After a year of relative stability, Latin America is heading into uncertain times in 2006.
At
best, Latin America’s prospects for this year could be described as
mixed. While the economies of countries such as Brazil and Colombia are
becoming increasingly prosperous and robust, their neighbors, including
Argentina and Venezuela, are anything but stable.
Argentina
is among those countries giving investors most cause for concern. In a
move that was widely criticized among investors, Argentine president
Nestor Kirchner in November replaced Roberto Lavagna as economy
minister with Felisa Miceli, the head of state bank Banco de la Nacion
Argentina. Although she has been a protégé of Lavagna, Miceli is seen
as more leftist and market-critical than her predecessor.
The
recent change of guard at Argentina’s economy ministry has generated
growing concern among investors that the South American country, the
region’s third-largest economy, will expand public expenditure, weaken
fiscal discipline and lose its struggle against ever-rising inflation.
“What worries us is that there’s a lack of a concrete macroeconomic
reaction to the inflation,” says Gustavo Cañonero, the Buenos
Aires-based chief Latin America economist for Deutsche Bank. “It’s
nothing compared with what we saw in the past, but it’s a risk we
hadn’t expected to see.”
Until
1991, when the country introduced a so-called convertibility law that
pegged the peso to the US dollar, Argentina had experienced years of
hyperinflation. The law was scrapped in 2002 in a move that coincided
with Argentina’s massive debt default. “The outlook is one of slow
deterioration from today because of a shift to more populist policies
with the new minister of [economy],” says Paulo Leme, the Miami-based
managing director for emerging markets at Goldman Sachs. Instead of
taking advantage of a positive external environment and strong local
growth to implement further market reforms, the government is going the
opposite way, Leme points out.
“Our
concern is that inflation will rise, and substantially, probably …
rising to 14% [in 2006],” Leme says. While the price controls were
expected to help reduce inflation at the end of 2005, prices will
probably again pick up in the first quarter of 2006, predicts CSFB
analyst Carola Sandy.
However,
Cañonero believes that apart from the rising inflation, Argentina still
has much to brag about. “The real economy is still growing strongly,”
he says, forecasting a GDP growth of around 6% in 2006. By comparison,
Latin America as a whole should grow by 3.8% in 2006, the IMF
forecasts.
Latin America’s two
largest economies, Brazil and Mexico, may also see some turbulence in
advance of their presidential elections, scheduled for October and July
respectively. “There will be some market volatility until the elections
[in Brazil]. The political dispute will create uncertainty, but not of
the magnitude of the last election,” Leme says, referring to the
massive capital flight seen in Brazil when Luiz Inácio Lula da Silva
was heading all polls ahead of the 2002 elections.
Despite
overseeing a remarkable turnaround in his country’s economy, Lula might
not win reelection. Observers such as Leme are expecting a win for the
opposition PSDB, whose likely candidate will be São Paulo mayor José
Serra, who is popular among investors.
Even
if the country’s leadership changes, investors will be unlikely to
suffer. “You won’t see any big changes in Brazil after the
elections,”Cañonero says. He expects continued declines in inflation
and interest rates combined with good foreign trade growth to produce a
GDP expansion of 3% or more. “The economic fundamentals continue to be
very favorable, although it’s fair to say that some election-related
news could impact the markets leading up to the polls,” he says.
In Mexico,
however, the likely outcome of the election is spreading anxiety among
investors. That election “will also generate substantial market
volatility, particularly because it will be a very tight election
similar to what we’ve seen at the gubernatorial level, with margins of
less than 2% for some winners,” Leme points out. “That will generate
volatility.” As in Brazil in 2002, having as leading candidate a
leftist politician—Andrés Manuel López Obrador—is generating some
concerns. “He is unproven, untested, [and] we don’t know what policies
he will pursue,” says Leme.
Many
economists in and outside of Mexico have warned of potential negative
fallout from a victory by López Obrador. This might play into his
hands, of course, as expectations will be low when he takes office. He
also would be stepping into the shoes of Vicente Fox, a president who
many criticized for being too weak and failing to push through key
economic reforms, Cañonero comments. In fact, many observers believe
the opposition PRI party, which ruled Mexico for 71 years until 2000,
is capable of pushing through key reforms if their candidate is
elected.
While the election is
sowing doubt among investors, few expect a repeat of the 1994 “Tequila
Crisis,” when the peso plunged. According to Leme, Mexico’s economy is
solid enough and its fiscal policies are robust enough to weather the
potential pre- and post-election turmoil. Most analysts expect the
currency to weaken but for the country’s economic expansion to
continue, posting perhaps 3% growth in 2006. “There’s going to be
uncertainty [but] overall substantial strength,” Leme says.
Elsewhere
in the region, similar uncertainty prevails. Cañonero sees major
improvements in Colombia in 2006. The likely re-election of Alvaro
Uribe as the country’s president in May 2006 will result in a
significant boost to Colombia’s economy, which needs to deal with
fiscal imbalances and high external account deficits, he says.
