Market Insights en-gb Mon, 18 Jun 2018 10:33:05 GMT 1882 Brazil: The Kids Aren’t Alright Despite Finance Ministry’s efforts to clean up public accounts and reduce fiscal risk in the future, the strategy for fiscal adjustment, as with the spending cap, has been gradual. As a consequence, one could not discard the risk of creeping insolvency, which could threaten the recently secured economic stability. Unemployment among youths is climbing 15 Jun 2018 Brazil Market Insights 66 Fri, 15 Jun 2018 16:56:21 GMT This gradualism doesn’t stem from mistakes in diagnostics or a lack of effort from the economic team, but from the inherent rigidity of the budget. Since 2015, obligatory spending covers practically all the Federal Government’s net income. In 2017 it was equivalent to 101% of the net income, with 53% spent on Social Security.         

Austerity achieved through executive power is not sufficient to achieve the necessary fiscal adjustment: Congress needs to be a partner in this enterprise, approving structural reforms that reduce budget rigidity. So far Congress has shown little support for spending cuts, and moreover, on many occasions dealt a blow to the government’s efforts, without much concern for providing alternative sources of money. The next president will need to be quite politically shrewd to overcome this obstacle.

Gradualism is politically more palatable but also carries many risks. Countries become more vulnerable to the swings in investor sentiment and strength of global liquidity. 

The recent Argentinian experience is a fitting example of this. The Macri government wasn’t able to reduce public deficit (4.8% of GDP), thus compromising the economic environment. The inflationary financing of this deficit (1.5% of the GDP, according to the IMF) creates additional inflationary pressures, which is particularly worrying in a such a dollarized economy. This erodes the credibility of the Central Bank, which also didn’t really do enough due diligence – and inevitably had to resort to fairly drastic measures to stem a rout on the currency.

External accounts are also affected by the public deficit and the elevated inflation that depreciates the Argentinian peso in real terms, dealing more blows to a country that defaulted on their debt in a not so distant past.

The Brazilian situation is less complex in the short term, as the Temer government managed to reduce inflation, and the external fundamentals are solid. The challenges for the next president, however, will not be too different to those faced by Macri. Brazil urgently needs reforms to consolidate the economic recovery and manage the consequences of an ageing population. 

It is important to remember that these challenges will also concern local governors. After all, payroll consumes 60% of the net income; the number of retirees and pensioners is rising further.

A gradualist approach taken by the next government, with a tentative Social Security reform (assuming it will be on the next president’s radar) and the weak overall reform agenda, might actually undermine public policies, job creation and income growth.

A scenario such as this would be particularly harmful to children that suffer from inequality of opportunities, in part due to the collapse of public services, and the youth who would also feel the rise in unemployment. But the consequences will extend to all, with the mass violence and a practically stagnant income per capita that usually follows.

This is a disheartening picture. Unemployment among Brazilians in the 18-24 age range reached 28% in the first quarter of this year. Then there are the “neither-neithers” – neither study, neither work – that reaches 23% of the group between 15-29 years in 2017. What’s even more depressing is the number of youths, 170,000 of them, that abandoned higher education in order to support their families, as well as the human capital that flowed to other nations.

The number of permanent emigrants from Brazil doubled between 2013-14 and 2017. Of those that migrated to the US, only 6% didn’t have higher education in 2017, compared to 22% in 2013, according to research by JBJ Partners.

As consequence of this process, youths, who are naturally more impulsive, are also more susceptible to populist discourse among presidential candidates. There is no leeway for gradualism. The young are growing impatient all around the world and their need for urgency has to be addressed.

Macro Policy Americas Brazil
1881 Reforms Amplify Uncertainty in Saudi Arabia’s Real Estate Sector Saudi Arabia’s grand ambitions to create new large-scale residential, industrial, “shoppertainment” and other mixed-use developments could be a boon for the country’s – indeed the region’s – real estate developers, investors and financiers. But the sector’s potential has never looked so mixed. The Kingdom moves forward with ambitious agenda 14 Jun 2018 Middle East Market Insights 43 Thu, 14 Jun 2018 15:30:40 GMT The Saudi Arabian property market has undergone tremendous change over the past two years as the region’s largest oil producer was forced to adjust to larger deficits by curbing spending and raising taxes, which weighed on consumer sentiment and salaries alike. Rents on residential and commercial space have largely remained flat since 2016 in the country’s largest cities, while the volume and pace of transactions came under pressure in 2017, according to Knight Frank, a global estate agency.

