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  • Emerging Markets Debt Daily

    China Policy Response – All Hands on Deck

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    February 03, 2020

    China unveiled a barrage of measures to reduce the Coronavirus’s impact on the economy. Turkey’s inflation beat expectations, but falling inflation expectations leave room for more cuts.

    It’s China’s “whatever it takes” moment. The Coronavirus’s near-term impact on growth is likely to be brutal (potentially below 4% year-on-year in Q1). So, authorities are countering it with a barrage of monetary and regulatory measures (30+), including a surprising 10bps reverse repo rate cut and a massive RMB1.2T liquidity injection over the weekend. Depending on how the situation on the ground unfolds, we would expect to see further aggressive policy moves. There are concerns that China’s policy space is more limited now (compared to the SARS episode)—many commentators mention higher property sales, new housing starts and the debt/GDP ratio—but the sheer size of the response should help the economy to regain its footing when the outbreak is over.

    Turkey’s rate-cutting “spree” is back in focus after January’s inflation beat expectations. The upside surprise notwithstanding, the central bank (CBRT) believes that the current spike is driven by a low base effect and transitory factors, which should fade away in the second half of the year, leaving room for additional monetary easing. A lack of demand-driven price pressures and moderating inflation expectations (see chart below) support the CBRT’s outlook (at least directionally). The market shares this sentiment, seeing at least one more 25bps rate cut in the next three months.

    India’s fiscal performance continues to look wobbly. The Financial Year (FY) 2020 target was missed (3.8% of GDP vs. the initial estimate of 3.3% of GDP), and the FY 2021 target (3.5% of GDP) turned out wider than previously telegraphed. The weak growth has a lot to do with it and India absolutely needs to address the banking sector issues to start moving in the right direction. The quality of spending is another issue that is likely to keep analysts occupied in the coming months. On a positive note, the budget removed restrictions on non-resident ownership of some government securities—a timely move given India’s index-inclusion ambitions. 

    Chart at a Glance: Turkey – Lower Inflation Expectations Open Room For More Rate Cuts

    Chart at a Glance: Turkey – Lower Inflation Expectations Open Room For More Rate Cuts

    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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