Another CPI downside surprise largely due to hefty disinflation in CPI food and transport coupled with easing core inflation. Seasonally adjusted headline CPI printed another monthly drop (-0.4%MoM SA). The 2018 average inflation rate was 5.2%.
Assuming oil prices stay low and prevailing supply conditions persist, inflation can fade to less than 4% starting in March, based on our latest extrapolation. Average inflation in 2019 can settle at 3%.
The updated inflation trajectory, benign oil price conditions and supply side effects of upcoming liberalization of rice imports, would sustain BSP’s neutral rate stance this year and terminate its rate hiking cycle.
It’s still premature to talk about policy rate easing this year considering the limited policy space for flexibility as we face the risk of large macro imbalances that may require positive real rates and weaker PHP.
Enjoy the local market rallies following CPI’s downside surprise. We prefer to take profits on risk asset market rallies this early in the new year.
The PBOC’s desire to loosen up China’s economy is relying on consumers to keep spending. However, as seen in the data below, consumers just are not spending. From cars, to cameras and retail, consumers are increasingly avoiding big ticket items, as China’s consumers look for breathing space.
The big news in Chinese finance was the PBOC announcing Friday that it was cutting the RRR rate. Rather than what you can read in the press, we want to focus on a variety of factors which may not be as widely recognized.
FX reserves are up by about 10 billion dollars, which against a back drop of the size of FX and the Chinese economy is basically no change. They have been oddly flat over the past two years. Yet, the noise is really just that, the FX increase is so small that we believe it is a non-starter.
Brexit: Agreement with the EU was concluded before reaching the required reassurances for parliament. A soft Brexit remains most likely, before breaking harder, but the politics is fragmenting the outlook.
Economy: The post-referendum growth trend pace has re-established at 0.15% m-o-m, which appears to be above-potential. Inflation should temporarily slow below target despite domestic pressure building.
Monetary policy: The BoE delivered its second rate hike in August to 0.75%. Bullish economic trends mean I expect the next hike in May-19, assuming a smooth transition becomes assured soon.
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Fed chairman Jay Powell’s extraordinary flip-flops over the past 3 months have left his communication strategy in tatters (unsurprising, given that he has no economics training, as we warned at his appointment: Trump Now Has a Clear Path to Damage the Fed, Even as He Loses Political Ground). Nothing in the US growth numbers or core inflation could justify the seismic shifts in the Fed chair’s language. However, M2 money supply moderated sharply to 3.8% YoY growth in October, and didn’t materially improve in November or December, suggesting that the money multiplier is not rebounding quickly enough to offset the sharp contraction in the monetary base. In our view, this is the indicator that the FOMC and market need to pay more attention to in 2019.
While the stock market has predicted “nine of the last five recessions” (to use Paul Samuelson’s famous phrase), an inverted UST yield curve (specifically a negative 2-10 year Treasury spread) has predicted each of the last seven recessions. The 1980 recession began 18 months after the yield curve first inverted, but the lag has been shorter (about 12 months) for the subsequent four recessions. The yield curve has not yet inverted, but is inexorably trending toward negative territory. We expect the US to enter recession no later than mid-2020, bang in the middle of the next US presidential election cycle.
A weak US$ is likely to remain the last reflationary factor for the US in 2019. But, like in 2017, US$-weakness will be positive for Emerging Markets (EMs). We expect China’s debt and growth challenges to come to a head this year, but they would have imploded a lot sooner and more drastically had this been another year of US$ strength.
The UK parliament continues to show its opposition to everything, including a no deal Brexit. Recent amendments are more signalling than substance, though.
A political swerve to approve a deal based on the existing one remains the most likely scenario, in my view (55%). Brinkmanship leaves a crash out with no deal as a significant risk (30%), though, as it is the default outcome despite opposition.
Stopping the exit from the single market and customs union (15%) is appealing to many commentators, but it still looks more like hope over reality, in my view.
The ability to have stable prices has great value.
