Latin America and Brazil - On Economics and Politics

"Desejos" por Victor Hugo

2012-07-22T15:09:00.003-04:00

Desejo primeiro que você ame,E que amando, também seja amado.

E que se não for, seja breve em esquecer.

E que esquecendo, não guarde mágoa.

Desejo, pois, que não seja assim,

Mas se for, saiba ser sem desesperar.

Desejo também que tenha amigos, que mesmo maus e inconseqüentes,

Sejam corajosos e fiéis,

E que pelo menos num deles

Você possa confiar sem duvidar.

E porque a vida é assim,

Desejo ainda que você tenha inimigos. nem muitos, nem poucos,

Mas na medida exata para que, algumas vezes,

Você se interpele a respeito

De suas próprias certezas.

E que entre eles, haja pelo menos um que seja justo,

Para que você não se sinta demasiado seguro.

Desejo depois que você seja útil,

Mas não insubstituível.

E que nos maus momentos,

Quando não restar mais nada,

Essa utilidade seja suficiente para manter você de pé.

Desejo ainda que você seja tolerante,

Não com os que erram pouco, porque isso é fácil,

Mas com os que erram muito e irremediavelmente,

E que fazendo bom uso dessa tolerância,

Você sirva de exemplo aos outros.

Desejo que você, sendo jovem,

Não amadureça depressa demais,

E que sendo maduro, não insista em rejuvenescer

E que sendo velho, não se dedique ao desespero.

Porque cada idade tem o seu prazer e a sua dor e

É preciso deixar que eles escorram por entre nós.

Desejo por sinal que você seja triste,

Não o ano todo, mas apenas um dia.

Mas que nesse dia descubra

Que o riso diário é bom,

O riso habitual é insosso e o riso constante é insano.

Desejo que você descubra ,

Com o máximo de urgência,

Acima e a respeito de tudo, que existem oprimidos,

Injustiçados e infelizes, e que estão à sua volta.

Desejo ainda que você afague um gato,

Alimente um cuco e ouça o joão-de-barro

Erguer triunfante o seu canto matinal

Porque, assim, você se sentirá bem por nada.

Desejo também que você plante uma semente,

Por mais minúscula que seja,

E acompanhe o seu crescimento,

Para que você saiba de quantas

Muitas vidas é feita uma árvore.

Desejo, outrossim, que você tenha dinheiro,

Porque é preciso ser prático.

E que pelo menos uma vez por ano

Coloque um pouco dele

Na sua frente e diga "Isso é meu",

Só para que fique bem claro quem é o dono de quem.

Desejo também que nenhum de seus afetos morra,

Por ele e por você,

Mas que se morrer, você possa chorar

Sem se lamentar e sofrer sem se culpar.

Desejo por fim que você sendo homem,

Tenha uma boa mulher,

E que sendo mulher,

Tenha um bom homem

E que se amem hoje, amanhã e nos dias seguintes,

E quando estiverem exaustos e sorridentes,

Ainda haja amor para recomeçar.

E se tudo isso acontecer,

Não tenho mais nada a te desejar ".

US Quantitative Easing for Europe

2012-06-14T14:07:00.003-04:00

The QE policy is done primarily to weaken the USD through the purchase of treasury securities. These bonds will shift the yield curve downwards, decreasing the yield.

We have seen that the FED has been reluctant to implement another round of QE. However, since the FOMC meeting on April 25 the yield on the 10 year bond increased by 36 bp and the S&P decreased by 4.8%. People are buying bonds as a safe haven and as a way of profiting by selling the notes to the FED if QE3 indeed happens.

The labor market data in the US has weakened. Unemployment increased, payrolls increased, jobless claims increased and retail sales were simply modest.

So any data to be released that is bad is interpreted by the market as an increase in the probability of QE. The need for QE was said by Yellen.

People are buying bonds. So, yesterday we had the weekly auction for the 10 year bond. The outcome was in line with expectations. Indeed, they sold 21 billion, with a bid/cover ratio of 3.06 and a yield of 1.62%, an increase compared to the last one when the yield reached 1.85%.

People are buying treasuries because if there is a QE they will profit from selling to the government. So, US treasuries remain a safe haven.

In Europe the situation hasn’t changed much. Today we had an auction by Italy who sold 3 year papers for 3.92% compared to 2.75% of the previous auctions.

On Sunday Spain receive a loan from the EU in the amount of 95 bn. The IMF reported that the financial system corresponds to 275% of Spain GDP.

Bottom line: QE will not help weaken the dollar primarily because the European crisis is getting worse. The only way it will weaken the USD is if the crisis is solved.

Just take a look at the latest IMF report on Spain and answer if we are in a crisis or not:

On Europe and US - Market Conditions

2010-08-01T16:47:00.003-04:00

After my last post on the stress test i must confess i was gladly surprised with the quality of the stress tests. The methodology was uniform, the tests were rigorous enough and still a few banks failed.

Ever since July 23, Europe has been posting positive news. Either from the countries themselves - UK registering unexpected high growth and Germany with increasing confidence - or from the market itself. The Euro that has sanked to levels close to 1.15 dollars, has reached 1.31 last Friday.

On the US side, we had the release of the Q2 GDP. In turn, the US economy grew 2.4% from Q1 to Q2, on a annualized base. The ´so-called' market consensus was forecasting 2.5% for Q2. In any case, growth in the first quarter was revised up to 3.7%, meaning that growth has averaged over 3% for the first half of 2010. The comprehensive data revisions released with the report provide further evidence of just how severe the recession has been: the fall in GDP between 2007:Q4 and 2009:Q2 was 4.1%, making this the deepest recession since 1947.

According to Romer:
"The data revisions, together with recent estimates, also provide some important new information about longer-run trends. Revisions to both personal income and consumer spending have led to estimates of the personal saving rate in 2008 and 2009 that are substantially higher than previously reported. The average saving rate in 2009, for example, is now 5.9%, 1.7 percentage points higher than previously reported. In 2010:Q2, the saving rate is 6.2%. This higher saving rate is consistent with estimates reported in the Economic Report of the President of likely consumer behavior in the wake of the financial crisis. The higher level also suggests that there is room for further consumer spending growth as consumers become more confident, without returning to the very low saving rates of the past decade.

The revised data also indicate that productivity growth in 2008 and 2009 has averaged roughly 3%, slightly above the average from 1995 to 2007. Productivity growth fell sharply in 2008 (now estimated at an annual rate of -0.3%) and rose even more sharply in 2009 (at an annual rate of 6.3%). That the average over the recession and the first stages of recovery is equal to the historical average could suggest that the financial crisis has not damaged productivity growth (as some have argued)."

The Scenario for The First Week Of August
As of now, we believe that the market might observe an upward trend for August. In Europe there are a bunch of outstanding news regarding the fiscal austerity packages, the increase in confidence, the higher than expected growth in large countries like Germany. Also, we notice that the fear of the Greek sovereign default is finally gone for good.

