20170317-法国巴黎银行-EM_Matters_30页_3mb

Summary of EM Monthly Report - 17 March 2017

Core Content

Emerging markets (EM) have shown resilience in 2017 despite rising US interest rates and a mild USD appreciation. This resilience is attributed to the strongest and most synchronized global growth since 2011, along with the absence of aggressive protectionist policies from the Trump administration. Key factors supporting EM have included China's industrial rebound and reassertion of capital controls, which have helped stabilize the global reflation narrative.

Main Points

• Global Growth and Commodity Prices:

  • Global growth has accelerated and is more synchronized than before.
  • This growth has supported commodity prices, which in turn has been a reflationary boost for EMs, especially commodity exporters.
  • The CRB raw industrial index has continued to rise even as oil prices have declined, indicating the pullback in oil is supply-driven.

• US Policy and EM Vulnerability:

  • The Fed's dovish March rate hike has limited the immediate threat of aggressive tightening.
  • However, the prospect of rising US rates and potential US trade measures remain key risks for EMs.
  • The Trump administration's focus on healthcare reform rather than trade policy has delayed the implementation of disruptive trade measures.

• China's Role:

  • China's aggressive policy easing in 2016, including a significant increase in lending, has helped reflate the economy.
  • FX reserves have rebounded, and capital outflows have slowed, partly due to improved capital controls and stabilized RMB expectations.
  • The PBoC is expected to continue with fine-tuning rather than aggressive tightening, as the economy remains strong.

• India and Brazil as Bright Spots:

  • India is expected to regain the EM crown after the BJP's landslide win in Uttar Pradesh, which reinforces confidence in structural reforms and economic stability.
  • Brazil is seen as a bright spot due to its potential for rate cuts, driven by economic slack and low inflation expectations.

Key Risks

• Potential US Trade Measures:

  • Although not yet materialized, the threat of US trade measures could disrupt EMs.
  • The MXN has shown some recovery, but BNP Paribas remains bearish on its outlook.

• Global Rate Hikes:

  • Rising US rates are expected to continue, which could create more pressure on EMs.
  • The combination of higher rates and a possible slowdown in China could risk a recurrence of the 2015 "doom loop."

• Oil Price Pullback:

  • The recent drop in oil prices is a supply-side issue, not a demand-driven one.
  • Steadier oil prices may help reduce breakeven inflation and support the case for higher real rates in the US, which could be more bearish for EMs.

Country-Specific Insights

Czech Republic

• Inflation has risen sharply, increasing the likelihood of removing the koruna cap in mid-2017.
• The CNB is expected to lift the cap at the June policy meeting.
• Long-term, the EURCZK is expected to fall to around 25.00, but short-term volatility is likely.

South Africa

• CPI is expected to undershoot the SARB and consensus estimates.
• The SARB is likely to cut rates in Q3 due to lower inflation and improved terms of trade.
• The country's external vulnerabilities are expected to decrease, supporting the currency.

Argentina

• Fiscal transparency has improved with more detailed reports and quarterly targets.
• A comprehensive tax reform bill is expected in 2018 to reduce taxes and spur growth.
• The primary deficit is expected to decrease, with spending cuts likely to be around 2pp of GDP by 2019.

Mexico

• Core inflation has risen above the target ceiling, and second-round effects are spreading.
• Banxico is expected to hike rates to 8% this year to combat inflation.
• FX hedging programs are being considered, but they are seen as complementary to monetary policy.

Conclusion

While EMs have shown resilience in 2017, the outlook remains mixed. The key risks include potential US trade measures, rising global rates, and the possibility of a slowdown in China. Brazil and India are seen as the least affected by these risks, with India expected to benefit from its political stability and reform momentum, and Brazil poised for significant rate cuts. The overall message is that EMs are in a better position than before, but the path forward will require careful monitoring of these risk factors.