asia quarterly q12017 - mizuho bank · stable cny takes precedence. • on the international trade...

Asia Quarterly ― Q1 2017: Trumponimcs ―

6th January 2017

Mizuho Bank, Ltd. Asia and Oceania Treasury Department

Vishnu Varathan Head, Economics & Strategy [email protected] Cynthia Kalasopatan, PhD Market Economist [email protected] Chang Wei Liang FX Strategist [email protected]

Donald Trump’s economic policies – Trumponomics - comprising of fiscal expansion (tax cuts and infrastructure spending) fitted around protectionist tendencies, banking/energy de-regulation and bringing jobs to the US has far-reaching impact. The first order (market) impact sent UST yields surging led by the long end (bear steepening), with consequent jump in the USD. BoJ welcomes resultant JPY slump and Nikkei boost. But for most EM (Asia) currencies, prospects of destabilizing capital out-flows cast a pall. Worries of trade protectionism to the detriment of most Asian exporters, either directly or via supply-chain linkages within the region (most notably via China). But Trumponomics may invoke global capital expenditure (especially if US infrastructure spending plans hit targets), a key catalyst for reviving global demand. Similarly, China’s 19th Party Congress may endorse massive infrastructure spending. For now, moderately higher inflation, upward trend in yields and greater market volatility are the order of the day until clarity on how campaign promises covert to policy is seen.

Asia Quarterly – Q1 2017

- 1 -

Executive Summary

• Trumponomics transcends US economics/politics with far-reaching impact on yields, FX and potentially trade. Meanwhile slightly more hawkish FOMC hike expectations tentatively accentuate US-G3 policy divergence; and prop up USD.

• With “Brexit” risks and political uncertainty such as French elections, the

ECB’s prolonged (but slower rate) of bond purchases stretches dovish bias. Whereas, stabilizing oil prices are set to re-introduce “taper” risks.

• Meanwhile the BoJ is enjoying the additional mileage from its yield curve

control tool (thanks to Trump-flation driven yield surge); while the consequent drop in JPY is welcome, Trump’s threat to TPP may hurt Japan sentiments.

• Despite signs of bottoming in China, policy shift to tackle banking/property

sector risks could interrupt/hamper traction in H1 before pro-gr owth bias re-emerges ahead of the 19th Party Congress. Stable CNY takes precedence.

• On the international trade front, Trump’s protectionist talk, aimed most visibly

at China, entails risks if tariffs; with supply-chain impact on rest of Asia. • India’s de-monetization meanwhile is set to hammer Q4 2016 GDP with some

lingering drag into early-2017 before measured gains from re-monetization; and firmer oil prices are set to re-widen C/A deficit.

• Indonesia’s structural reforms are welcome; but do not insulate from “Trump-flation”-induced fund out-flows for now as foreign investors re-price risk. Bank Indonesia’s ability to ease is as such constrained as it trades off IDR stability.

• South Korea’s political crisis is in dire need of resolution; with strong leadership required post-impeachment. Meanwhile corporate re-structuring burden lingers. Vietnam faces USD funding risks as C/A surplus erodes; US protectionism is a risk given large bi-lateral trade surplus with US.

• Singapore: As property market cools further, service sector underperformance is set to drag on growth. Nonetheless, MAS will refrain from step depreciation barring a crisis. And Malaysia’s imposition of FX regulation reveal MYR vulnerabilities amid underlying 1MDB/elections risks despite bottoming oil.

• Thailand’s smooth monarchy succession plan and unperturbed elections

schedule for 2017 should help with stabilization; as should military government spending on infrastructure stimulus as spending post-Constitution reform is relied on. With slower remittances, Philippines will fall short of 7% growth, but reforms help mitigate the “short-fall”.

• Australia : Bottoming in iron and copper ore prices may be relegated by weak capex and employment. Credit ratings risks from fiscal plans watched.

• AXJ are vulnerable to “taper”-like sell-off if UST yield surge persists.


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AT A GLANCE

Yearly Economic Forecasts

Quarterly Outlook – Growth and Consumer Inflation Growth Forecasts

Consumer Inflation forecasts

GDP YoY CPI C/A (% GDP) GDP YoY CPI C/A (% GDP) GDP YoY CPI C/A (% GDP) GDP YoY CPI C/A (% GDP)

United States 2.6 0.1 -2.6 1.6 1.3 -2.6 2.2 2.3 -2.7 2.3 2.3 -2.8

Eurozone 2.0 0.0 3.1 1.9 0.3 3.2 1.4 1.4 2.9 1.4 1.6 2.8

Japan 1.2 0.8 3.4 0.5 -0.2 3.2 1.0 0.5 3.2 1.0 0.9 3.0

ASIA (ex-Japan) 6.1 2.4 2.7 6.6 2.8 2.3 6.8 3.3 2.0 6.8 3.3 2.0

ASEAN-6 4.6 3.1 2.5 5.1 2.4 2.2 5.5 3.3 1.7 5.5 3.3 1.7

China 6.9 1.4 3.0 6.8 2.0 2.8 6.7 2.4 2.6 6.7 2.1 2.6

India 7.2 4.9 -1.1 7.1 5.0 -0.7 7.3 4.7 -1.8 7.7 5.1 -1.8

Korea 2.6 0.7 7.7 2.7 1.3 7.1 2.8 2 7.0 2.8 2.0 7.0

Singapore 2.0 -0.5 19.8 1.8 -0.5 19.0 1.8 1.2 19.5 2.8 2.1 19.5

Malaysia 5.0 2.1 2.9 4.1 2.1 2.5 5.0 2.3 2.7 5.0 2.7 3.2

Indonesia 4.8 3.5 -2.1 5.0 3.6 -2.1 5.5 4.1 -2.3 5.8 4.1 -2.3

Thailand 2.8 -0.9 8.2 3.2 0.2 5.1 3.8 2.0 4.8 3.7 2.0 4.8

Phi lippines 6.3 1.4 2.6 6.9 1.9 1.3 6.2 3.0 1.5 6.6 3.2 2.2

Vietnam 6.7 0.6 0.5 6.2 2.7 0.4 6.5 4.6 0.5 6.8 4.1 0.9

Australia 2.4 1.5 -4.8 2.4 1.3 -4.5 2.6 2.2 -4.1 2.8 2.3 -4.1

Note: Asia (ex Japan) includes China, India, South Korea, Singapore, Hong Kong, Taiwan, Malaysia, Indonesia, Thailand, Philippines, Vietnam

Country

2015 2016 2017 2018

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China 6.9 6.8 6.8 6.8 6.7 6.7 6.7 6.6 6.4 6.4 6.5 6.5

India 7.2 7.1 6.7 7.1 7.3 8.0 7.3 7.7 7.3 7.6 8.0 7.7

Korea 2.6 2.7 2.9 2.7 2.8 2.8 2.8 2.9 3.0 2.6 2.8 2.8

Singapore 2.0 1.8 1.1 1.9 2.1 1.9 1.8 2.3 3.0 2.9 2.9 2.8

Malaysia 5.0 4.1 4.3 4.6 4.8 4.5 4.6 4.8 4.6 4.9 4.8 4.8

Indonesia 4.8 5.0 5.4 5.6 5.7 5.1 5.5 5.6 5.8 5.8 6.0 5.8

Thailand 2.8 3.2 3.8 3.6 3.7 4.1 3.8 3.8 3.6 3.6 3.9 3.7

Phil ippines 6.3 6.9 6.8 5.2 6.3 6.5 6.2 6.6 6.4 6.8 6.7 6.6

Vietnam 6.7 6.2 7.1 7.0 6.2 6.2 6.5 6.7 6.9 7.2 7.1 6.8

Australia 2.4 2.4 2.6 2.4 2.6 2.9 2.6 2.8 3.0 2.9 2.6 2.8

2018

Note: Asia (ex Japan) includes China, India, South Korea, Singapore, Hong Kong, Taiwan, Malaysia, Indonesia, Thailand, Phil ippines, Vietnam

Country 2015 2016

2017

2017

2018

2016 2017 2018Lower Upper Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1.5 3.5 China 2.1 2.1 1.7 2.2 2.3 2.4 2.6 2.5 2.0 2.4 2.1

2.0 6.0 India 5.3 5.7 5.2 3.9 4.3 4.6 4.6 5.4 5.0 4.7 5.1

2.5 3.5 Korea 1.0 0.9 1.2 1.3 1.5 1.9 2.3 2.3 1.1 2.0 2.0

2.0 3.0 Singapore -0.8 -0.9 -0.4 0.1 0.7 0.9 1.4 1.7 -0.5 1.2 2.1

2.5 3.5 Malaysia 3.4 1.9 1.5 2.0 1.9 2.4 2.5 2.4 2.2 2.3 2.7

3.0 5.0 Indonesia 4.3 3.5 3.0 3.3 4.0 4.3 5.3 5.2 3.5 4.7 4.9

1.0 4.0 Thailand -0.5 0.3 0.3 0.7 1.9 1.7 2.2 2.1 0.3 2.0 2.0

2.0 4.0 Philippines 1.1 1.5 2.0 2.5 3.3 3.3 3.1 2.4 1.9 3.0 3.2

5.0 7.0 Vietnam 1.3 2.2 2.8 4.4 4.9 4.6 4.8 4.3 2.7 4.6 4.1

2.0 3.0 Australia 1.3 1.0 1.3 1.5 2.2 2.3 2.1 2.2 1.3 2.2 2.3

Policy Threshold

Country

2016 2017


- 3 -

Central Bank Policy Outlook

FX Outlook .

Market Watch

Sources: Reuters, Mizuho Bank

Country Central Bank 2016 Policy Rate

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

China PBoC 4.35 1-Yr Lending Rate 4.35 4.35 4.35 4.35 4.00 4.00 4.00 4.00

India RBI 6.25 Repo Rate 6.00 5.75 5.75 5.75 6.00 6.00 6.25 6.50

Korea BoK 1.25 Base rate 1.00 1.00 1.00 1.25 1.25 1.25 1.50 1.50

Singapore MAS^* Reduced slope S$ NEER

Malaysia BNM 3.00 O/N Policy Rate 2.75 2.75 2.75 3.00 3.00 3.00 3.00 3.00

Indonesia BI** 4.75 Benchmark Rate 4.50 4.50 4.50 4.50 4.75 4.75 4.75 5.00

Thailand BoT 1.50 1-Day repurchase rate 1.50 1.50 1.50 1.75 1.75 2.00 2.00 2.25

Philippines BSP*** 3.00 Reverse repurchase rate 3.00 3.00 3.25 3.25 3.25 3.25 3.50 3.50

Vietnam SBV 6.50 Refinancing Rate 6.50 6.50 6.50 6.50 6.50 6.00 6.00 6.00

Australia RBA 1.50 O/N Cash Rate 1.50 1.50 1.50 1.75 1.75 2.00 2.25 2.25

2017

Unl ike other regional central banks, the MAS conducts monetary policy via FX. Specifical ly it adopts a trade-weighted appreciation of the SGD at a "modest and

gradual" (estimated to be 2% per annum) pace as the default policy.

** BI will set the 7 Day repurchase rate (currently at 5.50%) as the benchmark rate in August. In the transition period, the current benchmark rate prevails.

*** BSP will implement an interest rate corridor to its monetary policy framework. The policy rate will now be the overnight reverse repurchase rate and wil l be

adjusted to 3.00% on June 3.

