Friday, 13 February 2009

No Abstention Allowed: Chavez Tries Second Attempt at Indefinite Re-Election. We Expect a Close Call, More Political Polarisation

Ojo pelao, bebé!

President Hugo Chávez, Venezuela's ruler, is trying to get indefinite re-election approved in his country for the second time in 14 months. The referendum for the abolition of term limits takes place on Sunday, Feb. 15. With the prospects of an economic downturn haunting him, the former lieutenant colonel (let's not forget where he comes from) is rushing to get voters scrap term limits that would otherwise force him to step down at the end of his presidential period (early 2013.)

Most polls show the ballot will be a close call, with the most recent data giving a small edge to the 'Yes´ -- the opposition had a 10-point lead in surveys only a month ago. The results of the two previous elections and an ''intimidation” factor that polls failed to capture in recent elections aren't contained in these results. The 'No´ has, therefore, decent chances of winning this one (again.) We felt no consensus among voters has been built about the need for indefinite re-election. But the government has mobilised its supporters massively and ... yes, it helps their objectives (click here to read a very good story by Bloomberg News bureau chief in Caracas, Matt Walter, in which he depicts the efficient Chavez machinery working. During my time at Bloomie, I also wrote a similar story describing the abuses incurred during campaign time.) Thus, the greater the turnout of Chavista voters, the bigger the probability that the 'Yes´ wins -- Chávez has been hurt in the past two elections by the apathy of his rank-and-file, which the opposition says is tiring of his XXI Century Socialism.

Nevertheless, neither option will win by a large margin. A victory of Chavez should grant him more political leeway to extend political control while enabling him to fight dissent within his coalition. He will gain momentum in his crusade to intimidate foes and hold back business leaders seen as opponents of his regime. The word starts with D and ends with P. The problem will come in the aftermath of the vote, when the former lieutenant colonel (let's not forget where he comes from) has to contend with the impact of plummeting oil revenues, rampant inflation and rising food shortages -- or a recession. Funnily, Barclays Capital expects the economy to contract about 4 percent this year (we mentioned this in a recent post.)

On the other hand, a defeat of the 'Yes´ will raise questions over the path of the Bolivarian Revolution. This may trigger a more authoritarian direction by the lt. colonel, with political and social tensions spiking. We write here in MM about the economic implications of this vote: let's start then ... There's a slight probability the government chooses to do the right thing, regardless of the result, and begins tidying up the house: that domestic fuel subsidies are trimmed, that he overhauls fiscal spending policies and eases exchange rate controls.

His victory will further undermine checks-and-balances in the country, not only at an institutional level but also in the economic environment. First, there is virtually no oversight on about $20 billion in off-budget funds, and the current budget reflects an unrealistic view of the nation's finances. And as Chávez runs short of policy alternatives to deal with high inflation and food shortages (because he left the country more vulnerable to oil,) the problem will be radicalisation of his economic agenda. Nationalisations can occur. Possible sectors: banking and finance, food. Does he have the money to do it? probably he is running out of petrodollars to embark on an ambitious wave of seizures, similar to that of 2007. But, this is the key point, the policy of economic compensation may have to be reworked. Will he pay? depends on PDVSA's cash holdings .. and we have taled extensively about this in this blog ... the company is facing a severe cash crunch.

Indonesia on the Road: Road Show Meetings Spark Interest on Medium-Term, Benchmark Size Issuance

According to a note released by the government of Indonesia that one reader kindly sent to us this morning, the country unveiled its intention to set up a benchmark-sized dollar bond issue under the Global Medium-Term Note Programme (GMTN) upon the completion of an update process for investors and parliamentary red-tape. Barclays Capital and UBS AG are managing the sale.

In recent weeks, especially in the November-through-January period, the decline in international reserves in Southeast Asia has been acute. In emerging market Asia (ex-China) the drop in reserves has been equivalent to 2.2 percent of gross domestic product, twice as much the decline posted in Latin America and Eastern Europe. In the case of Indonesia, portfolio outflows were the equivalent of 5 percent of GDP in the fourth quarter. Consequently the price of five-year credit default swaps (CDS) on government dollar bonds rose by about 300 basis points in the same period. In light of the tumble in exports and the heavy foreign debt repayment schedule, more emerging market countries will be forced to tap the international bond markets in spite of higher borrowing costs. As we saw Wednesday, Mexico sold $1.5 billion of five-year debt (a weird transaction, given the fact that Mexico and state company Pemex have flooded the market this year with a total $6 billion in issuances ... anyways, that is a different story.) Basically, my point here is that Mexico's decision provided a series of observations about the situation of the sovereign debt asset class. That there is still appetite for short-duration investment-grade paper seems to be one of the main conclusions. Indonesia might be exploring the MTN market because it is either ready to pay high borrowing costs for the money, or it fears its external account and debt positions may put reserves further under pressure. Summarising, it does need the money.

