RBI on tricky terrain of high inflation and slowing growth (Economic Times)

Nomura expects RBI to cut rates by 100 bps this cycle (Economic Times)

Devendra Fadnavis to take oath as Maharashtra CM today, PM Modi to attend (Business Standard)

FinMin, CBI, public banks discuss ways to expedite bank fraud investigations (CNBC TV18)

Ministry of Coal announces 11th round of commercial coal mine auctions (CNBC TV18)

India's GDP growth loses momentum: What's behind the urban spending freeze?(Business Standard)

The Economic Times India's services sector saw strong growth in November, PMI shows (www.m.economictimes.com)

Services PMI remains strong at 58.4 in November on consistent demand, record hiring (Financial Express)

Govt working on centralised data repository for state welfare schemes (Economic Times)

• Next Policy Meeting: December 4-6, 2024
• Current Policy Rate: 6.5%
• Last Decision: Hold (October 9, 2024)
• Our Forecast: Hold
• Rationale: Persistent inflationary pressures and expectations of further price increases suggest that the RBI will maintain the repo rate at 6.5% in December.

At its October 9 meeting, the Reserve Bank of India's Monetary Policy Committee (MPC) voted unanimously to maintain the benchmark repo rate at 6.5%, alongside holding the standing deposit facility (SDF) rate steady at 6.25% and the marginal standing facility (MSF) rate at 6.75%. This session marked the debut of the newly appointed external members, whose contributions brought a novel dimension to the deliberations. While the RBI had switched its stance to neutral in the meeting paving way for rate cuts in December, this is now expected to be deferred.

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At the time, the Monetary Policy Committee (MPC) reaffirmed its commitment to the medium-term inflation target of 4%, underscoring the need for vigilance in the face of price volatility. Governor Shaktikanta Das flagged geopolitical tensions, fluctuating global oil prices, and domestic food supply disruptions as key risks to the inflation outlook. With October's Consumer Price Index (CPI) inflation climbing to 6.21% y/y, the Reserve Bank of India (RBI) is expected to adopt a cautious tone, indicating that rate cuts are unlikely in the near future as it prioritizes price stability. However, the recent real GDP data for Q2 revealed strong deceleration in economic activity and this could prompt changes to other tools such as the cash reserve ratio and open market operations.

Economic Growth

India's economic growth showed considerable deceleration in Q2 FY25, as private consumption eased and public spending uptick was moderate at best. Persistently high inflation has eroded purchasing power among the urban population, which led to moderating demand in the quarter. The downturn was primarily attributed to a weaker performance in the manufacturing sector. The print was less than that predicted by the market as well as the Reserve Bank of India (RBI). the Gross Value Added (GVA) in agriculture grew by 3.5% y/y during the quarter, up from 1.7% in the same period last year and 2% in Q1 FY24, signalling resilience in the sector. Meanwhile, the GVA for manufacturing dropped sharply to 2.2% y/y, compared to a robust 7% in Q1 and 14.3% growth in the previous year, reflecting subdued industrial momentum. With the exception of agriculture, all other sectors recorded a slowdown in activity. The mining sector recorded a contraction of 0.1% y/y, which was primarily on account of limited activity during the monsoon season.

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Recent PMI data also suggests the momentum slowdown continuing in Q3 as well, which will be of concern. Nonetheless, the RBI expects the momentum to pick up in H2 as government steps up spending and private demand revives.

Inflation

Inflation remains a critical concern. After moderating to 3.5% in July, Consumer Price Index (CPI) inflation surged to 5.5% in September and further to 6.21% in October, exceeding the RBI's upper tolerance threshold. Rising food prices, exacerbated by erratic weather patterns and supply chain disruptions, have been the main driver of this uptick.

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In response, the government has implemented measures such as releasing strategic reserves of wheat, rice, and sugar to stabilise prices. Despite these efforts, external risks-including volatile global oil prices and escalating geopolitical tensions, particularly in the Middle East-pose significant upside risks to inflation. The RBI is expected to remain vigilant, balancing growth objectives with the need to anchor inflation expectations.

The RBI expects CPI inflation to average 4.5% for FY25, but headline inflation may stay elevated in Q4 2024, with projections of 4.8% in Q3 and 4.2% in Q4. While the MPC maintains a neutral stance, it is unlikely to pivot toward rate cuts until inflation shows consistent moderation.

Financial and External Sector

India's banking system remains stable, with credit growth averaging 18.8% y/y in 2024, driven by demand from services, personal loans, and infrastructure projects. Foreign exchange reserves reached a record high of USD 682.1bn as of early November, providing a buffer against external shocks. Despite a widening current account deficit (CAD) to 1.1% of GDP in Q1 FY25, strong remittance inflows and resilient service exports have kept the external position manageable. Foreign portfolio inflows surged, with USD 19.2bn net inflows recorded from June to October, reflecting improved investor sentiment.

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Outlook

The FY25 budget seeks to energize the economy through a blend of tax incentives and significant infrastructure spending. However, these efforts face challenges from persistently high inflation and steep borrowing costs, which continue to dampen consumer and business confidence.

At its December policy meeting, the Reserve Bank of India (RBI) is anticipated to adopt a cautious approach, maintaining a wait-and-see stance as inflation risks remain prominent. A recent uptick in inflation, along with potential pressures from fluctuating global oil prices, has reduced the odds of an imminent rate cut. While earlier projections hinted at monetary easing by year-end, such measures now seem more likely in early 2025, contingent on sustained inflation moderation and a stable global economic environment.

In the short term, the RBI is expected to prioritize price stability over growth concerns, reflecting its commitment to managing inflation. Striking this balance amid persistent geopolitical and economic uncertainties will be critical, reinforcing the central bank's focus on preserving macroeconomic stability.

Further Readings

Monetary Policy Meeting Statement, October 2024

Reserve Bank of India Consumer Confidence Survey, Oct 2024

Reserve Bank of India Household Expectations Survey, Oct 2024

Minutes of the Monetary Policy Committee Meeting, Oct 2024

• Govt to introduce B40 biodiesel in 2025, B50 in 2026
• Govt aims to end reliance on imports of key commodities, including rice

The government aims to end diesel imports by 2026, Energy Minister Bahlil Lahadalia said. This will be achieved by increasing the share of the biocomponent in the diesel mix, allowing Indonesia to utilise more of its domestically produced palm oil.

