quarterly global outlook3. the us economy remains on its steady recovery path, promising ... their...

CHINA FOCUSGrowth And Policy Targets Set For 20162016年增长和政策目标设立

SINGAPORE FOCUSApril Policy Stance To Remain Intact,Despite Still-Weak Economic Conditions?

ASEAN FOCUSAEC: The China-ASEAN Connection

GMS FOCUSBorder Trade In The Greater Mekong Sub-Region (GMS): Challenges And Opportunities

OIL FOCUSThe Color Of Oil In 2016: Back To Black?

FX STRATEGYA Bumpy Road For Dollar?

QUARTERLY GLOBAL OUTLOOK2Q 2016

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EXECUTIVE SUMMARYMonetary Policy Is Not Dead,But With Paradoxical Effect

FX & INTEREST RATE OUTLOOK

ASEAN FOCUS AEC: The China-ASEAN Connection

CHINA FOCUS Growth And Policy Targets Set For 2016

中国焦点 2016年增长和政策目标设立

GMS FOCUS Border Trade In The Greater Mekong Sub-Region (GMS): Challenges And Opportunities

OIL FOCUS The Color Of Oil In 2016: Back To Black?

SINGAPORE FOCUSApril Policy Stance To Remain Intact,Despite Still-Weak Economic Conditions?

FX STRATEGYA Bumpy Road For Dollar?

INDONESIA

MALAYSIA

SINGAPORE

THAILAND

INDIA

CHINA

HONG KONG

JAPAN

SOUTH KOREA

TAIWAN

EUROZONE

AUSTRALIA

NEW ZEALAND

UNITED KINGDOM

UNITED STATES OF AMERICA

FX TECHNICALS

CONTENT

Information as of 22 March 2016

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04Quarterly Global Outlook 2Q2016

UOB Global Economics & Markets Research

Executive SummaryMonetary Policy Is Not Dead, But With Paradoxical Effect

Global growth has been disappointing and expectations are for the IMF to further downgrade its 2016’s GDP growth forecast lower from the 3.4% it projected earlier in January. Whether the IMF trims world growth lower by 0.1 or 0.2 or even 0.5ppt in their next World Economic Outlook in April 2016, the pessimistic trend is clear with the emerging markets and developing economies likely bearing the brunt of the downgrade (as they are expected to record slower growth for the sixth consecutive year in 2016) while the developed economies continue to support growth in a moderate but uneven fashion.

Even as we anticipate an imminent growth downgrade, market confidence seemed to have returned even before the end of the first quarter. The terrifying fears that plagued us at the start of 2016 – a China “hard landing”, a stuttering US economic recovery, a sustained collapse in commodity (especially crude oil) prices, currency shocks from increasing divergent monetary policy trends, financial markets going into a volatile tailspin, and whispers of a financial crisis – while not fully dissipated, seemed to have found some relief and stability since the Lunar New Year holidays in mid-February.

Our world view has remained largely intact:

1. We expect China to grow at its “new normal” slower pace as its economic growth sources continue to transit from investment and manufacturing toward consumption and services, with no spectacular collapse/”hard landing” in the foreseeable future;

2. Management of the Chinese financial markets remains a challenge and policy missteps cannot be ruled out but should not be fatal;

3. The US economy remains on its steady recovery path, promising enough for the Fed Reserve to tighten rates further in 2016 but not strong enough for anything more than two 25-bps hikes;

4. We expect US and global (Brent) crude oil prices to average US$30-35 a barrel in 2016 but the bias to the price direction remains on the downside to US$20-30 especially when any lingering hope of coordinated production caps among major oil producers evaporate by 2 June 2016 [i.e. the 169 (Ordinary) OPEC Meeting]; and

5. Geopolitical risk events continue to cast a shadow on the global economy and financial markets, including Brexit (UK referendum on EU membership on 23 June), elections in Asia (Korean parliamentary elections on 13 April, Philippines on 9 May), the increasingly divisive US Presidential election (8 November), economic woes in Latin American countries potentially transiting to political instability, and the on-going Syrian conflict with the accompanying migrant crisis overwhelming Europe.

Playing a central role of reviving the global economy is the central banks of the world. With the exception of several Latin American central banks hiking rates to defend their currencies and stem capital outflows, and the US Fed Reserve (with policy rate at 0.25-0.5% remains very accommodative in our view), central banks almost everywhere have been easing monetary policy conditions to support growth of their domestic economies with the ECB and the BOJ embarking on and intensifying the use of highly unconventional monetary policy of negative interest rates.

While these policy steps have pushed rates lower (with the 10-year Japanese government bond yields now in negative territory for the first time), it has also put banks’ profitability under threat, depositors at a disadvantage, and yet may not be all that helpful to reinvigorate economic activity. Indeed, the key question is about the efficacy of monetary policy in dealing with economic growth problem. Interest-rate monetary policy is likely to be the right tool to fight inflation but even at

its most extreme unconventional form, is not likely the right tool to support/boost economic growth. And yet with fiscal policy sorely missing in action (and unlikely to return anytime soon in most of the major economies except China), the task of saving the world economy remains squarely on the shoulders of central banks which despite their best unconventional efforts may reap little success but at the cost of potentially disastrous long-term consequences.

The recent G20 Finance Ministers and Central Bankers meeting in Shanghai on 26-27 February brought out this very issue that monetary policy could continue to support economic activity and ensure price stability, but this alone cannot lead to balanced growth. Fiscal policy and economic restructuring/reform should play their part.

The manifestation of this paradox of the current stimulative monetary policy environment is the unexpected reversal of the US dollar strength. Whether the current dollar weakness is temporary (and if so, for how long) remains debatable. That is, contrary to conventional thinking, increased monetary policy stimulus and with interest rates turning more negative, has resulted in stronger currencies, at least for now.

We think this paradoxical monetary policy phenomenon could remain at least through to 2Q16-3Q16. As such, we have a made a number of adjustments to our FX forecasts to take into consideration the impact of the recent weak USD and unconventional policy elsewhere. Some notable changes to our projections include USD/SGD for end-2016, which is lowered to 1.36 (from previous forecast of 1.42), USD/JPY to 112 (previously: 122), and end-2016 NZD/USD adjusted higher to 0.70 from 0.67 earlier. Our USD/CNY forecasts have been tweaked to reflect the broad two-way moves as seen in 1Q16, though end-2016 projection remains at 6.45.

Even as we scale back our positive view for the USD, sharp and sudden snapbacks of the US dollar could still occur in this uncertain and volatile market environment that is increasingly sensitive to news flows and event risks, a few of which were mentioned earlier in this article. As such, the need to hedge for unexpected FX moves remains paramount in minimizing risks and exposures.



ASEAN IN FOCUS IIIASEAN Economic Community: The China-ASEAN Connection The AEC will be crucial in facilitating the freer movement of goods and services for its 10-member countries, and thus enlarging the trading sphere of ASEAN (and generate more intra-regional trade). However, there had been concerns that the AEC could potentially cannibalize trade/investment flows to another nearby, competing economy such as China. Such worries are unwarranted. In fact, we think that since the stages of economic development and factor endowments are different between China and the 10 ASEAN countries, there are more reasons for the economies to increase trade/investment between one another.

Even before the AEC was mooted, China has been playing an active role in building trade and investment relations with ASEAN in the past decade, extending the historic relationship that dates back to thousands of years. Indeed, China today is the largest trading partner for 7 out of 10 ASEAN members; while ASEAN as a region is China’s 3rd largest trading partner. Since China’s ascension into the WTO in 2001, ASEAN’s total trade with China had increased 10-fold and this had benefitted millions of people in both regions due to jobs creation, higher incomes and better living standards. Going forward, China’s link with ASEAN and other regional countries is not a want, but a need. As China faces its domestic “growing pains” of rising labour costs, land costs, and slowing economic growth, it is increasingly seeking new production and market bases overseas. ASEAN is a natural destination given the geographic and historic ties. We forecast that China’s trade with ASEAN will increase by almost three times from US$492 billion in 2015 to US$1.85 trillion in 2030.

CHINA FOCUSGrowth And Policy TargetsSet For 2016 At the opening of the annual National People’s Congress (NPC) session on Sat, 5 Mar, Chinese Premier Li Keqiang laid out the work report for 2015 and targets for 2016, as well as for the 13th five-year plan (2016 to 2020). As has been flagged months earlier, growth projection for 2016 is set at 6.5-7.0%, from the “about 7%” set for last year (which came in at 6.9% for full year 2015), while aiming GDP growth rate of at least 6.5% through the

2016-2020 period. This is the first time in two decades that a target range, rather than a point forecast, has been used. This suggests that: 1) the government wants to deemphasize the obsession with economic growth alone and focus on other more crucial policy indicators, such as economic reform, efficiency, productivity, value-add, and performance of the labour market, and 2) uncertainty of economic forecasts given a backdrop of weak global environment and demand – which is outside the control of China – and domestically, the challenges of balancing economic growth and the ongoing market/industries reform. We think the growth range is reasonable and the risks of a “hard landing” remain low, especially with more than sufficient room from fiscal and monetary policy measures, if needed. We maintain our growth forecast for China at 6.8% for 2016, and expect the pace to slow gradually through the 2016-2020 planning period, as the size of the economy increases.

GMS IN FOCUS Border Trade In The Greater Mekong Sub-Region (GMS): Challenges And Opportunities The level of cooperation within the Greater Mekong Sub-region (GMS) is considered as quite progressive, especially after taking into account the low level of economic development in most of the member countries as well as the remaining deep differences between them. In addition, trade between countries in the GMS has seen an increasing trend over the past decade, mainly owing to the rapid growth in the member economies, the opening up of the Cambodia-Laos-Myanmar-Vietnam (CLMV) countries to trade, and the rise of trade and development cooperation among the GMS members. Thailand has greatly benefited from sharing borders with the neighbouring countries. The proximity to the CLM countries has enabled Thailand to export with lower costs and greater ease. Nevertheless, the main limitation on border trade is the lack of an integrated transportation system and network within the region. If the transportation routes become more connected in the future, trade opportunities will grow, especially those involving cross-border trade to China. Moreover, associated soft infrastructure to support trade facilitation should be in place. We believe that integration into the AEC will be a major game changer reducing trade obstacles and encouraging cooperation

between Thailand and its neighbours. All of these will help make transportation of goods within the region faster and more convenience, which means more business opportunities contributing to the overall welfare of the local people and the GMS expansion.

SINGAPORE MONETARY POLICY IN FOCUSApril Policy Stance To Remain Intact, Despite Still-WeakEconomic Conditions With a series of disappointing economic data released since the start of 2016 in Singapore, market is increasingly hoping for the Monetary Authority of Singapore (MAS) to provide another round of easing stimulus in their upcoming April policy meeting. Such an expectation is of no surprise, since the central bank had eased the appreciation slope of the SGD NEER twice in 2015, when poor economic data releases haunted policymakers and investors alike. However, we think that it is unwarranted. Another round of monetary easing will probably mean that the SGD NEER will be at a neutral appreciation stance and the chance for such a move remains small, as such a move is only used previously during economic recessions. Moreover, the core inflation expectations of the central bank remains at 0.5% to 1.5% and is aligned to our current expectations of the SGD NEER appreciation slope of 0.5% pa.

That said, the recent selloff in the USD/SGD (from the high of 1.44 in Jan 2016 to 1.36 post-March FOMC) due to the dovish tone of the March Fed meeting may see the USD/SGD trading in that same downward trend to reach 1.34 by the end of 2Q 2016. On the whole, we think that the U.S. rate hike thesis will still support our view for the USD/SGD to trade higher at 1.36 by end 2016.

OIL IN FOCUSThe Color Of Oil In 2016: Back To Black? The commodity slump, which started in 2014 and led by the capitulation of crude oil prices, gained traction in late 2015 and has dominated risk sentiment in financial markets (commodity, FX and equity) so far this year, more so than other factors such as major central bank policy actions. Since mid-February, there was a significant rebound in oil prices with US WTI crude futures closing above US$40 for the first

Executive Summary



Executive Summary

time in 2016 at US$40.20 on 17 Mar 2016 (a >53% increase from the recent low of US$26.21 close on 11 Feb 2016!) while London Brent closed at US$41.54 on 17 Mar 2016 (a marked 49% jump from its 2016 low of US$27.88 on 20 Jan). The surge in oil in turn has supported risk appetite, driving the recovery in Asian and commodity-related currencies and stocks markets globally. While the prior correction in crude oil prices may have been overdone, it remains to be seen whether the recent recovery is justified or transient due to the illusion of hopes for a coordinated production freeze among major oil producers.

We think that oil price may have found a bottom but the recent surge is probably not justified. Based on the EIA estimates, the supply-demand mismatch is projected to continue to narrow into 2016 but remains materially wide at 1.59 mn bbl/day, compared to 2.04 mn bbl/day in 2015. We expect US and global (Brent) crude oil prices to average in the range of US$30-35/bbl in 2016 but the bias to the price direction remains on the downside to US$20-30/bbl especially when hope of coordinated production caps among major oil producers is squashed in the 17 April Doha meeting and any lingering hope may evaporate by 2 June 2016 [169th (Ordinary) OPEC Meeting].

FX STRATEGYA Bumpy Road For Dollar?Since the start of the year, the US dollar has underperformed versus most of the G10/Asian currencies owning to a cautious Fed which has succumbed to market volatilities, resulting in the halving of expected Fed rate hikes to two from four in 2016. Curiously, the USD has lost ground as a result of paradox of the efficacy of the unconventional monetary policy elsewhere. Momentum wise, the US dollar looks vulnerable to further downside in the next one to two weeks but key big-figure supports for dollar (4.00 for USD/MYR and 13,000 for USD/IDR) are likely to hold further declines, especially when regional fundamentals have not caught up with their respective currencies to justify a sustainable overshoot. We still expect Fed to deliver a 25bps rate hike in the 16 June FOMC and that should keep the U.S dollar sufficiently supported, and we caution of the possibility of US snapbacks from time to time. In conclusion, looking ahead for 2Q16, we expect regional currencies (SGD, MYR, IDR and THB) to trade range bound to the US dollar.

GLOBAL FXEUR/USD: At this juncture, we are positive that the latest measures unveiled by the ECB will work better than before, and thus, growth and inflation should pick up eventually. This should feed into support for the EUR. We also maintain our view that the gradual path of monetary tightening by the Fed is likely to see any appreciation of the USD limited.

GBP/USD: The looming Brexit risk should have bearish implications for sentiment, and thus on the currency. GBP also remains at risk of further downside on the back of a delayed monetary policy tightening by the BoE.

AUD/USD: We expect that AUD/USD will trade higher, notwithstanding some volatility. Weakness in commodity prices and fragile market sentiment could present some downside risks. But overall, a relatively resilient domestic economy and our view for a steady cash rate for all of 2016 should limit further falls in the AUD.

NZD/USD: The RBNZ is serious when it comes to achieving lower interest rates and a weaker currency. We look for a softer NZD amid risks of further “jawboning” by the RBNZ, alongside deviating paths for monetary policy, especially if the RBNZ brings the OCR lower.

USD/JPY: Even as more BOJ easing is likely in 2016, recent market volatility & safe haven demand for yen has recalibrated the USD/JPY to lower level while the ineffectiveness of BOJ stimulus could send the pair to towards & re-test the 110-mark in 2Q-2016 but that will be the intervention threshold and we expect a gentle uptrend thereafter.

ASIAN FXUSD/CNY: We had cautioned back in January, when selling pressures were at its peak, that such pessimism on the RMB (and China economic outlook in general) was excessive. We are keeping our forecasts towards 6.45 by end-2016, with minor tweaks for 2Q16 and 3Q16 to reflect the two-way flexibility seen in 1Q16. The recent stability of the onshore and offshore prices suggests that speculative activities are now kept at bay. However, depreciation pressure on the currency remains as there is still likelihood of a USD rebound against EM currencies. More important though is that with the RMB referencing a basket of currencies, the USD/RMB exchange rate is likely to see greater volatility and more

flexibility going forward, even if the basket as a whole stays relatively stable.

USD/SGD: The recent selloff in the USD/SGD (from 1.44 in Jan 2016 to 1.36 post-March FOMC) due to the dovish tone of the March Fed meeting may see the USD/SGD trading in that same downward trend to reach 1.34 by the end of 2Q16. On the whole, we think that the US rate hike thesis will still support our view for the USD/SGD to trade higher at 1.36 by end 2016.

USD/IDR: The IDR has outperformed with gains of more than 5% against USD ytd (as at 17 March). However, with the divergence in the interest rate trajectories in the US and Indonesia, near-term downside to USD/IDR may be limited. We expect the pair to trade sideways, ending 2Q16 at 13,000 and rising to 13,200 by end-4Q16 on expectation that the US Fed hike trajectory could pick up in 2017. The key risks to IDR are likely to stem from a more aggressive monetary easing in Indonesia, worse-than-expected current account deficit, disappointing infrastructure investment realization as well as market risk aversion from Emerging Markets.

USD/KRW: USD/KRW recorded a 5 ½ year high of 1,245.13 in late-February before paring the gains on broad USD correction. Slow growth, monetary easing bias and the intensifying tensions in the Korean peninsula since North Korea’s claim of a hydrogen bomb test in January and launch of a satellite leading to the closure of the Kaesong Industrial Complex, have all contributed to the negative sentiment towards the KRW. Given the recent correction and dimmer outlook for the US Fed policy normalisation in the near-term, we have revised down our USD/KRW forecast to 1,180 by end-2Q16 and moving higher to 1,200 by year-end.

USD/MYR: The Ringgit has strengthened over 10% from its weakest point of 4.4812 at end-September 2015, and ytd (as at 21 March) is up 5.8% to be one of the stronger performing currencies in the EM space. The slide is aided by improved sentiment amid receding domestic headwinds especially on the political front and 1MDB issues, stable fundamentals, dollar weakness, some recovery in oil prices, and stronger Renminbi. We revise our near-term USD/MYR projections to 4.05 by mid-year (vs. 4.25 previously) while keeping our year-end target of 4.10. Key event risk to watch is the appointment of BNM Governor Zeti’s successor.



Executive Summary

USD/THB: The volatility in global financial markets is likely to persist in 2016. With Thailand’s interest rates expected to remain low and the gradual normalization of the US interest rates, we maintain our view that there would be downward pressure on the THB going forward. We expect the THB to weaken against the USD towards 36.5 by end 2016 from around the 34.9 level currently.

