What Has Changed in EM

Blog icons-EMchanged

  • Indonesian President Widodo shuffled his cabinet
  • Egypt has requested a three-year $12 bln loan from the IMF
  • Johannesburg Stock Exchange data on investment flows into South Africa was wrong
  • Fitch downgraded South Africa’s local currency rating by one notch to BBB- with a stable outlook
  • Fitch cut its outlook on Colombia’s BBB rating from stable to negative

In the EM equity space as measured by MSCI, Turkey (+4.8%), India (+1.4%), and Qatar (+1.3%) have outperformed this week, while Colombia (-6.4%), Mexico (-3.2%), and Singapore (-2.9%) have underperformed. To put this in better context, MSCI EM rose 0.6% this week while MSCI DM rose 0.6%.

In the EM local currency bond space, Turkey (10-year yield -35 bp), South Africa (-14 bp), and Hungary (-13 bp) have outperformed this week, while Ukraine (10-year yield +31), Colombia (+16 bp), and the Philippines (+5 bp) have underperformed. To put this in better context, the 10-year UST yield fell -8 bp this week to 1.49%.

In the EM FX space, ZAR (+2.3% vs. USD), TRY (+2.2% vs. USD), and KRW (+1.3% vs. USD) have outperformed this week, while COP (-3.8% vs. USD), RUB (-2.5% vs. USD), and CLP (-1.4% vs. USD) have underperformed.

Indonesian President Widodo shuffled his cabinet. The most important change is Sri Mulyani Indrawati coming back as Finance Minister. She is very well-respected by the markets, and held the same Finance post from 2005-2010. Widodo also appointed two retired generals to important posts. Former Defense Minister Wiranto will become Coordinating Minister for Politics, replacing Luhut Panjaitan, who becomes Minister for Maritime Affairs.

Egypt has requested a three-year $12 bln loan from the IMF. IMF Middle East and Central Asia Director Ahmed said that an IMF delegation will start a two-week visit to Egypt on July 30 to continue talks, adding that “We welcome this request, and look forward to discussing policies which can help Egypt meet its economic challenges. Our goals are to help Egypt return to economic stability and to support strong, sustainable and job-rich growth.”

Johannesburg Stock Exchange data on investment flows into South Africa was wrong. It appears that about ZAR70.2 bln (USD4.9 bln) of net share purchases by foreign investors during May and June were instead ZAR36.4 bln of net sales. JSE official said the error was caused by a programming error and that it was taking “immediate steps” to avoid any recurrences.

Fitch downgraded South Africa’s local currency rating by one notch to BBB- with a stable outlook. This moves it into line with its foreign currency rating. Fitch said it was part of a review applying new criteria. We have always felt that the local and foreign currency ratings should in general match up for every country. In addition, this move is a clear reminder that sub-investment grade ratings are likely to be seen this year from at least one agency.

Fitch cut its outlook on Colombia’s BBB rating from stable to negative. We just wrote this in our quarterly EM ratings model update on July 14: “Colombia saw its implied rating fall two notches to BBB-/Baa3/BBB-. Here, the drop in oil prices has really taken a toll on the economy. Downgrade risks to actual ratings of BBB/Baa2/BBB are picking up.”