Emerging Markets Radar (July 22, 2013)

Emerging Markets Radar (July 22, 2013)

Strengths

• In a regular State Council meeting, Premier Li Keqiang stated that China’s economy was stable in the first half of the year, and that it can achieve major economic development goals this year, CCTV reported. One of three “Keqiang” indicators, power consumption, rose 5.1 percent in the January to June period versus a rise of 4.9 percent in the January to May period. Power generation rose 4.4 percent from January to June versus a rise of 4.1 percent from January to May. Similarly, China’s June foreign direct investment (FDI) rose 20.1 percent versus the 0.7 percent growth estimate.

• Alibaba Group announced that its earnings tripled to $669 million in the first quarter, indicating booming online internet businesses in China. In a separate report, Baidu is buying 91 Wireless, a mobile Internet App store, for $1.9 billion to have mobile game exposure.
• Macau’s gross gaming revenue grew 15.3 percent for the first half of 2013, better than most had expected. Improving infrastructures, connecting Macau with Hong Kong and mainland China, should bring in more visitors.
• China has announced that its solar power generation capacity will increase to 35 gigawatts by 2015, quadrupling from the current level. China also imposed a 57 percent preliminary tariff on imported polysilicon from the U.S. and Korea. Those policies favor local upstream polysilicon producers.
• Polish industrial output grew faster than expected in June, reinforcing the central bank’s case for cutting rates in recent months, while halting moves as the economy begins to recover. Industrial production rose 3 percent from a year earlier in June, after declining 1.8 percent the previous month, according the statistics office in Warsaw. The release exceeded the median estimate of a 1.5 percent increase noted in a Bloomberg survey. Similarly, output expanded 2.8 percent from May and gained 3.1 percent seasonally- adjusted from a year earlier, while inflation came in at a record low, increasing the central bank’s flexibility to manage the lending environment.
• Brazil’s inflation slowed more than analysts’ forecast in mid-July. Annual inflation slowed to 6.4 percent, going back into the central bank’s 2.5 to 6.5 percent target range, according to the National Statistics Agency. The news is welcoming for the Brazilian central bank that has embarked on the largest cycle of interest rate increases among the world’s major economies, in order to tame inflation that has remained above the 4.5 percent midpoint of the target since September 2010.

Weaknesses

• China’s second quarter GDP growth was 7.5 percent, slowing from 7.7 percent for the prior quarter, though it does meet the market consensus. In the year to June, China’s fixed asset investment growth was 20.1 percent versus 20.4 percent in the year to May. The country’s value-added industrial growth was 8.9 percent in June versus 9.2 percent in May. The good news was in regard to retail sales, which were up 13.3 percent, above the market consensus of 12.9 percent. Additional good news from the second quarter data release was that gross floor area (GFA) new-starts rose 14.2 percent in June, expanding growth in the first half of 2013 to 3.8 percent.
• China’s rail freight volume fell 1.7 percent year-over-year in June; freight volume by road was flat. Airline’s Revenue Freight Tone Kilometers (RFTK) was up 0.7 percent, down from 4.6 percent in May. All numbers indicated weaker activities.
• Gold jewelry companies in China and Hong Kong are probed for price manipulation by China’s National Development and Reform Commission (NDRC). Recent profit alerts in Hong Kong have seen gold jewelry companies increase sales due to higher same-store sales growth, in spite of the sharp gold price correction.
• China State Administration of Taxation said that it will expand property tax to more cities.
• Singapore’s non-oil domestic exports fell 8.8 percent in June, while the consensus was looking at a contraction of 5.8 percent.
• The Monetary Policy Committee (MPC) of Thailand has cut its forecast for GDP growth this year to 4.2 percent from 5.1 percent, citing a slowdown in domestic demand and a delay in export recovery. This is a sharp cut and more than reverses the two previous upgrades to the growth forecast from 4.5 percent at the beginning of the year. In spite of the cut on the GDP growth forecast this year, MPC expects normal growth will be restored next year, supported by strong employment and income, a rise in investments from both the private and public sectors, and also from export recovery.
• Russia’s fixed capital investment unexpectedly fell the most since February 2010, adding to signs that the economy is failing to gain momentum. Investment dropped 3.7 percent in June from a year earlier, according to the Federal Statistics Service in Moscow. The median estimate, in a Bloomberg survey, was for a 0.5 percent increase. On the same note, unemployment rose to 5.4 percent from 5.2 percent in May. Russia’s economic growth is stumbling to the weakest pace since 2009 contraction, as the commodity weakness affects demand for Russian exports of oil, gas and metals.
• Peru’s GDP growth for the month of May slowed to 5 percent from 7.7 percent in April, the government’s statistics agency said. Last week the central bank held the key rate at 4.25 percent for the twenty-sixth month, citing close to potential growth and anchored inflation, yet it highlighted that reserve requirements could be loosened if needed to boost lending.

