25 February 2021
VanEck Blogs | Emerging Markets Debt Daily
Brazil’s Splitting Headache

Brazil’s key near-term risk is that the emergency aid bill will be approved without compensatory measures. Mexico’s electricity bill raises further concerns about reforms’ rollback. 

The approval of the emergency aid bill is the most important near-term driver for Brazil’s assets. Investors are realists, and they understand that the bill will most likely be watered down. What worries them much more is that the bill might be split into two parts―emergency spending and compensatory measures―which will be voted on separately. If the bill is approved without the compensatory measures, Brazil might end up having a wider budget deficit and a higher debt level in 2021, increasing the uncertainty about the spending cap and potentially leading to more aggressive rate hikes by the central bank.

Mexico continues to generate “ok” macroeconomic results―the post-pandemic recovery is taking place, there is no fiscal blowout, the current account shows textbook adjustment (USD17.4B surplus and another upside surprise in Q4), inflation is sticky but not Turkey-like. However, we see more and more dents in the country’s structural framework. The electricity bill prioritizing the state utility was just approved by the lower house, adding to concerns about the sector’s opening, the energy reform reversal and Mexico’s longer-term growth potential.

Slowly but steadily, the higher inflation backdrop is becoming a given for central banks across the globe. The Bank of Korea just raised its 2021 inflation forecast, as the removal of COVID restrictions and the vaccine rollout is expected to lead to stronger growth (especially in consumption and services). The consensus added 25bps of rate hikes in emerging markets (EM) in 2021, and the recent price action in EM fixed income and currencies shows that the market is still uncertain whether higher rates will “neutralize” the positive impact of the improving growth outlook and higher commodity prices.

IMPORTANT DEFINITIONS & DISCLOSURES  

This material may only be used outside of the United States.

This is not an offer to buy or sell, or a recommendation of any offer to buy or sell any of the securities mentioned herein. Fund holdings will vary. For a complete list of holdings in VanEck Mutual Funds and VanEck Vectors ETFs, please visit our website at www.vaneck.com.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Van Eck Associates Corporation or its subsidiaries to participate in any transactions in any companies mentioned herein. This content is published in the United States. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed herein.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

Natalia
Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy