

This highlights a broader reality: even if supply-chain rejigging may lead to marginal gains for some

economies as they displace Chinese exports to the US, the region is highly exposed to slowing

demand in China as well. Therefore, to the extent that trade tensions reduce growth in China (and

the US), overall exports can still suffer. To put this into perspective, consider Chart 10. This shows

the estimated growth response in individual economies to a 1ppt slowdown in GDP growth in

China, the US, and the EU. With the exception of the Philippines, all markets in the region have

a far higher growth sensitivity nowadays to swings in Chinese demand than to the US, let alone

Europe. Therefore, while some economies may gain market share vis-à-vis China in the US, these

gains can be easily offset by a slowdown in China itself.

Chart 8: US imports from Asia, January-July cumulative (% y-o-y)


… but exports from most the

region to China have fallen

Chart 9: Mainland China imports from Asia, January-July cumulative (% y-o-y)

Source: CEIC, HSBC

For Asia, growth sensitivity

to mainland China is much

greater than to US market

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And there is another point to consider: while exporters from China may struggle to compete in

the US because they face increasing tariffs and other restrictions, no such barriers, at least to

the same extent, have so far been erected elsewhere. As a result, shipments from China that

would ordinarily have gone to the US have been diverted to other destinations, in the process

squeezing exporters from third markets.

Start with Chart 11. This shows the level of shipments from China, indexed to the start of the

trade tensions in the second quarter of 2018, in both USD and RMB terms. While, as discussed,

shipments from China to the US have fallen at a double-digit rate, total Chinese exports are still

up by nearly 8% measured in US dollars. Given the depreciation of the RMB, in local currency

terms the gain is even greater. This suggests that Chinese exporters are displacing competitors

elsewhere. In fact, that’s exactly what’s happened in Europe: since the middle of last year, import

growth from China has consistently exceeded that from other parts of Asia (Chart 12).

Still, there is evidence of some production being relocated from mainland China into neighbouring

economies. In particular, as shown, exports from Bangladesh, predominantly apparel, continue to

gain market share, accelerating not only to the US but also to China. Both Vietnam and Taiwan

have also seen an increase in exports, centred on electronics. Yet, for Thailand and Malaysia,

two economies often regarded as at least ‘relative winners’ of the trade tensions between China

and the US, the evidence is a little more mixed, with total shipments still down in both.

Chart 10: GDP growth response to a 1ppt deceleration in G3 growth (ppt)

Source: CEIC, HSBC

Chinese shipments to

other destinations have held

up well …

Chart 11: Mainland China exports Chart 12: EU imports (% y-o-y, 3mma)


… displacing for example

exports from the rest of

Asia to Europe

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It’s admittedly early days, however. The longer the trade tensions between China and the US

persist, the more some production is likely to be relocated within the region. Already, foreign

direct investment has picked up sharply in 2019 in Thailand, the Philippines, and Vietnam, and

remains strong in Malaysia (Chart 13). A large share of this likely reflects investment by export-

oriented manufacturers. By contrast, flows into Indonesia, Taiwan and India have shown no

similar uptick (though, in Taiwan’s case, much manufacturing investment is undertaken by local

firms, and thus is not reflected in FDI numbers).

Whether the rise in FDI in parts of ASEAN is purely a consequence of the trade tensions

between China and the US is debatable: over the past several years, FDI inflows into the region

have risen faster than into China, reflecting ASEAN’s rising competitiveness in the face of

climbing labour costs in China. In fact, 2018 was the first year since 1993 when FDI inflows into

ASEAN exceeded those into China (Chart 14). From this perspective, the current trade frictions

merely accelerate a process that has been under way for some time already.

Despite ongoing trade tensions and the risk of a further slowdown in developed markets and

China, a few, tender green shoots have sprung up of late that point to a possible stabilisation in

exports. In particular, after a sharp deceleration, global new orders for electronics have

increased again of late, even if at a still tepid pace. Meanwhile, semiconductor equipment

billings have improved somewhat, a useful lead indicator for the electronics sector (Chart 15).

Still, it is important to keep these ‘green shoots’ in perspective: in part they may reflect strategic

inventory building ahead of expected additional trade restrictions rather than an improvement in

Chart 13: FDI inflows (% y-o-y) Chart 14: FDI inflows (USDbn)

NB: *approvals, **BoP inflows, ***registered capital, ****applications Source: CEIC, HSBC

Source: UNCTAD, HSBC

FDI inflows have picked up in

Thailand, the Philippines,

and Vietnam

Chart 15: Electronics green shoots? Chart 16: New export orders still falling

Source: Markit, CEIC, HSBC Source: Markit, CEIC, HSBC

Tender signs of stabilisation

in electronics

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12

underlying demand. In fact, Taiwan’s official new export orders have yet to show positive annual

growth, and average new export orders for the regional manufacturing sector remain close to

their cycle low (Chart 16).

Still talkin’

Amid all the headlines about tariffs and other tensions, it is easy to lose sight of the fact that many

economies continue to pursue trade deals (see also Janet Henry and James Pomeroy, Putting the

air back in, 26 September, 2019). In Asia, the Comprehensive and Progressive Agreement for Trans-

Pacific Partnership (CPTPP) came into force earlier this year, including Australia, New Zealand,

Japan, Brunei, and Malaysia from the region, although the latter has so far not ratified the deal (Peru,

Canada, Mexico, and Chile are the members from the Western Hemisphere). Given its far-reaching

commitments, the projected gains from the CPTPP are substantial. According to one study, Vietnam,

Singapore, and Malaysia stand to gain the most (Chart 17).

Meanwhile, negotiations for the Regional Comprehensive Economic Partnership (RCEP), a trade

agreement comprising almost all major economies in the region, are ongoing, with the stated target

of reaching a deal by November of this year. While not as ambitious in scope as the CPTPP, and

therefore yielding lower projected benefits for most markets, the RCEP would nevertheless create

the largest ‘free trade area’ in the world. Still, there is a risk that the deadline for reaching a deal

might again slip, not least given lingering concerns by some members about opening up too swiftly

and thus exacerbating bilateral trade imbalances (Chart 18).

Meanwhile, the US and Japan have also reached a mini-deal that will reduce some tariffs on the

latter’s agricultural imports, and the former is cutting a number of restrictions on industrial goods.

However, while encouraging, it is important to keep the agreement in perspective: its overall effect

on lifting trade will likely remain limited. In fact, the deal is supposed to serve only as an initial step

to more protracted, and presumably more intractable, negotiations that will start next year, amid

a US presidential election campaign, for a broader agreement. Pointedly, the mini-deal does also

not explicitly rule out potential US tariffs on automotive imports from Japan, which would prove highly

disruptive to the latter’s economy, comprising about 1% of GDP (Chart 19).

In the coming months, there might also be a mini-deal between the US and India. But this, too, will

likely have only a limited impact on overall trade: the US may gain better access to India for medical

devices and some other goods, while it in return restores India’s benefits under the Generalised

System of Preferences (GSP), which were only revoked in June, covering about 6 billion dollars of

shipments (about 1.8% of India’s total exports).

Chart 17: Potential gains or losses by 2030 of various trade agreements (% of income)

Source: Peter A. Petri and Michael G. Plummer, China should join the New Trans-Pacific Partnership, Peterson Institute for International Economics, Policy Brief 19-1, Washington, DC, January 2019; NB: *CPTPP member, **member, but not yet ratified CPTPP, ***assumed no member of CPTPP or RCEP for purposes of this analysis

Ongoing trade liberalisation

efforts should support growth

Mini-deals between the US and

Japan, and possibly the US

and India, to offer only limited

lift to trade

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13


Wobbles spreadin’

The longer the softness in exports and, hence, manufacturing, persists across the region, the

bigger the risk it will drag down domestic demand further. Already, private consumption and

investment have pulled back in many economies: Chart 20 shows the difference in growth

between the second quarter of this year and the last quarter of 2018 (in y-o-y terms). While

elections or public spending-related uncertainties may have held back especially investment in

the Philippines, India, Thailand, Australia, and Indonesia, ongoing trade tensions may cap any

potential rebound. Meanwhile, private consumption has decelerated as well in most economies, a

process that is less readily attributable to temporary domestic political or budgetary uncertainty.

In fact, the latter may reflect growing worries about job prospects. Amid sluggish manufacturing,

companies have started to shed workers, even if at a still relatively gradual pace. Chart 21 shows

the employment sub-index of individual manufacturing PMIs, comparing the average reading for

the fourth quarter of 2018 and the last three months. With the exception of Australia’s gauge, all

measures have pulled back, with only the Philippines, India, Japan, and Vietnam still showing some

job growth. Admittedly, the pull-back in Asia hasn’t been as abrupt as in the Eurozone or the US

(with the exception of New Zealand), but given that the sector tends to account for a larger share of

total employment in the region, the impact on overall consumer sentiment is bound to be significant.

Chart 20: Difference between 2Q 2019 and 4Q 2018 real consumption and investment growth (ppt, y-o-y terms)

Source: CEIC, HSBC

Signs of weaker employment

in manufacturing

Private consumption and

investment slowed in much

of Asia in 1H 2019

Chart 18: India trade with mainland China Chart 19: Japan’s auto export to US


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14

No surprise, then, that there has been a marked deceleration in credit growth across the region

as well. On some measures, this has fallen to its slowest pace since the early 2000s, a period

when many economies first grappled with the risk of deflation (Chart 22). And momentum points

to a further slowdown: Chart 23 shows the difference in bank lending growth over the latest three

month and the end of 2018 (in y-o-y terms): with the exception of New Zealand, credit has continued

to slow this year. Consider China. As HSBC’s Chief China Economist Qu Hongbin explains in the next chapter,

officials have so far been highly restrained in providing stimulus to the economy. Although the

authorities have lowered the reserve requirement ratio two times so far this year, and interest rates

have gradually declined, lending growth has barely budged. As a result, the credit impulse, or

growth in lending relative to GDP, has only turned neutral, well short of the positive readings of

previous cycles (Chart 24). As a result, overall investment growth has continued to decelerate and

home sales growth has been broadly flat (though it is still running at a near-record level). Unless,

therefore, officials pursue more determined easing, the economy is bound to slow further in the

coming quarters.

In India, too, overall credit growth has been sluggish, despite a series of rate cuts by the Reserve

Bank. In part, this may be due to sluggish credit demand. However, it likely also reflects an impaired

transmission mechanism, with liquidity and asset quality issues restraining lending growth among

commercial banks (Chart 25) as well as non-bank financial companies.

Chart 21: Manufacturing PMIs employment sub-index

Source: Markit, HSBC

Average credit growth in Asia

at its lowest since early 2000s

Chart 22: Bank lending growth (simple regional averages, % y-o-y)

Chart 23: Change in bank lending growth latest and end-2018 (ppt, y-o-y terms)

Source: CEIC, HSBC; NB: simple average Source: CEIC, HSBC

Credit impulse in China only

back to neutral

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15


Lending support

A challenging external environment and softening local demand point to the need for continued

policy support in virtually all economies in the region. Here, the shift in the Federal Reserve’s

stance from a tightening to an easing bias over the past several months (though the ‘dots’ now

suggest a neutral outlook) has arguably accelerated the easing cycle across Asia. So far,

however, the rate cuts that have been delivered (black squares) still mostly fall short of the

easing implemented over the last cycle (red bars; Chart 26). This suggests more scope for

easing in the months ahead, and we forecast central banks to loosen the reins further in all EM

markets except Taiwan (blue squares).

Inflation, certainly, does not pose an obstacle for further monetary easing for the time being.

In all economies across the region, price pressures are either below or comfortably within the

official target range (or government forecast where explicit central bank targets are not

available; Chart 27). But monetary officials have to consider broader risks as well when

setting policy and three in particular will likely affect central bank action in Asia over the

coming quarters.

Chart 24: China credit impulse Chart 25: India bank non-food credit

Source: Bloomberg, HSBC Source: CEIC, HSBC

Policy rate cuts so far do not

match previous easing cycle

Inflation remains well within,

if not below, target

Chart 26: Change in policy rates over previous cycle and now (ppt)

Source: CEIC, HSBC; NB: Singapore refers to NEER slope change

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16

The first relates to food prices. Most notably, African swine fever has pushed up pork prices in

China by over 40% since April. And as consumers shift to substitutes, prices for poultry, beef, and

even seafood have begun to climb as well. In the meantime, cases of African swine fever have

now been reported in Vietnam, Cambodia, Laos, Mongolia, and South Korea, with risks that the

disease could spread further. But, even if ASF remains contained for the most part to China,

it could still push up the cost of food across the region via higher imports of agricultural products

from other economies. Given the sensitivity of headline CPIs to food price swings across the

region, the issue could complicate the monetary policy response to the current growth malaise.

Indeed, food price inflation has already accelerated in Indonesia, Hong Kong, Sri Lanka, India,

mainland China and Malaysia, though in most cases this so far reflects local factors (Chart 28).

Moreover, in some places, there has been a sharp easing of food price pressures, most notably

in the Philippines, Vietnam, and Korea, pulling down headline inflation readings markedly.

The second big risk that central bankers will need to take into consideration when setting monetary

policy in the coming months is that even as headline measures may be skewed to the upside due

to higher food costs, underlying price pressures continue fizzle. In fact, even as the monetary policy

response so far in Asia has lagged the previous easing cycle (Chart 26), core inflation is already

running below 2015-16 lows in Taiwan, Japan, Thailand, Korea, Malaysia, Indonesia, and India

(Chart 29). Particularly given that the potential rise in food prices is prompted by a supply-shock,

rather than overheating demand, and that underlying price pressures continue to trend lower, further

easing may be warranted even if headline CPI readings should stabilise or even climb.

Chart 27: Latest CPI inflation and central bank target/government forecast (% y-o-y)

Source: CEIC, HSBC

Food inflation has ticked up

in a number of economies…

…but core CPIs mostly already

below 2015-16 lows

Chart 28: Food CPI inflation (% y-o-y) Chart 29: Core CPI inflation (% y-o-y)

Source: CEIC, HSBC Source: CEIC, HSBC; NB: refers to non-food and non-energy CPI

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17


A third consideration concerns the impact of exchange rate volatility on inflation. Over the past year,

there has been a marked diversion in the performance of local currencies against the US dollar,

with some exchange rates falling and others rising (Chart 30). From an inflation perspective, a

weaker currency can raise pressures and vice versa. However, our quantitative estimates show

that the impact of a given move in the exchange rate has had a far lower impact on local inflation in

the post-crisis period than before, likely reflecting the structural easing of price pressures since

the episode (Chart 31; the only exceptions being Japan and Malaysia). From this perspective then,

too, central bankers should be less reluctant to cut interest rates further even if exchange rates

remain under pressure.

Inflation risks, in short, should not present a material constraint on further monetary easing in Asia.

And with the exceptions of Bangladesh, Japan, Sri Lanka, Taiwan, Vietnam, and the Philippines, we

expect all central banks to provide further accommodation in the last quarter of this year (Table 1).

However, beyond this, the pace of easing is expected to slow. In part, that’s because policy rates

in some cases are rapidly approaching the zero bound, with no clear consensus yet formed about

the need or desirability of implementing unconventional policies (e.g. Australia, New Zealand, Korea,

Taiwan, and Thailand). In part, this also reflects lingering macro-prudential concerns among officials,

with swift monetary easing seen as potentially reigniting an undue build-up in debt, especially among

households (e.g. China, Thailand, and Korea). And in part, it also represents worries about potential

FX volatility, especially in markets that maintain current account deficits (e.g. Indonesia, and India).

Chart 30: Exchange rate change against US dollar (% y-o-y)

Chart 31: Impact on headline CPI of 10% depreciation of NEER (ppt)

Source: Bloomberg, HSBC; NB: as of 27 September, 2019 Source: HSBC

Most central banks to ease

again before year-end

Table 1: HSBC policy rate forecast (%, red denotes rise, grey fall)

Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19f Q1 20f Q2 20f Q3 20f Q4 20f

Australia 1.50 1.50 1.50 1.50 1.25 1.00 0.75 0.50 0.50 0.50 0.50 New Zealand 1.75 1.75 1.75 1.75 1.50 1.00 0.75 0.25 0.25 0.25 0.25 Bangladesh 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 Mainland China 4.35 4.35 4.35 4.35 4.35 4.20 4.00 3.90 3.80 3.75 3.75 Hong Kong 2.25 2.50 2.75 2.75 2.75 2.25 2.00 2.00 2.00 2.00 2.00 India 6.25 6.50 6.50 6.25 5.75 5.40 4.90 4.90 4.90 4.90 4.90 Indonesia 5.25 5.75 6.00 6.00 6.00 5.25 5.00 4.75 4.75 4.75 4.75 Japan -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 Korea 1.50 1.50 1.75 1.75 1.75 1.50 1.25 1.25 1.25 1.25 1.25 Malaysia 3.25 3.25 3.25 3.25 3.00 3.00 2.75 2.75 2.75 2.50 2.50 Philippines 3.50 4.50 4.75 4.75 4.50 4.00 4.00 3.75 3.75 3.75 3.75 Singapore* 0.50 0.50 1.00 1.00 1.00 1.00 0.50 0.50 0.00 0.00 0.00 Sri Lanka 7.25 7.25 8.00 8.00 7.50 7.00 7.00 7.00 6.50 6.50 6.50 Taiwan 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 Thailand 1.50 1.50 1.75 1.75 1.75 1.50 1.25 1.25 1.25 1.25 1.25 Vietnam 6.25 6.25 6.25 6.25 6.25 6.00 6.00 6.00 5.75 5.75 5.75

*Refers to slope of NEER Source: CEIC, Refinitiv Datastream

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18

A bigger push

Broadly, then, monetary policy is starting to lose a bit of its ‘punch’ in Asia. As elsewhere, there is

thus growing pressure for a more determined fiscal push. Already, a number of economies have

implemented sizeable stimulus packages. Earlier this year, Korea and China led the way, with

spending increases and tax cuts, respectively. More recently, India announced a big corporate tax

cut, worth about 0.7% of GDP, and Thailand has unveiled in August a spending and incentive

programme of over USD10bn (see Table 2).

It is important to recognise, however, that headline fiscal support packages do not always translate

into a corresponding lift to growth. For example, tax cuts, whether corporate or personal, may be

saved, rather than spent, amid high debt levels and elevated economic uncertainty. In addition, if

fiscal policy is loosened materially in one year, it can easily turn contractionary the next, especially if

corrective action needs to be taken to balance the books.

While in most economies fiscal policy will provide a positive fiscal impulse next year, this is not

uniformly the case. In Japan, for example, after years of deficit spending, the government proceeded

with a VAT rate increase on 1 October to shore up revenues. This scheduled rise likely pushed up

domestic spending over the previous two quarters, thus explaining the economy’s relative resilience

amid weaker export growth. Despite officials’ plans to cushion the impact with extra spending, the tax

hike is still likely to push the economy into a mild recession in 2020, when the overall fiscal impulse is

estimated to be negative.

Japan’s VAT hike may push

the economy into a mild

recession

Table 2: Fiscal policy outlook

Economy Fiscal plans

Australia With a budget in balance, low public debt and a triple-A sovereign rating, Australia has plenty of fiscal room to manoeuvre. RBA Governor Lowe has repeatedly suggested that as monetary policy reaches its limits, looser fiscal policy might be a better policy mix. This has been met with little response thus far as the Federal government seeks to deliver budget surpluses which were a key campaign promise in the May 2019 Federal election.

Hong Kong SAR In August, the government unveiled a fiscal package of HKD19bn, consisting of targeted tax relief and fee reductions for businesses and households. These measures were followed by further support for Small and Medium Enterprises (SMEs) through the Hong Kong Mortgage Corporation

India On 20 September, Finance Minister Nirmala Sitharaman announced substantial cuts in the corporate tax rate - the basic rate was cut from 30% to 22% while for new manufacturing firms, it was cut from 25% to 15%, at a cost of INR1450bn (0.7% of GDP) of tax revenues annually.

Indonesia Despite a lower deficit target of 1.8% in 2020, we expect a sizeable overall fiscal impulse due to off-balance sheet SOE spending. The government recently announced plans to gradually cut corporate tax rates from 25% to 20% starting in 2021. Meanwhile, the direct budget impact of the new capital construction, likely to start in 2021, should be manageable with just 19% financed by the budget.

Japan Fiscal policy will turn contractionary after the scheduled consumption tax hike in October. However, the government has rolled out measures to mitigate the negative impact. Even excluding JPY1.3trn set aside to be used in infrastructure projects, the government is set to spend 83% of the new tax revenue, with much of this on a permanent basis. This will be delivered as more support for childcare and seniors and subsidies to medical fees. Temporary measures will be given as rebate schemes for SMEs, vouchers with premiums and support for house and automotive purchases.

Korea Fiscal policy is set to remain supportive, which we think will partly offset the slowdown in growth. The government will focus its increased spending to support innovation, enhance social welfare, and create jobs amid stiffening external headwinds. However, the increased expenditure is expected to come with a hefty bill, as tax revenues may decline 0.9% next year, reflecting weaker collection of corporate tax and fewer real estate transactions.

Mainland China China has stepped up its fiscal stimulus to cushion the economy from the downside risks to growth. It has delivered a fairly sizeable tax cut in 2019, lowering the VAT rate and social security contribution for all corporates by approximately RMB2trn. We expect to see more tax cuts in 2020, which could be an even larger magnitude compared with 2019. Apart from this, local government special bond issuance may also be sped up.

New Zealand New Zealand’s fiscal position remains strong. The 2018/19 surplus looks like it will come in a little larger than forecast, and government debt is very low. The government is likely to come under pressure to loosen fiscal policy further. The 2019/20 spending plans are already stimulatory after this year’s ‘wellbeing’ budget increased the spending allowance. However, this effect is likely to fade from 2020 without further fiscal loosening.

Singapore We expect the government to deliver a highly expansionary FY2020 budget early next year. The fiscal impulse is likely to come in the forms of consumer hand-outs, credits to offset the impact of future Goods and Services Tax hike, and incentives for businesses to prevent payroll reduction.

Taiwan, China The Taiwanese government has been committed to infrastructure spending. Taiwan does have some fiscal policy room, within the constraint of the debt ceiling. W may see a bigger push for expansionary fiscal policy, particularly as Taiwan heads to the polls in January 2020.

Thailand In August, the Thai Cabinet approved a fiscal stimulus package worth USD10.2bn. The measures were wide-ranging, with programs to help low-income households, farmers, the elderly, Small and Medium Enterprises (SMEs), and the tourism sector.

The Philippines The government’s fiscal constraint this year has led to a substantial deceleration in growth. Now that those constraints have been lifted, the government still needs to ramp up spending in the quarters ahead to prevent further growth deterioration. We expect an expansionary fiscal impulse and further monetary loosening to lift growth in 2020 and 2021, but delayed passage of the 2020 budget poses the most significant risk in 2020.

Source: HSBC

19


Meanwhile, in Malaysia, after a sizeable fiscal impulse in 2019, the need for budget consolidation

may still impose a drag on growth next year, something that is also true for Thailand and Hong Kong,

although in the latter there is considerable fiscal space that would allow for extra stimulus should

the growth outlook deteriorate further. Australia, too, has ample fiscal space, but the current budget

projections reveal a continued conservative bias at the federal level.

Elsewhere, the fiscal impulse is expected to be mildly positive, delivering only a big punch, however,

in the Philippines, Korea, and Singapore. Still, should things turn for the worse, much of the region

has at least the fiscal muscle to do much more.

Chart 32: Expected fiscal impulse (% of GDP)

Source: CEIC, HSBC

Fiscal impulse mostly positive

next year

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20

Growing headwinds

Headwinds have intensified over the last few months

It has been a head-turning couple of months as the trade war between the US and China has

continued to take the limelight. In the latest escalation of the trade war, the US further increased

tariffs on Chinese goods. China now faces 15% tariffs on an estimated 111bn worth of goods,

and 25% on USD228bn (set to increase to 30% on 15 October). An additional 15% on the

remaining 156bn is expected to come through on 15 December. These tariffs will exert

downward pressure on China’s trade and manufacturing sectors, and we estimate a 0.8ppt drag

on GDP over a 12 month period (see chart 1). Globally, a growth slowdown and manufacturing

malaise are adding to the pressures faced by China.

Mainland China: Moderate

stimulus, slower growth

Intensifying headwinds should prompt more stimulus in the

coming months

Key measures include cutting RRR and lending rates, more SME

lending and infrastructure spending; These stimuli will likely offset

part but not all of the headwinds

Beijing is unlikely to rush into new dramatic stimulus as they want

to balance between reflation and deleveraging

Qu Hongbin Co-head Asian Econ Research, Chief China Economist The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 2025

Erin Xin

Economist, Greater China

The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2996 6975

Chart 1. Tariff tracker on impact on China’s growth

Source: CEIC, US Census Bureau, HSBC

0 100 200 300 400 500 600

Value of Chinese goods impacted (USDbn)

$50Bn List(appx $46Bn)

25% tariffs


25% tariffs

List 4A(appx $111Bn)

10% tariffs1 September


25% tariffs


25% tariffs

List 4B (appx $156Bn)

10% tariffs15 December

List 4A (appx $111Bn)

15% tariffs1 September


30% tariffs15 October

List 4B (appx $156Bn)

15% tariffs15 December

Note: The amount and GDP impact are cumulative; Approximate values are based on calculations of 2018 US import value from the US Census Bureau.

$300Bn List

0.1 ppt.

0.8 ppt

1.3ppt

1.6ppt

21


External sector aside, China is also facing a slowdown in domestic demand. A clear reflection of

this is seen in the lacklustre investment spending by businesses, where investment growth, in

nominal terms, has fallen to 5.5% in August 2019 from as high as 20% in 2012. The manufacturing

sector has been particularly hard hit. In August, investment growth for the manufacturing sector

has fallen to a meagre 2.6% y-o-y y-t-d (see chart 2).

Waning business confidence is the main culprit responsible for slower investment growth. As

the trade tensions have dragged on for 18 months, and as the negotiations have gone through

many ups and downs, it seems the only thing predictable is the unpredictability. For businesses

operating in such a continuously uncertain environment, it becomes difficult to plan for the future.

In our preferred gauge of business confidence, there has been a decline in business sentiment

since the beginning of the trade war in Q1 2018 (see chart 3). Our preferred measure of business

confidence tends to lead business investment by 12 months, giving us more reason to believe

that a recovery in the private sector will continue to be delayed, or even possibly derailed (see

Trade war wounds, 9 August 2019). We expect the slowdown in growth to continue into 2020

because business confidence has continued to be eroded.

Chart 2. Fixed asset investment has slowed considerably

NB: Real estate investment excludes land purchase Source: CEIC, HSBC

Chart 3. General business confidence has been slowing, with investment following suit

Source: CEIC, HSBC

Beijing’s continued efforts to engage in pro-cyclical tightening are not helping. Policymakers have

imposed restrictions on financing in targeted markets, particularly the property market, as well

as on local government spending. Macroprudential concerns about sustainable debt have

over-ridden policymakers’ desires to support broad based growth.

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In light of these growing headwinds, we recently downgraded our GDP growth forecast to 6.2%

for 2019 (from 6.5% previously) and to 5.8% for 2020 (from 6.3%). For details, see China GDP

downgrade, 28 August 2019. We forecast that growth will remain at 5.8% for 2021.

Policy response: Stepping up, but gradually

Policymakers will step up stimulus to ease pressures on the economy

Faced with so many headwinds, we expect policymakers to step up stimulus with both monetary

and fiscal measures. With monetary policy, there is both the need for more easing as well as

enough policy space to conduct it. For one, core inflation has remained stable and low at below

2% (despite headline inflation picking up recently due to spiking pork prices) (see China inflation,

10 September 2019). The producers’ price index (PPI) has also shown signs of deflation, with

the last two months showing contracting growth, and provides more space to introduce easing

(see PPI in China, 10 September 2019). Secondly, central banks around the world are cutting

rates, led by the US Federal reserve which cut 50bp in Q3 2019, and a forecasted additional

25bp cut in October.

Interest rate reforms using the LPR tied to the MLF are introduced

China has introduced monetary policy reforms that may enable it to manage policy rates more

effectively. On 17 August, officials launched a new benchmark framework based on the Loan

Prime Rate (LPR) and Medium-term Lending Facility (MLF) to manage interest rates (China’s

interest rate reform, 19 August 2019). On the 20th of each month, 18 commercial banks provide

a quote of the lending rates charged to their best customers, and these form the basis of the LPR

fixing price. A 5-year tenor of LPR was also introduced. Instead of using the PBoC’s 1-year lending

rate (now at 4.35%), banks contributing to the LPR fixing base their quote contributions on the

PBoC’s open market operation rates (mainly, the 1-year MLF rate, which is now at 3.30%).

Chart 4. LPR and MLF form new benchmark framework

Chart 5. Private sector focused lending has room to grow

Source: CEIC, HSBC Source: Wind, HSBC

By changing the benchmark, lending rates should be more market driven and a lowering of the

rates should incentivise more businesses to take on lending, thus spurring economic activity.

Over the first two months of the LPR fixing since the reform, the 1-year LPR has fallen gradually

to 4.20% (the 5-year is 4.85%) and is 15bp lower than the previous benchmark rate, the 1-year

lending rate, at 4.35%. This leaves ample room for reduction, as there is a 90bp spread between

the LPR and MLF. We expect LPR guidance to drop by 45bp by the end of Q3 2020. We also

expect a 20bp cut to the MLF before year-end 2020.

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Aside from the new interest rate reforms, the PBoC continues to use the reserve requirement ratio

(RRR) to provide monetary relief. A 50bp broad-based cut and a 100bp targeted cut for city

commercial banks were recently implemented and added more liquidity to the market (see PBoC

cuts RRR, more easing to come, 6 September 2019). We expect an additional 50bp cut by year-end

as well as a further 100bp cut in 2020. Moreover, increased lending to the corporate sector,

especially small and medium-sized enterprises (SMEs), will remain a forefront policy objective. In

addition to interest rate reforms aimed at lowering the borrowing rate, policymakers have used a

“carrot and stick” approach to encourage credit lending for the corporate sector throughout the year.

Tools such as targeted and tiered RRR cuts for SME-focused banks can provide further stimulus to

the economy because SMEs traditionally face higher interest rates as lenders view them as riskier.

Table 1. Three VAT cut scenarios expected to take place in 2020

VAT cut scenario Value of tax cut impact Value as a % of GDP, 2020e

Lower 13% to 11%, and lower 9% to 6%, keep 6% unchanged (conservative case)

From RMB925bn to RMB975bn 0.9

Lower 13% to 9%, keep 9% and 6% unchanged (base case)

From RMB1,200bn to RMB1,250bn 1.2

Lower 13% to 9%, and lower 9% to 6%, keep 6% unchanged (stimulative case)

From RMB1,525bn to RMB1,575bn 1.5

Source: Wind, CEIC, HSBC forecasts

From a fiscal policy side, we expect policymakers to continue to build off the momentum seen

earlier this year when they announced an RMB2trn corporate tax package for the year (see

Trade war: A winning strategy, 26 June 2019). Reductions to the valued-added tax and

corporations’ social security contributions helped provide a much needed fiscal boost. An

estimated RMB800-900bn in benefits are expected to come through for the remainder of the

year. More corporate tax cuts could be announced in 2020. These could take the form of further

VAT tax cuts (rates under the current tiered system range from 6 to 13%), a reduction in the

corporate tax rate (now at 25%), and further reduction in corporate social security contributions.

Fiscal stimulus can also take the form of support for infrastructure spending via the issuance of local

government bonds. An increase in the quota as well as pre-issuance for 2020 spending may spur

infrastructure development in the coming quarters. In September, the government already began the

process of asking for local governments’ assessments of their borrowing needs (Caixin, 5 September

2019). This is three months in advance of the same process last year, and the pre-clearance should

speed up issuance in the beginning of the year in 2020, leading to faster allocation of funds.

Chart 6. RRR cuts will be both broad and targeted

Chart 7. Local government bond issuance quotas expected to increase


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To restore confidence, more stimulus is needed

Slowing growth unlikely to be reversed through gradual stimulus

Policy easing has been trickling in for most of the year. But, in spite of the large tax cuts for the

corporate sector and better credit conditions for SMEs that have been pushed through, we have

yet to see a rebound in growth. It seems that the headwinds are overwhelming the effect of the

stimulus measures. While we expect a step-up in stimulus in the coming months, which may

offset some of the downward pressure on growth, the gradual policies will not be enough to

completely reverse the impact of the growing headwinds. Thus, if policy continues at the current

pace, we expect the slowdown in growth to continue into 2020 as business sentiment may fail to

pick up again.

Restoring business confidence needs a more dramatic approach

Like starting a car engine, confidence needs to be jump-started to get going again. Only then

can it reverse course and return to a stable growth path. Instead of gradual easing, a super-

stimulus package is needed to restore business confidence. A more concerted effort to step up

broad-based easing, and all at once, would not only give businesses the direct benefits of the

stimulus measures, but also provide a positive signal that policy will remain accommodative to

help restore confidence.

Why not a super-stimulus?

If more dramatic stimulus is needed, what is holding policymakers back? They are trying to strike

a balance between the conflicting goals of managing the debt burden and reflating the economy

(see From the Horse’s Mouth: No dramatic stimulus in sight, 24 September 2019). The main

concern around injecting too much stimulus into the economy is that it could lead to an increase

in the debt burden to unsustainable levels. In the few years prior to the trade war (from 2015 to

2017), the government was already concerned with debt levels in the economy and engaged in

a deleveraging campaign to remove overcapacity. That fear has not been forgotten. In the last

Politburo meeting in July, the government stressed its reluctance to open the floodgates for

stimulus and stated that it will continue to rein in particular sectors, such as the property market,

and regulate local government spending (see China Politburo Meeting, 31 July 2019).

Meanwhile, the rising risk of a long-lasting trade war means Beijing likely wants to manage the

pace of the stimulus to save some bullets for the future.

Chart 8. Policymakers have been resistant to using flood-like stimulus

Source: CEIC, HSBC

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For the property market, the government has emphasised that real estate “should not be used

for speculation”, and is effectively excluded from using the best rate for lending (the 1-year

LPR). In addition, at the beginning of the year, policymakers introduced regulations to curb

inefficient local government spending and to stop the issuance of “hidden” debt. Special local

government bonds are restricted from being used for land reserves and real estate

development. These restrictions on the property market and local government spending are not

likely to let up anytime soon. At the same time, growing deflationary pressures have emerged, as

PPI has contracted for two months in a row, putting a further onus on Beijing to reflate the economy

(PPI in China, 10 September 2019).

Conclusion

In light of intensifying headwinds, policymakers will likely continue to step up easing in the coming

months with a mix of monetary (RRR cuts, cuts to the lending rate, increased lending to SMEs)

and fiscal policies (corporate tax cuts and local government bond issuance). However, the pace

of policy stimulus is too gradual to stabilise growth. More dramatic stimulus is needed to restore

business confidence, the main drag on growth. However, macroprudential concerns still hold

policymakers back, and the likelihood of a super-stimulus package coming through are reduced.

Gradual policy easing can offset some of the headwinds, but not enough to slow the slowdown.

Thus, our outlook for the coming quarters is one of subdued growth. At the end of August, we

adjusted our GDP growth forecast lower to 5.8% in 2020.

