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  • Emerging Markets Debt Daily

    Asia Pacific Trade Deal – Win for China?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    November 16, 2020

    Asia’s new regional free trade deal is considered a big geopolitical win for China. Brazil’s fiscal agenda is back in focus after the municipal elections.

    A brand new Asian free-trade agreement – Regional Comprehensive Economic Partnership or RCEP – is widely considered a major geopolitical win for China. The deal might not be as encompassing as Trans-Pacific Partnership, but there are some aspects – this is the first trade deal between Japan and mainland China – that reinforce China’s image as a regional and global economic heavyweight. The fact that China continues to recover at a brisk pace (check October’s domestic activity indicators on chart below) while authorities still have room for policy maneuvers is an added bonus.

    Fiscal issues are back on the front burner in Brazil. The municipal elections took place this weekend, and the centrist candidates did well – a sign that political polarization might be subsiding. What is uncertain, however, is whether lawmakers will have enough time to tackle key fiscal items – including the spending cap rules – before the year-end. Brazil is expected to post one of the widest budget deficits in Emerging Markets (EM) this year (over 16% of GDP), and failure to implement a credible fiscal adjustment program might get the attention of the bond market (again).

    Peru’s interim President Manuel Merino resigned after 6 days in the office due to escalating protests. The search for the new successor continues, as the president of the congress who is the “next in line” also resigned. With this level of uncertainty, the main questions are (1) what will be the economic downside in a country that was severely hit by the COVID crisis, and (2) whether this will result in the early elections. There is actually a possibility that the constitutional tribunal might reinstate President Vizcarra who was impeached last week – not the worst possible outcome.

    Chart at a Glance: China Recovery Is On Track


    Source: Bloomberg LP


    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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