7 May 2018
Malaysia: Trade surplus hits six-year high

Data supports expectations of strong and steady GDP growth, but nothing matters more for the markets than politics ahead of next week’s general elections    

Weak imports boost trade surplus

Malaysia’s trade surplus surged to a six-year high of 14.7bn Malaysian ringgit (MYR) in March as imports contracted more than expected by 9.6% year-on-year, while exports rose in line with consensus by 2.2%. Electronics and commodities continued to be the main drivers of Malaysia’s trade growth. The cumulative surplus in the first quarter of the year more than doubled to MYR 33.4bn from a year ago. However, the 5.8% export growth and -0.8% import growth in 1Q18 represent a sharp slowdown from 21% and 28%, respectively, from a year ago.

China foreign reserves to drop

We expect China's foreign reserves to drop in April. This is for the same reason that drove the rise in previous months-- the US dollar

Value effect from dollar move to dominate

The dollar has increased more than 2.5% in April. This would be big enough to reduce the value of non-USD denominated assets in foreign reserves. As we expect the dollar effect to dominate, foreign reserves could fall to $3.128 trillion in April from $3.143 trillion in March.

Inflows from net exports should be bigger than outflows from yuan depreciation

If we take off the valuation effect, and look into the flows of money across the border, we expect a net inflow into China. On trade, we expect net exports of $23 billion in April to add to foreign reserves after a net trade deficit of nearly $5 billion in March. Having said that, we are aware that there is a risk of net outward remittance driven by yuan depreciation in the month. If this effect was significant in April- and we don't think it was- then the fall in foreign exchange reserves would be driven by both the valuation effect and yuan depreciation. Under such circumstances, the central bank would try to avoid yuan depreciation in the coming months.

Inflows to continue due to relaxing FDI in financial sector

We expect inflows will continue to be greater than outflows for the rest of the year, which would help to build up foreign exchange reserves. 

There are three reasons:

  • First, the government has relaxed restrictions on foreign direct investments in the financial market. These include removing capital restrictions on foreign-owned banks and asset management companies that operate in China and easing ownership restrictions on foreign life insurance, securities and fund companies. The market expects these to be in place around June. At the same time, the central bank has increased outbound financial investment quotas slightly, though they should be small compared to the FDI. The quota for the Qualified Domestic Limited Partnership (QDLP) programme in Shanghai and the quota for the Qualified Domestic Investment Enterprise (QDIE) programme in Shenzhen will be expanded to $5 billion each from $2 billion and $2.5 billion, respectively.
  • Second, though trade tensions are escalating, we do not expect China to experience a persistent trade deficit. A smaller trade surplus is more likely.
  • Third, we expect yuan appreciation to continue, albeit mildly, at around 2.6% in 2018. This would be enough to prevent continuous capital outflows from China.
Philippines: Likely tightening as inflation accelerates in April

The central bank (BSP) is likely to hike policy rates at the 10 May meeting as April inflation rose to 4.5% from March’s 4.3% and February’s 3.8% 

BSP is likely to hike policy rates to assure markets and to moderate second-round effects

Inflation accelerated to 4.5% in April from the 1Q18 average inflation rate of 3.8%. The April figure was is in line with the consensus forecast and near the upper end of the BSP’s April inflation forecast of 3.9% to 4.7%. Eight of the 11 sub-index categories were higher YoY in April while food inflation remained elevated. We expect inflation to peak in May or June at around 4.8% to 4.9%. The MoM inflation rates are slowing or are steadier. We also expect the government’s rice imports to enter the market in late May or in June at lower than prevailing retail prices. Rice accounts for nine percent of the CPI. Although inflation may peak in the next two months, it is likely to remain elevated at above 4% - the upper end of BSP’s inflation target range of 2% to 4% - for the remainder of this year. The high inflation environment feeds second-round effects with demands for higher minimum wages and transport fares. Firm oil prices and a relatively weak PHP also contribute to expectations of high inflation this year. Like BSP we expect inflation to return to within the target range in 2019, but if expectations are not contained, this could lead to firmer-than-expected inflation. We expect BSP to hike policy rates by 25bp at the 10 May meeting. This would also support PHP and help moderate inflation pressures. We expect another rate hike in 4Q while BSP keeps a hawkish tone in between rate hikes.

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Good MornING Asia - 7 May 2018

No matter how fast the US economy grows, or how low its unemployment rate falls, wages remain muted - it really is different this time

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