Venezuela,
another key economy, is causing mixed feelings among economists,
however. On the one hand, the country’s massive oil revenues are seen
as a boon. On the other hand, the rapid spending of those revenues is
seen as a negative. Political uncertainty as president Hugo Chavez
increases his power at the expense of independent institutions, coupled
with rising attacks against local and foreign investors, is also
raising concern.
“Under Chavez, we
expect Venezuela’s credit fundamentals to continue to deteriorate over
the long term, owing to intensifying price controls, the public
sector’s expansion into numerous non-oil sectors, and the weakening of
the investment climate, legal framework and transparency,” CSFB analyst
Cem Karacadag wrote in a recent research report.
Overall,
Latin America should see good growth this year, helped by the outlook
for the global economy and higher commodity prices. “In terms of growth
liquidity, in terms of market performance [and] currency debt, it’s
going to be hard to replicate the outstanding performance of 2005,
[but] overall there will be positive returns,” Leme says. Cañonero
believes the first half will see the strongest growth, followed by a
weaker second half. “We see a very favorable development,” he
concludes.
Joachim Bamrud
Global Finance, November 2005
Firm Foundations
Sound fundamentals are the key
reasons why Brazil, Latin America’s largest economy, and its capital
markets have been able to withstand a major corruption scandal.
As
the political scandal around President Luiz Inácio Lula da Silva
reached its peak over the summer, nervous investors began to consider
bailing out of Brazil. Surprisingly, though, the country’s markets
barely flinched. While Lula has been weakened by the scandal, which
started in June and has led to several of his top government and party
aides resigning, neither Brazilian stocks nor the country’s
macroeconomics have been badly affected.
Acesita
Helped
by rising demand in China, Brazilian steelmaker Acesita has grown
revenues this year. After hitting a low in July, its stock has been
climbing steadily and was selling for more than $35 in mid-October—a
15% improvement over a year earlier. So attractive is Acesita that
Arcelor, the world’s second-largest steelmaker, made a bid in October
to buy the company.
In
fact, by mid-October the Bank of New York’s Brazil ADR Index was up
43.04% year-to-date. Much of that was fueled by a combination of the
Brazilian companies’ actual performances—mostly strong improvements
over last year—and confidence in the economic fundamentals of Brazil.
“The fundamentals are extremely strong,” says John Welch, the New
York-based chief Latin America economist with Lehman Brothers. The
markets got worried in August when finance minister Antonio Palocci was
accused of corruption by a former aide, but after those charges
receded, the threat to economic policy also receded, Welch says.
Bradesco
Banco
Bradesco, Brazil’s top private bank, has seen its ADR jump from $34.82
in July to $50.17 on October 10. That brought its increase year-to-date
to an impressive 100%. The results are partly tied to the bank’s
performance so far this year; in the first half it managed to more than
double its net income over the same period last year.
More
recently, a pro-Lula politician, Aldo Rebelo, was elected president of
the Brazilian lower house, Welch points out. The election enables Lula
to regain control over the legislative agenda after several months
suffering a gradually weakening position.
Although
the investigation into corruption continues, most analysts believe the
threat to the market is largely over. “The market believes the
political crisis does not pose any relevant threat to conducting
economic policy,” says José Carlos de Faria, a São Paulo-based senior
economist for Latin America with Deutsche Bank. Long-term finance
obligations and foreign direct investment are taking care of Brazil’s
finance needs, adds Victoria Werneck, a São Paulo-based economist with
UBS. Foreign direct investment last year reached $18.2 billion, the
highest in Latin America and a 79% increase over 2003, according to the
United Nations Economic Commission for Latin America and the Caribbean
(ECLAC).
CVRD
CVRD’s
preferred ADR (Rio-P) rose from $27.85 in July to $36.38 on October 10.
That was also a 49% increase year-to-date. CVRD, the world’s largest
producer of iron ore, has seen continued strong demand from China. And
global iron ore demand is rising faster than CVRD can boost its
production.
This year will
be the third consecutive year Brazil runs a current account surplus, an
achievement that is expected to be repeated next year as well, Werneck
notes. The surplus this year will be 1.7% of GDP and next year 0.7%,
the IMF forecasts.
Last, but
certainly not least, the country’s central bank has been given de facto
autonomy and has done its job well. “Lula, contrary to what everybody
believed, let the central bank act autonomously in order to meet its
only goal, to bring inflation down,” Werneck says. Confounding
expectations, the central bank did its job well. Despite the
uncertainty resulting from the corruption scandal, Brazil’s inflation
this year is expected to reach 6.8%, only slightly higher than last
year’s rate of 6.6%, according to the IMF. Next year it should fall to
4.6%, the fund forecasted in its latest world economic outlook,
released in September.
Gerdau
The
ADR of Gerdau, Latin America’s largest steelmaker, has gone from $10.39
in July to $13.92 on October 10. The latest price is also a 16%
improvement year-to-date. The company has been helped both by rising
demand in China and more recently from Hurricane Katrina repair efforts
on the US Gulf Coast.
