What Has Changed in EM

  • China announced retaliatory tariffs on $75 bln of US goods
  • Bank Indonesia delivered a dovish surprise and cut rates 25 bp to 5.5%
  • Japan-Korea relations continue to deteriorate
  • Turkey’s central bank loosened policy by easing reserve requirements
  • South Africa government will announce plans to reduce debt and spending at its mid-term budget review in October
  • Argentina Economy Minister Dujovne resigned last weekend
  • Brazil plans to accelerate the sale of state-owned assets

China announced retaliatory tariffs on $75 bln of US goods. Some will take effect September 1, while the rest will take effect December 15 and mirrors the US timetable for 10% tariffs on $300 bln of Chinese goods. Of note, Chinese tariffs will be on soy, oil, and autos. These products are generally produced in the so-called Red States, so the move is meant to put maximum pressure on Trump ahead of the 2020 elections.

Bank Indonesia delivered a dovish surprise and cut rates 25 bp to 5.5%.  The market was a bit split.  Of the 34 analysts polled by Blomberg, 21 saw steady rates and 13 saw a 25 bp cut.  We thought the weak rupiah was problematic and looked for no cut.  However, like Mexico last week, it appears that policymakers are more concerned about boosting growth.  Governor Warjiyo said the cut was consistent with the bank’s low inflation forecasts and was a “preemptive measure to push economic growth momentum in the future.”

Japan-Korea relations continue to deteriorate.  Seoul announced that it is withdrawing from its intelligence sharing agreement with Japan.  This is a continuation of the feud arising from colonial era reparations and comes despite the urging of the US to continue working together.  Korean officials said it can review this withdrawal if Japan ends its trade restrictions.  Tensions here are another headwind to global trade and growth.

Turkey’s central bank loosened policy by easing reserve requirements.  There is now a sliding scale for commercial bank reserve requirements so that the more a bank lends, the lower its reserve requirements will be.  The central bank estimated this will inject about TRY5.4 bln into the system.  Coming ahead of the policy meeting September 12, the move suggests the bank will cut aggressively then.

South Africa President Ramaphosa said the government will announce plans to reduce debt and spending at its mid-term budget review in October. Ahead of that, the National Treasury has reportedly asked all departments for proposals to reduce expenditures in a way that has smallest impact on service delivery. It is reportedly seeking cuts of 5% for FY2020/21 followed by 6% and 7% cuts for the following two fiscal years. Treasury estimated that savings could be as much as ZAR300 bln ($19.7 bln) over three years.

Argentina Economy Minister Dujovne resigned last weekend.  He will be replaced by Hernan Lacunza.  Furthermore, Argentina was downgraded by two of the major rating agencies last Friday.  S&P downgraded it a notch to B- with negative outlook, while Fitch downgraded by three full notches from B to CCC.  Our own ratings model shows Argentina at B-/B3/B-, but this latest bout of turmoil is likely to push it lower.  Downgrade risk remains high for Moody’s B2 rating.

Brazil plans to accelerate the sale of state-owned assets. It will also boost efforts at licensing the operation of various state-owned enterprises. The government will reportedly put state development bank BNDES in charge of the planning. Brazil hopes to raise BRL 1.3 trln ($323 bln) over the next several years through auctions of licenses to operate infrastructure projects like airports, oil wells, and ports. It will also seek to privatize state-owned companies such as the postal service and the national mint.