Emerging Markets Debt Daily
Emerging Markets - Moving GreenNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMay 28, 2021
Indonesia’s new coal plants announcement is a big environmental milestone. Local politics and the pace of vaccinations drive EM differentiation against a generally supportive global backdrop.
Please note: Emerging Markets Debt Daily will not be published on May 31. We look forward to resuming our daily updates on June 1.
It’s not just the Exxons and Chevrons that are paying more attention to environmental issues these days. Indonesia’s announcement that it will stop approving new coal-fired power plants and offer more incentives for renewable energy is a big milestone (given the country’s status as a top thermal coal exporter). Indonesia’s current ESG rating is “moderately negative” (Moody’s) with waste and pollution considered a source of environmental risks. So, progress in this area is most welcome. Indonesia’s move is also part of the global secular transition from fossil fuels to metals/minerals that is already underway.
A combination of U.S. strong growth (plus even more fiscal support) and the patient U.S. Federal Reserve (Fed) is traditionally considered a “goldilocks” scenario for emerging markets (EM). However, there is a lot of differentiation across EM, and it often happens along two lines—politics/geopolitics and the pace of COVID vaccinations. Turkey is a poster child for the former—another bout of domestic political noise drove the lira to a record low against the U.S. dollar this morning, making it the worst-performing EM currency so far this year (see chart below). The binary outcomes of next week’s elections in LATAM can lead to big asset price moves as well.
As regards the pace of vaccinations, many Asian EMs are lagging behind. The average administered vaccines-to-population ratio in Malaysia/Indonesia/Philippines/Thailand is 6.4% vs. 55% in Central Europe and double-digit numbers across LATAM. So, there is a risk that Asian EMs will have to continue relying on lockdowns to control the COVID’s flare-ups, which might hurt their 2021 growth prospects and asset performance.
Charts at a Glance: Turkish Lira Performance – At the Bottom
Source: Bloomberg LP
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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