OCBC TREASURY RESEARCH - OCBC 1H 2022 GLOBAL OUTLOOK 6 December 2021
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OCBC TREASURY RESEARCH
OCBC 1H 2022 GLOBAL OUTLOOK
6 December 2021
After Omicron, what’s next? Market
Upheaval Even as Growth Normalises?
2021 has been a roller-coaster ride, as vaccines preluded a positive start to the
Selena Ling
year, but the green shoots came under heavy rain showers in the form of the
Head of Research & Strategy
+65 6530 4887 Delta variant before persistent elevated inflationary prints prompted the
LingSSSelena@ocbc.com frontloading of hawkish central bank expectations. Of course, this was before
the latest Omicron variant landed on many shores, prompting market swings
as investors attempted to ascertain the health and economic implications. The
rain clouds may be gathering even though it is not clear if it will be a passing
shower or a persistent thunderstorm. While there is still uncertainty attached
to the Omicron variant at this juncture, more importantly some themes remain
familiar and are likely to sustain into the new year, and these include the long
tail of Covid mutations, complex US-China bilateral relations, and global supply
chain bottlenecks contributing to inflation.
US equity markets had a good run this year up until the new Covid variants
emerged. While the FOMC did a relatively good job of guiding market that a
taper was forthcoming, nevertheless, the tenacity of elevated inflation may
have caught them by surprise and prompted the shift in rhetoric from
“transitory” to “persistent” inflation. The different risk events contributing to
the global supply chain bottlenecks was partly to blame, but rising commodity
prices including crude oil, also put the heat on corporate profits and
increasingly also translating to the prices paid by end-consumers. For now,
consumers remain relatively willing to spend amid the labour market recovery
and as pandemic fatigue wears on. Hopes of Covid turning endemic with the
ramp up in vaccination rates also proved premature.
The combination of both improving demand and continued global supply chain
bottlenecks are posing a near perfect inflation storm. Once elevated inflation
persists into 1H22, it is no longer a matter of low base effects from 2020. In
fact, the continued tightening of Covid restriction measures and border
controls due to first Delta and now Omicron (and potentially more Greek
alphabets to come), suggests that there will be no immediate panacea to
inflation, short of another global recession. Other mitigating factors of course
could include OPEC+ ramping up oil supplies, international borders re-opening
quickly to allow freer flow of goods and workers again (which looks unlikely for
now with Omicron) etc.
Major central banks which were initially reluctant to withdraw monetary policy
accommodation prematurely for fear of undermining the nascent recovery
have subsequently turned more confident that inflation would stay structurally
higher due to supply side factors, including efforts to combat climate change,
and hence have embarked on tapering asset purchases and/or hiking interest
rates. The sea-change, however, can be noted in the FOMC with Fed chair6 December 2021 OCBC 1H 2022 GLOBAL OUTLOOK
Powell shifting his language to signal the clear and unmistakable hawkish pivot
by speaking of accelerating the taper to complete earlier rather than later in
1H22, possibly as early as March 2022. Understandably, market players are
now imputing a frontloaded rate hike trajectory if upside inflation risks mount,
and we concur that up to two 25bp rate hikes may materialise in 2H22.
A hawkish FOMC would undoubtedly create new headwinds for financial
markets that are priced close to perfection. Note that even the IMF has urged
the Fed to speed up monetary policy tightening amid mounting inflation fears.
Whether this would be purely a “sell the rumour, buy the fact” phenomenon
for the US equity market remains to be seen. However, the November US
nonfarm payrolls report disappointed at 210k, significantly below market
expectations and less than half the 546k reading in October to mark the
smallest growth in 2022. Nevertheless, the US unemployment rate fell sharply
to 4.2% even as the labour force participation rate rose to 61.8%. Payrolls still
stand some 3.9 million below pre-Covid levels, but it is increasingly getting
closer to fulfilling the FOMC’s maximum employment mandate, and hence
pressurizing the central bank to act to ensure the high inflation the US is
currently experience does not become entrenched, which is the other half of
its dual mandate to maintain price stability.
The narrative across different markets continues to reflect idiosyncratic factors.
First, the China growth slowdown story was complicated by the prioritization
of common prosperity objectives, as articulated in the regulatory clampdown
on private sectors including tech companies regarding data privacy as well as
private tuition, the energy shortage and property market downside risks
arising from high-yield debt restructuring for China Evergrande Group amongst
others. China’s pricing pressures also diverged, with factory gate inflation
record highs and squeezing profit margins but seeing little pass-through to
consumer prices for now. The policy reaction function was also fascinating,
with swift responses to curtail tail risks in the energy crunch and property
market, but without broad-based policy easing in recent months. As China was
the first-in-first-out of the pandemic in 2021, we anticipate a controlled
descent into 2022, which should defy the naysayers. Moreover, with a clear
long-term political mandate given to President Xi, it should garner confidence
that any market turmoil should not degenerate into widespread market
contagion. Still bout of market angst and handwringing is likely as market
players try to palpate the willingness of Chinese policymakers to stave off any
potential market flare-ups.
Meanwhile, US-China bilateral relations may stay complicated into 2022
despite the first Biden-Xi virtual meeting which yielded few significant
takeaways. Nevertheless, we are still awaiting a partial lifting of some of the
tariffs from the Trump era at a future stage, but admittedly the negotiations
may get tougher the closer to the US mid-term elections. Meanwhile, time of
reckoning has not yet drawn near, even though a harsh sell-off of Chinese
stocks listed in the US have topped US$1 trillion since February amid delisting
concerns, with the latest being Didi Global Inc which plans to delist its shares
from the New York Stock Exchange. The axiom of politics driving economics
may be the leitmotif here.
Treasury Research & Strategy 26 December 2021 OCBC 1H 2022 GLOBAL OUTLOOK
Within Asia, the Delta resurgence has taken a heavy toll on the GDP growth of
many regional economies like Malaysia and Indonesia in 3Q21, albeit there are
signs that as Covid cases wane, growth momentum should improve into the
year-end. On the domestic politics front, at least some stability has returned
with the Malaysian government and the PH opposition signing a historic
bipartisan deal in September 2021 but may run into thin air again if elections
materialise in 2022.
Moreover, the emergence of the Omicron variant is now an added headwind
to kick off 1Q22 after a year of surprises in 2021. Still, with vaccination rates
much higher than 3-6 months ago, and some indications that drugmakers will
be forthcoming with vaccine tweaks to tackle Omicron, hopefully a speedier
bounce back from this variant would be in the pipeline. That said, virus variants
and the vaccine gap between the rich and poor nations mean that nobody is
safe until everyone is safe. Hence, policies to build economic and healthcare
resilience through supplier diversification and vaccine diplomacy are already in
place. If countries can overcome domestic challenges to push ahead with
multilateral efforts, whether for trade (eg. the Regional Comprehensive
Economic Partnership), climate change (eg. COP25) or Covax, then the world
may see a smoother transition to an endemic Covid phase.
