Emerging Markets Debt Daily
Turkey Interventions – Here We Go Again?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyApril 26, 2021
Today’s price action raised concerns that the Turkish central bank’s FX interventions are back. The resurgence of far-left policies and the private pension funds’ withdrawals are key trends to watch in LATAM.
The Turkish central bank had wasted a lot of reserves on futile interventions in the past (see chart below), which is why the lira’s abrupt appreciation in the morning trade raised concerns that it might be doing the same again. This would be in line with President Tayyip Erdogan’s recent comments on the matter (we can intervene more if necessary). The problems is that Turkey does not have huge policy buffers now – and the market knows it. Testing the central bank’s resolve will almost certain send the currency weaker, and the central bank might end up tightening even more to stabilize it. These concerns were clearly expressed during Turkey’s discussions at the latest IMF meetings – our report can be found here. This creates a risk that Turkey will fail to fully benefit from a more bullish setup for Emerging Markets (EM).
There are two trends in LATAM that should be watched very carefully, as they might have significant longer-term consequences. The first trend is the resurgence of radical left policies/populism across the region. New polls in Peru continue to place the far-left presidential candidate Castillo way ahead of the more centrist candidate Fujimori (35-41% vs. 21-23%). Another trend is the increasing reliance on pension funds’ withdrawals to boost consumption/growth. Mexico reported a sizable increase in withdrawals from the individual accounts in March. Peru approved a new round of withdrawals last month. And the Chilean senate voted in favor of the third round of withdrawals last week. As regards near-term growth, the benefits of withdrawals are undeniable. However, they might undermine fiscal outlooks several years from now.
Brazil’s solid external balances had been one of the few bright macro spots lately, so the dual weakness of the current account and foreign direct investments (FDI) attracted attention this morning. The current account deficit widened to nearly USD4B in March, while FDI moderated to USD6.86B. The good news is that the basic balance (a sum of the current account and FDI) is still positive – which means solid fundamental support for the currency despite domestic political shenanigans. All we need for the fundamentals to shine through is less political noise and speedy fiscal adjustment.
Charts at a Glance: Turkey FX Interventions – Futile But Back For More?
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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