The earthquake and tsunami that devastated Japan are not expected to have a significant impact on LatAm. The trade link between Japan and LatAm is fairly weak, according to Nomura, which adds that as of 2009, Japanese trade with LatAm accounted for only 4.7% of its total. The sum of exports and imports from LatAm to Japan only amounts to 3.0% of the total trade to the region. In addition, Nomura says there is almost no outward FDI from LatAm to Japan. Meanwhile, Deutsche Bank says that “the main channel of transmission of weakness in Japan for LatAm equities would be via potential pressure on commodities prices.” According to BCP “in the short run, [the disaster] will depress commodity prices as the [Japanese] government decides how to address the public’s safety concerns about the nuclear generating facilities.” Nevertheless, this may not be a sign of trouble for LatAm commodity exporters, according to Nomura. Chile, which sends about 12% of its exports to Japan could benefit from a rise in demand, even if commodities prices are lower, Nomura says. Peru may also benefit, albeit to a lesser extent. About 6% of Peru’s exports go to Japan. Brazil, another important commodity producer, only sends about 3% of its total exports to Japan, according to Nomura. RBC says fears of Japanese repatriation of Brazilian financial assets is unwarranted, though there is a risk of a slowdown of further Japanese flows into Brazil in the short term as money is needed to finance local reconstruction.
Category: Economy & Policy
Hike Expected for Chile Rate
Market consensus points to Chile’s central bank tightening its rate by 25bp, bringing it to 3.75% today. “Though the minutes from the February meeting – in addition to recent comments by central bank officials – suggest rising concerns about the inflation outlook, the central bank seems committed to continuing its tightening cycle at a gradual pace, most likely in 25bp increments,” says Morgan Stanley. “At this stage we assess a 20% probability of a 50bp rate hike (down from a probability of 35% due to the high uncertainty around the outlook for the global and Japanese economy following the recent devastating developments),” according to Goldman Sachs.
Peru Cement Sector Booms
Peru’s cement sector is growing at a record pace, according to the Association of Cement Producers (Asocem). The country needs approximately $38bn of investment in the next 5 years in energy, sanitation and transportation infrastructure to ensure annual economic growth of 6% or more. Meanwhile, Peru faces a deficit of 1.2m housing units as of the start of 2011, according to the Peruvian Construction Chamber (Capeco). The twin deficits, on top of forecasts of more than $56bn in new mining and energy projects through 2020, is fueling significant growth. Cement consumption in November 2010 jumped 22.9%, to 754,422 metric tons compared to the same month in 2009. In 2010, cement dispatched from the 7 companies with factories in Peru reached 8.1m metric tons, 15.1% more than 2009, according to Ascocem. This year, the cement sector is expected to grow by 12% in the first quarter, slower than for the corresponding period in 2009, according to Pablo Nano, a sector analyst with the economic research unit of the Peruvian branch of Canada’s Scotiabank. “There is dynamic growth [in the cement market] with rates well above 10% annually,” says Juan Carolos Cardenas, general manager of Mexico’s Cemex in Peru.
Remittances to LatAm, Caribbean Increasing
Remittances to LatAm and the Caribbean are likely to rise this year after stabilizing in 2010, according to the IDB’s Multilateral Investment Fund. Measured in USD, money transfers made by LatAm and Caribbean migrants to their countries of origin reached $58.9bn in 2010, virtually unchanged from $58.8bn in 2009, when remittances saw a 15% drop due to the effects of the global economic crisis, the MIF says. Although remittances stabilized in 2010, the MIF says they increased in some sub-regions. Transfers to CentAm jumped 3.1% while those to Haiti increased 20%, largely due to the humanitarian crisis caused by the earthquake. “Remittances to LatAm and the Caribbean are likely to continue rising in volume in 2011, although still below the double-digit rates they attained in years prior to the global crisis,” the MIF says, adding that the pace of growth will depend principally on how strongly the job markets in source countries such as the US and Spain recover.
DomRep Power Could Suffer Oil Shock
The Dominican Republic’s power generation sector is highly exposed to rising oil prices, according to Fitch. The vast majority of the country’s power, 82% of installed generation, comes from fuel oil and natural gas-fired thermoelectric plants, it says. That makes it the most highly exposed country in the CentAm and Caribbean. El Salvador comes in second place, as nearly 70% of power generation comes from fossil fuels, Fitch says. Less exposed to rising energy prices are Costa Rica, where 72% of power comes from renewable resources, and Panama, where 50% of total capacity is provided by hydroelectric sources. On average, the power generation system in CentAm generates more than half (54%) of its electricity is generated by thermoelectric sources, says Fitch. This exposure could translate into higher expenses this year. “Prices could briefly surpass $140 per barrel within the next 3 months,” Bank of America Merrill Lynch says. It expects the price of oil to average $108 per barrel for the year.