2018

Status Quo Status Quo Status Quo Reinstate Slope

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

USD/JPY 117 116 112 109 105 104

EUR/USD 1.04 1.03 1.05 1.07 1.08 1.10

USD/CNY 6.95 7.00 6.92 6.85 6.85 6.75

USD/INR 68.2 70.0 67.5 66.3 65.5 65.0

USD/KRW 1207 1220 1200 1170 1130 1100

USD/SGD 1.45 1.46 1.45 1.42 1.40 1.39

USD/IDR 13465 13900 13600 13300 13000 12800

USD/MYR 4.48 4.55 4.40 4.35 4.22 4.10

USD/PHP 49.8 51.0 49.8 48.8 48.0 47.5

USD/THB 36.0 36.4 35.9 35.4 35.0 35.0

USD/VND 22770 22880 22750 22650 22500 22450

AUD/USD 0.72 0.70 0.74 0.77 0.79 0.78

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Equities YTD Returns (%)

YTD (% in USD) YTD (% in lcl ccy)*As of 29 Dec 16

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Jan 17 Mar 17 Apr 17 Jun 17 Jul 17 Sep 17 Oct 17 Dec 17

Market vs FOMC Expectations -Fed Funds Rate (%)

Market-implied Fed Funds Rate FOMC Median FFR Projection

*As of 29 Dec 16

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FX YTD returns (%)

YTD spot w/ carry (%) YTD spot (%)*As of 29 Dec 16

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10Y Yield YTD Changes (bps)

Change bps (10y)*As of 29 Dec 16


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Table of Contents 1. Global Overview --------------------------------------------

5

Trumponomics

2. Asia Outlook -------------------------------------------------

7

Trade-Off

3. China --------------------------------------------------------

8

Two-Halves

4. India ---------------------------------------------------------

10

Re-Monetization

5. South Korea-------------------------------------------------- 12

Political Turmoil

6. Singapore ---------------------------------------------------

14

Dis-Service

7. Malaysia -----------------------------------------------------

16

Measured Recovery

8. Indonesia ----------------------------------------------------

18

Boosting Structural Reforms

9. Thailand -----------------------------------------------------

20

Fiscal Support to Lift

10. Philippines ---------------------------------------------------

22

Continuity in Structural Reforms

11. Vietnam -----------------------------------------------------

24

Donald’s Disruption?

12. Australia ----------------------------------------------------- 26

Palpable Investment Drag


- 5 -

Global Overview: Trumponomics (May Cut Both Ways)

Growth: IMF view of gentle global growth pick-up to 3.4% in 2017 (2016: 3.1%) is predicated on; i) US bounce to 2.2% (2016: 1.6%) more than offsetting, EZ slip (partly Brexit-induced) to 1.5% (2016: 1.7%) and; ii) EM commodity producers (e.g. Russia, Brazil) rebounding from sharp contraction with commodities bottoming. But Trumponomics heightens uncertainty around assumed growth outcomes. Reason being, while Trump’s massive fiscal stimulus plans may boost US, and subsequently wider global, growth – along with commodity and capital goods demand – protectionist tendencies threaten to sink global trade (and demand), exposing downside risks. Upshot is that Trumponomics may cut both ways. Risks: Despite a Republican-dominated Congress fiscal conservatism may waylay, or at least curtail the full extent of Trumponomics – massive infrastructure boost and deep tax cuts. In any case, surging yields in anticipation of “Trumpflation” (and consequent Fed tightening) dampens intended US fiscal boost and, most worrying, induce potentially destabilizing capital outflows from EM – resurgent USD amplifying pain from higher external liabilities. Lingering EZ/“Brexit” risks and China’s high debt-soft growth conundrum accentuate risks of prolonged global economic overhang.

Policy: Expectations of widening US-global central bank policy divergence are overdone. Admittedly, more hawkish “Dot Plot” (3 rate hikes in 2017, up from two), concedes Trump-flation risks . Nonetheless, policy divergence theme is stretched. First, fiscal stimulus, and inflation pass-through could undershoot on political roadblocks. Second excessive USD strength from “Trump-flation” will probably dampen the Fed’s ability/inclination to tighten. Finally, scope for ECB and BoJ to ease may be challenged. The former by fading oil disinflation upping “taper” pressures and the BoJ facing the constraints of a massive balance sheet burdened by more than a third of outstanding JGBs. Asset Markets: “Trump -flation” trades exhibit a few distinct traits. First, higher UST yields and consequently stronger USD – the latter may persist with yield ascendancy, alongside curve steepening. As a corollary, AXJ* are hollowed out by capital outflows. This “re-allocation” out of EM into US is captured US equity market exuberance contrasting against recoil in EM equities. Moreover, to the extent that US equities are buoyed by optimism about reduced regulatory burden for banks and fiscal boost for builders, shortfall in policy delivery risks reversal in US equity bounce, but with further EM pressures; alongside a jump in JPY.

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Trump's fiscal stimulus* may lift US growth by ~1.0 %-pts & up global growth by ~0.3%-pts!

US GDPUS with fiscal stimulusGlobal GDPGlobal with US stimulus

Fiscal Assumptions for Trumponomics:

1) US$550bn infrastructure boost will be implemented over two terms (8 years) .

2) Corporate tax rate cut from 35% to 15% reduces tax by ~US$170-180bn in 2017/18. And personal income tax reduction of ~US$100bn.

3) No multiplier is assumed and real GDP effect is derived discounted for estimated inflation .

Sources: CEIC, IMF, Mizuho Bank

1.6

1.8

2.0

2.2

2.4

2.6

2.8

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1.6

1.8

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2.4

2.6

2.8

3.0

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Similarity in yield surge between "Trump-flation" & "Taper Tantrums" warrants

watching for persistence

(Yields, % )

"Trump Effect" on USTs Taper Effect USTs

Days from Start of "Taper Tantrum" (end-Apr -13 onwards) /"Trump-flation" (end-Oct -16 onwards)

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1.7

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2.9

3.1

3.3

3.5

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

Inflation Expectations (based on 5Y5Y Inflation swaps) are largely influenced by Oil Prices;

but "Trump-flation" has overtaken even the OPEC upside!

US (% LHS) Brent (RHS)

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Limits of G4 Monetary Policy Stimulus is being Tested. Fed-BoE policy

divergence evolves post-Trump; ECB will approach "taper" sonn as Oil

dis-inflation fades further; BOJ's "YCC" is anchor comes at a cost.

EUR Deposit Rates Fed Funds Target Rate BOJ IOER

10Y UST Yields 10Y JGB Yields BOE Base Rate

10Y Bund Yields 10Y Gilt YieldsSources: Bloomberg, Mizuho Bank

UST yield surge on "Trump-flation" may have variable impact on Gilts and Bunds . But BoJ yields are capped rather than dragged .

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20"Trump Trades" evolved from "risk off" to reflation trades, that has driven USD & US

equities higher on fiscal stimulus bets. (% Chg vs. USD)

"Trump Trades" (End-Oct to End-Dec)

Oct-16

Q4

Sources: Bloomberg, Mizuho Bank

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Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

One of the "Trump effects" has been to boost banking stocks on hopes of greater de-

regulation (and high profile banking sector) draft into Trump's Administration.(Cumulative % Chg since start-2014)

S&P Global 100 S&P 500 - Financials S&P 500

* Asia ex-Japan Currencies


- 6 -

EUR/USD Outlook: Amidst increased expectations of US fiscal stimulus, heightened inflation pressures and a more hawkish Fed message, the USD has been propelled significantly against a broad swathe of currencies. EUR/USD was no exception, tanking over 5% towards 1.04 in the two months after Trump’s electoral victory. ECB’s announcement of a reduction of the pace of bond purchases was a surprise, while an extension of QE from Mar 17 to Dec 17 was not. However, Draghi’s emphasis that policy remains accommodative and that asset purchases could be stepped up again if needed kept EUR bulls in check. We see EUR/USD inching higher towards 1.08 by end 2017.

Sources: Reuters, BIS, Mizuho Bank

USD/JPY Outlook: BoJ’s yield curve control, where the Bank targets to keep the 10y yield around 0%, has been super effective in capping JPY yields despite a surge in global yields. This has allowed the UST-JGB yield differential to widen significantly, helping to lift USD/JPY back towards 118 levels, while other JPY crosses have mostly sold off as well. In the near-term, we see a potential consolidation around 116 levels, but a broader retreat could come into play next year as there remains significant uncertainty what sort of fiscal stimulus can the Trump administration achieve, which might well underwhelm currently lofty expectations.

Sources: Reuters, BIS, Mizuho Bank

Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

Fed Rate (%) 0.25 - 0.50 0.50 - 0.75 0.50-0.75 0.75-1.00 1.00 1.25

ECB Rate (% ) -0.40 -0.40 -0.40 -0.40 -0.40 -0.40

BoJ Rate (%) -0.10 -0.10 -0.10 -0.10 -0.10 -0.10

EUR/USD* 1.1241 1.0438 1.03 1.05 1.07 1.08

1.0976-1.1354 1.0387-1.1211 1.02 - 1.08 1.03 - 1.10 1.05 - 1.13 1.05 - 1.13

USD/JPY* 101.35 116.69 116 112 109 105

99.89-106.85 101.65-118.18 109 - 119 107 - 117 106 - 116 103 - 113

Brent Crude (US$/bbl)

49.06 56.82 56.00 60.00 62.00 65.00

41.51-51.22 43.57-57.89 48.00-62.00 52.00-65.00 55.00-65.00 60.00-70.00

0.80

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1.20

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EUR/USD fair value

EUR/USD EUR/USD Fair Value

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120

130

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170

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USD/JPY fair value

USD/JPY USD/JPY Fair Value

Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q3 & Q4 2016 ranges are from Bloomberg and only indicative.


- 7 -

Asia Outlook: Trade Off

Output: Trumponomicsis the wild card as measured spillover from China’s infrastructure boost is watched. Meanwhile, exports demand poses the biggest binary risk to Asia given high dependence on exports. And the extent to which Trump translates protectionist trade rhetoric from his campaign to actual policy will determine whether US infrastructure boost fillip for Asia is overshadowed by protectionism. Especially if Navarro-led US National Trade Council adopts Regan era-type measures to clamp down on Chinese/Asia imports – negative ripples across Asia’s supply-chain linkages amid wider trade (deals) off approach (e.g. TPP). Inflation: With lingering demand deficit, demand-pull inflation is not an overarching concern just yet. That said, oil price stabilizing higher – with attendant dissipation of energy dis-inflation, evolving into nascent energy inflation – coinciding with a sustained bout of Asian currencies weakness (amid USD strength driven by higher UST yields) means that imported supply-side price pressures is set to emanate sooner. To be sure, inflation will not imminently breach medium-term target materially. Nonetheless, emerging cost-push is set to present a trade-off with sub-par growth in Asia.

olicy: Sharp depreciation in Asian currencies (post-Trump) – unintended as it was – has shifted monetary policy calculus. From a theoretical view-point, easier overall monetary conditions from weaker exchange rate diminish the need to imminently ease policy; this may also be framed as a consequence of increased exposure to imported inflation. Crucially though, it is the overall macro stability risks from falling exchange rates (knocking on to higher external leverage and FX reserve depletion) that up the stakes of further easing – despite benign inflation. FX: The strong USD tsunami post-Trump in 2016 (surging more than 10% vs. JPY; 7% vs. AUD & ~ 6% vs. MYR, NZD, KRW), reflects re-introduction of downside risks to AXJ (Asia ex-Japan FX); derived from resurgent UST yields – reminiscent of summer “taper” tantrums . And in that vein, further (and sustained) upside in UST yields in coming months will catalyze fresh of sell-off in Asian currencies (AXJ) . But while predominant, yields are not exclusive, drivers of AXJ. Instead, Trump’s trade activism (especially against China/Asia) and unfolding “Brexit” risks will set the tone for Asia FX. Upshot: Till the French elections pass in May, downside risks to AXJ outweigh; but USD is set to moderate late-H2.

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VN TH TW MY CN IN KR SG* ID PH HK*

Direct & indirect (via China) US exposure relative to GDP suggests Asia will feel deep impact from Trump's trade actions. (as % of GDP; Average 2013-2015 )

EUUSJapanChinaG3 & China (RHS)Proportion of US & China (RHS, %)

Sources: CEIC, Mizuho Bank* Domestic exports used as entrepot status distorts exports reliance for SG & HK.

41

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China(incl. HK) Japan Korea Taiwan India ASEAN-6 Net Energy Asia ex-Japan*

Asia's % share of US trade defict has surged since 2005, led by China, more than

offsetting drop in net Energy deficit; risk of US trade backlash under Trump

2005 2010 2015 2005-2015 Chg (% Pts)

Sources: CEIC, Mizuho Bank

Net Energy deficit fell 21.3%-pts

* This comprises China, HK, Korea, Taiwan, India & ASEAN-6

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Even with Oil prices set to rise, inflation is expe cted to be mostly contained 3-5%; certainly not imminently inducing policy reaction.

(Inflation; %YoY)

CPI (LHS) Core (LHS) Oil (Brent, RHS)Sources: CEIC. Mizuho Bank

Brent is assumed to gradually gain traction, but with two-way trades in the US$50-68/bbl into 2017 as OPEC cuts exert some influence

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Having bottomed in Q1 2016 Brent crude looks set fo r US$50-68 range in 2017 before US$60-75 in H1 2018, will emphatically, but gently, tip into inflation from di s-inflation in 2017.

