Troubled Americas.
As gathering financial storm clouds roil currencies, credit and equities in the formerly-designated “third world”, a trio of Latin American countries will confront the prospect of major political change in coming months.
Argentina managed to raise $2.75 billion from investors via a 100-year dollar bond last year. It didn’t take long for trouble to sniff out the serial sovereign-defaulter (eight times since early 1800’s), as president Macri was obliged to ask the International Monetary Fund to expedite payment on a US$50 billion bailout package agreed to this year. That news sent those century bonds to below 70 cents on the dollar that same day. As inflation rages – CPI at 34.4% year-on-year in August – the peso continues to hover near lifetime lows against the dollar despite yesterday’s announcement of 196 billion (US$5 billion) in 2019 spending cuts.
Macri is bailing water furiously from a ship taking on it on fast after the corruption-riddled administration of predecessor Cristina Elisabet Fernández de Kirchner and faces the unenviable challenge of simultaneously pleasing his electoral constituents and foreign creditors, including the IMF.
Politics are likewise front and center in Brazil, which is in the midst of a rancorous and highly competitive campaign season ahead of national elections in three weeks. Today, a poll showed that former army captain and far right-wing candidate Jair Bolsonaro saw his support jump to 26% from 21% a week ago to lead the pack – this was after he was stabbed at a campaign event on Sept. 6. Bolsonaro’s leading opponents are leftists Ciro Gomes and Fernando Haddad, while market-friendly Geraldo Alckmin languishes at 9%. André Jakurski, founder and portfolio manager of JGP Gestao, tersely summed things up in an interview with Fabiano Santin (Grant’s): “The candidates are horrible.”
The market seems to concur. Brazil’s 10-year yield has jumped to 12.5%, up nearly 300 basis points since March, while the real has lost 23% against the dollar year-to-date and stocks have moved sideways with the Bovespa Index slightly down in local terms in 2018.
Finally, Mexico: which just ushered in a new political era of its own with the June 1 election of Andrés Manuel López Obrador, known as AMLO. Unlike the slow-motion train wreck seemingly underway in Brazil, AMLO’s ascension has already won over financial markets, with the Mexican peso rallying to 18.9 against the dollar from 20.9 in June. On July 4, Morgan Stanley upgraded Mexican equities to “overweight” from “equal-weight.”
The populist president-elect has wasted little time on projects large and small, including cancelling the pension of former presidents. Perhaps less market-friendly is AMLO’s prospective energy policy. One day after that trade agreement announcement, Reuters reported that “Mexico’s incoming government is considering indefinitely suspending auctions for oil and gas projects, and giving state-owned Pemex authority to pick its own joint-venture partners rather than holdings competitive tenders.”
The country, and leader, in question: Recep Erdogan of Turkey. Today, Erdogan offered an ominous response to the Turkish central bank, which just hiked its overnight rate to 24% in a bid to stem the free-falling lira: “It’s currently my phase of patience but there is a limit to this patience.”
