Mauritania Becomes a Launchpad for Irregular Migration to The EU

Indonesia

Our growth model suggests that switching to loose fiscal and monetary policy could help raise growth, but only partially.

Moving further up the manufacturing value chain, and graduating from exporting just ores and metals, to exporting EV batteries and EVs, and thereby reducing the impact of commodity price shocks on the economy, could push potential growth to 5.8% by 2028.

Malaysia

At full steam

After slow growth in 2023, Malaysia’s economy has been roaring again, expanding by 5.1% y-o-y in 1H24. The momentum has also been impressive, hitting 2.9% q-o-q, seasonally adjusted, in 2Q. Beyond strong headline numbers, what is more encouraging is the breadth of the recovery.

Electronics shipments have returned to growth

For one, the long-anticipated revival in manufacturing is rather outstanding. Albeit delayed compared to peers, Malaysia’s manufacturing and trade sectors have finally turned the corner, riding the global tech upturn. After a long stretch of annual declines, electrical and electronics shipments returned to growth on a three-month moving average basis, albeit this remains at a nascent stage. Meanwhile, there is a mixed performance in commodities, with palm oil and LNG exports leading.

While construction expanded in double digits

In addition to manufacturing, what was a great surprise is the performance of construction, which expanded by a double-digit y-o-y pace for the second consecutive quarter. Coupled with the expenditure side of the gross fixed capital formation data, this is not only related to the government’s recent increase in public investment but also reflects rising interest in FDI-related large-scale projects. Meanwhile, services continue to show strength. Not only has private consumption shown resilience, but tourism has also added much-needed fuel, as Malaysia has welcomed tourists equivalent to 90% of its pre-pandemic levels.

Given the upside surprise in 2Q, we recently upgraded our GDP growth for 2024 to 5.0% (previously: 4.5%), while keeping 2025 growth at 4.6%.

We expect interest rates to stay on hold for a while

Outside of growth, inflation pressure remains largely muted, despite diesel subsidy rationalisation in June. Headline inflation averaged around 1.8% y-o-y in the first seven months of the year. Even after taking into account unfavourable base effects, we expect manageable inflation. We forecast inflation at 2.3% in 2024 and 3.0% in 2025, though acknowledge uncertainty from the potential subsidy rationalisation on the petrol RON95. Our base case is for Bank Negara Malaysia (BNM) to keep its policy rate steady at 3.0% for a prolonged period.

As long as inflation falls within BNM’s 2-3.5% forecast range, we do not expect the central bank to move. That said, the risk of a hike is higher than a cut in Malaysia, compared to regional peers.

Philippines

The Philippines started its easing cycle in August

The Philippine central bank, Bangko Sentral ng Pilipinas (BSP), embarked on its easing cycle in August, cutting its policy rate by 25bp to 6.25% – even before the Federal Reserve (Fed) had lowered its policy rate.

It is good to look back to see how impressive this was. From 2022 to 2023, not only was inflation in the Philippines the highest in ASEAN, but the economy’s current account deficit was as wide as it was in the run-up to the Asian Financial Crisis. Many, including HSBC, thought that monetary policy in the Philippines had the least independence from the Fed when compared to others in ASEAN.

As headline inflation dropped below 3% y-o-y

However, the Philippines in 2024 held itself together and turned the corner. The authorities cut the tariff for rice – the country’s most ubiquitous staple – from 35% to 15%, setting the stage for headline inflation to ease to below 3% y-o-y, or to within the lower bound range of the BSP’s 2-4% target band. The current account deficit is also moderating at a pace faster than expected, thanks to the economy’s Business Process Outsourcing (BPO) sector booming over the past year. This provides the BSP with inflows to help strengthen the peso and some support to wiggle away from the Fed. And, given how far inflation can still ease, the BSP already signalled that more rate cuts are to come.

