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  • Emerging Markets Debt Daily

    EM Central Banks – Treading Carefully

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    October 07, 2020

    EM central banks are increasingly switching to wait-n-see mode. Geopolitics continues to weigh on asset prices in Turkey and Russia.

    Communications from Emerging Markets (EM) central banks are getting more cautious. In part, this reflects a significant amount of policy easing that had already been delivered and the fact that the stimulus is mostly working. There are also new headwinds – including the virus’s second wave – that can increase risk aversion and put more pressure on the currencies, potentially adding to inflation pressures, which warrant a “wait-n-see” approach. This was a clear message from today’s monetary policy minutes in South Africa and Hungary. The notion of financial stability also featured prominently in Poland’s monetary policy statement (albeit the central bank reassured that it will continue its quantitative easing program).

    Geopolitical twists and turns continue to exert pressure on asset prices in Turkey and Russia. We are seeing reports about Turkey’s testing its Russian-made S-400 missile system, which can lead to U.S. sanctions. Russia and Turkey are also involved in a regional conflict between Armenia and Azerbaijan. We suspect that the only reason why the Russian ruble stayed in the black this morning was the central bank’s Foreign Exchange (FX) sales, which it resumed in October to limit the currency’s volatility. The Turkish central bank’s ability to intervene is much more limited, which explains why the lira slipped to another historic low vs U.S. Dollar this morning. Russian equities are also underperforming EM peers today. 

    Mexico needs to spend more to support the recovery. Actually, a lot more – like additional 2.5-3.5% of GDP. This was the key takeaway from the IMF’s latest Article IV report for the country. The suggestion was promptly rejected by Mexican officials. The question is whether alternative measures – such as the new infrastructure package – will be sufficient to pull the economy out of one of the worst recessions in EM. 

    À propos: On a lighter note, this morning we found several batches of mushrooms outside our house that were dug out and left to dry on the sidewalk (see picture below). The only possible explanation – which is not supernatural – is that squirrels are stocking up for the winter. This is very Russian/Italian.


    Source: Natalia Gurushina


    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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