OUTLOOK FOR LATIN AMERICA
Argentina
Last November,
we predicted that the Merval would be heavily susceptible to the comings
and goings of the U.S. bond market. The reaction to U.S. Fed Chairman Greenspan's
comments on December 6 proved us right.
The Merval has
proven to be resilient to internal discord, shrugging off numerous hair-pulling
matches in the government, but both the market and the economy are heavily
dependent on external factors. For this reason, even though the Merval has
been an excellent performer over the last months and the recent U.S. Fed
meeting left U.S. bond yields unchanged, our leery rating remains.
Good news on
the economic front is also shaded by external elements. Third-quarter growth
was stronger than expected, and fourth-quarter growth looks to have continued
that upward pattern through the end of the year. Industrial production rose
substantially, but most of this production was marked for export. With persistently
high inflation, no rise in domestic demand is expected, however, and without
such a rise, the production pattern will likely translate into a growing
trade deficit in early 1997.
Internally, the
outlook on the crucial issue of labor reform is improving. Now awake to
the necessity of sustaining the recovery, unions have eased pressure on
the executive branch and entered into talks with Menem. The focus on the
issue has now shifted from whether the reforms will pass to when, and how
much Menem is willing to trade to push them through.
The labor reform
package will likely pass by the end of the first half. The 1997 budget was
being debated during extraordinary congressional sessions as we went to
press, and will likely have been passed by the time Taipan hits your mailbox.
A controversial
spending increase of US$500 million will be approved as part of the package.
The increase is seen as too small to make waves, however, so Economy Minister
Fernandez has left off threats of new tax increases to cover it, and no
danger is posed to negotiations with the IMF, slated to begin in mid-March.
Taipan's 1997 Forecast (Market outlook): High risk, neutral
Buenos Aires (Merval) US$ Return, 1/1/96-12/17/96: 16.07% Key Indicators 1996 (est) 1997 (fcst) Inflation (annual rate): 0.2% 10% 30-day Interest Rate: 7.0% 15% Year-end Exchange Rate: 1 Peso/USD 1 Peso/USD % Currency Change on Year: 0% 0% Sovereign Credit Rating (DCR): BB (Long-term); D-4 (short-term, dollar-denominated)
Brazil
After a wave
of bank privatizations drove the market up over five percent in one week,
Greenspan's comments cooled things down. The Bovespa's upward trend remains
in place, however, with a 52.17% rise since January 1996. There is plenty
of good news to keep the Bovespa moving, but market gains will be constrained
by uncertainty over the reelection issue, especially until elections for
the presidency of both congressional houses takes place in February.
Another question
mark that will shadow the market will be the outcome of a Supreme Court
case regarding a demand for a pay raise brought by a handful of civil employees.
The employees claim they are entitled to a pay raise given the military
in 1993, under a forgotten rule that says public servants of all categories
are entitled to raises given to any one category. The Court delayed indefinitely
a ruling on the claim, which could add US$7 billion to the government's
US$42 billion public sector payroll - at a time when downsizing that sector
is key to Cardoso's battle plan against the fiscal deficit.
The realization
has set in that most of the recent trade deficit hoopla was media hype.
November's US$835 million trade deficit was in line with expectations, and
the market and the government are in concurrence on a year-end trade gap
of US$5 billion. Cardoso's priority will be tackling the country's monster
fiscal deficit first, and keeping the Real Plan on track.
The battle against
inflation is being won handily, with the first price deflation since the
late fifties reported in November, when month-on-month prices fell 0.03%.
Growing accustomed to price stability, businesses are also shifting focus
from keeping up to maximizing efficiency. The result: a strong 6.5% increase
in growth for the third quarter, and a decline in unemployment from 5.23%
to 5.14%.
The inflation-killing
Real Plan got Cardoso elected in 1994, and it seems that it could do the
trick again. Polls show that the President and his policies both enjoy approval
ratings of over 60%. Legislators who like their jobs have this in mind when
calls to oppose the president directly are made by other presidential hopefuls.
PPB presidential hopeful Paolo Mahluf found this out the hard way when he
tried to rally the normally government-friendly PPB behind him against the
President. The party shrugged him off, and Mahluf is out of the picture.
