By Natalia Gurushina, Economist, Emerging Markets Fixed Income for VanEck
More emerging markets, including Thailand and India, opt for a pro-growth policy mix. Low inflation in the Philippines leaves room for more rate cuts.
Today is the last day of my Asia research trip and I am in Thailand. Local politics is as fascinating as usual, creating headwinds to growth. The central bank indicated that the historically low policy rate is not a sacred cow and rates can be brought lower, but they would prefer to first assess the impact of macro-prudential measures and the August fiscal package. The 2020 budget will definitely be expansionary (on the primary level), but there is a risk that diverging political interests might affect the timeline of individual infrastructure projects.
India’s policy mix is becoming increasingly pro-growth. The central bank delivered another rate cut today (25bps), indicating that it will maintain an accommodative bias for as long as necessary. The move comes on the heels of the major corporate tax relief effort, which explains why today’s rate cut was not too aggressive. The central bank’s estimates suggest that the output gap widened further, while the inflation outlook remains benign. This leaves room for additional policy easing going forward.
A big downside inflation surprise in the Philippines resurrected talks about additional rate cuts. Yearly headline inflation nearly halved (0.9%), while core inflation moderated to 2.7% year-on-year. The surprise reflected a big drop in food prices, so in theory, it should be considered transitory by the central bank. The central bank will also be easing through lower reserve requirements (effective from November). So, while another rate cut is a possibility, it might have to wait.
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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