The Andes’ Anti- Capital Capers
2012 May 16 by admin
Bolivia’s prospects for an inaugural sovereign bond previewed at the IADB annual meeting were undermined by President Morales’ May Day custom of utility nationalization as Spanish company Red’s operations were commandeered by soldiers following similar action against UK and French multinationals in 2010. His popularity has dipped to new lows and the timing coincides with Argentina’s high-profile oil producer takeover, further consumer and banking sector targeting in Venezuela, and the imposition of dual reserve requirements and additional set-asides on foreign currency loans in Peru. Ecuador too has threatened new moves against privately-owned media after the Correa administration ordered divestures from family-controlled groups. Peru’s central bank had been intervening aggressively to keep the sol/dollar rate around 2.7 drawing on record reserves of $55 billion. 30 percent of deposits are in greenbacks and short-term bonds are majority foreign-held, and limits on overseas credit were extended to longer-maturity 3-year credit under the clampdown. Commodity exports and FDI continue to set highs after mining controversies early in President Humala’s term. Neighboring project developers have entered as North American, European and Asian competitors turn wary, with three Brazilian firms recently investing $8.5 billion in gas and chemical ventures in the poorer south. The government claims they will create 50,000 jobs in line with the pledge that natural resources benefit rural communities. GDP growth is expected at a continent-leading 5.5 percent with inflation within the 1-3 percent band although at the upper reaches as the benchmark rate stays just above 4 percent. Good business and retail sentiment readings will offset continued delay in the high-profile $5 billion Conga scheme which was referred to an international technical review commission after environmental protests. Through April stock market performance aided by the Mila cross-trading facility has exceeded the core 11 percent MSCI result, while external bonds have mirrored regional top-grade levels.
The runaway EMBI climber continues to be Venezuela, where President Chavez was noticeably mute on May Day as he endured another round of cancer treatment amid rumors the Foreign Minister may be his designated successor going into October elections with the opposition candidate only behind 5 points in some opinion surveys. The minimum wage was hiked 30 percent as price controls cap inflation at 25 percent. Banks were instructed to buy special purpose agricultural bonds, and debt issuance beyond the current $20 billion ceiling was authorized to manage the fiscal deficit and exchange rate. The unified currency trading platform only registers $20 million in daily turnover on administrative difficulties and new development partners like South Korea which will finance $10 billion in infrastructure cite it as a bilateral obstacle as dealings seek to diversify from the dollar amid the looming span for a top departure.
Mexico’s Spurned Wal-Mart Special
2012 May 7 by admin
Mexican shares, after mirroring the MSCI’s advance, nosedived as heavyweight Wal-Mart was reportedly ensnared in large government payoffs to secure store locations that were not pursued after the results of an internal investigation. To labor activists, many close to the long-dominant PRI commandingly ahead in presidential opinion polls, the episode smacked of previous alleged cover-ups to hide questionable business practices including wage and working hour non-compliance. The revelation dented the domestic demand story that along with US-driven exports were to bring GDP growth close to 4 percent, above rival Brazil which has imposed 3-year limits on auto entry to protect domestic plants. It came as the central bank has tilted toward easing after a long stretch on hold in the pre-election period, with the peso also softening on a trajectory back to 13. The outgoing administration has trumpeted new success with the aerospace industry while postponing further steps on Pemex private opening, although President Calderon harshly criticized Argentina’s expropriation move against Spain’s Repsol. As the former colonial power reels from its own debt crisis regulators have looked for signs of strain at the big Spanish-owned networks mainly funded by local deposits. They are also key buyers of Treasury bills and bonds with the foreign-controlled share of the instruments at 30 percent. The monetary authority has rejected peso intervention while continuing the regular foreign exchange auction, but a sudden bout of weakness on capital outflow could bring a course shift. In probing Latin America’s vulnerabilities the IMF and World Bank during the spring meetings cited commodity price and European bank reversals. Front-runner for the July contest Perez Nieto has promised to sustain macro-economic discipline and increase formal employment through competitiveness and structural changes. His lead stands at double-digits despite commentator jabs at his intellect and questions of favorable deals during his tenure as state governor. Unlike the historical tendency all three candidates vow to tighten relations with Washington to further trade and anti-drug agendas, while they allow for future bilateral Nafta modifications and narcotics decriminalization.
