The Turkish Lira Continues To Slide, Are Bonds Next?

The Turkish lira is languishing at near record lows as December dawns.

The currency, which touched its lowest ever levels against the US dollar on November 23, found itself close to that level as November ended and December began — and its slide may not be over yet.

Further weakness in the lira will impact local currency-denominated bonds unless steps are taken to counter its decline.

How can the sliding lira impact Turkish bonds?

Between local currency-denominated equities and bonds, currency movement generally has a bigger impact on the latter since the absolute returns are usually smaller.

A weakening local unit will lower returns from a bond denominated in that currency when converted to the comparable foreign unit. Hence, since the Turkish lira has been declining against the greenback, returns from Turkish bonds denominated in the lira will fall when converted into dollars. Conversely, Turkish bonds denominated in dollars would see their returns rise.

This can be expected to be the case going forward, given market expectations of a further weakening in the lira.

But there is a caveat.

Central bank action

Turkey has been wrestling with elevated levels on inflation; it has been in double digits for most of 2017 so far. As shown by the graph below, after falling into single digits in July, prices began to rise again and for October, they stood at their highest level in nine years.

If the Central Bank of Turkey were to raise its key rates at this juncture, it would not only help in controlling price rise, it will also support the sliding lira.

But will the central bank take this action, and why has it not done so already?

The answer lies with the now even more empowered presidency.

In late November, President Recep Tayyip Erdoğan had said that the “artificial inflation” in exchange rates would revert to normal soon.

During the event, he also reiterated his belief that higher interest rates actually caused inflation rather than restraining it.

Apart from his belief, another reason why the President wants interest rates to remain low is to enable cheap credit via which he intends to fuel economic growth as well as maintain his popularity with people.

Hands tied

This stance by an exceptionally powerful political establishment has prevented the central bank from undertaking an aggressive rate action. Its one-week repo, overnight lending and late liquidity window rates continue to remain at 8%, 9.25% and 12.25% respectively. The last major change in the one week repo rate was effected in November 2016.

The central bank has taken some other steps and indirect measures to curtail inflation and support the lira though.

From November 6, it decreased the amount of foreign currency that lenders are required to park with the regulator. This unshackled $1.4 billion of foreign exchange for banks. It also allowed exporters to repay up to $5 billion in forex loans not due until February in lira at promising rates.

Recently, the central bank disallowed lenders from using its aforementioned 9.25% interbank overnight rate facility, thus forcing them towards the 12.25% late liquidity window. This was intended to lift the bowering costs for banks, thus tightening the monetary stance a bit, albeit indirectly.

But given the multi-year high levels of inflation, these measures may not suffice to contain price rise and may also prove to be insufficient to provide a floor to the lira. This also means continued lower returns from bonds.

Though an aggressive stance by the central bank is warranted, its possibility remains low. However, some rate action in its upcoming meeting would be required to boost sentiment towards the Turkish lira failing, in which case a further decline in both the currency and returns on local bonds can be expected.

How the 10 Largest Chinese Bank Stocks Have Fared Since the Announcement of Removal of Foreign Ownership Limits

Earlier in November, China’s Vice Finance Minister Zhu Guangyao had announced that the country will remove foreign ownership restrictions on banks along with easing stake-holding in securities firms, asset managers, and insurance companies.

At present, a single overseas investor can own a maximum 20% of a Chinese commercial bank and the overall cap on foreign investment in banks is 25%.

The announcement has invigorated global banks and financial companies several of whom, including JPMorgan Chase & Co. and Morgan Stanley, have reiterated their commitment to doing business in China. Others like Switzerland-based UBS Group intend to increase their stakes in their joint ventures with Chinese banks.

The new vision, whose implementation is expected to be slow, will help these global institutions access the deep and wide financial universe of the second largest economy in the world. It will address the long-standing concern of ownership ceiling for foreign companies at a time when China has been making efforts to enhance access to its financial markets.

Boost for foreign banks

Foreign banks’ ownership of Chinese banking assets is relatively puny. According to data from the China Banking Regulatory Commission, assets of foreign banks in China had stood at 2.9 trillion yuan ($436 billion) at the end of 2016, with the percentage of the country’s total banking assets (1.26%) being the lowest since 2003.

If all assets of foreign banks in China were collectively considered as a single entity, it would rank 58th in S&P Global Market Intelligence’s 2017 tabulation of the 100 largest banks in the world.

This relaxation in ownership limits will also reinvigorate the interest of foreign financial institutions in China.

At the beginning of this century, firms like Citigroup, Bank of America, Goldman Sachs and UBS, among others, had acquired stakes in Chinese commercial banks. However, at present, except for HSBC Holdings, which owns about a fifth of China’s Bank of Communications Co., all other lenders have divested their investments.

