Emerging Market Preview of the Week Ahead

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

With the broader dollar appreciation trend losing steam in last several weeks, the fall in oil prices has become the main external variable determining EM performance.  Russia, of course, is the weakest link amongst the major EM countries, but Malaysia and Colombia are also coming under pressure.  Even Mexico, which has hedged much of its near-term exposure to oil prices, is looking materially more fragile as investors consider that cheaper energy is here to stay.  There are second order effects to consider, for example, potential export gains given the increase in US disposable income from cheaper gasoline, but these will probably be less concentrated.

Whilst Emerging Asia should benefit from lower energy prices, the region is getting squeezed by the weak yen and the China slowdown.  Despite these unfolding risks, we prefer Asia over the other EM regions, particularly India and Indonesia.  Both have large domestic markets, and do not compete much with Japan.

Brazil reports November trade Monday, deficit expected at -$2.5 bln.  It reports October IP Tuesday, expected at -3.0% y/y vs. -2.1% in September.  The central bank then meets Wednesday and is expected to hike rates 25 bp to 11.5%.   However, the market is split.  Of the 39 analysts polled by Bloomberg, 17 are looking for a 50 bp hike to 11.75%.  Even if new Finance Minister Levy is able to meet his rather uninspiring primary surplus targets (1.2% of GDP in 2015, 2% in 2016 and 2017), rising interest payments will likely offset most of any improvements.  Interest payments are already approaching 6% of GDP, and likely to head higher as local rates move up.  As such, it's hard to see how the nominal deficit can move lower in any significant manner, which is needed for debt/GDP to stabilize.  November IPCA inflation will be reported Friday, expected to remain steady at 6.59% y/y. 

 
Korea reports November CPI Tuesday, expected to rise 1.1% y/y vs. 1.2% in October.  With inflation below the 2.5-3.5% target band, the central bank has leeway to cut rates in 2015 if the slowdown intensifies.  Easing is more likely if JPY/KRW continues to drop, as it is making new lows for this move near 9.33.  Korea trade data overnight came in much weaker than expected.  Exports -1.9% y/y, imports -4.0% y/y.  While it may be too early to fully reflect the impact of the weak yen, we expect regional trade data to get even worse.  Between the weak yen and slowing China, Asian exporters will continue to get squeezed.  A BOK policy response seems likely in 2015.

Reserve Bank of India meets Tuesday and is expected to keep rates unchanged.  Like Indonesia and Malaysia, cuts in fuel subsidies will put upward pressure on headline inflation and so should keep all these central banks in cautious mode.  India and Indonesia have large domestic markets, and don’t compete with Japan in terms of exports.  As such, these two countries are well-positioned within Asia to deal with a China slowdown and the weak yen.  Political developments in both countries have also been positive.

Turkey reports November CPI Wednesday, expected to rise 9.0% y/y vs. 8.96% in October.  With inflation well above the target range, it would be very dangerous for the central bank to cut rates anytime soon.  Next meeting is December 24, no move seen then.  Lower oil prices should help inflation and the external accounts, but the weak lira will likely offset some of the benefits.  The lira has been outperforming within EM recently, and this should continue as long as the central bank sticks to current rates.     

  
Polish central bank meets Wednesday and is expected to keep rates steady at 2%.  However, a small handful is looking for a rate cut to follow up on the surprise October 50 bp cut.  We were surprised that the bank kept rates steady in November, given the dovish signals the previous month.  Deflationary risks persist, and so we think there is a chance of a dovish surprise this week from the central bank.   

Taiwan reports November CPI Friday, expected to rise 1.2% y/y vs. 1.07% in October.  Price pressures remain low, giving the central bank leeway to cut rates in 2015 if the slowdown intensifies.  The slowing China economy and the weak yen are both headwinds on Taiwan.  Q3 GDP growth was revised down to 3.63% y/y from 3.80% preliminary and 3.78% in Q2, and further slowing is likely in 2015.  The weekend local elections saw the ruling KMT lose, and could lead it to rethink its policy of closer ties to the mainland.

The Philippines reports November CPI Friday, expected to rise 4.0% y/y vs. 4.3% in October.  Easing energy prices should continue pushing inflation lower, and we think the tightening cycle is over in the Philippines after the last 25 bp hike to 4% in September.  Like India and Indonesia, the Philippines really doesn’t compete with Japan in terms of exports.  However, it is a small economy with a small domestic market, and should feel the impact of the China slowdown in the coming months.

Russia reports November CPI Friday, expected to rise 8.9% y/y vs. 8.3% in October.  The weak ruble and ongoing sanctions are having quick pass-through effects on inflation, and could lead to further rate hikes.  Last move was a 150 bp hike to 9.5% in October, but has done nothing to stabilize the ruble as oil prices continue to plunge.  Russia is facing sluggish growth, high inflation, and deteriorating external balances, which should all keep the ruble on the defensive.  Still, as bearish as we are on RUB and Russia, the exchange rate is clearly in overshoot territory.

Mexico central bank meets Friday and is expected to keep rates steady at 3%.  With inflation easing back towards its 2-4% target range, we see no reason for the bank to move rates either way for now.  For now, the stronger US economy is helping to offset lower oil prices, as total October exports rose after stronger manufactured exports offset weaker petroleum exports.  Political risk is rising, however, and could weigh on Mexico assets as President Pena Nieto struggles to contain the fallout from renewed violence and corruption scandals. 

Colombia reports November CPI Friday, expected to rise 3.57% y/y vs. 3.29% in October.    The weak peso is one factor pushing inflation towards the top of its 2-4% target range.  However, officials are still quite happy with the exchange rate.  COP is the fourth worst EM currency YTD, down 13.5% vs. USD.  We think the tightening cycle is over for now, as the economy slows in response to previous hikes and lower oil prices.  Indeed, we are likely to see easing in 2015.