Tuesday, 30 December 2008

Cuba and the 50th Anniversary of the Revolution (Part1)

There was a subject I wanted to talk about days ago: Cuba. I recommend you, dear reader, to check this blog: Generacion Y, by Yoani Sanchez.

On Jan. 1, the Revolution has its 50th anniversary. The celebrations come at a critical point of inflexion for the island nation, where a process of political transition is taking place. Economy Minister Jose Rodriguez last week trimmed the official 2008 growth estimates to 4 percent from 7 percent, alleging the impact of hurricanes in Sept., the surge of oil and commodities and the global crisis. Growth, nonetheless, will be propelled by reforms undertaken in agriculture and wage policy by President Raul Castro since taking office in February.

Raul has boosted prices paid for agricultural products and redistributed idle state lands to private farmers and cooperatives to trim food imports. A few weeks after taking office, the younger Castro established a policy that scrapped caps on earnings, tying wages to individual performance. According to Reuters, more wage reforms are planned.

However, I read the news coming from the Cuban state, what´s reported by the independent media (the best economic reporter in Havana is with no doubt Marc Frank, the veteran Reuters correspondent) and I check Yoani´s blog and the difference between versions of the news are amazing. Frank has been quite right in pointing out the rapid deterioration of economic indicators (especially the external sector and commodity production) and the necessity by the regime to implement radical, credible changes in Cubans´way of life. On the other hand, Yoani´s blog tells us day by day the slow progress made by Raul in terms of implementing institutional and social reforms. She writes: ''The tedium typical of year-end led me to watch the monotonous show of our lawmakers´ last 2008 session. The eternal formula of exposing problems without pointing at the real causes of them is back this December at Congress Hall. It´s all about a style in which, typically, the lawmaker starts saying 'Our Revolution has done a lot to improve retailing, but there are problems we need to tackle on.´Without that indispensable bow, you could be taken either as an ungrateful individual or a hypercritical dumb.´´

Quite graphic, isn´t it? The regime needs to make quick progress in economic reforms to avert social unrest. The military controls 60 percent of Cuba´s $40 billion economy -- and that share may probably increase as a way to dissuade any attempt by citizens to question the regime. But the country also faces significant policy challenges -- an eroding current account situation, supply shortages and a flagging export market. Unless Venezuela continues to extend financial aid, the Cubans will be condemned to go through a period similar to the one they went through in the 1990s. recent erratic decisions made by the government to default on certain trade financing and loans with European countries will only help to shut down more funding windows for the Communist country.

Earlybird, Dec. 30, 2008

Headlines for Dec. 30:

  • ECUADOR -- Ecuador Pays Off $28 Million of BNDES Debt to Brazil: (Reuters) Contrary to what many people had said for weeks, the Ecuadorean government decided to repay part of the loan extended by the Brazilian state development bank. In my view, which I was almost forced to change because of the recent remarks made by Ecuadorean President Rafael Correa (Didn´t I, Jim?,) the country will recognise this loan to a point that doesn´t mean a disbursement bigger than 40 percent of the total credit (which is about $245 million.) The loan still is under arbitration for Ecuador still considers it ''illegal´´ (illegal???, what Correa does mean by illegal!!!!)
  • U.S. -- GMAC Gets $6 Billion Capital Injection by the Treasury: (WSJ) In a delayed move that signals the government´s decision to increase its role in the car industry, the Treasury Department will use the Troubled Asset Relief Program to help kick start auto loans. The TARF was initially designed for banks and financial companies. This may be an indication that the Obama administration won´t spare a single penny of aid until it sees clear signs of recovery.
  • U.S. -- Housing Crisis Means Problems for Divorced Couples: (New York Times) Check this story. One-sixth of homes in America are now worth less than the money borrowed to buy them.
  • MARKETS -- Oil Expected to Rebound to $60 a Barrel: (Bloomberg) OPEC output cuts may drive oil higher. This might mean that the dollar could fall further. Will Latin regional currencies rally again in the wake of this? Probably not.
  • BRAZIL -- Government to Manipulate Job Data to Reduce Share of Informal Workers: (Globo) In another move with evident electoral bias, Labour Minister Carlos Lupi (himself a union leader) announced changes to the way the government measures unemployment. If the changes take place, informal workers who contribute to social security will no longer be counted as part of the informal economy. This comes as most economists are expecting an increase of about 1-2 percentage points in the unemployment rate by the end of next year.
  • BRAZIL -- Unions Win Injunction in Courts Stopping Reduction of International Air Ticket Prices: (Valor) Citizens don´t trust the judiciary: in a recent survey, 38 percent of Brazilians rated the judiciary power as 'corrupt' and 'inefficient'. That is, as this case reflects, the result of well-organised trade unions and business associations with powerful lobby muscle suing the state and plans to modernise the country -- and obviously winning either significant regulatory or tax concessions.
  • BRAZIL -- Business Confidence Plunges to 10-Year Low: (Valor) The indicator points to a recession, because it is one-third of those business executives interviewed who now expect output to decline, the worst reading since Jan. 1991. It is clear -- the export component of Brazilian supply plus an expected deterioration in labour numbers in the coming months will only propel declines in manufacturing. Stay fixed-income. Expect lower interest rates next month!
  • PERU -- Crisis Will Slow Growth; Economy Growing Above Trend, Says Minister: (Comercio) Peru, the ''golden economy´´ of South America, is growing above trend (oh, really???) says its Economy Minister Valdivieso. He says his ''first task´´ was to cool down growth and prepare the country for the crisis. Valdivieso is hopeful that a $35 billion investment plan will stay on track, despite the dearth of financing (ha!!) And they still want to sell bonds, as Bloomberg reported last week, to ''reinforce market confidence (!!!!)´´
  • COLOMBIA -- Government Freezes Fuel Prices for First Quarter of 2009: (Espectador) Well, that is healthier than cutting prices. At least they will wait until oil stabilises below $60 a barrel to do so. I wonder what will happen to Ecopetrol if something like this happens. The stock should rise on the news (market participants were expecting the government to trim gasoline prices.)

