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2021 emerging market outlook

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Gustavo Arruda, BNP Paribas Brazil Chief Economist, joined Yahoo Finance Live to discuss his outlook for emerging markets in 2021.

Video Transcript

- Welcome back to the stream. And we invite in Gustavo Arruda. He is BNP Paribas' chief economist. He's joining us from Sao Paulo, Brazil. Good to have you here as we take a look at where markets could be headed globally in 2021. I'd asked you a question in the commercial break about a drought that had hit parts of Brazil. But it's weather instability, globally, that could affect markets. Can you help an investor understand how so?

GUSTAVO ARRUDA: Yeah, yeah. And in fact, when we think about emerging markets, we have to think about not just the global perspective, so what global factors can affect them, but you also have to think about the particulars, elements in each country, right? So each country is different. And then you may have to pay attention when you think about that. So in terms of global, I can tell you that vaccines can affect emerging markets, if you have a risk cough because something goes wrong, emerging markets will be affected.

Other elements on there is for something, for some reason that we don't think. If you guys in DM decide to soften the easing in terms of monetary policy, we would be affected badly. So I would highlight these two factors. Something related to vaccines that could go wrong and then we would be badly affected, and also the liquidity. Borrows liquidities is a key issue.

- You know, you pointed out that food inflation was the main culprit of upside surprises in 2020. But that could turn into downside risk in 2021. Can we explore that a bit, and where exactly we might be seeing some of this risk?

GUSTAVO ARRUDA: Sure, yeah. That has been a big surprise indeed for EM. So we were expecting across the EM world, most countries, a record low inflation. I can tell you about Brazil, the country I am in right now. We were expecting just 1.5 inflation through September. We will be ending up this year at 4.3. And it's basically about food inflation. We had a combination of factors here. We had a La Niña that brought the inflation up. We had other factors, like China buying way more grains than we were expecting. And some, of course, some fiscal impact in country to country. So we had tons of money in the economy, also in EM markets. And, well, consumption boomed. Then we had this combination of factors pushing inflation.

But again, looking forward, we can see this type of combination going away, right. So La Niña, that affects food prices, goes away in a few quarters from now. We are seeing good signs of good prices. The harvests should be good as well. And also, at some point, the fiscal policy will have to leave EM markets, right. So that's a risk for growth, but from the other side, it's a stabilization factor for prices here.

- Yeah, I was thinking, as you talk about commodity prices, I was thinking of soybean farmers in the United States competing with soybean farmers in Brazil to sell to China. Which, you know, gets ready for the next question, regarding President-elect Joe Biden. He's going to have a foreign policy team that might keep in place some of the tariffs on China. So what does this mean going forward? We're going to have a whole new foreign policy in this country.

GUSTAVO ARRUDA: That's correct. I think a few comments here. First, when we think about the elected President Joe Biden, the first thing that came to our mind is that can be good news for EM, because we should be talking more about multilateralism, right. And that's a key question for EM. We need to trade, we need to negotiate. And also, we need less uncertainty when we discuss about policies and diplomacy. So this type of approach, even if it's not unwind in terms of the tariffs that we have in place, it helps EM because we ourselves have tons of uncertainties around.

If you think about an EM country, usually you think about fiscal problems, political problems. And then when you sum up on top of that global or big countries like US pushing and surprising us with tariffs, you can think about problems, right? So we have, at the end of the day, we have our own problems here in the EM.

So it should be good news. Of course, it depends a lot country by country. So like myself here in Brazil, we think that the approach on green energy, on clean energy can be good news for Brazil, but not actually good news for the president in place here, Bolsonaro, since he questions a lot of the green environment in the ESG. But for Brazil itself, it could be good news.

- Gustavo, I do want to ask you about the weakening US dollar, and how we should think about that in the context of emerging markets, and how we should also think about just EM in general, given that backdrop.

GUSTAVO ARRUDA: Yeah. Yeah, I think the way we like to think about EM for 2021, we usually think about three channels here. So first, the trade channel. Basically, basically China buying a lot here. Second, it's the global cycle that is going up. Usually, when global growth goes up, we, as an EM, we go up.

And third is liquidity, as you mentioned. So liquidity and the weakening of the dollar tends to help EM, because when the dollar goes down and depreciates, historically, commodity prices goes up. And usually it's not one-by-one. So the beta here is bigger for commodity prices, and helps us in terms of trading and in terms of our balance of payments. So that usually is good news.

- Gustavo Arruda is BNP Paribas' chief economist, joining us from Brazil. We wish you all the best for the holidays and a happy, healthy new year.