Emerging Markets Monitor - August 2
Tensions Rise as Pelosi Heads to Taiwan, Euro Carry Trade and EM, Low-Income Countries Financing, Aramco Buys Valvoline Lubricants, Central Banks and Inflation
The Top 5 Stories Shaping Emerging Markets from Global Media - August 2
Chinese Fighter Jets Fly Close to Taiwan Ahead of Pelosi Visit
Financial Times
“China is ratcheting up military activity around Taiwan ahead of a potential visit by Nancy Pelosi, the Speaker of the US House of Representatives, who is expected to land in Taipei on Tuesday night.”
“The Taiwanese government also said it had come under cyber attack. Several Chinese fighter jets flew close to the median line that divides the Taiwan Strait on Tuesday morning, according to a Taiwanese official briefed on the developments, in a reminder to Taipei that Beijing’s air force could reach the island in a matter of minutes.”
“Military units across the People’s Liberation Army’s Southern Theater Command, which is in charge of the South China Sea and some Taiwan-related missions, have entered a status of high alert, according to military officials in two neighbouring countries.”
“Taiwan and the US braced themselves for a potential violent reaction from Beijing, which has repeatedly warned that the PLA would ‘not sit by idly’ if Pelosi were to visit Taiwan as part of a wider Asia trip that began in Singapore on Monday.”
“….China also announced a series of war games in the South China Sea scheduled to last from Tuesday morning until Saturday night, following various drills the previous week.” The FT reports.
Carry Traders Are Using Weak Euro to Win Big in Emerging Markets
Bloomberg
“For carry traders battered by the dollar’s rally and higher US borrowing costs, the euro’s worst plunge since 2005 couldn’t have come one moment sooner.”
“Investing in emerging-market currencies with borrowed euros is raking profits of as much as 29% this year depending on the choice of the higher-yielding currency, according to data compiled by Bloomberg. The gains are being driven by the euro’s 10% drop against the dollar, which took the cross to parity for the first time in two decades.”
“Those who funded the same carry positions with the greenback had much less lucrative results: not only the overall strategy is failing for a third successive year, but most individual emerging-market currencies are also producing losses. Even in Latin America, profits have stalled after a stellar start. Needless to say, traders are switching.”
“‘Funding carry trades by selling euro is becoming more common,’ said Brendan McKenna, a currency strategist at Wells Fargo in New York. ‘The European Union looks more likely to fall into recession and geopolitical developments should weigh on the currency, making emerging-market carry trades funded by the euro an interesting option.’” Bloomberg reports.
Low-Income Countries Turn to Risky Bank Loans
Wall Street Journal
“Fragile developing nations frozen out of global bond markets have turned to an old—and some say risky—source of money to plug budget gaps: syndicated loans.”
“Kenya and Ghana, buffeted by high commodity prices and surging borrowing costs, are among the countries that have said they won’t be able to issue foreign-currency bonds this year. They would instead borrow using syndicated loans, a type of direct lending from big commercial banks.”
“They join more than a dozen governments across Africa and the Middle East that have taken out syndicated loans worth about $13 billion this year through June…In July, no emerging-market government issued any foreign-currency bonds worldwide, according to research firm Tellimer. That is the most significant drought in financing since the ‘taper tantrum’ of 2013, when fears over the withdrawal of the U.S. Federal Reserve’s easy-money policies sent global markets into a tailspin.”
“‘Countries that find themselves shut out of the bond market, they’re coming to us and asking what’s possible in the loan market,’ said Charles Corbett, managing director in the Africa financing solutions team at Standard Chartered.”
“Syndicated loans, which are pooled among a group of lenders, were the dominant source of private foreign funding for emerging markets until the Latin American debt crisis of the 1980s.”
“Burned by lengthy restructurings, banks stepped back from financing developing nations’ budgets—though they continued to lend for trade and infrastructure projects. Governments, meanwhile, turned to bond markets, which promised greater transparency and lower costs.” Chelsey Dulaney reports.
Saudi Aramco Acquires Valvoline’s Lubricants Business for $2.65 Billion
The National
“Saudi Aramco on Monday said it will acquire Kentucky-based motor oil maker Valvoline's lubricants business for $2.65 billion as the Dhahran-based company seeks to expand its operations and partnerships.”
“The oil major signed an equity purchase agreement to acquire Valvoline's Global Products business, the companies said on Monday. The deal, subject to customary closing conditions and regulatory approvals, is expected to close in late 2022 or early 2023.”
“Aramco will benefit from the unit's manufacturing and distribution network, significant research and development capabilities, strong partnerships with major manufacturers and global brand recognition as it pursues opportunities to extend the brand globally, it said in a statement.”
“…Aramco, the world's largest oil-exporting company, will pay for the acquisition with cash, Valvoline said in a separate statement.” Deena Kamel reports.
Soaring Inflation Puts Central Banks on a Difficult Journey
IMF Blog
“Central banks in major economies expected as recently as a few months ago that they could tighten monetary policy very gradually. Inflation seemed to be driven by an unusual mix of supply shocks associated with the pandemic and later Russia’s invasion of Ukraine, and it was expected to decline rapidly once these pressures eased.”
“Now, with inflation climbing to multi-decade highs and price pressures broadening to housing and other services, central banks recognize the need to move more urgently to avoid an unmooring of inflation expectations and damaging their credibility. Policymakers should heed the lessons of the past and be resolute to avoid potentially more painful and disruptive adjustments later.”
“The Federal Reserve, Bank of Canada, and Bank of England have already raised interest rates markedly and have signaled they expect to continue with more sizable hikes this year. The European Central Bank recently lifted rates for the first time in more than a decade.”
“….The higher real interest rates on government bonds have spurred an even larger rise in borrowing costs for consumers and businesses, and contributed to sharp declines in equity prices globally. The modal view of both central banks and markets seems to be that this tightening of financial conditions will be enough to push inflation down to target levels relatively quickly.” IMF Blog writes.
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