navigating a vulnerable recovery
TRANSCRIPT
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PUBLIC
Global Research
Global Focus – Economic Outlook Q3-2021
Navigating a vulnerable
recovery
PUBLIC
Global Focus – Economic Outlook Q3-2021
Standard Chartered Global Research | 2 July 2021 2
Table of contents
Global overview 3
Navigating a vulnerable recovery 4
Where we differ from consensus 10
Global charts 12
Key elections to watch in the next 12 months 15
Geopolitical economics 16
EU-China relations – Frozen ground 17
Economies – Asia 22
Asia – Top charts 23
Asia – Macro trackers 24
Australia – Facing fresh COVID hurdles 26
Bangladesh – Gradual pick-up 28
China – Rebalancing act 30
Hong Kong – Fortunes turning, finally 32
India – Vaccinate to recover 34
Indonesia – A gradual recovery 36
Japan – Catching up 38
Malaysia – A bumpy ride 40
Nepal – A prolonged recovery process 42
New Zealand – RBNZ to start hiking in Q2-2022 43
Philippines – Still battling COVID headwinds 45
Singapore – Uneven recovery 47
South Korea – Robust economy, divided politics 49
Sri Lanka – Slower recovery likely 51
Taiwan – Speed bumps ahead 53
Thailand – Q3 critical to the recovery 55
Vietnam – Facing challenges 57
Economies – Middle East, North Africa
and Pakistan 59
Bahrain – Getting the balance right 60
Egypt – Holding steady 61
Oman – Battling a new wave 62
Pakistan – At a crossroads again 63
Qatar – Gaining momentum 65
Saudi Arabia – A stronger growth recovery 66
Turkey – Strong recovery, but can it last? 67
UAE – Recovery gaining momentum 69
Economies – Africa 70
Africa – Top charts 71
Angola – Still oil-dependent 72
Cameroon – Virus surge threatens recovery 73
Côte d’Ivoire – Counting on the rains 74
Ethiopia – When politics and economics collide 75
Gabon – Reducing the imbalances 76
Ghana – Addressing vulnerability 77
Kenya – Fiscal consolidation; eventful politics 78
Mozambique – A pause in LNG activity 79
Nigeria – FX liberalisation hopes 80
Senegal – Downside risks diminish 81
South Africa – Third wave, earlier tightening 82
Tanzania – Accelerated policy change 84
Uganda – Rising COVID cases weigh on outlook 85
Zambia – Looking to post-election reform 86
Economies – Europe 87
Europe – Top charts 88
Euro area – Almost out of the woods 89
Switzerland – Delayed recovery on the horizon 91
UK – Making up for lost time 93
Czech Republic – Pandemic under control 95
Hungary – A brighter year ahead 97
Poland – A brightening outlook 99
Russia – Heating up 101
Economies – Americas 103
US and Canada – Top charts 104
Latin America – Top charts 105
US – The talking starts 106
Canada – Overtaking 108
Argentina – Restructuring 110
Brazil – BCB leads the tightening cycle 111
Chile – Vaccinations and copper 113
Colombia – Volatile 115
Mexico – Benefiting from the US bonanza 117
Peru – Uncertain times 119
Strategy outlook 121
Parallel universe 122
Forecasts tables 128
Forecasts – Economies 129
Forecasts – FX 130
Forecasts – GDP 131
Forecasts – Rates 132
Forecasts – Commodities 133
Forecasts – Selected interbank rates by tenor 134
Authors 135
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Global overview
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Navigating a vulnerable recovery
Outlook improves for some, but sizeable risks remain
Entering H2-2021 in different gears
We expect global growth to rebound to 5.8% in 2021 from -3.3% in 2020 as economies
reopen and vaccination rollouts gain momentum. We see two key downside risks to the
outlook: (1) a more extensive resurgence of pandemic cases resulting from new variants,
which could force the extension or re-imposition of restrictions; and (2) a more sustained
surge in inflation that damages consumer confidence and forces a swifter tightening of
monetary policy. The two risks are linked, as current supply-chain pressures (and related
costs) could worsen if a COVID resurgence disrupts global production again.
Eighteen months on from the first COVID-19 cases, some parts of the world are
emerging from the pandemic, while others remain in the midst of a crisis. Global case
numbers so far this year are higher than for all of 2020, and many countries in Sub-
Saharan Africa (SSA), Asia, Latin America and the Middle East are experiencing
renewed surges with still-low vaccination rates. In most major developed economies,
by contrast, advanced vaccination programmes are containing the pandemic and
allowing restrictions to be eased.
Trend GDP already reached by some, still distant for others
Global GDP and trade volumes are recovering faster now than after the global financial
crisis (Figure 1). Thanks to successful pandemic containment, China’s GDP has
returned to trend (the level reached if growth had continued at the average pace seen
before the pre-pandemic peak); we continue to expect growth of 8% this year. Trade-
driven economies in Asia are also bouncing back strongly – Taiwan and Vietnam
posted positive GDP growth in 2020, and Korea had returned to pre-pandemic output
levels by Q1-2021. We expect strong growth in Vietnam to continue, and we have
upgraded our 2021 growth forecasts for Taiwan and Korea.
By contrast, activity elsewhere in Asia has turned lower again with a resurgence in
COVID cases. India, Singapore, Indonesia and Japan are unlikely to return to pre-
pandemic GDP levels until Q3-2021; Malaysia not before Q4-2021; and Thailand and
the Philippines not at all this year. Since our previous Global Focus in early April, we
have downgraded our 2021 GDP growth forecasts for these economies, with the
exception of Singapore, where activity has been resilient despite restrictions. Vaccination
rates are a key differentiator within this group. Well over half of Singaporeans have
Figure 1: Global IP, exports recover faster than post-GFC
CPB world industrial production and export volumes, index
Figure 2: Record-high order backlogs on disrupted supply
US PMI production and order backlogs; China export orders
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Industrial production
Exports80
90
100
110
120
130
Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Apr-19 Apr-21
US production (LHS)
US backlog of orders (LHS)
China new export orders (RHS)
25%
30%
35%
40%
45%
50%
55%
60%
25%
35%
45%
55%
65%
75%
Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21
Sarah Hewin +44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
Christopher Graham +44 20 7885 5731
Economist, Europe
Standard Chartered Bank
GDP and trade volumes have
recovered faster than after the
global financial crisis
Global pandemic case numbers are
higher so far this year than for all
of 2020
Activity has turned lower again in
many Asian economies
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received at least one vaccine dose, while the rate was below 25% in India, Indonesia,
Japan, Malaysia, Thailand and the Philippines as of 1 July (albeit rising rapidly).
Of the developed economies that were hardest hit by the pandemic, we expect the US
to return to trend GDP by late 2021 thanks to substantial fiscal support; we maintain
our 2021 GDP growth forecast of 6.5%. Although the euro area may not fully regain
output lost during the pandemic after having suffered a double-dip recession, we raise
our 2021 growth forecast to 4.5% given good vaccination progress, with over half of
the population having received at least one dose (catching up to, and now overtaking
the US). Similarly, we raise our GDP forecasts for the UK and Canada; around two-
thirds of their populations have received at least one vaccine dose.
For the GCC, the recovery in global oil demand and the potential for faster gains in
hydrocarbon output boost the growth outlook, while increased external issuance has
helped to calm currency de-peg fears. GCC countries have also reached high
vaccination rates. We raise our region-wide growth forecast for the MENAP region; in
Pakistan’s case, the improved outlook reflects fiscal support and strong global
demand. In Sub-Saharan Africa (SSA), the slow pace of vaccine administration is
becoming even more critical as the rapid spread of the Delta variant clouds the near-
term growth outlook. Increased multilateral focus on vaccine access is a positive, as
progress should create a firmer foundation for growth from 2022.
Global export volumes are now 3.9% higher than before the pandemic. Booming goods
trade has particularly benefited small export-oriented economies (such as Taiwan and
Vietnam) and commodity producers (such as Chile). We expect this dynamic to
continue, helped by pent-up consumer demand, as unemployment falls and savings
are deployed amid economic reopening.
In developed economies, the build-up of savings during the pandemic (Figure 4) has
raised the prospect of a spending surge once economies normalise and restrictions
are fully lifted. However, several factors may limit the full deployment of savings for
higher spending on goods and services. Households that have accumulated savings
tend to have high incomes and a lower marginal propensity (relative to low-income
households) to spend out of income or wealth. High financial and non-financial asset
prices – US housing prices rose 12.1% y/y in Q1-2021 and Germany’s residential
prices were up 9.4% – suggest that savings are being directed to assets. Precautionary
savings may stay high, particularly as households anticipate higher taxation to reduce
government debt levels. We expect a gradual rather than an abrupt return to ‘normal’
savings rates over the next couple of years.
Figure 3: Global inflation pressures are elevated
US PPI, China PPI, India WPI, % y/y
Figure 4: Surge in savings and asset prices
US household financial assets, house prices, % y/y
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
US
China
India
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May-13 May-15 May-17 May-19 May-21
Federal Reserve household financial assets
Case-Shiller national house
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Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Mar-19 Mar-21
A positive outlook for trade
Pent-up savings may be only
partially deployed as economies
open up
US to return to trend GDP by
late 2021
We raise our regional forecast for
MENAP
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Pandemic will continue to dominate the outlook
Struggle to reach herd immunity as variant risks persist
The pandemic continues to pose downside risks to the outlook. Despite a decline in
global cases and deaths since the most recent peak in late April, some countries –
including the UK, Australia, Indonesia, Malaysia, Thailand, South Africa, Oman,
Colombia, Russia and Kuwait (Figure 5) – are experiencing new waves, including the
more transmissible ‘Delta’ variant. In the UK, the Delta variant has delayed reopening
despite a relatively high vaccination rate. We see a risk that the UK experience will be
repeated in other countries in the coming months, particularly those still in the early
stages of vaccine rollout. In the EU, 90% of cases are expected to be of the Delta
variant by end-August.
The more recent emergence of the ‘Delta plus’ variant, which is potentially even more
transmissible, highlights that new variants will continue to pose a significant threat until
cases are brought down sufficiently on a global scale. Vaccination rates remain low
across a swathe of economies, and estimates of the point at which herd immunity is
reached have increased as new variants have emerged.
Achieving herd immunity against the Delta variant could require as much as 90% of
the population to be vaccinated (or to have gained antibodies via earlier infection).
While China and the EU are on track to approach such levels by September or October
(Figure 6), the recent slowdown in the US vaccination pace suggests that the 90%
level may not be reached until February 2022. Even in countries that made good
progress early on, complacency could lead to slowing vaccine take-up as economies
reopen. That said, as long as a large majority of people are vaccinated, containment
measures to halt further pandemic waves are likely to be much less restrictive than
during the past 18 months, especially if therapeutic remedies are also developed.
In South America and Asia, respectively, only 29% and 24% of people have received
at least one vaccine dose, notwithstanding positive outliers like Chile (66%) and
Singapore (56%). The pace of vaccination in these regions may pick up in the coming
months, but periodic supply disruptions cannot be ruled out. Asia and South America
are currently on track to reach 90% vaccination rates by February and April 2022,
respectively.
Figure 5: Pandemic cases are up again in some countries
New COVID-19 cases per million, smoothed
Figure 6: Vaccination rates vary
Dates by which 70% and 90% of populations are likely to be
fully vaccinated; assumes two doses per person and 30-day
trend through 30 June is maintained
% of population vaccinated
70% 90%
Europe Oct-21 Dec-21
o/w EU Sep-21 Oct-21
US Nov-21 Feb-22
Asia Dec-21 Feb-22
o/w China Aug-21 Sep-21
Singapore Aug-21 Oct-21
South America Jan-22 Apr-22
Oceania Jun-22 Oct-22
Source: Our World in Data, Standard Chartered Research Source: Our World in Data, Standard Chartered Research
Brazil
Colombia
Indonesia
Kuwait
Malaysia
Oman
Russia
S.Africa
Thailand
UK
0
100
200
300
400
500
600
Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21
New COVID-19 variants pose an
ongoing threat to the economic
recovery
The slowdown in the US vaccination
rate points to herd immunity being
reached only by early 2022
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In many African countries, vaccine rollout has barely begun due to slow progress on
the COVAX initiative; 88mn vaccines had been delivered globally via COVAX as of
mid-June, compared with a goal of 1.8bn and a total of 2.7bn vaccine doses
administered globally. In addition to the worrying consequences for public health and
economic activity in countries with low vaccination rates, the risk of more virulent
COVID-19 mutations and variants leaves all countries vulnerable. While the
commitment by G7 leaders in early June to provide another 870mn doses for poorer
countries is a step in the right direction, it is unlikely to be enough to get these countries
sufficiently close to herd immunity in 2022.
Seven COVID-19 vaccines have now been distributed in more than 20 countries
globally. Next-generation vaccines that target new variants are in development, and
are likely to be the longer-term answer to the threat from COVID mutations. However,
given that many of these vaccines are still in the early clinical trial stages, they are
unlikely to be available for distribution before late 2021 or early 2022. Scaling up
production could be a challenge given that many vaccine facilities will be at or near
capacity, though new production facilities will be coming online. These next-generation
vaccines are likely to see the same unequal distribution between high- and low-income
countries as the existing vaccines.
The debt challenge
Higher government debt raises vulnerability to inflation and rate hikes
One consequence of the pandemic-related collapse in activity – and the subsequent
extensive government support – is that government debt levels have risen to record
levels almost everywhere (Figure 7). In most countries, still-wide fiscal deficits will
further add to debt in 2021. There is little room for fiscal manoeuvre should higher
inflation become more permanent, driving interest rates higher than currently expected.
Supply and demand mismatches have driven up costs; producer price inflation is at the
highest levels in a decade or more in the US, China and India (Figure 3). So far, central
banks have attributed high inflation to transitory factors, including the commodity price
rebound in anticipation of stronger post-pandemic demand; supply-chain disruptions;
reopening pressures; and pandemic-related labour-market distortions. But with real rates
sharply negative in most economies (Figure 8), policy makers are starting to indicate that
they will soon be able to start normalising policy settings.
Figure 7: Government debt/GDP jumped in 2020
Government debt/GDP, change in 2019-20, ppt
Source: IMF, Standard Chartered Research
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Majors Asia MENAP Africa EmergingEurope
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Policy will no longer need to remain
on an emergency footing
Given slow vaccination progress,
Africa will take longer to get to
herd immunity
Next-generation vaccines may be
the answer to the threat from
COVID-19 mutations
High debt leaves governments with
little room for fiscal manoeuvre
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Talking about talking about tapering
In some countries, policy normalisation is already underway. Rates have started to rise
in Brazil, Mexico, the Czech Republic, Hungary and Russia. We expect Chile,
Colombia, Korea and Pakistan to hike in H2-2021, South Africa, Kenya, Uganda, New
Zealand and Peru in H1-2022, and Malaysia and India in Q3-2022 (Figure 9).
Meanwhile, the Fed has started to ‘talk about talking about’ tapering. We expect it to
start scaling back its current USD 120bn/month of QE purchases in Q1-2022, and to
deliver the first rate hike in H1-2023. We expect the central banks of Canada, the UK
and Indonesia to pre-empt Fed hikes by a few months, and China to start normalising
its policy rate in Q4-2023, once the Fed has raised rates meaningfully. Many of Africa’s
central banks may delay policy tightening given the persistent COVID threat and the
need for front-loaded fiscal consolidation. Ghana and Uganda (where real policy rates
remain highly positive) eased in Q2-2021 as their economies benefited from recovering
offshore portfolio flows.
Figure 8: Real policy rates are mostly negative
Policy rate minus latest CPI inflation, %
Source: Bloomberg, Standard Chartered Research
Figure 9: The rate-hike timetable
Timing and amount of first rate hike, actual and our forecasts, %
Source: National sources, Standard Chartered Research
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15.5
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We expect most central banks to
raise rates ahead of the Fed
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In 2013, Fed taper talk triggered problems for EM economies, particularly those reliant
on foreign capital flows. This time, the FOMC has committed to giving plenty of warning
before starting to remove policy accommodation, and its view that current inflation
pressures are transitory has kept long-end UST yields low. However, an inflation shock
triggering a renewed steepening of the UST yield curve could disadvantage EM
borrowers by making external debt issuance more expensive. This could leave
investors more reluctant to increase exposure, particularly to less liquid
emerging markets.
Our Icarus external vulnerability indicator shows that risks have risen in many
economies due to weaker fiscal and current account (C/A) positions brought on by the
pandemic. Brazil and Turkey have become more vulnerable, while India, Indonesia,
Thailand and Korea have moved into the ‘medium risk’ category. By contrast, Chile
and Mexico have entered the ‘low risk’ zone and are likely to stay there on the back of
stronger export and C/A performance.
External borrowing slowed in some countries during the pandemic, but issuance was
strong in others, including several MENAP countries. China’s foreign debt increased
significantly in 2020, mostly due to Renminbi bond purchases by foreign investors (FX-
denominated foreign debt increased only slightly). In SSA, a number of sovereigns
accessed international capital markets in H1-2021 in order to meet funding
requirements and lower refinancing risks; this followed considerable spread widening
with the onset of the COVID crisis in 2020.
Risks of an inflation shock
Policy makers continue to see high inflation as transitory, although they have
expressed this view with less conviction recently. While we believe most commodity
prices approached or reached their peak around mid-year, pass-through to producers
and consumers is likely to persist in Q3. In China, this pass-through has accelerated
since November 2020 amid growing supply shortages and an asymmetric recovery in
global demand and supply (we expect PPI inflation to average 6.8% in 2021, against
market consensus of 5.6%; see China – Higher and more enduring inflation). Another
shock to global supply chains cannot be ruled out if further pandemic waves of more
transmissible variants take hold in key exporting countries where vaccination rates are
still low.
The extent to which higher costs are reflected in persistently high inflation will depend
on labour-market developments and inflation expectations. In the US, higher wages
paid by companies such as Amazon and Walmart may have set an effective floor for
earnings, though there are no clear signs of accelerating wage growth in the economy
overall. The jump in US inflation expectations to 10-year highs raises the risk that
inflation pressures will persist for longer than expected. That said, there is still
substantial spare capacity: US employment is some 10mn below its trend level. While
we raise our US core PCE inflation forecast to 2.8% for 2021, we see it falling back to
2.4% in 2022 and 2.2% in 2023 given persistent spare capacity and a slow return to
full employment, which we do not expect before 2023. Among other major advanced
economies, we expect only Japan and Singapore to return to full employment by 2023;
this suggests persistent broad labour-market slack that should limit second-round
inflation effects.
Employment and inflation
expectations will be key
determinants of whether inflation
pressures endure
Plenty of warning before Fed
tapering starts
Fiscal and current account
deterioration has raised risks for
many countries
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Where we differ from consensus
China
Below consensus on GDP growth
Our 2021 GDP growth forecast of 8.0% is below the market consensus of 8.5%. Q1
GDP growth was 18.3% y/y, slightly below market expectations of 18.5%. We expect
growth to decelerate for the rest of 2021 on a fading base effect, slowing COVID-
related exports and credit policy normalisation; consumer spending and non-real
estate investment is likely to recover gradually. We expect y/y GDP growth to normalise
to 7.0% in Q2, 5.0% in Q3 and 4.8% in Q4. We see a slight upside risk to our forecast
if export growth or the housing market turns out to be more resilient than we expect.
Above consensus on PPI
Our 2021 PPI inflation forecast of 6.8% is well above the market consensus of 5.6%. We
believe the market is underestimating China’s inflation risk, despite the consensus PPI
forecast for 2021 having risen to 5.6% currently from 1.4% in February. PPI inflation
surged to 9% y/y in May from 0.3% in January. The pass-through of rising commodity
costs to manufacturing prices has accelerated since November 2020 amid growing
supply shortages (following delayed investment in 2020) and an asymmetric recovery in
global demand and supply (see China – Higher and more enduring inflation). We believe
that China’s surging PPI poses a greater upside risk to the global inflation outlook than
to China’s own (see China – Rising PPI poses asymmetric risks). Surging PPI inflation
and a strengthening currency are driving up China’s export prices rapidly.
Below consensus on C/A surplus
We forecast a 2021 C/A surplus of 1.2% of GDP, versus the market consensus of 1.8%
(the 2020 surplus was 1.9%). We expect the trade surplus to narrow on slowing exports
of COVID-related goods such as masks, computers and plastics; on the import side,
surging commodity prices and China’s strong demand for integrated circuits drove up the
2Y CAGR for import growth to 12.2% in May from 8.3% in January. The trade surplus
(rolling annual sum) moderated to USD 611bn as of May from USD 627bn as of April.
Hong Kong
Above consensus on GDP
Our 2021 GDP growth forecast of 6.9% is above the 6.1% consensus. We upgraded
our forecast following a surprisingly strong 7.9% y/y Q1 performance, which looks set
to put Hong Kong’s recovery on a higher trajectory. Our optimism relative to the market
stems from the city’s ability to benefit from both a broadening global recovery (via its
sizeable financial and export sectors) and an improving domestic economy (as vaccine
rollout and the unwinding of social distancing measures likely lower the unemployment
rate in the coming quarters). We see further upside risk to our forecast if international
and cross-border travel restrictions are significantly relaxed earlier than expected.
Korea
Below consensus on rate-hike expectations
We expect the Bank of Korea (BoK) to hike its interest rate twice within a short period,
but not by as much or as quickly as the market expects. The market expects the BoK
to hike the base rate five times by the end of 2023. We expect one hike per year until
2023. We think Korea’s terminal policy rate for this cycle will be lower than the current
market pricing of around 1.75-2.0%, and we expect any surge in growth driven by pent-
up demand to subside by 2022. We believe the current rise in inflation is transient, and
that inflation will stay below 2% in 2022 and 2023. The BoK's current tightening cycle
is driven more by concerns about financial imbalances and potential financial instability
than by inflation concerns, in our view.
Wei Li +86 21 3851 5017
Senior Economist, China
Standard Chartered Bank (China) Limited
Shuang Ding +852 3983 8549
Chief Economist, Greater China and North Asia
Standard Chartered Bank (HK) Limited
Kelvin Lau +852 3983 8565
Senior Economist, Greater China
Standard Chartered Bank (HK) Limited
Chong Hoon Park +82 2 3702 5011
Head, Korea and Japan Economic Research
Standard Chartered Bank Korea Limited
PUBLIC
Global Focus – Economic Outlook Q3-2021
Standard Chartered Global Research | 2 July 2021 11
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These concerns are likely to prevent the BoK from hiking by as much as the market
expects, in our view. High household debt implies that rate hikes will weigh on
household spending and growth. While rising housing prices could result in financial
imbalances, too much monetary tightening could lead to a sudden fall in housing prices
(as households have borrowed money to invest in the housing market). A housing price
crash would pose a bigger risk to financial stability than rising prices.
Indonesia
Below consensus on C/A deficit
We expect a 2021 C/A deficit of 0.9% of GDP, smaller than the market expectation of
a 1.3% deficit. We expect the trade balance to remain in surplus in H2 given the relative
strength of the global demand recovery compared to domestic demand. Indonesia
recorded a trade surplus of USD 10bn in the first five months of 2021, which is almost
half of the 2020 trade surplus; the 2020 C/A deficit was 0.4% of GDP. Synchronised
price increases for commodities such as coal, palm oil, gas, and crude oil have
mitigated the impact of net oil imports on the trade balance. Indonesia recorded a net
oil trade deficit of 0.8% of GDP in 2020, but a net commodity trade surplus (including
oil) of 3%. We think ongoing structural reforms aimed at boosting domestic
manufacturing and processing capacity will support exports. Manufacturing exports
such as processed minerals, vehicles, electrical machinery and textiles have increased
to 80% of total exports from 75% over the past decade.
Taiwan
Below consensus on GDP
Our 2021 GDP growth forecast of 5.0% is below the market consensus of 5.5% (and
the government’s forecast). The recent COVID-19 outbreak is likely to dampen
consumer spending in H2, although the government’s TWD 260bn (c.1.5% of GDP)
relief package should partly mitigate the impact. We see downside risks to the official
PCE inflation forecast of 2.75% given softer consumer sentiment and a less sanguine
job-market outlook. Furthermore, Taiwan’s residential housing market – which
accounts for c.17% of GDP – is likely to slow after regulators introduced property-
market cooling measures including tighter credit controls. External demand has
remained generally robust, but several one-off factors that supported tech exports in
H2-2020 are unlikely to recur in 2021. The high base will likely further crimp y/y growth.
We therefore expect GDP growth to ease to c.2.0-2.5% y/y in H2 from c.7-8% in H1.
Australia
Non-consensus view on extension of the RBA’s QE programme
We expect the Reserve Bank of Australia (RBA) to move to an open-ended QE
programme at a lower pace of purchases (AUD 4bn/week). The RBA’s QE1 and QE2
programmes were both for a total amount of AUD 100bn at AUD 5bn/week. Market
expectations are split between a continuation of the same total purchase amount of
AUD 100bn, lower purchases of AUD 50bn or AUD 75bn, or a slower pace of
purchases. We believe that an open-ended purchase programme would give the RBA
flexibility to respond to the evolving recovery; a slower pace of purchases would
support the longevity of the programme. The RBA already owns over 20% of the bonds
it targets, after only eight months of QE; at the current pace, it would own c.45% of
eligible bonds outstanding by end-2021. We expect the RBA to regularly review its QE
programme, likely tapering purchases further if Australia’s recovery continues. We
expect the RBA to keep the April 2024 bond as its target for purchases, rather than
shifting to the November 2024 bond (a view we have held since February 2021);
market expectations have converged with this view.
Aldian Taloputra +62 21 2555 0596
Senior Economist, Indonesia
Standard Chartered Bank, Indonesia Branch
Tony Phoo +886 2 6606 9436
Senior Economist, NEA
Standard Chartered Bank (Taiwan) Limited
Chidu Narayanan +65 6596 7004
Economist, Asia
Standard Chartered Bank (Singapore) Limited
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Global charts Figure 1: Estimated CAGR for 2021-22 GDP is below 2019 growth and 10Y averages for all economies (GDP, % y/y)
*CAGR refers to compound annual growth rate; ^ for IN, 2020 GDP refers to fiscal year ending March 2021; Source: IMF, Standard Chartered Research
Figure 2: Higher inflation in 2021 in most economies on rising commodity prices, low base effects
Inflation, % y/y
Source: IMF, Standard Chartered Research
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Figure 3: Saudi Arabia’s C/A balance to benefit from higher oil prices; India’s is set to deteriorate
Current account balances, % of GDP
Source: IMF, Standard Chartered Research
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Figure 4: US to return to above pre-COVID levels by Q2-
2021; euro area by Q1-2022
GDP, indexed to pre-COVID levels (Q4-2019 = 100)
Figure 5: Global economic activity to remain c.5% below
trend GDP levels in 2021 and 2022
Global GDP, indexed to pre-COVID levels (2019 = 100)
Source: Standard Chartered Research *Trend GDP based on 10Y average; Source: IMF, Standard Chartered Research
Figure 6: EM vaccination rate lags DM
Doses administered per 100 people
Figure 7: South America has the highest new cases
New cases per million people, 7-day moving average
Source: OWID, Standard Chartered Research Source: OWID, Standard Chartered Research
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Figure 8: G3 balance-sheet expansion slows
G3 balance-sheet size, % y/y
Figure 9: Financial conditions are accommodative in the
US and euro area; financial conditions index (positive
indicates accommodative conditions)
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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Figure 10: Our inflation monitor is running hot in the US, getting hot in India
Our inflation monitor – the redder the shade, the hotter inflation is running, warranting central bank attention
2019 2020 2021
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VN
Source: Bloomberg, CEIC, Standard Chartered Research
Figure 11: Government external borrowing rose in many countries in 2020
Government external debt/GDP, % (bars, LHS); change in foreign borrowing in 2020, % y/y in USD terms (dots, RHS)
Source: Moody’s, Standard Chartered Research
External debt/GDP, % (LHS)
% change in foreign debt in USD terms (RHS)
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Global overview
Geopolitical economics
Asia
MENAP
Africa
Europe
Americas
Strategy outlook
Forecasts and references
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references
Key elections to watch in the next 12 months Europe dominates the calendar; some EM elections will attract investor attention
Source: Official sources, Standard Chartered Research
Nothern Ireland5-May-22 | LeAssembly elections will take place amid political instability following Brexit and difficulties linked to the Northern Ireland Protocol. Polls show that the DUP, which favours British identity, has fallen far below Irish nationalist party Sinn Fein in voter support. This partly reflects perceptions that the DUP did not push back strongly enough against the Northern Ireland protocol. Today, the DUP and Sinn Fein control roughly the same share of the assembly, with a combined 56% of seats. However, current polls suggest that Sinn Fein could emerge for the first time as the largest party in the assembly. The risk is that tensions in could rise again in the near term.
HungaryMar-22 | LePolls point to a competitive race for the first time in years, showing similar support levels for the opposition alliance and the party of right-wing populist Prime Minister Viktor Orban. A decisive factor will be whether the opposition can coalesce around a consensus prime ministerial candidate. Increasing the chances of this, the six-party opposition alliance recently announced a joint primary election to select a candidate. Continuing cooperation would give the opposition a realistic chance of ousting Orban as PM, a post he has occupied since 2010. The elections will be closely followed in Brussels, as Hungary (along with Poland) has increasingly run afoul of EU norms.
South Africa27-Oct-21 | LGThe election will be a test of the popularity of President Ramaphosa and the ruling African National Congress (ANC) amid the economic and public-health challenges of the pandemic. Lower support for the ANC versus 2019 levels (58% support) could be seen as an indication of a possible leadership challenge within the party in 2022. Conversely, support exceeding the 2019 level would likely cement the president's position.
Hong-Kong19-Dec-21 | LeThe Legislative Council elections, which have been postponed twice, could attract international scrutiny. Arrests of opposition politicians and activists under the national security law since its July 2020 implementation have deterred protest activity. The risk of international backlash has risen again following the decision by China’s NPC to change Hong Kong’s electoral system to ensure that only “patriots” can govern the city. Raising the bar for pro-democracy candidates to qualify for (and win) future elections, and diluting their seats in the expanded election committee and legislative body, could keep opposition representation low in the upcoming elections.
Iraq10-Oct-21 | LeGiven the unstable domestic political situation, parliamentary elections could see increased street violence and protests. A wave of abductions and killings of journalists and pro-democracy activists has led to calls for a boycott. Pro-Iran militias have also contributed to instability. Iraq, the second-largest OPEC oil producer, has been trying to rebuild its institutions and return to a semblance of democracy since ISIS seized major parts of the country in 2014. Iraq plays an important role in Middle East geopolitics given its population size and its status as a major oil producer.
Russia19-Sep-21 | LeElections will be held as Russia's relations with the West remain very tense and as Putin's support has continued to erode. Putin’s ruling party, United Russia (UR), and its allies currently control c.90% of the assembly. Support for UnitedRussia has dropped to an eight-year low of around 30%. The Communist Party and the Liberal Democratic Party follow with 12% and 10% of support, respectively. Still, the election is unlikely to bring any surprises. UR is expected to retain its supermajority, with a possibility that Putin could exercise stronger control over the election outcome. There is a risk of domestic protests ahead of and during the polls.
FranceApr-22 | PrInvestors have started to build market positions for a potentially disruptive outcome. While polls suggest a repeat of the 2017 match-up between current President Emmanuel Macron and far-right candidate Marine Le Pen in the second round, polls are tighter this time. France’s presidential election system – where the two winners of the first-round vote face each other in a second-round run-off – brings the possibility of surprises. The two most likely market-adverse outcomes would be a victory for Le Pen or far-left candidate Jean-Luc Mélenchon, which could happen if Macron failed to advance to the second round.
Germany26-Sep-21 | LeThe outcome could prove tighter than originally expected given declining support for the ruling CDU/CSU in national opinion polls. The CDU’s new leader, Armin Laschet, will be the joint CDU/CSU candidate to replace Angela Merkel as chancellor; support for the CDU/CSU coalition has eroded since his appointment. It is unclear whether CDU/CSU will be able to form a working coalition. The Greens' support is now on par with the CDU/CSU alliance; it looks increasingly likely that the Greens will have to choose whether to form a working alliance with CDU/CSU (the most likely outcome, in our view) or push for a liberal or left-wing governing coalition.
Pr Presidential
Le Legislative
LG Local government
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EU-China relations – Frozen ground
Change of tone
During President Trump’s four-year mandate, US-China tensions regularly grabbed
headlines and moved markets. In the background, the relationship between China and
the EU – while less openly confrontational – was quietly deteriorating on various levels.
This deterioration has accelerated in the past year. The EU-China relationship is one
of the most important globally. Both are among the world’s largest trading blocs; China
became the EU’s biggest trading partner in 2020, and the EU is also China’s largest
trading partner. The change of US administration may partly explain rising EU-China
tensions. One of President Biden’s clearest foreign policy objectives is to tighten
cooperation with traditional US allies, partly with a view to restraining China more
effectively (see Biden’s democracy club). As relations between Washington and
Brussels improve under Biden, the EU is aligning itself more closely with the US
approach to China, although its stance remains more nuanced.
The derailing of the EU-China Comprehensive Agreement on Investment (CAI) is the
clearest example of this shift. The deal, which had been under negotiation since 2013,
had been hailed as a milestone in the EU-China economic relationship. In late May
2021, the EU parliament voted overwhelmingly (95%) to freeze its ratification. The
bloc’s trade chief, Valdis Dombrovskis, said that “the ratification process cannot be
separated from the evolving dynamics of the wider EU-China relationship”.
Politically, relations with China have faced a series of setbacks at both the EU-wide
and the country level. This culminated in March, when the EU joined Canada, the UK
and the US to impose sanctions on China (at the individual and entity level) over human
rights. This is the first time the EU has sanctioned China since the 1989 Tiananmen
events; the sanctions were imposed under the recently passed EU Magnitsky Act and
resulted in reciprocal sanctions from China. In May, an unidentified Chinese official
told Bloomberg that EU-China relations were at a critical juncture.
Figure 1: While political tensions are rising, the EU-China trade relationship has never been stronger
China is now the EU’s biggest trading partner (total merchandise trade with key partners, EUR bn and % of total)
Source: Eurostat, Standard Chartered Research
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Philippe Dauba-Pantanacce +44 20 7885 7277
Senior Economist
Global Geopolitical Strategist
Standard Chartered Bank
Christopher Graham +44 20 7885 5731
Economist, Europe
Standard Chartered Bank
The CAI was supposed to be the
culmination of the EU-China
economic rapprochement, but
political wrangling has derailed its
ratification
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Global Focus – Economic Outlook Q3-2021
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An abrupt change
The EU’s change of tone on China has been evident in various initiatives, declarations
and events. It has also been relatively abrupt, gaining significant momentum only in
the past two years. At the start of Trump’s term, the EU distanced itself from his
abrasive rhetoric on China and preferred to conduct the delicate aspects of diplomacy
with China behind closed doors. A pragmatic and constructive approach was seen as
more productive, with a perception that China’s sheer size necessitated a more
nuanced approach. In addition, not all EU countries shared the same view on how to
approach China.
A 2019 EU paper referred to China as a “systemic rival” for the first time. This was a
step change in language, reflecting a clear shift in the balance of assumptions about
the EU’s relations with China. This hardening of the EU stance continued, and
accelerated sharply during the pandemic, when many scholars argued that Europe’s
long-standing assumptions about China as a reliable global actor in times of crisis had
changed. This was in stark contrast to European leaders’ general perception that
China’s handling of the 2008-09 GFC and its aftermath had been constructive. The EU
has since adopted an increasingly adversarial stance towards China in areas spanning
from supply-chain dependence and telecom security to ideological competition and
protections for key strategic sectors. In May, the European Commission suggested
new instruments to block takeovers by state-funded Chinese companies and to
repatriate semiconductor production.
Heavy media coverage of tensions with China has also contributed to a shift in public
opinion, creating a self-reinforcing loop. Opinion leaders and citizens are joining
politicians in demanding that the EU relationship with China become more transparent,
accountable and value-based, rather than being based solely on economic interests.
Meanwhile, politicians are leveraging the apparent rise in popular anti-China
sentiment. A Pew Research Center survey conducted in late 2020 showed a collapse
of China’s soft power in Europe, with two-thirds to three-quarters of citizens in key
countries (Italy, Spain, Germany, France and the UK) expressing negative views on
China. In the UK, Germany, Spain, the Netherlands and Sweden, negative views on
China were at the highest level since the poll started over a decade ago.
Change of tone in Europe's most Sinophile capitals
While the change of tone has been palpable at the EU institutional level, it has been
perhaps been more remarkable coming from some European countries that previously
took an even more conciliatory approach towards China.
As recently as 2019, Italy signed on to China’s Belt and Road Initiative (BRI) during a
state visit by President Xi Jinping, becoming the first G7 country do so. The populist
coalition government at the time had clashed repeatedly with the EU, and the move –
which was seen as a symbol of China’s increasing global power and influence – was
controversial in Brussels. Italy had been the top EU recipient of investment from China
(along with Germany) for years. But the new government of Mario Draghi has clearly
pivoted away from China, declaring Italy’s foreign policy stance as “strongly pro-
European and Atlanticist, in line with Italy’s historical anchors”. In March, Draghi’s
government issued a Council of Ministers decree to block major Chinese telecom
companies from acquiring an Italian firm, a move that was widely interpreted as
marking the end of the BRI deal.
Italy was previously at the forefront
of pursuing closer ties with China
Europe has moved from a
pragmatic and trade-oriented
approach to a more political – and
confrontational – stance towards
China
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Germany has also made a sharp turn in its approach to China. Chancellor Angela
Merkel was an essential supporter and promoter of the CAI, and China has been
Germany’s largest trading partner since 2017. However, Germany has adopted a more
hawkish stance in recent years, marking a shift from its typically pragmatic and
apolitical approach to foreign policy. What started as muted German criticism of some
of the terms of its commercial relationship with China has given way to vocal and
orchestrated calls for a full reassessment of these ties. Government officials and the
influential BDI, Germany’s biggest industry organisation, published a strongly worded
strategy paper urging the government and the EU to develop new legal instruments to
ensure fair competition from China. Armin Laschet, the ruling party’s nominee for
chancellor in Germany’s September elections, suggested in May that the EU
parliament would not ratify the CAI until China made the “first move”. Meanwhile, the
Green party could play an important role in a future German government coalition,
which would likely result in a much more hawkish German stance on China.
In Eastern Europe, China’s influence strategy is exemplified by its ‘17+1’, initiative,
which aims to promote business and investment relations with Central and Eastern
European (CEE) countries. Introduced in 2012, 17+1 has been viewed by some as an
extension of the BRI. It has elicited criticism from Brussels, which has accused Beijing
of playing EU members states off against each other in order to gain influence in the
region. 17+1 member countries have vetoed several EU motions to censure China
over the years, on the South China Sea and other issues. Hungary and Poland have
arguably leveraged their cooperation with China in their disputes with Brussels,
presenting it as an alternative strategic option.
However, the 17+1 initiative appears to have lost momentum in recent years. In early
2020, the Czech Republic announced that it would not attend the annual 17+1 summit
that year; President Milos Zeman, a long-standing advocate of closer ties with China,
said Beijing had “not done what it promised” in terms of investment. The summit ended
up being cancelled because of the pandemic.
Other CEE countries have followed in distancing themselves from China. In February 2021,
Lithuania’s parliament voted to leave 17+1. In May, Romania terminated its joint venture
with a Chinese company to build a nuclear plant. Latvia’s annual security assessment
called China a national security threat, with its national intelligence agency publicly
expressing concerns over cyberthreats. And in recent months, multiple CEE countries –
including Poland, Croatia, the Czech Republic, Estonia, Romania and Slovenia – have
launched initiatives to restrict or ban China’s telecom operators from their infrastructure.
Europe increasingly inserts itself into Asia’s geopolitics
In January, the EU Foreign Affairs Council (comprising the foreign ministers of member
countries) invited their Japanese counterpart to brief them on efforts to forge a “free
and open Indo-Pacific” – a concept often criticised by China as code for interference
in what it sees as its natural area of regional influence and/or sovereignty.
More concretely, several European countries – including the UK, Germany and France
– have sent, or plan to send, navy ships to the South China Sea to reinforce freedom
of navigation efforts. This is seen as a sign that Europe has become more willing to
join US efforts to assert its hard power in Asia. More generally, the EU is also adopting
a more forceful policy in the contested Indo-Pacific. Brexit may have facilitated this as
well, as the UK had been reluctant to embrace a unified and autonomous EU
geostrategic diplomacy.
The EU is increasingly participating
in difficult Asian geopolitical
conversations
The deployment of military assets in
the region could raise tensions
Germany’s change is notable
considering the size of its trade with
China and its usually pragmatic
foreign policy stance
Eastern Europe was previously
viewed as fertile ground for China’s
influence in the EU
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France was the first country to announce a clear strategy to enhance protection of
maritime security and the rules-based international order in Asia in 2018. Germany and
the Netherlands have followed in the past two years. The UK has formulated a similar
strategy. The EU is expected to release its ‘Indo-Pacific strategy’ later this year. India
quietly supported France’s entry to the Indian Ocean Rim Association (IORA) in
December 2020, making France the first member without a mainland presence in the
region (it does have overseas territories). China’s strategy of increased influence in the
Indian Ocean is viewed negatively in Delhi. The same month, the EU and ASEAN
agreed to upgrade their relationship to a strategic partnership.
As it seeks to counter China’s influence both at home and in Asia, Europe will have to
balance strategic goals and ideological competition against the reality of the scale of
its economic relationship with China – as detailed below.
The China-EU trade relationship
China is the biggest importer from EU-27
EU-China trade has surged in the two decades since China joined the WTO in 2001.
Goods exports to China (largely machinery/equipment and motor vehicles) increased
to around 11% of EU-27’s total exports outside the bloc as of early 2021, from just 3%
in early 2003. Imports from China (largely machinery/equipment and industrial and
consumer goods) grew even more dramatically over the period, to 24% from 8% of the
total, over the same period. As a result, China is now the EU-27’s most important
source of goods imports and its third-largest market for goods exports. Trade in
services, while smaller in scale (c.10% of EU goods imports from China and c.20% of
EU goods exports to China), has also grown.
Within this broad uptrend there is considerable variance between EU countries; this
helps to explain why they rarely agree unanimously on how to manage the EU-China
relationship. As of 2020, while China accounted for almost 17% of Germany’s exports
outside the EU, nine EU countries sent less than 5% of their total exports to China. A
similar spread is observed for imports, with Ireland importing just 8% of its total extra-
EU-27 imports from China as of 2020, while the CE3 countries all imported more than
30%. Even more notable is the near 4x increase in China’s share for Hungary and
Figure 2: EU trade deficit with China is widening
EU-27 trade with China (% of extra-EU-27 trade)
Source: Eurostat, Standard Chartered Research
Exports, % of extra-EU27
Imports, % of extra-EU27
0%
5%
10%
15%
20%
25%
Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18 Jan-21
EU-China trading relationship has
grown significantly in the last
20 years
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Poland since 2000, and the more 5x increase for the Czech Republic over the same
period. Intra-EU trade still dominates, but the shift towards China in extra-EU-27 trade
nonetheless highlights the growing importance of the China trading relationship.
While EU-27 exports to all major trading partners have increased in nominal terms over
the past 20 years, China’s gain in market share has largely come at the expense of the
UK, which dropped from 23% of total extra-EU-27 exports in 2002 to 14% in 2020,
while the US dropped from 20% to 18%. A similar story has played out on the import
side, with the UK’s share falling from 18% in 2002 to 10% in 2020, and that of the US
dropping from 15% to 12%.
Owing to the widening differential between exports and imports, the EU-27’s trade
deficit with China has been expanding. One of the primary goals of the CAI for the
European Commission was to “create a better balance in the EU-China trade
relationship”. In the aftermath of the COVID-19 pandemic, there are also efforts via a
new industrial strategy to reduce the EU-27’s reliance on China (and other countries)
with respect to some key supply chains, including pharmaceutical ingredients and
semiconductors.
