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  • Emerging Markets Debt Daily

    China – More Drip Stimulus Measures

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    June 29, 2020

    China continues to roll out additional drip stimulus measures to support the recovery. Turkey’s economic confidence is up, but the underlying reasons cause concerns.

    China’s official activity gauges (PMIs) for June are out tonight. The consensus does not expect a major improvement and the latest Emerging Industries PMI points in the same direction, which explains why the central bank continues to roll out targeted policy measures. The latest push focuses (yet again) on the provision of credit to small and medium enterprises (SMEs), which are facing much higher funding costs compared to state-owned peers. Lower inflation means that real funding costs for SMEs are up as well. The recent headlines suggest that authorities also continue to narrow the 2020 Foreign Investment negative list—especially in the free trade zones—albeit the existing capital controls pose a headwind for companies hoping to benefit from this move. 

    Turkey’s economic confidence index showed a big improvement in June, but we are somewhat ambivalent about the interpretation. Yes, it is good that domestic activity is rebounding. However, the major driver behind the improvement is a state-sponsored credit surge which began well before COVID hit. One unfortunate consequence of this policy is a lack of adjustment in Turkey’s current account balance, which showed a massive deterioration in April. The next trade balance print is tomorrow—and we will be watching it as hawks.

    Does anybody care about the presidential elections in Poland that took place this weekend? Exactly. I have to “worry” about it because this is my job, but the market at large has enough confidence that the country’s institutional framework is strong enough to limit the impact of political changes on the economy. This is one of the factors that allows us to classify some emerging markets (EM) economies as “EM graduates”. The market implications of this status are very clear—the Polish currency outperformed most of its peers during the COVID crisis (the thick red line on the chart below). By the way, other “EM graduates”—the Thai baht, the Korean Won and the Chilean peso—are close by. Conclusion? “EM graduates” can provide a place to hide when market conditions become rough. I have to run now, but one of these days I promise to tell you my favorite story about Poland’s definitive transition to the EM graduate class.

    Chart at a Glance: EM FX Performance During COVID Crisis

    Chart at a Glance: EM FX Performance During COVID Crisis

    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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