Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 14, 2020
Moody’s cut Turkey’s sovereign rating to B2 with negative outlook in an unscheduled meeting. Brazil’s upside growth risks keep multiplying.
Moody’s unexpected downgrade of Turkey’s sovereign rating to B2 with negative outlook caused an uproar in some circles. Many commentators were upset that Turkey is now rated the same as the likes of Egypt and Jamaica. This is “not fair” they cried. Well, the Turkish economy is definitely more diversified—one can even say sophisticated. But the policy vector is definitely moving in the wrong direction—unlike in Egypt or Jamaica. Moody’s latest report on Egypt specifically mentioned “policy credibility and effectiveness”, which “would likely put positive pressure on the credit profile”. Unfortunately, Turkey had been resting on the laurels of past reforms for far too long. The policy direction is part of any sovereign rating, and this is what drove Moody’s decision (rather than politics).
Brazil’s latest data releases are very much in line with the “upside growth risks” narrative. The real activity proxy for July—released this morning—showed a smaller than expected contraction of 4.89% year-on-year, as the economy continues to benefit from the large-scale fiscal support and fewer social restrictions. Services are still lagging, but the improving terms of trade (see chart below) can give an extra boost to exports. The emergence of upside growth risks helps to explain why the market completely priced out additional rate cuts in Brazil.
August brought a change in the emerging markets (EM) inflation surprises dynamics. We are now seeing more downside surprises, and this includes today’s inflation print in India. Level-wise, yearly headline inflation is still high (6.69%, and above the central bank’s target range), but it decelerated more than expected in August. The COVID-related distortions are affecting inflation measurements in India (and across EM). However, if deceleration continues, the central bank might finally have room to ease more after staying on hold since May
Chart at a Glance:Brazil’s Terms of Trade – Nice Uplift
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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