USD/INR: The still-low oil prices is a positive for India’s economy should it continue into 2016, as it will improve the purchasing power of the typical Indian household. With household consumption at 56% of GDP, it should provide some boost to 2016 growth rates. The RBI had kept the repurchase rate unchanged at 6.75% during the last policy meeting on 2 Feb. Although the recent lower consumer prices had boosted speculation that central bank Governor Raghuram Rajan will be lowering interest rates, we hold on to our view that RBI could probably keep the current rates unchanged at least until 3Q 2016. Even without any further rate cuts in our forecasts, our expectations of a stronger USD from the US interest rates normalization will likely see the USD/INR trading at 69.0/USD by the middle of 2016, and to 71.1/USD by end 2016.

GLOBAL INTEREST RATESFederal Reserve: The US Fed kept its policy rate unchanged at 0.25-0.50% in March and remained positive on US outlook but highlighted “global economic and financial development” concerns and guided future rate trajectory expectations lower with the median policy rate forecast for end-2016 at 0.875% (from 1.375% previously), indicating just two 25-bps rate hikes this year, in line with our expectations. We maintain our projection for the US Fed policy rate trajectory to be even more spread out and gradual, to just two 25bps rate hikes in 2016 to bring the FFTR to 1% by end-2016. Although there remains significant uncertainty on 2016 outlook and the risk admittedly still looks tilted towards a shallower rate trajectory, we remain convinced that the Fed will not hike just once in 2015 and be done unless there is a significant market moving external event.

European Central Bank: What the ECB delivered in March was a massive punch, and we believe that the current policy stance will likely remain unchanged for some time. The new stimulus should be viewed positively as it is likely to support

growth over the coming months. After all, the favourable conditions under this new TLTRO2 regime is designed to help banks that are hit by the negative deposit rate cut, but at the same time, the ECB is wary of the complexities involved in a tiered system of negative rate, and which would have benefitted only mainly French and German banks given these are the ones that own most excess reserves. Hence, this not only addresses at least some of the concerns on the negative implications for the banks; but is clearly a push to support credit growth as it incentivizes banks that most affect the real economy to lend more, since the amount a bank can borrow is dependent on the bank’s outstanding loan book.

Bank of England: The vote for unchanged policy at the March meeting was unanimous for a second month in a row. With the UK economy seemingly stuttering so far this year and given the uncertain external environment, any interest rate hike has come off the table for now. Although we believe the next rate move as a hike, we see a risk that the move could be pushed back further.

Reserve Bank of Australia: The RBA left the overnight cash rate steady at 2.0% at its March board meeting, but clearly maintained its easing bias. We think that whilst there is still scope for the OCR to be lower, the RBA sees no immediate need for further easing. We continue to see the cash rate on hold at 2% over 2016.

Reserve Bank of New Zealand: The RBNZ unexpectedly cut its OCR from 2.50% to 2.25% at its March meeting. Given the RBNZ’s projections as well as the overall tone from RBNZ Governor Graeme Wheeler’s press conference, we now think that a further 25bps cut in the OCR over coming months is more likely than not. The timing will depend though on developments both domestically and abroad. That said, given the strong house-price inflation, we think that even with the possibility that the OCR will be lower, it will not go below 2.00%.

Bank of Japan: Even as it kept monetary policy unchanged in March, the Bank of Japan (BOJ) has made some unexpected decisions in recent months and there remains a high chance for easing measures to be announced in 2016. After the March MPM, the important 2016 MPM meetings will be 27/28 Apr, 28/29 Jul and 31 Oct/1 Nov in our view because these

meeting will include the updated outlook reports. And note that Ms Sayuri Shirai (31 Mar 2016) and Mr Koji Ishida (29 Jun 2016) – who coincidentally are two of the 4 dissenters in January MPM – will be exiting the MPM this year, so Kuroda may just get less opposition should he choose to ease monetary policy according to the newly minted 3-dimensions of QQE. We now expect additional stimulus from BOJ earlier rather than later, possibly in April MPM. If so, we believe that this will likely be in the form an expansion of its asset purchase programme and increasing the monetary base to an annual pace of JPY 90 trillion (from JPY80 trillion), instead of more negative rates in April as the BOJ will like more time to assess the impact of negative rates.

ASIAN INTEREST RATESPeople’s Bank of China: After announcing days earlier a subtle shift towards “prudent with slight easing bias” policy, PBoC acted swiftly with a broad-based 50bps cut in banks’ reserve requirement ratio (RRR) on 29 Feb, to 17.0% for major banks. The burden is likely to fall on RRR, as it works to fine tune the interest rate corridor. PBoC last cut interest rates on 23 Oct 2015, the sixth interest-rate cut in a year (depo rate 1.50%; lending 4.35%). There is still further room for interest rate and RRR reductions ahead, with the next reduction in RRR is likely to be in 2Q16.

Monetary Authority of Singapore: The combination of MAS maintaining their policy stance and dovish FED hikes mean that monetary policy divergence is now expected to be less acute. This reduces the upside potential for SORs via a reduction in the risk premium component. However, we maintain our expectations that the domestic growth outcome will not be sufficiently advanced to justify convergence between SG and US interest rates as a stable equilibrium in 2016.

Bank Indonesia: The monetary policy space in Indonesia depends on a very gradual interest rate hike expectation for the US Fed, subdued domestic inflation and stability in the IDR. If these conditions are met, it is conceivable that BI will be inclined to maintain an easing bias in 2Q16. After front-loading 75 bps rate cut in 1Q16, we expect a more moderate pace of easing in 2Q16 as we do not think current pace can be sustained. For now, we are penning down only another 25 bps rate cut in 2Q16.



Executive Summary

Bank of Korea: The interest rate is already at record low of 1.50% after the last cut in June 2015 and bias is towards more monetary easing given weak growth and subdued inflation which we forecast will average around 1.3% this year (2015: 0.7%). Note that the rate decision was not unanimous in February and March with one board member (out of seven) voting to cut interest rate. Changes to the make-up of the monetary board committee in April (four members have their tenor expiring) may have some bearing on the rate decision going forward. We still see risk of a 25 bps interest rate cut in 2Q16. Monetary policies in other central banks will also influence BOK’s decision in the upcoming meetings.

Bank Negara Malaysia: The central bank has kept the Overnight Policy Rate (OPR) unchanged at 3.25% since September 2014. We expect the OPR to remain unchanged for now as the 2016 Budget Recalibration measures are expected to help shore up private consumption while infrastructure projects and capital spending in manufacturing and services are expected to support investments. The risk for rates is on the downside but only if growth takes a turn for the worse. Inflation is expected to peak in 1Q16 before moderating in further quarters. Moreover any upside price pressures would be mitigated by weak demand. The central bank maintained the Statutory Reserve Requirement (SRR) at 3.50% in March following a 50bps cut in the January meeting. A new Governor will chair the next monetary policy meeting on 19 May.

Real GDP Growth Trajectory

y/y % change 2014 2015 2016F 3Q15 4Q15 1Q16F 2Q16F 3Q16F 4Q16F

China 7.3 6.9 6.8 6.9 6.8 6.8 6.9 6.8 6.6

Eurozone 0.9 1.6 1.7 0.3 0.3 1.5 1.6 1.7 1.8

Hong Kong 2.6 2.4 2.0 2.2 1.9 1.5 2.0 2.1 2.1

Indonesia 5.0 4.8 5.0 4.7 5.0 5.1 5.1 5.0 4.8

Japan 0.0 0.5 1.0 1.0 1.0 1.5 1.0 0.8 0.7

Malaysia 6.0 5.0 4.2 4.7 4.5 3.9 4.1 4.4 4.5

Philippines 6.1 5.8 5.9 6.1 6.3 6.4 6.1 5.8 5.5

India 6.9 7.3 7.4 7.7 7.3 7.5 7.5 7.6 7.8

Singapore 3.3 2.0 2.7 1.8 1.8 2.0 2.7 2.8 3.3

South Korea 3.3 2.6 2.9 2.7 3.0 2.9 3.1 2.8 2.8

Taiwan 3.9 0.7 1.1 -0.8 -0.5 -0.4 1.0 1.6 2.1

Thailand 0.8 2.8 3.2 2.9 2.8 2.9 3.2 3.2 3.3

US (q/q SAAR) 2.4 2.4 2.5 2.0 1.0 0.8 3.5 3.0 2.8Source: CEIC, UOB Global Economics & Markets Research Estimates

Bank of Thailand: The next MPC meeting will be held on 23 March and at this juncture, we still expect the BoT to maintain the current policy rate of 1.50%. We think that monetary policy stance should continue to be sufficiently accommodative to help support Thailand’s economic recovery, while maintaining long-term economic and financial stability. Further expansionary monetary policy could only marginally improve the economic outlook. As a consequence, the limited policy space should be preserved for future use as there remain downside risks to GDP growth from both external and domestic sources.

Reserve Bank of India: Although India’s most recent consumer inflation eased in February, it was only for one month and still early to tell if it will continue. Food remains the largest portion in the typical Indian consumption basket (46%) and its expected price direction is usually related to weather patterns. The RBI had kept the repurchase rate unchanged at 6.75% during the last policy meeting on 2 Feb. Lower consumer prices had boosted speculation that central bank Governor Raghuram Rajan will be lowering interest rates after the government stuck with a plan to narrow the budget deficit. We are of the view that RBI could probably keep the current rates unchanged at least until 2Q 2017, where higher expected inflation will bring about a 25bps hike to the RBI repo rates to 7.0%.



FX & Interest Rate Outlook

FX OUTLOOK As at 22 Mar End 2Q16F End 3Q16F End 4Q16F End 1Q17F

USD/JPY 111.9 110 111 112 115

EUR/USD 1.125 1.11 1.11 1.12 1.13

GBP/USD 1.438 1.39 1.43 1.46 1.47

AUD/USD 0.759 0.77 0.79 0.80 0.80

NZD/USD 0.677 0.67 0.69 0.70 0.71

USD/SGD 1.361 1.34 1.35 1.36 1.39

USD/MYR 4.038 4.05 4.08 4.10 4.10

USD/IDR 13,160 13,000 13,100 13,200 13,300

USD/THB 34.9 36.0 36.0 36.5 37.0

USD/PHP 46.3 48.0 47.0 46.0 45.0

USD/INR 66.5 69.0 70.0 71.1 72.2

USD/TWD 32.4 32.1 32.3 31.9 31.6

USD/KRW 1,159 1,180 1,190 1,200 1,230

USD/HKD 7.75 7.80 7.80 7.80 7.80

USD/CNY 6.490 6.47 6.50 6.45 6.44Source: Bloomberg, UOB Global Economics & Markets Research

INTEREST RATE TRENDS As at 22 Mar 2Q16F 3Q16F 4Q16F 1Q17F

US (Fed Funds Rate) 0.50 0.75 0.75 1.00 1.25

EUR (Refinancing Rate) 0.00 0.00 0.00 0.00 0.00

GBP (Repo Rate) 0.50 0.50 0.50 0.50 0.75

AUD (Official Cash Rate) 2.00 2.00 2.00 2.00 2.00

NZD (OCR) 2.25 2.00 2.00 2.00 2.00

JPY (OCR) 0.10 -0.10 -0.20 -0.20 -0.30

SGD (3-Mth SIBOR) 1.23 1.20 1.25 1.50 1.70

IDR (BI Rate) 6.75 6.50 6.50 6.50 6.50

MYR (Overnight Policy Rate) 3.25 3.25 3.25 3.25 3.25

THB (1-Day Repo) 1.50 1.50 1.50 1.50 1.75

PHP (Overnight Reverse Repo) 4.00 4.00 4.00 4.00 4.25

INR (Repo Rate) 6.75 6.75 6.75 6.75 6.75

TWD (Official Discount Rate) 1.63 1.38 1.38 1.38 1.38

KRW (Base Rate) 1.50 1.25 1.25 1.25 1.25

HKD (Base Rate) 0.75 1.00 1.00 1.25 1.50

CNY (1-Yr Working Capital) 4.35 3.85 3.85 3.85 3.85

Source: Bloomberg, UOB Global Economics & Markets Research



AEC: THE CHINA-ASEAN CONNECTION

US$41billion

US$492billion

US$1,847billion

2000 2015 2030

Between 2000 and 2015, total trade between China and

ASEAN had risen 10X to US$492 billion and projected

to reach US$1,847 billion by 2030

Between 2011 and 2014, Chinese visitors to ASEAN

countries had surged 79%, compared to an increase

of 25% in tourist arrivals from the rest of the world

In 2015, ASEAN’s population was

the 3rd largest in the world

CHINA INDIA ASEAN EU US1,375million

1,293million

629million

507million

321million

ASEAN is China’s 3rd largesttrading partner

EU

US

ASEAN

JAPAN

KOREA

US$644 billion

US$621 billion

US$429 billion

US$344 billion

US$280 billion

China is the largest trading partner for

7 of the 10 ASEAN members

US$2.5trillion

US$7.8trillion

2008 2014

China’s Overseas Direct Investment (ODI)

into ASEAN economies had risen over

200% to US$7.8 trillion in 2014

from US$2.5 trillion in 2008

$ $

Between 2007 and 2015, ASEAN’s GDP nearly

doubled to US$2.5 trillion in 2015 while GDP

per Capita is projected to reach US$5,347 by 2020

The economic opportunities from the economic agglomeration of ASEAN nations will be immense. The rise of China, coupled with the establishment of the AEC from 2016 onwards, is expected to provide new catalysts for growth in ASEAN.

Source: UOB Global Economics & Markets Research, Free Vector Maps

MyanmarPopulation: 51.8 millionGDP: US$65.8 billionGDP per Capita: US$1,268.7

CambodiaPopulation: 15.5 millionGDP: US$17.7 billionGDP per Capita: US$1,139.7

Malaysia (TPP)Population: 31.1 millionGDP: US$313.5 billionGDP per Capita: US$10,073.2

Singapore (TPP)Population: 5.5 millionGDP: US$294.0 billionGDP per Capita: US$53,224.5

IndonesiaPopulation: 255.5 millionGDP: US$872.6 billionGDP per Capita: US$3,415.8

ThailandPopulation: 68.8 millionGDP: US$373.5 billionGDP per Capita: US$5,426.3

Vietnam (TPP)Population: 91.6 millionGDP: US$198.8 billionGDP per Capita: US$2,170.9

Brunei (TPP)Population: 0.4 millionGDP: US$11.6 billionGDP per Capita: US$27,770.9

LaosPopulation: 7.0 millionGDP: US$12.5 billionGDP per Capita: US$1,785.2

ChinaPopulation: 1,375.0 millionGDP: US$11,384.8 billionGDP per Capita: US$8,280.1

PhilippinesPopulation: 101.4 millionGDP: US$299.3 billionGDP per Capita: US$2,951.1

US$1.4trillion

US$2.5trillion US$2,450

US$5,347

2007 2015 2007 2020

$$Tourists from China traveling to ASEAN countries

20142011

13.1million

7.3million

ASEAN GDP ASEAN POPULATION ASEAN TOURISM

ASEAN TRADE WITH CHINA ASEAN TRADING PARTNERS ASEAN INVESTMENT



ASEAN FocusAEC: The China-ASEAN Connection

In the first part of this series (published in 2015 Q4 Quarterly Report), we discussed the economic potential of ASEAN in view of the implementation of the ASEAN Economic Community (AEC) at end-2015. We also highlighted the favourable demographic and income trends that will drive ASEAN economies to become one of the top economic regions for investment with its single production base and a large consumer market for global corporates. Then in the second part (published in 2016 Q1 Quarterly Report), we pointed out that the lack of infrastructure development in ASEAN today remains the biggest challenge but it also presents immense opportunities for foreign direct investment. With better infrastructure and facilities, more manufacturing activities and services can be generated and that will lead to increased trade volumes in goods and services for ASEAN members. In this third and final part of the series, we will discuss the closer integration between ASEAN and China, which is a result of several ongoing initiatives such as the One Belt, One Road, AIIB, TPP, and the AEC.

Trade is Not a Zero-Sum GameThe AEC will be crucial in facilitating the freer movement of goods and services for its 10-member countries, and thus enlarging the trading sphere of ASEAN (and generate more intra-regional trade). However, one must not have the misconception that this implies a return to the old ages of mercantilism, where ASEAN is now deemed to be a single large cartel that aims to accumulate monetary reserves through a positive trade balance, and the concept that trade is a zero-sum game is worshiped.

In fact, there are more worries that the AEC could potentially cannibalize trade/investment flows to another nearby, competing economy such as China. We suggest for such worries to be put aside. Since the time when the benefits of free trade were posited by Adam Smith and David Ricardo, economists has mostly come to accept that trade is not a zero-sum game, but can be a win-win situation. That is, since the stages of economic development and factor endowments

are different between China and the 10 ASEAN countries, there are more reasons for the economies to increase trade/investment between one another.

Even before the AEC was mooted, China has been playing an active role in building trade and investment relations with ASEAN in the past decade, extending the historic relationship that dates back to thousands of years.

To illustrate the very close relationship and interdependence, China today is the largest trading partner for 7 out of 10 ASEAN members; while ASEAN as a region is China’s 3rd largest trading partner. Since China’s ascension into the WTO in 2001, ASEAN’s total trade with China had increased 10-fold and this had benefitted millions of people in both regions due to jobs creation, higher incomes and better living standards.

In 2013, China’s President Xi Jinping mooted the idea of the New Silk Road, or the Maritime Silk Road that starts from Fujian province and linking all the littoral countries of the region. This Maritime Silk Road concept will even further deepen China’s connection with ASEAN, with the AEC serving as a major catalyst.

From China’s perspective, reaching out to ASEAN and other regional countries is

not a want, but a need. As China faces its domestic “growing pains” of rising labour costs, land costs, and slowing economic growth, it is increasingly seeking new production and market bases overseas. ASEAN is a natural destination given the geographic and historic ties. In fact, several new initiatives such as the upgrading of the ASEAN-China FTA, the setting up of the Asian Infrastructure Investment Bank (AIIB), and the mooting of the One-Belt, One-Road (OBOR) strategy will further promote cooperation between both regions.

Nothing could be more telling about the strong economic ties between China and ASEAN than a quick look at how trade between the two had grown over the years. Exhibit 1 shows that total trade between China and ASEAN had risen 10-fold from US$41 billion in 2000 to US$492 billion in 2015 (estimated). As a share of ASEAN’s total trade with the world, China had accounted for 5.1% in 2000 and this had more than tripled to 17.2% in 2015. Based on our projections, China’s share of ASEAN’s total trade could reach 25%, or US$1.85 trillion, by 2030.

