Emerging Markets Weekly Economic Briefing Divergence in emergers monetary policy This year economic activity across the emergers has been subdued but inflation has generally remained moderate, allowing many countries to loosen policy. But in some countries policy has been much more constrained and the constraints have grown in recent months. Currencies have generally depreciated, particularly in those countries that rely on external financing to fund a sizeable current account deficit. In several countries this has added to existing inflation pressures. In this article we look at the factors influencing monetary policy choices in the emergers. The policy dilemma in Brazil is particularly stark, with high inflation demanding tighter policy despite a prolonged period of weak economic activity. In Turkey and Indonesia, falling exchange rates are exacerbating existing inflation pressures and policy is already being tightened. In India, until the currency plunged in May we had expected further policy easing but sustained currency weakness and rising inflation have now forced the central bank to tighten monetary conditions. By contrast, some of the major emergers still have scope to ease policy if growth disappoints in H; indeed, we expect Russia to start cutting rates in the coming months. Meanwhile, China has tightened monetary policy modestly in recent months but this action has been prompted by considerations of long-term financial stability (to dampen shadow banking) rather than by any fears of inflation. Emerging Markets: Monetary Policy and Inflation Policy Rate Latest Date Changed Recent cycle Highest Lowest Interest rate Interest rate Direction of latest monetary conditions Inflation month average Currency vs US$ Latest % change over months to 1 Aug China. Dec-1. 1..3.7 3.9 India 7. May-13 9..7 1. 9. -9.3 Indonesia. Jul-13.7.7.3. -7.9 Korea. May-13..? 1. 1. 1.1 Malaysia 3. May-11 3..? 1. 1. -.9 Philippines 3. Oct- 7. 3.? 3.1. -. Thailand. May-13. 1.?...7 Brazil. Jul-13. 7...3 -. Chile. Jan-..? 1.9. -.1 Mexico. Mar-13..?.1 3. 3. South Africa. Jul- 13.... -17.9 Czech Rep. Nov-.7.. 1. -3. ** Hungary. Jul-13 11.. 3.7 1. -.7 ** Poland. Jul-13.. 1.9 1.1 -.9 ** Russia. Sep- 13. 7.7?.. -7.3 * Turkey. Apr-13 7.. 7..9-1.** * vs basket, ** vs Euro 1 August 13
The policy dilemma is especially awkward in Brazil, so growth will stay low for longer In recent months, the Brazilian central bank has raised the key Selic interest rate to.% as inflation breached the.% upper target in March and has remained high since then. In addition, the currency fell sharply against the US$ in May and June and remains % lower than a year earlier, pressured by the current account deficit widening to over US$bn this year. The weak currency will exacerbate the inflation pressures. And while the authorities would like to see faster growth (after two years of disappointingly sluggish activity), they cannot ignore inflation given the country s hyperinflationary history and the particularly marked impact it has on squeezing real incomes of the poor (which might lead to further bouts of social unrest). As a result, we expect further rate hikes, taking Selic to 9.7% by the end of the year. This should gradually bring inflation under control and support the currency, but it will also mean another year of modest growth. We now expect the Brazilian economy to grow by just.3% in 1. High inflation has also prompted tighter policy in Indonesia By contrast, in Indonesia economic activity has reasonable momentum. In an effort to combat higher inflation expectations triggered by fuel prices rising a third (CPI inflation rose to.