Emerging Markets: What Changed

(from my colleague Dr. Win Thin)

• Moody’s upgraded Vietnam one notch to Ba3 with stable outlook.
• The National Bank of Romania delivered a dovish surprise.
• US State Department announced new sanctions on Russia for its nerve gas attack.
• Central Bank of Russia said it may reduce its volume of daily FX purchases under the budget rule in order to help reduce FX volatility.
• US President Trump added fuel to the fire by announcing increased tariffs on Turkish imports.
• Turkey tweaked foreign currency reserve requirements for commercial banks.
• S&P upgraded Israel a notch to AA- with stable outlook.
• A widening graft probe in Argentina is raising concerns.

In the EM equity space as measured by MSCI, Hong Kong (+2.2%), China (+1.9%), and Indonesia (+1.6%) have outperformed this week, while Brazil (-8.4%), Russia (-7.5%), and Chile (-5.0%) have underperformed.  To put this in better context, MSCI EM fell -1.0% this week while MSCI DM fell -0.7%. 

In the EM local currency bond space, Indonesia (10-year yield -13 bp), Israel (-9 bp), and Korea (-8 bp) have outperformed this week, while Turkey (10-year yield +266 bp), Brazil (+41 bp), and Russia (+35 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 11 bp to 2.88%. 

In the EM FX space, IDR (+0.1% vs. USD), EGP (+0.1% vs. USD), and CZK (+0.1% vs. EUR) have outperformed this week, while TRY (-20.1% vs. USD), ARS (-5.9% vs. USD), and RUB (-5.7% vs. USD) have underperformed.  To put this in better context, MSCI EM FX fell -0.9% this week. 

Moody’s upgraded Vietnam one notch to Ba3 with stable outlook.  The agency cited strong growth potential and improvements in the health of the banking sector.  Moody’s added that the upgrade was “underpinned by strong growth potential, supported by increasingly efficient use of labor and capital in the economy.”  Our own sovereign ratings model has Vietnam at BBB-/Baa3/BBB- and so further upgrades are warranted to actual ratings of BB-/Ba3/BB. 

The National Bank of Romania delivered a dovish surprise.  The bank kept rates on hold while market was looking for a 25 bp hike.  Governor Mugur Isarescu said the monetary tightening cycle was nearing its end, adding that that progress had been made in tackling inflation and that the bank’s goal is to avoid further cooling of the economy. 

US State Department announced new sanctions on Russia for its nerve gas attack on a former Russian spy and his daughter in the UK.  This response was required under the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, which has only been invoked against North Korea and Syria.  These sanctions must be enacted within 60 days, and tougher measures are required after three months if Russia fails to prove that it is no longer using or producing chemical weapons.  

Central Bank of Russia said it may reduce its volume of daily FX purchases under the budget rule in order to help reduce FX volatility.  The bank acknowledged that it cut its FX purchases in half on Wednesday when the ruble plunged in response to the announcement of another round of sanctions by the US.   

US President Trump added fuel to the fire by announcing increased tariffs on Turkish imports.  He tweeted "I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar!  Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!" 

Turkey tweaked foreign currency reserve requirements for commercial banks.  The move will reportedly provide banks with an additional $2.2 bln, according to the central bank.  This was a very minor move aimed at taking some pressure off the lira.  The fact that this is all that Turkey can do while the lira is in free-fall is quite disappointing. 

S&P upgraded Israel a notch to AA- with stable outlook.  S&P noted that strong growth coupled with adherence to fiscal rules will enable the government to lock in recent fiscal gains.  It added that “The upgrade reflects improvements in Israel’s fiscal policy framework.  Although public debt remains relatively high, we now think that fiscal slippages leading to a significant reversal of the debt path are unlikely.” 

A widening graft probe in Argentina is raising concerns.  For now, only members of the previous Fernandez and Kirchner administrations have been implicated and not from the current Macri government.  Police have arrested dozens already.  Fitch warned that the economic impact is real, but added that the ratings implications are less so.  

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