Emerging Markets: What has Changed

• The New York Times reported that the US is preparing to seize $1 bln in assets tied to 1MDB
• S&P downgraded Turkey a notch to BB with a negative outlook, citing political uncertainty
• Turkish President Erdogan declared a three-month state of emergency
• The Nigerian Naira weakened above 300 per dollar for the first time
• Brazil’s central bank signaled a longer wait until it cuts rates

In the EM equity space as measured by MSCI, Hungary (+4.2%), Czech Republic (+4.1%), and Hong Kong (+2.3%) have outperformed this week, while Turkey (-13.7%), Russia (-2.6%), and Colombia (-1.3%) have underperformed.  To put this in better context, MSCI EM rose 0.1% this week while MSCI DM rose 0.2%. 

In the EM local currency bond space, the Philippines (10-year yield -125 bp), Colombia (-11 bp), and Indonesia (-10 bp) have outperformed this week, while Turkey (10-year yield +88), Russia (+21 bp), and Hungary (+17 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 3 bp this week to 1.58%. 

In the EM FX space, ZAR (+2.0% vs. USD), PLN (+1.7% vs. EUR), and ILS (+0.8 vs. USD) have outperformed this week, while MYR (-2.8% vs. USD), RUB (-1.6% vs. USD), and PEN (-1.5% vs. USD) have underperformed. 

The New York Times reported that the US is preparing to seize $1 bln in assets tied to 1MDB.  Malaysian authorities have dropped their investigations of 1MDB, but other countries have not.  Elsewhere, Swiss authorities seized paintings by Monet and Van Gogh at the request of the US, and are said to be conducting their own probe.  The Monetary Authority of Singapore identified several banks for lapses related to 1MDB, and said its investigations are ongoing.

S&P downgraded Turkey a notch to BB with a negative outlook, citing political uncertainty.  This came just days after Moody’s put its Baa3 rating on review for possible downgrade.  We agree with both moves, as our own sovereign ratings model views Turkey as a BB/Ba2/BB credit.  Fitch should also move soon.  Deteriorating fiscal and external balances coupled with worsening political risk are likely to be the triggers for continued downgrades this year.

Turkish President Erdogan declared a three-month state of emergency.  The government said it will use that time to pursue the coup plotters.  Under the state of emergency, the government can suspend customary rights and freedoms of individuals, where suspects can be detained longer without trial.  Erdogan warned the EU not to interfere, and ominously said that other countries may have been involved in the failed coup.

The Nigerian Naira weakened above 300 per dollar for the first time.  Recent NGN weakness has been orderly so far, suggesting the central bank maintains a heavy hand in managing the exchange rate.  Yet the black market rate is weakening as well (said to be around 375 this week), keeping the gap with the official rate very wide.

Brazil’s central bank signaled a longer wait until it cuts rates.  Inflation measures are mixed, with consumer prices easing and wholesale/producer prices accelerating.  The July 20 meeting was clearly too soon to cut, and the hawkish tone of the statement suggests that rates may be kept steady at the August 31 meeting too.  Now, it seems more likely that easing will begin at the October 19 meeting.    

(from my colleague Dr. Win Thin)

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