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THINK Economic and Financial Analysising.com/THINK

Follow us@ING_EconomicsJanuary 2019

Rob Carnell - Head Of Research, APAC

Asia 2019Macro and Markets

https://twitter.com/ING_Economics

https://twitter.com/ING_Economics

The backdrop – it’s complicated

2

In words: why it’s messy

3

• Asian and Global Markets entered 2019 in a “Pollyanna” mood – looking for the good in everything.

• Fed Chair Powell’s comments at the Atlanta Economic Conference were interpreted as signaling possible rate cuts.

• This despite astonishingly strong payrolls and wage growth in December 2018.

• Stock markets soared too on more positive noises about the possibility of a China-US trade deal, thanks to comments from President Trump.

• Our view…Wake up! (apologies for the shouting)

• The Fed will still hike in 2019 and the best we can hope from the trade discussions is a cessation of additional hostilities, not a rewind of existing tariffs.

• Optimism will evaporate, the USD will show some further strength in 1Q19, and possibly 2Q19, but then start to increasingly show signs of strain.

• Synchronised global slowdown in late 2019 early 2020 sees the USD soften, and some semblance of uneasy calm return, though risk havens will likely hang on to gains (JPY)

• Idiosyncratic factors – political elections and upsets, and the return of oil need to be overlaid on this. It’s complicated.

In words and pictures: why it’s messy

4

• There are (at least) three clear and oppositely signed intervals for the USD backdrop for Asian currencies in 2019.

• More depending on the overlap between trade war developments, and the markets pricing of expected Fed behaviour.

Jan 2019 Mar 2019 Jun 2019 Sep 2019 Dec 2019

Positive outlook for trade war as Trump looks for stock positive sound bite and Xi looks to stem the hit to China’s real economy

Market responds to dovish Powell testimony by pricing in rate cuts in 2019

Reality that no real progress to be made, and lack of substance and tariff reduction leads to market disappointment

Damning realisation that US labour market is RED HOT and the Fed will be hiking in 2019

US finally succumbs to ebbing of fiscal stimulus, trade war, strong dollar, tighter rates and weak stocks. Market suspects Fed will start easing

USD - USD + USD -

Source: ING

And in pictures only: why it’s messy

5

• Here is a best guess stylised picture of how the year looks for Asian FX, though there are of course country specific factors and other considerations beyond simply the USD and the ongoing trade war to consider – for example, oil.

Strong

Weak

Optimism on trade, Fed dovishness


Trade war, Fed reality

kicks in Generalised EM weakness (?)

Political uneaseIndia, Indonesia

Asia’s exporters start to do

better

Revision of Fed, trade

view, China outlook dims

US outlook deteriorates, growth falls ,

rate cut expectations

rise

China stimulus measures

catching up with slowdown

Asian FX

Source: ING

And then there are idiosyncratic factors

6

• Taking into account oil, and politics, it gets messier still, but you are getting the idea…


USD Return to calm?

Oil $65 $68 $69 $73

Politics

Strong Asia FX Most likely period for EM Asia volatility

24 MarThai

General Election?

17 AprIndonesian

General Election

May 2019India

General Election

Idiosyncratic factors:Non time-line specific- North Korea tensions- Taiwan Cross Strait- Singapore-Malaysia tensions

Outperformers: IDR, PHP Outperformers: JPY Outperformers: IDR, PHP

Underperformers: KRW, CNY, INR

Indifference range for oil for Asia where losses due to higher costs offset due to gains to producers incomes and export growth

Benefits

Suffers

IDR, PHP, INR

MYRIDR, PHP, INR

MYR

Source: ING

What does the US want on Trade?

7

• Trade balance – China to cut its trade surplus by $200bn by end 2020 relative to 2018 levels

• Reach 75% of its commitment to increase purchase of US goods by $100bn for year starting Jan 2018 and 50% of an additional $100bn for year starting Jan 2019

• IP theft - Halt subsidies and support as part of China 2025 plan, stop policies that promote technological transfers, stop government backed cyber-theft of IP. Withdraw complaint at WTO about section 301 investigation and not retaliate to any of the US tariffs

• Tariffs / non-tariff barriers - Lower its tariffs to US in all non-critical areas. Remove certain non-tariff barriers including those associated with China 2025 and recognize that the US will impose tariffs in critical areas. Open up China’s economy for services and agricultural products

• Investment restrictions - Not challenge US restrictions on investments in some areas

• China list for foreign investment and removal of investment restrictions - Make it easier for US companies to invest in China, improve the Chinese negative foreign investment restrictions and ownership requirements

