Morning Note /

Latam Daily: Politics heating up again

  • Chile heads to the polls this weekend

  • Brazil to meet with S&P to discuss fiscal developments

  • Peru’s political situation remains volatile

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
19 November 2021
Published by

Talking Points: Politics in focus once again into the weekend

Brazil: While there is a dearth of economic data today, it still looks set to be a busy day ahead for domestic markets. The big event today will undoubtedly be the meeting between BCB President Roberto Campos Neto, global ratings agency S&P and Treasury representatives at 16:30 local time. As always, any comments post the meeting have the potential to provide some fresh impetus for domestic assets.

Fiscal dynamics were in focus on Thursday after the government signalled a series of changes in the court-ordered payments bill known as Precatorios to ease Senators’ reluctance to the text, according to reports from news outlet O Globo. The agreement between Senate, the government and the Lower House may include slicing up the proposal as well as commitments outside the main theme of the bill. O Globo also reported that the government is considering allocating all the room in the budget stemming from the bill to fund the so-called Auxilio Brasil aid, social assistance programs and adjustments to mandatory expenses by inflation. Note that this would prevent the government from using the additional room in the budget to raise civil servants wages.

After the news broke, Lower House speaker Arthur Lira said some adjustments proposed by the Senate could even improve the Precatorios bill. Lira added that he hopes the text’s approval rate is kept at around 95% while noting that there is no room in the bill to raise civil servants wages, as previously announced by President Jair Bolsonaro. Lira said that Congress should have a position next week on the bill amendments..

Mexico: The first North American Summit in five years was held yesterday, which sought to revitalise cooperation that has been overshadowed by tension over Biden’s “Buy American” agenda and immigration policies. According to Reuters, no major breakthroughs were announced. However, Mexican Foreign Minister Marcelo Ebrard said talks between Mexican President Lopez Obrador, US President Joe Biden and Canadian Prime Minister Justin Trudeau, would contribute to a scheme likely to be called "sembrando oportunidades", or 'planting opportunities'. This is essentially an investment in Central America and southern Mexico to promote development and help contain immigration. Ebrard did not give details or the investment size. For now, the Mexican government will be happy that there has been a response to Obrador’s concerns around migration between itself and the US.

Meanwhile, Ebrard said talks with Trudeau covered Canada helping Mexico upgrade its hydroelectric plants, pointing to the expertise of Canadian firm Hydro-Quebec. All in all, these are the very first discussion, with further debates to continue. According to Ebrard, the next leader's summit is scheduled to take place in Mexico City in 2022..

Colombia: According to President Duque, Colombia is looking to achieve growth of 10% this year. The central bank currently forecasts growth of around 9.8%, and recent data suggest that the economy performed well in Q3 and could be on track to reach such levels. Activity should continue to increase within the economy, but at a slower pace than that seen in Q3 as the impetus from lower COVID cases and abating lockdowns will fade. Monetary policy has also been tightened recently and we should see further rate hikes in the coming months, another drag on growth going forward. According to the latest forecasts on Bloomberg, Colombia’s economy will grow by 8.2% this year and 3.7% next year..

Chile: All eyes were on the 3Q GDP numbers yesterday and the data showed a red hot economy underpinned by massive amounts of government stimulus coupled with a wall of cash coming from the pension fund withdrawals. The quarter on quarter reading came in at 4.9% which was marginally lower than the market expected at 5.2%. On a year on year basis we missed consensus once again with the print coming in at 17.2% versus 17.6%. What is certain is that Chile is potentially heading for one of the largest economic hangovers in history following this massive recovery period which is one of the strongest among the major world economies. The BCCH has pencilled in growth for 2021 at 11.5% before it falls off a cliff to record 2% in 2022. The growth has been underpinned by massive consumptive demand which given the tightening from the BCCH and imported inflation is unlikely to feature as strongly next year.