Indonesian government officials met with as many as 120 international investors that included asset managers, bankers and other investors in London, New York, Boston, San Francisco, Los Angeles, Singapore and Hong Kong, according to the note. A bit of colour always does good to these postings. The GMTN Program was established on Jan. 29 (we wrote a short posting about it, so go back to the archive if you are interested to find out details on the programme or, I will make it easier for you, click here) and streamlines future international bond issuance by the country. Investors were addressed on the impact of the global credit crisis on Indonesia, current policy responses, the proposed fiscal stimulus and planned budget financing.

Ecuador Again: Citigroup Says Borrowing Needs Remain a 'Connundrum.´ Funding Problems May Lead to Abandonment of Dollarisation

In a report called ''Ecuador: Financing Requirements for 2009 Remain Unknown,´´ Citigroup Inc. economists assert that public sector borrowing requirements for 2009 remain a ''conundrum despite the recent official announcements to the contrary, putting dollarisation at risk.´´ We have said here that President Rafael Correa (photo), despite likening the dollarisation as a necessary evil, had so far tried not to dismantle it. But he now might be trying to do so, by forcing bad events to happen ... Weird, but true. A group of local analysts we are in touch with said the course of developments is so irrational sometimes it looks like Correa would actually be forcing the outcome of some events!

Yesterday, Minister Diego Borja announced that the government had secured a credit line with the IADB for $500 million, of which $100 million would be disbursed in the first quarter. Borja also said that the Correa administration is seeking $1.5 billion from multilaterals to close remaining borrowing requirements
for this year, according to Citigroup. The borrowings would come on top of the $1.2 billion obtained from the social security fund since December. ''Despite the government’s announcements, we believe multilateral financing will be questioned and delayed. Local analysts indicate the IADB officials both in Washington and Quito, still far from reaching a basic understanding, needed to internally activate unconditional and conditional loans for $500 million and $365 million, respectively,´´ said the economists. The problem is, apparently, according to Citigroup, IMF staff who were also present in last week’s meeting with Ecuadorean officials, were asked to issue a letter of assessment before the IADB staff seeks its board approval, where strong resistance is expected from the U.S. government. I doubt the U.S. will oppose the awarding of these loans, but the argument sounds solid.

Bottom line is, financing likely will fall short of the budget needs; Citigroup is predicting such outcome will lead to a reduction in spending of the $13 billion budget. One of the consequences of this move would be a quick abandonment of dollarisation. Why? Citigroup gives a few, interesting reasons: 1) The social security fund has little room for further lending to the government. So, the country will have to look for multilateral funding to make ends meet. CAF is first option (do you remember that Correa was close to defaulting on some CAF loans in December, prompting Standard and Poor's to revise the outlook on the entity's credit ratings to negative from stable? Thanks Rafa!) CAF’ has a huge exposure to Ecuador (21 percent of the total loans are in hands of the country, followed by Peru (18 percent) and Colombia (17 percent).) CAF may not be able to lend that money though ... so ... Citigroup concludes that ''under these circumstances, the president may have no choice but to opt between failing to meet the promised budget, abandon dollarisation, and backtrack on his decision to never accept IMF loans and conditionality.´´

And the analysis continues: ''Oppressed by falling reserves and a stronger dollar, we expect the president to attempt to convey to voters the benefits of abandoning the U.S. dollar towards the second semester.´´ The political power that he now has, which includes control of Congress and the recent implementation of the new constitution drafted by him and his cronies, gives him the edge needed to end with the dollarisation system, which did good to Ecuadoreans by assuring inflation remained within its targets.

Columnista Invitado: Mientras Se Busca un Seudónimo, Nuestro Lector Nos Habla de Ecopetrol y sus Perspectivas de Precio

A partir de hoy, un lector que trabaja en en el mercado local de valores entra a MM como contribuidor ocasional. Este blog le agradece su interés y abre este espacio no sólo para él sino también para otros lectores que estén interesados en divulgar sus opiniones sobre el mercado local y global. Como lo he dicho, el anonimato será respetad siempre y cuando el autor cumpla un mínimo de reglas de publicación que MM impone -- para evitar los abusos que aquí en este blog se combaten.

