Emerging Asia

Thailand

Interest rates and inflation to remain low

Growth in China will weaken further over the coming year as a downturn deepens in industry and construction. The outlook for the rest of the region is improving. We expect many economies to rebound strongly as governments ease restrictions on the back of faster vaccine rollouts and success reining in COVID outbreaks. Central banks – unlike in much of the emerging world – are in little rush to tighten. Inflation hasn’t emerged as a concern and, with large output gaps set to keep a lid on price pressures, we expect policy rates in most countries to remain on hold over the coming year. In contrast, the consensus and financial markets are expecting central banks to begin tightening in 2022.

20 October 2021

Supply shortages take their toll

The supply shortages that have affected many DMs have also intensified in emerging economies over the past couple of months. The automotive sector has been hit hard by global semiconductor shortages, weighing on recoveries in Mexico, Czechia and Hungary in particular. More broadly, EM manufacturers are struggling to meet new orders, causing backlog of works to increase. Meanwhile, recent power shortages have weighed on recoveries in China, India and Brazil. As shortages continue, they are likely to not just weigh on growth, but also add to upward pressure to core inflation. That will probably keep central banks in Latin America and Central Europe in particular in tightening mode.

18 October 2021

EM supply constraints mount

Although the emerging market manufacturing PMI ticked up last month, EM industry has been undergoing a slowdown for some time. And the surveys show that supply constraints are mounting, which is likely to weigh on manufacturers’ output in the months ahead.

1 October 2021
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PacMan joins the race, baht set for further falls

The next presidential election in the Philippines is not until May, but the contest is already generating plenty of headlines with former boxing world champion Manny Pacquiao (PacMan to his fans) this week announcing his intention to run. He is joined by several other presidential hopefuls, including a former actor and two children of former presidents. We will have more to say once the candidates outline their policy platforms, but the uninspiring list of presidential hopefuls bodes poorly for the country’s prospects. Meanwhile, policymakers in Thailand appear unfazed by the recent decline in the baht, which fell by over 4% against the US dollar last month. We think further weakness is likely over the coming year.

Manufacturing PMIs (Sep.)

While regional PMIs showed that the disruption from large virus waves in the region is easing somewhat, unmet orders continue to pile up, meaning that the resulting shortages further down supply chains are set to remain for some time to come.

Asian central banks in little rush to raise rates

Over the past month or so, the central banks of Korea, Pakistan and Sri Lanka have all raised interest rates, but we don’t think other countries will be in any rush to follow suit. There is certainly little to worry about on the inflation front. Pakistan, India and Sri Lanka are the only three countries where headline inflation is above 5% y/y. With GDP still well below potential in most parts of the region, underlying price pressures will remain subdued. Similarly, with the exception of Sri Lanka and Pakistan, where large current account deficits are putting downward pressure on currencies, external factors are unlikely to prompt central banks into hiking rates. Although the US Fed is likely to announce plans to taper its asset purchases later this year, large current account surpluses mean Asian economies are well placed to withstand any sudden shift in capital flows that tighter monetary policy in the US could trigger. Meanwhile, unlike in Korea, there is no sign elsewhere in Asia that low interest rates are fuelling a rise in financial risks. Credit growth has slowed in many countries, with policymakers in Indonesia and the Philippines encouraging commercial banks to lend more. Finally, most countries still have large output gaps, and with the virus continuing to cause significant economic disruption across the region, central banks will remain keen to support economic activity.

Thailand: rates to stay low for an extended period

The Bank of Thailand (BoT) left interest rates on hold today at 0.5%, and we have taken out the rate cut we originally had pencilled in for this year. However, rate hikes are still a long way off.

Rate cut in Thailand, Taiwan applies to join CPTPP

With the economy in the doldrums and deflation worries increasing, we think the Bank of Thailand will cut interest rates by a further 25bp at its meeting on Wednesday (most other analysts are expecting rates to stay on hold at 0.5%). Meanwhile, Taiwan followed China this week by applying to join the CPTPP. Taiwan’s entry would provide much less of a boost to existing members, but it would also be significantly less controversial.

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