Opportunities

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• As shown in the graph above, the Philippines has benefited from increasing overseas workers remittances and growing business process outsourcing (BPO) revenue. The two sectors add more than 30 percent to the GDP and dramatically increase domestic consumption, which benefits real estate and retail businesses, and in the meantime, supports the Philippine peso. For the first five months of 2013, remittances from Overseas Filipino Workers (OFWs) have already increased 5.6 percent year-over-year, which was faster than the central bank’s forecast of 5 percent for the year. The Philippines’ government also promised to increase spending on infrastructure, looking to invest 3, 4.1, and 5 percent of GDP in the next three years from their current goal of 2.5 percent in 2013. The amount would more than double from this year’s target of 299.4 billion Philippine pesos to 834.5 billion by 2016. The market is not fully confident on this guarantee, since the government seems to promise more but do less.
• Hopes for liberalization of Mexico’s oil industry have once again been raised following President Enrique Pena Nieto's recent interview with the Financial Times. Presently, the Mexican nation acts as the sole owner of the country's hydrocarbons, and gives state-owned oil firm, Pemex, sole responsibility for the management of the entire energy sector. However, in the absence of foreign capital and expertise, Mexico’s crude oil production has fallen noticeably in recent years. The opening of deepwater exploration and production to private companies, as hinted at by the president, may be the catalyst to reserve this decline.
• China eliminated the lower limit on lending rates offered by the nation’s financial institutions, as economic growth slows and the government seeks to liberate credit markets from government involvement. According to credit analysts, credit conditions have been very tight as of recently, and markets are unlikely to see an immediate drop in rates, but the lending costs will have more downward pressure when funding becomes abundant. The liberalization of the banking sector will also encourage private investments to pursue the banking business and increase competition, and therefore, improve money efficiency as China Premier Li Keqiang has intended.

Threats

• With the inflation expectation rising after the fuel price hike, along with stubborn current account deficit, the Indonesia rupiah might face further downward pressure. To make things worse, the sell-off due to the Federal Reserve tapering fears has caused foreign reserve to drop, which will further aggravate currency weakness. The currency effect will increase operating and capital expenses, and lower corporate profits due to rising bond yields and rising import expenses.
• The Hungarian government is proposing new legislation to retroactively rewrite foreign-currency loans, mainly to address the losses that borrowers incurred from exchange rate movements in foreign currency denominated mortgages. The government’s aim is to help Hungarian home buyers who borrowed mainly in Swiss francs to take advantage of lower interest rates, until a devaluation of the Hungarian forint currency sent repayments soaring. Hungarian banks, which are facing their third consecutive year of losses as a result of excessive bank taxes in a struggling economy, may be forced by the office of the Prime Minister to absorb the foreign exchange losses.
• Pablo Longueira, former Minister of Economy and the conservative coalition's candidate in the Chilean presidential campaign, has dropped out of the race because of health issues. The surprise resignation further weakens the chances for the governing conservatives to beat former president Michelle Bachelet of the Socialist Party in the November. Bachelet, who ended her presidency term in 2010, is campaigning on promises to increase taxes to address the nation’s vast income inequality.