Emerging Markets: What has Changed

(from my colleague Dr. Win Thin)

• Reserve Bank of India will introduce a new monetary policy tool.
• Moody’s raised the outlook on Russia’s Ba1 rating from stable to positive.
• Fitch cut Saudi Arabia’s rating a notch to A+.
• Moody’s cut the outlook on Turkey’s Ba1 rating from stable to negative.
• China has temporarily suspended beef imports from Brazil.

In the EM equity space as measured by MSCI, Russia (+2.0%), Colombia (+1.8%), and Chile (+1.5%) have outperformed this week, while Poland (-2.8%), Hungary (-2.0%), and Brazil (-1.3%) have underperformed.  To put this in better context, MSCI EM rose 0.3% this week while MSCI DM fell -0.9%.

In the EM local currency bond space, Hungary (10-year yield -22 bp), Poland (-17 bp), and Mexico (-15 bp) have outperformed this week, while Argentina (10-year yield +38 bp), the Philippines (+11 bp), and Czech Republic (+6 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 8 bp to 2.42%.

In the EM FX space, ZAR (+2.0% vs. USD), MXN (+1.0% vs. USD), and KRW (+0.8% vs. USD) have outperformed this week, while BRL (-1.2% vs. USD), EGP (-0.6% vs. USD), and HUF (-0.5% vs. EUR) have underperformed.

Reserve Bank of India will introduce a new monetary policy tool in FY17/18 to better manage excess cash in the system.  The Standing Deposit Facility (SDF) will help the bank absorb excess funds without having to provide lenders collateral in exchange.  The SDF will mostly replace the Market Stabilization Scheme, which uses bonds issued outside the government’s regular issuance to mop up excess liquidity.

Moody’s raised the outlook on Russia’s Ba1 rating from stable to positive.  Our own sovereign ratings model shows Russia’s implied rating at BB+/Ba1/BB+.  S&P and Moody’s both appear to have the correct ratings, and so we are surprised by the change in outlook since a one notch upgrade would take Russia back to investment grade Baa3.  

Fitch cut Saudi Arabia’s rating a notch to A+.  The outlook was moved to stable from negative. Fitch said the move reflects “the continued deterioration of public and external balance sheets, the significantly wider than expected fiscal deficit in 2016 and continued doubts about the extent to which the government’s ambitious reform program can be implemented.”  

Moody’s cut the outlook on Turkey’s Ba1 rating from stable to negative.  The agency cited persistent political uncertainty after last July’s failed coup, noting "The impact of ongoing political and geopolitical tensions on domestic confidence, and the heightened external pressures that led to a steep depreciation of the lira and high inflation, will suppress growth in the near-term relative to expectations last year.”

China has temporarily suspended beef imports from Brazil.  According to officials, any beef products currently at sea or in port will not be able to clear customs.  China and Hong Kong together are the biggest export market for Brazilian meat.  At issue are reports that Brazilian companies bribed health inspectors to approve tainted beef for sale and export.  

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