The government will introduce the B40 biodiesel in 2025, which includes a 40% palm oil biocomponent in the fuel mix. The share will increase to 50% in 2026, with the B50 biodiesel, which will then allow Indonesia to rely solely on its domestic production.

Overall, the new government seems to be on a scheme to make the country self-sustainable in a bid to end the reliance on imports for key commodities, including food. We remind that the government also aims to stop rice imports as soon as 2025.

• Loan to help financial inclusion of MSMEs, women, youth and rural population

The ADB approved a USD 500mn loan for Indonesia to support financial inclusion, according to an official press release. The loan will help provide vulnerable groups, including MSMEs, with access to financial services.

The loan will finance the development of a digital finance ecosystem and the implementation of Bank Indonesia's payment system blueprint for 2025. Women, youth and rural populations will also be supported by the programme.

This is the third loan under the ADB's financial inclusion programme extended to Indonesia.

UAE Hopes for Continued Strong Ties with Indonesia Under President Prabowo Subianto (Tempo)

Indonesia's Energy Ministry Offers 6 Oil and Gas Blocks in Second 2024 Auction (Tempo)

House Plenary Session Confirms Appointment of KPK Leaders (Jakarta Globe)

Indonesia Targets End to Diesel Imports by 2026 (Jakarta Globe)

ADB Greenlights $500 Million Loan for Indonesia's Financial Inclusion (Jakarta Globe)

Ridwan gears up for runoff despite rival claiming single-round victory (The Jakarta Post)

Apple should build factory in Indonesia: Industry Minister (Antara News)

• Govt previously rejected USD 100mn offer from Apple

The government expects to receive USD 1bn investment commitment from Apple in a week, investment minister Roman Roeslani told the parliament. Every company that benefits from sales in Indonesia must invest in the country and create jobs, he added. Thus, the value added will grow as suppliers will follow, he concluded.

We remind that Apple offered to invest USD 100mn over two years in Indonesia, but the government rejected the proposal. The move comes after the government banned iPhone 16 sales in Indonesia as it does not meet the minimum criteria for 40% of its parts to be produced locally.

At any rate, the government and Apple are embroiled in a sort of a trade war, with the large Indonesian market helping the government push forward its agenda to multinational companies.

• Both external and domestic debt declined
• Debt-to-GDP ratio slips to lowest in seven years
• Pace of debt accumulation slows sharply during Jul-Oct FY25

Central government debt fell for the second consecutive month by PKR 456.2bn m/m to PKR 69.1tn at the end of October, according to the State Bank of Pakistan (SBP) data. The contraction reflects the government's improved revenue position following the record transfer of profits by the central bank that reduced its borrowing needs. The debt was equal to 55.7% of the projected FY25 nominal GDP, the lowest in seven years.

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Domestic debt declined by PKR 305.5bn m/m to PKR 47.2tn at end-October as a gain in the stock of long-term bonds, mainly Pakistan Investment Bonds (PIBs), was offset by a plunge in the stock of T-bills. Similarly, external debt, which excludes IMF obligations and forex liabilities, fell for the first time in six months by PKR 150.7bn m/m to PKR 21.9tn. With the USD/PKR exchange staying broadly stable, the fall shows that debt amortization was more than loan inflows during the month.

Overall, the central government added just PKR 200bn to its debt in the first four months (Jul-Oct) of this fiscal year, compared with PKR 1.6tn in the same period last year. Strong fiscal consolidation as well as stability in the exchange rate contributed to the sharp slowdown in the pace of debt accumulation.

• Petroleum Minister said talks are ongoing to defer an additional five cargoes
• Pakistan has signed two LNG agreements with Qatar

Pakistan has postponed the delivery of 5 liquefied natural gas (LNG) cargoes from Qatar scheduled for 2025 by one year due to a slump in demand from LNG-fired power plants, Petroleum Minister Musadik Malik said on Wednesday. He added that negotiations are ongoing to defer an additional five cargoes under the long-term agreements with the Middle Eastern nation.

Pakistan imports most of the LNG cargoes under two long-term contracts with Qatar. According to media reports, the agreements allow for rescheduling of five cargoes in a year. The country faces surplus electricity as more power has been added to the grid over the past decade while consumption has declined due to sluggish economic activity and unaffordable energy costs. The premature termination of contracts with independent power producers and introduction of winter incentive package are parts of the government's efforts to fix the demand-supply imbalance.

• The 10-year floating rate bond attracted the highest bids
• Rental rates remained steady

The government on Tuesday raised PKR 353.5bn through a Sukuk auction at the Pakistan Stock Exchange against the target of PKR 300bn. While there was subdued appetite for fixed-rate Islamic bonds, demand for the floating-rate Sukuk remained strong, especially for the 10-year paper, which attracted the highest bids. This reflects investors' eagerness to part their liquidity in longer-tenor securities for maximum returns amid the central bank's ongoing easing cycle. To recall, the State Bank of Pakistan has cut the policy rate by 700bps since June, bringing the key rate down from an all-time high of 22.0% to 15.0%.

Subsequently, the government borrowed most of the funds, PKR 212.4bn, from the sale of 10-year floating rate bonds. Another PKR 54.2bn was raised from the sale of 1-year Sukuk T-bills. Meanwhile, the cut-off rentals on fixed rate bonds and T-bills were steady.

The government plans to rely more on Sukuk to finance its deficit in FY25. It aims to raise PKR 3.1tn through auctions, which is much more than the maturing amount of PKR 753bn during this fiscal year. It has sold Sukuk worth PKR 986bn so far in FY25.

It is noteworthy that the government has shifted Sukuk auctions to the Pakistan Stock Exchange from the State Bank of Pakistan in a bid to lower financing costs by tapping the ample liquidity in the stock market. The first such auction was conducted in Dec 2023.

