Brazil’s Competitiveness Fix Figments

Brazilian shares stayed at the rear of main Latin markets, with utilities joining banks in beatings, as President Dilma Rousseff ordered business and consumer electricity cost reductions as part of an overall infrastructure modernization program targeting $60 billion in near-term public-private projects. Power firms were already reeling from bond defaults as financial institutions have long been under the gun to lower borrowing rates in line with the benchmark Selic slash to just over 7 percent despite worsening arrears. With anemic demand at home and abroad keeping GDP growth at 1.5 percent as food and services push inflation toward 5 percent, supply-side reform has been prominent on the policy agenda with proposed administrative and tax streamlining. China appetite has offered a mixed reading for iron ore which constitutes one-quarter of commodity exports, as the new leadership at giant Vale prepared investors for a price around $90/ton and future operations rationalization. In offering relief to workers through other means the administration has held firm on resisting civil servant wage demands which could jeopardize the 3 percent of GDP primary budget surplus, while also hinting that the goal is flexible. On the exchange rate the course has also shifted to two-sided intervention to preserve a 2 real per dollar zone, which provided support for an oversubscribed fresh sovereign bond in August. The debt market which must mobilize long-term funding for the consecutive World Cup and Olympics gatherings through mid-decade was criticized in a recent IMF working paper for the 3-year average maturity of government paper and the small corporate size of 10 percent of GDP also of short duration and “limited buyer base and issuer diversification.” 90 percent of the instruments are indexed with scant secondary trading by predominantly bank holders. Securitized activity for mortgages and trade receivables is expanding under the FIDC program and infrastructure bonds could benefit from new tax exemptions. However prime names will continue to spurn the channel with the availability of discount credit from state lender BNDES, which accounts for one-tenth of the financial system and has doubled its balance sheet the past five years. The analysis points out that big users can access alternative capital sources and that the gap it was founded to fill is now with midsize enterprises and as an anchor partner on domestic and foreign mega-deals.

Mexico, in contrast, has topped the large exchanges with a promised lighter official touch toward the currency, credit and energy markets as PRI President Perez Nieto readies for the post with near-party majorities in both houses. Economic growth could triple Brazil’s on solid internal and US support, and the outgoing Calderon administration may enact long-sought labor rule changes. Both equity and fixed-income players were relieved when giant Cemex won creditor approval for another restructuring, as relative standing in the cross-border rivalry looks to be cast in concrete.