African Reserves

Delta variant of Covid creates gap in emerging markets as outperformers strike



Countries lagging behind in vaccination rates, such as South Africa and Russia, could feel the pressure as they tighten restrictions that will hurt economic activity, according to Crédit Agricole CIB. Once the best performers of 2021, the rand and ruble were among those that pushed an emerging market currency index down in June for the first time in three months.

“Achievements in terms of vaccination will increasingly be a differentiator among emerging markets in the second half of the year,” said Sébastien Barbe, Head of Emerging Markets Strategy at Crédit Agricole. “The impact of the spread of variants of the virus will vary widely depending on on vaccination rates,” as well as economic and political factors, he added.

The South African rand and the Colombian peso are both feeling the pain of a spike in Covid-19 cases, preventing expectations of a tightening of monetary policy. It is also wreaking havoc on their economies: Tighter restrictions put pressure on a South African economy that is reeling from its worst contraction in a century, while Colombia’s decision to suspend a plan to raise taxes earned it a lowered rating by Fitch Ratings.

The currencies of South Africa and Colombia are the most vulnerable because their central banks do not increase their rates “to constitute a real cushion of rates” against the United States, according to Ed Al-Hussainy, principal analyst of the rates of the United States. interest and currency at Columbia. Threadneedle Investments in New York City. Adding pressure: the prospect of increased budget spending and the risk of cash outflows after yield-hungry global investors flock to nations’ assets this year, he said. declared.

In comparison, the Brazilian real and the Mexican peso will be more resilient as their central banks tighten their policies, he said. The Real has surpassed all of its developing peers this year, even though Covid-19 cases remain at record levels.

The spread of the delta strain is also wreaking havoc in Southeast Asia. MUFG Bank Ltd. expects the low income from tourism to weigh on the Thai baht. Meanwhile, the Indonesian rupee fell to its lowest level since April, with the country imposing the tightest restrictions to date on economic centers of Java and Bali.

Deepening of divisions

Only a few developing countries – Chile, China, Israel, the United Arab Emirates, and countries of central and eastern Europe – have inoculated nearly half of their populations, the level considered necessary to curb the spread of the variant. delta, Bank of America Corp., said in a report Friday. Most of the major emerging markets are expected to get there by the end of the year, including Brazil, India, Indonesia, Mexico, Russia and Turkey, said David Hauner, head of cross strategy. -asset at BofA.

South Africa is the outlier, he said, with only about 5% of its population vaccinated. At the current rate, it would take until 2023 for the nation to reach 50%. In Colombia, only 11% of the population is fully vaccinated – a lower proportion than in Chile, Mexico and Brazil.

Economic data confirms the division: Purchasing manager indices in Russia and South Africa, as well as those in Asian countries with relatively low vaccination rates, fell in June. Those in Eastern Europe and Latin America, where immunization programs are more advanced, have mostly increased.

This could increase pressure on central banks in developing countries to remain accommodative, another negative point for currencies as the Federal Reserve begins to discuss withdrawing stimulus measures. And that could widen the gap between emerging and developed markets. It’s already showing: A Bloomberg index of developed markets stocks has beaten its emerging market counterpart by a factor of almost two since the start of the second quarter.

Even more industrialized countries, like the UK, are struggling to contain the virus, despite relatively tight restrictions and advances in vaccines. So the latest wave of infections in many developing economies – in many cases not yet due to the new strain – suggests that “the results could be much worse now,” Deutsche Bank AG said in a report. .

“We are closely monitoring the resurgence in the number of infections,” said Witold Bahrke, Copenhagen-based senior macro-strategist at Nordea Investment. “This is one of the factors that leads us to underweight emerging currencies, especially given its potential impact on the EM-DM Growth Differential.”

status quo

  • Central bankers in Romania, Malaysia, Peru and Poland are all expected to keep borrowing costs at current levels
  • Romanian policymakers will likely keep the country’s benchmark rate at 1.25% on Wednesday. The leu fell 4.2% in 2021, trailing most regional peers.
  • The next day, Malaysia’s central bank could keep its key rate at an all-time high of 1.75%, maintaining an accommodative stance after the government announced a new tax package of 150 billion ringgit ($ 36 billion) this week. last. The ringgit has fallen more than 3% this year.
  • Also on Thursday, Peruvian policymakers are expected to keep the country’s benchmark rate at an all-time high of 0.25%, but they could take a more cautious tone in their statement after higher-than-expected inflation last week, as well as and external risks, according to Bloomberg Economics. The ground slipped to third among emerging markets in the second quarter as a close presidential election raised concern among investors.
  • On the same day, the Polish monetary authority will likely keep borrowing costs at 0.1%. The zloty fell 1.8% in 2021, rebounding in the last quarter.

Inflation indices

  • Inflation data is expected from Thailand on Monday, the Philippines on Tuesday and Taiwan on Wednesday. China will release consumer and producer price inflation indicators on Friday.
  • China’s PPI could cool from 13-month high of 9% in May due to slower metal ore and coal price increases, while CPI could accelerate to 1.8 % against 1.3% the previous month, according to Bloomberg Intelligence. The yuan is the first emerging currency in Asia this year after the Taiwan dollar.
  • Taiwan to release foreign reserves data on Monday, followed by China, Indonesia and Malaysia on Wednesday and Thailand on Friday
  • Taiwan to release June trade statistics on Wednesday, while the Philippines to release May trade figures on Friday
  • Taiwan’s exports are expected to have jumped 32.6% from a year earlier, Bloomberg survey of economists finds, reflecting growing demand for semiconductors
  • Brazil and Mexico will release June inflation figures on Thursday after accelerating price growth led Latin America’s two largest economies to raise interest rates. Traders will look for clues to further rate hikes in Thursday’s minutes of Mexico’s June rate meeting, when policymakers unexpectedly increased borrowing costs.
  • Chile could report Thursday that inflation accelerated last month after weeks of rising energy costs, according to a Bloomberg analyst poll. Inflation could even exceed the target range, increasing pressure on the central bank to start tightening in the third quarter. Chile also reports trade figures for June on Wednesday.

Brazil’s retail figures on Wednesday are likely to show sales soared 17% in May from a year earlier, down from 24% in the previous month, as emergency cash distributions boost incomes for consumers. supermarkets.

This story was posted from a feed with no text editing. Only the title has been changed.

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