PM Shehbaz winds up 'fruitful' tour of Saudi Arabia (Dawn)

IT-driven export of services rises 14% in October (Dawn)

Finance Minister dissatisfied with slow pace of agri tax legislation (Dawn)

ADB to give $86.2m for aviation fuel facility (Dawn)

IMF condition keeps dollar overvalued (Express Tribune)

PTI holds out an olive branch to rivals (Express Tribune)

SOEs earn Rs102b in profits (Express Tribune)

IMF deadline: NTC asks provinces to lay agriculture tax bills by year-end (The News)

Pakistan, Russia sign protocol on rail connectivity (The News)

Islamabad protest saga: Gohar claims over 5,000 PTI workers missing (The News)

LNG contract deferred for a year: Musadik (The News)

17 IPPs of 1994, 2002 policies: Deal reached on hybrid 'take and pay' model (Business Recorder)

• Next policy meeting: Dec 16
• Current policy rate: 15.0%
• Last decision: Cut by 250bps (Nov 4)
• Our forecast: Cut by 200bps
• Rationale: Sharp deceleration in inflation and external sector stability

We expect the State Bank of Pakistan (SBP) to cut the policy rate for the fifth straight meeting by 200bps in line with the sharp deceleration in inflation. Last month, the key rate was slashed by a record 250bps to 15.0%, bringing cumulative reductions to 700bps in the current easing cycle that began in June. The real interest rate on the spot basis remains above 1,000bps while it is also significantly positive on a 12-month forward-looking basis. This along with the continued strengthening of the external sector is likely to prompt another aggressive policy rate cut from the SBP.

Inflation environment

Inflation eased to 4.9% y/y in November, the lowest since April 2018, moderating from 7.2% y/y in October. Besides coming in lower than market expectations, the print was less than the SBP's medium-term target range of 5-7%. The marked slowdown was mainly due to a fall in food and fuel prices, reflecting improved farm output and lower global oil prices, respectively. The central bank is likely to revise down its inflation forecast for FY25 from an earlier projection of 11.5%-13.5%. The IMF sees inflation to average 9.5% in the ongoing fiscal year.

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External sector

Pakistan's external sector stability remains intact, with foreign exchange reserves rising to USD 11.42bn as of Nov 22, reaching the highest since March 2022. Loans from multilateral agencies coupled with sizeable interbank forex purchases by the SBP, aided largely by robust workers' remittances, have enabled the central bank to build up its reserves. However, external debt repayments continue to limit the accumulation in forex reserves, which are expected to rise to USD 13bn by June 2025. The SBP projects the current account to post a deficit in the range of 0-1% of GDP in this fiscal year, widening from 0.2% in FY24 as recovery in domestic demand jack up imports.

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GDP growth

The SBP forecasts GDP growth to accelerate to 2.5%-3.5% in FY25, from 2.4% in the previous fiscal year. The recovery is seen supported by a pick up in manufacturing and services sectors amid the absence of import controls, falling borrowing costs and muted price pressures. Last month, the central bank said that economic activity has gained traction due to better-than-anticipated production of rice and sugarcane and higher factory output, particularly in the textile, food, automobile and allied industries.

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Conclusion

Overall, the SBP is all set to cut the policy rate at its upcoming meeting. However, it may turn vigilant as waning base effect as well as a likely rise in gas tariff and additional taxation measures amid revenue shortfall may put upward pressure on inflation. The IMF too has urged to "pursue a tight monetary policy stance. We believe the central bank has room to reduce the key rate by another 300-400bps in a bid to keep the real interest rate in a positive zone.

Further Reading

Last MPC press release

Calendar of MPC meetings

• Renewable energy projects account for 85% of total amount
• Local and foreign investment approvals totalled PHP 1.20tn and PHP 379.3bn respectively

The Philippine Board of Investments (BOI) has approved PHP 1.58tn in investments in Jan-Nov, the BOI said on Wednesday. The BOI is an attached agency of the Department of Trade and Industry (DTI). The 11-month amount is 44% higher y/y. It is also very near the agency's PHP 1.6tn investment approvals target for 2024.

The robust y/y growth was driven mainly by renewable energy projects, the value of which climbed 48% y/y to PHP 1.35tn. Other important sectors included air and water transport (PHP 121.2bn); real estate activities (mass housing, PHP 34.7bn); and manufacturing (PHP 30.4bn).

Local and foreign investment approvals totalled PHP 1.20tn and PHP 379.3bn respectively. The top foreign investment source countries included Switzerland (PHP 289.1bn), the Netherlands (PHP 40.6bn) and Japan (PHP 14.7bn).

In our view, the most significant weakness of the 11-month data is that a single sector (renewable energy) accounts for 85% of the total amount, whereas the investment in the key manufacturing sector is fairly modest.

• Acceleration driven mainly by food and transport prices
• Seasonally adjusted CPI rises by 0.2% m/m
• Core inflation accelerates to 2.5% y/y

CPI inflation speeded up to 2.5% y/y in November from 2.3% y/y in October, the statistics office reported on Thursday. The latest reading is equal to the projection in a Reuters poll. The inflation target range is 2.0-4.0%. The CPI rose by 3.2% y/y in Jan-Nov. Annual core inflation was 2.5% in November, up from 2.4% in October. The seasonally adjusted CPI increased by 0.2% m/m in November, after rising by 0.1% m/m in October.

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The biggest contribution to the acceleration of headline inflation came from the group food and non-alcoholic beverages, where prices increased by 3.4% y/y in November, speeding up from 2.9% y/y in October. In addition, the y/y decline in transport prices narrowed. Positive y/y price growth accelerated in three more groups, namely alcoholic beverages and tobacco; furnishings, etc.; and personal care, and miscellaneous goods and services. On the other hand, lower y/y increases were reported in three other groups, whereas unchanged y/y price growth was reported in five groups.

Food inflation speeded up to 3.5% y/y in November from 3.0% y/y in October. The most important contribution came from vegetables, tubers, plantains, cooking bananas and pulses, where prices rose by 5.9% y/y, reversing a 9.2% y/y decline in October. At the same time, annual rice inflation decelerated to 5.1% from 9.6%. Rice prices fell by 1.5% m/m in November.

The top three contributions to the y/y CPI growth in November came from food and non-alcoholic beverages (1.3pps); housing, water, electricity, gas and other fuels (0.4pps); and restaurants and accommodation services (0.4pps).

