Global Research
Global Focus – Economic Outlook Q2-2021
Global growth – An uneven race
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Global Focus – Economic Outlook Q2-2021
Table of contents
Global overview 3 Cameroon – Moving towards recovery 75 Global growth – An uneven race 4 Côte d’Ivoire – A series of unfortunate events 76 Where we differ from consensus 10 Ethiopia – A particularly difficult quarter ahead 77 Global charts 12 Gabon – The oil price reprieve 78 Ghana – The long reach of the COVID crisis 79 Geopolitical economics 14 Kenya – Third-wave woes 80 Biden’s democracy club 15 Mozambique – Delayed but not denied 81 Economies – Asia 20 Nigeria – Higher oil, faltering reform 82 Asia – Top charts 21 Senegal – Flaring tensions 83 Asia – Macro trackers 22 South Africa – Bracing for a third wave 84 Australia – Chugging along 24 Tanzania – Transition 86 Bangladesh – Turning around 26 Uganda – Oil to drive growth acceleration 87 China – Embarking on the 14th FYP 28 Zambia – Debt restructuring, IMF & elections 88 Hong Kong – Recovery cannot be rushed 30 Zimbabwe – Ifs, ands, and buts 90 India – FY22: A tale of two halves 32 Economies – Europe 91 Indonesia – Reviving the economy 34 Europe – Top charts 92 Japan – Challenges and opportunities ahead 36 Euro area – Cracks in the exit strategy 93 Malaysia – All-round support 38 Switzerland – Back on track in 2021 95 Nepal – Gradual pick-up 40 UK – Ahead of the curve 97 New Zealand – Hold your horses 41 Czech Republic – Infection rates soar 99 Philippines – Battling headwinds 43 Hungary – A delayed recovery 101 Singapore – Watch for the nuances 45 Poland – Resilience amid new COVID wave 103 South Korea – Tailwinds are blowing 47 Russia – Modest recovery expected 105 Sri Lanka – PBoC swap to buffer FX reserves 49 Taiwan – An upbeat start to 2021 51 Economies – Americas 107 Thailand – Confidence remains low 53 US and Canada – Top charts 108 Vietnam – Strong fundamentals 55 Latin America – Top charts 109 US – Post-pandemic bonanza 110 Economies – Middle East, North Africa and Canada – Resilient 112 Pakistan 57 Brazil – One step forward, two steps back 114 Bahrain – Balancing non-oil growth and reform 58 Chile – Taking a shine 116 Egypt – Steady as she goes 59 Colombia – Mixed blessings 118 Iraq – Devaluation amid rigid reform outlook 60 Mexico – More good than bad 119 Kuwait – Higher oil prices to ease liquidity 61 Peru – Speaking in binary 121 Lebanon – The more things change… 62 Oman – Goldilocks scenario 63 Strategy outlook 123 Pakistan – Balancing act 64 Exodus 124 Qatar – Onwards and upwards 65 Forecasts tables 130 Saudi Arabia – Shifting sands 66 Forecasts – Economies 131 Turkey – Treading carefully 67 Forecasts – FX 132 UAE – Recovery underway 68 Forecasts – GDP 133 Economies – Africa 69 Forecasts – Rates 134 Africa – Vaccine delays weigh on the outlook 70 Forecasts – Commodities 135 Africa – Top charts 72 Forecasts – Selected interbank rates by tenor 136 Angola – Oil provides a welcome respite 73 Authors 137 Botswana – Putting fiscal stabilisation first 74
Standard Chartered Global Research | 31 March 2021 2
Global overview
Global Focus – Economic Outlook Q2-2021
Global growth – An uneven race
A multi-speed economic recovery, with risks Razia Khan +44 20 7885 6914 [email protected] Global The scale of US fiscal stimulus and the speed of vaccine rollout have overview Head of Research, Africa and Middle East
Standard Chartered Bank
significantly lifted global economic prospects. We raise our 2021 global growth
Edward Lee +65 6596 8252 forecast to 5.7% from 4.8%. Growth optimism has driven markets since we made our
Chief Economist, ASEAN and South Asia initial forecast in December, contributing to commodity gains and new inflation Standard Chartered Bank (Singapore) Limited concerns. However, we maintain a cautious outlook given the uneven nature of the
economic recovery.
economics Geopolitical
The speed of vaccine rollout is a key differentiator of near-term growth prospects
(Figure 1). US growth now looks likely to be front-loaded (see US – Post-pandemic
bonanza). Around 30% of the US population had received at least one COVID-19 vaccine
dose by end-March, enabling a faster and likely more sustained economic recovery. In Asia
Europe, vaccine supply bottlenecks and the slower pace of progress have prompted us
to lower our 2021 GDP forecast (see Euro area – Cracks in the exit strategy). Downside
risks to growth persist given new waves of COVID and the likelihood that containment
measures will need to be extended. Europe’s fiscal response to the pandemic has been more constrained relative to the US; slow progress on submitting reform plans is likely to
MENAP delay disbursements from the EU’s Recovery Fund.
Global growth to bounce back this
China is likely to maintain robust growth this year, with the authorities tapering
year following the COVID crisis; stimulus only moderately in order to safeguard the economic recovery (see China –
policy is playing a key role
Embarking on the 14th FYP). The People’s Bank of China (PBoC) has pledged to Africa
stabilise the macro leverage ratio by making credit growth more consistent with
nominal GDP growth. Rebalancing will become more important, as growth to date has
been insufficiently broad-based and concentrated in exports (where demand is largely
COVID-related, for example PPE or electronics) or sectors benefiting from easy credit. Consumer-related sectors such as catering, accommodation, tourism and air travel
remain well below pre-pandemic levels.
Europe
The acceleration of industrial production growth has highlighted supply bottlenecks and
the risk of rising producer inflation (Figure 3). China’s latest Five-Year Plan aims to
prioritise high-quality growth by deepening supply-side reforms, expanding domestic
demand and fostering home-grown innovation. Americas
Figure 1: Vaccine rollout – EM clearly lags DM Figure 2: The world is experiencing another wave of
% of people who have received at least one vaccine dose COVID-19 infections (daily new cases, 7DMA (’000s)
20 100 800 outlook Brazil Strategy Africa Asia India 18 90
700 European Union North America France
16 80 Poland
Oceania South America Turkey 600
14 70 Germany
12 World 60 World (RHS) 500 US (RHS) 10 50 400
Forecasts 8 40 300
6 30 200 4 20 2 10 100 0 0 0 29-Dec-20 28-Jan-21 27-Feb-21 29-Mar-21 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 Source: OWID, Standard Chartered Research Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 4
Global Focus – Economic Outlook Q2-2021
India has seen a new surge in In India, more expansionary fiscal policy should support recovery momentum
cases, but targeted restrictions overview
(see India – FY22: A tale of two halves). We expect a sharp recovery to double-digit Global should allow more activity than growth in FY22 (ending March 2022), driven by consumption and public capex. India’s earlier lockdowns
economic recovery has been uneven to date, with the informal sector lagging the
formal sector and rural demand growing faster than urban demand. Policy – especially monetary policy – will need to remain supportive to sustain the recovery. Higher oil
Geopolitical prices pose a risk, as do obstacles to vaccinating India’s large population. Localised economics COVID outbreaks are a concern. Case numbers have recently surged to their highest since October 2020. We do not expect the majority of the population to be vaccinated
until 2022, suggesting that economic activity remains vulnerable to restrictions during episodes of higher infections.
The pace of recovery diverges in The pace of recovery also diverges across the rest of Asia. Developing domestic Asia Asia; strong exports and successful pandemic situations are a key driver of this divergence. Taiwan and Vietnam are
pandemic management support among the few economies that started 2021 with GDP above pre-COVID levels. Strong
growth in Taiwan and Vietnam external demand and successful domestic pandemic management support the positive
growth outlook for these economies. In contrast, an early-year surge in infections in
Indonesia and Malaysia has negatively affected their 2021 outlook (we downgraded MENAP our growth forecasts for these economies earlier this year). The situation has since
stabilised, but not without affecting their growth recoveries. Similarly, we have
downgraded our 2021 GDP growth forecast for Japan, partly due to the six-week
emergency lockdown in January-February.
In domestically driven economies In domestically driven economies such as Indonesia and the Philippines, the pace of Africa like Indonesia and the Philippines, vaccine rollout will be particularly important to the resumption of activity. In the the pace of vaccine rollout will be Philippines, household consumption accounts for c.72% of GDP and contracted 7.9%
important in 2020. The economy is now seeing a resurgence of infections to the highest levels
since the start of the pandemic; this looks set to delay the reopening of the economy. Excluding Singapore, many Asian economies have vaccine rollout rates below the Europe global average. Singapore and Malaysia are targeting herd immunity by year-end;
more populous Vietnam and Thailand target inoculating 25% and 50% of their
populations, respectively, by end-2021.
Americas
Figure 3: China’s PPI inflation risk is rising rapidly with soaring IP growth % y/y (latest data point shows avg growth in January-February 2021 vs 2020)
10
Strategy IP outlook Services
5 production
0
Forecasts
-5
-10
-15 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 5
Global Focus – Economic Outlook Q2-2021
Middle Eastern economies such as the UAE, Bahrain and Qatar have seen some
of the fastest vaccine rollout rates; the UAE leads GCC economies, at 79.1 vaccinations administered per 100 people as of end-March. However, progress has
Global been uneven across the region – the comparable numbers are 11.1 for Saudi Arabia,
overview
8.6 for Kuwait and 2.6 for Oman, suggesting a staggered recovery even as
economies reopen.
Vaccine progress across the We forecast a gradual post-COVID growth recovery for the MENAP region this MENAP region varies; fiscal reforms year given the dual pressures of lower oil prices and output. Despite higher oil prices,
economics may blunt the consumer recovery Geopolitical Saudi Arabia’s unilateral production cuts weigh on its H1 growth outlook, given the
sensitivity of real growth to output levels.
Growth positives for the region include the resolution of the Gulf diplomatic dispute
with Qatar, which will ease bottlenecks and should boost intra-regional trade and travel Asia
over time; and Dubai’s hosting of EXPO 2020 (delayed by a year to October 2021),
which should boost tourism. Nonetheless, structural concerns persist. Long-term
scarring from the COVID crisis has yet to manifest fully. Smaller Gulf states have seen
population declines as large numbers of expatriates have departed. While the UAE has introduced visa and social liberalisation reforms to facilitate tourism and attract
MENAP new remote-working residents, region-wide expatriate population declines may weigh
on the consumption recovery. Fiscal reforms necessitated by recent economic
pressures, including Saudi Arabia’s tripling of VAT and Oman’s planned VAT
introduction in Q2-2021, may also weigh on consumption.
SSA growth is likely to be most Sub-Saharan Africa (SSA) is likely to see only a technical recovery in 2021, driven
Africa
vulnerable to rising vaccine by a weaker base from 2020. Logistical hurdles and affordability issues have precluded
nationalism; higher commodity faster vaccine rollout. As of early March, the SSA region accounted for only c.0.04% of
prices will provide only a partial
COVID vaccines administered globally. A full SSA economic recovery could be delayed offset by rising vaccine nationalism in more developed markets and the prioritisation of domestic needs amid new COVID waves in Europe and India. SSA is the region most
Europe dependent on the World Health Organization-funded COVAX scheme for its vaccine
supply. SSA faces the threat of a third COVID wave; in March, Kenya became the
region’s latest major economy to announce new containment measures.
The news is not all negative, however. The region’s largest economies, South Africa
and Nigeria, both saw positive Q4-2020 growth surprises. Rising commodity prices, Americas
especially oil, could provide fiscal revenue relief in producing countries. South Africa
saw positive revenue momentum in FY21 (ends March 2021), partly due to higher
corporate tax revenue from the mining sector. SSA commodity producers may also
start to benefit from the longer-term push by large EM economies such as China and
India to further diversify their oil sources. However, the region’s non-commodity-
outlook Strategy
producing, oil-importing economies face more significant growth headwinds.
The Biden administration’s embrace of multilateralism should also favour SSA economies, most meaningfully through new G7 approval of increased IMF SDR allocations. The expected new SDR allocation to all IMF member countries should
provide a much-needed boost to regional economies’ FX reserves. Significant COVID-
Forecasts
related revenue deterioration has left many SSA economies with elevated debt ratios. Given their existing vulnerabilities, they may stand to benefit the most from the across- the-board boost to external liquidity provided by an SDR re-allocation. The benefit would be even more pronounced if low-income countries see a further reallocation of existing SDRs from economies that do not need higher allocations.
Standard Chartered Global Research | 31 March 2021 6
Global Focus – Economic Outlook Q2-2021
Risks to the recovery – Is the inflation threat real?
overview From ‘reflation’ to inflation Global Inflation is again occupying the market’s attention as the global economy
returns to growth. The market focus has recently shifted from the economic recovery
(the ‘reflation trade’) to fears of higher inflation. Accommodative policy globally, low base effects from last year, record US fiscal stimulus, and higher commodity prices
Geopolitical
economics have driven these concerns.
The Suez Canal closure has re- We think inflation concerns are largely overdone. Supply-chain disruptions during
focused attention on ‘just-in-time’ the pandemic had led to higher prices in some instances, fuelling inflation fears. The supply chains and their role in recent temporary closure of the Suez Canal and rising freight rates have reinforced global disinflation
expectations of a shift away from ‘just-in-time’ supply chains, which played a key role
in the global disinflation trend of the last two decades. However, it seems premature Asia
to predict the end of globalisation-driven disinflation. While a focus on domestic self-
sufficiency has led to a shift towards ‘just-in-case’ supply chains in some cases (for
example, semiconductor production in the US), production efficiency will remain the
overriding driver of sourcing decisions, in our view.
MENAP Economic reopening is likely to lead to one-off price pressures, but secondary
price effects are unlikely. Prolonged lockdowns across both developed and emerging
economies have led to a rise in ‘unintended’ savings (Figure 4), swelling retail bank
balances. As restrictions are eased and economies reopen following the shutdown of
services sectors, mini-consumption booms are anticipated. Pent-up demand may pressure prices. Could this turn into more significant inflationary pressure? Given Africa
persistently large negative output gaps, and with a return to full employment some years away, we do not think so. Central bankers have emphasised that they will look
through transient price shocks.
A number of factors support our view that market fears of higher global inflation are Europe overblown.
The view from the US
Inflation is likely to surprise to the We have an above-consensus view on core PCE, expecting it to rise to 2.5% in Q2-
upside in Q2-2021; we expect
2021 due to a pronounced base effect, higher non-energy import prices, and a robust Americas inflation to be transient, with limited acceleration in consumer spending as the economy reopens. Supply bottlenecks could secondary effects
Figure 4: Declining household savings will likely support consumption Household savings rate, % of disposable income
30
Strategy
outlook
25
20 Australia
15 Forecasts EA Canada US
10
5
0 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20 Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 7
Global Focus – Economic Outlook Q2-2021
also add to near-term price pressures. However, given that full employment is not
expected until 2023, we think price pressures are unlikely to remain elevated (see US – Post-pandemic bonanza). Further fiscal stimulus will focus on infrastructure, which
Global should ease supply constraints over the long term. Investment in infrastructure would
overview
be considered less inflationary than putting stimulus cheques directly in the hands of
consumers. Fed Chair Powell has emphasised that the US has been “living in a
disinflationary world for a long time”. In the Fed’s view, a one-time shock will not
change this. economics Geopolitical The view from Europe
We expect inflation to pick up sharply in the coming months on higher energy prices,
pandemic-related supply constraints and stronger demand (Euro area – Cracks in the
exit strategy). Inflation may even reach 2% later in 2021. But given low wage pressures
Asia and significant economic slack, we expect price pressures to fade thereafter; higher
inflation is likely to be only temporary.
The view from China
China’s PPI is likely to rise strongly, China’s industrial sector risks overheating; its pace of y/y growth in January-February CPI less so; turnaround in China’s 2021 (from a weak 2020 base) exceeded the average for the same period in 2015-19.
MENAP consumer sector will be closely Supply constraints and recovering commodity prices could drive PPI inflation even
watched
higher. We expect China’s PPI, which is traditionally more strongly correlated with US
CPI (see China – Rising PPI poses asymmetric risk), to exceed 5.0% y/y in Q3-2021.
That said, the lack of significant momentum in China’s consumer sector to date may
limit CPI gains. Given anecdotal evidence of a turnaround in the consumer sector, we Africa
will be watching CPI inflation risks closely.
The view from other Asian economies
Since the start of 2021, economies such as Malaysia, Singapore, Korea and the
Philippines have already seen higher inflation prints. Excepting the Philippines, price
pressure remains benign, in our view (see ASEAN and India – Who’s hot?).
Europe
Price increases have been limited, with only a small subset of inflation basket
components showing price increases higher than their 2015-19 averages. Price levels
are within central banks’ tolerance ranges, and core inflation is low. The overall price environment remains unthreatening and should allow Asian central banks to maintain
Americas their accommodative policy stance.
Figure 5: Inflation is starting to pick up (less green), but not yet running hot (yellow at most)
Our inflation monitor – the redder the shade, the hotter inflation is running, warranting central bank attention outlook
Strategy 2018 2019 2020 2021
US
EA
IN ID
MY
Forecasts
PH SG TH VN
Source: Bloomberg, CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 8
Global Focus – Economic Outlook Q2-2021
The view from commodity markets
overview
Saudi Arabia is unlikely to favour Copper has rallied strongly, with prices reaching the highest levels since 2011. Vaccine Global increased production until an optimism, expectations of a greener post-COVID economic reopening, and firm
improvement in oil demand is renewables demand have all played a role. In the case of oil, which has been confirmed
vulnerable to news of vaccine supply bottlenecks, unilateral Saudi production cuts have also supported prices. We think Saudi Arabia is unlikely to favour increased
Geopolitical production until the improvement in oil demand is confirmed (see Macro Strategy economics Views, Oil – Market tightens sharply as OPEC+ price response lags). This may materialise only in Q3-2021, leaving room for oil price upside in the interim. We see a
high risk of an oil price overshoot in Q2-2021, with prices potentially averaging USD 73/bbl. Eventually however, the supply response is likely to guide prices lower in late
2021 and 2022. The inflation threat from oil is unlikely to be sustained.
Asia
We expect central banks to err on the side of growth
Rising UST yields could push more Rising UST yields have contributed to less benign risk conditions globally. The vulnerable emerging markets to Fed’s messaging that higher UST yields are in line with the economic recovery has not
tighten fiscal policy sooner helped to calm the rise in yields. With a multi-speed recovery in place globally, the risk
MENAP is that higher UST yields and surging developed-market (DM) inflation in Q2-2021 could tighten financing conditions, pushing financing costs higher. This could force a
faster adjustment in fiscal policy than economic conditions would otherwise justify,
especially in more vulnerable EM economies.
We see 10Y UST yields rising to 2.0% by end-2021. Continued benign messaging from Africa global central banks should allow global risk appetite to reassert itself, eventually creating more favourable funding conditions for EM. We do not see the Fed tapering
its asset purchases until 2022, and we do not forecast Fed policy rate hikes until 2023.
EM central banks are likely to err on The EM central bank response will also be important. Despite an uneven growth
Europe the side of growth recovery, rising UST yields and higher commodity prices will limit room for further easing. But with key sectors still depressed by the pandemic, we do not expect a
uniform tightening response across emerging markets. Raising rates prematurely
would be detrimental to the recovery. The expected rise in inflation in the quarters
ahead is likely to be narrow, driven by base effects. With some exceptions, we expect
Americas EM central banks to refrain from tightening monetary policy and to err on the side of growth.
Strategy
outlook
Forecasts
Standard Chartered Global Research | 31 March 2021 9
Global Focus – Economic Outlook Q2-2021
Where we differ from consensus
Euro area
Global Below consensus on GDP growth overview
Sarah Hewin +44 20 7885 6251 We lower our 2021 growth forecast to 3.7% (from 4.0%) on account of the slow [email protected] Head of Research, Europe and Americas pace of vaccine rollout in Europe. We still expect a return to positive growth in Q2
Standard Chartered Bank
(following an estimated c.1.0% q/q contraction in Q1) as euro-area economies Christopher Graham +44 20 7885 5731 [email protected] gradually ease lockdown restrictions. However, the slow pace of vaccine rollout Economist, Europe means the recovery is set to be weaker than previously envisaged, and susceptible
Standard Chartered Bank economics Geopolitical to delays if restrictions need to be tightened again. We see downside risks to growth,
especially in Q4-2021 and Q1-2022, when the risk of a new COVID-19 wave would
be at its highest.
Asia China
Below consensus on GDP growth
Shuang Ding +852 3983 8549 Our GDP growth forecast for 2021, at 8.0%, is below the market consensus of 8.5%.
[email protected] Chief Economist, Greater China and North Asia China’s economy has recovered swiftly but unevenly since H2-2020. Industrial and Standard Chartered Bank (HK) Limited export-oriented sectors have recovered strongly, but domestic consumer-related Wei Li +86 21 3851 5017
[email protected] sectors – such as accommodation, catering, tourism and air travel – continue to MENAP Senior Economist, China operate below pre-pandemic levels. While we expect the services industry to continue
Standard Chartered Bank (China) Limited
to recover in 2021, slowing credit growth (as the authorities seek to stabilise China’s
leverage ratio) and fading COVID-related demand are likely to weigh on growth. As a
result, we expect GDP growth to moderate to 4.8% y/y in Q4-2021 from c.18% in Q1
– a sharper moderation than the market currently expects.
Africa
Above consensus on PPI, which poses a global inflation risk
We forecast China’s PPI inflation at 3.8% in 2021, much higher than the market
consensus of 1.8% (according to the latest Bloomberg survey). Growing industrial supply constraints and rebounding commodity prices already drove up monthly PPI to
Europe 1.7% y/y in February 2021 from a low of -3.7% in May 2020. Feedback from our on-
the-ground client visits suggests that PPI inflation will accelerate further – topping c.5%
y/y in Q3 and remaining elevated in Q4 – against an improving global economic
backdrop (see China – Revising up our PPI forecast to 3.8% in 2021). We think China’s rising PPI inflation poses asymmetric risks to global inflation. Our study shows that the
correlation between China’s PPI and its own CPI has been close to zero since 2012, Americas
whereas the correlation between China’s PPI and US CPI has been 0.61 (see China –
Rising PPI poses asymmetric risks).
Fading COVID-related demand to lower China’s C/A surplus
We expect smaller C/A surpluses than the market consensus – 1.2% of GDP for 2021 outlook
Strategy (consensus: 1.5%) and 0.6% for 2022 (consensus: 1.1%). China’s C/A surplus
increased to 1.9% of GDP in 2020 from 1.0% in 2019, driven by COVID-related
demand and China’s ability to resume production earlier than other countries. While export growth remained strong in early 2021, we expect fading COVID-related demand, increased global competition as overseas production resumes, and a
stronger CNY to weigh on export growth this year. Border reopening should also cause
Forecasts
China’s services trade deficit to widen again.
Standard Chartered Global Research | 31 March 2021 10
Global Focus – Economic Outlook Q2-2021
Thailand
overview Below consensus on GDP growth Global Tim Leelahaphan +66 2724 8878 Our GDP growth forecasts of 2.4% for 2021 and 3.0% for 2022 are below consensus [email protected]
Economist, Thailand (3.5% and 4.6%, respectively). The lack of visibility on fiscal and monetary stimulus
Standard Chartered Bank (Thai) Public Company Limited
this year is the key negative for the outlook, in our view. Fiscal and monetary policy face constraints as public debt approaches the legal limit, while policy rates have little
Geopolitical
economics room to be cut further. Our economic forecasts for 2021 factor in still-subdued demand, the unclear tourism outlook, and slow fiscal disbursement. Thailand’s pace of COVID vaccine rollout is likely to be slow at least until mid-year. We do not expect a sharp
rebound in consumer confidence or business sentiment soon.
South Africa
Asia The market is likely wrong to price in SARB tightening in 2021
Razia Khan +44 20 7885 6914 We do not expect the South African Reserve Bank (SARB) to resume tightening until
[email protected] Head of Research, Africa and Middle East Q3-2022. In contrast, the Forward Rate Agreement (FRA) market is currently pricing Standard Chartered Bank
in tightening as early as this year. The SARB’s own Quarterly Projection Model (QPM)
– which incorporates the interest rate path as an endogenous variable – suggests two MENAP rate hikes of 25bps each, in Q2- and Q4-2021. However, the SARB has emphasised
that it views the QPM only as a “broad policy guide”. We believe that the SARB will
want to keep policy as accommodative as possible to support the economic recovery.
While we have raised our near-term CPI inflation forecasts on higher oil prices and electricity tariffs, we see only a remote possibility of pronounced secondary effects
Africa given the weak economy.
Europe
Americas
Strategy
outlook
Forecasts
Standard Chartered Global Research | 31 March 2021 11
Global Focus – Economic Outlook Q2-2021
Global charts
Figure 1: 2021 global growth to be driven by favourable base effects from sharp 2020 contraction
GDP, % y/y Global overview
15 2019 2020 2021 2022 10Y avg 2021 global growth
10
5 economics
Geopolitical 0
-5
-10
Asia
-15
IN CN US MX CA AU UK ID TR BR EA ZA KR RU JP AR SA
Source: IMF, Standard Chartered Research
MENAP Figure 2: Inflation likely to remain subdued in 2021; central banks to stay accommodative
Inflation, % y/y
16 2019 2020 2021 2022 10Y avg
14
12
Africa
10
8
6
4
Europe 2
0
-2
TR BR IN RU ZA MX SA ID US CA UK AU KR EA CN JP
Source: IMF, Standard Chartered Research
Americas
Figure 3: India’s C/A likely to return to deficit as trade balance normalises; US deficit to widen on income-focused
fiscal measures (current account, % of GDP)
10 2019 2020 2021 2022 10Y avg outlook
Strategy 8
6
4
2
0
Forecasts
-2
-4
-6 KR JP SA RU EA MX ZA AU CN IN AR BR CA ID US TR UK
Source: IMF, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 12
Global Focus – Economic Outlook Q2-2021
Figure 4: US to return to Q4-2019 GDP level by Q2-2021; Figure 5: Deadweight loss to global growth in 2020 is
overview
euro area by Q2-2022 unlikely to be recouped in the near term Global GDP levels, Q4-2019 indexed to 100 Global GDP levels, 2019 indexed to 100
120 115 CN
Pre-COVID-19 115 110
Geopolitical 110 economics 105 Latest 105 US 100 Q4-2019 level Global EA
100 95 95
90 90
Asia
85 85 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 2019 2020 2021 2022
Source: Standard Chartered Research Source: Standard Chartered Research
MENAP Figure 6: Fiscal deficit consolidation vs 2020 across most economies, but still-significant fiscal support in 2021
Fiscal balance, % of GDP
10 2019 2020F 2021F
5
Africa
0
-5
-10 Europe
-15
-20
SG TW MX TR HK TH ID KR CN MY VN EA NZ JP PH BR LK AU UK IN US ZA Americas Source: National sources, CEIC, Bloomberg, Standard Chartered Research
Figure 7: Only China and Taiwan ended 2020 with growth above pre-COVID levels
% deviation from Q4-2019 levels
Strategy
outlook
15% Q4-2020 Q1-2021F Q2-2021F Q3-2021F Q4-2021F
10%
5% Forecasts
0%
-5%
-10% CN TW IN ID US AU SG MY KR NZ TH EA PH Source: CEIC, Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 13
Geopolitical economics
Global Focus – Economic Outlook Q2-2021
Biden’s democracy club
overview
Global The ‘Summit for Democracy’ – Who’s in and who’s out?
Philippe Dauba-Pantanacce +44 20 7885 7277 Restoring US leadership on the world stage is a central goal of US President Joe [email protected]
Senior Economist | Global Geopolitical Strategist Biden’s foreign policy. To that end, he has pledged to organise a global ‘Summit for Standard Chartered Bank Democracy’ – an international forum that will “bring together the world’s democracies
Geopolitical
economics to strengthen our democratic institutions, honestly confront the challenge of nations that are backsliding, and forge a common agenda to address threats to our common
values”. Biden introduced the idea during his presidential campaign, and mentioned it
again in a February speech.
The primary objectives of the planned forum – which will involve civil society
organisations as well as governments – are to fight corruption, fight authoritarianism and advance human rights globally, according to Biden’s foreign policy platform. The Asia
Summit for Democracy also aims to tackle threats to democracy from technology and
social media companies, calling on them to ensure that they are not “empowering the
surveillance state” or “facilitating repression in China”.
Despite a multitude of existing The Summit for Democracy is aligned with the Biden administration’s goal of MENAP international forums, none is strengthening ties with traditional US allies in Europe (which were frayed under the suitable for Biden’s purpose Trump administration), as well as Asia-Pacific allies such as Japan, South Korea and
Australia. The initiative is a clear effort by the US to create a unified front against the
geopolitical and economic challenges posed by the rise of China and others; it reflects a world order increasingly defined by competing value systems, with the Western liberal
Africa
democratic model pitted against the rest. While international forums and organisations
have proliferated since WWII, the US and its allies currently lack a forum for ‘like-minded’ countries.
According to some academics, a unified US-led front would pose a much more credible
long-term challenge to China than the Trump approach, which was chaotic and Europe transactional, rather than strategic, in nature. The Brookings Institution (among others)
advocated such an approach during the Trump administration, similar to former Secretary of State Dean Acheson’s Cold War “situations of strength” doctrine. However,
such a project is also fraught with difficulties – starting with deciding which countries to
include on the guest list. Americas
Figure 1: Existing international forums – an overlapping web
Deciding which countries to invite to a ‘Summit for Democracy’ could be fraught with pitfalls
G20
P5 Indonesia India Russia Argentina South Africa
Strategy OECD China Saudi Arabia Brazil outlook SfD*
South Korea G7 Australia Mexico
NATO Japan EU UK Turkey
Austria Czech Republic Hungary Lithuania Forecasts Germany Bulgaria Finland Latvia Slovakia Portugal Netherlands Croatia France Romania Ireland Poland Belgium Greece Cyprus Italy Slovenia Malta Sweden Spain Estonia Luxembourg
US Canada Iceland Norway Montenegro Albania N. Macedonia
Israel Chile Switzerland Colombia New Zealand * Summit for Democracy (proposed); expected membership as predicted by the Center for American Progress (CAP); Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 15 Global Focus – Economic Outlook Q2-2021
The US and its allies need a place to talk
A worldview split between Foreign policy objective: Defend democracy and reinstate US leadership democratic and undemocratic Biden has made it clear that he sees global politics as being increasingly defined along Global forces overview the faultline of democratic versus undemocratic value and governance systems. The
fall of the Berlin Wall 30 years ago was seen as a triumph of the Western liberal
democracy over other models. However, this model has gradually been eroded since
the 2008 global financial crisis (GFC), facing internal threats in Europe and the US and losing its global dominance as the only perceived path to successful development.
2020 marked the 14th consecutive year of global deterioration in political rights and civil economics Geopolitical liberties, including backsliding in several established democracies, according to
Freedom House, an NGO that conducts research on democracy, political freedom and
human rights.
Asia Biden wants to push back against these trends and put the US at the centre of the
crusade to restore democracy – reaffirming its role as the ‘leader of the free world’.
Critics argue that the US is an unlikely – or at least precarious – champion of
democracy given the events surrounding the November 2020 presidential election,
when democratic processes were under assault. However, the Biden administration NAP has been explicit in its vision of a world order in which the US takes the lead in pushing
ME back against undemocratic forces. Within that order, it has identified China as the main
threat to the US. In its March 2021 National Security Guidance Report, the White
House said that China “is the only competitor potentially capable of combining its
economic, diplomatic, military, and technological power to mount a sustained
challenge to a stable and open international system.”
Africa
Existing international forums do not fit the bill
Intergovernmental institutions and Since WWII, international cooperation has coalesced around forums and alliances – forums have defined – and helped both formal and informal – of the world’s most powerful countries. Many of these to build – the post-WWII intergovernmental organisations focus on specific areas, such as military, economic, international order
Europe trade, regulatory or political cooperation. The post-war international order started with
the creation of the Bretton Woods ‘twin institutions’ (the IMF and World Bank, 1944),
followed by the UN a year later, and the seeds of what would become the WTO. The
five-member UN Security Council – comprising China, France, Russia, the UK and the US, also known as the Permanent Five or P5 – has a vast remit and is the only UN body with the authority to issue binding resolutions on member states. However,
Americas fundamental ideological differences between its members have rendered it largely
dysfunctional for years.
In the decades following WWII and Bretton Woods, new groupings and alliances
proliferated as like-minded countries sought to advance their shared agendas outside outlook
Strategy the larger global forums. The creation of NATO, the G7, the G20, the OECD and the
EU (the most integrated union of countries in history) further redefined the world order.
Today, the Biden administration seeks to form a new ‘club’ for democracies seeking to
push back against existential threats.
None of the existing forums has the The existing forums are seen as unsuited to this purpose. Some, such as the G20 and Forecasts right group of countries for a
the OECD, are too large or have included non-democratic countries from the start. The
Summit for Democracy UN Security Council has been consistently split in recent years. Some groups, such as
NATO and the EU, have seen significant democratic backsliding among their members (see The West in question and The EU – The threat from within). Others are seen as too narrow in scope to address the strategic competition with China; for example, the G7 is missing South Korea and Australia.
Standard Chartered Global Research | 31 March 2021 16
Global Focus – Economic Outlook Q2-2021
Challenges to a binary view
overview
Splitting the world into two distinct A key criticism of the Summit for Democracy is that splitting the world into two camps Global camps could prove – liberal democracies on one side and the rest on the other – could alienate countries
counterproductive
whose support is crucial to furthering US interests. Following years of democratic
backsliding, a diminishing number of countries meet the definition of ‘liberal democracy’. If the US defines the criteria for membership in its club too strictly, it could
Geopolitical find itself with a shrinking pool of allies to counter China’s rise and other threats. For economics example, India, Turkey and Brazil are crucial to supporting US interests – but none of them are defined as liberal democracies, according to the V-Dem Institute’s
Democracy Report 2021.
Leading the ‘free world’: Back to the Some foreign policy experts have criticised Biden’s Summit for Democracy for
future? reflecting an anachronistic and overly simplistic worldview in which the ‘free world’ is Asia
pitted against the rest of the world. David Adler of Oxford University and Stephen
Wertheim of Columbia University argued in a recent op-ed that the project is a
throwback to the “mental map that was first drawn by the managers of US foreign policy
eight decades ago”. While acknowledging that democratic values have been under
attack globally for years now, they argued that the summit would “drive US foreign MENAP policy even further down a failed course that divides the world into hostile camps.”
A forum that splits the world into two distinct camps could prove counter-productive by
pushing some countries to choose the other (non-US) camp or antagonising countries that are not invited to participate. To safeguard its own interests and wider international
Africa
security, the US needs to engage with countries that do not share all of its values or
its political system in areas such as intelligence-sharing, climate change, digital taxation, and global anti-terrorism efforts.
Deciding who gets to join the club Deciding the guest list is the first One of the thorniest aspects of this project will be deciding which countries make it Europe challenge onto the guest list. Given the issues with existing international forums, its membership
is likely to be at the invitation of the US. In light of complex relationships and political
sensitivities, who gets invited – and, just as importantly, who gets left out – could provoke backlash.
Americas
A Western club? The most likely make-up of the Summit for Democracy is the G7 countries (the US,
Canada, the UK, France, Germany, Italy and Japan) plus South Korea and Australia
and possibly some other “developing democracies”, according to the Center for
American Progress (CAP), a US-based public policy research and advocacy
Strategy
organisation. The EU and the NATO could act as observers, as they do in other forums outlook (see Figure 2). The CAP expects the membership to include “a small, core set of
democracies that are likely to be aligned on key issues and have the capacity to drive
global actions on shared priorities.”
Recent events point to the Recent events suggest that a group of ‘like-minded countries’ may already be
Forecasts emergence of a more unified front coalescing around a common approach to China. In March, Canada, the UK and the by the US and its allies EU coordinated with the US to impose sanctions on China (at the individual and entity
level) over human rights. This is the first time the EU has sanctioned China since the
1989 Tiananmen events; its sanctions were imposed under the recently passed EU Magnitsky Act.
Standard Chartered Global Research | 31 March 2021 17 Global Focus – Economic Outlook Q2-2021
This does not mean that the US and the EU are fully aligned in their approach to China.
The hawkish US stance is the result of a strong bipartisan consensus, whereas not all
EU countries share the same appetite for confronting China. This could remain a point
Global of contention among EU member states, preventing the bloc from taking a common
overview
position with Washington, according to some experts on European foreign policy.
That said, positions in Europe could harden after Beijing recently imposed countermeasures, including sanctions on some members of the European
Parliament. Several EU MPs have said that the EU-China market access deal – economics
Geopolitical which was negotiated over seven years and agreed in late 2020, and is still unratified
– was in jeopardy. The deal needs to be ratified by all national parliaments and the
European Parliament. A further escalation could push the EU closer to the US
position. In another recent show of unity, more than 20 Western diplomats in China
made a public appearance outside the court where former Canadian diplomat Asia
Michael Kovrig is on trial.
The Summit for Democracy versus China?
Closing ranks with traditional US Biden (and Secretary of State Antony Blinken) have made it clear that they see China allies to confront China
NAP as a key focus of US foreign policy. At the Munich Security Conference in February,
ME Biden reiterated his desire for the US and Europe to “work together for a long-term
strategic competition with China”, arguing that the world faced a contest between
democracy and autocracy.
Biden wants to develop a long-term A key purpose of the Summit for Democracy would be to develop joint strategies to strategy to contain China, based on Africa confront the challenges posed by China’s rise. In contrast to Trump’s direct ‘anti-China’
a coordinated approach with allies stance (expressed primarily through tariffs), Biden is taking a more long-term approach
to the competition with China; coordinated efforts by the US and its democratic allies,
centred on their shared values, are a key element of his approach. While the methods and language have changed, the ultimate objective remains the same: contain China’s
rise, shift some key supply-chain dependencies from China to allies, slow China’s Europe
increasing edge in strategic technologies, and maintain the dominant role of the US
and its allies in the interpretation of international rule of law.
Former Australian Prime Minister Kevin Rudd, who is also a noted China scholar, wrote in a Foreign Affairs article that the Summit for Democracy could increase the
effectiveness of the Biden approach towards China: “The [Chinese Communist Party’s Americas
(CCP)] diplomatic establishment fears that the Biden administration, realising that the
US will soon be unable to match Chinese power on its own, might form an effective
coalition of countries across the diplomatic capitalist world with the express aim of
counterbalancing China collectively. In particular, CCP leaders fear that President Joe
Biden’s proposal to hold a summit of the world’s major democracies represent a first
outlook Strategy
step on that path.”
Forecasts
Standard Chartered Global Research | 31 March 2021 18
Global Focus – Economic Outlook Q2-2021
Figure 2: International forums – A deeper dive
overview
Summit for Global Forum Quad P5 G7 G20 EU NATO OECD Democracy Year
2007 1945 1973 To be confirmed 1999 1957 1949 1961
founded
Informal strategic The five G7 leaders meet The Summit for Initiated by G7 Unique political Intergovernmental Intergovernmental economic
forum that holds permanent annually; finance Democracy could fill the members entity; the world’s military alliance organisation initially founded semi-regular members of the ministers meet 2- gap left by existing following a series most integrated between 30 to stimulate economic
Geopolitical summits, UN Security 4 times a year. forums, which are of EM crises in the political and European and progress and world trade. Its economics information Council; its The G7 consists deemed too narrow or late 1990s. economic union North American members claim a exchanges and powers include of the world’s too wide in scope to Meetings are countries. Under commitment to democracy military drills. Its establishing largest advanced combat democratic irregular. The the NATO collective and the market economy, inception was peacekeeping economies (as backsliding and forum initially defence system, providing a platform to
seen as a operations, defined by the authoritarian models of focused on independent compare policy experiences, response to enacting IMF). Russia governance. Its agenda promoting global member states promote trade and China's international previously would likely include financial stability, agree to mutual multilateralism, identify best
increasing sanctions, and attended G7 coordinated policies and and has defence in practices, and coordinate
strategic role in authorising events (G7+1), strategies to confront subsequently response to an fiscal/ monetary policies as Asia Asia, and was military action. but stopped being economic and strategic addressed global attack by any needed. Most members are
followed by the The P5 is the only invited in 2014 competition from China. governance external party. high-income economies with ‘re-branding’ of UN body with the following Russia’s issues such as “very high” Human
the region to authority to issue invasion of financial markets, Development Index (HDI) ‘Indo-Pacific’ from binding Crimea. climate change readings, and are regarded
‘Asia-Pacific’ by resolutions on and tax as developed countries. US government member states. competition.
MENAP agencies. Number of 4 5 7+EU To be confirmed* 19+EU 27 30 37
members Members US China Canada Canada Argentina Austria Albania Australia
India France France France Australia Belgium Belgium Austria
Australia Russia Germany Germany Canada Bulgaria Bulgaria Canada Japan UK Italy Italy Brazil Croatia Canada Belgium
Africa US Japan Japan China Cyprus Croatia Chile
UK UK (EU) Czech Republic Czech Republic Colombia
US US France Denmark Denmark Czech Republic
EU South Korea Germany Estonia Estonia Denmark
Australia India Finland France Estonia Indonesia France Germany Finland
(+ other "developing Italy Germany Greece France Europe democracies") Japan Greece Hungary Germany
Mexico Hungary Iceland Greece (* Proposed make-up, Russia Ireland Italy Hungary
by The Center for Saudi Arabia Italy Latvia Iceland American Progress) South Africa Latvia Lithuania Ireland
South Korea Lithuania Luxembourg Israel Americas Turkey Luxembourg Montenegro Italy UK Malta Netherlands Japan
US Netherlands North Macedonia South Korea
Poland Norway Latvia Portugal Poland Lithuania
Romania Portugal Luxembourg
Strategy Slovak Republic Romania Mexico outlook Slovenia Slovak Republic Netherlands
Spain Slovenia New Zealand
Sweden Spain Norway
Turkey Poland
UK Portugal
US Slovak Republic Forecasts Slovenia Spain
Sweden
Switzerland Turkey United Kingdom United States
Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 19
Economies – Asia
Global Focus – Economic Outlook Q2-2021
Asia – Top charts
overview Global Figure 1: Pace of vaccinations remains slow in Asia Figure 2: Current vaccination pace is far from target
% of people who have received at least one vaccine dose % of targeted eligible^ population fully vaccinated
16 120% IN JP MY IN-CRR* IN-Goal
14 Geopolitical SG-CRR SG-Goal economics PH SG KR 100% 12 ID-CRR ID-Goal TH TW VN 10 80%
Global 8 60%
6 40%
4 A
sia 20% 2
0 0% 29-Dec-20 28-Jan-21 27-Feb-21 29-Mar-21 Mar-21 Jun-21 Sep-21 Dec-21
Source: OWID, Standard Chartered Research ^We assume that eligible population excludes children aged below 16; *CRR = current run rate;
Source: OWID, Standard Chartered Research MENAP
Figure 3: Asia has generally seen more than one wave of Figure 4: Divergent paces of growth recovery infections (daily new cases, 7-day moving average) 2021 GDP forecasts, % y/y (ranked by change in forecast
Africa since end-2020)
14 14,000 ID 100,000 MY End-2020 Latest
90,000 12,000 PH 12
SG 80,000 10 10,000 TH 70,000 VN Europe
8,000 CN 60,000 8 TW 50,000 6 6,000 KR 40,000 IN (RHS)
4,000 30,000 4
20,000 2,000 2 Americas 10,000 0 0 0 1-Mar-20 1-Jun-20 1-Sep-20 1-Dec-20 1-Mar-21 IN TW SG KR PH CN HK TH VN ID MY
Source: CEIC, Standard Chartered Research Source: Standard Chartered Research
Strategy outlook
Figure 5: Inflation is starting to pick up across ASEAN and India, but not yet running hot
Our inflation monitor – the redder the shade, the hotter inflation is running, warranting central bank attention
2018 2019 2020 2021
Forecasts IN ID
MY
PH SG TH VN
Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 21 Global Focus – Economic Outlook Q2-2021
Asia – Macro trackers
Figure 1: USD export growth – Improvement in exports led by Greater China and Northeast Asia
Shades of green (or red) indicate better (worse) growth compared to the past three years; darker shades show a stronger signal
Global overview
2017 2018 2019 2020 2021
JP Highest NE Asia
KR
CN Greater HK China
economics TW Geopolitical
ID
MY
ASEAN PH
SG Asia
TH
AU
IN Lowest
Source: CEIC, Standard Chartered Research
Figure 2: Local-currency export growth – Exports to continue to recover on global economic re-openings MENAP
Shades of green (or red) indicate better (worse) growth compared to the past three years; darker shades show a stronger signal
2017 2018 2019 2020 2021
JP Highest
NE Asia KR
Africa CN Greater HK
China
TW
ID
MY
ASEAN PH Europe
SG
TH
AU
IN Lowest Source: CEIC, Standard Chartered Research
Americas
Figure 3: Current account – Import normalisation should lead to deterioration of trade balances in 2021
Shades of green (or red) indicate surplus (or deficit); darker shades show a stronger signal
2017 2018 2019 2020
JP Surplus
outlook NE Asia
Strategy KR
CN
Greater HK China
TW
ID 0
MY
Forecasts
ASEAN PH
SG
TH
AU
IN Deficit Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 22
Global Focus – Economic Outlook Q2-2021
Figure 4: Headline inflation to pick up in the coming months on low base effect
Shades of red (or green) indicate higher (lower) inflation compared to the past 3 years; darker shades show a stronger signal overview
Global
2017 2018 2019 2020 2021
JP Highest NE Asia
KR
CN
Greater Geopolitical HK economics China TW
ID
MY
ASEAN PH
SG
TH A
sia AU
IN Lowest
Source: CEIC, Standard Chartered Research
MENAP Figure 5: Food inflation remains the key contributor to headline inflation in most economies Shades of red (or green) indicate higher (lower) inflation compared to the past 3 years; darker shades show a stronger signal
2017 2018 2019 2020 2021
JP Highest
NE Asia KR
CN Africa Greater HK China
TW
ID
MY
ASEAN PH Europe
SG
TH
AU
IN Lowest
Source: CEIC, Standard Chartered Research Americas
Figure 6: Energy inflation to pick up through 2021 on higher oil prices and low base effect
Shades of red (or green) indicate higher (lower) inflation compared to the past 3 years; darker shades show a stronger signal
2017 2018 2019 2020 2021 Strategy
outlook
JP Highest NE Asia
KR
CN
Greater HK
China
TW Forecasts
ID
MY
ASEAN PH
SG
TH
AU
IN Lowest Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 23 Global Focus – Economic Outlook Q2-2021
Australia – Chugging along
Economic outlook – Recovery is well on track
Global Chidu Narayanan +65 6596 7004 The strong recovery is likely to continue throughout 2021; we forecast growth overview [email protected]
Economist, Asia of 4.8%, following a 2.4% contraction in 2020. Successful containment of domestic Standard Chartered Bank (Singapore) Limited COVID infections and supportive fiscal policies have driven a sharp rebound in
Mayank Mishra +65 6596 7466
[email protected] sentiment. This, combined with a further reopening of the economy, should support Global FX and Macro Strategist consumption growth in 2021. Residential investment is likely to pick up on increased Standard Chartered Bank (Singapore) Limited
demand, while non-residential investment should remain subdued. We expect the economics Geopolitical Reserve Bank of Australia (RBA) to maintain its accommodative monetary policy
stance until at least end-2021 to support the recovery (see Australia – Consumption
engine picks up speed).
We expect domestic consumption to be the biggest growth driver in 2021. Asia
Consumption is likely to improve throughout the year, driven by strong job creation and
improving sentiment; this should support growth in the near term. The likely relaxation
of cross-border movements should also support domestic activity. Household incomes
are likely to decline in Q2 as government support programmes are gradually unwound;
we expect a rebound in Q3 as wage growth accelerates. Household savings growth is
MENAP likely to slow further to c.5% in 2021 (from 12% in Q4-2020), offsetting the decline in
wages and supporting consumption.
The unemployment rate is likely to The health of the labour market will remain policy makers’ key focus this year, in our increase marginally in Q2, resume view. We expect job creation to remain strong as the economy reopens further and its decline in Q3
Africa external demand improves, supporting the domestic recovery. Job losses during the
April-May 2020 lockdowns have been fully recovered; hours worked returned to pre-
pandemic levels in February 2021, recording the first y/y increase since the start of the
pandemic. Notwithstanding the strong recovery, substantial slack still exists in the labour market, and this might extend into H2. We expect the unemployment rate to rise modestly in Q2 on job losses as the government’s JobKeeper programme expires in
Europe March; however, the job losses should be limited and temporary. The share of people
working zero hours is now close to pre-COVID levels, suggesting that job creation
depends only modestly on the JobKeeper programme.
Subdued wage growth is likely to Private investment is likely to remain subdued near-term on lingering overcapacity,
limit the increase in inflation despite improving sentiment. We expect only modest maintenance investment in the Americas
mining sector (despite higher commodity prices), as current capacity is sufficient.
Figure 1: Australia macroeconomic forecasts Figure 2: Hours worked are close to pre-COVID levels
Monthly hours worked, compared to March 2020 levels (%)
2% outlook
Strategy 2021 2022 2023
0%
GDP grow th (real % y/y) 4.8 3.3 3.0
-2%
CPI (% annual average) 1.5 2.3 2.3 -4% Policy rate (%)* 0.10 0.10 0.10
-6%
Forecasts
AUD-USD* 0.82 0.82 0.82 -8%
Current account balance (% GDP) 1.4 0.4 -0.7 -10%
Fiscal balance (% GDP)** -9.4 -5.0 -4.6 -12% Jan-19 Jun-19 Nov-19 Apr-20 Sep-20 Feb-21 *end-period; **for fiscal year ending in June; Source: Standard Chartered Research Source: Australian Bureau of Statistics, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 24
Global Focus – Economic Outlook Q2-2021
Residential investment is likely to increase, particularly in suburban areas, driven by
increased migration from inner cities and insufficient existing supply. The government’s overview
Global HomeBuilder programme is also likely to support residential investment in 2021; in
contrast, we expect inner-city construction to remain muted.
