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  • Emerging Markets Debt Daily

    China Growth – Stronger Sequential Momentum

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    November 30, 2020

    China’s official activity gauges point to a stronger sequential growth momentum. Turkey’s Q3 GDP bounced more than expected, but the end of cheap credit is a major headwind going into 2021.

    China’s official activity gauges looked very strong in November. The manufacturing PMI (Purchasing Managers Index) rose to 52.1 (3-year high) and the services PMI accelerated to 56.4 (the highest since 2013). Details were equally encouraging―the new orders PMI, the import PMI and the new export orders PMI moved deeper into expansion zone. The recovery momentum notwithstanding, talks about policy tightening are probably premature. First, China’s disinflation is pushing real rates higher. Second, the cost of funding for corporates spiked in November due to concerns about SOE (state-owned enterprises) defaults. This also partially explains the central bank’s surprising liquidity injection this morning.

    The Turkish economy’s Q3 2020 bounce was much stronger than expected (6.7% year-on-year in real terms). The big question is whether this pace is sustainable after the recent policy U-turn, which pushed the benchmark interest rate to 15% (from 8.25% in August). The chart below strongly suggests that the growth model that relied on government-sponsored credit expansion is over (at least for now), and that Turkey needs to find alternative growth drivers going into 2021―not impossible, but not an easy task either.

    A material improvement of South Africa’s external balance is the silver lining of the COVID-induced recession. The trade surplus surprised to the upside yet again in October, benefitting from the on-going improvement in terms of trade and a more competitive exchange rate (kudos to the central bank and its refusal to conduct FX interventions). Looking forward, it would be great to see cyclical improvements complemented by longer-lasting structural adjustments―this is the reason why the government’s fiscal plans remain firmly in focus.

    Chart at a Glance: Turkey Growth – The End of Cheap Credit


    Source: VanEck Research; 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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