Emerging Markets: What has Changed

(from my colleagues Dr Win Thin and Ilan Solot)

1) Unconventional policy measure in China could be on the table 

2) Poland sold sells its first international bond with a negative yield 

3) Indonesia executed eight people over drug charges, seven of which were foreigners 

4) Russia’s central Bank stepped up its pace of easing, cutting rates 150 bp to 12.50% vs. the expected 100 bp 

5) The Ukraine government implemented one of the most painful measures, hiking gas and heating tariffs for households 

6) The Thai central bank cut rates unexpectedly 

Over the last week, Hungary (+4.6%), Colombia (+4.5%), and Peru (+2.4%) have outperformed in the EM equity space as measured by MSCI, while Indonesia (-9.7%), Thailand (-4.0%), and the Philippines (-3.7%) have underperformed.  To put this in better context, MSCI EM fell -1.3% over the past week while MSCI DM also fell -1.3%.

In the EM local currency bond space, Russia (10-year yield -33 bp), South Africa (-8 bp), and China (-3 bp) have outperformed over the last week, while Ukraine (10-year yield +34 bp), Hungary (+19 bp), and Poland (+18 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 16 bp over the past week.

In the EM FX space, COP (+3.0% vs. USD), ZAR (+1.5%), and TRY (+1.3) have outperformed over the last week, while BRL (-2.1% vs. USD), RUB (-1.6%), and THB (-1.6%) have underperformed.

1) Unconventional policy measure in China could be on the table.  Although press reports were later denied, it was still enough to reinforce the view that there is still a lot more easing to come.  We think China still has a lot of conventional easing tools at its disposal, so even if QE is being discussed, we doubt it is imminent.  That said, we recognize that China is looking to find way to expand the monetary base in light of less liquidity injected from diminished sterilization operations.  We do not see a weak yuan policy in place, as PBOC fixed USD/CNY at its lowest level since mid-December.

2) Poland sold sells its first international bond with a negative yield.  It raised CHF 580 mln of zero coupon May 2018 debt at -0.213%.  Poland’s Finance Ministry said the proceeds will be used to buy back some of its CHF1.5 bln debt due in May.  Despite the additional vote of confidence in Poland and the 7% appreciation against the euro this year, officials seem to be comfortable with further zloty’s appreciation.  Central bank MPC member Osiatynski commented that the bank was “not convinced” about the impact of capital inflows into Poland, while MPC member Hausner assured markets that a stronger currency would not be a trigger for a policy move.

3) Indonesia executed eight people over drug charges, seven of which were foreigners. The Australian and Brazilian government were the most outspoken against the action, with the former recalling its ambassador in protest.  Note Australia is Indonesia’s largest aid donor.  Some observers say that despite the negative repercussions abroad, the decision to carry out the executions will help boost President Widodo’s popularity at home.  Or at least, it will avoid leaving an open flank for his critics to attack him as weak and indecisive.

4) Russia’s central Bank stepped up its pace of easing, cutting rates 150 bp to 12.50% vs. the expected 100 bp.  The bank said it would continue cutting rates as inflation improves.  Officials have made it clear that they were not happy about the fast rebound in the ruble and would prefer the currency weaker, so there was no resistance on that side.  Inflation remains high, and the bank noted that the stronger ruble would help lower it.  Still, inflation doesn’t seem to be on the top of the central bank’s list of concerns, especially with GDP expected to contract sharply (-3.0%) this year.

5) The Ukraine government implemented one of the most painful measures, hiking gas and heating tariffs for households.  This signals that the risk of IMF EFF going off track is low.  However, some the macro developments deviated from the program, with a deeper recession and weaker UAH in 2015 now expected.  This will likely require a revision of the program’s parameters as the IMF is likely to ask for additional measures to achieve the debt-to-GDP threshold in time, including bigger fiscal adjustment.

6) The Thai central bank cut rates unexpectedly. The bank surprised markets with a 25 bp cut in its policy rate to 1.5%.  The vote was 5-2.  We were expecting a cut later in the year but we do see the grounds for earlier action.  Thailand reported April CPI falling more than expected at -1.0% y/y vs. -0.6% in March.  Headline is dragging core lower, which rose 1.0% vs. 1.3% in March.  This is nearing the bottom of the 0.5-3.0% target range for core inflation. Also, the Ministry of Finance cut its growth forecast to 3.7% from 3.9% for this year.  This comes after 2014 growth came in at the lowest rate in 3 years.