Inflation should remain benign this year. We expect it to pick up to c.1.5% y/y (0.8% in
Geopolitical 2020), supported by a low base; the RBA forecasts average underlying inflation at economics 1.25% in H2. A sharper-than-expected growth improvement, higher commodity prices and rising housing prices present upside risks to our inflation forecast. We expect wage
growth to remain well below the 2019 level of c.2% for most of 2021, weighing on inflation and offsetting the lower base.
Monetary policy – Still accommodative A
sia
RBA is likely to maintain an The RBA is likely to maintain its accommodative policy until end-2021 at least. accommodative stance throughout We expect the central bank to further extend QE, likely in Q3; it is likely to keep the
2021 policy cash rate (0.10%) and the 3Y yield curve target (0.10%) unchanged. The RBA
has repeatedly noted that it would maintain highly supportive monetary conditions “until its goals are achieved, which is still some way off”; we expect the central bank to MENAP maintain this stance throughout 2021. The RBA’s bond purchases (as a share of GDP)
are still lower than most G10 peers’, suggesting space to ease further if necessary. We
believe that the current pace of purchase will be maintained over the next few quarters.
We expect the central bank to keep the April 2024 bond as its target bond (instead of moving to the November 2024 bond) given the strong recovery; a negative growth
Africa shock could prompt the RBA to move the target to the longer-dated security.
The RBA has stressed that wage growth would need to pick up substantially for
inflation to return sustainably to the 2-3% target range; Governor Lowe has noted that even pre-COVID wage growth of c.2.3% was insufficient to push up inflation. We
Europe
believe wage growth will remain subdued in H1-2021, before picking up gradually as labour-market slack is reduced and temporary wage freezes are unwound (starting in
the public sector). We expect wage growth to increase to 2% y/y in Q4-2021.
COVID-19 – Increased focus on vaccinations
Americas Australia has been successful in containing the spread of new infections. We expect a further gradual relaxation of restrictions over the next few months, allowing increased inter-state travel and reduced quarantine requirements for international travellers. The Secretary of the Department of Health has said that the government is on track to
inoculate all residents with at least a first dose by end-October; faster progress could
Strategy increase the pace of reopening. International travel is likely to start with travel bubbles outlook with other countries that have had success in controlling infections.
Market outlook
We remain medium-term Overweight the AUD, expecting further upside for the
Forecasts currency on higher commodity prices. US fiscal stimulus (and hopes of infrastructure spending) have extended commodity strength, boosting the outlook for commodity-
linked currencies like the AUD. We expect AUD-USD to rise gradually to 0.82 by
end-2021.
Standard Chartered Global Research | 31 March 2021 25 Global Focus – Economic Outlook Q2-2021
Bangladesh – Turning around
Economic outlook – Recovery is gaining momentum
Global Saurav Anand +91 22 6115 8845 Growth is likely to return to pre-pandemic levels in FY22. We expect GDP growth overview [email protected]
Economist, South Asia to improve to 7.5% in FY22 (year starting July 2021) as global growth accelerates and Standard Chartered Bank, India wider vaccine rollout leads to enhanced mobility. Stronger global growth is likely to
Nagaraj Kulkarni +65 6596 6738
[email protected] spur a rebound in export demand, while faster vaccination rollout could accelerate the Senior Asia Rates Strategist execution of public investment projects. Private consumption growth should be Standard Chartered Bank (Singapore) Limited supported by improving employment and wages and still-strong remittances. Private
Divya Devesh +65 6596 8608 economics Geopolitical [email protected] investment, however, is likely to remain muted as excess capacity persists. Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited We estimate FY21 growth at 5.6%. While several indicators point to a turnaround
(particularly personal mobility indicators, which are now at pre-pandemic levels), our forecast is below the government’s 7.4% projection. We expect economic activity to
Asia take longer to return to pre-pandemic levels. Relative to other economies,
Bangladesh’s GDP growth will benefit less from a low base effect this year, as official
provisional estimates put FY20 growth at 5.2%. However, nearly 10mn people lost
employment in Q4-FY20 and 65% of the total workforce lost their income; it will take time
to restore lost jobs and wages.
MENAP Private-sector credit growth averaged 8.8% in 7M-FY21 (July 2020 to January 2021),
slowing from 9.7% in FY20. Concessional credit facilities provided by Bangladesh Bank
(BB) accounted for all of the private-sector credit disbursal during the period – banks
disbursed nearly BDT 656bn (USD 7.7bn) of concessional credit, of a total of BDT 979bn provided under the COVID-19 stimulus programme. Industrial term loans continued to
Africa contract sharply across large, medium and small-scale industries. Small- and medium-
scale industries saw sharper loan declines than large industries, mirroring the sharper
fall in their industrial production. Overall industrial production growth slowed to c.6% y/y
in H1-FY21 from 13% on average during the FY17-FY19 period. Electricity generation
growth also slowed to c.6% y/y in H1-FY21 from 11% in FY17-FY19.
We now expect the C/A balance to We now expect a C/A surplus of 0.2% of GDP in FY21, versus our previous forecast Europe
flip to a surplus in FY21 of a 0.5% deficit (and a FY20 deficit of 1.6%). Strong remittance growth, recovering
exports and slow import growth should drive the return to surplus. The C/A turned to a
c.0.7% surplus in 7M-FY21, driven by a c.35% y/y rise in remittances. Exports fell
c.1.5% y/y in 8M-FY21 and imports contracted c.1%, indicating weaker global and domestic demand. Declines in imports of intermediate and capital goods during the
Americas period indicate a weaker investment outlook.
Figure 1: Bangladesh macroeconomic forecasts Figure 2: Remittance inflows have started to soften after a
COVID surge (monthly remittances, USD bn)
FY21 FY22 FY23 2.5 outlook
Strategy 2.3
GDP growth (real % y/y) 5.6 7.5 7.3 2.1
1.9 CPI (% annual average) 5.6 5.6 5.5
1.7 1.5 Policy rate (%) 4.75 4.75 4.75 1.3
Forecasts USD-BDT* 86.00 87.00 88.00 1.1
0.9 Current account balance (% GDP) 0.2 -2.0 -2.0 0.7 0.5 Fiscal balance (% GDP) -6.0 -5.0 -5.0 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
Note: Economic forecasts are for fiscal year ending in June; *end-December; Source: CEIC, Standard Chartered Research Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 26
Global Focus – Economic Outlook Q2-2021
We continue to expect a C/A deficit of 2.0% of GDP in FY22 as imports recover and
remittance growth slows (albeit from a high base). Remittance growth in FY21 has overview
Global been driven by largely by COVID-related factors: the need for additional support to
remittance-receiving households, increased use of formal remittance channels as
informal channels were disrupted, and government incentives (including a 2-3% cash incentive and the raising of the ceiling for remittances without documentation to
Geopolitical USD 5,000 from USD 1,500). Remittances have declined on a m/m basis since economics September as these supportive factors fade. We expect Bangladesh’s balance of payments to remain in surplus in FY21 as the country receives c.USD 4bn in
concessional multilateral loans to fight COVID-19. FX reserves are likely to rise to c.USD 43bn by end-FY21 after staying in the USD 32-33bn range for the past three
years. FDI flows declined 7% y/y in 7M-FY21 (after a 39% drop in FY20) and could
improve gradually for the rest of FY21 and FY22. A
sia
Policy – Less fiscal support for growth Bangladesh Bank is likely to We expect the central bank to keep its policy rate at 4.75% in FY21 as inflation
maintain the status quo in FY21 picks up. We lower our FY21 CPI inflation forecast marginally to 5.6% (from 5.8%) to reflect weaker non-food inflation until February. However, this is still above BB’s target MENAP of 5.4% for FY21. Excess liquidity in the banking sector nearly doubled to BDT 2.0tn in January 2021 from BDT 1.03tn in January 2020; this could lead to higher inflation
once economic activity picks up.
We revise our FY21 fiscal deficit We now forecast a narrower fiscal deficit of 6.0% of GDP in FY21 (versus 7.5%
Africa forecast to 6.0% of GDP previously) due to slower-than-expected budget execution; our revised forecast is in
line with the government’s target. We expect revenues to miss budget estimates by
25% (leading to a revenue-to-GDP ratio of 9%), and spending to be 15% below budget.
Our estimates assume spending growth of 25% y/y and revenue growth of c.15% for the rest of FY21. Bangladesh posted a small fiscal surplus in 7M-FY21 as spending
Europe
fell 13%, led by a c.35% decline in development expenditure. Most of the COVID- related stimulus has been via concessionary credit facilities, not direct government
spending. We maintain our FY22 fiscal deficit forecast of 5.0% of GDP.
The COVID-19 pandemic has exacerbated existing financial-sector vulnerabilities.
Americas However, the banking sector has benefited from regulatory forbearance, and it will take time for a clearer picture to emerge. Non-performing loans (NPLs) declined to 8.9% of
total loans in September 2020 from 12% in September 2019.
Market outlook – We are Neutral on BDT bonds
Strategy We maintain our Neutral outlook on BDT bonds. While manageable inflation and outlook stable monetary policy rates are positive for bonds, negative real yields and a still-large
fiscal deficit outweigh the positives. We think yields are close to their cyclical trough
(3M T-bill yield: 0.95%, 10Y bond yield: 6.00%); we see gradual bear steepening of the
1Y-5Y segment of the yield curve.
Forecasts
We forecast USD-BDT at 86 by We expect modest FX depreciation. We see USD-BDT moving to 86 by end-2021 end-2021 on a gradual worsening of the C/A balance (driven by higher imports) and
extended valuations.
Standard Chartered Global Research | 31 March 2021 27 Global Focus – Economic Outlook Q2-2021
th
China – Embarking on the 14 FYP
Economic outlook – From recovery to rebalancing
Global Wei Li +86 21 3851 5017 We expect growth to ease towards 5% in H2 due to slower credit growth and fading overview [email protected]
Senior Economist, China COVID-related external demand; Q1 growth likely topped 18% y/y due to a low base. Standard Chartered Bank (China) Limited China’s economy has recovered swiftly thanks to well-targeted virus control measures
Shuang Ding +852 3983 8549
[email protected] and government measures to resume production sooner than other countries. The Chief Economist, Greater China and North Asia recovery trend has remained intact in early 2021, with growth indicators surging more Standard Chartered Bank (HK) Limited than 30% y/y. We revise up our current account surplus forecasts to 1.2% of GDP for
Becky Liu +852 3983 8563 economics Geopolitical [email protected] 2021 and 0.6% for 2022 (from 0.4% and 0% prior, respectively) on better-than- Head, China Macro Strategy
Standard Chartered Bank (HK) Limited expected export performance and the improving global recovery outlook.
However, the foundation of China’s economic recovery is not solid. Growth has been
concentrated in sectors benefiting from easy credit (e.g., car and housing sales) and Asia
surging COVID-related exports (e.g., protective gear and electronics for ‘work-from-
home’ purposes). In contrast, consumer-related sectors such as catering,
accommodation, tourism and air travel remain well below pre-pandemic levels (see
China – Fire and ice and China – Demystifying the strong export recovery). Divergent
industrial performance reflects the lingering effects of COVID-19, including slower
MENAP household income growth, rising underemployment for migrant workers and new
college graduates, travel restrictions, and consumer behaviour changes. Our on-the-
ground client visits suggest that the situation is improving, with growth momentum in
consumer-related sectors improving in recent weeks.
Africa We expect PPI inflation to rise The industrial sector risks overheating. Industrial production growth, on a two-year-
substantially higher in 2021 on average basis, accelerated further to 8.1% y/y as of January-February 2021, well
growing industrial supply above the 6-7% growth rate during the same period in 2015-19. Industrial supply
constraints constraints and recovering commodity prices drove up PPI inflation to 1.7% y/y in February 2021 from a low of -3.7% in May 2020 (Figure 2). We expect monthly PPI to top 5% y/y in Q3 and average 3.8% in 2021, up from -1.8% in 2020 (see China –
Europe Revising up our PPI forecast to 3.8% in 2021). Moreover, we think China’s rising PPI
inflation poses asymmetric risks to global inflation. Our study shows that the correlation
between China’s PPI and its own CPI has been close to zero since 2012, whereas the correlation between China’s PPI and US CPI has been 0.61 (see China – Rising PPI
poses asymmetric risk).
Americas
Figure 1: China macroeconomic forecasts Figure 2: PPI likely to rise materially in 2021
PBoC survey of 5,000 industrial enterprises, y/y change 30% 25%
2021 2022 2023 Share of respondents who think outlook Strategy the economy is overheating (LHS)
20%
GDP grow th (real % y/y) 8.0 5.6 5.5 15%
10%
CPI (% annual average) 0.9 2.5 2.5
0% 5% Policy rate (%)* 2.95 2.95 2.95
-10% -5% Forecasts
USD-CNY* 6.45 6.50 6.60 PPI inflation (RHS) -20% -15% Current account balance (% GDP) 1.2 0.6 0.0 -30%
Fiscal balance (% GDP) -6.0 -4.5 -4.0 -40% -25% Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21
*end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 28
Global Focus – Economic Outlook Q2-2021
Policy – Safeguarding the economic recovery
overview China targets above-6% GDP China will prevent an abrupt policy exit in 2021 to safeguard the economic Global growth and c.3% CPI inflation recovery at the start of the 14th Five-Year Plan (FYP), according to Premier Li. The
in 2021 GDP growth target for 2021 has been set at above 6%, which should be fairly easy to
achieve given the positive base effect due to the sharp recession in Q1-2020. We expect GDP growth of 8.0% in 2021. CPI inflation is likely to undershoot the official
Geopolitical target of c.3% in 2021 given the food price down-cycle in Q1; we forecast 2021 CPI economics inflation at 0.9%. Maintaining stable employment and supporting private business have been set as top priorities for 2021.
PBoC is expected to guide TSF The government has said it will maintain “prudent” and “flexible” monetary policy. We
growth slower to 10-11% in 2021, expect the required reserve ratio (RRR) and policy interest rates to be kept unchanged
consistent with nominal GDP A
in 2021. The People’s Bank of China (PBoC) is expected to guide total social financing sia growth
(TSF) growth slower to 10-11% in 2021 from above 13% in 2020, consistent with
nominal GDP growth; this should help to stabilise the macro leverage ratio, which rose to 281% of GDP at end-2020 from 256% at end-2019. The Chinese yuan (CNY)
exchange rate should be kept broadly stable. Monetary policy will provide targeted support for micro and small businesses and self-employed individuals via preferential MENAP tax treatment and concessional loans, and keep growth in inclusive financing extended by large commercial banks above 30%.
The government has set a broad The government has set the broad budget deficit target for 2021 at 8.0% of GDP, only budget deficit target of 8% of GDP slightly lower than the actual 8.6% deficit in 2020. Based on a fiscal multiplier of 0.6,
Africa for 2021, only slightly lower than an the planned deficit reduction would subtract c.0.4ppt from GDP growth in 2021, versus
actual deficit of 8.6% in 2020 an addition of 1.8ppt in 2020. However, lower CPI inflation and the increased GDP
share of government spending should keep the contribution of government
consumption to GDP growth at c.1ppt in 2021, little changed from 2020. Faster spending under the funds account is likely to result in faster government investment
Europe
this year (see China – Quantifying the fiscal policy impact in 2021).
China to boost innovation and Ensuring a good start to the 14th FYP (which runs from 2021-25) is another key priority
domestic demand during the in 2021. Broad goals under the 14th FYP include prioritising high-quality growth, th 14 FYP deepening supply-side structural reforms, expanding domestic demand and
Americas investment in new infrastructure and urbanisation, strengthening support for home- grown innovation, maintaining “reasonable” economic growth, and further opening up
China’s economy (see China – Doubling the economy in 15 years).
Politics – A more predictable US approach
Strategy A more multilateral US approach should increase predictability and reduce outlook collision risks. The Biden administration views China as an economic competitor, but
also as a needed partner in addressing common challenges like global warming.
Market outlook – CNY fundamentals remain supportive
Forecasts We forecast USD-CNY at 6.30 at We maintain our USD-CNY forecast of 6.3 for end-H1-2021, and expect a reversal end-June and 6.45 at end-2021 to 6.45 by year-end. The CNY is likely to remain supported by China’s solid economic
recovery and increasing capital inflows. We estimate that confirmation of China
government bonds’ inclusion in the World Government Bond Index (WGBI) will lead to passive inflows of USD 130-156bn from October 2021 to September 2024. While the USD may rebound modestly near-term on a strong US economic recovery, weak fundamentals – including record trade and fiscal deficits – are likely to weigh on the USD in the medium term.
Standard Chartered Global Research | 31 March 2021 29 Global Focus – Economic Outlook Q2-2021
Hong Kong – Recovery cannot be rushed
Economic outlook – Gathering pace in H2
Global Kelvin Lau +852 3983 8565 We maintain our 3.5% GDP growth forecast for 2021, reflecting a shallow overview [email protected]
Senior Economist, Greater China recovery. This puts us at the lower end of the government’s 3.5-5.5% forecast range. Standard Chartered Bank (HK) Limited Externally, we expect Hong Kong to benefit from the improving global outlook;
Mayank Mishra +65 6596 7466
[email protected] domestically, the unwinding of social-distancing measures since February should Global FX and Macro Strategist provide relief. Yet many headwinds persist, meaning the domestic recovery is unlikely Standard Chartered Bank (Singapore) Limited to gain momentum until H2-2021, in our view.
Terry Chan +852 3983 8560 economics Geopolitical [email protected] Fixed Income Associate
Standard Chartered Bank (HK) Limited In the meantime, we see strong headwinds from a still-rising unemployment rate, which
rose to a 17-year high of 7.2% in February; upside risks remain in the coming months,
as indicated by the rise in the underemployment rate to a post-SARS high of 4.0%.
Vaccine rollout is set to pick up pace after a slow start, thanks to the recent expansion Asia
of eligibility to more age groups; as of 28 March, only 458,000 doses had been
administered (versus a total population of 7.5mn). Herd immunity and the full lifting of
the inward travel ban are still some quarters away, in our view. We maintain our below-
consensus CPI inflation forecast of 1.1% for 2021, which reflects the slow demand
recovery and the still-falling private housing rent component.
MENAP
Policy – Loose liquidity to buffer fiscal austerity
It would take a lot of HKD weakness Upside risks to HIBOR look limited as long as the Fed stays dovish. HIBOR barely
to start draining the Aggregate budged during the recent bout of global risk aversion triggered by reflation worries and
Balance the back-up in US Treasury yields. This reflects ample local liquidity and the perception
Africa that the Fed’s first hike will come in 2023 at the earliest. The Aggregate Balance, a
measure of banking-system liquidity, currently stands at a record HKD 457bn. It would
take substantial and persistent capital outflows – an unlikely scenario, in our view – to
push USD-HKD towards the 7.85 weakside convertibility threshold and prompt the
Hong Kong Monetary Authority to intervene to defend the peg, causing a drain
on liquidity.
Europe
The government expects fiscal The government takes a small first step towards austerity. The fiscal deficit for
deficits for the next four years FY22 (ending March 2022) is budgeted at HKD 101.6bn (3.6% of GDP) – less than
half the estimated deficit of HKD 257.6bn for FY21, which incorporated more than HKD 300bn worth of pandemic relief programmes. The planned deficit reduction reflects
Americas more cautious spending. The FY22 budget includes electronic consumption vouchers
of HKD 5,000 per adult, half the size of cash handouts in FY21; and a repeat of
Figure 1: Hong Kong macroeconomic forecasts Figure 2: Residential prices holding up relatively well
Property price indices, 2017=100
125 outlook
Strategy 2021 2022 2023
120
GDP grow th (real % y/y) 3.5 3.0 2.5 Residential
115
CPI (% annual average) 1.1 2.3 2.3 110
105 Office 3M HIBOR* 0.40 0.60 1.00
Forecasts 100
USD-HKD* 7.80 7.80 7.80 95
Current account balance (% GDP) 4.0 4.0 4.0 90 Retail Fiscal balance (% GDP)** -4.5 -1.5 -1.0 85 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 *end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 30
Global Focus – Economic Outlook Q2-2021
concessions like salaries tax reduction and rates concessions for domestic properties,
but with lower ceilings. overview
Global
We believe the reduction in the fiscal impulse reflects a commitment to fiscal prudence.
However, introducing this amid lingering COVID disruptions and travel restrictions
adds to our conviction that Hong Kong’s recovery will be shallow at best. We forecast
Geopolitical
the FY22 deficit at 4.5% of GDP (larger than the government’s 3.6% projection) given economics the difficulty of sustaining austerity and materially broadening Hong Kong’s very narrow tax base. Deficits may also overshoot the government’s projections of small annual
deficits (less than HKD 20bn) for FY23-FY25.
Asset markets are supported by We see little negative impact from higher stamp duty on stock transfers. Hong
ample cheap liquidity Kong’s equity market remains fundamentally supported by tailwinds including global
A
QE, the re-acceleration of China’s capital account opening, and the threat of US de- sia
listing of China stocks. Barring a hawkish Fed surprise, we expect benign interest rates
to persist, limiting the debt-servicing burden of mortgagees and curbing downside risks
to the residential property market. A dovish Fed and benign interest rates help to
explain the outperformance of residential property prices in recent years – they are
MENAP down just 4% on average from the H2-2018 peak, versus -19% for offices and -15% for commercial retail properties, according to official data.
Politics – ‘Patriots only’ after electoral reform
Electoral reform is now entering the Mass arrests of opposition politicians and activists under the national security law since
implementation stage its July 2020 implementation have deterred protest activity. The risk of international Africa backlash has risen again recently following the decision by China’s NPC to change
Hong Kong’s electoral system to ensure that only “patriots” can govern the city. Raising
the bar for pro-democracy candidates to qualify for (and win) future elections, and
diluting their seats in the expanded election committee and legislative body, could keep
opposition representation low at the upcoming Legislative Council elections Europe
(postponed from last year) scheduled in December.
Greater Bay Area (GBA) – More spillover needed
The rest of the GBA is recovering We expect Hong Kong’s recovery to continue to lag other GBA cities. Our GBA
ahead of Hong Kong Business Confidence Index (GBAI), a diffusion index based on quarterly surveys of Americas over 1,000 companies operating in the GBA, showed the region’s growth returning to pre-COVID norms at the start of the year. Within the GBA, however, Hong Kong was
the only city with an expectations index reading below 50 (at 38.3).
Market outlook – Outperforming the real economy Strategy
outlook HKD continues to trade on the Resilient financial markets keep the HKD supported. USD-HKD has moved away strong side of the convertibility
from the 7.75 strong-side convertibility threshold since late February as reflation-
band induced risk aversion has prompted USD Treasury yields to rise and stocks to correct.
The pair, however, has stayed on the strong side of the band, indicating limited
outflows and strong confidence in the peg; we expect the HKD to remain supported
Forecasts throughout 2021, as global liquidity is unlikely to tighten dramatically, allowing the local IPO scene to stay active and capital flows supportive for the HKD.
GBHK yields are on the rise We raise our forecasts for Hong Kong government bond (GBHK) yields in line with our upwardly revised UST forecasts. We now see the 10Y GBHK yield rising further to 1.4% (previous forecast: 1.1%) by end-Q2-2021 and 1.7% (1.0%) by end- 2021. We expect GBHKs to outperform USTs this year due to much lower primary supply and continuing accommodative HKD liquidity conditions.
Standard Chartered Global Research | 31 March 2021 31 Global Focus – Economic Outlook Q2-2021
India – FY22: A tale of two halves
Economic outlook – Uneven recovery
Global Kanika Pasricha +91 22 6115 8820 India has returned to growth, and recovery momentum remains positive. GDP overview [email protected]
Economist, India expanded in Q3-FY21 (ended December 2020) after two successive quarters of Standard Chartered Bank, India contraction, and our economic activity indicator shows that recovery momentum has
Nagaraj Kulkarni +65 6596 6738
been sustained in Q4. We expect GDP growth to rebound sharply to 11.5% in FY22 [email protected] Senior Asia Rates Strategist from a 7.3% contraction in FY21, with GDP levels returning to pre-pandemic levels by Standard Chartered Bank (Singapore) Limited the end of December 2021. The expansionary budget for FY22 outlined a fiscal impulse
Divya Devesh +65 6596 8608 economics Geopolitical [email protected] of 1.0-1.5% over the next five years, supporting our constructive outlook on India’s Head of ASA FX Research growth. The recent increase in COVID cases is a concern for near-term growth, Standard Chartered Bank (Singapore) Limited
however. The rise is currently limited to selected states; a more widespread outbreak
would pose downside risk to our growth forecast, but we do not expect a repeat of the
sharp downturn seen in Q1-FY21.
Asia
The nascent growth recovery is We believe that the nascent growth recovery requires policy support, especially
uneven and requires continued from monetary policy. Detailed GDP data shows an uneven recovery, with the informal
policy support sector lagging the formal sector, rural demand growing faster than urban demand, and
manufacturing outpacing services. We expect FY22 GDP growth to be driven by consumption and public capex, along with urban demand, which may catch up with a
MENAP lag. The patchy recovery requires supportive policies, as unemployment remains high
Vaccinating the majority of the and the MSME sector – which is not captured well in high-frequency indicators –
population is likely to take continues to suffer. India’s vaccination rollout has picked up pace, but given the large
until 2022 population size, vaccinating the majority of the population is likely to take until 2022.
As a result, full economic reopening is unlikely in FY22, in contrast to China, the US,
Africa the EU or smaller Asian economies.
Base effects are likely to drive Base effects are likely to distort y/y indicators in FY22 as the economy recovers growth higher and inflation lower from the worst crisis in four decades. We expect H1-FY22 GDP growth to spike to in FY22 c.18% y/y (from a contraction of c.16% in H1-FY21), before normalising to near pre- COVID levels of c.5% in H2. Base effects will have the opposite effect on inflation,
Europe pushing it lower, but not until H2-FY22. India’s inflation was a global outlier in 2020,
rising to a five-year high (despite the growth slump) due to food-supply disruptions and
policy-driven price pressures. As a result, we expect inflation to moderate in FY22
versus FY21. However, our still-high average inflation forecast of 4.9% for FY22 (even from an elevated base of 6.2% in FY21) underlines inflationary pressures from rising
commodity prices and the growth recovery. Americas
Figure 1: India macroeconomic forecasts Figure 2: FY22 inflation easing to be led by food prices,
but we see upside risks (ppt contributions to inflation, %)
FY21 FY22 FY23 Core ex T&C
outlook
Strategy
GDP grow th (real % y/y) -7.3 11.5 5.0
Core
CPI (% annual average) 6.2 4.9 4.2
Fuel and elec Policy rate (%) 4.00 4.00 4.50
Forecasts USD-INR* 73.07 76.50 78.50 Food & bev
Current account balance (% GDP) 1.0 -0.8 -1.3 FY22 F CPI FY21 Fiscal balance (% GDP)** -13.1 -10.5 -9.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Note: Economic forecasts are for fiscal year ending in March; *end-December of previous year; Source: CEIC, Standard Chartered Research **central + state governments; Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 32
Global Focus – Economic Outlook Q2-2021
We see both downside and upside Downside risks to our inflation forecasts include a delayed growth recovery due to a
risks to our inflation forecasts more widespread increase in infections. Upside risks include a bad monsoon or a overview
Global larger-than-expected spike in commodity prices amid better global growth, which could
lead to a risk of faster policy tightening. In a pessimistic scenario, we estimate that CPI
inflation could rise to 6% in FY22.
Geopolitical We now expect a larger C/A deficit We now expect a smaller current account surplus in FY21 (1.0% versus 1.2% economics of 0.8% of GDP in FY22 previously) and a larger deficit in FY22 (0.8% versus 0.4%); this reflects the growth recovery and higher oil prices. Our calculations show that every USD 1/bbl rise in the
Indian crude basket (ICB) price widens India’s C/A deficit by USD 1.4bn. We now expect ICB to average c.USD 65/bbl in FY22, versus our initial forecast of USD 52/bbl
– adding USD 18bn (0.6% of GDP) to the C/A deficit. However, this should be partly
offset by much better-than-expected invisibles flows – including services exports due A
sia to improved demand post-COVID, higher remittances due to rising oil prices, and a
normalisation of investment outflows following a spike in FY21. The C/A deterioration
is likely to remain manageable overall amid rising capital inflows. We expect another
BoP surplus in FY22, although we now expect a slightly smaller surplus of USD 47bn
(versus our prior expectation of USD 55bn). We also lower our FY21 BoP surplus MENAP forecast to USD 88bn from USD 98bn.
Policy – Monetary policy normalisation likely in H2-FY22
Repo rate hikes are likely to be Better domestic and global growth, along with elevated inflationary pressure, deferred to FY23 should trigger the start of policy normalisation in Q3-FY22. We expect CPI inflation
Africa to exceed the MPC’s 4.0% threshold in both H1 (5.3%) and H2-FY22 (4.6%). In
response, we expect the Reserve Bank of India (RBI) to initiate a reduction in the size of
the liquidity surplus in Q3-FY22, followed by gradual reverse repo rate hikes of 25bps in
February 2022 and 15bps in April 2022. This would return the corridor (the gap between the repo and reverse repo rates) to the pre-pandemic level of 25bps.
Europe
We expect repo rate hikes to start in Q2-FY23, with 50bps of hikes to 4.5% by Q3. We
see the reverse repo rate rising to 4.25% by end-Q3-FY23 from 3.35% currently. We
view these moves as a normalisation, not a tightening, of monetary policy, as tightening
could dampen growth momentum. Even factoring in 50bps of hikes in Q2 and Q3-
Americas FY23, the repo rate would still be below the pre-pandemic level of 5.15%.
We expect the fiscal deficit to On the fiscal policy front, the pro-growth budget is a key contributor to our constructive
undershoot budgeted levels growth outlook. Implementation of capex plans and reforms will therefore be closely
watched. Debt markets will also keep an eye on any positive fiscal surprises – we
Strategy
believe that the FY22 budget underestimates revenues, and we expect the fiscal deficit outlook to be 0.3-0.6% of GDP lower than budgeted.
Market outlook
We are Neutral on IGBs and INR We have a Neutral outlook on Indian Government Bonds (IGBs). We believe the
demand-supply mismatch is a bigger driver of IGBs than a manageable pick-up in Forecasts inflation. Market expectations of policy normalisation are indicated in already-steep rates curves. We expect the Indian rupee (INR) to weaken as India’s C/A balance flips
to a deficit; in addition, the INR REER is at multi-year highs and market positioning is significantly long INR. We target USD-INR at 76.50 by year-end.
Standard Chartered Global Research | 31 March 2021 33 Global Focus – Economic Outlook Q2-2021
Indonesia – Reviving the economy
Economic outlook – Vaccine rollout to support H2 recovery
Global Aldian Taloputra +62 21 2555 0596 We maintain our GDP growth forecasts of 4.5% for 2021 and 5.0% for 2022. Our overview [email protected]
Senior Economist, Indonesia 2021 projection factors in a Q1 GDP contraction followed by a rebound in the coming Standard Chartered Bank, Indonesia Branch quarters. The normalisation of economic activity, vaccine distribution, and fiscal and
Divya Devesh +65 6596 8608
[email protected] monetary stimulus should support the recovery, despite the soft start to the year. A Head of ASA FX Research sharp decline in COVID-19 infections (the number of daily infections fell below 6,000 Standard Chartered Bank (Singapore) Limited in mid-March, half the January peak) and improving vaccine distribution have allowed
economics Geopolitical the government to reopen the economy further. Vaccine distribution accelerated to an
average 350,000 daily doses in March, almost four times the February level, and is
projected to reach the 800,000 target by end-Q2, subject to vaccine availability.
We expect growth to peak at c.7% Recent data suggests that consumption and investment activity remain weak, while Asia
y/y in Q2, following a 1.2% exports are performing strongly. Retail sales fell 17% y/y in February, and transit
contraction in Q1 mobility was below Q4-2020 levels, as the government tightened social-distancing
measures at the start of the year. More than 55% of Indonesia’s labour force is
employed in sectors hit particularly hard by COVID-19, such as retail/wholesale trade, accommodation, construction, and services; given the domestically oriented nature of
MENAP Indonesia’s economy, the pace of domestic reopening will determine the strength of
the recovery, more so than for more export-reliant economies.
Government-led investment is likely With production capacity utilisation still 10% below the pre-pandemic high, private-
to support the recovery sector companies are unlikely to be in a rush to restart their capex cycle. Government-
initiated projects such as infrastructure, mineral processing, and basic manufacturing Africa
are likely to lead the investment recovery this year. Four additional nickel and lead
smelters, with investment worth USD 2.2bn, are likely to be completed this year; 30
more are due for completion by 2024, taking Indonesia’s total number of smelters to
53. The overhaul of investment regulations under the recently passed omnibus law on
job creation is likely to improve the investment climate. Europe
Supply factors and base effect will We expect CPI inflation to return to around 2% in April-May as the low base effect from
be the dominant drivers of inflation
last year’s pandemic shutdown kicks in, before grinding higher to 2.9% by end-2021. this year
Higher imported inflation – due to rising global food prices and imports of intermediate goods and raw materials from China – may push inflation higher this year. Prices of
wheat, sugar and soybeans, which account for almost half of Indonesia’s food imports, Americas
have risen by an average 70% from last year’s lows.
Figure 1: Indonesia macroeconomic forecasts Figure 2: Monetary policy aims to sustain external stability
C/A balance, % of GDP (RHS); CPI inflation, policy rate, % (LHS)
18 5 outlook
Strategy 2021 2022 2023
16 C/A balance, % 4
of GDP (RHS)
GDP grow th (real % y/y) 4.5 5.0 5.2 14 3
2 12 CPI (% annual average) 2.2 3.0 2.5 1 10 0 Policy rate (%)* 3.50 3.50 3.50 8
-1 Forecasts
6 USD-IDR* 14,600 14,840 15,070 -2 4 -3 Current account balance (% GDP) -1.8 -2.3 -1.8 2 CPI inflation -4 Policy rate Fiscal balance (% GDP) -5.4 -4.0 -2.9 0 -5 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18 Mar-20 *end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 34
Global Focus – Economic Outlook Q2-2021
Transportation costs may start to contribute positively to headline inflation amid
improving mobility and rising crude oil prices. We estimate that a 10% rise in the global overview
Global crude oil price increases Indonesia’s retail fuel price by around 4%, although some of
the increase may be absorbed by state-owned companies. That said, we believe
underlying inflation remains manageable given below-potential growth and well- anchored inflation expectations.
Geopolitical
economics Improved global demand and a We expect a 2021 C/A deficit of 1.8% of GDP on continued strong global demand, gradual domestic demand recovery higher commodity prices, and a subdued domestic economic recovery. Indonesia should support the balance of
posted a large trade surplus of USD 4bn in the first two months of 2021, and we expect payments this to continue in H1. The balance of payments is likely to remain in surplus this year
thanks to resilient FDI flows (which recorded a net surplus of 1.3% of GDP in 2020,
despite the pandemic) and potential flows into Indonesia’s new sovereign wealth fund;
A portfolio flows may stagnate due to rising UST yields. We expect the 2021 BoP surplus sia to rise to USD 5.2bn from USD 2.6bn in 2020.
Policy – Firing on all cylinders
BI to continue with government Increasing IDR volatility is likely to constrain the monetary policy response. We MENAP bond purchases and think rising UST yields have removed the scope for further rate cuts by Bank Indonesia accommodative macro-prudential (BI), following a 25bps cut in February. That said, we expect the policy stance to remain measures accommodative. BI will still need to buy a significant amount of government bonds
given the absence of strong foreign inflows, and we expect it to keep policy
accommodative. We see a rate hike as unlikely this year, despite our expectation of a weakening Indonesian rupiah (IDR). Still-subdued growth, inflation in line with BI Africa targets, a manageable C/A deficit, and ample FX reserves and domestic NDF
availability should enable BI to maintain IDR stability and keep interest rates low for
longer. However, a more hawkish US Fed or a deteriorating C/A deficit would increase
the risk of a rate hike, in our view.
Europe The government has increased The government has increased COVID-19 stimulus for 2021 to c.IDR 700tn (4.0% of
COVID stimulus to support GDP), almost double the initial 2021 budget allocation and up 21% from last year’s corporates/SMEs and vaccine stimulus. This is aimed at financing vaccine procurement, support for corporates and
procurement
SMEs, and social assistance. The budget also includes VAT and luxury tax exemptions
on new housing purchases up to IDR 2bn, and purchases of some cars; this should Americas stimulate consumer spending and boost sectors with large multiplier effects on the economy. The government aims to limit the fiscal deficit to 5.7% of GDP this year (6.0% in 2020) by using its fiscal buffer, budget reallocation, and previous years’ cash balances. This should help to prevent a fiscal cliff as the deficit is brought back below
3% in 2023 (as required by law).
Strategy
outlook Politics – BI law revision is back in focus
New draft may be more supportive of BI independence than last year’s version.
The government is working on a new draft of the BI law revision, to be included in the
financial-sector omnibus law due for passage this year. While BI’s role will still be extended and harmonised with government policy priorities, the new draft aims to Forecasts preserve BI independence, according to a recent Bloomberg report. This includes removing the monetary board system and tightening criteria for BI bond purchases.
Market outlook – Neutral view on the IDR We recently revised our end-2021 USD-IDR forecast to 14,600 from 13,800. Our weaker IDR view reflects increasing US rates volatility, which is likely to weaken Indonesia’s external balance, despite the manageable C/A deficit.
Standard Chartered Global Research | 31 March 2021 35 Global Focus – Economic Outlook Q2-2021
Japan – Challenges and opportunities ahead
Economic outlook – Downside uncertainty Chong Hoon Park +82 2 3702 5011 Global We lower our 2021 GDP growth forecast to 2.8% from 3.0%. The revision reflects the
overview [email protected]
Head, Korea and Japan Economic Research emergency lockdown in Q1, delays in Japan’s vaccination programme, and the decision Standard Chartered Bank Korea Limited to ban foreign visitors from the Tokyo Olympics. In addition, political and geopolitical
Chidu Narayanan +65 6596 7004
uncertainty in an election year may complicate trade relations with neighbouring [email protected] Economist, Asia countries and the effective implementation of fiscal policy in H2; we lower our H2 growth Standard Chartered Bank (Singapore) Limited forecast to 2.8% from 3.3%. Despite these headwinds, our 2.8% full-year growth forecast Mayank Mishra +65 6596 7466
economics reflects a solid recovery driven by the global economic rebound, vaccination rollout and Geopolitical [email protected] Global FX and Macro Strategist the Olympics. We raise our 2022 growth forecast to 1.8% from 1.5%, as we expect the Standard Chartered Bank (Singapore) Limited
impact of pent-up demand to be delayed from H2-2021.
Downside risk is larger than upside Japan’s economy is on a broadly improving trend. GDP growth reached double digits in
Asia Q3 and Q4-2020 on a q/q annualised basis, suggesting high potential for a recovery once
COVID-19 is contained. Exports and industrial production should continue to improve,
boosting business sentiment and corporate profits. Japan’s leading economic indicator
rose to 99.1 in February from 97.7 in January, beating consensus expectations. Private
inventories subtracted 0.6ppt from q/q growth in Q4-2020, the most negative contribution
since Q2-2012. This suggests room for a strong rebound in output in the coming quarters. MENAP
On the negative side, the emergency lockdown from January-March lasted longer than
expected and likely caused Q1 GDP to shrink 1.2% q/q and 2.1% y/y. Exports fell 4.5%
y/y in February, underperforming market expectations as ongoing coronavirus
outbreaks in key overseas markets weighed on demand. The export volume index also fell 4.3% y/y. Domestically, private consumption of services such as food/beverage
Africa and accommodation continued to suffer in early 2021 amid the new wave of the virus.
The Tokyo summer Olympics, due to open on 23 July, will provide less of a growth
boost than previously expected following the decision to bar overseas spectators to limit attendance. This will result in the loss of millions of dollars in tourism income. While the Olympics should lead to a significant recovery in domestic services
Europe consumption, potential limits on domestic fans (to be decided in April) create further
downside risk.
Americas
Figure 1: Japan macroeconomic forecasts Figure 2: Consumer sentiment and retail sales are
improving but still below pre-COVID levels
Consumer sentiment, index (LHS) vs retail trade, % y/y (RHS)
outlook 45 Retail trade 15 Strategy 2021 2022 2023 Consumer sentiment
40 (RHS)
10 GDP growth (real % y/y) 2.8 1.8 1.1
35
5 30 CPI (% annual average) 0.2 0.5 1.0 25 0
Policy rate (%)* -0.10 -0.10 -0.10 20 -5
Forecasts 15
-10 USD-JPY* 108.00 105.00 104.00 10 5 -15 Current account balance (% GDP) 3.5 3.5 3.0 0 -20
Fiscal balance (% GDP)** -7.0 -6.5 -4.5
Jul-19 Jul-20
Jan-21 Jan-19 Jan-20
Mar-19 Mar-20
Sep-19 Nov-19 Sep-20 Nov-20 May-20 May-19 *end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 36
Global Focus – Economic Outlook Q2-2021
We continue to expect average CPI inflation of 0.2% and a current account surplus
forecast of 3.5% of GDP in 2021. Inflationary pressure from rising commodity prices overview
Global and a weaker Japanese yen (JPY) should be offset by weak services-sector demand
and a slower-than-expected economic recovery. A steady services surplus and a trade
surplus (due to improving exports) support our expectation of a 3.5%-of-GDP C/A surplus.
Geopolitical
economics Policy – BoJ likely to maintain the status quo The BoJ’s first policy review in five The Bank of Japan (BoJ) announced the outcome of its monetary policy review, the
years brought no significant first since 2016, on 19 March. The changes are unlikely to have significant implications changes for financial markets, in our view. The BoJ opened up the possibility of a hike in long-
term rates, widening its yield curve control (YCC) target band for the 10Y yield to 0%
A
+/-25bps (from +/-20bps). However, we see this as a largely symbolic gesture given sia
the small size of the increase. We expect the BoJ to maintain an accommodative
monetary policy stance for the rest of the year. Governor Kuroda mentioned in a recent interview that it is too early to think about an exit from the BoJ’s current policy this year.
On the fiscal front, Japan’s lower house approved a budget of JPY 106.6tn for the year MENAP ending March 2022 to fight COVID-19. Government debt is set to rise in 2021, as
planned bond issuance to fund the deficit will be larger than last year; we see a
possibility of an additional budget given the uncertain economic environment.
Politics – Timing the general election right Africa Election-related uncertainty is not The key challenge for Prime Minster Suga is deciding when to hold the general election positive for economic policy in 2021; the latest possible date is 22 October. He is likely to try to time it for when
COVID-19 has been brought under control domestically, the economy is solid, and he
has the ruling party’s support to be the next prime minister. How the Olympics play out
will also be an important determinant of the political landscape; timing the elections Europe soon after the successful hosting of the games would be positive for the ruling party.
Tokyo Metropolitan Assembly elections, to be held on 4 July, will be a litmus test for the general election.
On the foreign policy front, Suga is likely to take a tougher stance towards China and Americas try to improve relations with South Korea this year, in line with the US-Japan alliance. However, Japan’s increasing economic dependence on China could complicate this strategy.
Market outlook – Quick to depreciate, slow to appreciate
Strategy
outlook We are bearish on the JPY We expect real yield differentials to continue to support USD-JPY short-term; in the medium term, broad USD weakness due to widening US twin deficits is likely to weigh
on the pair. We forecast USD-JPY at 110 at end-Q2 and end-Q3-2021, before a
gradual decline back to 108 at end-2021 and 106 at end-Q1-2022. Notably, we expect
the JPY to underperform even amid broad USD weakness ahead, following its
Forecasts significant underperformance in the recent USD rebound. We continue to like the currency as a funder (see JPY – Keep funding).
Standard Chartered Global Research | 31 March 2021 37 Global Focus – Economic Outlook Q2-2021
Malaysia – All-round support
Economic outlook
Global Edward Lee +65 6596 8252 We maintain our 2021 GDP growth forecast of 5.7%. Growth is likely to pick up in Q2 overview [email protected]
Chief Economist, ASEAN and South Asia as the economy benefits from higher commodity prices, continued fiscal and monetary Standard Chartered Bank (Singapore) Limited policy support, improving external demand, and the domestic vaccination rollout. The
Jonathan Koh +65 6596 8075
[email protected] economy likely contracted in Q1 as a Movement Control Order (‘MCO 2.0’) was Economist, Asia re-imposed for much of the quarter following a resurgence of COVID infections. Standard Chartered Bank (Singapore) Limited
Divya Devesh +65 6596 8608 economics Geopolitical [email protected] Malaysia’s growth recovery hinges on private consumption and investment. Labour- Head of ASA FX Research
Standard Chartered Bank (Singapore) Limited market conditions have worsened in recent months. The unemployment rate rose to
4.9% in January, a seven-month high. Assuming the pre-COVID average participation
rate of 68.8%, the unemployment rate would be higher, at 5.3%. That said, conditions
are likely to improve as the coronavirus situation is contained and mobility restrictions Asia
are relaxed. Targeted wage subsidies should also provide some support (albeit less
than in 2020) to pandemic-affected sectors – the government has allocated an
additional MYR 700mn to extend the wage subsidies for another three months
through June.
MENAP EPF withdrawals to buoy consumer Consumer spending should also be supported by withdrawals from the Employee spending
Provident Fund (EPF). Conditions for withdrawals from the EPF’s ‘i-Sinar’ pandemic
relief facility were removed in early March, enlarging the pool of members who are
eligible to tap their EPF savings for financial relief (although caps remain in place). We estimate that EPF withdrawals and reduced contributions will total c.MYR 64bn in
Africa 2021. Assuming that 50% of this is spent in the economy, it will contribute c.2ppt to
GDP growth.
Public and private investment should pick up this year, especially in H2. The 2021
budget includes a 38% increase in development spending, and investment approvals picked up towards the end of 2020. Business confidence improved in Q4-2020 (despite
Europe the resurgence of infections) on better domestic and export demand. Total loans
disbursed (ex-households and financial institutions) rose 1.2% y/y 3mma in January –
the first increase after nine consecutive months of decline. The start of Malaysia’s
vaccination programme should also boost confidence. The government has secured enough vaccine doses to inoculate the entire population and aims to achieve herd
immunity (c.80% of the population inoculated) by end-2021.
Americas
Figure 1: Malaysia macroeconomic forecasts Figure 2: Labour-market recovery is key
% y/y 3mma (LHS); % 3mma (RHS, inverted)
10 Private consumption 3.0 outlook
Strategy 2021 2022 2023
5
GDP grow th (real % y/y) 5.7 5.9 4.8 Unemployment rate SA 3.5
(RHS-inverted)
CPI (% annual average) 2.5 1.9 2.2 0 4.0
Policy rate (%)* 1.75 1.75 3.00 -5
Forecasts 4.5
USD-MYR* 4.00 4.00 4.05 -10 5.0 Current account balance (% GDP) 1.7 1.8 2.0 -15
Fiscal balance (% GDP) -6.0 -4.5 -3.9 -20 5.5 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 *end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 38
Global Focus – Economic Outlook Q2-2021
We raise our headline inflation forecast for 2021 to 2.5% from 2.0% to account for
higher oil and food prices. Our commodities team forecasts that Brent oil prices will overview
Global average USD 65/barrel in 2021, almost 50% higher than in 2020. Higher global food
prices are likely to feed into higher food price inflation in Malaysia. The UN food price
index has recorded seven consecutive months of y/y increases, rising 16.7% in
February. We maintain our 2021 core inflation forecast of 1.0% given the still-subdued
Geopolitical
economic backdrop. economics
Policy
We expect BNM to maintain a We expect Bank Negara Malaysia (BNM) to remain on hold in 2021. At the March neutral stance; inflation is unlikely meeting, the central bank maintained its neutral stance. It turned slightly more to be a concern
optimistic on the global growth outlook and noted that while MCO 2.0 restrictions hit
growth in Q1, they likely had a less severe impact than the previous round of A restrictions (MCO 1.0), and that growth should pick up from Q2. BNM noted that sia
headline inflation may spike temporarily in Q2 due to the low base, moderating
thereafter. This implies that BNM may look through temporary spikes in headline
inflation amid expectations that underlying inflation will remain subdued due to ongoing spare capacity in the economy.
MENAP
The government has raised its 2021 The government approved another MYR 20bn fiscal package in March to support
fiscal deficit projection to 6.0% of the economic recovery. The latest programme (‘Pemerkasa’) includes spending to
GDP from 5.4% accelerate the pace of vaccinations, support small infrastructure projects, and provide
cash handouts to low-income households. According to the finance minister, the direct
fiscal injection amounts to MYR 11bn and will widen the 2021 fiscal deficit to 6.0% of Africa GDP from the initially budgeted 5.4%. This is despite potentially higher-than-budgeted oil revenue given the initial budgeted oil price assumption of USD 42/bbl; other fiscal
items, such as higher fuel subsidies, may offset the benefits of higher oil prices. The
new oil price assumption for the 6% fiscal deficit is USD 60/bbl. As a result of the higher fiscal deficit, the government estimates that statutory debt-to-GDP will rise to 58.5% of
Europe
GDP by end-2021. This remains below the statutory limit of 60%, suggesting more fiscal room if required.
Politics
A state of emergency is in effect until 1 August; it began on 11 January. The
Americas measure is aimed at facilitating government efforts to tackle the COVID situation, although no economic measures accompanied the state of emergency; previous states
of emergency have been imposed due to security concerns. Prime Minister Muhyiddin
reportedly said that a general election will be held once the pandemic has subsided
and it is safe to do so (elections cannot be held during the state of emergency).
Strategy According to local media reports, the ruling government coalition led by Prime Minister outlook Muhyiddin Yassin now holds a slim majority of 112 parliamentary seats out of 222.