Meanwhile, financial markets would have to ride through other challenges like
the ongoing IBOR transition, property market gyrations and China’s common
prosperity implications, all of which are covered in our thematic pieces.
Pending the pace of re-opening, the uneven recovery story across different
sectors remains as pertinent today as a year ago. Hopefully, when our mid-
2022 global outlook report is published, we would not be still singing the same
tune. In the interim, hope for brighter growth ahead in 2022, but brace for
more market volatility (dare we say tantrums?) as bond yields and corporate
earnings grapple and recalibrate for a different interest rate environment
ahead.
Treasury Research & Strategy 36 December 2021 OCBC 1H 2022 GLOBAL OUTLOOK
GDP Growth Rates
% CHANGE YOY 2020 2021F 2022F 2023F 2024F
US -3.4 5.9 3.8 2.5 2.0
Eurozone -6.5 5.0 4.6 2.1 1.8
Japan -4.7 3.4 2.9 1.3 0.8
United Kingdom -9.7 5.0 4.3 2.9 1.6
New Zealand -1.2 5.3 3.5 2.8 1.9
Australia -2.3 4.8 5.0 2.8 2.6
China 2.3 8.2 5.4 5.6 5.5
Hong Kong -6.1 6.0 3.0 3.5 2.0
Taiwan 3.1 6.0 3.8 2.4 2.5
Indonesia -2.1 3.7 5.0 5.1 5.3
Malaysia -5.6 3.2 5.0 4.5 4.6
Philippines -9.6 4.4 6.8 6.5 6.7
Singapore -5.4 7.2 4.0 3.0 2.5
South Korea -1.0 4.0 2.8 2.5 2.5
Thailand -6.1 0.7 3.9 4.5 3.6
Myanmar 3.2 -17.9 -0.1 2.5 2.5
Vietnam 2.9 2.5 7.5 6.8 7.0
Source: Bloomberg, CEIC. IMF, OCBC Bank Estimates
Treasury Research & Strategy 46 December 2021 OCBC 1H 2022 GLOBAL OUTLOOK
Inflation Rates
% CHANGE YOY 2020 2021F 2022F 2023F 2024F
US 1.2 4.2 3.3 2.2 2.1
Eurozone 0.3 2.2 2.0 1.5 1.3
Japan 0.0 0.0 0.8 0.7 0.5
United Kingdom 0.9 2.5 3.2 2.0 2.0
New Zealand 1.7 3.5 2.7 2.1 2.0
Australia 0.9 2.5 2.4 2.3 2.2
China 2.5 0.9 2.6 2.3 2.3
Hong Kong 0.3 1.4 2.1 2.1 2.0
Taiwan -0.2 2.0 1.7 1.0 1.0
Indonesia 2.0 1.5 3.3 3.4 3.7
Malaysia -1.1 2.1 1.5 1.6 1.8
Philippines 2.6 4.3 4.0 3.0 3.0
Singapore -0.2 2.0 2.2 1.5 1.5
South Korea 0.7 2.2 1.8 1.5 1.5
Thailand -0.8 1.1 1.8 1.2 1.2
Myanmar 5.7 4.1 6.5 6.8 7.0
Vietnam 3.2 1.9 3.9 3.2 3.2
Source: Bloomberg, CEIC. IMF, OCBC Bank Estimates
Treasury Research & Strategy 56 December 2021 OCBC 1H 2022 GLOBAL OUTLOOK
Central Bank Policy Rates
BENCHMARK RATE % 2020 2021F 2022F 2023F 2024F
US Fed Funds Rate 0.00-0.25 0.00-0.25 0.50-0.75 1.25-1.50 1.50-1.75
ECB Deposit Facility Rate -0.50 -0.50 -0.50 -0.25 -0.25
BOJ Overnight Rate -0.10 -0.10 -0.10 0.00 0.00
BOE Base Rate 0.10 0.25 0.75 0.75 0.75
RBNZ Cash Rate 0.25 0.50 1.00 1.25 1.25
RBA Cash Target Rate 0.10 0.10 0.25 0.75 0.75
China Loan Prime Rate (1 year) 3.85 3.85 3.65 3.65 3.65
CBRC Discount Rate 1.125 1.125 1.375 1.625 1.75
Hong Kong Base Rate 0.50 0.50 1.00 1.75 2.00
BI Reference Rate 3.50 3.50 3.50 4.00 4.50
BNM Overnight Rate 1.75 1.75 1.75 2.25 2.50
BSP Overnight Reverse Repo 2.00 2.00 2.00 2.50 3.00
Singapore SORA 0.94 0.16 0.38 0.80 1.05
BOK Target Overnight Call 0.50 1.00 1.50 1.50 1.50
BOT Repurchase Rate 0.50 0.50 0.50 0.75 1.00
Source: Bloomberg, CEIC, IMF, OCBC Bank Estimates
Treasury Research & Strategy 66 December 2021 OCBC 1H 2022 GLOBAL OUTLOOK Contents China: Containing Tail Risks.................................................................................................................................... 8 Hong Kong: Recovery on Course, but with Downside Risks................................................................................... 13 Indonesia: Hard to Decouple................................................................................................................................ 17 Macau: Gaming Hub a Mixed Bag ........................................................................................................................ 21 Malaysia: Another Reset ...................................................................................................................................... 25 Myanmar: Political Instability Continues to Hinder Growth .................................................................................. 29 Philippines: Capital Outflows in 2022 an Increasing Possibility ............................................................................. 32 Singapore: Growth confidence and inflation alert imply more tightening in 2022................................................. 35 South Korea: Further Economic Recovery Hinges on Supply Bottlenecks and China demand ................................ 41 Taiwan: Another Boost from Reviving Private Consumption ................................................................................. 46 Thailand: Growth dependent on border reopening .............................................................................................. 49 Vietnam: Above-trend Growth in 2022 Expected ................................................................................................. 52 The Great Transition – SOR to SORA .................................................................................................................... 55 Moving Homes: How Indonesia’s property market has ridden the pandemic wave .............................................. 62 Corporate Cooperation Needed if Climate Goals Are to be Met ........................................................................... 68 What does Common Prosperity Mean?................................................................................................................ 71 Singapore: Residential Property: A Stellar Asset Class ......................................................................................... 75 Treasury Research & Strategy 7
OCBC TREASURY RESEARCH
China
China: Containing Tail Risks
Tommy Xie Dongming • With consensus on domestic politics being reached, China is moving swiftly
+65 6530 7256 to contain tail risks.