At the moment,
the passage of the reelection bill is a given, probably by the end of the
first quarter. Whether the bill will apply to Cardoso, however, is another
matter. Things look good now, but the President isn't out of the woods yet.
February's battle for the presidency of both congressional houses stands
as a main hurdle. An ugly battle is taking place between two other government-allied
parties for that seat, and Brazilian government sources tell us that the
loser will likely oppose reelection out of vindictiveness. At this point,
though, even if Cardoso fails, any successor would be compelled to maintain
his policies.
In the meantime,
the President's political strength helped him to squelch a group of anti-privatization
extremists that sprouted up in congress recently, threatening to stall the
February sale of CVRD. The sale will still wait until March, but only because
of the technical challenge of pulling it off, the Finance Ministry says.
Also moving forward are the privatizations of the telecom sector and the
electrical sector, with the bills creating the regulatory agencies and policies
for each sector being sent to the lower house in the past few weeks.
Taipan's 1997 Forecast (Market outlook): Medium risk, highly bullish
Sao Paulo (Bovespa) US$ Return, 1/1/96-12/17/96: 42.96% Key Indicators 1996 (est) 1997 (fcst) Inflation (annual rate): 18.4% 15% Deposit Interest Rate: 28% 22% Year-end Exchange Rate: R$1.03/USD R$1.19/USD % Currency Change on Year: 0% 13.5% Sovereign Credit Rating (DCR): BB-
Chile
In December,
the Chilean bolsa sank to an 18-month low of 89.55. Investors wrung their
hands over impending price cuts in the electricity sector, and worried about
the effects of a drought in central Chile on power companies' fourth quarter
earnings. But we remain buyers in Chile.
Central Bank
chief Massad last month said Chile's 1996 inflation goal of 6.5% would be
met for certain, and that a '97 goal of 5.5% was "perfectly attainable."
GDP grew 5.5% in the 3rd quarter, against the 6.9% of the third quarter
of 1995, well in line with expectations. The government's goal of 7% GDP
growth for the year seems to have been achieved. With all this in the bag,
Finance Minister Aninat has once again guaranteed a rate cut for the first
half of 1997.
While the Central
Bank says that the cuts will be gradual, the government's continued reassurance
of rate cuts clearly has the private pension funds, or AFPs, convinced.
Net inflows into the stock market from AFPs has been increasing substantially
since October, rising to US$103 million against a monthly average for the
year of US$68 million.
When the rates
actually do come down, the AFPs will jump in with both feet. Keep in mind
that a 1% shift in AFP holdings is the equivalent of seven trading days'
worth of volume. At the moment, there is little driving the market, other
than the electricity sector or the hopes of a rate cut. The AFPs are still
mostly out, the institutions are out, and the locals are apathetic. Once
again, we are comfortably ahead of the crowd, just as we were in Venezuela
in January of 1996, when nobody else wanted to touch it.
Taipan's 1997 Forecast (Market outlook): Low risk, bullish
Bolsa de Comercio de Santiago US$ Return, 1/1/96-12/17/96: -17.06% Key Indicators 1996 (est) 1997 (fcst) Inflation (annual rate): 7.7% 6.9% Deposit Interest Rate: 7.5% 6.9% Year-end Exchange Rate: 420 429.1 % Currency Change on Year: 3.4% -2.1% Sovereign Credit Rating (DCR): A-
Colombia
The bolsa has
remained ambivalent through the month. The market is attractive over the
long term, with a P/BV of 1, real EPS growth forecast of 4.4% for 1997,
and the infrastructure in place for the market to rebound. But current political
and economic turmoil will delay a comeback and also make a cyclical downturn
even worse in the near term. The market will remain flat to down through
year-end.
A major concern
in the market is the increasing possibility of US punitive action, as already
strained U.S.-Colombia ties get pushed to the limit. The government continues
to refuse extradition, claiming it's in violation of the Colombian constitution,
but the amendment forbidding it was passed in violation of an earlier agreement
with the U.S. Also, congress recently watered down a key anti-drug bill,
causing outcries from both the US and the Colombian business sector. A second
U.S. decertification, this time with the removal of trade preferences, is
becoming likely.
