Mid-year EM EMEA outlook

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

Despite having to navigate the (i) war in Ukraine (and its reverberations on global energy and food prices); (ii) aggressive rate hikes; as well as (iii) draconian Chinese lockdowns, the EM EMEA region demonstrated remarkable resilience in H1 2023. A key factor behind the resilience has been excess private savings in DMs that continue to buffer domestic demand from the lagged impact of monetary tightening. 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 EMEA economies in H2 2023, with external funding requirements the central concern. We expect EM EMEA 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.

 

FX views

RUB weakness stands out amidst more mixed EM FX performance. Risks remain titled to downside as RUB falls back towards last year’s lows from March. Meanwhile, the best performing EM currency over the past week has been the THB (+1.1% vs. USD).

 

Week in review

PMIs have collapsed across the CEE-3 (Czech Rep., Hungary and Poland) with a confluence of falls in output, new orders and purchasing accompanied by further job shedding all driving headline levels lower. Separately, Polish inflation decreased by 1.5ppts in June to 11.5% y/y, surprising to the downside for the third month in a row with supportive base effects in energy pushing headline inflation significantly lower.

 

Week ahead

This week, we will have rate meetings in Romania (MUFG and consensus: on hold at 7.00%) and Poland (MUFG and consensus: on hold at 6.75%). Additionally, June’s inflation data will be released in Turkey (MUFG and consensus: 38.9% y/y) and in Hungary (MUFG: 20.2% y/y ; consensus: 20.1% 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, in the week ending 23 June, total outflows from EM funds were at USD-0.7bn, of which USD-0.5bn was from equities while USD-0.2bn was from bond funds.