Emerging Trends – China’s EV Dominance, Hungarian FX Deposits and More

Summary

• China is winning in EVs. Korea’s semiconductor industry is picking up steam.
• Crude time spreads are in extreme backwardation – 98^th percentile since 2004.
• High real rates and basic balance surplus give Bank Indonesia room to cut rates.
• One-third of Hungarian deposits are in hard currency FX (euro). Poland’s minimum wage rise outpacing regional peers.

In Emerging Trends, we flag developing themes that are typically under the radar and may translate into future market catalysts.

China Is Winning in EVs

• China is the largest maker, buyer, and exporter of Electric Vehicles (EVs) in the world.
• 7 million EVs (BEV + PHEVs) were sold in January-July this year, up 40% YoY. Over half of these (55%) were sold in China.
• BYD, not Tesla, is the top seller in the world, by volume.
• Around 1 million EVs were exported in 2022, 35% of which were made in China and 18% in Korea.

Korea’s Semiconductor Revival

• Korean exports of semiconductors recovered sharply in September, recovering to the highest level this year. Industrial production for August also surprised to the upside, thanks to a sharp increase in semiconductor and machinery manufacturing.
• Memory chip production has a typical cycle time of six months. Production cuts made in Q2 have set up suppliers to reach market balance by yearend. 2024 could be marked by undersupply and rising prices.
• A US exemption on Korean chipmakers’ sales to China expires on 11 October but is expected to be extended indefinitely.
• Barring a demand shock, the recovery in Korea’s semiconductor exports should continue.

Indonesia – Real Rates and External Liquidity Open Door for Cuts

• Thanks to a substantial drop in inflation, Indonesia’s ex-post real rates are near record highs and among the highest in Emerging Markets.
• Current account is slipping into deficit, but combined with stable FDI inflows, external liquidity is comfortable.
• BI has a dual mandate to ensure a) rupiah stability and b) sustainable growth. With growth holding up, BI is prioritizing IDR stability for now.

The Oil Market Is Extremely Backwardated

• 12-month time spreads at $10.5 are currently in the 95^th percentile going back to 2004. Adjusted for interest rates, in the 98^th percentile.
• The market is telling us inventories are low and supply is tight.
• However, we think the level of backwardation is too large given the current oil market dynamics. Namely product stocks are ok, while the 3-2-1 crack spread has fallen significantly, which no longer encourages high refinery utilisation.
• We think 12m time spreads should be closer to $8.

Rising Euroization in Hungary, Poland’s Minimum Wage Hikes

• Euroization is on the rise in Hungary despite the elimination of FX-denominated mortgages in 2015. Forint volatility and government measures to limit the transmission from high local rates explain the shift.
• Debate over ERM2 entry has also resurfaced again recently in Hungary. Eventual euro adoption remains a long way off in our view.  
• Minimum wages are set for another year of double-digit gains across CEE. Poland’s agreed 19.4% rise comes after 19.6% this year and is only just down from the all-time high of 20.3% in 2008. Since PiS came to power in 2015, minimum wages will have increased by 146% (PLN terms).
• 2024 minimum wage hikes are yet to be confirmed in Hungary and Czechia, but Hungary is discussing 10-15% and Czechia somewhere in between.