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Monday, October 17, 2011 - 03:10

LatamWatch: Brazil Copom Expected to Cut 50 Bps to 11.5% Weds

* Argentina Seeks to Cut Imports in Run-up to Presidential Election * Mexico Reports Key Retail Report; Congress Debates Budget

BUENOS AIRES, MEXICO CITY and SAO PAULO, Oct 17 (MNI) - Brazil's fixed-income traders are listening to hints from policymakers and are now expecting a half-point cut in the Selic rate to 11.5% Wednesday.

The Central Bank Monetary Policy Committee (Copom) as usual will announce its decision after markets close.

The most recent data, including the Central Bank's proprietary IBC-Br leading indicator, shows the economy slowing more quickly than most analysts had predicted, and in line with the Central Bank's own projections.

Many local analysts are now cutting their GDP growth forecasts for 2011 to near 3% for this year and next, compared to a 4% consensus just a few months ago, and some are retracting their prior criticism of the Copom's surprise 50 bps cut.

Inflation is still not slowing with the economy, and the market consensus is for consumer prices to continue rising at a 5.5-6% annualized pace for the next few months.

The IPCA price index may exceed the 6.5% upper limit of the inflation target rang this year, and 2012 consensus expectations of 5.59% are well above the 4.5% target, but the government wants to keep growth strong.

Some traders are even betting on a 75 or 100 bps cut, but the vast majority is heeding Central Bank President Alexandre Tombini's indication that more "moderate adjustments," such as the half-point easing August 31 are appropriate.

Still, Tombini's Copom has shown a willingness to contradict both earlier signals and conventional wisdom, and the August 31 cut completely surprised the market.

The IBGE releases its midmonth IPCA-15 inflation survey Thursday, the day after the Copom meeting.

Brazil moved to summer time Sunday, moving its clocks ahead one hour and increasing the time difference with U.S. Eastern Standard Time to two hours.

* Argentina Seeks to Cut Imports in Run-up to Presidential Election

Argentina's government this week will continue efforts to maintain economic growth and a trade surplus as campaigning enters its final week before the Sunday presidential election.

President Cristina Fernandez de Kirchner is expected to win a second term after sweeping the Aug. 14 national primaries against competitors from all parties with 50% of the votes.

Opponents like Ricardo Alfonsin of the Radical Civic Union have scaled down campaigning, probably leaving the second place for Hermes Binner of the Socialist Party.

No matter, analysts and executives are preparing for another four years of CFK and expansionist policies that have spurred 8% average annual growth since 2003, along with accelerating inflation.

Companies are modifying plans on expectations that slower sales and rising costs and tax pressure will cut profits in 2012.

Many economists and business leaders have cut economic growth forecasts for 2012 to between 3% and 4.5%, less than the government's 5.1% estimate.

Inflation likely will accelerate to an annual 25% next year from 22-23% this year. The government expects 9.6% inflation next year based on its data and consumer price index, which are under question for manipulation.

Business leaders said at a conference in Mar del Plata last week that the focus next year will be on reducing costs to maintain profit margins.

Another strategy will be to produce more premium products to skirt government pricing controls, which are focused on basic products. McDonald's, for example, is promoting higher-priced hamburgers because of a price cap on its Big Mac.

Executives said they will seek to put pressure on unions and the government to limit wage hikes next year, helping to keep a lid on inflation. The government has been signing off on hikes of 25-30% over the past years.

The government will continue to promote import substitution through an increase in domestic production.

Canada's Research in Motion has started to produce its Blackberry smart phones in the southern province of Tierra del Fuego, a move that the government said has created 300 jobs and is substituting $200 million a year in imports of the devices.

The government is promoting investment in more factories, offering tax breaks in places like Tierra del Fuego.

For companies that cannot establish factories in the country, the government requires they export the same value of their imports. Germany's BMW last week said it will export auto parts, leather and rice so it can gain authorization to import its high-end vehicles.

"We have a national project that protects our borders from foreign products, and this implies protecting the jobs of all Argentines," Economy Minister Amado Boudou said last week.

The effort is aimed at keeping trade in surplus. The surplus shrank to $640 million in August from $1 billion in the year-earlier period largely because of a 179% rise in energy imports because of lower domestic production of natural gas, oil and petroleum products.

The government will report September economic activity Tuesday, followed Friday by third-quarter employment data.

* Mexico Reports Key Retail Report; Congress Debates Budget

With the Bank of Mexico promising to be on alert for a slowdown in the economy that would merit easing monetary policy, the August retail sales report and service sector index due out this week could take on added significance.

State statistics agency INEGI releases the two reports Thursday,

Retail sales rose 3.1% in July and economist Delia Paredes of Banorte-Ixe expects this trend to be reflected in the August results.

Manuel Molano of the Mexican Institute on Competitiveness cautioned that continuing weakness in the peso erodes purchasing power and this could be reflected in future reports.

Santander is predicting annual increase of 2.5% in retail sales for 2011.

The service sector however has been a strong sector, posting 6.8% year-over-year growth in July, while employment was up 3.3%.

INEGI releases broad unemployment rate Friday. The rate has been inching upward, measuring 8.98% in August.

Meanwhile, the lower house of Congress must approve the revenue portion of the 2012 budget by Thursday. Budget revenue is based on an exchange rate of 12.20 pesos to the U.S. dollar and an oil price of $84.90 per barrel.

Molano expects the exchange rates and oil price to remain unchanged, even though the peso has been trading at a lower rate than originally forecast by the Finance Ministry.

The government budget plan slashes the deficit target to 0.2% of GDP from 0.5% this year, in a show of fiscal responsibility to buffer the nation against the global economic slowdown.

The government plan has 2012 spending, not including investment in Pemex, of 3.32 trillion pesos, a 2.6% increase over 2011.

Congress has until Nov. 15 to approve the 2012 budget.

* Editor: Heather Scott; email:; (202) 371-2121

* Follow us on Twitter: @MNILatamWatch

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