Emerging Markets: What has Changed

(from my colleagues, Dr. Win Thin and Ilan Solot)

1. The “lesson” is over in China.

2. Brazil is in flux and there is some room to be optimist.

3. Indonesia is finally increasing subsidized fuel prices.

4. The Turkish central bank is stepping up even more.

5. The Czech National Bank is moving closer to weakening the koruna.

1. The “lesson” is over in China. The PBOC switched to a more conciliatory stance on money market tightness and started to provide funds selectively. The PBOC reassured markets that it has the resources and will keep money market rates at "reasonable" levels. On net, this seems to spell out a more challenging short-term outlook for China, since the government seems prepared to face market pressure and accept slower growth to start sorting out the problems in the banking system. But of course, this is positive in the long term. 

2. Brazil is in flux and there is some room to be optimistic. The repercussions from the protests in Brazil could prove to be more meaningful than many observers initially thought. They will likely have some impact on (1) fiscal policy, (2) monetary policy, (3) potential cabinet reshuffle, and (4) possibly the outcome of the 2014 presidential elections. Mentioning fiscal responsibility as the first point in Dilma’s “Five Pacts” was a welcome surprise – our concern is the government’s definition of “fiscal responsibility.” We believe that the protests gave the administration a greater sense of urgency about fighting inflation, which will grant the central bank more degrees of freedom to act. On the BRL front, the government removed the reserve requirement on short FX positions. The requirement was 60% for positions above $3 bln. The Dilma administration has also floated the idea of taking coordinated action together with the BRICs countries to deal with the USD appreciation. 

3. Indonesia is finally increasing subsidized fuel prices. This is the first move since 2008. The price of subsidized gasoline was increased by 44% and diesel by 22%. The increase was in line with recent official commentary, so it should not be a surprise. The news is long-term positive for Indonesia, of course, but it won’t help IDR too much in the short term. The latest data on government bonds shows that foreigners continue to pull out at a rapid pace, with holdings down to IDR285 trln from over IDR300 trln in May. We expect further action to stabilize the still nervous markets, including direct intervention and further rate hikes.

4. The Turkish central bank is stepping up its efforts to support the lira even more. The bank announced it will hold a single auction to sell dollars for liras to banks on days it provides liquidity at its policy rate of 4.5%, i.e. “normal days.” The amount of dollars it will sell will be announced at 3pm.

5. The Czech National Bank is moving closer to weakening the koruna. Whilst leaving policy steady at its meeting this week, officials are signalling greater concern about the economy. Governor Singer noted that the probability of FX intervention is rising, and would be in “bigger amounts” if started. He added that the risks point to a need of looser monetary conditions than previously forecast. On the other hand, the comments themselves got the market to do the CNB’s job of selling CZK.