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  • Emerging Markets Debt Daily

    Brazil Hawks Spread Their Wings

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    December 09, 2020

    Brazil’s central bank message is getting decidedly hawkish. South Africa’s cyclical external adjustment continued with current account surplus surging to 5.9% of GDP in Q3.

    Brazil’s central bank is turning more hawkish, and the message is loud and clear. “Low for long” forward guidance is still there, but it is on life support – ready to be dropped if inflation expectations continue to move closer to the target. There is also no more mention of a potential room to ease further. Even though the central bank believes the current inflation pressures are transitory, risks associated with delayed fiscal adjustment in 2021 are real – and the central bank indicated on numerous occasions that it will be watching them like a hawk (no pun intended). 

    South Africa’s current account surplus surged to 5.9% of GDP in Q3 (see chart below), cementing the country’s status as a poster kid for cyclical external adjustment (pandemic=weak domestic demand=weak imports=improving trade balance). The improving terms of trade also helped, boosting South Africa’s exports. But the central bank deserves a lot of praise for dealing with exogenous shocks in a market-friendly manner – avoiding currency interventions and not wasting the international reserves. The next item of South Africa’s “to do” list is structural adjustment - a major challenge, but an absolute must to reverse the de-rating narrative.  

    The “rule of law” spat between Poland/Hungary and the European Union appears to be over. The two countries threatened to veto the EU recovery fund over “undue” intervention in their internal affairs. However, the prospect of losing sizable structural fund inflows from the EU (several percentage points of GDP) persuaded them to consider a compromise solution. The market might appreciate some trading opportunities created along the way.

    Chart at a Glance: South Africa Current Account – Cyclical Adjustment Continues


    Source: 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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