Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 16, 2020
Argentina tightened currency controls to prevent a further loss of reserves. South Africa’s currency rallies on a new turnaround plan for the state-owned utility.
Further tightening of Argentina’s (already tight) capital controls was inevitable. The local sentiment remains sour, boosting demand for U.S. dollars. So, the international reserves started to dwindle again (see chart below), and authorities had to act. The new quotas are fairly draconian, and they apply to both individuals and companies with foreign currency debt. Individuals are now facing extra levies, and credit card purchases will now be included in the USD200 monthly limit. Companies will be allowed to buy only a portion of foreign currency for debt payments on the official market, and those with maturities of over USD1M/month will need to present a debt restructuring plan.
This morning brought no respite for South Africa’s activity indicators (July’s retail sales surprised massively to the downside, contracting by 9% year-on-year), but the currency continued to rally in the anticipation of tomorrow’s rate-setting meeting. Reports that the government and labor unions agreed on a turnaround plan for the state-owned utility Eskom added to optimism, despite a lack of details.
Poland’s core inflation slowed more than expected in August (for the first time since December 2018), giving the central bank breathing space. In theory, a wider output gap and the normalization of supply chains should cap inflation pressures going forward. However, Poland’s monetary and fiscal expansion during this crisis had been quite unprecedented (not just vs. its history but compared to emerging markets (EM) peers), and there is a possibility that the policy transmission mechanism had been affected as well. So, we keep our eyes open…
Chart at a Glance: Argentina Reserves Are Dwindling
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
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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