% in July after subsidies were cut), Bank Indonesia has increased the key interest rate by 7bp in recent months. Inflation pressures have also been exacerbated by a weakening currency, as the IDR has fallen % over the past twelve months, undermined by the country running a small current account deficit for the first time since the 199s (which has made the economy more vulnerable to swings in global sentiment). In addition to the rises in interest rates, the authorities have intervened very heavily in the foreign exchange market, running down their reserves to limit the fall in the IDR (reserves in July fell to US$9.7bn, down US$bn from end-). On balance we expect the bank to now leave interest rates on hold in the coming months and only tighten further when the global economy is much stronger in mid-1. We forecast that inflation will fall back to % or so next year once the fuel price hike drops out of the annual comparison, while GDP growth should be dampened only modestly by these developments, moderating to a -% pace. Brazil: CPI measures & Selic interest rate 1 1 1 1 CPI ex regulated prices & food & drink Headline CPI Selic interest rate 7 9 1 11 13 / Oxford Economics Indonesia: Interest rates & CPI inflation % 1 Policy interest rate 1 1 1 CPI inflation 1 3 7 9 11 13 Source: Bank Indonesia 1 August 13
Currency weakness exacerbating inflation risks, forcing reversal in policy in Turkey Turkey s domestic economy gathered momentum in H1 13, sucking in more imports and widening the country s large current account deficit again. But having been one of the favourite destinations for overseas money in the months to early May, sentiment towards Turkey changed quite dramatically when global markets began to worry about the likelihood of QE starting to be reduced in the US. The disruption to Turkey relative to other leading emergers was magnified by a sharp increase in domestic political tensions occurring at the same time. Against this background, the currency has dropped significantly. This has exacerbated inflation pressures, which were already elevated due to surging domestic food prices, and CPI inflation rose to.9% in July. In response to this combination of adverse developments, the central bank has had no choice but to reverse policy and tighten monetary conditions significantly. Although it has not yet raised the main policy interest rate, it has tightened liquidity conditions so that 3- month interbank rates have risen to more than 7.7% from under % in early May (feeding into higher bank lending rates). At the moment we do not anticipate that market interest rates will rise much further, and therefore expect only a comparatively brief period of subdued growth, but renewed global tensions could result in further currency weakness and higher interest rates, with dangerous consequences for the economy. Turkey: Interest rates and inflation % 1 1 Average bank lending rate India: Interest rates and wholesale prices 1 1 Mumbai 3-month offered rate 1 1-week interbank rate Repo rate 9 3 "Core" inflation Wholesale prices (WPI) inflation 7 9 1 11 13 / Oxford Economics - 7 9 1 11 13 Source: Oxford Economics and also in India, increasing the risks to growth Until the rupee began to slide in May, we had expected the Indian central bank would follow its bp rate cuts in January, March and May with more easing to support activity. But while growth remains disappointingly modest, the currency dropped sharply in May and June, exacerbating already high inflation risks (wholesale price inflation rose to.% in July, while CPI inflation is still close to 1%). The rupee is now 1% lower than a year earlier against the US$, which given the importance of financing the current account deficit (% of GDP last year or over US$9bn) and the impact of rising oil import costs, has altered the central bank s priorities. In July the central bank kept its main official rate (the repo rate) unchanged but raised others (with the consequence that 3-month interbank rates have jumped nearly bp) forced to tighten actual monetary conditions to maintain India s attractiveness as a destination for foreign inflows. But despite this latest development, provided markets stabilise in the coming months we expect the bank will 1 August 13
