Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
July 02, 2020
South Africa recorded the first current account surplus in 17 years. Brazil’s growth story might be finally turning.
South Africa is one of the countries where dismal GDP growth has a silver lining in the form of rapidly improving trade and current account balances. Note that weak growth and current account improvement are not always related—Turkey’s example is an interesting case study. So, South Africa’s developments are worth a mention. This is South Africa’s first current account surplus in years (1.3% of GDP, see chart below), and it was driven by a big jump in the trade surplus. The adjustment reflected declining imports and improving terms of trade. I would add that the central bank’s steadfast refusal to meddle in the foreign exchange market—letting the currency absorb external shocks—might have helped as well.
Brazil’s growth story might be finally turning. It looks like industrial production is bottoming out, and a very sharp improvement in June’s manufacturing PMI (Purchasing Managers Index, from 38.3 to 51.6) suggests that the rebound is real. If this scenario is confirmed, the market should feel more confident about pricing out additional rate cuts in Brazil (11bps still expected in August).
Political risks staged a comeback in parts of Europe, the Middle East and Africa (EMEA), specifically in Russia and Ukraine. Russia’s noise is more geopolitical in nature. Ukraine’s upset is domestic. Yesterday’s resignation of the central bank’s Governor, Yakiv Smoliy, was not completely unexpected, but the fact that he mentioned “persistent political pressure” as the reason caused concern. Ukraine was the emerging markets (EM) poster kid for structural reforms, and the market was super-comfortable owning Ukraine’s assets (both local and hard currency). The most immediate implications are (1) a cancellation of Ukraine’s USD1.75B March 2033 Eurobond, and (2) a question mark about further IMF disbursements. Not all is lost—Ukraine has plenty of credible candidates to fill Yakiv Smoliy’s shoes. If this happens, Ukraine might have changed more than we realize (in a good sense).
Chart at a Glance: South Africa’s Current Account – Finally Turning Positive
Source: Bloomberg LP
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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