Asia Daily Update

** South Korea: Policy makers to restructure zombie companies
** Singapore: Q3 GDP revised up to 1.9% vs 1.4% initially; 2015 growth seen around 2%
** Singapore: The new normal arrives in Singapore, 2016 growth seen at a modest 1-3%
** Thailand: Continued weakness in October trade
** Indonesia: VP Kalla urges BI to cut rates while Governor Agus emphasizes need for stability

North Asia:

SOUTH Korea: Policy makers in Seoul are accelerating efforts to restructure debt-laden and unprofitable companies before an anticipated rise in U.S. interest rates and any further slowdown in China reverberates in South Korea. Falling exports and huge losses among some of Korea’s corporate giants have injected urgency into efforts to sell poorly performing assets and raise competitiveness. Overseas shipments have dropped every month this year, with notable weakness in sales to China. Government ministries, financial regulators and state-run banks have established a committee to oversee corporate restructuring while a review of credit ratings continues for large companies that are at risk of collapse. The government this month identified steel, shipping, shipbuilding, construction and petrochemicals as sectors suffering from oversupply and excessive competition.

South/Southeast Asia:

SINGAPORE: The final Q3 GDP released this morning was revised up to 1.9% y/y vs the advance report of 1.4%. This was driven by the strong services sector, revised up to 3.6% from 3% initially and unchanged from Q2. The construction sector was unchanged at 1.6% but slower than Q2’s 2.2%. The manufacturing sector was the main drag on the economy, it was revised down notably to -6.2% vs +1.4% initially and even weaker than Q2’s -4.2%. Of greater concern, the weakness came from the electronics sector. This suggests we could see a sharp drop in October’s industrial production due tomorrow. On a quarterly basis, growth was revised up to 1.9% seasonally-adjusted q/q annualized vs 0.1% originally and partly reversed the -2.6% in Q2. This highlights the volatile nature of Singapore’s GDP, even when measured on a seasonally adjusted basis.

The government expects 2015 growth to come in “close to 2%”. Given 2.2% growth in the first three quarters of the year, this implies a moderation in Q4 to around 1.7%. For 2016, the government is projecting 1-3% vs preliminary estimates over the past two years of 2-4%, implying a continued downshift in growth. More than anything, this reflects 1) the sluggish global growth recovery; and 2) the continued drop in potential growth for the economy due to a host of factors, including demographics, maturing economy, and hollowing out of the electronics sector on rising costs. For USD-SGD, it continued to ease this morning to 1.4070 after falling 0.5% yesterday in line with the drop in USD-Asia.

USD-SGD fell nearly 70 pips or 0.5% yesterday to 1.4100 in line with the drop in USD-Asia on the softer USD and profit taking. For the SGD NEER, we estimate it is at -0.5% vs the mid-point for USD-SGD at 1.4100, USD-MYR at 4.2430, and USD-CNY at 6.3890. The +/-2% range for the SGD NEER corresponds to USD-SGD between 1.3750-1.4310, ceteris paribus.

THAILAND: October trade numbers released yesterday showed continued weakness in both external and domestic demand. In USD terms, exports contracted for the 10th straight month by 8.1% y/y vs -5.5% in September. In the first ten months of the year, exports are down 5.3% vs -0.4% for 2014. Imports slumped 18.2% vs -26.2% previously and down 10% year-to-date, a reflection of weak domestic investment demand. The trade balance narrowed to USD2.1bn from USD2.8bn previously.

The weak export picture is likely to continue to weigh on the growth momentum near term. Growth in the first three quarters of the year has averaged around 2.9% but this is likely to the low 2% level in Q4, partly on the higher base last year. We are projecting around 2.6% in 2015. For 2016, we are looking for a slightly firmer reading of 2.8% on the basis that 1) export growth picks up; and 2) the government’s USD 9.5bn (2.6% of GDP) stimulus package and other infrastructure plans are implemented. This is one key source of demand given the uncertain external backdrop. Yesterday, the cabinet also approved to set up a THB10bn fund to support investment in key industries eg via subsidies.

Despite the benign inflation environment, Bank of Thailand's (BoT) scope for further easing is restrained by the need to curb high household debt, which stands at around 86% at end-2014. For USD-THB, it eased back 0.3% yesterday to close at 35.74 in line with the lower USD-Asia on the softer USD. From a bigger picture point of view, THB is down around 8% vs USD year-to-date and the relatively wide consolidation range of 35.30-36.70 is seen near term.

INDONESIA: Vice President Jusuf Kalla yesterday said Bank Indonesia (BI) should stop using the US Fed as an excuse not to cut rates. He called for an easier monetary policy stance to help spur growth, implying that rates are too high and are impeding investment. In response, BI Governor Agus said the central bank is “committed to stability and has held rates steady because of the Fed, China, and commodity prices”. The public call for lower rates from the government highlights the disagreement with BI’s policy. This debate is spilling over into the public arena because of the sluggish growth backdrop where growth has averaged below 5% in the first three quarters of the year.

Pressure from the government probably prompted BI to compromise at the last meeting in mid-November by lowering the reserve requirement ratio by 50bp to 7.5%. The good news for BI is that inflation is showing signs of moderating, it has eased to 6.2% in October from the peak of 7.3% in July 2015. A continued drop on lower oil prices and sluggish growth should pave the way for BI to least put in a token rate cut in the next few months. However, it would also need to be mindful of not giving the perception of bowing to government pressure and compromising on the inflation target. Otherwise, the relative stability in IDR of the past month or so could be unwound. USD-IDR stability and ensuring investor confidence are the main issues BI would need to be cognizant of when it decides on the timing and extent of rate cuts. This is also complicated by the firmer USD backdrop and pending Fed normalization.