Quarterly Global Outlook - Q2 2018 Balancing Between Hopes & Fears - UOB Group
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Quarterly Global Outlook
Q2 2018
Balancing Between Hopes & Fears
SINGAPORE FOCUS FX STRATEGY
Singapore MAS Policy Preview: It’s Time Risks And Opportunities In 2Q18
To Catch Up With Policy Normalization As USD Stays Soft
MALAYSIA FOCUS RATES STRATEGY
Rise Of China-Malaysia Relations Staying The Course On Monetary Policy While
Recognizing That Equilibrium Has Shifted In Bond Markets
INDONESIA FOCUS COMMODITIES STRATEGY
Achieving Fiscal Sustainability Key To Clear Build-Up In Net Long Positioning And
Fostering Higher Economic Growth Inventories Cap Further Meaningful Gains
CHINA FOCUS
NPC Targets Set For 2018
CONTENT
04
EXECUTIVE SUMMARY CHINA � 46
Balancing Between Hopes & Fears
HONG KONG � 47
11
FX, INTEREST RATE & COMMODITIES FORECASTS INDIA � 48
INDONESIA � 49
12 JAPAN � 50
SINGAPORE FOCUS I
Singapore MAS Policy Preview: It’s Time To Catch Up MALAYSIA � 51
With Policy Normalization
MYANMAR � 52
18 SINGAPORE � 53
SINGAPORE FOCUS II
Singapore Budget 2018: Strategies To Cope SOUTH KOREA � 54
With An Ageing Society
TAIWAN � 55
22 THAILAND � 56
MALAYSIA FOCUS
Rise Of China-Malaysia Relations VIETNAM � 57
25
INDONESIA FOCUS AUSTRALIA � 58
Achieving Fiscal Sustainability Key To
Fostering Higher Economic Growth EUROZONE � 59
NEW ZEALAND � 60
30
CHINA FOCUS UNITED KINGDOM � 61
NPC Targets Set For 2018
UNITED STATES OF AMERICA � 62
32
VIETNAM'S CONSUMER INSIGHTS FX TECHNICALS � 63
The Bright Spot In The Mekong Region
COMMODITIES TECHNICALS � 68
34
FX STRATEGY Information as of 23 March 2018
Risks And Opportunities In 2Q18 As USD Stays Soft
GlobalEcoMktResearch@UOBgroup.com
www.uob.com.sg/research
38 Bloomberg: UOBR
RATES STRATEGY
Staying The Course On Monetary Policy While
Recognizing That Equilibrium Has Shifted In Bond Markets
42
COMMODITIES STRATEGY
Clear Build-Up In Net Long Positioning And
Inventories Cap Further Meaningful Gains Scan the QR Code for a list of all our reports
EXECUTIVE SUMMARY
Balancing Between Hopes & Fears
At the start of the year, the global economy looks and sounds familiar, that’s because intellectual-property violations. Another
was still humming along and IMF upgraded it is. Right after Trump’s election victory venue for the US to force through trade
global growth as well as the outlook in late 2016, this was exactly one of the protectionism is possibly through labelling
for several major economies (many key concerns everyone had since Trump China as a “currency manipulator” in the
other international agencies did similar campaigned on a populist platform of semi-annual US Treasury FX report as an
upgrades as well). But financial markets anti-establishment, anti-free trade, anti- indirect route of forcing trade restrictions.
followed a different script. After a positive immigration, imposition of trade tariffs and The next report will be due in April 2018.
January, things went south in February tax cuts (which is seen as protectionist and
as the sudden spike in concerns about detrimental to global trade). But now, what we’re seeing from President
the possibility of a faster Fed rate hike Trump is either a fulfilling of his presidential
trajectory sent stock markets tumbling, After concentrating on domestic issues campaign pledges, creating a distraction
with a “timely” warning that volatility is not in his first year in office, Trump first from his domestic political issues, taking a
dead. announced tariffs on solar panels & risky bet to make gains in the November
washing machines in early 2018, and US mid-term elections or a combination of
That said, even though the first 3 months on 1 Mar, he announced his intention to all three. And it would be naïve to think that
of 2018 did not start out as planned and impose 25% tariffs on steel imports and Trump can keep throwing more and bigger
it probably did not hurt as much as we 10% tariffs on aluminium imports. And now “stones” at China and expect China not to
initially feared, the risk is now emanating he seems ready to take aim at China as respond. Surely Trump will get a response,
from the geopolitical space. The biggest Trump signed an executive memo on 22 and likely not a pleasant one. Our base
immediate risk is likely the escalating Mar, instructing US Trade Representative case remains that we do not expect an all-
trade tensions between US and the rest Robert Lighthizer to levy at least US$50bn out trade dispute but there is clearly a non-
of the world, in particular China. If this of tariffs against Chinese goods over zero potential risk.
US Trade In Goods Balance With Key Partners: Vulnerability To US Based On Export Exposure:
Bigger Deficit, Bigger Target For Trump China, Japan, Vietnam & India Clearly Stand Out
Source: Macrobond, UOB Global Economics & Markets Research Source: CEIC, Bloomberg, UOB Global Economics & Markets Research
200
Hong Kong
180
Singapore
Export of goods & services (% GDP)
160
140
120
100
Vietnam
80 Thailand
Taiwan Malaysia
60
EU South Korea
40
NZ Philippines India
20 Australia China
Myanmar Indonesia
Japan
0
0 5 10 15 20 25
Export to US (% total export)
Quarterly Global Outlook 2Q2018
04 UOB Global Economics & Markets Research EXECUTIVE SUMMARY
Beyond the US-led trade tensions, there hosted in Russia, that could bring some inventories in key commodities. Across
are many other geo-political developments challenges of a political nature. 1Q, copper witnessed a strong build-
that markets need to be watchful in the up in inventories across all three major
coming second quarter: And to end our executive summary with exchanges, the LME, COMEX and ShFE.
what we wish for in the coming months, to
US Special Counsel Robert Mueller’s quote from a cliché answer from another As for WTI crude oil, the on-going surge in
investigation into Russian meddling global “competition” of a different but full US shale oil production has now pushed
with the 2016 US presidential elections of Trump-related influence/interest, we US crude oil production past the 10 mio
(a stormy time for Trump?) sincerely hope for – world peace. bpd level. As such, US crude oil exports
have surged, threatening the fragility of
Japan domestic political stability being _________________________________ the OPEC led global production cap. In
rocked by a controversial government addition, net long positioning in crude oil
land sale deal implicating Japan PM FX Strategy: as implied from NYMEX futures is now at a
Shinzo Abe and Fin Min Taro Aso Risks And Opportunities In 2Q18 decade high. Overall, after the strong price
As USD Stays Soft rally last year, we now see LME copper
UK & EU Brexit negotiations seeing After more than a year of non-stop sell-off, settling into range trade at USD 6,500 to
positive developments ahead of the EU the outlook for the USD remains difficult 7,000 / MT. Similarly Brent Crude Oil will
leader’s summit (22-23 Mar) and weak. On-going flattening of the yield find it difficult to trade above USD 70 / bbl,
curve and the converging of normalization rather some consolidation within USD 60
A US-North Korea Leaders’ summit of global monetary policy are two key to 70 / bbl is in order.
