Natalia Gurushina, Economist, Emerging Markets Fixed Income
January 30, 2020
Turkey kept its ambitious inflation targets unchanged, signaling more policy easing down the road. Mexico’s real GDP growth remains stuck in sub-zero territory.
A very good colleague is jokingly nudging me to use “Turkey Slice” in the headline each time I mention Turkish rate cuts. I thought I was “safe” after the last cut (as it pushed the real policy rate into negative territory), but it looks like I was wrong. The Turkish central bank decided to keep its (very ambitious) inflation forecast unchanged at 8.2% in 2020 and 5.4% in 2021 in the latest quarterly report, thinking that current price pressures are transitory. So, it looks like another round of monetary easing is on the way, with more concerns about the quality of growth and the health of the banking sector.
The Mexican economy did a touch better than expected in Q4 2019, but this was not enough to prevent a quarterly real GDP contraction (-0.3%). The 2019 annual growth was also negative—a big swing compared to 2% in 2018. Weak investments remain Mexico’s Achilles Heel (down by 5.2% in 2019)—as a lack of certainty about policy direction continues to sour local sentiment. Further rate cuts can help at the margin (the U.S. Federal Reserve’s dovish stance is helpful in this regard), but Mexico’s potential output will remain severely constrained unless structural issues are addressed. President Andrés Manuel López Obrador’s remark that development is possible without growth suggests that we might be facing an uphill battle here.
Argentina presented a timetable for debt talks with creditors—and it is pretty tight. If all goes according to plan, the debt offer should be expected in the second week of March with roadshows in the second half of March. In the meantime, an International Monetary Fund (IMF) delegation will travel to Buenos Aires, while the government will hold consultations with creditors. Portfolio Manager Eric Fine discussed the recent developments in Argentina (together with his outlook for emerging markets and investment opportunities there) in his quarterly webinar earlier this week (Emerging Markets Debt: Opportunity Amid Euphoria).
Chart at a Glance: Mexico Growth – Stuck Below Zero
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
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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