Their stance may be tamer than Brazilian President Dilma Rousseff’s during her April visit to the US, where she lambasted the “monetary tsunami” triggered by the Fed’s near-zero interest policy and insisted the WTO investigate possible exchange rate manipulation. She also pressed for answers on a defense contract won by aircraft maker Embraer that was later suspended and solicited support for a permanent UN Security Council seat. With the benchmark Selic due to revert to its post-crisis low under 9 percent the central bank is now demanding that domestic lenders reduce record spreads after erecting a complex of anti-appreciation measures against foreign investors. The development giant BNDES will receive a fresh infusion for infrastructure and strategic sectors that find strict definitions discounted in a sudden shopping frenzy.
Cartagena’s Post-Summit Tourist Travails
2012 May 4 by admin
The Americas Summit in Colombia concluded without commercial or diplomatic breakthroughs as notoriety focused on US Secret Service nocturnal leisure activity in the popular vacation spot with other regional destinations also under the microscope for their own event risks. Host President Santos reaffirmed direct and portfolio investment overtures as the central bank paused while warning of possible credit overheating and reserving the right to take new anti-appreciation currency measures. Following the meeting he promptly denounced Argentina’s YPF seizure as the opposite of his administration’s welcome as Chile’s Codelco considers cross-border mining ties and oil production reaches fresh records. However in cracking down against former paramilitaries while pursuing rapprochement with FARC guerillas and Venezuelan counterpart Chavez, he may be breaking with his predecessor’s hard security stance embraced by the conservative business community at home and abroad that have been traditional allies. Although no change was agreed there on including Cuba and ending Washington’s trade boycott, he also called existing practices toward the communist bastion “unacceptable.” Colombian financial executives attending hailed the “positive atmosphere” but noted leaders’ preoccupation with their own political and economic futures once more frustrating hemispheric solidarity despite minor accords on energy and broadband and academic cooperation.
The talks proceeded in the wake of a harsh IMF review on Jamaica as its new government tries to resurrect the standby accord which narrowly skirted debt default. GDP growth is minimal even with better visitor numbers, while inflation is over 5 percent, the fiscal deficit is 6 percent of GDP and the current account gap is twice that proportion. Remittances are up from North America and Europe but reserves dipped below $2 billion with multilateral lender repayment and oil import costs. Banks that endorsed a domestic maturity extension as part of the original structure have hinted at renegotiation as balance sheets are squeezed, and external bonds have been avoided on the prospect they too could be restructured. That outcome will definitely be repeated in Belize after the results of March elections where Premier Barrow got another term on a platform to reduce the stepped-up coupon load of the so-called “superbond.” Prices rallied on his desire for an “amicable” process as tourism which accounts for one-third of output and jobs was steady. The economy should expand 3 percent and the budget deficit is modest given the expected higher interest bill under a revised formula. In the Dominican Republic hospitality inflows increased 5 percent as the incumbent party may hang on to the presidency despite IMF program non-compliance and the chronic power crisis. As an active EMBI component, holders favor it over Costa Rica where the Chinchilla team planned a market return but was repelled on prerequisite tax reform as sharks circled.
Cuba’s Papal Blessing Blemishes
2012 April 27 by admin
Cuban debt saw rare actions in the exotics market as the Pope visited the island to encourage religious revival and was warmly received by the Castros at the same time Venezuelan benefactor Chavez underwent further anti-cancer treatment as opinion polls showed him tied with unified opposition candidate Capriles for the October presidential contest. The closed-end Miami-based Caribbean Basin fund which has targeted a post-US trade embargo for decades with investments in cruise lines and food companies, also enjoyed a brief pop as the visit triggered Washington discussion of further restriction removal with educational, family and remittance connections already flowering. According to outside observers GDP growth should be 3 percent this year after the leadership sanctioned individual private business launch to absorb the shedding of hundreds of thousands of state employees at loss-making firms. Smallholder agriculture could also receive credit and equipment inputs under the changes in an effort to revive commodity exports that have concentrated on nickel and recent discovery of offshore oil. Services, in particular medical professional deployment is the primary balance of payments support, offsetting a large bilateral goods deficit with Caracas. Chinese loans are available for commercial purchases, and Brazilian joint ventures operate in the tobacco and ports sector. While Havana has dismissed relation with the “colonial” Bretton Woods institutions with their historic Western dominance it has edged closer to regional lenders including the new “Bank of the South,” Andean Investment Fund and Caribbean Development Bank. Although not a member of the OAS democratic club, many members have urged participation and dialogue at periodic Americas summits such as April’s Colombian one. Cuban officials have reportedly sought technical advice in such areas as currency and pension regimes in an effort to control retirement costs and manage an eventual switch from the artificial “convertible peso” pegged at par to the dollar for tourist use. According to end-2011 statistics 350,000 citizens applied for a business license but most kept their state jobs against the goal of half private sector transfer by mid-decade.
