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  • Emerging Markets Debt Daily

    EM Reforms – Back From The Dead?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 22, 2020

    Against all odds, we are seeing advancements in structural reforms in several major EM. Mexico’s pension reform proposal might actually end up better than expected.

    Headlines about structural reform advances in major EMs look encouraging amidst renewed concerns about political risks (both in the U.S. and globally) and the virus’s second wave. The Brazilian government had just sent its tax reform proposals (introducing a Value-Added Tax (VAT) instead of several other taxes = simplification + easier collection). In Russia, Ministry of Finance said it wants to optimize spending (to the tune of 1% of GDP) starting from 2021 in order to get the government’s finances back into shape after the COVID-related splurge.

    Mexico’s pension reform draft actually looks like a step in the right direction rather than a much-feared rollback. The proposal was submitted by President Lopez Obrador this morning with a view of getting it through the parliament as soon as possible. The proposal cuts the minimum contribution period for accessing the guaranteed pension, but raises employer contributions and augments the investment rules for pension funds to boost infrastructure investments. This is just a preliminary assessment (we are still waiting for details, etc.), but fingers crossed…

    The market reaction to the renewed U.S.-China tensions (U.S. ordering China to close its consulate in Houston and China promising to retaliate) was limited. However, global assets are rapidly closing the COVID selloff gaps (see chart below), so there is a risk that some of them can become more susceptible to profit-taking going forward.

    Chart at a Glance: Global Assets Closing the COVID Gap1

    Chart at a Glance: Consensus Continues to See Sizable Fiscal Gaps in 2021

    Source: VanEck Research, Bloomberg LP

    1Chart Index Definitions:

    US HY: The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below.

    CEMBI: Corporate Emerging Markets Bond Index (CEMBI) is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities.

    MSCI EM: The MSCI Emerging Markets Index captures large- and mid-cap representation across  Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

    S&P 500: S&P 500®Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples.


    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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