Archive for the ‘Latin America’ Category

Brazil: Fitch Ratings not happy about fiscal deterioration

September 8, 2009
"G-2": Brazil's President Lula and Mexico's President Calderon: Whose fiscal ship faces calmer seas?  Source:  Google Images
“G-2”: Brazil’s President Lula and Mexico’s President Calderon: Whose fiscal ship faces calmer seas? Source: Google Images

Fitch Ratings published a report this month analyzing Brazil’s fiscal deterioration this year (see press release below).  Brazil’s public finances have slipped just like in just about every country in the world.  Fitch highlights Brazil’s heavy government debt burden relative to its emerging market peers.  Brazil’s fiscal deterioration — characterized by rising spending, tax cuts, and a poor tax intake — will at the very least slow any upward movement in Brazil’s credit rating, currently at BBB- for foreign currency debt, and could in fact lead to a downgrade if a fiscal consolidation is not forthcoming over the medium term, suggests Fitch. 

Yet Fitch rates Mexico fully two notches above Brazil (BBB+), albeit with a Negative Outlook (meaning the rating should go down within two years).  Brazil’s government debt to GDP ratio is nearly 70%, whereas Mexico’s is below 40%.  What they don’t highlight is that Brazil’s debt to tax revenue ratio is lower than Mexico’s (nearly 170% in South America’s largest economy vs. Mexico’s nearly 200%).  Mexico’s woeful tax performance is a perennial problem gone unfixed for decades.  Moreover, the Mexican government relies on oil-related revenues, even though oil production south of the Rio Grande is declining.  The Mexican government won’t allow private investment in the energy sector as a way to increase production (and can’t, due to popular opposition).  Mexico is a mess (not least because of its heavy dependence on one country, eh-hem, eh-hem, the United States), and Fitch acknowledged as much in July when it said it will monitor fiscal measures in the wake of the mid-term legislative election to decide whether or not to downgrade.  Signs are that an austere budget may be in the works.

Debt is measured against both GDP and revenues to indicate a country’s ability to grow out of its debt burden, i.e. to raise enough revenues to pay future debt obligations.  The debt to revenues measure is arguably a better proxy for this capacity, even though most analysts look at debt to GDP because GDP is more standardized…and perhaps out of laziness  Sure, Mexico has a vast untaxed portion of the economy it  could draw on to service its debt.  But it hasn’t ever done so and it won’t.  An owner of a Mexican trucking company once told me, he doesn’t pay any taxes.  So, Mexico’s fiscal picture is at least as bad, if not worse, than Brazil’s.  What’s more, Brazil’s external balance sheet is stronger than Mexico’s, with lower net external debt to exports and a stronger sovereign net external creditor position.  Its economy appears more resilient, not least due to its diversification.

Yet Mexico still remains two notches above Brazil due to sticky credit ratings and the inability of the rating agencies to take dramatic action.  Such dramatic rating action would suggest that rating agency analysts have been wrong for some time.      

Fitch: Brazil’s Fiscal Deterioration – A Slippery Slope
03 Sep 2009 2:05 PM (EDT)

Fitch Ratings-New York-03 September 2009: Fitch Ratings believes that Brazil will need to begin the process of fiscal consolidation, as an expected economic recovery begins to take hold, in order to preserve its fiscal credibility. Fitch has published a special report on Brazil’s deteriorating fiscal situation and the potential impact on its credit profile.

The degree of fiscal deterioration in Brazil’s public finances is quite evident when comparing the fiscal outturn of the first seven months of 2009 with the same period a year ago. The central government primary surplus has declined by 60% in the first seven months of 2009 compared with the same period in 2008 as a result of fast-paced spending growth and weak revenue performance.

‘The structure of Brazil’s public spending is deteriorating as a significant part of the increase is related to personnel and pension benefits, which will be harder to adjust in the future and cannot be classified as strictly ‘counter-cyclical’ in nature,’ said Shelly Shetty, Senior Director in Fitch’s Sovereign Group.

On the positive side, the scale of Brazil’s counter-cyclical fiscal stimulus package is modest by international standards, and the expected deterioration in the country’s fiscal balance is somewhat less than its rating peers. In addition, the government has domestic and external market access to fund the higher deficit. However, Fitch notes that the country’s starting fiscal position is weaker when compared with its peers. Brazil’s general government debt burden is significantly higher than the ‘BBB’ median (66% of GDP compared with 27% for the ‘BBB’ median) and will increase further this year.

