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  • Emerging Markets Debt Daily

    Turkey – On A Path To Policy Redemption?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    October 20, 2020

    The consensus sees another sizable rate hike in Turkey. China keeps the benchmark rates on hold, creating additional policy space if growth disappoints.

    The Turkish central bank’s rate-setting meeting is the most anticipated event of the week. The central bank surprised with a hefty 200bps rate hike at its last meeting. Turkey also did a fair amount of “backdoor” tightening since mid-July – the average cost of funding rose by about 500bps to 12.39% (see chart below). The consensus now sees more tightening through the “front door” – the benchmark 1-week repo rate is expected to go from 10.25% to 12% (!) on Thursday. Why this matters? Another rate hike can make the real policy rate positive again. Would this stabilize the currency? We do not know (geopolitics can be a “wrecking ball”). But it can slow the state-sponsored growth push and reduce some macro imbalances (a lack of external adjustment) that sour investor sentiment. Stay tuned!

    China kept 1-year and 5-year benchmark Loan Prime rates on hold – very much in line with its “drip” stimulus approach (targeted support as opposed to “blanket” measures). Disinflation pushes China’s real rates – both market and policy – further into positive territory, and this means additional space for easing if the second wave of the virus have a stronger than expected impact on the economy. Smart.

    Argentina made an attempt to reduce volatility of the “market” exchange rate – the so-called “blue chip swap” or BCS, which is allowed to move as opposed to the “frozen” official exchange rate. The gap between the two rates widened to 115% or so last week – and officials though this was out of line with reality. So, the central bank eased some restrictions. In particular, all holding periods were reduced to 3 days, and the non-residents would now be allowed to sell peso-denominated bonds against U.S. Dollar in the local market. The “blue chip” exchange rate opened up sharply stronger this morning – let’s see whether this is going to last (the last-minute update – it’s all over the place).

    Chart at a Glance: Turkey’s Average Cost of Funding Went Up Quite A Bit

    Chart at a Glance: Turkey’s Average Cost of Funding Went Up Quite A Bit

    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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