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  • Emerging Markets Debt Daily

    Turkey “Backdoor” Policy Tightening

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    August 18, 2020

    Turkey cut the overnight borrowing limit for local banks, which is a form of “backdoor” policy tightening. EM overseas remittances look much stronger than the World Bank’s initial estimate for 2020.

    Turkey’s “backdoor” policy tightening continues, with the central bank’s cutting overnight borrowing limit for local banks in half. Overall tightening is moderate at this stage – the central bank’s weighted average cost of funding went up from around 7.3% in the middle of July to 9.17% this morning (it was close to 12% back in January). However, this might be the best monetary authorities can do against the backdrop of political pressures to keep interest rates low. The central bank’s rate-setting meeting is on Thursday – the market expects no changes in the benchmark rate (8.25%). The Turkish lira is a bit stronger vs. U.S. Dollar this morning (as of 9:40am ET, according to Bloomberg LP) – but we suspect it is mostly a “by-product” of the global risk-on sentiment. 

    The latest overseas remittances prints in EM suggest that the World Bank was too pessimistic with its initial estimate of a 20% decline in 2020. El Salvador’s remittances jumped by 14.1% year-on-year in July. Remittances in the Philippines staged a very nice recovery in June, beating expectations by a wide margin and fully recovering from the COVID slump (see chart below). These numbers came on the heels of strong remittances in Guatemala (up by 13.8% year-on-year in July) and a series of upside surprises in Mexico. This is a big tailwind for external balances and GDP growth in these economies.

    Indonesia’s external adjustment continued unabated in Q2. The current account deficit narrowed to USD2.9B, and surging trade surplus (USD3.26B in July) suggests that this process might extend into Q3. The adjustment is “textbook” – i.e. driven by weaker imports. This is likely to reverse at some point as the post-COVID recovery gathers pace. However, the central bank is using this episode to boost its international reserves, which points to a stronger fundamental support for the currency in the future.

    Chart at a Glance: Philippines Overseas Remittances – Back to Normal

    Chart at a Glance: Philippines Overseas Remittances – Back to Normal

    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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