Peru’s credit quality continues to improve with S&P upping the sovereign’s long-term credit rating to BBB from BBB minus Tuesday. The agency expressed confidence that President Ollanta Humala would continue to implement fiscal and monetary policies that would support stronger growth. While the president has promised to increase social and infrastructure spending as well as public sector wages, the government has said it would carry out these plans within the limits of fiscal constraints, tying expenditures with increased revenues. “Assuming a fairly steady currency, net general government debt to GDP likely will continue to gradually decline over the next three years,” it says. As rating constraints, the agency points to high poverty levels and a significant level of dollarization. “We likely would upgrade Peru if economic growth outside sectors related to energy and mining accelerates, dollarization diminishes significantly and fiscal performance does not fall victim to potential political rifts,” it adds. The outlook remains stable.
Category: Economy & Policy
Fitch Ups Dasa To BB+
Fitch upgraded Brazilian laboratory services provider Diagnosticos da America (Dasa) to BB+ from BB, with a stable outlook. The agency cited improved cash flows after the company gained scale and synergies from recent acquisitions, including this year’s merger with MD Diagnosticos. Valued at BRL1.1bn ($692m), the merger was financed through a share exchange and the payment of BRL88m to the minority shareholders of some of MD1’s subsidiaries. Fitch said it expects the company to maintain a conservative capital structure and an adequate liquidity position. The merger, however, is still awaiting regulatory approval and an unfavorable outcome could impact the company’s profitability, it says. Dasa generated BRL384m in Ebitda during 2010, but its cash flow generation over the last 12 months to June was impacted by higher interest payments after it repurchased its USD bonds and swapped them for local debentures, the agency adds. Any ratings downgrade would likely come from large debt financings on the back of acquisitions, while upgrades could be generated from improved cash flow generation or any successful consolidation without increased leverage.
Paraguay Receives Double B
S&P has moved Paraguay into the double B universe by upping its long-term foreign currency rating to BB minus from B+, with a stable outlook. This comes on the back of increased fiscal flexibility thanks to Brazilian government’s agreement to raise the country’s share of revenues generated from the Itaipu Dam, it says. “As a result the Paraguayan government is able to continue to expand social programs and fund much-needed infrastructure while maintaining fiscal discipline,” it adds. Paraguay’s revenues from the project are expected to be increased by about 1.5% of GDP. The sovereign had been thought to be considering an international bond offering as far back as 2009, but no deal ever emerged. Earlier this year, BBVA Paraguay priced its $100m 3-year bond to yield 9.75% via Citi and BBVA, issuing what was thought to be one of the first cross-border dollar deals to emerge from the country. The Reg-S only transaction was rated Ba3.
Mexico Holds Rates
Mexico’s central bank held the country’s benchmark interest rate at 4.5%, keeping it at the same level it has been for the last 2 years. But the bank’s hands-off approach may soon change if global markets deteriorate further, say analysts. In its announcement, the bank cites slowing growth in developed markets, weaker-than-expected inflation and the lack of US rate increases in the near future. “In case the performance of the local economy or the international financial markets were to deteriorate going forward, implying an unintended tightening of the monetary policy stance, the board would ponder the idea of reacting to such new developments,” the bank says. For analysts, this implies the door is open to future cuts. “Banxico is ready to cut interest rates from the current 4.5% level, if necessary,” Bulltick says. The shop says it expects the bank to hold rates until late 2012.
Mexico Expected to Maintain Rate
Mexico’s central bank is expected to keep the country’s benchmark interest rate at 4.5% Friday. The case for the bank’s neutral stance was strengthened earlier this week when authorities announced lower than expected inflation numbers. “Against a backdrop of moderate real activity expansion, still negative output gap, well contained inflation dynamics, and exceptionally accommodative monetary conditions for the foreseeable future in the United States given the uninspiring real business cycle conditions, the central bank is likely to remain on hold also for the foreseeable future,” Goldman Sachs says. The shop sees the bank likely holding until 2013, with a growing probability of rate cuts if domestic real economic activity decelerates.
SC Loses LatAm Economist
Douglas Smith has left Standard Chartered, where he was chief economist for the Americas. He has not been replaced since departing in July, a bank spokeswoman says. The move leaves the bank with only Bret Rosen, Latin America sovereign debt strategist, covering the region. Smith is not heard yet joining another institution. Standard Chartered closed its LatAm sovereign and CDS trading business in July due to decreased trading volume, though the bank insists it is not pulling back from the region.
Colombia Pauses
Colombia’s central bank has elected to hold its benchmark interest rate at 4.50%, contrary, in-line with market expectations. With the global economic outlook deteriorating, about half of the market had expected the pause, shifting from a consensus call for a 25bp increase. As in other countries in the region, the inflation and domestic overheating concerns that spurred rate hikes in recent months, have taken a backseat to the fear of contagion from problems in the US and Europe. Chile also held its benchmark, at 5.25%, last week.
Chile Holds Rates
Chile’s central bank decided to keep the country’s benchmark interest rate at 5.25% for the second straight month, in line with market expectations. In a statement, the bank notes a decline in global inflation expectations as developed world economies slow. With inflation hovering around a 3% target, analysts expect the bank to keep rates on hold for the remainder of the year.
Mexico Narrows Water System Bidding
After opening financial bids for the El Zapotillo-Leon water system contract, Mexican water authority has narrowed the bidding to 2 finalists. The first consortium is made up of Abengoa Mexico, Befesa Agua and Abeinsa, and the second includes Korea Water Resources, and units of Samsung and Techint. The contract to build and operate the water transfer system serving Guadalajara, Jalisco and Leon, Guanajuato requires an estimated investment of MXP5.36bn ($460m). A third consortium led by Acciona was disqualified on technical requirements.
Brazil to Create Blue-Chip Credit Reference
Brazil’s central bank plans to start publishing in September a new benchmark interest rate to be granted to low-risk clients, according to remarks made to the press by the central bank head Alexandre Tombini. The move is aimed at increasing transparency and conditions for competiveness in the banking sector. The new indicator will be published first as part of the central bank’s financial stability report in mid-September and would be similar to that of the prime rate used in other countries. The central bank currently publishes average interest rates charged by banks but does not distinguish them by credit risk.