Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
May 19, 2020
Indonesia surprised the market by keeping its policy rate on hold. Russia adopts a more proactive fiscal stance as the coronavirus takes a heavy toll on the economy.
Indonesia defied consensus this morning, keeping its policy rate on hold at 4.5%. The decision shows that the central bank wants to keep its power dry—especially after yesterday’s meaningful fiscal expansion. It also signals that the central bank cares about the exchange rate—so it wants to keep the real policy rate reasonably high (see chart below). However, monetary authorities are not averse to additional easing, as the risks to near-term growth are to the downside—low inflation (and stable currency) leave plenty of room for more rate cuts if needed.
Scary high-frequency activity numbers forced the Russian government to adopt a more proactive fiscal stance. Estimates suggest that Russia’s real output contracted by as much as 20% year-on-year in April, with about 1/3 attributable to oil and 2/3 to the coronavirus. The morning headlines mention a recovery plan worth approximately 10% of GDP that will be implemented in stages. The initial goal is to prevent further output decline and pave the road to a recovery sometime in late-2020/early-2021. The implementation of the plan will widen the fiscal deficit well beyond the consensus expectation of approximately 4% of GDP. Numbers in today’s reports point to 6% of GDP as a more likely outcome for 2020.
With only a few days left before the National People’s Congress, China unveiled new reform guidelines. There are a lot of “usual suspects”—internationalization of the yuan, interest rate liberalization and granting foreign companies more access to the economy (we are curious how the latter is going to play out if/when trade tensions flare up again). The guidelines also mention some liberalization of the oil and gas sector (prices, pipelines), as well as property taxes. A proposal to draw new medium- and longer-term national plans for science, technology, defense and security is a reminder that geopolitics will remain in the forefront going forward.
Chart at a Glance: Indonesia Keeps Powder Dry and Real Policy Rate High
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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at email@example.com for assistance.
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Associates Corporation 666 Third Avenue New York, NY 10017800.826.2333