Brazil’s Erroneous Era Earmarks

Brazilian shares continued at the BRIC bottom as the central bank again raised interest rates 50 basis points to 10.5 percent on 6 percent inflation despite price controls,  international accounts registered a decade-worse $12 billion outflow on a paltry $2 billion trade surplus, and slumping car sales dented chances for escaping flat GDP growth.  The 10-year local Treasury bond yield in turn jumped to 13.5 percent as the real headed toward 2.4 to the dollar on pared swap intervention. On the fiscal side Finance Minister Mantega claimed a “record high” primary surplus around 2 percent of GDP with a series of one-time windfalls, including proceeds from the pre-salt oil field auction and provincial debt rescheduling. Pre-election spending will further reduce it to half the longstanding 3 percent result with President Rousseff favored by 45 percent of recent poll respondents for another term. To mobilize additional revenue the government has promoted infrastructure concessions to tepid response on regular rule shifts, as it scrambles to build all venues for the mid-year World Cup. Sovereign ratings downgrade and corporate default contagion scares have faded, as agencies are likely to postpone a decision past elections and the Batista OGX conglomerate completes asset sales and creditor negotiations which may bring new cash injection. A cabinet shakeup is set as members leave to contest seats, and a fresh chief of staff could foster minor economic policy changes with the flagship cash transfer anti-poverty program remaining sacrosanct. Mexico’s stock market start in contrast has been almost positive with auto exports and domestic purchases both strong as Mazda opened another plant. NAFTA retrospectives put wage and skill competitiveness now with China’s, as free-trade agreements extend to dozens of additional countries and the US-Canada connection is also embraced under the pending Trans-Pacific Partnership. Consumer confidence is still weak and the fiscal deficit is due to rise 1 percent of GDP in 2014, as the Pena Nieto administration works with the returning legislature on implementation of energy and tax reforms. Peso momentum has stalled with a break beneath 13 to the dollar as Japanese retail investors in particular rotate allocation, although foreigners continue to own half of long-term government bonds.

Chile and Colombia have fared even worse on an annual basis with near 30 percent equity declines mainly on commodity price softness. Chile’s short-term external debt to reserves coverage is thin due to private borrowing and President Bachelet’s return to office will initially stress her campaign platform of environment and education protection. Copper giant Codelco will likely see a management and governance overhaul advocated by private pension funds. Colombia’s current account hole should repeat at 3.5 percent of GDP readily offset by foreign direct and portfolio inflows, as individuals and firms increasingly put capital abroad. New York-listed Bancolombia recently extended its Central American footprint with a Panama acquisition from its headquarters in Medellin addicted to cross-border creases.