RaboResearch - Economic Research

Emerging markets – US tapering has a big impact

Economic Update

  • US tapering is leading to portfolio outflows in emerging markets, especially in countries that are running both a current account and budget balance deficit.
  • Eastern European countries seem, for now, less vulnerable to US tapering given their current account surpluses and the end of recession in the euro area
  • Although Q2 economic growth figures were slightly disappointing, August’s PMI’s point at some improvement.

China – PMIs point to further strengthening

China’s manufacturing PMI’s in August suggest that the economic rebound has continued. The official PMI increased to a 16-month high of 51.0, from 50.3 in July and the HSBC/Markit PMI turned positive again, increasing markedly from 47.7 in July to 50.1 in August. The improvement was due to a better external environment, with the new export orders component rising above 50 for the first time since March. In addition, a strengthening of the domestic economy on the back of limited stimulus measures by the government is starting to have an effect. Is has thus become increasingly likely that growth will accelerate in Q3. However, afterwards, slower credit growth will start to take its toll on growth.  

Table 1: Overview real GDP growth
Table 1: Overview real GDP growthBron: Source: IMF July WEO update
Figure 2: China’s PMI
Figure 2: China’s PMISource: Reuters Ecowin

Indonesia – Fast response

On August 29, the central bank of Indonesia held an emergency meeting and announced, among others, a 50bps policy rate hike. The unusual meeting was triggered by the continued downward pressure on the rupiah and ongoing portfolio outflows. Even though the rate hike might not convince nervous investors to stay, the signal that the bank is willing and able to react swiftly to changing market conditions is valuable. Moreover, the rate hike could help to curb the current account deficit, as it tempers growth. Also, the decision to shorten the holding period of BI certificates, a popular investment instrument, could lure some investors back. Still, Indonesia is likely to remain in the hot seat for now.                        

Mexico – GDP growth in Q2 disappointing

Compared to the previous quarter, Mexico’s economy shrunk by 0.7% in Q2 (seasonally adjusted). The figure was disappointing as well as unexpected, as a forecast poll set up by Reuters expected a 0.2% expansion. The economic contraction was the result of stagnating export growth and lower government spending. As a result of the contraction, the government lowered its growth forecast for 2013 from 3.1% to 1.8%, whereby the second half of the year is expected to be better than the first half. The improvement is based on the assumption that the US economy will gain some momentum (80% of Mexico’s exports go to the US). In addition, an increase in government spending is underway.

Figure 3: Indonesia’s CB lifts policy rate
Figure 3: Indonesia’s CB lifts policy rateSource: Bloomberg
Figure 4: Economic growth of Mexico
Figure 4: Economic growth of MexicoSource: Bloomberg

Turkey – Struggling to defend the lira

The Turkish lira ranks among the worst-hit emerging market currencies amid expectations of reduced US monetary stimulus. To stop the depreciation of the lira the Turkey's Central Bank announced on August 21, daily auctions of USD 100m, as the 50bps hike of the overnight lending rate to 7.75% a day earlier, could not halt an ongoing slide of the lira. The marked increase in USD sales seems to reflect the central bank's reluctance to strongly raise interest rates ahead of next year's elections. However, the sales increase the pace of foreign exchange (FX) reserves depletion. Yet, given that Turkey has already spent 15% of its scarce FX reserves (based on the freely useable reserves), the room to continue to avoid major interest rate hikes is more and more limited. Especially given the fact that the daily auctions did not have the desired effect, as the Turkish lira has shown a further depreciation.

CEE - Less dependent on external financing

Benefitting from the end of recession the euro area, several Central and Eastern European countries managed to generate current account surpluses in Q2. The improvement was mainly driven by a strong rise in exports, as import growth remained weak at best. Poland's current account surplus came in at EUR 1.5bn, while Romania and crisis-stricken Slovenia reported surpluses of EUR 372m and EUR 685m, respectively. Latvia, Lithuania and the Czech Republic also had surpluses. Though no data is available yet, the same should also hold for Hungary and Slovakia. The lower dependency on external funding boosts the region's resilience in times of deteriorating external financing conditions.

Figure 5: Turkey’s FX-reserves under pressure
Figure 5: Turkey’s FX-reserves under pressureSource: Reuters Ecowin, Central Bank of Turkey
Figure 6: Current account surplus in CEE
Figure 6: Current account surplus in CEESource: Local central banks
Maarten van der Molen
Rabobank KEO
+31 30 21 62666

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