EM Preview for the week of February 14, 2021

Here's a look at the main drivers in Emerging Markets this week.

EM FX had a stellar week, taking advantage of broad-based dollar weakness that saw virtually every major EM currency gain. MSCI EM FX is nearing its all-time high from January, while MSCI EM gained for the second straight week and is already trading at new all-time highs. The fundamental and liquidity backdrop remains favorable for EM, so much so that EM FX could continue to gain this year even if the dollar carves out a bottom against the major currencies some time in Q1, as we expect.

AMERICAS

Colombia reports Q4 GDP data Monday. Growth is expected at 5.7% q/q vs. 0.6% in Q3, while the y/y rate is expected at -4.5% vs. -9.0% in Q3. December retail sales and IP were very weak and this softness is likely to carry over into Q1 given the lockdowns in effects. Of note, President Duque named Jaime Jaramillo to replace Arturo Galindo on the central bank’s monetary policy committee. Each president typically appoints two MPC members, which Duque already has, but Galindo is resigning for personal reasons. Duque also appointed Governor Villar. The vote to keep rates steady was 5-2 in January, with the two dissents in favor of a 25 bp cut. Next policy meeting is March 26 and markets will be watching to see if there is a shift in the voting pattern.

EUROPE/MIDDLE EAST/AFRICA

Poland reports January CPI and December trade and current account data Monday. Headline inflation is expected to remain steady at 2.4% y/y. If so, it would remain at the cycle low and in the bottom half of the 1.5-3.5% target range. PPI and industrial output will be reported Thursday, with the former expected to rise 0.5% y/y vs. flat in December and the latter by 1.1% y/y vs. 11.2% y/y in December. Real retail sales for January will be reported Friday and are expected to fall -4.7% y/y vs. -0.8% in December. The bank left rates steady this month. While Governor Glapinski said further cuts can’t be ruled out, we think the bank will continue to rely on QE and FX intervention to add stimulus. Next policy meeting is March 3.

Russia reports January IP Monday. It is expected to rise 0.1% y/y vs. -0.2% in November. PPI will be reported Tuesday and is expected to rise 4.4% y/y vs. 3.6% in December. Unemployment and real retail sales will be reported Thursday, with sales expected to fall -3.0% y/y vs. -3.6% in December. The central bank releases its quarterly monetary policy report Friday. Last week, it left rates unchanged at 4.25% and Governor Nabiullina said that potential for further easing has been exhausted. However, she added that it’s too early to speak about the timing for a return to neutral policy and so we see an extended period of steady rates ahead.

Israel reports January CPI Monday. Headline is expected to fall -0.6% y/y vs. -0.7% in December. If so, it would be the tenth straight month of deflation and well below the 1-3% target range. Q4 GDP will be reported Tuesday and is expected to contract -2.6% annualized vs. 39.7% growth in Q3. The central bank meets Friday and is expected to keep rates steady at 0.10%. However, it will likely underscore its commitment to weakening the shekel. Elsewhere, polls suggest that a significant portion of the ultra-Orthodox community may boycott the March 23 election, which would hurt Netanyahu’s chances of winning.

South Africa reports January CPI and December retail sales Wednesday. Headline inflation is expected to rise to 3.3% y/y vs. 3.1% in December, while sales are expected to fall -2.3% y/y vs. -4.0% in November. If so, inflation would be the highest since October but still near the bottom of the 3-6% target range. Next SARB meeting is March 25. The vote to hold rates steady last month was 3-2, with the dissents in favor of a 25 bp cut. If the economy remains weak, we cannot rule out a cut then. The February 24 budget speech may be a determining factor if there is no significant fiscal stimulus unveiled.

Turkey central bank meets Thursday and is expected to keep rates steady at 17%. A handful of analysts look for a 100 bp hike. It has been on hold since its last 200 bp hike in December. CPI rose 14.97% y/y in January, the highest since August 2019 and further above the 3-7% target range. For now, Turkey’s growing external deficits are being easily financed but any loss of confidence in the central bank’s commitment to orthodox policy would be dangerous. TRY is by far the best performing EM currency this year at 6% YTD.

ASIA

Thailand reports Q4 GDP data Monday. Growth is expected at 0.8% q/q vs. 6.5% in Q3, while the y/y rate is expected at -5.4% vs. -6.4% in Q3. For the year as a whole, a contraction of -6.4% is expected vs. 2.4% growth in 2019. The economy continues to suffer from the drop in global tourism. Next policy meeting is March 24 and no change is expected then. Political tensions are rising as demonstrations against the government widened after four opposition leaders were sent to pretrial detention on charges of royal defamation. Prime Minister Prayuth faces a vote of no confidence this week for his government’s handling of the pandemic..

Singapore releases its 2021 budget statement Tuesday. A deficit equal to -15.5% of GDP is expected to be announced vs. -2.1% in 2020, with aggressive fiscal stimulus aimed at boosting the recovery from the pandemic. January trade will be reported Wednesday, with NODX expected to rise 5.4% y/y vs. 6.8% in December. For now, the economy continues to benefit from the regional recovery and so the MAS is likely to keep policy unchanged at its policy meeting in April and allow fiscal policy to carry most of the load this year.

Bank Indonesia meets Thursday and is expected to cut rates 25 bp to 3.5%. It has been on hold since its surprise 25 bp cut in November. CPI rose 1.55% y/y in January, and has remained below the 2.5-4.5% target range since last May. However, the bank has been reluctant to cut for fear of weaker foreign investment inflows. Recent firmness in the rupiah is likely to be the deciding factor behind a cut, as inflows remain strong. Q4 current account data will be reported Friday and a surplus of $1.2 bln is expected vs. $964 mln in Q3. While the external accounts improved over the course of 2020, they are likely to worsen over the course of 2021.

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