In the week ended April 13, LatAm equity funds shed $163m, according to EPFR Global, which says this is the 12th time in the past 13 weeks the funds experienced redemptions. The funds “ran into fresh headwinds as Brazil expanded its capital controls and nationalist Ollanta Humala, seen by many as a man in the same mold as the current leaders of Venezuela and Bolivia, emerged as one of the two candidates for June’s run-off for Peru’s presidency,” it says. Brazil funds saw outflows of $89m and GEM funds gained $1.6bn. As for performance, Lipper data show a weakening in LatAm funds, which were down 3.08% in the week ended April 14 and down 1.80% year-to-date. EM funds were down 1.43% in the week, but are still up 1.85% ytd. Global small and mid-cap funds dropped 0.85% in the week, but are still up 4.25% ytd.
Category: Economy & Policy
LatAm External Issuance to Decline
External bond issuance is likely to decline to below $12bn this year, according to Moody’s. The ratings agency says the financing needs of LatAm and Caribbean sovereigns will total an estimated $384bn in 2011, down from $410bn in 2010. Sovereigns will need to finance an average of 5.8% of GDP in 2011, down from 9.2% in 2009. The decline is mainly due to an increase in nominal GDP, and Moody’s expects continued economic growth and moderate fiscal results, which bodes well for future levels of financing requirements. The ratings agency says domestic funding by governments continues to rise. In 2011, the rating agency estimates that only 6.2% of funding needs in its sample will be sourced externally, down from 9.8% in 2009. External bond issuance is likely to be below $12bn this year, also on a declining trend. Mexico, has the largest 2011 funding needs at 11.1% of GDP, Peru has one of the lowest funding needs at only 0.5% of GDP.
Mexico Leaves Rate Untouched
Mexico’s central bank left its rate unchanged at 4.50%, as expected by the market. “The post-meeting communiqué remains neutral and we reiterate our call that the first rate hike will be in Q1 2012,” says Nomura. Goldman Sachs meanwhile says that “as the output gap shifts to above neutral by mid-year and base effects raise the yoy inflation rate from mid-2011 onward, we believe that Banxico will initiate a tightening cycle in October, raising the rate 4 times by 25bp per meeting to 5.5% in March. Thereafter, Banxico will keep the rate unchanged at 5.5%.”
Mexico Rate Seen Unchanged
According to market consensus, Mexico’s central bank should leave its rate unchanged at 4.50% today. “While the central bank is likely to acknowledge the large and encouraging drop in inflation rates, it will probably also reiterate that the rapid tightening of the output gap and upside risks from commodity prices are the main reasons why it has to remain vigilant,” says Goldman Sachs. Bank of America Merrill Lynch says that in March inflation came in at 0.19%, below market expectations, leading to a substantial decline in annual inflation to 3.04%.
Chile Tightens Rate
As expected by market consensus, Chile’s central bank increased its rate by 50bp to 4.50%. It cites the increase in oil and food prices globally and a positive trend in local demand and employment as reasons for the hike. Nomura believes the bank will hike another 50bp in May and 25bp in June. Bulltick expects the bank to increase the rate to 5.50% by the end of the year to combat the rise in inflation.
Daimler Prices MXP Bonds
Daimler Mexico has issued MXP500m in 3-year bonds, after receiving 1.4x demand, says a banker on the deal. The bonds priced at TIIE plus 34bp, tight to guidance of 35bp, he adds. The transaction came tight to last week’s issuance by Mexico’s Volkswagen Leasing, which sold MXP2bn in 3-year bonds at TIIE plus 40bp. An investor says that the smaller size of the issuance and the fact that it was done at the holding company level were the main reasons for the tighter spread. The bonds were bought by investment funds, private banks and some pension funds. The issuance had been pushed back a week because of a delay in the documentation process, adds the banker. The proceeds will be used for general corporate purposes. Santander managed the sale, rated AAA on a national scale. Daimler last came to market in November last year, when it issued MXP750m in 2-year bonds.
Chile Expected to Hike Rate
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.
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%.
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
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.