14 February 2018
Bank of Thailand to keep policy on hold

We forecast no change to monetary policy all year

Consensus of on-hold BoT policy

The Bank of Thailand (BoT) Monetary Policy Committee meets today. There is a unanimous consensus that they will keep policy unchanged. The main policy rate, the 1-day repurchase rate, has been at 1.5% since April 2015 when the last easing cycle ended.

There are no strong reasons for the BoT to change the policy anytime soon. Even as GDP growth picked-up to a five-year high of about 3.8% in 2017 from 3.2% in the previous year the underlying economic fundamentals remained weak. The much-touted increase in infrastructure spending is still missing in action. And consumer price inflation has undershot the BoT’s 1-4% medium-term policy target for the third straight year (see chart), thanks to weak domestic spending and an appreciating Thai baht (THB).

Thai baht outlook

We forecast no change to monetary policy all year. There was no let-up in the THB appreciation trend coming into 2018 with 2.8% year-to-date appreciation against the USD. The key force behind THB strength is a persistently large current account surplus. At about 11% of GDP in 2017 the surplus was barely changed from 2016.  

The large current account surplus is the result of weak domestic demand. The textbook remedy for such an imbalance is demand-boosting economic policies. With no scope for monetary easing, more needs to come from the fiscal side. Without this, a repeat of 2017's THB performance looks difficult this year. Our year-end USD/THB forecast is 31.0 (spot 31.5, consensus 31.3).   

Indonesia: Mind the (current account) gap

Indonesia's current account gap widened in 4Q 2017 and the country recorded a deficit equal to 1.7% of GDP last year. But we expect this to narrow slightly in 2018

Current account deficit in 2018 is likely to narrow to -1.6% of GDP

The current account deficit jumped to -$5.8bn in 4Q (2.23% of GDP) from -$4.6bn in 3Q and -$1.8bn in 4Q 2016, due to high primary income payments (for investments in equity) and a moderate trade surplus.

  • Exports in 4Q moderated to a 13% year-on-year increase from 25% in 3Q and 14% in 4Q 2016.
  • Import growth remained above 20% in 4Q and 3Q and accelerated from 7% growth in 4Q 2016.
  • Export growth in 2017 averaged at 16.4% while imports posted a 15.7% average increase.
  • We expect export and import growth to moderate in 2018 with export growth still slightly outpacing imports. Primary income payments are likely to remain high and increase by 13% this year.
  • The result is a current account deficit of -$18.2bn or -1.6% of GDP (on real GDP growth of 5.4%) in 2018 from 2017's -1.7%. 
Indonesia: Central bank to stay on hold

Indonesia’s central bank is likely to keep its policy rate steady at this Thursday's meeting, as it focuses on maintaining stability after a recent bout of FX volatility

BI is likely to maintain its neutral stance despite uncertainties

Bank Indonesia is likely to maintain a neutral stance after its 50bps rate cut in 2H 2017. BI continues to consider GDP growth, inflation and the Indonesian rupiah as important factors in determining monetary policy. Both the central bank and the market expect GDP growth to improve in 2018.

  • The consensus forecast of 5.3% GDP growth in 2018 is within the BI’s forecast range of 5.1% to 5.5%. We expect GDP growth that is in line with the government’s target of 5.4%.
  • Inflation is low with January inflation moderating to 3.25% from December’s 3.6% rate. Low inflation is expected to spur consumer spending, which also benefits from higher wages, faster economic activity, higher government expenditures and election spending. BI expects inflation to average 3.5% in 2018 although the consensus expects an inflation rate of 3.8%. We expect an average inflation rate of 3.6% for 2018, which is within the BI’s target range.
  • However, USD/IDR delivered some instability recently with the currency swinging from IDR13280 late last month to IDR13648 last week. Direct intervention and steady policy settings are seen to stabilise the currency, especially with US monetary tightening and the uncertainty that accompanies elections as well as the selection of the BI governor.
  • Indonesia election uncertainty starts with June regional and local elections. The President appoints a new BI governor in the next few months. We expect the President to appoint a candidate who would continue the current monetary policy path and is respected in the local and global capital markets. Governor Agus Martowardojo’s term ends in three months but the market still considers a second term as possible.
Reading time around 4 minutes

Good MornING Asia - 14 February 2018

An essentially flat day yesterday in equity and bond markets, but the US dollar reverts to a weakening trend. Today - it's all about GDP and inflation

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