According to Fitch Ratings, this decision by China could heighten interest in the country’s smaller banks.

How do Chinese banks feel about the move?

Foreign banks are thrilled by the decision and are looking forward to steps which will detail its implementation. But what about Chinese banks?

The Asian nation’s banks dominate the global spectrum when it comes to size with four of them figuring in the top five. Let’s look at how stock prices of the ten largest banks of China have fared since the announcement on November 10.

Industrial and Commercial Bank of China

The Industrial and Commercial Bank of China (IDCBY) is the world’s largest bank by assets according to the 2017 report of the 100 largest banks in the world by S&P Global Market Intelligence. It has nearly $4 trillion in assets.

Its stock had declined by 2% on November 10 – the day when the announcement on foreign ownership limits in banks was made – compared to a day ago. A day later, it bounced back and closed 0.3% higher over the previous two trading days.

From its close on November 9, it had risen by 4.9% to its peak on November 22 and is up by 2.2% at present.

China Construction Bank

China Construction Bank (CICHY) is the second largest in the world by assets according to the aforementioned report.

Its stock had declined 0.7% on the day of the announcement and continued to fall on the next trading day on November 13. By the end of the day, it had declined by 1.3% compared to its close on November 9.

Further, since that day, it has risen by 1.9% until November 24.

Agricultural Bank of China (AgBank)

The third largest bank in the world – the Agricultural Bank of China (ACGBY) by assets had seen its stock decline by 1.4% on November 10 compared to a day ago.

It bounced back a bit the next trading day with the decline since November 9 narrowing to 1.1%.

At present, the stock is up by 3.3% compared to its level before the announcement regarding foreign ownership levels in Chinese banks.

Bank of China

Bank of China (BACHY) – with nearly $3 trillion in assets according to the aforementioned 2017 S&P report – is the fourth largest bank in the world.

After the announcement by Vice Finance Minister Guangyao on November 10, its stock had declined by 0.8% from a day ago level. It was flat on the subsequent trading day.

As of November 24, its stock was trading at the same level at the end of the day as on November 13.

China Merchants Bank

The shares of China Merchants Bank (CIHKY) have been one of three in this curated list of ten which had responded enthusiastically to the announcement by the government.

Though it was flat on November 10 compared to a day ago, it rose 2.2% on the following trading day.

Since November 9, the stock reached a peak of 14.1% on November 22 before shedding some of its gains.

Bank of Communications (BoComm)

After having fallen by 0.3% on November 10 from a day ago, the stock of Bank of Communications (BKFCF) reversed its losses the next day.

Since November 9, it has returned 0.9% until the week ended November 24.

Shanghai Pudong Development Bank

Alike the shares of China Merchants Bank, those of Shanghai Pudong Development Bank have broadly risen since the announcement on November 10.

Its stock rose by 0.6% on the day of the announcement and continued rising on the next trading day.

By November 22, it had reached an intra-period peak by gaining 5.4% over its closing level on November 9 and is up over 4% at present since that day.

Industrial Bank Co.

The stock of Industrial Bank Co. (601166.SS) had initially declined post the announcement, but later recouped its losses and gained the next trading day.

By November 22, the shares had risen over 5.5% compared to their closing level on November 9 and are trading above 4.7% at present.

Postal Savings Bank of China

The stock of the Postal Savings Bank of China has been the only one among the ten included in this review which has declined since the announcement on November 10.

Initially, it had gained 0.9% over the previous trading day on November 9. But then it erased gains on the subsequent trading day and remains down by over 1.7% levels since that date.

China CITIC Bank Corporation

The shares of China CITIC Bank Corporation (CHCJY) – similar to those of China Merchants Bank and Shanghai Pudong Development Bank – have shown enthusiasm about the announcement.

They were flat on November 10 compared to a day ago and posted some gains on the subsequent trading day.

Since then, they have broadly continued to rise and had gained 2.8% over their November 9 level by November 22 and even after some correction, are 2% up over those levels.

Valuation and analyst views

The following tables show the price-to-earnings multiples of these banks and analysts’ views on them:

The Nine Stocks Which Have Led the Nosedive in the Dubai Financial Market

The Dubai Financial Market General Index continues to deflate. Since the 3,665 level seen on October 25, the index has declined 6.8% until November 20.

Driving the decline are stocks from the consumer staples & discretionary and real estate & construction sectors among the nine classified by the exchange. Between the aforementioned dates, these sectors have dived 15% and 11% respectively. Telecommunication is a distant third, down by 6.5%.

There following are the nine stocks which have led this significant drop, each of which have fallen in double digits over the aforementioned period.

Arabtec Holding: All securities comprising the real estate & construction sector have declined between October 25 and November 20, led by Arabtec Holding PJSC. The company operates in the housing and commercial construction space and also provides infrastructure services. Its geographic expanse spans the United Arab Emirates, Middle East, and North Africa.

