Marcelo Carvalho is again spot on in this Tuesday's MS GEF post:
As the US economy appears to slide towards recession, and global growth forecasts are cut back, the debate intensifies about whether emerging markets like Brazil would be able to ‘decouple’ from the developed world’s agony. The ‘decoupling’ debate is misplaced, in our view, at least in its binary version. If the US goes into recession, does Brazil necessarily have to contract sharply? We think the answer is no. But then is Brazil fully immune? Our answer is again no. Decoupling should not be seen as a yes or no proposition, but rather as a spectrum of possibilities, in a continuum of outcomes. As usual with these matters, in medio stat virtus: the truth lies somewhere in the middle.
As the US economy appears to slide towards recession, and global growth forecasts are cut back, the debate intensifies about whether emerging markets like Brazil would be able to ‘decouple’ from the developed world’s agony. The ‘decoupling’ debate is misplaced, in our view, at least in its binary version. If the US goes into recession, does Brazil necessarily have to contract sharply? We think the answer is no. But then is Brazil fully immune? Our answer is again no. Decoupling should not be seen as a yes or no proposition, but rather as a spectrum of possibilities, in a continuum of outcomes. As usual with these matters, in medio stat virtus: the truth lies somewhere in the middle.
The balance of payments is the main channel of transmission from global turbulence into Brazil. We have already made the point that Brazil’s trade surplus is likely to narrow much faster than the consensus believes (see “Brazil: Waiting for Godot”, EM Economist, October 26, 2007, and “Brazil: Trade Consensus – What Is Wrong with This Picture?” EM Economist, November 16, 2007). Robust domestic demand and a strong currency should keep imports growing rapidly, while exports are set to struggle amid a less encouraging global environment. The market consensus is calling for only a modest decline in the trade surplus from roughly US$40 billion this year to around US$35 billion in 2008. By contrast, we see the trade surplus falling by half, to about US$20 billion in 2008. Correspondingly, while the consensus view still looks for a current account surplus next year, we are confident that the current account will fall into negative terrain in 2008. But the current account is just part of the picture. In this note, we take a closer look at the other side of the balance of payments: the capital account.
Das Kapital account
Swings in the capital account have been by far the main driver behind changes in Brazil’s international reserves, much more so than the relatively less volatile current account balance. Indeed, an unprecedented surge in capital inflows this year has allowed the central bank to speed up its pace of intervention in the foreign exchange market, and to more than double its stock of reserves from the US$85 billion mark seen at end-2006.
Capital account strength has been broad-based, across net foreign direct investment (FDI), equities and fixed income. Net FDI has surged to record-highs, even without the help from privatization-related inflows which boosted FDI figures at the beginning of the decade. Macroeconomic stability has expanded companies’ planning horizons. Declining real interest rates have unlocked investment opportunities. And robust domestic demand has enticed firms to expand their output capacity. Coupled with favorable global conditions, the improving domestic environment has attracted FDI into Brazil, mainly in the form of new operations (although also through inter-company loans, to a lesser degree). Interestingly, net outward direct investment has risen in recent years too, as Brazilian companies expand abroad.
Where is FDI going?
Net FDI inflows are widely spread across the economy. Services (including financials and retail) account for about half of the total, although the broadly defined agribusiness-mining complex has gained importance (especially mining). Within industry, the main recipients of FDI include sectors such as metallurgy, fuels, chemicals and food processing.
Capital inflows into the equity market have also boomed to unprecedented highs, spurred by a record-high number of IPOs. The expansion and maturing of the local capital market has brought a deluge of new companies to the local stock market. Foreign participation in IPOs has been high at about three-quarters of the total, and so it is unsurprising that capital inflows through this channel have boomed.
Registered inflows into the local fixed income market have jumped high as well, in part supported by tax and regulatory changes aimed at facilitating direct foreign participation in the local market. Brazil’s Treasury has steadily bought back its external debt, migrating its financing towards the local market. That brings hope of redemption from the so-called ‘original sin’ (or emerging markets’ historical inability to issue long-term debt in local currency). It also lures foreign investors into the local fixed income market.
The outlook for 2008
What to expect for the capital account going ahead? We look for a slowdown in capital inflows next year. As the global economy decelerates, and global risk-aversion re-emerges after being suppressed for years, recent all-time high capital inflows seem unlikely to persist. Net FDI should prove relatively resilient, as this type of flow tends to follow normally slow-moving perceptions about longer-term trends. We suspect that the peak in IPOs in the local stock market is behind us. Likewise, we fear that an environment of less global risk appetite might take its toll on capital inflows into the local fixed income market. We assume that these inflows slow towards levels seen prior to the 2007 boom.
