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  • Emerging Markets Debt Daily

    Brazil Pension Reform Emotions Running High

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    June 17, 2019

    Brazil’s main political actors are pushing hard for pension reform’s approval, but details of the bill will matter a lot. Turkey’s sovereign downgrade by Moody’s signals that authorities are not doing enough to reduce the risk of a balance of payments crisis.

    Brazil is trading calmer this morning after the initial strong reaction to Minister of Finance Paulo Guedes’ criticism of changes made in the pension reform bill by the congressional rapporteur
    . Guedes’ main target was the omission of states and municipalities and the removal of the capitalization system, which can weaken the overall longer-term impact of the bill. We anticipated that the reform’s approval process will be volatile, but so far the congressional speaker, Rodrigo Maia, has indicated that he aims to have the bill approved in the first half of the year, and that the final version would include states and municipalities. The vote in the special committee is still scheduled to take place on June 27, and the societal consensus to have the reform approved is very strong.

    The market reaction to Turkey’s downgrade by Moody’s was muted, in part because the country is already in the “junk” category. Still, the message sent by a one-notch sovereign rating cut to B1 (with negative outlook) was clear—risks associated with a balance of payments crisis remain elevated and authorities are not making enough progress on the structural front to reduce them. This morning’s release of the central government’s budget numbers for May show that Turkey’s fiscal metrics remain weak. Even though the monthly deficit narrowed to TRY12.1B, the cumulative five-month fiscal gap is the widest since the series began in 2006.  

    The global growth outlook remains firmly in focus going into this week’s Federal Reserve (Fed) meeting. A big downside surprise in the U.S. Empire Manufacturing Indexpushed the dollar down in the morning trade, but the latest gross domestic product forecast revisions show that the U.S. economy continues to look stronger on a comparative basis (see chart below). Notwithstanding, the market now attaches an 80.4% probability to the Fed’s preemptive 25bps interest rate cut in July, with a total of 83bps priced in for the next 12 months.

    Chart at a Glance

    Source: Bloomberg LP

    1The Empire State Manufacturing Index measures general business conditions in New York State.


    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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