General market tone: Risk-off. President Trump fired off another round of tariffs, slapping a 10% tax on imports worth $200bn but made to stay clear of select consumer electronics. Come 2019 the tariff rate will rise substantially to 25% with Trump indicating he has more where that came from.
July Overseas Filipino Workers’ cash remittances rebounded from June’s 4.5% drop to a 5.2% year-on-year increase in July. But remittances are not enough to cover the trade deficit and that's driving the Philippine peso lower
Overseas Filipino worker (OFW) remittances recovered with 5.2% YoY growth in August from a drop of 4.5% in June. The 7-month 2018 average growth of 3% is below our 4-4.5% 2018 growth forecast.
Monthly remittances remain inadequate to finance the monthly trade deficit. This shortfall in July amounted to $1.1 billion. For the seven months, it was $5.9 billion, a reversal of the $3 billion excess in 2017. This shortfall will continue and should keep the peso on a defensive bias.
The trade balance was in deficit for a second straight month in August, pushing the July-August trade balance into a $3.03 billion deficit from the year-ago surplus of $1.9 billion. The current account deficit in 3Q could remain at -3% of GDP
Indonesia’s strong domestic demand continues to power imports. Oil and gas imports posted a 51.4% year-on-year increase in August accelerating from July’s 50% increase and June’s 32% pace. Higher energy prices have contributed to the high oil and gas import bill. Benchmark oil prices were almost 60% higher YoY while the Indonesian rupiah (IDR) depreciated by an annualised rate of 9% for the month. IDR’s weakness of almost 8% year-to-August has not restrained demand. Higher energy subsidies have insulated energy demand from IDR’s weakness and higher oil prices.
As a result, the economy posted a second straight deficit in August. The July-August deficit now amounts to $3.03 billion, a reversal of the surplus of $1.9 billion for the same period last year. This means that the 3Q current account will likely incur another $8 billion deficit which would be as bad as the 2Q deficit. Such an outcome would keep the current account deficit at close to -3% of GDP. We reiterate our current account deficit forecast of -2.6% of GDP or a deficit of almost $28 billion in 2018 from 2017’s -1.4% of GDP or -$14.5 billion. We believe that such a weak external balance would keep the IDR on a weakening path. However, the central bank's hawkish stance together with government efforts toward import substitution for fuel, export enhancing rules and modest fiscal deficit spending could deliver some relief for the currency.
Investors may start pricing in more aggressive tightening in India after recent measures failed to stem the currency weakness. But we're in no rush to change our forecast of two more 25 basis points central bank policy rate hikes at the October and December meetings, or a USD/INR rate of 73.50 by end-2018
After a brief hiatus, India’s currency slide resumed today despite new measures to stem the rupee (INR) depreciation. At the start of trading today, the INR reversed almost all its gains against the US dollar, which had been eked out in the last two trading sessions in anticipation of some significant action from the government and the RBI to stabilise the currency market.
Late Friday, the finance ministry announced measures including the relaxation of regulation of foreign borrowing up to $50 million by manufacturing companies for a year compared to the current minimum of three years, the scrapping of withholding tax on masala (INR-denominated) bonds, and a possible easing in the current 20% limit on foreign ownership of corporate bonds. Nothing more.
It’s hard to imagine these measures being immediately effective in curbing the currency depreciation, as the external payments situation remains on a deteriorating path. Today's market reaction testifies to this. As such, more measures are expected. Some potential steps have been widely-discussed, including:
Investment data shows that real estate activity has held up well, suggesting that China has support from a key sector even as the trade war escalates. Could this delay further trade talks until after the midterm elections even if the US lowers the tariff rate to 10% from 25% on the $200 billion goods?
Real estate activity in China has continued to support overall investment, suggesting that sentiment in the real estate asset market is still positive, even amidst the trade war. This could buy China some time and suggests there's no rush for them to enter trade talks again, as reported in Chinese media.
With tariffs on $200 billion of goods yet to be imposed, the offer of talks from the US - led by Treasury Secretary Steven Mnuchin - could signal that the administration is interested in some sort of compromise, possibly lowering the tariff rate to 10% from 25%. Though it is reported that President Trump also wants to impose further tariffs on $267bn of goods.
China could delay talks until after the US mid-term elections, as discussions before then are unlikely to yield any solid result. President Trump's tweets also suggest he is in no hurry to strike a deal with China.
Investment was slower than expected in August because we misjudged the timing of fiscal stimulus.
We did not expect railway investment to deteriorate from the previous month's -8.7% year-on-year YTD rate. Instead, it was down 10.6% YoY YTD. Still, we believe that transportation infrastructure will rise in the coming months to reflect the results of fiscal stimulus.
We still expect to see fiscal stimulus come into effect in September.
If not, we may need to gauge the situation in China again. It could be that the government is looking ahead and wants to avoid too much overcapacity in the future, even if the economy is currently facing the negative impact of a trade war. It could also be that the government has estimated a smaller impact from the trade war compared to our own estimates. In this case, China may not need a lot of pro-growth programmes.
The next round of the US-China trade war kicks off as early as next Monday with 10% tariffs on $200bn of US imports from China. The announcement dashes hopes of any trade negotiations between two rivals. Be prepared for a prolonged period of risk-off