Emerging Markets Update: What has Changed

Here is my colleague, Ilan Solot's update on changes in emerging markets.

This is what has changed in the EM space, in our view: 

1) We are becoming less bearish on Hungary

2) The Turkish central bank got its formal excuse to lean against currency strength

3) Bird flu acts as a wild card against otherwise positive news from China

4) Russia intervenes in FX and signals easing ahead

We are becoming less bearish on Hungary. It’s not obvious to us that the measures announced by the Hungarian central bank are negative, as the knee-jerk market reaction suggests. First, the measures were not as dramatic as many has expected. Moreover, the amount discussed (about 1bln in dollars) is not too big compared with Hungary’s USD46 bln in FX reserves. Second, we have nothing in principle against using public funds to help with the FX-denominated loan problem – G10 countries used public funds for far more questionable uses during this crisis. Third, the real economy sure could use some help. The main question we have is whether the banks will be penalized in some way, as it has been the pattern. This does not seem to be the case so far.

The Turkish central bank now has a formal excuse to lean against currency strength. The TRY REER for March came in at the magic 120 number (well, just about at 119.95). This is a formality, but it matters. Governor Basci has made it clear that a move above this level could precipitate action on the FX front. We believe it, but we don’t think anything drastic is coming. The main repercussion is that it increases the probability of a reduction in the lower end of the interest rate corridor. With growth still very sluggish and the current account gap starting to widen again, officials will remain sensitive to lira strength. Inflation remains high, and rose a higher than expected 7.3% y/y in March. We think the stagflation theme will keep Turkish assets on the defensive near-term.

Bird flu acts as a wild card against otherwise positive news from China. Expectations are building for an upside surprise in the March lending numbers, with the headline new loans figures rumoured to reach RMB1 bln. Service PMI data was also on the strong side. Monthly China data deluge will begin next week, and with growing concerns about growth in the US and the euro zone, we think there will be an even greater focus on China data now.

Russia intervenes in FX and signals easing ahead. The central bank defended the ruble as the basket breached the 35.65 level on Wednesday, according to data released on Friday. The intervention was seen as light-handed and lacking conviction. Not surprisingly, the basket traded up to almost 36.0. Separately, the CBR signalled a stronger dovish tilt by cutting some long-term (Lombard) repo rates in its meeting on Monday. Lower oil prices point also point to downside growth, as we had the worst week for oil prices in six months. This came just as Q4 GDP growth printed at 2.1% y/y vs. 3.0% in Q3 and then March CPI was reported at 7.0% y/y vs. 7.3% in February.