We note that the November headline inflation is within the central bank's month-ahead forecast range of 2.2-3.0% y/y. The BSP will further maintain a measured approach in its easing cycle to ensure price stability consistent with sustainable economic growth and employment, the central bank said in a statement quoted by Bloomberg and the PNA. The November CPI data are consistent with the BSP's assessment that inflation will trend closer to the low end of the target band in the near term on the back of easing supply pressures for key food items, especially rice. At the same time, the balance of risks to the inflation outlook for 2025 and 2026 has moved toward the upside. Risks could stem from electricity prices and higher minimum wages in areas outside Metro Manila.

We think that a hold decision and a 25bp policy rate cut are both possible at the next meeting of BSP's Monetary Board (MB) on Dec 19. In October, the MB lowered the BSP's target reverse repurchase (RRP) rate by 25bps to 6.0%. This was the second consecutive 25bp cut after the one in August.

NEDA: Gov't measures keep inflation within target in November (Philippine News Agency)

2nd impeachment complaint vs. VP Sara filed in House (Philippine News Agency)

Economic risks from 'UniTeam' feud flagged (INQUIRER)

BoI-approved investments hit P1.58T (BusinessWorld)

House panel OKs bill raising PNP retirement age to 57 (Philippine News Agency)

PHL worsens in anti-money laundering index (BusinessWorld)

EU hoping to 'match' PHL ambitions for FTA by 2027 (BusinessWorld)

Yields on term deposits drop on strong demand (BusinessWorld)

Tobacco growers get P6,000 aid (INQUIRER)

US condemns China's latest hostility vs. PH vessels in WPS (Philippine News Agency)

• Electrical and electronics sector attracted more than half of total inflows
• Realized FDI in green technology projects totalled MYR 28.2bn from 2021 until June 2024

Realized FDI in Malaysia's manufacturing sector amounted to MYR 9bn in the first half of this year, the Ministry of Investment, Trade and Industry (Miti) told the parliament, without providing comparable figures from the same period last year. More than half of the total inflows, or MYR 4.8bn, was poured into the electrical and electronics sector. Earlier, it was revealed that the country approved foreign investments worth MYR 85.4bn during H1 2024, with most of the funds expected to come from Austria, Singapore and China.

Meanwhile, Miti said that FDI pledges in renewable energy or green technology projects totalled MYR 42bn from 2021 until June 2024, of which MYR 28.2bn have been realized. To remind, Malaysia aims to increase the share of renewable sources in power production to 70% by 2050, from about 27% at present, primarily through solar PV installation, in a bid to achieve carbon neutrality by 2050. The plan to shift the country's reliance away from fossil fuel has been outlined in the National Energy Transition Roadmap unveiled last year.

• Focus would be on increasing tax compliance and implementing tax measures announced in Budget 2025

There is no plan to introduce any new tax in the near future, the Ministry of Finance informed the Dewan Rakyat. It said that the government is solely focused on increasing tax compliance such as through e-invoicing, which is being implemented in stages starting Aug 1, 2024. Besides, only those tax measures will be implemented that have been announced in Budget 2025, it added. The global minimum tax on multinational companies with a global annual revenue of at least EUR 750mn (from Jan 1, 2025), broadening of services tax (from May 1, 2025), hike in excise duty on sugar drinks (from Jan 1, 2025) and 2% tax on dividend income exceeding MYR 100,000 are among the new taxes that will be imposed from next year, the ministry said.

The government aims to generate MYR 259bn from taxes in 2025, up by 7.5% y/y. The expansion is expected to be driven by higher corporate and individual income tax as well increase in sales and services tax. This along with prudent expenditure, which is estimated to post a slower 3.3% y/y growth, are projected to contain fiscal deficit at 3.8% of GDP next year, down from 4.3% of GDP in 2024.

No proposal for Malaysia to join China-based New Development Bank - Miti (The Edge Malaysia)

Govt studying best mechanism for implementation of foreign workers' EPF contribution - MOF (The Edge Malaysia)

No official proposal from BRICS countries regarding de-dollarisation - Tengku Zafrul (The Edge Malaysia)

FashionValet co-founders claim trial, charged with CBT for transferring RM8m Khazanah, PNB investment funds without board approval (The Edge Malaysia)

Govt has no plan to introduce new taxes in the near future - Finance Ministry (The Edge Malaysia)

Value added GDP of manufacturing sector increases 5.5% to RM97.4 bil in third quarter of 2024 - Miti (The Edge Malaysia)

E&E segment records realised investments of RM4.8 bil as of June 2024 (The Edge Malaysia)

Malaysia-Singapore Retreat postponed as Singapore PM contracts Covid-19 (The Edge Malaysia)

Petronas awards 4 new production sharing contracts under MRB 2024 (Free Malaysia Today)

Najib's applies to adduce new evidence in 'house arrest' addendum appeal (Free Malaysia Today)

RM392bil needed to carry out all flood mitigation projects nationwide (The Star)

Floods: Number of evacuees in six states drops to 48,549, unchanged in Pahang (The Star)

PM Anwar slams MyDigital ID rollout delays, calls second 5G network setback of 'negligence' (Malay Mail)

• Domestic demand to be the primary driver of growth
• Inflation to quicken but remain below its long-run average
• Current account surplus projected to narrow next year

The OECD forecast Malaysia's economy to expand by 5.1% in 2025, moderating from 5.7% growth this year. Domestic demand was seen the primary driver of growth, with private consumption expected to remain firm, supported by favourable labour market conditions, higher minimum wage, increase in public spending on social assistance and hike in salaries for civil servants. Moreover, exports were projected to sustain their upward trajectory.

On the price front, the OECD forecast inflation to quicken to 2.7% in 2025 from 2.2% in 2024 largely due to the planned withdrawal of RON95 gasoline subsidies. However, the pace of gain would remain below its long-run average. Meanwhile, the current neutral monetary policy stance was deemed appropriate as it provides room to accommodate a temporary increase in inflation. Lastly, the current account surplus is estimated to narrow to 1.3% of GDP next year, from 1.6% in 2024.

The OECD's growth and inflation forecasts are in line with that of the government, which expects the economy to rise in the range of 4.5%-5.5% and inflation to pick up to 2.0%-3.5% in 2025.

