Group Economics Emerging Markets
Asia outlook
Arjen van Dijkhuizen, +31 20 628 8052 arjen.van.dijkhuizen@nl.abnamro.com
Sailing stormy waters
24 August 2015 • • • • •
China-related concerns (stock market correction, CNY devaluation, growth outlook) trigger capital outflows. Still, the adjustment of China’s exchange rate regime makes economic sense, while we do not expect a currency war. We lowered our growth forecasts for South Korea, Singapore, Taiwan and Thailand, also given weak export performance. With China’s economy slowing gradually, we expect regional growth to fall to 6.2% in 2015 (2014: 6.4%). Key risks to the outlook: China hard landing, rising risk aversion and further capital outflows in the run-up to the Fed liftoff, FX-related risks, lower growth in advanced economies, high domestic debt levels and geopolitical issues.
China concerns keep grabbing the headlines Over the past months, concerns regarding China contributed to further capital outflows out of EMs including emerging Asia, while hitting a broad range of market prices including commodities and EM FX. The sharp correction of the Chinese stock market in June/July and the subsequent range of unorthodox measures to stabilise markets have fed doubts about the government’s real capability to steer towards desirable outcomes. Subsequently in mid-August, when the stock market dust had hardly settled, the PBoC adjusted the USD-CNY fixing rate by around 4.5%, triggering a CNY depreciation of some 3% so far. These moves caused broad market turmoil, as China growth concerns rose further, while some accused China of starting a competitive devaluation.
Adjusting an expensive peg Real effective exchange rate, index, 1 Jan 2013 = 100
120 115 110 105 100 95
While we do not expect a full-blown currency war, … Although we expect some more moderate CNY weakening in 2015 and 2016, we do not think that the yuan devaluation will trigger a full-blown currency war. First, the steps taken so far are not very aggressive. Second, we expect the CNY to remain a heavily managed currency, as the authorities aim to avoid too sharp a depreciation. Third, other countries seem to recognise that the Chinese economy faces challenges and have reacted in a (relatively) benign fashion so far. … we have adjusted our Asia FX forecasts downwards Still, the CNY devaluation has impacted other Asian (and other EM) currencies. Currencies from countries with relatively large exports to China or countries that compete relatively strongly with China on third markets have come under pressure, such as the Korean won, the Singapore dollar and the Taiwan dollar. Although less exposed to China, the Indian rupee has also been affected by contagion. For the Indonesian rupiah, the Malaysian ringgit and the Thai baht, the CNY devaluation has strengthened a longer lasting and stronger depreciation trend versus the USD, which also reflects other factors such as falling commodity prices. Meanwhile, Vietnam decided to devalue the dong, for the third time this year. We have downgraded our Asia FX forecasts recently (also see our FX Watches published in recent weeks).
90 85
Asian exports impacted by weak demand 13
14 China
15 India
South Korea
Indices, Jan-2006 = 100*
140
200
130
180
120
160
110
140
100
120
Source: Thomson Reuters Datastream
Adjustment CNY regime makes sense While we understand the market concerns regarding China, the adjusting of the de facto CNY peg with the USD makes economic sense, in our view. The authorities wanted to show commitment to incorporate more market elements into the CNY regime, in the run-up to the IMF’s decision on SDR inclusion (which has been delayed to 2016). What is more, pegging the currency to a strong USD was hurting China’s external competitiveness. Some currency depreciation will not only help to restore competitiveness somewhat, but can also help pushing Chinese inflation a bit higher.
90 10
11 12 Exports Asia (lhs) Imports China (rhs)
13
100 14 15 Imports adv. economies
Source: Thomson Reuters Datastream *China: Import volumes are estimates, 12 months rolling.
2
Asia outlook, Sailing stormy waters – 24 August 2015
Modest regional slowdown continued in Q2 …, Meanwhile, the moderate regional slowdown that started in late 2014 has continued in Q2 of 2015. We estimate regional growth to have fallen to 6.2% in Q2, just below the pace reached in preceding quarters. Next to subdued domestic demand in several countries, the slowdown is to a large extent driven by weak external demand from main trade destinations. This includes weak import demand from advanced economies, despite signs of recovery in these countries, and from China. After dropping sharply in early 2015, Asian export volumes recovered somewhat in recent months, but the overall picture remains bleak. For some countries, currency appreciation hurting external competitiveness has played a role as well. … with annual growth coming down in most countries Compared to Q1, annual GDP growth in Q2 was (more or less) stable in China, Indonesia and Thailand. By contrast, growth clearly slowed in the (highly) trade-oriented countries Taiwan, Singapore and Korea, as well as in commodity producing Malaysia. Hong Kong was the only country where annual growth rose in Q2, to 2.8% yoy, driven by strong domestic demand. Forward-looking manufacturing PMIs do not point a very bright picture either. Our regional GDP-weighted PMI for the manufacturing sector has continued to slide, reaching a two-year low of 49 in July. Indonesia, South Korea and China (Caixin) currently rank the lowest. Only in India and Vietnam, the Manufacturing PMIs are presently above 50.