Its stock has been the largest decliner on the Dubai Financial Market for the period outlined above. Down by 18.1%, the stock leads the four companies from the real estate & construction sector on this list.

Drake & Scull International: The stock with the second-biggest decline on the list is also from the real estate & construction sector. Shares of Drake & Scull International PJSC are the most heavily traded on the Dubai Financial Market.

The company, which operates in the construction space in the Middle East, Europe, Asia, and North Africa, has seen its shares decline by 16% from October 25 to November 20.

DXB Entertainments: Earlier known as Dubai Parks and Resorts PJSC, DXB Entertainments PJSC functions in the leisure and entertainment segment in the United Arab Emirates. Its offerings include theme parks, hotels and dining experiences.

The stock forms part of the consumer staples & discretionary sector according to the categorization by Dubai Financial Market and is by the far the biggest decliner from the sector, down 15.7% in less than a month.

DAMAC Properties Dubai Co.: The third entrant from the real estate & construction sector and fourth overall is luxury real-estate developer DAMAC Properties Dubai Co. PJSC.

The company which develops high-end residential, commercial, and for leisure properties has seen its stock plummet by 15.3% from October 25 until November 20.

Al-Madina For Finance & Investment Company: The Shariah-compliant private equity firm is engaged in direct investments, fund management, and financial services among other businesses. It is the only entrant from the investment and financial services sector in the list and has fallen by 12.5% from October 25 until November 20.

AAN Digital Service Holding Co: Similar to Al-Madina, AAN Digital Service Holding Co is the sole entrant in this list from the telecommunication sector. With a decline of 12.4% over the aforementioned period, the company’s stock has emerged as the sixth largest decliner.

Dar Al Takaful: At the seventh position is the only entrant from the insurance sector – Dar Al Takaful PJSC. The firm which offers a wide range of insurance and reinsurance products in accordance with Shariah law has seen its share prices decline by 12% from October 25 until November 20.

Union Properties: Rounding-off the four companies from the real estate & construction sector is Union Properties PJSC. The company offers real estate property investment, development, and management. Over the aforementioned period, its stock has been down 10.8%.

Emirates Investment Bank: At the bottom of our list is Emirates Investment Bank PJSC which offers investment and private banking services including portfolio and wealth management. Its stock, down 10% from October 25 until November 20, leads decliners from the banking sector as categorized by Dubai Financial Market.

Stocks of National Central Cooling Company PJSC (Tabreed) from the services sector, down 9.9%, and Dubai Islamic Insurance & Reinsurance Company (AMAN) from the insurance sector, down 9.8%, narrowly missed the list of double-digit decliners.

These Philippine Stocks Have Been Humming Since the Friendly Exchange Between Trump and Duterte

It was in October 2016 on a visit to Beijing that Philippine President Rodrigo Duterte  announced his country’s pivot away from the US and towards China. This created ripples across the geopolitical fabric in the region spreading all the way to Uncle Sam’s doorstep.

Philippine stocks were negatively affected, and the 70-year friendship between the two countries seemed to be heading for severe weather.

However, as the graph below shows, after declining until the penultimate week of 2016, the two main indices of the Philippine Stock Exchange (PSE) recovered and have had a good 2017 so far.

Net inflows to the sole ETF dedicatedly investing in Philippine stocks and traded on US exchanges – the iShares MSCI Philippines ETF (EPHE) – show a similar trend.

From the last week of October 2016 until November 2017, the $177 million ETF has seen net outflows of nearly $36 million according to Bloomberg data, owing primarily to the sharp outflows witnessed last year after Duterte’s comments. In YTD 2017, the fund has seen net inflows worth $12.2 million.

Will the friendly tone keep foreign money flowing?

The EPHE has returned 13.8% in this year so far, primarily due to financials (Ayala Corporation (AYALY), BDO Unibank (BDOUY)), real estate (Ayala Land (AYAAF), SM Prime Holdings (SPHXF)), and industrials (SM Investments Corporation (SMIVY)) sectors.

As far as the domestic markets are concerned, overseas investors have continued to buy Philippines stocks even after the announcement of a pivot away from the US as shown in the graph below.

Recently, during a visit to the island nation, US President Donald Trump termed the relationship between him and President Duterte as “great” while his counterpart sang a popular Filipino song.

Though amidst the camaraderie, broader Philippines stock indices did not hum the same tune, there were specific stocks which did quite well.

While the PSEi is comprised of 30 stocks, the broader PSE All Share Index is made up of 274 stocks.

