Emerging Markets Debt Daily
EM-DM Growth Differential - Better in 2021Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyFebruary 17, 2021
The expected 2021 EM-DM growth differential keeps improving. South Africa’s inflation outlook should allow the central bank to maintain policy status quo.
The global reflation narrative got a major boost from today’s upside surprise in the U.S. producer prices and retail sales. A key question for many Emerging Markets (EM) assets (especially FX and equities) is how EM growth will stack up against the improving outlook for Developed Markets (DM)/U.S. The consensus numbers for 2021 look quite good. The EM growth projection was raised from 6.3% in September to 6.7% in February (see chart below), pushing the expected growth differential with DM wider (from 2% to 2.4% or so). The outlook for 2022 is a bit more complicated. The EM GDP forecast is up, but the forecast for DM improved even more, narrowing the all-important growth differential.
A very modest increase in South Africa’s inflation should allow the central bank (SARB) to maintain policy status quo. In the past, Governor Lesetjia Kganyago expressed concern about South Africa’s low-ish real policy rate - it would be interesting to see how his views evolve against the backdrop of policy normalization in major EMs.
Nigeria is Africa’s biggest economy, so sizable exchange rate moves tend to draw attention. The currency slipped very abruptly in the past few days – to the weakest level against the U.S. Dollar since March 2020 – inviting suggestions that the central bank is attempting to normalize the currency regime (which now involves elaborate controls and parallel exchange rates). We are not overly optimistic about proper FX adjustment – in part because inflation is high (16.5% year-on-year) and the weaker currency will push it even higher. But additional currency flexibility will reduce pressure on the international reserves, improving the outlook for sovereign bonds.
Charts at a Glance: Consensus Keeps Upgrading EM Growth Outlook
Source: VanEck Research, 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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