The data is the last set before Chileans head to the polls this weekend. The race is very much between two candidates on opposite sides of the political spectrum. Gabriel Boric is to the left riding on campaign promises of increased minimum wages, higher corporate taxes and scrapping the private pension system, while his conservative counterpart Jose Antonio Kast is pledging to cut corporate and wealth taxes, cut government spending and impose stricter immigration rules.

The polls have Kast ahead of Boric, but as we have seen before, anything is possible in politics and even after the final vote is counted there is no guarantee that there will not be contentious issues coming to the fore which casts doubt on the results

Peru: Meanwhile, President Castillo spoke at the CADE business forum yesterday and noted that the government has increased its forecasts for economic growth for this year to 13%. Castillo also said that the budget will grow by 7% or more in 2022, and called on investors to invest in the country, highlighting 9 infrastructure projects that Peru will offer next year that will equal around $2.8bn. To attract investors, Castillo promised legal stability within the country, but these promises mean nothing until we see signs that the political situation is stabilizing and economic policies can be implemented to help the country grow. Speaking of growth, note that yesterday's GDP data release was shifted to 22 November.

Highlighting this political uncertainty is news that an opposition lawmaker is seeking enough signatures to force Congress to debate impeaching Castillo. Patricia Chirinos has accused the President of moral incapacity and says that he is unable to run the country. She will need 26 signatures to force the debate, which would then require 87 lawmakers to back Castillo's ouster. Given recent comments from the President of Congress, it is questionable whether or not the 87 votes will be achieved at the moment if it is sent to the floor. Additionally, Congress has approved summoning Transport Minister Silva in for questioning regarding irregularities in appointments in several institutions. This has the potential to see yet another minister ousted from their position in Castillo's Cabinet.

Forex: Risk-off conditions will pressure Latam FX

Brazil: The sell-off in the BRL persisted yesterday as a combination of EM contagion risk linked to a tanking Turkish Lira and heightened domestic political and fiscal uncertainty weighed. The BRL led the declines among Latam currencies yesterday with the local currency losing a further 0.76% against the USD to end the session at 5.5660, according to Bloomberg data. This brought the BRL’s weekly losses to more than 2.00%. Looking at the session ahead, the USD has regained its footing this morning, reversing all of its losses suffered on Thursday. This points to another challenging session ahead for the BRL..

Mexico: The USD-MXN strengthened yesterday as sentiment towards riskier currencies waned due to expectations that the Federal Reserve may withdraw accommodation faster than expected to combat inflation. During intraday, the pair spiked higher to probe the 20.900 mark before easing to 20.7783. Although the USD has pulled off its intra-week highs, it remains well supported, keeping the USD-MXN trading firmly on the front foot. That said, traders should be mindful of the Thanksgiving holiday in the US next week, which will reduce liquidity and leave the MXN vulnerable to fluctuations due to the amplified movements in financial assets.

The Mexican government proposed the renewal of its flexible credit line (LCF) with the International Monetary Fund (IMF) for two years but with a reduction of around $15bn, according to the Finance Ministry. The current amount of the LCF is $61bn, which the IMF approved in November 2019. Liquidity in Mexico isn’t expected to be impacted by the reduction of the LCF because the government still has the allocation of the IMF’s Special Drawing Rights (SDR), which will maintain the same level of protection for any eventuality in the balance of payments. Mexico’s fiscal position has allowed for it to reduce its LCF.

Colombia: It was a volatile day of trade for the COP, with the currency swinging between positive and negative territory to finally end the session in red, joining in on the broad-based EM sell-off. EM currencies were a sea of red yesterday despite a weaker USD as contagion risks remerged following a sharp fall in the Turkish Lira. After touching an intraday low of around 3905.426 and a high of 3955.980, the pair closed the session 0.18% higher at near 3925.400, according to Bloomberg data. The grind towards the 4000 big figure, therefore, continues with risk reversals recently bottoming out and showing that traders are turning more bearish on the local unit once again. The 3-month tenor is at its most COP-bearish since early-October.