Brent (US$/Barrel; LHS)

Brent Inflation (% YoY; RHS)

Sources: CEIC. Mizuho Bank

Mizuho Forecast .

Inflationary

Dis-inflationary

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Most Asia CBs have stretched scope for easing, thou gh not all have exhausted options; but the Fed's resumption (+25bp in Dec) narrows windows for easin g (Policy Rates, % )

BI (ID) BNM (MY) BSP (PH) BoT (TH) Fed (US)

PBoC (CH) RBA (AU) RBI (IN) BoK (KR)

Sources: CEIC, Bloomberg, RBI, BoK, BoT, BSP, BNM, BI, PBoC, RBA

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Asia-US Real* Interest Rate Differentials (%; 12mma) suggests some, but limited, scope for the RBI and B I to ease; but currency stability concerns could over ride.

India Indonesia Malaysia Thailand Australia Philippines Korea

Sources: CEIC, Bloomberg, RBI, BoT, BSP, BNM, BI, BoK, Mizuho Bank

* Real interest rates are calculated by deflating nominal interest rates (in this case, the policy rate) by consumer inflation. The differential is then obtained by subtracting real US rates from the respective real Asian rates.

LooseningConditons

TighteningConditions

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2(20)

(15)

(10)

(5)

0

5

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

"Trump-flation" fuelled UST yield (surge) based on assumed fiscal stimulus by Trump driving FX

markets - stronger USD! JPY worst hit on YCC divergence ; MYR, AUD & KRW hit hard(er)! (cumulative % Chg)

IDR AUD

INR MYR

JPY KRW

THB CNY

SGD UST Yields (10Y, inverted, RHS)

Days from Start of "Trump-flation" (end-Oct 2016 onwards)


(20)

(15)

(10)

(5)

0

5

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95

"Taper Tantrum" (2013) Sell-off tracked over the first 100 days reveals that pressures (on worst-hit

Asia FX) started abating about 90 days out as clarity on Fed policy emerged (cumulative % Chg in Currencies)

IDR AUD INR THB JPY MYR UST Yields (10Y, inverted, RHS)

Days from Start of "Taper Tantrum" (end-Apr 2013 onwards)

JPY reversal to surge even as yields rallied (UST p rices plunged) and Asian currencies sold-off brutally indicates that a (risi ng UST) yield driven FX market dynamic morphed into more generalised "risk off" reaction.



- 8 -

China: Two-Halves Growth: China’s story may shape up to be one of two halves – in more than one sense. On one hand is the half-full or half-empty perspective – whether debt woes will overwhelm or astute management of banking/property sectors alongside fiscal expansion will help with bottoming. Crucially, , with the 19th National Congress of the Communist Party of China (NCCPC) in Autumn 2017, macro-prudential leaning policies from early-2017 may be swapped out for more pro-growth stance in H2; demarcating first-half stability and second-half boost. In any case, we expect fairly steady growth buoyed above 6.5% on fiscal boost; in line with Mizuho’s China activity tracker suggesting bottoming.

Industry: Prolonged exports woes worsening in 2016 undermine industrial recovery – already hobbled by chronic overcapacity and inventory glut. China’s infrastructure boost is thus a welcome catalyst to kick-start fresh demand. Meanwhile, pick-up in real estate bodes well for getting broader investments underway – a necessity given conspicuously absent external demand. That said, sharp disparity between China’s frothy tier-1&2 properties and dismal tier-3&4 as well as hard-to-manage overheating and attendant banking may give rise to hit-and-miss policy approach that gives rise to some industrial volatility.

Growth dynamics: To be sure, the massive (and rapid) build-up of debt in continues to pose a background/tail risk . Nonetheless, nominal growth sustaining the pick-up (and overtaking real growth) is a start to out-growing debt. And if the recovery in the property market is appropriately managed, worst-case outcomes may be avoided to the benefit of stabilizing growth. Necessarily though, something has to give, and any backstop for growth would entail falling back on investments – something China was attempting to wean off as part of “restructuring”.

Inflation : With global energy and commodity prices bottoming emphatically in 2016 (and thus commodity dis-inflation fading out), coupled with an significantly softer CNY (down 6.5%), supply-side and imported price pressures are set to nudge inflation higher. The pick-up will probably be more pronounced in producer inflation given an almost unimpeded pass-through. Nonetheless, global demand deficit and excess capacity means that inflation will not surge dramatically either . On the whole, we think that consumer inflation will, by and large, be contained below 3%; well within the PBoC’s desired inflation range.

(5)

0

5

10

15

20

25

30

35

4

6

8

10

12

14

08 09 10 11 12 13 14 15 16

Signs are that China's Activity, while still sub-pa r, may find traction at low base; property is key to watch!

(% YoY, Quarterly data)

GDP (LHS) GDP Proxy* (RHS)

Sources: CEIC, Mizuho Bank.

* Mizuho's proxy of activity correlating to GDP. It comprises a weighted aggregate of freight, credit, electricity output and auto production activity.

85

90

95

100

105

110

0

10

20

30

40

50

05 06 07 08 09 10 11 12 13 14 15 16 17

With signs of real estate turnaround real estate, m anaging disparity across cities is the challenge; whereas real wider investm ents fillip is a silver lining.

FAI (YTD % YoY, LHS)

FAI Real Estate (YTD % YoY, LHS)

Real Estate Climate Index (RHS)Sources: CEIC, Mizuho Bank .

(20)

(10)

0

10

20

30

40

(20)

(10)

0

10

20

30

40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

China: Chronic shortfall of trade targets since 201 1 with first post-Lehman contraction in 2015; and 2016 (Jan-Nov) exports hav e only worsened! (% Chg YoY)

Exports Growth

Imports Growth

NPC Trade growth Target^

Total Trade Growth ^ Assumes 10-15% (12.5% mid-point) target for 2005-2008 & 10% for 2009-2010.

2016 data only compares Jan-Feb to corresponding period previous year. While the NPC abandoned trade growth target for 2016 , it indiacted desite to improve over 2015.

Source:s CEIC, Mizuho Bank

0

5

10

15

20

25

5

10

15

20

25

30

35

40

09 10 11 12 13 14 15 16

China Q3 GDP : Nominal GDP growth picking up further is welcome; and a pre-requisite to start growing out of debt!

Total Social Financing* (% YoY, Quarterly)

TSF ex Bankers Acceptance

Nom GDP YoY


*Total Socia Financing comprises both Conventional and Shadow Banking.

0

10

20

30

40

(50)

(25)

0

25

50

75

08 09 10 11 12 13 14 15 16

Sustained (albeit tempered) pick-up property sales to underpin stabilization in wider economic activity; to juggle banking-bubble r isks.

Land Purchased (LHS, YoY)

Floor Space Sold (LHS, YoY)

Real Estate Inv. (RHS; YoY)Sources: CEIC, Mizuho Bank

(2)

0

2

4

6

8

10

(2)

0

2

4

6

8

10

05 06 07 08 09 10 11 12 13 14 15 16

China CPI Contribution (%-pts) shows that abating F ood inflation will keep overall price pressures contained.

Others

Residence

Food

CPI (% y/y)


Inflation pick-up mostly due to the pick-up in domestic food prices; but is neither chronic nor entrenched.

(12)

(8)

(4)

0

4

8

12

253035404550556065707580

05 06 07 08 09 10 11 12 13 14 15 16

PMI Price Index pick-up points to further producer inflation pick-up ; and squares with rising industrial profits. (3mma)

Price IndexProducer Inflation (% y/y; RHS) Sources: CEIC, Mizuho Bank.


- 9 -

Policy: Despite imminent pick-up in price pressures, the PBoC has the flexibility to ease policy gently. Nonetheless, with the focus on “prudent” monetary policy stance and CNY stability alongside checking banking risks (diametrically opposed to easier credit), we expect that the PBoC will refrain from easing in the earlier part of 2017 – instead fiscal policy may have to shoulder most of the burden whilst monetary policy. But come second half, the PBoC may be inclined to lower RRR to ease banking sector constraints. Facilitating the ability of local government to engage in debt swaps may be backdoor stimulus in lieu of outright policy rate cuts.

External Position: We suspect that despite solid C/A surplus, upsized “hot” outflows pressure China’s overall external balance – and we think speculative (“hot”) outflows intensified into Q4 in the aftermath of “Trump trades”. In the first half of 2017 heightened risk of outflows may not materially diminish as a stronger USD prevails. But second half reversal of USD strength (and consequently stronger CNY) should feed-into positive capital inflow cycle. Meanwhile, China’s administrative “capital guidance” should act as a speed bump for light-footed, out-bound capital - supporting CNY.

FX: With an expanded CNY NEER basket (effective start-2017), which de-emphasizes USD at the margin in favour of EM currencies, the policy goal may be wider representation. Inevitably though, USD/CNY will be subject to more volatile moves during period of unilateral USD strength (assuming a fairly stable CNY NEER reference). But that said, this should not be conflated with the desire for a weaker CNY. Fact is, with reduced exports sensitivity to CNY, Beijing’s top priority is for stability ; and in particular to stem excessive capital outflows. With, a fairly stable NEER reference USD/CNY will pick-up in coming months if higher USD follows UST yields. Late-2017 USD/CNY reversal is predicated on USD correction.

Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 6.7% 6.8% 6.7% 6.8% 6.7% 6.7%

CPI (% y/y) 1.7% 2.2% 2.3% 2.4% 2.6% 2.5%

Policy Rate (%) 4.35% 4.35% 4.35% 4.35% 4.35% 4.35%

USD/CNY* 6.6716 6.9559 7.00 6.92 6.85 6.85

6.6254-6.7045 6.6716-6.9603 6.67 - 7.17 6.75 - 7.09 6.68 - 7.02 6.68 - 7.02

0

5

10

15

20

25

(4)

(2)

0

2

4

6

8

10

06 07 08 09 10 11 12 13 14 15 16

Scope - though not excessive - for further Policy & R RR cuts lined up; but to take a backsea as banking/real estate ri sks precede.

1-yr Lending (LHS) *Real interest rates (LHS)

CPI (% y/y; LHS) 7-Day Repo (LHS)

RRR (RHS) RRR - Small/Med banks (RHS)Sources: CEIC, Mizuho Bank

(8)

(6)

(4)

(2)

0

2

4

6

8

10

(8)

(6)

(4)

(2)

0

2

4

6

8

10

09 10 11 12 13 14 15 16

Capital Outflows (% of Prev Qtr FX Reserves) were roughly balanced by firm C/A surplus; but "hot" outflows persist, worse ning in Q4!

C/A Investments

Valuation Effect Deviation (Implied Hot flows)

Chg in FX Reserves


5.90

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

6.80

6.90

7.00

7.10

5.90

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

6.80

6.90

7.00

7.10

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

While CNY tumble post-Trump looks sharp and compoun ds capital exodus fears, it is consistent with broader USD move; and a stable C NY NEER.

USD/CNY

Lower Band

Upper Band

USD CNY Fix

USD/CNH


Stronger CNY11-Aug: 1.9% reference devaluation followed by a fe w sessions of self-reinforcing sell-off as fixing shi fted to market-based mechanism. CNY sell-off quelled by PBo C intervention/clarification

USD/CNY rally post-Trump

88

90

92

94

96

98

100

102

104

106

88

90

92

94

96

98

100

102

104

106

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

Post-Trump, CNY NEER has edged up; but has more broadly been st able with SDR-inclusion levels . (Index end-2014=100)

CNY NEER

4% appreciation p.a. (start-2010)

2% appreciation p.a. (start-2010)

CNH NEER

Sources: CFETS (PBoC), Bloomberg, Mizuho Bank

Brexit triggered some CNY NEER slippage initially. But since then PBoc has signalled preference for stability.



- 10 -

India: Re-Monetization

Growth: Surprise de-monetization – remove, all 500- and 1,000-rupee bills (~86-87% of currency!) – in early-Nov probably ravaged growth by between 0.8-1.3%-pts in Q4 (to 6.0%-6.5%). The sharp impact is a consequence of delays in replacement 500- and 2000-ruppee bills curtailed consumption, paralyzed the grey economy (where cash transaction dominate) and took the wind out of investments; as knock-on from black money withdrawal dented big-ticket purchases and investments. Re-monetization into Q1 will initiate growth restoration; but not immediately. Lingering confidence setback and external uncertainties could stall pick-up back to 7.0-7.5% growth to H2 2017.

