Thursday, 5 March 2009

Brazil Said to Be Considering Reducing Primary Surplus. Reaction? Negative

O Estado de S. Paulo, Folha de S. Paulo and other prominent newspapers in Brazil reported yesterday that the government is considering cutting the primary surplus target for this year to 2.8 percent of gross domestic product from 3.8 percent of GDP. We assume the government is seeking to maintain investment spending programmes under President Luiz Inácio Lula da Silva's Growth Acceleration Package -- the $220 billion Frankenstein he announced couple of years ago. Well, there's no free lunch -- now that the central bank has started to reduce interest rates in a significant manner, the government cannot loosen fiscal limits, so no surprise if the central bank at some point stops the monetary front-loading. We are sure there is no consensus among government officials over the feasibility and convenience of such move, which by the way must be an idea of Guido Mantega, the Brazilian finance minister, and his Workers' Party ideological friends.

As the economic slowdown eats out tax collections in significance and political pressure for more state aid to fend off a recession mounts, attaining the target without streamlining programmed expenditures would be quite hard. Markets will react to this very negatively -- pushing debt costs higher, and making it harder for the government to finance its consolidated fiscal shortfall. As Goldman Sachs Group Inc. economist Alberto Ramos puts it, this announcement may fail to spark a reactivation in private investment (says Ramos that ''the corporate sector might fail to believe that higher fiscal spending will lead to higher growth and would therefore not increase investment spending.´´ To me, simply, 'if the government is investing on my behalf, why then should I invest? I better pay more dividends, or hoard cash.´)

Bottom line -- the excesses are beginning to surpass any possible limits that were thinkable or feasible a few months ago. In Brazil, fiscal policy is all about making permanent spending commitments, and those who covered that country for years know that no fiscal expansion in Brazil has only short-term impact (there is a tendency to create long-term spending programmes.) Once the economy recovers, you can't dismantle them -- they are politically-rewarding. One more reason for credit agencies to backpedal on their decision to award investment-grade ratings to a country with such difficult -- and unresolved -- structural problem.

China Offers a Short-Covering Bounce for Latin Debt, Says IDEAGlobal

In a short note called ''China Creates a Short-Covering Bounce,´´ New York-based market resreach company IDEAGlobal analysts say:

Latin American ''debt credits weren’t of much note in their overall returns yesterday, as local equity and currency markets in Latin America carried much more luster, nonetheless, the trading session produced an oversold bounce that countered recent expanded pessimism. U.S. equity indices demonstrated leadership in setting the directional tone for the global financial markets, as the major gauges all rose by over 2.3 percent. However, the core propellant for the recovery was exogenous to the inner workings of the U.S. markets, though non-surprising in its origin in China.´´

NR Finance Plans Sale of 3.9 Billion Pesos of 18-Month Bonds in Mexico; Maturities Remain Constrained Due to Credit Crunch

NR Finance, the Mexican car financing unit for Nissan Corp. and Renault SA, plans to offer 3.9 billion Mexican pesos in bonds in domestic markets this week. The proceeds from the sale of the 18-month so-called certificados búrsatiles is to help repay maturing debt in May. Bondholders of the maturing debt will be goven the chance to replace their bonds with the new issuance; in case they refuse, they will be repaid fully by NR Finance. The situation for car loan companies is getting tougher as the credit crunch extends -- and credit conditions in Mexico continue to be challenging. Yet, the corporate debt market, as we have mentioned a few times here, is staging a steady recovery, especially the segment of commercial paper, which has experienced a good revival this year.