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27


Indicators


28

GDP % y-o-y 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f

Mainland China 7.9 7.8 7.3 6.9 6.7 6.8 6.6 6.2 5.8 5.8 Hong Kong 1.7 3.1 2.8 2.4 2.2 3.8 3.0 0.3 1.5 1.4 Japan 1.5 2.0 0.4 1.2 0.6 1.9 0.8 0.9 -0.1 0.7 Korea 2.4 3.2 3.2 2.8 2.9 3.2 2.7 2.0 2.2 2.2 Taiwan 2.1 2.2 4.0 0.8 1.5 3.1 2.6 2.1 1.9 2.0

North Asia-ex Japan 6.7 6.8 6.6 6.1 6.0 6.2 6.0 5.5 5.2 5.2

Australia 3.9 2.1 2.6 2.5 2.8 2.4 2.7 1.9 2.3 2.7 Bangladesh 6.0 6.1 6.6 7.1 7.3 7.9 8.1 7.7 7.8 7.7 India 5.5 6.4 7.4 8.0 8.2 7.2 6.8 5.9 6.5 6.5 Indonesia 6.0 5.6 5.0 4.9 5.0 5.1 5.2 5.0 5.0 5.2 Malaysia 5.5 4.7 6.0 5.0 4.4 5.7 4.7 4.5 4.1 4.3 New Zealand 2.5 2.2 3.6 3.5 3.9 3.1 2.9 2.1 2.4 2.3 Philippines 6.7 7.1 6.1 6.1 6.9 6.7 6.2 5.7 6.3 6.3 Singapore 4.4 4.8 3.9 2.9 3.0 3.7 3.1 0.4 0.9 1.6 Sri Lanka 9.1 3.4 5.0 5.0 4.5 3.4 3.2 2.7 3.3 3.7 Thailand 7.2 2.7 1.0 3.1 3.4 4.0 4.1 3.1 2.8 2.9 Vietnam 5.2 5.4 6.0 6.7 6.2 6.8 7.1 6.9 6.4 6.5

Asia-ex mainland China, India & Japan 4.2 4.0 4.0 3.6 3.8 4.4 4.1 3.3 3.4 3.5 Asia-ex mainland China & Japan 4.6 4.7 5.0 4.9 5.1 5.3 5.0 4.1 4.4 4.5 Asia-ex Japan 6.5 6.5 6.4 6.1 6.1 6.2 6.0 5.4 5.3 5.3

Asia 5.3 5.5 5.1 5.1 5.0 5.4 5.0 4.5 4.3 4.4

Note: Australia and New Zealand are not included in the Asia aggregate. Aggregates use chain nominal GDP (USD) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. India and Bangladesh data are FY. Source: CEIC, HSBC forecasts

GDP growth: Bangladesh and Vietnam in the lead GDP growth: Drifting down a tad

Source: CEIC, HSBC forecasts Source: CEIC, HSBC forecasts

GDP

% y-o-y _____________ 2019f ______________ _____________ 2020f _____________ _____________ 2021f _____________ 1Q 2Q 3Qe 4Qf 1Qf 2Qf 3Qf 4Qf 1Qf 2Qf 3Qf 4Qf

Australia 1.7 1.4 1.9 2.5 2.2 2.4 2.3 2.3 2.7 2.7 2.8 2.8 Mainland China 6.4 6.2 6.1 6.0 6.0 5.9 5.8 5.7 5.7 5.7 5.8 5.8 Hong Kong 0.6 0.5 0.1 0.2 1.3 1.5 1.7 1.6 1.5 1.5 1.4 1.3 India 5.8 5.0 5.5 6.1 6.6 6.9 6.7 6.3 6.1 6.3 6.4 6.5 Indonesia 5.1 5.0 5.0 4.9 4.9 5.0 5.0 4.9 5.2 5.2 5.2 5.2 Japan 1.0 1.0 1.7 0.0 -0.5 -0.5 -0.4 1.0 1.1 0.8 0.6 0.5 Korea 1.7 2.0 2.3 1.9 2.8 2.1 2.1 2.0 2.1 2.3 2.2 2.3 Malaysia 4.5 4.9 4.6 4.1 4.2 4.1 4.1 4.2 4.2 4.4 4.4 4.3 New Zealand 2.5 2.1 2.1 1.8 1.9 2.2 2.6 2.8 2.6 2.3 2.3 2.3 Philippines 5.6 5.5 5.9 5.8 6.3 6.4 6.3 6.2 6.3 6.3 6.4 6.3 Singapore 1.1 0.1 0.2 0.3 -0.4 1.0 1.3 1.9 2.0 1.7 1.5 1.4 Sri Lanka 3.7 1.6 2.1 3.3 3.2 3.6 3.5 3.0 3.6 3.7 3.7 3.7 Taiwan 1.8 2.4 2.1 2.0 2.0 1.9 1.8 1.9 1.9 2.0 2.0 2.1 Thailand 2.8 2.3 3.5 3.6 3.0 3.1 2.6 2.3 2.6 2.7 3.0 3.3 Vietnam 6.8 6.7 7.3 6.7 6.5 6.3 6.3 6.6 6.3 6.6 6.4 6.6


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Inflation % y-o-y 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f

Mainland China 2.6 2.6 2.0 1.4 2.0 1.6 2.1 2.6 2.4 1.9 Hong Kong 4.1 4.3 4.4 3.0 2.4 1.5 2.4 2.8 2.5 2.3 Japan -0.1 0.3 2.8 0.8 -0.1 0.5 1.0 0.7 0.9 0.1 Korea 2.2 1.3 1.3 1.1 0.9 1.9 1.5 0.5 1.6 1.5 Taiwan 1.9 0.8 1.2 -0.3 1.4 0.6 1.3 0.5 0.7 0.8


Australia 1.8 2.4 2.5 1.5 1.3 1.9 1.9 1.6 1.8 2.1 Bangladesh 7.2 7.5 7.0 6.2 5.5 5.7 5.5 5.6 5.5 5.5 India 9.9 9.4 6.0 4.9 4.5 3.6 3.4 3.5 3.7 3.8 Indonesia 4.0 6.4 6.4 6.4 3.5 3.8 3.2 3.2 3.2 3.3 Malaysia 1.7 2.1 3.1 2.1 2.1 3.8 1.0 0.6 1.6 1.9 New Zealand 1.1 1.1 1.2 0.3 0.6 1.9 1.6 1.5 1.9 1.9 Philippines 3.2 2.6 3.6 0.7 1.3 2.9 5.2 2.7 3.0 2.9 Singapore 4.6 2.4 1.0 -0.5 -0.5 0.6 0.4 0.6 0.7 0.7 Sri Lanka 7.5 6.9 2.3 2.2 4.0 6.6 4.3 4.1 4.0 4.0 Thailand 3.0 2.2 1.9 -0.9 0.2 0.7 1.1 0.9 1.1 1.0 Vietnam 9.1 6.6 4.1 0.7 2.7 3.5 3.5 2.6 3.0 3.2


Asia 3.8 3.8 3.2 2.3 2.3 2.1 2.3 2.4 2.5 2.2

Note: Australia and New Zealand are not included in the Asia aggregate. Aggregates use chain nominal GDP (PPP) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. India data are FY. Source: CEIC, HSBC forecasts

Headline CPI inflation: down sharply in the Philippines Headline CPI inflation: Up marginally for the region


CPI

% y-o-y _____________ 2019f _____________ _____________ 2020f ______________ _____________ 2021f ______________ 1Q 2Q 3Qe 4Qf 1Qf 2Qf 3Qf 4Qf 1Qf 2Qf 3Qf 4Qf

Australia 1.3 1.6 1.7 1.6 1.9 1.8 1.7 1.7 1.9 2.0 2.2 2.3 Bangladesh 5.5 5.6 5.6 5.6 5.5 5.5 5.4 5.6 5.4 5.5 5.5 5.6 Mainland China 1.8 2.6 2.8 3.1 3.3 2.7 2.1 1.7 1.6 1.7 2.1 2.4 Hong Kong 2.2 3.0 3.2 3.0 2.9 2.7 2.3 2.1 2.1 2.4 2.5 2.3 India 2.5 3.1 3.3 3.7 3.9 3.7 3.8 3.7 3.7 3.6 3.7 3.8 Indonesia 2.6 3.1 3.5 3.6 3.7 3.2 3.0 3.2 3.2 3.4 3.4 3.3 Japan 0.3 0.8 0.3 1.4 1.2 1.1 1.1 0.1 0.1 0.1 0.1 0.1 Korea 0.5 0.7 0.1 0.5 1.5 1.5 1.9 1.4 1.5 1.5 1.5 1.7 Malaysia -0.3 0.6 1.3 0.9 1.5 1.5 1.6 1.7 1.8 1.9 1.9 1.9 New Zealand 1.5 1.7 1.4 1.5 1.9 1.9 1.9 2.0 2.0 2.0 1.9 1.8 Philippines 3.8 3.0 1.8 2.0 2.9 3.1 3.2 2.9 2.9 2.9 2.9 2.9 Singapore 0.5 0.7 0.5 0.7 0.8 0.6 0.6 0.6 0.6 0.6 0.7 0.9 Sri Lanka 4.0 4.4 3.6 4.3 4.3 3.9 3.9 4.0 3.9 4.1 4.1 4.0 Taiwan 0.3 0.8 0.5 0.4 0.7 0.6 0.7 0.7 0.9 0.8 0.9 0.7 Thailand 0.7 1.1 0.8 1.1 1.4 1.0 1.2 1.0 1.0 1.0 1.0 1.0 Vietnam 2.6 2.7 2.2 2.7 3.3 3.0 3.1 2.8 2.8 3.1 3.4 3.7


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Industrial production & unemployment Industrial Production

% y-o-y 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f

Mainland China (VAI) 10.8 9.7 8.2 6.0 6.2 6.6 6.1 5.7 5.1 5.1 Hong Kong -0.8 0.1 -0.4 -1.6 -0.4 0.4 1.3 0.2 0.6 1.0 Japan 0.6 -0.3 1.9 -1.1 0.0 3.1 1.1 -2.1 -2.3 -1.5 Korea 1.7 0.5 0.6 -0.5 1.9 3.1 1.4 -1.5 2.4 1.8 Taiwan 0.5 3.2 6.4 -1.3 2.0 5.0 3.6 0.8 2.7 2.2


Australia 3.0 1.9 4.4 1.6 2.0 1.4 1.7 -1.7 1.5 2.0 Bangladesh 8.7 9.4 9.7 11.3 13.6 14.0 12.1 10.1 10.4 9.8 India -3.3 3.3 4.0 3.3 4.6 4.4 3.8 2.0 4.0 4.4 Indonesia 4.1 6.0 4.8 4.8 4.0 4.3 4.4 4.4 4.7 5.0 Malaysia 4.2 3.4 5.2 4.4 4.1 4.4 3.0 3.1 2.9 2.8 New Zealand 0.5 0.5 3.1 1.5 1.3 2.4 1.5 0.8 2.0 2.4 Philippines 5.4 10.3 8.3 5.7 7.1 8.4 4.9 4.4 3.7 3.2 Singapore 0.3 1.5 2.7 -5.1 3.7 10.4 7.1 -2.9 -1.3 0.6 Sri Lanka 1.2 -0.5 6.0 3.5 3.3 2.5 2.4 2.2 3.0 3.0 Thailand 2.9 1.4 -2.5 0.2 1.7 1.7 2.9 -2.9 1.4 1.3 Vietnam 3.6 7.7 7.5 11.9 16.3 7.3 11.0 7.7 7.3 8.0


Asia 5.2 5.4 5.3 3.3 4.3 5.3 4.5 2.9 3.2 3.4

Note: Australia and New Zealand are not included in the Asia aggregate. Aggregates use chain nominal GDP (USD) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. India data are FY. Source: CEIC, HSBC forecasts

Industrial production growth: Bangladesh up front Unemployment rate: Lowest in Thailand


Unemployment rate (average)

% 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f

Mainland China 4.1 4.1 4.1 4.0 4.0 3.9 3.8 3.6 3.8 3.8 Hong Kong 3.3 3.4 3.2 3.3 3.4 3.2 2.8 3.0 3.0 3.0 Japan 4.3 4.0 3.6 3.4 3.1 2.8 2.4 2.4 2.5 2.8 Korea 3.2 3.1 3.5 3.6 3.7 3.7 3.8 4.0 3.6 3.6 Taiwan 4.2 4.2 4.0 3.8 3.9 3.8 3.7 3.7 3.8 3.8


Australia 5.2 5.7 6.1 6.1 5.7 5.6 5.3 5.2 5.3 5.1 Indonesia 6.4 6.2 6.1 6.1 5.9 5.6 5.4 5.4 5.5 5.3 Malaysia 3.0 3.1 2.9 3.2 3.5 3.4 3.3 3.4 3.5 3.4 New Zealand 6.4 5.8 5.4 5.4 5.1 4.7 4.3 4.2 4.4 4.2 Philippines 7.0 7.2 6.6 6.1 5.7 5.6 5.3 5.2 5.3 5.1 Singapore 1.9 1.9 1.9 1.9 2.2 2.1 2.2 2.3 2.3 2.3 Sri Lanka 4.0 4.4 4.3 4.7 4.4 4.2 4.4 4.1 4.1 4.1 Thailand 0.7 0.7 0.8 0.9 1.0 1.2 1.1 1.0 1.1 1.1 Vietnam 3.2 3.6 3.4 3.4 3.2 3.2 3.1 3.0 3.0 2.9

Asia-ex mainland China & Japan 3.8 3.7 3.8 3.8 3.8 3.8 3.7 3.8 3.7 3.6 Asia-ex Japan 4.0 4.0 4.0 4.0 4.0 3.9 3.8 3.7 3.8 3.8

Asia 4.1 4.0 3.9 3.8 3.8 3.7 3.5 3.4 3.5 3.5

Note: Australia and New Zealand are not included in the Asia aggregate. Aggregates use chain nominal GDP (USD) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. Source: CEIC, HSBC forecasts

-4-202468101214

-4-202468

101214

JN HK KR NZ AU SL TH MA TA IN ID PH CH SI BA

2018 2019f 2020f

% y -o-y % y -o-y

0

1

2

3

4

5

6

0

1

2

3

4

5

6

TH SI JN HK VN MA TA KR CH NZ SL AU PH ID

2018 2019f 2020f

% %

31


Consumption & saving Consumption Expenditure

% y-o-y 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f

Mainland China 8.3 7.0 8.0 7.4 8.5 6.5 9.1 7.0 6.6 6.7 Hong Kong 4.1 4.6 3.3 4.8 2.0 5.6 5.5 0.9 2.0 2.4 Japan 2.0 2.4 -0.9 -0.2 -0.1 1.1 0.3 0.7 -0.8 0.7 Korea 1.7 1.7 2.0 2.2 2.6 2.8 2.8 2.0 1.9 1.5 Taiwan 1.8 2.3 3.4 2.6 2.4 2.5 2.0 1.3 1.1 1.2




Asia 5.6 5.2 4.9 5.1 5.8 5.1 6.3 4.8 4.6 4.9

Note: Australia and New Zealand are not included in Asia aggregate. Aggregates use chain nominal GDP (USD) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. India and Bangladesh data are FY. Source: CEIC, HSBC forecasts Consumer spending: expected to contract in Japan Saving: Still highest in Singapore and mainland China

Source: CEIC, HSBC forecasts Source: CEIC, HSBC forecasts Gross Saving Ratio

% GDP 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f




Asia-ex mainland China, India & Japan 33.0 33.0 33.3 34.0 34.1 34.2 33.6 33.2 33.1 33.4 Asia-e mainland China & Japan 33.3 32.7 33.0 33.1 32.9 33.0 32.2 31.8 31.7 31.9 Asia-ex Japan 42.9 42.7 42.7 42.2 41.1 41.2 40.5 40.0 39.6 39.8

Asia 37.9 37.9 38.2 38.1 37.4 37.8 37.4 37.0 36.7 36.8

Note: Australia and New Zealand are not included in the Asia aggregate. Aggregates use chain nominal GDP (USD) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. India and Bangladesh are FY. Source: CEIC, HSBC forecasts

-2

0

2

4

6

8

10

-2

0

2

4

6

8

10

JN TA SL SI KR AU NZ TH ID BA HK PH VN MA IN CH

2018 2019f 2020f

% y -o-y % y -o-y

0

10

20

30

40

50

60

0

10

20

30

40

50

60

NZ AU JN PH HK SL IN BA ID MA TA VN TH KR CH SI

2018 2019f 2020f

% of GDP % of GDP


32

Investment Total Investment

% y-o-y 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f

Mainland China 9.7 10.0 7.4 7.0 5.5 7.3 7.1 3.1 3.0 3.1 Hong Kong 6.8 2.6 -0.1 -3.2 -0.1 2.9 2.0 -8.7 3.5 1.8 Japan 3.5 4.9 3.1 1.6 -0.3 3.0 1.1 1.7 1.0 1.2 Korea -0.1 2.8 3.1 5.4 6.6 9.8 -2.4 -2.4 2.3 2.1 Taiwan -2.6 5.3 2.1 1.6 2.4 -0.1 2.5 6.2 5.6 4.2


Australia 9.5 -2.1 -2.7 -4.3 -2.2 3.3 3.2 -1.9 0.7 2.6 Bangladesh 5.4 9.9 7.1 8.9 10.1 10.5 8.2 8.6 7.0 7.1 India 4.9 1.6 2.6 6.5 8.3 9.3 10.0 4.0 6.3 6.8 Indonesia 9.1 5.0 4.4 5.0 4.5 6.2 6.7 4.8 6.6 7.3 Malaysia 19.0 8.1 4.8 3.8 2.6 6.1 1.4 -1.5 1.9 2.5 New Zealand 6.1 7.9 9.2 3.8 4.3 3.5 3.7 2.3 1.0 1.3 Philippines 10.8 11.8 7.2 16.9 26.1 9.4 12.9 -0.3 6.3 9.5 Singapore 8.6 6.1 4.2 2.0 1.1 6.4 -4.0 1.2 2.0 2.4 Sri Lanka 16.1 5.5 -1.7 0.1 9.1 4.8 -0.5 3.0 4.6 4.8 Thailand 10.7 -1.0 -2.2 4.4 2.9 1.8 3.8 2.1 4.4 5.9 Vietnam 1.9 5.3 9.3 9.4 9.9 10.2 8.6 5.7 7.4 5.5


Asia 6.8 6.8 5.1 5.4 4.7 6.5 5.3 2.5 3.3 3.4

Note: Australia and New Zealand are not included in the Asia aggregate. Aggregates use chain nominal GDP (USD) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. India and Bangladesh are FY. Source: CEIC, HSBC forecasts Investment growth: to bounce in the Philippines Investment share: Still highest in mainland China

Source: CEIC, HSBC forecasts Source: CEIC, HSBC forecasts Investment-to-GDP ratio

% 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f





Asia 36.4 36.2 36.3 35.4 35.2 36.0 36.1 35.6 35.6 35.0

Note: Australia and New Zealand are not included in the Asia aggregate. Aggregates use chain nominal GDP (USD) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. India and Bangladesh are FY. Source: CEIC, HSBC forecasts

-10

-5

0

5

10

15

-10

-5

0

5

10

15

SI KR SL JN MA HK TA AU NZ TH ID CH BA VN IN PH

2018 2019f 2020f

% y -o-y % y -o-y

0

10

20

30

40

50

0

10

20

30

40

50

TA HK MA JN AU NZ TH SI PH SL KR IN BA VN ID CH

2018 2019f 2020f

% of GDP % of GDP

33


Trade Real Exports

% y-o-y 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f

Mainland China 7.9 7.8 6.0 -2.9 -7.7 7.9 9.9 0.1 1.5 2.3 Hong Kong 3.2 7.8 1.0 -1.4 0.7 5.9 3.8 -5.2 -0.9 0.4 Japan -0.1 0.8 9.3 2.9 1.7 6.8 3.4 -1.8 0.3 1.0 Korea 5.8 3.8 2.1 0.2 2.4 2.5 3.5 0.6 3.1 3.4 Taiwan 0.4 3.5 5.9 -0.4 1.9 7.4 3.8 3.3 2.9 3.1

North Asia-ex Japan 7.2 7.2 5.4 -2.4 -6.1 7.3 8.9 0.2 1.7 2.4

Australia 5.4 5.8 6.9 6.5 6.8 3.4 5.0 3.3 2.3 3.2 Bangladesh 2.5 3.2 -2.8 2.2 -2.3 8.1 14.9 8.0 9.0 9.2 India 6.8 7.8 1.8 -5.6 5.1 4.7 12.5 4.1 6.0 6.0 Indonesia 1.6 4.2 1.1 -2.1 -1.7 8.9 6.5 -1.5 0.0 3.2 Malaysia -1.7 0.3 5.0 0.4 1.3 8.7 2.2 -2.2 -2.8 0.7 New Zealand 1.9 0.9 3.4 7.7 2.3 2.3 2.5 2.4 0.4 2.0 Philippines 8.6 -1.0 12.6 8.5 11.6 19.7 13.4 4.1 5.1 5.3 Singapore 1.4 6.0 3.6 5.0 0.0 5.7 5.1 -1.9 -1.7 2.5 Thailand 4.9 2.7 0.3 1.6 2.8 5.4 4.2 -3.0 3.3 3.1

Asia-ex mainland China, India & Japan 3.2 3.5 2.6 0.6 1.5 6.3 5.1 0.0 1.9 3.1 Asia-ex mainland China & Japan 4.2 4.7 2.4 -1.3 2.6 5.8 7.5 1.4 3.2 4.0 Asia-ex Japan 6.4 6.5 4.5 -2.3 -3.7 7.1 8.9 0.6 2.2 3.0

Asia 4.9 5.2 5.6 -1.2 -2.6 7.0 7.9 0.2 1.8 2.6

Note: Real Exports for G&S. Australia and New Zealand are not included in the Asia aggregate. Mainland China data are nominal. Aggregates use chain nominal GDP (USD) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. India data are FY. Source: CEIC, HSBC forecasts

Real export growth: Broadly slowing Current account balances: Mostly positive


Current account balance

% GDP 2012 2013 2014 2015 2016 2017 2018 2019f 2020f 2021f



Australia -4.3 -3.4 -3.1 -4.6 -3.3 -2.6 -2.1 0.1 -1.1 -1.2 Bangladesh 1.6 0.8 1.5 1.9 -0.5 -3.6 -2.3 -2.3 -2.6 -2.5 India -4.8 -1.8 -1.3 -1.1 -0.6 -1.8 -2.1 -1.9 -2.0 -2.0 Indonesia -2.7 -3.2 -3.1 -2.0 -1.8 -1.6 -3.0 -2.7 -2.8 -2.9 Malaysia 5.1 3.4 4.3 3.0 2.4 2.8 2.1 3.1 3.0 2.5 New Zealand -3.9 -3.1 -3.1 -2.7 -2.0 -2.7 -3.9 -3.3 -3.5 -3.4 Philippines 2.8 4.2 3.8 2.5 -0.4 -0.7 -2.4 -2.2 -2.4 -2.1 Singapore 17.6 15.7 18.0 17.2 17.5 16.4 17.9 17.5 16.6 16.0 Sri Lanka -5.8 -3.4 -2.5 -2.3 -2.1 -2.6 -3.2 -3.0 -3.0 -3.0 Thailand -1.2 -2.1 2.9 6.9 10.5 9.7 6.4 5.9 5.8 5.3 Vietnam 6.1 4.6 5.0 -1.1 0.3 -0.7 2.8 2.1 0.5 1.7


Asia 1.7 1.6 2.1 3.1 2.8 2.4 1.4 1.8 1.3 1.0

Note: Australia and New Zealand are not included in the Asia aggregate. Aggregates use chain nominal GDP (USD) weights for the respective years. 2019, 2020 and 2021 use 2018 weights. India and Bangladesh data are FY. Source: CEIC, HSBC forecasts

-6

-3

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3

6

9

12

15

-6

-3

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15

MA NZ JN KR TA HK TH AU SI ID CH IN PH BA

2018 2019f 2020f

% y -o-y % y -o-y

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9

12

15

18

-6

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NZ SL ID PH BA IN AU CH MA VN JN HK KR TH TA SI

2018 2019f 2020f

% of GDP % of GDP


34

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35


Economy profiles


36

Australia

Weak growth, but stimulus should support a pick up

Real GDP growth slowed to 1.4% y-o-y in Q2, the weakest pace since the global financial crisis

a decade ago. Growth was supported by a strong pick-up in exports, while growth in domestic

demand slowed to just 1.0% y-o-y, down from 3.3% a year earlier. The major drag on growth

has been weakness in household consumption. In part, this has been due to a cooling housing

market, but the key factor has been weak household income growth. Overall nominal household

disposable income grew by just 2.4% over the past year.

However, household incomes have received a boost in recent months, which should support

stronger growth in consumption in the second half of 2019. The RBA has delivered a combined

75bp of cuts in its cash rate since June. The government also introduced tax cuts for households

which are arriving as they file their 2018/19 tax returns (a process that began in July). In

aggregate, these two measures should boost disposable income by around 1.25-1.50%.

There are other reasons to believe that domestic activity should hold up. Business investment is

rising modestly and mining investment is set to rise over coming quarters, after having fallen for

a number of years. Mining profits have been strong and there has been a strong rise in the

corporate tax take, which is supporting a ramp-up in infrastructure investment. However, residential

construction will remain a drag on growth for some time.

Notably, the slowdown in GDP growth has not yet had a visible impact on job growth; the number

of people in work has risen 2.6% over the past year. However, labour force participation has also

risen strongly, to a record high, meaning that the unemployment rate has largely trended sideways

over the past year, and this has weighed on wages growth.

Although we expect growth to pick up from here, we lower our GDP forecast to 1.9% for 2019

(2.1% previously) and 2.3% for 2020 (2.6% previously), largely reflecting downward revisions to

HSBC’s mainland China growth forecasts. We expect growth of 2.7% in 2021. With growth set to

be below trend for some time, we expect further monetary policy easing, with the Reserve Bank

of Australia (RBA) expected to cut its cash rate in Q1 2020, to a new low of 0.50%.

GDP growth has slowed The unemployment rate has edged higher

Source: ABS Source: ABS

Paul Bloxham Chief Economist, Australia, NZ & Global Commodities

HSBC Bank Australia Limited

[email protected]

+61 2 9255 2635

Daniel Smith Economist


[email protected]

+61 2 9006 5729

-2

0

2

4

6

-2

0

2

4

6

2000 2003 2006 2009 2012 2015 2018q-o-q y-o-y

% %GDP growth

60

62

64

66

68

2

4

6

8

10

2000 2003 2006 2009 2012 2015 2018Unemployment rate (LHS) Participation rate (RHS)

% %Labour market

37


Policy issues

A key challenge the RBA faces is that the cash rate is getting nearer to the zero lower bound,

which could, in future, limit the capacity of the central bank to provide support for growth. Over

the past few months, the RBA has gradually provided more details of its thinking about where it

sees its lower nominal bound for the cash rate and what sort of ‘unconventional’ policy options it

could consider once the cash rate is cut as far as is deemed to be useful.

The RBA Governor, Phil Lowe, has made clear that the RBA does not expect to cut its cash rate

to a negative rate. Instead, the Governor has pointed to the experience of Canada, the US and

the UK in the post-global financial crisis period as examples the RBA could choose to follow.

That is, he has indicated that 0.25% might be the lower nominal bound for the cash rate. If the

RBA cuts its cash rate further in coming months, as we expect it will, one of the key criteria for

considering unconventional policy options will be how much of the cash rate cut is passed

through to effective mortgage and business rates. If the RBA deems that the pass-through has

been insufficient it could take other ‘unconventional actions’ to lower bank funding costs. Outright

sovereign bond purchases remain an option, although the key economic support mechanism

from this would be to put downward pressure on the AUD.

The RBA Governor has given many speeches in recent times, pointing out that monetary policy

is reaching its limits and that looser fiscal policy would be a better policy mix. This has been met

with little response thus far, as the Federal government seeks to deliver budget surpluses which

were a key campaign promise in the May 2019 Federal election.

Risks

Further deterioration in global growth remains a key risk to the Australian economy, especially

further weakness in mainland China. So far, the US-China trade tensions have not had a

noticeable negative impact on Australia, but if key commodity prices, such as for iron ore or

coal, were to fall significantly this would be negative for Australia. The key local risk is that the

unemployment rate rises more quickly than we currently forecast.

2Q 19 3Q 19e 4Q 19f 1Q 20f 2Q 20f 3Q 20f 4Q 20f 1Q 21f 2Q 21f 3Q 21f 4Q 21f

GDP (% y-o-y) 1.4 1.9 2.5 2.2 2.4 2.3 2.3 2.7 2.7 2.8 2.8 GDP-sa (%q-o-q) 0.5 0.7 0.7 0.3 0.6 0.7 0.7 0.7 0.7 0.7 0.7 Industrial production (% y-o-y) -3.0 -1.5 -0.3 0.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0 CPI, quarter-end (% y-o-y) 1.6 1.7 1.6 1.9 1.8 1.7 1.7 1.9 2.0 2.2 2.3 Core CPI, quarter-end (%y-o-y) 1.6 1.7 1.6 1.8 1.8 1.8 1.9 2.0 2.1 2.2 2.2 PPI, quarter-end (% y-o-y) 2.0 1.8 1.9 2.2 2.4 2.4 2.4 2.4 2.4 2.4 2.4 Trade balance (% GDP) 4.0 3.6 3.2 2.8 2.5 2.1 1.9 2.0 2.0 2.1 2.1 Current account (% GDP) 1.2 0.0 -0.4 -0.8 -0.8 -1.2 -1.4 -1.3 -1.3 -1.1 -1.1 Policy rate, quarter-end (%) 1.25 1.00 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 10yr yield, quarter-end (%) 1.32 1.10 1.00 1.05 1.20 1.15 1.00 1.00 1.00 1.00 1.00 SD/AUD, quarter-end 0.71 0.69 0.68 0.68 0.68 0.68 0.68 0.68 0.68 0.68 0.68 EUR/AUD, quarter-end 0.63 0.63 0.62 0.62 0.62 0.62 0.62 0.62 0.62 0.62 0.62 CPI, q-o-q ar 2.5 2.0 2.0 1.2 2.0 1.6 2.0 2.0 2.4 2.4 2.4 Exports G& S (% y-o-y) 16.3 10.8 7.2 1.6 -2.8 -2.0 -2.0 -0.4 1.1 2.6 3.4 Imports G & S (% y-o-y) 0.9 0.4 0.9 2.5 3.3 4.5 3.7 3.1 3.4 2.6 2.3 Investment (% y-o-y) -2.9 -2.7 -1.8 -1.3 1.2 1.2 1.7 2.1 2.4 2.7 3.2 Private Consumption (% y-o-y) 1.4 1.7 1.9 2.0 2.2 2.3 2.4 2.5 2.4 2.3 2.2 Government Consumption (% y-o-y) 6.2 6.1 6.2 6.1 4.4 4.9 4.2 4.2 4.0 2.9 2.6 Exports of G&S, Volume (% y-o-y) 2.9 3.3 4.9 3.1 2.2 2.0 2.0 2.6 3.1 3.6 3.4

Note: 2021 FX numbers are assumptions, not forecasts Source: ABS, RBA, Refinitiv Datastream, HSBC forecasts


38

Growth in household consumption remains weak

Growth in real household consumption has been weak over the past year, running at 1.4% y-o-y in aggregate.

Weaker activity in the housing market has played a role.

Consumption of household goods and motor vehicles fell by 1.1% and 5.2%, respectively, over the year to June. These categories tend to be highly correlated with housing market activity, particularly the level of turnover, which has been very low recently.

However, the greater constraint on spending, has been weak growth in household incomes. Although employment has been growing strongly and supporting labour income, growth in wages and non-labour income has remained very weak.

Source: ABS

The Sydney and Melbourne housing markets are rebounding

Recent tax cuts and lower interest rates should boost household income growth and spending in the second half of 2019. Aside from the direct impact on household cash flow, lower interest rates are already lifting the housing market.

Sydney and Melbourne house prices rose by around 1.5% m-o-m in August, a rapid turnaround following almost two years of steady price declines. Sales volumes remain low, but should pick up now that market conditions have improved.

Conditions in other housing markets remain more subdued,

although there are signs of stabilisation in most cities, as a result of lower interest rates. The key exception remains Perth, where stronger conditions in the mining sector have not, so far, offset a rapid expansion in housing supply over recent years (relative to population growth).

Source: Corelogic

Inflation remains below target

Inflation remains below the RBA’s 2-3% target band in both headline and underlying terms. The RBA currently does not expect underlying inflation will return to the target band until 2021.

There have been some specific factors dragging on inflation.

In particular, weak housing market conditions and a significant boost to the rental housing stock (thanks to an apartment-building boom) have seen very low growth in housing costs. Increased retail competition, including from online and overseas retailers, is also playing a role.

More broadly, an environment of low wage growth and spare

capacity in the economy has suppressed overall inflationary pressure. Until spare capacity is further reduced, particularly in the labour market, a generalised increase in inflation seems unlikely.

Source: ABS

-2.0

0.0

2.0

4.0

6.0

8.0

-2.0

0.0

2.0

4.0

6.0

8.0

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

q-o-q % Real HH consumption, y-o-y %

50

75

100

125

150

175

200

50

75

100

125

150

175

200

2005 2007 2009 2011 2013 2015 2017 2019

IndexIndex

Sydney Brisbane Adelaide

Perth Canberra Melbourne

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Underlying inflation Headline CPI

% y-o-y % y-o-y

39


Australia: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 2.6 2.5 2.8 2.4 2.7 1.9 2.3 2.7 Nominal GDP (USDbn) 1,480 1,289 1,268 1,368 1,441 1,397 1,386 1,440 GDP per capita (USD) 62,583 53,729 51,987 55,190 57,208 54,543 53,262 54,456 Private consumption (% y-o-y) 2.5 2.4 2.9 2.7 3.1 1.9 2.2 2.4 Government consumption (% y-o-y) 0.3 4.4 4.9 4.0 4.0 5.5 4.9 3.4 Investment (% y-o-y) -2.7 -4.3 -2.2 3.3 3.2 -1.9 0.7 2.6 Stock building (% GDP) 0.0 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Business investment (% y-o-y) -5.2 -9.5 -9.4 4.6 1.7 -0.5 3.0 3.9 Dwelling investment (% y-o-y) 9.6 8.9 7.9 -2.2 4.8 -7.9 -8.6 -5.9 Public investment (% y-o-y) -7.0 -1.0 9.8 8.2 5.7 2.1 5.5 8.2 Exports of G&S (vol growth) % y-o-y 6.9 6.5 6.8 3.4 5.0 3.3 2.3 3.2 Imports of G & S (vol growth)% y-o-y -1.4 2.0 0.1 7.7 4.0 -1.4 2.5 2.9 Net exports % of GDP -1.3 -0.4 0.9 0.1 0.3 1.3 1.3 1.3 Net exports (contribution to GDP growth, ppt) 1.6 0.9 1.3 -0.8 0.2 1.0 0.0 0.1 Final domestic demand % y-o-y 0.7 1.0 2.0 3.1 3.3 1.6 2.4 2.6 Domestic demand % y-o-y 1.0 1.3 1.9 2.8 3.0 0.8 2.3 2.7 Industrial production (% y-o-y) 4.4 1.6 2.0 1.4 1.7 -1.7 1.5 2.0 Gross national saving (% of GDP) 23.3 21.6 20.8 22.0 21.8 22.1 20.6 20.3 Household saving rate (%) 8.2 7.0 5.4 4.5 3.1 2.5 2.3 2.3 Unemployment rate, avg (%) 6.1 6.1 5.7 5.6 5.3 5.2 5.3 5.1 Prices & wages Trimmed mean CPI, (% y-o-y) 2.5 2.2 1.7 1.7 1.8 1.6 1.8 2.1 CPI (% y-o-y) 2.5 1.5 1.3 1.9 1.9 1.6 1.8 2.1 PPI (% y-o-y) 1.1 1.9 0.7 1.7 2.0 1.9 2.4 2.4 Core CPI (% y-o-y) 2.2 2.2 1.5 1.7 1.9 1.6 1.9 2.2 Labour cost index, nominal (% y-o-y) 2.6 2.2 2.0 2.0 2.2 2.3 2.4 2.6 Money, FX & interest rates Money Supply M1, average (% y-o-y) 12.6 14.4 9.4 9.3 5.0 n/a n/a n/a Broad money supply, average (% y-o-y) 6.8 6.7 6.1 6.5 2.5 n/a n/a n/a Private credit growth-nominal (% y-o-y) 5.1 6.4 6.1 5.5 4.8 3.0 3.4 3.4 Policy rate, year-end (%) 2.50 2.00 1.50 1.50 1.50 0.75 0.50 0.50 10yr yield, year-end (%) 2.81 2.96 2.77 2.70 2.32 1.00 1.00 1.00 USD/AUD, year-end 0.87 0.71 0.76 0.78 0.72 0.68 0.68 0.68 USD/AUD, average 0.92 0.79 0.74 0.76 0.76 0.70 0.68 0.68 EUR/AUD, year-end 0.69 0.63 0.68 0.67 0.62 0.62 0.62 0.62 EUR/AUD, average 0.68 0.68 0.67 0.69 0.64 0.62 0.62 0.62 Real Trade-Weighted-Index 147.3 133.6 140.5 140.3 135.2 n/a n/a n/a External sector Exports of G&S (USDbn) 302.5 247.9 252.8 293.9 328.9 342.0 329.2 334.7 Imports of G&S (USDbn) 311.8 275.8 263.5 286.8 311.6 293.8 296.7 305.3 Goods and Services Balance (USDbn) -9.3 -27.9 -10.6 7.0 17.3 48.2 32.5 29.5 Current account balance (USDbn) -45.5 -59.0 -41.3 -35.2 -30.2 2.1 -14.8 -17.1 Current account balance (% GDP) -3.1 -4.6 -3.3 -2.6 -2.1 0.1 -1.1 -1.2 Net FDI (USDbn) 40.9 39.3 46.5 38.8 62.7 n/a n/a n/a Net FDI (% GDP) 2.8 3.0 3.7 2.8 4.4 n/a n/a n/a Exports (% y-o-y) 3.0 -2.8 3.9 15.2 13.1 12.0 -1.3 1.7 Imports (% y-o-y) 2.7 5.1 -2.7 7.7 9.8 1.7 3.5 2.9 International FX reserves (USDbn) 47.4 36.2 48.9 59.0 46.4 n/a n/a n/a Import cover (months) 1.8 1.6 2.2 2.5 1.8 n/a n/a n/a Public and external solvency indicators Central government balance (% GDP) -3.0 -2.3 -2.4 -1.9 -0.9 0.0 0.2 0.2 Net external debt (AUDbn) 931.9 1002.4 1003.2 1013.7 1082.9 n/a n/a n/a Net external debt (% GDP) 57.7 61.1 58.9 56.1 57.1 n/a n/a n/a Gross public domestic debt (AUDbn) 320.0 368.0 420.0 501.0 532.0 546.0 560.0 570.0 Gross public sector debt (% GDP) 20.0 22.7 25.3 28.4 28.8 28.1 27.9 27.5 Net public sector debt (% GDP) 13.1 51.1 18.3 18.3 18.5 19.2 18.0 17.0 Macro-prudential indicators Capital adequacy ratio 10.8 11.6 11.8 12.3 12.7 n/a n/a n/a Non-performing loan ratio 0.7 0.5 0.5 0.4 0.3 n/a n/a n/a Household debt/income (%) 166.2 171.5 178.2 185.2 188.8 n/a n/a n/a Total credit/GDP (%) 145.1 152.4 155.0 153.7 153.3 n/a n/a n/a House prices growth (%y-o-y) 9.1 9.0 5.5 8.4 -1.4 -5.8 3.7 2.5 Loan/deposit ratio 1.1 1.1 1.1 1.1 1.2 n/a n/a n/a Stock market capitalisation/GDP (%) 96.3 98.5 98.0 101.8 100.8 n/a n/a n/a

Note: Trimmed mean data represents Core CPI; 2021 FX numbers are assumptions, not forecasts Source: ABS, RBA, Refinitiv Datastream, IMF, HSBC forecasts


40

Bangladesh

Speed bumps ahead for Asia’s fastest-growing economy

With global demand expected to stay subdued and structural impediments at home, some shine

is likely to be wiped off Bangladesh’s impressive growth trajectory. At 8.1%, growth in FY18-19

was the highest in Asia and a record for the country. Exports and remittances, the two key growth

drivers, remained robust even as global demand faced stiff headwinds from the US-China trade

tensions. But a protracted trade war could dent demand in the economy’s key trading partners,

while remittances are likely to moderate in the coming months. Still, we expect Bangladesh’s

economy to grow at a solid pace of 7.7% in FY19-20 and 7.8% in FY20-21.

One issue to watch is inflation. Effective 1 July, the state-run Bangladesh Energy Regulatory

Commission (BERC) has raised natural gas prices by 32.8%, on average, for all users. A survey

by the central bank, Bangladesh Bank, has indicated that elevated inflation expectations with

the IMF are prompting it to adjust its monetary stance as needed. Still, we expect lower food

prices to keep a lid on headline inflation.

So, while the overall economic situation is positive, maintaining robust economic performance will

require the government to address key bottlenecks to improve investment. Lingering challenges

in the banking sector are a key concern, as is the absence of a mature capital market, since

banks in Bangladesh play a dominant role in mobilising and allocating resources for investment.

The non-performing loan (NPL) ratio rose to 11.9% at end-March 2019, reflecting challenges

related to due diligence and compliance with risk management practices. According to the IMF,

the published NPL ratio figure likely underestimates potential problems in the banking sector, as

it does not include the rising rescheduled and restructured loans. About half of all the

rescheduled loans in the financial system are owed by the industrial and textile sectors. The

latter is the economy’s primary export revenue earner.