On the investment front, China’s push in recent years to investment overseas (in order to balance out investment inflows and also partly to reduce appreciation pressure on the RMB), have seen ASEAN as a main beneficiary. China’s overseas direct investment (ODI) to the world-ex Hong Kong had been growing very strongly at 37% p.a. from 2003 to 2014. During this period, Asia had been the number two region for China’s overseas investment (ex-HK), averaging 22% of

EXHIBIT 1: Rising Trade Between China And ASEAN

Source: IMF, UOB Global Economics & Markets Research Estimate

0.041

0.290

0.492

0.764

1.847

5.1%

14.4%17.2%

19.5%

25.0%

0%

5%

10%

15%

20%

25%

30%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2000 2010 2015 2020 2030

% China TradeUS$ Tril

ASEAN's Total Trade with China % of Trade with China



EXHIBIT 3: China’s ODI To ASEAN Economies

Source: CEIC, UOB Global Economics & Markets Research Estimate

1.6 1.4 1.1

3.31.5 2.0 2.8

0.6

1.41.6

1.3

0

1

2

3

4

5

6

7

8

9

2008 2009 2010 2011 2012 2013 2014

US$ billion

Brunei Philippines Myanmar Vietnam CambodiaMalaysia Thailand Laos Indonesia Singapore

EXHIBIT 4: China’s Population To Start Shrinking In 2031

Source: World Population Prospects 2014, UOB Global Economics & Markets Research Estimate

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

bn pax

China ASEAN India

Population Starts to Shrink

2031

2064

2064

ASEAN Focus

total ODI to the world. In 2014, the share of ODI to Asia (ex-HK) was 27%, at US$14.1 billion (Exhibit 2).

Of China’s US$14.1 billion ODI into Asia (ex-HK) in 2014, 55% was directed into ASEAN economies, at US$7.8 billion. In fact, over the 2003-14 period, ASEAN had accounted around 48% of ODI into Asia (ex-HK) on average, thereby highlighting the opportunities and importance of ASEAN to Chinese corporates and investors.

A breakdown of the ODI into ASEAN (Exhibit 3) shows that the largest chunks traditionally came into Singapore (at 33% on average during 2003-2014), Indonesia (15%), Thailand (11%), and Laos (9%).

Even Closer ASEAN-China Economic Ties: Not A Want, But A NeedIn the years ahead, we postulate that there will be an even greater degree of intra-ASEAN trade, as well as ASEAN-China trade. The key reason is due to the structural shift in China’s demographic trend which will result in a shift in the existing industry mix, where less efficient/productive operations will move out and situate in selected ASEAN countries.

As of 2015, it is estimated that 9% of the Chinese population (132 million pax) is above the age of 65 years old (and thus assumed not to be economically active). By 2030, it will be 14% (235 million pax). In fact, China’s population is estimated to start shrinking from 2031, while ASEAN’s population is estimated to reach a maximum of nearly 800 million pax before shrinking from 2064 (Exhibit 4).

With China’s population greying rapidly, future economic growth strategies will be concentrated in capital-intensive, high labour-productivity manufacturing as well as services industries. Lower-value added manufacturing activities will move out of China as the higher labour costs no longer justifies the production of such goods. As such, trade flows in goods/services between China and ASEAN countries will only increase further as the former outsources the labour-intensive and lower-value added activities.

Even within the manufacturing sector, firms in China will move up the value chain towards having a higher ratio of manufacturing ‘services’ in their total

EXHIBIT 2: Share Of China’s ODI (ex-HK) To The World


27.0

6.1

20.717.6

24.6

8.3

22.1

9.312.8

7.4

42.3

6.4

0

5

10

15

20

25

30

35

40

45

ASIA Africa Europe North America LatAm Oceania

% of ODI (ex HK)

2014 Average (03-14)



ASEAN Focus

output as they try to shed off labour-intensive production (where value-added per unit produced is lowest). This is where emerging ASEAN economies can potentially enter to fill the manufacturing vacuum (Exhibit 5).

ConclusionIn conclusion, the economic opportunities from the economic agglomeration of ASEAN nations will be immense. The rise of China, coupled with the establishment of the AEC from -2016 onwards, is expected to provide new catalysts for growth in ASEAN. Even with the use of fairly conservative assumptions in our economic projections (i.e. in most of forecasts in this report, we assumed just half of the compounded growth rates seen in the previous period), the future of ASEAN is indeed promising.

Domestic factors such as population growth, rural-urban migration and the rise in the middle income class in ASEAN will pave the way for AEC’s promise of an integrated production platform and an enlarged consumption base. The resultant trade, financial, and social integration will be beneficial to trade, tourism and investment in the region.

At the same time, the shift in domestic conditions in China is propelling an outward orientation mindset. Initiatives such as the AEC will be complementary to and further enhanced by other programs such as the AIIB, Maritime Silk Road, and the upgrading of the ASEAN-China FTA.

EXHIBIT 5: Emerging ASEAN Economies Can Fill The Manufacturing Vacuum

Source: Stan Shih, Former Chairman of Acer Group, 1992

Value-Added/Unit

Time

Manufacturing Smile Curve

R&D

Design

Procurement

Production

LOGISTIC

Marketing

Sales/Services

DistributionCONCEPT

Global Competition Area Competition

CHINA

ASEAN

CHINA



China FocusGrowth And Policy Targets Set For 2016

Growth Range Of 6.5-7.0% For 2016 At the opening of the annual National Peo-ple’s Congress (NPC) session on Sat, 5 Mar, Chinese Premier Li Keqiang laid out the work report for 2015 and targets for 2016, as well as for the 13th five-year plan (2016 to 2020).

As has been flagged months earlier, growth projection for 2016 is set at 6.5-7.0%, from the “about 7%” set for last year (which came in at 6.9% for full year 2015), while aiming GDP growth rate of at least 6.5% through the 2016-2020 period. This is the first time in two decades that a target range, rather than specific forecast, has been used.

Fiscal deficit for 2016 is projected at 3% of GDP, from 2.3% in 2015 as revenue is likely to slow as the government lowers taxes to reduce business costs. Other tar-gets for 2016 are shown in the table.

According to data from Ministry of Fi-nance earlier, fiscal expenditure in 2015 rose sharply by 15.8%y/y compared to 8.3% increase in 2014, while fiscal reve-nue growth slowed from 8.6%y/y in 2014 to 8.4% (the slowest pace since 1988), leaving a deficit of RMB2.355 trillion, com-pared to a fiscal shortfall of RMB1.131 tril-lion in 2014. With 2015 GDP at RMB67.7

trillion, headline fiscal deficit works out to be 3.5% of China’s GDP for the year, up from 2.1% of GDP in 2014. Fiscal deficit is projected at RMB2.18 trillion in 2016.

In the work report, Premier Li also em-phasized the need for economic reform, with the word appearing 76 times, vs 86 times in 2015, suggesting that economic restructuring and reform will remain the key theme for 2016 and beyond.

For the 13th five-year plan target period of 2016-2020, the government aims to maintain average growth rate of 6.5%, employment creation of at least 50 million, urbanization rate of 60% by 2020, and 30,000km of high speed rail, among other things.

Comments This is the first time in two decades that a target growth range, rather than a point forecast, has been set. This suggests that: 1) the government wants to deempha-size the obsession with economic growth alone and focus on other more crucial pol-icy indicators, such as economic reform, efficiency, productivity, value-add, and performance of the labour market, and 2) uncertainty of economic forecasts given a backdrop of weak global environment and demand – which is outside the control of

China – and domestically, the challenges of balancing economic growth and the on-going market/industries reform.

However it is clear that the government has a baseline growth target of 6.5% to ensure that the objectives for the 13th five-year plan will be achieved and to maintain the momentum of job creation. As every 1% of GDP growth is estimated to gener-ate about 1.2 to 1.5 million new jobs, it is crucial to maintain a baseline growth to meet the demand of roughly 15 million of new job seekers (graduates from universi-ties and other tertiary institutions) entering China’s labour market each year.

Among other things, the 13th 5-year plan aims to double the size of China’s GDP and per capita GDP from 2010 to 2020. In 2010, China’s GDP was RMB40 trillion and per capita income at USD4,400, and achieving RMB90 trillion of GDP by 2020.

We think the growth range is reason-able and the risks of a “hard landing” remain low, especially with more than sufficient room from fiscal and mon-etary policy measures, if needed. We maintain our growth forecast for China at 6.8% for 2016, and expect the pace to slow gradually through the 2016-2020 planning period, as the size of the econ-omy increases. China continues to transi-tion to a service-led and domestic-demand driven economy. At the same time, the manufacturing sector is undergoing trans-formation with excess capacity continues to be rationalized in old and inefficient sec-tors such as steel, cement, and coal which the government is setting aside a budget of RMB100 billion to help in the restruc-turing efforts.

The task of reforming and restructuring, especially within the state-owned enter-prises (SOE) sector, is challenging, given the extent of excess capacity (see table below). Utilization rates are estimated in the 50-70% range for a wide range of industries in China, after the stimulus-in-duced sharp increases in investment since

China: Economic Targets At A Glance

Indicator 2016 Target 2015 Actual 2015 Target

GDP growth rate 6.5-7.0% 6.9% “About 7%”

CPI inflation 3.0% 1.4% 3.0%

M2 money supply growth 13.0 13.3% 12.0

Total Social Financing (% change) 13.0 12.4 (“Steady Growth”, 平稳增长)

Fiscal deficit (% of GDP) 3.0% 3.5% 2.3%

Job creation (millions) 10.0 13.12 10.0Source: Bloomberg, UOB Global Economics & Markets Research Estimate

China: Industrial Production Capacity

Current Capacity (estimated) Capacity Closed in Last 3 Years

Steel (million tons) 1,200 More than 90

Cement (million tons) 2,350 230

Flat glass (million weight boxes) 793.0 76.0

Aluminum smelting (million tons) 42.0 More than 1.0

Coal (million tons) 5,700 560 (between 2010-2015); a further 700 to be eliminated by 2019Source: 2016 Work Report for NPC; Media Reports, UOB Global Economics & Markets Research Estimate



the global financial crisis in 2009. This is down from utilization rate of as much as 80-90% prior to 2008, according to IMF data.

Premier Li vouched again at the 2016 Work Report that there would not be any massive government stimulus anytime soon and we expect the pace of reform and restructuring to gather speed as the 13th 5-year plan gets underway this year.

In terms of monetary policy, the reserve requirement ratio (RRR) cut announced on 29 Feb, just days prior to the NPC ses-sion, has set the tone of a “prudent but with slight easing bias” for now. Premier Li noted that the policy stance would be flexible to maintain sufficient liquidity in the system through the coordinated use of policy tools including open market oper-ations, interest rate, RRR, relending, and others, to lower financing costs and pro-vide sufficient support to the real econo-my, especially for smaller enterprises and agricultural sectors.

As such, we think there is room for fur-ther monetary policy easing in 2016, al-though the burden is likely to fall on RRR, as PBoC works to fine tune the interest rate corridor. PBoC last changed interest rate policy on 23 Oct 2015, the sixth in-terest-rate cut in a year (depo rate 1.50%; lending 4.35%). Coupled with recent RRR cut announcement, we still see further room for interest rate and RRR reductions ahead, with a slim chance of interest rate cuts by end-1Q16. The next reduction in RRR is likely to be in 2Q16, as shown in the table.

Premier Li reiterated that RMB exchange rate will be stability at reasonable range and this suggests relatively low likeli-hood of large-scale depreciation/de-valuation of the RMB. More important though is that with the RMB referenc-ing a basket of currencies, the USD/RMB exchange rate is likely to see greater volatility and more flexibility going forward, even if the basket as a whole stays relatively stable. We are still keeping our forecasts intact, with our call at 6.45 by end-2016. The recent sta-bility of the onshore and offshore RMB prices suggests that speculative activities are now kept at bay. However, depreci-ation pressure on the currency remains significant as there is still room for a USD rebound against EM currencies, as uncer-tainty on the US Fed interest rate hike cy-cle remains.

LinkComplete Text of 2016 Work Report (Chinese), 2016年政府工作报告(全文实录),5 March 2016 http://bit.ly/1TB3Xt3

China Focus

China: Interest Rate and RRR Forecasts

% 2Q15 3Q15 4Q15 1Q16F 2Q16F 3Q16F 4Q16F

1-year Benchmark Lending Rate 4.85 4.60 4.35 4.10 3.85 3.85 3.85

1-year Benchmark Deposit Rate 2.00 1.75 1.50 1.25 1.00 1.00 1.00

Reserve Requirement Ratio 18.50 18.00 17.50 17.00 16.00 15.00 15.00Source: UOB Global Economics & Markets Research Estimates



中国焦点2016年增长和政策目标设立(This is the translated version of China: Growth And Policy Targets Set For 2016 on page 14)

2016年增速定为6.5~7.0%3月5日星期六，中国国务院总理李克强于一年一度全国人大（NPC）会议开幕式上发表了2015年工作报告讲话，并对2016年目标及第13个五年计划（2016年~2020年）进行了规划。

如数月前已提及，2016年经济增幅目标定为6.5~7.0%，相比之下，去年的目标值为“7%左右”（2015年全年的最终增幅为6.9%），同时将2016~2020年期间GDP年均增长率保持在6.5%以上。这是近20年来首次使用目标范围，而非具体预测值。

由于政府为减少企业成本而采取“只减不增”的税负，据此可能造成财政收入放缓，因此，2016年财政赤字预计占GDP的3%，相比之下，2015年财赤目标为2.3%。有关2016年其他目标，请参阅下表。

据财政部先前数据表明，相比2014年8.3%的财政支出，2015年大幅上升至15.8%，同时财政收入增长率从2014年的8.6%降至8.4%（1988年以来最低），致使产生2.355万亿元赤字，而2014年财政赤字为1.131万亿元。由于2015年GDP为7.7万亿元，故整体财政赤字总计占该年中国GDP的3.5%，而2014年为2.1%。2016年预计财政赤字预估数额为2.18万亿元，其中，中央财政赤字1.4万亿元，地方财政赤字7，800亿元。

在该工作报告中，李克强总理还强调了经济改革的需要。在其讲话中，“改革”共计出现76次，而在2015年工作报告出现86次，这表示经济结构调整和改革仍将是2016年及以后年份的关键主题。

除此以外，在2016~2020年第13个五年规划时期内，政府目标还将包括年均增长6.5%以上的增幅、创造至少五千万个就业机会，以及截至2020年，实现常住人口的60%城镇化率、修建完成30,000公里高速铁路里程。

评论这是中国近20年来首次使用目标范围，而非具体预测值。这表明：1）注意力不将只限于经济增长率，同时也将专注于其他更为重要的政策指标，如经济改革、效率、生产力、增值，以及劳动力市场的效益；2）全球环境和需求疲软状况造成经济预测不确定性，而这是中国无法掌控的。因此，在国内，如何平衡经济增长和市场 / 行业改革也属于一种挑战。

但是，政府明确以6.5%的基准增长为底线，以确保实现第13个五年计划的目标，保持就业创造势头。由于GDP每增长1%，预计产生约120至150万个新就业机会，因此，关键在于一个增长率的底线，以满足每年1500万个进入中国劳动力市场的新求职者（大学、大专院校等毕业生）。

此外，第13个五年规划目标还有从2010至2020年，将中国GDP规模和人均GDP翻番。2010年，中国的GDP为40万亿人民币，人均收入为4400美元，到2020年中国经济总量预计将达到90万亿人民币。

我们认为，中国政府所定下的经济增幅目标仍较为合理，且“硬着陆”风险仍然偏低。中国财政和货币政策仍然有足够扩张的空间。我们保持对中国2016年经济增长6.8%的预测，并预期在2016 - 2020年规划时期内，随着经济总量的提高，这一增长速度将逐渐放缓。中国继续朝以服务为主导和国内需求拉动型经济转型。与此同时，制造业正在经历转型，老旧和低效行业，如钢铁、水泥和煤炭行业。采取兼并重组、债务重组或破产清算等措施，积极稳妥处置”僵尸企业”等途径以淘汰过剩落后的产能。其中中央财政安排1000亿元专项奖补资金，重点用于职工分流安置。

考虑到产能过剩程度（见下表），改革和结构调整工作（特别国有企业（SOE）部门的”僵尸企业”）将极具艰难性和挑战性。自2009年全球金融危机起，因全球大幅财政刺激和宽松的货币政策引起的投资上涨之后，包括中国在内许多行业都面临产能过剩。在中国，产能利用率目前只约为50 - 70%，而根据IMF数据，2008年前中国的产能使用率高达80 - 90%。

在2016年的工作报告中，李克强总理再次重申，将不再出现大规模财政强刺激的“大水漫灌”模式。我们期待随着今年开始的第13个五年计划，改革和结构调整的步伐将加快速度。

关于货币政策，于“两会”召开的前几天，人民银行在2月29日宣布的存款准备金率（RRR）降准已奠定了“稳健略偏宽松的状态”基调。李克强总理在2016的工作报告指出，稳健的货币政策要灵活适度。今年广义货币M2预期增长13%左右，社会融资规模余额增长13%左右。通过对政策工具，运用公开市场操作、利率、准备金率、再贷款等各类货币政策工具，保持流动性合理充裕，疏通传导机制，降低融资成本，加强对实体经济特别是小微企业、”三农”等支持。

因此，我们认为中国央行在2016年还将具有进一步货币放宽政策的空间，尤其是通过调整存款准备金率。中国央行上次调

中国：经济目标一览

- 2016 目标 2015 实际 2015 目标

GDP 增长率 6.5-7.0% 6.9% “7%左右”

CPI通胀率 3.0% 1.4% 3.0%

M2货币供应增长 13.0 13.3% 12.0

社会融资总量（变化 %） 13.0 12.4 （平稳增长）

财政赤字（GDP的 %） 3.0% 3.5% 2.3%

创造就业机会（数百万） 10.0 13.12 10.0

数据来源：彭博社，大华银行全球经济与市场研究部预测

中国：工业产能

当前产能(估计) 近3年淘汰的落后产能

炼钢炼铁 (百万吨) 1,200 超过90

水泥 (百万吨) 2,350 230

平板玻璃 (百万重量箱) 793.0 76.0

电解铝 (百万吨） 42.0 超过1.0

煤炭 (百万吨) 5,700 560（2010~2015年）；至2019年，还将淘汰另外700

数据来源：2016年全国人大工作报告；媒体报道；大华银行全球经济与市场研究部预测



整利率政策的时间是2015年10月23日（第六次降息：存款利率1.50%，贷款利率4.35%）。结合最近的降准（二月29日），我们认为，未来还具有进一步降息降准空间，但2016年第一季度降息的可能性不大。RRR的下次降准时间很可能出现于在2016年第二季度，如下表所示。

李克强总理重申，人民币汇率将稳定在合理范围内，这表示人民币出现大幅度贬值的概率相对较低。更重要的是，在人民币汇率参考一篮子货币的同时，美元兑人民币汇率未来很可能会出现更大波动性和灵活性，即使货币篮子整体相对较稳定。因此，我们依然保持现有美元兑人民币汇率预测，即2016年年底为6.45。近期在岸价

格和离岸价格较稳定，这表明，投机活动在一定程度上受到了牵制。然而，由于美元兑新兴市场货币（包括人民币）还有反弹的空间，以及美联储利息率加息周期保持不变，人民币的贬值压力仍较显著。

链接：2016 工作报告（中国）全文，2016年政府工作报告（全文实录），2016年3月5日http://bit.ly/1TB3Xt3

中国：利率和存款准备金率预测

% 2015年第二季度

2015年第三季度

2015年第四季度

2016年第一季度

2016年第二季度

2016年第三季度

2016年第四季度

1年期贷款基准利率 4.85 4.60 4.35 4.10 3.85 3.85 3.85

1年期存款基准利率 2.00 1.75 1.50 1.25 1.00 1.00 1.00

存款准备金率 18.50 18.00 17.50 17.00 16.00 15.00 15.00

数据来源：大华银行全球经济与市场研究部

中国焦点



GMS FocusBorder Trade In The Greater Mekong Sub-Region (GMS):Challenges And Opportunities

Trade between countries in the Greater Mekong Sub-region (GMS), comprising Cambodia, Laos, Myanmar, Thailand, Vietnam, and Yunnan Province and Guangxi Zhuang Autonomous Region in China, has seen an increasing trend over the past decade, mainly due to three reasons: the rapid growth in the GMS economies, the opening up of the Cambodia-Laos-Myanmar-Vietnam (CLMV) countries to trade, and the rise of trade and development cooperation among the GMS members. However, the intra-regional trade volume in this sub-region still represents a small proportion of total trade, compared with the rest of the world. The GMS intra-regional trade is around 12% of the total trade. In addition, the percentage of overland cross-border trade to the total intra-regional trade volume is even smaller.

