Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
June 23, 2020
A structural reform drumbeat in Brazil is getting stronger. South Africa’s pre-COVID unemployment rate topped 30%, posing major social and fiscal challenges.
The release of the central bank’s minutes was supposed to be the event of the day in Brazil, but we think a stronger reform drumbeat is a more interesting development (the central bank confirmed that another small rate cut will be “residual”—we already knew this). The reforms drumbeat came from several sources. First, the expected senatorial approval of the sanitation bill on Wednesday can give an impetus to the privatization program. Second, President Jair Bolsonaro talked about revamping social security programs, which can potentially reduce pressure on the budget in the medium term. Finally, both President of the House and Minister of Economy’s team indicated that tax reform proposals might be ready for the vote in the House special committee in August.
South Africa’s Q1 2020 unemployment number was unequivocally bad—30.1%, up from 29.1% in Q4 2019, worse than expected, the highest in 17 years and the highest among major emerging markets (EM) (see chart below). Note that this was the pre-COVID release, so the next unemployment print will look even worse. South Africa’s high unemployment is structural, with most people in this group not just unemployed but most likely unemployable—unless there is a stronger push to develop the services sector. Until this happens, high unemployment will continue to pose major fiscal challenges—in a situation when the country’s fiscal performance is expected to one of the worst in EM, both in 2020 and 2021.
Even in the middle of the crisis, Russia continues to think about structural reforms. The morning brought headlines about President Vladimir Putin’s proposal to abandon the flat tax rate (13%) and raise the personal income tax rate for higher earners to 15%. Russia accumulated a sizable fiscal cushion in good times, but the budget will come under pressure following the recent global developments. The proposal looks timely and prudent—and not too painful for the majority of the population.
Chart at a Glance: South Africa’s High Unemployment – Major Structural Challenge
Source: 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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