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    EM Growth Outlook – Don’t Worry?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    June 02, 2021

    The accelerating pace of vaccinations can be a powerful headwind for EM growth. A risk of premature rate cuts in Turkey is back after President Erdogan’s remarks.

    Reports about COVID flare-ups and new lockdowns raise legitimate concerns about the near-term growth outlook in emerging markets (EM). The situation, however, is not necessarily one-dimensional. Yes, the average 2021 growth forecast (Bloomberg consensus) for countries with the administered vaccine doses/population ratio of less than 20% was cut by 0.26% in the past three months. At the same time, the average 2021 growth forecast for countries where the ratio is above 20% was raised by 0.46%. So, even though some countries are going through a rough patch right now (Malaysia), the accelerating pace of vaccinations could be a powerful tailwind for EM growth as a whole.

    International reserves and overseas remittances are the two areas where things truly look different in EM compared to the aftermaths of the previous crises (see chart below). Of course, the double-digit remittances growth reflects a low base effect. But the inflows are still very sizable as a percentage of GDP. In the case of Mexico, remittances equaled 3.4% of GDP in 2020 and are getting close to 4% of GDP so far this year. This is not an insignificant amount as regards support for domestic consumption in the absence of a large-scale fiscal stimulus. 

    Turkish President Recep Erdogan is once again acting as de-facto Governor of the central bank—setting the timeline for rate cuts (despite high inflation and strong growth), and sending the lira to another historic low against the U.S. dollar along the way. A suggestion that the central bank might be relying on expected inflation (rather than trailing inflation) to make sure that the real policy rate stays positive brings back concerns about premature easing, as there is a massive 5% difference between the two inflation measures.

    Charts at a Glance: EM Overseas Remittances – This Time It Is Different!

    Charts at a Glance: EM Overseal Remittances – This Time It Is Different!
  • PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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