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EM STRATEGY | GLOBAL WEEKLY - 23 February 2018 Summary

Core Content

This document outlines the Emerging Markets (EM) strategy for the week of 23 February 2018, focusing on currency, interest rates, and political developments in key EM regions: Asia, CEEMEA, Latin America (Latam), and South Africa. It is authored by the EM Strategy Team of BNP Paribas, including contributors from various branches and strategists.

Main Themes

1. Asia FX: Adjusting to "higher-for-longer" USD rates

• Expectation: Asian currencies are expected to weaken in the short term (1-3 months) due to rising US rates and market volatility, which may trigger capital flight.
• Long-term Outlook: Strong growth fundamentals and balance of payments could support currency strength later in the year.
• Key Currencies:
  • USDSGD: New forecast shows a short-term rise followed by a decline.
  • USDKRW: Expected to rise in Q1 and Q2, then stabilize.
  • USDTWD: New forecast suggests a slight decline in Q1, but potential for a rebound.
  • USDTHB: Likely to rise in Q1 and Q2, with a gradual decline in the latter half of the year.
  • USDMYR: Expected to rise in Q1 and Q2, then stabilize.
  • USDINR: Projected to rise throughout 2018.
  • USDIDR: Expected to rise in Q1 and Q2, with a plateau in the latter half of the year.
  • USDPHP: Strong depreciation expected, with the central bank (BSP) not in a rush to intervene.

2. South African Politics: Ramaphosa's Thin Ledge

• Political Context: The transition from Jacob Zuma to Cyril Ramaphosa has not alleviated the underlying political and economic challenges.
• Key Issues:
  • The compromises that supported the transition to democracy have reached their limit.
  • Rapid population stratification and leadership failures have created structural difficulties.
  • The new administration is expected to face challenges in balancing diverse interests and maintaining trust.
• Economic Outlook: The 2018 budget signals fiscal consolidation, aiming for primary balance by FY2020/21. This may provide short-term confidence but could lead to a worsening economic outlook by 2019.

3. South African Budget: Buying Some Time

• Fiscal Measures: The budget includes VAT increases and expenditure cuts, primarily through reprioritisation and reduced conditional capex.
• Impact: These measures aim to stabilise the economy and restore market confidence, though they may not be sufficient to address long-term challenges.

4. Colombian Peso: Returning to the Long Camp

• Currency Assessment: Based on the BEER approach, the Colombian peso is seen as undervalued relative to other Latin American currencies.
• Rationale: Divergence between energy prices and currency performance supports the peso's undervaluation.

5. Mexico: The Dichotomy Between Locals and Foreigners

• Debt Structure: 75% of Mbonos with tenors longer than 10 years are held by overseas investors.
• Yield Correlation: TIIE 10y yield is closely correlated with non-resident holdings, indicating foreign capital's influence on Mexican debt markets.

Key Recommendations

What's Up Next Week

Asia

• Korea: Central bank meeting on 27 February; no rate hike expected due to weak economic data.
• China: February PMI figures on 22 February.
• Thailand: Current account balance figures on 22 February.
• Malaysia & Indonesia: CPI figures on 22 and 23 February respectively.
• India: GDP figures on 22 February.

CEEMEA

• Hungary: MNB monetary policy meeting on 27 February; no rate change expected.
• South Africa: Manufacturing PMIs for South Africa, Czech Republic, Poland, Hungary, and Russia on 27 February.
• Cabinet Shuffle: Expected soon under Cyril Ramaphosa's presidency, likely affecting the Ministries of Mining and Public Enterprises.

Latam

• Argentina: BCRA is expected to keep rates unchanged.
• Brazil: Real GDP growth is expected to be positive at +0.3% q/q, with annual GDP growth at 2.5% y/y for 2018.
• Mexico: Continued focus on economic recovery and potential for further growth.

Conclusion

The document highlights the ongoing challenges and opportunities in emerging markets, emphasizing the impact of US rate hikes and market volatility on Asian currencies, the political and economic shifts in South Africa, and the evolving dynamics in Latin American markets. It also provides detailed trade recommendations and forecasts, underscoring the need for careful monitoring of both macroeconomic and political developments.