CitiFX | Corporate Solutions Group
Market commentary | October 2013
Emerging Markets: Is The Crisis Over?
Stephen Leach [email protected] +1 212-723-9332 Contents
Summary Themes The (misnamed) ‘Fragile 5’ Central bank response Outlook? Non-tradable currencies
1 Summary
Tradable currencies: is the crisis over? Yes – for most currencies in both the short- and medium-term This does not mean that currencies cannot depreciate further – some will in the normal turn of events But a few are still at risk – most obviously the Turkish lira Appreciation for the Chinese renminbi & a number of other Asian currencies Why did currencies rebound? Global factors – the Fed, China etc. Central bank signals – rather than intervention or tighter monetary policy per se
2 Summary
Non-tradable currencies: more problems ahead? The obvious candidates: Argentine peso, Egyptian pound, Pakistani rupee, Ukrainian hryvnia, Venezuelan bolivar A number of smaller currencies?
3 Summary
Two buckets……..
ARS The main Those tradable impacted EGP currencies primarily by PKR affected by domestic UAH global trends factors alone VEF …et al
4 Summary
DEPRECIATION vs. base currency: April 30 to October 18 0% -3% -6% -9% -12% -15% -18%
-21% -24% INR BRL MNT IDR UYU ZAR TRY ARS GHS MXN PYG THB CLP MYR PHP Maximum depreciation 18-Oct
Source: Reuters, own database
5 Summary
APPRECIATION vs. base currency: April 30 to October 18 12%
10%
8%
6%
4%
2%
0% EURHUF KRW UGX MAD ILS MUR TZS CNY TWD KWD Maximum appreciation 18-Oct
Source: Reuters, own database
6 Themes
Chinese rebalancing & commodity EMFX ‘Tapering’ of QE3 demand
Softer GDP growth as a constraint
7 Themes
FOREIGN HOLDINGS OF GOVERNMENT DEBT
Per cent of outstanding debt 50% Malaysia: not a risk of a ‘sudden stop’; 40% rather the risk of outflows 30%
20%
10%
0% | '08 | '09 | '10 | '11 | '12 | '13 | Korea Thailand Malaysia Indonesia
Source: Citi Asia Macro View, June 14, 2013
8 Themes
Appreciation? Countries with Higher current account surpluses or deficits funded with long-term yields Greater capital (direct investment?) difficulty in attracting portfolio capital or in raising Re-pricing external loans of EM risk Depreciation? Countries with current account deficits funded previously with portfolio capital or loans
The (supposedly) longer-term issue…………….
9 Themes
ASIA: Current Account Balances
Vietnam ? Thailand Taiwan Singapore Philippines Malaysia Korea 2014 Indonesia 2013 India Hong Kong China -6% -3% 0% 3% 6% 9% 12% 15% 18% Per cent of GDP
Source: Citi Global Economic Outlook & Strategy, September 2013
10 Themes
CEEMEA: Current Account Balances
Ukraine Turkey South Africa Serbia Russia Romania Poland Nigeria Israel 2014 Hungary 2013 Czech Rep. -10% -8% -6% -4% -2% 0% 2% 4% Per cent of GDP
Source: Citi Global Economic Outlook & Strategy, September 2013
11 Themes
Slower Chinese GDP Rebalancing of growth + Chinese economy
Slower growth in demand for Could demand actually industrial commodities decline?
Division between price & Flat-to-lower commodity prices volume?
Weaker balance of payments Trade & investment for commodity producers
12 Themes
CHINA:GDP growth
Per cent
12% Official target = 7.5%.... 11% ….or is it really 10% 7.0%?
9% Caveat: 7.5% growth adds as 8% much GDP as 11.5% just five 7% years ago 6% '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Source: Bloomberg for history, Citi Global Economic Outlook & Strategy September 2013
13 Themes
EXPORT COMPOSITION IN 2012
Per cent 100% Mexico is the standout in terms of 80% a low exposure to commodity exports 60% and thus to China 40%
20%
0% A Bra C Co Ecuador M Pe U Venezuela rge h exi ru zi ile lo ru gu n mbia c t l o a in y a
Agriculture Fuel/mining Industrial
Source: IIF, Latin America, Call of the Yield, March 2013; own calculations
14 Themes
BRAZIL: Exports to China & the U.S.
