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  • Emerging Markets Debt Daily

    IMF Meetings – Reflation Is Alive and Well

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    April 07, 2021

    Global growth prospects improved, but the divergent recovery might pose challenges to some EM. India’s surprising quantitative easing program does not mean that policy normalization is delayed indefinitely.

    We are at the virtual IMF meetings this week, and the reflation narrative is alive and well. The improved growth prospects are linked to higher interest rates in the U.S. (you can think about it as “good cholesterol” as opposed to near-term concerns about Treasury debt supply and rising risk premia)—and emerging markets (EM) officials pay very close attention to it. Their line of thinking is that interest rate differentials with the U.S. might affect risk appetite for EM assets, potentially affecting medium-term growth prospects. Most EMs are not in a hurry to hike rates, but some believe that it is necessary to have positive real policy rates as a cushion for financial stability. A potential challenge for EM can come from the divergent and asynchronous recovery. At the same time, the financial sector in EM appears to be in decent shape this time around, being part of the solution rather than a problem (like in the previous crises). Stay tuned!

    A recurrent theme in this week’s IMF discussions about EM is that expansionary monetary policy has limits and quantitative easing (QE) is finite. And this partly explains the market’s reaction to India’s new QE plan (the rupee dropped by 154bps vs. U.S. dollar, as of 9:50am ET, according to Bloomberg LP). The central bank kept all of its rates on hold today, but it removed the time-based forward guidance and pre-committed to buy more government bonds on the secondary market. The surprising dovish policy shift reflected the recent COVID resurgence—so our take is that India’s policy normalization is delayed, but not indefinitely.

    Mexico’s inability to boost investments is a major structural impediment to growth. The end. This is how short this bullet point should be. Gross fixed investments contracted by more than 10% year-on-year in January (see chart below)—staying well below the already weak pre-pandemic levels. Fiscal support and monetary easing will not change the situation in any meaningful way. Mexico needs structural reforms, but the government’s mixed messages suggest that we will be stuck with this unfortunate status quo for quite some time.

    Charts at a Glance: Weak Investments – Mexico’s Achilles Heel

    Charts at a Glance: Weak Investments – Mexico’s Achilles Heel

    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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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