Fitch recognizes that Brazil has a good track record in delivering and surpassing fiscal targets even when economic conditions are difficult, such as in 2002-2003. Across the globe, 2009 has been a challenging year, and many emerging markets have seen deterioration in their fiscal balances. However, the sharp increase in spending growth observed so far in 2009 needs to be curbed for the authorities to achieve even the reduced primary surplus target for this year, and more importantly, to return to the higher primary surplus target of 3.3% for 2010, as set under the Budgetary Guidelines Law.

‘Given the uncertainty in the pace of economic recovery and thus revenue growth, greater resolve to contain spending growth (especially current) would be positive for the credibility of fiscal targets,’ added Shetty.

While Brazil’s external finances remain strong and the country has weathered the global financial crisis relatively well, the deteriorating fiscal picture could potentially dampen the upward momentum of Brazil’s credit trajectory. On the other hand, persistent and significant deterioration of public finances and debt dynamics could undermine fiscal credibility, increase investor risk premia, and adversely affect investment and growth prospects, which in turn, could weigh on Brazil’s creditworthiness.

Fitch currently rates Brazil’s Long-Term Issuer Default Ratings at ‘BBB-‘ with a Stable Rating Outlook.

The full report ‘Brazil’s Fiscal Deterioration: A Slippery Slope’ is available on the Fitch Ratings web site at ‘’

Contact: Shelly Shetty +1-212-908-0324 or Erich Arispe +1-212-908-9165, New York.

Media Relations: Kevin Duignan, New York, Tel: +1 212-908-0630, Email:; Sandro Scenga, New York, Tel: +1 212-908-0278, Email:

Brazil: Trouble for Lula’s Heir-Apparent

August 18, 2009
President Lula and Candidate Dilma Rousseff.  Source:  Google Images President Lula and Candidate Dilma Rousseff. Source: Google Images

Dilma Rousseff, the less-than-glamorous heir-apparent to Brazil’s leftist President Lula, is being accused of exerting pressure on a government official to whitewash an investigation into a political ally.  See FT article on the subject.  These corruption investigations snarl Brazil’s Congress all the time, and some blow over, while others balloon.  What will happen to this one could affect Dilma’s chances in the presidential election of 2010, which is getting under way.  Dilma, former guerrilla tortured under Brazil’s military regime in the 1970s, Lula’s chief of staff, energy minister and chairwoman of Petrobras, Brazil’s part-state-owned energy company, may not coast as easily into the Brazilian presidency as Barack Obama did into the White House.  Stay tuned…

China & Ecuador: They need each other

August 18, 2009
Source: Google Images Ecuador Source: Google Images

The FT reports today that China is extending a much-needed $1 billion loan to the government of Ecuador, one of the worst-run countries on the planet, as a downpayment on oil deliveries to the Asian juggernaut.  Ecuador has oil, as well as other assets, including in tourism (for example, the Galapagos Islands, the Andes, and charming Quito), but it has been mismanaged by elites for decades, leaving its indigenous population impoverished and its debt in default.  China needs oil.  These countries need each other.  Read an earlier post on China and Latin America.

Colombia: US Democrats’ Hypocrisy?

August 18, 2009

Are the Democrats hypocrites on Colombia and on Free Trade?  With Obama in tow, last year they killed the Colombia FTA legislation promoted by President George W. Bush (I know you don’t like him), who really got it right on hemispheric free trade and on U.S. ally Colombia.  The Dems whined about abuses by the government of Alvaro Uribe, who has in fact made great strides in ending Colombia’s nasty guerrilla war.  Read posts I wrote in the past on Colombia and on trade.

Now, President Obama, who has adopted many of the policies he savaged when they were Bush’s (e.g. targeted killings in Afghanistan to name one) is backing greater U.S.-Colombia military ties, which had already been deepened under Mr. Bush.  So, much so that Obama’s erstwhile buddy, Chavez, whom he shmoozed with earlier this year, refuses to normalize relations with his neighbor to the west.  Yet Obama cannot so easily backtrack on his wrong-headed kaybashing of Colombia FTA, based on the AFL-CIO’s trumped up charges of abuse against the Uribe government. 