Market outlook
We have a bullish view on the Malaysian ringgit (MYR). Malaysia benefits from
higher commodity prices, particularly for palm oil and liquefied natural gas (LNG). Palm Forecasts oil exports have already benefited from higher prices, while LNG exports have recently started to increase – they rose to a monthly average of MYR 2.6bn in December- January from MYR 1.8bn in May-November. In addition, a strong trade surplus,
favourable valuation dynamics and strong FX reserves should remain supportive of the MYR. Risks to our view include foreign portfolio outflows from the domestic bond market and a sharp pick-up in total imports.
Standard Chartered Global Research | 31 March 2021 39 Global Focus – Economic Outlook Q2-2021
Nepal – Gradual pick-up
Economic outlook – Politics, vaccination progress are key
Global Saurav Anand +91 22 6115 8845 Political uncertainty clouds the near-term outlook. We expect growth to slow to overview [email protected]
Economist, South Asia 2.0% in FY21 (year ending 15 July 2021), as the COVID-19 crisis has derailed Standard Chartered Bank, India economic momentum and exacerbated structural vulnerabilities. Political uncertainty
has prevailed since December, also weighing on growth. Initial vaccination progress
has been slow but is likely to pick up pace from April onwards. While we expect growth
to rebound to 6.5% in FY22, we see downside risks if political stability has not returned
economics Geopolitical by then. In the three years prior to the pandemic, Nepal’s economy grew at an average rate of 7.3% (FY16-FY19) against a backdrop of political stability and a policy emphasis
on investment, productivity and effective public institutions; this was significantly higher
than the average of 4-5% in the two prior decades. Travel restrictions have halted
tourism, with ripple effects on domestic employment. Private investment remains
Asia subdued amid an uncertain growth outlook.
FX reserves are sufficient, at We raise our C/A deficit forecast for FY21 to 4.0% of GDP from 3.0%, as the post-
14 months of import cover COVID resumption of economic activity is likely to widen the trade deficit (via higher
imports) more than expected. Remittances were strong in H1-FY21, growing 6.7% y/y, led by higher transfers to support local consumption and greater use of financial
MENAP channels. However, remittance growth is likely to moderate as COVID-19 subsides.
We see the C/A widening further to 6.0% of GDP in FY22 on a wider trade deficit. FX
reserves are sufficient, at USD 13.8bn (c.14 months of imports) as of February.
We lower our fiscal deficit forecast Political uncertainty has delayed budget execution, leading to a sharp slowdown in
Africa for FY21 on slower budget expenditure since December. Spending is likely to remain weak, with political clarity
execution unlikely before late FY21; we therefore narrow our FY21 fiscal deficit forecast to 4.0%
of GDP from 5.5% (FY20: 1.9%). We expect the deficit to widen to 5.5% in FY22 as budget execution improves. Public debt stood at 38.3% of GDP in FY20, implying limited stress due to debt levels.
Europe We lower our FY21 average inflation forecast to 4.0% (from 6.5%), as slower demand
has led to lower non-food inflation and a better harvest has kept food inflation in check.
Nepal’s lower inflation has caused the inflation differential with India to widen to a five-
year high. We expect inflation to rise to an average 5.5% in FY22 on higher commodity prices, narrowing the differential with India, which shares a porous border with Nepal
and is the country’s biggest source of imports.
Americas
Figure 1: Nepal macroeconomic forecasts Figure 2: Growth likely to bounce back in FY22
Ppt contributions, % y/y 14%
FY21 FY22 FY23 Private consumption Government consumption GCF Net exports outlook
Strategy 12%
GDP (% y/y)
GDP grow th (real % y/y) 2.0 6.5 6.0 10%
8%
CPI (% annual average) 4.0 5.5 5.5 6% 4% USD-NPR* 116.91 122.40 125.60
Forecasts 2%
0% Current account balance (% GDP) -4.0 -6.0 -5.8 -2%
Fiscal balance (% GDP) -4.0 -5.5 -6.0 -4% FY16 FY17 FY18 FY19F FY20 FY21F FY22F Note: Economic forecasts are for fiscal year ending 15 July; *NPR is pegged at 1.6x INR for Source: CEIC, Standard Chartered Research end-December of previous year; Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 40
Global Focus – Economic Outlook Q2-2021
New Zealand – Hold your horses
overview
Global Economic outlook
Jonathan Koh +65 6596 8075 We recently lowered our 2021 GDP growth forecast to 4.0% from 4.9% to reflect [email protected]
Economist, Asia slowing growth momentum. Given that the economic recovery is still nascent, we Standard Chartered Bank (Singapore) Limited expect the Reserve Bank of New Zealand (RBNZ) to maintain its accommodative Chidu Narayanan +65 6596 7004
Geopolitical [email protected] stance. In addition, still-expansionary fiscal policy and New Zealand’s relatively economics Economist, Asia successful pandemic containment should continue to support the economic recovery. Standard Chartered Bank (Singapore) Limited
Mayank Mishra +65 6596 7466
[email protected] New Zealand’s recovery from the Q2-2020 economic slump triggered by the Global FX and Macro Strategist Standard Chartered Bank (Singapore) Limited nationwide lockdown has been uneven. GDP contracted in Q4-2020, reflecting the
ongoing impact of the pandemic even as the country was under the least stringent level
of COVID restrictions (Alert Level 1) for much of the quarter. The impetus for a A
sia sustainable recovery will have to come from border reopening, in our view (see New
Zealand – Border re-opening required). Higher-frequency data suggests that while
Border reopening is required for a sustainable recovery sentiment has improved, real economic activity is stalling. As of February, business
confidence had stayed above 0 for three consecutive months, while credit card retail
spending had fallen on a m/m basis for five consecutive months. Employment growth MENAP has also softened in recent months, with growth in jobs filled easing to 0.1% y/y (3mma)
as of January – the slowest pace since August 2010.
Border closures have continued to weigh on the economy. Services exports were still
47.6% below Q1-2020 levels as of Q4 due to border closures, even as private consumption, investment and goods exports have recovered from the COVID-related Africa
slump. Travel services accounted for c.76% of the decline in services exports in 2020. Direct and indirect employment by the tourism sector accounted for c.8% and c.5.6%,
respectively, of total employment in the year ended March 2020.
The agriculture and manufacturing sectors stand to gain as global economies reopen. Europe
On a 3mma basis, dairy prices rose 8.7% y/y in February after 11 consecutive months of declines; the performance manufacturing index rose for an eighth consecutive
month, with the ratio of new orders to finished goods remaining above 1. Construction
and real-estate services should be supported by the buoyant property market,
especially in H1-2021. The pace of growth may moderate in H2, however, as macro- Americas prudential measures dampen demand for housing.
Figure 1: New Zealand macroeconomic forecasts Figure 2: Services exports are the largest drag on GDP
amid border closure
Strategy
outlook % deviation from Q1-2020 levels 10%
2021 2022 2023 0%
GDP grow th (real % y/y) 4.0 3.4 3.3 -10%
-20%
Forecasts CPI (% annual average) 2.0 1.6 2.0 -30% Q2 Q4 -40% Q3 Policy rate (%)* 0.25 0.25 0.75
-50%
NZD-USD* 0.75 0.75 0.75 GDP
Current account balance (% GDP) -2.9 -2.6 -2.7
Imports of goods of Imports
Exports of goods of Exports
Imports of services of Imports
Exports of services of Exports Private investments Private
Fiscal balance (% GDP)** -6.7 -4.9 -2.9 consumption Private Government expenditure Government investments Government *end-period; **for fiscal year ending in June; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 41 Global Focus – Economic Outlook Q2-2021
Inflation is likely to peak in Q2 and We raise our CPI inflation forecast for 2021 to 2.0% from 1.0% to reflect higher oil
moderate in the following quarters prices. The low base effect from last year will be most pronounced in Q2. We estimate
the economic base effect will add c.1ppt to headline inflation in Q2-2021 (see ASEAN
Global – Impact of inflation base effects in 2021). We see inflation peaking at c.2.5% in Q2
overview
and moderating thereafter as a persistent negative output gap weighs on inflation. We
forecast that inflation will moderate to an average of 1.6% in 2022 and rise back to
2.0% in 2023. A faster-than-expected pace of border reopening and labour-market
recovery would pose upside risk to our forecasts. economics Geopolitical Policy
We expect the RBNZ to remain on We expect the RBNZ to keep the official cash rate (OCR) on hold in 2021 and
hold in 2021-22; we expect the 2022. The Large-Scale Asset Purchase (LSAP) programme is set to expire at end-
hiking cycle to start in 2023, but see June 2022, and the Funding for Lending Programme (FLP) is due to expire in June a risk of hikes in H2-2022
Asia 2022 (for initial allocations) and December 2022 for (for additional allocations). We
forecast two OCR hikes in 2023, as the output gap is likely to turn positive by end-
2022, creating room for monetary policy normalisation.
We expect the RBNZ to keep the OCR on hold throughout 2022 for several reasons. First, the RBNZ has made it clear that macro-prudential measures will be used to
MENAP influence housing prices, and that the targets under the Monetary Policy Committee remit
remain unchanged: maintaining low and stable consumer price inflation and contributing
to maximum sustainable employment. Second, the FLP programme is linked to the OCR,
so premature rate hikes could result in higher funding costs for the real economy. Third,
the RBNZ maintains its dovish stance, noting that prolonged monetary policy stimulus is
Africa required given the significant uncertainty ahead. We see a risk of rate hikes in H2-2022
if the economic recovery is faster than expected (see New Zealand – Hold your horses).
Housing prices New housing measures targeted at The government announced housing measures on 23 March to curb rising home
Europe speculative purchases are likely to prices. The measures aim to remove incentives for speculators while providing
contain price increases support to first-time homebuyers. The increase in mortgage lending to date has been
driven by investors and other owner-occupiers, rather than first-time homebuyers. The
RBNZ also reinstated loan-to-value ratio (LVR) restrictions on 1 March to contain the increase in risky mortgage lending. The average mortgage size for investors has
increased significantly, and the share of loans with LVRs above 70% has surged since Americas
the removal of LVR restrictions on 1 May 2020. We think the new housing measures
and reinstatement of LVR restrictions will help to contain risks to financial stability. The
central bank has also announced plans to further tighten LVR restrictions for residential
property investors. outlook
Strategy Market outlook
We expect the improving global growth outlook and broad USD weakness to lead
NZD-USD gradually higher to 0.75 by end-2021. However, we expect the NZD to
underperform the AUD, as we believe premature expectations of RBNZ tightening will be disappointed. The RBNZ’s projections show the unconstrained policy rate
Forecasts remaining below zero until late 2022, underlining the need for accommodative policy.
In addition, the government’s housing measures are likely to pare RBNZ rate-hike expectations and drive NZD underperformance.
Standard Chartered Global Research | 31 March 2021 42
Global Focus – Economic Outlook Q2-2021
Philippines – Battling headwinds
overview
Global Economic outlook – Downside risks to nascent recovery
Chidu Narayanan +65 6596 7004 Increasing inflationary pressure, subdued credit growth and rising COVID [email protected]
Economist, Asia infections are headwinds to the recovery. We maintain our below-consensus Standard Chartered Bank (Singapore) Limited growth forecast of 6.1% for 2021; a low base from 2020 and higher public spending Divya Devesh +65 6596 8608
Geopolitical [email protected] are likely to support growth, but may be partly offset by still-soft private-sector growth economics Head of ASA FX Research amid subdued sentiment. Bangko Sentral ng Pilipinas (BSP) is likely to maintain an Standard Chartered Bank (Singapore) Limited accommodative monetary policy stance throughout 2021, despite rising inflation. Arup Ghosh +65 6596 4620
[email protected] Senior Asia Rates Strategist Standard Chartered Bank (Singapore) Limited The recent surge in COVID-19 infections could scupper the nascent growth recovery
and further dampen sentiment. The seven-day average increase in daily new infections
rose in March to the highest level since the start of the pandemic, and continues to A
sia increase; in response, the government imposed a two-week curfew in the capital region
for residents below 18 years of age, barred international arrivals for one month, and
Recent increase in infections poses has warned of stricter controls if new infections remain high. The latest jump in downside risks to growth
infections presents downside risks to our growth forecast.
MENAP We expect a rebound in public investment in 2021, starting off gradually in Q2 and
gathering pace in H2. The government has allocated PHP 1.1tn (c.5.4% of GDP) to its flagship ‘Build, Build, Build’ infrastructure programme in 2021; progress on
implementation has been slow, however. A growth rebound and positive news on
vaccine rollout should support consumer sentiment and domestic consumption in H2.
Africa Current account is likely to remain The trade deficit is likely to stay contained near-term amid still-subdued imports. We in surplus in 2021, albeit smaller expect growth in raw-material imports to accelerate once public investment activity
than in 2020 picks up in H2. Crude oil imports are likely to increase on higher prices, while staying
low in volume terms on still-soft activity. Imports of consumer goods are likely to remain subdued throughout 2021 as sentiment and consumption stay soft. We see overseas
Europe
remittance growth rebounding sharply to 5-10%, along with a rise in business process outsourcing (BPO) services exports, as global demand recovers this year. Tourism
receipts, however, are likely to remain subdued in H1 on travel restrictions and
lingering pandemic concerns. We expect a C/A surplus of 2.0% of GDP in 2021.
We expect inflation to peak at 6% in Inflation is likely to rise further in Q2; we expect it to peak at 6% y/y in May before Americas May before declining in H2; risks edging modestly lower in H2. Food inflation rose rapidly in January and February, are to the upside
driven by supply constraints; it is likely to remain elevated near-term, even if the
government’s price caps prevent a further acceleration in m/m price gains. We expect
Figure 1: Philippines macroeconomic forecasts Figure 2: We see inflation rising further in 2021, peaking
Strategy
outlook at 6% y/y (ppt contributions to y/y inflation) 8%
2021 2022 2023 Monetary conditions are loose, 7% but not as loose as in 2018
Headline GDP grow th (real % y/y) 6.1 6.5 5.9 6% Food Housing Transport
5% CPI (% annual average) 4.8 2.6 2.7 Forecasts 4% Core Policy rate (%)* 2.00 2.00 2.00 3%
2% USD-PHP* 51.00 51.50 51.70 1% Current account balance (% GDP) 2.0 -0.5 -1.2 0%
Fiscal balance (% GDP) -7.5 -6.5 -5.0 -1% Aug-13 Oct-14 Dec-15 Feb-17 Apr-18 Jun-19 Aug-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Philippine Statistics Authority, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 43 Global Focus – Economic Outlook Q2-2021
food inflation to remain around current highs until August, before declining due to a
higher base and increasing supply. Higher global crude prices also pose upside risks
to transport inflation; we see it increasing further in Q2 but moderating from Q3
Global onwards due to a higher base in H2-2020, when social-distancing measures and lower
overview
supply pushed up transport prices. Higher public infrastructure investment could pose
upside inflation risks later this year, but still-subdued private-sector activity should cap
inflation. We forecast average headline inflation of 4.8% in 2021, declining to 2.6% in 2022 due to a high base. Core inflation is likely to remain within the central bank’s 2-
4% target range, despite the increase in headline inflation (see Philippines – Inflation economics
Geopolitical is likely to rise further to 6%).
Policy – This time is different
BSP is likely to maintain its We expect BSP to look through the sharp rise in inflation and maintain its
Asia accommodative policy, despite a accommodative monetary policy stance throughout 2021. The central bank has
pick-up in inflation
noted that supply-driven inflation increases do not require a monetary response. While
persistently high inflation may concern the central bank (even if it is driven by non-core
inflation), we expect BSP to refrain from hiking policy rates amid a still-soft recovery
and subdued credit growth. Instead, we expect it to tighten monetary conditions by reducing flush onshore liquidity via open-market operations. The central bank is likely
MENAP to look past a spike in inflation to 6% if credit growth remains subdued and new COVID-
19 infections stay high. However, we see a risk of a policy rate hike in June if inflation
rises well beyond 6%, credit growth picks up from current lows, and infrastructure
investment increases rapidly.
Africa Credit growth is likely to remain The current rise in inflation is reminiscent of the spike in mid-2018; then, BSP
subdued for most of 2021
responded with aggressive rate hikes of 175bps within six months, despite higher food
inflation being driven by supply constraints. We believe this time is different. Credit
growth has declined to a multi-decade low, despite easy monetary conditions.
Corporate credit growth slowed to a post-GFC low of -1.1% y/y in January; in 2018,
corporate and household credit growth rates exceeded 19% y/y. In 2018, GDP growth Europe
in the two quarters preceding the inflation spike to 4.5% averaged 6.65% y/y, compared
with -9.9% currently. We (and BSP) expect GDP to have continued to contract in Q1-
2021. Given that private-sector activity is likely to remain subdued near-term, we
expect BSP to eschew rate hikes in favour of reducing market liquidity to contain
inflation.
Americas
Market outlook
We maintain our Underweight medium-term FX weighting on the Philippine peso
(PHP). A widening trade deficit and the sharp rise in inflation amid already-negative
real interest rates are likely to create headwinds to the currency. We remain bearish outlook
Strategy on the currency and target USD-PHP at 51 by year-end.
Negative real policy rates reduce RPGBs underperform. We expect RPGBs to underperform regional peers
appetite for RPGBs (following strong outperformance last year) amid a larger-than-expected rise in inflation, real policy rates moving further into negative territory, PHP
underperformance and rising UST yields. The curve remains under steepening
Forecasts
pressure from the lack of a real yield cushion and unfavourable demand-supply dynamics. Foreigners have net-sold RPGBs YTD, and local real-money demand has been muted in reaction to higher yields.
Standard Chartered Global Research | 31 March 2021 44
Global Focus – Economic Outlook Q2-2021
Singapore – Watch for the nuances
overview
Global Economic outlook
Edward Lee +65 6596 8252 We raise our 2021 GDP growth forecast to 6.3% from 5.2% to reflect better-than- [email protected]
Chief Economist, ASEAN and South Asia expected performance in Q1 so far. Singapore’s economy is benefiting from a Standard Chartered Bank (Singapore) Limited combination of successful domestic pandemic management, robust fiscal support, Jonathan Koh +65 6596 8075
Geopolitical [email protected] accommodative and stable monetary policy, and improving external demand. economics Economist, Asia Standard Chartered Bank (Singapore) Limited Singapore, like many economies, is seeing an uneven recovery. Pandemic-affected Divya Devesh +65 6596 8608
[email protected] sectors such as accommodation, construction, transport, food and beverage, and retail Head of ASA FX Research Standard Chartered Bank (Singapore) Limited are still running below pre-COVID levels. In contrast, the manufacturing, finance and
insurance, infocomm, and wholesale trade sectors have recovered their pandemic-
related output losses. The recovery may remain uneven until the economy reopens A
sia after widespread vaccination. Singapore is in discussions to start travel bubbles with
Hong Kong, Australia and others; the success of such arrangements will depend on
pandemic management and negotiations on a common framework.
Singapore’s high-frequency economic data shows a continuation of the sequential MENAP recovery that began in Q3-2020. Non-oil domestic exports (NODX) expanded 8.4% y/y
in January-February; industrial production (IP) rose 12.4% y/y over the same period,
supported by electronics demand. Electronics exports accounted for 28% of NODX
growth in 2M-2021, and electronics production contributed 25ppt to IP growth. Having
said that, the electronics PMI peaked in December and has eased since, to 50.8 in February. Singapore’s vaccination drive has started, with c.5% of the population fully Africa
vaccinated as of mid-March. The government expects to fully vaccinate the population by the end of year.
Policy
Europe
Watch for a hawkish shift in the We expect the Monetary Authority of Singapore (MAS) to keep monetary policy MAS statement, particularly settings unchanged in April. The slope of the Singapore dollar nominal effective
changes to the ‘accommodative’ exchange rate (SGD NEER) policy band is currently flat; it was last lowered to flat from
language or the timing reference 0.5% per annum on 30 March 2020, along with an estimated 1% re-centring lower. We
estimate the width of the policy band at +/-2% around the centre.
Americas
While the economy has rebounded from the sharp Q2-2020 contraction, Q4-2020 GDP
(on a seasonally adjusted basis) was still about 2.4% below the Q4-2019 level. Other
economic metrics show a similar profile. The resident unemployment rate eased to
Figure 1: Singapore macroeconomic forecasts Figure 2: Domestic demand is still subdued
Strategy % change from Q4-2019 levels outlook 30%
2021 2022 2023 May-20 Jun-20 25%
Jul-20 Aug-20 GDP grow th (real % y/y) 6.3 4.4 1.9 20% Sep-20 Oct-20
CPI (% annual average) 1.2 0.7 1.1 15% Nov-20 Dec-20 Forecasts Jan-21 Feb-21 10% 3M SGD SIBOR* 0.45 0.55 1.00
5%
USD-SGD* 1.32 1.32 1.32 0%
Current account balance (% GDP) 16.5 16.0 15.0 -5%
-10% Fiscal balance (% GDP)** -0.5 1.2 1.5 NODX IP Retail sales Loans *end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 45 Global Focus – Economic Outlook Q2-2021
4.3% in January 2021 from 4.8% in September 2020, though it remained above the
December 2019 level of 3.2%. Core inflation also remains soft, running at -0.1% since
the latest monetary policy statement in October (below the central bank’s forecast of
Global 0-1% for 2021). The uneven recovery may result in a more gradual normalisation of
overview
unemployment and subdued overall wage growth. We raise our 2021 headline CPI
forecast to 1.2% from 0.3% on higher prices of non-core items such as petrol prices,
and stabilising housing rents. Rising global food prices may also feed through to domestic food prices. The MAS is likely to revise up its headline inflation forecast
(latest: -0.5 to 1.5%) at its April meeting.
economics Geopolitical
While we expect the MAS to maintain the current slope, centre and width of the policy
band, any changes to its monetary policy guidance will be just as important. This may
affect whether the SGD NEER trades in the middle or upper half of the policy band. In
its October statement, the MAS noted that “an accommodative policy stance will Asia
remain appropriate for some time”. A change in the “accommodative” wording (to
“neutral”, for example) could signal an increased tolerance for a higher SGD NEER. A
change in the time reference – such as referring to the October statement, when the
phrase was first introduced, in a backward-looking context – may also indicate a subtle
hawkish shift. MENAP
Focus shifts back to fiscal Budget focus shifts back to fiscal prudence. The government projects a fiscal
prudence, even as the government
deficit of 2.2% of GDP for FY21 (ending March 2022), versus 13.9% for FY20
projects another deficit for FY21 (Singapore – Return to fiscal prudence). We expect a fiscal cliff to be avoided, as unused funds of 44% of total spending from FY20 can be used in 2021. The shift to a
Africa longer-term spending focus is clear – pandemic-related measures are being reduced
to SGD 11bn for FY21 from SGD 75.2bn in FY20. The government also noted that a
planned GST hike to 9% from 7% may happen between 2022 and 2025, sooner rather
than later due to rising recurrent spending (especially on health care).
The government has also proposed new legislation to allow borrowing to fund long-
Europe term infrastructure projects over the next 15 years, with a SGD 90bn limit; the
government does not currently borrow to fund its annual total expenditure. However,
each successive government will still need to run a balanced budget over the course
of its term. Issuance of Significant Infrastructure Government Loan Act (SINGA) bonds may start in Q4-2021. SINGA bonds will rank pari passu with current Singapore
Government Securities, which are issued to develop the bond market.
Americas
Market outlook
We have a bullish view on the SGD. Improving global growth is positive for the SGD;
we have found that the SGD is positively correlated with both crude oil prices and US outlook
Strategy inflation expectations. Singapore is also heavily reliant on global mobility given its
position as a regional transport node. As such, improving trade and human mobility as
vaccination programmes are rolled out should support the SGD. Moreover, given that
MAS monetary policy is based on FX, any increase in inflation expectations would raise the risk of tighter monetary policy onshore. This is supportive of a stronger SGD.
Forecasts
Standard Chartered Global Research | 31 March 2021 46
Global Focus – Economic Outlook Q2-2021
South Korea – Tailwinds are blowing
overview
Global Economic outlook – Positive external environment
Chong Hoon Park +82 2 3702 5011 We raise our 2021 GDP growth forecast to 3.2% from 2.9%. The revision reflects [email protected]
Head, Korea and Japan Economic Research better-than-expected export performance supported by US fiscal expansion and Standard Chartered Bank Korea Limited China’s strong economic rebound. Domestically, consumption will receive a boost from Arup Ghosh +65 6596 4620
Geopolitical [email protected] the recently passed additional budget of KRW 14.9tn. Facility investment should stay economics Senior Asia Rates Strategist resilient amid strong export and improving global recovery prospects, while Standard Chartered Bank (Singapore) Limited expansionary fiscal policy should support green energy infrastructure investment. Mayank Mishra +65 6596 7466
[email protected] Global FX and Macro Strategist Standard Chartered Bank (Singapore) Limited Korea’s exports grew 10.5% y/y in January-February, led by high-value goods such as
ICT products (up 22.8%), automobiles (45.4%) and semiconductors (16.5%). Export Korea enjoys positive economic destinations were also well balanced. Exports to the US (+26.6%), the EU (+35.5%) A
sia momentum thanks to a supportive and China (+24.5%) grew sharply. Robust export growth in high-value goods, and to external environment major trading partners with good economic recovery prospects, are a positive indicator
for 2021 growth. We expect export growth to rebound to c.8% in 2021 from -2.5% in
2020. Strong exports are likely to lead to a larger current account surplus, outpacing
the investment-driven rise in imports; to reflect this, we raise our 2021 current account MENAP surplus forecast to 3.8% of GDP from 3.5%.
We expect facility investment to stay strong, with growth staying above 5% in 2021
(following 6.8% last year). Capital-goods imports, a leading indicator of facility
investment, rose c.36% y/y in February and 50% in January, supporting our view.
Africa
The emergency fiscal package The recently passed emergency fiscal package should boost consumer sentiment, in
should support domestic turn lifting household spending. Consumption growth has been subdued until now as
consumption consumption of high-contact services continues to contract, but we expect it to recover
as the spread of COVID-19 slows. This was already evident in February, when the
composite consumer sentiment index (CCSI) improved 2 points from January to 97.4. Europe
We now expect inflation to rise faster this year than we previously did, in line with our
upwardly revised growth forecast. Rising commodity prices and base effects are also
likely to push inflation higher in the near term. We raise our average CPI inflation
forecast for 2021 to 1.3% from 0.7%. However, we expect inflation to remain benign. Americas
Figure 1: South Korea macroeconomic forecasts Figure 2: Leading index indicates solid export momentum
Export growth, % y/y (LHS) vs cyclically adjusted leading
Strategy
outlook indicator, index (RHS) 50 104
2021 2022 2023 40 103
Cyclically adjusted 30 102 GDP grow th (real % y/y) 3.2 2.6 2.5 leading index (RHS)
101 20
100 Forecasts CPI (% annual average) 1.3 1.5 1.8 10 99 0 Policy rate (%)* 0.50 0.75 1.00 98
-10 97
USD-KRW* 1,050 1,050 1,050 -20 96 Export growth -30 95 Current account balance (% GDP) 3.8 3.5 3.0 -40 94
Fiscal balance (% GDP) -5.4 -5.9 -5.9
Jan-10 Jan-09 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-08 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 47 Global Focus – Economic Outlook Q2-2021
While we are positive on the economic growth outlook, we remain cautious on the job
market. We expect Korea to experience a ‘K-shaped’ recovery, with exports
rebounding strongly but more labour-intensive services sectors lagging. The number
Global of job seekers has declined recently, while the number of unemployed has risen. The
overview
total number of jobs fell by 982,000 y/y in January and by 437,000 in February. While
government support and the easing of virus restrictions should eventually support the
job market, it will take time for these effects to be felt.
Policy – BoK to follow the Fed’s lead economics Geopolitical BoK is likely to hike only once the We expect the Bank of Korea (BoK) to keep its base rate on hold through H1-2022 and
Fed and other central banks are hike by 25bps in Q3-2022; we bring forward the expected timing of the first hike from
ready to move end-2023 to reflect the stronger-than-expected economic rebound, US rate pressure
and global inflation concerns. Korea’s K-shaped recovery will likely prompt the BoK to
Asia maintain its accommodative stance throughout 2021. Following the first 25bps hike in
Q3-2022, we expect another in H1-2023. The KRW money-market curve already
implies c.70bps of BoK base rate hikes over two years, which we think is overblown.
We think the BoK will follow the US Fed’s lead in normalising monetary policy. Despite rising commodity prices and inflation concerns in some economies, we expect Korea’s
MENAP inflation to stay below 2% until next year. Benign inflation should allow the BoK to
remain dovish until it feels external pressure to normalise policy.
Politics – Setting the stage for the presidential election By-election results could result in By-elections on 7 April will be a leading indicator of next year’s presidential Africa an earlier lame-duck period for the contest. Seoul and Busan, Korea’s two largest cities, will hold mayoral by-elections
current government
on 7 April. If the opposition party wins, we think this will be seen as a challenge to the
ruling Democratic Party’s current policies; it could increase the possibility of more
populist economic policies. If the ruling party wins, President Moon will likely maintain his influence until the end of his term in April 2022. Rapidly rising housing prices,
Europe widening wealth inequality, and corruption allegations against the state housing
corporation will be strong headwinds to the ruling party in the upcoming elections.
Reforms of the prosecutor’s office are also a prominent topic for this election; the
attorney general recently stepped down to protest the reform push by the ruling party.
Market outlook – Bullish on KRW; rates curve to steepen Americas
We are bullish on the Korean won (KRW). Recovering memory chip prices and
global growth are likely to boost Korea's exports. Reduced investor positioning in the
KRW and Korean equities is also favourable for the currency in the medium term. We
forecast USD-KRW at 1,100 at end-Q2-2021 and 1,050 at end-2021. outlook
Strategy Steeper rates curve. The KRW money-market curve already implies c.75bps of BoK
base rate hikes over the next two years. Foreign demand is likely to benefit the short
end amid an on-hold BoK, a reduction in global duration, and an attractive yield pick- up over USTs (on both a USD-hedged and unhedged basis). Gross planned 2021 KTB issuance was already at a record high KRW 176.4tn; the extra budget will increase
supply by KRW 9.9tn.
Forecasts
Standard Chartered Global Research | 31 March 2021 48
Global Focus – Economic Outlook Q2-2021
Sri Lanka – PBoC swap to buffer FX reserves
overview Economic outlook – External financing reprieve in 2021 Global Saurav Anand +91 22 6115 8845 We expect a gradual growth recovery in 2021. The COVID-19 pandemic has had a [email protected]
Economist, South Asia severe impact on Sri Lanka’s economy, raising concerns about debt sustainability. Standard Chartered Bank, India However, the recovery began in Q3-2020 and has gained momentum in early 2021. Nagaraj Kulkarni +65 6596 6738
Geopolitical
We expect Sri Lanka’s GDP to grow 4.5% in 2021, supported by base effects, following economics [email protected] Senior Asia Rates Strategist a 3.6% contraction in 2020. Growth is likely to remain uneven, with some sectors – Standard Chartered Bank (Singapore) Limited such as tourism – continuing to be negatively affected for most of 2021. Divya Devesh +65 6596 8608
[email protected] Head of ASA FX Research Investors are concerned about Sri Lanka’s external financing risks in the absence of Standard Chartered Bank (Singapore) Limited engagement with the IMF, which could lead to a lack of market access. But a USD
1.5bn, three-year swap line from the People’s Bank of China (PBoC) – recently
confirmed by Sri Lanka’s government – should help to meet near-term debt obligations A
sia USD 1.5bn swap line from the PBoC (see PBoC swap to support 2021 FX reserves). The arrangement, along with the should help Sri Lanka meet its near-
possible new allocation of Special Drawing Rights (SDRs), should boost reserves near- term external financing needs term and help to meet this year’s external financing needs.
We expect public debt to rise above 110% of GDP by end-2021 (including government-
MENAP guaranteed debt), with the fiscal deficit remaining large at 8.9% of GDP. The primary deficit is likely to remain high in the near term, even as increased economic activity
likely improves revenue buoyancy. FX reserves fell to USD 4.6bn in February (and
could fall to USD c.4bn by end-2021), and we estimate external debt servicing needs
at c.USD 3.5bn for the rest of 2021. Sri Lanka plans to fund this largely through bilateral
support, FDI and multilateral funding. Africa
That said, beyond 2021, Sri Lanka has USD 4-5bn of government external debt service annually until 2025, leading to continued external financing pressure. The resumption
of tourism and higher FDI are therefore critical to ensure external debt sustainability
from 2022 onwards.
Europe Government debt-to-GDP ratio is Concerns about medium-term debt sustainability are increasing amid rising debt levels
likely to rise to c.110% of GDP and constrained revenues. We expect public debt-to-GDP to rise to c.110% by end- in 2021 2021 from 105% at end-2020 (including sovereign guaranteed debt), keeping interest
costs-to-revenue high at c.55%. This year’s primary deficit is likely to be c.3.1% of
GDP. Our estimates suggest that the government needs a primary surplus of more
Americas than 2.0% and real GDP growth of more than 5.0% (nominal growth: c.10%) to stabilise debt; this seems challenging in the near term given the current revenue strategy of
keeping tax rates low.
Figure 1: Sri Lanka macroeconomic forecasts Figure 2: Over USD 4bn of external debt service annually
Strategy
outlook between 2021-25 (USD bn) 6
2021 2022 2023
5 GDP grow th (real % y/y) 4.5 4.2 4.5 SLDB
4 Forecasts CPI (% annual average) 4.7 4.5 4.5 Interest 3 Policy rate (%)* 5.50 5.50 6.00
2 Other FX USD-LKR* 210.00 215.00 220.00 loans 1 Current account balance (% GDP) -1.4 -2.5 -2.5 Bonds Fiscal balance (% GDP) -8.9 -8.0 -7.0 0 2021F 2022F 2023F 2024F 2025F *end-period; Source: Standard Chartered Research Source: IMF, MoF, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 49 Global Focus – Economic Outlook Q2-2021
Sri Lanka needs to improve debt sustainability by lowering its high financing costs.
We estimate financing costs at 5.8% of GDP (53% of revenues) in 2021. Higher
interest costs (along with a narrow revenue base) leave very little room for productive
Global expenditure. We therefore think IMF engagement is needed to resolve Sri Lanka’s
overview
economic and debt sustainability challenges. To return to a sustainable debt
trajectory, the country also needs a credible medium-term economic plan for fiscal
consolidation and structural reforms to boost growth to its potential c.5% (see Sri Lanka – Focus shifts to economy) and build revenue resilience. An IMF programme
would also likely unlock other concessional multilateral assistance.
economics Geopolitical We expect moderate medium-term We expect a moderate medium-term growth trajectory given the significant debt overhang
growth of around 4.5% and the prolonged impact of COVID on the services sector, especially tourism (which
accounted for almost 5% of Sri Lanka's GDP in 2019). We see growth closer to 4.5% in our
medium- to long-term steady-state analysis. This is above the average annual growth rate Asia
in the five years before the pandemic but below 2010-14 levels. The government’s debt
overhang leaves limited fiscal space for public investment.
We expect a C/A deficit of 1.4% of GDP in 2021 (2020: 1.3%), driven by a wider trade
deficit as the economic recovery and higher commodity prices boost imports. Import
MENAP restrictions are likely to continue in 2021 given the need to conserve FX reserves. We
assume higher tourism revenue of USD 1.4bn in 2021 (compared to USD 1bn in 2020),
with a recovery expected in H2. We forecast remittances at USD 8.0bn this year, up
12%. The risk of a wider C/A deficit could arise if tourism or remittance inflows fall short
of our expectations. Africa
Policy – Monetary support for growth likely to continue
We now expect CBSL to maintain We now see the policy rate staying on hold for the rest of 2021, versus our
the status quo with an earlier expectation of a 50bps cut in Q2. We expect the Central Bank of Sri Lanka
accommodative stance in 2021 (CBSL) to keep the Standard Lending Facility Rate (SLFR) at 5.5%, maintaining an
accommodative stance. Average inflation is likely to increase to 4.7% (2020: 4.2%) Europe
given excess liquidity, improving economic activity and higher commodity prices,
while remaining well within CBSL’s target band of 4-6%. We expect the central bank
to continue with liquidity-enhancing measures and regulatory forbearance, in line
with policies already announced, to ensure financial stability and monetary policy
transmission.
Americas
Politics – Stable politics is a key positive in 2021
The current SLPP government has a nearly two-thirds majority in parliament. The
president and parliament are likely to work in close co-ordination to improve the
economic situation – something that was lacking between 2017 and 2020.
outlook
Strategy
Market outlook
We maintain our Negative outlook We see significant challenges ahead for the Sri Lankan rupee (LKR); we forecast USD- on LKR bonds LKR at 210 at end-2021 given declining reserves, steep debt repayments and a widening C/A deficit. We maintain our Negative outlook on LKR bonds given
unattractive valuations and still-high domestic securities issuance. External financing
Forecasts
requirements and debt sustainability amid still-weak growth are also concerns.
Standard Chartered Global Research | 31 March 2021 50
Global Focus – Economic Outlook Q2-2021
Taiwan – An upbeat start to 2021
overview
Global Economic outlook
Tony Phoo +886 2 6606 9436 We raise our 2021 GDP growth forecast to 4.4% (from 3.3%). This is in line with [email protected]
Senior Economist, NEA market consensus but slightly below the government’s forecast of c.4.6%. Economic Standard Chartered Bank (Taiwan) Limited activity has maintained strong y/y momentum in early 2021, supported by a low base. Mayank Mishra +65 6596 7466
Geopolitical [email protected] The external outlook is positive as key export markets reopen; rapid vaccine rollout economics Global FX and Macro Strategist and large fiscal stimulus in the US are also supportive. Global demand for Taiwan’s Standard Chartered Bank (Singapore) Limited tech exports is likely to remain strong due to pent-up demand for chips and rising
DRAM prices. Domestically, the TWD 420bn COVID-19 relief programme approved in
early 2020 should continue to support growth this year. Ongoing uncertainty Taiwan’s growth should remain
strong in H1 on the reopening of surrounding US-China trade tensions is likely to support reshoring activity; Taiwan has
key export markets, reshoring attracted TWD 1.3tn in pledged FDI investment since the government launched A
sia activity, and a consumer spending initiatives to boost investment in 2019. Private consumption spending is also expected
rebound to turn around in 2021 amid rising household income expectations and stable job-
market conditions.
We see potential risks and challenges ahead, however. The favourable base effect MENAP is set to wane by H2-2021. Some of the one-off factors that drove export and
manufacturing growth in 2020 are also unlikely to be repeated this year – including
a surge in demand due to increased remote working, rush orders for sensitive
technology ahead of US sanctions, and ‘precautionary’ inventory stocking following lockdowns. The sharp slowdown in Taiwan’s semiconductor equipment imports, a
Africa leading indicator of tech exports, is a concern. In addition, the government has
recently introduced policies to rein in speculative activity in the housing market; housing transaction value accounted for an estimated c.17% of GDP in 2020.
Food and transportation costs, and We raise our 2021 CPI inflation forecast to 1.2% (from 1.0%). Food price inflation,
proposed water conservation fees, Europe which was muted in 2020, could pick up due to the less favourable base effect. Higher pose upside risks to inflation retail gasoline prices – which track global oil prices – could also put upward pressure on headline inflation in 2021, including via potential pass-through from rising input
costs. Import price deflation moderated to -3.4% y/y in 2M-2021 from double digits for most of 2020. Taiwan is also considering a surcharge on excessive water consumption by industrial users; if implemented, this would pose upside risks to headline inflation in Americas 2021-22.
Figure 1: Taiwan macroeconomic forecasts Figure 2: Taiwan exports near peak of current up-cycle
Strategy
outlook US ISM (LHS); export orders, % y/y (RHS) 60 1.6
2021 2022 2023 Export orders
40 GDP grow th (real % y/y) 4.4 2.5 2.0 1.4
20 Forecasts CPI (% annual average) 1.2 1.0 1.0 1.2 0 Policy rate (%)* 1.13 1.13 1.13
1.0
-20 USD-TWD* 28.00 27.80 27.70 0.8 -40 Current account balance (% GDP) 11.0 9.0 8.0 US ISM - manufacturing Fiscal balance (% GDP) -1.0 -1.0 -1.0 -60 (orders/inventory) 0.6 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 51 Global Focus – Economic Outlook Q2-2021
The current account (C/A) surplus is likely to decline slightly to 11% of GDP in
2021 from 14% in 2020. The services balance unexpectedly flipped to a small surplus
last year as outbound travel declined; this is unlikely to be repeated in 2021 as
Global international borders gradually reopen. Also, Taiwan’s import costs may rise at a faster
overview
pace in 2021 due to higher commodity/oil prices; the delivery of US military equipment
approved by the Trump administration may also weigh on the C/A.
Policy
CBC is likely to stay on hold, remain We expect Taiwan’s central bank (CBC) to keep policy rates on hold for the economics Geopolitical vigilant against rising volatility and rest of 2021, in line with market consensus. Policy makers’ tone turned slightly
risks to financial market stability positive at the March meeting; however, they stressed the need to remain vigilant
against rising volatility and risks to financial-market stability, particularly the rapid
rise in long-end rates globally. The CBC revised up its 2021 GDP growth forecast to
Asia c.4.5% from 3.7%; and raised its headline and core CPI inflation forecasts to c.1.1%
(from 0.1%) and c.0.8% (from 0.7%), respectively. Even with the upward revisions,
the CBC’s inflation outlook remains mild; meanwhile, robust external demand and a
rebound in consumer spending should support strong GDP growth. At the post-
meeting press briefing, Governor Yang said the CBC will maintain the flexibility to adjust monetary policy based on prevailing economic and market conditions, globally
MENAP and domestically.
Politics
President Tsai has reiterated the President Tsai Ing-wen has reiterated the need for constructive dialogue across
need to resolve differences through the Taiwan Strait, but has continued to resist the ‘1992 Consensus’ reached between Africa constructive dialogue; Biden the former Nationalist Party government and the mainland. Beijing’s leadership sees
administration has expressed its
adherence to the ‘One China’ principle embedded in its version of the 1992 Consensus
commitment to Taiwan
as a precondition for resuming official engagement with Taiwan’s government.
Separately, US National Security Adviser Jake Sullivan recently commented that US
Europe support for Taiwan will remain strong. Secretary of State Antony Blinken has also
reaffirmed the US’ commitment to Taiwan, saying that support for Taiwan will continue
to be founded on the principles laid out in the Taiwan Relations Act (TRA) and US-
China joint communiqués. These comments suggest that the Biden administration plans to continue to engage with Taiwan, making use of the flexibility under the existing
framework.
Americas
Market outlook
We remain medium-term Underweight the Taiwan dollar (TWD) and forecast
USD-TWD at 28.00 at end-2021 and 27.80 at end-2022. The currency is likely to
underperform peers amid broad USD weakness, given rich valuations and policy
outlook Strategy
makers’ concerns about currency strength. The TWD nominal effective exchange rate
(NEER) has risen to fresh multi-decade highs; the real effective exchange rate (REER)
is near its highest levels since the GFC. Rising concerns about currency strength have
led to a faster pace of reserve accumulation in recent months, raising the risk that the US Treasury could label Taiwan as a currency manipulator. To ease pressure on the
Forecasts TWD, the authorities have started to allow foreign investors to use foreign-currency
collateral for investments in TWD assets. Regulators have also relaxed the quota on foreign-currency insurance policies to 40% from 35%, which is expected to lower FX hedging pressure from life insurers (see Macro Strategy Views – Born to run).
Standard Chartered Global Research | 31 March 2021 52
Global Focus – Economic Outlook Q2-2021
Thailand – Confidence remains low
overview
Global Economic outlook – Plenty of risks; unclear tourism outlook
Tim Leelahaphan +66 2724 8878 The outlook for the Thai economy remains weak. We maintain our GDP growth [email protected]
Economist, Thailand forecasts of 2.4% for 2021 and 3.0% for 2022; both are below consensus. The lack of Standard Chartered Bank (Thai) Public Company Limited visibility on fiscal and monetary stimulus this year is the key negative for the outlook, Divya Devesh +65 6596 8608
Geopolitical [email protected] in our view. Fiscal and monetary policy face constraints as public debt approaches the economics Head of ASA FX Research legal limit and policy rates have little room to be cut further. Our economic forecasts Standard Chartered Bank (Singapore) Limited for 2021 continue to factor in low inflation due to subdued demand; a moderate current
account (C/A) surplus due to the unclear tourism outlook, with import normalisation and higher oil prices posing risks to our forecast; and a small fiscal deficit due to
slow disbursement.
A
Vaccination rollout has been slow Thailand’s COVID-19 vaccination rollout started in March, and the pace is likely to be sia so far slow at least until mid-year. The pandemic situation has stabilised after a new wave of
infections in December caused a sharp contraction in domestic economic indicators in
January. We do not expect a sharp rebound in consumer confidence or business
sentiment soon.
MENAP
The tourism outlook remains Thailand’s tourism reopening plan is a key area of focus for Q2-2020. A gradual
unclear reduction of the required quarantine period for incoming travellers is expected
throughout the year, likely starting in Q2. That said, the tourism outlook remains
unclear. Demand is likely to stay subdued in the short term due to the fluid COVID-19
situation globally; supply may be an issue in the medium term, as the pandemic has Africa forced a large number of hotel operators to close. With tourism accounting for around 15% of Thailand’s GDP, we expect ongoing weakness in the sector to contribute
negatively to economic growth this year. On the positive side, exports (c.50% of GDP)
returned to positive growth in early 2021, with auto shipments (c.13% of total exports) starting to improve.
Europe
Policy – Monetary and fiscal policy face constraints
We expect the BoT to keep interest The Bank of Thailand (BoT) faces limited policy room. We think the current
rates at the current low level this economic weakness and negative inflation justify a further interest rate cut. However,
year the BoT has held its policy rate steady since May 2020, when it cut to 0.5%. We expect
Americas the BoT to maintain the status quo on rates this year, as the policy rate is already close to zero and the effectiveness of previous rate cuts in boosting the economy is unclear.
Figure 1: Thailand macroeconomic forecasts Figure 2: Private consumption (c.50% of GDP) has been
Strategy
outlook sluggish since the start of the pandemic (% y/y, 3mma)
15
2021 2022 2023 10 Private
GDP growth (real % y/y) 2.4 3.0 4.5 5 consumption
0 CPI (% annual average) 1.0 1.5 3.0 Forecasts -5 -10 Policy rate (%)* 0.50 0.50 0.50
-15
USD-THB* 31.00 31.30 31.70 -20 -25 Durable Current account balance (% GDP) 3.5 3.0 -0.5 -30 consumption -35 Fiscal balance (% GDP)** -4.5 -4.0 -4.0 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
*end-period; **for fiscal year ending in September; Source: Standard Chartered Research Source: BoT, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 53
Global Focus – Economic Outlook Q2-2021
We do not expect a policy rate hike Despite recent talk of an earlier-than-expected Fed rate hike, we do not expect
until end-2023 at the earliest Thailand to normalise its policy rate until at least end-2023. The weak outlook for
growth and inflation is likely to take precedence in driving monetary policy for the
Global foreseeable future, unless the BoT sees a significant risk to financial stability from a
overview
prolonged low-interest-rate environment.
The lack of significant fiscal The BoT has called on the government to step up fiscal stimulus to boost the economy support may pressure the BoT to in response to the pandemic. However, the stimulus package for this year is relatively
cut rates small – the latest cash handouts of THB 210bn (c.1% of GDP) for COVID relief to economics Geopolitical households are only half the size of those implemented in 2020. About 75% of the
special two-year borrowing plan of THB 1tn (c.6% of GDP) initiated in Q2-2020 has
been disbursed, but private consumption has not shown a significant improvement.
Recent cash handouts are unlikely to provide a meaningful boost to consumption, in
our view.
Asia
Both fiscal and monetary policy With Thailand’s public debt approaching the legal limit, we believe a large fiscal boost
appear to be at a standstill is unlikely to materialise. This puts the onus on the central bank to shore up the
economy, either through further interest rate cuts or more unconventional monetary
policies. That said, a soft loan scheme for SMEs has seen limited take-up, and we do
MENAP not expect further unconventional policies.
Rising public debt could become a Public debt stood at 52% of GDP as of January 2021, rising from 42% pre-COVID due
concern for the government and the to the fiscal stimulus package. The rise in yields globally could also accelerate the rise public in public debt. That said, most of Thailand’s public debt is domestic and long-term
(averaging around 10 years); the external debt position has been reduced since the Africa
1997 Asian financial crisis. To maintain fiscal discipline, Thailand has set a limit of 60%
for public debt-to-GDP. Any decision to raise the ceiling would need to be made – and
justified – by the fiscal policy committee chaired by the PM. There is currently no
indication that the ceiling will be raised. Channelling unspent budget funds from recent
years to contain the rise in debt would also be difficult, in our view.
Europe
Politics – Elevated noise
Ongoing protests may have The political situation may pose a risk to fiscal policy and budget
implications for fiscal policy disbursement, both now and post-COVID. Anti-government street protests resumed recently after pausing in December; this does not bode well for business sentiment,
Americas in our view. An escalation of the conflict could have significant implications for the
economy, judging from previous episodes of political unrest in Thailand. The
government survived a February no-confidence debate in response to the
administration’s handling of the pandemic and the economy. The unity of the
government coalition parties will remain key, as it could have implications for outlook
Strategy fiscal policy.
Market outlook – Pace of THB appreciation to slow
Thailand’s C/A balance has deteriorated in recent months as imports have recovered while the tourism recovery has been delayed further. As such, we see more
headwinds to the THB in the coming months. However, we still expect a recovery in
Forecasts
the THB in late 2021 as tourism receipts gradually improve. To account for the delay in tourism normalisation, we recently raised our USD-THB forecasts to 31.50 for mid- year (from 29.75) and to 31.00 by year-end (from 29).
Standard Chartered Global Research | 31 March 2021 54
Global Focus – Economic Outlook Q2-2021
Vietnam – Strong fundamentals
overview Economic outlook – Growth to re-accelerate Global Tim Leelahaphan +66 2724 8878
Vietnam is set to remain one of the world’s fastest-growing economies this year.