The residential sector remained fairly unpredictable in 2017, with rents in some parts of the country – like mid-tier residential in Riyadh – jumping by high double digits, and others – like high-end villas – dropping by near equal amounts.

“Economic uncertainties continued to weigh on occupier expansion plans in 2017. This is particularly true in Riyadh where government entities remain a key occupier of office space,” explained Raya Majdalani, one of the firm’s research managers, in a recent report.

“This lacklustre performance could be mainly attributed to tightening market liquidity triggered by the fall in oil prices. This is further exacerbated by a combination of more inherent factors, namely the lack of affordability and limited access to finance, a supply shortage in the mid-to-lower end of the market, as well as the lack of suitability of the existing stock of residential units.”

But despite those cuts and a flatlining real estate market, the government is pushing ahead with significant new initiatives in the sector – under its flagship Vision 2030 and National Transformation Plan – as part of its wider USD19bn bid to stimulate the non-oil segments of the economy.

Its objectives, which are anything but modest, include increasing the percentage of the real estate sector’s contribution to GDP from 5% to 10% by 2020 (the regional benchmark is 13%, and internationally, 20%); increasing the annual growth rate in the real estate sector from 4% to 7% by 2020 (regional benchmark of 6%; internationally, 11%); reducing the average waiting period for citizens to obtain housing financing from 15 years to 5 by 2020 target; and increasing the household ownership ratio from 47% to 70% by 2030.

To complement new funding and help increase home ownership, the Saudi government converted its state-owned housing fund into a domestic lender, the Real Estate Development Fund (REDF), tasked with offering cost-competitive mortgage financing solutions for residents in conjunction with the private sector.

The fund previously offered interest-free loans for buyers of new property developments, but its mandate has since expanded to include existing properties; it is now tasked with cultivating a vibrant secondary mortgage market by aggregating and packaging portfolios of mortgages than can then be sold off as mortgage-backed securities to mainstream domestic and international investors. This is line with the Kingdom’s bid to boost the size of the mortgage market to more than SAR502bn (approx. USD133bn) by 2020, up from roughly SAR270bn currently. Analysts say this is optimistic, but not wholly unachievable.

“The key driver for the sector at the moment is the Vision 2030 and the [National Transformation Plan] 2020,” explains Ibrahim Al Buloushi, Country Head for Saudi Arabia at JLL MENA and member of the Housing Committee in JCCI, a group mostly composed of experts from the Ministry of Housing and Municipal, Rural Affairs, Ministry of Commerce, Justice, and the National Guard. The Committee is tasked with enhancing relations between real estate developers and the government, and helping to provide affordable housing in Jeddah.

“The KSA government has taken many steps in the right direction and I am positive about the achievability of their objectives,” he added.

Grand Ambitions, Equally-Sized Challenges

Indeed, the pace at which the government is moving on the affordable housing portfolio is as impressive as it is ambitious. In conjunction with the National Housing Company, effectively the Ministry of Housing’s investment arm, REDF has already launched five housing programmes this year and allocated more than 105,000 residential and financial products during the first five months of 2018, with a target of 300,000 by the year’s end.

In early May, the Ministry of Housing and REDF announced a further 8,000 units would be developed in Makkah and Eastern Province, with a further 5,100 units to be developed on plots in Riyadh, Qassim, the Eastern Province, Asir, the northern border region and Al-Jawf.

But reforming a sector rife with inefficiencies won’t be easy. The average time required to approve and license new residential real estate development projects is currently about 730 days – an eternity by most standards.

How the government plans to hit its target of 60 days by 2020 and simplify the legal and procedural structures surrounding the approval process, without significantly adding headcount at the Ministry of Housing, is somewhat of a mystery. And, if those efficiencies were to be achieved, dealing with the rapid acceleration in occupancy that would result from them would be difficult.

“Renting the three million square meters of built-up areas at reasonable prices, or even achieving decent occupancy rates, will be very challenging indeed,” Al Buloushi said. Prices are set to rise as new commercial and residential property sales are now subject to the 5% VAT, which came into force 1 January 2018 (residential rents are exempt, as are purchases for first time homebuyers up to a purchase value of SAR850,000).

