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Growth rotation, delayed disinflation and geopolitics

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

Several trends are gaining traction across EM EMEA. First, there is an apparent rotation in economic growth, with high yielders Turkey and Russia weakening, whilst the GCC and CEE regions as well as South Africa gaining. Second, following what was an extended period of downside surprises to inflation in H1 2024, EM EMEA inflation prints have been more mixed in recent months. Third, the intensification of the Middle East conflict poses material risks to EM EMEA outlook given the region includes both major oil producers and economies that are highly dependent on oil imports. Finally, the outcome of the US presidential election on 5 November remains a broadly binary event for EMs. While a potential increase in global protectionism under a Trump 2.0 would be damaging for global growth in general, the largest negative effects on growth would likely be seen in export-orientated EM economies (implying larger negative effects outside of the US).

FX views

Emerging market currencies have continued to weaken over the past week extending their sell-off this month. The worst performing emerging market currencies over the past week have been the LatAm currencies. The MXN has declined by -2.9% vs. USD, the CLP by -2.6%, and the BRL by -1.7%. The stronger USD is contributing to weakness in EMEA FX especially the Central European currencies. It prompted the NBH to deliver a more a hawkish policy signal ahead of this week’s policy meeting.

Week in review

Inflation in Saudi Arabia picked up to 1.7% y/y in September from 1.6% y/y in August. Israel’s inflation ticked down to 3.5% y/y in September from 3.6% y/y in August. Egypt maintained its deposit rates on hold at 27.25% and Turkey kept its policy rate at 50.00%. Poland’s core inflation edged higher from 3.7% y/y in August to 4.3% y/y in September. Lastly, Egypt president Sisi has stated that the current economic reform programme is being implemented under challenging and volatile external circumstances.

Week ahead

In the week ahead, there will be a rate meetings in Hungary (MUFG and consensus: on hold at 6.50%) and Russia (MUFG and consensus: +100bp to 20.00%). Separately, September CPI will be released in South Africa (MUFG and consensus: -0.6ppt to 3.8% y/y).

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.