All in all, we assume that capital inflows slow from about US$90 billion in 2007 to almost a third of this in 2008, although admittedly the capital account is harder to predict than the current account. How does that compare with expectations about global capital flows into EM overall? The latest report from the International Institute of Finance on this subject sees a modest decline (to still-high levels) in capital flows to emerging markets in 2008 after a peak in 2007. To be frank, such a projection now looks a bit sanguine in light of ongoing downgrades in the global environment for next year, in our opinion. For Brazil in particular, our assumptions are less smooth than the IIF’s: we see a higher peak in capital inflows in 2007 and a larger decline in 2008.
What are the risks around our forecast? If our numbers materialize, Brazil would still be able to accumulate foreign reserves next year, albeit at a slower pace than in 2007. That should prove to be a relatively benign backdrop. We suspect that the main downside risk to our scenario would be a sharper-than-expected turnaround in capital inflows. If the capital account really dries up, on top of what seems to us to be an inevitable deterioration in the current account, then the Brazilian real would suffer – although the central bank theoretically could lean against currency-weakening by selling reserves. In turn, currency devaluation could push inflation expectations up, eventually forcing the hand of the central bank to tighten. Monetary tightening, for its part, could take the punchbowl away from the domestic demand party. To be fair, there is potential upside risk too. If capital inflows prove more resilient than we assume, resulting currency strength would prolong Brazil’s virtuous-cycle story.
Bottom line
The current account balance is bound to fall into deficit next year, and capital inflows look set to take a hit too, in our view. We assume that the overall balance of payments will remain sufficiently robust to allow further reserve accumulation, albeit at a slower pace. The main downside risk: if capital inflows really dry up, then the currency could weaken significantly, pushing inflation expectations up, forcing interest rates higher, and entailing a downturn in the growth outlook.
Facebook Blogging
Friday, December 07, 2007
Thursday, November 15, 2007
The Future Is No Longer What It Used To Be
A very interesting piece from Morgan Stanley's Marcelo Carvalho.
Despite renewed turbulence in US markets, Brazilian asset prices have done well in recent weeks, with the local stock market close to all-time highs, and the currency remaining strong. As for the outlook for 2008, analysts continue to paint a rosy picture for Brazil. But what could be wrong with this picture?
The consensus remains too optimistic on Brazil’s trade balance outlook for 2008, in our opinion. We recently argued that the market consensus for a US$35 billion trade surplus next year is simply too upbeat (see “Brazil: Waiting for Godot”, WIB, October 26, 2007). Our out-of-consensus forecast instead looks for a much narrower surplus, of about US$20 billion. The consensus forecast for the 2008 trade balance has started to drift lower, but still has a long way to go.
The current account balance should soon dip into deficit. The market consensus still looks for a current account surplus in 2008. That should change soon. As prospects for the trade surplus are revised down, so should the current account balance. After running in surplus for several years, the actual current account balance could move into negative terrain as early as 2Q08, in our view.
The consensus assumes just more of the same. What are analysts missing? We think the main problem is that the market consensus seems to simply assume ‘business as usual’ for 2008. It fails to recognize an evolving global landscape and its implications for Brazil’s trade outlook, against the backdrop of robust domestic demand growth and a strong currency.
The future is no longer what it used to be
The global environment is changing. History may view the years since 2003 as a uniquely favorable backdrop for emerging markets, with a potent combination of strong global growth and rapidly rising commodity prices. That picture may be changing in the coming year. The IMF, for instance, foresees a decline of 7% in non-fuel commodity prices next year, and a slowdown in global growth from 5.2% in 2007 to 4.8% in 2008, with risks biased to the downside.
Global growth risks are biased to the downside. Morgan Stanley now judges that the risks of a US recession have risen to about 40% (from around one-in-three before), and has recently revised down its 2008 US growth forecast to 1.7% (on a 4Q-over-4Q basis) from 2.1% before (see “The Credit Recession”, WIB, November 9, 2007). At the start of the year, the US 2008 forecast called for 3.0% growth.
The implications of a euro area growth slowdown tend to be overlooked. Although much market attention focuses on the US, analysts often appear to forget the importance of Europe for emerging markets. In fact, while the US takes 19% of emerging market exports, the Eurozone takes 28%. For Brazil’s exports, the US represents 19% and the Eurozone 22%. Morgan Stanley has called for euro area growth of 2.0% in 2008, down from 2.6% in 2007. But high oil prices, a strong euro and tight credit conditions could slow euro area growth to 1.5% next year (see “Oil at 100, Euro at 1.5, Credit Crunch: The Bill”, Global Economic Forum, November 5, 2007).
