Global Economy

Global Markets Torn By Anxieties

In the Near-term, 'Uncertainty' Will Be the Buzzword

TODAY, global markets are torn by anxieties.

The fallout from the UK’s vote to exit the European Union, the prospect of a strengthen­ing US economy following an anaemic second quarter economic growth, a disappointing Japanese stimulus plan with a total value of 28 trillion yen over several years, of which includes ¥7.5 trillion (US$73bil) in new spending to jump-start the nation’s sluggish economy, con­cern over the Chinese economy slowing down, saw the markets tom, and an aggressive mone­tary policy by Bank of England, are key issues to have raised the anxiety.

In the near-term, “uncertainty” will be the buzzword. This begins with the UK, when it kick-starts the process of an unprecedented withdrawal from EU. Possibilities for the UK to head into a short-term recession are on the cards. This explains why the Bank of England (BoE) adopted an aggressive mode in their recent Monetary Policy Committee meeting by reducing the policy rate and restarting the quantitative easing policy, commonly known as ‘printing of money’.

Following BoE’S aggressive move, doubts are creeping up as to whether the US Federal Reserve will be able to raise their policy rate anytime in remaining months of 2016. Expectations for the US economy to perform better in second half of 2016 may not be ade­quate to justify for a rate hike. More so after a poor economic performance in the first half of 2016.

The US Fed’s potential decision on its inter­est rate is not just on what is happening with the other countries, but more of its own issues. Having said that, one remains unable to totally wipe out the possibility that the Fed will not raise rates in 2016.

The recent approval by the Japanese cabi­net of 13.5 trillion yen (US$132.04bil) in fiscal measures as part of its effort to revive the country’s flagging economy was received with less excitement. Part of the spending will be on rail besides cash payouts to low-income earners and infrastructure spending.

Some disappointment was seen over the Bank of Japan’s monetary policy measures with no signs of it introducing the “helicopter money”, in which the government issues perpetual bonds for the BoJ to underwrite debt.

And now, concerns are that the policies that once halted and reversed the doom loop between the real economy and risky assets could be running out of steam.

It appears that the central banks are racing to ease their respective monetary policy with the hope that low and/or negative interest rates added with asset purchases would help lift their growth and keep their respective cur­rencies weak. This despite the fact that such policies have become less overwhelming.

Should the fear that cheap money policy is becoming less effective grows, pressure will creep on the risky assets. Hence, the global markets direction may not lead to any ‘treas­ure’ but will certainly entice “treasury papers”. In the past, tail risks tend to be more occasional where strong policy responses tend to be solid and effective. Authorities were able to keep risk off and restore asset prices to their previous highs, if not take them even higher.

Today, the policy mix is suboptimal follow­ing overreliance on monetary tools.

Besides, the decades of globalisation that has been a dominant political theme across developed and emerging economies, and have generally been successful, have achieved what they set out to deliver, but worsened the social tensions within countries. While the globalisation may raise overall economic growth, its speed has left many unable to adjust. Consequently, global incomes have risen and worsened inequality.

Hence, with societies still defined at a local level, while large companies have become more international, the most successful are doing so through locally defined tactics. Companies that focus on understanding the environments they operate in and tailoring their strategies will be in a better position to meet the diverse needs of customers, employ­ees, regulators and other stakeholders in the markets in which they compete.

Companies in more global sectors will typically face both greater challenges and oppor­tunities adapting to an environment in which local expectations and regulations are unique and require distinct strategies.

Investors will eventually have to focus on “substance’ and not on noise”.

The Asian ex-Japan markets have opportu­nities. Looking at the valuation of these mar­kets, they remain attractive, reflected by the price-to-book ratio, which is still at a discount with respect to its long-term average.

Besides, the macroeconomic growth in this region is still better than many advanced economies, growing on average above 4% compared to the advanced economies still struggling to grow around 2%. Furthermore, most Asian markets government bond yields far surpasses the major global government bond yields, on average around 3% compared to the near zero or negative returns from the developed countries.

On the equity front, the markets in this region still provide good value especially for those long-term investors. The region is ulti­mately a net beneficiary of lower-for-longer commodity prices and offers significant growth opportunities led by infrastructure development, albeit contingent on positive government action.

