Page 46 - bne magazine July 2022_20220704

46 I Special Report bne July 2022
the 2013 “taper tantrum.” Higher-debt countries are getting hit even harder. Italy’s real 10-year yield has risen from -0.7% at the end of 2021 to 1.8% now, a very sharp – if orderly – repricing.”
Rising interest rates in the developed markets are bad news for emerging markets as this typically sucks money out of them as capital seeks the safer havens of advanced economies that begin to pay more attractive returns.
“Interest rate shocks therefore historically have generated outflows from EM and this is indeed what we are seeing,” Brookes said. “Our high frequency tracking of non-resident portfolio flows across some of the biggest emerging markets is seeing outflows that are comparable in scale to the 2015/6 RMB devaluation scare, with outflows concentrated on non- China EM. Meanwhile, flows to China have resumed so far this quarter,
though they are weaker than in the past, something that dates back to the start of the war in Ukraine.”
The leading emerging markets has bought themselves some protection, as they were quick to spot the inflation problem and started rate hikes early. The first to move was Ukraine with a reversal of its easing policy in March 2021 with a 50bp hike, after a series of sharp cuts as the economy began to grow in 2019.
The Central Bank of Russia (CBR) followed a few weeks later with a
25bp hike also in March – the first since 2018. CBR Governor Elvia Nabiullina began to warn that inflation was persistent and a bigger problem than most central bankers believed and began a string of increasingly aggressive hikes to head the problem off. Before the war in Ukraine knocked Russia’s economy sideways, she was
widely seen as having successfully contained inflation and had halted
the tightening cycle, as inflation was expected to start falling again. In general, the EM central banks have been well ahead of the tightening curve, whereas the DMs are behind the curve.
“Indeed, the normalisation in longer- term real rates is something that is mostly a story for advanced economies, while longer-term real yields – in
much of EM – normalised in 2021,” says Brooke. “Of course, there are exceptions. Emerging markets where inflation is running well ahead of monetary policy have real rates that are deeply negative. Those EMs now face increasing challenges and will likely experience further – perhaps substantial – depreciation. However, we see such countries as idiosyncratic and not emblematic of a broader vulnerability across EM.”
of the pain the bottom third of
society feels during a crisis. It is
based on the “misery index”, which is simply the addition of inflation and unemployment: in a crashing economy both these indicators go shooting up, but disproportionately affect the poor, so the index is a convenient shorthand way of quantifying the amount of pain the man in the street is suffering from.
To the misery index bne IntelliNews added poverty to better capture the pain in developing markets; few developing markets have a functioning social safety net and so poverty adds another dimension to the suffering of the underprivileged in times of crisis.
An ideal despair index should score below a value of ten if residual indicators are taken into account: inflation (2%) + residual unemployment (4%) + poverty (0%). Unfortunately, while 2% inflation and 4% unemployment are regularly reported, no countries have ever managed to eradicate poverty, which runs at least 12% in the developed world and averages in the mid-teens or above in most developing countries.
Turkey’s despair rating score is worse than war-torn Ukraine’s
bne IntelliNews
Turkey is in a full-blown crisis and has an extremely high despair index of 93.8, even worse than that of sanction-embattled Russia’s 42.5 in May. But that is only if you believe the official statistics. Independent economists estimate that the real rate
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of inflation is closer to 150%, which would send Turkey’s despair index to 170.3. That is even worse than war-torn Ukraine’s 115.3, as the chart shows.
bne IntelliNews invented the despair index several years ago as an indicator