Es importante recordarles a Uds., queridos lectores, que ninguna de las opiniones registradas en el siguiente reporte representa o intenta representar una recomendación formal de compra o venta del título valor. Las opiniones del columnista, al mismo tiempo que las de MM, no buscan atraer potenciales inversionistas para la compra o venta de estos títulos o papel relacionado a Ecopetrol. Las opiniones contenidas estan basadas en un estudio técnico, del cual el autor es el único responsable. De igual forma, el escritor del artículo declaró no poseer acciones del emisor en cuestión. Este servidor posee acciones de Ecopetrol en su portafolio.

Espero que les guste. Al lector -- señor, necesitamos un seudónimo urgente para Ud! -- Mil gracias de nuevo.



Como algunos lectores de este blog ya familiarizados con el mercado bursátil colombiano deben saber, Ecopetrol (ECOPTL) es la acción más representativa en el índice IGBC de la Bolsa de Valores de Colombia. La acción presentó durante gran parte del 2008 una correlación positiva relativa al precio referencia del crudo (WTI) en la NYMEX. Sin embargo, dicha correlación se rompió a finales de Octubre, cuando el precio local se estacionó alrededor del 1,825 pesos colombianos (USD$0.76) por acción (lo que llamo el nivel de soporte.) El precio rebotó ligeramente después de algunas semanas, retomando un comportamiento lateral el cual se ha consolidado alrededor de los 2,000 pesos -- como un soporte de mediano plazo.

Desde los primeros días de noviembre, el precio del crudo tuvo una trayectoria descendente la que mantiene hasta nuestros días (ubicándose a menos de $40 esta semana). Contrariamente, la acción de Ecopetrol ha tenido en las últimas semanas algunas valorizaciones modestas, fruto entre otros factores del anuncio de ganancias que superaron los $5,000 millones el año pasado. Entre las razones que han influido en la reciente valorización del papel están los recientes anuncios del plan de inversiones de $60,000 millones para el período 2009-2015; dicho plan incluye el aumento de la capacidad de refinación y de producción de petroquímicos. De otra parte, existen expectativas entre los inversionistas acerca de una posible emisión de deuda por parte de Ecopetrol en el mercado global de capitales, la cual podría definirse en algunas semanas.
Este comportamiento alcista se da, vale la pena resaltar, en un contexto global de aversión al riesgo y de una reducción sustancial en los niveles de negociación -- las que generalmente conducen a reducciones en los precios de los activos.

Para el caso de Ecopetrol, encontramos resistencias para el corto plazo a niveles de 2,165 pesos, 2,220 pesos y 2,280 pesos. En el mediano plazo (3 a 6 meses,) sería posible esperar que la acción de Ecopetrol oscile entre 2,300 pesos y 2,350 pesos. Estas perspectivas se explican, en mi opinión, por el aumento en las reservas de la compañía por la compra de Offshore International Group, propietaria a su vez de Petro-Tech Peruana SA; dicha transacción incrementará las reservas de Ecopetrol en aproximadamente 6,000 barriles/día.

Andima's Moraes Says About Petrobras-BNDES Loans: 'One Thing is to Pledge, Another is to Do'

The president of Andima, Brazilian banker Alfredo Moraes (photo, right) is reasonably skeptical over the recent BNDES pledges that it will extend 22 billion reais in loans to state-controlled oil company Petrobras. He told the association's Web site in an interview that ''one thing is to pledge, another is to actually do so.´´ He is right. While some readers have commented in this blog about Petrobras funding needs -- some of these readers actually say that Petrobras may require less than that (something I disagree with) -- I have my doubts that the company will take on so much debt without hearing first from rating agencies. Fitch has already said that the financing required is likely to put credit metrics under pressure (which may trigger a reassessment of credit ratings.)

Moraes is hopeful that credit will soon return to pre-crisis levels. He echoed recent remarks made by central bank President Henrique Meirelles. We all hope so. Funnily, in the same interview, Moraes avoided mentioning the awful surge in the cost of borrowing experienced by companies and individuals in recent months.

Click here on this link to read the story posted on the Andima Web site (it's in Portuguese. I am sorry but I refuse to translate the entire story ... it´s too long and I have to rest .. it's been a long and busy week.)