Just keeping score…

Brazil: Another quiver in its bow

August 17, 2009
Brazil's President Lula with Petrobras's CEO and Lula's Heir-Apparent, Dilma Rousseff  Source: Latin American Herald Tribune
Brazil’s President Lula with Petrobras’s CEO and Lula’s Heir-Apparent, Dilma Rousseff Source: Latin American Herald Tribune

Brazil’s persistent economic weakness over the years has been its external balance sheet — heavy indebtedness to foreigners, weak foreign trade sector, and low external liquidity (e.g. low fx reserves).  This was in addition to a heavy government debt burden (government borrowing abroad in fact drove the fragile balance of payments), a poor business climate (a huge tax burden, heavy regulation and a state-dominated economy) and huge social challenges (e.g. poverty, wealth inequality, crime). 

Yet since the arrival of President Fernando Henrique Cardoso in 1994, whose stabilization and market-oriented policies were largely continued by President Lula since 2002, Brazil has improved somewhat on all these fronts.  What has changed like night to day is the external balance sheet  — as the country’s diversified commodity exports have fueled growth of such economic smokestacks as China.  Brazil, traditionally an energy importer — both hydro and fossil — due to its heavy consumption needs, has recently become a net oil exporter.  No longer do higher energy prices mean balance of payments problems for Brazil, but rather rising fx reserves. 

And, the news keeps getting better. With the technology available for deep-sea drilling, Brazil is set to become a quite sizable oil exporter (read a NYTimes article on the subject).  Petrobras, the part-government-owned energy company, is set to take the lead in developing the deep-sea fields.  It is no accident that Lula’s heir-apparent, Dilma Rousseff, is chairwoman of the board of directors of Petrobras.

Brazil’s fx reserves should continue to mount, providing an almost China-like fortress against external shocks.   This should provide the country with the room it needs to confront its other ills, enumerated above, and move higher and higher among the ranks of today’s Rising Powers.

China, Latin America and the US

August 17, 2009

China: Learning to enjoy the Brazilian bear hug.  Presidents Lula and Hu.  Source: Xinjuanet

What would President Monroe say?

An Economist article discusses the growing presence of Great Powers, especially China, in Latin America, flouting nearly two centuries of U.S. dominance in the region, since the articulation of the Monroe Doctrine in the early 1820s.  In the near term, this worry is overdone.  Longer-term, if the U.S. continues to damage its sovereign creditworthiness, i.e. by not putting in place a medium-term fiscal consolidation program (that is, to reduce America’s rising government debt) — a program that should include putting health care reform on hold, then America’s relative decline will accelerate and this will affect its projection of power in the Western Hemisphere. 

In the 1820s, as revolution in Spain led to unrest in its colonies in the Western Hemisphere, the Holy Alliance of autocratic east European courts — Russia, Austria and Prussia, threatened to intervene in these colonies.  President Monroe in 1823, backed by the British Navy, warned Europe that any extension of European power to the Western Hemisphere would be “dangerous to our [U.S.] peace and safety.”

Nowadays, as the world moves increasingly toward a multipolar system, power projection in Latin America is largely in the form of commerce.  China, India and others seek, above all, the region’s raw materials to fuel their rising economies.  True, with economic influence comes political influence.  True as well, such powers as Russia and Iran seek direct political influence through arms sales and energy deals with the likes of Chavez’s Venezuela, Cuba, and Evo Morales’s Bolivia.  But these countries are on the fringe.  More of interest to U.S. policymakers are China’s economic relations with the major economies of the region, notably Brazil.  China’s economic relations with Brazil have been hand in glove — raw materials fueling a manufacturing juggernaut, while with Mexico, they have been competitive.  Brazil is also a manufacturing nation and will one day find China an unwelcome competitor. 

So, the thrust of the foreign “intervention” is commercial and good for Latin America.  This is good for the United States as well, insofar as China supports growth in the region and the U.S. no longer has to be relied on so heavily as the source of demand and investment for the hemisphere.  In previous U.S. downturns, Latin countries hovered on the brink of default (or in fact defaulted), whereas this crisis they have weathered, due in part to demand from China and elsewhere. 

