Digest Dec 2015 No11 : May see more room for monetary easing than fiscal stimulus if the country needs to respond to weaker growth
Japanese SMEs pessimistic heading into 2016
- While Bank of Japan (BOJ) policymakers are more optimistic on economy despite risks from slowdown in China and other emerging markets, increased rates from US Federal Reserve, Japanese small business sector aren't sharing the same enthusiasm.
- Since Japan's interest rates were already at record low, Bank of Japan's (BOJ) monetary policy stance has done little to help them out. Some of them, focusing on domestic economy faces increased pressure from weaker Yen, increasing their import cost of commodities, mainly oil. Moreover, overall price has risen in Japan, due to rise in sales tax hurting producers focused to domestic economy.
- In December survey of 1000 small business showed confidence is weakest in more than six months. The survey is conducted by Shoko Chukin bank of Japan.
- Headline number dropped to 48.3 in December from 49.9 in November and forecast suggests it is likely to dip further into new year. January reading is already predicted to be 48.
Yen however, trading strong today as Dollar is weaker relatively across the board. Currently at 120.9 per Dollar.
Risk of capital outflow persists in China on Fed rate hike
- Greater tolerance for CNY weakness against the USD is likely to support the ebbed capital outflows moving ahead. The outflows might have risen in November.
- These are evidenced by a notable decline in PBoC FX Reserves of $87bn in November despite some valuation effect, a $35bn drop in net FX purchase option and a widened deficit in net FX sales to $55bn.
- Adding to it, the recent hike by US Fedcould lead onshore corporate to accelerate their repayment of external borrowings. There is also scope for increased overseas investment by residents led by households necessity of risk diversification, and reduce home bias and seek higher returns.
- "This could be facilitated by further financial liberalisation - ie, allow more outward portfolio investment through the planned QDII2 scheme, in our view", says Barclays in a research note.
CNY depreciation pressure to continue
- The Chinese currency has weakened further after the Fed hike on 16 December, and USD/CNY is now at its highest level since 2011 at 6.4837. A clear sign that the pressure on CNY is intact is that the CNH-CNY spread remains high, indicating that foreign selling is taking place in the CNH market.
- In line with the expectations the pressure intensified after China was included in the SDR on 30 November. In addition, on 11 December the People's Bank of China announced on its website that the China Foreign Exchange Trade System (also known as CFETS) has introduced a CFETS exchange-rate index for the purpose of guiding market participants to shift their focus from the bilateral RMB/USD exchange rate to the effective exchange rate, which is based on a basket of currencies. The announcement supports the view that the Chinese authorities will allow for a gradual depreciation of the CNY (and CNH) versus the USD. The trade-weighted CNY is very strong from a historical perspective and has substantial room to depreciate versus the USD.
- "We look for a further moderate rise of USD/CNY to 6.65 in 12M, with the risks being skewed towards a greater weakening of the CNY versus USD as the Fed may have to tighten policy more than we expect. Given our bullish forecast for EUR/USD (we target 1.16 in 12M) we look for a substantial increase in EUR/CNH towards 7.71 in 12M", says Danske Bank.
India continues to be the main positive story within the emerging market universe
- India's GDP growth has averaged 7.3% in 2015 (higher than Chinese growth around 7%) and industrial production rose 10% y/y in October. India continues to be well positioned for robust growth in 2016 and 2017. (1) It is benefiting substantially from the lower oil price, (2) improving external and domestic balances have left room to ease both fiscal and monetary policy and (3) it has a strong reform-oriented government progressing with building a stronger role for markets, cutting red tape and opening up the economy. If this continues, there is potential for high growth rates for many years.
- The general election in 2014 gave the main opposition party BJP an outright majority in the Lower House. Hence, compared with the past two decades, India has a relatively strong government with substantial political room to accelerate economic reforms. India also has a highly credible central bank governor in Raghuram Rajan, former Chief Economist at the IMF.
- India's current account deficit has declined markedly to about 2% of GDP and should decline further due to the sharp decline in the crude oil price. India is no longer regard as among the 'fragile' emerging markets as imbalances have been reduced markedly over the past two years.
New Zealand finishes the fiscal journey
- The New Zealand Treasury staff is expected to revise down their economic assumptions materially in this week's Half Year Update, given that the forecasts in May were so upbeat, and with growth having clearly slipped a gear through this year. Those downgrades were realized, with GDP growth now forecast to average in the low 2%s over the next couple of years, rather than near 3%. The changes to the unemployment forecasts, which previously followed a straight path lower, were even more material.
- But did not expect the economic downgrades to cascade through to much change in the fiscal tracking, and for the most part they didn't. Even as the economy has drifted to a softer growth pace, revenue performance repeatedly has come in above forecast, and in October, the final Budget outcome for 2014/15 printed a slight surplus, the first since 2008.
- The healthier tone of the fiscal accounts, relative to other metrics, reflects the fact that New Zealand's growth performance has not been weak in absolute terms, but only in the sense that it has underperformed relative to supply growth (particularly immigration), and so has struggled to close the output gap, lower unemployment, and raise inflation, factors of most relevance for monetary policy. Consumption and employment growth, to which the tax base is levered, by contrast, have held up well.
Korea: New Finance Minister nominated
- ZATco Analysts explained that South Korea President Park yesterday nominated Mr. Yoo, Il Ho for the new finance minister to replace Mr Choi Kyoungwhan.
- Key Quotes:
- "Mr Yoo is currently a member of the National Assembly from the ruling Saenuri party. He worked briefly as Minister of Land, Transportation and Maritime Affairs in 2015. Before that, he worked with the Korea Development Institute and Korea Institute of Public Financing, specialising in fiscal and tax policies. We will have much more information about his views and policy biases during the upcoming hearing in front of the National Assembly in January 2016. He said yesterday that he will follow the 2016 economic policy plan which was already announced last week.
- At this juncture, we do not expect any major shift in economic policy. However, we assume that he may see more room for monetary easing than fiscal stimulus if the country needs to respond to weaker growth. This is because he is quite aware of Korea's long-term fiscal challenges from ageing population, increasing demand for social welfare budget and the contingent fiscal burden from a potential reunification with North Korea.
- We expect Korea's real and nominal GDP growth in 2016 to be 2.5% and 3.5%, respectively, which are far short of the government forecasts of 3.1% and 4.5%. In this base case, we maintain our out-of-consensus call that the Bank of Korea (BOK) will cut policy rates by 25bp to 1.25% in February and further to 1.00% in June 2016, in an effort to achieve the government's 5% nominal GDP growth target and the BOK's 2% CPI inflation target."
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