resume its policy of cutting rates to support the real economy in Q 13. But clearly there is a significant risk that the rupee will remain fragile, removing the bank s room for manoeuvre. And if policy remains tighter for longer, our forecast of stronger % GDP growth next year, up from % in 13, may be too optimistic. China: 3-month SHIBOR rate South Africa: Exchange rate % Index v US$ (Dec 3, 1 = 1) 7 1 3 1 7 9 1 11 13 1 9 9 7 7 depreciation Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 China tightened policy modestly mid-year, but for long-term financial stability reasons In China, growth is modest by historical standards and inflation remained moderate at.7% in July. But although the combination of low inflation and more subdued economic activity would seem to justify a continued loose policy, effective monetary conditions have actually tightened in recent months. Having surged to.% in late June, the 3-month SHIBOR rate has subsequently fallen back to.7%, but this is noticeably higher than May s level of 3.9%. But unlike Brazil and India, whose recent monetary policy actions are essentially responses to short-term concerns about inflation and the exchange rate, China s recent policy adjustment reflects the authorities determination to ensure financial stability for the longer term and to ensure that the economy does not become excessively dependent on cheap credit (by clearly indicating that it wants to dampen the expansion of the shadow banking sector). Weak ZAR means that South Africa s central bank is boxed in In South Africa, although growth is weak, inflation is relatively high (just within the target range ceiling), its currency has depreciated the most of all the major emergers over the last months (down almost 1% against the US$) and its current account deficit is set to exceed % of GDP again this year. As a result, the central bank is boxed in it does not want to raise interest rates to support the currency as this might lead to even weaker growth, but nor can it cut interest rates further, as this might spark a completely uncontrolled fall in the currency, which in turn would lead to rapidly accelerating inflation and a sharp erosion of consumers purchasing power. But Hungary and Poland have loosened monetary policy substantially this year By contrast, some emerger central banks have been in a position this year to move more aggressively than expected on interest rates to support their real economies, as inflation has fallen sharply and their exchange rates have not fallen too dramatically. In Hungary, headline CPI inflation has fallen from % at the end of last year to 1.% in July. This, together with a more 1 August 13
aggressive policy approach after a change of personnel, has led to the central bank there cutting rates from 7% in August last year to % currently, and we expect another bp of cuts in the next few months. Meanwhile, since November the National Bank of Poland has cut its main policy rate from.7% to.% (headline inflation has dropped from.% in December to.% in June and 1.1% in July). We now expect rates to be left on hold as, after a period of disappointingly weak growth, we anticipate that the policy easing of the past year and the Eurozone moving out of recession will induce a gradual improvement in the real economy; however, should the latter not materialise, then further rate cuts are likely. Central & Eastern Europe: Consumer prices Emerging Europe: Policy interest rates % 1 1 Russia 1 1 Russia 1 1 Hungary Poland Czech - 3 7 9 1 11 13 9 Hungary Poland 3 Czech 3 7 9 1 11 13 Russia is also expected to cut rates in the coming months to boost activity Economic activity has been disappointing in Russia this year; we are now forecasting GDP growth of.