Emerging Markets: What has Changed

1) The Hong Kong dollar posted its biggest two-day decline since 1992

2) Bank Indonesia restarted its easing cycle, cutting rates for the first time since February 2015

3) Poland’s current Monetary Policy Council (RPP) held its last policy meeting

4) Poland’s president proposed a draft bill on FX loan conversion

5) Russia will reportedly cut budgetary expenditures by 10% due to low oil prices

6) Russia’s central bank has turned more hawkish

7) Argentina officials and debt holdouts met for the first time since President Macri won the election

8) Petrobras cancelled its planned bond sale due to “unfavorable market conditions”

In the EM equity space, Colombia (+2.8%), Mexico (+2.7%), and Poland (+1.0%) have outperformed this week, while China (-7.2%), UAE (-5.6%), and Brazil (-5.4%) have underperformed.  To put this in better context, MSCI EM fell -4.0% this week while MSCI DM fell-1.3%.

In the EM local currency bond space, Indonesia (10-year yield -26 bp), Hungary (-14 bp), and Thailand (-13 bp) have outperformed this week, while the Philippines (10-year yield +24 bp), Brazil (+22 bp), and South Africa (+17 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -10 bp this week.

In the EM FX space, ARS (+2.4% vs. USD), HUF (+0.9% vs. EUR), and SGD (+0.3 vs. USD) have outperformed this last week, while RUB (-3.6% vs. USD), ZAR (-2.6% vs. USD), and INR (-1.4% vs. USD) have underperformed.

1) The Hong Kong dollar posted its biggest two-day decline since 1992.  Yet HKD still remains in the strong half of the 7.75-7.85 trading band and has not yet traded above the midpoint fix rate of 7.80.  However, Financial Secretary Tsang admitted that it’s possible that HKD could move to the weak side of the band.  Again, we do not think it is a speculative attack, as some in the press are suggesting.  Please see our recent piece entitled “Some Thoughts on the HKD Peg.”

2) Bank Indonesia restarted its easing cycle, cutting rates for the first time since February 2015.  The main policy rate was cut 25 bp to 7.25%, while the rate on overnight deposits was also cut 25 bp to 5.25%.  With inflation falling, we see further easing this year.  Complicating matters was the terrorist strike in Jakarta.  Reports indicate at least three explosions in a shopping district (Sarinah).  The Islamic State was immediately identified as the likely culprits. 

3) Poland’s current Monetary Policy Council (RPP) held its last policy meeting.  The next RPP will be made up of virtually all new members as the 6-year terms of 8 members (out of 10 total) expire in January and early February.  Many expect the new RPP to usher in another round of easing given Law and Justice’s pledge to install pro-growth candidates.  Elsewhere, Poland requested a cut in its IMF Flexible Credit Line (FCL) from SDR15.5 bln to SDR13 bln.  The Finance Ministry said the move would save Poland PLN42 mln, and that it would consider a gradual exit from the FCL.

4) Poland’s president proposed a draft bill on FX loan conversion.  The proposal will first be assessed by Poland’s banking regulator before being sent to parliament.  It would force banks to accept repayment of FX loans at a “fair” exchange rate if the two sides can’t agree on a voluntary conversion.  The “fair” exchange rate will reportedly be set individually for each borrower, based on a specially-designed formula.  The borrower will also be allowed to forfeit the property used as collateral for the loan in order to cancel the mortgage without additional costs.

5) Russia will reportedly cut budgetary expenditures by 10% due to low oil prices.  Ministries and other government departments have until today to come up with planned cuts that total RUB700 bln ($9.1 bln), according to three cabinet officials.  Elsewhere, Russia reported that its oil output ended 2015 at 10.825 mln bbl/day, a new post-Soviet high.  

6) Russia’s central bank has turned more hawkish.  First Deputy Governor Yudaeva said that she can’t “completely” rule out a rate hike now, as inflation risks have intensified.  These are the first hawkish signals from the bank, which was in an easing cycle but has kept rates at 11% for three straight meetings.  These latest comments suggest they will remain on hold for much longer, until pressure on the ruble eases.  Lower oil is taking a toll, with USD/RUB trading at new cycle highs today.  

7) Argentina officials and debt holdouts met for the first time since President Macri won the election.  Macri reportedly wants to resolve the holdout issue quickly in order to attract foreign investment.  However, the talks are getting rocky after government officials refused to sign a non-disclosure agreement that holdouts requested before submitting their settlement proposal.  

8) Petrobras cancelled its planned bond sale due to “unfavorable market conditions.”  This news comes after the company cut spending plans and reduced estimates for its output growth.  Its 2020 target for oil production was cut 3.6% to 2.7 mln bbl/day.  President Rousseff raised the possibility of capitalizing Petrobras if oil prices continue to fall.  This strikes us negative, coming at a time when the government is under pressure to rein in spending.  

(from my colleague Dr. Win Thin)

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