What Has Changed in EM

Blog icons-EMchanged

  • Chinese President Xi has strengthened his grip on power
  • Mozambique said it is in “debt distress” and hired advisors for a debt restructuring
  • South Africa revised its macro forecasts in the Finance Ministry’s Medium-Term Budget Program
  • Chile’s ruling center-left coalition lost municipal elections

In the EM equity space as measured by MSCI, Poland (+3.2%), Chile (+3.1%), and Hungary (+0.9%) have outperformed this week, while the Philippines (-3.2%), Peru (-2.2%), and China (-1.9%) have underperformed. To put this in better context, MSCI EM fell -0.8% this week while MSCI DM fell -0.4%.

In the EM local currency bond space, Peru (10-year yield -2 bp), Malaysia (flat), and Chile (flat) have outperformed this week, while the Philippines (10-year yield +67 bp), Turkey (+23 bp), and Indonesia (+21 bp) have underperformed. To put this in better context, the 10-year UST yield rose 11 bp this week to 1.85%.

In the EM FX space, CLP (+2.4% vs. USD), ZAR (+0.7% vs. USD), and THB (+0.3% vs. USD) have outperformed this week, while COP (-1.1% vs. USD), TRY (-1.0% vs. USD), and RUB (-0.9% vs. USD) have underperformed.

Chinese President Xi has strengthened his grip on power. The Chinese Communist Party (CPC) issued a communique calling on its members to “closely unite around the CPC Central Committee with Xi Jinping as the core.” While perhaps subtle, the wording is significant as it comes ahead of a government shuffle next year when 5 of the 7 Standing Committee members are due to retire. Xi will clearly consolidate his grip even further then.

Mozambique said it is in “debt distress” and hired advisors for a debt restructuring. Debt restructuring is a precursor for the IMF to resume aid to the country. Mozambique has already restructured so-called “tuna bonds” earlier this year. The government reportedly plans to reach an agreement with its creditors on a “debt-resolution proposal” in December, to be implemented in January.

South Africa revised its macro forecasts in the Finance Ministry’s Medium-Term Budget Program. The budget gap is now seen narrowing from -3.7% of GDP in FY15/16 to -3.4% in FY16/17 (was -3.2% in February budget), -3.1% in FY17/18 (was -2.8%), and -2.7% in FY18/19 (was -2.4%). Gross and net debt to GDP ratios are also forecast to stabilize later and at higher levels.

Chile’s ruling center-left coalition lost municipal elections. Those candidates won 141 mayoral seats, down from 167 in 2012. On the other hand, opposition candidates won 144 mayoral seats, up from 121, while independent candidates won 52 seats, up from 41. Voter participation was very low at around 33% and was the lowest since the military dictatorship ended in 1990. Vote comes ahead of the national elections next year.