potentially in May 2018 (It is unclear drivers that continue to weigh on the
whether this will be a positive or a USD. For 2Q18, we see three risks which In the precious metals space, there was a
negative for the markets?) present interesting opportunities in the FX clear falling out of favor for palladium as
space. extended net long positioning and ETF
Increasingly rocky relationship between holdings were pared off. Silver was also
Russia and G7 First, investors may need to hedge against weighed down as net long positioning was
more JPY strength to 100 against the completely erased across 1Q. Finally, as
Italian election stalemate and new USD, as concerns about reduced bond for gold, we maintain our negative view.
elections are likely, but the timing is not purchases by the BoJ persist. Second, More likely than not, gold is expected
yet settled given the persistent widening of USD vs to pull back to USD 1,200 / oz as short
HKD interest rate spread, it is increasingly term money market rates continue to rise
Malaysia likely to hold its 14th General likely that the HKD weak side convertibility further, adding to funding costs for a long
Elections in 2Q and the ruling coalition of 7.85 will be tested, but we continue to gold position.
is largely expected to win the elections expect the USD/HKD peg to hold. Third, we _________________________________
like to take this opportunity to accumulate
G7 leaders’ summit in June may be a the AUD now that it has pulled back to the Rates Strategy:
messy affair if trade tensions escalate lower end of its broader trading range. Our Aggressive End 2018
further Money Market Rates Forecast
Specific to USD/Asia, we maintain our Are Within Sight; And Expectations
Geo-politics is creating a lot of uncertainty view of two halves, i.e. once Asian For Longer Dated Bond Yields
in the outlook and the warnings have currency strength dissipates, USD/Asia Are Reset Higher
been sounded even though the economic may well stabilize and inch higher in H2. We maintain our expectations for the
fundamentals are healthy. Global monetary Ironically, any escalation of trade tensions FED to hike a total of 3 times in 2018,
policy is still on the normalising path led by may well accelerate this bottoming of though the risk of a 4th hike has increased
US Federal Reserve but politics & trade USD/Asia, as many Asian economies, considerably. After the jump in 3M US
tensions could spoil the party. China, in including China have large export engines Libor from 1.7% to 2.2% across 1Q18, our
comparison, is on the other end of the and as such, Asian currencies may well money market rate forecasts are no longer
spectrum, providing the political stability be vulnerable to any negative impact on as aggressive compared to when they
and continuity as Xi Jinping is unanimously exports. Consequently, USD/SGD is seen were made at the end of 4Q last year. As
elected as the President during the 13th stabilizing in 2Q at around 1.29, before such, we maintain our end 2018 US Libor,
National People’s Congress (NPC) drifting back up to 1.32 by End 2018. SG Sibor and SOR at 2.40%, 1.85% and
session. _________________________________ 1.65% respectively.
On balance, we believe we have more Commodities Strategy: In addition to the anticipated rise in short
to be hopeful for than to be fearful, but Build-Up In Net Long Positioning term money market rates, we also highlight
admittedly the number/degree of “fears” is And Inventories the increasing imbalances forming in
increasing. For sure, the 2018 World Cup Cap Further Meaningful Gains offshore US funding markets. These can
tournament will be a welcome distraction As a result of the Goldilocks euphoria, be witnessed from the rise in 3M CP/OIS
at the end of the 2nd quarter (14 June since the start of the year, there has been and 3M L/OIS spreads across 1Q.
to 15 July 2018) but with the Cup being a clear build-up in net long positioning and
Quarterly Global Outlook 2Q2018
EXECUTIVE SUMMARY UOB Global Economics & Markets Research 05
As for longer term bond yields, we have liveable city; caring and cohesive society; Malaysia Focus:
raised our projections. Our end 2018 and fiscally sustainable and secure future. Rise Of China-Malaysia Relations
forecast for 10Y US Treasury yield of This is a continuation Budget 2017 where China and Malaysia celebrated 40 years
2.90% has been reached, and we raise it we then observed the inclusion of the of diplomatic relations in 2014. There
to 3.20%. Similarly, we also raise our end sections on the “environment” and “fiscal has been significant strengthening of
2018 forecast for 10Y SGS from 2.45% to prudence” for the first time. China-Malaysia bilateral relations through
2.75%. trade, investments and tourism. The
Finance Minister Heng Swee Keat levels accelerated particularly in 2016
Hereafter is a brief synopsis of key Focus discussed at length with regards to rising and 2017. We anticipate a larger flow of
pieces as well as key FX and Rates views. expenditure, particularly from healthcare FDI and investments from China in the
and infrastructure, due to the rapidly ageing coming years particularly with the Belt and
_________________________________ population. This is a long term challenge Road initiative. Although there is rising
for Singapore since total fertility rate competition from Indonesia and the CLMV
Singapore Focus I: remains stubbornly low, and immigration region, Malaysia looks favourable from
Singapore MAS Policy Preview: policies remain tight. As more of the perspective of long historical friendship
It’s Time To Catch Up With population reaches retirement age and between the two countries, high level of
Policy Normalization drops out of the workforce, government’s political engagement, strong government
The Monetary Authority of Singapore revenue from direct methods of taxation cooperation, strategic geographical
(MAS) is expected to release monetary will be growing at a slower pace. To that, location, good infrastructure, and available
policy decision on the 2nd week of April he prepared the nation for a Goods & natural resources.
2018 (9th to 13th April) and we expect the Services Tax hike from 7% currently to 9% _________________________________
central bank to start policy normalization sometime between 2021 and 2025.
by allowing the SGD NEER on a mildly Indonesia Focus:
appreciating path (est: 0.5% pa) while Government’s overall budget surplus of Achieving Fiscal Sustainability
keeping the midpoint and bandwidth of the S$9.61 billion (2.1% of GDP) for FY2017 Key To Fostering Higher
policy band unchanged. was larger than initially (S$1.91 billion) Economic Growth
expected. For FY2018, the government Indonesia’s fiscal sector has shown
Our policy normalization expectation estimates a primary budget deficit of remarkable improvement over the past
is based on three key factors. Firstly, S$7.34 billion. This is thus an expansionary decade or so, leading to an investment
global and domestic growth-inflation- budget that will provide some boost to grade ratings on the country by all three
labour conditions have improved quite economic growth for FY2018. Overall major international rating agencies (Fitch,
significantly since the lows of 2015. budget balance is expected to come in at Moody’s, and finally Standard & Poor’s)
Central banks around the world today are a deficit of S$0.60 billion. as of 2017. In fact, in late 2017, Fitch
biased towards tightening, rather than _________________________________ upgraded Indonesia’s rating to BBB (Stable
loosening monetary policy stance. outlook, up from BBB- previously) and just
China Focus: months after S&P finally gave Indonesia
Secondly, the forex market seems to be China NPC Sets Targets For 2018 to long-awaited investment grade rating.
