Emerging Markets: What has Changed

• Local press is reporting that RBI Governor Rajan does not want to serve another term
• The incoming Philippine government is signaling looser fiscal policies ahead
• Polish President Duda’s team of experts may present several plans for consideration
• A second cabinet minister in Brazil was forced to resign
• Colombia eliminated its FX intervention program
• The IMF boosted Mexico’s Flexible Credit Line (FCL) from $67 bln to $88 bln

In the EM equity space, China (+4.1%), Brazil (+3.0%), and Hong Kong (+1.8%) have outperformed this week, while Poland (-2.6%), Russia (-2.1%), and Qatar (-1.9%) have underperformed.  To put this in better context, MSCI EM rose 1.4% this week while MSCI DM fell -0.1%.

In the EM local currency bond space, Turkey (10-year yield -41 bp), Brazil (-30 bp), and Colombia (-18 bp) have outperformed this week, while the Philippines (10-year yield +47 bp), Thailand (+12 bp), and Poland (+8 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -14 bp this week to 1.71%.

In the EM FX space, ZAR (+3.0% vs. USD), BRL (+2.0% vs. USD), and TRY (+1.6 vs. USD) have outperformed this week, while MYR (-1.6% vs. USD), PEN (-0.7% vs. USD), and MXN (-0.4% vs. USD) have underperformed.

Local press is reporting that RBI Governor Rajan does not want to serve another term.  His current 3-year term ends September 4.  Rajan is well-respected by the markets, and we expect Prime Minister Modi will do his best to keep him on.  Under Rajan, the rupee has remained remarkably steady and he has presided over a period of significantly lower inflation.  Yet Rajan has come under fire from the right, in large part due to his hawkish stance at the helm.  

The incoming Philippine government is signaling looser fiscal policies ahead.  Budget Secretary Diokno said that a budget gap equal to -3% of GDP is a “comfortable deficit target.”  That would be the highest since 2010 and a reversal from the -2% of GDP adopted by the outgoing government of President Aquino.  Diokno said that “I don’t mind borrowing now, because it’s quite cheap.  Rates now are a lot lower than before.” Finance Secretary Dominguez said that lower income taxes will be part of a tax reform bill to be submitted soon.

Polish President Duda’s team of experts may present several plans for consideration for conversion of franc-denominated mortgages.  The panel will hold a final meeting to discuss the matter June 7.  Local press reports suggest that the most likely plan will be to convert CHF-denominated loans at the exchange rate that prevailed on the day that the loan was made.  It added that Polish banks would cover the costs of the conversion.  However, governmental financial institutions such as the central bank or state-owned BGK would be able to buy commercial bank shares to help cover losses.  

A second cabinet minister in Brazil was forced to resign.  Fabiano Silveira, the Minister of Transparency and Control, resigned after press published recordings in which he criticized the Carwash probe and offered advice to a politician under investigation.  There is chatter that more tapes may be released implicating other ministers.  We don't think this derails the Rousseff impeachment scenario, but it certainly weakens Temer.  As it was, we were very skeptical that an unelected president would be able to push through painful structural reforms.  Having more corruption scandals in his government makes it even more difficult for Temer.

Colombia eliminated its FX intervention program.  It has been in place since last October, though the thresholds were adjusted from 7% to 5% to 3% deviations from the 20-day moving average.  The program was triggered for the first time last week, and the move to scrap it strikes us as curious given our view that EM is likely to come under more pressure as the June FOMC and Brexit votes approach.  

The IMF boosted Mexico’s Flexible Credit Line (FCL) from $67 bln to $88 bln.  The line is precautionary and though the FCL has never been used by any country, it's good insurance to have.  Mexican officials requested the increase, so it looks like they are doing everything they can to limit the country’s vulnerabilities.  

(from my colleague Dr. Win Thin)

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