In the US, the good news is more related to the GDP. Even if the GDP is a lagged indicator it is displaying that the economy is recovering. One might say that Q3 and Q4 are not going to be as good as Q2. However, the point is that people are already pricing this information whereas the Q2 info was not known by the market.

If you are in the market my call is to buy S & P or BMF. Have a good week!

A Quick Take On The European Stress Test

2010-07-21T16:15:00.006-04:00

It has been a while since my last post.

I am always thinking that i should write on the two themes that i am following closely - Europe and the financial reform in the US. But then as I read my fellow bloggers - Rebecca Wilder, Mark Thoma, Yves Smith, Simon Johnson and James Kwak and so many others, I realize i have very little to add to the debate.

This time i think i might be adding something new, i guess. The core of this post is on the stress test. Enjoy!

The idea of the stress is to measure the banks’ performance in times of a recession combined with a sovereign crisis. Indeed, according to the Committee of European Banking Supervisors site also assumes an adverse scenario that leads to a hike in interest rates leading to a deterioration in the EU bond markets. This scenario assumes a 3% deviation of GDP for the EU compared to the EC forecasts over two years horizon.

Clearly, the idea of the European stress test, organized by the CEBS, is to be sure that banks have enough buffers to support a significant downward turn. It seems that it is only stress test equity tier 1 capital, not something else.

The list with all the banks that are being tested can be found here.

The market is signaling two important things. First, it will equally bad if all banks fail or if all banks pass. Clearly, neither scenario couldn´t be farther from the truth. Second, the Euro will get a boost of credibility mostly if there is transparency in the process.

While we hope for the best regarding the outcome of the tests, it seems that we might have a few critical problems. The major problem is that the CEBS announced that there is no need for countries to release the methodology of the tests. So, it may be the case that all Greek banks can pass the test according to the Greek methodology but fail under the German one, for example. How can we compare apples with oranges? By not having a unified methodology the CEBS is saying that the same countries that run a unified currency – the Euro – are so different income wise, GDP wise, trade wise, labor wise, tax wise, that they cannot bear the same methodology under a stress test. The question then comes: Why should countries that have different criteria for stress tests carry the same currency?

Bear in mind that countries are not required to release the methodology. But I hope regulators are aware that the key goal of this test is to enhance the Euro’s credibility and hence the more transparent it is, the more credible it gets.

The second problem with the Friday outcome is that there is no consensus on how a bank can get the required funding. So, for example, let´s it is indeed true that the nationalized Hypo Real Estate Holding AG failed the test. In this case it seems that the bank would need to raise capital in the market. Clearly, the bank will fail to raise the required capital. Then, it seems that the bank needs to ask for the local government. So, in the case Hypo Real Estate it would ask to be bailout by the German government. However, the missing aspect here is that it European Financial Stability Facility (EFSF) was created exactly to bail out the banks. The €440bn ($520bn) rescue package establishes a special purpose vehicle, backed by individual guarantees provided by all 19 member countries. But if the EFSF was created with the intent of bailing out the banks why can't member countries (and their commercial banks) access the funds right away?

In the United States one should remember that the outcome of the stress tests displayed a shattered financial system. No doubts in early 2009, the system was way better than September-October 2008 but far from being considered dynamic or healthy. However, in the US, the regulators were able to inject capital in the banks that failed the test. What would happen if the state banks in Germany and Spain fail the test? Will they be required to be shut down? In the US there was a strong consensus that the government was going to bail out those who fail the test. In Europe there is no such a guarantee.

I honestly cannot foresee a happy outcome for the European stress test. While people simply are no longer talking about Greece, Portugal, Spain and Ireland, I don´t think that the sovereign crisis experienced by Greece in May 2010 is gone for good. It is not true that what we have seen was simply a confidence crisis against the Euro and against Greece. While markets may remain calm for a while, the crisis we observed early this year displayed key problems and fragilities surrounding the Euro. Here are a few obstacles of the Euro zone: the fact that countries have high debt levels, that some countries chose to preserve the old ‘welfare state’ but also like to have a strong Euro, that the Eurozone will always have different labor costs, that the Euro lacks a unified fiscal stance and most of all, that it is impossible to group poor and rich countries under a single currency.

O Adeus à TV Bloomberg Brasil

2010-01-12T12:43:00.001-05:00

A TV Bloomberg vai ser extinta dia 20 de janeiro. Você, caro leitor, sabia disso? A TV Bloomberg Brasil é um veículo importante para divulgar opiniões econômicas e financeiras de alto nível. Eu ainda não me conformo com a apatia das população brasileira. Ninguém reclama, protesta ou mesmo escreve um artigo para chamar a atenção para tal fato.

A extinção da TV Bloomberg é um evento que deve trazer impactos bastante negativos à mídia de forma geral pois tende a aumentar o grau de monopólio das grandes redes nacionais e assim reduzir ainda mais o já escasso debate sobre política econômica no Brasil.

A TV Bloomberg sempre se pautou pela diversidade de opiniões e nunca se manifestou contra ou a favor de qualquer tema econômico ou político. Tal diversidade é salutar para o sistema como um todo e é, sem dúvida, um exemplo de mídia democrática.
Entretanto, como a extinção da TV Bloomberg vai beneficiar as remanescentes ninguém está nem aí com a saída da rede de TV mais importante sobre mercado financeiro.
Ninguém me pediu para escrever este blog. Entretanto, acho importante exercer meu direito de cidadã e reclamar e clamar a atenção para tal fato. Na verdade, um tema bem menos relevante como o caso do pai americano que ganhou a custódia do filho de mãe brasileira (não sei o nome pq me recusei a seguir tamanha idiotice), ganhou muito mais destaque na mídia nacional e internacional.

Entretanto, o encerramento das operações de uma das mais bem sucedidas emissoras de TV do mundo, não mereceu nenhuma nota ou mesmo reclamação de ninguém que eu conheça aqui no Brasil ou no exterior.

O final da TV Bloomberg Brasil deixa a porta aberta para que a rede CNBC (maior rede de TV sobre mercado financeiro americano) venha a entrar no mercado brasileiro e tomar o mercado que a Bloomberg conquistou à duras penas durante anos a fio.

Enquanto economista as vezes me pergunto porquê vivemos num país subdesenvolvido. Neste exato momento, minha resposta pouco científica, viesada e triste é sobretudo em virtude de traços culturais. Um país onde falta diversidade de opiniões é um país que está fadado à pobreza, senão econômica, ao menos intelectual. O encerramento das operações da TV Bloomberg Brasil marca um retrocesso em termos culturais. E, como tudo de bom que acaba neste país, a Bloomberg encerra suas operações calada.

Já sinto saudades da TV Bloomberg Brasil!!

The Subprime Primer

2009-11-08T08:50:00.031-05:00

Please forgive me for being absent this semester. I had no time to blog since my last post but I intend to resume blogging on a regular basis after Xmas.

In between, I decided to post this sketch I received from Victor Arakaki on the subprime mess.

We say that a good joke is worth more than a thousand words, right? Please check this out, you won´t regret.

