New Year, Old Patterns: Emerging Market Country Profiles:  South Korea

The Korean economy has continued to grow. Q3 GDP rose 3.8% y/y, the highest growth since Q1 2014. Private consumption has improved moderately and investment continues to keep expansion strong. Net exports have been steady thanks largely to the global economic recovery, especially improved conditions in the Chinese economy. The economy is expected to continue its solid growth. President Moon suggests the government will continue its expansionary fiscal policy. The Bank of Korea (BOK) forecasts the economy to grow well over 3% this year on the back of strong exports.

The current account surplus peaked but has been steady in spite of a strong won and oil price rises. The current account surplus of GDP is expected to drop to 5.6% in 2017, down from 7.0% in 2016 but still much higher than Japan and China.

Inflation pressures have been modest in Korea. Its November headline CPI slowed to 1.3% y/y from 1.8% y/y in October, below the 2% target. Its core CPI rose 1.2% y/y, the lowest rate since December 2016.

BOK hiked rates by 25bp to 1.50% in November, which was the first hike since June 2011. The modest inflation pressure is likely to make BOK cautious with respect to additional rate hikes. BOK emphasized that inflationary pressures on the demand side will not be elevated for the time being.

The won has been solid in 2017 under strong Korean fundamentals. USD/KRW had dropped to 1076, which is the lowest amount since May 2015. S&P said that it would consider raising South Korea’s sovereign credit rating if North Korea is sincere about stopping its provocative acts. Developments between the US and North Korea might be a risk to the won.

New Year, Old Patterns: Emerging Market Country Profiles:  Philippines

The Philippine economy has been steady. Its Q3 GDP growth accelerated to 6.9% y/y, after growth of 6.7% y/y in Q2 and 6.4% y/y in Q1. Public consumption was the main driver, rising 8.3% y/y. Meanwhile, gross fixed capital formation slowed to 6.6% y/y and private consumption to 4.5% y/y due to slowed overseas remittances. President Duterte announced major infrastructure projects as the government targets $180 billion in investment over five years, which would boost growth.

Philippine external accounts have worsened. The country’s balance of payment deficit in the past 12 months has expanded since March, reaching $3.62 billion in October, the highest reading since the statistics started. Imports continue to expand on strong domestic demands, while exports have been firm thanks to steady global growth.

Inflation pressures have stabilized in the Philippines. CPI growth has been over 3% y/y since September, within the 2-4% target range. The Philippine central bank – Bangko Sentral ng Pilipinas (BSP) – sees inflation rising 3.2% in 2017 and 3.4% in 2018, while it considers the balance of risks to the inflation outlook to be on the upside.

Philippine politics remain a major risk. Duterte’s war on drugs continues, and he maintains an unpredictable style of governance. The Philippines ranked 113th in the World Bank’s 2017 Ease of Doing Business report. Philippine district elections in May 2018 should be noted as a reflection of Duterte’s popularity.

The peso has recovered since November but remains fragile due to worsened external accounts, strong inflation pressures, and political risks. For peso’s recovery, Philippine officials need to control fiscal loosening and inflation pressures.

New Year, Old Patterns: Emerging Market Country Profiles:  Indonesia

The Indonesian economy grew modestly as GDP rose 5.06% y/y. Fixed investment supported the growth while private consumption has been tepid. Its economy is likely to continue improving. Private consumption will start to recover with strong consumer sentiment and low inflation. Indonesian motorbike sales have begun to increase y/y, and the consumer sentiment index remains at the highest level since the statistics started in 2002. Combined with steady global growth, exports will continue to support the economy with rising commodity prices such as crude palm oil and coal. Fixed investment is likely to keep expanding under continued government infrastructure projects. The Bank of Indonesia (BI) expects the economy to grow in the range of 5.1-5.5% in 2018.

Indonesian external accounts have improved. The country’s financial account surplus was $10.4 billion in Q3, the largest in 3 years. The current account deficit was $4.3 billion, which is fully offset by the surplus. The deficit will stand at 1.6% of GDP in 2017, which is the lowest it has been since 2012.

Inflation pressures have eased within the 3-5% target range since November 2015. Higher oil prices may lift inflation close to 5% but modest growth and stabilized rupiah should limit inflation expectations. Inflation is expected to remain low at 3.0-3.5% in 2018.

BI has been vigilant on inflation. BI cut rates by 25bp in August and September but has kept rates at 4.25% since October. BI is likely to keep policy rates unchanged as sees the current policy rate as adequate to control inflation within the target corridor and maintain a healthy current account deficit.

The Indonesian government has continued its prudent fiscal policy. The tax amnesty plan in 2016 ended in disappointment, and so the government needs to try boosting tax revenues. Weak tax revenues will constrain public investments, given the legal cap of 3% of GDP on the budget deficit. The budget deficit is estimated at 2.7% of GDP in 2017, up from 2.4% in 2016.

The rupiah dropped after BI cut rates in September, but it has been stable since November. Stable inflation and positive real yields would continue to support the rupiah.  