Santander MXP Price Talk Heard
Price talk for the 2-year floating rate tranche of Banco Santander’s bond issuance is 15bp over TIIE, according to market participants. The bank will issue up to MXP5bn on March 17 in a dual tranche deal, though pricing for the 10-year fixed rate tranche has not yet been determined, say bankers. The deal is self-led together with Banamex and HSBC. A banker on the deal says the size of each tranche is yet to be determined. The bonds will be used for working capital and increase maturities.
China Increasing Ties to CentAm
CentAm government are seeing increased economic and commercial ties to China following improved diplomatic relations which are beginning to bear fruit. Costa Rica boasts a $100m new arena deemed a “gift” from the Chinese government since the two countries established diplomatic relations in 2007. The world’s second largest economy is beginning to make its way into El Salvador, Guatemala, Honduras, Nicaragua and Panama as well. In October, El Salvador hosted its first-ever Chinese business symposium in San Salvador, with 52 Chinese companies and 150 local firms attending. “We hope that this event represents the beginning of a much improved commercial relationship between El Salvador and the Republic of China,” says Manuel Flores, president of the Salvadorian Friendship Association with China. “We consume infinite amounts of Chinese products, while they know very little about ours. We hope to begin to change that,” he adds. Meanwhile, in September China’s state-owned energy company Sinohydro signed an “understanding agreement” with the government of Honduras to manage and operate construction of 3 hydroelectric plants in western Honduras known as Patuca I, II and III.
Pemex Scores Tight MXP
Pemex issued MXP10bn of 2016 bonds Thursday, after receiving MXP23.1bn in orders, according to bankers on the deal. The bonds priced at 21bp over TIIE, tight to the 23bp- 28bp over TIIE guidance, according to an investor. “We were very pleased by the participation in the deal by pricing achieved for a 5-year bond,” Mauricio Alazraki, managing director of finance and treasury, tells LatinFinance. “The market is very receptive to the TIIE floating rate format compared to the fixed rate format which, together with the flight to quality environment, gave us the ability to achieve low spreads.” He adds that the deal represents approximately half of the total amount of debt Pemex wants to issue this year in Mexican pesos. The issuance received 129 orders, says a banker on the deal. Investors express mixed views on the pricing. “This was a good bond issue and attractive for domestic investors, as Pemex usually issues in the foreign market,” says one Mexican asset manager. Another Mexico-based investor says that pricing was attractive for debt from a state-owned company. “The pricing was not expensive and as there have not been many corporates coming to the market in the first 3 months of the year, there was understandably a lot of demand.” One Afore investor, however, says the spread was too tight for the bonds to be attractive for his fund, while another Afore investor had expected tighter pricing, around the 15bp over TIIE mark. Orders came from a diversified investor base including pension funds, mutual funds, private banks, trading desks and insurance companies. Ixe, Banamex and Actinver were joint leads on the deal, which is rated AAA on a national scale. Proceeds will be used to pay down outstanding debt and for investment purposes. The state-owned oil company last came to the domestic market June, when it priced MXP5bn in a reopened 9.1% of 2020 bond to yield Mbonos plus 113bp.
Peru Raises Rates to 3.75%
Peru’s central bank raised its rate 25bp Thursday to 3.75%, in line with market expectations. Morgan Stanley sees the rate reaching 4.00% by the end of the year. According to Citi, the increase is a preventative measure against inflationary pressure from international food and energy prices amid continuing strong domestic demand.
Argentina Politics Seen as Key for Outlook
For investors in Argentina, the political outlook is key to their investment outlook for the country. Some analysts say that even a second Fernandez administration would take a more conciliatory approach to the business community now that it has lost Nestor Kirchner. “After the passing of Nestor Kirchner, the political landscape has changed,” says Daniel Marx, executive director of Quantum Finanzas, an Argentine financial advisory firm specializing in corporate finance and portfolio management. “The elections now look much less personalized. Kirchner’s personality catalyzed situations one way or the other. That seems to be much less the case going forward.” The national presidential and legislative elections are scheduled for October 23, with mandatory primaries scheduled for August 14. All 23 provinces and Buenos Aires will have elections for their governors while one-third of the upper house and half of the lower house of the legislative branch of the government will be in play. Fernandez’s Peronist alliance will see a challenge from the center-right alliance, along with one from the Radical party. The new president will be inaugurated in December. According to Marx, the three most formidable candidates this fall will be incumbent Cristina Fernandez for the Peronist FPV party, businessman and leader of the center-right PRO alliance’s Mauricio Macri, and Radical member of the Lower House of Congress Ricardo Alfonsin. Macri and Alfonsin have already made their intentions known. “The . . . big question mark that we have for the future is whether Cristina will run or not,” Marx says. “Speculation is that she will but she has not confirmed that.” Macri, the head of government for Buenos Aires, is the most visible leader of the opposition, says Daniel Kerner, LatAm analyst with political risk consultancy Eurasia Group. According to US diplomatic cables published by Wikileaks, Macri informed the US ambassador to Buenos Aires in 2009 that he plans to run in the next elect