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  • Emerging Markets Debt Daily

    South Africa – A Looming Downgrade?

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 29, 2019

    Rating agencies’ comments about South Africa underscore the risk of further downgrades. The market continues to price in a fairly aggressive rate cut schedule in Brazil.

    Rating agencies’ patience with South Africa is wearing thin—and this means a higher risk of losing the investment grade status
    . Fitch’s decision on Friday to revise the country’s outlook to negative follows Moody’s warning that the government’s additional support for state-owned utility Eskom might have negative implications for the sovereign credit metric. A negative outlook usually implies a one in three chance of a rating downgrade—in the case of Fitch this would mean moving further into non-investment grade territory. If this happens, Moody’s ability to keep its South Africa’s rating two notches higher and in the investment grade would be questioned even more.

    The market is standing ready for a 50bps policy rate cut in Brazil later this week. However, the fiscal performance remains underwhelming. The consolidated budget’s primary deficit was tracking at 1.42% of gross domestic product (GDP) in June, and the headline deficit remained wide at 6.54% of GDP. As a result, the net debt/GDP ratio reached 55.2%—the highest since 2003 (see chart below). This raises a question of whether the central bank will choose to play it safe before the lower house’s second vote on the pension bill in August.

    The weekend’s interview with Argentina’s opposition presidential candidate, Alberto Fernandez, was a stark reminder about the binary nature of the race—specifically its policy consequences. Fernandez implied that he would stop paying interest on the central bank’s notes (Leliqs) in order to finance a 20% boost in pensions and re-impose capital controls in the form of a 30% cash deposit applied to U.S. dollar inflows. Fernandez’s economic advisor made a subsequent “translation”, saying that he simply meant a lower rate on Leliqs rather than default, but the damage was done—the peso sold off by 108bps after the opening (as of Bloomberg LP at 10:32 am ET). The latest opinion polls show that President Mauricio Macri is leading by approximately 2% in the August 11th primaries—but the margin of error is small and this will drive the market volatility in the next two weeks.

    Chart at a Glance: Brazil’s Debt/GDP Ratio Continues to Climb Higher

    Brazil’s Debt/GDP Ratio Continues to Climb Higher

    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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