Vietnam Cuts Refinance Rate to 12% From 13%, Effective May 28
Latin America Channel: Latest Posts
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Latin America
Rising FDI in Latin America
The UN Economic Commission for Latin America and the Caribbean (ECLAC) released its report on foreign direct investment (FDI), with generally good news for Latin America. While 2010 investment worldwide was fairly flat (and fell in developed economies), it soared forty percent in the region – reaching nearly $113 billion. Of the just over a trillion in worldwide flows, Latin America captured a tenth of the total (and over twenty percent of that invested in emerging economies).
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Emerging Markets
Does Foreign Exchange Intervention Slow the Pace of Currency Appreciation?
Abundant global liquidity and high exposure to capital movements have put foreign exchange intervention at center stage of the policy debate in Latin America. Although intervention is widely used, there is limited evidence about its effects on the exchange rate, and particularly in terms of slowing the pace of currency appreciation.
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Emerging Markets
Can Sterilized Foreign Exchange Purchases Be Expansionary?
In Brazil, the purchase of foreign exchange reserves through sterilized interventions has been the object of several criticisms, including my own. The fiscal cost of maintaining reserves amounting to US$ 320 billion is more than R$ 50 billion, exceeding total budget savings promised by the government for this year. Moreover, under current circumstances, sterilized interventions have the merely temporary effect of depreciating the nominal exchange rate. In order to have a permanent effect, the Brazilian Central Bank (BCB) must continue its purchases, further increasing the reserves’ already extremely high cost.
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Emerging Markets
Latin America 2030
With the number of governments and companies issuing debentures with longer maturities, investors are wondering what Latin America will look like in 20 years? The average GDP growth rate for the past six years was 4% y/y. Assuming that the pace of GDP growth declines to 3.5%, the size of the Latin American aggregate economy will be $8.9 trillion by 2030. At the same time, U.S. GDP growth will remain anaemic, given its need to digest the enormous debt overhang that was accumulated during the past decade. Therefore, the U.S. GDP growth rate will probably average between 1.5% and 2%, meaning that the aggregate Latin American economy will be about half the size of the U.S. in less than 20 years. Currently, it is only a third. Of course, these assumptions are on the pessimistic side for Latin America and on the optimistic side for the U.S. Given the recent warnings issued by S&P, the dynamics for the U.S. economy could be much worse. An ugly budget row could lead to further depreciation of the dollar, which would further depress the relative size of the U.S. economy. At the same time, population growth in Latin America is on the decline. Less than a decade ago, the region had a population growth of 2%. However, the improved prosperity reduced the population growth rate to 1.09%. This suggests that Latin America’s per capita income should reach $14,000 by 2030—almost 50% more than current levels. The change in economic conditions will create regional and political opportunities and challenges.
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Geostrategy
Why Cuba and Spain Need Each Other Again
Cuba obtained independence from Spain in the aftermath of the Spanish American War which came to an end in December of 1898. The loss of Cuba, Puerto Rico, Guam and the Philippines is known in Spanish contemporary history as El Desastre (The Disaster), the event which concluded Spain’s era as a colonial power and inaugurated a time of pessimism and despair personalized by the generations of 1898 and 1914, two generations of Spanish intellectuals who anticipated the clash of social classes, which led to the Spanish Civil War between 1936 and 1939. The Spanish American War was the easiest of the wars ever fought by the United States. The event marked the decadency of a country that never experienced a revolution and experienced a 19th century of civil confrontations and wars, a period of decadency that perhaps took off with the independence of a majority of Latin American nations in 1812.
Spain and Cuba need each other because of their common history, language, culture and tremendous synergies. Spain and Cuba could inaugurate bilateral partnerships between developed and developing nations in the 21st century that go well beyond trade and foreign aid.
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Emerging Markets
“Good-Bye” to the U.S. Dollar? Financial De-Dollarization in Latin America
Dollarization has been a feature of banking systems of many Latin American countries. Financial dollarization—the process in which a large share of residents’ assets and liabilities are denominated in U.S. dollars—has been a distinguishing feature of the banking sector of many countries in Latin America, making it one of the most dollarized regions in the world. Although it was largely a consequence of past episodes of severe economic crises and high inflation, financial dollarization has remained stubbornly high even after a prolonged period of economic stability and low inflation.
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Latin America
Chile: Industrial Output Disappointing; Activity Indicators Robust
Industrial output stayed in negative territory in February; contracting 1.1% m/m (-0.5% m/m in January). On a yearly basis, industrial production decelerated sharply to 1.9% y/y (3.4% y/y 3MMA), surprising the consensus (4.5% y/y) and RGE (3.8% y/y) on the downside. Disappointing results in consumer (-1.9% y/y) and intermediate (3.4% y/y)—accounting for 97% of the index—pressed down.
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Geostrategy
Brazil: Government Announces New Decree
On March 29, the government announced a new decree in the Official Gazette, increasing the financial-operation tax (IOF) on overseas loans—corporate loans and debt sold abroad by banks and companies. The tax was raised to 6% from 5.38% on international bond sales and extended to transactions with a maturity of up to 360 days from the previous 90-day limit. Brazil’s central bank said the increase was aimed at curbing foreign currency loans with a maturity longer than three months; which have grown around 39% since the end of 2008. In addition, the local newspaper Folha de S.Paulo, asserted that since January 2011, the inflows of U.S. dollars into the country had reached almost US$35 billion, reflecting an increase of 42% with respect to 2010’s total inflows.
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Latin America
Mexican Inflation to Edge Closer to Target by March
Mexico’s Core CPI Dynamics (y/y, 2w/2w index)
Source: Banxico and RGE
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Latin America
Brazil’s Current Account Deficit Likely Narrowed in February
The current account deficit likely narrowed to US$3.9 billion in February, from a deficit of US$5.4 billion in January, but widened compared to a deficit of US$3.3 billion in February 2010. A widening of the merchandize trade surplus to US$1.2 billion—driven by higher commodity prices—despite an expected narrowing in the net services deficit to US$5.3 billion, should explain the deterioration from January. This would mean that, on 12-months rolling basis, the current account shortfall shrank to US$49.3 billion in February from US$48.6 billion in the previous month. We highlight that FDI and portfolio inflows have been more than enough to cover the gap; however, the quality of the funding has deteriorated as portfolio, rather than FDI, becomes more prominent. We expect the current account to continue to deteriorate in 2011 to US$70 billion, or 3% of GDP, as domestic demand should continue to grow at a faster pace than external demand as the currency remains overvalued—though elevated commodity prices should help in avoiding a sharper deterioration.
