Emerging Markets: What has Changed

(from my colleagues Dr Win Thin and Ilan Solot)

1) Indonesian Finance Minister Bambang Brodjonegoro said the government will probably raise subsidized fuel prices before year-end 

2) Dilma Rousseff was re-elected as President of Brazil 

3) Brazil’s central bank delivered a hawkish surprise too on Wednesday,hiking rates by 25 bp to 11.25% 

4) Protests continue to spread in Hungary

Over the last week, Brazil (+6.1%), Russia (+4.5%), and Korea (+3.4%) have outperformed in the EM equity space as measured by MSCI, while Hungary (-1.7%), UAE (-1.6%), and Indonesia (-0.6%) have underperformed. To put this in better context, MSCI EM rose 2.3% over the past week while MSCI DM rose 1.0%.

In the EM local currency bond space, Brazil (10-year yield -12 bp), Mexico (-9 bp), and India (-7 bp) have outperformed over the last week, while Russia (10-year yield +12 bp), Hong Kong (+11 bp), and Indonesia (+7 bp) have underperformed. To put this in better context, the 10-year UST yield was +2 bp over the past week.

In the EM FX space, BRL (+3.7% vs. USD), CLP (+1.4%), and TRY (+1.1%) have outperformed over the last week, while RUB (-0.9% vs. USD), IDR (-0.6%), and THB (-0.6%) have underperformed.

1) Indonesian Finance Minister Bambang Brodjonegoro said the government will probably raise subsidized fuel prices before year-end. It looks like Indonesia will follow India in cutting subsidies. The moves are long overdue, but lower commodity prices are giving them cover the perfect cover to do so now. Elsewhere, the government said it wanted to lower the average maturity of its debt in order to lower borrowing costs.

2) Dilma Rousseff was re-elected as President of Brazil. Markets sold off initially and then rallied. There is no hard evidence yet that there willbe any substantial change in the way the government is conducting fiscal policy, so we assume that the recovery in Brazil assets is more a matter of positioning. We will have to wait at least until the new Finance Minister is announced to gauge Rousseff’s intentions.

3) On the other hand, Brazil’s central bank delivered a hawkish surprise too on Wednesday, hiking rates by 25 bp to 11.25%. No change was expected. It seems to signal that President Rousseff will try to win back the confidence of markets. Fiscal policy is still the major weak spot for Brazil, but this rate hike will support the view that she will be more market-friendly in her second term. If nothing else, the surprise hike should keep BRL from underperforming as much as it has been recently.

4) Protests continue to spread in Hungary. The trigger was a plan to impose an internet tax, but we see this as just an excuse to vent deeper frustrations against Prime Minister Orban. We doubt this will lead to any material change in policy or market impact. It may serve as the catalyst for a more organized opposition against the Fidesz party but for now, the government remains firmly in power for the foreseeable future. The party has won all three elections held this year and has a large enough majority to change the constitution several times already. Recall that earlier in the year, Orban gave a speech in which he expressed his intentions to turn Hungary into an “illiberal state,” modeled after the likes of Russia and China.