Regional manufacturing PMI index has fallen further % yoy^
index**
12
60
10
55
8
50
6
45
4
40
2
35 08
09
10
11
Asia real GDP (lhs)
12
13
14
15
Asia manufacturing PMI (rhs)
Sources: Bloomberg, Thomson Reuters, Datastream, ABN AMRO GE. ^ 2015-Q2 is still an estimate. ** China: Caixin version
Forecasts cut for Korea, Singapore, Taiwan and Thailand On the basis of recent developments and taking into account rising risks to the outlook, we have cut our growth forecasts for Singapore, Korea, Taiwan and Thailand. Compared to 2014, we now expect growth to cool in most countries, except for India and Thailand. Regional growth is expected to slow to 6.2% this year (2014: 6.4%), bouncing back to 6.4% next year. This regional outlook rests on a few crucial assumptions. First, although China’s industrial sectors have lost momentum again recently, we expect China’s overall slowdown to remain gradual, given that services sectors are doing much better and
assuming the authorities remain committed to add stimulus to keep growth close to the 7% target. Monetary conditions are already easing, while we have penciled in another 25 bp policy rate cut and around 100 bps in RRR cuts. We also expect the authorities to allow more CNY weakness and to add more targeted (fiscal) stimulus e.g. by boosting infrastructure spending. Second, we still anticipate emerging Asia to profit from the expected pick-up in advanced economies’ growth, albeit with a lag. Finally, ongoing low oil prices will remain supportive, as Asia’s major economies are net oil importers.
Emerging Asia: Economic growth % yoy
Q4-14
Q1-15
Q2-15
2014
2015*
2016*
China
7.3
7.0
7.0
7.4
7.0
7.0
Hong Kong
2.4
2.4
2.8
2.5
2.5
3.0
India
6.6
7.5
-
7.3
7.5
7.5
Indonesia
5.0
4.7
4.7
5.0
5.0
5.5
Malaysia
5.7
5.6
4.9
6.0
5.0
5.0
Singapore
2.1
2.8
1.8
2.9
2.5
3.0
South Korea
2.7
2.5
2.2
3.3
2.5
3.5
Taiwan
3.5
3.8
0.5
3.8
2.5
3.5
Thailand
2.1
3.0
2.8
0.9
3.0
3.5
Reg. avg.
6.3
6.3
6.2*
6.4
6.2
6.4
Sources: EIU, Bloomberg, ABN AMRO Group Economics *Annual forecasts for 2015-16 are rounded. ** Forecast.
Main risks to the outlook A China hard landing, which is not our base case, forms the main risk to our EM Asia outlook. Another key risk relates to the recent fall in risk tolerance affecting EMs, including Asia. Sentiment may weaken further in the run-up to the Fed lift-off, which we still expect to occur in September. Further capital outflows could trigger an unwelcome tightening of financial conditions, while affecting asset prices and exchange rates more strongly. The ‘most risky’ countries (Indonesia, Malaysia and Thailand) look particularly vulnerable in this respect. Another risk stems from further currency weakness, also for countries exporting to/competing with China that face the threat of losing market share. While currency depreciation can help to restore competitiveness, it also adds risks as repaying FX-denominated obligations will become more expensive. We believe those risks are rising, but are still contained for most of Asia. External debt levels and external deficits are generally quite manageable, while the share of FX-denominated loans is relatively low and FX reserves generally high. Indonesia is one of the exceptions, with a relatively high current account deficit and a relatively high share of USD denominated debt. Other key risks stem from disappointing growth in advanced economies, high domestic corporate and household debts in several countries (China, Hong Kong, Malaysia, Singapore, South Korea, Thailand), and a flare-up of (geo)political risks, as witnessed by recent developments in Thailand and on the Korean peninsula.
3
Asia outlook, Sailing stormy waters – 24 August 2015
Main economic indicators/forecasts GDP growth (%) Emerging Asia Emerging Europe Latin America Middle East/North Africa Emerging markets total
2013 6.5 1.8 2.4 1.4 4.6
2014 6.4 1.3 1.0 3.0 4.4
2015e 6.2 -0.9 -0.2 2.9 3.8
2016e 6.4 1.9 1.3 4.0 4.7
-0.3 1.5 3.1
0.9 2.4 3.3
1.5 2.7 3.1
2.2 3.1 3.8
2013 -2.5 -1.5 -3.0 0.5
2014 -2.5 -1.5 -4.5 -3.0
2015e -2.5 -3.0 -5.5 -7.5
2016e -3.0 -2.5 -4.0 -5.0
Eurozone -2.9 -2.4 US -4.1 -2.8 Source: EIU, ABN AMRO Group Economics
-2.1 -2.5
-1.9 -2.2
Eurozone US World Budget balance (% GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa
Inflation (%) Emerging Asia Emerging Europe Latin America Middle East/North Africa Emerging markets total Eurozone US World Current account (% GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa Eurozone US
2013 4.6 5.3 9.0 13.5 6.5
2014 3.5 6.3 12.8 7.3 5.8
2015e 2.7 11.2 15.3 7.2 6.3
2016e 3.2 5.5 11.9 6.8 5.2
1.3 1.6 4.3
0.5 1.6 3.9
0.2 0.4 3.8
1.5 2.4 3.8
2013 1.0 -1.5 -3.0 9.0
2014 1.5 0.0 -3.0 6.0
2015e 2.5 1.0 -3.0 -0.5
2016e 2.0 0.5 -3.0 1.0
2.6 2.9 3.3 3.5 -2.4 -2.4 -2.3 -2.4 * figures Emerging Markets regions are rounded
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