Brazil’s central bank kept the selic rate on hold at 10.75%, as expected by the market. Morgan Stanley says a hike could come in Q2 2011 in view of strong domestic demand. Barclays, meanwhile, does not expect any hike this year or next.
Category: Economy & Policy
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Colombia Re-Assigns Spending
Spending plans of Colombia’s new government will remain broadly in line with the previous government’s, though some spending will be re-assigned and increased, German Arce, director of public credit and the national treasury tells LatinFinance. “We will re-assign around $1.5bn equivalent towards housing, infrastructure, agriculture, and science and technology education,” says Arce. He adds that the government will raise a further $2bn equivalent to go towards these sectors in 2011 and that this will largely be funded in the domestic capital markets. Arce adds that the government would not sell off strategic assets to fund projects, such as those relating to the oil sector but says some non-strategic assets, such has some small electrical plants could be sold off. Funding plans for 2011 include a dollar benchmark, and Colombia could also look to tap the Asian markets and look for investment from the Middle East. Patricia Morena, subdirector of external financing added.
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IMF Sees 6% Growth in LatAm
The IMF says it expects GDP in LatAm and the Caribbean to grow 5.7% in 2010 and 4.0% in 2011. Brazil, Peru and Uruguay are expected to grow more than 7.0%, helped by export activity, while Caribbean economies are expected to grow at a slower rate of about 3.0% in 2010 due to its dependence on the US economy, which is seeing slow growth.
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No Change Seen for Brazil Rate
Brazil’s central bank is expected to keep the monetary policy rate on hold at 10.75% today. Morgan Stanley agrees with market consensus, saying that a hike could come in Q2 2011 in view of strong domestic demand. Barclays also says the rate will be left unchanged as the central bank is comfortable with inflation levels. The shop does not expect any hikes this year or next.
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Brazil Jacks Up Bond Tax, Again
Brazil has again hiked the IOF tax for fixed income investments, to 6% from 4%, in a move that analysts say will dent bonds and FX. Brasilia is also indicating that it will do more to stem the unprecedented inflows of portfolio money seeking relatively high returns in the local bond market. “While markets elbowed the first hike to 4% only 2 weeks ago, this move hits the markets with a considerably more fragile technical position,” says Barclays, which sees a threat to BRL and a sell off in the long end of the local curve. On top of 45bp-35bp in additional yield required to compensate for the IOF jump, it also expects the market to price additional risk premium in the curve to reflect fears of even higher IOF, or other measures, in the future. The IOF tax on BM&F margins will rise to 6.00% from 0.38%. The raise follows an increase to 4% from 2% earlier this month, while the rate for equity inflows remains 2%. “The measures should influence FX and fixed income markets negatively in the coming days,” says Barclays. “This is a bit more comprehensive than just raising the IOF tax in the past as it targets foreigners’ leveraged positions,” says Standard Chartered. However, it adds that the impact will likely be temporary. “The fact remains that Brazil has the highest interest rates in the world, and coupled with the likelihood of further quantitative easing from the Fed and possibly the Bank of England, global liquidity will look to Brazil and other places for yield,” says Standard. “Implementing controls is really just treating the symptoms which can have temporary benefits but does not resolve the underlying issue,” it adds.
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Banxico Leaves Rate Intact
As expected, Banxico has left the monetary policy rate at 4.50%. The bank says in a statement that industrial production and exports have been growing at a high rate, but that this could be affected by the slowdown in the US economy, where unemployment remains high and consumption is still below pre-crisis levels. In a report, Barclays says it believes that in the most likely scenario, Banxico will maintain the current 4.50% rate for several months. Morgan Stanley says in a report that it expects the rate to remain at 4.50% for the rest of the year, increasing to 5.50% by the end of 2011.
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Grupo KUO Plans MXP Issue
Mexico’s Grupo KUO is looking to issue MXP700m of 5 year bonds in November, according to a filing on Mexico’s bolsa. The bonds will pay a spread over TIIE (which closed on Friday at 4.87%) and have a BBB + rating on a national scale. IXE is the bookrunner on the deal. Proceeds will be used to refinance liabilities and for other corporate purposes. KUO has holdings in the consumer goods, chemical and automotive industries.
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Chile Tightens Policy Rate
As expected, Chile has tightened its monetary policy rate by 25bp to 2.75%, slowing from the 50bp hike seen in the past 4 months. The central bank says in a statement that the domestic market has seen robust growth in line with expectations. Bank of America Merrill Lynch says in a research report that the reduction in the pace of hikes is also brought by the appreciation of the CLP, which it forecasts will strengthen to CLP500 per USD by the end of 2011 from the CLP530/USD level it expects to see in December 2010. Local shop Celfin forecasts that the rate will increase to 3.25% by the end of 2010.
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Fitch Boosts Colombia Outlook
Fitch says it has improved the outlook on Colombia’s BB+ rating to positive from stable to reflect the country’s economic resilience and improved macroeconomic performance in relation to its peers. In spite of comparatively slow recovery by regional standards, Fitch says Colombia’s 5-year average growth, reaching 4.4% in 2009 and 4.3% in 2010, is expected to outperform the BB median of 3.5% and 3.1%, respectively. The outlook puts Colombia on track for investment grade early in 2011.
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Mexico Expected to Hold Rate Steady
Mexico’s central bank is expected to leave its monetary policy rate unchanged at 4.50% today. Morgan Stanley, which agrees with market consensus, says in a research report that unlike other countries in the region that are fighting currency appreciation, Mexico’s currency is not misaligned and inflation trends have been benign. Bank of America Merrill Lynch also expects rates to remain the same and says any intervention to control the currency is unlikely.