Spooky! Bankers Polled by IADB, Felaban See Crisis Lasting 1-3 Years in Latin America

A survey commissioned by the Inter-American Development Bank, the IIC (the bank's investment bank) and Felaban, the industry group for Latin commercial banks, found that regional bankers expect the crisis in financial markets to last between one and three years. They also see declining bank credit for small- and mid-sized enterprises (a reversal of the trend seen during the boom years) but greater interest in microfinance. The IADB, which released results of the poll yesterday in Washington DC, said two in three bankers surveyed believe the global credit crisis will affect their domestic markets in a significant or relevant manner. Well, hello! It's already happening!!! Interesting subject: Mexican bank executives were somewhat more optimistic than their Central American and South American counterparts.

The poll also found that six out of 10 executives foresee a decline in available funding for their financial institutions. This is scary for it means that banks will have a hard time raising funds that they can channel into new lending going forward. Another effect that is worth mentioning is the expected decline in worker remittances and in trade financing: both items have been fundamental for lenders in the region in the boom years.
Remittances are a key source of foreign exchange into the region's economies and for bank's dollar balance sheets. Many banks repackaged flows of remittances into securities that they sold to investors, raising money that they would funnel into new loans. On the other hand, trade financing is one of the first credit products that large global financial companies shut in times of turmoil. As you might remember (we wrote about this extensively a few weeks ago,) the Banco Central do Brasil had to pledge the use of $20 billion of the nation's reserves to lend to 4,000 or more companies suffering from clogged trade financing.

The survey, ''which on previous occasions was conducted to gauge banks’ views on SMEs, found that bankers anticipate that these businesses will face higher interest rates and stricter lending requirements.´´ Nine out of 10 bankers said their institutions remain interested in working with SMEs, providing them services such as working capital loans, credit lines, advice on export deals and payroll and payments management. Obviously, bankers remain interested in maintaining commercial relations with these clients. There's no free lunch, though: Borrowing costs for the segment rose by more than 5 percentage points in countries like Brazil and Colombia. But in the event that the global economy recovers rapidly (1 percent probability in my humble view,) banks need to have a range of credit-hungry SMEs to cater. Isn't it?

One important thing that bankers stressed in the survey wasn't surprising: the importance of positive cash flows and good credit track records among requirements for approving loans for SMEs. But, as you know, creditworthiness has deteriorated across all levels of borrowing, because exports are tumbling, domestic sales are limping and defaults by either final buyers or suppliers are rising. Countries like Mexico, Brazil and Colombia are experiencing rising unemployment rates (and as you might suspect, that is quite dangerous for banks.) Yet, ''an auspicious trend arising from the poll was the increased interest expressed by bankers in microfinance, which caters to businesses with fewer than 10 employees.´´ Large banks see this activity as an attractive alternative, more so than small financial institutions. Four in every 10 executives said their banks are already involved in microfinance, while three out of 10 said they plan to expand into microfinance in the medium term.

The technical information: more than 100 executives from large, mid-size and small banks from 19 Latin American and Caribbean countries took part in the survey conducted at the end of 2008, after the global financial crisis started to hit this region.

And to finalise this, a tad of publicity for the IADB: ''The global financial crisis will be one of the main topics of discussion of the IADB Board of Governors annual meeting, which will take place March 27–31 in Medellín, Colombia.´´

Emerging Market Bond Funds Suffer Outflows in Feb. 11 Week; Local Currency Funds See Largest Redemptions, Says EFPR

In the week ended Feb. 11, emerging market debt funds experienced $580 million worth of outflows (equivalent to 1.38 percent of assets under management,) according to EFPR. The outflows were twice the $260 million outflow recorded in the prior week. Net redemptions were seen across all fund types with the greatest nominal outflow seen for local currency funds ($329 million pulled by investors in total -- 3 percent of AUM.) In the previous week, the decline was $127 million.

So far in 2009, emerging markets debt funds have seen assets under administration drop by about $3 billion. Dedicated high-yield funds continue to be ''the beneficiary of new investor money,´´ according to ING Bank NV, adding that inflows in the Feb. 11 week were $687 million. ''So far this year, inflows have amounted to $3.4 billion, with market price effects adding a further $3.2 million to asset value,´´ ING wrote.

U.S. May Suspend Temporarily CDS Trading, According to Reuters

This is a wee old, but I have been quite busy these days trying to earn some honest money. Well, check this -- it seems important and with the potential to derail the growth of a market aimed at redistributing and diminishing risks. You will read this in the story but anyways, Reuters says ''Credit default swaps have been blamed for spreading the risks of bad assets, including residential mortgages, which caused massive losses to companies around the world and for amplifying the impact of financial turmoil.´´ Perhaps, this step is necessary to pave the way for more stringent self-regulation in this market that, it must be said, remains opaque to most investors and regulatory agencies.


