Sanctions, Reactions, Expectations

Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation


The new Russia sanctions and uncertainty about the future are weighing on Russian and Ukrainian assets. But it’s life as usual for many other EMs, with central banks responding to higher inflation and the markets evaluating draft budgets.

Russia/Ukraine Conflict

Russian and Ukrainian assets were hit hard this morning, as the markets absorbed the additional Russian sanctions and reports about new developments on the ground. One practical question (from the fixed income (FI) perspective) is whether Russia might be excluded from global bond indices, given the limitations on new issuance and trading on the secondary market. Russia’s weight in the J.P. Morgan local bond index (GBI-EM Global Diversified) is approximately 6% and in the J.P. Morgan sovereign bond index (EMBIG) is just under 3%. These are non-negligible amounts. A prospect of India’s inclusion in the local bond index adds an element of suspense, as regards the ultimate impact on country weights.

EM Inflation, Policy Rates Outlook

As investors are wondering whether the Russia/Ukraine escalation will affect developed markets’ (DMs’) policy normalization plans, central banks in EMEA and LATAM are very much in the mood for more tightening. Hungary raised its policy rate by 50bps yesterday, and the consensus sees a 30bps hike in Hungary’s 1-week depo rate on Thursday. Today’s upside mid-month inflation surprise in Brazil reaffirms the market expectations (implied by the local swap curve) of another 100bps rate hike in March, followed by 65bps of additional tightening in May and 36bps more in June. The market has rewarded Brazil’s proactive monetary policy stance with massive currency/local bonds outperformance so far this year (see chart below). But we keep an eye on the weakening growth outlook (now only 0.6%, according to Bloomberg consensus), which is rapidly becoming collateral damage in the central bank’s heroic anti-inflation fight.

South Africa Fiscal Consolidation, Debt Profile

South Africa is another “Year-to-Date emerging markets (EM) star” – and today’s presentation of the 2022 budget suggests that there may be further potential here. Even though the market was taken aback by a slower than expected pace of fiscal consolidations and no changes in issuance, the budget is based on conservative growth assumptions, there are no increases in the wage bill and the draft also shows some improvements in South Africa’s debt profile over time (including a lower debt peak). Stay tuned!

Charts at a Glance: EM Stars of 2022

Charts at a Glance: EM Stars of 2022

Source: Bloomberg LP

Originally published by VanEck on February 23, 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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