• Non-market status - Wants China to drop demand to be treated as a market economy and provide full details of shipments being trans-shipped through 3rd countries or face additional tariffs

China and CNY

8

Chinese growth – already slowing

9

45

47

49

51

53

55

57

59

61

Sep-09 Jan-11 May-12 Sep-13 Jan-15 May-16 Sep-17 Jan-19

China official manufacturing PMI SA

Manufacutring new orders PMI SA

Manufacturing new export orders PMI SA

4 trillion yuan fiscal stimulus

Overcapacity cut reform

Post Europe crisis without fiscal stimulus

Post overcapacity cut reform + trade war

• Export orders have fallen to below 50, i.e. in contraction on a monthly basis

• The Chinese domestic market has also been hit – this is now feeding right through the economy

Source: Bloomberg, ING

China’s multi-pronged (though drip-fed) response

10

Fiscal Policy Monetary Policy

Consumption Exports Investment

Import tariff cuts on consumption goods

(July 2018)

Infrastructure spending increases planned

Personal Tax threshold raised (Oct 2018)

Four RRR cuts in 2018

More in 2019

Relending and rediscounting quota increases (June, Oct

2018)

Support for corporate bond issuance

Personal tax deductions (proposed Oct 2018, effective Jan 2019)

Export tax refund increases (Oct 2018)

Import Tariff cuts on industrial goods

(effective Nov 2018)

FX Policy?If all the above, why not CNY?VAT cuts, corporate tax

cuts

Record liquidity provision

Source: Bloomberg, ING

Aggregate lending needs to improve

11

• China is still suffering from the deleveraging, shadow banking purge of 2017 and hasn’t quite reversed tack.

• It needs to do so to get money to the private sector. Banks will find it very difficult to lend to this sector.

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18

Aggregate lending - China

RMB loans Shadow banking Capital market Total

Rmb bnAggregate lending – China (RMB billion)

Source: Bloomberg and ING

China’s private owned firms facing higher default rates

12

4Q18 Defaults (212)53 Energy, 43 Materials, 42 industrials, 24 Consumer discretionary, 16 Financials, 13 consumer staples, 9 technology, 7 Utilities, 3 health care, 2 communications

0

1

2

3

4

5

6

7

China defaults

Private State owned

$USD bn

7

6

5

4

3

2

1

0

$USD bnChina defaults (USD billion)


CNY – 4Q18 was not the reverse of 4Q15

13

• The PBoC now says it will maintain a stable CNY at a reasonable level

• But then it has said lots of things in the past…

• …$ pegging, basket pegging, countercyclical policy…

• …and responded sharply to threats, like the beginning of the trade war

• Does it need a weaker currency today? (no)

• Might it need a weaker currency in a few months if the trade war kicks off again? (yes)

• But mindful of the effects of depreciation on FX reserves, peak USD/CNY might only just breach 7.0

CNY and FX reserves - levels

Rates of change

CNY 3m change annualised (%)

Annualised change inFX reserves CNY bn

Source: CEIC, Bloomberg, ING


Korea and KRW

14

15

Korean production – slowing, slowing, slowed

• Facilities investment has caused capacity to rise at a much faster pace, and operating ratios (and presumably profit per unit output) have declined.

• Inventory ratios suggest further slowdowns ahead for production.

• The good news – this is cyclical weakness, it will pass.

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0-3

-2

-1

0

1

2

3

4

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18

Investment and inventory ratios

Index of Equipment InvestmentEstimation: sa

Inventory to shipments, rhs, inv

YoY% YoY%

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18

Production and inventory ratios

IPI: Manufacturing (Mfg)

inventory to shipments ratio, rhs, inv

YoY% YoY%

Investment and inventory ratios (%YoY) Production and inventory ratios (%YoY)

Source: CEIC Source: CEIC

16

Bank of Korea rate policy – one and done?

-10

-5

0

5

10

15

20

25

11 12 13 14 15 16 17 18

Korean Residential price indicators

Seoul Metro

Gwangju

Total

Daegu

Daejon

Incheon

Rent

Busan

Ulsan 9

9.5

10

10.5

11

11.5

12

12.5

90

100

110

120

130

140

150

160

2002 2004 2006 2008 2010 2012 2014 2016 2018

Household debt (% income)

Debt to incomes ratio (%) lhs

Debt service costs, rhs

%%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18

Consumer Price Index:YoY

CPI: Core (ExcludingFood & Energy)