Figure 3: Increase masks wide variations by country
Exports to China by member state (% of country’s exports outside EU-27)
Source: Eurostat, Standard Chartered Research
20002020
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Croatia
Lithuania
Latvia
Malta
Slovenia
Portugal
Romania
Poland
Cyprus
Estonia
Italy
Belgium
Czech Republic
Hungary
Netherlands
Spain
Luxembourg
Austria
France
Bulgaria
EU-27
Ireland
Sweden
Finland
Denmark
Slovakia
Germany
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Economies – Asia
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Asia – Top charts
Figure 1: Most Asian economies are on track to return to
pre-COVID levels by end-2021
GDP, % deviation from Q4-2019 levels
Figure 2: TW and SG have outperformed
CAGR of quarterly GDP growth, % (sorted by deviation of past
3Q growth from historical trend growth)
Source: Bloomberg, CEIC, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Figure 3: COVID-19 pandemic is still afflicting Asia
Daily change in confirmed cases, 7DMA
Figure 4: SG, CN, HK and MY to achieve herd immunity by
end-2021, based on current vaccination pace
% of population vaccinated*
Source: OWID, Standard Chartered Research *Calculated as total doses administered divided by total doses required, assuming two doses
required for full vaccination; Source: OWID, Standard Chartered Research
Figure 5: Unemployment rates have gradually improved
but remain broadly above pre-COVID averages
Unemployment rate, %
Figure 6: China has led the recovery in Asia’s exports,
which have surpassed pre-COVID levels
Export volume index, seasonally adjusted (2010 = 100)
Source: Bloomberg, CEIC, Standard Chartered Research *Emerging Asia ex-China includes HK, IN, ID, KR, MY, PK, PH, SG, TW, TH, VN
Source: CPB, Standard Chartered Research
-10%
-5%
0%
5%
10%
15%
CN TW IN AU NZ KR SG ID MY TH PH
Q4-2020 Q1-2021 Q2-2021F
Q3-2021F Q4-2021F
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
TW SG IN KR PH ID TH MY
2015-2019 Q3-20 to Q1-21 Q1-21
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21
Indonesia MalaysiaPhilippines ThailandTaiwan South KoreaIndia (RHS)
44% 42%
24%
16%12% 11%
7% 6% 5% 3% 1%
84%
35%
54%
76%
32%
44%
25% 24%
14%
Herd immunity
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SG CN HK KR IN MY ID TH PH TW VN
Latest
End-2021 based on currentrun rate
0
5
10
15
20
25
IN PH ID HK MY SG KR TW VN TH
Pre-COVID Worst since Jan-2020 Latest
China
Emerging Asia excl China*
90
100
110
120
130
140
150
160
170
180
Apr-11 Apr-13 Apr-15 Apr-17 Apr-19 Apr-21
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Asia – Macro trackers Figure 1: USD export growth – Asia exports rebound strongly, should remain supported by global economic reopening
Shades of green (or red) indicate better (worse) growth compared to the past 3 years; darker shades show a stronger signal
Source: CEIC, Standard Chartered Research
Figure 2: Current account – Import normalisation likely to lead to a deterioration of trade balances in H2-2021
Shades of green (or red) indicate surplus (or deficit); darker shades show a stronger signal
Source: CEIC, Standard Chartered Research
Figure 3: Headline inflation has started to pick up across many economies, mainly due to base effects
Shades of red (or green) indicate higher (lower) inflation compared to the past 3 years; darker shades show a stronger signal
Source: CEIC, Standard Chartered Research
JP Highest
KR
CN
HK
TW
ID
MY
PH
SG
TH
AU
IN Lowest
NE Asia
Greater
China
ASEAN
2018 2019 2020 2021
JP Surplus
KR
CN
HK
TW
ID
MY
PH
SG
TH
AU
IN Deficit
NE Asia
Greater
China
ASEAN
2018 2019 2020 2021
0
JP Highest
KR
CN
HK
TW
ID
MY
PH
SG
TH
AU
IN Lowest
NE Asia
Greater
China
ASEAN
2018 2019 2020 2021
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Figure 4: Food inflation is still benign for now, but may increase further on higher global food prices
Shades of red (or green) indicate higher (lower) inflation compared to the past 3 years; darker shades show a stronger signal
Source: CEIC, Standard Chartered Research
Figure 5: Energy inflation is the biggest contributor to headline inflation, driven by low base effects
Shades of red (or green) indicate higher (lower) inflation compared to the past 3 years; darker shades show a stronger signal
Source: CEIC, Standard Chartered Research
JP Highest
KR
CN
HK
TW
ID
MY
PH
SG
TH
AU
IN Lowest
NE Asia
Greater
China
ASEAN
2018 2019 2020 2021
JP Highest
KR
CN
HK
TW
ID
MY
PH
SG
TH
AU
IN Lowest
NE Asia
Greater
China
ASEAN
2018 2019 2020 2021
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Australia – Facing fresh COVID hurdles
Economic outlook – Slow vaccination risks derailing recovery
We expect the strong recovery to continue in H2, but the latest COVID spike risks
slowing its pace. We maintain our 2021 growth forecast of 4.8% for now, but we see
downside risks if the current COVID outbreak spreads further or continues for longer.
Buoyant consumption and robust residential construction are still likely to drive growth
this year (see Australia – Private sector to support robust recovery). A declining
savings rate and a strong labour market should further support consumption, and
services consumption is likely to improve as the economy opens up further. Non-
residential investment may pick up on declining spare capacity, while public spending
is likely to decline as private-sector growth picks up. We expect the Reserve Bank of
Australia (RBA) to maintain its accommodative monetary policy stance, but to reduce
the pace of bond purchases.
Consumer confidence has dipped sharply since its April peak. While it remains
positive, we expect a sharp decline in the near term following the recent spike in
infections in several states. A further increase in cases, leading to prolonged
lockdowns, could hurt sentiment and growth beyond H2-2021. Australia’s vaccination
rate is significantly below G7 peers’ (see Figure 2), amplifying the risk posed by new
infections. As of end-June, less than 25% of the population had received at least one
vaccine dose, and less than 6% were fully vaccinated.
The health of the labour market is a key priority for both the government and the RBA.
The job market has remained resilient despite domestic lockdowns and the end of the
government’s JobKeeper programme. The unemployment rate is back at pre-COVID
lows, even with the participation rate rising to all-time highs. We expect robust job
creation in H2, with a sharp decline in labour-market slack. International border
closures have reduced the supply of foreign workers, further tightening the labour
market; we see the risk of a sharp rise in wages in 2022 if borders remain closed. We
expect the unemployment rate to fall below 5% by end-2021.
Domestic consumption will be the biggest growth driver in H2, in our view, supported
by a resilient labour market and declining savings. Consumption has risen 14% from
the Q2-2020 low but remains 1.5% below the end-2019 high. The winding down of the
JobKeeper programme has had a smaller impact than initially expected: 31,000 jobs
were lost in April and May, well below the Treasury’s preliminary estimate of 100,000-
Figure 1: Australia macroeconomic forecasts Figure 2: Australia’s vaccination rate is well below peers’
Vaccinated population, % of total
2021 2022 2023
GDP growth (real % y/y) 4.8 3.3 3.0
CPI (% annual average) 1.6 2.3 2.3
Policy rate (%)* 0.10 0.10 0.10
AUD-USD* 0.82 0.82 0.82
Current account balance (% GDP) 1.9 0.4 -0.7
Fiscal balance (% GDP)** -9.4 -5.0 -4.6
*end-period; **for fiscal year ending in June; Source: Standard Chartered Research Source: OWID, Standard Chartered Research
23.6%
5.8%
0%
10%
20%
30%
40%
50%
60%
70%
UK US EU Canada Japan World Australia
At least 1 dose
Fully vaccinated
Chidu Narayanan +65 6596 7004
Economist, Asia
Standard Chartered Bank (Singapore) Limited
Mayank Mishra +65 6596 7466
Global FX and Macro Strategist
Standard Chartered Bank (Singapore) Limited
Unemployment is likely to edge
steadily lower as labour-market
slack declines
We see the savings rate falling in
the next few quarters, supporting
consumption
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150,000 job losses. Household savings fell to 11.6% in Q1 following a sharp increase
in 2020 (when savings tripled to AUD 187bn), despite rising household income. We
expect the savings rate to fall sharply in 2021 and 2022 to c.4% of disposable income
– below the five-year pre-COVID average of 5.25% – as households take comfort from
increased 2020 savings and a better growth outlook.
We expect residential construction to remain strong in H2, supported by rising housing
prices and ongoing projects (started in Q4-2020 and Q1-2021) supported by the
government’s HomeBuilder subsidies and similar state-level programmes. Building
approvals are a good leading indicator of residential construction activity, leading
actual construction activity by around 6-12 months. Approvals have continued to grow
sharply in the past year, pointing to accelerating construction until end-2021 at least.
Inflation should remain benign near-term. It is likely to moderate to 1.4% y/y in H2 following
a sharp increase in Q2 from a low base. We see inflation averaging 2.3% in 2022 and
2023; the RBA forecasts underlying inflation to remain below 2% until mid-2023.
Policy
The RBA is likely to slowly reduce its accommodation as the recovery continues.
We expect the RBA to move to an open-ended purchase programme at a slower pace
of AUD 4bn/week. It is likely to keep the policy cash rate (0.10%) and the 3Y yield
curve target (0.10%) unchanged until 2023. We maintain our view that the RBA will
keep the April 2024 bond as its target bond for yield curve control (YCC) purchases.
The RBA has stressed that wage growth would need to pick up to at least 3% for
inflation to return sustainably to its 2-3% target, and it believes this will not happen until
2024. Given the strong recovery and still-tight border controls, we believe labour-
market slack might decline more rapidly, pushing up wages. We expect wage growth
to pick up in H2-2021 as labour-market slack is reduced and temporary wage freezes
are unwound (starting in the public sector); we forecast that wage growth will reach
c.2% by end-2021, from 1.5% in Q1. We see the risk of a sharp increase in wages in
H2-2022 if international borders remain closed; if so, the RBA could hike policy rates
as early as 2022.
Other issues
Housing prices have risen to multi-year highs following declines in Q2 and Q3-2020.
The five-capital aggregate price index has risen 8.6% y/y in early June, up 13% since
end-2016; Sydney has experienced the sharpest increase, of over 14% from COVID
lows. We expect prices to pick up further in 2021 given accommodative monetary
conditions and improving sentiment. Regulators are likely to monitor the pace of credit
growth to housing investors; however, we do not expect macro-prudential limits to be
imposed in 2021.
Market outlook
We remain bullish on the Australian dollar (AUD) given the currency’s undervaluation
relative to Australia’s commodity export prices. Iron ore prices (up c.28% YTD) remain
close to multi-year highs, and are likely to keep the trade surplus near record highs.
We also expect the RBA’s policy tone to become more supportive of the AUD ahead.
A gradual rollback of unconventional stimulus measures could lift the AUD to better
align it with Australia’s terms of trade.
RBA is likely to remain
accommodative, but slowly reduce
support
We expect housing prices to remain
elevated throughout H2
We see strong residential
construction until at least end-2021
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Bangladesh – Gradual pick-up
Economic outlook – Resilience amid new COVID wave
Vaccinations are key to the growth recovery. We expect GDP growth to improve to
7.2% in FY22 (year starting July 2021) from 5.6% in FY21 as stronger global growth
spurs a rebound in export demand. Private consumption growth should be supported
by resilient remittance inflows, which helped to offset the impact of lost labour income
in FY21. Private investment, however, is likely to remain muted as excess capacity
persists. Public investment, which was slow in FY21 due to the absence of foreign
experts, should also accelerate if vaccination progress reduces COVID-related
concerns; this should support a rebound in construction.
Our FY21 growth forecast of 5.6% is lower than the government forecast of 6.1%, and
reflects the severe impact on economic activity of lockdowns in Q4-FY21. Industrial
growth slowed in Q4-FY21 with a sharp decline in ready-made garment (RMG)
manufacturing, while services-sector growth was weighed down by disruptions to
transport, retail, hotels and restaurants. Agriculture, which supported growth in FY20,
was severely impacted by floods in FY21.
We see significant downside risks to the outlook, particularly from delayed vaccination
rollout and issues in the financial sector. A national COVID vaccination campaign
began in February 2021, and was expected to accelerate as Bangladesh received
doses under the COVAX initiative. However, progress has been slow due to scarce
supply. Bangladesh had administered only 10mn vaccination doses as of 15 June,
against a requirement of nearly 200mn doses. While the government is in talks to
procure more supply, the delay has left the growth outlook vulnerable to further COVID
outbreaks and consequent risks to economic activity – similar to those seen during the
April-June periods in both 2020 and 2021.
The pandemic has exacerbated pre-existing risks to financial stability stemming from
high non-performing loans (NPLs), weak capital buffers, and poor bank governance
and risk management. Reduced profitability, weaker asset quality, and lower credit
growth could have large second-round effects on the real economy. Gross NPLs fell
to c.8% of total loans as of December 2020 (from 12% in September 2019) as a
moratorium on debt repayment and asset foreclosures was introduced from March-
December 2020. Although the moratorium has been lifted, Bangladesh Bank
Figure 1: Bangladesh macroeconomic forecasts Figure 2: Rising remittances have supported domestic
consumption and the C/A balance (remittances, USD bn)
FY21 FY22 FY23
GDP growth (real % y/y) 5.6 7.2 7.3
CPI (% annual average) 5.6 5.6 5.5
Policy rate (%) 4.75 4.75 4.75
USD-BDT* 86.00 87.00 88.00
Current account balance (% GDP) 0.2 -2.0 -2.0
Fiscal balance (% GDP) -6.0 -6.2 -5.0
Note: Economic forecasts are for fiscal year ending in June; *end-December;
Source: Standard Chartered Research
Source: CEIC, Standard Chartered Research
Monthly
6mma
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2.7
May-15 May-16 May-17 May-18 May-19 May-20 May-21
Saurav Anand +91 22 6115 8845
Economist, South Asia
Standard Chartered Bank, India
Nagaraj Kulkarni +65 6596 6738
Senior Asia Rates Strategist
Standard Chartered Bank (Singapore) Limited
Divya Devesh +65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
Downside risks to the growth
outlook emanate from slower
vaccination and fragile banking
sector
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subsequently allowed banks to restructure loans for previously non-defaulted
borrowers. While this will reduce loan-loss provisioning requirements for banks, it will
defer the recognition of NPLs and losses, as well as adequate provisioning.
We maintain our C/A deficit of 2.0% of GDP for FY22 as imports recover and
remittance growth slows (albeit from a high base). The FY21 C/A balance was a
marginal surplus of 0.2% of GDP as remittances jumped c.33% to USD 24bn and the
trade deficit was contained amid lower imports in the first eight months of the year. We
expect the trade deficit to widen to USD 22bn in FY22 from USD 20bn in FY21 as
imports rise on improving economic activity. While remittances are likely to soften
slightly, we expect them to stay strong at USD 22bn. Remittance growth in FY21 has
been driven largely by COVID-related factors: the need for additional support to
remittance-receiving households, increased use of formal remittance channels amid
disruptions to informal channels, and government incentives (including a 2% cash
incentive). Taking these factors into account, we expect Bangladesh’s balance-of-
payments surplus to shrink to USD 1bn in FY22 from an estimated USD 8bn in FY21.
FX reserves are likely to rise to c.USD 45bn by end-FY22, nearly seven months of
import cover.
Policy – Growth to remain the priority
Bangladesh Bank is likely to maintain its accommodative policy stance. We
expect policy rates to stay on hold in FY22 after 125bps of cuts (along with 150bps of
CRR cuts) in FY21. The central bank is likely to stay accommodative as growth
remains below pre-COVID levels and pandemic risks persist. We expect inflation to
remain close to Bangladesh Bank’s target of 5.4% in FY22, allowing the Bangladesh
to remain accommodative. Despite monetary easing, growth in credit to the private
sector is at the lowest in 10 years; it slowed to 8.3% y/y in April and averaged 8.8% in
the first 10 months of FY21 – substantially below the central bank’s 11.5% target.
Fiscal policy is likely to remain growth-supportive. The fiscal deficit is budgeted to
widen to 6.2% of GDP in FY22 from 6.1% (revised estimate) in FY21, according to the
budget presented in June. We revise up our FY22 fiscal deficit forecast to 6.2% to
match the government’s target. Revenue targets are ambitious, in our view, but
spending cuts should compensate for a potential shortfall. Key budget announcements
included the lowering of tax rates by 2.5ppt for publicly listed corporates (except banks,
tobacco companies and mobile operators); and a 10-year tax holiday for onshore
manufacturing of three- and four-wheel vehicles and some home appliances, as well
as the setting up of hospitals outside four major cities. The government has also
proposed to set aside BDT 1.1tn (c.3% of GDP, up 13% y/y) for social safety
programmes. Cash incentives of 1% on the export value of textiles and 2% on
remittance receipts will continue in FY22.
Market outlook – We remain slightly bearish on the BDT
We have a Neutral outlook on BDT bonds. With money-market rates already below
1%, we see limited room for bond yields to decline further. The government’s FY22
issuance patten is heavy on short-end bonds, and we expect this to exert bear-
flattening pressure on the BDT bond yield curve.
In FX, we maintain our slightly bearish view on the Bangladeshi taka (BDT). As imports
normalise and trade deficit widens, we expect Bangladesh’s BoP surplus to decline. A
smaller BoP surplus and extended overvaluation should allow for slight BDT
weakness. We target USD-BDT at 86 at end-2021.
We forecast the FY22 fiscal deficit
at 6.2% of GDP
We expect the C/A balance to turn
to a deficit of 2% of GDP in FY22
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China – Rebalancing act
Economic outlook – Slower but more balanced growth
We expect growth to decelerate for the rest of 2021 on a fading base effect,
declining COVID-related demand and policy normalisation. We maintain our
growth forecasts of 8.0% for 2021 and 5.6% for 2022. This year, we expect y/y growth
to normalise to 7.0% in Q2, 5.0% in Q3 and 4.8% in Q4, following an 18.3% surge in
Q1 (inflated by last year’s low base). We see a slight upside risk to our forecast if export
growth or the housing market turns out to be more resilient than we expect.
The economy has become more balanced in 2021. Consumption is reasserting itself –
the two-year compound annual growth rate (2YCAGR) for retail sales improved to
4.5% y/y in May from 3.2% in January-February on recovering income growth and
better job-market conditions. The surveyed unemployment rate declined to 5.0% in
May from 5.4% in January. The government has effectively contained the spread of
COVID without causing major economic disruptions. Surging industrial profit growth
(2YCAGR of 22% y/y in January-April) and worsening supply shortages have also
prompted a rebound in manufacturing investment growth, to 3.7% y/y in May
from -3.4% in January-February. Infrastructure investment growth picked up to 2.8%
from -1.6% y/y over the same period as projects approved last year entered the
implementation stage.
In contrast, the 2YCAGR for housing sales slowed to 10.3% y/y in May from 12.6% in
January-February owing to tightening housing controls and slowing credit growth. The
2YCAGR for export growth decelerated to 11.2% y/y in May from 15.2% in January as
declines in COVID-related exports (e.g., plastic products, textiles and computers)
offset increases in investment-related exports (e.g., steel products and automobiles).
Recovering overseas production is expected to weigh on China’s share of global
exports in 2021, after it rose to 10.5% in 2020 from 9.6% in 2019.
The trade surplus is likely to narrow on slowing exports and re-accelerating imports.
Surging commodity prices and China’s strong demand for integrated circuits saw
import growth (2YCAGR) accelerate to 12.2% in May from 8.3% in January-February.
The trade surplus (rolling annual sum) eased to USD 611bn as of May from USD 627bn
as of April. We continue to expect China’s current account (C/A) surplus to narrow to
1.2% of GDP in 2021 from 1.9% in 2020.
Figure 1: China macroeconomic forecasts Figure 2: Pass-through from PPI to CPI is accelerating
PPI and CPI, % y/y
2021 2022 2023
GDP growth (real % y/y) 8.0 5.6 5.5
CPI (% annual average) 1.5 2.5 2.5
Policy rate (%)* 2.95 2.95 3.05
USD-CNY* 6.58 6.50 6.60
Current account balance (% GDP) 1.2 0.6 0.0
Fiscal balance (% GDP) -6.0 -4.5 -4.0
*end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
CPI
PPI
Wei Li +86 21 3851 5017
Senior Economist, China
Standard Chartered Bank (China) Limited
Shuang Ding +852 3983 8549
Chief Economist, Greater China and North Asia
Standard Chartered Bank (HK) Limited
Becky Liu +852 3983 8563
Head, China Macro Strategy
Standard Chartered Bank (HK) Limited
Despite a moderating trend, the
economy is becoming more
balanced in 2021
C/A surplus is likely to narrow to
1.2% of GDP in 2021 on re-
accelerating imports driven by
rising commodity prices and
recovering consumption
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Standard Chartered Global Research | 2 July 2021 31
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Policy – Achieving greater economic balance
With GDP growth having rebounded close to its potential level, policy makers’
focus has shifted from recovery to rebalancing. The Politburo, China’s top
leadership body, called on 30 April for “achieving a higher degree of economic balance
while maintaining reasonable growth”. We expect the government to continue with
gradual policy normalisation throughout 2021 via (1) targeted support for small
companies still suffering from the COVID impact; (2) tighter housing controls; and (3)
slower total social financing (TSF) growth of 10-11% to stabilise the leverage ratio.
China is likely to under-implement its budget in 2021 due to revenue outperformance
and stagnating spending. The broad budget recorded a surplus of CNY 299bn in 5M-
2021, versus a deficit of nearly CNY 2.08tn in 5M-2020. As a result, we expect the
fiscal deficit to reach only 6.0% of GDP in 2021, versus the budgeted amount of 8.0%.
We expect the People’s Bank of China (PBoC) to keep the one-year medium-term
lending facility (MLF) rate unchanged at 2.95% through end-2022. The recovery in CPI
inflation has been limited so far, from -0.3% y/y in January to 1.3% in May – well below
the PBoC’s target of around 3%. However, sharp declines in pork prices have masked
the true scale of CPI inflation. Excluding pork, May inflation would have risen to 1.9%
y/y (instead of 1.3%), while food inflation would have accelerated to 2.9% (instead of
0.3%). We expect pork prices to stabilise in Q4 on increased policy support, including
increasing national pork reserves, and better demand-supply dynamics. We forecast
that CPI inflation will rise to 2.9% y/y by year-end, averaging 1.5% in 2021.
Surging commodity prices have become a growing concern for China. A series of
measures have been introduced to improve domestic commodity supply, including a
steel export tariff hike, domestic coal production increases, and penalties for
commodity hoarding. Even so, most industries have seen their margins fall since Q3-
2020, especially consumer-goods producers (see China – How commodity prices
affect industrial margins). PPI inflation surged to 9% y/y in May from 0.3% in January
(Figure 2). The pass-through of rising commodity costs to manufacturing prices has
accelerated since November 2020 amid growing supply shortages (following delayed
investment in 2020) and an asymmetric recovery in global demand and supply. We
expect PPI inflation to average 6.8% in 2021, against market consensus of 5.2% (see
China – Higher and more enduring inflation).
Politics – Lower risk of collision
The tough US position on China has bipartisan support and is unlikely to reverse
in the near term. That said, President Biden’s multilateral approach should increase
predictability, allow cooperation in some areas and reduce the risk of escalation
between the two countries.
Market outlook – Fundamentals are less compelling in H2
We expect the CNY to maintain its strength near-term against the CFETS basket
on strong exports, renewed capital inflows, and ultra-flush USD liquidity conditions. We
see more uncertainty in H2; we expect USD-CNY to rebound to 6.4-6.6 due to China’s
reduced growth premium over developed economies, a declining C/A surplus, a more
uncertain outlook for the USD upon the Fed’s tapering announcement, and a possible
increase in geopolitical tensions.
CNY is likely to trade mostly around
6.4-6.6 in H2 as growth moderates
and the current account surplus
declines
We expect the PBoC to slow TSF
growth to 10-11% in 2021 to
stabilise the leverage ratio
The broad fiscal deficit is likely to
undershoot in 2021 at 6% of GDP,
versus the budgeted 8%
We expect the PBoC to keep the
one-year MLF rate 2.95% through
end-2022
The pass-through from surging
commodity costs to consumer
prices has accelerated since
end-2020
Biden’s multilateral approach
reduces confrontation risk
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Hong Kong – Fortunes turning, finally
Economic outlook – Light at the end of the tunnel
Hong Kong’s economy is in the best shape in at least two years. GDP grew 7.9%
y/y in Q1-2021 after six straight quarters of contraction, thanks to a favourable base
and a strong boost from the export sector. More importantly, the recovery has
continued to broaden since then. Most notably, the unemployment rate improved to
6.0% in May from a recent peak of 7.2% in February (on a seasonally adjusted, 3mma
basis; Figure 2). This reflects recovering domestic activity – the ‘retail, accommodation
and food services’ and ‘construction’ sectors saw the biggest unemployment declines
(non-SA) over the period, enjoying the biggest boost as social distancing measures
were relaxed. The combination of improving domestic momentum and the broadening
global recovery supports our 2021 growth forecast of 6.9%, which is above the 6.1%
consensus.
Only c.17% of Hong Kong’s 7mn population had been fully vaccinated against COVID
as of 22 June, but the pace is finally picking up as businesses start to provide
vaccination incentives. This – along with recent sustained stretches of zero daily local
untraceable COVID cases – should help the jobless rate to edge lower in H2-2021,
supporting a further modest domestic recovery. That said, the next major boost to
growth could still be some quarters away, when international and cross-border travel
restrictions are likely to be significantly relaxed.
Given that Hong Kong is a services-oriented economy, local consumer prices are less
at risk of spillover from rising global commodity prices and supply-chain disruptions.
While the improving growth outlook poses upside risks to our 1.1% average inflation
forecast for 2021, key CPI components like private housing rents and miscellaneous
services remain benign for now; one-off government relief measures will also cap fees.
Policy – Support from persistently low interest rates
The residential property market is heating up again, taking YTD average price
gains to c.6%, according to the weekly Centa-City Leading Index. The index is now
only c.2% below the high seen in mid-2019, before the start of local social unrest and
COVID. Monthly residential property transactions exceeded 7,000 units for a third
straight month in May, rising from an average c.5,000 units in the 12 months prior.
Persistently low interest rates have helped to unleash pent-up demand for flats now
that economic prospects are improving. The Aggregate Balance (a measure of
Figure 1: Hong Kong macroeconomic forecasts Figure 2: Relaxation of social distancing measures has
driven the jobless rate lower (%)
2021 2022 2023
GDP growth (real % y/y) 6.9 3.0 2.5
CPI (% annual average) 1.1 2.3 2.3
3M HIBOR* 0.25 0.40 1.00
USD-HKD* 7.80 7.80 7.80
Current account balance (% GDP) 4.0 4.0 4.0
Fiscal balance (% GDP)** -4.5 -1.5 -1.0
*end-period; **for fiscal year starting in April; Source: Standard Chartered Research
Source: CEIC, Standard Chartered Research
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Jan-
18
Mar
-18
May
-18
Jul-1
8
Sep
-18
Nov
-18
Jan-
19
Mar
-19
May
-19
Jul-1
9
Sep
-19
Nov
-19
Jan-
20
Mar
-20
May
-20
Jul-2
0
Sep
-20
Nov
-20
Jan-
21
Mar
-21
May
-21
Headline unemployment rate (SA)
Construction (non-SA)
Retail, accommodation and foodservices (non-SA)
Kelvin Lau +852 3983 8565
Senior Economist, Greater China
Standard Chartered Bank (HK) Limited
Mayank Mishra +65 6596 7466
Global FX and Macro Strategist
Standard Chartered Bank (Singapore) Limited
Residential prices are now only
c.2% below the 2019 peak
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interbank liquidity) is still at a record-high HKD 457bn, and the US Fed is likely to hike
rates only in 2023; we expect this to anchor market sentiment and HIBOR near current
low levels, and keep HKD liquidity ample for the rest of 2021. This, in turn, should keep
mortgage servicing manageable and curb downside risks to the property market from
a potential taper shock (not our core scenario).
In contrast, residential rents are showing only nascent signs of bottoming out; the
official rental price index for private domestic units remains more than 11% below the
mid-2019 peak. Even when private rents rebound, this is likely to be reflected in the
CPI housing rental component with a lag. As a result, we expect upward pressure on
housing inflation to emerge only in 2022.
Hong Kong’s fiscal health is also set for a slow recovery. Government revenue
(on a 12M rolling sum basis) barely grew on a y/y basis as of April 2021, while
government expenditure grew 34% y/y due to stimulus measures. More such
measures are in the pipeline, including the impending rollout of a HKD 5,000 electronic
consumption voucher for every adult.
Politics – One-year anniversary of the NSL
It has been one year since the national security law (NSL) was enacted. During
this period, protests have been deterred, opposition politicians and activists arrested,
and the city’s electoral system overhauled. Electoral changes will make it more difficult
for pro-democracy candidates to qualify for (and win) the Legislative Council elections
scheduled for December; any seats they do win will be diluted as a result of the
overhaul. The Chief Executive election in March 2022 will also be closely watched,
starting with the September election of the Election Committee, which will select
candidates for the city’s top job .
Greater Bay Area (GBA) – What our clients say
We recently completed our 12th annual GBA manufacturing survey of 220+ clients
operating in the GBA. Their responses showed a recovery in orders, sales, hiring,
wages and capex in 2021. Larger manufacturers are operating closer to pre-COVID
levels and look set to outperform smaller companies. Beyond the expected y/y
improvements in performance metrics, however, our survey shows lingering labour-
market slack and weak appetite for investment in key innovations. Respondents are
less eager to move capacity overseas than they were a year ago, and they expressed
greater confidence in the long-term GBA outlook. We see the GBA benefiting from a
broad range of drivers, including a sizeable population and strong policy support in the
form of continued financial opening. Hong Kong is likely to be the main beneficiary of
such policies, cementing its role as China’s financial window to the rest of the world
and its dominance as the Renminbi’s biggest offshore centre.
Market outlook – Flows are the key driver of the HKD
USD-HKD has been resilient, staying close to 7.76 for much of Q2. We believe
capital flows have emerged as the key driver of USD-HKD in the absence of FX carry.
Our tracker of ETF-based equity flows suggests that outflows (amid weakness in China
and technology stocks) lifted USD-HKD spot off the lower end of the 7.75-7.85 band in
Q1-2021; this followed strong inflows from Q2 to Q4-2020, which had kept USD-HKD
near 7.75. Outflows slowed in Q2-2021, leading spot to consolidate near 7.76. Net flows
via the Stock Connect schemes have also been largely neutral, anchoring HKD stability.
All eyes on the Chief Executive
election in March 2022
Returning inflows are anchoring
the HKD
Higher private housing rents will
take time to start spilling over to
CPI inflation
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India – Vaccinate to recover
Economic outlook – A sure-footed recovery by Q4-FY22
Vaccination is key to a sustained recovery. We expect GDP growth to recover to
8.5% in FY22 (started April 2021) from -7.3% in FY21. The intensity of India’s second
COVID wave has eased sharply – the daily case count has fallen below c.50,000 from
a peak of c.410,000 in early May. However, economic activity is likely to remain
cautious until vaccination coverage improves in Q2 and Q3-FY22. Our base case is
that c.45-50% of the population will be vaccinated by end-2021 and c.65-70% by end-
March 2022. If these targets are met or exceeded, we expect a more decisive growth
recovery to start by Q4-FY22. Until then, activity is likely to remain vulnerable to further
mobility restrictions given the virus’ high transmissibility and the risk of a third wave.
Gradual improvement in leading indicators as states exit lockdown. Our daily
activity tracker has risen back to levels last seen at end-April. In May (peak of the
second wave), it had fallen to the lowest levels since September 2020 (peak of the first
wave). Google mobility trends are rising as most states have started to reopen. Other
leading indicators – fuel demand, electricity use, GST e-way bills and rail freight –
showed a sequential recovery in the first half of June. However, given the spread of
cases to rural areas (unlike last year), demand may remain under pressure for a
prolonged period amid record-low consumer confidence. In this context, potential fiscal
stimulus announcements – particularly targeted towards rural areas – and monsoon
trends will be closely watched. The Indian Meteorological Department has predicted a
normal monsoon this year; rainfall levels and distribution in the July-August period,
which accounts for 60% of annual sowing and rainfall, will be key to the macro outlook.
Yet another year of high inflation. We forecast FY22 inflation at 5.4%, following 6.2%
in FY21. The higher-than-expected May reading of 6.3% indicated that food prices
(especially edible oils and pulses) may not correct until H2-FY22; meanwhile, core
inflation may remain elevated throughout FY22 as inputs costs rise. Our forecast
assumes a partial reversal of price gains for some items as supply disruptions ease,
commodity prices correct, and/or data issues that boosted the May reading are
resolved. However, in an adverse scenario, FY22 inflation could rise to c.6.1% if food
supply is disrupted, excise duties on petrol/diesel are not cut, the May price spike is
not reversed, or domestic demand recovers more sharply than expected. Downside
inflation risks include contained food inflation and a stalled rally in global commodity
prices amid mixed global growth trends.
Figure 1: India macroeconomic forecasts Figure 2: Around 50% of adult population likely to be
vaccinated by end-2021 (% vaccinated)
FY21 FY22 FY23
GDP growth (real % y/y) -7.3 8.5 5.5
CPI (% annual average) 6.2 5.4 4.2
Policy rate (%) 4.00 4.00 4.50
USD-INR* 73.07 75.50 77.50
Current account balance (% GDP) 1.0 -0.7 -1.3
Fiscal balance (% GDP)** -13.1 -10.5 -9.0
Note: Economic forecasts are for fiscal year ending in March; *end-December of previous
year; **central + state governments; Source: Standard Chartered Research
Scenarios based on a range of average daily vaccination rates from June 2021 to March
2022; Source: CEIC, Standard Chartered Research
4.5 mn doses
Current pace (3.2mn doses)
5.5mn doses
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
To date Jul-21 Sep-21 Nov-21 Jan-22 Mar-22
Vaccination pace, fiscal stimulus,
monsoon trends will be watched
Kanika Pasricha +91 22 6115 8820
Economist, India
Standard Chartered Bank, India
Nagaraj Kulkarni +65 6596 6738
Senior Asia Rates Strategist
Standard Chartered Bank (Singapore) Limited
Divya Devesh +65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
A recovery is underway after the
peak of India’s second COVID wave
May 2021 inflation surprise has
ignited inflation worries
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We now expect a slightly smaller FY22 C/A deficit of 0.7% of GDP (0.8%
previously). This reflects lower imports amid slower domestic activity during the
second wave, stronger demand for services exports, and lower investment outflows.
Gold demand slipped in May (after being front-loaded in March/April), causing a
decline in imports, although higher commodity prices partly offset the impact.
Meanwhile, key export markets have seen a sharp demand recovery amid policy
support and improved vaccination coverage. We expect a marginal C/A surplus in Q1-
FY22 on a smaller goods trade deficit and continued strength in the invisibles surplus;
this should turn to a deficit for the full year as India’s growth gradually recovers. We
now expect a FY22 BoP surplus of USD 55bn (USD 47bn previously); the BoP for April
to mid-June 2021 is estimated at c.USD 20bn. Risks to the BoP include sharp oil price
moves, capital flow volatility on a Fed taper announcement, or a sharp deviation in
domestic growth from our forecast.
Policy – MPC to focus on growth despite higher inflation
Recent inflation surprise puts the policy makers in a tight spot. The spike in May
inflation above the Monetary Policy Committee’s (MPC’s) target range poses a key
challenge, given the policy focus on supporting growth amid COVID uncertainty.
We expect the MPC to stay focused on growth unless the inflation scenario turns
adverse. Monetary policy normalisation will start in Q3-FY22, in our view. We expect
a reduction in the liquidity surplus, followed by gradual increases in the reverse repo
rate – by 25bps in February 2022 and 15bps in April 2022 – taking the corridor back to
the pre-pandemic level of 25bps. Repo rate hikes are likely to start in Q2-FY23; we
expect a total 50bps of hikes to 4.5% by end-Q3-FY23. We maintain our view that the
MPC will normalise rather than tighten monetary policy, as tightening could dampen
growth momentum. Even after factoring in 50bps of repo rate hikes, the rate is likely to
remain below the pre-pandemic level of 5.15%. We would expect an earlier repo rate
hike only in an adverse inflation scenario, with FY22 inflation averaging above 6%.
We see fiscal slippage risks from stimulus and lagging stake sales. The central
government has already announced extra borrowing of c.INR 1.6tn in FY22 to
compensate states for a likely GST collection shortfall (although we think the fiscal
impact of this may be smaller than the government estimates). Beyond GST, we expect
limited slippage unless the divestment shortfall is large, as budget estimates for other
revenue sources are conservative. Spending on food and fertiliser subsidies could
result in slippage of 0.5-0.7% of GDP, though the impact may be offset by a higher
Reserve Bank of India (RBI) dividend and the prepayment of Food Corporation of India
arrears in FY21 (totalling c.0.5%). On balance, we see a risk of fiscal slippage of 0.5-
1.0% of GDP versus the budgeted FY22 deficit of 6.8%.
Market outlook
We maintain a Neutral outlook on IGBs. The RBI’s continued support for IGBs is
counter-balanced by elevated inflation, the end of the monetary easing cycle, and
unfavourable demand-supply dynamics.
We target USD-INR at 75.50 by end-December. The key drivers of our bearish INR
view are crowded long INR positioning, extended overvaluation and expectations of a
deteriorating trade balance. A key risk that could cause USD-INR to overshoot our
forecasts is a more hawkish-than-expected stance by the US Fed.
We are Neutral on IGBs and bearish
on USD-INR
We see fiscal slippage risk of 0.5-
1.0% vs the central government’s
deficit target in FY22
Policy normalisation is unlikely to
start before Q3-FY22, barring an
adverse inflation scenario
We revise our FY22 C/A deficit
forecast to reflect lower goods
imports and stronger invisibles
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Indonesia – A gradual recovery
Economic outlook
We lower our GDP growth forecasts to reflect Indonesia’s resurgence of COVID-19
cases, slower-than-targeted vaccination rollout and diminishing policy space. We now
forecast growth of 4.1% in 2021 (previously 4.5%) and 4.8% in 2022 (previously 5.0%).
Near-term growth should benefit from policy support, strong external demand and
improved confidence in the vaccination programme. However, the resurgence of cases
and the re-tightening of mobility restrictions may slow the pace of recovery, especially
for directly affected sectors such as tourism, transportation and accommodation.
Monetary and fiscal policy support is likely to be scaled back next year amid global
monetary policy normalisation and Indonesia’s fiscal consolidation push. We expect
investment to lag the broader GDP recovery, as the corporate sector’s capex cycle
hinges largely on household consumption and public investment, which is constrained
due to pandemic-related government spending (Figure 2).
Indonesia’s daily new COVID cases surged to a record 21,807 on 29 June, straining
the health system and forcing the government to tighten mobility restrictions further for
the 3-20 July period. The measures include a 100% working-from-home requirement
for non-essential sectors (the energy, financial, food, logistics, communication, and
export sectors can still operate on-site with capacity limitations), the closure of malls
and public facilities, and requirements of vaccination proof and negative COVID tests
for travellers. The recent restrictions are tighter than those in January but less strict
than in April-May 2020. We estimate that every one-month period of restrictions may
lower GDP growth by 0.5ppt. The government aims to accelerate the vaccination rate
and tracing and testing in hard-hit areas. We estimate that at the current rate (1mn
daily vaccinations), around 40% of the population would be fully vaccinated by end-
2021 and 60% at end-Q1-2022 (versus the government’s target of 70%); limited
vaccine stock remains a risk.
We lower our average 2021 CPI inflation forecast to 1.8% y/y from 2.2% to account for
low inflation to date, adequate food stocks and relatively subdued demand. We expect
well-anchored inflation expectations and a negative output gap to keep inflation low
this year, limiting commodity price pass-through to consumer prices. Capacity
utilisation was still running at 73% in Q1-2021, 5ppt below the pre-pandemic high,
according to Bank Indonesia (BI) data. The pass-through from higher crude oil prices
has been relatively limited, although it is likely to continue for the rest of the year.
Figure 1: Indonesia macroeconomic forecasts Figure 2: Loan demand recovery tends to lag GDP
Credit growth (LHS), GDP growth (RHS), % y/y
2021 2022 2023
GDP growth (real % y/y) 4.1 4.8 5.0
CPI (% annual average) 1.8 3.0 2.5
Policy rate (%)* 3.50 3.75 4.00
USD-IDR* 14,600 14,840 15,070
Current account balance (% GDP) -0.9 -2.0 -2.0
Fiscal balance (% GDP) -5.4 -4.0 -2.9
*end-period; Source: Standard Chartered Research
Source: CEIC, Standard Chartered Research
Credit
GDP (RHS)
-6
-4
-2
0
2
4
6
8
10
-10
-5
0
5
10
15
20
25
30
35
40
Mar-04 May-06 Jul-08 Sep-10 Nov-12 Jan-15 Mar-17 May-19
Mobility restrictions have been
re-tightened as cases rise
Aldian Taloputra +62 21 2555 0596
Senior Economist, Indonesia
Standard Chartered Bank, Indonesia Branch
Divya Devesh +65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
Below-potential growth and
adequate food supply are likely to
anchor inflation this year
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Government plans to increase the VAT rate and expand VAT coverage may contribute
to CPI inflation. There are no details yet on the new VAT scheme, but we estimate that
raising the rate to 12% from the current 10% would add around 1.5ppt to m/m inflation.
We maintain our 2022 average inflation forecast at 3.0%.
We lower our C/A deficit forecasts to reflect a wider YTD trade surplus, higher
commodity prices and a structural rise in value-added exports. We now expect deficits
of 0.9% of GDP in 2021 (1.8% previously) and 2.0% in 2022 (2.2%). The
outperformance of advanced economies versus emerging markets (due to faster
vaccine rollout) may keep the trade surplus wide by containing import demand.
Indonesia’s relatively diversified export product mix – including higher-value-added
products such as processed minerals, vehicles and basic manufactured goods – is
export-positive. Manufacturing exports have increased to 80% of total exports from
75% in the past decade. Commodity prices are also likely to stay elevated (albeit down
from this year’s highs), supporting Indonesia’s main exports of coal, palm oil and oil.
Policy – Diminishing room for policy support
We now forecast policy rate hikes of 25bps in Q4-2022 and Q1-2023; we
previously expected no change through 2023. We also now expect 150bps of
reserve requirement ratio (RRR) hikes in H1-2022, versus none previously. The
revisions reflect our view that Indonesia’s negative output gap will close in H1-2022,
and that the Fed will start tapering in H1-2022 before hiking rates by 50bps in 2023.
Indonesia’s stronger external position should allow it to weather the impact of global
monetary normalisation better this time than during the 2013 taper tantrum, allowing
BI to gradually normalise policy. A manageable C/A deficit (down from 4.2% of GDP in
Q2-2013), low foreign ownership of government bonds, and BI’s ample FX reserve
buffer (including domestic NDFs) should support currency stability. BI may start
normalising policy by allowing relaxations of macro-prudential regulations to lapse.
The government is committed to bringing the fiscal deficit back below 3% of GDP in
2023. It projects that the deficit will narrow gradually to 4.5-4.9% in 2022 and 2.7-3.0%
in 2023. Given the ongoing need for pandemic-related spending and political hurdles
to spending cuts, deficit reduction will need to come mostly from higher tax revenue.
The government has proposed tax measures including a higher VAT rate; VAT taxation
of necessities such as food, education, transportation, health services, and e-
commerce transactions; a new income tax bracket for high-income individuals; and a
carbon tax. We think the target of reducing the fiscal deficit below 3% in 2023 is
achievable, although tax reform will still need to be accompanied by lower spending.
Politics – Fiscal consolidation is the top priority
Government may face a tougher battle on fiscal reform. The draft new tax code,
which has been submitted to parliament, has received public pushback. While the
government still appears to have solid parliamentary support for the draft law, it may
need to compromise on some tax provisions, including tax rates. The BI law revision
may be delayed as the near-term focus shifts to fiscal consolidation.
Market outlook – Tactical bullish view on the IDR
We maintain our end-2021 USD-IDR forecast of 14,600, but we see the IDR
strengthening in the near term as UST yields consolidate. Indonesia’s relatively
attractive carry, light positioning, and strong reserve buffer make the IDR attractive to
investors during risk-on periods.
Manageable external position
should allow gradual monetary
policy normalisation
The fiscal impulse is set to ease in
2022 as the government enters a
period of fiscal consolidation
C/A deficit is likely to remain
manageable next year
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Japan – Catching up
Economic outlook – Vaccination to support the rebound
We lower our 2021 GDP growth forecast to 2.6% from 2.8%. The revision reflects
weaker-than-expected Q1 GDP performance and Japan’s fourth COVID wave in April-
May. We expect the economy to improve starting in Q3, supported by exports and
improving personal consumption as the vaccination rate increases. The external sector
supported growth during the emergency lockdown in Q1, expanding 2.3% q/q. We expect
this trend to continue as the US and China – Japan’s biggest export markets – lead the
global recovery. Also, auto production should accelerate in H2 as the global
semiconductor shortage eases. We raise our 2022 growth forecast to 2.3% from 1.8%,
as the slower pace of recovery should result in a bigger growth boost next year.
The ongoing pandemic is likely to limit the positive economic impact of the upcoming
Tokyo Olympics. Bank of Japan (BoJ) Governor Kuroda did not mention the games at
the 18 June policy meeting, implying reduced expectations of an Olympics-related
boost to the economy. Given low expectations, however, Japan’s successful hosting
of the games (starting on 23 July) should support consumer and business confidence,
in our view.
Private consumption will be influenced by near-term virus developments; concerns about
infections and the slow pace of vaccination may halt the recent rebound in consumer
sentiment. Retail sales fell 4.6% m/m in April, reversing a 1.2% gain in March, as Japan
extended its emergency lockdown. Household spending fell 0.6% m/m in April after rising
5.6% in March. While uncertainty around consumption is high, we expect a sharp
rebound in H2, as vaccine rollout accelerated in June.
Unlike the US and China, Japan is concerned about deflation rather than inflation.
Headline CPI inflation remained negative as of May, and core inflation excluding fresh
food was positive (0.1% y/y) for the first time since March 2020. We expect CPI inflation
to stay close to zero throughout Q3, capped by weak demand and mobile-phone fee
reductions under Prime Minister Suga’s welfare policy. The base effect is likely to fade
only in Q4. We lower our average 2021 inflation forecast to 0.1% from 0.2% to factor in
these downward pressures. We raise our 2022 forecast to 0.7% from 0.5% to reflect the
delayed economic rebound and pent-up demand. We expect a current account surplus
forecast of 3.5% of GDP in 2021, supported by a steady services surplus and a
widening trade surplus (due to improving exports).