The
outlook also shows that Brazil’s economy should expand by 3.3% this
year and another 3.5% next year. While the 2005 forecast is lower than
last year’s 4.9% growth, it’s still higher than the GDP growth rate the
fund expects in Mexico this year (3%). More importantly, as far as
popular support for Lula goes, real wages have been increasing on a
sustained basis given the central bank’s success in bringing inflation
down, Werneck points out.
Finally,
Brazil’s international reserves are now at a whopping $57 billion, a
substantial increase from the $27 billion in December 2004, Werneck
says. “You have all these things a country needs—solid fiscal front,
low inflation, a growing economy—so it can weather a big, big storm,”
she says. “If you look at every single factor, Brazil is doing
fantastically better than in 2002,” she adds, referring to the year
before Lula assumed office.
Gol
Startup
and low-cost airline Gol has seen a slight increase in its ADR
price—from $29. 70 in July to $31.45 in October—yet it can boast rising
revenue and net income as it increasingly takes market share from the
established flag carrier, Varig.
Improved
corporate governance, according to Welch, “certainly has helped”
Bovespa, the São Paulo stock exchange. While it’s hard to tell yet what
impact the new regulations will have—they’ve only been in place some 18
months—there has been a lot of movement in terms of shareholder
resolution, which was a big problem before, he says.
The
main impact will be felt over the medium- to long-term rather than
today, says Werneck. “I think it’s very important, indeed, but at the
current stage with GDP growth and consolidation of an orthodox and
serious fiscal policy, this is not the main trigger [behind market
optimism],” she says. Another factor behind optimism in the markets is
that Brazil’s high interest rates are expected to drop soon, providing
a welcome incentive for business in the country, Welch points out.
Petrobras
Helped
by soaring international oil prices, Brazil’s state oil producer
Petrobras can boast an ADR price increase of 58% year-to-date. The
October 10 price of $57.21 is also significantly higher than the July
closing price of $45.72.
Brazil
has also benefited from a strong increase in exports. Last year they
totaled $96.5 billion, an increase of 32% from 2003, according to
ECLAC. Companies that have done particularly well include iron ore
exporter CVRD and steel producer Acesita. “Even with a negative impact
of a global slowdown, it will take a lot to hurt the balance of
payments,” de Faria says.
With
elections due to take place in a half-dozen Latin American nations over
the next year, investors are anxiously following events in the region.
They’re expecting some significant changes.
Mexico’s Andres Manuel Lopez Obrador Leads All Polls in The Race to Become the Country’s Next President
On
Wall Street and in London and Tokyo, institutional investors are keenly
following the political events in Latin America these days, especially
in major bond-issuing countries such as Brazil and Mexico but also in
other key economies such as Colombia and Peru. Along with Bolivia and
Chile, these countries are all slated to hold presidential elections
between December and July. Ecuador may also hold elections during that
period.
Combined, these polls will
determine whether Latin America shifts further to the left or maintains
the market-friendly policies that dominated the region in the 1990s.
Already, leftist governments are in power in Argentina, Brazil, Uruguay
and Venezuela.
While the corruption
scandal in Brazil that is toppling one after another of President Luiz
Inácio “Lula” da Silva’s closest aides is grabbing most of the news
headlines out of the region, investors are just as keenly following
developments in Mexico, where Andres Manuel Lopez Obrador (popularly
known as AMLO among friend and foe) leads all polls in the race to
become the country’s next president. AMLO is a longtime activist of the
leftist Revolutionary Democratic Party and, until recently, mayor of
Mexico City, one of the world’s largest conurbations.
Colombia’S President Alvaro Uribe is Trying to Run for re-Election Espite a Constitutional Ban on Doing So
While
AMLO’s political party’s name might strike fear into the hearts of
investors, his policies may not be quite so revolutionary. “I don’t
think he’ll do anything crazy,” says John Welch, chief Latin America
economist with Lehman Brothers. “We’ve already seen some signs that
he’s moving to the center.” In the end, AMLO may become another Lula,
heavy on leftist rhetoric before the election but a pragmatist after,
several investors and analysts believe. Says Alfredo Thorne, the Mexico
City-based chief of Latin America research for JPMorgan Chase, “To be
honest, it may just be political rhetoric.”
When
Brazil’s Lula was first elected, the markets wobbled but gradually
recovered. Investors are expecting a similar outcome if other countries
in Latin America move further to the left. “I do think we’ll see
turbulence,” Welch says, especially on the currency sides. Lehman
expects the Mexican peso to weaken this year and more going into the
July elections, he says. To a certain extent, AMLO has already started
affecting stocks and bonds, says Enrique Alvarez, Latin America debt
strategist at research company IDEAGlobal. “He’s obviously the
frontrunner,” he says. “The market tends to discount that in advance.”
And
even if AMLO wanted to continue his leftist agenda after the elections,
he would likely face a divided congress, as current President Vicente
Fox has. “AMLO has to take measure of how the parties are organized in
congress,” says Pedro Tuesta, Washington, DC-based senior Latin America
economist, 4Cast. “The institutions in Mexico are strong enough to have
a leftist government.”