At the end of trade on November 13 (the day that Trump and Duterte intially met), only three stocks forming the PSEi were in the black:

  • LT Group Inc
  • Manila Electric Company (MAEOY); and
  • Jollibee Foods Corporation (JBFCY)

These stocks remained in the top three in terms of returns between November 10 and 14, though LT Group and MAEOY exchanged positions. These stocks had gained 3.8% and 8.4% respectively in the two trading sessions. Meanwhile, Alliance Global Group, Inc. (ALGGY) and Bank of the Philippine Islands (BPHLF) also joined the group of rising stocks.

Meanwhile, on the broader PSE All Share Index, the following stocks have been the top gainers from the end of trading on November 10 until November 14 with the percentage change in their prices given in parentheses:

  • NOW Corporation – Information Technology (12.8%)
  • Manila Electric Company (MAEOY) – Utilities (8.4%)
  • Oriental Petroleum and Minerals Corporation (OPTBF) – Energy (7.7%)
  • Boulevard Holdings – Consumer Discretionary (7.5%)
  • Philippine Realty & Holdings Corp – Real Estate (7.2%)

The reason that these stocks have failed to boost the broad indices even after strong returns is that except for Jollibee Foods in the PSEi and Manila Electric in the All Share Index, the other gainers form a negligibly small portion of their respective indices, thus significantly reducing their impact on the broader stock market.

Given the fact that overseas investors have steadily increased their holdings of Philippine stocks even when relations with the US had become tense, the friendly tune being hummed by the two nations now could have a positive impact on equities of the island country.

Russian ETFs Are Underwater, But These 7 Stocks Have Mitigated Their Fall Into Negative Territory

Russian equities have had a difficult year compared to many of their peers. In a year when the MSCI Emerging Markets Index has risen 30% until November 13, the MSCI Russia Index has fallen 1%. It is one of only three MSCI country indices in the emerging markets universe which is in the red for the year, Qatar and Pakistan being the other two.

Of the five ETFs investing in Russian equities and traded on US exchanges, two – the VanEck Vectors Russia ETF (RSX) and the iShares MSCI Russia Capped ETF (ERUS) – are broad-based and non-leveraged.

Between the two, US investors have shown a clear preference for the ERUS as shown in the graph below.

Though the year had begun well for the RSX, its fortunes changed from the beginning of March with its shares outstanding going into a broad decline since. On the other hand, the ERUS has seen increased purchases, though it has mostly come in fits and starts instead of continuous flows.

Investor flows exhibits the same trend, as shown in the graph below.

In YTD 2017 until November 13, the ERUS has seen net inflows of $186 million while the RSX has seen net outflows of $604 million, according to Bloomberg data. Even among ETFs listed outside of the US, the ERUS has attracted the most inflows in the year so far. It is followed by the France-incorporated LYXOR RUSSIA (Dow Jones Russia GDR) UCITS ETF – C ($105 million) and Luxembourg-registered db x-trackers MSCI Russia Capped Index UCITS ETF ($74 million).

However, among the US-listed funds, the RSX still remains the larger of the two with $2 billion in assets compared to $650 million for the ERUS.

Head above water

In terms of performance, unlike the MSCI Russia Index, the two ETFs have been able to keep their head above water with the RSX (4.7%) edging out the ERUS (3.6%) in YTD 2017 until November 13.

There’s not much difference in terms of the number of holdings with both invested in about 30 instruments. Further, the expense ratios are nearly the same as well. However, while the ERUS tracks the MSCI Russia 25/50 Index, the RSX follows the MVIS Russia Index.

Portfolio composition difference which explains performance

Though stocks from the energy sector form the biggest chunk of the portfolios of both funds (40% for RSX and 47% for ERUS), there is marked difference in the rest of the composition.

The two most significant ones are the exposure to financials and information technology sectors. While financials forms a quarter of the portfolio of ERUS, it forms only 15% of the RSX. Meanwhile, tech stocks form half of the weight of financials in RSX while the ERUS is not invested into the sector at all.

In terms of contribution to returns, financials are by far the highest contributing sector to the ERUS with materials being a distant second. Telecom services were the only other sector to contribute positively to the fund in the year so far.

On the other hand, stocks from the information technology sector have led gains for the RSX, followed by those from financials and materials sectors in that order. The difference between the contributions of these three sectors is not as significant as it is in the top three contributing sectors of ERUS. Consumer staples was the only sector which has dragged on the returns of the RSX in YTD 2017.

Stocks which have helped gains

The sponsored American Depository Receipts (ADRs) and the common shares of Sberbank of Russia (SBRCY) from financials have been the top two contributors to the ERUS. PJSC Mining and Metallurgical Company Norilsk Nickel (NILSY) from materials was the third largest contributor.

Though the energy sector overall has been a negative contributor to ERUS, shares of PJSC Tatneft (OAOFY) come in at fourth highest in terms of individual contributors, with the biggest five being completed by PJSC Mobile TeleSystems (MBT).