Xied@ocbc.com
• We expect China’s economy to remain resilient although the pace of
growth will largely depend on infrastructure investment. Our projections
estimate China to grow at 8.2% yoy in 2021 and 5.4% yoy in 2022.
• With structural easing tools and fiscal policies in place, China is in no rush to
cut RRR till at least the first quarter of 2022.
Despite the Chinese economy decelerating further to 4.9% yoy in 3Q21 from
7.9% yoy in2Q21. On a two-year average after adjusting for the pandemic
effect, the Chinese economy grew by 4.9% yoy in 3Q, down from 5.5% in 2Q21.
For the first three quarters of 2021, China’s economic growth decelerated to
9.8% yoy from 12.7% yoy in the first half of 2021. The deceleration was mainly
attributable to base effect as well as looming event risks such as regulatory
tightening, property debt crisis and disruptions from power shortage.
Weak outlook in property market
In China’s context, the property market is always a double-edged sword. It has
been one of the key drivers to support China’s post-pandemic economic
recovery from the second half of 2020. However, it has become one of the key
factors dragging down the growth from the second half of 2021 due to
tightening measures and rising debt concerns.
On a two-year average, property investment growth decelerated to 6.8% yoy
in the first ten months of 2021 from the peak of 8.6% yoy in the first five
months of 2021. Meanwhile, floor space started fell by 33.1% in October while
land area purchased by developer fell by 24.2% yoy. The weak appetite for
land and start of new projects imply weak prospects in the property sector.
Therefore, we expect property investment to slow down further in the coming
quarters, which will further weigh down on GDP growth.
Infrastructure investment failed to pick up
Although China has stepped up the issuance of local government special bond
in the past few months, which helped put a brake in further deceleration of
aggregate social financing in October, infrastructure investment growth
decelerated to 1.0% yoy in the first ten months of 2021 from 1.5% in the first
three quarters. The weak infrastructure investment was partially the result of
cautious fiscal expenditure. Noting that fiscal deposits in October surged by
CNY1.1 trillion. Nevertheless, given that China is likely to roll out major
infrastructure projects in the coming months, with the funding in place. Indeed,
we expect China’s infrastructure investment growth to reaccelerate in 2022 to
play its counter-cyclical role to provide a floor to the slowing growth.
Treasury Research & Strategy 8OCBC TREASURY RESEARCH
China
Chart 1: Both floor space started and floor space Chart 2: Developers’ appetite for land purchase fell due
completed fell recently to funding constraint.
80% 50%
60% 40%
40% 30%
20% 20%
10%
0% 0%
-20% -10%
-40% -20%
-60% -30%
07/2018
01/2019
07/2019
-40%
01/2018
04/2018
10/2018
04/2019
10/2019
01/2020
04/2020
07/2020
10/2020
01/2021
04/2021
07/2021
10/2021
-50%
10/2018
04/2021
01/2018
04/2018
07/2018
01/2019
04/2019
07/2019
10/2019
01/2020
04/2020
07/2020
10/2020
01/2021
07/2021
10/2021
Monthly Floor Space Started %yoy
Monthly Floor Space Completed % yoy Monthly land area purchased % yoy
Source: Wind, CEIC, OCBC Bank
Infrastructure investment failed to pick up
Although China has stepped up the issuance of local government special bond
in the past few months, which helped put a brake in further deceleration of
aggregate social financing in October, infrastructure investment growth
decelerated to 1.0% yoy in the first ten months of 2021 from 1.5% in the first
three quarters. The weak infrastructure investment was partially the result of
cautious fiscal expenditure. Noting that fiscal deposits in October surged by
CNY1.1 trillion. Nevertheless, given that China is likely to roll out major
infrastructure projects in the coming months, with the funding in place. Indeed,
we expect China’s infrastructure investment growth to reaccelerate in 2022 to
play its counter-cyclical role to provide a floor to the slowing growth.
Manufacturing investment remains the key driver
Manufacturing investment remained the key supporting factor offsetting weak
property investment and lackluster infrastructure investment. Manufacturing
investment grew strongly by 14.2% yoy in the first ten months on the back of
resilient external demand and increasing economic activities in high-tech
sectors. The share of manufacturing in China’s GDP in the first three quarters
rebounded to 27.4% from 26.1% in 2020.
External demand remains supportive
China’s trade surplus in October hit a record high of US$84.5 billion. Demand
from advanced economies remained strong. In addition, China’s trade surplus
with the US also at record high level above US$40 billion for two straight
months.
The strong external demand also helped offset the disruption from the power
shortage to China’s industrial output. On a two-year average, industrial
production rebounded to 5.2% yoy in October from 5% yoy in September. The
rebound of industrial production was mainly attributable to three factors. First,
external demand remains supportive alongside the gradual reopening of global
economy. Second, economic activities in high-tech industries remained strong.
High-tech manufacturing output growth reaccelerated to 14.7% yoy from 14%
yoy in September 2021. Third, China’s swift move to boost energy supply is
Treasury Research & Strategy 9OCBC TREASURY RESEARCH
China
taking effect. China’s daily coal output has been boosted to more than 12
million tons in October while output in electricity and heat sectors rose by
11.1% yoy, up from 9.7% yoy in September 2021.
Chart 3: Manufacturing investment offset the weak Chart 4: Share of manufacturing in China’s GDP
property and infrastructure investment rebounded after multi-years decline.
60 31%
40 30%
29%
20
28%
%
0 27%
-20 26%
-40 25%
May-20
May-21
Jan-20
Jan-21
Mar-21
Mar-20
Sep-20
Jul-20
Jul-21
Sep-21
Nov-20
24%
23%
03/2015
08/2015
01/2016
06/2016
11/2016
04/2017
09/2017
02/2018
07/2018
12/2018
05/2019
10/2019
03/2020
08/2020
01/2021
06/2021
Manufacturing investment
Infrastructure investment
Share of manufacturing in China's GDP
Property investment
Source: Wind, CEIC, OCBC Bank
Consumption in the driver seat
Consumption has been the bright spot in the October-November. Despite
weak car sales due to chip shortage and sporadic outbreak of delta variant,
China’s retail sales reaccelerated further to 4.6% yoy on two-year average from
3.9% yoy in September and 1.5% yoy in August 2021.
China’s unemployment fell to 4.9% in October, its lowest since 2018, despite
the reshuffling of private education sectors. Youth unemployment rate for
those aged 16-24 also fell further to 14.2% in October from the peak of 16.2%
in July as more college graduates found jobs after leaving the schools. The
improving job market is expected to add more support to domestic demand.
