What Has Changed in EM

  • India Prime Minister Modi is boosting fiscal stimulus ahead of general elections due by May
  • Indian officials appear to be withholding economic data that is harmful to the government
  • Pakistan central bank unexpectedly hiked rates
  • Russia central bank may be tilting dovish
  • Argentina central bank will increase its USD purchases when the peso trades below the target range
  • Fitch downgraded PEMEX two notches to BBB- with a negative outlook

In the EM equity space as measured by MSCI, Czech Republic (+3.6%), Brazil (+3.0%), and Peru (+2.8%) have outperformed this week, while Malaysia (-1.0%), South Africa (-1.0%), and Poland (-0.7%) have underperformed. To put this in better context, MSCI EM rose 1.7% this week while MSCI DM rose 1.4%.

In the EM local currency bond space, Turkey (10-year yield -102 bp), Philippines (-24 bp), and Brazil (-22 bp) have outperformed this week, while Argentina (10-year yield +42 bp), Pakistan (+10 bp), and India (+5 bp) have underperformed. To put this in better context, the 10-year UST yield fell 4 bp to 2.68%.

In the EM FX space, BRL (+3.2% vs. USD), ZAR (+2.2% vs. USD), and CLP (+2.2% vs. USD) have outperformed this week, while MXN (-0.7% vs. USD), ARS (-0.6% vs. USD), and CZK (-0.2% vs. EUR) have underperformed. To put this in better context, MSCI EM FX rose 0.7% this week.

India Prime Minister Modi is boosting fiscal stimulus ahead of general elections due by May. The income support program for small farmers is meant to boost the government’s popularity, as it would spend INR750 bln ($10.6 bln) in FY2019 starting April 1 on direct payments of cash to farmers.

Indian officials appear to be withholding economic data that is harmful to the government. Two officials at the National Statistical Commission resigned this week, expressing concerns about government efforts to keep unemployment data under wraps. Afterwards, press reports suggest that the unemployment rate rose to 6.1% in FY2017 ending March 2018, a 45-year high.

Pakistan central bank unexpectedly hiked rates. The policy rate was hiked 25 bp to 10.25% and was the fifth straight hike. The bank cited budget deficit concerns as a major factor behind the decision. The hike was a surprise given recent PKR stability, but things are clearly not all right beneath the surface. We are likely see another step-wise devaluation in the coming weeks.

Russia central bank may be tilting dovish. Governor Nabiullina would not comment on the direction of rates at next Friday’s policy meeting. Previously, she had flagged the possibility of rate hikes before meetings late last year. Consensus sees no hike next Friday, but this may just be a pause as inflation is expected to accelerate to 5.1% in January, further above the 4% target.

Argentina central bank will increase its USD purchases when the peso trades stronger than the target range. The bank will buy as much as $75 mln per day vs. $50 mln that was set when Argentina introduced their new monetary policy framework bank in September.  The so-called “non-intervention range” adjusts daily and is currently set at 37.886-49.030.

Fitch downgraded PEMEX two notches to BBB- with a negative outlook. The rating agency cited “the continued deterioration of Pemex’s standalone credit profile” as well as “under-investment in the company’s upstream business” as the major factors behind the move. This came despite the AMLO administration offering $3.5 bln in tax breaks for the company the day before.