Weaker currencies may add to inflation pressure in 2017

Philippines’ Nov inflation rose to its highest level since February 2015

Philippines’ inflation unexpectedly accelerated to 2.5% yoy in November 2016 (2.3% in October), the highest level since February 2015 and higher than market expectations of an improvement to 2.2%. Similarly, core inflation also picked up slightly to 2.4% yoy in November (2.3% in October). The higher than expected inflation was due to rising costs of housing, water, electricity, gas & other fuels (1.3% yoy vs 0.9% in October) as well as transport costs (0.5% vs 0.2% in October). Nevertheless, the country’s average inflation of 1.7% yoy in 11M16 was still below the range of between 2-4% of the official full-year 2016 forecast.

Looking ahead, with some recovery in global commodity prices, as reflected also in global oil prices, the Asean region’s inflationary pressure may likely continue to build up, where weaker currencies in the region will likely add to imported inflation. Regional currencies have been on a downtrend recently, following Trump’s unexpected victory in US Presidential Election, leading to stronger dollar on expectation of more aggressive rate hikes by US Federal Reserves, if fiscal spending stimulus boosting economic growth in the US. The possibility of protectionist trade policy, especially tariffs on China’s goods, has also raised concerns on the negative repercussion on economic performance of Asean countries, where China is the main export destination for intermediate and capital goods. The regional currencies’ depreciation since 8th November (US Presidential Election), ranges between 2% and 7%, and may result in higher production costs for the manufacturers, which will eventually be passed on to consumers. This was also highlighted in the latest Asean manufacturing PMI, where the firms surveyed highlighted rising input costs.

Separately, Indonesia’s reserves fell by US$3.5bn to US$111.5bn as at end-November (US$115bn in October), the lowest since July 2016. However, according to officials, the decline is expected to be temporary because investors are optimistic about domestic economic recovery, improved exports performance and global financial market recovery. Similarly, Philippines’ foreign reserves also declined to US$82.73bn by end-November 2016 (US$85.1bn in October), where the decline was attributed to the national government’s payments of its maturing foreign debt and impact of the central banks foreign exchange operations. International reserves of Asean countries will likely be under some pressure, with continued uncertainties in the foreign exchange market, especially in 1H2017, where volatility in short-term capital flows still persist.

Source: Affin Hwang Research - 9 Dec 2016