The share of final consumption expenditure to China’s GDP growth increased
further to 64.8% in the first three quarters up from 61.7% in the first half while
share of capital formation to China’s GDP growth fell further. We expect
China’s resilient domestic demand to support growth in the coming quarters.
Containing tail risks
China’s Central Committee of the Communist Part of China (CPC) concluded its
sixth plenary session in early November. The meeting adopted a landmark
resolution, the third in the Party’s 100-year history. Unlike the previous two
(1945 resolution and 1981 resolution), which examined the mistakes by the
predecessors, the latest resolution is mainly on the achievements and
historical experience of Party’s 100-year history.
The 2021 resolution showed that CPC is more confident in seeking a
development path based on China’s own culture and history. The smooth
rollout of the resolution also indicated that the consensus has been built
within Party elites, which will give President Xi a mandate to lead the soul
searching for the Party for the next 100 years.
Treasury Research & Strategy 10OCBC TREASURY RESEARCH
China
From the market perspective, a smooth political transition will give China more
room to contain those tail risks to strike a balance between breaking new
ground and remaining committed to self-reform. China has moved swiftly
recently to contain the tail risks such as property debt problem, energy crunch
and US-China relationship.
On the property front, China’s top leaders and regulators reassured their
support to reasonable funding demand in the property space. China’s banking
regulator also said banks will support genuine demand for housing with
favourable loan to value and mortgage rate for first time buyers. In addition,
there are news that some tier-1 cities have sped up the disbursement of
mortgage.
On the energy crunch front, the recent boom bust movement of thermal coal
futures is self-explanatory in showing how effective China’s top-down
intervention is.
On the US-China relationship, although there are no concrete announcements
from the Xi-Biden virtual meeting on 16 November, we see the meeting as a
positive development. In addition, President Xi’s comments that China will be
patient on Taiwan may also reduce market jitters about the imminent risk of
conflict escalation.
With China moving towards containing the tail risks, we expect China’s
economy to remain resilient although the pace of growth will largely depend
on infrastructure investment. We expect China to grow by 8.2% yoy in 2021
and 5.4% yoy in 2022.
Chart 5: Retail sales reaccelerated on two-year average Chart 6 Share of final consumption expenditure to
thanks to resilient domestic demand China’s GDP growth increased further.
15
Contribution to GDP growth
10
5 80
0
60
%
-5
40
%
-10
-15
20
-20
Jun-19
Jun-20
Jun-21
Mar-19
Sep-19
Dec-19
Mar-20
Sep-20
Dec-20
Mar-21
Sep-21
0
03/2021
06/2021
09/2021
China's retail sales %yoy adjusting for Final consumption Capital formation
pandemic
Net exports
Source: Wind, CEIC, OCBC Bank
Treasury Research & Strategy 11OCBC TREASURY RESEARCH
China
Falling expectation on RRR cut
Despite surging PPI, the passthrough effect from higher producer prices to
consumer prices remains limited for now. China’s core CPI has stabilized
around 1.2%-1.3% yoy since July. Our estimation shows that CPI is likely to stay
below 3% in 2022. As such, the latest inflation reading is unlikely to change
market expectation on monetary policy.
The widening gap between PPI and CPI to a fresh high of 12 percentage points
in October has called for more policy supports to SMEs due to increasing
pressure on profit margin. Back in July, supporting SMEs was the key catalyst
for China to cut its reserve requirement ratio. Nevertheless, the latest
messages from Boc has dialed back market expectation on RRR cut.
Chart 7: China’s core inflation remained low Chart 8 Widening gap between PPI and CPI
3.0 15
2.5
10
2.0
1.5 5
%
%
1.0 0
0.5
-5
0.0
-0.5 -10
2001-11
2002-12
2004-01
2005-02
2006-03
2007-04
2008-05
2009-06
2010-07
2011-08
2012-09
2013-10
2014-11
2015-12
2017-01
2018-02
2019-03
2020-04
2021-05
2013-01
2013-07
2014-01
2014-07
2015-01
2015-07
2016-01
2016-07
2017-01
2017-07
2018-01
2018-07
2019-01
2019-07
2020-01
2020-07
2021-01
2021-07
China's Core CPI China PPI-CPI
Source: Wind, CEIC, OCBC Bank
It seems that Boc has moved to structural easing measures such as relending
to support SMEs. In addition, pubic also announced to roll out a new carbon
reduction supporting tool on 8 November. The low-cost flexible nature of this
new facility plays a role of structural easing, which again reduces the
expectation for a RRR cut.
Overall, with structural easing tools and fiscal policy in place, we think PBoC is
likely to take a wait-and-see approach and is in no rush to support smaller
companies via RRR cut. As such, we expect no RRR cut until at least first
quarter of 2022.
Treasury Research & Strategy 12OCBC TREASURY RESEARCH
Hong Kong
Hong Kong: Recovery on Course, but
with Downside Risks
Tommy Xie Dongming • Hong Kong’s economy stayed on course for recovery. Domestic and
Economist external demand remained robust on the back of continued global
+65 6530 7256 economic recovery and still-loose monetary condition. Consumption,
xied@ocbc.com investment and trade all registered solid year-on-year expansions. Labour
market also fared better than expected, while business sentiment
Assisted by Cindy Keung continued to see improvement. Yet, growth momentum showed signs of
cindyckeung@ocbcwh.com softening in the near term amid a challenging external environment.
• Entering 2022, the domestic recovery hinges on the prospect of a full-
fledged reopening of border and extension of fiscal stimulus. Downside
risks stemming from monetary policy normalisation, lingering uncertainties
over COVID-19 and China’s regulatory risks, still warrant caution.
• We expect the economy to expand by 3% yoy in 2022 with all the tail risks
considered.
Economy on the course for recovery
In 3Q21, Hong Kong’s GDP rose further by 5.4% yoy, extending the 7.8% yoy
growth in H1. Domestic and external demand remained robust on the back of
continued global economic recovery and still-loose monetary conditions.
Underpinned by a stable epidemic situation, improved job market and stimulus
from the Consumption Voucher Scheme, private consumption saw a solid 7.1%
yoy growth. The local job market also fared better than expected, with the
seasonally adjusted unemployment rate between August and October slipping
to 4.3%, the lowest level since early 2020. Inflation pressure at consumer level
remained modest.
Business sentiments remained largely positive with the Purchasing Manager
Index for private sector hovering above the boom-bust divide. Following the
improved business outlook, investment also grew by 10.8% yoy in 3Q21.
