Emerging Markets Debt Daily
LATAM – Old Risks Are BackNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMay 03, 2021
LATAM policy and political risks are back on the front burner. A prospect of an early rate cut in Turkey looks more real after below-consensus inflation.
Several macroeconomic risks staged a comeback in LATAM over the weekend. First, Colombia’s new tax reform hit a major roadblock. President Iván Duque Márquez (Duque) was forced to withdraw the tax bill from the congress due to massive protests; this was followed by the resignation of the Minister of Finance and his deputy. Duque promised to work on a new reform proposal, however time is short. A rating downgrade is not yet inevitable, but the risk is higher now. Second, El Salvador’s assembly ousted the Attorney General and top judges. The surprising political move worsened the outlook for an IMF program in a situation when the country is facing sizable financing needs (=debt sustainability risk). The early market reaction in both Colombia and El Salvador was predictably negative, and we expect more volatility in the coming days.
A prospect of an early rate cut in Turkey looks more real following April’s downside inflation surprise. Inflation remained in high double-digits (see chart below), but if further releases confirm Governor Şahap Kavcioglu’s “peak April” inflation argument, the central bank might be emboldened to move in June―a small cut would keep the real policy rate positive (in line with the latest statement). Would the market be “understanding”? Not necessarily―but this has not stopped Turkish policy-makers in the past.
The latest activity gauges (Purchasing Managers Indices, PMIs) show the on-going divergence among major emerging markets (EM). There is a sizable cluster of countries with high (well in expansion zone) and stable PMIs―South Africa, India and Brazil―which raises hopes that the recent COVID resurgence will not hurt EM growth as much as feared. We also have a group of countries that showed big improvements in April―Malaysia, Indonesia and the Czech Republic (every little bit helps, as regards the growth outlook). And then there are underperformers, including Turkey (barely above 50) and the Philippines (back in contraction zone). PMIs are not a perfect measure, but they help to form the growth narrative (one of the reasons not to treat EM as a monolith).
Charts at a Glance: Turkey Inflation – High But Below Consensus
Source: Bloomberg LP
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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