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  • Emerging Markets Debt Daily

    A Cautionary Tale of Two Rate Cuts

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    May 21, 2020

    Turkey and South Africa cut their policy rates by 50bps, but the respective currency reaction was very different. South Korea’s preliminary trade numbers for May reflect well on China’s domestic rebound.

    Turkey’s 50bps policy rate cut kept the currency underwater in the morning trade. First, the real policy rate moved deeper into negative territory, undermining fundamental support for the lira. Many observers also questioned the need for the cut, given that domestic credit is surging and the current account deficit is widening. Finally, there is a lingering sense of policy disconnect. A combination of rate cuts and FX interventions/reserve loss does not look credible, and yesterday’s “band-aid” in the form of additional FX swap lines with Qatar was not particularly reassuring.   

    South Africa also cut its policy rate by 50bps this morning, but the currency’s reaction was much more cheerful than in Turkey. There was a sense of relief that the board refrained from a more aggressive cut, even though the 2020 real GDP growth forecast was slashed to -7% and the inflation projection lowered to 3.4%. Governor of the South African Reserve Bank, Lesetja Kganyago, emphasized once again that the central bank’s bond purchases are not a classic quantitative easing (QE) program, and that the central bank’s main objective is to address market dislocations and liquidity issues. In our opinion, a combination of a stronger currency and lower inflation frees room for additional easing, but we expect the board to maintain its conservative bias

    South Korea’s preliminary trade numbers for May sent a positive signal about China’s domestic activity, but not about global demand. Exports to China are definitely bottoming out, but this was pretty much the only area of improvement. So, global growth headwinds remain strong for now. In addition, U.S.-China trade/geopolitical tensions are back, with the U.S. Senate passing a bill that can lead to de-listing of Chinese companies from U.S. stock exchanges. The timing is unfortunate—not just for the two economies in question, but for small open economies in Asia that were hit growth-wise more than closed economies during the previous trade flare-ups (see chart below).

    Chart at a Glance: Growth in Open Economies Suffers When Trade Tensions Escalate

    Chart at a Glance: Growth in Open Economies Suffers When Trade Tensions Escalate

    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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