GDP Growth Alert: Singapore, Taiwan and Thailand

At the time of writing, five countries – China, Korea, Indonesia, Singapore and Taiwan – had reported first-quarter GDP numbers. Activity either slowed or remained anaemic in all of them. In fact, the data reminded us yet again that the recovery process is likely to be slow and halting and, more importantly, contingent upon an improvement in the global environment.
We analyse the economies of Singapore, Taiwan and Thailand in this article. 
Singapore: Worse than expected
Not much has changed in the past month. Weak external demand coupled with on-going tightness in the labour market (resulting in supply-side constraints) led to a contraction in real GDP growth in Q1 2013 of -0.6% year-on-year (-1.4% quarter-on-quarter, seasonally adjusted) versus 1.5% year-on-year (3.3% quarter-on-quarter, seasonally adjusted) in Q4 2012.
Biomedical manufacturing and transport engineering clusters were responsible for the contraction, while construction and financial and business services output gave some support to limit the contraction.
The externally driven slowdown is consistent with weakness in the non-oil domestic exports in Q1 2013, which showed -11.7% year-on-year growth compared to -3.7% in Q4 2012. Credit growth has also slowed markedly from a high of 31% year-on-year in late 2011 to just 19.2% in the last quarter.
GDP 2013 forecast. We recently cut our overall growth forecast for 2013 to 2.4% from 2.7% earlier in light of the worse-than-expected output in the first quarter. Our revised forecast is, however, still within the official target range of 1-3%.
Going forward, we think that as global demand improves, growth will become stronger in H2 2013, although still sub-potential, while domestic cost pressures will ease further.
Inflation. As we have said in the past, domestic cost pressures are easing mainly because of an upcoming increase in the supply of apartments and curbs on private car loans, on top of high-base effects. In response, the Monetary Authority of Singapore has lowered its official inflation target for 2013 to 3-4% (previously 3.5- 4.5%), converging with our forecast of 3.8%. In Q1 2013, inflation averaged 4% versus the 2012 average of 4.7%.
However, we think core inflation (the MAS measure excludes the costs of accommodation and private road transport) will remain relatively elevated on the back of labour market tightness, which we expect to persist. This may result in higher factor prices and thus increase the pass- through for core consumer prices.
Ironically, the MAS cut its core inflation forecast to 1.5-2.5% for 2013, down from 2-3% earlier. We believe that inflation will settle near the high end of that range or even breach the target range given that we do not expect the strict immigration policies to be reversed anytime soon this year.
Policy and FX outlook. The MAS maintained its modest and gradual appreciation of the SGD nominal effective exchange rate (NEER) in its first biannual meeting for 2013 in April, with no change in the slope and width of the policy band or the level on which it is centred.
Persistent tightness in the labour market will keep the MAS’s hands tied. It will maintain its current stance of modest and gradual appreciation for the rest of the year, despite growth clearly slowing.
Consequently, we maintain our USD/SGD forecast of 1.22 by H1 2013 and 1.20 by the end of this year. A possible outcome is that a strong exchange rate policy will keep interest rates depressed, pushing the government to consider another round of macro-prudential measures in the property market.
Taiwan: Slowed by the mainland
Taiwan’s economy slowed in the first quarter of 2013, reflecting weaker growth in mainland China. According to advance estimates, the economy contracted by 0.8% quarter-on-quarter, seasonally adjusted, after growing 1% and 1.8% in the previous two quarters.
Taiwan expanded by 1.9% year-on-year in Q1 2013, down from 3.4% in the last quarter of 2012. The growth contribution of domestic demand continued to rise, with investment performing particularly well.
Export growth. Net exports subtracted from growth because a slowdown in exports was not matched by weaker imports. The negative growth contribution of net exports may be partly owing to strong domestic demand, but partly may also be due to an inventory build-up of imported inputs. Indeed, inventory levels are approaching record highs and net exports should add to growth as input inventories are drawn down.
The Taiwanese economy mirrors the slowdown in mainland China. Regressing Taiwanese growth on US and Chinese growth yields highly significant coefficients, while European growth has no statistically significant impact.
A one percentage point boost to growth in China and the US raises Taiwanese growth by 0.8 of a percentage point and 1.4 percentage points, respectively. With US growth being relatively stable over recent years, much of Taiwan’s growth performance owes to the mainland.
GDP forecasts and inflation. With our China economist projecting growth of 7.8% this year and our US economist projecting growth of 2%, Taiwan should log growth of 2.5% this year. On the same basis Taiwan should grow 4.2% in 2014.
Inflation ran at 1% in April and 0.4%, if we exclude volatile food and oil prices. Even if month-on-month inflation returned to its historical average, year-end inflation would only return to 0.9% year-on-year in 2013 and 2% in 2014.
Policy outlook. The central bank left the policy rate unchanged at 1.875% at its Q1 2013 meeting, as widely expected by a Bloomberg poll of forecasters. We expect the first 12.5-basis-point interest hike in Q1 2014, when the rebound is well-established. The tightening cycle should proceed with 12.5-basis-point hikes each quarter through 2014.
FX outlook: We had previously maintained that the sell-off in the TWD in response to Abenomics had been overdone. Subsequently, the TWD appreciated by 2%, but lost 1.6% over the second week of May as the yen weakened further.
