Colombia: reshuffle does not spell disaster
Nicolas Jaquier and Christine Reed discuss Petro’s surprise cabinet reshuffle, its short- and long-term implications, and how fixed income markets have reacted.
April was a calmer month for global financial markets. The lack of major newsflow allowed market participants to shift their focus back towards the US economic growth outlook and future path of interest rates. Against this more stable backdrop, EM fixed income and FX posted positive total returns.
The government in Egypt continued to face pressure regarding the lack of progress on its privatisation initiative, with S&P lowering the country’s outlook to negative from stable. Kenya continued to make progress on securing the required financing for 2023, with the IMF, African Export-Import Bank and the World Bank all looking to provide additional financing.
Strong economic data prints continued to emerge from China, but the recovery remains services driven so regional goods exporters such as South Korea and Taiwan are yet to see a rebound. Inflationary pressures have continued to moderate and surprise on the downside, with Indonesia, Thailand, South Korea, Malaysia, China, and the Philippines all boasting lower inflation.
In Colombia, President Petro dealt a negative surprise to the market with a cabinet reshuffle, sacking his credible and prudent finance minister. Brazil recorded its largest current account surplus since June 2021, and inflation fell to its lowest level since January 2021. Headline inflation fell in Mexico, and central banks in Uruguay and Costa Rica cut interest rates.
Central and Eastern Europe
Although economic activity data was weak in Poland, there was a large improvement in the county’s current account balance, which moved from deficit to surplus in February. Hawkish comments from central bank members in the Czech Republic suggested that any potential easing of monetary policy may take place later than what the market is currently pricing.
Rest of Europe, Middle East and Africa (EMEA)
Moody’s downgraded Israel’s outlook to stable, citing governance concerns relating to the government’s proposed judicial reform. In South Africa, power outages continue to weigh on the economic outlook, while important export sectors are seeing lower volumes.
EM corporate debt highlights
The EM corporate debt market (JP Morgan CEMBI) returned +0.88% over April, with moves in spreads and underlying Treasuries both driving the total return figure. While spreads tightened modestly at the overall index level, there was a divergence in spread performance between high-yield and investment-grade (IG) issuers, with spreads widening slightly in the former and tightening in the latter.
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