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  • Emerging Markets Debt Daily

    Mexico’s Structural Bottlenecks Cap Growth

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    June 19, 2020

    Mexico’s final domestic demand continued to weaken in Q1 2020. Russia cut its policy rate to the lowest level since the introduction of inflation targeting.

    The contraction of Mexico’s final domestic demand accelerated in Q1 2020 (to -1.9% year-on-year). The onset of the COVID crisis was a factor. However, the deterioration started well before the virus hit the economy—and this points to unresolved structural issues, which continue to weigh both on private consumption and private investments. The central bank implemented a series of rate cuts—and is expected to do more easing—to provide some relief. But the government’s response was very limited—especially when compared to other emerging markets (EM). Importantly, there is very little appetite for reform right now, which means that Mexico’s growth underperformance might persist after the COVID crisis.

    Russia’s central bank (CBR) cut its policy rate by 100bps to 4.5% today, bringing it to the lowest level since the introduction of inflation targeting. The CBR maintained a dovish bias, which looks sensible given that domestic activity remains soft and inflation low. However, there is a distinct sense that the era of emergency easing is over, with more emphasis on data-dependency. In this regard, Russia looks very similar to other emerging markets.

    The on-going decline in Turkey’s inflation expectations is a pleasant surprise against the backdrop of mostly disappointing data releases. Compared to EM peers, Turkey’s 12-month ahead expectations are still high (9.03%), but the downside trajectory (see chart below) looks well-established, adding to the central bank’s confidence that it can hit its inflation targets (and justify the past rate cuts).

    Chart at a Glance:Turkey Inflation Expectations Continue to Moderate

    Chart at a Glance: Turkey Inflation Expectations Continue to Moderate

    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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