In all, our global GDP growth forecast now stands at 4.6%, but risks still seem biased to the downside. After several years in which global growth figures were repeatedly revised upwards, we may be entering a cycle of growth downgrades.
Let’s do the math
Soaring export prices have been a major plus for Brazil’s trade performance, but that could change. Amid strong global growth, Brazil’s export prices have climbed more than 50% since 2002. The trade surplus, which has run above US$40 billion lately, would be already running close to the US$20 billion mark at 2002 average prices. Note that, at 2002 prices, the trade surplus has actually started to narrow already since 2006. And as we have argued before, even a moderate decline in export prices can make a significant dent in the trade surplus.
The outlook for export volumes in 2008 is uninspiring. A historical series gauging the external demand for Brazil’s exports can be constructed, based on total import growth at Brazil’s main export destinations, weighted by their share of Brazil’s exports. The correlation of that series with Brazil’s exports is high. In addition, we projected the global demand for Brazil’s exports, based on Morgan Stanley’s individual country forecasts. The upshot is that the external demand for Brazil’s exports is projected to slow from 18% in 2006 to 16% in 2007, and then to 12% in 2008.
And a strong currency does not help export competitiveness. Our econometric work suggests that a change of one percentage point in global real GDP growth implies a change of four percentage points in the external demand for Brazil’s exports. In other words, if global real GDP growth slides to the 3-4% range, external demand would slow to the 5-10% range. This in turn could easily pull Brazil’s export volume growth close to a halt, as currency appreciation since 2003 has already acted to slow export volume growth to about 6% in the latest data.
The consensus forecast for imports looks too sanguine. Imports look bound to keep growing at a strong pace next year. Imports are highly correlated with domestic demand, as proxied by industrial production. In fact, in light of steady currency appreciation since 2003, imports have grown even faster than industrial production would have suggested. Looking ahead, the market consensus sees industrial production growth at 4.5% in 2008, relatively stable compared to recent figures. But the consensus forecasts a slowdown in import growth to about 15% in 2008, from a pace of almost 30% in the latest data, despite the consensus view that the currency will remain strong next year. Something has to give.
For years, strong export growth has allowed fast import growth amid currency appreciation without trade deterioration. This is changing. Since 2003, strong global growth and rising commodity prices, and the resulting push for export growth, has allowed imports to grow quickly under an appreciating currency at the same time that the trade balance still kept improving. However, as the global economy slows and prospects for exports turn less exuberant, the combination of robust domestic demand and a strong currency will likely take its toll on the trade balance.
It does not take absurd assumptions to see potential for a significant erosion in the trade balance. A simple sensitivity analysis suggests that a range of plausible assumptions on import and export growth can result in relatively large swings in the trade balance next year. For instance, a 10% change in exports means a change of about US$15 billion in the trade balance, while a 10% change in imports alter the trade balance by about US$11 billion.
Bottom line
The market consensus forecast for Brazil seems to assume business as usual. It fails to recognize important changes in the global environment. As the outlook for exports turns more challenging while imports keep growing on strong domestic demand, the trade surplus is bound to narrow faster than the market expects. In turn, Brazil’s current account balance should soon dip into deficit.
Despite renewed turbulence in US markets, Brazilian asset prices have done well in recent weeks, with the local stock market close to all-time highs, and the currency remaining strong. As for the outlook for 2008, analysts continue to paint a rosy picture for Brazil. But what could be wrong with this picture?
The consensus remains too optimistic on Brazil’s trade balance outlook for 2008, in our opinion. We recently argued that the market consensus for a US$35 billion trade surplus next year is simply too upbeat (see “Brazil: Waiting for Godot”, WIB, October 26, 2007). Our out-of-consensus forecast instead looks for a much narrower surplus, of about US$20 billion. The consensus forecast for the 2008 trade balance has started to drift lower, but still has a long way to go.
The current account balance should soon dip into deficit. The market consensus still looks for a current account surplus in 2008. That should change soon. As prospects for the trade surplus are revised down, so should the current account balance. After running in surplus for several years, the actual current account balance could move into negative terrain as early as 2Q08, in our view.
The consensus assumes just more of the same. What are analysts missing? We think the main problem is that the market consensus seems to simply assume ‘business as usual’ for 2008. It fails to recognize an evolving global landscape and its implications for Brazil’s trade outlook, against the backdrop of robust domestic demand growth and a strong currency.
