Emerging Markets: What has Changed

1) PBOC appears to have confirmed a somewhat easier monetary stance

2) Malaysian Prime Minister Najib is consolidating his grip on power

3) Hungarian central bank Vice Governor Nagy hinted at more rate cuts

4) Press reports suggest South African Finance Minister Gordhan threatened to resign last week

5) Brazil was downgraded to sub-investment grade by Moody's

6) Colombia’s central bank tweaked its FX intervention mechanism

In the EM equity space, Turkey (+2.6%), Hungary (+1.9%), and Thailand (+1.7%) have outperformed this week, while China (-3.4%), India (-2.3%), and Chile (-0.8%) have underperformed.  To put this in better context, MSCI EM fell -0.1% this week while MSCI DM rose 1.5%.

In the EM local currency bond space, Russia (10-year yield -42 bp), Turkey (-24 bp), and Colombia (-10 bp) have outperformed this week, while Ukraine (10-year yield +45 bp), South Africa (+24 bp), and Indonesia (+15 bp) have underperformed.  To put this in better context, the 10-year UST yield was up 2 bp this week.

In the EM FX space, RUB (+2.0% vs. USD), COP (+1.6% vs. USD), and CLP (+1.3% vs. USD) have outperformed this week, while ZAR (-4.3% vs. USD), ARS (-2.6% vs. USD), and HUF (-0.9% vs. EUR) have underperformed.

1) PBOC appears to have confirmed a somewhat easier monetary stance.  Governor Zhou characterized its policy as "prudent with a slight easing bias."  In the recent past, he said it was a "prudent policy, making reasonably ample liquidity."  Note that the PBOC fix today was the fourth day in a row for a slightly weaker yuan, yet EM currencies have digested this well.  Just like the contagion from weaker Chinese equity markets was limited this week, so too perhaps is the impact of a weaker yuan

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2) Malaysian Prime Minister Najib is consolidating his grip on power.  The ruling United Malays National Organisation (UMNO) suspended its number 2 person Muhyiddin Yassin, who has been very critical of Najib.  Muhyiddin’s suspension as Deputy President of UMNO will be in effect until the next party elections (due by 2018), Secretary-GeneralTengku Adnan Tengku Mansor said.  The move follows the ouster this month of former Prime Minister Mahathir’s son (and Najib critic) as chief minister of northern state Kedah.  

3) Hungarian central bank Vice Governor Nagy hinted at more rate cuts.  Up until now, most bank officials said further easing would be done via unconventional measures.  Nagy said the bank is weighing rate cuts now due in part to the firmer currency, though he added that March/April is too soon for a cut.  He did add that unconventional easing would be seen in March.  The forint may also be suffering from political risk, as PM Orban called for a referendum to block the EU plan forcing member states to shelter refugees.  This is yet another flashpoint between Hungary and the EU.  

4) Press reports suggest South African Finance Minister Gordhan threatened to resign last week.  He is reportedly clashing with South African Revenue Service Commissioner Tom Moyane.  Obviously, one could expect some tensions ahead of the budget statement, but this sounds pretty extreme.  Add in another report that Gordhan is being investigated by the police, and one gets the sense that Gordhan is walking on thin ice.  Zuma expressed support for Gordhan, but these other developments suggest otherwise.  If Gordhan is forced out, then we think that investors would give up on any hope of orthodox policies from Zuma.  Whatever happens, the nation's reputation has been greatly damaged in recent weeks.

5) Brazil was downgraded to sub-investment grade by Moody's.  This was long overdue, as the agency cut Brazil two notches to Ba2 (= BB) with a negative outlook.  It has caught up with S&P's BB and now Fitch is the outlier at BB+.  Our own ratings model has Brazil at BB-/Ba3/BB- and so further cuts are warranted.  Moody's move wasn't a huge surprise but it underscores our feeling that the rating agencies are on the warpath.  That's bad news for South Africa and Turkey, the other weak links in EM besides Brazil.  

6) Colombia’s central bank tweaked its FX intervention mechanism.  Policymakers said they will now auction FX call options when the peso weakens 3% or more from the 20-day moving average, down from a previous level of 5%.  It’s worth noting that the central bank has never sold dollars under the intervention mechanism first announced at its October meeting.  However, the bank said that it is lowering the barrier to help mitigate the impact of peso weakness on inflation.


(from my colleague Dr. Win Thin)

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