Emerging Market Economies, Policy Rates & FX

Forecast “I am somewhat more sanguine about Fed announcements causing a wholesale disruption in EM markets.” [We know what you did last summer,1 September 2017]

Outcome A GDP-weighted basket of emerging markets NEERs was broadly stable in September while EM equities continued to rally

Forecast “Unlike developed central bank policy rates, emerging market rates continue to edge lower in the face of receding inflationary risks and I see room for further rate cuts particularly in Brazil given the pace of Real appreciation and to a lesser extent in India.” [Broken Records, 8 August 2017]

Outcome The Central Bank of Brazil cuts its benchmark Selic rate 100bps to 8.25% on 6 September 2017 and a further 75bps on 25 October .

Forecast “Bank Indonesia (BI) cut its policy rate 25bp both in September and October but may stay on hold until market conditions stabilise […]. Reserve Bank of India (RBI) has twice cut its policy rate this year but may stay on hold until market conditions stabilise.” [Fast and Furious – Market drift, 15 November 2016]

Outcome The RBI left its policy rate unchanged on 7 December 2016, contrary to the consensus forecast that it would cut rates 25bp, and did not cut again until August 2017. BI has left its policy rate unchanged since November 2016.

Forecast “In emerging markets the picture is admittedly more nuanced, given that in a number of economies the central bank real policy rate remains high by historical standards. I would again flag that this is the case in Russia, Singapore and Indonesia […] further CBR and BI rate cuts remain on the cards, in my view. Moreover, the Monetary Authority of Singapore (MAS), which cut the pace of SGD NEER appreciation to zero at its semi-annual policy meeting on 14 April, is unlikely to tighten monetary policy at its October meeting” [All to play for, 30 September 2016]

Outcome Bank Indonesia cut rates 25bp on 20 October 2016 and Reserve Bank of India cut 25bp on 4 October 2016. MAS kept its flat SGD NEER policy band unchanged at its bi-annual meeting on 14 October.

Forecast An EM crisis is still more likely to have its birthplace in the US or China than Europe for example, in my view, with EM asset prices in the past 18 months relatively resilient to made-in-Europe stresses […]. Moreover, the US presidential elections scheduled for 8th November present a significant event-risk to emerging markets and their currencies.” [What will sour sweet spot?, 29 July 2016]

Outcome Donald Trump’s victory in US presidential elections precipitated a broad-based and sharp sell-off in EM currencies and equities.

Forecast “Risk aversion likely to see further capital outflows and continued slow fall in EM central bank FX reserves […]. Falling commodity prices will keep exporting nations and their exchange rate regimes under pressure but I expect pegs to US dollar to hold.” [What to expect in 2016 – Same, same but worst, 19 January 2016]

Outcome Dollar-value of EM central bank FX reserves fell about $270bn in 2016, but adjusting for currency-valuation effects reserves were down only $185bn. This was a far slower pace of decline than in 2015 when FX reserves fell $690bn ($465bn adjusted). Middle-East currency pegs to US dollar held despite oil price remaining below $50/barrel throughout most of 2016.

Forecast “Where central banks’ real policy rates are already low and currencies are under duress (South Africa, Russia, Mexico), policy-makers are likely to remain in a bind.” [Global growth – Down but not out, 30 October 2015]

Outcome SARB was forced to hike rates 25bp in November 2015 and a further 50bp in January 2016. Similarly Bank Mexico hiked rates 25bp in January 2016 and 50bp in February 2016.

Forecast “The case for further policy rate cuts is even stronger when the EM-excluding China real policy rate (2.4%) is compared to meagre GDP growth of 1.9% yoy in H1 2015. Turning to country specifics, candidates for future central bank rate cuts include India […], Nigeria […], Taiwan […] and the Philippines […]. In Brazil, the real rate is very high relative to negative GDP growth, but this is likely necessary in order to offer the beleaguered Brazilian Real some support.” [More EM central banks to join rate-cutting party, 30 September 2015]

Outcome By end-2015, China had cut its policy rate 25bp (in October), Nigeria 200bp (in November) and Taiwan 12.5bp (in December); Brazil kept rates unchanged.

Forecast “Emerging market central banks’ real policy rates are still quite high by historical standards […]. Large commodity exporters (e.g. Brazil) have case for high real rates to protect currency […]. If Fed fails to hike, this could pave way for perhaps further modest rate cuts and a degree of currency weakening in EM […]. SARB, COPOM and Bank Indonesia may buck trend and get into lockstep with Fed to support their currencies.” [Asymmetric risk to emerging market monetary policy, 6 August 2015]

Outcome China cut its policy rate 25bp (in August), India 50bp (in September) and Taiwan 12.5bp (in September); Indonesia and Brazil kept rates unchanged in August-September and South Africa hiked 25bp in November 2015 and January 2016.

Forecast The scaremongering about the fall in EM central banks’ FX reserves is not justified, particularly when currency-valuation effects (dollar strength) are factored in and we look beyond China and commodity exporters.” [Headline EM FX reserves distort the real story, 2 June 2015]

Outcome Dollar-value of EM central bank FX reserves remained sizeable at $7.5trn in early 2017 despite decline from a mid-2014 peak of $8.75trn. Accounting for currency-valuation effects, FX reserves fell only $635bn and rose $70bn if China is excluded, according to my estimates. Dollar-value of FX reserves has risen since June 2014 in India, Indonesia, Korea, Taiwan and Thailand.

Forecast “This has provided support for the won but the central bank (BoK) has both the room and the incentive to cut its 2% policy rate and lean against rapid or sustained currency appreciation in a bid to maintain export competitiveness and put a floor under economic growth.” [What you may have missed and why it matters, 2 January 2015]

Outcome Bank of Korea cut its policy rate 25bp in March 2015.