EM Review: Revival of U.S.-China Tension Weighs on Risk Appetite

(Bloomberg) -- Emerging-market stocks and currencies resumed their downward slide last week as optimism waned that the coronavirus is being contained and U.S.-China tensions heated up again after several quiet months. Central banks across developing-markets cut interest rates further as data showed the drastic economic impact of the pandemic.

The following is a roundup of emerging-market news and highlights for this week through May 10:

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Highlights:

• Trade negotiators from China and the U.S. pledged to create favorable conditions for the implementation of the phase one trade deal and cooperate on the economy and public health
  • China fired back at U.S. Secretary of State Michael Pompeo, saying he has no evidence to back up claims that Covid-19 escaped from a lab in the city of Wuhan. Chinese state media called him “evil” and a liar
  • China’s ambassador to Washington called for an end to the “blame game” over the coronavirus in the country’s most high-profile response since U.S. President Donald Trump escalated his criticism of Beijing
  • Trump said he’s struggling with Beijing, casting doubt on the future of the phase one deal
• President Trump launched headlong into his push to reopen the country, saying Americans should begin returning to their everyday lives even if it leads to more sickness and death from the pandemic
  • U.S. employers cut a record 20.5 million jobs in April, tripling the unemployment rate to 14.7%
• Traders are pricing in the possibility the Fed will cut its policy rate below zero
• The European Central Bank responded to a German court ruling criticizing its bond-buying program by pledging to continue doing everything necessary to revive inflation
• Private creditors have articulated the problems that will have to be overcome if a plan to ease the debt burden of the world’s poorest nations is to get their support
• African finance ministers will meet Thursday to discuss debt-relief proposals, according to a United Nations official
• Turkey’s lira fell to a record despite efforts by authorities to keep a lid on depreciation
• Bahrain became the lowest-rated country to issue dollar bonds since the market hiatus triggered by the Covid-19 pandemic subsided in late March
• The Saudi Arabian Monetary Authority said it has enough foreign reserves to meet all foreign obligations and reaffirmed its commitment to maintaining a currency peg to the dollar
• Argentina may consider easing capital controls once it finishes negotiations with bondholders to restructure its debt, and after the coronavirus uncertainty clears, Economy Minister Martin Guzman said
• Lebanon plans to shift to a flexible exchange rate once it secures external funding for an economic overhaul, and will need $28 billion in the next five years to overcome its worst financial crisis in decades
  • Bank of America said Lebanon is probably targeting a 75% haircut on its Eurobonds as part of its debt restructuring
• Brazil cut rates by 75 basis points to a record 3%, boosting the pace of monetary easing and sending the currency to an all-time low
• Malaysia cut its benchmark rate by 50 basis points, the most since early 2009, as it seeks to bolster its newly reopened economy
• The Czech Republic lowered borrowing costs more than expected, extending the European Union’s steepest rate cuts to ease the pain for an economy heading into a record contraction
• The U.S. has removed two of its four Patriot antimissile batteries from Saudi Arabia and another two in the Mideast partly because tensions with Iran have eased, according to a U.S. official

Asia:

• Factory output across several Asian countries slumped to record lows in April, signaling a deeper contraction in the world’s manufacturing hub even as China begins restarting some operations

• The People’s Bank of China said the country faces unprecedented economic challenges from the coronavirus pandemic and it will resort to “more powerful” policies to counter the hit to growth

  • China’s exports unexpectedly rose in April aided by stronger shipments to South East Asia, though with the coronavirus pandemic damaging global demand that increase may be temporary
  • Current account posted the first deficit in almost two years in the first quarter
• The U.S. delayed an annual report to Congress assessing Hong Kong’s autonomy, Pompeo said, amid signs China’s top agency in the city may take a more hands-on role
• Bank of Korea will halt auctions for dollar loans to banks using the currency swap line with the Fed for the time being as FX funding condition continues to look favorable, the central bank said
  • South Korea’s inflation slowed in April as the coronavirus and the oil slump weighed on the cost of some goods and services

• India will increase its borrowings by the most since 2009 to cushion the impact of the coronavirus pandemic, abandoning plans to curb the budget gap and potentially raising the risk of a ratings downgrade

