Monday, 16 February 2009

IDEAGlobal Sees Mexico, Colombia Debt Prices Under Fire Due to U.S. Recession. Colombia Bond Yields Should Rise Further.

In a short note e-mailed to customers this morning, IDEAGlobal, the New York-based market research company, sees Colombia and Mexico as two of the most scrutinized Latin economies amid the tailspin experienced by the U.S. economy. ''In the debt market, Mexico has suffered some important setbacks, not only as a consequence of the evident large positive correlation between this economy and its neighbor to the north, but also due to an unnerving jaunt into the new issuance market in the latest week, where this nation became one of the first investment-grade emerging market credits forced to pull an intended long-duration paper due to lack of interest,´´ says IDEAGlobal, referring to Mexico's five-year sovereign bond sold last week (a complete rarity in the asset class.)

Spreads between the respective sovereign curves have been tightening, mostly due to Mexico's sputter, says IDEAGlobal. In focusing on the differentials between Colombia's 2014 benchmark and Mexico's 2015 Global, ''the current 50 basis-point differential with which Colombia trades over Mexico is now the tightest post-crisis level that we've experienced. Spreads between these bonds have traded much tighter for prolonged periods, but this has been only in very bullish, risk-tolerant surroundings for emerging markets, a backdrop that is unlikely to re-emerge anytime soon.´´ But, the most plausible explanation may be, it seems to me, that Mexico has been producing a glut of its own paper in recent months ($6 billion of sovereign and quasi-sovereign paper that came to markets since December,) and the U.S. recession side effects-related underperformance of Mexican debt. IDEAGlobal says ''Colombian spread levels have yet to fully assimilate the increasingly darkening skies on the horizon for the finances of this sovereign, while Mexico is significantly ahead in this camp.´´ Therefore, more declines in Colombian debt prices loom. The credit is under pressure as the economy unravels too fast and there is a perception of inaction by the authorities (see our posting today on trade and interest rates, and policy conundrums.)


Finally, IDEAGlobal recommends using ''the spread narrowing to bet on more trying circumstances ahead for Colombia, with Mexico hurting, but already ahead in the game of absorbing negative developments.´´ Investors should target 75 to 80 basis-point spreads, and stop out if they fall below 30 basis points. We apologise we have no graphs available for this posting.

Excerpts of Chávez Victory Speech Last Night ... From the Balcón del Pueblo ...


Chávez se dirige al pueblo patriota desde el
Balcón del Pueblo. Como es fácil encantar serpientes ...

These are excerpts of President Hugo Chávez's victory speech last night. Translations are mine. Apologies for the mistakes.

-- ''Here you are, people of Bolívar, waving the flags of dignity and victory. We have written together another unforgettable page this February, rebel February. A February of
united people, of passion for the fatherland.´´
-- ''Truth defeated lies. Truth won over those who deny the fatherland. This is the victory of persistence. Let's remember some words Bolívar used to say: God gives victory to those who persist. This is the persistence of a group of people who opted for this choice in clear majority. This country will never go back to its past of indignity.´´
-- ''This soldier of yours is already a presidential pre-candidate for the 2013-2019 period. Get those idiots ready for that,´´ he said, referring to the opposition. ''Unless God and the fatherland decide something different, I will run for president again.´´
-- ''I will promise to fight these evils that are hurting our democracy,´´
he said referring to bureaucracy, violence, crime, wasteful use of the budget, food shortages, inflation, unemployment ....

Mexico, the IMF and the Debate Over the Currency Market Intervention. So Far, the Government's Winning

The International Monetary Fund commended Mexico for its policies to deal with the crisis. Fiscal spending appeared adequate (the government plans to spend the equivalent of 1.5 percent of gross domestic product to fight the economic downturn) and said Mexico has room to do more if needed. The IMF also commended the recent policy of intervention in the currency market as an effective way to address liquidity shortages. Banks including French giant BNP Paribas see the peso as fundamentally cheap, but recovery is limited to the health of the global economy. Summarising, the peso will stay cheap for quite a while. BNP expects the peso to weaken to 15.50 pesos to the dollar in coming months before staging a recovery late in 2009. Banco de Mexico's intervention should help contain the peso from plunging further, no matter its stance on interest rates.

As you might remember, Fitch raised the flags in relation to this issue of currency intervention a week ago. It actually threatened to revise its ratings on Mexico if it finds the actions damaging to the nation's fiscal equilibrium and for the climate of business.

Colombian Exports Plunge. Declining Demand, Deteriorating External Sector Dynamics Fan Calls for Larger Rate Cuts

Exports tumbled 27 percent in November. Traditional exports (such as oil, nickel, coffee and coal) dropped 37 percent while non-traditional exports declined 19 percent from Nov. 2007. On the other hand, imports grew 5.4 percent in November, which means they are losing momentum. The trade deficit widened to $816 million in Nov., compared with a $190 million surplus in the year-earlier period. But, the good news are here, exports grew 29 percent in the first 11 months, outpacing the 21 percent increase in imports -- as a result the year-to-date trade surplus was $377 million (better than the $1.35 billion deficit recorded in the January-November 2007 period.) Going forward, there should be a marked deceleration of exports as commodity prices will stay low and global demand will be sluggish. The Venezuela economic downturn will prove a headache for Colombia, we believe. On the other hand, the sharp deceleration of domestic demand and a weakening peso will likely hinder import growth.