''WASHINGTON, Feb 11 (Reuters) - The U.S. futures industry regulator would be empowered under a bill filed by the House Agriculture Committee chairman on Wednesday to suspend trading in credit default swaps if needed to protect investors and the financial market.

The bill also would require clearing of over-the-counter transactions through entities registered with the Commodity Futures Trading Commission or the Securities and Exchange Commission, according to a summary. It said banks could clear OTC transactions if they registered with CFTC as a derivatives clearing organization or with the SEC as a clearing agency. The Federal Reserve would be barred from regulating clearing houses. CFTC would gain criminal prosecutorial power under the bill, which is scheduled for committee discussion and vote on Thursday afternoon. Committee chairman Collin Peterson, Minnesota Democrat, has said he hopes for committee approval of the bill this week.

An earlier draft would have banned "naked" CDS and limit the instrument to investors who can show a need, such as owning the underlying bonds. Financial industry groups said a ban would destroy the U.S. market for CDS and impair the availability of credit. Instead, the bill empowers the CFTC, if the president agrees, to "summarily suspend trading in any credit default swap" to protect investors and the markets.

Credit default swaps have been blamed for spreading the risks of bad assets, including residential mortgages, which caused massive losses to companies around the world and for amplifying the impact of financial turmoil. While the bill would require clearing of OTC transactions, it allows an alternative of reporting the transactions to CFTC. That path would require investors to show their financial integrity and the soundness of the transaction.

The bill includes anti-speculation provisions aimed at energy and agricultural futures contracts. They were in a bill that passed the House, 283-133, last September. They require foreign exchanges to adopt reporting and disclosure rules that mirror U.S. standards, require position limits on agricultural and energy contracts and allow CFTC regulation of look-alike OTC energy and agricultural contracts.´´

S&P Strikes Back .. Argentina Corporates Suffer

Yesterday, Standard and Poor's got tougher on Argentina and cut the ratings of the following corporate issuers:

-- Alto Parana (to BB- from BB)
-- Electricidad Argentina (to CCC from B-)
-- Distribuidora y Comercializadora (to B- from B)
-- YPF, the energy company (to B+ from BB)
-- Telecom Argentina (to B- from B)
-- Petrobras Argentina (to B from BB)

The question is, what is next?

Colombia Security Improvements Put Under Question by Several Analysts

Bogotá: Homicides fell more than 70 percent in the past ten years until
Mayor Samuel Moreno took office in early 2008. God, have mercy
and help us impeach that idiot!

In a report released to customers, a London-based risk intelligence company (I omit its name for obvious reasons) recently said that, despite recent releases, guerrillas will continue to kidnap. Potential victims include cattle ranchers and businessmen, children and government officials in Antioquia, Bogotá and the southern part of the country.

This seems quite important to highlight, especially in the eve of political turmoil involving the possible re-election bid by President Alvaro Uribe. As you might know, a series of hostage releases by the FARC (the guerrilla group unilaterally released six kidnap hostages, including the last two politicians they held) took place last week. The releases marked the end of a 10-year strategy ordered by former FARC leader Manuel Marulanda to kidnap high-profile politicians in order to force a prisoner exchange. Some local and foreign analysts say the releases obey to a reaction by the new FARC leadership to quell public dissatisfaction with the abduction of civilians. The FARC still holds some 700 hostages for ransom and won't give up on kidnapping -- the group seems to necessitate supplemental extortion and kidnapping incomes.

The thing is, despite a reduction in guerrilla abductions, independent criminal groups operating in major cities are increasing operations. We have talked frequently about the deterioration of personal and business security in Bogotá. In recent days, a factory owned by a relative of mine was the target of an armed robbery. Apart from stealing office material, cash and personal belongings, some workers were pointed at with guns, with some being beaten up. In Cartagena crime is heightening. Cali, tells me a friend of mine, is a scary place to go at night. Some of these abductions take the shape of ''express kidnappings,´´ a modality very popular in Caracas and Brazilian cities like São Paulo, where victims are snatched from the street and forced to withdraw money at cash points until their card limits are reached. The risk assessment firm says highest risk provinces include Antioquia, metropolitan Bogota, Tolima, Valle de Cauca, Narino, Arauca and Cundinamarca. Business owners, children, public officials, drivers and cattle ranchers tend to be the main targets.