[email protected] Economist, Thailand We expect GDP growth to accelerate to 6.7% in 2021 from 2.9% in 2020. We revise
Standard Chartered Bank (Thai) Public Company Limited down our 2021 growth forecast from 7.8% to reflect worse-than-expected Q1 GDP; we Divya Devesh +65 6596 8608 raise our 2022 forecast to 7.3% (from 6.7%) due to the lower base. GDP grew 4.5%
Geopolitical [email protected] economics Head of ASA FX Research y/y in Q1-2021, the same pace as Q4-2020. Export-focused manufacturing – led by Standard Chartered Bank (Singapore) Limited electronic equipment, phones and accessories – was the main growth driver, rising 9.5% y/y (2020: 5.8%).
Growth continued in Q1 despite Economic data including exports, imports, retail sales and industrial production
new outbreak; Q3 to see extensive maintained positive y/y growth in Q1 despite the emergence of a new COVID-19
vaccine rollout outbreak in late January; the situation has now stabilised. Vietnam has been one of
A
the world’s most successful countries in containing COVID-19. The country began sia vaccinations on 8 March; wider vaccination rollout is expected in Q3, and is a
precondition for a tourism rebound and a sustainable economic recovery, in our view.
Tourism sector may start to revive Tourism industry representatives have proposed that vaccinated foreign visitors be
in Q3-2021 permitted to enter the country starting in Q3-2021, according to local media reports. MENAP The number of international visitors to Vietnam slid 79% in 2020 due to pandemic-
related travel restrictions, falling to just 3.83mn from a record 18mn in 2019.
Trade data is sustaining the positive Exports rose 22.0% y/y in Q1; imports jumped 26.3%, and the trade surplus was USD
momentum from last year 2bn. Exports of telephones and parts (18% of total exports) and electronics, computers and parts (15% of the total) made strong gains. Vietnam has signed multiple free trade
Africa agreements with partners including the EU in recent years, boosting its competitive
advantage in global trade. Supply-chain disruptions may be a risk to the economic recovery in the near term.
We expect inflation to remain on a We maintain our average inflation forecast of 3.8% for 2021, up from 3.2% in 2020. rising trend this year Faster economic growth is likely to keep inflation on a rising trend, and rising food Europe prices globally are feeding through to local inflation. The government may avoid raising
prices of some public services, such as education and health care, in order to curb inflation towards the year-end.
Moody’s raises Vietnam’s outlook Moody’s recently raised its outlook for Vietnam’s sovereign credit rating to positive from
to positive negative. It cited signs of improving fiscal and economic strength that may strengthen Americas Vietnam’s credit profile over time. Vietnam’s economy stands to benefit from global shifts in production, trade and consumption following the pandemic, according to Moody’s. It affirmed Vietnam’s long-term credit rating at Ba3.
Figure 1: Vietnam macroeconomic forecasts Figure 2: Rebound in manufacturing drove Q1 growth
Strategy
outlook YTD growth, % y/y 16
2021 2022 2023 Services 14 sector
GDP grow th (real % y/y) 6.7 7.3 6.7 12 Mfg
10 Constn sector CPI (% annual average) 3.8 4.2 5.5 Forecasts 8
Policy rate (%)* 4.00 4.00 4.00 6
4 GDP
USD-VND* 23,000 22,500 22,000 2 Agri, forestry and fishery sector 0 Current account balance (% GDP) 2.2 2.9 2.9 -2
Fiscal balance (% GDP) -6.0 -5.4 -5.4 -4 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 *end-period; Source: Standard Chartered Research Source: CEIC, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 55 Global Focus – Economic Outlook Q2-2021
Policy – SBV to continue to support businesses this year
SBV to continue to support credit We expect the refinancing rate to stay on hold at 4.0% throughout 2023, despite
growth improving economic and credit growth since Q4-2020. However, the possibility of Global
overview a rate hike may gradually emerge. According to the State Bank of Vietnam (SBV),
support for businesses during the post-pandemic period will be a key priority for the
banking sector in 2021. Credit expanded 1.47% YTD as of 19 March 2021, picking up
from 0.68% a year earlier. Deposit and interbank rates are, however, driven by
abundant liquidity. economics Geopolitical FDI – Inward investment to remain strong medium-term
Pledged FDI – an indicator of future investment – rose 18.5% y/y in Q1, while
disbursed FDI rose 6.5%. Depressed investment sentiment and lingering global
COVID-19 uncertainty may continue to dampen FDI flows to Vietnam in the short term.
Asia That said, global vaccine rollout should support a gradual recovery in global demand
and investment appetite. This is evidenced by the recent improvement in export data
from Asian countries. FDI flows to Vietnam should improve in 2021 and 2022 thanks
to the better global backdrop, along with ongoing investment relocation to Vietnam due
to the US-China trade and technology dispute (which is prompting the sustained
relocation of low-tech manufacturing to Vietnam from China).
MENAP
Vietnam needs to seize Beyond this year, Vietnam will have to show the global investment community that it is
opportunities to boost FDI inflows on track to achieving its objectives of becoming a regional supply-chain hub, a modern over the longer term industrial economy and a high-income country. Vietnam’s increasing role in the
manufacturing supply chain in Asia – which is outperforming Western economies – Africa
increases its appeal to investors. Moreover, Vietnam could benefit from a potential
further rise in global trade protectionism.
Structural issues could hinder Vietnam enjoys several clear advantages that should help it attract investment flows: Vietnam’s efforts to take its strong growth, a sizeable domestic market, low labour costs, an abundant working-age economy to the next level Europe population (with high purchasing power), free trade agreements, and a strategic
location. However, limited transportation infrastructure and a lack of economic
diversification may have held Vietnam back from becoming a global player.
Politics – Setting the medium-term direction Nguyen Phu Trong was re-elected general secretary of the Communist Party of
Americas Changes in top government posts
will be watched closely this year Vietnam Central Committee on 31 January. Parliament will vote in April on the nominee
for president (who is the current premier) and the nominee for prime minister. The
leadership changes will be closely watched for signs of a potential shift in the country’s
economic or geopolitical direction over the medium term. outlook
Strategy Market outlook – Stronger VND
We expect mild appreciation to continue. Vietnam’s balance of payments remains
strong, supported by robust FDI and exports. The country faces ongoing pressure from
the US to allow a stronger Vietnamese dong (VND), and FX reserves have also increased to meet the IMF threshold for reserve adequacy. All of these factors support
Forecasts a stronger VND, in our view.
Standard Chartered Global Research | 31 March 2021 56
Economies – Middle East, North Africa and Pakistan
Global Focus – Economic Outlook Q2-2021
Bahrain – Balancing non-oil growth and reform
Economic outlook – Slow recovery in trade and tourism
Global Carla Slim +971 4508 3738 We expect a gradual growth recovery to 1.8% in 2021, after a 4.0% contraction in overview [email protected]
Economist, MENAP 2020. Real GDP contracted for a third consecutive quarter in Q3-2020, shrinking c.7% Standard Chartered Bank y/y – the worst performance since the 2008-09 global financial crisis. Oil output is likely
to remain constrained in 2021 given Bahrain’s support for Saudi Arabia, which has unilaterally taken on deep oil output cuts in the first months of 2021.
economics Geopolitical Bahrain’s outlook hinges on The recovery in non-oil economic activity is likely remain constrained by the support from the GCC, via both the government’s commitment to fiscal consolidation under the Fiscal Balance Programme
Development Fund and the Fiscal
(FBP), as well as continued weakness in traditional growth engines such as tourism Balance Programme
and trade. Bahrain is also vulnerable to slower disbursement under the USD 7.5bn
GCC Development Fund (announced in 2011 and meant for infrastructure funding), of Asia
which USD 3.5bn had been disbursed by end-2020. The 2021 and 2022 budgets
envisage BDH 656mn (c.USD 1.7bn) of capex, partly funded by the GCC Development
Fund. If lower oil prices tighten FX liquidity in Saudi Arabia, the UAE and Kuwait,
transfers might be made only to the FBP (aimed at balance-of-payments support)
NAP rather than to the GCC Development Fund.
ME
Policy – Improving funding outlook
Narrower twin deficits are likely on We revise our twin deficit forecasts on higher oil prices. In light of improved fiscal
higher oil prices and external imbalances, reform momentum is likely to slow after Bahrain’s front-loaded
reform drive since 2018. In the event of renewed downside risks to oil prices, we do not
Africa rule out decisions to raise non-oil government revenue, which would weigh further on
domestic demand. Such measures would be in keeping with Saudi Arabia’s tripling of the
VAT rate and Oman’s plan to implement income tax. We now expect the fiscal deficit to
shrink to 7.5% of GDP in 2021 (prior forecast: 8.5%) from 14% of GDP in 2020, and the
2021 current account (C/A) deficit to narrow to 2.0% of GDP (6.5%). Europe
Concerns about the sustainability of the USD peg may resurface in 2021, as room
to tap FX reserves for fiscal or external financing has shrunk substantially. FX erosion
is likely in the coming months, following an increase in January after Bahrain’s first
Eurobond issuance of the year. This might expose Bahrain’s heavy reliance on GCC disbursements under the FBP and on access to international markets to support its
Americas reserves.
Figure 1: Bahrain macroeconomic forecasts Figure 2: Reserves to be supported by Eurobond
issuance and GCC disbursements under the FBP 4.0
outlook FX reserves (USD bn)
Strategy 2021 2022 2023
3.5
GDP grow th (real % y/y) 1.8 2.5 3.0
3.0
CPI (% annual average) 1.0 1.5 1.5 2.5
Policy rate (%)* 1.00 1.00 1.50 2.0
Forecasts 1.5
USD-BHD* 0.38 0.38 0.38 1.0
Current account balance (% GDP) -2.0 -2.5 -2.0 0.5
Fiscal balance (% GDP) -7.5 -6.1 -6.0 0.0 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 *end-period; Source: Standard Chartered Research Source: CBB, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 58
Global Focus – Economic Outlook Q2-2021
Egypt – Steady as she goes
overview
Global Economic outlook – Speedy recovery ahead
Carla Slim +971 4508 3738 Within MENAP, we expect Egypt to experience the fastest return to pre-COVID [email protected]
Economist, MENAP growth. We forecast growth at 5.5% in FY22 (ends June 2022), despite a slower pace Standard Chartered Bank of vaccine rollout than elsewhere in the region. FY21 growth is likely to remain below
Geopolitical trend at 2.0% on subdued external demand given the sluggish global tourism recovery; economics this follows a growth slowdown to 3.6% in FY20. Headline GDP contracted 1.3% y/y in Q1-FY21, dragged down by tourism (-70% y/y), trade (-11%) and manufacturing (-
13%).
Policy – Stabilising
External challenges will likely Egypt is likely to maintain unfunded engagement with the IMF beyond the end of Asia
persist in 2021, partly on higher its current USD 5.2bn, one-year Stand-By Arrangement (SBA), which was oil prices
approved in June 2020. Securing external financing is likely to remain a policy priority in 2021 as external-sector challenges remain. We expect current account deficits of
3.8% of GDP in FY21 and 3.6% in FY22 as higher oil prices push up the import bill. Although Egypt’s net foreign asset (NFA) position is almost back to pre-pandemic MENAP levels (Figure 2), a renewal of GCC deposits held at the Central Bank of Egypt (CBE)
will also be needed to contain the drawdown of FX reserves, in our view.
Keep calm and carry on We expect the CBE to maintain a neutral monetary policy stance in FY22; its easing cycle has ended, in our view. We believe real rates will be kept firmly positive
Africa to continue to attract portfolio inflows and rebuild the CBE’s FX reserves. This, along
with strong remittance flows, should allow Egypt to avoid a disorderly FX adjustment.
We expect USD-EGP to gradually depreciate to 16.2 by 2022.
A risk to our view is further downside CPI surprises, which would create room for
Europe more easing. Headline inflation was below the lower end of the CBE’s target of 7% (+/-2ppt) in February, averaging 4.5% y/y since the start of FY21; this was slightly lower
than expected due to food disinflation. Looking ahead, inflation should edge up on
higher oil prices and the economic recovery.
Americas
Figure 1: Egypt macroeconomic forecasts Figure 2: The recovery in portfolio inflows has helped to
Strategy
rebuild Egypt’s NFA position, allowing EGP strength outlook
FY21 FY22 FY23 400,000 Net foreign assets (LHS, EGP mn) 18.5
350,000 18.0
GDP grow th (real % y/y) 2.0 5.5 6.5 USD-EGP 17.5 300,000 (RHS)
17.0 CPI (% annual average) 4.7 5.5 6.0 250,000 16.5 Forecasts 200,000 Policy rate (%) 8.25 8.25 8.25 16.0 150,000 USD-EGP* 15.80 16.20 18.78 15.5
100,000 15.0 Current account balance (% GDP) -3.8 -3.6 -2.0 50,000 14.5
Fiscal balance (% GDP) -7.0 -7.0 -7.0 0 14.0 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Note: Economic forecasts are for fiscal year ending in June; *end-December; Source: Bloomberg, Standard Chartered Research Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 59 Global Focus – Economic Outlook Q2-2021
Iraq – Devaluation amid rigid reform outlook
Economic outlook – Protracted output gap
Global Carla Slim +971 4508 3738 We expect Iraq to return to modest growth of 1.7% in 2021 from -12% in 2020, overview [email protected]
Economist, MENAP when it faced the triple-whammy of low oil prices (and output), COVID-19 and social Standard Chartered Bank unrest. Despite the recovery in oil prices, real oil-sector GDP growth is likely to be
constrained by sluggish global oil demand after oil production declined 13% in 2020. The non-oil-sector recovery is also likely to be shallow, weighed down by uncertainty We expect a slow and fragile recovery from the 2020 recession around the post-election outlook and rising import costs following the currency
economics Geopolitical devaluation. As such, we raise our 2021 CPI inflation forecast to 3.0% (1.0% prior).
Policy – Reform urgency persists despite smaller deficits
We expect Iraq’s imbalances to narrow on higher oil prices. We revise our 2021
Asia fiscal and current account (C/A) deficit forecasts to 4.0% (from 13.0%) and 6.0% (from
12.0%), respectively. We turn more bearish on prospects for reform implementation in
2021 given higher oil prices and planned elections in October (see Iraq – Fragility in
rigidity). The government ‘white paper’ on financial and fiscal reform, endorsed in Q4-2020, envisions cutting the public-sector wage bill and subsidies to a total of 5% of
NAP GDP in 2023 from 25% in 2020. Structural reforms such as public-sector wage
ME consolidation are unlikely in an election year, in our view.
Downside risks to oil prices could In the absence of reforms, and given reductions in government spending, Iraq is lead to a repeat devaluation given unlikely to be able to draw on IMF or bilateral funding; it is unlikely be willing to tap slow reform implementation and
international markets. Equally, tapping FX reserves risks a repeat devaluation. We lack of external funding
Africa raise our 2021 USD-IQD forecast to 1,460 (from 1,182) as we think the surge in oil
prices limits the risk of another devaluation.
Politics – Election delay, more accommodative US stance Iraq is set to hold early parliamentary elections in October 2021, in response to
Europe ongoing social unrest that began in 2019. Elections were delayed from 6 June but will
still be held early (before March 2022). The composition of the new parliament and
subsequent cabinet is set to create political uncertainty in Q4, likely delaying the
implementation of fiscal reforms even if Prime Minister Mustafa al Kadhimi remains in power, which we do not rule out. A more conciliatory US stance towards Iran under the Biden administration could be positive for Iraq – President Trump’s ‘maximum
Americas pressure’ strategy exacerbated Iraq’s unstable domestic politics.
Figure 1: Iraq macroeconomic forecasts Figure 2: Higher oil prices provide funding relief for Iraq,
limit risk of repeat devaluation 90,000 90
outlook Brent (RHS, USD/bbl) Strategy 2021 2022 2023
80,000 80
GDP grow th (real % y/y) 1.7 3.6 5.0 CBI net foreign assets
70,000 70
(LHS, IQD bn)
60,000 60 CPI (% annual average) 3.0 2.0 1.5 50,000 50
Policy rate (%)* 4.00 4.00 4.00 40,000 40
Forecasts
30,000 30 USD-IQD* 1,460 1,460 1,460 20,000 20 Current account balance (% GDP) -6.0 -5.0 -6.0 10,000 10
Fiscal balance (% GDP) -4.0 -5.0 -5.0 0 0 Oct-15 Jul-16 Apr-17 Jan-18 Oct-18 Jul-19 Apr-20 Jan-21 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 60
Global Focus – Economic Outlook Q2-2021
Kuwait – Higher oil prices to ease liquidity
overview
Global Economic outlook – Constrained for longer
Carla Slim +971 4508 3738 We expect Kuwait’s economy to return to growth of 2.5% in 2021, following an [email protected]
Economist, MENAP expected 6.3% contraction in 2020. Non-oil economic activity should recover only Standard Chartered Bank gradually, as Kuwait was strongly affected by COVID-19 containment measures. The
Geopolitical pandemic also appears to have accelerated Kuwait’s drive to reduce its reliance on economics foreign workers, who currently make up 70% of the population. Oil-sector growth is set to remain constrained in 2021. Kuwait’s oil output is likely to remain well below capacity
of 3.2 million barrels per day (mb/d); it was at 2.3mb/d in February.
Policy – Twin deficits to narrow despite policy paralysis
Risks from uncertain funding plans We revise our 2021 fiscal and current account forecasts to -6.0% (from -20.7% of Asia
are mitigated by lower funding GDP) and 8.4% (from 3.2%), respectively. The improvements are likely to be driven needs
by higher oil prices and the suspension of revenue transfers to the Future Generations Fund (FGF). Measures to raise non-oil government revenue seem unlikely given policy
paralysis. Kuwait has not yet introduced the planned GCC-wide VAT, which was introduced in Saudi Arabia and UAE at the start of 2018, Bahrain in 2019, and is MENAP expected in Oman in H1-2021.
Sovereign savings will likely be used to finance deficits, given uncertain
passage of the new debt law. Unlike GCC peers, Kuwait has issued only one international bond (raising USD 8bn in 2017). Parliament has resisted government
Africa efforts to pass a new debt law that would raise the debt ceiling and allow the sovereign
to tap global capital markets. In the meantime, the General Reserve Fund (GRF) – part
of Kuwait’s sovereign wealth fund, which has been used to finance government deficits
– may have been depleted in Q1-2021.
Europe Currency devaluation concerns have surfaced given tightening liquidity. The market has questioned the possibility of a material FX adjustment as parliament weighs
alternative ways to address the oil price shock. We expect the debt law to ultimately
be passed. Policy makers will likely let the fiscal balance – rather than the currency –
absorb the oil price shock, in our view. As such, we expect the weightings in Kuwait’s
Americas currency peg basket to remain unchanged and see little Kuwaiti dinar (KWD) volatility in 2021.
Figure 1: Kuwait macroeconomic forecasts Figure 2: Public debt could spike in 2021 if debt law is
Strategy
outlook passed for fiscal financing purposes 40
Public debt (% of GDP)
2021 2022 2023
35 GDP grow th (real % y/y) 2.5 3.4 3.0
30
CPI (% annual average) 0.8 2.5 2.5 25 Forecasts
Policy rate (%)* 1.50 1.50 2.00 20
15
USD-KWD* 0.30 0.30 0.30 10
Current account balance (% GDP) 8.4 4.2 4.0 5
Fiscal balance (% GDP)** -6.0 -7.5 -7.0 0 2014 2015 2016 2017 2018 2019 2020 2021F *end-period; **for fiscal year starting 1 April; Source: Standard Chartered Research Source: IMF, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 61 Global Focus – Economic Outlook Q2-2021
Lebanon – The more things change…
Economic outlook – Deep scarring
Global Carla Slim +971 4508 3738 We expect Lebanon’s recession to persist in 2021 amid ongoing COVID-related overview [email protected]
Economist, MENAP restrictions, social unrest, policy paralysis, and the absence of a plan to emerge from Standard Chartered Bank the financial crisis. We maintain our 2021 GDP growth forecast at -10% and see a
return to growth only in 2023; this would mark five years of economic contraction. Banque du Liban’s (BdL’s) coincident indicator – a weighted average of real-sector
The economy’s deepest contraction indicators that mirrors economic activity – contracted c.40% y/y in January-October
economics Geopolitical since 1990 is set to persist into 2021 2020, the worst decline since the series started in 1993.
Policy – Policy paralysis amid government deadlock
Absence of a government is Lebanon’s path out of its debt and currency crises is pending government
Asia delaying negotiations with the IMF formation. Forming a new cabinet (following the resignation of Prime Minister Diab’s
government after the 4 August Beirut blast) is a pre-requisite for any plan to exit the
crisis, which will include IMF involvement, in our view. Domestic consensus will have
to be reached on the scale and allocation of the losses, as previous IMF negotiations stalled because of disagreements between the government and the banking sector.
NAP More importantly, officially liberalising the currency and reforming the electricity sector
ME are likely to be conditions for a funded programme – following which debt and banking-
sector restructuring can be tackled.
Meanwhile, hyperinflation is likely to persist (Figure 2) as the parallel-market rate
continues to diverge from the official peg. We raise our 2021 inflation forecast; we
Africa now see average inflation accelerating to 95% in 2021 (prior forecast: 50.0%) from
84% in 2020 on delayed government formation, unanchored expectations and higher
oil prices. Higher oil prices could exacerbate the electricity crisis, fuelling further
unrest. Electricity production was down c.20% y/y in January-October 2020.
Anecdotal evidence suggests real-time production has continued to decline since. Europe
The official peg has been rendered obsolete. We expect reserve erosion to decelerate
as fewer imported goods are cleared at the official peg rate of 1,507.5. After the BdL’s
reserves depleted at a run rate of USD 1bn in 2020, BdL’s foreign assets (excluding
gold reserves of USD 17bn) stood USD 24.1bn at end-2020, of which FX reserves
were USD 18.6bn.
Americas
Figure 1: Lebanon macroeconomic forecasts Figure 2: Inflation spike is set to persist in 2021 amid
unanchored devaluation expectations 160 9,000
outlook Parallel market USD-LBP
Strategy 2021 2022 2023
140 8,000
GDP grow th (real % y/y) -10.0 -5.0 0.0
7,000
120
6,000 CPI (% annual average) 95.0 15.0 5.0 100 5,000 80 Policy rate (%)* 10.00 10.00 10.00 CPI % y/y (LHS) 4,000
Forecasts 60
3,000 USD-LBP* 6,000 7,000 8,000 40 Official peg USD-LBP 2,000 Current account balance (% GDP) -10.0 -12.0 -15.0 20 1,000
Fiscal balance (% GDP) -7.0 -7.0 -7.0 0 0 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 62
Global Focus – Economic Outlook Q2-2021
Oman – Goldilocks scenario
overview
Global Economic outlook – Non-oil growth to recover slowly
Carla Slim +971 4508 3738 We expect Oman’s economy to recover gradually from the 2020 recession. We [email protected]
Economist, MENAP forecast a return to headline growth of 0% in 2021, following a 5.0% contraction in Standard Chartered Bank 2020 (close to the IMF’s recently revised 2020 forecast of -6.4%, from -10%). The
Geopolitical recovery will likely be driven by a return to non-hydrocarbon-sector growth of 1.5%, economics helped by support for economic activity via the economic stimulus plan announced in
early March. This should partly offset the negative impact of VAT implementation on
16 April, which will likely weigh on public and private consumption and investment.
Policy – Supported by oil prices, committed to reform
Achieving meaningful fiscal Commitment to the Medium-Term Fiscal Plan (MTFP) – which targets a deficit of Asia
adjustment while ensuring 1.7% of GDP by 2024 – remains key to unlocking external funding. A VAT socioeconomic stability is a key
implementation date has been set for 16 April 2021, suggesting no delays. This is policy priority expected to add c.USD 1bn annually to non-oil government revenue and is contingent
on the speed of the consumption recovery, which may benefit from the government’s economic stimulus plan. Higher oil prices have created some fiscal space to support MENAP the non-oil sector, for example via corporate income tax exemptions. Oman is less
likely to require additional financial support following Qatar’s USD 1bn financial
package in 2020, as funding needs will likely decline on higher oil prices. We now
expect the 2021 fiscal deficit to narrow to 6.0% of GDP (c.USD 4bn), instead of 12%.
The 2020 deficit was 17.3%; the MTFP’s 2021 target is 11.5%. Africa
Omani riyal (OMR) de-peg concerns should ease amid lower projected drawdowns
of FX reserves and sovereign wealth fund (SWF) assets given lower funding needs.
We expect the USD peg to hold for the foreseeable future, despite the gradual decline in the FX coverage ratio, measured as total FX assets (SWF assets + FX reserves)/M2
Europe money supply. The ratio fell to 0.75% at end-2020 from 1.15% in 2014, suggesting that Oman could be increasingly vulnerable to capital outflow pressure. We believe the
disadvantages of adjusting the exchange rate regime outweigh the advantages.
However, a move away from the peg may have merit longer-term, when tourism will
likely account for a larger share of economic activity.
Americas
Figure 1: Oman macroeconomic forecasts Figure 2: Debt trajectory should reverse on lower funding
Strategy
outlook needs given higher oil prices (% of GDP) 90
2021 2022 2023 80
GDP grow th (real % y/y) 0.0 2.6 3.5 70
60 CPI (% annual average) 2.5 2.0 2.0 Forecasts 50 Policy rate (%)* 0.50 0.50 1.00 40
30 USD-OMR* 0.39 0.39 0.39 20 Current account balance (% GDP) -7.6 -6.0 -6.0 10
Fiscal balance (% GDP) -6.0 -8.0 -7.0 0 2019 2020 2021F 2022F 2023F 2024F *end-period; Source: Standard Chartered Research Source: IMF, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 63 Global Focus – Economic Outlook Q2-2021
Pakistan – Balancing act
Economic outlook – We turn more bullish on growth
Global Carla Slim +971 4508 3738 We now expect Pakistan’s economy to return to growth of 1.5% in FY21, as high- overview [email protected]
Economist, MENAP frequency indicators point to stronger-than-expected activity; we previously expected Standard Chartered Bank
0% growth this year. This follows a short and shallow contraction of -0.4% in FY20
(ended June 2020). Our FY21 growth forecast is still below the central bank’s 3.0% (recently raised from 2.0%) given the resurgence of COVID-19 infection rates and The trajectory of COVID-19 in Pakistan’s relatively slow vaccine rollout. The downturn in Pakistan’s business cycle
Pakistan remains uncertain economics Geopolitical predates the 2020 pandemic shock; it began following fiscal consolidation measures
under the IMF programme agreed in July 2019. We expect Pakistan to return to growth
of 4.0% in FY22, close to its long-term average.
Asia Policy – SBP likely to look through higher CPI in H1
To hike or not to hike? We raise our FY21 CPI forecast to 8.5% (from 6.6%) to reflect higher oil prices and
supply-side disruptions, which have led to sticky food inflation in particular. We expect
the State Bank of Pakistan (SBP) to look through a transitory pick-up in CPI driven by volatile items such as food and energy, and to turn more hawkish only in the event of
NAP underlying price pressures. In FY22, headline inflation is likely to soften as food
ME inflation normalises, causing the real policy rate to rise close to 0%. We think the SBP
will ultimately reverse its policy of negative real rates as the recovery gains momentum.
Given this, along with faster-than-expected growth and inflation, we now forecast a
cumulative 50bps of hikes in FY22, taking the policy rate to 7.5% (we previously
expected rate hikes to start in FY23).
Africa
Capital and financial account flows will be key to covering a widening C/A deficit
and avoiding a disorderly FX adjustment. Most importantly, the resumption of the
IMF programme should support the external outlook. The IMF Executive Board’s
recent approval of the second review will unlock USD 500mn of the USD 6bn Extended
Fund Facility, bringing disbursements to USD 2bn; this leaves another USD 4bn of Europe
potential inflows over the course of the programme. Forthcoming disbursements, along
with external debt issuance, should offset rising external-sector risks stemming from
higher oil prices and likely softer remittance growth. We expect Pakistani rupee (PKR)
appreciation to reverse and gradual depreciation to resume. We see USD-PKR at 162
by end-2021. Americas
Figure 1: Pakistan macroeconomic forecasts Figure 2: Negative real rates to ultimately be reversed;
SBP to look past higher CPI in the near term
FY21 FY22 FY23 16 outlook
Strategy 14
GDP grow th (real % y/y) 1.5 4.0 5.0
12
Policy rate %
CPI (% annual average) 8.5 7.7 7.1 10
Policy rate (%) 7.00 7.50 7.50 8 6
Forecasts USD-PKR* 162.00 170.00 180.00
4 CPI % y/y
Current account balance (% GDP) -2.1 -2.0 -2.0 2
Fiscal balance (% GDP) -8.5 -7.0 -4.0 0 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Note: Economic forecasts are for fiscal year ending in June; *end-December; Source: Bloomberg, Standard Chartered Research Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 64
Global Focus – Economic Outlook Q2-2021
Qatar – Onwards and upwards
overview
Global Economic outlook – GDP pick-up on diplomatic resolution
Carla Slim +971 4508 3738 We expect Qatar’s economy to return to 3.0% growth in 2021. The lifting of [email protected]
Economist, MENAP restrictions on trade and travel between Qatar and Saudi Arabia, the UAE, Bahrain and Standard Chartered Bank Egypt (the ‘quartet’) should add impetus to the recovery underway in these sectors
Geopolitical
economics (see Qatar – Rebuilding economic ties post-2017 dispute). In the medium term, growth should benefit from additional demand during the 2022 World Cup (hosted by Qatar)
Qatar Petroleum’s USD 29bn and from increased hydrocarbon capacity. Qatar – which produces liquefied natural
investment in gas output expansion gas (LNG) at the relatively low cost of USD 4 per million British thermal units – plans at the North Field to support to add four new LNG megatrains. They are expected to increase capacity from the medium-term growth prospects
North Field by c.60% to 126 million tonnes per year by 2027 (6.7mn barrels of oil
equivalent per day). Asia
Policy – Higher reserves, lower debt Liquidity buffers are likely to be put Higher hydrocarbon prices are set to improve FX liquidity further. We raise our
towards debt repayment 2021 fiscal and current account (C/A) forecasts to incorporate our revised oil price forecast of USD 65/bbl in 2021. We now expect fiscal and C/A surpluses of 4.2% of MENAP GDP (1.2% prior), and 4.1% of GDP (1.6% prior), respectively, after small deficits in
2020. This will likely improve the Qatar Central Bank’s (QCB’s) reserve position and
support the government’s priority of lowering public debt-to-GDP. Reserves were USD
56bn in December 2020, up by more than one-third since 2017.
Africa Convergence between onshore and offshore spot USD-QAR was limited following
the resolution of the diplomatic dispute, in line with our expectations. Still, we are not
concerned about USD de-peg risks given higher hydrocarbon prices and Qatar’s
success in tapping international capital markets, both of which should continue to support reserves. Currency forward markets reflect this comfortable liquidity position.
Europe
Politics The first-ever Shura council elections will be held in October 2021. Citizens will
elect two-thirds of the 45-seat advisory body, which until now has been appointed
entirely by the Emir. Americas
Figure 1: Qatar macroeconomic forecasts Figure 2: Banks’ elevated negative NFA positions might
Strategy
outlook constrain USD-QAR spot convergence 3.95
2021 2022 2023 USD-QAR offshore spot
3.90
GDP grow th (real % y/y) 3.0 3.3 4.0 USD-QAR onshore spot
3.85
CPI (% annual average) 0.5 1.5 2.0 Forecasts 3.80 Policy rate (%)* 2.50 2.50 3.00 3.75
USD-QAR* 3.64 3.64 3.64 3.70
Current account balance (% GDP) 4.1 0.5 2.6 3.65
Fiscal balance (% GDP) 4.2 2.4 2.9 3.60 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 65 Global Focus – Economic Outlook Q2-2021
Saudi Arabia – Shifting sands
Economic outlook – Recovering, with constraints
Global Carla Slim +971 4508 3738 We forecast a return to GDP growth of 1.9% in 2021 after a contraction of 4.1% overview [email protected]
Economist, MENAP in 2020. The recovery will likely be driven by non-oil-sector growth as oil-sector growth Standard Chartered Bank remains constrained by Saudi Arabia’s unilateral production cut of 1 million barrels per
day (mb/d) in February-April. High-frequency indicators such as point-of-sale transactions reflect a sharp recovery in domestic consumption, likely boosted by
digitalisation (Figure 2).
economics Geopolitical Consumption growth is constrained by job losses in 2020 and the tripling of VAT.
The PMI survey softened to 53.9 in February, reinforcing our view that the recovery
will be gradual and non-linear; however, this marked five months of consecutive prints
above 50, reflecting an expansion in economic activity. We still expect non-oil growth Asia
to reach c.2% in 2021 – below the 2019 level, despite the weak base – as the July
2020 tripling of the VAT rate and job losses constrain consumption growth. The latest
employment data shows that c.230,000 expatriates and c.50,000 Saudis lost their jobs
between March and September 2020.
NAP Policy – Improving liquidity bodes well for USD peg, PIF ME
We expect a continued post-crisis Liquidity should improve in 2021 on higher oil prices. We revise our 2021 fiscal
commitment to fiscal reform, balance forecast to -2.1% of GDP from -5.2%, and our 2021 current account balance
despite higher oil prices and lower forecast to 3.0% of GDP from -0.9%. Despite this improvement, there is little room for
deficits meaningful fiscal stimulus or backtracking on fiscal reforms, in our view. As such, we
do not expect last year’s tripling of the VAT rate to 15% to be reversed in the short to Africa
medium term. Rather, we expect policy to focus on enhancing competitiveness and
attractiveness, as evidenced by recent labour-market reforms and the decision to grant
government contracts exclusively to companies headquartered in Saudi Arabia starting
in 2024.
Europe The Public Investment Fund (PIF) is likely to play a larger domestic role through
its investments. Saudi Arabia’s financial buffers have declined in recent years. The
Saudi Arabian Monetary Authority’s (SAMA’s) reserve assets fell by c.USD 52bn in
2020 to USD 450bn as of January 2021; this included a USD 40bn transfer to the PIF to acquire offshore assets. In the context of the USD-SAR peg, we estimate that the ratio of SAMA net foreign assets to M2 is 0.89, after falling below 1.0 in March for the
Americas first time since mid-2005.
Figure 1: Saudi Arabia macroeconomic forecasts Figure 2: Point-of-sale transaction data indicates a
recovery in non-oil GDP and accelerated digitalisation
400 40 outlook
Strategy 2021 2022 2023
350 35
Value of POS transactions
GDP grow th (real % y/y) 1.9 2.7 3.5 (LHS, SAR bn)
300 30
CPI (% annual average) 2.9 2.2 3.3 250 25
200 20 Policy rate (%)* 1.00 1.00 1.50
Forecasts 150 15
USD-SAR* 3.75 3.75 3.75 100 10 Number of Current account balance (% GDP) 3.0 4.0 3.5 50 transactions 5 (RHS, mn) Fiscal balance (% GDP) -2.1 -4.5 -4.0 0 0 Dec-18 Apr-19 Aug-19 Dec-19 Apr-20 Aug-20 Dec-20 *end-period; Source: Standard Chartered Research Source: SAMA, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 66
Global Focus – Economic Outlook Q2-2021
Turkey – Treading carefully
overview
Global Economic outlook – How long will orthodoxy last?
Carla Slim +971 4508 3738 We raise our 2021 GDP growth forecast to 4.5% (from 3.5%), as the economy [email protected]
Economist, MENAP performed better than expected in 2020. We expect the current account (C/A) to remain Standard Chartered Bank under pressure this year amid a gradual recovery in exports, tourism, construction and Philippe Dauba-Pantanacce +44 20 7885 7277
Geopolitical [email protected] manufacturing, along with higher oil prices. We forecast a C/A deficit of 4.0% of GDP economics Senior Economist | Global Geopolitical Strategist in 2021, following c.5% of GDP in 2020. Despite recent leadership changes at the Standard Chartered Bank Central Bank of the Republic of Turkey (CBRT), we think both global and domestic
factors will constrain the CBRT from easing interest rates at the 15 April MPC meeting. Globally, changing risk sentiment poses downside risks to the outlook; domestically,
fundamentals warrant an extended period of tighter monetary policy. Nonetheless, we
Turkey’s economic performance now expect rate cuts in H2-2021 (rather than our previous expectation of 2022) as Asia continues to surprise to the upside,
policy makers’ priorities shift to pro-growth policies from the external sector. As such, pressuring the C/A deficit
we lower our end-2021 policy rate forecast to 16% (from 18%).
Politics – Back to volatility Possible sanctions from the US and On the international front, sanctions threats from the US and EU dominate. While MENAP EU remain a risk this has been a risk for some time, the Biden administration is less likely than its
predecessor to shield Turkey from a push by Congress to penalise its deployment of
the Russian S-400 anti-missile system. The State Department reiterated in February
that the S-400 purchase could be subject to additional sanctions under the Countering
America’s Adversaries Through Sanctions Act (CAATSA). Biden still had not called Africa Erdogan as of early March, despite overtures from Ankara. The EU has also threatened sanctions against Turkey; negotiations between the two sides are ongoing.
Domestic politics becoming Domestically, perceived challenges with pandemic management and rising increasingly fractured tensions with the opposition have contributed to a decline in support for President
Europe Erdogan and the ruling AKP, according to polls. Recent talk of banning the main Kurdish HDP party was met with criticism, both domestically and in the EU. While
Erdogan has talked about implementing multiple reforms (including a human rights
charter, electoral reforms and a new constitution), few details have emerged to date.
Critics have argued that reform plans are a distraction from domestic difficulties and
Americas
Erdogan’s eroding support.
Figure 1: Turkey macroeconomic forecasts Figure 2: CBRT is likely to cut rates as disinflation
Strategy
outlook resumes towards Q4 (%) 30
Weighted average cost-of-funding rate CPI % y/y
2021 2022 2023
25 GDP grow th (real % y/y) 4.5 3.5 4.0
20 Forecasts CPI (% annual average) 13.2 12.0 11.0
15 Policy rate (%)* 16.00 14.00 14.00
10 USD-TRY* 9.00 10.00 9.80
Current account balance (% GDP) -4.0 -3.0 -2.5 5
Fiscal balance (% GDP) -3.5 -3.0 -4.0 0 Mar-18 Aug-18 Jan-19 Jun-19 Nov-19 Apr-20 Sep-20 Feb-21 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 67 Global Focus – Economic Outlook Q2-2021
UAE – Recovery underway
Economic outlook – Supported by rapid vaccine rollout
Global Carla Slim +971 4508 3738 The UAE’s domestic economy – particularly Dubai – has positioned itself for a overview [email protected]
Economist, MENAP speedy return to pre-pandemic levels. It has remained open for business despite a Standard Chartered Bank resurgence in cases in Q1-2021, and should benefit from its rapid pace of vaccine
rollout. Dubai aims to vaccinate all eligible adults before the end of the year; 7.6mn doses, the equivalent of c.40% of the population, had been administered at the time of
writing. The UAE PMI was 50.6 in February, marking the third straight month of private-
economics Geopolitical sector expansion (Figure 2).
We are now less concerned about We raise our 2021 GDP growth forecast to 2.5% from 1.9% to reflect a lower base from
downside risks to the recovery from 2020. We now estimate 2020 growth at -5.5% (versus -4.6% previously), as oil
demographics production contracted 9.4% during the year, more than we had anticipated. The Asia
recovery already underway in the UAE’s tourism, trade and logistics sectors should
gain further impetus from Dubai’s hosting of EXPO 2020 – now scheduled for October
2021, one year later than originally planned – and the resolution of the diplomatic
dispute with Qatar (see Qatar – Rebuilding economic ties post-2017 dispute). Dubai’s
NAP expatriate population growth slowed to 1.5% in 2020 from 5.3% in 2019 but the
ME expected contraction was avoided, easing concerns about demographic risks to the
recovery. As part of Dubai’s 2040 urban plan, policy makers now project the population
will surge to 5.8mn people in 2040 from about 3.4mn in 2020.
Policy – Higher oil price adds space for fiscal spending
Africa Excess capacity in a range of Policy is likely to aim at enhancing competitiveness and attracting/retaining
sectors constrains stimulus
expatriates; recent immigration and legal reforms include an amendment to the UAE
citizenship law. Higher oil prices could add fiscal space for spending on social
infrastructure and other construction projects to boost economic activity. We revise our
2021 fiscal deficit forecast to 1.6% of GDP from 3.4%, and now expect a 2021 current
account surplus of 5.1% (prior forecast: 2.5%), on expectations of higher oil prices. Europe
However, we think policy makers will channel government spending allocations to
‘unsaturated’ sectors (such as agri-tech) to avoid adding to excess capacity and
contributing to broad-based deflation, including in property prices. We expect property
prices to recover slowly but surely, in line with fundamentals; they could bottom out this year following a downturn that started in 2014 and was exacerbated by the dual
Americas shock of COVID-19 and lower oil prices in 2020.
Figure 1: UAE macroeconomic forecasts Figure 2: The UAE has positioned itself for a speedy
return to pre-pandemic activity levels (UAE PMI)
outlook 60
Strategy 2021 2022 2023
GDP grow th (real % y/y) 2.5 3.0 3.5 55
CPI (% annual average) 2.7 3.0 3.0 50
Policy rate (%)* 0.60 0.60 1.10
Forecasts 45
USD-AED* 3.67 3.67 3.67 40 Current account balance (% GDP) 5.1 5.8 6.6
Fiscal balance (% GDP) -1.6 -1.8 -1.9 35 Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 68
Economies – Africa
Global Focus – Economic Outlook Q2-2021
Africa – Vaccine delays weigh on the outlook
Economic outlook – Recovery, with qualifications
Global Razia Khan +44 20 7885 6914 SSA economies will see a technical recovery in growth in 2021 from a weak base.
overview [email protected]
Head of Research, Africa and Middle East There is little indication yet of the extent of the longer-term economic scarring from the Standard Chartered Bank COVID crisis. South Africa and Nigeria – the region’s largest economies – reported
positive growth surprises in Q4-2020, partly reflecting pent-up demand after earlier containment measures. Commodity-producing economies also received a boost from
China’s strong rebound in late 2020. South Africa’s fiscal revenue for FY21 (ended 31 economics Geopolitical March 2021) exceeded revised budget assumptions, largely as a result of mining-
sector corporate tax outperformance.
Regulatory relief measures may SSA central banks have provided much-needed support, given limited fiscal
sia mask the true extent of scarring space. Policy interest rates have been lowered almost everywhere since the start of A
the pandemic; a number of countries (Botswana, Ghana, Kenya and Tanzania) cut
statutory reserve ratios, releasing additional liquidity. Central banks also offered
regulatory relief in the form of temporary changes to loan classification or provisioning
guidelines. Payment holidays or loan maturity extensions for COVID-affected sectors were encouraged; in many countries, payment holidays have helped to flatten NPLs.
MENAP While some countries extended their COVID support schemes in early 2021, a more
accurate picture of the financial and real-economy damage wrought by the pandemic
is likely to emerge only after these measures expire.
SSA economies face the risk of second or third waves of COVID. Kenya recently
Africa became the latest economy in the region to see a new wave of infections, announcing
sweeping new containment measures in its five most affected counties. In South Africa,
epidemiologists predict a third wave in the coming winter months, which could
necessitate new restrictions.
Elevated debt service costs The latest restrictions allow more room for economic activity than those imposed
Europe following 2020 deficit expansion last year, suggesting a less negative economic impact. On the fiscal policy front,
may complicate fiscal consolidation
however, subsequent waves of COVID may prevent a quick recovery in revenue back
plans
to pre-pandemic levels. Moreover, last year’s fiscal deficit expansion will contribute to
higher debt service costs, potentially delaying fiscal consolidation.
Vaccine rollout in SSA still lags well behind the global average (see Figure 1, Americas
Africa top charts). Renewed disruptions to global vaccine supply could hurt activity in
the region, where both affordability and logistical hurdles have held up vaccination
progress. Many SSA economies are dependent on the donor-funded COVAX scheme
– a global initiative that aims to deliver vaccines to low- and middle-income countries
– for meeting initial inoculation targets of c.10-20% of their populations.
outlook
Strategy
The Africa Vaccine Acquisition Trust, an initiative of the African Union, recently
announced plans to procure 220mn single-shot vaccine doses at a cost of USD 10/dose starting in Q3-2021, and an additional 180mn by end-2022. Based on current projections, we see little prospect of comprehensive vaccine rollout (sufficient to
achieve meaningful herd immunity) in most SSA economies until at least 2023; some
Forecasts
countries, like Ghana and Senegal, are likely to meet targets sooner. The slow pace of vaccination increases the risk that new variants of COVID could emerge, with global effects. It also suggests that a full economic recovery in SSA – especially in more tourism-dependent economies – could be delayed.
Standard Chartered Global Research | 31 March 2021 70
Global Focus – Economic Outlook Q2-2021
An evolving, but possibly inadequate, multilateral response
overview The multilateral response to the pandemic has varied so far. The IMF acted fast Global at the onset of the crisis, disbursing rapid relief financing to a number of countries,
including many in SSA. While the financing was on more concessional terms than
would be available through international capital markets, it represents a debt obligation needing to be repaid. For a number of SSA economies under our coverage, the timing
Geopolitical of this repayment (in three to five years) will coincide with a concentration of other economics external debt maturities on debt obligations pre-dating COVID.
DSSI uptake was limited; its impact The G20 Debt Service Suspension Initiative (DSSI) also offers liquidity support, is not sufficiently far-reaching but only to eligible low-income countries (LICs) and poor countries. Many would-be
beneficiaries rejected the DSSI on concerns that the proposed freeze on debt service
payments – to multilateral, official bilateral and private creditors alike – would Asia
complicate market access, limiting the benefits. Rating agencies suggested that the
non-payment of debt service to private creditors, even under a formal initiative, might be construed as a default.
The DSSI preserves the value of creditor claims, allowing borrowing countries to MENAP push out debt service payments for five years, with a one-year grace period before
repayment starts. However, it does not reduce the amount of debt that ultimately needs
to be repaid. Another criticism of the DSSI is that voluntary private-creditor participation
in the scheme has been weak. The DSSI is currently set to run only until June 2021;
barring an extension, it is unlikely that more debtor countries will sign up for the Africa initiative.
The Common Framework, allowing The G20 countries endorsed a Common Framework for debt relief in late 2020.
for co-ordinated debt restructuring,
Unlike the DSSI, the Common Framework recognises that in some instances, deeper is unlikely to be widely used debt treatment is needed to restore debt sustainability. The Common Framework does
Europe not seek to preserve the value of creditor claims. It will apply at the request of the borrowing country, and the language requiring “comparable treatment” by private
sector creditors is much stronger than under the DSSI. To date, only three African
countries have applied for debt negotiations with creditors under the Common
Framework – Chad, Ethiopia and Zambia. Each of them faced significant external
Americas liquidity stress, even prior to COVID.
The G20 Common Framework is likely to be limited in its application, in our view
(see Angola – Not yet in the clear and Cameroon – Debt worries seem overdone). Only
countries with extreme external liquidity stress (rather than just elevated debt ratios)
Strategy
are likely to opt for it. For many SSA economies, the question of how they will recover outlook from the lasting economic effects of the pandemic remains unanswered.
The expected new IMF SDR allocation should help with external liquidity (for our
detailed views on the allocation, see EM sovereigns – SDR allocation to bolster
liquidity). If the boost to FX reserves from the proposed USD 650bn increase in SDRs Forecasts is in line with current IMF quotas, then the impact on SSA is likely to be small – and insufficient to fundamentally protect future growth capacity. There has been some
discussion of using the SDR allocations of countries that do not need them to boost
IMF lending capacity. For SSA, the fear is that even this solution would not go far enough to provide the degree of multilateral support that is urgently needed to speed up vaccination programmes and restore more robust growth.
Standard Chartered Global Research | 31 March 2021 71 Global Focus – Economic Outlook Q2-2021
Africa – Top charts
Figure 1: SSA still lags far behind global average in terms Figure 2: For many economies, the second or third wave Global
overview of vaccines administered of COVID is still a key threat
COVID vaccine doses administered per 100 people (23 Mar) Confirmed COVID cases to 23 March 2021, 7DMA; ’000s
180 1,800
Kenya Nigeria Ghana 160 Kenya Uganda 1,600 Uganda 140 Zimbabwe Botswana 1,400
Senegal CDI economics Geopolitical CDI 120 1,200 South Africa (RHS) 100 1,000
Angola
80 800
South Africa 60 600 sia
A Senegal 40 400
20 200 Ghana
0 0
0.0 0.5 1.0 1.5 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21
Source: Our World in Data, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
MENAP
Figure 3: Frontier SSA FX has largely been more resilient Figure 4: Eurobond spreads have generally tightened
to rising UST yields SSA Eurobonds, mid Z-spread, bps
SSA FX rebased (Jan 2020 = 100), USD-LCY
160 UG TZ AO GH 4,000 CDI 28 ANGOL 28
Africa KE NG ZA ZM 150 GHANA 29 KENINT 28
NGERIA 27 SOAF 28
3,000
140 ZAMBIN 27
130 2,000
120
Europe 110
1,000
100
90 0 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21
Source: Refinitiv Datastream, Standard Chartered Research Source: Bloomberg, Standard Chartered Research Americas
Figure 5: SSA easing cycle has ended Figure 6: New SDR allocation would boost FX reserves
Policy rate, % FX reserves, USD bn
25 45
outlook End-2016 End-2018 End-2019 2021 latest Strategy
40
20 35
30
15 GH 25 20 NG 10 15
Forecasts ZM
10 KN 5 5 ZA 0
0
Kenya
Ghana
Angola
Nigeria
Zambia Uganda
Nov-17 May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 CEMAC WAEMU
Tanzania
Source: Central Banks, Standard Chartered Research Source: Central banks, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 72
Global Focus – Economic Outlook Q2-2021
Angola – Oil provides a welcome respite
overview
Global Economic outlook – Higher oil prices offer some relief
Sarah Baynton-Glen, CFA +44 20 7885 2330 Stronger oil prices are positive for Angola given its dependence on oil revenue [email protected]
Economist, Africa (over 90% of exports, 30% of GDP). With a budgeted oil price of USD 39/bbl, compared Standard Chartered Bank to our recently revised 2021 forecast of USD 65/bbl, Angola has fiscal room, although
Geopolitical this will be partly offset by weaker-than-expected oil production (1.1mb/d in February; economics
MoF 2021 forecast: 1.22mb/d). Meaningful investment in Angola’s offshore oil sector,
needed to reverse declining production, has yet to materialise but may be more
attractive at current oil prices. Angola is now likely to achieve a fiscal surplus in 2021; we change our forecast to 0.6% from -0.2% prior. We also expect a current account
surplus of 5.0% of GDP in 2021 (0.3% prior).