China, for its part, is “intervening” in Latin America as a rule-abiding member of the global capitalist system, wrought by the U.S. and its allies.  This should not worry American policymakers.  Sure, they should keep an eye on the mischief-making of countries like Iran and Russia that seek to upset the U.S. in its own backyard, much as Krushchev did with Cuba in the middle of the last century (however less dramatic and threatening the current mischief-making is).  Again, the smartest thing U.S. policymakers can do is get America’s fiscal house in order — by first of all, postponing health care reform — and revive the formidable U.S. economy — upon which the country’s power projection is based — not least through continued banking overhaul, workout of real estate loans, policies to increase household savings, and a reform of monetary policy (by discarding Greenspan’s discredited approach).

The Russians are Coming…

August 4, 2009

Russian subs off East Coast echo 1960s Hollywood comedy...  Source:  Google Images

The NYTimes reported today that Russian subs were spotted nearly 200 miles off the East Coast of the United States, echoing the 1960s comedy, The Russians are Coming, The Russians are Coming, in which a Russian sub accidentally runs ashore off the coast of Massachusetts, causing an international incident and not a few laughs.  By the mid-1960s, lampooning the Cold War was acceptable and probably a good release for Americans, who only a few years before endured the war scare of the Cuban missile crisis.  The phrase — the Russians are coming, the Russians are coming — first attributed to Truman’s Secretary of Defense Forrestal in 1949, came into common U.S. usage to reflect the anxiety about the rise of the Soviet Union since WWII.

Now, the Russians are really coming, if not rising.  The Times article suggests that these Russian naval maneuvers could signal irritation with U.S. policy — U.S. duplicity, from the Russian point of view, speaking out of both sides of the mouth, with good cop Obama flying to Moscow to press the “reset” button, and bad cop Joe Biden running off his mouth in the Ukraine and Georgia.  Not only did the Vice Mouth compliment the beauty of Ukrainian women (who does he think he is, the Beatles?), he gave verbal support to these countries’ claims to joining Western institutions, including NATO.  This mischief-making in Russia’s near-abroad is no reset, especially in Russian eyes, even though Biden, with his gleaming pearly whites, is a more acceptable Cheney than Cheney.

Worries about Russia’s tightening relations with Venezuela, with arms and energy deals and Chavez due for a visit to Moscow in the near future, are well-founded and smack of the chess moves of the Cold War.

Moody’s: Benign view of Latin America

May 20, 2009

Moody’s analyst Gabriel Torres penned a nice report on the impact of the global financial crisis on the 27 sovereign nations his firm assigns credit ratings to in Latin America and the Caribbean (email me for a copy —  He joined two of his colleagues in an informative conference call today to discuss the report and respond to investors’ questions.  Moody’s takes a relatively benign view of the impact of the global financial crisis in the region, though the global rating agency believes Mexico, due to its integration with the US economy and its structural weaknesses, remains most vulnerable to deterioration and a possible downgrade.

Torres outlined four channels by which emerging market countries are affected by the global crisis:  remittances (cash sent home by nationals working overseas), exports, capital inflows, and commodity prices.  While countries in the region have been negatively impacted through all four channels, Mexico has been hit hardest.  Most other countries, notably Brazil and Peru, have been in a relatively strong position to sustain the shocks.  Ironically, Latin America is best-prepared for the planet’s worse financial crisis in years (with generally high levels of foreign exchange reserves, reaped during the boom in commodity prices earlier this decade).  Rising interest rates and recession in the developed world in the eighties and nineties toppled many Latin countries; however, the strides made in improving public finances, floating exchange rates, and cleaning up banks have made America’s partners in the western hemisphere more resilient to handle this crisis.  Of note was the point Torres made that, if their benign view is wrong over the next 18 months, it will be because of problems in the banks that are not apparent today.

Moody’s reports that, since the onset of the crisis, Latin American and Caribbean sovereigns sustained negative rating actions in only 5 out of 27 cases, versus 12 out of 21 in Eastern Europe.  Similar trends can be found at the other major rating agencies (S&P and Fitch).  See Moody’s Sovereign Ratings.  This is partly due to the fact that the rating agencies may have over-rated Eastern Europe (brushing aside gaping current account deficits because they were financed by FDI) and under-rated Latin America (over-weighting the region’s poor credit history and discounting its burgeoning fx reserves). 

