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Delta variant creates gap in emerging markets as best results reach

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Delta variant creates gap in emerging markets as best results reach

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(Bloomberg) – A handful of emerging market currencies have held onto gains against the dollar this year. That list may shrink in the coming weeks as the highly contagious delta variant forms a new fault line for developing nations.

Countries that lag behind in vaccination rates, such as South Africa and Russia, may feel the pressure as they tighten restrictions that will hurt economic activity, according to Credit Agricole CIB. Once they had the best performance of 2021, the rand and the ruble were among those that caused an index of emerging market currencies to fall in June for the first time in three months.

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“Vaccination achievements will increasingly be a differentiator among emerging markets in the second half,” said Sebastien Barbe, Credit Agricole’s head of emerging markets strategy. “The impact of further spread of virus variants will vary significantly depending on vaccination rates,” as well as economic and political factors, he added.

Both the South African rand and the Colombian peso are feeling the pain of a rebound in Covid-19 cases, keeping expectations of tighter monetary policy at bay. It’s also wreaking havoc on their economies: Tighter restrictions are putting pressure on a South African economy reeling from its worst contraction in a century, while Colombia’s decision to shelve a plan to raise taxes earned it a rating cut to garbage. from Fitch Ratings.

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The currencies of South Africa and Colombia are the most vulnerable, as their central banks are not raising rates “to create a real rate cushion” against the US, according to Ed Al-Hussainy, senior interest rate analyst and Columbia currency. Threadneedle Investments in New York. On top of the pressure: the prospect of higher tax spending and the risk of exits after performance-hungry global investors flocked to nations’ assets this year, he said.

By comparison, the Brazilian real and the Mexican peso will be more resilient as their central banks tighten policy, he said. The real has outperformed all of its developing peers this year, even as Covid-19 cases remain at record levels.

The spread of the delta strain is also taking its toll in Southeast Asia. MUFG Bank Ltd. expects sluggish tourism receipts to weigh on the Thai baht. Meanwhile, the Indonesian rupiah fell to its lowest level since April when the country imposed the tightest restrictions yet on the economic centers of Java and Bali.

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Deepening divisions

Only a few developing nations (Chile, China, Israel, the United Arab Emirates and the countries of Central and Eastern Europe) have inoculated about half of their populations, the level considered necessary to slow the spread of the delta variant. , Bank of America Corp. said in a report on Friday. Most of the major emerging markets should arrive there before the end of the year, including Brazil, India, Indonesia, Mexico, Russia and Turkey, said David Hauner, head of cross-asset strategy at BofA.

South Africa is the outlier, he said, with only about 5% of its population vaccinated. At the current rate, it would take until 2023 for the nation to reach 50%. In Colombia, only 11% of the population is fully vaccinated, a lower proportion than in Chile, Mexico and Brazil.

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Economic data confirms the split: indices of purchasing managers in Russia and South Africa, along with those of Asian countries with relatively low vaccination rates, fell in June. Those in Eastern Europe and Latin America, where vaccination programs are more advanced, mostly increased.

That may increase pressure on developing-country central banks to remain accommodative, another negative for currencies as the Federal Reserve begins to discuss withdrawing the stimulus. And it could widen the gap between emerging and developed markets. That’s already showing: a Bloomberg index of developed market stocks has outperformed its emerging market counterpart by a factor of nearly two since the beginning of the second quarter.

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Even the most industrialized nations, like the UK, are struggling to contain the virus, despite relatively strict restrictions and vaccine progress. So the latest surge in infections in many developing economies, in many cases not yet driven by the new strain, suggests that “the results could be much worse now,” Deutsche Bank AG said in a report.

“We are closely watching the resurgence of infection numbers,” said Witold Bahrke, a senior macroeconomic strategist at Nordea Investment based in Copenhagen. “It is one of the factors that leads us to be underweight in emerging currencies, especially due to their potential impact on the EM-DM growth spread.”

Status quo

Central bankers in Romania, Malaysia, Peru and Poland are expected to keep borrowing costs at their current levels. On Wednesday, Romanian policy makers will likely keep the country’s benchmark rate at 1.25%. The leu has plunged 4.2% in 2021, behind most of its regional peers. The next day, the Malaysian central bank may keep its policy rate at a record low of 1.75%, maintaining an accommodative stance after the government announced a new RM 150 billion fiscal package. ($ 36 billion) last week. The ringgit has fallen more than 3% this year. Also on Thursday, Peruvian policy makers are expected to keep the country’s benchmark rate at an all-time low of 0.25%, but could take a more cautious tone in their statement after a higher-than-inflation rate expected last week. as well as internal and external risks, according to Bloomberg Economics. The sun fell third among emerging markets during the second quarter as tight presidential elections sparked investor anxiety. On the same day, the Polish monetary authority will likely keep borrowing costs at 0.1%. The zloty has declined 1.8% in 2021, rebounding in the last quarter.

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Inflation clues

Inflation data will be received from Thailand on Monday, the Philippines on Tuesday and Taiwan on Wednesday. China will release consumer and producer price inflation indicators on Friday. China’s PPI could cool down from a 13-month high of 9% in May due to slowing metal ore and coal price gains, while the CPI could accelerate to 1.8% from 1.3% the previous month, according to Bloomberg Intelligence. The yuan is Asia’s top emerging currency this year after the Taiwan dollar. Taiwan will release foreign reserve data on Monday, followed by China, Indonesia and Malaysia on Wednesday, as well as Thailand on Friday. While the Philippines will release its May trade figures on Friday, Taiwan’s exports are forecast to have risen 32.6% from a year earlier, according to a Bloomberg survey of economists, reflecting growing demand for semiconductors, Brazil and Mexico will report inflation figures for June on Thursday after a rebound. Rising price growth led the two largest economies in Latin America to raise interest rates. Traders will look for clues to further rate hikes in Thursday’s minutes of Mexico’s June rates meeting, when policy makers unexpectedly raised borrowing costs. Chile could report Thursday that inflation accelerated last month after weeks of rising energy costs, according to a Bloomberg survey of analysts. Inflation may even rise above the target range, putting pressure on the central bank to begin to adjust in the third quarter. Chile also reports June trade figures on Wednesday. Brazilian retail figures on Wednesday will likely show that sales soared 17% in May from a year earlier, down from 24% the month before, as emergency cash donations boost supermarket revenue.

© 2021 Bloomberg LP

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