The data will spur calls from a group of dovish central bankers to implement interest-rate cuts bigger than the 50 basis point ones that we have seen in recent weeks. The current macro outlook requires more determination by the central bank. Banco de la República will soon speed up its actions and start cutting rates by at least 75 basis points in the upcoming weeks. The tasa repo should end the second half close to 6 percent or less.

Just to finish, Goldman Sachs Group Inc. economist Alberto Ramos says this about the attitude of central banks in the region that failed to assume a more proactive stance towards the crisis:

''The market has not rewarded the moderation/caution shown by the Colombian central bank. This caution, perhaps excessive, is not contributing to allaying fears of a rapidly widening output gap, and this has translated into a weaker currency. The dollar has gained more than 13 percent against the Colombian peso since the end of 2008. In contrast, other more activist central banks (e.g., Chile and Brazil) have been rewarded with stronger or stable currencies. For instance, the Central Bank of Chile surprised the market in both January and February by delivering rate cuts of 100 basis points and 250 basis points, respectively, and the currency has gained 7 percent since the end of 2008. In fact, the Chilean peso has strengthened 2.5 percent against the dollar today (Feb. 12) despite the much higher than expected 250 basis-point rate cut enacted yesterday. That is, in recent weeks regional currencies have been trading less on domestic-foreign interest rate differentials but more on measures of output gap. The weaker the outlook for real activity the weaker currencies have traded.´´
Good lesson to Colombian policymakers.

St. Valentine's Weekend: Chávez Win Means Democracy Will Limp

Este fin de semana, ganó el amor del hombre que le pega a la mujer. Ganó el amor mentiroso.

I will try to speak metaphorically about this. Imagine that, years after the last football game you played (you had a serious injury that kept you out of the the pitches for all this time,) you decide to give it a try once again. You start to prepare for the big game late, a few weeks before, but you do prepare well. You run, stretch out, bike every day with discipline ... despite the fact that you know that playing football again might hurt your leg. And a defeat -- clearly the return of your injury in this case, -- will kill trust inside of your heart. But the heart is tougher than the mind, and you keep training. You even try to do this with a friend of yours.


The day of the game you feel ready. You stretch out for a long time, think about the implications and dream scoring a goal, or just doing a good job. Then, something unexpected happens: you come out of the game limping, with an injury different from the one that crippled you for two years.

I say all this BS because there are two sides to this very one story. Chávez knew that Venezuelans were far from having reached a consensus on this. But he had no fear, mobilised his supporters, prepared for a tough debate, and at a very moment of internal dissent, he managed to rally his rank-and-file, lure them into this project. He did know what he had to do, and he was right. Abstention rates fell to about 32 percent -- compared with an average 42 percent in the past two elections. We said this that the higher the voter turnout, the more likely a Chavista victory. Chávez campaigned in the name of love in front of his supporters, but continued to intimidate rivals and foes to a point unheard of in the history of this nation's democracy. Chávez always use the word ''love´´ to enchant his supporters (they know a flurry of petrodollars will come into their pockets.) Abuse of power, use of public money, all those things that you, readers, probably imagine or know.

On the other hand, there is the opponents to his referendum effort. The opposition was complacent, indulgent, waited for too long to attack the proposal. They fell again in Chávez's game, that of being the centre and victims of political polarisation, and opted to stay away -- as if running away from Chávez's criticism was going to protect them. Stupid attitude that resembles the stance they took on in the Dec. 2005 congressional elections. They lost yesterday's referendum foolishly and by a large margin after having squandered a 10-point lead not long ago. The opposition lost this ballot because no one is as better prepared to tackle on the country's politics than Hugo Chávez.

That is why the opposition left out the pitch limping. One won, the other lost. The opposition, civic organisations tired of Chávez as well as many citizens might be asking themselves ''What did go wrong?´´ and all that. The win of this amendment is mainly due to Chávez's virtues. But the opposition helped quite a lot here. This was just to summarise.

The consequences for the economy will be devastating, if history tells us something. Apart from his deprecatory comments about his opponents, in which he often calls them ''farts,´´ Chávez vowed to be conciliatory to the opposition. St. Valentine's lies -- you know what I mean, don't you? Radicalisation in politics and the economy will follow: the president has an urgent task of finding a solution to the economic crisis and it might be on the imposition of measures to ease the growing economic imbalances in the country. Or he may chose to toughen the current restrictions that are hurting businesses and investment, ramp up spending and continue the mess, even as the feast is already long gone. I am sure this second path will be chosen, with the long-term implications in terms of high inflation that will be tackled on with the wrong policy tools, unemployment that will be temporarily solved by surges in state hiring and nationalisations, disinvestment that hardly be cured with more state intervention, and the very dangerous tendency to extend the military's control of the nation's resources -- to this one there is no solution: It is the Cuban model, nada más!

One reader said that term limits should be eliminated because they are undemocratic. He might be right. But the referendum election in Venezuela didn't take place on a level playing field. Democracy was already injured, it wasn't prepared to face the match and, when the moment of playing arrived, it came out of the field limping.