New Year, Old Patterns: Emerging Market Country Profiles: Brazil

Brazil’s economy continues to recover. Q3 GDP grew at 1.4% y/y, the most since Q1 2014. The economy should continue to recover in 2018. Brazilian consumer credit has bottomed out due to lower rates. Low inflation and improved labor conditions should support private consumption. Business confidence has improved and industrial capacity utilities have gradually risen under a stabilized Chinese economy. Fixed capital formation could start to increase in Q1 2018.

The external account remains in good shape. Brazil’s current deficit stayed at 0.6% of GDP in Q3, which is the lowest it has been since Q1 2008. It is expected to marginally worsen to 1.4% in 2018, but this would be offset by the inflow of foreign direct investments (FDI). FDI to Brazil has been steady with the 12-month total near $7.0 billion.

Brazil’s inflation pressures have been low. October IPCA slowed to 2.7% y/y, well below the 4.5% target and in the bottom half of the 2.5-6.5% target range. The Brazilian central bank – Banco Central do Brasil (BCB) – cut rates by 50bp in December as expected. BCB has cut rates for the 10th straight meeting, with a total reduction of 725bp since October 2016. BCB suggested it may cut rates by 25bp in February 2018, but the easing cycle is about to end. The Brazilian economy will likely continue to recover, and inflation could start to accelerate.

The political situation remains unclear. Brazilian President Temer has tried to pass a pension reform bill but it would take more than four months to be approved. 250 to 260 lawmakers are currently in favor of pension reform, while 120 to 150 remain undecided. The Senate will not take the reform bill up until February 2018 even if the reform bill passes the Lower House.

High yields and a solid external account should support the real, but political risks could largely depress it.

New Year, Old Patterns: Emerging Market Country Profiles:  Mexico

The Mexican economy has stalled due to monetary and fiscal tightening. Its Q3 GDP slowed to 1.5% y/y, the lowest rate since Q4 2013. Monthly data in Q4 suggests that the economy continues to slow. October Mexico ANTAD retail sales rose 2.1% y/y, which is the slowest growth since December 2014. The average IMEF index level in October and November was lower than the Q2 average level in both manufacturing and non-manufacturing.

Inflation pressures remain high. November CPI accelerated to 6.7% y/y from 6.4% y/y in October. The Mexico central bank, Banxico, says it will remain vigilant to ensure a prudent monetary stance. It will need to keep monetary policy tight and maintain the relative monetary stance between it and the Fed. Another rate hike cannot be ruled out if the peso comes under pressure.

The Mexican government has kept the fiscal policy prudent. The fiscal deficit continues to shrink. It will be 1.4% of GDP in 2017, down from 2.5% in 2016. The rise in oil prices might be a trigger to ease tightened fiscal policy ahead of the presidential elections in July 2018.

The political situation remains unclear. According to polls, Andres Manuel Lopez Obrador (AMLO), who leads the left-wing party, Morena, is the front-runner with around 30% support. Former Finance Minister Meade, who is expected to get the PRI presidential nomination, follows AMLO with around 20% support. The PAN-PRD alliance continues to squabble over the method for selecting their presidential nominee, but PAN leader Anaya will be its candidate. Former First Lady Margarita Zavala left the PAN and is running as an independent. The Mexican presidential elections tend to be fluid as President Peña Nieto’s 23% lead over AMLO slid to just 6.5% on election day. If AMLO is expected to win, markets would react negatively. The fifth round of NAFTA renegotiations ended without significant progress on contentious issues. The sixth negotiating round will be held in January in Canada, and could delay a final deal due to lack of agreement.

New Year, Old Patterns: Emerging Market Country Profiles:  South Africa

S&P downgraded South African local currency debt to sub-investment grade in November, citing a further deterioration in the economic outlook and fiscal performance. South Africa’s credit rating by Fitch has been in sub-investment grade territory since April. It is likely only a matter of time before Moody’s follows suit. Moody's has kept South African debt on negative watch, implying that it may downgrade the debt to junk if the next annual budget does not meet its expectations.

The South African economy has been weak. Its Q3 GDP slowed to 0.8% y/y from 1.3% y/y in Q2. The South Africa Reserve Bank (SARB) cut the growth outlook to 1.2% in 2018 and 1.5% the following year. Weak growth would enhance the downside risk of government revenue, and make it more difficult to cut expenditures.

South African inflation has eased in 2017. Headline CPI remains close to the middle of the target range, and core CPI in October slowed to 4.5% y/y, which is the lowest level since July 2012. However, SARB will need to remain vigilant to stem inflation pressures. SARB foresees its core CPI will accelerate to 5.1% y/y in 2018 and 5.3% in 2019. In November, SARB voted unanimously to keep rates at 6.75%, contrary to a split over a possible rate cut in September. It said the inflation outlook faces upside risks including weak rand and high oil prices.

While the rand remains vulnerable to possible risk-off sentiments, including US monetary policy normalization by the Fed and concerns over rating downgrades, it has been supported by high yields.

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