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  • Emerging Markets Debt Daily

    China – Setting the Stage for More Stimulus

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    September 05, 2019

    China’s policy easing “drumbeat” is getting stronger. Turkish President is pushing for more rate cuts in order to boost growth.

    Murmurs about the U.S.-China trade talks lightened up the mood this morning. Another development that is capturing the market’s attention is a stronger “easing” drumbeat. Yesterday’s call from China's State Council for a “timely” cut in the reserve requirements was followed by Vice Premier Liu He’s remarks that banks should boost lending to small and medium companies and to private firms to alleviate downward pressure on growth. His particular reference to “unclogging” the policy transmission mechanism, however, makes us think that more aggressive policy easing will be accompanied by additional moves to liberalize interest rates and maybe other structural reforms—which would be great for the quality of growth.

    Turkish President Recep Tayyip Erdogan undercut the lira’s rally with his remarks about “elevated” interest rates. We completely agree that rapid disinflation and tepid domestic activity open the door for additional rate cuts. The consensus already sees a fairly sizable 262bps rate cut next week (this would completely reverse last summer’s 625bps hike). However, the president wants to boost real gross domestic product (GDP) growth to 5% in 2020 (vs. consensus forecast of -1.5% in 2019 and 2.2% in 2020)—and this would imply much more policy easing than currently priced in.

    We’ve got a big macro “ouchie” in South Africa this morning. The current account deficit unexpectedly widened to 4% of GDP in Q2, getting perilously close to erasing all 2018-2019 gains (see chart below). This is not a critical level, per se. However, the deterioration is happening while economic growth is stalling (0.9% year-on-year in Q2) and the budget gap is widening. The latter is expected to reach 5% of GDP this year. 4% + 5% = 9% of GDP—and this is a very big funding hole by any standard.

    Chart at a Glance: South Africa’s Current Account Gains Rapidly Evaporating

    South Africa’s Current Account Gains Rapidly Evaporating

    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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