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  • Emerging Markets Debt Daily

    Mexico Budget Not as Radical as Feared

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 17, 2018

    The market was relieved that Mexico’s 2019 budget draft was less radical than expected. Turkey’s industrial production collapse puts the central bank under more pressure to lower the policy rate.

    The Mexican peso responded well to the fact that the 2019 budget proposal looked less radical than expected. Specifically, despite a barrage of social promises the actual social spending was increased by “only” 1.1% of gross domestic product (GDP) which the new government wants to fund through lower public administration costs. The government targets a 1% of GDP primary surplus (a slight increase from 0.7% of GDP expected this year), and the underlying macro assumptions (GDP growth, inflation, etc.) appear reasonable. There are many uncertainties that can affect the budget execution going forward for example, the new gasoline price policy, oil revenue, and the Mexico City new airport cancellation costs, but that is a story for another day.

    Turkey’s industrial output plunged by 5.7% year-on-year in October. The outcome was significantly worse than expected and is the weakest print since the global financial crisis (see chart below). With downside risks to growth multiplying and the inflation peak behind us (maybe), the central bank might find itself under more pressure to lower the policy rate in the run up to the local elections (the market prices in 274bps of cuts over the next six months). The rating agencies are well aware of the risks, which might explain why Fitch chose to keep Turkey on negative outlook for now (BB).

    Indonesia’s trade deficit print might have implications for the central bank’s meeting later this week. The November foreign trade gap widened unexpectedly to USD2.05B on the back of weaker exports and stronger than expected imports, raising concerns that the current account’s deterioration will continue in Q4. The central bank’s policies to reverse the trend and narrow the deficit are yet to bring results – hence suggestions that we might see one more rate hike on Thursday.


    Chart at a Glance

    Turkey Industrial Production

    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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