Tough Choices

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


The Russia/Ukraine conflict deteriorated again, and will remain the focus of attention of the weekend. Argentina’s rate hike yesterday shows that EM is not a monolith – even among “rotten apples”.

Russia/Ukraine Conflict

It’s Friday before a long weekend here in the U.S., and investors will no doubt remain focused on the conflict between Russia and Ukraine, which seems to have deteriorated in the past 24 hours. Make sure to check VanEck’s blog about investment implications of the Russia/Ukraine crisis. On the data front, there are no important releases today, but one policy move on Thursday drew attention to two Emerging Markets (EM) with circa 50% annual inflation – one of which might be of interest to Fixed Income investors, while another should probably be avoided under the current political setup.

Policy Divergence in Emerging Markets

The countries in question are Argentina and Turkey. Both are considered the black sheep of the EM family, but there are nuances – such as monetary policy. We learned yesterday that the central bank of Argentina raised its policy rate for the second time this year – by 250bps to 42.5%. Turkey, by contrast, can barely wait to cut the policy rate from already inadequate 14%, relying on an out-of-box but questionable scheme to prop up the currency and administrative measures to cap inflation pressures. The central bank also mentioned “permanent liraization” – but nobody knows what it means in practice. As you can imagine, expected inflation in Turkey runs extremely high, making local bonds the least attractive in the investable universe of 34 countries (despite seemingly high nominal yields – chart below shows a version of this argument for real policy rates)

Argentina and IMF

Argentina’s policies and politics are very messy, but it looks like the country might finally be able to secure a staff level agreement with the IMF in early March, and a deal in April. Would Deal #22 (!) solve Argentina’s problems? Unlikely. We half-jokingly referred to it as Catch-22. But it can make sovereign bonds more “palatable” – at least for a while. Stay tuned!

Chart at a Glance: Turkey’s Real Rates – The Lowest in EM

Chart at a Glance: Turkey’s Real Rates - The Lowest in EM

Source: VanEck Research, Bloomberg LP

Originally published by VanEck on February 18, 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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