Emerging Markets: What has Changed

(from my colleague Ilan Solot)

1) Peace talks in Colombia are becoming more tenuous

2) Brazil still doesn’t have an economic team, but there is a frontrunner

3) Center-right candidate Klaus Iohannis won the Presidential election in an upset result

4) Indonesia’s government finally raised its subsidized fuel price

5) Mexico and Russia’s bond sales yielded vastly different results

In equity markets this week, Russian (+1.8%), Turkey (+1.6%) and Taiwan (+1.3%) outperformed. South Africa (-2.7%), Argentina (-2.3%) and China (-1.3%) underperformed.

In the local currency fixed income space, longer-dated yields rose the most in Colombia (+6 bp), Poland (+6 bp) and Malaysia (+5 bp), and fell the most in Turkey (-37 bp), Brazil (-33 bp) and South Africa (-15 bp). To put this in context, the 10-year UST yield fell 1 bp.

In the EM FX space, ZAR (+2.2%), TRY (+0.8%) and BRL (0.7%) outperformed in the week. KW (-1.6%), TWD (-1.0%) and CLP (-1.0%) underperformed.

1) Peace talks in Colombia are becoming more tenuous. Earlier in the week, President Juan Manuel Santos suspended talks with the FARC guerrillas after the group took new hostages on Sunday. Since then, however, the group has agreed to release at least one of the hostages, a captured army general. Cuba and Norway are mediating the negotiations. We don’t think that this event will have any spillover effects into financial markets, but we note that Santos was elected largely by his soft line platform in dealing with the FARC. The more pressing issue for Colombian assets is the fall in commodity prices, which will have a substantial impact on the government’s budget.

2) Brazil still doesn’t have an economic team, but there is a frontrunner. Luiz Carlos Trabuco, the president of Bradesc (the second largest private bank in Brazil) now seems to be first name on the list. The possibility of a more market-friendly finance minister being appointed cheered up markets on Wednesday (it’s a holiday in Brazil today). If confirmed, we expect there to be a follow-through rally in the Bovespa and BRL. Still, we don’t expect this appointment will be enough to change the medium-term prospects for the Brazilian economy – only concrete measures would.

3) Center-right candidate Klaus Iohannis won the Presidential election in Romania after an upset result. Iohannis received 54.7% of the vote against 45.3% for the Social Democrat PM Ponta. Note, however, that Romania has a semi-presidential system, and Iohannis will have control of mainly foreign and defense policies, and will have to govern along with Ponta. As such, it’s hard to expect a material change in policy direction. Interestingly, in one of his first public comments, Iohannis said that “My orientation is west. What is happening in Hungary now, that is not democracy going in the right direction.”

4) Indonesia’s government finally raised its subsidized fuel price. Although it was mostly expected, markets reacted positively to it. As promised, President Widodo (a.k.a Jakowi) delivered a 30% increase, which will greatly help offset the fiscal costs coming from the subsidy. This is obviously positive news for Indonesia, especially if the money saved gets reinvested in infrastructure, health and education, as Widodo had pledged. Despite the good news, we see the upside from the Indonesian elections far more limited than, for example, the election of Modi in India. The President did not need parliamentary approval and is not indicative of a break in the unfavorable position Jakowi faces in parliament, where the opposition controls nearly 60% of the seats.

5) Mexico and Russia’s bond sales yielded vastly different results. Mexico issued a new 10-year bond, raising $2 bln at a record 135 bp over equivalent Treasury bonds. With a yield of 3.68%, Mexico’s bond was well below the average for investment-grade debt, at around 4.4%, according to Bloomberg. Russia, in contrast, sold less than 10% of the amount offered in its first debt auction in six weeks. Unlike the Mexican issuance, this was a short-dated domestic bond sale, which perhaps makes the result even more egregious. The Russian treasury managed to sell just RUB 491 mln ($10 mln) of a May 2016 at a weighted-average yield of 10.06%. They planned to sell RUB 5 bln, and the last sale of similar-maturity was in January, at 6.67%.