Korea Gets a Credit Upgrade and Thailand’s Constitution Referendum Passes

S&P upgraded Korea a notch to AA with a stable outlook, Voters passed the constitutional referendum in Thailand by a wide margin, The IMF and Egypt have reached a staff-level agreement on a 3-year $12 bln loan program, Argentina’s central bank will begin using a new overnight rate to manage monetary policy, Political uncertainty has returned to Brazil

S&P upgraded Korea a notch to AA with a stable outlook, Voters passed the constitutional referendum in Thailand by a wide margin, The IMF and Egypt have reached a staff-level agreement on a 3-year $12 bln loan program, Argentina’s central bank will begin using a new overnight rate to manage monetary policy, Political uncertainty has returned to Brazil

In the EM equity space as measured by MSCI, Colombia (+6.3%), Mexico (+5.8%), and China (+4.1%) have outperformed this week, while Indonesia (-0.9%), Philippines (-0.6%), and India (+0.2%) have underperformed.  To put this in better context, MSCI EM rose 2.8% this week while MSCI DM rose 1.2%.

In the EM local currency bond space, Turkey (10-year yield -28 bp), Mexico (-15 bp), and South Africa (-14 bp) have outperformed this week, while Thailand (10-year yield +5), Philippines (+3 bp), and Ukraine (+2 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 10 bp this week to 1.49%.

In the EM FX space, COP (+5.7% vs. USD), MXN (+3.3% vs. USD), and ZAR (+2.9% vs. USD) have outperformed this week, while INR (-0.2% vs. USD), PKR (-0.1% vs. USD), and EGP (flat vs. USD) have underperformed.

S&P upgraded Korea a notch to AA with a stable outlook.  This is right where our own ratings model puts it.  The move also matches Moody’s, which upgraded Korea to Aa2 back in December.  Fitch now lags with its AA- rating, but it should follow suit in the coming months.

Voters passed the constitutional referendum in Thailand by a wide margin.  The approval of the new constitution that was submitted by the military-led government will allow the planned general elections in 2017 to go forward.  Moody’s noted that the referendum anchors short-term political stability.

The IMF and Egypt have reached a staff-level agreement on a 3-year $12 bln loan program.  Implementation is key, and we think the pound will be devalued again.  The IMF program calls in principle for lowering energy subsidies and increasing revenue collection under a new VAT that is currently being discussed in parliament.  The proposed VAT rate of 14% is higher than the current 10% sales tax.  However, the government emphasized that many basic goods will be exempt from the VAT, limiting the impact somewhat on the poor.

Argentina’s central bank will begin using a new overnight rate to manage monetary policy.  Since December, the central bank has been running policy via the 35-day notes known as Lebacs.  The new rate will be introduced in the coming months and will be set monthly, according to officials.

Political uncertainty has returned to Brazil.  Reports suggest Marcelo Odebrecht is nearing a plea bargain that links acting President Temer to an illegal BRL10 mln campaign contribution in 2014.  Meanwhile, the impeachment process continues after the full Senate overwhelmingly voted for it 59-21 on August 9.  Rousseff’s final trial will likely be set for late August or early September, where a two-thirds majority is needed.

Emerging Markets: What has Changed is republished with permission from Marc to Market