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Rate-Cut Powder Seen Kept Dry Before Greek Vote: Southeast Asia

Asian manufacturers would be exposed to a Greek exit from the euro zone via weaker export demand and reduced trade financing, Moody’s Analytics said last week. Photographer: Nana Buxani/Bloomberg
Asian manufacturers would be exposed to a Greek exit from the euro zone via weaker export demand and reduced trade financing, Moody’s Analytics said last week. Photographer: Nana Buxani/Bloomberg

June 11 (Bloomberg) -- Central banks in Southeast Asia’s two largest economies meet to set interest rates this week, with officials forecast to hold off on stimulus days before a Greek election at risk of triggering a deeper European turmoil.

Indonesia and Thailand, along with the Philippines, the region’s No. 5 economy, will keep interest rates unchanged, according to surveys of economists by Bloomberg News. Bank Indonesia meets tomorrow, the Bank of Thailand June 13 and Bangko Sentral ng Pilipinas the day after.

Policy makers across the globe are confronting the dangers posed by Europe and slowing growth, with China, Brazil and Australia opting for rate cuts the past two weeks. Many Asian nations are better prepared now than when the credit crunch hit in 2008, according to HSBC Holdings Plc and Moody’s Analytics, giving scope to hold rate-cut fire for now.

“Even though there is a temptation to cut rates now, doing so too aggressively could mean that monetary policy is too loose” at a time when inflation pressures remain, said Frederic Neumann, Hong Kong-based co-head of Asian economics at HSBC and a former consultant to the World Bank. “It would be more advisable to spur fiscal policy.”

President Benigno Aquino is taking that approach in the Philippines, increasing state spending to a record this year. Last week, the government started the bidding process for a 60 billion-peso ($1.4 billion) Manila rail extension project and won pledges for more than $500 million of investment projects from Glencore International Plc and Gazasia Ltd.

Malaysia Spending

Malaysia, which kept its benchmark unchanged last month and next meets to set rates July 5, has also turned to fiscal stimulus and spurring investment to support growth.

Prime Minister Najib Razak, who unveiled a record 232.8 billion ringgit ($73 billion) budget in October, has raised civil servant salaries and pensions, waived school fees and boosted handouts for the poor. In May, he announced private investment plans worth a total 20.5 billion ringgit.

Malaysia’s industrial production growth quickened in April, with output at factories, utilities and mines rising 3.2 percent from a year earlier, after climbing a revised 1.5 percent in March, the statistics department said today. That compares with the median estimate for a 2 percent increase in a Bloomberg News survey of 16 economists.

While Asia is in a better shape to withstand an export slump compared with 2008 as countries become less reliant on European and U.S. demand, a global slowdown will still hurt the region, according to HSBC’s Neumann.

’Less Exposed’

“As far as trade is concerned, Asia appears a little less exposed than in 2008,” Neumann said in a note last week. Still, “the sensitivity of local growth to swings in credit appetite has increased in the intervening years. Crucially, Asia’s policy response to another global slump may be less forthright than before.”

Asian manufacturers would be exposed to a Greek exit from the euro zone via weaker export demand and reduced trade financing, Moody’s Analytics said last week. The severity of the downturn may not be as severe as the 2008-09 global recession as regional companies and policy makers are “better positioned heading into any new crisis,” economists Fred Gibson and Glenn Levine said in a June 6 note.

The MSCI Asia-Pacific Index of regional shares has fallen more than 16 percent in the past year as the escalating European crisis spurred outflows from emerging markets. Greece will hold elections on June 17 after an inconclusive earlier vote, and the results could hand power to parties that oppose the terms of the nation’s rescue package, precipitating its exit from the 17-nation euro area.

Steepest Slowdown

The risks have driven policy makers to act to shore up a global economy that is suffering its steepest slowdown since the recession ended in 2009. China cut interest rates last week for the first time since 2008 to counter what Premier Wen Jiabao has called increasing downward economic pressure. Vietnam has cut interest rates four times this year as growth slowed to 4 percent in the first quarter, the smallest gain since 2009.

European Central Bank President Mario Draghi left the door open at a June 6 press conference to a rate cut, while highlighting the limitations of the ECB’s tools in countering the region’s financial turmoil. U.S. Federal Reserve Chairman Ben S. Bernanke told a Congressional committee last week that policy makers will discuss later this month whether to do more to spur growth, though he said the steps they could take may have “diminishing returns.”

Showing Resilience

Southeast Asian economies have shown resilience as domestic demand helped counter faltering exports. Indonesia, Southeast Asia’s largest economy, expanded more than 6 percent for a sixth straight quarter in the three months through March. Thailand’s economy unexpectedly expanded last quarter, while Philippine growth was the fastest since 2010.

Indonesia will hold interest rates at 5.75 percent tomorrow, according to all 21 economists surveyed by Bloomberg News. Inflation unexpectedly slowed for the first time in three months in May, even as price risks persist with a declining currency. The country took steps last month to reduce excess funds in the economy while extending a pause in rate cuts to contain price risks, saying it would raise the rates on central bank bills and term deposits.

Thailand will keep its key rate at 3 percent for a third straight meeting on June 13, all 15 economists surveyed by Bloomberg predict. The Philippines will maintain the benchmark rate at 4 percent for a second meeting a day later, according to 10 of 11 economists in a separate survey, with one forecasting a quarter-point cut.

“Managing inflation remains our primary mandate and so we will consider the balance of these factors and determine if there is a need to make adjustments to policy,” Bangko Sentral Governor Amando Tetangco said in a mobile-phone text message on June 8. The central bank will consider global developments and “the domestic growth trajectory if there are inflation pressures that we need to be wary about,” he said.

In South Asia, Sri Lanka will keep the repurchase rate steady at 7.75 percent for a second month on June 13, according to six of eight economists. One predicts an increase and the other expects a cut. The island’s central bank increased borrowing costs in February and April to curb rising prices.

To contact the reporters on this story: Karl Lester M. Yap in Manila at; Shamim Adam in Singapore at

To contact the editor responsible for this story: Stephanie Phang at

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