What Has Changed in EM

  • Bank Indonesia delivered a hawkish surprise
  • Malaysian parliamentary committee will reopen its 1MDB probe
  • Russia took some limited action to support the ruble
  • Moody’s sounded a warning on South Africa’s fiscal situation
  • Turkey took measures to help support the lira
  • Qatar pledged $15 bln of investment in Turkey
  • Argentina central bank continues to tighten policy
  • Brazil prosecutors may charge presidential candidate Geraldo Alckmin before the first-round vote in October

In the EM equity space as measured by MSCI, Hungary (+1.1%), India (+0.6%), and Czech Republic (-0.5%) have outperformed this week, while Turkey (-9.0%), China (-6.1%), and Qatar (-5.9%) have underperformed. To put this in better context, MSCI EM fell -3.8% this week while MSCI DM fell -0.5%.

In the EM local currency bond space, Brazil (10-year yield -11 bp), Russia (-8 bp), and Korea (-7 bp) have outperformed this week, while Philippines (10-year yield +34 bp), Indonesia (+29 bp), and South Africa (+20 bp) have underperformed. To put this in better context, the 10-year UST yield fell 8 bp to 2.85%.

In the EM FX space, TRY (+4.6% vs. USD), ILS (+1.3% vs. USD), and KRW (+0.4% vs. USD) have outperformed this week, while ZAR (-4.9% vs. USD), COP (-2.7% vs. USD), and BRL (-2.0% vs. USD) have underperformed. To put this in better context, MSCI EM FX fell -0.8% this week.

Bank Indonesia delivered a hawkish surprise. Most expected it to keep rates steady at 5.25%. However, about a quarter of the analysts polled by Bloomberg saw a 25 bp hike to 5.5%. We see continued tightening ahead if the rupiah remains under pressure. Next meeting is September 27, and the decision then will depend largely on the global backdrop.

Malaysian parliamentary committee will reopen its 1MDB probe. This is not surprising since most observers believe that the previous probe swept any wrongdoing under the rug. After 100 days in office, the Mahathir government is still trying to uncover the full 1MDB story.

Russia took some limited action to support the ruble. Finance Minister Siluanov announced that regular FX purchases made under the budget law would be suspended. He said “This reduces downward pressure on the ruble. We’ll continue to use this instrument in the future depending on the situation on the financial market.”

Moody’s sounded a warning on South Africa’s fiscal situation. The agency noted that fiscal consolidation will likely be slower than what the government estimates because of weak GDP growth and higher public sector wage costs. Moody’s sees the budget deficit at about -4% of GDP for FY2018/19 ending in March. That compares with the government’s February budget forecast of -3.6%.

Turkey took measures to help support the lira. Regulators halved the amount of swap transactions that banks can do to 25% of shareholder equity. This is meant to make it more difficult to access lira in the offshore swaps market, which is an important channel for shorting it. Regulators also cut the leverage ratio for local FX brokers from 10:1 to 1:1.

Qatar pledged $15 bln of investment in Turkey. Turkish government official said the funds would be channeled into its banks and financial markets, but no further details were given. The investment was announced after Qatar’s Emir Tamim bin Hamad Al-Thani met President Tayyip Erdogan.

Argentina central bank continues to tighten policy. Earlier in the week, it hiked the policy rate 500 bp to 45% and pledged to keep the rate at 45% until October. Days later, the bank raised reserve requirements 300 bp for the nation’s largest banks. Argentina continues to do the right things while Turkey does nothing. The contrast couldn’t be starker.

Brazil prosecutors may charge presidential candidate Geraldo Alckmin before the first-round vote in October. Sao Paulo prosecutors may file two charges tied to alleged irregularities during his time as Governor. Alckmin is the centrist candidate that markets would prefer. If he’s somehow compromised, then we will get another huge dose of political uncertainty.