Friday, 13 March 2009

Chile Delivers Another Massive Rate Reduction; Currency Should Rally Slightly

The Banco Central de Chile, commanded by economist José de Gregorio, delivered a 250 basis point cut in the benchmark overnight lending rate to 2.25 percent (in line with market forecasts.) That is what a responsible country does when it has the firepower to do it, namely fiscal ammunition, low debt, etc. This is the third rate reduction this year -- 100 basis points in January, 250 basis points in February, and 250 basis points this month.

We have been insisting on markets' preference for countries with an aggressive package of anti-recession policies. We have seen how well the Brazilian real and the Chilean peso fared compared to the Colombian and Mexican pesos (and we insisit these two countries were late to act against the crisis.) The Chilean peso has gained momentum in recent weeks, following the announcement of a $4 billion fiscal stimulus package at the end of last year. One important thing to highlight here is that the Chile has more fiscal room to implement counter cyclical policies than Brazil. The peso therefore might rise to levels close to 580 to the dollar, from 594 pesos now.

Brazil Retail Surged; Hey, Slow it Down -- Consumers Have Longer Lagtime to Trim Spending During Crisis

The government reported today that January retail sales in volume terms increased 1.4 percent on a seasonally-adjusted, month on month basis, and 6 percent year-over-year. According to a Bloomberg survey, it was about twice as fast the increase expected by a survey of economists. In general, analysts were expecting January retail sales in volume terms to post a 0.2 percent decline month-on-month and a 2.7 percent increase on a year-on-year basis.

While this might mislead people by telling the downturn in the retail industry was not as bad as initially expected, we have to remember that the process of adjustment in the industry tends to be quicker than with consumers. I don't know where I read this a few days ago (probably it was from ING Bank's Zeina Latif) that the lagtime for consumers to slow demand tends to be close to six months, and for companies to be less than three months. Some investors, on the other hand, might expect the central bank to be more careful when cutting interest rates. We don't think so -- we insist on our call, that the bank will be pressured to keep cutting rates by large amounts so the Selic target might be below 10 percent before June.

The risk of inflation spiking is big, but, who cares? Activity is plunging, confidence remains very weak and the president thinks he will be able to avert a recession. Expect more political noise, little congressional action and more unreasonable government spending events (that on the political risk side) in coming months.

Korea's Posco Considers Bond Offering When Market Conditions Improve

Posco, the South Korean steelmaker that recently privately-placed $550 million in bonds to fund its Brazil investments, is considering selling debt again in international capital markets. The company mandated Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc. and Merrill Lynch & Co. -- yes the guys with the bonus problems -- to arrange a road show with investors between March 16-18. A bond transaction should be launched following the roadshow, subject to market conditions, according to a good source. The modality (senior unsecured, guaranteed, terms, duration, etc.) is yet to be defined. My understanding is that the bonds won't be offered in the U.S. -- therefore they will have FSA registration or will be listed in Luxembourg. We will keep you updated.

Posco placed the yen-denominated bonds in December to a group of investors led by Japan's Sumitomo Mitsui Financial Group -- which ended up being the sole buyer of the Samurai bonds with a three-year maturity.

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