The Indian market remains the biggest overweight, while China is faced with many pitfalls in its move to be selective and transi­tion its economy into a consumption-led one.

While being aware of the risk relating to currency depreciation in the Asean region, Thailand and Indonesia do have several com­panies with robust and enduring business models and franchises priced attractively, and we are encouraged by incremental devel­opments on infrastructure projects in both countries.

Improvement in the Philippines’ political outlook warranted adding positions there, given the favourable longer term outlook and potential for infrastructure led investment cycle. Stable growth could see some entice­ment on the Malaysian equity market.

Anthony Dass is head of AmBank Research, AmRank Group.

Adapted from The Star/News/Monday, 8 August 2016

Jobs Data Stoke Expectations of Rate Hike

LONDON: Bumper July jobs data from the United States have again begun to stoke expectations of a September rate hike from the Federal Reserve, just when other major central banks around the globe are unleashing ever-looser policy.

That slightly more positive tone Tiay linger as a backdrop for the global economy in the coming week, with growth data due for the euro zone, Germany and Italy, along with key releases on inflation, industrial pro­duction and retail sales in China.

New Zealand’s central bank is also expected to join the easing brigade with a cut on Thursday.

In the past week, the Bank of England fired its first post - Brexit salvo - cutting the bank rate to a new record low of 0.25% while also reigniting its asset purchase programme and hinted further easing was in the pipeline.

Governor Mark Carney said he had unveiled an “exceptional package of measures” because the economic out­look had changed markedly follow­ing the June Brexit vote. The Bank expects the economy to stagnate for the rest of 2016 and suffer weak growth next year.

Slow growth and virtually non-existent euro zone inflation will also force the European Central Bank to extend and expand the scope of its asset purchase programme, a Reuters poll of economists showed last month.

Early indications suggest the bloc has so far largely shrugged off Britain’s decision to quit the European Union but preliminary data due on August 12 are expected to show the rate of economic growth across the currency union halved to 0.3% in the second quarter.

Germany will also publish its GDP numbers, likely to show a slowdown, but rising employment and wages should continue to support dispos­able income growth in the second half of the year.

Italy probably maintained its slow and steady pace.

“With the UK potentially on the brink of recession, the resilience in economic sentiment indicators on the other side of the English Channel in July is perhaps surprising,” said Christian Schulz at Citi.

The Bank of Japan disappointed markets last month by keeping bond purchases steady, defying expecta­tions it would buy up more, and made traders even more nervous after announcing it would re-evaluate policies in September.

Japan’s economic growth is also expected to have slowed last quarter, weighed down by weak domestic demand and stagnant exports, a Reuters poll found on Friday.

That would be a setback for Prime

Minister Shinzo Abe who has said the top priority for his reshuffled cabinet is growing the economy and beating deflation.

“The world’s third-largest economy, continues to take centre stage in glob­al macroeconomic developments, partly due to the sense that it operates as a lodestar for the trajectory of both developed and emerging economies,” said Richard Iley at BNP Paribas.

The actual GDP data won’t be pub­lished until August 14 but on Wednesday the Cabinet Office pub­lishes June core machinery orders, a leading indicator of capital spending, which likely rose for the first time in three months.

Three years of reflationary mone­tary, fiscal and reform policies dubbed “Abenomics” have done little to revive the economy, and financial markets are growing worried the BOJ is running out of ammunition.

“To quash talk that its arsenal is empty, the BoJ might decide at its September meeting to stop targeting the monetary base, which conflicts with the negative-rate policy,” Iley said.

Skittish global investors may be reassured by fairly steady growth expected in a flurry of Chinese data in coming weeks, but tepid demand, slowing investment and rising debt levels remain pressing concerns for the world’s second-largest economy.

Reuters

Adapted from The Star/News/Monday, 8 August 2016

Impact of Rate Cuts

Banks reacting differently to declining interest rates

AGAINST interest rate cuts, banks are react­ing differently, depending on competition, cost of funding and their liquidity situation.

In Australia, banks passed on only half of the rate cut to customers and raised deposit rates, partly due to regulatory requirements and to attract quality deposits.

In the Australian case, savers benefit while customers such as mortgage borrow­ers would not get the full benefit of the gov­ernment’s interest rate cut.