Rate cuts should stimulate growth in 2025 & 2026

The easing cycle comes at a good time. Although growth in the Philippines has held up relative to therest of Asia, some cracks are already showing. For instance, growth in household consumption dipped to its lowest level since the Global Financial Crisis, barring the COVID-19 pandemic, while growth in durable equipment investment has fallen for the second consecutive quarter. Credit in the economy also remains weak with the cost of borrowing high. That said, we expect the BSP’s easing cycle to reinvigorate small- to medium-scale investments and reduce the debt burden of households, bolstering growth in 2025 and 2026. We are even more bullish on next year’s prospects, with the tariff rate cut on rice potentially freeing-up 1.1% of the economy for growth.

With inflation on its way down but nothing terrible happening to GDP, we expect the BSP’s easing cycle to be gradual. We expect only one more 25bp rate cut (to 6.00%) in 2024 and pencil in a total of 100bp worth of rate cuts in 2025, bringing the year-end policy rate to 5.00%. We think the easing cycle will end in 2025, so we expect the policy rate to remain at 5.00% throughout 2026.

Singapore

A mixed bag

Singapore has made good progress in its economic recovery in 2024. While the possibility of a technical recession was still on the cards in 2Q23, the recovery momentum continues, helping Singapore to emerge from a severe downturn in the trade cycle to see healthy growth of c3% y-o-y in 1H24.

Consumer electronics is set to lead Singapore’s recovery

While manufacturing remained in contraction, the magnitude was much smaller, and it is also a mixed story. The culprit was falling pharmaceutical output, which is volatile in nature, and could swing back to growth later. Electronics output still saw a decent recovery, though the pace lags behind other tech-exposed economies like Korea and Taiwan Region. But this is because they have heavier exposure to Artificial Intelligence (AI)-related production, and Singapore is set to ride a broader recovery in consumer electronics.

Services came in better-thanexpected

Despite still subdued manufacturing activity, better-than-expected services came to the rescue. But it is also a mixed bag. On a sequential basis, domestically oriented sectors fared better, while consumer-facing and travel-related ones saw large corrections in 2Q. But this was largely expected, as a busy line-up of large-scale international concerts was concentrated in 1Q. That said, there is still potential to grow further. Singapore has welcomed visitors equivalent to almost 90% of 2019’s level in 1H24. July saw for the first time the return of Chinese tourists exceeding the monthly 2019’s level.

All in all, we recently upgraded our growth forecast to 3.0% (previously: 2.4%) for 2024 and maintain our 2025 growth forecast at 2.6%.

Core inflation continued to decelerate in July

In addition, the disinflation progress also continues with core inflation decelerating to 2.5% y-o-y in July. Services inflation like education and healthcare continued to trend down, but entertainmentrelated costs barely budged. Most importantly, fuel and utilities cost momentum was muted, and oil prices are likely to stay relatively range-bound for now. As such, we recently revised down our core inflation forecast to 2.8% for 2024 (previously: 3.1%) and 1.9% for 2025 (previously: 2.2%).

Although we do not think the MAS will cut rates soon

Despite cooling inflation, we do not believe this will prompt the Monetary Authority of Singapore (MAS) to ease anytime soon; at least inflation trends on their own may not be enough to warrant an easing bias from the MAS.

Thailand

It’s complicated

Manufacturing and goods exports picked up steam Thailand’s GDP growth accelerated to 2.3% y-o-y in 2Q 2024, with its fiscal engines finally up and running, despite delaying the release of its budget for six months. The manufacturing production index in July also at last turned positive after falling for roughly 21 months, while goods exports leaped by 21.8% y-o-y as Thailand benefitted from the global tech upcycle. This coincides with the PMI new orders index, which just turned expansionary for the first time in 12 months back in July. All in all, it seems the economy is finally revving up. We expect Thailand to stage a V-shaped recovery for the remainder of 2024, growing 2.7% and 3.7% y-o-y in 3Q and 4Q 2024, respectively.

However, a lot happened before the economy got to where it is now. Amidst tough competition from mainland Chinese imports, headline inflation dropped back to below the Bank of Thailand’s (BoT) 1- 3% target band, while the trade balance swung back into deficit. Thailand also saw its political landscape change quickly: in less than 48 hours after Srettha Thavisin was removed from office, parliament elected Paetongtarn Shinawatra as Thailand’s youngest Prime Minister in history.

