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  • Emerging Markets Debt Daily

    Turkey Reserves – Back to Square One

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 28, 2020

    Turkey’s international reserves resumed declining, and are now back to the level before the swap line with Qatar. Brazil’s external adjustment is well underway, improving the fundamental backdrop for the currency.

    The positive effect of Turkey’s USD15B swap line with Qatar was short-lived and the central bank’s international reserves resumed declining. The gross reserves dropped to USD49.2B during the week of 17 July—not far from where they were prior to the swap line’s announcement (see chart below). Turkey is the only major emerging economy that lost a big portion of reserves during the current crisis. This is clearly not a good sign as regards the overall policy setup—it points to on-going currency interventions that prevent faster external adjustment. Today’s release also shows that the central bank has very limited room for further rate cuts—so its decision to stay on hold last week was completely justified.

    Brazil is a good example of external adjustment done right (at least so far). The current account surplus edged higher in June (albeit not as much as expected), driven by smaller imports of goods and less spending on international travel. The 12-month trailing current account deficit moderated to circa 2.5% of GDP, and it is more than fully financed by foreign direct investments (>4% of GDP). This means that Brazil’s basic balance (a sum of current account and foreign direct investments) remains positive, creating a more supportive fundamental backdrop for the currency in the future.

    The IMF approved a USD4.3B emergency package for South Africa in order to support the government’s anti-COVID efforts. The amount is modest and will cover only a small portion of the country’s financing needs—the fiscal gap is expected to widen to 15.2% of GDP in 2020 and remain above 10% of GDP in 2021 and 2022. So, the domestic policy response will remain the main driver for South Africa’s asset prices—especially local bonds.

    Chart at a Glance: Turkey International Reserves – Still Down Despite Qatar Swap Line

    Chart at a Glance: Turkey International Reserves – Still Down Despite Qatar Swap Line

    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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