Emerging Markets: What has Changed

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

1) Turkey’s central bank surprised with a cut
2) Peru’s central bank surprised with a cut
3) Egypt’s central bank surprised with a cut
4) China’s central bank surprised with more liquidity injections
5) South Africa’s central bank surprised with a strong dovish shift
6) Dmitry Tulin took over as the head of monetary policy as the new First Deputy Chairman of Russia’s central bank
7) The ECB’s QE is good for CE3, but the CHF appreciation is bad

Over the last week, Hungary (+8.8%), Russia (+7.2%), and Chile (+5.7%) have outperformed in the EM equity space as measured by MSCI, while the Philippines (-0.9%), Czech Republic (-0.6%), and UAE (-0.1%) have underperformed.  To put this in better context, MSCI EM rose 3.6% over the past week while MSCI DM rose 2.2%.

In the EM local currency bond space, Indonesia (10-year yield -50 bp), Russia (-44 bp), and Hungary (-37 bp) have outperformed over the last week, while Ukraine (10-year yield +147 bp), Thailand (+20 bp), and Singapore (+9 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -1 bp over the past week.

In the EM FX space, HUF (+2.7% vs. EUR), PLN (+2.0% vs. EUR), and RUB (+1.6% vs. USD) have outperformed over the last week, while EGP (-3.3% vs. USD), ILS (-1.5% vs. USD), and SGD (-1.2% vs. USD) have underperformed.

1) Turkey’s central bank surprised with a cut.  The bank cut the benchmark repo rate 50 bp to 7.75%, but the statement sounded cautious.  Of note, the decision didn’t hold back the government from more jawboning.  President Erdogan went as far as saying that the bank “still hasn’t got the message.”  Industry Minister Isik commented that “we were expecting a bolder rate cut.”  It will be hard for the market to overlook such overt pressure on the central bank, but given the context, it appears that the bank has exercised a significant degree of autonomy by delivering only a 50 bp cut.
2) Peru’s central bank surprised with a cut. The bank eased rates 25 bp to 3.25%.  While the timing was unexpected, easing was expected to resume sometime this year.  Of course, lower fuel prices and weaker growth from Peru’s commodity sector drove the decision.  Copper (-10% YTD) accounts for about a quarter of Peru’s exports.  These factors will help inflation converge quicker to the 2.0% target from 3.2% y/y currently. 

3) Egypt’s central bank surprised with a cut.  The bank cut rates 50 bp to 8.75%.  The usual factors were cited in the statement.  The country had already cut fuel subsidies in the middle of last year, so the fall in energy prices won’t be a huge fiscal help.  Still, the inflation outlook is vastly improved.  CPI rose 7.7% y/y in December, down from the cyclical peak of 10.1% y/y in August.
4) China’s central bank surprised with more liquidity injections. The bank unexpectedly added CNY50 bln to its CNY269.5 bln rollover of yuan loans.  The next day, it conducted its first reverse repo transaction in a year, worth CNY50 bln. This will be taken as a further sign that policy is in easing mode, albeit moderate.  A few days before that, the PBOC also announced it would allocate money for lending to small companies and the agricultural sector.

5) South Africa’s central bank surprised with a strong dovish shift.  SARB Governor Kganyago said the bank was assessing the impact of lower oil prices before making a call on whether to cut interest rates.  Just the fact that easing is on the table is a big switch from the hawkish stance in 2014.  The January 29 meeting seems too soon, but we think a cut at the March 26 meeting is starting to look more likely if current disinflation trends continue.

6) Dmitry Tulin took over as the head of monetary policy as the new First Deputy Chairman of Russia’s central bank.  Tulin will also be in charge of international reserve management, refinancing operations and liquidity provision.  Governor Elvira Nabiullina remains in place.  The move comes on the heels of the large rate hike last month, from 10.5% to 17%, which only gave temporary relief.  Tulin is meant to instil confidence.  He was the deputy head of the central bank right after the fall of the Soviet Union in 1991, and has since worked at the IMF, EBRD, and Deloitte consulting.  Comments from a presidential aid suggest that the reshuffle is no accident and will lead to changes in policy.  These changes could take many forms, but we assume they will lead to some headline risks for those holding short ruble positions.

7) The ECB’s QE is good for CE3, but the CHF appreciation is bad.  The medium-term impact of QE on Eastern European assets seems positive, on balance.  For dollar-based investors, CE3 currencies will be dragged down with the lower euro.  But the ECB is doing some of the easing for those central banks and, assuming it works to some degree, they will benefit in terms of flows and potential growth spill overs.  The dramatic move by the SNB helped to highlight the still lingering concerns about FX-linked lending in the region. That said, Hungary seems to have gone further in insulating the economy from this problem than Poland.  In both cases, we expect the consequences of the move to be manageable.