What Has Changed in EM

1) S&P downgraded Brazil by a notch to BB+, below investment grade
2) Peru’s central bank started a tightening cycle with a 25 bp hike to 3.5%
3) Indonesia has been given approval to rejoin OPEC later this year
4) Thailand’s latest draft constitution was rejected by the National Reform Council
5) JP Morgan cut Nigeria from its EM bond indices
6) Russia is suspending its so-called budget rule


1) S&P downgraded Brazil by a notch to BB+, below investment grade.  The reasons why don’t warrant further discussion beyond noting that the numbers are going to get much worse before they get better.  We just ran Brazil’s macro numbers in our sovereign rating model ahead of our usual quarterly update in October.  Using the current readings and consensus forecasts, Brazil’s implied rating has fallen two notches to BB-/Ba3/BB-.  While we had originally thought that S&P maintaining its negative outlook was perhaps a bit aggressive given our previous implied rating of BB+/Ba1/BB+, the new implied rating totally justifies more downgrades ahead.

2) Peru’s central bank started a tightening cycle with a 25 bp hike to 3.5%.  This was the first move since its 25 bp cut back in January.  It was expected to keep rates steady at 3.25%, but a small handful looked for a 25 hike.  August CPI rose 4.0% y/y vs. 3.56% in July.  This is well above the 1-3% target range, and with inflation moving further above target, we warned of a hawkish surprise.  At its August meeting, the central bank adopted a hawkish bias while leaving rates steady at 3.25%.

3) Indonesia has been given approval to rejoin OPEC later this year.  This comes despite the continued decline in its crude output. Indonesia is expected to rejoin OPEC at the December meeting, seven years after suspending its membership due to falling production.  If Indonesia rejoins, it would be one of the smallest producers in the group alongside Libya, Ecuador, and Qatar.  More importantly, it would be the only net oil importing nation in OPEC, and would bring membership up to 13 countries.  Indonesia has a 2015 oil output target of about 825,000 bbl/day, roughly half of its peak production in the early 1990s.

4) Thailand’s political outlook remains cloudy after the latest draft constitution was rejected by the National Reform Council.  This move effectively delays general elections until mid-2017.  A new constitutional reform committee will be set up over the next 30 days and will then be given 180 days to write another draft constitution.  After that, another 4 months are needed to prepare a constitutional referendum, then 6 months to write the new laws, followed by 4 months of campaigning.  At this point, mid-2017 looks to be the soonest possible timeline for a return to democracy.

5) JP Morgan cut Nigeria from its EM bond indices.  This is very negative, but it can’t come as a huge surprise given the difficulty investors have seen in getting money out of Nigeria.  We would expect some forced selling on this news, though getting the dollars out could (ironically) prove challenging.

6) Russia is suspending its so-called budget rule.  The budget rule, which went into effect in 2013, was meant to cap public spending based on average long-term oil prices.  The rule may be modified, reinstated, or dropped entirely, according to Economy Minister Alexey Ulyukayev.  Clearly, Russia is grappling with the impact of lower oil prices and wants greater freedom to used fiscal stimulus.  Russia’s central bank kept rates steady in September for the first time this year, potentially ending the easing cycle after 600 bp of cuts.