Emerging Markets: What Changed - Friday, December 1

(from my colleague Dr. Win Thin)

Bank of Korea hiked rates by 25 bp to 1.50%, the first hike in six years.

Egypt central bank lifted the last remaining currency controls.

S&P cut South Africa’s foreign currency rating one notch to BB with stable outlook.

Turkey President Erdogan was implicated in an alleged plot to help Iran evade US sanctions.

Moody’s upgraded Argentina one notch to B2 with stable outlook.

The IMF approved a new $88 bln Flexible Credit Line (FCL) for Mexico.

Mexico shook up its economic team.

Brazil press is reporting that the pension reform vote may be delayed to 2018 due to lack of support.

In the EM equity space as measured by MSCI, Egypt (+2.4%), Czech Republic (+1.1%), and Korea (+0.8%) have outperformed this week, while China (-4.8%), Hungary (-4.4%), and Brazil (-3.8%) have underperformed. To put this in better context, MSCI EM fell -3.2% this week while MSCI DM rose 0.4%.

In the EM local currency bond space, Argentina (10-year yield -27 bp), Czech Republic (-21 bp), and Turkey (-17 bp) have outperformed this week, while Brazil (10-year yield +25 bp), South Africa (+11 bp), and Mexico (+5 bp) have underperformed. To put this in better context, the 10-year UST yield was flat at 2.34%.

In the EM FX space, ZAR (+3.1% vs. USD), TRY (+0.9% vs. USD), and PHP (+0.8% vs. USD) have outperformed this week, while CLP (-1.9% vs. USD), BRL (-0.7% vs. USD), and COP (-0.5% vs. USD) have underperformed.

Bank of Korea hiked rates by 25 bp to 1.50%, the first hike in six years. There was one dissenter, who expressed concern about low inflation. Korea reported November CPI today, and inflation fell sharply to 1.3% vs. 1.8% in October, further below the 2% target. Governor Lee said that policy will remain accommodative, so we do not see another hike until the inflation trajectory warrants it.

Egypt central bank lifted the last remaining currency controls. It removed the limits imposed in 2015 on deposits and withdrawals by importers of non-essential goods. This follows a similar move in June, when the central bank ended the cap on FX transfers of $100,000. Senior official said that “We saw it as appropriate to remove the caps today because the market has strengthened [and] our foreign-currency resources have increased.” Note also that the central bank increased the cost of using its special FX window by adding a 1% surcharge to new inflows.