Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
June 11, 2020
Mexico’s central bank will keep emergency measures in place as uncertainty remains high and the currency fragile. Argentina’s debt restructuring talks might continue over the weekend.
Mexico’s emergency support measures are here to stay for now – this was the key message from the central bank’s governor Diaz de Leon in the semi-annual report. The report mentioned Mexico’s deteriorating outlook, high uncertainty about global developments, and the currency’s fragility as key reasons. The latter was on full display this morning, with a nearly 300bps selloff vs. U.S. Dollar. Governor Diaz de Leon also expressed strong support of Mexico’s private pension system, saying that it is a “fundamental element” of the financial framework. The comment comes on the heels of President Andrès Manuel Lopez Obrador’s call to roll back pension reform. Assets of Mexico’s funded and private pension funds are around 16% of GDP – not a negligible amount (see chart below). And like in many Emerging Markets (EM), they are important players on local markets, including the bond market. Bonds might feel the pain if this stabilizing factor is gone.
South Africa’s mining and manufacturing production numbers for April looked seriously bad. We would usually ignore such releases because they are backward-looking. However, in South Africa’s case the decline happened against the backdrop of extremely high unemployment (nearly 30% in Q4-2020!), which tells us that the social impact of the virus could be worse than in EM peers. Looking forward, domestic activity should start recovering following the removal of some lockdown restrictions in June. The government’s massive stimulus package (10% of GDP) – which it put together in April – should also help. We also note the quality of President Cyril Ramaphosa’s leadership and his collegial approach, which help to de-escalate the situation and leave less room to his opponents within the ANC to challenge him.
The latest newswires from Argentina suggest that that the debt restructuring talks might continue over the weekend, as both sides are working very hard to reach a compromise. The current deadline is June 12. Local reports also signal that the government might be backtracking on the nationalization of the agro exporter Vicentin – if confirmed, this would send a reassuring business climate signal to the market.
Chart at a Glance: Don’t Mess Up with EM Private Pension Funds – They Are Important Market
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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