One way to achieve this, says Nawaf Saymeh, Director of Advisory Services and Capital Markets at Colliers International KSA, is to transform monotype real estate into more mixed-use developments, enhancing their appeal to a broader swathe of real estate buyers and boosting local businesses at the same time. Vision 2030 aims to repurpose some of the built-up areas and changes the real estate mix, increasing the allocation for residential accommodation, services and hospitality areas.

Another is to provide buyside stimulus. In February this year, the government announced a plan to pump USD32bn into subsidising home mortgage loans, including a USD6.3bn loan guarantee programme, through 2030.

Housing Minister and REDF chairman Majed Al Hogail says the move will help boost occupancy and reduce a rapid accumulation of private sector risk in the residential real estate sector, but analysts say close monitoring of the programme will be key if a bubble is to be avoided. Real estate financing as a percentage of GDP is just 5% of Saudi Arabia, compared with 69% in the United States and 74% of the United Kingdom, so there is considerable room to grow.

Sentiment on the ground is that the reforms are working, and the latest data coming out of the Kingdom is starting to back up that perception. Real estate loans increased 5.7% during the first quarter of 2018 according to SAMA, as did private sector lending on aggregate (0.7%), a sign that the reforms may be starting to take hold and confidence beginning to return.

REDF’s recently anounced plans to support fixed-rate long-term mortgages later this year – a welcome shift from the variable-rate loans that currently dominate the segment – will also help insulate borrowers from the challenges of living in a currency-pegged environment with rising interest rates and boost home loans in the Kingdom.

Projects on the Table, but Will Money Follow?

The government is also supporting a number of large real estate PPPs and mega projects which are poised to create additional residential and commercial supply. These include Neom, a USD500bn 26,500km2 “transnational” city that along the Gulf of Aqaba and the Red Sea that extends across the borders to Jordan and Egypt, which is pegged to become the Kingdom’s high-tech hub, and Qiddya, an USD8bn 334km2 entertainment complex said to dwarf Disney World by a factor of three, and a 34,000km2 luxury tourism development along the Red Sea between Umluf and Al Wajh, two cities in the north of the Kingdom.

Finally, there is the King Abdullah Financial District, a new development under construction near King Fahad Road in the Al Aqeeq area of Riyadh, which is more than just a supersized version of the Dubai International Financial Centre. Upon completion, the 17.2 million square foot development, originally conceived over a decade ago, will include more than 60 towers of residential, retail and commercial space; have its own monorail; and house up to 50,000 residents.

Most of these and other real estate projects are being funded by local banks. The Saudi sovereign wealth fund, Public Investment Fund (PIF), is supporting these projects – but international liquidity on an almost unparalleled scale will be required to bring them to fruition. That in itself will be a huge challenge for a number of reasons, according to bankers, despite the growing chorus of banks securing investment banking licenses in the Kingdom.

“There is a fairly well-established track record for foreign direct investment in Saudi Arabia and international lending in the country has picked up significantly in recent years, but the amounts we are talking about here are just eye watering,” one UAE-based banker explained. “Is there a big enough market to attract hundreds of billions from foreign investors and banks in five years? That isn’t clear.”

“The other problem is that save for one or two large-scale developers known outside the Kingdom, many don’t actually have international exposure from a banking perspective, which could be an uphill battle for many of these companies, and challenging for us from a KYC perspective.”

Developers are finding other ways of tapping into both domestic and international liquidity. Listed real estate investment trusts (REITs), a relatively new asset class for the Kingdom, are starting to gain more traction with investors. Eight REITs were listed on the Tadawul, Saudi Arabia’s largest stock exchange, in 2017. That number is set to rise – but analysts say only if they are underpinned by high-quality assets.

There is little doubt the debt markets are to play a growing role in funding these and other ambitious real estate projects – but again, the bond market will only be able to absorb so much, particularly if both the sovereign and real estate developers start turning to international investors to essentially fund the same projects. Some believe sukuk, which is structurally well-suited to the real estate sector and ethically aligned with the Kingdom’s religious base, could be the answer.

