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EM election indigestion

Head of Commodities, ESG and
Emerging Markets Research –
DIFC Branch – Dubai
T:+971 (4)387 5033


Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031


Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968


MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

EM assets have had a challenging period over the last week digesting the margin surprises (not headline results) in elections across three major markets – South Africa, Mexico and India. The moves have been led in Mexico, where risks of post-election policy pivots appear most acute. These surprises have forced investors’ attention to fiscal dynamics. We view it is still too early to call for a synchronised rise in EM fiscal risk – though the prospect of rising fiscal concerns in negative scenarios cannot be overlooked. Medium-term fiscal risks may be exacerbated by a growth downturn that may pressure fiscal gaps, as authorities could intensify anti-cyclical fiscal measures. All in, catalogued in our EM 2024 outlook that this year will not be a normal year for EM politics (see here). It’s also not just an EM story with the US election in November, too, warranting the focus of EM investors. We continue to believe that in a de-globalised era, this cycle may see less policy discipline than we have historically been accustomed to with volatility abound.

FX views

EM currencies have continued to weaken against the USD over the past week extending the sell-off since the middle of last month. The USD has staged a sharp rebound over the past week driven primarily by the release of the robust NFP report for May. EM political risks remain in focus after triggering carry trade unwind.

Week in review

Poland kept rates on hold at 5.75% with hawkish signals that rates will likely be kept on hold until mid-2025. Inflation in Turkey rose to 76% y/y in May – likely signalling a peak in the cycle though the disinflation process remains uncertain. Russia kept rates on hold at 16.00% with a hawkish signal of rate hikes (we expect a 100bp increase in rates in July). Egypt’s international reserve position further strengthened in May (up USD5.1bn to USD46.1bn) following the UAE’s recent capital injections. Finally, South Africa witnessed an increased in Q1 2024 GDP (0.5% y/y) and a narrowing in its current account deficit (-1.2% y/y) in the first quarter of this year.

Week ahead

This week, will be a one across the EM EMEA region. A rates meeting will be held in Ukraine (13 June). Inflation data for May will be released in Egypt, Hungary, and Ukraine (all on 10 June), Czech Republic (11 June), Ghana (12 June), Romania (13 June), as well as in Poland, Israel, and Russia (all on 15 June). GDP data for Q1 2024 will be published in Ukraine (11 June). Finally, current account data will be released in Turkey (10 June). In South Africa, coalition talks are ongoing following the 29 May general election.

Forecasts at a glance

Growth across the EM universe is set to stabilise as domestic fundamentals offset external drags, with some rotation from the largest to smaller EMs. Inflation and interest rates are both “over the hump” – disinflation is progressing, and the decline in rates will continue and broaden in 2024 (see here).

Core indicators

The latest monthly IIF flow data signalled that EM securities attracted USD5.5bn of inflows in May 2024 – the weakest level since October 2023. The rationale for the weakening trend is on the back of ongoing EM investor caution suggests surrounding the higher-for-longer DM rates narrative, alongside an elevated degree of volatility stemming from geopolitics and fragmentation uncertainty.

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