  • India’s budget deficit has touched 4.4% of gross domestic product, breaching the target set in February as an economic slowdown reduced tax collections, people with knowledge of the matter said
  • The world’s biggest lockdown forced 122 million people out of jobs in India last month, according to estimates from a private sector think tank
  • India’s dominant services industries slumped in April, signaling a massive contraction in the economy due to stay-at-home restrictions
  • India increased a special tax on gasoline and diesel as pressure builds on Prime Minister Narendra Modi’s government to restrain a ballooning budget deficit
  • India will deploy commercial jets, military transport planes and naval warships to bring back hundreds of thousands of citizens stranded across the world, in what’s set to be the biggest-ever peacetime repatriation exercise
  • India is developing a land pool nearly double the size of Luxembourg to lure businesses moving out of China, according to people with the knowledge of the matter
  • The Asian Infrastructure Investment Bank approved a $500 million loan to support India’s efforts to prevent, detect and respond to the threat posed by Covid-19
• Indonesia’s economic growth slowed in the first quarter of the year amid expectations the coronavirus will take an even heavier toll on the economy in the months ahead
  • Indonesian officials have begun discussions about reopening the economy in phases starting from June, as job losses accelerate and businesses struggle to survive amid strict social-distancing rules
  • Borrowers from Indonesia are taking advantage of reduced volatility in global credit markets to raise funds in dollars as economic pressures from the coronavirus outbreak mount
  • Bank Indonesia sees GDP growth below its forecast of 2.3% this year as the impact of coronavirus takes its toll on the economy, Governor Perry Warjiyo said
• Malaysia will extend its relaxed lockdown by four weeks, allowing nearly all economic activities to continue while keeping its borders shut and schools closed
• Thailand’s consumer prices fell the most in more than a decade, posting a near 3% drop in April from a year ago that exceeded all estimates
  • The Thai government will deliberate on May 14 whether to begin the next stage of reopening, which may be slated for May 17
  • Investors in Thailand’s bond funds will have to notify asset managers in advance if they want to make big redemptions under new rules being crafted by regulators

• The Philippine economy contracted in the first three months of 2020 as restrictions to stem the coronavirus outbreak shut businesses and sapped consumption, a trend seen worsening in the current quarter

  • Bangko Sentral ng Pilipinas’s reductions in the policy rate and lenders’ reserve requirement ratio this year have provided sufficient buffers for the economy, Governor Benjamin Diokno said
  • President Rodrigo Duterte may relax lockdown measures in some cities in the Philippine capital region after May 15, his spokesman Harry Roque said
  • The Philippines’ largest media company, often a target of criticism from the nation’s president, had trading in its shares halted, a day after the government shuttered its television and radio stations
  • President Rodrigo Duterte has offered an olive branch to tycoons he attacked months ago, thanking them for helping government in its virus response
  • Philippine economic performance will probably be worse than the zero growth to 0.8% contraction initially estimated for 2020 after the lockdown was extended over Metro Manila and nearby areas, Finance Secretary Carlos Dominguez said
• Taiwan urged the World Health Organization to allow it to rejoin a key global health assembly this month despite objections from China, as Taipei pushes for more inclusion in international bodies
  • Companies that suspended operations due to safety concerns can resume business after undergoing evaluations from local governments, according to Taiwan Centers for Disease Control
  • A jump in Taiwan’s exports to China wasn’t enough to keep the island’s shipments from declining for a second month in April

EMEA:

• Russian President Vladimir Putin’s approval rating has fallen to a record low amid economic damage from the coronavirus and the slump in oil prices, an opinion poll showed
  • Putin told regional governors not to rush to ease the coronavirus lockdown even as top government ministers said pressure on the economy is intensifying
• Policy makers in central and eastern Europe are racing to shield their economies from the impact of the coronavirus, with a growing number of countries deploying developed-market tools
• Poland will delay its presidential election by several months, seeking to quell concerns that holding it during the brunt of the pandemic through a mail-in ballot system may not be free or fair
  • Poland’s economy may avoid falling into a recession in 2020 and it should continue growing next year, Deputy Prime Minister Jadwiga Emilewicz said
• Hungary’s central bank kicked off its quantitative-easing program by buying government bonds at an auction
  • Hungary may post growth this year as its economy is set to rebound from a second-quarter slump, central bank Governor Gyorgy Matolcsy said

• Turkey’s banking regulator expanded the definition of manipulative trades in financial markets as the country’s currency fell to new lows

