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  • Emerging Markets Debt Daily

    Global Growth – EM Still the Best Option

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    June 24, 2020

    The IMF sees a deeper global recession in 2020, but the EM growth trajectory is still higher than DM’s. South Africa’s emergency budget looked bad, but was generally in line with the market expectation.

    The International Monetary Fund (IMF) lowered its global growth forecast to better reflect the COVID’s impact on the world. The IMF now sees the global economy contracting by 4.9% in real terms in 2020 (1.9% lower than in April). The downgrade notwithstanding – the IMF believes that emerging markets (EM) will remain on a higher growth trajectory compared to Developed Markets (DM) (see chart below). The IMF’s numbers also highlight China’s massive contribution to global growth – note that the world growth average on the chart below is above the respective averages for both EM and DM!

    South Africa’s emergency budget numbers looked unequivocally bad, inviting numerous comments about a higher probability of a debt crisis going forward. However, earlier laments from government officials prepared the market, which explains a relatively limited post-announcement reaction. So, the 2020/21 fiscal deficit is expected to widen to 15.7% of GDP, pushing the debt/GDP ratio to 81.8%. The borrowing requirements are expected to double, leading to higher (mostly domestic) bond issuance. The government is still targeting primary surplus by 2023/24 – now we would like to know how they intend to get there.

    The EM inflation scene looks less uniform these days. The latest inflation prints in South Africa and Malaysia were lower than expected, however Mexico’s inflation (both core and headline) accelerated and surprised to the upside in the first half of June. Mexico’s headline inflation (3.17% year-on-year) is now back in the upper part of the inflation target range (2-4%) – hence more questions about the pace of monetary easing going forward. There are obvious methodological issues related to measuring inflation during the COVID crisis. This explains why the market continues to price in 131bps of rate cuts in Mexico over the next 12 months.

    Chart at a Glance:New IMF Growth Projections Show Higher Trajectory in EM

    Chart at a Glance: New IMF Growth Projections Show Higher Trajectory in EM

    Source: IMF

    Note: The chart shows quarterly growth projections as indices with Q1 2019 = 100


    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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