Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 09, 2020
Governments and international financial institutions are stepping up policy support. Russia is in a much better position to withstand lower oil prices than its fellow OPEC rebel Saudi Arabia.
The fact that the U.S. 10-year Treasury yield crashed to 47bps and 30-year Treasury yield to 92bps this morning, and that WTI is trading around $30, is much more important than another batch of China’s backward-looking (and not seasonally-adjusted) foreign trade numbers. Governments and international financial institutions are stepping up policy support, albeit the efficacy of some measures is questionable. Germany announced a fiscal package—which is better than nothing, but more help might be needed. The IMF and the World Bank released a USD62B emergency financing package (most of it under the IMF’s Rapid Credit Facility) for low-income and emerging economies. But all eyes are on the U.S. Federal Reserve—hoping not just for another rate cut, but for an asset purchase program.
Russia/Saudi Arabia’s OPEC rebellion surely moved the oil market over the weekend, but some commentators rightly described Saudi Arabia’s decision as a Pyrrhic victory. By contrast, Russia is in a much better position to withstand lower oil prices: (1) it has both fiscal and current account surpluses; (2) its international reserves are nearly USD100B higher than the country’s total gross external debt; and (3) even after all the rate cuts, it still has a very high real policy rate (6.25% nominal key rate and 2.3% year-on-year inflation). Conclusion? Fundamentals matter for geopolitical ambitions. (I guess developed markets should start paying attention to this fact at some point.)
So, it looks like its “game over” for Lebanon’s external debt. The government announced on Saturday that it will not be making a payment on its USD1.2B Eurobond due on March 9, as the central bank’s reserves fell to a “critically low” level and the current growth model is no longer viable. There is no IMF program in sight and there is now a talk about a full external debt moratorium.
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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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