Chile: The CLP was punished again yesterday with the local unit touching an intra-day high of 841.25 before closing at 832.30. Event risk relating to this weekend’s election has made the market cautious and we have lost the Central Bank support in the form of dollar sales which have been suspended until December. Added to this we had a general EM sell off driven by the TRY which fell out of bed following the CBRT cutting rates by 100 bpts on instruction from President Erdogan. Buying on the dips still the favoured trade for now’.

Peru: The USD-PEN gapped higher at the open yesterday and held onto its gains to close the session at 4.0215. This topside bias for the pair may remain entrenched into the weekend, given some rising political concerns. The 100DMA at 4.0321 is, therefore, the level to watch today. This resistance level has held up over the last month and a half or so, but with building risks to the PEN, we could see it breached in the near term.

Fixed Income: Event and political risk keeping notable risk premiums embedded

Brazil: In recent months, bond yields across developed and emerging markets have risen notably on the growing expectation that inflation will become a factor that central banks will have to deal with. As inflation expectations rise, so central banks are being forced to tighten despite slow growth. It is worth pointing out that while the bearish bias in shorter-dated bonds remains intact, generally speaking, there has been some reprieve for longer date bonds on the back of renewed growth concerns.

Forecasters across the globe have downwardly revised their growth expectations amid persistent supply chain disruptions and inflation pressures. In particular, the outlook for the global manufacturing sector has declined markedly due to supply-demand mismatches and shortages of key components, including semiconductors, clogged ports and a lack of cargo containers, and a labour crunch as global supply chains optimized for efficiency remains in disarray after pandemic-induced shutdowns last year.

Given that global inflation is expected to remain robust due to soaring supply-side costs such as food and fuel, we expect central banks across the world to continue tightening monetary policy. This will continue to prop up shorter-dated bond yields. While elevated fiscal risks may keep longer-dated bond yields buoyed in some countries, the emergence of fresh economic growth concerns is expected to continue to drag longer-dated bond yields lower in the months ahead. Therefore, we expect the broader flattening bias across the global bond market to persist through into 2022. In Brazil, where stagflation fears are acute, the flattening bias has been so strong that its bond curve has inverted..

Mexico: The Mexican yield curve consolidated again yesterday to suggest the bond market rout may be pausing. Meanwhile, the swaps market recorded a subtle payer’s bias on the front end of the IRS curve, whilst a slight receiver bias was seen on the belly and long end of the curve. Still, the movements in each direction hardly shifted the flattening bias of the curve. The inflation debate continues and will set the tone for all asset classes going into next year, given that inflation is here to stay and will be stickier than what central banks anticipated. The market is still pricing in about 140bps worth of rate hike risk in the upcoming year..

Colombia: While still some way below that of its Latam peers, the cost of insuring against a sovereign default in Colombia has risen notably in recent months. Specifically, Colombia’s 5yr USD credit default spread has risen more than 90bps since the start of the year to sit at a one and a half year high of 182bps. The marked increase in Colombia’s 5yr CDS is reflective of the less favourable external conditions and mounting idiosyncratic risks. Looking ahead, while this suggests that fiscal risks have intensified, we still assess the risk of a credit event as unlikely, even if metrics may continue to deteriorate over the coming months..

Chile: The trend is your friend at the moment, with higher yields the order of the day across the yield curve. The 2030 bond closed through the 6% mark at 6.03%, while the near dated 2023 finished at 5.66%. Plenty of event risk coupled with fiscal challenges are keeping the bonds offered. We expect some consolidation into the weekend as investors square off risk. No data out locally or out of the US will leave the markets without an economic handle to trade off, so focus will be on the elections over the weekend.

Peru: Local currency government bonds retained their consolidatory trend yesterday, with some non-descript movements along the curve registered on the day. The approval of the BCRP board members removes some uncertainty from the mix, but the political situation remains very volatile at the moment which will see some notable risk still baked in and foreign investor activity levels remain low. Any further PEN depreciation, meanwhile, could stoke greater inflation fears and weigh on short-end tenors as more hikes will be priced in.