Emerging Markets: What Has Changed

1) Petrobras reported stronger than expected Q1 earnings
2) A Colombian court ordered a delay to the sale of the government’s 57.6% stake in hydropower company Isagen
3) The Mexican government cut its growth forecast for the year by a full percentage point
4) Bank Indonesia kept rates steady at 7.5%, as expected, but eased via macroprudential policies
5) S&P moved the outlook on Indonesia’s BB+ rating from stable to positive
6) Press reports that China is readying plans to boost local government borrowing
7) Russian Finance Ministry started buying USD

Over the last week, China (+8%), India (+2%), and Indonesia (+2%) have outperformed in the EM equity space, while Brazil (-3%), Peru (-3%), and Russia (-2%) have underperformed.

In the EM local currency bond space, Brazil (10-year yield -20 bp), Hungary (-19 bp), and South Africa (-10 bp) have outperformed over the last week, while Indonesia (10-year yield +7 bp), Turkey (+6 bp), and Peru (+5 bp) have underperformed. To put this in better context, the 10-year UST yield fell 6 bp over the past week.

In the EM FX space, THB (+0.4% vs. USD), CNY (+0.2% vs. USD), and ZAR (+0.1% vs. USD) have outperformed over the last week, while COP (-2.7% vs. USD), CLP (-1.4% vs. USD), and PLN (-1.4% vs. EUR) have underperformed.

1) Petrobras reported stronger than expected Q1 earnings. The company posted $7.2 bln in earnings, helped by a fuel price increase that allowed its refining and supply unit to turn profitable for the first time since 2010. The earnings report came three weeks after Petrobras disclosed its audited 2014 results. The company also secured $10 bln in loans from China in order to help avoid a cash crunch.

2) A Colombian court ordered a delay to the sale of the government’s 57.6% stake in hydropower company Isagen. Sale was originally planned for May 19, and had already been delayed last year. Court will consider three suits that are trying to block that sale, and said that it expects to make a ruling within 2-3 months. This latest delay will likely hurt foreign investment, as several foreign companies had put down deposits in order to take part in the auction.

3) The Mexican government cut its growth forecast for the year by a full percentage point. The economy is now seen growing 2.2-3.2% this year vs. 3.2-4.2% previously. The original forecast was 3.7% and had been cut once already. The government’s revision comes two days after Bank of Mexico Governor Carstens cut the central bank's growth forecast for the second time in three months. The central bank now sees 2015 growth between 2-3%, down from 2.5-3.5% previously.

4) Bank Indonesia kept rates steady at 7.5%, as expected, but eased via macroprudential policies. For example, it increased the loan-to-value limits to boost lending. Note that Q1 GDP came in weaker than expected at 4.7% y/y, and was the weakest since Q3 2009. We think Bank Indonesia retains an easing bias and so there will likely be more easing measures ahead and a policy rate cut remains an option. BI will have to be cautious in light of recent IDR softness and rising inflation, as a surprise rate cut would feed further into those negative impulses.

5) S&P moved the outlook on Indonesia’s BB+ rating from stable to positive. The agency said it may raise the rating over the next twelve months. Our own sovereign ratings model views Indonesia as a BBB-/Baa3/BBB- credit, and so an upgrade by S&P to investment grade is warranted. This move would match Fitch (BBB-) and Moody’s (Baa3).

6) Press reports that China is readying plans to boost local government borrowing. Planning agency (National Development and Reform Commission) is reportedly seeking feedback on a draft proposal that would change rules on bond sales in order to help funding. The NDRC proposals include lowering the required debt-to-asset ratio and cancelling limits on the number of note sales if proceeds are for projects approved by the government. The relaxed rules would also make it easier for local government financing vehicles (LGFVs) to sell bonds.

7) Russian Finance Ministry started buying USD. The purchases, carried out for several weeks and separately from the central bank, will reportedly be used to cover this year’s budget expenditures in foreign currency, including debt payments. The purchases had no impact on the domestic currency market or on FX liquidity, according to the central bank. In that regard, the central bank has been buying about $200 mln daily. Both sources of dollar demand suggest policymakers are getting more concerned about a strong ruble.