Where deposit growth lags that of lend­ing, competition for deposits among banks sets in.

Currently, in Malaysia, all banks have low­ered their lending and deposit rates follow­ing a rate cut by the central bank.

However, local banks may consider offer­ing higher deposit rates to protect their cus­tomer deposit base as competition for deposits heats up.

But that would mean lower margins for the banks. “There may not be much choice if competition heats up,” said Nazlee Khalifah, CEO of Affin Islamic Bank.

“Every bank would have to accept lower margins.

“Come year-end, they will also have to comply with the next phase of the liquidity coverage ratio (LCR) requirement.

“Usually, one can see deposit rates rising in the fourth quarter of every year,” said Nazlee. (LCR is defined as a stock of high-quality assets divided by total net cash out­flows over the next 30 calendar days. By Jan 1 next year, banks would need to reach a minimum LCR of 80%).

Lowering lending and raising deposit rates at the same time may not badly hurt banks that are largely dependent on whole­sale funding.

Apparently, Australian banks tap funding in the international markets which are growing more fearful of problems in the Australian housing market, hence liquidity from international funding sources is dry­ing up, said Pong Teng Siew, head of research, InterPacific Securities.

"So there is now a rush to tap domestic money to fund the loans.

“That is why deposit rates have climbed sharply even as the Reserve Bank of Australia has dropped its policy rate,” said Pong.

Such a scenario is less likely to happen in Malaysia where Bank Negara is believed to set a strong precedence that local banks tow the line with regard to following changes in the overnight policy rate (OPR), said Chris Eng, head of research, Etiqa Insurance & Takaful.

“It’s possible that greater scrutiny will be on whether banks follow the change in OPR in the lending rather than deposit rates,” said Eng, adding in case of tight liquidity which may trigger a hike in deposit rates

following a cut in OPR, Bank Negara will likely cut the statutory reserve requirement (SRR). (The SRR is an amount of interest-free funds kept by commercial banks with Bank Negara for the management of liquidity in the banking system).

Should there be further interest rate cuts, uneven rate adjustments may occur, said Wong Yin Ching, cohead, financial institu­tion ratings, RAM Rating Services.

“Major domestic banks have responded to the OPR cut (of 25 bps to 3%) with a reduc­tion in their lending rates by between 20-25 bps.

Fixed deposits rates have also declined in tandem. “In some instances, the cut in fixed deposit rate has exceeded that of the lending rate for the individual bank although not by a large quantum.

“In an attempt to arrest declining net interest margins, we might continue to see uneven rate adjustments, should there be further rate cuts although not in the magni­tude observed in the Australian banks recently.

“How rate cuts translate into lending and deposit rates ultimately could relate to domestic circumstances such as regulatory and competitive landscapes, which can vary from country to country,” said Wong.

So far, the impact of the recent cut in OPR should be manageable.

“Malaysian banks have been experienc­

ing net interest margin compression over the last few years, as a result of keen compe­tition for both loans and deposits.

“Bank Negara’s recent move to cut the OPR is generally negative for banks’ profita­bility as most banks are dominated by float- ingrate loans while the bulk of their deposits take time to be repriced. Nonetheless, the impact should be manageable,” said Wong.

The impact of possible future rate cuts would be interesting to watch. For borrow­ers, it would be a good time to lock in the best borrowing rate possible.

For savers, they may have to take stock of the potential erosion in their income from savings. It is a good things that in the race for deposits, local banks have raised deposit rates and offered quite good promotions.

There have already been reports overseas of savers withdrawing their money before an expected rate cut.

In what type of investment and which country would savers park their money is a matter of personal choice and would be based on advice and a certain amount of research done.

Columnist Yap Leng Kuen hopes that competition for deposits among local banks would drive up savings rates as higher income from savings could result in higher spending, provided debt is man­ageable.

STOCKS MARKET REPORTS

KUALA LUMPUR

BURSA Malaysia is expected to continue its uptrend this week backed by positive factors such as recovery in the crude oil prices, country’s trade data and Bank of England’s (BoE) cut in interest rate.

Affin Hwang Investment Bank vice-presi­dent and retail research head Datuk Nazri Khan said the rally in the crude oil prices would provide another lift to the local bourse this week.