The high level of stressed assets (over 20%), which include NPLs, restructured loans, and

rescheduled loans, constrain banks’ ability to engage in new lending and limit their access to

credit. Encouragingly, though, the authorities are confident that the corrective measures they

have rolled out will address the situation effectively.

Frederic Neumann Co-head of Asian Economics Research The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 4556

Abanti Bhaumik

Associate

Bangalore

Bad loans soar Credit growth dips

Source: CIEC, HSBC Source: CEIC, HSBC

6

7

8

9

10

11

12

13

Mar-10 Mar-12 Mar-14 Mar-16 Mar-18

System wide NPL

% of total loans

5

10

15

20

25

30

00 02 04 06 08 10 12 14 16 18

Domestic credit growth

Private sector credit growth

% y-o-y

41


Policy issues

There are limited tools available to bolster the economy from here. Inflation is already at 5.5%

and upside risks remain, meaning the central bank doesn’t have a lot of room to lower its repo

and reverse repo rates to below their current levels of 6.00% and 4.75%, respectively.

The stock market did get a shot in the arm when Bangladesh Bank allowed banks to borrow from

the central bank via repos at the rate of 6%, specifically for investment in the capital market.

Although there is a legal limit to banks’ stock market exposure (25% on a solo basis and 50%

on consolidated basis), banks’ overall investments in the capital market has reached just c.14%

this, leaving ample scope for further investment. While this should help restore investor confidence,

by itself it will not resolve the tightening of credit conditions in the economy: companies that

perform well are often not listed due to an inconvenient listing procedure, depriving the capital

market of quality stocks.

The FY18-19 fiscal deficit was 4.9% of GDP (preliminary estimate), just under the 5% target, as

lower-than-budgeted spending compensated for lower-than-budgeted revenue. However in the

current fiscal year, meeting the deficit target of 5% of GDP, will be more challenging. The

budget not only assumes an optimistic 30.8% growth in revenue, it also includes higher planned

spending for subsidies and cash incentives for remittances and exports.

Risks

The economic outlook is subject to risks from weaker-than-expected global growth, as it could

significantly weigh upon both exports and remittances. In addition, slow progress on banking

sector reforms raises the risk of a further tightening in credit conditions and, in turn, to the fiscal

target and GDP growth.

Key forecasts


Industrial production (% y-o-y) 11.0 9.0 11.3 11.0 10.4 10.0 10.1 9.8 9.6 9.7 9.9 CPI, (% q-o-q saar) 5.4 5.5 5.2 5.6 5.7 5.2 5.9 4.7 6.0 5.6 6.1 CPI, average (% y-o-y) 5.6 5.6 5.6 5.5 5.5 5.4 5.6 5.4 5.5 5.5 5.6 Exports, value (% y-o-y) 10.0 12.1 11.1 10.0 9.0 7.2 7.6 7.0 6.0 7.0 9.7 Imports, value (% y-o-y) 9.3 9.0 10.0 8.4 7.5 7.2 6.5 5.9 6.3 6.9 6.8 Trade balance (USDbn) -5.5 -3.9 -4.1 -4.5 -5.8 -4.2 -4.2 -4.6 -6.2 -4.5 -4.1 Remittances (% y-o-y) -8.9 4.0 5.6 0.0 0.0 9.8 12.5 12.5 12.5 4.4 -18.9 Current account (USDbn) -2.8 -1.0 -1.3 -1.7 -3.2 -1.9 -2.0 -2.4 -3.9 -2.2 -2.6 International reserves (USDbn) 30.0 30.0 33.0 31.0 32.5 33.1 33.7 34.3 34.9 35.5 36.1 Policy rate, quarter-end (%) 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 BDT/USD, quarter-end 84.50 85.50 86.00 86.00 86.00 86.00 86.00 86.00 86.00 86.00 86.00 BDT/EUR, quarter-end 96.33 94.05 94.60 94.60 94.60 94.60 94.60 94.60 94.60 94.60 94.60

Note: 2020 and 2021 FX forecasts are assumptions, not forecasts Source: CEIC, HSBC forecasts


42

Remittances growth … … has been moderating in recent months

Weaker global growth could adversely affect remittances,

weighing on the current account balance For a while now, the current account has been in deficit,

driven by larger capital imports related to infrastructure projects, and a one-off surge in food imports due to floods. Although remittances grew by double digits, they were often not enough to cover the larger trade deficit.

Remittances have been declining as a share of GDP since

FY14, a trend likely to persist. Slower remittances could also be a drag on private

consumption.

Source: CEIC, HSBC

Inflation remains contained … … thanks to easing food inflation

Food inflation eased, while non-food inflation rose on the

back of upward adjustments in domestic administered gas and electricity prices, and VAT reform.

Inflation expectations remain elevated on the back of

gradually increasing non-food inflation, and strong growth supported by robust domestic demand.

However, the growth of monetary and credit aggregates has

been decelerating until recently and remains below the Bangladesh Bank’s targets.

On balance, we think inflation will remain close to the central

bank’s 5.5% target.

Source: IMF, HSBC

Fiscal target was maintained … … as both revenues and expenditure were lesser than budgeted

During the current fiscal year maintaining the fiscal target is

likely to be challenging, as higher spending has been planned while revenue growth may lag projections.

The IMF has stressed the need to boost revenues to finance the upgrade of infrastructure, support vulnerable sectors, and meet the potential costs of climate change, a key future risk.

They also highlighted the need to expand the tax base by reducing exemptions, and to modernise tax administration.

Source: CEIC, HSBC

0

200

400

600

800

1,000

1,200

1,400

1,600

-20

-10

0

10

20

30

40

50

60

May-06 May-09 May-12 May-15 May-18

Overseas Workers Remittances-% y-o-y, 3mma (LHS)Overseas Workers Remittances-USD m, 3mma (RHS)

% y-o-y, 3mma USDm, 3mma

0

2

4

6

8

10

0

2

4

6

8

10

Jun-12 Jun-14 Jun-16 Jun-18

Headline CPI Food CPI

% y-o-y % y-o-y

6.5

7.0

7.5

8.0

8.5

9.0

9.5

6.5

7.0

7.5

8.0

8.5

9.0

9.5

2006 2008 2010 2012 2014 2016 2018

Tax to GDP ratio (%)

43


Bangladesh: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y)* 6.6 7.1 7.3 7.9 8.1 7.7 7.8 7.7 Nominal GDP (USDbn)* 195.1 221.4 249.7 274.0 301.8 320.8 392.1 475.8 GDP per capita (USD)* 1,236.0 1,385.0 1,544.0 1,675.0 1,827.0 1,915.4 2,314.2 2,776.9 Private consumption (% y-o-y)* 5.8 3.0 7.4 11.0 5.4 7.2 7.3 7.1 Government consumption (% y-o-y)* 8.8 8.4 7.8 15.4 8.0 7.0 7.1 7.0 Investment (% y-o-y)* 7.1 8.9 10.1 10.5 8.2 8.6 7.0 7.1 net Exports (contribution to GDP growth, ppt)* -1.3 1.9 -0.9 -3.6 1.3 0.0 0.4 0.4 Industrial production (% y-o-y) 9.7 11.3 13.6 14.0 12.1 10.1 10.4 9.8 Gross domestic saving (% GDP)* 30.4 31.6 30.0 27.7 29.3 29.0 30.1 30.0 Prices & wages CPI, average (% y-o-y) 7.0 6.2 5.5 5.7 5.5 5.6 5.5 5.5 CPI, year-end (% y-o-y) 6.1 6.1 5.0 5.8 5.3 5.6 5.7 5.7 Non-food CPI, average (% y-o-y) 5.6 6.4 7.1 3.5 4.5 5.2 4.9 6.0 Non-food CPI, year-end (% y-o-y) 6.5 7.1 4.5 3.8 5.4 4.5 6.3 6.7 Manufacturing wages, nominal (% y-o-y) 10.1 9.6 7.0 6.6 6.3 6.5 6.0 6.0 Money, FX & interest rates Broad money supply M2, average (% y-o-y) 12.4 14.8 11.8 9.5 12.0 13.0 12.6 12.4 Real private sector credit growth (% y-o-y)* 6.8 10.9 10.2 11.2 9.1 9.9 12.0 12.0 Policy rate, year-end (%) 7.25 7.25 6.75 6.75 6.00 6.00 6.00 6.00 BDT /USD, year-end 78.0 78.5 78.7 82.7 83.9 86.0 86.0 86.0 BDT /USD, average 77.6 78.0 78.5 80.6 83.5 84.8 85.9 86.0 BDT /EUR, year-end 94.3 85.6 82.6 99.2 96.5 94.6 94.6 94.6 BDT /EUR, average 102.9 86.9 87.1 91.0 98.9 95.1 94.5 94.6 External sector Merchandise exports (USDbn) 30.0 31.7 34.1 35.3 38.7 42.7 46.3 49.8 Merchandise imports (USDbn) 37.4 39.2 41.5 48.9 56.0 60.5 65.0 69.2 Trade balance (USDbn) -7.4 -7.5 -7.4 -13.6 -17.3 -17.8 -18.6 -19.4 Remittances (% y-o-y) 8.0 2.5 -11.1 -0.6 14.8 0.5 5.6 2.1 Current account balance (USDbn)* 2.9 4.3 -1.3 -9.8 -7.0 -7.3 -10.2 -11.9 Current account balance (% GDP)* 1.5 1.9 -0.5 -3.6 -2.3 -2.3 -2.6 -2.5 Net FDI (USDbn)* 1.8 2.5 3.0 2.8 4.0 6.3 8.4 8.4 Net FDI (% GDP)* 0.7 0.9 1.0 0.8 1.1 1.7 1.8 1.5 Current account balance plus FDI (% GDP)* 2.2 2.8 0.4 -2.7 -1.2 -0.6 -0.8 -1.0 Exports, value (% y-o-y) 4.4 5.9 7.5 3.4 9.6 10.5 8.4 7.5 Imports, value (% y-o-y) 8.4 5.0 5.7 17.8 14.5 8.1 7.4 6.5 International FX reserves (USDbn) 22.3 27.5 32.1 33.2 32.0 33.0 33.7 36.1 Import cover (months) 7.2 8.4 9.3 8.2 6.9 6.5 6.2 6.3 Public and external solvency indicators Gross external debt (USDbn)* 23.9 26.3 28.3 33.1 34.1 32.1 40.8 50.0 Gross external debt (% GDP)* 12.3 11.9 11.3 12.1 11.3 10.0 10.4 10.5 Central government balance (% GDP)* -3.7 -3.2 -3.4 -4.4 -4.5 -4.6 -4.7 -4.6 Primary balance (% GDP)* -1.6 -1.2 -0.5 -0.9 -0.7 -0.5 -0.5 -0.5 Government domestic debt (BDTbn) 1,089 1,117 933 1,148 1,217 1,333 1,684 2,046 Government domestic debt (% GDP)* 7.2 6.4 4.7 5.1 4.8 4.9 5.0 5.0 Government debt (% GDP)* 48.1 48.8 47.8 40.2 44.1 46.3 47.1 48.1 Macro-prudential indicators Capital adequacy ratio 10.4 9.4 10.9 10.8 n/a n/a n/a n/a Non-performing loan ratio 9.7 8.8 9.2 9.3 n/a n/a n/a n/a Total credit/GDP (%)* 49.1 48.5 47.6 47.8 n/a n/a n/a n/a Loan/deposit ratio 73.3 74.1 75.7 78.9 n/a n/a n/a n/a

*Data on fiscal year basis (July-June), e.g., fiscal year 2014-15 refers to 2014 in the table Note: 2020 and 2021 FX forecasts are assumptions, not forecasts Source: CEIC, Bangladesh Bank, Bangladesh Bureau of Statistics, IMF, World bank, HSBC forecasts


44

Mainland China

Escalating trade war, slower growth

Eighteen months in, China-US trade tensions show no sign of letting up. Instead, the tariff war

is intensifying as the US put 15% tariffs on approximately USD111bn worth of goods (part of a

potential USD300bn discussed) on 1 September. The rate on the earlier tranche of USD228bn

is set to go up to 30% on 15 October (from 25% now). Another tranche, of approximately

USD156bn, will be tariffed on 15 December. The implementation remains uncertain as trade

talks have reportedly resumed. But if these tariffs go ahead, they will likely shave a combined

0.8ppt off annual GDP growth over a 12-month period.

Higher tariff rates are putting pressure on trade-related sectors. China’s overall export growth

has slowed from 9.9% in 2018 to 0.4% in 2019 y-t-d. Exports to the US have contracted by 9%

y-o-y, and imports from the US by 28% y-o-y so far in 2019. Meanwhile, the second-round

impact is starting to become more visible. Our preferred gauge for corporate confidence has

declined sharply since June 2018. We believe weakening business confidence has already

derailed an anticipated recovery in private sector business investment in 2H 2019. As the trade

war drags on, we now see the recovery being further postponed, until 2020, if not longer.

Given increased headwinds, we expect policymakers to step up their easing efforts over the next few

months. The most likely measures include cutting the Medium-term Lending Facility rate, guiding the

Loan Prime Rate (LPR) lower, cutting the Reserve Requirement Ratio (RRR) and lifting infrastructure

spending. These factors should offset some of the tariff impact, but they are unlikely to be big enough

to reverse the decline in business confidence or the consequent slowing of GDP growth. As a result,

we recently lowered our GDP growth forecast for 2019 to 6.2% (from 6.5%), and our 2020 GDP

growth forecast to 5.8%, from 6.3% previously (see China GDP downgrade, 28 August).

Slower growth will put some pressure on the labour market. We estimate that around 1.8m jobs

may be eliminated by the escalation of trade tensions with the US. This is equivalent to around

a 1.6ppt loss in total manufacturing employment, or a 0.4ppt loss in total urban employment.

That said, a faster-growing and more labour-intensive service sector may help to absorb some

of the impact. This is because, while manufacturing has been hit hard, household consumption

and the service sectors thus far remain relatively unscathed.

Qu Hongbin Co-head Asian Econ Research, Chief China Economist The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 2025

Julia Wang

Senior Economist, Greater China The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 3604 3663

Jingyang Chen

Economist


[email protected]

+852 2996 6558

Madhurima Nag

Associate

Bangalore

Protracted trade war weighs on business confidence

Policy easing remains targeted, for now

Source: CEIC, HSBC (Mfg = Manufacturing) Source: BIS, Bloomberg, Eviews, CEIC, HSBC

0

10

20

30

40

40

50

60

70

80

2011 2013 2015 2017 2019

% YTD, y-o-yDiffusion index score

General Business Condition FAI Mfg. (RHS)

Aug 16 Feb 17 Aug 17 Feb 18 Aug 18 Feb 19 Aug 19

-4

-2

0

2

4

-4

-2

0

2

4point contributionpoint contribution

REER, % y-o-y Change in real repoReal TSF MCI Headline

Loosening

Tightening

https://www.research.hsbc.com/R/10/RVjcGJFtFwkZ

45


Policy issues

Since the beginning of 2018, policymakers in China have eased both monetary and fiscal policy

to mitigate the impact of the trade war. On the monetary policy side, the People’s Bank of China

and financial regulators have come up with a range of regulatory ‘carrots’ and ‘sticks’ to push

banks to lend more to the small and medium-sized companies. They recently reformed the Loan

Prime Rate (LPR) system and guided it lower for corporate lending while keeping property

market-related lending rates unchanged. The central bank has recently cut the RRR across the

board by 50bp and the RRR for city commercial banks (that only operate within provinces) by

another 100bp. Cuts continue to be made to the Value Added Tax (VAT), intended to save

consumers an estimated RMB800-900bn in taxes.

But, as the trade war has intensified, economic headwinds have grown stronger. The tariff war

has escalated and spilled over to technology and currencies. It looks increasingly as if it will last

much longer than we originally assumed. We believe this will put additional pressure on growth.

To offset the impact on growth, policymakers will likely step up the pace of easing. After its last

quote on 20 September, we expect the Loan Prime Rate to fall another 45bp by the end of Q3

2020 as it converges with the Medium-term Loan Facility (MLF) rate. The PBoC will likely cut the

MLF rate by 20bp in 2020, as CPI inflation will likely ease. We also continue to see 50bp cuts to

the RRR in the remainder of 2019 and a further 100bp in 2020. Continued moderate weakening

of the RMB will likely help exporters. Fiscal policy will probably remain expansionary, with a

more generous quota for local government bond issuance as well as potential deliberation of

additional tax cuts in 2020.

Risks

Given the downward adjustment in our GDP forecast, we believe the risks are evenly distributed.

On the one hand, external uncertainty remains high. The trade war could, in the worst-case

scenario, play out in an even more disruptive manner. On the other hand, China’s policymakers

have generally been patient and moderate in their easing effort. There is significant room to

ease further, both on the monetary and on the fiscal side, should growth continue to slow and

the impact become too big for the labour market and financial system.

Key forecasts


GDP (% y-o-y) 6.2 6.1 6.0 6.0 5.9 5.8 5.7 5.7 5.7 5.8 5.8 GDP sa (% q-o-q) 1.6 1.4 1.4 1.6 1.3 1.3 1.4 1.6 1.3 1.4 1.4 Industrial production* (% y-o-y) 5.6 5.4 5.3 5.3 5.2 5.0 5.0 5.2 4.9 5.1 5.1 CPI, (% q-o-q saar) 4.1 3.5 3.3 2.2 1.8 1.2 1.3 2.1 2.1 2.7 2.6 CPI, average (% y-o-y) 2.6 2.8 3.1 3.3 2.7 2.1 1.7 1.6 1.7 2.1 2.4 PPI, average (% y-o-y) 0.5 -0.6 -0.6 0.7 -0.1 -0.6 -1.2 -1.0 -0.5 -0.1 0.4 Exports, value (% y-o-y) -1.0 0.6 -0.2 0.6 1.2 2.0 2.1 2.3 2.3 2.4 2.4 Imports, value (% y-o-y) -4.0 -4.9 -1.0 2.6 3.7 4.4 4.5 4.2 5.4 5.4 5.5 Trade balance (% GDP) 3.0 3.3 3.5 2.0 2.7 2.9 3.2 1.7 2.1 2.3 2.6 International reserves (USDbn) 3,119.2 3,120.6 3,074.4 3,083.6 3,096.1 3,105.4 3,095.7 3,108.4 3,109.1 3,104.4 3,080.9 Policy rate**, quarter-end (%) 4.35 4.20 4.00 3.90 3.80 3.75 3.75 3.75 3.75 3.75 3.75 5yr lending rate, quarter-end (%) 3.06 2.99 2.80 2.50 2.40 2.40 n/a n/a n/a n/a n/a RMB /USD, quarter-end 6.87 7.10 7.20 7.25 7.25 7.30 7.30 7.30 7.30 7.30 7.30 RMB /EUR, quarter-end 7.84 7.81 7.92 7.98 7.98 8.03 8.03 8.03 8.03 8.03 8.03

*Industrial production is the output of companies with annual sales over RMB20m **We have changed policy rate from the one-year benchmark lending rate to the Loan Prime Rate (LPR) after the recent reform of the LPR system on August 2019, this policy rate was reduced by 11bp in Q3 2019 Note: 2021 FX numbers are assumptions, not forecasts Source: CEIC, HSBC forecasts


46

Manufacturing investment slowed considerably in 2019 … … as business confidence weakened due to protracted trade tensions

Overall fixed asset investment growth has been more

modest in 2019 as manufacturing investment slowed considerably. It grew 2.6% y-t-d, y-o-y in August 2019, much lower than 7.5% y-t-d, y-o-y in August 2018.

The manufacturing sector slowdown reflects the impact of poor business sentiment due partly to the protracted trade tensions. Meanwhile, property investment, the key driver of fixed asset investment growth in 2019, may slow in the coming months on the back of further tightening measures.

Given increased headwinds to growth, we think policy stimulus needs to be more decisive and aggressive in the coming months. A diverse set of policies, both fiscal and monetary easing should be directed primarily towards restoring business confidence.

Source: CEIC, HSBC

Producer prices face deflationary pressure … … leaving room for further monetary easing

Producer prices moved swiftly into deflation in 2H19. PPI has been low throughout 2019, rising just 0.1% y-o-y in Jan-Aug 2019 compared with 4.0% for the same period last year.

Aggregate demand has been weaker on the back of softer global demand and a slow recovery in domestic demand. On the other hand, since 2018 some of the supply-side constraints have been loosened, leading to a gradual pick-up in supply. This is has been the key reason behind the steady decline in PPI.

The PPI deflation, along with low core CPI inflation, leaves room for further easing in the monetary policy, both in terms of boosting lending to the private sector as well as lowering their cost of borrowing.

Source: CEIC, HSBC

Retail sales growth has been softening …

… due partly to weaker car sales

Retail sales growth slowed to 8.2% y-o-y in Jan-Aug, (from

9.3% in 2018).

Auto sales have been contracting since 2H18, weighing on the overall retail sector. More specifically, passenger car sales have decelerated sharply, due partly to subsidies and tax breaks in recent years that have triggered the front-running of car purchases.

Our estimates suggest that the headwinds to growth from the trade tensions are likely to kill 1.8m jobs. However, we expect the faster-growing, labour-intensive service sector to cushion the labour market from some of the impact.

Source: CEIC, HSBC

2012 2013 2014 2015 2016 2017 2018 2019

-5

0

5

10

15

20

25

30

-5

0

5

10

15

20

25

30% y-o-y, 3mma% y-o-y, 3mma

Total Investment InfrastructureProperty Manufacturing

-8

-6

-4

-2

0

2

4

6

8

2011 2013 2015 2017 2019

-40

-30

-20

-10

0

10

20

30

40

% y-o-y, 3mma% y-o-y, 3mma

Mining Raw material

Processing Headline PPI (RHS)

-20

-10

0

10

20

30

7

9

11

13

15

17

2012 2013 2014 2015 2016 2017 2018 2019


Retail Sales Auto Sales (RHS)

47


Mainland China: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 7.3 6.9 6.7 6.8 6.6 6.2 5.8 5.8 Nominal GDP (USDbn) 10,440 11,014 11,142 12,156 13,605 14,051 14,392 15,333 GDP per capita (USD) 7,632 8,012 8,058 8,745 9,750 10,029 10,232 10,858 Retail sales (% y-o-y) 12.0 10.7 10.4 10.2 9.0 8.0 7.5 7.6 Fixed Asset Investment (nominal, % y-o-y) 15.7 10.0 8.1 7.2 5.9 5.3 4.7 4.8 Net exports (contribution to GDP growth, ppt) 0.3 -0.1 -0.6 0.6 -0.6 1.1 0.9 0.6 Industrial production (% y-o-y)* 8.2 6.0 6.2 6.6 6.1 5.7 5.1 5.1 Gross domestic saving (% GDP) 49.3 48.2 46.4 46.4 45.7 45.2 44.6 44.7 Unemployment rate, average (%) 4.1 4.0 4.0 3.9 3.8 3.6 3.8 3.8 Prices & wages CPI, average (% y-o-y) 2.0 1.4 2.0 1.6 2.1 2.6 2.4 1.9 CPI, year-end (% y-o-y) 1.5 1.6 2.1 1.8 1.9 3.4 1.5 2.4 Core CPI, average (% y-o-y) 1.6 1.6 1.6 2.2 1.9 1.6 1.5 1.5 Core CPI, year-end (% y-o-y) 1.3 1.5 1.9 2.2 1.8 1.4 1.6 1.5 PPI, average (% y-o-y) -1.9 -5.2 -1.4 6.3 3.5 -0.1 -0.3 -0.3 PPI, year-end (% y-o-y) -3.3 -5.9 5.5 4.9 0.9 0.2 -1.3 0.5 Wages, nominal (% y-o-y) 9.5 10.1 8.9 10.0 11.0 9.0 8.0 8.0 Money, FX & interest rates Central bank money M0, average (% y-o-y) 6.3 2.4 6.4 7.1 2.7 5.5 6.0 5.3 Broad money supply M2, average (% y-o-y) 12.7 11.9 12.0 10.2 8.3 8.3 8.2 8.1 Policy rate, year-end (%) 5.60 4.35 4.35 4.35 4.35 4.00 3.75 3.75 Reserve Requirement Ratio (RRR**) 19.50 17.00 16.50 16.50 11.55 10.00 9.00 9.00 5yr yield, year-end (%) 3.53 2.71 2.84 3.85 2.95 2.50 n/a n/a Real private sector credit growth (% yr) 14.3 12.6 16.6 13.4 9.8 10.0 9.0 9.5 RMB /USD, year-end 6.12 6.49 6.94 6.53 6.86 7.20 7.30 7.30 RMB /USD, average 6.14 6.23 6.64 6.75 6.62 6.92 7.26 7.30 RMB /EUR, year-end 7.40 7.08 7.28 7.84 7.89 7.92 8.03 8.03 RMB /EUR, average 8.14 6.94 7.37 7.62 7.83 7.76 7.99 8.03 External sector Merchandise exports (USDbn) 2,342.3 2,273.5 2,097.6 2,263.3 2,486.7 2,490.1 2,528.3 2,587.4 Merchandise imports (USDbn) 1,959.2 1,679.6 1,587.9 1,843.8 2,135.7 2,058.4 2,137.7 2,248.0 Trade balance (USDbn) 383.1 593.9 509.7 419.6 350.9 431.6 390.6 339.4 Current account balance (USDbn) 236.0 304.2 202.2 195.1 49.1 205.5 134.2 69.8 Current account balance (% GDP) 2.3 2.8 1.8 1.6 0.4 1.5 0.9 0.5 Net FDI (USDbn) 145.0 68.1 -41.7 27.8 107.0 90.0 71.2 84.0 Net FDI (% GDP) 1.4 0.6 -0.4 0.2 0.8 0.6 0.5 0.5 Current account balance plus FDI (% GDP) 3.6 3.4 1.4 1.8 1.1 2.1 1.4 1.0 Exports, value (% y-o-y) 6.0 -2.9 -7.7 7.9 9.9 0.1 1.5 2.3 Imports, value (% y-o-y) 0.5 -14.3 -5.5 16.1 15.8 -3.6 3.9 5.2 International FX reserves (USDbn) 3,843.0 3,330.4 3,010.5 3,139.9 3,072.7 3,074.4 3,095.7 3,080.9 Import cover (months) 23.5 23.8 22.8 20.4 17.3 17.9 17.4 16.4 Public and external solvency indicators Gross external debt (USDbn) 1,779.9 1,383.0 1,415.8 1,758.0 1,965.2 2,065.2 2,165.2 2,265.2 Gross external debt (% GDP) 17.0 12.6 12.7 14.5 14.4 14.7 15.0 14.8 Short term external debt (% of int’l reserves) 33.8 26.6 28.9 35.0 41.4 42.7 43.7 45.2 Consolidated government balance (% GDP) -2.1 -2.4 -2.9 -2.9 -2.6 -2.8 -3.0 -2.8 Public Sector Debt (% GDP) 38.8 36.7 37.0 36.5 37.1 38.7 40.8 41.1 Macroprudential indicators Capital adequacy ratio 13.2 13.5 13.3 13.7 14.2 n/a n/a n/a Non-performing loan ratio 1.3 1.7 1.7 1.7 1.8 n/a n/a n/a Household debt/ GDP (%) 36.1 39.4 45.1 49.4 53.2 n/a n/a n/a Total credit/GDP (%)*** 191.6 201.6 217.9 222.8 223.0 227.0 230.3 235.5 Residential house prices (% y-o-y) 1.4 7.4 10.1 5.6 10.7 n/a n/a n/a Loan/deposit ratio 71.7 69.2 70.8 73.2 76.8 79.9 82.6 86.0 Stock market capitalisation/GDP (%) 57.9 76.8 68.6 69.0 48.3 48.3 48.3 48.3

*Industrial production is the output of companies with annual sales over RMB20m **Refers to the system-wide RRR rate. Data for Q2-Q4 2018 are extrapolated ***Total credit is Total Social Financing Stock. 2021 FX numbers are assumptions, not forecasts Other notes: Budget balance (% GDP) refers to annual numbers after adding drawdowns from government deposits. Policy rate was changed from the 1-year benchmark lending rate to the Loan Prime Rate (LPR) after the recent reform of the LPR system on August 2019; this policy rate was reduced by 11bp in Q3 2019 Source: CEIC, HSBC forecasts


48

Hong Kong

Facing multiple headwinds

After growing more slowly than expected in Q1, the Hong Kong economy contracted by 0.4% q-o-q

in Q2. A slew of high frequency indicators suggest that economic activity will remain soft in the

coming months. The August PMI fell to the lowest level since February 2009. Meanwhile, tourist

arrivals fell by 4.8% y-o-y and retail sales contracted by 11.4% y-o-y in July.

The Hong Kong economy will likely continue to face multiple headwinds in the near term. The

recent escalation of trade tensions will weigh on trade-related sectors, especially given Hong

Kong's large trade and logistics sector (exports are 1.6 times the size of GDP). The current

situation in Hong Kong is adding to the pressures on the economy. In its official statement for

the Q2 GDP release, the government noted that “the recent local social incidents, if continued,

will cause significant disruptions to inbound tourism and consumption-related economic

activities”. These headwinds will likely weigh on business investment, which has already started

to contract. Investment contracted by 7% y-o-y in Q1 2019 and more sharply in Q2 2019, by

11.6% y-o-y. In light of this, we recently lowered our GDP forecast to 0.3% in 2019 and 1.5% in

2020, down from 2.4% for both years previously.

On 15 August, the Hong Kong government unveiled a fiscal relief package of HKD19bn, consisting of

targeted tax relief and fee reductions for businesses as well as relief for households. These

measures should kick in as soon as October 2019. The government estimates this will boost growth

by 0.3ppt over time. On 4 September, the government further increased support for small and

medium-size enterprises (SMEs) through products offered by the Hong Kong Mortgage Corporation.

For now, the relative stability of the labour market remains a key anchor for the economy.

The labour market has been structurally tightening for some years, with the unemployment rate

hovering close to a thirty-year low of 2.9% as of August 2019. This should, in turn, support wage

income and household consumption, which remains the biggest part of GDP. Despite a stable

labour market, the volatility in asset markets (both the equity market and the housing market)

means that the wealth effect will likely remain very modest.

Julia Wang


[email protected]

+852 3604 3663

Erin Xin

Economist, Greater China


[email protected]

+852 2996 6975

An unexpected contraction in Q2 More headwinds in the near term


2014 2015 2016 2017 2018 2019

-4

-2

0

2

4

6

8

-4

-2

0

2

4

6

8% y-o-yppt.

Net exports Change in inventoriesGov cons. InvestmentPrivate cons. GDP (RHS)

Contributions to GDP growth

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30

Jul 17 Jan 18 Jul 18 Jan 19 Jul 19

% y-o-yppt

Tourism Related SalesHousing Related SalesVolatile Items (Food & Fuel)Domestic Demand (Ex. Housing & Volatile Items)Retail Sales Value (RHS)

49


Policy issues

To cushion the economy from the multiple headwinds, the Hong Kong government unveiled a

fiscal relief package totalling HKD19bn on 15 August, equivalent to 0.6-0.7% of estimated 2019

GDP. The package provides incentives for businesses to maintain operations and possibly

increase activity and investment. There are also tax reductions and direct stipends for individuals

and households. The Finance Secretary announced further measures on 4 September, easing

rules for some of the products offered by the Hong Kong Mortgage Corporation. If economic

growth continues to slow, we would not rule out further fiscal policy support in the coming months.

On the back of trade war disruptions and a global manufacturing slowdown, the FOMC delivered

25bp cuts at both its July and September meetings and stopped its balance sheet reduction

ahead of schedule. We expect further easing from the FOMC in October 2019, and the Hong

Kong Monetary Authority is expected to follow suit. The further loosening of financial conditions

will likely offer some support to sentiment in financial markets and should help to stabilise the

housing market by lowering the borrowing cost for mortgages.

Risks

As a financial centre, Hong Kong's economy has seen some volatile swings in the past. Given

the protracted China-US trade war and the downturn in the global manufacturing sector, risks to

growth are still tilted to the downside in the near term. Also, as the government stated in August,

“the recent local social incidents, if continued, will cause significant disruptions to inbound

tourism and consumption-related economic activities”. Despite potentially slower growth, we

believe Hong Kong's financial stability will remain resilient and well-supported.

Key forecasts


GDP (% y-o-y) 0.5 0.1 0.2 1.3 1.5 1.7 1.6 1.5 1.5 1.4 1.3 GDP sa (% q-o-q) -0.4 -0.3 0.0 0.7 0.6 0.5 0.6 0.3 0.3 0.2 0.2 Industrial production (% y-o-y) 0.4 -0.5 -0.3 0.5 0.4 0.7 0.8 0.7 0.9 1.2 1.3 CPI, average (% y-o-y) 3.0 3.2 3.0 2.9 2.7 2.3 2.1 2.1 2.4 2.5 2.3 PPI, average (% y-o-y) 0.8 1.0 0.4 -0.1 0.0 0.4 0.4 0.6 0.6 0.6 0.7 Exports, value (% y-o-y) (BOP, goods) -4.2 -5.6 -6.8 -2.1 -1.3 -0.8 -1.0 -0.5 -0.4 -0.2 -0.2 Imports, value (% y-o-y) (BOP, goods) -5.3 -6.9 -5.7 -0.8 -0.6 0.1 0.0 0.2 0.6 0.5 0.4 Trade balance (% GDP) (BOP, goods) -10.3 -4.3 -6.4 -10.6 -10.7 -5.4 -7.4 -11.0 -11.6 -6.1 -7.9 Current account (% GDP) 5.4 4.8 3.7 1.2 2.9 1.9 0.9 0.6 1.9 0.9 0.4 International reserves (USDbn) 445.7 450.3 454.0 455.1 457.8 459.8 460.7 461.3 463.2 464.1 464.5 Policy rate, quarter-end (%) 2.75 2.25 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 5yr yield, quarter-end (%) 1.44 1.48 1.50 1.50 1.50 1.50 n/a n/a n/a n/a n/a HKD /USD, quarter-end 7.81 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 HKD /EUR, quarter-end 8.91 8.58 8.58 8.58 8.58 8.58 8.58 8.58 8.58 8.58 8.58

Note: 2021 FX numbers are assumptions, not forecasts Source: CEIC, HSBC forecasts


50

Tourism arrivals growth has eased since the beginning of 2019 ... … putting pressures on retail sales and related service industries

Slowing growth in tourist arrivals put pressures on retail

sales as tourism related sales account for c30% of retail sales. Tourism related sales contracted by 42% y-o-y in August.

Tourists from mainland China, which make up c80% of total

tourism to Hong Kong, have fallen the most from a high of 27% y-o-y, 3mma in January to -11.8% in August.

Coupled with lacklustre domestic consumption since the

beginning of 2018, retail sales will likely continue to decline in the face of weakened visitor growth. Services industries like hospitality and the food sector are also affected.

Source: CEIC, HSBC

Hong Kong’s external sector remains under pressure … … from slowing global demand and continued trade tensions

Hong Kong’s external sector faces headwinds from slower

global demand and uncertainty stemming from China-US trade tensions. Also, world trade volume growth weakened to -0.4% y-o-y in Q2 2019, from +3.9% y-o-y for the same period in 2018.

Re-exports from mainland China, which account for the lion's

share of Hong Kong's total exports, continued to slow throughout 2019. As a result, exports have contracted by 3.9% y-o-y in for 2019 year to date, compared with growth of 9.4% y-o-y for the same period in 2018.

China-US trade tensions escalated again in August, and the

likelihood of a meaningful resolution by year end is minimal. Thus, the continued uncertainties will continue to weigh on Hong Kong’s external sector.

Source: CEIC, CPB, HSBC

The labour market has remained tight… …though the headwinds, if continued, may affect employment levels.

The unemployment rate has been fairly stable. It has remained below 3% since January 2018, though there was a slight pickup in July from 2.8% to 2.9%, and remained unchanged in August.

The labour market’s stability will provide support for the economy, though the growing headwinds, if continued, may have some negative impact on wages and employment.

The retail, hospitality and food sectors, which made up

15.5% of total employment in August, are most exposed to the slowdown in visitors and domestic consumption.

