Natalia Gurushina, Economist, Emerging Markets Fixed Income
February 11, 2020
Russia proposes a new scheme to finance national projects. South Africa’s manufacturing output contracted further in December.
Russia’s newly-minted Prime Minister Mikhail Mishustin is moving fast, threatening to discipline those who failed to properly implement national investment projects. “Bureaucratic Superman” also ordered a budgetary study of 2019 results and an overview of the 2020 spending plans. Importantly, we now have more clarity on additional financing of national projects. The scheme is very interesting—and not that bad for the currency’s longer-term outlook. It involves a purchase of the central bank’s stake in the largest state-owned bank Sberbank by the National Wealth Fund, tendering it at a market price (it is reportedly worth USD40B), and then gradually selling foreign currency over several years on the domestic market.
A very nasty manufacturing production print in South Africa (-5.9% year-on-year, see chart below) once again drew attention to the country’s developmental divergence from its peer group. The real GDP growth consensus forecast for 2020 was recently cut to a mere 0.8%, in part reflecting massive power blackouts. South Africa’s macro outlook is very problematic, but a lot of bad stuff had already been priced in. The next couple of weeks will be crucial (especially as regards Moody’s rating decision)—President Cyril Ramaphosa will deliver his State of the Nation address on Thursday and the 2020 budget will be presented on February 26.
Brazil’s monetary policy minutes revealed the central bank’s concerns about the near-term impact of certain reforms on supply-side inflation risks. This especially applies to the government’s decision to end “centralized capital allocation”—it was highly subsidized and mispriced, but kept some companies going. The central bank also alluded to the “lost output” problem, given the length of the past recession. This factor can also exacerbate supply-side price pressures going forward. So, it looks like ending the rate-cutting cycle earlier this month was a perfectly logical decision.
Chart at a Glance: South Africa Manufacturing Falls To A Multi-Year Low
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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