The Malaysian ringgit has weakened considerably since May and our end-2006 dollar-ringgit forecast of 3.55 is looking challenged, writes UBS’ Sanjay Mathur. Economic factors have had a limited role in this episode of currency weakness. The weakness of the business cycle is well known and Malaysian rates have been trading at a discount to US rates for sometime now. The overwhelming influence appears to be political tensions which are discouraging foreign participation in Malaysian assets. We think that Bank Negara views these developments as aberrations as evident from the absence of a policy shift in either direction.
We recommend buying South Africa 2014s versus Mexico 2014s at a spread of about 23 basis points, say Dresdner Kleinwort’s emerging markets chiefs Arnab Das and Arko Sen. The spread widened as South Africa underperformed in the sell off, but with risk appetite improving and Mexico priced tightly, the spread should revert to –30 basis points. With the Fed having paused, high beta names are now likely to be back in vogue as risk appetite improves. South African beta has caught up with Mexico, though they both remain below 1.
South African growth seems to be slowing which should aid the current account. Pre-emptive actions taken by the Central bank and the possibility of even 100 basis points of hikes to come this year, most of which seems priced in, is likely to keep inflation expectations in check and support the currency. Among the key investment grade names, South Africa stands out as cheapest by far. Mexican spreads have already priced in a Calderon presidency and there is a good chance of some profit taking after the immediate urgency is over, as the market realises that Calderon's victory though preferable, does not imply that reforms are going to enter the fast track.
Thailand’s political stalemate has been unlocked, reports Standard Chartered’s Upsara Wilaipich. The king has approved a general election for October 15, and it is likely that Thaksin Shinawatra’s Thai Rak Thai will win again, given its support in the countryside. Thaksin himself has not confirmed whether he will run again, but the bottom line is that the worst of the country’s political uncertainty is over. Further deceleration in Thailand’s growth beyond 2006 is unlikely; and domestic demand and investor confidence should recover after the election.
ABN Amro’s Evgenia Raspopina and John Bates note that Kazakhstan’s banks are “steaming ahead,” with the six largest banks showing strong balance sheet growth driven by accumulating deposits and international borrowing. Second tier banks are growing faster than the biggest three: Kazkommertsbank, Halyk Bank and Bank Turan Alem. Customer deposits are not growing as fast as balance sheets, and the share of deposits in total funding declined among the top six banks during 2005. Higher reserve requirements are unlikely to stem new issues on the Eurobond or syndicated loan markets. “We particularly like Halyk Bank… and note its higher profitability in terms of return on equity and interest margins, and its focus on the domestic market.