Although progress hasn’t been a straight line, the general direction is improving. In fact, amidst the political volatility, financial markets in Thailand finally ticked up after underperforming for 12 straight months. The SET index in September jumped for the first time this year, while the THB nominal effective exchange rate (NEER) is nearing its pre-pandemic levels.

Government spending and tourism are fuelling growth, but headwinds persist

The Thai economy, however, isn’t all in the clear. Yes, government spending and tourism continue to fuel growth. But headwinds persist in manufacturing and consumption. Competition from mainland Chinese imports may limit how far manufacturing can improve while Thailand’s high household debt will likely be a major drag on private consumption.

We expect rates to stay on hold until at least 2027

That’s the complicated part. Although headwinds are strong and inflation is weak, we do not expect the Bank of Thailand (BoT) to ease monetary policy from now until 2027. Keeping the policy rate at 2.50% should help guide Thailand’s much-needed deleveraging cycle, particularly on household debt.

Vietnam

Waiting for further lift

Vietnam’s growth surprised on the upside in 2Q. Vietnam’s economic recovery continues to firm up as the Year of the Dragon progresses. Growth improved and surprised on the upside in 2Q24, rising 6.9% y-o-y in 2Q24. The recovery in the external sector has started to broaden out beyond consumer electronics, although the pass-through to lifting the domestic sector still remains to be seen.

Helped by manufacturing and industrial production

For one, the manufacturing sector has emerged strongly from last year’s woes. PMIs have registered five consecutive months of expansion, while industrial production (IP) has registered a bounce-back in activity for the textiles and footwear industry as well. This has supported robust export growth at double digits, with structural forces, such as expanding market access for Vietnamese agricultural produce, also underway.

However, retail sales are still lagging

However, the domestic sector is recovering more slowly than initially expected, with retail sales growth still below the pre-pandemic trend. Encouragingly, the government has put in place measures to support a wide range of domestic sectors that is expected to shore up confidence with time. Environment tax cuts on fuel and value-added tax cuts for certain goods and services will last until year-end 2024, while the revised Land Law effective from August will buttress the outlook for real estate. Albeit still early, the latter seems to have already contributed to a boost in foreign investment in the sector, with recent FDI showing broad-based gains.

We believe the potential upside risks can offset the temporary economic disruptions from Typhoon Yagi. All in all, we forecast GDP growth at 6.5% for both 2024 and 2025.

Inflation is cooling as unfavourable base effects fade

On inflation, price developments are turning more favourable in 2H24, as unfavourable base effects from energy have faded. An expected Fed easing cycle will also help to alleviate some exchange rate pressures. Taking all these into consideration, we forecast inflation at 3.6% in 2024 and 3.0% for 2025, both well below the State Bank of Vietnam’s target ceiling of 4.5%.

A predicted slide in Halloween consumption is the latest blow for heavily-indebted retailers battling mounting overheads and the trend of consumers trading down to cheaper products.

US spending for the holiday will drop by 5 per cent to US$11.6 billion (S$15.1 billion) this year, according to the National Retail Federation. Sales of greeting cards and costumes are likely to see the greatest decline, a hit to merchants reliant on seasonal splurges in what’s already been a tough year for the industry.

Households on the lower end of the income scale are broadly struggling as unemployment has edged higher this year and underlying inflation has remained persistently high. Retailer Michaels Cos. said on a recent earnings call that households earning less than US$100,000 are retrenching, resulting in lower basket sizes.

“2024 has been a perfect storm for retailers of all stripes,” said Erica Weisgerber, a partner at law firm Debevoise & Plimpton. “Inflation, high operational costs, and reduced consumer spending have been especially challenging for brick-and-mortar retailers, and online retailers have struggled with steep competition from e-commerce giants like Amazon.”

Many of the troubled firms, including Michaels and At Home Group, are owned by private equity managers after buyouts during the pandemic proved ill-timed when interest rates rose and inflation crimped household budgets. Home, clothing and hobby retailers dominate the list of distressed retailers because the size of their debt means they lack the liquidity to compete with better capitalised competitors, according to Moody’s Ratings.

