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  • Emerging Markets Debt Daily

    EM Inflation – Changing Landscape

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    December 15, 2020

    Poland’s core inflation edged higher, pointing to potential risks that might affect other EMs. Mexico postponed the discussion of the controversial central bank bill until February.

    Poland’s November core inflation was higher than expected (4.3% year-on-year), and it provided valuable insights into potential near-term risks that might affect other countries as well. Pent-up demand for services requiring closer contact (like medical services, etc.) is one of them. Another one is higher costs of services due to additional anti-COVID regulations and requirements. Finally, Poland is yet another country where we now see higher regulated prices and tariffs (these were largely “frozen” during the pandemic). The chart below shows that the emerging markets (EM) inflation heatmap is changing, with prices on the increase in more countries than before. We do not yet know whether these changes will be longer lasting, but the market is already buzzing about rate hikes across EM in 2021.

    There was a sigh of relief after Mexican legislators decided to postpone the discussion of the controversial central bank bill until February 2021. The main concern is that the proposed changes could undermine the central bank’s independence and be credit-negative for the sovereign―this point was specifically mentioned by Moody’s and the IMF’s Managing Director Kristalina Georgieva.

    The new governor of the Turkish central bank, Naci Agbal, hit all the right notes in his policy briefing. He promised to keep monetary policy tight in order to lower inflation, reduce de-dollarisation, and boost the international reserves. The key question is whether he would be allowed to use the necessary tools (such as additional rate hikes) to achieve these goals―this remains conditional upon President Recep Erdogan’s views and agenda. The central bank’s rate-setting meeting on December 24 would be an important litmus test―a rate hike would help to convince the market that the policy U-turn is for real.

    Chart at a Glance: EM Inflation Landscape Is Changing

    Chart at a Glance: EM Inflation Landscape Is Changing

    Source: VanEck Research; 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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