The future is no longer what it used to be
The global environment is changing. History may view the years since 2003 as a uniquely favorable backdrop for emerging markets, with a potent combination of strong global growth and rapidly rising commodity prices. That picture may be changing in the coming year. The IMF, for instance, foresees a decline of 7% in non-fuel commodity prices next year, and a slowdown in global growth from 5.2% in 2007 to 4.8% in 2008, with risks biased to the downside.
Global growth risks are biased to the downside. Morgan Stanley now judges that the risks of a US recession have risen to about 40% (from around one-in-three before), and has recently revised down its 2008 US growth forecast to 1.7% (on a 4Q-over-4Q basis) from 2.1% before (see “The Credit Recession”, WIB, November 9, 2007). At the start of the year, the US 2008 forecast called for 3.0% growth.
The implications of a euro area growth slowdown tend to be overlooked. Although much market attention focuses on the US, analysts often appear to forget the importance of Europe for emerging markets. In fact, while the US takes 19% of emerging market exports, the Eurozone takes 28%. For Brazil’s exports, the US represents 19% and the Eurozone 22%. Morgan Stanley has called for euro area growth of 2.0% in 2008, down from 2.6% in 2007. But high oil prices, a strong euro and tight credit conditions could slow euro area growth to 1.5% next year (see “Oil at 100, Euro at 1.5, Credit Crunch: The Bill”, Global Economic Forum, November 5, 2007).
In all, our global GDP growth forecast now stands at 4.6%, but risks still seem biased to the downside. After several years in which global growth figures were repeatedly revised upwards, we may be entering a cycle of growth downgrades.
Let’s do the math
Soaring export prices have been a major plus for Brazil’s trade performance, but that could change. Amid strong global growth, Brazil’s export prices have climbed more than 50% since 2002. The trade surplus, which has run above US$40 billion lately, would be already running close to the US$20 billion mark at 2002 average prices. Note that, at 2002 prices, the trade surplus has actually started to narrow already since 2006. And as we have argued before, even a moderate decline in export prices can make a significant dent in the trade surplus.
The outlook for export volumes in 2008 is uninspiring. A historical series gauging the external demand for Brazil’s exports can be constructed, based on total import growth at Brazil’s main export destinations, weighted by their share of Brazil’s exports. The correlation of that series with Brazil’s exports is high. In addition, we projected the global demand for Brazil’s exports, based on Morgan Stanley’s individual country forecasts. The upshot is that the external demand for Brazil’s exports is projected to slow from 18% in 2006 to 16% in 2007, and then to 12% in 2008.
And a strong currency does not help export competitiveness. Our econometric work suggests that a change of one percentage point in global real GDP growth implies a change of four percentage points in the external demand for Brazil’s exports. In other words, if global real GDP growth slides to the 3-4% range, external demand would slow to the 5-10% range. This in turn could easily pull Brazil’s export volume growth close to a halt, as currency appreciation since 2003 has already acted to slow export volume growth to about 6% in the latest data.
The consensus forecast for imports looks too sanguine. Imports look bound to keep growing at a strong pace next year. Imports are highly correlated with domestic demand, as proxied by industrial production. In fact, in light of steady currency appreciation since 2003, imports have grown even faster than industrial production would have suggested. Looking ahead, the market consensus sees industrial production growth at 4.5% in 2008, relatively stable compared to recent figures. But the consensus forecasts a slowdown in import growth to about 15% in 2008, from a pace of almost 30% in the latest data, despite the consensus view that the currency will remain strong next year. Something has to give.
For years, strong export growth has allowed fast import growth amid currency appreciation without trade deterioration. This is changing. Since 2003, strong global growth and rising commodity prices, and the resulting push for export growth, has allowed imports to grow quickly under an appreciating currency at the same time that the trade balance still kept improving. However, as the global economy slows and prospects for exports turn less exuberant, the combination of robust domestic demand and a strong currency will likely take its toll on the trade balance.
It does not take absurd assumptions to see potential for a significant erosion in the trade balance. A simple sensitivity analysis suggests that a range of plausible assumptions on import and export growth can result in relatively large swings in the trade balance next year. For instance, a 10% change in exports means a change of about US$15 billion in the trade balance, while a 10% change in imports alter the trade balance by about US$11 billion.
Bottom line
The market consensus forecast for Brazil seems to assume business as usual. It fails to recognize important changes in the global environment. As the outlook for exports turns more challenging while imports keep growing on strong domestic demand, the trade surplus is bound to narrow faster than the market expects. In turn, Brazil’s current account balance should soon dip into deficit.
Brazil Retail Sales September 2007
Bloomberg this morning:
Brazil's retail sales rose more than expected in September, led by sales of cars, computers and home appliances, as record low interest rates stoke consumer demand in Latin America's biggest economy.