Enjoy,

Vitoria

Source: Victor Arakaki

Por Que as Bolsas de Valores Nos BRICs Estão Subindo Tanto?

2009-08-05T11:54:00.002-04:00

Nas últimas semanas, os mercados de ativos nas economias maduras - após subirem de forma brutal por três meses - fizeram uma pausa e começaram um período de correção nas últimas semanas.

Até que esssa última correção recente começasse houve um significativo aumento no preço dos ativos. De fato, esse movimento de alta tem sido verificado de forma sistemática desde da segunda semana de março de 2009. Observou-se altas no mercado de ações, elevação dos preços de petróleo e alta no preço das commodities. Do lado monetário, verificou-se uma contração nos spreads de crédito sugerindo um aumento de confiança no setor privado. Além disso, o fato das taxas de juros de longo prazo dos títulos do tesouro americano subiram de 2% para 4% sugerindo que o mercado esta prevendo crescimento econômico num futuro próximo. Um outro fator positivo importante é a recente queda da volatilidade dos preços dos ativos, indicando um aumento de confiança e um redução na aversão ao risco.

Nos mercados emergentes, os preços dos principais ativos - ações, títulos e moeda - nunca estiveram tão otimistas. De fato, os índices dos BRICs estão mostrando que desde o início de 2009 alguns investidores começaram a acreditar que essas economias - a começar com a China – devem registrar um significativo crescimento econômico em 2009 e tal crescimento vai tender a aumentar ainda mais o preço das commodities.
No caso do Brasil, a Bovespa atingiu em meados de agosto o nível mais alto dos útlimos 11 meses sobretudo em virtude do aumento de confiança que a recessão generalizada está terminando e que a perspectiva é de melhoria do cenário global. De fato, em julho a Bovesta teve o seu melhor mês desde 1998 sendo que a razão de tal excepcional performance está relacionada a significativa melhoria do cenário internacional.

No caso da China, após registrar queda de 70% no final de 2007, o Índice composto de Shanghai (Shanghai Composite Index) registrou impressionante alta de 91% no acumulado do ano de 2009 até julho. As razões de 'price/earning`mais do que dobraram sobretudo considerando o nível baixo que se encontravam em novembro de 2008. A excepcional performance do mercado de ações na China está relacionada as expectativas que a recuperação da economia chinesa caminha a pleno vapor.
No caso da Índia, a bolsa de valores subiu 47% no acumulado do ano de 2009 até julho. De fato, o índice caiu no início de 2009, fazendo a Índia ficar atras do Brasil, Russia e China (BRICs) no primeiro trimestre de 2009. De fato, o mercado atingiu um piso em começo de março de 2009 e desde então subiu 94% desde março até julho de 2009. A subida de 28% em maio de 2009 é o melhor ganho mensal da bolsa indiana desde 1992. Entretanto, o otimismo do mercado indiano está refletindo a incerteza quanto a recuperação econômica nos Estados Unidos. Deste modo, o mercado indiano também tem apresentado elevada volatilidade em virtude da incerteza quanto ao rumo futuro da economia americana sobretudo se a recessão já acabou mesmo ou não.

No caso da Rússia, as ações tiveram uma longa alta de nove meses, com o petróleo sendo negociado a $71 por barril. As projeções otimistas para os metais aumentaram o preço das ações de minérios. O índice da bolsa de valores da Russia - Micex - subiu 90% em seis meses sobretudo considerando que o petróleo - o principal item da pauta de exportação russa - mais do que dobrou desde que atingiu o nível mais baixo de fevereiro de 2009.

Em outras palavras, os mercados centrais que há quatro meses atras estavam precificando uma profunda recessão com um formato de L passaram a precificar uma rápida recuperação em formato de V com as economias centrais crescendo próximo ao produto potencial. A melhora das expectativas econômicas nos países centrais pode ser explicada sobretudo pelas ações agressivas tomadas pelo Federal Reserve, pelo Tesouro americano. Fora dos EUA, cabe mencionar o expressivo pacote fiscal lançado pela China em novembro de 2008. De modo análogo, Índia e Brasil também lançaram suas versões do "Paulson Plan". Ou seja, todos os grandes países em diferentes graus entenderam que a mera utlização de política monetária seria insuficiente para retirar o sistema da profunda recessão mundial. Não há duvidas atualmente que o risco de uma recessão em formato de L é quase inexistente.

Muito embora o aumento de confiança na economia global explique o excepcional desempenho do mercado acionário nos BRICs e nas economias desenvolvidas, é preciso lembrar também que os fundamentos não são o único fator em movimento. É possivel que uma parcela da alta de alguns mercados esteje ligado à maior liquidez, especialmente considerando que os governos aumentaram a liquidez do sistema e somente agora tal aumento da liquidez está chegando no mercado de ativos.

Atualmente os mercados estão precificando que a recesssão já está chegando ao fim. Nas economias centrais, a recuperação deve ocorrer, muito embora os fundamentos dessas economias - em especial EUA, zona do Euro e Reino Unido - estejem ainda bastante deprimidos. Há problemas profundos no sistema financeiro desses países, no sistema de hipotecas, entre outros que inibem uma retomada sustentada do crescimento econômico nos países centrais. Há também poucas dúvidas que os elevados déficits fiscais que estão sendo monetizados venham a aumentar as expectativas inflacionárias futuras. Sem dúvida em algum momento os EUA terão que reduzir a elevada dívida federal. De fato, a dívida pública americana vem crescendo a taxas maiores do que a taxa de crescimento do PIB. No final de 2008 a dívida publica era equivalente a 41% do PIB e conforme projeções do Congressional Budget Office a dívida pública americana deve aumentar para 82% do PIB em 10 anos. A elevada dívida pública americana é apenas um dos muitos problemas a serem resolvidos pelos EUA nos próximos anos.

Neste cenário de início de uma recuperação gradual das economias centrais há poucas dúvidas que os mercados emergentes devem ter uma melhor performance do que as economias centrais. Entre os emergentes, o destaque especial são os países que compõem os BRICs - Brasil, Russia, Índia e China. Não há dúvidas que mesmo os BRICs também dependem da demanda externa, como fonte de crescimento e, neste sentido, não podem descolar totalmente do ritmo da recuperação da economia mundial. Por outro lado, esta crise mostrou que a demanda doméstica de países como China e Brasil estão sendo capazes de sustentar o crescimento do PIB destes países num momento onde o mundo está registrando taxas de crescimento negativas.

Em síntese, as bolsas de valores dos BRICs estão refletindo a euforia do eventual final do cenário recessivo a nível mundial. Além disso, esses mesmos países também injetaram liquidez no sistema e possivelmente tal aumento de liquidez esteje atigindo os principais mercados de ativos. A recuperação econômica dos países centrais - leia-se EUA, zona do EURO, Reino Unido e Japão - deve ser tímida em 2010. Em contraste, os BRICs devem registrar elevadas taxas de cresciemento em 2010, com China liderando o grupo (8.9% de crescimento projetado para 2010 e 7.7% para 2009), seguido de Índia (7.3% para 2010 e 5.7% para 2009), Brasil (4% em 2010 e 0.5% em 2009) e Rússia (1% para 2010 e -8.1% para 2009).