pricing in a more hawkish MAS stance The annual NPC session sets growth This puts Indonesia to be on par with
as the SGD NEER has appreciated 1.2% target for 2018 at 6.5% as expected, as the Philippines and Portugal in terms of
since the start of 2017, while our UOB this is sufficient to keep labour market its investment grade ratings. However,
SGD NEER model also shows that the in balance but fiscal stance is tightened despite the positive tones accompanying
SGD NEER had been trading consistently somewhat with the change in deficit the upgrade, most rating agencies do
above the midpoint 88% of the time in the target. Monetary policy bias remains as acknowledge that government revenue
same period. “prudent and neutral”, though targets for is still very low across peers of similar
money supply and credit are absent this ratings as of Indonesia. Looking deeper
Thirdly, the MAS had perhaps signaled a year, which means that the focus has into the revenue-expenditure dynamics
normalization inclination by removing a shifted away from quantitative increases. on the Indonesian fiscal space, we found
forward guidance word “extended” from It should be noted that an additional that reforms would be needed to ensure
its oft-used phrase “current neutral SGD measure of jobless rate target has been higher tax compliance and tax buoyancy
NEER policy is deemed appropriate for added, which is an improvement over in Indonesia. The shift of focus in fiscal
an extended period of time” in their last the existing “registered jobless rate” as expenditure into more infrastructure and
October 2017 policy statement. the broader measure takes into account social-development is duly acknowledged
_________________________________ of non-resident workers, such as migrant and applauded. However, given risks
workers from the countryside. With a of relying on external financing, the
Singapore Focus II: backdrop of steady growth environment, institutional reforms or some drastic
Singapore Budget 2018: Strategies we expect the government to accelerate measures to increase tax revenue remain
To Cope With An Ageing Society its economic reform and restructuring key to not only ensuring a sustainable
Singapore’s Budget 2018 had 4 key agenda and to look for ways to prevent fiscal, but also to foster higher GDP
areas of focus: developing a vibrant and systemic and financial risks. growth momentum and unleash further
innovative economy; smart, green and _________________________________ the Indonesian economic potential.
Quarterly Global Outlook 2Q2018
06 UOB Global Economics & Markets Research EXECUTIVE SUMMARY
Furthermore, it is by first anchoring a bund yields. From 1.25 in 2Q18, we see NZD/USD: After the Labor Party took over
sustainable fiscal posture, only then the EUR/USD climbing gradually to 1.27 in the government last October, there was
Indonesian fiscal policy can desirably 3Q18 and 1.29 in 4Q18 and 1Q19. Any an initial heavy sell-off in the NZD/USD all
adopt counter-cyclical measures to foster strength above 1.30 is unlikely for now, the way down to the bottom of the 2-year
higher economic growth in the foreseeable given that the US Federal Reserve is trading range between 0.68 and 0.75.
future. also in the process of monetary policy Investors had sold the NZD aggressively
_________________________________ normalization. on concerns of protectionist policies from
the incoming Labor government. After
Vietnam's Consumer Insights: GBP/USD: The recovery in the GBP/USD that initial knee jerk sell-off, the NZD/USD
The Bright Spot can be attributed in a large part to the on- stabilized and has reverted back to the
In The Mekong Region going support from the Bank of England current 0.73 level as immigration arrivals
Vietnam is currently experiencing one of (BoE), which hiked by 25 bps last Nov and for New Zealand picked up again. The
its fastest economic expansions in years, has signaled once again that it is likely to uncertainty at the RBNZ has also come
with gross domestic product (GDP) per hike a second time by May. However, at to an end with the appointment of Adrian
capita at current prices (Purchasing power its current level of just around 1.40, we Orr as the new governor at the end of
parity, or PPP) growth averaging 6.7% believe that the upcoming BoE rate hike Mar 18. In the meantime, NZD/USD can
over the last 3 years. Robust economic in May is largely priced in. Furthermore, be expected to grind higher towards the
growth and low unemployment rates have the BoE’s rate hikes are mostly built on top end of the above mentioned range.
propelled household income and spending the premise of rising inflation in the UK. We forecast NZD/USD at 0.74 in 2Q18,
in the country, positioning Vietnam to And the latest monthly print showed that 0.7450 in 3Q18, 0.75 in 4Q18 and 1Q19.
be one of the most promising consumer inflation in the UK has drifted further back
markets in Asia. This report looks at the down to 2.7% YoY in Feb, from its peak of ASIAN FX
emergence of the Vietnamese consumer 3.1% YoY last Nov. Going forward, amidst USD/CNY: Going forward, further CNY
and the sectors likely to benefit from the further intense Brexit discussions, growth strength will likely be capped by rising
rise of consumerism in one of the fastest outlook of the UK economy remains trade tensions with the United States.
growing economies in Asia. uncertain as the economy continues to The Trump administration is taking an
nurse a growing current account deficit. increasingly tough stance against trade
Overall, we maintain our view that GBP/ with nations that run large trade surpluses
GLOBAL FX USD will not be able to sustain gains against the United States. Given that China
USD/JPY: Going forward, we believe that above 1.40 and will drift back down from runs the largest trade surplus against the
the risk of further JPY strength is still there. here on. We forecast GBP/USD at 1.40 United States, i.e. USD 375 bn across
As highlighted in the executive summary, in 2Q18, 1.38 in 3Q18, 1.36 in 4Q18 and 2017, there are increasing concerns that
there is increasing political risk in Japan. 1Q19. the Trump administration may target
Furthermore, while BoJ Govenor Haruhiko Chinese imports next. As such, the CNY
Kuroda has been reappointed, he has yet AUD/USD: Despite RBA making clear on may be vulnerable to weakness should
to dispel increasing market concerns that multiple occasions its desire to maintain Chinese exports get negatively impacted.
the BoJ will eventually need to normalize its steady monetary policy, we continue to This also comes at a time when the US
monetary policy sooner than later. This maintain a positive outlook for the AUD/ Federal Reserve is poised to continue
was despite the fact that Japan’s inflation USD. This is mainly driven by support from its steady monetary policy normalization.
remains far from the 2% target. As such, commodities. However, across 1Q18, we Overall, we see USD/CNY inching higher
we see USD/JPY falling further to 100 in witnessed an increase in inventory and from hereon, to 6.35 in 2Q18, 6.40 in
2Q18, followed by a moderate recovery to positioning levels in various industrial 3Q18, 6.45 in 4Q18 and 6.50 in 1Q19.
103 in 3Q18, 107 in 4Q18 and 110 in 1Q19 metals like copper, limiting further strong
as the US Federal Reserve continues its upside. Similarly, amidst concerns of USD/SGD: Ahead of the widely anticipated
gradual rate hikes in the quarters ahead. strong increases in US production levels, policy normalization by the MAS in mid-
crude oil price seemed to have been April, the SGD NEER has been trading
EUR/USD: As a result of the ECB’s deft capped ahead of USD 70 / bbl. As such, predominantly at a premium above its
balancing act, EUR/USD was sandwiched AUD/USD has pulled back from its high of estimated mid-point of the current neutral
for now in-between the near term trading 0.81 in Jan18 to the current level of 0.78. range. Similarly, exacerbated by the weak
range of 1.22 to 1.25. Downside below Going forward, we believe that after the overall tone in the USD, the SGD has
1.22 is firmly supported by strong and recent pullback, further weakness may be been trading on a strong note as well.
