Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
July 07, 2020
EM successfully rebuilt their international reserves after the COVID-related loss. Countries with high real rates – like Malaysia – have room for more rate cuts.
It only took a couple of months for key emerging markets (EM) to rebuild their international reserves after the COVID-related loss (which was not huge to begin with). Outside of Turkey (truly in a class of its own) and China (steady but still opaque), EM reserves now exceed February’s level (see chart below). The reason EMs were able to bounce back so quickly is that most of them learned their lessons and now explicitly target international reserves. Currency “stability” is kind-of important, but many EMs really like the idea of using FX as a shock-absorber, which help to minimize macroeconomic imbalances and improve competitiveness. The fact that both the markets and population consider these policies (largely) credible keeps the FX-inflation pass-through low, which is a big change vs. the old days.
The monetary easing cycle in EM is getting to a close, but we continue to get some “residual” rate cuts here and there. Malaysia just lowered its key rate by 25bps to 1.75%, with dovish bias firmly in place. The reason the central bank can afford to be dovish is that the real policy rate is high (perhaps some DMs should take notice). As regards future easing, the pace of recovery and the government’s fiscal policy would be key factors to keep an eye on.
Alert! We have another upside inflation surprise in EM – this time in the Philippines. Level-wise, the number looks OK (2.5% year-on-year), giving credence to the central bank’s view that pressures should remain contained for the time being (which can translate in another rate cut this summer). However, this is the fourth sizable upside surprise in EM this month (including Turkey, Poland, and Thailand) – and if this trend continues, the EM disinflation narrative can get challenged.
Chart at a Glance: EM Successfully Rebuilding International Reserves After COVID Shock
Source: VanEck Research, 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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