Brazilian stocks continued at the front of the core universe and a $1 billon sovereign bond return was acclaimed at a lower than expected 5 percent yield, despite a poor last 2016 quarter bringing GDP contraction to almost 4 percent, and interim President Temer’s popular disapproval rating rivaling his ousted predecessor. Headline scandals also proliferated, with construction giant Odebecht now facing bribery charges and penalties across Latin America, with Peru seeking extradition of former President Toledo for questionable transactions in office. Local prosecutors are investigating hundreds of mayors suspected of corruption, including for deals around the Rio Olympics as the original Car Wash campaign probe drags on, with courts to determine whether the Rousseff-Temer election ticket should be retrospectively invalidated. The current government head waved off this risk and his unpopularity and went on a media blitz to affirm commitment to structural spending reforms, as reflected in legislation to tie discretionary appropriations to inflation increases over the next decade, and limit state pension and social security outlays out of kilter with global norms. The primary fiscal deficit was a record 2.5 percent last year and public debt could soar to 90 percent of GDP by end-decade without program rollback. The currency has rebounded along with currencies from the previous trough and facilitated inflation reduction to 5 percent, and the central bank cut the benchmark 75 basis points at its latest meeting and is on track to slash it to single-digits over the coming months. The easing is share-positive and could spur flat corporate and consumer lending on both demand and supply constraints. The new director of development bank BNDES has concentrated on portfolio restructuring and clarified future direction as providing targeted support to justify its subsidy instead of an all-purpose backstop as in the past. FDI assistance is a priority as $80 billion continues to pour in annually to offset capital outflows and cap the current account gap at 1.5 percent of GDP.
Argentina has been on its own 20 percent roll on the MSCI frontier index and President Macri and his Brazilian counterpart have met and set up commercial and diplomatic teams to revive the moribund trade pact Mercosur, after ejecting Venezuela from the group. The two countries have clashed on auto sector tariffs and the bloc maintains steep barriers against outside goods. The overall trade balance was in surplus in 2016 after a 2015 deficit, with agricultural harvests ample on commodity price recovery and peso collapse subduing imports. Growth has turned positive after last year’s recession and the new Finance Minister, after an early 2017 external bond encore, promises to redress the 4 percent of GDP fiscal gap with measure still protecting the poor. The central bank has kept interest rates around 25 percent with stubborn inflation in the aftermath of floating the peso. The President’s minority party hold in parliament could worsen in upcoming elections, but the opposition Peronists remain too divided for a blowout. One wild card is the possible candidacy of his predecessor Christina Fernandez, now under both criminal and civil proceedings for suspect currency and Iran dealings. The latter claimed the life of the former lead investigator in a shooting incident looking like suicide, amid scrutiny of the government’s self-inflicted policy wounds.