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  • Emerging Markets Debt Daily

    Turkey Monetary Policy Capitulation

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    April 25, 2019

    The Turkish central bank removed its tightening pledge, raising concerns about the country’s policy mix. Argentine assets remain under a lot of pressure as the markets digest the possibility of the opposition candidate winning the presidential election.

    In Turkey, the central bank’s unexpected decision to remove its pledge for further tightening raised a lot of eyebrows this morning. Many were surprised by the rush to shift to a neutral policy stance when yearly headline inflation remains close to 20%, inflation expectations are stuck at 15%, and the weakening currency poses obvious risks to disinflation. The government’s policies also give little justification for the central bank’s more relaxed approach. The Turkish lira is underperforming its emerging markets peers today, and for a good reason.

    Argentina’s larger than expected trade surplus (USD1.183B in March) did nothing to change investors’ sentiment. It was a nice macro morsel, but the focus is shifting to the presidential election, and the story that the recent polls are telling is not pretty. Some of them show a 9% lead for the opposition candidate. The inability to rein in inflation—which is likely to get closer to 60% year-on-year in April-May—is another glaring macro/policy blunder. The probability of default implied by sovereign credit default swaps had risen to circa 20% (see chart below)—and this is despite the gargantuan International Monetary  Fund program. Local assets were pounded more this morning, with the currency shedding 554bps vs. U.S. dollar after the opening (as of 10:15 a.m. ET, according to Bloomberg LP).

    The Brazilian real is one of the few emerging markets currencies that managed to appreciate today. A key reason is that pension reform seems to be on track—the lower house special committee should be set today (faster than expected), and start working on May 7. The chairman of the committee, Marcelo Ramos, reportedly understands the need for reform and is able to articulate this quite clearly. Meanwhile, the macro flow remains “palatable” (especially compared to some regional peers). The basic balance (a sum of the current account and foreign direct investments) stayed positive in March, and the acceleration of mid-month inflation to 4.71% year-on-year was largely due to temporary factors.

    Chart at a Glance

    Argentina Default Probabilities

    Source: VanEck, 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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