Investors digest ECB news; South Korean leader impeached; Turkey eyed; Bahrain downgraded

By Christine Van Dusen

Atlanta, Dec. 9 – South Korea stepped into the spotlight on a Friday that saw emerging markets investors digesting the news that the European Central Bank will slow but extend quantitative easing.

“The extension would add a total of €540 billion to its current €1.7 billion stimulus, making the size of the program double what the ECB initially announced in January 2015,” according to a report from Schildershoven Finance BV. “Policymakers also kept the main refinancing rate at zero.”

Meanwhile, South Korea’s parliament voted to impeach President Park Guen-hye. Prime Minister Hwang Kyo-ahn will take over while a court decides if the impeachment can be made permanent. That ruling could take up to six months to complete.

“If approved, fresh elections will have to be called within two months,” according to a report from Commerzbank. “The lack of an administrative leadership comes at a time when the economy is facing increasing challenges on both the external and domestic front. We see downside risks to our growth forecast of 2.8% and 2.9% for 2016 and 2017.”

This comes as South Korea faces a contracting bond market, with high yields stemming from the uncertainty created by Donald Trump’s presidential win. In response, the sovereign’s financial regulatory commission is looking to restart its bond stabilization fund.

Looking to Turkey, the government is planning some measures to support the economy, according to a report from Schildershoven Finance BV.

“The government will help commercial banks lend up to an additional 250 billion liras,” the report said. “It will be the guarantor for up to 100% of new commercial loans that will be taken out by exporters and small and medium-sized enterprises.”

Turkey in focus

Restarting the bond stabilization fund is meant primarily to “strengthen the non-financial sector’s access to credit,” Schildershoven said.

But the measures don’t include direct cash injections, so the impact on the market is likely to be limited, the report said.

Bahrain rating cut

In other news on Friday, Bahrain’s rating was cut to BB- from BB by S&P, with a stable outlook.

Among Middle Eastern names, Bahrain is, of late, “one of the weaker links in the Gulf region,” a London-based trader said.

“On pure economics, the credit has some obvious concerns: It has the highest fiscal break-even in the region, large percentage external debt to GDP, large percentage of dependency on hydrocarbons, and twin deficits,” he said. “No great shock to see rating agencies push Bahrain much lower, given these dynamics. As I’ve often said, Bahrain is the whipping boy of the [region].”

Still, the sovereign’s 2018, 2020 and 2021 notes trade well, he said, and feel solid.

Sovereign could issue

Looking to the new year, it’s expected that Bahrain could strengthen, particularly if oil ticks higher, the trader said.

“I would expect, given the metrics and their funding needs, to see this credit come back to the market in the first quarter,” he said. “New issues from Bahrain provide good clearing levels, given the concessions on offer and it also being the furthest point from additional supply.”

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