Latin America/Caribbean

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The East Caribbean’s Test Tube Tsunami

2018 August 14 by

With continued economic and banking strains the past decade in the six island East Caribbean Currency Union, with a joint central bank and currency peg, an IMF working paper applied stress tests to model major shocks on the interconnected financial system, which revealed that a regional crisis could trigger the collapse of half its lenders. Bad credit is down from the peak but still one-tenth the total and provisioning lags while good deposit growth has created excess liquidity. The sector averages 150% of GDP, with St. Kitts and Nevis and Montserrat at double the proportion, and Grenada, Dominica and Antigua and Barbuda at or below the norm. The 35 institutions are evenly split between local and foreign-owned, mainly from Canada. Interbank exposure has dropped in recent years, but sovereign debt holdings are 15% of assets in some members and close ties are common with non-bank credit unions, insurers and pension funds. In St. Vincent and the Grenadines they control 10% of deposits, and wholesale withdrawal carries risk. These relationships are not simulated in the disaster scenarios with the paucity of information and data, and the exercise also excludes global groups that would depend on their parent for support in the absence of separately-capitalized area subsidiaries. The East Caribbean Central Bank has limited lender of last resort capacity and deposit insurance is lacking. After calculating isolated bank failure and severe individual country and regional output contraction that could result from tourism scares or natural disasters, the research finds that 10 institutions would be insolvent in the direst case, as undercapitalization and heavy public debt portfolios play out. The results are an additional warning to foreign frontier bond investors after serial restructurings in Grenada, and planned haircuts and swaps now in neighboring Barbados. If an IMF program accompanies the workout as in Jamaica, the process can be further complicated and lengthened with authorities there conducting two exchanges over the course of consecutive arrangements. In the broader region, calls have circulated for sovereign wealth fund formation to act as contingency buyers, as the latest Invesco survey of the field identifies 2% emerging market debt allocation. It points out that equity and alternative investments in turn are fast expanding categories, as managers look to increase returns after mixed records the last decade.

According to fund trackers retail and strategic investor bond outflows accelerated at the end of the first half, and are larger than during the Taper Tantrum five year ago. ETFs are 15% of the former, and dedicated manager cash positions remain steady at under 5%. Even though sovereign wealth vehicles as a group may level off in the near term, Norway and others maintain big exposures at 15% of the fixed income bucket. Foreign ownership of local bonds stands at a 25% average, and frontier name participation in Central and Latin America, like Costa Rica and Ecuador, may be stretched in the view of major market-making firms. In mainstream instruments technical indicators suggest excess weightings in Mexico, Russia, South Africa and Indonesia as the respective regions endure practical stress tests the IMF may help cushion in financial and research terms.

 

 

Argentina’s Rough Repeat Reentry Paths

2018 July 13 by

Argentine stocks and bonds tried to recoup big losses at mid-year after turning again to the IMF for a 3-year $50 billion standby program, and gaining readmission to the MSCI core index starting next May following capital market modernization steps. Massive portfolio outflows began in April to shake the peso, and the central bank proved unable through intervention and interest rate hikes to halt double-digit decline against the dollar and its head resigned with Fund recourse. Local and foreign investor lack of monetary policy confidence was apparent for months after inflation persisted at above target 25% and a neutral to easing stance was pursued nonetheless. Fiscal credibility was also in question with likely overshoot of the 3% of GDP deficit goal on spending plans ahead of 2019 elections, with President Macri widely expected to eye a second term. With access to multilateral credit lines, including from the World Bank and Inter-American Development Bank, he can meet the $20 billion external financing hump over the next year and a half, but near-term growth is set at less than 1% under ambitious budget and exchange rate blueprints. They envision a primary surplus and subsidy and provincial transfer cuts, and regular $5 billion incremental boosts to $25 billion in net reserves while steering inflation toward 20%. Central bank autonomy will be reinforced under new legislation, and the Treasury will conduct continuous currency auctions as domestic bond LEBAC stock is reduced. The policy rate will rise to 40% by year end for peso stability and then can relax for slight depreciation against the dollar, assuming pass-through inflation is on track toward moderation and fourth quarter union wage settlements do not upset the mix. Austerity will combine with agricultural drought for technical recession, and Brazil’s outlook as a leading export destination has soured at the same time, with the pre-election 2018 growth forecast recently halved to 1%. A baseline scenario projects no commercial borrowing except through public-private infrastructure projects, as buybacks retire more expensive debt. The current account gap will remain high over the medium term, but level off at 4% of GDP with import compression, according to initial calculations.

