Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 11, 2020
The structure of China’s credit expansion bodes well for GDP growth. Turkey’s current account narrowed in July, but longer-term improvement is not yet assured.
China’s latest credit numbers look growth-positive. Total social financing and new yuan loans exceeded expectations in August, but reasons for optimism are related more to the structure of credit expansion. This includes (1) higher government bond issuance (linked to infrastructure projects); (2) robust medium-term corporate lending/bond issuance (linked to the utilization of the central bank’s re-lending facility to support infrastructure and small/medium size enterprises); and (3) higher household loans (this includes consumer lending, not just real estate). The structure of credit growth clearly shows that the “drip” stimulus is still considered the best policy tool, as it allows to target “weak links” both on the supply side and the demand side, without creating too many “bubbles” and excesses.
Turkey’s current account deficit narrowed in July to USD1.82B, in line with expectations. The improvements were mostly driven by services, and we think that recovering tourism and stronger global demand can lead to more progress in the near term – albeit there is a lot of uncertainty about gold imports and domestic credit expansion. The latter is one of the reasons why the consensus expectations for Turkey’s 2020 current account deficit worsened in recent weeks to 2.5% of GDP (after 1.2% of GDP surplus in 2019).
The activity data-flow in EM looks a bit more reassuring – in a sense that the worst is behind us and that the past stimulus is showing up in the macro numbers. Today’s releases point to a smaller industrial contraction in India and Mexico, recovering services in Brazil, and acceleration in Malaysia’s industrial production (up by 1.2% year-on-year in July). The progress, however, is uneven (both within individual countries and across EM), and there are multiple headwinds, including the second wave of the virus. This helps to explain why the consensus had been reluctant to revise EM growth forecasts higher (it is currently around -1% for 2020 and just under 5% for 2021).
À propos: Today’s “À propos” is about housing. My housing, to be more precise. The core of the house was built in 1875, and we uncovered old walls while doing some work in the kitchen. The original logs are about 10 inches thick (see picture below)! Now I understand why we do not need to use air conditioning during the summer months on the first floor.
IMPORTANT DEFINITIONS & DISCLOSURES
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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