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  • Emerging Markets Debt Daily

    Brazil Pension Reform Hits Hurdle

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    April 16, 2019

    The Brazilian government faces a delay in the approval of its pension reform. China’s inclusion in the FTSE World Government Bond Index (WGBI)should boost capital inflows, compensating for the declining current accountsurplus.

    The Brazilian real is under the weather this morning as the government suffered another pension reform setback. The recent change in the constitution and justice committee’s agenda means that the reform vote may be delayed until next week (it was supposed to take place on April 17). The lower house speaker, Rodrigo Maia, is still pushing for the bill’s approval tomorrow, but the development adds to uncertainty about the reform timeline. The market is also concerned that fuel price disagreements between the government and national oil conglomerate Petrobras may lead to another truck drivers’ strike, with the ensuing upside risks to inflation and downside risks to growth.

    FTSE’s announcement that it would consider including China in the WGBI and reports that China may shift some agricultural tariffs to other goods boosted the market sentiment this morning. In the case of a positive market accessibility review by FTSE, China could become part of the index in March 2020, and the expected increase in capital inflows may help to compensate for the rapidly shrinking current account surplus. This, in turn, should ease the policy “headache” for the central bank (PBoC), which aims for a stable currency but has limited room for interventions and will most likely remain in the easing mode for some time (despite a marginal hawkish tilt in yesterday’s comment on the Q1 monetary policy committee meeting).

    This morning brought more signs that Turkey’s industrial production may be bottoming out. The sector expanded on a sequential basis for the second month in a row, slowing the pace of yearly contraction to -5.1% in February (see chart below). However, reports that the ruling AK party formally applied for the cancellation of the Istanbul mayoral elections strengthened concerns that protracted political uncertainty will continue weighing on growth. Further, the recovery was not broad-based, so a potential (likely?) reversion of the pre-election stimulus poses another downside risk.


    Chart at a Glance

    Turkey Industrial Production

    Source: Bloomberg LP

    1The FTSE World Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds.
    2Current account is a record of a country’s transactions with the rest of the world, based on its net trade in goods and services, net earnings on cross-border investments, and net transfer payments.


    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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