A Brief Overview on Latam FX and Brazil´s Inflation and Selic

2009-07-14T17:08:00.003-04:00

FX Perspectives in Latin America
In contrast to Emerging Europe, Latin America has emerged out of the crisis as more resilient. This is so in part because of flexible exchange rates, lower leverage than Emerging Europe and better macro conditions. In fact, some countries in Latin America are implementing counter cyclical fiscal policies to fight the external crisis. The key countries using counter cyclical fiscal policy in Latam are Brazil, Peru and Chile. This differentiation adds to the perception that Latin American credit ratings lag other emerging markets and the near-term prospects for rating actions in regards to several regional countries on the cusp of an investment grade including Brazil, Colombia, Panama, Peru and Costa Rica point to the upside. Regarding growth, we believe GDP will converge to its potential level by mid 2010. In the absence of significative inflationary pressures, it is hardly possible that monetary authorities in key Latam countries hike rates until Q2 2010. In turn, it is possible that FX play an imoportant role especially considering that moderate growth rates may also induce central banks to become more tolerant with eventual currency weakness.

Brazil: Inflation and Interest Rates Decision
The latest BCB's consensus survey showed significant upward revisions in inflation expectations, with the median of 2009 IPCA projections increasing to 4.50% (from 4.42% in the previous week), after hovering below the target midpoint for four months deterioration in the inflation scenario. It is not only the short term inflation expectations tht are deteriorating mostly because the 2010 expectations are also pointing to the target midpoint, with this week posting 4.40% from 4.43%. The clear signs that the economy is already expanding, along with the definition of the 2011 target at 4.50%, in an election year should move 2010 market expectations to 4.50% in the coming months, but still significant local and global idle capacity should prevent inflation expectations from moving above targeted levels. In our opinion, this picture is in line with the Copom delivering one more round of rate cuts (by 50bp) this month, which would leave the Selic at 8.75% until July 2010.

Recover in Sight - the IMF Take on the World

2009-07-08T18:17:00.003-04:00

The IMF has just released an update of its World Economic Outlook. The main news is that growth during 2009-10 is now set to be 0.5% higher than forecast by the IMF in April, reaching 2.5 percent in 2010. The IMF recognizes that they overestimated the size of the recession in both, US and Japan.

In the same report the Fund says that financial conditions have improved, as forceful policy intervention has reduced the risk of systemic collapse and expectations of economic recovery have risen. Clearly the world wide policy response in both - finance and macro - have minimized the risk of a systemic crisis and indeed improved market confidence. The IMF emphasized thatr recovery likely to be sluggish

Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.

Despite these positive signs, the global recession is not over, and the recovery is still expected to be slow as financial institutions remain weak and credit intermediation impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.

According to the IMF the main policy priority remains restoring financial sector health. Macroeconomic policies need to stay supportive, while preparing the ground for an orderly unwinding of extraordinary levels of public intervention. At the same time, given weak internal demand prospects in a number of current account deficit countries, including the United States, policies need to sustain stronger demand in key surplus countries.

For the IMF:

"In the United States, high-frequency indicators point to a diminishing rate of deterioration, including in the labor and housing markets. Industrial production may be close to bottoming out, the inventory cycle is turning, and business and consumer confidence has improved. These developments are consistent with stabilization of output during the second half of 2009, with a gradual recovery emerging in 2010.

In Japan, following a dismal first quarter, there are signs that output is stabilizing. Improved consumer confidence, progress in inventory adjustment, aggressive fiscal policies, and strong performance by some other Asian economies are expected to lift growth in the coming quarters.

In the euro area, consumer and business survey indicators have been recovering, but data on real activity show few signs of stabilization and thus activity is projected to strengthen more slowly than elsewhere. Macroeconomic policies are providing support, but much of the adjustment in the labor market still lies ahead. Rising unemployment will weigh on consumption and activity, as will the economy’s heavy dependence on a still-ailing banking sector.

Emerging and developing economies are projected to regain growth momentum during the second half of 2009, albeit with notable regional differences. Low-income countries are facing important challenges because official aid has fallen and these economies are particularly vulnerable to swings in commodity prices."

In brief, EM will grow by only 1.5% in 2009 but will rebound to 4.7% in 2010. China will grow by 7.5% in 2009 and 8.5% in 2010. India will also present high rate of growth of 5.4% in 2009 and 6.5% in 2010. Asia will contract by 0.3% in 2009 before growing 3.7%. In contrast, some regions will post negative growth: Latin America (-2.6), Eastern Europe (-5) and CIS (-5.8).

Brazil: Inflation, Fiscal Sector and Selic

2009-07-07T12:18:00.002-04:00

The BCB inflation survey suggests a gradual increase in inflation expectations. Hoewever, expectations are not a problem since they are below the midpoint of 4.5%. The IPCA forecasts for 2009 reached 4.42% and 4.33% for 2010 suggesting a mild increase from a month ago. Our forecast for IPCA inflation for 2009 is 4.1% comfortably below the center of the official target (+4.5%) and lower than the reading for 2008 of 5.9%.

From inflation to the fiscal sector, the government is denying an eventual reduction of the primary surplus for 2009 from 2.5% to 1.85% especially because the government is spending on infrastructure, on the one hand, and there has been a decrease in tax revenues due to the decline in economic activity. Even if there is no change in the primary surplus it is important to stress that the current fiscal performance is below the 2.5% target (it reached 2.3% of GDP in May). The trend is to expect further deterioration considering the mandatory spending that will happen in the near future. In brief, primary surplus over GDP should see a fall from the 4.1% in 2008 to a likely 2.2% in 2009. It remains to be seen if the government will be able to restore the 3% primary surplus next year, when economic activity improves. In turn, the public debt over GDP should increase from 42.5% in 2008 to 44% in 2009.

Considering the favorable inflation scenario, the absence of cost pressures, stability of commodity prices we believe that the Central Bank of Brazil has reached the end of the monetary easing. We expect one more round of cuts by 50 bps to 8.75% and from then on the monetary authority should maintain the Selic stable until year end.

The IMF and the Special Drawing Rights Bonds

2009-07-06T19:38:00.002-04:00

As we mentioned before here, the IMF is planing to sell bonds for the first time in its history as part of its efforts to raise new funds. We have also explained that China and Brazil have announced their intention of buying the notes, denominated in special drawing rights (SDR). SDR is the IMF currency and is a basket of currencies. In my opinion, China and Brazil are being generous enough to lend IMF money mostly because both countries want a larger voting share at the IMF.

