Brazil’s Silva Bullet Ricochet
Brazilian stocks seesawed with presidential election voting intentions on the eve of October’s first round with main opposite candidate Silva roughly even with the incumbent Dilma and pro-business party standard-bearer Neves the potential swing influence in the likely second ballot. Silva’s platform has departed from the single-issue environmentalism which motivated her Green movement challenge the last contest and now embraces financial community nostrums like pension reform and central bank independence. Both aspirants have criticized the Administration’s continued fiscal giveaways leaving a negligible primary surplus even as the new sovereign wealth fund was tapped to keep it above 1 percent of GDP. The consensus growth estimate has been slashed to 0.5 percent this year on lagging internal and foreign demand as inflation drifts toward 7 percent. Finance Minister Mantega who will not be reappointed in a second term denies recession, and after blaming global liquidity for real appreciation now fights the opposite “currency war” with swap intervention as the dollar level touches the 2.4 range. The central bank has paused rate hikes until after the poll with the benchmark at 11 percent and credit expansion slowing to 10-15 percent. Reserve requirements were recently eased but corporate and consumer loan appetite is subdued. Company debt has risen to 50 percent of GDP but officials have provided reassurance about international low-cost long-term borrowing and depict OGX’s collapse last year as a criminal fraud under several investigations. Petrobras remains the largest issuer in the CEMBI and its chief executive, a close Rousseff ally, continues to argue operations and the balance sheet are well-managed despite allegations of large lawmaker bribes and overseas project waste. The former refining division head has implicated a cross-section of prominent politicians, and the press has compared the fallout to top aide mischief during the Lula era which resulted in resignations and prosecutions. Silva backers have been fingered but her anti-corruption reputation remains intact according to opinion surveys which instead question social conservative views. She has enlisted mainstream economists as advisers, but the Neves camp can spotlight acclaimed previous central bank chief Fraga who held the post during the early 2000s crisis requiring IMF help. His recommendations include reductions in state development bank lending and Petrobras fuel subsidies as well as VAT introduction and further trade liberalization which could shrink the 3.5 percent of GDP current account deficit.
Mexican single-digit stock gains have been roughly the same as it seeks to boost FDI and shake up the government oil monopoly with private bidding for assets and exploration due to start early in 2015 after the recent adoption of enabling laws. A turnaround expert is at Pemex’s helm but as with other reforms in telecoms and education the results will be take time according to President Pena Nieto, whose approval rating has dropped below 50 percent. GDP growth is stuck at 2.5 percent with infrastructure spending set to boost performance although fiscal balance will worsen. Low worker productivity is a chronic obstacle and the central bank has refused peso intervention with the IMF flexible credit line in place and half of long-term bonds with foreign institutional investors thus far reluctant to pull the trigger.
