The Pacific Alliance’s Bellicose Bluster
Stocks were unmoved from slides to date as Chile, Colombia, Mexico and Peru formally joined in a “Pacific Alliance” representing one-third of Latin American output and half of exports. The three outside Mexico had previously linked up through the MILA joint exchange which will be second in size to Brazil’s at $700 billion. The broader initiative will extend free trade and labor movement multilaterally to complement bilateral pacts. Lima’s index has been down over 20 percent with the even match between leftist Humala and conservative Fujimori for the presidency after the business community’s favorite candidates faded. GDP growth could fall by one quarter to 6.5 percent this year on softer construction and manufacturing despite 20 percent annual credit expansion, according to officials. Inflation is over 3 percent, and the central bank has continued 25 basis point interest rate rises as rater Moody’s recently warned of overheating. Humala’s original campaign platform vowed renegotiation of mining agreements and higher corporate taxes to fight poverty, while Fujimori’s stressed her father’s law and order legacy and open market-privatization push which risks alienating powerful labor groups. In Chile, worker wage demands have sent inflation to the same level, with the monetary authority lifting the benchmark to 5 percent from the previous near-zero rate under quantitative easing. Domestic demand is up 15 percent from the year-ago quake period, while copper-related inflows have resulted in record peso strength despite $4 billion already used for intervention. As an oil importer, fuel subsidies have caused a 1 percent of GDP fiscal deficit which may worsen with reconstruction spending.
Colombia’s sovereign investment grade return has brought decent cross-border bond and equity allocation according to fund monitors, as private foreign debt has almost doubled to $28 billion the past year. The Santos Administration predicts 5 percent GDP growth aided by likely imminent passage of a US free trade deal, as $20 million daily entry under an inherited smoothing program has not broken the peso’s rise. Flooding has lifted food prices, as the central bank’s progressive “normalization” leaves the policy rate at 4 percent. Mexico’s bourse has seen $400 million in outflows, although long-term Treasury bond commitments remain solid at $1 billion. The currency has soared past the 12 to the dollar barrier on historic international reserves of $125 billion supplemented by a 2-year $70 billion IMF flexible credit line. The government rejects resort to capital controls, and has imposed anti-monopoly penalties on phone magnate Slim. However auto production slipped in April on Japan’s supply disappearance and oil capacity is also dwindling as the next presidential election cycle approaches, with fiscal reform on hold as a bitter aftertaste to the current sweet spot.
