Emerging Markets: What has Changed

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

1) The Reserve Bank of India (RBI) surprised with yet another intra-meeting rate cut 

2) Poland’s central bank cut 50 bp but said that the easing cycle is over 

3) Ukraine's central bank hiked rates by another 1050 bp to 30% in order to defend the hryvnia 

4) China lowered its growth target to “around 7%” this year, down from “around 7.5%” last year 

5) Brazil Senate President Calheiros rejected the government’s plan to reverse payroll tax breaks 

6) Russia political tension has entered a new phase with last weekend’s assassination of opposition leader Boris Nemtsov 

Over the last week, Egypt (+2.4%), Korea (+0.8%), and India (+0.7%) have outperformed in the EM equity space as measured by MSCI, while Brazil (-9.4%), Colombia (-8.0%), and Turkey (-7.7%) have underperformed.  To put this in better context, MSCI EM fell -2.2% over the past week while MSCI DM fell -1.0%.

In the EM local currency bond space, Ukraine (10-year yield -92 bp), Russia (-24 bp), and Czech Republic (-3 bp) have outperformed over the last week, while Brazil (10-year yield +67 bp), Indonesia (+42 bp), and Mexico (+38 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 24 bp over the past week.

In the EM FX space, RUB (+2.5% vs. USD), CZK (+0.7% vs. EUR), and EGP (+0.7% vs. USD) have outperformed over the last week, while BRL (-7.0% vs. USD), TRY (-5.0% vs. USD), and ZAR (-3.3%) have underperformed.

1) The Reserve Bank of India (RBI) surprised with yet another intra-meeting rate cut.  The repo rate was cut 25 bp to 7.50%.  The next scheduled RBI meeting is April 7.  It appears as if the RBI is rewarding the government for its recent budget agreement and for granting the central bank an official inflation targeting regime.  The RBI inflation target for the fiscal year through March 2017 “and all subsequent years” was announced last weekend at 4% +/- 2 percentage points.

2) Poland’s central bank cut 50 bp but said that the easing cycle is over.  This was the first move since last October.  The bank raised its 2015 and 2016 GDP growth forecasts, while cutting its inflation forecasts for those years.  We note the bank signalled that the easing cycle was over after its July 2013, after which it kept rates steady for 14 months before the October 2014 cut.  The Polish central bank tries to be predictable, but it is not averse to changing policy when circumstances change.  If deflation deepens, they could cut again but for the time being, we see steady rates in Poland.

3) Ukraine's central bank hiked rates by another 1050 bp to 30% in order to defend the hryvnia.  It has now raised rates by a cumulative 16 percentage points this year alone and by 23.50 percentage points since it started raising rates back in April 2014.  The country is running out of reserves, leaving capital controls and an interest rate defense as the only possible tools to help support the hryvnia.  USD/UAH has been very volatile of late, and for good reason.  30% rates will only add to the woes of an already crippled economy. 

4) China lowered its growth target to “around 7%” this year, down from “around 7.5%” last year.  The forecast was made in a work report by Premier Li at the annual meeting of China’s legislature.  The report also said fiscal policy will remain proactive, while monetary policy will remain prudent and the exchange rate will be kept at a balanced level.  It’s worth noting that a larger fiscal deficit is forecast, suggesting fiscal stimulus will take a greater role in supporting growth this year.  With inflation so low, it’s clear that maintaining growth will take center stage for China policymakers.  

5) Brazil Senate President Calheiros rejected the government’s plan to reverse payroll tax breaks.  Calheiros said the proposal needed to be submitted as a bill and not as a provisional decree.  Rousseff has resubmitted it as a bill, but we note that 40 out or 59 PT lawmakers said they opposed her budget measures.  Opposition from within her own PT party really calls into question whether the political will is there to push the fiscal measures through.  In the meantime, Brazil’s Prosecutor General has asked the Supreme Court to authorize a probe of senior politicians for potential links to the Petrobras scandal.

6) Russia political tension has entered a new phase with last weekend’s assassination of opposition leader Boris Nemtsov.  The investigation is ongoing, but very few observers believe the whole truth will ever come out.  Still, the ruble firmed on the week, with USD/RUB dipping below 60 briefly to trade at the lowest level since January 8.