YoY% Headline and Core CPI

0

0.5

1

1.5

2

2.5

3

3.5

10 11 12 13 14 15 16 17 18 19 20

Market rate expectations

BoK base rate

US Fed funds, upper bound

F'castBoK f'casts based on medianof Bloomberg consensusUS Fed funds from Fed funds

futures implied rates

Market rate expectations Headline and core CPI (%YoY)

Korean residential price indicators Household debt (% income)

BoK forecasts based on median of Bloomberg consensus US Fed funds from Fed funds futures implied rates

Source: CEICSource: Bloomberg

Source: BloombergSource: CEIC

0

2000

4000

6000

8000

10000

12000

14000

Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18

Semiconductors

Gen Machinery

Petrol

Autos

Steel

Vessels15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

40,000.0

45,000.0

08 09 10 11 12 13 14 15 16 17 18

$mn

17

Korean exports – narrowly based

-6 -4 -2 0 2 4 6 8 10 12

Autos

Wireless comms

Mob phone parts

Flat Panel LCDs

Auto Parts

Flat Panels

Home Apps

Fiber

Mob phones

Computers

Steel

Vessels

Gen Machines

Petrochem

Petrol

Semiconductors

Korean exports Dec 2017 dominated by chips

Total exports (US$m) Exports by type (US$m)



Korean exports Dec 2018 YoY%– chip dominance reversed

Korean exports Dec 2017 dominated by chips

-4 -3 -2 -1 0 1 2 3

Flat Panel LCDs

Semiconductors

Wireless comms

Mob phone parts

Petrochem

Computers

Fiber

Steel

Home Apps

Gen Machines

Flat Panels

Mob phones

Auto Parts

Petrol

Vessels

Autos

18

KRW - a function of trade not yield spreads

950

1000

1050

1100

1150

1200

1250

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18

US-Korea 2Yr spread

US-KO 2Y spread

USDKRW

-2

-1

0

1

2

3

4

5

6

7800

900

1000

1100

1200

1300

1400

1500

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Current account and KRW

USDKRW, lhs

Trade balance as % GDP,rhs, inv

• There is virtually no relationship between 2Y government bond yield spreads (US and Korea) and USD/KRW

• So to some extent, we need worry less about the BoK and what they are doing, than about the global trade outlook and the Korean trade balance

• Korea’s Trade balance has been shrinking, though remains reasonably large at 3-4% GDP

• Softer demand for electronics following the 2017 surge, coupled with stagnant demand for other exports…

• …is partially offset by softer domestic demand and moderate import growth

• Some further modest narrowing of the surplus seems likely

US-Korea 2-year spread Current account and KrW

Source: Bloomberg Source: Bloomberg

19

KRW - driven by anxiety, and the USD

• When Emerging markets sell off, the KRW sells off

• The correlation is good

• KRW is a liquid currency regionally

• When things get bad, even if the Korean economy seems sound, KRW is an easy way to raise liquidity

• It might sound a bit obvious, but then the dollar index is strong, the KRW is soft…

• …but looked at another way, a broad dollar appreciation is one way of causing an EM Sell off…

• …local EM central banks have to fight domestic currency weakness with rate hikes, and fears spike about deficit countries sustainability

600

700

800

900

1000

1100

1200

13001000

1050

1100

1150

1200

1250

10 11 12 13 14 15 16 17 18

USDKRW and MSCI EM index

USDKRW, lhs

MSCI EM index, rhs, inv

USDKRW MSCI index

70

80

90

100

110

1000

1050

1100

1150

1200

1250

10 11 12 13 14 15 16 17 18

USDKRW and DXY

USDKRW, lhs

Dollar index, rhs

USDKRW DXY

USD/KRW (lhs) and MSCI index (rhs) USD/KRW (lhs) and DXY (rhs)


Japan – adequate, improving

20

21

Japan: forward guidance – forward nonsense

• Who cares that the BoJ is missing its inflation target? Not the BoJ, if their asset purchasing is anything to go by

• The current run rate is only about JPY45 pa

• This could be a hint at how they eventually stop doing QQE…”stealth taper”

• But their forward guidance pretends they are doing more than ever – this is not the case

0

50

100

150

200

Aug 16Nov 16 Feb 17May 17Aug 17Nov 17 Feb 18May 18Aug 18Nov 18

JGBs

Total Assets (inc ETFs, JREITS

etc)

Cumulative asset total if BoJ

achieving JPY80tr asset

purchase pace

BoJ cumulative asset growth, JPY tr

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2013 2014 2015 2016 2017 2018

Consumer Price Index: YoY

Ex fresh food, energy

Tokyo

YoY% Inflation missing BoJ's 2% targetInflation missing BoJ’s 2% target (%YoY) BoJ cumulative asset growth, JPY tr

Cumulative asset total if BoJ

JGBs

Total assets (inc ETFs, JREITS etc..