Merchandise trade’s performance remained strong in 3Q21 in the face of
strong external demand. Goods export saw 22.8% yoy gain in value terms in
3Q21, with double-digit expansion in exports to all major trading partners.
Momentum is softening in the near term
Nonetheless, the momentum showed signs of softening entering 4Q21.
External environment also turned increasingly challenging amid the resurgence
of virus in Europe, lingering inflation concerns, normalising monetary policy
and slower-than-expected vaccination progress in Asia. These developments
reaffirm our growth forecast of 6% yoy in 2021. Meanwhile, the government’s
2021 GDP growth forecast was pitched at 6.4%, near the upper bound of its
5.5%-6.5% forecast range in August.
Treasury Research & Strategy 13OCBC TREASURY RESEARCH
Hong Kong
Chart 1: Revived consumption and investment Chart 2: Robust external demand supported exports
3Q 2021 vs. 3Q 2020 Two-year average vs. 3Q 2019
GDP 5.4% 0.8%
Private consumption
7.1% -0.7%
expenditure
Government consumption
4.3% 5.9%
expenditure
Gross domestic fixed
10.8% -0.4%
capital formation
Exports of goods 14.2% 8.9%
Imports of goods 16.8% 9.1%
Exports of services 4.2% -16.4%
Imports of services 4.5% -17.6%
Sources: HK Census and Statistics Department, OCBCWH
Chart 3: Unemployment rate continued to decline Chart 4: Business sentiment stayed positive
Sources: HK Census and Statistics Department, Bloomberg, Markit, OCBCWH
Domestic recovery hinging on reopening and fiscal stimulus
The ongoing “zero COVID” strategy and quarantine restrictions continue to
pose challenges to Hong Kong’s economic recovery. As the effect of
Consumption Voucher Scheme has waned, a further domestic recovery in 2022
will hinge on the prospect of reopening of borders and an extension of fiscal
stimulus.
With a satisfactory vaccination rate (over 60% of population fully vaccinated)
and a stable local epidemic situation setting the stage, we expect a controlled
reopening of the border with the mainland to be rolled out by the first quarter
of 2022 if not earlier. This should provide a long-awaited boost to the tourism-
related sectors. Yet, without a full-fledged reopening on the horizon, the
economy should continue to run below capacity. Full-year retail sales growth is
tipped at 5% based on the assumption of gradual reopening, with upside risks
stemming from strong-than-expected rebound in inbound tourism and higher
mainland visitors spending on the back of a strong RMB.
Treasury Research & Strategy 14OCBC TREASURY RESEARCH
Hong Kong
On the labour market, a revival in inbound tourism should lend some support
to the COVID-hit sectors, but containment measures in place will continue to
weigh on the job market. Hence, jobless rate may fall below 4% in 2022, but
stay above its pre-pandemic level.
Vibrant trading and financial activities
Trading activities are likely to remain vibrant alongside buoyant regional trade
flow and continued global economic recovery. Amidst a resumption of global
manufacturing activities and regionalisation of trade, Hong Kong’s
merchandise trade may see a further expansion due to higher demand for
China’s intermediate goods and capital goods. That said, owing to the lingering
US-China trade tensions, as well as the high base effect, year-on-year growth
of merchandise trade in 2022 will probably be kept at single digits. Meanwhile,
exports in services, in particular exports of financial services, should see
further pick up amid vibrant cross-border financial activities.
The financial market is dampened by uncertainties over monetary stance of
the Fed and concerns over China’s regulatory crackdown, stock market and IPO
market softened somewhat in 3Q21. Nonetheless, Hong Kong’s IPO pipeline
remains strong, with a record number of firms lining up for IPOs and seeking
pre-IPO regulatory clarity. Further down the road, the pending approval for
special purpose acquisition companies (SPAC) regime, together with the
relaxation of rules for secondary listings, should give a further boost to the
local IPO market. On top of this, the financial industry is poised to benefit from
the earlier launch of the wealth management connect and southbound bond
connect in 2021.
Benign inflation
As a service-oriented economy operating below full capacity, elevated
commodity price and fuel cost had limited impact so far on the cost of living
and the real economy. Inflation remained largely modest in 2021,
notwithstanding consumption-led price upticks and external price pressures.
Composite CPI in October climbed 1.7% yoy, driven mainly by non-rental
components. Heading into 2022, inflationary pressure is expected to stay tame,
with full year growth of CPI projected at around 2%.
Downside risks stemming from monetary policy normalisation
With Fed’s rate hike approaching, all eyes have turned to its implications on
asset markets, as well as the HKD borrowing cost and interbank liquidity.
During the last rate hike cycle, the asset price correction kickstarted prior to an
actual rate hike and lasted for a few quarters. In 2015-2016, Hang Seng Index
and housing price underwent 36% and 11% peak-to-trough correction
respectively.
Taking precedence from the previous tightening cycle, we expect to see
correction in asset markets ahead of potential Fed rate hike in 2022. The
extent of adjustment will depend on the pace of rate hikes, market
expectations and the global macroeconomic landscape. The consequential
market volatility and negative wealth effect may hurt consumption and in turn
the real economy. For the housing market, with the upside capped by the
prospect of higher mortgage, rate, we expect the housing price to increase by
around 2% yoy in 2022.
Treasury Research & Strategy 15OCBC TREASURY RESEARCH
Hong Kong
Chart 5: Asset price correction during 2015 rate hike Chart 6: HIBORs remained at low levels
Sources: HK Rating and Valuation Department, HKMA, Bloomberg, OCBCWH
On the money market, with flush domestic liquidity, HIBORs is likely to stay at
relatively low levels in the near future before reflecting the tighter monetary
conditions in the US. Given the colossal size of aggregate balance (a gauge of
interbank liquidity) at HKD402 billion (sevenfold of the pre-COVID level),
anything short of a substantial drain of liquidity or massive capital outflow, will
have minimal impact on interbank rates. The fact that HIBORs remained
insensitive to recent changes in the aggregate balance, as authority mopped
up liquidity in anticipation of future rate hikes, fits our narrative.
In conclusion, Hong Kong’s economic momentum has started to soften in the
near term amid a challenging external environment. However, should the
border control get lifted and social distancing measure relaxed, we will likely
see a more broad-based recovery and a further decline in unemployment rate.
Meanwhile, multiple headwinds may still GDP growth in the periods ahead and
cause turbulence in the asset markets. All in all, we expect the economy to
expand by 3% yoy in 2022 with all tail risks considered.
