Mexico’s inflation is still at high levels. South African government bonds staged a big rally following the release of the 2021/22 budget.
Mexico’s inflation remains stuck at the top of the target range, despite soft domestic activity, a large output gap, et cetera, et cetera. Food and fuel price are still the main drivers, and rising global commodity prices suggest that these pressures are unlikely to dissipate soon. We also keep an eye on minimum wage increases, as these might create additional risks going forward. The market continues to price in additional policy easing in Mexico, but only half-heartedly―about 17bps of rate cuts in the next six months. The central bank’s minutes will be released tomorrow, so we expect to get some extra color.
South Africa’s government bonds absolutely loved the 2021/22 budget projections. The revised medium-term debt/GDP trajectory looked particularly impressive (see chart below). Underlying macroeconomic assumptions were not too rosy and the government promised no additional allocations for state-owned enterprises as well as suggested some permanent medium-term spending cuts and expenditure re-prioritizations. As usual, implementation is key, and some areas―such as the public sector wage bill (nearly 15% of GDP)!)―could be politically sensitive. Debt service costs are still very high (above the targeted allocations for health or economic development, for example), so room for mistakes is extremely limited.
Brazil’s external backdrop is generally solid, but the latest current account and foreign direct investments (FDI) numbers raise some questions. The current account deficit continued to widen in January (to USD7.25B), while FDI remained weak (at USD1.84B). The FDI “lull” might well prove temporary (COVID-related). However, if a more interventionist policy stance is not just a passing stage, this can create fundamental reasons for foreign businesses to stay away (together with their money and expertise).
Charts at a Glance: South Africa’s Revised Debt/GDP Path Looks More Palatable
Source: South Africa’s National Treasury