With Ollanta Humala winning Peru’s presidential elections over the weekend, investors are now turning their attention to his choices for central bank governor and minister of finance as they look for clues to how the left-wing candidate will manage the country’s booming economy. A Goldman Sachs research report identifies Kurt Borneo, former vice minister of finance, and Oscar Dancourt, former president of the central bank, as potential candidates. Both worked in Alejandro Toledo’s administration when he was president between 2001 and 2006 and they were also advisors to Humala’s campaign. They are seen as orthodox economic thinkers who are unlikely to support plans that would lead to a significant decline in fiscal discipline. Another key development to watch will be what Humala says during his inauguration speech on July 28. Traditionally, incoming presidents use the opportunity to outline their legislative priorities for their administrations. Statements regarding mining tax reforms, a key platform of his campaign, will also have significant influence on how the market views the incoming administration. Almost 20% of Peru’s GDP comes from foreign direct investment, the majority of which comes from the mining sector. However, according to Itau’s weekly macroeconomic report, the possibility of a mining tax increase may well already be priced into market expectations, since both candidates supported the proposal. Indeed, mining company Southern Copper Corp’s 2040s held up relatively well Monday despite the sell-off among other Peruvian assets, widening about 20bp-25bp to close at 275bp, according to one trader. “It will take some time…for the business community to regain confidence,” says Hugo Mario Santa, managing partners of Apoyo Consultoria in Peru. That uncertainty could lead to a decline in private investment for the second half of the year, potentially stunting GDP growth. “We might see in the second half of the year Peruvian GDP instead of growing 7.0%-7.5% gr
Category: Corporate & Sovereign Strategy
Record Growth Expected for Guatemala Remittances
Guatemala’s central bank expects remittances to increase 5.3% to an all-time high of $4.35bn in 2011. The growth expectations are encouraged by recent strong performance for the first 5 months of the year and an improved US labor outlook, where most remittances to Guatemala originate, according to a JPMorgan report. May remittances to Guatemala surged 16.3% to $415m from $357m the year before, when remittances grew by only 7.3%. May’s favorable performance brings total remittance volumes up $1.76bn for the first 5 months of the year, up 10.5% from the corresponding period of 2010. Given projected growth in nominal GDP, however, remittances as a percentage of GDP will likely fall below 10% for the first time since 2003, closing 2011 at 9.8%. Guatemala remittances totaled $4.13bn in 2010, $3.91bn in 2009, and $4.31bn in 2008.
Unidas Gets BRL300m Equity Investment
Three private equity firms invested a total of BRL300m ($189m) in Brazilian car rental company Unidas in exchange for a 47% stake in the company, according to an announcement on the CVM. Unidas reported Ebitda of around BRL160m in 2010 according to Pedro de Almeida, head of investor relations, which would imply a valuation multiple of around 4x EV/Ebitda. Kinea Investimentos, Vinci Capital Gestora de Recursos and Gavea Investimentos are each investing BRL100m and will take equal stakes in the company. The funds will be used by Unidas to expand its fleet of automobiles and to fund additional growth. Solucoes Automovel Globais, the parent company for Unidas, retained Banco Espirito Santo and Caixa Geral to advise on the deal. The financial sponsors did not use an advisor.
BMG on Review for Possible Downgrade
Moody’s has placed Brazil’s Banco BMG’s Ba2 rating on review for a possible downgrade. The ratings agency also downgraded Banco Schahin’s long-term local and foreign currency deposit ratings to B2 from Ba3. BMG announced in April that it would acquire Schahin for BRL230m ($146m). The ratings review on BMG will assess the effect the acquisition could have on BMG’s financial performance, particularly its capital structure and profitability. BMG’s capital levels have come under pressure due to recent requirements for additional capital allocation.
Fitch Ups Panama
Fitch has raised Panama’s credit rating to BBB from BBB minus, it says, based on solid economic growth prospects and favorable government debt dynamics. “Panama’s growth momentum has outshined that of most of its rating peers and this trend is expected to continue,” the agency says. Fitch forecasts 7.0% GDP growth in 2011 and in 2012, following a surprise to the upside 7.5% last year. The Panama Canal expansion, an ambitious $13.5bn public investment program and strong foreign direct investment flows and tax reforms have helped, Fitch says, and government indebtedness has declined to 43% of GDP, a level converging with the BBB median. “Panama’s near-term challenges include managing domestic demand pressures in order to mitigate potential risks associated with overheating, especially as investment expansion goes into high gear,” the agency says. The outlook is stable. Panama’s other two sovereign ratings are Baa3/BBB minus.
