1、Global Emerging Markets Research08 June 2022 EM Frontier Local Markets Compass: 2H22 outlookWe enter into a short USD/KZT via 6m NDFs Emerging Markets StrategyAyomide O Mejabi AC(44-20) 7134-J.P. Morgan Securities plcSean T Kelly AC(44-20) 7134-J.P. Morgan Securities plcSaad Siddiqui AC(44-20) 7742-
2、J.P. Morgan Securities plcAnezka Christovova AC(44-20) 7742-J.P. Morgan Securities plcMichael Harrison AC(44-20) 7134 J.P. Morgan Securities plcGisela R Brant AC(1-212) 834-J.P. Morgan Securities LLCMilo Gunasinghe(852) 2800-J.P. Morgan Securities (Asia Pacific) LimitedEM, Economic and Policy Resear
3、chNicolaie Alexandru-Chidesciuc AC(44 20) 7742-J.P. Morgan Securities plcSteven Palacio AC(52 55) 5382-Banco J.P.Morgan, S.A., Institucin de Banca Mltiple, J.P.Morgan Grupo FinancieroGbolahan S Taiwo AC(44-20) 3493-J.P. Morgan Securities plcJessica Murray(44-20) 7742 J.P. Morgan Securities plcJin Ti
4、k Ngai, CFA AC(65) 6807 JPMorgan Chase Bank, N.A., Singapore BranchSthembiso E Nkalanga AC(27-11) 507-JPMorgan Chase Bank, N.A., Johannesburg BranchSee page 34 for analyst certification and important More of the same required. In our year ahead outlook, we laid out the case for a more cautious portf
5、olio given the expected tightening in global financial conditions and consensus positioning. As we head into the second half of theyear, we expect this will remain the case, as a mix of headwinds and tailwinds mean the case for differentiation will remain important. Frontier economies are once again
6、 likely to approach multilateral agencies for support. For those that have existing IMF programs, the new Resilience and Sustainability Trust, which does not count towards countries normal access limit, may be an option. We are still awaiting further progress with the G20s Common Framework, which is
7、 arguably delaying the conclusion of bond restructuring in Zambia and its commencement in Ethiopia. Despite the already light foreign positioning, we see limited scope for capital inflows in 2H22. Heavily managed currencies, such as KES, could be at risk of a substantial devaluation, especially once
8、 the political cycle comes to an end general elections in Kenya are scheduled for August 2022. Frontier Local Markets Guide: We recently published the inaugural edition of the J.P. Morgan Frontier Local Markets Guide, in which we cover in detail the local markets of 20 countries (and regions). Takea
9、ways from the J.P. Morgan Frontier Markets Conference: On Wednesday 25 May, J.P. Morgan held its inaugural Frontier Markets Fixed Income Conference. The focus was on sovereign special situations in Frontier Markets, and the outlook for stress amidst challenging global conditions. Frontier local mark
10、ets Risk-Reward scorecard: Heading into 2H, our net risk-reward score remains in positive territory. KZT now holds the top ranking in our framework, given strong ToT and sizeable FX carry. Updates: 1) Kazakhstan, 2) Zambia, 3) Kenya, 4) Egypt, 5) Ghana, 6) Nigeria, 7) Serbia, 8) Ukraine, 9) Sri Lank
11、a, 10) Pakistan and 11) Dominican Republic. EM Frontier Market Strategy: We make one outright trade change. We enter into a short USD/KZT via 6m NDFs (spot entry: 435.00, 6m NDF entry: 466.00, spot target: 415.00, spot review: 450.00). Elsewhere, we hold onto a long bond position in Zambia (FX unhed
12、ged) and a long USD/KES via 6m NDFs. Please see respective country pages and the appendix for more details. Exhibit 1: Performance overviewTotal FX return vs USD including carry or T-bill/govt bond return if more representative. Source: J.P. Morgan, as of 06/06/22. 12-m OMO for NGN, 12m T-bill for P
13、KR, Jul-23s for EGP, Jul-24s for GHS, Dec-27s for ZMW, Jan-33 KENIBs for KES, 12m NDF mid for KZT and UAH; Feb-28s for RSD, Jul-23s for LKR and GBI-EM GD index for DOP. Based on Bloomberg indicative mid prices3.0%1.3%-1.1%-1.3%-2.5%-9.9%-10.4%-10.5%-14.3%-14.8%-15.3%-21.5%-47.7%-60.0%-50.0%-40.0%-30
14、.0%-20.0%-10.0%0.0%10.0%NGNKZTKESDOPZMWEGPGBIEM GDPKRUAHRSDEMBI GDGHSLKR1m2022YTDAs of: 06-Jun-222Global Emerging Markets ResearchEM Frontier Local Markets Compass: 2H22 outlook08 June 2022Ayomide O Mejabi(44-20) 7134- EM Frontier Local Markets Views: SummaryMacroStrategyKazakhstanView:PositiveNBK k
15、ept rates on hold at 14% as we expected. The statement highlighted acceleration in inflation and growth surprising to the upside but still kept key rate and corridor unchanged. We believe the move was driven by CBR rate cuts and KZT strengthening vs USD (on the back of RUB gains). NBK stated that fu
16、rther decisions will depend on how actual inflation is relative to the forecasted path. However, since NBK sees inflation outside the target band even in 2024, it is hard to see what could force the NBK to hike we expect the next move to be a cut in Jan-23. Enter into new short USD/KZT via 6m NDF. D
17、espite the scale of the rally, NDF yields across the curve remain elevated. Looking ahead, we expect spot can remain anchored. Oil prices have remained remarkably resilient and our commodities team retain a bullish outlook, which should see the CA register an impressive surplus this year. Such is th