improving macroeconomic fundamentals limited. Despite recent consolidation, key However, we believe that it may be difficult
in Eurozone. On the other hand, EUR/USD industrial metals and energy commodities for the SGD to strengthen further against
was prevented from staging a premature remain supported due to on-going strong the USD going forward. This is due to the
rally above 1.25. Overall, as we get nearer synchronized growth recovery. As such, increasing trade tensions between the
to the eventual stop in asset purchase we see mild AUD/USD strength ahead to United States and China, as trade and
towards the end of the year, we believe 0.79 in 2Q18, 0.81 in 3Q18 and 0.83 in exports from Asia are at risk of getting
that EUR/USD will appreciate slowly from 4Q18 and 1Q19. negatively impacted. This also comes
here on, in line with the gradual climb at a time when the US Federal Reserve
higher in various Eurozone and German is poised to continue its monetary policy
Quarterly Global Outlook 2Q2018
EXECUTIVE SUMMARY UOB Global Economics & Markets Research 07
normalization, with gradual rate hikes and October, followed by the BOK’s rate hike in 13,850 in 3Q18, 13,900 in 4Q18 and
on-going balance sheet reduction. In other November. Thereafter across 1Q18, USD/ 13,950 in 1Q19.
words, there may be limited downside KRW largely range traded within 1,060
for USD/SGD below 1.30. Overall, we and 1,100. The latest news of warming of USD/THB: From 36.0 in Jan 17, the
forecast USD/SGD at 1.29 in 2Q18, 1.30 ties with North Korea pushed USD/KRW THB has strengthened significantly, by
in 3Q18, 1.32 in 4Q18, 1.33 in 1Q19. back down to the lower end of this trading about 13% to the current level of 31.20
range. Going forward, while we welcome against the USD in Mar 18. Along the
USD/HKD: The interest rate differential the improving geopolitics, we believe that way, THB strength was supported by
between 3M US Libor and 3M HK Hibor the KRW may be increasingly vulnerable the abovementioned strong economic
jumped from 0.40% last December to to trade tensions with the U.S. instead rebound and export recovery in Thailand
1.05%, leading to further upside pressure as the latter is taking an increasingly across 2017. Despite current THB
on USD/HKD. At the pace which the rate tough stance on trade against countries strength, the outlook for the twin pillars of
spread widens, it is increasingly likely that which run a large trade surplus against Thailand economy, i.e. exports and tourism
the HKD will soon test sometime in 2Q, it. In addition, expectations of further rate arrivals remains strong. As such, fueled by
the weak side convertibility limit of 7.85 hikes by the BOK later in the year may on-going strong current account surplus,
against the USD but we do not see any have already been baked into the current the THB may still stay biased on the strong
risk to the peg at this stage. However, KRW strength. As such, we see risk of side in the near term. Thereafter, as the
in order to limit further weakening of USD/KRW bottoming around the current year progressed in 2H18, the USD would
the HKD towards 7.85, the HKMA now 1,060 level and trading moderately higher be able to register mild gains against the
has a delicate act of guiding domestic thereafter. Our forecasts for USD/KRW THB, as financial markets would have
rates gradually higher without disrupting going forward are 1,070 in 2Q18, 1,080 in digested the anticipated 25 bps rate hike
domestic activity and capital markets. This 3Q18, 1,090 in 4Q18 and 1,100 in 1Q19. from BoT and the US Federal Reserve
test of the 7.85 level will likely happen would have progressed with a total of
over the coming two quarters, before local USD/MYR: Previously, expectations of an 3 rate hikes across 2018. Overall, we
rates play catch up with rising US rates upcoming rate hike by BNM and strong forecast USD/THB at 31.00 in 2Q18,
and USD/HKD drift back down towards rise in crude oil prices have fueled the before a mild recovery to 31.30 in 3Q18,
7.80. Thus we forecast USD/HKD at 7.85 outright strengthening of the MYR. Now 31.50 in 4Q18 and 31.80 in 1Q19.
across 2Q18 and 3Q18, and 7.83 in 4Q18 that BNM has hiked in January, going
and 7.80 in 1Q19. forward, they are likely to remain on hold. USD/VND: Going forward, we see the US
Furthermore, given increasing supply risk Federal Reserve continuing its gradual
USD/TWD: Across 1Q, various risks from the US, it may be difficult for Brent rate hike process, with another two more
have built up against the TWD. First, the crude oil to strengthen further above rate hikes in 2H18. Overall, we see on-
growth outlook is expected to moderate USD 70 / bbl. Rather, Brent crude oil going mild VND weakness in line with
to a less stellar 2.3% this year, compared is now expected to settle within a broad rising US rates. The domestic positive
to 2.9% last year. Second, any escalation trading range of USD 60 / bbl to USD 70 drivers will limit excessive VND weakness.
of trade tensions between US and China / bbl for the coming 4 quarters. As such, Our forecasts for USD/VND are 22,800 in
will likely have a negative impact as well supported by strong export growth and 2Q18, 22,900 in 3Q18, 23,000 in 4Q18
on Taiwanese exports and consequently various positive domestic demand drivers, and 23,100 in 1Q19.
the TWD. Third, given the on-going rise the pace of MYR strengthening will likely
in US Treasuries yield, the yield spread ease going forward. Overall, we see USD/ USD/INR: With India’s monthly trade
between 10 year US Treasuries and MYR drifting lower to 3.88 in 2Q18, 3.85 in deficit widening on a quicker path since
10 year Taiwan government yield has 3Q18 and 3.80 in 4Q18 and 1Q19. March 2016, the central government
widened further from 1.50% at the start of fiscal budget deficit growing, and the RBI
the year to 1.85% now. On a related note, USD/IDR: Despite the improving domestic probably keeping the current monetary
as highlighted above, Taiwan’s real policy macroeconomics, the IDR had recently stance throughout this year, we think that
rate has dipped into negative. As such, weakened against the USD. As a result, there could not be much room for the INR
we maintain our forecast that USD/TWD USD/IDR climbed from its low of 13,300 in to continue its strong performance against
will likely bottom out nearer to the middle Jan to current level of 13,750. This is most the greenback. We forecast the USD/INR
of the year and inch back up in 2H18. likely due to pressure from rising US rates, at 65.00 in 2Q18, 65.30 in 3Q18, 65.60 in
Overall, we forecast USD/TWD at 29.40 in which typically has a negative impact on 4Q18, and 66.00 in 1Q19.
