What Has Changed in Emerging Markets

(from my colleague Dr. Win Thin)

China’s government approved the creation of a bond link between Hong Kong and the mainland.
S&P upgraded Indonesia one notch to investment grade BBB- with stable.
Fitch revised the outlook on Vietnam’s BB- rating from stable to positive.
Egypt will announce a package of social spending soon.
Moody's changed the outlook on Poland's A2 rating from negative to stable.
Brazil press reported that meat-packing company JBS has submitted compromising tape recordings to the Supreme Court.
Chile central bank surprised markets with a 25 bp cut but signaled a move to a neutral bias.

In the EM equity space as measured by MSCI, Hungary (+2.6%), Indonesia (+2.0%), and Peru (+1.4%) have outperformed this week, while Brazil (-11.1%), Poland (-1.8%), and Egypt (-1.7%) have underperformed. To put this in better context, MSCI EM fell -0.3% this week while MSCI DM was flat.

In the EM local currency bond space, India (10-year yield -11 bp), Korea (-7 bp), and Peru (-4 bp) have outperformed this week, while Brazil (10-year yield +155 bp), Argentina (+28 bp), and Turkey (+22 bp) have underperformed. To put this in better context, the 10-year UST yield fell 8 bp to 2.25%.

In the EM FX space, SGD (+1.3% vs. USD), ZAR (+1.0% vs. USD), and THB (+0.9% vs. USD) have outperformed this week, while BRL (-4.6% vs. USD), ARS (-3.1% vs. USD), and INR (-0.5% vs. USD) have underperformed.

China’s government approved the creation of a bond link between Hong Kong and the mainland. The PBOC and HKMA said that the bond connect system would only be northbound at the start, which give foreigners better access for buying onshore bonds. There will be no daily quota. No date was given for when the link would begin. The HKMA said eligible investors would include central banks, sovereign wealth funds, international banks, and medium- to long-term institutional investors.

S&P upgraded Indonesia one notch to investment grade BBB- with stable. The move matches Moody’s and Fitch, but both of those have positive outlooks that suggest further upgrades. S&P cited improvement in the budget as the main factor behind the move. Our own sovereign rating model has Indonesia at BBB/Baa2/BBB and so further upgrades are warranted.

Fitch revised the outlook on Vietnam’s BB- rating from stable to positive. The agency cited strong growth, current account surpluses, a low debt servicing load, and continued FDI as the main factors behind the move. Our own sovereign rating model has Vietnam at BBB-/Baa3/BBB- and so further upgrades are warranted.

Egypt will announce a package of social spending soon. Deputy Finance Minister Kouchouk said the planned measures will target public servants, low-income taxpayers, and recipients of food subsidies. Stubbornly high inflation has eroded the purchasing power for most Egyptians, and so the government continues its efforts to help offset this negative impact. Kouchouk said inflation will average 22.8% in the fiscal year starting July 1, up significantly from 15.2% estimated in March.

Moody's changed the outlook on Poland's A2 rating from negative to stable. The agency cited reduced risks of loose fiscal policy, and noted that uncertainties stemming from government policies will remain contained. We disagree. Our own sovereign rating model has Poland at BBB/Baa2/BBB and so further downgrades are warranted. So far, S&P is the only one that agrees with us, cutting Poland last year one notch to BBB+.

Brazil press reported that meat-packing company JBS has submitted compromising tape recordings to the Supreme Court. They reportedly have President Temer approving “hush money” payments to jailed former lower house Speaker Eduardo Cunha. Temer denies any wrongdoing, but many observers (including us) have long felt that it was only a matter of time before the ongoing “Car Wash” corruption scandal implicated him. If the recordings are true and released to the public, we see no way that Temer can survive as president.

Chile central bank surprised markets with a 25 bp cut but signaled a move to a neutral bias. This suggests that rates are now on hold after 100 bp of easing this year. We cannot rule out further easing, but this will depend on how the data come in.

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