What Has Changed in EM

  • The PBOC will resume use of the counter-cyclical factor for the CNY fix
  • Thailand junta leader announced that elections are likely on February 24
  • Russia will issue new economic forecasts next week that will likely reflect the negative impact of sanctions
  • Russia central bank suspended its FX purchases through the end of September
  • President Trump issued a critical tweet regarding South Africa’s controversial plans for land reform
  • Turkey was downgraded by both S&P and Moody’s
  • Mexico President-elect Andres Manuel Lopez Obrador said he will not auction off any new oil blocks for at least two years
  • Venezuela devalued the bolivar and somehow tied it to its sovereign “petro” cryptocurrency

In the EM equity space as measured by MSCI, South Africa (+6.4%), Mexico (+4.8%), and Indonesia (+4.6%) have outperformed this week, while Brazil (-3.1%), Hungary (-1.5%), and UAE (-0.6%) have underperformed. To put this in better context, MSCI EM rose 2.8% this week while MSCI DM rose 1.1%.

In the EM local currency bond space, South Africa (10-year yield -14 bp), Hungary (-13 bp), and Turkey (-11 bp) have outperformed this week, while Brazil (10-year yield +40 bp), Argentina (+6 bp), and Thailand (+3 bp) have underperformed. To put this in better context, the 10-year UST yield fell 5 bp to 2.82%.

In the EM FX space, ZAR (+2.5% vs. USD), COP (+2.5% vs. USD), and THB (+1.6% vs. USD) have outperformed this week, while BRL (-4.2% vs. USD), ARS (-2.1% vs. USD), and RUB (-0.4% vs. USD) have underperformed. To put this in better context, MSCI EM FX rose 0.8% this week.

The PBOC will resume use of the counter-cyclical factor for the CNY fix. The bank reportedly contacted yuan-fixing banks and said they can use that factor again starting Monday when calculating their fix submissions. Given that the yuan has been relentlessly weakening against the dollar (like the rest of EM FX), this supports our view that policymakers are not pursuing a weak yuan policy. Note that the CNY counter-cyclical factor was phased out back in January.

Thailand junta leader announced that elections are likely on February 24. The vote has been delayed several times in the past, after more than four years of military rule. Prime Minister Prayuth Chan-Ocha said after a Cabinet meeting that “If we can do it, we will do it in February. If we can’t do it, we will discuss that later.”

Russia will issue new economic forecasts next week that will likely reflect the negative impact of sanctions. Economy Minister Maxim Oreshkin said that the updated forecasts will show a smaller gain in GDP and a weaker ruble than anticipated, adding that capital outflows are likely to accelerate over the next 12 months.

Russia central bank suspended its FX purchases through the end of September. The bank has halted these daily purchases for six days earlier this month then resumed this week, which markets took as a signal that authorities were not worried about a weaker ruble. By suspending the purchases until Q4, it suggests that weakness has become a greater concern. The central bank buys FX under a fiscal rule aimed at insulating the economy from volatile oil prices.

Turkey was downgraded by both S&P and Moody’s. S&P cut its sovereign credit rating to B+ from BB- with stable outlook. It noted that “Despite heightened economic risks, we believe the policy response from Turkey’s monetary and fiscal authorities has so far been limited.” Moody’s cut Turkey’s rating to Ba3 from Ba2 with negative outlook and said “The key driver for today’s downgrade is the continuing weakening of Turkey’s public institutions and related reduction in the predictability of Turkish policymaking.” Our own sovereign ratings model has Turkey at B/B2/B and so there is ongoing downgrade risks to actual ratings of B+/Ba2/BB.

President Trump issued a critical tweet regarding South Africa’s controversial plans for land reform. He tweeted that he’s asked Secretary of State Mike Pompeo to “closely study the South Africa land and farm seizures and expropriations and the large scale killing of farmers.” While there have been no seizures nor large scale killings of farmers to date, the comment raised concerns that the US could still punish South Africa with sanctions, as it’s done recently with Turkey.

Mexico President-elect Andres Manuel Lopez Obrador said he will not auction off any new oil blocks for at least two years. He reportedly plans to tweak the hydrocarbons law rather than propose any changes to constitution. Other planned changes include giving Pemex more freedom to choose its partners in developing oil blocs as well as raising the required national content of equipment and services for foreign oil companies that operate in Mexico

Venezuela devalued the bolivar and somehow tied it to its sovereign “petro” cryptocurrency. We think this is yet another gimmick that does absolutely nothing to address the nation’s deep structural problems as its struggles with default. M2 rose 10555% y/y in July and is still accelerating. Until the government stops monetizing its deficit, nothing it does will address this hyperinflation. Like Turkey, Venezuela is an idiosyncratic disaster that poses little contagion risk to wider EM.