US crude oil prices settled 2.7% higher at US$41.93 a barrel, a day after rising over 3% amid a drawdown in oil inventories while international benchmark, Brent crude was up 2.67% to US$44.25 a barrel.

Nazri said the sentiment on the local bourse also improved on upbeat trade sur­plus of RM41.79bil in the first half of this year, which reflected Malaysia’s strong export sector.

“The benchmark FBM KLCI is ready to stage further upside if the ringgit and com­modities continued to strengthen, with immediate support at the 1,690 points level while key resistance at the 1,677-1,667 points level,” he told Bemama.

Nazri said another factor that boosted the market was the cut in interest rate by the BOE from 0.5% to 0.25% and the stimulus programme to soften the economic shock after the ‘Britain exit’ (Brexit) referendum to leave the European Union.

“The BOE has decided to cut its lending rate for the first time in more than seven years to a new record low of 0.25% from 0.5% as measures to prevent post-Brexit recession.

For the week just ended, the local market saw range-bound trading, helped by trading in heavyweights led-by energy stocks, trade and services, industrial stocks as well as vol­atile in the crude oil prices.

On a Friday-to-Friday basis, the FBM KLCI added 10.78 points to 1,664.04 from 1,653.26 the previous week.

The FBM Emas Index surged 92.25 points to 11,677.36, FBMT 100 Index rose 94.31 points to 11,378.09 and the FBM Emas Shariah Index increased 93.03 points to 12,291.80.

On a sectoral basis, the Finance Index surged 81.31 points to 14,267.76, Industrial Index rose 25.13 points to 3,120.28 and the Plantation Index increased 134.47 points to 7,696.71.

Weekly turnover increased to 10.02 billion units worth RM8.94bil from 8.88 billion units worth RM8.72bil previous week.

Main market volume fell to 6.25 billion shares worth RM8.39bil from 6.42 billion shares worth RM 8.29bil previously. – Bernama.

FBM KLCI FUTURES ROUNDUP

KUALA LUMPUR

The FBM KLCI futures contracts (FKLI) on Bursa Malaysia Derivatives are expected to be well-supported this week as the underly­ing cash market is projected to trade higher.

Inter-Pacific Research Sdn Bhd head of research, Pong Teng Siew, said in general, Bursa Malaysia was expected to be positive this week and continue for the rest of the month and extended to September.

He said the market generally climbed because the funds, which were mostly from Europe were flowing into emerging markets and Malaysia will be one of the beneficiaries.

“So far, the funds have been flowing into Indonesia, Thailand, Taiwan and South Korea, we expect it to be coming here soon,” he told Bemama.

For the week just-ended, the market was mainly higher on positive sentiment.

Spot month August 2016 added 11.5 point to 1,659.5, September 2016 advanced 12.0 points to 1,655, December 2016 was 13.5 points higher at 1,636.5.

Turnover declined to 30,059 lots from 107,693 lots previous week while open inter­est decreased to 41,111 contracts.

The benchmark FBM KLCI up 8.75 points higher at 1,664.04 from 1,653.26 previous Friday. – Bemama

GOLD FUTURES ROUNDUP

KUALA LUMPUR

Gold futures contracts on Bursa Malaysia Derivatives are expected to see uncertain trading this week, tracking the US Comex gold market and the US Federal Reserve (Fed) decision on the interest rates, said Phillip Futures Sdn Bhd.

Its dealer, Amberlyn How, said the trading will likely be volatile, especially after the release of upbeat US non-farm payrolls.

“The gold prices will not go up so much or down and there is a possiblity of a technical correction,” she told Bemama.

How said the US Fed was expected to con­sider a couple of non-farm payroll releases before deciding on rates.

“The downside for the gold price is expected to be limited after Bank of Englands eas­ing,” she said, adding that the trading of the local currency will also influence the the gold market.

On a Friday-to-Friday basis, July 2016 last traded rade at RM174.60 a gramme, and new spot month August 2016 improved 52 ticks to RM177.20 a gramme, September 2016 advanced 61 ticks to RM177.85 a gramme and October 2016 was 54 ticks better at RM178 a gramme.

Weekly turnover eased to 89 lots worth RM1.58mil from 96 lots worth RM1.52mil previously.

