What Has Changed in EM

  • Reports suggest China is “seriously” considering limiting exports of its rare earths to the US
  • S&P upgraded Indonesia a notch to BBB with stable outlook
  • Israel will head to the polls again
  • South Africa President Ramaphosa announced a market-friendly cabinet after a delay
  • There appears to be a thaw in Turkey-US relations
  • Brazil President Bolsonaro appears to be softening his approach to get pension reforms passed
  • President Trump abruptly announced 5% tariffs on all Mexican imports
  • Venezuela central bank published economic data for the first time since 2015

Reports suggest China is “seriously” considering limiting exports of its rare earths to the US. About 80% of US imports of rare earths come from China. China also just put its purchases of US soybeans on hold. Editorials and commentaries in China continue to ramp up the rhetoric, including the notable use of a phrase that’s equivalent to “don’t say I didn’t warn you.”

S&P upgraded Indonesia a notch to BBB with stable outlook. This brings it into line with the other two agencies. S&P noted that “We raised the ratings to reflect Indonesia’s strong economic growth prospects and supportive policy dynamics, which we expect to remain following the re-election of President Joko Widodo recently.” Our own model has Indonesia’s implied rating at BBB+/Baa1/BBB+ and so actual ratings of BBB/Baa2/BBB are still enjoying some upgrade potential.

Israel will head to the polls again. Prime Minister Netanyahu was unable to form a workable coalition by the midnight deadline. Rather than allow another party to try to form a government, Netanyahu instead dissolved the Knesset and called for fresh elections September 17. This was the first time a party has failed to form a government in Israel. Recent polls suggest a similar outcome will be seen then, but there are clear risks to this gambit as Netanyahu has been politically weakened even as he faces corruption charges.

South Africa President Ramaphosa announced a market-friendly cabinet after a delay. He reduced its size from 36 to 28 ministers and reappointed Tito Mboweni as Finance Minister and Pravin Gordhan as Public Enterprises Minister. These two market-friendly faces will hopefully work to offset concerns stemming from Deputy President Mabuza remaining in his post. He has been linked to several corruption scandals and highlight the difficulties Ramaphosa faces in terms of cleaning house.

There appears to be a thaw in Turkey-US relations. Erdogan and Trump had a call to discuss trade and tariffs yesterday and scheduled a meeting at the June G20 summit. Afterwards, Turkey freed a NASA scientist that had been held on terrorism charges after the 2016 coup attempt.   The thaw comes ahead of planned US sanctions over Turkey’s plan to purchase a Russian missile defense system. Fundamentals remain awful, and so we view this bounce in the lira as unsustainable.

Brazil President Bolsonaro appears to be softening his approach to get pension reforms passed. He has offered more concessions and recently met with the heads of the judiciary and legislative branches to help come up with a workable plan for passage. Press reports suggest a compromise plan is taking shape in Congress that would bring savings of BRL600 bln vs. BRL1.2 trln proposed by Bolsonaro.

President Trump abruptly announced 5% tariffs on all Mexican imports in response to the migrant inflows across the border. The tariffs will go into effect June 10 and will increase by five percentage points on the first of every month to a 25% ceiling by October 1 unless “illegal immigration problem is remedied.” This will have consequences not only for consumers, but for US producers that rely on parts and components from Mexico.

Venezuela central bank published economic data for the first time since 2015. Inflation was reported at 130,060% in 2018 and 862.6% in 2017, while GDP contracted -22.5% y/y in Q3 2018. The data is certainly noteworthy but to us, what’s more incredible is that the central bank’s estimates still vastly underestimate how bad the economy has gotten in recent years.