Thursday, 5 February 2009

S&P Sees China as Best Positioned BRIC Against Current Crisis. It Fails to Say Which is the Worst Prepared Though ...


Wen Jiabao, the Chinese premier, has a hard
task ahead of himself. First, creating dozens of millions of jobs a year
and averting social unrest; second, managing a tough
balancing act in trade and currency policies

Standard and Poor's issued yesterday an interesting report on the financial and economic health of BRIC countries (Brazil, Russia, India and China.) The term, as some of you might know, was coined by former Goldman Sachs & Co. economists to discriminate some countries with outstanding output and financial potential from other emerging markets countries. In the report, called "BRIC By Name, BRIC By Nature?", S&P economist Frank Gill basically tells us that financial strength remains the most important variable when it comes to forecasting what is to happen with these nations. This report sounds to me like they refuse to engage with something more far-reaching than that, though.

Says Gill: "For various reasons -- not least its strong public finances, relatively less exposed financial system, low levels of private sector leverage, and potential to raise consumption's share in gross domestic product, -- we believe that of all four BRICs, China is probably best positioned to find endogenous solutions -- in particular fiscal stimulus -- to withstand an externally driven crisis.´´ Nevertheless, S&P says that without protracted stimulus, China's economy could potentially suffer a severe shock, which could be accompanied by social pressures with political repercussions. ''Recent announcements from Prime Minister Wen Jiabao suggest a strong understanding of these risks and a willingness to access China's considerable assortment of domestic tools to steer the economy through the external crisis,´´ says Gill.

The report, at least the presentation that I got, doesn't mention anything about the current exchange system that is reason to most of China's competitive advantage to the world. In recent weeks, U.S. Treasury Secretary Tim Geithner called the Chinese ''manipulators´´ of their own currency. Surely, some of the analysis should have focused on S&P's view on how the country was to continue weakening its currency artificially to promote exports. For India, the challenge is being able to consolidate public finances in order to reduce its debt burden -- a comment that looks extremely thin on my humble opinion.

Let's say that S&P's concerns focus most on Russia's general picture and Brazil's fiscal inflexibility. Gill says of Russia: "Russia, due to the collapse in its terms of trade, the falloff in financial account inflows, the distress in its banking system, and the absence of excess capacity on the supply side, has access to fewer endogenous cures to the external gloom.´´ And adds: ''although amid all the current difficulties, the Russian Federation can still boast some important ratings strengths, in particular relatively low levels of general government debt.´´ And while China and India stand to gain from falling prices of raw materials, which should keep them competitive relative to other nations, Russia and Brazil are regarded as net losers from lower energy, metals, and agriculture prices.

The investment boom in these two countries has been closely correlated with commodity price increases (something that President Lula tacitly refuses to admit) ''and hence has been interrupted by recent commodity price declines,´´ says Gill. Furthermore, second-round effects of declining terms of trade on growth and public finances in both Russia and Brazil will be similarly adverse.

And a bit more about Russia. ''Due to its oil dependency and the legacy of its three-year domestic credit boom, we see Russian imbalances as far more glaring, although this susceptibility is, in our view, largely offset by Russia's superior public finances,´´ S&P said. Even these, however, may well suffer between 2009 and 2011 as a portion of the Russian Federation's sovereign contingent liabilities becomes explicit and as a contracting economy drives the general government budget into deficit for the first time in over a decade.

Finally, Brazil. While ''imbalances still may not be material, the country in our view nevertheless remains vulnerable to the volatility of the commodity and credit cycles.´´ The Lula government has understood the situation pretty well, and yes, it has been active trying to fight the impact of the crisis -- but, then we have to ask ourselves, are the means by which it is fighting this crisis good for the country on a long-term basis? Ohh .. sorry, that was my comment, not Gill's. Anyways, let's continue. So, in the analysis of S&P, investors should remain attentive, not in alert, over the worsening of Brazilian imbalances. I think that is quite indulgent to a country that is using this crisis as a way to change the rules of the game for the working of the private economy and investment.

Earlybird, Feb. 5, 2008

The headlines are:

U.S. -- Foreign Companies Line Up for Piece of Stimulus Money (Click here for link to NYT story): It's hard to tell whether this will lead to higher investment into the U.S. But the way the stimulus bill is being approved and discussed is questionable. Fox News (yes, I know they are the most anti-stimulus bill, etc.) showed an interview with a bee caretaker who questioned the need for $180 million in aid to the honeybee industry, his sector, included in the stimulus bill. And many times they showed images and quotes of Democratic lawmakers saying that they didn't care about the way the bill was being passed, or who the recipient targets were ... anything. Not that I believe Fox News entirely, but I am not positive the stimulus bill and its recipient base followed a thorough analysis.