2Q18, 29.60 in 3Q18, 29.80 in 4Q18 and Asian and Emerging Market currencies
30.00 in 1Q19. with underlying current account and fiscal _________________________________
deficits. Given that our base case calls for
USD/KRW: In the final months of 2017, two more FED rate hikes this year (after GLOBAL INTEREST RATES
the KRW strengthened significantly, the recent 25 bps in Mar), 3M US Libor is FOMC: Our moderately hawkish outlook
forcing USD/KRW to retreat from 1,150 in expected to rise further towards our year- for the Fed rate trajectory in 2018 is still
October 2017 to as low as 1,060 in late end target of 2.40%. As such, we see intact as we still expect two more 25bps
December 2017. This was off the back risk of further IDR weakness in line with hikes in 2018 (after the latest March rate
of the normalization of trade and tourism the rest of Asian currencies. Overall, our hike), bringing the FFTR to 2.25% by
ties between China and South Korea last forecast for USD/IDR is 13,800 in 2Q18,
Quarterly Global Outlook 2Q2018
08 UOB Global Economics & Markets Research EXECUTIVE SUMMARY
end-2018. While we remain mindful that RBA: The RBA surprised nobody when after 15 years leading the central bank.
stronger wage & inflation expectations it held its OCR steady at a record low of Other than the usual monetary policy
could add to the risk of a more aggressive 1.5% in March. Overall, we maintain the execution, the combination of the banking
Fed in terms of policy normalization, the view that the RBA is in no hurry to move and insurance regulators into one agency,
flipside is that recent US trade policy rates as household incomes are growing PBoC’s role as a financial regulator will be
developments could warrant a more slowly and debt levels are high; and it clearer and strengthened. We maintain our
cautious Fed, at least until the cloud of seems as though the RBA will continue to view that PBoC is likely to lean on raising
trade uncertainty clears. jawbone the local currency. We also note at least one time its policy rates by end
that a key turning point was 31 January of 2Q18, with a 25bps hike from current
We also expect continuity in Fed Reserve’s – when 4Q inflation data showed both record low of 1Y lending rate at 4.35% and
balance sheet reduction (BSR) program headline and core inflation staying below 1Y deposit rate at 1.50%.
and since trimming the Fed balance the bottom of the RBA's 2-3% target. RBA
sheet is somewhat a 'substitute' for rate Governor Philip Lowe's mid-February MAS: We maintain our forecast of two
hikes, so we believe the continuation of testimony to lawmakers also made it clear more 25bps hikes by the US Fed in
BSR is a key factor the FOMC will take that the RBA will not mechanically follow 2018 after the March 2018 hike. And
into consideration and not add more rate the global trend, and can afford to be more with Singapore’s domestic interest rates
hikes beyond the 3 hikes in 2018 unless patient. following quite closely to the US rates,
we get a sharp inflation surprise. BSR we forecast the 3-month SIBOR to edge
will likely gain further traction in 2018, RBNZ: As expected, the RBNZ held its higher towards 1.70 by 2Q 2018 and
as cuts to reinvestment expand so the OCR unchanged at 1.75% in March. onward to 1.85% by the end of 2018.
aggregate annual cuts will increase from Focus will now be on the new Policy
US$30bn in 4Q 2017 to US$420bn in Targets Agreement (PTA) that Orr will RBI: The RBI had kept its repurchase rate
2018 and reach steady state of US$600bn sign with the Minister of Finance, Grant unchanged at 6% since a 25bps cut in
in 2019. We expect BSR to continue Robertson, and the review of the Reserve August 2017. We were previously having
until the Fed balance sheet is reduced to Bank Act that is currently underway. We a view that the RBI could potentially cut
aboutUS$2.5trillion by mid-2021. continue to expect the RBNZ to remain rates by another 25bps to provide support
accommodative, and do not foresee an to the economy due to the lingering after-
ECB: Overall, there is little implication OCR hike until early-2019. effects of the demonetization and GST.
to our view following the latest ECB However, the impact of both seems to
meeting. The ECB needs to end asset BOJ: Despite another status quo have worn off, while India’s GDP is growing
purchases within the next 12-15 months decision on 9 March, the spectre of above the potential rate and inflation rate
to avoid a bond shortage problem. Yet “BOJ normalization” which crept into expected to inch higher, we now think that
we see little reason, at this juncture, for market psyche in late 2017 lingers the RBI can possibly afford to keep rates
the ECB to make more fundamental on. The re-appointment of Kuroda to unchanged for the rest of 2018.
changes to forward guidance before an 2023 (and appointment of 2 new “like-
announcement on the future of QE is mined” deputies) did not help to dispel BI: We expect inflation to turn higher in
made (likely in June). This should help to normalization concerns, failing to shift the second half of this year. The most
prevent a further strengthening of the EUR market sentiment that Kuroda will stay the recent Bank Indonesia’s consumer survey
and “unwarranted tightening of monetary course and patiently keep BOJ monetary revealed the findings that households
conditions”. As for policy rates, we are not policy broadly “expansionary till 2% is expect prices to go higher starting May
anticipating any rate increases until later met”. BOJ’s cause was not helped by the of this year on the back higher electricity
in 2019. fact that the projected annual pace of JGB and gas tariffs, and possibly higher fuel
buying has continued to moderate so far and gasoline prices. Inflation is estimated
BOE: As expected, the BoE left the Bank this year. While we keep our long-held to be at a range of 2.5-4.5% for 2018,
Rate on hold at 0.50% and asset purchases view that it remains premature to expect with our current 2018 forecast is now
unchanged at GBP435bn in March. But the BOJ to normalize/taper its easing slightly revised lower to 4.0% (from 4.2%
two members of the MPC – Michael program anytime soon, because Japan is before) but remains at the upper range of
Saunders and Ian McCafferty – were the still far away from its 2% inflation target, BI’s inflation target. With the backdrop of
dissenters, voting for an immediate 25bps the uncertainty will continue unless the inflationary pressures coming fairly soon,
rate rise. We had previously been looking BOJ finds a way to reassert its “easy we reiterate our forecast for BI to stay
for the BoE to move only later part of this monetary policy” credentials. neutral for the most part of 2018 and we
year, but there are now more reasons to only pencil in currently a 25bps rate in
think a move at the next meeting in May ASIAN INTEREST RATES December 2018. Our BI rate forecast (7-
is likely. Still, we do not believe the MPC PBoC: PBoC’s prudent and neutral Day Reverse Repo) remains consistent
wants to persuade markets to expect more monetary policy stance has been with our inflation forecast and still lend
hawkish policy thereafter. Whilst a 25bps reaffirmed in the 2018 Government support to overall growth.
move in May (as opposed to August) now Work Report. The policy implementation
looks highly likely, we do not envisage any is expected to remain with the recent
further changes for the rest of this year. appointment of Yi Gang as Governor,
replacing Zhou Xiaochuan who retired
Quarterly Global Outlook 2Q2018
EXECUTIVE SUMMARY UOB Global Economics & Markets Research 09
BOK: From the real interest rate BNM: Bank Negara Malaysia (BNM) kept BOT: The Bank of Thailand (BoT) kept
perspective, the pick-up in headline the Overnight Policy Rate (OPR) at 3.25% the policy rate unchanged at 1.5% on 14
inflation should still keep the door open for on 7 March following a 25bps hike on 25 February 2018. Looking forward, the BoT
1-2 rate hikes this year. A faster pace of January. Real policy rate has widened to will likely raise the policy rate to 1.75% in
U.S. rate hikes will be another catalyst as +1.8% amid slower inflation. With regards the second half of 2018 as the economy
the Base Rate is set to fall below the Fed to forward guidance, BNM reverted to a would continue to expand steadily at
Funds Target Rate for the first time since more neutral tone. BNM kept a balanced around its potential rate, thus lessening the
2007. Although we do not think there is view such that despite renewed signs need for an exceptionally accommodative
an imminent risk of large capital outflows, of emerging volatility and rising trade monetary policy.
it will create pressure for the BOK to act tensions, they expect continuity in global
if the domestic growth outlook permits, economic expansion. BNM kept a positive SBV: The State Bank of Vietnam (SBV)
caveat on the impact of the unfolding view on the domestic economy and would maintain the policy rate at 6.25%
trade tensions. We see the next rate hike reiterated that inflation is expected to until at least the end of 2018. Currently, the
in South Korea taking place in 2Q18 (Apr/ moderate in 2018. We maintain our year- monetary policy stance is accommodative
May) and another possibly in 4Q18. The end OPR projection of 3.25%, implying no and supportive of economic activity.
reappointment of Governor Lee Ju-yeol further rate adjustments for the year. Global growth prospects will also help
is expected to maintain stability in the sustain strong merchandise exports and
monetary policy setting. keep Vietnam’s trade-reliant economy
humming this year.