In any case, by July 1, the IMF announced that the board approved a framework for issuing notes to member states. Interest payments will be made quarterly SDR interest rate, a weighted average of 3-month interest rates in the U.S. dollar, euro, yen and pound sterling. The maximum maturity of five years, consistent with IMF lending under Stand-By Arrangements and Flexible Credit Line arrangements. The IMF already has welcomed commitments from Brazil and Russia to buy $10 billion of new IMF bonds each, and for China to purchase up to $50 billion of new debt. India, Korea and Saudi Arabia have also expressed interest.

For some analysts, the IMF bonds are not competing with US treasuries. According to Prasad these bonds could substitute for other reserve assets, meaning buying them might have little budgetary implications, and facilitating diversity of reserve holdings--which might boost yields of US bonds. Moreover if the assets were of limited duration (12-18m), EMs could restrict the timing of their financial support to press for governance reforms. These bonds would be traded only among the IMF and official agencies, i.e., central banks of member countries without a secondary market for private investors to acquire or trade these instruments. The bonds are likely to be denominated in SDRs and pay an interest rate linked to the SDR interest rate.

One should bear in mind that this extra funding was decided at the G20 meeting where authorities decided to triple the IMF funds to $750 billion. In this context, the issuance of these SDR bonds will come from the BRICs country as a way of accomplishing the $750 bn goal. Since August 2008 the IMF has lent approximately $50 billion. Most of the countries that have received IMF loans are emerging market countries and the extra funding will be lent to other EM that might need funding due to the global financial crisis.

Trade Balance Outlook for 2009

2009-07-05T17:49:00.000-04:00

Over the past couple of weeks, the data released have reinforced that the external accounts are improving, ultimately supporting the favorable trend in the BRL.
The trade balance in June surprised the market to the upside and reached a strong USD 4.6bn surplus. On an anualized basis, trade balance was running above USD 27.5bn surplus accumulated in the twelve months to June. Exports’ performance was key for such dynamics. Indeed, they recover by 19% s.a. up to June 2009 in nominal terms. For imports, if we compare to August 2008 (which was the peak) it decreased by almost 50% (45% indeed) until April 2009.

In terms of price and volume we notice a significant improvement in the terms of trade since early 2009 given the stabilization of commodity prices.
The main reason for the improvement in the nominal trade balance has been the faster recovery of the volume of exports than the volume of imports.
The exports-to-imports volume ratio rose by 32.5% from October 2008 (the recent bottom) until May 2009, surpassing, by far, the contribution from the
improvement of the terms of trade to date. While we don´t have date, it is highly possible that the recovery of exports was driven by China. Indeed, in 2009 China´s imports of Brazilian products increased by 150%. Also, we have observed an modest increase of Brazilian exports to Europe (15%) in the year until May.

Looking forward, the trade balance should continue to receive support from the positive terms of trade shock.We expect merchandise trade balance to post a surplus of $23.5 billions for the entire year of 2009, a small decrease compared to the 2008 surplus of US$24.7 billion. It comes as a positive surprise for Brazil that exports will not present a significative fall in 2009 especially considering the magnitude of the global financial crisis. We expect the real to appreciate throughout the end of the year to a range of BRL1.80 to 1.98 per U.S. dollar. According to our calculations we expect exports to be $152 billion, down from $198 billion in 2008. We will also observe a decline in imports in 2009. The recovery of domestic demand in 2H of 2009 will not be able to prevent the fall of imports in the year. Indeed, in our view, the weakening domestic demand is likely to curb imports to reach $128.2 billion in 2009,from $ 173 billion in 2008.

Happy Fourth of July!!!!!!!!

2009-07-04T09:08:00.001-04:00

credits: Robert Gerard Brown

Christina Romer and the 1937 Warning - Rising Unemployment in the US

2009-07-03T13:07:00.002-04:00

Yesterday the figures for may US unemployment were released and surprisingly the figures were higher than expected and reached 9.5% in June, the highest rate since 1983 (which means that 14.7 millions of people were unemployed). The worst is that job losses so far are greater than the numbers observed in last two recessions and the unemployment rate has been rising steadily in the current cycle. Clearly, a rising unemployment may increase the chances of another rounds of defaults (consumers may default on their debts) which may create balance sheet problems for the financial system.

By mid June, Christina Romer, the lead person of the Council of Economic Advisors of the White House, released a piece at the Economist warning the market that the United States and the Obama administration will not repeat the mistake of the 1937, when the United States wrongfully believed that the country was already out of the 1930s depression and the Federal Reserve started hiking rates and the Treasury suspended all the ongoing programs and fiscal stimulus because it became consensual that the depression was over and the recovery was at full force. Christina Romer in that piece wisely explains that the 'glimmers of hope´of the current situation in the United States are not strong enough to justify a suspension of government support. It is then premature to stop the Recovery Act spending, especially because it will still provide nearly $400 billion of stimulus in the 2010 fiscal year, but just over $130 billion in 2011. This implies a fiscal contraction of about 2% of GDP. If all goes well, private demand will have increased enough by then to fill the gap. If that is not the case, broad policy support may need to be sustained somewhat longer.

While some analysts believe that the US recovery will recover in a W format - that means it goes down and up and then goes on a sustained recovery - Christina Romer and the Obama administration are indeed trying to pave the way for a U shaped recovery. In other words, the recovery that is taking place in the US intends to be in full force and the government is using all the tolls available in the world (and clearly in macroeconomics) to avoid that those 'glimmers of hope' overshadow the reality that the United States is still on the road towards a full force recovery. In this sense, the Obama administration is correct in warning that they will not make the same mistake implemented in 1937, when the Fed started hiking rates and the whole previous efforts to boost the economy were somehow lost. In short, it does not come as a surprise that the US unemployment rate increased. Such fact only corroborate Christina Romer´s example that despite the 'glimmers of hope´the United States will continue to fight and to provide all the conditions to take the economy out of the recession using consistent policies and government support.

Good News on the External Sector in Brazil

2009-07-02T19:41:00.002-04:00

Trade balance posted a strong USD 4.6bn surplus in June. Exports performance explained such strong result. On the margin, it increased by 13% m/m s.a. in nominal terms, pushing the annual change up from -37% y/y in May to -22% y/y in June. Imports expanded 2% m/m s.a. with the annual change moving up slightly from -40% y/y in May to -38% y/y in June. Overall, trade balance reached USD 49bn surplus on seasonally adjusted and annualized terms, up from the USD 31bn SAAR in May. Accumulated over the last 12-months, trade balance rose from USD25.6bn to USD27.5bn surplus.

In the first semester of 2009, trade balance posted a surplus 25% greater than the one posted in the same period in 2008. This positive outcome is due to two factors. First, the decrease in international trade that decreased Brazilian exports. Second, the domestic contraction in the Brazilian economy that led to a decrease in imports. The flow of commerce decrease 25.3% in the first semester of 2009. The flow of commerce shows a better picture of the external sector in Brazil because it adds exports and imports. In the first six months of 2009, exports decreased 22% while imports decreased 29%.

