Emerging Markets: What has Changed

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

1) It was a memorable week for Brazil
2) The Colombian government and the FARC guerrillas announced that they are ready to sign an agreement
3) The Hungarian central bank shifted the policy rate from the 2-week deposit rate to the 3-month deposit rate
4) Malaysian opposition parties have announced plans for a new alliance
5) Fitch revised the outlook on its BBB- rating for the Philippines from stable to positive
6) Taiwan surprised markets with a 12.5 bp rate cut
7) The Nigerian central bank kept its record-high benchmark policy rate unchanged at 13%, but it cut the cash reserve ratio by 600 bp to 25%

In the EM equity space, UAE (+0.5), Qatar (-0.6%), and China (-0.6%) have outperformed over the last week, while Brazil (-4.2%), Russia (-4.2%), and Indonesia (-3.9%) have underperformed.  To put this in better context, MSCI EM fell -4.7% over the past week while MSCI DM fell -1.7%.

In the EM local currency bond space, the Philippines (10-year yield -133 bp), Israel (-26 bp), and Hungary (-16 bp) have outperformed over the last week, while Ukraine (10-year yield +90 bp), Indonesia (+55 bp), and Turkey (+24 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 3 bp over the past week.

In the EM FX space, RUB (+1.5% vs. USD), EGP (flat vs. USD), and PKR (-0.1% vs. USD) have outperformed over the last week, while MYR (-4.3% vs. USD), ZAR (-3.8% vs. USD), and COP (-2.9% vs. USD) have underperformed.

1) It was a memorable week for Brazil.  Local markets spent the first few sessions in panic mode.  USD/BRL rose above the key 4.0 level to set a new all-time high near 4.25, CDS prices blew out, and the local rates curve began to price an exorbitant risk premium.  Nerves were only calmed when central bank President Tombini made some stronger statements suggesting more aggressive FX interventions and unwillingness to chase the market higher with the SELIC rate.  Yet we still didn’t get any fundamental change in the negative picture for Brazil that would convince us that we have reached an inflexion point.  This would almost necessarily have to come from the political sphere, particularly in the form of positive fiscal news. 

2) The Colombian government and the FARC guerrillas announced that they are ready to sign an agreement.  After three years of negotiations, this seems to be an important development as both parties claim to have reached common ground on many contentious issues and have found an agreeable way to proceed with the disarmament.  Implementation is the key now, but there is definitely reason to be optimistic.  As such, this could represent a major long-term positive factor for Colombia.

3) The Hungarian central bank shifted the policy rate from the 2-week deposit rate to the 3-month deposit rate while keeping both steady at 1.35%.  It later cut the overnight deposit rate by 25 bp to 0.1% in order to push more money into government bonds.  Moreover, it warned that rates would likely stay low for “a longer horizon than expected.”  Back in July, central bank President Matolcsy promised to keep rates low for a “very long” time.  The technical measures taken this week have fed into the notion that policymakers will have to eventually do more easing, and we would not rule out more easing in the coming months.

4) Malaysian opposition parties have announced plans for a new alliance.  After the collapse of the old Pakatan Rakyat grouping in June, three of the four main opposition parties are forming a new alliance called Pakatan Harapan.  Pakatan Rakyat was formed back in 2008, but had little in common beyond wanting to unseat the ruling Barisan Nasional coalition.  Indeed, the PAS will not take part in Pakatan Harapan due to opposition to its plans to implement shariah criminal law in a PAS-controlled state.  The next general elections are due by 2018, and it remains to be seen if the opposition can capitalize on the current events that are clearly negative for the ruling Barisan Nasional.

5) Fitch revised the outlook on its BBB- rating for the Philippines from stable to positive.  It cited improving governance standards and global competitiveness under the Aquino administration as major factors behind the move.  We believe a one notch upgrade is justified, but it would simply match S&P (at BBB) and Moody’s (at Baa2).  Our own sovereign rating model has the Philippines as a borderline A-/A3/A-, so we view it as very underrated by all three agencies.  Upgrades should continue from all three.

6) Taiwan surprised markets with a 12.5 bp rate cut, bringing the policy rate down to 1.750%.  The decision was unanimous.  In the conference call, Governor Perng Fai-nan mentioned that the Taiwanese dollar real exchange rate remains relatively high and that the inflation outlook for next year remains subdued, but should no longer be negative.  Of course the deceleration in China has also played an important role in the bank’s decision.  Further easing is likely.

7) The Nigerian central bank kept its record-high benchmark policy rate unchanged at 13%, but it cut the cash reserve ratio by 600 bp to 25%.  The central bank remains concerned about the rising inflationary trend, with CPI rising to 9.3 % y/y in August, above the bank’s upper limit of 9%.  Still, officials though it was in order to try to boost liquidity and banking lending though the cut in the cash reserve ratio.

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