18、e extent of this ToT support, the currency has jumped to the top of our risk-reward scorecard. While geopolitical uncertainty remains high, we see enough factors to keep the currency supported near term.UkraineView: NeutralExternal support for Ukraine is on the rise. The European Commission has put
19、forward a new macro-financial assistance package with the aim ofsupporting the Ukrainian budget. Funding has low interest rates and long maturities and is formed of loans rather than grants and this will lead to a corresponding increase in Ukraines debt profile. The EU has sent EUR1.4bn to Ukraine s
20、ince the war started and the new MFA package would provide significant further support.Neutral on Ukrainian local assets. The official USD/UAH exchange rate remains fixed at 29.2549. Although the NBU recently decided to resume the setting of monetary policy, by hiking the policy rate to 25%, the FX
21、market is expected to remain closed in the near term. The central bank stated that the recent rate hike was, in part, aimed to help maintain stability in the FX market, given risks of increased dollarization pressures and widening between the cash market exchange rate and the official FX rate.Serbia
22、View: NeutralNBS to deliver more front-loaded hikes. NBS has hiked the policy rate100bp since April and we see more to come, with end-22 policy rate at 3.5%.Inflation is above the upper-target band and will remain so through this year; core inflation is also building momentum. The Presidents re-elec
23、tion and victory for the ruling SNS implies policy continuity and Serbia should remain on the EU path, though Russia relations presents some challenges.Pressures on RSD have begun to ease. The depreciation pressures seen over the course of March/April have eased in recent weeks, with EUR/RSD now bac
24、k to its lowest point of the year. The central bank has tightened monetary conditions via a combination of rate hikes and FX intervention. Given the stable basic balance position, we expect EUR/RSD to remain in a relatively tight range. EgyptView: NeutralBOP pressures abating on improved FDI outlook
25、; CBE to hike some more. Continued commitments from the GCC amid the governments privatization drive should improve the outlook for the Egypts BOP. Authorities plan to target US$10bn in investments annually over the next 4 years to improve private sector participation in the economy. Meanwhile, we s
26、till expect 175bp in cumulative hikes from the CBE, taking the policy rate to 13% by year-end amid continued inflationary pressuresThe outlook for USD/EGP has turned more positive. Authorities have allowed a sizeable FX adjustment to take place and have also delivered sizeable hikes. Furthermore, th
27、e FDI outlook has improved while non-resident positioning has lightened significantly, as authorities reported around US$20bn in outflows since mid-February. Consequently, we have turned more neutral-to-positive on EGP and view the likely agreement of an IMF programme as a potential trigger to go lo
28、ng EGP once again.Kenya View: Negative50bp lift-off as we expected, another 50bp to go. The combination of persistent exchange rate pressures, likely dislodging inflation expectations and tighter global financial conditions is likely to prompt another rate hike by the CBK later this year, taking the
29、 policy rate to 8.0% by year-end.Stay long USD/KES via 6M NDFs. With a worsening external accounts position and foreign exchange policy that limits the ability of the exchange rate to absorb the shocks in a timely manner, we remain downbeat about the prospects for the KES and expect that authorities
30、 may need to allow larger depreciations than currently priced by NDFs. We expect commercial banks to continue rationing FX for imports as the demand-supply imbalance persists.Zambia view: PositiveInflation continues to buck the trend but direction of travel could change in 2H. Lower food inflation c
31、oupled with a stable currency ensured a ninth consecutive month of decline in headline inflation to 10.2%oya in May (from 11.5% in April). Our expectations are for base effects to start to wane from 2H,which should see headline inflation start to inch back up towards 12% by year-end, prompting a tig
32、htening stance from the BOZ.Remain long ZAMGBs (FX unhedged). Despite continued delays in forming a formal creditor committee and the likely finalization of the IMF deal in 3Q22, we remain positive on Zambia local bonds. This is because the relatively new government continues to implement structural
33、 reforms that should be supportive for domestic inflation, the current account and, by extension, long-end rates. We expect BoZ to continue intervening in the FX market, which should see USD/ZMW trade around 17.25-18.00 for most of 2H22. Pakistan: NeutralBrighter outlook for IMF program extension wi