According to Edward Gibbon, the decaying Roman Empire exhibited five hallmarks: 1) concern with displaying affluence instead of building wealth; 2) obsession with sex; 3) freakish and sensationalistic art; 4) widening disparity between the rich and the poor; and 5) increased demand to live off the state. Most DMs and many EMs display similar symptoms today because fiscal and monetary policies, the foundation of both ancient and modern societies, are identical: increasing welfare outlays by artificially inflating the money supply. The Roman Empire took more than four centuries to destroy what the Republic had built in the previous five centuries because clipping and debasing coins inflated currency supplies slowly. Entering debits and credits in the books of commercial and central banks is much more efficient.
The Indian economy is in a sweet spot currently. On one hand economic growth is strong and on the other hand, some of the risks have abated due to the sharp fall in Oil prices. Economic growth will thus be strong in 2019 with macro stability. However, given that 2019 is an election year, the risks of a policy mistake are high due to the divergence in economic growth between rural India and the rest of the country. It is very likely that the next few months will see some monetary easing on one hand due to the relatively benign outlook for headline inflation and fiscal stimulus on the other to prop up the rural economy. This given the backdrop of already strong overall growth and stubbornly high core inflation risks over stimulating the economy and consequent build-up of inflationary pressures – something akin to what happened in 2009 but on a smaller scale. However, that is a problem for 2020 or perhaps beyond. In the interim, 2019 promises to be a reasonably strong year with 7% plus growth, lower interest rates and strong growth in corporate earnings.
No end is apparent for the 18‑day‑old partial government shutdown following US President Donald Trump’s Oval Office Address today. Rather than offering compromise, proposing new ideas or even attempting to expand public support for his position, Trump relied on familiar techniques of lurid hyperbole and base fear‑mongering. But this doggesd pursuit of a US$5.7 billion wall seems bound to fail. In effect, Trump is a political neophyte, with poor advisors, confronting an opposition‑controlled House for the first time – and he is blundering.
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You might be surprised to learn that in the ten years to 2017 Asia has outperformed advanced economies. Despite extraordinary monetary and fiscal stimulus and the damaging dollar-demand deflationary policies of the ECB, BoJ and BoE, the region is 188% larger in US dollar terms compared with 2007 while US dollar GDP per capita income is 170% higher. The parallel numbers for the advanced countries – the US, euro-area and Japan combined- are 19% and 13%. Asian stock markets have underperformed since 2010 but we believe that investors are still to fully acknowledge Asia’s strong growth fundamentals. Combined with cheap valuations there is significant upside for Asian equity markets.
As market scrutiny focuses on the short-term effects of current trends – i.e., slowing global growth, the US government shutdown and the Trump ‘trade war’ – an overlooked longer-term prospect is that the US political outlook may finally be improving.
Since Hillary Clinton’s sensational loss in 2016, the Democrat Party has been in disarray about whom to nominate for president in 2020, and this in turn has fostered the specter of President Donald Trump serving through 2024. However, new polls now show that the Democrats may already be uniting behind a potential nominee who is not only vetted and viable, but also reasonably centrist (especially on economics). This is the former three-term congressman from El Paso, Texas: Beto O’Rourke (no relation to this insight writer).
O’Rourke’s emergence is significant because it can reduce perceptions of risk surrounding the 2020 election and, more importantly, offer prospects for sounder policymaking and international re‑engagement starting 24 months from now. In particular, O’Rourke (like Obama) supports free trade and he voted for the Trans Pacific Partnership (TPP). In contrast to redressing perceived grievances through ruinous tariffs, the TPP offered hope for bringing about equitable economic relations through positive inducements. If the pact were to develop and expand with US participation, benefits to membership might become clear – which might eventually elicit interest from China and achieve the cooperation that Trump has fitfully pursued through coercive means. In any event, the prospect of less US protectionism post‑2020 suggests that the recent downturn for exporters (e.g., Apple) may be, in the grand scheme, a blip – not the start of a secular decline.
PBoC responds to disappointing start to another year of slowing growth
Talks planned but US-China “clash of civilisations” deepens
Ever faster trains, new airports from Beijing to Antarctica – and more debt
Two-child policy fails to avert demographic crisis
Beijing nails first ever landing on moon’s far side
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
We remain upbeat on 2019 growth prospects (6.5%-6.6%) amid fading inflation risk. However, we don’t see a return to the ‘sweet spot’ with the risks of swelling macro imbalances as highlighted in our macro strategy piece recently. Domestic demand, which will underpin growth prospects, has a larger impact on the trade shortfall rather than oil price fluctuations.
