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  • Emerging Markets Debt Daily

    Brazil Policy Rate – Taking a Pause

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

    Brazil’s declining economic slack and upside inflation risks ended the easing cycle. Argentina’s government presented its emergency proposals to the congress.

    The minutes of Brazil’s central bank confirmed that the current easing cycle is over. The board drew attention to the fact that recovery is finally gaining traction and that there are upside inflation risks. It specifically noted that greater efficiency of credit and capital markets may result in faster than anticipated decline of economic slack, and that this necessitates more policy caution going forward. The markets now think that the central bank’s next move is likely to be a hike, pricing in 105bps of tightening between June and December 2020.

    Argentina needs to figure out a path to fiscal surpluses before it can assess debt sustainability—this was one of the key messages from today’s presentation of the government’s emergency measures to the parliament. Encouraging de-dollarization, promoting the repatriation of capital and using the bulk of proceeds from a 30% tax on dollar purchases for social needs also made a lot of sense. The Minister of Economy’s assertion that authorities cannot just print money to fund budget deficit and that there will be no pension adjustment for 180 days (until the government comes up with a new formula) sent encouraging signals on the fiscal front. A suggestion that strict capital controls are here to stay should ease pressure on international reserves. It is not surprising that Argentina’s sovereign bonds responded well to the presentation, but the unofficial exchange rate took a hit.

    South Africa’s leading indicator is pointing to stagnation. A tiny upside surprise notwithstanding, it remained close to post-election lows in October. I can go on talking about South Africa’s structural failures and inefficient policy choices and their impact on the country’s output trajectory, but I think today’s chart (see below) gives a much better illustration of South Africa’s growth predicament.

    Chart at a Glance: South Africa’s Growth – “Arrested Development”

    South Africa’s Growth – “Arrested Development”

    Source: VanEck Research; 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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