For the RSX, ADRs of SBRCY have been the highest positive contributors in the year so far. And OAOFY and NILSY find themselves ranked third and fourth respectively.

The information technology sector rounds out the top five list for ERUS, with search-engine provider Yandex N.V. (YNDX) emerging as the second highest contributor to the RSX in YTD 2017 while the Global Depository Receipts (GDRs) of online communication and entertainment services provider Mail.Ru Group Limited (MLRYY) edges out MBT for the fifth spot.

Shot In The Arm: Can Copper Prices and Debt Management Fuel A Rebound In Zambia?

Economic growth in Zambia has taken a hit in the past two years as can be seen from the graph below. Domestic output in these years rose at less than half the pace seen in 2012 and 2014.

Much of the slowdown has to do with copper. The non-ferrous metal forms over 70% of the country’s exports, as shown in the graph below.

Zambia is Africa’s second-largest copper producer. According to London Metal Exchange data, copper prices fell by 13.7% in 2014 and by 26% in 2015, thus impacting output in the following years. However, things may be looking up.

The graph above displays the recent rise in copper prices, which is expected to provide a shot in the arm to the country’s economic growth. Finance minister Felix Mutati expects the economy to grow by 5% in 2018 from an expected 4.3% this year.

As of October 17, copper prices have risen by 26.7% in 2017 while Zambia’s copper exports have shot up by 38% through August, thus helping the economy expectedly grow over the 4% level for the first time in three years.

Challenges and concerns

After a tumultuous couple of years, Zambia finally finds itself in a position from which it can look to a brighter future. It continues to face challenges, but has seen some economic indicators turn favorable.

For instance, while inflation at 6.6% for September seems high, it is down markedly from double digits just a year ago and has dropped from over 20% in early 2016. Resurgent copper prices, as seen above, have supported the otherwise flagging economy.

However, rising debt remains a serious concern for the country, and can have implications for fixed income investors – an scenario which the government intends to address.

In a recent review, the International Monetary Fund (IMF) had a positive view on the near-term outlook for the country’s economy due to rising copper prices and good rainfall which has helped power production. However, it also cited high debt, fiscal consolidation, and revenue mobilization as issues.

According to the IMF, the fiscal deficit on a cash basis had stood at 9.3% of gross domestic product (GDP) in 2015, two times its budgeted level.

The institution viewed the pace of growth of public debt as “unsustainable”, pointing specifically to the risks it poses to the private sector.

It noted that outstanding public and guaranteed debt rocketed from 36% of GDP in 2014 to 60% in 2016, primarily due to external borrowing and weakness in the Zambian kwacha.

Action plan

Apart from rising copper prices, prudent policies are required to enhance the attractiveness quotient of Zambia among African nations.

The country has launched the Economic Stabilization and Growth Program and the Seventh National Development Plan in that direction. Further, finance minister Mutati is of the opinion that the 2018 National Budget will address the IMF’s concerns. The budget aims to reduce the fiscal deficit to 6.1%.

Zambia also intends to increase revenue collection by the Zambia Revenue Authority (ZRA). Mutati said that the ZRA would aim to increase tax compliance from56% currently to 76% going forward.

Impact on bonds

Zambia has been undertaking reform measures in order to procure a $1.3 billion loan from the IMF which has so far eluded them due to high public debt.

Reining in public debt is important also in order to keep its borrowing costs low. The graph above shows that the average auction yield on the 10-year bond has come down, easing some pressure on government finances.

Zambia’s external debt rose to $7.6 billion by the end of August 2017 from $2 billion at the end of 2011. This includes three Eurobond issuances from 2012 until 2015 amounting to a cumulative $3 billion. The earliest of these issuances falls due in September 2022 and concerns over debt would raise questions on the repayment ability of the government, thus hurting investors in these bonds. At this juncture, increasing copper prices could play a strong role in improving the health of the economy.

Will These Two Emerging Countries Continue To See Easy Monetary Policy In 2018?

South Africa

Unlike some other countries in this review, rate cuts in South Africa later this year, and going into 2018 are much more uncertain.

The sole rate cut effected in July this year was aimed at stimulating the economy, and a dip in inflation supported the 25 basis point reduction.

Similar to the situation in Brazil, risks emanating from political developments can be expected to drive financial markets until the 54th National Conference of the ruling African National Congress in December.

The South African Reserve Bank sees upside risks to inflation due to an electricity tariff increase and maintains that monetary policy alone may not be enough to stimulate growth in light of the political uncertainty.

However, in its September monetary policy statement, the picture painted by the central bank forces one to believe that the authorities may cut rates. Particularly if its views on inflation remain in the expected range with some headroom, consumer spending remains constrained after rebounding in Q2 2017, and credit extension to the private sector continues to decline, among other aspects.