% this year, down from 3.7% expected in January. Moreover, inflation has started to fall in recent months and this disinflationary trend should continue in H due to the strength of this year s harvest (we expect the headline rate to be under % in early 1, down from July s.%). Against this background, we think the stage is set for a concerted monetary easing cycle, with the refinancing rate falling by bp to 7% by end-1. The one factor that may impede this easing is the performance of the rouble, which has slipped over the last year despite relatively firm oil prices. and a number of other emergers have scope to loosen policy if activity disappoints In Korea, Thailand, Chile and Mexico, inflation is moderate and their currencies have not weakened that significantly against the US$ over the last year. In these countries, economic activity was generally quite subdued in H1 13 and we forecast a modest pick-up in H 13. But if the recovery is weaker than anticipated, these countries have room to ease policy. Korea and Thailand cut rates in Q but Mexico is perhaps more likely to cut rates again in H 13 (having cut in March). Mexican CPI inflation eased to 3.% in July, falling within the -% target range for the first time since February and industrial activity and retail sales have stagnated this year. We also think there is a high chance that Chile will cut its policy rate (currently %) in response to low inflation (around %) and the ongoing uncertainty about the health of the global economy, though as domestic demand is fairly robust we only expect one bp cut. 1 August 13
Latest data Recent Data Releases Previous month Latest Comment Brazil Retail sales vol. (s. adj.) (Jun) Economic Activity (s. adj) (Jun).% m/m.% y/y -1.% m/m.% y/y.% m/m.% y/y 1.1% m/m 3.% y/y The monthly indicator of economic activity rebounded in June, but in Q as a whole was up just.9%, slower than Q1 s rise of 1.1%. Retail sales also rose on the quarter but only modestly compared with trend of recent years. Russia Exports (Jun) - Imports (Jun) - Trade balance (m total) -.9% y/y -.% y/y $17.7bn (May) 1.% y/y 3.% y/y $17.bn (Jun) The trade surplus may fall faster in H and 1 if domestic demand and imports start to pick up again. India Industrial Output (Jun) Wholesale prices (Jul) Food prices (Jul) Consumer Prices (Jul) Exports (Jul) - Trade balance (m total) -.9% y/y.9% y/y.% y/y 9.9% y/y -.% y/y -$.bn -.% y/y.% y/y 9.% y/y 9.% y/y 11.% y/y -$199.3bn Industrial output fell y/y for a second successive month in June and the outlook remains weak as the July manufacturing PMI fell to its lowest in more than four years. The weaker currency is putting pressure on prices and wholesale prices picked up in July. More encouragingly, exports rose strongly in July. Korea Unemployment (Jul) Employment (Jul) 3.% (seas. adj.) 1.% y/y 3.% 1.% y/y Employment continues to increase at a solid pace suggesting steady growth in services. Mexico Ind. Output (Jun, s. adj.) 1.1% m/m.3% y/y.% m/m -1.% y/y Although overall industry was flat in June, manufacturing did rise on the month but its trend so far this year has been subdued. Turkey Ind. Output (Jun, s. adj.) Current account (m total) -.7% m/m.% y/y -$3.bn (May) 1.% m/m.3% y/y -$3.bn (Jun) Industrial output increased by 1.3% on the quarter in Q despite weaker export volumes, suggesting strengthening domestic demand. The latter has led to a widening current account deficit but fast growth in exports of services is providing some offset. S. Africa Retail sales vol. (Jun, s. adj.).1% m/m.3% y/y.% m/m 3.% y/y Retail sales were up 1% on the quarter in Q. The consumer remains key driver of economy. Singapore GDP (Q, s. adj) Consumer spending (Q) Export Volumes (Q) Fixed Investment (Q).% q/q.1% y/y 1.3% y/y -.1% y/y -.% y/y 3.7% q/q 3.7% y/y.7% y/y 3.1% y/y -3.% y/y The economy rebounded in Q, with both manufacturing and services growing strongly. The Ministry of Trade and Industry upgraded its forecast for GDP growth this year to 3.