Emerging Markets: What Has Changed?

(from my colleagues Dr. Win Thin and Ilan Solot)

1) Turkey stepped up the rhetoric, but no action so far

2) The India central bank is conducting a backdoor FX intervention via the public oil companies

3) The Indonesian central bank increased both the reference rate and the FASBI by 50 bp in today’s extraordinary meeting

4) The extraordinary intervention program announce by the Brazilian central bank seems to be working, so far

1) Turkey stepped up the rhetoric, but no action so far. Official efforts have done little to support the lira, aside from hinting non-specified new tools to contain the move. Meanwhile, the widening trade deficit, along with the proximity to Syria, should ensure that the lira will remain under performing against other EM currencies for now.

2) The India central bank is conducting a backdoor FX intervention via thee public oil companies. The transaction will be conducted via a FX swap window to meet dollar requirements of these companies originating from crude oil imports. RBI will subsequently reverse the transaction after a specified period. These companies are estimated to require over $8 bln per month to import around 7.5 mln tons of crude oil. The rupee is outperforming following the news but we suspect that the new measure, while helpful, will not be enough to counter negative sentiment.

3) The Indonesian central bank increased both the reference rate and the FASBI by 50 bp in today’s extraordinary meeting. The rates are now at 7.0% and 5.25%, respectively. The FASBI rate is the overnight deposit facility at the BI. The bank also increased the rate on the lending facility by 25 bp to 7.0%. Separately, the BI also renewed the $12 bln bilateral swap agreement with Japan, which serves as extra insurance to boost the BI’s firepower in case of a further selloff. The moves are a big help for near-term sentiment, given that the bank was far behind the curve. Still, the fundamental problems and high investor exposure (especially in the bond market) will remain unresolved for now. Perhaps, like Brazil, Indonesia will be satisfied if it can merely prevent a currency rout within a backdrop of generalized EM weakness.

4) The extraordinary intervention program announced last Friday by the Brazilian central bank seems to be working, so far. In short, the new measure gives markets a far greater degree of predictability. It marks a departure from the piecemeal micromanaging style of policymaking by Brazilian authorities (and most other EM officials) in reaction to the current selloff. With this facility in place, it has become less likely that the central bank will resort to heterodox/macroprudential measures. BRL is by far the biggest outperformer in EM this week, up more than 3.0% since the announcement last Friday.