Thursday, 15 January 2009

Meirelles Surprising Remarks Increase Odds of Interest-Rate Cut

A plan outlined last night by Banco Central Brasil President Henrique Meirelles to ready $20 billion in funds to help local companies refinance maturing debt overseas indicates that corporate liquidity problems will probably persist for another quarter or two. Meirelles, the former Bank Boston executive, reaffirmed a commitment made in November that the government will use any sources of money at hand (even international reserves) to help about 4,000 companies roll over maturing obligations. Brazil had $205 billion in reserves at the start of this year.

We discussed in this a few days ago the problems facing Arantes, Cosan and other commodity, food and cellulose producers. Access to credit will normalise in a few months, but the problem is time and availability of funds. According to ING Bank, Brazilian companies face more than $60 billion in bond and loan maturities throughout the year. Trade loans were cut off at the height of the crisis in early October -- the central bank had to intervene and commit more than $9 billion in reserves money for that purpose.

If there is a consequence to this announcement -- apart from the sigh of relief that some corporate managers might have made following Meirelles remarks, -- is that the BCB will engage with a more aggressive interest rate-cut than initially planned for next week. My bet is a 75 basis-point cut, what is yours? Write us a comment and let us know.

A reader wanted to know my line of thought regarding the cut. Here is my answer:
  1. ''The experience of Brazil during the 2002 crisis is valid for the time being. When Brazil had this speculative attack ahead of the 2002 election (you probably remember that the currency dropped 50 percent in three months) the issue of trade financing and credit problems couldn´t be dealt with properly becasue international reserves were falling dramatically and the economy was undergoing a hike in inflation.´´
  2. ''The bank raised the Selic by 300 bps on Oct. 14 (forgive if I am wrong, using my memory here) and kept borrowing costs high for a few months until price pressures subsided. Trade lines remained shuttered for as many as seven months, until markets realised the Lula administration was willing to honour the national debt. The situation here is the opposite, except for the credit crunch. Inflation is down dramatically -- and it will keep falling, -- and the government is quite concerned with jobs and activity in certain key industries (commodities, foods, mining and energy.) The country has plenty of reserves at this moment, and Brazil didn´t suffer the currency tumble that other EM nations (especially EE countries) did. Reserves are at similar levels to those before the crisis!!!´´
  3. ''Having said that, the same way Arminio Fraga´s BCB overreacted by raising the Selic by 300 bps in an extraordinary meeting in a mid-October afternoon, Henrique Meirelles´s BCB will be a bit more measured, to show market participants his board is both agressive and prudent. People in the markets expect a half-point cut, but at this juncture I think that 75 bps is the most likely size. It´s a balanced cut (big for Brazilian standards, although small if you see the gravity of the crisis that is coming.)´´

4 comments:

  1. Guillermo, please explain your reasoning. (Why does this plan increase the odds of -75bp?)

    ReplyDelete
  2. Dear Mrs Signoret

    First, let me thank you for following MM. The full reasoning, perhaps for space and time constraints isn´t contained there. I will indeed update the note and add some details. You probably saw this morning the results of some inflation measures in Brazil, with some weekly indices showing defaltion of almost 1 percent in the first week of January. I heard (thanks to some contacts I have in the domestic financial markets) that some companies are seeing orders plunge and rushing to renegotiate debts with lenders (I mentioned the issue in a note about beef producer Arantes.) Some leading indicators have shown awful readings.

    The experience of Brazil during the 2002 crisis is valid for the time being. When Brazil had this speculative attack ahead of the 2002 election 9you probably remember that the currency dropped 50 percent in three months) the issue of trade financing and credit problems couldn´t be dealt with properly becasue international reserves were falling dramatically and the economy was undergoing a hike in inflation. The bank raised the Selic by 300 bps on Oct. 14 (forgive if I am wrong, using my memory here) and kept borrowing costs high for a few months until price pressures subsided. Trade lines remained shuttered for as many as seven months, until markets realised the Lula administration was willing to honour the national debt. The situation here is the opposite, except for the credit crunch. Inflation is down dramatically -- and it will keep falling, -- and the government is quite concerned with jobs and activity in certain key industries (commodities, foods, mining and energy.) The country has plenty of reserves at this moment, and Brazil didn´t suffer the currency tumble that other EM nations (especially EE countries) did. Reserves are at similar levels to those before the crisis!!!

    Given that, the same way Arminio Fraga´s BCB overreacted by raising the Selic by 300 bps in an extraordinary meeting in a mid-October afternoon, Henrique Meirelles´s BCB will be a bit more measured, to show market participants his board is both agressive and prudent. People are expecting half a point, but I think it is more probable that 75 bps is the final size of the cut. It´s a balanced cut (big for Brazilian standards, although small if you see the gravity of the crisis that is coming.)

    That is my opinion on the matter. Please let me know what you think.

    Have a nice day and thanks for reading this blog,

    Sincerely,

    Guillermo Parra-Bernal

    ReplyDelete
  3. Guillermo,

    I have replied on my blog: http://transeconomics.blogspot.com/2009/01/while-i-find-guillermo-parra-bernals.html.

    Here's what I said:

    16 January 2009
    Brazil's monetary decision, part III
    While I find Guillermo Parra-Bernal's forecast for -75pb by the Bank of Brazil perfectly plausible, I am unpersuaded by his claim that the Bank's decision to to help Brazilian producers roll over foreign debt maturing in 2009 raises the probability of a cut that size.

    The Bank's help extended to suppliers is financial crisis management: the central bank is acting in its role as lender of last resort in global conditions of tight access to credit. A forecast rate cut of 75bp on January 21 is justified by the outlook for Brazilian inflation.

    A rapid pace of disinflation in annual terms and outright deflation in monthly terms will now set in. Industrial output is collapsing, raw materials costs are moderating, demand has eroded so quickly that currency depreciation (of 20+% versus the dollar since the fall of Lehman) is scarcely passing through to consumer prices, and inflation expectations as measured by surveys of professional forecasters have stabilized.

    ********

    Es perfectamente plausible el pronóstico de Guillermo Parra-Bernal's de un recorte de 75bp por el Banco de Brasil. Sin embargo, no me convence su su afirmación de que la decision del Banco Central de ayudar a los productores brasileños a cumplir con deuda por vencerse en el 2009 aumente la probabilidad de un recorte de esa magnitud.

    Dicha medida del Banco Central es una medida para lidiar con la crisis crediticia: BCB está ejerciendo su papel de prestamista de última instancia. Una proyección de un recorte de 75pb el 21 de enero se justifica por el panorama de los precios al consumidor.

    Se prevé ahora para los índices de precios rapída desinflación en términos interanuales y franca deflación en términos intermensuales. La producción industrial se colapsa, los costos de las materias primas se moderan, la demanda se erosiona tan rápido que la depreciación de la moneda (de 20+% frente al dólar desde la caída de Lehman) prácticamente no se ha traspasado a los precios internos y las expectativas sobre la inflación medidas por las encuestas a los pronosticadores profesionales ya se estabilizaron.

    Saludos, Genevieve

    ReplyDelete
  4. Mil gracias ... en realidad la funcion del banco centyral es cuidar la inflacion. No se si fui claro, pero creo que lo que hace el paquete de ayuda es acrecentar la posibilidad de un corte mayor -- nunca en esta pagina se sugirio que el BCB solo haria ese corte mayor motivado por la situacion de liquidez.

    Mil gracias por leer este blog .. espero mantenerme en contacto con vos.

    Guillermo

    ReplyDelete