JGBs

Total assets (inc ETFs, JREITS etc..

achieving JPY80tr asset

purchase paceConsumer Price Index: YoY

Ex fresh food, energy

Tokyo

Source: CEIC, Bloomberg Source: CEIC, ING

22

Japan: reasons to be cautious?

• The BoJ and government have both been talking the economy down, and the prospects for any normalisation.

• 10Y JGB yields have been driven close to zero, amidst fears that inflation expectations will bring about a self-fulfilling spiral of deflation

• But the real worry is the JPY, not helped by the ECB’s pull back and the fact that the USD looks questionable too

-0.05

0

0.05

0.1

0.15

0.2

104

106

108

110

112

114

116

Jan 18 Mar 18 May 18 Jul 18 Sep 18 Nov 18 Jan 19

USDJPY JGB yields

USDJPY 10Y JGB yields

-0.05

0

0.05

0.1

0.15

0.2

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Jan 18 Apr 18 Jul 18 Oct 18 Jan 19

5Y Breakeven, lhs

10Y Breakeven, lhs

10Y JGB, rhs

%YoY

Yen strengthens and JGB yields drop Inflation expectations fallingYen strengthens and JGB yields drop Inflation expectations falling

USD/JPY 10Y JGB yields %YoY %Yield

Source: BloombergSource: Bloomberg

23

Japan: growth – what’s the problem?

• Abe seems to be succeeding in strong-arming corporate Japan and causing them to pay faster wages growth than the glacial improvement seen until now…

• …GDP in 3Q18 was a bit of a disaster, but Japan was hit by the most powerful storm on the plant in September, (Typhoon Jebi)

• If you focus on the Tankan survey, not GDP, then the direction of the economy remained positive in 4Q18

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2013 2014 2015 2016 2017 2018

Scheduled

Cash earnings

YoY% YoY% 3mmaYoY% YoY% 3mma

-1

-0.5

0

0.5

1

1.5

2

2.5

3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 18

All industry

Large Mfg

GDP

Index YoY%

Wages growth – up! Economic activity – up!

%YoY 3mma%YoY


India and INR

24

Potential

7-8%

4-5%

Baseline*

7.0%

4.5%

Worst

<6.0%

>6.0%

25

India: medium-term outlook up to FY2020

GDP Growth

CPI Inflation

Neutral Loose LooseFiscal policy: ~3% of fiscal

deficit

Tight Neutral LooseMonetary

policy: ~4% inflation

* Average of ING growth and inflation forecasts from FY2018-19 and FY2019-20 (FY = financial year starting 1 April)

Source: ING

26

India: what shaped the year 2018?

7.0

7.2

7.4

7.6

7.8

8.0

8.2

8.4

62

64

66

68

70

72

74

76

USD/INR 10y bond (% rhs)C

PI s

pik

e a

bo

ve5

%

FY2

01

7-1

8 f

isca

ldef

icit

ove

rru

n

Up

swin

g in

cru

de

oil

pri

ce, U

S-C

hin

a tr

ade

war

US

Trea

sury

m

anip

ula

tor

rad

ar

$1

.8b

nb

ank

scam

RB

I rat

e h

ike

US

emb

argo

on

Iran

o

il

Loss

of

BJP

in

Kar

nat

aka

stat

e

Loss

of

BJP

in 4

ou

t o

f 5

st

ate

elec

tio

ns

GST

rat

e cu

t

CP

I dip

s b

elo

w

4%

Wai

ver

on

Iran

oil

imp

ortIN

R s

tab

iliza

tio

n

mea

sure

s

RB

I pau

ses

rate

hik

e

IL&

FSfi

nan

cial

tro

ub

le

Go

vt.-

RB

I liq

uid

ity

ten

sio

ns

Furt

her

GST

cu

t

Res

ign

atio

n

of

RB

I go

vern

or

Arg

enti

na,

Turk

ey f

inan

cial

cr

isis

Source: ING, Bloomberg, Various

27

India: politics dominates in 2019

Will BJP retain ower?• Lok Sabha (lower house) elections in May

2019

• Loss to the ruling BJP in 8 by-elections for Lok Sabha seats and in 3 key states held in 2018…

• … reflects PM Modi’s waning popularity

• … makes it a close-to-call general elections

• Is coalition era back?

268

36

45

38

136

NDA- Bharatiya Janata Party

NDA- Other parties

UPA- Congress

UPA- Other parties

Other parties

Current Lok Sabha Strength:523

NDA: National Democratic Alliance, UPA: United Progressive Alliance

Current party position by states Will BJP retain power?

