What Has Changed in EM

  • PBOC Governor Yi Gang hinted that the 7 level for the yuan is by no means sacrosanct
  • Reserve Bank of India cut rates 25 bp, as expected
  • Russia central bank Governor Nabiullina said a rate cut next week is possible
  • ANC said it will follow through on its plans to expand the mandate of the SARB
  • Colombia central bank suspended its dollar purchase program
  • The ratings agencies are punishing Mexico

PBOC Governor Yi Gang hinted that the 7 level for the yuan is by no means sacrosanct. More specifically, he said that no number is important than another with regards to the exchange rate. He added that China has “tremendous” room to adjust both fiscal and monetary policies if trade tensions worsen. This suggests China is buckling in for the long haul. The yuan has stabilized recently, but we think that has more to do with wider EM FX getting traction than anything else.

Reserve Bank of India cut rates 25 bp, as expected. Q1 GDP growth came in much weaker than expected at 5.8% y/y, the fourth straight quarter of deceleration and the slowest since Q1 2014. Governor Das said that “Our decision is driven by growth concerns and inflation concerns, in that order.” The decision was unanimous while the bias was moved to accommodative from neutral previously. Next policy meeting is August 7, and another cut then is likely.

Russia central bank Governor Nabiullina said a rate cut next week is possible. The bank meets June 14. After two straight months of deceleration to 5.1% y/y in May, inflation is still above the 4% target. She noted that “External conditions turned somewhat more volatile in recent weeks, and we will take into consideration all these factors, but we think that this option of a reduction is possible.”

The African National Congress said it will follow through on its plans to expand the mandate of the South Africa Reserve Bank. A resolution passed in December 2017 would have the bank to focus not only on price stability but also on employment and growth. While many central banks have a dual mandate (such as the Fed), investors will not view these changes positively in the current environment. S&P warned that central bank independence is a key credit rating strength and that tinkering with it could harm the agency’s assessment. We agree.

Colombia central bank suspended its dollar purchase program. The program was initiated back in September, and the bank said it is suspending it now to evaluate the impact it’s had on the peso. The plan was initially intended to last two years and was meant to offset a possible reduction in the nation’s Flexible Credit Line with the IMF.

The ratings agencies are punishing Mexico. Fitch cut Mexico one notch to BBB with stable outlook while Moody’s cut the outlook on its A3 rating from stable to negative. Our own sovereign ratings model has Mexico’s implied rating at BBB/Baa2/BBB and so we are not at all surprised by Fitch’s move. What we are surprised at is that Moody’s still has Mexico at A3.