Open interest last Friday decreased to 266 contracts versus 286 contracts previously. - Bemama

On a Friday-to-Friday basis, spot month August 2016 was pegged at 96.54 while September 2016, October 2016 and December 2016 all stood at 96.59.

 KLIBOR FUTURES ROUNDUP

KUALA LUMPUR

The three-month Kuala Lumpur Interbank Offered Rate (Klibor) futures contracts on Bursa Malaysia Derivatives is expected to remain untraded this week.

The futures market was untraded for the week just-ended.

On a Friday-to-Friday basis, spot month August 2016 was pegged at 96.54 while September 2016, October 2016 and December 2016 all stood at 96.59.

The underlying three-month Klibor on the cash market stood at 3.40%. – Bernama.

COMMODITIES ROUNDUP

CPO

KUALA LUMPUR

Crude palm oil (CPO) futures prices on Bursa Malaysia Derivatives are expected to see profit-taking this week after a strong surge last week.

Interband Group of companies sen­ior palm oil trader, Jim Teh, said the prices could go down to RM2,300- RM2.350 a tonne this week on the back of news reports that China has released two million tonnes of rape- seed oil from its state reserves.

“This could mean that imports from top consumers, China and India, would be lower,” Teh told Bernama.

Teh said this, however, may be lim­ited as speculators expected La Nina, usually associated with wet weather, to take place in the coming months.

“If it happens, it could cause supply distruptions that are positive for CPO prices overall,” he said.

Nevertheless, he said, the CPO mar­ket remained ‘healthy.

He also said investors would also expect the Malaysia Palm Oil Board monthly report, expected to be released on Aug 10, to show higher inventories in July.

On a Friday-to-Friday basis, August 2016 jumped RM131 to RM2.505 per tonne, September 2016 surged RM94 to RM2,430 a tonne, October 2016 rose RM91 to RM2,407 a tonne and November 2016 improved RM85 to RM2,311 a tonne.

Weekly turnover fell to 196,644 lots from 197,456 lots previously, while open interest eased to 248,914 con­tracts from 257,412 contracts previ­ously.

On the physical market, August South gained RM130 to RM2,510 per tonne. - Bemama

RUBBER

KUALA LUMPUR

The Malaysian rubber market is likely to remain stable this week amid fluc­tuating crude oil prices, dealers said.

A dealer said there were also uncertainties in the benchmark Tokyo Commodity Exchange futures market following Japan’s stimulus package announced earlier last week.

“The current development in Japan, including the yen’s performance, would be among the factors affecting the rubber market in the region.

“On the home front, the rubber market would also depend on the ringgit’s performance against the US dollar. The local rubber market, despite these factors, is still stable overall,” he told Bemama.

On a weekly basis, the Malaysian Rubber Board’s official physical price for tyre-grade SMR 20 gained 10.5 sen to 517.50 sen a kg while while latex- in-bulk dipped 2.5 sen to 453.0 sen a kg. The unofficial physical price for tyre-grade SMR 20 added 10.5 sen to 515.50 sen a kg and latex-in-bulk fell 12 sen to 449.0 sen a kg. - Bemama

TIN

KUALA LUMPUR

The Kuala Lumpur Tin Market (KLTM) is expected to be firm this week with prices moving US$17,900 and US$18,200 a tonne, a dealer said.

He said this trend will also be in line with the uptrend on the London Metal Exchange.

“The local market was bullish throughout the week, except on Aug 4, where it declined marginally on technical correction.

The price has breached the US$18,000 level and is poised to prompt encouraging demand from traders in the days ahead,” he told Bemama.

For the week just-ended, tin fin­ished US$110 higher at US$18,080 per tonne compared with US$17,900 per tonne previous Friday. Turnover fell to 177 lots from 201 lots previously.

The premium between KLTM and the LME narrowed to US$410 from US$425 per tonne previously. - Bemama

CRUDE OIL

LONDON

Chronic oversupply sent oil prices slumping last week into a so-called bear market, losing 20% from recent June peaks above US$50.

In tumultuous trade on Wednesday, US benchmark West Texas Intermediate (WTI) struck US$39.19 - which was the lowest level since April 18.

And on Tuesday, Europe’s main contract Brent North Sea crude slid to US$41.51 - which was also a trough last reached on that same day.

