By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation
Geopolitical fragmentation, China’s policy miscalibration, global stagflation risks, EM winners and losers, and poorer nations’ debt distress dominate discussions at the IMF Spring Meetings.
Geopolitical Risks, Future of Dollar Base System
We are at the IMF Spring Meetings this week, and it’s now a “speed-dating” phase – when we are running across the city, joining discussions on individual countries and regions. But we are not neglecting global issues either – geopolitical fragmentation/new international order (new Cold War?), the future of the U.S. Dollar-based international monetary system and the role of cryptocurrencies, energy security, and setbacks in the fight against poverty that can lead to widespread civil unrest in lower-income countries are front and center in many discussions. Concerns about the U.S. growth outlook appear contained, and the consensus view is that balance sheets are in a decent shape, and that the U.S. consumer is strong. Still, volatility and high inflation are here to stay, especially if excess savings are spent quickly adding to price pressures. The European concerns center more on the recession risk rather than the inflation risk – but the fight between the ECB’s hawks and doves is attracting a lot of attention. On the fiscal front, many participants underscored the need for “nimble” and “agile” policies to protect the most vulnerable groups of the population.
China Policy Miscalibration
As regards individual countries, China discussions focus a lot on the risk of secondary sanctions, the impact of the strict lockdowns and the zero-COVID policy on domestic politics (and relations with the U.S.), and miscalibration of the policy stimulus. LATAM’s swing to the left and changes in global supply chains can play a big role going forward, but the sentiment about Brazil is fairly optimistic. The Gulf economies emerged as clear winners in the current situation – not only because of higher oil prices and OPEC+, but also due to the fact that there was a sustained structural reform effort in the past 4-5 years.
Poor Nations Debt Distress
Frontier markets are “on trial”, being hit by a succession of exogenous shocks, which now include the impact of the Russia/Ukraine war on food and energy prices. Higher transport costs work just like trade tariffs, boosting the underlying costs of running a business and undermining these countries’ ability to recover after a shock. So, we are hearing more concerns about debt sustainability in poorer nations (see chart below) and more calls to improve the debt management system for these countries. Coordination challenges are key, because the composition of creditors changed massively in the past 20 years – including a much greater role played by Chine. The U.S. Treasury appears to be more open to including more countries into the G20 Common Framework – would China be on board? Stay tuned!
Chart at a Glance: Low-Income EM – Rising Risk of Debt Distress
Source: International Monetary Fund
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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