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  • Emerging Markets Debt Daily

    IMF – Cautious Optimism, Nagging Concerns

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    October 16, 2020

    The key message from the IMF Annual Meetings is that of cautious optimism. The consensus started to price in another sizable rate hike in Turkey.

    Today is the last day of the virtual Annual IMF Meetings. The key message is that of cautious optimism, and that things would have been much worse without timely and large-scale policy support (around 22% of global GDP!). Tensions between China and the U.S. are not going away, and this can affect the future of the G20.1Many participants are not happy with the G20 debt relief program for poorer countries, and, unfortunately, the World Bank just upped its forecast of the global poverty rate from 7.5% to 8.9-9.4%. Digitalization/digital currencies feature prominently in discussions—often in a context of other countries moving away from U.S.-centric payment systems. And there are growing concerns about COVID’s second wave against the backdrop of rising leverage.

    Is Turkey’s monetary policy framework getting more credible? The consensus seems to think so, seeing another sizable (150bps) policy rate hike next week. The new consensus forecast popped out on our screens at about the same time as Turkey’s 12-month ahead inflation expectations. The latter rose to 10.53% in October, signaling that the state-sponsored growth push is having negative macroeconomic effects. If the hike materializes, the ex-ante real policy rate will get back into positive territory, providing more “cushion” for the currency and (hopefully) helping to reduce macro imbalances.

    Most emerging markets (EM) currencies are far away from their COVID lows (see chart below). There are some notable exceptions, however. The Turkish lira and the Peruvian sol are re-testing the COVID lows, and they are closely followed by the Russian ruble and the Brazilian real. What is interesting about this group of currencies is that only the lira fits the definition of a bona fide “rotten apple”. By contrast, the real, the sol and the ruble are “awash” with international reserves. But solid external fundamentals are overpowered by political and geopolitical noise, as well as concerns about respective reform agendas.

    Chart at a Glance: EM Currencies – Plenty of Divergence in COVID Patterns

    Chart at a Glance: EM Currencies – Plenty of Divergence in COVID Patterns

    Source: VanEck Research; Bloomberg LP

    1G20 - The G20 (or Group of Twenty) is an international forum for the governments and central bank governors from 19 countries and the European Union (EU).


    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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