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Emerging Markets Daily - March 18
Brazil Raises Rates, Emerging Asia And The 'Temper Tantrum,' Lebanon Economy Sinks as Politicians Feud, BCA Downgrades China, DP World Sees Opportunity After Tough 2020
The Top 5 Emerging Markets Stories - March 18
As Brazil Raises Rates, Questions Arise About Risks in EM Economies
“Brazil on Wednesday became the first major economy to raise interest rates this year, a harbinger for other developing countries that could be forced to raise borrowing costs and endanger their fragile economies.”
“The central bank’s decision to lift its benchmark lending rate to 2.75% from its record low of 2% comes as inflation hit a four-year high in Latin America’s biggest economy amid a weakening currency and sharply rising fuel prices. On top of that, Brazil is logging nearly a third of all the world’s daily Covid-19 deaths.”
“Economists say the tightening monetary policy in Brazil underscores risks for emerging markets, many of which have dire outlooks in comparison with developed countries. A strong U.S. recovery is prompting a rise in long-term bond yields, which attracts more investors to buy dollars at the expense of emerging-market currencies. That could lead other developing nations to raise their interest rates to stem the capital outflow, stifling the economic rebound those countries are counting on.”
“The Brazilian currency has depreciated about 10% against the dollar in the last three months as investors pull their money out of riskier markets that racked up debt during the pandemic, pushing consumer prices higher as imports become more expensive. Rising oil prices, buoyed by a strong recovery in Asian demand, also has increased Brazil’s fuel costs, which helped raise inflation to 5.2% in February, near the top of the central bank’s target range.” The Wall Street Journal reports.
Emerging Asia Can Avoid ‘Taper Tantrum,’ Though Risks Remain
“Rising U.S. bond yields will not hurt Asia’s emerging markets as badly as they did during the ‘taper tantrum’ eight years ago, according to a report by S&P Global Ratings.
“‘Taper tantrum’ describes the surge in U.S. Treasury yields in 2013 after the Federal Reserve said it would wind down its quantitative easing — or asset purchase — program. The move led to sharp outflows of money from emerging markets, including those in Asia, and forced their central banks to hike interest rates to protect their capital accounts.”
“‘The recovery across Asia’s emerging economies should withstand rising U.S. yields so long as this reflects an improving growth outlook and reflation rather than a monetary shock,’ said Shaun Roache, S&P Asia’s Chief Economist…”
“Still, risks remain. The economist said Asia’s recovery could be threatened if markets view the Fed as underestimating inflation risk, resulting in U.S. yields rising very quickly and the U.S dollar appreciating at the same time.”
“Under such circumstances, India and the Philippines will be the most vulnerable, said S&P. Both economies have seen inflation rise in recent months, and their real policy rates are below long-run averages, the agency said. That means funds may pull out quicker from the two markets, leaving their central banks to raise rates in response, it added.” CNBC reports.
Geopolitics: Lebanon Politicians Feud as Economy Continues to Sink
“Lebanon’s president asked Prime Minister-designate Saad Hariri to step down if he was unable to form a government, escalating a months-long political blame-game that’s compounded a currency meltdown.”
“Hariri has insisted since he was tapped for the job in October that the next government should be comprised of nonpartisan experts able to manage the country’s worst financial crisis in decades. He has since clashed repeatedly with President Michel Aoun, who wants more say over the lineup and larger representation for his own political allies.”
“The impasse has left Lebanon under a caretaker government since August, when outgoing Premier Hassan Diab resigned in the aftermath of an explosion that killed at least 200 people and destroyed swaths of the capital. Diab’s team is unable to resume talks with the International Monetary Fund or implement economic reforms required to unlock donor support.”
“In televised speech late Wednesday, Aoun said the prime minister-designate should make way for someone else if he cannot form ‘a salvation government.’ The alternative is for Hariri to meet and agree on an administration ‘without excuses or delays.’
“Hariri hit back on Twitter, saying he was willing to meet the president for the 17th time since he was tasked by parliament with forming a government. He said Aoun should make way for a new presidential election if he was unable to sign off on a non-partisan lineup ‘capable of implementing reforms to stop the collapse and alleviate the people’s suffering.’” Bloomberg reports.
China Stocks Downgraded On One Year Outlook: BCA Research
“China’s stocks have been downgraded on a one-year outlook by analysts at Montreal, Canada-based firm BCA Research, who cited ‘high risk’ policy overtightening and weakening technical indicators as their reasons, as the government pulls back policy support this year.”
“The firm cut its tactical (zero to three months) and cyclical (six to 12 months) positions to underweight relative to global benchmarks in a report. The move follows after a cut in recommendation to neutral on January 13, citing valuations and policy miscalculation risks amid tighter industry regulations…”
“The underweight position reflects BCA Research’s negative short-term view on three benchmarks, namely the MSCI China Index and MSCI China A Onshore Index, and the HSCI Hong Kong Index…”
“Chinese stock prices peaked in mid-February but, in our view, the correction has not yet run its course,’ the analysts said.” South China Morning Post reports.
DP World Sees 29% Profit Fall in 2020, But New Opportunities Abound
“Port operator DP World announced Thursday its profits slid 29 percent in 2020 from the previous year to $846 million, as the coronavirus pandemic froze supply chains and upended the world’s trade flows.”
“The port operator, which delisted from the stock exchange and returned to full state-ownership last June, stressed that it defied analysts’ low expectations for global trade over the difficult period. The maritime firm, one of the world’s largest, has faced various challenges with the virus surging, regional tensions rising and trade wars continuing.”
“…The port operator’s delisting from the stock exchange came as its parent company, Dubai World, sought to repay more than $5 billion to banks.Despite dismal predictions of slumping global trade last spring, DP World said the container terminal industry has shown resilience, pivoting to automation and digital investment.”
“In recent months, the company has done brisk business. DP World struck a $4.5 billion deal with one of Canada’s biggest pension-fund managers to expand its footprint in Europe and Asia Pacific last fall. It won several lucrative concessions this year to build vast ports and logistics hubs in Indonesia, Senegal and Angola”
“The company also plans a joint bid with an Israeli port operator for Israel’s newly privatized Haifa Port, following a breakthrough deal to normalize relations between the countries. In a press conference Thursday, Sultan Ahmed bin Sulayem, DP World’s chairman and CEO, told reporters the company aims to invest in other key Israeli seaports, including in the southern cities of Ashdod and Eilat.” Arab News/AP report.