Brazil’s Olympic Faith Leaps
Brazilian stocks were up 30 percent and the currency 20 percent, retracing 2015 losses, on the eve of the Rio Summer Olympics with reported 50 percent budget overrun to $4.5 billion. The federal government plugged the hole despite public debt lurching to 75 percent of GDP, as recent consumer and commodity sales data showed the recession may have bottomed. The primary budget deficit remains 2 percent of GDP, but the interim Temer administration has proposed a constitutional spending cap envisioning a maximum 2 percent increase in coming decades for discretionary accounts, which currently represent just one-tenth the total. On monetary policy the central bank intends to revive the 5 percent target and may soon lower the benchmark rate, as another charter amendment considers legal autonomy. Structural reforms including greater foreign ownership of farmland and real estate are also moving through parliament and could be passed more smoothly with the resignation of Speaker Cunha implicated in the Car Wash scandal. Both the sovereign and Petrobras returned to external bond markets, but the state oil company is far from this year’s $15 billion asset divestiture goal and faces shareholder lawsuits both at home and in New York. Default worried intensified with the $20 billion bankruptcy of airline Oi, as foreign and local bondholders organized separate groups to press their claims. It owes state banks over half that sum as credit firm Experian tracked over 400 insolvency requests in the first quarter. The new chief economic policymaker Mereilles was on a global investor relations blitz before the Rio opening ceremonies, but deposed President Rousseff will soon mount her impeachment defense, and authorities broke up an Islamic terror plot and tried to reassure about mosquito control before the Games amid security and Zika virus fears. Central bank chief Goldfajn has so far resisted exporter intervention pleas as the real strengthens, as the $350 billion reserve pile may be dented after previous swap positions are calculated and it is tapped to repay state enterprise contingent liabilities.
Argentina has lost favor as an alternative as MSCI’s latest review offered no consideration of core index return, and the economy there is likewise mired in recession on 3 percent monthly inflation under revised statistics. The central bank continues to cut interest rates toward 30 percent as the peso is firm around 16/dollar, but the fiscal deficit is frozen with lower tax collection and may worsen with a court ruling on back pension obligations. President Macri’s popularity rating has suffered as adjustments bite and the opposition rallies to workers’ and his predecessor’s sides with proposed civil service retrenchment and investigations into currency and property dealings during Fernandez’s terms. In foreign policy the President has diluted previous harsh criticism of Venezuela’s government for basic goods shortages and denying a leadership recall petition. The sovereign and state oil monopoly must repay $6 billion in external bonds the second half with reported reserves, largely illiquid, just twice that figure. Output could shrink double digits this year on hyperinflation, and thousands have poured across the border into Colombia to find food and other staples, with security threats already prominent under a demobilization deal with the rebel FARC ending decades-long civil war. President Santos believes an upcoming referendum will clearly endorse end but another predecessor feud has helped to solidify reservations about the marathon peace track tabled.