This research identifies the tremendous potential and the complementary nature of the regional economies, which could help to expand trade and together with that, maximise the benefits accrued from trade for local people.

I. Border Trade In The GMSBorder or overland trade refers to the flow of goods and services across international land borders between countries. In this sense, it is a part of normal trade that flows through standard export-import frameworks of nations. It is necessary to differentiate trade over international border points from other local border points in the GMS, where only the residents in immediately neighbouring provinces/states can cross borders and trade freely.

The volumes of trade over international border crossings are always recorded and contribute to the total volume of intra-regional trade mentioned above. On the contrary, the local border points might carry noticeable trade volumes, but they are unrecorded and therefore, informal border trade. In terms of volume, formal trading channels account for the bulk of border trade in the GMS, constituting some 70-80% of the total volume of trade. These flows are formal in the sense of being recorded, requiring paper work, appropriate documentation and

processing, i.e. in terms of export-import procedures.

Moreover, border trade has a significant role to play in the relationship between two or more neighbouring countries. It is a key indicator of such international relationships. That is, if people of neighbouring countries can live together, sharing resources and opportunities, there will be regional peace, security, economic prosperity and development. In the GMS, border trade shares the same characteristics and bears the same significance to the trading partners. With the increasing interest in sub-regional cooperation, international assistance and rapid economic growth, especially in tourism and service sectors, the border zones of countries in the GMS are undergoing rapid transformation, most notably through infrastructure and institutional development.

II. Geo-Centric Thailand Drives Trade With Its Neighbouring CountriesThe geo-centric location of Thailand in Indochina places the country in a position to drive trade with its neighbours. Although, Thailand’s exports in 2015 contracted significantly by 5.8%, the biggest annual pace of decline in six years, mainly owing to the slowdown of global economy and the structural problems in Thai manufacturing sector, the border trade with Cambodia, Laos and Myanmar (CLM countries) and Malaysia was bright, accounting for USD27.8bn (Exhibit 1). Meanwhile, Thailand’s border trade partnerships have historically been dominated by Malaysia, which accounted for 49% of Thailand’s total border trade in 2015 (Exhibit 2). Thailand’s border trade is increasingly developing with CLM countries as a result of accelerated economic development, declining tariff levels under the ASEAN Free Trade Agreement, economic liberalisation in Myanmar since 2011, and Thai outbound investment comprising of natural-resource related projects, agricultural projects and agro-industries, and service-based investments to expand production chains regionally.

In contrast to other ASEAN economies, Thai exports to CLM countries tend to

be less volatile given the higher share of necessary goods. As many Thai exports to ASEAN 5 are intermediate goods used for products destined for re-export, the major share of exports to CLM countries are destined for end-users, and are thus less linked to global market demand. Most transactions involve products, which are essential for everyday life such as consumer goods, some agricultural products and natural resources.

Among all of Thailand’s neighbours, Malaysia is the most important trading partner. Part of the reason is that Malaysia is the country with the largest economy of all of the neighbors, and it has more liberal economic and trade policies than the other countries. Yet, economic development and urbanisation in CLM countries are driving demand for consumer goods. Increasing investments by Thailand-based corporates in the economies are also expanding production chains regionally, driving trade and establishing synergies between neighbouring countries.

Myanmar is the market with the most potential for future growth among CLM countries. In 2015, border trade between Thailand and Myanmar reached USD6.0bn, the most among CLM countries. One factor is geography as the border is very extensive, at more than 2,400 kilometers in length. This translates into large trade volume between the two countries. This is also a result of its economic expansion, which has commenced to present more clearly positive signs, especially since Myanmar’s government has adopted a policy of liberalizing its economy and opening itself up to the outside world.

Changes in Myanmar demonstrate both opportunities and challenges for Thailand in expanding trade channels to a large consumer market with a population almost as large as Thailand’s. Opportunities are especially positive for consumer goods from Thailand, which are essential for daily life and are in high demand in Myanmar. Among these Thai products are food, clothes and medicine as Myanmar is currently unable to produce enough of these goods to meet up with their huge pending domestic demand. Myanmar’s demand for construction materials has also been expanding steadily since the nation has been opening up and rapidly developing basic infrastructures and public utilities, which will further encourage economic activity there. Spending is even rising for luxury goods including electrical



goods and electronics, furniture, home appliances, cosmetics and healthcare products. The expenditure appears to be growing, whilst Myanmar’s consumer behavior changes and purchasing power grows.

Additionally, there are gigantic opportunities for border trade with Laos. Even though border trade between Thailand and Laos may not be as high in value as border trade with other neighboring countries, growth trends suggest that Laos is still a very promising market with many opportunities. In particular, Thailand is the most important trading partner of Laos, with a market share of up to 45%. This is since most Laotians have high recognition of Thai brands, and view Thai products as being high in quality.

Furthermore, border trade between Thailand and Cambodia is likely to grow healthily. Thailand and Cambodia share almost 800 kilometers of common border. Both governments have also expanded economic cooperation and developed communication networks between the two countries to improve efficiency. Currently, they are considering the possibility of establishing an economic zone along the Thai-Cambodian border to boost trade flows, adding more opportunities for firms interested in trading there.

III. Developing Stronger Infrastructure To Enhance The Border Trade Border trade between Thailand and its neighbours remains constrained by a lack of infrastructure to support such trade, and where infrastructure does exist, it is insufficient. As the average annual trade growth between Thailand and the CLM countries rose from 2001-2015, road links from Thailand to the countries remain unreliable, and the additional costs of sea-freight prices put many small-medium enterprises (SMEs) out of the export market.

The Thai government has allocated USD155bn for new infrastructure investments planned until 2019 to develop three major transport modes – rail, air and water. Investments in the rail and motorway projects to increase connectivity throughout eastern-western Thailand are expected to improve border links and the logistics of customs clearance. The Industrial Estates Authority of Thailand has also worked with local government and private investors to establish special economic zones in many provinces

including Kanchanaburi and Chiang Rai to leverage this growth and attract migrant workers.

In addition to the infrastructure development, Thailand is considering another bridge over the Mekong River into Laos, extending on the friendship bridge project completed in 2003 with joint investment from Laos and China. Despite Thailand focusing on its effort to provide the CLM countries with official development assistance in regard to the infrastructure, border trade development is still dependent on the countries to invest in their own logistics upgrades to see significant benefits.

Currently, the main limitation on cross-border trade is the lack of an integrated transportation system and network within the region. For example, the sea

route is usually utilised for exports to Myanmar given the absence of reliable road connections between Bangkok and the commercial capital of Yangon. If the transportation routes become more connected in the future, trade opportunities will grow, especially those involving cross-border trade to China.

Besides, associated soft infrastructure to support trade facilitation should be in place, which means approval and implementation of required legal and policy reforms, effective agreement on trade and transit treaties, and measures to address environmental impacts caused by new projects in the region. All of these will help make transportation of goods within the region faster and more convenience, which means more business opportunities contributing to the overall welfare of the local people and the GMS expansion.

GMS Focus

Exhibit 1: Value Of Thailand’s International Trade With Malaysia, Cambodia, Laos and Myanmar (USD Billion)

Source: Thailand’s Ministry of Commerce, UOB Global Economics & Markets Research

12.5 13.4 10.9

28.2 30.0 27.8

2013 2014 2015Border Trade Others

40.743.4

38.7

Exhibit 2: Proportion Of Thailand’s Border Trade Value In 2015 (Classified By Country)

Source: Thailand’s Ministry of Commerce, UOB Global Economics & Markets Research

49%

21%

18%12%

Malaysia Myanmar Laos Cambodia



IV. ConclusionAs compared to other sub-regional grouping, the level of cooperation within the GMS has already been considered as quite progressive, especially after taking into account the low level of economic development in most of the member countries as well as the remaining deep differences between them.

Thailand has greatly benefited from sharing borders with the neighbouring countries despite the logistical issues. The proximity to the CLM countries has enabled Thailand to export with lower costs and greater ease. Such export items include household products, cosmetics, alcoholic and non-alcoholic drinks, engine, computer and parts, vehicles and parts, diesel fuel, gasoline, sugar, and rubber and related products. The businesses should start to discover opportunities and channels now before others begin to enter and compete for market share.

We believe that integration into the AEC will be a major game changer reducing trade obstacles and encouraging cooperation between Thailand and its neighbours. This means bigger business opportunities close to home, and the entrepreneurs should not overlook the importance of the region.

GMS Focus



Oil FocusThe Color Of Oil In 2016: Back To Black?

The commodity slump, which started in 2014 and led by the capitulation of crude oil prices, gained traction in late 2015, has dominated risk sentiment in financial markets (commodity, FX and equity) so far this year, more so than other factors such as major central bank policy actions. And since mid-February, there was a significant rebound in oil prices with US WTI crude futures closing above US$40 for the first time in 2016 at US$40.20 on 17 Mar 2016 (a >53% increase from the recent low of US$26.21 close on 11 Feb 2016!) while London Brent closed at US$41.54 on 17 Mar 2016 (a marked 49% jump from its 2016 low of US$27.88 on 20

Jan). The surge in oil in turn has supported risk appetite, driving the recovery in Asian & commodity-related currencies and stocks markets globally. While the prior correction in crude oil prices may have been overdone, it remains to be seen whether the recent recovery is justified or transient due to the illusion of hopes for a coordinated production freeze among major oil producers.

We think that oil price may have found a bottom but the recent surge is probably not justified. Based on the EIA estimates, the supply demand mismatch will continue to narrow into 2016 but remains materially

wide at 1.59 mn bbl/day compared to 2.04 mn bbl/day in 2015. We expect US and global (Brent) crude oil prices to average in the range of US$30-35/bbl in 2016 but the bias to the price direction remains on the downside to US$20-30/bbl especially when hope of coordinated production caps among major oil producers is squashed in the 17 April Doha meeting and any lingering hope may evaporate by 2 June 2016 [169th (Ordinary) OPEC Meeting].

Oil Led The WayIn The Commodity Sell-OffThe pullback across most asset classes in 2015 and subsequent poor performance in the early part of 2016 was on the back of sluggish global demand growth and fears of the impact of commodity price collapse spilling over into the corporate and banking space as much of the oil investments done in the last few years was done based on the assumption of much higher crude price. And in this respect, the decline in energy prices has been sharper than in other commodity classes which suggest that inherent supply and demand dynamics in the energy market, in particular oil, have accentuated the negative tone in the overall financial markets due to the linkages to the banking industry and the real economy.

While other commodity classes have been weighed down by the slump in oil prices, the decline in industrial metals/agriculture/precious metals appear to be shallower. Precious metals, in particular gold, have not only held up and even recorded a near 19% return so far in 2016 (as of 18 Mar) as markets pared back expectation of US rate normalization pace, the weaker US dollar and bouts of risk aversion in the financial markets could continue to support prices of precious metals.

It’s A Supply Problem Not Demand, And Certainly Not ChinaWe believe oversupply was (and remains for the next 12-18 months) the main driver of the oil price slump, not the drop in global demand and certainly not China’s growth slowdown which has been conveniently blamed for it. In fact, China’s and US’ demand for crude oil has continued to rise in 2015, albeit at a slower pace.

At its lowest point in early 2016, crude oil prices have fallen as much as 70% from mid-2014 level, similar to the sharpest drop during the Global Financial Crisis when we compare the recent episodes of oil price collapse. The recent 50% rebound

Episodes Of Oil Price Declines >30% Within 6-Month Period

Source: US EIA, Bloomberg

0

40

80

120

160

Apr 83 Jul 86 Oct 89 Jan 93 Apr 96 Jul 99 Oct 02 Jan 06 Apr 09 Jul 12 Oct 15WTI Brent Crude

1990/91US recession

1997/98 Asian Financial Crisis

2008/09 Global Financial Crisis

2001 US recession

2014 OilSlump

US$/bbl

1985/86 Oil Crisis: Increase in the supply of oil and change in OPEC policy

Energy Has Underperformed Other Commodities In The Current Downturn


0

40

80

120

160

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16

Bloomberg Commodity Indexes

Energy Agricultural Precious Metals Industrial Metals

Jan 2, 2014=100



Oil Focus

re-invigorated oil market sentiment, suggesting that oil has bottomed and further downside from here may be limited. However, current price trend as compared

to 1985/86 and 2008/09 is still weaker with recovery taking longer than in previous cycles even after taking into account of the recent rebound.

We also note that commercial crude inventory continues to build up, not just in US but all over the world. US crude inventories rose 1.3 million barrels to 523.2 million barrels as of 11 March 2016 (the last time inventories exceeded half a billion barrels was in the 1930’s) while the commercial crude oil inventories among OECD countries is expected to hit an accumulated 3.239 billion barrels by end-2016 (up from 2.72 billion barrels at end-2014). And yet amidst this unending buildup of crude oil stockpiles in 1Q 2016, crude oil prices rallied in the Feb-Mar period simply on the belief that major oil producers are on the verge of coming to an agreement to coordinate a freeze to oil production output so as to stabilize prices (which we again reiterate our view that we do not think it is possible or enforceable in any case).

Overall, we think it is still possible that oil prices will head lower from the current levels (of around US$40) from the over-supply perspective but the downside to oil prices may likely be capped at US$20-30/bbl unless the global economy goes into a serious recession.

Price Correction LeadsTo Supply Correction?Low oil prices will cause supply to be rebalanced as higher-cost crude oil extraction operations will be forced out of business. In the longer-term, supply will moderate as budgets for exploration and maintenance are being cut. This should result in some stabilization in oil prices and supply/demand equilibrium over time. The cut back in production is expected to affect mainly the non-OPEC suppliers with smaller scale of production such as the shale producers in the US. On the demand side, greater energy usage efficiency and alternative sources will cap growth in oil consumption. That said, the crucial point is how long the period of oversupply will last. We estimate the over-supply situation will persist at least in 2016 and 2017.

Within ASEAN, IndonesiaAnd Malaysia Hardest HitBy Commodity SlumpFor commodity exporting countries such as Indonesia and Malaysia, the slump in commodity prices has been one of the factors for their currency weakness in 2015. There were of course other domestic factors at play for the IDR and MYR weakness but the commodity slump certainly exacerbated the currency depreciation pressure late last year.

EIA Forecast Supply Demand Mismatch To Continue But Will Narrow Into 2016 But Remain Materially Wide

Global Petroleum and Other Liquids 2014 2015F 2016F 2017F

Supply & Demand (million barrels per day)

Non-OPEC Production 56.06 57.41 57.19 56.68

OPEC Production 36.35 38.18 39.25 40.02

OPEC Crude Oil Portion 30.08 31.60 32.35 32.80

Total World Production 93.30 95.74 96.44 96.70OECD Commercial Inventory (end-of-year) 2,721 3,045 3,239 3,302

Total OPEC surplus crude production capacity 2.07 1.62 1.79 1.55

OECD Consumption 45.73 46.33 46.45 46.56

Non-OECD Consumption 46.64 47.37 48.39 49.50

Total World Consumption 92.37 93.70 94.85 96.06Under-supply (-) versus Excess-supply (+) +0.93 +2.04 +1.59 +0.64Primary Assumptions (percent change from prior year)

US Real GDP Growth 2.4 2.4 2.2 2.8

Real US$ Exchange Rate 3.6 10.9 6.8 -0.4Source: US EIA (as of 14 Mar 2016), UOB Global Economics & Markets Research Estimate

China’s Demand For Commodities Broadly Higher In 2015

Source: CEIC, UOB Global Economics & Markets Research

335.5

953.4

0 200 400 600 800 1,000

Crude oil

Iron ore

Million tons

China: Annual Imports (Volume)

2015 2014 2013 2012 2011

81.7

1.3

20.4

12.8

0 10 20 30 40 50 60 70 80 90

Soybean

Copper ore

Coal

SteelProducts

China: Annual Imports (Volume)

2015 2014 2013 2012 2011

Thousand tons

Collapse



Oil Focus

That said, commodities accounted for less than 20% of Malaysia’s exports compared to nearly 40% in Indonesia. A more diversified export base in Malaysia will help the country cope better in a protracted commodity slump. In Indonesia, we expect a more aggressive infrastructure plan to offset the weakness in the export sector, as well as some resilience in private consumption demand and the scope for infrastructure development can provide some support to growth this year.

