Emerging Markets: What has Changed

(from my colleagues Dr. Win Thin and Ilan Solot)

1. India surprises with tightening

2. Philippines announced a new infrastructure push while India improves FDI rules

3. Mexico announced big infrastructure plans

4. Talk of more stimulus measures in China is surfacing again, but not large scale

5. Turkish central bank signalled an adjustment to the rates corridor is likely

1. India surprises with tightening. The government delivered a 200 bp increase in the marginal lending facility to 10.25%. The bank also withdrew INR120 bln of liquidity from the money markets. This measure is directly intended to support the INR (by raising the cost of being short INR) while at the same time avoiding having to burn too much of their FX reserves. Still, tighter liquidly to support the currency will also threaten to further undermine the already weakening economy and maybe discourage debt inflows further. As always, it will be a fine balancing act in India.

2. Philippines announced a new infrastructure push while India improves FDI rules. The plan is to spend a record PHP400 bln ($8 bln) in 2014, taking infrastructure spending to around 3.0% of GDP, compared with 2.5% this year. For 2015, the plan is to reach 4.1% of GDP, then 5.0% in 2016. Meanwhile, the Indian government approved plans to further relax FDI rules for several industries, including telecommunications and defense. 

3. Mexico announced big infrastructure plans. Spending will be worth $316 bln between now and 2018, including investment from the private sector. That’s 1/3 of Mexico’s GDP. The idea behind the initiative is to boost competitiveness and to support growth. There are not that many countries in a position to conduct counter-cyclical fiscal policy at this stage of the game, but Mexico is well-placed, with the 2013 budget deficit expected to come in just above 2.0% of GDP this year.

4. Talk of more stimulus measures in China is surfacing again, but not large scale. Local reports suggest that a new round of economic reforms could be in the pipeline, including changes to the fiscal and tax regimes, as well as reforms in the financial and energy sector. On top of this, the Commerce Ministry stated that measures to support export and import companies will be coming out soon. But overnight, the Ministry of Finance curbed expectations for any large scale action. 

5. Turkish central bank signalled that an adjustment to the rates corridor is likely. “A measured step to widen the interest rate corridor will be on the agenda of the next Monetary Policy Committee meeting on July 23,” Governor Erdem Basci said in a statement on the central bank’s website this week. It's too early to declare victory, especially as Turkish fundamentals are still deteriorating, but at least policymakers have injected more two-way risk now.