Industry: As domestic demand seizes on the cash shortage – particularly acute for big-ticket items, the pressure should begin to turn up in output data. But equally, the unobservable pressures on the informal sector – including small scale manufacturing – where the cash squeeze paralyzes output, could also feed into wider slowdown in the formal economy. The drag will come through in both output as well as consumption (as cash-paid) workers tighten belts. And rising oil costs compound the bottom-line squeeze – and this shows up as wider trade and C/A deficit. Re-monetization only offers partial relief.

Growth dynamics: Admittedly, demonetization may be a transitory interruption to activity, banking and investments. But how re-monetization plays out – the extent of formalization grey economy, estimated to be 20-23% of GDP – will dictate economic potential by extending banking penetration, increasing fiscal efficiency, and as a corollary, growth multipliers. Superficially, reported growth will shift higher. But re-monetization is no panacea, and re-capitalizing Indian banks, is a crucial pre-requisite to attain and sustain “potential” 8-10% growth. With asset quality deterioration, this is increasingly urgent too.

Inflation : Sharp fall in headline inflation (late-2016) is due to exaggerated price impact of de-monetization – but mostly on perishables. Whereas “ core” inflation has remained fairly “sticky” . Consequently, “volatile” aspects of inflation is set to bounce back as re-monetization re-starts demand; but equally, without necessarily resulting in sharp, run-away inflation. We expect that pent-up will be transitory and moderated in any case. And looking through the de- and re-monetization, we expect that inflation will gravitate towards the 5% ballpark later in 2017.

(8)

(4)

0

4

8

12

16

(8)

(4)

0

4

8

12

16

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16

Net Exports and government spending only partly offset Investment drop . De-monetization to intensify the drop as consumption v ia Consumption hit.

(Contribution to Growth YoY %-pts)

Errors Net Exports

Stocks & Valuables Investments

Govt Consumption

GDPSources: CEIC, Mizuho Bank

(4)

(2)

0

2

4

6

8

10

(4)

(2)

0

2

4

6

8

10

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16

With import compression peaking on Oil & Gold demand and Exports dropping on de-monetizatoin seizure in production, net expor ts could subtract too!

(Contribution to Growth YoY %-pts)

Imports

Exports

Net Exports


Imports CompressionExports Growth

Imports GrowthExports Compression

(10)

0

10

20

30

40

50

60

(10)

0

10

20

30

40

50

60

06 07 08 09 10 11 12 13 14 15 16

With de-monetization, auto saleshave plunged in Nov on the cash crunch; poised for further drop as cash-paid workers feel t he squeeze

(3mma % YoY)

Passenger Vehicles SalesIndustrial ProductionInfrastructure IndustriesSteel


20

40

60

80

100

120

140(20)

(18)

(16)

(14)

(12)

(10)

(8)

(6)

(4)Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

With Oil prices off Q1 lows, trade deficit is set t o re-widen; likely to show up as measured re-widening in C/A deficit

(3mma US$bn)

Trade DeficitOil Prices (advanced 3 months U$/bbl; RHS)

Sources: CEIC; Mizuho Bank

0

1

2

3

4

5

0

2

4

6

8

10

12

14

16

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

NPLs are up , and could be further pressured by headwinds while capital buffer relative to loans have diminished .

Restructured Loans Ratio (%)

NPL Ratio (%)

Capital-to-Loans Ratio (%, RHS)

Sources: CEIC; Mizuho Bank

60

62

64

66

68

70

72

74

76

78

80

0

5

10

15

20

25

30

35

07 08 09 10 11 12 13 14 15 16

Drop in credit and surge in deposits are both artifacts of de-

monetization; and durability is not guaranteed. (3mma % y/y)

Non-food credit (LHS)

Deposits (LHS)

Loans-to-Deposits Ratio (%; RHS)Sources: Bloomberg, CEIC, Mizuho Bank

0

2

4

6

8

10

12

0

2

4

6

8

10

12

Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16

New RBI MPC surprised with 25bp rate cut (Sep) to 6 .25%; minutes & softer real "neutral" rate target point to more c uts (% y/y)

Food Fuel & Light

Clothing Housing

Misc CPI

RBI Policy (Repo) Rate CPI ex-Food, Fuel&Light



- 11 -

Policy: In a nutshell, the RBI has policy space to ease the repo rate from current 6.25% on account of inflation pullback coinciding with softer growth. But will nonetheless be gradual and tactical – corresponding to at least one 25bp cut, possibly two (spaced out in H1). First, the RBI views de-monetization’s dampening effects as transitory – and thus cannot be seen to react instinctively in the immediate aftermath of demonetization. Second, to restore confidence about price stability priority in the midst of “sticky” c ore inflation . Third, due to wider financial stability risks from “Trump-flation”. Finally, the RBI is also looking for further transmission of easing.

External Position: With the bottoming in oil prices, we expect that C/A deficit will widen emphatically into end-2017, accentuated by de-monetization dent on exports near-term. Overall C/A deficit will “normalize” towards 2% of GDP in the medium-term+. Arguably this risks slow underlying INR appreciation bias, but we expect that capital inflows will more than offset in the medium-term. Into H1 2017 though, external account pressures could increase insofar that widening C/A deficit collides with diminished capital inflow – if not outright reversal to outflows. The risk is that capital reversal from EM Asia amid higher UST yields may catch investors short on confidence post-demonetization. Re-monetization restoration though into late-2017. FX: To be sure, INR drop alongside other Asian currencies is unavoidable in coming months if unilateral USD ascendancy continues – even if in bouts. And bottoming C/A deficit colliding with capital flow reversals will invariably turn up pressures on INR . More so if oil prices rise a little faster than anticipated. Nonetheless, we are not unduly alarmed about a re-run of the 2013 “taper tantrums” that relegated the INR to the bottom (with a drop of 20% at one point) of the EM FX pile either. Fact is, FX reserve build-up and improved fundamentals buffer INR. Thus our expectation of USD/INR breaching 70 is due to the low (INR) starting point rather than the depth of the drop’ and we expect recovery towards 65 by end-2017.

Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 7.1% 6.2% 6.7% 7.1% 7.3% 8.0%

CPI (% y/y) 5.2% 3.9% 4.3% 4.6% 4.6% 5.4%

Policy Rate (%) 6.00% 6.25% 6.00% 5.75% 5.75% 5.75%

USD/INR* 66.56 68.21 70.0 67.5 66.3 65.5

66.28-67.50 66.25-68.78 66.2 - 71.9 65.7 - 70.0 64.5 - 68.1 63.8 - 67.2

(1)

0

1

2

3

4

5

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

With the neutral real interest rate target lowered from 1.5-2.0% to 1.0-1.5%, the implied easing bias suggests more rate cuts; but only if

real rates are derived from headline CPI. Using "core" CPI instead suggests no urgency for a rate cut. (%)

RBI Policy (Repo) Rate

Real Interest Rate (RHS, %)

Real "Core" Interest Rate (RHS, %) Sources: CEIC, Mizuho Bank

0

2

4

6

8

10

0

2

4

6

8

10

06 07 08 09 10 11 12 13 14 15 16

Bottoming C/A Deficit alongside diminished capital inflows reveal significantly eroded "free cash" buffer; undermines INR.

(4Qma, % of GDP)

C/A Deficit (% of GDP)

Capital Inflows (% of GDP)Sources: Bloomberg, CEIC, Mizuho Bank

The Capital Account (Surplus) to C/A (deficit) remains positive for the INR - capital inflows comfortably finance the C/A gap - but boost could fade if C/A deficit re-widens on firmer Oil. Regardsless though, INR is far less vulnerable now compared to 2013 "taper tantrums".

(2)

0

2

4

6

8

10

(2)

0

2

4

6

8

10

05 06 07 08 09 10 11 12 13 14 15 16

Despite modest restoration of portfolio infliws in Q3, this, Q4 could see a slip , while FDI weakens on "demonetization". Erodes Cap ital buffer!

(% of GDP, 4Q ma)

FDI Portfolio Loans

Banking Capital Other Capital BOPK A/c

Sources: Bloomberg, CEIC, Mizuho Bank

4

6

8

10

12

14

16

80

85

90

95

100

105

110

06 07 08 09 10 11 12 13 14 15 16

Improved FX reserve buffer squares with REER streng th; but capital outflows from "risk off" & Oil may lift USD/ INR

INR REER (LHS; 2010=100)

Imports cover (months of imports FX Reserves cover, RHS, ratio)

Sources: BIS, CEIC, Mizuho Bank



- 12 -

South Korea: Political turmoil

Growth: The economic recovery process has been rather slow in the context of sluggish external demand. Net exports for instance contributed negatively to growth in recent quarters. And the ongoing political turmoil is another challenge especially if this translates to a marked deterioration in confidence and which in turn translates into lower household spending. Growth prospects may be hampered though a collapse in the economy is unlikely. There is still scope for additional policy support via monetary easing or fiscal stimulus if necessary. Industry: Two factors have weighed down on exports. Lackluster demand from Korea’s main trading partners has exerted pressure on exporters. Secondly, soft oil prices have also affected chemical and petrochemical exports given the country’s strong exposure to those sectors as well. Going forward, better prospects lie ahead with oil prices experiencing a recovery (albeit measured). Additionally, with G3 economies on a better footing and China’s economy stabilizing, demand for Korean products may improve as well. Caveat: US position on trade policy in the future may contain exports momentum.

Growth dynamics: The Parliament voted to impeach the President by a landslide margin with 234 votes against 56 (200 votes were necessary). Prime Minister Hwang-Kyo Ahn will be acting President while the Constitutional Court statutes on the motion. This process may be fairly long (6 months). If the Court statutes in favour of impeachment, then Presidential elections would need to be organized within 60 days which shortens the election schedule (Dec 2017 initially). As for the country’s sovereign rating, it is unlikely to be impacted by the ongoing political turbulence.

Sources: Realmeter, Mizuho Bank

Inflation : The recent uptick in inflation has been mainly led by higher food and oil prices. Transport component is no longer a drag on consumer prices and may start contributing positively to inflation. Going forward, consumer prices are expected to accelerate gradually on oil prices but should remain well below BoK’s target in 2016. Inflation dynamics in 2017 should not be a major threat to the economy either (our forecast: 2.0% YoY).

(3)

(1)

1

3

5

Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16

Korea: contribution to GDP growth Private consumption

Government

Gross fixed capital formation

Changes in inventories

net exports

Statistical discrepancy

Source: BoK, Mizuho Bank

(20)

(15)

(10)

(5)

0

5

10

Oct 13 Oct 14 Oct 15 Oct 16

Contribution to export growth (3mma, ppts, %)

Chemicals Machinery EE

Passenger Car Vessels Crude materials/fuels

Light industry other Exports, YoY

Source: CEIC, Mizuho Bank

54.3

56.9

60.2 60.1

51.2

46.747.6

51.2 51.149.7 49.4

39.7

35

40

45

50

55

60

65

President Park's Appoval Rating

(2)

(1)

0

1

2

3

4

Contribution to Inflation (ppt)Food Clothing

Housing Household equipment

Health, Comm, Education Transport

Restaurants& hotels other

CPI YoY



- 13 -

Policy: BoK eased policy in June 2016 then kept an accommodative stance since then. Tellingly, lower real interest rate reduces the urgency to take policy action. Besides, risks of capital outflows resulting from the recent UST Yield surge (“Trumpflation” and Fed normalizing policy) suggest that the Central Bank may adopt a cautious stance. Besides, the lack of clarity related to US future stance on trade may be an additional reason for BoK to “wait” and “see”. That said, we think that there is still scope to ease policy further by another 25 bps next year if economic recovery is delayed.

External Position: Trade balance may narrow in 2016 and 2017 as the country’s energy imports is set to increase as oil prices recover. And imports may rise at a faster pace than exports. Besides there are downside risks to trade especially if US gears towards a protectionist trade policy. In any case, the current account surplus is expected to narrow in the near term (2016: 7.2% of GDP; 2017: 6.5%). Meanwhile, risks of capital outflows (portfolio flows) stemming from Fed’s policy normalization and “Trumpflation” theme and the corollary UST yield surge remain manageable overall. FX reserves, estimated at $372, are comfortable and can buffer shocks.

