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EM STRATEGY DAILY SUMMARY - 15 December 2017

Core Content Overview

This document provides a summary of key developments and market outlook for Emerging Markets (EM) on 15 December 2017. It includes updates on central bank policy decisions, political events, and economic indicators across several EM regions. The report is produced by BNP Paribas and highlights the current market conditions, potential risks, and strategic insights from the firm's analysts.

Key Market Developments

Central Bank Policy Decisions

• Turkey: The Central Bank of the Republic of Turkey (CBRT) raised the late liquidity window (LLW) rate by 50bps to 12.75%. This was below market consensus and closer to expectations. The CBRT is likely to continue using LLW to fund the market, leading to an average repo rate increase of 50bps. The rate hike is conditional on the Turkish Lira (TRY) depreciation, and further hikes are unlikely unless USDTRY reaches a level that retests recent highs.

• Ukraine: The central bank raised rates by 100bps, exceeding market expectations.

• Mexico: Banxico raised rates by 25bps, in line with market expectations. The central bank expressed concerns about wage dynamics and NAFTA, and markets are pricing in more rate hikes for 2018.

• Russia: The central bank is expected to cut rates by 25bps to 8.0%. CPI inflation remains below the 4% target, at 2.5% in November.

• Israel: November CPI data is expected to show a drop to -0.2% from 0.3% previously.

• Egypt: The Ministry of Finance plans to issue Eurobonds by June 2018 to access international capital markets.

• Indonesia: Bank Indonesia (BI) kept the policy rate at 4.25% for the third consecutive month, with no changes in macroeconomic forecasts. The rate is unlikely to be cut in 2018 due to limited room for easing.

Political and Economic Events

• South Africa: The ANC conference begins this weekend, expected to bring leadership changes. The National Energy Regulator (NERSA) is anticipated to approve a 7-8% electricity tariff increase for 2018/19, which is lower than Eskom's request of 18.9%. This could lead to more government capital injections, impacting the 2018 National Budget.

• Brazil: The pension reform has been delayed until February 19, indicating challenges in passing structural reforms. Rating agencies have raised credit concerns due to the delay.

• Argentina: ARS-denominated bonds are highlighted, with a note on the "Lete game begin" suggesting potential market movements or strategies.

Strategic Insights and Market Outlook

• TRY Risk: Investors are still holding large accumulated losses on the Turkish Lira, with 3-month returns down 9.5%. The risk is that weekly returns could turn negative, sparking a selloff.

• Latam Strategy: BNP Paribas analysts suggest that the Colombian Peso (COP) is undervalued from an FX fair value perspective, despite a recent downgrade from S&P. Short USDCOP positions are increased.

• EM Strategy Contacts: A list of key contacts for Emerging Markets strategy across various regions, including London, Istanbul, São Paulo, and Singapore, is provided.

Legal and Disclaimer Notes

• This document is non-independent research and is intended as a marketing communication.
• It does not constitute investment research and is not subject to any prohibition on dealing ahead of dissemination.
• BNP Paribas may have conflicts of interest due to its involvement in investment banking, underwriting, or advisory services.
• The document may contain simulated performance data, which is not a guarantee of future results.
• The information is not intended to provide investment, tax, legal, or other advice.
• The document is confidential and may not be reproduced or distributed without prior written consent.

Summary of Key Points

• Central banks in Turkey, Ukraine, and Mexico made rate decisions, with Turkey and Mexico's moves aligning with expectations, while Ukraine exceeded them.
• Russia is expected to cut rates, while Israel and Egypt have upcoming economic and political events.
• Political developments in South Africa and Brazil are impacting market sentiment and credit ratings.
• Analysts suggest that COP is undervalued, and there is a risk of further selloff in TRY if weekly returns turn negative.
• The document is a marketing communication and does not provide investment advice.

Conclusion

The report offers a snapshot of recent EM developments, focusing on central bank actions, political events, and market dynamics. It highlights the risks and potential opportunities in key markets, while emphasizing the non-independent nature of the research and the potential for conflicts of interest. Investors are advised to consult with their own advisors and exercise independent judgment.