Emerging Markets: What has Changed

1) South African President Jacob Zuma fired Finance Minister Nene and replaced him with little-known ANZ lawmaker David Van Rooyen 

2) S&P revised the outlook on South Africa’s BBB- rating from stable to negative 

3) People’s Bank of China announced the publication of a new CNY basket on its website 

4) Moody’s put Brazil’s Baa3 rating on review for possible downgrade 

5) Brazil’s Supreme Court suspended for a week the creation of the congressional impeachment committee 

6) Relations between Brazil Vice President Temer and President Dilma Rousseff have deteriorated sharply 
7) Argentina’s central bank President Alejandro Vanoli resigned 

8) The Venezuelan ruling party lost control of the National Assembly in last weekend’s elections 

In the EM equity space, Qatar (+0.2%), Colombia (+0.2%), and Brazil (-0.4%) have outperformed over the last week, while UAE (-6.0%), Poland (-5.6%), and Turkey (-5.4%) have underperformed.  To put this in better context, MSCI EM fell -5.0% over the past week while MSCI DM fell -3.0%.

In the EM local currency bond space, the Philippines (10-year yield -11 bp), Singapore (-8 bp), and Korea (-6 bp) have outperformed over the last week, while South Africa (10-year yield +172 bp), Brazil (+41 bp), and Turkey (+41 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -10 bp over the past week.

In the EM FX space, PKR (+1.0% vs. USD), CZK (flat vs. EUR), and EGP (-0.1% vs. USD) have outperformed over the last week, while ZAR (-10.3% vs. USD), MXN (-4.2% vs. USD), and BRL (-3.3% vs. USD) have underperformed.

1) South African President Jacob Zuma fired Finance Minister Nene and replaced him with little-known ANZ lawmaker David Van Rooyen.  Nene was removed from his position after only 19 months.  Zuma knows the investment grade rating is in serious trouble.  So what does he do?  He fires the one guy that's been trying to protect that rating.  Nene’s removal suggests that there was a clash with President Zuma about how deep the fiscal cuts should be.  We reiterate our long-standing call that the nation gets cut to sub-investment grade, and now it's likely sooner rather than later.

2) S&P revised the outlook on South Africa’s BBB- rating from stable to negative.  That same day, Fitch cut its rating on South Africa by a notch to BBB-.  This happened before Nene was dismissed, calling into question President Zuma’s judgment.  Here too, we think a downgrade is a done deal, as our own ratings model has South Africa at BB/Ba2/BB.  Moody's still has it at Baa2, but that won't last either.

3) People’s Bank of China announced the publication of a new CNY basket on its website.  It said it was meant to bring about a shift in how markets view exchange rate movements, with the obvious intent of lessening the focus on the bilateral USD/CNY rate.  We think this is a benign move, and is simply part of the evolution of China’s FX policy.

4) Moody’s put Brazil’s Baa3 rating on review for possible downgrade.  This is a stronger action than just moving the outlook to negative.  The agency wrote that improvement in Brazil’s economic and fiscal performance "now appears unlikely in 2016.”  S&P already has Brazil at sub-investment grade BB+, so a Moody’s downgrade would likely lead to some forced selling by institutional investors that require an investment grade rating from at least two of the major rating agencies.  We think a downgrade is a done deal, as our own ratings model has Brazil at BB-/Ba3/BB-.  

5) Brazil’s Supreme Court suspended for a week the creation of the congressional impeachment committee.  The move came after the government lost its bid to make the process of appointing committee members public.  Decision to suspend was made by Justice Fachin, who was appointed to the top court by Rousseff and so the move has bad optics.  We still believe that the impeachment process is a net negative for Brazil assets, further delaying and/or preventing much-needed fiscal adjustments.    

6) Relations between Brazil Vice President Temer and President Dilma Rousseff have deteriorated sharply.  In a letter published by all major newspapers in the country, Temer said Rousseff never trusted him and only gave him a figurehead role for the past five years. Ironically Temer would replace Rousseff should she be impeached by Congress.  

7) Argentina’s central bank President Alejandro Vanoli resigned.  Incoming President Macri had said Vanoli isn’t qualified, and has nominated Federico Sturzenegger to replace him.  Sturzenegger has a Ph.D. in economics from MIT.  The economic team is shaping up to be a strong one, and bodes well for policy.  New Finance Minister Alfonso Prat-Gay is well-regarded by the markets, with experience at a major US bank as well as central bank governor.

8) The Venezuelan ruling party lost control of the National Assembly in last weekend’s elections.  Furthermore, the opposition appears to have won a super-majority that will give it greater control and influence over policies.  It's a good sign, of course, but we think President Maduro is still in the driver’s seat.  We need to see Maduro replaced (like Kirchner/Fernandez were in Argentina) before we can get more optimistic.

(from my colleague Dr. Win Thin)

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