% from.%. But machinery investment continued to fall significantly, reflecting global uncertainty. Poland GDP (Q, s. adj) Exports (Jun) (EUR).1% q/q.% y/y.1% y/y.% q/q 1.1% y/y 7.1% y/y Some improvement in growth, helped by end to Eurozone recession. Boost from interest rate cuts should lead to faster q/q growth in 1. Czech GDP (Q, seas. adj.) -.% q/q -1.9% y/y.7% q/q -1.% y/y The economy grew in Q for the first time in nearly two years. Hungary GDP (Q, s. adj.).% q/q -.% y/y.1% q/q.% y/y Advance estimates suggest the economy struggled to make any headway in Q. 1 August 13
Events Monetary policy meetings in past week Key rate (now) Outcome Comment August 1 th - Indonesia.% (Policy rate) Unchanged Bank Indonesia left the key interest rate on hold as expected but took a number of measures to try to curb credit growth and stop inflation expectations increasing. The bank cut the ceiling on the loan-todeposit ratios of commercial banks to 9% from 1% and said it plans to increase the secondary minimum reserve requirement for rupiah deposits from.% to %. Aug 1th - Chile.% (Policy rate) Unchanged The central bank has not changed interest rates for 19 months now. However, we expect the main policy rate to be cut to.7% next month. With inflation (.% in July) still well below the 3% target and likely to fall below % again later this year (inflation ex food and energy was under 1% in July), the central bank has scope to bolster the economy in the face of a subdued external outlook. Domestic activity remains reasonable so we expect the loosening to be limited to one cut. Aug 9 th - Russia.% (Refinancing rate) Unchanged The central bank left the interest rate on hold, suggesting that it will wait until inflation drops below % before easing rates. Inflation slowed to.% in July and will fall below % within the next few months (influenced by a good harvest). As a result, we think the bank will start lowering rates soon although it will have to keep an eye on the rouble, which has weakened over the last couple of months. For more information contact Clare Howarth (chowarth@oxfordeconomics.com) or Sarah Fowler (sfowler@oxfordeconomics.com) 1 August 13
Asia China: Industrial output & retail sales volumes Industrial 1 output 1 1 1 Retail sales 3 month moving average 1 3 7 9 11 13 Source: CEIC Emerging Markets: Industrial output =1 (seasonally adjusted) 17 1 1 1 13 11 1 9 Emerging Europe ex Russia (inc. Turkey) East Asia ex China Latin America India 7 1 / Oxford Economics Asia: Manufacturing producer prices 1 Korea: Employment Korea producer prices 3 - China 1-1 - 1-1 3 7 9 11 13 Source: Korea National Statistics Office South East Asia: Real GDP 1 Malaysia 1 Singapore Hong Kong: Components of GDP % quarter Exports of services - -1-1 Indonesia - 199 1997 1999 1 3 7 9 11 13 - Consumer spending GDP - 7 9 1 11 13 1 August 13
Asia Emergers: Exchange rates v US$ Emergers: Exchange rates v US$ Index (Dec 3, 1 = 1) Index (Dec 3, 1 = 1) 1 11 China appreciation 1 1 Singapore Philippines 1 Korea 1 Malaysia 9 1 9 Indonesia appreciation 1 India 9 7 9 Thailand 7 9 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Emerging Asia: Short-term interest rates % 1 9 India 7 China Korea 3 Thailand 1 1 3 7 9 11 13 India: WPI inflation 1 1 1 9 3 Non-food manufacturing products (core) Total Food -3 7 9 1 11 13 Source: Oxford Economics India: Exports & imports 7 Imports 3 1 Exports -1 - -3 3 month moving average - 1997 1999 1 3 7 9 11 13 Source: India Ministry of Commerce India: Manufacturing & electricity output (3 month average) Manufacturing 1 1 Electricity - -1 7 9 1 11 13 Source: Oxford Economics 1 August 13
