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  • Emerging Markets Debt Daily

    Mexico Growth: Begging for More Policy Support

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    October 30, 2019

    With no improvements in Mexico’s growth trajectory, the market continues to price in additional rate cuts. South Africa’s medium-term budget spooked the market, raising expectations of Moody’s rating downgrade.

    Mexico’s real GDP growth continues to beg for more policy support. The preliminary Q3 GDP print was lower than expected, with yet another yearly contraction (-0.4%). Manufacturing is a weak spot, with inadequate investments (down by 7.6% year-on-year in July) limiting any potential upside. The market prices in 72bps of easing in the next three months, but the current expectation is that the next move will still be a cautious 25bps cut (unless there is a more visible improvement in core inflation).

    The only thing you need to know about South Africa’s medium-term budget statement is that the fiscal deficit is expected to peak at 6.5% of GDP: 6.5%!!! This. Is. Bad. The fiscal path is clearly unsustainable—and Moody’s is clearly asleep at the wheel—with the debt-to-GDP ratio rising to 71.3% in the next three years. The expected fiscal deterioration is due to several factors, including more support for the black hole state-owned utility Eskom and a weaker growth trajectory (=lower revenue collection). The rand and local rates got crushed after the National Treasury’s revelations. And for good reason—the numbers and the policy attitude show South Africa is not an investment grade credit!

    It’s been three days since the presidential elections in Argentina and the transition process is very much underway. President-elect Alberto Fernandez is busy establishing links with regional governors in order to offset the political (and policy) influence of Vice President Cristina Kirchner. The macro backdrop is more stable than initially feared—the central bank quietly bought some U.S. dollars (about USD160M on Monday and Tuesday) and the gap between the official and the parallel exchange rates narrowed down a bit. One of the biggest shifts policy-wise is a more dovish central bank stance, made possible after the introduction of much stricter capital controls.

    Chart at a Glance: Mexico’s Sad Growth Trajectory

    Mexico GDP Total YoY NSA

    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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