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Conclusion: Alongside China, Brazil is one of the key global economies that led 2011’s global growth slowdown. Supported by aggressive policy, we expect the country to lead on the way up if/when the global economic cycle turns.



Through yesterday’s close, Latin American equity markets have had a phenomenal week, closing up +5.8% in the week-to-date on a median basis. Gains were led by the higher-beta Argentina, which closed yesterday up +7.5% in the week-to-date. We remain negative here, and do not see their capital flight headwinds/currency devaluation pressure easing in a meaningful way over the intermediate term. Brazil, a market we are getting increasingly constructive on from a fundamental perspective after having the negative view for over a year, closed up +5.9% in the week-to-date.

There are a couple of monster moves to report across Latin American FX markets. Brazil’s real finally stopped going down on the back of monetary easing, closing up +5% vs. the USD in the week-to-date. Mexico’s peso also had a great week vs. the USD, closing up +4.5% in the week-to-date on the heels of central bank holding rates and announcing measures to strengthen the currency. We think the latter will eventually lead to easing in the former and remain fundamentally negative here. The -15bps week-to-date drop in Mexico’s 1yr O/S interest rate swap rates lend credence to our view.

Slowing growth continues to get imputed into Latin American sovereign debt markets, though at varying levels of duration risk due where each country is in the context of its own economic cycle. Brazil, which has led regional and global growth lower in the YTD, saw its 2yr yields fall -24bps in the week-to-date. Even after this week’s rate cut, Brazil’s 1yr O/S interest rate swaps market remains 90bps below the benchmark Selic rate – an indicator of expectations for further easing. Mexico, which has held up alongside a “resilient” U.S. economy saw its 10yr yields fall -46bps in the week-to-date as international capital continues to view Mexican sovereign debt as a “levered play on the U.S. economy” (per one bond fund manager). We expect this short-term move to reverse; Mexico’s 10yr yield has an -0.95% inverse correlation to the MXN/USD sport price.

No surprise here, given the week-to-date rally in global beta, but Latin American 5yr CDS markets closed down -13.1% on a median percentage basis. Argentina, a country with a deteriorating credit profile, underperformed, narrowing only -91bps or only -8.4% in the week-to-date.


Weekly Latin America Risk Monitor: All Eyes On Brazil - 1


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Growth Slowing:

  • Brazilian industrial production growth slowed in Oct to -2.2% YoY vs. -1.6% prior.
  • Credit growth continued to slow in Brazil, falling in Oct to +18.4% YoY vs. +19.7% prior. In an effort to ward off a more material deceleration in domestic liquidity, the monetary policy council will delay the implementation of accounting rules that would have been rather punitive to Brazilian financials in the near term, including having to fully book loan portfolios as a profit at the time of sale. This accounting change would have forced them to record a string of losses stemming from prepaid loans. Additionally, the central bank is considering increasing the limit larger banks can uses to buy loan books in an effort to increase liquidity for smaller lenders (currently at 36% of reserves on time deposits).
  • Brazil’s domestic growth situation must be rather dire; either that or Brazilian policymakers are far too aggressive with recent measures – which may show up in 2012 inflation readings. We think it’s a little bit of both… Their latest stimulus efforts include reducing a variety of taxes throughout the real and financial economies. The IOF taxes on foreign equity purchases and corporate infrastructure debt have both been reduced to 0%; the IOF tax on consumer credit has been reduced by -50bps to 2.5%; and sales taxes on consumer appliances and food staples have been cut by an estimated R$1 billion. If Rouseff’s government finds a way to enact meaningful austerity (vs. the usual accounting gimmicks) in the coming months, Brazil’s 2012 economic outlook should appear rather bright.
  • Chile’s Oct economic data was quite bad, on the margin: industrial production growth slowed (-0.8% YoY vs. +5.2% prior); industrial sales growth slowed (-0.6% YoY vs. +1.1% prior); and retail sales growth slowed a full -100bps to +8.6% YoY. One bright spot was the unemployment rate, which saw a -20bps MoM decline to 7.2%.

Deflating the Inflation:

  • Brazilian CPI, as measured by the unofficial IGP-M series, slowed in Nov to +6% YoY from +7% YoY prior. This deceleration is supportive of our dovish intermediate-term outlook for Brazilian inflation, as the IGP-M series has led the benchmark IPCA series by an average of 5.2 months over the last ten years.

Sticky Stagflation:

  • Peruvian CPI accelerated in Nov to +4.6% YoY vs. +4.2% prior.

