In this briefing:
- Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI
- Philippine Monetary Policy: Relief from No Rate Hike
- Preview: BoE Stuck in the Brexit Quagmire
- FLASH: UK Back to Brussels with Bruises
- The Year of Dithering Dangerously
1. Campaign Sparring Re: Islam / KPK on PLN / Gov’t Wants Unicorn IPOs / Loan Growth Uptick / WB on FDI
The Prabowo-Uno campaign are focusing on Central Java while elements on both fringes of the religious spectrum debate poligamy and whether Widodo is ‘criminalizing’ clerics. The KPK is investigating the head of the State Power Company (PLN) after court convicted BlackGold owner Johannes Kotjo. Information Minister Rudiantara wants IPOs for four giant startups. BI cited positive macro indicators, including 13% October credit expansion, but the World Bank warned that FDI inflows are too low.
2. Philippine Monetary Policy: Relief from No Rate Hike
- In yesterday’s Monetary Board (MB) meeting (December 13), policymakers decided to maintain the policy rate at 4.75%. Receding price pressures on easing constraints on food supply, steady inflation expectations and BSP’s inflation forecasts showing a lower path over the policy horizon supported an unchanged policy setting.
- The MB stated that its pause also allows time for the recent policy rate adjustments to ‘work their way through the economy’. We interpret this as giving time for the recent tightening actions (cumulative 175bp rate hike), low oil price effects, and liberal rice imports with the passage of the rice tarrification bill to work their magic in anchoring inflation expectations to within the BSP’s preferred range.
- We sense the risk of large macro imbalances next year with a trade deficit of 15%-16% of GDP, could spook inflation expectations. This could happen with a large trade gap provoking PHP to drift to historic highs of 55-56 even with an easing inflation print. Inflation expectations may take its time reverting to the BSP’s inflation target band. While there’s risk of a BSP rate adjustment if macro imbalances worsen, it won’t be of the ‘sequential’ kind that we witnessed this year.
- While a weaker PHP outlook would prevail next year, risk of interest rates staying elevated would be driven more by potential liquidity tightness in line with widening investment-savings gap of both the public and private sectors (defines the larger trade/current shortfall). It’s a value proposition if ever the long end of the curve drifts up to 8% if not more. A compressed yield curve in which bond yields slip to less than 7% would constitute a clear sell signal in our view.
3. Preview: BoE Stuck in the Brexit Quagmire
- Excess UK demand and inflation continue to put hawkish pressures on the MPC, but Brexit uncertainty justifies postponing a more hawkish signal or action.
- I expect the MPC to vote for no change in policy unanimously and not prepare for a Feb-19 rate hike. A May move is a more likely but still state-dependent outcome.
4. FLASH: UK Back to Brussels with Bruises
- Theresa May won the confidence of her parliamentary party by 200 votes to 117 after pledging to hand over before the next election and suggesting an early exit.
- Large-scale opposition to her leadership diminishes authority, but an inability to re-challenge her for a year provides some space for pivoting even softer if needed.
- Attempts to improve the backstop can now resume. A stated intent to make it a deal the DUP can tolerate makes it much more challenging to fix swiftly.
- Unless the European Council sounds surprisingly open to change tomorrow, talks are likely to drag on and deprive the BoE of the clarity needed to hike in Feb-19.
5. The Year of Dithering Dangerously
President Joko Widodo, cabinet-level policymakers and the broader political elite are neglecting the imperative for economic reform at a particularly critical juncture. Prospects for improvement in a second Widodo term are questionable.
