Asean’s Split Sentiment Sentry

ASEAN’s main stock markets were mixed heading into the first quarter close, with Thailand and Malaysia at the front with respective 10% and 5% gains, and Indonesia and the Philippines behind with average losses over 5% on the MSCI Index. Currencies started the year strong, but in February the prospect of multiple US Federal Reserve rate hikes and trade spats sparked regional local bond selloff, with $3 billion in outflows. Politics has injected its own volatility with Malaysia’s yet to be scheduled poll inviting fresh vitriol between the ruling and opposition parties,  Indonesian and Thai candidates positioning for 2019 elections, and Philippines President Rodrigo Duterte slamming critics and rejecting UN sway over his bloody anti-drug trafficking campaign. At the same time inflation and possible overheating have become concerns with faster 5% range growth, as banks also widen the credit spigots amid business and household debts drawing rating agency unease.

Malaysian Prime Minister Najib Rezak will call elections before the end of April with his Barisan Nasional coalition vying for another 5-year term. Allies in a longstanding tradition have gerrymandered voting districts to improve their odds, but the rival Pakatan Harapan pulled in his predecessor Mahathir Mohamad to join forces with jailed head Anwar Ibrahim to mount a stiff challenge in a race hinging on the economy. The opposition has hammered away at the Prime Minister’s responsibility over the $600 million missing in the 1MDB fund scandal, with heated rhetoric accusing him of “bankrupting” the country. It advocates elimination of the recently-imposed goods and services tax and toll road fees, which the Finance Ministry claims would open a $150 billion budget hole.

The ringgit is steady around 3.9/dollar with the central bank on hold, after $1.5 billion in net portfolio inflows so far this year. Foreign direct investment was $10 billion and reserves passed $100 billion in 2017, and World Economic Forum competiveness standing rose two places. The International Monetary Fund recently outlined Malaysia’s track toward “high-income” status, and the Prime Minister’s adviser pointed out that debt/GDP was below the statutory 55% level despite the opposition’s “insolvency” charge. Public and private sector forecasts are for another year of 5-5.5% growth and subdued 3% inflation on an ample current account surplus compensating for uneven domestic demand. However a bitter campaign will reduce the likelihood of future economic policy consensus, as Moody’s Ratings in a March banking system report continued to flag high household leverage and souring commercial real estate loans.

Indonesia may re-run the 2014 presidential sweepstakes as General Prabowo Sabianto of the Gerindra party has reportedly sounded out colleagues as well as Islamic activist organizations kept at a distance by the Jokowi government. The incumbent’s opinion popularity is solid, but he again will fall short of the 7% growth target, with Coordinating Minister Darmin Nasution previewing a first quarter under 5% figure. Finance Minister Sri Mulyani Indrawati acknowledged a softer rupiah below 14000/dollar and $3 billion reserve dip in February, but cited favorable tax revenue and current account trends. Stocks trade at a hefty 17 times price-earnings ratio with a bare profits increase, and foreign investors otherwise trimming local bond exposure may have stalled the pace with inclusion in a benchmark Barclay’s index. The President and his team are aggressively pitching infrastructure projects to fund managers at home and abroad to reverse output slack, and will turn to banks for above 10% annual loan expansion, including through new fintech providers, after years at a single-digit clip.

Thailand’s ruling junta has yet to formally fix a date for long postponed election return as the central bank signaled a growth upgrade to over 4% on good tourism and manufacturing numbers, aided by a 10% predicted rise in Asian neighbor inward direct investment. Exports are set to increase 7% to sustain the large current account surplus fueling baht appreciation alongside capital inflows. The Philippines in contrast ran a $2.5 current account deficit in 2017, and the peso is ASEAN’s worst performer despite frontrunner 6.5% growth. The central bank tightened monetary policy, but not headline interest rates as inflation nears the 4% upper band goal. Investor consensus holds that both the economy and the President’s temper may be overheating, but the dizzying cross-country rotation may spin again toward mid-year

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