Emerging Markets: What has Changed

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

1) The BOK is sounding pro-active again about the risks to KRW weakness, even though the currency is strengthening
2) The Thai government joined the group of EM countries providing extra fiscal support
3) India’s central bank has a new Governor
4) The search for the next Bank of Israel Governor has restarted after the second candidate Leiderman withdrew from consideration.


1) The BOK is sounding pro-active again about the risks to KRW weakness, even though the currency is strengthening. We just hope these concerns don’t spill over into macroprudential-type regulation that will harm market functioning. The Finance Minister stated they are looking to strengthen monitoring of capital movement and FX market because of a possible Fed tapering and the downside risks from Chinese growth. Moreover, Korea will coordinate with G-20 to offset these adverse effects. KRW has been outperforming other EM Asian currencies in the last few weeks, probably partially driven by the appreciation of the Japanese yen.

2) The Thai government joined the group of EM countries providing extra fiscal support. The cabinet approved 20 measures to boost growth including accelerating government budget disbursement, loan guarantee for small businesses, expanding exports to potential markets, supporting multiple-entry visa, and providing benefits for production of eco cars. The Ministry of Finance projected that Thai GDP growth will reach 4.0-4.5% this year. Mexico, Russia, Poland, the Philippines, and China are amongst the countries that also announced fiscal stimulus recently. Still, the news did little to help the baht, which along with many other EM currencies, are rubbing against recent lows against the dollar. USD/THB is close to breaking the key 31.50 level, which will open up the pair to reach levels not seen since mid-2012.

3) India’s central bank has a new Governor. By all accounts, Raghuram Rajan is a great option to head the central bank. If anything, it will reinforce the bank’s commitment to price stability. But despite the difficult macroeconomic situation, that is not where or concerns lie. What remains to be seen is how he will deal with the weakening INR. For example, he could be more aggressive in direct FX intervention, maybe even a shock-and-awe approach to build credibility in that area. Another, vastly different, path could be macroprudential measures and regulation. After all, he was on the front line criticizing the fragility of the US financial sector even before the crisis hit. For now, our initial reaction to the appointment is positive.

4) The search for the next Bank of Israel Governor has restarted after the second candidate Leiderman withdrew from consideration. The bungled process reflects poorly on the government, but rather than selling the shekel, the market is buying it. Why? The thinking goes that as the central bank remains “leaderless”, it will not be as focused or aggressive on FX intervention to prevent shekel gains. USD/ILS is making new lows for the year below 3.54, as markets test this thesis. Reports suggest it is intervening in small amounts.