BI and BSP May Possibly Ease Policy Rates Further

The International Monetary Fund (IMF) recently guided that due to the Covid- 19 outbreak on economic growth prospects, it is expecting negative impact on both global supply and demand where one-third of economic loss will be direct (i.e. workplace closures and quarantines), while the remaining twothirds will be indirect through lower consumer and business confidence and a tightening in financial markets. As a result, IMF projects global growth in 2020 to be lower than the 2.9% growth in 2019 which suggests a downward revision in IMF’s 2020 global growth forecast of 3.3% in the next World Economic Outlook in April. We believe this will also translate into lower GDP growth in the Asean region.

Asean Manufacturing PMI in February rose above 50 for the first time since May 2019 to 50.2 from 49.8 in January. However, we believe this improvement will unlikely be sustained. According to IHS Markit, the higher PMI reading was due to new orders rising at its fastest pace in nine months. However, it was also guided that production had declined for the first time in three months while employment fell again. Among the Asean countries, Indonesia and the Philippines were the only two countries to register a reading above 50. Meanwhile, Myanmar (49.8), Thailand (49.5), Vietnam (49.0), Malaysia (48.5) and Singapore (45.8) registered PMI readings below 50. IHS Markit noted that pressure on the supply chain has increased due to the Covid-19 outbreak. Going forward, it is likely for the region’s manufacturing sector to be continually weighed down by supply chain disruptions and slower global economic activity especially from China.

In the Philippines, inflation moderated in February to 2.6% yoy from 2.9% in January, following three consecutive months of acceleration. Similarly, coreinflation eased to 3.2% yoy from 3.3% in January. As inflation remains within Bangko Sentral ng Pilipinas’ (BSP) inflation target range of 2-4% in 2020, we believe that BSP has room to lower its policy rate further following its recent 25bps cut to 3.75%. Therefore, if the domestic economy slows down sharply as a result of the outbreak, we believe there is a possibility for BSP to cut its policy rate further.

Separately, in Indonesia, inflation rose for the second consecutive month to 3% yoy in February from 2.7% in January, but remains within the central bank’s inflation target range of 2-4%. Higher inflation was driven by the rise in cost of food, beverage and tobacco and health. Bank Indonesia (BI) has already lowered its policy rate by 25bps this year to 4.75%. We anticipate BI to continue its easing cycle in line with the recent 50bps US Fed rate cut especially if the negative impact of the outbreak is prolonged beyond 1Q20.

Source: Affin Hwang Research - 6 Mar 2020