Figure 1: Japan macroeconomic forecasts Figure 2: Japan’s exports rise on global demand;
domestic demand remains depressed amid COVID wave
Export growth (LHS) vs CPI inflation (RHS), % y/y
2021 2022 2023
GDP growth (real % y/y) 2.6 2.3 1.1
CPI (% annual average) 0.1 0.7 1.0
Policy rate (%)* -0.10 -0.10 -0.10
USD-JPY* 108.00 105.00 104.00
Current account balance (% GDP) 3.5 3.5 3.0
Fiscal balance (% GDP)** -7.0 -6.5 -4.5
*end-period; **for fiscal year starting in April; Source: Standard Chartered Research
Source: Bloomberg, Standard Chartered Research
CPI
Export growth (LHS)
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
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40
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60
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Jul-1
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Oct
-19
Jan-
20
Apr
-20
Jul-2
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Oct
-20
Jan-
21
Apr
-21
The ongoing pandemic is delaying
Japan’s economic recovery for
longer
Chong Hoon Park +82 2 3702 5011
Head, Korea and Japan Economic Research
Standard Chartered Bank Korea Limited
Tony Phoo +886 2 6606 9436
Senior Economist, NEA
Standard Chartered Bank (Taiwan) Limited
Mayank Mishra +65 6596 7466
Global FX and Macro Strategist
Standard Chartered Bank (Singapore) Limited
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Standard Chartered Global Research | 2 July 2021 39
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Monetary policy – BoJ to maintain status quo for longer
The BoJ kept its policy rate on hold in June, as expected; we expect no change in
monetary policy settings until 2023 at the earliest. Unlike the Fed, the BoJ delivered a
dovish message. It extended a COVID programme that provides financing support to
pandemic-affected companies by six months to end-March 2022, and gave verbal
assurances that it would cut rates further if needed to boost the economy and meet the
2% inflation target. While Kuroda said that accelerated vaccination progress should
support the domestic market by unleashing pent-up demand, he did not specify when
he expected this to happen. He said that global inflationary pressure is not a concern
beyond this year, so its impact on Japan will be limited; he emphasised the need for
Japan to aim to achieve its 2% inflation target. Separately, the BoJ recently announced
plans for a new policy tool to address climate change, which will require companies to
meet environmental standards; more details will be announced at the next meeting.
Fiscal policy – Additional budget will be needed
On the fiscal front, the lower house approved a budget of JPY 106.6tn for the year
ending in March 2022 to fight the coronavirus. Government debt is set to rise in 2021,
as planned bond issuance to fund the deficit will be larger than last year. We also think
an additional budget will be needed given the uncertain economic environment. While
debt stood at a substantial c.256% of GDP in 2020 (according to the IMF), we do not
think this is a concern, as 90% of the debt is owned domestically by the BoJ, other
public institutions and banks. The incentive for increased government spending is likely
to be strong in an election year, particularly considering weak H1-2021 GDP growth
expectations. Japan will hold lower house elections by 22 October 2021.
Olympics will go on as scheduled
Japan plans to go ahead with hosting the Olympics from 23 July to 8 August, despite
concerns about the recent COVID surge. After a slow start, the rate of vaccination
accelerated in June; the share of the total population having received at least one
vaccine dose increased to 29.6% as of 29 June from 7.73% as of 31 May.
Market outlook – Bearish on the JPY
The JPY has underperformed G10 peers this year, as expected; we have been using
it as a funding currency since the start of the year on the view that yield differentials
are likely to move against the JPY in a reflationary environment. USD-JPY has been
driven higher by rising real yield differentials; 10Y US real yields are up c.20bps YTD,
while 10Y JPY real yields are down c.30bps due to a recovery in domestic inflation
expectations and nominal yields are anchored by the BoJ’s yield curve control (YCC)
policy.
We expect real yield differentials to remain supportive of USD-JPY, driving JPY
underperformance even during periods of broad USD weakness. We maintain our
USD-JPY forecasts of 110 for end-Q3-2021 and 108 for end-Q4-2021.
BoJ is likely to maintain its current
QE and interest rate settings,
supporting the recovery
JPY to remain a funding currency
The government is expanding fiscal
policy to support the recovery
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Malaysia – A bumpy ride
Economic outlook
We lower our 2021 GDP growth forecast to 4.7% (from 6.3%) to take the latest
lockdown into account. The encouraging growth recovery (Q1 GDP rose 2.7% q/q
SA) has been disrupted as the government materially tightened mobility restrictions in
June to address a third wave of infections. The ‘Full Movement Control Order’ (FMCO)
– which was extended on 28 June – is the most restrictive set of measures since
Malaysia’s first lockdown in Q2-2020. But we think that the economic impact will be
milder than in Q2-2020. More economic sectors are allowed to remain open this time,
including the key electrical and electronics manufacturing sector. Robust external
demand, ongoing government support measures, and improved remote working
capacity should also help. Once the economy reopens, Malaysia’s accelerated
vaccination rollout is likely to support the rebound. That said, no end date for the FMCO
‘phase 1’ restrictions had been announced at the time of writing, and new COVID cases
remain above 4,000 per day.
The government’s phased economic recovery plan sees the economy fully reopening
by end-October, contingent on the pandemic situation and vaccination progress. The
government targets fully vaccinating 60% of the population by October. While the
current vaccination rate (200,000 seven-day moving average) is lower than required to
reach the target, the pace is accelerating rapidly.
Given the phased reopening, the recovery is likely to remain uneven. We expect
external demand to remain a key source of support; in contrast, domestic demand may
be curtailed by weaker employment in affected sectors and social distancing
restrictions on consumer-facing businesses. Malaysia continues to benefit from strong
demand for electronics, commodities and rubber gloves. Ongoing infrastructure
projects should also support growth; the government’s allocation to development
expenditure rose 34% y/y in Q1.
Private consumption may remain cautious, as the labour-market recovery is still
gradual, intermittent and uneven. The unemployment rate eased gradually to 4.6% in
April from a high of 5.3% in May 2020 but remains above the pre-COVID level (3.2%).
The latest FMCO may have led to increased unemployment. Wage inflation should
remain subdued (excluding the Q2 boost from a low base) amid labour-market slack
Figure 1: Malaysia macroeconomic forecasts Figure 2: Still-affected sectors account for 32% of GDP
Hit to GDP growth* for every ppt fall in mobility (average of
transit and workplaces)
2021 2022 2023
GDP growth (real % y/y) 4.7 5.0 4.6
CPI (% annual average) 2.8 1.6 1.7
Policy rate (%)* 1.75 2.50 3.00
USD-MYR* 4.00 4.00 4.05
Current account balance (% GDP) 1.7 1.8 2.0
Fiscal balance (% GDP) -6.0 -4.5 -3.9
*end-period; Source: Standard Chartered Research * Change in GDP growth is versus Q4-2019 levels; Source: Google mobility report,
Standard Chartered Research
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Tra
nspo
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Info
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and
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Who
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Ret
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Agr
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Min
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Q2-2020 Q3-2020 Q4-2020 Q1-2021
The economic impact of the latest
lockdown is likely to be milder than
in Q2-2020
Edward Lee +65 6596 8252
Chief Economist, ASEAN and South Asia
Standard Chartered Bank (Singapore) Limited
Jonathan Koh +65 6596 8075
Economist, Asia
Standard Chartered Bank (Singapore) Limited
Divya Devesh +65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
External demand may help to
mitigate effect of slow recovery in
domestic consumer
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and rising skills-related underemployment (13.7% of total employment versus 10.1%
in Q4-2019). Wage inflation has also been capped so far by fewer hours worked (c.3%
below pre-COVID levels). That said, earlier withdrawals from the national pension fund,
which totalled c.MYR 63bn YTD as of June, should boost consumption.
We raise our 2021 headline inflation forecast to 2.8% from 2.5%. This partly reflects
higher global oil prices, although the government is now placing a cap on diesel and
RON95 fuel prices (RON97 prices are not capped). Meanwhile, global food prices
continue to increase, rising almost 40% y/y in May. This may add to upward pressure
on local food prices. Due to the higher base and our lower global oil price forecast for
2022, we lower our 2022 headline inflation forecast to 1.6% from 1.8%.
Policy
Bank Negara Malaysia (BNM) may start normalising monetary policy in 2022.
Despite the rise in headline inflation, we expect core inflation to remain manageable at
1.0% in 2021. Core inflation was only 0.7% y/y in April, despite a 4.7% y/y headline
inflation rate, of which fuel costs alone contributed c.64% of the increase. Phased
economic reopening in H2-2021 may also delay a pick-up in demand-side inflation. As
a result, we expect BNM to remain biased towards growth. We estimate that the output
gap will close in Q4-2022. However, given that the policy rate is at a historical low, we
now expect BNM to start raising rates in Q3-2022 – two rate hikes of 25bps in Q3 and
another 25bps in Q4 – before pausing. (We previously expected no change in rates
through 2022.) This would take the overnight policy rate to 2.5% from 1.75% currently,
still below the 3.0% pre-COVID level. We see rate hikes resuming in H2-2023, taking
the policy rate to 3.00%.
Meanwhile, further fiscal support may be limited by the statutory debt ceiling of 60% of
GDP. Based on current official projections, statutory debt may reach 58.5% of GDP by
year-end, but this ratio may be higher due to lower-than-projected growth. The
government’s recent direct fiscal injection of MYR 15bn may add another c.1ppt to debt
(although how this may be funded remains unconfirmed).
Politics
The state of emergency imposed since 11 January is due to end on 1 August.
The measure was imposed to facilitate government efforts to tackle COVID; Malaysia’s
previous states of emergency were imposed due to security concerns. Parliament has
been suspended, and no elections are allowed during this period. The latest economic
recovery plan noted that parliament may reconvene only in September-October,
although there are growing calls for an earlier reopening of parliament.
Market outlook
We remain constructive on the Malaysian ringgit (MYR). The currency should
continue to benefit from rising commodity prices – LNG and crude palm oil prices were
up 86% and 50% y/y as of June, respectively. The trade surplus has remained robust
as a result, averaging MYR 20bn per month in 4M-2021, similar to H2-2020. The recent
re-imposition of restrictions may have caused import demand to slow again, while
external demand remains high; this is likely to sustain a large trade surplus until Q3.
However, we expect the surplus to narrow towards the end of 2021 as the economy
reopens further and imports pick up. Optimism over travel reopening in 2022 may
support the currency. Favourable MYR valuations on a real effective exchange rate
basis and strong FX reserves should also provide support. FX reserves (including
changes in the forward book) rose c.USD 12bn in the year to April.
Additional fiscal support may be
hampered by the 60% debt ceiling
Manageable core inflation should
allow BNM to refrain from
normalising monetary policy
until 2022
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Nepal – A prolonged recovery process
Economic outlook – Vaccine delays, politics are key risks
We lower our FY22 growth forecast to 5.0% (from 6.5%) to reflect the slow pace of
vaccination. While we still expect the economic recovery to improve in FY22, the pace is
likely to be more gradual than we earlier expected. We estimate growth of 2.0% in FY21
(year ending 15 July 2021). The improvement is likely to be driven by services as social
distancing rules are eased, and by agriculture on the back of recent favourable monsoons.
However, tourism – a key sector for Nepal – is likely to remain nearly non-existent, at least
in H1-FY22. Moreover, the lasting impact of the pandemic is not yet clear. According to a
World Bank COVID-19 monitoring survey, more than two of every five economically active
workers in Nepal reported a job loss or a prolonged work absence in 2020.
Nepal’s second COVID wave in April and May caused significant disruptions, and
highlights the risk to the economy from the slow pace of vaccination. Nearly 2.9mn
vaccine doses had been administered as of early June, compared with Nepal’s
requirement of nearly 40mn shots. Meanwhile, political uncertainty remains high after
the prime minister dissolved parliament in December 2020. The Supreme Court
reversed the decision in February, but the president dissolved parliament in May,
calling for elections in November as no party had a majority.
Fiscal and monetary policy is likely to remain accommodative. We forecast the FY22
fiscal deficit at 5.5% of GDP (widening from 4.0% in FY21) given higher COVID-related
expenditure. The central bank, Nepal Rastra Bank (NRB), has been using an interest
rate corridor since FY17 to manage volatility in short-term interest rates. We expect
NRB to keep interest rates stable after it cut the lower limit of the corridor by 1ppt (to
1%) and the upper limit by 0.5ppt (to 3%) to enhance liquidity. NRB is also likely to
deliver additional credit relief measures for the ailing private sector. While we expect
inflation to rise to 5.5% in FY22 (from 4.0% in FY21), driven by the economic recovery
and base effects, this is still below the NRB target of 6%.
We expect the C/A deficit to widen further to 6.0% of GDP in FY22, driven by a larger
trade deficit as the post-COVID resumption of economic activity boosts imports. We
forecast a C/A deficit forecast of 4.0% of GDP for FY21. Remittances were strong in
9M-FY21, growing 13% y/y, led by higher transfers to support local consumption and
greater use of financial channels. However, tourism – which contributed 1.7% of GDP
in FY20 – fell c.90% in 9M-FY21 and is likely to remain muted in FY22. FX reserves
are sufficient, at USD 10.9bn (c.12 months of imports) as of April.
Figure 1: Nepal macroeconomic forecasts Figure 2: Growth is likely to improve in FY22
ppt contributions to GDP (% y/y)
FY21 FY22 FY23
GDP growth (real % y/y) 2.0 5.0 6.0
CPI (% annual average) 4.0 5.5 5.5
USD-NPR* 116.91 120.80 124.00
Current account balance (% GDP) -4.0 -6.0 -5.8
Fiscal balance (% GDP) -4.0 -5.5 -6.0
Note: Economic forecasts are for fiscal year ending 15 July; *NPR is pegged at 1.6x INR for
end-December of previous year; Source: Standard Chartered Research
Source: CEIC, Standard Chartered Research
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
FY16 FY17 FY18 FY19F FY20 FY21F FY22F
Private consumption Government consumption GCF Net exports
GDP (% y/y)
Saurav Anand +91 22 6115 8845
Economist, South Asia
Standard Chartered Bank, India
Vaccine supply and political
uncertainty are the key risks to our
FY22 outlook
Fiscal and monetary policy are
likely to remain growth-oriented
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New Zealand – RBNZ to start hiking in Q2-2022
Economic outlook
We expect GDP growth of 5.5% in 2021. We remain cautiously optimistic on the
economic outlook for the rest of the year, with leading indicators pointing to a continued
recovery. Global economic reopening amid rising vaccinations, the contained domestic
COVID situation, still-accommodative monetary policy and expansionary fiscal policy
should provide support.
Leading indicators bode well for the economic recovery ahead. Higher dairy prices and
improving external demand should continue to benefit the agriculture sector, although
floods are a downside risk. The manufacturing PMI was in expansionary territory for
11 of the 12 months through May; business confidence in the sector has been in
positive territory since November 2020. Construction activity should remain robust
amid buoyant housing demand; building consents issued rose 39% y/y in April on a
3mma basis. The labour shortage poses a risk to the construction sector, however.
While tourism-dependent sectors may benefit from travel bubbles in the coming
months, a return to pre-COVID levels is unlikely until late 2022 or early 2023 as border
restrictions are relaxed only gradually. The COVID-19 pandemic remains a key
downside risk to growth. While it has been contained domestically, the pace of
vaccination has been slow due to supply constraints; only 7.9% of the population had
been fully vaccinated as of 22 June. At the current pace of 16,400 doses administered
daily, we estimate that only c.40% of the population will be vaccinated by end-2021.
The labour-market recovery is likely to continue. The number of filled jobs has picked
up in recent months, rising on a m/m basis for three straight months through April. The
recovery has also become slightly more broad-based; as of April, filled jobs in c.67%
of industries had returned to above pre-COVID levels, up from c.50% in March. That
said, as of 4 June, c.170,000 jobs were associated with wage subsidies. The resilience
of the labour market as wage subsidies fade will be a key determinant of the outlook.
Policy
The Reserve Bank of New Zealand (RBNZ) is likely to begin normalising policy
in Q2-2022. We expect the first 25bps hike to the official cash rate (OCR) in May 2022,
followed by one hike each in Q3- and Q4-2022 and two more in 2023. We expect the
output gap to narrow gradually for the rest of 2021 before turning positive in Q1-2022.
Figure 1: New Zealand macroeconomic forecasts Figure 2: Output gap to turn positive in Q1-2022
Real GDP indexed to Q4-2019 at 100 (LHS); output gap, %
(RHS)
2021 2022 2023
GDP growth (real % y/y) 5.5 3.8 2.9
CPI (% annual average) 2.0 1.8 2.0
Policy rate (%)* 0.25 1.00 1.50
NZD-USD* 0.75 0.75 0.75
Current account balance (% GDP) -2.9 -2.6 -2.7
Fiscal balance (% GDP)** -4.5 -5.3 -2.6
*end-period; **for fiscal year ending in June; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Output gap (RHS)
Real GDP (Q4-2019 = 100)
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
85
90
95
100
105
110
Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22
Leading indicators bode well for the
economic recovery
We expect the first 25bps hike from
the RBNZ in May 2022
Jonathan Koh +65 6596 8075
Economist, Asia
Standard Chartered Bank (Singapore) Limited
Mayank Mishra +65 6596 7466
Global FX and Macro Strategist
Standard Chartered Bank (Singapore) Limited
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A labour-market recovery and higher pricing intentions are likely to translate into higher
inflationary pressures. We forecast 2021 inflation at 2.0%; we raise our 2022 forecast
to 1.8% from 1.6% to account for a higher output gap.
Our rate-hike call also reflects the RBNZ’s hawkish turn at its May 2021 meeting. In its
monetary policy statement, the RBNZ incorporated two 25bps rate hikes in 2022 and
three in 2023. In addition, changes in its assessment of current conditions and
guidance on the maintenance of current stimulatory monetary settings suggest a
slightly pre-emptive stance towards tightening. This is a deviation from its previous
emphasis on a “least regrets” approach to normalising policy (see New Zealand –
RBNZ to begin hiking in May 2022).
The key risk to our call is a worsening of the pandemic situation, which could delay the
recovery and thereby delay policy rate normalisation. In addition, business lending
remains weak, despite the improvement in business confidence.
The central bank noted in May that of the monetary policy tools currently being
deployed, the OCR is the preferred tool to respond to future economic developments.
While the RBNZ may end its Large Scale Asset Purchase (LSAP) programme before
hiking rates, we do not see this as a necessity given that purchases are now smaller
due to reduced government bond issuance. Also, take-up of the Funding for Lending
programme has been low (NZD 3bn to date). This supports our view that the first rate
hike will take place in May 2022.
While we expect additional LSAP purchases to end by June, we do not expect balance-
sheet reduction. The RBNZ is likely to maintain the size of its balance sheet and
reinvest maturing holdings until the recovery is on a steadier footing and pandemic
uncertainty dissipates further, in our view.
Housing
Housing measures introduced in late March have capped speculative activity.
Mortgage loans to investors fell 6% m/m May; while median house prices remain high,
they appeared to have peaked in March-May. The RBNZ is exploring other macro-
prudential tools; debt-to-income (DTI) restrictions are likely to be the next tool to be
deployed, if necessary. In its May financial stability report, the central bank suggested
that DTI restrictions are effective in stabilising housing cycles, and that they are more
likely than loan-to-value ratio (LVR) restrictions to have a sustained effect over time.
The RBNZ also noted that DTI caps tend to impact investors and higher-income owner-
occupiers more since they borrow at higher DTI ratios, on average. Furthermore, the
central bank noted that ‘speed limits’ could mitigate the impact on access to credit for
first-home buyers.
Market outlook
We remain constructive on the New Zealand dollar (NZD). We expect commodity
strength and the RBNZ’s hawkish shift to support the NZD. The RBNZ has also
softened its FX rhetoric at recent meetings, dropping the comment that NZD strength
was offsetting support from stronger export prices. We believe that RBNZ concerns
about currency strength have eased due to the consolidation in the trade-weighted
NZD, despite price gains in New Zealand’s key commodity exports and the improving
domestic outlook.
RBNZ is studying using DTI
restrictions as a macro-prudential
tool
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Philippines – Still battling COVID headwinds
Economic outlook – Waiting for fiscal support to kick in
We expect subdued growth of 4.6% in 2021, following a 9.6% contraction in 2020.
The slow pace of COVID vaccination rollout and potential new waves of cases pose
risks to our forecast. Private-sector demand is likely to remain subdued on still-soft
consumer and business sentiment. We expect public infrastructure investment to pick
up only in mid-Q3, with a risk that it does not eventuate at all. Bangko Sentral ng
Pilipinas (BSP) is likely to maintain an accommodative monetary policy stance for the
rest of 2021 to support growth, while keeping policy rates unchanged.
New COVID infections declined following nationwide lockdowns in May, but they
remain elevated and above 2020 highs. New cases have increased recently following
the relaxation of restrictions; a sharp increase in the coming weeks could lead to the
re-imposition of lockdowns, further dampening sentiment and growth. The Philippines’
low vaccination rate increases the risk of new COVID waves. Less than 2% of the
population is fully vaccinated; only 4.3% of people have received at least one dose. At
the current rate of vaccination, the Philippines is unlikely to meet its target of reaching
herd immunity by end-2021. Domestic consumption is likely to remain modest for the
rest of 2021 amid subdued consumer sentiment.
We expect infrastructure investment to pick up in mid-Q3 at the earliest. While the
government has allocated PHP 1.1tn (c.5.4% of GDP) to its flagship ‘Build, Build,
Build’ infrastructure programme in 2021, implementation has been slow. We see a
risk that infrastructure investment does not happen at all if progress is not made by
end-Q3. With general elections due in May 2022, infrastructure investment may
become less of a focus for the government, particularly if new investments have not
started by early Q4.
The trade deficit is likely to remain contained in H2 as exports pick up only moderately
and import growth remains slow amid soft domestic activity. A pick-up in infrastructure
investment could boost growth in raw-material imports. While high oil prices and a low
base will boost crude oil imports, volumes are likely to remain low. We expect overseas
remittances to remain strong, supported by the global growth recovery; we also see a
rapid increase in business process outsourcing (BPO) services exports. Foreign tourist
receipts are likely to remain close to 2020 lows as travel restrictions continue. We
expect another current account surplus in 2021, supported by a subdued trade deficit
Figure 1: Philippines macroeconomic forecasts Figure 2: Growth is likely to stay soft on still-subdued
sentiment (growth, % q/q, seasonally adjusted)
2021 2022 2023
GDP growth (real % y/y) 4.6 6.6 5.9
CPI (% annual average) 3.9 3.0 2.7
Policy rate (%)* 2.00 2.00 2.00
USD-PHP* 49.50 50.50 50.70
Current account balance (% GDP) 2.0 -0.5 -1.2
Fiscal balance (% GDP) -7.5 -6.5 -5.0
*end-period; Source: Standard Chartered Research Source: Philippine Statistics Authority, Standard Chartered Research
-20%
-15%
-10%
-5%
0%
5%
10%
GDP Consumption Agri Industry Services
Mar-20 Jun-20 Sep-20 Dec-20 Mar-21
We expect the current account to
remain in surplus in 2021
Chidu Narayanan +65 6596 7004
Economist, Asia
Standard Chartered Bank (Singapore) Limited
Divya Devesh +65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
Arup Ghosh +65 6596 4620
Senior Asia Rates Strategist
Standard Chartered Bank (Singapore) Limited
Public infrastructure investment is
likely to start picking up only in
mid-Q3
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and strong remittance and BPO inflows. We forecast a C/A surplus of 2.0% of GDP in
2021, turning to a deficit of 0.5% in 2022.
Inflation is likely to slow in H2-2021 amid subdued activity, even as the low base from
2020 fades. We expect average inflation to moderate to 3.0% in H2 from 4.4% in H1.
Food inflation, the primary driver of the H1 inflation spike, has declined on lower
vegetable prices and is likely to remain modest in H2. A high base from 2020 should
cap transport inflation in Q3, despite expected high global crude prices; we expect a
further moderation in Q4. Risks to our inflation forecast are balanced; elevated
infections could slow activity and therefore inflation, while higher infrastructure
investment and global crude oil prices present upside risks.
Policy
BSP is likely to maintain its accommodative policy for the next few quarters to
support growth. Declining inflationary pressure should enable BSP to prioritise
growth, especially in the absence of substantial fiscal support. We expect it to keep the
policy rate at the current record low. Further cuts are unlikely in 2021, in our view; BSP
may wait for sentiment to improve before considering further rate cuts in order to
maximise the impact of any further easing.
Credit growth has turned negative this year despite accommodative monetary
conditions. Corporate credit extension fell 3.9% y/y in April, the biggest drop in 14
years; household credit fell even further, by 10.2%, the biggest decline in multiple
decades. We expect credit growth to remain soft for the rest of 2021 given subdued
business confidence and the uncertain demand outlook. An improvement in consumer
and business confidence is essential to reviving growth in corporate credit and
business investment; this is unlikely to happen in 2021, in our view.
Politics
Attention is likely to turn to the general election (slated for May 2022) in Q4. This may
cause the political focus to shift from infrastructure investment to election campaign
planning.
Market outlook
We maintain our Underweight medium-term FX weighting on the Philippine peso
(PHP). The rise in domestic COVID cases has curbed domestic demand and further
delayed a major infrastructure development push, leading to a stronger C/A balance.
However, we remain bearish on the PHP relative to both consensus and forwards. We
think PHP valuations remain extremely stretched. We also see signs of weakness in
the balance of payments as residents’ demand for foreign assets rises against a
backdrop of negative real rates.
RPGBs benefit from local investors’ search for carry. We expect 5Y-7Y RPGBs to
outperform on a steep curve, driven by the following factors: the Philippines’ subdued
growth outlook and slow vaccination pace; the expected moderation in inflation in H2;
BSP’s on-hold and accommodative policy stance; and locals extending slightly further
out the curve for yield pick-up and carry. 7Y RPGBs trade on the steepest part of the
curve and provide a c.150bps yield pick-up over the policy rate. That said, foreign
appetite for RPGBs could remain low as a still-negative real yield cushion and an
elevated PHP REER weigh on total-return expectations.
We expect BSP to remain
accommodative for the rest of 2021
to support growth
5Y-7Y RPGBs outperform on a
steep curve
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Singapore – Uneven recovery
Economic outlook
We raise our 2021 GDP growth forecast to 7.0% (from 6.3%) to reflect better-than-
expected external demand so far. The economy continues to benefit from relatively
successfully pandemic management, the reopening of global economies, targeted
fiscal support, and accommodative monetary policy. The government forecasts 2021
GDP at 4-6%. We lower our 2022 GDP growth forecast to 3.6% from 4.4% due to the
higher base.
Singapore faced a resurgence of COVID cases in Q2 that led to more stringent mobility
restrictions. However, we estimate that the percentage of sectors affected by mobility
measures is low, at c.24% (see ASEAN – Does mobility still matter?); the hit to full-
year growth from the one-month ‘Phase 2’ restrictions is likely to be minimal, at
c.0.4ppt. Also, cases have fallen as vaccination progresses. Based on the current run
rate, we expect Singapore to have fully vaccinated its population by mid-Q4.
Meanwhile, the economy continues to benefit from robust external demand. As of April,
industrial production had risen on a m/m basis for five out of six months; non-oil
domestic exports (ex-pharmaceuticals) expanded 8.7% y/y in 4M-2021. That said, both
the headline and the electronics manufacturing PMIs moderated in May. While a high
base effect may be coming into play in the semiconductor sector, the global chip
shortage should continue to sustain production.
The unevenness of Singapore’s growth recovery is likely to become even more
pronounced in the coming months. Externally oriented sectors (manufacturing,
wholesale trade) should benefit further from global economic reopening, and ‘modern
services’ (finance and insurance, information and communications) will remain
supported by digitalisation efforts and demand for payment solutions. In contrast,
consumer-facing and tourism-dependent sectors (transportation, accommodation and
food services, retail trade) and construction remain adversely affected by social
distancing measures and border closures.
We expect private consumption to return to close to pre-pandemic levels by end-2021.
The labour market continued its gradual recovery in H1-2021; the resident
unemployment rate fell to 3.9% in April (the lowest since Q2-2020) from a peak of 4.8%
in Q3-2020, though it remained above Q4-2019 level of 3.2%. Retrenchments also fell
Figure 1: Singapore macroeconomic forecasts Figure 2: Labour-market recovery has been uneven
% change from Q4-2019 levels (top and bottom 3)
2021 2022 2023
GDP growth (real % y/y) 7.0 3.6 2.7
CPI (% annual average) 1.7 1.2 1.1
3M SGD SIBOR* 0.45 0.55 1.00
USD-SGD* 1.32 1.32 1.32
Current account balance (% GDP) 16.5 16.0 15.0
Fiscal balance (% GDP)** -0.5 1.2 1.5
*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
-30%-25%-20%-15%-10%-5%0%5%
10%
IT &
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Unevenness of Singapore’s growth
recovery may become even more
pronounced
Edward Lee +65 6596 8252
Chief Economist, ASEAN and South Asia
Standard Chartered Bank (Singapore) Limited
Jonathan Koh +65 6596 8075
Economist, Asia
Standard Chartered Bank (Singapore) Limited
Divya Devesh +65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
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in Q1-2021 to 2,270, close to pre-COVID levels, and were down for a second
consecutive quarter. Investment may pick up, led by the private sector, as business
confidence improves in the manufacturing and services sectors. Loan growth, while
still weak on a y/y basis, is picking up sequentially. Government consumption is likely
to remain supportive, but we expect the fiscal impulse to fade as the government
returns to fiscal prudence.
Policy
We expect monetary policy normalisation to start only in April 2022, amid a
broader economic and labour-market recovery. But the risk of tightening has risen
since the April monetary policy meeting. While it is a close call, we expect the Monetary
Authority of Singapore (MAS) to keep monetary policy settings unchanged in October
for three key reasons (Singapore – Fine print opens the door). First, we expect core
inflation to stay subdued, averaging 0.7% for 2021. Headline inflation should moderate
in the months ahead as low base effects fade. That said, we raise our 2021 headline
inflation forecast to 1.7% from 1.2% to reflect higher-than-expected readings to date.
Second, the labour-market recovery is uneven. Historically, early signs of a broad-
based job-market recovery have emerged prior to monetary policy normalisation. In
April 2010, c.70% of industries were back at or above pre-crisis employment levels; in
April 2018, c.65% of sectors had returned to levels that preceded three quarters of job
losses. In contrast, as of Q1-2021, c.70% of industries remained below Q4-2019
employment levels. Furthermore, the quality of employment may be a concern. While
a government programme to link unemployed workers with available jobs had placed
76,000 residents into positions as of end-2020, 16,600 of those positions (accounting
for 0.7% of the resident labour force) were traineeships, which may not be permanent.
Third, significant pandemic-related uncertainty – particularly regarding variants and
slow vaccination rollout across the region – may keep the MAS cautious, despite
Singapore’s strong recovery and already loose monetary policy. We think it is unlikely
to tighten in October as long as inflation pressure is not entrenched. The MAS noted
in its April policy statement that 2021 growth was likely to exceed the 4-6% forecast
range. However, the government maintained that range in the final Q1 GDP report
(despite better-than-expected Q1 GDP) amid Singapore’s latest COVID wave.
Politics
Deputy Prime Minister Heng recently withdrew as successor to Prime Minister Lee,
citing concerns over his age as the pandemic delayed the handover. Heng was chosen
as the head of the ‘fourth-generation’ (4G) leadership in 2018 and was next in line to
become prime minister. A new leader-elect is expected to emerge before the next
general election, which has to be held by August 2025.
Market outlook
We remain slightly bullish on the SGD. The Singapore dollar nominal effective
exchange rate (SGD NEER) has traded in the upper half of the band since April, aided
by the global economic recovery and the MAS’ removal of its explicit commitment to
maintain an accommodative stance “for some time”. Strong external demand, rising
inflation and Singapore’s rapid vaccination pace should keep the SGD NEER in the
upper half of the policy band as the October MAS meeting approaches. USD-SGD
may, however, be range-bound due to concerns about Fed tapering and a more stable
CNY as China slows the pace of currency appreciation.
Risk of normalisation by the MAS
has risen since the April monetary
policy meeting
Manageable core inflation, uneven
labour-market recovery and
pandemic-related uncertainty may
keep the MAS on hold in October
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South Korea – Robust economy, divided politics
Economic outlook – Helped by tailwinds
We see more upside than downside risk. We raise our 2021 and 2022 GDP growth
forecasts to 4.2% (from 3.9%) and to 2.9% (from 2.6%), respectively, supported by
expansionary fiscal policy in H2-2021. The government has proposed a KRW 33tn
additional budget to support the SME and services sectors, along with plans to hand
out disaster support funds to 80% of the population. This should boost private
consumption in H2. The proposed extra budget will be fully funded by the tax surplus.
Korea’s exports have recovered strongly along with the global economy, and we
expect this trend to continue as more economies reopen in H2. While export growth is
likely to moderate as the base effect fades, still-strong exports should support Korea’s
economy. Improving global growth prospects should also keep investment strong.
Construction investment, which slowed in H1, is likely to pick up as supply disruptions
ease and the domestic market rebounds following reopening.
We expect the job market (as measured by the number of employed) to continue to
improve in H2, but at a slower pace. We see the number of employed rising by
c.200,000 per month on average in 2021. The number is unlikely to return to 2019
levels, as businesses are not expected to reopen fully by the end of the year. Labour-
market slack in the services sector may persist, and job losses driven by the rise of
online shopping are likely to rise in 2022.
We raise our 2021 CPI inflation forecast to 1.8% from 1.7% to account for higher-than-
expected prints in Q2. Supply shocks to agriculture products and commodities remain
sources of upside inflation risk. Demand-pull inflation may also pick up due to
increased government subsidies under the second additional budget. We also raise
our 2022 CPI inflation forecast to 1.6% from 1.5% to reflect the lingering inflationary
impact of fiscal support in H2-2021. However, we still expect the current pick-up in
inflation to be transitory, normalising in H2-2022.
We expect Korea’s current account surplus to moderate to 3.5% of GDP in 2021 from
3.9% in 2020 as investment increases with faster economic growth. The C/A surplus
reached 4.9% of GDP in Q1, but should gradually narrow in H2 as improving business
prospects spur higher imports of capital goods.
Figure 1: South Korea macroeconomic forecasts Figure 2: Asset prices have risen amid low interest rates
Housing prices vs KOSPI, normalised at January 2019 prices
2021 2022 2023
GDP growth (real % y/y) 4.2 2.9 2.5
CPI (% annual average) 1.8 1.6 1.8
Policy rate (%)* 0.75 1.00 1.25
USD-KRW* 1,050 1,050 1,050
Current account balance (% GDP) 3.5 3.5 3.0
Fiscal balance (% GDP) -5.4 -5.9 -5.9
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Housing prices (LHS)
Kospi (RHS)
90
100
110
120
130
140
150
160
170
85
90
95
100
105
110
115
120
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
Economic upside is bigger than
downside risk
Chong Hoon Park +82 2 3702 5011
Head, Korea and Japan Economic Research
Standard Chartered Bank Korea Limited
Arup Ghosh +65 6596 4620
Senior Asia Rates Strategist
Standard Chartered Bank (Singapore) Limited
Mayank Mishra +65 6596 7466
Global FX and Macro Strategist
Standard Chartered Bank (Singapore) Limited
We expect the pick-up in CPI
inflation to be transitory
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Policy – We expect rate hikes in November, January
We expect the Bank of Korea (BoK) to raise the base rate by 25bps in November
2021 and again in January 2022. BoK Governor Lee has indicated at recent events
that rates could be hiked as early as this year, and the minutes of the May Monetary
Policy Committee meeting showed that a majority of members think policy needs to be
normalised soon. With economic growth rebounding and inflation rising, we concur
with this view (We hear you).
Given further hawkish comments from the BoK, we now expect the second hike to
come earlier – in January 2022, versus our previous call of Q3-2022. We think the BoK
will want to contain risks to financial stability from current housing-market conditions.
Fiscal measures should partly offset the economic impact of BoK tightening as the
government continues to support COVID-affected SMEs and services sectors. After
hiking in January 2022, we expect the BoK to pause given Korea’s below-potential
GDP growth and weak SME sector. We expect the next hike to come in H1-2023.
Politics – Election amid social divisions
The younger generation poses a challenge to the status quo. Lee Joon Seok, age
36, recently became the youngest leader of the main opposition party in Korea’s
history. Voters in their 20s and 30s were a game-changer in recent mayoral elections
in Seoul and Busan, and we expect them to be the swing voters in the March 2022
presidential election. The younger generation are speaking out against Korea’s social
and economic inequality and demanding more opportunity; many are vocal critics of
the current government of President Moon amid rising housing prices and shrinking
job opportunities. Korea’s welfare system will also be a critical issue in the upcoming
election. Lee Jae-myung, the leading candidate for the liberal party, is campaigning on
the promise of a universal basic income. In contrast, the conservative party advocates
a more targeted welfare policy. How this debate is resolved will have a far-reaching
impact on the tax system and Korea’s corporate culture, and could exacerbate social
and economic tensions.
The ruling party has called for an extra budget of around KRW 33tn, including handouts
to 80% of Korean households; this could help to expand its support ahead of the
election. Considering that the ruling party controls the National Assembly and the
budget will be funded with the tax surplus, the opposition party is unlikely to be able to
block it, in our view.
Market outlook – Bullish on KRW; look to receive 2Y/1Y rates
We remain bullish on the Korean won (KRW); we expect the currency to benefit from
stronger exports driven by rising memory chip prices and recovering global growth. We
also think capital flows are turning more supportive of the currency, after acting as a
headwind since the start of the year. We maintain our USD-KRW forecasts of 1,080
for end-Q3-2021 and 1,050 for end-2021. We also remain short JPY-KRW.
A hawkish BoK stance and earlier lift-off are likely to lower the level of terminal rates
required to keep inflation within the BoK’s 2% target in the medium term. Korea money-
market and CD rates tend to rise in H2, as banks need to issue financial debentures
to refinance the maturing notes that they issued the previous year to manage their
liquidity coverage ratios. We shift further out the curve and prefer receiving 2Y/1Y
forwards or 5Y tenors on a rates back-up. 2Y/1Y forwards trade on the steepest part
of the curve, and the belly already implies a c.1.75-2.0% terminal level for BoK rates.
We expect the BoK to hike its base
rate before the end of 2021, and
again in January
The presidential election may pit the
younger generation against the
establishment and accentuate
social tensions
In the rates market, we will look to
receive 2Y/1Y forwards or 5Y bonds
on a rates back-up
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Sri Lanka – Slower recovery likely
Economic outlook – Vaccine availability is a key risk
We lower our 2021 GDP growth forecast to 4.0% from 4.5%. This primarily reflects Sri
Lanka’s third COVID wave, whose adverse economic impact likely peaked in Q2. The
country’s gradual pace of vaccination may slow the recovery process. The expected
reopening in Q3 is likely to be slow given the highly contagious nature of the virus and
Sri Lanka’s low vaccination coverage, which has been limited due to supply issues.
Nearly 3mn vaccine doses had been given as of 15 June, versus the government’s
target of 28-30mn. While the government is in talks with various vaccine
manufacturers, it could take another six to nine months to vaccinate a significant
portion of the population.
Investors remain concerned about Sri Lanka’s external financing risks in the absence
of engagement with the IMF. However, the government has arranged bilateral funding
sources given its lack of market access. It has secured a three-year, USD 1.5bn swap
line from the People’s Bank of China, a USD 500mn loan from China Development
Bank (already drawn down in May), and a USD 250mn swap with Bangladesh. The
government has also secured a concessional USD 500mn loan facility from Korea
Exim Bank to be used by 2022, and a USD 100mn line of credit from India. Further, Sri
Lanka’s central bank governor has indicated that it could access a USD 400mn swap
from the Reserve Bank of India in August. The arrangement, along with a possible new
Special Drawing Rights (SDR) allocation of c.USD 790mn, should boost reserves near-
term and help meet this year’s external financing needs. We estimate that Sri Lanka’s
external debt servicing is adequately covered in 2021, with FX reserves likely to remain
at USD 3.5-4.5bn by year-end (USD 4bn at the end of May).
Beyond 2021, however, the government has USD 4-5bn of external debt service
annually until 2026, with nearly USD 29bn to be paid between now and end-2026. This
will result in continued external financing pressure. A resumption of tourism and
increased FDI are critical to ensuring external debt sustainability from 2022 onwards.
We now expect a wider 2021 C/A deficit of 2.4% of GDP (USD 1.9bn), versus 1.4%
(USD 1.2bn) previously. This reflects lower tourism receipts, as we expect a tourism
recovery to be delayed to H2-2022. We now estimate a USD 7.2bn trade deficit this
year (versus USD 6.5bn earlier) due to lower-than-expected exports. Our import
estimate remains unchanged, as rising commodity prices are likely to be offset by
Figure 1: Sri Lanka macroeconomic forecasts Figure 2: Over USD 4bn of external debt to be serviced
annually (USD bn)
2021 2022 2023
GDP growth (real % y/y) 4.0 4.2 4.5
CPI (% annual average) 4.7 4.5 4.5
Policy rate (%)* 5.50 5.50 6.00
USD-LKR* 210.00 215.00 220.00
Current account balance (% GDP) -2.4 -2.5 -2.5
Fiscal balance (% GDP) -10.0 -8.0 -7.0
*end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
Bonds
Other FX loans
Interest
SLDB
0
1
2
3
4
5
6
2021F 2022F 2023F 2024F 2025F
Saurav Anand +91 22 6115 8845
Economist, South Asia
Standard Chartered Bank, India
Nagaraj Kulkarni +65 6596 6738
Senior Asia Rates Strategist
Standard Chartered Bank (Singapore) Limited
Divya Devesh +65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
We now expect a wider 2021 C/A
deficit of 2.4% of GDP
We expect FX reserves to be in a
range of USD 3.5-4.5bn by end-2021
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falling import demand amid reduced economic activity and weak consumer confidence.
We now expect tourism receipts of just USD 300mn in 2021 (USD 1.4bn earlier) as the
third COVID wave deters visitors. We expect FDI inflows to remain subdued at c.USD
800mn in 2021 – similar to 2019 but significantly better than USD 548mn in 2020.
Policy – CBSL likely to remain accommodative in 2021
We maintain our view that the Central Bank of Sri Lanka (CBSL) will keep policy rates
on hold for the rest of 2021. We expect it to keep the Standard Lending Facility Rate
(SLFR) at 5.5%, maintaining an accommodative stance. Average inflation is likely to
increase to 4.7% (2020: 4.2%) given improving economic activity, higher commodity
prices and excess liquidity; this is still well within CBSL’s target band of 4-6%. We
expect the central bank to continue with liquidity-enhancing measures and regulatory
forbearance, in line with policies already announced, to ensure financial stability and
monetary policy transmission.
We revise our 2021 fiscal deficit forecast to 10% of GDP (versus 8.9% previously and
11.1% in 2020) as slower growth leads to a revenue shortfall. We forecast revenue
growth of 17.6% in 2021 and a revenue-to-GDP ratio of 10% – below the budgeted
11.5%. We expect the government to cut expenditure to 20% of GDP (versus the
budgeted 20.4%). Public investment is likely to be reduced sharply to offset the rise in
revenue expenditure; we expect it to come in at 3.5% of GDP, below the budgeted
6.1%. We expect revenue expenditure to overshoot, at 16.5% of GDP versus 14.4%
in the budget. This is driven by higher salaries (including pensions) and interest
expenses.
Concerns about medium-term debt sustainability are likely to remain high amid a wider
fiscal deficit and rising debt levels. We expect public debt-to-GDP to rise to the 115-
120% range by end-2021 from 110% at end-2020 (including sovereign guaranteed
debt), keeping the interest costs-to-revenue ratio high at c.60%. This year’s primary
deficit is likely to be c.3.7% of GDP. Our estimates suggest that the government needs
a primary surplus of more than 2% and real GDP growth of more than 5.0% (nominal
growth: c.10%) to stabilise debt. This seems challenging in the near term given the
current strategy of keeping tax rates low.
Politics – Situation likely to remain stable
The current SLPP government has a nearly two-thirds majority in parliament. The
president and parliament are likely to work in close co-ordination to improve the
economic situation – something that was lacking between 2017 and 2020.
Market outlook
We maintain a Negative outlook on Sri Lankan rupee (LKR) bonds. The end of the
monetary easing cycle and medium-term debt sustainability are key concerns.
Although nominal yield levels are high, we see room for a further up-move.
On the FX front, we remain bearish on the LKR and maintain our USD-LKR target of
210 for end-2021. Depreciation pressure on the currency is likely to persist amid a
widening trade deficit, a weak tourism outlook, steep external financing requirements
and limited FX reserves.
We expect CBSL to continue with
accommodative monetary policy
Fiscal deficit likely to remain wide
at 10% of GDP in 2021
We maintain our USD-LKR target of
210 for end-2021
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Taiwan – Speed bumps ahead
Economic outlook
We raise our 2021 GDP growth forecast to 5.0% (from 4.4%) to reflect an
exceptionally strong Q1 performance; our forecast remains below the government’s
projection of c.5.5%. Taiwan’s exporters should continue to benefit from strong global
tech demand, the commodity/oil price recovery, and the reopening of major overseas
economies. Domestically, Taiwan’s recent COVID-19 outbreak has mostly affected the
services sector, leaving the manufacturing sector largely unscathed. Government
containment measures – including on-site mass-testing and tighter management of
migrant workers’ health status – have prevented the virus from spreading to major
industrial parks. Taiwan’s government recently doubled the COVID stimulus package
to TWD 840bn from the TWD 420bn approved in 2020; this should provide a cushion
against COVID containment measures. The authorities imposed ‘Level 3’ pandemic
restrictions (the second-highest level) in May in response to the outbreak.
However, Taiwan’s recovery faces speed bumps ahead. Consumer spending is likely
to remain weak until vaccine rollout improves significantly. The deteriorating job-
market outlook, particularly in the non-essential services sector, further dented
consumer confidence in June. While the tech-sector outlook for H2 is generally
positive, order cancellations (following over-ordering as overseas buyers have
sought to secure components amid longer lead times and a global chip shortage)
could pose downside risk.