Diagnosed COVID cases are low, and the resumption of activity could result in Asia
Angola’s first year of positive GDP growth since 2015. Angola received its first vaccines
under COVAX in March and plans to vaccinate 53% of its population. We now expect growth of 2.3% in 2021 (previous forecast: 1.2%) and 2.0% in 2022 (0.8%).
Angola is unlikely to request restructuring under the G20 Common Framework, MENAP especially given stronger oil prices. External debt restructuring with creditors in China
and relief under the Debt Service Suspension Initiative have eased external liquidity stress, but we still see risks from 2023, when suspended debt service will start to be
repaid (see Angola – Not yet in the clear). Angola has USD 5.2bn in debt service due
in 2021, which looks manageable. The IMF views Angola’s debt as sustainable, despite debt-to-GDP above 120% in 2020. Africa
Signs of external pressure remain Higher oil prices, better external liquidity provide relief. The Angolan kwanza (AOA)
has appreciated following the central bank’s (BNA’s) domestic liquidity-tightening
measures, including a custody fee penalising banks that hold excess liquidity. We expect monetary policy to remain tight as BNA focuses on controlling inflation (2021 target: 18%;
Europe January inflation: 25.3%). As inflation started the year higher than expected, we raise our 2021 inflation forecast to 19.2% from 17.4%. We lower our USD-AOA forecasts to 680
(from 732) at end-2021, 715 at end-2022 (775) and 736 at end-2023 (798.3) given recent
AOA appreciation. We still expect depreciation pressure given external imbalances. The
spread between the official and parallel-market rate remains, but has narrowed to 760
Americas from over 800 at end-2020. Increased oil revenues from higher oil prices have not resulted in reserve accumulation: FX reserves fell to USD 14.9bn in March from USD
15.4bn post-IMF disbursement in January.
Figure 1: Angola macroeconomic forecasts Figure 2: H1 may see further AOA appreciation
Strategy
outlook USD-AOA
700
2021 2022 2023
GDP grow th (real % y/y) 2.3 2.0 3.0 600
CPI (% annual average) 19.2 12.1 8.0 500 Forecasts
Policy rate (%)* 17.50 17.50 15.00 400
USD-AOA* 680.0 715.0 736.0 300
Current account balance (% GDP) 5.0 2.0 1.8 200
Fiscal balance (% GDP) 0.6 1.3 1.5 100 Jan-18 Jun-18 Nov-18 Apr-19 Sep-19 Feb-20 Jul-20 Dec-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 73 Global Focus – Economic Outlook Q2-2021
Botswana – Putting fiscal stabilisation first
Front-loaded fiscal adjustment to weigh on recovery
Global Emmanuel Kwapong, CFA +44 20 7885 5840 Botswana is prioritising a front-loaded fiscal adjustment over support for the overview [email protected]
Economist, Africa economic recovery. Historically, Botswana – the highest-rated SSA sovereign, with Standard Chartered Bank a history of fiscal surpluses – would have reacted to external shocks with increased
fiscal stimulus. This time, a substantially weakened fiscal position owing to the pandemic has prompted the authorities to focus on fiscal stabilisation. The budget for
FY22 (ending March 2022) targets a sharp consolidation of c.8% of GDP, underpinned
economics Geopolitical by the introduction of new tax measures. These include a 2ppt VAT hike, an increase
in the fuel levy and implementation of a sugar tax. Development spending has also
been cut by c.10% relative to the projections in the October budget strategy paper.
sia We revise our FY22 and FY23 fiscal deficit forecasts to 3.2% and 3.0%, respectively A
(from 9.1% and 5.1%), on the authorities’ front-loaded fiscal adjustment plan.
We lower our 2021 growth forecast to 8.0% from 8.8%. A relatively modest fiscal
stimulus, with lower-than-expected public investment spending, will result in a smaller boost to growth than we had initially expected. The new revenue measures will also
MENAP likely hit disposable income and weigh on the recovery in domestic demand.
A quicker-than-expected recovery in diamond demand has been one of the few
positives. Diamond exports rebounded sharply in H2-2020, rising c.28% y/y after contracting c.50% in H1, helped by pent-up demand. We expect the diamond recovery
momentum to have carried over to 2021, limiting the downside risk to growth. With Africa
diamonds accounting for c.90% of exports, we lower our 2021-22 current account deficit
forecasts to 5.2% and 4.4%, respectively (from 8.2% and 5.3%).
Inflationary pressures to rise We raise our 2021-22 inflation forecasts to 4.4% and 3.7%, respectively (from 1.8%
sharply on new tax measures and 3.0%). We expect headline CPI inflation to rise sharply towards the upper bound
Europe of the Bank of Botswana’s (BoB’s) 3-6% objective range as the new tax measures take
effect from April. Inflation should peak at c.6% by June. Nonetheless, we expect the
BoB to look through price pressures, with tightening likely to start only in 2022.
Americas
Figure 1: Botswana macroeconomic forecasts Figure 2: Botswana targets sharp deficit reduction
Fiscal balance, % of GDP
outlook 6
Strategy 2021 2022 2023
4
GDP grow th (real % y/y) 8.0 5.6 3.9
2
CPI (% annual average) 4.4 3.7 2.6 0 -2
Policy rate (%)* 3.75 4.00 4.00 -4
Forecasts
USD-BWP* 11.43 11.54 11.85 -6 -8 Current account balance (% GDP) -5.2 -4.4 -3.7 -10
Fiscal balance (% GDP)** -11.6 -3.2 -3.0 -12 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 *end-period; **for fiscal year ending in March; Source: Standard Chartered Research Source: Ministry of Finance, BoB, Refinitiv Datastream, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 74
Global Focus – Economic Outlook Q2-2021
Cameroon – Moving towards recovery
overview
Global Economic outlook – Resilient
Emmanuel Kwapong, CFA +44 20 7885 5840 We remain optimistic on Cameroon’s 2021 recovery prospects, despite the [email protected]
Economist, Africa impact of COVID. We expect a strong rebound in non-oil growth, buoyed by the Standard Chartered Bank normalisation of services activity. We also expect a rebound in investment growth with
Geopolitical the implementation of the National Development Strategy 2020-30. The focus will likely economics be on the completion of ongoing infrastructure projects and the government’s reconstruction plan for the Anglophone regions and the far north. Nonetheless,
Cameroon’s withdrawal of its approval of the AstraZeneca COVID vaccine in March could delay the start of its vaccination programme, posing downside risks to the
recovery as COVID cases have been increasing.
Asia We expect real GDP growth of 3.2% Cameroon’s ability to weather the COVID shock reflects its relatively diversified in 2021 economy and the quick easing of coronavirus restrictions. Positive growth resumed in
Q3-2020 (1.0% y/y) after a modest pandemic-induced contraction in Q2 (-1.0%). The Q3 print was better than expected, driven by a quick recovery in the tertiary sector. We
expect the momentum to have continued in Q4, and we raise our 2020 growth estimate
MENAP to 0.8% (from 0.4%). We lower our 2021 growth forecast to 3.2% (from 3.6%), mainly to reflect the higher base.
A gradual fiscal consolidation path
Moderate fiscal deterioration allows The fiscal position has benefited from resilient economic activity. The Q3 budget for a more gradual fiscal adjustment execution report indicates relatively modest fiscal deterioration in the first nine months Africa path of 2020, thanks to resilient revenue mobilisation and below-target capital expenditure.
While Cameroon is classified as being at high risk of debt distress, its relatively low debt level (c.43% of GDP) and modest COVID-induced fiscal deterioration allows for a
more gradual fiscal adjustment to support the recovery.
Funding needs appear to be largely Financing pressures are set to ease amid central bank support and a likely IMF Europe covered programme. The regional central bank, BEAC, has extended its government bond
repurchase programme by a further six months from March 2021. This should allow Cameroon to meet its domestic financing needs from regional capital markets.
Formal negotiations with the IMF on a successor programme are scheduled for mid-
April, by which time the impact of the pandemic on the economy should be clearer.
Americas We expect Cameroon to have secured a new programme by Q3-2021, which should unlock further funding. An extension of the G20 Debt Service Suspension Initiative,
or a new allocation of SDRs, would further benefit Cameroon.
Figure 1: Cameroon macroeconomic forecasts Figure 2: Cameroon likely avoided a recession in 2020
Strategy
outlook Real GDP, % y/y Secondary Primary Tertiary Taxes less subsidies
2021 2022 2023 8
GDP GDP grow th (real % y/y) 3.2 4.6 4.5 6
CPI (% annual average) 2.0 2.0 2.0 4 Forecasts
Policy rate (%)* 3.25 3.50 3.50 2
0 USD-XAF* 547 521 521 -2 Current account balance (% GDP) -3.8 -3.6 -3.5 -4
Fiscal balance (% GDP) -3.8 -3.2 -3.0
Q2-18 Q3-17 Q4-17 Q1-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q2-17 *end-period; Source: Standard Chartered Research Source: INS Cameroon, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 75 Global Focus – Economic Outlook Q2-2021
Côte d’Ivoire – A series of unfortunate events
Politics – Death of the presumptive successor Emmanuel Kwapong, CFA +44 20 7885 5840 Global Politics is in focus following the death of Prime Minister Hamed Bakayoko in overview [email protected]
Economist, Africa March. The PM, who doubled as defence minister, had been out of the country on Standard Chartered Bank medical leave since mid-February. He had been appointed PM on 30 July 2020
following the sudden death of his predecessor and the ruling RHDP’s candidate for
the October 2020 election, Amadou Gon Coulibaly, earlier that month. This event
forced President Ouattara to rescind his decision not to run for a third term.
economics Geopolitical The prime minister’s death The PM’s death is likely to refocus attention on a successor to President
increases succession uncertainty
Ouattara. Hamed Bakayoko was widely expected to succeed Ouattara at the 2025
presidential election. Patrick Achi, who was appointed acting PM a few days before the
sia death of the PM, was confirmed in the role in late March. He is seen as a possible A
contender. The position of vice president remains vacant; whoever is appointed could
also be a potential successor to Ouattara.
Legislative election results boost The ruling RHDP maintained its dominance in the March legislative elections. the president’s standing The elections, in which all the major opposition parties participated, were a litmus test
MENAP of the popularity of the RHDP given that the main opposition parties boycotted the
October presidential election. The president’s standing has been strengthened by the
results, with the RHDP securing c.54% of the seats in the national assembly and
gaining ground in some opposition strongholds.
National reconciliation is likely to be We expect attempts at political reconciliation to intensify. The only opposition Africa
prioritised candidate to participate in the October presidential election, Kouadio Konan Bertin,
was appointed minister of the newly created National Reconciliation Ministry in
December and is likely to be retained under the new government of Patrick Achi. With
the legislative elections now concluded, dialogue between the government and the
main opposition is likely to gain momentum in Q2-2021. This could result in some
Europe moderate opposition elements joining the government. Former President Laurent
Gbagbo could also return to Côte d’Ivoire soon; the International Criminal Court upheld
his acquittal for crimes against humanity at end-March following an appeal by the
prosecutor. His return could boost national reconciliation, but he might require a
presidential pardon given that he still faces a 20-year jail term in Côte d’Ivoire.
Americas
Figure 1: Côte d’Ivoire macroeconomic forecasts Figure 2: Investor sentiment towards CDI remains strong
Eurobond Z-spread, bps
4,000 outlook
Strategy 2021 2022 2023
NGERIA 27 IVYCST 28
3,500
GDP grow th (real % y/y) 6.7 6.5 6.7
3,000 ANGOL 28 KENINT 28
CPI (% annual average) 2.0 2.0 2.0 2,500 GHANA 29 ZAMBIN 27
Policy rate (%)* 4.00 4.00 4.00 2,000
Forecasts 1,500
USD-XOF* 547 521 521 1,000
Current account balance (% GDP) -2.7 -2.9 -2.8 500
Fiscal balance (% GDP) -4.7 -3.8 -3.0 0 May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 76
Global Focus – Economic Outlook Q2-2021
Ethiopia – A particularly difficult quarter ahead
overview
Global Economic outlook – Restructuring and politics in focus
Sarah Baynton-Glen, CFA +44 20 7885 2330 Q2 will likely be a pivotal quarter for Ethiopia. On top of restructuring under the G20 [email protected]
Economist, Africa Common Framework, regional politics are fragile and general elections are scheduled Standard Chartered Bank for 5 June. Expected telecoms industry privatisation in Q2 is in doubt after reports that
Geopolitical the government will not proceed unless its anticipated sales value is reached. Ethiopia economics has only secured vaccines under the COVAX initiative. Vaccine rollout is likely to be challenging in a low-income, populous country of 115mn with many internally displaced
people; COVID cases have been increasing.
The IMF has welcomed Ethiopia’s In January, Ethiopia became the first Eurobond issuer in the region to request debt
request for restructuring under the restructuring under the Common Framework, aiming to reduce its risk of debt distress
Common Framework rating to moderate. Although debt-to-GDP is not particularly high (c.60%), external Asia
liquidity is very tight. Ethiopia has USD 2bn of debt service due in 2021. FX reserves
were USD 3.3bn as of September 2020. Two factors will make a difference to Ethiopia’s debt sustainability: (1) SOE debt, which is 70% of its external debt service
in 2021; and (2) negotiations with China, which accounts for c.30% of its external debt.
Pre-COVID, Ethiopia had already restructured some of its China debt. MENAP
Clarity is awaited on what the “comparable treatment” requirement will mean for private
creditors. However, given the small share of debt owed to Eurobond holders (just USD
66mn of USD 2bn of debt service in 2021), we do not expect this to be a major focus of
any restructuring. The authorities plan to approach private creditors as a last resort and
want to preserve market access. Fitch and S&P downgraded Ethiopia’s rating following Africa its Common Framework announcement, citing their view of elevated default risk.
Both domestic and regional Elections on 5 June (delayed from 2020) will be a major political test of Prime
tensions are high ahead of elections
Minister Abiy and his Prosperity Party. Given the benefits of incumbency and the lack on 5 June of a strong opposition, Abiy’s party is likely to secure victory. Following electoral reforms, including amendment of the Electoral Law and tightening of political party Europe registration guidelines, this election should be more free, fair and credible than in the past (in 2015, the ruling party won every seat). However, elections will take place
against a backdrop of severe regional unrest. Eritrean and Amharan regional forces
remain in Tigray following the government’s military intervention. While the US has
resumed aid to Ethiopia (after pausing it as a result of the conflict), it has called for an Americas international probe into potential war crimes. Separately, an agreement has yet to be reached with Sudan and Egypt on the filling of the Grand Ethiopian Renaissance Dam.
Ethiopia has rejected calls for additional mediation in the dispute.
Figure 1: Ethiopia macroeconomic forecasts Figure 2: Politics and restructuring drive Eurobond
Strategy
outlook 2024 Eurobond, YTM %
12
2021 2022 2023
Military 10 GDP grow th (real % y/y)** 2.7 6.0 6.0 intervention in
Tigray begins CPI (% annual average) 12.5 7.8 7.0 8 Forecasts
3M T-bill (%)* 1.20 2.00 2.00 6
USD-ETB* 43.70 48.00 55.00 4 Common Framework external debt 2 restructuring Current account balance (% GDP)** -5.0 -5.0 -5.0 announced
Fiscal balance (% GDP)** -3.9 -3.0 -4.0 0 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 *end-period; **for fiscal year ending 8 July; Source: IMF, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 77 Global Focus – Economic Outlook Q2-2021
Gabon – The oil price reprieve
Economic recovery plan supports medium-term outlook
Global Emmanuel Kwapong, CFA +44 20 7885 5840 The rebound in oil prices should narrow Gabon’s macroeconomic imbalances overview [email protected]
Economist, Africa following the dual shock of COVID and oil prices in 2020. Gabon remains highly Standard Chartered Bank dependent on oil (71% of exports, 33% of GDP and 35% of tax revenues). It avoided
the full impact of the oil shock in 2020 by producing more than its OPEC+ quota; oil production was down c.3% y/y, versus a c.21% contraction expected under full
compliance. While we assume a decline in oil production in 2021 given mounting
economics Geopolitical pressure on Gabon to conform with its OPEC+ quota, higher oil prices should support
the fiscal and external adjustments.
COVID-related restrictions will likely The tightening of COVID restrictions in Q1 will weigh on the 2021 recovery. While
sia weigh on the non-oil recovery the start of COVID vaccinations in March should help contain the virus, a resurgence A
of infections since the start of the year resulted in stricter COVID-related restrictions,
including expanded curfew hours. The impact on Q1 economic activity is likely to have
been significant. Consequently, we lower our 2021 growth forecast to 1.9% from 2.5%.
Gabon’s economic recovery Implementation of the recently launched three-year development plan should strategy could boost growth over
MENAP boost medium-term growth prospects. Authorities estimate that their new the medium term
Transformation Acceleration Plan (PAT 2021-23) focused on economic diversification
will cost between XAF 4.2-4.5tn (c.50% of GDP); the majority will be spent on
infrastructure. While the authorities have already secured 55% of the total funding,
mainly from external sources, obtaining the remainder will depend on implementation
Africa of reforms to boost the business environment.
A new IMF programme should help A new IMF funded programme could be agreed in Q2. With Gabon’s debt rising to
Gabon meet its funding needs c.70% of GDP in 2020, the new programme is likely to focus on safeguarding debt
sustainability. Under the PAT, the authorities intend to achieve a balanced budget; we
think this could happen by 2023. The PAT also indicates the sale of state assets
Europe (including privatisation of the state oil refinery) to reduce the debt stock. The clearance
of recently validated domestic arrears (c.3% of GDP) would likely be prioritised under a
new IMF programme, further reducing the debt ratio. A revised budget seems likely, to
incorporate higher oil prices (the initial 2021 budget benchmark oil price is USD 41/bbl),
PAT-related spending, and possible vaccine expenditure.
Americas
Figure 1: Gabon macroeconomic forecasts Figure 2: Gabon yet to comply with its OPEC+ quota
Actual production and OPEC+ production quota, kb/d
outlook OPEC quota Strategy 2021 2022 2023 250
Actual
production
GDP grow th (real % y/y) 1.9 2.9 3.5 200
CPI (% annual average) 2.5 2.0 2.5 150
Policy rate (%)* 3.25 3.50 3.50 100
Forecasts
USD-XAF* 547 521 521 50
Current account balance (% GDP) -4.6 -3.1 -3.8 0
Fiscal balance (% GDP) -2.6 -1.7 0.0 Jul-20
Oct-20
Jun-20 Jan-21
Feb-21
Aug-20 Sep-20 Nov-20 Dec-20 May-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered
Standard Chartered Global Research | 31 March 2021 78
Global Focus – Economic Outlook Q2-2021
Ghana – The long reach of the COVID crisis
overview
Global Vaccine rollout to boost growth; debt weighs on outlook
Razia Khan +44 20 7885 6914 Rising oil prices and a significant vaccination drive should boost Ghana’s [email protected]
Head of Research, Africa and Middle East growth. We raise our 2021 GDP growth forecast to 4.9% from 4.2%. In February, Standard Chartered Bank Ghana became the first country to receive vaccines under the WHO-led COVAX
Geopolitical scheme. It currently expects to receive 17.6mn doses by June and is targeting 20mn economics doses this year for its population of 31.7mn. Even so, the COVID crisis is likely to have a long-lasting economic effect. Government projections suggest that oil-sector GDP
growth may only accelerate meaningfully (reaching double digits) by 2023, partly reflecting delayed investment plans due to COVID. More importantly, rising debt levels
– debt-to-GDP reached 76.1% in 2020 – and a larger interest burden is set to limit
room for public investment in the years ahead.
Asia
Elevated debt and high interest Ghana will embark on fiscal consolidation in 2021, albeit more slowly than
costs remain the key fiscal
previously envisaged. We raise our 2021 fiscal deficit forecast to 9.8% of GDP (from challenges 8.8%). Although 2020 was an election year, the headline budget deficit (11.7%) only
narrowly exceeded revised government projections (11.4%). The primary deficit widened
to 5.3% of GDP; debt service costs made up the difference. Ghana is targeting a much MENAP smaller primary deficit in 2021, of 1.2% of GDP. Even so, elevated debt service will likely
keep the headline deficit close to double digits. In Q1-2021 the government borrowed USD
3.025bn externally (less than initially planned). Some proceeds will be for liability
management, including of more expensive domestic debt. However, addressing Ghana’s interest burden will likely remain the key fiscal challenge in the years ahead.
Africa Little room for slippage if Ghana is Ghana aims to restore compliance with the 5.0%-of-GDP fiscal deficit ceiling by 2024.
to meet its consolidation target We think this will be difficult. The 2021 budget envisages a 32% increase in revenue.
Even with measures such as a 1ppt increase in VAT, improved administration, and
levies on fuel and banks, this may be ambitious. Spending will likely remain elevated
given risks associated with the second COVID wave; it is expected to rise 13.7% above Europe 2020 crisis levels. Contingent liabilities, related to the energy sector, remain high.
Consequently, there is little room for slippage. In order to stabilise debt levels, Ghana will need to achieve a primary surplus by FY22, very soon after the initial COVID shock.
Given the likely inflationary impact of revenue-raising measures, we now no longer
expect the Bank of Ghana (BoG) to cut its policy rate in May. Any easing will likely be Americas deferred to 2022. We now see the end-2021 policy rate at 14.5% (14.0% prior).
Figure 1: Ghana macroeconomic forecasts Figure 2: Debt service is a key source of fiscal pressure
Strategy
Fiscal and C/A balances, % of GDP outlook Primary fiscal 2021 2022 2023 2 balance
0
GDP grow th (real % y/y) 4.9 5.0 4.9 -2
CPI (% annual average) 7.8 7.4 6.5
-4 Forecasts
Policy rate (%)* 14.50 14.00 14.00 -6 Overall fiscal balance
-8 USD-GHS* 6.10 6.50 6.60
Current
-10 account Current account balance (% GDP) -3.2 -3.8 -4.0 -12
Fiscal balance (% GDP) -9.8 -8.3 -7.2
2020 2012 2013 2014 2015 2016 2017 2018 2019
2022F 2023F 2024F 2021F *end-period; Source: Standard Chartered Research Note: 2021-24 fiscal figures are official projections; Source: Ministry of Finance, Bank of Ghana, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 79 Global Focus – Economic Outlook Q2-2021
Kenya – Third-wave woes
Economic outlook – IMF to help reassure on debt profile
Global Razia Khan +44 20 7885 6914 We now expect growth to accelerate to 5.3% in 2021 (prior forecast: 4.7%) given overview [email protected]
Head of Research, Africa and Middle East our revised assessment of the base. Kenya likely saw only weakly positive growth in Standard Chartered Bank 2020. Our forecasts reflect a technical recovery; revenue growth may remain weak,
and important downside risks to the economy persist. The current ‘third wave’ of COVID, the extension of the curfew, a likely constitutional referendum later in 2021,
and the 2022 elections are important risk factors. Tourism is likely to remain weak for economics Geopolitical an extended period, NPLs may rise further with the end of regulatory forbearance, and
rising oil prices are a headwind to growth. We lower our 2022 GDP growth forecast to
4.5% (from 5.5%); beyond this, we see modest growth averaging c.5.0% (weaker than
the pre-COVID trend) as fiscal consolidation efforts intensify.
sia A
Kenya received vaccines under the COVAX scheme in March (for c.0.5% of the
population), with an initial focus on inoculating health-care workers. Progress is likely
to be slow, with less than 3.0% of the population likely to be covered by June 2021.
Kenya plans to achieve 30% of population coverage by 2023.
MENAP BBI referendum in 2021 and Staff-level agreement on a three-year, USD 2.4bn IMF programme was reached in elections in 2022 raise near-term
February, following Kenya’s earlier decision to reverse COVID-related tax cuts and
risks; however, IMF programme participate in the G20 Debt Service Suspension Initiative. Despite concerns over rising
should mitigate debt concerns public debt (in 2020, the IMF changed its assessment of Kenya’s risk of external debt distress to high from moderate), we do not expect Kenya to seek debt treatment under
the G20 Common Framework. The IMF sees a multi-year fiscal consolidation, with Africa
Kenya achieving a primary fiscal surplus sufficient to stabilise debt. We remain wary of
fiscal risks given Kenya’s weak fiscal consolidation track record and a Building Bridges
Initiative (BBI) recommendation that a greater share of revenue be allocated to county
governments under proposed constitutional reforms. However, progress under an IMF
programme, and a likely SDR allocation to boost FX reserves later in 2021, should help
Europe mitigate external debt concerns.
Kenya’s external borrowing is set to rise further near-term (see Kenya – Liability
management, EUR Eurobond plans). A supplementary budget in FY21 (ends 30 June)
will be partly funded through at least c.USD 730mn of external issuance, with plans also underway to refinance a USD 2bn Eurobond due in 2024. External borrowing in
Americas FY22 may include the refinancing of a USD 3.2bn syndicated loan.
Figure 1: Kenya macroeconomic forecasts Figure 2: Technical bounce projected in 2021
Note: CPI forecasts are provisional Kenya GDP, % y/y
8 outlook
Strategy 2021 2022 2023
6
GDP grow th (real % y/y) 5.3 4.5 5.1
4
CPI (% annual average) 6.8 6.0 6.5 2 0 Policy rate (%)* 7.00 8.00 8.50
-2
Forecasts
USD-KES* 113.30 114.30 115.00 -4 -6 Current account balance (% GDP) -5.4 -5.7 -5.5 -8
Fiscal balance (% GDP)** -9.0 -7.9 -6.8
Q2-18 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q1-16 *end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: KNBS, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 80
Global Focus – Economic Outlook Q2-2021
Mozambique – Delayed but not denied
overview
Global Economic outlook – Downside risks
Sarah Baynton-Glen, CFA +44 20 7885 2330 Downside risks have emerged to our 2.3% y/y 2021 GDP forecast. A militant [email protected]
Economist, Africa insurgency near the LNG-producing area caused Total to evacuate staff in January. Standard Chartered Bank Although the project is still on schedule for 2024 production (offshore work has
Geopolitical continued even as onshore work has been suspended), further delays are a risk. The economics authorities have struggled to bring the insurgency under control. A Southern African Development Community meeting in January to discuss regional cooperation was
delayed due to COVID. The Final Investment Decision on a second, USD 30bn project, initially expected in 2020, is now unlikely until at least 2022; this is likely to push
production from this project beyond 2027.
Asia Vaccine rollout plans are in the Mozambique has experienced a resurgence of COVID cases since the end of 2020,
early stages resulting in new lockdown measures in February. Although cases have come down
since then, COVID containment and vaccine rollout remain sources of risk. The
government aims to vaccinate 16mn people by 2022, but only 1.7mn vaccines have
been secured so far. Mozambique has received vaccines under COVAX and 200,000 MENAP vaccines donated by China.
The Bank of Mozambique was the first central bank globally to hike rates in 2021,
tightening by 300bps to 13.25% in January. Inflation is low at 5.1% but has risen from
3.5% at end-2020, driven by food prices. The central bank sees upside inflation risks
from transport disruptions due to the insurgency in the north and following Cyclone Africa Eloise in January. As an oil importer, Mozambique will likely see inflation pressure from
higher oil prices as well as currency depreciation. We therefore raise our 2021 CPI
inflation forecast to 8.2% from 4.3%. Given risks to growth, we now expect the Bank of
Mozambique to pause; we raise our 2021 policy rate forecast to 13.25% from 9.5% to
reflect the January hike. Europe
Delayed discussions with the Virtual discussions with the IMF aimed at agreeing a new Extended Credit Facility,
IMF towards an ECF have now delayed from 2020, took place in March. The IMF’s view on Mozambique’s debt
taken place sustainability will be key to accessing funding. Mozambique is in debt distress, but the
IMF has previously assessed its debt as sustainable given future LNG production.
Americas Resolution of Mozambique’s undisclosed debt is likely to be a long process. A London Court of Appeal ruled in March that Mozambique’s case against Privinvest (to have the
government guarantee declared illegal) should be decided by arbitration.
Figure 1: Mozambique macroeconomic forecasts Figure 2: Confidence is not yet back to pre-pandemic
Strategy
outlook levels (INE economic confidence indicator) Economic climate indicator Hotels and restaurants
2021 2022 2023 120 Transport Industrical production
Construction GDP grow th (real % y/y) 2.3 4.0 6.2 110
100 CPI (% annual average) 8.2 5.4 4.6 Forecasts 90 Policy rate (%)* 13.25 10.50 9.00
80
USD-MZN* 80.00 82.40 84.00 70
Current account balance (% GDP) -65.0 -80.0 -68.0 60
Fiscal balance (% GDP) -8.6 -5.0 -4.5 50 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 *end-period; Source: Standard Chartered Research Source: INE, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 81 Global Focus – Economic Outlook Q2-2021
Nigeria – Higher oil, faltering reform
Economic outlook – Crawling out of recession Razia Khan +44 20 7885 6914 Global Higher oil prices should boost sentiment and growth in 2021, although Nigeria’s overview [email protected]
Head of Research, Africa and Middle East ongoing compliance with OPEC+ production cuts will likely keep oil-sector growth Standard Chartered Bank negative in H1. We still see GDP growth of 2.5% in 2021, but from a much higher base
than we had previously assumed – 2020 GDP contracted only 1.9% as growth surprised positively in Q4, driven by non-oil GDP (we had expected a 4.3% contraction
in 2020).
economics Geopolitical Higher oil prices should boost Rising COVID cases still pose a downside risk to our forecasts, although a second
sentiment, but production cuts and wave early in 2021 now seems to have tapered off. Nigeria has recorded 162,000
COVID still pose downside risks to cases so far, with c.2,000 fatalities – but ‘excess deaths’ suggest the numbers were growth
sia likely greater. Nigeria’s large population of c.200mn poses logistical hurdles to vaccine
A rollout, and achieving herd immunity could take years. Nigeria received 4mn doses
under the donor-funded COVAX scheme in March.
FX policy has been in focus, with the I&E (investors and exporters, or NAFEX) USD- NGN exchange rate allowed to trend higher to c.410. However, liquidity in this window remains poor, and modest depreciation pressure has resumed in the parallel market
MENAP despite central bank efforts to encourage more inflows through formal channels.
Nigeria’s vice president and finance minister have both confirmed plans to start using
the NAFEX rate for all official transactions, including payments to the Federal
Allocation Account Committee (FAAC), effectively harmonising Nigeria’s FX rates. This is an important condition for donor funding, including World Bank budget support; but
Africa so far, Nigeria has not devalued its official FX rate of 379. We expect higher oil prices
to give the Central Bank of Nigeria (CBN) confidence to gradually ‘reopen’ the FX
market. Higher FX reserves following an IMF SDR allocation should also help. Money-
market rates have started to adjust higher, but yields will need to be much higher to
attract renewed portfolio inflows.
Europe Authorities have indicated some Given rising inflation, we no longer expect the CBN to cut rates; we now see the
willingness to adjust FX policy; policy rate staying on hold at 11.5% this year and next (11.0% prior). The authorities
higher reserves would create have not allowed further fuel price adjustment, despite higher global oil prices and
confidence warnings from the state-owned oil company that Nigeria cannot afford fuel subsidies of c.USD 300mn a month. We raise our average inflation forecasts to 16.4% y/y for
Americas 2021 (from 13.4%) and 10.3% for 2022 (9.1%) on higher food prices and the expected
end of the fuel subsidy when union negotiations conclude.
Figure 1: Nigeria macroeconomic forecasts Figure 2: IMF SDR allocation to boost FX reserves
FX reserves, USD bn (LHS); Bonny light crude, USD/bbl (RHS)
Bonny light oil (RHS) outlook Strategy 2021 2022 2023 50
80
45 GDP grow th (real % y/y) 2.5 3.1 4.0
40 70
35
60 CPI (% annual average) 16.4 10.3 9.3 30 25 50 Policy rate (%)* 11.50 11.50 11.50
20 40 Forecasts
15 USD-NGN* 440.0 460.0 470.0 30 10 5 20 Current account balance (% GDP) -2.5 -2.0 -2.0 FX reserves 0 10
Fiscal balance (% GDP) -6.3 -6.0 -5.6
Jun-17 Jun-18 Jun-19 Jun-20
Mar-17 Mar-18 Mar-19 Mar-20 Mar-21
Dec-16 Sep-17 Dec-17 Sep-18 Dec-18 Sep-19 Dec-19 Sep-20 Dec-20 Sep-16 *end-period; Source: Standard Chartered Research Source: Refinitiv Datastream, CBN, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 82
Global Focus – Economic Outlook Q2-2021
Senegal – Flaring tensions
overview
Global Economic outlook – Rising downside risks to the recovery
Emmanuel Kwapong, CFA +44 20 7885 5840 Political risk is in focus following deadly political protests. The arrest of opposition [email protected]
Economist, Africa leader Ousmane Sonko in early March, after clashes between his supporters and the Standard Chartered Bank police, triggered days of widespread violent protests. His subsequent release under
Geopolitical judicial supervision (he is charged with rape and death threats) helped to ease economics tensions, with at least one planned protest being called off. Sonko claims that the charges are politically motivated and aimed at blocking his candidacy in the 2024
presidential election. Two major opposition figures were blocked from running in the 2019 elections because of criminal convictions that they claim were politically
motivated. Meanwhile, media reports of a potential third-term bid by President Macky
Sall have increased, with Sonko calling on the president to publicly rule out the
Asia possibility of a third term (the constitution sets a two-term presidential limit).
We downgrade our 2021 growth We lower our 2021 growth forecast to 4.9% from 5.4% to reflect increasing forecast, mainly due to the downside risks to the recovery. The government reintroduced a state of emergency
tightening of COVID restrictions in January, with curfews in two regions (including the capital), to contain a resurgence
in Q1 MENAP of the virus that began in December. While Senegal’s earlier start to its vaccination programme relative to peers (it received its first doses in February) should help to
contain the virus, the tightening of COVID restrictions likely weighed on Q1 activity.
Elevated political tensions are also likely to take a toll on growth.
Fiscal consolidation to the fore
Africa Focus on growth-friendly fiscal Fiscal policy is focused on safeguarding debt sustainability. The authorities are
consolidation targeting growth-friendly fiscal consolidation with the implementation of their medium- term revenue strategy; this includes greater emphasis on digitalisation and a
broadening of the tax base. The withdrawal of some COVID-related expenditure, and
planned rationalisation of current expenditure, should help on the spending side. However, higher oil prices could weigh on the fiscal position, as energy subsidies come Europe into effect when oil prices rise above c.USD 60/bbl. Recent social unrest might make domestic energy price increases less likely.
A new public-private partnership (PPP) law passed in February aims to simplify the PPP
framework and enhance the efficiency of public investment. This should ease the burden Americas on the government balance sheet under the second phase of the Plan Senegal Emergent (PSE II), and reduce Senegal’s reliance on government investment.
Figure 1: Senegal macroeconomic forecasts Figure 2: Vaccines should help contain virus resurgence
Strategy
outlook New COVID-19 cases, 7-day moving average
2021 2022 2023 350
300 GDP growth (real % y/y) 4.9 8.0 13.7
250 CPI (% annual average) 1.7 1.4 1.2 Forecasts 200 Policy rate (%)* 4.00 4.00 4.00 150
USD-XOF* 547 521 521 100
Current account balance (% GDP) -11.7 -10.9 -8.5 50
0 Fiscal balance (% GDP) -5.0 -4.0 -3.0 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 *end-period; Source: Standard Chartered Research Source: Refinitiv Datastream, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 83 Global Focus – Economic Outlook Q2-2021
South Africa – Bracing for a third wave
Electricity, COVID pose downside economic risks
Global Razia Khan +44 20 7885 6914 We expect 2021 growth of 3.6%, following a 7.0% contraction last year. While overview [email protected]
Head of Research, Africa and Middle East economic momentum has started to improve, we remain cautious on the outlook amid Standard Chartered Bank
persistent COVID risks. A second wave of infections likely drove negative GDP growth
in Q1 (on a q/q SAAR basis). Although the economy has since reopened, scientists anticipate that South Africa could face a more pronounced third wave later this year as
the country enters its winter months. GDP surprised positively in both Q3 and Q4-2020, economics Geopolitical helped by external demand and rising commodity prices; South Africa achieved its first
full-year current account surplus in 2020 since 2002. Our 2021 growth forecast is lower
than the 3.8% currently projected by the South African Reserve Bank (SARB). We
raise our 2022 growth forecast to 2.4% (from 2.0%) to reflect the lower base, firm sia
A commodity prices and an eventual improvement in electricity supply.
Electricity load-shedding risk to Electricity availability remains a key source of downside risk to growth. The
continue until September; power ongoing maintenance programme at state-owned electricity company Eskom means availability is a binding constraint that the risk of load-shedding will persist until September 2021 at least, with varying on growth severity. Last year, South Africa experienced a record number of power shortages
MENAP despite weak growth and COVID shutdowns. Power capacity will be tested as
economic activity continues to normalise. An emergency power round inviting bids for
production of an additional 1,845 MW of ‘emergency’ power (from both renewable and
non-renewable sources) has just concluded. However, this new supply will not be
connected to the main grid until August 2022. Africa
A fifth round of renewables bidding has also been opened. Aimed at adding an
additional 2600 MW of renewables capacity, it should close by the end of July 2021,
adding to power supply by 2023. Electricity availability is likely to remain a binding constraint on growth for some time. Currently, we do not see South Africa’s GDP
returning to pre-COVID levels until mid-2023.
Europe
South Africa’s COVID vaccination programme is proceeding slowly. South Africa
has been hardest-hit by COVID within SSA, with 1.5mn cases and 50,000 fatalities to
date. Authorities aim to vaccinate two-thirds of the population (c.40mn adults) by the end of 2021, but progress has been patchy, and new difficulties procuring vaccines
may mean that this target is missed. As of end-March 2021, only 231,000 people have Americas
been vaccinated, mostly health-care workers. The government may miss its interim
Figure 1: South Africa macroeconomic forecasts Figure 2: Fiscal plans depend on curbing wage bill
Govt compensation of employees, % of GDP
outlook 16
Strategy 2021 2022 2023
14
GDP growth (real % y/y) 3.6 2.4 2.5 12
10
CPI (% annual average) 4.2 3.9 4.5 8 6 Policy rate (%)* 3.50 4.00 5.00 4
Forecasts 2
USD-ZAR* 13.85 14.20 14.50 0
Italy
Spain
Korea
France
Mexico Greece
Current account balance (% GDP) 1.5 -0.8 -1.3 Norway
Canada
Portugal
Denmark
Germany South Africa South
Fiscal balance (% GDP)** -14.0 -9.2 -6.8 United States United Kingdom OECD- average *end-period; **for fiscal year ending 31 March; Source: Standard Chartered Research Source: OECD, South Africa National Treasury, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 84
Global Focus – Economic Outlook Q2-2021
target of vaccinating 500,000 health-care workers by end-April. Initial deliveries of the
AstraZeneca vaccine were sold to other African countries after tests suggested that overview
Global they were less effective against a new strain of COVID more prevalent in South Africa
(neighbouring countries seeing the same strain were also advised to source other
vaccines). More vaccine deliveries are expected in Q2, but South Africa may be at risk of a third wave after Easter.
Geopolitical
economics Repo rate on hold this year; fiscal consolidation underway We now expect the first repo rate We expect the repo rate to stay on hold through mid-2022; we now forecast the
hike in Q3-2022; SARB models first hike in Q3-2022 (end-2022 previously). Our non-consensus ‘on hold in 2021’ foresee more aggressive tightening view stems from our conviction that the SARB will want to keep policy accommodative
to support a still-weak economy, particularly with little room for fiscal expansion. It will
likely look through any technical jump in inflation, such as the expected rise in CPI in Asia
Q2-2021 (which will reflect a weak base, as CPI components were largely ‘imputed’
during last year’s lockdown). As an inflation-targeting central bank, the SARB will maintain accommodative policy as long as it does not see a risk of an inflation
overshoot. For now, it sees “balanced” risks to the growth and inflation outlook. However, inflation risks are building further out. Factoring higher oil prices and MENAP domestic electricity tariffs into our inflation forecasts, we see CPI inflation rising faster in the coming years – we raise our average inflation forecasts to 4.2% for 2021 (from
3.8%) and to 3.9% for 2022 (3.5%).
Although the SARB’s Quarterly Projection Model (QPM) incorporates rate hikes Africa of 25bps in Q2 and Q4-2021, we think the MPC is unlikely to deliver them (SARB
Governor Lesetja Kganyago has emphasised that the QPM is a “broad policy guide”).
We see repo rate hikes starting in July 2022, a full quarter after we expect the Fed to
start tapering its asset purchases. More rate hikes are likely in 2023, when we also expect the Fed to start tightening (SARB policy moves will be predicated on South
Europe Africa’s domestic inflation profile, not necessarily what the Fed does). We now see South Africa’s repo rate at 4.0% at end-2022 (3.5% prior) and 5.0% at end-2023. The
SARB’s QPM projects a repo rate just above 6.0% by end-2023.
Fiscal consolidation is underway; South Africa surprised markets by announcing a larger-than-expected reduction
Americas curbing public-sector pay is key to in domestic borrowing in FY22 (ends March 2022). The February budget reinforced achieving targets the government’s fiscal consolidation intent; caps on public-sector compensation are
still key to achieving narrower deficits. Drawdown of the government’s cash balances
will allow the National Treasury to cut its weekly SAGB issuance by ZAR 2.6bn from
April. A 50% reduction in the size of non-competitive auctions has already been
Strategy announced. The main positive surprise in the budget was a change in the funding outlook strategy aimed at reducing domestic debt service costs.
We expect further South African rand (ZAR) strength later this year as market volatility calms and yield-seeking flows resume. A perceived positive shift in domestic
politics, with mounting calls for ANC Secretary General Ace Magashule to step down Forecasts while a corruption trial is ongoing, would likely lead to further ZAR appreciation. The market’s interpretation of a Magashule exit is that it would strengthen the position of
reformers in the ruling party. We now see South Africa’s current account remaining in
surplus in 2021 thanks to strong export flows. We forecast a surplus of 1.5% of GDP, from a 1.8% deficit prior; we still expect a C/A deficit in 2022 as demand gradually recovers, but we now see a smaller deficit of 0.8% of GDP (2.2% prior). The SARB currently sees the ZAR as undervalued versus its long-run equilibrium value.
Standard Chartered Global Research | 31 March 2021 85 Global Focus – Economic Outlook Q2-2021
Tanzania – Transition
Economic outlook – 2021 could be tougher than 2020
Global Sarah Baynton-Glen, CFA +44 20 7885 2330 Tanzania is at a likely turning point. Following the death of President Magufuli in overview [email protected]
Economist, Africa March 2021, the key question in the coming months will be whether the new leadership Standard Chartered Bank brings a meaningful change in COVID policy and an improvement in the business
environment, both domestically and for foreign investment. Former Vice President
Samia Suluhu Hassan was sworn in as president on 19 March and will serve the
remainder of the five-year term (ends 2025). Her ability to secure broader support from
economics within the ruling CCM party will be a key challenge. Geopolitical
A surge in COVID cases at the start While much of Sub-Saharan Africa is likely to see a recovery in 2021, the outlook
of 2021 may result in containment for Tanzania is more challenging. With no containment measures since June, 2020
measures being put in place growth appears to have held up relative to economies where stringent measures were sia
A in place; official statistics suggest c.4.5% growth. We may see a change of stance
towards COVID in the coming months. Magufuli was sceptical of both COVID and
treatments for it; he declared Tanzania COVID-free in May 2020, and no containment
measures have been in place since. This appears to have reflected his own view rather
than that of the ruling party. A surge in cases, and the deaths of several high-profile Tanzanians with symptoms, suggest that the pandemic can no longer be ignored. The
new leadership may be more willing to implement lockdown measures. Tanzania has MENAP
not made plans to secure vaccines and is not listed in the initial COVAX distribution
schedule. As a result, the recovery in its tourism sector (c.15% of GDP) is likely to lag
other countries.
Signs of domestic weakness have emerged in recent months, including lower imports
Africa and slowing private-sector credit growth (2.6% y/y in January 2021 versus 11.1% in
December 2019). We therefore lower our 2021 GDP forecast to 3.2% from 4.9%.
We lower our 2021 CPI forecast to 3.3% y/y (from 3.8%) and to 4.3% in 2022 (from
5.3%) to reflect rebasing of CPI to December 2020. We still expect inflation (3.8% y/y
in January) to rise on higher oil prices, although the weight of fuels and utilities is now
Europe lower at 5.7% from 8.1%.
The current account deficit is likely to widen in 2021 after it narrowed to 1% of GDP in
2020. Lower services receipts have been offset by weak import demand and strong
gold exports, but pressure will likely return as a slow tourism recovery is combined with higher oil prices (c.25% of imports). Reserves were adequate at USD 5.2bn in January
2021 (6.2 months of imports). Americas
Figure 1: Tanzania macroeconomic forecasts Figure 2: Tourism receipts are unlikely to recover quickly
USD mn
2021 2022 2023 3,000 2018 2019 2020 outlook
Strategy 2,500
GDP growth (real % y/y) 3.2 6.0 6.6 2,000
1,500 CPI (% annual average) 3.3 4.3 5.0
1,000 3M T-bill (%)* 3.00 4.50 4.00 500 0
Forecasts USD-TZS* 2,350 2,370 2,370
Gold
Current account balance (% GDP) -4.1 -5.5 -5.5 Re-exports
exports
Otherservices
Otherminerals Travelreceipts
Fiscal balance (% GDP)** -3.4 -3.0 -2.9 Transportreceipts
Traditionalexports Othernon-traditional Manufacturedgoods *end-period; **ends 30 June (includes donor assistance); Source: BoT, Standard Chartered Research Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 86
Global Focus – Economic Outlook Q2-2021
Uganda – Oil to drive growth acceleration
overview
Global Economic outlook – Slow start to 2021, then oil
Razia Khan +44 20 7885 6914 Uganda’s near-term prospects will be determined by the Final Investment [email protected]
Head of Research, Africa and Middle East Decision (FID) on oil, expected by end-June 2021. Given recent oil price gains, our Standard Chartered Bank forecasts now incorporate a positive FID on oil. Construction of an oil pipeline, starting
Geopolitical
in late 2021, could help accelerate the economy’s gradual recovery from COVID. economics
Despite soft Q1-2021 activity following January elections, we now see c.5.0% GDP growth in 2021 (4.0% prior), with faster gains thereafter.
Further COVID-related lockdowns are not anticipated. Uganda received 964,000 vaccine doses under the COVAX scheme in March. Initial rollout to health-care workers
has been slow. Uganda hopes to secure up to 3.5mn doses from COVAX and a further
18mn from commercial sources for its population of 43mn. Downside risks to our GDP Asia
forecast would include a negative decision on oil production or a more severe third wave of COVID, interrupting the recovery.
Softness in recent growth We now see the Bank of Uganda (BoU) resuming a tightening cycle in late 2021
indicators suggests that the BoU (we previously expected this in April). Despite higher oil prices, rising portfolio inflows
MENAP may stay on hold until Q4-2021 have supported the Ugandan shilling (UGX). While the C/A deficit should widen ahead of eventual oil production, financing via FDI and portfolio investment will likely limit FX depreciation risks. A relatively stable UGX should also contain inflation. We now see
headline CPI inflation averaging 3.7% in 2021 (5.7% previously) and 4.4% in 2022
(4.8%). The BoU sees persistent spare capacity, with the output gap closing only in FY24. It recently extended COVID credit relief measures by a further six months from
Africa 1 April 2021. While oil-related developments could allow a faster recovery in headline
growth, domestic activity outside of oil-related sectors should remain subdued. The BoU likely wants to keep the policy rate low for an extended period to encourage a
recovery in private-sector lending. We now see the BoU on hold until Q4-2021, with
rate hikes of 50bps each in October and December.
Europe Weak revenue collection is still a The budget for FY22 (ending June 2022), to be presented in June 2021, may be key constraint the last before confirmed future oil receipts. While portfolio inflows have allowed comfortable deficit financing in FY21 to date, longstanding fiscal vulnerabilities remain.
The revenue base is weak, with interest payments (domestic and external) set to rise
to 23.0% of revenue in FY22. Authorities expect the public debt ratio to rise from 49.9%
Americas of GDP at end-FY21 to a peak of 54.1% in FY23, alongside Uganda’s increasing reliance on external (largely project) financing. However, the post-COVID revenue
recovery should enable the fiscal deficit to narrow starting in FY22.
