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  • Emerging Markets Debt Daily

    Brazil – New Wave of Fiscal Concerns

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    September 29, 2020

    Concerns about Brazil’s fiscal discipline are back. South Africa’s unexpected drop in unemployment was due solely to COVID-related disruptions.

    When the market asks a question, the consequences for asset prices can be quite dramatic. Just look at what happened to Brazil’s local rates yesterday (see chart below). The market questioned the government’s ability to provide a reliable source of financing for its new social program called “Renda Cidadã1”—without blowing its medium-term fiscal targets. President Jair Bolsonaro reaffirmed his commitment to fiscal discipline in his latest remarks, but the market (and some local politicians) wants something more concrete—such as setting up the spending cap rules as soon as possible.

    South Africa’s official unemployment rate dropped to “mere” 23.3% in Q2. A cause of celebration? Well, let’s put this into perspective. First, the unemployment rate is still by far the highest among major emerging markets (EM), and many people in this group are not just unemployed—they are unemployable. Second, the Q2 official numbers reflected the fact that fewer people were actively looking for a job amidst COVID-related lockdowns. The alternative measure of unemployment—which includes those who stopped looking for a job—rose from 39.7% to a mind-blowing 42%.

    Turkey has a new medium-term program, which pledges the return to growth (5.8% in 2021), policy normalization, etc. We are a bit skeptical about the implementation aspect of it (which is natural, given Turkey’s most recent economic history). But the latest orthodox turn in the central bank’s policy shows that things can change. So, we keep our eyes open.

    Chart at a Glance: Brazil Local Rates Wider on Fiscal Concerns (28 Sept 2020


    Source: Bloomberg LP

    1“Citizen Income”.


    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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