Market consensus points to Chile’s central bank tightening its rate by 50bp to 4.50% today. Goldman Sachs says there is a small probability of a more moderate 25bp rate hike. “We expect the central bank to drive the policy rate to 5.50%-6.00% by end 2011. The rate hiking cycle is not expected to be more aggressive because core inflation is still well behaved,” it says. Morgan Stanley says a 50bp hike will reinforce the central bank’s anti-inflationary commitment.
Category: Economy & Policy
Posted inDaily Brief
Little Challenge Seen to Peru Fundamentals
Following news Monday of a likely runoff between leftist Ollanta Humala and congresswoman Keiko Fujimori, analysts do not see a major change that would threaten Peru’s economic gains of the past decade. “Neither candidate would be in a position to seriously challenge Peru’s very strong fundamentals or have the political ability to enact sharp policy adjustments to challenge the country’s very strong credit fundamentals,” Moody’s says. The agency points out that any future government would probably have “a difficult time” promoting state-owned companies because of heavy constitutional restrictions, and proposed mining taxes are unlikely to hamper investment prospects. GDP growth of more than 6%, forex reserves of 30% of GDP, and a low debt-to-GDP ratio of 22% make the country resilient to changes in the government, Moody’s says. “The congress is expected to be a highly divided one, thus putting checks and balances on the possibly extreme agendas of Mr. Humala,” Nomura says. “A Humala versus Keiko race is expected to be extremely tight, as they both occupy the polar opposites of the political spectrum and consequently both have sizable rejection votes,” the bank says, noting that it expects a narrow Fujimori victory. Nomura says the market may get jittery if over the next two months poll numbers for Humala get significantly ahead over Fujimori. In the coming days it does not expect Peruvian asset prices to underperform, as the Humala versus Fujimori scenario was widely expected. Humala appeared to have about 30% of the votes late Monday, followed by Keiko with 23% and Pedro Pablo Kuczynski in third with 21%.
Posted inDaily Brief
Peru Sees Limited Downside to Election
Analysts and investors see a limit to downside for Peruvian assets as voters sent Ollanta Humala and one of his closely-polling opponents to the second round of Peru’s presidential elections set to take place June 5. Newswires reported late Sunday that the race for second place could take days to determine, as Keiko Fujimori held a slight lead over Pedro Pablo Kuczynski. Though there has been concern in the markets as Humala took a strong lead in polls recently, his ability to make major changes to Peru’s successful economic framework is seen as limited. “We expect a positive market reaction if it’s [Alejandro] Toledo in the second round [with Humala], while Pedro Pablo Kuczynski or [Keiko] Fujimori would see a bit more pressure, says Eduardo Suarez, senior emerging market strategist at RBC. Speaking Friday, he notes a growing consensus that Toledo is the strongest opponent for Humala in the second round. Even if Humala prevails in the second round, the leftist is not seen as jeopardizing Peru’s track record of GDP growth and investment-grade status with a major leftward shift. “In any event he might find himself somewhat like Toledo was [in a previous term] where he was something of a lame duck and didn’t have the clout in the congress to push through some of his less market-bearable ideas,” says David Spegel, head of EM strategy at ING. Spegel notes Peru’s 5-year CDS traded at 130bp Friday, back from their widest level of 154bp April 5, and are only about 15bp wider on the year. Peru’s stock market rose 0.5% Friday to 21,256, after having lost 10.4% on the year. “The paths are either for a steady recovery on lost Humala momentum in the second round polls or for much higher credit spreads on a Humala victory and then an eventual recovery once the investment grade rating holds,” says Siobhan Morden, head of LatAm strategy at RBS. She tells LatinFinance that most important will be the polls in early May. When he went to the second round in 2006 versus outgoing presi
Posted inDaily Brief
Peru Tightens Rate
Peru’s central bank has tightened its rate by 25bp to 4.0%, in line with market expectations. The bank cites the increasing inflation expectations and fast growth in the domestic economy as reasons for the hike. However, some shops forecasted a higher hike. Barclays expected a 50bp hike, as it believed strong domestic growth –of around 10% year over year in February- gives the central bank room for more aggressive tightening. Citi also expected a 50bp hike.
Posted inDaily Brief
Braskem Gives a Little on $750m Bond
Braskem has priced $750m in 2021 bonds at 98.14 with a 5.75% coupon to yield 6.00%, or UST plus 243bp, at the tight end of 6.000%-6.125% guidance. Braskem is funding a tender offer for shorter, more expensive bonds. Capitalizing on its recent promotion to investment grade by S&P, the petrochemicals producer was heard getting more than $2.5bn in orders for the Baa3/BBB minus/BB+ bond, with a yield that pleased investors. “They left a little bit on the table this time,” says a New York-based EM investor. He sees a 10bp-15bp concession to the curve, noting that the company has not given up much in the past. The bond traded up slightly in the gray market, according to a trader. “This is an improving situation,” says another US EM investor participating in the deal. He expects a third investment-grade rating soon, and sees Braskem in strong position to improve in the next 2-3 years along with Brazil’s GDP growth. Citi, Deutsche Bank and Santander managed the deal. Braskem is raising the funds to buy back any and all of $250m in 11.750% 2014 bonds, $250m in 9.375% 2015s and $275m of 8.000% 2017 bonds. It will offer $1,242.50 per $1,000.00 for the 2014, $1,220.00 per $1,000.00 for the 2015 and $1,168.75 per $1,000.00 for the 2017, it says, in a tender launched as soon as today. Braskem’s most recent transaction was a $450m perpetual in September.