Brazil as well fell from grace as stocks went negative through May, as the central bank defended the real through swaps after a long respite and the benchmark rate cutting cycle bottomed. A national truckers strike over increased fuel costs tested investor patience over smooth inflation and political transitions. A large fiscal adjustment is need to restore the primary surplus and social security solvency and cap ballooning public debt, and Lula whose administration bequeathed the mess, remains the presidential favorite while in prison on a corruption conviction. Right winger Bolsanoro and leftist Silva are next, each with 15% in opinion surveys, but “none of the above” respondents are an unprecedented chunk. The candidates attack establishment taint and pledge wholesale reform but have been careful not to propose draconian spending curbs and state enterprise privatization to appeal to swing and young voters. In the balance of payments FDI at 3% of GDP has more than covered the current account hole, but a market-unfriendly election result could interrupt the inflow and unleash corporate remittances to tarnish that silver lining.

 

 

 

 

 

Barbados’ Motley Default Crew Crucible

2018 June 25 by

After her party’s sweeping election victory taking all seats in parliament in a repudiation of the government’s economic mismanagement, including failure to modernize sewage treatment as it leaked into tourism spots, Prime Minister Motley bowed to the inevitable with an intended IMF program and debt restructuring. Last year’s emergency fiscal plan showed meager results as ratings agencies kept the near default CCC sovereign grade, and commercial banks were forced to raise bond exposure on incremental central bank deficit financing withdrawal. Two thirds of the debt is domestic, but international bond prices almost halved following her announcement with the likelihood of a haircut coupled with thin liquidity. Analysts shifted course after originally predicting the Jamaica model would be followed and spare foreign obligations. Its bonds and stocks have languished too this year, with the latter down 5% on the MSCI frontier index. Trinidad’s component in contrast was up 10% through May on higher energy export value, although it is at risk from Venezuela’s mass exodus with Tobago just a short boat trip away. Both neighbors are at least growing unlike Barbados, where output shrank half a percent on an annual basis into the poll period. The Fund in its latest Article IV report projected 1% medium term expansion with the reported 135% of GDP gross debt, reserves at less than two months imports, and “lingering uncertainty.” The current account gap remains at 2-3% as planned hotel and oil facility privatizations are delayed. The 2017 adjustments were geared toward tax increases while state enterprise reform lagged, according to the review. Government borrowing was almost half of GDP the last fiscal year and bank minimum allocation was hiked to one-fifth of deposits in January as private sector credit was flat. Bad loans are in high single digits and profitability is minimal, but capital adequacy at 20% of assets is a shock absorber. The public wage and pension bills are crushing and job and benefit cuts are overdue and social safety nets must also be better targeted in the future, the Fund observed. Fifteen companies and funds receive most of the transfers which are almost 40% of total spending, and the national social security scheme runs large arrears and has disproportionate government bond holdings.  The insurance sector is stagnating, offshore business registration should be more closely monitored, and the longstanding currency peg may be in question with evidence of overvaluation, it added.

The Caribbean does not feature as a preferred venture capital destination in the latest industry statistics and rankings compiled by EMPEA, which had Asia and Latin America ex-Brazil in the top 5 spots. The former took 90% of Q1 $7 billion fundraising, and disclosed transactions for the period were a record $17 billion. E-commerce deals were one-third the total, with fintech just behind as a popular play. Impact investment vehicles gathered $200 million through a half-dozen offerings, although 80% of LPs surveyed specifically weigh environment and social factors in allocation. Emerging markets represent one-tenth of global subscriptions and 15% of company activity, while private equity penetration rates remain negligible at under 0.5% of GDP across the geographic range.

