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  • Emerging Markets Debt Daily

    EM – Reality of Negative Real Rates

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    August 19, 2020

    EM real policy rates adjusted by forward-looking inflation are getting increasingly negative. Indonesia kept its policy on hold, signaling that it will rely more on quantitative easing going forward.

    Governor of South Africa’s central bank, Lesetja Kganyago, drew attention to the fact that the country’s real policy rate adjusted by the inflation forecast turned negative. Yep. Welcome to a brave new world, where most EM real policy rates are now in negative territory – and sometimes more negative than in key developed markets (see chart below). Does this mean that room for additional conventional easing is limited? The South African rand’s price action this morning (up by 102bps vs. U.S. Dollar as of 10:35am ET, according to Bloomberg LP) suggests that the market started to internalize this eventuality.

    Indonesia’s real policy rate is the highest among major EM (see chart below), and the central bank’s decision to remain on hold at 4% cemented this position. It looks like the central bank’s quantitative easing (QE) program (government bond purchases) and macro-prudential policies will be relatively more important going forward, which is in line with the central bank’s earlier communications. Indonesia’s external balance continued to improve in Q2 – the current account deficit down, the international reserves up – strengthening the fundamental backdrop for the currency. Still, monetary authorities always keep an eye on the rupiah’s dynamics, which also helps to explain the central bank’s caution regarding rate cuts.

    Turkey. Friday. Suspense. President Tayyip Erdogan said that his forthcoming announcement will herald a new era for the country. Sounds exciting. The Turkish lira finally rallied this morning (by 133bps vs. U.S. Dollar as of 10:35am ET, according to Bloomberg LP). We have no idea what to expect, so for now we stay focused on tomorrow’s rate-setting meeting at the central bank. The consensus believes that the benchmark rate will remain on hold, and that the central bank will do more “backdoor” tightening by gradually pushing the weighted average cost of funding higher.

    Chart at a Glance: EM Real Rates Cushion – No Longer There?

    Chart at a Glance: EM Real Rates Cushion – No Longer There?

    Source: VanEck Research; 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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