Emerging Markets: What has Changed

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

(1) Some measure to support the lira maybe on the way in Turkey.
(2) Singapore MAS kept the slope and width of the policy band unchanged, a hawkish surprise. 
(3) Malaysia sells $1.5 bln in the country’s first global bond offering since 2011. 
(4) The EC suspended about EUR450 mln from Hungary's EU funding after the nation failed to take action on a previous dispute. 
(5) Colombia central bank Co-Director Cano delivered some hawkish remarks. 
(6) Brazilian Finance Minister Levy still looks set to deliver the basics.

Over the last week, China (+6.3%), Argentina (+4.8%), and Hong Kong (+1.39%) have outperformed in the EM equity space, while India (-1.5%) and Czech Republic (-0.9%). In the EM local currency bond space, longer date yields in Turkey (+34 bp), Indonesia (+27 bp) and Peru (+12 bp) rose the most, and fell the most in Colombia (-8 bp), Check Republic (-6 bp) and Brazil -6 bp). To put this in better context, the 10-year UST yield fell 7 bp over the past week. In the EM FX space, the top performers were RUB (+5.4% vs. USD), SGD (+1.8%), and BRL (+1.8%), while the underperformers were TRY (-2.1% vs. USD) and PEN (-0.0%).

(1) Some measure to support the lira maybe on the way in Turkey. The central bank says it will discuss a measured cut FX depo lending rates. It will also consider “a measured hike in the partial remuneration rate on Turkish lira reserve requirements” at its MPC meeting on April 22.  However, it’s still unclear whether the government can remain quiet if the central bank keeps policy rates unchanged again.

(2) Singapore MAS kept the slope and width of the policy band unchanged, a hawkish surprise.  The monetary authority will maintain the policy of a modest and gradual appreciation of the S$NEER band.  The decision was in part following considerably better growth figures, with Q1 GDP rising 2.1% y/y, same as the previous quarter. Also, Singapore’s labor market remains tight.  We do not rule out another move to loosen policy this year, as we believe the economic outlook has worsened since the last MAS intra-meeting move back in January.

(3) Malaysia sells $1.5 bln in the country’s first global bond offering since 2011.  Both 10- and 30-year paper were sold, at spreads over US Treasuries of 115 bp and 170 bp, respectively.  Demand was strong, with orders totalling $9 bln.  This is a good sign of confidence, which was hurt by recent default concerns over state-owned investment company 1MDB.  Malaysia’s foreign reserves have slumped to $105 bln in March, the lowest since, even as $1.25 bln of sukuk bonds come due in June.

(4) The EC suspended about EUR450 mln from Hungary's EU funding after the nation failed to take action on a previous dispute.  The EC found problems last year with spending decisions during the 2007-2013 budget cycle, and asked the government to take corrective measures.  According to Deputy State Secretary Csepreghy, the dispute is of a "technical" nature.  There are no penalties involved, only interruptions and suspensions.

(5) Colombia central bank Co-Director Cano delivered some hawkish remarks.  He warned that the policy rate might need to be raised if inflation expectations drift higher. While Cano argued that “the policy rate should remain unchanged for at least the rest of the year,” he noted that steady rates are conditional on “inflation expectations not becoming unanchored from the target.” 

(6) Brazilian Finance Minister Levy still looks set to deliver the basics. The first draft of the 2016 budgetary directives proposal sees a primary surplus target of 2.0% of GDP in 2016 (up from 1.2% in 2015). While positive, this is still not enough to stabilize the country’s debt/GDP ratio. There will still be a lot of debate, and the bill will only be voted around August. All in all, this is a positive signal, but one that markets have likely already priced in.