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A Slow Progress To Recovery - Fears of a Second Wave Dampen Recovery Outlook
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A Slow Progress To Recovery - Fears Of A Second Wave Dampen Recovery Outlook

Global Markets

Data from the United States Bureau of Economic Analysis revealed that the United States economy grew by a 4% annual rate in Q4’2020. In Q3’2020, the United States economy grew by a 33.40% annual rate. The sustained GDP growth in Q4’2020 is mainly attributed to increased exports, consumer spending, and residential fixed investment. Although the US economy showed an improvement which began in Q3’2020, after a poor Q2’2020 performance induced by the coronavirus pandemic, the spike in new COVID-19 cases domestically weighed heavily on economic recovery. Overall, in 2020, the United States economy declined by 3.50% YoY (FY’2019: +2.20% YoY). The economic decline in 2020 represented the US economy’s worst performance since 1946.

Domestic Economy

The most recent Purchasing  Managers’ Index (PMI) data revealed that Manufacturing PMI lowered to 49.60 index points in December 2020 (November 2020: 50.20 index points). The decline in Manufacturing PMI implied that the economic contraction worsened in December 2020. We attribute the worsened economic contraction to the lingering impact of the coronavirus pandemic. In particular, we relate the decline in raw material/work-in-progress index (the primary manufacturing PMI decline driver) to FX scarcity during the period. Employment level index also lowered in December 2020.

The Non-Manufacturing PMI also contracted in December 2020 to 45.70 index points from 47.60 index points in November 2020. A decline in business activity, new orders/customers/incoming business, employment level, and inventory all resulted in an overall non-manufacturing PMI. As highlighted in the Manufacturing PMI, we also attribute the Non-Manufacturing PMI weakness in December 2020 to the continued impact of the coronavirus pandemic and FX scarcity.

The Monetary Policy Committee met on January 25 – 26, 2021. The Committee considered the global and domestic macroeconomic developments. In the domestic economy, some of the MPC considerations included the possibility of renewed COVID-19 infections and rising inflation driven by higher food prices, deregulation of the downstream oil industry, and the upward adjustment in electricity tariffs. Overall, the Committee decided to keep the policy rate and other parameters unchanged. The Committee argued against a loosening despite its pro-growth stance, citing the implications on price and exchange rate stability.

Outlook

Although we note the contraction in economic activities in December 2020, as suggested by the PMI data, we expect to see a recovery in January 2021 and February 2021. We base our assumptions on a combined effect of the fiscal and monetary policies by the authorities.

We expect to see a downward trend in food prices in the coming months, on the back of the government’s directive to reopen the borders. However, we think that it will be a gradual step before it becomes effective. On the other hand, we see price pressures coming from fuel prices (given rising oil prices), and electricity tariffs (resulting from tariff adjustment). We also expect to see further exchange rate adjustments, which adds to the overall price pressure. Overall, we project inflation to rise to 16.11% in January 2021 and 16.54% in February 2021.

Fixed Income Markets

Yields in the fixed income markets have begun to rise since the start of 2021, resulting from the market's expectations of a yield reversal. Also, we believe that investors are on the hunt for a positive real return amid heightened inflationary pressures. Currently, the benchmark 10-year bond yields trade at 9% levels. We expect the yields on benchmark bonds to be within 8% - 12% in the near to medium term.

Equities Market

In our economic outlook titled ‘The Recovery’, we expected to see a continued rally in the equities market in the near term, given sustained inflows into stocks. We posited to see a possible reversal in the equities market in H2’2021 due to our expectations of a yield reversal in the fixed income markets amid widening fiscal and current account deficits. However, the recent rise in fixed income yields could hamper the equities market’s current positive momentum. In January 2021, the equities market’s price appreciation slowed to 5% from 15% in December 2020. Depending on the fixed income markets’ activities, we could see a price reversal in the equities market sooner than expected.

Foreign Exchange Market

We believe that macroeconomic pressures still exist in the foreign exchange markets, which could continue to threaten the exchange rate's stability. However, we note that the recent rising trend of crude oil prices could support external reserves and result in an improved supply of dollars


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