Oil industry experts argue that the market got caught up in forecasts that supply and demand would shift into balance in 2016.

The International Energy Agency had forecast in April that oil was expected to almost balance out in the second half of the year.

“Crude prices have re-entered bear market territory,” said analysts at London-based consultancy Energy Aspects in a research note.

“The problem has been that the market priced in a full rebalancing too quickly and discounted the scale of the inventory overhang, which has left many disappointed.”

The market had nosedived from above US$100 in mid-2014 to 13-year lows of around US$27 in February, plagued by the supply glut, but have since rebounded somewhat.

That collapse was triggered by a glut that was worsened by rising unconventional oil production, main­ly from booming US shale crude, alongside the OPEC cartel’s reluctance to cut output.

Last week, meanwhile, the US gov­ernment’s Department of Energy (DoE) revealed that crude reserves rebounded by 1.41 million barrels in the week ended July 29.

That confounded analysts’ forecasts for a drop of 1.75 million barrels, and left total stockpiles at 522.5 million.

That was 14.8% more than was recorded at the same point last year and marked the highest seasonal level in decades.

Data showing an increase in inven­tories tends to heighten worries about oversupply and push the market lower.

However, prices rose over Wednesday and Thursday on signs of rebounding demand for motor fuel amid the peak-demand driving sea­son, when many Americans hit the road for vacations.

“The DoE inventory data (provided) further evidence of a supply over­hang returning to the market,” XTB analyst David Cheetham told AFP, adding gasoline demand was never­theless weak.

Average US daily domestic crude pro­duction was meanwhile down 55,000 barrels at 8.5 million.

The US Labour Department report showed that nonfarm payrolls rose by 255,000 in July, far outpacing expecta­tions for a gain of 180,000.

While the unemployment rate remained unchanged at 4.9%, it held below the 5% mark associated with full employment.

On the New York Mercantile Exchange, a barrel of West Texas Intermediate benchmark crude for September delivery fell 13 cents to close at US$41.80.

In London, North Sea Brent for October delivery fell two cents to US$44.27 a barrel on the Intercontinental Exchange. – AFP
Adapted from The Star/Stocks/Monday, 8 August 2016

The new normal for oil

Wednesday, 10 August 2016/ By AFIQ ISA

Crude seen at US$50, prices may remain for next five years

KUALA LUMPUR: The new normal for oil is US$50 per barrel, says a leading consultancy firm.

Bain & Co feels that this scenario of prolonged low oil prices will remain for the next five years and predicts that the industry will continue to grapple with deleveraging and cash flow issues.

“We believe that this scenario is likely to exist for a while due to the tremendous amount of supply coming from low-cost sources such as Russia and members of the Organisation of the Petroleum Exporting Countries.

“There is also the likelihood of a slowdown in demand towards the end of this decade,” Jorge Leis, a partner in Bain & Co, told reporters at a briefing.

Brent crude prices have fallen from their highest point this year recently. After peaking at US$52.51 per barrel back in June, it was last traded at US$45.29 per barrel on Tuesday.

Despite major restructuring and refinancing efforts since oil prices began to plummet in late 2014, the leveraged positions of some South-East Asian upstream players are still causing financial distress.

Prominent Singaporean offshore services firm Swiber Holdings Ltd was the latest casualty from the low oil price situation.

Last week, the company narrowly averted bankruptcy after putting itself under judicial management to facilitate a restructuring exercise.

According to Leis, the “new normal” scenario calls for a major transformational effort in order for companies to survive over the next five years, as the worst is not over yet for the industry players.

“The adjustments made over the past two years may have gone slower than we expected. However, companies have better access to capital markets today, which will avert the possibility of extreme situations such as bankruptcy,” he remarked.

During its oil and gas (O&G) roadshow in Kuala Lumpur, among the questions asked by prominent Malaysian O&G firms was on what it would take to cope with the long-term ramifications of the low oil prices, said Dale Hardcastle, who is a Bain partner for its Singapore office.

“As for Malaysia, attracting new investments into the upstream segment will be very challenging due to the current volatility in crude prices. If this prolonged low oil price scenario occurs, the industry will need to see a lot more consolidation of assets going forward,” he explained.

