What Has Changed in EM

  • Pakistan reached agreement with the IMF for a $6 bln 3-year Extended Fund Facility
  • Philippines central bank cut reserve requirements by two percentage points to 16%
  • The US announced it would cut tariffs on Turkish steel by half to 25%
  • Egypt reached agreement with the IMF to unlock $2 bln of aid in final review of its 3-year Extended Fund Facility
  • Brazil saw nationwide protests against proposed cuts in the education budget

Pakistan reached agreement with the IMF for a $6 bln 3-year Extended Fund Facility. Afterwards, the rupee has fallen to record lows. One likely IMF condition is that Pakistan allow the rupee to float, as the IMF doesn’t want to see its money wasted on a defense of the rupee. We expect the central bank will still intervene from time to time to prevent destabilizing FX moves but for now, the rupee will try to find its own level.

Philippines central bank cut reserve requirements by two percentage points to 16%. The cut will be implemented in 3 stages. One percentage point will take effect on May 31, the next 0.5 percentage point on June 28, and the last 0.5 percentage point on July 26. The bank estimates that a one percentage point reduction releases about PHP90 bln into the financial system. Governor Diokno said that “Proper use will encourage further cuts and speculation will do otherwise.”

The US announced it would cut tariffs on Turkish steel by half to 25%. These tariffs were enacted last summer as relations between the two worsened over the fate of exiled Turkish cleric Gul. The move comes despite an ongoing dispute about a Russian missile defense system and supports our view that the US is pulling in its horns elsewhere as it focuses narrowly on China. Nevertheless, we remain very negative on Turkish assets despite this move.

Egypt reached agreement with the IMF to unlock $2 bln of aid in the fifth and final review of its 3-year Extended Fund Facility. If approved by the IMF’s Executive Board, total disbursements under the EFF would rise to $12 bln. The IMF noted that “Prudent monetary and fiscal policies and a flexible exchange rate have underpinned macroeconomic stabilization and strengthened Egypt’s resilience to external shocks.”

Brazil saw nationwide protests against proposed cuts in the education budget. Students, teachers and supporters protested in at least 250 cities across all the states. The demonstrations come at a difficult time for the Bolsonaro government, which is struggling to get the pension reforms passed in Congress. National student association UNE has already called for another round of demonstrations on May 30.