Citigroup Asia Macro View - Takeaways from our Macro Trip (SL, IN, TH, PH, ID)

 Meetings reinforce very upbeat growth outlooks in all these countries — There was significant emphasis on domestic growth drivers (especially investment) and, surprisingly, officials paid little attention in our meetings to slowdown risks from advanced countries. The main domestic risk to growth centered on implementation/execution of investment plans.

 Very divergent CB tone: BI and BSP dovish; RBI and BoT more hawkish — Despite strong growth and inflation hovering close around the top end of its inflation target, BI is the most dovish central bank we met, signaling no intention to raise rates for all of 2010 and 2011F. BSP was also relatively dovish with inflation expected to remain at the low end (3-4%) of its target band in 2011F. RBI remains more focused on inflation and is likely to raise a few more times before pausing, while BoT seems determined to reduce (or abolish) its negative real rates and remains vigilant on inflation.

 Managing capital flows is a key concern but capital controls look unlikely — None of the officials we met hinted at the option of imposing capital control restrictions.

Among the five countries we visited, Thailand is probably slightly more at risk of putting some restrictions on portfolio fixed income flows but negative experience from 2006 will mean it will be very cautious and focus on encouraging capital outflows. Meanwhile, India, Sri Lanka and Indonesia still need foreign capital though, in Indonesia’s case, there may be a risk of a lengthening of the holding period restriction on SBIs further (e.g. to 3 month from 1 month). Following recent lifting of FII limits on government and corporate bonds, India seems unlikely to lift more restrictions anytime soon with lingering caution towards debt-related inflows.

 Fiscal consolidation remains on track for most; India a bit disappointing — We expect tax reforms in Sri Lanka will be forthcoming in the 2011 Budget due in November, and Philippines’ zero-based budgeting and tight monitoring of spending also bode well for fiscal consolidation in 2011F. While debt sustainability is not an issue given strong growth, India’s outlook on tax reforms is disappointing, with GST likely to be delayed well beyond the Apr 11 deadline.

 Indonesia’s budget financing overwhelmingly relies on foreigners to buy LC bonds — Given current yields, we see limited room to boost domestic investor base for bonds –bank funding costs are higher than bond yields, and insurance/pension funds have other non-govt bond options. Government looks increasing reliant on foreigners to absorb most of the Rp209+trn of gross bond issuance in 2011F.

 On Asia FX outlook –Still positive on INR, PHP; a bit more positive IDR short-term — We see a strong external inflows supporting Asia FX appreciation across the board. RBI appears to be the only central bank that hasn’t significantly intervened in the FX market – we still like INR, PHP (alongside KRW) as our top picks. We are more “near-term” constructive on IDR as we have underestimated BI’s tolerance to let IDR move if other regional currencies move as well, and have unchanged (constructive) views on THB.