Good morning 🦁- it is Monday 🤗 Can’t wait for another week of Asian economics!!! Don’t worry, we’ll continue this NIRP thread during lunch hour (kind of fun to have a virtual reading club right?) This is where nerds rejoice 🤓🤓🤓😎💪🏻💪🏻💪🏻!!!
Let's look at the agenda for this week:
South Korea 🇰🇷 1st 20-day of trade 🥳🤗 - fav data obvs because it is the 1st for the region & so far the 1st 10-day is really bad & China lending data horrible for July
Fed minutes
Indonesia rate - cut expected by me
Flash PMIs 👈🏻
Watch reforms to the Loan Prime Rate (LPR) that replaces the benchmark 1y lending rate of 4.35% for new ref rate for pricing of new corp loans from 20 Aug:
Frequency of adjustment MONTHLY on 20th each month
Linked to 1yMLF (3.3%)
# of participating banks rise to 18 from 10
(Deleted old tweet b/c I said daily but should be monthly).
Note that the central bank said that the reform of the LPR can, "Achieve the effect of lowering the real interest rate for loans."
In other words, watch this stealth move by the PBOC to lower lending rates for the eco
How rates work in China:
a) Benchmark lending rate for 1yr was 4.35% & that will be REPLACED TOMORROW
b) Average lending rates is 5.9% (above 4.35% & defo above ever-lower SHIBOR, which doesn't tell u much about funding conditions of eco but rather large banks)
c) MLF rate 3.3%
MLF stands for medium lending facility & this move on LPR key:
*18 reporting banks'll add a spread to the MLF (3.3%) based on own calculation of funding costs, demand, risks
*Submit before 9am on 20th/month
*LPR'll have longer tenure & ref for new loans
*Goal is to lower rates
This is on the back of very bad lending data in July & the only thing that went up was local gov issuance so the PBOC is clearly worried about TIGHT LIQUIDITY & the stickiness of lending costs despite lower SHIBOR.
Oldies but definitely goodies on what happens next in China regarding PPI & - yes, the interview was on 15 Feb 2019 - on why rates will have to fall in China. This interview was the day after we published our 💌
And obvs this one a month ago - all relevant today. Btw, what happens when rates fall? Watch China tomorrow for the new LPR thing & also the OMO. People are watching this very intensely.
Who likes higher fuel prices in Asia??? Well, no one except Indonesia and Malaysia and by that I mean exporters.
The biggest deficit as a share of GDP goes to Thailand but mostly in LNG. Second is South Korea.
Obvs this is as a share of GDP. Higher fuel costs = higher import costs = someone has to pay for it & eg higher inflation or higher fiscal costs.
Who likes higher food prices? Well, a few - Thailand, Malaysia, Indonesia, Vietnam and India. Obvs this is EXPORTERS only who gain. EM has high food as a share of consumption basket. But net food exporters have levers to pull. They can BAN exporting of food.
Who is most vulnerable? The Philippines. South Korea imports a lot too.
Putting food and fuel together as a share of GDP: Who is most exposed?
Well, South Korea and the Philippines. KRW doesn't like this news.
PHP doesn't like it. One caveat is that SK is much richer so can afford it more than say PH where this will hurt more.
Did you know that South Korea exports more to the US now than it does to China?
Actually, it isn't alone. A lot of Asian countries, due to supply chain reshuffling and also geopolitics and industrial policies, are exporting now more to US than China.
Why is South Korea doing more trade with a country far away than a country next door?
First, growth of exports to the US is faster than exports to China. In fact, China hasn't been importing much more and it is Korea that has been importing more from China for goods such as intermediate goods etc.
This has raised a big concern in Korea that China is a competitor & it's hard for SK to compete with its industrial policy and subsidies.
And so South Korea has 1 lever it can pull that is better than China - GEOPOLITICS. South Korea is an ally to the US. And as a country w/ a US FTA, it is being favored.
Whether it's the Chips Act or the Inflation Reduction Act (IRA), the whole point is to exclude China.
Indonesia elects a new president in a week. The leading candidate is riding high on Jokonomics, or the continuation of his policy & popularity, as Jokowi's eldest son is VP.
Prabowo promises 8% average GDP growth or Jokonomics. How realistic & what is Jokonomics anyway?
While people believe that Prabowo is the best bet of doing more of what popular Jokowi has done for Indonesia in the past decade & he promises the highest growth, Jokowi 10-year only produced 4.2% GDP growth on average. Stripping out 2020 (Covid), it's 4.9%. No where near 8% 👈
Indonesia elects a new president next week to replace Jokowi. The leading candidate - Prabowo - is riding the president's coat tail as many hope that he is the best hope for continuation. But what is Jokonomics exactly? From 2014 to 2023, Indonesia grew on average 4.2% per yr👈.
If we strip out 2020, which economy contracted, then under Jokowi, the economy grew 4.9% on average (4.2% if we don't strip it out).
So that's sub 5%. In fact, GDP barely deviates from 5% level. So why do people think that Prabowo is the key to escape the middle income trap?
Pres Jokowi's biggest accomplishments come from the fiscal side. Indonesia got investment grade in 2017. By weaning Indonesia slowly off expensive energy subsides, the expenditure side was contained. And with the commodity boom, Indonesia fiscal positions were leaner than most.
As we bid adieu to 2023, which was an abysmal economic year for EM Asia (India an exception), hope springs eternal as we look to 2024 with key drags dissipating.
The great expectations of China lifting the region via imports and tourism disappointed as demand faded, weighed down by property market woes & weak investment.
From Korea to Vietnam, exports to China crashed, dragging down overall shipment, hurting big traders the most.
The goods deflation felt globally, especially in ICT, hit big traders hard. Commodity exporters such as Indonesia too didn't like the downward price trend.
Despite stronger US growth, China downward import growth dragged Asian exports.