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  • Emerging Markets Debt Daily

    Brazil Rubs (Pre-)Salt in Privatization Wounds

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    November 06, 2019

    The much-anticipated auction for production rights from off-shore, pre-salt oil fields in Brazil fails to secure foreign capital inflows. Russia’s disinflation continues, opening room for more rate cuts.

    A big disappointment in Brazil this morning – and a major selloff in the Brazilian real – as the much-anticipated auction for production rights from off-shore, pre-salt oil fields in Brazil turned out to be a joke. There was basically no foreign money, and Petrobras ended up getting 90% in the largest oil field – effectively auctioning the field to itself, whereas the idea was to bring foreign capital and expertize into the sector. Furthermore, there were no bids at all for two riskier fields. The results were very surprising, and there will be a lot of soul-searching regarding what went wrong. The development of the fields should bring more jobs to the economy anyway, but private sector jobs are usually more productive, so the “private” option would have been better for the growth outlook.

    Russia’s macro remains delightfully boring. The disinflation trend stayed intact in October, with yearly headline inflation slipping below the target (to 3.8%) and core inflation surprising to the downside at 3.7%. The central bank believes that headline inflation will slow to 3% year-on-year in January, and the Ministry of Economy thinks that it can fall below 3% in Q1 2020. It is hardly surprising that the market sees room for another 75bpbs of rate cuts in the next twelve months.

    Who does not need more capital inflows these days? Thailand, apparently. The central bank not only cut its key rate to 1.25% this morning, but it also relaxed some currency regulations to push U.S. dollars out of the country and reduce the appreciation pressure on the baht. Given that headwinds to gross domestic product (GDP) growth remain significant (and a strong currency is one of them), another 25bps policy rate cut should not be excluded at this stage.

    Chart at a Glance: Russia – Disinflation Is Back!

    Source: Bloomberg LP


    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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