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  • Emerging Markets Debt Daily

    China Eyes Reforms Despite Rising Tensions

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    May 29, 2019

    China is considering interest rate changes to help smaller companies. Reform of state-owned enterprisesand low economic growth remain the main policy challenges in South Africa.

    The newsflow surrounding the U.S.-China trade negotiations remains extremely heavy
    . The good news is that China did not make it to the updated U.S. list of currency manipulators. What is a bit more concerning is that China once again hinted that rare earth metals exports can be used as leverage against the U.S. It is not surprising that China’s reform agenda is getting less attention these days. However, changes are still happening. The central bank Governor Yi Gang noted that market reforms should help small enterprises facing funding problems. So, we pay close attention to reports that the People's Bank of China might scrap the official benchmark lending rates.

    Reform of state-owned enterprises and low economic growth are emerging as key issues during our South Africa research trip. This is due to their impact on the country’s fiscal trajectory and debt ratios, which are closely watched by the market and rating agencies. It became obvious that the energy giant Eskom would require more financial assistance from the government than currently budgeted, which means that the fiscal deficit ceiling might be breached again this year. The longer-term solution to Eskom problems—including a possibility of the government’s assuming at least some of its liabilities—is still being worked out, but these issues are closely watched by the central bank. If the government would have to step in, the sovereign credit metric will take a hit, affecting the country’s risk premium and pushing the neutral rate higher.

    Venezuela’s central bank surprised the country-watchers by releasing some macro numbers yesterday. The official numbers show the real gross domestic product shrinking by 19.2% in the first three quarters of 2018 after a 15.7% drop in 2017. The International Monetary Fund sees further 25% decline this year, with inflation measured in millions percentage points.

    1A state-owned enterprise is a legal entity that is created by a government in order to partake in commercial activities on the government's behalf.


    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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