Brazil’s Splitting Headache | Beyond Basic Beta Channel

By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy

Brazil’s key near-term risk is that the emergency aid bill will be approved without compensatory measures. Mexico’s electricity bill raises further concerns about reforms’ rollback.

The approval of the emergency aid bill is the most important near-term driver for Brazil’s assets. Investors are realists, and they understand that the bill will most likely be watered down. What worries them much more is that the bill might be split into two parts―emergency spending and compensatory measures―which will be voted on separately. If the bill is approved without the compensatory measures, Brazil might end up having a wider budget deficit and a higher debt level in 2021, increasing the uncertainty about the spending cap and potentially leading to more aggressive rate hikes by the central bank.

Mexico continues to generate “ok” macroeconomic results―the post-pandemic recovery is taking place, there is no fiscal blowout, the current account shows textbook adjustment (USD17.4B surplus and another upside surprise in Q4), inflation is sticky but not Turkey-like. However, we see more and more dents in the country’s structural framework. The electricity bill prioritizing the state utility was just approved by the lower house, adding to concerns about the sector’s opening, the energy reform reversal and Mexico’s longer-term growth potential.

Slowly but steadily, the higher inflation backdrop is becoming a given for central banks across the globe. The Bank of Korea just raised its 2021 inflation forecast, as the removal of COVID restrictions and the vaccine rollout is expected to lead to stronger growth (especially in consumption and services). The consensus added 25bps of rate hikes in emerging markets (EM) in 2021, and the recent price action in EM fixed income and currencies shows that the market is still uncertain whether higher rates will “neutralize” the positive impact of the improving growth outlook and higher commodity prices.

Originally published by VanEck, 2/25/21


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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