We raise our 2021 CPI inflation forecast to 1.6% from 1.2%. Headline inflation
rebounded to 1.4% y/y in 5M-2021 from -0.2% for the whole of 2020, partly due to base
effects. Transportation costs contributed more than half the inflation gains, rising 5%
y/y in 5M-2021. Food price inflation, which is volatile in nature, is a key upside risk due
to the low base. In contrast, housing expenses – which account for nearly a quarter of
the CPI basket – are likely to moderate slightly in H2 on the government’s decision to
reverse a planned electricity price hike. We expect core CPI inflation to peak at 1.5%
y/y in Q3-2021 before easing to 0.9% in Q4.
We raise our current account (C/A) surplus forecasts. We now expect surpluses of
12% of GDP in 2021 (11% prior) and 11% in 2022 ( 9%). The trade surplus – which
accounts for the bulk of Taiwan’s C/A surplus – jumped 59% y/y to USD 26.7bn in 5M-
2021, supported by strong global demand for integrated circuit (IC) chips. This puts the
Figure 1: Taiwan macroeconomic forecasts Figure 2 Taiwan’s services PMI dipped in May
Index
2021 2022 2023
GDP growth (real % y/y) 5.0 2.5 2.0
CPI (% annual average) 1.6 1.0 1.0
Policy rate (%)* 1.13 1.13 1.25
USD-TWD* 27.20 27.00 26.90
Current account balance (% GDP) 12.0 11.0 9.0
Fiscal balance (% GDP) -1.0 -1.0 -1.0
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Svc PMI
Mftg PMI
35
40
45
50
55
60
65
70
75
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
35
40
45
50
55
60
65
70
75
Tony Phoo +886 2 6606 9436
Senior Economist, NEA
Standard Chartered Bank (Taiwan) Limited
Mayank Mishra +65 6596 7466
Global FX and Macro Strategist
Standard Chartered Bank (Singapore) Limited
Inflation pressure is likely to ease
gradually in H2, but rising food
inflation is a risk
Recent COVID-19 outbreak has left
the manufacturing sector largely
unscathed
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Global Focus – Economic Outlook Q3-2021
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2021 trade surplus on track to surpass last year’s USD 59.4bn. Additionally, the
services balance registered a surplus in Q1-2021 for a fourth straight quarter as the
delayed lifting of international border restrictions reduced outbound travel.
Policy
We expect the Taiwan central bank (CBC) to keep policy rates on hold for the
rest of 2021, in line with market consensus. Policy makers remained positive on the
external and domestic growth outlook at the June MPC meeting. The CBC raised its
2021 growth forecast to 5.08% from 4.53%, noting that robust exports and investment
should counter a temporary disruption to consumer spending due to the recent COVID
outbreak. The CBC also raised its 2021 headline and core CPI inflation forecasts to
1.6% (from 1.07%) and 1.11% (from 0.77%), respectively. However, it views the
current rapid rise in inflation as transitory – it expects headline inflation to ease to
1.46% in Q4 from a peak of 2.23% in Q2. Policy makers have also maintained several
credit control measures introduced in March to rein in speculative activity in the
residential housing market. We expect the CBC to start hiking rates only in 2023,
following the lead of major central banks.
Politics
Taiwan will hold a nationwide referendum on 18 December on various issues
championed by the Democratic Progressive Party (DPP) government, including the
construction of a controversial natural gas project, nuclear energy policy, and whether
to reinstate a ban on US pork imports containing ractopamine. The referendum is
widely seen as a mid-term test of support for the ruling DPP ahead of local government
and mayoral elections in November 2022. President Tsai Ing-wen’s approval rating
has dropped by c.20ppt in recent months, falling below 40% in June for the first time
since she was re-elected in January 2020, according to recent polls by TVBS.
Market outlook
We forecast USD-TWD at 27.50 at end-Q3-2021 and 27.00 at end-Q1-2022. The
TWD has been supported by strong exports and CNY gains in recent months, following
a period of weakness in March when equity outflows and a stronger USD weighed on
the currency. We expect a strong trade rebound driven by robust semiconductor
demand to continue to support the currency. Equity outflows have slowed in recent
months after USD 12bn of outflows in Q1, reducing a headwind to the TWD. Rich
valuation remains a concern for policy makers; this is likely to keep the pace of TWD
gains in check (see Macro Strategy Views, TWD – Gradual gains, underperformance
vs peers).
The December referendum will be
seen as a test of support for the
DPP government ahead of local
elections in 2022
CBC remains positive on the
external and domestic outlook, sees
recent rise in inflation as transitory
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Thailand – Q3 critical to the recovery
Economic outlook – Still far from potential
We maintain our below-consensus GDP growth forecasts of 1.8% for 2021 and
3.1% for 2022. Q3-2021 could see a turnaround in consumer and business sentiment,
but the pace will depend on whether mass vaccination rollout goes as planned; around
70% of the population is targeted for full inoculation by year-end. Phuket’s planned
reopening to tourists – still scheduled to start in July, despite Thailand’s current COVID
spike and a nationwide state of emergency – will also be crucial to gauging prospects
for a broader reopening in Q4. The tourism sector has contributed negatively to
Thailand’s GDP growth since the pandemic started early last year.
We expect the current account (C/A) surplus to narrow to 1.0% of GDP in 2021 from
3.3% in 2020. This reflects a smaller trade surplus as imports rise sharply, offsetting
the improving export outlook. That said, the slow pace of Thailand’s growth recovery
may delay import normalisation. We also maintain our 2021 headline inflation forecast
at 1.0%, the lower end of the Bank of Thailand’s (BoT’s) 1-3% target range. Domestic
demand remains subdued and government measures are reducing households’ cost
of living during the ongoing pandemic. The low base effect that pushed up inflation in
Q2 may fade. 5M-2021 average inflation stood at 0.8%.
The tourism reopening plan should help to reignite sentiment in Q3; however, the actual
number of visitors is likely to remain low until Q4 at least. We continue to expect Thailand’s
economic growth to remain far below potential through next year. Even after the current
COVID outbreak is brought under control and wider vaccination rollout allows tourists to
return, the number of arrivals is unlikely to rise to pre-COVID levels soon. Many tourism
businesses have shut down during the pandemic and supply will have to be rebuilt.
Policy – BoT may face pressure as peers tighten
We expect the policy rate to stay on hold at 0.5% until at least end-2023. The BoT
now expects the economy to take longer to recover to pre-COVID levels (in early 2023
rather than H2-2022). This supports our view of low interest rates for longer. The
benign inflation outlook should also allow a supportive stance. Even if inflation rises
faster than expected, we believe growth will remain the top priority in setting monetary
policy. Moreover, the BoT has not recently expressed concerns about risks to financial
stability from a prolonged low-interest-rate environment, despite rising household debt.
Figure 1: Thailand macroeconomic forecasts Figure 2: Fiscal spending has started to slow; household
debt has risen
Fiscal expenditure (LHS); household debt (RHS)
2021 2022 2023
GDP growth (real % y/y) 1.8 3.1 4.5
CPI (% annual average) 1.0 1.5 3.0
Policy rate (%)* 0.50 0.50 0.50
USD-THB* 31.00 31.30 31.70
Current account balance (% GDP) 1.0 3.0 -0.5
Fiscal balance (% GDP)** -4.5 -4.0 -4.0
*end-period; **for fiscal year ending in September; Source: Standard Chartered Research Source: BoT, Standard Chartered Research
Fiscal expenditure (% y/y, 4qma, LHS)
Household debt (% of GDP, 4qma RHS)
70
72
74
76
78
80
82
84
86
88
90
-4
-2
0
2
4
6
8
10
12
14
16
18
Q1-2013
Q1-2014
Q1-2015
Q1-2016
Q1-2017
Q1-2018
Q1-2019
Q1-2020
Q1-2021
C/A surplus to remain below
average; inflation outlook is benign
amid subdued demand
Economic growth is the BoT’s
current priority, not inflation or
financial stability
Tim Leelahaphan +66 2724 8878
Economist, Thailand and Vietnam
Standard Chartered Bank (Thai) Public Company Limited
Divya Devesh +65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
Tourism will likely take time to
recover fully, as supply has been
hit hard
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We do not rule out a further rate cut, as the economic and pandemic situation remains
unclear. However, we believe room to stay accommodative will narrow as global
central banks move closer to normalising policy. In our view, the key challenge for the
BoT over the next 12 months will be to maintain a relatively loose stance to support
the domestic economy against a changing global monetary policy backdrop. Given the
slow pace of the domestic recovery and the lack of clarity on turnaround factors, the
BoT may lack the flexibility to turn even slightly hawkish. We also believe that Thai
businesses and households are not ready for a change in Thailand’s monetary policy
stance. The longer it takes for Thailand to recover fully, the more capital outflows
should be expected, leading to a wider interest rate differential with the US.
Fiscal policy – Shrinking fiscal policy room
We expect further fiscal stimulus, but we are unsure of its efficacy. Given the
BoT’s limited space to loosen monetary policy further, fiscal measures are likely to be
the main tool to support the economy this year and next. The government has been
authorised to borrow another THB 500bn (3% of GDP) until September 2022 to fund
stimulus; the previous THB 1tn borrowing plan introduced in April 2020 has been
mostly completed. According to the Public Debt Management Office (PDMO), around
20% of the planned new borrowing is expected by September 2021. We therefore do
not expect a significant fiscal boost in the short term; larger stimulus is likely in Q4 or
next year. However, public debt is approaching the legal limit, potentially constraining
the government’s ability to deliver stimulus.
More targeted and effective measures may be needed to stimulate the economy,
especially post-COVID. Earlier pandemic relief measures consisted mainly of cash
handouts and subsidies to households; these failed to significantly boost consumption,
even before the latest surge in local cases. In our view, measures to support business
and investment are equally important as measures to boost consumption.
Thailand’s fiscal room is shrinking; the PDMO expects public debt to rise close to the
ceiling of 60% of GDP later this year. While raising the debt limit is a possibility, it has
not been officially proposed. The budget for FY22 (starting in October 2021) forecasts
a deficit of THB 700bn, up 15% from the current fiscal year. In our view, this indicates
that more effective fiscal spending is needed to avoid an adverse impact on Thailand’s
credit rating. We maintain our fiscal deficit forecasts of 4.5% of GDP for FY21 and
4.0% for FY22 (narrowing from 5.2% in 2020) due to slow budget disbursement. See
Thailand – Shrinking fiscal policy room.
Politics – A swing factor for Q4
The political situation will be closely watched, especially once the pandemic is
under control. Anti-government protests have been banned amid the ongoing COVID
outbreak; protesters had earlier gathered outside parliament to call for the resignation
of Prime Minister General Prayut Chan-o-cha and the rewriting of the constitution.
Protesters have recently criticised the government’s handling of the pandemic. Political
activities could resume in Q4 as the economic recovery gains traction and the
pandemic situation is brought under control; they were largely peaceful last year.
Market outlook – A challenging path for the THB
We maintain a cautious outlook on the THB. The path to normalisation for the
tourism sector remains highly uncertain. Meanwhile, given the rise in commodity prices
and the subsequent deterioration in Thailand’s trade balance, we think the path ahead
for the THB remains challenging. We target USD-THB at 31 by year-end.
BoT is likely to face increasing
pressure as monetary policy is
tightened globally
More investment-focused stimulus
measures are needed to boost
growth, in our view
Political protests are on hold for
now, but could resume once the
current COVID wave is contained
The government now has less fiscal
room than during the pre-COVID
period; further borrowing still likely
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Vietnam – Facing challenges
Economic outlook – COVID to drive short-term prospects
We still expect strong growth this year and next, but the current COVID outbreak
poses downside risks. We lower our 2021 GDP growth forecast to 6.5% (from 6.7%)
to incorporate slower-than-expected H1 growth of 5.6%; that said, manufacturing
growth was robust at 11.4% y/y. We maintain our 7.3% growth forecast for 2022, as
we continue to expect a post-COVID economic acceleration. In the near term, the
country’s pandemic management will be crucial to the outlook amid the current wave,
which has brought record cases. While Vietnam’s economy has continued to expand
during past waves of the pandemic, vaccination rollout has been slow so far.
Domestically oriented sectors have been the main economic drivers since last year.
These sectors – including retail sales – are likely to be the hardest-hit if the current
COVID wave persists. The focus now is on whether the impact on the industrial sector
will be temporary or more long-lasting.
While the global pandemic has weighed on Vietnam’s economy via reduced tourism,
supply-chain disruptions and weaker overseas demand, external indicators are showing
a strong recovery. H1 exports rose 28.4% y/y and imports rose 36.1%. That said, exports
of telephones, electronics, computers and parts (c.30% of total exports) slowed in June.
Vietnam recorded a trade deficit of USD 1.5bn in H1. Pledged FDI – an indicator of future
investment – fell 2.6% y/y in H1, and disbursed FDI rose 6.8%. Lingering global COVID-
19 uncertainty may dampen investment sentiment and therefore FDI flows to Vietnam. A
plan to reopen the tourism sector to foreign tourists remains tentative.
Policy – Expansionary amid rising inflation
Inflation is becoming a concern, in our view. Inflation has stayed high despite the
pandemic, and a further rise could pose a risk to Vietnam’s recovery. We think inflation
is on a rising trend; we expect CPI inflation to accelerate to 3.8% in 2021 and 4.2% in
2022, on average, from 3.2% in 2020 and 2.8% in 2019.
Our expectations of faster inflation are premised on Vietnam’s accelerating growth and
the global economic recovery, along with higher prices for oil, logistics, food (40% of
the CPI basket), agricultural and aquaculture products, and land (amid rising demand
from overseas investors). Domestic steel prices have risen by 30-40% since end-2020,
according to the Vietnam Steel Association; it forecasts continued price gains until the
Figure 1: Vietnam macroeconomic forecasts Figure 2: Ongoing COVID wave may slow the recovery
% y/y; 6mma
2021 2022 2023
GDP growth (real % y/y) 6.5 7.3 6.7
CPI (% annual average) 3.8 4.2 5.5
Policy rate (%)* 4.00 4.00 4.00
USD-VND* 22,850 22,500 22,000
Current account balance (% GDP) 2.2 2.9 2.9
Fiscal balance (% GDP) -6.0 -5.4 -5.4
*end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
Exports
Retail sales (YTD)
Industrial production
-5
0
5
10
15
20
25
30
35
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21
COVID-19 in Vietnam:
1st wave: Mar-Apr 2020
2nd wave: Jul-Aug 2020
3rd wave: Jan-Feb 2021
4th wave: From 27 Apr 2021
Vietnam may need to focus more on
price stability
Strong economic growth may result
in high inflation, together with
supply-push factors
Tim Leelahaphan +66 2724 8878
Economist, Thailand and Vietnam
Standard Chartered Bank (Thai) Public Company Limited
Divya Devesh +65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
The external environment is turning
more supportive of Vietnam’s
economy
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end of Q3-2021 given low supply of intermediate goods for steel production from China
and India. Steel costs typically account for 10-30% of the costs for a construction
project, so major price fluctuations pose challenges for Vietnam’s contractors. That
said, Vietnam’s current COVID wave could pose downside risks to inflation. The
authorities have introduced targeted measures to control inflation; Vietnam’s medium-
term economic objectives appear to prioritise growth over price stability.
Fiscal and monetary policy remains expansionary. Rising inflation reduces the likelihood
of further interest rate cuts, in our view. We also do not expect rate hikes, despite
improving economic and credit growth since Q4-2020 (credit expanded 5.5% YTD as of
21 June); we expect the State Bank of Vietnam (SBV) to keep its refinancing rate at 4.0%
through end-2023 to support credit growth. According to the SBV, support for businesses
during the post-pandemic period is a key priority for the banking sector in 2021. The
possibility of a rate hike may gradually emerge if inflation and growth accelerate faster
than expected. We expect an ongoing fiscal deficit, widening to around 6.0% of GDP this
year; the government aims to reduce the deficit to 3.4% by 2025.
Medium-term outlook – No room for complacency
We believe Vietnam is moving towards its goal of becoming a regional supply-chain
hub, a modern industrial economy and a high-income country in the future. All three
international rating agencies have revised their outlook on the country to positive this
year. However, Vietnam’s policy focus appears to be on growth in both the short and
medium term; we believe more emphasis is needed on price stability to achieve
sustainable economic growth.
Vietnam managed the COVID situation well in 2020, further enhancing its appeal to
foreign investors; the country had already benefited from the ongoing supply-chain shift
in recent years. In order to maintain its attractiveness, Vietnam will need to manage
the current outbreak in a way that provides confidence to the global investment
community, in our view.
Vietnam’s current coronavirus outbreak threatens to disrupt investment and trade
activity. Factories – including suppliers for global tech firms such as Apple and
Samsung – are operating below capacity, with small suppliers more affected than large
ones. We believe longer-term plans are needed to smooth operations, as the pandemic
is unlikely to fully subside soon, even with greater vaccine availability.
The current global shortage of semiconductors – a key input to Vietnam’s
manufacturing production – could pose a near-term risk to the economic recovery. Few
Vietnamese producers can make a chip from start to finish, so they are reliant on
imported inputs, which are becoming more expensive amid the supply shortage. It
remains unclear whether the chip shortage will ease soon; that will depend on the
ongoing global pandemic as well as the US-China technology dispute. Vietnam’s
dependence on imported chips is not just an issue for the short term, in our view.
Market outlook – Turning more constructive on the VND
We lower our USD-VND forecasts to 22,900 at end-Q3-2021 (from 23,100) and to
22,850 at end-2021 (23,000). Our end-2022 forecast remains unchanged at 22,500.
The balance of payments remains highly supportive of the currency, with strong
exports and high net FDI inflows. We also see the central bank as increasingly tolerant
of a stronger currency, which should allow the USD-VND downtrend to persist.
Heavy external dependence may
affect Vietnam’s medium-term
outlook
SBV is likely to stay on hold, but we
do not rule out a policy rate hike
The outlook for exports and
industrial production will depend
partly on the COVID situation
PUBLIC
Economies – Middle East, North Africa
and Pakistan
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Bahrain – Getting the balance right
Economic outlook – Fast vaccine rollout to support recovery
We raise our 2021 growth forecast to 3.0% (from 1.8%) as we now expect a faster
non-oil recovery. While a resurgence in COVID-19 cases in H1-2021 and the
subsequent reintroduction of restrictions weighed on growth, the economic impact is
likely to have been milder than we had initially expected, with households and
businesses adapting to the restrictions. Data from the central bank shows that e-
commerce transactions rose 107% y/y in the first four months of 2021. We expect the
non-oil recovery to gain momentum in H2 as a sharp drop in coronavirus cases since
early June and a high vaccination rate (more than 55% of the population has been fully
vaccinated) allow the relaxation of restrictions. A three-month extension of the
government’s economic stimulus package, to August, should also help.
Policy – Funding outlook improves
Focus will likely remain on Bahrain’s financing needs. Having seen a substantial
widening of its twin deficits as a result of the COVID shock, Bahrain still needs to
implement more fiscal reforms to put debt on a declining path. However, higher oil
prices should provide some near-term fiscal relief (oil contributes more than 60% of
revenue) and enable more support to the non-oil sector. The improved liquidity position
of GCC neighbours lowers the likelihood of slow GCC disbursements. These remain
key to Bahrain meeting its financing needs. Bahrain is also likely to return to
international capital markets in H2-2021, following its January issuance; media reports
suggest the authorities are in talks with banks on new external issuance. While the
extension of the economic stimulus package, estimated at USD 1.28bn, will add to
fiscal pressures, this should be partly offset by higher revenue. Consequently, our
7.5% fiscal deficit forecast for 2021 remains unchanged.
A recovery in FX reserves should ease peg sustainability concerns. FX reserves
rose to USD 3.46bn in April from USD 764mn a year earlier, boosted by an increase
in external debt including GCC loans and Eurobond issuance. Higher oil prices, further
GCC disbursements and new external issuance in H2-2021 should support FX
reserves. Bahrain should also benefit from a new SDR allocation; it could receive USD
540mn by end-August. However, rising external debt maturities over 2021-24 will likely
limit the upside to FX reserves. Fiscal reform remains important to reduce public debt,
estimated at c.133% of GDP.
Figure 1: Bahrain macroeconomic forecasts Figure 2: Eurobond, GCC flows to support reserves
FX reserves, USD bn
2021 2022 2023
GDP growth (real % y/y) 3.0 2.5 3.0
CPI (% annual average) 1.0 1.5 1.5
Policy rate (%)* 1.00 1.00 1.50
USD-BHD* 0.38 0.38 0.38
Current account balance (% GDP) -2.0 -2.5 -2.0
Fiscal balance (% GDP) -7.5 -6.1 -6.0
*end-period; Source: Standard Chartered Research Source: CBB, Standard Chartered Research
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Apr
-19
Jun-
19
Aug
-19
Oct
-19
Dec
-19
Feb
-20
Apr
-20
Jun-
20
Aug
-20
Oct
-20
Dec
-20
Feb
-21
Apr
-21
Access to international capital
markets and GCC support are key
to maintaining the USD peg
Funding pressures have eased
Emmanuel Kwapong, CFA +44 20 7885 5840
Economist, Africa
Standard Chartered Bank
Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
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Egypt – Holding steady
Economic outlook – Downside risks
We expect growth to rebound to 5.5% in FY22 (ends June 2022). However, risks to
this view have increased. Much of the growth recovery may take place only in H2-FY22
due to a slow global tourism recovery and weak domestic demand. Egypt’s PMI has
been in contraction for six months (48.6 in May), reflecting weak private-sector
sentiment. Nonetheless, Egypt was one of the few countries that avoided a growth
contraction in 2020. GDP growth picked up to 2% y/y in Q4 from 0.7% in Q3.
The pace of vaccine rollout has underperformed much of the region but should
accelerate. Egypt aims to vaccinate 40% of its population by end-2021 and is due to
start production of the Sinovac vaccine (40mn doses in the first year of production).
COVID-related restrictions imposed for much of May following a surge in cases were
lifted on 1 June, which should help to stimulate activity.
Policy – On hold
We expect the Central Bank of Egypt (CBE) to keep its policy rate at 8.25%
throughout FY22. Headline CPI inflation rose to 4.8% y/y (0.7% m/m) in May from
4.1% in April, driven by higher food inflation. Inflation is likely to increase further on
higher global oil and food prices, while remaining within the CBE’s 7% +/- 2ppt range.
The CBE will likely keep real rates firmly positive given investor positioning in local-
currency (LCY) debt and the CBE’s focus on currency stability. Egypt’s expected
GBI-EM inclusion at year-end should anchor investor sentiment, but foreign investors’
ownership of LCY debt is already high; additional inflows may therefore be limited.
External inflows are set to support the CBE’s FX reserves; gross reserves
recovered to USD 40.47bn as of end-May 2021 from USD 36bn a year earlier. Egypt
has received USD 1.6bn from the IMF after the second and final review of the Stand-
By Arrangement (SBA), and is likely to receive USD 2.78bn from a new Special
Drawing Rights allocation. This, along with strong remittance flows and foreign-
currency borrowing, should allow Egypt to avoid a disorderly FX adjustment, despite a
large current account deficit (we forecast 3.6% of GDP in FY22). We see USD-EGP
gradually depreciating to 16.2 by 2022.
Figure 1: Egypt macroeconomic forecasts Figure 2: FX reserves to be supported by inflows from IMF
Gross reserves, USD bn
FY21 FY22 FY23
GDP growth (real % y/y) 2.0 5.5 6.5
CPI (% annual average) 4.6 5.5 6.0
Policy rate (%) 8.25 8.25 8.25
USD-EGP* 15.80 16.20 18.78
Current account balance (% GDP) -3.8 -3.6 -2.0
Fiscal balance (% GDP) -7.0 -7.0 -7.0
Note: Economic forecasts are for fiscal year ending in June; *end-December;
Source: Standard Chartered Research
Source: CBE, Standard Chartered Research
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Sarah Baynton-Glen, CFA +44 20 7885 2330
Economist, Africa
Standard Chartered Bank
We think the CBE’s easing cycle
has ended
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Oman – Battling a new wave
Economic outlook – A slow recovery
A new wave of COVID-19 cases raises downside risks to the economic recovery.
The resurgence has been driven by new variants against the backdrop of a low
vaccination rate (only c.4% of Oman’s population had been fully vaccinated by late
June). While the authorities lifted restrictions at the start of June, a subsequent sharp
rise in cases forced a re-tightening from 20 June, including the reintroduction of night-
time curfews. The new restrictions are not as tight as those imposed in late March and
early April, despite new infections exceeding previous peaks. May’s public protests
were triggered by elevated unemployment, worsened by COVID-related restrictions.
Our 2021 GDP growth forecast remains 0.0% for now as we monitor the impact of the
new surge on economic activity.
Policy – Balancing fiscal reform and social pressures
Oman has shown a strong commitment to its Medium-Term Fiscal Plan (MTFP
2021-25), with the authorities implementing VAT on 16 April as planned. While the VAT
is expected to boost non-oil government revenue by c.USD 1bn annually, a soft
consumption recovery may weigh on receipts, particularly given the significant decline
in foreign workers. Over 200,000 expatriate workers (c.4% of the total population) have
left Oman since March 2020. Plans to introduce a personal income tax for high earners
in 2022 are also underway. However, increasing social pressures raise the risk that
the pace of fiscal adjustment might slow; the government decided to create more than
32,000 jobs in 2021 following protests in May.
The fiscal position should improve significantly in H2-2021. Preliminary fiscal data
for the first four months of 2021 showed a sharp deterioration. However, this was
largely driven by a c.30% fall in hydrocarbon revenue, reflecting the three-month delay
in the oil price used to calculate hydrocarbon revenue. The pass-through from higher
oil revenues from Q3 should ease fiscal pressures and create some fiscal space to
support the non-oil sector. Recent external borrowing should also help Oman meet its
financing needs.
Omani riyal (OMR) devaluation risks remain low, in our view. While FX reserves
declined to USD 30.4bn (including SWF assets) in March 2021 from USD 33.3bn at end-
2020, they still support the peg. We expect higher oil prices and improved capital inflows
to support the external position and ease de-peg concerns. In addition, Oman may receive
c.USD 740mn under an IMF Special Drawing Rights allocation, likely in late August.
Figure 1: Oman macroeconomic forecasts Figure 2: FX reserves remain on a downward path
Government foreign reserves, USD bn
2021 2022 2023
GDP growth (real % y/y) 0.0 2.6 3.5
CPI (% annual average) 2.5 2.0 2.0
Policy rate (%)* 0.50 0.50 1.00
USD-OMR* 0.39 0.39 0.39
Current account balance (% GDP) -7.6 -6.0 -6.0
Fiscal balance (% GDP) -6.0 -8.0 -7.0
*end-period; Source: Standard Chartered Research Source: Ministry of Finance, Standard Chartered Research
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Rising social pressures could
impact the pace of fiscal adjustment
Emmanuel Kwapong, CFA +44 20 7885 5840
Economist, Africa
Standard Chartered Bank
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Pakistan – At a crossroads again
Economic outlook – We remain bullish on growth
Economic recovery is faster than expected but needs to be sustained. We raise
our GDP growth forecast for FY22 (year starting July 2021) to 4.5% from 4.0%; this is
still below the official 4.8% projection. Preliminary estimates show that FY21 growth
was 3.9%, above our 1.5% estimate. Recent news on the slowing spread of COVID,
both domestically and globally, is positive. Pakistan’s lower new case numbers and
faster vaccine rollout provide hope that any further containment measures may have a
more limited economic impact. The central bank kept its policy rate at 7.0% at end-
FY21; monetary policy is likely to remain accommodative near-term. The recently
announced FY22 budget proposes higher development spending and no significant
new taxes. These factors are likely to provide a stronger growth impetus than we
previously expected.
Policy – SBP to tighten gradually amid demand pressures
Policy remains accommodative, but demand-side pressures are emerging. We
raise our CPI inflation forecasts – to 8.9% (from 8.5%) for FY21 and to 8.2% (from
7.7%) for FY22 – to reflect higher global oil prices and demand-side pressures from a
faster-than-expected economic recovery. We still expect the State Bank of Pakistan
(SBP) to look through any near-term acceleration in CPI, which is likely to be food
price-driven and transitory. However, we now expect the SBP to start hiking the policy
rate sooner in response to domestic (output and inflation) and external (trade balance)
pressures. We now forecast the first 25bps hike in H1-FY22, versus H2-FY22
previously. We also now expect more cumulative tightening, with the policy rate rising
to 8.5% by end-FY23 (7.5% previously).
Capital and financial account flows will be key to covering a widening C/A deficit. We
raise our C/A deficit forecast for FY22 to 2.5% of GDP from 2.0% to reflect a wider
trade deficit (via higher imports) due to the post-COVID resumption of economic
activity, higher oil prices and import tariff exemptions for raw materials. Remittances
have been on a historic upward trend, increasing 30% y/y during the July-April period.
This contributed to a C/A surplus during this period for the first time in 17 years. We
now forecast the FY21 C/A deficit at 1.0% of GDP (2.1% earlier) on higher remittance
growth. However, we expect remittance growth to moderate in FY22 as COVID
Figure 1: Pakistan macroeconomic forecasts Figure 2: An improving economic recovery
Real lending rate, using y/y CPI (LHS); trade deficit, USD bn
(LHS); industrial production (RHS); all 3mma
FY21 FY22 FY23
GDP growth (real % y/y) 3.9 4.5 5.0
CPI (% annual average) 8.9 8.2 7.5
Policy rate (%) 7.00 7.50 8.50
USD-PKR* 165.00 175.00 185.00
Current account balance (% GDP) -1.0 -2.5 -3.0
Fiscal balance (% GDP) -7.1 -7.0 -6.0
Note: Economic forecasts are for fiscal year ending in June; *end-December;
Source: Standard Chartered Research
Source: Bloomberg, Standard Chartered Research
Real lending rateTrade balance
Industrial production
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External sector remains vulnerable
to a potential slowdown in
remittances
Demand-side pressures are likely to
speed up the tightening cycle
Farooq Pasha +92 21 3245 7859
Economist, MENAP
Standard Chartered Bank (Pakistan) Limited
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subsides and travel restrictions are gradually eased. FX reserves have increased
recently due to IMF disbursements and new Eurobond issuance of USD 2.5bn. We
expect the PKR to depreciate gradually to 165 against the USD by end-2021.
Fiscal policy has a pro-growth tilt
The recently proposed FY22 budget is growth-centric, with ambitious revenue and
spending targets, while still targeting fiscal consolidation. The budget aims to narrow
the fiscal deficit further to 6.3% of GDP in FY22 from a revised estimate of 7.1% for
FY21. In our view, however, the budget’s pro-growth focus may come at the cost of
fiscal consolidation. We maintain our fiscal deficit forecast of 7.0% of GDP for FY22.
The budget projects a 24% increase in revenue, despite the absence of new taxation
measures. Indirect taxes and non-tax revenues are projected to contribute most of the
revenue increase. Sales tax and customs duties account for almost 58% of the
projected increase in federal revenue, while non-tax revenue is also expected to rise
sharply via a petroleum levy and the Gas Development Infrastructure Cess. We see
significant downside risks to the revenue plan. In particular, the budgeted 30%
increase in sales tax and further increase in petroleum levy are unlikely to materialise
given past experience and the likely political cost of such measures.
On the spending side, the government is investing in development in FY22. The budget
includes one-off funds for vaccine procurement (USD 1bn) and emergency COVID
funds (PKR 100bn). Development expenditure is targeted to rise 42% to support
education, health care and infrastructure projects, with a view to generating
employment and supporting growth. However, as in the past, development expenditure
could be cut if revenue growth is lower than budgeted.
The pro-growth budget is likely lead to a delay in the release of the sixth tranche of the
Extended Fund Facility (EFF) programme with the IMF. The proposed FY22 budget
deviates from the headline targets for the fiscal deficit and the primary balance agreed
with the IMF in April. Finance Minister Shaukat Tarin, who took charge after the last
IMF review was completed in March, has resisted further increases in power-sector
tariffs and new taxation measures. We expect the IMF to combine the sixth review
(originally scheduled for June) and the seventh review (scheduled for September), and
to renegotiate both quantitative and structural benchmarks. We currently expect the
IMF programme to continue. In comments following the budget presentation, Tarin
ruled out quitting the programme.
A delay in IMF disbursement is unlikely to create external financing challenges in the
near term, as Pakistan’s current external position remains comfortable. However,
persistent delays of the IMF review could prevent the completion of the programme. It
is scheduled to end in September 2022; the likelihood of extension beyond that is low
given parliamentary elections scheduled for the summer of 2023.
Budget’s focus on growth could put
recent fiscal consolidation at risk
The IMF programme sixth review is
likely to be delayed
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Qatar – Gaining momentum
Economic activity to pick up in H2
Improved growth prospects in H2-2021. A new wave of coronavirus cases that
began in Q1-2021 has been largely contained, helped by new restrictions as well as a
rapid vaccine rollout (c.50% of the population has been fully vaccinated). The fall in
new infections allowed the authorities to relax some restrictions in mid-June; a full lifting
is planned for end-July. More significantly, the start of construction activity on the North
Field gas expansion (NFE) project in H2, following the final investment decision in
February, should boost growth. The national oil and gas company commenced the sale
of USD 12.5bn of bonds at end-June for the execution of the NFE project, which should
also have a significant medium-term impact, raising Qatar’s liquefied natural gas (LNG)
production capacity by c.64% over 2025-27.
Policy – Focus on debt repayment on improved liquidity
Qatar’s return to fiscal surpluses should ease public debt concerns. Higher
hydrocarbon prices, alongside spending restraint, should significantly strengthen the
fiscal position, with Qatar likely to record fiscal surpluses over the medium term. This
should allow the authorities to implement a debt repayment strategy. Along with the
rebound in nominal GDP, this should put the public debt-to-GDP ratio on a declining
path from 2021.
Convergence between onshore and offshore spot USD-QAR has yet to
materialise, despite the improving external situation. While the recovery in
hydrocarbon prices should support the upward trend in FX reserves (USD 56.4bn), FX
liquidity in the banking system is likely to remain tight, reflecting the sector’s large net
foreign liability (NFL) position (USD 124bn). This will likely constrain offshore and
onshore USD-QAR spot convergence. Nonetheless, Qatar’s substantial FX reserves
(including sovereign wealth fund liquid assets) and the likely return to current account
surpluses from 2021 minimise de-peg risks, in our view.
Politics – Elections in focus
The first-ever Advisory Council elections are due in October. Citizens will be
allowed to elect 30 members of the 45-member Advisory Council; the appointed
Advisory Council’s term expired at the end of June.
Figure 1: Qatar macroeconomic forecasts Figure 2: Banks’ large NFL position limits FX convergence
Banks’ NFL, USD bn (LHS); USD-QAR spot spread (RHS)
2021 2022 2023
GDP growth (real % y/y) 3.0 3.3 4.0
CPI (% annual average) 0.5 1.5 2.0
Policy rate (%)* 2.50 2.50 3.00
USD-QAR* 3.64 3.64 3.64
Current account balance (% GDP) 4.1 0.5 2.6
Fiscal balance (% GDP) 4.2 2.4 2.9
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
NFL (LHS)
USD-QAR offshore and onshore spot spread
-0.04
-0.02
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Large banking-sector NFL position
hinders FX spot convergence
Improving fiscal buffers should
allow a sustained decline in
public debt
Emmanuel Kwapong, CFA +44 20 7885 5840
Economist, Africa
Standard Chartered Bank
Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
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Saudi Arabia – A stronger growth recovery
Economic outlook – Non-oil growth is back
We raise our 2021 growth forecast to 2.8% from 1.9% given strong non-oil private
investment and expectations of higher oil production as OPEC+ production cuts are
tapered. We expect global oil demand to return to pre-COVID levels by the end of
2021, with much of the improvement likely in the near term. Saudi Arabia’s stance to
date has been to wait for evidence of increased oil demand before responding with
higher oil production.
Saudi Arabia’s non-oil economy returned to growth in Q1-2021, although overall
GDP still contracted 3.0% y/y due to oil production cuts. While the oil sector shrank
11.7% y/y, the non-oil economy grew 2.9%, expanding for the first time since Q1-2020.
Private-sector growth rebounded strongly to 4.4% y/y in Q1, and private-sector credit
extension has accelerated (+15% y/y in April 2021).
PMI readings have stayed above 50 for six consecutive months, rising to 56.4 in May;
higher inventories signal that firms are preparing for a demand recovery. Authorities
have unveiled an investment programme (‘Shareek’) aimed at increasing the private
sector’s contribution to GDP to 65% by 2030; this is expected to facilitate c.USD 40bn
of private-sector investment annually in 2021-22. Growth should also be supported by
partial border reopening and a rebound in consumer spending. Point-of-sale
transactions rose 140% y/y in April, reflecting the economy’s recovery from COVID.
While overseas Hajj pilgrims will still be banned this July, 60,000 Saudi pilgrims will be
allowed, marking a tentative normalisation.
Inflation is likely to slow sharply from July given the high base from the tripling
of the VAT rate to 15% in July 2020. Inflation rose to 5.7% y/y in May, still pressured
by higher taxes. Higher consumer spending and rising domestic demand may continue
to exert upward pressure on inflation, but we expect this to be offset by the pronounced
base effect. We expect CPI inflation to average 2.9% in 2021.
Policy – A significantly smaller fiscal deficit
Tax reforms have had a favourable impact on Saudi Arabia’s fiscal position, with
non-oil revenue rising 39% y/y in Q1 and the deficit narrowing to SAR 7.44bn from SAR
34bn a year earlier. A c.50% cut in capital expenditure in Q1 also helped. The budget
assumes an oil price of USD 62/bbl and production of 9mb/d in 2021. Authorities have
lowered their full-year fiscal deficit forecast to SAR 102bn (3.3% of GDP). However,
we think the deficit is likely to be smaller (2.1%) given higher oil prices.
Figure 1: Saudi Arabia macroeconomic forecasts Figure 2: Higher VAT boosts revenue
Taxes on goods and services, SAR bn
2021 2022 2023
GDP growth (real % y/y) 2.8 2.7 3.5
CPI (% annual average) 2.9 2.2 3.3
Policy rate (%)* 1.00 1.00 1.50
USD-SAR* 3.75 3.75 3.75
Current account balance (% GDP) 3.0 4.0 3.5
Fiscal balance (% GDP) -2.1 -4.5 -4.0
*end-period; Source: Standard Chartered Research Source: MoF, Standard Chartered Research
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Sarah Baynton-Glen, CFA +44 20 7885 2330
Economist, Africa
Standard Chartered Bank
Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
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Turkey – Strong recovery, but can it last?
Economic outlook – Growth amid rising risks
The economy continues to grow, but clear policy direction is needed for stability.
We raise our 2021 GDP growth forecast to 5.0% (from 4.5%) to reflect the faster
reopening of European economies, a pick-up in Turkey’s vaccine drive ahead of the
summer tourism season, and a weak GDP base (2020 growth was only 1.8%).
The upward growth trend is likely to continue in H2, supported by domestic and
external demand. On the domestic front, the manufacturing sector is showing signs
of a robust recovery. Industrial production (adjusted for working days) grew 66% y/y in
April, and capacity utilisation remained above 75% in both April and May. Foreign
tourist arrivals jumped in April and should further support economic growth going
forward. Exports also picked up in April and May, increasing by 109% and 66% y/y,
respectively. We expect this trend to continue should global trade and economic
activity recover as expected in H2-2021.
We raise our 2022 growth forecast to 4.0% (from 3.5%) to reflect the carry-over
from a stronger-than-expected rebound in H2-2021. However, we still expect
growth to slow relative to 2021 on moderating external demand growth and a higher
base. Domestically, we expect the lagged effect of monetary tightening to be felt
through a deceleration in credit growth and domestic economic activity in H1-2022.
Policy – CBRT to resist pressure to cut rates
We expect the Central Bank of the Republic of Turkey (CBRT) to maintain a tight
monetary stance near-term, easing only in Q4-2021. We recently raised our 2021
CPI inflation forecast to 15.2% (from 14.2%) on higher-than-expected inflation to date,
rising global oil prices and significantly elevated producer prices. CPI will not start to
show a clear disinflationary trend until Q4-2021, in our view. In the near term, a post-
lockdown acceleration in GDP growth and higher inflation expectations may offset the
impact of tight monetary policy to some extent. We expect CPI inflation to remain above
15% y/y through end-Q3.
We forecast that the CBRT will keep the policy rate at 19.0% throughout Q3-2021.
The central bank may be under increased scrutiny over the next few months due to
President Erdogan’s statement on the desired monetary policy direction and recent
changes in the central bank’s management. The messaging from the next few policy
Figure 1: Turkey macroeconomic forecasts Figure 2: External and domestic pressures pose major
risks to economic recovery
2021 2022 2023
GDP growth (real % y/y) 5.0 4.0 4.0
CPI (% annual average) 15.2 12.0 11.0
Policy rate (%)* 16.00 14.00 14.00
USD-TRY* 9.00 10.00 9.80
Current account balance (% GDP) -4.0 -3.0 -2.5
Fiscal balance (% GDP) -3.5 -3.0 -4.0
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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CPI y/y
policy rate
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committed to tight monetary policy
in Q3
Farooq Pasha +92 21 3245 7859
Economist, MENAP
Standard Chartered Bank (Pakistan) Limited
Philippe Dauba-Pantanacce +44 20 7885 7277
Senior Economist
Global Geopolitical Strategist
Standard Chartered Bank
Economic recovery is stronger
than expected, but policy support is
needed to sustain it
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meetings, more than the expected ‘on hold’ decisions, will shape perceptions of the
monetary policy trajectory, in our view.
We expect the C/A deficit to narrow to 4.0% of GDP in 2021 on the recent recovery
in the trade balance, despite the expected loss of tourism FX inflows. The trade
balance has improved in 2021 so far, despite higher global oil prices, thanks to a robust
pick-up in exports. Exports rose 38% y/y in 5M-2021, driven by economic recoveries
in major trading partners, particularly the euro area; we expect them to remain robust
in H2. Tourism has been hit hard, with international tourist arrivals down 35.6% y/y in
the first four months of the year. We expect 2021 tourism revenue to be closer to the
level seen in COVID-impacted 2020 (USD 12.6bn) than pre-COVID levels (USD 23bn
in 2019). This is negative for the tourism sector, the C/A balance, the currency and the
overall economy.
The Turkish lira (TRY) has weakened by more than 11% against the USD since the
start of 2021, making it one of the worst-performing currencies of the year so far.
Further pressure on the trade balance or other sources of FX flows could lead to further
currency depreciation. Gross FX reserves have declined by more than 40% since the
start of 2020, and the TRY remains prone to further weakness from external shocks.
In our view, external-sector stability is the key to a sustainable economic recovery.
Politics – External appeasement, domestic challenges
On the international front, President Erdogan appears to have softened his stance
on various issues, including Turkey’s relations with Greece, France and its NATO
partners in general. Erdogan’s first meeting with US President Biden at the NATO
leaders’ summit in June appears to have gone smoothly, although Erdogan said his
position on the S-400 anti-missile system remained unchanged; this point of contention
with the US could resurface at any time. In the meantime, Turkey might continue to
keep the system inactive to avoid a potential escalation.
Domestically, Erdogan faces mounting political challenges. Support for the
president and the ruling AKP is at record lows amid rising unemployment, unorthodox
economic policies and criticisms of the government’s pandemic management. The
political temperature has risen further amid recent online allegations of crimes tied to
the ruling party and other people close to the government, which have captured the
national debate.
Erdogan appears to be taking a less
confrontational approach to foreign
policy; domestically, challenges
abound
TRY remains under pressure, and is
likely to weaken further
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UAE – Recovery gaining momentum
Economic outlook – Vaccine rollout is a key strength
Rapid progress on vaccine administration boosts recovery prospects. Almost
80% of the UAE’s population has now been fully vaccinated, and over 85% of the
vulnerable population. This has allowed the economy to remain largely open, even
though new cases persist. The recent surge in the Delta variant in key tourism markets
including the UK and India may weaken near-term growth performance. However,
Dubai’s hosting of the delayed Expo 2020 in October is likely to boost economic
momentum in Q3. The authorities are targeting 25mn visitors to Expo from October
2021 to March 2022. Even if the target is not fully achieved, the event should still drive
a substantial y/y recovery in the tourism sector, after Dubai’s tourist arrivals dropped
to 5.5mn in 2020 from 17mn in 2019. As a result of the pandemic, Dubai’s flag carrier
also recorded a loss of USD 5.5bn, its first in 33 years.
We expect the UAE’s recovery to gain momentum in H2. Recent PMI readings
have pointed to softer performance, with the May reading declining to 52.3 from 52.7.
Business activity expanded at its slowest pace since February, and the employment
sub-index contracted for a fourth month. However, the future output reading has
steadily increased as Expo is expected to boost activity in H2. Dubai’s PMI also
dropped in May to 51.6 from 53.5, reflecting weakness in travel and tourism. Credit
extended to the private sector is still down on a y/y basis but has started to recover
(rising 0.4% m/m in April). While expatriate population growth has slowed, it did not
contract in 2020 as initially feared. Policies aimed at attracting expatriates, including
the liberalisation of residency requirements, should support UAE population growth in
the years ahead. In line with improving fundamentals, we expect property prices to
recover gradually.