On the other hand, Hardcastle lauded the efforts made by Petroliam Nasional Bhd in its bid to lower operating expenses. The oil giant plans to reduce tens of billions in capital expenditure over the next several years to account for lower commodity prices.

Over the long term, Leis ruled out the likelihood of prices returning to US$100 per barrel as seen during the industry’s boom phase several years ago.

“Even in the best-case scenario, we do not foresee oil breaching above US$85 per barrel over the next five years. Oil prices returning to US$100 per barrel will only likely be triggered by some large-scale geopolitical strife, which is not something that the industry wants,” he said.

Tourism, Infrastructure to Support Thai Economy

The Star/Business News/Tuesday, 9 August 2016

BANGKOK: Thailand’s record tourist arrivals and public works spending are expected to offset weak domestic demand and global economic drag, keeping South-East Asia’s second-largest economy on course for 3.1% growth this year, the central bank governor told Reuters in an interview.

The trade-dependent economy has been hit hard by the deteriorating global economic environment and the slowdown in demand for exports, which the Bank of Thailand (BoT) expects to decline for the fourth consecutive year in 2016.

Tourism has been one of the few bright spots in the Thai economy, and government spending on big ticket infrastructure should give a jolt to the sluggish economy later in the year, BoT Governor Veerathai Santiprabhob said.

“We are on track,” Veerathai told Reuters in an interview on Friday. “We’ll have to monitor the secondary impacts of Brexit.

“Certain sectors of our economy have been hit by China’s transition. But we expect to see better government disbursement for large projects in the second half of the year.”

The central bank has predicted economic growth of 3.1% this year, with exports contracting 2.5%. The economy expanded 2.8% last year, picking up from 0.8% growth in 2014 when political turmoil brought the country to the verge of recession.

In the first quarter, the Thai economy grew 0.9% on the previous quarter and 3.2% on the year.

The military government has talked up plans for big infrastructure projects since seizing power in a May 2014 coup, but has spent little. That should change now big projects have gone to auction, Veerathai said, adding spending would increase again in 2017.

Veerathai said while the central bank can ease policy if conditions worsen considerably, there was no immediate need to cut interest rates to stimulate growth as liquidity remains ample.

“There are limits on what monetary policy can do to help stimulate economic growth further,” he said.

“It’s more of the supply-side policies that we need to tackle...and I think the government fully realises this. The fiscal engine is moving forward.”

The central bank has left the benchmark one-day repurchase rate at 1.5%, where it has been since April 2015, just a quarter-point above the record low reached during the global financial crisis.

It next reviews policy on Sept 14, and expectations for a cut are rising due to slow economic growth and upward pressure on the baht. — Reuters

Money Managers

Money Managers Pour in US$13bil Into Thai Stocks

The Star/Friday 26 August 2016

Despite political shocks, the economy has been able to bounce back

Growing economy: A file picture showing a Bangkok Mass Transit System Skytrain travelling along the city skyline in Bangkok. Overseas investors have bought US$10.3bil of the nation's debt, heading for the largest annual inflows since 2013.

KUALA LUMPUR: Even in a region where investors are accustomed to political risks, Thailand stands out.

Having weathered a dozen coups in the past century and a decade of Muslim insur­gency, South-East Asia’s second-biggest econo­my now faces a tentative transition to democ­racy which may reshape its political land­scape.

Money managers have set such uncertain­ties aside to pour US$13bil into baht-denomi­nated stocks and bonds this year, the most across emerging Asian markets outside of South Korea.

"The Thai economy has thus far proven to be resilient and able to bounce back from political shocks,” said Edward Ng, a Singapore-based fixed-income portfolio manager at Nikko Asset Management, which was over­seeing more than $170 billion as of end- March.

‘Therefore, depending on the severity of each political event in Thailand, benchmark investors will still need to have certain expo­sure to Thailand given that Thailand is part of many bond and stock indices.”

Global bond funds have boosted their investments in emerging-market debt to the highest levels in four years, as sub-zero yields in Japan and Europe bolster the allure of pos­itive yields. The JP Morgan EMBI Global Core index has gained 15% year to date, the best performance for the period since 2009.

