Weekly Latin America Risk Monitor: A Leopard and His Spots

Conclusion: Newly-elected Peruvian president Ollanta Humala made a key decision to central bank president Julio Velarde. Markets took this as a sign of long-term stability; we view it as a leopard attempting to hide his spots for the sake of short-term political gain.


This is the third installment of our now-weekly recap of prices, economic data, and key policy action throughout Latin America. We’re aiming to keep our prose tight here, so if you’d like to dialogue more deeply regarding anything you see below, please reach out to us at .




From an equity market perspective, the delta between the region’s best performer (Peru’s Lima General Index up +8.4%) and the region’s worst performer (Chile Stock Market Select down -2.1%) was over 1,000bps wide – a rather sizeable divergence from a week-over-week perspective. The Brazilian real’s (BRL) +1.4% gain led the way on the currency front. Though bond yields were little changed, Latin American credit markets had some fairly sizeable moves from a CDS perspective. Peru led the way here (-9bps or -7%), confirming the strength we saw in its equity market.


Weekly Latin America Risk Monitor: A Leopard and His Spots - 1


Weekly Latin America Risk Monitor: A Leopard and His Spots - 2


Weekly Latin America Risk Monitor: A Leopard and His Spots - 3


Weekly Latin America Risk Monitor: A Leopard and His Spots - 4


Weekly Latin America Risk Monitor: A Leopard and His Spots - 5




Brazil: The key news out of Brazil last week was not necessarily the central bank’s decision to hike rates +25bps to 12.5%, but rather their accompanying commentary, which dropped mention of continuing to hike rates for a “sufficiently long” period. Though we see Brazilian YoY CPI peaking in August, we think consensus long-term expectations for Brazilian rates of inflation are low by ~100-200bps. As such, we believe long-term Selic Rate forecasts must also be revised up. We’ll be out with an extensive report on Brazil later this week.


Elsewhere in the Brazilian economy, we see that the central bank changed the formula for the way in which banks must calculate risk on payroll deductible cards. This “macro prudential” measure is designed to slow credit growth (YTD +20.6% YoY vs. central bank target of +15%) by forcing banks to raise capital provisions on loans with maturities exceeding 36 months. The previous measure to slow credit growth (an additional +3% tax on consumer credit operations) merely boosted the government’s tax receipts for such transactions (+71% YoY) rather than actually slowing the pace of credit growth. We continue to strongly believe credit is simply too cheap in Brazil (relative to historic costs) for piecemeal measures like these to be wholly effective in containing credit growth.


Mexico: The central bank and the central government’s forecast for economic growth diverged noticeably this week, with the central bank’s monetary policy board citing “weaker demand” as the culprit for a slowing economy and president Filipe Calderon increasing his 2011 YoY GDP forecast to +4.6% (vs. 4.3% in May). We continue to side with the Central Bank of Mexico here and remain bearish on Mexican equities and the Mexican peso (MXN). Last week, Mexico reported incremental data in support of this view: retail sales growth slowed to +1% YoY and its unemployment rate backed up +20bps to 5.4%.


Peru: Perhaps the most moving news out of the region last week was President Ollanta Humala’s decision to appoint Julio Velarde to another five-year term as central bank president. This sent a resounding message to the markets that Humala appears committed to providing macroeconomic policy stability and assuages fears that his socialist agenda will derail the country’s long-term growth prospects. We remain bearish on Peru from a long-term TAIL perspective and see maneuvers such as this one as mere window dressing designed to calm jittery markets. Though we do not think he’ll be able to implement his fiscal policies any better than his mentor Hugo Chavez did in Venezuela, we do see scope for Peruvian assets to continue higher in the near-term as he wins over some investors on the margin.


Darius Dale


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