What Has Changed in EM

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  • The Hungarian central bank capped the amount commercial banks can keep at its 3-month deposit facility
  • S&P upgraded Hungary from BB+ to BBB- with stable outlook
  • Bank of Israel will move to 8 meetings per year starting in 2017, down from 12 currently
  • S&P raise the outlook on Russia’s BB+ rating from negative to stable
  • The South African Reserve Bank signaled a potential end of the tightening cycle

 In the EM equity space as measured by MSCI, Brazil (+5.5%), Turkey (+5.0%), and Peru (+4.9%) have outperformed this week, while Qatar (-0.6%), Hungary (flat), and South Africa (+0.3%) have underperformed. To put this in better context, MSCI EM rose 3.6% this week while MSCI DM rose 2.1%.

In the EM local currency bond space, Brazil (10-year yield -36 bp), Turkey (-26 bp), and Hungary (-17 bp) have outperformed this week, while Ukraine (10-year yield +9 bp), Mexico (+2 bp), and China (flat) have underperformed. To put this in better context, the 10-year UST yield fell 7 bp this week to 1.62%.

In the EM FX space, ZAR (+3.5% vs. USD), RUB (+2.3% vs. USD), and CLP (+2.1% vs. USD) have outperformed this week, while MXN (-0.6% vs. USD), PHP (-0.4% vs. USD), and CNH (-0.4% vs. USD) have underperformed.

The Hungarian central bank capped the amount commercial banks can keep at its 3-month deposit facility. Those deposits stand at HUF1.6 trln today, and the central bank said it would lower that amount to HUF900 bln by year-end. This unconventional policy is akin to monetary easing, as it pushes funds out of its deposit facility and into government bonds and the interbank market. The end result should be lower government borrowing cost, lower lending rates, and a weaker forint.

S&P upgraded Hungary from BB+ to BBB- with stable outlook. This matches Fitch’s upgrade to investment grade BBB- back in May. Now, Moody’s is the outlier at Ba1. Hungary has not had two investment grade ratings since December 2011, and so this move opens up investment opportunities for funds that were constrained from doing so before.

Bank of Israel will move to 8 meetings per year starting in 2017, down from 12 currently. This seems to be the trend in EM central bank meetings, as others have also moved to fewer meetings per year. No policy implications, though we have always felt more is better. The next meeting is September 26, no changes seen. The economy remains fairly robust, with GDP growing 4% annualized in Q2.

S&P raise the outlook on Russia’s BB+ rating from negative to stable. Fitch has Russia at BBB- and Moody’s has it at Ba1. While the worst may be over for Russia, we do not expect upgrades from any of the major agencies anytime soon.

The South African Reserve Bank signaled a potential end of the tightening cycle, just as inflation moved back into the 3-6% target range. The SARB has been on hold since its last 25 bp hike to 7.0% back in March, but Governor Kganyago gave the first hint that this was more than a temporary pause. He noted that if inflation stays within the target range longer, the bank may be near the end of the tightening cycle.