“The overall shape [emerging markets] are in has a lot more cracks now than it did five years ago and certainly at the time of the global financial crisis. It’s both external and internal conditions.”
Carmen Reinhart, 15 May 2018
Speaking to investors in Europe last week, I cannot recall a single client meeting when concern about Turkey did not come up (and usually without me having to raise it). Important though it is, I do not believe that Turkey alone poses anything remotely resembling a systemic threat. But I also don’t believe that it should be viewed in isolation from other troubled emerging markets (EMs), especially not at a time when, collectively, EMs have to repay or refinance a total of around USD249bn in debt over the next year, according to Bloomberg. So, the question I have been posing is whether — at a time of not only rising US interest rates but also rising oil prices — we may see turmoil in sufficient individual EM economies to trigger a more general rout? To try to answer this question, I think it worth looking at five important EMs in particular as follows (in alphabetical order).
Argentina: Not out of the woods
“Argentina is far from being in the clear. There is the memory of policy mistakes, and as Goldman Sachs says the past month has left a ‘financial scar’ that will make investors demand a higher risk premium than previously sought to return to the Argentine market. But there is an underlying belief among investors that Argentina can rescue a bad situation.”
Roger Blitz, Financial Times, 24 May 2018
The authorities in Buenos Aires — with help from the IMF — have certainly done a good job stemming the immediate crisis around the peso (in stark contrast to Turkey, at least until the 28 May move by the central bank in Ankara — see below) and shoring up investor confidence. Nevertheless, there are still major challenges ahead. Most immediately, resort to the IMF has resulted in large numbers of protestors taking to the streets, adding to domestic pressure on a government which is already struggling to push through the public service price hikes which are a cornerstone of President Mauricio Macri’s ambitious reform programme. Much now depends on the terms which the IMF sets in return for its support. The next general election is not due until 27 October 2019 which may seem a long way off but is very little time relative to what needs to be done economically if Mr Macri is going to be well placed to secure a second term.
Brazil: A critical election ahead
“The October presidential election is key to the revival of Brazil’s economy, say analysts. One important question is whether the winner will be able to implement important fiscal reforms, such as overhauling the pension system, to rein in a fast-growing budget deficit.”
Joe Leahy, Financial Times, 15 May 2018
Such is the uncertainty around Brazil’s presidential and legislature elections, due to be held on 7 October (with a second round for the former on 28 October if necessary), that I have to date declined to offer any view as to the likely outcome. Even when the presidential candidates are known, which will not be until mid-August, the election will be mired in uncertainty — assuming, that is, that former President Luiz Inácio Lula da Silva (aka Lula) does indeed remain sidelined. As things stand the current frontrunner looks to be right-wing populist Jair Bolsanaro, reflecting widespread concern in Brazil over violent crime. Not far behind him in polls stands the left-of-centre environment activist Marina Silva. ‘Establishment’ candidates, favoured by financial markets, are all trailing, discredited by implication at least by the Lava Jato anti-corruption investigation which remains a critical context for the election. One way or the other, although the economy is clearly doing much better after a brutal classical adjustment, it is not at all clear that the next administration will be able to push through long-overdue structural reforms badly needed to sustain a positive trajectory.
India: Could Congress prevail?
“…the problem that [Congress] faced in Karnataka where the Governor invited the BJP despite the Congress JDS post-poll alliance having the majority can be avoided by president Rahul Gandhi entering into pre-poll alliances in many threatened states. While this may look like a surrender of the Congress’s pre-eminence, it will, in fact, go a long way towards reviving the confederal spirit of the original, pre-independence Congress, perhaps in a different form.”
Uttam Khobragade, The Times of India, 23 May 2018
There are many ways to read the outcome of this month’s state election in Karnataka where the BJP secured a plurality of seats but lost the popular vote and where, in the end, Congress was able to secure power in partnership with the JDS. But the main lesson has to be that identified by Mr Khobragade, ie that if Congress is going to have a realistic change of unseating the BJP in the general election due no later than April/May 2019 it needs to be forming pre-election alliances with smaller (mainly local) parties.
