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  • Emerging Markets Debt Daily

    South Africa’s Policies Weigh on Confidence

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    November 28, 2018
     

    Policy uncertainties pose a major risk to business and consumer confidence in South Africa. The Turkish government’s latest plans to boost bank lending raise a lot of red flags.

    South Africa’s latest confidence indicators clearly show that the post-election euphoria is over. The BER Consumer Confidence Indexfor Q3 was much weaker than expected, dropping to a mere 7 from 22 in Q2, while business confidence fell to its lowest level since Q2 2017. Policy uncertainty (including land reform) is the main reason behind the decline, and this will continue to weigh on domestic activity in the coming months. The consensus does not expect any meaningful recovery in Q4 real gross domestic product (GDP) growth (0.5% year-on-year), while the Q1 2019 forecast has been cut to 1.2%.

    Turkey’s intentions to boost its growth outlook is understandable, but the latest plans, which involve the use of mortgage-backed securities, raise a lot of questions. According to local press, the banking regulator wants to encourage local banks to securitize mortgages and sell/transfer them to the development bank in exchange for asset-backed securities (with 0% risk weight), which can then be used as collateral when borrowing from the central bank. We look at the government’s latest plan through the prism of (a) the recent cancellation of bank stress tests and (b) no credible program to deal with bad loans. What can go wrong, indeed?

    The secondary revision of Q3 GDP growth in the U.S. showed a fairly optimistic picture. Even though personal consumption was revised lower, the headline growth number remained unchanged at 3.5% quarter-on-quarter, driven by stronger investments. The latter is expected to get extra support from solid after-tax corporate profits in the coming months. The market reaction to the release was muted (U.S. dollar virtually unchanged, the 10-year U.S. Treasury yield only slightly higher), as the focus now shifts to Federal Reserve Chairman Jerome Powell’s speech later today.

     

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    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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