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  • Emerging Markets Debt Daily

    EM Growth – Bullish Signs

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    December 01, 2020

    The vast majority of EM manufacturing gauges stayed in expansion zone in November. Brazil’s surprising decision to increase energy tariffs points to short-term inflation risks in EM.

    The latest batch of emerging markets (EM) manufacturing gauges look encouraging. The vast majority of November’s PMIs (Purchasing Managers Indices) were in expansion zone, with several countries―including China’s Caixin manufacturing PMI―hitting multi-year highs (see chart below). There were some downside surprises, though. Russia stayed at the bottom of the league table together with Mexico, raising a question whether the governments’ fiscal stances are overly tight. Turkey’s PMI moderation to 51.4 is also noteworthy against the backdrop of higher interest rates and the expected reversal of credit growth.

    EM inflation pressures are largely contained, but we keep an eye on regulated prices and tariffs, many of which were frozen during the pandemic. These restrictions can now be lifted as the recovery progresses, posing short-term inflation risks. This is exactly what is happening in Brazil right now. The regulatory energy agency unexpectedly imposed additional fees on households due to a low level of water in reservoirs, which is likely to push year-end inflation above the 4% target.

    The overseas remittances story is a major bright spot in the EM narrative, and it continues to defy the negative expectations that dominated the early stages of the pandemic. The latest example is a 14.1% year-on-year jump (in U.S. dollar terms) in Mexico’s October remittances, which should provide additional support to private consumption in a situation when the government is not in a hurry to prop up growth via fiscal channels.

    Chart at a Glance: China Manufacturing Gauges – Powering Ahead


    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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