Longer-term recovery is likewise elusive in neighboring Haiti despite strides the past year from the epochal earthquake, the IMF finds in its latest snapshot. GDP growth at 5.5 percent in FY 2011 was equal to the previous period’s contraction as inflation dipped to single-digits and fiscal and external positions strengthened. The currency has firmed against the greenback despite the financial system’s 60 percent dollarization level, but the tax revenue-output ration remains barely above 10 percent. Despite almost $1 billion in external debt relief, domestic arrears have accumulated and further liabilities will mount with Treasury-bill issuance. A new central bank law attempts to promote central bank monetary policy independence after long evading ruling power endorsement.
The IDB’s Forked Road Determination
2012 April 4 by admin
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.
The Americas’ Summit Leaning Ledges
2012 March 19 by admin
After 2009’s sedate gathering in Trinidad and Tobago, hemispheric leaders will follow the IDB annual meeting with a summit in Cartagena, Colombia, itself a symbol of the continent’s revival with its anti-crime and drug campaign again ensuring tourism’s popularity. The Free Trade for the Americas theme that initially motivated the conclave has recently been supplanted by a wave of protectionist measures in Brazil, Argentina and elsewhere as the Federal Reserve’s ultra-loose monetary policy has spurred speculative capital inflows in contrast with previous calls for stronger US direct and portfolio investment consideration. The host has again resorted to daily intervention to halt peso appreciation after easily placing half its 2012 external bond program with a $1.5 billion issue. FARC guerillas recently renounced kidnapping as a terror and funding tactic, and the Santos administration has moved to enshrine a fiscal responsibility law which may bring a sovereign ratings outlook upgrade in the first half. Oil production now matches Brazil’s scale and higher export prices have raised the dividend from state company Ecopetrol, although domestic pump charges will also rise. The central bank continues its distinct 25 basis point hiking cycle on 3.5 percent inflation and 20 percent bank credit expansion, as the minimum wage was as well lifted 6 percent with unemployment approaching single-digits. In Chile, headline price pressure is at the same level but the currency has not spiked with its petroleum import dependence and ambiguous copper direction. GDP growth should be close to 5 percent and the new monetary authority chief has urged a cautious stance after an early year minimal rate cut. The mining industry’s future, and in particular Codelco’s freedom from state control and earnings transfer, is again under debate after foreign partner disputes and an eruption of worker unrest.
In Peru such tensions provoked a cabinet reshuffle, but President Humala’s approval rating has climbed on the still buoyant economy and success in eliminating remaining Shining Path militants. The sol is up against the dollar despite purchases through February already above all of 2011, as the greenback’s share in total bank deposits reverts to one-third. After a well-received flotation by the city of Lima, the sovereign may return to global bond markets more actively to underwrite an ambitious public investment scheme. Uruguay is likely soon to join the investment-grade club with the budget roughly balanced and the current account hole hovering at 2 percent of GDP. 8 percent inflation has been met with rate tightening but is partially due to heavy vacationer demand for lodging and hospitality services. Its soft bond restructuring was hailed throughout the Greek saga as an elusive model as the Cartagena summit commences its own unsettled ascent.
China’s Latin America Loan Lurches
2012 March 15 by admin
As Chinese-Latin American government development loans at almost $40 billion in 2010 surpass the traditional Bretton Woods providers with a focus on natural resource and renimbi-dominated facilities, an Inter-American Dialogue report investigating practices and terms finds they are stricter and more expensive than portrayed in popular criticism. The region has taken half of overseas commitments though CDB, the Ex-Im Bank and ICBC, and the 90 percent infrastructure and heavy industry concentration is greater than with Western sources. Venezuela, Ecuador, Argentina and Brazil have been the major recipients with Carcacas’ $35 billion tally to date a contrast with its $5 billion Inter-American Development Bank support. Their size is typically over $1 billion and CDB’s rates are commercial such as in Argentina’s 2010 railway project at 600 basis points over Libor, while Ex-Im’s concessional mandate slightly undercuts its US counterpart. Since 2005 of $75 billion tracked three-quarters have come from the former institution and while policy conditionality is not attached Chinese goods purchase “almost always” features. That element not only ensures Mainland business but reduces default risk, in the think tank’s view. Over half of recent deals have been loans-for-oil but they are done at market prices, and not through guaranteed quantities as a “last resort” when external funding is otherwise unavailable or shunned. On the environment the Equator Principles that voluntarily guide OECD credit agencies and international project financiers do not apply, but Beijing has adopted preliminary guidelines although enforcement is uncertain. The monograph concludes that Latin borrowers pay a premium with equipment and employment “strings” for this new pool. Its “greatest concern” may be reinforcing reliance on primary commodities instead of encouraging a diverse growth path, but the arrangement can be “win-win.”
