SOUTH KOREA — Monetary conditions will remain conducive to economic growth in South Korea; we think that further monetary stimulus may be implemented in the second quarter despite the fact that the Bank of Korea (BoK) opted to leave its benchmark interest rate unchanged at 1.50% in March. The BoK will pay close attention to the following developments when setting its policy stance: 1) major countries’ monetary policy direction, 2) financial and economic conditions in China, 3) international capital flow dynamics, 4) geopolitical risks, and 5) increasing household debt burden in South Korea. The South Korean inflation outlook remains manageable, yet the headline inflation rate rose to 1.3% y/y in February from 0.8% the month before, reflecting higher agricultural product prices. We expect to see a further modest pick-up in price pressures over the coming months; the annual inflation rate will likely reach around 1⅔% by the end of the year, remaining below the BoK’s 2% inflation target for 201618. In our view, South Korea’s economic outlook will improve gradually over the coming quarters as monetary and fiscal stimulus underpins domestic demand; the nation’s real GDP growth expansion will likely average 2.9% y/y over the next two years. Parliamentary elections will take place on April 13th, 2016. We assess that given a divided opposition, the ruling Saenuri Party will likely win a majority. The party’s agenda is centered on labour market reforms, reducing income inequality, boosting job creation and youth employment, and raising birth rates by increasing the number of child care centers.
THAILAND — Thailand’s economic outlook remains challenging, yet the country’s authorities assess that monetary policy space needs to be preserved should conditions deteriorate further. Accordingly, on March 23rd the Bank of Thailand (BoT) opted to leave the benchmark interest rate unchanged at 1.50%. Following the monetary policy meeting, the BoT authorities expressed concerns regarding international capital flows and associated high exchange rate volatility as well as their potential adverse impact on the economy’s recovery prospects. Given that financial stability is among the central bank’s key priorities, the BoT will continue to monitor investors’ yield-seeking behaviour closely and may intervene in order to smooth excessive currency volatility. We expect a moderate economic recovery to continue over the coming quarters; Thailand’s real GDP will likely grow by around 3% this year, mainly supported by tourism and public sector outlays. Meanwhile, the export sector continues to struggle. Thailand’s inflation outlook remains muted; the headline inflation rate remained in negative territory in February when prices dropped by 0.5% y/y. We expect deflationary pressures to remain in place in the first half of 2016, after which modest price gains will take the inflation rate toward the lower end of the BoT’s medium-term target of 2½% ±1½%.
TAIWAN — Monetary conditions continue to ease in Taiwan. On March 24th, the central bank injected further monetary stimulus into the weak economy and lowered the benchmark interest rate by 12.5 basis points to 1.50%. The prior rate cut had taken place in December 2015. The central bank noted that a subdued inflation outlook and a widening negative output gap warranted additional stimulus measures. Moreover, authorities assess that monetary accommodation would promote financial stability given that low interest rates globally have recently triggered a surge of capital flows into Taiwan. Such developments have caused elevated volatility in the foreign exchange and financial markets; therefore, policymakers will stand ready to intervene to prevent the New Taiwan dollar from appreciating significantly. Headline inflation jumped to 2.4% y/y in February from 0.8% a month earlier on the back of higher food prices that reflected cold weather and the timing of the Chinese New Year celebrations. We expect price gains to remain manageable over the foreseeable future with the inflation rate returning to below 2% y/y in the near term. The Taiwanese economy continues to struggle with muted domestic demand and struggling export sector performance; we expect the nation’s real GDP to grow by around 1½% in 2016. The Taiwanese political power structure is changing; the Democratic Progressive Party, which won the January 16th elections, now holds a majority in parliament. President-elect Tsai Ing-wen will take office in May.
TURKEY — The Turkish economy appears to have started the year off strong, underpinned by solid gains in industrial production. The country’s elevated current account deficit also continues to gradually narrow and public sector finances remain sound. Expectations that the US Federal Reserve will follow a more moderate pace of monetary tightening this year than we had previously anticipated should also prove supportive of the Turkish lira, which has registered a modest recovery in recent weeks to 2.87 against the US dollar (USD). Nevertheless, the lira remains over 25% lower against the USD since mid-2014 and inflation continues to hover well above the Turkish Central Bank’s medium-term target of 5%, at 8.8% y/y in February. Meanwhile, despite robust manufacturing output, other key indicators have been less encouraging. Indeed, growth in retail sales has been soft and capacity utilization has retreated. High-frequency surveys such as consumer and business confidence, and PMIs have also weakened, suggesting that external uncertainty and the escalation of domestic terrorist violence are countering the potential boost to sentiment from the stabilization of the lira and financial market conditions. We expect Turkish real GDP growth to slow to 3.4% this year from 3.7% in 2015, and that elevated inflation and adverse pressures on the lira will persist, ending 2016 at 8.0% y/y and 2.95 per USD, respectively.