Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 27, 2020
S&P downgraded several sovereigns and corporates with strong oil connections and/or weak macro and policy buffers. India, Malaysia and the Czech Republic announced further fiscal and monetary stimulus.
Standard & Poor's (S&P) went on a rampage, downgrading a bunch of sovereigns and corporates in the past 24 hours. Many affected names have strong oil connections—Angola, Nigeria, Kuwait and Oman, for example. Mexico also lost one notch (BBB+ to BBB, negative outlook), with the rating agency particularly concerned about ineffective policy execution, stagnant growth and the COVID-19 shock, both in Mexico and its main trade partner, the U.S. S&P also cut Colombia’s outlook to “Negative”, which means a higher risk of losing an investment grade status in the coming months.
Meanwhile, emerging markets (EM) central banks and governments continue to line up policy responses to minimize the impact of the virus on economies and financial markets. First, we would like to acknowledge yesterday’s spectacular 75bps rate cut in the Czech Republic. The best part is that the policy rate remained positive even after the cut, leaving room for more easing, if necessary. India’s central bank (Reserve Bank of India (RBI)) also went for a bigger than expected inter-meeting rate cut (75bps). In addition, it lowered the cash reserve ratio for banks (by 100bps), and announced several liquidity provision measures, including Targeted Long Term Repo Operations (TLTRO). Malaysia’s new government unveiled a massive USD58B stimulus package—a whopping 17% of GDP—that includes at least 1.7% of GDP of new fiscal spending. An honorary EM, Canada—we have an internal joke that asset prices in many developed markets (DM) are reacting like traditional EM these days—also joined the chorus lowering its key rate by 25bps just moments ago.
Argentina’s current account and trade balance continued to improve in Q4 2019 and February, 2020, respectively (see chart below). Sustaining the pace of external adjustment and making sure that the trade balance stays positive (and sizable) is critical for the government’s ability to stay current while conducting debt negotiations. One uncertainty going forward is the impact of weaker global activity, especially movement restrictions on Argentine exports. Argentina’s exports were not particularly strong even before the crisis, and most of the external adjustment took place on the back of weaker imports. So, this space should be watched closely.
Chart at a Glance: Argentina Current Account Adjustment Still On Track
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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