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  • Emerging Markets Debt Daily

    Brazil Pension Reform Firmly in Focus

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    June 13, 2019

    As Brazil’s pension reform proposal is getting finalized, details and second-round reforms will gain in importance. Mexico’s central bank remains in fighting mode, arguing against premature rate cuts.

    The event of the day in Brazil is the congressional rapporteur’s presentation of the final version of pension reform
    . We spent the last three days in Brazil, and we have a strong feeling that all political players now want the reform to be approved before the end of the year, paving the way for policy rate cuts by the central bank. While the overall fiscal savings are likely to dominate the headlines initially, important details—such as the inclusion of states and municipalities—would be key for the reform’s longer-term success. Another consideration is that pension reform alone is not enough to change Brazil’s growth trajectory. So, the government’s ability to approve the second-round reform agenda is crucial. Unfortunately, there is still a lot of uncertainty about whether President Jair Bolsonaro’s team will have enough political capital left after the battle for pension reform.

    Mexico’s central bank is very much in fighting mode, with Deputy Governor Jonathan Heath issuing a strong statement that it would be counterproductive to cut rates against the backdrop of rating downgrades and tariff threats from the U.S. The dovish market expectations had been on the increase lately, with domestic activity remaining soft and headline inflation’s dynamics improving (somewhat). Still, Heath definitely has a point. We would argue that sticky core prices make his reasoning even stronger.

    In South Africa, yesterday’s presentation by a monetary policy council member, Fundi Tshazibana, generated some hawkish buzz. The reason is Tshazibana’s emphasis on policy certainty in an environment of “limited resources and constrained policy space”, especially as regards structural constraints. We do not think that this precludes moderate policy easing later this year—especially if inflation dynamics remain benign. However, the presentation raises an important issue that a lower potential growth and a smaller output gap can stifle disinflation, limiting room for policy easing over a longer term.


    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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