With the exception of Indonesia and Malaysia, Asian countries are net commodity importers and thus should benefit from low commodity prices. For these countries, the contagion risks are mainly in the related industries.

Lower Commodity Prices Kept Inflationary Pressures At Bay, But Not AwaySustained low oil prices keep inflationary pressure in check but deflation concerns may be over-blown. While inflation will likely remain moderately low in 2016, our forecasts are still showing positive inflation rate for the bulk of the countries. Stagflation risks remain low.

From an average of US$102.91 per bbl in 2010-2013, the Brent crude price fell to US$76.52 per bbl in 2014-2015, leading to declines in inflation rates during the period for most of the countries. Inflation in Indonesia, Malaysia and Japan bucked the trend as the former two rolled back their fuel subsidies and Malaysia also implemented the Goods & Services Tax (GST), while QE in Japan has helped to turn the economy back on inflation path after years of deflation.

With our forecasts still showing positive inflation rate for the bulk of the countries in 2016, this should dispel some worries that the low oil prices will lead to a deflationary environment which reduces the debt repayment ability as nominal GDP grows at a slower rate or even drops.

Comparing The 1985, 2008 & 2014 Oil Busts


-80

-60

-40

-20

0

20

40

0 100 200 300 400 500 600 700 800

May 1985 - Sep 1988 May 2008 - Dec 2010 From Dec 2013 - Mar 2016

Oil Price Indexed To Zero

Number of Days

The long-awaited rebound?

Rationalization In Number Of US Oil Rigs

Source: Baker Hughes, Bloomberg

0

20

40

60

80

100

120

0

500

1000

1500

2000

2500

Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16

Shale rig count Conventional rig count WTI (US$/bbl)

No. of rigs US$/bbl

US Crude Oil Production Coming Off And Expected To Drop Further This Year


4.0

5.0

6.0

7.0

8.0

9.0

10.0

Mar 09 Apr 10 May 11 Jun 12 Jul 13 Aug 14 Sep 15 Oct 16 Nov 17

US Crude Oil Production (mn bbl/day)

Production peaked in Mar 15

US Department of Energy forecast



Comparing Export Structure Of Malaysia And Indonesia (2015) - Malaysia


Rubber, 0.5%

Saw logs, 0.3%Sawn timber, 0.4% Palm oil, 5.1%

Tin, 0.3%Crude oil, 3.3%

Liquefied natural gas, 6.0%

Others, 84.0%

RubberSaw logsSawn timberPalm oilTinCrude oilLiquefied natural gasOthers

Comparing Export Structure Of Malaysia And Indonesia (2015) - Indonesia


Gas, 6.9%Oil, 5.6%

Agriculture, 3.8%

Coal & Metals, 12.8%

Palm Oil, 10.1%

Others, 60.8%

GasOilAgricultureCoal & MetalsPalm OilOthers

Deflationary Impact of Lower Oil Prices

Average Brent Crude Price (US$ per bbl) 102.91 76.52 32.75

- Average Inflation (%)

Country 2010-2013 2014-2015 2016F

China 3.5 1.7 2.0

Eurozone 2.3 0.3 0.5

Hong Kong 4.0 3.7 2.5

Indonesia 5.2 6.4 4.2

Japan -0.2 1.8 0.5

Malaysia 2.2 2.6 2.5

Philippines 3.7 2.8 2.4

India 10.1 5.8 5.0

Singapore 3.8 0.3 0.8

South Korea 2.6 1.0 1.3

Taiwan 1.3 0.4 1.0

Thailand 3.1 0.5 0.5

US 2.1 0.9 1.0


Oil Focus



Singapore FocusApril Policy Stance To Remain Intact, Despite Still-Weak Economic Conditions?

With a series of disappointing economic data released since the start of 2016 in Singapore, market is increasingly hoping for the Monetary Authority of Singapore (MAS) to provide another round of easing stimulus in their upcoming April policy meeting. Such an expectation is of no surprise, since the central bank had eased the appreciation slope of the SGD NEER twice in 2015, when poor economic data releases haunted policymakers and investors alike.

Looking back, the first policy easing was an unanticipated off-cycle policy action in January 2015. Catching market off-guard then, traders started selling down the SGD and it experienced a 3.9% drop (from 1.3389/USD to 1.3926/USD) in the span of one trading month. Months of poor data (particularly in the manufacturing sector) thereafter prompted the market to anticipate further easing actions in the subsequent April and October meetings.

The second easing (we estimated that it was a 0.5% cut to the SGD NEER slope to the current 0.5% pa rate) was executed in the October 2015 meeting. As the easing was less than what the market had hoped for, the SGD gained, rather than fell, 1.8% in just two days (from 1.4025/USD to 1.3781/USD) as a result.

Between the last central bank meeting till today, global economic conditions and the performance of risk assets had worsen, causing most central banks to continue on a dovish policy path. A gauge of world equities performance (the MSCI World Index) experienced a draw-down of 12.3% since Oct 2015 to 11 Feb 2016 (although it had climbed back up since, with a 8% gain). Risk-averse assets such as bonds were the flavor of the period as investors rushed over to seek shelter.

Moreover, in their latest inflation report, the MAS had even lowered their headline inflation forecast for 2016 to -1% to 0%, from -0.5% to +0.5% previously, to reflect “the significant step-down in global oil prices in recent months and the larger-than-expected decline in COE premiums at the start of the year”

With that, market is conveniently drawing another conclusion that the recent spate of weak Singapore and global economic numbers may pressure the MAS to ease further in their April policy meeting. However, we think otherwise as the market is looking at the wrong numbers.

First, the central bank’s preferred indicator on their policy action dashboard is Singapore’s core inflation. Not just historic core inflation (which was, by the way, 0.5% in 2015 and aligned with our estimation of the 0.5% SGD NEER slope), but core inflation expectations. Even in their latest inflation report, the MAS maintained their 2016 core inflation outlook of 0.5% to 1.5%, saying that “core inflation is expected to pick up gradually over the course of 2016, as the disinflationary effects of oil as well as budgetary and other one-off measures ease.” With the midpoint of the central bank core inflation expectations at 1.0% (higher than the 0.5% in 2015), we risk looking at a steeper, and not less steep, SGD NEER slope.

Second, another SGD NEER slope easing exercise will mean a neutral appreciation stance. We think that the chance of such a move remains small, as it was only done during economic recessions in the past. It will provide too strong a signal where market thinks that policymakers are pessimistic about aggregate demand

growth going forward, and such pessimism may self-perpetuate and hit consumption and investment demand.

If there indeed is a need to provide a more accommodative condition if global economic conditions continue to stagnate but just shy from a recession, we think that it is more possible for the MAS to ease monetary policy by re-centering the midpoint by 1.0% (Our SGD NEER model shows that the SGD NEER is currently trading at the midpoint as of 18 Mar). But this is not our base case. Moreover, the recent move of the SGD NEER back towards the midpoint (from the lowest point of 1.80% below midpoint on 11 Jan 2016) may not justify a re-centering.

We still maintain our view that the U.S. Federal Reserve will hike interest rates twice this year, and providing the upside to the USD/SGD pair. However, the recent selldown in the USD/SGD (from 1.44 in Jan 2016 to 1.36 currently) due to the dovish tone of the Mar Fed meeting may see the USD/SGD trading in that same trend to reach 1.34 by the end of 2Q 2016. That said, the U.S. rate hike thesis will support our view for the USD/SGD to trade higher at 1.36 by end 2016.

In view of the weakness of USD/SGD in the coming quarter, we prefer to be sellers on rallies, via:

1. Initiate short USD/SGD cash at 1.3605 on 21-Mar, target 1.3405, stop 1.3670;

2. Sell 3-month USD/SGD call option strike 1.3700, receive 1.10% (spot ref 1.3605)

SGD NEER Chart


119

121

123

125

127

129

Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16SGD NEER Upper-end: 2%Mid-Point of Estimated Policy Band Lower-end: 2%

MAS shifted SGD NEER slope from 2% to 1% in an off-cycle decision

MAS shifted SGD NEER slope from 1% to 0.5%



Based on our USD/SGD currency forecast and expectation that future FED hikes this year would most probably continue to carry a dovish tone as long as growth outcomes remain muted, we have adjusted our SGD interest rates forecasts lower to incorporate a tighter SG vs. US interest rate spread.

The combination of MAS maintaining their policy stance and dovish FED hikes mean that monetary policy divergence is now expected to be less acute. This reduces the upside potential for SORs via a reduction in the risk premium component.

However, we maintain our expectations that the domestic growth outcome will not be sufficiently advanced to justify convergence between SG and US interest rates as a stable equilibrium state within the remainder of 2016.

4Q Ahead Updated Forecasts

- 2Q16F 3Q16F 4Q16F 1Q17F

3M SGD SOR % 1.30 1.40 1.70 1.90

3M SGD SIBOR % 1.20 1.25 1.50 1.70

10Y MAS Treasury 2.30 2.50 2.70 2.90

Singapore Focus



FX StrategyA Bumpy Road For Dollar?

Since the start of the year, the U.S dollar positioning has taken a beating (blue line in Chart 1) and has declined to the smallest net long position since August 2014 where the current U.S dollar rally begun. Consequently, the U.S dollar has underperformed versus most of the G10/Asian currencies that we track YTD (see Chart 2).

The under-performance of the U.S dollar came about despite strong upside surprises in recent U.S data (black line in Chart 1), even for the Fed’s preferred measures of employment and inflation. The U.S economy has been adding average 200k jobs monthly for the past 65 months. The PCE deflator and core CPI had a remarkable uptick since 4Q-2015. The positive feedback loop of stronger U.S data translating to Fed being more confident to deliver the next rate hike has been broken.

Since the start of the year, the Fed has succumbed to market volatilities, with various Fed officials citing financial conditions “considerably tighter” than they were in December. By the second week of February, with WTI at $26, USD/JPY at 111 and S&P down 12% YTD, the Fed funds futures market has erased all probability of a rate hike, not just in March but for the entire year. It is also not surprising that the subsequent recovery in S&P 500 and oil from mid-Feb brings back the likelihood of a 25bps rate hike in June. In the just concluded March FOMC, the Fed though has softened language on adverse global market conditions but still cited they “continue to pose risks”. With the Fed one leg always on the brake pedal, the debate going forth in the next quarter would be whether Fed can deliver the two more hikes before the year is up. Against that back drop, one would not be surprised if the U.S dollar continued to be on the defensive in Q2.

The U.S dollar weakness in first quarter of 2016 does not come as a big surprise to us. In fact, in our last report (http://www.uobgroup.com/assets/pdfs/research/FX-Strategy_1q16.pdf), we highlighted “limited downside for regional currencies in Q1-2016”. As of 14-March, regional

currencies posted modest gains against the U.S dollar with THB (+2.8%), SGD (+3.0%), MYR (+4.5%) and IDR (+5.5%), despite the still-weak data points (eg exports are still contracting strongly) in the respective economies. The factors that have attributed to the recovery included the following:

1. PBOC has fended off devaluation pressures well in Q1, almost flat for the year at 6.5000 for USD/CNY. After China returned from Lunar New Year holidays, the offshore CNH has converged to onshore

CNY after trading as much as 1,400 pips weaker than the latter in early January. In a nut shell, the stability of the Chinese Yuan has anchored the recovery of the regional currencies.

2. Foreign reserves in various regional central banks have stopped declining and are showing signs of being rebuilt. This has feedback positively to market confidence as central banks are seen not requiring to deplete reserves to defend their declining currencies.

3. Equity and debt flows have improved meaningfully for the regional economies, reversing course from multi months of outflow as funds scooped under-valued emerging market assets.

Chart 1: U.S Dollar Position (.IMM$BETS) Overlaid Citi U.S Economic Surprise Index (CESIUSD)


-80

-70

-60

-50

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-30

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10-500000

-400000

-300000

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-100000

0Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16

.IMM$BETS G Index CESIUSD Index (RHS)

USD positioning scaled back to Aug 2014

Strong upside surprise

Chart 2: YTD Performance Of U.S dollar versus G10 And Asian Peers (as of 14-Mar)


-3.00% -1.00% 1.00% 3.00% 5.00%

Japanese YenIndonesian RupiahMalaysian RinggitSingapore DollarAustralian Dollar

Thai BahtEuro

Offshore RMBTaiwanese Dollar

Onshore RMBHong Kong Dollar

South Korean WonNew Zealand Dollar

British Pound



Looking ahead for Q2, we expect regional currencies (SGD, MYR, IDR and THB) to trade range bound to the U.S dollar. Momentum wise, the U.S dollar looks vulnerable to further downside in the next one to two weeks but key big-figure supports for dollar (4.0000 for USD/MYR and 13,000 for USD/IDR) are likely to hold further declines, especially when regional fundamentals have not caught up with their respective currencies to justify a sustainable overshoot. We still expect Fed to deliver a 25bps rate hike in the 16-June FOMC and that should keep the U.S dollar sufficiently supported.

FX Strategy



Indonesia

Infrastructure Spending Driving GrowthIndonesia’s GDP growth accelerated to 5.04% y/y in 4Q15 from 4.74% in 3Q15. The upside surprise was mainly from gross fixed capital formation while household private consumption growth remained stable. With further declines in commodity prices, Indonesian exports of goods and services contracted for the fifth consecutive quarter at -6.44% y/y in 4Q15 (3Q15: -0.6%), the low base not providing much relief to the export sector. For the full-year, Indonesia economy grew by a weaker 4.79% from 5.02% in 2014.

Despite the stronger GDP turnout in 4Q15, we keep a cautious outlook for growth in 2016, primarily due to the global trade recession and weakness in commodities. Continuing the weak trend, merchandise exports contracted by 14.3% y/y in Jan-Feb. Nonetheless, we still expect fixed investment to outperform as infrastructure projects get pushed ahead. Our growth forecast for 2016 remains at 5.0%, lower than Bank Indonesia’s (BI) forecast of 5.2-5.6%. We see risks from weaker realization of infrastructure spending and uncertain commodity prices. With delay in the parliamentary debate of the tax amnesty to April, potential revenue shortfall could also constrain government’s spending on infrastructure amid the drop in oil revenue.

Pace Of Monetary EasingTo Slow In 2Q16 BI has resumed its rate cut cycle in January after a 10-month break, cutting its policy rate by 25 bps for the third consecutive month to 6.75% in March. The bias is towards further monetary easing to support growth as commodity prices remain under pressure. Credit growth has slowed since 2H14 while lower inflation since late 2015 and IDR stability have provided the leeway to cut rates.

Domestic inflation is expected to stay subdued this year on the assumption of low commodity prices and a relatively high base effect. We expect an average headline inflation of 4.2% in 2016 with December rate at around 4.4% y/y. This is still comfortably in BI’s 3.0-5.0% target.

Going forward, the monetary policy space depends on a very gradual interest rate hike expectation for the US Fed, subdued

domestic inflation and stability in the IDR. If these conditions are met, it is conceivable that BI will be inclined to maintain an easing bias in 2Q16. After front-loading 75 bps rate cut in 1Q16, we expect a more moderate pace of easing in 2Q16 as we do not think current pace can be sustained. For now, we are penning down only another 25 bps rate cut in 2Q16.

Weaker Infrastructure Investment Realization Could Sap Positive SentimentUSD/IDR has eased sharply in 1Q16, briefly sinking below 13,000 to 10-month low of 12,984 in March. In the first two months of this year, net foreign funds inflows into Indonesia’s stocks and IDR-denominated government bonds recorded US$0.1 bn and US$2.1 bn respectively. Some recovery in oil prices since mid-February has also contributed to the positive tone in IDR. The currency has outperformed with gains of more than

5% against USD ytd (as at 17 March). However, with the divergence in the interest rate trajectories in the US and Indonesia, near-term downside to USD/IDR may be limited. We expect the pair to trade sideways, ending 2Q16 at 13,000 and rising to 13,200 by end-4Q16 on expectation that US Fed hike trajectory could pick up next year. Key risks to IDR are likely to stem from a more aggressive monetary easing in Indonesia, worse-than-expected current account deficit, weaker infrastructure investment realization as well as EM market risk aversion.

UOB Economic Projections 2014 2015 2016F 2017F

GDP 5.0 4.8 5.0 5.5

CPI (average, y/y %) 6.4 6.4 4.2 5.2

Unemployment rate (%) 5.9 6.2 6.0 5.8

Current account (% of GDP) -3.1 -2.1 -2.7 -2.8

Fiscal balance (FY, % of GDP) -2.3 -2.8 -2.2 -2.3

How Much More Can BI Cut?


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9.0

Jan 10 Sep 10 May 11 Jan 12 Sep 12 May 13 Jan 14 Sep 14 May 15 Jan 16 Sep 16

BI Rate (%) CPI (y/y %)

UOB's forecast

Stabilization In Foreign Reserves


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20

40

60

80

100

120

140


International Reserves IDR-denominated Gov Bonds Held By Foreigners

USD bn



Malaysia

Soothing Slowdown FearsDespite sustaining four-quarters of slowing growth, the Malaysian economy continues to display an underlying resilience that has reaffirmed our bullish view on the Ringgit. Real GDP surprised markets with 4.5% y/y growth in the final quarter of 2015, bringing full year expansion to 5% (6% in 2014). The surprise upside came from both services and manufacturing sectors which helped to offset declines in mining and commodities. Some of the strength is expected to wane, evidenced from recent weakness in January trade, industrial production, and monetary statistics. The unemployment rate has also inched higher to 3.3% at end-2015 (vs. 3% in 2014) while Petronas reported planned capital and operational spending cuts of MYR15-20bn in 2016 as well as a group-wide transformation that would result in under 1,000 redundancies over six months. Still we think the economy may derive support from the mega infrastructure capital spending and growth stabilization measures that were announced in conjunction with the recalibrated 2016 budget.

