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  • Emerging Markets Debt Daily

    Risk of Populism Is Back in India

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 12, 2018

    The risk of populism in India looks higher after the local elections. Mexico’s concessions to airport bondholders and conciliatory moves in China and the U.S. helped brighten the mood, while Turkey’s headlines continue to weigh on local assets.

    The outcome of India’s local elections raised concerns that the country’s policy could turn more populist and that Prime Minister Narendra Modi’s government may put more pressure on the central bank in the run-up to next year’s general election. The opposition party is set to take back the majority in three major states, undermining Prime Minister Modi’s chances of staying in office for another term. These concerns overshadowed a sharp drop in November’s inflation (both core and headline – see chart below). The return of disinflation was behind the market expectation of one full rate cut in the next 12 months. However, if populist risks materialize, the expectations’ revision may be in order.

    South Africa’s latest inflation prints are likely to strengthen the central bank’s cautious bias. Headline inflation edged higher to 5.2% year-on-year and core to 4.4%, exceeding expectations and reflecting some of the currency’s past weakness. The inflation dynamics alone do not justify another rate hike after the preemptive 25bps move in November, especially against the backdrop of lower oil prices. However, the increase in core inflation was broad-based, while potential fiscal slippages may add to inflation pressures later in 2019. The market prices in 43bps of rate hikes in South Africa in the next year – and for a good reason.

    Risky assets appreciated positive vibes in the Eurozone (including stronger than expected industrial production in October and talks about targeting a 2% of gross domestic product budget deficit in Italy) and a lack of upside inflation surprises in the U.S. this morning. Reports suggesting that China may scale down its plans for global manufacturing domination by tweaking the “Made in China 2025” plan (in the context of the trade war negotiations) and Mexico’s additional concessions to the Mexico City airport bondholders improved the mood further. Turkish assets are underperforming, however, as markets were spooked by headlines about a new military operation in Syria and the sovereign wealth fund’s bond issuance (not a good idea). There are also concerns about premature policy relaxation at tomorrow’s central bank meeting.


    Chart at a Glance

    Turkey Consumer Price Index

    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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