* EM stocks drop more than 1 percent despite China leap
* South Africa budget boosts rating hopes
* IMF cheers Serbia efforts as programme ends
* Turkey’s lira sags as Syria conflict rumbles
By Marc Jones
LONDON, Feb 22 (Reuters) - The Korean won, Indonesian rupiah and South African rand led a swathe of emerging market currencies lower on Thursday, as a stronger dollar courtesy of the highest U.S. Treasury yields in four years also soured sentiment for stocks and bonds.
A swoon in commodity markets didn’t help either and even a 2.2 percent jump by Chinese stocks in what was their best day in 18 months couldn’t prevent a more than 1 percent fall of MSCI’s widely-tracked 24-country EM index.
It was its heaviest tumble since a global rout almost two weeks ago and there were longer milestones looming for various individual markets.
A near one percent slide in Polish stocks left them flirting with their lowest level since August. It was partly the global mood but also political angst and signs that interest rates and therefore firms’ borrowing costs could be heading higher.
“It is the biggest and most liquid market (in central and eastern Europe) and therefore it is probably the easiest target for global sentiment,” said Erste Bank’s head of CEE equity research Henning Eßkuchen.
South Africa’s main stock market fell back around the same amount in its biggest drop in almost three weeks with the rand also weaker at 11.73 to the dollar.
It came a day after its budget raised value-added tax for the first time in 25 years but was generally welcomed by investors as a good first effort from new President Cyril Ramaphosa.
That was reflected in government bonds which gained ground again. The yield on the benchmark instrument due in 2026 was down half a basis point to 7.98 percent having fallen 11.5 basis points on Wednesday.
The hope is that the budget will be enough to prevent rating agency Moody’s stripping the country of its last investment grade credit rating in decision due soon.
“I think it is fair to say the market is now pricing out a downgrade,” said fund manager UBP’s macro and FX EM strategist Koon Chow.
“The reaction from credit and every other market has been consistently positive,” since Ramaphosa’s took power, he added.
Turkey’s markets were also firmly in focus, with the usual pressure from a stronger dollar due to its high levels of dollar-denominated debt also being compounded by a military offensive in Syria’s Afrin region.
Turkey warned on Wednesday that pro-Damascus forces would face “serious consequences” for entering the area to help Kurdish fighters repel a Turkish offensive.
Their arrival raises the spectre of wider escalation on Syria’s northern battlefront, which includes the Syrian army, allied Iran-linked militias, Kurdish forces, rebels, Turkish troops, and Russian and American forces.
The lira was down for its third day in the last four at 3.8 to the dollar though Credit Default Swap rates - seen as a good gauge of sentiment - were steady.
“It has been a sustained campaign (for Turkey in Syria) and at the same time the relationship between Turkey and Russia has been quite decent so it suggests that this has got the nod from Russia,” said UBP’s Chow.
In the Western Balkans meanwhile there was upbeat news for Serbia as the International Monetary Fund said the country had done much “better than expected, overperforming many of its macroeconomic goals,” as it completed a three year programme.
“Serbia has managed to dig itself out of a hole,” said James Roaf, the head of the IMF’s Serbia team.
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For RUSSIAN market report, see) (Reporting by Marc Jones; Editing by Toby Chopra)