Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
May 05, 2020
Deflation emerges as a major near-term risk in EM, as food and energy prices drop sharply. Indonesia’s weak Q1 growth performance leaves room for more rate cuts.
The latest inflation prints in emerging markets (EM) point to deflation as a bigger near-term risk (vs. the stagflation scenario). The chart below shows how lower food and energy prices amplify the deflationary impact of weaker domestic activity and at least partly offset the inflationary impact of weaker EM currencies. April’s inflation numbers in Thailand looked quite alarming in this respect. Yearly headline inflation collapsed to -2.99% (much worse than expected), and yearly core inflation continued to move closer to zero. These are the weakest inflation numbers since the global financial crisis, and we would not be surprised to see another policy rate cut by Thailand’s central bank.
Indonesia’s Q1 growth setback is likely to prompt a more aggressive policy response from the central bank. The real GDP growth dropped to an 18-year low, undershooting consensus by a wide margin (2.97% year-on-year vs. 4% expected). We are not going to dwell on the reasons here—they are quite obvious. But we would like to emphasize that Indonesia’s central bank kept most of its powder dry, cutting the policy rate only by 50bps so far this year. With the nominal policy rate of 4.5% and headline inflation at 2.67% year-on-year, this leaves plenty of room for more rate cuts going forward.
Multiple reports suggest that Argentina might extendthe investor deadline for accepting its debt restructuring proposal until May 22 (in line with the grace period) after main creditor groups rejected the original offer. It remains to be seen whether this would be the case, but one possible scenario for the government is to calculate the acceptance rate, use the information in the negotiations, and then extend the deadline to May 22 afterwards. In a related development, Argentina’s President Alberto Fernandez reiterated yesterday that he does not want the country to default on its foreign law debt and that the government might be willing to look at alternative proposals in order to find a mutually-acceptable solution.
Chart at a Glance: Emerging Markets – Food and Energy Amplify Deflation Pressures
Source: VanEck Research; Bloomberg LP
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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