FX: With political uncertainty on President Park’s impeachment set to dampen investment sentiment in Korea, we expect BoK to maintain an accommodative monetary policy stance for longer, which should weigh on the KRW in the near-term. Elections could be held as early as March 2017 once the Constitutional Court confirms the impeachment, after which we see scope for KRW to rebound in line with a recovery in global trade. Meanwhile, we think USD/KRW could trade towards the 1200 mark in Q1 next year on the back of a more hawkish Fed and significant USD/JPY ascendancy.


Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 0.7% 2.7% 2.9% 2.7% 2.8% 2.8%

CPI (% y/y) 0.8% 1.3% 1.5% 1.9% 2.3% 2.3%

Policy Rate (%) 1.25% 1.25% 1.00% 1.00% 1.00% 1.00%

USD/KRW* 1,102 1,207 1,220 1,200 1,170 1,130

1,091-1,159 1,104-1,212 1100 - 1270 1140 - 1250 1110 - 1220 1080 - 1170

(3)

(2)

(1)

0

1

2

3

4

5

(3)

(2)

(1)

0

1

2

3

4

5

Nov 12 May 13 Nov 13 May 14 Nov 14 May 15 Nov 15 May 16 Nov 16

Korea: Policy vs inflation, real interest rate (%)

CPI - headline (YoY) Policy rate (%)

Real Interest rate CPI - Core (YoY)


(15)

(10)

(5)

0

5

10

15

Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16

Korea: Balance of Payments (3 mma, USD, bn)

Other investment (incl Int. Bank lending)

Portfolio flows (Bond and equity)

FDI

C/A


800

900

1000

1100

1200

1300

1400

1500

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

USD/KRW - Fair Value

USD/KRW USD/KRW Fair Value



- 14 -

Singapore: Dis-Service

Growth: 2016 growth (flash: 1.8%) surpassing consensus is hollow consolation that does not out-perform 1-2% official guidance in any case. Instead the bigger picture is that, 2017 outlook remains subpar (1-2%) as service sector drag threatens to entrench, offsetting nascent industrial recovery. Fact is, rising interest rates may compound pain from cooling property market, with wider adverse feedback via banks. So the dis-service (service sector undershoot) may wash out gains from manufacturing (gently) emerging from a prolonged recession – as bottoming oil prices alleviate pressures on oil-related industries. Inadvertent protectionism or unexpected “Brexit” spillover threaten to prematurely smother nascent manufacturing traction.

Industry: Late-2016 manufacturing pick-up may have been overstated by low base in electronics flattered by holiday demand and positive volatility in Bio-medical. Admittedly, with oil prices stabilizing well off the lows, severe drag from petrochemicals and transport engineering could begin to dissipate. And the correction in SGD is welcome relief too. But these are essentially diminished dis-service to manufacturing, restoring modest growth at best. Whereas, sustained pick-up in global demand from global (spillover from US and China) fiscal expansion and crucially, averting trade protectionism are key to keeping industrial pick-up intact.

Growth dynamics: Rising interest rates may exacerbate headwinds in the property market – especially if interest rate ascendancy from Trumpflation endures. Higher leverage, deterioration banks’ asset quality and softer job market (especially in terms of job creation) could then conspire to render the economy rather lethargic – and this underpins our view that restoration of 3-5% growth will elude in coming years. The biggest risk is shades of protectionism further hampering already soft global trade/demand. A softer SGD meanwhile is a relief; but only insofar that relative competitiveness is not willfully compromised. Whereas competitive devaluation is not a viable growth boost.

Inflation : Upturn in headline inflation , notably out of “deflation” in late-2016, is a trend that is set to endure into 2017. Fade out of oil dis-inflation coupled with COE (vehicle ownership quota) base effects should see fuel and energy components of inflation being restored. But with property price effect expected to remain dis-inflationary, 2017 CPI is seen averaging a benign 1.2%. The MAS’ “core” measure that disregards accommodation and private road costs though should rise to 1.5-2.0%. While, a softer SGD could tip inflation a tad higher, but he crucial point is that inflation pick-up will predominantly be a supply-side phenomenon with little (if any) demand-pull risks.

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11 12 13 14 15 16 17

Smoothed out sequential growth (4Qma QoQ) reveals service sector turning from support to drag; even as Mfg picks up

GDP Mfg Services Construction


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25

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08 09 10 11 12 13 14 15 16 17

Services, which accounts for two thirds of the econ omy, grinding down on property/banking drag suggests that growth may re main compressed .

(GDP Contribution; %-points; YoY)

Ex-Biomed Mfg Biomed Mfg*

Services Construction

Others GDP y/ySources: CEIC, Mizuho Bank .

(30)

(20)

(10)

0

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50

60

(30)

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(10)

0

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50

60

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

Pharmaceutical remains volatile and transient ; rig-builders & petrochemicals in deep recession ; & electronics rebound, but from a soft base.

(% YoY 3mma)

Industrial Production (IP) IP ex-BiomedTpt Eng. PetrochemElectronics Pharma Sources: CEIC, Mizuho Bank

(3)

(2)

(1)

0

1

2

3

(20)

(15)

(10)

(5)

0

5

10

15

20

11 12 13 14 15 16 17

Sharp SGD depreciation : Dovish MAS rhetoric provides some SGD "catch-down"/accommodation; but relief rather than panacea !

(LHS % 3m y/y)

Nominal NODX SGD (MoM Chg, 2mma; RHS)


40

60

80

100

120

140

160

180

(20)

(10)

0

10

20

30

40

50

05 06 07 08 09 10 11 12 13 14 15 16

Singapore's stretched loan books amid property down cycle a risk could be a constrain on liquidity; this may drive up fund ing costs.

Loans Growth (% YoY; LHS) Biz LoansConsumer Housing&BridgingLoans-to-Deposit Ratio (RHS; %) Total Loans (% of GDP; RHS)


(20)

(15)

(10)

(5)

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(20)

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(5)

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20

06 07 08 09 10 11 12 13 14 15 16

Property Market under-performing Nominal GDP suggests that "negative wealth" effects may continue to seep in & will drag GDP in coming quarters.

(% 2Q/2Q)

Private Property Index Nominal GDP


(2)

(1)

0

1

2

3

4

5

(2)

(1)

0

1

2

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5

Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16

Fading petrol/utilities dis-inflation lifts CIP (al beit gradually) with less dis-inflatinary COEs nudging "core" press ures up.

(CPI contribution; %-pts; YoY)

Food Housing

Utilities Petrol

Pte Road Tpt ex-Petrol Public Road Tpt

Others Headline

Core


* Core inflation, for Singapore's purpose, excludes accommodation and private road transportation. The latter mainly reflects COE dis-inflation effects.


- 15 -

Policy: Pre-emptive slope flattening (Apr ’16), coupled with soft guidance of S$NEER to the weaker half of S$NEER policy band (Oct ’16) diminishes the case for imminent easing. And inflation set to turn up, albeit without excessive second-round risks, only means that a prolonged policy hold remains the optimal choice to straddle soft growth and supply-side price pressures seeping-in. That said, the option to ease remains firmly on the table, in the event of adverse shocks from tail risks (e.g. protectionist backlash, “Brexit”, China debt/credit shocks). Point being, revoking S$NEER appreciation bias, typically a response to recessions, renders one-off S$NEER devaluation as the only viable easing lever. And to be clear, “step depreciation” is a crisis response, not a competitive devaluation resort.

External Position: Sustained improvement in the C/A surplus (Q3: S$27.4bn, up ~19% YoY) masks the decline in exports as imports compression more than offset. But with commodity prices bottoming while global demand remains weak, C/A surplus has limited scope to widen significantly (discounting FX effects). Crucially, the disparity between widening C/A surplus and BOP struggling to print a surplus is set to may be set to remain (if not worsen) as higher UST yields and consequently higher USD trigger capital flows out of EM Asia – and with Singapore acting as a (financing/RHQ) conduit, the outflows show up prominently. Meanwhile a softer SGD reflects fund flows too.

FX: Being blindsided by a Trump victory and the consequent “Trump-flation” trade means that we had previously under-estimated USD/SGD upside at 1.40. Accordingly, with the surge in UST yields (accentuated by a more hawkish Fed) and consequent unilateral USD surge coupled with the MAS guiding the S$NEER to the weaker side of the band gives means that USD/SGD surge clean above 1.45 is firmly on the cards with headroom to 1.50 amid policy/political uncertainties in H1. But firmer inflation in H2 alongside broad-based moderation in the USD may provide the run-way for partial SGD bounce. Correspondingly, USD/SGD is set for sub-1.40 as S$NEER weakness is reined in.

Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 1.2% 1.8% 1.1% 1.9% 2.1% 1.9%

CPI (% y/y) -0.4% 0.0% 0.7% 0.9% 1.4% 1.7%

FX Policy

Zero Appreciation

Stance

Zero Appreciation Stance with hints of Easing Bias. Status Quo Status Quo

USD/SGD* 1.3628 1.4499 1.46 1.45 1.42 1.40

1.3392-1.3682 1.3651-1.4512 1.41 - 1.50 1.41 - 1.49 1.38 - 1.46 1.36 - 1.44

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12

00 01 03 04 06 07 09 10 12 13 15 16

"Flat" S$NEER slope since April prices in downside risks. So, absent an adverse shock there is no justification for a mid-p oint shift down .

Technical Recession QoQ

Growth-Inflation Composite*(YoY, LHS)Slope Effects (RHS)


Slightly steeper slope

(Default) Modest & Gradual Appreciation

Flat Slope (0% appreciation)

TighterPolicy

LooserPolicy

Ne

utra

lP

olic

y

S$NEER mid-point shifted down ex-post to prevailing S$NEER levels in reponse to adverse shocks

S$NEER mid-point shifted up to prevailing S$NEER levels

S$NEER mid-point shifted up, but below, prevailing levels.

Slope Reduction (Jan & Oct)

* Growth-Inflation Composite is the equally weighte d sum of GDP and inflation.

April '16: Flat Slope (0% appreciation)

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35

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35

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07 08 09 10 11 12 13 14 15 16

C/A buoyed as NODX pick-up outweights imports. But FDI outflows dent BOP as portfolio flows soften too .

(% of GDP, 4Qma)

Goods ServicesIncome & Others BOPC/A


1.30

1.32

1.34

1.36

1.38

1.40

1.42

1.44

1.46

1.30

1.32

1.34

1.36

1.38

1.40

1.42

1.44

1.46Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17

Acute SGD drop vis-a-vis implied mid-point triggere d by dovish MAS guidance in Oct (despite policy status quo) and accelerated all over again on "Trump

effect" - that is stronger US$ and higher US bond yi elds!USD/SGD, inverted; +/-2% bands)

SGD (Actual)

SGD (Mid Pt)

Sources: Bloomberg, CEIC, Mizuho Bank

Stronger SGD



- 16 -

Malaysia: Measured Recovery Growth: Commodity headwinds continue to weigh on the economy though a mild improvement was observed in Q3 GDP print. Private consumption continues to be the key driver to growth while investment softened with firms remaining on a cautious stance. In coming quarters, we expect the economy to pick up gradually on the measured recovery in commodity prices. Additionally, prospects for exports are better though the boost is likely to be measured with G3 economies expected to recover modestly and that China’s economy is just stabilizing. Next year, the economy may also benefit from pre-election spending though the ongoing fiscal consolidation will limit the amount which the government can spend.

Industry: Exports earnings remain under pressure. The decomposition of exports by partner continues to point a downward momentum for G3 economies and ASEAN. Nonetheless, the interesting point to note is that exports to China has been improving in recent months. This is consistent with the view that China’s economy has bottomed and is welcome for Malaysia’s exports. What’s more, with G3 economies on a slightly firmer footing, prospects for exports appear brighter in the future. The recovery in oil prices albeit measured should also be positive for exports.

Growth dynamics: The Government’s strong commitment to fiscal consolidation efforts in Budget 2017 averts imminent credit risks. The recovery in oil prices, will help contain slippage in oil revenues. Contingent liabilities and 1 MDB risks remain in the background. In the meantime, focus will shift on the General elections which have to be scheduled by August 2018. Household spending may be supported by pre-electoral spending though scope to increase expenditures substantially is limited. Investors may put plans on hold though. On the external front, US future stance on TPP and its trade policy in general remain a risk factor for exports through the ASEAN Economic Community may buffer.

Inflation: Consumer prices edged down since the beginning of the year owing to subdued oil prices. Transport and food have both contributed to reduce pressure on inflation. Looking ahead, we expect the uptick in oil prices to expert upward inflationary pressure. That said, inflation outlook in 2016 and 2017 is likely to remain within BNM’s comfort range (our projections: 2.1% in 2016; 2.3% in 2017).

