Theme of the month
It's been an eventful month, beginning September, for global markets and a rather favourable one for EMs. Broad based gains were witnessed across all asset-classes, and more notably in FX markets. First and most importantly, the US Fed unexpectedly deferred QE tapering in its September 18th FOMC meeting, thereby offering a temporary reprieve to EMs. Secondly, concerns of a slowdown in
China, a major export destination for EMs, have eased considerably amidst signs of economic recovery. Thirdly, the nomination of known-dove Yellen as the next Chairperson of the Fed has provided a measure of comfort to markets. And more recently, expectations of a further deferral of QE tapering have gained traction on account of the possible growth implications of the recently ended fiscal standoff in the US.
On the whole, near-term risks seem to have ebbed. We believe that the current economic scenario offers the perfect window of opportunity for EMs to address structural constraints and fortify domestic fundamentals in order to withstand the impact of the inevitable QE tapering, whenever it happens.
China: GDP growth improved in Q3; Yuan at record highs
Data released last week showed that China's GDP rose by 7.8% YoY (+2.2% QoQ), faster than prior quarter's +7.5% YoY reading (+1.9% QoQ). Evidently, growth in Q3 relied heavily on investment spending as the Government maintained its focus on urbanization, thereby encouraging spending on railways and affordable housing projects. However, leading indicators suggest that growth might slow down a bit in Q4'2013.
South Africa: Inflation concerns to restrict SARB's policy options
South Africa remains in the midst of a fragile economic recovery, with continued labour unrest posing downside risks to growth. The unemployment rate remains high at 25.6%. However, the Central Bank is unlikely to ease policy as inflation remains above the SARB's comfort range.
Indonesia: Domestic imbalances to keep the Rupiah under pressure
The Indonesian economy continues to battle against domestic imbalances, namely- a high current account deficit, persistently high inflation and a weak currency. Some of the measures taken to correct these imbalances, such as a hike in subsidized fuel prices and interest rates and stricter bank lending norms, are likely to weigh on near-term growth. Against this backdrop, the Rupiah is also likely to remain under pressure.
Malaysia: Recovery around the corner
Malaysia's economy is showing signs of recovery, as reflected in the higher Q2 GDP growth number. Investment and private demand remains firm and export growth is on the rise. These three demand factors are expected to keep growth supported going ahead. However, a downside risk stems from the possible fiscal consolidation measures that the Government might consider to address the high fiscal deficit.
South Korea : On the path of gradual recovery
South Korea's economy seems poised for a gradual recovery, led by government spending and investment. However, the external sector remains under pressure. Domestic demand, meanwhile, is likely to remain at the current low-levels as household debt remains high. Going ahead, a recovery in exports coupled with firm private investment is expected to keep growth supported.
Brazil: Currency expected to recover in the near term
The Brazilian Real depreciated very sharply in the period between May-September and has only recently started recovering its lost ground. Maximum depreciation was witnessed during August when at the peak the Real had fallen by almost 23% from the beginning of May. However, from the latter half of September it has started recovering again primarily as concerns about Fed tapering have been laid to rest for now.
Thailand: Economy expected to recover from recession
The Thai Baht had seen a maximum depreciation close to 10% against the Dollar during September as compared to its levels at the beginning of May. Since then however, it has recovered some ground as global risk sentiment has improved on the back of a delay in Fed tapering.
Please refer to the attached document for details.
Regards,
ICICI Bank : Treasury Research
Contact:
Sunandan Chaudhuri:
(+91-22) 2653-7525
