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Buoyant first quarter for emerging markets

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

EM fundamentals and markets have been resilient throughout the first quarter of 2024. Recent weeks have witnessed a continuation of the supportive EM fundamental backdrop, as incoming data has extended the process of upward growth revisions, while EM inflation has seen downward surprises. This backdrop is allowing EM central banks to credibly cut policy rates and has cushioned EM assets from the repricing to less Fed easing. Moreover, February PMIs have also delivered good news for most major EMs, with ongoing recovery in both manufacturing and services activity. Our 2024 EM outlook was anchored on the pivot from “triple whammy” of higher US rates, a strong US dollar and slower Chinese growth in 2023 to “over the hump” for both inflation and monetary policy rates (see here). The latest developments reinforce our narrative with favourable dynamics warranting admiration in the face of still restrictive interest rates, fiscal consolidation and tight global financial conditions.

FX views

Broad-based USD sell off triggered relief rebound for EM FX last week. US CPI and PPI report pose main upside risk for USD in week ahead. The best performing EM EMEA currencies over the past week have been the ZAR and PLN. Favourable carry conditions support ZAR. Stronger PLN welcomed by NBP who remain reluctant to lower rates.

Week in review

NBP left key rate on hold at 5.75%, while February CPI came in at 3.7% y/y in Hungary. Egypt’s ratings outlook was revised to positive by Moody’s, while February CPI spiked to 35.7% y/y. Meanwhile, Saudi Aramco’s shares (an additional 8%) was transferred from the state to companies fully-owned by the PIF.

Week ahead

Central bank meeting is scheduled in Ukraine, where expect rates to remain on hold at 15.00%. February CPI data is due for release in Czech Republic, Israel, Nigeria, Oman, Poland, Qatar, Romania, Russia, Saudi Arabia and UAE.

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 in 2024 (see here).

Core indicators

EM securities attracted USD22.2bn in the month of February – equity and debt flows were USD17.24bn and USD4.96bn, respectively.