Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation
Only four major EMs have inflation within the target ranges. Some rate hike laggards are catching up. Widening current account deficits create additional policy challenges.
Global Inflation Risks
Inflation remains a top concern globally, and newswires continue to bring reports about potential new risks – such as rising fertilizer prices. As of this morning, only four major emerging markets still have their headline inflation prints within the respective target ranges (see chart below). South Africa is one of them – annual headline and core inflation were unchanged in February, surprising to the downside (another rarity these days). And this means that the central bank can still afford to proceed with gradual policy normalization, including a 25bps rate hike tomorrow.
Emerging Markets Policy Normalization
I would like to make two more points about emerging market’s (EM) inflation challenges. First, some policy laggards are finally catching up. Argentina delivered another rate hike yesterday (+200bps to 44.5%). The central bank is moving in the right direction – even if this is just to make the IMF happy. However, with 4.7% monthly inflation in February – and more to come in March – Argentina requires much more tightening to push interest rates into positive territory. Now, as regards EM’s top monetary policy “rebel” – Turkey – the market buzz is that some orthodox-leaning policymakers might be brought back to orchestrate a hawkish policy U-turn. But the more concrete news is that Turkey’s regulator is trying to curb offshore lira liquidity to reduce selling pressure. Oh, well… The next inflation print on April 4thwill be fun to watch.
Emerging Markets External Balances
Another point is that deteriorating current accounts – especially in the absence of offsetting capital account inflows – can necessitate either more aggressive tightening or outright FX interventions (to minimize the FX-inflation pass-through). One region we are watching very carefully is Central Europe – its geographic proximity to the Russia/Ukraine war had already created a lot of additional pressure points. Hungary’s Q4 current account deficit widened more than expected (EUR2.45B). The deterioration was driven mostly by profit repatriations. Higher energy prices – together with some export curbs (grains) – can affect the trade balance as well going forward, weighing on the currency. Stay tuned!
Chart at a Glance: EM Inflation – Hard to Stay on Target
Source: Bloomberg LP
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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