Retail, supermarket and grocery store sales, as measured by units sold, rose 8.5 percent in September from the year-ago month, the national statistics agency reported today. Economists expected an 8 percent gain, according to the median of 31 forecasts in a Bloomberg survey.
The report added to speculation that central bankers won't move to lower the benchmark lending rate anytime soon on concern that accelerating economic growth will fuel inflation, said Zeina Latiff, an economist with ABN Amro NB's Brazilian unit.
``The figure reinforces the central bank diagnosis about the need to pause,'' said Latiff, in a phone interview from Sao Paulo.
Against the backdrop of the fastest economic growth since 2004, the bank on Oct. 17 paused after 18 straight cuts, holding the overnight rate at an all-time low of 11.25 percent, down from 19.75 percent in September 2005
Higher food and gasoline prices last month helped quicken annual inflation last month to 4.12 percent compared with an eight-year low of 2.96 percent in March. The bank targets annual inflation of 4.5 percent.
Sales of computer, office materials and communication equipments jumped 30.4 percent in October from the year-ago month. Sales of home appliances climbed 12.7 percent. Sales of cars and construction materials rose 19.8 percent and 9.1 percent respectively.
``Higher sales are disseminating among all sectors,'' said Zeina, who doesn't expect policy makers to lower the so-called Selic rate again until 2009.
The Brazilian real rose for a second day in early trading, climbing 1.7 percent to 1.7355 per dollar at 9:16 a.m. New York time from 1.7660 late yesterday.
Yields on interest-rate futures fell. The yield on the inter-bank deposit contract for Jan. 2, 2010, delivery, the most traded interest-rate futures contract in Sao Paulo, fell 6.6 basis points, or 0.066 percentage point, to 11.940 percent.
Brazil's retail sales rose more than expected in September, led by sales of cars, computers and home appliances, as record low interest rates stoke consumer demand in Latin America's biggest economy.
Retail, supermarket and grocery store sales, as measured by units sold, rose 8.5 percent in September from the year-ago month, the national statistics agency reported today. Economists expected an 8 percent gain, according to the median of 31 forecasts in a Bloomberg survey.
The report added to speculation that central bankers won't move to lower the benchmark lending rate anytime soon on concern that accelerating economic growth will fuel inflation, said Zeina Latiff, an economist with ABN Amro NB's Brazilian unit.
``The figure reinforces the central bank diagnosis about the need to pause,'' said Latiff, in a phone interview from Sao Paulo.
Against the backdrop of the fastest economic growth since 2004, the bank on Oct. 17 paused after 18 straight cuts, holding the overnight rate at an all-time low of 11.25 percent, down from 19.75 percent in September 2005
Higher food and gasoline prices last month helped quicken annual inflation last month to 4.12 percent compared with an eight-year low of 2.96 percent in March. The bank targets annual inflation of 4.5 percent.
Sales of computer, office materials and communication equipments jumped 30.4 percent in October from the year-ago month. Sales of home appliances climbed 12.7 percent. Sales of cars and construction materials rose 19.8 percent and 9.1 percent respectively.
``Higher sales are disseminating among all sectors,'' said Zeina, who doesn't expect policy makers to lower the so-called Selic rate again until 2009.
The Brazilian real rose for a second day in early trading, climbing 1.7 percent to 1.7355 per dollar at 9:16 a.m. New York time from 1.7660 late yesterday.
Yields on interest-rate futures fell. The yield on the inter-bank deposit contract for Jan. 2, 2010, delivery, the most traded interest-rate futures contract in Sao Paulo, fell 6.6 basis points, or 0.066 percentage point, to 11.940 percent.
Tuesday, September 18, 2007
Brazil and Safe Havens
Ok, as the US starts to slow, and Japan and Germany follow suit, the interesting question is going to be to try and follow who in the emerging markets sector can hold up under the pressure. Brazil will be an interesting test case in this sense. Bloomberg today:
Brazil's real rose after the Federal Reserve cut the benchmark U.S. lending rate more than expected, making yields on Brazilian bonds more attractive and buoying expectations that demand for the country's exports will remain strong.
The real rose to a six-week high, climbing 2.2 percent to 1.8770 per dollar at 3:41 p.m. New York time after the Fed cut the benchmark rate by a half-percentage point to 4.75 percent. The real touched 1.8730, the strongest since Aug. 3. Brazil's currency has appreciated 13.9 percent this year, the second- biggest gain among the 16 most actively traded currencies tracked by Bloomberg News.
``A half-point cut sends a very clear message the Fed is not just looking at inflation, it's also making economic growth a priority,'' said Rogerio Chequer, who helps manage about $150 million of emerging-market stocks and bonds at Atlas Capital Management in White Plains, New York.