 

Venezuela’s Refugee Wave Window (Financial Times)

2018 May 24 by

Emerging market fund managers still investing in Venezuela are no longer just focused on debt restructuring scenarios heading into May elections in the wake of self-inflicted economic collapse, as over 1 million migrants and refugees have already fled to neighboring countries to roil their financial markets with prospects of millions more to come, according to a study by the Washington-based Center for Strategic and International Studies. Over 500,000 Venezuelans are in Colombia in advance of the presidential race there, 250,000 each are in Ecuador and Panama, and 150,000 in both Chile and Peru, and 50,000 in Brazil. Latin American stock markets outperformed rival regions on the MSCI index through the first quarter, but the influx’s humanitarian and fiscal costs have yet to fully register.

The UN refugee agency officially declared a crisis and called on regional governments and international development lenders to exercise individual protection and share the funding load. The Inter-American Development Bank and World Bank are gearing up for infrastructure and social support, but established  public-private sector arrangements like the cross-border Latin America Integrated Market (MILA) stock exchange between Colombia, Chile and Peru could also create specific capital market instruments to foster refugee employment and business creation upon arrival.

Colombia has an estimated 50,000 Venezuelans daily pouring into border towns like Cucuta to meet daily food and health needs or to stay indefinitely. In addition, it has an unresolved legacy of internal displacement as the peace accord negotiated by outgoing President Santos with the guerilla FARC goes into effect, under the general principle of exchanging army demobilization for peaceful civilian return with promised job training. However the fiscal rule in place limits the deficit to 3% of GDP this year, and the front-runner in the end-May presidential contest, Ivan Duque from ex-President Uribe’s party. has signaled a harsher stance toward former rebels. The current account gap is at the same level placing pressure on the sovereign rating, despite higher foreign direct investment in the oil industry. Growth and inflation are in the 3% range, as central bank easing is set to continue. A second round runoff is predicted with more centrist opponents who have tried to co-opt Duque’s business-friendly platform, and forced migration will be likely sidetracked as a priority during the leadership transition as headline movements demand action.

Chile is host also to Haitians who fled the poorest nation in the hemisphere after the 2010 earthquake and subsequent hurricanes, and moved further south after deportation efforts in Brazil in particular. It has traditionally attracted seasonal low-wage workers from neighboring countries, but a permanent presence has posed cultural and labor market challenges. President Pinera, in his second term, promises to revamp the economic model in a free-market and socially-responsible balance, in part to salvage his popularity which previously suffered under an image of wealthy elitism. Refugees outside Santiago seek employment in the copper mines with keen competition and few protections, and like the middle-class students protesting under the previous administration seek wider university access for advanced education and skills. With 3.5% predicted GDP growth and negligible inflation, the solid investment-grade credit rating is intact, but Chile will be a test case for a future “melting pot” demographic and productivity engine.

Peru was the Andean stock market champion with a 10% first quarter gain as President Kucyzynski, implicated in the continent-wide Odebrecht scandal, resigned and was replaced by a technocrat successor and cabinet. Amid the political jockeying before his departure, plans to deepen MILA exchange ties, originally described to MSCI when it threatened frontier index demotion, were shelved and asset managers expect new President Vizcarra and his team to restore momentum. Ecuador takes in the Pact’s largest Venezuelan group after Colombia, and intends to reenter the MSCI frontier gauge and consider new local and global financing sources as President Moreno breaks with his socialist predecessor on fiscal discipline and investor compatibility. He plans to again tap global bond markets and renegotiate Chinese debt terms, and may even consider an IMF program to smooth fundamental and structural shifts including on refugee absorption.

As the international aid and diplomatic communities mobilize to address the systemic Venezuelan exodus, financial markets looking for fresh impetus could act with the same urgency to adapt solutions. On the MILA, listed companies could readily issue securities aimed at local and overseas buyers to expand refugee-related capital, hiring and supplier relationships benefiting host economies. Unlike governments and development lenders, this platform could  generate longer-term commercial flows so far absent in the” burden-sharing” mix, and offer a more optimistic prosperity prescription to shape the regional debate

