Key Developments in Asian Local Currency Markets
Issue: 26 August 2019
In its meeting on 21-22 August, Bank Indonesia's Board of Governors decided to reduce the 7-day reverse repurchase rate by 25 basis points (bps) to 5.50%. This marked the second consecutive month the central bank loosened monetary policy, resulting in a cumulative rate cut of 50 bps this year. Bank Indonesia raised rates six times in 2018 by a cumulative 175 bps to stabilize the Indonesian rupiah. The decision to lower the policy rate for a second straight month was deemed appropriate given the low-inflation environment and the need to spur economic growth.
Thailand's gross domestic product growth slowed to 2.3% year-on-year (y-o-y) in the second quarter of 2019 from 2.8% y-o-y in the previous quarter, amid a continuing slowdown in domestic and external demand. The agriculture sector contracted 1.1% y-o-y, while the nonagricultural sector expanded 2.6% y-o-y in the second quarter of 2019. The growth in the latter was driven primarily by the services sector, which expanded 3.5% y-o-y. In contrast, manufacturing production contracted 0.2% y-o-y, due to a decline in export-oriented sectors such as computers, rubber, and plastic products.
In July, inflation remained unchanged at 3.3% y-o-y in Hong Kong, China, while it eased to 0.5% y-o-y in Japan and 0.4% y-o-y in Singapore. In Hong Kong, China, the faster increase in food prices, which was due to disruptions in the supply of pork, was offset by a slower rise in the cost of tour packages. Meanwhile, the lower inflation in Singapore stemmed from lower costs of services, retail and other goods, and electricity and gas. In Japan, weaker inflation was driven by a slower increase in food prices.
The Republic of Korea's Producer Price Index declined 0.3% y-o-y in July, a reversal from the 0.1% y-o-y growth posted in June. The contraction was driven by a continued decline in the agriculture, forestry, and marine products, and manufacturing subindices. On a month-on-month basis, the Republic of Korea's Producer Price Index was unchanged.
The Philippines posted a balance-of-payments surplus of USD248 million in July, a reversal from the USD455 million deficit posted in the same month in 2018. For the first 7 months of the year, the Philippines posted a cumulative surplus of USD5.0 billion, driven by overseas Filipino remittances and net inflows from foreign direct investment.
The Government of the Philippines posted a budget deficit of PHP75.3 billion in July, down from the PHP86.4 billion deficit posted in the same month in 2018, as revenues rose at a faster pace than expenditures.
Malaysia's international reserves stood at USD103.1 billion in the middle of August, which was equivalent to 7.6 months' worth of retained imports. The Philippines' July gross international reserves amounted to USD85.2 billion at the end of July, sufficient to cover 7.4 months' worth of imports and payments of services and primary income.
Last week, local currency bond yield movements were mixed in most markets in emerging East Asia. In the Republic of Korea, Malaysia, the Philippines, and Singapore, yields dropped for shorter-dated tenors but rose for longer-dated tenors. Yields increased for most tenors in the People's Republic of China, but declined for most tenors in Hong Kong, China and Indonesia. Yields rose for all tenors in Thailand, but fell for all tenors in Viet Nam. The spread between the 2- and 10-year tenors widened for all markets except Indonesia.