2018 July 13 by admin
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.
2018 May 24 by admin
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
2018 April 28 by admin
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.
2018 March 22 by admin
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.
2017 December 11 by admin
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.
2017 November 3 by admin
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.
2017 September 11 by admin
Argentine stocks, after sloughing off disappointment at MSCI’s unmentioned first-tier return with the frontier index up 35% through July, was again on edge into mid-August primary elections, with former President Christina Fernandez charting a Senate comeback to rally the opposition Peronist party. She retains popularity especially among working class pockets in the capital as the current political base, given the large social spending during her tenure subsequently slowed under the Macri government’s austerity policies. However corruption and money laundering investigations have put her on the defensive, and she roughly tied with the ruling Change coalition candidate in the preliminary race ahead of the October mid-term polls. Foreign investors took her revived visibility in stride as the central bank intervened to support the peso after relative stability following its free float. Recent inflation figures still at 1.5 percent monthly and delays in agricultural export proceeds have pressured the currency, but the monetary authority has tried to maintain high real interest rates through a 25 percent benchmark and Lebac secondary market transactions. The exchange rate has slipped over 10 percent in nominal terms the past few months to 17/dollar with the current account deficit wider at 3 percent of GDP on goods and services imbalances, the latter from increased tourism abroad. Fiscal policy is mostly on target with the primary gap around 4.5 percent of GDP despite election-related outlays and consolidation backlash as unions organize against consumer subsidy and provincial transfer cuts. Should President Macri’s grouping hold its own in the October contest the process will accelerate as sovereign bond holders have begun to insist on further discipline with growth pickup to sustain high-yield participation.
Brazil is also grappling with overdue reforms as President Temer survived an initial impeachment attempt and his cabinet vowed to press on with labor and social security changes. The employment code overhaul will update World War II era practices and ease administrative burdens for small business in particular, while pension adjustment remains uncertain with plans to extend retirement age and conceivably shift to private fund reliance as the current generous scheme is an outsize budget drag. The pro-business PSDB, which backed Temer’s ouster, is a proponent while his PMDB, the largest party in Congress is divided a year from the next scheduled national elections. The government must tread carefully after bad publicity over price and service switches at passport offices and other essential arms to save money. The overall deficit is stuck at 10 percent of GDP and the once sacrosanct primary surplus will not reappear over the near-term. Loosening has moved to the monetary side as the central bank continues to reduce the benchmark Selic, with inflation at a 20-year low of 3 percent on incipient economic recovery. However recession is still deep in Rio de Janeiro state a year after the Summer Olympics there prompting a media blitz of critical retrospectives. A former governor is in jail and major politicians in charge of the event contacts face criminal prosecution, as law and order has worsened since the closing ceremonies. Federal authorities have dispatched 10000 troops to patrol the streets and beaches as the sporting facilities originally designed for productive municipal use lay idle in another form of retirement abuse.
2017 June 18 by admin
Venezuelan bonds as top EMBI performers came under pressure for boycott or index removal, after leading houses were reported to have scooped up issues held by the central bank and other captive buyers at a steep discount through small specialist brokers. Goldman Sachs bought a $3 billion chunk at one-third the price through a London intermediary, and Nomura and Morgan Stanley were also involved in deals. Opposition parties in Caracas condemned the move and expatriate demonstrations were organized in Miami and Washington as a former Planning Minister, head of Harvard’s International Development Institute, referring to widespread staple food shortages, dubbed the instruments “hunger bonds.” He called for benchmark index removal as MSCI applied long ago for equities given pervasive exchange controls. Although international reserves are not formally divulged they are estimated in gross terms at $10 billion, roughly equivalent to import needs with scant cushion for debt-servicing. PDVSA has already executed a maturity swap which won bare acceptance with local investor control, and its future was further thrown into question with its chief executive due to depart. A President Maduro loyalist is set to fill the slot, who was previously in charge at US unit Citgo, which has pledged collateral both to bondholders and Russian partner Rosneft in case of default. The Treasury Department increased scrutiny of the relationship as the Trump administration debates sanctions against the regime after the President tweeted about a meeting with the spouse of jailed opposition head Lopez. Military support at home may be wavering as security forces demur at cracking down on street protesters, as Maduro’s bid for a hand-picked national assembly to rewrite the constitution and mollify popular outcry has met with sweeping criticism following the Organization for American States’ anti-democracy condemnation. The Chinese meanwhile are bracing for further losses on their $50 billion bilateral loans with unknown asset claims that could place them in direct conflict with other creditors.
