Colombia’s central bank has chosen to raise the benchmark interest rates by 25bp to 4.75%. The bank cites continuing credit expansion in Colombia and higher than expected inflation. European economic activity is slowing, but it isn’t happening at a disorderly pace, while the US economy continues to grow, it notes.
Category: Economy & Policy
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Perfect Storm for Brazil Mid-Cap Banks?
These are not particularly sunny days for small, mid-cap banks in Brazil, especially those involved in the payroll lending business. Limited access to liquidity, tougher capital requirements from the country’s central bank and high levels of maturing debt are putting a squeeze on a number of weak banks and weighing on secondary debt levels. This week, Moodys’s downgraded Banco Cruzeiro do Sul, or BCSUL’s, financial strength rating to D- from D and its long-term deposit ratings to Ba3 from Ba2, among other ratings, citing limited financial flexibility and a threat to profits from higher provisioning requirements for long term payroll loans, its core business. “The outlook for both funding and capital is pretty weak and is set to weaken in 2012,” noted MTR Securities in a trading note to clients. “There is a general consensus that many [of these banks] will be bought or cease to exist in their current form.” Brazil’s central bank is demanding higher capitalization for long-term payroll loans and has limited the amount of time deposits smaller banks can issue. Competition in the payroll loan business has also increased, putting downward pressure on bank margins. More importantly, mid-caps must soon address looming maturities after issuing roughly $20bn in debt over the past years, much of it in short-dated instruments with tenors of roughly five years or less. All this has hit secondary trading levels. For instance, BCSUL bonds saw an active session Friday with its 8.25% 2020 bond trading at 81 and yielding 14%. Banco BMG, with a loan portfolio made up of 91% payroll loans, is also giving the market pause for thought, especially following its move to acquire Banco Schahin, another reputed weak bank, for BRL230m. BMG’s 8.875% 2020 bonds stood at 91.9 and were yielding 10.3% on Friday.
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India Seeks Larger LatAm Presence
Indians aim to boost involvement in LatAm, as their companies seek high-growth markets as well as new sources of raw materials and agricultural products. Facing demographic trends that suggest a transformation similar to China’s, Indian firms bring different offerings to the table than the region’s more established trading partner, officials tell a LatinFinance panel. Two decades since India embarked on a more open economic policy, India is faced with rising food and energy prices, and like China it is likely to seek investments abroad in these sectors. “It is in food where Latin America will offer the most synergistic relationship [with India],” says TCA Ranganathan, chairman of the Exim Bank of India. For instance, he notes, India has rapidly become a net importer of high value crops such as sugar cane due to water and land shortages. Indian investment flows to LatAm reached about $25bn last year, representing an increase from next to nothing 10 years ago, but it still falls short of the $140bn from China. That India’s global expansion comes through private entrepreneurs, as opposed to China’s government-driven model, may be beneficial to LatAm, Ranganathan explains. “You won’t see a $140bn figure [from India-LatAm],” Ashutosh Maheshwari, CEO of Motilal Oswal Investment Banking. “It’s not the government driving it. These are corporates that are accountable to those from whom they raise money.” This means that Indians are better disciplined and use capital wisely, but are unable to have a 20 to 30-year investment horizon like the Chinese do, he explains. Expertise in services, engineering and other specialty areas is where India is poised to add value, rather than through sheer dollar size. Indian crop-protection company United Phosphorus has already made six investments in the region and appears satisfied with the quality of labor in the region. “The management in Latin America is very mature, very competent and very reliable,” says Vikram Shroff, the company’s ex
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S&P Raises Brazil to BBB
S&P has raised Brazil’s long-term foreign currency rating to BBB from BBB minus, citing the government’s cautious fiscal and monetary policies and its ability to weather external shocks. “S&P’s decision to upgrade the Brazilian credit rating at a sensitive time in the international economy is recognition that the country’s economic policy is in the right direction and that its macroeconomic fundamentals are sound,” Brazil’s ministry of finance said in a statement. .S&P praises the government’s response to inflationary pressures this year, sending what it calls an “important signal about its policy flexibility and commitment to economic stability.” Thanks to budget cuts and the government’s ability to contain increases in pension spending, the consolidated public sector primary surplus this year is expected to hit 3.15% of GDP, the agency says. However the agency believes that efforts to increase private-sector investments will be a key challenge for the country. “Implementing a vigorous agenda of economic reforms that boost investment and GDP growth would give Brazil greater policy flexibility and lower real interest rates and, in turn, could lead to an upgrade,” it says.
