Natalia Gurushina, Economist, Emerging Markets Fixed Income
March 25, 2020
South Africa’s central bank decided to buy government debt on the secondary market to support financial stability. Brazil is making progress in approving the “war budget” constitutional amendment.
South Africa’s central bank, the South African Reserve Bank (SARB), made a courageous and timely decision to start buying government debt on the secondary market. SARB is known to be extremely conservative, but the country is in a very tough spot as regards the government’s ability to stimulate on the fiscal side—the budget deficit was expected to reach 6-6.5% of GDP even before the coronavirus crisis, and fiscal constraints might become even more binding after the 3-week lockdown. The SARB’s asset purchases should be an important factor in maintaining financial stability—especially against the backdrop of a possible rating downgrade by Moody’s and the rebalancing of the World Government Bond Index (now postponed until April).
Progress in the approval of the “war budget” constitutional amendment in Brazil is in stark contrast with anti-lockdown statements made by President Jair Bolsonaro (which many analysts consider a political “hedge”). The amendment gives more flexibility in fiscal decision-making but limits emergency spending to this year’s budget (for now). A definite positive in the current situation is that Brazil has no major issues in its external accounts—and today’s balance of payments numbers confirmed this fact. The current account deficit narrowed pretty much as expected in February, and it was more than fully covered by foreign direct investments (FDI). Brazil’s basic balance (a sum of current account and FDI) therefore remains positive (see chart below), providing an important macroeconomic buffer.
The Bank of Thailand (BoT) surprised the market by staying on hold today. The decision was not unanimous, but the majority thought that the emergency rate cut on March 20 was enough for now. The BoT, however, made a big revision in its macroeconomic forecasts—it now sees real GDP contraction and deflation in 2020—and this is a very good indication that more policy easing will be coming in the upcoming weeks and months.
Chart at a Glance: Brazil – External Accounts Remain Solid
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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