Previous high-flyer Brazil has also lost favor, as MSCI equity gains fell to 3 percent through May, with the Electoral Court to determine whether President Temer received illegal campaign contributions after release of a payoff tape he claimed was “doctored.” Core PMDB party backing may no longer be assured as the stage is set for another potential impeachment. He promises to continue pressing labor and fiscal reform agendas, but major public pension overhaul in particular could be in danger with the budget deficit heading toward 10 percent of GDP despite renewed growth. The Temer recording allegedly came from one of the founding brothers of global meat supplier JBS, which faces bond and stock holder lawsuits after admitting to bribery and accepting a $3 billion penalty. Prosecutors got wind of wider misconduct after investigating inspector kickbacks for tainted products. Beef rival Argentina in contrast paced frontier markets with a 45 percent jump on possible track toward an MSCI upgrade in advance of primary elections before the October parliamentary poll. President Macri and his party intend to underscore economic success with the recession over and fiscal targets mostly honored with a one-time amnesty as $30 billion in capital has poured into one-month central bank bonds with yields over 20 percent. A new internationally-compliant consumer inflation gauge will be operational in July with likely IMF endorsement as the current administration craves its approval after a decade of resistance.
2017 April 15 by admin
Ahead of a $2 billion state oil company amortization in April, Venezuelan bond prices fell to the 40s as the Supreme Court moved to disband the opposition party-led National Assembly in another violation of the Organization for American States (OAS) charter drawing member condemnation. Fifteen countries headed by Mexico had called for political prisoner release and elections before the judicial “coup,” which was reversed when the Attorney General broke ranks with Chavista allies to outlaw the maneuver as unconstitutional. The challenge was the latest senior official blow after February’s US arrest of Vice President El Aissami on drug trafficking charges, and prompted another round of violent street protests against security forces amid worsening food and medicine shortages. Import needs are estimated at $20 billion, twice reported reserves, but oil earnings should rise to $30 billion with higher prices and Chinese loan repayment relief could also provide breathing space. The government is trying to sell PDVSA joint venture stakes to raise revenue but has been blocked in parliament, and the impasse may have animated the mooted closure effort. A miner got a Washington court order to attach oil monopoly assets, as Conoco awaits another likely big arbitration award from nationalization.
Ecuador bonds sagged likewise as President Correa’s chosen successor Moreno defied projections with a 2 percent win over rival former investment banker Lasso, who demanded a recount. The victor, confined to a wheelchair, gained support with his personal courage and common touch, in contrast to the opposition candidate considered aloof and closely tied to the business elite. The legislative majority for Moreno’s party shrank 20 percent to 55 percent, and he inherits a recession and 5 percent of GDP budget deficit after last year’s earthquake which may force resort to the IMF, which offered natural disaster aid.
Elsewhere in the Andeans Colombia’s sovereign ratings outlook was upgraded to stable by two agencies as the current account gap tightened to 4.5 percent of GDP and fiscal reform was passed in 2016, although peace plan spending may erase immediate tax gains. Economic growth has languished at 2 percent, but inflation has halved to 5 percent on food cost reduction allowing the central bank to cut benchmark rates. In the wake of the guerilla accord and mushrooming Odebrecht scandal, jockeying has begun for 2018 elections, with one of President Santos’ ex Vice presidents set to run, although an anti-establishment outsider could enter in the current charged climate, experts believe. Peru stocks increased the same 5 percent on the MSCI index in the first quarter as the government lowered its growth forecast 1 percent to 4 percent, which would still top the South American charts. Inflation is put in the 2 percent target range this year after consecutive misses, and recent flooding could again damage crops. The budget deficit will remain steady at almost 3 percent of GDP despite President PPK’s consolidation pledge as he ramps up early reconstruction and infrastructure spending. The terms of trade switched with commodity recovery to enable surplus return, but copper value remains heavily dependent on Chinese appetite and despite a flurry of commercial overtures to Beijing another bottoming is factored into metals scenarios.
2017 March 25 by admin
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.