Source: CEIC, HSBC

2012 2013 2014 2015 2016 2017 2018 2019

-20

-10

0

10

20

30

-20

-10

0

10

20


Total visitors

Visitors ex. mainland China

Visitors from mainland China

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

-20

-15

-10

-5

0

5

10

15

20

-40

-30

-20

-10

0

10

20

30


Exports Imports World Trade Volume(RHS)

0

1

2

3

4

5

6

7

8

9

1984 1989 1994 1999 2004 2009 2014 2019

%, SA

Unemployment rate

51


Hong Kong: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 2.8 2.4 2.2 3.8 3.0 0.3 1.5 1.4 Nominal GDP (USDbn) 291.4 309.4 320.9 341.7 363.1 374.6 391.8 409.0 GDP per capita (USD) 40,313.2 42,428.7 43,734.8 46,226.3 48,725.9 49,715.6 51,611.0 53,531.9 Private consumption (% y-o-y) 3.3 4.8 2.0 5.6 5.5 0.9 2.0 2.4 Government consumption (% y-o-y) 3.1 3.4 3.4 2.8 4.2 4.2 2.8 3.1 Investment (% y-o-y) -0.1 -3.2 -0.1 2.9 2.0 -8.7 3.5 1.8 Net exports (contribution to GDP growth, ppt) -0.3 2.7 -1.1 -4.8 -5.7 6.3 -5.8 -4.1 Industrial production (% y-o-y) -0.4 -1.6 -0.4 0.4 1.3 0.2 0.6 1.0 Gross domestic saving (% GDP) 25.2 24.9 25.5 26.7 25.2 24.5 24.4 24.0 Unemployment rate, year-end (%) 3.3 3.3 3.3 3.0 2.8 3.1 3.1 3.1 Prices & wages CPI, average (% y-o-y) 4.4 3.0 2.4 1.5 2.4 2.8 2.5 2.3 CPI, year-end (% y-o-y) 4.9 2.4 1.2 1.7 2.5 2.9 2.1 2.3 Core CPI, average (% y-o-y) 3.5 2.3 2.3 1.7 2.6 2.9 2.5 2.2 Core CPI, year-end (% y-o-y) 3.1 2.3 2.0 1.7 2.9 2.7 2.3 2.1 PPI, average (% y-o-y) -1.7 -2.7 1.3 3.8 2.0 0.7 0.2 0.6 PPI, year-end (% y-o-y) -1.2 -3.2 4.0 3.5 0.4 0.4 0.4 0.7 Manufacturing wages, nominal (% y-o-y) 4.1 4.2 3.6 3.8 4.1 3.6 3.5 3.5 Money, FX & interest rates Central bank money M1, average (% y-o-y) 12.8 17.2 10.9 11.7 6.1 -1.0 3.6 3.4 Broad money supply M3, average (% y-o-y) 12.6 7.1 5.6 10.7 5.9 5.4 6.8 7.2 Real private sector credit growth (% y-o-y) 8.3 0.5 4.1 14.6 2.0 -0.3 2.9 3.5 Policy rate, year-end (%) 0.50 0.75 1.00 1.75 2.75 2.00 2.00 2.00 5yr yield, year-end (%) 1.40 1.31 1.60 1.67 1.89 1.50 n/a n/a HKD /USD, year-end 7.76 7.75 7.75 7.81 7.83 7.80 7.80 7.80 HKD /USD, average 7.76 7.75 7.76 7.79 7.84 7.82 7.80 7.80 HKD /EUR, year-end 9.38 8.45 8.14 9.38 9.01 8.58 8.58 8.58 HKD /EUR, average 10.28 8.64 8.61 8.80 9.28 8.77 8.58 8.58 External sector Merchandise exports (USDbn) (BOP, goods) 514.1 501.7 502.2 540.5 569.2 541.9 535.1 533.5 Merchandise imports (USDbn) (BOP, goods) 546.5 524.6 518.3 563.5 601.7 570.0 568.2 570.6 Trade balance (USDbn) (BOP, goods) -32.4 -22.8 -16.1 -22.9 -32.4 -28.2 -33.1 -37.1 Current account balance (USDbn) 4.1 10.3 12.7 15.9 15.6 17.6 6.7 3.9 Current account balance (% GDP) 1.4 3.3 4.0 4.6 4.3 4.7 1.7 0.9 Net FDI (USDbn) -11.1 102.5 57.7 24.0 30.5 -3.0 11.0 16.0 Net FDI (% GDP) -3.8 33.1 18.0 7.0 8.4 -0.8 2.8 3.9 G & S balance plus FDI (% GDP) -2.4 36.5 21.9 11.7 12.7 3.9 4.5 4.9 Exports, value (% y-o-y) (BOP, goods) 1.6 -2.4 0.1 7.6 5.3 -4.8 -1.3 -0.3 Imports, value (% y-o-y) (BOP, goods) 2.3 -4.0 -1.2 8.7 6.8 -5.3 -0.3 0.4 International FX reserves (USDbn) 328.5 358.8 386.2 431.4 424.7 454.0 460.7 464.5 Import cover (months) 7.2 8.2 8.9 9.2 8.5 9.6 9.7 9.8 Public and external solvency indicators Commercial banks’ FX assets (USDbn) 1,552.2 1,571.2 1,664.3 1,822.1 1,913.1 n/a n/a n/a Gross external debt (USDbn) 1,301.0 1,300.3 1,357.0 1,575.3 1,692.3 n/a n/a n/a Gross external debt (% GDP) 446.4 420.3 422.9 461.0 466.1 n/a n/a n/a Consolidated government balance (% GDP) 3.2 0.6 4.5 5.6 2.4 0.1 0.8 0.2 Public sector debt (% GDP) 0.1 0.1 0.1 0.1 0.1 n/a n/a n/a Macro prudential indicators Capital adequacy ratio (local authorised Institutions) 16.8 18.3 19.2 19.1 20.3 n/a n/a n/a Non-performing loan ratio 0.5 0.7 0.9 0.7 0.5 n/a n/a n/a Household debt/ GDP (%) 65.5 67.1 67.6 70.5 72.1 n/a n/a n/a Total credit/GDP (%) 199.8 200.1 208.2 226.0 225.2 n/a n/a n/a Residential house prices (% y-o-y) 6.0 15.5 -3.6 16.7 13.0 n/a n/a n/a Loan/deposit ratio 72.2 70.1 68.4 73.0 72.6 n/a n/a n/a Average mortgage loan to value ratio 55.2 51.6 51.8 49.4 46.9 n/a n/a n/a Stock market capitalisation/GDP (%) 1,101.4 1,018.5 981.7 1,266.4 1,044.6 n/a n/a n/a

Note: Public debt refers to government debt only; 2021 FX numbers are assumptions, not forecasts Source: CEIC, HSBC. IMF, ADB, the Hong Kong Census and Statistics Department


52

India

When the going gets tough

India’s real GDP growth fell to a six-year low and nominal GDP fell to a ten-year low in Q2 2019.

Growth had been slowing for a year and markets were expecting it to be lower than in the prior

quarter. But it came in much worse than expected (5.0% y-o-y versus consensus of 5.7%).

How did India get to such low growth rates? We look at the current slowdown through three

lenses: (1) Strong interlinkages across unlikely sectors are making the slowdown broad-based.

One such interlinkage is that between rural incomes and shadow banks. A large proportion of

rural Indians work in construction, and 70% of construction depends on the real estate sector.

Real estate gets much of its funding from shadow banks. Until they revive, rural incomes could

remain challenged. (2) The ongoing slowdown has both cyclical and structural components.

The cyclical element is best represented by core inflation, which has fallen since early 2019.

The structural moderation reflects the lack of labour and capital reforms over the last decade.

We calculate that potential growth has fallen from more than 8% a decade ago to less than 7%

now. (3) An unfortunate piling up of growth headwinds – the shadow banks’ fallout, volatile

monsoon rains, unexpected tax increases in the July budget, and a rekindling of global trade

tensions. We expect growth to come in weaker than we had anticipated: 5.9% in FY20f

(previously 6.8%); and 6.5% in FY21f (previously 6.8%).

When and how will India get emerge from the growth malaise? We expect a gradual recovery in

FY20 and FY21, led by three factors: (1) A low base should to help statistically. (2) Bank credit

will likely rise gradually given that much of the policy response (rate cuts, liquidity injections,

recapitalisation funds) has been directed towards banks. (3) The large fiscal boost in the form of

corporate tax cuts should buoy sentiment and aid consumption as producers cut prices.

However, much of this recovery will be soft, and consumption based, in our view. A spike in

investment could have made the growth revival stronger and more sustainable, but we believe

investment can rise only if capacity utilisation rises and the government ramps up public capex

in a fiscally responsible way (via asset recycling), to ‘crowd in’ private investment.

Pranjul Bhandari

Chief Economist, India HSBC Securities and Capital Markets (India) Private Limited

[email protected]

+91 22 2268 1841

Aayushi Chaudhary

Economist

HSBC Securities and Capital Markets (India) Private Limited

[email protected]

+91 22 2268 5543

Deep Nagpal

Associate

Bangalore

Growth has been falling for a year Lower core has offset higher food inflation

Note: Core GVA = GVA excluding public services and agriculture Source: CEIC, HSBC estimates

Source: CEIC, HSBC estimates

4

5

6

7

8

9

4

5

6

7

8

9

Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Jun-19

% y-o-y % y-o-yTrends in real growth

GDP GVA Core GVA

Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19

-3

0

3

6

9

-3

0

3

6

9

CPI inflation momentum

HeadlineCore CPI (ex food, fuel, petrol & diesel, housing)Food (RHS)

% q-o-q,sa ann

% q-o-q,sa ann

53


Policy issues

Inflation: So far this year, the rise in food prices has been met by a wide-spread fall in core

inflation. A recent pick-up in monsoon rains and weak growth are likely to keep inflation within

the 4% target over the foreseeable future. For the year as a whole, we expect CPI inflation at

3.5% in FY20f, and 3.7% in FY21f.

Our real rate math suggests that the repo rate could go under 5% without raising questions

on sustainability. We expect 50bps of further rate cuts, taking the repo rate to 4.9% by

December 2019.

Fiscal: In an unexpected move to raise growth, the government slashed corporate tax rates on

September 20. This is likely to cost the exchequer INR1450bn (0.7% of GDP) of tax revenues

annually. Of this, 0.45% of GDP should accrue to the central government, and the rest to the

states. We believe the central government fiscal deficit could be around 3.7% of GDP in FY20,

higher than the budgeted estimate of 3.3%. And, because India's states tend to get about a third

of these tax revenues, their finances could also come under some pressure.

External finances: Weak domestic demand is likely to narrow the current account deficit to

1.9% of GDP this year. The balance of payments is likely to move into surplus from a deficit in

the previous year.

Risks

Insufficient rate cut transmission by banks could inhibit growth recovery in FY21. Further

intensification of trade tensions could also weigh on growth. Sole dependence on consumption

could make growth revival unsustainable. If the disinvestment plan of the government does not

take off as budgeted, the fiscal situation may become tight. Further defaults in India's shadow

banks could hurt financial stability.

Key Forecasts


GDP (% y-o-y) 5.0 5.5 6.1 6.6 6.9 6.7 6.3 6.1 6.3 6.4 6.5 Industrial production (% y-o-y) 3.6 -0.2 1.5 2.8 4.6 4.4 3.1 4.0 4.1 4.4 4.6 WPI, (% q-o-q saar) 4.0 -1.8 4.1 5.8 4.6 2.4 2.4 3.6 4.0 2.6 2.2 CPI, average (% y-o-y) 3.1 3.3 3.7 3.9 3.7 3.8 3.7 3.7 3.6 3.7 3.8 WPI, average (% y-o-y) 2.7 1.0 1.2 3.0 3.1 4.2 3.8 3.2 3.1 3.1 3.1 Exports, value (G&S) (% y-o-y) 2.5 4.7 6.6 4.6 6.4 9.2 6.2 4.7 3.5 5.9 10.0 Imports, value (G&S) (% y-o-y) 1.5 1.4 6.5 7.5 4.3 7.4 5.9 9.9 5.4 8.5 10.4 Trade balance (% GDP) -6.6 -6.6 -7.3 -5.8 -6.5 -6.5 -7.0 -6.4 -6.5 -7.0 -7.2 Current account (% GDP) -2.0 -2.1 -2.3 -1.2 -1.7 -1.7 -2.3 -2.1 -2.0 -2.2 -2.3 International reserves (USDbn) 399.9 394.2 390.0 393.1 396.1 398.4 396.4 394.5 395.2 393.4 392.5 Policy rate, quarter-end (%) 5.75 5.40 4.90 4.90 4.90 4.90 4.90 4.90 4.90 4.90 4.90 5yr yield, quarter-end (%) 6.88 6.16 6.00 5.90 5.60 5.60 n/a n/a n/a n/a n/a INR /USD, quarter-end 68.92 71.00 70.00 70.00 71.00 71.00 71.50 71.50 71.50 71.50 71.50 INR /EUR, quarter-end 78.57 78.10 77.00 77.00 78.10 78.10 78.65 78.65 78.65 78.65 78.65



54

The broad-based nature of the current slowdown … … is a result of strong linkages between unlikely sectors

One such interlinkage is that between rural incomes and shadow banks.

Rural Indians have diversified beyond agriculture led

employment, and have moved towards sectors such as

construction, whose share in rural employment is up sharply

since the early 2000s.

70% of construction depends on the real estate sector. And

real estate gets much of its funding from shadow banks. For

instance, in FY18, 100% of incremental credit to the real

estate sector came from shadow banks.

To cut a long story short, until shadow banks restart lending,

rural wages will remain weak.

Source: NSSO, HSBC

The ‘investible surplus’… … available for private investment has fallen sharply

Government borrowings have been rising, currently over

c8% of GDP, around the same time household financial

savings have fallen.

As a consequence, the 'investible surplus' available for

private investment is now under 1% of GDP.

Just to put this in context, the last time India saw a rise in its

investment cycle, the investible surplus was closer to 5% in

the FY04-08 period.

Source: CEIC, HSBC. Note: ‘Investible surplus is defined as net household financial savings + Foreign capital (current a/c deficit) – Gross public sector borrowing

India is among those economies that have taken … … trade restricting steps recently

India has, over the past couple of years, imposed a number

of import restrictions.

We find evidence that rising import tariffs could, over time,

hurt export growth.

To lift exports, as well as promote domestic industry, India may

need to focus even more on easing local growth bottlenecks.

Source: HSBC based on data from www.globaltradealert.com

0

5

10

15

50

55

60

65

70

75

80

85

1977-78 1987-88 1999-00 2009-10 2017-18

% share% share Employ ment by industry

(Rural Male)

Agriculture Construction (RHS)

25%

27%

29%

31%

33%

35%

37%

-2%

0%

2%

4%

6%

8%

10%

Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 Mar-19

% GDP% GDP Investible surplus and investment rate

Gross fixed capital formation (RHS)Investible surplus

0

5000

10000

15000

20000

25000

30000

UnitedStates ofAmerica

India Russia Canada China

Number Net contribution to trade interv entions (Harmful - liberalising)

55


India: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y)* 7.4 8.0 8.2 7.2 6.8 5.9 6.5 6.5 Nominal GDP (USDbn)* 2,014 2,101 2,301 2,639 2,715 2,900 3,099 3,390 GDP per capita (USD)* 1,590 1,638 1,771 2,006 2,038 2,151 2,272 2,455 Private consumption (% y-o-y)* 6.4 7.9 8.2 7.4 8.1 4.2 6.8 6.7 Government consumption (% y-o-y)* 7.6 7.5 5.8 15.0 9.2 8.8 8.0 7.7 Investment (% y-o-y)* 2.6 6.5 8.3 9.3 10.0 4.0 6.3 6.8 Net exports (contribution to GDP growth, ppt)* 0.2 0.1 0.1 -2.8 -1.1 0.2 -0.3 -0.4 Industrial production (% y-o-y)* 4.0 3.3 4.6 4.4 3.8 2.0 4.0 4.4 Gross domestic saving (% GDP)* 32.2 31.1 30.3 30.5 29.2 28.9 28.8 28.9 Prices & wages CPI, average (% y-o-y)* 6.0 4.9 4.5 3.6 3.4 3.5 3.7 3.8 CPI, year-end (% y-o-y)* 5.3 4.8 3.9 4.3 2.9 3.7 3.8 3.9 Core CPI, average (% y-o-y)* 5.6 4.6 4.8 4.6 5.8 4.1 4.3 4.4 Core CPI, year-end (% y-o-y)* 4.2 4.7 5.0 5.3 5.1 4.0 4.3 4.6 WPI, average (% y-o-y)* 1.3 -3.6 1.8 2.9 4.3 2.0 3.6 3.1 WPI, year-end (% y-o-y)* -3.8 -2.0 5.1 2.7 3.1 3.1 3.1 2.9 Money, FX & interest rates Central bank money M0, average (% y-o-y) 10.3 11.2 7.1 -8.2 30.2 n/a n/a n/a Broad money supply M3, average (% y-o-y) 12.7 10.8 10.1 7.1 10.0 n/a n/a n/a Real private sector credit growth (% y-o-y) 3.1 6.4 1.3 6.7 11.2 5.1 6.5 5.9 Policy rate, year-end (%) 8.00 6.75 6.25 6.00 6.50 4.90 4.90 4.90 5yr yield, year-end (%) 7.98 7.87 6.74 7.10 7.24 6.00 n/a n/a INR /USD, year-end 63.3 66.3 68.0 63.9 69.8 70.0 71.5 71.5 INR /USD, average 61.1 64.3 67.3 65.0 68.5 69.7 70.7 71.5 INR /EUR, year-end 76.6 72.3 71.4 76.7 80.3 77.0 78.7 78.7 INR /EUR, average 81.0 71.7 74.8 73.3 81.1 78.2 77.8 78.7 External sector Merchandise exports (USDbn)* 316.5 266.4 280.1 309.0 337.2 349.9 376.4 415.2 Merchandise imports (USDbn)* 461.5 396.4 392.6 469.0 517.5 539.4 580.3 640.5 Trade balance (USDbn)* -144.9 -130.1 -112.4 -160.0 -180.3 -189.6 -203.9 -225.4 Current account balance (USDbn)* -26.9 -22.2 -14.4 -48.7 -57.3 -55.7 -60.5 -66.9 Current account balance (% GDP)* -1.3 -1.1 -0.6 -1.8 -2.1 -1.9 -2.0 -2.0 Net FDI (USDbn)* 31.3 36.0 35.6 30.3 30.7 34.9 36.0 38.0 Net FDI (% GDP)* 1.5 1.7 1.6 1.1 1.1 1.2 1.2 1.1 Current account balance plus FDI (% GDP)* 0.2 0.7 0.9 -0.7 -1.0 -0.7 -0.8 -0.9 Exports, value (% y-o-y)* -0.6 -15.9 5.2 10.3 9.1 3.7 7.6 10.3 Imports, value (% y-o-y)* -1.0 -14.1 -1.0 19.5 10.3 4.2 7.6 10.4 International FX reserves (USDbn)* 316.2 332.1 346.3 399.1 384.1 393.1 394.5 398.7 Import cover (months)* 8.2 10.1 10.6 10.2 8.9 8.7 8.2 7.5 Public and external solvency indicators Commercial banks’ FX assets (USDbn) 340.4 369.1 378.5 423.1 411.5 n/a n/a n/a Gross external debt (USDbn)* 474.7 485.1 471.3 529.3 543.0 609.5 616.8 671.1 Gross external debt (% GDP)* 23.6 23.1 20.5 20.1 20.0 20.0 19.9 19.8 Short term external debt (% of int'l reserves)* 27.0 25.1 25.4 25.6 24.0 25.1 26.7 28.9 Consolidated government balance (% GDP)* -6.7 -6.9 -6.9 -5.7 -5.9 -6.3 -6.2 -6.0 Central government balance (% GDP)* -4.1 -3.9 -3.5 -3.5 -3.4 -3.7 -3.6 -3.4 Primary balance (% GDP)* -0.9 -0.7 -0.4 -0.4 -0.2 -0.2 0.0 0.0 Gross public sector debt (% GDP)* 67.8 69.6 68.9 70.4 68.1 67.7 65.7 64.4 Macro prudential indicators Capital adequacy ratio (system wide)* 13.0 13.3 13.7 13.8 n/a n/a n/a n/a - tier 1* 10.3 10.8 11.2 11.7 n/a n/a n/a n/a Non-performing loan ratio* 4.3 7.5 9.3 11.2 9.1 n/a n/a n/a Household debt/ GDP (%)* 9.4 10.1 10.5 11.2 11.7 n/a n/a n/a Residential house price index (Mumbai metropolis, % y-o-y)** 11.8 11.0 9.4 12.6 4.9 n/a n/a n/a Loan/deposit ratio* 76.3 77.7 72.9 75.5 77.7 n/a n/a n/a Stock market capitalisation/GDP (%)* 81.4 68.8 79.1 83.2 79.5 n/a n/a n/a Total credit/GDP (%)* 53.1 52.6 51.0 50.5 51.4 n/a n/a n/a

*Data on a fiscal tear basis (April-March), e.g. fiscal year 2010-11 refers to 2010 in the table **RBI. 2021 FX numbers are assumptions, not forecasts Source: Central Statistical Organisation, Reserve Bank of India, Bloomberg, ADB, IMF, CEIC, HSBC forecasts


56

Indonesia

Awaiting the next investment cycle

While Indonesia is one of Asia’s least trade intensive economies, it isn’t immune from the

slowing global economy. This can best be seen through commodity prices: palm oil and coal

prices are falling on y-o-y terms, which will increasingly dampen rural consumption. Meanwhile,

manufacturing sector exports continue to contract. Infrastructure spending also slowed this year

partly due to import curbs last year. All this is weighing on growth, which decelerated in line with

our initial forecasts for 2019.

Fortunately, we believe Indonesia’s outlook for 2020 and 2021 is relatively positive. We see

tangible signs for a new infrastructure cycle next year, as President Joko Widodo’s (Jokowi)

launches a new round of priority projects. This will likely sustain and accelerate into 2021, when

construction on a new USD33bn capital begins. Altogether, President Jokowi’s remaining term

should witness a prolonged infrastructure cycle with gross fixed capital formation accelerating to

6.6% and 7.3% y-o-y in 2020 and 2021, from 4.5% in 2019. This should support headline

growth, partly offsetting external challenges. We forecast growth of 5.0% in 2020 (previous:

5.1%) unchanged from 2019.

What about the current account deficit (CAD), given the new investment cycle? Indeed, the CAD

deteriorated during previous investment cycle, and is currently lingering near historical highs,

despite the reduction in capital goods imports over the last year. Ultimately, the CAD will remain

a key short-term challenge for policymakers: we think Bank Indonesia will maintain a high real

yield buffer to attract inflows, while the government will likely accelerate plans to incorporate

palm oil in domestic gasoline. Fortunately, other fundamentals remain sound: inflation pressures

are remarkably subdued, and sovereign, corporate, and household debt levels are at

comparatively low levels.

But it’s not just an infrastructure story. It has become increasingly clear that President Jokowi’s

second term will be a focus on attracting more FDI and growing the size of the manufacturing

sector. We are optimistic as new FDI commitments of about USD15bn related to the electric

vehicle supply chain (smelters, battery production, car assembly) is already committed and is

also attracting new FDI in textile and electronics manufacturing. Still, for this to materialise,

further reforms are vital.

Joseph Incalcaterra

Chief Economist, ASEAN The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 4687

Maitreyi Das

Associate

Bangalore

Higher investment spending should support growth and offset external risks…

…but this will result in the current account deficit remaining high


0

1

2

3

4

5

0

1

2

3

4

5

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

% of GDPPublic infrastructure spending

Central govt Regional govtSOE Total infra spend

% of GDP

SBY 2

Jokow i 1

Jokow i 2(forecast)

-50

-30

-10

10

30

50

70

-15

-10

-5

0

5

10

15

20

2001 2003 2005 2007 2009 2011 2013 2015 2017

% y -o-y

GFCF Goods import volumes (RHS)

% y -o-y

57


Policy issues

After delivering 175bps of rate hikes in 2018, Bank Indonesia has started to embark on an

easing cycle in 2019 with 75bp of cuts in the July, August and September meetings. We expect

a further 25bp of interest rate cut this year, and a 25bp cut in 2020, implying an easing cycle of

125bps. Importantly, we believe BI will ease less than in previous cycles due to the fact that the

current account deficit (CAD) remains high by historical standards. As the country embarks on

the next round of its investment cycle, in particular construction of USD24bn of refineries set to

begin next year, capital goods imports will increase. From a monetary policy perspective, this

means that BI will likely maintain relatively high real rates and a substantial buffer with global

rates in order to attract financing.

BI is likely to continue targeting a CAD between 2.5-3.0% of GDP, and any upside risks would result

in rate cuts being put on hold. In this scenario, BI would likely resort to macro-prudential easing to

offset growth risks. And inflation? Prices have been well behaved this year thanks to continued

improvement in food supply management, while energy prices are subdued in line with the global

trend. Ultimately, we see inflation remaining low at 3.2% in 2020 (2019: 3.2%), which will be in the

top half of BI’s lower 2-4% 2020 inflation target (2019 target: 2.5-4.5%).

As for fiscal policy, the government is targeting a lower deficit of 1.8% of GDP in 2020, from 1.9% in

2019. However, despite the lower deficit target, we believe the government’s overall fiscal stance will

be expansionary due to the fact that SOEs will carry out a large share of infrastructure financing.

Meanwhile, the government has undershot its capital budget target for 2019, meaning 2020 capital

spending growth will be as high as 15% y-o-y.

Risks

Following the election, political risks have subsided sharply. However, an expanded legislative

majority points to the risk of a reduced presence of technocrats in the cabinet, which could

weigh on reform progress. The composition of the next cabinet will be a key litmus test for

the government.

External risks remain a significant risk factor. Any delay in Fed easing plans and lingering

risk-off sentiment will weigh on portfolio inflows, which Indonesia requires to finance its current

account deficit. Trade tensions between the US and mainland China do not have a large direct

impact on Indonesia, but the associated financial market reaction could lead to sharp outflows.

All in all, the external environment remains one of the main considerations for policymakers.

Key forecasts


GDP (% y-o-y) 5.0 5.0 4.9 4.9 5.0 5.0 4.9 5.2 5.2 5.2 5.2 GDP sa (% q-o-q) 1.3 1.2 1.2 1.3 1.3 1.2 1.3 1.3 1.4 1.3 1.4 Industrial production (% y-o-y) 3.6 4.7 4.6 4.6 4.7 4.7 4.6 5.0 5.0 5.0 5.0 CPI, (% q-o-q saar) 5.2 3.9 3.1 2.6 2.9 3.3 3.7 3.0 3.5 3.3 3.3 CPI, average (% y-o-y) 3.1 3.5 3.6 3.7 3.2 3.0 3.2 3.2 3.4 3.4 3.3 Exports, value (% y-o-y) -8.4 -8.8 -3.0 -3.6 -3.8 -0.1 -1.1 2.1 4.6 3.8 7.0 Imports, value (% y-o-y) -8.2 -12.6 -11.3 -0.2 1.4 2.0 5.5 8.5 9.3 10.8 12.4 Trade balance (% GDP) 0.1 0.5 0.5 -0.1 -0.6 0.2 -0.4 -0.9 -1.2 -0.7 -1.2 Current account (% GDP) -3.0 -2.7 -2.6 -2.7 -3.3 -2.5 -2.6 -2.8 -3.1 -2.7 -3.1 International reserves (USDbn) 123.8 125.5 127.2 129.7 130.3 133.0 135.2 136.8 137.2 138.0 137.9 Policy rate, end-quarter (%) 6.00 5.25 5.00 4.75 4.75 4.75 4.75 4.75 4.75 4.75 4.75 5yr yield, quarter-end (%) 7.04 6.64 6.20 5.90 5.90 5.90 n/a n/a n/a n/a n/a IDR/USD, quarter-end 14,141 14,200 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600 IDR/EUR, quarter-end 16,121 15,620 16,060 16,060 16,060 16,060 16,060 16,060 16,060 16,060 16,060



58

Key commodity prices are contracting so far in 2019 … … which will increasingly weigh on rural consumption

Commodity prices have fallen sharply this year, in particular, palm oil and coal prices. This will dampen rural consumption in Indonesia. In fact, there are already signs that consumer spending is slowing: latest motor cycle sales fell 11.3% y-o-y.

Fiscal policy support for consumption should also taper off in the second half of the year, given that it was front-loaded in the first half of the year ahead of elections. As a result, we expect further downside pressure on consumption.

From a direct consumption perspective, the fiscal stance next year will be roughly neutral. However, should global conditions deteriorate, there may be need for further fiscal support to help prop up domestic demand.

Source: Bloomberg, HSBC

Fortunately a new infrastructure cycle should begin in 2020 …

…. an investment cycle that will accelerate further in 2021

One of the primary focus for Jokowi in his second term will be infrastructure. Given low capital spending realisation in 2019, there is scope for a strong growth in infrastructure spending next year. Moreover a large share (c30%) of infrastructure is funded off-balance sheet (by SOEs). The chart shows how SOEs are expected to deliver a large share of infrastructure spending.

President Jokowi has declared 223 projects as National Strategic Projects (NSPs), out of which 31 NSPs worth IDR276.4trn are expected to be completed by 3Q19. We estimate another IDR400bn (c2.5% of GDP) in projects, including two massive oil refineries, are set to start construction in 2020. All this will result in a return to investment led growth over the coming years, helping to offset external risks.

Source: CEIC, HSBC

Capital goods imports are likely to rise … … which will put pressure on the balance of payments

Increased infrastructure spending will result in a rise in capital

goods imports. The current account deficit is likely to remain within the 2.5-3.0% range during this period – on the high side by historical standards. This will restrain how much easing BI can ultimately deliver.

Higher FDI inflows can partly offset the wider CAD. The government made progress on de-regulating foreign investment by repealing some 3,000 regulations and implementing 15 reform packages. We expect continued progress on this front. The 2018 negative list reform, yet to be implemented, could open up 54 sectors to foreign FDI.

Most importantly, the government is targeting to complete labour market reform by the end of this year, which could drastically improve Indonesia’s competitiveness. Tangible progress on these reforms should both FDI inflows and the country’s potential growth rate.

Source: CEIC, HSBC

-40

-20

0

20

40

60

80

100

-40

-20

0

20

40

60

80

100

2011 2013 2015 2017 2019

% y-o-y, USD prices% y-o-y, USD prices

Palm oil Coal

11.9% GDP

0.8% GDP

8.5% GDP1.4% GDP

13.6% GDP0.5% GDP

0%

20%

40%

60%

80%

100%

2020-2024 Infra plan New capital

Gov't budget SOEs Private sector

Funding share, % total budget

-4

-2

0

2

4

6

-4

-2

0

2

4

6

2Q10 4Q11 2Q13 4Q14 2Q16 4Q17 2Q19 4Q20f

% of GDP% of GDP

Current Account Net FDINet Portfolio Inflows Core BalanceBasic Balance

59


Indonesia: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 5.0 4.9 5.0 5.1 5.2 5.0 5.0 5.2 Nominal GDP (USDbn) 890.5 860.5 932.4 1,015.4 1,042.4 1,126.1 1,188.9 1,289.9 GDP per capita (USD) 3,531.6 3,366.8 3,607.0 3,885.0 3,945.9 4,167.3 4,258.9 4,473.0 Private consumption (% y-o-y) 5.1 5.0 5.0 4.9 5.0 5.0 4.8 5.1 Government consumption (% y-o-y) 1.2 5.3 -0.1 2.1 4.8 6.9 3.7 3.1 Investment (% y-o-y) 4.4 5.0 4.5 6.2 6.7 4.8 6.6 7.3 Net exports (contribution to GDP growth, ppt) -0.2 0.9 0.1 0.3 -1.0 0.8 -0.1 0.0 Industrial production (% y-o-y) 4.8 4.8 4.0 4.3 4.4 4.4 4.7 5.0 Gross domestic saving (% GDP) 31.8 33.2 33.3 33.2 31.2 31.2 30.5 30.2 Unemployment rate, avg. (%) 6.1 6.1 5.9 5.6 5.4 5.4 5.5 5.3 Prices & wages CPI, average (% y-o-y) 6.4 6.4 3.5 3.8 3.2 3.2 3.2 3.3 CPI, year-end (% y-o-y) 8.4 3.4 3.0 3.6 3.1 3.5 3.1 3.2 Core CPI, average (% y-o-y) 4.5 4.9 3.4 3.1 2.8 3.2 3.7 3.4 Core CPI, year-end (% y-o-y) 4.9 4.0 3.1 3.0 3.1 3.5 3.6 3.4 Manufacturing wages, nominal (% y-o-y) 4.0 6.5 22.9 6.9 4.6 4.4 4.4 4.9 Money, FX & interest rates Broad money supply M2, average (% y-o-y) 11.5 12.8 7.8 9.9 6.9 8.5 9.0 9.0 Real private sector credit growth (% y-o-y) 9.3 4.7 3.8 3.7 6.2 5.6 6.6 6.5 Policy rate, year-end (%) n/a 6.25 4.75 4.25 6.00 5.00 4.75 4.75 5yr yield, year-end (%) 7.75 8.86 7.75 6.04 8.01 6.20 n/a n/a IDR /USD, year-end 12,440 13,795 13,436 13,548 14,481 14,600 14,600 14,600 IDR /USD, average 11,872 13,395 13,307 13,381 14,235 14,243 14,600 14,600 IDR /EUR, year-end 15,052 15,037 14,108 16,258 16,653 16,060 16,060 16,060 IDR /EUR, average 15,737 14,935 14,771 15,104 16,851 15,970 16,060 16,060 External sector Merchandise exports (USDbn) 175.3 149.1 144.5 168.9 180.7 168.3 164.8 172.0 Merchandise imports (USDbn) 168.3 135.1 129.2 150.1 181.2 164.2 167.8 185.1 Trade balance (USDbn) 7.0 14.0 15.3 18.8 -0.4 4.2 -3.0 -13.1 Current account balance (USDbn) -27.5 -17.5 -17.0 -16.2 -31.0 -30.9 -33.0 -37.6 Current account balance (% GDP) -3.1 -2.0 -1.8 -1.6 -3.0 -2.7 -2.8 -2.9 Net FDI (USDbn) 14.7 10.7 16.1 18.5 13.4 21.7 26.0 25.5 Net FDI (% GDP) 1.7 1.2 1.7 1.8 1.3 1.9 2.2 2.0 Current account balance plus FDI (% GDP) -1.4 -0.8 -0.1 0.2 -1.7 -0.8 -0.6 -0.9 Exports, value (% y-o-y) -3.7 -14.9 -3.1 16.9 7.0 -6.9 -2.1 4.4 Imports, value (% y-o-y) -4.5 -19.7 -4.4 16.2 20.7 -9.4 2.2 10.3 International FX reserves (USDbn) 111.9 105.9 116.4 130.2 120.7 127.2 135.2 137.9 Import cover (months) 8.0 9.4 10.8 10.4 8.0 9.3 9.7 8.9 Public and external solvency indicators Gross external debt (USDbn) 293.3 310.7 320.0 352.5 377.3 401.3 418.0 434.9 Gross external debt (% GDP) 32.9 36.1 34.3 34.7 36.2 35.6 35.2 33.7 Short term external debt (% of int'l reserves) 40.3 36.5 34.9 35.8 39.7 47.3 46.4 47.3 Private sector external debt (USDbn) 163.6 168.1 161.7 171.8 191.0 196.8 202.7 208.7 Central government balance (% GDP) -2.1 -2.6 -2.5 -2.5 -1.8 -2.0 -1.9 -1.9 Primary balance (% GDP) -0.9 -1.2 -1.0 -0.9 -0.1 -0.1 -0.4 -0.4 Central government domestic debt (USDbn) 118.5 126.9 149.9 172.8 178.4 189.4 199.4 209.4 Central government domestic debt (% GDP) 13.3 14.8 16.1 17.0 17.1 16.8 16.8 16.2 Public sector external debt (USDbn) 129.7 142.6 158.3 180.6 186.3 204.6 215.4 226.2 Public sector external debt (% GDP) 14.6 16.6 17.0 17.8 17.9 18.2 18.1 17.5 Public sector debt (% GDP) 27.9 31.3 33.1 34.8 35.0 35.0 34.9 33.8 Macro-prudential indicators Capital adequacy ratio 19.6 21.4 22.9 23.2 23.0 n/a n/a n/a Non-performing loan ratio 2.2 2.5 2.9 2.6 2.4 n/a n/a n/a Household debt/GDP (%) 11.9 11.9 12.1 12.2 12.3 n/a n/a n/a Total credit/GDP (%)* 35.1 35.4 35.5 35.1 35.9 n/a n/a n/a Residential house prices (% y-o-y) 7.0 5.6 3.2 3.2 3.3 n/a n/a n/a Loan/deposit ratio 89.4 92.1 90.7 90.0 94.8 n/a n/a n/a Stock market capitalisation/GDP (%) 49.5 42.3 46.4 51.9 47.3 n/a n/a n/a

*Credit refers to commercial and rural bank loans Note: 2021 FX numbers are assumptions, not forecasts Source: CEIC, World Bank, HSBC forecasts


60

Japan

Brace for the VAT hike

The Japanese economy has been tugged along by domestic demand, particularly the boost in

spending ahead of the 2020 Tokyo Olympics as well as some frontloading ahead of the

consumption tax hike (Mind the VAT: Five questions for Japan in 2019, 10 January 2019). This

has helped the economy to smartly weather stiffening external headwinds coming from a global

slowdown in fixed investment due to US-China trade wars (Trade tensions: Japan and Korea hit

by uncertainty, 24 June 2019). While the degree of frontloading ahead of the tax hike remains

debatable, we believe that there will be notable payback in 4Q 2019, pushing the economy into a

modest contraction next year. While powerful easing is undoubtedly required, we think the Bank

of Japan (BoJ) has almost exhausted conventional easing measures, and thus policy action will

be limited to tweaking the current policy framework, in our view.

Indeed, growth has been holding up better than we had forecasted, with real GDP up 1.3% q-o-q

saar in 2Q 2019 after a 2.2% gain in the previous quarter. On an over-year-ago basis, this growth

has been steady at a 1.0% y-o-y pace in 1H 2019 despite the fourth negative contribution from

net exports through 2Q 2019. In addition to Olympic-related spending that likely added 0.2-0.3ppt

to headline growth, we believe the economy was supported by frontloading of spending ahead of

the consumption tax hike. While this does not show as a big jump in retail sales like in 2014, we

note that household consumption has been growing firmly against a backdrop of slower wage

growth and weaker sentiment. All said, we now forecast growth at 0.9% in 2019 (previously 0.7%)

and -0.1% in 2020 (previously -0.2%), given stronger growth in 1Q 2019.

Meanwhile, wages fell an average 0.5% y-o-y in 1H 2019 despite historically tight labour market

conditions. Indeed, companies base their wage decisions in line with the long-term economic

outlook, but now also dampened by weaker business sentiment amid escalating trade tensions.

With the economy likely to contract following the consumption tax hike, momentum in wage

growth is to weaken further, in our view, and thus inflationary pressures are likely to remain

weak, in our view. HSBC now expects headline inflation to be 0.7% in 2019 (previously 0.6%)

and 0.9% (previously 1.1%) in 2020, with the scheduled tax hike adding around 1ppt to inflation

during 4Q 2019 to 3Q 2020.

We observe mild frontloading ahead of the VAT hike when other variables are controlled

The government is poised to mitigate the negative impact of the VAT hike

Note: A simple regression of domestic consumption with proxies for wealth (income and TOPIX 500), consumer confidence and CPI gives 0.47 R-squared. The fitted line is derived from the regression Source: CEIC, HSBC calculations

Note: Other benefits include social security enhancement, temporary rebate schemes and support for car and house purchases. Government construction projects will focus on natural disaster prevention Source: MoF, HSBC calculations

James Lee

Economist The Hongkong and Shanghai Banking Corporation Limited

[email protected]

+852 2822 1647

Ki-Hyuk Lee

Economist, Asia


[email protected]

+852 2822 4523

-4

-3

-2

-1

0

1

2

3

4

-4

-3

-2

-1

0

1

2

3

4

2010 2012 2014 2016 2018

% y-o-y, real

Consumption Fitted

% y-o-y, real

JPY, trn

Estimated tax

burden increase JPY, trn

Estimated

mitigating

measure impact

From the VAT

hike in October 5.7

Exemptions

from the tax hike 1.1

From other tax

revisions in

FY 2018 0.6 Other benefits 4.2

Total 6.3

Subtotal

(excl. SOCs)

5.3

(83% of tax

increase )

Govt. const.

projects 1.3

Total 6.6

https://www.research.hsbc.com/R/10/psqnJmCZshN6

https://www.research.hsbc.com/R/10/tVP2sCC6XxSn

https://www.research.hsbc.com/R/10/tVP2sCC6XxSn

61


Policy issues

Although the BoJ has actively managed expectations stating that the Bank will act if required,

the key question is not should they ease but more on what they can do. Indeed, as inflation is

unlikely to reach the price stability target of 2% in the foreseeable future, the BoJ’s easing will

have to be accompanied by measures to enhance the sustainability of its policy framework,

especially with increasing concerns around regional banks’ profitability. In this regard,

conventional policy tools and meaningful easing remain limited apart from tweaks such as

widening the 10y YCC trading range. As such, we believe the BoJ will maintain its extremely

easy policy setting, but unlikely to introduce substantial easing measures.