A similar moviment was observed in the month of June. There was a decrease of 38% in imports and of 22% in exports. This led the trade balance to reach $4.6 billion, the best performance since December 2006. In comparison to June 2008, this result is almost 70% larger. In our opinion, considering that 2008 was the best performance of the Brazilian external sector ever, the current external sector performance tends to be outstanding. Clearly, when the financial crisis is over, Brazilian exports will boom again and the country will post extremely high growth rates.

The Defeat of the Kirchners - A Comment on Argentina

2009-06-29T20:49:00.001-04:00

According to exit polls, the government has lost the majority in congress. The new congress will take power on December 2009. In the absence of majority in the congress, the government will need to negotiate in the Congress. This in turn, is an opportunity for the opposition to insert a new policy mix in the whole Kirchner-Kirchner term. Mrs. Kirchner's popularity has declined sharply since she took office in December 2007, because of a weak economy and a bitter dispute between the government and farmers over a grain tax.

It is hardly possible that the Kirchners lost the election because of their ´populist´ government. It is more likely that elections were lost due to the absence of resolution of the farmers´strike during the whole 2008. In any case, the recession in Argentina is already extremely significant and is eroding tax collection, and public spending is still rapidly growing. It seems that the Kirchners sensed the magnitude of the current crisis (and how it would affect Argentina)

When the administration sensed the scope of the crisis, three months back, it moved the original Election Day (October 25) forward, as early as possible for June 28. This means that the authorities foresee that the second half of the year will be more difficult and especially with the late crisis effects, i.e., the unemployment rate is expected to rise. In other words, the strategy of the government was to have the elections as soon as possible as a way of minimizing the negative impacts of the recession on the electoral vote. Still, it didn´t seem that this was winning strategy given the defeat for the Kirchners.

Business climate in Argentina is extremely negative. This year, people have been increasing their holdings of dollars, considering the ongoing rumors that government may let the peso weaken to bolster economic growth. Indeed, deposits in dollars increased by $1.3 billion this year until May. In order to improve the business climate and to attract more FDI Argentina needs transparency and needs strong institutions. For example, it tends to be impossible to believe in the country´s inflation index. What about monetary policy? Why doesn´t Argentina set interest rates and their monetary policy committee have regular meetings with online proceedings? What about the Paris Club and the IMF, will they be ever solved? What about the holdouts? In other words, there are many relevant issues that are yet to have a final answer. These issues, the lack of an answer suggest for an outside observer that policies in Argentina are not guided by rules and regulations. Instead, it seems that the current government prefers to use discretion than rules. We learned a while ago the advantages of rules over discretion as a way to enhance the credibility of the government. Why does Argentina need to reinvent the wheel?

Are We At the End of the Monetary Easing Cycle?

2009-06-27T19:20:00.001-04:00

Emerging market countries are facing a difficult choice: to continue or not the monetary easing. On the one hand, most EMs were not facing inflationary pressures 2009, mostly because of the absence of food prices (decrease in commodity prices). On the other hand, given the severity of the US financial crisis, most Central Banks abandoned (at least on a temporary basis) their inflation target regimes and decreased rates as a way of avoiding the crisis to become widespread worldwide. However, by June 2009, many countries had reached or neared the trough in their interest rate cycles. It may be the case that the pace of easing in most countries will slow from Q2 as central banks tune back in to inflation risks as growth bottoms out. Currency depreciation may also cause slowing in the pace of easing, especially among emerging markets dependent on offshore capital flows.

It seems that the Central Banks in Latin America are slowing down the pace of easing. The largest rate cuts in the world this year were seen in this region as rates started from a high base. Colombia kicked off the region's easing cycle with a 50bps rate cut in Dec 2008 and bottomed at 4.5%. Chile surprised with whopping 250bp cuts in Feb and Mar 2009. Mexico suggested in June that it's approaching the end of easing. Peru's easing is still going strong, with another 100bp cut in June and a dovish forward bias.

Another strong reason for slowing down the pace of monetary easing is due to the fact that approximately 20 emerging market economies are following an inflation targeting regime. Nearly every country is facing inflation figures above the center of the established target. Biggest gaps between actual and target inflation: Ghana, Guatemala, South Africa, Turkey, Romania, Philippines, Serbia, Chile, Czech Republic, Hungary, Poland, Slovakia, Israel, Colombia, Peru. We should also take into account that another barrier against easing: currency depreciation pass-through, tougher inflation-output trade-offs and pressure from public opinion and politicians. It is also true that most EMs are experiencing higher growth and inflation than the US. In Russia, India, China monetary policy remains expansionary.

Balance of Payments Results: Brazil

2009-06-24T17:46:00.001-04:00

The current account in Brazil in May, posted a deficit of USD 1.7bn. We were expecting a smaller deficit, of around $1 bn. Indeed, dividends remittance was negative in USD 2.6bn with “other services and income” net negative in USD 1.2bn. However, the surplus in the trade balance of 2.7bn prevented the current account to be even more negative in May. When compared with May'08, current account deteriorated from the USD -0.8bn seen in that month, due to lower trade surplus (USD 4.1bn surplus in May'08).The trade balance result (USD 2.7bn) comparing with April's one (USD 3.7bn) was caused mainly by the fall on exports volume on the margin. On the imports side, volume expanded by 2.4% m/m s.a. in May following a small contraction of 0.9% m/m s.a. in April.

On the capital account side, there was a strong inflow. Indeed, FDI reached USD2.5bn and the inflow from Brazilian direct investments were USD 1.4bn. As a result, the net direct investment reached USD 3.9bn, well above the one seen in May'08 of USD -0.1bn. Portfolio flows were also positive, USD 3.0bn, reflecting mainly foreign investments in equities (USD 2.5bn), topping the USD 1.7bn seen in May'08.

Over the last 12-months, the current account deficit went down from -1.4% to -1.5% of GDP. An interesting aspect is the fact that FDI (accumulated in the last 12 months) rose from 2.9% to 3.1% of GDP.

We tend to agree with the Central Bank of Brazil that the current account in 2009 should present a deficit of about -16 bn. The dynamics of the Brazilian balance of payments is basically set by the trade account and the service account. For 2009, the Central Bank of Brazil announced an upward revision of trade surplus from USD 17bn to USD 20bn that partially offseted by dividends remittance, revised down from USD -15bn to USD -17bn.

Monetary Policy Decisions in Latin America

2009-06-19T17:27:00.001-04:00

Ever since the beginning of the current financial crisis, Latin American countries started decreasing domestic interest rates. Indeed, such actions were correct, especially considering that some Central Banks are extremely conservative, that is they care a lot about inflation and inflation expectations. Given the severety of the current crisis, however, lower interest rates is the correct action. However, given the signs in the US that the current financial crisis might be coming to an end it may be the case that the Latin central banks may stop decreasing interest rates soon. In what follows we provide a brief overview of the key Central and their policy actions.

In Mexico, the Central Bank cut its benchmark interest rate for a sixth consecutive month in a bid to bolster the country’s flagging economy. The bank lowered the key lending rate a half percentage point to 4.75 percent. However, the president of the Banxico already warned the market that the easing cycle will come to an end very soon.