The real may strengthen to 1.85 reais per dollar over the next month, said Ronie Marcelo Germiniani, proprietary trading manager in Sao Paulo at Banco Itau SA, Brazil's biggest non- government bank in terms of market value.
The rate cut reassured investors that the world's largest economy will continue to grow, preserving demand for Brazilian exports such as orange juice, steel, coffee and soybeans.
Brazil's trade surplus widened to $3.54 billion in August from $3.35 billion the previous month, according to the Trade Ministry. That exceeded the $3.1 billion median estimate in a Bloomberg survey of 18 economists.
Record Exports
Exports rose to a record $15.1 billion last month from $14.1 billion in July, while imports also increased to a record $11.6 billion from $10.8 billion in July, the ministry said.
Brazil's 11.25 percent benchmark rate is among the highest in the world and is more than double the U.S. rate, helping lure capital to the country's fixed-income market.
The yield on Brazil's benchmark zero-coupon bonds due in January 2008 fell 2 basis points, or 0.02 percent, to 11.1 percent, according to B
Brazil's real rose after the Federal Reserve cut the benchmark U.S. lending rate more than expected, making yields on Brazilian bonds more attractive and buoying expectations that demand for the country's exports will remain strong.
The real rose to a six-week high, climbing 2.2 percent to 1.8770 per dollar at 3:41 p.m. New York time after the Fed cut the benchmark rate by a half-percentage point to 4.75 percent. The real touched 1.8730, the strongest since Aug. 3. Brazil's currency has appreciated 13.9 percent this year, the second- biggest gain among the 16 most actively traded currencies tracked by Bloomberg News.
``A half-point cut sends a very clear message the Fed is not just looking at inflation, it's also making economic growth a priority,'' said Rogerio Chequer, who helps manage about $150 million of emerging-market stocks and bonds at Atlas Capital Management in White Plains, New York.
The real may strengthen to 1.85 reais per dollar over the next month, said Ronie Marcelo Germiniani, proprietary trading manager in Sao Paulo at Banco Itau SA, Brazil's biggest non- government bank in terms of market value.
The rate cut reassured investors that the world's largest economy will continue to grow, preserving demand for Brazilian exports such as orange juice, steel, coffee and soybeans.
Brazil's trade surplus widened to $3.54 billion in August from $3.35 billion the previous month, according to the Trade Ministry. That exceeded the $3.1 billion median estimate in a Bloomberg survey of 18 economists.
Record Exports
Exports rose to a record $15.1 billion last month from $14.1 billion in July, while imports also increased to a record $11.6 billion from $10.8 billion in July, the ministry said.
Brazil's 11.25 percent benchmark rate is among the highest in the world and is more than double the U.S. rate, helping lure capital to the country's fixed-income market.
The yield on Brazil's benchmark zero-coupon bonds due in January 2008 fell 2 basis points, or 0.02 percent, to 11.1 percent, according to B
Monday, September 17, 2007
Banco Santander in Brazil
This is an interesting piece from Bloomberg this morning:
Botin Builds `Republic of Santander' in Lula's Brazil
Brazil's trade minister is a former executive at Banco Santander SA. So is the man who oversees the country's monetary policy. Spain's biggest bank spent 1.8 million reais ($948,000) to back President Luiz Inacio Lula da Silva's campaign in 2002.
Now Santander is bidding for ABN Amro Holding NV's Brazilian unit to double its size in Latin America's largest economy. The deal would make Santander the biggest non-state bank in Brazil, ahead of Banco Itau Holding Financeira SA.
``Brazil is fast becoming the Republic of Santander,'' said Paulo Pereira da Silva, a federal deputy and head of Forca Sindical, the country's second-biggest union grouping. ``The bank's influence is growing.''
Santander Chairman Emilio Botin built ties to Lula as other lenders pulled back on concern the former labor leader would default on Brazil's debt, said Mauro Guillen, who wrote a history of the bank. Five years later, Citigroup Inc. and HSBC Holdings Plc are vying for a bigger slice of the Brazilian market as declining interest rates increase demand for loans.
``If they succeed in buying ABN Amro, Santander will become a Brazilian powerhouse,'' said Guillen, a professor at the Wharton School in Philadelphia. ``It's a quantum leap.''
Santander, based in the northern Spanish town of the same name, is part of a group led by Royal Bank of Scotland Group Plc that has offered 72 billion euros ($100 billion) for Amsterdam- based ABN Amro. The Spanish bank would get ABN Amro's Brazilian unit, Banco Real and Italian lender Banca Antonveneta SpA. A Santander spokesman declined to comment on ties to Lula.