Posted inDaily Brief
Hike Expected for Peru Rate
Market consensus points to an expected 25bp hike in Peru’s policy rate, increasing it to 4.00%. Morgan Stanley says that the central bank will have to continue tightening rates to contain inflation. It expects the rate to reach 5.50% by the end of the year. Barclays, however, expects a 50bp hike, saying that strong domestic growth –of around 10% year over year in February- gives the central bank room for more aggressive tightening.
Posted inDaily Brief
Investors Upbeat Despite Subdued Flows
With EM debt seeing slowing inflows and some managers seeing outflows, investors remain positive towards the asset class. EM bond funds posted a net inflow of $2.32bn for Q1 2011, according to EPFR, a shadow of the $11.54bn recorded during the comparable period last year. “There is still a need for income,” says Paul Denoon, head of EM debt at AllianceBernstein. “For fixed-income it is an issue of relocation,” the investor says, explaining that there may be more funds going into products other than straight EM, such as multisector funds with an EM component. The slowdown in flows is not a major concern at this point, he says. “Interest is still high in EM,” says Denise Simon, EM portfolio manager at Lazard Asset Management. She says investors are still underexposed to and interested in EM, and describes the slowdown as “natural” and “healthy.” Alberto Bernal, head of research at Bulltick, notes that many local pensions in LatAm are investing less in EM assets and more in cheap US assets. EM performance is lagging as well. EM external debt has returned just 1% this year, compared to 4% for US high yield, 4% for EM equities and 6% for the S&P 500, according to HSBC. Optimism about a US recovery may be diverting funds away from pure EM bond investment and could pressure the asset class further if it is joined by US rate hikes expected later this year, Pablo Goldberg, head of EM research at HSBC, says. He notes that too little US growth is also unfavorable, as US and China are still key drivers for EM economic performance. All spoke on an EMTA panel in New York Monday. Panelists saw the EM debt benchmarks returning 4%-6% this year, and local currency benchmarks returning about 7%.
Posted inDaily Brief
VW Leasing Raises MXP2bn
Mexico’s VW Leasing has issued MXP2bn in 3-year bonds at TIIE plus 40bp, pricing in line with guidance, according to a banker on the deal. The issue received MXP3.2bn in orders, according to another banker on the deal. Prior to the sale, a report from Scotia had expected pricing of 30bp-35bp, while some investors had expected as much as 60bp. “The company has a guarantee from Volkswagen, which is why the deal is AAA, but the leasing company itself does not have a very strong balance sheet,” says one investor. Mutual funds, bank treasuries and pension funds were the main types of investors, bankers say. VW leasing plans to use proceeds to finance its operating needs. BBVA Bancomer and Banamex managed the sale. The leasing company last came to the Mexican market in October 2010, when it issued MXP1.5bn in 4-year bonds, which priced at 60bp over TIIE.
Posted inDaily Brief
Brazil Upgraded to BBB by Fitch
Brazil’s sovereign rating was upgraded by Fitch Monday to BBB from BBB minus. “The Brazilian economy has increased to 4%-5%, supporting the medium-term fiscal outlook and the continued strengthening of its external liquidity position,” according to Fitch. The outlook is revised to stable from positive. GDP growth last year reached 7.5%, and notes that while Brazil’s current account deficits are likely to remain more elevated, the deterioration in net external debt indicators could be contained by expected FDI. Economic growth is expected to reach 4% in 2011, according to Fitch. The ratings agency has had the sovereign on a positive outlook since June 2010. S&P rates Brazil one notch lower, at BBB minus with a stable outlook, while Moody’s rates it Baa3. The BRL closed against the USD at BRL1.61 Monday. Nomura says it sees BRL1.60 as fair value based on its models. “We see recent events as further proof that the current interventionist policy will likely do little to impede the appreciation of the BRL,” Nomura says in a research note.
Posted inDaily Brief
Funds Flow into EM Bonds
In the week ended March 30, EM bonds saw inflows of $441m, EPFR Global says, adding that this is an 11-week high. “Flows into EM bond funds continue to favor funds with local currency mandates and, from a geographic perspective, those with an Asian focus,” EPFR says. Performance was also positive, with the funds gaining 1.02% in the week ended March 31, and 1.54% so far this year, according to Lipper.