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  • Emerging Markets Debt Daily

    Turkey Rate Hike – U-Turn or Bandaid?

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

    Turkey hiked the benchmark rate as expected, but it is still unclear whether this marks a genuine policy U-turn. Indonesia and the Philippines delivered surprising rate cuts to boost growth.

    The market cheered the expected 475bps benchmark rate hike in Turkey. The hike pushed the real rate from -1.5% to +2.8% (see chart below), creating a much-needed policy cushion, but there are some questions left. First, it remains to be seen whether local banks will follow the CBRT and raise deposit rates, which is key to prevent further dollarization and create a more stable financial backdrop. Second, the hike was not an independent decision – rather the CBRT was allowed to hike. President Tayyip Erdogan’s remarks just days ago suggest he still thinks high rates are detrimental, and this is a big obstacle for a longer-lasting and genuine policy U-turn.

    We often say that Emerging Markets (EM) is not a monolith, and two surprising rate cuts in Asia this morning illustrate this point perfectly. Rate cuts in Indonesia and the Philippines reflected mounting growth concerns. Stable currencies and benign inflation and provided a window of opportunity for central banks to act. The level of real policy rates – especially in Indonesia (around 2.3%) – indicate that there is room to ease further if growth headwinds become stronger.

    We’ve got a flurry of fiscal headlines in Brazil – just as Fitch reaffirmed the country’s rating at BB- with negative outlook. Concerns about fiscal sustainability and the rising debt level dominated the rating agency’s press-release, which is why Minister of Economy Paulo Guedes’s latest comments came under extra scrutiny. We loved the bit about speeding up privatization and using proceeds to reduce the debt/GDP ratio. But we also would like to hear more about solidifying the spending cap rules – something that the rating agencies, the central bank, and the market are watching rather intently.

    Chart at a Glance: Turkey Real Benchmark Policy Rate – Back in the Black


    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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