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Emerging Markets Roundup


Investors once again shifted to the “safe heaven” strategy amid another oil price slump. Yields on U.S. 10-year Treasuries slipped 10 bps to 1.85% on Tuesday, touching the lowest level since April, 2015. Market volatility to remain extremely high this week.images (6)


EM Market Data 3 Feb

WTI fell below USD 30/bbl level following the the American Petroleum Institute report. It showed that Crude inventories expanded by 3.8 million barrels last week, while gasoline stockpiles added 6.6 mln. The government data on Wednesday is expected to show supplies rose further from a record, according to a Bloomberg survey. Meanwhile, Chevron Corp.’s credit rating was cut by Standard & Poor’s for the first time in almost three decades, while Royal Dutch Shell Plc’s debt rating was reduced to the lowest level since S&P began coverage in 1990.


CORPORATE : Turkish Arcelik group reported quite strong financial results for 2015, which could support demand for its Eurobonds. Arcelik has announced its 2015 financial results. In 2015, the share of domestic sales increased to 40.4% from 38.8% in 2014, partly due to weaker figures from Russia and Ukraine.

Fitch comments on the Alfa Bank’s credit quality were quite solid;

Fitch has affirmed Alfa Bank’s rating at ‘BB+’ with negative outlook. The negative outlook reflects the weak operating environment in Russia, which will continue to put pressure on the bank’s asset quality and performance. At the same time, according to the agency, “Alfa remains the highest-rated Russian privately-owned bank, reflecting its good management, considerable resilience due to solid preimpairment profitability and reasonable capital buffers, and good track record of navigating through past Russian crises.”

Fitch noted Alfa bank’s asset quality deteriorated in 2015: NPLs increased to 6.2% of gross loans at end-1H15 from 2.7% at end-2014, and remained roughly stable in 2H15. Basel Tier 1 and total capital ratios stood at solid 14.4% and 19.8%, respectively, at end-1H15.

NEW ISSUES : According to the Bloomberg article, Credit Bank of Moscow, the only Russian bank to announce plans to sell Eurobonds this year, has shelved the idea after falling oil prices spurred borrowing costs. The bank was eyeing its first Eurobond since 2013 to partly refinance USD 500 million of November, 2018 notes.


ASIA asia 7

REGION SUMMARY :  Yields on Asian bonds continued to creep higher today on the back of lower commodity prices and broader market sell-off.

MACRO:  Mixed Chinese data was published overnight. The positive services sector figures were somewhat offset by a drop in consumer confidence in 4Q15. It is pointing to a risk of slowdown in consumer spending in months ahead. For now, the sentiment towards Chinese bonds remains mainly bearish and we don’t think this will change until the market has more clarity on the depth of economic slowdown.

The Caixin China services PMI, which accounts around 45% of the economy, increased to a six-month high of 52.4 in January from 50.2 a month earlier. The increase was driven by strong new orders. PBOC consumer confidence index dropped to 49.1 in 4Q15 from 50.1 in the previous quarter.

India: The positive Indian service sector data is unlikely to cause bonds reaction, as they are more affected by a broader negative market sentiment at the moment. The service sector accounts around 60% of the economy and its continued expansion somehow counterbalances sluggishness in the industrial sector.

CORPORATE: Vedanta Resources announced on 1 Feb’16 Dutch Auction tender to buy-back USD250m out of USD904,1m currently outstanding convertible VEDLN’16. Repurchase date is 10 Feb’16. The buy-back price will probably be lower than the redemption price of 102.75. It will generate lower return than holding the security until maturity in July. The buy-back price at Jan’20 tender offer was 91. Convertible VEDLN’16 is trading around 96.

S&P has affirmed its ‘BB‘ corporate credit rating of Australia-based Fortescue Metals Group with a Negative Outlook. The agency commented that “Fortescue will continue to generate a positive cash margin amid lower iron ore prices due to its ability to improve production costs and manage capital expenditure, will result in credit metrics in line with the ‘BB’ rating and our assessment of an aggressive financial risk profile”

Crisis Contained? Emerging Market Lessons for China:

Bloomberg news From Mexico in 1994 to Turkey in 2001, the triggers for emerging market crises have included a combination of high foreign debt, inadequate reserve buffers, limited policy space to support growth, and political instability. On those axes, China scores significantly better than its peers. The one area where it scores poorly is economy-wide leverage.

High leverage is a significant problem and already a drag on growth, but on a one- to two-year time horizon will not tip the economy into crisis. One reason for that is the vast majority of debt is domestic. A second is that much of the lending and borrowing is between different arms of the government. That means the government has time and tools to manage the problem. A 3.2 trillion yuan ($486 billion) bailout for local governments, and more to come, has managed down one of the main risks.

What if all those advantages come to nothing and China falls victim to a currency crisis? The lesson of recent history is that the consequences would be severe and far reaching. On average, the seven emerging markets in our sample saw currencies fall 64 percent against the dollar from pre-crisis to trough. GDP contracted 7 percent in the first year and unemployment rose 2 percentage points. Countries that did not face instability ahead of the crisis did so afterward, with Indonesia among those seeing a change of government.

Currency performance 3 years after Crises:

Would China’s low foreign debt provide a cushion, even if the yuan fell sharply? Maybe, and Japan is an example of a country where even very high domestic debt has not triggered a crisis. But the impact of capital flight on the financial system could still be damaging. Recovering from the blow to confidence as events spiral out of the control of policy makers would also take time. The risk of a crisis is low. The impact if it does occur will be high.

Real GDP Three Years After Crises (Pre-Crisis Level = 100)


LATAMimages (31)

REGION SUMMARY : The regional bond market declined slightly due to the negative oil price dynamics. Brazilian BXBZCRP Index decreased 39 bps.

MACRO :  Dilma Rousseff’s speech in Congress is positive for investors, as she confirmed her course for austerity implementation.

Brazilian Congress has returned from recess. Dilma Rousseff urged legislators to approve caps on government spending growth, cuts in pension benefits and the revival of a financial transaction tax to shrink the growing budget deficit. Substantial part of the opposition lawmakers negatively react to her speech backing temporary implementation of taxes on financial transactions. Her speech confirmed the government’s main course for austerity implementation. This is slightly positive for investors in the country’s capital market.

CORPORATE  :CSN rating downgrade by Fitch was unexpectedly strong. The company’s bonds may show some negative dynamics.

Fitch downgraded CSN from B+ to B- (Neg). The agency noted the current company’s capital structure was unsustainable in current market conditions. Fitch expects the company to face difficulties in its non-core assets selling. Cash received from the assets sale will be used to close the cash gap in 2016, 2017. The company’s iron ore division would stay under pressure. Core steel business would be limited in increasing profit due to a global steel oversupply. If the company successfully sells all of its non-core assets, CSN’s outlook could be raised to stable, Fitch announced.

It looks like Samarco’s shareholders will try to delay a BRL 2 bln deposit creation. Vale’s and Samarco’s bonds are too risky. BHP’s may be interesting for some investors. Today Samarco is to deposit over BRL 2 bln for the Brazilian government as a guarantee of a larger compensation after the environmental disaster. The company’s shareholders may ask government for an extension. According to the prosecutors, safety at the dams is still insufficient. Samarco’s bonds are too risky for investors. Vale’s are connected with high risks, too. BHP bonds may be interesting in current conditions.


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