“There is huge appetite for Saudi risk, and real estate is particularly appealing because there are tangible assets in play – so there is breadth in terms of the types of instruments that could play a meaningful role in financing these projects. There is also potentially huge upside, given the relatively low exposure of international banks to the sector,” the banker added.

Projects Macro Policy Middle East
1880 Sanctions Unsanctioned: Russia Becomes EM’s Riskiest Safe Haven By late 2017, to the surprise of naysayers, the Russian economy appeared to have successfully navigated a challenging sanctions-riddled period and by Q1 2018 was looking to be one of the better EM stories on the market. But the latest escalation in tensions with Washington, along with broader EM outflows, have seen the country’s issuance pipeline dry up even as economic fundamentals remain strong, especially relative to the struggling peers like Turkey and Argentina. The economy looks stronger as World Cup nears 13 Jun 2018 Russia & CIS Market Insights 57 Wed, 13 Jun 2018 13:28:27 GMT Russian president Vladimir Putin has earlier this month signed the “counter-sanctions” bill, enacting into law a range of broad – and somewhat vague – measures, drawn up by the members of the Duma in response to the most recent round of Western sanctions. While in the past Russia’s response to restrictions stopped short of targeting foreign entities and businesses, and instead focussed largely on import restrictions, this time the Kremlin has taken a harder stance.

The new legislation provides a framework for countering various types of restrictions that the West has employed in its stand-off with Moscow following the annexation of Crimea in 2014. It gives the president, among other things, the power to sever ties with unfriendly countries, and to ban trade of goods with those countries.

Legal experts have noted that the wording of the new regulations has been left markedly vague – perhaps to provide the authorities with maximum scope for prosecuting some transgressors, without creating a legal duty to do so in every case, particularly when it comes to systematically important local FIs.

“The bill generally gives broad powers to President Putin and the Russian Government to introduce specific countersanctions at their discretion,” Baker & Mackenzie, a consultancy, said in a note. “The lawmakers did not add any new measures as regards the scope of countersanctions as compared to the previous second reading, but broadened the application of the bill to all entities that are “directly or indirectly controlled by, or affiliated with, “unamicable” foreign states”.

The third version also includes an amendment stating that any actions or measures aimed at countering foreign sanctions mustn’t involve critically important foreign goods and imports, which cannot be effectively replaced by local produce.

Criminalizing Compliance with Sanctions

While the countermeasures bill is likely to give legal and compliance departments of international companies working in Russia a headache, two other legislative initiatives currently under discussion could be of far greater concern. The draft bills, approved by the Duma in the first reading, call to criminal and administrative liability for compliance with anti-Russia sanctions, including fines of up to RUB50mn and possible jail time.

Unlike the countersanctions bill, these two initiatives stalled in the Duma after a backlash from pro-business lobbyists concerned about a possible exodus of foreign firms caught up in legal jeopardy. While Baker & McKenzie experts expect that the Draft to be “considerably revised and softened,” the uncertainty is taking a toll on the business climate in Russia – which is already rattled by escalating tensions and tit-for-tat measures.

“The new US sanctions leave many uncertainties. Consequently, companies need to seek expert legal advice to ensure appropriate compliance,” commented Bruce Johnston, Head of International Finance at Morgan Lewis.

Johnston also noted that there is precedent for the counter measures currently mulled by Moscow.

“[Outlawing observance of anti-Russian sanctions] would cause many problems for Russian and non-Russian companies operating in Russia. The same applies to any EU blocking laws. Remember that the EU already has blocking laws against the US sanctions against Cuba. It is illegal for EU persons to comply with the US sanctions against Cuba,” Johnston noted.

Richard Segal, Senior Analyst at Manulife Asset Management, admits that while the new bill discussed by the lawmakers is making some market participants “genuinely concerned, others expect it to be watered down.”

“Push comes to shove, if foreign firms are faced with a choice between US prosecutors and Russia, they might try to create SPVs or subsidiaries to evade punishment, but it’s too early to tell,” Segal speculated.

Controlled Devaluation

Some of the earlier rally in Russian assets and improved macro picture can be attributed to the market’s rebalancing following the US Treasury’s decision not to target Russian debt, and reluctance to expand the scope of the existing sanctions.  

