Emerging Markets Radar (June 11, 2012)
Strengths
- The People’s Bank of China (PBOC) has cut interest rates. Lending rates were cut by 25 basis points for all maturities. Deposit rates were cut by between 10 and 40 basis points. The move makes the one-year reference lending rate 6.31 percent and the one-year reference deposit rate 3.25 percent. However, banks have also been given increased flexibility to pay deposit rates up to 10 percent above the reference (previously the reference rate was a ceiling) and make loans at rates up to 20 percent below the reference (previously the floor was 10 percent below).
- Chinese banks lent almost 800 billion Yuan in May, Economic Information Daily reports.
- China HSBC Services PMI was 54.7 versus 54.1 in the prior month, indicating retail and services still in an expanding stage.
- The Philippine economy expanded by 6.4 percent year-over-year in the first quarter of 2012, beating expectations with strong services growth of 8.5 percent amid an improving domestic outlook.
Weaknesses
- While the market praised the progress the PBOC has made in liberalizing interest rates by widening the band where the banks can deviate lending and deposit rates from the reference rates, it almost unanimously agreed this squeezes the banks’ profit margin. In fact, there are a couple of reasons that the margin pressure will be much smaller than the market would believe. Those money center banks have a dominant franchise in China and so they can resist reducing lending rates and increasing deposit rates. For depositors, safety is more important than earnings from the deposits. Besides, bank customers place more than 50 percent of their money in demand deposits with large banks, which pay very little interest and provide banks with cheap money.
- Malaysia’s exports unexpectedly fell in April for a second straight month, dropping 0.1 percent as shipments of electronics and palm oil dropped.
- Lackluster external demand is weighing on the Israeli economy, and weak data have led the broad market index (BMI) to revise down the 2012 real GDP growth forecast from 3.2 percent to 2.9 percent.
Opportunities
- India's external weaknesses are starting to correct. The country's trade shortfall came in at $13.5 billion in April, down from $15.2 billion in February and $19.6 billion in October 2011. Lower global commodity prices and the weaker currency are likely to lead to a further narrowing of the trade deficit in the coming months.
- The Colombian peso has a potential to further strengthen in the short term, points out Business Monitor International as companies bring in U.S. dollars from abroad to pay annual taxes due on June 25.
- China cut benchmark lending and deposit rates by 25 basis points on Thursday. Historically, such a move will drive up liquidity and the stock market in Hong Kong and in the domestic B share market, as the chart shows.
Threats
- In spite of the interest rate cut on Thursday evening by the PBOC, both Hong Kong and China domestic A share markets went down on Friday. This indicates that the market is worried about the economic data to be released over the weekend. Also, the rate cut of 25 basis points is not to reverse the economic slow-down in China in the short term, but infrastructure investment and government fiscal spending will.
- The Russian central bank feels increasingly uncomfortable with the recent weakening of the ruble. The central bank has now started to intervene on the open market by selling its foreign currency reserves. So far, this intervention, which is partly responsible for a $10 billion decline in foreign reserves in May, had little success in reversing the decline in the ruble.