Higher oil production as OPEC cuts are relaxed should support growth in H2,
providing fiscal space for spending on social infrastructure and other construction
projects to boost economic activity. In Q1, oil production increased 4.3% q/q, in line
with the OPEC agreement (although it fell 17.6% y/y). We forecast a moderate fiscal
deficit of 1.6% of GDP this year, and a current account surplus of 5.1%. Debt levels
are likely to stay elevated; debt-to-GDP was c.77% in 2020. External liquidity remains
a key strength. The UAE’s foreign assets increased to AED 393.8bn in April from a low
of AED 350.7bn in June 2020.
Figure 1: UAE macroeconomic forecasts Figure 2: UAE central bank foreign assets have increased
Central bank total foreign-currency assets, AED bn
2021 2022 2023
GDP growth (real % y/y) 2.5 3.0 3.5
CPI (% annual average) 2.7 3.0 3.0
Policy rate (%)* 0.60 0.60 1.10
USD-AED* 3.67 3.67 3.67
Current account balance (% GDP) 5.1 5.8 6.6
Fiscal balance (% GDP) -1.6 -1.8 -1.9
*end-period; Source: Standard Chartered Research Source: Central Bank of the UAE, Standard Chartered Research
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Sarah Baynton-Glen, CFA +44 20 7885 2330
Economist, Africa
Standard Chartered Bank
Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
We expect a stronger recovery in
H2, helped by delayed Expo 2020
and higher oil production
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Economies – Africa
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Africa – Top charts Figure 1: A multi-speed recovery
GDP, % y/y (our forecasts for 2021)
Figure 2: Third wave threatens near-term growth
Confirmed COVID cases to 22 June 2021, 7DMA; thousands
Source: IMF, National sources, Standard Chartered Research Source: OWID, Standard Chartered Research
Figure 3: Frontier SSA likely to be more resilient to a taper
SSA FX, rebased (Jan 2020 = 100), USD-LCY
Figure 4: Spreads have tightened; market access restored
SSA Eurobonds, mid Z-spread
Source: Refinitiv Datastream, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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CDI 28 ANGOL 28
GHANA 29 KENINT 28
NGERIA 27 SOAF 28
ZAMBIN 27
Figure 5: Uganda and Ghana cut rates on credit growth
concerns (policy rate, %)
Figure 6: IMF SDR allocations to boost FX reserves
FX reserves (USD bn)
Source: Central Banks, Standard Chartered Research Source: Central banks, Standard Chartered Research
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Angola – Still oil-dependent
Economic outlook – Oil prices, China restructuring help
Stronger oil prices and reduced debt service after China debt restructuring are
big positives. Angola has confirmed its participation in the extended Debt Service
Suspension Initiative and is eligible for USD 400mn of additional relief in H2-2021.
GDP growth is set to turn positive in 2021 for the first time since 2014, with current
account and fiscal surpluses. We expect 2021 budget revisions given the initially
budgeted oil price of USD 39/bbl. While debt sustainability has improved, we see
medium-term risks when China debt relief unwinds from 2023. This may be
exacerbated by oil production declines (Angola – Not yet in the clear). COVID cases
appear to be falling after rising in Q2, but the slow pace of vaccine rollout remains a risk.
Angola’s IMF programme ends this year, and the Ministry of Finance has indicated that
discussions on future IMF engagement are underway. Following a USD 772mn (SDR
531.5mn) disbursement from the IMF in June with the fifth review of the Extended Fund
Facility, Angola should receive the same amount again with the final review; it could
also receive USD 1.2bn from an eventual SDR allocation. This should support FX
reserves, which recovered to USD 15.1bn at end-June, having fallen to USD 14.1bn
before the IMF disbursement.
Politics – Election due in 2022
The next election is due in August 2022. We expect an MPLA win, with João Lourenço
as president; the result may be closer than in the past given a protracted economic
slowdown and the high cost of living (inflation is above 25%, and likely to remain high
at c.20% at end-2021). The MPLA’s share of the vote declined to 61% in 2017 from
82% in 2008. The main opposition parties (UNITA and CASA-CE, which won 27% and
5% of the vote in 2017) may field a single candidate, likely either Abel Chivukuvuku of
CASA-CE or Adalberto Costa Junior of UNITA. Angola’s first local elections, cancelled
in 2020 as a result of COVID, look unlikely to take place ahead of the general election.
Market outlook – Good FX liquidity
Banco Nacional de Angola (BNA) will likely continue to favour tight monetary
policy to support the Angolan kwanza (AOA) and contain inflation. While we
expect recent AOA stability to continue, we see a mild depreciation trend in H2-2021;
we lower our end-2021 forecast to 660 (from 680). FX liquidity has improved, and the
demand backlog has been cleared. The parallel-market USD-AOA rate has dropped
to 705 from a high of c.800 in 2020.
Figure 1: Angola macroeconomic forecasts Figure 2: FX reserves have continued to decline
Brent, USD/bbl (LHS); gross FX reserves, USD bn (RHS)
2021 2022 2023
GDP growth (real % y/y) 2.3 2.0 3.0
CPI (% annual average) 22.3 12.4 8.8
Policy rate (%)* 17.50 17.50 15.00
USD-AOA* 660.0 680.0 714.0
Current account balance (% GDP) 5.0 2.0 1.8
Fiscal balance (% GDP) 2.4 1.6 1.7
*end-period; Source: Standard Chartered Research Source: Bloomberg, BNA, Standard Chartered Research
Brent
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The election due in 2022 is likely to
be closer than past elections
Sarah Baynton-Glen, CFA +44 20 7885 2330
Economist, Africa
Standard Chartered Bank
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Cameroon – Virus surge threatens recovery
Economic outlook – COVID resurgence to test resilience
Downside risks to Cameroon’s economic recovery have risen. The country has
been battling a resurgence of COVID-19 infections, with total confirmed cases more
than doubling since the start of 2021. While the authorities have so far not implemented
tighter restrictions, high vaccine hesitancy (only c.16% of vaccines received have been
dispensed) raises the risk that the new wave could persist for some time. Such a
scenario would weigh significantly on the economic recovery and pose substantial risks
to our 2021 growth forecast, which remains unchanged at 3.2% for now as we monitor
the health situation.
Policy – New IMF programme to strengthen fiscal reforms
Cameroon’s new IMF programme will anchor fiscal policy reforms. The authorities
reached a staff-level agreement with the IMF on a successor three-year funded
programme in May 2021, with IMF Executive Board approval likely by end-July. Fiscal
reform will be a key component of the programme, with a focus on strengthening
revenue mobilisation and improving public financial management systems. Greater
prominence will likely be given to improving fiscal transparency following recent
allegations of misappropriation and embezzlement of IMF emergency loans provided
in 2020.
The recent Eurobond financing should strengthen debt sustainability. Cameroon
issued a c.EUR 685mn Eurobond at end-June following the modification of the 2021
finance bill in May, allowing external non-concessional debt issuance, mainly to
refinance the country’s existing USD Eurobond. As we highlighted earlier this year
(Cameroon – Debt worries seem overdone), Cameroon’s ‘high risk of debt distress’
classification was largely due to elevated external debt service from 2023-25 on
maturing Eurobond payments. The rollover of this debt should improve Cameroon’s
debt metrics and ease concerns around debt sustainability. The EUR issuance should
also reduce exchange rate risk given the euro peg.
Politics – Succession back in focus
While the next presidential election is not scheduled until 2025, President Biya’s
advanced age (88) and limited clarity on succession add to political risks. The
president’s son, Franck, has gained more media attention recently as a possible
candidate for the ruling party in the 2025 election.
Figure 1: Cameroon macroeconomic forecasts Figure 2: Recovery threatened by new wave of infections
Confirmed coronavirus cases to 9 June 2021, 7DMA; ’000s
2021 2022 2023
GDP growth (real % y/y) 3.2 4.6 4.5
CPI (% annual average) 2.0 2.0 2.0
Policy rate (%)* 3.25 3.50 3.50
USD-XAF* 521 521 521
Current account balance (% GDP) -3.8 -3.6 -3.5
Fiscal balance (% GDP) -3.8 -3.2 -3.0
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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Eurobond refinancing eases debt
distress risk
A new IMF programme has been
agreed, with a focus on improving
public financial management
Emmanuel Kwapong, CFA +44 20 7885 5840
Economist, Africa
Standard Chartered Bank
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Côte d’Ivoire – Counting on the rains
Electricity disruptions, poor rains pose risk to recovery
Côte d’Ivoire remains on track for a strong growth rebound in 2021, but
downside risks have risen significantly. The country experienced a prolonged dry
spell until mid-June despite the onset of the rainy season in April, posing risks to
agricultural output. Poor rains also impacted hydroelectric production; this, along with
technical issues surrounding thermal production (c.70% of electricity output), has
forced power rationing since April. Côte d’Ivoire, West Africa’s power export hub, has
also had to significantly scale back electricity exports to neighbouring countries.
We lower our 2021 growth forecast to 6.0% from 6.7% given that the authorities
expect the load-shedding exercise to persist until July, which will likely weigh on
domestic output. A slightly higher base, with 2020 growth performing better than we
had expected (2.4% versus our 1.8% forecast), also contributes to our downward
growth revision. Risks to our forecast remain tilted to the downside, as agricultural
output could be weaker than we currently expect if the late rains disappoint.
We raise our 2021 inflation forecast to 3.3% from 2.0%. Headline inflation breached
the West African Economic and Monetary Union’s 3% threshold in February 2021,
reaching 4.2% in May, the highest in at least eight years. This was driven largely by
higher food prices. We expect inflation to fall below the 3% threshold by Q4-2021 as
food supply improves with the start of the harvest season in Q3.
We raise our 2021 current account deficit forecast to 3.5% (from 2.7%), mainly
on deteriorating terms of trade. Cocoa prices (c.40% of exports) have fallen c.5%
since end-December, weighed down by record global production and a sluggish
recovery in demand. Higher-value processed cocoa exports will also be affected, as
power cuts have hampered cocoa bean processing. Higher oil prices will also weigh
on the current account position given that Côte d’Ivoire is a net oil importer.
Political tensions continue to ease with the focus on reconciliation. Former
President Gbagbo returned to Côte d’Ivoire in June after the International Criminal
Court upheld his acquittal in March 2021 following an appeal. Gbagbo was not arrested
despite facing a 20-year jail term in Côte d’Ivoire, in line with President Ouattara’s
reconciliation agenda. With Gbagbo still commanding significant support, his return will
likely contribute to further political reconciliation.
Figure 1: Côte d’Ivoire macroeconomic forecasts Figure 2: Inflationary pressures have risen sharply
Headline inflation, % y/y
2021 2022 2023
GDP growth (real % y/y) 6.0 6.5 6.7
CPI (% annual average) 3.3 2.0 2.0
Policy rate (%)* 4.00 4.00 4.00
USD-XOF* 521 521 521
Current account balance (% GDP) -3.5 -2.9 -2.8
Fiscal balance (% GDP) -4.7 -3.8 -3.0
*end-period; Source: Standard Chartered Research Source: Refinitiv Datastream, Standard Chartered Research
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Emmanuel Kwapong, CFA +44 20 7885 5840
Economist, Africa
Standard Chartered Bank
Higher food prices push inflation to
a multi-year high
We downgrade our 2021 growth
forecast, as power disruptions will
likely weigh on output
We now expect a wider current
account deficit in 2021
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Ethiopia – When politics and economics collide
Economic outlook – Political risk is running high
We expect the economy to recover in H2-2021, but see significant political risks.
The budget for FY22 (year ending July 2022) envisages a growth rebound to 8.7%.
Progress has been made on telecoms liberalisation, with the sale of a new licence to
a consortium of investors; expressions of interest have also been requested for a
minority stake in the state-controlled telecoms company.
Political developments are a risk to the outlook. International concern over suspected
human rights abuses in the Tigray region has increased, amid early warning signs of a
potential famine. Food price inflation has pushed Ethiopia’s headline inflation to c.20%
y/y. The US has halted all non-humanitarian aid, and the EU has said it is unlikely to
provide budget support until it sees improvements in the situation in Tigray. Egypt has
appealed to the UN in its dispute over the Grand Ethiopian Renaissance Dam ahead of
expected filling during the 2021 rainy season (June-September). Elections, held on 21
June after being postponed twice, are unlikely to resolve regional tensions. Polling did
not take place, or was delayed, in several constituencies (including Tigray) and all major
opposition parties boycotted the election.
Debt restructuring under the G20 Common Framework will remain the focus in
Q3. The IMF is working on a Debt Sustainability Analysis (DSA), which will provide the
basis for creditor negotiations. While the Ethiopian authorities’ stance on private-
creditor participation is clear – they view private-creditor restructuring as a last resort
and will continue paying Eurobond coupons – it is unclear if this will be compatible with
the ‘comparable treatment’ requirement. Debt treatment is likely to involve flow
rescheduling (the IMF has indicated Ethiopia’s risk of debt distress could then improve
to ‘moderate’ from ‘high’), and private creditors may avoid a haircut. Ethiopia, although
eligible for over USD 900mn in debt service relief from May 2020 to June 2021 under
the DSSI, has received less than USD 200mn so far, according to the Finance Ministry.
The Ethiopian birr (ETB) has come under renewed pressure. Ethiopia has chronic FX
shortages, and while the currency has been allowed to depreciate at a faster rate than
previously, the gap between the official and parallel-market rates has widened (official
USD-ETB rate: 43.7; parallel-market rate: 54-58). Given faster-than-expected
depreciation this year, we revise our end-2021 forecast to 47.2 from 43.7.
Figure 1: Ethiopia macroeconomic forecasts Figure 2: More pronounced depreciation may continue
USD-ETB
2021 2022 2023
GDP growth (real % y/y)** 2.8 8.5 8.2
CPI (% annual average) 19.9 11.2 8.0
3M T-bill (%)* 1.20 2.00 2.00
USD-ETB* 47.20 51.00 55.00
Current account balance (% GDP)**
-5.0 -5.0 -5.0
Fiscal balance (% GDP)** -2.1 -3.0 -4.0
*end-period; **for fiscal year ending 8 July; Source: IMF, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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the key external focus
Sarah Baynton-Glen, CFA +44 20 7885 2330
Economist, Africa
Standard Chartered Bank
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Gabon – Reducing the imbalances
Economic outlook – A soft recovery
We lower our 2021 growth forecast to 1.5% from 1.9%, reflecting our downward
revision to non-oil growth. New coronavirus infections have started to taper off since
the start of the more pronounced second wave in January, and the pace of the
vaccination rollout has improved. However, strict COVID-related restrictions, including
nationwide curfews and restricted domestic movement, will likely remain into Q3. This
may weigh significantly on full-year non-oil output. In addition, the revised budget cut
public investment spending by c.27% versus the initial projection. This is contrary to
our expectation of increased public investment on the back of the authorities’ recently
announced Transformation Acceleration Plan (PAT 2021-23). As a result, we now
expect softer investment growth in 2021.
Improving external position. We now see Gabon recording a small current account
(C/A) surplus in 2021 (0.1% of GDP versus -4.6% previously). Given Gabon’s track
record of overproducing relative to its OPEC+ production quota, and a still-elevated
production target in the revised budget, we now assume compliance with OPEC
production cuts will remain weak. Consequently, we raise our export receipts
projection. We have also lowered our capital-goods import projection to reflect the
weaker public investment budget. We expect the C/A balance to swing back to a deficit
in 2022, premised on lower average oil prices and rising imports as economic activity
recovers. Nonetheless, we now expect smaller deficits in 2022-23 – 0.4% and 0.7%,
respectively (from 3.1% and 3.8%) – mainly to reflect our higher export projections.
Revised budget puts Gabon on faster consolidation path
The revised 2021 budget prioritises fiscal consolidation. While revenues have
been revised lower and current expenditure higher (mainly on COVID-related
spending), this is offset by the significant cut to capital expenditure (to 3.7% of GDP
from c.5%), helping to ease fiscal pressures. Consequently, we lower our 2021 fiscal
deficit forecast to 1.9% from 2.6%. Nonetheless, financing needs are set to rise as the
authorities now plan to issue debt on the international capital markets, which we think
will mainly be used to refinance existing debt. A staff-level agreement was reached for
a new three-year IMF funded programme in June, with IMF Executive Board approval
likely by end-July; this should help Gabon meet its funding needs and also serve as a
catalyst for additional concessional funding.
Figure 1: Gabon macroeconomic forecasts Figure 2: Fiscal and external adjustments are underway
Fiscal and external balance, % of GDP
2021 2022 2023
GDP growth (real % y/y) 1.5 2.9 3.5
CPI (% annual average) 2.5 2.0 2.5
Policy rate (%)* 3.25 3.50 3.50
USD-XAF* 521 521 521
Current account balance (% GDP) 0.1 -0.4 -0.7
Fiscal balance (% GDP) -1.9 -1.7 0.0
*end-period; Source: Standard Chartered Research Source: IMF, BCEAO, Standard Chartered Research
Current account
Fiscal balance
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Emmanuel Kwapong, CFA +44 20 7885 5840
Economist, Africa
Standard Chartered Bank
The C/A balance should swing to a
small surplus in 2021
We now expect a faster pace of
fiscal consolidation in 2021
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Ghana – Addressing vulnerability
Economic outlook – Policy pivot to fiscal consolidation
Ghana’s economic recovery appears to be on track following growth of only 0.4%
in 2020. GDP growth accelerated to 3.1% y/y in Q1-2021; the weak base should result
in faster growth in the quarters ahead. The Bank of Ghana’s (BoG’s) Composite Index
of Economic Activity grew 26.8% y/y in March 2021, driven by domestic consumption.
Nonetheless, Q1-2021 data suggests that revenue still fell short of targets, and the
outlook remains vulnerable to potential new waves of COVID. Ghana has encountered
significant vaccine supply bottlenecks; initial plans to have two-thirds of the population
inoculated by end-2021 now look likely to be delayed.
Ghana’s handling of the COVID crisis has received plaudits but has substantially
weakened fiscal metrics and exacerbated pre-existing debt vulnerabilities. IMF data
suggests that public debt reached 78% of GDP at the end of 2020, including energy-
sector liabilities and financial-sector bailout costs. The 2021 budget introduced in
March front-loaded fiscal consolidation measures, raising the VAT rate by 1ppt
(effective in May) and imposing new levies, including on the financial sector. Despite
this, spending remains elevated and will increase c.14 y/y in 2021. Debt service as a
percentage of budgeted revenue is high; budget estimates suggest that it could reach
50.5% excluding grants in 2021, from c.46% last year. The IMF has urged a fiscal
consolidation effort centred on a reduction in debt service payments. Unaddressed
cost recovery in the energy sector, and a failure to renegotiate ‘take or pay’ contracts
with independent power producers, remain key fiscal risks.
The BoG surprised markets by cutting its policy rate 100bps to 13.5% in May,
citing still-weak private-sector credit growth. With y/y food inflation slowing after a
pronounced COVID-related shock, headline inflation eased to 7.5% in May, giving the
BoG room to ease. But despite still-elevated real spreads, we expect the BoG to be
cautious about further easing, to avoid discouraging new portfolio inflows into LCY debt
(only front-end yields are likely to react meaningfully to a cut). Based on new series
data, we update our average CPI inflation forecasts to 8.7% y/y in 2021 and 7.3% in
2022; this would allow more room for eventual easing, but only gradually and after
more significant fiscal consolidation. Given lower inflation, we now see the policy rate
at 13.0% at end-2022 and 12.5% at end-2023 (both 14.0% prior). Despite a shift in
focus to Fed tapering, we expect relative Ghanaian cedi (GHS) stability to persist, with
FX reserves likely to be supported by an IMF SDR allocation and planned green bond
issuance of c.USD 1bn over the coming quarter.
Figure 1: Ghana macroeconomic forecasts Figure 2: BoG surprised with a 100bps rate cut in May
Ghana CPI, % y/y; BoG policy rate, %
2021 2022 2023
GDP growth (real % y/y) 4.9 5.0 4.9
CPI (% annual average) 8.7 7.3 6.6
Policy rate (%)* 13.50 13.00 12.50
USD-GHS* 6.05 6.45 6.80
Current account balance (% GDP) -3.2 -3.8 -4.0
Fiscal balance (% GDP) -9.8 -8.3 -7.2
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
CPI, % y/y
Policy rate, %
5
10
15
20
25
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May-15 May-16 May-17 May-18 May-19 May-20 May-21
We now see rates on hold until
Q4-2022, following a surprise rate
cut in May
Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
Fiscal vulnerabilities persist; high
debt service costs need to be
addressed
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Kenya – Fiscal consolidation; eventful politics
Economic outlook – COVID uncertainty persists
Despite persistent COVID-related uncertainty, we expect Kenya’s economic
growth to accelerate to 5.3% in 2021 from c.0.6% in 2020. Our GDP forecast is below
the government’s (6.6%) and the IMF’s (6.3%, revised from 7.6%). The IMF projections
attribute the recovery largely to a normalisation of activity, including the reopening of
schools, from a weak base last year. We maintain our cautious outlook given rising
cases in Kenya amid a new variant (neighbouring Uganda has already announced new
containment measures). The Q1 GDP data release has been delayed pending
publication of a rebased GDP series. However, private-sector credit data points to
momentum in transport and communications, with loan growth at 13.3% y/y in April,
lending to agriculture up 10.0%, and consumer durables up 19.3%. Given the slow
pace of vaccine administration, we do not expect tourism to recover fully through our
2023 forecast horizon. Elections due in 2022 – with the holding of a constitutional
referendum still unresolved – may also be a source of uncertainty, potentially weighing
on near-term investment plans.
Stabilising Kenya’s public debt ratio and getting debt service to more manageable
levels will be key areas of focus in the years ahead. Kenya’s recently negotiated three-
year IMF programme is likely to anchor fiscal credibility. In June, the IMF Executive
Board approved the release of an additional USD 407mn for Kenya under the first
review, citing the authorities’ strong commitment to reforms including the completion
of COVID-related spending audits. The IMF programme makes allowances for near-
term economic uncertainty, deferring more significant fiscal consolidation and a
primary fiscal surplus to the later years of the programme. The IMF is encouraged by
the 1.6ppt-of-GDP decline in the primary deficit targeted for FY22 (ends 30 June).
While authorities project a 7.5% fiscal deficit in FY22, we see growth and revenue risks
to this outcome. Containing spending ahead of 2022 elections may be difficult. More
meaningfully, adoption of some of the recommendations of Kenya’s Building Bridges
Initiative (even outside of a referendum) could result in an increased 35% allocation of
revenue to county governments, exacerbating structural fiscal pressures.
Given the focus on fiscal deficit reduction, we expect monetary policy to remain
accommodative, with the policy rate on hold until Q2-2022. Our inflation forecasts
reflect newly available base year data for the updated CPI series.
Figure 1: Kenya macroeconomic forecasts Figure 2: IMF programme an anchor for fiscal policy
Kenya fiscal balance (% of GDP, FY13-FY20)
2021 2022 2023
GDP growth (real % y/y) 5.3 4.5 5.1
CPI (% annual average) 6.3 5.6 6.2
Policy rate (%)* 7.00 8.00 8.50
USD-KES* 108.60 112.00 115.00
Current account balance (% GDP) -5.4 -5.7 -5.5
Fiscal balance (% GDP)** -8.6 -7.9 -6.5
*end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: The National Treasury of Kenya, Standard Chartered Research
-9
-8
-7
-6
-5
-4
-3
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-1
0
2013 2014 2015 2016 2017 2018 2019 2020
Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
IMF programme should support
fiscal consolidation, but higher
revenue allocation to counties may
add to pressure
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Mozambique – A pause in LNG activity
Economic outlook – Coordinated response needed
A halt to LNG activity after the attack by radical insurgents on Palma is the main
downside risk to Mozambique’s outlook. We now expect a weaker recovery in 2021
GDP growth to 1.1% (2.3% previously). The boost to growth from LNG production,
previously expected from 2024, will be delayed by at least a year. We now expect GDP
growth to accelerate to 8% only in 2025, rising to 11% in 2026. The Southern African
Development Community has set out plans to send 3,000 troops to Mozambique to
help quell the insurgents; international partners including Portugal and the US have
offered support, but little concrete action has been taken yet. The final investment
decision on a second large LNG project is expected to be delayed beyond 2022.
The pause in LNG activity has implications for debt sustainability. While
Mozambique is currently in debt distress, the IMF considers its debt to be sustainable
on a forward-looking basis given expected LNG production. Any indication of a more
prolonged delay may have implications for how the IMF views Mozambique’s debt.
Mozambique’s restructured Eurobond was arranged with consideration of expected
LNG production, with the coupon increasing from 5% to 9% from 2023. The authorities
expect a fiscal deficit of 6.5% of GDP in 2021, but security spending will add pressure.
Policy – Inflation concerns have not materialised
USD-MZN depreciation is likely to continue, reversing its appreciation to c.55 in April
from 75 in February. The gains reflected 300bps of tightening by Banco de
Moçambique (BdM) in January, and a February central bank circular clarifying the
obligation for exporters to convert 30% of export revenues into local currency. To
reflect this, we revise our end-2021 USD-MZN forecast to 77 from 80. Even with
reduced LNG-related capital-goods imports, Mozambique has a large current account
deficit. FX reserves are USD 4bn, and should be supported by an SDR allocation
(c.USD 310mn) and an extended Debt Service Suspension Initiative.
We lower our 2021 CPI inflation forecast to 5.1% (from 8.2%) to reflect FX appreciation.
Following BdM’s surprise 300bps hike in January on inflation concerns, we do not
expect any further hikes. BdM now expects prices to fall in the coming months on good
harvests, weak domestic demand and currency appreciation.
Figure 1: Mozambique macroeconomic forecasts Figure 2: USD-MZN depreciation is back
USD-MZN
2021 2022 2023
GDP growth (real % y/y) 1.1 2.1 3.8
CPI (% annual average) 5.1 4.1 4.6
Policy rate (%)* 13.25 10.50 9.00
USD-MZN* 77.00 82.40 84.00
Current account balance (% GDP) -16.0 -21.0 -64.0
Fiscal balance (% GDP) -7.5 -5.0 -4.5
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
50
55
60
65
70
75
80
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
Sarah Baynton-Glen, CFA +44 20 7885 2330
Economist, Africa
Standard Chartered Bank
The growth outlook and debt
sustainability are at risk following a
shutdown of LNG activity
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Nigeria – FX liberalisation hopes
Economic outlook – Slow improvement
Higher global oil prices raise the likelihood of FX market reforms; this could lift
Nigeria’s economic prospects. We still expect growth of 2.5% in 2021 after a 1.9%
contraction last year. Q1 GDP rose 0.5% y/y, signalling still-weak momentum, but this
was the second consecutive quarter of positive y/y growth since the COVID shock.
While the non-oil economy grew only 0.8% y/y, the oil sector contracted 2.2% y/y in
real terms, reflecting compliance with OPEC+ production cuts. With global oil demand
set to accelerate near-term, a sharper tapering of OPEC+ production cuts seems likely
in H2, favouring a return to positive oil-sector growth. The passage of long-awaited oil-
sector legislation in H2 should create more certainty on fiscal terms, unlocking new oil
investment.
Despite higher oil prices, FX reserves remain pressured, falling to USD 33.4bn in
June. A number of factors likely explain this. The C/A remains in deficit, with few
offsetting flows (although the deficit narrowed to USD 1.75bn in Q1-2021 from USD
5.4bn in Q4-2020, reflecting higher oil prices and reduced imports due to limited FX
availability). With oil exports still constrained by the OPEC quota, recent data suggests
that import demand has been rising faster than exports. Rising spending on fuel
subsidies since January 2021 likely played a significant role. Subsidies have also
reduced state-owned oil company remittances to the Federation Account – the usual
source of FX reserve replenishment.
Several measures point to a possible ‘reopening’ of the FX market. The Central
Bank of Nigeria (CBN) has allowed yields on OMOs to rise, but these would have to
adjust higher to attract portfolio inflows. Inflation has started to stabilise y/y and should
slow to c.12% by end-2021 on base effects. In May, the CBN confirmed that it had
effectively devalued the official USD-NGN FX rate (previously 380); it will now be set at
the Investors & Exporters (I&E) rate, currently c.412. This should boost fiscal receipts.
The requirement that banks record all I&E trades on a Reuters platform has created more
transparent pricing and is a likely precursor to more comprehensive FX liberalisation,
with greater price discovery on the I&E window. Authorities have enquired about the
extent of the FX demand backlog backed by official certificates of capital importation; an
increase in FX supply following any boost to FX reserves seems likely. The planned SDR
allocation (USD 3.4bn) and any external issuance (at least USD 3bn) would give
authorities the confidence to increase FX supply more meaningfully, in our view.
Figure 1: Nigeria macroeconomic forecasts Figure 2: FX reserves pressured, despite higher oil price
Nigeria Bonny Light, USD/bbl; FX reserves, USD bn (RHS)
2021 2022 2023
GDP growth (real % y/y) 2.5 3.1 4.0
CPI (% annual average) 16.1 10.2 9.3
Policy rate (%)* 11.50 11.50 11.50
USD-NGN* 440.0 460.0 480.0
Current account balance (% GDP) -2.5 -2.0 -2.0
Fiscal balance (% GDP) -6.3 -6.0 -5.6
*end-period; Source: Standard Chartered Research Source: Bloomberg, Reuters, Standard Chartered Research
FX reserves (RHS)
Bonny Light, USD/bbl (LHS)
0
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30
40
50
60
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40
60
80
100
120
140
Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21
Th
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Despite rising oil prices, FX
reserves remain pressured;
however, some respite from an IMF
SDR allocation and external
borrowing
A number of indicators signal FX
liberalisation intent
Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
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Senegal – Downside risks diminish
Economic outlook – Recovery to pick up speed in H2
Senegal’s economic recovery should gain momentum in H2-2021 as downside
risks ease. This year’s recovery is likely to be driven by the secondary and tertiary
sectors, after robust agricultural output led to an upside growth surprise in 2020 (1.9%
versus the government’s projection of -0.7%). Services activity should pick up with the
containment of the second wave of infections that started in December, enabling the
easing of restrictions. High-frequency data also points to a strong rebound in industrial
production driven by the extractive and manufacturing sectors. Nonetheless, we lower
our 2021 growth forecast to 4.0% from 4.9%, mainly to reflect the higher base.
Political tensions have eased considerably following widespread protests
against the government in March. With elevated youth unemployment seen as a
major factor behind the protests, the government’s recently announced emergency
youth employment programme should lower the risk of further social unrest near-term.
Nevertheless, the trial of Ousmane Sonko, the opposition figure whose arrest triggered
the March protests (see Senegal – Flaring tensions), will be followed closely to gauge
the risk of renewed protests.
The planned start of hydrocarbon production in 2023 supports Senegal’s
medium-term outlook. Work on the Greater Tortue Ahmeyim (GTA) LNG project was
58% complete at end-Q1 and should be 80% complete by end-2021. A final investment
decision on the project’s second phase is expected in 2022. Improved execution of the
GTA LNG and Sangomar oil field projects following COVID-related delays in 2020
should allow for first hydrocarbon production from these fields in 2023. However, we
now see the projects providing a smaller boost to medium-term growth than we initially
expected, partly because of the investment delays. We lower our 2022-23 growth
forecasts to 6.1% and 11.2%, respectively (from 8.0% and 13.7%), to reflect this.
Policy – Rising fiscal pressures
We raise our 2021 fiscal deficit forecast to 5.4% of GDP from 5.0%, bringing it in
line with the government’s revised projection. New spending, including on the
emergency youth employment programme and vaccine procurement, will add to fiscal
pressures. Rising energy subsidies are also likely to weigh on the fiscal position.
Nonetheless, we expect the authorities to intensify efforts to boost revenue mobilisation
under their IMF-supported Medium-Term Revenue Strategy; this should allow Senegal
to achieve its 3% fiscal deficit target by 2023.
Figure 1: Senegal macroeconomic forecasts Figure 2: Second wave of infections is tapering off
Confirmed COVID cases to 08 June 2021, 7DMA; ‘000s
2021 2022 2023
GDP growth (real % y/y) 4.0 6.1 11.2
CPI (% annual average) 1.7 1.4 1.2
Policy rate (%)* 4.00 4.00 4.00
USD-XOF* 521 521 521
Current account balance (% GDP) -11.7 -10.9 -8.5
Fiscal balance (% GDP) -5.4 -4.0 -3.0
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21
Hydrocarbon-related activity should
support the medium-term outlook
Senegal will now target a slightly
wider deficit than initially projected
Emmanuel Kwapong, CFA +44 20 7885 5840
Economist, Africa
Standard Chartered Bank
Political risks have receded
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South Africa – Third wave, earlier tightening
Third wave sets in, but mining to provide a sustained boost
A pronounced third wave of COVID has created greater uncertainty for the near-
term growth outlook. Notwithstanding third-wave concerns, we raise our 2021 GDP
growth forecast to 4.2% (from 3.6%), as we expect the economic recovery to continue.
Our 2022 and 2023 forecasts remain 2.4% and 2.5%. South Africa announced a strict
countrywide ‘Level 4’ lockdown on 27 June following a positivity rate of over 33% in
the economically important province of Gauteng. The new restrictions include school
closures, an extended overnight curfew, and bans on alcohol sales, sit-down
restaurant meals, and leisure travel into and out of Gauteng. The measures were put
in place for 14 days initially (until 11 July), and may be extended.
Given the greater transmissibility of the new Delta variant (now the dominant variant in
South Africa), we see a significant risk that containment measures will be extended.
However, this year’s measures have had a less significant impact on economic activity
than those in 2020, as more economic activity has been preserved. While growth may
slow near-term, we expect the economic recovery to continue, barring the need for a Level
5 lockdown (the highest level, partly responsible for last year’s 7.0% GDP contraction).
Mining exports are benefiting from a demand recovery in the rest of the world and a
structural shift in favour of greener technologies, which have boosted commodity prices
(see South Africa – In search of secular positives). Q1 GDP growth surprised positively
at 4.6% q/q SAAR. Although gross capital formation contracted, we expect firm
commodity prices to boost activity. The current account (C/A) has also benefited from
the combination of export strength and weak domestic demand. We raise our 2021
C/A surplus forecast to 3.0% of GDP (from 1.5%). We now expect the C/A to remain
in surplus in 2022 (1.0% of GDP, versus -0.8% prior).
Structural reforms, including the lifting of restrictions on self-generation of electricity,
should provide some support to medium-term growth. But outside of mining,
momentum has come largely from economic reopening; the sustainability of the upturn
is still in question. Despite the positive Q1-2021 growth surprise, data on South Africa’s
formal-sector businesses (Figure 2) shows that turnover decreased in six of the eight
sectors surveyed between Q4-2020 and Q1-2021; increases were recorded only in the
mining and personal services sectors. As of May 2021, private-sector credit growth
had turned negative y/y, pointing to demand challenges ahead.
Figure 1: South Africa macroeconomic forecasts Figure 2: Total business turnover declined in Q1
Turnover in the formal business sector, % q/q, Q1-2021
2021 2022 2023
GDP growth (real % y/y) 4.2 2.4 2.5
CPI (% annual average) 4.1 3.8 4.5
Policy rate (%)* 3.50 4.00 5.00
USD-ZAR* 13.00 13.50 13.60
Current account balance (% GDP) 3.0 1.0 -0.2
Fiscal balance (% GDP)** -11.2 -7.8 -6.3
*end-period; **for fiscal year ending 31 March; Source: Standard Chartered Research Source: Stats SA QFS, Standard Chartered Research
-8% -6% -4% -2% 0% 2% 4% 6% 8% 10%
Mining
Personal services
Business services
Trade
Manufacturing
Electricity & Water
Transport & Communication
Construction
Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
South Africa’s third wave poses a
near-term risk to growth, but is
unlikely to derail the recovery
Mining has outperformed, boosting
growth and the C/A surplus
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An improved pace of vaccine administration may brighten prospects. Although the
vaccination drive started late because of difficulties procuring supplies, c.5.0% of the
population had received at least one dose by end-June. South Africa targets
inoculating two-thirds of its population by February 2022. In addition, International
Finance Corporation funding for domestic production of 500mn vaccine doses has
been secured. Half of these doses will be produced by end-2021, with 30mn reserved
for domestic use. We think the pick-up in vaccine administration will be important to
the economic outlook; it remains a key factor for monetary policy decisions.
SARB normalisation underway; risk is of earlier tightening
We now expect SARB hikes of 25bps in January and May 2022, instead of July
and November. This still leaves our end-2022 repo rate forecast at 4.0%, but with
tightening front-loaded. SARB output gap models have long suggested the need for
earlier tightening; its Quarterly Projection Model (QPM) incorporates two rate hikes in
2021. At its May Monetary Policy Committee (MPC) meeting, the SARB emphasised
its output gap models, highlighting the need for tightening (see South Africa –
Continued accommodation, for now). While the third wave makes tightening in 2021
less likely, we think that the SARB will still want to normalise rates quickly, causing it
to front-load tightening in 2022.
The last two MPC meetings, in March and May, saw unanimous 5-0 decisions to keep
rates on hold. SARB communications have stressed that early tightening would likely
mean the need for fewer hikes over the cycle. According to the SARB, policy will remain
accommodative, even allowing for rate hikes. Our forecasts support this: we project
that inflation will average 3.8% in 2022 and 4.5% in 2023, and see the end-year repo
rate at 4.0% and 5.0% respectively. The prime rate, at which banks typically lend, is
set at 350bps over the repo rate.
With the SARB focused on inflation outcomes in 18-24 months, the current third wave
is unlikely to affect projections much. Deputy Governor Naidoo said in late June that
the SARB may still raise its growth forecast at the July MPC meeting given the upside
Q1 GDP growth surprise. This would imply a faster closing of the negative output gap,
and the SARB – keen to lower its inflation target eventually from the current mid-point
of 4.5% – will likely need to react to this by tightening.
The key risk to our repo rate view is that market conditions might prompt the SARB
to tighten even earlier, in 2021. This is not our core scenario, however, despite QPM
projections. For now, with the C/A in surplus and an improving fiscal outlook, domestic
markets should be more resilient to any talk of a Fed taper compared with 2013.
Fiscal vulnerability is also lower
We revise our fiscal projections to reflect the mining-led economic improvement. The
main budget deficit for FY21 (ended 31 March) was a better-than-expected 11.2% of
GDP, the result of a 2.8ppt-of-GDP revenue outperformance versus October 2020
projections and public-sector pay restraint. While the court ruling on public-sector pay
may still be challenged, National Treasury has already cut planned local-currency bond
issuance in FY22. This should result in meaningful debt service savings. Given this,
along with continued revenue buoyancy, we now see fiscal deficits of 7.8% of GDP in
FY22 (9.2% prior) and 6.3% in FY23 (6.8%).
We now expect the SARB to front-
load tightening in January and May
2022 as it seeks to normalise
quickly
South Africa’s C/A surplus may
reduce its vulnerability to a
Fed taper
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Tanzania – Accelerated policy change
Economic outlook – More open to foreign investment
The pace of policy change has accelerated under new President Samia Suluhu
Hassan. A COVID committee has been set up and has recommended accessing
vaccines under the COVAX initiative (Tanzania has yet to roll out vaccines). We expect
statistics on COVID cases and deaths to be published – a pre-requisite for IMF
emergency financing to help with the pandemic response under the Rapid Financing
Instrument (RFI). Tanzania could receive USD 571mn under the RFI.
Better business sentiment should be positive for H2 activity. The budget for FY22
(ends June 2022) forecasts GDP growth of 5.6% in 2021. Discussions have resumed
on LNG production and the Host Government Agreement, with construction targeted
to start mid-2023. Hassan has indicated that a large iron ore mine project, in discussion
since 2011, will also be fast-tracked. There are early signs of accelerating private-
sector credit extension (to 4.8% in April from 2.3% in March). While the authorities
expect a fiscal deficit of 1.8% of GDP in FY22 (narrowing from 2.6% in FY21), this is
premised on a large (9.2%) increase in revenue, which looks optimistic. Spending on
the COVID response and vaccine rollout may exacerbate pressure on public finances.
The authorities have signalled that they may issue a Eurobond in FY22 and would
like to secure a credit rating. While Tanzania is rated B2 with a stable outlook by
Moody’s, the rating was unsolicited. Strong historical growth (Tanzania achieved GDP
growth close to 5% even in 2020), a relatively diversified economy and a debt ratio
below those of many regional economies (c.40% of GDP) are likely to be credit
positives; they are offset by high external debt (76.5% of total debt), budget
underperformance and low GDP per capita. Capital account opening to investors
beyond the East African Community may come back into focus, having stalled for
several years.
Tanzania has seen a sharp decline in tourism earnings, which fell to USD 700mn
in the year to April 2021 from USD 2.2bn the previous year. While a rapid turnaround
looks unlikely, tourism weakness has been partly offset by strong mining performance
(USD 3bn in the year to April 2021 from USD 2.4bn the year prior). FDI is likely to pick
up on stronger business sentiment and expected progress on large mining projects.
We expect a gradual USD-TZS depreciation trend in H2-2021.
Figure 1: Tanzania macroeconomic forecasts Figure 2: Divergent goods and services export
performance (USD mn, year ending April)
2021 2022 2023
GDP growth (real % y/y) 5.3 6.5 5.5
CPI (% annual average) 3.3 4.3 3.5
3M T-bill (%)* 3.50 3.50 3.50
USD-TZS* 2,335 2,350 2,400
Current account balance (% GDP) -4.1 -5.5 -5.5
Fiscal balance (% GDP)** -2.6 -2.1 -2.0
*end-period; **ends 30 June (includes donor assistance);
Source: Standard Chartered Research
Source: BoT, Standard Chartered Research
Goods exportsServices exports
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500
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Oth
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2019 2020 2021
Sarah Baynton-Glen, CFA +44 20 7885 2330
Economist, Africa
Standard Chartered Bank
Eurobond issuance appears to be
under consideration again, having
been last discussed in 2016
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Uganda – Rising COVID cases weigh on outlook
Economic outlook – Near-term uncertainty
We lower our 2021 GDP growth forecast to 4.0% (from 5.0%) to reflect greater
economic uncertainty following a renewed COVID surge. The economy contracted
1.1% in 2020. While agriculture is showing significant momentum, the outlook is now
less certain. With a final investment decision (FID) on oil likely in the months ahead,
Uganda’s transition to oil-producer status should support medium-term growth. The
Bank of Uganda (BoU) estimates that infrastructure projects in the lead-up to oil
production could add 0.5ppt annually to growth; actual production could raise the
growth rate by 2-3ppt. A ramp-up to production of c.230kb/d by 2025 is anticipated.
Executive Board approval of a new three-year, USD 1bn IMF facility was reached
in June. Revenue deterioration following the COVID shock and large fiscal deficits
(estimated at 9.9% of GDP in FY21, ended 30 June) increased public debt to 49.8%
at end-2020. The IMF programme aims to raise fiscal revenue gradually to 15% of
GDP, improve the transparency and efficiency of public spending, and stabilise debt
at c.50% of GDP. The FY22 budget envisages narrowing the deficit to 6.4% of GDP,
with spending falling slightly to UGX 44.8tn from UGX 45.5tn in FY21. Domestic
borrowing is set to decline to UGX 2.9tn from a record UGX 6.3tn in FY21, when BoU
advances to the government exceeded 10% of the previous year’s fiscal revenue.
While the IMF programme will likely safeguard fiscal consolidation, our fiscal balance
forecasts are less optimistic than the authorities’, largely reflecting growth uncertainty.
We now see deficits of 6.9% in FY22 and 5.4% in FY23 (from 7.5% and 7.0%). The
authorities see the deficit narrowing to 3.8% of GDP in FY23.
The BoU cut its policy rate in June to 6.5%, an all-time low, following the release
of a new CPI series. We update our CPI forecasts in line with the new series; we now
see inflation at 2.2% in 2021 (3.7% prior), 3.5% in 2022 (4.4%) and 4.0% in 2023
(4.1%). The BoU is concerned that NPLs could spike when COVID relief measures
end, later in 2021. Private credit growth has also been weak, with little room for fiscal
stimulus given the IMF-led consolidation. Given this, we now see the policy rate
remaining at 6.5% until Q2-2022. The BoU’s concern is that rising foreign investor
participation in local-currency debt markets might raise vulnerability to external shocks.
Fed tapering could influence the timing of future tightening; we now see the policy rate
at 7.5% at end-2022 (9.0% prior) and 8.0% at end-2023 (10.0% prior).
Figure 1: Uganda macroeconomic forecasts Figure 2: IMF programme aims to cap public debt growth
Uganda’s public debt to GDP, % (forecasts from 2020)
2021 2022 2023
GDP growth (real % y/y) 4.0 6.0 7.0
CPI (% annual average) 2.2 3.5 4.0
Policy rate (%)* 6.50 7.50 8.00
USD-UGX* 3,550 3,620 3,800
Current account balance (% GDP) -8.7 -9.0 -9.5
Fiscal balance (% GDP)** -9.9 -6.9 -5.4
*end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: IMF, Standard Chartered Research
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Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
IMF programme should safeguard
fiscal consolidation, even as
Uganda becomes an oil producer
We amend our CPI forecasts in line
with the new series with updated
weights; policy rate is likely to stay
on hold until Q2-2022
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Zambia – Looking to post-election reform
Economic outlook – IMF progress likely to follow election
Elections scheduled for 11 August will be the key driver of Zambia’s near-term
outlook. Authorities expect GDP growth of 6.0% in 2021 following a 3.3% contraction
in 2020. Our own forecast of 3.0% is more conservative, given persistent COVID
uncertainty and the deepening impact of macroeconomic imbalances. The Bank of
Zambia’s (BoZ’s) composite indicator showed negative q/q growth across most sub-
indices in Q1-2021 amid a COVID second wave. In June, with a third wave threatening,
Zambia saw one of the biggest rises in per-capita COVID cases globally, with schools
shut for three weeks. Election campaigning was suspended in Lusaka and three other
districts because of both COVID and the threat of political violence.
