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Investor Insights

Brown Brothers Harriman: EM Preview of the Week Ahead

EM is coming off a difficult week in which all the economic data underscored just how bad the global outlook has gotten. While risk sentiment ended last week on an upbeat note, we believe EM and other risk assets will have difficulty getting much traction as the data continue to worsen. Oil prices remain under pressure and that is likely to weight on sentiment as well.

AMERICAS

Mexico reports mid-April CPI Thursday. Headline inflation is expected at 2.19% y/y vs. 3.71% in mid-March. If so, inflation would be in the lower half of the 2-4% target range for the first time since December. Banco de Mexico cut rates 50 bp to 6.5% last month. Next policy meeting is May 14 and another 50 bp cut to 6.0% is expected. Late Friday, Moody’s downgraded Mexico a notch to Baa1 with negative outlook. We are in the process of updating our EM sovereign rating model but note that we already had Mexico at BBB last November. Things have gotten much worse and we suspect Mexico is in danger of eventually losing its investment grade rating.

Brazil reports March current account and FDI data Friday. The external accounts should remain in solid shape due to the slowdown, but the fiscal accounts are likely to become a larger concern. We also see upside risks to the budget deficit given the likely virus-related spending that’s in the pipeline. The economy remains soft and so COPOM is expected to cut rates 50 bp to 3.25% at its next meeting May 6.

EUROPE/MIDDLE EAST/AFRICA

Poland reports March industrial output and PPI Tuesday. Both are expected to contract y/y as the impact of the coronavirus is felt. Real retail sales will be reported Wednesday, which are expected to contract -5.1% y/y. Central bank minutes will be released Thursday. While inflation was above the 2-4% target at 4.6% y/y in March, this did not prevent the bank from slashing rates 50 bp to 0.5% at its meeting this month. Next policy meeting is May 6. While rates are likely to be kept steady, we suspect more unconventional easing may be seen then.

South Africa reports March CPI Wednesday. Inflation was 4.6% in February, near the middle of the 3-6% target range. Given the dire outlook for the economy, the SARB just delivered an emergency 100 bp cut to 4.25% last week. Next policy meeting is May 21 and if inflation remains well-behaved, another cut then seems likely.

Turkey central bank meets Wednesday and is expected to cut rates 50 bp to 9.25%. As usual, expectations are all over the place and range from no cut to cuts of 25, 50, 75, and 100 bp. CPI rose 11.9% y/y in March. While still well above the 3-7% target range, the direction is downward and so the bank is likely to continue pushing real rates further into negative territory.

Russia reports March IP Wednesday, which is expected to contract -0.4% y/y vs. +3.3% in February. The central bank then meets Friday and is expected to cut rates 25 bp to 5.75%. However, estimates range from no cut to cuts of 25, 50, and 75 bp. CPI rose 2.5% y/y in March, well below the 4% target. With oil continuing to sink despite the output cut, we see risks of a dovish surprise this week.

ASIA

China publishes its April benchmark loan rates Monday. The 1-year Loan Prime Rate is expected to fall 20 bp to 3.85%, while the 5-year rate is expected to fall 10 bp to 4.65%. Recall the PBOC eased liquidity last week by cutting the rate on its 1-year Medium-Term Lending facility (MLF) rate by 20 bp to a record low 2.95%. This was the largest single move for the facility, which has been cut two other times (5 and 10 bp) in this cycle. Its clear to us that ongoing easing measures means that the mainland economy is not recovering as strongly as policymakers hoped for.

Taiwan reports March export orders Monday, which are expected to contract -6.0% y/y vs. -0.8% in February. This is a good bellwether for regional activity. Unfortunately, the data suggest very little prospects for recovery over the next six months. Taiwan then reports March IP Thursday, which is expected to rise 4.85% y/y vs. 20.34% in February.

Korea reports trade data for the first twenty days of April Tuesday. It then reports Q1 GDP Thursday, which is expected to contract -1.5% q/q vs. +1.3% in Q4. In y/y terms, growth is expected to slow to 0.7% from 2.3% in Q4. Fiscal stimulus is already in the pipeline, but the BOK is likely to add more monetary stimulus in the coming months. It cut 50 bp to 0.75% in March and then kept rates steady this month. Next policy meeting is May 28 and another cut then seems likely.

Singapore reports March CPI Thursday, with headline inflation expected to fall -0.1% y/y vs. +0.3% in February. While the MAS does not have an explicit inflation target, low inflation allowed it to ease policy at an emergency meeting last month. Next scheduled meeting is in October but we would not rule out another emergency move before then, March IP will be reported Friday, which is expected to contract -4.8% y/y vs. -1.1% in February.

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Win Thin is the Global Head of Emerging Markets Strategy and has over 25 years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. Prior to that, Win was a vice president and international economist, covering major emerging markets in Asia and Latin America for Alliance Capital Management

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