At current exchange rates, Taiwan’s relative unit labour costs (ULC) are still 4% below their historical average. At their peak in 2001, Taiwan’s relative ULC were 19% above their historical average.
In sum, the appreciation of the TWD against the JPY has been striking. But, according to this measure of competitiveness, the TWD remains undervalued relative to the JPY.
We use the above ULC-based measure of competitiveness to calculate a JPY pain level. This we define as the JPY level that would return Taiwanese relative ULC to their 2001 peak (assuming that the TWD remains at the current level of 29.8). This JPY pain level turns out to be 127.
In sum, while the pace of TWD appreciation has been striking, the level is not out of the ordinary. Much of the yen depreciation must, therefore, be read as an adjustment of past distortions.
Thailand: Waiting on the baht
More signs of the Thai economy slowing down are apparent based on the most recent high-frequency indicators for 1Q 2013.
The private consumption index contracted by 1.1% month-on-month as imports of consumer goods fell while the private investment index also declined by 0.7% month-on-month as investment in machinery and equipment decelerated. Imports of consumer goods declined and overall merchandise imports contracted slightly at 0.4% month-on-month or -12.5% year-on-year.
Supply-side. However, the supply-side of the economy is improving, with a 4.9% gain in the exports value, mainly in electronics and automobiles, while the tourism sector held up pretty well. Nevertheless, there are still some risks related to the exports market, emanating from the strong exchange rate recently.
In fact, a local survey has shown that should the local currency continue to appreciate to levels below 28, then approximately 10% of businesses would be unprofitable and may have to shut down operations1.
All in all, we believe that if the upcoming Q1 2013 real GDP growth figure (due to be released on 20 May) comes in lower than expected (our forecast is 8.4% year-on-year on the back of a low-base effect), then the likelihood of capital controls will be higher, given that domestic demand is already slowing.
Inflation. Inflation moderated further to 2.4% year-on-year in April from 2.7% year-on-year in March, thanks to a decline in the growth pace of April energy prices to 3.1% year-on-year, i.e., approximately half of that in March. This also managed to push transportation prices into a slight deflation from a 1.4% gain in March 2013.
Overall, although food prices were higher again in April, the deceleration in non-food items and falling core CPI managed to sustain the trend in headline inflation. Inflation, for now, would be less of an economic concern, but much depends on how energy prices evolve and how food prices behave ahead, especially around the mid-year harvesting season with less rain expected compared to last year.
Policy outlook. On 30 April, the Bank of Thailand approved a framework for exchange rate management in light of recent movements in the exchange rate, although details of the framework remain scanty.
Options include a mandatory hedging of foreign capital inflows and a foreign capital reserve similar to the 30% unremunerated reserve requirement introduced in 2006 by the then Finance Minister Devakula. Less harsh measures include minimum holding periods of three to six months for foreigners buying local currency bonds and/or imposing a fee on foreigners buying local debt based on the gains they receive.
We think that tough measures, such as the re-introduction of the unremunerated reserve requirement (URR), are not viable at the moment, given their adverse economic impact in the past. However, we believe that macro-prudential measures, such as the minimum holding period or even increasing the current 15% interest income and capital gains tax on foreign investors’ holdings of Thai bonds, seem more viable.
A much bigger concern for now is that interest rate cuts are being pushed by the government as one of the important tools to deter capital inflows that underpin the baht’s strength. Should the Q1 2013 real GDP growth figure (scheduled to be release on 20 May) come in weaker than forecast by the central bank, then we may see rate cuts.
FX outlook: Although a recent reprieve in the THB gave comfort to local policymakers, we cannot rule out the possibility of capital controls to ensure that exports recovery get adequate support when global demand picks up.
Good fundamentals and improving trade and current account balances recently are indeed factors to support continued THB appreciation, but a fall in export revenue would put a dampener on excessive gains in the THB.
At the 30 April non-MPC meeting, the BOT expressed concerns over THB volatility and rapid appreciation of the local currency that is not justified by economic fundamentals. One particular push factor would be growing concerns among exporters that if the THB were to further appreciate considerably, then SMEs that rely heavily on domestic factors of production will be pushed to the wall and could end up closing down.
This could now be more of a political consideration, but we remain of the view that cutting interest rates to stem gains in the THB is uncalled for. We think that introducing a minimum holding period, as in Indonesia, would be more warranted.
As we await the form of macro-prudential measures to be announced, we remain on the side line now for the THB. We, however, keep our end-2013 USD-THB forecast at 28.50 on the back of good fundamentals, notably investment prospects.
About the Author
This article is excerpted from “Asia Navigator,” a report by Royal Bank of Scotland and affiliated companies that was published in May 2013. It has been re-edited for conciseness and clarity.  

Photo credit: Shutterstock 


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