Real GDP Growth Trajectory
y/y% change 2016 2017 2018F 1Q17 2Q17 3Q17 4Q17 1Q18F 2Q18F 3Q18F 4Q18F
China 6.7 6.9 6.7 6.9 6.9 6.8 6.8 6.8 6.7 6.8 6.7
Eurozone 1.8 2.3 2.3 2.1 2.4 2.6 2.7 2.5 2.5 2.3 2.2
Hong Kong 2.1 3.8 3.4 4.3 3.9 3.7 3.4 3.4 3.5 3.4 3.2
Indonesia 5.0 5.1 5.3 5.0 5.0 5.1 5.2 5.3 5.4 5.2 5.3
Japan 0.9 1.7 1.8 1.4 1.5 1.9 2.0 1.2 2.1 2.1 1.7
Malaysia 4.2 5.9 5.0 5.6 5.8 6.2 5.9 5.4 5.0 5.0 4.8
Philippines 6.9 6.7 6.8 6.4 6.7 6.9 6.6 6.7 6.7 6.6 6.9
India 8.2 7.1 6.5 6.1 5.7 6.5 7.2 6.3 6.5 6.6 6.7
Singapore 2.4 3.6 2.8 2.5 2.8 5.5 3.6 3.5 3.0 2.2 2.8
South Korea 2.8 3.1 3.0 2.9 2.7 3.8 3.0 3.0 3.0 2.8 3.1
Taiwan 1.4 2.9 2.3 2.6 2.3 3.2 3.3 2.9 2.7 1.9 1.8
Thailand 3.3 3.9 4.0 3.4 3.9 4.3 4.0 4.0 4.0 3.9 4.0
US (q/q SAAR) 1.5 2.3 2.5 1.2 3.1 3.2 2.5 1.0 3.5 2.5 3.0
Source: CEIC, UOB Global Economics & Markets Research
Quarterly Global Outlook 2Q2018
10 UOB Global Economics & Markets Research
FX, INTEREST RATE & COMMODITIES FORECASTS
FX 23 Mar 18 2Q18F 3Q18F 4Q18F 1Q19F RATES 23 Mar 18 2Q18F 3Q18F 4Q18F 1Q19F
USD/JPY 105 100 103 107 110 US Fed Funds Rate 1.75 2.00 2.00 2.25 2.50
EUR/USD 1.23 1.25 1.27 1.29 1.29 USD 3M LIBOR 2.27 2.15 2.15 2.40 2.65
GBP/USD 1.41 1.40 1.38 1.36 1.36 US 10Y Treasuries Yield 2.80 2.80 3.00 3.20 3.25
JPY Policy Rate -0.10 -0.10 -0.10 -0.10 -0.10
AUD/USD 0.77 0.79 0.81 0.83 0.83
EUR Refinancing Rate 0.00 0.00 0.00 0.00 0.00
NZD/USD 0.72 0.74 0.75 0.75 0.75
GBP Repo Rate 0.50 0.75 0.75 0.75 0.75
USD/CNY 6.33 6.35 6.40 6.45 6.50 AUD Official Cash Rate 1.50 1.50 1.50 1.50 1.75
USD/HKD 7.85 7.85 7.85 7.83 7.80 NZD Official Cash Rate 1.75 1.75 1.75 1.75 2.00
USD/TWD 29.2 29.4 29.6 29.8 30.0
CNY 1Y Benchmark Lending 4.35 4.60 4.60 4.60 4.60
USD/KRW 1,081 1,070 1,080 1,090 1,100 HKD Base Rate 2.00 2.25 2.25 2.50 2.75
USD/PHP 52.34 52.50 53.00 53.50 54.00 TWD Official Discount Rate 1.38 1.38 1.38 1.38 1.50
KRW Base Rate 1.50 1.75 1.75 2.00 2.00
USD/MYR 3.91 3.88 3.85 3.80 3.80
PHP O/N Reverse Repo 3.00 3.25 3.25 3.25 3.50
USD/IDR 13,778 13,800 13,850 13,900 13,950
USD/THB 31.26 31.00 31.30 31.50 31.80 SGD 3M SIBOR 1.38 1.70 1.70 1.85 1.85
USD/MMK 1,334 1,350 1,360 1,370 1,380 SGD 3M SOR 1.59 1.50 1.50 1.65 1.75
USD/VND 22,785 22,800 22,900 23,000 23,100 MYR O/N Policy Rate 3.25 3.25 3.25 3.25 3.25
IDR 7D Reverse Repo 4.25 4.25 4.25 4.50 4.50
USD/INR 65.11 65.00 65.30 65.60 66.00
THB 1D Repo 1.50 1.50 1.75 1.75 1.75
USD/SGD 1.32 1.29 1.30 1.32 1.33
VND Refinancing Rate 6.25 6.25 6.25 6.25 6.25
EUR/SGD 1.62 1.61 1.65 1.70 1.72 INR Repo Rate 6.00 6.00 6.00 6.00 6.00
GBP/SGD 1.86 1.81 1.79 1.80 1.81
COMMODITIES 23 Mar 18 2Q18F 3Q18F 4Q18F 1Q19F
AUD/SGD 1.01 1.02 1.05 1.10 1.10
Gold (USD/oz) 1,338 1,290 1,260 1,230 1,200
SGD/MYR 2.98 3.01 2.96 2.88 2.86
Brent Crude Oil (USD/bbl) 69 60-70 60-70 60-70 60-70
SGD/CNY 4.81 4.92 4.92 4.89 4.89
6,000- 6,000- 6,000- 6,000-
JPY/SGDx100 1.25 1.29 1.26 1.23 1.21 LME Copper (USD/mt) 6,695
7,000 7,000 7,000 7,000
Quarterly Global Outlook 2Q2018
UOB Global Economics & Markets Research 11SINGAPORE FOCUS I
Singapore MAS Policy Preview: It’s Time To Catch Up
With Policy Normalization
The Monetary Authority of Singapore (MAS) is expected to release monetary policy decision on the 2nd week of April 2018 (9th to
13th April) and we expect the central bank to start policy normalization by allowing the SGD NEER on a mildly appreciating path (est:
0.5% pa) while keeping the midpoint and bandwidth of the policy band unchanged.
Our policy normalization expectation is based on three key factors. Firstly, global and domestic growth-inflation-labour conditions
have improved quite significantly since the lows of 2015. Central banks around the world today are biased towards tightening, rather
than loosening monetary policy stance.
Secondly, the forex market seems to be pricing in a more hawkish MAS stance as the SGD NEER has appreciated 1.2% since the
start of 2017, while our UOB SGD NEER model also shows that the SGD NEER had been trading consistently above the midpoint
88% of the time in the same period.
