Eoin Treacy's view -
(2) Commodity exporters (top three EM in this group are Brazil, Russia and Indonesia): While USD appreciation was already resulting in an exogenous monetary tightening in these countries, a simultaneous downward trend in commodity prices and weakness in non-commodity exports hit these economies hard. Domestic demand in these economies has been impacted adversely since 2Q15, as reflected in the trend for real imports.
(3) Commodity importers (top three EM in this group are India, Korea and Turkey): Commodity importers in EM have also seen a slowdown in exports but their domestic demand has seen a positive offset in the form of the terms of trade, which has also helped to improve their current account balance. Lower inflation has encouraged the central banks to ease monetary policy even as the dollar has been rising.
Advanced Stage of Adjustment, EM Drag to Decline
While we think the EM adjustment is not yet complete, we expect the EM drag on global growth to reduce as all three factors – terms of trade, real rates needed in response to the rise of the dollar and unwinding of domestic misallocation – will become less onerous. Particularly on the issue of real interest rates, the top ten EM excluding China have now lifted their real interest rates about 270bp higher than US real rates. With real rates remaining high as EM continues on the adjustment path, a number of them, though not all, are likely to see improvement in macro stability indicators including their current account balances and inflation. Indeed, we expect more EM central banks to cut policy rates, though still on a selective basis, in 2016.
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2015 has already seen some major declines in emerging market currencies with a number of Asian currencies testing their Asian Financial Crisis lows while commodity related currencies are also testing historic lows. A crisis needs to be seen to be getting worse for it to continue to have such a marked effect on prices. Rather than focus on the extent of the problem, the better question at this stage is to ask how much worse is it likely to get?
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