Figure 1: Uganda macroeconomic forecasts Figure 2: BoU indicators point to likely Q4-2020 slowdown
Strategy
outlook BoU business tendency indicators 65
2021 2022 2023
60 GDP growth (real % y/y) 5.0 6.0 7.0
55 CPI (% annual average) 3.7 4.4 4.1 Forecasts
50 Policy rate (%)* 8.00 9.00 10.00
45 USD-UGX* 3,705 3,730 3,770 Overall index Construction Manufacturing Agriculture 40 Current account balance (% GDP) -8.7 -9.0 -9.5 Wholesale trade 35 Fiscal balance (% GDP)** -10.7 -7.5 -7.0 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 *end-period; **for fiscal year ending 30 June; Source: Standard Chartered Research Source: Bank of Uganda, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 87 Global Focus – Economic Outlook Q2-2021
Zambia – Debt restructuring, IMF & elections
Economic outlook – Difficult choices ahead
Global Razia Khan +44 20 7885 6914 Zambia’s efforts to seek debt reduction under the G20 Common Framework, and overview [email protected]
Head of Research, Africa and Middle East negotiations on a new Extended Credit Facility (ECF) with the IMF, will be key drivers Standard Chartered Bank of the outlook in the weeks ahead. Additional fiscal reforms are needed to secure an
IMF programme; whether reforms will be delivered ahead of the August presidential and parliamentary elections remains uncertain. To qualify for IMF assistance, Zambia
will also need to address its “high risk of debt distress” designation. It is currently in economics Geopolitical default on its Eurobond and other commercial debt. Although copper prices have rallied
strongly recently, we expect Zambia’s growth to remain subdued pending resolution of
its external debt overhang.
sia Despite rising copper prices, We raise our 2021 growth forecast to 3.0% (from 2.0%) to reflect a weak base; we A
Zambia – in default on its external estimate a 2.9% GDP contraction for 2020. This will be a technical recovery at best.
debt – may see only limited growth Zambia’s copper output reached an all-time high of 882,000 metric tonnes in 2020,
largely due to mining investment in prior years. Since then, relationships with key mine
investors have been increasingly strained. A comprehensive debt restructuring under the Common Framework would lend itself to the resumption of modest growth in the
MENAP years ahead, potentially creating room for future development expenditure. But any
delay in negotiations on an IMF programme could weigh on growth prospects, resulting
in a weaker medium-term growth trajectory than we currently assume.
The IMF said progress has been The IMF completed a virtual mission to Zambia in early March, stating that while made, but ‘key challenges remain’
Africa “significant progress had been made” and agreement was reached on the underlying
causes of Zambia’s macroeconomic imbalances, “key challenges” remain. The IMF
wants to see an improvement in fiscal revenue. Zambia missed its 2020 budgeted
revenue target by c.2.2%, according to the Zambia Revenue Authority. While this appears to be a favourable outcome in a COVID-impacted year, revenue targets may
have been set too low, with government finances still stretched by mounting arrears.
Europe The IMF also called for greater transparency on debt and spending, as well as an end
to domestic arrears in the fuel and electricity sectors.
While higher copper prices may help Zambia with its fiscal adjustment, the appetite for sweeping fiscal reforms – especially ahead of general elections – is
uncertain. In January, the authorities zero-rated VAT on petrol and diesel to limit further Americas
price increases (prior to that, a VAT rate of 16% had applied). The finance ministry
Figure 1: Zambia macroeconomic forecasts Figure 2: Copper rallies, but kwacha declines
LME copper cash, USD (LHS); USD-ZMW inverted (RHS)
outlook 10000 0.20
Strategy 2021 2022 2023
9000 0.18
GDP growth (real % y/y) 3.0 3.0 4.6 8000 0.16
Copper
7000 0.14 CPI (% annual average) 24.9 15.2 8.4 6000 0.12
Policy rate (%)* 14.50 14.00 12.00 5000 0.10 USD-ZMW
Forecasts 4000 0.08
inverted USD-ZMW* 24.00 24.20 24.50 3000 0.06 2000 0.04 Current account balance (% GDP) 3.0 2.0 1.5 1000 0.02 0 0.00 Fiscal balance (% GDP) -12.0 -9.0 -7.0 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 88
Global Focus – Economic Outlook Q2-2021
Fiscal measures limiting fuel price estimates that it will forgo c.USD 130mn in revenue following the zero-rating of gasoline
gains will need to be addressed and diesel, as well as a reduction in excise duties on fuel, aimed at keeping domestic overview
Global fuel prices in check. The ministry has said that the measures will have a sunset clause
and will be reviewed by year-end. However, the IMF may require a faster adjustment,
in our view.
Geopolitical Our fiscal forecasts, including a 12.0%-of-GDP fiscal deficit in 2021, are economics tentative; much will depend on progress on ECF negotiations. Should fuel ‘subsidies’ remain in place, the deficit could be wider. Other fiscal risks persist. The Zambia
Revenue Authority faced outstanding VAT refund claims of ZMW 16.6bn at end-2020 (ZMW 9.5bn, allowing for the VAT owed by the mining sector).
Publication of an updated DSA is Zambia’s FX reserves fell to USD 1.2bn (2.4 months of import cover) at the end of
Asia required before debt restructuring 2020. Its external debt stock was USD 12.7bn. In March 2021, Zambia missed its third
talks can begin Eurobond coupon payment since it froze the servicing of its external debt last year.
Under the terms of the G20 Common Framework, Zambia will now seek to negotiate
a debt reduction with all of its external creditors, adhering to the ‘comparable treatment’
principle in order to achieve a more sustainable external debt position. Given that MENAP Eurobond debt (USD 3bn) accounts for a sizeable proportion of Zambia’s USD 12.7bn
of external debt, private creditors will likely also see some reduction in the value of
their claims following any debt restructuring. Publication of an updated IMF debt
sustainability analysis would be needed for debt restructuring talks to commence. However, this is anticipated only after an IMF staff-level agreement on a new
Africa programme is reached.
Policy – Tough choices for monetary policy too
Monetary policy remains a key The Bank of Zambia (BoZ) raised its policy rate by 50bps to 8.5% at its February litmus test for progress on IMF meeting, far less than we had expected. Inflation continues to accelerate above the
Europe negotiations central bank’s 6-8% target, despite the non-adjustment of local fuel prices. Zambian kwacha (ZMW) depreciation, higher food prices, and elevated money supply growth
have all played a role in driving prices higher. (M3 money supply grew 46.4% y/y in
December; consequently, local-currency debt auctions have been better bid.)
Americas We now see inflation averaging 24.9% in 2021 (18.6% prior) and 15.2% in 2022 (13.2%). In our view, the BoZ will need to tighten policy further to curb pressure on the
ZMW, even if this initially creates a more difficult backdrop for domestic debt auctions.
We expect rate hikes of 200bps at each of the remaining MPC meetings this year (in
May, August and November), taking our year-end 2021 policy rate forecast to 14.5%
Strategy
(16.0% prior). Monetary tightening would make us more confident in the likelihood of outlook IMF funding being secured, as it would likely precede more difficult fiscal reforms. The
absence of monetary tightening might call into question the likelihood of an IMF
agreement.
With Zambia’s domestic economy weak but copper prices and output rising, we now Forecasts see an even larger current account surplus than we previously did (3.0% of GDP in 2021 versus 2.0% prior; 2.0% in 2022 from 1.5% prior). A potential increase in IMF
SDR allocations would further boost Zambia’s FX reserves. However, with a backlog
of unmet FX demand and still-vulnerable external liquidity, this may not be sufficient to limit future ZMW depreciation.
Standard Chartered Global Research | 31 March 2021 89 Global Focus – Economic Outlook Q2-2021
Zimbabwe – Ifs, ands, and buts
Economic outlook – Precarious
Global Sarah Baynton-Glen, CFA +44 20 7885 2330 Zimbabwe’s economy remains fragile. GDP contracted sharply in 2020. Given overview [email protected]
Economist, Africa better agricultural performance and relatively early vaccine rollout, we now expect Standard Chartered Bank
growth to recover to 3.0% in 2021 (from our previous -0.5% forecast). But the outlook
is uncertain and depends on the authorities’ ability to improve functioning of the FX market, lower inflation (321.6% y/y in February) and build confidence. Arrears to
multilateral and bilateral creditors mean Zimbabwe has not had access to IMF or G20 economics Geopolitical support. There has been no public progress on arrears clearance.
Vaccine rollout will be key. Renewed lockdown restrictions, implemented following a
resurgence in COVID cases at end-2020, have started to be eased after a drop in
cases. Zimbabwe began the rollout of vaccines donated by China in February (China sia
A has pledged 400,000 vaccines). The government plans to buy an extra 1.8mn doses
from China, is in negotiations with Russia, and will receive COVAX vaccines. It aims
to vaccinate 10mn people but is far from securing enough doses to be able to do so.
We increase our 2021 inflation Inflation is likely to remain high. We raise our 2021 forecast to 133.6% (from 103.2%) forecast to 133.6% (from 103.2%) to reflect recent higher prints. Zimbabwean dollar (ZWL) depreciation and higher oil
MENAP prices (Zimbabwe is an oil importer) will drive inflation, but may be offset by lower food
prices on good harvests. Given sharp inflation-driven revenue growth in Q4-2020 and a
smaller-than-expected 2020 fiscal deficit of 0.5% of GDP, we revise our fiscal deficit
forecasts to -1.5% (from -6%) for 2021 and -1.8% (from -6%) for 2022.
While we expect ZWL depreciation, The outlook for the ZWL is uncertain given the lack of consistent policy direction, but Africa this may depend on a number of pressures have been building again. As well as a clear inflation differential with key
factors, including RBZ policy
trading partners and higher oil import costs, USD-ZMW is now at c.115 in the parallel
market. We do not anticipate a meaningful change to FX liquidity. The central bank has
introduced rules to support FX liquidity, including a requirement that exporters
(including tobacco and mining) sell 40% of their foreign-currency earnings at FX
Europe auctions. Auctions currently supply only c.USD 100mn monthly. FX reserves are
extremely low; the IMF’s last update in 2020 noted that they were only c.USD 100mn,
and they have likely dropped since. Although Zimbabwe posted a current account
surplus of USD 1.1bn in 2020, this was largely due to FX shortages, remittances (USD 1bn) and USD 600mn in aid; these flows may not be repeated in 2021.
Americas
Figure 1: Zimbabwe macroeconomic forecasts Figure 2: USD-ZWL has started to depreciate again
USD-ZWL
outlook 90
Strategy 2021 2022 2023
80
GDP growth (real % y/y) 3.0 0.8 5.5
70
60 CPI (% annual average) 133.6 5.0 5.4 50 40
Forecasts USD-ZWL 104.00 108.20 112.53
30 20 Current account balance (% GDP)* -0.4 -1.2 -1.5 10
Fiscal balance (% GDP) -1.5 -1.8 -2.0 0 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 90
Economies – Europe
Global Focus – Economic Outlook Q2-2021
Europe – Top charts
Figure 1: Q4 recovery profiles varied across Europe Figure 2: PMIs signal a two-speed recovery Global
overview Q4-2020 GDP, % q/q, countries in Europe Euro-area PMIs
3 70
Manufacturing
0 60 Composite 50
-3 Services
economics Geopolitical 40
-6
30
-9
UK
Italy 20
Asia
Spain
Ireland
Austria France Poland
Croatia
Greece
Sweden Belgium
Portugal
Hungary
Denmark
Germany
Euroarea
Netherlands 10
Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 CzechRepublic
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
MENAP
Figure 3: Inflation rises on commodity price base effects Figure 4:Second-wave shock milder on the economy
UK, EA, Switzerland CPI, % y/y (LHS); Brent oil price (RHS) Euro area IP, construction output and retail sales, % y/y
4 90 10 Construction output Retail sales 80 5 Africa 3
Brent 70 0
(RHS) 2 60 -5
Industrial production EA-19 UK
50 -10
1
40 -15
0 30 -20 Europe
20 -25
-1
10 -30
Switzerland
-2 0 -35 Feb-17 Feb-18 Feb-19 Feb-20 Feb-21 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Americas
Figure 5:UK labour market weakens Figure 6: Poland outperformed CE3 and EU-27 in 2020
Employments furloughed, mn; unemployment rate, % GDP growth by quarter, % y/y
10 6.0 8 Poland outlook Strategy 9 Employments Hungary
Unemployment 5.5
furloughed 4 Millions 8 Czech Republic
(LHS) rate (RHS)
7 5.0 0 6 EU-27 5 4.5 -4 4 4.0 Forecasts 3
-8 2 3.5 1 -12 0 3.0
-16
Jul-20
Apr-20 Oct-20
Jun-20 Jan-21
Mar-20
Nov-20 Dec-20
Aug-20 Sep-20
May-20 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20
Source: HMRC, Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 92
Global Focus – Economic Outlook Q2-2021
Euro area – Cracks in the exit strategy
overview
Global Economic outlook – Focused on vaccine rollout
Christopher Graham +44 20 7885 5731 We lower our 2021 growth forecast to 3.7% (from 4.0%) owing to the slow vaccine [email protected]
Economist, Europe rollout in Europe. After an expected Q1 GDP contraction of c.1.0%, we see a return Standard Chartered Bank to growth in Q2 as lockdown restrictions gradually ease. However, the slow pace of Sarah Hewin +44 20 7885 6251
Geopolitical the EU’s vaccine rollout means the recovery is set to be weaker than we had economics [email protected] Head of Research, Europe and Americas envisaged, and could stall if restrictions need to be tightened again. Downside risks Standard Chartered Bank exist, especially in Q4-2021 and Q1-2022, when the economy could be vulnerable to Geoff Kendrick +44 20 7885 6175
[email protected] a new COVID wave – particularly if a significant minority remain unvaccinated. Weaker Global Head, Emerging Markets FX Research growth this year should provide more positive base effects in 2022, assuming the euro Standard Chartered Bank
area continues to make progress on the vaccination front and closes its output gap; we
therefore raise our 2022 GDP growth forecast to 4.0% (from 3.7%); we see growth
Asia returning to trend in 2023, at 1.3%.
Sustainable easing of restrictions The pace of recovery in 2021 will be shaped by the trade-off between near-term likely requires herd immunity economic activity and the need for virus containment. Italy, France and Germany
should be able to ease restrictions gradually by mid-Q2 as warmer weather leads to
MENAP a natural reduction in COVID-19 cases. Whether this proves sustainable will depend on how far vaccine rollout has progressed. The EU’s goal of vaccinating 70% of the adult population by mid-September is achievable but ambitious, and will require a
significant ramp-up of vaccination rates in the coming months. If this is not achieved,
any move towards full reopening over the summer months could lead to the reintroduction of tighter restrictions in Q4-2021 or Q1-2022. Fiscal support in the
Africa euro area is already set to be substantially less than in the US this year, and risks
are growing that Recovery Fund disbursements could be delayed beyond mid-2021;
this could act as a further headwind to the region’s economic recovery.
Policy – ECB can afford to wait
Europe Rate hikes are unlikely to be Deposit rate to stay put through end-2023. We think the combination of Europe’s considered until inflation weak growth outlook and subdued inflation outlook (forecasts are far from target, even
expectations pick up significantly by 2023) will cause the European Central Bank (ECB) to keep the deposit rate at -0.5%
over our forecast horizon. On the QE front, the ECB has indicated that it will increase
the pace of bond purchases in Q2 in response to the rise in market interest rates since
Americas the start of 2021. It will also monitor how financing conditions evolve in the coming months.
Figure 1: Euro area macroeconomic forecasts Figure 2: PEPP purchases to accelerate
Strategy
outlook ECB PEPP purchases, 4-week moving average, EUR bn 120
2021 2022 2023
100 GDP grow th (real % y/y) 3.7 4.0 1.3
80 CPI (% annual average) 1.5 1.3 1.8 Forecasts 60 Policy rate (%)* 0.00 0.00 0.00
40
EUR-USD* 1.20 1.26 1.26 20 Current account balance (% GDP) 2.0 2.3 2.5 0
Fiscal balance (% GDP) -6.0 -4.5 -3.0
Jul-20 Jul-20 Jul-20
Apr-20 Apr-20 Oct-20 Oct-20
Jun-20 Jun-20 Jan-21 Jan-21
Mar-20 Mar-21
Feb-21 Feb-21
Aug-20 Aug-20 Sep-20 Sep-20 Nov-20 Nov-20 Dec-20 Dec-20 May-20 May-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 93 Global Focus – Economic Outlook Q2-2021
Given the slow pace of vaccine rollout, the Pandemic Emergency Purchase
PEPP may need to be expanded by
six months Programme (PEPP) may need to be extended for six months or so beyond the current
March 2022 target date as the economy normalises. Another round of targeted long-
Global term refinancing operations (TLTROs) could be announced after end-2022 to avoid a
overview
negative market impact from a sudden stop, but likely with less favourable conditions
attached.
We expect inflation to pick up sharply in the coming months on higher energy prices,
pandemic-related supply constraints and stronger demand. Inflation may even hit 2% economics Geopolitical at some point this year; we therefore raise our 2021 CPI forecast to 1.5% (previously
1.1%). But factors driving prices temporarily higher are likely to fade given significant
slack in the economy and low wage pressures. Overall, we see headline and core
inflation staying well below the close-to-but-lower-than-2% target, in line with our own
forecasts (1.3% in 2022, 1.8% in 2023).
Asia
We maintain our view that the euro-area fiscal deficit will shrink to around 6.0% of GDP
in 2021 from c.9.0% last year, and to 4.5% in 2022 and 3.0% in 2023; that said, these
forecasts conceal a wider range of country deficits, dependent on their post-COVID
recoveries. Disbursements from the EU’s Recovery Fund had been hoped to begin in
MENAP H2-2021, on the assumption that governments would submit their reform programmes
to the EU by end-April. However, reports suggest that progress has been slow, and
some countries’ submitted programmes will need further work. This raises the risk that
disbursements could be pushed back to later in 2021 or 2022.
Africa Politics – Never a dull year
Battle to replace Angela Merkel is Germany’s federal elections and post-Brexit disputes with the UK are set to
beginning to heat up
dominate the European agenda. Germany’s federal elections in September could
prove tighter than originally expected given declining support for CDU/CSU in
national opinion polls, as seen in recent local election results. The CDU’s new leader,
Armin Laschet, is far from guaranteed to become the CDU/CSU joint candidate to Europe
replace Angela Merkel as chancellor; nor can CDU/CSU assume that it will secure a
working coalition. As the second-largest political party, the Greens look likely to be
the kingmaker at the next election, choosing whether to form a working alliance with
CDU/CSU (the most likely outcome, in our view) or pushing for a left-wing governing
coalition.
Americas
The EU is also navigating a delicate post-Brexit relationship with the UK; disputes over
vaccines, fishing and the Northern Ireland protocol have already resulted in a
deterioration in relations. The EU threat of legal proceedings against the UK in
response to perceived breaches of the trade deal agreed last year should yield a outlook
Strategy compromise in the coming months. In a worst-case scenario, however, a political over-
reaction by either side – leading eventually to a more significant economic escalation
– could cause the trade deal to begin to unravel.
Market outlook – Near-term challenges remain
Slow euro-area vaccine rollout has added to EUR negativity in Q1. As a result, we
Forecasts
expect modest further downside pressure on the EUR in the coming months. However, we expect USD weakness towards end-2021 and into 2022 on widening US external imbalances and concerns about excess reliance on fiscal stimulus and government debt. We forecast EUR-USD at 1.17 at end-Q2 and Q3-2021, before a gradual recovery to 1.20 at end-2021 and 1.22 in Q1-2022.
Standard Chartered Global Research | 31 March 2021 94
Global Focus – Economic Outlook Q2-2021
Switzerland – Back on track in 2021
overview
Global Economic outlook – An industry-led recovery
Emiko Bowles +44 20 7885 6409 We lower our 2021 growth forecast to 3.0% (from 3.6%) on account of tightened [email protected]
Research Associate restrictions and slow vaccine rollout, as evidenced in early 2021. The Swiss Standard Chartered Bank economy contracted just 3.0% in 2020, much less than its European neighbours; Christopher Graham +44 20 7885 5731
Geopolitical [email protected] growth of 0.3% q/q in Q4-2020 was led by strong investment, public consumption and economics Economist, Europe exports. Switzerland’s milder contraction was likely attributable to less severe Standard Chartered Bank restrictions and stronger export conditions. This is likely to mean a weaker bounce in Geoff Kendrick +44 20 7885 6175
[email protected] growth in 2021 from a higher base; COVID-19 dynamics since the start of 2021 could Global Head, Emerging Markets FX Research Standard Chartered Bank also weigh on growth.
New COVID variants and slow COVID infection rates and hospitalisations have fallen significantly from their Asia vaccine rollout pose downside risks November peak as a result of tighter restrictions. The government eased some of its to economic reopening
restrictions on 1 March, starting with the reopening of shops, museums and sports
facilities, but a complete reopening is unlikely while vaccination rates remain low.
Indeed, slow vaccine rollout and vaccine scepticism pose a risk of a third wave. The
government plans to inoculate 70% of Switzerland’s 8.6mn population by summer, yet MENAP only 9.7% have received their first dose so far. According to recent polling data, only
41% of people surveyed said that they would be willing to get vaccinated immediately.
The sustainability of the recovery will depend on an acceleration of the government’s
vaccine rollout. The Swiss government has postponed plans to further relax COVID restrictions in response to the recent pick-up in daily new cases.
Africa
GDP likely contracted in Q1-2021, Industrial activity is a bright spot, having been resilient throughout the second wave. despite resilient industrial activity Switzerland’s manufacturing PMI climbed to 61.3 in February, the highest since August
2018. Further, the KOF leading indicator rose to 117.8 in March from 102.7 in February,
suggesting cause for optimism (Figure 2). Nonetheless, we expect Q1-2021 GDP growth to be negative, mainly due to sharp declines in consumption and tourism. We see a more Europe
broad-based economic recovery taking hold in Q2 as restrictions loosen and services reopen. We continue to see the economy recovering into 2022, albeit with growth falling
to 2.4%, followed by a further moderation in 2023 to 1.6%.
We expect medium-term growth to be driven by a broad recovery in domestic demand Americas and a slight pick-up in investment as high levels of uncertainty subside.
Figure 1: Switzerland macroeconomic forecasts Figure 2: Robust recovery in industry
Strategy
outlook KOF leading indicator; manufacturing PMI 140 70
Manufacturing
2021 2022 2023 130 PMI (RHS) 65
GDP grow th (real % y/y) 3.0 2.4 1.6 120 60
110 55
Forecasts CPI (% annual average) 0.0 0.5 0.8 100 50 -1.25 to -1.25 to -1.25 to 90 45 Policy rate (%)* -0.25 -0.25 -0.25
80 40
USD-CHF* 0.93 0.87 0.87 70 35 60 KOF leading 30 Current account balance (% GDP) 10.0 9.7 9.4 50 indicator (LHS) 25
Fiscal balance (% GDP) -3.0 0.2 0.5 40 20 Feb-07 Feb-09 Feb-11 Feb-13 Feb-15 Feb-17 Feb-19 Feb-21 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 95 Global Focus – Economic Outlook Q2-2021
Policy – SNB expected to remain highly accommodative
SNB is willing to intervene more We expect rates to stay on hold for the foreseeable future and FX intervention to
strongly in the FX market be used when necessary. The Swiss National Bank (SNB) is likely to keep the deposit Global
overview rate at -0.75% through end-2023, and remains willing to intervene more strongly in the
FX market to counter upward pressure on the Swiss franc (CHF). SNB Vice President
Fritz Zurbruegg recently reiterated the central bank’s willingness to “go further with
both instruments, should the situation require that”; further rate cuts would need to be balanced against policy makers’ concerns about the lasting impact of negative interest
rates on the economy.
economics Geopolitical
The SNB continues to supply generous amounts of liquidity to the banking sector via
its COVID-19 refinancing facility. It also continues to utilise FX intervention to provide
further stimulus, despite the US having labelled Switzerland a currency manipulator in
Asia December. We think this stance will continue, emboldened by the perceived lower
probability of countervailing duties from the US under Biden than Trump.
Inflation is likely to turn positive by Headline inflation stagnated at -0.5% y/y in February, but is likely to turn positive by Q2 due to energy price base effects Q2 due to energy price base effects; however, inflationary pressures should remain
modest over the course of the year, particularly relative to the euro area. We therefore
MENAP maintain our average CPI forecasts for 2021 and 2022; we expect the CPI to rise in
2023 and average 0.8% y/y as it approaches trend inflation.
Switzerland’s 2020 fiscal deficit was narrower than anticipated as a result of better-
than-expected GDP growth and the under-utilisation of fiscal support programmes.
Africa Still, the deficit widened to 4.4% of GDP in 2020 from a surplus of 1.4% in 2019. We
maintain our 2021 fiscal deficit forecast of 3.0%, which reflects second-wave fiscal
support costs and the expected fall in tax revenues. We expect unemployment to peak
in 2021 before declining again in 2022, which should begin to alleviate pressure on
government support schemes.
Europe
Market outlook – Downside EUR-CHF pressures on pause
Excluding intervention, the usual scenario is for EUR-CHF to grind lower due to
Switzerland’s inflation almost always being lower than in the euro area. In the absence of large swings in local bank balance sheets, inflows from Switzerland’s trade surplus
are only ever temporarily offset by portfolio flows. This downside pressure on EUR-
Americas CHF is offset by SNB intervention, which has been the central bank’s policy tool of
choice to add stimulus at a time when the deposit rate is at a perceived floor (-0.75%).
The good news for the SNB – in the near term – is that it is getting a temporary break
from the need to intervene. Former ECB President Mario Draghi became Italy’s prime
minister on 13 February, boosting euro-area market sentiment. We expect EUR-CHF outlook
Strategy to reach a high of 1.1450 in late Q3 or early Q4 as non-resident deposits in Swiss
banks are reduced, before gradually retracing to the new soft floor around 1.08.
Forecasts
Standard Chartered Global Research | 31 March 2021 96
Global Focus – Economic Outlook Q2-2021
UK – Ahead of the curve
overview
Global Economic outlook – A credible exit strategy
Christopher Graham +44 20 7885 5731 Strong growth in 2021 and 2022 should close the UK’s output gap by late next [email protected]
Economist, Europe year. Following one of the worst economic contractions among major economies in Standard Chartered Bank 2020 (-9.9%), we expect UK GDP to rebound sharply in 2021 (4.8%) and 2022 (5.5%) Geoff Kendrick +44 20 7885 6175
Geopolitical [email protected] as the UK’s vaccine rollout is one of the world’s fastest. Our expectation of a further economics Global Head, Emerging Markets FX Research growth pick-up in 2022 is underpinned by the likely GDP contraction in Q1-2021 Standard Chartered Bank following a national lockdown to counter new strains of COVID-19. Nonetheless, with
around half of the population having already received a first vaccine dose, the government has outlined a steady roadmap for exiting lockdown restrictions in Q2. If
vaccination progress continues, we think this exit strategy should prove sustainable,
allowing a full opening of the economy by summer. Vaccines are likely to be updated Asia
periodically to counter the threat of new variants.
Household consumption should While investment is likely to pick up alongside an improving COVID-19 outlook, we
drive the economic recovery over expect consumer spending to be the primary growth driver in the coming quarters as the summer households’ excess savings built up during the last 12 months are – at least partly – MENAP drawn down. The likelihood of partial travel restrictions continuing across Europe
means that many UK households will likely vacation in the UK over the summer, further
supporting the economic recovery. As employment support schemes are scaled back
in Q3, unemployment is likely to head higher; however, we think the scale of last year’s output drop will ensure growth momentum keeps pace heading into 2022. We see
Africa growth slowing back to 1.5% in 2023 as GDP returns to its pre-crisis level and the
government edges towards more fiscal consolidation.
Early evidence points to significant We noted in January that new customs and regulatory checks at the border would likely
trade disruptions from Brexit cause significant disruptions to trade. Early evidence supports this view, with January trade data showing a sharp fall in both exports and imports from the EU. While this Europe
partly reflected pandemic restrictions in the UK and EU and pre-Brexit stockpiling, the impact was greater than observed for non-EU trade. If the data shows a more
permanent impact going forward, this would pose downside risk to our medium-term growth outlook.
Americas Policy – BoE is focused on the output gap
BoE to look through CPI spike Tentative monetary tightening is likely from late 2022. Notwithstanding the recent
this year rise in CPI inflation, we think the Bank of England (BoE) will remain focused on the
Figure 1: UK macroeconomic forecasts Figure 2: Trade disruption clear
Strategy
outlook Trade in goods, excl. precious metals, Jan 2021 vs Dec 2020 5% 2%
2021 2022 2023 0%
GDP growth (real % y/y) 4.8 5.5 1.5 -5%
-10% CPI (% annual average) 1.8 2.0 2.0 Forecasts -15% -29% -13% -20% Policy rate (%)* 0.10 0.25 0.50 -41%
-25%
GBP-USD* 1.40 1.39 1.39 -30% -35% Current account balance (% GDP) -4.0 -4.0 -3.5 -40% EU Non-EU -45% Fiscal balance (% GDP) -9.5 -5.5 -4.0 Exports Imports *end-period; Source: Standard Chartered Research Source: ONS, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 97 Global Focus – Economic Outlook Q2-2021
scale of the UK output gap this year and the prospect of higher unemployment once
government support schemes are scaled back. CPI inflation is likely to rise in the
months ahead and may even surpass the BoE’s 2.0% target, but we do not see a major
Global risk of monetary tightening in response. Instead, we think the BoE will look for signs
overview
that the output gap has closed, which could happen by end-2022. As a result, we
continue to expect the first rate hike in Q4-2022, of just 15bps, taking the base rate
back to 0.25%; we forecast a single 25bps rate hike in 2023 to 0.50%. We see a risk that the BoE could move faster in 2023, but this will depend largely on growth and
COVID-19 developments over the next few quarters. Purchases under the QE economics
Geopolitical programme are likely to be completed by late 2021 or early 2022.
Outlines of fiscal consolidation Fiscal policy looks set to remain broadly accommodative this year. The chancellor’s already presented by the chancellor
March budget statement included support schemes set to be extended to September
in most cases, and economic recovery policies aimed at supporting the retail and Asia
hospitality sectors, while also encouraging business investment. However, the
government also outlined fiscal consolidation measures, including a freezing of income
tax thresholds and a corporation tax hike in 2023 to 25% from 19%, on top of the public-
sector wage freeze already announced. We think that this year’s support measures will
result in a slightly larger fiscal deficit than we previously envisaged (9.5% of GDP, up
MENAP from 8.5%); we still see the deficit narrowing to 5.5% next year on account of stronger
growth and tightening measures.
Politics – Holyrood vs Westminster
Scottish independence referendum Scottish independence in focus. Scotland’s First Minister Nicola Sturgeon made
Africa unlikely this year clear in January that she would push for an advisory referendum on independence if
the Scottish National Party (SNP) secures a majority in May’s Holyrood elections,
whether Westminster consents or not. Challenges to her leadership over the
investigation into complaints against former SNP leader Alex Salmond risk weighing
on her leadership credentials and the SNP’s election prospects; while we have seen a
dip in SNP support in recent months, polls still suggest they are likely to win in May. Europe
This would set the scene for a face-off between Westminster and Holyrood later in the
year. With recent polling pointing to a fall in support for independence in Scotland, the
UK government could be tempted to allow another referendum; but we think it is more
likely to push back against its legitimacy, setting up a potentially long-running legal
battle in the UK courts.
Americas
Tensions with the EU are also rising on several fronts. Disputes over vaccines, fishing
quotas and the implementation of the Northern Ireland protocol erupted between the
UK and EU in Q1; the EU has commenced legal proceedings over the Northern Ireland
protocol. Our base case is that a compromise will be found and the existing trade deal outlook
Strategy will survive. However, with other disputes – including over vaccines – still simmering,
we do not rule out a political over-reaction by either side, leading to a more significant
economic escalation further down the line.
Market outlook – Back to neutral
Easy GBP gains are likely behind We expect the most important drivers of the British pound (GBP) in 2021 to be (1) Forecasts
us; other drivers are likely to be declining UK productivity as the drain from the City of London results in highly less supportive going forward productive finance being replaced with less productive sectors; and (2) valuation- related factors, as the GBP’s recovery has closed most of the undervaluation gap from 2020. We believe that GBP gains are capped for now, and we maintain our flat forecast profile of 1.40 from now through end-2021.
Standard Chartered Global Research | 31 March 2021 98
Global Focus – Economic Outlook Q2-2021
Czech Republic – Infection rates soar
overview
Global Economic outlook – Recovery to begin in H2-2021
Emiko Bowles +44 20 7885 6409 We lower our 2021 growth forecast to 3.5% (from 4.2%), as the deterioration in the [email protected]
Research Associate COVID-19 situation has led to tighter restrictions, which will act as a headwind to H1 Standard Chartered Bank growth. Given the severity of the third wave, authorities are likely to ease COVID- Christopher Graham +44 20 7885 5731
Geopolitical [email protected] related measures only cautiously over the coming months. However, if the shutdown economics Economist, Europe of industry can be avoided, stronger manufacturing and exports should cushion the Standard Chartered Bank negative economic shock from further restrictions. We expect other areas of the Geoff Kendrick +44 20 7885 6175
[email protected] economy – retail and services – to start to recover from end-Q2 as restrictions are Global Head, Emerging Markets FX Research Standard Chartered Bank loosened and domestic and external demand strengthens.
Hard data points to weakening Q1 Despite the surge in COVID-19 infection rates, the economy grew 0.6% q/q in Q4- Asia
economic activity 2020, driven largely by automotive-sector exports. However, hard data points to
weakening economic activity in Q1-2021. Industrial production grew 0.9% y/y in
January, slowing from 2.5% in December, as companies faced supply-chain
disruptions. Further, the shutdown of retail and services has continued to weigh on
consumption, with retail sales down 8.0% y/y in January. We expect consumption to MENAP pick up towards end-Q2 as shops and businesses reopen and pent-up savings are
partly drawn down. We forecast growth of 3.7% in 2022 and 2.2% in 2023 as the
economy returns to trend.
Pace of vaccinations rises, but Slow vaccine rollout and vaccine scepticism pose major downside risks to our outlook. vaccine scepticism remains Only 10.1% of the population has received at least one dose of the vaccine. The recent Africa elevated
pick-up in the pace of inoculations provides some cause for optimism; given the current rate, we expect half of the population to have been offered their first dose by end-July.
However, willingness to get vaccinated remains low in the Czech Republic: December
polling data found that only 40% of the those surveyed would willingly be vaccinated, among the lowest in Europe. As is the case in other EU countries, the sustainability of Europe
the Czech Republic’s exit from lockdown restrictions will depend on vaccination rollout progress over the coming months.
Policy – Rate normalisation to begin in H2-2021
Americas We expect one rate hike in 2021 We forecast one rate hike this year, in H2. The Czech National Bank (CNB), at its February policy meeting, announced its intention to start hiking rates in the latter half
of the year as inflation returns to target and the adverse effects of the third COVID
wave subside. However, the ensuing deterioration in the domestic COVID-19 situation,
Figure 1: Czech Republic macroeconomic forecasts Figure 2: Will the third wave be the last?
Strategy
outlook Daily new confirmed COVID-19 cases per million people 1,400
2021 2022 2023
1,200 GDP growth (real % y/y) 3.5 3.7 2.2
1,000 CPI (% annual average) 2.5 2.0 2.0 Forecasts 800 Policy rate (%)* 0.50 1.25 1.50 600
USD-CZK* 20.83 20.12 20.10 400
Current account balance (% GDP) 1.0 0.5 0.5 200
0 Fiscal balance (% GDP) -5.0 -2.5 -2.0 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 *end-period; Source: Standard Chartered Research Source: Our World in Data, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 99 Global Focus – Economic Outlook Q2-2021
plus rising infection rates in many countries in Europe, suggests that monetary
conditions may need to remain accommodative for longer. For now, we expect one
25bps rate hike in H2-2021 and 75bps of hikes in 2022. In the event of a stronger-than-
Global expected rebound this year, the CNB may consider two hikes by year-end. In either
overview
scenario, we forecast a total of 100bps of rate hikes by end-2022.
We maintain our 2021 inflation We maintain our 2021 average inflation forecast at 2.5% y/y, despite the likely negative forecast, as higher oil prices are demand impact of COVID-19. Although headline inflation eased to 2.1% y/y in
likely to offset the COVID impact February from 2.2% in January, recent commodity price spikes suggest that the economics Geopolitical inflation outlook has shifted higher. In addition, we expect higher oil prices to push fuel
prices up further in the coming months.
Many fiscal support policies have been extended amid the second and third COVID-
19 waves and the reintroduction of restrictions. Despite government job-support Asia
programmes, unemployment rose to 4.3% in February 2021 from 3.0% in February
2020. Most fiscal support measures are expected to be phased out in 2021, which is
likely to lead to higher unemployment and depress incomes. However, sizeable EU
grants and proceeds from the new EU Recovery Fund should partly offset these
negative effects. Recipient countries are required to submit green and digital-friendly
MENAP national recovery plans to the European Commission by end-April; if they are
approved, disbursements from the EU will start in H2-2021. The Czech Republic
stands to receive EUR 7.1bn in grants through to 2026.
The Czech Republic’s current account surplus likely expanded above 3.0% of GDP in
2020 on stronger-than-average goods exports. We expect the current account to Africa
remain in surplus from now until 2023; import demand is likely to be relatively subdued
in 2021, so we revise our surplus forecast to 1.0% of GDP from 0.2%. As import
demand gradually improves, we now see the surplus shrinking to 0.5% in both 2022
and 2023 (we previously expected 0.2% in both years).
Europe Politics – As elections loom, Babis’ popularity falls
Failure to gain control of the Legislative elections on 8-9 October will be a major test of Prime Minister (PM)
pandemic causes Babis’ popularity Andrej Babis’ hold on power. According to recent polling data, support for Babis’
to fade minority government plunged to around 21% as it struggled to contain one of the
world’s worst COVID outbreaks. The PM faces criticism from those who argue that too
Americas little has been done to stem the pandemic, as well as those who feel that restrictions
have been too tight. Meanwhile, support for the newly formed alliance between the
Pirate Party and the Mayors and Independents party (STAN) is around 30%, according
to recent polls – with clear potential to defeat Babis’ ANO party in October. However,
support could flow back towards ANO by then if COVID-19 concerns fade because of outlook
Strategy progress on vaccine rollout and declining infections.
Market outlook – Fundamentals remain supportive of CE3
CE3 currencies have faced renewed pressure amid the latest wave of COVID-19 infections. While this is unlikely to change in the near term, we are more optimistic
over the medium term as fundamentals – industry, manufacturing and exports – remain
Forecasts
supportive. Trade balances in the region continue to improve, helped by a faster recovery in exports relative to imports. We expect the correlation between CE3 currencies and the Chinese yuan to remain strong as China’s rapid economic recovery continues to create positive spillover to the region via trade. We see EUR-CE3 crosses drifting lower as external demand improves from current low levels.
Standard Chartered Global Research | 31 March 2021 100
Global Focus – Economic Outlook Q2-2021
Hungary – A delayed recovery
overview
Global Economic outlook – Third-wave headwinds
Emiko Bowles +44 20 7885 6409 We maintain our below-consensus growth forecast of 4.0% for 2021 on account [email protected]
Research Associate of the worsening COVID-19 outlook, a strong headwind to growth in the coming Standard Chartered Bank months. The stronger-than expected end to 2020 – with GDP growth surprising at 1.4% Christopher Graham +44 20 7885 5731
Geopolitical [email protected] q/q – was followed by a rapid resurgence of COVID cases in early 2021. In response, economics Economist, Europe authorities announced a new round of strict lockdown restrictions, many of which will Standard Chartered Bank be in place until early April at least, or potentially later in Q2, in our view. Geoff Kendrick +44 20 7885 6175
[email protected] Global Head, Emerging Markets FX Research Standard Chartered Bank Industrial activity was weak heading into 2021; while industrial production turned
positive in January, rising 0.2% m/m, it remains 2.8% below last year’s level. Supply-
Industry weakens due to supply- side constraints, particularly in the automotive sector, have depressed economic Asia side constraints and lockdown activity so far this year. At the same time, the manufacturing PMI has fallen below 50 restrictions
after four consecutive months of contraction. We expect industrial activity to remain
sluggish in the near term given supply-side constraints and as virus containment
measures hold back a full recovery.
MENAP Hungary’s retail outlook is also weak. Retail sales improved month-on-month in
January but fell 1.8% y/y. We expect retail trade and services in general to continue to
struggle given recent closures of most non-essential shops and businesses. However,
we see consumption picking up by late Q2 or early H2-2021 as restrictions are
gradually loosened in line with progress on the vaccine rollout.
Africa
Hungry emerges as an EU leader in Hungary has emerged as a frontrunner within the EU in terms of COVID-19
vaccination rollout vaccinations, thanks to its efforts to seek vaccine doses both within the EU and
externally. First doses have been administered to 20% of Hungary’s 9.7mn
population, significantly above the EU average of 11%. At the current rate of rollout, half of the population should have received their first dose by end-May. While newer, Europe more transmissible variants are straining Hungary’s health-care system, the
combination of tightened lockdown restrictions and vaccination rollout progress
should start to bring infections under control by mid-Q2, when we expect a more
sustainable economic recovery to emerge. This will be particularly important for
Hungary’s tourism sector, which is reliant on a recovery in tourist numbers over the Americas summer.
Figure 1: Hungary macroeconomic forecasts Figure 2: Infections soar, while vaccinations pick up
Daily new COVID-19 cases per million people; daily vaccine
Strategy
outlook doses administered per 100 people, 7-day MA 900 New vaccinations 0.7
2021 2022 2023 800 (RHS)
0.6
x10000 GDP grow th (real % y/y) 4.0 4.0 2.7 700
Daily new COVID-19 cases 0.5 600 CPI (% annual average) 3.5 3.0 3.0 (LHS) Forecasts 500 0.4 Policy rate (%)* 0.75 0.90 0.90 400 0.3
300 USD-HUF* 300 280 282 0.2 200 0.1 Current account balance (% GDP) 0.3 1.0 1.5 100
Fiscal balance (% GDP) -6.0 -4.5 -3.5 0 0.0 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 *end-period; Source: Standard Chartered Research Source: Our World in Data, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 101 Global Focus – Economic Outlook Q2-2021
Policy – NBH is turning hawkish
We expect base rate hikes to 0.90% We forecast one 15bps rate hike from the Hungarian central bank (NBH) by
by end-2022, from 0.60% currently end-2021, taking the base rate to 0.75% (from 0.60%) followed by another 15bps Global
overview hike in 2022 to 0.90% by end-2022. The pace of monetary tightening will depend
largely on how the COVID-19 situation develops, as well as inflation dynamics in
the coming quarters; we expect the NBH to closely watch infection rates both
domestically and in the rest of Europe.
CPI could reach 4.0% in Q2-2021 Headline inflation jumped to 3.1% y/y in February (from 2.7% in January) as fuel prices economics Geopolitical before trending towards the central rose on the back of higher energy prices. We expect a temporary inflation spike in Q2,
bank’s target largely as a result of energy price base effects. We maintain our 2021 inflation forecast
of 3.5%, but we see upside risks to our outlook. Temporary supply-side constraints are
likely to feed into consumer prices in the coming months, as demonstrated by the 6.6%
Asia y/y rise in producer prices in January. However, we expect the near-term spike in
inflation to be short-lived; prices should head towards the NBH’s target inflation rate of
3.0% y/y by end-2022.
We expect ongoing fiscal support throughout 2021, as evidenced by the record deficit
in February. The government’s new recovery plan aims to support the domestic
MENAP economy via wage subsidies, freezes on loan repayments, and tax cuts for SMEs.
Weakening economic activity, combined with increased fiscal spending due to ongoing
closures, will put additional pressure on the fiscal deficit. We therefore increase our
2021 deficit forecast to 6.0% of GDP from 4.5%; however, early economic reopening
and a stronger-than-expected H2-2021 could result in a smaller deficit. We see the
Africa deficit shrinking to 4.5% in 2022 (previous forecast: 3.0%) and 3.5% in 2023 as the
economic recovery continues.
Hungary’s current account (C/A) balance showed a slight surplus at end-2020;
stronger-than-expected exports and weak import demand in H2 outweighed the
deterioration in services exports due to the shutdown of tourism. We lower our forecast Europe
for the 2021 C/A surplus to 0.3% of GDP (from 2.2%). Our below-consensus forecast
reflects the worsening COVID outlook across Europe, which could dampen export
demand and limit tourism this year, and sluggish industrial production. We expect the
C/A surplus to improve to 1.0% in 2022 (prior forecast: 2.4%) and 1.5% in 2023 (0.5%),
helped by EU funding and the return of tourists.
Americas
Market outlook – Fundamentals remain supportive of CE3
CE3 currencies have come under renewed pressure amid the latest wave of
COVID-19 infections. Ongoing pressure is likely in the near term, but we are more
optimistic over the medium term as fundamentals – industry, manufacturing and outlook
Strategy exports – remain supportive. Regional trade balances continue to improve, helped
by a faster recovery in exports than imports. We expect the correlation between
CE3 currencies and the Chinese yuan to remain strong as China’s rapid economic
recovery continues to create positive spillover to the region via trade. We see EUR-
CE3 crosses drifting lower as external demand improves from current low levels.
Forecasts
Standard Chartered Global Research | 31 March 2021 102
Global Focus – Economic Outlook Q2-2021
Poland – Resilience amid new COVID wave
overview
Global Economic outlook – Robust recovery delayed to H2-2021
Emiko Bowles +44 20 7885 6409 We forecast GDP growth of 3.5% in 2021; weaker consumption is likely to temper [email protected]
Research Associate strength in industrial activity in H1 owing to the deterioration in the COVID-19 Standard Chartered Bank situation early this year. We increase our medium-term growth forecasts to 4.0% for Christopher Graham +44 20 7885 5731
Geopolitical [email protected] 2022 (from 3.2%) and 3.5% for 2023 (from 2.7%) on account of stronger global trade economics Economist, Europe flows and our view that fiscal policy will remain broadly accommodative, particularly in Standard Chartered Bank light of EU Recovery Fund disbursements. Household consumption should be the main Geoff Kendrick +44 20 7885 6175
[email protected] growth driver, but we also expect solid contributions from government consumption Global Head, Emerging Markets FX Research Standard Chartered Bank and investment.
Poland was the most resilient CE3 economy in 2020, contracting just 2.7%, Asia compared with 5.5% in the Czech Republic and 4.8% in Hungary. Authorities were
largely successful at containing the COVID second wave; however, the gradual
easing of restrictions announced in mid-February 2021 resulted in a sudden surge
in new cases. This has led to the re-imposition of tighter restrictions, which are
likely to weigh on economic activity in H1. The pace of vaccinations has also been MENAP slow; just 10% of Poland’s 38mn population has had a first dose, slightly below the
EU average of over 11%. As is the case across the EU, vaccine rollout will be the
primary factor dictating the pace and shape of the recovery.
Industrial resilience is supporting Household consumption has been weak as a result of periodic lockdowns. Retail the economic recovery sales growth rebounded to 4.0% m/m in February from a 24.6% contraction in Africa
January; on a y/y basis, however, retail sales contracted 2.7%. We expect retail and services to continue to struggle, as the country re-entered national lockdown on 20
March. Consumption should start to recover by mid- to late Q2 as vaccine rollout
continues, restrictions are loosened and fiscal policy remains supportive. Industrial production growth, on the other hand, recovered to 2.7% y/y in February – despite Europe
supply-chain issues in the automotive sector – after negative growth in previous months. The manufacturing PMI strengthened to 53.4, its highest level since June
2018. We expect manufacturing to continue to support output for the rest of 2021.
Americas
Figure 1: Poland macroeconomic forecasts Figure 2: Industry leads the economic recovery
Strategy
outlook Industrial production and retail sales, % y/y 15
2021 2022 2023 Industrial production
10 GDP growth (real % y/y) 3.5 4.0 3.5
5
CPI (% annual average) 3.0 2.5 2.5 0 Forecasts
-5 Policy rate (%)* 0.10 0.50 1.00 Retail sales -10
USD-PLN* 3.50 3.39 3.40 -15
Current account balance (% GDP) 2.2 1.5 1.0 -20
-25 Fiscal balance (% GDP) -5.0 -1.9 -1.5 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 103 Global Focus – Economic Outlook Q2-2021
Policy – Accommodative amid worsening COVID situation
We forecast monetary tightening We expect the National Bank of Poland (NBP) to leave rates unchanged in
starting from 2022 2021. We forecast 40bps of hikes in 2022 as Poland closes the output gap left by Global
overview COVID-19 and returns to pre-pandemic GDP levels. The pace of policy tightening
is likely to be gradual in the coming years, as reiterated by monetary policy council
member Gatnar. We expect a further 50bps of hikes in 2023, taking the central
bank rate to 1.00%. Near-term, the NBP intends to continue to purchase government assets in the secondary market to maintain favourable liquidity
conditions. It has also stressed its willingness to intervene in the FX market if economics
Geopolitical necessary.
We expect inflation to rise Inflation has fallen steadily from its pre-COVID (February 2020) peak of 4.7% y/y.
throughout 2021 before moderating Headline inflation eased to 2.4% y/y in February 2021. At the same time, PPI in 2022
Asia inflation rose to 2.0% y/y, having been negative for much of 2020. Temporary cost-
push factors are likely to feed into consumer prices in the coming months. We
maintain our 2021 inflation forecast of 3.0%, as prolonged COVID restrictions are
likely to keep domestic demand subdued throughout H1-2020. We expect inflation to moderate to 2.5% in 2022 as temporary factors such as energy price base
effects recede.
MENAP
On the fiscal front, we see continuing support in 2021. The government’s more targeted
fiscal response to subsequent waves of the pandemic should support the sectors most
directly affected by the new restrictions. On top of this, Poland stands to benefit from
EUR 23.9bn in EU grants from the new EU Recovery Fund. By end-April, Poland is
Africa expected to submit green and digital-friendly national recovery plans to the European
Commission; a 13% pre-financing payment will be made available this year, if
approved. Poland will be able to draw on these funds until 2026, up to twice a year.
Poland’s current account surplus increased sharply in 2020 to over 3.0% of GDP as
domestic demand was subdued while industrial activity remained more resilient to the Europe
impact of COVID-19. We expect the surplus to moderate in 2021 as restrictions are
eased and a demand recovery leads to higher imports; we revise our 2021 current
account forecast to 2.2% of GDP from -0.1%, and we now expect surpluses of 1.5% in
2022 (previous forecast: 0.0%) and 1.0% in 2023 (0.5%).