In Brazil, the COPOM decided to cut the Selic rate by 100bps to 9.25%. Policy makers said they will be more “parsimonious” in future rate cuts and keep in mind the potential impact of lower borrowing costs on inflation. We expect CB to deliver a 50bp cut in July to 8.75% and then pausing in the remaining of the year.

The latest monetary policy decision in Chile on June 16 was towards decreasing rates by 0.5% to a record of 0.75%. Indeed in the last six meetings, the Central Bank of Chile have decreased interest rates by 7.5%. Chile is however experiencing deflation that is a sustained decrease in the overall price level. This is a problem for Chile especially considering that the country is a commodity exporter and copper is low in the international markets.

A similar movement of decreasing rates was also observed in Colombia, where the Central Bank reduced interest rates by 0.5% to 4.5% on June 19. It seems that even Peru is also feeling the negative impacts of the crisis. Indeed, Peru’s central bank lowered its benchmark interest rate by 100bps to 4%, the fourth consecutive monthly reduction. Moreover, the monetary authority said it will keep easing monetary policy as long as inflation and domestic demand keep slowing and the global economy gets worse.

The BRICs´ First Summit

2009-06-15T18:01:00.001-04:00

On June 16, the BRICs – Brazil, Russia, India and China – will hold their first annual summit. The meeting will focus on developing a common position on international financial reforms and climate change. However, despite a common interest in role that indicates their weight in the global economy there are also significant divides between BRIC countries, with Russia and to a lesser extent Brazil being more reliant on commodity exports and China and India being net importers. Lately, we have seen comments by Russian, Chinese and Brazilian officials about moving away from the U.S. dollar, using more domestic currency in bilateral trade and alternate reserve currencies. While these countries, especially China may take some steps to allow more internationalization of their currencies, shifting away from the dollar is happening only on the margins and given the new inflows to EMs especially the BRICs, reserve accumulation has been on the rise.

The idea that China and Brazil may use their own currencies when they are trading might be the first step towards the convertibility of these currencies. Another aspect is the different reasons that each of the BRICs has regarding its reserve positions. India seems to regard its reserves most traditionally; an insurance against future calamities. Brazil and Russia are more willing to use reserves for domestic purposes and operates in the foreign exchange market daily. China’s massive reserves, more tan a quarter of the world’s reserves, are as much a sign of its successes as its failures.

According to the IMF, the BRICs respond for 25% of the world economy in 2008, as compared to 16% ten years ago. BRIC countries have agreed to buy IMF bonds to help raise funds. Indeed, the idea was that China would buy $50 billion, and Russia, India and Brazil have contributed to buy $10 billion each. However, according to Reuters, president Lula has announced the IMF loan one week before he was set to meet his counterparts from key emerging markets in Russia, where leaders of the so-called BRIC nations will gather for the first time to discuss ways to assert a new world order that reflects their growing influence. It seems that it is not a coincidence that the announcement came on the same day that Russia announced it would gradually reduce its holdings of the US treasuries. Clearly, such an announcement drove the US dollar down. In turn, it may be the case that Brazil decided to anticipate the decision regarding the IMF loan as a way of saying that the loan does not intend to weaken the US dollar.

Funding the Fund: Will Mexico Join Brazil?

2009-06-14T17:53:00.001-04:00

Russia and Brazil, seeking to reduce their dependence on the dollar, announced plans to buy $20 billion of bonds from the International Monetary Fund and diversify foreign-currency reserves. I was under the impression that Mexico was suffering a lot with the crisis and that would a country who would receive financial aid from the IMF. For me it makes little sense that Mexico is willing to lend money to the IMF. The country should instead be receiving funds.

The IMF’s board may consider in late June or July a proposal to issue bonds. The Fund probably will sell the bonds only to member states and central banks. The debt will pay a yield similar to U.S. Treasuries and will be denominated in the fund’s basket of currencies, known as Special Drawing Rights. The IMF calculates the value of SDRs daily, with 44 percent weighted towards the dollar, 34 percent to the euro and the remainder split between the yen and the pound .Brazil’s central bank will decide which assets to sell from its reserve portfolio to free up the funds needed to purchase the IMF securities. This is an investment that Brazil is doing with part of its reserves and making available financing so that the IMF may help emerging countries.

The BRICs Performance for 2009 and 2010

2009-06-11T12:02:00.001-04:00

Yesterday we wrote about reserve accumulation among the BRICS. Todday we are going to discuss the possibility that the BRICs are already on their way towards recovery. Indeed, their assets markets are already pricing this outperformance and in most of the cases, the strong inflow of foreign exchange into those countries have already triggered CB intervention and international reserves accumulation

While it is too much of a stretch to call the current situation a decoupling we can be sure that China, Russia (to a less extent), Brazil and India are on their way towards recovery. EM equities have greatly outperformed their developed world peers since the start of the year, accelerating since risk appetite began to improve in March. Different from some professional pessimists, China and India will grow strong this year and we believe on the possibility that China presents a growth rate of more than 8% in 2009. It is also possible to observe both China and India growing 10% in the next five years.

On the external side, the BRICs are buying dollars at a very fast pace as a way to prevent their domestic currency to appreciate. According to Bloomberg, Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July. Leaders from China, Brazil and Russia are suggesting to create an alternative to the dollar. While Russia is proposing the creation of another currency that would circulate within the BRICs, China and Brazil are looking into ways of using their own currencies when both countries are trading.

What about the perspectives for growth?In India, the economy expanded 5.8% in Q1 2009 after expanding 5.3% in Q4 2008. The economy was boosted by the government stimulus measures implemented later last year to deal with the crisis. In 2009, it is possible to observe India growing around 4.9% and in 2010 already growing around 9%. In India, economic indicators like exports and industrial production are still contracting and capex and consumption have slowed sharply. On the other end, capital inflowshave resumed boosting the currency and stock market, PMI has improved and OECD leading indicator shows signs of approaching a bottom. Some improvement in global economy will be a positive for continued capital inflows and easing of export contraction. Central bank measures are improving credit flow in the economy.

On China, we agree with Jim O´Neal from Goldman Sachs who says that China will lead the global recovery, returning to trend growth by mid-2010, much earlier than any other country. India and Brazil should return to trend in 2011, also more rapidly than most other emerging markets. In addition, while the momentum is strongest in China, all three countries are poised to close their output gaps quickly. This rapid narrowing of output gaps is due to recent above-trend growth as well as the relatively quick return to trend growth forecast for these countries. Russia lags the other BRICs as it is set to return to trend.

While it is true that China has many capital account restrictions and is not as financially integrated as Brazil, China is the country with the largest inflow of FDI among the EM. Besides that,Chinese government has become the single largest holder of official FX reserves and of US government debt securities.We expect China to grow between 6 and 8% in 2009. There are many indicators saying that China is recovering. For example, manufacturing accounts for 40% of China's GDP and until April, the PMI was in contraction as external demand for Chinese goods fell and domestic demand softened. Now, the PMI, an indication of manufacturing activity, have risen above the 50 threshold which indicates expansion.