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Bovespa CEO Sees IOF Tax Cut
BM&F Bovespa’s CEO Edemir Pinto is expressing optimism over the possibility that the Brazilian government could soon adjust, or eliminate altogether, the 2% IOF tax on stock investments. “We believe in the short-term that we can have an agreement to revise the IOF over shares,” said Pinto talking at a Bradesco investment forum in New York Wednesday. This comes as Brazilian stock exchange officials carry out discussions with the government about the logic of maintaining such a tax. Pinto acknowledged that the BM&F Bovespa’s stock has been weighed down partly because investors have priced in regulatory risks. The elimination of the tax is seen as an important step for a capital market that still relies heavily on foreign capital. Between 40 to45 Brazilian companies are still waiting to come to market after Petrobras’s massive capital raising last year and ongoing volatility forced them to stay sidelined, Pinto adds. Emphasizing the growth potential of the country’s equity markets, Pinto noted that only 300 of Brazil’s largest 1,000 companies are listed on the exchange.
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Chile Holds Rates
Chile’s central bank chose to maintain the benchmark policy rate at 5.25%, in line with market expectations. In a statement, the bank pointed to slow growth in international economies and high financial risks in Europe. It noted that ongoing problems around the world could affect growth and inflation in Chile, along with the orientation of its monetary policy.
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Chile Set for Rates Decision
Chile’s central bank is scheduled to announce its benchmark interest rate policy decision late today. The market largely expects the country’s monetary authorities to hold rates at 5.25%. “The GDP proxy Imacec [economic activity index] remained solid in September and inflation surprised to the upside in October with potential contamination on inflation expectations,” RBS says in a report forecasting a hold.
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LatAm Watches for European Contagion Risks
After dodging a bullet in 2008’s financial crisis and subsequently fixing vulnerabilities exposed during that period, LatiAm policymakers feel more prepared than ever to face future contagion risks. Events in Europe, however, are being watched with increasing unease amid the realization that the continent’s debt predicament will eventually wash upon the region’s shores. Weakness in the commodity complex, volatility in the FX rates, and a lengthy lull in capital markets activity are just some of the areas of susceptibility for LatAm. For now at least, the immediate horizon looks stormy but manageable. JPMorgan estimates that LatAm growth should dip to 3.2% in 2012 from 4.0% this year, putting it behind its 3.6% potential, but not by far. “Needless to say, we will experience some turbulence because of the interconnectedness of the global financial market, but we feel our main financial variables will be anchored by the strong fundamentals,” Augustin Carstens, Mexico’s central bank head, told LatinFinance earlier this year. Though the region is still reliant on foreign capital, the development of local markets means borrowers now have an important alternative funding pool. However, successes on this front have created their own challenges at a time when foreign investors have become increasingly enamored by local currency plays. These often crowded trades leave countries once again exposed to sudden movements in international portfolio flows. “A lot of the selloff has been in those countries where the foreign position has been highest,” says Joyce Chang, head of emerging markets and global credit research at JPMorgan. Indeed, the notion that LatAm can decouple from events in G3 countries has been broadly rejected. “Under the current conditions, there is a pretty good external backdrop for the most part,” says Javier Kulesz, chief economist for Latin America at UBS. “But if we move to a more hostile environment, LatAm will not decouple.” Balance sheets and reserves migh
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Fitch Cuts Rede Energia to CCC
Fitch has downgraded Rede Energia’s rating to CCC from B minus, it says. The agency cites Rede’s short-term debt and refinancing challenges, along with operational cash flow difficulties and planned investments. It subsidiaries Celpa and Cemat were each lowered to B minus from B. The outlook is stable.
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Peru Holds Rates
Peru’s central bank has decided to again hold the benchmark rates at 4.25%, in line with market expectations. Above-target inflation was seen as the main reason for holding rates this month.