Italy’s turmoil: EM at contagion risk – Nomura

EM balance-of-payment pressures have been driven by the trio of higher US bond yields, rising oil prices and USD appreciation and although the former two have eased, EM jitters look set to persist, according to analysts at Nomura.

Key Quotes

“One reason is President Trump’s statement that the US will follow through on plans to impose tariffs on Chinese imports. Another is the rising risk of desynchronised global growth (rising US growth but slowing growth elsewhere). Our European team has cut its euro area 2018 GDP growth forecast to 2.1% from 2.4% and, still seeing downside risks, has pushed back the expected timing of the ECB’s first rate hike to Q3 2019 from Q1 2019. The duo of Fed rate hikes (we expect three more this year) and USD appreciation usually bodes poorly for EM.”

“The third new budding risk facing open EM economies is a potential deepening of Italy’s political crisis that could lead to fresh concerns over the future of the EU. True, Eurozone economies are in a healthier position than in 2012 and there is now a crisis support mechanism in place, but consensus decision making takes time in the EU, Italy’s economy is much larger than that of Greece, non-establishment parties have been on the rise across Europe and the ECB has much less monetary policy firepower.”

“If financial instability in Italy deepens and engulfs the Eurozone, who in EM will face the largest contagion?

• The four most exposed are all in EMEA, followed by LatAm; but there are only two in Asia – Malaysia and Indonesia – in the top ten. Taiwan and Thailand are least exposed.

• On exports, Hungary, Poland, Romania, Turkey and Russia are most exposed to Italy but, if the turmoil spreads to the Eurozone, the impact would be larger and broader.
• On exposure to Italian banks, Hungary and Romania stand out. But again, if the turmoil spreads, other EMs – such as Poland, Chile and Singapore – are exposed.”