After the consumption tax hike, fiscal policy will inevitably turn contractionary. However, the

government has rolled out measures to mitigate the negative impact. In total, according to the

Ministry of Finance’s estimates, these measures will deliver estimated JPY6.6trn, annualised,

fiscal stimulus to offset estimated JPY6.3trn increase in tax burden. Even excluding JPY1.3trn

set aside to be used in infrastructure projects, the government is set to spend 83% of the new

tax revenue back to the population. What is more significant is that 81% of non-infrastructure

spending is on a permanent basis, meaning consumption should be elevated rather than

savings. These will be delivered as more support for childcare and seniors, exemptions of some

food products and subsidies to medical fees. Temporary measures will be given as rebate

schemes for SMEs, vouchers with premiums and support for house and automotive purchases.

Risks

The biggest risk comes from the scheduled VAT hike in October 2019. Prime Minister Shinzo

Abe looks set to go through with this twice postponed leg of the tax hike, from 8% to 10%.

Despite headline growth remaining buoyant in 1H 2019, external demand fell and the tax hike

poses a significant risk to the economy. So far in the second half of the year, the US-China

trade tensions re-escalated and new tensions arose between Japan and Korea. Continued

economic policy uncertainty has potential to further weaken external demand. The BoJ also has

limited policy manoeuvrability to support the economy. External environment and monetary

policy have little room to provide cushion to absorb the negative impact of the VAT hike.

Key forecasts


GDP (% y-o-y) 1.0 1.7 0.0 -0.5 -0.5 -0.4 1.0 1.1 0.8 0.6 0.5 GDP sa (% q-o-q) 0.3 0.4 -1.2 0.0 0.4 0.4 0.2 0.1 0.1 0.1 0.1 Industrial production (% y-o-y) -2.3 -0.3 -4.0 -2.1 -2.8 -3.3 -1.2 -1.1 -1.5 -1.6 -1.7 CPI, (% q-o-q saar) 0.3 0.2 4.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 CPI, average (% y-o-y) 0.8 0.3 1.4 1.2 1.1 1.1 0.1 0.1 0.1 0.1 0.1 Dom. CGPI, average (% y-o-y) 0.6 -0.1 -0.1 0.5 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Exports, value (% y-o-y) -5.0 -10.9 -12.1 -10.7 .-9.2 -2.5 0.1 0.2 0.0 0.0 0.1 Imports, value (% y-o-y) 1.1 -4.8 -9.1 -12.1 -4.5 -1.1 2.1 3.8 4.2 4.2 4.1 Trade balance (% GDP) -0.3 -0.9 -0.5 0.3 -0.9 -1.1 -0.8 -0.2 -1.5 -1.7 -1.3 Current account (% GDP) 3.3 3.2 1.2 3.4 2.5 3.0 0.7 3.0 2.2 2.6 0.3 International reserves (USDbn) 1,322.3 1,337.1 1,281.5 1,349.4 1,327.9 1,327.5 1,319.2 1,321.2 1,289.2 1,277.1 1,200.1 Policy rate, quarter-end (%) -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 10-yr yield, quarter-end (%) -0.17 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 JPY/USD, quarter-end 107.6 105.0 105.0 105.0 105.0 105.0 105.0 105.0 105.0 105.0 105.0 JPY/EUR, quarter-end 122.7 115.5 115.5 115.5 115.5 115.5 115.5 115.5 115.5 115.5 115.5

Note: 2021 FX numbers are assumptions, not forecasts; 10-yr yield forecast refers to economists' forecast of mid-point of Yield Curve Control target, not market rate Source: CEIC, Cabinet Office, MoF, BoJ, HSBC forecasts

17


62

Headline GDP growth was an upside surprise in 1H19 … … driven mainly by resilient domestic demand

Real GDP rose 1.0% y-o-y in the two quarters in 1H 2019,

above potential growth rate and expectations, largely driven by resilient domestic demand (Japan GDP (2Q19): Domestic demand up amid stiffer export headwinds, 9 August 2019).

Olympic related spending and some mild frontloading ahead of the VAT hike likely upheld growth, while the slowdown in the global investment cycle from persisting economic policy uncertainty weighed on exports.

We expect notable payback in 4Q19 from frontloading ahead of the consumption tax hike. Against the backdrop of stiffening external headwinds, this is likely to send the economy into a mild contraction next year (Mind the VAT: Five questions for Japan in 2019, 10 January 2019).

Source: CEIC, HSBC

Tight labour market conditions continue … … but exert limited inflationary pressures as wages are falling

The Japanese labour markets remain at its tightest in

decades, with the unemployment rate at 2.2% in July 2019. In spite of this, wages fell 0.9% y-o-y in July, after contracting an average 0.5% y-o-y in 1H 2019.

At the outset of deteriorating growth perspective, corporations are not only freezing wages but also shedding them. Wage setting behaviours are linked to long-term growth potential, but this does not protect wages from cyclical downfalls.

Underlying price momentum is weak with the BoJ’s preferred measure of core inflation, excluding fresh food and energy, at 0.5% in August 2019. With wages falling, the BoJ has a tough task of raising inflation expectations.

Source: CEIC, HSBC

BoJ has almost exhausted conventional monetary tools … … and is more cautious on price momentum loosing stem

The BoJ kept its monetary policy unchanged at the

September meeting and expressed increasing concerns on price momentum. It will reassess developments at the upcoming meeting in October (Bank of Japan (Sep): On hold to reassess in October, 19 September 2019).

Governor Kuroda, while reframing from suggesting imminent

policy easing, commented that a steeper yield curve is desirable. The pace of balance sheet expansion has slowed notably since the introduction of YCC in September 2016 and is falling further.

With rising concerns over regional banks’ profitability and JGB liquidity, the Bank’s monetary easing tools are increasingly constrained and further easing might have to come as an expanded policy framework into derivatives markets.

Source: CEIC, HSBC

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

GDP Consump Construct Equip

% y

-o-y

avg

2001-2013 2014 onwards

2

3

4

5

6-5

-3

-1

1

3

5

00 02 04 06 08 10 12 14 16 18Average monthly cash earnings, % y-o-y 3mma

BoJ Core CPI, y-o-y

Unemployment rate, % sa (RHS, inverted)

300

400

500

600

700

800

900

0

5

10

15

20

25

30

35

40

45

2000 2003 2006 2009 2012 2015 2018

BoJ JGB holdings, % of total outstandingJGB outstanding outside BoJ, JPY trn (RHS)

https://www.research.hsbc.com/R/10/xjz6F7f

https://www.research.hsbc.com/R/10/xjz6F7f

https://www.research.hsbc.com/R/10/psqnJmC

https://www.research.hsbc.com/R/10/psqnJmC

https://www.research.hsbc.com/R/10/nNmSfv9

https://www.research.hsbc.com/R/10/nNmSfv9

63


Japan: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 0.4 1.2 0.6 1.9 0.8 0.9 -0.1 0.7 Nominal GDP (USDbn) 4,859.7 4,390.3 4,931.8 4,860.2 4,973.0 5,149.2 5,302.1 5,332.6 GDP per capita (USD) 38,229.3 34,574.7 38,843.3 38,346.0 39,312.8 40,949.8 42,649.0 42,970.4 Private consumption (% y-o-y) -0.9 -0.2 -0.1 1.1 0.3 0.7 -0.8 0.7 Government consumption (% y-o-y) 0.5 1.5 1.4 0.3 0.8 1.8 2.1 1.0 Investment (% y-o-y) 3.1 1.6 -0.3 3.0 1.1 1.7 1.0 1.2 Net exports (contribution to GDP growth, ppt) 0.0 0.3 0.6 0.5 0.0 -0.2 -0.1 -0.1 Industrial production (% y-o-y) 1.9 -1.1 0.0 3.1 1.1 -2.1 -2.3 -1.5 Gross domestic saving (% GDP) 21.8 22.6 22.8 23.6 23.9 23.8 23.7 23.7 Unemployment rate, average (%) 3.6 3.4 3.1 2.8 2.4 2.4 2.5 2.8 Prices & wages CPI, average (% y-o-y)* 2.8 0.8 -0.1 0.5 1.0 0.7 0.9 0.1 CPI, year-end (% y-o-y)* 2.4 0.1 0.3 1.1 0.3 1.5 0.1 0.1 Core CPI, average (% y-o-y)** 2.6 0.5 -0.3 0.5 0.8 0.8 1.1 0.4 Core CPI, year-end (% y-o-y)** 2.6 0.0 -0.2 0.9 0.7 1.4 0.4 0.4 Dom. CGPI, average (% y-o-y)*** 3.2 -2.3 -3.5 2.3 2.6 0.3 0.3 0.3 Dom. CGPI, end (% y-o-y)*** 1.7 -3.6 -1.3 3.0 1.4 -0.1 0.3 0.3 Total wages, nominal (% y-o-y) 0.8 -0.9 0.6 0.4 1.7 0.4 1.3 1.4 Money, FX & interest rates Central bank money M0, average (% y-o-y) 37.3 31.5 22.3 12.9 5.6 5.9 3.3 3.7 Broad money supply M2+CDs, average (% y-o-y) 2.8 3.0 2.8 3.4 2.5 2.3 2.9 2.9 Policy rate, year-end (%) 0.10 0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 10yr yield, year-end (%) 0.32 0.27 0.04 0.05 -0.01 0.00 0.00 0.00 Nominal credit growth (% y-o-y) 3.2 3.3 2.7 2.6 2.9 2.9 2.8 2.8 JPY /USD, year-end 119.8 120.4 117.1 112.7 110.4 105.0 105.0 105.0 JPY /USD, average 105.8 121.0 108.8 112.2 110.4 107.8 105.0 105.0 JPY /EUR, year-end 145.0 131.3 123.0 135.2 127.0 115.5 115.5 115.5 JPY /EUR, average 140.3 134.9 120.8 126.6 130.7 120.9 115.5 115.5 External sector Merchandise exports (USDbn) 699.8 622.1 635.5 688.7 735.9 736.8 755.9 760.0 Merchandise imports (USDbn) 799.7 629.4 584.4 644.9 724.7 754.2 796.1 830.2 Trade balance (USDbn) -100.7 -7.5 48.6 44.5 14.0 -21.3 -33.4 -61.7 Current account balance (USDbn) 36.8 136.9 193.6 204.6 175.8 152.3 125.5 91.1 Current account balance (% GDP) 0.8 3.1 4.0 4.1 3.5 3.0 2.4 2.0 Net FDI (USDbn) -118.2 -133.2 -137.6 -153.4 -133.3 -199.1 -154.2 -159.9 Net FDI (% GDP) -2.4 -3.0 -2.8 -3.2 -2.7 -3.9 -2.9 -3.0 Current account balance plus FDI (% GDP) -1.7 0.1 1.2 1.0 0.8 -0.9 -0.5 -1.0 Exports, value (% y-o-y) 9.3 1.7 -8.7 12.0 5.4 -8.1 -5.7 0.1 Imports, value (% y-o-y) 10.6 -9.9 -16.7 13.4 10.6 -3.5 -3.9 4.1 International FX reserves (USDbn) 1,261 1,233 1,217 1,264 1,271 1,282 1,319 1,200 Import cover (months) 18.9 23.5 25.0 23.5 21.0 20.4 19.9 17.3 Public and external solvency indicators Gross external debt (USDbn) 3,111.4 2,945.6 3,670.5 3,623.4 4,028.7 4,309.5 4,616.3 4,806.8 Gross external debt (% GDP) 64.0 67.1 74.4 74.6 81.0 83.7 87.1 90.1 Private sector external debt (USDbn) 2,117.1 1,943.7 2,491.8 2,405.6 2,641.5 2,825.6 3,026.9 3,151.7 General government balance (% GDP) -5.6 -3.8 -3.7 -3.2 -3.2 -2.9 -2.2 -1.9 Primary balance (% GDP) -4.8 -3.1 -3.0 -2.7 -2.9 -2.6 -1.9 -1.6 Gross public domestic debt (JPY trn) 1,103.5 1,112.0 1,141.5 1,147.3 1,152.7 1,169.5 1,182.6 1,191.6 Gross public domestic debt (% GDP) 214.7 209.3 213.0 210.5 210.0 210.7 212.4 212.8 Gross public external debt (USDbn) 994.3 1001.9 1178.7 1217.8 1387.1 1483.8 1589.5 1655.1 Gross public external debt (% GDP) 20.5 22.8 23.9 25.1 27.9 28.8 30.0 31.0 Gross public sector debt (% GDP) 236.1 231.6 236.3 235.0 237.2 238.8 241.5 242.9 Macro-prudential indicator Capital adequacy ratio 12.1 12.7 13.3 13.8 14.9 n/a n/a n/a Non-performing loan ratio 1.7 1.5 1.4 1.2 1.3 n/a n/a n/a Household debt/ GDP (%) 57.5 56.8 57.4 57.1 57.3 n/a n/a n/a Total credit/GDP (%) 106.3 105.0 106.5 108.8 111.5 n/a n/a n/a Loan/deposit ratio 68.4 68.8 65.4 64.5 65.0 n/a n/a n/a Stock market capitalisation/GDP (%) 92.1 109.5 97.8 114.7 121.5 n/a n/a n/a

*Includes the effects of government planned VAT hike from 8% to 10% in October 2019; 10-yr yield forecast refers to economists' forecast of mid-point of Yield Curve Control target, not market rate Note: 2021 FX numbers are assumptions, not forecasts Source: CEIC, ADB, IMF, MoF, BoJ, HSBC forecasts


64

South Korea

Fiscal to the rescue

Despite heavy quarterly volatility, growth is slowing. While slowing trend growth is partly to blame,

the administration’s structural policies are also accelerating the process, especially the introduction

of the 52-hour workweek, in our view. This comes at a critical time given still slowing global

investment amid heightened trade tensions. That said, two things have been cushioning the

slowdown, as we had expected (How low will growth go?: Five questions for Korea in 2019,

25 January 2019). First, although down in nominal terms, semiconductor exports are growing again

in volume terms since 2Q 2019. In addition, fiscal policy is set to remain supportive next year, which

we think will partly offset the slowdown in growth, while monetary policy support is likely to be

limited amid a rapidly shrinking external surplus. All said, we forecast real GDP growth to be 2.0%

in 2019 and 2.2% in 2020 (Korea’s growth slowdown: The structural, cyclical, and policy drivers,

16 September 2019).

Meanwhile, another key development is the rapid reduction in the current account surplus since

late last year (Korea's external surplus: Turbocharged no more, 25 June 2018). Indeed, the

current account surplus has averaged a historically large 5% of GDP during 2013-2018, but has

narrowed to 2.8% of GDP in 1H 2019. The main reason behind the inflated surplus in the past

years was due to an improvement in the terms of trade for the economy, with global oil prices

falling and then semiconductor prices jumping. However, even as net exports add to real GDP

growth, terms of trade are falling rapidly again, with semiconductor export prices plunging

36.9% y-o-y in July and expected to fall further. As such, we forecast the current account

surplus to shrink to 2.7% of GDP (or USD46bn) in 2019 and 2.3% (or 37bn) in 2020, which is

likely to push the basis balance into a deficit from this year. This has helped ease financial

market conditions, with the real effective exchange rate now converging towards the 10-year

average, after being 10% above the average in last September.

Headline inflation fell 0.4% y-o-y in September. The sharp slowdown in consumer price inflation

is largely due to a high base from last year when abnormally hot weather pushed up agricultural

product prices sharply. That said, while government policy has played a role in lower prices

through increased subsidies, underlying inflation pressures remain rather muted, with core

inflation at 0.6% y-o-y in September. We forecast an acceleration in inflation in the coming

quarters, reaching mid-1% level by 1Q 2020.

James Lee


[email protected]

+852 2822 1647

Ki-Hyuk Lee

Economist, Asia


[email protected]

+852 2822 4523

Korea’s external surplus has been shrinking due to declining terms of trade

Average workweek turned into a downtrend since 2017


80

85

90

95

100

105

110

-2

0

2

4

6

8

10

2010 2012 2014 2016 2018Current account balance Terms of trade (RHS)

% of GDP, sa, 3mma 100=2015, sa

-3

-2

-1

0

1

2

3

-3

-2

-1

0

1

2

3

2001 2006 2011 2016

% y-o-y% y-o-y

Average workweek, 3mma 2yma

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Policy issues

The Bank of Korea (BoK) is likely to cut again in 4Q 2019, pushing the policy rate lower by 25bp

to the historical low of 1.25%. Indeed, at the August policy meeting, two members, Dr Cho

Dongchul and Dr Shin Inseok, called for a back-to-back cut in the base rate. Two consecutive

cuts have only been implemented by the central bank in crisis situations and the two viewed the

economic outlook to warrant such move. Moreover, Governor Juyeol Lee also appeared to be

more open to further easing, especially with the Bank lowering expectations on Korea’s

potential growth to 2.5-2.6% in 2019-2020. Looking further ahead, we forecast the BoK to stay

on hold in 2020, with the basic balance turning into a deficit from this year.

Fiscal policy is set to stay more expansionary than previously expected. The government has

submitted the 2020 budget proposal to the National Assembly, which pencils in an 8.0%

increase in spending, to KRW513.5trn, following a budgeted increase of 9.5% this year. The

pace of spending growth in 2019 and 2020 is almost double the average of 5.0% in 2011-2018.

The government will focus its increased spending to support innovation, enhance social welfare,

and create jobs amid stiffening external headwinds. However, the increased expenditure is

expected to come with a hefty bill, as tax revenues are forecasted to decline 0.9% next year,

reflecting weaker collection of corporate tax and fewer real estate transactions. The

government's managed fiscal deficit, excluding contribution of social security funds and funded

through bond issuance, is set to widen materially to KRW72.1trn (or 3.6% of GDP) in 2020, from

a forecasted KRW42.3trn (or 2.2% of GDP) in 2019 and KRW10.6trn (or 0.6% of GDP) in 2018.

(Korea's 2020 budget proposal: Packing some oomph, 30 August 2019).

Risks

Persistent economic policy uncertainty lays the key risk to our growth outlook. Korea is less

exposed to the slowdown in global capex spending but it is not immune from the potential spill

over of trade tensions to the tech sector. Further, geopolitical tensions are rising between Japan

and Korea. It is yet to materialise into an export ban but the tail risks from raised uncertainty

itself can have damaging implications to the semiconductor sector and the nascent recovery in

real exports (Trade turbulence: Ten key questions now, 2 September 2019).

Key forecasts


GDP (% y-o-y) 2.0 2.3 1.9 2.8 2.1 2.1 2.0 2.1 2.3 2.2 2.3 GDP sa (% q-o-q) 1.0 0.7 0.6 0.5 0.4 0.6 0.5 0.6 0.6 0.6 0.6 Industrial production (% y-o-y) -0.7 -2.0 -0.1 3.5 2.4 1.9 1.8 1.8 1.8 1.8 1.8 CPI, (% q-o-q saar) 1.8 -0.2 2.9 1.4 1.7 1.4 1.2 1.5 1.7 1.7 1.7 CPI, average (% y-o-y) 0.7 0.1 0.5 1.5 1.5 1.9 1.4 1.5 1.5 1.5 1.7 PPI, average (% y-o-y) 0.4 -0.5 0.6 1.6 1.4 1.8 1.4 1.5 1.5 1.6 1.7 Exports, value (% y-o-y) -11.8 -12.2 -7.3 1.0 4.2 2.9 2.7 3.4 4.1 4.5 4.9 Imports, value (% y-o-y) -4.8 -1.6 -4.0 5.7 4.6 3.5 3.9 4.3 4.5 4.7 4.9 Trade balance (% GDP) 3.6 4.1 4.3 4.1 4.0 4.0 4.0 3.9 4.0 4.0 4.0 Current account (% GDP) 2.6 2.8 2.8 2.5 1.9 2.5 2.2 2.0 1.6 2.2 2.1 International reserves (USDbn) 403.0 398.5 392.3 386.6 379.0 372.7 365.5 358.0 348.3 340.7 332.6 Policy rate, quarter-end (%) 1.75 1.50 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 5yr yield, quarter-end (%) 1.53 1.10 1.00 0.90 0.80 0.80 0.80 0.80 0.80 0.80 0.80 KRW /USD, quarter-end 1,157 1,220 1,220 1,225 1,230 1,235 1,240 1,240 1,240 1,240 1,240 KRW /EUR, quarter-end 1,319 1,342 1,342 1,348 1,353 1,359 1,364 1,364 1,364 1,364 1,364


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https://www.research.hsbc.com/R/20/l7LjzcG7MHqc


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Korea’s growth is trending lower … … due to its ageing population

Despite quarterly volatility, Korea’s potential growth is

slowing structurally, as the working age population is expected to contract 0.6% in 2019-23.

The government’s economic policy, especially the 52-hour workweek restriction, is accelerating the slowdown in the growth trend, in our view, and the BoK lowered its growth estimates for 2019-20 to 2.5-2.6% in July from 2.8-2.9% announced in 2017

Cyclical headwinds are stiffening as deteriorating global business sentiments are weighing on global investment spending. Geopolitical tensions between Japan and Korea have tail risks of potential disruptions in production (Korea’s growth slowdown: The structural, cyclical, and policy drivers, 16 September 2019).

Source: CEIC, HSBC

Expansionary fiscal policy is set to continue … … into 2020 and beyond

Against the backdrop of slowing potential growth and

heightened external headwinds, the government has submitted a budget proposal pencilling in an 8.0% increase in expenditure in 2020 (Korea’s 2020 budget proposal: Packing some oomph, 30 August 2019).

Supporting innovation, enhancing social welfare and creating jobs will be the main focus of increased spending. Looking further ahead, spending growth will rise to average 6.8% in 2019-23 from 5.0% in 2011-18.

The increased expenditure is expected to come at a cost, with the government’s managed fiscal deficit is set to increase to 3.6% of GDP in 2020, from a forecasted 2.2% in 2019 and 0.6% in 2018.

Note: Shaded area based on budget including the supplementary budget for 2019, budget proposal for 2020, and government’s plan from 2021 onwards Source: MoEF, CEIC, HSBC

Inflation has turned negative recently … … but should pick up in the coming quarters

Inflation turned negative for the first time in more than five

decades in September, but largely due to volatility in agricultural product prices.

Core inflation slowed notably to 0.6% y-o-y in September, as the government’s increased social benefits pushed public service prices down by 1.2%.

While inflation should accelerate to 1.5% by 1Q 2020, the BoK is likely to cut the policy rate in 4Q 2019 on weak growth and lower inflation expectations.

Source:: CEIC, HSBC

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South Korea: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 3.2 2.8 2.9 3.2 2.7 2.0 2.2 2.2 Nominal GDP (USDbn) 1,486.2 1,463.5 1,491.2 1,623.7 1,760.7 1,704.5 1,639.4 1,687.6 GDP per capita (USD) 29,286.4 28,688.0 29,115.1 31,612.8 34,116.9 32,922.5 31,564.4 32,388.0 Private consumption (% y-o-y) 2.0 2.2 2.6 2.8 2.8 2.0 1.9 1.5 Government consumption (% y-o-y) 4.3 3.8 4.4 3.9 5.6 6.9 6.0 4.3 Investment (% y-o-y) 3.1 5.4 6.6 9.8 -2.4 -2.4 2.3 2.1 Net exports (contribution to GDP growth, ppt) 0.5 -0.7 -0.9 -2.2 1.2 0.3 -0.1 0.2 Industrial production (% y-o-y) 0.6 -0.5 1.9 3.1 1.4 -1.5 2.4 1.8 Gross domestic saving (% GDP) 34.8 36.4 36.5 36.5 36.0 35.0 35.0 35.5 Unemployment rate, avg. (%) 3.5 3.6 3.7 3.7 3.8 4.0 3.6 3.6 Prices & wages CPI, average (% y-o-y) 1.3 1.1 0.9 1.9 1.5 0.5 1.6 1.5 CPI, year-end (% y-o-y) 0.8 0.4 0.7 1.4 1.3 1.0 1.3 1.7 Core CPI, average (% y-o-y) 2.0 2.1 1.9 1.5 1.2 0.7 1.4 1.4 Core CPI, year-end (% y-o-y) 1.6 2.1 1.6 1.4 1.3 0.9 1.2 1.6 PPI, average (% y-o-y) -0.5 -1.3 -2.2 3.5 1.9 0.2 1.6 1.6 PPI, year-end (% y-o-y) -2.1 -3.7 -3.6 2.2 0.9 1.2 1.3 1.7 Manufacturing wages, nominal (% y-o-y) 4.0 3.5 3.4 1.7 3.8 4.0 3.5 3.5 Money, FX & interest rates Central bank money M0, average (% y-o-y) 11.7 14.6 11.4 11.4 9.7 10.0 6.5 7.0 Broad money supply M3, average (% y-o-y) 7.1 9.9 8.2 6.7 7.0 6.4 4.6 4.6 Real private sector credit growth (% y-o-y) 7.0 6.6 4.9 3.7 4.9 3.7 2.6 2.6 Policy rate, year-end (%) 2.00 1.50 1.25 1.50 1.75 1.25 1.25 1.25 5yr yield, year-end (%) 2.34 1.90 1.87 2.30 1.89 1.00 0.80 0.80 KRW /USD, year-end 1,099 1,172 1,209 1,071 1,118 1,220 1,240 1,240 KRW /USD, average 1,052 1,133 1,163 1,122 1,077 1,142 1,230 1,240 KRW /EUR, year-end 1,355 1,355 1,355 1,355 1,286 1,342 1,364 1,364 KRW /EUR, average 1,355 1,355 1,355 1,355 1,275 1,280 1,353 1,364 External sector Merchandise exports (USDbn) 613.4 543.1 511.9 580.3 625.4 564.2 579.3 603.8 Merchandise imports (USDbn) 527.3 422.8 395.5 466.7 513.6 491.8 513.4 536.9 Trade balance (USDbn) 86.1 120.3 116.5 113.6 111.9 72.4 66.0 66.9 Current account balance (USDbn) 83.0 105.1 97.9 75.2 76.4 46.0 37.0 33.3 Current account balance (% GDP) 5.6 7.2 6.6 4.6 4.3 2.7 2.3 2.0 Net FDI (USDbn) -18.7 -19.6 -17.8 -18.8 -19.5 -31.2 -32.6 -34.6 Net FDI (% GDP) -1.3 -1.3 -1.2 -1.2 -1.1 -1.8 -2.0 -2.0 Current account balance plus FDI (% GDP) 4.3 5.8 5.4 3.5 3.2 0.9 0.3 -0.1 Exports, value (% y-o-y) -0.8 -11.5 -5.7 13.4 7.8 -9.8 2.7 4.2 Imports, value (% y-o-y) -2.0 -19.8 -6.5 18.0 10.0 -4.2 4.4 4.6 International FX reserves (USDbn) 363.5 368.7 372.8 387.0 403.1 392.3 365.5 332.6 Import cover (months) 8.3 10.5 11.3 10.0 9.4 9.6 8.5 7.4 Public and external solvency indicators Gross external debt (USDbn) 424.3 396.1 382.2 412.0 440.6 380.0 380.0 380.0 Gross external debt (% GDP) 28.6 27.1 25.6 25.4 25.0 22.3 23.2 22.5 Short term external debt (% of int'l reserves) 32.0 28.3 28.1 30.0 31.4 32.4 34.8 38.3 Private sector external debt (USDbn) 319.2 298.9 297.4 309.4 328.1 266.0 271.7 269.7 Central government balance (% GDP) 0.6 0.0 1.1 1.5 1.8 -0.1 -0.5 -1.1 Primary balance (% GDP) 1.4 0.8 1.8 2.1 2.4 0.7 0.3 -0.2 Gross public domestic debt (USDbn) 471.3 484.8 503.0 552.6 597.6 613.2 628.8 689.2 Gross public domestic debt (% GDP) 31.7 33.1 33.8 34.1 33.9 36.0 38.4 40.8 Gross public external debt (USDbn) 6.8 6.4 5.8 6.4 7.5 7.2 6.3 6.4 Gross public external debt (% GDP) 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Gross public sector debt (% GDP) 32.2 33.6 34.2 34.4 34.4 36.5 38.8 41.3 Macro prudential indicators Capital adequacy ratio 14.0 13.9 14.8 15.2 15.4 n/a n/a n/a Non-performing loan ratio 1.0 0.9 0.7 0.6 0.5 n/a n/a n/a Household debt/GDP (%) 69.4 72.6 77.1 79.0 81.2 n/a n/a n/a Total credit/GDP (%) 149.3 154.0 158.3 159.6 165.2 n/a n/a n/a Residential house prices (% y-o-y) 1.5 3.4 2.7 1.3 2.2 n/a n/a n/a Loan/deposit ratio 102.4 102.0 100.8 100.1 100.2 n/a n/a n/a Stock market capitalisation/GDP (%) 76.3 75.0 75.2 87.5 71.0 n/a n/a n/a

Note: Public debt refers to government debt only 2021 FX numbers are assumptions, not forecasts Source: CEIC, ADB, IMF, MoSF, HSBC forecasts


68

Malaysia

Still outperforming, for now

Thanks to strong private consumption and a relatively resilient external sector, growth in Malaysia

accelerated in 1H19 vs. 2H18. However, notwithstanding some ongoing supply chain diversion

benefits manifested by strong FDI inflows and exports, we believe Malaysia’s trade-dependent

economy will increasingly feel the pain of slower global and regional growth in 2020.

In 1H19, growth surpassed expectations as private consumption accelerated, thanks in part to an

expansionary fiscal position this year. The external sector also held up better than Malaysia’s peers,

with exports continuing to track positive growth. Strong manufacturing FDI inflows in 2018 improved

commodity export volumes through LNG pipeline repairs, and new electronics capacity additions.

Moreover, operations at Petronas’ gargantuan USD27bn RAPID facility are set to commence

imminently. This should add approximately USD1bn in new net petrochemical exports over the

course of the next year.

However, there are some warning signs on the horizon. A particularly sharp contraction in imports

contributed to the improvement in net exports in 2Q19, which we think will partly reverse in the

quarters ahead. Moreover, the latest export data shows that overall shipments to mainland China are

declining. We think slower growth on the mainland, coupled with continued weakness in the global

electronics and commodity cycles, will drag down export growth next year.

What about private consumption? This has been the main growth driver, tracking about 7.5% this

year. Expansionary fiscal policy in 2019 and past wage gains have been important drivers of this

trend. However, we expect consumption growth to slow, given the fact that average wage growth

decelerated notably to 1.9% y-o-y in 2Q, and the 2020 budget stance will likely be less expansionary

than 2019. All in all, we see headline GDP growth of 4.5% in 2019 (unchanged), and forecast a

considerable moderation to 4.1% in 2020 and 4.3% in 2021.

Fortunately inflationary pressures remain benign, with core inflation tracking 1.5% so far in 2019.

Although some Malaysians may lose access to fuel subsidies next year, we expect the overall

inflation trend to remain subdued as the oil price edges lower. This provides BNM with ample space

to use monetary policy to offset any growing growth risks in the coming years.

Joseph Incalcaterra


[email protected]

+852 2822 4687

Maitreyi Das

Associate

Bangalore

GDP accelerated in 1H19, but we expect slowing global growth to impact Malaysia

Wage growth has decelerated sharply in recent months


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69


Policy issues

Bank Negara Malaysia (BNM) cut the Overnight Policy Rate (OPR) by 25bp to 3.00% at its May

2019 meeting, a pre-emptive move to offset growing external risks to growth. Given the likelihood of

a continued external slowdown, coupled with less room for expansionary fiscal policy, we think

further monetary accommodation is necessary. We forecast two more rate cuts of 25bp each – one

in 4Q19 and the other in 3Q20 – to help offset what we forecast to be a prolonged period of

sub-potential growth.

As for fiscal policy, we forecast a relatively neutral 2020 budget stance compared to the 2019 budget.

This means that the Malaysian government is likely to table a 2020 budget with a deficit higher than

the 3% targeted over the medium-term fiscal plan released last year. In short, while the 2020 budget

may not provide the same degree of consumer impulse as this year’s budget, it will nonetheless

remain supportive of overall growth. Given that the government is likely to postpone fiscal

consolidation, it may opt to accelerate asset sales from Khazanah (SOE holding company) to

improve the country’s overall fiscal health and help maintain its credit rating.

Risks

Rising uncertainties related to US-China trade tensions pose considerable risks to Malaysia’s

trade-dependent economy. The corresponding impact on Chinese growth will further weigh on

both manufacturing and commodity shipments. Meanwhile, the global semiconductor cycle is

likely to remain weak into next year. As a result, we believe there are still downside risks on the

external front. Meanwhile, net reserve adequacy is still low relative to Malaysia’s external debt.

Given that there are risks of potential outflows from bond investors in the coming months should

index exclusion materialise, reserve adequacy will remain an area of heightened focus from

investors and rating agencies.

On the political side, the governing coalition has lost a significant amount of support, suggesting

growing policy risks. Deteriorating support for the government reduces the likelihood of an

ambitious reform agenda continuing in the months ahead. There is also some lingering

uncertainty as to exactly when Prime Minister Mahathir will yield power to Anwar Ibrahim, which

was agreed to before the election victory in 2018.

Key forecasts


GDP (% y-o-y) 4.9 4.6 4.1 4.2 4.1 4.1 4.2 4.2 4.4 4.4 4.3 GDP sa (% q-o-q) 1.0 1.0 0.9 1.0 1.0 1.1 1.0 1.1 1.2 1.0 0.9 Industrial production (% y-o-y) 3.9 2.7 3.1 3.0 2.9 3.0 2.8 2.9 2.8 2.8 2.7 CPI, (% q-o-q saar) 3.0 1.5 0.0 1.7 2.8 2.1 0.1 2.1 3.1 2.3 0.3 CPI, average (% y-o-y) 0.6 1.3 0.9 1.5 1.5 1.6 1.7 1.8 1.9 1.9 1.9 PPI, average (% y-o-y) -1.6 -2.6 -1.5 -0.9 -1.2 -1.0 -1.1 -1.0 -1.0 -1.0 -1.0 Exports, value (% y-o-y) 0.3 -3.5 -6.0 -1.7 -2.9 -3.3 -2.9 -2.1 -2.6 -0.4 2.2 Imports, value (% y-o-y) -0.8 -5.0 -4.6 -1.6 -2.3 -2.7 -1.9 1.6 -0.6 2.8 2.3 Trade balance (% GDP) 7.6 7.2 7.1 8.7 6.7 6.4 6.1 6.5 5.3 4.7 5.8 Current account (% GDP) 3.8 1.9 2.2 4.4 3.8 1.9 2.1 3.2 3.3 1.1 2.6 International reserves (USDbn) 102.6 105.1 102.9 103.5 103.1 101.6 101.8 102.3 103.0 100.8 102.4 Policy rate, quarter-end (%) 3.00 3.00 2.75 2.75 2.75 2.50 2.50 2.50 2.50 2.50 2.50 5yr yield, quarter-end (%) 3.43 3.26 3.30 3.30 3.10 3.10 n/a n/a n/a n/a n/a MYR/USD, quarter-end 4.14 4.20 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30 4.30 MYR/EUR, quarter-end 4.72 4.62 4.73 4.73 4.73 4.73 4.73 4.73 4.73 4.73 4.73



70

Export growth has generally remained positive this year… …allowing the Malaysian economy to outperform

Overall growth in Malaysia held up well in the first half of the year

(4.7% y-o-y) compared to 2H18. Still-strong private consumption helped drive growth, but resilient exports is what set Malaysia apart compared to other regional economies

In recent years, strong FDI in the manufacturing sector resulted in

new capacity additions, especially in the electronics sector. As a result, IP growth has been strong at c.4% this year. Exports are still tracking positive growth this year.

However, due to a sharp growth deceleration in key trading

partners and lingering trade tensions, exports are likely to slow in 2020. Overall, we expect GDP growth to slow to 4.1% y-o-y in 2020 and 4.3% in 2021 from 4.5% in 2019.

Source: CEIC, HSBC

High frequency indicators point to slowing growth … …especially domestic demand

Private consumption, which accounts almost 60% of total GDP, has

been the main growth driver for the Malaysian economy. It has been surprisingly strong this year at 7.5% y-o-y in 1H19. A steady labour market and expansionary budget has helped drive consumption.

However, both retail sales and motor vehicle sales growth have been moderating sharply over the past few months – in part due to unfavourable base effects – alongside weakening consumer sentiment.

Wage growth has decelerated relatively sharply in recent quarters,

and this will likely slow consumer spending going into 2020. At the same time, we expect less support from the fiscal stance as the government addresses debt concerns.

Source: CEIC, HSBC

2020 budget will be far less expansionary than 2019… …we expect an overall neutral budget stance next year

The 2019 budget had many pro-consumer measures that helped

drive private consumption. We expect a less expansionary stance in 2020, and forecast a headline deficit of 3.2% of GDP compared to 3.4% in 2019.

The government will have to balance the need to provide some short-term counter-cyclical support to the economy while simultaneously reducing the overall debt load. One way to do this is to accelerate asset sales from SOEs.

We expect the government to announce a clear plan for fiscal consolidation starting in 2021, possibly pushing back the original 2020 goal for bringing the deficit to 3% of GDP.

