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  • Emerging Markets Debt Daily

    Brazil – A Nod of Approval from Moody’s

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    May 18, 2020

    Moody’s affirmed Brazil’s issuer rating, reminding us that political noise obscures important macro strengths. Argentina is rallying on recognition that the government is in negotiation with creditors.

    Moody’s decision to affirm Brazil’s sovereign rating (Ba2) and outlook (stable) is a good reminder that the Brazilian economy has important strengths, which are currently being obscured by political noise. First, Brazil’s external debt is low. Second, the central bank’s international reserves are high. Third, low interest rates reduce the cost of debt service. Finally, the agency also believes that there is a reasonable likelihood of fiscal consolidation after the crisis is over. Not bad at all (for sub-investment grade).

    This is an important week for Argentina, as a grace period for interest payments on global bonds ends on May 22. The week began on a good note—with the market rallying on recognition that the government is in negotiation with creditors, rather than assuming a “take it or leave it” stance. Creditor proposals generally reduce proposed maturities, increase cash flows and look for payment of accrued interest. Creditors are in the process of convincing the government that their counter-proposals are consistent with the recently-published debt sustainability analysis for Argentina.

    Costs associated with fighting the coronavirus forced Indonesia’s government to revise its 2020 fiscal target once again. The deficit is now expected to widen from 5.07% of GDP to 6.27%, keeping Indonesia in the middle of the emerging markets (EM) pack (see chart below; we suspect that the consensus might be underestimating this year’s fiscal expansion in India). The revision is understandable, as the virus will affect both spending and revenue collection. The key question is what it means for additional debt issuance, and to what extent the central bank might be able to help.

    Chart at a Glance: Indonesia Fiscal Gap to Widen More

    Chart at a Glance: Indonesia Fiscal Gap to Widen More

    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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