Finally, ratings are notoriously sticky.  This has been part of the criticism leveled at the agencies for rating real estate transactions too high (some of them AAA).  Because of all the notches in the ratings scale and the inability to take a binary or at least a less “granular” view of risks, agency analysts have a hard time changing a view dramatically on a country (or any other credit) in a short time frame.  In short, the rating agencies are not nimble.  They are prisoners of their ratings scale.  See an Economist article on the agencies and a Reuters article on Goldman’s new product that bypasses credit ratings.

Hence, although Mexico is on a deteriorating trend — it is running out of oil, which represents about a third of government revenue, and politicians won’t liberalize the energy sector or widen the tax base — and Brazil is on an improving trend — it has become a net oil exporter and has very strong fx reserves, the former is rated Baa1, fully three notches above the latter, at Ba1.  Rapid downgrades and rapid upgrades are not possible at a rating agency – until, of course, it is too late — because what does that mean?  It means the analyst was wrong.

The other meeting in Latin America

April 20, 2009
Interamerican Development Bank 50th Anniversary Meeting in Colombia last month
Interamerican Development Bank 50th Anniversary Meeting in Colombia last month

The Summit of the Americas in Port of Spain, Trinidad included the much-publicized American initiative to open up to Cuba.  President Obama continued to present his new, more acceptable face of America, put forth with grace since his inauguration in January.  He even unleashed his charm offensive against Venezuela’s irascible and mercurial Hugo Chavez, joking and smiling with him for the cameras, united perhaps in their unrelenting criticism of Obama’s predecessor, though Obama never quite used the term “el diablo.”

Yet the less-publicized hemispheric meeting took place at the end of March in Medellin, Colombia, the occasion of the 50th anniversary meeting of the Board of Governors of the Interamerican Development Bank (the IDB or BID, according to its Spanish or Portuguese acronym), the regional multilateral lender that comprises 48 countries, 27 Latin American and Caribbean nations that borrow, and the rest, including the U.S., Asian and European countries, that lend.

The meeting, which included appearances by U.S. Treasury Secretary Geithner and former U.S. President Clinton, concluded with a call by the Board for a capital increase to help member countries weather the global financial crisis.  Why not?  The IMF did so well at the G-20 meeting last month.  Of particular interest to readers are two research reports released by the IDB discussing the economic and social impact of the financial crisis on the economies of the region.  Likewise the IDB publishes LatinMacroWatch, data tables for 26 member countries.

China made its presence known, its first official presence at the IDB annual assembly, with a speech by its central bank governor and two of its state banks signing project finance agreements with the IDB.  My colleague Chris Herbert discusses China’s initiatives in the region in more depth in a recent Rising Powers post.

Brazil: President Lula’s Coattails

March 12, 2009
President Lula and his choice to succeed him, Dilma Rousseff

President Lula and his choice to succeed him, Dilma Rousseff. Source: O Globo


How long are they?  His coattails, that is.  He’s at 84% approval, largely due to the perception that Brazil is doing better than most in this global financial crisis, and it is.  His pick for his successor is his chief of staff, Dilma Rousseff, a stalwart in the PT (Lula’s leftist Workers Party), who could become Brazil’s first female president in the 2010 elections.  Yet in the polls, she is well behind the colorless Jose Serra, governor of Brazil’s largest state and co-founder of the PSDB (Brazil’s Social Democratic Party), who lost to Lula in 2002.  Aecio Neves, grandson of a former president and also a PSDB governor, bests Dilma as well in opinion polls.  One scenario is that Neves switches parties to run against Serra.

Political analysts point out that there is little room for ideology in Brazilian politics these days.  Since the Real Plan (the great achievement of the last PSDB president, Fernando Henrique Cardoso), which tamed hyperinflation, everyone in Brazil agrees on macro policies that keep inflation low.  Hyperinflation was the great scam against the poor, Lula’s key constituency, the only ones who could not index.  This is what is meant by “little room for ideology.”

But there is room for ideology, ideology about such questions as whether to maintain substantial government intervention in the economy or to expand the market economy.  Yet political fragmentation hinders ideological groupings, and the country’s recent strong economic performance (up until the fourth quarter of 2008) masks its nagging weaknesses.

