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Key themes and EM takeaways form the IMF/World Bank spring meetings

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

 

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 spring IMF/World Bank meetings this month were defined by caution. Notwithstanding IMF upgrading global growth by 0.3ppts in 2024 to 3.2% (flat to 2023 levels), and certainly suggesting we are far from a global recession risk, there remains palpable worries over a high for longer interest rates in developed markets, a strong US dollar, elevated geopolitical volatility as well as a re-assessment of global r* and what that does to EM economies still grappling with higher fiscal burdens, and weaker capital inflows. Central banks from across the EM space appeared to signal that external factors were now playing a larger role than domestic dynamics in how they conduct monetary policy, which implied a limit to how much further they could cut rate in the near term. It is thus with little surprise that investors comprised little conviction on top-down EM opportunities. This reinforces our 2024 EM outlook narrative that a bottom-up approach is warranted to position across the EM complex (see here). We continue to hold conviction that investors will be well-positioned if they seek one of the three “S’s” in their EM selection criteria – “strong” fundamentals, “structural” narratives and “sizable” risk premiums. In essence, we favour EMs more immune from the top-down global backdrop – the GCC economies, Brazil, Mexico and to some extent Turkey.

FX views

Emerging market currencies have rebounded over the past week even as US yields have continued to adjust higher indicating that the USD has lost some upward momentum ahead of the upcoming FOMC meeting. The Fed is expected to deliver a hawkish policy update in the week ahead. We expect Fed Chair Powell to reiterate that the recent run of stronger US activity and inflation data will delay their plans to begin lowering rates into H2 2024.

Week in review

Turkey kept rates on hold at 50.00% and remains in a wait-and-see mode. Hungary slowed the pace of cuts to 50bps to 7.75% with a hawkish stance. Inflation in Saudi Arabia for March edged lower to 1.7% y/y owing to weaker food prices. Abu Dhabi issued USD5bn in international capital markets – first time in 2021. Finally, Egypt delivered a marginal tightening via its 7 day main operation.

Week ahead

In the coming week, there will be monetary policy meeting in the Czech Republic (MUFG and consensus -50bps to 5.25%). Inflation data for April will be released in Turkey (MUFG 70.1% y/y; consensus 70.2% y/y). Finally, Q1 2024 flash GDP estimates for the Czech Republic (MUFG 0.4% y/y; consensus 0.3% y/y) and Hungary (MUFG and consensus 1.3% y/y) will be published.

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

According to the IIF, EM fund flows attracted USD32.7bn of inflows in March – the fifth consecutive month of increases.