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Summary of the Document: HOW WE ANALYSE EMERGING MARKETS

Core Content

This document outlines the analysis of emerging markets (EMs) from a global and local perspective, focusing on economic growth, interest rates, US dollar trends, trade dynamics, and policy influences. It also presents broader trends indicating EMs are in a better position to withstand economic headwinds and provides forecasts for 2019 and 2020.

Main Global Drivers

1. Global Growth and Advanced Economies

• Advanced economies are slowing, which has a direct impact on EMs.
• China's economic growth is expected to stabilize with the effect of policy stimulus.
• World trade has been slowing since the beginning of the year, indicating potential slowing growth in EMs.
• Trade war impacts vary by country, with EM Asia, Chile, and Mexico being more exposed to tariffs.

2. Real Interest Rates and the US Dollar

• Real interest rates are a key factor for EMs.
• Lower long-term real rates in the US help compress EM spreads.
• The US dollar has peaked in its historical cycles, suggesting a weaker dollar may benefit EM currencies.
• EM FX tends to rise when the US dollar weakens, despite a stronger USD, EM spreads remain tighter due to a more stable macroeconomic environment.

3. Trade Exposure and FX

• The BNPP EM trade war exposure index highlights the varying levels of exposure to trade disputes.
• EMs with a higher share of exports to China and the US are more vulnerable to trade tensions.
• EM Asia, Chile, and Mexico are particularly exposed, but each has unique characteristics that affect their exposure.

Local Drivers

1. Elections and Policies

• Elections in emerging markets can significantly influence economic and political outcomes.
• Argentina's uncertain election outcome poses challenges for its economy, which is already in recession and facing high inflation.
• The government's ability to gain popularity and reduce rejection is crucial for economic recovery.

2. Sovereign Ratings and Fiscal Policies

• EM sovereign ratings have shown improvement, with many retaining investment-grade status.
• Fiscal rules have become more prevalent, enhancing policy-making control and accountability.
• Sovereign ratings are correlated with market premia, indicating better creditworthiness.

3. Foreign Direct Investment (FDI)

• "Real" FDI inflows are a better indicator of foreign investment resilience.
• Non-resident FDI has been a significant component of EM investment flows.

Broader Trends

1. EMs in Better Shape

• EMs have become more resilient to economic crises due to improved frameworks.
• Inflation has declined consistently since the 1980s, with core inflation remaining low.
• Exchange rate regimes have evolved from pegged to more flexible systems since the 1980s.
• EMs have shown a sharp reduction in poverty since the 1980s.

2. Ease of Doing Business

• EMs have improved their business environment, as reflected in the 2019 Doing Business ranking.
• These improvements are weighted by GDP size and exclude China.

Scenario and Forecasts

1. GDP Growth

• EM GDP growth is expected to slow in 2019 and 2020, with a downside bias.
• Forecasts are based on a sample of 17 EMs, with GDP weighted averages.

2. Inflation

• Low core inflation suggests minimal underlying price pressures.
• However, specific cases may show different trends.

3. Policy Rates

• More rate cuts are expected across EMs in 2019, as growth disappoints and inflation remains low.
• Countries with more transparent central banks are better at anchoring inflation expectations.

4. FX and Rates

• EM FX is expected to remain stable or appreciate, even with a stronger USD.
• The BNPP EM FX index is correlated with sovereign ratings, indicating better economic performance.

Key Forecasts

Key Insights

• Growth: EMs are expected to experience slower growth in 2019 and 2020, with a downside bias.
• Inflation: Core inflation remains low, suggesting minimal underlying price pressures, although specific countries may show higher inflation.
• Policy Rates: Rate cuts are anticipated across EMs due to weak growth and low inflation.
• Trade: Trade tensions impact EMs differently, with certain countries being more exposed.
• Sovereign Ratings: EMs have improved sovereign ratings, with many retaining investment grade.
• Fiscal Policies: Improved fiscal frameworks and rules are contributing to better policy accountability.
• Poverty: There has been a sharp decline in poverty levels in EMs since the 1980s.
• FX Trends: EM currencies are expected to remain stable or appreciate, even with a stronger USD, due to better macroeconomic conditions.

Team

The analysis is conducted by the BNP Paribas Emerging Markets Strategy team, including:

• Marcelo Carvalho: Head of Global Emerging Markets Research
• Gabriel Gersztein: Head of Global Emerging Markets Strategy
• Jose-Carlos Faria: Head of Latin America Economic Research
• Florencia Vazquez, Filipe Klein: Economists, Argentina & Chile
• Gustavo Arruda: Economist, Brazil
• Joel Virgeno Rojano: Economist, Mexico & Colombia
• Andre Digiacomo, Luca Maia, Samuel Castro: FX and Rates Strategists, Latam
• Burak Baskurt: CEEMEA Strategist
• Hakan Aklar: Chief Economist, Turkey
• Jeffrey Schultz: Economist, South Africa
• Michal Dybula: Chief Economist, Central and Eastern Europe
• Luz Eduardo Peixoto: Economist, Emerging Markets
• Mohamed AbdelmeGUID: Economist, MENA
• Okan Ertem: Senior Economist, Turkey
• Nicholas Borain: Politics Analyst, South Africa
• Wojciech Stepien, Siddharth Mathur, Tianhe Ji, Altaz Dagha: FX and Rates Strategists and Research Heads

Disclaimer

• This document is non-independent research and may be subject to conflicts of interest.
• It is intended for professional clients and eligible counterparties under MiFID II.
• It is not investment research and is not subject to independence requirements.
• The information is based on public sources and may not have been independently verified.
• It is not suitable for non-Relevant Persons.