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  • Emerging Markets Debt Daily

    EM Recovery – Reality Check

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 21, 2020

    South Korea’s trade numbers signal that the impact of global headwinds on EM recovery should not be underestimated. Central Europe is expected to benefit a lot from EU’s EUR750B recovery fund.

    South Korea’s preliminary foreign trade numbers slipped expectedly in July (see chart below), providing a much-needed reality check after a series of encouraging global activity surprises. The overall exports momentum remains slow, and moderating daily exports to China drew particular attention. As usual, we are not making far-reaching conclusions on the basis of a limited data set. However, the release is a reminder that the recovery’s pace is likely to remain uneven in the foreseeable future and that risks (such as the virus’s second wave and China’s floods) should not be underestimated.

    Central European nations should be among key beneficiaries from the European Union’s EUR750B recovery fund. This especially applies to Hungary and Poland, which have a very developed infrastructure to absorb EU funds quickly and efficiently. This new growth tailwind, however, also suggests that the rate-cutting cycle in the region is over. Hungary lowered its key rate by 15bps earlier today, but that was expected and well-telegraphed. The fact that real policy rates in Poland, Hungary, and the Czech Republic are among the lowest in EM (and deeply negative when adjusted both by trailing and expected inflation) strengthens the case for no additional easing.

    South Africa’s disappointing leading indicator underscores policy challenges going into this week’s rate-setting meeting of the central bank. The leading indicator dropped by 8.1% year-on-year in May, showing only marginal improvement vs. April. The consensus thinks that rapid disinflation and weak growth will pave the way for a 25bps rate cut (to 3.5%), but this is not a foregone conclusion after 275bps of cuts already delivered.

    Chart at a Glance: EM Global Headwinds Still Present – Check South Korea’s Exports

    Chart at a Glance: EM Global Headwinds Still Present – Check South Korea’s Exports

    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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