Anticipated costs from a hefty current account gap would be the sustained compression of official reserves with a corresponding peso liquidity drain. Managing the hefty current account deficit likely to probe more than 3% of GDP as investment- driven growth persists, would require the combination of a weaker PHP and positive, real interest rates. Aside from attracting portfolio flows, real interest rates would encourage private sector savings in our twin deficit situation. Positive real rates could also curb the private sector’s strong debt appetite. A staggered 2% bank reserve cut anticipated this year when monthly inflation is closer to 5% or less, would provide partial relief to peso liquidity loss arising from the BSP’s net dollar sales in the inter-bank FX market.
Fiscal deficit has to be kept in check and within the range of 3% of GDP. Public sector credit risk has been buoyed by the implementation of the 2nd phase of excise hikes on diesel and gasoline products this year amid low oil prices. More fiscal reforms are pending in Congress that could be delayed by the mid-term elections.
Against a backdrop of hefty fiscal and external gaps, it’s premature to contemplate lower policy rates with receding inflation risk. The full impact (or pass-through) of the cumulative 175bp hike in lowering inflation expectations to within the BSP’s inflation target range of 2-4%, has yet to be seen. While BSP’s policy bias may ‘sound’ dovish in the new year, maintaining its policy rate at 4.75% amid receding inflation, would signal policy focus on lingering macro stability issues.
PHP may revisit historic highs of 55-56 on the back of swelling macro imbalances in the near-term although correction to the 54-55 range would depend much on the US Fed finally declaring an end to its rate tightening cycle and thus, terminate the strong USD episode, with BSP sticking to its current policy rate.
We continue to like ‘steepeners’ in the long end as debt supply from the government and private corporate debts to fund ambitious investment plans would likely persist. The expected backdrop of upbeat growth prospects coupled with our view of the BSP ending its monetary tightening cycle (ahead of the Fed) amid waning inflation risk, bode well for local equities and short-duration bonds.
Ahead of Friday’s employment report for December pessimism about the economic outlook was running high. The employment report, however, showed unambiguous strength in the U.S. economy with a surge in payrolls, broad-based employment gains by sector, faster wage growth, and a sharp increase in hours worked.
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As we reach the 20th anniversary of the introduction of Euro, now is a good time to assess the success or failure or the single European currency. From the perspective of employment it is fair to say the Euro has been nothing short of a catastrophe. Over the past 20 years the average rate of unemployment in the Eurozone has been 9.4%, or about 3 times higher than the level most economists would consider to be a normal level of frictional unemployment. The total number of man-years of lost output as a result of unemployment now mounts to over 280 million of which perhaps 185 million man-years of unemployment are structural rather than frictional. Given current productivity levels those 185 million lost man-years could account for up to USD 6 trillion of lost output. That is a heavy cost the blame for which arguably lies with the politicians who pushed ahead with a largely political project while ignoring the obvious economic ramifications of the single currency. As is nearly always the case when analyzing the Eurozone the average and the total hide a wide range of outcomes between countries.
The UK’s services PMI rebounded by 0.8 points to 51.2 in Dec-18, which was above Consensus expectations but consistent with historical payback after large falls.
I still expect the ONS to report growth in the equivalent services sectors of 0.5% in 4Q18, despite the PMI continuing to point weaker than that.
Unfavourable rounding helps constrain my forecast for Nov-18 GDP growth to 0.1% m-o-m. Recent downside news in energy output reversed the upside from retail.
Relatively benign inflation benefits Widodo as the 17 April election approaches, but a succession of scandals in ministries threatens to weaken his image for clean governance. Prabowo is suffering embarassment from a proposal for a Koran-reading contest (he is illiterate in Arabic) — while Widodo’s readiness to take part sets a negative precedent for upholding pluralism. Indrawati is The Banker’s 2019 Finance Minister of the Year, despite the problematic investment climate. Revenue collection was strong in 2018, suppressing the fiscal deficit to 1.8% of GDP.