Moreover, if rating agencies cut the country’s ratings further, the central bank may need to reduce its policy rate even in the face of political uncertainty.

Investors have continued to pile into South Africa bonds even in the face of political challenges and rating cuts; a small rating cut may not deter them given the still large spread between South African bonds and US Treasuries. Depending on the political situation, it may help infuse some confidence in the country and resuscitate private investment.


Indonesia has surprised markets both times that it has slashed rates this year. Its moves were aimed at stimulating a stagnating economy which has been stuck at about 5% growth for the past four quarters. Bank Indonesia is hoping that the rate cuts will reignite bank lending.

Going forward, the central bank would first want to assess the impact of these two cuts on inflation and growth in economic output. A few more reductions may be in the offing if inflation remains within the target range of 4% plus/minus 1% for 2017 and 3.5% plus/minus 1% for 2018.

Indonesian bonds have been attractive in 2017 given their yields. However, as shown by the graph above, yields have come down in the past year, making them less attractive to prospective investors than before.

Bonds from countries like South Africa and Brazil are a providing serious competition to Indonesia in this regard. But the country’s relative stability to these nations is keeping its bonds in play.

Apart from monetary policy, investors would want to keep an eye on the Indonesian rupiah for local currency-denominated bonds. A breakout from the narrow trading range that the rupiah maintained against the dollar could be a trigger point for Indonesian bonds.

After An ‘Easy’ YTD 2017, How Will Monetary Policy Impact Bonds Latin American Countries?


Inflation has been benign in Brazil. In its latest reading for September, it rose 2.5% from a year ago, which is below the central bank’s target of 4.5% plus or minus 1.5%. There are wide-ranging expectations regarding the Selic to be reduced to 7% by the end of this year.

In all likelihood, these expectations will materialize. However, the central bank has already expressed that future rate cuts could be gradual.

Given that the reduction of the Selic to 7% is largely expected, it is already priced into its bonds. At this juncture, aggressive rate cuts in 2018 are not expected and investors in the country’s bonds would need to focus on developments on the political front to drive bond yields once the rate cut cycle draws to a close.


Monetary policy easing in Peru this year has been aimed at spurring economic growth. The country’s economy had grown at a less-than-expected 2.4% pace in Q2 2017 after posting a 2.1% rate in the first quarter.

Inflation has stood at 3.04% in May, higher than the 1-3% range that the Banco Central de Reserve del Peru targets, but the reserve rate was still slashed for the first time this year. Though this seems counterintuitive, it was needed to support the economy and was made possible by views that the factors putting upward pressure on inflation were transitory.

Another indicator which helped the central bank reduce rates was the strength of the Peruvian sol against the US dollar. A stronger domestic currency increases the returns on local currency-denominated bonds when converted to dollars.

Similar to Brazil, the Peruvian central bank may be close to ending the rate reduction cycle. However, it can still consider cutting rates once either this year or the beginning of the next year depending on how inflation moves in response to the most recent rate cut. Inflation slowed to 2.94% in September, and if the impact of the intermittent rise in food prices is only transitory, one more rate cut may be in the offing.

Chile and Colombia

Unlike Brazil and Peru, monetary policy easing may have come to a close for now for both Chile and Colombia.

Chile’s Monetary Policy Rate was last slashed in May, and even though inflation remains benign at 1.5% in September, lower than its 3% target, moderation in the central bank’s stance indicates that until essential, further rate reductions may not be considered.

In its May policy statement, the Banco Central de Chile sounded neutral on further rate cuts by pledging to remain flexible about monetary policy. This was a major change from consideration of additional easing in the April statement, and easing being necessary given market conditions in the March statement.

However, the central bank has headroom to reduce rates further if conditions warrant in 2018.

As far as Colombia is concerned, the Banco Central de la Republica de Colombia may like to see the effect of the rate cut at the end of August on the economy. A bounce back in economic growth may reduce the necessity to ease policy rates further.

Monetary Policy May See Additional Rate Cuts In These 3 Emerging European Countries


The National Bank of Ukraine has slowed down the pace of rate cuts this year compared to 2016. The reason is visible from the graph below.

The central bank keeps a close eye on inflation as the key factor which determines whether further easing will take place or not. The upward trajectory of inflation in 2017 explains why rate cuts in the country have not been as aggressive this year as they were last year.

The central bank is targeting an inflation rate of 8% plus/minus 2% for this year and 6% plus/minus 2% for 2018. In its quarterly inflation report, last published in July, the National Bank of Ukraine had kept its inflation forecast unchanged at 9.1% for this year and 6% for the next.

Given the relatively high rate of inflation, aggressive rate hikes in the remainder of 2017 can be ruled out. However, if the indicator remains on the expected path in 2018, the central bank may resume slashing its discount rate next year.

