Emerging Markets: What Has Changed

(from my colleague Ilan Solot)

1) Mexican data is taking a decisive turn for the worse

2) Brazil is stepping up intervention in FX and fixed income markets

3) The Turkish central bank unexpectedly raised the top end of the corridor by 50 bp to 7.75%

4) Peru got upgraded

5) India will now try a bond buyback program

6) In Indonesia will announce a new economic package on Friday

1) Mexican data is taking a decisive turn to the worse. First came the dismal Q2 GDP at -0.7% q/q vs. exp. +0.2%, the first quarterly decline since mid 2009. Then June retail sales plunged -1.9% (exp. -0.4%). Still, local rates (TIIE) have not reacted very much, taking cues from US Treasury yields instead. If the negative data continues, it will of course put a cut by Banxico back in play. For now, however, we very much doubt any easing is forthcoming, especially given the sell-off in the currency.

2) Brazil is stepping up intervention in FX and fixed income markets. So far, these actions have provided only temporary relief. This week, the Treasury announced an extraordinary buyback operation (for LTN and NTN-F bonds) as an attempt to provide some liquidity to the market. This is the first such operation since the June stage of the selloff. In addition, the central bank came in with more FX swap auction and offers of FX credit lines. This follows BCB President Tombini’s step up in rhetoric earlier in the week, suggesting “recent movement seen in interest rates in the market has incorporated excessive premium.” With local rates now pricing in SELIC rates rising to nearly 11.0%, we tend to agree with him – though much depends on where BRL stabilizes.  As it stands, we don’t think the measures are enough to stem the bearish mood.

3) The Turkish central bank unexpectedly raised the top end of the corridor by 50 bp to 7.75%. We had highlighted this risk already and agree that the extra room to tighten could come in handy. The bank subsequently announced that it would keep offering liquidity only at the upper end of the corridor (i.e. “special day”) until further notice. On top of this, there will still be $100 mln in FX sales during these extraordinary days. There was little reaction in lira so far, which has fallen in line with other high-beta EM currencies.

4) Peru got upgraded. The country’s long-term foreign currency rating was raised by S&P to ‘BBB+’ and long-term local currency rating to ‘A-‘ with a stable outlook based on the “country’s ability to withstand external shocks including establishing a Fiscal Stabilization Fund and building international reserves.” There is not much reaction in foreign debt markets to the news. The central bank is doing what it what it can to stabilize the sol, selling as much as £350 mln in an operation this week. The currency has preformed relatively well, falling just 1.5% this month.

5) India will now try a bond buyback program. The government stated it will attempt to “ease” liquidity and spiking interest rates by buying longer-dated government debt. According to the statement, the bank will purchase the equivalent of $1.3 bln on Friday and “thereafter calibrate them both in terms of quantum and frequency” based on market condition. The bank will raise the interest rate paid on foreign currency deposits for non residents, in a (probably futile) bid for capital inflows. The good news is that yields in India are well off their highs earlier in the week. The yield on 5-years swaps, for example, fell to 8.58% from a high of 9.22% on Monday.

6) In Indonesia will announce a new economic package on Friday. In addition, Coordinating Min Rajasa said that BI was watching the market and preparing a policy response. Direct intervention has been timid with no big measures to contain volatility aside from FX swap auctions every Thursday. Also note that the bond buying is still going on, amounting to IDR 31trn worth of bonds in 2013, and that the Treasury has plans to issue more foreign bond soon to boost FX reserves. Separately, the country’s two main state pension funds announced they would increase their purchases of local stocks after the recent selloff.