In our view, a smooth election is necessary for Zambia to secure an IMF agreement.
After the election, an IMF deal will be a priority, but Zambia will need to deliver on fiscal
reforms first. An IMF Debt Sustainability Analysis will form the basis of creditor
negotiations under the Common Framework. But this can only happen following a staff-
level agreement with the IMF. With parliament in recess ahead of the election, progress
is slow; there are few visible signs that reforms are being pursued. Higher copper
prices have increased mining royalties, helping to stabilise the Zambian kwacha (ZMW)
while reducing a backlog of FX demand, but spending – including on a farmer input
support programme and fuel subsidies – remains elevated. Our fiscal projections are
only estimates pending the publication of updated data.
Despite elevated inflation, the BoZ kept its policy rate at 8.5% in May, arguing that
improved food harvests and newfound ZMW stability would moderate inflation. We think
that more meaningful policy tightening is a pre-requisite for an IMF programme. We now
expect rate hikes of 200bps each at the end-August and November MPC meetings, with
more tightening early in 2022. Reflecting the lower starting point due to the BoZ’s failure
to tighten meaningfully earlier, we now forecast a policy rate of 12.5% at end-2021 (from
14.5%) and 14.5% at end-2022 (14.0%). Despite improved subscription at T-bill and
bond auctions, market interest rates remain at a premium to the policy rate.
Copper production likely slowed in H1-2021 from record levels in 2020, but higher
prices more than offset this. The BoZ estimates a current account (C/A) surplus of
15.9% of GDP in Q1-2021. In line with this, we raise our 2021 surplus forecast to 15.0%
(from 3.0%); we expect a moderation to 6.0% in 2022 (previously 2.0%) and 3.0% in
2023 (previously 1.5% prior) as imports resume. Despite the C/A surplus, FX reserves
remain pressured, but should be boosted by an IMF SDR allocation at end-August.
Figure 1: Zambia macroeconomic forecasts Figure 2: C/A surplus makes little difference to reserves
Zambia FX reserves (LHS); USD-ZMW (RHS)
2021 2022 2023
GDP growth (real % y/y) 3.0 3.0 4.6
CPI (% annual average) 24.5 15.6 8.4
Policy rate (%)* 12.50 14.50 12.00
USD-ZMW* 24.00 24.50 26.00
Current account balance (% GDP) 15.0 6.0 3.0
Fiscal balance (% GDP) -12.0 -9.0 -7.0
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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Razia Khan +44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
Zambia remains in default on its
external debt; an IMF programme is
needed for debt restructuring talks
under the Common Framework to
progress
Significant C/A surplus and yield-
seeking inflows help to stabilise
the ZMW
PUBLIC
Economies – Europe
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Europe – Top charts Figure 1: A varied Q1 recovery
Q1-2021 GDP, % q/q, countries in Europe
Figure 2: Services recovery gains speed
Euro-area PMIs
Source: Eurostat, Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Figure 3: Prices spike on base effects and supply issues
UK, EA, Switzerland CPI, % y/y (LHS); Brent oil price (RHS)
Figure 4: Hard data points to a mixed Q1 recovery
Euro area IP, construction output and retail sales, index
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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Construction output
Retail sales
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Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21
Figure 5: UK unemployment falls, services rebound
Unemployment rate, % (LHS); retail sales, % m/m (RHS)
Figure 6: Greece to benefit most from EU RRF funding
EU Recovery and Resilience Facility (grants + loans), % GDP
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Unemployment rate (LHS)
Retail sales (RHS)
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Euro area – Almost out of the woods
Economic outlook – Vaccine rollout drives the recovery
We modestly upgrade our 2021 growth outlook. We raise our 2021 GDP growth
forecast to 4.5% from 4.3% following a milder-than-expected Q1 contraction (-0.3%
versus Eurostat’s expectation of -0.6%). Growth is likely to be well supported by the
region’s progress on COVID-19 vaccine rollout. We continue to expect growth to ease
slightly to 4.0% in 2022, but we raise our 2023 growth forecast slightly to 1.6% (from
1.3%) on account of stronger fiscal policy support.
Pandemic case numbers remain well under control at the time of writing, despite Delta
variant cases being identified in various euro-area countries. In addition, the region’s
vaccine rollout has continued to pick up pace, with 50% of the population having
received the first dose and 31% receiving all required doses. This bodes well for
continued economic reopening in the coming months. Moreover, with the European
Commission’s aim of vaccinating 70% of the EU’s adult population by late September
remaining on target (with potential to be reached by late July), the risk of another wave
later in the year has diminished further.
The Q1 GDP performance, while confirming a double-dip recession, also reinforced
our view that companies and households are managing lockdown restrictions better as
the pandemic has evolved. A host of survey indicators have also trended higher,
signalling growing optimism on the recovery. We expect 1.7% q/q growth in Q2, picking
up to 2.1% in Q3 as lingering lockdown restrictions are eased further.
Supply bottlenecks are a potential concern as the pandemic remains prevalent in other
regions, and led to a surprise decline in Germany’s industrial production in April. Such
disruptions have likely also contributed to the rise in inflation, but the constraints should
prove transitory as supply chains return to normal. A supportive fiscal and monetary
policy mix should provide a further tailwind for growth over the medium term.
Policy – ECB to favour wait-and-see approach
Headline inflation heads higher, but ECB should look through this. HICP inflation
fell back to 1.9% y/y in June from 2.0% y/y in May; we expect inflation to be at or above
target for most of this year, reaching a nine-year high of 2.6% in Q4. Moreover, signs
of supply-chain disruptions in Q2 suggest potential for some stickiness in prices.
However, we think many of the factors driving inflation higher will prove transitory, and
Figure 1: Euro area macroeconomic forecasts Figure 2: ZEW sets a 20-year record
ZEW expectations of economic growth
2021 2022 2023
GDP growth (real % y/y) 4.5 4.0 1.6
CPI (% annual average) 1.9 1.3 1.5
Policy rate (%)* 0.00 0.00 0.00
EUR-USD* 1.26 1.26 1.26
Current account balance (% GDP) 2.0 2.3 2.5
Fiscal balance (% GDP) -6.0 -4.5 -3.0
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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Sep-99 Sep-02 Sep-05 Sep-08 Sep-11 Sep-14 Sep-17 Sep-20
On course for herd immunity by Q3
Inflation spike is likely to be largely
transitory, although we see scope
for stickiness
Christopher Graham +44 20 7885 5731
Economist, Europe
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Survey indicators point to strong
Q2 and Q3 performance
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should begin to fade heading into H1-2022, continuing into 2023. We therefore
maintain our view that average inflation will fall back to 1.3% in 2022 from 1.9% in
2021. Thereafter, we expect it to edge up more gradually than we previously expected,
and we now forecast inflation at 1.5% in 2023 (from 1.8%).
In light of this, while hawks on the ECB Governing Council (GC) are likely to favour
ending QE purchases sooner rather than later, we expect the majority opinion will be
to maintain accommodative policy until at least early 2022, while monitoring economic
data closely for evidence of stronger demand-driven inflation. We continue to expect
rates to stay on hold over through end-2023 at least. At the current pace, the EUR
1.85tn ‘envelope’ will be fully utilised by early March 2022, which will be on target.
Policy makers have indicated that it may be too early to wind back QE stimulus, but
are likely to emphasise Pandemic Emergency Purchase Programme (PEPP) flexibility
and reduce purchases once the economy is on a more secure footing. While another
PEPP extension is possible, we currently think it is a close call, given that more
hawkish GC members will be reluctant to extend emergency policy support.
On the fiscal front, progress continues on unlocking funds from the Recovery and
Resilience Facility (RRF). All countries have passed necessary legislation to enable
the European Commission to collectively borrow on their behalf. While recovery plans
still need to be agreed between the Commission and member states, RRF
disbursements should begin by around mid-July; this should support national economic
recoveries, largely via increased green and digital investments, particularly as
governments begin to scale back employment and business support schemes.
Politics – Germany and France take centre stage
CDU/CSU-Greens coalition government the most likely outcome in Germany.
German and French elections will dominate European politics for the next 12 months,
given their potential impact on both intra-EU and external relations. In Germany, as
expected, the CDU has increased its lead over the Greens again as vaccine rollout
progresses, but the race still looks tight ahead of the September federal elections. A
CDU/CSU-Greens coalition remains the most likely outcome, with implications for both
environmental commitments and Germany’s foreign policy (see On the Ground,
12 April, ‘Germany – Shifting political sands).
Investors have started to build market positions for a potentially disruptive outcome in
the French presidential election. While polls suggest a repeat of the 2017 run-off
between current President Emmanuel Macron and far-right candidate Marine Le Pen
in the second round, polls are tighter this time. France’s presidential election system –
where the two winners of the first-round vote face each other in a second-round run-
off – brings the possibility of surprises. The two most likely market-adverse outcomes
would be a victory for Le Pen or far-left candidate Jean-Luc Mélenchon, which could
happen if Macron failed to advance to the second round.
Market outlook – Grinding higher
We expect EUR-USD to rise to 1.26 by end-2021, with the euro (EUR) benefiting
from faster-than-expected vaccination progress. While we do not expect an immediate
rollback of ECB balance-sheet expansion, the pace of buying could slow at some point.
We expect rates to stay on hold
throughout the forecast period
In France, polls suggest a repeat of
the 2017 run-off between Macron
and Le Pen
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Switzerland – Delayed recovery on the horizon
Economic outlook – Consumer demand to pick up from H2
We raise our 2021 growth forecast to 3.3% from 3.0% on a pick-up in vaccination
rates and positive survey data. COVID-19 case rates rose from February to April,
halting the easing of restrictions and causing GDP to contract 0.5% in Q1. We see a
strong economic recovery in H2 on further loosening of restrictions, increased vaccine
rollout, and a pick-up in industry and services data. The new, more transmissible
COVID variant and the ongoing negative impact of global supply-chain disruptions on
Switzerland’s manufacturing industry pose downside risks to the outlook.
Hard economic data showed a mixed picture in the first months of 2021. Industrial
production slumped 6.2% q/q in Q1 after rebounding 14.6% q/q in Q4-2020; electrical
equipment and chemical product manufacturing saw the greatest declines. Further,
retail sales fell 4.4% m/m in April after increasing 22.3% m/m in March as restrictions
that had been loosened in March were re-imposed. Still, we believe there is cause for
optimism, as demonstrated by recent survey data. The manufacturing and services
PMIs rose to 69.9 and 58.8, respectively, in May, while the KOF leading indicator
stayed elevated at 133.4 in June. We expect a strong rebound in consumer demand
from June onwards as restrictions are eased and travel gradually resumes. A solid
industrial recovery is likely to take longer than we initially expected, owing to ongoing
chip shortages and supply-chain disruptions, which we see extending into early 2022.
Switzerland’s daily new COVID cases have continued to fall, prompting the
government to further relax containment measures in recent weeks. As of 31 May,
restaurants can open both indoors and outdoors, the work-from-home requirement has
been downgraded to a recommendation, and public events can be held with larger
numbers of people. Vaccinations have accelerated to over 1 per 100 people per day,
overtaking inoculation rates in both the UK and US. At the current rate of vaccination,
herd immunity (70% of the population fully vaccinated) should be achieved by the end
of summer; around 50% of the population has received at least one dose so far. As is
the case across Europe, the new Delta variant increases the risk of a further wave and
poses a clear downside risk to our economic outlook.
Figure 1: Switzerland macroeconomic forecasts Figure 2: Pandemic cases fall and vaccinations increase
Daily new COVID-19 cases per million (LHS); share of people
who have received at least one vaccine dose, % (RHS)
2021 2022 2023
GDP growth (real % y/y) 3.3 2.4 1.6
CPI (% annual average) 0.3 0.5 0.8
Policy rate (%)* -1.25 to
-0.25 -1.25 to
-0.25 -1.25 to
-0.25
USD-CHF* 0.89 0.91 0.88
Current account balance (% GDP) 10.0 9.7 9.4
Fiscal balance (% GDP) -3.0 -1.0 0.5
*end-period; Source: Standard Chartered Research Source: Our World in Data, Standard Chartered Research
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Emiko Bowles +44 20 7885 6409
Research Associate
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Vaccination rate accelerates after a
slow Q1 start
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Policy – Monetary policy to remain accommodative
We expect the Swiss National Bank (SNB) to keep rates on hold for the
foreseeable future, continue with FX intervention when necessary. The SNB is
likely to keep the deposit rate at -0.75% through end-2023; SNB President Thomas
Jordan noted recently, “if the SNB were to raise interest rates… then we would have a
much stronger franc, we would have negative inflation, and I don’t think that would
benefit anyone”. The SNB will also likely continue to use FX intervention to contain
Swiss franc (CHF) strength. FX reserves reached an all-time high in March.
Headline inflation rose to 0.6% y/y in May after turning positive in April for the first time
since January 2020. Increasing cost pressures are beginning to feed into producer
prices; this, along with base effects, is likely to drive inflation temporarily towards 1%
in the coming months. Thus, we raise our 2021 CPI forecast to 0.3% (from 0.0%), still
significantly below the SNB’s target of “less than 2% per annum”. We maintain our
average 2022 and 2023 CPI forecasts of 0.5% and 0.8%, respectively, to reflect easing
cost pressures and base effects.
We expect fiscal policy to remain highly accommodative in 2021. Due to the prolonged
second wave, measures to cushion the economic impact, including the short-time work
scheme, have been extended. Further, a new subsidy programme has been introduced
to support the most affected companies. That said, we expect government revenue to
stay resilient in 2021 on ongoing labour-market tightening: unemployment fell to 3.0%
in May from a peak of 3.5% between November and January. We therefore maintain
our 2021 fiscal deficit forecast of 3.0%. We still expect the deficit to narrow in 2022 and
2023 as COVID-related fiscal support programmes are withdrawn. However, we revise
our 2022 forecast to -1.0% from +0.2% to reflect more accommodative post-COVID
fiscal support; we maintain our 2023 forecast of a 0.5% surplus.
Politics – Bern pulls out of Swiss-EU treaty negotiations
Negotiations between Switzerland and the EU on reviving the stalled bilateral
treaty came to a halt on 26 May. The Swiss Federal Council concluded that
“substantial differences” remained between Switzerland and the EU on key aspects of
the agreement. The framework was supposed to bring together 120 treaties and
arrangements with Brussels, which would have formalised ties between Switzerland,
a non-member state, and the bloc. However, final ratification had been delayed by
Swiss concerns regarding the Citizen’s Rights Directive (CRD), wage protection and
state aid provisions.
While the existing agreements governing the bilateral relationship will remain, they
will eventually weaken as the EU gradually amends its own rules. We do not see
talks resuming anytime soon; instead, Switzerland is likely to look to non-EU
countries such as the UK and China for further cooperation as trade barriers with the
EU gradually increase.
Market outlook – EUR-CHF to strengthen further
We think EUR-CHF will grind higher over the next 12 months to an eventual high
around 1.15; the SNB is likely to defend 1.08 on the downside, and the Swiss yield
curve is likely to remain flat. However, we see USD-CHF at 0.89 at end-2021 and 0.91
at end-2022, reflecting a gradual pace of increase along with EUR-USD strengthening.
Cost pressures to support inflation
in the medium term
Swiss-EU relations are likely to
weaken after bilateral treaty
negotiations fail
SNB to keep the policy rate negative
for foreseeable future
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UK – Making up for lost time
Economic outlook – Stellar bounce-back expected
We still expect a strong growth bounce in 2021 and 2022. We raise our 2021
growth forecast to 7.0% (from 6.4%) to reflect the milder-than-expected Q1 contraction
of 1.5%, alongside better-than-expected economic activity in Q2. We maintain our
2022 growth forecast of 5.5%. The virus remains the biggest risk to growth in the next
few quarters, in particular the potential for new variants to limit the effectiveness of
existing vaccines. The development of new targeted vaccines, and the UK’s early
orders for those vaccines, should mitigate longer-term risks.
Hard economic data already shows a significant improvement in economic activity; the
seasonally adjusted retail sales index has already surpassed pre-pandemic levels,
while industrial production is less than 5% below pre-pandemic levels (Figure 2).
Forward-looking indicators are similarly encouraging, with the composite PMI above
60 since April. We therefore expect strong GDP growth in Q2 (c.4.5% q/q), slowing
slightly in Q3 (c.3.8% q/q) as employment support schemes are scaled back;
unemployment is likely to rise by year-end, although not beyond 5.5-6.0% (4.7%
currently). We expect a drawdown of household excess savings as consumer
confidence improves, and higher investment owing to supportive government policy;
both should help to sustain growth heading into next year.
The UK’s vaccine rollout is one of the most advanced in the world: almost 50% of the
population has received all required doses of the regimen, and nearly 70% has
received at least the first dose. The Delta variant remains the primary concern given
its higher risk of hospitalisation and high transmissibility, but vaccines still appear to
have high efficacy against severe disease. International travel restrictions could remain
in place well into 2022, delaying the recovery in tourism.
Policy – BoE can afford to wait
First rate hike is unlikely until late 2022. CPI inflation rose to 2.1% y/y in May –
above the Bank of England’s (BoE’s) 2.0% target – and is likely to rise further in the
coming months. Wage growth as measured by average weekly earnings also hit 5.6%
in April, the highest reading since 2007. However, we think this measure is being
distorted by the effects of the furlough scheme introduced last year (with many workers
dropping to 80% wages), and by the fact that most people who have lost their jobs are
from lower-income sectors. While these factors could send the measure even higher
Figure 1: UK macroeconomic forecasts Figure 2: Retail sales already fully recovered
Index values for retail sales and IP (volume, 2016=100)
2021 2022 2023
GDP growth (real % y/y) 7.0 5.5 1.5
CPI (% annual average) 1.9 2.0 2.0
Policy rate (%)* 0.10 0.25 0.50
GBP-USD* 1.43 1.45 1.42
Current account balance (% GDP) -4.0 -4.0 -3.5
Fiscal balance (% GDP)** -12.0 -9.5 -5.0
*end-period; **for fiscal year ending 5 April; Source: Standard Chartered Research Source: Bloomberg, ONS, Standard Chartered Research
IP
Retail sales
70
75
80
85
90
95
100
105
110
115
Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21
Hard economic data points to Q2
growth of 4-5%
Wage growth is being distorted
Christopher Graham +44 20 7885 5731
Economist, Europe
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Vaccine rollout and vaccine pipeline
look solid
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over the coming months, we think the BoE will be looking more for signs of
improvement in underlying wage growth.
We expect CPI inflation to fall back to the BoE’s target in early 2022. We raise our
average 2021 forecast slightly to 1.9% (from 1.8%) on account of stronger-than-
expected inflationary pressures in Q2; we see average CPI inflation at 2.0% in 2022
and 2023. While supply disruptions (from COVID-19 and Brexit) could pose upside
risks, we think the MPC will look through elevated inflation in H2, and we do not expect
the first 15bps rate hike until Q4-2022.
As for the QE programme, the slowing of weekly purchases in early May leaves more
of the GBP 875bn Gilt target still to be bought (c.GBP 65bn given that Gilt purchases
stood at GBP 807bn in late May). While a further slowing of purchases could be
announced in August, we expect the programme to be completed by end-2021 and no
expansion to be announced in the coming months.
Fiscal policy is set to tighten gradually over the medium term as emergency support
measures are scaled back this year and taxes rise in 2022 and 2023. The budget deficit
(measured on a fiscal-year basis, and on a current basis – i.e., not including the
government’s net investment spending) is set to narrow from 12.0% of GDP in FY21
(ends 5 April) to 9.5% in FY22 and 5.0% in FY23.
Politics – Brexit and Scotland (again)
The post-Brexit EU relationship and Scotland’s calls for another referendum will
dominate the government’s domestic agenda. The UK government aims to
distinguish itself as a leader on climate change at COP 26 in Glasgow later this year,
but Brexit and Scotland are likely to continue to dominate domestic politics. Brexit
tensions are likely to persist amid the ongoing UK-EU dispute over implementation of
the Northern Ireland (NI) protocol. This issue could spill over to further tensions within
NI itself. While we expect an eventual compromise, political overreaction by either side
could lead to a more significant economic escalation further down the line, particularly
with separate disputes over fishing, state aid and financial services still to be resolved.
Pro-independence parties won a majority of seats in Scotland’s May elections; the
Scottish Nationalist Party (SNP) claims that this provides a mandate for another
independence referendum. However, a formal request from SNP leader Nicola
Sturgeon is unlikely until after the pandemic has subsided (likely in 6-12 months). Boris
Johnson is likely to use this time to win back soft pro-independence voters via his
‘levelling-up’ strategy (with commitments to increase infrastructure funding for Scotland)
and the offer of increased devolved powers. However, his popular support is low north
of the border. When Sturgeon eventually issues a formal request, we expect this to
become the primary issue in UK politics (see Not all roads lead to IndyRef2).
Market outlook – Grinding higher
We expect GBP-USD to rise to 1.43 at end-2021 and 1.45 at end-2022. Solid
economic momentum supports the British pound (GBP), despite concerns over EU-UK
trade tensions. However, with other positives (Brexit concluded and UK vaccine rollout)
already in the price, we expect any further move in GBP-USD to be a slow grind.
QE set to end this year
UK government keen to
demonstrate leadership on climate
change at COP 26 in Glasgow
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Czech Republic – Pandemic under control
Economic outlook – A muted 2021 recovery
We lower our 2021 growth forecast to 3.3% (from 3.5%) owing to the negative
impact of weak supply chains on Czech Republic’s industrial sector. Q1 GDP
contracted 0.3% q/q as prolonged restrictions kept retail and services closed. We
expect both services and industry to have remained muted in Q2 on lingering
restrictions, weak consumer confidence and subdued manufacturing. Key industrial
sectors continue to suffer from global supply-chain disruptions. Economic reopening
and wider vaccine rollout should foster renewed consumer spending, which is likely
to drive stronger economic growth in H2-2021.
Industrial production grew 1.9% m/m in April, versus 2.6% in March. Supply shortages
– arising from overburdened global supply chains – continue to weigh on
manufacturing; producer prices rose 5.1% y/y in May, the biggest increase since
November 2011. The automotive industry, which accounts for c.10% of GDP, and the
computer and consumer electronics sector have been hardest hit. Retail sales grew
0.7% m/m in April after contracting 0.8% in March; we expect a gradual but sustained
pick-up in consumption in H2-2021 as containment measures ease and pent-up
savings are gradually drawn down.
We see industry and services reverting to robust growth in 2022 as supply-chain issues
and pandemic uncertainties fade. Improved business sentiment, alongside funding
from the EU Recovery and Resilience Facility (RRF), should help to fuel investment
from next year onwards. We therefore raise our 2022 and 2023 growth forecasts to
4.0% (from 3.7%) and to 3.5% (from 2.2%), respectively.
The pandemic situation continues to improve: daily new cases have fallen 99% to just
12 per 1mn population since the third wave peaked in early March. Daily vaccinations
have accelerated to 0.9 per 100, up 36% in the last month. Some 31% of the population
has been full vaccinated; at the current rate of vaccination, herd immunity (70% of the
population fully vaccinated) should be achieved by end-August. Still, new and more
transmissible variants pose an ongoing threat to economic recovery. Household and
corporate sentiment is likely to remain subdued until most of the adult population is
inoculated.
Figure 1: Czech Republic macroeconomic forecasts Figure 2: Vaccination pace accelerates
Daily COVID-19 vaccine doses per 100 people
2021 2022 2023
GDP growth (real % y/y) 3.3 4.0 3.5
CPI (% annual average) 2.5 2.0 2.0
Policy rate (%)* 0.75 1.25 1.50
USD-CZK* 19.84 19.84 19.80
Current account balance (% GDP) 1.0 0.5 0.5
Fiscal balance (% GDP) -5.0 -2.5 -2.0
*end-period; Source: Standard Chartered Research Source: Our World in Data, Standard Chartered Research
Czech Republic
EU
UK
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0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21
x 10
000
We raise our 2022 and 2023 growth
forecasts on likely improvements in
household and corporate sentiment
Emiko Bowles +44 20 7885 6409
Research Associate
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Vaccination pace accelerates after a
very slow Q1 start
Global supply-chain issues
continue to weigh on manufacturing
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Policy – Accommodative fiscal policy in 2021
We expect another 25bps rate hike from the Czech National Bank (CNB) in H2-
2021. The CNB remains hawkish on inflation despite muted growth. We therefore
expect a further 50bps of hikes in 2022, in line with the domestic and global demand
recovery. Given the increased risk of another surge in COVID cases, risks to our rates
outlook are to the downside; the CNB may delay the next hike to 2022 in the event of
another wave.
We maintain our 2021 average inflation forecast of 2.5%. Headline inflation slowed
slightly to 2.9% y/y in May from 3.1% in April. We expect inflation to remain elevated
in Q3 before softening towards the end of the year as fuel price base effects and global
supply-chain issues ease. We see inflation gradually heading towards the CNB’s target
of 2.0% in 2022 as monetary policy tightens.
Fiscal policy is likely to remain highly accommodative for the rest of 2021 given the
prolonged third wave. Government compensation schemes aimed at protecting jobs in
pandemic-affected sectors and supporting household incomes, combined with the
personal income tax reduction introduced at the start of 2021, should support
consumer demand this year. Most domestic fiscal support measures should be phased
out in 2022, as expected.
The Czech Republic is likely to receive EUR 7.1bn in grant funding from the EU’s
RRF between 2021 and 2026. The European Commission has until early August to
assess the country’s RRF plan, after which the European Council will have four
weeks to adopt the Commission’s proposal for a Council Implementing Decision.
Given that the government was late in submitting its plan, disbursements are unlikely
until Q4-2021 at the earliest.
Politics – 2021 legislative elections
Legislative elections are scheduled for 8 and 9 October. All 200 members of the
Chamber of Deputies will be elected, alongside a leader of the resulting government,
who will become prime minister. Support for Andrej Babiš’ ruling ANO party has
continued to fall since the start of the pandemic. According to recent polling data,
support for the minority government is down to 20% (ANO won 29.6% of the vote in
2017), while the opposition alliance between the Pirate Party and the Mayors and
Independents party (STAN) is at 27.5%. Babiš is unlikely to regain support by October,
in our view; ANO’s popularity has failed to recover despite increasing vaccinations and
the gradual easing of restrictions.
Market outlook – EUR-CE3 outlook unchanged
Terms of trade have improved across CE3 as the region benefits from the global post-
pandemic recovery. At the same time, central banks have turned more hawkish; the
Czech Republic and Hungary have already delivered rate hikes. We expect further
improvement, with a relative preference for the Czech koruna (CZK), followed by the
Polish zloty (PLN) and the Hungarian forint (HUF), based on relative terms of trade
and the potential for further central bank normalisation. We maintain our end-2021 and
2022 forecasts for EUR-CE3 crosses, and we see EUR-CZK at 25.0 at end-2022.
Inflation to remain in Q3 on base
effects and higher producer prices
We expect one more rate hike
in 2021
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Hungary – A brighter year ahead
Economic outlook – Optimistic amid early reopening
We raise our 2021 GDP growth forecast to 5.5% (from 4.0%) on solid Q1 growth,
fast vaccine rollout and early economic reopening. GDP grew 2.0% q/q in Q1 on
the back of strong exports, industrial-sector resilience and supportive government
spending. Though the resurgence of COVID cases in early 2021 meant much of March
and April was spent in lockdown, we expect the economic rebound to have resumed
in Q2. We raise our 2022 growth forecast to 4.5% (from 4.0%) and our 2023 growth
forecast to 3.5% (from 2.7%) to reflect expansionary fiscal policy being maintained
through 2023 and funding via the EU Recovery and Resilience Facility (RRF).
Industrial production fell 3.2% m/m in April after a weak 0.1% increase in March.
However, recent survey data suggests cause for optimism: the manufacturing PMI
turned expansionary in April and rose to 52.8 in May. We see industrial activity
improving in H2-2021 given the lifting of almost all restrictions by end-May and higher
external demand. Retail sales also suffered in April, contracting 1.0% m/m. However,
the services sector is likely to rebound strongly in H2-2021 as pent-up savings are
spent and tourism returns.
Hungary’s pandemic situation continues to improve. After a rapid resurgence of COVID
cases in February and March, daily new cases have fallen to less than 10 per million
people. Further, c.57% of the population has already received a first vaccine dose,
above the EU average of c.50%. At the current rate of vaccination, herd immunity
should be achieved by end-August. That said, we remain cautious of further COVID
outbreaks given the government’s early reopening programme and the spread of the
new, more transmissible COVID variant throughout Europe.
Policy – Monetary tightening, accommodative fiscal policy
We see another 60bps of rate hikes from the National Bank of Hungary (NBH) by
end-2021, taking the base rate to 1.5%. The NBH raised the base rate by 30bps in
June (to 0.90%), the first hike since the start of the pandemic. The central bank has
communicated that in order to “prevent the lasting effects of inflation risks and to
anchor inflation expectations”, it will assess the need to “further tighten monetary
conditions in a data-driven manner at its monthly policy meeting”. The pace of rate
hikes will depend mostly on inflation dynamics in the coming months as more transient
Figure 1: Hungary macroeconomic forecasts Figure 2: Activity dipped in April on COVID spike
Industrial production and retail sales, % m/m
2021 2022 2023
GDP growth (real % y/y) 5.5 4.5 3.5
CPI (% annual average) 4.2 3.0 3.0
Policy rate (%)* 1.50 0.90 0.90
USD-HUF* 286.00 286.00 290.00
Current account balance (% GDP) 0.3 1.0 1.5
Fiscal balance (% GDP) -6.0 -4.5 -3.5
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Retail sales
IP
-30
-25
-20
-15
-10
-5
0
5
10
15
20
May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21
Industry and services to exhibit
robust recovery in H2-2021
Emiko Bowles +44 20 7885 6409
Research Associate
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Hungary’s vaccination campaign is
well ahead of the EU’s
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drivers (i.e., higher commodity prices versus last year) fade. However, we believe the
NBH will be proactive, front-loading rate hikes in Q3 before taking a more incremental
approach to tightening in Q4.
Headline inflation remained elevated at 5.1% y/y in May, driven by increases in fuel
prices and excise taxes. We expect inflation to remain close to the NBH’s upper
tolerance band of 4% (target rate: 3% +/- 1ppt) in H2-2021 as demand continues to
outstrip supply, domestic and external consumption resumes, and global supply-chain
issues linger. Producer prices rose 11.3% y/y in May as supply shortages continued to
pass through to domestic prices. As such, we raise our 2021 inflation forecast to 4.2%
(from 4.0%). We expect a gradual softening of prices in 2022 and 2023 as supply
issues ease and the drawdown of pent-up savings diminishes. We maintain our
inflation forecasts of 3.0% for both 2022 and 2023.
On the fiscal front, Hungary’s finance minister has communicated that post-COVID
government spending will remain expansionary through 2023. Hungary is also likely to
receive EUR 7.2bn (c.5% of GDP) in grant funding from the EU RRF between 2021 and
2026. Policy reforms will be structured around the green transition, health care and
digitalisation; projects will include investments in sustainable transport and the energy
transition. We maintain our fiscal deficit forecasts given that earlier-than-expected
reopening should offset early-year fiscal underperformance. We see risks of a larger
deficit, especially given greater economic uncertainty due to the new Delta variant.
We continue to expect the current account surplus to gradually improve for the rest of
2021 as improving external demand leads to higher exports. Further, increased
investment as a result of ongoing fiscal support and future RRF funding should add to
output capacity, supporting the current account in the medium term.
Politics – 2022 parliamentary elections
Parliamentary elections are scheduled for spring 2022; at stake are 199 seats
in the National Assembly. 106 seats are elected through constituencies via first-
past-the-post voting and the remaining 93 via nationwide proportional
representation. Support for the ruling Fidesz-KDNP Party Alliance, led by Prime
Minister Victor Orbán, has slipped since the 2018 election; recent polling data
suggests 47% support. Leaders of the six opposition parties have agreed to form an
alliance in an attempt to defeat the incumbent. The ‘United Opposition’ alliance,
including the Movement for a Better Hungary, or Jobbik (which has attempted to
transition from the far right towards the centre of the political spectrum) and the
Hungarian Socialist Party (MSZP), together poll at 48% support. The ruling
nationalist party is likely to maintain strong fiscal support in order to regain popularity
and retain its supermajority next year.
Market outlook – EUR-CE3 outlook unchanged
Terms of trade have improved across CE3 as the region benefits from the global post-
pandemic recovery. At the same time, central banks have turned more hawkish; the
Czech Republic and Hungary have already delivered rate hikes. We expect further
improvement, with a relative preference for the Czech koruna (CZK), followed by the
Polish zloty (PLN) and the Hungarian forint (HUF), based on relative terms of trade
and the potential for further central bank normalisation. We maintain our end-2021 and
2022 forecasts for EUR-CE3 crosses; we see EUR-HUF at 360 at end-2022.
Supply-side disruptions to keep
inflation elevated for the rest
of 2021
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Poland – A brightening outlook
Economic outlook – Solid H2-2021 recovery ahead
We raise our 2021 GDP growth forecast to 4.0% from 3.5% on expectations of a
robust H2 consumer demand recovery and accommodative monetary and fiscal policy.
GDP grew 1.1% q/q in Q1 on the back of increased private spending and strong
investment (gross capital formation grew 17.5% q/q). Economic activity dipped in April
as a result of deteriorating pandemic conditions. However, we remain optimistic for a
sustained economic recovery starting in late Q2 as containment measures are eased
and household consumption picks up.
Retail sales grew 8.4% m/m in May (sales of clothing and footwear were up 92.6%
m/m) after falling 27.3% m/m in April on renewed lockdown restrictions. We see
services activity accelerating in H2-2021 on pent-up domestic demand and a further
global demand recovery. Industrial production grew 0.6% m/m in May following a 0.2%
contraction in April. The manufacturing PMI strengthened to 57.2 in May, a record high,
as growth in both output and new orders accelerated. However, global supply-chain
disruptions due to the pandemic continue to affect Poland’s industrial sector. Suppliers’
delivery times increased to record highs in May, reflecting ongoing supply-side
shortages. The gradual easing of supply-chain issues from end-2021 should support
Poland’s automotive industry and boost export growth from 2022 onwards.
Restrictions continue to be eased across Poland as daily new cases fall to less than 5
per million population. As of early June, all non-essential businesses, restaurants
(albeit with capacity limits) and schools are open. Poland’s vaccination rate has
increased threefold since March, rising to over 0.7 doses per 100 people per day. Over
40% of the total population has received at least one dose of a COVID-19 vaccine; at
the current vaccination rate, herd immunity should be achieved by early September.
Still, vaccine scepticism remains high in Poland. In May, a survey by state-owned
research centre CBOS indicated that 25% of respondents do not intend to receive a
vaccine when offered. Given the spread of the more transmissible Delta variant, low
take-up poses a significant threat to economic reopening and a return to normalcy.
Figure 1: Poland macroeconomic forecasts Figure 2: Inflation picks up while policy rate stays steady
CPI, % y/y (LHS) and NBP policy rate, % (RHS)
2021 2022 2023
GDP growth (real % y/y) 4.0 4.0 3.5
CPI (% annual average) 3.5 2.5 2.5
Policy rate (%)* 0.10 0.50 1.00
USD-PLN* 3.33 3.33 3.35
Current account balance (% GDP) 2.5 1.5 1.0
Fiscal balance (% GDP) -5.0 -1.9 -1.5
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Inflation, % (LHS)
Policy rate, % (RHS)
0
1
2
3
4
5
6
7
-4
-2
0
2
4
6
8
10
12
14
May-07 May-09 May-11 May-13 May-15 May-17 May-19 May-21
Services and industrial recovery is
likely to accelerate in H2-2021
Emiko Bowles +44 20 7885 6409
Research Associate
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Vaccine scepticism poses an
ongoing threat to sustained
economic reopening
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Policy – Accommodative through 2021
We expect the National Bank of Poland (NBP) to leave rates unchanged in 2021.
NBP President Glapinski has stressed that it is “way too early” to consider monetary
policy normalisation given prevailing pandemic uncertainty. He has commented that
monetary tightening cannot be justified until forecasts reflect higher GDP growth in the
coming years, persistent inflation and a strong labour market. As such, we forecast no
rate hikes in 2021; we expect 40bps of hikes starting around mid-2022 as Poland’s
economy returns to trend. In addition to keeping the policy rate steady, the NBP has
said it will continue to purchase government assets in the secondary market to maintain
favourable liquidity conditions. The central bank has also reiterated its willingness to
intervene in the foreign exchange market if necessary.
Headline inflation rose to 4.7% y/y in May from 4.3% in April on commodity price base
effects (fuel prices were up 33.0% compared to a year ago) and food price increases.
Temporary supply-chain disruptions also continue to bolster inflation: producer price
inflation spiked to 6.5% y/y in May, having remained largely negative in 2020. We see
inflation staying close to the upper band of the NBP’s inflation target (2.5% +/- 1ppt)
for the rest of 2021 on longer-than-expected supply shortages and strong industrial
demand. As a result, we raise our 2021 inflation forecast to 3.5% (from 3.0%). We
expect inflation to gradually soften towards the target in 2022 as temporary drivers
fade; we maintain our CPI inflation forecasts of 2.5% for both 2022 and 2023. We think
the perception that inflationary factors are temporary will keep the NBP from tightening
policy this year.
Domestic fiscal policy is likely to remain accommodative for the rest of 2021, with
support targeted to sectors most affected by subsequent pandemic waves. Further,
Poland is expected to received EUR 23.9bn in grants and EUR 12.1bn in loans – c.7%
of GDP – under the EU Recovery and Resilience Facility (RRF). As in euro-major
countries, green transformation features heavily in Poland’s plan. Projects include
measures to reduce air pollution and develop energy-efficient buildings, sustainable
energy sources and zero-emission transport, and are expected to be financed over the
entire 2021-26 RRF period. We expect disbursements to begin sometime in Q3-2021.
Poland’s current account surplus increased to 3.7% of GDP in March on positive trade
dynamics. Goods exports and imports were up 27.7% and 24.6% y/y, respectively. We
expect the current account surplus to moderate in H2-2021 as a consumer demand
recovery leads to higher imports. Nevertheless, we revise our 2021 current account
forecast up slightly to 2.5% (from 2.2%) to reflect our expectation of resilient
external demand.
Market outlook – EUR-CE3 outlook unchanged
Terms of trade have improved across CE3 as the region benefits from the global post-
pandemic recovery. At the same time, central banks have turned more hawkish; the
Czech Republic and Hungary have already delivered rate hikes. We expect further
improvement, with a relative preference for the Czech koruna (CZK), followed by the
Polish zloty (PLN) and the Hungarian forint (HUF), based on relative terms of trade
and the potential for further central bank normalisation. We maintain our end-2021 and
2022 forecasts for EUR-CE3 crosses and see EUR-PLN at 4.20 at end-2022.
We raise our 2021 CPI inflation
forecast to 3.5% on temporary
factors
Monetary policy normalisation is
not expected until 2022
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Russia – Heating up
Economic outlook – Trade and demand support recovery
We maintain our 2021 GDP growth forecast of 3.2% on a shallower-than-
expected Q1 contraction, delayed vaccine rollout and mixed economic data.
GDP contracted by 0.7% y/y in Q1 due to weak retail sales and lingering COVID-19
restrictions; the H2-2021 recovery should be supported by strong exports, booming
domestic demand and favourable fiscal spending ahead of parliamentary elections in
September. Slow vaccine rollout and the potential dampening effect of rising inflation
on consumer demand are downside risks to our outlook.
Exports remained strong in April – having returned to trend – with support from growing
global demand and a weaker Russian ruble (RUB). Exports of autos, copper, and
machinery and equipment saw the biggest increases versus March. The industrial-
sector recovery has been subdued so far; industrial production grew 1.1% m/m in May
following a weak 0.1% expansion in April. We believe global supply-chain disruptions
– and the corresponding 35.3% y/y jump in producer prices in May – are keeping
industrial production growth subdued. Retail sales growth slowed to 0.3% m/m in April
from 9.2% in March. Inflation dynamics are likely to play a key role in sustaining the
consumer demand recovery. On a more optimistic note, survey indicators continue to
improve, with both the manufacturing and services PMIs edging higher since the
beginning of 2021.
On the COVID front, only c.15% of the population has received at least one vaccine
dose (source: Our World in Data); this is concerning given the global spread of the
new, more contagious Delta variant. Daily COVID-19 cases and deaths have picked
up after a prolonged period of stability. Cases in Moscow surged in June to the highest
level since mid-January, prompting authorities to reimpose work-from-home
restrictions. Since the start of the pandemic, the Kremlin has resisted re-imposing strict
containment measures in favour of keeping the economy open. We see a significant
risk that this strategy will allow the Delta variant to become widespread, which could
curb growth in the coming quarters.
Policy – Monetary policy tightening to continue
The Central Bank of Russia (CBR) is likely to hike rates by another 100bps this
year. At its June meeting, the CBR increased the key rate by 50bps to 5.50% in
response to accelerating inflation in May.
Figure 1: Russia macroeconomic forecasts Figure 2: Inflationary pressures strengthen
CPI (% y/y) and key rate (%)
2021 2022 2023
GDP growth (real % y/y) 3.2 2.5 2.2
CPI (% annual average) 5.2 4.2 3.5
Policy rate (%)* 6.50 6.00 5.75
USD-RUB* 70.0 68.0 71.4
Current account balance (% GDP) 2.0 3.0 3.5
Fiscal balance (% GDP) 0.0 0.5 0.5
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
CPI, %
Key rate, %
0
2
4
6
8
10
12
Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21
Exports and services continue to
fuel the economic recovery
Another 100bps of hikes expected
this year, assuming no further
lockdowns in H2
Emiko Bowles +44 20 7885 6409
Research Associate
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Slow vaccination rollout poses a
clear downside risk to our outlook
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The CBR also maintained its hawkish tone, noting that increased inflationary pressure
– driven by a faster-than-expected domestic and global recovery and supply-chain
disruptions – “creates the necessity of further increases in the key rate at upcoming
meetings”. We think the next 50bps hike will come in July, followed by a 25bps hike in
September. We expect another 25bps hike in December, provided that the recent pick-
up in cases does not lead to widespread closure of the economy. This would take the
key rate to 6.50% by end-2021.
Headline inflation accelerated to 6.0% y/y in May – well above the CBR’s 4.0% target
– on stronger domestic demand and ongoing global supply-chain disruptions. The pace
of food price inflation has prompted the government to impose temporary price caps
on key products, including sugar. We expect inflationary pressures to persist in Q3
amid rising inflation expectations, which have reached their highest level in four years,
as well as elevated government spending ahead of the September elections. We
maintain our 2021 average inflation forecast of 5.2%, in line with consensus. We expect
inflation to soften to 4.2% in 2022 and 3.5% in 2023 as global commodity prices and
global supply-chain issues ease.
We expect fiscal policy to remain accommodative ahead of the September elections,
but we raise our 2021 fiscal balance forecast to 0.0% of GDP (from -2.5%) to reflect
higher non-oil revenue (mostly VAT receipts) and lower health expenditure. The federal
budget surplus was RUB 312.1bn in May, versus a deficit of RUB 273.7bn a year
earlier. The Kremlin is likely to proceed with fiscal policy normalisation in 2022 and
2023, leading to a narrower fiscal balance. We therefore raise our 2022 fiscal balance
forecast to 0.5% from -0.5%; we keep our 2023 forecast at 0.5%.
Politics – Russia-US relations unlikely to improve
Biden and Putin held a widely anticipated summit in June. Short of an
improvement in relations, the meeting raised hopes that the two sides might establish
‘rules of the road’ to avoid confrontation in areas such as cyberattacks. Expectations
are low – on both the US and the European side – that relations with Putin’s Russia
will improve materially.
Legislative elections are scheduled for mid-September; at stake are 450 seats in the
lower house of the Federal Assembly. Putin’s ruling party, United Russia (UR), and its
allies currently control c.90% of the assembly. Support for UR has dropped to an eight-
year low of around 30%. The Communist Party (CPRF) and the Liberal Democratic
Party (LDPR) follow with 12% and 11% of support, respectively. Still, the election is
unlikely to bring any surprises. We expect UR to retain its supermajority, with a
possibility that Putin could exercise stronger control over the election outcome (see
2021 – Electoral heatmap).
Market outlook – RUB staying strong
We are constructive on the RUB. Concerns over sanctions have eased, with
restrictions limited to new OFZ issuance, and we think RUB strength can continue.