Ukraine has been one of the most attractive places for fixed income investors in emerging Europe, along with Russia, this year. A further cut in interest rates would increase profits for investors already invested in the country’s bonds. Investors in local currency-denominated bonds would need to watch out for its movement vis-à-vis the US dollar, though.


Alike Ukraine, inflation has been the main driving factor behind the reduction in the refinancing rate by the National Bank of the Republic of Belarus.

However, unlike Ukraine, inflation in Belarus, which fell to 4.9% in September from 5.3% in August, is already below the central bank’s target of 9% for this year.

Given the fact the central bank aims to gradually reach the inflation rate of 5% by 2020 – a target which has already been met – it opens up the possibility of further rate cuts going into 2018.


Inflation in Russia stood at 3% in September, while core inflation was down to 2.8%. Both numbers were the slowest on record. This sets a stage for further rate reductions in the country. However, the path is not as straightforward as some of its peers.

This is because there is disagreement between the central bank and the government regarding the path of monetary policy traversed until now. While the government thinks that the central bank has been slow in responding to the decline in inflation, the central bank believes that there is a greater than anticipated risk of a rise in prices, thus justifying its cautious stance.

Though another rate cut before the end of the year is quite likely, market participants would need to read closely the stance of the central bank which sees risks to inflation and intends to remain measured in its moves – both in size and scope.

These 10 Emerging Market Central Banks Account For the Largest Interest Rates Cuts In 2017

Economic developments in emerging market countries throughout 2017 have led to many central banks reducing their key rates this year.

Some of the major emerging markets which have slashed interest rates are shown in the graph below with the levels of their key rates as on October 11.


Ukraine has cut its policy rate twice in YTD 2017 by a cumulative 150 basis points. The discount rate had begun the year at 14% and was last reduced in May by 50 basis points.

The country’s central bank – the National Bank of Ukraine – has been on a policy easing cycle since August 2015 and has cut the discount rate by a sizable 17.5% since then. Its speed of rate cuts has declined though; in 2016, the central bank reduced the discount rate by a total of 8 percentage points.


Belarus has seen quite a bit of monetary easing in the form of rate cuts this year. The National Bank of the Republic of Belarus has slashed its refinancing rate seven times so far and has already announced that it will introduce another cut in its meeting later in October.

The refinancing rate had begun the year at 18%, and with the announced reduction in October, it will decline to 11%. Of these eight cuts, six have been a full percentage point each.


In 2017 so far, the Central Bank of Russia has reduced its key interest rate by 150 basis points. The bank’s key rate began the year at 10%, and four reductions later, stands at 8.5%; the latest cut was effected on September 15. A dive in inflation in the country has been the primary driver of the aforementioned rate cuts.


The Banco Central do Brasil has been on an aggressive rate-cutting spree. In YTD 2017 alone, the central bank reduced its Selic rate six times and post the latest cut in September, it stands at a four year low of 8.25%.

South Africa

South Africa has seen only one rate cut this year. The South Africa Reserve Bank had surprised markets by reducing its average repo rate by 25 basis points to 6.75% in July but since then, has remained unmoved.

The rate cut in July was its first in five years and was aimed primarily at supporting the economy which had fallen into recession at the beginning of the year.


The Reserve Bank of India has been relatively cautious about easing monetary policy this year, slashing its key repo rate just once in August by 25 basis points to 6%.


Colombia has cut rates seven times this year. The Colombia minimum repo rate had begun the year at 7.5%, and with the latest reduction in August, the cumulative amount of cuts stands lower by 225 basis points.

Low inflation has allowed the Banco Central de la Republica de Colombia to slash rates and stimulate economic growth.


Bank Indonesia surprised markets when it cut its 7-day Reverse Repo Rate for the first time since October 2016 in August. It kept the surprise element going by catching market participants off-guard again in September. In total, the central bank has reduced its policy rate by 50 basis points in 2017 so far.


Similar to Belarus and neighboring Brazil and Colombia, Peru has witnessed several interest rate reductions in 2017. The Peru Central Bank Reference Rate has been slashed three times this year by a cumulative 75 basis points.

The first cut of the year was effected in May and it had marked the first decline in the reference rate in 14 months.


The Banco Central de Chile, similar to several of its Latin America peers, has cut its policy rates in 2017. Chile’s Monetary Policy Rate has been reduced four times this year by a cumulative one percentage point and stands at 2.5% at present.

Will Stocks Keep Rising And The Peso Finally Stabilize After The Latest Rate Hike In Argentina?

The Banco Central de la Republica Argentina surprised markets by hiking its policy rate by 100 basis points to 28.75% on November 7. This is the third rate hike by the central bank in its monetary tightening cycle which began in April this year.

Inflation has been stubborn, leading economists surveyed by the central bank to increase their expected reading of the metric to 23% from 22% by the end of the year. Apart from that, the bank hiked rates in anticipation of upward pressure caused by a scheduled increase in natural gas and electricity prices later in the year.

