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Emerging Markets Debt Daily
Turkey – Waiting for “Extraordinary Evidence”Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyNovember 12, 2020
The consensus now expects a 475bps rate hike in Turkey next week. South Africa’s unemployment is back above 30%.
Carl Sagan once said that extraordinary claims require extraordinary evidence―and this is how Turkey feels these days after President Recep Erdogan’s apparent policy U-turn. The big test is next week. The consensus now expects the central bank to raise its benchmark rate from 10.25% to 15%. This will push the real interest rate well into positive territory, strengthening policy buffers and sending an important signal. It goes without saying that failure to deliver will have serious market implications.
South Africa had a major social reality check this morning―the rate of unemployment climbed back above 30% in Q3. This is a record high since the series began and a big headwind for domestic demand. The latest IMF estimates suggest that South Africa’s real per capita GDP might not get back to pre-COVID level for years (see chart below), which sets South Africa apart from most emerging markets (EM) peers. These numbers are not near-term market-movers―the government’s fiscal objectives and the central bank’s stance are much more important here. However, they show why South Africa’s longer-term de-rating narrative is so persistent.
Another month, another upside inflation surprise in India. Headline inflation climbed to 7.61% year-on-year in October, the highest since 2014. Volatile food prices and COVID-related disruptions are important drivers, and they should fizzle out eventually. However, with headline inflation above the target band since March and annual core inflation sticky at around 5.5%, the central bank’s near-term policy space might be limited. And this puts more pressure on the government―not just as regards fiscal support, but also reforms.
Chart at a Glance: South Africa Per Capita Income – Stuck in Low Range
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.
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