Brazil, the Economic Crisis and the Presidential Succession (Part 1)

A few days ago I met a number of political analysts in Sao Paulo as part of my routine duties as an ''analyst.´´ Apart from the typical lousy political jokes we make, and the arguments we have, and the speculative scenarios that we tend to fabricate, the conversations had an unusual and perhaps not quite timely focus: the 2010 presidential race.

Dear reader, you may wonder why we were talking about the campaign, which starts only in April 2010, and the election (scheduled for October of the same year.) But the global crisis is giving some sort of relevance to this discussion, so I will tend to be brief (sorry for my long epistles of the past few days) and summarise the main bullet points that we all touched during the round of talks of the first days of December.

1) The crisis and how it does/will affect presidential hopefuls: The inflation rate, the Selic and the unemployment rate won´t be as relevant as they were in defining the winner of the 2010 race, although they will play a role. The crisis poses a problem, and hardly an opportunity, to the presidential hopefuls, according to most of the analysts I talked to. For the opposition, the crisis seems to be a significant problem -- the two biggest states that it dominates (Sao Paulo and Minas Gerais) would be hard hit in the event of a recession (which I insist is day by day becoming a more likely scenario.) Governors Jose Serra of Sao Paulo and Aecio Neves of Minas (photo, right) will put into motion an ambitious programme for investments next year. I wonder how they will implement it as tax revenue declines. Sao Paulo is even creating some Frankenstein-like programme similar to what Lula created: the sovereign wealth fund. I read that in the news (can´t say where exactly and I am sorry for that.) But government supporters who dominate a great part of local governments also are in dire straits. Lula won´t be able to transfer part of his record popularity to his handpicked successor. That because his popularity depends (and will depend) upon high growth rates. Dilma Rousseff (photo, left,) so far his handpicked and preferred candidate for 2010, is lagging behind in polls, and his national presence, charisma and preparations are almost always put into questions by allies and foes. We know the good times are gone for sure and for Dilma, that´s bad news.

2. The reshuffle of political forces in the event of an economic crisis of great proportions: The crisis may make it almost impossible for the ruling Workers´Party to create a candidacy (president-vice president formula) of its own. For sure, the PT will have to rely on Lula´s choice for the succession (and it is more likely than ever that he will force the party to accept a formula where the PMDB -- the largest party in the country, -- to pick the running mate.) And it is not necessarily clear that the presidential candidate will be a ''petista´´ (as members of the Workers´Party are known.) A candidate with national presence and recognition such as Ciro Gomes (the former finance minister who is a member of the Socialist Party) or PMDB´s Sergio Cabral (the Rio de Janeiro state governor.) One analyst mention Henrique Meirelles, the central bank president, as one of Lula´s possible choice.

And for the opposition PSDB party, the crisis will also create hurdles for the unification around one single name (remember that Neves and Serra are excellent names for the 2010 presidential election.) If their administrations manage to dribble the worst of the crisis and as a consequence leverage their names a bit further for the race, and the better their image, the smaller the chance they will agree on a single name.

3. Congress and its role: The government and the opposition face a tug of war for the election of the presidents of the Senate and the lower house in February. The opposition will use its force to fracture the ruling coalition. The ruling coalition is fractured, all in all, because the PT and the PMDB want to elect their own leaders as heads of both houses. The PMDB may, in the event of a defeat in the Senate, start to depart from the ruling coalition. The consequence of all this will be, in the opinion of all the analysts consulted, a complete paralysis of the economic legislation agenda for next year in Congress.

