Cavalry effect

All along the rally since the first days of the coronavirus pandemic, the effect on emerging markets was limited, especially from a markets perspective. As the U.S.-outlined new fiscal plan boosts its economy, the effects on emerging markets via trade are likely to be limited as well. Market watchers doubt the Fed will move more quickly to reduce stimulus in response, and external financing conditions facing emerging markets should remain loose.

According to research by Capital Economics, the fiscal plan will end up being closer to $1 trillion, rather than the current proposal of $1.9 trillion. But even if the additional $900bn is approved, the impact on global economic growth is likely to be small and, correspondingly, it won’t significantly alter the outlook for emerging market exports.


We interpret the rise in U.S. Treasury and real yields as being benign for emerging market assets, as it appears to reflect optimism about growth and the effects of a larger U.S. fiscal stimulus. While rising U.S. real yields can cause adverse consequences for EMs, for example via longer-term asset allocation decisions – i.e. investors finding higher real yields in the U.S. may be less tempted to allocate capital into EMs – the reasons for these rises still matter for EM assets, in our view. Our colleagues have argued that the recent rise in U.S. real yields has been driven by fundamentals, related to positive COVID vaccination developments and a reassessment of the size of the fiscal stimulus in the U.S. Regarding the latter, they argue that the extra government spending, if spread over multiple years, is less likely to face supply-side constraints and be inflationary, and more likely to be growth-positive, which explains the move in real yields.

-Christian Keller, economist, Barclays, Feb. 25


The Central Bank of Turkey (CBRT) announced that it had raised the reserve requirement ratio (RRR) on lira deposits by 200bps for all maturities, effective February 19, while also hiking the interest rate it pays on TRY-denominated RRR by 150bps to an attractive 13.5%. Alongside this RRR hike, the CBRT also lowered the maximum amount banks are allowed to hold lira reserves in foreign currency. While the Central Bank had promised to tighten monetary policy further, if required, in view of high inflation, we doubt that this motive had anything to do with the move. Rather, the rise in global market interest rates in recent weeks has triggered a mild “taper tantrum”, which managed to reverse the lira’s recent rally. We view this latest (secondary) monetary tightening as a response to this threat on the exchange rate. When the CBRT reacts to lira weakness after the fact, the market is rarely satisfied. For this reason, we would not expect a change in the exchange rate trend because of the CBRT’s action – the lira’s trend will very much depend on how the external situation develops from here.

-Tatha Ghose, strategist, Commerzbank, Feb. 25

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