16 January 2018
India – A mixed inflation bag

With the risk of worsening public finances overshadowing green shoots of economic recovery, the Indian rupee will remain under weakening pressure in 2018

Lower WPI but higher CPI inflation in December

Contrary to the consensus of acceleration, India’s wholesale price inflation slowed in December to 3.6% year-on-year from 3.9% in the previous month. The consensus was 4.0% while at ING, we were forecasting: 3.9%. 

This follows consumer price inflation data last Friday showing acceleration to a 17-month high of 5.2% in December from 4.9% in November. Food prices were a source of divergence in two price measures, while fuel and utility prices remained elevated in both measures. This puts October-December average CPI inflation at 4.6% and WPI inflation at 3.7%, up from 3.0% and 2.7% respectively from the previous quarter.

Philippines: November Remittances Disappoint

The Philippine peso's (PHP) bias for weakness is due to challenging external payments as November overseas worker remittances slow to 2% YoY 

Slower growth from major sources of remittances

November cash remittances slowed to 2% YoY from November 2016's growth of 18.5% and from October 2017's growth of 8.4%. The 11-month growth of total remittances is 4% which is in line with the central bank's forecast growth of 4% in 2017. Slower remittances were seen in most regions and major host economies. Remittances from Japan slowed to 2.8% YoY in November bringing 11-month growth to 7% from the 10-month average of 7.4%. Remittances from the US also slowed to 2.4% YoY, bringing the 11-month growth rate to 5.5%. The US remains the largest source of remittances with an 11-month share of 34% while Japan is responsible for 5.2%. Remittances from the Middle East, which accounts for 28% of total remittances, contracted by 6% YoY in November as remittances from Saudi Arabia slid 18.5% YoY. The country accounts for 10% of total remittances. The exceptions are Asian and European regions. Remittances from other Asian economies offset the slowdown from Japan and pushed regional remittance growth to 13% YoY in November to bring the 11-month growth rate to 6.2%. Remittances from Asia account for 19% of the total. Remittances from Europe increased by 6.2% YoY in November and brought the 11-month growth rate to 1.5% from only 1% for the 10-month period. Sustained recoveries in these regions partially offset the slower US, Middle East and Japanese remittances. However, we expect a seasonal rise in December due to the Christmas holidays.

PHP weakness as remittances cannot finance the trade deficit

Overseas worker remittances of $2.3bn is $1.5bn short of fully financing the November trade deficit of $3.8bn. The 11-month shortfall amounted to $413m, a reversal of the $107m surplus in the same 11-month period in 2016 and a major collapse from the 11-month surplus of $12.6bn in 2015. Strong import growth reflects a vibrant domestic economy. Rising government infrastructure and business spending together with steady consumer spending growth have driven economic growth of 6.5% in 2015 and 2016 and 6.7% in 2017. We expect these drivers of growth to keep the economy growing by 6.7% this year and keep imports strong. The shortfall of remittances against the wider trade deficit in 2018 could worsen to between $1bn and $2bn. This imbalance would likely keep PHP on the defensive unless foreign direct investments rise as they did in 4Q 2017.

Indonesia: Current Account stress from weak December exports

Any downside growth surprise from exports in December would lead to a less favorable current account deficit expectation

Downside growth surprise from exports

Any downside growth surprise from exports in December would lead to a less favorable current account deficit expectation. Decmber import growth of 17.8% was roughly in line with the market forecast of 18.1%. Weak exports and relaitvely strong imports resuled to the second monthly deficit in 2017, at -$271m in December, a reversal of the $1.1bn surplus in December 2016. December exports were up 6.9% YoY, only half the market forecast. Non-oil exports were a major disappointment, posting only a 5.6% YoY increase, a third of the 11M average growth of 18% and below our forecast of 15%. Possibly slower demand and negative base effects resulted to the weakness. Import growth on the other hand resulted from 50% YoY growth in oil and gas imports and a 13% YoY increase in non-oil imports. Non-oil import growth was slower than then 11M average growth of 15.6%.

Current account deficit for 4Q forecast likely to be larger than 4Q16

The 4Q17 current account deficit could reach $4bn with a significantly lower trade surplus of just $945m -30% of the trade suplus of $3.1bn in 4Q16. We had earlier expected a current account deficit of only $3bn on a trade surplus of $2.2bn. The rvised current account deficit forecast of $4bn is equivalent to 1.7% of GDP. The full year 2017 current acocunt deficit would likely amount to $15.5bn or 1.5% of GDP. Bank Indoensia, Indonesia's central bank, expects the 2017 current acocunt deficit o be below 2% of GDP. We expect export growth in 2018 to slightly outpace import growth, reuslting to a trade suplus of $14.5bn and a current account deficit of $18bn or 1.6% of GDP.

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Good MornING Asia - 16 January 2018

Weaker dollar is good for Asia as it helps Asian domestic economies, by allowing local central banks to keep local policy accommodative

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