As I have pointed out in previous blogs, Brazil’s 1988 Constitution, coming on the heels of many years of military rule, has resulted in political fragmentation and gridlock, allowing a multitude of personality-based parties and requiring hard-to-assemble majorities to pass reforms.  Again, I’ll plug Barry Ames’s work, The Deadlock of Democracy in Brazil, for a discussion of Brazil’s unwieldy political system.  Political reform that would reduce the number of parties in Congress, diminish party switching, strengthen party leaders over state governors, and lower the threshold to pass reform would be well worth the trouble, but remains unlikely.

With such political reform, perhaps we would see the coalescing of political groupings on the right and left.  The leftist PT could merge with the PMDB (the Democratic Movement Party), which currently sits in Lula’s government and holds the leadership of Congress.  The PMDB, once the official opposition to military rule, has become a massive non-ideological party, representing a nation-wide system of patronage.  The center-right PSDB could merge with the Democrats (formerly the PFL, heir to the party of the military government, variously described as liberal in the European sense and an adherent to Christian Democracy).  However, this merger could take time, as these two parties, given their history, make strange bedfellows.  Due to a lack of leadership talent, neither the PFL nor the PMDB has been able to field a viable presidential candidate in recent elections.  There is some speculation that Aecio Neves could become the PMDB’s presidential candidate in a stop-Serra movement that could include President Lula, if he abandons Dilma should her campaign falter.

Lula’s charisma enabled the PT to supplant the PSDB in its preferred position on the center-left.  The PSDB was envisioned by its founders, including Cardoso and Serra, as a traditional Social Democratic party, seeking mixed solutions (market and government) to the plight of the poor.  Yet under Cardoso, the PSDB became so involved in macro stabilization, it has since been identified with the right.  The PT, for a time opposed to market economics, cleverly adopted the PSDB’s macro framework, because Lula, to his credit, realized that inflation was the bogeyman of the poor.  Having pushed the PSDB uncomfortably to the right, Lula transformed himself into the “anti-Lula,” and the PT took over where the PSDB left off.  At the same time, the PT lost its ideological edge, and with it, its militants.  Thus, the PT and PSDB currently occupy an overlapping political space; yet these parties have been too competitive in elections to permit cooperation.

Jose Serra, who was Cardoso’s health minister, has been seen as a supporter of government intervention.  In an election between him and Dilma, little voice would be given to the traditional viewpoint of the right – less government, lower taxes and greater participation of the private sector in solutions to society’s problems.  This vibrant debate is alive and well in other countries, notably in the U.S., though in the current economic climate, the hand of the interventionists has been strengthened.  Brazil, flush with success and foreign exchange reserves, currently lacks any charismatic leadership on the pro-business right.

This is due in part to Lula’s success, through government intervention, at combating one of Brazil’s fundamental economic weaknesses and moral dilemmas, that is, its woeful income distribution.  At 57, Brazil’s Gini coefficient (a World Bank index of income distribution – the higher the figure the worse the income distribution) remains one of the worst on the planet and is certainly worse than in other Rising Powers.  Lula’s Bolsa Familia program has provided income support to millions of poor families and promoted health and education.  Government, not business, is seen as the solution to poverty.  Yet with government debt of around 65% of GDP and the global recession set to hurt tax revenues, the Brazilian government has little room to expand spending and must enlist the private sector to promote economic growth.

Lula’s government has failed to improve the business climate and to effectively promote infrastructure investment.  Government spending is dominated by pensions and salaries, so that Brazil’s public investment program is notoriously under-funded.  To address this, the Lula government set up its Growth Acceleration Program (PAC), centered on using public funds to leverage private investment in infrastructure.  Dilma Rousseff runs the PAC.  Last week, Cardoso, in a thinly-veiled effort to support Serra, called the management of the PAC incompetent.  He said that the Lula government does not have the know-how to implement key projects, such as road construction.  Many analysts agree with this assessment.  By contrast, the PSDB is viewed as having the technocrats required to implement complex programs.

It is early.  National elections take place in October 2010.  Don’t count Dilma (or Lula) out.  She may yet ride his coattails into power.  And, the Aecio Neves factor may keep political uncertainty high.  As for Lula, unlike American presidents with two terms under their belts, Brazilian former presidents can run for a third term, just not consecutively.  So, at 69 in 2014, Lula might have a better shot in a rematch against a President Serra (who will be 71), than in 2018 when his ally Dilma would presumably finish her two terms.