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  • Emerging Markets Debt Daily

    Argentina—Bracing for Policy Discontinuity

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    August 12, 2019

    The opposition’s shockingly strong performance in Argentina’s primary elections increases the risk of policy discontinuity. A big drop in China’s July credit impulse reflected lower shadow financing.

    Argentina’s primary election results shook the market this morning, as the opposition’s unexpectedly strong performance (15% margin) opens up a possibility of first-round victory in the presidential elections in October. With polling results so off, the market is now pricing in a much higher risk of policy discontinuity after the elections, including debt reprofiling/restructuring and capital controls. The central bank will try to minimize the damage by tightening its policy stance and conducting monetary currency interventions, but we might be in a different reality right now (the currency was down by 20% after the opening).

    The escalation of tensions in Hong Kong (clashes with police on Sunday, the protesters occupying the international airport on Monday) adds to market concerns about China-related tail risks, especially the growth outlook. A big decline in China’s July credit impulse (monthly total social financing halved vs. June), therefore, deserves a closer look. Details point to a sizable drop in shadow financing—a gutsy (and welcome) structural move. At the same time, trade tensions affected sentiment and demand for business loans, while smaller companies were disproportionately hit by credit events in several regional banks. This highlights the need for more stimulus, but also for further reforms to improve the transmission mechanism in the economy.

    Russia’s stellar monetary and fiscal policies got a nod of approval from Fitch, which raised the country’s sovereign rating by one notch to BBB with stable outlook. One area where Russia is still lacking is growth. Today’s preliminary Q2 gross domestic product (GDP) growth of a mere 0.9% year-on-year proves the point, a small upside surprise notwithstanding. Russia’s super-low debt/GDP ratio and fiscal surpluses help to reduce market pressures. But the low-growth environment also limits potential upside for the currency and stocks.


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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