There is
still widespread skepticism among economists in Mexico that AMLO will
actually win. He still faces rivalry within his own party and will have
to counter the effects of increased campaigning from other leading
candidates as the election nears. “They expect AMLO to face strong
opposition as the machinery gets going into the election,” says Welch.
He believes that AMLO will win in the end, though.
Michelle Bachelet, the Rontrunner in Chile, is Expected to Continue the Market-Friendly Policies of the Outgoing President
For
international investors, the main concern is Brazil—by far the top bond
issuer in Latin America and the origin of most of the region’s ADR’s in
New York. “Brazil is the overriding concern,” says Welch. The
corruption scandal has been bad news for investors, who had been
generally pleased with Lula. And, until recently, he’d been a sure-bet
at winning re-election in October 2006. Now, the Brazilian president is
facing several scenarios, with mixed results for the markets. Even if
he isn’t impeached, that won’t necessarily be good news, investors
believe. “He’ll be extremely weak going into the election [and] may end
up not running at all,” says Welch.
That
would leave candidates such as finance minister Antonio Palocci and São
Paulo mayor José Serra, he says. Serra would probably win that
election, spelling good news for the markets. Serra lost the last
election to Lula but has received praise for his management of São
Paulo in the interim and gains from having no ties to the corruption
scandals in the current government.
But
if Lula were to run for re-election, what could happen? “The problem
for the market right now is if Lula decides to throw the house out the
window to win popularity,” warns 4Cast’s Tuesta.
Colombia
represents another uncertainty. President Alvaro Uribe, whose policies
have been popular with investors, is trying to run for re-election
despite a constitutional ban on this. The country’s Constitutional
Court is expected to rule on the matter later this year. “That’s a
problem,” says Tuesta. “We don’t know whether Uribe can run.” There
will be more market movement if he can’t run than if he can, forecasts
Welch.
In neighboring Peru, the
outlook is also uncertain. President Alejandro Toledo, whose constant
policy flip-flops have been unpopular in the business community, cannot
run for re-election in the April elections. Despite naming five prime
ministers since assuming office a little over four years ago, Toledo
has been fortunate enough to see Peru’s economy grow strongly the past
few years. “This president, as bad as he is, didn’t go back [on key
market reforms],” Tuesta says. “With commodities doing well, it’s been
easy to manage a good economy.”
Pedro
Pablo Kuczynski, a former managing director at Credit Suisse First
Boston who was named prime minister in August, is popular among
investors but has ruled out running. On the other hand, neither will
Alan Garcia, a former president who defaulted on Peru’s debt in the
1980s. That, at least, is good news for investors, Tuesta says.
Despite
the possibility that Bolivia will elect Evo Morales, a radical coca
activist, in elections in December, most investors say that will have
little effect beyond the South American country. “Bolivia is very tiny
within the overall spectrum of Latin America,” says Alvarez. Morales is
a close ally of Hugo Chavez in Venezuela, where oil continues to keep
the value of the country’s bonds high despite the anti-market policies
of the president. Venezuela is slated to hold elections in December
2006, which Chavez likely will win. “In the case of Venezuela, you
won’t see any changes in current policies so long as crude oil
continues high,” says Alvarez.
Another
country expecting few changes, even after the December 2005 elections,
is Chile. Frontrunner Michelle Bachelet from the ruling centrist
coalition is expected to continue the largely market-friendly policies
of outgoing president Ricardo Lagos.
“I
think certainly Chavez has made his point of being a very populist
leader,” says Thorne. “But there are lots of incentives for other
presidents to disagree.” Lula, for example, came with strong rhetoric
and realized that putting aside the rhetoric was much better for the
population at large, he says.
Most investors hope that will be the result in Mexico as well.
Joachim Bamrud
Global Finance, October 2005
Central Bank Report Cards
Argentina
Martin Redrado - Grade: D
Martin
Redrado has had his hands full since taking over at Argentina’s central
bank in a surprise appointment in September 2004. Redrado, a former
deputy foreign minister, has had to fight rising inflation as
government expenditures have grown. Inflation is likely to reach 7.7%
this year, up from last year’s rate of 4.4%. Meanwhile, GDP will likely
grow by 6%, down from the 9% growth of last year. Redrado has made some
noise about reining in government expenditure, but his hopes of making
a difference are slim. Although Redrado’s predecessor, Alfonso
Pratt-Gay, lasted longer in the job than many previous central bankers,
his demise, after less than two years, was allegedly the result of a
disagreement with President Nestor Kirchner over economic policy.
Redrado will have to be very careful if he is to avoid the same fate.
Despite his claims that the central bank is independent of the
government, many local economists and investors view the central bank
as too weak to efficiently fight inflation. Few consider the frequent
changes in leadership at the central bank as anything other than
politically motivated and another indication that the central bank is a
Kirchner puppet. Redrado will have his work cut out if he wants to
restore confidence in his organization. Of course, if he does, he’ll
probably suffer the same fate as his predecessors.