28

India: turmoil, turmoil and more turmoil

Policy certainty, or uncertainty• An evident shift in the RBI policy after

resignation of Governor Patel in December highlights policy uncertainty

• The rift between the govt. and the RBI has ended, but the RBI’s independence has been compromised

• The RBI is likely to leave policy on hold in 2019, but don’t be surprised if it actually cuts rates

• An ultra-loose fiscal policy will see another overshoot of fiscal deficit above 3.3% of GDP target for current fiscal (ING forecast 3.6%)

• The continuity of easier monetary and fiscal policy will be at risk depending on the outcome general elections

• Re-pricing of greater political risk => INR will continue to be Asian underperformer

Politics overshadows economy• Political uncertainty is looming large as general

election approach

• A clear win to incumbent government looks difficult judging from BJP’s poor showing in recent state elections

• This injects more uncertainty for markets in the run up to and well past the polls

• On a positive note, surge in election spending should support growth…

• ...though external drag from the trade war looks inevitable

• Geopolitics, such as US sanction on oil import from Iran will remain in play as key driver of financial asset prices

29

India: growth and inflation dynamic

-1

0

1

2

3

4

5

6

7

8

9

2014 2015 2016 2017 2018

% YoY

Financial year starting April

High core inflation

Total CPI Core CPI Food, utilities and transport

-3

0

3

6

9

12

15

18

2010 2011 2012 2013 2014 2015 2016 2017 2018

% YoY


Choppy policy, choppy investment

Private cons Gross fixed capital formation

-60

-40

-20

0

20

40

60

80

-6

-4

-2

0

2

4

6

8

2012 2013 2014 2015 2016 2017 2018

% YoY


Vulnerability to oil

Wholesale price

Average oil price

- rhs

-4

-2

0

2

4

6

8

10

12

1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18

% YoY


Domestic demand-driven GDP growth

Domestic demand Net trade

Domestic demand-driven GDP growth (%YoY) Choppy policy, choppy investment (%YoY)


High core inflation (%YoY) Vulnerability to oil (%YoY)


30

India: potential risks

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

2011 2012 2013 2014 2015 2016 2017 2018 INGf

% of GDP


Resurgent twin-deficit problem

Current account balance Fiscal balance

0

2

4

6

8

10

12

2008 2009 2010 2011 2012 2013 2014 2015 2016

% of gross

loans


High public sector bank NPAs impair RBI policy

64

65

66

67

68

69

70

71

72

73

74

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

ING f

% of GDP


Rising public debt

10

17

24

31

38

45

52

59

-60

-40

-20

0

20

40

60

80

2011 2012 2013 2014 2015 2016 2017 2018


Rising oil will keep deficit trade deficit under pressure

Trade deficit ($bn, 3mo. rolling sum) - rhs

Average oil price (% YoY, 3mma) - lhs

Rising oil will keep trade deficit under pressure High public sector bank NPAs impair RBI policy

Resurgent twin-deficit problem Rising public debt



Asia – regional trends…

31

32

Inflation – a mixed bag

• North Asian inflation is low, arguably too low, though lower oil prices is the main cause

• Inflation in SE Asia falls into 3 camps1. Those for whom inflation is a bit high (basically the Philippines), though trending sharply

down as food and energy price increases reverse2. Those for whom it is a bit low (Thailand, Singapore and Malaysia – a GST effect)3. Everyone else (Vietnam and Indonesia), where it is about right

Likely policy response varies across both groups

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0


North Asia

China

Hong KongSAR

South Korea

Taiwan

YoY%

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0


SE Asia

Philippines

Vietnam

Indonesia

Thailand

Singapore

Malaysia

Source: CEIC

North Asia (%YoY) SE Asia

Source: CEIC

33

Export competitiveness

• A more direct way to look at competitiveness, and room for CB policy changes is export growth

• 2017 export strength was partly a function of 2016 weakness

• ASEAN saw very robust export growth in 2017 – though there were helpful base effects

• Even accounting for these, Malaysia still looks impressive

• Singapore is hanging in, though rates of growth are fairly pedestrian

• …Indonesia’s exports are no longer looking all that strong

• China on the other hand had a USD export bounce in line with the decline in 2016, but has continued to push ahead

• Taiwan and Korea are looking softer, after stellar 2017

-5

0

5

10

15

20

25

2016 2017 2018 ytd

% YoY ASEAN export growth

Sing Thai Malay Indon Phil Viet

-10

-5

0

5

10

15

20

2016 2017 2018 ytd

% YoY North Asia export growth

China Hong Kong Japan Taiwan Korea


ASEAN export growth (%YoY) North Asia export growth (%YoY)

