The Dominican Republic government has announced it will visit the IMF to renegotiate the main targets of the stand-by arrangement (SBA) due to the spike in oil prices. “The market should not overreact to this possible SBA renegotiation. Even with our 2.5% of GDP fiscal deficit for 2011, public debt sustainability is not in question,” Boris Segura, contributing analyst with Nomura, says. “Assuming nominal growth of primary spending of 5% this year, the fiscal deficit contracts to 2.5% of GDP, above the 1.6% of GDP target in the SBA,” he continues, describing the target as “unrealistic” as it considers a halving of the budget transfers to the electricity sector to $350m (from $706m in 2010).
Category: Economy & Policy
Posted inDaily Brief
Peru Seen Tightening Rate
Peru’s central bank is expected to tighten its rate by 25bp today, raising it to 3.75%. Goldman Sachs says the hike will take place “in recognition of the risk of visible deterioration of the inflation outlook.” Morgan Stanley sees the rate reaching 4.00% by the end of the year.
Posted inDaily Brief
Analysts See Argie Agro Demand
Argentina is likely to experience increased demand for its agricultural exports as low domestic consumption combines with untapped arable land, analysts say. “South America needs to provide the world with incremental soybean supply,” says Alexander Bos, a London-based agricultural commodities analyst at Macquarie. “Accelerating soybean demand in Asia, especially China, is increasing the pressure on soybean supplies,” he adds. Argentina is the world’s largest exporter of soya oil and third largest exporter of soybeans, according to the Food and Agriculture Organization. The country is using only 18% of its fertile farmland, the agency adds. “Argentina’s output of food is for 350m people, but there are only 40m people in the country so it will keep on being a leading food exporter with a growing importance,” says Axel Hinsch, CEO at Calyx Agro. Calyx acquires, develops, converts and sells land in Brazil, Argentina, Uruguay and Paraguay. Meanwhile, drought could affect this year’s crop in Argentina. Walter Chiarvesio, head of equity research at Santander Rio, says soya output could fall to 50m tons, down from predictions of 52m-53m tons for the year and a recorded 55m tons for 2010. “The outlook is good because prices are high and production has not gone down that much, which is positive for the sector,” Chiarvesio says. Argentine agriculture companies are also making significant investments in technology, according to Hinsch. “Los Grobo Agropecuaria has made big investments, and is using new technology and as a result has grown significantly,” says Gabriel Beramendi, an analyst at Argentine advisors firm Prisma Invest.
Posted inDaily Brief
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
Posted inDaily Brief
IMF Sees Inflation Risk for Panama
IMF managing director Dominique Strauss-Kahn warned that inflationary pressures for Panama could intensify due to higher global commodity prices, low unemployment and the country’s ambitious public investment program. Nevertheless, he says Panama will continue to be among the fastest growing economies in the Americas. Panama’s GDP grew 7% in 2010 and is expected to see strong growth in 2011. IMF reports indicate it expects Panama’s GDP to grow 6.3% in 2011.
Posted inDaily Brief
Argentine Risk Compression Likely to Continue
The fall of the price of CDS for Argentina’s sovereign debt is likely to continue as global headlines favor additional compression. With the CDS for the country’s 5-year trading around 650bp, the risk premium has seen a rise since the beginning of the year, when it had fallen as low as 532bp after trading as high as 4216bp in November 2008. Still, investors and analysts say the price could have further to fall. “The likelihood that Argentina would be defaulting in the short to medium term is very very low,” says Daniel Marx, executive director of Quantum Finanzas, an Argentina-based advisory firm specializing in corporate finance and portfolio management. “There is this trend of Argentina converging a bit more to the rest of the merging market, particularly the Latin American countries.” David Rolley, senior portfolio manager for global fixed income at Loomis Sayles, which has $150bn AUM, says that much of the risk compression has been driven by global events, such as rising food prices due to droughts in Russia and China, which could favor Argentina as a major food exporter. Diego Ferro, partner with New York-based Greylock Capital Management, says he sees around 100bp-150bp of upside for Argentina’s CDS if the soft commodity bull market, for products like soy and wheat, continues. “Argentina was mispriced before,” Ferro says, referring to the previous highs reached by the CDS. “It’s still mispriced, just not as dramatically. We still see a little upside.” As the country has been locked out of the international DCM markets since defaulting on its debt in 2001, its debt-to-GDP has declined as GDP has grown in the last decade. But the sovereign still faces attachment risk from holdouts to its bond swap offering, according to Ferro. Several holdouts continue to push for full restitution on the defaulted bonds. That could prevent the country from returning to the international markets anytime soon. “The attachment risks that Argentina faces if it attempts to tap the in
Posted inDaily Brief
Investors See Pemex Pricing as Reasonable
Investors say they expect Pemex to price MXP10bn in 5-year bonds at 15bp over TIIE on Thursday. Investors say the pricing is reasonable, as they would expect government agencies to price flat to TIIE. “We believe that 15bp over TIIE is reasonable for Pemex, as it is a government-owned company and the government bonds in the 5-year part of the curve pay flat to TIIE,” says one Mexico City-based investor. Ixe, Banamex and Actinver are 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.
Posted inDaily Brief
Banxico Keeps Rates Steady
As expected, Mexico’s central bank maintained its rate at 4.5% Friday. The bank is expected to maintain rates at this level for the rest of the year. “With inflation within the target band of 2%-4% and the output gap expected to be barely positive in H2 2011, we believe Banxico will keep the policy rate unchanged this year,” according to Nomura. Barclays agrees, noting a slightly more hawkish tone from the minutes but says it still believes Mexico will maintain its rate for the rest of the year.
Posted inDaily Brief
Fitch Upgrades Costa Rica
Fitch has upgraded Costa Rica’s issuer rating to BB+ from BB, with a stable outlook. The rationale for the ratings upgrade includes better than expected resilience to the financial crisis, improved macroeconomic stability, lower inflation and modest external debt. Fitch says that while the fiscal deficit has worsened since 2009, to 30% of GDP at the end of 2010, it is below the BBB/BB medians at 35% and 30% respectively. However, it adds that development of the local markets will improve Costa Rica’s flexibility in financing its debt. It adds that reforms to increase the government’s revenue base are necessary, which would benefit its creditworthiness.
Posted inDaily Brief
MENA Troubles May Firm LatAm Currencies
Currencies of LatAm countries with strong oil and gas industries could benefit from the turmoil in the Middle East and North Africa as Brent crude prices edge towards $120 per barrel. “We believe high oil prices will be particularly positive for the COP,” says Nomura, adding that the “BRL should be counted among the winners given the huge potential in oil production.” The MXP, meanwhile, “is likely to be a marginal winner,” Nomura says. However, if oil prices rise above $3.50 per gallon – the average now is $3.19 – the US economy may be hurt, affecting growth in some LatAm economies, Nomura explains. “On balance, in the case of an oil-shock-induced global recession, the CLP, MXP and PES are likely to be impacted more negatively than the BRL and COP.” In terms of exposure to a global slowdown, Nomura says Chile, where net imports of oil amount to 5.2% of GDP, seems particularly vulnerable as non-oil exports represent around 35% of GDP. Chile is followed by Mexico (25%), Peru (23%) and Argentina (18%). Brazil and Colombia appear less exposed to a significant deceleration in global growth, as non-oil exports represent less than 10% of their GDP.