Latin America Brazil: Monthly economic activity indicator % 1 1 - -1-1 - - Year-on-year growth 3 month annualised growth -3 7 9 1 11 13 Brazil: Industrial output & retail sales volumes 7=1 (seasonally adjusted) 1 1 1 13 11 1 9 Retail sales Industrial output 7 1 Source: IBGE Mexico: Real economy indicators 3=1 (seasonally adjusted) 13 13 11 11 1 1 9 9 Construction Manufacturing output 1 / Oxford Economics Latin America: Consumer prices Colombia Brazil 1 Mexico Chile - 1997 1999 1 3 7 9 11 13 Latin America: Trade balance US$ bn Brazil Emergers: Exchange rates v US$ Index (Dec 3,1 = 1) 11 3 1 Argentina Chile 1 1 9 9 Argentina Brazil Chile Mexico -1 Mexico month total - 1997 1999 1 3 7 9 11 13 7 depreciation 7 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 1 August 13
Emerging Europe CEE: Real GDP (seasonally adjusted) Central & Eastern Europe: Goods' exports Q1=1 11 Poland 11 3 Czech Poland 1 1 Hungary Czech 1 9 9-1 Germany Romania 7 9 1 11 13 / Oxford Economics - 3 month moving average (in EUR terms) Slovak -3 7 9 1 11 13 Russia: Industrial output Manufacturing 1 1 - Mining -1-1 - - -3 3 7 9 1 11 13 Russia: Credit growth 1 Personal rouble loans Corporate rouble loans - 7 9 1 11 13 Central & Eastern Europe: Trade balance US$ bn US$ bn month total 1 Hungary 1 Czech 1 1-1 1 - Russia (RHS) -3 Poland - 1 3 7 9 11 13 Central & Eastern Europe: Consumer prices 3 Romania Latvia 1 Bulgaria 1 Lithuania Estonia - 1 3 7 9 11 13 1 August 13
Rest of the world & financial developments Turkey: Industrial output Turkey: Exports (US$) 1=1 (seasonally adjusted) 11 11 1 1 3 1 Turkey (goods) 9 9-1 -3 Turkey (services) 7 9 1 11 13-3 month moving average - 1 3 7 9 11 13 South Africa: Industrial output & Retail Sales 1 Retail sales volumes 1 Emergers: Exchange rates Index (Dec 3, 1 = 1) 1 1 9 9 Turkey (v Euro) - Manufacturing output -1-1 3 month moving average - 1997 1999 1 3 7 9 11 13 7 S. Africa (v US$) 7 depreciation Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Emergers: 1 year government bond yields % 13 Brazil 11 1 Turkey 9 South Africa 7 Poland 3 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Emergers: Equity markets Index (Dec 3, 1 = 1) 1 13 US S&P 11 1 9 Emergers (MSCI, US$) 7 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 1 August 13
Industrial Production Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland Jul 9. -3.9 -. -.1. 3. 3.3 -.. Aug.9-1.9 -.. 3..1. 1.3 1. Sep 9. -.7-1. -. 3.. 3.. -1. Oct 9. 1.1 -.7.3. 1....7 Nov 1.1 -.9. -1. 3.1 1.9.. -1.7 Dec 1.3-1.7.1 -.. 1. -1.3.3 -. 13 Jan 9.9 3.... -.. 1. -.3 Feb 9.9 -.7-1.. 1.1 -.1 3.9.3 -.3 Mar.9 1. -1. 3... 1.3-1.7. Apr 9.3 3. -1. 1.9 -.1.3 3.3-1. -. May 9. 1.9 -.7 -.9.3-1.. -1. -.9 Jun.9. -1.3 -. -1..1.3 1.. Jul 9.7 - - - - -.7 - - - Consumer prices Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland Jul 1.. 1. 9.9.. 9.1.. Aug.. 1. 1...9.9 3. 3. Sep 1.9.3. 9.7.. 9. 3. 3. Oct 1.7..1 9... 7..3 3. Nov.. 1. 9.9... 1.. Dec.. 1. 1. 3... 1.. 13 Jan.. 1. 1. 3.3 7.1 7.3 1.1 1.7 Feb 3..3 1. 1.9 3. 7.3 7. 3. 1.3 Mar.1. 1.3 1..3 7. 7.3 1. 1. Apr.. 1. 9.. 7..1 1.. May.1. 1. 9.3. 7...7. Jun.7.7 1. 9.9.1.9.3.. Jul.7.3 1. 9. 3...9.1 1.1 1 August 13
Exports (US dollars) Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland Jul 1. -. -. -. 3.1 -.. -11. -. Aug.7-1. -. -9.7. -.. -. -9. Sep 9.9-1.1 -. -1... 19. 1.3 -.1 Oct 11. -1.7 1. -1...9 19.7-1.9 11. Nov.9 -. 3. -..3 -. 13.. 3.3 Dec 1. -1. -. -1.9.1 -...9 -. 13 Jan. -1.1 1.9. -.7-1. 7. 1. 9. Feb 1.7-13. -.. -.9 -. 7.9-1.. Mar 1. -7.. 7. 1. -.. 3. -3. Apr 1.7.. 1.7 -. -. -3. -1.9 11. May 1. -. 3. -1.1 1. -.9..7 3. Jun -3.1 9. -1. -.. 1. -3.1.. Jul.1 -.9.7 11. - - - 1. - Imports (US dollars) Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland Jul. -.1 -. -1.1. 1. -. -3.3-11. Aug -. -13.9-9.7 -.1. 1. -.3-7.9-1. Sep. -13.7 -.1.1.1. -.3 1. -. Oct.3 1.7 1. 7... -.3-1. 3.3 Nov. -..9..7. 1..1-1.1 Dec.1 -. -.3.3.3.3. 1. -.3 13 Jan 9. 1.7 3.9.1.7 13.3...1 Feb -1. 3.1-1.7..7 7. 1. -. -.7 Mar 1. 1. -1.9 -.9...9. -3. Apr 1. 1.7 -.3 11.. 11.3 1.7 -..9 May -.3. -. 7.. -. 7.9 -. -3. Jun -.7 1. -. -..3 3.... Jul 1.9. 3. -. - - - -7. - 1 August 13