Source: CEIC, HSBC

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71


Malaysia: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 6.0 5.0 4.4 5.7 4.7 4.5 4.1 4.3 Nominal GDP (USDbn) 343.0 301.5 301.8 319.1 358.8 364.9 373.3 396.0 GDP per capita (USD) 11,014.1 9,515.5 9,397.3 9,832.6 10,948.5 11,113.4 11,199.9 11,592.5 Private consumption (% y-o-y) 7.0 6.2 5.9 6.9 8.0 7.5 6.3 6.9 Government consumption (% y-o-y) 4.4 4.4 1.1 5.5 3.3 1.8 1.4 1.8 Investment (% y-o-y) 4.8 3.8 2.6 6.1 1.4 -1.5 1.9 2.5 Net exports (contribution to GDP growth, ppt) 1.1 -0.2 0.0 -0.3 0.8 0.7 -0.1 -0.4 Industrial production (% y-o-y) 5.2 4.4 4.1 4.4 3.0 3.1 2.9 2.8 Gross domestic saving (% GDP) 35.2 33.8 32.5 32.2 31.5 31.8 30.5 28.9 Unemployment rate, year-end (%) 2.8 3.2 3.5 3.4 3.3 3.5 3.6 3.3 Prices & wages CPI, average (% y-o-y) 3.1 2.1 2.1 3.8 1.0 0.6 1.6 1.9 CPI, year-end (% y-o-y) 2.7 2.7 1.7 3.5 0.2 0.9 1.7 2.0 Core CPI, average (% y-o-y) n/a n/a 2.5 2.3 0.8 1.0 1.2 1.5 Core CPI, year-end (% y-o-y) n/a n/a 2.0 2.2 0.4 1.0 1.3 1.6 PPI, average (% y-o-y) 1.2 -4.8 -1.1 6.7 -1.1 -2.0 -1.0 -1.0 PPI, year-end (% y-o-y) -4.5 -2.5 6.5 0.3 -3.7 0.2 -1.0 -1.0 Manufacturing wages, nominal (% y-o-y) 4.7 5.9 6.3 6.1 8.6 3.2 2.8 3.1 Money, FX & interest rates Central bank money M0, year-end (% y-o-y) 7.7 10.1 2.9 4.3 5.5 3.8 3.6 4.6 Broad money supply M3, average (% y-o-y) 6.1 5.4 2.5 4.9 7.3 4.1 3.8 4.8 Real private sector credit growth (% y-o-y) 6.8 5.5 4.3 0.3 6.9 3.5 2.4 3.2 Policy rate, year-end (%) 3.25 3.25 3.00 3.00 3.25 2.75 2.50 2.50 5yr yield, year-end (%) 3.84 3.47 3.70 3.56 3.78 3.30 n/a n/a MYR/USD, year-end 3.50 4.29 4.49 4.06 4.14 4.30 4.30 4.30 MYR/USD, average 3.27 3.90 4.14 4.30 4.03 4.16 4.30 4.30 MYR/EUR, year-end 4.23 4.68 4.71 4.87 4.76 4.73 4.73 4.73 MYR/EUR, average 4.34 4.35 4.60 4.85 4.77 4.67 4.73 4.73 External sector Merchandise exports (USDbn) 207.5 174.5 165.9 186.4 206.5 195.1 183.8 182.5 Merchandise imports (USDbn) 172.9 146.5 141.2 159.2 177.0 166.7 158.0 160.4 Trade balance (USDbn) 34.6 28.0 24.6 27.2 29.6 28.4 25.8 22.2 Current account balance (USDbn) 14.8 9.0 7.2 8.9 7.6 11.2 11.2 10.1 Current account balance (% GDP) 4.3 3.0 2.4 2.8 2.1 3.1 3.0 2.5 Net FDI (USDbn) -5.5 -0.5 3.3 3.8 2.8 4.0 3.0 2.6 Net FDI (% GDP) -1.6 -0.2 1.1 1.2 0.8 1.1 0.8 0.7 Current account balance plus FDI (% GDP) 2.7 2.8 3.5 4.0 2.9 4.2 3.8 3.2 Exports, value (% y-o-y) 6.5 0.4 0.8 16.7 3.9 -2.5 -2.7 -0.7 Imports, value (% y-o-y) 4.5 1.2 2.2 17.0 4.3 -2.7 -2.1 1.5 International FX reserves (USDbn) 120.5 95.5 98.2 99.7 100.6 102.9 101.8 102.4 Import cover (months) 8.4 7.8 8.3 7.5 6.8 7.4 7.7 7.7 Public and external solvency indicators Gross external debt (USDbn) 228.6 214.4 220.8 205.9 229.4 233.2 237.1 249.0 Gross external debt (% GDP) 67.6 72.2 74.3 65.4 64.7 63.9 63.5 62.9 Short term external debt (% of int'l reserves) 92.3 94.4 93.0 82.1 99.9 99.3 102.1 106.6 Private sector external debt (USDbn) 177.2 163.8 170.1 158.8 n/a n/a n/a n/a Central government balance (% GDP) -3.3 -3.2 -3.1 -2.9 -3.7 -3.4 -3.2 -3.0 Primary balance (% GDP) -1.3 -1.1 -1.0 -0.9 -1.6 -0.9 -0.7 -0.6 Government domestic debt (MYRbn) 414.7 433.1 438.2 484.1 562.2 552.2 586.5 586.5 Government domestic debt (% GDP) 37.5 37.4 35.6 35.8 39.3 36.3 36.5 34.4 Government external debt (USDbn) 51.4 50.6 50.8 47.2 44.3 56.8 58.5 58.5 Government external debt (% GDP) 15.2 17.0 17.1 15.0 12.5 15.6 15.7 14.8 Government debt (% GDP) 52.7 54.4 52.7 50.7 51.8 51.9 52.2 49.2 Macro-prudential indicators Capital adequacy ratio 15.9 16.7 17.0 17.8 18.1 n/a n/a n/a Non-performing loan ratio 6.6 5.9 5.6 5.1 4.4 n/a n/a n/a Household debt/GDP (%) 86.1 88.4 87.8 83.8 83.0 n/a n/a n/a Total credit/GDP (%)* 119.1 122.9 121.8 115.5 116.4 n/a n/a n/a Residential house prices (% y-o-y) 9.4 7.4 7.0 6.5 3.3 n/a n/a n/a Loan/deposit ratio 80.1 84.6 87.6 87.7 85.6 n/a n/a n/a Stock market capitalisation/GDP (%) 142.5 137.7 123.2 133.4 111.9 n/a n/a n/a

*Credit refers to Banking System loans Note: 2021 FX numbers are assumptions, not forecasts Source: CEIC, ADB, BNM, HSBC forecasts


72

New Zealand

Losing more momentum

New Zealand’s economy has continued to lose momentum over recent months, weighed down

by global and domestic factors. In particular, uncertainty and low confidence amongst

businesses have become a significant drag on investment and are weighing on hiring. Low

business confidence is not a new development, with persistent weakness since late 2017 when

the general election unexpectedly resulted in a new, Labour-led government. That created

significant uncertainty over the direction of policy in key areas such as taxation, labour markets

and the environment. Over time, as more clarity has emerged on domestic policy, the global

economy has weakened and added a new, additional layer of economic uncertainty.

Business investment has been weak, with almost no growth in machinery and equipment

investment over the year to June 2019. Jobs growth has slowed over the past couple of

quarters to a pace that is below the population growth rate. The past few months have seen

firms’ surveyed hiring and investment intentions fall further, to the lowest levels since 2009.

Increased caution on the part of businesses is also starting to have an effect on the broader

economy. As in much of the rest of the world, conditions in the goods-producing sectors have

continued to deteriorate, with the PMI slipping below 50 for the first time since 2012. Conditions

in the services sectors are holding up better, but have, nonetheless, slowed noticeably.

Consumer spending growth has also weakened, likely weighed down by weak job gains, softer

housing markets in many regions, and a pullback in Chinese visitor arrivals.

The RBNZ has been proactive in addressing weaker conditions and rising risks to the economy.

The cash rate has been reduced by 75bp since May, including a surprise 50bp cut in August,

and is currently at a new record low of 1.00%. We expect a further 25bp cut at the final meeting

of 2019 in November, and another two cuts to be delivered in early 2020, to 0.25% by 1Q20.

Our 2019 growth forecast is unchanged, at 2.1%, while we lower our 2020 forecast to 2.4%

(from 2.5% previously). Significant monetary easing is expected to give the economy a boost,

particularly in 2020. For 2021, we forecast growth of 2.3%.

Paul Bloxham Chief Economist, Australia, NZ & Global Commodities


[email protected]

+61 2 9255 2635

Daniel Smith

Economist


[email protected]

+61 2 9006 5729

Business conditions have deteriorated further

Jobs growth has slowed

Source: Business NZ Source: Statistics New Zealand, RBNZ

40

45

50

55

60

65

40

45

50

55

60

65

2005 2008 2011 2014 2017 2020

3mma 3mma

PSI PMI

-4

-2

0

2

4

6

-4

-2

0

2

4

6

2000 2003 2006 2009 2012 2015 2018

% y-o-y% y-o-y

Working-age population Filled jobs

Labour market

73


Policy issues

Although the weaker economic outlook is likely to have an adverse impact on the government’s

finances, the fiscal position remains strong. The 2018/19 surplus looks like it will come in a little

larger than forecast, and government debt is very low. The government is likely to come under

increasing pressure to loosen fiscal policy further to support growth. The 2019/20 spending

plans are already stimulatory after this year’s ‘wellbeing’ budget increased the spending

allowance. However, this effect is likely to fade from 2020 onwards without further loosening of

the purse strings.

The RBNZ’s review of the banking sector’s capital requirements continues. The central bank’s

initial proposal was to raise the Tier 1 capital requirement to 16% of risk-weighted assets; the

current actual level of capital held averages about 12%. Higher capital requirements would likely

result in a rise in lending interest rates, as banks seek to retain their net interest margins. The

RBNZ is reviewing feedback and is scheduled to announce its final decision in November 2019.

Any change in capital requirements is expected to be phased in, starting in April 2020.

Meanwhile, the RBNZ is refreshing its internal work on unconventional policy tools, which may

come into play if the cash rate reaches its effective lower bound (estimated by the RBNZ to be

around -0.35%). Apart from a high-level paper published in 2018, the central bank has not made

this work public yet.

Risks

Further deterioration in global growth remains a key risk to the New Zealand economy,

especially if conditions weaken further in China and/or Australia. Currently, demand for New

Zealand’s primary exports has remained strong, although growth in services exports has eased

somewhat. A key local risk is ongoing weakness in business confidence leading to even less

investment and hiring than our central case.

Key forecasts


GDP (% y-o-y) 2.1 2.1 1.8 1.9 2.2 2.6 2.8 2.6 2.3 2.3 2.3 GDP-sa (%q-o-q) 0.5 0.3 0.4 0.7 0.8 0.6 0.6 0.5 0.5 0.6 0.6 Industrial production (% y-o-y) -0.9 0.7 1.4 0.8 2.4 2.4 2.4 2.4 2.4 2.4 2.4 CPI (% y-o-y) 1.7 1.4 1.5 1.9 1.9 1.9 2.0 2.0 2.0 1.9 1.8 PPI (% y-o-y) 3.2 2.7 2.1 4.1 4.1 4.1 3.9 3.6 3.4 3.2 3.2 G & S Balance (% GDP) 0.3 0.2 -0.1 -0.2 -0.3 -0.2 -0.3 -0.3 -0.3 -0.3 -0.2 Current account (% GDP) -3.1 -3.3 -3.6 -3.5 -3.5 -3.4 -3.4 -3.5 -3.4 -3.4 -3.3 Policy rate, quarter-end (%) 1.50 1.00 0.75 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 10yr yield, quarter-end (%) 1.79 1.20 0.90 0.90 1.00 1.00 0.90 0.90 0.90 0.90 0.90 USD/NZD, quarter-end 0.64 0.63 0.62 0.62 0.62 0.62 0.62 0.62 0.62 0.62 0.62 EUR/NZD, quarter-end 0.58 0.57 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56 0.56 CPI, q-o-q ar 2.4 2.3 0.8 2.3 2.0 2.6 1.4 2.3 1.7 2.3 1.0 Exports G & S (% y-o-y) 3.8 1.5 1.2 1.4 0.3 1.1 2.2 1.9 2.2 2.0 2.0 Imports G & S(% y-o-y) 3.1 1.2 1.3 2.1 2.4 2.5 2.8 2.5 2.4 2.3 2.0

Note: 2021 FX numbers are assumptions, not forecasts Source: RBNZ, StatsNZ, Refinitiv Datastream, HSBC forecasts


74

Growth continues to weaken

Real GDP growth slowed to 2.1% y-o-y in 2Q, the slowest rate

since 2013. In the context of still-strong population growth, this performance is even poorer; per-capita growth slowed to just 0.5% y-o-y, the slowest rate since 2011.

Slower growth in the construction sector, which has run into

capacity constraints, has been a key factor in the slowdown in growth over the past couple of years. Slower growth in building has also weighed on important related industries such as professional services.

More recently, household consumption growth has weakened

noticeably in 2019. Consumption grew at an annualised rate below 2% in 1Q19, down from around 4% in 2H18.

Source: Statistics New Zealand

Visitor numbers have slowed a little lately, driven by China

In addition to slower growth in household consumption, a dip in

international visitor arrivals has also likely been a drag on spending in the economy.

The slowdown in the pace of arrivals has been led by Asian

visitors, in particular those from China. After several years of strong growth, which led to China becoming New Zealand’s second-largest source of visitors (after Australia), Chinese arrivals were 11% lower in 1H19 vs. 1H18.

Arrivals from Australia and the US (the third-largest source of

visitors) are still growing. The lower NZD should also support arrivals numbers and spending rates heading into the 2019/20 summer season.

Source: Statistics New Zealand

Inflation still below 2%, but only just

Most measures of inflation remain within the RBNZ’s 1-3% target

band, but below the 2% mid-point. The RBNZ’s own key measure of underlying inflation, the sectoral factor model, has been below 2% for a decade.

Capacity constraints, the lower NZD, and government policies

such as large minimum wage increases, should maintain a modest degree of inflationary pressure.

However, the current focus of the RBNZ is on supporting

economic growth and preventing downside risks (to both growth and, as a result, inflation) coming to fruition. The central bank would also likely be comfortable with inflation ‘overshooting’ the mid-point of the target band for a period. Hence, although inflation is solid, it is no barrier to further rate cuts.

Source: Statistics New Zealand, RBNZ

-4

-2

0

2

4

-4

-2

0

2

4

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

GDP growth q-o-q GDP growth y-o-y

% %

100

150

200

250

300

350

100

150

200

250

300

350

2000 2003 2006 2009 2012 2015 2018

Tho

usan

ds

Tho

usan

ds

Visitor arrivals (thousands, monthly, s.a.)

0

1

2

3

4

5

6

0

1

2

3

4

5

6

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019Headline CPI, %y-o-y RBNZ factor model

CPI ex food & energy

% %

75


New Zealand: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 3.6 3.5 3.9 3.1 2.9 2.1 2.4 2.3 Nominal GDP (USDbn) 198.9 172.2 187.4 202.1 199.6 195.0 199.2 208.0 GDP per capita (USD) 43,819 37,661 40,493 43,146 42,109 40,642 41,031 42,327 Private consumption (% y-o-y) 3.1 3.6 5.4 4.8 3.3 2.7 2.7 2.5 Government consumption (% y-o-y) 3.4 2.5 2.0 2.8 2.2 3.4 5.0 3.7 Investment (% y-o-y) 9.2 3.8 4.3 3.5 3.7 2.3 1.0 1.3 Exports of G&S (vol growth) % y-o-y 3.4 7.7 2.3 2.3 2.5 2.4 0.4 2.0 Imports of G&S (vol growth)% y-o-y 7.9 4.0 3.4 6.8 5.9 0.6 2.3 2.3 Net exports % of GDP -3.9 -2.9 -3.2 -4.6 -5.7 -5.1 -5.6 -5.7 Contribution of Net exports to Growth, ppt -1.5 0.9 -0.4 -1.5 -1.3 0.5 -0.7 -0.2 Final Domestic demand % y-o-y 4.5 3.4 4.5 4.1 3.2 2.7 2.7 2.4 Domestic Demand % y-o-y 4.9 3.1 4.6 4.0 3.6 2.1 2.8 2.4 Industrial production (% y-o-y) 3.1 1.5 1.3 2.4 1.5 0.8 2.0 2.4 Gross national saving (% of GDP) 19.4 20.2 21.4 21.0 21.6 21.6 22.1 22.1 Unemployment rate, average (%) 5.4 5.4 5.1 4.7 4.3 4.2 4.4 4.2 Prices & wages CPI (% y-o-y) 1.2 0.3 0.6 1.9 1.6 1.5 1.9 1.9 PPI (% y-o-y) -1.9 -1.1 2.3 4.4 4.7 2.1 3.9 3.2 Core CPI (% y-o-y) 1.2 1.4 1.4 1.5 1.7 1.9 2.0 2.0 Labour Cost Index (% y-o-y) 1.8 1.8 1.7 1.7 2.0 2.2 2.6 2.5 Money, FX & interest rates Broad money supply M3, average (% y-o-y) 6.7 9.9 7.7 7.3 6.4 n/a n/a n/a Private credit growth (% y-o-y) 4.1 6.5 7.5 5.6 5.3 5.9 6.9 4.4 Policy rate, year-end (%) 3.50 2.50 1.75 1.75 1.75 0.75 0.25 0.25 10yr yield, year-end (%) 3.95 3.46 2.95 2.86 2.59 0.90 0.90 0.90 USD/NZD, year-end 0.78 0.68 0.69 0.71 0.65 0.62 0.62 0.62 USD/NZD, average 0.83 0.70 0.70 0.71 0.69 0.64 0.62 0.62 EUR/NZD, year-end 0.65 0.63 0.66 0.59 0.58 0.56 0.56 0.56 EUR/NZD, average 0.63 0.63 0.64 0.63 0.58 0.57 0.56 0.56 External sector Exports (G&S, USDbn) 56.4 48.6 50.1 55.7 56.3 54.3 53.7 54.8 Imports (G&S, USDbn) 54.0 46.8 48.1 53.2 56.4 54.1 54.1 55.4 G&S Balance (USDbn) 2.4 1.7 2.0 2.6 -0.1 0.2 -0.4 -0.6 Current Account Balance (USDbn) -6.1 -4.7 -3.8 -5.5 -7.7 -6.5 -6.9 -7.0 Current account balance (% GDP) -3.1 -2.7 -2.0 -2.7 -3.9 -3.3 -3.5 -3.4 Net FDI (USDbn) 1.9 0.0 2.9 3.0 n/a n/a n/a n/a Net FDI (% GDP) 0.9 -0.1 1.6 1.5 n/a n/a n/a n/a Exports (NZD, % y-o-y) 4.9 3.8 0.5 9.7 6.3 3.2 1.3 2.0 Imports (NZD, % y-o-y) 4.4 4.4 0.0 9.1 11.6 2.7 2.5 2.3 International FX reserves (USDbn) 15.8 14.6 17.6 20.7 17.1 n/a n/a n/a Import cover (months) 3.5 3.7 4.4 4.7 3.6 n/a n/a n/a Public and external solvency indicators Central government balance (% GDP) -1.2 0.2 0.7 1.5 1.9 1.5 1.0 1.0 Gross External Debt (NZDbn) 244.5 250.5 264.8 272.9 283.6 n/a n/a n/a Gross External Debt (% GDP) 101.7 99.9 99.6 96.6 96.6 n/a n/a n/a Gross public sector debt (NZDbn) 82.0 86.1 86.9 87.1 88.1 83.0 87.0 89.0 Gross public sector debt (% GDP) 34.6 35.2 33.6 31.9 30.5 27.5 27.4 26.5 Macro-prudential Indicators Capital Adequacy Ratios- Tier 1 capital ratio 11.4 11.9 12.1 13.0 n/a n/a n/a n/a Capital Adequacy Ratios- Total capital ratio 12.5 13.0 13.3 14.1 n/a n/a n/a n/a NPL Ratio 0.9 0.7 0.5 0.5 n/a n/a n/a n/a Household debt to income ratio 153.5 156.9 160.4 162.0 163.7 n/a n/a n/a Total credit/GDP ratio 147.7 152.3 153.7 151.6 153.9 156.9 159.1 158.6 House prices growth- Dwelling sales price (%y-o-y) 5.6 12.4 14.2 6.6 3.6 1.8 4.1 2.5 Stock market capitalisation (% GDP) 41.1 41.0 40.6 43.9 n/a n/a n/a n/a

Note: 2021 FX numbers are assumptions, not forecasts Source: RBNZ, StatsNZ, Refinitiv Datastream, ADB, IMF, HSBC forecasts


76

Philippines

Infrastructure gridlock

Recent economic data have painted a clear picture that weak investment is dragging down the

Philippine economy. The drag is primarily on the public investment side, where government

construction has shown consistent and significant declines since the start of the year. This is

due to the delayed passage of the 2019 fiscal budget and the midterm elections in May – both

of which prevented the government from spending on new infrastructure projects. The

slowdown in fixed investment was even more pronounced than we initially anticipated,

prompting a downward revision to our GDP forecast for 2019 from 6.0% to 5.7%.

That said, growth in other areas of the economy remained firm. Private consumption growth

remains in line with historical trend and government expenditure, excluding infrastructure

investment, has accelerated. The industry side also tells a similar story, with construction

activity being the only sector that contracted in 2Q while others showed solid growth. We expect

GDP growth to pick up in 2H19, given a reversal of the factors that dragged down investment in

the first half of the year. We also expect the expansionary fiscal impulse and further monetary

loosening to lift growth in 2020 and 2021 to 6.3% for both years.

Higher government spending and fixed investment growth in 2H19 are likely to lead to a

re-widening of the trade deficit. Indeed, high frequency indicators suggest that the trade and

fiscal deficits have already started widening as of July, and we expect this to continue to year-

end and into 2020. We forecast a current account deficit of 2.2% of GDP in 2019 and 2.4% in

2020 before narrowing back down to 2.1% of GDP in 2021.

Meanwhile, headline inflation has fallen below the BSP’s 2-4% target range as of August, and it is

likely to fall further in the months ahead. A decline in food (particularly rice) and oil prices have led

to the moderation in price increases. Moreover, upside risks to inflation, particularly inclement

weather at this time of the year, have not manifested themselves in a significant way. As a result,

we have pared down our headline inflation forecast for 2019 from 3.0% to 2.7%. We also expect

headline inflation to remain contained for 2020 and 2021, averaging 3.0% and 2.9%, respectively.

Noelan Arbis


[email protected]

+852 2822 4325

A substantial decline in public investment has led to the growth slowdown this year

Inflation has fallen below target at a rapid pace, giving room for further rate cuts


-300,000

-200,000

-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

Private (RHS) Public (RHS)

Public, y-o-y Private, y-o-y

%, y-o-y PHP mn

-101234567

-101234567

Aug-17 Feb-18 Aug-18 Feb-19 Aug-19Food, alcoholic drinks, tobaccoHousing & electricityTransportOtherHeadline (RHS)Target range

% y-o-yppt, contribution

77


Policy issues

The BSP has embarked on a monetary loosening cycle, which we expect to continue in the

quarters ahead. The central bank has reduced both its policy rate and reserve requirement ratio

(RRR) since the start of the year. We expect the policy loosening cycle to continue until 1Q20 in

light of fast declining inflation – which has translated to real interest rates rising to their highest

level since the interest rate corridor was introduced in 2016 – and expectations for continued

easing across other major central banks. The rationale for rate cuts is also broadening from

merely supporting growth to also normalising interest rates, which we believe provides the BSP

with room for another 50bp of rate cuts throughout this easing cycle, totalling 100bp since it

started in May. We forecast the policy rate to be at 3.75% by end-2020.

We also see continued cuts to the RRR in the years ahead as part of the BSP’s structural reform

agenda. Indeed, we expect another 100bp RRR cut before the end of the year and forecast 200bp of

RRR cuts each in 2020 and 2021, which may come staggered at 50bp each quarter to prevent

financial stability and inflation risks. This leaves the RRR at 11% by end-2021.

Risks

The government’s fiscal constraint this year has led to a substantial deceleration in growth. Now

that those constraints have been lifted, the government still needs to ramp up spending in the

quarters ahead to prevent further growth deterioration. Delayed passage of the 2020 fiscal

budget would also pose downside risks to growth in 2020, similar to its impact this year. The

country’s biggest growth risk, therefore, is on the domestic front, but this could be very well

avoided by timely fiscal action (see: Philippines 2020 Budget: Back on track, 19 July 2019).

As we have previously noted, the Philippines’ relatively low integration to the regional tech cycle

limits its exposure to external shocks. But building a competitive manufacturing sector remains a

structural challenge for the country to provide inclusive growth. This emphasises the need to

expand the country’s manufacturing capabilities and to build an industrial base that can cater to

both domestic and external demands.

Key forecasts


GDP (% y-o-y) 5.5 5.9 5.8 6.3 6.4 6.3 6.2 6.3 6.3 6.4 6.3 GDP sa (% q-o-q) 1.4 1.7 1.9 1.2 1.5 1.6 1.8 1.3 1.4 1.7 1.8 Industrial production (% y-o-y) 4.0 4.4 4.2 3.9 3.6 3.7 3.7 3.3 3.2 3.3 3.2 CPI, (% q-o-q saar) 2.1 2.6 4.0 2.8 2.9 3.1 2.7 3.0 2.9 3.1 2.7 CPI, average (% y-o-y) 3.0 1.8 2.0 2.9 3.1 3.2 2.9 2.9 2.9 2.9 2.9 PPI, average (% y-o-y) 1.5 0.9 1.0 1.5 1.5 1.6 1.4 1.4 1.5 1.5 1.5 Exports, value (% y-o-y) 1.5 1.5 1.5 1.0 -1.0 -1.0 -1.0 -2.0 -2.6 -3.2 -3.8 Imports, value (% y-o-y) 3.0 3.0 4.0 5.0 4.5 4.0 3.0 2.5 1.9 1.2 0.6 Trade balance (% GDP) -14.9 -15.1 -14.4 -15.9 -15.6 -15.7 -14.3 -15.8 -15.3 -15.2 -13.6 Current account (% GDP) -3.3 -1.4 -2.4 -1.9 -3.7 -1.7 -2.3 -1.8 -3.4 -1.4 -1.8 International reserves (USDbn) 75.5 75.3 78.7 78.5 81.8 83.8 86.1 85.5 86.3 88.3 90.0 Policy rate, quarter-end (%) 4.50 4.00 4.00 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 10yr yield, quarter-end (%) 5.07 4.20 4.00 3.70 3.70 n/a n/a n/a n/a n/a n/a PHP/USD, quarter-end 51.36 52.60 54.00 54.00 54.40 54.80 55.00 55.00 55.00 55.00 55.00 PHP/EUR, quarter-end 58.55 57.86 59.40 59.40 59.84 60.28 60.50 60.50 60.50 60.50 60.50


https://www.research.hsbc.com/R/10/p7GRWVN


78

Infrastructure spending and government expenditure are picking up…

…which should help boost growth in 2H19

High frequency indicators suggest that the Philippine economy is

turning around from its below-trend growth in 1H19.

Government spending is picking up, exports have turned positive, and consumer sentiment has turned more upbeat. This reduces the need for the BSP to cut rates to “accommodative” levels to support growth.

In our view, leaving the policy rate at around 3.75% provides enough real rate buffer, assuming inflation averages around 3% (midpoint of the BSP’s 2-4% target range), to limit financial stability risks and a build-up in demand-driven inflation. Meanwhile, it also leaves enough policy space to cut rates further in case of an economic slowdown.

Source: CEIC, HSBC

Yearly M3 and bank lending growth remain low compared to historical standards…

…which should prompt additional RRR cuts

BSP Governor Benjamin Diokno has committed to further reducing

the Philippines’ reserve requirement ratio (RRR), continuing on former BSP governor Nestor Espenilla’s reform agenda.

But recent data also suggest that previous RRR cuts (400bp since 2018) have not done enough to fully alleviate the tightness in domestic liquidity.

We believe there may be several reasons for this, including: a

wider trade deficit, greater government bond issuance, policy rate hikes in 2018, and the BSP’s liquidity absorption facilities. We expect the RRR to fall to 11% by 2021.

Source: Bloomberg, HSBC

Non-performing loans (NPLs) appear to have bottomed-out…

…and may be on the rise with excess liquidity in the system

We believe the BSP’s plan to continue cutting the RRR is

positive overall, as it improves monetary policy transmission and frees up non-interest bearing capital for potentially more productive investments.

However, it does not preclude any risks over the medium-term

(i.e. +1 year). The biggest risks, in our view, are a potential rise in non-performing loans (NPLs).

NPLs tend to be backward-looking when assessing excesses in the financial market, and Philippine credit data suggest that NPLs have bottomed-out and may be on the rise. This could be attributed to higher bank lending growth pre-2019 and may accelerate in the future as RRR cuts boost lending growth yet again.

Source: CEIC, HSBC

-30

-10

10

30

50

70

-30

-10

10

30

50

70

Jul-15 Jul-16 Jul-17 Jul-18 Jul-19Infrastructure Gov't Expenditure

% y -o-y , 3mma % y -o-y , 3mma

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

Dec-08 Jun-12 Dec-15 Jun-19

M3 growth, y-o-y Bank Lending, y-o-y

% y-o-y% y-o-y

0.0

2.0

4.0

6.0

8.0

10.0

0.0

2.0

4.0

6.0

8.0

10.0

Mar-09 Sep-11 Mar-14 Sep-16 Mar-19

Total NPL ratio

Consumer loan NPL to total consumer loans

% %

79


Philippines: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 6.1 6.1 6.9 6.7 6.2 5.7 6.3 6.3 Nominal GDP (USDbn) 284.6 292.5 304.6 313.5 330.7 354.4 374.8 406.3 GDP per capita (USD) 2,849.0 2,880.1 2,950.5 2,987.9 3,102.5 3,259.4 3,379.8 3,591.4 Private consumption (% y-o-y) 5.6 6.3 7.1 5.9 5.6 6.0 5.8 5.8 Government consumption (% y-o-y) 3.3 7.6 9.0 6.2 13.0 6.8 8.7 9.2 Investment (% y-o-y) 7.2 16.9 26.1 9.4 12.9 -0.3 6.3 9.5 Net exports (contribution to GDP growth, ppt) 1.0 -3.1 -4.9 -0.7 -2.8 0.6 -0.7 -0.4 Industrial production (% y-o-y) 8.3 5.7 7.1 8.4 4.9 4.4 3.7 3.2 Gross domestic saving (% GDP) 24.3 23.7 24.0 24.5 24.6 23.3 23.1 24.1 Unemployment rate, average* (%) 6.6 6.1 5.7 5.6 5.3 5.2 5.3 5.1 Prices & wages CPI, average (% y-o-y) 3.6 0.7 1.3 2.9 5.2 2.7 3.0 2.9 CPI, year-end (% y-o-y) 1.9 0.7 2.2 2.9 5.1 2.6 2.8 2.9 Core CPI, average (% y-o-y) 2.6 1.1 1.5 2.5 4.1 3.3 3.2 2.9 Core CPI, year-end (% y-o-y) 1.4 1.2 2.3 2.4 4.7 3.0 2.8 2.9 PPI, average (% y-o-y) 1.8 0.3 0.6 1.4 2.6 1.3 1.5 1.5 PPI, year-end (% y-o-y) 1.0 0.4 1.1 1.5 2.6 1.3 1.4 1.5 Manufacturing wages, nominal** (% y-o-y) 1.6 2.4 2.4 1.6 4.4 4.8 4.8 4.8 Money, FX & interest rates Central bank money M0, average (% y-o-y) 11.5 10.9 16.4 13.7 17.6 8.0 10.0 10.0 Broad money supply M3, average (% y-o-y) 11.2 9.4 12.8 11.9 9.5 7.0 9.0 9.0 Real private sector credit growth (% y-o-y) 16.3 11.4 15.3 13.6 9.8 9.3 9.0 9.1 Policy rate, year-end (%) 4.00 4.00 3.00 3.00 4.75 4.00 3.75 3.75 10yr yield, year-end (%) 4.31 4.42 4.80 5.17 7.07 4.00 n/a n/a PHP/USD, year-end 44.62 47.17 49.81 49.92 52.72 54.00 55.00 55.00 PHP/USD, average 44.62 47.17 49.81 49.92 52.72 54.00 55.00 55.00 PHP/EUR, year-end 53.99 51.41 52.30 59.91 60.63 59.40 60.50 60.50 PHP/EUR, average 59.14 52.59 55.29 56.35 62.41 60.55 60.50 60.50 External sector Merchandise exports (USDbn) 49.8 43.2 42.7 51.8 51.7 52.2 51.9 50.4 Merchandise imports (USDbn) 67.2 66.5 78.3 92.0 100.7 105.0 109.3 111.0 Trade balance (USDbn) -17.3 -23.3 -35.5 -40.2 -49.0 -52.9 -57.5 -60.6 Current account balance (USDbn) 10.8 7.3 -1.2 -2.1 -7.9 -7.7 -9.0 -8.6 Current account balance (% GDP) 3.8 2.5 -0.4 -0.7 -2.4 -2.2 -2.4 -2.1 Net FDI (USDbn) -1.0 0.1 5.9 7.3 5.9 7.6 10.3 12.3 Net FDI (% GDP) -0.4 0.0 1.9 2.3 1.8 2.1 2.7 3.0 Current account balance plus FDI (% GDP) 3.4 2.5 1.5 1.6 -0.6 0.0 0.3 0.9 Exports, value (% y-o-y) 11.9 -13.3 -1.1 21.2 -0.3 1.0 -0.5 -2.9 Imports, value (% y-o-y) 8.0 -1.0 17.7 17.6 9.4 4.3 4.1 1.5 International FX reserves (USDbn) 79.5 80.7 80.7 81.6 79.2 78.7 86.1 90.0 Import cover (months) 9.9 9.6 8.8 7.1 6.7 6.3 6.7 6.9 Public and external solvency indicators Commercial banks’ FX assets (USDbn) 26.6 28.1 29.6 30.5 30.7 31.7 32.2 32.6 Gross external debt (USDbn) 77.7 77.5 74.8 73.1 79.0 81.5 84.9 85.8 Gross external debt (% GDP) 27.3 26.5 24.5 23.3 23.9 23.0 22.7 21.1 Short term external debt (% of int’l reserves) 20.4 18.7 18.0 17.5 20.3 20.7 19.7 19.1 Private sector external debt (USDbn) 27.6 25.4 23.5 32.0 32.0 33.0 33.3 33.7 Consolidated government balance (% GDP) -0.6 -0.9 -2.4 -2.2 -3.2 -2.4 -3.2 -3.1 Central government balance (% GDP) -0.6 -0.9 -2.4 -2.2 -3.2 -2.4 -3.2 -3.1 Primary balance (% GDP) 2.0 1.4 -0.3 -0.3 -1.2 -0.5 -1.4 -1.4 Gross public domestic debt (PHPbn) 4,063.5 4,130.0 4,167.5 4,638.8 4,974.4 5,610.8 6,031.8 6,470.6 Gross public domestic debt (% GDP) 32.2 31.0 28.8 29.3 28.5 30.0 29.5 29.0 Gross public external debt (USDbn) 35.2 34.2 33.5 33.8 35.9 37.6 40.2 40.2 Gross public external debt (% GDP) 12.4 11.7 11.0 10.8 10.9 10.6 10.7 9.9 Gross public sector debt (% GDP) 49.8 48.8 45.6 45.1 44.7 47.2 46.2 45.2 Macro-prudential measures Capital adequacy ratio 16.2 15.8 15.1 15.0 15.3 n/a n/a n/a Non-performing loan ratio 1.8 1.6 1.4 1.2 1.3 n/a n/a n/a Household debt/GDP (%) 7.0 8.0 8.8 9.4 9.5 n/a n/a n/a Total credit/GDP (%) 39.3 41.8 44.8 47.8 49.9 52.0 53.3 54.6 Loan/deposit ratio 59.5 61.2 63.0 66.0 70.2 73.5 75.6 77.6 Stock market capitalisation/GDP (%) 112.8 101.1 99.7 111.2 92.7 n/a n/a n/a

*September 2005: The ILO definition of unemployment has been adopted by official sources **Refers to minimum wage index Note: 2021 FX numbers are assumptions, not forecasts Source: CEIC, ADB, IMF, HSBC forecasts


80

Singapore

Recession risks

Singapore has slid into a significant economic downturn in 2019. Growth in 2Q decelerated

sharply to the slowest pace seen in a decade (0.1% y-o-y), and somewhat more alarmingly, the

deceleration was broad-based across sectors. While we do not expect a technical recession in

2019, external data is likely to remain weak as a result of subdued global capex and ongoing

trade tensions. In light of these growing external risks, we recently revised down our growth

forecast to 0.4% in 2019 and 0.9% in 2020.

External weakness has taken a heavy toll on Singapore’s manufacturing sector, which has seen

sequential output contractions over three consecutive quarters. Evident in high frequency IP

and NODX data, electronics output has led the manufacturing downturn. Somewhat

constructively, there are signs that manufacturing output is stabilising in 3Q; however, this is

likely to be short-lived. With continuing US-China tariff escalation, we see growing downside

risks to global semiconductor production. We expect global manufacturing weakness to once

again impact Singapore’s manufacturing sector, which is likely to contract again in 4Q19 and

1Q20. This may well tip the Singapore economy into a technical recession at the start of 2020.

External headwinds were largely expected this year. The key question is how Singapore’s

domestic-facing sectors hold up. While services contracted sequentially in 2Q, the latest

indicators suggest the sector should hold up relatively well. For the time being, the labour

market has been resilient, with generally stable resident unemployment rates. However, wage

growth has weakened, which is likely to weigh on private consumption in the quarters ahead.

Meanwhile, inflationary pressures have receded sharply in 2019, largely driven by subdued oil

prices and lower energy costs due to the dampening effect of the open electricity market

scheme (OEM). However, even without the impact of electricity market liberalisation, core

inflation is still running below the long-term average, and the trend is likely to remain on a

downward trajectory in 2020. We forecast core inflation to come in at 1.1% (1.2% previously) in

2019, before easing further to 0.7% in 2020. This means that the MAS is likely to revise down

its inflation forecast from the lower-end of 1-2% this year to 0.5-1.5% next year. With slow

growth and weak inflation outlook, we expect the MAS to ease its monetary policy by delivering

a 50bp reduction in SGDNEER in October this year and another 50bp reduction in 2020.

However, the lack of a resolution to the on-going trade dispute between China and the US could

result in a risk scenario of a 0% slope being adopted as soon as the October meeting.

Joseph Incalcaterra


[email protected]

+852 2822 4687

Yun Liu

Economist


[email protected]

+852 2822 4297

Sharp deceleration in growth since the start of 2019…

…with weak core inflation suggesting a need of monetary policy accommodation


-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19

Manufacturing Construction Services

Others q-o-q saar (RHS)

ppt, q-o-q saar (4qma) % q-o-q saar (4qma)

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

15 16 17 18 19Energy (fuel and uilities) Food (excl. food servicing)Domestic demand Core inflation (RHS)Core forecast (RHS) Long-term average (RHS)

% y-o-yContributions to core CPI, ppts

81


Policy issues

With mounting headwinds, we expect stimulus policies from both monetary and fiscal fronts to

support the economy. On the monetary front, we expect the MAS to deliver a 50bp SGDNEER policy

band slope reduction in the upcoming October meeting. While we forecast growth to pick up slightly

to 0.9% in 2020, this is mostly a result of some technical bounce-back, and it is important to establish

that growth will remain below potential. Coupled with a lacklustre core inflation of 0.7% next year, a

weak economic outlook will translate to the necessity of further monetary easing. Thus, we expect

the MAS to adopt a flat SGDNEER slope by the October-2020 meeting.

