Emerging Markets: What has Changed

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

1) Talks in Geneva have not yielded a de-escalation of the Ukraine crisis

2) Net foreign equity inflows into Korea for the year have turned positive just this week

3) The Chinese government has moved forward on more SOE reforms

4) Colombia bought 80% more dollars than usual in its daily spot market interventions

5) Turkey’s central bank kept key policy rates steady, but cut the minor late liquidity rate

Over the last week, Egypt (+2.4%), Poland (+1.4%), and South Africa (+1.4) have outperformed in the EM equity space in local currency terms, while Russia (-2.1%), Pakistan (-1.9%), and China (-1.5%) have underperformed.

In the EM local currency bond space, Brazil (10-year yield -13 bp), Hungary (-9 bp), and Turkey (-7 bp) have outperformed over the last week, while Russia (10-year yield +19 bp), Ukraine (+15 bp), and Indonesia (+13 bp) have underperformed. To put this in better context, the 10-year UST yield was up 1 bp over the past week.

In the EM FX space, BRL (+0.7% vs. USD), CZK (+0.1% vs. EUR), and KRW (flat vs. USD) have outperformed over the last week, while IDR (-1.5%), PKR (-1.5%), and INR (-1.3%) have underperformed.

1) Talks in Geneva have not yielded a de-escalation of the Ukraine crisis. The joint statement noted that the parties “…agreed on initial concrete steps to de-escalate tensions and restore security for all citizens. All sides must refrain from any violence, intimidation or provocative actions.” So much for that. Recent deaths in the Southeast Ukrainian region and threats of new sanctions by the US have all but buried the agreement. Pro-Russian insurgents said they would only leave the occupied buildings if the interim Ukrainian government resigns. This story is far from over.

2) Net foreign equity inflows into Korea for the year have turned positive just this week, according to the Korea Exchange (see graph). Inflows have been recovering steadily since late March, and never looked back. Indeed, KRW has been a beacon of stability throughout the latest EM sell off. The economy is in recovery mode with Q1 GDP surprising on the upside. This has kept the BOK on hold since the last 25 bp cut to 2.5% back in May 2013.

3) The Chinese government has moved forward on more SOE reforms. Overnight, 80 infrastructure projects were approved for private investment, ranging from IT infrastructure to clean energy projects. The official statement suggests that the next target areas could be oil and gas, public utilities, water conservation and airports. The core of the idea is simple: to rely more on the private sector to support growth. Implied here is the message that no big stimulus programs are forthcoming by the government. 

4) Colombia bought 80% more dollars than usual in its daily spot market interventions. To be clear, the central bank is still working within the $1 bln purchase program for Q2 that it set at its March meeting but is just front-loading it and responding to increased inflows. Fresh inflows are in part related to the increase in weighting of Colombia in the JPM local currency bond index. We think that 1900 is the line in the sand (for now). If the EM rally continues, they can slow the move but not stop it.

5) Turkey’s central bank kept key policy rates steady, but cut the minor late liquidity rate. It called the move “technical” and added that it will keep policy tight until inflation improves. Still, the cut in late liquidity rate serves as a reminder that the central bank will start taking back all of its extraordinary measures in the coming months, and that the government is still applying pressure to do so.