34、th tighter policy mix. Staff-level talks with IMF concluded last week without an explicit deal, but prospects have improved following the governments decision to partially reverse fuel subsidies. SBP also hiked the policy rate by 150bps in response to an upward revision to its growth and inflation f
35、orecasts. With the forward-looking real policy rate now up to 3.6% and fiscal consolidation in the cards, we expect the SBP to stand pat for now. Neutral Pakistani local assets, but expecting contained weakness. Localrates have repriced higher after SBP hikes since April, but the outlook remains for
36、 sticky and elevated inflation in the coming months. PKR faces headwinds from CA weakness and currently low real yields, with the pace of FX depreciation accelerating recently, but shorting NDFs is too costly. If inflation moderates from 4Q22, real rates would be attractive outright and relative to
37、peers, but real rates risks are to the downside, in our view.Dominican Republic View: NeutralBCRD hiked its policy rate 100bp to 6.50%. The BCRD emphasized the role of relative monetary policy in its reaction function, which suggests to us the CB will have no space to decouple from the Fed BCRD made
38、 reference to 200bp of Fed hikes being priced-in by markets, which, provided they materialize, we take as a floor for potential rate hikes this year. We revise our year-end policy rate forecast to 9.25% (from 8%)We remain neutral on local assets. A more hawkish central bank that also feels comfortab
39、le with the currency strength, coupled with strong growth and improving tourism as Covid fears wane are positives for DOP. However, valuations are not looking very attractive, with the REER already at 2018 levels, 11.5% higher from the 2020 lows, and a relatively wide current account deficit of 3.5%
40、.3Global Emerging Markets ResearchEM Frontier Local Markets Compass: 2H22 outlook08 June 2022Ayomide O Mejabi(44-20) 7134- Market Overview: Juggling act More of the same required. In our year ahead outlook, Cloudy with a chance of rain, we laid out the case for a more cautious portfolio given the ex
41、pected tightening in global financial conditions and the apparent consensus positioning. Thus far in 2022, the investment environment has indeed proved more challenging, with the case for bottom-up differentiation being required as opposed to a top down, beta view. As we head into the second half of
42、 this year, we expect this will very much remain the case, as a confluence of both headwinds and tailwinds mean the case for differentiation will remain important. On the one hand, risks around China growth, a further tightening in financial conditions, as well as inflation pressures are headwinds t
43、o frontier economies that are reliant on external financing. On the other, persistently high commodity prices should prove a positive for the exporters. Heading into 2H22,we see scope for oil exporters such as KZT (with high carry) to benefit.With frontier markets at the epicenter of the geopolitica
44、l tensions, we have keptpositioning light through 1H22. The escalation of tensions between Russia and Ukraine came on the heels of domestic tensions in Kazakhstan, which, when coupled with fiscal concerns in Ghana, represented significant headwinds to a substantial segment of frontier local markets.
45、 As a result, we kept positioning relatively light, having pared back longs and held core positions in only Zambian bonds (long) and Kenya FX (short), while trading in and out of Egypt FX and rates. The re-surfacing of frontier market vulnerabilities has prompted significant policy adjustment this y
46、ear. The collateral damage from the Russia-Ukraine war has resulted in a reassessment of the broader vulnerabilities evident in frontier markets. Even before the war, damage from the pandemic followed by higher global oil and food prices in 2021 had already made the fundamentals in many frontier eco
47、nomies more fragile amid increased concerns over debt sustainability. The war-related further rise in commodity and food prices, alongside the tightening in global financial conditions, has aggravated the situation. Funding widening current account deficits and external debt obligations has become s
48、ignificantly harder. As a result, on average, Frontier local markets have fared worse this year, with a median return ofaround -9.8% since the start of the year (Exhibit 1).Some Frontier economies have tightened monetary policy and significantly adjusted exchange rate policy, but further support may
49、 be needed. To name a few, the central banks of Ukraine, Kazakhstan, Egypt and Ghana have taken decisive action, hiking policy rates significantly in 1H (Exhibit 2). Egypt shifted towards a more flexible exchange rate, but it will need continued GCC and IMF support, coupled with more rate hikes. Sri Lanka and Pakistan are currently undergoing both political and economic upheavals. In Sri Lanka, in addition to the sharp devaluation of the LKR, a clampdown on imports resulting in a severe scarcity of essential items and power cuts triggered widespread protests, resulting in resignations within
