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EM Strategy Summary - 19 February 2018

Core Content

This document outlines the key market events and analysis for Emerging Markets (EM) and Latin America (Latam) for the week of 19 February 2018. It is produced by BNP Paribas Global Markets Research teams and includes insights from various strategists across different regions.

Main Focus Areas

1. Global Market Outlook

• Risky assets are stabilizing, but the USD's structural headwinds are expected to dominate again.
• EM/Latam Premiums are analyzed, with a focus on the long-end of the US yield curve as the most important factor in assessing systemic risk.
• The EMBIG 10y blended yield is projected to rise by 40 basis points to 6.65%, which is almost 100 basis points above the December 2017 level.
• These findings align with the Bank of International Settlements (BIS) analysis.

2. CEEMEA Region

• South Africa is the key risk event of the week, with the Ministry of Finance presenting the national budget on 21 February.
  • The budget deficit is expected to narrow from 4.6% of GDP in FY2017/18 to 4.1% by FY2020/21.
  • Gross debt-to-GDP should stabilize below 60%.
  • State-owned enterprises, particularly Eskom, will need to address governance, liquidity, and guarantee issues.
• CPI data for South Africa is expected to show a decline from 4.7% y/y in December to 4.4% y/y in January.
• Moody's may reconsider South Africa's sovereign rating in late February/March, but the hurdle to avoid a downgrade remains high.
• Russia's GDP data (Q4 2017) is expected on Monday, 19 February, which could affect the Baht.
• Poland's January industrial production, retail sales, and PPI will be released on Tuesday, 20 February.

3. Asia Region

• Asian markets are mostly closed due to the Chinese New Year and other holidays.
• Singapore's budget is due on Monday, 19 February, with a focus on possible tax restructuring.
• January CPI will be released on Friday, 23 February, and cost pressures remain modest.
• However, with increased economic activity, there is a risk of monetary tightening in April.
• Thailand's Q4 2017 GDP release on Monday, 19 February may influence the Baht.
• South Korea's February import and export data on Wednesday, 21 February will indicate Q1 trade performance.
• Malaysia's foreign reserves are expected on Thursday, 22 February.

4. Latin America (Latam) Region

• Mexico's bi-weekly CPI is expected on Thursday, 22 February, and is likely to draw market attention.
• Inflationary pressure persists, and upward surprises in recent CPI data are anticipated.
• Monetary policy meeting minutes will likely address inflation dynamics and risks to inflation targets.
• The minutes are expected to be hawkish, reinforcing Banxico's commitment to inflation control.
• In Brazil, the mid-month CPI on Friday, 23 February is expected to show inflation under control at around 3% y/y.
• The premium in the short end of the curve has been reduced, but the largest premium is still in the belly of the D1 curve (Jan20-Jan21).
• COPOM minutes indicate that further downside surprises to inflation could lead to rate cuts, influencing the premium embedded in the curve.

Key Contacts

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Additional Information

• Online resources: BNP Paribas Global Markets Website and Strategy Website.
• Bloomberg codes: Fixed Income Research (BPFR), G10 Interest Rate Research (BPBS), Emerging Markets Research (BPFR), Market Economics (BPEC).
• Legal disclaimer: The document is not a prospectus, advertising, or public offering.
• United States Disclosures:
  • Options are complex and not suitable for all investors.
  • ETFs may involve tracking error, currency, and geopolitical risks.
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  • BNPPSC is responsible for distributing the report to U.S. persons.