Brazil’s Account Delay Aches

Brazilian debt and equity retreated after early year gains as Petrobras continued to suspend formal financial statement release pending write-downs from the Laundry investigation and current and future investments no longer viable with the world oil price swing.  The new budget introduced by Finance Minister Levy also levies taxes that will be passed on to consumers potentially reinforcing above-target 7 percent inflation as he aims to restore the primary surplus which vanished last year. The 2015 forecast is barely positive GDP growth as monetary policy is likewise tightened with the benchmark Selic already close to 12 percent. The energy cost hike could worsen with drought with widespread shortages reported around Sao Paolo. The 2014 current account gap over 4 percent of GDP was covered by portfolio and direct inflows aided by heavy central bank real intervention which will be halved to $100 million daily though the next quarter  which could set the unit on a path toward 3/dollar. Another sovereign ratings downgrade has likely been avoided with President Rousseff’s second term adjustments, but banks are preparing for flat credit expansion and poor earnings as both corporate and consumer business sours without a ready macroeconomic policy fix. Mexico has fallen from earlier euphoria over structural reforms as scandals there take their toll and energy opening in particular is complicated by industry lethargy and mid-year state elections. Growth driven by infrastructure spending will again be 3 percent on the same inflation number with pass-through from the softer peso in the 14/dollar range. The central bank may have to follow the US Fed as it lifts rates and a minimum wage increase may exert pressure in the meantime. Shallow-water blocks are to be auctioned in the coming months but tenders may be shelved until global conditions settle. The government may once more have hedged against continued collapse in the derivatives market but will soon confront a budget hole with Pemex revenue loss under its watershed autonomy, along with huge fund diversions now uncovered by intense contract scrutiny.

Chile stocks are also off to a tepid start with lower oil offsetting mining export decline for a quadrupling of the trade surplus to $8.5 billion last year. Growth should slightly improve to 2 percent with inflation just above that figure on continued peso depreciation. Copper should stabilize around $250/lb. and the Bachelet administration will proceed with education, labor and public pension expanded coverage and protection to redeem campaign promises to redress income inequality. It already raised the corporate income tax and eliminated loopholes while agreeing to inject capital at state-owned Codelco. Mila exchange partner Colombia has suffered fiscal and current account shocks from the crash in petroleum representing two-thirds of exports, with expected growth down to 3 percent in 2015. Political events will divert the agenda as a guerilla peace pact, with the ELN now expressing interest with the FARC, may be concluded and put to referendum and municipal elections take account of President Santos’ public-private partnership infrastructure success.