What Has Changed in EM

  • India-Pakistan tensions are rising
  • Poland central bank is tilting even more dovish.
  • Israel opposition is uniting against Prime Minister Benjamin Netanyahu
  • Nigeria delayed its elections by one week to this Saturday
  • South Africa Finance Minister Mboweni painted a grim fiscal picture
  • Argentina President Mauricio Macri official announced he will seek re-election for a second term this October
  • Brazil President Jair Bolsonaro personally delivered his pension reform proposal to Congress
  • Banco de Mexico took the unprecedented step of correcting its meeting minutes

In the EM equity space as measured by MSCI, China (+4.1%), UAE (+4.0%), and Chile (+2.9%) have outperformed this week, while Brazil (-1.2%), Turkey (-0.6%), and Czech Republic (+0.3%) have underperformed. To put this in better context, MSCI EM rose 2.6% this week while MSCI DM rose 0.9%.

In the EM local currency bond space, Pakistan (10-year yield -16 bp), South Africa (-15 bp), and Indonesia (-10 bp) have outperformed this week, while Turkey (10-year yield +37 bp), Brazil (+21 bp), and Poland (+8 bp) have underperformed. To put this in better context, the 10-year UST yield was flat at 2.66%.

In the EM FX space, CLP (+1.9% vs. USD), RUB (+1.4% vs. USD), and CNY (+0.9% vs. USD) have outperformed this week, while ARS (-1.5% vs. USD), BRL (-0.9% vs. USD), and TRY (-0.8% vs. USD) have underperformed. To put this in better context, MSCI EM FX rose 0.7% this week.

India-Pakistan tensions are rising. India announced plans to divert water from flowing into Pakistan. Under the Indus Waters Treaty from 1960, the two nations agreed to share water rights of the six rivers in the Indus River basin. This comes after a deadly terrorist attack in Kashmir that killed 40 Indian paramilitary soldiers last week. Elsewhere, Pakistan army spokesperson warned “Don’t mess with Pakistan.”

Poland central bank is tilting even more dovish. After extending forward guidance of steady rates into 2020, Governor Adam Glapinski said for the first time that rates could possibly go down. He noted “Of course, if the situation becomes critical we have scope to cut rates. Our recent analysis shows that there is room for maneuver.” The policy rate has been stuck at 1.5% since the last 50 bp cut back in March 2015

Israel opposition is uniting against Prime Minister Benjamin Netanyahu. Retired military chief Benny Gantz and Yair Lapid of the Yesh Atid party will present a joint list for the upcoming April 9 elections. Under the agreement, Gantz and Lapid would rotate as prime minister if their Blue and White party wins the election and forms the next government. Polls suggest the new party could win as many as 36 seats in the 120-member Knesset vs. 26 for Netanyahu’s ruling Likud party.

Nigeria delayed its elections by one week to this Saturday. The presidential and parliamentary vote was postponed last Saturday just hours before voting was to begin. Current President Muhammadu Buhari and his main challenger Atiku Abubakar both accused each other of trying to rig the vote. Many voters must travel to their home towns to cast their ballots and so many fear low turnout after last week’s last-minute cancellation.

South Africa Finance Minister Mboweni painted a grim fiscal picture. The FY2018/19 budget deficit was revised to -4.2% of GDP from -4.0% in October. The deficit is forecast to widen to -4.5% in FY2019/20 vs. -4.2% in October before narrowing back to -4.3% in FY2021/22 vs. -4.0% in October. With regards to gross national debt, it is seen peaking at 60.2% of GDP in FY2023/24 vs. 59.6% forecast in October. The fiscal trajectory has gotten even worse and supports our call for imminent downgrades to the nation.

Argentina President Mauricio Macri official announced he will seek re-election for a second term this October. Despite two recessions in three years, polls suggest he still has the support of about a third of the voters. His likely opponent Cristina Fernandez de Kirchner is polling around the same level of support. Macri added that he hasn’t decided yet who his running mate will be.

Brazil President Jair Bolsonaro personally delivered his pension reform proposal to Congress. It is estimated to save up to BRL1.16 trln ($312 bln) over the next ten years. Details include setting the minimum retirement age at 65 for men and 62 for women. The plan would also remove the automatic link between social security benefits and the minimum wage and would also increase the social security tax paid by some workers. Now comes the hard part, which is selling the plan to Congress.

Banco de Mexico took the unprecedented step of correcting its meeting minutes. The cause was the accidental inclusion of a phrase in the English version that was not in the original minutes in Spanish. In the English-language version, policy makers promised to act “in whatever direction is required,” which was read as being dovish. The central bank sent out a press release correcting the English-language minutes that removed the phrase. Officials said the error was due to a mistake in the process of translating the minutes.