Monday, 29 December 2008

A Stone-Cold Sober Voice in Brazilian Markets, Finally ...

Check this out, dear readers:

Brazil Stocks Won’t Gain in 2009, Real May Fall 20%, Nehmi Says
By Paulo Winterstein and Laura Cassano

Dec. 29 (Bloomberg) -- Brazilian stocks may not gain next year and the real will fall another 20 percent against the dollar as a global recession curbs demand for commodities, said Victor Nehmi Filho, whose hedge fund beat 99 percent of its peers.
“The Bovespa has no strength, and I see no reason for it to have strength. People talk about this as a crisis, with a rebound. But this is more of a recession than a passing crisis,” said Nehmi, portfolio manager at Sparta Administradora de Recursos Ltda. in Sao Paulo. “There’s still room for another drop in the real in 2009, especially during the first half.”

Bloomberg reporters Paulo Winterstein and Laura Cassano were quite right by pointing out the latest bear voice, as our dear investing community stays hopeful that 2009 will be a better one. Winterstein and Cassano provided us in their story with a bit of a size and scope that makes the interviewee a worthy speaker in the matter: Nehmi´s fund this year beat 99 percent of his peers in the hedge fund industry (there are about 6,700 funds of that kind in Brazil, according to Anbid, the investment-banking and securities industry association.) It is interesting to see that there´s finally a sober guy in the domestic capital markets. Clearly, as we have pointed, the number of Brazil analysts pointing to a mild deceleration grows by the day while the number of doomers remains small (too small.) Click here to see a document on Sparta´s performance, which I found on the Internet and I suppose is public information.

One of the most prominent voices among the bears, Morgan Stanley economist Marcelo Carvalho is, contrary to most his colleagues, expecting a recession to hit Brazil in the second quarter of 2009. The dismal behaviour of certain stocks often thought as ''defensive,´´ and the fact that the central bank may cut rates as early as next month are all signs of bad times for growth.

Well, we stand by our predictions: buy more fixed-income, buy no stocks for a while. Keep your stocks positions defensive. And there´s little Lula can do to prevent the inevitable.

Brazil and The Sovereign Fund (Update)

As we in this blog humbly said President Lula would do, Brazil´s government overruled the authority of Congress and established, through the use of a decree measure, the fundraising scheme for the Sovereign Wealth Fund of Brazil (FSB.) It is a lousy move as, for the first time in more than a decade, the government is selling debt without having a corresponding revenue on the pipeline. It is also drawing money from the national savings destined to pay Brazil´s $600 billion debt to pay for expenses that aren´t necessary: the extension of aid to Brazilian companies to buy assets overseas, and the localisation of important, profitable investments in the local and global markets.

There are two things that we would like to highlight here: first, we would like to refute the government´s argument, which says the fiscal impact of the fund will be nil. That is partly true. The government, as one economist told me, is selling bonds to pay for primary (operational) expenses, not to pay for financial expenses (debt refinancing.) With the decree, the government scrapped a part of the law passed by Congress last week that prohibited feeding the fund with money from debt sales. Mistake No. 1.

The second thing is, how can you submit regional governments to obeying the Fiscal Responsibility Law if the federal government is overruling it to create an unnecessary tool of populist spending? What we mean by this is, states and municipalities are forbidden by the LRF to issue their own paper and sell it to investors. This is moral hazard.

Lawmakers will resume their duties at the start of Feb. We hope that they study this issue profoundly, and deeply. That decree, which has to be passed by Congress (or rejected) within six months of its publication, is bad at a time Brazil begins to feel the pinch of the global crisis. It would be irreponsible if Congress doesn´t revoke such decree.

Earlybird Dec. 29, 2008

Headlines for Dec. 29:

WORLD -- Israel Launches Third Day of Attacks in Gaza: (Reuters) Obama must include this subject at the top of his agenda. Today, oil is surging on concern this conflict will disrupt supply. Again, more events of this kind add to volatility.

LATIN AMERICA -- Madoff Investors in Latin America Keep Mum: (WSJ) Would it be disastrous for regional markets that investors and banks disclose losses linked to the Madoff scandal? I can hardly believe it. Private banks and some funds might have invested with Madoff, but we are far from witnessing such disclosures triggering a broad impact in local financial systems. As the story suggests, weak domestic regulatory controls allowed these investors to hide their exposure. Again, it is imperative that countries such as Colombia and Peru overhaul their corporate governance and financial disclosure practices right away.

