Brazil’s Nagging Next Century Sale
Brazil’s external debt went negative on the EMBI and stocks were down 15 percent on the MSCI index despite Petrobras’ dramatic market return with a $2.5 billion 100-year bond yielding 8.5 percent. The re-entry came on the heels of Chinese funding accompanying a state visit and belated release of 2014 earnings with a $1.5 billion corruption scandal write-off. The oil monopoly’s new management plans major asset sales this year and also noted in the sale documents “potential material effects” from the raft of investor lawsuits around alleged balance sheet misrepresentation. Construction firms implicated in the affair have filed counterclaims, as they petition the courts for a global settlement that will free operations for next year’s Olympics building program still running behind schedule. President Rousseff, responding to infrastructure criticism and forecast recession that may persist through 2016, has unveiled a $60 billion medium-term public-private partnership scheme for ports and roads on more generous terms than previous concessions. However she froze other budget spending and proposes additional financial transaction taxes in an effort to recoup a small primary surplus and head off junk sovereign rating demotion.
The banking sector otherwise has been under pressure as overdue household debts pass 5 percent of the total with government lender Caixa doubling provisions, and HSBC announcing it will unload its local unit under revised headquarters strategy. Bradesco is a likely buyer but the acquisition would strain capital, as development bank BNDES will stay removed under orders to pare subsidized lines. In other economic indicators unemployment was at its worst since the Workers Party took power over a decade ago, and inflation spurted to 8 percent as the central bank is on track to raise the benchmark rate to 14 percent. The real has settled below 3/dollar as swap contract rollovers will be reduced from the current 80 percent, and depreciation has helped lower the current account deficit toward 4 percent of GDP although FDI has slipped in parallel. Corporate bond spreads narrowed with the Petrobras tap but were jolted by another default by a commodities trader which will constrain second half appetite heading into a telegraphed Federal Reserve rate increase.
Mexico’s MSCI component slid marginally through June after it issued a euro-denominated century bond before at a yield over 4 percent. President Pena Nieto’s popularity continued to dissolve under personal housing deal revelations and meager 2 percent GDP growth after a cascade of energy and educational reforms. The first Pemex private exploration auction winners will be revealed in mid-July, as the powerful teachers union tries to gut the standards package and backed opponents in the recent legislative and governor elections. The ruling PRI saw its number shrink but maintained a majority with Green Party aid, as a breakaway group founded by perennial presidential candidate AMLO made a leftist splash and a no-party independent known as “El Bronco” convincingly won a state race. The other main parties, the PAN and PRD, have experienced erosion since agreeing to the “tripartite pact” with Pena Nieto early in the administration. Bondholders were net sellers in Q1, and slashed their position in short-term Treasury bills from 70 percent to 45 percent of the amount according to the latest figures on reports central bank head Carstens, a respected last century veteran, may not be reappointed