Some of the key measures include a 3% cut in Employee Provident Fund (EPF) contribution rate, a special MYR2k tax relief for middle-income tax payers, higher BR1M cash handouts, increase in minimum wages, civil servant increments, visa waiver for China tourists, as well as a 1% corporate tax cut. These measures could effectively inject over MYR14bn into the economy or around 1% of nominal GDP. Meanwhile every 10% increase in Chinese tourists from 2014 would add around MYR0.6bn in tourist receipts. As such we project 4.2% growth this year, with average of 4% in 1H16 before picking up to 4.4% in 2H16.

Ringgit Gains GroundThe USD/MYR has strengthened over 10% from its weakest point of 4.4812 at end-September 2015 on the back of improved sentiment amid receding domestic headwinds especially on the political front and 1MDB issues, stable fundamentals, dollar weakness, some recovery in oil prices, and stronger Renminbi.

Other silver linings include - China has pledged to purchase Malaysian

government bonds, lending support to domestic markets. The government announced a recalibrated budget that shores up growth while ensuring minimal fiscal slippage (fiscal deficit target unchanged at -3.1% of GDP in 2016) despite weaker oil price assumptions. The current account surplus widened in 4Q15, bringing the full year current account surplus to MYR34bn or 2.9% of GDP (+4.3% in 2014), dispelling initial fears that Malaysia would incur a current account deficit. While we expect a gradual export recovery helped by manufactured shipments and tourism receipts, imports could stay sticky owing to stable Ringgit and capital spending. International Rating agencies have reaffirmed Malaysia’s long-term foreign currency ratings at A3/A- with Stable outlook. Meanwhile Government-linked companies (GLCs) and investment and investment funds are reportedly selling their overseas properties in London, Singapore and Australia, and expected to gradually repatriate the funds.

We are revising our near-term USD/MYR projections to 4.05 by mid-year (vs. 4.25 previously) while keeping our year-end target of 4.10. We expect volatility in between periods though the deviations are expected to be narrower compared to last year. We have assumed a steady Renminbi that lends more stability to the regional currencies, and abating dollar strength though the greenback remains supported by future US rate hikes. The oil price outlook has improved somewhat but remains a wild card. However since the start of the year, we witnessed a diverging trend whereby the Ringgit held steady despite further downside in oil prices. A

key event risk to watch is announcement of BNM Governor Zeti’s successor ahead of her retirement at end-April.

Interest Rates On Pause Despite recent weakness in economic data, we continue to expect BNM to stand pat on interest rates for now and assess the impact of the growth measures as well as external developments. Following the 50bps cut in statutory reserve requirement (SRR) ratio in January, we have seen a return of capital flows, stable foreign reserves, and some easing in domestic liquidity tightness evidenced by declining interbank rates. As such, we think BNM will keep its powder dry as economic conditions have not shown significant deterioration akin to the Global Financial Crisis.

Although inflation spiked up in January and likely to remain high in February, the upside prices pressures are partly offset by petrol price cuts. Some upside price pressures include removal of flour subsidies; revision of excise duties on alcohol; potential toll rate hikes; and higher minimum wage pressures that would be passed on to consumers. However this would be offset by low oil prices, stronger Ringgit, coupled with abating base effects and weaker domestic demand that should see inflation trend lower from March onwards.

UOB Economic Projections 2014 2015F 2016F 2017F

GDP 6.0 5.0 4.2 5.0

CPI (average, y/y %) 3.1 2.1 2.5 3.0


Current account (% of GDP) 4.3 2.9 1.6 1.5


USD/MYR Holding Its Ground Despite Weaker Oil Prices In Early 2016


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90

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110

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40

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120

Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Index (100 = Sep 2014)

US$/bbl

Brent oil

USD/MYR

USD/CNY



Singapore

2015 Economy GrewAt Slowest Pace In Six YearsSingapore’s 2015 economic growth registered 2.0%, significantly slower than the 3.3% expansion in 2014). This is the slowest growth rate since the recession in 2009, where growth contracted 0.6% then. Key weakness came from the manufacturing sector as it contracted by 5.2%, a reversal from the 2.7% growth in 2014. Weakness in this sector was broad-base as all the manufacturing clusters, with the exception of the chemicals cluster, saw a decline in output. Growth in the construction sector moderated to 2.5%, from 3.5% in 2014, primarily due to a lower volume of private industrial and residential building activities.

The services producing industries remained the key pillar supporting economic growth in 2015 as it grew by 3.4%, easing slightly from the 3.6 per cent growth in 2014. Growth was supported mainly by the wholesale & retail trade and finance & insurance sectors, which expanded by 6.1% per cent and 5.3% respectively.

Singapore’s external demand remained weak, while the domestic sectors continue to face the challenges from the on-going economic restructuring amid tight labour market conditions. Economy-wide labour productivity remained weak since the labour productivity reform started in 2011. The dovish central bank actions around the world and the global disinflationary trend had resulted in a decline in Singapore’s export competitiveness, as well as the importation of global deflation onto its shores.

We maintain our forecast for 2016 GDP to grow 2.7%, at the higher end of government’s 1-3% growth forecast. Although Singapore’s manufacturing sector is not out of the doldrums yet (and we are expecting 1Q 2016 to be another quarter of on-year contraction for this sector), we remain optimistic that there could be some pickup in external sectors (such as manufacturing) growth in 2H2016.

First, we expect the economic conditions in the US to continue on an improving path. Better jobs numbers, stronger wage gains due to the tighter labour market, and a stronger USD will see the rise of consumption demand from the average American consumer. The pickup is not just in the US as latest economic indicators have shown signs of improvement in various advanced economies, even as growth in the emerging economies remains challenging. Second, the basis effects from the low base in 2015 will provide some support for growth.

The services sector will continue to be a bright spot. However, we forecast that services growth for 2016 may slow to 2.7%, from 3.6% in 2015 as the wholesale & retail trade faces the higher base effects from 2015, while the finance & insurance sector may grow at a slower pace, a result of rising interest rates and still-weak business sentiments.

Although growth had slowed considerably, we still maintain our view that the central bank will keep the April monetary policy unchanged. The recent USD/SGD move lower had been quick and furious and we think there is still room for the pair to touch the 1.34 mark in 2Q2016. However, holding on to our view of 2 US interest rate hikes (Jun and Dec), the USD/SGD pair should move higher to the 1.36 level at end-2016. The 3m SIBOR is forecasted to reach 1.50% by the end of 2Q 2016, and moving on to 1.75% by the end of 2016 on the back of the rate hikes in the US.


GDP 3.3 2.0 2.7 3.0

CPI (average, y/y %) 1.0 -0.5 0.8 1.5



Fiscal balance (% of GDP) -0.03 -0.17 0.34 0.70

Services-Producing Sectors Helped To Support Singapore’s Economic Growth In 2015

Source: CEIC

6.1

5.3

4.2

2.5

1.5

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0.0

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2.1

7.0

3.5

1.6

1.7

2.6

2.7

-6 -4 -2 0 2 4 6 8

Wholesale & Retail Trade

Finance & Insurance

Infocomms

Construction

Business Services

Accomodation & Food Services

Transport & Storage

Manufacturing

% y/y

2014 2015

2015 Share of GDP

18%

8%

2%

13%

5%

4%

13%

19%

Services-Producing Industries



Thailand

Tourism and public investment are main factors to drive Thailand’s economy forward.

Thailand’s economy in 4Q15 continued to recover as a gradual pace attributed to accelerated public spending especially in transportation, irrigation and small-scale investment projects and improvement in the tourism sector after the bombing incident in Bangkok. The 4Q15 GDP growth rose to 2.8% y/y versus 2.9% y/y in the previous quarter, bringing full-year 2015 GDP growth to 2.8% from 0.8% in 2014. Additionally, private consumption gradually recovered supported by improved consumer confidence, persistent decline in energy prices, and partly benefitted from additional stimulus measures. However, those were weighed down by low farm income. Manufacturing production and private investment slightly improved. The value of merchandise exports, nevertheless, dropped significantly from a decrease in export prices of several products following global oil prices and a decline in quantity owing to the economic slowdown in China and ASEAN countries.

The cautious economic recovery is expected to gather momentum gradually. The growth momentum would be largely driven by sustained public spending, private investment in some industries such as telecommunication and alternative energy, and household spending supported by falling oil prices despite lower farm incomes following declining commodity prices. In addition, the tourism sector in 2Q16 is projected to continue an expansion trend, supporting a continued growth in related service sectors, especially wholesale and retail trade, hotels and restaurants, and logistics. However, downside risks to economic growth are expected to increase, largely attributable to external factors including the prospect of economic recovery in major trading partners, subdued commodity prices, and the monetary policy divergence in advanced economies. The increasing risks to global growth could weigh on Thai merchandise exports, and that warranted close monitoring.

On the stability front, inflationary pressures are expected to subside following a decrease in energy prices. Nevertheless, headline inflation rate, currently below zero, is projected to rise slowly and turn positive during 1H16, although the inflation outlook would largely depend on the trajectory of oil prices. The unemployment rate in 2Q16 will remain at low level. Meanwhile, the current account is projected to post a surplus as imports would continue to contract.

The Bank of Thailand (BoT) decided to maintain the policy rate at 1.50% in the Feb meeting. The BoT reiterated that monetary policy stance should continue to be sufficiently accommodative to support the economic recovery, while maintaining long-term economic and financial stability. Looking ahead, we expect that the BoT is likely to maintain the policy rates unchanged at 1.50% in 2Q16. With energy and commodity prices set to remain soft, headline inflation will stay close to the inflation target. Moreover, further monetary policy easing could only marginally improve the economic and inflation outlook given that the current policy stance is accommodative. As a result, the limited policy space should be preserved for future utilisation, whilst there remain downside risks to economic growth from both external and internal sources.

Global financial markets experienced heightened volatility since the beginning of 2016 on the back of fluctuations in China’s financial markets, declining oil prices, and the monetary policy divergence among developed countries. The factors caused volatile movements in capital flows and exchange rates, especially after the BoJ’s announcement of a negative interest rate policy and the ECB’s additional monetary easing. Consequently, investors raised their holdings of emerging market assets, including Thailand, which contributed to the THB appreciation similar to other regional currencies. Looking forward, the volatility is likely to persist in 2Q16. The Fed is likely to raise the policy rates gradually in 2016 despite recent positive developments in the US. To support the ongoing economic recovery, we expect broad THB depreciation against USD in 2016. For now, we expect THB to weaken against USD towards 36.0 at end-2Q16 from around the 34.9 level currently.


GDP 0.8 2.8 3.2 3.6

CPI (average, y/y %) 1.9 -0.9 0.5 1.2




Tourism Has Been A Key Growth Driver For The Thai Economy, With Expected Tourist Arrivals Of Around 32millions In 2016.

Source: Thailand’s Department of Tourism, UOB Global Economics & Markets Research

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2010 2011 2012 2013 2014 2015 2016FNumber of Tourists (Million) GDP Growth Trend (RHS)



India

Measures To Improve Government Revenue To Meet Budget Deficit TargetsThe government of India delivered the FY2017 Budget on 29 Feb, which showed that it had met the deficit targets during the two years that PM Modi was at the helm. Overall, the budget is likely to be credit positive for India’s sovereign standing as it aims to bring fiscal deficits to 3% over the next two years. Both the proposed efforts to widen the tax base and restraint on expenditure should be beneficial in terms of lower borrowing costs. Several new measures will simultaneously boost tax revenue and reduce tax evasion. The government is also committed to implementing a national goods and services tax in the “near future.”

But Challenges From Higher Expenditures ExpectedHowever, Moody’s lamented that the Budget did not contain “significant measures to address structural fiscal challenges, such as the government’s low tax revenue base and the vulnerability of government finances to economic shocks”. In fact, the implementation of the Seventh Pay Commission recommendations of a 24% hike in public sector salary, allowances and pensions, will likely be a key source of spending pressure in the coming year. Moreover, after two consecutive years of drought, there is a pressing need to improve rural infrastructure and incomes, especially since agriculture and related sectors account for about half of India’s employment.

In all, this means that material improvements to India’s public finances will likely be limited in the near term, and deficit reduction will come from cyclical upswings or tactical fiscal management, rather than a broad-based fiscal consolidation strategy. Weak corporate profitability and lower trade and rural consumption had dampened government direct and indirect tax revenues respectively, and the budget deficit target for the current fiscal year will be met largely due to the tactical management of revenues and expenditure and the effect of lower oil prices.

Inflation Expectations RemainA Key Concern In 2016Although India’s most recent consumer inflation eased in February, it was only for one month and still early to tell if it will continue. Food remains the largest portion in the typical Indian consumption basket (46%) and its expected price direction is usually related to weather patterns. Although weather and rainfall is notoriously hard to forecast, the probability of another yet of rain shortfall in 2016 seems lower. There were only 2 instances in India’s history (since 1900) where rainfall fell for three consecutive years (1949-1951 and 1984-1987).

Moreover, still-low oil prices is a positive for India’s economy should it continue into 2016, as it will improve the purchasing power of the typical Indian household and with household consumption at 56% of GDP, should provide some boost to 2016 growth rates. Moreover, we expect India’s trade deficit and thus current account deficit to improve as well due to the low oil prices.

The RBI had kept the repurchase rate unchanged at 6.75% during the last policy meeting on 2 Feb. Lower consumer prices had boosted speculation that central bank Governor Raghuram Rajan will be lowering interest rates after the government stuck with a plan to narrow the budget deficit. We are of the view that RBI could probably keep the current rates unchanged at least until 2Q 2017. Even without any further rate cuts in our forecasts, our expectations of a stronger USD from the US interest rates normalization will likely see the USD/INR trading at 69.0/USD by the middle of 2016, and to 71.1/USD by end 2016.


GDP 6.9 7.3 7.4 7.7

CPI (average, y/y %) 6.4 5.9 5.0 5.4



Inflation Expectations Remain A Key Concern In 2016

Source: CEIC

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6

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16

18

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% y/y

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China

Downside Pressure On Growth RemainsChina’s 4Q15 GDP growth came in at 6.8%y/y, in line with expectations, and slowing from 6.9%y/y in 3Q15, marking the slowest pace since 2009. For the full year, China’s economy expanded 6.9% in line with expectations, from 7.3% in 2014, the weakest since 1990. High frequency monthly data general point to further weakness ahead. The ongoing restructuring and reform also add to further growth headwinds, though risks of a “hard landing” scenario remain low, as reflected in consumer spending and power generation data.

One key reason is the labour market remains stable, which keeps spending well supported. Per capita real disposable income grew an average of 7.8% annually from 2013 to 2015, slightly faster than real GDP growth rate of 7.3%.

Public infrastructure investment in relation to urbanization continues to gain speed, rising an average of 20% annually from 2013-2015, compared to overall investment growth of 15%, and contributing to nearly 30% of overall investment growth rate in 2015, from contribution of 17.5% in 2013.

One question that is often asked is where the growth engine for China is with the shift towards services sector. To get some sense, one can look at the scale of the labour market. Annually, about 15mn of new job seekers enter China’s labour market, comprising about 7.6mn new graduates and another 7.5mn or so other post-secondary graduates. New jobs added have kept the labour market stable, with 13.1mn created in 2013, 13.22mn in 2014, and 13.12mn of new employment in 2015. Services share of the total labour force rose from 36.1% in 2012 (industrial: 30.3%) to 42.4% in 2015 (industrial: 29.3%). Employees in services-related sector have risen from 276.90mn in 2012 to 328.39mn, rising at an average pace of 17.16mn per year.

For 2016, we expect China’s growth rate at about 6.8% (1Q16F: 6.8%). For 2017 and beyond, we expect overall economic growth pace to decelerate continuously, and to hit 6.4% by 2020. As such for the 13th 5 year plan period (2016 – 2020), it is reasonable that growth projections to fall between 6.5 to 7.0% range, announced in the recent National People’s Congress on 5 Mar.

Room For Policy Easing After announcing days earlier a subtle shift towards “prudent with slight easing bias” policy, PBoC acted swiftly with a broad-based 50bps cut in banks’ reserve requirement ratio (RRR) on 29 Feb, to 17.0% for major banks.

With the easing bias and availability of policy tools, the risks of “hard landing” in China remain relatively low and so is likelihood of large-scale RMB devaluation. The burden is likely to fall on RRR, as it works to fine tune the interest rate corridor. PBoC last cut interest rates on 23 Oct 2015, the sixth interest-rate cut in a year (depo rate 1.50%; lending 4.35%). There is still further room for interest rate and RRR reductions ahead, with a slim chance of interest rate cuts by end-1Q16. The next reduction in RRR is likely to be in 2Q16.

For the RMB, we had cautioned back in January, when selling pressures were at its peak, that such pessimism on the currency (and China economic outlook in general) was excessive. We are keeping our forecasts intact, for 6.45 by end-2016. The recent stability of the onshore and offshore prices suggests that speculative activities are now kept at bay. However, depreciation pressure on the currency remains as there is still likelihood of a USD rebound against EM currencies. More important though is that with the RMB referencing a basket of currencies, the USD/RMB exchange rate is likely to see greater volatility and more flexibility going forward, even if the basket as a whole stays relatively stable.


GDP 7.3 6.9 6.8 6.7

CPI (average, y/y %) 2.0 1.4 2.0 1.9




GDP By Industry (2010p)

Source: CEIC, UOB Global Economics & Markets Research Estimates

6.8

4.1

6.1

8.2

0.0

2.0

4.0

6.0

8.0

10.0

Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15

y/y% change年比增速%

Overall GDP （总体GDP） Primary Ind （第一产业）

Secondary Ind （第二产业） Tertiary Ind （第三产业）

Interest Rate & RRR Forecasts 2Q15 3Q15 4Q15 1Q16F 2Q16F 3Q16F 4Q16F

1-year Benchmark Lending Rate % 4.85 4.60 4.35 4.10 3.85 3.85 3.85

1-year Benchmark Deposit Rate % 2.00 1.75 1.50 1.25 1.00 1.00 1.00

Reserve Requirement Ratio % 18.50 18.00 17.50 17.00 16.00 15.00 15.00

Source: UOB Global Economics & Markets Research



Hong Kong

Economic Activity Continued To SlowHong Kong’s GDP expanded 1.9%y/y in 4Q15, slowing from 2.2% in 3Q15, and average of 2.7% in 1H2015, as domestic demand growth shrank during the quarter at 0.2%y/y, its first negative reading since 3Q10. HK economy expanded 2.4% in 2015, down from 2.6% in 2014. One key drag factor to HK’s growth in 4Q15 has been domestic demand, specifically the back-to-back declines in capital investment, which contracted 9.7%y/y in 4Q15, from -6.4% in 3Q15.