Treasury Research & Strategy 16OCBC TREASURY RESEARCH
Indonesia
Indonesia: Hard to Decouple
Indonesia’s economic recovery still depends on the pandemic path
Wellian Wiranto
• Throughout 2021, Indonesia’s economic fortunes remain inadvertently tied
+65 6530 6818
WellianWiranto@ocbc.com
to the course of the pandemic. Whatever growth spurt it had in 2Q when
the pandemic eased was negated by the slump it suffered in 3Q when the
virus cases were skyrocketing, for instance.
• The experience thus reminds us that, as we sketch out the outlook for 2022,
the sheer unpredictability of the pandemic path would remain a nagging
variable of note. This may be especially so for Indonesia, given that its
vaccination rate has fallen short of its peers, leaving it excruciatingly
vulnerable to any new resurgence wave that might yet come.
• From the policy front, the authorities are keen to pursue a path of
consolidation that means little ammunition left should things take a turn for
the worse. Hence, for Indonesia to reach a respectable growth rate of 5.0%
that we envision for 2022, the margin of error is unfortunately quite small.
Walloped by the Wave
Indonesia suffered its worst wave of pandemic resurgence in the middle of
2021, leading to a period of economic malaise. Indeed, at 3.51% yoy,
Indonesia’s 3Q21 GDP print came below what the market and we had pencilled
in at 3.9-4.0%. It is also effectively half of the 7.07% growth rate in 2Q21,
before the delta-driven pandemic resurgence walloped the economy. Private
consumption was especially badly hit over the period.
Going into the data release, market players would have known that the 3Q21
GDP would not be a pretty one, given how cases were surging seemingly
unstoppably especially in the month of July.
Source: OCBC, Bloomberg
Treasury Research & Strategy 17OCBC TREASURY RESEARCH
Indonesia
Almost as if to allow for an ease of timestamping, the government had also
instituted a host of PPKM social restriction measures from the start of the
quarter that saw malls and most businesses shut across the most populous
provinces in Java and Bali.
The miss in the 3Q21 GDP data came down largely to the larger-than-expected
degree of slowdown in private consumption during the period. While it
remained in the positive territory with a 1.03% yoy growth, that is courtesy of
the base effect from the 3Q20 slump when the economy was still reeling from
the initial pandemic attack. Indeed, on a non-seasonally adjusted basis,
consumption shrank by 0.15% from the prior quarter of 2Q21.
Source: OCBC, Bloomberg
The degree of the private consumption slowdown in 3Q21 can be seen as a
direct manifestation of consumer concerns with the virus spread itself and
indirectly due to the social restrictions that were imposed during the period.
Looking ahead, in the near term, the close relationship between the pandemic
path and private consumption should work in the favour of economic growth.
As the pandemic situation stays under better control, allowing consumer
confidence to regain ground and the social restriction measures to be lax,
consumption growth should be able to gain ground in 4Q21. Indeed, our view
that the overall GDP growth can clock 4.8%, allowing the full-year 2021 figure
to still hit 3.7% is predicated on that.
Looking into 2022, however, the high sensitivity of Indonesia’s consumption
growth to the pandemic situation may remain the Achilles’ heels of the
economy. That may be especially so given how Indonesia’s vaccination rate
remains low. Even if major areas such as Jakarta have achieved high
inoculation rate, at the broader national level, just 35% of the population have
been fully vaccinated as of November 2021.
While the government is keen to talk up the need to move towards an
endemic state of “living with the virus” – whatever that ultimately means – the
low vaccination rate presents a substantial roadblock. It could ultimately make
it hard for Indonesia to limit the damage wrought by any new pandemic wave
on the economy, as well.
Treasury Research & Strategy 18OCBC TREASURY RESEARCH
Indonesia
Despite such lingering concerns for the future, to be sure, the momentum is
turning positive for now for the Indonesian economy. For one, investment
cycle has held up relatively well despite the pandemic impact. It grew by 3.74%
yoy in 3Q21. Even if it was considerably lower than the 7.54% growth clocked
in 2Q21, it was nonetheless a commendable feat given the challenging
circumstances.
Looking at the industry-breakdown of the GDP data for clues, the respectable
performance of the investment activities may have been due to the good
performance in the mining industry, which grew by 7.78% yoy over the period.
The fact that Indonesia benefits from the commodities uptick can also be seen
in the supportive growth in the exports portion of the GDP, which grew by
29.16% yoy in 3Q21. That favourable trade sector’s momentum should build
on itself heading into 4Q21, considering the help coming from the
commodities complex.
Overall, despite the miss in the 3Q21 GDP, the Indonesian economy is
undoubtedly in a better place now compared to the dark period covered by
the data time window. There are still pockets of uncertainties to be sure,
especially due to the potential havoc brought by any new round of virus
resurgence on a less-than-prepared population. Indeed, we see improvements
in the recent economic momentum, with the manufacturing PMI reading for
October 2021 surging to an all-time high of 57.2, for instance. Hence, as a
baseline, we see growth improving to 5.0% yoy in 2022.
Source: OCBC, Bloomberg
Such growth improvement allows the policymakers to breathe more easily,
and we see them broadly holding the course rather than pursuing any new
dose of policy accommodation.
For instance, on the fiscal front, the government continues to posture towards
further fiscal consolidation, rather than stepping into any fiscal largesse, into
next year. Already, it has reportedly cancelled the bond auctions for the rest of
2021, partly because it is spending less than scheduled but also because
revenue collection is coming stronger – a sign of better growth prospects. Into
Treasury Research & Strategy 19OCBC TREASURY RESEARCH
Indonesia
2022, there remains a chance that deficit might come lower than the 4.85% of
GDP that it had pencilled in, partly because of the recent tax reforms.
Source: OCBC, Bloomberg
Similarly, on the monetary policy front, Bank Indonesia has time and again
signalled that it is not looking to change its policy rate from the record-low
3.50% anytime soon. That stance is unlikely to be rocked given the way
momentum has moved up in recent months as the pandemic situation stays
under better control.
In terms of risk factors, any pandemic resurgence remains a key area to look
out for. Even as pockets of population centres such as the capital city of Jakarta
have seen high inoculation rate of above 80% as of November 2021. The
vaccination pace remains uneven throughout the admittedly vast country.
Hence, even if Indonesia can escape a massive lockdown like what it saw
starting in July 2021, there will be areas across the country that might not be
spared a repeat episode of restrictions, such that growth might suffer once
more. Until the vaccination pace picks up speed and becomes more equitable
throughout the country, the decoupling between pandemic wave and
economic impact will remain a distant dream, unfortunately.
Elsewhere, how Indonesia navigates a tighter global monetary policy
environment, whereby there remains a distinct chance of the Fed hiking rate
due to the US domestic inflation pressure, is another risk factor to consider.