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Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16

GDP: Contribution to growth (%, ppts)Consumption Govt Spending Stock

Investments Net Trade GDP


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30

40

Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16

Exports by partner (YoY, 3 mma, %)EU SingaporeChina Japan

US ASEAN 5

Source: CEIC, Mizuho Bank, Singapore Treasury

0

1

2

3

4

5

6

7

8

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(Budget)

Budget consolidation efforts

Budget deficit (% of GDP)

Sources: IMF, Bloomberg, Mizuho Bank, Singapore Treasury

(2)

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Malaysia: CPI Contribution (%-points; % y/y)

Food Housing Transport Others CPI % y/y



- 17 -

Policy: BNM lowered its benchmark rate by 25 bps in July 2016 to 3.00% to support the economy. The Central Bank may opt for a policy hold in the near term while awaiting for more clarity related to US economic policy and more signals in terms of Fed’s policy guidance. While downside risks to exports (via TPP and Brexit) signal that the easing bias prevails, the expected pick-up in inflation will nonetheless reduce the window of opportunity to cut policy rate. Overall, BNM’s still has scope to ease policy further early next year though, aggressive rate cuts are unlikely.

External Position: Malaysia’s current account surplus is expected to narrow in 2016 (our projections: 1.5% of GDP). A mild recovery is expected next year though a catch-up to pre-Lehman crisis is unlikely in the near term. As such, the key challenge is to implement structural reforms to reduce the country’s exposure to commodity exports. Meanwhile, the high foreign ownership of government bonds (around 40% of total) imply risks of capital outflows, especially in the context of the “Trumpflation” trade and Fed’s policy normalization. BoP risks are manageable though. FX reserves scan contribute to buffer shocks. FX: USD/MYR has surpassed its 1998 Asian Financial Crisis level, but we continue to see headwinds for the MYR in the near-term despite good valuations. High foreign ownership of MGS has made the MYR vulnerable to outflows amidst a more hawkish Fed stance and a global bond sell-off. Further adding to these concerns was BNM’s attempt to rein in the NDF market, which led investors to become more circumspect in buying MGS, for fear of a reduction in their ability to hedge. Meanwhile, chatter of early elections next year also undermines sentiment in the interim.


Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 4.3% 4.1% 4.3% 4.6% 4.8% 4.5%

CPI (% y/y) 1.4% 1.6% 1.9% 2.4% 2.5% 2.4%

Policy Rate (%) 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%

USD/MYR* 4.1355 4.4825 4.55 4.40 4.35 4.22

3.9475-4.1400 4.1275-4.4825 4.13 - 4.76 4.20 - 4.60 4.15 - 4.55 4.02 - 4.42

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Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16

Malaysia: CPI (%, YoY) vs Policy rate (%)

CPI 3 mma Policy rate


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08 09 10 11 12 13 14 15 16

BOP (% of GDP, 4Qma)

C/A FDI Portfolio Flows

Other Investment Error BOP


2.50

2.75

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

USD/MYR - Fair Value

USD/MYR USD/MYR Fair Value



- 18 -

Indonesia: Boosting Structural Reforms Growth: Indonesia’s economy has shown resilience in the past quarters. Private consumption and investment remain the key drivers to growth despite a context of sluggish external demand and subdued commodity prices. Growth should be overall decent in 2016, then may experience a mild pick-up in the 2017 (Our projections 2016: 5.0%; 2017: 5.2% ). The country should benefit from the bottoming of China’s economy and the recovery in G3 economies, signaling better prospects in terms of external demand. The uptick in commodity prices is also welcome for exporters. Meanwhile, structural reforms (negative investment list, tax amnesty) implemented recently should also contribute to maintain the confidence boost in the future. Industry: Trade surplus prevailed for most of this year owing mainly to import compression. Tellingly, lower energy imports provided relief. Lower demand for intermediate goods (due to softer exports) was also another factor. Going forward, the narrowing of the trade surplus will be inevitable. The rise in oil prices implies higher energy bill given that Indonesia is a net oil importer. That said, given that the increase in oil prices is likely to be measured, the dent will probably be a gradual process. Besides, better exports prospects ahead may also buffer.

Growth dynamics: Major structural reforms are boosting confidence. The latest one includes the Tax Amnesty Bill, implemented in June 2016 to broaden the tax base will contribute to ensure fiscal sustainability in the medium term. This is welcome especially in the context of headwinds on oil revenues. With an initial slow start, the momentum built up towards end-Sep. Revenues generated by the measure is close to 60% of the official target of IDR 165 tn as of end September. Budget deficit may deteriorate to 2.6% of GDP and reach close to the limit of 3% limit. Budget proposal for 2017 was positively received with estimates viewed as more realistic. Deficit may be reduced to 2.4% next year with the government looking to broaden the tax base further. On the expenditure side, the subsidy rationalization process will be pursued further with electricity price hikes in 2017.

Inflation : Inflation has been decelerating since the beginning of the year but has now bottomed. The gradual uptick in consumer prices observed in recent months is likely to continue further in the near term. The expected increase in electricity tariff next year along with the rise in oil prices will push up inflation. Transport and electricity components will be the key factors driving inflation. El Niño risks may also be reflected in food prices early 2017. Overall, inflation remains in BI target range for 2016 and may edge close to the upper range of the target in 2017 (forecast in 2016: 3.6% YoY; 2017: 4.8%).

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Sep 12 Sep 13 Sep 14 Sep 15 Sep 16

Indonesia: Contribution to GDP growth (YoY, %)

Household GFCF

Government consumption Change in stock

Net exports Statistical discrepancy

GDP


(30)

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10

20

30

40

50

(1.5)

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(0.5)

0.0

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1.0

1.5

2.0

2.5

3.0

3.5


USD, bn

Indonesia's Trade Balance

Trade Balance - LH Scale (USD)

exports YoY, 3mma

Imports YoY, 3mma


97.2

165

0

20

40

60

80

100

120

140

160

180

Gov revenues collected Target Gov. Revenues

Revenues generated (end-Sep) by Tax Amnesty close to target (IDR, bn)

Source: Press, Mizuho Bank

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Oct 15 Jan 16 Apr 16 Jul 16 Oct 16

Indonesia: Contribution to CPI (ppt, YoY)

Food Processed food

Electricity, gas Clothing

Health education, recreation

Transport CPI, YoY



- 19 -

Policy: BI was on an easing bias throughout 2016 starting with the BI rate. The switch to the reverse repo rate as the new benchmark rate in Aug 2016 to improve the transmission mechanism of monetary policy has been reduced from 5.50% to 4.75% in recent months. While the Central Bank may pause amid Fed’s rate hike and US leadership change in January, the window of opportunity will narrow with domestic inflation expected to rise gradually. BI may ease policy early next year to support the economy then pause for a while.

External Position: The Current account deficit is expected to narrow to 2.0% of GDP in 2016 mainly due to the sharp drop in imports. Next year, a mild deterioration may be expected given that the energy bill is expected to increase. Meanwhile, risks of capital outflows remain a concern especially that the country runs a C/A deficit and that portfolio flows (the volatile component of capital flows) plug the gap. External debt of corporates especially in the context of a strong Dollar theme signal some stress for corporates though hedging rules imposed by the Central Bank (2015) to mitigate the risks.

FX: IDR was lifted by a successful tax amnesty program in 2H 2016. The program attracted repatriation amounting to over IDR141trn (~USd10.6bn) of assets, or equivalent to about 60% of Indonesia’s 2016 current account deficit. However, IDR gains now look to be exhausted, with the 2nd phase of the tax amnesty in Q4 appearing to be less successful as tax rates ratchet higher. Furthermore, the sizeable private sector’s USD-denominated debt (~USD219bn, around 24% of GDP) point to latent risks of hedging outflows, accentuated by USD appreciation expectations. As such, we expect USD/IDR to test towards 14000 in Q1 2017, before an improvement in commodity prices investment growth support an IDR recovery.


Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 5.0% 5.0% 5.4% 5.6% 5.7% 5.1%

CPI (% y/y) 3.0% 3.3% 4.0% 4.3% 5.3% 5.2%

Policy Rate (%) 5.00% 4.75% 4.50% 4.50% 4.50% 4.75%

USD/IDR* 13,051 13,475 13,900 13,600 13,300 13,000

12948-13278 12978-13573 12900-14500 13000-14100 12700-13800 12400-13500

2

3

4

5

6

7

8

9

10

Nov 09 Nov 10 Nov 11 Nov 12 Nov 13 Nov 14 Nov 15 Nov 16

Indonesia: Policy rate (%)

FASBI New Benchmark rate (Repo rate)


Corridor is formed by the FASBI and

Repo rate

new benchmark rate as

from Aug 19Symmetric

corridor

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(5)

0

5

10

15

Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16

Indonesia: Capital Flows (4QMA; USD, bn)Other invesments (incl international Bank lending)

Portfolio flows

FDI

CA


2000

4000

6000

8000

10000

12000

14000

16000

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

USD/IDR fair value

USD/IDR USD/IDR Fair Value

Note: Values in black are historical whereas those in blue represent forecasts. * Point forecast is for end-period. Q3 & Q4 2016 ranges are from Bloomberg and only indicative. **As from Aug 2016, BI implemented a new policy framework with the 7-day repurchase rate at the new benchmark rate.


- 20 -

Thailand: Fiscal support to Lift Growth: Thailand’s growth momentum softened somewhat in Q3 to 3.2% YoY (Q2: 3.5%), reflecting reduced fiscal impulse and also a dour investment climate. While consumption was a pillar of support for Q3 growth, the passing of the late King in October could dampen consumer spending as festivities and ostentatious spending are pared back. Going forward, Thailand’s exports appear to be picking up amidst a nascent recovery in global trade, while slated fiscal spending should also start kicking in more forcefully. The Thai economy could thus see modest improvement heading into 2017.

Industry: Industrial production has been picking up recently, helped by ongoing improvement in external demand. The key manufacturing sector, which accounts for around 30% of GDP, is showing nascent momentum, driven by an increase in machinery and communications equipment production. Going forward, we think renewed ongoing JPY depreciation could allow for lower import costs for supply chain inputs, thus providing some tailwinds to manufacturing margins. However, the longer-term investment picture could become more ambivalent as Japanese investment incentives are perhaps reduced.

Growth dynamics: Thailand’s growth outlook remains soft. There has been a drop in visitor arrivals after the King’s passing, with entertainment venues shutting down operations. Consumer confidence has also edged lower since September, while investment projects could remain deferred on political uncertainty, with elections for a civilian government likely to be delayed again until late 2017. This has triggered increased fiscal support from the government, which is planning to launch a THB100bn infrastructure fund and embarking on THB896bn (~6.4% of GDP) worth of infrastructure projects in 2017. Near-term growth momentum will thus hinge on the execution of these projects.

Inflation: Headline inflation continues to hover below the target range from 1-4%, although it has been trending higher on the back of rising oil prices. Given the recent OPEC/non-OPEC agreement to reduce output, we expect oil prices to remain supported, and thus drive up headline inflation. Subtracting out the impact from oil paints a different picture however. Core inflation has been weak given sluggish domestic demand and a limited recovery in exports. Furthermore, an faster pace of Fed rate hikes could lead to further outflows from Thailand, constituting an implicit tightening of financial conditions which could keep price pressures in check.

