–Mexico Politics Set to Heat Up Reform Agenda Debate, Inflation Cools
–Argentina Sees Boom in Energy Sector, Tightens FX Controls
BUENOS AIRES, MEXICO CITY AND SAO PAULO, JULY 22 (MNI) – Brazil’s
government is scheduled to announce budget cuts Monday, but the primary surplus
target of 2.3% of GDP appears to be at risk as most analysts doubt the cuts will
be sufficient to meet even that downwardly revised goal.
The official target was originally set at 3.1%, but Finance Minister Guido
Mantega already has admitted that after exceptions and exclusions permitted by
law, the real target for the year is 2.3%.
Government calculations are at least R$10 billion, and perhaps R$15
billion, in budget cuts will be required to hit that target, but it is no secret
that officials have had trouble finding sufficient cuts and have therefore
delayed this announcement until the last possible date.
Monday is the last day for the government to send Congress its bimonthly
report on spending and revenues.
At the same time, and amid widespread public protests over costs for the
World Cup and the Olympics, the government is under increasing pressure to up
spending, particularly on investment and social programs, and President Dilma
Rousseff’s current political weakness makes it difficult for her to slash
legislators’ earmarks.
The newspaper Valor Economico reported Friday that budget officials are
pressing to lower the fiscal target to 1.8% from 2.3% of GDP, in an attempt to
save investments. Since most analysts, skeptical of government forecasts, have
been projecting a fiscal target around 1.8% for months, the market reaction to
such a change might be mild.
But Finance Minister Guido Mantega reaffirmed last week the target would
remain 2.3%.
In addition to budget cuts, Monday’s report should also contain an updated
GDP forecast. If the official GDP forecast is 3% as Mantega has hinted, the
revenue projections, and with them the forecast for the primary surplus, may be
too optimistic.
The market consensus is the economy will only grow 2.3% this year, and the
IMF recently cut its forecast by a half point to 2.5%.
Data releases this week include the June current account balance Tuesday
from the central bank and June unemployment Wednesday from the IBGE state
statistics agency. For the 12 months ending May, the current account deficit was
3.2% of GDP, while foreign direct investment was only 2.82%.
A strong labor market has been both the main support of economic activity
and an inflation risk, so markets could react if unemployment rises
significantly from last month’s 5.8%.
–Mexico Politics Set to Heat Up Reform Agenda Debate, Inflation Cools
With key energy and fiscal reforms in the balance, President Enrique Pena
Nieto’s reform coalition, the so-called Pact for Mexico, has sprouted cracks
following regional elections July 7, leaving the leader’s Institutional
Revolutionary Party searching for middle ground.
In reaction to allegations of vote buying and coercion, the left-wing
Democratic Revolutionary Party has announced it will hold a national referendum
on energy reform with the country deeply divided on the issue, while the
conservative National Action Party has said it will present its own version of
energy reform July 31.
Both parties are demanding some sort of recognition of electoral
wrongdoings including possible political reform before effective dialogue begins
for the reforms.
The Bank of Mexico Friday releases the minutes of the July 12 monetary
policy meeting where governors held the rate at 4%. The prospect of
“normalization” in U.S. monetary policy has locked forecasts to hold the
benchmark rate here at 4% at least through 2013, especially as inflation in
Mexico continues to plummet and growth points downward.
Any positive U.S. employment news will have a powerful impact on outlook
for monetary policy, and the rate debate could shift. Like other emerging
markets, investors shifting positions on expectations the Fed will slow the bond
buying program, has weakened the local currency and raises long-term bond rates.
Meanwhile, inflation continues to march downward as food prices continue to
fall within an increasingly positive comparison basis against the height of a
massive bird flu outbreak last year that sent egg and poultry prices soaring in
July, August and September 2012.
The mid-July headline CPI, due for release Wednesday, is set to fall below
4% for the first time since January with forecasts from several banks indicating
a slight increase in month-to-month headline inflation in the first half of
July.