Click here for our comprehensive database of macro forecasts.

• Rhee confirms that diffusing widespread panic remains priority for BOK
• Growth outlook, oath of monetary policy remain unchanged
• No further monetary easing warranted for now, Rhee saud

The current political situation is a not a factortoconsider when making policy decisions or adjusting the growth outlook, BOK's governorRhee Chang-yongsaid on Thursday during a press briefing in Seoul.With regard to the impeachment motion started against President Yoon, Rhee said that it is difficult to forecast how things will unfold, but judging from the recent historical precedent with Park Geun-hye's impeachment in 2016,a potentialimpeachment will not have any long-term growth implications. Rhee also reiterated that he expects the martial law fallout to be short-lived and the Korean won to strengthen provided no new shocks emerge. He alsoremained confidentconfidence that Korea's creditworthiness and economic dynamics remain insulated from political instability.

The main priority for BOK remains the diffusion of market panic, Rheestated. He said that he has received many phone calls and e-mails from global organizations which demonstrated to him how political turmoil can be a source of sheershock for foreign investors without the context of domestic politics. He added that he thinks that the martial law declaration was made purely out of political reasons and the current political situation in Korea is different from what its peershaveexperienced. Korea's politics currently include highly-charged political conflicts defined by extreme ideological divide over fiscalpolicyor other policies, he said.

Meanwhile, Rhee alsostated that both the path of monetary policy and the growth outlook remain unchanged. No further monetary easing is warranted for now since the previous economic outlook remains the same, he added. The BOK adjusted its growth outlook last week when it lowered its 2024 growth forecast to 2.2% from 2.4% and the forecast for next year to 1.9% from 2.1%.

Finally, Rhee also reaffirmed that the central bank will spare no efforts to stabilize the economy, business activities and the lives of the public. The BOK aims to make sure that the fallout of the martial law declaration will have limited impact on the financial markets and the economy at large. To remind, the BOK has already pledged to provide unlimited won liquidity through repo to the financial system, while the financial watchdog FSC said it is ready to inject KRW 50tn to stabilize the stock and bond markets.

• DP decides to push ahead with impeachment of public officials after PPP opposes Yoon's impeachment motion
• Impeached public officials disagreed with DP on key corruption investigations

Parliament voted to impeach the state auditor's chiefChoi Jae-hae, the Seoul Central District Prosecutors' Office Chief Lee Chang-soo and two other top prosecutors, local media reported on Thursday. The impeachment vote against Choi passed with 188 votes in favour and 4 votes against, whereas the impeachment against Lee passed by 185 votes in favour and 3 against. It should be noted that public officials in Korea can be impeached with a simple majority, however, the impeachment of the president can only be done with a two-thirds majority.All impeachment need to be confirmed by the Constitutional Court.

That said, impeachment of public officials remains very controversial move by the opposition party. The opposition DP apparently decided to pursue that route after the ruling party PPP decided to reject the motion to impeach President Yoon Suk-yeol that was tabled earlier on Thursday.

The impeached public officials took opposing stancesfrom DP on key corruption investigations and audits. For instance, the state auditor's chief Choi have started a targeted audit of the liberal Moon Jae-in administration, whereas chief prosecutor Lee Chang-soo decided not to investigate first lady Kim Keon-hee in the Deutsche Motor stock market manipulation case. DP stated that the four public officials violated their political neutralitywhich serves as the reason for their impeachment.

Unsurprisingly, the impeachments were heavily criticized by the ruling party PPP, with PPP floor leader saying that it is "low-level political scheme to threaten and paralyze the functions of state agencies" and "unprecedented act of tyranny in constitutional history." We remind that the impeachment of public officials was cited as one of the key reasons for which President Yoon decided to impose martial law in the country as he saw DP's actions as being "anti-state."

• Han cites concern about political stability and public harm if Yoon is impeached
• New Realmeter survey finds 7 out of 10 people supporting Yoon's impeachment

The leader of the People Power Party (PPP) Han Dong-hoon stated that his party will try to block the impeachment motion of the opposition Democratic Party (DP) against President Yoon that was tabled on Dec 5, local media reported. At the same time, he also condemned President Yoon's decision to impose a short-lived martial law in the country and said that Yoon must face "strict accountability" for his actions. At the same time, he stated that the impeachment motion can bring more harm than goodand cause political instability. Still, he stressed that his opposition to the impeachment motion does not mean he tries to justify the president's actions.

PPP floor leader Choo Kyung-ho agreed with Han's stance and pledged to unite the party's 108 MPs against the motion. It should be noted that only 8 MPs from the ruling party are enough for the motion to pass as the opposition controls 192 MPs from the 200 votes needed for a two-third majority.

At the same time, the leader of the main opposition party Lee Jae-myung condemned both the ruling party and the president, while saying that impeachment is needed to prevent further abuse of power. He stated that the martial law declaration was a "royalist coup attempt" as Yoon sought to make himself "absolute monarch by taking control of all constitutional and state institutions."

It should be noted that public opinion remains largely aligned with DP's view as a fresh Realmeter poll showed that 73.6% of voters supported Yoon's impeachment compared to 24% who rejected it. In addition, some 70% of voters agreed that Yoon's actions constituted treason. These figures are unsurprising since Yoon's approval rating before the martial law declaration was around 20%-25%.

Overall, PPP's defense of Yoon is more or less understandable as a potential impeachment of president Yoon would have very hard repercussions for conservative powers in the country. In our view, Han will try to put pressure on Yoon to resign in the coming days to prevent a disorderly transfer of power. However, such possibility has been reportedly ruled out by President Yoonwhose "perception of the situation differs significantly from mine and from the public's, making it difficult to empathize," in Han's own words.

• OECD remains slightly more optimistic on growth than central bank, IMF
• Domestic demand to increasingly drive growth, OECD says

OECD cut its 2024 GDP growth forecast for Korea to 2.3% from 2.5% and its 2025 forecast to 2.1% from 2.2%, according to its latest Economic Outlook report. Growth in 2026 is projected to remain steady at 2.1%.OECD's growth forecast remains slightly more optimistic than the ones of the central bank (2.2% in 2024 and 1.9% in 2025) and the IMF (2.2% in 2024 and 2.0% in 2025).