  • Turkey signaled it may reverse a ban on trading liras with BNP Paribas SA, Citigroup Inc. and UBS Group AG, potentially stepping back from measures imposed after the currency’s slide to a record low
• Slovakia’s long-term foreign currency debt rating was downgraded by Fitch Ratings to A from A+
• Egypt expects to secure final approval to borrow $2.7 billion from the International Monetary Fund via a rapid financing facility this week, an official said, one of many African nations turning to the Washington-based lender as the coronavirus hits economies
• Qatar’s sovereign wealth fund is pledging some of its most high-profile European equity investments to raise a 7 billion euro ($7.6 billion) loan that will help the top liquefied natural gas exporter bolster its cash reserves amid plunging energy prices
• Business conditions in the Arab world’s three largest economies deteriorated further last month amid shutdowns from the coronavirus and a plunge in commodity prices
  • Non-oil private-sector activity collapsed at an unprecedented pace in Egypt and suffered another record setback in the United Arab Emirates, according to Purchasing Managers’ Index surveys compiled by IHS Markit
• Saudi Arabia moved to prop up a nascent recovery in energy markets by raising crude prices for its customers worldwide, triggering a rally in oil futures
  • A currency devaluation would be too costly for Saudi Arabia and the better option is to adapt to the oil shock through fiscal changes, according to Goldman Sachs Group Inc.
• Fitch lowered Jordan’s credit outlook to negative from stable
• The first commerce under an Africa-wide free-trade pact will provide new stimulus to countries on the continent to overcome the economic damage of the coronavirus, even if it could be delayed for around six months, according to a senior official
• In a month when lockdowns to slow the spread of the coronavirus halted output in many African economies, business activity in Kenya managed to not drop as far as the rest
• African countries require a two-year debt standstill to provide governments with the fiscal space to fight the coronavirus pandemic, according to South African President Cyril Ramaphosa
• South African inflation that’s “under control” gives policy makers room to help support the economy during the coronavirus shock, Reserve Bank Governor Lesetja Kganyago said
• Zambia has closed a tender process to select a financial advisor to manage its debtload and is creating a shortlist

Latin America:

• Brazil’s rating outlook was revised to negative by Fitch as political tensions hinder the reform agenda

  • Congress approved two stimulus bills that will provide financial help to states and municipalities, set aside money for the economic recovery from the pandemic and allowed the central bank to buy corporate bonds
  • Political turmoil continued as Economy Minister Paulo Guedes was said to have signaled his future in the government isn’t certain anymore; President Jair Bolsonaro came to Guedes’ defense, saying he will follow his advice and veto a change to a bill that had been proposed by congress
  • Former Justice Minister Sergio Moro made new accusations against Bolsonaro in a testimony to federal prosecutors, while the president nominated another ally to head the federal police and participated in protests against congress
  • Industrial production plunged more in March than economists forecast and consumer prices tumbled in April
  • Talks about easing social distancing measures are being overshadowed by new coronavirus hotspots emerging in the north; Sao Paulo extended the quarantine until May 31

• Argentina’s President Alberto Fernandez is waiting on counteroffers from the nation’s creditors. Speaking in an interview with Futurock radio, the president said all parties are seeking to avoid default, and he expects counter-proposals in coming days after the nation blew past Friday’s deadline for bondholders to accept a $65 billion restructuring offer

  • Early last week, the three biggest bondholder groups said they can’t support the initial proposal because it forces them to “bear disproportionate losses”
  • The Inter-American Development Bank will disburse $1.8 billion to Argentina this year to help mitigate the health, social and economic consequences of the coronavirus
  • Argentina made a $320 million quarterly interest payment to the IMF
• Remittances to Mexico climbed to a record in March as workers in the U.S. rushed to send savings back home
  • The chief economist of Mexico’s Finance Ministry, Alejandro Gaytan, is said to be leaving his post to become the nation’s representative at the Inter-American Development Bank
• Chile’s central bank held its policy rate close to zero as the nation braces for its worst economic crisis in nearly four decades
  • Chile sold an additional 500 million euros of bonds due in 2025 to help fund the fight against the pandemic
• Peru kept borrowing costs at an all-time low after slashing rates in the last two months and issuing cheap loans to support businesses
• Colombia secured $2.5 billion in new loans from multilateral banks
• The World Bank approved a $506 million loan to Ecuador to address its Covid-19 crisis

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With assistance from Bloomberg