Inside, confidential and off the record
Emerging markets risk 2018
The peso is up 7 percent this year, but the politics and NAFTA makes the outlook
"fundamentally more uncertain", Mike Hugman at Investec Asset Management said,
predicting sovereign bonds and peso to be "more challenged" in 2018.
Emerging markets should continue to benefit from strong economic growth and easy monetary policy next year after a stellar 2017 but investors are keeping a wary eye on events that have the potential to fuel volatility.
Politics, monetary policy and debt defaults are among the hazards that could knock asset prices from current levels http://tmsnrt.rs/2jXRTYa
Following is a list of potential pressure points for 2018, with countries listed according to the size of their economy: RUSSIA - President Vladimir Putin's victory in March elections is seen as certain, allowing him to extend his dominance over Russian politics into a third decade. Yet Russia's ties with the West, strained since the 2014 Ukraine crisis, are at their lowest point for years; the United States is mulling extending sanctions to cover Russian sovereign debt.
That may cause foreigners to sell Russian bonds, which have been a popular trade with returns of about 16 percent in 2017. Bank of America Merrill Lynch identified this as a potential shock event for 2018.
"Pressure could be material," BAML said, predicting big rouble falls and possible repatriation of up to $37 billion from local government bonds.
MEXICO - Chances are rising that Mexico's July elections will bring to power left-winger Andres Manuel Lopez Obrador, who is leading opinion polls. He plans to fund increased welfare by cutting government waste but investors fear higher spending and that key energy reforms could be reversed.
U.S. ties, already under pressure from President Donald Trump's threat to scrap the NAFTA trade treaty, could worsen, with Lopez Obrador saying he would not accept "racist, hegemonic or arrogant attitudes". Mexico sends 80 percent of its exports to the United States.
The peso is up 7 percent this year, but the politics and NAFTA makes the outlook "fundamentally more uncertain", Mike Hugman at Investec Asset Management said, predicting sovereign bonds and peso to be "more challenged" in 2018.
VENEZUELA - Next year could be crunch time for the oil-rich South American nation which has sought to restructure $60 billion in debt but continued to make repayments, albeit with delays.
President Nicolas Maduro has firmed his grip on power ahead of 2018 elections, with a purge that has paralyzed state oil firm PDVSA -- the source of 90 percent of Venezuela's export revenue. A further decline in oil output raises the likelihood that Caracas will default sooner rather than later.
BlueBay Asset Management's Anthony Kettle said the prospect of a quick debt restructuring and economic turnaround now looked like "a pipe dream".
For a graphic on PDVSA's troubles click: tmsnrt.rs/2vc01II SOUTH AFRICA - Markets have celebrated businessman Cyril Ramaphosa's taking charge of the ruling ANC party, which very likely means he will be the country's next president. But 2018 will be a key year during which he has to kickstart growth, create jobs and fill budget holes -- without angering party leaders and voters before 2019 elections.
Focus is now on the budget due in spring and a Moody's rating review which could see South Africa's rating cut to junk and the country's bonds ejected from a key index. That would in turn cause billions of dollars to flee, raising bond yields and pressuring the currency.
"It is doubtful that Ramaphosa will be able to meaningfully address the structural reforms next year ... that could lead to policy paralysis, and that is the real risk," said Anders Faergemann at PineBridge Investments. UKRAINE - Ukraine has received $8.4 billion in loan tranches from the International Monetary Fund (IMF) since a 2014 debt restructuring, helping it recover from recession. But further disbursements hinge on reforms, including overhauling the pension system and utilities.
These appear to have stalled, bringing warnings from Western donors and even leading a tranche of European Union aid to lapse. Continued economic recovery and earning investors' respect is crucial given a significant amount of restructured debt starts maturing after 2019.
"Next year will be the final test for commitment of the current government to reforms, before the IMF programme expires and the country moves to the 2019 election season," Morgan Stanley told clients. LEBANON - Lebanon holds its first legislative election in almost a decade next May, potentially transforming the politics of a country caught in a proxy war between Sunni Saudi Arabia and Shi'ite Iran.
Relying heavily on citizens' remittances from Gulf states, Lebanon will be hit hard if newly assertive Riyadh imposes economic sanctions or expels expat workers. That could in turn strain its currency peg to the dollar.
"Lebanon, for me, is the credit to watch next year. This is an economy with a similar debt-to-GDP to Japan but with a huge current account deficit," Societe Generale analyst Regis Chatellier said.
ISSUES.... 12/ 25/ 2017 - Send Us Your Issues
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