What Has Changed in EM

  • PBOC cut reserve ratios for all commercial banks
  • Hong Kong Chief Executive Lam announced the withdrawal of the controversial extradition bill
  • Fitch cut Hong Kong’s sovereign rating a notch to AA with negative outlook
  • Central Bank of Russia cut rates 25 bp to 7.0%
  • Argentina announced capital controls
  • Chile cut rates 50 bp to 2.0%, as expected

PBOC cut reserve ratios for all commercial banks by 0.5 percentage points.  The cut was widely expected after press reports and becomes effective September 16.  The ratio for some city commercial banks was cut by one percentage point that becomes effective in two steps on October 15 and November.  All told, the cuts will release CNY900 bln into the system.  For now, the PBOC is unlikely to cut policy rates outright.

Hong Kong Chief Executive Lam announced the withdrawal of the controversial extradition bill. Previously, it had only been suspended. We think markets should not get too optimistic here, as we see the move as simply too little too late. Protests leader are saying they want all five key demands met. We don’t think Lam or the mainland China government will meet them and so we expect the protests to continue and tensions to remain high.

Fitch cut Hong Kong’s sovereign rating a notch to AA with negative outlook.  While the agency said that the “one country two systems” framework should remain intact, it warned that recent events have inflicted long-lasting damage to investor perceptions of the quality of Hong Kong’s governance and the rule of law.  Fitch said the negative outlook reflects the likelihood that the protests will persist.  Our model has Hong Kong at AAA and so we do not think the downgrade is warranted by the fundamentals.

Central Bank of Russia cut rates 25 bp to 7.0%. After lower than expected inflation of 4.3% y/y was reported, the Economy Ministry said it would fall further to 3.6-3.8% by year-end. However, the bank was more cautious and now sees year-end inflation between 4.0-4.5% vs. 4.2-4.7% previously. Governor Nabiullina said another cut was likely in the next several months. Next policy meeting is October 25 and a cut then seems likely.

Argentina announced capital controls. The central bank now requires exporters to repatriate foreign currency within five days. In addition, the bank now requires corporations to seek its authorization to buy dollars in the FX except in cases of international trade. Individuals are limited to no more than $10,000 a month in dollar purchases. The IMF described the move as “capital flow management” and stated that it would “continue to stand with Argentina during these challenging times.”

Chile cut rates 50 bp to 2.0%, as expected.  The bank said that further easing may be required but this would be evaluated at the upcoming meetings.  Next policy meetings are October 23 and December 6 and further easing seems likely. The bank also cut its growth forecast for this year to 2.25-2.75% from 2.75-3.5% previously. It also cut its inflation forecast for this year to 2.7% from 2.8% previously.