Emerging Markets: What has Changed

1) Indonesia announced it will allow full foreign ownership in many local industries in an effort to boost foreign investment 2) The Thai military government called a referendum on the new constitution on July 31 3) Poland’s ruling Law and Justice party dropped its backing for candidate Wnorowski to join the MPC 4) The IMF is starting to warn Ukraine 5) Press reports suggest some slippage in Brazil’s fiscal consolidation efforts 6) Mexico’s Finance Minister Videgaray acknowledged spending cut will be needed to maintain budgetary discipline 7) Elsewhere, Mexico’s President Pena Nieto replaced Pemex CEO Emilio Lozoya with Jose Gonzalez AnayaIn the EM equity space, Colombia (+0.3%), Chile (+0.2%), and Poland (-0.6%) have outperformed this week, while India (-6.6%), Czech Republic (-5.5%), and Hong Kong (-5.0%) have underperformed.  To put this in better context, MSCI EM fell -3.9% this week while MSCI DM fell -3.8%. In the EM local currency bond space, the Philippines (10-year yield -26 bp), Thailand (-25 bp), and Hong Kong (-17 bp) have outperformed this week, while Ukraine (10-year yield +62 bp), Colombia (+30 bp), and Brazil (+15 bp) have underperformed.  To put this in better context, the 10-year UST yield fell -15 bp this week. In the EM FX space, IDR (+1.0% vs. USD), SGD (+0.7% vs. USD), and CNH (+0.6% vs. USD) have outperformed this week, while MXN (-3.9% vs. USD), COP (-2.5% vs. USD), and ARS (-2.4% vs. USD) have underperformed.1) Indonesia announced it will allow full foreign ownership in many local industries in an effort to boost foreign investment.  It also loosened ownership limits in several industries, and the government said it was moving towards simplifying the limits to three tiers:  49%, 67%, and 100%.  President Jokowi said this was only the first round of loosening foreign investment rules, and that there would be several more rounds.  While this is a good medium-term development, this is not the best environment for foreign investment.  As such, we see little positive short-term impact from this move.

2) The Thai military government called a referendum on the new constitution on July 31.  This will reportedly be followed by a general election before the end of 2017, regardless of whether or not the new constitution is approved.  Deputy Prime Minister Wongsuwon said the government has a plan ready for the election if the constitution is rejected, but he did not give any further details.

3) Poland’s ruling Law and Justice party dropped its backing for candidate Wnorowski to join the MPC.  This is an interesting development.  With Law and Justice controlling both houses of parliament as well as the presidency, the party has carte blanche to remake the MPC however it wants to.  No reason was given as to why this candidate was dropped, and we may never know the real reason.  Whoever is nominated next, expectations are that the new MPC will have a more dovish slant than the old one, which has kept rates steady at 1.5% since March 2015.  A dovish MPC would be zloty-negative, of course.

4) The IMF is starting to warn Ukraine.  IMF head Lagarde warned that “Without a substantial new effort to invigorate governance reforms and fight corruption, it’s hard to see how the IMF-supported program can continue and be successful.”  This comes a week after reformist Economy Minister Abromavicius resigned abruptly.  President Poroshenko reaffirmed the government’s commitment to reform, but clearly he needs to do more to convince the IMF.

5) Press reports suggest some slippage in Brazil’s fiscal consolidation efforts.  A planned spending freeze has been delayed until March, making it virtually impossible to meet the 2016 fiscal targets.  Some reports say that a freeze of BRL25 bln is being discussed, much lower than the BRL50 bln that had been expected.  Elsewhere, the government will reportedly delay its social security reform proposal.  All these delays come just as congress returns from its recess and Carnival holidays.  Fundamentals continue to deteriorate, and adds to the political risks.

6) Mexico’s Finance Minister Videgaray acknowledged spending cut will be needed to maintain budgetary discipline.  He said spending cuts would start with Pemex, and that those cuts would have to be accompanied by additional cuts in overall government spending cuts.  Previously, Videgaray had stressed that spending cuts already in place would maintain the budgetary outlook.  This comes days after Governor Carstens warned that without spending cuts, especially at Pemex, interest rates would have to rise and “the process of adjustment would be much longer and more painful.”

7) Elsewhere, Mexico’s President Pena Nieto replaced Pemex CEO Emilio Lozoya with Jose Gonzalez Anaya.  We don't think this was expected, and Lozoya can hardly be blamed for low global oil prices.  There has also been some chatter about the government having to inject capital into Pemex, but we don't think anything has been finalized.  If Anaya is seen as more likely to enact the much-needed spending cuts and internal reforms at Pemex, it may pave the way for capital injections.