OECD predicted that lower interest rates and rising real wages will underpin private consumption starting from late 2024. At the same time, employment will be boosted by increased female labour participation and elderly labour market participation. Thus, domestic demand should increasingly drive growth as exports are showing signs of weakness. In terms of monetary policy, the OECD expects 50bps cumulative rate cuts in 2025, bringing the policy rate to 2.5%. Headline inflation is expected to average 1.8% in 2025 and 2.0% in 2026. At the same time, the current account surplus should remain rather high at 4.6% of GDP in 2024, 4.5% of GDP in 2025 and 4.3% of GDP in 2026.

Click here for our comprehensive database of macro forecasts.

Deputy PM Choi Urges National Assembly to Pass Special Semiconductor Act Swiftly (Business Korea )

Martial Law Fallout: 'Sell Korea' Hits Stock Market (Business Korea )

Martial law by Yoon draws constitutional criticism; insurrection still in question (Chosun)

Editorial: President Yoon must answer for martial law crisis (Chosun)

President Yoon faces impeachment vote, rebellion charges after failed martial law (Chosun)

Rival parties clash over Yoon impeachment (Korea JoongAng Daily)

Top U.S. official says Yoon 'badly misjudged' (Korea JoongAng Daily)

Yoon silent after martial law lifted as schedule cleared, aides resign (Korea JoongAng Daily)

Yoon accepts Defense Minister Kim Yong-hyun's resignation, names successor (Korea JoongAng Daily)

Retired Army general-turned-ambassador named new defense minister (Korea Times)

7 out of 10 support Yoon's impeachment over martial law declaration: poll (Korea Times)

Korean stocks diverge: Winners, losers of Yoon's martial law debacle (Korea Economic Daily)

BOK to buy repos to counter martial law-driven market tantrum (Korea Economic Daily)

Assembly passes motion to impeach state auditor's chief, top prosecutors (Korea Herald)

• Yoon plays down martial law declaration as necessary response to DP's actions
• Yoon rejects calls for cabinet reshuffle, dismissal of defense minister Kim

President Yoon reportedly rejected calls to step down and said there was no wrongdoing with respect to the martial law declaration he issued on Dec 3, according to remarks he made during a meeting with PM Han Duck-soo and ruling PPP chief Hjad Dong-hoon on Wednesday afternoon. The daily Korea Times reported that he rejected allegations of any wrongdoings he committed as a result of the martial law declaration. Yoon also tried to present his actions as a necessary response to the actions of the opposition party, which he called "abuse of impeachment powers." This reportedly drew harsh criticism from PPP leader Han who said that the martial law declaration cannot be used as a mere warning. Another PPP lawmaker, Jeong Sung-kook, said that the President sounded too complacent and could not understand the severity of the situation.

According to reports, Yoon also adamantly rejected calls for complete cabinet reshuffle to restart his presidency. In addition, he reportedly ruled out the dismissal of Defense Minister Kim Yong-huyn who will likely face charges of treason after pushing for unconstitutional military rule following his appointment as martial law commander. Kim has already apologized for his actions and offered to resign on Wednesday together with all other members of Yoon's cabinet.

Menawhile, the ruling PPP held an emergency general meeting on Wednesday in which a proposal was discussed to demand Yoon to withdraw from the party. The pro-Yoon and anti-Yoon factions could not reach a conclusion how to act with respect to Yoon. Local media writes that PPP members have expressed serious concerns that a potential impeachment of president Yoon would severely weaken the conservative powers in the country some 8 years after the conservative Park Geun-hye suffered the same fate. Ultimately, we think that PPP will likely try to defend Yoon as an impeachment would have severe consequences for the party, but this might be in vain as only 8 ruling party MPs are needed to defect for the opposition's impeachment motion to be approved.

• Next policy meeting: Jan 16
• Current policy stance: 3.00%
• Our forecast: Hold
• Last decision: Cut by 25bps (Nov 28)
• Rationale: Political crisis adds to existing FX market pressures that have weakened won

The Bank of Korea is likely to keep its policy rate higher for longer on the back of the political crisis that has developed since President Yoon decided unexpectedly to declare emergency martial law on Dec 3. The political crisis has added to existing FX market pressures that had weakened the Korean won even before the martial law incident. We remind that the BOK decided to cut its policy rate by 25bps on Nov 28 as it made a second consecutive cut in a row, citing the intensifying downside risks for the economy. However, the prevailing expectations were that it will keep its policy rate unchanged due to the weakening won.

Data Download

The declaration of the martial law on Dec 3 led to a sharp increase in the USD/KRW exchange rate initially after which the Korean won rebounded as parliament voted to lift the martial law. However, the current level of the USD/KRW rate remains higher than before the declaration. In our view, the USD/KRW exchange rate could still resume its uptrend given that the KRW 1,400 key resistance level has been overcome convincingly, which will likely put the BOK on the defensive.

BOK also pledged to implement various market stabilization measures to reduce financial and foreign exchange market volatility, the central bank announced after an emergency MPC meeting on Wednesday. BOK expressed confidence that market sentiment will gradually stabilize down the line driven by solid fundamentals of the Korean economy. That said, we are still rather skeptical that the worse is over for the Korean won as even though the martial law crisis has ended, an impeachment crisis is likely to start given that the opposition will now push hard to impeach President Yoon. The potential impeachment of President Yoon could also mean snap presidential elections in South Korea in 2025.

All of this will complicate significantly BOK's job, which is already made difficult due to the concerns about Trump's America First policies. In our view, the most likely scenario is that the BOK will stay on hold for longer as it weighs the different factors that impact inflation, exchange rates, real estate prices and growth. Thus, we think that the BOK will stay on hold throughout Q1, while the political crisis is being settled and the new Trump administration reveals its intentions with regards to tariffs and export restrictions to China.

Growth and inflation data

In terms of the economic situation of the country, the economy has definitely slowed down since Q3, but the latest data for October was actually more upbeat than expected. All industry production rose by 2.3% y/y in October after falling by 1.3% y/y in September led by strong industrial production growth of 6.3% y/y, solid growth in services by 1.9% y/y, which were offset by decline in construction output by 9.7% y/y. Manufacturing PMI also picked up slightly to a 3-month high in November despite the increase in risks following Trump's victory.