Russia is the worst performer among the BRICs. Russian GDP fell 9.5% in Q1 2009 YoY, and 23.2% since Q4 2008. The fall is generalized among the main categories. Not only we have observed a marked fall on investment but also on consumption as well as industrial production. On Q1 2009, Russian GDP already felt 9.5% and 23.2% since Q4 2008. Russia should have a marked negative growth in 2009 of -4.5%.

The Brazil scenario is not as bleak as the Russian one. Indeed, Q1 2009 GDP contracted 1.8% y/y and 0.8% q/q (Q4 2008 -3.6% q/q). Consumption declined from 2.2% y/y in Q4 to 1.3% while private investment went from 3.8% to -14.0% y/y in Q1 2009. Exports contracted 15.2% while imports were down by 16%. On the supply side, Agriculture went from +2.2% to -1.6% y/y while industry and services grew by -9.3% and +1.7% from -2.1% and +2.5% in Q4 2008 respectively. While the fall on investment was significant, it is possible to observe growth to reach 0 in 2009. It will be very unlikely that Brazil experience negative growth in 2009.

Some encouraging, albeit tentative, signs are emerging that the contraction in economic activity is moderating. Recent data on retail sales and consumer and business confidence in some advanced and emerging economies suggest that the rate of decline of private consumption, exports, and industrial production may be easing. According to the IMF with contracting world trade, slowing domestic demand, and sharply reduced access to external financing, emerging market growth is expected to decline sharply to 1.5% in 2009, from 6.1% in 2008. However, the dynamism of China, India and Brazil are shining brighter than the remaining emerging world and we expect the BICs (without the R for Russia) to present an outstanding rate of growth in 2009.

The US Dollar and the Brics - A Love and Hate Affair

2009-06-10T19:18:00.003-04:00

According to Bloomberg, the BRICs are buying dollars at the fastest pace since before credit markets froze in September, protecting exports even as leaders of the biggest emerging markets consider alternatives to the U.S. currency.. Indeed, Brazil, Russia, India and China increased foreign reserves by more than $60 billion in May to limit currency gains as the first global recession since World War II restricted exports, data compiled by central banks and strategists show. Brazil bought the most dollars in a year, India’s reserves gained the most since January 2008 and Russia added the most foreign exchange since July. The reversal of capital flows back to emerging markets has led to an increase in central bank intervention to slow appreciation of their currencies.

While Russian, Chinese and Brazilian leaders suggest substituting the dollar, the central bank purchases show just how much these countries still rely on the dollar. Russia is proposing the BRICs consider creating a new unit of exchange when they meet in Yekaterinburg on June 16. China and Brazil said last month they may look at ways of dropping the dollar for trade between the two countries.

On the other end, China is proposing an overhaul of the global monetary system, suggesting that the U.S. dollar could eventually be replaced by the IMF's Special Drawing Right (SDR) as the world's main reserve currency. It seems that China is considering buying bonds issued by the IMF to boost the institutions capital. These statements come as China has expressed increasing concern about the long-term value of its US assets and has taken several steps to gradually increase the international role of the RMB.

Similar to what happened last month, when Brazilian president Lula proposed the use Brazilian and Chinese currencies when China and Brazil were trading, it seems that now, the proposal has gained Russia´s acceptance. The idea would be to create regional currencies as way tto shift away from the dollar.

In our view, it is clear that the attempts to create regional currencies display the countries´disappointment towards the US poor performance. It also poses a (non credible) threat towards the long term stand of the US dollar as a universal medium of exchange, store of value and unit of account. On the other end, we notice that these same countries that are trying to stay away from the dollar are also increasing its international reserves, that are mainly dollar based. So, it will still take time for the world to find another universal medium of exchange that is as liquid as the US dollar.

Slowdown in Brazil and Interest Rates Decision

2009-06-09T18:34:00.000-04:00

Today it was released the data regarding the contraction of the Brazilian economy in Q1. The economy shrank less than expected in the first quarter, increasing the bets that central bank will slow the pace of interest rate cuts. Output decreased by 1.8% from a year ago and 0.8% with rrespect to Q4 2008. In turn, because this is the second straight quarterly of contraction we can say that Brazil has formally entered a recession, for the first time since 2003. Different from the Bloomberg consensus, we were not forecasting a worse number.

The fact is that this smaller contraction may impact the upcoming monetary policy decision. In our view, the Central Bank may decrease rates by 0.5% tomorrow from 10.25%. That would be the smallest cut this year. In turn, interest rates would be 9.75%. The first reason is the smaller contraction, suggesting that the economy may be recovering soon. Besides, given that the economy is on the track towards recovery it makes little sense for the Central Bank to implement a larger interest rate cut and then latter, have to hike again to avoid an overheated economy. The fact is that this crisis enabled Brazil to achieve a low real interest rates. This is important for a variety of reasons. One of them is that the low rate of investment in Brazil is always explained by the high rates of interest rates that do not stimulate the capital to be allocated towards the productive use of capital. Now, with lower rates, investors will have enough incentive to invest in the productive sector of the economy. This will allow the country to solve a set of bottlenecks in a wide range of sectors, like infrastructure. Besides, a low and stable interest rate also should incentive the widespread use of long term credit. The fact that we lived for a very long time with high rates deprived consumers from having access to credit. Now, with low rates, we will be able to have access to cheap access to credit.

Reasons Why The Worst of the Crisis is Behind Us in the Emerging Markets

2009-06-07T19:14:00.000-04:00

Emerging markets are increasingly affected by the recession in advanced economies through trade and financial market channels. Before the crisis, it was thought that emerging markets would be able to decouple and weather the storm. Clearly, this proved to be too optimistic especially considering the size of the current recession. With contracting world trade, slowing domestic demand, and sharply reduced access to external financing, emerging market growth is expected to decline sharply to 1.5% in 2009, from 6.1% in 2008, which would be the weakest growth rate since the 1990s.

There are many recent signs that some emerging markets are forging a limited version of decoupling from the still very weak developed economies. Massive fiscal stimulus, especially in China, is paying quick dividends. Moreover, since many emerging markets have strong financial sectors, these economies may be responding more readily to traditional stimulus measures.

According to the IMF, recent data on retail sales and consumer and business confidence in some advanced and emerging economies suggest that the rate of decline of private consumption, exports, and industrial production may be easing. Fiscal stimulus coming on stream and continuing monetary policy support should contribute to a moderation in the contraction of economic activity.

While global economy has been dragged down this year and hence global GDP is set for its worst year in the post-war era in 2009, it may be the case that EM may emerge out of this crisis faster than develop countries.

For 2009, Latin America, according to the IMF is expected to contract by 1.5% following growth of about 4.5% in 2008. The slowdown is projected across the board, being more pronounced for the region’s commodity exporters and for economies with the strongest manufacturing ties to global industrial production chains. Clearly growth will rebound in 2010 to more than 1.5%. The absence of systemic banking problems is a key reason to explain the fact that Latin American economies will resume growth faster than developed ones.