Americas

Europe

Japan

As ia Pac

Asia Pacific dominates Semiconductor industry

Americas Europe Japan Asia Pac

It’s not just output, SC prices are falling too

34

• US Semiconductor billings are a reasonable proxy for global demand, and growth of billings has stopped

• A number of price indicators suggest show that unit prices of semiconductors are also falling

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

Semiconductor industry - Prices

US Export prices

Korea Export Prices, SC Machines

Korea Export Prices, SC Display

YoY%YoY%

0

500

1,000

1,500

2,000

2,500

3,000

-40

-20

0

20

40

60

80

100

11 12 13 14 15 16 17 18

Semiconductor billings

YoY%, rhs

3m average

YoY% $mn


Source: CEIC

Semiconductor billings Semiconductor industry – prices (%YoY)

Asia Pacific dominates semiconductor industry

%YoY $m

35

Trade weighted FX – not many stand-outs

• Most Asian currencies appreciated in 2016 and 2017 on a trade weighted basis, and have depreciated in 2018

• Taiwan dollar and Thai baht appreciated more than the others (but not much)

• There has been some recovery in the most stressed currencies of 2018 – PHP, IDR, INR

• CNY looks quite weak on this basis

83

88

93

98

103

108

113

118

2015 2016 2017 2018

Jan 2016=100Trade weighted exchange rates

TWD

THB

AUD

SGDJPY

MYR

INRIDR

PHP

NZD

KRW

CNY

Source: CEIC

Trade weighted exchange rates

36

Real currency valuations – mostly fair

• There are few stand-out misalignments in Asian FX space

• China could appreciate quite a bit without becoming overvalued

• Malaysia is becoming fair value or maybe now exceeding it…depends on start date

• Indonesia has declined, but not that much

• Philippines looks weak, Singapore steady, and

• Thailand remains strong

85

90

95

100

105

110

115

120

2015 2016 2017 2018

REER North Asia

China Japan Korea Taiwan85

90

95

100

105

110

115

120

2015 2016 2017 2018

REER SE Asia

Indonesia Malaysia Philippines Singapore Thailand

90

92

94

96

98

100

102

104

106

108

110

2015 2016 2017 2018

Other Asia Pacific

Australia India New Zealand


Source: CEIC

REER North Asia REER SE Asia

Other Asia Pacific

37

Real policy rates – how much policy leeway?

• Real rates for most of Asia are close to zero

• Positive real rates (China – small), India, Indonesia, Malaysia) probably justified, could rise further

• Negative real rates (Japan, Philippines) have room to rise – but could benefit from falling inflation

-1

0

1

2

3

4

5

6

7

Policy rates and inflation

2018 year-to-date CPI inflation

Policy rate

%

Source: Bloomberg, CEIC and ING

Policy rates and inflation (%)

38

Where is most at risk? It depends…

• The heat map is one way of considering what may be most at risk in the event of a renewed bout of EM anxiety

• Vietnam tops this list due to its high levels of external debt, relatively high inflation and weak government

• Turkey and Argentina are not surprisingly high up this list, but so too, worryingly is Indonesia

• But these heat maps take some interpreting, if we credit Indonesia’s high real rates as proactive and prudent, then it does much better – an incomplete tool then…

Vietnam Turkey Indonesia Argentina Malaysia Mexico India Philippines Poland China Japan Thailand Singapore Korea Taiwan

Inflation 2.98 20.3 3.13 46.77 0.2 4.83 2.19 5.1 1.1 1.9 0.8 0.36 0.3 1.3 -0.05

Real rates 1.27 3.7 2.87 10.84 3.05 3.42 4.31 -0.35 0.4 2.45 -0.9 1.39 1.58325 0.45 1.425

Govt debt % 58.2 28.5 28.9 52.6 54.2 54.2 70.2 37.8 51.4 47.8 236.4 41.9 110.9 39.8 35.2

Deficit % -1.8 -2.03 -2.92 -0.32 -2.8 -2.65 -3.86 -3.04 -1.4 -3.69 -3.16 -3.2 0.58 2.72 -0.11

Import Cover 2.9 4.0 7.7 8.7 5.7 4.2 9.4 8.5 4.4 17.4 3.1 9.6 9.2 8.9 19.4

C/A Balance 1.8 -5.6 -2.8 -6.3 2.6 -1.5 -2.4 -3.0 -2.1 0.4 3.8 7.6 18.5 4.6 12.7

External debt % 216.5 65.5 35.4 16.9 66.8 8.7 20.1 23.9 66.8 14.6 2.0 31.0 0.0 28.2 35.4

