Domestic Issues Drive EM Policy Responses

By Natalia Gurushina, Chief Economist, VanEck

Domestic issues – which include both economic and political considerations – drive policy decisions in EM. DM “tapering” and policy normalization are duly noted, but not key.

And “issues” are not restricted to purely macroeconomic stuff, like growth or inflation. In China’s case, the regulatory, political and ideological considerations are just as important – and this can clearly be seen in today’s release of money and credit aggregates. The breakdown shows that tighter regulations in real estate and the tech sector continued to weigh on the new credit growth in August (which rose less than expected). The on-going decline in off-balance sheet (“shadow”) financing points in the same direction (see chart below). A big jump in the government bond issuance shows that the Politburo’s call for more fiscal support is already having an effect, and we should see more of it – in tandem with targeted monetary measures – in the coming months.

Going back to traditional macroeconomic drivers, surging inflation is Challenge #1 for central banks in EMEA and LATAM. There is still a great deal of uncertainty regarding the nature of inflation spikes (how much is transitory and how much is not), but monetary authorities increasingly feel compelled to respond with rate hikes in order to avoid the “contamination” (this is a quote from a recent conference call) of inflation expectations. Peru accelerated the pace of tightening (to 50bps) at its rate-setting meeting yesterday. Russia delivered a smaller than expected rate hike (25bps), but it tightened by a total of 250bps so far this year, and the central bank’s statement left room for more hikes if necessary.

A surprising acceleration in Czech headline inflation (from 3.4% year-on-year in July to 4.1% in August) pushed the real policy rate deeper into negative territory, increasing the probability of a larger 50bps rate hike on September 30. Such a move will lead to greater policy divergence between Hungary/Czech Republic and their Central European neighbor, Poland, which remains decisively dovish despite going through the same inflation.

Chart at a Glance: Changes in China Shadow Financing – Firmly Below Zero

 Chart at a Glance: Changes in China Shadow Financing – Firmly Below Zero

Source: Bloomberg LP

Originally published by VanEck, September 10, 2021

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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