Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 08, 2020
The consensus seems reluctant to upgrade EM growth forecasts for 2020 and 2021. Russian assets are pressured by lower oil prices and geopolitical noise.
The consensus is reluctant to revise the EM growth projections higher. The real GDP forecast for 2020 is now below -1%, and the 2021 forecast remains stuck under 5%. One reason is a lack of upside activity surprises in major emerging markets like South Africa or Mexico. South Africa’s Q2 GDP print disappointed this morning, contracting by 17.1% year-on-year. The growth momentum had already been weak going into the COVID crisis, and there are numerous concerns that the recovery will be slow due to lockdowns and energy blackouts. The on-going decline in employment (the unemployment rate is expected to hit 35% - one of the highest in the world) pose major social challenges, reinforcing the negative feedback loop in the economy.
A surprising jump in one of Brazil’s secondary inflation indicators is worth noting as it comes just before the official inflation release later this week. The general price index (IGP-DI) recorded the highest monthly increase since November 2002, adding to concerns that the consensus might be underestimating the extent of COVID-related price pressures. For what it’s worth, the market had already started to price in policy tightening in Brazil, expecting two full rate hikes in the next six month.
Russian assets are under a lot of pressure this morning due to a combination of lower oil prices and geopolitical noise. Russia’s economic policy track record might be exemplary and the credit metric is among the best in EM, but these facts are completely overshadowed by the post-election standoff in neighboring Belarus and the alleged poisoning of Russia’s opposition leader Alexey Navalny. Some commentators believe that the latter increases the possibility of suspending the Nord Stream 2 gas pipeline from Russia to Germany until the poisoning investigation is over.
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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