Five highly plausible ‘macro surprises’ could be in store for Asia’s corporates during 2015, according to Citi.
The group outlines the five potential developments at length in its just-published ‘Asia Macro and Strategy Outlook’ for the year ahead. In brief they are as follows:
- Thanks to lower oil prices growth in several Asian countries could produce a positive surprise during 2015: India, the Philippines and Vietnam top Citi’s list. The group notes that India and the Philippines are not weighed down by leverage, and benefit from an accommodative/easing policy. Even Vietnam’s debt overhang is now six to eight years old and its impact is abating. Despite the cheaper oil windfall, Citi believes there are too many negative offsets – including leverage and politics – that make it less plausible for either China or Thai growth to surprise positively.
- Despite low inflation, some Asian central banks (CBs) could surprise in their resistance to ease monetary policy at the onset: The Citi report notes that either CBs perceive the disinflation to be more supply driven, and thus a ‘transitory’ shock and/or that financial stability considerations are a serious constraint, with China, Korea, Singapore and Thailand the group’s main candidates. Resistance to easing extends subpar growth/low inflation dynamics (flatter curves) that could raise expectations of having to ease later.
- Reserve Bank of India (RBI) surprises the markets with the speed/magnitude of rate cuts: Could Bank Indonesia (BI) surprise too, asks the report? Sharper than expected commodity-led disinflation, receding inflation expectations, disappearing external imbalances, lack of financial stability concerns and a credible fiscal consolidation plan are factors that set the stage for RBI to surprise in its delivery of rate cuts. Citi adds that it’s harder for Indonesia to do the same as external imbalances and a much more aggressive inflation target will constrain BI policy (prudence should support Indonesia credit, anchor the Indonesian rupiah (IDR) and drive down IDR bond yields, but then growth is less likely to surprise positively).
- A sharper than expected tightening of global funding conditions from a sustained US dollar (USD) strength: Aside from the vulnerabilities in large current account deficit (CAD) countries – Mongolia, Sri Lanka, and to a lesser extent, Indonesia), the report’s authors think even surplus countries like China, Malaysia could be vulnerable given the sizeable external borrowing that coincided with the rise in leverage that could reverse. For Singapore tight funding is an issue even ahead of a US rate rise.
- China widens the renminbi (RMB) trading band, leading to more depreciation: While the report’s authors stress that this is not their base case, it is a plausible risk underappreciated by the market. A more flexible exchange rate is part of China’s financial market reform agenda. There could be an argument to be made that it is better to do it sooner rather than later, and such a move would likely lead to larger-than-expected RMB depreciation.