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16

Thailand - GDP by expenditure (y/y)

Consumption Govt Investment Net exports GDP y/y

-15

-10

-5

0

5

10

Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16

Thailand - Exports by Products (6m/6m saar)

Agricultural Agro Industrial

Principle Manufacturing Mineral and Fuel

Customs Exports 6m/6m saar

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16

Thailand - Value-added Production (y/y, 3mma)

Food/Beverage Vehicles

Mineral Products Communications

Others VA Production (y/y 3mma)

(2)

(1)

0

1

2

3

4

Nov 13 Nov 14 Nov 15 Nov 16

Contribution to inflation (ppts, %, YoY) Food Housing

Transport; communication Healthcare

Other CPI



- 21 -

Policy: Given Thailand’s modest growth outlook and below-target inflation, we expect BoT to maintain its accommodative stance for a prolonged period of time and hold its 1D repo rate at 1.50%. BoT has downgraded its growth outlook in December, citing increased downside risks due to economic uncertainty of its key trading partners, as well as uncertainty related to US trade policies going forward. Furthermore, capital flow and exchange rate volatility were mentioned as potential risks, signalling that BoT could remain cautious and refrain from additional easing, especially in the context of tighter US monetary policy. External Position: Thailand looks set to register a record current account surplus in 2016, which could stand at around USD46bn (or ~12% of GDP). This is mostly due to cheaper oil imports given the earlier decline in oil prices, and also significant import compression as domestic growth remains lackluster. Meanwhile, exports appear to be improving somewhat, which could further consolidate gains in the trade surplus. As such, we believe the THB should remain better buffered against capital outflows, although there could be some erosion going into 2017 given the recent jump in oil prices. FX: Despite a momentous royal transition, the economy has largely continued humming along as political disruptions have empathetically faded this year. On a fundamental basis, Thailand’s large current account surplus has also provided a substantial buffer for THB . Even as THB looks poised to outperform regional peers, we believe a continuation of the USD rally given policy divergence, as well as a narrowing of the trade surplus given higher oil prices, could still drive USD/THB towards 36.40 in Q1 2017. That said, there is scope for the cross to ease back to 35.0 in late 2017 as growth momentum picks up on fiscal spending.

Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 3.2% 3.7% 3.8% 3.6% 3.7% 4.1%

CPI (% y/y) 0.3% 0.5% 1.0% 1.9% 1.7% 2.2%

Policy Rate (%) 1.50% 1.50% 1.50% 1.50% 1.75% 1.75%

USD/THB* 34.59 35.98 36.4 35.9 35.4 35.0

34.55-35.23 34.65-36.02 34.6 - 37.3 35.0 - 36.8 34.5 - 36.3 34.1 - 35.9

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Inflation vs policy rate (%,YoY, 3mma)

Policy rate CPI (3mma) Core (3mma)


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14

Sep 06 Sep 08 Sep 10 Sep 12 Sep 14 Sep 16

Thailand: C/A surplus largely compensates for capital outflows ( USD, bn, 4QMA )

C/A FDI Pf Other (incl bank flows)


26

28

30

32

34

36

38

40

42

44

46

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

USD/THB - Fair Value

USD/THB USD/THB Fair Value



- 22 -

Philippines: Continuity in Structural Reforms Growth: Official growth estimates were revised lower to 6-7% this year from 6-8-7.8% previously to reflect external headwinds. Nonetheless, Philippines is likely to remain amongst the fastest growing economies in Asia in 2016 and 2017 provided newly elected President Duterte commits to structural reforms. Meanwhile, the strong GDP print in the second quarter was mainly driven by consumption, investment and government spending. Going forward, growth momentum may be sustained though we remain cautious about the slower pace of remittances growth which may in turn affect household spending. Secondly, a more pronounced trade deficit may also have a negative impact on growth.

Industry: Trade balance may deteriorate further this year as a result of an increase in imports and weak exports growth. Specifically, plans to accelerate infrastructure spending will maintain high domestic demand for capital goods and raw materials. Besides, as a net oil importer, Philippines will see its import bill rise on firmer oil prices. In the meantime, exports may remain subdued amid sluggish external demand. Brexit, via the trade channel are downside risks but are overall manageable.

Growth dynamics: The government’s plans to increase budget deficit in the near term may be a cause of concern but it is not alarming as regards to fiscal sustainability. There are also no major threats in terms of credit risks. Crucially, the country has ample fiscal space with public debt at 46% of GDP. Besides, the increase in spending will be probably allocated to priority sectors such as infrastructure and social spending which should bear positive spill-over effects. Strong commitment to pursue structural reforms such as addressing infrastructure bottlenecks, tackling corruption, improving the business environment and reducing social inequality also bodes well for the economy.

Inflation : Consumer prices appear to have bottomed earlier this year. The steady rise observed in recent months is mainly driven by food which account for a significant share of the consumer’s basket (about 60%). Upward pressure remains in the future in the context of El Niño but is not alarming overall. Headline inflation is likely to remain within the Central Bank’s comfort range in the near term (our projections of 1.9% YoY in 2016 and 3.0% in 2017).

(10)

(5)

0

5

10

15

(10)

(5)

0

5

10

15

Jun 13 Jun 14 Jun 15 Jun 16

GDP Exp. Contribution (YoY; %-pts)

Pte Consumption Govt Spending InvestmentsStocks Net Exports ErrorsGDP % y/y


(20)

(10)

0

10

20

30

Jun 13 Jun 14 Jun 15 Jun 16

Contribution to import growth (ppts)Capital goods Raw materials / intermediate

mineral and fuel Consumer goods

other Imports (YoY, %)


(6)

(5)

(4)

(3)

(2)

(1)

0

0

10

20

30

40

50

60

70

80

2001 2003 2005 2007 2009 2011 2013 2015

Ample fiscal space to increase budget deficit

Gvt debt (% GDP) - LH Scale Budget balance (% GDP)

Source: IIF, World Bank, Mizuho Bank

(1)

0

1

2

3

4

5

6

7

8

Jul 10 Jul 12 Jul 14 Jul 16

CPI Contribution (%-points; YoY )

Others Transport Utilities Food CPI % y/y



- 23 -

Policy: BSP introduced an interest rate corridor in June to improve the transmission mechanism of monetary policy. The Central Bank also tweaked its benchmark rate by 100 bps to 3.00%. The corridor is a symmetrical ±50 bps from the benchmark rate. The narrow corridor aims at reducing volatility in interbank rates and to strengthen the link between policy and interbank rates. Going forward, BSP is likely to maintain a policy hold while assessing recent policy actions. Besides, growth is likely to remain strong this year, which thus reduces the urgency to take imminent action. That said, the possibility of RRR cuts are not ruled out following recent signals from the Central Bank.

External Position: The current account surplus may narrow further from a more pronounced trade deficit. This is the result of sluggish exports and higher imports. And higher imports are mainly due to higher energy bill and stronger imports of raw materials and capital goods. Meanwhile, commitment to tackle corruption, continue structural reforms and to improve the business climate should be overall positive for capital flows, provided there are no execution delays. Specifically, FDI flows which have been lagging behind in Asia may be boosted in the medium term.

FX: President Duterte’s pivot towards attracting Chinese investment is economically pragmatic, and he also enjoyed a stroke of luck, with the election of Trump likely to see a helpful reset in US-Philippines relations. As such, foreign investment could see some improvement heading into 2017, especially if the anti-drug campaign is to be wound down over time. That said, slowing remittances growth and dour export performance point to a shrinking current account surplus, which would contribute to further PHP weakness in the near term. With the USD likely to stay bid on a more hawkish Fed policy, USD/PHP should remain buoyed towards 51 in Q1 2017.


Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 7.1% 6.0% 6.8% 5.2% 6.3% 6.5%

CPI (% y/y) 2.0% 2.4% 3.2% 3.2% 3.1% 2.4%

Policy Rate (%) 3.00% 3.00% 3.00% 3.00% 3.25% 3.25%

USD/PHP* 48.40 49.80 51.0 49.8 48.8 48.0

46.23-48.40 47.97-49.99 47.9 - 52.3 48.5 - 51.1 47.6 - 50.0 46.8 - 49.2

0

1

2

3

4

5

6

7

8

Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16

Philippines: Interest rate corridor framework O/N reverse repurchase rate (Policy rate) Lower bound Upper bound

O/N Repurchase rate O/N lending facility

SDA rate

O/N Deposit

facility

(3)

(2)

(1)

0

1

2

3

4

5

6

Mar 13 Mar 14 Mar 15 Mar 16

Philippines: BoP (USD, bn)4QMA

C/A FDI (net) Portfolio net Other flows (net)

Source CEIC, Mizuho Bank

30

35

40

45

50

55

60

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

USD/PHP fair value

USD/PHP USD/PHP Fair Value



- 24 -

Vietnam: Donald’s Disruption? Growth: All else equal, so long as Vietnam averts another weather-induced farm sector slump like that in 2016, growth is poised for a pick-up in 2017. Moreover, further signs of bottoming/nascent recovery in global demand bolstered by China’s infrastructure boost square with our base case for an above-consensus pick-up to 6.5% (2016: 6.2%). Nonetheless, Vietnam is vulnerable to US trade protectionism – the “Donald disruption” . If TPP is torn up and/or protectionist measures are adopted direct and indirect exports dent will drag significantly as US and China account for more than a third of Vietnam’s exports.

Industry: The “half-full” view that industrial output is stabilizing rather than slumping. Uptick in durable goods is welcome partial buffer from negative exports impact on electronics from Samsung. And if banking sector support eases credit flow, overall manufacturing may be buoyed. But then again, these incremental improvements are susceptible to further interruptions to global demand recovery (from fairly soft levels). In particular, (Donald’s) disruptive shock to global trade; in which case, rising interest rates and bottoming energy costs may prove unhelpful. In addition, banking sector capital shortfall may exacerbate any industrial slowdown.

Growth dynamics: Vietnam’s strength – inherent manufacturing/exports leverage – is proving to be an acute vulnerability. The solid growth in electronics is structurally desirable, but has cyclically stumbled from exposure to Samsung for now. But US trade action may be a far greater and enduring risk. Point being, net trade with Vietnam accounted for nearly 4% of US trade deficit in 2015 (~US$31bn) from just 0.7% in 2005 (US$6bn); the largest in Asia (outside of Japan and China). Upshot: Vietnam is poised to out-perform on sustained global demand recovery; but protectionism risks dampening exports/industry as well as investments.

Inflation : Fairly rapid pick-up in price pressures into Q4 last year highlights the latent risks from underlying (non-food) inflation; especially as global crude oil prices bottom emphatically. But equally, with global food prices reasonably contained and the VND on a more stable footing – in particular, fixing based on trade-weighted, market based references – we do not expect run-away imported, cost-push inflation either . What’s more, constrained credit growth and wages restrained by softer growth, demand-pull inflation risks remains low. All considered, price pressures are likely to pick up further before settling back in the 4-5% range further out.

(2)

0

2

4

6

8

10

(2)

0

2

4

6

8

10

07 08 09 10 11 12 13 14 15 16 17

Mining remains a drag. And while Mfg has improved, Trump-induced uncertainty in terms of trade/TPP could be a bugbear .

(YoY Growth Contribution %-points)

Agriculture M&Q Mfg Utilities

Construction Services GDP


(20)

0

20

40

60

80

100

120

140

(20)

0

20

40

60

80

100

120

140

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

Surge in Autos is fading as are Electronic Componen ts; but Consumer Electronics is buoying overall Mfg (% YoY, 3mma, Value)

MV Electronic Components Consumer Electronics

Sources: CEIC , Mizuho Bank

0

10

20

30

40

50

60

0

4

8

12

16

20

24

07 08 09 10 11 12 13 14 15 16

Peaking credit growth and weak external demand cast doubt on follow-through Mfg/IP surge; Brexit risks watched.

(%YoY, 3mma)Industrial Production (LHS)

Domestic Credit (RHS)


0

2

4

6

8

10

12

14

16

18Jump in Electronics Exports partly reflects spillov er benefits from China up-

scaling, Cost & Infrastructure Advantages! But equa lly ...(% of Total Exports)

2007 2012 2013 2014 2015 2016


-1.3

0.3 1

.5 1.8 2.1 2

.7 2.9 3

.5 3.8

-0.7-0.1

0.3

0.1

0.5

-0.2

1.4 1.4

3.1

(2)

(1)

0

1

2

3

4

5

(2)

(1)

0

1

2

3

4

5

Singapore Philippines Indonesia Taiwan Thailand Malaysia India Korea Vietnam

Vietnam's % share of US trade defict has surged (since 2005) the most in Asia

ex-Japan & China; TPP/protectionism risks could dent Vietnam more

2005 2010 2015 2005-2015 Chg (% Pts)

Sources: CEIC, Mizuho Bank * This comprises China, HK, Korea, Taiwan, India & ASEAN-6

(5)

0

5

10

15

20

25

30

(5)

0

5

10

15

20

25

30

07 08 09 10 11 12 13 14 15 16 17

As Oil Dis-inflation fades and pipeline food price pressures grow threat policy space diminishes (Inflation Contribution; %-pts)

Food Housing

Transport Others

CPI (% y/y) Non-food CPI (% y/y)



- 25 -

Policy: Out previously assessed window for ~50bp cut has narrowed, if not shut, with the stabilization in oil prices. Nevertheless, rising inflation remains within “Goldilocks” boundaries. In other words, along the current trajectory, inflation will not imminently catalyze premature policy tightening. Especially given that the stable VND policy, alongside softer growth. To be sure though the degree of policy flexibility available to the SBV is a function of – to be precise, is inversely related to – capital flow volatility. Donald’s disruption as such, could tie the hands of the SBV insofar that stimulus and stability may be diametrically opposed objectives given the policy tools.

