January 24, 2022

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Emerging Markets Look for Salvation

(Bloomberg) — Whether emerging markets extend last week’s across-the-board gains will likely depend on what the so-called guardians of the global economy do to save them from the worst of the coronavirus.

But even if the International Monetary Fund and Group-of-20 offer help this week to address what former IMF chief economist, Maury Obstfeld, described as the greatest global crisis of the postwar period, the risks to the rally are manifold. Traders are bracing for one of the worst first-quarter earnings seasons in living memory as well as data showing a slump in Chinese economic output.

“While we expect a recovery of flows to emerging markets in the second half of 2020, we do not believe that the pickup will be strong enough to bring about a return to 2019 levels,” economists at the Washington-based Institute of International Finance, including Robin Brooks and Elina Ribakova, wrote in a note. “We expect many countries to turn to multilateral support in coming months due to external financing stress and a lack of policy space to support their economies.”

Ethiopia’s Prime Minister Abiy Ahmed said in a Bloomberg Opinion piece that Africa needs emergency fiscal stimulus worth $100 billion, in addition to the IMF’s already planned $50 billion of regular support, to tackle the Covid-19 crisis.

The weekend’s OPEC+ agreement has been a source of some solace in Asia trading, although the bounce so far in oil prices has been modest. China’s consensus-smashing money supply and credit numbers over the weekend, are also somewhat encouraging as the numbers indicate that the authorities are prepared to use sizable non-price or quantitative tools despite a relatively meager rate-cut response.

Emerging-market stocks and local-currency bonds had their best weekly performance in four years in the five days through Friday, while developing-nation currencies had their biggest weekly gain since June. The U.S. Federal Reserve helped by announcing an extra $2.3 trillion of liquidity on Thursday.

Still, the prospect of debt defaults, unsustainable stimulus efforts and unbridled infection rates in the world’s most vulnerable economies has left many investors on the sidelines. Emerging-market equity funds recorded their eighth consecutive weekly outflow in early April despite attractive valuations, according to EPFR Global.

Another Rate Cut

Indonesia’s central bank meets on Tuesday, and the consensus is there will be a further 25 basis-point rate cut. However, if the rupiah remains under pressure, the decision to loosen policy may be deferredThe Reserve Bank of India is scheduled to release on Monday the minutes for its emergency meeting on March 27. The monetary authority reduced the benchmark repurchase rate by 75 basis points to 4.40% and announced steps to boost liquidity in a stimulus worth 3.2% of gross domestic productInvestors are awaiting minutes on Thursday from Chile’s last central bank meeting. The monetary authority cut borrowing costs twice in March to offset the impact of Covid-19“We should expect more interest-rate cuts and fiscal stimulus but, in many emerging markets, lower rates of financial inclusion and higher reliance on informal labor inhibit their impact,” said Hasnain Malik, the Dubai-based head of strategy at Tellimer

Read: What Africa’s Economies Need to Survive Coronavirus: Abiy Ahmed

China’s GDP, Trade Data

China’s first-quarter gross domestic product data are due on Friday. The Bloomberg consensus is for a 6% year-on-year contraction. Industrial-production data for March are also due and are expected to show a 7% contraction, while retail sales probably fell 10%. Fixed-asset investment is likely to slide 15% from a year earlier, according to economists surveyed by BloombergChina will release March trade data on Tuesday. It’s expected that both exports and imports will show a double-digit contraction. The following day, Indonesia and India will also release trade numbersMalaysia reports industrial production for February on Monday. It’s expected to rise slightly from January’s rate. The country on Friday announced that it will extend its lockdown period to April 28India’s inflation data for March, also due on Monday, may be incomplete. Field surveys were suspended during the second half of the month owing to coronavirus-related precautions. Even if there is a release, it’s unlikely to present a comprehensive picture, including whether or not prices spiked due to panic buying of essential goods. Investors are also expecting India’s shutdown to be extended beyond TuesdayThe Philippines will release remittance numbers on Wednesday. There’s concern that these numbers could contract sharply this year, partly due to the drop in energy prices hitting Middle Eastern economiesSouth Korea’s unemployment data will be released on Friday. The country’s central bank last week announced further measures to channel liquidity to the economy, expanding the range of bonds eligible for its open market operations and flagging outright purchases of government bondsRussia’s industrial production due Wednesday should show signs of stress in March, though the brunt of the impact from the pandemic is likely to hit the sector this monthColombian retail sales for February, to be published on Wednesday, may flag the effects of a lockdown. The peso has fallen more than 15% this yearInvestors are expecting Mexico’s international reserves data on Tuesday. Formal job creation figures may also provide clues on how the economy is faring. The peso is the third-worst emerging-market currency this year

Debt Discussions

Ecuadorian officials must persuade most of the country’s creditors to accept interest-payment delays by Friday, the current deadlineArgentina, meantime, is still working to present a renegotiated debt deal to bondholders. Inflation figures for March, released on Wednesday, will provide the first indication of the effects of the country’s lockdown.

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