Emergng Markets: What has Changed

(from my colleagues Dr Win Thin and Ilan Solot)

1) The PRD (left-leaning opposition party) has left the Pacto Por Mexico

2) Tensions in Ukraine continue to rise

3) In Brazil, there was bad news on growth, but less bad news on the fiscal front

4) Fitch moved the outlook on its A rating for Israel from stable to positive

Over the last week, China (+1%), Malaysia (+1%), and India (+2%) have outperformed in the EM equity space in local currency terms, while Czech Republic (-4%), Russia (-3.5%), Turkey (-3%), Poland (-3%), and Brazil (-3%) have underperformed. 

In the EM local currency bond space, Brazil (10-year yield up 49 bp), Turkey (up 48 bp), Mexico (up 28 bp), and South Africa (up 15 bp) have underperformed over the last week, while Hungary (10-year yield down 14 bp), Czech Republic (down 8 bp), and Thailand (down 5 bp) have outperformed.

In the EM FX space, INR (+1% vs. USD), IDR (+0.4%), and RUB (+0.4%) have outperformed over the last week vs. USD, while ZAR (-3%), BRL (-2.5%), and TRY (-1.5%) have underperformed.

1) The PRD (left-leaning opposition party) has left the Pacto Por Mexico. The departure of the PRD from the Pacto Por Mexico last week should be seen as short-term noise that could ultimately lead to more upside risk in the energy reform. There are far too many rumors circulating, but they seem net positive – as seen by the peso’s outperformance this week. The only thing worth noting is that the voting on the energy reforms is scheduled for next Monday. 

2) Tensions in Ukraine continue to rise. The opposition lost a no confidence motion which would force the resignation of the government, so President Yanukovych decided to fly out to China on an official visit, as scheduled. Deputy PM Arbuzov said the government needed €10 bln for the economy to survive the implementation of the association agreement with the EU. The latest development, however, was a statement by the Deputy PM saying the government was prepared to discuss snap elections. The situation is too fluid to make any predictions, but our impression is that things could get worse before they get better. 

3) In Brazil, there was bad news on growth, but less bad news on the fiscal front. Brazilian Q3 GDP came in at 0.5% q/q and 2.2% y/y, below both market expectations and the (now embarrassing) pre-announcement by the government. Industrial production data provide some positive relieve, but not enough to offset the bearish tone. Separately, the government backed down on its dodgy idea to get the public bank Caixa to lend money to Eletrobras to pay for electricity subsidies. The move would have almost certainly pushed rating agencies over the edge to cut Brazil’s ratings – something that may still be in the cards for next year anyway.

4) Fitch moved the outlook on its A rating for Israel from stable to positive. The agency cited a shrinking budget gap as a major factor. Our model views Israel as A+/A1/A+, which lines up with S&P’s A+ and Moody’s A1 ratings. Fitch is an outlier, and should upgrade it to catch up with the other agencies. The shekel continues to outperform within EM, with USD/ILS still trading near the year’s low around 3.50.