Emerging Markets: What has Changed

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

1) News that Ukraine and Russia have agreed on a cease-fire in east Ukraine was greeted enthusiastically by investors

2) A report by Fitch rating highlighted the sharp increase in Turkish bank’s foreign borrowings

3) Polish central bank left rates steady at 2.5% but the statement was much more dovish than expected

4) There is more concrete talk that Indonesia’s new president will indeed reduce fuel subsides

5) The outlook for Venezuela has become more uncertain after a cabinet shuffle saw Rafael Ramirez move to the Foreign Ministry

Over the last week, Argentina (+6.8%), Pakistan (+6.6%), and Hungary (+5.4%) have outperformed in the EM equity space as measured by MSCI, while Korea (-2.3%), Malaysia (-1.5%), and Turkey (-0.6%) have underperformed. To put this in better context, MSCI EM rose 1.4% over the past week while MSCI DM rose 0.6%.

In the EM local currency bond space, Russia (10-year yield -24 bp), Indonesia (-23 bp), and Turkey (-15 bp) have outperformed over the last week, while Chile (10-year yield +11 bp), Singapore (+5 bp), and Czech Republic (+4 bp), and have underperformed. To put this in better context, the 10-year UST yield was up 9 bp over the past week. 

In the EM FX space, PLN (+0.9% vs. EUR), HUF (+0.8% vs. EUR), and CZK (+0.7% vs. EUR), and have outperformed over the last week, while MYR (-0.9% vs. USD), RUB (-0.6% vs. USD), and IDR (-0.5% vs. USD) have underperformed.

1) News that Ukraine and Russia have agreed on a cease-fire in east Ukraine was greeted enthusiastically by investors. So far, so good. There is a 7-step plan in place and markets have stabilized, but we caution that there are a vast number of possible slip ups in the horizon. It will also be important to see if NATO speakers will tone down their rhetoric and how plans for any additional sanctions are going to develop. 

2) A report by Fitch rating highlighted the sharp increase in Turkish bank’s foreign borrowings (up until the 1H 2014). Borrowing increased to $164 bln, or 38% of Turkey’s total external debt, compared with 20% in 2008. Needless to say, this leaves Turkey exposed to changes in the global liquidity environment – especially considering it has less than $115 bln in foreign FX reserves. 

3) The Polish central bank left rates steady at 2.5% but the statement was much more dovish than expected. It noted that “If incoming data confirm weakening of economic growth and increasing risk of the inflation rate remaining below target in the medium term, the council will begin to adjust monetary policy.” Governor Belka later added that a rate cut was discussed, that rate cuts are probable, and that he doesn’t rule out more than one move.

4) There is more concrete talk that Indonesia’s new president will indeed reduce fuel subsides. It would be a big vote of confidence for Indonesia if Joko Widodo raises fuel prices upon taking office in October. Reports suggest that his economic team is considering three strategies: a one-time price hike, a gradual quarterly price adjustment, or fixing the subsidy amount. Whatever happens, we expect it to come together with some measures to alleviate the impact on the poor. 

5) The outlook for Venezuela has become more uncertain after a cabinet shuffle saw Rafael Ramirez move to head up the Foreign Ministry. As Vice President for the Economy as well as Oil Minister, Ramirez had a big say in economic policy, and was widely viewed as market-friendly and pragmatic. Venezuelan foreign currency bonds have sold off this week, reflecting unease with the decision. However, like Argentina, we do not think problems in Venezuela will have any lasting impact on the wider EM.