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  • Emerging Markets Debt Daily

    Brazil: A Pro-Growth Samba Beat

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    September 26, 2019

    The Brazilian government and congress reached an agreement on pro-growth reforms. Mexico’s weak domestic activity points to a deeper rate-cutting cycle.

    The pro-growth drumbeat in Brazil is getting stronger and stronger. This morning’s headlines suggest that the government and the congress reached an agreement to speed up tax and administrative reforms. The two sides also signed a deal guaranteeing the pre-salt oil fields transfer of rights auction, which is expected to bring in more than USD10B of inflows before the year-end. This means that the privatization story stays very much alive. The market may have finally realized that the pro-growth reform momentum is real, which helps to explain why the currency is feeling better this morning.

    Mexico’s domestic activity disappointed again in July, expanding by a mere 0.33% in year-on-year terms. The central bank is expected to deliver a 25bps rate cut this afternoon, and the market sees at least 150bps more in the next 12 months. Weak forward-looking indicators—the manufacturing Purchasing Managers' Index stayed in contraction zone for the past three months (see chart below)—and a lack of obvious positive growth catalysts give credence to this outlook.

    The Philippine central bank (BSP) continues to reverse the last year’s tightening. The key rate was lowered by 25bps to 4% earlier today, with the BSP arguing that the improved inflation outlook gave room for additional policy stimulus. The latest indicators, however, suggest that the growth momentum is picking up again, which explains why the BSP wants to be more data dependent going forward.

    Chart at a Glance: Mexico’s Downward Sloping Growth Trajectory

    Mexico Manufacturing PMI

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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