King Dollar:

  • Brazil’s central bank lowered its benchmark Selic rate by another -50bps, in-line with the recent pace of cuts (now at -150bps in the current easing cycle). Their commentary was unchanged meeting-to-meeting, suggesting to us that they intend to keep cutting at a “moderate” rate.
  • As the U.S. dollar continues to make a series of higher intermediate-term highs and lows, we’ve seen it materially erode EM corporate earnings and the market for issuing international debt, as well as increasing dollar funding costs for such borrowers. The latest data out of Brazil, whose international junk bond issuance calendar has been dark since July 7, saw HY/HG credit spreads widen to 565bps – the largest premium since April ’09 and up from a much-tighter 216bps in early July. Our models have Brazilian GDP growth bottoming in the 4Q/1Q range, so we expect to see additional deterioration in Brazil’s HY credit market over the near term.
  • Mexico, whose currency (the peso) has declined the most in LatAm vs. the USD over the past six months (-13.9%), saw its central bank announce measures to support the peso through U.S. dollar auctions. In the short term, this announcement is bullish for the currency at face value, but looking through to forward implications, this sets the MXN up to extend declines as it gives the central bank room to eventually cut its benchmark interest rate from the current all-time low of 4.5%, after holding at that level today. Recall that last week both JPMorgan and Credit Suisse recanted forecasts for Banxico to cut rates as a function of the dramatic decline in the peso, which has the potential to negatively impact Mexico’s domestic intermediate-term inflation outlook.
  • The recent spate of aggressive intervention out of Argentine policymakers (designed to stem capital flight) has had some negative consequences to-date: consumer confidence ticked down in Nov to 56.7 vs. 57.7 prior; yields on Argentine bank bonds are rising 4-10x their LatAm peers after restrictions on FX purchases forced depositors to withdraw dollar depots from the country’s banking system; and insurers and other investors are fast selling the country’s dollar bonds after being forced boost local investments. Argentina’s 2012 securities declined -7.3% last week vs. +5.8% for JPMorgan’s broad EM dollar bond index. The latest data (through 3Q) shows the pace of capital flight has accelerated to a single-quarter record of $8.4 billion, upping the YTD total to $18 billion (+100% YoY!).

Eurocrat Bazooka:

  • Santander is planning to sell a ~10% stake in its Brazilian unit, Banco Santander Brasil SA, and another 7.8% stake in Banco Santander Chile SA as the struggling Spanish bank looks to artificially strengthen its capital ratios by selling what it can vs. liquidating what it should (i.e. Spanish sovereign debt).


  • Brazil’s FGV consumer confidence index ticked up in Nov to 119 vs. 115.2 – a four-month high. Brazil’s unemployment rate ticked down to 5.8% – an all-time low for the month of Oct.
  • Still slowing, but at a slower rate: Brazil’s manufacturing PMI ticked up in Nov to 48.7 vs. 46.5 prior.
  • Mexican real GDP growth accelerated in 3Q to +4.5% YoY vs. +3.2% prior, aided by a resilient consumer (retail sales growth accelerated in Sept to +4.7% YoY vs. +2.7% prior). The strength was followed by a dramatic improvement in the unemployment rate in Oct to 5% vs. 5.7% prior.
  • In an effort to combat a recent uptick in inflation, Colombia’s central bank hiked its benchmark interest rate to 4.75% - the first LatAm country to do so since July.


  • Brazil’s domestic fund flow situation anchors well with our intermediate-term outlook for the country (continued slowing growth and inflation), as fixed-income funds received another R$2.8 billion in Oct, which drove the YTD inflows up to a 4yr-high of R$67 billion. The central bank wound up cutting the benchmark Selic rate -500bps from the following year’s peak of 13.75%, making the pre-2008 fund-flow move a profitable bet for a great many of Brazil’s domestic money managers. If their trip back to the ol’ well is successful this time around, it may be the result of a dramatic deterioration in global economic conditions.
  • In what may be his last year as President of Venezuela, Hugo Chavez just recently signed into law regulation that will allow his government to set price caps on as many as 15,000 products. The cost of 18 basic goods including soap, toothpaste, and diapers will be immediately frozen. This new measure is on top of existing legislation that regulates the price of 100 foodstuffs – a law that has been viewed by many as a culprit behind persistent shortages of key items. Vice President Elias Jaua had this to say upon the announcement: “This idea of an invisible hand of the market that generates an equilibrium between supply and demand is a lie... [This is] a system in which the capitalists won’t have any way of fooling and defrauding us. The only ones who should fear the law are the speculators who have become accustomed to robbing the Venezuelan people.” On that cheery note, have a great weekend.

Darius Dale


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