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  • Emerging Markets Debt Daily

    Brazil Growth Still Elusive

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 02, 2019

    A big bounce in Brazil’s yearly industrial production growth (up 7.1% in May) masked yet another broad-based sequential decline (18 out of 26 industrial sectors). The sharp year-on-year increase was due to a low base (disruptions caused by the truck drivers’ strike in 2018—see chart below). Brazil’s manufacturing has yet to reap the cyclical benefits of low interest rates and easier financial conditions. One of the reasons is uncertainty about the pension reform bill, which is currently waiting for congressional approval. However, there is also growing realization that the bill alone will not solve the low growth problem. Lifting potential output would require more structural adjustment in the form of tax and labor market reforms, but it remains to be seen whether the government has enough political capital left to get these changes approved.

    China’s announcement about an earlier removal of foreign ownership limits in the financial sector (in 2020) is the kind of response we would expect in the aftermath of weaker than expected activity surveys and an uptick in the borrowing costs for non-state owned enterprises (see our blog: China's Recovery on Edge. The gap between the funding costs for small and state-owned companies remains wide, as local banks are reluctant to lend to the private sector, weakening the monetary transmission mechanism. So, further liberalization of the financial sector is a welcome move.

    Turkey’s international bond announcement attracted a lot of attention this morning, with many observers raising a logical question about the use of proceeds (in light of the recent currency interventions). The news lifted the mood among bond-holders, but the lira was barely in the black at the time of this note, as the market is waiting for the release of June’s inflation figures tomorrow. The consensus is quite bullish—yearly headline inflation is expected to drop to 16.1% and core to 14.65%. These projections underpin the market expectation for sizable rate cuts, with 139bps of easing priced in for the next three months.

    Chart at a Glance

    Brazil Industrial Production

    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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