Emerging Market Capital Controls Event Risk Remains High And Rising

From Win Thin

More and more EM policy-makers are complaining about currency strength, and we think it’s only a matter of time before other countries resort to capital controls to help ease appreciation pressures.  Chile President Pinera said today that he is concerned by peso appreciation as some industries are “really suffering.”  Czech central banker Rezabek said today that the strong koruna was “not good” until the economic outlook has stabilized, while Brazil central bank chief Meirelles was quoted as saying that policy-makers are considering new tax measures that may affect the exchange rate.  Last Friday, South Africa central banker said that the strong rand exerted downside risks to the economic outlook and that the bank could cut interest rates again in response.  The government’s Medium Term Budget Policy Statement will be presented to Parliament on October 27 and some are expecting some sort of exchange rate policy shift to be announced then too.

EM FX was soft earlier in the day but most have come back to be flat or even up on the day.  We think EM capital controls will likely lead to knee-jerk selling that will then be greeted with renewed buying at better levels.  THB is firmer now than it was last Monday when the 15% tax on foreign investment in Thai bond market was reinstituted, while BRL is firmer now than it was when the IOF tax was reintroduced last October and then increased this month.  As long as the wall of money going into EM persists, EM policy-makers will continue to wrestle with this issue and investors are going to have to deal with periodic event risk.  For now, investors are taking such controls in stride but at some point, we will see a tipping point when foreign investors rethink the risk/reward matrix for EM investing.

Win Thin | Global Head Of Emerging Markets Strategy