What Has Changed in EM

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  • India’s upper house approved the creation of a Good and Services Tax (GST)
  • The Polish government softened its stance on the proposed Swiss franc loan conversion plan
  • Support for South Africa’s ruling African National Congress (ANC) appears to have fallen below 60% for the first time ever
  • Brazil’s Senate impeachment committee recommended putting President Rousseff on trial

In the EM equity space as measured by MSCI, Indonesia (+4.2%), Poland (+3.9%), and Brazil (+1.9%) have outperformed this week, while Czech Republic (-5.4%), Singapore (-1.5%), and UAE (-1.3%) have underperformed. To put this in better context, MSCI EM rose 1.2% this week while MSCI DM fell -0.4%.

In the EM local currency bond space, Poland (10-year yield -11 bp), Chile (-10 bp), and Indonesia (-8 bp) have outperformed this week, while Turkey (10-year yield +22), Hungary (+9 bp), and Mexico (+8 bp) have underperformed. To put this in better context, the 10-year UST yield rose 10 bp this week to 1.56%.

In the EM FX space, BRL (+2.1% vs. USD), PLN (+1.8% vs. EUR), and TWD (+1.5% vs. USD) have outperformed this week, while TRY (-0.9% vs. USD), THB (-0.7% vs. USD), and ILS (-0.7% vs. USD) have underperformed.

India’s upper house approved the creation of a Good and Services Tax (GST). This national sales tax would replace more than a dozen separate taxes. The vote was by a unanimous 203-0 margin, though one regional party abstained. It now has to be approved by the lower house (where Modi’s BJP-led coalition holds a majority) and then ratified by at least half of the states. This process is likely to be finished by year-end.

The Polish government softened its stance on the proposed Swiss franc loan conversion plan. Rather than being forced, conversion will be done voluntarily and made easier through regulatory changes that won’t destabilize markets. Officials stressed this is the first stage, and that forced conversion may be revisited in one year after evaluating the situation. This is a positive development, and shows that the Law and Justice party is cognizant of the market impact of its policies.

Support for South Africa’s ruling African National Congress (ANC) appears to have fallen below 60% for the first time ever. Final results will be announced August 7, but preliminary results show the ANC losing ground to the main opposition Democratic Alliance (DA). ANC support is running at 54.7% vs. 62.2% in the 2014 national election, while DA support increased to 26.6% from 22.2% in 2014. We suspect the ANC will swing more populist in an effort to boost support ahead of the 2019 national elections.

Brazil’s Senate impeachment committee recommended putting President Rousseff on trial. The committee voted 14-5 to approve the report by Senator Antonio Anastasia that recommended impeachment. It now goes to the full Senate for an August 9 vote, where a simple majority is needed to pass it. If so, then the final impeachment trial will proceed, which many expect would start in late August or early September.