“The market is still suffering a bit, but for the real economy, there doesn’t seem to be much impact: our inflation data suggests that the fall in the rouble hasn’t caused much inflation; activity data suggests economy has strengthened in Q2. So it hadn’t had a significant hit to the economy,” said William Jackson, Senior emerging market economist at Capital Economics.

“Russia has sort of ridden out this latest of omens in EMs’, but you have to remember that earlier in the year it was already feeling the heat of the US sanctions, which caused the rouble and Russian equities to fall sharply and bond yields to spike. So the Russian market has calmed down, but the rouble has remained weaker than before the sanctions.”

The latter is a point that could be easily missed if one judges solely by the USD/RUB chart. While the rouble has remained relatively steady to the dollar and the Euro, making up most of the losses from the 9% drop on the sanctions shock in April, it has increasingly become decoupled from the rallying oil price, leading some to speculate that the financial authorities have essentially done a “quiet devaluation” of the currency by around 20%.

Maxim Oreshkin, the Minister of Economic Development, admitted as much on the sidelines of SPIEF18, claiming that a weaker rouble increases Russia’s competitiveness and boosts export profit.

Oreshkin pointed to a budget rule that calls for the Finance Ministry to buy hard currency in weekly auctions with any additional profits made from oil exports – i.e. when the price is above the budgeted 40 dollars per barrel.

“If we hadn’t done that, then at 80 dollars per barrel the rouble would soar up to 50 per USD mark, as it was in 2014, and would stay there,” Oreshkin conceded. “The government’s approach is such that whether oil is rising or falling, it no longer shocks the exports market or threatens overall stability,” the minister explained.

As a result, while oil price grew by about 80% compared to same time last year, RUB vs USD actually weakened slightly to RUB62.1 per USD, compared to RUB59.2 with oil at USD44 per barrel. According to the MinFin’s official statistics, that policy in Q1 2018 has allowed it to top up the federal budget with 80% of all export profits, or USD13.3bn.

Segal explained that part of the explanation is that the current range has become the “new normal” and the markets have “gotten used to it.” According to Jackson, the pressures of a strong dollar on EM currencies is another significant factor. 

“It hasn’t helped that there’s been a lot of turmoil in EM financial markets more broadly – in a more benign environment we could have seen the oil/rouble relationship reassert itself more strongly. But in the current environment of a strong dollar that is unlikely,” Jackson said.

Segal, likewise, admitted that there have been some cash injections from the CBR, but the main issue is the change in overall environment and monetary policy.

“The CBR will likely keep rates unchanged until there is more clarity and is unlikely to hike for now; higher oil supports the overall environment. The economy is quite soft, growth is just over 1%, which is an improvement on the previous year, but not strong enough yet. The low inflation was surprising, and should keep the central bank happy, as it would rather meet the target than overshoot.”

Outflows Intensify

For a commodity seller like Russia, keeping exporters happy is already half the battle, but it doesn’t solve all the issues – and also raises more questions for foreign investors, who may be missing out on additional profits due the currency being kept artificially cheap. And as a more bearish sentiment engulfs EM assets in recent weeks, the arguments for and benefits of staying in will need to significantly outweigh the risks.

So far, the capital outflows have not hit Russia as hard as some of the shakier EM economies – but they are nonetheless substantial. According to Bloomberg, international investors have sold off roughly RUB200bn (USD3bn) worth of Russian sovereign bonds (OFZs) since April, when the country was hit by the latest round of sanctions.

With corruption still posing a major challenge for the economy, huge volumes of cash are still being siphoned out of the country via offshores (such as Cyprus and the British Virgin Islands) – around USD42bn over the past year, according to Central Bank statistics, or twice as much as the government spends on education and healthcare.

While money is pouring out, the global EM rout and threat of further sanctions on Russia are making it difficult for new capital to come in, even as the benefits of monetary easing carried out by the Central Bank are beginning to bear fruit.

“It does seem credit conditions have improved over the past few years, with credit growth picking up after a big slump in 2015,” Jackson commented. “The CBR left rates unchanged in the last meeting late April, as the fall in the currency made them a bit cautious, leading to a break in the easing cycle. The statement was quite dovish, highlighted that inflation pressures were weak and left the door open for more cuts going forward.”