Americas Market outlook – Fundamentals remain supportive of CE3
CE3 currencies have come under renewed pressure amid the latest wave of
COVID-19 infections. This is unlikely to change near-term; however, we are more
optimistic over the medium term as fundamentals – industry, manufacturing and
exports – remain supportive. Regional trade balances continue to improve, helped outlook
Strategy by a faster recovery in exports than imports. We expect the correlation between
CE3 currencies and the Chinese yuan to remain strong as China’s rapid economic
recovery continues to create positive spillover to the region via trade. We see EUR-
CE3 crosses drifting lower as external demand improves from current low levels.
Forecasts
Standard Chartered Global Research | 31 March 2021 104
Global Focus – Economic Outlook Q2-2021
Russia – Modest recovery expected
overview
Global Economic outlook – Fundamentals to pick-up in H2-2021
Emiko Bowles +44 20 7885 6409 We maintain our GDP growth forecast of 3.2% for 2021 as the pace of [email protected]
Research Associate vaccinations picks up and household and business sentiment improves. GDP Standard Chartered Bank contracted 3.1% in 2020, much less than expected. As a result, we see GDP returning Christopher Graham +44 20 7885 5731
Geopolitical [email protected] to its pre-crisis level by end-2021. Moderate restrictions in Q4, strong manufacturing economics Economist, Europe performance, fiscal budget support and favourable export dynamics have all helped to Standard Chartered Bank ease second-wave shocks to the economy and should continue to support economic Philippe Dauba-Pantanacce +44 20 7885 7277
[email protected] activity ahead. Senior Economist | Global Geopolitical Strategist Standard Chartered Bank
COVID infection rates have fallen steadily from their December peak, enabling most Geoff Kendrick +44 20 7885 6175 [email protected] lockdown restrictions to be lifted. While the current trend in cases and deaths Asia Global Head, Emerging Markets FX Research Standard Chartered Bank appears encouraging, much depends on successful vaccine rollout. Authorities plan
to administer first doses to 14% of the population by end-Q1. So far, only 4.7% have
Slow vaccine rollout poses had their first dose. Vaccine scepticism is a cause for concern: a recent poll by Ipsos
downside risk to the economic found that less than half of Russians are willing to be vaccinated. On the current
recovery trajectory, herd immunity is unlikely to be achieved before winter. As such, periodic MENAP restrictions may be required to control the pandemic.
Industry performance remains The industrial-sector recovery has been variable since the beginning of 2021, with
variable, while consumer demand
industrial production contracting 3.7% y/y in February, despite the manufacturing
picks up PMI remaining above 50 in both January and February. We expect an improvement in the coming months, particularly as external demand continues to recover. At the Africa
same time, consumer demand is improving, potentially in response to the brighter COVID outlook.
Higher inflationary pressures could dampen consumer spending further down the
Europe line. However, assuming that COVID-related restrictions are not tightened further
and vaccine rollout continues to pick up pace, we expect both consumption and
industrial activity to support growth this year. Medium-term growth should be
supported by recovering investment, stable domestic demand and rising external
demand. However, once the economy recovers to pre-pandemic levels, we expect
Americas growth to moderate back to 2.5% in 2022 and 2.2% in 2023.
Figure 1: Russia macroeconomic forecasts Figure 2: Demand shows signs of recovery
Strategy
outlook CPI and industrial production (% y/y) 8 8
2021 2022 2023 Industrial production (RHS) 6
7 GDP growth (real % y/y) 3.2 2.5 2.2 4
6
2 Forecasts CPI (% annual average) 4.3 3.5 3.0 5 0 4 Policy rate (%)* 5.00 5.50 6.00 -2 3
-4 USD-RUB* 75.0 75.0 76.5 2 CPI (LHS) -6 Current account balance (% GDP) 2.0 3.0 3.5 1 -8 0 -10 Fiscal balance (% GDP) -2.5 -0.5 0.5 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 *end-period; Source: Standard Chartered Research *end-period; Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 105 Global Focus – Economic Outlook Q2-2021
Policy – CBR heads towards neutral monetary policy
CBR expected to hike by another The Central Bank of Russia (CBR) is likely to continue to hike rates this year. The 50bps in 2021, bringing base rate sharp rise in headline inflation has pushed the CBR back into tightening mode; it
Global to 5.00%
overview surprised markets with a 25bps hike in March and recently hinted at 125bps of hikes
in 2021. We think overall tightening is likely to be less aggressive than this, but we still
expect at least one more 25bps hike in H1-2021 and another in H2. This would take
the base rate to 5.00% by year-end (we previously forecast 4.25%). We forecast another 50bps of hikes in 2022, taking rates to 5.50%. The CBR could go further and/or
faster than this, depending on inflation dynamics this year, the pace of the economic economics Geopolitical recovery, global commodity prices and the evolving COVID-19 situation.
Inflation should peak by mid-2021 Headline inflation rose to 5.7% y/y in February on positive base effects, higher
government spending, rising global commodity prices and stronger consumer spending.
PPI inflation has also recovered, reaching 6.7% y/y in January. We expect inflation to
Asia peak in the coming months and gradually moderate for the rest of the year. However, the
recent spike is sufficient to prompt us to raise our 2021 average inflation forecast to 4.3%
(from 3.5%), above the CBR’s target of 4.0%; we now expect inflation to slow to an
average of 3.5% in 2022 (3.0% previously).
On the fiscal front, we expect government spending to remain accommodative in 2021,
MENAP to avoid a sharp contraction in fiscal support ahead of parliamentary elections
scheduled for September. We maintain our end-2021 fiscal deficit forecast at 2.5% of
GDP, as higher oil revenues are likely to be matched by increased fiscal spending
ahead of legislative elections in September.
Politics – Sanctions and elections Africa
The US and EU recently imposed The closing of space for domestic dissent marks a turn in Russian politics;
further sanctions on Russian various local NGOs have likened the current situation to the end of the Soviet era.
officials and entities Internationally, relations with the West are increasingly strained. Both the US and
Europe imposed supplementary sanctions against senior Russian officials and entities
in March. The US indicated that it might add more in the future, although we do not
Europe think that systemic sanctions are likely at this point.
Legislative elections are scheduled for mid-September; at stake are 450 seats in the
lower house of the Federal Assembly. Putin’s ruling party, United Russia (UR), and its allies currently control c.90% of the assembly. Support for UR has dropped to an eight-
year low of around 30%. The Communist Party (CPRF) and the Liberal Democratic
Americas Party (LDPR) follow with 12% and 10% of support, respectively. Still, the election is
unlikely to bring any surprises. UR is expected to retain its supermajority, with a
possibility that Putin could exercise stronger control over the election outcome (see
2021 – Electoral heatmap).
Market outlook – Resilient, despite sanctions risk
outlook Strategy
Rising sanctions risk is keeping the Russian rouble (RUB) under pressure. If
existing OFZ bond holdings were to be sanctioned, the RUB would suffer sharply (85%
of the USD 73bn of foreign-owned Russian bonds are held by US- and Europe-based investors). However, the likelihood of such sanctions being imposed remains very low, in our view; they would damage not only Russian, but also US and European,
investors. If OFZ sanctions are implemented, we think they will be limited to new
Forecasts
issuance, which would limit RUB weakness. Further, Russia’s high reserves provide an additional line of defence if the RUB weakens substantially. Thus, we think that the fundamental case for the RUB remains strong; until new sanctions are imposed, the RUB is likely to continue to lag oil prices.
Standard Chartered Global Research | 31 March 2021 106
Economies – Americas
Global Focus – Economic Outlook Q2-2021
US and Canada – Top charts
Figure 1: US spending on goods soared as services stalled Figure 2: Strong US housing starts and investment Global
overview Consumer spending volumes (Jan 17=100) and USD tn, Housing starts, mn (SAAR); non-defence capital goods
SAAR; as of Feb-2021 shipments, ex-aircraft, USD bn
150 72 1.7 USD 1.8tn 1.6 140 Durable goods 70 Core capital goods 1.5
130 68 economics
Geopolitical shipments (LHS) 1.4 120 USD 3.2tn 66
1.3
110 Non-durable 64 1.2 goods 100 62
Asia 1.1 USD 9.8tn Housing starts
90 60 (RHS) 1.0 Services
80 58 0.9
Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 Feb-21
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
MENAP Figure 3: US inflation likely to break above target in the Figure 4: US unemployment rate is falling, but labour
coming months participation has not recovered since August 2020
Core PCE deflator, actual and our forecasts, % Unemployment rate, labour participation rate, %
2.5 2021 forecasts 64 15
Africa Target: 2% 2.0 12
63
1.5 Unemployment rate 9
62 (RHS) 1.0 6
Europe Participation rate 0.5 61
(LHS) 3
0.0
60 0
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21
Q1-10 Q1-11 Q1-12 Q1-13 Q1-14 Q1-15 Q1-16 Q1-17 Q1-18 Q1-19 Q1-20 Q1-21
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Americas
Figure 5: A narrower US-China trade deficit, but overall Figure 6: Canada’s business sentiment jumps
US trade deficit has continued to widen CFIB business barometer, index, STCA manufacturing new
Goods trade balance, USD bn orders, CAD bn
-50 -20 70 CFIB business outlook
Strategy barometer
US bilateral
-60 deficit with -25 60 China, 6mma
(RHS) sts -70 -30 50 STCA manufacturing
Foreca new orders
-80 -35 40 US trade deficit, SA (LHS) -90 -40 30 Jan-17 Aug-17 Mar-18 Oct-18 May-19 Dec-19 Jul-20 Feb-21 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 108
Global Focus – Economic Outlook Q2-2021
Latin America – Top charts
overview Global Figure 1: Brazil’s current account is back in deficit Figure 2: Brazil’s exports to China have slowed
USD mn % y/y
6,000 Primary incomeIncomeB Goods and servicesServices Secondary incomeIncome 90 China imports from US % y/y
Geopolitical 4,000 economics 70 2,000 0 50
-2,000 30 -4,000
-6,000 10
-8,000 Asia Current -10 -10,000 account China imports
from Brazil % y/y -12,000 -30 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20 Feb-21
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research MENAP
Figure 3: Mexico’s recovery has lagged regional peers’ Figure 4: Inflationary pressures in Mexico have increased
PMI % y/y
5
70 65 4 Core Africa 60 Brazil
CPI SA 55 Colombia 3
50 Banxico target (3% ± 1%)
45 Mexico 2 Services
40 Europe
35 1 30
25 0
Feb-18 Jul-18 Dec-18 May-19 Oct-19 Mar-20 Aug-20 Jan-21 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research Americas
Figure 5: Chile’s wage pressures have reaccelerated Figure 6: Chile has administered more vaccines than
% y/y Mexico, Colombia, and Peru combined
Strategy # of vaccine doses administered, millions outlook
6 20
18 Brazil
5 Millions 16
4 Nominal 14
Forecasts 3 wages 12 10 2 Chile
8
Mexico 1 6 Real wages 4 0 2 Colombia Peru (1) 0 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 1-Dec-20 1-Jan-21 1-Feb-21 1-Mar-21
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 109 Global Focus – Economic Outlook Q2-2021
US – Post-pandemic bonanza
Economic outlook – Front-loaded growth
Global Sarah Hewin +44 20 7885 6251 We upgrade our 2021 growth forecast to 6.5% (from 5.5%) to reflect substantial overview [email protected]
Head of Research, Europe and Americas fiscal stimulus and good vaccination progress. But we expect growth to be front- Standard Chartered Bank loaded, and we lower our 2022 forecast to 3.0% (from 4.0%); we expect 2.0% for 2023.
John Davies +44 20 7885 7640
[email protected] We now expect Q4 y/y growth of 6.0% in 2021 (previously 6.5%), 2.2% in 2022 (2.0%) US Rates Strategist and 2.0% in 2023. We expect the boost from the USD 1.9tn stimulus package to be Standard Chartered Bank
mostly reflected in stronger Q2-2021 GDP growth. Early 2021 data suggests that GDP economics
Geopolitical growth accelerated in Q1, although poor weather stalled some activity in February.
The vaccination programme is As of 28 March, around 28% of the US population had received at least one COVID- progressing well
19 vaccine dose, and we expect most pandemic restrictions to be lifted by June. In the
coming months, households are likely to draw on some of their c.USD 2tn in Asia
‘unintentional’ savings as the economy opens up, further boosting consumer spending.
Downside risks to our forecast include a further possible surge in COVID cases if more
transmissible variants take hold before the majority of vulnerable people have been
vaccinated. Later in the year, the economy may be vulnerable to a new COVID-variant
wave, despite better protection from vaccinations. MENAP
Employment gains are likely to be Employment is likely to pick up sharply in the coming months as travel rises and the
substantial in Q2 and Q3
hospitality, entertainment and personal services sectors open up further. The
unemployment rate fell to 6.2% in February from a peak of 14.8% in April 2020, although labour-market participation declined in that period. We expect substantial
Africa gains in monthly non-farm payrolls in Q2 and Q3, with the unemployment rate falling
to 4.3% by Q4-2021 alongside a rise in the work force as previously disaffected
workers register for work. We expect the economy to reach full employment
(unemployment rate of 3.5%) by Q2-2023.
A widening current account deficit The current account (C/A) deficit is likely to widen further as a result of strong domestic
Europe as imports pick up further demand; we expect net exports to remain a drag on GDP. In 2020, the US posted its
largest annual trade deficit since 2008. The C/A deficit was 3.1% in 2020 on higher
commodity prices and a surge in imports. We expect a deficit of 3.5% in 2021, driven by higher import volumes and prices; exports will likely continue to underperform
imports due to relatively weaker growth in some key trading partners.
Americas
Figure 1: US macroeconomic forecasts Figure 2: GDP makes up lost ground; employment lags
GDP, chained 2012 USD SAAR, tn; employment, mn
21 170 outlook Strategy 2021 2022 2023 Q4-2021:
GDP back to
165
GDP grow th (real % y/y) 6.5 3.0 2.0 trend
20 Employment
(RHS) 160
Core PCE (% annual average) 2.2 2.1 2.2 sts 19 155 Fed funds target rate (%)* 0.25 0.25 0.75 GDP (LHS)
Foreca Our forecasts 150
10Y UST yield (%)** 2.00 2.25 2.25 18 145 Current account balance (% GDP) -3.5 -3.0 -2.8 17 140 Fiscal balance (% GDP) -12.0 -8.0 -6.0 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 2018 2019 2019 2020 2020 2021 2021 2022 2022 *FFTR: upper-end of expected range; **end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 110
Global Focus – Economic Outlook Q2-2021
Policy – Staying supportive
overview QE tapering to start early in 2022 Fed to stay on hold this year and next, hike from 2023. The FOMC expects to keep Global rates unchanged until the labour market has achieved “maximum” employment and
inflation (the core PCE deflator) has reached 2% and is “on track” to rise modestly
above 2% for some time. Treasury purchases will increase by at least USD 80bn/month, and mortgage-backed securities (MBS) purchases by USD 40bn/month,
Geopolitical until the economy has made “substantial further progress” toward the FOMC’s inflation economics and employment goals. We expect this point to be reached over the next year, allowing tapering to begin in Q1-2022. We expect the first policy rate hike in H1-2023 and a
second in H2-2023, taking the end-2023 Fed funds rate to 0.50-0.75%.
Inflation is likely to accelerate in the coming months on base effects (prices fell from
March-May 2020), the opening-up of the economy, and higher non-energy import Asia
prices. We expect core PCE to rise to 2.5% in Q2, and raise our 2021 forecast to 2.2%
from 2.1%. We expect inflation to average 2.1% in 2022 and 2.2% in 2023.
Plans for infrastructure and welfare Following the passage of his USD 1.9tn stimulus bill, President Biden is turning to spending longer-term infrastructure and social welfare reform programmes. Spending could be MENAP on the order of USD 3tn, albeit spread over a number of years and likely to be partly
financed by tax hikes for corporations and wealthier households. The focus is on green
infrastructure – investing in a carbon-pollution-free power sector, sustainable homes
and buildings, and climate-friendly transport, as well as improving broadband and investing in traditional infrastructure such as roads and bridges. Social spending
Africa priorities include education subsidies and support for low-income families. We now
expect the 2021 fiscal deficit to be 12% of GDP instead of 10%, and see it narrowing
to 8.0% in 2022 instead of 6.5%. Our 2023 forecast is 6.0%.
Politics – A multilateral approach to China Europe Building alliances to negotiate Policy towards China will likely be less volatile than under the previous
with China administration, but the US continues to regard China as a competitor, particularly in technology, while it has adopted a more demanding approach on human rights. Biden
is building alliances to present a united front in negotiating with Beijing and to shape
and enforce international rules to constrain China. That said, differing views on China Americas within the EU may limit trans-Atlantic cooperation. Areas of potential co-operation between the US, its allies and China include climate control and nuclear non- proliferation.
UST market outlook – Pricing a tightening cycle
Strategy
outlook Due to fiscal stimulus, UST yields We recently raised our UST yield forecasts to reflect the impact of President Biden’s may continue to rise – we see the USD 1.9tn stimulus package, the lack of Fed pushback against higher long-term rates,
10Y at 2% by year-end and risks of further fiscal easing (see Rates Alert, 8 March 2021, ‘UST yields – Higher
forecasts on higher stimulus’). We forecast the 10Y yield at 1.75% at end-Q2 and 2.0%
at end-2021. Given this view and our expectation of QE tapering from Q1-2022, we
Forecasts raise our end-2022 forecast to 2.25% (from 1.60%). In terms of pricing the Fed outlook, the market focus has clearly shifted from policy accommodation to the next tightening
cycle. We doubt that the market can pull the expected starting point for rate hikes much
further forward. However, we see a clear risk that the market may price in a faster hiking cycle and/or a higher terminal rate.
Standard Chartered Global Research | 31 March 2021 111 Global Focus – Economic Outlook Q2-2021
Canada – Resilient
Economic outlook – Tackling a new pandemic wave
Global Sarah Hewin +44 20 7885 6251 The economy is facing a third pandemic wave, but has so far been relatively overview [email protected]
Head of Research, Europe and Americas resilient despite lockdown restrictions. We raise our 2021 GDP growth forecast to Standard Chartered Bank 5.5% (from 4.0%) given stronger-than-expected momentum in Q4-2020 (despite
Steve Englander +1 212 667 0564
[email protected] pandemic containment measures), encouraging data in Q1-2021, and substantial Head, Global G10 FX Research and North America Macro savings built up during the pandemic that may be deployed once restrictions end. Strategy Standard Chartered Bank NY Branch Canada should also benefit from stronger US growth in Q2, which we expect to be
economics Geopolitical supported by the recent USD 1.9tn Biden stimulus package (likely to deliver 0.5-1.0ppt
in additional GDP growth to Canada, according to the OECD). We raise our 2022 GDP
growth forecast for Canada to 3.5% (from 3.0%) and maintain our 2023 forecast
of 2.5%.
Asia
Pandemic cases are rising again, Second-wave COVID cases peaked in January, but a third wave now appears to be
while vaccination rate is low taking hold, driven by new variants of the virus. Cases have been rising again since early
March, as have hospitalisations and ICU occupancy; rates of cases linked to virus
variants are highest among younger people. Meanwhile, vaccination has been slow, with only 12% of people having received at least one dose by 28 March, though the pace is
MENAP set to pick up. Pandemic restrictions were at their tightest early in the year, but further
easing looks unlikely until cases are falling on a sustained basis.
Improving labour market, strong Business sentiment and activity are picking up, and housing has been strong. Home foreign demand sales were up 8.7% between end-2020 and February 2021, and February housing
Africa starts were 17.2% higher than a year earlier. However, retail sales declined in
December and January. The unemployment rate fell to 8.2% in February from a peak
of 13.7% in May 2020, but is still higher than the pre-pandemic level of 5.6%. Further
job gains are likely in sectors worst affected by the pandemic (entertainment, food and accommodation, and personal care services) once restrictions are eased. Exports and investment are likely to be supported by improving foreign demand and higher
Europe commodity prices.
Inflation is set to accelerate Inflation (1.1% in February) is likely to rise sharply in the coming months to near the near-term top of the 1-3% target band. The key drivers are base effects from falling prices during the early stages of the crisis in 2020, and higher gasoline prices. Inflation should
moderate in H2 as base effects dissipate. We raise our CPI forecasts to 2.1% (from Americas
1.8%) for 2021 and 2.0% (from 1.8%) for 2022; we see 2023 inflation at 2.1%.
Figure 1: Canada macroeconomic forecasts Figure 2: A race to vaccinate as COVID-19 cases rise again
New daily cases, 7-day ma; people vaccinated per 100
10,000 Cases 10 outlook
Strategy 2021 2022 2023
9,000 9
GDP growth (real % y/y) 5.5 3.5 2.5 8,000 8
7,000 7 CPI (% annual average) 2.1 2.0 2.1
6,000 6 sts 5,000 5 Policy rate (%)* 0.25 0.25 0.75
Foreca 4,000 4
USD-CAD* 1.22 1.26 1.26 3,000 3 2,000 People vaccinated 2 Current account balance (% GDP) -1.8 -1.6 -1.0 per 100 (RHS) 1,000 1 0 0 Fiscal balance (% GDP)** -7.0 -3.5 -2.5 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 *end-period; **for fiscal year starting in April; Source: Standard Chartered Research Source: Our World in Data, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 112
Global Focus – Economic Outlook Q2-2021
Policy – Cautiously less accommodative
overview BoC tapering in Q2, but rates on The Bank of Canada (BoC) has signalled that it will begin tapering soon. In March, Global hold until 2023 Deputy Governor Gravelle set out a path to slowing the pace of government bond
purchases. The BoC has been buying a minimum of CAD 4bn/week of government
bonds; it looks likely to lower purchases to CAD 3-3.5bn/week in Q2, probably at the 21 April meeting, assuming the third COVID wave does not stall the economic
Geopolitical recovery. We expect further tapering in Q3-2021. economics
The BoC has pledged to keep its policy rate at 0.25% until economic slack has been
fully absorbed, likely well after the end of the QE programme; according to the BoC, the economy is likely to return to its potential only by 2023. We also expect the first
25bps hike to come early in 2023, with a second 25bps hike in H2-2023. Canada’s
private non-financial sector is highly leveraged (the highest debt-service ratio among Asia
OECD countries, close to 25% of gross disposable income), so the BoC is likely to take
a cautious approach to tightening policy.
A three-year recovery programme On fiscal policy, the government will present its 2021 budget on 19 April, after a gap of over two years since the previous budget. In 2020, the federal government initiated a MENAP range of programmes to mitigate the impact of the pandemic, including new benefits
(the Canada Emergency Response Benefit and the Canada Recovery Benefit), as well
as tax deferrals and industry subsidies. This took the fiscal deficit to c.17% of GDP.
The 2021 budget is expected to incorporate up to CAD 100bn in new spending over three years. We maintain our forecasts for fiscal deficits of 7.0% of GDP in 2021 and
Africa 3.5% of GDP in 2022, and expect the deficit to narrow further in 2023, to 2.5%.
Politics – Friends again
A reset of US-Canadian relations Canada is finding increased common ground with the new US administration.
US President Biden’s first bilateral meeting with a foreign leader was with Canadian Europe Prime Minister Trudeau, marking a reset of US-Canada relations. Under the Trump
administration, relations were strained over trade, although a new US-Canada-Mexico trade deal (USMCA) was ultimately agreed and took effect in July 2020. Biden and
Trudeau have agreed to work together on areas of mutual interest, including the
pandemic, post-pandemic recovery and action on climate change. That said, areas of Americas tension remain, including the Keystone XL pipeline, which was blocked by Biden on his first day in office.
Market outlook – CAD outperformance
CAD is likely to benefit from US We expect the Canadian dollar (CAD) to strengthen. The CAD has outperformed in
Strategy
outlook fiscal stimulus recent weeks, hitting three-year highs against the USD. It is likely to benefit greatly from successive rounds of US fiscal stimulus, as exports to the US account for just
under 20% of Canada’s GDP. Canada’s 5Y government yields are above those of
equivalent USTs in both nominal and real terms, with the gap shifting in the CAD’s
favour. BoC commentary suggests that it is more eager than other central banks to
Forecasts normalise monetary policy.
Standard Chartered Global Research | 31 March 2021 113 Global Focus – Economic Outlook Q2-2021
Brazil – One step forward, two steps back
Economic outlook – Squeezed on all sides
Global Ilya Gofshteyn +1 212 667 0787 We maintain our 2021 GDP forecast at 3.7%. While Brazil has experienced one of overview [email protected]
Senior EM Macro Strategist the sharpest recoveries from the COVID-19 shock among emerging markets, growth Standard Chartered Bank NY Branch
is slowing again and the economic outlook is deteriorating. In addition, COVID infection
rates remain elevated, and the vaccination effort has been lacklustre.
An impressive fiscal response amounting to over 12% of GDP has played a large role in
economics the strength of the recovery, but budget constraints are leading to a decline in fiscal support. Geopolitical Further, padding household balance sheets has diminishing returns. The aggregate effect
has been a decline in consumer sentiment in recent months, and an even steeper
deceleration in retail activity (Figure 2). This is a meaningful headwind for a closed economy
like Brazil’s, which is heavily reliant on domestic demand for growth.
Asia
Brazil’s consumers are being While some EM economies have received growth support from current account (C/A)
squeezed on all sides surpluses driven by currency weakness, Brazil’s fiscal response has blocked this path
to recovery. Brazil’s C/A surged to a surplus in 2020 as imports collapsed, but imports have rebounded sharply since early 2021 due to government stimulus. The C/A is back
in deficit, while Latam peers (Mexico, Chile) still have surpluses. MENAP
At the same time, exports have decelerated because, despite a substantial terms-of-
trade improvement, volumes are down. Nominal export growth is just barely back in
positive y/y territory, even though prices of Brazil’s three main exports – crude oil, iron, and soybeans – have surged. Since China is the biggest export market by a wide
Africa margin (followed by the US), China’s renewed focus on sourcing imports from the US
rather than Brazil under the US-China Phase 1 trade deal is putting persistent
downward pressure on Brazil’s exports.
A weakening Brazilian real (BRL) and a declining fiscal impulse lead us to revise our 2021 C/A forecast to -1.7% of GDP (from -2.0%), and our 2022 forecast to -1.3% (from
Europe -2.5%) on expectations of an import contraction.
BRL weakness has led to higher Supply constraints and currency weakness have led to accelerating inflation. Higher
inflation headline inflation readings are primarily a function of higher import costs; they do not
reflect above-trend growth. As we expect further BRL weakness (see FX Explorer – FX forecast changes), we expect these pass-through inflationary pressures to persist.
Americas We raise our 2021 CPI inflation forecast to 5.3% (from 3.4%).
Figure 1: Brazil macroeconomic forecasts Figure 2: Consumer activity has been declining
FGV index (LHS); retail sales % y/y (RHS)
110 10 outlook Strategy 2021 2022 2023 FGV
consumer
100
GDP growth (real % y/y) 3.7 2.5 2.5 confidence 5
expectations 90
CPI (% annual average) 5.3 4.0 3.5 0
sts 80 Policy rate (%)* 5.50 7.50 8.00 Retail sales, -5
70 % y/y
Foreca
-10 USD-BRL* 5.75 5.45 5.55 60 -15 Current account balance (% GDP) -1.7 -1.3 -2.5 50
40 -20 Fiscal balance (% GDP) -7.9 -7.1 -5.5 Jan-15 Nov-15 Sep-16 Jul-17 May-18 Mar-19 Jan-20 Nov-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 114
Global Focus – Economic Outlook Q2-2021
Policy – It doesn’t get easier
overview We expect BCB to tighten monetary Rising inflation and fiscal deterioration have led Banco Central do Brasil (BCB) Global policy substantially to start policy normalisation. We believe BCB’s primary focus is to get the real
policy rate back into positive territory. More favourable base effects and a persistent
output gap may moderate inflation readings marginally in H2-2021. Further, higher policy rates would widen BRL yield differentials, potentially leading to stronger BRL
Geopolitical performance and reducing pass-through pressures (see EM stratagem – economics Retribution). This should give BCB room to slow the pace of tightening over time. Following the larger-than-expected 75bps hike on 17 March, we expect another
75bps hike at the May meeting. We expect BCB to deliver 50bps hikes thereafter until the real policy rate is above zero. We therefore raise our end-2021 policy rate
forecast to 5.5% (from 4.75%).
Asia
We now expect another 200bps of hikes in 2022, taking the SELIC rate to 7.5% by
end-2022 (previous forecast: 6.5%), but sequencing will be tricky. Presidential elections in Q4-2022 may lead to more tightening earlier in the year than would
otherwise have occurred. Elevated risk premia ahead of the elections may renew pressure on local rates markets, which could impact BCB thinking. We expect the MENAP SELIC rate to rise to 8.0% by end-2023.
The political will to tackle fiscal The fiscal policy outlook presents several uncertainties. Broad-based political will to
imbalances appears to be lacking tackle fiscal challenges appears lacking. Finance Minister Paulo Guedes, who market participants trust, often appears politically isolated. The most recent round of fiscal
Africa measures will not technically breach the spending ceiling, but a credible path to fiscal
sustainability appears mostly absent. The recent changes to Bolsonaro’s cabinet do
not technically impact the fiscal outlook, but highlight the tenuous political state of the
administration and Guedes’s position within it.
Europe Former President Lula’s 2022 presidential candidacy has added to this unwelcome mix of circumstances. While the Q4-2022 elections are still too far away to preoccupy
markets, the proximate fear is that the Bolsonaro administration could pursue further
populist and market-unfriendly measures ahead of the elections.
Americas We expect a renewed focus on administrative reform, privatisation, and potentially
even tax reform after the latest round of stimulus legislation is completed. Nonetheless,
we see these measures as insufficient to put fiscal accounts on a sustainable path. We
therefore revise our fiscal balance forecasts to -7.9% of GDP (from -4.7%) for 2021, -
7.1% (from -6.1%) for 2022, and -5.5% (from -1.0%) for 2023.
Strategy
outlook Market outlook – Unrelenting pressure
The BRL faces both external and The BRL has persistently been the worst performer in Latam, and we expect it to
domestic headwinds remain a laggard relative to EM peers near-term. This is because risks to the BRL
outlook are asymmetric to the downside, in our view. The surge in US rates volatility
has magnified investor concerns about Brazil’s growing fiscal deficit. At the same time, Forecasts the political will to tackle fiscal challenges appears to be lacking. Fears of a possible departure of Finance Minister Paulo Guedes inject an additional risk premium. The
near-term outlook for the BRL therefore remains challenging.
Standard Chartered Global Research | 31 March 2021 115 Global Focus – Economic Outlook Q2-2021
Chile – Taking a shine
Economic outlook – Roses and sunshine
Global Ilya Gofshteyn +1 212 667 0787 We raise our 2021 GDP forecast to 6.9% (from 5.6%) and our 2022 forecast to overview [email protected]
Senior EM Macro Strategist 3.5% (from 2.6%). Chile’s terms-of-trade improvement is the sharpest in over a Standard Chartered Bank NY Branch
decade, and Chile’s COVID-19 vaccination effort is ahead of most DM, let alone EM,
economies. We believe the market is substantially underestimating Chile’s growth
prospects in 2021 and 2022. economics Geopolitical Chile is benefiting from a significant Chile’s economy has a lot going for it. On the external side, surging copper prices are
terms-of-trade improvement the biggest positive. The resulting boost to growth is set to unfold over the coming
quarters (Figure 2). Further, risks to Chile’s copper export market are to the upside, in
our view. An accommodative global policy backdrop is likely to keep commodity prices
generally well supported. Copper may get a further boost from possible US Asia
infrastructure spending.
We revise our 2021 current account (C/A) forecast to reflect the stronger external
backdrop, and now see a surplus of 0.3% instead of a deficit of 1.8%. We expect the C/A to fall back into deficit in 2022 as imports recover, but we see a smaller deficit than
MENAP before, revising our forecast to -0.9% (from -2.5%).
Impressive vaccine rollout improves The domestic outlook is also encouraging. Chile’s vaccine rollout effort has been
near-term domestic outlook impressive, implying a relatively quick return to normalcy. While the output gap remains
substantial and unemployment is elevated, we see ample scope for these metrics to
recover rapidly once lockdowns ease and services reopen.
Africa
The combination of these factors could have positive second-round effects. First, wage
growth is likely to pick up. Copper unions are already pushing for higher wages on the
back of higher copper prices. At the same time, services-sector hiring could improve domestic sentiment and consumer spending. We see little reason for the output gap to
Europe remain positive for very long.
We expect inflation to overshoot… With this optimistic outlook, we believe inflation will remain elevated. Our 2021 forecast
remains above consensus at 3.9%, and we raise our 2022 forecast to 3.7% (from 3%). In recent months, headline inflation has been caught in a tug-of-war between elevated
tradables CPI (due to higher pass-through) and muted non-tradables CPI (due to
Americas
Figure 1: Chile macroeconomic forecasts Figure 2: Terms-of-trade improvement implies strong
growth acceleration in coming quarters
ToT index (LHS); IMACEC GDP proxy % y/y, 3-qtr lag (RHS)
50 outlook Strategy 2021 2022 2023 Terms of trade 9
40
GDP growth (real % y/y) 6.9 3.5 3.5 30
4 20 CPI (% annual average) 3.9 3.7 3.0 10 sts -1 0 Policy rate (%)* 0.50 3.50 5.00
Foreca -10 -6
USD-CLP* 775 830 840 -20 -30 -11 Current account balance (% GDP) 0.3 -0.9 -2.5 -40 IMACEC y/y % -50 -16 Fiscal balance (% GDP) -3.8 -2.7 -2.0 Jan-12 Jan-14 Jan-16 Jan-18 Jan-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 116
Global Focus – Economic Outlook Q2-2021
domestic weakness). As a function of our constructive outlook on the economy, we
expect non-tradables inflation to rise towards tradables. Inflation expectations are now overview
Global 3.2%, the highest in almost five years. Wage negotiations may add to upward
inflationary pressure over time.
Policy – Too good to be true
Geopolitical …and BCCh to exit its forward We do not expect the central bank to follow through on its forward guidance of economics guidance early the policy rates on hold through most of 2022, given our optimism on Chile’s growth prospects and our expectation that inflation will overshoot the target. We now expect
a hiking cycle to begin at the start of 2022, and we expect 300bps of hikes over the course of the year. Accordingly, we raise our end-2022 policy rate forecast to 3.5%
(from 2.5%); we still see the rate reaching 5.0% by end-2023.
Asia
Current commentary from Banco Central de Chile (BCCh) is dovish, expressing the
view that recent higher inflation readings are transitory. This is in line with messaging
from most other central banks globally, but inflation concerns can be self-reinforcing.
Higher tradables inflation could fuel higher expectations to an even greater degree if the growth backdrop is improving. We believe BCCh will find it hard to ignore these MENAP developments, and will start preparing the market for an exit from the forward guidance
in H2-2021.
Political considerations may also factor into the timing of BCCh lift-off. The central bank may hesitate to embark on a hiking cycle shortly before presidential elections in Q4-
Africa 2021, which is why we expect the cycle to begin after the elections. The delay could
also put BCCh further behind the curve, which could necessitate faster policy rate
adjustment than would otherwise have taken place. It is worth recalling that BCCh’s
latest significant hiking cycle, coming out of the 2008-09 global financial crisis, began with four successive hikes of 50bps each. We believe this is a distinct possibility this
Europe time around.
Politics – Less worrisome than before
Recovery in Piñera’s approval The improved political backdrop is an additional positive. Going into 2021, ratings reduces political risks investors were worried about two major political risk events: the constitutional Americas convention election, likely to be delayed until 15-16 May; and the presidential elections in Q4. Both seem less threatening now, for two key reasons. First, the left has been
fragmented and is therefore less likely to dominate the constitutional convention
committee. Second, Piñera’s approval rating has improved thanks to the impressive
vaccine rollout effort, strengthening the market-friendly centre-right. A lot can happen
Strategy between now and the presidential election, but all else being equal, this reduces outlook political risks.
Market outlook – Breakaway
An early exit from BCCh forward The Chilean peso (CLP) has been the region’s standout performer due to the sharp
Forecasts guidance would be another tailwind improvement in Chile’s terms of trade, and we expect this tailwind to persist. We for the CLP therefore maintain our constructive view on the CLP on a relative-value basis. Should
BCCh depart from its forward guidance and signal a sooner start to policy rate
adjustments, the CLP would likely get an additional boost from improved yield differentials. Chilean asset markets could experience pullbacks ahead of the two upcoming political risk events, but we would see any such back-ups as opportunities to re-enter long CLP positions.
Standard Chartered Global Research | 31 March 2021 117 Global Focus – Economic Outlook Q2-2021
Colombia – Mixed blessings
Economic outlook – Higher growth, higher deficits
Global Ilya Gofshteyn +1 212 667 0787 We raise our 2021 GDP growth forecast to 5.6% (from 4.1%) and our 2022 overview [email protected]
Senior EM Macro Strategist forecast to 4.1% (from 3.3%), as rising oil prices have provided some relief to the Standard Chartered Bank NY Branch
economy. Better terms of trade could close the output gap at a faster pace, but we still
expect it to remain negative in 2021. Further, due to Colombia’s relatively closed economy, FX pass-through pressure is likely to remain muted. We therefore see a fairly
benign path for inflation this year, though we expect it to accelerate in 2022.
economics Geopolitical As a result, we believe Banco de la República (BanRep) can maintain its dovish stance
in the coming months. We expect BanRep to embark on a hiking cycle in H2-2021,
primarily in response to global factors rather than domestic ones. Monetary policy
tightening across other high-yield EM economies may prompt BanRep to start
Asia normalising monetary policy as well. We maintain our forecast of two 25bps hikes later
this year, followed by 125bps of tightening in 2022. We expect the policy rate to rise to
5.0% by end-2023.
The Duque administration has Fiscal deterioration may also pressure BanRep to be less accommodative than it turned away from fiscal discipline otherwise would be. The Duque government has become less focused on fiscal discipline;
MENAP the tax reform currently under discussion is likely to increase revenues only modestly. The
government’s aim of 1.5% tax revenue growth seems optimistic; we see 1% as a best-
case scenario given the sensitivities surrounding VAT increases. Nor do we expect fiscal
discipline to improve substantially in 2022 ahead of the presidential election in May. We
therefore revise our 2021 fiscal balance forecast to -8.5% of GDP from -4.9%. We now
Africa see a slower pace of fiscal recovery thereafter; we revise our 2022 fiscal balance forecast
to -5.9% from -4.2% and our 2023 forecast to -3.8% from -1.5%.
Market outlook – Cutting down the angle
Modest positives at best; we expect We expect the Colombian peso’s (COP’s) performance to remain firmly in the middle the COP to remain in the middle of of the Latam pack amid a mixed outlook. On the positive side, rising oil prices reduce
Europe the Latam pack Colombia’s fiscal vulnerabilities and reduce investor unease about economic
imbalances. They may also dissuade BanRep from further easing. On the other hand,
none of this is likely to prevent a rating downgrade; investors may remain cautious on Colombia’s assets as a result (see Trimming the sails but not changing course). At the same time, liquidity remains a challenge. On balance, we are happy to own the COP
as part of a broader EM reflation trade basket, but we do not see it as the optimal Americas
expression of the EM FX recovery.
Figure 1: Colombia macroeconomic forecasts Figure 2: Tax revenues have been slow to recover
% y/y
40 outlook
Strategy 2021 2022 2023
30
GDP growth (real % y/y) 5.6 4.1 3.3
20
CPI (% annual average) 2.9 4.0 4.0 10 Government
sts tax receipts 0 Policy rate (%)* 2.25 3.50 5.00
Foreca -10
VAT USD-COP* 3,600 3,360 3,440 -20 revenues
Current account balance (% GDP) -4.0 -3.0 -3.0 -30
-40 Fiscal balance (% GDP) -8.5 -5.9 -3.8 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 118
Global Focus – Economic Outlook Q2-2021
Mexico – More good than bad
overview
Global Economic outlook – Tailwinds from abroad
Ilya Gofshteyn +1 212 667 0787 We raise our 2021 GDP growth forecast to 5.8% (from 4.7%) and our 2022 [email protected]
Senior EM Macro Strategist forecast to 2.9% (from 2.2%), based on our positive outlook for US growth. We Standard Chartered Bank NY Branch believe market participants are too pessimistic on the outlook for Mexico’s economy,
Geopolitical and we remain constructive on growth prospects for this year. Investor concerns about economics lacklustre domestic growth are understandable but overblown, while the strength of the external backdrop is underappreciated, in our view.
Mexico’s economy benefits from Mexico stands to be a major beneficiary of the current macro backdrop, especially the
external backdrop
impressive global manufacturing recovery, which benefits manufacturing exporters.
Indeed, Mexico could see outsized gains from additional US fiscal stimulus. The US Asia auto and housing markets are likely to remain especially strong. This has clear positive
implications for Mexico’s industrial sector, which is heavily geared towards exports of
vehicle parts and appliances to the US.
Further, trade is the primary channel through which Mexico benefits; surging MENAP remittance flows are another meaningful positive. These factors have sent Mexico’s
current account (C/A) well into positive territory, and we expect it to remain there for
the foreseeable future (Figure 2). We revise our 2021 C/A forecast to a surplus of 1.6%
of GDP (from 0.2%), and now see a 2022 surplus of 0.5% (from a deficit of 0.5%). We
expect a C/A surplus of 0.2% in 2023.
Africa
Mexico’s industrial sector has Longer-term, Mexico has gained considerable advantages over its global
gained competitiveness manufacturing competitors as a source of labour and destination for investment. The
Mexican peso (MXN) is c.20% weaker than the Chinese yuan (CNY) since the onset
of the COVID-19 crisis, substantially boosting Mexico’s competitiveness. At the same
time, US-China trade tensions are likely to remain elevated, with Mexico standing to Europe gain from China’s loss. These advantages may not show up in monthly activity statistics, but they are a clear tailwind for Mexico’s economy over time.
In contrast to these positives, domestically oriented sectors of the economy remain
under severe strain. Unlike most EM PMIs, Mexico’s remains firmly in contractionary Americas territory. Further, the short-term outlook remains poor, with slow vaccine rollout and a
muted fiscal response relative to most EM peers.
Figure 1: Mexico macroeconomic forecasts Figure 2: Mexico’s current account has turned positive
Strategy
outlook USD mn 25,000 Current account
2021 2022 2023 20,000 Goods and
GDP growth (real % y/y) 5.8 2.9 2.2 15,000 services balance Transfers
10,000 balance CPI (% annual average) 3.6 3.5 3.5 Forecasts 5,000
Policy rate (%)* 4.00 4.75 6.00 0
-5,000
USD-MXN* 21.00 20.60 20.95 -10,000 -15,000 Rent Current account balance (% GDP) 1.6 0.5 0.2 balance -20,000
Fiscal balance (% GDP) -3.3 -3.4 -2.5
Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20
Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20
Sep-16 Sep-18 Dec-15 Dec-16 Sep-17 Dec-17 Dec-18 Sep-19 Dec-19 Sep-20 Dec-20 Sep-15 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 119 Global Focus – Economic Outlook Q2-2021
The silver lining is that these negatives are likely surmountable. First, we expect
consumer behaviour to recover as the benefits of export growth accrue to workers.
Second, COVID vaccination rates should speed up eventually. At that point, we would
Global expect domestic services activity to catch up with manufacturing activity (and not the
overview
other way around).
Policy – Lingering unease We expect monetary policy to Banco de México (Banxico) halted its easing cycle at its 25 March meeting in a
remain accommodative unanimous decision; we do not think it has room to ease further, and we raise our economics Geopolitical end-2021 policy rate forecast to 4.0% (from 3.75%). The Federal Reserve’s dovish
tone gives Banxico room to keep its policy rate at cyclical lows for longer than many
EM peers. We therefore expect a gradual normalisation process, and see the policy
rate at 4.75% at end-2022 and 6.0% at end-2023. Asia
Banxico’s board has been vocal about its belief that higher headline CPI readings are
temporary. The board’s more dovish composition than in prior years makes it more
likely to look through higher inflation prints than before. Base effects are set to turn more favourable in H2-2021, putting downward pressure on realised inflation.
MENAP Still, we believe that short-term inflation risks have risen, primarily as a function of
renewed MXN weakness. While pass-through from a weaker currency was limited
early in the pandemic (due to the sheer magnitude of the economic slowdown), cost
pressures appear to have risen more recently. CPI components like furniture and
appliances, sourced partly from abroad, are pushing up core CPI readings and
Africa pressuring inflation expectations. Persistent MXN weakness could prompt Banxico to
turn more hawkish.
Fiscal risks may increase heading AMLO has maintained greater fiscal discipline than we anticipated; we revise our 2021 into midterm elections fiscal deficit forecast to 3.3% (from 3.7%). Still, while the deficit is manageable, we
believe it is headed in the wrong direction. For one thing, AMLO’s pursuit of heterodox Europe
macroeconomic policies threatens the revenue side of fiscal accounts. Further,
heading into the June midterm elections, AMLO might be tempted to relax efforts to
contain spending. His popularity remains high, and though his Morena party does not
poll as well as he does, the PAN-PRI-PRD opposition looks to be at a disadvantage. Should this change, we would grow more concerned about the fiscal outlook. On
Americas balance, we expect the fiscal deficit to narrow over the medium term as the economy
recovers and revenues rebound. We forecast the 2022 fiscal deficit at 3.4% of GDP
and the 2023 deficit at 2.5%.
Market outlook – Caught offside outlook
Strategy Increase in global rates volatility The global increase in rates volatility has pressured the entire EM FX complex,
has pressured the MXN and the MXN has been among the biggest losers. This is partly a function of heavier
MXN positioning to begin with, and partly of the MXN’s role as a proxy for emerging
markets. We believe that near-term catalysts for a reversal of US yield increases are sts lacking, and we expect pressure on the MXN to persist. While we believe that the MXN
will weaken versus the USD near-term, we are more constructive on the MXN on a
Foreca
relative-value basis. Further, if US rates volatility subsides later in 2021 as we expect, we would see this as an opportunity to re-engage in outright long MXN positions (see EM stratagem – Delayed gratification).
Standard Chartered Global Research | 31 March 2021 120
Global Focus – Economic Outlook Q2-2021
Peru – Speaking in binary
overview
Global Economic outlook – Improvement on the horizon
Ilya Gofshteyn +1 212 667 0787 We expect the economy to recover strongly in 2021, after a sharp contraction in [email protected]
Senior EM Macro Strategist 2020 relative to many EM peers. We raise our 2021 GDP forecast to 9.4% (from Standard Chartered Bank NY Branch 3.6%) and our 2022 forecast to 4.1% (from 3.3%) on improved terms of trade and
Geopolitical favourable base effects. economics
Improved terms of trade and Like other small, open economies specialising in commodity exports, Peru is
competitiveness are tailwinds for experiencing a significant positive terms-of-trade shock. The effects of this growth improvement are likely to be reflected in economic data over the medium rather than
the short term, owing to uncertainty around the upcoming presidential elections on
11 April and the slow start to Peru’s vaccine rollout. We therefore expect H2-2021
Asia activity data to improve materially relative to H1.
Peru’s economy benefits from another tailwind that many of its peers do not. Due to
Banco Central de Reserva del Perú’s (BCRP’s) tight management of the exchange
rate, the Peruvian nuevo sol (PEN) has not rebounded in line with the rest of EM FX.
MENAP It is therefore substantially weaker on a real effective exchange rate (REER) basis. In turn, Peruvian labour costs are competitive. As a result, Peru’s exports may gain
market share over peers in the coming months. We now expect the 2021 current
account balance to be 0.2% instead of -2.8% based on these factors, and we now
expect a narrower 2022 deficit of 1.2% (instead of 2.5%).
Africa Keeping the PEN undervalued increases inflationary pressures at the margin due to higher FX pass-through pressures. The struggling domestic economy has kept price
pressures muted, but we expect inflation to accelerate as the recovery gains steam.
An undervalued currency and better Further, Peru’s economy has become progressively less dollarised over the past
Europe growth could put upward pressure decade. As a result, currency weakness has a larger effect on domestic goods prices on inflation than it may have had in prior cycles. Based on these factors, we raise our 2021 CPI
forecast to 3.1% (from 2.5%); we see a further acceleration to 4.0% in 2022.
We expect the combination of higher inflation and recovering growth to prompt BCRP to tighten the policy rate in H2-2021. We maintain our forecast of 100bps of hikes this Americas
year, and raise our end-2022 policy rate forecast to 3.0% (from 2.0%). We still expect the policy rate to rise to 4.5% by end-2023.
Figure 1: Peru macroeconomic forecasts Figure 2: Dollarisation of the economy has declined over
the past decade
Strategy
outlook Proportion of banking system liquidity denominated in USD 43
2021 2022 2023 41
GDP grow th (real % y/y) 9.4 4.1 3.3 39
37 CPI (% annual average) 3.1 4.0 3.0 Forecasts 35 Policy rate (%)* 1.25 3.00 4.50 33
31 USD-PEN* 3.85 3.40 3.45 29 Current account balance (% GDP) 0.2 -1.2 -2.5 27
Fiscal balance (% GDP) -5.3 -4.2 -1.5 25 Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16 Jul-17 Oct-18 Jan-20 *end-period; Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 121 Global Focus – Economic Outlook Q2-2021
Politics – The elephant in the room
Presidential election on 11 April The outcome of the presidential election on 11 April could significantly impact could bring profound policy the future of the economy. The presidential field is fragmented, with at least four
Global regime change
overview candidates within striking distance. At the same time, polls suggest that wide swathes
of the electorate are still undecided. Projecting the outcome with confidence is difficult.
Instead, we place the candidates into two buckets, based on whether or not they
espouse policies seen as market-friendly.
We see George Forsyth (Victoria Nacional) and Rafael Lopez Aliaga (Renovación economics Geopolitical Popular) as broadly appealing to market participants. Forsyth holds typical centre-right
views, while Aliaga has a more populist right-wing approach but would likely still be
viewed favourably by markets. Both would provide some measure of reassurance to
investors, and would likely carry positive implications for Peru’s asset markets. Asia
On the other hand, Veronika Mendoza (Juntos por el Perú) and Yonhy Lescano
(Acción Popular) have both espoused views that could discourage investors, in terms
of their implications for both economic growth and government policy. Should they both make it through to the second round, the initial market reaction would likely be negative. That said, second-round candidates may moderate their tone to try and
MENAP capture more centrist votes, in which case concerns about wholesale policy regime
change may diminish heading into the second round of voting in early June.
