Emerging Markets Debt Daily
EM Activity Gauges – Still ExpandingNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMay 04, 2021
Activity gauges in most EM stayed in expansion zone in April. Brazil’s tax reform shows signs of life – we hope the rapporteur’s presentation will not extinguish them.
April’s activity gauges for most emerging markets (EM) are out, and the main takeaway is that the vast majority of them remained in expansion zone―despite the COVID resurgence (see chart below). We keep an eye on potential near-term headwinds and the pace of vaccinations, but the consensus is not yet in the mood for meaningful growth downgrades in EM―the 2021 growth forecast remain stable at just under 7%.
Tax reform is dead. Long live tax reform! This is one way to describe the current policy landscape in LATAM. Colombia is racing against time to put together a new tax proposal to avoid a rating default. But the outlook for Brazil’s tax reform, however, might prove more constructive. The rapporteur should be presenting his report on reform later today―and he wants to do reform in four stages (which can make it easier to pass). Brazil’s experience with pension reform shows that this is going to be a long process. And politics (2022 presidential election) can interfere big time. But the market seems to be OK with the new narrative―local bonds staged a mini-rally and the Brazilian real outperformed most EM peers in the past two weeks.
Is South Africa finally turning the fiscal corner? Let’s see. This year’s budget looks more realistic. Revenue collection is higher than expected. And this makes it possible for the National Treasury to reduce weekly local bond issuance (check today’s announcement). As one can imagine, the market is loving every minute of it. A big outstanding fiscal item―and a potential risk―is the wage negotiations. The unions are threatening to strike. The government is not yielding (yet). Stay tuned!
Charts at a Glance: EM Activity Gauges – Glass Half Quite Full
Source: VanEck Research, Bloomberg LP
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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