What Has Changed in EM

  • Philippine President Duterte named Budget Secretary Benjamin Diokno as the new central bank Governor
  • US-Turkey relations are souring
  • National Energy Regulator of South Africa allowed state-owned power company Eskom to raise by prices by 9.4% starting April 1
  • Argentina central bank tightened monetary policy by the most since last fall
  • S&P cut its outlook for Mexico’s BBB+ rating from stable to negative

 In the EM equity space as measured by MSCI, Philippines (+2.2%), India (+1.3%), and Egypt (+0.7%) have outperformed this week, while Qatar (-4.3%), UAE (-3.8%), and Mexico (-3.6%) have underperformed. To put this in better context, MSCI EM fell -2.1% this week while MSCI DM fell -2.5%.

In the EM local currency bond space, Philippines (10-year yield -22 bp), Poland (-10 bp), and Chile (-10 bp) have outperformed this week, while Hungary (10-year yield +43 bp), Indonesia (+12 bp), and Argentina (+12 bp) have underperformed. To put this in better context, the 10-year UST yield fell -9 bp to 2.63%.

In the EM FX space, INR (+1.1% vs. USD), EGP (+0.5% vs. USD), and THB (+0.3% vs. USD) have outperformed this week, while ARS (-3.1% vs. USD), COP (-2.3% vs. USD), and BRL (-2.2% vs. USD) have underperformed. To put this in better context, MSCI EM FX fell -0.5% this week.

Philippine President Duterte named Budget Secretary Benjamin Diokno as the new central bank Governor. He replaces Nestor Espenilla, who passed away in February. Diokno will serve the remainder of Espenilla’s six-year term, which ends in mid-2023.  This seems like an overtly political choice. BSP halted its tightening cycle and with inflation back in the 2-4% target range, it will likely start an easing cycle sooner rather than later under Diokno.

US-Turkey relations are souring. Pentagon official warned of “grave consequences” if Turkey goes ahead with its plan to buy a missile defense system from Russia. He added that Turkey would not be able to make any purchases from Lockheed Martin or Raytheon. This comes even as the two are in talks over their respective roles in Syria.

National Energy Regulator of South Africa allowed state-owned power company Eskom to raise by prices by 9.4% starting April 1. This is less than the 17.1% Eskom requested. However, Eskom can recover some other expenses accrued over the past four years which would bring the total increase this year to 13.8%. Eskom will also be allowed to rise energy prices by 8.1% next year and 5.2% the year after that. These price increases will complicate SARB’s policy stance.

Argentina central bank tightened monetary policy by the most since last fall. The LELIQ rate rose to 56.76%, an increase of almost five percentage points. The move was necessary as the peso tumbled to a new all-time low this week. With inflation at 49.3% y/y and rising, more tightening will likely be needed.

S&P cut its outlook for Mexico’s BBB+ rating from stable to negative. The agency warned that the government’s efforts to limit private sector involvement in energy could lower Mexico’s growth prospects. S&P added that other developments have hurt investor confidence, such as the cancellation of the Mexico City airport project which may add to the government’s contingent liabilities.