The sharp contrast in the candidates’ views implies a binary outcome for government
policy. We expect fiscal loosening under most of the candidates, but the magnitude
Africa varies widely. To reflect our base case of higher spending under the next
administration, we now expect fiscal deficits of 5.3% in 2021 (instead of our previous
forecast of 2.5%) and 4.2% in 2022 (instead of 1.5%); but we acknowledge that the
range of possible outcomes is wider than normal.
Additionally, we see a strong possibility that BCRP President Julio Velarde will be Europe
replaced under a new administration. The choice of his replacement would have
implications for monetary policy as well as PEN management.
Market outlook – Dangerous play Uncertain presidential election The PEN outlook is binary due to uncertainty around the election outcome, and
Americas outcome means the PEN outlook therefore the future BCRP leadership, in our view. The possibility of a regime
is binary change for the fiscal framework and PEN management cannot be ruled out. We believe
that markets are under-pricing these risks, and we expect flows to exert upward
pressure on USD-PEN spot and forward rates heading into the vote. outlook
Strategy Thereafter, if investors perceive the election outcome as market-friendly, we see scope
for the PEN to rally. On a first-order basis, long USD-PEN hedges would be taken off.
Beyond that, the PEN REER it is at its weakest level in over a decade due to BCRP
management of the currency, despite a significant terms-of-trade improvement. If
sts perceptions of political risk subside, BCRP could allow meaningful PEN appreciation
to offset building inflationary pressures.
Foreca
Standard Chartered Global Research | 31 March 2021 122
Strategy outlook
Global Focus – Economic Outlook Q2-2021
Exodus
Eric Robertsen [email protected] • The reflation trade comes under heavy fire due to rising UST yields Global Head, Research | Chief Strategist Global and a recalcitrant Fed overview Standard Chartered Bank
• Global equities and currencies surrender their YTD gains as
financing costs rise with inflation fears
• US fiscal stimulus reignites discussions of US exceptionalism and lifts the USD
• USD depreciation and EM outperformance require UST yields to
economics Geopolitical stabilise before they can resume
Love me two times
2021 is supposed to be the year of the reflation trade. Global monetary and fiscal Asia
stimulus is expected to spur the economic recovery and improve corporate earnings.
A preference for assets that are geared to economic growth and offer the prospect of
higher returns should push investors away from low-yielding developed-market (DM)
bonds and into emerging-market (EM) bonds, equities and currencies, as well as commodities. DM bond yields are supposed to rise, but only slowly, as inflation remains
MENAP low and central banks resist any increase in bond yields that threatens the nascent
recovery. This narrative was going according to plan until mid-February, when bond
yields surged and enthusiasm for reflation turned into fear of inflation. To make matters
worse, the Fed appears comfortable that higher bond yields are consistent with the
record amounts of fiscal stimulus in the pipeline. Africa
The increase in UST yields, especially real yields, has sparked fears of another ‘taper
tantrum’ and led to broad-based risk reduction across EM currencies, credit and
equities. The prospect of US fiscal stimulus driving economic growth back above trend
has also rekindled talk of another period of US exceptionalism (Figure 1). USD shorts and EM longs may be vulnerable to further squeezes as long as the US
Europe growth impulse continues to gain momentum, and until UST yields stabilise. The
increase in 10Y UST yields is already nearly on par with previous corrections,
suggesting that a respite for EM may be approaching. Fed rate-hike pricing is overly
optimistic, in our view, and we believe inflation fears are overstated. Additionally, US growth will benefit the global recovery, not just the US. The reflation trade is not dead,
it’s just pausing for breath.
Americas
Figure 1: US economic growth could revert to trend faster than expected
GDP, chained 2012 USD SAAR, tn; employment, mn; actual and our forecasts
21 170
outlook Q4-2021: Strategy GDP back to trend*
165
20
Employment (RHS) 160
19 155
GDP (LHS) Forecasts
150
18 145
17 140 Q4 2018 Q2 2019 Q4 2019 Q2 2020 Q4 2020 Q2 2021 Q4 2021 Q2 2022 Q4 2022
* Assumes trend growth of 1.8% pa since Q4-2019; Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 124
Global Focus – Economic Outlook Q2-2021
Laissez faire
overview The increase in UST yields over the last several months can be largely attributed to the Global following factors: expectations of US fiscal stimulus and the ensuing growth impulse,
coinciding with the reopening of the US economy; fears of the UST supply increase
needed to fund the fiscal stimulus; and fears of an inflation surge. Yet each of these factors could be described as ‘known’ inputs, and should not necessarily have posed
Geopolitical significant threats to the reflation trade. And until mid-February, UST yields, EM equities, economics EM currencies, and commodities all rose in tandem. But something changed, prompting a surge in UST real yields and sparking a correction in many popular expressions of the
reflation trade. We believe that ‘something’ was the discovery that the Fed was taking a very laissez-faire approach to the rise in UST yields.
The Fed is trying to take a hands-off We believe UST yields, especially real yields, need to stabilise before investors will be Asia
approach to the rise in UST yields comfortable adding exposure to reflation themes again. The critical question becomes
when – or if – the Fed will intervene to cap yields. This requires an understanding of what has motivated the Fed to remain relatively agnostic on the UST yield move so
far. We think the Fed may simply believe that long-term yields need to be allowed to find – and settle at – a market clearing rate that reflects expectations of fiscal stimulus, MENAP economic recovery and additional UST supply. In other words, the Fed is already intervening by buying USD 120bn of USTs and MBS per month. It may feel that leaning
further against the yield rise would provide a crutch of support that markets do not
need. While nominal 10Y yields have increased more than 100bps since August 2020,
the increase in real yields pales in comparison to the 2013 taper tantrum (Figure 2). Africa
The Fed must weigh the growth The Fed may also believe that the growth impulse supporting the economy outweighs
impulse against the rates impulse
the threat from the rates impulse. In other words, the increase in yields has not
tightened financial conditions enough to threaten the nascent economic recovery. But with three rate hikes priced in by end-2023 and the forward curve pricing in a rate
Europe nearly equal to the Fed’s dot for the longer-term policy rate, yields may be approaching the limits of the Fed’s comfort zone (Figure 3). In the short term, we expect 10Y UST
yields to consolidate their recent increase. In H2, we see a greater probability of
additional fiscal stimulus in the form of infrastructure spending; we expect this to lead
to a mild further increase in nominal yields, with the 10Y reaching 2.0% by end-2021
Americas (UST yields – Higher forecasts on higher stimulus).
Figure 2: 2013 versus 2021 – comparing tantrums Figure 3: Full FOMC hiking cycle already priced in?
S
outlook 10Y UST real yield (LHS) vs 10Y UST yield (RHS), % USD 5Y5Y OIS, % (LHS) vs USD 2Y1M OIS, % (RHS) trategy
1.5 3.5 2.5 1.6 10Y UST yield (RHS) 1.4
1.0 3.0 2.0 1.2
2.5
Forecasts
0.5 1.0 USD 5Y5Y OIS 1.5 2.0 (LHS) 0.8 0.0 1.5 0.6 1.0
-0.5 0.4 1.0 0.5 0.2 -1.0 10Y UST real 0.5 USD 2Y1M 0.0 yield (LHS) OIS (RHS) -1.5 0.0 0.0 -0.2 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 125 Global Focus – Economic Outlook Q2-2021
Love her madly
The increase in UST yields may not have tightened US financial conditions, and it may
not be the sole cause of the increase in EM debt yields – either local-currency (LCY) Global
overview or hard-currency (HC) – but it is certainly not helping. The increase in US rates and
rates volatility has largely halted inflows to EM debt markets (EM flow dynamics –
Volatile, but still a rotation trade). Further, reduced demand from foreign investors in
an environment of increased bond supply has put steepening pressure on LCY yield curves. In some markets, central banks have been absorbing supply through open-
market operations, but the net result is that 10Y bond yields in many EM LCY markets economics Geopolitical have risen more than 10Y UST yields YTD (Figure 4). Outside of Asia, the yield moves
have been especially pronounced, with Mexico’s 10Y yield up by 120bps, South
Africa’s up 70bps and Brazil’s up 230bps.
Asia We are neutral on most EM LCY We see limited room for EM debt markets to outperform at the moment. EM/DM rate
debt markets spreads remain narrow, leaving EM bond markets vulnerable to further UST yield
increases and further EM FX volatility (EM LCY – Duration pain). Inflation across most of
Asia remains low, which should allow central banks to keep policy rates at record lows, supporting the front end of yield curves. But we expect fiscal stimulus and the burden of increased supply to keep steepening pressure on yield curves, led by the long end. We
MENAP currently recommend repo steepeners in China and IRS steepeners in Korea.
The increase in UST real yields has The increase in UST real yields has been blamed for poor EM performance recently,
not been as destabilising this time though we would be reluctant to label the recent moves as another taper tantrum.
as in 2013 Compared with 2013, the recent increase in UST real yields has been rather mild.
Africa Perhaps this explains the Fed’s reluctance to step in with verbal reassurance to the
market. In 2013, 10Y real yields increased by 180bps from the trough in December
2012 to the peak in September 2013. 10Y real yields have increased by less than
40bps YTD, and 5Y real yields are down c.25bps YTD. This might also explain why
the losses for a basket of EM currencies have been relatively mild (Figure 5). We
maintain our bias to be long EM FX in AXJ, including the CNY.
Europe
Americas
Figure 4: UST yield concerns spill over to Asia markets Figure 5: Are real yields really as threatening this time?
YTD change in 10Y yields, bps 10Y UST real yield, % (LHS) vs EM FX index (RHS)
100 1.5 100
outlook Strategy
90 10Y UST real
1.0
80 yield (LHS) 90
70
0.5 60 80 50 0.0 40
Forecasts 70
30 -0.5 20 60 -1.0 10 EM FX index (RHS) 0 -1.5 50 PH ID TH MY SG US KR IN CN Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 126
Global Focus – Economic Outlook Q2-2021
Could you be loved
overview The CNY remains among the strongest currencies YTD against the USD, along with Global the G10 commodity currencies. We expect this outperformance to continue. China
maintains a healthy growth differential versus the US and the rest of the world. China
is already starting to normalise both fiscal and monetary policy, while most major central banks are still actively engaged in quantitative easing (QE). Rate differentials
Geopolitical between the US and China are still supportive of the CNY, and China’s onshore bond economics market continues to see rapid foreign investor inflows. We expect the CNY to remain an anchor for currencies in AXJ; we forecast USD-CNY at 6.3 by end-Q2-2021.
The CGB market benefits from its The stability we have seen in CNY is also apparent in China CGBs. 10Y CGB yields have
low correlation to USTs increased by 6bps YTD, compared with a c.70bps increase in 10Y UST yields (Figure
6). Although the spread between CGBs and USTs has narrowed, we expect CGBs to Asia
continue to receive inflows from foreign investors looking to capture the yield spread and
diversification benefits of CGBs due to their low correlation to USTs. Further, with China’s CPI inflation remaining close to 0% and US inflation expected to increase, 10Y CGBs
have an attractive real yield advantage. Foreign inflows to China’s onshore bond markets exceeded CNY 1tn in 2020, rising more than 120% y/y. We expect inflows to reach CNY MENAP 1.3-1.5tn in 2021, offering further support for the CNY.
CNY to remain an anchor of stability US/China spreads have narrowed at the long end of the curve, but at the very front
for AXJ FX end, the spread between 3M SHIBOR and 3M USD LIBOR remains around 250bps. Over the last five years, the spread has been wider on only one occasion (Figure 7).
Africa Despite the increase in UST yields, we expect the FOMC to remain on hold until 2023,
keeping US money-market rates anchored at historically low levels and maintaining a
steep discount to China money-market rates (FOMC dots likely point to earlier lift-off).
If the USD short squeeze continues, we would expect the CNY to continue to outperform. This would imply potential further upside for the CNY on a basket basis,
Europe but once USD depreciation resumes – which we expect – USD-CNY should resume its downtrend.
Americas
Figure 6: Looking for places to hide in the bond markets Figure 7: CNY to remain supported by rate differentials
S
outlook 10Y CGB minus UST, % (LHS) vs 10Y China CGB, % (RHS) USD-CNY (LHS) vs 3M SHIBOR - 3M USD LIBOR, % (RHS) trategy 3.0 3.50 7.4 0.0
10Y CGB minus
UST yield (LHS) 7.2 0.5
2.5 3.25
USD-CNY (LHS) 7.0 1.0 2.0
Forecasts
3.00 6.8 1.5 1.5 6.6 2.0
2.75
1.0 6.4 2.5 3M SHIBOR - 3M USD 10Y China CGB yield 2.50 LIBOR, inverted (RHS) 0.5 6.2 3.0 (RHS) 0.0 2.25 6.0 3.5 Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21 Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21 Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 127 Global Focus – Economic Outlook Q2-2021
Is this love
Remain long EM FX, but be Although the broad USD sell-off has stalled so far in 2021, we maintain our preference
selective with the funding currency for being long AXJ currencies. Due to the ongoing uncertainty and volatility in UST Global
overview markets, we avoid the region’s high-yield currencies, such as the IDR and INR.
Although the weakness in high-yield EM FX has been much less pronounced than
during the 2013 taper tantrum, performance since February 2021 has shown clear
dispersion based on yield (Figure 8). In AXJ, we stick with CNH, SGD and AUD against the USD. We maintain our long KRW versus short JPY recommendation (Short JPY-
KRW – Tighten stop-loss), and we recently added a long SGD-THB trade (Buy SGD- economics Geopolitical THB; Figure 9). In the current environment of USD consolidation, we believe it is
important to reduce portfolio beta; diversifying the funding currencies helps to do that,
so we recommend using JPY and THB in addition to the USD.
Asia We add relative-value trades to our Outside of Asia, we are long MXN against the USD to maintain exposure to the global
FX recommendations to reduce manufacturing recovery and the improving economic outlook for the Americas; the
concentration risk and overall MXN is our sole high-yield EM FX long. We have also increased our relative-value
market beta positions to take advantage of idiosyncratic opportunities that strip out USD exposure. For example, we are short TRY-ZAR to take advantage of the countries’ relative exposures to the commodity recovery, while reducing explicit exposure to external
MENAP interest rate volatility (Sell TRY-ZAR).
We do not believe the USD depreciation trend is complete. But we are conscious of near-
term risks to our short USD view. These risks emanate largely from the US, where fiscal
stimulus – including the possibility of additional infrastructure spending – may keep UST
Africa yields elevated. At current US rate levels, we believe a lot of the good news for the US is
priced in, but we are prepared for the fact that there may be more good news in the
pipeline. We will continue to focus our FX recommendations on longs in lower-beta AXJ
currencies, using a diversified set of funding currencies to further reduce the volatility.
We will also continue to look for idiosyncratic opportunities that can be expressed as
relative-value trades with little net exposure to the USD or US rates.
Europe
Americas
Figure 8: High-yield FX hit in February and March Figure 9: Hiding in low-beta AXJ FX
Spot FX returns vs the USD since 12 February 2021 USD-CNY (LHS) vs USD-SGD (RHS)
0.0% 7.4 1.50
outlook Strategy
USD-CNY (LHS)
-1.0% 7.2
1.45 -2.0%
7.0
-3.0% 6.8 1.40
-4.0%
Forecasts
6.6 -5.0% 1.35 -6.0% 6.4 USD-SGD (RHS) -7.0% 6.2 1.30 TRY MXN IDR BRL ZAR Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21 Source: Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 128
Global Focus – Economic Outlook Q2-2021
Expresso love
overview We remain constructive on commodities, which have been the most resilient asset Global class to the shift from reflation optimism to inflation concerns. In fact, copper and oil
have accelerated their gains since the surge in UST yields gripped other financial
assets. And strong commodity performance has been well diversified across the energy, metals and agriculture sectors. Only gold and silver have been abandoned.
Geopolitical Perhaps this makes sense. The growth and inflation narrative that is driving UST yields economics higher is fuelled by fiscal stimulus and expectations of infrastructure spending. Commodities should perform well as a beneficiary of increased spending and
investment, and as a hedge against inflation if it should turn out to be sustainably higher than we expect.
Copper motors higher Copper remains our preferred expression of our constructive view on global Asia
commodities and global infrastructure spending, despite the significant price increase
from the March 2020 lows. Price gains now exceed 100% since 19 March 2020, yet copper exchange inventories remain light (Commodity Roadmap – Super-recycled).
Keep in mind that between 23 December 2008 and 15 February 2011, the copper rally exceeded 250% (SMS – Go your own way). MENAP
Oil is catching up, fueled by OPEC+ Oil markets had initially lagged the commodity recovery in 2020, but as we argued in
supply strategy and geopolitics our year-ahead outlook, oil perhaps offered the most upside convexity of any market
to an improvement in global growth expectations (MSV – I can see clearly now). Oil prices have recouped pre-COVID levels thanks to improving supply-demand
Africa fundamentals, further commitments to OPEC+ output restraint, and a willingness to
accommodate an overtightening of the oil market (On the Ground – OPEC+ - Extreme
caution and extreme risk-taking).
Gold now looks cheap measured Gold is the one commodity that has suffered due to rising UST yields, falling roughly
Europe against 5Y UST real yields 16% from the highs of USD 2,075/oz on 7 August 2020. Gold historically tracks 5Y UST real yields most closely, and at current levels, it appears relatively cheap versus
UST yields. Gold has fallen further out of favour as the broad USD has rallied in the
last few weeks, but we feel that current levels are attractive entry levels for
accumulating gold.
Americas
Figure 10: Commodities reaching for new highs Figure 11: Gold looks cheap to UST real yields
S
outlook Brent oil, USD/bbl (LHS) vs 3M LME copper, USD/t (RHS) Gold, USD/oz (LHS) vs 5Y UST real yield, inverted, % (RHS) trategy 90 10,000 2,200 -2.5
80 Brent oil (LHS)
-2.0 9,000 Gold (LHS) 2,000 70
-1.5
8,000 Forecasts 60 1,800 -1.0 50 7,000 -0.5 40 1,600
6,000 0.0 30 3M LME copper 1,400 5,000 20 (RHS) 5Y UST real yield 0.5 (RHS) 10 4,000 1,200 1.0 Feb-17 Sep-17 Apr-18 Nov-18 Jun-19 Jan-20 Aug-20 Mar-21 Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 129
Forecasts tables
Global Focus – Economic Outlook Q2-2021
Forecasts – Economies
overview Real GDP growth (%) Inflation (yearly average %) Current account (% of GDP) Global Country 2020 2021 2022 2023 2020 2021 2022 2023 2020 2021 2022 2023 # Majors -5.2 5.0 3.4 1.7 0.7 1.4 1.5 1.8
US^ -3.5 6.5 3.0 2.0 1.4 2.2 2.1 2.2 -3.1 -3.5 -3.0 -2.8
Euro area -6.8 3.7 4.0 1.3 0.3 1.5 1.3 1.8 2.1 2.0 2.3 2.5 Japan -4.9 2.8 1.8 1.1 0.0 0.2 0.5 1.0 3.2 3.5 3.5 3.0
UK -9.9 4.8 5.5 1.5 0.9 1.8 2.0 2.0 -3.8 -4.0 -4.0 -3.5 Geopolitical
economics Canada -5.4 5.5 3.5 2.5 0.7 2.1 2.0 2.1 -1.9 -1.8 -1.6 -1.0 Switzerland -3.0 3.0 2.4 1.6 -0.6 0.0 0.5 0.8 10.3 10.0 9.7 9.4 Australia -2.4 4.8 3.3 3.0 0.8 1.5 2.3 2.3 2.4 1.4 0.4 -0.7 New Zealand -2.9 4.0 3.4 3.3 1.7 2.0 1.6 2.0 -3.1 -2.9 -2.6 -2.7
Asia# -1.0 7.7 5.2 5.2 1.9 2.7 2.7 3.0 Bangladesh* 2.0 5.6 7.5 7.3 5.7 5.6 5.6 5.5 -1.6 0.2 -2.0 -2.0 China 2.3 8.0 5.6 5.5 2.5 0.9 2.5 2.5 1.9 1.2 0.6 0.0
Hong Kong -6.1 3.5 3.0 2.5 0.5 1.1 2.3 2.3 4.0 4.0 4.0 4.0
India** -7.3 11.5 5.0 5.5 6.2 4.9 4.2 4.0 1.0 -0.8 -1.3 -1.8 Asia Indonesia -2.1 4.5 5.0 5.2 2.0 2.2 3.0 2.5 -0.6 -1.8 -2.3 -1.8
Malaysia -5.6 5.7 5.9 4.8 -1.1 2.5 1.9 2.2 3.6 1.7 1.8 2.0 Philippines -7.3 6.1 6.5 5.9 2.6 4.8 2.6 2.7 3.6 2.0 -0.5 -1.2
Singapore -5.4 6.3 4.4 1.9 -0.2 1.2 0.7 1.1 16.5 16.5 16.0 15.0 South Korea -1.0 3.2 2.6 2.5 0.5 1.3 1.5 1.8 3.5 3.8 3.5 3.0
Sri Lanka -3.6 4.5 4.2 4.5 4.2 4.7 4.5 4.5 -1.3 -1.4 -2.5 -2.5
Taiwan 3.1 4.4 2.5 2.0 -0.2 1.2 1.0 1.0 14.0 11.0 9.0 8.0 MENAP Thailand -6.1 2.4 3.0 4.5 -0.9 1.0 1.5 3.0 3.3 3.5 3.0 -0.5 Vietnam 2.9 6.7 7.3 6.7 3.2 3.8 4.2 5.5 1.8 2.2 2.9 2.9 #
MENAP -1.6 2.6 3.6 4.4 9.6 11.4 4.7 4.0 Bahrain -4.0 1.8 2.5 3.0 -3.0 1.0 1.5 1.5 -11.0 -2.0 -2.5 -2.0
Egypt* 3.6 2.0 5.5 6.5 5.2 4.7 5.5 6.0 -2.4 -3.8 -3.6 -2.0
Iraq -12.0 1.7 3.6 5.0 0.6 3.0 2.0 1.5 -15.5 -6.0 -5.0 -6.0
Jordan -4.4 2.3 1.5 3.0 1.3 1.8 1.3 2.6 -6.7 -4.2 -3.8 -6.0 Kuwait -6.3 2.5 3.4 3.0 1.2 0.8 2.5 2.5 -8.5 8.4 4.2 4.0
Africa Lebanon -25.0 -10.0 -5.0 0.0 84.0 95.0 15.0 5.0 -13.0 -10.0 -12.0 -15.0 Oman -5.0 0.0 2.6 3.5 0.5 2.5 2.0 2.0 -13.5 -7.6 -6.0 -6.0 Pakistan* -0.4 1.5 4.0 5.0 10.8 8.5 7.7 7.1 -1.4 -2.1 -2.0 -2.0 Qatar -3.5 3.0 3.3 4.0 -2.5 0.5 1.5 2.0 -2.5 4.1 0.5 2.6
Saudi Arabia -4.1 1.9 2.7 3.5 3.4 2.9 2.2 3.3 -4.8 3.0 4.0 3.5
Turkey 1.8 4.5 3.5 4.0 12.3 13.2 12.0 11.0 -5.0 -4.0 -3.0 -2.5 UAE -5.5 2.5 3.0 3.5 1.4 2.7 3.0 3.0 0.0 5.1 5.8 6.6 Africa# -2.5 3.5 3.6 4.2 7.7 8.6 6.8 5.5 Europe Angola -4.3 2.3 2.0 3.0 20.6 19.2 12.1 8.0 -6.4 5.0 2.0 1.8 Botswana -7.7 8.0 5.6 3.9 1.9 4.4 3.7 2.6 -14.2 -5.2 -4.4 -3.7 Cameroon 0.8 3.2 4.6 4.5 2.0 2.0 2.0 2.0 -4.0 -3.8 -3.6 -3.5 Côte d’lvoire 1.9 6.7 6.5 6.7 2.0 2.0 2.0 2.0 -3.1 -2.7 -2.9 -2.8
The Gambia -2.1 6.0 5.9 6.1 4.9 5.8 6.6 5.7 -11.8 -10.9 -10.1 -9.8 Ghana*** 1.5 4.9 5.0 4.9 10.0 7.8 7.4 6.5 -3.0 -3.2 -3.8 -4.0
Kenya 1.5 5.3 4.5 5.1 5.4 6.8 6.0 6.5 -4.9 -5.4 -5.7 -5.5 Americas Nigeria -1.9 2.5 3.1 4.0 13.1 16.4 10.3 9.3 -3.3 -2.5 -2.0 -2.0 Sierra Leone -2.7 4.0 4.5 5.2 14.4 11.1 10.8 7.5 -12.6 -11.9 -11.1 -11.7 South Africa -7.1 3.6 2.4 2.5 3.3 4.2 3.9 4.5 2.2 1.5 -0.8 -1.3 Tanzania 4.5 3.2 6.0 6.6 3.2 3.3 4.3 5.0 -1.0 -4.1 -5.5 -5.5
Uganda -0.3 5.0 6.0 7.0 3.9 3.7 4.4 4.1 -9.2 -8.7 -9.0 -9.5 Zambia -2.9 3.0 3.0 4.6 15.6 24.9 15.2 8.4 2.7 3.0 2.0 1.5
Zimbabwe -10.0 3.0 0.8 5.5 619.2 133.6 5.0 5.4 5.0 -0.4 -1.2 -1.5
# Strategy Emerging Europe -3.3 3.3 3.0 2.5 3.3 3.3 2.8 2.6 outlook Czech Republic -5.5 3.5 3.7 2.2 3.2 2.5 2.0 2.0 3.0 1.0 0.5 0.5 Hungary -4.8 4.0 4.0 2.7 3.3 3.5 3.0 3.0 0.1 0.3 1.0 1.5
Poland -2.7 3.5 4.0 3.5 3.3 3.0 2.5 2.5 3.2 2.2 1.5 1.0 Russia -3.1 3.2 2.5 2.2 3.3 4.3 3.5 3.0 1.5 2.0 3.0 3.5
Latin America# -6.7 4.8 2.9 2.6 8.9 8.8 8.0 4.5
Argentina -6.8 1.9 2.5 2.5 41.0 34.0 29.0 10.0 -0.6 -1.0 -1.5 -2.5
Brazil -4.6 3.7 2.5 2.5 2.4 5.3 4.0 3.5 -1.5 -1.7 -1.3 -2.5 F Chile -5.1 6.9 3.5 3.5 3.1 3.9 3.7 3.0 -0.2 0.3 -0.9 -2.5 orecasts
Colombia -7.6 5.6 4.1 3.3 2.8 2.9 4.0 4.0 -5.5 -4.0 -3.0 -3.0 Mexico -8.7 5.8 2.9 2.2 2.9 3.6 3.5 3.5 0.1 1.6 0.5 0.2
Peru -7.1 9.4 4.1 3.3 1.4 3.1 4.0 3.0 -3.2 0.2 -1.2 -2.5 #
Global -3.3 5.7 4.1 3.4
^ US: Core PCE deflator used for inflation * Bangladesh, Egypt, and Pakistan: Figures are for fiscal year ending in June of year shown in column heading ** India: Figures are for fiscal year starting in April of year shown in column heading *** Ghana CPI only a broad estimate # Global and regional GDP forecasts are calculated by taking the weighted average of economies’ GDP in PPP terms, while regional inflation forecasts are calculated by taking the simple average of economies’ inflation Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 131 Global Focus – Economic Outlook Q2-2021
Forecasts – FX
Country Q2-21 Q3-21 Q4-21 Q1-22 Q2-22 2021 2022 2023 2024 2025
Majors Global
overview Euro area 1.17 1.17 1.20 1.22 1.23 1.20 1.26 1.26 1.26 1.26
Japan 110.0 110.0 108.0 106.0 105.0 108.0 105.0 104.0 104.0 103.0 UK 1.40 1.40 1.40 1.40 1.40 1.40 1.39 1.39 1.38 1.38
Canada 1.26 1.25 1.22 1.21 1.19 1.22 1.26 1.26 1.26 1.26
Switzerland 0.97 0.98 0.93 0.89 0.88 0.93 0.87 0.87 0.86 0.86 Australia 0.80 0.80 0.82 0.82 0.82 0.82 0.82 0.82 0.81 0.81 New Zealand 0.73 0.74 0.75 0.75 0.75 0.75 0.75 0.75 0.74 0.74
economics Asia Geopolitical Bangladesh 85.50 85.50 86.00 86.50 86.50 86.00 87.00 88.00 89.00 90.00
China 6.30 6.40 6.45 6.50 6.55 6.45 6.50 6.60 6.65 6.70
CNH 6.29 6.40 6.45 6.50 6.55 6.45 6.50 6.60 6.65 6.70
Hong Kong 7.81 7.81 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80
India 75.00 76.00 76.50 76.50 77.50 76.50 78.50 80.50 82.00 84.00
Asia Indonesia 14,400 14,500 14,600 14,700 14,800 14,600 14,840 15,070 15,320 15,590 4.10 4.05 4.00 4.05 4.10 4.00 4.00 4.05 4.05 4.10
Malaysia
Philippines 49.50 50.50 51.00 51.25 51.50 51.00 51.50 51.70 51.80 52.00
Singapore 1.34 1.33 1.32 1.33 1.34 1.32 1.32 1.32 1.32 1.32
South Korea 1,100 1,080 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,060 Sri Lanka 190.0 200.0 210.0 215.0 215.0 210.0 215.0 220.0 225.0 230.0 Taiwan 28.30 28.20 28.00 28.00 27.90 28.00 27.80 27.70 27.60 27.50
Thailand 31.50 31.25 31.00 30.50 31.00 31.00 31.30 31.70 32.00 32.30 MENAP
Vietnam 23,100 23,100 23,000 23,000 22,700 23,000 22,500 22,000 21,500 20,900
MENAP
Bahrain 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 Egypt 15.70 15.80 15.80 15.80 15.90 15.80 16.20 18.78 18.95 19.40
Iraq 1,460 1,460 1,460 1,460 1,460 1,460 1,460 1,460 NIL NIL Jordan 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71
Africa Kuwait 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30
Lebanon – – – – – 6,000 7,000 8,000 – –
Oman 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.39
Pakistan 160.0 161.0 162.0 163.0 164.0 162.0 170.0 180.0 190.0 200.0
Qatar 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64
Saudi Arabia 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 Turkey 8.50 8.75 9.00 9.25 9.50 9.00 10.00 9.80 10.15 10.51
Europe UAE 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67
Africa
Angola 650.0 670.0 680.0 695.0 700.0 680.0 715.0 736.0 758.1 780.8
Botswana 11.32 11.33 11.43 11.40 11.45 11.43 11.54 11.85 11.71 12.07
Cameroon 560.6 560.6 546.6 537.7 533.3 546.6 520.6 520.6 520.6 520.6 Côte d’lvoire 560.6 560.6 546.6 537.7 533.3 546.6 520.6 520.6 520.6 520.6 The Gambia 53.55 54.00 54.59 54.90 55.05 54.59 56.02 58.10 60.61 63.45
Americas Ghana 5.85 5.90 6.10 6.25 6.35 6.10 6.50 6.60 6.44 6.42
Kenya 111.6 112.5 113.3 112.9 114.0 113.3 114.3 115.0 116.5 113.0
Nigeria 420.0 425.0 440.0 450.0 455.0 440.0 460.0 470.0 525.0 500.0
Sierra Leone 10,505 10,818 11,025 11,291 11,407 11,025 12,008 12,989 14,005 15,049
South Africa 14.50 14.30 13.85 14.10 14.20 13.85 14.20 14.50 14.90 15.30 Tanzania 2,335 2,340 2,350 2,355 2,360 2,350 2,370 2,370 2,550 2,530
Uganda 3,680 3,700 3,705 3,720 3,715 3,705 3,730 3,770 4,270 4,150 outlook
Strategy Zambia 22.90 23.40 24.00 23.70 23.90 24.00 24.20 24.50 25.50 21.00
Zimbabwe 89.00 99.00 104.0 104.4 106.0 104.0 108.2 112.5 117.0 121.7
Emerging Europe
Czech Republic 21.79 21.37 20.83 20.49 20.33 20.83 20.12 20.10 20.10 20.10 Hungary 308.0 308.0 300.0 295.0 293.0 300.0 280.0 282.0 284.0 287.0 Poland 3.68 3.59 3.50 3.44 3.41 3.50 3.39 3.40 3.41 3.42 Russia 75.00 75.00 75.00 75.00 75.00 75.00 75.00 76.50 77.40 78.30
Forecasts Latin America
Argentina 102.0 111.0 120.0 130.0 135.0 120.0 93.30 101.0 109.3 118.3 Brazil 5.90 6.00 5.75 5.50 5.50 5.75 5.45 5.55 5.70 5.80 Chile 780.0 775.0 775.0 725.0 700.0 775.0 830.0 840.0 850.0 865.0 Colombia 3,700 3,750 3,600 3,500 3,400 3,600 3,360 3,440 3,520 3,600 Mexico 22.00 21.50 21.00 20.50 20.00 21.00 20.60 20.95 21.30 21.70 Peru 3.85 3.90 3.85 3.80 3.70 3.85 3.40 3.45 3.50 3.55 Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 132
Global Focus – Economic Outlook Q2-2021
Forecasts – GDP
overview
Global Country Real GDP growth (% y/y)
Q2-21 Q3-21 Q4-21 Q1-22 Q2-22 Q3-22 Q4-22 Q1-23
Majors
Geopolitical US 13.2 6.8 6.0 4.9 2.9 2.2 2.2 2.0 economics
Euro area 12.5 1.9 3.6 5.7 4.6 3.1 2.5 1.8
Japan 7.8 3.5 1.8 3.2 1.6 1.2 1.1 1.1
UK 18.3 5.7 6.1 10.8 6.5 3.0 2.0 1.7
Canada 13.9 5.6 4.0 4.0 3.3 3.3 3.3 3.1
Asia Australia 9.0 5.8 4.0 3.7 3.3 3.4 2.8 3.1
New Zealand 13.6 0.5 2.3 3.1 3.5 3.5 3.5 3.3
Asia
China 7.0 5.0 4.8 5.2 5.6 5.7 5.7 5.6 MENAP
Hong Kong 3.9 3.0 3.8 3.8 3.8 2.5 2.0 2.2
India 22.5 12.8 5.5 5.0 5.5 5.0 5.0 5.0
Indonesia 7.2 6.0 6.5 5.6 4.6 4.9 5.1 5.2
Malaysia 18.7 3.0 6.4 8.9 7.1 5.2 2.9 4.8
Africa Philippines 15.5 5.4 2.4 6.2 6.8 6.5 6.3 6.3
Singapore 15.1 6.9 5.3 5.4 5.4 4.3 2.5 1.9
South Korea 5.1 3.6 3.3 2.7 2.6 2.5 2.4 2.4
Sri Lanka 14.0 1.5 2.1 3.9 6.0 3.0 4.0 4.3 Europe
Taiwan 7.1 3.1 1.9 2.5 2.5 2.5 2.5 2.0
Thailand 7.0 3.5 4.0 3.0 4.0 2.0 3.0 4.5
Vietnam 8.0 6.6 7.0 7.7 7.2 7.2 7.2 6.7
Source: Standard Chartered Research Americas
Strategy
outlook
F
orecasts
Standard Chartered Global Research | 31 March 2021 133 Global Focus – Economic Outlook Q2-2021
Forecasts – Rates
End-period Current Q2-21 Q3-21 Q4-21 Q1-22 Q2-22 United States Policy rate 0.25 0.25 0.25 0.25 0.25 0.25
Global overview 3M LIBOR 0.20 0.20 0.20 0.25 0.25 0.25
2Y bond yield 0.14 0.20 0.25 0.35 0.40 0.55 5Y bond yield 0.91 0.90 1.00 1.20 1.30 1.50
10Y bond yield 1.73 1.75 1.75 2.00 2.00 2.10
Euro area Policy rate 0.00 0.00 0.00 0.00 0.00 0.00 3M EURIBOR -0.33 -0.50 -0.50 -0.45 -0.50 -0.50 10Y bond yield -0.27 -0.30 -0.30 -0.20 -0.20 -0.20
economics United Kingdom Policy rate 0.10 0.10 0.10 0.10 0.10 0.10 Geopolitical 3M Libor1 0.09 0.10 0.15 0.20 – –
10Y bond yield 0.84 0.85 0.85 1.00 1.00 1.10
Australia Policy rate 0.10 0.10 0.10 0.10 0.10 0.10
3M OIS 0.04 0.04 0.04 0.04 0.04 0.04
China Policy rate2 2.95 2.95 2.95 2.95 2.95 2.95 Asia 1Y deposit rate 1.50 1.50 1.50 1.50 1.50 1.50
RRR (major banks) 12.50 12.50 12.50 12.50 12.50 12.50
10Y bond yield 3.23 3.50 3.30 3.20 2.90 3.00
Hong Kong 3M HIBOR 0.23 0.30 0.35 0.40 0.40 0.45
10Y bond yield 1.66 1.40 1.40 1.70 1.70 1.80
India Policy rate 4.00 4.00 4.00 4.00 4.00 4.00 91-day T-bill rate 3.33 3.50 3.75 4.00 4.25 4.50
MENAP 10Y bond yield 6.31 6.40 6.40 6.60 6.60 6.80
Indonesia Policy rate 3.50 3.50 3.50 3.50 3.50 3.50
FASBI rate 2.75 2.75 2.75 2.75 2.75 2.75
10Y bond yield 6.75 6.25 6.50 6.75 7.00 7.25
Malaysia Policy rate 1.75 1.75 1.75 1.75 1.75 1.75
3M KLIBOR 2.01 2.00 2.00 2.00 2.00 2.00
10Y bond yield 3.28 3.00 3.20 3.30 3.40 3.60 Africa Philippines Policy rate 2.00 2.00 2.00 2.00 2.00 2.00
Standing overnight deposit rate 1.50 1.50 1.50 1.50 1.50 1.50
10Y bond yield 3.73 3.70 3.70 3.80 4.00 4.50 Singapore 3M SGD SIBOR 0.44 0.45 0.45 0.45 0.45 0.50
10Y bond yield 1.74 1.20 1.30 1.30 1.50 1.80 South Korea Policy rate 0.50 0.50 0.50 0.50 0.50 0.50
91-day CD rate 0.75 0.65 0.65 0.65 0.65 0.65 Europe
10Y bond yield 2.08 1.80 1.90 2.10 2.20 2.40
Taiwan Policy rate 1.13 1.13 1.13 1.13 1.13 1.13
3M TAIBOR 0.48 0.45 0.45 0.45 0.45 0.45
10Y bond yield 0.44 0.70 0.80 0.80 0.90 0.90
Thailand Policy rate 0.50 0.50 0.50 0.50 0.50 0.50 THFX6M 0.42 0.50 0.50 0.50 0.50 0.50
10Y bond yield 1.91 1.30 1.25 1.20 1.20 1.60 Americas
Vietnam Policy rate (Refi rate) 4.00 4.00 4.00 4.00 4.00 4.00
Overnight VNIBOR 0.24 0.10 0.10 0.10 0.10 0.10
5Y bond yield 1.04 2.80 2.90 2.90 3.00 3.00
Ghana Policy rate 14.50 14.50 14.50 14.50 14.00 14.00
91-day T-bill rate 12.87 13.55 13.40 13.20 13.10 13.00
5Y bond yield 18.14 18.80 18.95 19.00 19.20 19.20 outlook
Strategy Kenya Policy rate 7.00 7.00 7.00 7.00 7.00 7.50
91-day T-bill rate 7.09 6.40 6.60 6.60 6.70 6.80
10Y bond yield 11.85 12.15 12.25 12.20 12.20 12.20
Nigeria Policy rate 11.50 11.50 11.50 11.50 11.50 11.50 91-day T-bill rate 0.55 1.50 3.00 4.00 4.50 5.00 10Y bond yield 11.42 10.50 11.50 12.00 12.40 12.50 South Africa Policy rate 3.50 3.50 3.50 3.50 3.50 3.50
Forecasts 91-day T-bill rate 3.81 3.70 3.70 3.80 3.80 3.80
10Y bond yield 9.98 9.40 9.30 9.30 9.20 9.20 Tanzania 91-day T-bill 2.50 2.60 2.80 3.00 3.00 3.60 10Y bond yield 11.60 12.20 12.20 12.00 12.40 12.50 1 From Q1-2022 onwards absence of forecasts contingent on confirmation of IBA proposed publication cessation from end-2021 2 Starting from 30 Nov 2019, we are forecasting the 1Y medium-term lending facility (MLF) rate Source: Standard Chartered Research
Standard Chartered Global Research | 31 March 2021 134
Global Focus – Economic Outlook Q2-2021
Forecasts – Commodities
overview
Global Q2-21 Q3-21 Q4-21 Q1-22 Q2-22 Q3-22 2021 2022
Energy
Crude oil (nearby future, USD/bbl)
Geopolitical
economics
ICE Brent 73 67 56 57 58 59 65 59
NYMEX WTI basis Cushing, Oklahoma 71 65 54 55 56 56 63 56
Dubai 72 66 55 56 56 57 64 55
US natural gas (nearby future, USD/mmBtu)
Asia
NYMEX basis Henry Hub Louisiana 2.30 2.40 2.30 2.50 2.30 2.30 2.40 2.40
Metals
Base metals (LME 3M, USD/t) MENAP
Aluminium 2,225 2,290 2,210 2,000 1,990 1,975 2,206 1,979
Copper 8,990 9,250 9,100 8,600 8,100 7,500 8,960 7,900
Lead 1,980 1,965 1,962 1,960 1,950 1,930 1,986 1,944
Africa Nickel 16,600 16,900 16,800 16,700 16,500 16,200 16,973 16,325
Tin 24,000 22,800 21,000 21,000 19,800 19,500 22,875 19,875
Zinc 2,760 2,800 2,700 2,610 2,590 2,570 2,756 2,590
Precious metals (spot, USD/oz) Europe
Gold 1,775 1,820 1,875 1,800 1,750 1,700 1,820 1,713
Palladium 2,800 2,600 2,500 2,400 2,300 2,000 2,575 2,175
Platinum 1,250 1,150 1,250 1,200 1,150 1,200 1,206 1,213 Americas
Silver 27.5 29.0 30.0 28.0 26.0 24.0 28.4 25.0
Source: Standard Chartered Research
Strategy
outlook
F
orecasts
Standard Chartered Global Research | 31 March 2021 135 Global Focus – Economic Outlook Q2-2021
Forecasts – Selected interbank rates by tenor
2021 2022
Global End-period Q2 Q3 Q4 Q1 Q2 Q3 Q4
overview
USD LIBOR
FFTR 0.25 0.25 0.25 0.25 0.25 0.25 0.25
1M 0.15 0.15 0.20 0.15 0.15 0.15 0.20
economics Geopolitical
3M 0.20 0.20 0.25 0.25 0.25 0.30 0.35
6M 0.20 0.25 0.30 0.30 0.30 0.35 0.45
12M 0.35 0.35 0.40 0.40 0.45 0.50 0.65
Asia
SGD SIBOR
1M 0.30 0.30 0.30 0.30 0.35 0.40 0.45
3M 0.45 0.45 0.45 0.45 0.50 0.50 0.55 MENAP
6M 0.60 0.60 0.65 0.65 0.70 0.70 0.70
HIBOR
1M 0.15 0.20 0.25 0.25 0.25 0.25 0.30 Africa
3M 0.30 0.35 0.40 0.40 0.45 0.50 0.60
6M 0.50 0.55 0.55 0.55 0.60 0.65 0.75
12M 0.70 0.70 0.75 0.75 0.80 0.90 1.00
Source: Standard Chartered Research Europe
Americas
outlook
Strategy
Forecasts
Standard Chartered Global Research | 31 March 2021 136
Global Focus – Economic Outlook Q2-2021
Authors Razia Khan Edward Lee +44 20 7885 6914 +65 6596 8252 [email protected] [email protected] Head of Research, Africa and Middle East Chief Economist, ASEAN and South Asia Standard Chartered Bank Standard Chartered Bank (Singapore) Limited
Sarah Hewin Christopher Graham +44 20 7885 6251 +44 20 7885 5731 [email protected] [email protected] Head of Research, Europe and Americas Economist, Europe Standard Chartered Bank Standard Chartered Bank
Shuang Ding Wei Li +852 3983 8549 +86 21 3851 5017 [email protected] [email protected] Chief Economist, Greater China and North Asia Senior Economist, China Standard Chartered Bank (HK) Limited Standard Chartered Bank (China) Limited
Tim Leelahaphan Philippe Dauba-Pantanacce +66 2724 8878 +44 20 7885 7277 [email protected] [email protected] Economist, Thailand Senior Economist | Global Geopolitical Strategist Standard Chartered Bank (Thai) Public Company Limited Standard Chartered Bank
Chidu Narayanan Mayank Mishra +65 6596 7004 +65 6596 7466 [email protected] [email protected] Economist, Asia Global FX and Macro Strategist Standard Chartered Bank (Singapore) Limited Standard Chartered Bank (Singapore) Limited
Saurav Anand Nagaraj Kulkarni +91 22 6115 8845 +65 6596 6738 [email protected] [email protected] Economist, South Asia Senior Asia Rates Strategist Standard Chartered Bank, India Standard Chartered Bank (Singapore) Limited
Divya Devesh Becky Liu +65 6596 8608 +852 3983 8563 [email protected] [email protected] Head of ASA FX Research Head, China Macro Strategy Standard Chartered Bank (Singapore) Limited Standard Chartered Bank (HK) Limited
Kelvin Lau Terry Chan +852 3983 8565 +852 3983 8560 [email protected] [email protected] Senior Economist, Greater China Fixed Income Associate Standard Chartered Bank (HK) Limited Standard Chartered Bank (HK) Limited
Kanika Pasricha Aldian Taloputra +91 22 6115 8820 +62 21 2555 0596 [email protected] [email protected] Economist, India Senior Economist, Indonesia Standard Chartered Bank, India Standard Chartered Bank, Indonesia Branch
Chong Hoon Park Jonathan Koh +82 2 3702 5011 +65 6596 8075 [email protected] [email protected] Head, Korea and Japan Economic Research Economist, Asia Standard Chartered Bank Korea Limited Standard Chartered Bank (Singapore) Limited
Arup Ghosh Tony Phoo +65 6596 4620 +886 2 6606 9436 [email protected] [email protected] Senior Asia Rates Strategist Senior Economist, NEA Standard Chartered Bank (Singapore) Limited Standard Chartered Bank (Taiwan) Limited
Standard Chartered Global Research | 31 March 2021 137 Global Focus – Economic Outlook Q2-2021
Carla Slim Sarah Baynton-Glen, CFA +971 4508 3738 +44 20 7885 2330 [email protected] [email protected] Economist, MENAP Economist, Africa Standard Chartered Bank Standard Chartered Bank
Emmanuel Kwapong, CFA Geoff Kendrick +44 20 7885 5840 +44 20 7885 6175 [email protected] [email protected] Economist, Africa Global Head, Emerging Markets FX Research Standard Chartered Bank Standard Chartered Bank
Emiko Bowles John Davies +44 20 7885 6409 +44 20 7885 7640 [email protected] [email protected] Research Associate US Rates Strategist Standard Chartered Bank Standard Chartered Bank
Steve Englander Ilya Gofshteyn +1 212 667 0564 +1 212 667 0787 [email protected] [email protected] Head, Global G10 FX Research and North America Macro Strategy Senior EM Macro Strategist Standard Chartered Bank NY Branch Standard Chartered Bank NY Branch
Eric Robertsen [email protected] Global Head, Research | Chief Strategist Standard Chartered Bank
The scale of US fiscal stimulus and speed of vaccine rollout have significantly lifted Contents global economic prospects. We now expect the global economy to grow 5.7% in 2021. Overview Across developed and emerging markets alike, the differentiated pace of vaccine rollout will determine the speed of economic reopening. It remains an uneven race. Where we differ from consensus
While global growth optimism has contributed to commodity gains and renewed Geopolitics inflation concerns, we maintain a cautious outlook given the uneven nature of the Asia economic recovery. We believe that inflation concerns are overdone. Despite rising MENAP UST yields, we expect monetary policy to remain accommodative across our coverage universe, with EM central banks likely to err on the side of growth. Africa Europe Asia – Differentiated growth. Thanks to strong external demand and successful pandemic management, China, Taiwan and Vietnam all started 2021 with GDP above Americas pre-COVID levels. In domestically driven economies like Indonesia and the Strategy outlook Philippines, vaccine rollout rates will shape the economic recovery. Forecasts China – Robust growth, with a focus on rebalancing. China’s latest Five-Year Plan focuses on higher-quality growth, deepening supply-side reforms, and measures to boost domestic demand. The recovery to date has been uneven, concentrated in exports and sectors benefiting from easy credit; consumer-related sectors are still below pre-pandemic levels.
India – Expansionary fiscal policy supports recovery momentum. Consumption and public capex are likely to drive growth. India is seeing an uneven recovery, with rural demand growing faster than urban demand. New COVID outbreaks are a risk. Razia Khan Given the challenge of inoculating one of the world’s largest populations, we do not +44 20 7885 6914 [email protected] seeStandard a full Chartered economic Global reopening Research | 31until March 2022. 2021 138 Head of Research, Africa and Middle East Africa – New waves of COVID are a persistent threat. Sub-Saharan Africa has had Standard Chartered Bank less vaccine access than other regions. While the multilateral response to the
Global Focus – Economic Outlook Q2-2021
Disclosures appendix
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Chong Hoon Park is/are employed as an Economist(s) by Standard Chartered Bank Korea and authorised to provide views on
Korean macroeconomic topics only.
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Document approved by Document is released at Sarah Hewin 18:30 GMT 31 March 2021 Head of Research, Europe and Americas
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