Brazil
Henrique de Campos Meirelles - Grade: B
In
no small irony, Brazil’s top banker has survived yet another year,
despite allegations last year that he may have evaded taxes and engaged
in irregular forex transactions. Nevertheless, President Luiz Inácio
“Lula” da Silva decided to keep him on in a wise move, and today the
charges against Henrique de Campos Meirelles appear among the least of
Lula’s problems, as a number of his closest aides have had to resign
over direct corruption charges. But the current scandal has put
pressure on Meirelles to keep inflation down, a job he has managed
quite well. This year inflation will likely fall to 5.4%—an improvement
from last year’s 6.6%, although higher than the official target of
5.1%. Meanwhile, GDP will expand by 3.4%, much less than the growth of
last year, but only slightly lower than the early forecasts from the
central bank. Unlike its neighbor in Argentina, Brazil has managed to
keep the central bank strong and well respected. Meirelles thus gets to
keep his B grade yet another year.
Chile
Vittorio Corbo - Grade: A-
For
Vittorio Corbo, better than-expected GDP growth spells
worse-than-expected inflation. The good news is that the price of
copper, Chile’s top export, is up, leading to increased investments and
more job creation. The impact of this on GDP growth has been
impressive, with no less august an institution than the IMF predicting
that Chile’s economy will swell by more than 6% this year—substantially
more than the original 4.7% forecast. As is so often the case, though,
strong GDP growth, coupled with rising oil prices, is putting pressure
on inflation. By July it had scorched past its 3% annual target,
rocketing to a two year high of … 3.1%. Corbo is unlikely to be
breaking a sweat, partly because it is his actions that have kept
inflation under control. Between November 2004 and August this year he
raised rates eight times, nudging them up from a record low of 1.75% to
stand at 3.75% by mid-August. With one eye on continuing inflation
pressure, Corbo is expected to keep pushing on the brakes, perhaps
easing rates up to 4.5% or higher by the end of the year. His steady
hand at the bank and close control over inflation earns him an
impressive A-.
Mexico
Guillermo Ortiz Martinez - Grade: B
Mexico’s
top banker is caught in a classic central bank bind:
Weaker-than-expected GDP growth is forcing him to cut lending rates,
but he needs to keep inflation under control. Such a conundrum is
hardly likely to rattle Guillermo Ortiz, who as finance minister 10
years ago was instrumental in helping to rebuild the country’s
financial stability after the December 1994 peso crash. This time
around Ortiz is facing fewer macro fluctuations, but with GDP growth
slowing down after a promising start to the year, the central bank has
had to change its forecast several times. The official growth forecast
is now back to its original figure of 3.7% (private sector economists
forecast even lower growth). The central bank has also had to change
tack on interest rates. After raising them 12 times between February
2004 and April this year, it’s now bringing them back down again.
Meanwhile, inflation will probably end up at less than 4%, better than
the original forecast of 4.6%. The central bank’s survey of 34
economists at the end of July even showed an average estimate of 3.8%,
which would be its lowest rate in three decades.
Global Finance, September 2005
Global Custody
Global Custodians Focus on Innovation
As they
strive to find ever more creative ways to serve their clients,
custodians are increasingly finding themselves on the cutting edge of
technological innovation.
Invest
in technology or die. That’s the clear message from global custody
executives. “The technology is core in any aspect in [the] entire
custody workflow,” says Christian Hudson, chief information officer of
Swiss-American Securities (SASI). “It makes it harder and harder for
small and medium-size custodians to survive.”
Jim
Flannery, senior vice president and national marketing and sales
manager for Mellon Global Securities Services, agrees. “You invest in
technology and make sure that you’re either even with or ahead of the
curve in terms of technology,” he says. “One of the things that has
caused previous custodians in the US to sell their business is that you
have to have some scale in order to do it. There are some basic things
that you have to do that the industry or regulators require but that
are not inexpensive.”
Kevin Galvin,
the San Francisco-based vice president of institutional services and
asset management at Union Bank of California, agrees. “It’s really been
incumbent on us to continue to invest in [technology] or risk losing
[our] client base,” he says.
Flannery: Clients want faster data
But
significant technology investments are not enough. “The challenge will
be how to spend investments in technology wisely,” says John Galante,
JPMorgan’s chief technology officer for treasury and securities
services. “The goal is to aggressively pursue targeted investments in
technology and execute in a timely manner. Because of the heavily
regulated environment, the changes we’ve implemented are going to
ensure transparency and improve reporting to ensure compliance.”
JPMorgan recently added new custody technology, including JPMorgan
Performance Measurement, JPMorgan E-Tax and electronic distribution of
corporate action materials.
One of
the key innovations implemented by Mellon’s custody business was to
provide its clients with so-called “dashboard” reports, permitting a
customized screen inside the regular PC screen. “They’re populated
every day with information customers said they want,” Flannery says.
“It’s based on two or three things they like to see and don’t have to
go into databases and gather.”
Mellon
acquired Eagle Investment Systems in 2001 partly in order to be able to
have access to high-grade and next-generation technology. “By
purchasing Eagle, we purchased state-of-the-art technology,” Flannery
says. “We now have a factory that will not only generate
next-generation technology, but maybe fill holes where we have a
product gap.”
