-Seasonal Rebound in Mexico Industrial Production May Mask Econ Slowdown
-Argentina to Promote Tax Amnesty to Build Reserves, Economy
BUENOS AIRES, MEXICO CITY AND SAO PAULO, JUNE 10 (MNI) – Brazil’s central
bank has finally taken a hawkish tone against inflation, and the government has
begun easing capital controls, but the markets want more.
Sao Paulo futures markets are now pricing in at least 100 basis points of
hikes in the Selic overnight rate, currently 8.0%. And the 6% IOF tax on foreign
investment in fixed-income is history, but demand for government debt remained
low last week.
Investors remain wary of Brazil, and the S&P’s downward revision of the
country’s outlook to negative – warning of the possibility of a ratings
downgrade in two years – only confirmed this sentiment.
Analysts say Brazil needs to do more: auction infrastructure concessions,
tighten fiscal policy to keep the net debt-to-GDP ratio from rising, and end the
1% IOF tax on the notional value of new long real positions in the futures
market.
The first measure is high on the government’s list of priorities, but
doubts remain as the bureaucracy’s capacity to realize it; the second seems
improbable in a run-up to President Rousseff’s 2014 re-election campaign and the
spending needed to host the World Cup; the third is the subject of much debate.
It is clear the government is not eager to open the door to what it
considers speculation in the derivatives market, but it is also clear that a
stronger real would help the central bank fight inflation and help companies
like Petrobras service their foreign debts.
The IBGE state statistics agency releases April industrial employment and
wages Wednesday and April retail sales Thursday.
Industry has shown tentative signs of recovery, while consumer demand has
been the economy’s main source of growth, so weakness in either number would
increase pressure on the government.
The central bank will probably issue its April IBC-Br economic activity
index this week, though the date is only confirmed one day in advance and may
not come until the week after. This will be the first government estimate of GDP
growth since the May 29 Q1 GDP release, which showed the economy growing at an
annualized pace of only 2.2%.
The IBC-Br has proven both volatile month to month and a mediocre predictor
of the quarterly GDP numbers, but after the S&P specifically cited weak growth
as a motive for the more pessimistic outlook which could lead to the removal of
Brazil’s investment grade status, this release may provoke a market reaction.
-Seasonal Rebound in Mexico Industrial Production May Mask Econ Slowdown
After falling 4.9% year-over-year in industrial output in March, investors
may be tempted to move on what is likely to be a strong rebound in April.
However, calendar effects continue to play a dominant role in the data with the
shift of the Easter holiday to March from April. State statistics agency INEGI
releases the data Tuesday.
Even so, analysts are hopeful that manufacturing, and autos in particular,
will post at least modest growth, following a strong report from the Mexican
Auto Industry Association (AMIA) showing production up 15.6% in the month.
Rodolfo Navarrete, an analyst at local investment house Vector, said
seasonal effects in February, March and April are making it more difficult to
discern the scope and effects from an apparent economic slowdown, one largely
blamed on weak external demand.
However, concerns about slowing internal demand have mounted recently,
including in the Bank of Mexico in its June 7 monetary policy statement which
warned economic activity has “slowed significantly” this year and there are
signs that some aspects of internal demand “have slowed their rate of
expansion.”
Vector, Banorte-IXE and Santander are calling for industrial output to grow
5.6%, 5.5% and 5.6% year-over-year, while HSBC’s estimate is far less optimistic
at 2.0% based on the HSBC PMI and the IMEF index that point to further slowing
in the economy.
In seasonally-adjusted terms, IP is expected rise only modestly compared to
March, with Banorte-IXE suggesting an adjusted growth of only 1% for April.
Finance Secretary Luis Videgaray may be called to testify before Congress
this week after lawmakers from the opposition Democratic Revolutionary Party
last week said they seek answers about the decline in tax revenues in April,
particularly in light of the Finance Secretariat’s recent lowering of the growth
forecast for 2013 to 3.1% from 3.5%.
INEGI also will release revised trade data for April Monday. Preliminary
figures showed a trade deficit of $1.2 billion in large part due to an 18%
annual increase in imports, outmatching the 6.4% rise in exports, and a 1.7%
decline in oil exports on falling prices.
-Argentina to Promote Tax Amnesty to Build Reserves, Economy
The government this week will continue promoting a tax amnesty designed to
rebuild sagging foreign reserves, contain currency depreciation and expand
energy investments as the economy stagnates for a second year.
President Cristina Fernandez de Kirchner enacted legislation last week
giving people the chance to voluntarily repatriate undeclared funds – held
overseas or locally – without penalties as long as they are up to date in filing
their taxes.
The amnesty will run July 1 to Sept. 30, before which the government and
central bank will fine-tune the process and market it to the public.
Participants will get tax-free bonds and certificates of deposit in
exchange for their undeclared cash, which the government estimates at $160
billion, or four-times the $38.6 billion in hard-currency reserves held by the
central bank.
People will then be able swap the CDs for dollars to buy real estate, or
they can hold or sell the dollar-denominated bonds paying 4% annual interest.
The government has said it will use the funds from the amnesty to finance
construction, energy and infrastructure projects, helping to revive economic
growth and create jobs while building energy supplies and expanding
infrastructure capacity.
Analysts say it may be difficult to rally participation in the amnesty
because of low trust in the government and the peso.
CFK has said she wants to return the country to energy self-sufficiency, a
process that involved the state taking control of YPF, the country’s biggest
energy company, last year from Spain’s Repsol.
YPF plans to invest $37.2 billion through 2017 to increase oil and natural
gas production 32%, helping to stem energy imports that have become a major
drain of dollars out of the economy.
Argentina has suffered repeated devaluations, debt defaults, bouts of
hyperinflation and seizures of bank deposits over the past few decades, leaving
people with limited confidence in the system.
Many have chosen sock away their savings outside the banking system, even
though the government has made the practice illegal.
To encourage participation, the tax agency said it will hunt down
undeclared assets held in and outside the country and then go after on evaders
who do not enter the amnesty after it concludes. Tax Chief Ricardo Echegaray
said he has already identified 300 cases of undeclared assets.
The government needs the cash to rebuild central bank reserves to make debt
payments. While debt service is manageable, the government is not expected to
slow the high pace of spending ahead of the Oct. 27 midterm congressional
election. Spending has been growing faster than tax collections this year, while
capital flight has remained steady.
Central bank reserves have continued to sink from nearly $53 billion in
January 2011.
Demand for dollars rose last week on the black market as people collected
monthly salaries, causing the unofficial rate to drop to 8.80 to the dollar June
6 from 8.43 May 22. The government subsequently intervened by sending tax
inspectors to trading houses, reducing demand and cutting the rate to 8.60.
While the black market is small, it has become a thermometer of people’s
confidence in the peso and the economy – and a way for shielding savings against
25% annual inflation. The official rate is expected to continue losing ground
after closing at 5.30 to the dollar last week, down 16.5% from 4.55 a year
earlier.
The government will report June inflation Friday.
* Editor: Heather Scott; Follow us on Twitter: @MNILatamWatch
–MNI Washington Bureau; tel: +1 202-371-2121; email: hscott@mni-news.com
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