By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
EM Bonds Performance
The latest IMF projections show that the growth differential between emerging and developed economies should improve noticeably in favor of EMs in 2023 – an additional factor supporting the outlook for the asset class this year. However, EM is not a monolith, and while the market looks with amazement at super-tight sovereign spreads of “EM Graduates,” some lower-income EMs appear more distressed. As the debt restructuring drumbeat is getting stronger, many participants were unhappy about the slow progress in the common framework, especially as regards China’s role and the involvement of private creditors. China might be in a unique position to push things ahead. Still, the recent change of leadership and some institutional features inside China can make it more difficult to follow in the Paris Club’s footsteps. Geopolitical tensions involving China create an extra layer of uncertainty that can lead to further delays.
EM Structural Reforms
These issues define a broader context for discussions about structural reforms in EM, including fiscal adjustment. Everybody agrees that exceptional fiscal support during the pandemic was fully justified. Still, now governments have to balance disinflation and financial stability with the need to continue protecting the most vulnerable, especially in low-income countries. Some participants pointed out that aggressive fiscal consolidation in countries with high debt levels might have an offsetting negative impact on GDP, delaying their progress in meeting the UN’s sustainable development goals.
Turkey Elections
One country that has attracted a lot of attention this year is Turkey. Turkey is heading for the elections in exactly one month. The local bond rout (see chart below) signals that the market prices in (1) a normalization of the policy rate after the elections, and (2) the central bank having less firepower to support the local bond market, given the need to defend the exchange rate. Investors expect a lot of noise and volatility immediately after the elections, while the new team is put in place and some macro-prudential regulations potentially lifted. Deputy Portfolio Manager David Austerweil visited Turkey recently. He believes that the elections will majorly impact the debt market and that long-dated low-dollar price sovereign bonds look the most attractive given the balance of risks. Stay tuned!
Chart at a Glance: Turkey Pre-Election Signals – Things Need To Change*
Source: Bloomberg LP
*J.P. Morgan GBI-EM Global Diversified Composite Unhedged USD Index – Comprehensive emerging market debt benchmark that track local currency bonds issued by Emerging market governments, denominated in U.S. dollars without any currency hedging.
**J.P. Morgan GBI-EM Turkey Broad USD Unhedged Index – Tracks the performance of a diversified range of local currency government bonds issued by Turkey, denominated in U.S. dollars without any currency hedging.
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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