MUFG: A strong start to 2023 but near-term uncertainties abound for EMs

MUFG: A strong start to 2023 but near-term uncertainties abound for EMs

February 6, 2023

Emerging Markets
Emerging Markets (04) EM Opkomende landen Azië

Whilst we maintain our EM annual outlook conviction that 2023 will be mired by a tale of two halves for EMs – headwinds in H1 2023 making way for tailwinds in H2 2023, we recognise that it has been solid start to the year for the complex.

Whilst not much has changed since we laid out our annual thesis, core to the January outperformance has been the repricing lower of DM rate hikes and optimism on China’s reopenings (although high frequency indicators have yet to fully validate this upbeat mood music). Yet, uncertainties linger. Tighter financial conditions, the global manufacturing cycle downturn and geopolitics will likely temper near-term gains.

FX views

The USD has staged a rebound over the past week as it partially reverses losses recorded at the start of this year. The resilience of the US economy has cast some doubt on expectations for the Fed rate pause and then cuts later this year – the USD rebound is unlikely to be sustained. Also, weak commodity prices casts some doubt on the recent building-up of investor optimism over a softer global landing. However, CLP continues to outperform on the back of China reopening optimism.

Week in review

Saudi Arabia’s real GDP expanded from 3.9% in 2021 to 8.7% in 2022 – the strongest level since 2011. Czech Republic maintained rates at 7.00%, committed to continued FX interventions and Governor Michl pointed to keeping rates higher for longer. In a surprise move, Egypt kept rates on hold at 16.25%, to assess the impact of its “frontloaded” tightening measures. Finally, headline inflation in Turkey fell from 64.3% y/y in December 2022 to 57.7% y/y in January, surprising expectations to the upside.

Week ahead

This week we get three rate decisions all of which we (and consensus) anticipate to print with no changes – Poland (6.75%), Romania (7.00%) and Russia (7.50%). Meanwhile, inflation for January in the Czech Republic to peak (MUFG: 16.9% y/y; consensus 17.1% y/y) and Hungary to continue rising (MUFG: 25.0% y/y; consensus 25.2% y/y).

Forecasts at a glance

Whilst EMs continue to grapple with much the same themes at the turn of the year, we view the outlook as a tale of two halves in 2023. A fading boost from reopenings, a global manufacturing cycle downturn and tighter financial conditions are lumpy headwinds that will weigh on EM prospects in the first half of 2023. However, China’s zero COVID policy exit, the eventual end of rate hikes and a US dollar peak, all offer significant tailwinds to the EM complex in the second half of 2023.

Core indicators

EMs have witnessed fourth consecutive weeks of weekly capital inflows, thanks to the sharp improvement in risk sentiment led by the repricing of the monetary policy by core central banks, particularly the Fed.

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