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:

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.