“Our forecast is 6% for the end of the year, compared to 7.25% now; maybe some of those cuts will come in 2019, but we are probably more dovish on this than the financial markets, which were pricing in cuts to about 6.5% before the sanctions; now that pricing outlook remains unchanged for the whole year suggests a bit of an overreaction, given that the rouble has stabilized and inflation remains very weak.”

Pipeline Dries Up

With low external debt, solid fundamentals, oil on the rise, the soccer World Cup around the corner and presidential elections out of the way, the Russian economy exudes a sense of stability – albeit with weak growth prospects – that is sorely lacking in other subinvestment-grade economies.

“There is also some comfort from the fact that the most recent round of sanctions did not target Russian sovereign debt, but focussed on individuals and some quasi-corporates. So while uncertainty remains globally, and over sanctions, Russia will remain attractive, buoyed by the combination of a weak rouble and higher oil,” said Segal commented, conceding that the speed of the recent oil rally makes him suspicious about how sustained it will be.

End of 2017 and start of this year Russian issuers have been quite prolific. Back in March the sovereign tapped the markets with a USD4bn Eurobond, Gazprom followed up with a GBP850mn Eurobond and a flurry of smaller deals were announced in following weeks.

But that deal flow was cut short, however, as the latest round of sanctions was announced and clouds began to form over broader EM markets in April. At least one deal was pulled in the last minute due to low pricing, according to people close to the deal, with several other international issuances, by likes of Lukoil and Rosseti, and the Finance Ministry, postponed indefinitely. Some estimates suggest that average yields on 10-year sovereign notes rose as much as 40bp compared to February’s lows.

One factor that dampened demand for (and pushed up the yield premiums on) Russian state-linked companies and quasi-corporates is the case of Rusal, whose main shareholder Oleg Deripaska was hit by individual sanctions that led to a 40% plunge in share price.

The situation was exacerbated by the suddenness of the move by US Treasury (and a lack of unity with its European counterparts), and the ensuing confusion as some of the restrictions on Rusal were later pulled back.

For now, according to Johnston, investors are fearing the worst – additional stricter measures – but hoping for an improvement (and potentially full removal of sanctions against Rusal). That case, however, raised another painful theme for investors, one that recently arose with regards to another sanctioned entity, Venezuela’s PDVSA: what are the legal repercussions of a company’s failure to pay a coupon on its bonds, even if it is willing?

“This is a complex area, and dependent upon the governing law of a loan or bonds, and the place of payment,” Johnston explained. “It is possible that the English courts would enforce a coupon payment and accelerated debt for English law bonds with payments outside the United States. The English Court of Appeal did something similar contrary to US sanctions against Libya in the 1980s.”

Going Long on the Sovereigns

Whether or not Rusal will eventually resolve its issues, the reputational damage was enough to spook the markets and blow shut the international issuance window even as there is scope for interest rates and yields to come down. As a result, some corporates, like Polyus Gold, are using this opportunity to buyback existing Eurobonds, while many others will likely turn to the local markets.

“Going forward,” commented Segal. “Local issues are more likely; this in part due to sanctions-related uncertainty limiting banks’ involvement in Russia and the decline of global environment for new issues. But another reason is that Russian companies have borrowed enough in Q1 and are likely to tap only if they fear costs could rise even further.”

Local instruments, should still remain relatively attractive though, particularly on the longer duration side. ING analysts, for example, were in favour of a switch from RUSSIA 4.25% 27s / 4.375% 29s to RUSSIA 5.25% 47s.

They cited three key factors in their note, including the notion that “the recent steepening in the RUSSIA 10/30yr has run its course, with the spread differential as wide as before the announcement of the new sanctions” and “the lower cash price of the 2047 notes adding some protection” with regards to future geopolitical escalations.

“Third, RUSSIA 10/30yr has lagged vs global peers, which have flattened since early April. A sustained flatter curve in 10/30yr US Treasury should be supportive for long-end EM sovereign bonds,” the analysts concluded.

For now, it appears that with careful navigation of sanctions (and possible counter-sanctions) and a targeted approach, opportunities will pop up for international investors keen to gain exposure to the Russian market. But they will need to keep their eyes open and their ears to the ground.