Banespa Purchase
Botin appeared with Lula at a ceremony today in Madrid, where he said he expected Brazil to receive an investment-grade credit rating within 18 months.
``You know that we believe in Brazil,'' Botin told Lula, reminding him how they first met in his campaign office before the 2002 elections.
Santander, which entered Brazil in 1982, made its biggest push in 2000, when it bought Banco do Estado de Sao Paulo SA, known as Banespa, for $4.8 billion. Botin paid more than three times the price offered by the next-highest bidder, Uniao de Bancos Brasileiros SA, or Unibanco.
The rising value of Brazilian banks shows Santander's investment was sound, said Francisco Luzon, the bank's Latin America chief. Shares of Unibanco, Brazil's sixth-biggest bank by assets and the closest in size to Banespa, have risen fourfold since 2000, giving it a market value of 50.7 billion reais.
Yet Banespa's profitability and efficiency lag behind those of Brazil's biggest non-state banks, said Luis Miguel Santacreu, an analyst at Austin Rating in Sao Paulo.
Still Struggling
Banespa's return on equity was 15.5 percent last year, compared with 20.5 percent at Banco Bradesco SA and 18.3 percent at Itau. It also has the worst customer-complaint ranking among Brazil's biggest banks, according to the central bank.
``Buying Banespa was like a snake devouring a cow -- it takes a long time to digest,'' Santacreu said.
The payoff will be worth it, says Andrea Williams, who helps manage $2.4 billion in European banking stocks, including Santander, at Royal London Asset Management.
Brazil's mortgage market may grow more than fivefold in the next seven years, reaching 10 percent of gross domestic product from 2 percent now, according to Luiz Antonio Franca, mortgage director at Itau. Brazil contributed 455 million euros to Santander's first-half earnings, or 10 percent of group profit.
Santander backed Lula before the October 2002 elections, giving 1.8 million reais to Lula's party, according to Brazil's electoral court. It also donated 1.4 million reais to Jose Serra of the Social Democracy Party. By comparison, Itau donated 3.12 million reais to Serra's party and 350,000 reais to Lula's Workers' Party.
`Critical Time'
In August of that year, Botin restricted access to Santander's research after a New York analyst recommended selling Brazilian assets as the country's bonds and currency plummeted on concern Lula would default on 1.05 trillion reais of public debt.
After Lula's victory, Botin paid a call on the new president and pledged to maintain $2 billion in trade lines at a time when international lending to Brazil had plunged 16 percent.
``Santander believed in Lula and Brazil at a critical time,'' said Alexandre Marinis, who runs Mosaico Economia Politica, a consulting firm in Sao Paulo.
In March, Miguel Jorge, Banespa's corporate affairs director, was named trade minister. Mario Gomes Toros, a former vice president for Santander in Brazil, was appointed monetary policy chief at the central bank a month later.
A spokesman for Lula didn't return calls seeking comment. Jorge declined to be interviewed, a spokesman for the Trade Ministry said. Toros's representative declined to comment.
Jorge and Botin
At Banespa, Jorge helped leaders of United Workers' Central, Brazil's biggest union grouping, devise a plan for deducting loan payments from payroll checks, slashing costs for union members, said Jose Paulo Nogueira, executive director of the ABC Metalworkers' Union.
In previous corporate posts at Volkswagen AG's factory in Sao Bernardo and Autolatina, a venture of VW and Ford Motor Co., Jorge mixed with union leaders allied to Lula, including Luiz Marinho, who is now social security minister, Nogueira said.
Botin and Jorge hugged at today's meeting between Lula and Spanish Prime Minister Jose Luis Rodriguez Zapatero.
``Is Jorge someone Lula trusts? Well, he made him a minister,'' Nogueira said. ``They've been very astute.''
Botin Builds `Republic of Santander' in Lula's Brazil
Brazil's trade minister is a former executive at Banco Santander SA. So is the man who oversees the country's monetary policy. Spain's biggest bank spent 1.8 million reais ($948,000) to back President Luiz Inacio Lula da Silva's campaign in 2002.
Now Santander is bidding for ABN Amro Holding NV's Brazilian unit to double its size in Latin America's largest economy. The deal would make Santander the biggest non-state bank in Brazil, ahead of Banco Itau Holding Financeira SA.
``Brazil is fast becoming the Republic of Santander,'' said Paulo Pereira da Silva, a federal deputy and head of Forca Sindical, the country's second-biggest union grouping. ``The bank's influence is growing.''
