Emerging Markets: What Changed

(from my colleague Dr. Win Thin)

Reserve Bank of India cut its inflation forecast for the first half of FY2018/19 to 4.7-5.1%.
Former South Korean President Park was sentenced to 24 years in prison.
Malaysia Prime Minister Razak has called for early elections.
Bahrain discovered its biggest oil field since it started producing crude in 1932.
Local press reports Turkey’s Deputy Prime Minister Simsek tendered his resignation.
Brazilian Supreme Court rejected former President Lula’s plea to remain free while appealing his 12-year prison sentence for corruption.
Brazil Finance Minister Meirelles joined the ruling PMDB.
The US has reportedly softened a key NAFTA demand requiring greater North American content in auto manufacturing.

In the EM equity space as measured by MSCI, Colombia (+5.3%), Peru (+3.7%), and Mexico (+3.3%) have outperformed this week, while Brazil (-3.2%), Egypt (-3.1%), and Thailand (-1.6%) have underperformed. To put this in better context, MSCI EM fell -0.7% this week while MSCI DM was flat.

In the EM local currency bond space, India (10-year yield -19 bp), Mexico (-12 bp), and Poland (-11 bp) have outperformed this week, while Brazil (10-year yield +29 bp), Hungary (+11 bp), and Argentina (+10 bp) have underperformed. To put this in better context, the 10-year UST yield fell 1 bp to 2.77%.

In the EM FX space, PHP (+0.3% vs. USD), PLN (+0.3% vs. EUR), and INR (+0.3% vs. USD) have outperformed this week, while TRY (-2.5% vs. USD), BRL (-2.0% vs. USD), and ZAR (-1.8% vs. USD) have underperformed. To put this in better context, MSCI EM FX fell -0.4% this week.

Reserve Bank of India cut its inflation forecast for the first half of FY2018/19 to 4.7-5.1% from 5.1-5.6% previously. It kept rates steady, as expected. There was one dissenter in favor of a hike. CPI rose 4.4% y/y in February, which is in the top half of the 2-6% target range. The RBI is likely to remain on hold for now, and markets are not pricing in a hike until 2019.

Former South Korean President Park was sentenced to 24 years in prison after being found guilty of numerous corruption charges. Park was found guilty of nearly a dozen charges ranging from bribery to coercion, abuse of power and leaking of state secrets. Note that the sentence was less than the 30 years sought by prosecutors. Park can appeal her sentence to a higher court.

Malaysia Prime Minister Razak has called for early elections. Parliament will be dissolved Saturday and the Election Commission will announce the election date within 10 days. The vote itself must be held within the next two months. With a divided opposition, the ruling National Front coalition led by Razak’s UMNO is likely to win easily.

Bahrain discovered its biggest oil field since it started producing crude in 1932. State news agency reported that the shale oil and natural gas discovered off its west coast “is understood to dwarf Bahrain’s current reserves.” Bahrain will invite international oil companies to help develop the field, adding that it expects to start output within 5 years.

Local press reports Turkey’s Deputy Prime Minister Simsek tendered his resignation. He is in charge of macroeconomic policy and is well respected by the markets. Reports suggest that Simsek resigned following criticism of his economic policies from Erdogan. Simsek later said he would serve the country “until our last breath.” However, we suspect tensions are ongoing.

Brazilian Supreme Court rejected former President Lula’s plea to remain free while appealing his 12-year prison sentence for corruption. The vote was 6-5. Sergio Moro, the judge who prosecuted Lula, can now order him to prison even as the appeal remains ongoing. We think this latest ruling effectively ends Lula’s chances of running for president again.

Brazil Finance Minister Meirelles joined the ruling PMDB. Ostensibly, this sets up his candidacy for the party. Meirelles is well-respected by the markets, but his association with the current and very unpopular Temer administration would likely prevent him from garnering much support from the voters. Meirelles said he’ll likely leave his post this week, even without knowing if he will run as the party candidate in October.

The US has reportedly softened a key NAFTA demand requiring greater North American content in auto manufacturing. Rather than requiring 85% of all vehicles be made in North America, the US has proposed that 85% to be applied to major components such as engines and transmission. This is one of the biggest sticking points in the talks, but it’s not clear if the proposed change will be enough to get a deal. Indeed, the three countries remain far apart on several other issues.

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