US$ bn, 12-mos rolling total 50 Not as exposed to commodities as 45 some, but China is To China 40 by far its largest single export market 35
30
25
20 To the United States 15
10 | 2009 | 2010 | 2011 | 2012 | 2013 |
Source: Bloomberg, own calculations
15 Themes
Current a/c deficit about US$24 bn
‘Tapering’ of QE3 FDI less than US$1.3 bn Large unfunded Dependence on commodity exports current a/c deficits Continuing labor unrest + Extremely large real wage increases China Sluggish growth = no rate increases + Longer-term political concerns
Local factors SOUTH AFRICASOUTH AFRICA + Large depreciation of the rand Economic ‘soft patch’ Extreme volatility
16 The ‘Fragile 5’
THE ‘FRAGILE 5’
Index, Apr 30 = 1.00 Starting point: May 1 1.30 when U.S. 10-year yields reached their 1.25 low 1.20 1.15 1.10 1.05 1.00 0.95 |M |J| J |A|S|O | BRL INR IDR TRY ZAR
Source: Reuters, own database
17 The ‘Fragile 5’
CURRENT A/C vs. DIRECT INVESTMENT
Per cent of GDP Based on the most 7% recent data 6% India, South Africa & Turkey have large 5% financing gaps = 4% risk of sustained FX 3% pressure 2% Brazil has a small 1% gap that can easily be filled by reserves 0% – if necessary Brazil India Indonesia S. Africa Turkey
Current a/c deficit Direct investment inflows
Source: various central banks
18 The ‘Fragile 5’
Risk factors Large financing Over- or under- Political gap? valued? constraints on policy Brazil No Over- Yes India Yes Under- Yes Indonesia Yes? OK Yes South Africa Yes OK ? Turkey Yes Over- ?
19 The ‘Fragile 5’
TURKEY: Current a/c vs. Capital a/c
US$ billion, rolling 12-month total 80 The Turkish government Current a/c 60 (sign reversed) forecasts a current a/c deficit of 7.1% of 40 GDP in 2013, falling to 5.5% by 2016
20 Portfolio capital Too slow & not enough 0 Net FDI
-20 | 2009 | 2010 | 2011 | 2012 | 2013 |
Source: Central Bank of Turkey
20 The ‘Fragile 5’
BRAZIL: Current a/c vs. Capital a/c
US$ bn, rolling 12-month total Current account 140 Portfolio capital deficit still being 120 covered 100 Can FDI be 80 sustained in a period of slower 60 commodity 40 Current a/c (sign reversed) demand?
20 Can Petrobras Net direct investment continue to 0 attract -20 financing? | 2009 | 2010 | 2011 | 2012 | 2013 |
Source: Banco Central do Brasil
21 The ‘Fragile 5’
GDP GROWTH: Current vs. Previous Trend 10% Almost a common 8% theme: Less resistance 6% to depreciation at a time of 4% disappointing GDP growth 2%
0% Brazil India Indonesia S. Africa Turkey 2012 2013 2014
Average 2005-2011
Source: Citi Global Economic Outlook & Strategy, September 2013
22 Central bank response
Signaling can be critical Brazil: . Depreciation stopped only with an intervention package, not with intervention India: . Depreciation stopped only when the new RBI governor outlined his policy approach, not with higher interest rates Indonesia: . The central bank pulled back from distorting the market
23 Central bank response
Signaling can be critical South Africa: . Is the best signal no signal at all -- a laissez-faire approach to the exchange rate Turkey: . Unorthodox policies have worked so far but signals have been confused if not confusing
24 Central bank response
BRAZILIAN REAL: 2012-2013
Reais per U.S. dollar 2.5 Intervention package announced August 2.4 22 2.3 Represented a signal 2.2 that the central bank 2.1 would resist further 2.0 depreciation 1.9 Previous intervention 1.8 Intervention package announced had been focused on ‘smoothing’ the 1.7 depreciation, not 1.6 stopping it | 2012 | 2013 |
Source: Reuters, own database
25 Central bank response
