Emerging Market Central Banks Beat Richer Rivals to Divergence

By Simon Kennedy

Photographer: Getty Images

Just as central banks in the developed world show signs of diverging after years of embracing stimulus, monetary authorities in emerging markets are taking differing approaches as inflation varies.
Throw in gyrating currencies coupled with tumbling commodity prices and the result is that such economies should no longer be traded -- or treated -- as a single bloc as they were in the wake of the financial crisis.
The one-direction approach fell apart in mid-2013 as investors began to fret about the upcoming withdrawal of stimulus in the U.S. and punished those economies with large debts or current-account imbalances. Now a split in policy is under way. Russia and Brazil both raised benchmark rates last month. Poland, Chile and Romania cut in recent weeks. India and Turkey are standing pat for now.
“Divergence in economic performance across emerging markets remains a
key theme,” Credit Suisse Group AG analysts said in a Nov. 7 report in which they cut their forecast for 2015 growth in such economies to 4.6 percent from 4.9 percent.
Negative and below-target inflation in eastern Europe explains the different outlooks. By contrast, price gains are running closer to 10 percent and above goals in Turkey, Russia, Brazil and South Africa.
Much of what happens next depends on commodity prices. Cheaper raw materials should cut aggregate emerging-market inflation, excluding China and India, by a percentage point to 6.6 percent by the end of 2015, according to Credit Suisse.

Commodity Importers

The beneficiaries are commodity importers or those whose currencies have held up. The list includes South Korea, Taiwan, the Philippines and eastern Europe economies as well as perhaps Turkey and South Africa.
The resulting weaker inflation should allow “central banks to delay rate hikes, or, at the margin, ease policy,” said the Credit Suisse team. “This is especially true for the higher-inflation economies such as Turkey but also South Africa.”
On the flip side, Russia always suffers from falling oil prices. Also, Mexico, Indonesia, Brazil and Venezuela have energy prices that are either regulated or their currencies have dropped in line with commodities.
Unlike the developed world where stimulus is still at the center of policy debates even as the U.S. Federal Reserve ceases quantitative easing, in the emerging nations it is those raising rates which have the upper hand.
Economists at JPMorgan Chase & Co. predict that in the next six months the average emerging-market interest rate will rise by about another 35 basis points in addition to the 100 basis-point gain between the middle of 2013 and the first quarter of this year. The average rate is now 6.16 percent.
“This new round of tightening will likely weigh further on emerging market growth, which already was forecast to remain stuck below trend,” they said.