All in all, despite a more than respectable showing by the BJP in state elections over recent months and the undoubted campaigning power of Prime Minister Narendra Modi, the party certainly does not look as invincible today as appeared to be the case just 12 months or so ago. The state election in December in Rajasthan, where the BJP currently holds power thereby providing an indiction of its ability to fight elections as an incumbent rather than insurgent, should provide a useful indicator. Any real sense therein that the BJP may lose the general election is sure to unsettle investors.
Mexico: AMLO ahead
“A question institutional investors often ask regarding Mexico’s presidential elections next year is: Can Andrés Manuel López Obrador actually win?”
Victor Herrera, Americas Quarterly, 6 October 2017
Unless [opinion polls](https://en.wikipedia.org/wiki/Opinion_polling_for_the_Mexican_general_election,2018#By_candidates(January_2018-%29) are utterly wrong (and, to be fair, there are major differences among polls which are not, in any case, seen as being particularly reliable in Mexico), the answer to the question is not only that Andrés Manuel López Obrador (aka AMLO) can win but that he appears to be firmly on track to do so. His main rival, Ricardo Anaya heading a right-left coalition, appeared to ‘win’ the second TV debate on 20 May; but if he did it was not by a margin likely to sway the election in his favour. Assuming AMLO does win the presidency we shall have to wait until after 1 December when he will be sworn in to assess whether, as some believe, his bark is worse than his bite (although my personal greater concern, based on his track record in local government, revolves around his competence rather than his policies per se). But the combination of the prospect of an AMLO presidency (albeit almost certainly without an accompanying legislature majority for his party, MORENA) and the uncertainty surrounding the Nafta renegotiation (see pages 15-16 above) is clearly already dragging down investor sentiment.
Turkey: An investor roasting
“Mr Erdogan has called a snap election. He wants to assume the extensive new powers granted to the president in a constitutional referendum last year. The problem is there seems to be no great enthusiasm to re-elect him. The economy is bedevilled by inflation and a collapsing currency. His attempt to give Turkish secularism an Islamic hue has lost him support among the young and in big cities. It would be surprising if Mr Erdogan were not now glancing nervously over his shoulder at the recent fall of Malaysia’s erstwhile autocrat Najib Razak.”
Philip Stephens, Financial Times, 24 May 2018
Mr Stephens’s reference to Malaysia should not, in my view, be dismissed. The pre-election consensus in Kuala Lumpur (which I shared) was that ruling BN would do whatever it took to ensure victory. The same can be — and is — said of Mr Erdogan as far as the 24 June presidential and legislature elections in Turkey (with a second round for the former on 8 July if no single candidate betters 50% of the vote). Opinion polls (not seen as particularly reliable in Turkey) suggest that he may fail to secure a first round majority but would likely prevail if a second round were needed. Nevertheless, the polls are close enough that he is unlikely to leave anything to chance if he can avoid doing so.
This may account for why the central bank was allowed to make its 28 May move on interest rates (after something of a misfire the previous week), which has come as something of a boost to investor sentiment. The announcement certainly seems to go against Mr Erdogan’s seemingly firm and certainly longstanding claim that high interest rates cause inflation. And it should also be viewed alongside his assertion at a rally on 26 May that the slide in the lira was the result of a “foreign conspiracy”, arguably a further manifestation of what some see as the President’s propensity for paranoia.
As for the legislature, Mr Erdogan’s AKP does not look like winning an outright majority of the 600 seats. But its electoral alliance with the nationalist MHP, Cumhur İttifakı, could see it over the line. If not, then I think we can assume that the longstanding state of emergency declared after the 2016 attempted coup will be with us for many months to come (which it may be anyway, to be fair).
One way or the other, I simply can’t see Mr Erdogan easily letting go of the levers of power. And I suspect that post-election he is likely to return to his monetary unorthodoxy, putting the economy under further stress for which he will undoubtedly blame ‘foreign’ forces, thereby further unnerving investors.