Written by my colleague Dr. Win Thin
In the EM equity space as measured by MSCI, Mexico (+2.4), Turkey (+1.7%), and Russia (+1.5%) have outperformed this week, while the Philippines (-6.6%), UAE (-4.3%), and Thailand (-3.9%) have underperformed. To put this in better context, MSCI EM fell -2.4% this week while MSCI DM fell -0.8%.
In the EM local currency bond space, Mexico (10-year yield -28 bp), South Africa (-14 bp), and Poland (-7 bp) have outperformed this week, while Czech (10-year yield +10 bp), Israel (+10 bp), and Hungary (+9 bp) have underperformed. To put this in better context, the 10-year UST yield fell 3 bp to 2.91%.
In the EM FX space, ARS (+4.3% vs. USD), MXN (+2.9% vs. USD), and TRY (+1.3% vs. USD) have outperformed this week, while PKR (-1.7% vs. USD), CNH (-1.1% vs. USD), and TWD (-0.9% vs. USD) have underperformed. To put this in better context, MSCI EM FX fell -0.6% this week.
Nor Shamsiah Mohd Yunus was named the new Governor of Malaysia’s central bank. Shamsiah was Deputy Governor until November 2016 and helped investigate the 1MDB scandal. She replaces Muhammad Ibrahim, who resigned from the job this month due to questions about the central bank’s role in a deal linked to 1MDB. Shamsiah’s five-year term will reportedly start July 1.
Moody’s cut the outlook on Pakistan’s B3 rating to negative from stable. The agency said the move was driven by heightened external vulnerability, noting that foreign reserves have fallen to low levels. We note PKR has been devalued three times since December and so there are clear pressures building. Our own ratings showed Pakistan’s implied rating falling sharply to B/B2/B vs. actual ratings of B/B3/B. Still, we are not sure a cut to Caa territory is warranted.
National Bank of Hungary tiled more hawkish. While keep rates steady this week, the bank said that “the current loose monetary conditions can no longer prevail up to the end of the 5 to 8-quarter horizon” that held earlier. It also removed language saying monetary policy would be kept loose for “an extended period.” Lastly, the bank identified two risk scenarios that would require tightening. One was sustained capital outflows from EM that lead to further currency depreciation and higher inflation, and the second was rising wages that feed through to inflation.