BRAZIL -- Lula to Announce New Anti-Crisis Measures in January: (Estado) The crisis is President Lula´s favourite subject these days. The crisis has, all of a sudden, show his real face -- he is desperately looking for excuses to increase the state´s grip in any sector that he deems as ''strategic.´´ The concern, some economists say, is to have Brazil running out of ammunition as the crisis unfolds. Credit isn´t flowing, inflation is slowing rapidly and exports are dropping considerably. Recession signs, they call it. But there are things Mr. President can´t avoid. Why not making an effort to bulk up fiscal savings at this point, and reducing debt more rapidly, so interest rates can fall more consistently and quicker? More debt issuance and state-expansionary policies should be announced; Lula said the package will be announced by Jan. 20. Nathan Blanche, the trader who created the derivatives market in Brazil three decades ago, criticised in an interview with Estado yesterday the central bank´s foreign exchange market intervention policies, saying they failed to ease volatility.

COLOMBIA -- Pyramids Scandal Continues, and the Government Response Remains Timid: (Tiempo) Tonight is the deadline for investors on the DRFE pyramid company to file for compensation. The first time I heard of a pyramid company bursting was in August -- and so far the government hasn´t issued a single rule tightening controls on illegal fundraising by these type of companies. Financial regulation is a weak area of Colombia´s economy, and foreign investors should remain attentive to development on this issue.

PERU -- Gasoline Price to Fall Next Year, Garcia Says: (Comercio) This is interesting. An importing country plans to reduce gasoline prices, a move that will subsidise fuel consumption by a few citizens but, as opposed to what is predicated by populist politicians, usually fails to go down the market chain and ease the fuel companonet on the poor´s cost of living (I never saw food and rent prices coming down because of a drop in gasoline.) But the Peruvians have room to do it: for years they have been disciplined enough to bulk up their fiscal savings, so they can afford to keep gasoline subsidised for a little longer. In Colombia, a recent study by the central bank showed that it is necessary to eliminate subsidies (which implies prices should stay at similar or higher levels in 2009.) That is also prudent. For a country that´s on the verge of losing its oil self-sufficiency status, dismantling the current policy would be a mistake.

VENEZUELA -- Chavez Will Radicalise if He Loses Referendum on Presidential Term Limits: (AP) When Chavez lost the referendum on Dec. 3, 2007 and promised to accept his defeat, we said he would radicalise his positions. People listened to his softcore speech and refused to believe he would do it. Herman Escarra (I might be wrong, but I am sure he was a Chavez supporter and the mastermind of the 2007 defeated referendum draft) told AP the most likely scenario is a radicalisation. I agree with him -- the important loss of popular endorsement that Chavez is suffering can only be reverted (in the president´s erroneus view) by radicalising. In the meantime, the government passed an unreal budget for 2009, which will put more pressure on economic authorities to devalue the currency. Raising local fuel prices is becoming necessary. How long is this guy going to withstand the pressure?

Monday, 22 December 2008

Blog abandonado ... just for a few days

Merry Christmas, Feliz Natal, Feliz Navidad !!!!!
I will be writing on this blog sporadically during the next few days, but plan to start again in full fashion in the first days of 2009 -- I wish 2009 to be an excellent, prosperous and interesting year for all of us. Thanks to each of you who took a little time to read this blog.
Beijos, abraços, greetings, muchos abrazos!

Friday, 19 December 2008

In a Surprising Decision, Colombia's Banco de la Republica Trims Rates by 50 Basis Points

The Colombian Central Bank trimmed its benchmark lending rate by 50 basis points to 9.5 percent, reflecting concern over the impact of the U.S. recession and the global shortage of credit. In a statement released just a few minutes ago, the bank says that last month's decline in the inflation rate (which went from 7.9 percent to 7.7 percent in November) sets a trend, and that now it looks more likely that inflation will slow down towards the 4.5 percent-5.5 percent range targeted for 2009.

I spoke to a Colombian financial company executive a few weeks ago, and he was surprised that the bank had signaled no rate-cut even as the readings of most economic indicators were indicating a pronounced slowdown in economic activity. For sure, public debt and stocks will rally Monday -- when the markets will open again. I told that executive that my views were that the bank was quite worried with the extreme volatility in the exchange rate markets and the recent signs of fiscal ease. As the Fed moved to trim its rates this week, the Banrep probably won additional space to cut borrowing costs.

Is it possible to extract a more far-reaching conclusion after this decision, that is -- will we see a rally in the peso despite this rate cut? Yes. Banco de la Republica is probably betting on a peso recovery -- or at least, that the pace of the peso devaluation will be slower than that of the dollar. Risky bet, innit? The dollar should lose appeal before investors as rates in the U.S. stay close to zero, while local rates are still high enough to attract more capitals into Colombia. Let's see. However, this is an anticipated Christmas present not only to Colombia's battered financial industry but also for companies and individuals.