Businesses at
the moment are dogged by an economic downturn of recent months, spurred
by increasing guerrilla violence, high interest rates, and a buoyant peso.
Rates have been coming down over the year, however, and economic targets
for 1997 include a 3 percent drop in inflation, to 18 percent, and a gradual
currency devaluation of 15 percent.
Right now, however,
the government is nowhere near its 1996 targets, and it turns out that the
growing fiscal deficit is being financed by a surplus from social security
coffers. The Central Bank is aware that this well will dry up by 1999, and
that this is an unwise policy. The IMF has complained that government spending
is out of control, even though the 1997 targets include the lowest real
increase in spending in the last ten years, and the concerns are raised
that castigation from the IMF may damage the country's investment grade
credit rating.
Growth is currently
being driven almost entirely by the oil sector. The discovery of the tremendous
Cuisiana oil field - the largest discovery in the Western Hemisphere over
the past 20 years - has boosted Colombia into the big time as an oil player.
While the economy remains dogged by violence and political crises, the oil
sector is Colombia's only impetus for growth, and will remain so in 1997.
Taipan's 1997 Forecast (Market outlook): High risk, neutral
Bogota SE US$ Return, 1/1/96-12/17/96: 11.41% Key Indicators 1996 (est) 1997 (fcst) Inflation (annual rate): 21% 19% Deposit Interest Rate: 31% 30% Year-end Exchange Rate: 996 1149.9 % Currency Change on Year: +0.02% -13.38% Sovereign Credit Rating (DCR): BBB
Mexico
The bolsa had
a lackluster fourth quarter, focused mainly on rising Mexican interest rates
and volatility in the U.S. bond market. In addition, the emergence of yet
another guerrilla group, the ousting of Attorney General Antonio Lozano,
and political troubles for the PRI overrode a rosy third-quarter economic
picture in the markets. In early 1997, Mexican interest rates should continue
to dominate market sentiment. And we expect those rates to begin falling
soon.
U.S. bond yields
were left alone, despite Fed Chairman Greenspan's noises, and the peso settled
down to remain stable through the end of the fourth quarter. This will give
the markets a breather, and allow the positive economic outlook to sink
in. Some volatility is still expected, however. After all, this is Mexico.
What's more, the 1997 election year has officially begun, and promises to
be interesting.
The Central Bank
has been boosting Cetes and Interbank rates to prop up the peso, soothing
investor fears that the currency was reaching another critical mass. Instead,
investors now fret that high rates may threaten the recovery.
Neither thing
has happened, nor will it. As we said in Latin American Index back in May,
a second half peso correction was inevitable - and necessary. Secondly,
strong third-quarter performance indicates that the economy is picking up
steam. Growth continued in the fourth quarter, and 1996 growth should come
in around 4%.
In fact, the
government has revised its year-end 1997 GDP growth forecast from another
4% to 4.5%. The strong foundations of this upturn were also underscored
by the 1997 budget, which included the first increase in public spending
since the financial dark days of 1994, and the signing of a new wage-price
agreement. The agreement, or Pacto, mandates the first wage increase in
real terms since 1994 as well. Unemployment has also shrunk to 4.38 percent,
the lowest since Zedillo took office.
Politically,
Mexico is a porcupine. The PRI is being backed into a corner, suffering
key oustings in state and municipal elections this November, mostly at the
hands of the National Action Party (PAN). Its grip on the key states of
Guererro and Mexico, as well as in the federal district of Mexico City,
was substantially loosened, perhaps a harbinger of things to come in the
August 1997 congressional elections.
Desperate, the
PRI rammed through a watered-down election reform bill while Zedillo wasn't
looking, but the move only prompted several PRI members to quit the party
in disgust, fed up with the gangsterism and anti-reform attitude of the
"dinosaurs." A wave of walkouts is coming, they say.
The PAN is ideologically
identical to the PRI, right down to internal battles between hard-liners
and pro-reformers, so in terms of political upheaval, a PAN coup in congress
would move Mexico out of the frying pan and into the fire. But the battle
isn't over the issues, it's over the ruling party's 67-year stranglehold
on Mexican political power.
Zedillo's failure
to veto the emasculated election bill indicates that the president knows
he must compromise to retain broad support in the PRI, especially after
the socking pro-reform "technocrats" got during the last PRI convention
(see November's Taipan for more on that).
