EM Debt Daily: South Africa – Inflation and Policy Limitations
Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
August 26, 2020
South Africa’s inflation surprised to the upside in July, limiting room for traditional policy easing. Mexico’s 2020 GDP will be one of the weakest in LATAM despite the June bounce.
South Africa’s July upside inflation surprise does not mean that inflation is getting out of control. But it refocuses attention on the fact that real policy rates in most emerging markets (EM) are already negative (sometimes even more negative than in developed markets (DM)), which limits room for traditional easing (rate cuts) if the recovery turns out slower than expected. Countries that entered the COVID crisis in an already weakened state—such as South Africa—might be particularly vulnerable. Some EM central banks are responding with more quantitative easing (Hungary, yesterday), but South Africa’s central bank is reluctant to use this approach. Ultimately the ability to grow out of this situation depends on the reform agenda—which is still uncertain in the case of South Africa.
Mexico’s economic activity proxy for June signals that the worst is behind us. The yearly contraction narrowed sharply to -13.18%, and sequential monthly expansion was close to 9%. Still, Mexico’s 2020 real GDP growth is expected to be among the worst in the region (see chart below) due to the weak pre-COVID state and limited policy support (especially fiscal).
Rating agencies continue to prepare ground for future sovereign downgrades—and this includes not only countries with obvious policy issues (Turkey), but seemingly strong credits like Chile. Chile’s outlook was revised to “negative” by Moody’s, with the agency being increasingly concerned about the fiscal outlook and the rapidly rising debt-to-GDP ratio. Fiscal concerns predate the crisis—they are linked to the 2019-2020 social unrest and demands to tackle inequality.
Chart at a Glance: 2020 Growth – Mexico Among the Worst in LATAM
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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