On the fiscal side, we expect the government to deliver a highly expansionary FY20 budget

early next year. Given that this is likely to be the government’s last budget, there is scope to use

a large share of the accumulated surplus of SGD15bn (c.3.2% of 2019 GDP) from earlier in the

term. We forecast the overall budget deficit to widen to 1.3% of GDP, implying a fiscal impulse

as large as 1.9% of GDP. This is likely to come in the form of consumer hand-outs and credits

to offset the impact of future Goods and Services Tax hike, and incentives for businesses to

prevent payroll reduction.

Risks

A further deterioration in the global trade environment remains the biggest risk to Singapore’s

trade-dependent economy over the near term. This is particularly the case if increasing tariffs on

US imports of Chinese consumer electronics were to be implemented as scheduled in

December. That said, even if a trade deal were to be reached before December, prolonged

policy uncertainty is nonetheless weighing on firms’ capex intentions, posing further downside

risks to Singapore’s weak manufacturing sector. Meanwhile, if external weakness transmits to

the domestic sector, this would increase recession risks.

A weak labour market poses downside risks to our inflation forecast. Another key factor is the

international oil price. If prices drop further coupled with a deteriorating labour market outlook,

we see downside risks to both core and headline inflation, which would increase the likelihood

of a larger monetary policy response from the MAS this year.

Key forecasts


GDP (% y-o-y) 0.1 0.2 0.3 -0.4 1.0 1.3 1.9 2.0 1.7 1.5 1.4 GDP sa (% q-o-q) -0.8 0.3 -0.1 0.2 0.6 0.5 0.5 0.3 0.3 0.3 0.4 Industrial production (% y-o-y) -3.1 -3.6 -4.7 -3.6 -1.8 -1.1 1.3 1.3 0.6 0.4 0.3 CPI, (% q-o-q saar) 1.4 0.1 0.8 0.8 1.0 0.0 0.6 0.9 1.0 0.2 1.7 CPI, average (% y-o-y) 0.7 0.5 0.7 0.8 0.6 0.6 0.6 0.6 0.6 0.7 0.9 PPI, average (% y-o-y) -5.7 -1.3 -1.6 -2.3 -1.4 -1.4 -1.4 -1.1 -1.0 -0.9 -0.8 Exports, value (% y-o-y) -2.5 -1.5 -3.0 -3.8 -0.4 -1.4 1.0 0.1 -0.6 -0.7 -0.6 Imports, value (% y-o-y) -1.9 -3.0 -4.2 -5.6 0.6 -1.3 1.2 -0.1 -0.9 -1.0 -1.1 Trade balance (% GDP) 27.0 28.8 25.4 25.9 26.5 28.3 25.1 25.5 26.0 27.8 24.8 Current account (% GDP) 17.5 19.5 15.4 15.7 16.8 19.1 14.9 15.4 15.8 18.5 14.2 International reserves (USDbn) 273.9 273.1 269.5 266.8 264.5 263.9 259.8 253.9 251.2 250.8 246.7 3M interbank rate, end-quarter (%) 1.82 1.72 1.70 1.60 1.60 1.60 n/a n/a n/a n/a n/a 5yr yield, end-quarter (%) 1.77 1.70 1.60 1.50 1.50 1.50 n/a n/a n/a n/a n/a SGD/USD, end-quarter 1.35 1.37 1.38 1.38 1.38 1.38 1.38 1.38 1.38 1.38 1.38 SGD/EUR, end-quarter 1.54 1.51 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52 1.52



82

Manufacturing output fell sharply in 2019… …amidst trade tensions and subdued global growth

IP has been on a downward trajectory over the past two years

since the surge in the semiconductor cycle in 2017, but the deceleration into negative territory has occurred largely over the past two quarters.

Semiconductor production volume growth turned negative as a result of both the semiconductor cycle slowdown and a broader global capex deterioration.

But it’s not just electronics. The rest of the main sub-sectors (except volatile pharmaceuticals) have also seen similar downturns in recent months. External deterioration has taken a heavy toll on Singapore’s trade-related sectors.

Source: CEIC, HSBC

Fortunately, the labour market has largely held up… …for the time being

Although resident and citizen unemployment rates rose

slightly to 3.1% and 3.3%, respectively in 2Q19, the deterioration was moderate.

Retrenchments in 2Q19 even slowed with broad-based declines across all sectors. This means that while employers may be cautious in hiring new workers, they are not increasing retrenchments of existing ones.

However, with prolonged weakness in external sectors, we think sentiment in domestic industries will remain subdued and should result in a gradual ongoing deterioration in the labour market, which will put increasing downward pressure on already weak core inflation.

Source: CEIC, HSBC

We expect the MAS to deliver a 50bp reduction in SGDNEER slope this October…

…and another one by 2020

We think the fact that external headwinds have not transmitted to

a sharp deterioration in the domestic sector has likely placated policymakers’ concerns about how urgently monetary policy support is needed. The MAS Chief Economist ruled out an off-cycle monetary policy review in August.

Our base case is that the MAS is likely to ease its monetary

policy by delivering a 50bp reduction in SGDNEER slope this October and adopt a flat slope by the October 2020 meeting.

However, with the latest deterioration in global trade sentiment

and the weak oil price outlook, there is a growing risk that the MAS may opt to move to a 0% slope as soon as October 2019.

Source: CEIC, HSBC

-40

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-20

-10

0

10

20

30

40

50

-40

-30

-20

-10

0

10

20

30

40

50

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

Electronics PharmaceuticalMarine/offshore Precision engineeringChemicals Headline IP

% y-o-y 3mma % y-o-y 3mma

1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 1Q18 4Q18

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

-20

0

20

40

60

Services ConstructionManufacturing Resident unemployment (RHS)

Change in employment, thousands %

100

105

110

115

120

125

130

100

105

110

115

120

125

130

08 09 10 11 12 13 14 15 16 17 18 19HSBC S$NEER Policy Band

Index 1999=100 Index 1999=100

April 2016: MAS adopts a flat slope

Default policy settings: "modest and gradual" appreciation

April 2018:MAS restored 0.5% positive slope

October 2018:MAS restored 1.0% positive slope

83


Singapore: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 3.9 2.9 3.0 3.7 3.1 0.4 0.9 1.6 Nominal GDP (USDbn) 312.7 304.5 318.8 342.0 363.3 364.4 366.3 374.9 GDP per capita (USD) 57,163 55,016 56,861 60,930 64,427 63,501 62,691 63,032 Private consumption (% y-o-y) 3.6 5.1 2.7 3.4 2.7 3.2 2.2 3.5 Government consumption (% y-o-y) 1.4 8.6 3.7 4.6 4.1 3.1 3.9 4.0 Investment (% y-o-y) 4.2 2.0 1.1 6.4 -4.0 1.2 2.0 2.4 Net exports (contribution to GDP growth, ppt) 2.1 3.6 0.0 -1.1 2.0 -1.3 -2.3 -0.3 Industrial production (% y-o-y) 2.7 -5.1 3.7 10.4 7.1 -2.9 -1.3 0.6 Gross domestic saving (% GDP) 52.9 52.7 53.4 53.2 53.2 55.1 57.2 58.9 Unemployment rate year-end (%) 1.6 1.6 2.2 2.1 2.2 2.3 2.3 2.3 Prices & wages CPI, average (% y-o-y) 1.0 -0.5 -0.5 0.6 0.4 0.6 0.7 0.7 CPI, year-end (% y-o-y) -0.1 -0.6 0.2 0.4 0.5 0.9 0.4 1.2 Core CPI, average (% y-o-y) 1.9 0.5 0.9 1.5 1.7 1.1 0.7 0.9 Core CPI, year-end (% y-o-y) 1.5 0.3 1.2 1.3 1.9 0.6 0.8 0.9 PPI, average (% y-o-y) -7.5 -8.2 0.9 0.9 3.8 -1.4 -1.4 -0.9 PPI, year-end (% y-o-y) -9.7 -7.7 5.6 -0.6 -0.3 -1.6 -1.4 -0.8 Manufacturing wages, nominal (% y-o-y) 2.3 3.5 3.7 3.1 3.5 2.6 2.4 2.4 Money, FX & interest rates Central bank money M0, average (% y-o-y) 8.8 8.4 8.4 12.8 9.2 9.3 9.1 9.3 Broad money supply M3, average (% y-o-y) 5.2 7.2 4.2 7.3 5.0 5.6 5.4 5.4 Real private sector credit growth (% y-o-y) 8.1 2.1 3.0 5.3 4.7 6.8 2.7 4.7 3M interbank rate, year-end (%) 0.74 1.70 1.01 1.11 1.91 1.70 n/a n/a 5yr yield, year-end (%) 1.60 1.90 1.85 1.68 1.90 1.60 n/a n/a SGD/USD, year-end 1.32 1.41 1.45 1.34 1.36 1.38 1.38 1.38 SGD/USD, average 1.27 1.37 1.38 1.38 1.35 1.36 1.38 1.38 SGD/EUR, year-end 1.60 1.54 1.52 1.60 1.57 1.52 1.52 1.52 SGD/EUR, average 1.68 1.53 1.53 1.56 1.60 1.53 1.52 1.52 External sector Merchandise exports (USDbn) 450.8 396.4 371.7 409.1 459.6 448.1 443.3 441.3 Merchandise imports (USDbn) 364.1 303.8 284.3 316.5 361.2 350.6 346.4 343.8 Trade balance (USDbn) 86.7 92.6 87.3 92.6 98.4 97.2 96.8 97.5 Current account balance (USDbn) 56.5 53.0 55.9 55.4 65.1 63.9 60.8 59.8 Current account balance (% GDP) 18.0 17.2 17.5 16.4 17.9 17.5 16.6 16.0 Net FDI (USDbn) -16.1 -24.5 -34.0 -51.1 -45.6 -68.8 -81.2 -88.0 Net FDI (% GDP) -5.2 -8.0 -10.6 -15.1 -12.6 -18.9 -22.2 -23.5 Current account balance plus FDI (% GDP) 12.8 9.2 6.9 1.3 5.3 -1.4 -5.6 -7.5 Exports, value (% y-o-y) -1.6 -12.1 -6.3 10.1 12.4 -2.5 -1.1 -0.5 Imports, value (% y-o-y) -4.0 -16.6 -6.4 11.3 14.1 -2.9 -1.2 -0.8 International FX reserves (USDbn) 256.9 247.7 246.6 279.9 287.7 269.5 259.8 246.7 Import cover (months) 8.5 9.8 10.4 10.6 9.6 9.2 9.0 8.6 Public and external solvency indicators Budget balance (% GDP) 1.1 -0.6 -0.4 0.6 -1.1 -1.1 -3.0 -2.7 Gross external debt (USDbn) 1,346.8 1,285.2 1,317.8 1,469.5 1,499.1 1,555.1 1,630.4 1,711.3 Gross external debt (% of GDP) 446.1 429.1 433.7 420.3 416.6 431.4 445.1 456.5 Public sector debt (% of GDP) 97.1 99.5 105.4 107.4 111.3 119.4 127.8 135.7 Macro prudential indicators Capital adequacy ratio (system wide) 15.9 15.9 16.5 17.1 16.8 n/a n/a n/a - tier 1 13.6 13.7 14.3 15.4 14.9 n/a n/a n/a Non-performing loan ratio 0.8 0.9 1.2 1.4 1.3 n/a n/a n/a Household debt/GDP (%) 73.8 71.2 70.4 69.3 66.8 n/a n/a n/a Residential house prices (% y-o-y) -4.0 -3.7 -3.1 1.1 7.9 n/a n/a n/a Loan/deposit ratio 110.3 107.1 103.5 107.5 107.0 n/a n/a n/a Stock market capitalisation/GDP (%) 247.3 211.4 208.6 222.4 190.7 n/a n/a n/a

*Refers to primary balance, which excludes contributions from sovereign wealth funds Note: 2021 FX numbers are assumptions, not forecasts Source: CEIC, IMF, ADB, HSBC forecasts


84

Sri Lanka

Growth moderation to continue in 2019

Growth in 2Q19 plummeted to 1.6% as a consequence of the April attacks. Activity in the services

sector fell, pulling overall growth to a five year low. Tourism and allied sectors contracted, but IT

programming consultancy and related sectors continued to grow, offsetting part of the weakness.

2019 will be marked by growth meandering through the after effects of April blasts. Business

sentiment is at an all-time low and the IIP remains weak. The PMI surveys have improved, only to be

back at their trend levels. It’s not just the private credit, but even growth in outstanding balance of

credit cards remains subdued, signalling weak private consumption demand. Tourism is gradually

picking up, but to put things into perspective, the tourist arrivals are currently at August 2014 levels.

The presidential elections are scheduled for 16 November 2019. Depending on the outcome, there is

a possibility of an early general election (by February 2020). Putting the election timelines together,

by 1H20 we expect political and policy uncertainty to wane. By then, the transmission of a 100bp rate

cut would also be complete.

2020, in our view, will mark a gradual recovery. Armed with improved business sentiment, lower cost

of funding, and a host of structural reforms, we expect a genuine pick-up in economic activity.

We expect first signs of recovery in consumption, which has been lacklustre for two years now.

Tourism sector, too, is likely to recover by 2020 as experience in other countries (e.g. Thailand)

shows the impact of a severe security incident tends to fade overtime, possibly in one year.

Investment recovery will be led by a revival in construction activity. We expect growth to accelerate

from 2.7% in 2019 to 3.3% in 2020.

Aayushi Chaudhary

Economist HSBC Securities and Capital Markets (India) Private Limited

[email protected]

+91 22 2268 5543

Growth will moderate below 3% in 2019, but will pick up more sustainably in 2H20

Inflation is likely to remain in the lower bound of CBSL’s target of mid-single digit

Source: CEIC, HSBC estimates Source: CEIC, HSBC estimates

5.0% 5.0%4.5%

3.4% 3.2%2.7%

3.3%

0%

1%

2%

3%

4%

5%

6%

0%

1%

2%

3%

4%

5%

6%

2014 2015 2016 2017 2018 2019f 2020f

% y-o-y% y-o-y Growth trends

-3

-1

1

3

5

7

9

Aug 18 Dec 18 Apr 19 Aug 19 Dec 19 Apr 20 Aug 20

% y-o-y Sri Lanka (Colombo CPI)

Headline CPI Non-food inflation

Food inflation

Forecast

85


Policy issues

The central bank has undertaken a series of steps in order to support growth. The policy

corridor has been lowered by 100bp to 7-8% (by rate cuts of 50bp each in May and August).

In order to quicken the pass-through of policy rate changes and to reduce the cost of funding,

the central bank linked the deposit rates with the market interest rates.

The Statutory Reserve Ratio (SRR) is still 2.50 percentage points below November levels, when

they were cut (1.50ppt in November 2018 and 1ppt in February 2019), in order to address the

liquidity deficit in the economy.

However, the transmission into lower lending rates was not satisfactory. The central bank

recently asked the licensed banks to reduce interest rates on all LKR-denominated loans and

advances by at least 200bp by 15 October 2019.

The CBSL views high nominal and real interest rates as a key reason for slowing credit

expansion and rising non-performing assets. A reduction in lending rates will certainly help fix

the cost issue slowing the credit offtake. However, a pick-up in credit demand is likely to happen

in early 2020, which is just about the time when election-related uncertainties will fade.

Globally, the demand outlook remains subdued with many central banks cutting policy rates.

Domestically, we expect inflation to remain in the lower bounds of the central bank’s target of

mid-single digits, credit growth in single digits and growth much below its potential. Once

elections are over, we expect the CBSL to cut rates once more by 50bp in 1H20 in a bid to

further support growth recovery.

Having said that, it is important for the central bank to be mindful of the risks on the horizon. It

has to tread carefully in managing the risks around debt repayment, currency volatility, quality of

credit growth, and the slower pace of fiscal consolidation.

Risks

Sri Lanka has an upcoming debt repayment of c.USD3.1bn over the next year. Not just that, it

runs a twin deficit of c.8% of GDP (current account and fiscal deficit combined). It’s extremely

important for Sri Lanka to continue undertaking structural reforms under the IMF umbrella as

these reviews underscore market confidence in the country’s commitment towards reforms.

Key forecasts


GDP (% y-o-y) 1.6 2.1 3.3 3.2 3.6 3.5 3.0 3.6 3.7 3.7 3.7 GDP sa (% q-o-q) -0.7 0.8 1.4 1.7 -0.3 0.7 0.9 0.6 1.5 0.7 0.8 Industrial production (% y-o-y) 0.6 1.9 4.2 2.9 3.7 3.0 2.5 2.7 2.8 2.9 3.0 CPI, (% q-o-q saar) 4.9 3.9 4.1 4.4 3.3 3.7 4.6 3.9 4.1 3.7 4.4 CPI, average (% y-o-y) 4.4 3.6 4.3 4.3 3.9 3.9 4.0 3.9 4.1 4.1 4.0 NCPI, average (% y-o-y) 3.1 3.3 4.6 4.7 4.8 4.4 4.0 4.1 3.9 3.9 3.9 Exports, value (% y-o-y) 3.6 -1.3 1.1 1.5 6.6 5.3 4.1 4.0 5.4 6.8 8.3 Imports, value (% y-o-y) -12.6 -2.8 12.9 20.7 8.1 -1.8 -10.7 -12.7 -1.4 11.6 26.2 Trade balance (% GDP) -9.4 -10.1 -14.5 -12.7 -10.8 -8.8 -10.5 -8.0 -8.9 -9.8 -14.7 International reserves (USDbn) 8.9 8.5 8.2 8.0 8.1 8.2 8.3 8.1 8.3 8.4 8.5 Policy rate, end-quarter (%) 7.50 7.00 7.00 7.00 6.50 6.50 6.50 6.50 6.50 6.50 6.50 LKR/USD, quarter-end 176.5 184.0 189.0 193.0 196.0 196.0 196.0 196.0 196.0 196.0 196.0 LKR/EUR, quarter-end 201.2 202.4 207.9 212.3 215.6 215.6 215.6 215.6 215.6 215.6 215.6

Note: 3Q20 onwards FX numbers are assumptions, not forecasts Source: CEIC, HSBC forecasts


86

Private sector credit growth is weak… …and is currently growing in single digits

In four out of the last seven months there was a reduction in

outstanding credit to the private sector.

While private credit off-take was weak, government and public corporation loans have been growing in late teens.

The central bank’s response in terms of policy action has been timely and is likely to help alleviate the growth slowdown. However, a weak growth outlook, subdued private participation in investment activity, and election-related uncertainties, in our view, will be a drag on growth recovery in 2019.

Once elections are over, a lower cost of credit along with improved business sentiment will lead to a sustainable rise in private credit growth in 2020.

Source: CEIC, HSBC

Lending and deposit rates are down c.25bp… ...despite policy rates being cut by 100bp

So far in 2019, the policy rates were cut by 100bp, deposit

rates were linked with market interest rates and statutory reserve ratio was kept low to ensure adequate liquidity in the banking system.

Yet, the transmission of lower cost of funding into lower lending rates has not been satisfactory. The CBSL has now asked the licensed banks to reduce lending rates by at least 200bp by October.

We believe that full transmission of policy rate cuts into lower lending rates will be complete by early 2020.

Once elections are over, we expect the CBSL to cut rates once more by 50bp in 1H20 in a bid to further support the growth recovery.

Source: Central Bank of Sri Lanka, HSBC

Fiscal consolidation may pause… …due to higher spending and lower revenues

In 1H19, the government’s expenditure reported a rise due

to the implementation of relief packages, strengthening of security measures, and re-construction of the affected public infrastructure.

Revenue collection, however, was low due to weak activity in affected sectors like finance, tourism, trade, and construction.

According to a fiscal report published by the Ministry of Finance, an initial estimate of the fall in the government’s revenue in the short term due to the Easter Sunday attacks is LKR50bn (0.5% of GDP) approximately.

Meeting fiscal consolidation target of 90bp in 2019 under such condition (along with upcoming elections) seems highly unlikely. We expect 2019 fiscal deficit unchanged at 5.3%.

Source: Parliament.lk, CEIC, HSBC

5

8

11

14

17

20

23

26

29

Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

% y-o-y Private sector credit growth

2018 avg: 15%

2016 avg: 26%

2017 avg: 18%

2019 avg YTD: 11%

8.0

8.5

9.0

9.5

12.5

13.0

13.5

14.0

14.5

15.0

Dec-16 Aug-17 Apr-18 Dec-18 Aug-19

Lending and deposit rate

Weighted Average Lending Rate (AWLR)

Weighted Average Deposit Rate (AWDR), RHS

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Fiscal deficit (% GDP)

Long-term average

87


Sri Lanka: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 5.0 5.0 4.5 3.4 3.2 2.7 3.3 3.7 Nominal GDP (USDbn) 79.4 80.6 82.3 88.0 89.1 83.5 83.6 89.7 GDP per capita (USD) 3,820 3,844 3,882 4,105 4,110 3,814 3,779 4,012 Private consumption (% y-o-y) 3.7 7.5 7.4 2.5 2.3 2.5 3.0 3.5 Government consumption (% y-o-y) 6.0 10.2 2.3 -5.4 -5.5 2.5 2.8 3.0 Investment (% y-o-y) -1.7 0.1 9.1 4.8 -0.5 3.0 4.6 4.8 Net exports (contribution to GDP growth, ppt) -1.4 -1.7 -1.9 -0.6 -0.3 -0.2 -0.3 -0.4 Industrial production (% y-o-y) 6.0 3.5 3.3 2.5 2.4 2.2 3.0 3.0 Gross domestic saving (% GDP) 29.8 28.8 25.7 26.2 25.4 23.1 22.2 24.2 Unemployment rate, average (%) 4.3 4.7 4.4 4.2 4.4 4.1 4.1 4.1 Prices & wages CPI, average (% y-o-y) 2.3 2.2 4.0 6.6 4.3 4.1 4.0 4.0 CPI, year-end (% y-o-y) 0.9 4.6 4.5 7.1 2.8 4.4 4.0 4.0 Core CPI, average (% y-o-y) 2.5 4.9 4.4 5.9 3.5 5.6 4.2 4.1 Core CPI, year-end (% y-o-y) 2.0 6.7 5.8 4.3 3.1 5.8 4.4 4.1 NCPI, average (% y-o-y) 0.0 3.8 4.0 7.7 2.1 3.3 4.4 3.9 NCPI, year-end (% y-o-y) 0.0 4.2 4.2 7.3 0.4 5.1 4.4 3.9 Minimum wages, nominal (% y-o-y) 3.7 2.9 0.0 0.0 0.6 0.3 0.3 0.3 Money, FX & interest rates Central bank money M1, end (% y-o-y) 26.3 16.8 8.6 2.1 4.7 3.0 4.5 6.0 Broad money supply M2, end (% y-o-y) 13.1 17.2 18.9 17.5 13.5 11.0 12.5 12.5 Real private sector credit growth (% y-o-y) 6.5 22.8 17.9 7.6 11.6 5.9 8.0 9.0 Policy rate, year-end (% y-o-y) 6.50 6.00 7.00 7.25 8.00 7.00 6.50 6.50 LKR/USD, year-end 131.9 144.1 149.8 153.2 182.7 189.0 195.3 196.0 LKR/USD, average 130.8 138.0 146.9 152.9 153.8 181.4 195.3 196.0 LKR/EUR, year-end 160.5 157.3 157.2 183.9 210.1 207.9 214.8 215.6 LKR/EUR, average 170.8 152.5 163.0 172.6 182.0 203.4 214.8 215.6 External sector Merchandise exports (USDbn) 11.1 10.5 10.3 11.4 11.9 12.1 12.7 13.4 Merchandise imports (USDbn) 19.4 18.9 19.2 21.0 22.2 20.9 21.6 22.8 Trade balance (USDbn) -8.3 -8.4 -8.9 -9.6 -10.3 -8.8 -8.9 -9.3 Current account balance (USDbn) -2.0 -1.9 -1.7 -2.3 -2.8 -2.5 -2.5 -2.7 Current account balance (% GDP) -2.5 -2.3 -2.1 -2.6 -3.2 -3.0 -3.0 -3.0 Net FDI (USDbn) 0.8 0.6 0.7 1.3 1.5 -1.4 -1.4 -1.4 Net FDI (% GDP) 1.0 0.8 0.8 1.5 1.7 -1.7 -1.7 -1.6 Current account balance plus FDI (% GDP) -1.5 -1.6 -1.3 -1.1 -1.4 -4.7 -4.7 -4.6 Exports (% y-o-y) 7.1 -5.2 -2.2 10.2 4.7 2.2 4.3 6.1 Imports (% y-o-y) 7.9 -2.5 1.3 9.4 6.0 -5.9 3.1 5.6 International FX reserves (USDbn) 8.2 7.3 6.0 5.1 7.0 8.2 8.3 8.1 Import cover (months) 5.1 4.6 3.8 2.9 3.8 4.7 4.6 4.3 Public and external solvency indicators Gross external debt (USDbn) 42.9 44.8 46.4 51.6 52.3 58.3 60.2 62.7 Gross external debt (% GDP) 54.1 55.6 56.4 58.6 58.7 69.8 72.0 69.9 Short term external debt (% of int’l reserves) 88.5 104.8 122.0 153.1 114.9 100.0 100.0 103.7 Budget balance (% GDP) -5.7 -7.6 -5.3 -5.5 -5.3 -5.3 -5.1 -4.9 Gross public domestic debt (USDbn) 32.8 36.5 36.7 36.7 37.0 41.3 45.5 49.9 Gross public domestic debt (% GDP) 41.3 45.3 44.5 41.7 41.6 49.4 54.5 55.7 Gross public external debt (USDbn) 23.8 26.1 27.8 31.0 36.7 34.7 33.5 33.5 Gross public external debt (% GDP) 30.0 32.4 33.7 35.2 41.2 41.5 40.0 37.3 Gross public sector debt (% GDP) 71.3 77.6 78.3 76.9 82.8 91.0 94.5 93.0 Macro prudential indicators Capital adequacy ratio (system wide) 16.6 15.4 15.6 16.4 15.1 n/a n/a n/a - tier 1 14.1 13.0 12.6 13.4 12.0 n/a n/a n/a Non-performing loan ratio 4.2 3.2 2.6 2.5 3.4 n/a n/a n/a Household debt/GDP (%) 23.6 22.5 20.9 21.5 22.1 n/a n/a n/a Loan/deposit ratio 88.3 95.9 99.6 97.6 102.8 n/a n/a n/a Stock market capitalisation/GDP (%) 30.0 26.8 22.9 21.6 19.7 n/a n/a n/a Total credit/GDP (%) 44.8 52.3 55.6 55.9 61.1 n/a n/a n/a

Note: 2020 and 2021 FX numbers are assumptions, not forecasts Source: CEIC, ADB, IMF, HSBC forecasts


88

Taiwan

Not all doom and gloom

After a slow 1Q, economic activity picked up in 2Q as export growth stabilised and domestic

demand picked up. Headline GDP came in better than expected at 2.4% y-o-y. Net exports

contributed 0.73ppt to the reading, mostly as overseas demand picked up ahead of the

scheduled launch of new products and the rolling out of 5G technology in mainland China. After a

sharp fall in 2H18, export growth stabilised in May and expanded modestly through August.

Exports of information and communication devices have been growing at a double digit pace

since the end of 1Q.

Meanwhile, supply chain re-organisation is quickening. Even while overall exports were still

contracting, exports to the US were rising at double digit rates. Exports to the US are benefiting

broadly from substitution, as trade between mainland China and the US contracted sharply. More

importantly, companies continue to increase investment in Taiwan as trade tensions intensify. The

government's “Action Plan for Welcoming Overseas Taiwanese Businesses to Return to Invest in

Taiwan”, launched in January with a goal to attract TWD250bn (approximately USD8bn) investment

in 2019, is gaining traction. On 9 May, the goal was doubled to TWD500bn (approximately

USD16bn). The MoEA estimates that it could raise more than TWD600bn by September (source:

Focus Taiwan, 31 August 2019). This is equivalent to roughly 3.3% of Taiwan’s estimated 2019

GDP. Imports of machinery and transport equipment have similarly picked up to double digit growth,

suggesting that the pace of business investment is indeed picking up.

The relatively fast pace of trade war-related adjustment in Taiwan stands out in the region. That

being said, risks to growth remain to the downside for now. Most of this remains external. The

final tranche of US tariffs on mainland China, which we estimate to be around USD156bn, covers

approximately USD100bn of consumer electronics, a large part of which are produced by Taiwan

companies based in mainland China. This remains a significant downside risk to growth over the

near term, even as supply chains continue to adjust.

As of now, given mixed rather than continuously deteriorating data, the Central Bank of China

(Taiwan) (CBC) may not be in as big a rush as its peers in the region to cut rates. That said, there is

some room for both monetary and fiscal policy to offer some moderate help in 2020, if needed.

Julia Wang


[email protected]

+852 3604 3663

Madhurima Nag

Associate

Bangalore

Supply chain shift continues apace But further tariff a risk in the near term


2015 2016 2017 2018 2019

-4

-2

0

2

4

6

-4

-2

0

2

4

6% y-o-yppt. Contributions to GDP growth

Consumption Investment Government

Net Exports GDP (RHS)

Jan 18 Apr 18 Jul 18 Oct 18 Jan 19 Apr 19 Jul 19

-20

0

20

40

60

80

100

-20

0

20

40

60

80

100% share% y-o-y IC and Audio Video Pdt exports

US mainland ChinaRest of the World mainland China (LHS)US (LHS)

89


Policy issues

The Central Bank of China (Taiwan) (CBC) remained on hold at its latest monetary policy meeting on

19 September. This was widely expected. As has been the case for some time, the overall tone

remains cautious. Despite further escalation of the tariff war over the past few months, economic

activity continues to be mixed. On one hand, the external sector is clearly still under pressure from

the global manufacturing sector slowdown and trade policy uncertainty. On the other hand, domestic

demand has held up relatively better, due to a pickup in investment growth as part of the supply

chain shift. Other indicators, from the labour market to inflation and consumption growth also remain

fairly stable. In light of this, the central bank has been able to remain patient. But further escalation of

the trade war could still tip the balance and compel the central bank to deliver more easing.

Apart from monetary policy, Taiwan also has some fiscal policy room, within the constraint of the

debt ceiling. If economic activity slows, we could have a bigger push from a moderate expansionary

fiscal policy, particularly as Taiwan heads to the polls in January 2020.

Risks

As has been the case for some time, the key risk to the near-term growth outlook is still the

external sector and what happens next in the trade war. If tensions continue to escalate, more

products are tariffed and the trade war spills over in a disorderly manner, growth could slow

further than we currently forecast. Conversely, domestic investment is picking up at a fairly

robust pace. If more infrastructure investment and policy support is committed, this could lend a

bigger boost to the economy.

Key forecasts


GDP (% y-o-y) 2.4 2.1 2.0 2.0 1.9 1.8 1.9 1.9 2.0 2.0 2.1 GDP sa (% q-o-q) 0.7 0.4 0.4 0.5 0.5 0.4 0.4 0.5 0.5 0.5 0.5 Industrial production (% y-o-y) -0.6 3.7 4.1 4.8 2.6 1.6 2.2 4.7 1.6 1.2 1.5 CPI, average (% y-o-y) 0.8 0.5 0.4 0.7 0.6 0.7 0.7 0.9 0.8 0.9 0.7 WPI, average (% y-o-y) -0.6 0.6 1.1 1.0 1.0 0.7 0.9 0.9 0.7 0.8 0.9 Exports, value (% y-o-y) -7.4 -0.6 2.9 2.8 2.8 3.5 3.9 3.6 4.0 3.9 4.5 Imports, value (% y-o-y) -5.9 -4.6 -0.1 -2.7 -2.0 2.6 3.3 2.6 2.8 2.7 3.3 Trade balance (% GDP) 9.4 11.7 13.0 11.4 12.3 12.7 13.7 12.1 13.2 13.5 14.8 Current account (% GDP) 12.4 10.4 14.0 12.1 11.1 10.9 13.4 12.5 11.6 9.6 13.4 International reserves (USDbn) 467.0 470.2 473.3 476.3 479.1 481.9 484.7 487.6 490.5 493.4 496.3 Policy rate, end-quarter (%) 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 1.375 5yr yield, end-quarter (%) 0.59 0.63 0.60 0.60 0.60 0.60 n/a n/a n/a n/a n/a TWD/USD, end-quarter 31.07 31.00 31.60 31.60 31.60 31.60 31.60 31.60 31.60 31.60 31.60 TWD/EUR, end-quarter 35.42 34.10 34.76 34.76 34.76 34.76 34.76 34.76 34.76 34.76 34.76



90

Investment emerged as the backbone for economic growth in 2Q19… …as repatriation of investment accelerated through the year

Economic growth in 2Q19 was backed by robust growth in

investment that added 1.5ppt to the headline GDP growth. Investment (GFCF) grew 9.5% y-o-y in 1H19, the fastest pace since 2011, where private investment (the lion’s share) added 7.7ppt to it.

The government’s “Action Plan for Welcoming Overseas Taiwanese Businesses to Return to Invest in Taiwan” also had some success in repatriating investment back to Taiwan. The government estimates that total repatriation will reach TWD600bn by the end of September.

We expect investment to continue to pick up and support economic growth in 2019 and 2020. Our estimation suggests that GFCF can add about 1.3-1.4ppt to the headline growth in 2019 and 2020, cushioning the economy from some risks of the trade war.

Source: CEIC, HSBC

Exports started to show some signs of stabilisation… …but trade risks remain on the horizon

The biggest highlight for the GDP breakdown in 2Q has been the

external sector. Its rebound added 0.7ppt to headline growth. More importantly, this rebound has been due to faster export growth rather than import contraction.

We also see some stabilisation in the high frequency indicators. Both merchandise exports and export orders growth appear to have troughed for now. Electrical machinery and information, communication and audio-video products were the key sectors behind the stabilisation.

That said, the trade war remains the biggest risks on the horizon. Precisely, near-term growth depends on whether the US decides to go ahead with tariffs on the final tranche of USD156bn goods. Given that most of these are consumer electronics, the hit to Taiwan companies should be much larger than the previous tranches of tariffs.

Source: CEIC, CPB, HSBC

Price pressures likely to remain modest for the rest of 2019… ...leaving room for the CBC to stay on hold

Inflationary pressures remained subdued for most of 2019 as the

impact of tobacco taxes faded and oil prices treaded lower than last year. Headline inflation rose only 0.5% y-o-y in Jan-Aug 2019, compared with1.6% y-o-y in the first eight months of 2018. Food prices have been slightly elevated due to damaged harvest from heavy rainfall over the past few months.

The recent pickup in global oil prices, due to supply shocks, may

have some short-term impact (oil share of the inflation basket is approximately 2.7%). But the overall impact should be manageable for now given muted inflation elsewhere.

From a monetary policy perspective, a mixed picture of

recovering growth, persisting external uncertainty, and easing inflation gives the CBC some room to stay on hold for now. However, if further downside risks materialise, we think the CBC has the flexibility to act swiftly.

Source: CEIC, HSBC

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30

08 09 10 11 12 13 14 15 16 17 18 19

% y-o-yppt. cont. to GFCF

GFCF: Govt. GFCF: Public Enterprises

GFCF: Pvt. Enterprises GFCF

-40

-20

0

20

40

60

-20

-10

0

10

20

30

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019


World trade volume (LHS) Export Orders

Actual Exports

Feb 17 Aug 17 Feb 18 Aug 18 Feb 19 Aug 19

-1

0

1

2

3

-1

0

1

2

3

Misc Education & EntertainmentMedicine TransportHousing ClothingFood CPI (RHS)

% y-o-yppt.

