Brazil’s Corrosive Car Wash Streaks
Brazilian securities continued to sell off after the President’s squeaker re- run despite her assent to higher fuel prices and lower state development bank lending converging with the opposition platform as new cabinet speculation focused on Workers Party economic orthodoxy proponents especially Lula Administration veteran Mireilles. The Petrobras corruption scandal exploded further in the aftermath with additional arrests and investigations at home and the launch of US Justice Department and SEC prosecutions. Senior executives and politicians have been implicated in the “car wash” for alleged bribes and money laundering, with construction giant Oderbrecht also named, as the latest quarter financial statements were delayed without auditor signoff pending balance sheet and legal clarifications. The central bank hiked interest rates 25 basis points on depreciation-driven inflation with the real below 2.5/dollar after resumed swap intervention. GDP growth is barely positive and the primary budget surplus derives mainly from bookkeeping maneuvers as gross debt tips past 60 percent of GDP increasing sovereign downgrade pressure. On the credit front Banco do Brail warned of slowdown and souring consumer and corporate portfolios as normal household borrowing rates hit 45 percent. Petrobras has dragged the MSCI down double-digits and with $50 billion in bond issuance in recent years is the largest CEMBI component as that asset class has continued with good returns and fund inflows versus choppier government segments. Last year’s OGX default has been mired in lawsuits against former billionaire Batista, and smaller firms suspended payments in recent months as S&P warned that downgrades would be twice upgrades in 2015. Energy and water rationing could further damage prospects and deter FDI in particular needed to bridge the 3 percent of GDP current account gap and prepare the 2016 Olympics stage. Mexican stocks were likewise battered by sensational stories as protestors marched on the presidential palace demanding answers on college student disappearance purportedly linked to local drug gangs with official collusion, and a Chinese construction firm was awarded and then lost a contract after reports it owned and had upgraded the first lady’s $7 million private residence. These blows came as a new Finance Ministry hedge was put on against steeper oil price decline, which will hurt budget revenue and potential bidding for Pemex’s first private exploration tracts next year after the Supreme Court dismissed remaining challenges. A trade shift to surplus on auto exports and solid domestic demand readings will sustain 2-3 percent growth as the central bank stays on hold with 4 percent inflation.
On external bonds Mexico as with collective action clauses originally will be the first main issuer to adopt aggregation and pari passu rules suggested by the IMF and private bodies to block future Argentina-like holdout claims. Beyond the initial group, other unpaid funds have joined the New York Court filing for relief as the standoff goes into the year-end expiry of the no better offer legislative clause in Buenos Aires. Minister Kicilof hinted at an improved subsequent negotiating climate as the black market peso exchange steadied with rolling dealer raids.