On the inflation front, CPI rose by 1.5% y/y in November as CPI inflation has stayed below the 2% target for three months in a row. Nonetheless, the BOK recently stated that it expects the inflation rate to return to the 2% level in December on the back of the weakening won. When it comes to household lending growth, the latest preliminary data showed that the 5 largest banks saw an increase in household loans by KRW 1.26tn m/m in November, up marginally from KRW 1.1tn m/m in October. At the same time, housing prices have been also mostly contained thanks to the tighter lending regulations introduced by banks.

Conclusion

Overall, we think that FX market pressures and growth will remain the two primary concerns for the central bank in the near future as financial stability and inflation have been mostly dealt with by authorities. BOK will keep a close eye on the political situation in the country and market sentiment as it weighs when to resume its monetary easing cycle. The decline in the USD/KRW exchange rate would also lead to higher imported inflation, potentially pushing the inflation rate above 2% yet again. On the other hand, underlying inflation remains mostly stable despite the recent slowdown in growth as evidenced by the lack of change in core inflation over the past 3-4 months.

Our forecast is that there will be no more rate cuts in Q1 2025, while rate hikes to stabilize the exchange rate remain highly unlikely as it will give conflicting signals to banks regarding the future path of monetary policy. We still expect the BOK to fully utilize the pledged market stabilization measures to strengthen the Korean won.

MPC meetings calendar 2025

Minutes

Previous MPC decisions

MPC board members

• Borrowing capped at LKR 4tn
• LKR 1.4tn set out for ministries

The government is set to unveil a mini-budget today, proposing a borrowing limit of LKR 4tn, according to a resolution circulated to legislators. The interim budget also allocates LKR 1.4tn to fund ministry operations through April 2025.

The resolution requests parliamentary approval for LKR 4.2tn to be drawn from the consolidated fund, covering expenditures such as debt servicing and repayment. Additionally, it seeks authorisation to raise funding from domestic or international borrowing.

A comprehensive budget for 2025, aligned with the ongoing IMF program, is expected to be presented in February 2025

Sri Lanka President discusses new govt's policy priorities with World Bank ED (Economy Next)

Sri Lanka possibly losing two-thirds of border tax revenue due to corruption, says Shippers' Council (Daily Mirror)

Vote on Account to be presented in Parliament today (Ada Derana)

Final decision on NDF's National List MP seat to be announced tomorrow (Ada Derana)

Experts urge caution as Govt. prepares to lift vehicle import restrictions (Daily FT)

Colombo stock market reaches all-time high (Daily FT)

Sri Lanka new govt's policy statement passed in parliament unanimously (Economy Next)

• Next Policy Meeting: TBD (Q1 2025)
• Overnight Policy Rate (OPR): 8.0%
• Standing Deposit Facility Rate (SDFR): 7.5%
• Standing Lending Facility Rate (SLFR): 8.5%
• Previous Decision: New OPR set at 8% (Nov 27)
• Our Forecast: Hold
• Rationale: The Central Bank of Sri Lanka (CBSL) will allow for the latest change in monetary policy and further easing to trickle into the economy before slashing rates further.

Policy Overview

The Central Bank of Sri Lanka (CBSL) has made a significant change to its monetary policy framework, introducing a single policy interest rate mechanism effective Nov 27. The new Overnight Policy Rate (OPR), set at 8.00%, replaces the previous dual rate system and will serve as the primary tool for guiding monetary policy, signalling a continued easing of the Bank's stance. This move represents an approximate 50-basis-point reduction from the current Average Weighted Call Money Rate (AWCMR).

Data Download

Under this updated framework, the OPR will be adjusted periodically to align with the CBSL's monetary policy direction. The Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) - which previously set the bounds for overnight interbank transactions - will now be anchored to the OPR with a margin of ±50 basis points, establishing these rates at 7.50% and 8.50%, respectively.

As anticipated, the CBSL opted to ease monetary policy further, following sustained deflation over September and October. With the economy aiming to boost activity, the central bank is focused on promoting credit growth to drive economic momentum. Supporting economic expansion remains the CBSL's primary objective in the near term.

Inflation Trends

Sri Lanka's inflation landscape has undergone a notable shift. Following a year of effective inflation management, the Central Bank of Sri Lanka (CBSL) is now focusing on stimulating economic growth. In November, the Colombo Consumer Price Index (CCPI) showed a y/y decline of 2.1%, signalling deflation. This trend has been driven by lower prices for fuel, electricity, and gas, with further price reductions expected. While the short-term outlook indicates deflation, inflation is projected to remain around the 5% target in the medium term. The move to ease policy further comes in response to growing deflationary pressures and a positive external economic outlook. Core inflation, which indicates the strength of underlying demand, has also moderated.

Data Download

According to CBSL forecasts, headline inflation is expected to stay negative in the near term, driven by ongoing declines in fuel and transport costs, as well as easing food prices. However, it is anticipated to turn positive by mid-2025 and gradually move toward the 5% target over the medium term, bolstered by strategic policy measures. Core inflation is likely to stabilize after a brief dip, and inflation expectations have shown further signs of moderation since the last review.

Moving forward, the CBSL is expected to adopt a cautious approach and monitor price developments closely following the recent rate cut. The central bank will also remain attentive to the policy actions of the incoming government. Furthermore, the CBSL is anticipated to proceed carefully after the government's 2025 budget is unveiled, with the budget scheduled for announcement on January 9, 2025.

Economic Growth

Sri Lanka's economic recovery is progressing steadily, with real GDP increasing by 4.7% year-on-year in Q2 2024, slightly lower than the 5% growth seen in Q1. This marks a full year of positive growth after five quarters of economic contraction. The industrial sector led the expansion with a significant 10.9% year-on-year increase, driven by strong performances in utilities, chemicals, metals, and wood products. Agriculture grew by 1.7% year-on-year, supported by seasonal factors. Construction saw impressive growth at 11.9%, while the services sector experienced a slower 2.5% increase. However, tourism-linked industries, such as insurance and accommodation, reported substantial gains.