Though the central bank has already missed its inflation target for the year, it expects its contractionary stance to get price rises back on track and achieve the 10% (plus or minus two percentage points) targeted level for next year.

But can this hike support the sliding peso?

Impact on the Argentine peso

The Argentine peso has been sliding against the US dollar as shown in the graph below.

For a country which seems to be getting back on track economically, this seems odd. Normally, when a central bank hikes rates, it strengthens the local currency. However, in the case of Argentina, this has not been the case. Even after a cumulative 400 basis point increase in the policy rate this year so far, the peso has continued to weaken.

The primary reason for this is inflation, whose expected upward rise can result in a downward pressure on the currency.

Until budget and trade deficits firm up, there is little reason for the peso to strengthen despite the structural reforms and monetary policy decisions being taken.

But what about equities?

Argentine equities: Continuing to soar?

Except for certain phases, Argentine stocks have done quite well for themselves in YTD 2017. The benchmark Merval index is up 66% for the year. For overseas investors, the returns have been reduced by a weak peso, but gains are still considerable. Those holding the Global X MSCI Argentina ETF (ARGT) would have seen their investment soar by 42% in YTD 2017 until November 7.

Between the Merval and the ARGT, the index has much higher exposure to stocks from the energy, materials, and utilities sector than the latter, while the ETF has a significantly higher exposure to stocks from the industrials and consumer staples sectors compared to the former.

The strong performance of stocks like Pampa Energía (PAM), Transportadora de Gas del Sur (TGS), Transener, and Transportadora Gas del Norte (TDGDF) from the energy and utilities sectors – the two largest sectors comprising the Merval – have helped it gain this year.

On the other hand, information technology and financials have been the primary drivers of ARGT, led up by Mercadolibre (MELI), Banco Macro (BMA), and Grupo Financiero Galicia (GGAL).

A rate hike has a negative impact on some sectors, but the stock market has been responding to economic and structural measures taken by the government. Thus, Argentine stocks may continue to rise further.

The ARGT has seen net inflows amounting to $62 million in YTD 2017. There were some outflows in August and September, placing a question mark on the stocks’ attractiveness, but in October, investors displayed enhanced interest in the fund.

There may be some good news for fixed income investors as well. Higher than expected inflation may lead to a rise in yields of longer-term bonds such as the one plotted above, thus providing a buying opportunity.

Investors in the country’s 100-year bond need not do anything, though.

“Arabamız”: The Numbers That Drove Turkey’s Launch of a Homegrown Automobile Manufacturer

“Our car” is what the Turkish word ‘Arabamız’ translates to in English. The country, which is the 14th largest automobile manufacturer in the world, recently announced its first indigenous car whose prototype is expected by 2019 with commercial production targeted by 2021.

Five companies will collaborate to bring the national pride project to fruition. Three of them – Anadolu Group, BMC, and Kıraça Holdings – are directly involved in manufacturing cars for foreign brands including Kia and Isuzu. Among the other two, Turkcell is the nation’s largest mobile operator while Zorlu Holding is a conglomerate and will primarily provide technical support and assistance.

An experienced campaigner

Though Turkey may seem late to the game of car manufacturing, it is an experienced campaigner in the arena as it currently exports cars to Europe, Middle East, and Central Asia. 77% of the production of its automotive industry was exported in 2016 with Germany, France, and the United Kingdom among the top export destinations.

The graph above shows auto production in the country is segregated across the commercial vehicle and passenger car segments, and points to the increasing interest of its export partners in choosing the country as a key overseas manufacturing hub.

Apart from manufacturing, Turkey is also home to research and development centers of global auto majors including Ford, Daimler, and Fiat.

Domestic demand

Development of an indigenous car also makes sense from the perspective of domestic consumption. Monthly sales figures over the past 10 years, as shown by the graph below, show a generally increasing trend.

Electric and hybrid car sales are also posting impressive numbers, with sales up 800% in the first nine months of 2017 to 2,763 compared to 300 in first nine months of 2016. Meanwhile, the yearly sales breakdown shows rising demand for passengers.

The country imports about 70% of its vehicles, thus indicating a massive domestic demand which can be served with homegrown production. Further, fulfillment of some portion of this demand would also help in reducing imports as well as currency outflow.

The car, which has not yet been named, is not the first attempt by Turkey in domestic car production though. In the 1960s, the country had created its first locally made car christened “Devrim” which translates to “revolution.”

However, the car was riddled with issues concerning fuel consumption and many other. In the end, the project never came to fruition. This is the first concrete attempt at making a domestic car again since then.

With the focus now on hybrid and electric cars, it is possible that this new car may herald the auto revolution in Turkey that was originally envisioned six decades ago.