Rating Agencies Are Keeping Us Busy These Days: Now It's the Turn for Votorantim

Moody's today changed the Baa3 ratings outlook (investment-grade) for Brazil's Votorantim to stable from positive. The move scraps the chance of an upgrade that should have taken place by the first quarter of 2009. This deals a blow to the group, which in October disclosed 2.1 billion reais in losses stemming from wrong bets on derivatives contracts linked to the direction of the exchange rate. I appreciate one of my sources' heads-up on this one (I almost missed it because I am on my way to the airport!)

In the note, Moody's says the action reflects declining prices for the commodities produced by the group (cellulose, metals, minerals, etc.) and the impact of the credit crisis on the group's funding strategy. The expected declines in earnings and cash flows should be offset by the recent drop of the real against the dollar (the devaluation should mitigate Votorantim's declining sales in its exports markets.) Moody's mentions a positive aspect of the cement business -- saying local demand for cement in Brazil should be propped up by the government's push to finance a series of heavy construction projects. We hope the ratings company isn't being too optimistic in that front. 

Colombia's BVC Expects to Create ETF Next Year

Bolsa de Valores de Colombia (BVC) will create four more derivative contracts next year (two for public debt, one for the currency and an ETF linked to the Colcap -- the BVC's market capitalisation index,) Portafolio quoted Juan Pablo Cordoba (photo, right,) the stock exchange's president, as saying. 

The move follows the recent creation of three ETFs in Brazil by Barclays. Mexico is the biggest regional market for ETFs (or the most active for this type of instrument,) followed by Brazil -- where trading of ETFs is expected to grow 25 percent by 2012. 

S&P Cuts Ratings of 12 Major U.S. and European Banks

Today Standard and Poor's announced downgrades and rating outlook changes to the credit debt rankings of 12 major U.S. and European banks. As a result, European bank shares plunged today. 

The rating cuts follow almost $800 billion of credit-related writedowns and losses at banks around the world (the data comes from Bloomberg and other news agencies.) Commercial banks are facing unprecedented stress as they have become more reliant on central bank liquidity and the interbank lending market paralysed since the collapse of Lehman Brothers in September. One thing that surprised is that this move didn't come before -- one wonders why these rating companies are so slow to reassess credit risk when it is evident that the financial industry model is bound for a collapse in almost every developed economy.    

The ratings company says the decision reflects its view on higher industry risk and the impact of the global recession on the quality of their balance sheets, loan portfolios and investments. S&P says there will be more volatility in financial markets in the months ahead, and that wholesale funding for global lenders will be more likely to become costlier and scarce. One interesting aspect of all this is that S&P will from now on emphasise more on measures to rate banks' risk-adjusted capital data. This is especially important, because it indicates that rating companies will be more careful to assess the risks stemming from the industry's exposure to private equity and similar activities.

On the other hand, S&P seems quite supportive and optimist over government intervention on the sector. The company applauded recent moves by central banks around the world in providing banks with greater access to primary funds.  ``For the first time,'' said the S&P statement, ``we are recognising this extraordinary support for certain banks in the U.S.''

Brazil Fails to Earmark Budget Money for Sovereign Wealth Fund

The political opposition handed a lovely defeat to President Lula's plans to earmark 14 billion reais this year to the Sovereign Wealth Fund of Brazil (one of the president's numerous economic Frankesteins.) Last night, opposition senators obstructed the passage of a bill that urged the earmarking of the money from this year's primary surplus to the creation of the fund. 

The reason why the government wants to slash the primary surplus is for mere politics. The Lula administration doesn't want his voting base to see budget money sitting on the coffers -- funds that are ready to be paid to bankers and investors as interest on the country's debt. Because of the congressional decision to delay the earmarking of the funds, the government (according to a source at the planning ministry) will have to scour for new money and destine it for the SWF by decree. That should happen before Dec. 31. 

The worst thing that Brazil can do at this point is to indicate that it will lower the primary surlus with the excuse that the global crisis is enough reason to set aside less for debt-servicing. This will create erroueous signlas over the conduction of economic policy. The country will pay dearly for that in the medium term. By that, the government would be fulfilling its dream of ``punishing greedy bankers'' and renege from its responsibilities towards investors (who in the end poured their money into Brazil with the hope that the country will be willing to honour its debt commitments.) The bottom line is, kudos to the opposition, shame on Lula and his state expansionist model.

In a moment where thrift and prudence should guide government decisions, Lula and his economic team are signaling the opposite -- that is, becoming more ambiguous over its commitment to debt-servicing. The SWF will only help finance Brazilian companies' operations abroad at a moment where there is no need to invest heavily in overseas expansion. Or ... will the Treasury use the money to buy ... U.S. Treasury debt? It's hard to trust Finance Minister Mantega's qualities as a hedge fund manager. Hope this doesn't cost too much to Brazilian taxpayers (me included.) 

CAF Sells Peso-Denominated Debt in Colombia (Update)

Yesterday, a reliable source gave me details on the 245 billion peso bond sale by CAF in Colombian debt markets. 

