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  • Emerging Markets Debt Daily

    EM - Multispeed Inflation, Multispeed Policies?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    September 09, 2020

    EM inflation landscape is uneven, but there is room for targeted policy support in countries like China. Mexico’s authorities are not planning major changes in 2021 fiscal framework.

    The inflation landscape in Emerging Markets (EM) remains very uneven. There are several hotspots, where COVID-related distortions and supply-side factors push inflation higher. Headline inflation in Mexico is now above the 2-4% target range. Core inflation in Central Europe is about 2 standard deviations higher than in the previous 3 years, and we hear more hawkish undertones in central banks’ communications in these countries. By contrast, monetary authorities in Brazil and Russia seem more relaxed – inflation is creeping up but the outlook remains benign (Brazil’s headline inflation rose by mere 2.44% year-on-year in August). Finally, China’s inflation is in a class of its own due to the oversized impact of pork prices – a big drop in August (from 85.7% to 52.6% year-on-year, see chart below) drove headline disinflation, leaving ample space for targeted (“drip”) policy support.

    The Mexican government is not planning any major changes in its fiscal policy – this is the main takeaway from the 2021 draft budget. This applies to all aspects of the fiscal framework: (1) ambitious targets (the government expects 0.2% of GDP primary surplus this year and aims for the balanced primary budget in 2021); (2) optimistic assumptions (especially real GDP growth and oil production); and (3) reliance on stabilization funds to meet fiscal goals. One problem with the latter is that the existing buffers will be pretty much exhausted after 2021 – and this will be a real test of the government’s fiscal resolve.

    A big upside surprise in South Africa’s Q3 business confidence comes on the heels of a very disappointing Q2 GDP print, so it attracted a lot of attention this morning. The rebound signals that the worst is behind us, but it is difficult to see a sustained strong recovery in a country with a 30%+ unemployment rate and resistance to much-needed structural reforms.

    Chart at a Glance: China – Falling Pork Prices Free Room for Policy Support

    Chart at a Glance: China – Falling Pork Prices Free Room for Policy Support

    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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