Data Download

The recovery is being buoyed by reforms under the IMF program and a rebound in tourism. The current tourist season is expected to provide further support to the services sector. By mid-November 2024, Sri Lanka had already welcomed over 1.7 million tourists, suggesting continued strong arrivals in the remainder of the year. However, the disbursement of the next tranche from the IMF could face delays as the government's review process is still underway.

External Sector

Sri Lanka's external sector has shown mixed performance. The trade deficit widened in early 2024 due to increased imports. Meanwhile, tourism revenues surged as arrivals exceeded 1.7mn through November. Remittances also strengthened, improving the current account position, and the Sri Lankan Rupee has appreciated over 7% against the USD in 2024, with gross official reserves at USD 6.4bn in October.

Data Download

Debt restructuring progress has been significant, with recent agreements with bondholders marking a milestone toward stabilising national finances. Export recovery in H2 2024, supported by global trade improvements, is anticipated. However, risks such as geopolitical tensions and the U.S. elections may affect the timeline.

Outlook

With inflation subdued and growth steadily improving, the CBSL is expected to maintain its current supportive monetary stance following the latest rate cuts. Rather than further easing, the central bank is likely to hold rates steady at the next meeting to assess the impact of its recent measures. Key drivers of economic stability, including tourism, structural reforms, and IMF backing, remain crucial, although delays in fund disbursement and external uncertainties could dampen recovery momentum. With parliamentary elections now concluded, attention will turn to government policy initiatives, which the CBSL will closely monitor to gauge their influence on the broader economic trajectory.

Further reading

Last MPC decision

Panel aims to delay wage hike (Bangkok Post)

Thailand extends EV production deadlines (Bangkok Post)

New taxes for EVs (Bangkok Post)

People's Party urges action to curb PM2.5 (Bangkok Post)

Ministers pledge to make Thailand an AI learning hub (Bangkok Post)

SEC drafting regulations on using shares as collateral (Bangkok Post)

B62bn in tourism revenue predicted over New Year (Bangkok Post)

South Korean upheaval should serve as a lesson for Thailand - People's party (Thai PBS World)

Thai private sector estimates flooding has cost economy about ฿85 billion (Thai PBS World)

• Foreign tourism revenue amounts to THB 1.5tn
• Flooding in the southernmost provinces weighs on visits by Malaysians last week

The number of foreign tourist arrivals increased by 28% y/y to 32mn over the period Jan 1-Dec 1, according to the Tourism and Sports Ministry as quoted by Bloomberg. The largest number of visitors came from China (6.2mn), Malaysia (4.5mn) and India (1.9mn). The foreign tourism revenue amounted to THB 1.5tn.

Tourism Minister Sorawong Thienthong said that more long-haul visitors are expected to visit Thailand in December. Arrivals will be also supported by larger airline capacity. At the same time, visitor arrivals fell by 5.7% w/w in the week ended Dec 1, due to a 22.2% decline in the number of Malaysian tourists caused by the flooding in the southernmost provinces.

There were 3.15mn foreign tourist arrivals in November, some 17.6% higher y/y.

The BOT and the finance ministry forecast 36.0mn visitors this year. The ministry expects that foreign tourism revenue will rise by 37.4% to THB 1.69tn in 2024. There were 28.15mn foreign tourists in 2023, which compares with 11.07mn in 2022 and 39.92mn in 2019.

• The total registered FDI reached nearly USD 31.4bn as of November 30, marking a marginal 1% y/y increase
• Realized capital remains steady, with approximately USD 21.68bn was disbursed, a 7.1% increase over the same period in 2023
• The processing and manufacturing sector led with total investment, followed by real estate sector

Total registered FDI reached nearly USD 31.4bn as of November 30, representing a maginal 1% y/y increase, according to data from the Foreign Investment Agency under the Ministry of Planning and Investment. While foreign investment in remains positive, growth is showing signs of deceleration, with newly registered capital lower than in the same period in 2023.

In the first eleven months, Vietnam recorded 3,035 new projects, with total registered capital of approximately USD 17.39bn. This represents a 1.6% increase in the number of projects and a 0.7% increase in capital compared to last year. Meanwhile, capital adjustments contributed an additional USD 9.93bn, marking a significant 40.7% y/y increase. In contrast, foreign investment through capital contributions and share purchases totaled USD 4.06bn, reflecting a 39.7% decline y/y in capital value.

Despite slower growth in registered investments, realized capital maintained stability, with USD 21.68bn disbursed over the eleven months, an 7.1% y/y increase. Additionally, large-scale projects in high-potential sectors-including semiconductors, energy (battery production, photovoltaic cells, silicon bars), and high-value electronics-continued to attract new investments and capital expansions.

The processing and manufacturing sector remained the top FDI recipient, attracting nearly USD 20.2bn, which represents about 64.4% of total registered FDI, although this marks a 8.7% y/y decrease. The real estate sector ranked second, with total investment of nearly USD 5.63bn, accounting for around 17.9% of the total and and marking a significant 89.1% increase y/y.

Investors from 106 countries and territories contributed to Vietnam's FDI inflows in 2024. Singapore led, with investments exceeding USD 9.14bn, accounting for nearly 29.1% of total FDI and marking a 53.7% y/y increase. South Korea followed with over USD 3.89bn, representing 12.4% of total investment and a 9% decrease from previous yeat. Other significant investors included China, Japan, and Hong Kong, highlighting the diversity of Vietnam's FDI sources.

PM urges faster legal reform to achieve double-digit economic growth (Vietnam news)

Viet Nam rises to the top 11 largest exporters globally (Vietnam news)

Singapore, S Korea, China Vietnam's biggest investors in Jan-Nov (The investor)

Post-tax profit of Samsung's 4 major factories in Vietnam drops 23.6% in Jan-Sept (The investor)

Vegetable and fruit exports heading to USD 7.2bn (VnEconomy)

SBV net withdraws VND 54tn, resumes 14-days T-bill issuance (CafeF)

Public investment disbursement accelerated in last months (Dien dan doanh nghiep)

Some VND 500tn pumped into economy to meet 15% credit growth target (Stockbiz)