Venezuelan President Chavez will hope the relationship translates at the ballot box after Miranda state governor Capriles got 65 percent for a resounding victory in the opposition primary versus 30 percent for Zulia head Perez. He is now the Democratic Unity standard-bearer for the October election and is twenty years younger and advocates an economic platform of gradual control removal. The incumbent will continue a spending binge which increased government outlays 50 percent in 2011 while private investment cratered on 30 percent inflation. The sovereign and oil company PDVSA are prepared for another $10 billion in debt issuance until the poll to extend largesse and satisfy dollar demand under artificial exchange rates. The imminent supply has tempered a rally as the best EMBI performer on glimmers of a post-Chavez era. The consumer products giant Polar, energized by the possibility, may sue the regime for inadequate compensation for seized holdings as longtime adversaries generate momentum.
Central America’s Cramped Election Campaigns
2012 March 8 by admin
Central American components of JP Morgan’s new NEXGEM index struggled for traction amid a string of early-year elections turning on debt and economic policy fragilities. Belize has plunged the most, off 25 percent as Prime Minister Barrow injected continued servicing of the post-restructuring “superbond” into the March parliamentary poll debate. The “willingness” challenge caused S&P to downgrade the sovereign rating to CCC+ as an end-February payment was due, with GDP growth at a 2-3 percent pace. With the coupon moving to 8.5 percent on the $550 million instrument, public debt stands at 85 percent of GDP as good oil and tourism earnings eliminated the fiscal gap. The government has become increasingly chauvinistic over its tenure as low-income migrants pour in from throughout the region, and foreign direct investors in the utility sector complaining of rule changes were rebuffed by state takeover. El Salvador has elections around the same time where the opposition rightist Arena that dominated after the civil war is ahead of the ruling FMLN following a budget deficit increase to cover post-storm reconstruction. Remittances have held up with US recovery, but trade and official debt figures deteriorated last year. Tax rises on consumer staples have hurt domestic demand with anemic growth forecast this year. The Dominican Republic has performed better as the May presidential contest approaches with well-known candidates relatively even, despite derailing of the IMF standby agreement. Oil import costs swelled the current account deficit to 8 percent of GDP as visitor arrivals hit a record and free-zone manufacturing jumped double-digits. Higher energy and food prices pushed inflation to 8 percent, prompting the central bank to initiate a targeting scheme. Public sector debt remains modest at 30 percent of GDP but the burden of underwriting the failing electricity grid has combined with new calls such as housing Haitian refugees to feature as prominent political issues.
Guatemala previously shifted administrations and a business-friendly platform has been previewed on solid agricultural export results. Domestic bond issuance has bridged the 3 percent of GDP fiscal hole, while external paper yields less than 6 percent, thwarting appetite. Inflation is currently at that level, and remittances too are due to climb a similar rate to $4.5 billion. In Jamaica these inflows as a crucial balance of payments element should reach half that sum as the new National Party team tries to resurrect the lapsed IMF program. International reserves have dropped below $2 billion as another debt exchange may be proposed to stanch the worsening 135 percent/GDP debt ratio which could include foreign obligations exempted in the original maturity extension operation. Prime Minister Simpson, after a recent electoral sweep, has also vowed to lift the flat economy which beached her predecessors.
