Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
August 13, 2020
Russia’s international reserves are now ten times higher than the federal government’s external debt. Two more upside inflation surprises in EM give additional credence to the reflation narrative.
Some charts/statistics and the stories they tell are just hard to ignore. Russia’s international reserves reaching a new historic high and topping USD600B is one of them. Russia’s reserves are now 10 times higher than the federal government’s external debt. And this had not always been the case—the chart below clearly shows that only 15 years ago, the reserves were lower than the debt. Russia made a truly impressive effort to rebuild policy credibility—and it is joined by many other emerging markets (EM) which did the same (targeting reserves, rebuilding their safety cushions, and pursuing orthodox policies). Russia is a standout on this metric, but EM reserves in general were surprisingly stable during the COVID crisis. A massive crisis-related reserve drop like in Turkey is now an exception rather than the rule.
There were two more upside inflation surprises in EM this morning, giving a bit more credence to the reflation narrative. India’s yearly headline inflation jumped to 6.93% in July, and Czech headline inflation to 3.4%. Both numbers are 1.6-1.7 standard deviations higher than the average of the past three years, which makes then harder to ignore. COVID-related distortions—especially on the supply side—account for some upside surprises, but what we do not know at this stage is whether these distortions will be longer-lasting. Central banks, however, might be increasingly opting for a pause in their easing cycles to better assess the situation.
Yesterday’s resignations in Brazil raised new concerns about the reform agenda. We are happy to report that Brazilian assets are doing much better today across the board, after President Jair Bolsonaro’s joint declaration with leaders of the senate and the congress supporting the spending cap rule (the main element of Brazil’s longer-term fiscal stabilization strategy) and other reforms. This is a great gesture, but we keep our eyes on implementation (as usual).
Chart at a Glance: Russia Reserves – Unstoppable Surge
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
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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