-- Bids for the issue: 300 billion pesos (CAF said it was 2.4 times thw amount offered. Some there's some discrepancy in the data.)
-- Yields for the five-year issue: 11.25 percent, or a spread of about 1.06 percentage point over the DTF benchmark rate (this week it stands at 10.19 percent.)
-- Yields for the ten-year portion of the sale: 11.75 percent, or 1.56 points above the DTF. 

As we pointed out yesterday, the returns seems attractive for a AAA rated issuer and especially during a time where there's plenty of liquidity (seasonally speaking) in the economy. 

CAF has permission to sell another 750 billion pesos for the next two to three years. It may be reasonable to expect more sales in 2009 to bolster the local capital markets. 

Inca Kola News -- Greetings! Check this Blog

Long time we didn't talk! Otto.rock1 has finally been found .... a good friend and an acute observer of Latin America's loony economic and financial affairs, with whom I debated and sparred with about news on Venezuela, Colombia, Brazil and all this crazy region, Otto has a blog and he's been found, I repeat. I am glad we stumbled across each other, thanks to the Blog world.  

This is his blog -- which I very much recommend you to access on a daily basis: http://incakolanews.blogspot.com

This morning, one reader posted a comment, saying that she wanted to read more news about Peru in my blog. I will write more, thanks for the feedback and the very good suggestion. Nonetheless, dear reader, if you are really really interested in reading some insightful news about Peru, please go to Inca Kola News. It will be hard to match Otto's postings on Peru, but I will try!

Dear Otto, I hope this is the last time I lose track of you. Readers, please go to his excellent blog where you will find zero BS stock analysis, insightful and timely market comments on Latin America. 

Regards ...

Brazil Government, Courts at Odds Over Creation of Super-Tele

Yesterday the telecommunications regulatory agency Anatel approved Oi's purchase of Brasil Telecom, a transaction that counted with the blessing of President Lula. The new company will act practically in every state in Brazil except Sao Paulo, will have 22 million fixed- phone lines and service more than 20 million mobiles phones. Two days ago, a councillor at the federal Comptroller-General Council (TCU) ordered Anatel to delay any ruling on the approval until both companies presented relevant documentation regarding their merger. The TCU says the merger would lead to a wasteful use of taxpayers' money. 

Certainly the process has been obscure and hostage to the political interests of President Lula and his ruling party. When Lula promised to change telecom laws to create a Brazilian carrier capable of competing with Spain's Telefonica and Mexico's Telmex for control of the local market, it was foreseeable that the government would vie for a stake big enough to have a say in the new company's decisions and plans. Under the terms of the transaction, the government (represented by the development bank BNDES and state pension funds) will have about 49 percent of the company. The rest will be held by private investors who will have to pay onerous borrowing costs to the government during the next five years. 

TCU's concerns range from difficulties in understanding the real scope of the concession to the companies' reluctance to pass through on to customers the smaller costs that will stem from gains in scale. The government and Anatel proceeded to vote favourably for the merger in spite of the TCU's warnings. It is possible that new legal loopholes arise in coming weeks and that the process is marred by further lawsuits and legal bickering.    

Thursday, 18 December 2008

CAF Sells Peso-Denominated Debt in Colombia

CAF (Corporacion Andina de Fomento), Latin America's largest multilateral lender, yesterday sold 245 billion pesos ($110 million) in five- and ten-year bonds. The corporation didn't give additional information on yields. Investors bid for more than twice the amount offered by the CAF.   

I suppose that the yield offered was probably one or two percentage point above the DTF benchmark rate. Investors have been reluctant to buy new issues, yields on goverment debt (TES) have fallen dramatically these days (flight-to-safety effect) and borrowers are shy to tap the markets amid Colombia's worst credit dryout since the 1998-1999 recession. Nonetheless, December is always a good month to place debt because there is excess cash in the market due to the holiday season (I am not really sure that that is the case this year, but probably for an investor in the fixed-income market, buying CAF paper, apart from its relative safety to other instruments, can turn into a good deal.) CAF is a AAA rated issuer. Unfortunately the CAF didn't give enough information on the transaction. BBVA was the lead manager for the transaction. 

Comments on Bloomberg News' Brazil Defence Story

story posted in Bloomberg's Web site today says that Brazil is increasing defence spending to keep pace with Venezuela's arms race. It also says that it is trying to revitalise its own weapons industry after years of under-performance following the ouster of the military regime in the mid-eighties. 