Politics: Hard‑line Islamic backers of Gerindra Chair Prabowo Subianto risked appearing hypocritical when Acehnese clerics proposed a Koran‑reading contest for presidential contenders. The foreign‑educated Prabowo is apparently unable to read Arabic, and he rejects the contest. In contrast, campaign aides to President Joko Widodo gleefully agreed to it, perceiving an opportunity to impugn Prabowo’s religious credentials Widodo himself is non-committal, but the stance of his campaign officials serves, in effect, to legitimize the Acehnese practice of requiring that leaders be literate in Arabic. The president and his advisors are again willing to sacrifice principles of pluralism to make perceived campaign gains (Page 2). Authorities debunked a claim from a Partai Demokrat official that a voting‑fraud conspiracy is underway. The episode reflects poorly on a prominent Demokrat vice secretary general, Andi Arief – but, for the pro‑Prabowo alliance, it deflects critical press attention from Prabowo’s Koran‑reading predicament (p. 3). In a speech in Jakarta, Prabowo reiterated dire environmental warnings (p. 5). Finance Minister Sri Mulyani Indrawati is The Banker’s 2019 Finance Minister of the Year (p. 5).
Disasters: The Sunda Straits tsunami, triggered by the eruption of Anak Krakatau Volcano, caused 437 fatalities on 22 December (p. 6).
Justice: For the third time in six months, a ministry faces investigation from the Anti‑Corruption Commission (KPK). Unseemly revelations affect the Public Works Ministry, as investigators believe that kickbacks occurred on the procurement of water pipes for disaster relief in Palu. Corruption in disaster relief is potentially subject to capital punishment. The succession of ministerial‑level scandals risks jeopardizing Widodo’s crucial image for clean governance (p. 7). The sentence for PT Nusa Konstruksi Enginiring Tbk (NKE) fell short of what prosecutors sought (p. 7).
Policy News: At last, the administration is invoking new reformist rules on managing the civil service, by dismissing 480 personnel convicted of corruption. A joint ministerial decree on the matter shows welcome attention to issues of institutional dysfunctions (p. 9).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Economics: Fueled by commodity prices, state revenues attained 100 percent of the budget target in 2018, while spending reached 97 percent – producing a deficit equivalent to 1.8 percent of GDP (p. 10). Inflation was low again in December, resulting in a 3.1 percent annual rate for 2018 (p. 11).
Jakarta: The odd‑even license‑plate restrictions on traffic will remain in effect for at least another three months (p. 13).
Metals are an important part of China’s economic prowess. Specifically, metals are a spoke in the economic wheel with fortunes of commodities and real estate all centered around metals. As we look at metals futures, we see that most metals futures are very flat.
Tax revenues in India are running sharply lower than budget estimate. At current run rate, tax revenues would miss the budget estimate by almost US$19bn or 0.7% of GDP. This short-fall is almost entirely due to weaker GST revenues. Direct tax revenues are running broadly inline with the estimate suggesting the economy is doing fine. This short-fall however will not result in a material widening of the fiscal deficit. The government has been remarkably conservative in spending so far with expenditure growth running well below budget estimate. Non-tax revenues are also running ahead of full year estimate. This coupled with higher small savings collections will mean that Government borrowings will be lower than budget estimate even if the fiscal deficit is modestly higher and that will be a relief to the bond market. However, the quality of deficit is worsening with the government resorting to even more questionable routes (the PFC-REC transaction is a case in point) to achieve its disinvestment target. Additionally, it has started to resort to off-balance sheet financing with the loan to the ailing Air India from the NSSF. The numerical focus on fiscal deficit is resulting in wrong precedents being set and government finances becoming more opaque.
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The UK’s manufacturing PMI increased by 0.6-points to 54.2 in Dec-18, contrary to Consensus expectations of a decline towards the weaker euro area readings.
Inventory accumulation was mostly responsible for the headline strength. Car manufacturing weakness may offset this in Q4, though, and energy looks set to weigh on overall industrial production.
