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Emerging Markets Update

Investors should be prepared for volatility, as there is a high probability that further Chinese statistics will be disappointing.

Global HY investors are currently focused on the incoming Chinese statistics that affects the market strongly. According to the market sentiment, the second largest economy in the world will continue to slow down that leads to further national currency devaluation. The negative sentiment pressured EM currencies, capital markets and commodities. It is difficult to predict further China’s performance, but we recommend investors to be prepared for growing volatility.



REGION SUMMARY : Asian bond market remains weak, with most of the pressure is felt by the commodity-related companies. Barclays Asian USD HY index lost 66 bps on Friday.

MACRO : As the Chinese regulator has to spent too much of its foreign currency reserves to support the yuan rate,  high chances of further currency devaluation  to follow.

As reported, the People’s Bank of China sold a record amount of foreign currency in December; its foreign exchange assets tumbled by the equivalent of 708 billion yuan to 24.85 trillion yuan, more than twice as much as in any previous month. That compares with a drop of 2.21 trillion yuan for the whole of last year and is similar to the USD 107.9 billion slide in the nation’s foreign-exchange reserves that was previously reported for December.


Standard & Poor’s lowered its corporate credit rating on the Australia-based mining equipment rental company EMECO Holdings Ltd. to ‘CCC+’, from ‘B-‘. “The downgrades reflect our concerns that Emeco’s ability to meet its financial commitments has deteriorated. Worsening conditions in the company’s Canadian oil sands segment, stemming from a depressed oil price environment, will reduce its earnings in the year ending June 30, 2016,” Standard & Poor’s credit analyst commented. EMECO Eurobond due in 2019 trades at 54% of par with YTM of 35% pa.

Anton Oilfield Services Group has announced its 2016 strategy update. The Group will insist on “asset-light” and “internationalization”, vigorously developing international markets, resuming its growth path, tightening cost control and improving profitability in a low oil price environment to completely overtake the competition. In its market strategy, the company will maintain the internationalization growth strategy, with a focus on overseas markets, increase proportion of international revenue; consolidate the leading position in the Chinese market. In the finance strategy, Anton will strive to achieve revenue growth, profitability improving, and broadening the funding channels; improving efficiency of the funds management.



 REGION SUMMARY : The market is likely to stay under pressure today, given the oil trades near the local minimum.

MACRO : Given the current market conditions, the are almost no chances CBR will ease its policy during its meeting on January, 29. On the contrary, the possibility of a rate hike to limit the inflationary pressure has increased. Such a decision could negatively affect both economic recovery – given the higher cost of borrowing for the companies – and local bonds yields, as well. However, the regulator should find the proper balance between support to the economy and consumer prices growth.

The central bank of Russia first deputy governor Ksenia Yudaeva considers the regulator can’t completely rule out the interest-rate increase, as inflation risks in Russia have intensified because of a weaker ruble. According to current base-case scenario, the central bank forecasts consumer price growth will ease to about 6% by end-2016, while the economy may contract as much as 1% with oil averaging at USD 50. However, as reported, the Bank may revise its predictions in March. According to Vedomosti newspaper, the Economic Development Ministry has revised the GDP estimate for 2016 to a 0.8% contraction from a 0.7% growth. Vedomosti reported that the new average ruble rate estimate is at 68.2 per USD, inflation is at 8.5% and capital outflow USD 50 bln.

The Polish central bank left the reference rate at 1.5% on Thursday, matching the analysts’ forecasts. Commenting on the central bank policy, the bank’s governor Marek Belka said he wouldn’t expect “sudden and large” changes in monetary policy during the next meeting just because of changes in the committee composition (eight policy makers will be replaced by March). As the Law & Justice party won Oct., 25 elections, expectations of a 25 bps rate cut have strengthened recently.

CORPORATE :News on the government support is positive for Arcelik Eurobonds. However, the market reaction will be limited due to the global negative mood:

Turkish economy ministry has approved investment incentive certificates for the planned investments at 7 Arcelik facilities over the next 4 years for TRY 1.14 bln. The government support will include customs duty and VAT exemptions, social security premium support and corporate tax deductions.

NEW ISSUES Promsvyazbank weighs possible Eurobond sale in 1Q, Interfax reports, citing unidentified people familiar with the proposed transaction.



REGION SUMMARY : The regional bond market was under pressure due to the negative market sentiment. It is strongly expected oil price will decline further, which could trigger another negative wave in the regional capital market. Brazilian BXBZCRP Index decreased 58 bps.

MACRO: Brazilian finance minister Nelson Barbosa will meet with BNDES president Luciano Coutinho to discuss the possible ways for stimulating economic growth. According to the trade minister Armando Monteiro, the government is currently seeking the state-owned banks to support Brazilian construction and export-oriented companies. As for construction, the key government’s priorities are huge infrastructure projects in the transportation system. According to BNDES’s estimates, the sector will face the highest growth in 2015-2018 with an estimated USD 12 bln of investments needed over the next 5 years. Government support to the key industries, especially export-oriented sectors, may become a positive factor for the future growth dynamics. The main danger on this side is too broad supportive measures.

It is highly expected the Brazilian central bank will increase its interest rate by 50 bps in the nearest future in order to strengthen the national currency and reduce inflation pressure. The action is supported by finance minister and the country’s president. Investors should be prepared for slight market repricing, if the interest rate hike is implemented.

CORPORATE  : Pacific E&P (former Pacific Rubiales) missed its interest payment under notes due 2025 and 2019. The company stated it would use a 30 day grace period to assess the strategic alternatives and extension the minimum liquidity deadline under the waivers to its credit agreement. Additionally, EIG Global Energy Partners (EIG) said it was seeking to buy control of the company starting with a tender offer for its debt. Harbour (an investment arm of EIG) offered 17.5 cents on dollar for Pacific E&P’s USD 4.1 bln debt. The oil producer said it wasn’t working on a sale agreement and wasn’t aware of the operations EIG was working at. There is a high probability the deal will be approved, as Pacific E&P is currently near a default


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