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  • Emerging Markets Debt Daily

    EM Activity – Promising Start to the Year

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    January 03, 2021

    Most activity gauges in EM stayed in the expansion zone and showed improvement in December. Turkey might stay on hold in January despite an upside inflation surprise. 

    The latest manufacturing activity gauges in Emerging Markets (EM) looked promising. The vast majority of the reported Purchasing Managers Indices (PMIs) (a) showed improvement and (b) stayed in the expansion zone – giving credence to the 2021 consensus GDP forecast of 5.07 China’s PMIs were a bit softer than expected – both official and Caixin – indicating that the post-pandemic growth overshoot might be over. However, the industrial reflation story and the demand-side catch-up narrative continue to hold, and the vaccine rollout can give an extra boost to China’s growth in the coming months. The upside surprise of the month came from Central Europe, with Poland and especially the Czech Republic reporting stronger than expected PMIs. We look at these numbers in a context of a sharp increase in capacity utilization in the region to screen for potential inflation risks.

    Turkey’s inflation beat consensus by a wide margin in December, but we doubt this will lead to another rate hike later this month. Turkey’s real policy rate is now the highest in EM (after the latest hikes - see chart below), and the annual credit growth appear to be slowing. So, the central bank might address the lagged impact of the lira’s devaluation and higher fuel prices with a strong statement and verbal commitment to orthodox policies (for now). Looking forward, however, policy challenges abound. A big minimum wage increase and accelerating producer prices can feed into headline inflation and expectations. It is also imperative that local deposit rates go higher to aid de-dollarization.

    Mexico’s overseas remittances growth is set to exceed 10% in 2020, contributing to the first current account surplus in years (expected 1.4% of GDP). This is a much better outcome compared to a 20% decline expected by the World Bank early in the pandemic. Mexico is not the only EM showing such strong results, but the marginal impact of remittances on consumption/growth might be of more importance given that the government’s fiscal stimulus is fairly small.

    Chart at a Glance:Turkey Can Delay Rate Hikes - Real Policy Rate Is Already High


    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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