Emerging Markets Diary (June 21, 2010)
Strengths
- Further progress was made in the third round of negotiation between Taiwan and mainland China on the Economic Cooperation Framework Agreement (ECFA). China agreed to reduce tariffs on more than 500 import items from Taiwan and mainland market-access rules for Taiwanese banks were also relaxed.
- The Bank of Indonesia’s recently-announced measures to reduce volatility in the currency market and smooth capital flows did not cause a negative reaction from institutional investors.
- The cumulative budget balance in Turkey improved noticeably in May and significantly outperformed the results of 2009. Morgan Stanley called fiscal performance in Turkey “impressive” and its year-end deficit forecast of 4.3 percent of GDP “conservative.”
Weaknesses
- Malaysian palm oil futures declined this week amid concerns over deteriorating exports to China in June based on preliminary surveys, potentially higher production next year because of La Nina weather patterns and a record supply of soybean oil, a major substitute, from South America.
- Hong Kong’s unemployment rate rose to 4.6 percent in May from 4.4 percent in April, the first increase since mid-2009, as uncertainties in overseas markets, especially Europe, discouraged hiring.
- Despite higher oil prices, capital inflows into Russia in 2010 remain relatively weak.
Opportunities
- In the first half of 2009, the Russian economy combined double-digit inflation with a double-digit drop in GDP. One year later, the economy returned to growth and inflation is below 8 percent, creating an opportunity for Russia to resume long-term growth with less inflationary pressure.
- Equity investors and credit investors seem to price Russia-specific risk very differently at the moment. The last time such a widening of equity risk premium over the credit risk occurred in 2005, and it was followed by a strong rally in the equity prices.
- Recent media focus on wage hikes for low-skilled assembly line workers in China should be interpreted in light of potential impact on corporate profitability. Wages typically account for no more than 10 percent of total operating costs for Chinese and Taiwanese companies, which may relocate capacity inland or pass on some of the cost pressure to downstream customers. In addition, China’s labor market could see significant relief next year when the 2008 stimulus is due to end and unemployment rises.
Threats
- Within the banking system in Poland, the foreign currency loan-to-deposit ratio of 250 percent is very high because Polish banks rely on non-deposit foreign liabilities to fund loans. A cutoff in foreign financing amid jitters in the European financial system is a considerable threat.
- According to the latest quarterly survey from China’s central bank, a record 72.5 percent of responding households believe current home prices were “too high to be acceptable,” with only 15.5 percent of respondents indicating a readiness to buy homes in the next three months. While further tightening in China’s property market may not occur in the near term, Chinese policymakers probably would not reverse their strict bias toward real estate before a considerable decline in prices occurs.
