Winners and laggards across the EM EMEA complex in H2 2023

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

RAMYA RS
Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: ramya.rs@ae.mufg.jp

LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp

PAUL FAWDRY
Head of Emerging Markets FX Desk
Emerging Markets Trading Desk
T: +44(0)20 577 1804
E: paul.fawdry@uk.mufg.jp 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

Against an environment of slowing growth, sticky inflation, fiscal and monetary pressures and constrained access to funding, we examine the expected winners and losers across the EM EMEA complex in H2 2023. Despite easing energy prices, our favourite conviction story remains the GCC region with confidence high, inflation low and activity still building momentum backed by strong public finances, falling debt and a trade-driven current account surplus (see here). The challenges facing commodity economies outside the GCC region appear more immediate, with a modest dip in prices coming at a time when access to new funding remains poor, shifting the focus to structural impediments to balanced and sustainable growth – South Africa, Nigeria and Russia have seen the terms of trade sour with pressure on public finances. For non-commodity economies, the policy agenda remains dominated by the long drive to bring external account imbalances in check and restore price stability, particularly in the CEE region, Egypt and Turkey.

 

FX views

Last week, EM currencies staged a strong rally over the past week driven by the broad-based USD sell-off. The main trigger for the USD sell-off has been the release of more evidence (US CPI & PPI reports for June) revealing that inflation in the US continues to slow. It has given market participants more confidence that the Fed will soon bring an end to their rate hike cycle, and then begin to consider rate cuts next year if inflation continues to fall closer to their inflation target.

 

Week in review

Headline inflation in the Czech Republic fell from 11.1% y/y in  May to 9.7% y/y in June, in line with consensus but below our and the CNB's forecast (10.1%). Headline inflation in Romania fell from 10.6% y/y in May to 10.2% y/y in June, in line with our, the consensus and the NBR's expectations. The Bank of Israel left its policy rate unchanged at 4.75%, in line with consensus expectations but below our forecasts for a 25bp hike. Finally, the UAE has moved away from a less stringent, business-as-usual (BAU) scenario based 2030 emissions reduction target, to a fixed, base year (2019) based goal. In the process, the country has set a more ambitious near-term emissions reduction goal, representing an absolute emissions reduction of 19% by 2030 from 2019 levels, which is also 40% lower than the 2030 BAU scenario – an improvement from the earlier commitment of 31% reduction vs BAU.

 

Week ahead

This week, we will have rates meetings in South Africa (MUFG and consensus +25bp to 8.50%), Turkey (MUFG +400bp to 19.00%; consensus 18.00%) and Russia (MUFG and consensus +50bp to 8.00%). Additionally, June’s inflation data will be released in South Africa (MUFG: 5.6% y/y; consensus 5.5% y/y).

 

Forecasts at a glance

In a world of tightening global financial conditions and questions about the liquidity implications of the now-finalised US debt ceiling, we see a degree of macro risks for EM economies in H2 2023, with external funding requirements the central concern. We expect EM growth to trough this year but remain below potential in the 2024 recovery. The silver lining is that subdued growth should cap inflation, facilitating monetary policy easing where external balances allow.

 

Core indicators

According to IIF data, foreign institutional investors funnelled USD22bn into EM portfolios in June 2023 – the largest amount since January 2023.