What Has Changed in EM

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  • S&P cut China’s credit rating by a notch to A+ with stable outlook
  • In a follow-up move, S&P also cut Hong Kong’s rating by a notch to AA+ with stable outlook
  • President Trump issued an executive order that could widen sanctions on North Korea
  • Hungary’s central bank eased again
  • Saudi Arabia will reportedly phase out subsidies for gasoline by November
  • Brazil has a new Prosecutor General
  • A powerful 7.2 magnitude earthquake struck near Mexico City

In the EM equity space as measured by MSCI, Chile (+1.8%), Korea (+1.6%), and the Philippines (+1.3%) have outperformed this week, while Peru (-3.3%), Turkey (-3.0%), and India (-1.5%) have underperformed.  To put this in better context, MSCI EM rose 0.1% this week while MSCI DM rose 0.3%.

In the EM local currency bond space, Hungary (10-year yield -32 bp), Argentina (-25 bp), and Brazil (-14 bp) have outperformed this week, while Turkey (10-year yield +21 bp), Poland (+6 bp), and South Africa (+6 bp) have underperformed.  To put this in better context, the 10-year UST yield rose 5 bp to 2.25%.

In the EM FX space, PHP (+1.1% vs. USD), ILS (+1.0% vs. USD), and CLP (+0.3% vs. USD) have outperformed this week, while ARS (-1.8% vs. USD), TRY (-1.7% vs. USD), and INR (-1.1% vs. USD) have underperformed.

S&P cut China’s credit rating by a notch to A+ with stable outlook.  Back in May, Moody’s also cut China to A1 from Aa3, and both agencies warned of risks from rising debt loans.  Note that all three agencies now line up with our own sovereign rating model.

In a follow-up move, S&P also cut Hong Kong’s rating by a notch to AA+ with stable outlook.  The agency cited spillover risk from the mainland as reasons for the move.  The move brings it into line with Fitch.  Note that Moody’s cut Hong Kong one notch to Aa2 back in May, and lines up with our own ratings model.  As such, there are still downgrade risks to S&P and Fitch.

President Trump issued an executive order that could widen sanctions on North Korea.  The US may now put sanctions on any foreign financial institution that knowingly conducts or facilitates “any significant transaction in connection with trade with North Korea.”  The order also bans planes and ships from entering the US if they have traveled to North Korea in the past 180 days.  These measures would go beyond sanctions imposed by the UN Security Council.

Hungary’s central bank eased again.  It kept the main policy rate steady at 0.9%, but it cut the overnight deposit rate deeper into negative territory to -0.15% and lowered the cap on 3-month deposits to HUF75 bln at the end of Q4 vs. HUF300 bln at the end of Q3.  Policymakers won’t be happy with the forint strengthening in response, as a weaker currency is one of the desired side effects of unconventional measures.

Saudi Arabia will reportedly phase out subsidies for gasoline by November.  The government may boost gasoline prices to the international price.  At current levels, this could result in a hike of about 80% for octane-91 grade gasoline to about 1.35 riyals per liter (0.36 cents). The government plans to delay increases in other energy prices until early 2018, according to sources.  Final decision will be made in September or October.

Brazil has a new Prosecutor General.  President Temer named federal prosecutor Raquel Dodge to the post to replace Rodrigo Janot, whose 4-year term came to an end.  The process starts with the National Association of Federal Prosecutors (ANPR) having an internal selection of potential candidates.  ANPR then submits a list of the three best-voted prosecutors to the president.  During the PT era, Presidents Lula and Rousseff chose the prosecutors that topped these lists, but Temer chose second place winner Dodge, who is thought to be friendlier to the government.

A powerful 7.2 magnitude earthquake struck near Mexico City.  The full impact of the tragic earthquake in Mexico has not yet been determined.  It’s worth noting that economists’ views are still mixed as to the medium- and long-term impact of natural disasters on an economy.  The short-term negatives to growth and government budgets are often offset by boosts to longer-term investment and infrastructure spending.