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  • Emerging Markets Debt Daily

    Growth, Rebalancing and Persistence

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 28, 2021

    The vaccination gap between EM and DM is the main reason why the IMF lowered its 2021 growth forecast for EM. The IMF also expressed concerns that inflation risks can prove more persistent.

    The U.S. Federal Reserve’s (Fed’s) policy verdict is the focus of the day, especially as regards any taper considerations and the outlook for the economy. Past experience shows that a taper announcement can produce a knee-jerk reaction among emerging markets (EM) assets, but EM tend to perform quite well once the Fed starts hiking, as long as higher rates reflect stronger growth. For what it’s worth, there is a lot of optimism about U.S. prospects outside the Fed. The consensus growth forecast for 2021 is still unchanged at 6.6%, and the IMF just raised its 2021 U.S. growth forecast by 0.6% to 7% and the 2022 forecast by whopping 1.4% to 4.9%. 

    The IMF’s numbers come from the newly updated World Economic Outlook, which has some interesting takeaways besides the U.S. growth. The key words are “rebalancing” and “persistence”. “Rebalancing” refers to growth upgrades and downgrades in EM vs. developed markets (DM). The main “fault line” is access to vaccinations. EM vaccinations are picking up, but the rate is still much lower than in DM (see chart below), which is why the IMF lowered the 2021 EM GDP by 0.4% (to still respectable 6.3%), while raising the projection for DM. The region with the deepest forecast cut is EM Asia. 

    “Persistence” refers to inflation risks. The key concern for the IMF is the evolution of inflation expectations against the backdrop of the “unchartered” recovery that comes after the “unprecedented” recession. The IMF’s main focus is on fiscal support (which is still significant) and large household savings - both of which can affect inflation expectations and push them higher. We are curious whether the Fed’s verdict will be the same. Stay tuned!

    Charts at a Glance: Vaccinations - Big Gap Between EM and DM

    Charts at a Glance: Vaccinations - Big Gap Between EM and DM

    Source: International Monetary Fund

  • 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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