By Natalia Gurushina, Economist, Emerging Markets Fixed Income for VanEckGlobal
Several Asian central banks loosened their monetary policy stance in the past 24 hours. Turkey’s downside inflation surprise leaves the door open for additional rate cuts.
The G7 draft communique did not mention coordinated rate cuts, but several Asian central banks (Malaysia, Indonesia, and Australia) loosened their monetary policy in the past 24 hours. Malaysia’s 25bps policy rate cut was expected, but welcome nevertheless. By contrast, Indonesia’s decision to cut the reserve requirements (on both USD and IDR) was a surprise. The foreign exchange reserve requirements were halved (from 8% to 4%) and this is expected to inject an additional USD3B+ of liquidity in to the market. It’s been our long-standing argument that higher real policy rates in many emerging markets give more policy room and improve the efficacy of monetary easing, compared to developed markets.
A very low base effect continued to push Turkey’s inflation higher in February—but not as much as expected. Headline inflation rose to a “mere” 12.37% year-on-year and yearly core inflation stayed below 10%. Even though Turkey’s domestic activity is picking up at a brisk pace, the coronavirus-related decline in the price of oil might help to cap near-term inflation pressures. This leaves the door wide open for further rate cuts, albeit that the central bank will continue to watch the lira, as the pass-through between the currency moves and inflation remains high.
I do not know whether anyone can be surprised by a downside surprise in South Africa’s GDP growth at this stage, but here we are … The real GDP growth undershot consensus in Q4, falling by 0.5% year-on-year (see chart below). This is a clear negative for the fiscal outlook (especially in conjunction with falling inflation) and debt dynamics. But the 2020 budget address leaves us hopeful that some of these pressures can be reduced through the reduction of the wage bill and other planned expenditure cuts.
Chart at a Glance: South Africa Growth – Downward Momentum Intensifies
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; 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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