Emerging Markets: What Has Changed

1) Indonesia’s recently elected President Jokowi is facing his first major popular challenge
2) Turkey raised the daily dollar auction amount from $20 mln to $40 mln
3) There are signs of some growing concern over currency weakness in Mexico
4) Brazil central bank chief Tombini is already changing the tune from the statement of the last COPOM meeting
5) Moody's upgraded the Philippines one notch to Baa2 with stable outlook
6) Ethiopia raised $1 bln via a debut 10-year eurobond sale, amidst strong demand

Over the last week, Singapore (+1.5%), Hungary (+1.3%), and Malaysia (+0.1%) have outperformed in the EM equity space as measured by MSCI, while UAE (-12.7%), Russia (-10.5%), and Colombia (-9.3%) have underperformed. To put this in better context, MSCI EM fell -4.2% over the past week while MSCI DM fell -2.0%.

In the EM local currency bond space, Thailand (10-year yield -13 bp), India (-10 bp), and Czech Republic (-10 bp) have outperformed over the last week, while Ukraine (10-year yield +112 bp), Russia (+108 bp), and Brazil (+49 bp) have underperformed. To put this in better context, the 10-year UST yield fell -4 bp over the past week.

In the EM FX space, KRW (+1.3% vs. USD), PKR (+1.0%), and ILS (+0.7% vs. USD) have outperformed over the last week, while COP (-6.4% vs. USD), ZAR (-3.4%), and MXN (-2.9%) have underperformed.

1) Indonesia’s recently elected President Jokowi is facing his first major popular challenge. Millions of protestors have taken the streets in Jakarta protesting for a higher pay and eliminating outsourcing by state-owned companies. One of the main issues is that the increase in minimum wage was set at 11%, far less than the 30% increase in fuel prices. Unlike Modi in India, Jokowi wasn’t elected with such a strong mandate. As we can see, his honeymoon period with voters has been rather short. IDR is trading at multi year lows, in part as investors come to terms that Jokowi’s reformist administration will probably not be able to deliver all that some had expected.

2) Turkey raised the daily dollar auction amount from $20 mln to $40 mln. The move follows the recent increase in FX volatility, according to the central bank statement. Here too, the concern is mostly over the pace of lira and not any particular level for USD/TRY. Indeed, the lira has been outperforming within EM so far in Q4 (second best after PHP, QTD).

3) There are signs of some growing concern over currency weakness in Mexico. Banxico has re-activated daily dollar auctions that it suspended back in April 2013. Then, the auctions had been in place since November 2011 and were triggered by a 2% move from the previous day. Now, it's triggered by 1.5% daily weakness. Amounts are less, however ($200 mln now vs. $400 mln before). As it was before, we don't think Banxico is trying to protect any particular level for the peso, but clearly wants to avoid gappy, destabilizing moves in the exchange rate. We are dismayed, however, at the poor communications coming out of Banxico. Just last week, Governor Carstens was suggesting a need for further peso weakness.

4) Brazil central bank chief Tombini is already changing the tune from the statement of the last COPOM meeting. He was quoted saying that monetary policy should remain “active” in the current circumstances. He was also quoted saying that “Brazil has reserves to regulate FX activity,” but that the weaker currency will help with exports. All in all, this is mixed and hard to know where the emphasis is. Some already assumed that he meant that the intervention program will be scaled back. We are not convinced yet. The minutes to the last COPOM meeting sounded a bit dovish, consistent with the statement. One notable point was the discussion about the possibility of fiscal tightening, which suggests a more dovish inclination, almost as if the bank was looking for reasons to justify a shorter cycle. Sure there will be some fiscal tightening, but it’s hard to believe it will be too strong, especially in 2015

5) Moody's upgraded the Philippines one notch to Baa2 with stable outlook. Moody's is the first to move it this high, as S&P and Fitch still have the Philippines at BBB-. Our own sovereign ratings model has it at BBB+/Baa1/BBB+ and so we think further upgrades are likely. This is a good move by Moody's, though.

6) Ethiopia raised $1 bln via a debut 10-year eurobond sale, amidst strong demand. The nation joins a growing group of frontier market issuers looking to take advantage of the low-yield environment. The B1 rated 10-year bonds yielded 6.625% (at the lower end of guidance), with the proceeds expected to be used for infrastructure development and sugar industry projects. Eurobond sales by African countries (including Ghana, Kenya, Senegal, and Ivory Coast) have topped a record $15 bln this year, compared to the previous record of $14 bln in 2013.