Investors Anticipate Narrow Keiko Win
Investors and economists say they are anticipating a narrow win by Keiko Fujimori over Ollanta Humala ahead of Peru’s presidential election Sunday. Shares of Peruvian companies traded in the US did well Thursday on the strength of private polling suggesting Fujimori’s lead was widening, but investors warn that political risk continues on the possibility that Humala might contest election results if the margin of victory is within a few percentage points. “Humala already said that he thinks there was some vote rigging involved in the first round, so he does seem to be setting the market up for a challenge,” says David Spegel, head of EM strategy at ING. “If there’s only a 2% margin [of victory for Fujimori], that increases the likelihood that he’s going to demand a recount. If Fujimori wins by a 5%, or even more than a 3%, than the chances of a recount going in favor of Humala are that much reduced.” Peru’s 5-year CDS is trading at around 143bp, down from an intraday high of 177bp on April 26, suggesting that the market is pricing in a slightly greater probability of an Humala win, Spegel says, despite the polling. Eduardo Suarez, senior emerging market strategist at RBC, says that pricing is fair since there is a greater potential downside to an Humala victory than there is upside to a Fujimori victory. “On CDS, if Keiko wins it probably goes back to 110bp or so,” Suarez says. A win by Humala, on the other hand, could cause the 5-year to widen out to close to 200bp, he says. “If she wins and the vote is uncontested and there’s a margin of 4%-5%, clearly it will be a complete relief rally down to pre-election levels, almost instantaneous,” says Siobhan Morden, head of LatAm strategy at RBS. “The problem is, any relief rally would be interrupted if there were social unrest, or if it [the election] is contested or there is uncertainty on the final outcome.” The combination of uncertainty going into the weekend combined with the stark contrast in potential outcomes has
Costa Rica Ratifies FTA with China
Costa Rica announced late Tuesday that its legislature has ratified a free trade agreement with China. The two countries have only had diplomatic ties since 2007, when Costa Rica cut its ties with Taiwan. Negotiations between the two countries on an FTA began in January 2009 and terms were agreed to in April 2010. China is Costa Rica’s second largest trading partner, according to the government. In July, ground should be broken on a Chinese refinery near the Caribbean port of Moin, Costa Rica’s primary oil and fuel shipping hub on the east coast. The country also boats a $100m new arena deemed a “gift” from the Chinese government.
Daycoval Gets Baa3 rating
Brazil’s Banco Daycoval received a Baa3 rating from Moody’s yesterday, its first from the agency. Moody’s cites the bank’s credit quality, driven by a conservative risk profile that supports franchise stability and a steady performance track record. The bank focuses primarily on lending to mid-market companies.
HSBC Names LatAm Chief Economist
HSBC has appointed Andre Loes as chief LatAm economist, which is a new role. He will be based in Brazil, and will continue is his current role as chief economist for Brazil. The economics teams in Brazil, Mexico and Argentina will report to him. Loes will report to Patrick Boucher, head of research for the Americas, and functionally to Stephen King, HSBC chief economist. Loes joined HSBC in August 2008, in the role as chief economist for Brazil. Before that he spent 8 years at Santander Brazil.
LatAm Private Capital Flows to Plateau: IIF
Net private capital inflows into LatAm should be slightly less in 2011 than in 2010, but still remain strong, the IIF says. Net inflows to the region are forecasted for $254.7bn this year and $238.5bn in 2012, compared to $264.9bn in 2010. Though lower, the forecasts still remain strong compared to 2009’s $155.5bn and 2008’s $138.1bn. EM as a whole is forecasted to hit $1,041.1bn this year and $1,056.4bn for 2012, growing from $989.8bn in 2010. Following record inflows to LatAm last year, portfolio equity investment will moderate somewhat, the IIF says. “Carry trade inflows will likely remain substantial as key countries continue to tighten monetary policy in order to rein in rising inflation. Robust, albeit moderating private capital inflows, combined with further terms of trade gains will most likely continue to put upward pressure on local currencies, thereby complicating policymaking,” it says. Of the $254.7bn in net inflows forecast for the region this year, $100.6bn is expected to come in the form of direct equity investment, $50.1bn in portfolio equity investment and $104.0bn in private credit investment. Direct equity investment’s contribution should represent a slight rise, with the other two components dropping slightly. The IIF’s report is drawn from 30 economies in the emerging markets, including 8 in Latin America.