Inflation accelerates on strong
domestic demand and supply-chain
disruptions
Low hopes for improving relations
with the West; legislative elections
are unlikely to bring surprises
PUBLIC
Economies – Americas
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US and Canada – Top charts Figure 1: Inflation is the highest since the early 1990s
US core CPI and core PCE, % y/y
Figure 2: Incomes and spending are back above
pre-pandemic levels; savings rate is twice as high
US household saving rate, %; consumption and income, USD bn
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Figure 3: Inflation expectations have risen
U Mich inflation expectations during next 1Y and 5-10Y, %
Figure 4: Investment has picked up strongly
US capital-goods new orders, non-defense ex aircraft, USD bn
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Core PCE
Core CPI
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
May-91 May-95 May-99 May-03 May-07 May-11 May-15 May-19
Household savings (LHS)
Personal income, chained 2012 USD (RHS)Personal spending,
chained 2012 USD (RHS)
10,000
12,000
14,000
16,000
18,000
20,000
0
5
10
15
20
25
30
35
40
May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21
1yr
5-10yrs
0
1
2
3
4
5
6
Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18 Jan-21
45
50
55
60
65
70
75
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21
Tho
usan
ds
Figure 5: Employment is still c.10mn below trend
US total employment (mn) and pre-pandemic trend
Figure 6: US GDP to return to pre-pandemic level by Q2-
2021; Canada by Q3-2021
US* & Canada** GDP in domestic currency value, tn
Source: Bloomberg, Standard Chartered Research *Chained 2012 prices; **chained 2007 prices; Source: Bloomberg, Standard Chartered Research
130
135
140
145
150
155
160
165
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
Tho
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US (LHS)
Canada (RHS)
1.6
1.7
1.8
1.9
2.0
2.1
2.2
14
15
16
17
18
19
20
Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Mar-19 Mar-21
Tho
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Tho
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Latin America – Top charts Figure 1: Vaccination rates are low, except in Chile
Share of population vaccinated (one or more doses), %
Figure 2: Inflation is taking off in some countries
CPI, % y/y
Source: Our World in Data, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Figure 3: Exports have recovered well
Latin America and world export volume index
Figure 4: Real policy rates are set to turn less negative
Real policy rate, %
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Brazil
Chile
Colombia
Mexico
Peru
0
10
20
30
40
50
60
70
Feb-21 Feb-21 Mar-21 Apr-21 Apr-21 May-21 Jun-21
Peru
Chile
Colombia
Mexico
Brazil
0
1
2
3
4
5
6
7
8
9
Jan-18 Jun-18 Nov-18 Apr-19 Sep-19 Feb-20 Jul-20 Dec-20 May-21
Latam
World
80
90
100
110
120
130
140
150
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
Brazil Chile Peru Mexico Colombia
Figure 5: After Peru’s radical swing, potential for more
regional political change in next 15 months
Upcoming elections
Figure 6: Copper price driven by demand and USD moves
LME copper price (LHS) vs DXY dollar spot index (RHS)
Country Election type Date
Chile Presidential (run-off) 21 Nov (19 Dec) 2021
Colombia Presidential 29 May 2022
Brazil General and
presidential 2 October 2022
Source: National sources, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
LME copper price (LHS)
DXY USD Index (RHS)
88
89
90
91
92
93
94
7,000
8,000
9,000
10,000
11,000
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21
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US – The talking starts
Economic outlook – Employment is catching up
Stronger job growth should sustain economic momentum. We expect 2021 GDP
growth of 6.5%, reflecting substantial fiscal stimulus and the reopening of the economy
on positive vaccination progress. While employment has recovered at a slower pace
than we expected, we think job growth will accelerate in Q3, sustaining buoyant
quarterly GDP growth. We now expect Q4-2021 y/y growth of 6.7% (previously 6.0%),
with stronger momentum driving full-year 2022 growth of 3.5% (3.0%). We expect 2023
growth to slow to 2% as the economy normalises after the pandemic-related bust and
boom. We expect both Q4-2022 and Q4-2023 y/y growth to be 2.0%.
Labour demand is strong, but employers report worker shortages despite
unemployment being well above the 3.5% rate associated with full employment.
Factors limiting the take-up of jobs – including nervousness over pandemic risks, child-
care issues and enhanced unemployment benefits – may ease in H2-2021. Higher
unemployment benefits end in early September, and a number of states are
increasingly ceasing these benefits earlier. Good progress has been made on
vaccinations, with 54% of the population having received at least one dose by 27 June.
That said, the pace has slowed since end-April, leaving a sizeable minority unprotected
against the more transmissible COVID-19 Delta variant, which may become the
dominant variant in Q3.
Consumer spending likely stayed strong in Q2, though momentum slowed after the
impact of March’s pandemic-related payments faded, and consumers have become
more nervous about headwinds from higher inflation. Stronger job growth, the receipt
of child tax credits, and the deployment of savings accumulated during lockdowns
should further boost spending in H2. Investment spending is also likely to be a growth
driver, underpinned by low interest rates. But earlier strong momentum in residential
investment has waned in the face of shortages of building materials and lower buyer
interest amid weaker affordability. While exports are rising on the back of a broader
global recovery, we expect import growth to outpace export growth. In Q1-2021, the
current account (C/A) deficit deteriorated to 3.2% of GDP, the worst level since 2009.
We expect a 2021 C/A deficit of 3.5% of GDP, improving to 3.0% in 2022 and 2.8% in
2023 as US domestic demand slows.
Figure 1: US macroeconomic forecasts Figure 2: Inflation set to stay well above target in H2-2021
Services and durable goods PCE deflators, % y/y
2021 2022 2023
GDP growth (real % y/y) 6.5 3.5 2.0
Core PCE (% annual average) 2.8 2.4 2.2
Fed funds target rate (%)* 0.25 0.25 0.75
10Y UST yield (%)** 2.00 1.80 1.80
Current account balance (% GDP) -3.5 -3.0 -2.8
Fiscal balance (% GDP) -15.0 -8.0 -6.0
*FFTR: upper-end of expected range; **end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Durable goods PCE deflator (LHS)
Services PCE deflator (RHS)
1.0
1.5
2.0
2.5
3.0
3.5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
May-11 May-13 May-15 May-17 May-19 May-21
Labour shortages despite high
unemployment
Sarah Hewin +44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
John Davies +44 20 7885 7640
US Rates Strategist
Standard Chartered Bank
Investment is strong, and spending
should be boosted by rising
employment, tax credits and
savings drawdowns
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Policy – Tapering moves into view
We expect the Fed to start tapering QE purchases in Q1-2022 and raising rates
in H1-2023. With an increasing share of the population vaccinated against COVID-19
and the economy likely to be back at trend GDP later this year, the need to keep
monetary policy on an emergency footing is waning. But policy makers have committed
to maintaining QE at the current USD 120bn/month until substantial progress has been
made towards their goal of maximum employment and inflation that has reached 2%
and is on track to modestly exceed 2% for some time.
While we expect job gains to accelerate in H2-2021, an increase in the labour force
and higher labour participation rates are likely to slow the decline in the unemployment
rate. Consequently, full employment (an unemployment rate of 3.5%) may not be
reached until 2023. Even so, a decline to 4.5-5.0% by end-2021 may be sufficient
progress towards the Fed’s employment goal to allow tapering to start in 2022.
Inflation is currently well above the 2% target, with the core PCE deflator reaching 3.4%
y/y in May. Much of the acceleration in inflation in H1-2021 was due to higher
commodity prices, pandemic-related supply disruptions and economic reopening as
pandemic restrictions were eased. We raise our 2021 core PCE deflator forecast to
2.8% (previously 2.2%) but now expect 2022 to slow to 2.4% (2.1%); we still see 2023
at 2.2%. We expect Q4 y/y inflation of 3.2% in 2021, 2.2% in 2022 and 2.1% in 2023.
We see a risk of core PCE reaching c.4% by Q4 if commodity prices and supply-side
constraints do not ease as we expect in H2. Inflation expectations are high, at 4.2%
over a 1-year horizon and 2.8% over a 5-10 year horizon; policy makers are concerned
that elevated inflation expectations could embed higher inflation in wage-setting.
The fiscal deficit is likely to stay wide in 2021, after reaching 15.6% of GDP in 2020.
We now expect a 2021 deficit of 15% of GDP (previously 12%), narrowing to 8% in
2022 and 6% in 2023. In Q1, households and individuals received USD 1.9tn via the
American Rescue Plan (enhanced unemployment benefits and direct payments);
further funds for individuals and households may be forthcoming if economic
momentum slows. An infrastructure package of some USD 1tn, the ‘American Jobs
Plan’ (new funding and renewal of existing infrastructure funding) over the next five
years has received bipartisan support from a group of senators. President Biden also
hopes that Congress will pass the ‘American Families Plan’, c.USD 1.8tn of welfare
and climate-related spending and tax credits over 10 years (funded by tax hikes on
wealthy Americans), although this bill is likely to rely solely on Democratic support in
Congress via the reconciliation process.
UST market outlook – Consolidation continues
Q2 data, while strong overall, did not beat market expectations, and the 10Y UST yield
was unable to sustain the Q1 uptrend. Broad consolidation has therefore been the key
theme; in Q3, we expect the 10Y yield to stay mostly within the c.1.50-1.75% trading
range that has dominated price action in recent months. We maintain our end-2021
10Y UST forecast of 2.0% for now, but see growing downside risks; we recently
lowered our end-2022 forecast to 1.8% from 2.25% (see Macro Strategy Views). While
we expect the Fed to start raising rates in 2023, inflation should be drifting down
towards target by then, and we see growth slowing towards potential. This is likely to
limit market pricing for the overall Fed hiking cycle; we therefore also lower our end-
2023 10Y UST yield forecast to 1.8% from 2.25%.
The need to keep monetary policy
on an emergency footing is waning,
assuming ongoing progress in
tackling COVID-19
We expect core PCE inflation to
average 2.8% in 2021
Our base case is that the c.1.50-
1.75% range for the 10Y UST yield
will hold in Q3
The fiscal deficit is likely to narrow
only slightly in 2021
Full employment may not be
reached until 2023
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Canada – Overtaking
Economic outlook – Vaccinations to deliver growth boost
H2 growth is likely to be strong as the economy pulls out of a third pandemic
wave. We raise our forecast for 2021 GDP growth to 6.4% (previously 5.5%), and 2022
to 4.5% (3.5%). A third pandemic wave struck in April and May, but cases have come
down sharply; meanwhile, under an accelerated vaccination programme, 68% of the
population had received at least one dose by 27 June. We expect the economy to
bounce back in H2-2021, after subdued Q2 growth, as COVID restrictions are eased
over the summer. Strong activity in H2-2021 should provide a solid base for 2022;
thereafter, we see growth slowing to a more ‘normal’ pace of 2.5% in 2023.
After growth of 5.7% q/q SAAR in Q1, driven by strong household spending, the
economy slowed in Q2-2021 with the re-introduction of pandemic restrictions. Some
275,000 jobs were lost in the third wave of the pandemic in April and May, more than
in the second wave over the winter months; the unemployment rate rose to 8.2% in
May. High-frequency data point to employment recovering swiftly with the reopening
of the economy, though employers face labour shortages that may be partly due to
pandemic unemployment benefits. Bank of Canada (BoC) Governor Tiff Macklem said
that employment would need to return to c.200,000 above the pre-pandemic level to
get back on trend and reduce unemployment back below 6% (Figure 2).
Exports should help to drive the recovery, supported by high prices for oil and other
commodity exports and increased US demand (Canada sends 75% of its exports to
the US). The trade balance was in surplus for three of the first four months of the year
(albeit partly due to a 22% drop in vehicle imports in April as semiconductor shortages
led to shutdowns in the auto industry). We expect the current account deficit to narrow
to 0.8% of GDP in 2021 from 1.8% in 2020.
We raise our 2021 inflation forecast to 3.1% (previously 2.1%). As elsewhere, inflation
has accelerated on base effects, higher commodity prices and supply constraints. In
Canada, the impact of economic reopening has also contributed to higher prices, along
with building costs and demand for housing. CPI inflation rose to 3.6% y/y in May (well
above the 1-3% BoC target) from 0.7% in December 2021, while the average of core
inflation measures rose to 2.3%. The BoC views inflation pressures as transitory, with
underlying price pressures remaining weak due to economic slack.
Figure 1: Canada macroeconomic forecasts Figure 2: Employment has recovered but is still below trend
Employment, mn; unemployment rate, %
2021 2022 2023
GDP growth (real % y/y) 6.4 4.5 2.5
CPI (% annual average) 3.1 2.0 2.1
Policy rate (%)* 0.25 0.50 1.00
USD-CAD* 1.15 1.14 1.15
Current account balance (% GDP) -0.8 -1.0 -1.0
Fiscal balance (% GDP)** -6.5 -3.5 -2.0
*end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Actual employment
(LHS)
Trend employment (LHS)
Unemployment rate (RHS)
5
7
9
11
13
15
17
16
17
18
19
20
2016 2017 2018 2019 2020 2021
Sarah Hewin +44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
Steve Englander +1 212 667 0564
Head, Global G10 FX Research and North America Macro
Strategy
Standard Chartered Bank NY Branch
Exports should benefit from
stronger US demand
Employment is recovering, though
employers complain of labour
shortages
Inflation has risen to well above the
BoC’s 1-3% target
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Policy – Gradually removing emergency support
Further tapering; we now see a rate hike in 2022. BoC Deputy Governor Timothy
Lane indicated on 10 June that if the economy recovers in line with, or faster than, the
BoC’s expectations, it will not need as much support over time. “Given the reopenings
happening in many parts of Canada, we expect to learn more over the coming weeks
to further inform that assessment,” he said. Following a tapering of bond purchases in
April, we expect another reduction in QE purchases in July to CAD 2bn/week from the
current pace of CAD 3bn/week. We see further gradual tapering over the next 12
months, down to zero by mid-2022.
Policy makers have committed to holding rates low until the damage from the pandemic
is fully repaired. We expect the BoC to start raising rates ahead of the Fed; we now
forecast that it will deliver first 25bps move in H2-2022 (instead of 2023), taking the
policy rate to 0.5% (instead of keeping it on hold at 0.25%). We now forecast two further
hikes in 2023, taking the policy rate to 1.0% (rather than 0.75%).
The 2021 budget, published in April, committed to maintaining support for households
and businesses, prolonging emergency benefits via a number of schemes (including
the Canada Emergency Wage Subsidy and the Canada Recovery Benefit), and
introducing an additional wage-bill subsidy, the Canada Recovery Hiring Program.
Some CAD 101bn in new spending was committed over three years. We expect the
fiscal deficit to narrow to 6.5% of GDP in 2021 from 10.7% in 2020 as revenues recover
and the need for support declines; we forecast further deficit reduction to 3.5% of GDP
in 2022 and 2.0% in 2023.
Politics – Early elections?
While the next federal election is not due until October 2023, an early election in
2021 cannot be ruled out. The ruling Liberal party – which holds 157 seats, short of
a majority in the 338-seat lower house – may be tempted to capitalise on the success
of the accelerated vaccination programme by going for an early vote in September or
October. This could allow Prime Minister Justin Trudeau to build a majority so that he
no longer needs to rely on the Bloc Québecois and the New Democratic Party, which
currently hold the balance of power. That said, opinion polls do not suggest a clear-cut
victory for the Liberals, so Trudeau may be cautious about triggering a new vote.
Canada-US relations have improved under the Biden administration. US President
Biden’s first bilateral meeting with a foreign leader was with Trudeau; they agreed to
work together on areas of mutual interest, including the pandemic, post-pandemic
recovery and action on climate change. In addition, the countries are aligned on foreign
policy, including relations with China and Russia.
Market outlook – CAD up on rates outlook and commodities
We expect the Canadian dollar (CAD) to strengthen against the USD. We see
USD-CAD at 1.17 at end-Q3-2021, 1.15 at end-Q4-2021, 1.14 at end-Q1-2022 and
1.14 at end-Q2-2022. Canada’s vaccination programme is picking up sharply,
accelerating expectations of economic reopening. By contrast, US reopening has
provided limited USD support, even when surprising to the upside. The BoC appears
far more eager to normalise rates than the Fed, and we expect strong US demand and
firm commodity prices to support the CAD.
The budget deficit should narrow as
revenues build and the need for
emergency support declines
Trudeau may be tempted to go for
an early vote to build a majority in
parliament
We expect a reduction of bond
purchases in July and the first rate
hike in H2-2022
CAD is supported by accelerating
vaccinations, high commodity
prices and prospect of higher rates
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Argentina – Restructuring
Economic outlook – Recovering after prolonged recession
The economy is set to rebound strongly from a weak base. We raise our 2021
GDP forecast to 6.8% (from 1.9%). This would be the first year of positive growth since
2017, albeit mostly a bounce-back from the deep recession in 2020, when the economy
contracted by 9.9%. Price controls, an overvalued exchange rate and limits on exports
remain headwinds to growth; we now expect 2022 GDP growth to slow to 3.0%
(previously 2.5%) and still see 2023 growth at 2.5%.
GDP likely contracted in Q2 after strong growth in Q4-2020 and Q1-2021. Economic
activity fell 1.2% m/m in April due to pandemic-related restrictions and a farmers’ strike
to protest a temporary ban on beef exports. Mobility restrictions may be needed until
late 2021 or early 2022. As of 27 June, 35% of Argentines had received one or more
vaccine doses; the pace of vaccinations picked up sharply in June after a third-wave
peak in May. In H2, investment and consumer spending is likely to be supported by
negative real interest rates. Higher agricultural prices have boosted exports, and we
now expect current account surpluses of 1.5% of GDP in 2021 and 0.5% in 2022
(previously deficits of 1.0% and 1.5%). We expect a return to deficit in 2023 (-1.5%
versus -2.5% previously).
Policy – Aiming for IMF and Paris Club deals by Q1-2022
Annual inflation accelerated to 49% in May, the fastest pace since the pandemic hit
last year. We raise our inflation forecasts to 48% (from 34%) for 2021, 42% (29%) for
2022, and 35% (10%) for 2023. Banco Central de la República Argentina (BCRA) has
kept the policy rate at 38% since March 2020, leaving real rates deeply negative. To
limit the rise in inflation, policy makers have used a combination of capital controls,
price controls, export controls (for example on beef exports) and allowing currency
appreciation in real terms. We expect policy rate tightening to 40% in 2022 once debt
restructuring has been concluded.
Negotiations with the IMF continue, with the aim of reaching an agreement on an
Extended Fund Facility by March 2022. The government announced that it would make
a partial USD 430mn payment to the Paris Club before the end of July to avoid a
default, after failing to meet a USD 2.4bn maturity in May. Argentina has until end-
March 2022 to complete debt restructuring with the Paris Club.
Figure 1: Argentina macroeconomic forecasts Figure 2: GDP growth to turn positive for the first time
since 2017 (GDP, % y/y)
2021 2022 2023
GDP growth (real % y/y) 6.8 3.0 2.5
CPI (% annual average) 48.0 42.0 35.0
Policy rate (%) 38.00 40.00 32.00
USD-ARS* 120.00 140.00 101.00
Current account balance (% GDP) 1.5 0.5 -1.5
Fiscal balance (% GDP) -6.0 -4.0 -3.0
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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-8
-6
-4
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0
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4
6
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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021F
GDP likely contracted in Q2 given
pandemic-related restrictions
Real rates are deeply negative
Sarah Hewin +44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Argentina has until end-March 2022
to complete Paris Club debt
restructuring
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Brazil – BCB leads the tightening cycle
Economic outlook – Stronger growth
The economy has recovered faster than expected, despite a high number of
pandemic cases and fatalities. We raise our forecast for 2021 GDP growth to 4.0%
(previously 3.7%), helped by the carryover from buoyant activity in Q4-2020. We
expect growth to slow to 2.5% in 2022 and 2023. Q1 growth was stronger than
expected at 1.2% q/q, after a 3.2% bounce in Q4-2020, supported by booming
agriculture and sustained strong investment. The pick-up in activity came despite a
surge in the virus, tighter pandemic restrictions, and a delay in emergency cash
handouts for poorer people that contributed to falling household consumption.
Pandemic cases have stayed elevated since March. Spending should pick up in H2 as
restrictions are eased and the vaccination rate accelerates; 34% of the population had
received at least one dose by 27 June, and the share is rising swiftly. While rising
unemployment (14.4% in Q1-2021, up from 11.3% pre-pandemic) is likely to weigh on
incomes, we expect households to draw on savings accumulated during 2020,
supporting stronger consumption. That said, the risk of a third wave of the pandemic
should not be underestimated.
Tighter monetary policy is likely to act as a brake on consumer and investment activity
amid sharply higher borrowing rates, while accelerating inflation is damaging real
household incomes. IPCA inflation rose to 8.1% y/y in the first half of June, well above
the 3.75% target. Political uncertainty ahead of next year’s presidential election may
start to weigh on investment activity in 2022.
Higher commodity prices and strong external demand (particularly from China) for food
and minerals are boosting exports and the trade surplus; we now expect only a small
current account deficit of 0.8% of GDP in 2021 (formerly 1.7%), though we forecast a
widening deficit (1.3%) in 2022; we now see the 2023 deficit at 1.5% (formerly 2.5%).
That said, the impulse to economic activity from stronger net exports is likely to be
limited, since trade is a relatively small part of Brazil’s economy.
Figure 1: Brazil macroeconomic forecasts Figure 2: More rate hikes to come as inflation takes off
IPCA CPI, % y/y, SELIC rate, %
2021 2022 2023
GDP growth (real % y/y) 4.0 2.5 2.5
CPI (% annual average) 6.0 4.0 3.5
Policy rate (%)* 6.50 7.00 8.00
USD-BRL* 4.80 6.00 5.05
Current account balance (% GDP) -0.8 -1.3 -1.5
Fiscal balance (% GDP) -7.9 -7.1 -5.5
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
0
2
4
6
8
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Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21
IPCA CPI
SELIC rate
Spending should pick up in H2,
assuming no further pandemic
wave
Sarah Hewin +44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Exports are booming
Headwinds from tighter monetary
policy and higher inflation
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Policy – Rates up
Monetary policy is being tightened to counter rising inflation. Banco Central do
Brasil (BCB) raised the SELIC rate by 225bps in H1 from a historical low of 2%; we
expect another 225bps of hikes to 6.5% by end-2021. Underlying inflation has picked
up sharply since end-2020 as a result of global cost pressures and currency
depreciation; we now expect 2021 CPI inflation to average 6.0% (previously 5.3%),
before slowing to 4.0% in 2022 and 3.5% in 2023. We think policy rate normalisation
will continue in 2022, with the SELIC rate reaching a neutral level of 7% by mid-2022.
More favourable inflation base effects and the upcoming presidential election could
create a window for BCB to pause its hiking cycle, before tightening further in 2023.
The National Monetary Council has confirmed inflation targets of 3.5% in 2022 and
3.25% in 2023, and has set a 3% target for 2024.
Fiscal policy poses upside risks to our interest rate forecasts. We do not expect
the fiscal ceiling to be breached this year (although some BRL 100bn, c.1% of GDP,
of pandemic-related spending is excluded from the fiscal spending cap). Some fiscal
slippage is likely next year, as the Bolsonaro administration will be pressured to spend
ahead of the 2022 elections. We expect the deficit to narrow to 7.9% of GDP this year
from 14.9% in 2020, and to stay relatively wide (7.1%) in 2022 before narrowing further
to 5.5% in 2023. Privatisations could provide a one-off offset to the fiscal deficit; the
lower house has cleared the path for the privatisation of Eletrobras in early 2022.
General government debt rose to 89% of GDP in 2020, though lower debt-servicing
costs, stronger GDP growth and prepayment of a BRL 100bn treasury loan from the
BNDES development bank should lower the debt/GDP ratio slightly in 2021.
Politics – Looking ahead to 2022
The 2022 presidential elections are already dominating political discussion.
Elections take place on 2 October 2022 (also covering the national congress, state
governors and state legislative assemblies). A second round of voting for the
presidency will be held on 30 October in the event of no clear first-round winner. At this
point, the leading candidates are incumbent Jair Bolsonaro and former President Lula
da Silva. Lula has pulled ahead in opinion polls in recent months; his corruption
convictions were annulled, allowing him to run for political office. Mounting protests
about Bolsonaro’s handling of the pandemic have raised the prospect that he could be
removed from office ahead of next year’s elections; 57% of the population backs his
impeachment. Separately, markets are watching the fortunes of Economy Minister
Paulo Guedes, whose reform efforts have hit political and interest-group barriers.
Market outlook – Favourable differentials vs risky politics
The outlook for the Brazilian real (BRL) may finally be starting to improve. BCB’s
aggressive rate hikes have driven more favourable BRL yield differentials versus both
the USD and most EM FX peers, and should allow real rates to re-enter positive
territory in Q4-2021. At that point, we expect external inflows to pick up and the BRL
to see another leg of appreciation. That said, the removal from office of either
Bolsonaro or Guedes would likely lead to substantial BRL weakening, although this
remains a risk rather than an immediate threat to markets. As markets start to look
ahead to potential outcomes of the 2022 presidential election, Brazilian assets may
face additional pressure.
Opinion polls show Lula in the lead
BCB is expected to continue hiking
until mid-2022, before pausing
ahead of elections
The political backdrop is the main
downside risk to the BRL
Fiscal deficit is likely to stay wide
this year and next
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Chile – Vaccinations and copper
Economic outlook – Post-pandemic bounce
Chile is one of a handful of economies to have recovered to pre-pandemic GDP
levels. We expect 2021 GDP growth of 6.9%, and we now see a milder slowdown to
3.8% in 2022 (instead of 3.5%). Chile is facing another rise in pandemic cases, which
peaked in April, and tight restrictions have been in place since March. That said, the
impact on activity has been less than in 2020; businesses have adapted and extensive
policy support is available for both households and firms. Some 66% of the population
had received at least one vaccine dose by 26 June, and business and consumer
sentiment has improved as vaccinations have risen. Fiscal support and pension
drawdowns have underpinned retail spending; once the economy opens up, spending
on hospitality and recreation services should pick up.
Meanwhile, record-high copper prices are delivering a sizeable terms-of-trade bonus.
Exports and investment are likely to remain the engines of growth; in 2019, exports to
China accounted for some 10% of GDP and exports to the US and euro area
accounted for a further 5% of GDP. We expect a current account surplus of 0.3% of
GDP in 2021, moving back into deficit in 2022 (-0.9%) and 2023 (-2.5%).
Policy – Reducing policy accommodation
We expect 100bps of rate hikes this year, given accelerating inflation. Monetary
policy has stayed highly accommodative – policy rates have been held at a record low
of 0.50% since March 2020, and a range of unconventional measures have been
deployed to support credit expansion. Banco Central de Chile (BCCh) risks falling
behind the curve as inflation picks up. We expect rates to be raised 100bps in H2-2021
to 1.5%, another 200bps in 2022 to 3.5%, and to 5.0% in 2023.
Fiscal support equal to c.13% of GDP has been extended in 2020 and 2021, with
pandemic relief measures (cash transfers for poorer households, a job retention
scheme, hiring subsidies and public guarantees for SMEs) strengthened in response
to the recent pandemic wave. Fiscal revenues have been buoyed by higher copper
prices; that said, the possibility of further pension system withdrawals is nontrivial, and
the government faces pressure to spend more ahead of the elections. We expect fiscal
accounts to remain under pressure, with deficits of 4.5% of GDP in 2021, 3.5% in 2022
and 2.8% in 2023.
Figure 1: Chile macroeconomic forecasts Figure 2: Copper is king
Copper exports, USD mn; copper price, LME 3m, USD/t
2021 2022 2023
GDP growth (real % y/y) 6.9 3.8 3.2
CPI (% annual average) 3.6 3.3 3.0
Policy rate (%)* 1.50 3.50 5.00
USD-CLP* 750 700 770
Current account balance (% GDP) 0.3 -0.9 -2.5
Fiscal balance (% GDP) -4.5 -3.5 -2.8
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Copper exports (LHS)
Copper price(RHS)
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jun-19 Dec-19 Jun-20 Dec-20 Jun-21
Rates are likely to rise sharply after
November elections
Sarah Hewin +44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Sudakshina Unnikrishnan +44 20 7885 6583
Commodities Analyst
Standard Chartered Bank
High copper prices provide a terms-
of-trade boost
Pressure for pre-election spending
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Politics – Elections and a new constitution
Chileans will vote in presidential, parliamentary and regional elections on 21
November. Incumbent President Sebastián Piñera is ineligible for re-election. The left
looks energised: Daniel Jadue, backed by the Communist party, is leading in opinion
polls on a platform of reducing Chile’s dependence on copper, raising taxes to increase
social welfare spending, and nationalising pensions, copper and water. Other
candidates include Pamela Jiles of the left-leaning Humanist Party and Joaquin Lavin
of the right-wing Independent Democratic Union (UDI). The right may gain more
momentum as the economy reopens, and the left may end up divided, as in previous
elections. For now, no candidate is polling higher than 20%, pointing to a second-round
vote in December.
Beyond the November elections, the focus is on the constitutional assembly to replace
the current constitution. Following street protests, President Piñera agreed to draft a
new constitution to replace the one introduced in 1980 by Augusto Pinochet. In voting
in May, independent and radical candidates won 88 of the 155 seats on the body that
will draft the new constitution. Including seats reserved for indigenous people, over
two-thirds of participants will be independent, above the majority needed to approve
the wording of the new constitution. Piñera’s centre-right coalition failed to win the one-
third of seats it expected, depriving it of a veto. Once the rules of the process have
been defined, delegates could spend up to 12 months drafting the new constitution
before it is presented for a vote.
Copper outlook
We expect copper prices to remain elevated. Copper prices doubled in the 12
months to May 2021 to a record high above USD 10,000/tonne (t), underpinned by a
supportive macro backdrop, demand recovery and risks to supply. While we remain
positive on fundamentals, we expect prices to remain choppy, with risk appetite,
inflation expectations and USD moves the key drivers of price direction. Even with
slower demand growth from China for the rest of the year, we expect prices to average
USD 9,411/t in 2021 – still well above pre-pandemic levels, albeit lower than in Q2-
2021. We expect average prices of USD 8,590/t in 2022 and USD 8,000/t in 2023.
Demand optimism in the US and Europe has firmed, and fiscal stimulus packages have
a strong renewable, electric vehicle (EV) and clean energy bias, boding well for
medium-term copper demand. Even in China, after softening near-term, demand is
likely to receive a boost from the decarbonisation goal, with extensive copper use in
EVs, EV charging stations, ultra-high voltage transmission lines and electrification.
That said, supply risks remain, ranging from labour disputes to mine renegotiations to
the potential for higher copper taxes and royalties. A larger-than-usual number of
contract wage renegotiations are due this year at mines in Chile, including at the
world’s largest copper mine, Escondida.
Market outlook – CLP boosted by copper boom
The Chilean peso (CLP) is being driven by two competing crosswinds. On the
one hand, the substantial terms-of-trade boost is a clear tailwind for economic and
asset-market performance; on the other, the political backdrop continues to worry
investors. In the near term, we believe the terms-of-trade factor is more important, with
copper prices likely to stay elevated. In the medium term, political developments may
lead to a less-market-friendly environment.
New constitution may be presented
to voters in 2022
We expect copper prices to stay
well above pre-pandemic levels
Labour disputes may disrupt
production
The left is energised but may split
the vote in November
Investors may become concerned
over challenges to Chile’s neo-
liberal model
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Colombia – Volatile
Economic outlook – Momentum carries through
We raise our 2021 GDP growth forecast to 7.0% (previously 5.6%), supported by
momentum from late 2020 and early 2021, and an expected recovery in H2. The
economy recovered well after the first wave of the pandemic hit in Q2-2020, and GDP
growth surprised to the upside in Q1-2021 (2.9% q/q), supported by a strong rebound
in household spending. However, leading indicators suggest a downturn in Q2, with
consumer sentiment down and activity hit by local virus-related lockdowns and
restrictions on mobility, which were re-introduced in April and May.
Social protests and supply-chain disruptions have exacerbated the slowdown in
activity. Political uncertainty is likely to remain a headwind to the investment recovery,
though significant infrastructure investment and strong housebuilding activity should
help. We now expect growth to moderate to 3.7% in 2022 (previously 4.1%) on
uncertainty over the 2022 elections, and to 3.3% in 2023.
Colombia’s pandemic cases are the highest in the region as a share of the population,
reaching a new peak in June. Vaccinations have picked up speed, but from a very low
base. As of mid-June, only 22% of the adult population had received at least one
vaccine dose; this is up from 2% in mid-March.
Stronger commodity prices and improving economic prospects in Colombia’s main
trading partners should buoy external demand and strengthen the export recovery. We
now see a smaller 2021 current account deficit of 3.5% of GDP (4.0% prior) on robust
global demand, and we expect the deficit to narrow to 3.0% in 2022 and 2023.
Policy – Slow to act
Higher inflation is likely to trigger a rate hike in H2-2021. We now expect just one
25bps hike this year, taking the minimum repo rate/overnight lending rate to 2.0% in
Q4-2021 (previously 2.25%). We raise our 2021 CPI inflation forecast to 3.2% from
2.9%. That said, Colombia’s inflation dynamics appear to be the most benign among
the major Latam economies. This creates room for Banco de la República (BanRep),
which currently has a neutral policy bias, to lag behind Latam peers in embarking on a
hiking cycle.
Figure 1: Colombia macroeconomic forecasts Figure 2: Sentiment weakens on protests and new
restrictions (business and consumer confidence)
2021 2022 2023
GDP growth (real % y/y) 7.0 3.7 3.3
CPI (% annual average) 3.2 4.0 4.0
Policy rate (%)* 2.00 3.50 5.00
USD-COP* 3,700 3,800 3,870
Current account balance (% GDP) -3.5 -3.0 -3.0
Fiscal balance (% GDP) -8.5 -5.9 -3.8
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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20
Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Jun-21
Consumer confidence
Business confidence
Tentatively raising rates
Sarah Hewin +44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Vaccinations were low when the
pandemic third wave hit
The economy struggled in Q2-2021
after a better-than-expected
performance in Q1
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The fiscal deficit widened to c.9% of GDP in 2020 as a result of the pandemic-induced
recession, and debt/GDP rose to over 60% from c.45% before the pandemic. Fiscal
support has underpinned the economy to a limited extent, but the cost of supporting
some 2mn refugees from Venezuela remains a drag on public finances.
The failure of fiscal reform (see below) is a major setback and likely will raise borrowing
costs for potential investments; the prospect of meaningful reform to address the
widening deficit appears low. Consequently, the likelihood of a rating downgrade to
non-investment grade has risen. In May, Standard & Poor’s cut Colombia’s rating to
non-investment grade; Fitch has Colombia’s BBB-rating on negative outlook, while
Moody’s has Colombia at Baa2, two notches above non-investment grade.
Politics – Protests ahead of next year’s elections
The Duque administration appears to be losing authority. Popular frustration has
built up over extended lockdown restrictions, alongside long-standing grievances over
the lack of economic opportunities and allegations of government corruption. These
frustrations led to widespread street protests in April, when the government announced
a tax reform aimed at plugging a hole in government finances. Civil unrest looks unlikely
to dissipate given widespread discontent and low government approval ratings.
Presidential elections are still a year away. As elsewhere in the region, the possibility of
populist candidates (who have been gaining support in opinion polls) may be a source of
uncertainty for investors, as well as an increasing hurdle to the economy.
Presidential elections will take place on 29 May 2022; if no candidate receives a
majority, a second round of voting will follow. Opinion polls show left-wing Gustavo
Petro, ex-mayor of Bogota, comfortably ahead. Petro, a former guerrilla, is generally
considered to be a radical who is antipathetic to business.
Market outlook – COP slipping behind
We remain downbeat on the Colombian peso (COP). We continue to see it
primarily as a funder for other EM FX longs. Several factors underpin our pessimism.
First, yield differentials remain unattractive relative to both Latam peers and the
USD. This limits the COP’s appeal from a carry standpoint. Relatively low inflation
allows BanRep to maintain its dovish tone even as other central banks in the region
move towards policy tightening. As such, we expect low carry to remain a persistent
disadvantage for the COP.
Second, the fiscal outlook remains challenging, and the election calendar, civil unrest
and lingering refugee issues are likely to keep investors concerned for the foreseeable
future. Further, the rising rates environment globally threatens to exacerbate
Colombia’s fiscal strain. In the wake of the government’s latest failure to advance tax
reform, Colombia’s CDS rose to an eight-month high; we expect these concerns to
continue to exert an upward pull on USD-COP. The case for owning the COP is
uncompelling, in our view. Low liquidity relative to Latam peers serves as an additional
deterrent for risk allocators.
Risk of another rating downgrade
Government approval ratings
are low
Low carry likely to remain a
persistent disadvantage for the COP
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Mexico – Benefiting from the US bonanza
Economic outlook – Exports lead the way
Trade is likely to remain the primary growth driver in 2021 and 2022. We raise our
2021 GDP growth forecast to 6.2% (from 5.8%), and our 2022 forecast to 3.1% (2.9%)
on improved export prospects; we expect 2023 growth to slow to 2.2%. Manufacturing
exports hit record-high levels in March and April, benefiting from the US economic
recovery and stimulus measures, which are supporting the consumption of imported
autos and appliances from Mexico. The US takes around 80% of Mexico’s exports,
equivalent to c.28% of Mexico’s GDP in 2019. Overall, net exports contributed 2.8ppt
to GDP in 2020; we expect this to moderate to c.1.8ppt in 2021 as imports recover, but
export growth to continue to outpace import growth. Strong exports underpin our
forecast of a current account surplus of 1.6% of GDP in 2021; we expect the surplus
to shrink to 0.5% of GDP in 2022 and 0.2% in 2023.
Domestic demand remains a laggard but will likely pick up as the impact of COVID-19
eases and the labour market recovers. Mexico successfully contained the pandemic
after a peak in cases in January, though the economy is vulnerable to a further wave
given the relatively slow pace of vaccination. As of 26 June, only 23% of the population
had received at least one vaccine dose. We expect investment spending to pick up,
partly boosted by infrastructure projects. Underinvestment (even prior to the pandemic)
and competitiveness gains versus China are tailwinds for firmer investment spending.
Policy – Fiscal discipline and monetary tightening
Higher inflation prints will likely pressure Banco de México (Banxico) to hike
again in Q4-2021. Banxico raised the TdF rate by 25bps to 4.25% in June 2021. We
expect rates to rise by a further 25bps to 4.5% in Q4-2021, with policy tightening
continuing in 2022 (to 5.0%) and 2023 (to 6.0%). CPI inflation accelerated to 5.9% in
May from 3.2% at end-2019, driven by base effects, higher commodity prices and the
impact of supply disruptions; Mexico’s CPI is particularly sensitive to higher food prices.
In addition, as the economy opens up further, we expect services inflation pressure to
build. We recently raised our 2021 CPI inflation forecast to 5.2% (3.6% prior), well
above Banxico’s 3% (+/- 1ppt) target. We expect inflation to slow to 3.8% in 2022 and
3.5% in 2023.
Figure 1: Mexico macroeconomic forecasts Figure 2: US demand to support Mexico’s export growth
Mexico’s exports to US, FOB, USD bn, 3mma
2021 2022 2023
GDP growth (real % y/y) 6.2 3.1 2.2
CPI (% annual average) 5.2 3.8 3.5
Policy rate (%)* 4.50 5.00 6.00
USD-MXN* 19.25 18.50 19.90
Current account balance (% GDP) 1.6 0.5 0.2
Fiscal balance (% GDP) -3.3 -3.4 -2.5
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
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20
25
30
35
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Exports hit record levels in March
and April on rising US demand
Accelerating inflation will likely
pressure rates higher in H2
Sarah Hewin +44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
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Banxico Governor Diaz de Leon’s term ends at the end of December; he will be
replaced by current Finance Minister Arturo Herrera, who will in turn be replaced by
Rogelio Ramirez de la O.
Fiscal rectitude is a core conviction of President Lopez Obrador (AMLO). Mexico’s
spending to mitigate the impact of the pandemic was a fraction of what other Latin
American countries spent, and most support has been in the form of small business
loans rather than grants. Revenues were resilient in 2020, limiting the deterioration in
the budget deficit to 3.9% of GDP. Government debt rose to 61% of GDP at end-2020
from 53% in 2019 as a result of the wider budget deficit, GDP contraction and the
decline in the value of the peso (MXN). The 2021 budget aims to reduce the deficit to
3.3% of GDP. Spending plans are set to remain heterodox but contained. There are
no plans to raise taxes, but tax collection has improved. Pensions and the minimum
wage have also been improved. Fiscal reform will aim to achieve tax efficiencies,
expand the tax base and close loopholes.
Politics – Challenging the courts
The 6 June mid-term elections have curtailed AMLO’s ability to make
constitutional changes. AMLO’s Morena party maintains a majority in both houses
of congress thanks to the support of coalition partners, and won 11 out of 15 governor
seats. But the ruling coalition lost its supermajority in the lower house, which limits
AMLO’s ability to amend the constitution. Investors anticipate that the president will
therefore be prevented from giving aid to state-owned companies such as Petroleos
Mexicanos (Pemex) and Comision Federal de Electricidad (CFE), since he needs a
supermajority to overturn court decisions suspending such aid.
AMLO continues to challenge the integrity of Mexico’s institutions. in April, he
controversially endorsed a two-year extension of the supreme court president’s term,
raising concerns that the move could set a precedent for extending other terms,
including the six-year presidency (AMLO’s term is due to end in 2024). He has also
threatened to get rid of independent institutions that make rulings with which he
disagrees. That said, the judiciary has so far acted as a constraint on some of AMLO’s
more controversial proposals.
Market outlook – MXN maintaining its lead
The Mexican peso (MXN) exceeds Latam peers on a carry basis. This is the
primary reason for our optimism on the currency on a relative-value basis. With EM FX
volatility declining across the board, the MXN continues to look particularly attractive
versus peers on a carry/volatility basis.
Further, we believe risks to the inflation outlook are skewed to the upside, and we
believe that the TIIE curve may be under-pricing Banxico’s pace of monetary policy
adjustment. We therefore expect the tailwind of favourable yield differentials to persist.
Higher inflation prints may be a source of volatility for the MXN in the short term, but in
the medium term they are likely to lead Banxico to tighten monetary policy. We would
expect markets to respond positively to this.
With the mid-term elections now out of the way, we think the MXN has further room to
catch up to global high-yield peers.
The ruling coalition lost its
supermajority in April’s mid-term
elections
MXN looks particularly attractive
versus peers on a carry/volatility
basis
Pandemic-related government
spending has been limited
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Peru – Uncertain times
Economic outlook – Recovering lost ground
The economy is bouncing back, but the outlook is uncertain following the
election. Far-left candidate Pedro Castillo gained the most votes; if his victory is
confirmed, policy is likely to swing left, with higher taxation and public spending. Public
investment may pick up, but private-sector investment has been dampened by
uncertainty over the direction of government policy. That said, we expect the economy
to grow strongly in 2021 after a severe downturn in 2020, while remaining below the
pre-pandemic level until well into 2022. Peru suffered the biggest GDP drop of any
Latam economy in 2020 – down 11%, the worst downturn in three decades – so scope
for recovery is substantial. We expect 2021 GDP growth of 9.4%, and we raise our
2022 growth forecast to 4.6% (previously 4.1%); we still see 2023 growth at 3.3%.
Peru has had the fifth-highest number of deaths from COVID-19 globally, at over
190,000, and the highest deaths as a share of population, at 5,086 per million (as of
26 June) – more than twice Brazil’s death rate. Pandemic cases are declining slowly,
having peaking during a second wave in April. But vaccinations have reached only a
small number of people, with only 13% of the population (as of 26 June) having
received at least one dose.
GDP growth recovered to 3.8% y/y in Q1 from -1.7% y/y in Q4-2020. The
unemployment rate peaked at 16.5% in September 2020, and has since come down
to 12% (May 2021), still well above the pre-pandemic level of c.6%. Leading indicators
suggested increasing economic activity in May, helped by improving global growth.
Stronger external demand and high commodity prices are significant tailwinds; Peru
has experienced a substantial terms-of-trade boost given the doubling of copper prices
in the year to May 2021. Exports rebounded strongly in 2020, though volumes were
down 5.5% y/y in Q1-2021; imports rose 5.0% y/y in Q1, recovering from a collapse in
domestic demand in early 2020.
We expect copper prices to remain elevated (see our Copper outlook), but Castillo
plans to raise mining taxes, which has implications for longer-term supply growth. The
current account moved into surplus in H2-2020; we continue to expect a small surplus
of 0.2% of GDP in 2021, falling back into deficit in 2022 and 2023.
Figure 1: Peru macroeconomic forecasts Figure 2: Export recovery followed by firmer imports
BCRP trade balance: Exports and imports, USD bn
2021 2022 2023
GDP growth (real % y/y) 9.4 4.6 3.3
CPI (% annual average) 3.1 2.5 2.5
Policy rate (%)* 0.25 2.00 3.00
USD-PEN* 4.10 3.70 4.20
Current account balance (% GDP) 0.2 -1.2 -1.5
Fiscal balance (% GDP) -5.8 -4.0 -2.5
*end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Exports
Imports
1
2
3
4
5
Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Apr-19 Apr-21
Peru has suffered the highest
pandemic fatality rate in the world
Sarah Hewin +44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
Geoff Kendrick +44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
Stronger external demand and high
commodity prices are significant
tailwinds
Copper prices to stay elevated, but
higher taxes on mining companies
may damage supply longer-term
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Policy – Staying very accommodative
BCRP will likely be slow to raise rates given concerns over the durability of the
recovery. Banco Central de Reserva del Perú (BCRP) cut rates to an all-time low of
0.25% during the first wave of the pandemic in April 2020. It looks likely to lag other
central banks in the region in tightening policy given concerns over ongoing headwinds
from the pandemic. We now expect rates to stay on hold at 0.25% in 2021 (we
previously expected hikes to 1.25%). We expect the first hike of 50bps in Q2-2022,
rising to 2.00% by end-2022 (3.00% previously) and 3.00% by end-2023 (4.5%).
Lima inflation jumped to 2.68% in January 2021 from 2.0% in December 2020, but it
has stayed in a 2.4-2.7% y/y range since the start of the year, coming in at 2.45% in
May. While core inflation rose to 1.8% in May from 1.7% in April, it remained below the
midpoint of the 2.0% +/- 1ppt target.
Inflation expectations have picked up to 2.5% for end-2021 and 2.4% for end-2022,
according to the central bank’s June survey. But policy makers believe that current
inflation pressures are transitory: they indicated at their June meeting that they expect
inflation to remain within the target range near-term and fall back below 2% in 2022
due to remaining economic slack. We maintain our forecast of 3.1% average inflation
in 2021; we lower our 2022 and 2023 forecasts to 2.5% (previously 4.0% and 3.0%) to
reflect the declining impact of transitory cost pressures such as commodity prices.