Still, Michaels and At Home are hopeful that they can win a larger slice of the holiday spending. At Home saw a strong start to Halloween spending after flat second-quarter net sales of about US$443 million, chief financial officer Jerry Murray said on a September earnings call.

Michaels also saw a revenue pop tied to Halloween as customers began to buy inventory earlier this year, according to people on last month’s earnings call. That’s a fillip for the firm whose earnings declined by about 20 per cent to US$50 million in the second quarter from a year earlier, the people said, asking not to be identified as the information is private.

The pullback is creating challenges for the wider industry and has contributed to several high-profile bankruptcies this year, including Joann Inc., Big Lots and Conn’s Inc. It also makes it harder to turn around firms simply by slashing costs.

With capital markets shunning troubled firms, more retailers turned to bankruptcy rather than distressed exchanges over the past year as the companies require deeper restructuring that is best done in court, Moody’s Ratings said in a report last month. It’s part of a wider trend that saw quarterly filings for Chapter 11 bankruptcy protection rise to the highest level since 2012 in the three months through June.

Private equity’s widespread failure to hedge against rising borrowing costs also means it’s less able to come to the rescue of troubled firms, which could have knock-on effects for the economy and jobs.

Source: Straitstimes

Citigroup has struggled to adequately train employees in risk, compliance and data roles, according to the bank's own assessment, shedding light on why it is taking it years to fix regulatory issues even as billions are spent on an overhaul.

Citi’s analysis, a portion of which was seen by Reuters and has not been previously reported, shows the bank has been grappling with a shortage of skilled personnel, finding at times that it did not have the right training and assessment tools to fix its regulatory challenges. The bank, which has for the past four years been operating under two regulatory reprimands, called consent orders, must resolve these problems for the decrees to be lifted.

In one place, for example, the analysis cites "insufficient compliance risk management skills” among staff directly dealing with such issues. The sections of the analysis seen by Reuters did not address why Citi had not been able to fix these issues. They were laid out in a December 2023 spreadsheet tracking Citi's progress on various aspects of the consent orders.

Separately, four sources familiar with the matter said the situation was further complicated when CEO Jane Fraser launched a massive exercise in September 2023 to simplify the bank, firing thousands of people and reducing the number of management layers there.

In the process, some staff involved in issues related to the consent orders were also let go, according to the sources.

Reuters could not independently determine whether the layoffs set back the bank's overall efforts to resolve the consent orders. Without providing specifics, Citi denied this, saying that "cherry picking numbers will paint a misleading picture."

"We continue to invest heavily in talent and training to ensure we have the right people and expertise in critical areas such as data, risk, controls and compliance,” the bank said in a statement. It added that it proactively assesses "the evolving skills needed so that we can hire" and enhance skills accordingly.

In response to questions posed by Reuters, Citi said further that it has invested billions of dollars in its "transformation," a project to address risks, controls and data management – issues raised in the 2020 consent orders from the U.S. Federal Reserve and the Office of the Comptroller of the Currency. The analysis seen by Reuters was done in response to the Fed’s consent order.

Citigroup said it had about 13,000 people dedicated to the project to overhaul its controls and systems, with thousands more supporting the effort across the bank. The bank has about 229,000 employees overall.

The Federal Reserve and the Office of the Comptroller of the Currency declined to comment.

CEO Jane Fraser has said previously that resolving Citi’s regulatory problems is a top priority. Regulators have said the bank's widespread risk and data flaws they have identified speak to its financial safety and soundness. The bank was put in the penalty box after it mistakenly sent nearly $900 million of its own funds in August 2020 to creditors of cosmetics company Revlon.

In July, the Fed and the OCC once again reprimanded and fined the bank. The OCC said Citi had “failed to make sufficient and sustainable progress” in complying with its consent order. The OCC also required it to enact a new quarterly process to ensure it devoted enough resources to meet compliance milestones. As of mid-July, the plan had not been agreed with regulators.

Last month, the company announced its technology head Tim Ryan would take on data management efforts alongside Chief Operating Officer Anand Selvakesari.