I think there are a few misunderstandings here, some of them caused by a lack of understanding, the others due to insuffficient research and little familiarity with the subject. Brazil's dissuasion capability is lagging behind that of other nations in the region (such as Colombia's and Venezuela's.) As Brazilian investments in South America grew in recent years, concerns began to mount that the country lacked of means other than diplomacy and regualr arbitration to protect those interests. The case of Ecuador's decision not to pay Brazil a $245 million loan is a proof of that (and we have a large set of examples that begin with Argentina imposing trade barriers to the absurd expulsion of some Brazilian companies from Bolivian soil in 2005.) As a result of that, President Lula signed in October 2008 a decree in which the state redefined the concept of external aggression and the government set new guidelines for a strategy of national mobilisation in the event of inter-state war. This was spearheaded by Minister Mangabeira Unger, who last year sent the draft for the so-called National Mobilisation Strategy to Lula. What the government is doing here is not engaging on an arms race to equal that of Venezuela's, as the Bloomberg story seem to suggest, but to update and upgrade its aging dissuasion and response defence capabilities. 

The above-mentioned decree, while giving Brazil the necessary legal framework to pursue military operations abroad for the first time, signals a gradual departure from its traditional pacifist posture. This does not mean at all that Brazil is engaged on weaponry purchases of the scale of Venezuela. The reasons why Brazil is doing this is because the strategic resources the country counts with are bigger than the government previously thought, and protection is required given their remote location (the heavy oil is located off-shore, the best quality iron-ore is in the Amazon, and the newest hydropower compounds are in the middle of the jungle, etc.) 

According to people who recently briefed me on this issue, defence spending is likely to accelerate through the end of 2010. The Air Force and the Navy need to renew their fleets. In addition, the relocation of troops from the south to the Amazon is a plan that's been under study since 2006, partly because of Bolivia's announcement that it would receive aid from Venezuela to set up military bases along Bolivian borders. This is not new. Furthermore, the army must be rethinking this redeployment plan after this week's ruling by the Supreme Court on the bordering of several indigenous reserves that run along the country's borders with Venezuela and Guyana (in the Amazon basin.) 

Thus, the recent steps taken by Brazil shouldn't be seen as an arms race effort, nor as a way to win more influence in the region through a military build-up. The Brazilians are likely to maintain their pacifist stance.

Obama Plans $850 Billion Economic Stimulus Package. Will it Work?

According to a story posted in Bloomberg's Web site, President-elect Barack Obama is negotiating a stimulus package of $850 billion. That follows remarks made this week that suggested that the U.S. government is running out of tools to fight the recession. 

There is almost full consensus that fiscal stimulus is what the U.S. requires to be pulled out of its worst recession in eight decades. The size of the package (of about 6 percent of GDP) should help propel recovery in some sectors but it may be not enough to restore some other sectors to equilibrium. The combination of both fiscal and monetary stimulus means in the end that the Federal Reserve will be crazily printing money until a single sign of recovery appears.   

One Wall Street economist told me an effective package would include programmes that generates enough jobs in labour-intensive activities such as infrastructure. Tax cuts may help, but would only help widen the fiscal deficit more rapidly. Children care programmes, unemployment benefits and other type of social aid would help mitigate the welfare effects of the recession, the economist said.  

One of the problems is the way congressional leaders, and local governments deal with the aid. If Congress uses part of the stimulus programme to add some pork-barrel spending projects to it, and state and municipal leaders decide what to do with some of the money, there are little chances that the Obama administration may reach its goal with the initiative. It is unclear how the programme would also help boost exports (which may get an additional boost with the expected drop in the dollar after the Fed cut rates to almost zero this week.) A rapid narrowing of the trade and current account shortfalls would permit U.S. policymakers more rapid action in other fronts and would open more space to expand fiscal spending, some economists said.

Bertin Ratings May be Cut by Moody's; Weak Exports, Rising Costs Seen Hampering Profits, Debt Metrics

Yesterday, Moody's analysts Soummo Mukherjee and Alex Carpenter said in a note that Bracol Holdings (the owner of Bertin, the Brazilian meat packer) may be downgraded. The rating agency changed its outlook on the Ba3 rating (junk) to negative from stable. 

The analysts said that the decision reflects Moody's view that operating margins may narrow and debt metrics may worsen as a consequence of high cattle prices (which pushes costs higher), and the potential global recession that will hinder exports in key markets. 

The move indicates that rating agencies will be quicker this year and next to change their ratings on Latin American companies. During last year and most of 2008, rating agencies awarded more upgrades than downgrades to Latin companies, and in general their comments at the start of the crisis tended to be bullish (that the region was entering this crisis in better shape, with better fundamentals, etc.) They have slowly been changing their opinions. It wouldn't be surprising if some change in Petrobras ratings is underway. Anyways, most analysts remain bullish on Latin corporate debt -- the Brazilian government for instance is preparing emergency credit lines for companies with debt denominated in foreign currency to refinance or make payments along 2009. Repayment risks are limited; perhaps the issue that deserves more attention is the way management will deal with the crisis (whether they will scrap expansion, freeze purchases, close idle plants and fire staff.) That will be key for future prices for regional corporate debt. 