Brazil’s Unseaworthy Flotation Attempts
2012 March 1 by admin
Brazilian stocks after rocketing 20 percent were shaken by the failure of simultaneous IPOs as a startup travel company and the local unit of Norway’s Seadrill met with rejection and foreign investors, who took half the action last year, stayed on the sidelines. The tourism operator looked to raise $850 million after a six-month hiatus following a lackluster $10 billion total last year that was one-quarter 2010’s record. Equity players passed in favor of bigger established listings trying to cope with a 3-4 percent GDP growth climate as the central bank takes rates below double-digits. The exchange operator itself reported lower earnings and volume in the last quarter, and banks and brokers are increasingly pursuing a continental strategy to maintain profits and franchise strength, as in the recent tie-up between BTG Pactual and Celfin Capital. Debt financing remains the preferred route with $20 billion raised through mid-February, including a mammoth $7 billion global bond from Petrobras which received quadruple that amount in orders after a chief executive reshuffle putting an ally of President Dilma Rousseff in place. The stock market disappointment as well did not seem to dent enthusiasm for Sao Paulo airport concession privatization although the winning bidding groups featured well-known state pension funds and industrialists. Heavy fixed-income inflows however have resurrected the “currency war” cry as the central bank is again intervening against rapid real appreciation. Macro-prudential measures could be added after a pause and partial reversal, and transaction taxes may be a tempting option to uphold the promised 3 percent of GDP primary fiscal surplus as the government also revisits structural changes in pensions and other areas. It has dunned mining giant Vale for back taxes, and demanded that development lender BNDES increase dividends.
The trade balance is weaker with Asian commodity demand, and officials are pushing an agenda of new export locations and administrative and labor incentives to boost competitiveness. A business delegation accompanied the president on a visit to Cuba which focused on construction projects while downplaying foreign policy aspects. In response to poor World Bank rankings an omnibus law has gone into effect to ease enterprise formation. The formalization effort for small traders may enable a more accurate reading of unemployment which is officially under 5 percent. With looser monetary policy and credit still expanding at a 15-20 percent annual clip, inflation expectations are at the top of the target range. The central bank denies any caving to political desires and argues that the global context indefinitely removes rate hike return. The region, with the exception of Colombia, has echoed the need for a supportive stance and even there the 25 basis point hike may not be repeated soon in the offering pipeline.
Argentina’s False Positive Pivots
2012 February 6 by admin
Argentine bonds roller-coastered to the top of the EMBI charts as President Kirchner’s thyroid cancer scare proved to be misplaced post-surgery and months of post-reelection capital flight abated with a stiff crackdown on dollar circulation and industrial and consumer imports. Sniffer dogs have been deployed to detect undeclared greenbacks heading across the river to Uruguay during the Southern Hemisphere summer, and the trade blocks are designed to preserve the surplus under literal fire from a prolonged drought savaging corn and soybean crops. The immediate post-crisis 2009 harvest was destroyed by such natural disaster as the administration moved to hike export taxes, angering the ruling Peronist party’s key farmer constituency. The agricultural lobby has since reconciled with the government, which is now under pressure from anti-mining groups to suspend projects for alleged environmental harm. Provincial authorities recently took action against a Canadian-owned gold venture in response to protests, while national ministries have been reluctant to alienate new investors although they advocate a tougher stance against longtime oil giant YPF controlled by Spain’s Repsol. Higher energy prices which will further bite with subsidy removal have drawn popular criticism, especially since they conspicuously affect inflation officially claimed to be at 9 percent versus the 20-25 percent presumed by outside estimates. Statistical credibility was openly challenged by the IMF after technical assistance providers found continued GDP growth and price measurement misalignment with international standards, and placed Buenos Aires on six-month notice to improve data or face consultation cut-off. Private analysts who court fines and criminal investigation for such actions have also begun questioning fiscal accounts amid suspicion that the primary surplus has disappeared. Capital outflows have been reduced to several hundred million dollars monthly as the peso’s imputed value hovers at 4.75 given heavy central bank intervention.
GDP bond warrants will not pay out this year as growth will slide to 2-3 percent, based on consensus projections. This kicker may feature in the Greek swap that is often stacked against Argentina’s precedent, with commercial creditors pointing out that the EU’s Eurostat is a more reliable output monitoring source. However a parallel is also drawn with the official sector’s arbitrary negotiating approach and deal terms which resulted in a decade-old exile from international fixed-income markets. Holdout funds that have gotten billions of dollars in New York and London court judgments but been unable to collect have raised the stakes in Washington by obtaining passage of legislation to withhold multilateral and duty-free aid pending satisfaction. President Kirchner, who announced unemployment at a record low after her brief debilitating bout despite widespread belief it is stuck at double digits, has nonetheless spurned such chinks in the longstanding model.