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The big news in Chinese finance was the PBOC announcing Friday that it was cutting the RRR rate. Rather than what you can read in the press, we want to focus on a variety of factors which may not be as widely recognized.
FX reserves are up by about 10 billion dollars, which against a back drop of the size of FX and the Chinese economy is basically no change. They have been oddly flat over the past two years. Yet, the noise is really just that, the FX increase is so small that we believe it is a non-starter.
Brexit: Agreement with the EU was concluded before reaching the required reassurances for parliament. A soft Brexit remains most likely, before breaking harder, but the politics is fragmenting the outlook.
Economy: The post-referendum growth trend pace has re-established at 0.15% m-o-m, which appears to be above-potential. Inflation should temporarily slow below target despite domestic pressure building.
Monetary policy: The BoE delivered its second rate hike in August to 0.75%. Bullish economic trends mean I expect the next hike in May-19, assuming a smooth transition becomes assured soon.
You might be surprised to learn that in the ten years to 2017 Asia has outperformed advanced economies. Despite extraordinary monetary and fiscal stimulus and the damaging dollar-demand deflationary policies of the ECB, BoJ and BoE, the region is 188% larger in US dollar terms compared with 2007 while US dollar GDP per capita income is 170% higher. The parallel numbers for the advanced countries – the US, euro-area and Japan combined- are 19% and 13%. Asian stock markets have underperformed since 2010 but we believe that investors are still to fully acknowledge Asia’s strong growth fundamentals. Combined with cheap valuations there is significant upside for Asian equity markets.
As market scrutiny focuses on the short-term effects of current trends – i.e., slowing global growth, the US government shutdown and the Trump ‘trade war’ – an overlooked longer-term prospect is that the US political outlook may finally be improving.
Since Hillary Clinton’s sensational loss in 2016, the Democrat Party has been in disarray about whom to nominate for president in 2020, and this in turn has fostered the specter of President Donald Trump serving through 2024. However, new polls now show that the Democrats may already be uniting behind a potential nominee who is not only vetted and viable, but also reasonably centrist (especially on economics). This is the former three-term congressman from El Paso, Texas: Beto O’Rourke (no relation to this insight writer).
O’Rourke’s emergence is significant because it can reduce perceptions of risk surrounding the 2020 election and, more importantly, offer prospects for sounder policymaking and international re‑engagement starting 24 months from now. In particular, O’Rourke (like Obama) supports free trade and he voted for the Trans Pacific Partnership (TPP). In contrast to redressing perceived grievances through ruinous tariffs, the TPP offered hope for bringing about equitable economic relations through positive inducements. If the pact were to develop and expand with US participation, benefits to membership might become clear – which might eventually elicit interest from China and achieve the cooperation that Trump has fitfully pursued through coercive means. In any event, the prospect of less US protectionism post‑2020 suggests that the recent downturn for exporters (e.g., Apple) may be, in the grand scheme, a blip – not the start of a secular decline.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
PBoC responds to disappointing start to another year of slowing growth
Talks planned but US-China “clash of civilisations” deepens
Ever faster trains, new airports from Beijing to Antarctica – and more debt
Two-child policy fails to avert demographic crisis
Beijing nails first ever landing on moon’s far side
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.
We remain upbeat on 2019 growth prospects (6.5%-6.6%) amid fading inflation risk. However, we don’t see a return to the ‘sweet spot’ with the risks of swelling macro imbalances as highlighted in our macro strategy piece recently. Domestic demand, which will underpin growth prospects, has a larger impact on the trade shortfall rather than oil price fluctuations.
Anticipated costs from a hefty current account gap would be the sustained compression of official reserves with a corresponding peso liquidity drain. Managing the hefty current account deficit likely to probe more than 3% of GDP as investment- driven growth persists, would require the combination of a weaker PHP and positive, real interest rates. Aside from attracting portfolio flows, real interest rates would encourage private sector savings in our twin deficit situation. Positive real rates could also curb the private sector’s strong debt appetite. A staggered 2% bank reserve cut anticipated this year when monthly inflation is closer to 5% or less, would provide partial relief to peso liquidity loss arising from the BSP’s net dollar sales in the inter-bank FX market.
