Morgan Stanley: Here&#39;s Your Guide To Where Inflation Is Threatening To Destroy Emerging Markets

Ultra-easy monetary policy in developed markets like the U.S., Europe, and Japan have increased inflationary pressures across the developing world, but when it comes to inflation risk, you can't paint all emerging markets with the same brush says Morgan Stanley.

Some are facing serious inflation threats, such as in China or Indonesia. Others are just cruising so far despite global liquidity, such as in Malaysia or Thailand:

Morgan Stanley's Manoj Pradhan:

Is inflation a problem? The EM world appears to be split fairly evenly on this issue (see Exhibit 1). Inflation is already a concern in many AXJ economies, notably in India, where the central bank has raised rates by 150bp in 2010 to ward off inflation. To a lesser extent, other AXJ economies (with the exception of Taiwan, Thailand and Malaysia) are wary of inflation and central banks have moved to take policy rates off the low levels that were in place during the Great Recession. The exception to this rule is Indonesia, where inflation risk is moderate but relatively higher than the rest of the AXJ region. Outside the AXJ region, the economies of Brazil and Peru in Latin America and Poland, Hungary and Romania in the CEEMEA region are grappling with an inflation problem as well.

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Drilling down into nations facing inflation problems, there are also different drivers. Brazilian inflation is fueled by robust domestic demand, ie. is the 'better' kind of inflation (demand-pull inflation). China however is fraught with the worst kind of inflation, that driven by rising costs (cost-push inflation).

And indeed, food inflation appears to be the main driver (or the joint main driver) of inflation in a large number of EM economies (see Exhibit 2). The big risk, naturally, is one of second-round effects of food price inflation on core inflation. This is particularly true where food inflation is high, domestic demand is strong but domestic demand-led core inflation has not yet picked up. The ideal example in this category is Indonesia, where food inflation has been a problem for a while and where domestic demand has been strong as well. The risk of a pass-through from food to more general inflation is therefore a worry. Turkey shares similar concerns but food prices are expected to normalise there, cutting down the risk of a pass-through into more general inflation.

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