MUFG: Ten questions for EM’s in 2023

MUFG: Ten questions for EM’s in 2023

January 9, 2023

Emerging Markets
Emerging Markets (04) EM Opkomende landen Azië

We wish all of our readers a happy, healthy and prosperous 2023. In the first EM EMEA Weekly of this year, we examine what we believe are the ten most important macro questions for 2023.

EM FX continue to benefit from improving investor sentiment, policy support and re-opening optimism in China. US recession risk encourages speculation over further dovish Fed policy pivot. US CPI poses risk to USD weakening trend. US recession risk encourages speculation over further dovish Fed policy pivot weighing on USD and US yields. US CPI poses risk to USD weakening trend in week ahead.

Trading views

EM equities are starting to outperform their US peers however there is a long way to go before allocators get excited. While EM FX has strengthened against the USD there has not been much overall outperformance which is strange, given China COVID reopening is leading the global growth charge. Positives for EM seem to centre around cheap valuations, improving balance of payments but actual positive catalysts for EM seem a bit stretched – China upside growth picture could be one. Risks centre over how long we can be in the middle of the USD smile, looking for a goldilocks period alongside the geopolitical risks in the EM world.

Week in review

The EM EMEA aggregate PMI rose from 50.0 in November 2022 to 51.2 in December 2022 (on a PPP-weighted basis), exceeding its long-term average (51.0). A third round of sharp FX declines over the first days of 2023 took EGP to ~27 against the USD, taking EGP losses since the first devaluation in March to ~45%. Inflation in Poland decreased from 17.5% y/y in November to 16.6% y/y in December, on much weaker household energy, transport fuel and food costs. Finally, inflation in Turkey declined sharply from 84.0% y/y in November to 64.3% y/y in December, on the back of base effects due to the currency crisis in December 2021 and falling energy prices.

Week ahead

This week, beyond the rate decision in Romania (MUFG and consensus: +25bps to 7.00%), we will have a host of inflation prints for December, (i) in Egypt (MUFG: +2.4ppts to 20.2% y/y); (ii) in Russia (MUFG: +0.2ppts to 12.2% y/y; consensus: 12.0% y/y)); (iii) in Hungary (MUFG: +2.5ppts to 25.0% y/y; consensus: 25.8% y/y); and (iv) Czech Republic (MUFG; -0.3ppts to 16.0% y/y). Beyond EMs, market direction will be on the US CPI reading for December (consensus: -0.6ppts to 6.5% y/y) which will be an important data point for assessing Fed policy direction.

Forecasts at a glance

Headwinds facing EMs are getting stronger as persistently high inflation prompts more hawkish monetary policy responses leading to further tightening of financial conditions and more sacrifices from growth.

Core indicators

In 2023, the backdrop for fund flows remains challenging. On the one hand, we have a deteriorating global liquidity backdrop, which implies further weakness in portfolio flows into EM. On the other hand, there is the widening of EM’s growth premium over DM, which should attract more capital into EMs.

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