Latin America’s Raging Resilience Reservations
After repeated reassurances by private and official bodies that the region was well-positioned for 4 percent GDP growth and capital market outperformance in the face of US, Eurozone and Chinese wobbles, other countries followed early fallen BRIC Brazil into downgrades and selloffs, especially as active Spanish bank troubles dominated headlines. Brazilian fund data show that bond outflows from Western and Japanese investors have joined equities at the bottom of the core universe index heap, with no end in sight to central bank rate reductions on barely positive economic expansion. The institution has intervened heavily to prevent the real reaching 2 per dollar with inflation transmission already over 5 percent. Fiscal policy has been tweaked to support consumer demand with tax exemptions while keeping the 3 percent of GDP primary surplus target. Banks have been urged to extend credit despite rising personal loan arrears as deals for smaller intermediaries reliant on wholesale lines have gone astray and may require state rescues. Industrial output remains in sad shape with agricultural exports also waning to China which is now a key destination. Mexican securities had benefited from redeployment until recently, with growth in the 3-4 percent range mirroring tepid US trends, as opinion surveys reported leftist candidate AMLO gaining ground on the PRI frontrunner in the July presidential race. Multinational PepsiCo also received direct threats from drug gangs suggesting the conflict could implicate strategic investors, and a standing central bank facility was tapped to stem peso decline. With oil prices dipping below $100/barrel PEMEX proceeds may suffer although it again hedged the risk as labor activists called on the three political parties to delay greater private opening.
Lower petroleum FDI may also hit Colombia, which has been the area darling with the US free trade pact entering force and the Santos Administration passing fiscal stability and civil war reconciliation laws. Interest rate hikes to cool consumer credit have paused and the 5 percent GDP growth forecast has been scaled back with big family-run groups increasingly following a sub-regional strategy that eyes expansion in MILA partners Chile and Peru. In the former President Pinera is under siege from university protesters and miners resisting change at government-owned Codelco, while Peruvian counterpart Humala likewise is caught in the natural resources debate crossfire after a big project compromise unraveled with environmental demonstrator deaths. Foreign investors control 60 percent of local debt and reserve requirements have been tightened to prevent rapid exit with the country as well qualifying for an IMF contingency line. Andean nervousness is due to be heightened by Venezuela’s course over the coming months, with dire health reports for president Chavez raising the odds of pre-election succession and paring the half-year success of benchmark external bonds.
