Brief Macro: Philippines: El Niño’s Comback – How Bad? and more

In this briefing:

1. Philippines: El Niño’s Comback – How Bad?
2. FLASH: UK Labour Market Melt-Up into 2019
3. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest
4. Brexit – The UK Economy Battles On
5. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC

1. Philippines: El Niño’s Comback – How Bad?

• With SST (sea surface temperature) in the Pacific past 26^oC, El Niño’s comeback is highly likely. Past occurrences of severe El Niño was isolated in the farm sector with upside risks to food prices. While another round of contraction in farm output and employment would be expected, the liberal rice import policy would entice imports to plug the gap between demand-supply in 1H19 and ease potential rice/food price upticks. 

• The El Niño supply shock would coincide with the global macro slowdown and fiscal spending delays that spawn downside risks to growth. With a legally handicapped fiscal budget, monetary policy may have to step up to ease likelihood of severe, near-term constraints to growth. We believe monetary adjustments would be the appropriate responses to the macro challenges as inflation winds down. Sequencing and appropriate timing of monetary reaction remains key to credible policy responses starting with the bank reserve ratio cut in 2Q19 (staggered cuts for a maximum of 3% this year) followed by policy rate cuts commencing in 3Q19 (cumulative -50bp in 2H19) when inflation hits rock bottom of less than 2%.

• Buy bonds with preference for the curve’s belly to short-duration.

2. FLASH: UK Labour Market Melt-Up into 2019

• The LFS unemployment rate fell to 3.9% on rapid wage growth of 222k. Unusually elevated participation is temporarily exaggerating strength, and its correction could cause a sharper slowdown in the data, irrespective of Brexit.
• Wage growth also exceeded expectations owing to revisions. The increasingly tight labour market appears to have melted-up at the start of 2019.

3. Widodo Lead Intact / VP Debate Lacks Impact / Trade Slows / Permitting Impediment / PPP Chair Arrest

A new poll from Alvara concurs with last week’s LSI data and shows Widodo’s lead intact.  A TV debate between the VP nominees was largely perfunctory, and Prabowo’s running mate Sandiaga Uno failed to use the opportunity to make up ground in the presidential race.  The KPK arrested Romahurmuziy, an arder Widodo supporter and chair of the Islamic United Development Party (PPP); this reflects poorly on the president at an awkward time, but is unlikely to cause significant damage.  Both exports and imports slowed precipitously in the Jan-Feb period, although capital-goods imports held up. 

Politics: The 17 March vice-presidential debate featured few stellar moments, but President Joko Widodo’s running mate Ma’ruf Amin generally outperformed expectations.  He commanded detail without perpetrating major gaffes.  Although Prabowo Subianto’s running mate Sandiaga Uno performed with eloquence, he lacked resonance and failed to make the compelling breakthroughs that his ticket needs (Page 2).  Officials in Prabowo’s campaign reiterated suspicions about inaccuracies in the voter list.  To be sure, maladministration has been chronically problematic, producing inaccuracies in the list – but alleging conspiratorial intent would be far-fetched (p. 3).  Widodo urged supporters to encourage voter turnout, counter hoaxes and avoid complacency (p. 4). 

Surveys: The Alvara Research Institute measured Widodo’s lead over Prabowo at 19 percentage points in a poll conducted in late February and early March.  This generally corroborates recent findings from the Survey Network (LSI) (p. 5).

Disasters: In Sentani, outside the provincial capital of Jayapura in Papua Province, flash flooding and mudslides killed at least 73, with 60 others still missing (p. 6).

Justice: United Development Party (PPP) Chair Romahurmuziy entered custody as a suspect on charges of graft.  Investigators from the Anti-Corruption Commission (KPK) believe he took bribes in exchange for arranging senior appointments in the Religion Ministry, which PPP’s Lukman Saefuddin heads.  If so, the case would mark the latest in a long line of Religion Ministry corruption scandals, and the second to embroil a PPP chair.  The affair is an embarrassment at a crucial time for Widodo, but the details do not implicate the president and the KPK has refrained from pursuing Saefuddin, for now.  Romahurmuziy has enthusiastically supported Widodo and he championed the VP candidacy of Amin; nonetheless, the PPP figure still lacks national prominence and his disgrace seems unlikely to materially affect the election (p. 7).  Testimony from a Bekasi official sheds more light on Lippo Group practices in the Meikarta bribery case (p. 8).

Policy News: The coordinating economics minister suggested penalizing district‑level governments that lack detailed spatial plans, which are crucial for a planned online investment permitting system (p. 9).

Economics: The finance minister registered caution about the trade surplus recorded during February, as exports underperformed while imports fell even further.  But capital goods imports have held up (p. 10).

4. Brexit – The UK Economy Battles On

The political crisis in the UK has left Brexit in shambles. Foreign manufacturers are exiting. Investment spending is contracting while London house prices are correcting fast. Despite this the UK economy has held up well, thanks to exporters and domestic consumers. UK economic activity is moderating but not as quickly as in the euro-area where heightened political tensions in Italy and France, a weakening German economy and slower additions to global US dollar GDP have taken their toll. Although Euro-area growth prospects are looking shaky economic activity should revive in 2H19. The same cannot be said about the UK economy. 

5. Foreign Investment Law/Trade War/Huawei/Eu Vs PRC

China News That Matters

• NPC approves “rushed” foreign investment law
• Trump in no hurry as “China threat” grows 
• Huawei struggles to build trust
• EU takes a stand: China as “systemic rival”