Emerging Markets: What has Changed

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

1) Colombia’s central bank unexpectedly hiked its policy rate 25 bp to 4.75% 

2) Mexico extended its FX auctions 

3) Petrobras raised prices for gasoline and diesel for the first time in almost a year 

4) China’s central bank cut the minimum down payment for first-time home buyers 

5) The central bank of Indonesia said it will start FX interventions in the forward market, joining the growing number of countries stepping up against currency weakness. 

6) Kazakhstan’s central bank hiked its base rate 400 bp to 16% and narrowed the rates corridor to +/- 1 percentage point 

In the EM equity space, Taiwan (+2.1), Hong Kong (+1.5%), and Korea (+1.4%) have outperformed over the last week, while Poland (-3.0%), Thailand (-2.2%), and Russia (-1.8%) have underperformed. To put this in better context, MSCI EM rose 1.2% over the past week while MSCI DM fell -1.1%.

In the EM local currency bond space, Brazil (10-year yield -73 bp), Singapore (-28 bp), and Poland (-21 bp) have outperformed over the last week, while Colombia (10-year yield +14 bp), Taiwan (+2 bp), and Israel (+2 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -24 bp over the past week.

In the EM FX space, KRW (+1.2% vs. USD), TRY (+0.8 vs. USD), and CLP (+0.6% vs. USD) have outperformed over the last week, while RUB (-1.7% vs. USD), BRL (-1.3% vs. USD), and THB (-1.1% vs. USD) have underperformed.

1) Colombia’s central bank unexpectedly hiked its policy rate 25 bp to 4.75%.  In the previous two meetings the decision to stay on hold was a split decision, but this move was unanimous.  The bank acknowledged inflation expectations are “possibly unanchored.”  

2) Mexico extended its FX auctions.  The FX Commission (made up of Banxico and the Finance Ministry) announced that the FX auction mechanism will be extended until November 30 due to the volatility in global financial markets.  Since the auction mechanism began last December, a total of US$15.4bn has been sold in these operations.

3) Petrobras raised prices for gasoline and diesel for the first time in almost a year.  While this may seem strange given continued weakness in global oil prices, the government has kept prices artificially low.  The adjustment in prices should help the fiscal accounts, but at a cost of higher inflation.  

4) China’s central bank cut the minimum down payment for first-time home buyers.  This was the first cut in five years, and steps up support for the property market.  The PBOC cut the minimum down payment for buyers in cities without purchase restrictions to 25% from 30% previously.  That rate had been in in place since 2010, when the government boosted the ratio from 20% to help curb property speculation.

5) The central bank of Indonesia said it will start FX interventions in the forward market, joining the growing number of countries stepping up against currency weakness. Separately, Trade Minister Lembong was quoted as considering emergency measures, which some may interpret as protectionism. We would downplay his comments for two reasons.  First, it would be out of line with President Jokowi’s push for deregulation and cut in red tape.  Second, we believe that, despite the country’s fragilities, there are some encouraging signs from the external accounts.

6) Kazakhstan’s central bank hiked its base rate 400 bp to 16% and narrowed the rates corridor to +/- 1 percentage point.  The bank said it narrowed the corridor “to reduce the volatility of money-market interest rates and give more clear signals to the market.”  The base rate was set as the new policy rate on September 2, just after the tenge was devalued.  The central bank has been actively intervening in the FX market, so the rate hike is meant to lend the tenge some support.  

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