Inflation in Indonesia and Thailand to Remain Weak Going Forward

Asean Manufacturing PMI recovered from a record low of 30.7 in April to 35.5 in May, but remained in a contraction phase for the third consecutive month. However, the recovery in the Asean countries was not across the board, where manufacturing PMI in Indonesia (28.6) and Singapore (27.1) continued to register a reading below 30. Singapore is also the only country with PMI trended to its lowest level in its survey record. Meanwhile, manufacturing PMI in Myanmar (38.9), Thailand (41.6), Vietnam (42.7), Malaysia (45.6) and Philippines (40.1) showed improvement during the month. This was consistent with China’s Caixin General Manufacturing PMI, which returned to an expansion of 50.7 in May (49.4 in April), its highest reading since January 2020. However, Markit cautioned that sluggish exports remained a big drag on China’s demand as the virus continued spreading overseas.

IHS Markit also noted that although Asean manufacturing PMI may appear to be bottoming out in April, it cautioned that there is a long way from recovery due to the enormous impact of the pandemic to the sector, despite the loosening of the lockdown restrictions. Meanwhile, the region firms’ expectations on output still remain near the record low. Going forward, it is likely for the region’s manufacturing sector to be weighed down by supply chain disruptions and slower global economic activity, especially from China and US.

Separately, in Indonesia, headline inflation eased for the second consecutive month to 2.2% yoy in May (2.7% in April), the lowest in 20 years. Core inflation also contracted for the two consecutive month by 2.6% yoy in May from 2.8% in April. Lower inflation was driven by the decline in cost of food, beverage and tobacco and clothing and footwear. Going forward, inflation will likely remain weighed down by slower domestic demand and softer labour market conditions. The inflation rate is well within its central bank’s target of 2% - 4% this year. Bank Indonesia (BI), which has already lowered its policy rate by 50bps this year to 4.5%, will likely ease monetary policy further. We anticipate BI to continue cut its policy rate if the negative impact of the outbreak is prolonged beyond 1H20. In Thailand, the headline inflation rate declined for the third consecutive month by 3.4% yoy in May from -3% in April, it sharpest decline since July 2009. The country’s unemployment rate increased to 1% in 1Q20 (0.9% in 1Q19) due to the decline in agricultural employment. Thailand’s authority already guided that unemployment rate in the country may increase from 1% to around 3% to 4% this year, close to a level seen during the 1997/98 Asian financial crisis. With weak domestic demand and low global oil prices, the country’s inflation will remain low in the coming months. We expect BOT to maintain its policy rate at 0.5% in 2020.

Source: Affin Hwang Research - 5 Jun 2020