Citigroup Asia Macro View

Takeaways from our Macro Trip (ID, TH, PH, CH)

Meetings reinforced very upbeat growth outlook in the region – no-one mentioned double-dip risk in Asia. China was the most bullish, but outlook still centered on sustained investment growth (shifting more to property from public investment) and export rebound –very little talk on boosting consumption shares in the near term. In all countries, resilient consumption and export rebound remains important, though Indonesia’s near-term growth outlook also has investment recovery, and Thailand’s 2010F outlook banks on fiscal stimulus.

Inflation concern is highest in Indonesia, and was uniformly downplayed in China. Indonesia’s output gap is considered the narrowest given supply bottlenecks, and administrative price adjustments are risks. BOT expects headline inflation will rise substantially to 4%-5% in 1Q 2010 due to base effect, but that core inflation, which the BOT targets, will stay within the middle of its target band in 8 quarters’ time. BSP downplayed the risk of food price shocks from the typhoon while China’s inflation risk was downplayed by everyone we met on the grounds of overcapacity – forecasting 2.5%-3.0% inflation in 2010F.

None of these four central banks are likely to be hike rates anytime soon (not this year) and unwinding liquidity measures will be pursued first before rate hikes – PBOC is the most dovish. BI’s real rate target of 100-200bps is seen as rather low versus BSP’s own neutral real rate of 250bps, but BI raised concerns that raising rates would exacerbate capital inflows. PBOC reiterated monetary policy will remain “moderately loose”, expects new loans in 2010F will reach RMB 8 trillion (which we estimate implies 20% credit growth), ruled out credit quotas and said interest rate hikes would be the “last option”. BOT said 1.25% overnight rate is “super” accommodative.

On Asia FX outlook – still bullish on IDR and, eventually, even on PHP. Broad consensus is that China won’t move on CNY anytime soon; BI and BSP highlighted that accumulating FX reserves is useful, but we sense BI, and eventually BSP, will be less resistant to FX appreciation —BOP outlook for both countries remains favorable and BI will want stronger IDR to ease inflation pressures, while BSP has proven in 2007 its tolerance to sharp PHP strength. THB is likely just to follow/lag rather than lead the region.

Bond supply – Indonesia’s gross bond supply higher than expected, no international bond issuance in Thailand, Philippines likely to pre-fund international bonds but keep foreign-domestic mix borrowing at around 30%-70%. Indonesia 2010F gross bond plan is higher than we thought at Rp177 trillion, but MOF expects c Rp20-30 trn surplus funds from this year, and will issue more Tbills (Rp2trn from Rp1 trn per auction) to facilitate phasing out of SBIs as well as to focus on duration extension on local bonds. Philippines privatization progress will be key to capping fiscal slippage, though the government sees the worst case 2009F fiscal deficit at PHP220-290bn (2.8%- 3.8% of GDP).