COLOMBIA -- Another Politician to Be Freed Today by the FARC (Click here for link to Espectador story): Following harsh criticism by former Governor Alan Jara to the role of President Alvaro Uribe in the hostages situation, Colombia prepares for the release of former Valle assembly lawmaker Sigifredo López. Hopefully López will tell us the truth not only about the FARC situation in the region (rumour has it that the guerrillas are very weakened in that region) but also whether the government helped in the process.

COLOMBIA -- 1.6 Million Cars Will Stay Home as part of No-Car Day Campaign (Click here for link to Espectador story): What used to be a reason to celebrate Bogotá's growing civismo is now reason for concern. With this mayor, this guy Samuel Moreno, a complete idiot, doing absolutely nothing to improve the city's chaotic traffic problem, we wonder how hard it will be for us to go to work today. Traffic congestion is costing hundreds of millions of dollars to Bogotá a year, and is preventing the city from becoming an investment hub for international companies (a plan drafted and pursued by the three former mayors.)

BRAZIL -- Lower House Passes Bill Allowing State Banks to Buy Their Private Rivals (Click here for link to Estado story): This is the atrocity of the day. Please read the comment on Brazil that was posted this morning.

U.S. -- Document Reveals Names of Madoff Clients. Are We Friends or Familiy With Any of Them? (Click here for WSJ story link): Who's Who: Sandy Koufax, Kevin Bacon, John Malkovich ... Many of those names sound familiar.

MARKETS -- I Need No Money, Therefore I Can Borrow (Click on the link for the FT story): Companies looking to secure financing for large mergers and acquisitions must be able to demonstrate their ability to refinance debt quickly in the bond markets.

Brazil House Passes MP 443, The Bill That Gives Preferential Treatment and Taxpayers Funds to State Banks for Rival Takeovers


Joao Paulo Cunha, sponsor of the MP 443 in Congress ...
He is the responsible for all the perks that BB and CEF
will enjoy at the expense of taxpayers.


Bad news. The lower house amended changes made by senators to the MP 443 and passed the bill last night. One of those amendments include the withdrawal of a provision included by the Senate in which a takeover of a private bank by state-controlled Caixa Economica Federal and Banco do Brasil that involved some type of covenant had to be approved first by senators. Furthermore, lower house lawmakers also stretched out the period of validity of this bill through 2011.

Lawmakers at the lower house also revived a part of the bill that created a 3 billion real credit line for the two banks to help finance projects contained in the Accelerated Growth Programme (PAC,) that Frankenstein set up by President Luiz Inacio Lula da Silva to kick start investment in infrastructure. The bill goes now for Lula's signature. The opposition bloc in the lower house showed its laziness and demonstrated that they are far from prepared to challenge Lula's coalition for the 2010 presidential election. The damage that this law can cause to the Brazilian economy is incommensurable. Opponents of the bill said they would set a committee to oversee the BB and the CEF and the emergency credit line. I doubt they will end up doing something.


Someone who thinks that this bill will not have a profound effect on the way private and state financial institutions interact is, in my humble view, very naive. Under the new rules, both state banks can:
1) Bid for banks, insurance companies, private pension funds and other financial institutions. Both banks are authorised to buy control of any financial company, or, what we say openly, nationalise a rival. 2) Easily win equity control of pension fund companies that administer individual retirement accounts. 3) Use their own capital to perform any takeover. While the government said that it has no plans to pump additional capital into BB or CEF to foment purchases, it is well known that they can count on with the aid of BNDES so long as the target bank is of ''strategic´´ importance for the government's objectives. 4) Bid for private banks and present offers for them, independent of parallel offers made by other private banks. 5) Have until 2011 to buy private banks. The banks that were purchased can be resold at market prices. 6) Skip any auction if their purpose is to buy a private bank. Isn't it favouritism?

The imminence of the passage of that bill accelerated the Itaú-Unibanco transaction. Thank God these two banker families, the Moreira Salles and the Setúbals, were clever enough to foresee the tremendous consequences of this bill on the functioning of the Brazilian financial system. Hopefully, there must be some other mergers and takeovers being considered -- only by private players, between private players. In the meantime, no one will look after the lousy use of taxpayers' money sponsored by this awful legislation.