Latin America’s Perverse Political Parade

2018 April 28 by

Latin America topped Q1 main stock market results with Peru and Brazil roughly tied with 10% gains, as the President finally bowed to congressional will and public anger at his consulting for disgraced construction firm Odebrecht and resigned, with the moderate vice president assuming the term’s remainder. The move ended months of political standoff and maneuvering and the departure may not protect PPK from judicial prosecution as he must stay in the country for now. Elsewhere Central America kicked off the election season with an unexpected cliffhanger in Costa Rica between the “two Alvarados,” one from the ruling party and the other an evangelist entertainer. The former won the second round with a minority in parliament which will continue to frustrate long-promised fiscal reforms to pare the 60% of GDP public debt. Government salaries take half of revenue, and popular opinion has turned against democracy with only 60% backing on the heels of scandals such as around questionable Chinese cement imports. El Salvador also had legislative and municipal polls in March with an almost 60% abstention rate, with the opposition Arena alliance ahead of the FMLN in power, which suffered its worst defeat since inception. The outgoing mayor of the capital Bukele was not on the ballot, but is tipped as the frontrunner in next year’s presidential run. The incumbent Sanchez Ceren has disappeared from view on rumored illness as GDP growth slugs along at 2% amid increased murder and poverty levels. In Cuba non-democratic next generation transition is also underway as Raul Castro hands over the nominal mantle to Vice President Diaz-Canel in his late 50s, who is a career Communist functionary with unknown economic policies. US tourism is down under stricter Trump administration travel curbs, with less than 5 million visitors in 2017. Havana in turn has cracked down on private sector business, which accounted for over half a million jobs by last count, but coders have found a place with European outsourcing, according to reports.

Mexico was flat for the period amid continued bickering over NAFTA 2.0, with about one-third of the 30 chapters completed and negotiations overshadowed by Washington’s steel and aluminum tariff decision hitting Canada. The latest rounds have been stuck over hot button national content, dispute resolution and expiration clauses with the US Trade Representative pushing for “creative solutions.” Inflation has eased to 5.5% with an eventual 3% target, as new central bank chief Diaz de Leon is on shock watch and prepared to raise the benchmark rate and peso intervention ahead of July’s presidential contest. Although retail sales are weak, manufacturing has been healthy with the PMI at 55 and real wages are up. Leftist-populist candidate AMLO is ahead at this stage with a 40% voter preference as backlash against the main parties’ corruption and security failures. He has downplayed past radical approaches to wealth redistribution and drug cartel relations, and repositioned as a competent economic manager who would scrap the proposed $15 billion Mexico City airport upgrade as wasteful. Conservative PAN standard bearer Anaya had been in second position with charisma and age drawing young and independent support, but now faces allegations of suspect real estate deals. The stock market itself has come under insider trading doubts as the regulator examines patterns in financial group listings, but punishment is rare as impunity likewise lingers in that culture.

Latin America’s Ineluctable Election Elevation

2018 March 22 by

Financial markets in Argentina, Brazil and Mexico strained to continue early year positive direction, with looming presidential election cycles overwhelming business and economic ones themselves presenting a mixed picture. Argentina’s contest is not until next year, but another term favorite President Macri has run into trouble with his “gradualist” adjustment program initially cheered and now displaying lackluster growth, inflation and FDI results. Labor unions long associated with the Peronist political opposition have gone into the streets to press for annual wage gains above the 15% target, after the price gauge was up 25% last year. The union federation head has been accused of embezzlement, but orchestrated a truckers strike also designed to challenge proposed labor reforms. The central bank’s anti-inflation credibility in turn was eroded after a surprise unexplained interest rate cut which may have been designed to curb peso appreciation with strong foreign portfolio inflows. The government issued $10 billion in external debt through February, and provinces and corporations joined the bandwagon. The carry trade case is still compelling on double-digit yields but the one-way bet will be muted with a volatility dose that the monetary authority could intend. The strategy could be compromised by chronic direct investment weakness, at 1.5% of GDP half the regional average, in the capital account. The infusion is also needed to cover the higher current account deficit as drought ravages agricultural exports, and consumers embark on an import spending binge with restrictions lifted from the Kirchner era. Industrial production was flat in December as a recent construction boom could be over, and the 2017 growth tally will not reach the 3% threshold for bonds’ warrant premium. Investors can point to fiscal deficit progress with subsidy rollback, but balance will remain elusive pending implementation of structural tax and pension changes. The President and his team propose more action in a second term, but social transfer cuts were a wedge issue in the parliamentary polls several months ago, and rival party chamber control supported by opinion surveys against future reductions will be difficult to overcome.

