Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 10, 2020
Brazil’s recovery and reforms are gaining pace. South Africa’s currency is facing more headwinds after the unexpectedly wide Q2 current account deficit.
Brazil’s retails sales bounced strongly in July (up 5.5% year-on-year), suggesting that (a) the market might have been too pessimistic about the pace of the post-COVID recovery, and that (b) there is less need for additional stimulus going forward. Another important aspect of Brazil’s rebound is that structural reforms are back on the front-burner. The government had just presented its proposals for administrative reform, which aims for BRL300B of fiscal savings over the next 10 years. There is always a risk of a slower than expected progress in the parliament, but it looks like the need for this particular reform was understood and internalized by key political players.
South Africa’s current account moved in the wrong direction in Q2, flipping into a wider than expected deficit (2.4% of GDP, see chart below). The main reason is that even though the COVID-related restrictions curbed imports, they also affected tourism inflows and export volumes – both were the lowest in decades. A combination of weak GDP growth and the unexpected current account weakness explain why the rand failed to benefit from today’s post-European Central Bank (ECB) market bounce.
The market’s doubts about Indonesia’s story continue to pile up, and this is affecting local asset prices. The re-introduction of large-scale social distancing measures rattled the stock market, pushing the Jakarta Stock Exchange Composite Index1 down by more than 5% today (according to Bloomberg LP). This development comes on the heels of the proposed changes to the central bank’s framework, which raised concerns about monetary policy’s independence and affected the recent performance of the currency and local bonds.
Chart at a Glance: South Africa – Unexpected and Unwelcome Current Account Correction
Source: Bloomberg LP
1Jakarta Stock Exchange Composite Index – Measures the stock price performance of all listed companies in Main Board and Development Board of the Indonesia Stock Exchange.
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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