Fiscal deficit has to be kept in check and within the range of 3% of GDP. Public sector credit risk has been buoyed by the implementation of the 2nd phase of excise hikes on diesel and gasoline products this year amid low oil prices. More fiscal reforms are pending in Congress that could be delayed by the mid-term elections.
Against a backdrop of hefty fiscal and external gaps, it’s premature to contemplate lower policy rates with receding inflation risk. The full impact (or pass-through) of the cumulative 175bp hike in lowering inflation expectations to within the BSP’s inflation target range of 2-4%, has yet to be seen. While BSP’s policy bias may ‘sound’ dovish in the new year, maintaining its policy rate at 4.75% amid receding inflation, would signal policy focus on lingering macro stability issues.
PHP may revisit historic highs of 55-56 on the back of swelling macro imbalances in the near-term although correction to the 54-55 range would depend much on the US Fed finally declaring an end to its rate tightening cycle and thus, terminate the strong USD episode, with BSP sticking to its current policy rate.
We continue to like ‘steepeners’ in the long end as debt supply from the government and private corporate debts to fund ambitious investment plans would likely persist. The expected backdrop of upbeat growth prospects coupled with our view of the BSP ending its monetary tightening cycle (ahead of the Fed) amid waning inflation risk, bode well for local equities and short-duration bonds.
Ahead of Friday’s employment report for December pessimism about the economic outlook was running high. The employment report, however, showed unambiguous strength in the U.S. economy with a surge in payrolls, broad-based employment gains by sector, faster wage growth, and a sharp increase in hours worked.
As we reach the 20th anniversary of the introduction of Euro, now is a good time to assess the success or failure or the single European currency. From the perspective of employment it is fair to say the Euro has been nothing short of a catastrophe. Over the past 20 years the average rate of unemployment in the Eurozone has been 9.4%, or about 3 times higher than the level most economists would consider to be a normal level of frictional unemployment. The total number of man-years of lost output as a result of unemployment now mounts to over 280 million of which perhaps 185 million man-years of unemployment are structural rather than frictional. Given current productivity levels those 185 million lost man-years could account for up to USD 6 trillion of lost output. That is a heavy cost the blame for which arguably lies with the politicians who pushed ahead with a largely political project while ignoring the obvious economic ramifications of the single currency. As is nearly always the case when analyzing the Eurozone the average and the total hide a wide range of outcomes between countries.
The UK’s services PMI rebounded by 0.8 points to 51.2 in Dec-18, which was above Consensus expectations but consistent with historical payback after large falls.
I still expect the ONS to report growth in the equivalent services sectors of 0.5% in 4Q18, despite the PMI continuing to point weaker than that.
Unfavourable rounding helps constrain my forecast for Nov-18 GDP growth to 0.1% m-o-m. Recent downside news in energy output reversed the upside from retail.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Relatively benign inflation benefits Widodo as the 17 April election approaches, but a succession of scandals in ministries threatens to weaken his image for clean governance. Prabowo is suffering embarassment from a proposal for a Koran-reading contest (he is illiterate in Arabic) — while Widodo’s readiness to take part sets a negative precedent for upholding pluralism. Indrawati is The Banker’s 2019 Finance Minister of the Year, despite the problematic investment climate. Revenue collection was strong in 2018, suppressing the fiscal deficit to 1.8% of GDP.
Politics: Hard‑line Islamic backers of Gerindra Chair Prabowo Subianto risked appearing hypocritical when Acehnese clerics proposed a Koran‑reading contest for presidential contenders. The foreign‑educated Prabowo is apparently unable to read Arabic, and he rejects the contest. In contrast, campaign aides to President Joko Widodo gleefully agreed to it, perceiving an opportunity to impugn Prabowo’s religious credentials Widodo himself is non-committal, but the stance of his campaign officials serves, in effect, to legitimize the Acehnese practice of requiring that leaders be literate in Arabic. The president and his advisors are again willing to sacrifice principles of pluralism to make perceived campaign gains (Page 2). Authorities debunked a claim from a Partai Demokrat official that a voting‑fraud conspiracy is underway. The episode reflects poorly on a prominent Demokrat vice secretary general, Andi Arief – but, for the pro‑Prabowo alliance, it deflects critical press attention from Prabowo’s Koran‑reading predicament (p. 3). In a speech in Jakarta, Prabowo reiterated dire environmental warnings (p. 5). Finance Minister Sri Mulyani Indrawati is The Banker’s 2019 Finance Minister of the Year (p. 5).
