Weekly Economic Briefings > Emerging Markets Weekly Economic Briefing

A change in government and fiscal reforms provided a huge boost to policy credibility in 2016, and the further improvements will likely come via passing the test of time. Further rebalancing of the fiscal-monetary policy mix will be more gradual, but we think that bond yields will fall by 150-200 basis points to 10% by end-2018, a slower pace of convergence with international norms, but still lucrative for investors.In particular, we think that, as of now, the bond market is not pricing in enough rate cuts by the central bank (BCB). Market consensus and our estimates suggest that, by having regained control of expectations, the BCB will be able to cut the policy rate to single digits in 2018 while keeping inflation at the target. With short rates expected to fall by another 450bp in the next 24 months (after November's cut), bond yields have room to fall considerably below this year's low of 11%.Another factor reinforcing our call is the increased predictability of fiscal policy brought by the 20-year spending cap. By ensuring that government expenditure will be flat in real terms in the long term, authorities managed to spread the cost of a 5% of GDP fiscal tightening over several years. As such, the debt-to-GDP ratio will fall steadily from 2020 onwards without the need for tax hikes, hence minimising the cost to growth.