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  • Emerging Markets Debt Daily

    Brazil - Bonanza Time!

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    September 09, 2019

    The announcement of an oil field auction in Brazil is good news for the budget and the currency. The past stimulus supports the recovery of China’s import levels.

    The apparent finalization of the pre-salt oil fields transfer of rights auction in Brazil may have significant implications for the currency and fiscal performance
    . If all goes according to plan, net fiscal revenue could be around 1% of gross domestic product (GDP) and potential FX inflows could exceed USD10B in 2019 alone. Another beneficiary could be the state oil company, Petrobras, as it would receive approximately USD9B for the transfer of its rights. Continuing the structural reform theme, we find it encouraging that the government keeps the privatization story alive—Minister of Economy Paulo Guedes just reaffirmed the intention to privatize all state-controlled companies. This is the only way for Brazil to lift its growth trajectory.

    Frets about tariffs? Yes. Growth collapse? No. This is our main takeaway from China’s latest trade numbers. The downside surprise in exports was small (-1% year-on-year), and the ongoing shift to ASEAN helped to mitigate lower exports to the U.S.. Imports continued to decline, but a bit less than expected (-5.6% year-on-year), and major commodity imports looked fairly robust. The import levels are also recovering (see chart below) on the back of the past stimulus. Complementing the “drip” stimulus with “blanket” measures—like last week’s 50bps cut in the reserve requirements—may speed up this process even more.

    Mexico’s 2020 budget proposal was described by some commentators as “investor-friendly”, but the draft raised a lot of questions. The primary surplus target was cut to 0.7% of GDP (from expected 1% in 2019), and some macro assumptions appear too rosy. One of them is that real GDP growth would recover from 0.6% in 2019 to 2% in 2020. Another one is that crude oil production would expand by 13% next year. So, while the market can take comfort in relatively subdued spending projections, the next year’s fiscal revenue rests on a shakier foundation.

    Chart at a Glance: China Import Levels Recovering

    China Import Levels Recovering

    Source: VanEck Research; 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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