Disasters: The Sunda Straits tsunami, triggered by the eruption of Anak Krakatau Volcano, caused 437 fatalities on 22 December (p. 6).
Justice: For the third time in six months, a ministry faces investigation from the Anti‑Corruption Commission (KPK). Unseemly revelations affect the Public Works Ministry, as investigators believe that kickbacks occurred on the procurement of water pipes for disaster relief in Palu. Corruption in disaster relief is potentially subject to capital punishment. The succession of ministerial‑level scandals risks jeopardizing Widodo’s crucial image for clean governance (p. 7). The sentence for PT Nusa Konstruksi Enginiring Tbk (NKE) fell short of what prosecutors sought (p. 7).
Policy News: At last, the administration is invoking new reformist rules on managing the civil service, by dismissing 480 personnel convicted of corruption. A joint ministerial decree on the matter shows welcome attention to issues of institutional dysfunctions (p. 9).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Economics: Fueled by commodity prices, state revenues attained 100 percent of the budget target in 2018, while spending reached 97 percent – producing a deficit equivalent to 1.8 percent of GDP (p. 10). Inflation was low again in December, resulting in a 3.1 percent annual rate for 2018 (p. 11).
Jakarta: The odd‑even license‑plate restrictions on traffic will remain in effect for at least another three months (p. 13).
Metals are an important part of China’s economic prowess. Specifically, metals are a spoke in the economic wheel with fortunes of commodities and real estate all centered around metals. As we look at metals futures, we see that most metals futures are very flat.
Tax revenues in India are running sharply lower than budget estimate. At current run rate, tax revenues would miss the budget estimate by almost US$19bn or 0.7% of GDP. This short-fall is almost entirely due to weaker GST revenues. Direct tax revenues are running broadly inline with the estimate suggesting the economy is doing fine. This short-fall however will not result in a material widening of the fiscal deficit. The government has been remarkably conservative in spending so far with expenditure growth running well below budget estimate. Non-tax revenues are also running ahead of full year estimate. This coupled with higher small savings collections will mean that Government borrowings will be lower than budget estimate even if the fiscal deficit is modestly higher and that will be a relief to the bond market. However, the quality of deficit is worsening with the government resorting to even more questionable routes (the PFC-REC transaction is a case in point) to achieve its disinvestment target. Additionally, it has started to resort to off-balance sheet financing with the loan to the ailing Air India from the NSSF. The numerical focus on fiscal deficit is resulting in wrong precedents being set and government finances becoming more opaque.
The UK’s manufacturing PMI increased by 0.6-points to 54.2 in Dec-18, contrary to Consensus expectations of a decline towards the weaker euro area readings.
Inventory accumulation was mostly responsible for the headline strength. Car manufacturing weakness may offset this in Q4, though, and energy looks set to weigh on overall industrial production.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The UK’s services PMI rebounded by 0.8 points to 51.2 in Dec-18, which was above Consensus expectations but consistent with historical payback after large falls.
I still expect the ONS to report growth in the equivalent services sectors of 0.5% in 4Q18, despite the PMI continuing to point weaker than that.
Unfavourable rounding helps constrain my forecast for Nov-18 GDP growth to 0.1% m-o-m. Recent downside news in energy output reversed the upside from retail.
Relatively benign inflation benefits Widodo as the 17 April election approaches, but a succession of scandals in ministries threatens to weaken his image for clean governance. Prabowo is suffering embarassment from a proposal for a Koran-reading contest (he is illiterate in Arabic) — while Widodo’s readiness to take part sets a negative precedent for upholding pluralism. Indrawati is The Banker’s 2019 Finance Minister of the Year, despite the problematic investment climate. Revenue collection was strong in 2018, suppressing the fiscal deficit to 1.8% of GDP.
