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  • Emerging Markets Debt Daily

    South Africa Budget Ignites Concerns

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    February 19, 2019
    South Africa’s 2019 budget, which targets a larger deficit of 4.7% of gross domestic product (GDP), was a major disappointment. The “bold” pension reform bill presented by the Brazilian government to the congress was well received by the market.

    The South African rand was in panic mode following the release of the 2019 budget,
     which made stellar inflation prints for January (released earlier this morning) irrelevant for a short while. The most disappointing part was larger than expected support for the national energy company, Eskom (ZAR23B a year over the medium term), which pushed the projected deficit to 4.7% of GDP. Given that South Africa’s growth continues to disappoint, there is a non-negligible risk of a revenue shortfall, which can push the deficit even closer to 5% of GDP, necessitating uncomfortable discussions with rating agencies

    The Brazilian government took its social security reform proposal to the congress today—and the markets’ reaction was reasonably good. The predominant assessment is that the proposal was on the “bold” side, including a minimum retirement age of 65 years for men and 62 for women. The draft—which targets fiscal savings of BRL1.2T over ten years—will probably be watered down in the coming months, generating some market volatility as negotiations progress. 

    The U.S.’ demand that China keeps its currency stable as part of the trade deal propelled the renminbi 54bps stronger in the morning trade. The market believes that this reduces the risk of retaliatory devaluation. Perhaps. However, the demand runs counter to an earlier push towards a freer-moving exchange rate that would be more compatible with the renminbi’s status as the reserve currency, as well as with China’s changing fundamentals (smaller current accountsurplus, slower GDP growth). Regarding the latter (growth), we keep an eye on the central bank’s new bill swap facility, which aims to support banks’ recapitalization and credit creation and which debuted today. 

    1Current account is a record of a country’s transactions with the rest of the world, based on its net trade in goods and services, net earnings on cross-border investments, and net transfer payments.

    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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