Buy side
Investec Asset Management argues that emerging market currencies still look attractive despite the recent bout of risk aversion stemmed from monetary tightening measures by the ECB and the Fed. They maintain “an overweight exposure in Latin America through Brazil, Chile, Colombia and Argentina; in Asia we are overweight Indonesia funded out of Korea and Taiwan whilst in EMEA we took profits on Turkey but maintain an overweight in Poland with underweight exposures in Czech, Hungary and Slovak.” Sell-side
- Standard Chartered debate the Euro/CFA franc peg and conclude that a review of the currency arrangement is necessary. They note that “improving FX reserves, buoyant oil prices and more robust GDP in some of the zone's economies were mitigating the risks for a devaluation” but that in the interest of competitiveness the region’s currency arrangement is not optimal. They also argue that the growth within the region varies markedly due to local factors.
“Political volatility in Côte d'Ivoire and the Central African Republic have been major growth constraining factors. In Niger, economic output is fragile due to its vulnerable agricultural sector and large informal sector. Guinea Bissau's small economy is at risk of a collapse given its narrow economic base and chronic fiscal deficit.” In additon, “no single country also met all three principal convergence criteria within the CFA region in 2006. These state that national budgets should be balanced, inflation should be no more than 3%, and public debt should be less than 70% of GDP.”
The fact that the economies are asymmetrical, labour mobility is limited, trade integration is weak and there is no automatic fiscal transfer mechanism between states means the peg is not appropriate, Standard Chartered says.
And on the vexed question of devaluation vs unpegging suggest various policy options; devaluing the CFA franc whilst developing higher value adding sectors like tourism and support services; opting for each economy within the region to peg at a different rate to the euro; changing the parity between the West African CFA franc (XOF) and the central African CFA franc (XAF); or to float the CFA franc.
- Deutsch Bank notes the positive balance of payment trends in most emerging market economies. In Asia, with the exception of Pakistan, “a significant shift is underway in how the current account surpluses are being recycled. Net private capital inflows are on the decline as governments and central banks have encouraged outflows from both private and other nonofficial investors.”
In EMEA they find that “in general countries’ vulnerabilities have changed little since the ’06 sell-off, though the FDI driven turnaround in South Africa’s basic balance and Slovakia’s export driven improvement in the headline c/a/ deficit deserve notable mention. Oil importers in EMEA continue to run an average c/a deficit of 5½%GDP, though are still on track to accumulate another 1½ %GDP in FX reserves this year (over 3%GDP, including oil exporters), barring a shock to the external environment.”
In Latin America, strong export performance, and improving macro fundaments means the regions’ external position is likely to remain fundamental robust. But that: “Colombia’s sizeable current account deficit makes it the single country in the region vulnerable to a change in the international mood, though improved security conditions and a booming economy are likely to act as a major buffer to external shocks. In Argentina, the increasingly interventionist nature of the government together with perceived economic data manipulation (particularly CPI) have started to offset the otherwise bright external and exchange rate prospects.”