Wednesday, 17 December 2008

CAF Becomes Ecuador Default's First Casualty in Capital Markets

CAF (Corporacion Andina de Fomento) had its rating outlook revised down to negative from stable by Standard and Poor's. The CAF's ratings are A+, considered as investment-grade. 

In a short note issued only a few minutes ago,  S&P revised the outlook ``because the credit risk embedded in CAF's portfolio rose sharply following Ecuador's decision to default on its bonded debt.'' CAF is the largest multilateral bank in the region, and it extends long-term credit to South American nations. A downgrade on the CAF's A+ rating could come if Ecuador decides not to honour its liabilities with the Caracas-based lender.  Another downgrade to one of CAF's large borrowers in Latin America may also trigger a similar move (a downgrade.) Usually, when rating agencies lower their rating outlook on a certain borrower, a move can come within three to six months. 

This won't be the last announcement of its kind by rating agencies. I wonder what will be the position of Fitch, S&P and Moody's towards Venezuela's exposure to Ecuador. They must pronounce on the matter soon.  

Fitch Says Risk of Crises in Latin America is Growing

In an ominous note released today by David Riley, head of global sovereign ratings at Fitch, the Chicago-based ratings agency said the economic and credit outlook for emerging market nations has worsened dramatically as a consequence of the financial meltdown afflicting the most developed economies. 

The note says that countries in Latin America with weak credit fundamentals (call it growing trade and current account imbalances, widening budget deficits and a regulatory framework unlikely to be made more flexible in stress situations) and that are reliant on commodity exports remain ``especially vulnerable.'' Fitch said the credit fundamentals are better for most emerging market economies than in previous crises, suggesting that an increase in funding needs by governments and a hemorrhage of international reserves in most places is an unlikely scenario. High international reserves (such as the case of Brazil, Venezuela and Peru, for instance) provide these nations a buffer against financial and economic turmoil.

Ecuador y la Moratoria (Update)

He recibido dos cartas de lectores, pidiendo mas explicacion sobre la situacion ecuatoriana. Tratare de responder sus preguntas, no sin antes advertir que hay muchas cosas que todavia estan por ser explicadas. 

Un lector, Juan Fonseca, pregunta lo siguiente: ``La decision (de pagar), es acertada o no? Tiene asideros juridicos? Cree Ud. que el pais va a mejorar o se ira por el despenadero?'' Bueno, es posible dar varias respuestas contundentes aqui. Primero, la decision no es buena, es ilegal e injusta con el tenedor de bonos o el banco prestamista. La razon por la cual Correa creo una comision dirigida por su propio gobierno (no independiente ni negociada con los acreedores) para la evaluacion de criterios de la deuda ecuatoriana lo dice todo. Pero el problema es mas complejo -- es un primer paso para que en la region se creen comisiones similares que van a intentar repudiar acuerdos de deuda pasados. La segunda respuesta tiene que ver con la primera en el sentido que no sera dificil para los acreedores buscar argumentos juridicos para ser compensados. La verdad, podrian ser confiscados bienes ecuatorianos en el exterior, asi como cuentas bancarias y demas activos del gobierno. En realidad, el presidente Correa esta buscando una forma de renegociar algunos contratos de deuda (de pronto emitir deuda nueva en una restructuracion a tasas cupon mas bajas, o reconocer un valor facial a los tenedores de bonos del orden del 25 por ciento, etc.) Hay margen de negociacion en mi opinion. 

Finalmente, creo que esta decision va a llevar a una salida de capitales extranjeros del Ecuador y al aislamiento del pais en los mercados internacionales. Como lo dije anteriormente, la decisiond e Correa seguramente va a alimentar en paises con orientacion politica similar como Bolivia, Venezuela y Nicaragua  el deseo de no honrar sus deudas. Es claro que el pais que podria sufrir mas en ese contexto es Venezuela. Pero si Venezuela cae, otros paises como Colombia sufriran las consecuencias indirectas (Colombia es uno de los dos primeros socios comerciales de Venezuela.) 

Un lector llamado Darcy tambien escribio, pidiendo un poco mas de explicacion sobre el mercado de credit-default swaps (CDS) y la moratoria. Creo que lo que va a pasar aqui es que se van a testar diferentes formas de settlement entre los underwriters de esos contratos y los tenedores de CDS's. Puede ser en cash, como puede ser la eliminacion de las posiciones, en general existen un sinnumero de alternativas que seguramente van a ser estudiadas. Lo que es preciso es crear una regla de compensacion para futuras situaciones como esta. Eso no existe y es necesario hacerlo. Afortunadamente, el caso de Ecuador oferece riesgos limitados al mercado de CDS soberanos en Latinoamerica, porque el tamano de la deuda en bonos y de los contratos vigentes no es muy grande.