Brazil enthusiasm picked up on a court ruling that former President Lula, the front runner with a commanding lead over right winger Bolsonaro, was ineligible to run with his criminal bribery conviction, but left after he appealed the decision. The pension overhaul narrative was dented too as the Temer Administration, seeking supermajority congressional passage of a constitutional amendment, abandoned the effort in the face of its 5% popular approval. Ratings agencies downgraded to “BB” in response, as the embedded cost of mid-50s early retirement is predicted to swell government debt to 75% of GDP by end-decade. S&P also cited unmet “fragilities” in the federal fiscal framework, including previous state and local authority rescues since they cannot place debt. “Subdued” growth estimated at 3% this year will not alter the budget path, and inflation could also increase over the medium term from current under-target lows. In external accounts the agency praised near elimination of the current account hole, but warns the country has reverted to a net debtor position with private sector borrowing, with total net liabilities over 250% of receipts. Petrobras tops the list with close to $150 billion outstanding, after settling a US class action lawsuit for $2.5 billion on clear shareholder candidate victory.

 

 

 

Central American Remittances’ Premium Protection Stakes

2018 February 24 by

With the US planning to lift “temporary protection status” for Northern Triangle El Salvador, Honduras and Nicaragua and Haiti migrants, remittances jumped 8% to $75 billion for the seventeen countries in the Inter-American Dialogue database last year. The pace was a multiple of 1% regional GDP growth and mirrored export increase. For Central America and the Caribbean 3.5% growth was due to a 15% remittance uptick, and the numbers reflected continued North American labor demand as well as dollar depreciation in Mexico, the Dominican Republic and Costa Rica. The violence-prone Triangle area has been in recession for a decade and families continue to head to the US border with apprehensions also declining. In Guatemala as an example 15% of the Western Highlands population left and transfers were up 17% according to the central bank. One-quarter of El Salvador’s citizens want to leave, surveys show, and in the Dominican Republic despite greater stability the number of transactions has jumped. Haitian emigration on the eighth anniversary of the record earthquake is toward Canada and South America as well, particularly to Brazil and Chile, which now hosts 100,000 in contrast with 5000 before the event. Mexican remittance growth was steady at 6%, but the weaker dollar may have prompted slightly lower volume. The individual principal amounts sent  roughly reflect the 2016-17 aggregate changes, but deportation fears may be forcing more savings on hand in case of such action. The flows contribute in the range of 5-35% of GDP, and work abroad is often the main alternative to informal employment at home, with substandard pay and labor protection. In El Salvador and Haiti immediately targeted for status termination, they account for one-third of national income, and Haitian migrants with the TPS designation are 6% of the total, the Dialogue report notes. President Trump allegedly used an epithet to describe the poorest hemisphere country, as a 2017 survey of five US cities revealed mounting Latino anxiety over potential law enforcement crackdown or new taxation.

 

On average a dozen payments are transmitted annually and only one-tenth are through the internet. With a tax 40% polled would resort to informal services, and one-quarter plan to cut amounts. One-third of immigrants think they will be deported, and 60% do not expect home government support. Over half would be open to a fine to normalize status, and the same portion claimed jobs were harder to get with the Administration’s tougher despite the healthy US economy. 70% of respondents believe that the door will be shut altogether to legitimate refugees as the provisional shelter program also lapses. Honduras’ external bond was shaky as President Hernandez was inaugurated for a second term after a disputed election fostering street protests and a security force response with live ammunition. The opposition candidate, a sports broadcaster, cited computer manipulation of his apparent victory and national strikes were organized against “dictatorship” as the Organization for American States urged a rerun. Chile may harden its line against Haitians after President Pinera’s second term win, which upgraded the growth forecast to 3.5% on boosted private sector confidence and modest rate cuts alongside but he may turn previous social spending promises to rubble.