Overall visitor arrivals to HK have changed along with moderating mainland arrivals. Total visitor arrivals in HK have declined on a y/y basis for 8 consecutive months to Jan 2016, the longest stretch of protracted declines since the 1997/98 when visitor arrivals fell for 13 months. Of note is that Mainland arrivals under individual scheme have been contracting on a y/y basis for the 11th straight month to Jan 2016, the worst since the scheme began in 2003.

With the ongoing challenges of sluggish global growth environment and a “new normal” slowdown in China, we are trimming down HK’s growth forecast for 2016 to 2.0% (previous forecast of 2.3%), which is well below HK’s average annual growth rate of 3.9% seen during 2005-2014.

HKD Peg To StayDespite Pressure Earlier After being beaten back in their speculative attacks against offshore CNH in late January, speculators took on the HKD with the reasoning that USD strength, rising US Fed rate, high domestic property prices and household leverage, and slowdown in HK and China would mean an excessive tightening of monetary conditions, making the HKD peg vulnerable. Pressures intensified by mid-January, as the 12-month forward points surged to 700 points, vs. average of 8.4 points in 2015, and twice the 375 points on 24 Aug 2015, two weeks after 11 Aug RMB mechanism change. HKMA intervened, and sentiment cooled off along with receding depreciation expectations on the RMB.

There are still doubts on the HKD peg. However, it is likely that status quo will

remain for now, as it has been an anchor for HK’s financial system for more than three decades, and there is very little economic or political incentive to switch out. In addition, as long as HKMA’s aggregate balances – i.e. HK banking system liquidity – remain flush due to capital inflows (HKD363bn as of Mar 2016) and Exchange Fund at substantial levels (HKD855bn at end-Jan 2016), there would be downward pressure on the USD/HKD forward points.

As we continue to expect two more rounds of US Fed interest rate hikes in 2016, HIBOR will likely remain well supported through the year. The squeeze in domestic liquidity in early 2016, as HKMA went to work to defend the HKD peg, has caused the 3-month HIBOR surged to high of 0.69% on 25 Jan, though it has eased to

0.57% by mid-March. This volatility could still return especially if the HKD peg is under pressure and become a proxy for attacks against RMB. Nevertheless, we are still looking for the 3-month HIBOR at towards the 1-1.5% range by end-2016.


GDP 2.6 2.4 2.0 2.4

CPI (average, y/y %) 4.4 3.0 2.4 2.5



Fiscal balance (FY, % of GDP) 1.1 1.9 1.0 1.0

Visitor Arrivals


-40

-20

0

20

40

60

80

Mar-08 Sep-09 Mar-11 Sep-12 Mar-14 Sep-15

%y/y change

HK: Visitor Arrivals China Arrivals China Arrivals: Individual Visitor Scheme

USD/HKD And 12-Month Forward Points


-200

-100

0

100

200

300

400

500

600

700

800

7.750

7.770

7.790

7.810

7.830

7.850

Jun 15 Aug 15 Oct 15 Dec 15 Feb 16

Fwd pointsUSD/HKD

USD/HKD exchange rate (LHS) HKD 12-month forward points (RHS)



Japan

Economy: Running Out Of Arrows? Japan’s final print for the 4Q 2015 GDP was surprisingly revised better to -0.3%q/q (from prelim estimate of -0.4%q/q). While private consumption declined a tad more by -0.9%q/q (from -0.8% in prelim), business spending turned out to be stronger at 1.5%q/q (from +1.4%q/q in prelim) helping to cushion domestic demand fall. That said, we remain wary about the sustainability of investment spending if export demand from external markets, especially China, fails to rebound. 4Q capital spending eased 8.5%y/y (after surging 11.2% in 3Q) but 4Q company sales fell -2.7%y/y (from 0.1% in 3Q). More disappointing is the unexpected company profitability decline by -2.7%y/y in 4Q 2015, the first y/y contraction since 1Q 2011, dashing hopes that profitability could be sustained. The Bank of Japan (BOJ) was more pessimistic about exports and production in its March policy decision, blaming it on the “slowdown in emerging economies”. Indeed, January industrial production contracted -3.8%y/y, the 6th straight month of decline since Aug 2015. Japan’s exports painted the same dismal start to 2016 just like many of its Asian counterparts. After a broad-based decline of -12.9%y/y in Jan (the sharpest drop since October 2009), exports fell a further -4%y/y in Feb, the fifth straight month of y/y contraction, but managed to etch out a JPY242.8bn surplus thanks to a -14.2%y/y fall in imports (from -17.8% in Jan). We keep our 2016 Japan growth forecast at 1% (from an anemic 0.5% in 2015) but the risk is for growth to be on the downside from our projection because of domestic consumer weakness on top of the uncertain external demand outlook on a trade-dependent Japan. The April 2017 sales tax hike looks to be still taking place as planned and that should keep BOJ happy to support the government with its monetary stimulus. And with Upper House election taking place in mid-year, we could expect a supplementary budget to finance a government stimulus package if Japan heads into a recession.

Japan’s core inflation (which excludes fresh food) eased further to 0%y/y in Jan (from 0.1% in Dec). The core-core inflation (which excludes food and energy) also eased lower to 0.7% (from 0.8% in Dec), and well off the above 2% reading between April 2014 and March 2015. In its Jan 2016 policy decision, the BOJ again pushed out its timeline to achieve the 2% inflation target further to first half of FY 2017 (from second half of FY 2016 announced in the 30 Oct 2015 MPM). While it maintained this timeline in March, it noted inflation expectations recently weakened, blaming falling oil prices.

BOJ Expected To Ease More In 2016While we expect more easing measures from the BOJ in 2016, the central bank kept its current policy stance unchanged in March and we think this is largely for two reasons: first, the BOJ just shifted into negative rates in January 2016 and may prefer longer period of assessment before adding more measures; second, the BOJ is likely to want to wait for the outcome of the 2016 Shuntō (which is Japan’s annual spring wage negotiations) before embarking on further stimulus. Indeed, the IMF recently called on Japan to release its 4th arrow of Abenomics which is wage growth.

That said, the BOJ has made some unexpected decisions in recent months and there remains a high chance for easing measures to be announced in 2016. After the March MPM, the important 2016 MPM meetings will be 27/28 Apr, 28/29 Jul and 31 Oct/1 Nov in our view because

these meeting will include the updated outlook reports. And note that Ms Sayuri Shirai (31 Mar 2016) and Mr Koji Ishida (29 Jun 2016) – who coincidentally are two of the 4 dissenters in January MPM – will be exiting the MPM this year, so Kuroda may just get less opposition should he choose to ease monetary policy according to the newly minted 3-dimensions of QQE. We now expect additional stimulus from BOJ earlier rather than later, possibly in April MPM and will likely be in the form an expansion of its asset purchase programme and increasing the monetary base to an annual pace of JPY 90 trillion (from JPY80 trillion), instead of more negative rates in April as the BOJ will like more time to assess the impact of negative rates.

JPY: 105 Is The Line In The SandEven as more BOJ easing likely in 2016, recent market volatility & safe haven demand for yen has recalibrated the USD/JPY to lower level while the ineffectiveness of BOJ stimulus could send the pair to towards & re-test the 110-mark and head towards 105 in 2Q-2016 but that will be the intervention threshold for the Treasury and we expect a gentle uptrend thereafter.


GDP 0.0 0.5 1.0 1.0

CPI (average, y/y %) 2.7 0.8 0.5 1.8



Fiscal balance (% of GDP) -8.3 -7.5 -6.5 -6.5

Elusive Trade Surplus Now Even More Challenging In Weak Demand Environment


-60

-40

-20

0

20

40

60

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Trade Balance (JPY bn) Exports (JPY bn)Imports (JPY bn) Exports Growth (%y/y - RHS)Imports Growth (%y/y - RHS)



South Korea

Poor Exports And Market Uncertainties Are Key Headwinds To GrowthSouth Korea’s exports remain on a downtrend with contractions for 14th consecutive months in February 2016 and showing no sign of letting up. In fact, the export outlook has weakened with double-digit contraction pace since December 2015. Despite some rebound in exports to EU and Japan, the weakness in its largest export market (China accounted for 26.0% in 2015) continued to hamper South Korea’s export recovery.

Going forward, the slow pace of recovery in global demand and market uncertainties are the key headwinds to South Korea’s growth. Domestic demand will be the main growth engine this year but high household indebtedness is expected to constrain any potential upside. Household debt has accelerated since 3Q14 after the government eased loans-to-value regulation in August 2014 to support the property market. Meanwhile, household income has stagnated with growth estimated at only around 1.7% in 2015. According to data from the Bank of Korea (BOK), the household debt-to-disposable income ratio (household credit statistics basis) stood at 143.0% at the end of 3Q15.

We are maintaining our GDP growth forecast of 2.9% in 2016, up from 2.6% in 2015. The BOK currently forecasts growth of 3.0% but this could be revised in April.

BOK On Hold,Wary Of The Impact Of Further Rate Cut The interest rate is already at record low of 1.50% after the last cut in June 2015 and bias is towards more monetary easing given weak growth and subdued inflation which we forecast will average around 1.3% this year (2015: 0.7%). Note that the rate decision was not unanimous in February and March with one board member (out of seven) voting to cut interest rate. Changes to the make-up of the monetary board committee in April (four members have their tenor expiring) may have some bearing on the rate decision going forward.

The BOK still sees the benchmark interest rate as accommodative enough and highlighted the need to balance financial and growth stability especially as there are

limitations in using further monetary policy easing to boost growth. The central bank has also highlighted the high household debt as a major concern if monetary policy is eased further. On balance, the BOK is unlikely to focus on monetary policy but we still see risk of a 25 bps interest rate cut in 2Q16. Monetary policies in other central banks will also influence BOK’s decision in the upcoming meetings.

KRW Underperforming Regional Peers USD/KRW recorded a 5 ½ year high of 1,245.13 in late-February before paring the gains on broad USD correction. Slow growth, monetary easing bias and the intensifying tensions in the Korean peninsula since North Korea’s claim of a hydrogen bomb test in January and launch of a satellite leading to the closure of the Kaesong Industrial Complex, have all contributed to the negative sentiment

towards the KRW. Given the recent correction and dimmer outlook for the near term US Fed policy normalisation, we have revised down our forecast for USD/KRW to 1,180 by end-2Q16 and moving higher to 1,200 by end 4Q16.


GDP 3.3 2.6 2.9 3.0

CPI (average, y/y %) 1.3 0.7 1.3 1.7




Slowdown In China Hampering The Recovery In South Korea’s Exports


-30

-20

-10

0

10

20

30

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

EU US Japan China Total export

Export (3mma, % y/y)

Contraction Across Key Segments


-2.1-3.1

-13.5-12.4

-8.0

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

Electrical &Electronics (export

share: 34%)

TransportationEquipment (export

share: 22%)

Chemical IndustrialProducts (export

share: 12%)

Steel & MetalProducts (export

share: 8%)

Total Export

Export Growth By Key Products (2015)% change



Taiwan

Off From Technical RecessionBut Outlook Remains WeakTaiwan reported its 4Q15 GDP report with a positive reading of 0.54%q/q seasonally-adjusted growth, after two consecutive quarters of negative returns (-0.05%q/q SA in 3Q15 and -1.58%q/q SA in 2Q15). While the figures suggest that Taiwan’s economy may be shrugging off a “technical recession” and the worst performance since 2011 when it reported 3 consecutive negative q/q readings from 2Q11 to 4Q11, recent data continue to show the Taiwanese economy continues to face significant headwinds ahead as global trade growth decelerating and mainland China itself is also slowing due to internal restructuring and reform.

Taiwan’s economy contracted -0.5%y/y in 4Q15, extending the -0.8% decline in 3Q15, for the first back-to-back declines in headline since the 3Q08-3Q09 period. Taiwan’s full year growth came in at 0.75% for 2015 (vs. advance estimate of 0.85%), down sharply from 3.92% in 2014, the worst since 2009 (-1.57%).

Recent data have not been reassuring as exports in value terms fell by double digit in Feb at 11.8%y/y, for an average decline of 12.4% in Jan-Feb 2016, largely keeping pace , with the -13.9%y/y drop in 4Q15 and -14%y/y 3Q15. A similarly dismal picture in volume terms, as exports fell 5.8%y/y in Jan 2016, extending the 4.4% fall in 2H15.

Particularly, exports to China and HK (about 37% share of total exports value) fell by 16.4%y/y while exports to the US (12% share) declined by 9.5% in Jan/Feb. Exports of electronics parts (about 1/3 of total exports) contracted 6.4%y/y.

Looking ahead for 2016, it is likely that further challenges remain even with the help of low bases, as global trade and growth outlook stay muted. Official growth forecasts were cut in Feb, from 2.32% to 1.47%. Exports in 2016 are expected to contract another 2.78%, reversing from earlier expectation of +1.97%. On our part, we have lowered Taiwan’s GDP forecast for 2016 to 1.1% from 1.8% originally, with 1Q16 likely to see a further decline of -0.4%y/y, (then picking up to 0.98%y/y in 2Q16, 1.57% in 3Q16 and 2.1% in 4Q16). It should be noted that Taiwan’s economic growth rates have halved with every change in presidency since the 1990s: from an average of 8% annually during Lee Teng-hui (1988-2000), to 4% during Chen Shui-bian (2000-2008), to 2% under Ma’s administration (2008-2016). A new President from the DPP led by Ms Tsai Ing-wen will be taking over the reign starting in May 2016.

Another Rate Cut Ahead In response to data pointing to another quarter of contraction in economic activities in1Q16, we expect another 12.5bps rate cut by the Central Bank of China (CBC) on 24 March to 1.50%, following the 12.5bps cut to 1.625% on 17 Dec 2015 and the 12.5bps move on 24 Sep 2015. This would bring the benchmark interest rate to near historic low of 1.25% during the global financial crisis in 2009. With most Asian central banks, including PBoC, biasing towards easing, the pressure is likely for CBC to “do more”.

As for the TWD, its close correlation with the RMB means that its fluctuations tend to follow that of its mainland counterpart, with correlation of 0.2-0.4. With devaluation pressure on RMB easing, TWD has regained posture since the Lunar New Year break. Nevertheless, in line with our view that the US Fed would raise interest rate at end-2Q16 and end-2016, USD strength could peter out towards end-2016. As such, we lower our USD/TWD forecasts along this trajectory, to 31.95 from 33.6 previously, at end-2016.


GDP 3.9 0.7 1.1 2.0

CPI (average, y/y %) 1.2 -0.3 1.0 0.7




CBC Discount Rate And Overnight Interbank Call Loan Rate


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0


% p.a.

Interbank Call Loan Rate: Overnight: Weighted Average CBC Benchmark Discount



Eurozone

Super Mario Did ItAfter underwhelming markets in December 2015, ECB President Mario Draghi delivered a bold easing package at the recent March meeting.

� All key interest rates were lowered.

� The volume of monthly purchases under the Asset Purchase Program (APP) was increased from EUR60bn to EUR80bn starting in April 2016, exceeding expectations for a EUR10bn increase. The APP will continue to run until at least March 2017 or at least until there is ‘a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term’. The programme will now also include investment grade bonds issued by non-bank corporations that are established in the Euro area. For there to be a smooth implementation of asset purchases, the bank will increase the issuer and issue share

limits from 33% to 50%.

� The ECB also announced four new Targeted Long Term Refinancing Operation (TLTRO) auctions, one per quarter starting in June 2016, with a maturity of 4 years, hoped to ‘strengthen the transmission of monetary policy by further incentivizing bank lending to the real economy’.

But Will This Work?What Draghi delivered was a massive punch. Yet, at the same time, this adds to the fear that monetary accommodation is closer to its limit; and that the ECB may have exhausted its policy options and be defenseless down the road. And it was during Draghi’s press conference, when he signaled that rates may not go any lower, that were taking very “negatively” by markets. However, in the grand scheme of things, we think the new stimulus should be viewed positively as it is likely to support growth over the coming months by providing some relief to banks. Euro area banks have indeed seen their profitability eroded by negative interest rates. This is why Draghi pointed out that the ECB cannot continue to cut interest rates without having consequences on

the banking system, and suggested that the decision not to adopt a tiered system on the deposit rates signals that negative rates could not go much lower.

As such, we believe the more important decision was the introduction of corporate bonds into the APP, and more importantly, the launch of the new TLTRO2. The favourable conditions under this new TLTRO2 regime is designed to help banks that are hit by the negative deposit rate cut, but at the same time, the ECB is wary of the complexities involved in a tiered system of negative rate, and which would have benefitted only mainly French and German banks given these are the ones that own most excess reserves. Hence, this not only addresses at least some of the concerns on the negative implications for the banks; but is clearly a push to support credit growth as it incentivizes banks that most affect the real economy to lend more, since the amount a bank can borrow is dependent on the bank’s outstanding loan book.

EUR Likely To Remain SupportedAt the end of the day, the ECB wants to maintain easy monetary conditions. And in that regard, a period of sustained EUR strength could be a concern. However, it was clear that what the ECB actually did was not lowering rates further into negative territory as a way to deter market participants from piling into the EUR. Instead, when taken in conjunction with the new TLTRO2 regime, it is obvious that the ECB is targeting credit rather than the currency. This, in our view, is a major game-changer since the ECB is changing its emphasis to attempt to fuel the domestic recovery by nurturing the banks to support credit growth. At this juncture, we are positive that these measures will work better than before, and thus, growth and inflation should pick up eventually. This should feed into support for the EUR. We also maintain our view that the gradual path of monetary tightening by the Fed is likely to see any appreciation of the USD limited.


GDP 0.9 1.6 1.7 1.7

CPI (average, y/y %) 0.4 0.0 0.5 1.4




- Now Previously

Interest Rates

Main Refinancing Rate 0.00% 0.05%

Marginal Lending Rate 0.25% 0.30%

Deposit Rate -0.40% -0.30%

APP

Size EUR80bn EUR60bn

Duration until at least Mar 2017

Issuer and Share Limit 50% 33%

Asset Type Eligibility

To include Investment-grade Euro-denominated bonds issued by non-bank corporates

Include purchases of regional government bonds

TLTRO2

Banks can borrow up to 30% of their non-mortgage private loan books. Estimates indicate that this is equivalent to about EUR1.5tn to EUR1.7tn, far larger than the maximum that could have been drawn from the initial TLTROs (7% of loan books) of EUR400bn.