Macro Currencies Policy Russia & CIS
1879 Bank of Singapore's Todd Schubert on GCC Credits and Fiscal Reform Effort Todd Schubert, Managing Director, Fixed Income Research at Bank of Singapore sat down with us at the Bonds, Loans & Sukuk 2018 conference in Dubai to talk about GCC credits from both relative value and absolute perspectives, and assess the success of key fiscal reform efforts undertaken in the region. Market insights from the conference sidelines 12 Jun 2018 Middle East Market Insights 43 Tue, 12 Jun 2018 14:59:47 GMT On a relative basis, GCC credits offer quite a compelling value right now, the banker insists.

Macro Policy Middle East
1878 Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead EM FX ended Friday on a mixed note, capping off a roller coaster week for some of the more vulnerable currencies. We expect continued efforts by EM policymakers to inject some stability into the markets. However, we believe the underlying dollar rally remains intact. Central bank meetings in the US, eurozone, and Japan this week are likely to drive home that point. Head of EM Strategy Win Thin on key data drivers this week 11 Jun 2018 Global Market Insights 55 Mon, 11 Jun 2018 11:41:01 GMT China reports May money and new loan data this week, but no date has been set. It reports May retail sales and IP Thursday. The former is expected to rise 9.6% y/y while the latter is expected to rise 7.0% y/y. Overall, markets remain comfortable with the mainland economic outlook.

Czech Republic reports May CPI Monday, which is expected to rise 2.1% y/y vs. 1.9% in April. If so, it would be the highest rate since and January and back in the top half of the 1-3% target range. Central bank officials have sounded more hawkish lately. However, the next policy meeting June 27 seems too soon for a hike.

Israel central bank releases its minutes Monday. May trade will be reported Wednesday, followed by Q1 current account data Thursday. May CPI will be reported Friday, which is expected to rise 0.5% y/y vs. 0.4% in April. If so, inflation would still be well below the 1-3% target range. Next policy meeting is July 9, no change expected then.

Turkey reports April current account and Q1 GDP Monday. Growth is expected at 7.0% y/y vs. 7.3% in Q4, while the current account deficit is expected at -$5.2 bln. Turkey then reports April IP Tuesday, which is expected to rise 6.2% y/y vs. 7.6% in March.

Mexico reports April IP Monday. With the central bank likely to deliver another rate hike on June 20, the economic outlook has deteriorated. In addition, trade tensions with the US are not helping matters ahead of the July 1 election.

Singapore reports April retail sales Tuesday, which are expected to rise 1.8% y/y vs. -1.5% in March. The economy remains vulnerable and so we do not believe the MAS will tighten again at its next semiannual policy meeting in October. CPI rose only 0.1% y/y in April, though the MAS does not have an explicit inflation target.

India reports May CPI and April IP Tuesday. The former is expected to rise 4.8% y/y vs. 4.6% in April, while the latter is expected to rise 6.0% y/y vs. 4.4% in March. May WPI will be reported Thursday, which is expected to rise 4.0% y/y vs. 3.2% in April. Next policy meeting is August 1. If price pressures continue to rise, another 25 bp hike then seems likely.

South Africa reports April retail sales Wednesday, which are expected to rise 4.2% y/y vs. 4.8% in March. Market sentiment remain sour after the weaker than expected Q1 GDP report, so investors will be keen to see if the slowdown carried over into Q2. For now, SARB is seen remaining on hold. Next policy meeting is July 19, no change expected then.

Brazil reports April retail sales Wednesday. With significant COPOM tightening now priced in, the economic outlook has gotten weaker. Next policy meeting is June 20 and a 50 bp hike to 7.0% is expected.

Chile central bank meets Wednesday and is expected to keep rates steady at 2.5%. CPI rose 2.0% y/y in May, right at the bottom of the 2-4% target range. The central bank has signaled an end to the easing cycle, but low price pressures will allow the bank to resume cutting if the economy were to slow.

Central Bank of Russia meets Friday and is expected to keep rates steady at 7.25%. However, the market is split. Of the 27 analysts polled by Bloomberg, 16 see steady rates and 11 see a 25 bp cut to 7.0%. Central bank officials tilted more dovish after May inflation data came in lower than expected. However, we think a rate cut this week may be too soon, especially given ongoing EM stresses.

Check out the EM Preview for the Week Ahead and other musings & insights on Emerging Markets at BBH’s “Mind on the Markets” blog.

Global Currencies Policy