Short term Ext debt% 34.9 17.4 4.5 4.0 30.8 4.0 4.1 3.8 8.6 9.4 0.2 12.8 0.0 8.0 33.2

Government 0.05 0.14 0.01 0.18 0.36 0.10 1.83 -0.01 0.69 1.07 0.34 1.37 0.01 0.88 2.21

Rank 1 2 3 4 5 5 7 8 9 10 11 12 13 14 15

Source: Bloomberg, World Bank and ING

Oil – an unconventional view

39

40

Asian growth boom and now decline – thanks to oil?

• Asian trade slumped in 2015 / 2016, and the pick up in 2017 was been flattered by what was a very

weak base. Export growth has now dropped right back

• One explanation rests on terms of trade for the oil exporting regions – weak oil prices left them with no

spending power for Asian produced exports, that improved in 2017, peaked out in 2018, and has now

been falling again

• The OPEC+ supply cut could change all of this, but until then, oil bears close watching in case it falls

below $65/bbl again

-15

-10

-5

0

5

10

15

-60

-40

-20

0

20

40

60

80

2012 2013 2014 2015 2016 2017 2018

% YoY% YoY, 3mma

Asian exports and crude oil price

Average brent oil

price

Asia exports

-15

-10

-5

0

5

10

15

0

20

40

60

80

100

120

140

2012 2013 2014 2015 2016 2017 2018

$/bbl% YoY, 3mma

Asian exports and crude oil price

Average brent oil

price

Asia exports


Asian exports and crude oil price Asian exports and crude oil price

(%YoY)($/bbl)

(%YoY, 3mma)

(%YoY, 3mma)1515

At the indifference range, everyone’s happy / sad

41

Oil / supply / demand

Global GDP

High

Low

Producers happier

Consumers happier

“Indifference range”

$/bbl $/bbl

D

S

S’

S’’

P*

• Casual observation suggests the current “indifference range” lies somewhere around $65-$75/bbl

• We can see oil fall a little further before it starts to become a “drag” from the producer perspective

Source: ING

Forecasts

42

43

Forecast summary: China, Taiwan

Sources: Bloomberg, CEIC, ING

China 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (%YoY) 6.9 6.6 6.2 6.2 6.3 6.3 6.3 6.2

CPI (%YoY) 1.6 2.2 2.5 2.5 2.6 2.6 2.5 2.5

PBOC 7D reverse repo rate (%, eop) 2.50 2.55 2.50 2.50 2.45 2.45 2.45 2.35

10Y govt. bond yield (%, eop) 3.90 3.30 3.25 3.20 3.15 3.10 3.10 3.00

CNY per USD (eop) 6.507 6.879 7.100 7.200 7.300 7.300 7.300 7.000

Taiwan 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (%YoY) 2.9 2.6 1.6 1.4 2.0 2.2 1.8 2.0

CPI (%YoY) 0.6 1.5 1.2 1.0 1.0 1.2 1.0 1.0

CBC discount rate (%, eop) 1.38 1.38 1.38 1.38 1.38 1.38 1.38 1.38

3M CP rate (%, eop) 0.65 0.72 0.66 0.66 0.66 0.66 0.66 0.66


TWD per USD (eop) 29.73 30.55 30.60 30.60 30.40 30.40 30.40 28.60

44

Forecast summary: Korea, Singapore


Korea 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (%YoY) 3.1 2.5 2.1 1.7 1.9 2.0 1.9 2.6

CPI (%YoY) 1.6 1.6 1.7 1.7 1.4 1.8 1.7 1.6

BoK base rate (%, eop) 1.50 1.75 1.75 1.75 1.75 1.75 1.75 1.75

3M CD rate (%, eop) 1.66 1.93 1.90 2.00 2.00 2.00 2.00 2.00


KRW per USD (eop) 1067 1111 1130 1140 1125 1115 1115 1000

Singapore 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (%YoY) 3.6 3.3 2.0 2.2 2.9 2.8 2.5 2.9

CPI (%YoY) 0.6 0.4 0.7 1.1 0.8 1.1 0.9 0.9

3M interbank rate (%, eop) 1.50 1.89 1.80 1.80 1.80 1.80 1.80 2.00


SGD per USD (eop) 1.337 1.363 1.370 1.360 1.350 1.340 1.340 1.280

45

Forecast summary: Malaysia, Thailand


Malaysia 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (%YoY) 5.9 4.6 4.2 4.6 4.5 4.6 4.5 4.8

