Emerging Markets: What has Changed

(from my colleague Dr. Win Thin)

Fitch upgraded Taiwan by a notch.
Thailand has a new king.
South Africa’s Finance Minister Gordhan has been summoned to appear in court to face charges.
Brazil’s Congress voted to approve a constitutional amendment to freeze government spending in real terms for at least the next 10 years.
Brazil’s Petrobras cut fuel prices and introduced a new pricing mechanism.

In the EM equity space as measured by MSCI, Brazil (+2.8%), Mexico (+2.6%), and Czech Republic (+1.6%) have outperformed this week, while the Philippine (-2.7%), South Africa (-2.7%), and China (-2.4%) have underperformed.  To put this in better context, MSCI EM fell -1.7% this week while MSCI DM fell -0.5%.

In the EM local currency bond space, Colombia (10-year yield -18 bp), the Philippines (-17 bp), and Brazil (-10 bp) have outperformed this week, while Turkey (10-year yield +27 bp), Russia (+22 bp), and South Africa (+13 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 5 bp this week to 1.77%. 

In the EM FX space, MXN (+2.2% vs. USD), BRL (+1.4% vs. USD), and COP (+0.5% vs. USD) have outperformed this week, while ZAR (-1.9% vs. USD), KRW (-1.5% vs. USD), and THB (-1.1% vs. USD) have underperformed.

Fitch upgraded Taiwan by a notch.  The rating is now AA- with stable outlook.  Fitch noted that the fiscal outlook was good, driven by strong revenues and prudent expenditures.  The upgrade was a catch-up move, with Fitch now at the same rating as S&P and Moody’s.  

Thailand has a new king.  King Bhumibol has passed away, with Crown Prince Vajiralongkorn set to ascend the throne after a short mourning period.  While the position wields little power, King Bhumibol was seen as a unifying presence in the deeply polarized country.  Political uncertainty is likely to pick up, as the uneasy truce between the so-called Red Shirts and Yellow Shirts may be tested as military rule continues.

South Africa’s Finance Minister Gordhan has been summoned to appear in court to face charges.  Tensions between Gordhan and President Zuma had died down but continued to simmer.  It has now boiled over.  Most see it as a politically motivated ploy.  Investors have been buying the rand in recent weeks, ignoring political risk at their own peril.  We think these developments will likely cement a downgrade to sub-investment grade and keep downward pressure on the rand.

Brazil’s Congress voted 366-111 to approve a constitutional amendment to freeze government spending in real terms for at least the next 10 years.  This was the first of two rounds of voting, and the Temer government only needed 308 to pass it.  This could help COPOM feel comfortable with starting the easing cycle on October 19.

Brazil’s Petrobras cut fuel prices and introduced a new pricing mechanism.  Gas prices will fall 1.4% and diesel prices by 1.8% at the retail level.  Prices will be reviewed at least once a month, and will not be allowed to fall below international levels.  This will lower potential subsidy costs moving forward.  The price cuts should also lower consumer inflation and adds to rate cut arguments.  

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