The budget deficit exceeded 8% of GDP in 2020, and we expect fiscal policy to stay
generous under the new government, limiting the deficit to 5.8% in 2021 even as the
economy recovers. We expect deficits of 4.0% in 2022 and 2.5% in 2023.
Politics – Into the unknown
Pedro Castillo has the edge; policy proposals lack detail. After elections on 6 June,
the result showed the far-left candidate Castillo ahead of right-wing populist Keiko
Fujimori by 44,058 votes, taking c.50.1% of the votes. At the time of publishing, the
final result awaited an electoral court ruling on disputed ballots. Castillo, a former
teacher and union leader, has backed away from earlier extensive nationalisation
plans, appointed mainstream economists as advisors, and expressed support for the
independence of the BCRP and its president, Julio Velarde. But higher taxation of
mining companies, wealth redistribution and spending on social programmes remain
key policy pledges. No matter who wins, the new president’s relationship with the
legislative branch is likely to remain poor and meaningful reform appears distant.
Market outlook – PEN whipsaws
Peruvian nuevo sol (PEN) could recover next year. The PEN, and Peruvian assets
more broadly, flagged on expectations of a Castillo victory. However, BCRP has
intervened heavily, so the FX move has been less dramatic than may have otherwise
been the case. We expect intervention to continue and expect USD-PEN to trade at
4.10 by end-2021.
The PEN is heavily undervalued on a real effective exchange rate (REER) basis due
to BCRP’s active management in recent years. Should BCRP take a more hands-off
approach, we would see substantial scope for the PEN to rebound versus peers once
election-related risk premium has been added to Peruvian assets. Given medium-term
undervaluation, we expect the PEN to recover to 3.70 by end-2022.
Castillo has backed away from
nationalisation plans
We expect BCRP to lag other
regional central banks in tightening
policy
Policy makers believe current
inflation pressures are transitory
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Strategy outlook
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Parallel universe
• The Q3 outlook for financial markets hinges on global inflation and
the prospect of Fed tapering
• US rates may struggle to break previous highs, suggesting UST yield
curve steepening is already complete
• CNY appreciation may slow, but ongoing resilience should provide
an anchor for AXJ FX
• We remain bearish on the USD and we prefer FX exposure over local-
currency bonds in Asia
• Commodities consolidate but remain cheap versus financial assets
The moment of truth
Throughout Q2-2021, we argued that US exceptionalism was overpriced in the US
rates market and that US rates would consolidate (SMS – The three R’s of recovery).
The yield consolidation has seen 10Y UST yields decline by more than 30bps and 10Y
UST inflation expectations fall by 25bps, all while US inflation has reached the highest
level in 30 years (Figure 1). From current levels, we believe UST yields may see one
more push higher in H2-2021, but we see an increasing risk that 10Y yields will struggle
to break the YTD highs of 1.77%. Further, we believe risks to our Q4-2021 forecast of
2.0% are to the downside.
The US rates market still has two significant hurdles to overcome in H2. The first is the
threat of US inflation sustaining or even exceeding current levels. The second is the
prospect of the Fed’s announcement of asset purchase tapering. The decline in
inflation breakevens should reassure the Fed that inflation expectations have not
become unanchored, and the lack of money velocity supports the notion that inflation
will not become entrenched in the economy (Figure 2). Still, sustained upside inflation
surprises over the summer may challenge the Fed’s view that inflation is transitory. We
expect a detailed discussion of tapering plans by the September or November FOMC
meeting, but until then, markets will wrestle with the question of whether tapering –
when it comes – will push yields higher or lower. We suspect that the answer might
be ‘lower’.
Figure 1: Transitory or not?
US core PCE (% y/y) vs 10Y UST inflation expectations (%)
Figure 2: A clue to the inflation debate
US fiscal deficit (% GDP), M2 and loan growth (% y/y), 12MMA
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, St. Louis Federal Reserve, Standard Chartered Research
US core PCE y/y %
10Y UST BE, %0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
May-00 May-03 May-06 May-09 May-12 May-15 May-18 May-21
M2Loans
Fiscal deficit-5%
0%
5%
10%
15%
20%
25%
Feb-71 Feb-81 Feb-91 Feb-01 Feb-11 Feb-21
Eric Robertsen
Global Head of Research
Chief Strategist
Standard Chartered Bank
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The world is round, not steep
The US yield curve-steepening trend that was so pervasive between March 2020 and
March 2021 is complete, in our opinion. In fact, the spread between 5Y and 30Y UST
maturities has already narrowed by c.45bps (Figure 3). We see a risk that this
steepening will continue to reverse in H2-2021. Temporary bouts of steepening are
possible if the market pushes long-dated yields higher in reaction to inflation or growth
data, but we think US curves are unlikely to re-steepen to new wides. Further, we
believe that as the market shifts its focus from the timing of Fed tapering to the timing
of rate hikes, any increase in yields is likely to occur at the front end of the yield curve,
rather than the long end.
The recent decline in long-term yields and interest rate forwards may already reflect
reduced anxiety about the risk of inflation and early Fed tapering. USD 5Y5Y OIS has
already declined from a peak of 2.40% on 30 March to recent lows of 1.55%. Notably,
the surge in USD 5Y5Y rates between 2020 and 2021 has already exceeded the
increase seen during the 2013 taper tantrum. As term premium is reduced for long
maturities, as we expect, we see scope for the US yield curve to flatten. The question
will shift from “how high can 10Y yields go to reflect the US economic recovery?” to
“how many rate hikes should be priced in for this cycle?”. 80bps of hikes are currently
priced in by December 2023. Further rate hikes could be built in to the curve, but we
also suspect that the Fed will struggle to deliver the 250bps of rate hikes implied by its
long-term dot-plot forecast.
Even at peak anxiety about US rates, 10Y UST real yields remained deeply negative.
The consolidation in yields in Q2 has pushed 10Y real yields back to the bottom of the
range, near -1.0%. We also note that during the recent 25bps decline in 10Y inflation
breakevens, 10Y real yields were largely unchanged – so the full decline in breakevens
has passed through to nominal yields. We expect real yields to remain depressed in
H2-2021, and this contributes to our bearish outlook on the USD (Figure 4). Both the
USD index and UST real yields are currently testing important technical support, but
as anxiety about Fed tapering subsides, we expect negative real yields to weigh heavily
on the USD.
Figure 3: Time to prepare for yield curve flattening
UST 5Y/30Y curve, bps (LHS) vs USD 5Y5Y OIS, % (RHS)
Figure 4: The USD threatens multi-year support
USD index (LHS) vs 10Y UST real yield, % (RHS)
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
USD 5Y5Y OIS (RHS)
5Y/30Y UST yield curve (LHS)
0
1
2
3
4
5
6
0
50
100
150
200
250
300
350
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21
USD index (LHS)
10Y UST real yield (RHS)
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
800
900
1,000
1,100
1,200
1,300
1,400
Jan-06 Jan-09 Jan-12 Jan-15 Jan-18 Jan-21
UST real yields remain deeply
negative and should continue to
weigh on the USD
Yield curve flattening is a greater
risk than steepening, in our view
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Tale of two cities
The CNY has delivered the strongest performance YTD among Asian currencies, with
gains of 1.0% and 2.5% in spot and total-return terms, respectively. While CNY
performance has lagged EM currencies outside of Asia, the CNY has been among the
best performers on a volatility-adjusted basis. It has strengthened to three-year highs
against the USD and a basket of currencies, prompting questions about whether
China’s policy makers have any appetite for further appreciation (Figure 5). We believe
a strong CNY contributes to the stability of CNY-denominated assets and helps to
attract foreign capital inflows. So while policy makers may resist further substantial
appreciation, we do not believe they seek a depreciation of the currency. A stable
currency at relatively strong levels is likely seen as the ideal outcome.
We believe that the CNY will participate as the USD continues to depreciate. But we
also believe that the leadership role in the currency rally will shift from the CNY to other
Asian currencies, such as the KRW and SGD. Concerns about USD-CNY include the
narrowing growth differential between the US and China as the US economy reopens.
In addition, the rate differential between UST and CGB yields has narrowed and
become less supportive of CNY strength against the USD. Finally, concerns about Fed
tapering and rising US interest rates have dented sentiment towards USD shorts. But
despite these concerns, we believe that China’s economic recovery remains on solid
ground, and that its policy makers will shift their focus from recovery to rebalancing
(China – From recovery to rebalancing). This rebalancing should contribute to the
sustainability of China’s recovery and to the ongoing resilience of the CNY.
CNY stability should support continued inflows to onshore assets, especially China
CGBs. The prospect of Fed tapering of asset purchases (expected to be announced
in Q4-2021) has kept term premium elevated for USTs and other major government
bond markets so far in 2021. However, we believe that both UST and CGB yields could
decline more meaningfully once the uncertainty around the tapering announcement is
out of the way (SMS – The great escape). In 2013, the December announcement of
the Fed’s tapering plans coincided with a significant top in both UST and CGB yields
(Figure 6). CNY stability would provide meaningful supportive for further inflows to
China’s bond market.
Figure 5: CNY strength provides stability
USD-CNY (LHS) vs SC CNY CFETS index (RHS)
Figure 6: Could China CGBs become a safe haven?
10Y China CGB yield, %
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
CFETS index (RHS)
USD-CNY (LHS)
86
88
90
92
94
96
98
100
6.0
6.2
6.4
6.6
6.8
7.0
7.2
May-17 Nov-17 May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21
Fed tapering starts
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
The Fed tapering announcement
may provide an opportunity to
increase exposure to China CGBs
CNY is likely to remain stable at the
strong end of its recent range, but
the leadership role will likely shift to
other AXJ currencies
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Give it away
We have held a long bias in AXJ currencies for most of 2021 (Sell USD vs AUD, SGD,
CNH and MXN; Sell JPY-KRW). This has been driven by a desire to hold FX exposure
to the drivers of the global economic recovery, including the resurgence of global trade
and manufacturing and the rise in commodity prices. But while these economic themes
remain intact, the USD is broadly unchanged YTD. Of the currencies we recommended,
only the CNH has generated a positive performance against the USD; the rest of the
basket is roughly unchanged. We expect CNH resilience to persist, acting as an anchor
for our basket and for Asian currencies more generally. We expect further USD
depreciation before year-end, especially as anxiety related to Fed tapering subsides.
The KRW remains one of our top picks for H2, given its exposure to the global trade
recovery and strength in key technology sectors. KRW performance against the USD
has been underwhelming YTD, though our recommendation to be long KRW against
the JPY has generated positive returns since 3 February (Sell JPY-KRW). Korea’s
recovery has been driven by an export rebound, with the technology, shipbuilding and
automobile sectors all contributing (SMS – Chips and boats). We have a 9.50 target
for JPY-KRW for end-2021, and we expect USD-KRW to reach 1,050 by then.
We argued in early April that US rates would experience a period of consolidation, as
they already priced in much of the good news on the US economic recovery (SMS –
The three R’s of recovery). US rates have certainly consolidated over the last two
months, but UST term premium remains elevated. 10Y UST term premium has
increased by 130bps since 4 August, mirroring the rise in term premium during the
2013 taper tantrum (Figure 8). We believe the persistently high term premium has
weighed on higher-yielding currencies such as the IDR. Indonesia offers the highest
real yields in Asia, but the uncertainty reflected in UST term premium levels has clearly
prevented a stronger IDR recovery. As we approach the Fed’s announcement of its
tapering plans in H2, some of this uncertainty should subside, paving the way for better
IDR performance. Traditional high-yield currencies such as the ZAR and RUB have
already logged strong recoveries, and we expect the IDR to narrow the performance
gap in H2.
Figure 7: Looking for USD weakness in low-yield FX
USD-KRW (LHS) vs USD-SGD (RHS)
Figure 8: High-yield FX needs lower term premium
USD-IDR (LHS) vs 10Y UST term premium, % (RHS)
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
USD-KRW (LHS)
USD-SGD (RHS)
1.25
1.30
1.35
1.40
1.45
1.50
1,000
1,050
1,100
1,150
1,200
1,250
1,300
1,350
May-15 May-16 May-17 May-18 May-19 May-20 May-21
10Y UST term premium (RHS)
USD-IDR (LHS)
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
Jan-13 Jan-15 Jan-17 Jan-19 Jan-21
IDR could tactically outperform if
UST term premium declines
We believe that KRW participation
in the USD sell-off will increase
in H2
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Watching and waiting
EM LCY rates markets have struggled YTD amid supply concerns and domestic
inflation fears. The increase in UST term premium (reflecting Fed tapering expectations
and the Q1 increase in nominal UST yields) has also left us reluctant to increase our
duration exposure in Asia LCY markets. As we enter H2-2021, we maintain a cautious
stance on these markets. We see tactical opportunities to receive rates at the front end
of yield curves that have priced in early policy rate hikes, and at the back end of
markets where yield curve steepening in H1 now provides attractive opportunities to
earn carry. But broadly speaking, we remain hesitant to add Asia LCY duration, as
risks persist and the real yield cushion has narrowed (EM LCY – Cautious on duration).
The global economic recovery remains uneven so far, but in economies where
fundamentals are seeing a sustained improvement, rate hikes are now priced into
money-market curves. In most cases, rate hikes are expected to start between 12-24
months from now. In China and Korea, hikes are priced for the next 12 months
(Figure 9). The risk is that policy makers start to talk more openly about policy
normalisation; this has already happened in Korea, with Bank of Korea (BoK) officials
suggesting that initial rate hikes would not represent policy tightening and that the first
hike could potentially come in 2021. We expect the BoK to raise rates for the first time
in November 2021 (South Korea – We hear you).
The additional challenge faced by EM LCY markets is the erosion of their real yield
premium over DM markets. Indonesia, China and India are the only markets in Asia
that offer positive real yields for 10Y maturities (Figure 10). Given the challenges EM
LCY debt markets have faced in 2021, which catalysts would prompt us to turn more
constructive? First, we believe that as markets get greater clarity on the timing of Fed
tapering plans, UST term premium should decline, reducing the probability of an
externally driven yield shock. This should also increase confidence in USD
depreciation. The continuing recovery in global growth should take some pressure off
of local budgets and reduce supply risk in local markets. The combination of these
factors would make us more comfortable with the risk-reward of increasing our
exposure to EM LCY duration later in 2021.
Figure 9: AXJ yield curves start pricing in rate-hike cycle
Market-implied rate hikes for next 12, 24 months
Figure 10: Not much real yield available in Asia EM LCY
2Y and 10Y real yield, % (CPI used to calculate real yield)
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Using O/N MIBOR
12M
Using FX-implied fixing
Using 7D Repo
24M
0
20
40
60
80
100
120
140
INR MYR THB CNY KRW
2Y real yield
10Y real yield
-4
-3
-2
-1
0
1
2
3
4
5
6
IDR INR MYR SGD PHP THB CNY KRW
EM LCY debt markets have seen
their real yield cushion narrow
Rates markets in Asia have started
pricing in rate hikes; we believe this
presents opportunities
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Midnight oil
A broad commodity index hit new highs in early June, extending the YTD rally to just
over 20%; the recovery from the 22 April 2020 lows reached as high as 60%. We
remain positive on commodities as an asset class, though price action could become
increasingly noisy in H2-2021 as commodities face more scrutiny from regulators and
policy makers. The macro fundamentals for commodities remain constructive,
including accommodative monetary policy, fiscal stimulus packages with a green
emphasis, and the economic recovery as the world emerges from COVID-related
lockdowns (Base and precious metals outlook – Tidal waves). Oil has led the
commodities rally since May as metals such as copper have consolidated after
reaching new highs earlier in the year. We believe this rotation is healthy. We also
believe that commodities remain cheap relative to financial assets, even though the
broad commodity basket has started to claw back some of its underperformance of the
last 13 years (Figure 11).
We expect rising commodity prices to attract increasing scrutiny from regulators and
policy makers in H2-2021. Strong commodity prices are fuelling heightened concerns
about inflation; this is increasing demand for hedges against future inflation, and thus
further propelling demand for commodities. Central bank officials have argued that
inflation is transitory; for now, the biggest official threat to commodities is from regulators
trying to dampen speculation, as we have seen in China. China’s PPI inflation recently
reached 9.0% y/y, with oil and metals demand contributing to the increase. Global policy
makers have so far refrained from tightening monetary policy in response to commodity
prices as core inflation remains benign, but this is a risk for H2.
US core PCE rose above 3.0% in April for the first time since July 1992 (Figure 12);
the surge was driven partly by base effects and partly by the rally in commodities. The
FOMC believes that the increase in inflation is transitory. As supply chains normalise
later in the year and base effects fade, the FOMC believes inflation will return towards
a more sustainable trend around 2.0%. Market-implied inflation expectations have
recently declined by c.20bps. As long as inflation expectations remain anchored, the
FOMC will have the flexibility to be patient. But a continued surge in commodity prices
could jeopardise that balancing act.
Figure 11: Commodities still cheap vs financial assets
Ratio of Bloomberg commodity index/S&P 500
Figure 12: Oil rally fuels inflation fears
US core PCE (LHS) vs Brent oil (RHS), % y/y
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
May-00 May-03 May-06 May-09 May-12 May-15 May-18 May-21
US core PCE (LHS)
Brent y/y % (RHS)-100%
-50%
0%
50%
100%
150%
200%
250%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
May-06 May-09 May-12 May-15 May-18 May-21
Commodity markets could
challenge the FOMC in H2
Commodity prices and inflation
expectations are reinforcing each
other
PUBLIC
Forecasts tables
PUBLIC
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Forecasts – Economies Economy Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP)
2020 2021 2022 2023 2020 2021 2022 2023 2020 2021 2022 2023 Major# -5.1 5.4 3.7 1.8 0.7 1.7 1.6 1.7 US^ -3.5 6.5 3.5 2.0 1.4 2.8 2.4 2.2 -2.9 -3.5 -3.0 -2.8
Euro area -6.8 4.5 4.0 1.6 0.3 1.9 1.3 1.5 2.1 2.0 2.3 2.5
Japan -4.7 2.6 2.3 1.1 0.0 0.1 0.7 1.0 3.2 3.5 3.5 3.0
UK -9.9 7.0 5.5 1.5 0.9 1.9 2.0 2.0 -3.8 -4.0 -4.0 -3.5
Canada -5.3 6.4 4.5 2.5 0.7 3.1 2.0 2.1 -1.8 -0.8 -1.0 -1.0
Switzerland -3.0 3.3 2.4 1.6 -0.6 0.3 0.5 0.8 10.3 10.0 9.7 9.4
Australia -2.4 4.8 3.3 3.0 0.8 1.6 2.3 2.3 2.5 1.9 0.4 -0.7
New Zealand -2.9 5.5 3.8 2.9 1.7 2.0 1.8 2.0 -3.1 -2.9 -2.6 -2.7 Asia# -1.0 7.1 5.3 5.2 1.9 2.8 2.8 2.9 Bangladesh* 2.0 5.6 7.2 7.3 5.7 5.6 5.6 5.5 -1.6 0.2 -2.0 -2.0
China 2.3 8.0 5.6 5.5 2.5 1.5 2.5 2.5 1.9 1.2 0.6 0.0
Hong Kong -6.1 6.9 3.0 2.5 0.5 1.1 2.3 2.3 4.0 4.0 4.0 4.0
India** -7.3 8.5 5.5 5.5 6.2 5.4 4.2 4.0 1.0 -0.7 -1.3 -1.8
Indonesia -2.1 4.1 4.8 5.0 2.0 1.8 3.0 2.5 -0.6 -0.9 -2.0 -2.0
Malaysia -5.6 4.7 5.0 4.6 -1.1 2.8 1.6 1.7 3.6 1.7 1.8 2.0
Philippines -9.6 4.6 6.6 5.9 2.6 3.9 3.0 2.7 3.6 2.0 -0.5 -1.2
Singapore -5.4 7.0 3.6 2.7 -0.2 1.7 1.2 1.1 16.5 16.5 16.0 15.0
South Korea -1.0 4.2 2.9 2.5 0.5 1.8 1.6 1.8 3.9 3.5 3.5 3.0
Sri Lanka -3.6 4.0 4.2 4.5 4.2 4.7 4.5 4.5 -1.3 -2.4 -2.5 -2.5
Taiwan 3.1 5.0 2.5 2.0 -0.2 1.6 1.0 1.0 14.0 12.0 11.0 9.0
Thailand -6.1 1.8 3.1 4.5 -0.9 1.0 1.5 3.0 3.3 1.0 3.0 -0.5
Vietnam 2.9 6.5 7.3 6.7 3.2 3.8 4.2 5.5 1.8 2.2 2.9 2.9 MENAP# -1.6 3.2 3.8 4.4 9.6 11.5 4.7 3.9 Bahrain -4.0 3.0 2.5 3.0 -3.0 1.0 1.5 1.5 -11.0 -2.0 -2.5 -2.0
Egypt* 3.6 2.0 5.5 6.5 5.2 4.6 5.5 6.0 -2.4 -3.8 -3.6 -2.0
Iraq -12.0 1.7 3.6 5.0 0.6 3.0 2.0 1.5 -15.5 -6.0 -5.0 -6.0
Jordan -1.5 2.3 1.5 3.0 1.3 0.6 1.0 2.0 -6.7 -4.2 -3.8 -6.0
Kuwait -6.3 2.5 3.4 3.0 1.2 0.8 2.5 2.5 -8.5 8.4 4.2 4.0
Lebanon -25.0 -10.0 -5.0 0.0 84.0 95.0 15.0 5.0 -13.0 -10.0 -12.0 -15.0
Oman -5.0 0.0 2.6 3.5 0.5 2.5 2.0 2.0 -13.5 -7.6 -6.0 -6.0
Pakistan* -0.5 3.9 4.5 5.0 10.8 8.9 8.2 7.5 -1.4 -1.0 -2.5 -3.0
Qatar -3.5 3.0 3.3 4.0 -2.5 0.5 1.5 2.0 -2.5 4.1 0.5 2.6
Saudi Arabia -4.1 2.8 2.7 3.5 3.4 2.9 2.2 3.3 -4.8 3.0 4.0 3.5
Turkey 1.8 5.0 4.0 4.0 12.3 15.2 12.0 11.0 -5.0 -4.0 -3.0 -2.5
UAE -5.5 2.5 3.0 3.5 1.4 2.7 3.0 3.0 0.0 5.1 5.8 6.6 Africa# -2.6 3.7 3.6 4.1 7.9 8.8 6.8 5.5 Angola -5.1 2.3 2.0 3.0 22.2 22.3 12.4 8.8 -6.0 5.0 2.0 1.8
Botswana -7.9 8.0 5.6 3.9 1.9 4.4 3.7 2.6 -14.2 -5.2 -4.4 -3.7
Cameroon 0.8 3.2 4.6 4.5 2.0 2.0 2.0 2.0 -4.0 -3.8 -3.6 -3.5
Côte d’lvoire 2.4 6.0 6.5 6.7 2.4 3.3 2.0 2.0 -3.4 -3.5 -2.9 -2.8
The Gambia -2.1 6.0 5.9 6.1 4.9 5.8 6.6 5.7 -11.8 -10.9 -10.1 -9.8
Ghana 0.4 4.9 5.0 4.9 9.9 8.7 7.3 6.6 -3.2 -3.2 -3.8 -4.0
Kenya 0.6 5.3 4.5 5.1 5.4 6.3 5.6 6.2 -4.9 -5.4 -5.7 -5.5
Nigeria -1.9 2.5 3.1 4.0 13.1 16.1 10.2 9.3 -3.3 -2.5 -2.0 -2.0
Sierra Leone -2.7 4.0 4.5 5.2 14.4 11.1 10.8 7.5 -12.6 -11.9 -11.1 -11.7
South Africa -7.0 4.2 2.4 2.5 3.3 4.1 3.8 4.5 2.2 3.0 1.0 -0.2
Tanzania 4.8 5.3 6.5 5.5 3.2 3.3 4.3 3.5 -1.0 -4.1 -5.5 -5.5
Uganda -1.1 4.0 6.0 7.0 3.8 2.2 3.5 4.0 -9.8 -8.7 -9.0 -9.5
Zambia -3.3 3.0 3.0 4.6 15.7 24.5 15.6 8.4 2.7 15.0 6.0 3.0
Zimbabwe -10.0 3.0 0.8 5.5 619.2 133.6 5.0 5.4 5.0 -0.4 -1.2 -1.5
Emerging Europe# -3.3 3.5 3.0 2.6 3.3 3.9 2.9 2.8 Czech Republic -5.5 3.3 4.0 3.5 3.2 2.5 2.0 2.0 3.0 1.0 0.5 0.5
Hungary -4.8 5.5 4.5 3.5 3.3 4.2 3.0 3.0 0.1 0.3 1.0 1.5
Poland -2.7 4.0 4.0 3.5 3.3 3.5 2.5 2.5 3.2 2.5 1.5 1.0
Russia -3.1 3.2 2.5 2.2 3.3 5.2 4.2 3.5 1.5 2.0 3.0 3.5 Latin America# -6.7 5.7 3.0 2.6 9.3 11.5 9.9 8.6 Argentina -9.9 6.8 3.0 2.5 42.0 48.0 42.0 35.0 0.8 1.5 0.5 -1.5
Brazil -4.1 4.0 2.5 2.5 3.2 6.0 4.0 3.5 -1.5 -0.8 -1.3 -1.5
Chile -5.8 6.9 3.8 3.2 3.1 3.6 3.3 3.0 1.3 0.3 -0.9 -2.5
Colombia -6.8 7.0 3.7 3.3 2.5 3.2 4.0 4.0 -3.3 -3.5 -3.0 -3.0
Mexico -8.2 6.2 3.1 2.2 3.4 5.2 3.8 3.5 0.1 1.6 0.5 0.2
Peru -11.0 9.4 4.6 3.3 1.8 3.1 2.5 2.5 0.4 0.2 -1.2 -1.5 Global# -3.3 5.8 4.2 3.5
^ US: Core PCE deflator used for inflation
* Bangladesh, Egypt, and Pakistan: Figures are for fiscal year ending in June of year shown in column heading
** India: Figures are for fiscal year starting in April of year shown in column heading # Global and regional GDP forecasts are calculated by taking the weighted average of economies’ GDP in PPP terms, while regiona l inflation forecasts are calculated by taking the simple
average of economies’ inflation
Source: Standard Chartered Research
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Forecasts – FX End-period Q3-21 Q4-21 Q1-22 Q2-22 Q3-22 2021 2022 2023 2024 2025 Majors
Euro area 1.24 1.26 1.26 1.26 1.26 1.26 1.26 1.26 1.25 1.25
Japan 110.0 108.0 106.0 105.0 105.0 108.0 105.0 104.0 104.0 103.0
UK 1.42 1.43 1.43 1.44 1.44 1.43 1.45 1.42 1.42 1.41
Canada 1.17 1.15 1.14 1.14 1.14 1.15 1.14 1.15 1.15 1.15
Switzerland 0.90 0.89 0.90 0.90 0.91 0.89 0.91 0.88 0.88 0.88
Australia 0.80 0.82 0.82 0.82 0.82 0.82 0.82 0.82 0.81 0.81
New Zealand 0.74 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.74 0.74 Asia Bangladesh 85.50 86.00 86.50 86.50 86.75 86.00 87.00 88.00 89.00 90.00
China 6.60 6.58 6.50 6.55 6.55 6.58 6.50 6.60 6.65 6.70
CNH 6.60 6.58 6.50 6.55 6.55 6.58 6.50 6.60 6.65 6.70
Hong Kong 7.81 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80
India 74.50 75.50 75.50 76.50 77.00 75.50 77.50 79.50 81.00 83.00
Indonesia 14,500 14,600 14,700 14,800 14,800 14,600 14,840 15,070 15,320 15,590
Malaysia 4.05 4.00 4.05 4.10 4.05 4.00 4.00 4.05 4.05 4.10
Philippines 49.00 49.50 50.00 50.25 50.50 49.50 50.50 50.70 50.80 51.00
Singapore 1.33 1.32 1.33 1.34 1.33 1.32 1.32 1.32 1.32 1.32
South Korea 1,080 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,060
Sri Lanka 200.0 210.0 215.0 215.0 215.0 210.0 215.0 220.0 225.0 230.0
Taiwan 27.50 27.20 27.00 27.00 27.00 27.20 27.00 26.90 26.80 26.70
Thailand 31.25 31.00 30.50 31.00 31.00 31.00 31.30 31.70 32.00 32.30
Vietnam 22,900 22,850 22,800 22,700 22,600 22,850 22,500 22,000 21,500 20,900 MENAP Bahrain 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38
Egypt 15.80 15.80 15.80 15.90 16.10 15.80 16.20 18.78 18.95 19.40
Iraq 1,460 1,460 1,460 1,460 1,460 1,460 1,460 1,460 0.00 0.00
Jordan 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71
Kuwait 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30
Lebanon 0.00 0.00 0.00 0.00 0.00 6,000 7,000 8,000 0.00 0.00
Oman 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39
Pakistan 163.0 165.0 167.0 170.0 172.0 165.0 175.0 185.0 190.0 200.0
Qatar 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64
Saudi Arabia 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75
Turkey 8.75 9.00 9.25 9.50 9.75 9.00 10.00 9.80 10.15 10.51
UAE 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 Africa Angola 650.0 660.0 660.0 665.0 670.0 660.0 680.0 714.0 736.0 750.0
Botswana 10.39 10.32 10.23 10.23 10.39 10.32 10.38 10.30 10.53 10.67
Cameroon 529.0 520.6 520.6 520.6 520.6 520.6 520.6 520.6 524.8 524.8
Côte d’lvoire 529.0 520.6 520.6 520.6 520.6 520.6 520.6 520.6 524.8 524.8
The Gambia 54.00 54.59 54.90 55.05 55.97 54.59 56.02 58.10 60.61 63.45
Ghana 5.90 6.05 6.15 6.25 6.40 6.05 6.45 6.80 6.44 6.42
Kenya 108.2 108.6 108.5 109.0 110.0 108.6 112.0 115.0 116.5 113.0
Nigeria 420.0 440.0 450.0 455.0 458.0 440.0 460.0 480.0 525.0 500.0
Sierra Leone 10,818 11,025 11,291 11,407 11,743 11,025 12,008 12,989 14,005 15,049
South Africa 13.30 13.00 13.10 13.20 13.30 13.00 13.50 13.60 14.00 14.30
Tanzania 2,330 2,335 2,335 2,340 2,340 2,335 2,350 2,400 2,550 2,530
Uganda 3,540 3,550 3,560 3,580 3,600 3,550 3,620 3,800 4,270 4,150
Zambia 23.40 24.00 23.70 23.90 24.20 24.00 24.50 26.00 25.50 21.00
Zimbabwe 99.00 104.0 104.4 106.0 107.0 104.0 108.2 112.5 117.0 121.7 Emerging Europe Czech Republic 20.16 19.84 19.84 19.84 19.84 19.84 19.84 19.80 19.80 19.80
Hungary 286.0 286.0 286.0 286.0 286.0 286.0 286.0 290.0 293.0 295.0
Poland 3.39 3.33 3.33 3.33 3.33 3.33 3.33 3.35 3.36 3.37
Russia 71.00 70.00 69.50 69.00 68.50 70.00 68.00 71.40 72.20 73.10 Latin America Argentina 111.0 120.0 130.0 135.0 140.0 120.0 140.0 101.0 109.3 118.3
Brazil 4.90 4.80 5.00 5.30 5.60 4.80 6.00 5.05 5.15 5.25
Chile 730.0 750.0 730.0 720.0 710.0 750.0 700.0 770.0 780.0 790.0
Colombia 3,650 3,700 3,725 3,750 3,775 3,700 3,800 3,870 3,960 4,050
Mexico 19.50 19.25 19.00 18.75 18.50 19.25 18.50 19.90 20.25 20.60
Peru 4.00 4.10 4.00 3.90 3.80 4.10 3.70 4.20 4.25 4.30
Source: Standard Chartered Research
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Forecasts – GDP
Economy Real GDP growth (% y/y, unless otherwise stated)
Q3-21 Q4-21 Q1-22 Q2-22 Q3-22 Q4-22 Q1-23 Q2-23
Majors
US 6.6 6.7 5.7 3.7 2.8 2.0 1.8 2.1
Euro area 2.7 4.7 5.8 4.7 3.1 2.3 1.9 1.6
Japan 3.2 1.5 3.0 3.2 1.5 1.5 1.1 1.5
UK 8.0 8.4 10.9 6.5 3.0 2.0 1.7 1.5
Canada 5.6 4.0 4.0 3.3 3.3 3.3 3.1 2.7
Australia 5.8 4.0 3.7 3.3 3.4 2.8 3.1 3.4
New Zealand 1.8 3.8 3.3 4.0 4.0 3.9 3.4 3.1
Asia
China 5.0 4.8 5.2 5.6 5.7 5.7 5.6 5.5
Hong Kong 6.0 6.5 2.3 3.5 3.3 2.8 2.2 2.3
India 6.5 5.6 4.6 5.0 5.3 5.5 6.2 5.8
Indonesia 5.3 4.7 4.6 4.8 5.0 4.9 5.0 5.0
Malaysia 0.5 5.2 3.4 7.4 5.9 3.6 3.9 4.5
Philippines 8.0 5.0 6.6 6.8 6.5 6.4 6.3 6.1
Singapore 8.6 5.2 3.0 5.7 2.7 2.9 2.5 2.5
South Korea 4.6 4.3 3.2 3.0 2.8 2.5 2.4 2.4
Sri Lanka 1.5 1.7 3.9 6.0 3.0 4.0 4.3 4.3
Taiwan 2.5 1.8 1.5 2.5 3.0 3.0 2.0 2.0
Thailand 0.5 4.5 3.5 6.0 2.0 1.0 4.5 4.5
Vietnam 5.5 8.2 7.4 8.1 8.1 6.1 6.7 6.7
Source: Standard Chartered Research
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Forecasts – Rates
End-period Current Q3-21 Q4-21 Q1-22 Q2-22 Q3-22
United States Policy rate 0.25 0.25 0.25 0.25 0.25 0.25 3M LIBOR 0.18 0.20 0.25 0.25 0.25 0.30 2Y bond yield 0.26 0.25 0.35 0.40 0.40 0.50 5Y bond yield 0.89 1.00 1.20 1.30 1.20 1.35 10Y bond yield 1.45 1.75 2.00 2.00 1.90 1.90
Euro area Policy rate 0.00 0.00 0.00 0.00 0.00 0.00 3M EURIBOR -0.54 -0.50 -0.45 -0.50 -0.50 -0.50 10Y bond yield -0.24 -0.30 -0.20 -0.20 -0.20 -0.10
United Kingdom Policy rate 0.10 0.10 0.10 0.10 0.10 0.10 3M Libor1 0.08 0.15 0.20 – – – 10Y bond yield 0.70 0.85 1.00 1.00 1.10 1.10
Australia Policy rate 0.10 0.10 0.10 0.10 0.10 0.10 3M OIS 0.03 0.04 0.04 0.04 0.04 0.04
China Policy rate2 2.95 2.95 2.95 2.95 2.95 2.95 1Y deposit rate 1.50 1.50 1.50 1.50 1.50 1.50 RRR (major banks) 12.50 12.50 12.50 12.50 12.50 12.50 10Y bond yield 3.13 3.30 3.20 2.90 3.00 3.00
Hong Kong 3M HIBOR 0.17 0.20 0.25 0.25 0.30 0.35 10Y bond yield 1.40 1.40 1.70 1.70 1.80 1.80
India Policy rate 4.00 4.00 4.00 4.00 4.00 4.25 91-day T-bill rate 3.47 3.50 3.75 4.00 4.25 4.50 10Y bond yield 6.05 6.20 6.60 6.75 6.75 7.00
Indonesia Policy rate 3.50 3.50 3.50 3.50 3.50 3.50 FASBI rate 2.75 2.75 2.75 2.75 2.75 2.75 10Y bond yield 6.54 6.50 6.75 7.00 7.25 7.50
Malaysia Policy rate 1.75 1.75 1.75 1.75 1.75 2.25 3M KLIBOR 1.94 1.95 1.95 2.05 2.25 2.60 10Y bond yield 3.28 3.20 3.30 3.40 3.60 3.70
Philippines Policy rate 2.00 2.00 2.00 2.00 2.00 2.00 Standing overnight deposit rate 1.50 1.50 1.50 1.50 1.50 1.50 10Y bond yield 3.66 4.40 4.60 4.70 4.90 4.90
Singapore 3M SGD SIBOR 0.40 0.45 0.45 0.45 0.50 0.50 10Y bond yield 1.53 1.70 1.90 2.00 2.10 2.10
South Korea Policy rate 0.50 0.50 0.75 1.00 1.00 1.00 91-day CD rate 0.66 0.65 0.90 1.15 1.15 1.15 10Y bond yield 2.07 2.20 2.40 2.40 2.60 2.60
Taiwan Policy rate 1.13 1.13 1.13 1.13 1.13 1.13 3M TAIBOR 0.48 0.45 0.45 0.45 0.45 0.45 10Y bond yield 0.43 0.80 0.80 0.90 0.90 1.00
Thailand Policy rate 0.50 0.50 0.50 0.50 0.50 0.50 THFX6M 0.48 0.50 0.50 0.50 0.50 0.50 10Y bond yield 1.83 1.70 1.90 2.00 2.20 2.20
Vietnam Policy rate (Refi rate) 4.00 4.00 4.00 4.00 4.00 4.00 Overnight VNIBOR 1.13 1.00 1.00 1.00 1.00 1.00 5Y bond yield 1.13 2.90 2.90 3.00 3.00 3.10
Ghana Policy rate 13.50 13.50 13.50 13.50 13.50 13.50 91-day T-bill rate 12.62 12.60 12.60 12.55 12.50 12.40 5Y bond yield 17.78 18.25 18.35 18.50 18.55 18.80
Kenya Policy rate 7.00 7.00 7.00 7.00 7.50 8.00 91-day T-bill rate 6.86 6.60 6.60 6.70 6.80 6.90 10Y bond yield 12.30 12.25 12.20 12.20 12.20 12.40
Nigeria Policy rate 11.50 11.50 11.50 11.50 11.50 11.50 91-day T-bill rate 2.50 3.00 4.00 4.50 5.00 5.80 10Y bond yield 12.76 12.75 12.90 13.05 13.15 13.30
South Africa Policy rate 3.50 3.50 3.50 3.75 4.00 4.00 91-day T-bill rate 3.82 3.90 3.95 4.10 4.18 4.24 10Y bond yield 9.34 9.30 9.30 9.20 9.20 9.00
Tanzania 91-day T-bill 3.30 3.30 3.50 3.50 3.50 3.50 10Y bond yield 11.60 12.20 12.00 12.40 12.50 12.50 1 Absence of forecasts from Q1-2022 onwards reflects IBA’s proposed cessation of rate publication at end-2021 2 1Y medium-term lending facility (MLF) rate
Source: Standard Chartered Research
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Forecasts – Commodities Q3-21F Q4-21F Q1-22F Q2-22F Q3-22F Q4-22F 2021F 2022F
Energy Crude oil (nearby future, USD/bbl)
ICE Brent 67 56 57 58 59 60 65 59
NYMEX WTI 65 54 55 56 56 57 63 56
Dubai 66 55 56 56 57 57 64 55
US natural gas (nearby future, USD/mmBtu)
NYMEX basis Henry Hub Louisiana 2.40 2.30 2.50 2.30 2.30 2.30 2.40 2.40
Metals
Base metals (LME 3m, USD/t)
Aluminium 2,410 2,320 2,260 2,200 2,170 2,160 2,310 2,198
Copper 9,970 9,300 9,000 8,760 8,500 8,100 9,411 8,590
Lead 2,050 2,000 2,002 1,990 1,965 2,005 2,054 1,991
Nickel 17,800 17,000 16,950 17,200 16,800 16,300 17,458 16,813
Tin 28,000 26,000 24,000 23,400 23,100 23,000 26,685 23,375
Zinc 2,905 2,900 2,870 2,770 2,810 2,800 2,882 2,813
Precious metals (spot, USD/oz)
Gold 1,920 1,940 1,900 1,825 1,750 1,700 1,869 1,794
Palladium 2,850 3,000 2,800 2,700 2,600 2,400 2,790 2,625
Platinum 1,190 1,250 1,200 1,175 1,250 1,300 1,206 1,231
Silver 29.0 30.0 28.0 26.0 24.0 22.0 28.4 25.0
Source: Standard Chartered Research
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G
lobal
overv
iew
Geopolit
ical
econom
ics
A
sia
M
EN
AP
A
fric
a
E
uro
pe
Am
ericas
S
trate
gy
o
utlo
ok
Fo
recasts
Forecasts – Selected interbank rates by tenor 2021 2022
End-period Q3 Q4 Q1 Q2 Q3 Q4
USD LIBOR
FFTR 0.25 0.25 0.25 0.25 0.25 0.25
1M 0.15 0.20 0.15 0.15 0.15 0.20
3M 0.20 0.25 0.25 0.25 0.30 0.35
6M 0.25 0.30 0.30 0.30 0.35 0.45
12M 0.35 0.40 0.40 0.45 0.50 0.65
SGD SIBOR
1M 0.30 0.30 0.30 0.35 0.40 0.45
3M 0.45 0.45 0.45 0.50 0.50 0.55
6M 0.60 0.65 0.65 0.70 0.70 0.70
HIBOR
1M 0.10 0.15 0.15 0.15 0.15 0.20
3M 0.20 0.25 0.25 0.30 0.35 0.40
6M 0.30 0.35 0.35 0.35 0.40 0.50
12M 0.40 0.45 0.45 0.50 0.55 0.70
Source: Standard Chartered Research
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Authors Sarah Hewin
+44 20 7885 6251
Head of Research, Europe and Americas
Standard Chartered Bank
Christopher Graham
+44 20 7885 5731
Economist, Europe
Standard Chartered Bank
Wei Li
+86 21 3851 5017
Senior Economist, China
Standard Chartered Bank (China) Limited
Shuang Ding
+852 3983 8549
Chief Economist, Greater China and North Asia
Standard Chartered Bank (HK) Limited
Kelvin Lau
+852 3983 8565
Senior Economist, Greater China
Standard Chartered Bank (HK) Limited
Chong Hoon Park
+82 2 3702 5011
Head, Korea and Japan Economic Research
Standard Chartered Bank Korea Limited
Aldian Taloputra
+62 21 2555 0596
Senior Economist, Indonesia
Standard Chartered Bank, Indonesia Branch
Tony Phoo
+886 2 6606 9436
Senior Economist, NEA
Standard Chartered Bank (Taiwan) Limited
Philippe Dauba-Pantanacce
+44 20 7885 7277
Senior Economist | Global Geopolitical Strategist
Standard Chartered Bank
Chidu Narayanan
+65 6596 7004
Economist, Asia
Standard Chartered Bank (Singapore) Limited
Mayank Mishra
+65 6596 7466
Global FX and Macro Strategist
Standard Chartered Bank (Singapore) Limited
Saurav Anand
+91 22 6115 8845
Economist, South Asia
Standard Chartered Bank, India
Nagaraj Kulkarni
+65 6596 6738
Senior Asia Rates Strategist
Standard Chartered Bank (Singapore) Limited
Divya Devesh
+65 6596 8608
Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited
Becky Liu
+852 3983 8563
Head, China Macro Strategy
Standard Chartered Bank (HK) Limited
Kanika Pasricha
+91 22 6115 8820
Economist, India
Standard Chartered Bank, India
Edward Lee
+65 6596 8252
Chief Economist, ASEAN and South Asia
Standard Chartered Bank (Singapore) Limited
Jonathan Koh
+65 6596 8075
Economist, Asia
Standard Chartered Bank (Singapore) Limited
Arup Ghosh
+65 6596 4620
Senior Asia Rates Strategist
Standard Chartered Bank (Singapore) Limited
Tim Leelahaphan
+66 2724 8878
Economist, Thailand and Vietnam
Standard Chartered Bank (Thai) Public Company Limited
Emmanuel Kwapong, CFA
+44 20 7885 5840
Economist, Africa
Standard Chartered Bank
Razia Khan
+44 20 7885 6914
Head of Research, Africa and Middle East
Standard Chartered Bank
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Standard Chartered Global Research | 2 July 2021 136
Sarah Baynton-Glen, CFA
+44 20 7885 2330
Economist, Africa
Standard Chartered Bank
Farooq Pasha
+92 21 3245 7859
Economist, MENAP
Standard Chartered Bank (Pakistan) Limited
Emiko Bowles
+44 20 7885 6409
Research Associate
Standard Chartered Bank
Geoff Kendrick
+44 20 7885 6175
Global Head, Emerging Markets FX Research
Standard Chartered Bank
John Davies
+44 20 7885 7640
US Rates Strategist
Standard Chartered Bank
Steve Englander
+1 212 667 0564
Head, Global G10 FX Research and North America Macro Strategy
Standard Chartered Bank NY Branch
Sudakshina Unnikrishnan
+44 20 7885 6583
Commodities Analyst
Standard Chartered Bank
Eric Robertsen
Global Head of Research | Chief Strategist
Standard Chartered Bank
Entering H2-2021 in different gears
We expect global growth to rebound to 5.8% in 2021 from -3.3% in 2020 as economies
reopen and vaccination rollouts gain momentum. We see two key downside risks to
Contents
Overview
Where we differ from consensus
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Disclosures appendix
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Chong Hoon Park is/are employed as an Economist(s) by Standard Chartered Bank Korea and authorised to provide views on Korean macroeconomic topics only.
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Document is released at
11:45 GMT 02 July 2021