CPI (%YoY) 3.8 1.0 1.0 1.5 2.0 2.0 1.6 1.8

BNM o/n policy rate (%, eop) 3.00 3.25 3.25 3.25 3.25 3.25 3.25 3.25



MYR per USD (eop) 4.05 4.13 4.16 4.20 4.16 4.12 4.12 4.00

Thailand 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (% YoY) 3.9 4.1 3.4 3.6 3.9 4.2 3.8 4.0

CPI (% YoY) 0.7 1.1 1.0 0.9 0.8 1.2 1.0 1.4

BOT 1D repo rate (%, eop) 1.50 1.75 1.75 1.75 1.75 1.75 1.75 1.50



THB per USD (eop) 32.58 32.33 33.00 33.30 33.10 32.80 32.80 32.00

Note: 3Q18 forecasts for GDP, actuals for other indicators.

46

Forecast summary: Indonesia, Philippines


Indonesia 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (%YoY) 5.1 5.2 5.4 5.5 5.1 5.2 5.3 5.2

CPI (%YoY) 3.8 3.2 3.2 3.3 3.6 3.4 3.1 3.4

BI 7D reverse repo rate (%, eop) 4.25 6.00 6.00 6.25 6.25 6.25 6.25 6.25



IDR per USD (eop) 13555 14390 14400 14550 14400 14350 14350 14050

Philippines 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (%YoY) 6.7 6.3 5.8 6.1 6.1 6.2 6.1 6.4

CPI (%YoY) 2.9 5.4 3.7 3.3 3.1 3.2 3.3 3.4

BSP o/n borrowing rate (%, eop) 3.00 4.75 4.75 4.50 4.50 4.25 4.25 4.00

3M T-bill rate (%, eop) 2.43 5.78 5.60 5.35 5.40 5.25 5.25 4.90


PHP per USD (eop) 49.85 52.56 53.64 53.89 54.13 54.24 54.24 54.79

47

Forecast summary: India, Japan


India (FY April-March) 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (%YoY) 6.7 7.1 6.4 6.0 6.8 7.2 6.8 7.2

CPI (%YoY) 3.6 3.5 2.8 3.0 4.1 5.5 4.5 5.0

RBI repo rate (%, eop) 6.00 6.50 6.50 6.50 6.50 6.50 6.50 6.50

3M T-bill rate (%, eop) 6.09 6.75 6.75 6.80 6.80 6.85 6.90 6.90


INR per USD (eop) 65.18 72.50 72.50 73.80 71.00 69.00 68.00 65.00

Note: Annual figures on financial year basis

Japan 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

Real GDP (%YoY) 1.7 1.9 1.6 0.7 2.8 0.4 1.4 1.3

CPI (%YoY) * 0.5 1.0 0.7 1.3 1.2 2.1 1.3 1.9

Excess reserve rate (%, eop) -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 0.00

3M JPY libor rate (%, eop) -0.02 -0.07 -0.05 -0.05 -0.05 -0.05 -0.05 -0.05


JPY per USD (eop) 113 110 113 113 110 105 105 95

* Assuming a consumption tax hike in 2019

48

Forecast summary: FX


USD/Asia exchange rates 2017 2018E 1Q19F 2Q19F 3Q19F 4Q19F 2019F 2020F

USD/CNY 6.507 6.879 7.100 7.200 7.300 7.300 7.300 7.000

USD/HKD 7.815 7.832 7.800 7.800 7.800 7.800 7.800 7.800

USD/INR 65.18 72.50 72.50 73.80 71.00 69.00 68.00 65.00

USD/IDR 13555 14390 14400 14550 14400 14350 14350 14050

USD/KRW 1067 1111 1130 1140 1125 1115 1115 1000

USD/MYR 4.047 4.134 4.160 4.200 4.160 4.120 4.120 4.000

USD/PHP 49.85 52.56 53.64 53.89 54.13 54.24 54.24 54.79

USD/SGD 1.337 1.363 1.370 1.360 1.350 1.340 1.340 1.280

USD/TWD 29.73 30.55 30.60 30.60 30.40 30.40 30.40 28.60

USD/THB 32.58 32.33 33.00 33.30 33.10 32.80 32.80 32.00

EUR/USD 1.20 1.15 1.10 1.12 1.15 1.20 1.20 1.30

USD/JPY 113 110 113 113 110 105 105 95

AUD/USD 0.76 0.70 0.72 0.68 0.69 0.71 0.71 0.75

NZD/USD 0.69 0.67 0.67 0.65 0.66 0.68 0.68 0.73

49

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