BRAZIL: An extremely convoluted foreign exchange market – with a larger role played by domestic futures than anywhere else Two types of intervention: . ‘Currency swaps’ – transactions in the domestic futures market, with the central bank selling a dollar-real hedge with net settlement at maturity – no net drain on liquidity, the equivalent of sterilized intervention . ‘FX repos’ – sales of U.S. dollars in the spot market, with a simultaneous purchase at some specified future date -- both pre-announced, through an auction mechanism
26 Central bank response
INDIAN RUPEE
Rupees per U.S. dollar Trend reversed only 70 with RBI’s Rajan announcing policy of 67 “transparency & 64 predictability”
61
58
55
52 |M |J| J |A|S|O |
Source: Reuters, own database
27 Central bank response
BRAZIL & INDIA: But the problem they both face is “how to reverse course” . Neither central bank favors a further appreciation in light of the current weak economic performance . Central Bank of Brazil is continuing to raise interest rates to fight inflation
28 Central bank response
BRAZIL: Interest Rates vs. Inflation
Per cent . No choice but to 14% respond to inflationary 12% pressures 10% Selic overnight rate 8%
6% Inflation 4% 2% Inflation target band 0% | '09 | '10 | '11 | '12 | '13 | '14 | '15 |
. Financial repression an Source: Bloomberg, own database ongoing problem
29 Central bank response
INDONESIAN RUPEE
Rupiah per U.S. dollar Local banks were not 12,000 able to quote accurate transaction 11,500 rates
11,000 Unconfirmed reports that actual spot rates 10,500 hit 12,000
10,000
9,500 |M |J| J |A|S|O | Domestic close Singapore NDF fix
Source: Reuters, Bloomberg, own database
30 Central bank response
INDONESIA: The whole range of measures: . Higher interest rates, . Intervention, . New BI facilities to attract hard currency deposits & . Interference in the market mechanism Recovery? . Clear sense that it was only when BI allowed the market to function
31 Central bank response
SOUTH AFRICA: None No scope for higher rates due to economic weakness No scope for intervention due to low level of reserves Trend depreciation due to (wage) inflation
32 Central bank response
TURKISH LIRA
Basket value No significant 2.40 recovery 2.35 2.30 2.25 2.20 2.15 2.10 2.05 |M |J| J |A|S|O |
Source: Reuters, own database
33 Central bank response
TURKEY: Weighted average cost of central bank funding
Per cent An unorthodox 9 & erratic policy 8 Refuse to raise 7 interest rates to defend currency 6 5 4 3 2 |M |J| J |A|S|O | Avg. funding cost Borrowing rate Lending rate Repo rate
Source: Central Bank of Turkey
34 Central bank response
TURKEY:
Goals Higher interest rates Stronger currency
Fight inflation Higher reserve Reduced credit requirements growth
Reduce current a/c deficit Lower interest rates Weaker currency
(More recently) Intervention Willing to spend Prevent excessive US$40 bn depreciation Reserve option mechanism
Variable liquidity injections
35 Outlook
U.S. fiscal crisis
Time for emerging markets to adjust Less robust U.S. economy Changes risk attitudes toward emerging markets
Delay in tapering
36 Outlook
INDIA: The key issue: reform under a new government
Strong coalition Weak coalition government government
Committed to reform Limited reforms
Upswing in growth Weak growth
Upswing in investment Anemic investment inflows inflows
Exchange rate stability Further depreciation
37 Outlook
TURKEY:
A resumption of No effective strategy for downward pressure on reducing current account the lira deficit + and/or Poor outlook for increasing foreign direct The adoption of more investment conventional macro- economic policies
38 Non-global currencies
Risk of large discrete devaluations ….. A lack of FX reserves ARS Or currencies being EGP FX markets not working/ allowed to ‘float’ being allowed to work PKR Black markets UAH Dysfunctional institutional/political Payment arrears VEF structure Debt restructurings
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