Low inflation, a strengthening currency and an easy monetary policy have burnished the appeal of Thai debt, with yields on bench­mark 10-year notes dropping 42 basis points this year and touching an unprecedented 1.53% in April.

At a time when the rule of law has come under scrutiny in neighbouring Malaysia and the Philippines, a military-backed constitu­tion aimed at paving the way for Thai elec­tions in 2017 is drawing criticism from New York-based Human Rights Watch that the charter will further entrench the rule of the junta that seized power more than two years ago.

Overseas investors have bought US$10.3bil of the nation’s debt, heading for the largest annual inflows since 2013. The baht strength­ened about 4% in 2016 and reached a one- year high of 34.500 per dollar last week.

The baht has gained since Thai voters voted in favour of the military-backed constitution on Aug 7.

While the result makes it more likely the junta will stick to its current timeline of hold­ing elections by late 2017, it has also raised concern about longer-term political stability and the lingering role of the current leader­ship and its influence over the appointment of the senate and prime minister.

“The constitution will make the military more powerful and allow it to remain to a very large degree in the driver’s seat,” said Michael Montesano, co-coordinator of the Thailand Studies Programme at the ISEAS Yusof Ishak Institute in Singapore.

“They certainly want a more restricted democracy. The effort to institutionalize this kind of order through the new constitution will not work.”

AllianceBemstein Holding LP has a posi­tive near-term view of Thai debt, citing the prospect of further easing by the Thai central bank and the nation’s sizable current-account surplus.

“Following years of political unrest, politi­cal risks are well recognised by the market,” said Vincent Tsui, a Hong Kong-based econo­mist at AllianceBemstein, which oversaw US$490bil as of June.

"In fact the political development has been generally stable after the coup and that shall not be the primary consideration for foreign investors gaining Thai exposure.

Putting politics aside, Thailand’s funda­mentals have improved noticeably over the past quarters.”

Democracy has had a checkered history in Thailand, which has seen 12 coups since 1932 and bouts of political violence.

The country has been under military rule since a 2014 coup which had ended more than six months of turmoil that led to the ouster of Prime Minister Yingluck Shinawatra. Insurgents in Thailand’s three Muslim- majority provinces are seeking independence and have staged regular explosions.

No one has claimed responsibility for two blasts late Tuesday in the southern province of Pattani, which killed one and injured 30.

“Investment opportunities will improve only after democracy returns in 2017,” said Paul Chambers-, director of research at the Institute of South East Asian Affairs in Chiang Mai. – Bloomberg

Indonesia mulls Iran’s proposal to build US$8.4 bil oil refinery

The Star/Wednesday, 10 August 2016

JAKARTA: Indonesia will study a proposal from Iran to build an oil refinery, along with bids from other countries, as it seeks to boost refining capacity to catch up with rising consumption.

Iran proposed a plant with processing capacity of more than 100,000 barrels a day and pledged to provide the crude, IGN Wiratmaja Puja, director-general of oil and gas at the Energy and Mineral Resources Ministry, said in Jakarta yesterday.

The project’s value is estimated at US$8.4bil and would be built over four or five years in Java, Iran’s state run news agency Mehr reported, citing Hassan Khosrojerdi, head of the joint Iran-Indonesia refinery’s board of directors.

Indonesia, already the only Organisation of the Petroleum Exporting Countries (Opec) member that’s a net oil buyer, may need to import half of its annual fuel needs even after increasing its refining capacity by 500,000 barrels a day in the next seven years, according to BMI Research. Iran is seeking to boost crude exports after international sanctions on its economy were eased in January.

A feasibility study on the refinery’s economic justification is being conducted, a spokesman for Iran’s oil ministry said. The National Iranian Oil Co has not signed any deals on the project, he said. Indonesia has made no decision on Iran’s proposal because it's still preliminary, Puja said.

Indonesia has also received proposals from China, Kuwait and Russia, Puja said. The ministry hasn’t come to any decisions on the bids. The government plans to offer the Bontang refinery in east Kalimantan to investors before other projects, he said.
Indonesia’s refining capacity may grow 2% by 2025 while consumption surges 31% in the same period, according to BMI. The country, which reactivated its membership in the Opec this year, produced 740,000 barrels a day of crude in July, according to data compiled by Bloomberg. – Bloomberg