Banks will be also allowed to switch all of their balances from TLTRO1 into TLTRO2 in June 2016. Under the old regime, banks would have to repay the TLTRO in September 2016 if the lending benchmark was not met. That is, the liquidity would have been 2-year maturity rather than 4 year maturity if banks had not grown lending in line with their benchmark. Under the new TLTRO2 regime, all liquidity will have a 4-year maturity irrespective of satisfying the lending benchmark.

The lending benchmark assessment will be used to determine the cost of TLTRO2 liquidity. In the worst case scenario, banks will pay the MRO (currently 0%). In the best case – if banks exceed a lending benchmark – banks will pay a rate in line with the -40bp deposit rate. For scenarios in between, there will be a graduated negative borrowing rate.

Source: ECB



Australia

Resilience In Australia’s EconomyThe Australian economy grew at a quicker pace than expected in the final quarter of 2015, with consumption and public investment coming in above expectations. GDP grew a seasonally adjusted 0.6% q/q, weaker than the 0.9% expansion in the previous quarter though. Final household consumption rose 0.7%, adding 0.4 percentage points to GDP growth, whilst public gross fixed capital formation contributed 0.2 percentage points to growth. Private gross fixed capital formation partly offset the expansion in the last quarter, falling 1.9%, driven by declines in new engineering construction, reflecting the fall in mining investment activity. Net exports made no contribution to GDP, as both exports and imports contributed 0.1 percentage points. On an annual basis GDP grew 3%, back to its long-term trend rate and ahead of consensus estimate for 2.5% growth. Although we are of the view that challenges and threats to growth remain, we think that overall, the Australian economy is still relatively resilient, thanks to a rebalancing of activity away from mining investment into the services sectors. We are maintaining our 2016 growth forecast of 2.6%.

RBA Keeps To Easing StanceThe RBA left the overnight cash rate steady at 2.0% at its March board meeting, but clearly maintained its easing bias. Notably, the OCR has been kept on hold at this level since May 2015, but that RBA has since introduced an easing bias last year after inflation continued to run below the RBA’s 2-3% target. The December quarter headline inflation ran at 1.7% annually, however underlying inflation fell to around 2%, according to the RBA’s February Statement on Monetary Policy (SoMP). One of the key reasons the RBA is happy keeping the cash rate unchanged for now has been the strength of the labour market. About a year ago, the RBA said it expected the jobless rate to rise to around 6.5%, but since then, the jobless rate has hovered around 5.8%-6.2%. We think that whilst there is still scope for the OCR to be lower, the RBA sees no immediate need for further easing. We continue to see the cash rate on hold at 2% over 2016.

Aussie’s Strength Could Hold Recall that AUD/USD had slid sharply over the first couple of weeks of this year, hitting seven-year lows of 0.6827 (15 January), largely on the back of China concerns and declines in commodity prices. But the currency pair has since rallied to touch recent-highs of 0.7680 (18 March). Not only have commodity prices seen a big fight-back during March; but USD strength did not persist despite the Fed’s liftoff, and amid excess liquidity around the world. We think that markets may have also taken an overly pessimistic view on the outlook for China, the domestic economy and interest rates. Going forward, we expect that AUD/USD will trade higher, notwithstanding some volatility. Weakness in commodity prices and fragile market sentiment could present some downside risks. But overall, a relatively resilient domestic economy and our view for a steady cash rate for all of 2016 should limit falls in the AUD.


GDP 2.6 2.5 2.6 2.9

CPI (average, y/y %) 2.5 1.5 1.9 2.5






New Zealand

RBNZ Could Cut Once MoreThe RBNZ unexpectedly cut its OCR from 2.50% to 2.25% at its March meeting. Given the RBNZ’s projections as well as the overall tone from RBNZ Governor Graeme Wheeler’s press conference, we now think that a further 25bps cut in the OCR over coming months is more likely than not. The timing will depend though on developments both domestically and abroad. In this regard, the Q1 CPI report on 18 April will be eyed. Any disappointment in these reports, renewed exchange rate strength, or deterioration in global financial conditions could see the RBNZ cutting as soon as the 28 April meeting. Otherwise, the 9 June meeting, in our opinion, is the more appropriate timing. Another important consideration for the RBNZ is the housing market, especially now that the strong house-price inflation has spread beyond Auckland – in Tauranga and Hamilton, prices are going up around 20% a year. This explains why we think that even with the possibility that the OCR will be lower, it will not go below 2.00%, as the RBNZ now projects.

Risks Remains For Kiwi EconomyThe reasons behind the RBNZ’s move in March are obvious. Price pressure is of course the RBNZ’s main target but we also see weak dairy prices and the strong NZD as other reasons for looser policy. In the RBNZ’s accompanying statement back in January, when the OCR was left on hold at 2.50%, the RBNZ has said that some “further easing may be required” to get inflation back to the 2% target midpoint. Headline inflation measured just 0.1% in the December quarter, the weakest annual rise in the price level since 1999. The dairy sector is also a major concern for the RBNZ as it is a major part of the New Zealand’s economy. Notably, export commodity prices remain around 55% lower than their early-2014-peak, and about 33% lower than this time a year ago. To add to the pain, the trade-weighted index was around 4% higher than was anticipated in the RBNZ’s December official statement forecasts, despite the subsequent fall in dairy prices. The RBNZ attributes this exchange rate rally to “an expectation that international monetary policy will be more stimulatory than previously expected”, but also noted that it hopes to see the NZD fall further.

Limited Downside For NZDAnd precisely, because RBNZ Governor Wheeler knows that in order to achieve the most out of this, he would have to take the markets by surprise. This was the reason why he chose to cut the OCR in March, just as the move was least expected. This also suggests that the RBNZ is serious when it comes to achieving lower interest rates and a weaker currency, despite the fact that the New Zealand dollar continues to be one of the weaker performers within the G10 space. Going forward, we could see a soft NZD amid risks of further “jawboning” by the RBNZ, alongside deviating paths for monetary policy, especially if the RBNZ brings the OCR lower. That said, we think this would have already been priced in, and should not drive the NZD materially lower.


GDP 3.0 2.4 2.3 2.6

CPI (average, y/y %) 1.2 0.3 1.3 2.0



Fiscal balance (FY, % of GDP) 1.3 1.4 0.0 0.2

Falling Milk Prices

Source: Bloomberg

1500

2000

2500

3000

3500

4000

4500

5000

5500

Apr 11 Dec 11 Aug 12 Apr 13 Dec 13 Aug 14 Apr 15 Dec 15



United Kingdom

Even The Hawks Are SingingA Dovish ToneThe March BoE meeting culminated with the MPC leaving the benchmark interest rate at a record-low of 0.5%, where it has been for seven years, and their stock of purchased assets unchanged at GBP375bn. The vote for unchanged policy was unanimous for a second month in a row. After a five-month split among the MPC, Ian McCafferty joined the majority of policymakers in February to vote for no change in rates. Martin Weale, another policymaker from the hawkish end of the MPC, also recently offered a cautious view on the policy outlook. Weale admitted that it was more likely than not that monetary policy in the UK would be tightened rather than loosened in the future, but at the same time added that, should more easing be needed, the BoE would have enough tools to offset the headwinds.

GDP And Inflation Revised Lower The UK economic outlook has indeed worsened since the BoE lowered its economic growth and inflation forecasts at the February meeting. The February Inflation Report saw the BoE cutting its average 2016 and 2017 growth forecasts to 2.2% and 2.4%, respectively, from 2.5% and 2.7% in the November Inflation Report, pushing below the OBR’s November projections of 2.4% and 2.5%. On inflation, the BoE lowered its central case 4Q16 and 4Q17 y/y rates to 0.88% and 1.93%, respectively, from 1.25% and 2.06% in the November Inflation Report. The 2% target now is not reached until 1Q18, at 2.05%, versus 2.14% in the November Inflation Report. With the UK economy seemingly stuttering so far this year and given the uncertain external environment, any interest rate hike has come off the table for now. Although we believe the next rate move as a hike, we see a risk that the move could be pushed back further.

23 June EU Referendum LoomsBrexit anxiety has been rising as the EU Referendum date nears. On this, our base case scenario is for the UK to ultimately vote to stay in the EU. Opinion polls have been cloudy though, with some showing the “leave the EU” camp in the lead. Yet, the lesson to be learned from the Scottish vote is in the polling. The vote was far less close than the polls made out, and the similar mistake was again made with regards to the British general election. That said, the lack of relevant precedence will mean that the impact from a surprise vote to leave the EU cannot be quantified with precision. As such, similar to the 2014 Scottish referendum, the negotiation process and eventual vote will likely spur bouts of market volatility.

Pound Remains VulnerableThe looming Brexit risk should have bearish implications for sentiment, and thus on the currency. As it is, GBP/USD has fallen in 14 out of the past 19 months. We think that in the eventual event of an ‘Out’ vote, the declines in the GBP could be substantial; but even an ‘In’ vote will be unable to save the GBP from a slowing UK economy. Besides, GBP remains at risk of further downside on the back of a delayed monetary policy tightening by the BoE.


GDP 2.9 2.2 2.1 2.2

CPI (average, y/y %) 1.5 0.0 0.8 1.8




Key Date

23 March The House of Commons recess begins. The Commons reconvenes on 11 April.

14 April In the run-up to the vote, there is a 10-week campaigning period that starts on 14 April during which rules on campaigning, spending and finances apply. The Electoral Commission is yet to publish a timetable showing the precise dates and deadlines for the referendum.

5 May Elections for devolved parliaments in Scotland, Wales and Northern Ireland will be held, along with the vote to decide London’s mayor and for control of many councils in England.

23 June Voters will cast ballots to answer the question: “Should the United Kingdom remain a member of the European Union or leave the European Union?”

July & beyond If the majority vote to leave, the UK could do so two years after notifying the European Council of its intention. However, the process would not be simple and would still involve “complex and probably lengthy negotiations”.

Source: Various sources



United States ofAmerica

Positive But Moderate Growth In 2016 The 2nd estimate for US 4Q 2015 GDP was a better than expected 1.0% from prelim estimate of +0.7%. However, the details were less promising as the revision was mostly driven by higher inventories while the key components were actually weaker (consumer spending increased by 2.0% from 2.2% in the advance estimate, business investment fell -1.9%, from -1.8%, residential investment increased 8.0% from 8.1%, exports declined by -2.7% from -2.5% and government spending actually fell -0.1% from +0.7%.

The US manufacturing sector joined ranks with its global peers last year as ISM PMI went and stayed in contraction territory (below 50) since Oct 2015, on weak global demand and the strong USD effect. That said, factory production recorded back-to-back increase in Jan (0.5%) and Feb (0.2%) suggesting that manufacturing may be starting to stabilize in US. In comparison, the more important services sector (which accounts >80% of the US economy) saw its PMI trending lower since its recent peak of 59.6 in July 2015 but it has not dropped below 50 since Feb 2010, and clocked in at 53.2 in Feb 2016. Job creation remains robust averaging 235,000 since Sep 2015, and have added jobs every month since October 2010 (of >13 million jobs). And while wage growth has been less impressive than employment, it is still holding above 2%. CPI inflation was nearly none existent in 2015 but will likely pick up in 2016 although mitigated by the weak oil prices. The Core PCE (Fed’s preferred inflation measure) grew to 1.7% in Jan from 1.5% in Dec, the fastest month to month acceleration since late 2012, certainly suggesting that inflationary pressures are starting to stir albeit in a subdued manner.

We believe US growth in 2016 will remain supported by the US consumer & housing market improvement but we are mindful of external weakness and risks spilling over to weaker business spending & sentiment in US & further inventory correction in the upcoming quarters. The weak external environment & strong USD could hurt US MNCs & re-widen the trade deficit. We continue to expect US 2016 GDP growth at 2.5% (from the 2.4% growth in 2014 and 2015) but the risk is more likely from outside of US. Strong domestic focus is still on the road to an increasingly divisive Nov US Presidential elections with Donald Trump, Hillary Clinton consolidating their leads to nomination day in mid-year.

FOMC: Focusing On External RisksThe US Fed Reserve kept its policy rate unchanged at 0.25-0.50% in March and remained positive on US outlook but highlighted “global economic and financial development” concerns and guided future rate trajectory expectations lower with the median policy rate forecast for end-2016 at 0.875% (from 1.375% previously), indicating just two 25-bps rate hikes this year, in line with UOB expectations. The median rate forecasts for 2017, 2018 and even the longer-run were also guided lower.

We maintain our projection for the US Fed policy rate trajectory to be even more spread out and gradual, to just two 25bps rate hikes in 2016 (one in each half of the year - at the 14/15 June and 13/14 December FOMC meetings) to bring the FFTR to 1% by end-2016. Although there remains a lot of uncertainty on 2016 outlook and the risk admittedly still looks tilted towards a shallower rate trajectory, we remain convinced that the Fed will not hike just once in 2015 and be done for the whole of 2016 unless there is a significant external event that will impact the US financial markets and the domestic economy.

UST: 2% Is The Yield To Breach After the Dec Fed rate hike, US Treasury yields have remained below key levels (2-year yield under 1% while the 10-year under 2%) since early 2016 because of risk aversion, lower Fed rate trajectory expectations and external downside pressure from negative rates policy from the ECB and BOJ. We still expect the directional trajectory for yields to remain cautiously higher but limited magnitude. Our 10-year UST forecast for end- 2Q 2016 is 2.15% while the 2-year yield is 1.1%.


GDP 2.4 2.4 2.5 3.0

CPI (average, y/y %) 1.6 0.1 1.0 2.5




Bias For Lower Rate Projections In The Dot Plot Chart Remains Intact

- 2016 2017 2018 Longer Run

Mar-16 Median 0.875 1.875 3.000 3.25

Dec-15 Median 1.375 2.375 3.250 3.50

Sep-15 Median 1.375 2.625 3.375 3.50

Jun-15 Median 1.625 2.875 - 3.75

Mar-15 Median 1.875 3.125 - 3.75

Dec-14 Median 2.500 3.625 - 3.75Source: Federal Reserve



FX Technicals

EUR/USD: 1.1210

The recovery from last December low of 1.0538 appears incomplete and the risk for the second quarter of this year is still on the upside. However, upward momentum is not strong and while a move above 1.1495 will not be surprising, the August 2015 high of 1.1710 is a very strong resistance and this level is likely out of reach. Support is at 1.0710 and the 1.0538 low is unlikely to come under threat in the next couple of months.

USD/SGD: 1.3650

The rally that started from the July 2014 low of 1.2365 has likely topped out at 1.4445 in January this year. The down-move from the peak is viewed as a multi-month corrective pull-back that has scope to extend lower to 1.3405 (50% retracement of the rally from 1.2365 to 1.4445) followed 1.3150 which is close to the 61.8% retracement. However, the down-move has been rather rapid and any further weakness is unlikely to be in a straight line. 1.4120 is a strong resistance and only an unlikely break back above 1.4335 would indicate a retest of the 1.4445 high.



AUD/USD: 0.7560

The up-move from the low of 0.6827 in early January is likely the initial stages of a corrective recovery in AUD. In other words, an intermediate low is likely in place and the current rebound could extend to 0.7850 (38.2% retracement of the drop from 0.9505 to 0.6827) with a lower prospect for a move to 0.8165 which is the 50.0% retracement. Support is at 0.7220 and the 0.6827 low is acting as a solid base and a move below this level appears unlikely in the second quarter of this year.

GBP/USD: 1.4250

GBP rebounded strongly after touching a low of 1.3836 in early March 2016. The up-move is likely part of a corrective recovery that has scope to extend higher to 1.4670 followed by 1.4935. Support is at 1.3836 and even a move below this level is expected to face solid support at 1.3500 which is the low seen during the financial crisis back in 2009.

FX Technicals



USD/JPY: 113.30

The sharp drop from the high of 121.68 after BOJ introduced negative rates appears incomplete and the pressure in the coming few months is still for a lower USD. However, downward momentum is not strong and this coupled with indicators that are quickly approaching oversold suggests that any further decline in USD is likely limited to the strong support zone between 105.20 and 110.07. On the upside, 116.50 is a sold resistance and any rebound in USD is unlikely to have enough momentum to move back above 121.65/70.

EUR/SGD: 1.5310

EUR/SGD has been trading between 1.4855 and 1.5830, roughly a 10 big figures ranges since early December 2015. Technical indicators are mostly flat and the outlook for the coming few months remains mixed. Overall, it appears likely that EUR/SGD will continue to trade within this broad range.

FX Technicals



GBP/SGD: 1.9450

While severely oversold, the weakness in GBP/SGD still appears incomplete and a move to 1.8950 will not be surprising in the next few months. However, in view of the severely oversold conditions, a move to the record low of 1.8500 seen in early 2013 is not expected. Overall, GBP/SGD is expected to remain under pressure unless it can reclaim 2.0240.

AUD/SGD: 1.0350

The break of the falling trend-line from April 2013 is a good indication that AUD/SGD has bottomed out. The current movement is likely the early stages of a recovery phase that has scope to extend higher to 1.0805. However, any up-move is likely to be messy and could take several months. Support is at 1.0000 ahead of the 0.9710 low.

FX Technicals



JPY/SGD: 1.2180

The strong rally from the low of 1.0717 has likely topped out at 1.2670 in late February 2016. The current movement is likely the early stages of a consolidation phase which may take several months to evolve. However, the near-term bias is for a deeper pull-back to test the major support at 1.1710. As of the time writing, a move below 1.1300 is not expected.

FX Technicals

Disclaimer

This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and area subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise.



Global Economics & Markets Research

Jimmy Koh Head of Research(65) 6598 [email protected]

Suan Teck Kin, CFASenior Economist(65) 6598 [email protected]

Alvin LiewSenior Economist(65) 6598 [email protected]

Julia GohSenior Economist(60)3 2776 [email protected]

More reports available on:URL: www.uob.com.sg/researchEmail: [email protected]: UOBR

MCI (P) 166/04/2015

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Lee Sue AnnEconomist(65) 6598 [email protected]

Ho Woei ChenEconomist(65) 6598 [email protected]

Manop UdomkerdmongkolEconomist(66)0 2343 [email protected]

Francis TanEconomist(65) 6598 [email protected]

Quek Ser LeangMarket Strategist(65) 6598 [email protected]

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Peter Chia Chih SiongFX Strategist(65) 6598 [email protected]

quarterly global outlook3. the us economy remains on its steady recovery path, promising ... their...

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