By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
EM Real Policy Rates
Recent communications from emerging market (EM) central banks showed greater concerns about the growth outlook – in fact, some economies might be facing a sharp slowdown (growth cliff) in the second half of the year. Persistent inflation pressures in many EMs suggest that policy tightening should continue – but how much more and at what pace? The chart below shows what real policy rates in major EMs would look like if the current consensus forecasts for inflation and nominal rates were to materialize. Most of them are positive, with quite a few way above zero (=looking restrictive).
EM Growth, External Imbalances
The right (high) end of the chart is dominated by Latin America (LATAM). Brazil’s story is well-known – early and aggressive rate hikes, faster than expected post-pandemic fiscal adjustment (which provided space for fiscal measures to cap inflation) and improving growth prospects. Colombia’s backdrop is more complicated partly because, in addition to double-digit inflation, the country is also running very large current account deficits (over 6% of GDP). The latest foreign trade numbers suggest that Colombia’s imports might be peaking, but very large external gaps point to overheating, which might require more tightening to cool the economy. The same can be said about Hungary and Chile – the latter’s current account gap widened to 8.8% of GDP in Q2.
EM Growth Cliff And Real Rates
There are currently only three major EMs where real policy rates are still expected to be negative 12 months from now. Turkey is a truly special case – one can question the validity of any macroeconomic forecast there. But Poland and Romania are more mainstream. Poland’s central bank has consistently argued that double-digit inflation and the widening current account deficit are largely due to exogenous shocks. There will be two important data releases before the central bank meets again on September 7 – August’s inflation (consensus expects slight annual disinflation) and the domestic activity survey (Purchasing Managers Index, PMI). If the consensus expectation for the manufacturing PMI turns correct – another leg down to a very contractionary 41.6 – there is a risk that the central bank will take a pause in its hiking cycle. Stay tuned!
Chart at a Glance: EM Real Policy Rates – Looking More Positive
Source: VanEck Research; Bloomberg LP
Originally published by VanEck on August 26, 2022.
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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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