91


Taiwan: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 4.0 0.8 1.5 3.1 2.6 2.1 1.9 2.0 Nominal GDP (USDbn) 529.5 524.8 532.1 577.2 589.8 584.8 587.6 600.1 GDP per capita (USD) 22,668.0 22,400.0 22,592.0 24,408.0 25,026.0 24,920.5 25,015.3 25,507.8 Private consumption (% y-o-y) 3.4 2.6 2.4 2.5 2.0 1.3 1.1 1.2 Government consumption (% y-o-y) 3.7 -0.1 3.6 -0.6 3.7 -1.6 1.2 -0.9 Investment (% y-o-y) 2.1 1.6 2.4 -0.1 2.5 6.2 5.6 4.2 Net exports (contribution to GDP growth, ppt) 0.6 -1.0 -0.6 1.9 -0.5 0.7 0.3 0.5 Industrial production (% y-o-y) 6.4 -1.3 2.0 5.0 3.6 0.8 2.7 2.2 Gross domestic saving (% GDP) 32.2 33.8 33.1 33.0 31.8 32.1 32.1 32.4 Unemployment rate, ave (%) 4.0 3.8 3.9 3.8 3.7 3.7 3.8 3.8 Prices & wages CPI, average (% y-o-y) 1.2 -0.3 1.4 0.6 1.3 0.5 0.7 0.8 CPI, year-end (% y-o-y) 0.6 0.1 1.7 1.2 -0.1 0.4 0.7 0.7 Core CPI, average (% y-o-y) 1.3 0.8 0.8 1.0 1.2 0.4 0.5 0.7 Core CPI, year-end (% y-o-y) 1.4 0.8 0.8 1.6 0.5 0.5 0.5 0.7 WPI, average (% y-o-y) -0.6 -8.9 -3.0 0.9 3.6 0.4 0.9 0.8 WPI, year-end (% y-o-y) -4.8 -7.3 1.8 0.3 0.8 0.9 0.8 0.9 Manufacturing wages, nominal (% y-o-y) 3.2 3.4 1.0 3.0 4.6 3.0 2.8 3.3 Money, FX & interest rates Central bank money M0, average (% y-o-y) 5.9 4.9 4.8 5.8 5.1 6.1 3.7 5.0 Broad money supply M2, average (% y-o-y) 5.7 6.3 4.5 3.7 3.5 3.0 3.0 3.2 Real private sector credit growth (% y-o-y) 3.9 3.7 1.4 3.4 3.9 3.8 3.8 3.6 Policy rate, year-end (%) 1.875 1.625 1.375 1.375 1.375 1.375 1.375 1.375 5yr yield, year-end (%) 1.09 0.61 0.92 0.64 0.70 0.60 n/a n/a TWD/USD, year-end 31.72 33.07 32.28 29.85 30.73 31.60 31.60 31.60 TWD/USD, average 30.43 31.96 32.28 30.32 30.17 31.08 31.60 31.60 TWD/EUR, year-end 38.38 35.91 33.89 35.82 35.34 34.76 34.76 34.76 TWD/EUR, average 40.43 35.46 35.83 34.23 35.71 34.85 34.76 34.76 External sector Merchandise exports (USDbn) (BOP, goods) 379.0 336.9 310.0 349.8 352.2 340.3 347.8 358.7 Merchandise imports (USDbn) (BOP, goods) 318.8 263.8 239.3 269.0 284.8 275.2 274.2 281.7 Trade balance (USDbn) (BOP, goods) 60.2 73.1 70.6 80.9 67.4 65.1 73.6 77.0 Current account balance (USDbn) 60.5 73.1 71.6 83.5 72.0 71.1 69.6 70.6 Current account balance (% GDP) 11.4 13.9 13.5 14.5 12.2 12.2 11.9 11.8 Net FDI (USDbn) -9.9 -12.3 -8.7 -8.3 -11.1 -8.5 -8.5 -7.9 Net FDI (% GDP) -1.9 -2.3 -1.6 -1.4 -1.9 -1.4 -1.5 -1.3 Current account balance plus FDI (% GDP) 9.6 11.6 11.8 13.0 10.3 10.7 10.4 10.4 Exports, value (% y-o-y) (BOP, goods) -0.8 -11.1 -8.0 12.9 0.7 -3.4 2.2 3.1 Imports, value (% y-o-y) (BOP, goods) -2.7 -17.2 -9.3 12.4 5.9 -3.4 -0.4 2.7 International FX reserves (USDbn) 419.0 426.0 434.2 451.5 461.8 473.3 484.7 496.3 Import cover (months) 15.8 19.4 21.8 20.1 19.5 20.6 21.2 21.1 Public and external solvency indicators Financial institutions’ FX assets (USDbn) 886.9 950.0 1,011.7 1,117.4 1,203.2 1,276.5 1,356.4 1,453.5 Gross external debt (USDbn) 177.9 159.0 172.2 181.9 191.2 178.4 176.5 187.1 Gross external debt (% GDP) 33.6 30.3 32.4 31.5 32.4 30.5 30.0 31.2 Private sector external debt (USDbn) 176.1 157.8 171.1 181.6 191.0 177.5 175.8 186.4 Central government balance (% GDP) -0.8 -0.1 -0.3 0.0 0.6 0.7 0.7 0.5 Central government domestic debt (TWDbn) 5,275.6 5,296.4 5,343.6 5,357.5 5,380.1 5,394.7 5,471.9 5,523.0 Central Government domestic debt (% GDP) 32.7 31.6 31.1 30.6 30.2 29.7 29.5 29.1 Gross public external debt (USDbn) 1.9 1.1 1.1 0.3 0.2 0.9 0.7 0.6 Gross public external debt (% GDP) 0.4 0.2 0.2 0.1 0.0 0.2 0.1 0.1 Gross public sector debt (% GDP) 37.8 36.6 36.2 35.5 35.0 33.9 32.9 31.9 Macro prudential indicators CAR - Tier 1 9.6 10.3 11.0 11.8 11.9 n/a n/a n/a CAR - Total 12.4 12.9 13.3 14.2 14.0 n/a n/a n/a Non-performing loan ratio 0.2 0.2 0.3 0.3 0.2 n/a n/a n/a Household debt/GDP (%) 83.9 83.5 83.8 86.1 n/a n/a n/a n/a Total credit/GDP (%) 136.1 134.8 136.6 139.9 144.7 n/a n/a n/a Residential house price - Taipei city (%y-o-y) 2.0 -4.0 -5.5 -0.1 2.1 n/a n/a n/a Residential house price - Taiwan area (%y-o-y) 6.4 -2.4 -3.2 1.1 1.6 n/a n/a n/a Loan/deposit ratio 69.9 68.1 67.8 68.4 70.0 n/a n/a n/a Stock market capitalisation/GDP (%) 166.9 146.1 158.6 181.9 164.8 n/a n/a n/a

Note: Public debt refers to government debt only. 2021 FX numbers are assumptions, not forecasts Source: CEIC, ADB, IMF, HSBC forecasts


92

Thailand

Still on shaky ground

The Thai economy continues to show broad-based weakness. Economic growth in 2Q19

registered its slowest pace in nearly five years, and it was largely expected given recent high

frequency indicators. Exports and imports have continued to slide, industrial production and

factory capacity utilisation have softened, and agricultural production has dropped due to an

ongoing drought. These translated to weaker private consumption growth and sequential

contractions in both fixed investment (public and private) and government expenditure.

We expect continued headwinds to growth in the quarters ahead. Heightening trade tensions

continue to pose risks to an already weakening global economy. Structural weakness in the

global manufacturing sector, particularly for autos and semiconductors, also weigh on

Thailand’s growth outlook. Meanwhile, a delay in the FY20 budget from October to January (at

the earliest) implies that public investment in infrastructure is unlikely to provide a boost to

growth over the near term. All these are compounded by souring private consumption and

investment sentiment, which threaten to curtail domestic demand.

To their credit, the government and the Bank of Thailand (BoT) have both been timely in their

response to the economic slowdown. The BoT on 7 August surprised the market with a 25bp rate

cut, a month earlier than HSBC’s forecast. On 20 August, the Thai cabinet approved a THB316bn

(USD10.2bn) stimulus package to boost domestic demand just a day after the weak 2Q GDP print.

We believe these measures are necessary and helpful over the near term but are unlikely to be

sufficient to sustainably boost growth. We retain our growth forecasts of 3.1% for 2019 but lower

our 2020 forecast to 2.8% from 3.0%. We expect growth to pick up slightly to 2.9% in 2021 as the

government’s infrastructure program provides a marginal boost to the economy.

Meanwhile, inflation remains stubbornly low, averaging below the Bank of Thailand’s (BoT) 1-4%

target range year-to-date. There are substantial risks that this trend will persist in the quarters

ahead. External headwinds to growth may keep commodity prices subdued, which have been the

main drivers of inflation in Thailand. Meanwhile, domestic demand remains weak and could weaken

further as consumption and investment sentiment continues to decline. We now expect headline

inflation to average 0.9% in 2019 (from 1.1% previously) and 1.1% in 2020.

Noelan Arbis


[email protected]

+852 2822 4325

Thailand’s 2Q GDP growth shows broad-based weakness

Inflation remains stubbornly low and is likely to average below the BoT’s target


-6.0-4.0-2.00.02.04.06.08.010.0

-6.0-4.0-2.00.02.04.06.08.0

10.0

Jul-17 Apr-18 Jan-19Government consumptionGross Fixed Capital Formation (GFCF)Net ExportsPrivate consumptionChange in InventoriesResidualGross Domestic Product (RHS)

Contribution to growth, ppt % y-o-y

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Aug-18 Nov-18 Feb-19 May-19 Aug-19

Energy Fresh FoodCore CPI Headline CPI, % y-o-y

Headline mid-point target

Target lower-bound

Contribution, ppt % y-o-y

93


Policy issues

Stubbornly low inflation and slowing growth should prompt additional monetary loosening from the

BoT. We believe the BoT’s rate cut in August was necessary given slowing global and domestic

growth, stubbornly low inflation, a persistently strong THB, and monetary easing from other major

central banks. But these compounding factors also mean that one rate cut alone is likely to be

insufficient. Further downside risks to growth have manifested themselves in the form of heightening

trade tensions and a delay in the FY20 fiscal budget. We expect another 25bp policy rate cut by

year-end, bringing the benchmark rate back down to its historical low of 1.25%. We also pencil in an

additional 25bp cut in 1Q20 on the assumption that global growth will continue to deteriorate, posing

further external risks to Thailand’s growth.

The BoT’s concerns about financial stability risks are likely to remain throughout the current easing

cycle, which we believe will prevent that BoT from engaging in a super aggressive easing cycle,

unless we see an outright recession. Household debt remains a concern at nearly 80% of GDP. That

said, the BoT is likely to prioritise growth over the near term as financial stability risks could be further

amplified if growth slows further and threatens the country’s most financially vulnerable.

Meanwhile, we believe the government’s USD10.2bn stimulus program is enough to boost domestic

demand for 2H19, but its impact is likely to be short-lived (see: Thailand stimulus: Fiscal to the

rescue, 21 August 2019). The impacts of the pro-consumer measures announced are likely to fade

by year-end, given the terms and conditions of the government’s additional allowance program.

Meanwhile, some of the pro-SME measures should help lift private investment growth, but its impact

is likely to be more drawn out and less pronounced than big-ticket infrastructure projects.

Risks

External headwinds remain the biggest threat to Thailand’s economy. Exports and imports

remained in contraction as of 2Q19 as a result of looming trade tensions and a cyclical

downswing in the automobile and semiconductor sectors. These factors, on balance, are likely

to weigh on Thailand’s growth despite evidence of trade and FDI diversion, which has enabled

the country to raise exports to the US. High frequency indicators also suggest a deterioration in

domestic demand as reflected in declining consumer and investment sentiment. Additional fiscal

and monetary support in 2020 could be necessary if growth continues to face headwinds.

Key forecasts


GDP (% y-o-y) 2.3 3.5 3.6 3.0 3.1 2.6 2.3 2.6 2.7 3.0 3.3 GDP sa (% q-o-q) 0.6 1.0 0.9 0.5 0.7 0.5 0.6 0.9 0.8 0.8 0.8 Industrial production (% y-o-y) -5.4 -1.5 -2.2 1.7 1.7 1.4 0.7 1.4 1.3 1.2 1.2 CPI, (% q-o-q saar) 1.9 0.2 1.6 1.8 0.5 0.9 0.8 1.8 0.4 0.9 0.8 CPI, average (% y-o-y) 1.1 0.8 1.1 1.4 1.0 1.2 1.0 1.0 1.0 1.0 1.0 PPI, average (% y-o-y) -1.1 0.2 0.3 0.2 0.0 0.1 0.1 0.1 0.2 0.1 0.0 Exports, value (% y-o-y) -4.2 -1.0 -1.0 0.7 1.0 2.2 2.3 2.5 2.4 2.4 2.3 Imports, value (% y-o-y) -3.4 -2.0 -2.0 2.5 3.0 3.0 3.0 5.8 5.8 5.8 5.8 Trade balance (% GDP) 4.4 3.5 3.7 3.9 3.5 3.2 3.5 2.7 2.1 1.6 2.0 Current account (% GDP) 3.8 5.4 5.1 7.5 4.0 5.8 5.6 7.0 3.3 5.4 5.5 International reserves (USDbn) 206.6 206.8 207.3 212.0 210.9 211.7 212.7 217.0 215.2 215.8 217.0 Policy rate, end-quarter (%) 1.75 1.50 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 5yr yield, end-quarter (%) 1.91 1.37 1.10 1.10 1.10 1.10 n/a n/a n/a n/a n/a THB/USD, end-quarter 31.10 30.50 31.80 31.80 31.80 31.80 31.80 31.80 31.80 31.80 31.80 THB/EUR, end-quarter 35.46 33.55 34.98 34.98 34.98 34.98 34.98 34.98 34.98 34.98 34.98


https://www.research.hsbc.com/R/20/GFQmFlk

https://www.research.hsbc.com/R/20/GFQmFlk


94

Employment is contracting across sectors, particularly manufacturing…

…posing risks to financial stability and growth

Employment in Thailand’s export-oriented sectors is in contraction.

In addition, recent monetary easing by the European Central Bank (ECB) and the Fed also suggests that they remain cautious of growth over the near term, which should pose concerns for export-oriented economies like Thailand.

Moreover, the BoT’s Monetary Policy Committee has noted at its previous statements that there is an increasing share of households that is sensitive to negative income shocks.

These data imply that weak growth in itself is Thailand’s biggest financial stability risk at the current juncture, which should prompt additional monetary easing from the BoT.

Source: Bloomberg, CEIC, HSBC

Consumer confidence and private investment are in decline… …which could limit domestic demand growth

Thailand has been on a prolonged period of tepid domestic

demand growth since the 2014 coup. Economic growth from 2016 to 2018 was largely lifted by rising exports and inventory build-up.

While Thailand may not be as domestically-driven compared to other countries in the region, government policies have historically been able to incentivise domestic demand to either offset external headwinds and/or to boost GDP growth.

To its credit, the Thai government’s USD10.2bn stimulus program should boost domestic demand for 2019. Based on our estimate, fiscal and monetary easing could add 0.3ppt to GDP growth this year, lifting GDP growth to around 3.1%.

Source: CEIC, HSBC

Inflation is likely to fall below the BoT’s target range yet again… …which could have unfavourable consequences for its credibility as an inflation-targeting central

Thailand’s stubbornly low inflation is yet another reason for

more monetary policy accommodation.

Inflation has averaged below the BoT’s 1-4% target range year-to-date, and there are substantial risks that this will persist despite the recent spike in global oil prices.

We expect headline inflation to average 0.9% in 2019. If so, it would mark the fourth time in five years that inflation averaged below the BoT’s target range.

Source: CEIC, HSBC

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Mar-16 Dec-16 Sep-17 Jun-18 Mar-19Manufacturing Retail Services

Agriculture

% y-o-y, 3mma % y-o-y, 3mma

125.0

130.0

135.0

140.0

145.0

65.0

70.0

75.0

80.0

85.0

Mar-12 Jan-14 Nov-15 Sep-17 Jul-19

Consumer Confidence Index

Private Investment Index, sa (RHS)

Index Index

-1.0

0.0

1.0

2.0

3.0

-1.0

0.0

1.0

2.0

3.0

2015 2016 2017 2018 2019f

Headline inflation, % YoY

Inflation Target: Midpoint

Inflation Target: Lower Limit

% y-o-y % y-o-y

95


Thailand: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 1.0 3.1 3.4 4.0 4.1 3.1 2.8 2.9 Nominal GDP (USDbn) 407.5 401.4 412.6 455.6 505.1 532.2 543.7 566.6 GDP per capita (USD) 6,015.2 5,904.9 6,049.8 6,658.9 7,361.7 7,733.3 7,878.8 8,186.7 Private consumption (% y-o-y) 0.8 2.3 2.9 3.0 4.6 4.3 3.5 3.3 Government consumption (% y-o-y) 2.8 2.5 2.2 0.1 1.8 3.2 5.0 5.0

Investment (% y-o-y) -2.2 4.4 2.9 1.8 3.8 2.1 4.4 5.9 Net exports (contribution to GDP growth, ppt) 4.2 1.2 2.8 0.1 -2.5 0.0 0.6 -1.0 Industrial production (% y-o-y) -2.5 0.2 1.7 1.7 2.9 -2.9 1.4 1.3 Gross domestic saving (% GDP) 30.7 31.9 33.2 34.9 35.1 33.8 33.8 34.1 Unemployment rate, year-end (%) 0.6 0.8 1.0 1.1 0.9 1.0 1.1 1.1 Prices & wages CPI, average (% y-o-y) 1.9 -0.9 0.2 0.7 1.1 0.9 1.1 1.0 CPI, year-end (% y-o-y) 0.6 -0.9 1.1 0.8 0.4 1.5 1.0 1.0 Core CPI, average (% y-o-y) 1.6 1.0 0.7 0.6 0.7 0.6 0.4 0.1 Core CPI, year-end (% y-o-y) 1.7 0.7 0.7 0.6 0.7 0.7 0.0 0.3 PPI, average (% y-o-y) 0.1 -4.1 -1.2 0.7 0.4 -0.2 0.0 0.1 PPI, year-end (% y-o-y) -3.6 -2.7 1.1 -0.6 -0.5 0.3 0.1 0.0 Manufacturing wages, nominal (% y-o-y) 9.2 1.5 1.0 0.6 2.5 2.6 1.6 1.7 Money, FX & interest rates

Central bank money M0, end (% y-o-y) 5.4 2.6 6.2 6.7 3.3 n/a n/a n/a Broad money supply M2, end (% y-o-y) 4.6 4.4 4.2 5.0 4.7 4.5 4.6 4.4 Real private sector credit growth (% y-o-y) 1.4 6.3 3.0 3.7 4.9 3.8 4.0 4.2 Policy rate, year-end (%) 2.00 1.50 1.50 1.50 1.75 1.25 1.25 1.25 5yr yield, year-end (%) 2.47 2.21 2.18 1.89 2.23 1.10 n/a n/a THB/USD, year-end 32.89 35.99 35.78 32.62 32.71 31.80 31.80 31.80 THB/USD, average 32.47 34.24 35.28 33.92 32.30 31.29 31.80 31.80 THB/EUR, year-end 39.79 39.23 37.57 39.14 37.61 34.98 34.98 34.98 THB/EUR, average 43.04 38.18 39.16 38.29 38.24 35.08 34.98 34.98 External sector Merchandise exports (USDbn) 226.6 213.4 213.5 233.7 251.1 244.7 248.5 254.5 Merchandise imports (USDbn) 209.4 187.2 177.7 201.1 228.7 222.9 229.3 242.5 Trade balance (USDbn) 17.2 26.1 35.8 32.6 22.4 21.8 19.2 12.0 Current account balance (USDbn) 11.6 27.8 43.4 44.1 32.4 31.5 31.3 30.3 Current account balance (% GDP) 2.9 6.9 10.5 9.7 6.4 5.9 5.8 5.3 Net FDI (USDbn) -0.8 3.9 -10.6 -10.6 -7.3 -5.0 -5.0 -5.0 Net FDI (% GDP) -0.2 1.0 -2.6 -2.3 -1.4 -0.9 -0.9 -0.9 Current account balance plus FDI (% GDP) 2.7 7.9 8.0 7.4 5.0 5.0 4.8 4.5 Exports, value (% y-o-y) -0.4 -5.9 0.1 9.5 7.5 -2.6 1.6 2.4 Imports, value (% y-o-y) -7.9 -10.6 -5.1 13.2 13.7 -2.6 2.9 5.8 International FX reserves (USDbn) 149.1 149.3 164.1 194.0 197.0 207.3 212.7 217.0 Import cover (months) 8.5 9.6 11.1 11.6 10.3 11.2 11.1 10.7 Public and external solvency indicators Gross external debt (USDbn) 141.7 131.1 132.2 155.2 163.6 171.9 186.9 195.2 Gross external debt (% GDP) 34.8 32.7 32.0 34.1 32.4 32.3 34.4 34.5 Short term external debt (% of int’l reserves) 38.2 35.2 33.2 35.4 37.4 38.0 39.4 40.9 Private sector external debt (USDbn) 116.4 110.5 109.5 123.7 133.7 143.7 153.7 163.7 Central government balance (% GDP) -2.7 -2.4 -2.6 -3.1 -2.4 -3.0 -3.0 -2.7 Public domestic debt (THBbn) 5,332.6 5,423.0 5,641.9 6,067.8 6,519.0 6,991.5 7,593.1 8,157.1 Public domestic debt (% GDP) 40.3 39.5 38.8 39.3 39.9 42.0 43.9 45.3 Public external debt (USDbn) 11.1 10.0 10.0 9.1 8.0 9.8 11.1 12.5 Public external debt (% GDP) 2.7 2.5 2.4 2.0 1.6 1.8 2.0 2.2 Public sector debt (% GDP) 43.3 42.6 41.8 41.9 42.1 43.8 46.0 47.5 Macro-prudential indicators CAR: Capital Funds/Risk Assets (%) 16.3 17.0 17.9 18.1 18.2 n/a n/a n/a CAR: Tier 1 Capital/Risk Assets (%) 16.0 16.7 17.6 17.8 17.8 n/a n/a n/a Non-performing loan ratio 2.4 2.6 2.9 3.1 3.1 n/a n/a n/a Household debt/GDP (%) 78.3 80.4 79.9 78.2 77.8 78.0 77.9 78.0 Total credit/GDP (%) 96.1 96.7 95.8 94.3 94.5 n/a n/a n/a Residential house prices (% y-o-y) 8.1 5.2 3.3 2.0 6.0 n/a n/a n/a Loan/deposit ratio 109.4 107.6 109.3 110.4 111.8 n/a n/a n/a Stock market capitalisation/GDP (%) 102.8 98.6 99.5 107.8 105.8 n/a n/a n/a

Note: 2021 FX numbers are assumptions, not forecasts Source: CEIC, IMF, ADB, HSBC forecasts


96

Vietnam

Treading cautiously

2019 has been bumpy for many Asian economies; however, Vietnam has managed to weather risks

to growth relatively well. Its economy expanded at an impressive rate of 7.0% y-o-y throughout 3Q,

with broad-based growth across sectors. Not only has manufacturing held firm, despite weak global

trade, the services sector has continued to see steady growth.

Vietnam’s manufacturing robustness has led to strong trade performance. Exports grew 8.2% y-o-y

y-t-d, albeit moderating from previous years, but still outperforming many regional peers. In particular,

growth in exports has come primarily from the electronics sector. As a major recipient of trade

diversion, Vietnam’s electronics exports to the US jumped at a record high of 80% y-t-d. With

numerous FTAs in place, Vietnam’s exports are likely to be further boosted in the years to come.

Meanwhile, we have also seen increasing FDI diversion to Vietnam, which adds capacity to the

country’s manufacturing sector. Three quarters of new registered FDI in 2019 flows into

manufacturing, with a large share likely going into electronics. Due to on-going trade tensions,

companies have accelerated some relocations to or expanded existing production capacity in

Vietnam, reflecting announcements made this year by tech giants, Samsung, LG, and Google.

That said, even as a main beneficiary of the US-China trade tensions, prolonged trade uncertainty

and a deteriorating economic outlook in major trading partners pose mounting downside risks to

growth next year. We expect Vietnam’s GDP to grow at 6.9% (previous: 6.7%) in 2019, before

decelerating to 6.4% (previous: 6.5%) in 2020 in anticipation of economic slowdowns in its major

trading partners.

Encouragingly, Vietnam’s inflationary pressures continued to ease. Headline inflation edged

down further to 2.5% on average y-t-d from 3.5% in 2018. Healthcare costs rose for the first

time in 2019, but this shouldn’t pose risks to the State Bank of Vietnam’s (SBV) “below 4%”

target. With a weak oil price outlook, the inflation trajectory should remain benign for the rest of

2019, and likely persist throughout next year. In this note we revise down our inflation forecast

to 2.6% in 2019 (previous: 2.7%).

Yun Liu


[email protected]

+852 2822 4297

Growth in 2019 remains strong with a resilient manufacturing sector…

…partly thanks to strong FDI that adds manufacturing capacity


-2

0

2

4

6

8

-2

0

2

4

6

8

Mar

-18

Jun-

18

Sep

-18

Dec

-18

Mar

-19

Jun-

19

Sep

-19

Dec

-19

Agriculture Mining

Manufacturing Construction

Services Others

GDP growth (RHS)

contribution, ppt % y-o-y

forecast

$274

$596

$599

$852

$6,807

0 2,000 4,000 6,000 8,000

Wholesale & retail

Others

Infrastructure

Real estate

Manufacturing

USD mn

New registered FDI, 2019 YTD

97


Policy issues

On 13 September, the SBV unexpectedly cut its refinancing rate by 25bp to 6.0%. This is the

first rate cut since July 2017, when the central bank addressed concerns over domestic growth.

However, the rationale is different this time.

Vietnam’s domestic economy has largely held up so far in 2019. Growth is even likely to exceed

the government’s “6.6-6.8%” target. Meanwhile, inflationary pressures are largely subdued.

Given a slowing but still resilient economy, we believe the SBV’s rate cut was mostly pre-

emptive in nature, reflecting its precautionary stance and desire to guard against growing

external risks. Moreover, the recent easing decisions taken by global central banks was a key

consideration cited by the SBV in its decision. Indeed, the SBV referred to the easing moves by

both the US Federal Reserve (Fed) and the European Central Bank (ECB) in its statements.

We do not expect any further easing by the SBV this year, but we forecast a 25bp cut in 2020,

given HSBC’s expectation for a notable growth deceleration in Vietnam’s key trading partners:

mainland China, the US and the EU. While the SBV’s decision to support growth is positive, it is

important to realise the potential side effects of looser monetary policy, especially in areas

where Vietnam has seen considerable progress in, such as containing inflation and NPLs. As

such, policymakers are likely to consider using macro-prudential and administrative policies to

contain financial stability risks.

Risks

Vietnam’s impressive trade performance has attracted the attention of the US. President Trump

and his administration have expressed concern over Vietnam’s growing trade surplus with the

US. This has increased the risk of tariffs being imposed on the country by the US, or being

named a currency manipulator. Fortunately, Vietnamese authorities responded quickly by

committing to buy more US products such as LNG and Boeing airplanes, as well as cracking

down on illegal transhipments. This has helped contain the risks for now. That said, direct US

tariffs would pose notable downside risks to Vietnam’s external sector, particularly to its textiles

and footwear industries of which the US is the dominant buyer.

Another external headwind to Vietnam’s highly trade-dependent economy is a notable economic

slowdown in its major trading partners in 2020. As the three markets account for more than half

of Vietnam’s total exports, Vietnam’s external sector would be highly exposed to a reduction in

their import demands, weighing on Vietnam’s growth.

Key forecasts


GDP (% y-o-y) 6.7 7.3 6.7 6.5 6.3 6.3 6.6 6.3 6.6 6.4 6.6 GDP sa (% q-o-q) 2.2 3.7 1.4 -1.0 2.1 3.7 1.7 -1.3 2.4 3.5 1.9 CPI, (% q-o-q saar) 2.3 2.4 3.9 4.6 1.0 2.8 2.9 4.7 2.0 4.0 4.2 CPI, average (% y-o-y) 2.7 2.2 2.7 3.3 3.0 3.1 2.8 2.8 3.1 3.4 3.7 Exports, value (% y-o-y) 9.0 8.1 6.1 7.8 8.7 3.7 2.9 7.2 10.4 14.3 16.7 Imports, value (% y-o-y) 9.8 7.6 5.9 9.1 10.6 5.6 4.8 8.1 10.6 12.6 14.8 Trade balance (% GDP) -0.2 6.3 -0.5 2.8 -1.6 3.8 -2.0 3.1 -1.4 6.3 -0.5 International reserves (USDbn) 64.7 66.7 68.7 70.7 72.7 74.7 76.7 78.7 80.7 82.7 84.7 Policy rate, quarter-end (%) 6.25 6.00 6.00 6.00 5.75 5.75 5.75 5.75 5.75 5.75 5.75 VND/USD, quarter-end 23,301 23,450 23,550 23,550 23,550 23,550 23,550 23,550 23,550 23,550 23,550 VND/EUR, quarter-end 26,563 25,795 25,905 25,905 25,905 25,905 25,905 25,905 25,905 25,905 25,905



98

The US has been Vietnam’s largest export destination since 2003… …with US imports from Vietnam growing twelvefold over the

past 15 years

Since Vietnam integrated into the global economy, the US has become its most important export destination, aided by the US-Vietnam Bilateral Trade Agreement signed in 2001, which paved the way for WTO accession.

US imports accounted for 23% of Vietnam’s overall exports in 2019 y-t-d, mainly concentrated in six categories. Vietnam’s apparel and footwear sectors are by far the most exposed to the US, which takes almost half of total exports.

Meanwhile, for Vietnam’s relatively advanced assembled electronics exports, the US is a relatively small export destination, even if growth in exports to the US has surged so far in 2019. This largely reflects industry-level production decisions. Over the past few years, Vietnam has entered into, or signed FTAs with major trading partners, which should result in a further expansion in exports.

Source: CEIC, HSBC

Public-Private Partnerships (PPP) has been growing… …as a ‘sustainable’ source to address Vietnam’s infrastructure needs

It is no secret that the focus on infrastructure has played a central role in supporting Vietnam’s sustained high growth in recent years. Despite significant investments in recent years, further improvements in the quality of infrastructure and investments in new infrastructure are needed.

Given the government’s ambitious projects and the growing budget constraints, this raises the question on sources of funding. One way is from the state budget; however, the public fiscal space has been limited. The other option is through preferential loans, but Vietnam has become ineligible for those provided by multilateral institutions because of its lower-middle income status.

As such, the PPP model has emerged as a ‘sustainable’ solution to finance infrastructure projects without growing public debt.

Source: CEIC, HSBC

Inflation continued to ease… …and is likely to be subdued for the remainder of the year

Vietnam’s inflationary pressures continued to recede in

2019. Food prices decelerated starting 2H, dragging down food contribution to overall headline to c.30% in September from over 50% on average in 1H19. Meanwhile, transport costs dropped recently on the back of lower oil prices.

Healthcare costs rose in August, which was the first time they increased in 2019. However, the momentum of the price increase was smaller than last year as it only came into effect on 20 August, and the magnitude was relatively moderate.

We believe this year’s inflation trajectory will be well contained within the SBV’s “below-4%” target, thus reducing possible inflation concerns.

Source: CEIC, HSBC

0

10

20

30

40

5020

13

2014

2015

2016

2017

2018

2019

YT

D

Vietnam’s key exports to the US

Others Machines & equipmentsWood & wooden products Electronics componentsPhones FootwearTextiles & garments Total

2

3

4

5

6

7

8

10

60

110

160

210

260

310

360

410

460

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

f

% of GDPVNdtrn

Tho

usa

nd

s

Infr. Spending % of GDP (RHS)

-1

0

1

2

3

4

5

-1

0

1

2

3

4

5

Jan 18 Jul 18 Jan 19 Jul 19

Health OtherHousing & construction TransportFood Headline CPI (RHS)

contribution to CPI, ppts

target

% y-o-y

99


Vietnam: Macro framework

2014 2015 2016 2017 2018 2019f 2020f 2021f

Production, demand and employment GDP growth (% y-o-y) 6.0 6.7 6.2 6.8 7.1 6.9 6.4 6.5 Nominal GDP (USDbn) 186.0 193.7 205.4 220.6 240.9 258.4 279.3 305.2 GDP per capita (USD) 2,010 2,074 2,207 2,286 2,511 2,667 2,857 3,092 Private consumption (% y-o-y) 6.1 9.3 7.3 7.3 7.3 4.2 6.4 6.5 Government consumption (% y-o-y) 7.0 7.0 7.5 7.3 6.3 1.5 4.3 4.6 Investment (% y-o-y) 9.3 9.4 9.9 10.2 8.6 5.7 7.4 5.5 Industrial production (% y-o-y) 7.5 11.9 16.3 7.3 11.0 7.7 7.3 8.0 Gross domestic saving (% GDP) 31.9 28.1 31.7 33.2 35.0 36.1 34.6 35.7 Unemployment rate, year-end (%) 3.4 3.4 3.2 3.2 3.1 3.0 3.0 2.9 Prices & wages CPI, average (% y-o-y) 4.1 0.7 2.7 3.5 3.5 2.6 3.0 3.2 CPI, year-end (% y-o-y) 1.8 0.6 4.7 2.6 3.0 3.3 2.9 3.7 Core CPI, average (% y-o-y) 4.2 2.1 1.8 1.8 1.3 1.6 1.8 1.8 Core CPI, year-end (% y-o-y) 2.3 1.7 1.9 1.3 1.7 2.0 1.8 2.0 PPI, average (% y-o-y) 3.3 0.0 1.9 2.7 2.7 1.8 2.3 2.1 PPI, year-end (% y-o-y) 1.1 -0.1 3.9 1.8 2.2 1.9 2.0 2.1 Manufacturing wages, nominal (% y-o-y) 9.8 5.1 8.8 8.0 9.0 8.5 8.1 8.0 Money, FX & interest rates Broad money supply M2, average (% y-o-y) 19.7 14.9 17.9 14.3 12.7 16.2 18.6 11.7 Real private sector credit growth (% y-o-y) 10.1 16.6 15.6 14.8 10.4 11.4 9.6 8.1 Policy rate, year-end (%) 6.50 6.50 6.50 6.25 6.25 6.00 5.75 5.75 VND/USD, year-end 21,246 21,890 22,159 22,698 23,175 23,550 23,550 23,550 VND/USD, average 21,167 21,647 21,926 22,689 23,003 23,326 23,550 23,550 VND/EUR, year-end 25,708 23,860 23,267 27,238 26,651 25,905 25,905 25,905 VND/EUR, average 28,059 24,137 24,338 25,610 27,230 26,154 25,905 25,905 External sector Merchandise exports (USDbn) 150.2 162.0 176.6 214.6 243.4 261.1 275.8 309.7 Merchandise imports (USDbn) 138.1 154.6 165.5 203.2 226.8 244.8 262.9 293.5 Trade balance (USDbn) 12.1 7.4 11.0 10.8 16.5 16.4 12.9 16.2 Current account balance (USDbn) 9.4 -2.0 0.6 -1.6 6.7 5.3 1.3 5.1 Current account balance (% GDP) 5.0 -1.1 0.3 -0.7 2.8 2.1 0.5 1.7 Net FDI (USDbn) 6.9 8.1 10.7 11.6 13.6 15.6 16.5 17.5 Net FDI (% GDP) 4.3 5.5 5.6 5.3 5.7 6.0 5.9 5.7 Current account balance plus FDI (% GDP) 9.4 4.5 5.9 4.5 8.4 8.1 6.4 7.4 Exports, value (% y-o-y) 13.8 7.9 9.0 21.5 13.4 7.3 5.6 12.3 Imports, value (% y-o-y) 12.0 12.0 5.6 22.8 11.6 7.9 7.4 11.6 International FX reserves (USDbn) 33.8 27.9 36.2 48.7 55.1 67.9 75.9 83.9 Import cover (months) 2.9 2.2 2.6 2.9 2.9 3.3 3.5 3.4 Public and external solvency indicators Gross external debt (USDbn) 72.4 77.8 85.6 104.1 112.4 119.7 129.3 139.6 Gross external debt (% GDP) 38.9 40.2 41.7 46.5 46.7 46.3 46.3 45.7 Short term external debt (% of int’l reserves) 40.2 43.0 35.2 45.0 28.4 24.7 23.9 23.6 Private sector external debt (USDbn) 13.8 19.3 24.7 30.1 37.5 39.9 43.1 46.5 Consolidated government balance (% GDP) -6.3 -6.1 -5.7 -3.3 -3.7 -3.6 -4.0 -3.7 Primary balance (% GDP) -5.0 -4.5 -3.6 -1.3 -1.7 -1.5 -1.8 -1.4 Gross public domestic debt (VNDtrn) 1,015.9 1,196.8 1,425.7 1,547.4 2,242.1 2,429.5 2,646.7 2,865.9 Gross public domestic debt (% GDP) 34.1 37.2 40.4 38.3 40.5 40.3 40.2 39.9 Gross public external debt (USDbn) 44.5 46.2 47.8 50.9 48.7 52.1 56.2 60.8 Gross public external debt (% GDP) 23.9 23.8 23.3 23.1 20.2 20.2 20.1 19.9 Gross public sector debt (% GDP)* 58.0 61.0 63.7 61.4 60.7 60.5 60.3 59.8 Macro-prudential indicator Total credit/GDP (%, year-end) 100.8 111.0 122.3 130.1 130.1 136.4 140.7 143.4 Loan/deposit ratio 87.9 89.5 89.53 90.33 n/a n/a n/a n/a Stock market capitalisation/GDP (%) 28.2 30.4 35.67 56.00 n/a n/a n/a n/a

Note: *Public debt refers to government debt only. 2021 FX numbers are assumptions, not forecasts Source: CEIC, ADB, IMF, HSBC forecasts


100

Notes

101


Notes


102

Disclosure appendix

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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)

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Arbis, Paul Bloxham, Aayushi Chaudhary, Pranjul Bhandari, Daniel Smith, Julia Wang, James Lee, Jingyang Chen, Erin Xin,

Shanshan Song, Yun Liu and Ki-Hyuk Lee

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CEEMEA

Chief Economist, CEEMEA Simon Williams +44 20 7718 9563 [email protected]

Economist, Russia and CIS Artem Biryukov +7 495 721 1515 [email protected]

Economist, CEE Agata Urbanska-Giner +44 20 7992 2774 [email protected]

Chief Economist, Turkey Melis Metiner +44 20 3359 2636 [email protected]

Economist, South Africa David Faulkner +27 11 676 4569 [email protected]

Economist, South Africa Thato Mosadi +27 11 676 4476 [email protected]

Argentina

Senior Economist Jorge Morgenstern +54 11 4130 9229 [email protected]

Mexico

Chief Economist, Mexico Alexis Milo +52 55 5721 2172 [email protected]

Jose Carlos Sanchez +52 55 5721 5623 [email protected]

Global Economics Research Team

mailto:[email protected]
















Q4 2019

Economics | A

siaA

sian Economics

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Main contributorsFrederic NeumannCo-head of Asian Economics ResearchThe Hongkong and Shanghai Banking Corporation [email protected]+852 2822 4556

Daniel SmithEconomistHSBC Bank Australia [email protected]+612 9006 5729

Qu HongbinCo-head of Asian Economics Research and Chief China EconomistThe Hongkong and Shanghai Banking Corporation [email protected]+852 2822 2025

Noelan ArbisEconomistThe Hongkong and Shanghai Banking Corporation [email protected]+852 2822 4325

Paul BloxhamChief Economist, Australia, NZ & Global CommoditiesHSBC Bank Australia [email protected]+612 9255 2635

Jingyang ChenEconomistThe Hongkong and Shanghai Banking Corporation [email protected]+852 2996 6558

Pranjul BhandariChief Economist, IndiaHSBC Securities and Capital Markets (India) Private [email protected]+91 22 2268 1841

James LeeEconomistThe Hongkong and Shanghai Banking Corporation [email protected]+852 2822 1647

Joseph IncalcaterraChief Economist, ASEANThe Hongkong and Shanghai Banking Corporation [email protected]+852 2822 4687

Julia WangSenior Economist, Greater ChinaThe Hongkong and Shanghai Banking Corporation [email protected]+852 3604 3663

Aayushi ChaudharyEconomistHSBC Securities and Capital Markets (India) Private [email protected]+91 22 2268 5543

Yun LiuEconomistThe Hongkong and Shanghai Banking Corporation [email protected]+852 2822 4297

Erin XinEconomistThe Hongkong and Shanghai Banking Corporation [email protected]+852 2996 6975

Ki-Hyuk LeeEconomistThe Hongkong and Shanghai Banking Corporation [email protected]+852 2822 4523

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