External Position: What renders VND stability risks greater is the erosion in FX reserve buffer as the slip in net export position undermines C/A surplus. With imports already fairly compressed and commodity prices bottoming, “low hanging” gains in net exports are not a viable option. What’s more, portfolio flows could soften in an environment of rising UST yields, while sustained USD strength further erodes capital account support. And while net FDI have favoured Vietnam, protectionist risks could throw a spanner into plans for foreign industrial investments; denting overall external position.

FX: The 1.2% slip in VND in 2016 must be viewed in the context of even weaker peers; 6.5% drop in CNY, 3.2% fall in EUR 2.9% pullback in KRW and 2.0% slide in SGD – four of the seven currencies that (market-based) VND fixing is referenced to. While JPY and TWD were up 2-3% in 2016, they were clearly declining rapidly post-Trump. So the bigger picture is that VND has been fairly stable in trade-weighted terms, and we expect this NEER-type stability to continue. So in line with further downside risks to Asian currencies amid broad-based USD strength in H1 2017, we expect more weakness in VND to persist, and prevail initially. But as USD moderates later in 2017, we expect USD/VND to ease back (partially) as well.

Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 5.7% 6.8% 7.1% 7.2% 6.2% 6.2%

CPI (% y/y) 2.8% 4.4% 4.9% 4.6% 4.8% 4.3%

Policy Rate (%) 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%

USD/VND* 22,296 22,771 22,880 22,750 22,650 22,500

22277-22326 22296-22771 22500-23200 22500-23200 22500-22950 22300-22800

(15)

(10)

(5)

0

5

10

15

(15)

(10)

(5)

0

5

10

15

07 08 09 10 11 12 13 14 15 16

Easing real interest rates due to inflation pick-up narrow hte scope for easing; especially given that VND stability issues emerge.

Refinancing Rate

Real (Re-financing) Rate

Average Real rates (2009-2013)Sources: SBV, CEIC, Mizuho Bank

(10)

(8)

(6)

(4)

(2)

0

2

4

6

(10)

(8)

(6)

(4)

(2)

0

2

4

6

06 07 08 09 10 11 12 13 14 15 16 17

Dip in Net Exports suggest weakening C/A support; t hough not necessarily a crisis for VND, it does suggest diminished buffer a s USD moves are watched.

($bn; Qtrly)

C/A (LHS) Net Exports (3m Rolling RHS)


(3000)

(2000)

(1000)

0

1000

2000

3000

05 06 07 08 09 10 11 12 13 14 15 16 17(3000)

(2000)

(1000)

0

1000

2000

3000FX Reserve accumulation in 2016 has waned as net trade softens & USD strength presumably erodes buffer (in view of stable VN D policy)!

(US$ mn, 3mma)

FX Reserves Chg Trade BalSources: CEIC, Mizuho Bank

20,500

21,000

21,500

22,000

22,500

23,000

20,500

21,000

21,500

22,000

22,500

23,000

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

Incremental adjustments to reference rate mitigate s risk of abrupt 1-2% devaluation, but wider USD strength undermines VND

VND (Monthly Avg)

SBV Reference Rate

Sources: CEIC, Reuters Mizuho Bank

Weaker VND

Three episodes of 1% devluation each in 2015:1) Jan (7th) from 21,246 to 21,458; 2) May (7th) to 21,673; 3) Aug (19) to 21,890

Annual devaluation of 1% each in Jun 2013 and Jun 2014.

12 Aug 2015: USD/VND trading bands doubled to +/-2% from +/-1%19 Aug 2015: USD/VND trading bands widened (again!) to +/-3%. And VND mid-point devlaued 1% to 21,890.



- 26 -

Australia: Palpable Investment Drag Growth: Australia’s Q3’s -0.5% q/q growth slippage was worse than anticipated, as mining-sector investment poses lingering headwinds despite a sustained rebound in both iron ore and coal prices. The lack of a stronger pickup in non-mining investment was particularly disappointing, given that the cheaper AUD was expected to help rebalancing to this sector. Meanwhile, the growth boost from increased commodity export volumes seen in 1H2016 looks to be easing, as new capacity comes online at a slower pace. RBA rate cuts in May and August this year might yet deliver a boost to growth going forward.

Industry: The mining sector remains subdued, and could remain so for an extended period until more elevated commodity prices start attracting investment back into the sector. Without further declines in the AUD trade-weighted index this year, we believe manufacturing investment could remain moribund. Australia’s three major automakers are still sticking to plans to shut down production by end 2017. While the services industry has seen pockets of strength, the broader picture appears to be one of modest expansion, rather than compensating strength.

Growth dynamics: While the handover of growth from the mining industry to non-mining sectors has helped Australia avert a recession, there remains lingering weaknesses. Even as the drag of mining investment is expected to alleviate going forward, the broader investment picture remains soft. The labor market recovery thus far is also far from robust, with around 80% of jobs created being part-time jobs. As such, consumption could remain insipid, weighed further by fiscal consolidation taking precedence going into 2017. That said, income effects from a sustained rise of commodity prices could provide some lift.

Inflation : Given rising oil prices on the back of the OPEC output deal and further planned increases in the tobacco excise tax, Australia’s headline inflation should pick up in the coming months. However, continued slow growth in labor costs, on top of a pause in the rise of tradable goods’ prices due to a firmer AUD, should underpin only a gradual lift in inflation. Conditions in the housing market have also eased somewhat given tighter lending standards, which should insulate against broader inflation pressures driven by wealth effects from rising house prices.

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0

06 07 08 09 10 11 12 13 14 15 16

Public sector buffer offsets private sector soft sp ots - in particular, sharp mining investment pullback continues to drag growth.

(GDP Contribution- %-pts)

Inventory & Errors Net Exports GFCF Public

GFCF Pte Non-Dwelling GFCF - Pte Dwellings Govt

Consumption GDPSources: CEIC, Mizuho Bank

(10)

(5)

0

5

10

15

20

(10)

(5)

0

5

10

15

20

06 07 08 09 10 11 12 13 14 15 16

Short-term Expectation of Private Sector Capex - Mining is a key drag & Mfg is stubbornly weak as Autos shut down; some but may be bottoming...

(QoQ, 4Qma)

Mining Mfg Others Total


(20)

(10)

0

10

20

30

(20)

(10)

0

10

20

30

08 09 10 11 12 13 14 15 16

Australia: Overall employment overstates labour market resilie nce given that Full-time job creation has fallen sharply.

FT Emp. Chg. (000's; 12mma; LHS)

Emp. Chg. (000's; 12mma; RHS)


(3)

0

3

6

9

(1)

0

1

2

3

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

While H/H consumption is fairly resilient, signs of softening around durable goods demand such as autos are worth noting .

Retail Sales (%3M/3M; LHS)

Car Sales (%3M/3M; RHS)Sources: CEIC, Mizuho Bank

0

2

4

6

8

10

12

0

2

4

6

8

10

12

11 12 13 14 15 16

Macroprudential tightening slows housing loans, tem pering credit demand. Money supply slowdown could cool growth.

(3M Avg % YoY)

Money Supply Housing Loans Total Loans


(2)

(1)

0

1

2

3

4

5

6

(2)

(1)

0

1

2

3

4

5

6

05 06 07 08 09 10 11 12 13 14 15 16

Fading food & fuel dis-inflation. Pre-emptive RBA rate cuts

require fresh downside surprise to invoke further easing. (%-pt contribution, YoY)

Automotive Fuel H/H Energy Total Housing ex-energy

Tpt-ex Fuel Services Alcohol & Tobacco

Food Inflation ex-Fuel & Energy CPI Sources: CEIC, Mizuho Bank


- 27 -

Policy: With inflation bottoming but with price pressures still comfortably subdued, we think RBA should keep policy on a prolonged hold. The front-loading of rate cuts in the middle of 2016 should provide a more notable boost to growth in 2017, given the usual time lags with monetary policy. With inflation likely to return back to target in coming months and absent any major shocks to Chinese growth or to commodity prices, RBA should continue to sit tight for now, with the timing of future rate normalization likely contingent on the Fed and AUD/USD dynamics.

External Position: Australia’s current account has been on an improving trend since late 2015, helped by the ongoing rebound in export commodity prices. That said, there is still scope for further gains as longer-term contract prices fixed when prices were lower are marked higher. Meanwhile, Australia is poised to see further increases in LNG export volumes as large projects go into production next year, which would see Australia overtaking Qatar as the biggest exporter of LNG. We see sustained commodity price increases to help reduce Australia’s trade deficit going forward.

FX: Even as iron ore and coal prices have flipped from a definitive drag to a modest boost for AUD/USD, buoyancy in the cross has fast deflated amidst a broad-based USD rally driven by rising yields, as well as renewed fears of a Chinese slowdown. China’s capital outflows and asset bubble risks have been a perennial bugbear for the AUD, and these issues could induce some near-term AUD wobbliness, but are unlikely to transform to real harm. Domestic issues could well take the spotlight for AUD investors, especially if Australia’s cherished AAA-rating is deemed to be at risk. Our base case is that the government will take active steps to avert such an outcome, underpinning the gradual return of AUD/USD back towards the 0.79 level by end 2017.

Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

GDP (% y/y) 1.8% 2.6% 2.6% 2.4% 2.6% 2.9%

CPI (% y/y) 1.6% 1.5% 2.2% 2.3% 2.1% 2.2%

Policy Rate (%) 1.50% 1.50% 1.50% 1.50% 1.50% 1.75%

AUD/USD* 0.7664 0.7196 0.70 0.74 0.77 0.79

0.7462-0.7703 0.7177-0.7762 0.67 - 0.78 0.70 - 0.78 0.73 - 0.81 0.75 - 0.83

(2)

0

2

4

6

8

(2)

0

2

4

6

8

06 07 08 09 10 11 12 13 14 15 16

Real interest rates, bumped up by energy and food d is-inflation, are likely to peak as inflation bottoms.

Diminishes scope for aggressive or urgent easing .

Real rates (Trimmed Mean)

Real rates (Headline)

Policy Rate


(25)

(20)

(15)

(10)

(5)

0

5

10

(25)

(20)

(15)

(10)

(5)

0

5

10

06 07 08 09 10 11 12 13 14 15 16

Softer AUD has only gently reined in C/A deficit (Limited J-curve benefits) . Capital flows though more than of fset.

(% of GDP; 4Qma)

Secondary Income Primary Income

Services Goods

C/A BOPSources: CEIC, Mizuho Bank

4000

4500

5000

5500

6000

6500

7000

7500

0.65

0.70

0.75

0.80

0.85

0.90

0.95

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17

If Copper price buoyancy is sustained amid China positives, this could set

the AUD up for a bounce ....

AUD Copper

20

40

60

80

100

120

140

0.65

0.70

0.75

0.80

0.85

0.90

0.95

Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17

Similarly, sustained buoyancy in iron ore prices could suggest that

AUD is under-priced; in the absence of policy dovishness that is

AUD Iron Ore



- 28 -

Important Information This publication has been prepared by Mizuho Bank, Ltd. (“Mizuho”) and represents the views of the author. It has not been prepared by an independent research department and it has not been prepared in accordance with legal requirements in any country or jurisdiction designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Disclaimer Unless otherwise stated, all views or opinions herein are solely those of the author(s) as of the date of this publication and are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, and are subject to change without notice. This publication has been prepared by Mizuho solely from publicly available information. Information contained herein and the data underlying it have been obtained from, or based upon, sources believed by us to be reliable, but no assurance can be given that the information, data or any computations based thereon are accurate or complete. This publication provides general background information only. It is information in summary form and does not purport to be complete. This publication has been prepared for information purposes only and is not intended by Mizuho or its affiliates to constitute investment, legal, accounting, tax or other advice of any kind and all recipients of this publication are advised to contact independent advisors in order to evaluate the publication, including, without limitation, the suitability of any security, commodity, futures contract or instrument or related derivative (hereinafter, a “financial instrument”), product or strategy herein described. 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asia quarterly q12017 - mizuho bank · stable cny takes precedence. • on the international trade...

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