Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    EM – Nice Gesture from Federal Reserve

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 30, 2020

    The U.S. Federal Reserve extended emergency swap lines, providing an important backstop for EM. Turkey’s international reserves predicament worsens.

    The U.S. Federal Reserve (Fed) confirmed its dovish stance, so we can move on. From the emerging markets (EM) perspective, one much-appreciated policy gesture was the extension of the Fed’s emergency swap lines until March 2021. Regarding the level of international reserves, EM in general (important details in the next bullet point) are in a better position this time around compared to the previous crises. Many of them explicitly target reserves and use currencies as “escape valves” to deal with exogenous shocks. This approach opened up space to cut policy rates and support growth. So, in a sense, EM are helping themselves by conducting orthodox policies, but the Fed’s swap lines are considered an important backstop that helps EM to weather this storm.

    Our key message is that EM should not be treated as a monolith. So, even though EM international reserves did not fall as much during the COVID episode and bounced back quickly, there are important differences—which become even more apparent if we look at reserves relative to M2money supply (see chart below). This metric is part of the standard reserve adequacy assessment, and it shows why the market is so worried about Turkey. The only country that scores worse than Turkey is China. However, China can afford to have a very low Reserves/M2 ratio because of strict and credible capital controls—and this invites questions whether Turkey will be forced to do the same.

    Mexico’s Q2 real GDP collapse was record-setting (-17.3% quarter-on-quarter) albeit not completely unexpected. The currency was not particularly thrilled though, trading 115bps weaker against U.S. dollar by mid-morning (as of 10:20am ET, according to Bloomberg LP). The release supports the market expectation of additional rate cuts (around 100bps in the next 12 months). Still, the growth rebound is expected to be very gradual, given the government’s refusal to open up fiscal spigots.

    Chart at a Glance: EM Reserves – Turkey In Spotlight

    Chart at a Glance: EM Reserves – Turkey In Spotlight

    Source: VanEck Research, Bloomberg LP

    1 M2 is a calculation of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds, and other time deposits. These assets are less liquid than M1 and not as suitable as exchange mediums, but they can be quickly converted into cash or checking deposits.


    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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.