US elections and EMs

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

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@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

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

Macro focus

The US election is a week away and occupies much of the airtime and topics of conversation with clients, with global markets waiting for the outcome to guide the outlook. There is distinctly scope for larger policy changes relative to the status quo under a Republican presidency compared to a Democratic one, with scenarios involving a united government across the White House and Congress also seeing potentially more marked implications. We hold conviction that there are five core policies under a Trump presidency that could have the most reverberations on EMs, namely, (1) trade; (2) immigration; (3) climate and energy; (4) foreign investments and aid; and (5) foreign policy. For trade, the main transmission channels are likely to be on the importer side – FX is in general the better asset class to position for trade policies, though within credit, we would look for economies with large goods imports, especially those running a sizable goods deficit (as they would be vulnerable to depreciation) – such as Morocco and Kenya. Meanwhile, Mexico and broader Central America are at high risk due to immigration policies. On climate and energy, although the US may be at an advantage in the tech space against China, there are risks on the energy transition with critical minerals and electric vehicles set to emerge as the next battleground. On foreign aid, bilateral (and multilateral) flows may skew more towards country allies – Argentina and El Salvador look well placed. Finally, foreign policy will have a large say in the outcome for Ukraine and the Central and Eastern Europe (CEE) region, as well as the Middle East.

FX views

A central global markets debate is investors are already almost fully pricing a Republican victory to whether all of the recent moves in the USD can be attributed to economic development. Whilst there is certainly some tariff premium in FX markets, there is a mix of macro factors in the US and abroad that can account for most of the USD’s strength this month, with the election playing an important supporting role. From an EM perspective, EM currencies have predominantly depreciated versus the USD in recent weeks, which can be explained to a large degree by global macro market developments.

Week in review

IMF officials have provided several comments over the past days in response to the Egyptian government’s request to extend some of the key targets and timeline of the programme, especially those related to electricity and fuel price hikes. The Central Bank of Russia (CBR) raised its key rate by 200bps to 21.00% from 19.00%, against our (and consensus) expectations of a hold. The National Bank of Hungary (MNB) kept its policy rate at 6.50% in line with our (and consensus) expectations. Headline inflation in South Africa edged lower from 4.4% y/y in August to 3.8% y/y in September, in line with our (and consensus) forecasts, whilst core inflation stayed at 4.1% y/y in line with our (and consensus) expectations. Finally, the IMF’s October 2024 outlook for the Middle East highlighted challenges from slower oil growth, inflation, and regional conflicts impacting economic stability.

Week ahead

In the upcoming week in the EM EMEA region, there will be an MPC meeting in Ukraine on 31 October (MUFG and consensus: on hold at 13.00%). CPI data will be released in Poland (MUFG and consensus: up 0.1ppt to 5.0% y/y). There will also be Q3 2024 GDP data released in Hungary (MUFG: 0.8% y/y; consensus: 0.7% y/y) and the Czech Republic (MUFG and consensus: 1.5% y/y). The South African Minister of Finance will present the medium-term budget statement on 30 October. Finally, PMI data will be released for countries across the region starting on 1 November.

Forecasts at a glance

Growth across the EM universe is set to stabilise as domestic fundamentals offset external drags, with some rotation from the largest to smaller EMs. Inflation and interest rates are both “over the hump” – disinflation is progressing, and the decline in rates will continue and broaden for the remainder of 2024.

Core indicators

The latest monthly IIF flow data signalled that EM securities attracted USD56.6bn in September 2024 driven by key policy shifts and a more favourable global monetary environment. Geopolitical risks and uncertainty around the US elections remain concerns that could affect investor sentiment. We reiterate that the relationship between EM currencies and Fed decisions are crucial – higher rates normally strengthens the US dollar, diminishing the appeal of EM currencies, which can lead to capital outflows and increased borrowing costs for EM.