Mercosur’s Mercurial Mercy Mission
Brazilian assets looked for traction after the central bank signaled continuation of its $60 billion foreign exchange hedging program through next year and opposition candidates including former well-placed environmental activist Silva merged their ticket to represent a credible challenge to the incumbent, whose favorability ratings have recovered from 30 percent during the earlier massive street protests which have continued with less intensity. Most top officials stayed home during the annual Bretton Woods institutions jamboree as the state development bank head vowed future lending moderation and selectivity as it dominates new credit creation and quasi-fiscal operations as the primary surplus dwindles to an estimated 1 percent of GDP. Growth will be around 2 percent this year, as the benchmark interest rate was nudged again toward 10 percent despite a better inflation reading than previous months’ 6 percent-plus. With high household debt service consumption is slack as external accounts show a 3.5 percent of GDP current account hole. With inflow tax removal and real stabilization foreign investors have returned to government but not corporate debt in light of the OGX bankruptcy saga, and continue to shun equities off 20 percent with scotched IPOs and rethink direct outlays predicated on indefinite middle-class boom. The main stock exchange index will be recalculated based on actual free float and liquidity, after a stricter corporate governance tier drew a following. Trading volume has dictated weightings, and the 90 percent loss associated with the Batista empire’s implosion deepened recent negative direction. Bonds are now quoted at 20 cents as both sides have lined up legal and financial counsel for an expected insolvency filing under Brazil’s code. Big holders like Pimco and BlackRock are in the $3 billion payment queue although domestic public and private sector banks profess to be unconcerned about large exposures. External debt watchers claim the risk should not contaminate other names, just as Mexico’s homebuilder failures were idiosyncratic there. Homex, Geo and Urbi have defaulted as government policy switched to apartment construction from home-buying help just before President Pena Nieto’s election. They also cancelled derivatives contracts with international investment banks that are now the subject of lawsuits.
The $5 billion offering by Bank of Brazil’s insurance affiliate early in the year was a rare success that also highlighted untapped financial services alternatives, as the business community generally seeks to diversify in the sub-region long hamstrung on Argentina trade spats. Paraguay in the original Mercosur bloc has undergone re-evaluation under President Cartes, a wealthy entrepreneur who returned the Colorado Party to victory. Double-digit GDP growth is on tap with better farming weather, as the new team emphasizes mining potential and highway building with the proceeds of an inaugural $500 million sovereign bond. Foreign-owned banks and telecom firms have also floated paper abroad and private pension funds may soon be in local capital markets ascendancy according to the administration’s vision.