Thirdly, the MAS had perhaps signaled a normalization inclination by removing a forward guidance word “extended” from its oft-used
phrase “current neutral SGD NEER policy is deemed appropriate for an extended period of time” in their last October 2017 policy
statement.
With the upcoming April policy normalization by MAS largely priced in, we see limited downside for USD/SGD below 1.30. Furthermore,
any escalation of trade tension between US and China risk negatively impacting Asian exports and consequently is a negative for the
SGD. Overall, we see USD/SGD testing the low of 1.29 across 2Q18, before drifting back up to 1.33 by 1Q19.
The Monetary Authority of Singapore bandwidth of the policy band untouched. the uncertainties of slow global economic
(MAS) is expected to release its half-yearly We think that this is a one-and-done growth and disinflationary pressures.
monetary policy statement sometime in the deal for 2018 although we acknowledge Central banks around the world were also
2nd week of April 2018 (9th to 13th April). there could be room for another 0.5% pa adopting easy monetary policy stance then
increase in the October 2018 policy review, to support economic growth.
We expect the MAS to start the but that will be dependent on the data over
normalization of Singapore’s monetary the next few months. In the two subsequent policy meetings
policy. What this means is that the MAS (October 2015 and April 2016), the MAS
may start to allow the SGD Nominal As a recap of the current accommodative continued to reduce the SGD NEER slope
Effective Exchange Rate (NEER) to monetary cycle, it all started when the towards an eventual “neutral appreciating
embark on a mildly appreciating path MAS surprised the market by reducing the path”, a stance which it had maintained
(which we estimate at 0.5% pa from 0% slope of the SGD NEER in an off-cycle since April 2016 to date.
currently), while keeping the midpoint and policy action in January 2015 to cope with
Quarterly Global Outlook 2Q2018
12 UOB Global Economics & Markets Research SINGAPORE FOCUS IOur expectations of a change of policy Fast forward to today, things have The synchronized recovery is evident in
stance towards a “mild appreciation” SGD improved. In their World Economic both developed (advanced) and emerging
NEER slope is based on the following Outlook Update (11 January 2018), the economies.
arguments: IMF had upgraded global economic growth
forecasts for 2018 and 2019 to 3.9%, from Quoting the IMF again from the same
1. Economics: Global and domestic 3.7% previously. In the words of the IMF: report:
growth-inflation-labour conditions
have improved quite significantly “The cyclical upswing underway since mid- “Among advanced economies, growth in
since the lows of 2015. With that, 2016 has continued to strengthen. Some the third quarter of 2017 was higher than
central banks around the world today 120 economies, accounting for three projected in the fall (ie: October 2017),
are leaning more towards monetary quarters of world GDP, have seen a pickup notably in Germany, Japan, Korea, and the
policy tightening, after many years of in growth in year-on-year terms in 2017, United States. Key emerging market and
very loose monetary policy conditions. the broadest synchronized global growth developing economies, including Brazil,
upsurge since 2010.” China, and South Africa, also posted
2. Expectations: the forex market third-quarter growth stronger than the fall
seems to be pricing in a more hawkish We reproduce the IMF’s forecast during forecasts.”
MAS stance (ie: appreciating SGD their October 2017 release in Exhibit 1. It
NEER) as the SGD NEER had can be clearly seen that even in October Additionally, we also observed that both
appreciated 1.2% since the start of 2017, the IMF had expected stronger the emerging and developed economies’
2017. Moreover, our UOB SGD NEER growth and inflation worldwide, and purchasing managers’ indices are
model also shows that the SGD NEER reaffirmed it in their January 2018 review. expanding in sync, across both the
had been trading consistently above manufacturing and services sectors no
the midpoint 88% of the time in the less (Exhibits 2A and 2B).
same period.
Exhibit 1: IMF’s October 2017 Forecast For Global Growth And Inflation
3. Policy: the MAS had perhaps signaled
a similar inclination by removing a Source: Macrobond, UOB Global Economics & Markets Research
forward guidance “extended period”
from its oft-used phrase “current
neutral SGD NEER policy is deemed
appropriate for an extended period”
in their last October 2017 policy
statement.
With the three factors at play, we think that
the time is ripe for the MAS to embark on
the normalization of Singapore’s monetary
policy. We will explain in details in the
following sections.
Global Economic Recovery Is In Sync
The global economic landscape had
improved quite dramatically over the past
three years. As recent as the MAS October Exhibits 2A & 2B: Synchronised Growth In Manufacturing & Non-manufacturing PMI
2016 policy meeting, we were still very
concerned about the global deflationary Source: Macrobond, UOB Global Economics & Markets Research
environment, hard landing risk from China,
and the unknown but “surely” negative
impact from Brexit.
Domestically, policymakers were worried
about the very slow economic growth
in Singapore, disinflationary pressures,
rising labour redundancies (particularly in
the Professionals, Managers, Executives
and Technicians or PMETs segment) and
industry-specific risk factors (eg: from the
offshore & marine industries). Those were
the conditions for an accommodative and
thus dovish monetary policy: a-la neutral
SGD NEER slope.
Quarterly Global Outlook 2Q2018
SINGAPORE FOCUS I UOB Global Economics & Markets Research 13Stronger economic activities and higher
prices point to the improvement in Exhibit 3: Recovery In World Trade Since 4Q 2016
aggregate demand worldwide and this is Source: Macrobond, UOB Global Economics & Markets Research
also evident in the recovery in world trade
since 4Q 2016 (Exhibit 3).
However, this also implies higher export
and import prices across the world (Exhibit
4). Eventually, these will pass-through to
higher global consumer inflation – another
indication that central banks may need to
tighten monetary policies at a faster pace.
Our global monetary environment scan
across 52 central banks’ actions since
Mar 2017 shows a total of 18 central
banks hiking interest rates to a combined
amount of 1,846.5bps; 26 central banks
keeping interest rates unchanged; while 8
central banks cutting rates to a combined
Exhibit 4: Strongest Growth In Export and Import Prices Since August 2011
amount of 1,475bps. Collectively, there
had been an inclination for central banks to Source: Macrobond, UOB Global Economics & Markets Research
tighten rather than loosen their respective
monetary policies (Exhibit 5).
Domestic Growth Drivers
Are Improving
In Singapore, the growth-inflation-labour
dynamics had improved too.
The government’s report card on 2017
economic performance probably scored
an “A” in our opinion as actual GDP grew
3.6%, above the upper end of the initial
forecast range of 1%-3% back in early
2017.
Core inflation, the intermediate target
of the central bank when it comes to Exhibit 5: More Global Central Banks Embarking On Monetary Tightening
assessing the direction of its monetary
policy, averaged 1.5% in 2017, higher than Source: Bloomberg, UOB Global Economics & Markets Research
the 0.9% in 2016 and 0.5% in 2015.
The labour market has also been improving
as indicated by various labour market
statistics including better job vacancy-to-
unemployed persons ratio and stronger
wage growth.
On growth, another way to assess the
current economic condition is to compare
it with the potential economic growth.
