International Trading

The strength of raw material exports keeps the trade balances of Argentina, Brazil and Chile in the black. However, Brazil’s current account is deteriorating rapidly, and Mexico’s is still negative. Bank lending in Brazil slowed in June, in line with other economic activity indicators. Public spending keeps growing fast in Argentina and Peru, but is still being financed by increasing revenues. Employment figures also improved in Argentina, where the unemployment rate fell to 7.9%; however, unemployment is worsening in Venezuela, having increased to 8.7%. On the other hand, the Central Bank of Argentina announced the relaxation of the Monetary Program for the last 2 quarters and Peru’s currency strength leads the Central Bank to raise the bank reserves requirement and to S&P to ratify the solvency of public debt, changing the outlook to positive.

Fears about the global economic cycle had asymmetrical effects in Latin America due to local factors. The outlook is still positive for the region’s assets
Brazil and Mexico experienced the largest exchange rate adjustments following the release of negative economic indicators in the USA, whilst the currencies of Chile, Peru and Colombia strengthened. The appetite for LATAM issues (stocks and private debt) remains high in the face of positive economic differentiation in most of the countries in the region.

Markets

Increasing concerns about the global economic cycle had asymmetric effects on currencies in the region due to local factors: Chile, Peru and Colombia have strengthened, whilst Brazil and Mexico weakened. The external situation and the weakness of US economic data keep having greater effects on BRL and MXN than on other currencies in the region. However, towards the end of the week BRL managed to recover some of the ground lost due to increased confidence that the sale of Petrobrás shares will finally take place at the end of September. The Mexican Peso on the other hand weakened steadily over the week, breaking through the technically important level of 13 pesos to the dollar. The Chilean Peso, the Nuevo Sol and the Colombian Peso all continued to perform positively, with more restrained depreciation in the face of increases in global risk premiums, and larger appreciations in response to positive sentiments. In the coming week, external factors may have greater weight than local factors in exchange rate performance, and there may also be a high degree of correlation with US stock market indices, particularly for MXN, given its greater dependency in cyclical terms.

The performance of regional stock markets over the week was negative compared to those in the USA and the EU, but the outlook continues to be more favorable. The region’s stock markets are performing more negatively than their counterparts in developed countries, displaying greater contagion from the perception of cyclical risk associated with recent USA economic data. In Brazil, the delay in agreeing the exchange of shares for crude oil between the government and Petrobrás (a necessary condition for the US$25bn placement) and the performance of raw material prices had an impact on the Bovespa. In Mexico, data on USA house sales had a major impact on companies linked to that sector. Overall, since recent highs, Latin American stock markets have, on average, fallen by only a third of the fall in their counterparts in developed countries. In the future, economic data will continue being the centre of attention. We consider that the relative economic strength of the region justifies better performance by its stock markets.

Despite the uncertain environment, international credit markets still have an appetite for Latin American issuers. Despite the increase in risk premiums, Pemex (BBB/BBB/Baa1) placed US$1,000 million in international markets through the reopening of a bond maturing in 2035. The state-owned company has now issued US$4,000 million in the markets in 2010, which is in addition to the US$4,000 billion issued by América Móvil in 1H10. We still consider that international credit markets have an appetite for Latin American assets, and some Latin American issuers have announced possible issues in international markets in the coming weeks. Risk premiums for Latin American corporate debt have increased due to the economic environment, oil price volatility and US economic data. Spreads (over UST) for Ecopet corporate bonds stood at 273pb (+14.4% week-on-week); Pemex 242pb (+7.7% on the week); and Petrobrás 241pb (+6.1% on the week).

Highlights

Employment recovers in Argentina but deteriorates in Venezuela
The unemployment rate in Argentina in the second quarter of the year stood at 7.9%, due to a large increase in employment caused by increased economic activity, which offset the effect of higher labor force participation rates (46.1%). Unemployment in Venezuela increased by 300 bp (m/m) in July to 8.7%. The upward trend in unemployment (y/y) matches other indicators of activity pointing towards a continuation in the reduction in economic activity over the third quarter.

The strength of raw materials keeps trade balances in the black
Trade balances remained positive in Brazil and Argentina in June despite significant increases in imports. The boost from demand for raw materials shows up in the growth of exports of primary products, particularly soybeans in Argentina (+ 83% y/y) and mining exports in Chile (+29.6% in 2Q10). However, the current account deficit keeps deteriorating in Brazil, reaching 2.2% of GDP in July. In Mexico, the current account for 2Q10 was also in the red, but only by 0.3% of GDP, reflecting a still modest recovery in domestic demand.

Record credit levels in Brazil
The stock of credit rose in July, reaching 45.9% of GDP. Even though the stock of credit expanded by 18.4% y/y, (seasonally-adjusted) credit flows fell by 1.6% m/m in July.

The Central Bank increased reserve requirements, whilst S&P kept the rating, but changed the outlook to positive.
The Central Bank increased the rate of bank reserves requirement of the deposits in local currency by external financial institutions, from 65% up to 120%, aiming to moderate pressures for appreciation of the sol. Standard & Poor's rating agency revised its outlook for Peru’s long-term public debt in foreign currency from "stable" to "positive" while maintaining the BBB- rating.

The Central Bank of Argentina relaxed the Monetary Program for the last 2 quarters
Total M2 can now expand up to 29.4% y/y, from the previous target of 19.4% y/y increase. The measure is in line with faster GDP growth and higher inflation.

Public expenditure keeps rising fast in Argentina and Peru
In Argentina, primary expenditure increased by 33% y/y in July, close to the average for the year; the situation in Peru is similar (around 20% y/y to June), although the government has announced that it expects public expenditure to slowdown and match the increase of GDP in 2011. However, as a result of increasing revenues, the public finances of these two countries remain within target ranges.

Calendar: Events

Brazil: SELIC. (September 1)
Forecast: 10.75%
Consensus: 10.75%
Previous: 10.75%

The Central Bank should leave the SELIC unchanged and end the monetary adjustment cycle following the moderation in both inflation and economic activity.

Calendar: holidays

Peru: Monday, August 30

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