Santander Chairman Emilio Botin built ties to Lula as other lenders pulled back on concern the former labor leader would default on Brazil's debt, said Mauro Guillen, who wrote a history of the bank. Five years later, Citigroup Inc. and HSBC Holdings Plc are vying for a bigger slice of the Brazilian market as declining interest rates increase demand for loans.
``If they succeed in buying ABN Amro, Santander will become a Brazilian powerhouse,'' said Guillen, a professor at the Wharton School in Philadelphia. ``It's a quantum leap.''
Santander, based in the northern Spanish town of the same name, is part of a group led by Royal Bank of Scotland Group Plc that has offered 72 billion euros ($100 billion) for Amsterdam- based ABN Amro. The Spanish bank would get ABN Amro's Brazilian unit, Banco Real and Italian lender Banca Antonveneta SpA. A Santander spokesman declined to comment on ties to Lula.
Banespa Purchase
Botin appeared with Lula at a ceremony today in Madrid, where he said he expected Brazil to receive an investment-grade credit rating within 18 months.
``You know that we believe in Brazil,'' Botin told Lula, reminding him how they first met in his campaign office before the 2002 elections.
Santander, which entered Brazil in 1982, made its biggest push in 2000, when it bought Banco do Estado de Sao Paulo SA, known as Banespa, for $4.8 billion. Botin paid more than three times the price offered by the next-highest bidder, Uniao de Bancos Brasileiros SA, or Unibanco.
The rising value of Brazilian banks shows Santander's investment was sound, said Francisco Luzon, the bank's Latin America chief. Shares of Unibanco, Brazil's sixth-biggest bank by assets and the closest in size to Banespa, have risen fourfold since 2000, giving it a market value of 50.7 billion reais.
Yet Banespa's profitability and efficiency lag behind those of Brazil's biggest non-state banks, said Luis Miguel Santacreu, an analyst at Austin Rating in Sao Paulo.
Still Struggling
Banespa's return on equity was 15.5 percent last year, compared with 20.5 percent at Banco Bradesco SA and 18.3 percent at Itau. It also has the worst customer-complaint ranking among Brazil's biggest banks, according to the central bank.
``Buying Banespa was like a snake devouring a cow -- it takes a long time to digest,'' Santacreu said.
The payoff will be worth it, says Andrea Williams, who helps manage $2.4 billion in European banking stocks, including Santander, at Royal London Asset Management.
Brazil's mortgage market may grow more than fivefold in the next seven years, reaching 10 percent of gross domestic product from 2 percent now, according to Luiz Antonio Franca, mortgage director at Itau. Brazil contributed 455 million euros to Santander's first-half earnings, or 10 percent of group profit.
Santander backed Lula before the October 2002 elections, giving 1.8 million reais to Lula's party, according to Brazil's electoral court. It also donated 1.4 million reais to Jose Serra of the Social Democracy Party. By comparison, Itau donated 3.12 million reais to Serra's party and 350,000 reais to Lula's Workers' Party.
`Critical Time'
In August of that year, Botin restricted access to Santander's research after a New York analyst recommended selling Brazilian assets as the country's bonds and currency plummeted on concern Lula would default on 1.05 trillion reais of public debt.
After Lula's victory, Botin paid a call on the new president and pledged to maintain $2 billion in trade lines at a time when international lending to Brazil had plunged 16 percent.
``Santander believed in Lula and Brazil at a critical time,'' said Alexandre Marinis, who runs Mosaico Economia Politica, a consulting firm in Sao Paulo.
In March, Miguel Jorge, Banespa's corporate affairs director, was named trade minister. Mario Gomes Toros, a former vice president for Santander in Brazil, was appointed monetary policy chief at the central bank a month later.
A spokesman for Lula didn't return calls seeking comment. Jorge declined to be interviewed, a spokesman for the Trade Ministry said. Toros's representative declined to comment.
Jorge and Botin
At Banespa, Jorge helped leaders of United Workers' Central, Brazil's biggest union grouping, devise a plan for deducting loan payments from payroll checks, slashing costs for union members, said Jose Paulo Nogueira, executive director of the ABC Metalworkers' Union.
In previous corporate posts at Volkswagen AG's factory in Sao Bernardo and Autolatina, a venture of VW and Ford Motor Co., Jorge mixed with union leaders allied to Lula, including Luiz Marinho, who is now social security minister, Nogueira said.
Botin and Jorge hugged at today's meeting between Lula and Spanish Prime Minister Jose Luis Rodriguez Zapatero.
``Is Jorge someone Lula trusts? Well, he made him a minister,'' Nogueira said. ``They've been very astute.''
Subscribe to:
Posts (Atom)
