Emerging Markets: What has Changed

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

1) There has been more talk of easy mortgage lending rules for second home buyers and greater funding by the big four China banks and discount mortgages by 30%

2) The Hungarian government confirmed the use of about EUR3 bln of its FX reserves in the household FX loan conversion plan

3) The Israeli central bank left rates steady at 0.25%, but added that the rate is expected to remain at 0.25% during 2015

4) Ukraine’s central bank introduced new capital control measures to prevent further hryvnia weakness

5) As we had expected, the Brazilian central bank began to act to defend the top of its comfort range for USD/BRL around 2.40

Over the last week, the Philippines (+1.0%), Thailand (+0.4%), and Egypt (+0.3%) have outperformed in the EM equity space as measured by MSCI, while Colombia (-5.0%), South Africa (-4.5%), and Hungary (-4.4%) have underperformed. To put this in better context, MSCI EM fell -2.5% over the past week while MSCI DM fell -1.1%.

In the EM local currency bond space, Russia (10-year yield -31 bp), Poland (-30 bp), and Hungary (-18 bp) have outperformed over the last week, while Brazil (10-year yield +22 bp), Turkey (+15 bp), and Mexico (+6 bp) have underperformed. To put this in better context, the 10-year UST yield was down -8 bp over the past week.

In the EM FX space, PLN (+0.5% vs. EUR), HUF (+0.2% vs. EUR), and CNY (+0.1% vs. USD) have outperformed over the last week, while COP (-1.9% vs. USD), BRL (-1.5% vs. USD), and TRY (-1.3% vs. USD) have underperformed.

1) There has been more talk of easy mortgage lending rules for second home buyers and greater funding by the big four China banks and discount mortgages by 30%. We see this as a signal that the government is becoming increasingly worried about the sector. Recall that the property sector is about 15% of the Chinese economy. This also supports our view that targeted, sectoral stimulus will continue rather than full-scale stimulus.

2) The Hungarian government confirmed the use of about EUR3 bln of its FX reserves in the household FX loan conversion plan. There is no timing yet for the announcement of the final conversion plan, but another EUR8-9 bln of FX reserves are expected to be allocated to ensure a smooth conversion. The central bank estimated that the compensation given to borrowers will boost 2015 GDP growth by 0.2-0.3 percentage points, due to an expected boost to consumption.

3) The Israeli central bank left rates steady at 0.25%, but added that the rate is expected to remain at 0.25% during 2015. We think this is the first time it's given such explicit forward guidance on rates. The bank also cut its 2014 GDP growth forecast to 2.3% from 2.9%, and so we think that the bank may eventually resort to unconventional measures. Indeed, Governor Flug said the bank still has tools even with near-zero rates, noting that bond purchases were used during the financial crisis. For now, we think policymakers are probably concentrating on getting a weaker shekel.

4) Ukraine’s central bank introduced new capital control measures to prevent further hryvnia weakness. The bank will limit household FX purchases to UAH3000 ($220) per day, citing “increased tension” in the FX market. Meanwhile, the government opened a criminal probe into former Finance Minister Kolobov for possible violations taken under a $3 bln Russian bailout last year, before then-President Yanukovych was ousted.

5) As we had expected, the Brazilian central bank began to act to defend the top of its comfort range for USD/BRL around 2.40. The bank increased the swap rollover amount (equivalent to selling USD vs. BRL in the forward market) from 6K to 15K contracts. We don’t think that it will stop there. We expect more action if necessary and stick to our view that – periodic overshoots aside – the pair will not sustainably hold above 2.40.