Brazil’s Scathing Score Embarrassments
Brazilian shares tried to sustain positive momentum after a lopsided semi-final World Cup loss to Germany followed on the heels of abysmal primary surplus and industrial output numbers combining to place popular opinion in an anti-Dilma funk with her re-election bid underway. Without one-time revenues in May the surplus reading was 0.5 percent of GDP as the President raised social spending and extended auto and retail tax breaks and state development bank subsidized lending. The March freeze was swamped by new public sector outlays, although net debt remains manageable at 35 percent of output worsened by the currency’s resumed appreciation. Manufacturing and durable goods production continue to be negative three months ahead of the poll with the incumbent at 40 percent of likely voters, double her closest challenger as respective media time is allotted. Inflation and slow growth are the main campaign themes as Workers Party predecessor Lula came to the government’s defense in hailing the inherited policy model’s “strong job creation record.” He acknowledged the need for better infrastructure and technology investment, but described them as “smaller reforms” in comparison with neighbors’ economic and financial stability challenges. He avoided comment on the portfolio expansion at state-run BNDES and Caixa as they prepare to sell distressed debt holdings to specialist funds. Asset managers are desperate for fresh funds as the $1 trillion industry reported the lowest inflows in a decade through mid-year on foreign investor net redemptions. Some of this money was diverted into Argentina debt and equity which bounced 20 percent over the period despite recession, the peaking of agricultural export proceeds, and wider parallel market depreciation. Following the US Supreme Court’s denial of a New York judge’s $1.5 billion repayment order to holdout creditors, indirect negotiations have begun through a mediator as an end-July default deadline looms on blocked normal bond service. The two sides have taken out full page ads in leading newspapers to press their cases there as Economy Minister Kicilof has used his post to lambaste “vulture blackmail” during international organization speeches. Holders of euro-denominated instruments have requested clarification on the extraterritorial reach to the Euroclear system as banks there otherwise bridle at the large sanctions penalties meted out to groups like BNP Paribas, which will pay a $9 billion fine for Iran and Sudan dealings and be suspended from correspondent relationships.
Chilean stocks have lagged however as President Bachelet toured world capitals to explain her agenda for change in the longstanding economic model there, including higher taxes and loophole elimination and new constitutional formulas for military and state copper company Codelco funding. Consumer loan expansion has also drawn central bank caution and private pension asset pools have frozen domestic and foreign allocations pending possible guideline and operating revisions. The government pledges to leave the rainy day sovereign wealth fund intact as it envisions venture capital-related wealth creation after previous attempts were undermined.
