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  • Emerging Markets Debt Daily

    Argentina Rebalancing Gains Pace

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 20, 2018

    Argentina’s external adjustment is gaining pace, strengthening fundamental support for the currency. China unveiled a new funding facility aimed at small companies.

    Argentina’s external adjustment is rapidly gaining pace, which is great news for the currency. The trade surplus improved markedly in November, widening to USD979B and beating consensus by a very wide margin (see chart below). The improvement was due to a sharp drop in imports, as should be expected after large-scale devaluation. Argentina’s current account deficit is expected to decline from 4.4% of gross domestic product (GDP) in 2018 to 2.3% next year. However, the data flow strongly suggests that the economy can easily outperform on this metric, reinforcing a positive feedback loop (larger external surpluses, stronger currency, lower inflation, lower interest rates, and higher growth).

    As markets are preparing for the next installment of policy signals in China (from this week’s Central Economic Working Conference), the central bank (People’s Bank of China (PBoC)) launched a new funding instrument aimed at small businesses. The targeted medium-term lending facility (TMLF) will have an interest rate that is lower than the regular medium-term lending facility (MLF) and longer maturity of 1-3 years. It remains to be seen whether the new instrument will be effective – the PBoC’s recent moves did not do much for China’s financial conditions.

    The central banks in emerging markets appear to be in a contemplation mode following yesterday’s not-so-dovish hike in the U.S. Both Indonesia (BI) and the Czech Republic (CNB) chose to stay on hold this morning, interrupting earlier tightening cycles. The CNB’s decision was not unanimous, with two board members voting for a hike, arguing that the economy is overheating. The market continues to price in at least one hike there. Indonesia’s central bank sounded cautious, and a risk of larger capital outflows in the run up to the April elections might push it to hike one more time before ending the cycle.


    Chart at a Glance

    New Housing Starts Signal That Recession Might Not Be Imminent

    Source: Bloomberg LP


    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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