Brief Macro: Widodo Withstands Prabowo’s Debate Pressure / BI Hints at Lower 1Q CAD / Gerindra Prepares Dispute and more

In this briefing:

1. Widodo Withstands Prabowo’s Debate Pressure / BI Hints at Lower 1Q CAD / Gerindra Prepares Dispute
2. A Solid U.S. Employment Report For March
3. Hong Kong FX
4. Fed Policy Independence: Facing the Biggest Challenges in Decades
5. RBI to Unwind Its Policy Error, but Not Fast Enough; External Sector to Lead Rebound

1. Widodo Withstands Prabowo’s Debate Pressure / BI Hints at Lower 1Q CAD / Gerindra Prepares Dispute

Prabowo performed forcefully in the 30 March presidential debate, but Widodo remained unflustered and debunked the Gerindra chair’s particularly dark realpolitik vision.  Prabowo fell ill later in the week but apparently recovered, and a major rally will occur in Jakarta on 7 April.  But virtually all polls show Widodo maintaining his large lead through mid-March and no developments seem likely to alter the standings.  But if Widodo’s 17 April margin of victory is unexpectedly narrow, Prabowo campaign officials seem certain to allege fraud and contest the outcome.  This scenario would present prolonged tension and uncertainty through 8 August. 

Politics: Gerindra Chair Prabowo Subianto missed three successive campaign appearances due to an unspecified malady (Page 2).  Supporters of Prabowo – namely, his brother Hashim Djojohadikusumo and the National Mandate Party (Pan) founder Amien Rais – warned of potential electoral fraud and threatened to mobilize “people power” after election day.  This highlights the importance of Widodo winning by a wide margin, lest a narrow victory lends credence to claims of fraud (p. 2).  Prabowo pressured President Joko Widodo more aggressively in the fourth presidential debate on 30 March, but he also lost his temper and appeared condescending – while Widodo coolly parried incessant jabs.  Prabowo sought to portray Widodo as being innocently out of touch with harsh realities in security, diplomacy and governance.  He depicted foreigners – including diplomats, journalists and investors – as duplicitous, disrespectful and untrustworthy.  For his part, Widodo chided Prabowo for being fearful and lacking confidence in Indonesian institutions, especially the military.  Prabowo insisted that willful leadership is essential to make Indonesia strong, prosperous and self‑sufficient.  He closed by reiterating his pledge to end food imports.  While his display of mettle may help his appeal among some voters, his bluster – debunked with effect by Widodo – may have alienated others (p. 3).  While scrutinizing the Golkar parliamentarian Bowo Pangarso regarding dealings with a state fertilizer firm, personnel from the Anti-Corruption Commission (KPK) discovered Rp8 billion in his company’s basement – neatly sorted in 400,000 envelopes.  He was allegedly preparing a vote‑buying operation in his Central Java electoral district (p. 13). 

Surveys: Indobarometer corroborated findings from other polls and measured Widodo’s lead at 18 percentage points as of mid‑March (p. 14). 

Security: Counter‑terror police apprehended a figure in West Java whom they suspect is a leader of the formidable Jemaah Ansharut Daulah (JAD) terrorist group (p. 15). 

Economics: A Bank Indonesia (BI) deputy governor cited the possibility of a significantly lower current account deficit for the first quarter of 2019, but warned that it could widen again in the second quarter (p. 16).  Oil production fell short of the government’s target again (p. 16).  

Jakarta: The public works minister openly rebuked Governor Anies Baswedan for making no progress on a ‘naturalization’ project to rectify drainage in the Ciliwung River.  Baswedan has refused to evict riverbank squatters who obstruct the work (p. 16). 

2. A Solid U.S. Employment Report For March

The U.S. employment report for March was solid and should be viewed as reassuring about the state of the economy in the first quarter of 2019.  Nonfarm payrolls rose 196,000 in March and t he unemployment rate held at 3.8%.

3. Hong Kong FX

We will be the first to admit some of our best ideas for reports come from subscribers. That is the story of today’s report on Hong Kong FX. Regular readers know we write extensively on China FX, but rarely touch on Hong Kong. To that end we got a request to look into FX currency and to a less extent rates in Hong Kong. At this point in history, while the HKD is tied directly to the USD, it more accurately reflects the CNY leaving the whole thing in a bit of a bind.

4. Fed Policy Independence: Facing the Biggest Challenges in Decades

Low inflationary expectations have finally forced the Federal Open Market Committee (FOMC) to become even more dovish at its last policy meeting due their inherent stickiness.

Although benign inflationary expectations have lowered the bar for cutting the federal funds rate, incoming economic data will ultimately determine whether any reductions actually come into fruition.

Since the beginning of 2018, the Fed has been encountering rising political pressure from the Trump Administration that has ultimately forced Chair Powell, despite his attempt to display policy autonomy, onto the back foot.

The Fed is facing rising risks to its independence via overt political appointments onto the Board of Governors, while Modern Monetary Theory (MMT) has supporters on both sides of the US political divide.

Meanwhile, President Trump has significantly lowered the bar in selecting candidates for Fed Governor vacancies, notably Stephen Moore, while also ignoring the historic convention of respecting Fed independence to pursue their dual mandate.

The Fed’s decision to hike the federal funds rate last December could prove very costly, both economically and politically, particularly if the US economy enters recession later this year or in 2020.

5. RBI to Unwind Its Policy Error, but Not Fast Enough; External Sector to Lead Rebound

We expect the RBI’s MPC to cut the policy (repo) rate by 25bp on 4th April, thereby unwinding the policy error it made last year by raising the repo rate by 50bp — on the basis of an utterly erroneous inflation forecast. (Our view was: RBI Raises Rates, but Will Likely Look Foolish when Inflation Moderates). Between November 2018 and January 2019, India’s real policy rate was consequently well above +4%. Even after tomorrow’s rate cut, India’s real interest rate will be among the highest in the world — and so the appropriate cut on 4th April would have been 50bp. Real GDP has decelerated to 6.6% and is set to decelerate further in the Jan-Mar19 quarter, and the decline in imports over the past 3 months provides additional evidence for the slowdown. 

However, India’s external sector is likely to lead the recovery over the next few quarters. FDI inflows averaged US$33.63bn annually in the first 4 years of NDA2 (the Modi administration), up from US$18.19bn in the previous 4 years. In April-December 2018, FDI inflows have risen to US$44.7bn. Meanwhile, the current account deficit was 2.4% of GDP in 2018 (calendar year), the largest during the Modi years, but is likely to shrink to 1% of GDP in January-March 2019. (During UPA2, the current account deficit was consistently above 2.6% of GDP, peaking at above 5% of GDP in 2012). The improved basic balance will lay the basis for a modestly stronger rupee that allows the RBI to pursue more aggressive monetary easing over the next few meetings. 

India’s exports grew 12.7% in 2017, 10% in 2018 and are up 3.1% YoY in Jan-Feb 2019. The latter seems unremarkable, except for the fact that Indonesia, South Korea, Taiwan and Singapore are all seeing their exports decline at a double-digit YoY pace over the past 4 months (and China’s exports are down 5.3% YoY in the latest 3 months) amid a renewed slump in global trade. In fact, India’s goods exports have grown faster than China’s for the past 3 years. In the last 3 months, India’s electronics exports (albeit only 3.3% of total goods exports) were up more than 50% YoY (amid a cyclical decline in global electronics demand!). Something big is beginning to stir in India, and it is not just the momentum in the election rallies!