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  • Emerging Markets Debt Daily

    EM Is Not A Monolith

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    October 01, 2020

    The latest activity gauges and inflation numbers point to a great deal of divergence among EM. The EM overseas remittances story keeps on getting better. 

    “EM is not a monolith” (quoting Portfolio Manager Eric Fine), and the latest batch of global activity gauges illustrates this point perfectly. There were major outliers on both sides. The manufacturing Purchasing Managers Indices (PMI) in India, South Africa and especially Brazil looked really strong, suggesting perhaps that there is limited need for additional policy easing. On the other hand, Russia, Turkey and especially Central Europe disappointed. In Central Europe, a combination of stalling activity and elevated inflation poses unique policy challenges for monetary authorities.

    Similar to activity gauges, the inflation landscape in emerging markets (EM) is also not uniform. Some countries are flirting with deflation (Malaysia, Thailand). There is a group of countries where inflation is positive, but close to the bottom of the target range (or below it)—this includes Indonesia’s benign headline and core numbers released this morning. And then there is Central Europe. Poland’s headline inflation surprised to the upside yet again, jumping to 3.2% year-on-year in September. This is about 1 standard deviation higher than the 3-year average, and many commentators link it to a very sizable COVID-related fiscal surplus.

    The EM overseas remittances story got another boost from Mexico, where the August inflows stayed strong and healthy at USD3.57B (see chart below). Mexico is not alone—albeit there is a great deal of divergence among EM—and it increasingly looks like the World Bank’s initial forecast of a 20% COVID-related decline will not materialize. This is a very positive signal for parts of EM where remittances contribute to consumption, growth and external balances.

    Chart at a Glance: Mexico Overseas Remittances – Still Going Strong


    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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