By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income
FX adjustment plays an important role here – EMs that allowed their currencies to absorb external shocks are now seeing better current account outcomes, which puts them in a stronger position to deal with global uncertainties. Digitization and AI-leapfrogging potential was mentioned more than once in the context of economic discussions about Africa’s growth potential and investability.
Inflation is on everybody’s mind after this week’s releases in the U.S. A tiny upside surprise in headline inflation – or rather a lack of downside surprises – pushed U.S. rates higher across the board, with the curve bear-flattening once again (=shorter rates rising more than long ones). The release was not completely U.S. Federal Reserve (Fed)-unfriendly though, and the market-implied probability of the Fed’s November hike was still below 15% at the time of the note. But “higher-for-longer” remains the baseline scenario, raising concerns about developed markets (DM) ability to deal with potential financial stability risks and rising debt-service costs. As one (very credible) EM central bank Governor said this morning, if you do not like high borrowing costs, reduce the amount you borrow. Wise advice!
A common theme here at the IMF is that falling inflation can improve growth prospects in EM by boosting real incomes and creating more transparency for investment decisions. We are already seeing some evidence of this happening in Brazil, and Hungary is hoping for a similar outcome in 2024. Turkish inflation will continue to re-accelerate for a while (see chart below), but “Team Turkey” presentations at the IMF meetings are consistently good, strengthening the market’s conviction that the policy U-turn is for real.
Chart at a Glance: Turkey Annual Inflation Expected To Peak Above 70%
Source: Bloomberg L.P.
