20160608-法国巴黎银行-What_s_new_this_month_26页_3mb

EM Matters Summary - June 2016

Core Content Overview

This report provides an analysis of Emerging Market (EM) dynamics and macroeconomic outlooks for June 2016, focusing on key factors influencing growth, inflation, and policy responses across various regions.

Main Views and Key Insights

US Monetary Policy and EM Impact

• The weak US jobs growth in May supports the view that the Federal Reserve is stuck in a "Hotel California" scenario, where it desires to raise rates but is unable to do so.
• This situation is EM-positive in the short term as it reduces USD strength, which in turn eases monetary policy constraints and perceived downside risks for EMs.
• A softer USD is beneficial for EMs, particularly China, as it allows the CNY to weaken by nearly 4% on a trade-weighted basis, with the JPY's strength playing a major role.
• EMs are benefiting from the low-for-long global rate environment, especially higher growth and reform-oriented economies like India and Indonesia.

EM Fundamentals and Long-Term Risks

• The report warns that while the short-term stabilisation is positive, longer-term risks are rising due to mature US economic cycles and weak growth in developed markets (DM).
• EMs' post-GFC growth engines—exports and credit—are showing signs of exhaustion, with exports remaining sluggish and credit cycles turning down.
• EMs need to use the current window of opportunity to improve fundamentals before conditions worsen.

Political Dynamics Across Regions

• Asia: Political momentum is mixed. India and Indonesia show slow but steady reform progress, while Thailand and South Korea face political inertia. China continues to grapple with reform vs. growth dilemma.
• LatAm: Political dynamics are strongly positive in Brazil and Argentina, with potential for virtuous feedback loops from monetary easing and fiscal reforms.
• CEEMEA: Political risks are high, especially in South Africa, where uncertainty is increasing and could lead to further rating downgrades.
• Turkey and Poland: Both face significant political and macroeconomic risks. Turkey's aggressive rate cuts under the guise of "simplification" may not be sustainable, while Poland's policy uncertainty is dampening investment and boosting inflation.

Regional Analysis

CEEMEA: Poland

• Policy Uncertainty: The new government's shift toward income redistribution and increased taxes is creating uncertainty, affecting both financial and real investment.
• Fiscal Outlook: Budget deficit is expected to rise significantly, and FDI inflows have declined, contributing to weak growth.
• Inflation: Rising consumption and new taxes are likely to increase inflationary pressure, with energy prices expected to rise in 2017.

LatAm: Brazil and Argentina

• Brazil: Vice President Temer is implementing fiscal reforms to stabilize the economy. Confidence indicators are showing improvement, and we forecast 2% real GDP growth for 2017.
• Argentina: The Macri administration is focusing on inflation control, with expectations of a significant drop in annualised CPI inflation in H2 2016. Growth is expected to improve in 2017, supported by Brazil's economic recovery.

Asia: South Korea and Thailand

• South Korea: The Bank of Korea is under pressure to ease due to weak exports and a stalled supplementary budget. A rate cut in July is likely.
• Thailand: The current account surplus has reached levels not seen since the Asia Crisis, driven by falling oil imports and a booming tourism sector. The Bank of Thailand is adding FX reserves to counter appreciation pressure.

Key Forecasts and Trends

• GDP and Inflation: EMs are expected to show stabilisation in the short term, but long-term growth is threatened by weak DM performance.
• Monetary Policy: EM central banks are gaining more flexibility due to a weaker USD, but this is not a long-term solution.
• Sovereign Risk: Sovereign CDS spreads and implied ratings reflect divergent political and economic conditions across EMs.

Pressure Points for the Next Month

• Monitor the impact of USD softness on EM monetary policy space.
• Watch for any changes in political dynamics in key EM countries, especially in CEEMEA, Turkey, and Poland.
• Track inflation trends, particularly in Argentina and Turkey, as they are critical for policy decisions.
• Observe the effects of recent fiscal measures in Argentina and the potential for further reforms in Brazil.

Conclusion

The report highlights a mixed outlook for EMs, with short-term stabilisation benefits from a weaker USD and low global rates, but long-term risks persist due to weak DM growth and domestic policy challenges. Political dynamics play a crucial role in determining the success of current economic strategies and the sustainability of EM growth.