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  • Emerging Markets Debt Daily

    Indonesia – Bold Hold

    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

    Chart at a Glance: Indonesia Keeps Powder Dry and Real Policy Rate High

    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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