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.