While Indonesia has managed to escape any Taper Tantrum-type episode in
part due to more prudent macroeconomic policy setting compared to the 2013
period, transitioning into a higher Fed funds rate environment might be yet
another matter altogether. This may be especially so when Indonesia had
taken the experimental route of outright debt monetization by the central
bank as part of its pandemic fight strategy.
Hence, overall, while there are bright spots supporting a fairly benign central
scenario, such as the uptick in commodity prices and the return of private
consumption confidence, market will remain watchful of such risk factors
heading into 2022.
Treasury Research & Strategy 20OCBC TREASURY RESEARCH
Macau
Macau: Gaming Hub a Mixed Bag
• Although Macau’s GDP growth was positive in 3Q21, the weaker than
Herbert Wong expected in visitor arrivals and gross gaming revenue were not encouraging.
+852 2852 5245 While the labour market recovery is not broad based yet, there is no
herberthtwong@ocbcwh.com
surprise on the expansionary budget for 2022, with the Hengqin economic
diversification plan among the key things to watch.
• Policy-wise, potential regulatory changes, concession renewals and the
recent change on the tourism outlook under China’s zero-Covid policy are
likely to bring uncertainty to the two pillar industries, namely tourism and
gaming sectors in 2022.
• In a nutshell, we downgrade Macau’s 2021 GDP forecast to 15% yoy from
20% previously, before reaccelerating to 20% yoy in 2022.
Weak economic data may derail the underlying recovery in 4Q21
Macau’s GDP rose 32.9% yoy in 3Q21, marking the second quarter of positive
growth. Specifically, the growth of consumption (+3.0% yoy) partially offset the
decline in government consumption expenditure (-3.8% yoy) and fixed
investment (-4.1% yoy) amid lower spending needs on medical services and a
jump in equipment investment. However, most of the categories, especially
exports of services, remained far below the same period in 2019. This
indicated that the economic recovery was still sluggish, mainly due to the virus
resurgence in China and tightening border controls during the months of July
and August 2021.
Tourism outlook remained weak in October and a recovery can only be
possible if border controls ease
Visitor arrivals dropped significantly by 43.6% yoy in October after the city
cancelled its plan to reopen the border with Zhuhai right before the China’s
National Golden week. According to the Macau Tourism Office, there were
only 8,159 visitors during the period of October 1-7 2021. Comparing the same
“Golden Week” in 2019 and 2020, the total visitor arrivals was down by 99%
and 94% respectively. Likewise, gross gaming revenue in October was down
40% from October 2019, reflecting both the tourism and gaming sectors are
still far from full recovery amid the virus resurgence and the ongoing border
control measures. The weaker than expected visitor arrivals and gross gaming
revenue may cap Macau’s economic recovery in 4Q21.
On a positive note, the SAR government has announced the lifting of some of
domestic restrictions and permitted entertainment business to resume
operations in Oct 2021. In addition, Macau’s casinos have implemented new
mandate for all staff members to either subject themselves to weekly testing
or show proof of vaccination. These measures may help the authorities to
further accelerate the local vaccination rate and ease of local restriction in the
longer term. Overall, we expect both visitor arrivals and gross gaming revenue
(“GGR”) to rebound in November and December, along with some easing
restrictions recently.
Treasury Research & Strategy 21OCBC TREASURY RESEARCH
Macau
However, there is uncertainty over the planned new gaming law and the
emergence of the new Omicron variant, our projection for a firm recovery in
gross gaming revenue may need to be pushed out to 2023. As such, we expect
the GGR to grow at 30% yoy in 2021, and pick up to 50% yoy in 2020, and 70%
yoy in 2023, but still accounting for only 75% of the pre-pandemic level in 2019
given the uncertain traffic recovery and additional junket crackdown which
may drag on the revenue recovery for casinos which depends heavily on the
premium mass market.
Table 1: China’s National Golden week figures in 2020 Table 2: China’s National Golden week visitor arrivals
yoy % change
Source: Gov.mo, OCBCWH
Labour market recovery has not broadened yet, particularly in services
Macau’s jobless rate stayed at 2.9% during the three months to September
2021, while both the employed population and labour force participation rate
remained at almost the same level since 2Q21. By sector, the employed
population of retail, hotel and restaurant sectors all have seen a significant
drop in 1.9% yoy, 22.0% yoy and 14.4% yoy respectively, reflecting that the
recurring imposition of containment measures has disrupted services sectors
more than others. In the medium term, should the gaming sector’s recovery be
hindered by any tightening measures from China, Macau’s labour market may
take longer to return to the pre-pandemic level as gaming industry has been
the largest employer in the city. Hence, we expect the unemployment rate to
stay above 2.5% in 2021 and 2022.
Treasury Research & Strategy 22OCBC TREASURY RESEARCH
Macau
Chart 1: Gross gaming revenue remain sluggish Chart 2: Visitors arrivals dropped notably
Chart 3: Components Contribution to Real GDP Growth Chart 4: Unemployment rate remain elevated
Source: DICJ, DSEC, OCBCWH
Expansionary budget for 2022 aimed at healing pandemic scars
On the week of 15 November, the Macau’s government delivered the policy
address for the fiscal year 2022, pencilling in a record allocation toward
promoting a stable recovery while earmarking MOP18.3billion with a goal of
boosting public infrastructure investment. Recall back in September, the
central authorities issued a general plan for building a Guangdong-Macau in-
depth cooperation zone in Hengqin, speeding up the practice of “one country,
two systems”, while accelerating the economic diversification in 2022. This
includes: 1) Macau and Hengqin will together develop industries including
high-end manufacturing, traditional Chinese medicine, and modern finance,
etc. 2) Further relaxation of rules on trade of goods, cross border travel and
financial management 3) Supportive measures including preferential tax
policies will be implemented to attract companies and talents.
Last but not least, the government hinted that there will be revisions to the
gaming laws, although the current system would allow licenses to be extended
beyond their expiry in June. We expect the six existing licenses to be renewed,
but with no new license granted, as gaming tax remains a key avenue for the
government to create jobs and promote infrastructure development.
Treasury Research & Strategy 23OCBC TREASURY RESEARCH
Macau
Chart 5: VIP-mass market % change Chart 6: Macau’s Vaccination rate won’t open before
80% jab rate
Source: DICJ, OCBCWH
Conclusion: Looking under the hood
All told, the lingering effects of the pandemic uncertainty and the government
oversight are both likely to pose a drag on the pace of recovery of the two
pillar industries, namely tourism and gaming sectors. That said, even if borders
reopen fully and safely, these two pillar industries may remain below their pre
pandemic levels. Taking this into account, we downgrade Macau’s 2021
growth forecast from 20% to 15%, before accelerating to 20% yoy in 2022.
