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  • Emerging Markets Debt Daily

    South Africa Recovery Remains Fragile

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 04, 2018
     

    South Africa’s growth rebounded in Q3, marginally supporting the country’s ratings, but recovery remains fragile. Argentina’s inflation survey may pave the way for the removal of the 60% interest rate floor.

    South Africa’s Q3 growth rebound helped to lift the rand in the morning trade, but the release’s details show that recovery is fragile. The headline gross domestic product (GDP) growth accelerated more than expected to 1.1% year-on-year. However, leading indicators remain soft, and there are few signs that the post-election confidence boost is generating new investments. The return to positive growth is marginally supportive of South Africa’s sovereign ratings, albeit questions about the structural reform agenda and fiscal dynamics will continue to weigh on its outlook.

    Continuing the emerging markets growth theme, Brazil’s industrial production surprised to the downside in October, supporting the Q4 GDP deceleration narrative. There were some positive signals, however. Capital goods production looked more promising, with the year-on-year growth rebounding to 10.8%. The continuation of this trend should improve the growth momentum going forward. One of the main external headwinds for Brazil is weaker growth in Argentina, which is a key market for Brazil’s manufacturing goods.

    Moody’s remark about the impact of Argentina’s restrictive monetary policy on credit growth and activity (sharply curbing) drew attention this morning. Note, however, that it was made within the context of a more benign comment about the banking sector’s stability. Besides, this is the whole point of the adjustment process aimed at reducing the country’s sizable twin deficits (fiscal and current account) and restoring fundamental support for the currency. The key event this afternoon is the publication of the central bank’s expectations survey. If the survey shows further a decline in 12-month ahead inflation expectations, the central bank could potentially remove the 60% interest rate floor, restarting the positive feedback loop (lower inflation expectations, lower interest rates, and improved growth momentum).

     

  • 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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