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  • Emerging Markets Debt Daily

    Looking for Policy Solutions in Argentina

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    February 20, 2019
    Argentina is under pressure again due to “hot and cold” monetary policy, the latest political trends, and higher inflation. Indonesia signals some monetary accommodation.

    The volatility of asset prices in Argentina attracted a lot of attention over the past few days, with most commentators pointing to higher inflation, local politics, and sharp turns in monetary policy as the main reasons. The question is what authorities are going to do about it. First, it appears that the central bank is no longer pushing for lower interest rates—the average Leliqrate was 153bps higher yesterday. Second, the central bank is also contemplating additional tightening in the form of over-compliance with the monetary base target (by an additional ARS40B) to mop up liquidity. Finally, the latest fiscal numbers were reassuring, with the government posting a primary surplus of 0.1% of gross domestic product (GDP) in January. Importantly, revenues were growing faster than expenditures (especially social spending). 

    Indonesia’s central bank kept its policy rate unchanged at 6%
     (as expected), but signaled that some macro-prudential measures can be relaxed. One possibility would be lowering reserve requirementsfor banks. We believe, however, that it would be premature to expect significant policy easing, in part due to concerns about the country’s external gap. January’s trade deficit remained wider than anticipated (USD1.2B), with broad-based export weakness and imports contracting at a slower pace. 

    The consensus may be tempted to cut its growth forecast for developed markets once again
     following the release of weaker than expected durable and capital goods orders in the U.S. and the contractionary manufacturing Purchasing Managers' Index in the Eurozone (49.2 in February). Given that the emerging markets growth forecast appears to be bottoming out, the emerging markets-developed markets differential should provide more fundamental support for the developing universe. 

    1Leliq notes are 7-day liquidity bills whose interest rate serves as the benchmark rate in Argentina.
    2The reserve requirement ratio is a central bank regulation, employed by most of the world's central banks, that sets the minimum amount of reserves that must be held by a commercial bank.

    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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