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  • Emerging Markets Debt Daily

    India Growth – Structural Deficiencies Bite

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    January 07, 2020

    A slower pace of India’s economic expansion drew attention to structural impediments to growth. A series of sizable upside inflation surprises in emerging markets might limit the central banks’ ability to provide additional policy support in the coming months.

    A slower pace of India’s economic expansion (a “mere” 5% in financial year 2020) did not come as a surprise, but it once again drew attention to structural impediments to growth and the adequacy of policy response. India’s real gross domestic product (GDP) growth definitely looks low-ish for its developmental stage (see chart below). However, the past stimulus (policy rate cuts, corporate tax cuts) improves the odds of cyclical recovery in financial year 2021—especially if it is complemented by measures to boost public and private investments and address past shortcomings (non-performing loans and the banking sector reform). Importantly, Prime Minister Narendra Modi’s reforms create huge growth potential—which might take time to realize, but create very interesting investment opportunities (check CEO Jan van Eck’s quarterly outlook).

    A series of sizable upside inflation surprises in emerging markets might limit the central banks’ ability to provide additional policy support in the coming months. Among today’s releases, Poland’s case looks the most unsettling, with yearly headline inflation unexpectedly surging to 3.4% in December and complicating the macro backdrop for this week’s rate-setting meeting. A big bounce in the Philippines (from 1.3% to 2.5% year-on-year) also did not go unnoticed by the markets, bear-flattening the curve and pushing short rates 20-23bps higher. Portfolio Manager Eric Fine provided an interesting take on issues facing emerging markets in 2020 in his Bloomberg Radio interview yesterday—central bank stimulation and further rate cut signals feature prominently there.

    China’s international reserves are out, and we are happy to report that the “snooze-fest” continued in December. The headline number stayed above the USD3T mark—a small monthly change was mostly due to valuation adjustment. My personal peeve is that the available numbers for the central bank’s forward book do not look accurate—having them would provide a better insight into foreign exchange intervention patterns. But for now, this is the least of the market’s concerns.

    Chart at a Glance: India’s Growth – Low-ish For Its Developmental Stage

    Chart at a Glance: India’s Growth – Low-ish For Its Developmental Stage

    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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