Weekly Emerging Markets: What has Changed

In the EM equity space, Russia (+0.9%), Malaysia (+0.5%), and Hungary (+0.4%) have outperformed this week, while Brazil (-4.1%), Poland (-3.0%), and India (-2.4%) have underperformed.  To put this in better context, MSCI EM fell -1.3% this week while MSCI DM fell -0.8%.

In the EM local currency bond space, the Philippines (10-year yield -9 bp), Mexico (-5 bp), and Ukraine (-4 bp) have outperformed this week, while Peru (10-year yield +21 bp), Brazil (+18 bp), and Russia (+11 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -4 bp this week to 1.73%.

In the EM FX space, ARS (+2.3% vs. USD), RUB (+0.8% vs. USD), and HUF (+0.3% vs. EUR) have outperformed this week, while BRL (-2.7% vs. USD), MXN (-2.2% vs. USD), and ZAR (-2.1% vs. USD) have underperformed.Bank Indonesia signaled it may pause its easing cycle.  Senior Deputy Governor Adityaswara said “We want to see the impact on growth and inflation before we do the next cut.”  Elsewhere, Governor Martowardojo said that the central bank must be careful in considering further rate cuts.  The bank has cut its policy rate 25 bp at every meeting this year so far.  The next policy meeting is April 21, and it seems likely to remain on hold then at 6.75%.

Vietnam undertook a massive cabinet shuffle a day after Prime Minister Nguyen Xuan Phuc was chosen as the leader of the government.  Phuc was elected this week by the National Assembly and promptly asked parliament to dismiss 20 cabinet members, including central bank Governor Nguyen Van Binh.  Le Minh Hung (a former deputy governor of the central bank) was selected to be the new governor.

MSCI is reviewing Nigeria’s standing in its equity indices due to the impact of ongoing FX controls.  MSCI noted that these controls have led to the “continuous deterioration of foreign-exchange market liquidity.”  MSCI said it will make a decision by April 29.  The FX controls have already led Nigeria to be excluded from several major EM bond indices.  Yet policymakers have shown no willingness to ease these controls.

Russia’s central bank tilted a bit more dovish.  Governor Nabiullina said an improving inflation outlook will allow the bank to undertake steeper monetary easing without putting financial stability at risk.  Still, she cautioned that one-off factors were largely responsible for the recent slowdown of inflation.  The next policy meeting April 29 may be too soon to start the easing cycle.

South Africa’s parliament voted down President Zuma’s impeachment proposal by a vote of 233-143.  As long as Zuma has the support of Cosatu trade union and key figures in the ANC, we think he can hang on to power. Like Brazil, markets had gotten too optimistic about political risks.  Zuma hanging on is seen as negative for ZAR.

The impeachment process in Brazil moved forward another step.  A report drafted by the rapporteur of the lower house committee on impeachment said there are grounds for the impeachment process to advance.  The report with the main argument behind the request to impeach her, saying there is sufficient evidence that President Rousseff used illegal methods to mask the true size of the budget deficit.  The lower house committee now votes on the report before it goes to the full lower house.

In related news, Brazil’s Prosecutor General submitted a report to the Supreme Court saying that Lula’s appointment to the cabinet should not be allowed.  He found signs that the appointment was aimed at interfering with the “Car Wash” corruption investigations.