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  • Emerging Markets Debt Daily

    EM Reserves – The Only Way Is Up?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    January 13, 2021

    Foreign currency purchase programs in Chile and Russia should further boost their international reserves. Turkey’s industrial production is in overheating zone, but the recent rate hikes should help to alleviate the situation.

    Emerging markets’ (EM) policy objective to target their international reserves―instead of currencies―served them well during the COVID crisis, paving the way for the fast rebound of sovereign bonds in the spring of 2020 and for EMFX later on. Some central banks are using the current trends―such as higher commodity prices―to boost their external buffers even further. Russia said earlier today that it will resume FX purchases under its budget rule (USD1.4B in January), while Chile announced an ambitious USD12B foreign currency purchase program to “replenish and expand” the reserves from ~15.7% of GDP to 18% of GDP over the next 15 months.

    Turkey recorded another strong industrial production growth in November (above-consensus 11% year-on-year―see chart below). However, some developments―such as high import growth and a lack of the current account adjustment―point to overheating. On the bright side, today’s release is backward-looking, and the recent sizable rate hikes should cap credit growth and domestic demand, helping to narrow the current account gap and reduce pressure on the international reserves. 

    The Czech Republic’s latest inflation release is a good illustration of the fact that core and headline inflation often move in the opposite directions, and that both central banks and the market pay attention to this. Annual headline inflation continued to slow in December (to 2.3% year-on-year), but core prices are still elevated (some commentators put it close to 3.6%―which is above the target). Wait-and-see is probably the most appropriate monetary policy stance at the moment, but the market started to price in a small rate hike of 20bps for 2021.

    Charts at a Glance: Turkey Industrial Production – In “Overheating” Zone?

    Charts at a Glance: Turkey Industrial Production – In “Overheating” Zone?

    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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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