Chile’s Elevated Election Rerun Fatigue

2017 December 11 by

Chilean stocks on a 35 percent run on the MSCI Index through October were humbled as repeated rightist presidential election favorite Pinera did not won on the first round as expected, with respective  center and far left contenders Guillier and Diaz finishing close behind. He would succeed outgoing President Bachelet for a second time, after her term was marred by meager growth at 1.5% this year and stagnant fixed investment from tax, labor union and private pension changes. She angered the mining community by refusing projects on environmental grounds, while expanding university access to low-income students. With family members caught in scandal, her popularity rating dipped below 25%, and the ruling coalition could not unite around a candidate leaving the field seemingly set for a Pinera romp although his abrasive character and past allegations of illegal campaign funding continued to alienate voters. In contrast with his initial sweeping free-market platform, the latest version has been cautious to court moderate support but includes easier copper industry permitting and labor rules after export rebound on Chinese demand. As the contest plays out inflation is subdued at under 2 percent aided by a firmer currency, and the central bank after an extended hold may cut rates into 2018 should food prices be unaffected by weather conditions. The business-friendly contender’s lackluster result may be an ominous signal for upcoming polls in Colombia as President Santos, another unpopular incumbent, exits on equally meager growth and a controversial peace deal with the guerilla FARC, which has registered as a political party to offer its own standard-bearer for “economic justice.” Oil export earnings are up, but the current account deficit will still come in around 4% of GDP, and the fate of fiscal reforms to curb that gap is uncertain under the next administration, which may be under public spending pressure to meet infrastructure and social commitments.

Mexico’s mid-year equity rally has petered out as the election cycle there looms alongside NAFTA renegotiation impasse after several rounds. Ratings agencies began to present worst-case scenarios under pact dissolution which would trigger the worst recession in a decade, as officials reject devastating outcomes with the remaining global network of trade relationships. Presidential early poll leader Lopez Obrador has toned down his trademark populism but promises to spurn a bad North America deal and revisit private opening of the state petroleum sector. He directs venom toward President Trump as an “irresponsible neo-fascist” while promising to uproot corruption and drug trafficking at home through new approaches. An independent opponent, the spouse of ex-President Calderon, has emerged with 10 percent backing under a “conciliator” vision appealing to centrist voters after she spurned the conservative National Action Party. The ruling PRI has not yet designated a successor to President Pena Nieto, whose reputation suffered from consecutive insider scandals and economic and law enforcement missteps. Central bank head Carstens steps down in November with annual inflation at 6 percent, triple the growth rate, and rate rises on the horizon to match the US Federal Reserve’s likely trajectory. The peso again dipped toward 20/dollar as sunset clauses and other negative constructs gripped upcoming tripartite talks and runoffs.

Jamaica’s Weather Beaten Backstop Boomerang

2017 November 29 by

Jamaican stocks were up almost 75 percent on the MSCI Frontier index and external bonds were reopened at record low 5-6 percent yields, as the IMF praised strong compliance under the second review of the 3-year $1.7 billion program. Fiscal year 2016-17 growth was 1.5 percent on second half mining, weather, and agricultural lag offset by “buoyant” construction and business outsourcing which reduced unemployment to 12 percent. Headline inflation was 4.5% in August, within the target zone, and the central bank dropped the benchmark rate 25 basis points to sustain double-digit credit expansion with bad loans now under 5 percent of the total. The current account gap rose to 2.5% of GDP with car and machinery imports on $2 billion in net international reserves and slight local dollar depreciation in the last quarter. In the financial sector securities dealer oversight tightened and competitive foreign exchange auctions were launched. The budget was roughly in balance with a 7 percent primary surplus amid slow progress on reducing public sector wages and “reshaping” government, according to the Fund’s October report. Pension reform is under preparation with Inter-American Development Bank help, and one-fifth of assets in two big state bodies, the Urban Development and Factories Corporations, could be divested though the stock exchange and direct tenders, with the plan a key trigger for the market rally. While all securities brokers observe a master retail agreement, legislation has not been finalized for a new bank resolution regime and pension fund portfolio guidelines for more domestic and international diversification. The central bank may need recapitalization, and foreign exchange exposure is a “sizable share” of financial institution balance sheets, equal to 10 percent of GDP for non-loan investment. Intermediaries often finance themselves through subsidiaries and are in turn tied to corporate conglomerates threatening wider spillover risks, the analysis cautioned.