Politics: Hard‑line Islamic backers of Gerindra Chair Prabowo Subianto risked appearing hypocritical when Acehnese clerics proposed a Koran‑reading contest for presidential contenders. The foreign‑educated Prabowo is apparently unable to read Arabic, and he rejects the contest. In contrast, campaign aides to President Joko Widodo gleefully agreed to it, perceiving an opportunity to impugn Prabowo’s religious credentials Widodo himself is non-committal, but the stance of his campaign officials serves, in effect, to legitimize the Acehnese practice of requiring that leaders be literate in Arabic. The president and his advisors are again willing to sacrifice principles of pluralism to make perceived campaign gains (Page 2). Authorities debunked a claim from a Partai Demokrat official that a voting‑fraud conspiracy is underway. The episode reflects poorly on a prominent Demokrat vice secretary general, Andi Arief – but, for the pro‑Prabowo alliance, it deflects critical press attention from Prabowo’s Koran‑reading predicament (p. 3). In a speech in Jakarta, Prabowo reiterated dire environmental warnings (p. 5). Finance Minister Sri Mulyani Indrawati is The Banker’s 2019 Finance Minister of the Year (p. 5).
Disasters: The Sunda Straits tsunami, triggered by the eruption of Anak Krakatau Volcano, caused 437 fatalities on 22 December (p. 6).
Justice: For the third time in six months, a ministry faces investigation from the Anti‑Corruption Commission (KPK). Unseemly revelations affect the Public Works Ministry, as investigators believe that kickbacks occurred on the procurement of water pipes for disaster relief in Palu. Corruption in disaster relief is potentially subject to capital punishment. The succession of ministerial‑level scandals risks jeopardizing Widodo’s crucial image for clean governance (p. 7). The sentence for PT Nusa Konstruksi Enginiring Tbk (NKE) fell short of what prosecutors sought (p. 7).
Policy News: At last, the administration is invoking new reformist rules on managing the civil service, by dismissing 480 personnel convicted of corruption. A joint ministerial decree on the matter shows welcome attention to issues of institutional dysfunctions (p. 9).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Economics: Fueled by commodity prices, state revenues attained 100 percent of the budget target in 2018, while spending reached 97 percent – producing a deficit equivalent to 1.8 percent of GDP (p. 10). Inflation was low again in December, resulting in a 3.1 percent annual rate for 2018 (p. 11).
Jakarta: The odd‑even license‑plate restrictions on traffic will remain in effect for at least another three months (p. 13).
Metals are an important part of China’s economic prowess. Specifically, metals are a spoke in the economic wheel with fortunes of commodities and real estate all centered around metals. As we look at metals futures, we see that most metals futures are very flat.
Tax revenues in India are running sharply lower than budget estimate. At current run rate, tax revenues would miss the budget estimate by almost US$19bn or 0.7% of GDP. This short-fall is almost entirely due to weaker GST revenues. Direct tax revenues are running broadly inline with the estimate suggesting the economy is doing fine. This short-fall however will not result in a material widening of the fiscal deficit. The government has been remarkably conservative in spending so far with expenditure growth running well below budget estimate. Non-tax revenues are also running ahead of full year estimate. This coupled with higher small savings collections will mean that Government borrowings will be lower than budget estimate even if the fiscal deficit is modestly higher and that will be a relief to the bond market. However, the quality of deficit is worsening with the government resorting to even more questionable routes (the PFC-REC transaction is a case in point) to achieve its disinvestment target. Additionally, it has started to resort to off-balance sheet financing with the loan to the ailing Air India from the NSSF. The numerical focus on fiscal deficit is resulting in wrong precedents being set and government finances becoming more opaque.
The UK’s manufacturing PMI increased by 0.6-points to 54.2 in Dec-18, contrary to Consensus expectations of a decline towards the weaker euro area readings.
Inventory accumulation was mostly responsible for the headline strength. Car manufacturing weakness may offset this in Q4, though, and energy looks set to weigh on overall industrial production.
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Risk appetite readings at minus 12.6 are still above the minus 40 criterion for an upturn
Recent large fall in risk appetite consistent with upcoming economic recession
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