Asia week ahead: The gloom continues

After an extended new year break, the Chinese markets reopen next week and will undoubtedly play catch-up to global markets, which have sold off on concern about the economic impact of the coronavirus. Local authorities are likely to act fast to minimise the damage, with the People’s Bank of China potentially offering further liquidity-boosting measures.

The Asian calendar is packed with activity data from China and the rest of Asia, though that will likely be secondary to news about the coronavirus. We're not likely to see the full economic impact of the virus in the January data, but holiday-related slack and the timing of the holiday (Lunar New Year was in February last year but in January this year) will distort the picture. Trade figures for January from China and Korea as well as manufacturing PMIs elsewhere will be in focus following the phase one trade deal between China and the US.

With China gearing up for more stimulus to soften the impact of the virus, other Asian countries are likely to follow suit. Central banks in Australia, India, the Philippines, and Thailand - all hold policy meetings next week and we're expecting more than just words.

The first to announce its policy decision is the Reserve Bank of Australia (4 February). Besides devastating bushfires, the imminent threat to growth from the virus has put the consensus view solidly behind a 25 basis point rate cut. Australia is highly dependent on Chinese demand.

Thailand is one of the front-line economies to face the brunt of the virus through a significant dent to the tourism industry. The ongoing fiscal stalemate due to the delayed passage of the 2020 Budget leads us to expect more Bank of Thailand easing this year. We don’t rule out a 25 basis point rate cut at this forthcoming meeting (5 February).

Just as in Thailand, tourism will be an added drag on the Philippines economy, not just from the virus but also from a volcanic eruption earlier this month. Our house forecast includes two 25 basis point rate cuts by the Bangko Sentral ng Pilipinas in the first and second quarters. We expect it to cut next week (6 February).

India’s Federal Budget for FY2020 to be announced this Saturday (1 February) will set the tone for markets there in a week that will also see the Reserve Bank of India setting monetary policy (6 February).

A big overshoot of the fiscal deficit in FY2019 (ends in March 2020), far above the 3.3% initial projection to something closer to 4%, suggests there isn't any scope for continued fiscal expansion ahead. That said, we don’t see the government backing away from its growth-friendly fiscal policy stance just yet, with media reports also pointing to off-budget borrowings, through state-owned entities, to fund extra spending. Whether this helps to revive growth remains to be seen but we are sceptical.

As for central bank policy, we believe the latest inflation spike above the 2-6% policy target to 7.4% in December has closed the door to RBI easing. After total rate cuts amounting to 135 basis points last year, the RBI paused in December. And just recently, Governor Shaktikanta Das also warned against high inflation risk ahead. We expect the RBI to remain on hold next week (6 February) and in the rest of 2020.