Treasury Research & Strategy 24OCBC TREASURY RESEARCH
Malaysia
Malaysia: Another Reset
Malaysia hopes for another better year
Wellian Wiranto • The year 2021 saw the Malaysian economy being challenged on multiple
+65 6530 6818 fronts and especially so because of the resurgence in both Covid-19
WellianWiranto@ocbc.com infections and the political temperature, which resulted in yet another
change of government. As evidenced by the considerable miss in 3Q21 GDP
due to those negative factors, the economic recovery remains very fragile.
• Looking ahead into 2022, there are some glimmers of hope. For one, the
high vaccination rate should allow a more sustainable economic reopening,
even if the pandemic has had its way of sneaking up despite such
protection. Meanwhile, a political détente that the new government has
struck with the opposition should offer some calm, even if the spectre of
election fight is never too far away and may rekindle political uncertainties.
• Overall, we do see a good chance of economic recovery picking up speed,
from what is likely to be a subpar 3.2% in 2021, to a more encouraging 5.0%
in 2022. While the government has telegraphed a 5.5-6.5% 2022 growth
outlook, we are more conservative partly because we see a more contained
recovery in private consumption, as households try to rebuild their savings
that have been depleted considerably during the pandemic bouts.
Echoes of the Pandemic
For the past two years, the ebbs and flows of the pandemic virulence have
been a key determinant for the growth outturn of many economies around the
world, including Malaysia’s. As a case in point of just how tied the economic
fortune of a country is to its control – or lack of it – of the virus situation, we
do not need to look far beyond the recently released 3Q21 GDP data of
Malaysia.
Given how bad the pandemic resurgence was and how long-lasting the
restriction orders were to contain the virus uptick in 3Q21, it should be no
surprise to see growth slumping sizably during the period. As it turns out, the
impact was nonetheless much greater, with the economy contracting by 4.5%
yoy, instead of 2.3% that we had in mind, from growth of 16.1% in 2Q21.
Drilling down further, private consumption bore the brunt of the hit, shrinking
as Malaysians stayed home due to MCO restrictions. Exports offered a brighter
spot, but the degree of uplift was more curtailed than expected. Given the
relatively strong imports, net trade turned out to be a drag on growth rather
than a boost. Investment activities slumped too.
We had -2.3% yoy in mind, and the market had pencilled in -2.6%. As it turns
out, Malaysia’s 3Q21 GDP came in a lot weaker with a contraction of 4.5% yoy.
Looking at the details, the downtick in most components such as private
consumption and investment activities came broadly in line with our
expectations, given the reality presented by MCO restriction orders in 3Q21.
Treasury Research & Strategy 25OCBC TREASURY RESEARCH
Malaysia
By the start of the quarter, Malaysia had imposed MCO for a month already,
but it tightened the measures considerably starting from early July especially
for some states including the economic heavyweight Selangor. With malls and
most factories shut in the name of curbing the virus spread, both consumer
and business confidence levels suffered.
Private consumption, for one, declined by 4.2% yoy, compared to a sizable
growth of 11.7% in 2Q21. In terms of its net contribution to headline growth,
consumption deducted a chunky 2.6 percentage points (ppt), compared to a
net addition of 6.7ppt before. Meanwhile, investment activities slumped
during the period as well, with growth of -10.8% yoy compared to 16.5% in the
prior quarter – signalling how businesses were, understandably, shying away
from plonking down capital on new projects and business expansion at a time
of elevated uncertainties.
While the shrinkage in consumption and investment activities was
considerable, it was not out-of-whack with what we had expected, given the
trying circumstances facing the country. With the same lens, however, the
performance of the external sector was subpar and may have inadvertently
contributed to the miss in the overall data.
From the GDP data, exports grew by 5.1% yoy in real and 14.8% yoy in nominal
terms, which appear to be quite staid compared to the exports growth
suggested by the monthly customs data. Combined with the fact that imports
growth remained relatively strong – at 11.7% yoy – the trade front deducted a
good chunk of 3.13ppt from headline growth in net terms.
Source: OCBC, Bloomberg
Overall, despite the miss in 3Q21 GDP, the authorities would likely still put on a
brave face and focus on the improving outlook instead. To the extent that the
pandemic resurgence appears to have come under better control, and that
vaccination rate in Malaysia has climbed rapidly with 76% of its total
population having received both shots, the confident tone is warranted.
Treasury Research & Strategy 26OCBC TREASURY RESEARCH
Malaysia
Source: OCBC, Bloomberg
Still, the outlook may not be as smooth sailing as the central scenario might
have it. The government is pencilling in growth of 5.5-6.5% in 2022, which
strikes us as being rather optimistic, especially given the lingering structural
headwinds facing consumption recovery.
To be sure, the reopening initiatives – the travel lanes with Singapore and
Indonesia being the most evident example – would give some boost to the
economy. However, we remain watchful of the fact that the EPF withdrawal
schemes that were an integral part of the stimulus packages have resulted in a
cleaving out of savings for households that might take a while to rebuild,
resulting in curtailed consumption growth in the coming years.
Indeed, the head of the EPF noted earlier this year that, out of a total
membership of 15mn people, as many as 6.3mn do not even have MYR10,000
left in their Account 1 and 9.3mn members do not have that same amount in
their Account 2 balances. In his words, “they’ve used their emergency funds.”
Given that under the EPF guidance, as much as MYR240,000 is said to be
necessary for a basic retirement needs, the depleted balances for a
considerable portion of Malaysians in their EPF accounts is an area of concern
and may act as a drag on private consumption on the path towards recovery.
Hence, as much as we agree and do hope that the worst is now over, we are of
the view that the recovery pace may not be as robust as assumed by the
government. We see growth coming in at a more conservative 5.0% yoy in
2022, higher than our previous forecast of 4.3% in part due to the deeper base
effect from this year. Owing to the 3Q21 GDP miss, we see full-year 2021
growth at 3.2% against 3.6% before.
Against the backdrop of better outlook for economic recovery, we see Bank
Negara refraining from any rate cut. After all, it kept its policy rate unchanged
throughout the whole of 2021, despite the overt challenges posed by the
pandemic and political crises of the period. Indeed, judging from its tone in the
November 2021 MPC meeting, it might have started to lay the groundwork in
preparation for greater expectation for the rate to move the other way: up.
There are aspects from the MPC statement that suggest that BNM is now
anticipating the need to pre-empt any rise in market anticipation for policy
rate hike in Malaysia.
Treasury Research & Strategy 27You can also read
