Trade war, Fed rate hikes and deflation to impact Asean’s outlook in 2019: Maybank Kim Eng

DECEMBER 04, 2018 - 12:39 PM

Three key themes that will drive Asean’s markets and outlook in the coming year include the US-China trade war, Fed rate hikes and tightening monetary conditions, as well as deflationary pressures, according to a report by Maybank Kim Eng.

Even as the US and China agreed on a truce in trade tariffs during the recent G20 Summit in Argentina, economists Chua Hak Bin and Lee Ju Ye said that there is a chance it could broaden to non-tariff barriers such as export controls. A ceasefire in the trade war is “bullish” for China, Singapore and Thailand, said the duo.

Meanwhile, the economists also projected that there could be a pause in Fed rate hikes by late 2019, which is their base case scenario. This would benefit Indonesia, India, and the Philippines, they said.

Theme 1: Trade War

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While there are positive developments in the US-China trade war, a definitive conclusion has yet to be seen. The trade war has been disrupting the Asian supply chain – electronics, in particular – which is concentrated on China with links to Northeast Asia, Singapore and Malaysia.

According to Mr Chua and Ms Lee, Asean will benefit from the reconfiguration of the supply chain away from China. Winners from trade and investment diversion include Vietnam, Thailand, Malaysia and Cambodia.

Theme 2: Fed rate hike pauses in late 2019

As the Fed continues to hike interest rates, Asean will face tighter global financial conditions, said the report.

“Our view is that the Fed is on track to normalise and hike three more times in 2019, even in the face of slowing US growth, but pause by late 2019 and in 2020,” said the report.

With a potential US recession in 2020, the Indonesian rupiah and Philippine peso will be pressured from higher US rates, given their dependence on external financing amidst a widening current account deficit. The Thai baht and Sing dollar will likely be more resilient, said the report.

Theme 3: Deflationary pressures

The continuation of the US-China trade war is deflationary for other countries. As such, lower global inflation and oil prices will ease pressure on countries with high inflation such as the Philippines, high oil imports (the Philippines, Thailand, India) and fuel subsidies (Indonesia, Thailand), said the economists.