The IDB’s Forked Road Determination
The Inter-American Development Bank’s annual meeting report on “Forking Paths” matched participant sentiment as souring on stalwart destinations Brazil and Mexico was offset by clamor for infrequent capital market players including South America’s poorest economy Bolivia, which tapped underwriters for a $500 million sovereign bond not attempted for almost a century. The dichotomy elaborated 2011’s theme of One Region, Two Speeds, with average 3.5 percent GDP growth a fluid forecast depending on European crisis and China slowdown outcomes. For commodities, metal more than agricultural prices are likely to fall, while the composition of capital inflows as heavily banking and portfolio-related is also worrisome given historical crash tendencies despite improved oversight and macro-prudential efforts. Fiscal space is constrained to address emergencies as structural deficits are higher than in 2008-09, and inflation-targeting regimes have become confused with central banks’ profusion of direct and indirect tools that have tightened policy since the original episode. Foreign reserve increases have translated into lower external debt ratios, but private sector balance sheets may be leveraged. European bank pullback is mitigated by the local retail base, but asset shedding to meet stricter minimum equity standards could have “significant effects.” Often these institutions hold large positions in domestic debt markets and selloffs could suddenly raise borrowing costs at home and abroad, the survey warns.
Brazil continues to raise the currency war cry with extension of the 6 percent tax to 5-year fixed-income flows, as jaded investors seek proof through public pension and other reform initiatives that the strategy is not diversionary. Mexico has benefited from a contrasting hands-off stance on the peso that has been the year’s top performer and US rebound, but the election cycle has begun as foreign ownership is 40 percent of long-term bonds. A PRI presidential victory remains consensus opinion despite gaffes by standard-bearer Perez Nieto, but parliamentary control could again be fragmented. Argentina’s moves against oil giant YPF and to revamp the central bank law to allow greater reserve access have further alienated investors betting on a softer line after President Fernandez’s re-election and health scare. While regional sovereign ratings are flat overall, Bolivia is among a handful going to market with a positive outlook. Costa Rica, El Salvador, Guatemala and Trinidad and Tobago all plan external issues after a lengthy pause. New Guatemalan President Perez Molina must roll over an outstanding instrument due next year, and has emphasized pro-business and anti-crime approaches. Trinidad and Tobago’s Stabilization Fund has $4 billion on hand from energy proceeds, but a $500 million tap is in the works for diverging hydrocarbons and financial services ambitions.
