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Emerging Markets: What has Changed

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

1) India’s central bank (RBI) kept its benchmark repo rate unchanged at 8.0%, but once again cut the Statutory Liquidity Ratio (SLR) by 50 bp to 22.0%
2) Russia retaliated sanctions from the West by imposing its own sanctions
3) Some of Argentina’s non-holdout creditors are trying to help negotiate a solution to the current default
4) The Mexican Senate approved the last bill of secondary energy legislation

Over the last week, Thailand (+1.8%), Poland (+1.4%), and Chile (+1.3%) have outperformed in the EM equity space as measured by MSCI, while Argentina (-8.3%), Russia (-4.8%), and Turkey (-4.2%) have underperformed. To put this in better context, MSCI EM was -1.2% over the past week.

In the EM local currency bond space, Chile (10-year yield -12 bp), Vietnam (-10 bp), and Singapore (-6 bp) have outperformed over the last week, while Turkey (10-year yield +35 bp), Russia (+32 bp), and Hungary (+29 bp) have underperformed. To put this in better context, the 10-year UST yield was -9 bp over the past week. 

In the EM FX space, CNY (+0.2% vs. USD), EGP, and PKR (both flat) have outperformed over the last week, while IDR (-1.8% vs. USD), RUB (-1.7%), and PHP (-1.4%) have underperformed.

1) India’s central bank (RBI) kept its benchmark repo rate unchanged at 8.0%, but once again cut the Statutory Liquidity Ratio (SLR) by 50 bp to 22.0%. The SLR functions in a similar way to reserve requirements, where banks need to keep a portion of their deposits in government securities. The cut in the SLR represents an alternative way for the RBI to increase lending and hopefully investment. The bank kept its 8.0% inflation target for the end of the year and 6.0% for 2015, though the statement was a bit on the hawkish side. 

2) Russia retaliated sanctions from the West by imposing its own sanctions. It has banned fruit, vegetables, meat, fish, milk and dairy imports from the US, Europe, and a few other countries. Some of the products banned can be balanced by imports from Brazil and New Zealand. The ban is scheduled to last for one year. We don’t see any noticeable market impact from the Russian actions besides, on the margin, some short term consequences to Poland. Russian officials also hinted at the possibility of banning flights to Asia over Siberia, which would be disruptive. 

3) Some of Argentina’s non-holdout creditors are trying to help negotiate a solution to the current default. A group is seeking to waive the so-called Rights Upon Future Offers (RUFO) clause, which right now prevents Argentina from giving an improved offer to the holdouts compared to what the restructured bondholders got. This clause will expire at the end of 2014, but that is an eternity in the financial markets. This creditor group represents about 40% of the bonds that have the RUFO, and so it is soliciting others to join it in seeking a waiver. If so, then this ongoing saga may be moving closer to a conclusion.

4) The Mexican Senate approved the last bill of secondary energy legislation. Now it’s time for President Nieto to ratify it. This bill is part of the long process of reforming the constitution to open up the country’s energy sector to private investment. One of the highlights of the bill was to allow the government to take over Pemex’s pension liabilities, as well as the liabilities of the electric company CFE. Together, these liabilities are estimated at about 10% of GDP.


Emerging Markets: What has Changed Emerging Markets:  What has Changed Reviewed by Marc Chandler on August 07, 2014 Rating: 5
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