A separate IMF piece of work soon to come out as a book examines the broader Caribbean distressed debt legacy over the past decade which peaked at 15-20 percent levels and have only marginally improved with lingering restructuring, sale and write-off obstacles. The highest loads are in the Eastern Caribbean in St. Kitts and Nevis and Dominica, while at the opposite end Trinidad and Tobago, with stocks ahead 7 percent, has less than a 5 percent burden. They contribute to economic drag, and courts take on average three years for insolvency cases. Valuation and registration are inadequate and social customs also weigh against disposal as property foreclosure is shunned. The research asked bank executives and government officials to rank the chief resolution impediments, and the former stressed economic, legal, collateral, and real estate conditions, while the latter cited poor creditor information and underwriting and the absence of formal impaired asset markets. The authors split the difference by urging clearer loss recognition rules and greater credit bureau use as in Jamaica in recent years. Judicial and bankruptcy frameworks should be revamped and beyond the Bahamas a pan-regional NPL market could be set up, building on OECS harmonization efforts in asset management and credit reporting to create “momentum” rather than creative accounting, they suggest.

Argentina’s Churlish Change Election

2017 November 3 by

Argentina financial assets shook off a brief scare about a parliamentary election opposition and Peronist party comeback against President Macri’s new Change movement with a rally after it won 40 percent of the vote and gained seats in both houses although still in minority position. The victory reflected popular acceptance of the government’s “gradualist” reform agenda despite opinion survey dips as well as rivals’ weakness, with no clear candidates emerging to claim the mantle of ex-President Christina Fernandez, who was narrowly defeated in a Buenos Aires Senate race as the target of corruption and abuse investigations during her time in office. Ruling party momentum should translate into promised labor, tax and capital market overhauls as details are proposed. Corporate income rates could come down 10 percent, and worker formalization could include amnesty while the social security system stays intact. Local institutional investor development, particularly mutual funds, is a priority with near-term elevation to core MSCI stock market status in mind. An infrastructure public-private partnership framework is also set to roll out an estimated $10 billion in annual projects through end-decade. The economy is out of recession and the fiscal deficit will improve this year, while inflation is stuck at 20 percent forcing the central bank to keep interest rates high as credit, especially mortgages begin to pick up after a prolonged freeze. The budget gap relies on external financing with another $2.5 billion sought before year-end, and exchange rate adjustment has lured investors after the decade-long capital controls regime while widening the current account deficit. The administration has pushed to realize potential from non-agriculture exports with currency competitiveness, but the scope is limited pending productivity and technological changes for small-scale manufacturing.

Elections are in the spotlight throughout Latin America as a main risk amid commodity recovery and sovereign ratings stabilization. Brazil’s Finance Minister Mereilles is rumored as a presidential candidate in 2018, as opinion polls show former convicted President Lula in the lead amid a pack of ideological entrants who may be too extreme for average voter appeal. Social security overhaul could be enacted before the thick of the political cycle, with modest trims the most likely scenario. Interest rate cuts may have run their course with inflation at the bottom of the target band, despite output slack, as development bank subsidies are also pared with a market-based benchmark. President Temer’s approval number is only single digits and he barely escaped the impeachment track, but is still in prosecutor sights for allegedly pocketing bribes from disgraced meat purveyor JBS, which faced securities holder lawsuits in the US and other jurisdictions.

Mexico’s peso has again flagged under US threats to dissolve NAFTA, after several negotiating rounds ended in acrimony. Trade Representative Lightizer insisted on strict local content revisions and a periodic sunset clause under which the agreement would automatically expire every five years without explicit renewal. Mexican officials tried to portray the talks as normal posturing while pointing out that half of cross-border commerce would survive pact abolition. The economists presenting the Mexican side have tried to make the case that the bilateral trade deficit is due to multiple factors, and pointed to recent breakthroughs in state oil company Pemex’s private auctions as removing barriers, but Trump tweets call for more dramatic change.