Union
Bank of California took control of its web utilities in December last
year. Prior to that it had utilized web-services-supported external
solutions. “By taking it in-house, we take data feeds in real time into
a relational database that we own, so that we hang it to our web
portal,” Galvin says. The result is that clients have access to more
information faster. “Our objective is to be able to make it as
efficient as possible and as seamless as possible for our clients to
have access to all the moving parts of the accounting environment and
how they measure and analyze that,” he says.
It’s
the “C” for communications in “ICT” (information and communications
technology) that will be crucial, adds Jon Lloyd, the Paris-based head
of clearing, settlement and custody at BNP Paribas Securities Services.
“The providers who can most easily and openly integrate themselves with
their clients and their clients’ operational processes will have a true
competitive advantage,” he says. “Innovative connectivity solutions
will therefore be one of the keys to success going forward.”
Galante: Execute in a timely manner
Among
the key technology innovations implemented at BNP Paribas Securities
Services is using the Internet rather than paper-based systems to
facilitate proxy voting before shareholder meetings to improve security
and efficiency. It has also implemented SwiftXML messages for its
transfer agent and fund administration products and established an
architecture principle to improve scalability and resilience.
Further
innovation will be key, Lloyd says. “Implications could be
considerable, especially as we seek ways to improve client connectivity
and STP [straight-through processing],” he says. “Hence developments
like ‘XML integrates’ are of considerable interest to us to help
simplify the myriad of connections needed, whether with clients, the
market infrastructure or internal applications.” XML (Extensible Markup
Language) permits the sharing of data across different systems.
BNP
Paribas Securities Services is also developing “rich client” front-ends
using “.net” to support what it calls power users within corporations,
according to Lloyd. “This will help to enhance the overall client
service by enabling operational account managers to develop their own
queries and workflow tools,” he points out.
Another
key challenge is to make sure clients actually use the technology
correctly. “It’s amazing how people don’t always understand the
technology. Fortunately, we have a dedicated CRM group that is
exceptionally active being at clients’ sites,” Hudson says.
More
important, incorrect use of technology could lead to lost business.
“When you bring a new client—and all technology is new—you end up
having to go back every while, just like an annual physical,” Flannery
says. “You want to avoid that a competitor shows them something they
didn’t realize was available on their PC. That way you make sure you
get maximum return on your investment.” And technology without the
equivalent service is also a waste. “Once you have technology in place,
you have to make sure you back that up with service,” Flannery adds.
Galvin: Invest or risk losing clients
A
key element clients increasingly require is speed, custody executives
say. “People want to know how quickly can I get my … information,” says
Flannery. Whether it’s pension fund managers or asset managers, they
want data as fast as possible. “Both seem to want data faster—core data
around securities or audited accounting data or performance data,”
Flannery says. That means companies have to spend money on technology
so they can get audited accounts not on the seventh business day, but
the third business day, he says. “Even the people who hire managers, a
lot of time they want snapshots of unaudited accounts early,” he notes.
Another key issue is security—of
greater concern now that custodians are using web-based solutions
rather than dedicated lines as in the past, Flannery points out.
“Information delivery is a key element of the future state of the
custody business,” he says.
In the
end, technology will help the bottom line. “The ability to maintain
proper accounting controls leads to more efficient and less risky
operating environments,” Galvin says. “To the extent that we’re able to
develop a more efficient operating environment, that will control our
operating overhead and improve our margins.”
Joachim Bamrud
Brazil ADR
Report in Global Finance magazine, July/August 2005
Brazil’s Trailblazers Continue to Drive Innovation in ADR Market
Despite political turmoil at home,
many American Depository Receipts (ADRs) of Brazilian companies are
doing well, thanks to strong liquidity in the United States. But
volatility is also hurting many stocks.
Jose
Marcos Treiger, head of investor relations at Brazil’s petrochemical
giant Braskem, is a big fan of ADRs. He has seen firsthand the positive
results the ADR-issues have brought—first to pulp producer Aracruz in
1992, where Treiger worked as an investor relations officer, then again
at Braskem last year. On September 22 of last year Braskem raised
$281.5 million after issuing 9 million depository receipts in New York.
“This became the most important and biggest equity offering by Brazil
in 2004,” says Treiger, who is also a former president of the Brazilian
Institute of Investor Relations (IBRI).
The
ADR issue actually had more demand, with total interest worth $1.9
billion, thanks to an ambitious road-show that included 110 meetings in
the United States, Europe, Argentina and Brazil. Treiger believes part
of the reason for the issue’s success was that the company rented a
private jet to bring the executives to meet with investors. “We were
everywhere whenever possible,” he says.
Braskem’s
ADR (BAK) was among the five best-performing ADRs on the NYSE last year
and the overall best performer in 2003. The Braskem ADR was officially
listed in September 2003 after it replaced the ADR being held by
Copene. Braskem is the result of the merger of various petrochemical
companies, including Copene. Thanks to the capital raised last year,
Braskem was able to reduce its debt, while raising its international
profile. “You can see how important the ADRs are to [that] success,”
Treiger says.
