Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    EM Structural Reforms – DMs Should Take Note

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    September 23, 2019

    The latest pro-growth initiatives in emerging markets contrast sharply with structural ineptitude in key developed markets. Brazil’s wider current account deficit is comfortably financed by very large foreign direct investments.

    We do not have a habit of starting our dailies with anti-developed markets (DM) rants, but the recent sequence of global events made it difficult to resist. The trigger was the latest activity survey in Europe (Purchasing Managers’ Index, or PMI), which looked unequivocally bad. Germany’s manufacturing PMI slipped to an abysmal 41.4 and the eurozone’s composite PMI barely stayed in expansion territory (50.4). The Markit PMI for the U.S. looked marginally better, but a “wow” factor was definitely lacking. DM policy-makers’ response to all this is, frankly, baffling – falling more and more under the definition of insanity (more of the same but expecting a different outcome). QE galore. Maybe some fiscal morsels. But no talk about reforms. This “structural” silence is deafening and damning – especially against the backdrop of gutsy pro-growth initiatives in several key emerging markets, including tax reform in Brazil and major tax relief in India. Now, back to emerging markets (and the measured tone)…

    Brazil’s external accounts remain the country’s undisputable bright spot. Even though the current account1deficit looks wider than a year ago (USD28B, 12-month running), it is dwarfed by massive foreign direct investment (FDI)2inflows (USD91B, 12-month running). The current account gap should continue to widen if domestic activity keeps regaining strength. However, the government’s pro-growth reform agenda – including privatizations – may encourage additional long-term capital inflows. As such, the basic balance (current account + FDI) should stay comfortably positive, providing fundamental support for the currency.

    Egyptian assets are still “wobbly” after the aggressive sell-off on the back of reports about anti-government demonstrations this weekend. The unexpected turn of events may force the market to look anew at political risks in the country that tries to position itself as a regional “safe haven”, with high yields and improving fundamentals. The probability of this week’s policy rate cut in Egypt now looks lower as well.

    Chart at a Glance:
    Brazil’s External Accounts – A Bright Macro Spot

    Source: Bloomberg LP

    1Current account is a record of a country’s transactions with the rest of the world, based on its net trade in goods and services, net earnings on cross-border investments and net transfer payments.

    2Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.


    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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    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 performance.