The outlook for Fed policy directly impacts EM FX as an asset class. As expectations change, so too will investor sentiment on EM FX. We continue to believe that the market is underestimating the Fed’s tightening path for 2018 and 2019. As US rates rise, investment will likely flow out of EM.

Whatever eventual Fed policy path develops, politics will be an important factor behind divergences within EM. The biggest market-moving events this past year or so have been political. The US elections, Brexit, and the UK elections all caught the markets wrong-footed.

Several of the biggest EM countries are facing potentially destabilizing developments in the political arena. Brazil and Mexico will go to the polls in 2018, while South Africa and Turkey follow suit in 2019. South Korea just elected a new president after the previous one was impeached, and this has opened up a period of heightened tensions with the North.

It's no coincidence that the worst performing EM currencies this past month have been TRY, BRL, COP, ZAR, and MXN. For the most part, these countries are facing heightened political risk that is likely to extend into 2018.


President Temer will not run for reelection in October 2018. Polls continue to show former President Lula leading the race, but it remains to be seen whether he can run again because of corruption charges. Finance Minister Meirelles would be the favored option for markets, but his candidacy has been called into question.

Brazil is coming out of a deep recession. GDP contracted 3.6% in 2016, and the IMF sees 0.7% growth in 2017 and 1.5% in 2018. Aggressive rate cuts have eroded BRL attractiveness. The structural reform agenda is at risk, as support for Temer is at record lows even as slow growth has led to fiscal slippage. Recent press reports suggest pension reforms won’t be passed by the current administration.


President Santos cannot run for reelection in May 2018 due to term limits. While market-friendly candidate Sergio Fajardo (ex-Mayor of Medillin) is now leading the polls, leftist candidate Gustavo Petro (ex-Mayor of Bogota) was in front just a few weeks ago. This is enough to keep markets jittery.

The economy is still in a slowdown. GDP grew 2% in 2016, and the IMF sees 1.7% growth in 2017 and 2.8% in 2018. Aggressive rates cuts should boost growth, but have harmed the peso’s attractiveness. The long-awaited peace deal has also improved Colombia’s medium-term outlook.


President Peña Nieto cannot run again in July 2018 due to term limits. The presidential election bears watching because of Andres Manuel Lopes Obrador (AMLO), as polls show the leftist candidate leading the race. Former First Lady Zavala recently announced that she is running as an independent. The center-right vote will likely be split, further enhancing the odds that AMLO will win.

Mexico’s economy remains sluggish. GDP grew 2.3% in 2016, and the IMF sees 2.1% growth in 2017 and 1.9% in 2018. Aggressive rate hikes have helped stabilize the peso, but at a cost to growth. NAFTA negotiations remain difficult and have been extended into Q1 2018, but any breakdown in talks will negatively impact Mexico’s economy. Earthquake rebuilding will strain the budget.

South Africa

President Zuma cannot run again due to term limits. The ANC leadership contest in December will set the tone for South Africa’s medium-term outlook. The outcome is very important ahead of the 2019 elections. Zuma prefers his ex-wife, while markets prefer Deputy President Ramaphosa.

The economy remains sluggish. GDP grew 0.3% in 2016, and the IMF sees 0.7% growth in 2017 and 1.1% in 2018. Finance Minister Gigaba needed to present a credible and solid mid-term budget statement last month, but failed to do so. As such, we believe the deteriorating fiscal outlook will lead to rating downgrades this month. South Africa will likely to be ejected from both Barclays Aggregate Bond Index and Citi’s World Government Bond Index (WGBI) as a result.


The July 2016 coup attempt continues to reverberate in Turkey. It has led to an ongoing attack on the nation’s institutions, as President Erdogan continues to purge the military, police, academia, and civil service of suspected Gulenists. Erdogan can run again in 2019 and 2024 as a result of this year’s controversial constitutional referendum.

The US-Turkey visa spat may be thawing, but relations between the two remain frayed. Given overall strained relations with the West, Turkey is tilting more towards Russia. EU entry is very unlikely for the foreseeable future. Against this backdrop, the economic fundamentals are weak. Usable FX reserves remain very low even as the nation remains highly dependent on hot money flows.


Tensions on the Korean peninsula are likely to persist. Pyongyang continues to develop its long-range missile program, and another launch is likely soon. China and Russia voted for the latest round of UN sanctions, which is a hopeful sign. The joint US-Korea THAAD missile defense shield is now fully operational. US-South Korea military drills were held this month.

President Park’s impeachment on corruption charges is a positive development, as was the arrest and five-year sentence for Samsung head Lee. Corporate governance will hopefully improve as a result of these developments.

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IS-03457-2017-11-15         Expiration 10/31/2019