Alexandre Q.
Fernandes is another keen supporter of ADRs. As disclosure manager of
investor relations at Petrobras, Brazil’s largest company and the
second-most traded Brazilian ADR, he’s seen the company’s depositary
receipts (DRs), whose symbols are PBR (common) and PBRA (preferred),
skyrocket from $25.25 and $12.74, respectively, to $52.80 and $46.51 on
June 28. “PBR is among the 10 most-NYSE-negotiated ADRs, and PBRA among
the 20 most negotiated,” he points out.
While
volatility has affected some shares, overall Brazilian ADRs have gained
in value and volume the past year. The Bank of New York’s Brazil ADR
Index went from $84.88 to $155.49 in the 52-week period ended on June
30. In the first six months of this year it gained 13%. The increase is
due to a combination of factors, including significant revenue and
earnings growth by the companies, increased confidence in Brazil’s
macroeconomic policies and economic outlook and growing liquidity among
US investors.
The index includes 34
Brazilian companies, all of which are listed on the NYSE. All but five
posted gains in the 52-week period ended June 30. The strongest gain
was registered by Perdigao (PGA), which saw a 135% increase in its ADR
price. Banco Bradesco (BBD) followed at 126%. Other big winners include
Cemig (CIG), Ultrapar (UGP), Banco Itaú Holding (ITU), and the two
companies with the most traded ADRs—Companhia Vale do Rio Doce (RIO and
RIO-P) and Petrobras.
The worst
decline was posted by wireless operator Telesp Celular Participações,
which saw its preferred ADR (TCP) decline by 44%, followed by
long-distance telephone operator Embratel (EMT), with a 23% decline,
according to data from the Bank of New York.
Despite
Telesp Celular’s recent tumble, Charles Allen, the company’s investor
relations director, remains a firm believer in the benefits of ADRs.
“It’s liquidity and exposure to the international market,” he says. “I
don’t see any disadvantage in having ADRs except for a slight amount of
additional paperwork, but that’s it.” Under the Vivo brand, Telesp
Celular Participações operates Brazil’s top wireless operator. The
Telesp ADR was launched in November 1998 as part of the Telebras ADR,
which was later split as a result of the privatization of Telebras.
Geraldo
Soares, investor relations manager at Banco Itaú, agrees. “The ADR
initiative aims to give Banco Itaú Holding Financeira greater
visibility and to encourage share trading in international capital
markets, since investors the world over can now trade our shares in
dollars,” he says. “This increases the liquidity and the upside
potential of Banco Itaú Holding Financeira’s shares.”
But
not everyone sees the ADRs as a panacea. For Luiz Gonzaga Murat, chief
financial officer of Brazilian food producer Sadia, having an ADR is a
double-edged sword. “Our program was launched … in order to access the
American equity market and open the possibility of Sadia participating
in the most developed worldwide market,” he says. While that is clearly
an advantage, information disclosed in relation to the ADR can reach
the company’s competitors. Sadia also has to bear extra costs simply to
have an ADR, although it has not participated in any equity calls in
the past 10 years, Murat says.
Nevertheless,
the Sadia executive is pleased with the result. Sadia’s Level II ADR
(SDA) has traded a daily average of $679,672 in the first quarter of
this year. That’s more than twice the average for all of 2004. However,
its value declined from $66.05 at the start of this year to $19.54 in
early trading on July 1.
The ADRs
provide access to significantly larger markets than local stock
exchanges such as the São Paulo Stock Exchange (Bovespa), Brazilian
executives and independent analysts point out. “The stock exchanges in
Brazil have small volumes compared to the big financial centers,” says
Pedro Roberto Galdi, a São Paulo-based analyst with ABN AMRO. That was
a major driver behind the decision by Companhia Vale do Rio Doce (CVRD)
to launch an ADR. The company wanted “to reach a large pool of
investors and increase the company’s shareholder base,” says Fatima
Cristina, CVRD’s international spokesperson.
Investors
are also sometimes wary of putting their money into the local exchanges
because they are concerned about regulation or other issues like
currency differences, while some funds are not permitted to trade in
stocks not listed on US exchanges. Bovespa, for example, is weakened by
questions around minority rights, although there are reform proposals
to make the exchange more efficient, says Christopher Garman, a São
Paulo-based analyst with the Eurasia Group. “Unfortunately, [local]
capital markets are not sufficiently developed,” he says.
Soares
from Banco Itaú agrees. “Entering in the ADRs market, Banco Itaú had to
fulfill the rules of US law that is different from Brazilian, and then
we made it an opportunity to improve our controls in advance of any
Brazilian legal imposition,” he says. Last year the bank created an
audit committee, formed by three councilors (two independents and one
external). The company’s corporate governance standards are now in line
with Sarbanes-Oxley requirements. “The disclosure and the expansion of
controls shouldn’t be treated as an obligation but always like an
opportunity to improve all the inside process,” Soares says.
