Inflation, Rates, Growth – Who Wins?

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy

EM Asia looks different from other EM regions in terms of inflation, policy rates and fiscal adjustment. Would this help to make it the EM growth star of 2022?

Yesterday’s rate hikes in LATAM (Mexico, Peru and Uruguay) continued to push the region’s average policy rate north of the pre-COVID level (see chart below). EMEA (excluding Turkey) is not that far away, and the latest inflation releases in both regions argue in favor of additional tightening. The pace will be different though – countries with stronger fiscal discipline (like Mexico) can afford to proceed at a more gradual pace (yesterday’s modest 25bps hike illustrates this point very well). Political considerations will matter as well, and Chile is a very interesting case in this regard. The country’s “legacy” institutional strength is beyond doubt, and this might explain the relatively low (compared to the rest of the region) rate hike expectations for the next 12 months – despite signs of economic overheating and a very wide projected fiscal gap for 2021 (8.2% of GDP, which is practically unchanged vs. 2020). The outcome of the presidential elections on November 21 will be closely watched – the market might become less placid if the leftist candidate emerges victorious.

Policy rates in emerging markets (EM) Asia look very different (see chart below). Asia’s inflation pressures are also very different at the moment – inflation is higher but mostly within target ranges. The pace of fiscal adjustment is different as well – much slower than in the rest of EM. Would these factors pave the way for a more gradual pace of rates’ normalization, making Asia an EM “growth star” of 2022? The consensus thinks so, upgrading the 2022 GDP forecasts for the region (while cutting them in LATAM).

The developments in China are key to watch. The real estate “decompression” caused a sizable near-term growth downgrade (Q4 2021 forecast was cut to mere 3.5%). Given that real estate and construction account for nearly 20% of GDP, the regulations rollback and additional targeted support can help to stabilize the situation for now. A more fundamental question – both for China and the region – is the impact of political developments in China (analysts are busy digesting the Communist Party 6thplenum’s communique) on the growth model, especially the balance between the supply side and demand side growth drivers, and the role of the military-industrial complex in a context of China’s geopolitical aspirations. Stay tuned!

Chart at a Glance: Regional EM Policy Rates – Diverging Paths

Chart at a Glance: Regional EM Policy Rates – Diverging Paths

Source: VanEck Research; Bloomberg LP

Originally published by VanEck on November 12, 2021.

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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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