Emerging Markets: What has Changed

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

1) Moody's upgraded its rating for Mexico to A3 from Baa1, with a stable outlook

2) COP is the weakest major EM currency this week after the central bank Governor Uribe flipped the rhetorical tone on the currency

3) Despite the strong resistance by the opposition, the voting in Thailand went ahead

4) South African political risk is rising

Over the last week, Poland (+3.2%), Thailand (2.5%), and Turkey (2.5%) have outperformed in the EM equity space in local currency terms, while Peru (-2.9%), Hong Kong (-2.8%), and Hungary (-2.6%) have underperformed.  

In the EM local currency bond space, Russia (10-year yield down 28 bp), Hungary (down 24 bp), and Turkey (down 19 bp) have outperformed over the last week, while Indonesia (10-year yield up 10 bp), Ukraine (up 10 bp), and Chile (up 3 bp) have underperformed.

In the EM FX space, TRY (+2.5% vs. USD), ZAR (+1.5%) and ARS (+1.4%) have outperformed over the last week, while COP (-2.0% vs. USD), ILS (-1.2%), and CLP (-1.0%) have underperformed.

1) Moody's upgraded its rating for Mexico to A3 from Baa1, with a stable outlook.  The main factor behind the decision was the belief that the government's reforms will boost the growth potential of the economy.  The other two main rating agencies give Mexico a BBB+ rating.  We suspect they will play catch-up over time.  Our own rating model puts Mexico at A-/A3/A- and so we feel the upgrade was justified.  However, further upside is unlikely now as virtually all of the good news has been priced in now.  The peso strengthened on the news, which helped lift sovereign debt prices, but also Mexican corporate bonds.  While Mexico could not avoid the carnage inflicted on emerging markets over the last couple of weeks, we look for its relatively better macro fundamentals to allow it be one candidates that recover quickly as some semblance of stability returns to EM.

2) COP is the weakest EM currency this week after central bank Governor Uribe flipped the rhetorical tone on the currency.  Recall that last week, Finance Minister Cardenas suggested that the central bank may reduce its USD purchase intervention.  This suggested that recent peso weakness was seen as sufficient.  Now, Governor Uribe is quoted saying that a weakening currency is “something we view as positive.”  USD/COP has just broken above the 2010 high near 2048 and is now trading at levels not seen since late 2009.  December 2009 high near 2062 lies near.

3) Despite the strong resistance by the opposition, the voting in Thailand went ahead.  This likely insures a victory for the Prime Minister Yingluck but risks continued political instability.  Several polling stations were disrupted by protests, but the vast majority functioned normally.  The main concern is that the elections will prove inconclusive because parliament will not have enough members to convene and form a government.  Consumer confidence makes multi-year lows as political uncertainty continues.  Meanwhile, Thai farmers blocked a highway this week to protest the government’s failure to pay them for rice bought under its subsidy scheme.  It is still hard to see any reason beyond short-covering to trigger a rebound of Thai assets.  

4) South African political risk is rising. Renewed mining unrest amidst eroding support for the ruling African National Congress (ANC) is raising risks that the party may move to a more populist stance in order to retain the support of young, unemployed voters in April elections.  However, this negative risk may have been ameliorated by this week’s split in the opposition.  Largest opposition party (the Democratic Alliance) had recently wooed respected activist Mamphela Ramphele and her Agang party to unite and field a joint candidate for president, but that deal just fell apart.  This improves the ANC standing, thought it was always widely expected to win no matter what the opposition did.  Meanwhile, talks to end a 2-week strike at platinum mines have been suspended, as the two sides were unable to reach a compromise.  The longer the strikes go on, the bigger the risks to an already weak economic outlook.