HARD PROBLEMS

The bank's analysis shines a light on why the problems are proving to be intractable. In one section, for example, the bank said its staff's technical skills, including on data governance -- policies that set out how data is handled -- needed to be improved. But then it also noted that when it came to data governance, its training curriculum did not sufficiently address "skills identified as needing enhancement."

It also identified areas such as data analytics and digital literacy as needing improvement.

For critical roles in compliance, the bank found it had not spelled out the skills that were needed to succeed. It also said it did not have an adequate assessment of whether employees had the right skills sets for those functions.

Citi did not comment on the specific issues raised in its analysis.

CITI LAYOFFS

The sources familiar with the bank's operations said Fraser's layoffs led to the removal of some of the people involved in regulatory work.

In risk management, for example, the bank laid off or redeployed 67 people out of a group of 441, according to a Citi document that lists some of the roles affected in one of the rounds of layoffs.

Some of the sources said the layoffs disrupted work because employees feared for their jobs and loss of managers at times meant lack of direction. But Citi challenged this view, saying it was careful to not let the layoffs affect work on consent orders.

"The facts speak for themselves, but cherry-picking numbers will paint a misleading picture of the significant resources dedicated to this effort," the bank said. "Our approach was disciplined and methodical, and prioritized protecting our ability to deliver on our regulatory commitments and accelerate this important work."

Source: The edge markets

The war on inflation is not over, but judging by the data, some battles have been won. In August, the annual rate of inflation was 2.5 percent in the United States and 2.2 percent in the eurozone. Core inflation, which excludes energy and food, was 3.2 percent and 2.8 percent in these areas respectively. Money printing has been brought under control and the proportional rise in prices has slowed since June 2022 in the U.S. and October 2022 in the eurozone. Central bankers have always claimed that their goal is low inflation (about 2 percent), rather than stable purchasing power for the dollar and euro. By that metric, success is in sight.

Moreover, the public is calm, expecting slowdowns in the price indexes before long. Most people are not aware that inflation has major redistributive effects, and that the low- and middle-income earners usually get hit. But workers realize that inflation ends up eroding their purchasing power; homeowners worry when rising nominal interest rates make their mortgages heavier; and pensioners know that under high inflation the real return on safe securities such as bonds drops to zero or turns negative.

That said, big government and part of the business world have other priorities and possibly other plans. The 2 percent inflation target may not be the true target.

Red lines for monetary expansion

Governments traditionally like generous monetary policies in general, and money printing in particular. They believe that by increasing the money supply – for example, by manipulating interest rates – they can create economic growth, while newly printed money can be used to buy treasury bills, thus allowing policymakers to finance public expenditure “for free,” without resorting to taxation or private savings.

But things have changed. After the major blunders of the past couple of decades, the “print what it takes” mantra has now been replaced by the “prudent monetary policy” slogan, where “prudent” means that monetary policy should be as generous as possible without unleashing a rate of inflation judged intolerable to the electorate. This shift raises two big questions: What delineates the red line for monetary expansion, and how can policymakers ensure they do not cross this line?

Both the U.S. and several European Union governments are currently in need of generous monetary policies and inflation support. This demand is not a recent development; as mentioned above, governments require additional revenue to manage public deficits. They also benefit from low interest rates that reduce the cost of borrowing and debt-servicing and boost private investment and debt-financed households’ consumption. Governments also need inflation to rein in some key expenditure items in real terms (such as state pensions), reduce public indebtedness in real terms, and possibly enhance debt sustainability (the debt-to-GDP ratio).

There is no objective way to determine the point at which monetary profligacy becomes alarming, but it takes time – at least two years – before monetary policy fully translates into consumer price inflation. People’s unease depends on their short-term debt-servicing (interest rates are often linked to inflation) and on how much they depend on capital income (including pensions). Of course, the latter effect is larger in countries with older populations. In this light, government action can take three different paths, as described in corresponding scenarios.

Scenarios

Most likely: Gradual easing

Less likely: Defining boundaries

Somewhat less likely: Abandoning prudence

Source: GIS