Taipan's 1997 Forecast (Market outlook): High risk, mildly bullish
Bolsa Mexicana de Valores US$ Return, 1/1/96-12/17/96: 6.93% Key Indicators 1996 (est) 1997 (fcst) Inflation (annual rate): 30.6% 25% Deposit Interest Rate: 34% 28% Year-end Exchange Rate: 7.9 Pesos/USD 9.1 Pesos/USD % Currency Change on Year: -2.5% -13.2% Sovereign Credit Rating (DCR): BB (long-term); D-4 (short term)
Peru
Peru posted lower-than-expected
growth in the third quarter, and the government has revised its growth estimate
for 1996 downward. Predictably, the slowdown is being reflected in Fujimori's
popularity ratings and in the market. But the infrastructure for long-term
growth remains in place, and Peru remains one of our favorites.
The Finance Ministry
and the Central Bank are squabbling over whether restraining inflation or
boosting economic growth should be the goal of monetary policy. The result
has been an anemic 1.8% expansion of the economy in 1996 and an inflation
rate that has failed to break into the single digits, coming in at 11.8%
for the year.
It has not gone
unnoticed that in this context continued obsession with inflation will only
spark recessionary pressures, so monetary policy is likely to focus on economic
growth in 1997. In fact, Finance Minister Camet recently announced growth
estimates of 5% in 1997 and 6% in 1998, further indicating that the Finance
Ministry is gaining the upper hand.
The formal closing
of the Brady Bond deal is also set to take place in January, and the Asia-Pacific
Economic Cooperative (APEC) said that Peru would join that group in 1998,
allowing Peruvian businesses access to that 18-nation market one year earlier
than planned.
Taipan's 1997 Forecast (Market outlook): Low Risk, Mildly Bullish
Bolsa de Valores de Lima US$ Return, 1/1/96-12/17/96: -2.53% Key Indicators 1996 (est) 1997 (fcst) Inflation (annual rate): 11.8% 8% Deposit Interest Rate: 15.5% 15% Year-end Exchange Rate: 2.57% 2.5 % Currency Change on Year: -9.3% 6.1% Sovereign Credit Rating (DCR): BBB
Venezuela
Caracas took
a breather in the fourth quarter, after a ballistic 30% run in September
helped push the market 203.92% over the first three. October's profit-taking
was largely offset by a rebound in November, when the market was boosted
by the successful launching of the government's remaining stake in CANTV,
as well as the news that Banco Consolidado and Banco de Venezuela would
get another shot at privatization early next year.
Since last April's
lifting of exchange controls and devaluing of the bolivar to market levels,
the government has been successful in keeping the currency steady and well
within its band at 471/US$.
There have been
no successful attacks on the bolivar because the government has the hard
currency to defend it, and because it is now - for the most part - fairly
valued. The fate of the bolivar will be determined largely by the government's
resolve to see through this difficult adjustment period without resorting
to quick-fix controls or damaging, populist spending measures. With inflation
having spurted into triple digits (as anticipated), this will be difficult.
We believe the government has the necessary discipline.
Underscoring
this resolve is the recent passage of a bill to use oil windfall money to
pay down domestic and external debt. In fact, all debt arrears back to 1980
have already been cleared under a prototype of this plan, the government
says. The government will also supplement its economic plan with a renewed
push to privatize state assets.
The recent announcement
to give Banco de Venezuela and Banco Consolidado another shot on the sale
block will be a credibility booster, but in the climate of low rates and
astronomical inflation, and a financial sector still clouded by the influx
of foreign competition, good prices will be hard to get. With foreign reserves
currently sufficient to cover 12 months of imports, the government could
certainly afford to wait a while.
Taipan's 1997 Forecast (Market outlook): High Risk, Mildly Bullish
Bolsa de Valores de Caracas US$ Return, 1/1/96-12/17/96: 203.92% Key Indicators 1996 (est) 1997 (fcst) Inflation (annual rate): 112.6% 45% Deposit Interest Rate: 35% 45% Year-end Exchange Rate: 474 568 % Currency Change on Year: 39.2% 16.6% Sovereign Credit Rating (DCR): BB