Banorte-IXE, Morgan Stanley, HSBC and Santander see a median monthly
increase of 0.03% for an annual inflation of 3.56%.
INEGI releases May retail and wholesale sales, as well as service sector
data, Monday. Retail sales are expected to continue weak amid further consumer
caution as the economy slows. Chain and department store association ANTAD
reported a mere 0.2% growth in May, and Wal-Mart de Mexico – the country’s top
employer – showed a 2.4% decline.
Consequently, the outlook is for a slight fall or meager increase on an
annual basis with forecasts falling roughly between a 0.5% drop and 1.1%
increase.
INEGI releases the global economic activity indicator for May Thursday, and
analysts see a modest gain in the 1% to 2% territory as the service sector
continues to lift the index despite mixed results in construction and
manufacturing.
The June trade balance is due out Friday, and forecasts project a deficit
similar to the $470 million seen in May. However, a $5 rise in oil prices should
help soften the impact of sustained weakness in manufacturing exports.
-Argentina Sees Boom in Energy Sector, Tightens FX Controls
Argentina likely will see a rise in investor interest in the energy sector
this week, while the government seeks to cut interest rates and contain a
depreciating peso.
President Cristina Fernandez de Kirchner’s administration said it expects a
flood of energy investment after U.S.-based Chevron and YPF, the state energy
company, last week agreed to invest an initial $1.5 billion in drilling for oil
and natural gas resources in the Vaca Muerta shale-rock formation.
Vaca Muerta (“dead cow”) is thought to hold among the world’s largest shale
resources, and the government expects its development will make the nation
self-sufficient in energy supplies and then a net exporter.
Chevron and YPF said they plan to boost shale oil output to 50,000 barrels
per day and that of gas to 3 million cubic meters per day in 2017, up from a
current 10,000 barrels of oil equivalent per day of both resources.
Other companies are sizing up the possibilities or already exploring,
including China National Offshore Oil Corp., ExxonMobil, Petrobras and Royal
Dutch Shell.
To entice them, the government last week slashed duties to 0-14% from
33-35% on importing drilling equipment and said if companies invest more than $1
billion in exploration and production they can export up to 20% of the output
after the fifth year. The exports, too, can be made tax-free and without the
current obligation to repatriate the export proceeds
This has removed two major hurdles for oil investment: high taxes and
capital controls.
Political uncertainty remains, however. Analysts said that as the benefits
will not be available for five years, investment will be exposed to the vagaries
of the economy and politics, including a 2015 presidential election.
Argentina needs investment to rebuild energy supplies after a decade of
decline led to a surge in imports. The energy surplus – $5.2 billion in April
2004 – tumbled to a deficit of $5.4 billion in March 2013, leading to a decline
in hard-currency reserves.
The central bank reserves have dropped to $37.4 billion from a record $53
billion in 2011 on steady capital flight.
Demand for dollars increased last week as companies paid biannual bonuses
and people went abroad during the winter holidays. This pushed the peso on the
black market to 8.85 per dollar last week from 8.30 the previous week and 7.80
before that.
The demand widened the spread to 63% compared with the official rate of
5.43 per dollar.
The surge led to a government clampdown on banks and money houses, helping
to reduce the rate to 8.57 to the dollar Friday. The government also sold dollar
bonds on secondary markets to increase the supply of dollars.
The government wants to keep the black market rate – a confidence barometer
– under control in the run-up to an Oct. 27 midterm congressional election when
its majority in both houses will be at stake.
The CFK administration also plans to bring down what it calls too high
interest rates after it started last week to regulate bank fees and commissions.
Banks can no longer charge fees on products or services not requested by a
client, a common practice. Nor can they charge for printing account statements,
sending out online statements, using a teller or for other common services.
The government will report June trade data Tuesday, and June shopping mall
sales Wednesday, supermarket sales Thursday and industrial production and
capacity utilization 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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