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  • Emerging Markets Debt Daily

    Brazil Reforms – One Step Back?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    August 12, 2020

    Brazil’s economic team’s resignations brought back concerns about the reform agenda. The reflation theme staged a mini-comeback.

    It’s “one step back” day in Brazil’s reform agenda. The resignation of two key members of the Economy Minister’s team—the driving force behind structural changes in the past few years—raised multiple questions about the implementation of such key policy initiatives as privatization and reducing excessive bureaucracy. It also brought back fears that Economy Minister Paulo Guedes might not enjoy full support of President Jair Bolsonaro.  The market channeled its concerns through the currency—the real was down by 152bps vs. U.S. dollar as of 9:54am ET, according to Bloomberg. Brazilian equities, however, took the news in stride, paying more attention to a rather positive retail sales number (the yearly growth returning to positive territory in June!).

    The reflation theme staged a comeback of sorts as both headline and core inflation in the U.S. beat consensus, leading to some curve-steepening. The most prevalent comments were “pent-up demand” and “COVID unwind”. We would also mention COVID-related measurement distortions. The U.S. release comes on the heels of several upside inflation surprises in the emerging markets (EM) (Mexico, Hungary), but there is a lot of divergence in this space—especially as regards core inflation (see chart below). EM local bonds (especially lower-yielding ones) is a place to watch if inflation continues to bottom out. 

    The morning brought no respite for the Turkish lira. The gradualist approach that relies on tweaking the average weighted cost of funding (as opposed to a credible rate hike) is not really working—most likely because the increase in the average rate is very small (around 100bps since mid-July). The current setup does allow the central bank to push the cost of funding much higher within the interest rate corridor, but this is yet to happen (plus, this approach lacks transparency).

    Chart at a Glance: EM Inflation Pressures Are Unevenly Spread

    Chart at a Glance: EM Inflation Pressures Are Unevenly Spread

    Source: VanEck Research; Bloomberg LP
    Note: Several countries are yet to report July’s inflation.


    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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