If the actual GDP growth rate is higher than Note: Central banks that hiked rates since March 2017 includes (375bps: Argentina), (300bps: Egypt, Ukraine), (125bps: Mexico),
(85.5bps: Oman), (75bps: Bahrain, Canada, Hong Kong, UAE, US), (70bps: Czech Rep), (50bps: Romania), (41bps: Venezuela),
the potential GDP growth rate, then there (25bps: Malaysia, Pakistan, Qatar, South Korea, UK). Central banks that cut rates since March 2017 includes (-625bps: Brazil),
(-275bps: Colombia), (-250bps: Russia), -125bps: Peru), (-75bps: Iceland, Chile), (-25bps: South Africa, India).
is a positive output gap which may result
in a higher inflationary environment and
justifying a more hawkish monetary policy
(ie: an upward sloping SGD NEER).
Quarterly Global Outlook 2Q2018
14 UOB Global Economics & Markets Research SINGAPORE FOCUS IAs such, we compare Singapore’s quarterly
real GDP growth rate with its potential EXHIBIT 6: Finally Out Of The Negative/Weak Output Gap Trap
GDP growth rate (derived using the Source: Macrobond, UOB Global Economics & Markets Research
Hodrick-Prescott filter) and found that after
suffering from 10 consecutive quarters
of negative or weak positive output gap
(since 2Q 2014), the stronger growth spurt
of 3Q 2017 had finally pushed Singapore’s
economy into registering a positive 2.4%
output gap in that quarter (Exhibit 6).
With the uplift from stronger external
demand, overall corporate profits had been
robust and posted the strongest expansion
(6.9% y/y) since 2010 (Exhibit 7).
With profits expanding at a record pace,
businesses are more confident and
investments had also expanded for the
first time, after five consecutive quarters of
Exhibit 7: Corporate Profits Expansion At Its Strongest Since 2010
contraction (3Q 2016 to 3Q 2017) (Exhibit
8). Source: Macrobond, UOB Global Economics & Markets Research
Domestic consumption also expanded
at a healthy clip from the improvement
in the labour market conditions (low
unemployment and stronger wage growth).
Looking ahead, the government’s
composite leading indicator (Exhibit 9),
which leads GDP growth by 1 quarter,
shows that we can expect continued
strength in economic growth.
That said, we believe that GDP growth
for 2018 could come in at a slower pace
of 2.8%, due to the high base in 2017,
and the expected slower growth in the
manufacturing sector. Exhibit 8: Continued Strength in Domestic Consumption, While Investments Expanded Finally
On inflation, Singapore’s core inflation had Source: Macrobond, UOB Global Economics & Markets Research
averaged 1.5% in 2017, higher than the
0.9% recorded in 2016 and 0.5% in 2015
(Exhibit 10).
For 2018, we forecast core inflation to
average 1.5%, while the MAS is expecting
an average of 1-2%. With prices rising at a
structurally higher level compared with the
2015-16 period, we believe that there is
some room for monetary policy to catch up
vis-à-vis SGD NEER appreciation stance.
Quarterly Global Outlook 2Q2018
SINGAPORE FOCUS I UOB Global Economics & Markets Research 15On labour market conditions, we observe
some improvements across various labour Exhibit 9: Composite Leading Indicator Points To Robust Economic Growth
market statistics. Source: Macrobond, UOB Global Economics & Markets Research
First, there had been some improvements
in labour market slack. Although there
are currently only 87 vacant jobs to every
one hundred unemployed persons, this is
an improvement from a recent low of 77
vacant jobs in 4Q 2016 (Exhibit 11).
Second, with demand for labour increasing,
we also observed that wage growth is
also on an uptrend (Exhibit 12), further
supporting domestic consumption, and
potentially generating higher pass-through
to consumer prices in the months ahead.
Expectations For Monetary Policy
Normalisation Are Rising
Exhibit 10: Core Inflation At A Structurally Higher Level Compared with 2015-16
With the improving growth-inflation-labour
conditions, the forex market had been Source: Macrobond, UOB Global Economics & Markets Research
pricing in expectations for the MAS to turn
more hawkish and to normalize the SGD
NEER slope sooner, rather than later.
Indeed, the SGD NEER had appreciated
1.2% from the start of 2017 to date and
our UOB SGD NEER had been trading
persistently above the midpoint (88% of
the time) in the same period (Exhibit 13).
This expectation was perhaps further
fueled by the MAS removing a forward
guidance word “extended period” from
its oft-used phrase “current neutral SGD
NEER policy is deemed appropriate for
an extended period” in their latest October
2017 policy statement.
Exhibit 11: Improvement In Labour Market Slack
With the above-mentioned conditions, Source: Macrobond, UOB Global Economics & Markets Research
we believe the MAS will start policy
normalization in the upcoming April
2018 meeting, where the SGD NEER
slope will be on a mildly appreciating
path (we estimate at 0.5% pa, from 0%
pa currently). We think that this is a
one-and-done deal for 2018 although
there remains a possibility of another
increase (of 0.5% pa) in the October
2018 policy review, depending on data
over the next few months.
Quarterly Global Outlook 2Q2018
16 UOB Global Economics & Markets Research SINGAPORE FOCUS ILimited Room For Further Downside
In USD/SGD Below 1.30 Exhibit 12: Wage Growth Back To Healthy Levels
As mentioned above, ahead of the widely Source: Macrobond, UOB Global Economics & Markets Research
anticipated policy normalization by the
MAS in mid-April, the SGD NEER has
been trading predominantly at a premium
above its estimated mid-point of the current
neutral range. Similarly, exacerbated by
the weak overall tone in the USD, the SGD
has been trading on a strong note as well.
As a result USD/SGD continued to head
lower across 1Q18, from 1.34 at the start
of Jan18 to current level of just around
1.31.
Going forward, we believe that it may be
difficult for the SGD to strengthen further
against the USD. Rather, with increasing
trade tensions between the United States Exihibit 13: Market Pricing In MAS Hawkishness Since April 2017
and China, trade and exports from Asia
Source: CEIC, UOB Global Economics & Markets Research
are at risk of getting negatively impacted.
Given that Asian economies have large 129 Easing Round 1 Easing Round 2 Easing Round 3 MAS kept neutral stance unchanged in
export components, there is an increasing Oct 16, Apr 17 and Oct 17 meetings
MAS shifted SGD NEER MAS shifted SGD MAS shifted SGD
risk that Asian currencies like the CNY, 127 slope from 2% to 1% in NEER slope from 1% NEER slope to
an off-cycle decision to 0.5% Neutral
KRW and including the SGD may weaken
somewhat should trade tensions rise
125
further.
123 SGD NEER was trading above
This also comes at a time when the US midpoint 88% of the time since
Federal Reserve is poised to continue Jan 2017
121
its monetary policy normalization, with
gradual rate hikes and on-going balance
sheet reduction. As such, we maintain our 119
Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18
view that it may be difficult for the SGD to
SGD NEER Upper-end: 2% Mid-Point of Estimated Policy Band Lower-end: 2%
strengthen further. In other words, there
may be limited downside for USD/SGD
below 1.30. Overall, we forecast USD/
SGD at 1.29 in 2Q18, 1.30 in 3Q18, 1.32 in
4Q18, 1.33 in 1Q19.
Quarterly Global Outlook 2Q2018
SINGAPORE FOCUS I UOB Global Economics & Markets Research 17You can also read
