Summary
The new Russia sanctions and uncertainty about the future are weighing on Russian and Ukrainian assets. But it’s life as usual for many other EMs, with central banks responding to higher inflation and the markets evaluating draft budgets.
Russia/Ukraine Conflict
Russian and Ukrainian assets were hit hard this morning, as the markets absorbed the additional Russian sanctions and reports about new developments on the ground. One practical question (from the fixed income (FI) perspective) is whether Russia might be excluded from global bond indices, given the limitations on new issuance and trading on the secondary market. Russia’s weight in the J.P. Morgan local bond index (GBI-EM Global Diversified) is approximately 6% and in the J.P. Morgan sovereign bond index (EMBIG) is just under 3%. These are non-negligible amounts. A prospect of India’s inclusion in the local bond index adds an element of suspense, as regards the ultimate impact on country weights.
EM Inflation, Policy Rates Outlook
As investors are wondering whether the Russia/Ukraine escalation will affect developed markets’ (DMs’) policy normalization plans, central banks in EMEA and LATAM are very much in the mood for more tightening. Hungary raised its policy rate by 50bps yesterday, and the consensus sees a 30bps hike in Hungary’s 1-week depo rate on Thursday. Today’s upside mid-month inflation surprise in Brazil reaffirms the market expectations (implied by the local swap curve) of another 100bps rate hike in March, followed by 65bps of additional tightening in May and 36bps more in June. The market has rewarded Brazil’s proactive monetary policy stance with massive currency/local bonds outperformance so far this year (see chart below). But we keep an eye on the weakening growth outlook (now only 0.6%, according to Bloomberg consensus), which is rapidly becoming collateral damage in the central bank’s heroic anti-inflation fight.
South Africa Fiscal Consolidation, Debt Profile
South Africa is another “Year-to-Date emerging markets (EM) star” – and today’s presentation of the 2022 budget suggests that there may be further potential here. Even though the market was taken aback by a slower than expected pace of fiscal consolidations and no changes in issuance, the budget is based on conservative growth assumptions, there are no increases in the wage bill and the draft also shows some improvements in South Africa’s debt profile over time (including a lower debt peak). Stay tuned!
Charts at a Glance: EM Stars of 2022
Source: Bloomberg LP
Originally published by VanEck on February 23, 2022.
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