By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
Institutional checks and balances have prevented extreme price and policy outcomes in Peru and Brazil. But extreme inflation surprises keep coming.
LATAM Policy
Very often when we talk about institutional frameworks in emerging markets (EM), it is in a context of weakness, which can lead to a deterioration of economic parameters, rating downgrades and a loss of investor confidence. But there are others – many more encouraging – examples (which can also create interesting business opportunities). Take yesterday’s “lunchtime” coup attempt in Peru. President Pedro Castillo (now ex-president) tried to avoid impeachment by illegally dissolving congress. But Congress had none of that, impeaching Castillo anyway and putting him in jail. The line of succession was clear, and by early afternoon Peru had the first-ever female president, Dina Boluarte. The currency – which had initially sold off – ended up strengthening against the US dollar (see chart below), and the central bank simply issued a “farewell” rate hike. by 25 basis points. The end.
Falling emerging market rates
Institutional constraints also allowed Brazil’s central bank to remain on hold yesterday – instead of giving a “warning shot” on rate hikes to meet the new administration’s fiscal expansion plans. President-elect Lula’s (populist) grand vision for social spending was confronted with reality in parliament, and the market reacted by pricing in some rate hikes over a 6-month horizon. Fiscal risks are still there – they were featured prominently in the central bank statement and they may delay 2023 rate cuts. This morning, the local swap curve saw no policy easing until September 2023 (per compared to March/May 2023 before the second round of elections).
Emerging market disinflation
Institutions are a major talking point in Mexico and Hungary, but the market was focused on inflation today. It looks like Mexico is finally on the path to disinflation – with bi-weekly core and headline inflation well below expectations at the end of November. This should allow the central bank to safely slow the pace of rate hikes (to 50 basis points at the next meeting in a few days). The case of Hungary is more complicated. Headline inflation accelerated above consensus in November (to 22.5% yoy), and is expected to rise further in December (peaking at 25-26%) after price caps are removed gasoline. Removing the caps may actually be good for the Hungarian budget (and for the technical aspects of the bonds), but it’s also essential that the central bank maintains a hawkish policy until inflation starts rolling in 2023. Stay tuned !
Chart at a Glance: Emerging Market Asset Prices (Peruvian Sol) – The Importance of Being Agile
Source: Bloomberg LP.
Originally published on December 8, 2022.
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PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; WRONG – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.
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