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  • Emerging Markets Debt Daily

    Brazil – Reform Hopes Resurface

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    October 06, 2020
     

    There are signs of political reconciliation in Brazil, but we need to see concrete progress on structural issues such as the spending cap rules. South Africa’s anti-graft campaign is gaining pace.

    The Brazilian currency is doing better this morning following reports about potential rapprochement between the government and the parliament over key reform initiatives and fiscal issues. Minister of Economy, Paulo Guedes, met with MPs to talk about (1) finding permanent sources of financing for new social entitlements, and (2) the acceleration of reforms (administrative, tax). It’s good that officials are trying to move forward, but we suspect that the market will go through multiple ups and downs before we get to the same level of certainty as with pension reform a couple of years ago. Setting up the spending cap rules for the budget is an absolute priority.

    South Africa’s central bank will publish its closely-watched bi-annual monetary policy review later today, but the morning’s focus is on the anti-corruption campaign and its wider implications for the economy and society. The arrests of senior African National Congress (ANC) officials and allies of former President Jacob Zuma led to suggestions about a possible “governance reboot”. This definitely attracted our attention. The key thing that we want to hear from the government is that the reform story—especially the fiscal story—is finally turning. The next important milestone is the October Medium-Term Budget Policy Statement.

    Our last comment today is about emerging markets (EM) rebound and how to make sense of the data releases and forecasts, which vary a lot. Here is an angle that we like. It is a well-established fact that lower-income countries tend to grow faster than richer nations—presumably this should be reflected in the consensus GDP forecasts for 2021. However, plotting 2021 growth forecasts versus per capita income (see chart below) reveals that large parts of Latin America (LATAM) and Europe, the Middle East and Africa (EMEA) are falling behind. The expected pace of recovery in this group is too slow for their level of development, and this points to structural impediments to growth, in addition to the COVID-related impact.

    Chart at a Glance: Structural Problems Limit the Pace of Recovery in Parts of EM

    US-Emerging-Markets-Daily-2020-10-06.png

    Source: VanEck Research; Bloomberg LP

  • IMPORTANT DEFINITIONS & DISCLOSURES  

    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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