Rene
Boettcher, vice president at the Bank of New York and head of Latin
America marketing for ADRs, points out that Brazilian companies—as well
as public regulations—have made significant progress the past few
years. “Overall, in the corporate governance landscape, Brazil has made
huge strides to become more transparent. Corporate governance has been
a huge topic the last two years,” he says.
Brazil
is the top ADR market in Latin America, with 96 ADR programs, compared
with 82 for Mexico. Worldwide, it ranked third last year measured by
trading value and fourth in trading volume, according to the Bank of
New York. Eight new Brazilian ADR transactions raised $1.1 billion last
year—almost three times as much as the capital raised in 2003. Among
the most successful was the ADR launch of airline Gol Linhas Aéreas
Inteligentes (GOL).
While some
other countries may have larger ADR volume than Brazil, the South
American country is unique in that it offers such a broad spectrum of
companies. “If you look at the breadth of Brazil, then it’s even more
important. Finland has one or two [ADRs] or Taiwan has a huge volume
out of three or four names,” says Boettcher. “That is why I think
Brazil is a huge force and will continue to be.”
Brazilian
companies are using ADRs to receive exposure and visibility in the US
market, broaden shareholder base, get more sell-side coverage, increase
interest in the country through the big companies, and use ADRs as
M&A currency, says Candice Teruszkin, regional head of Latin
America for ADRs at JPMorgan. Because of their flexibility and
liquidity, they form a useful addition to a company’s financial
toolbox. Apart from ADRs, Brazilian companies typically use the Bovespa
or even European stock exchanges to raise funds. Telesp, for example,
lists two shares on Bovespa (ordinary and preferred) and has a program
of bonds (through national and international markets) and some loans
from local development banks, Allen says. “We’re glad to have many
sources, including the NYSE, Bovespa or other markets,” he says.
Allen
believes the key to using ADRs successfully as part of a company’s
capital-raising toolbox is to be adaptable. “It’s not static; it’s
something that changes,” he says of the capital markets. “It’s
difficult to say, ‘Yes, I prefer Bovespa’ or ‘Yes, I prefer ADRs.’ It’s
simply a question of when you need it and how conditions are.”
Brazilian
companies Braskem, Sadia and pulp-and-paper-producer Suzano Bahia Sul
Papel e Celulose are also listed on Latibex, a market in Madrid on
which individual Latin American companies may list their shares.
Braskem was first out, with a listing on October 8, 2003, while Sadia
was the latest addition from Brazil, with a listing on November 15 of
last year.
The demand for existing
Brazilian ADRs is high and has helped offset the relatively low number
of new issues the past few years. Last year there were only six new
issues, and the year before that, only one. That compares with an
average of 10 during each of the previous four years. So far this year,
two companies have issues two ADRs each—transportation company ALL-
América Latina Logistica and online retailer Submarino in March and
April.
“The current state of the
Brazilian market is positive,” Teruszkin says. “Currently, there is
ample liquidity in the US market and local market as well. There is a
favorable appetite for Brazil.”
Of
today’s 10 most popular ADRs, six were launched in 2000 or later. In
terms of sectors, electric utility accounts for most of the ADRs (with
21), followed by telecommunications (13) and metal production and
distribution (8).
Despite the
recent volatility, executives like Sadia’s Muzat and CVRD’s Cristina
are optimistic about their ADRs. “CVRD sees an increasing interest in
the company’s shares not only from institutional investors but also by
other countries’ individuals,” says Cristina. “So the outlook for ADRs
remains very positive.”
ABN AMRO’s
Galdi believes more Brazilian companies will issue ADRs in the future.
“The companies have a need, and this is a way to follow,” he says.
“There is currently a cycle of new IPOs in Brazil with the expectation
that they will also be listed internationally.”
Some
analysts, however, are less optimistic. “I see a large trend of local
IPOs and less issuance of ADRs Level II or III, due to Sarbanes-Oxley
and other requirements,” warns Teruszkin. “There could likely be a
better chance of future Level IIIs due to the need to raise cash and a
better comfort level on the regulatory front.”
But
independent of the continued growth or not, Brazil has reason to be
proud of its ADR record, Boettcher points out. “If you look at the past
13 years—1992 was the first year when a Brazilian company made its
Level III global public offering—from that moment onwards it has been
only growth, every year,” he says. “In 13 years, you’ve gone from one
ADR program to now almost 100. That is huge growth.”
Dirceu, whose resignation triggered a rally in Brazilian ADR prices
In
early June Brazilian legislator Roberto Jefferson from the Labor Party
claimed that President Luiz Inácio Lula da Silva’s Workers’ Party (PT)
paid lawmakers money to support the coalition government. Lula has
denied wrongdoing, but four of his top aides resigned by mid July:
chief of staff José Dirceu, PT secretary general Silvio Pereira, party
head José Genoino and PT treasurer Delúbio Soares.
Lula
has vowed to investigate fully all the charges and punish whoever is
guilty. Even though no conclusion has yet been reached, the scandal has
dampened enthusiasm for Brazilian ADRs. Leading ADR’s such as CVRD
(RIO), Gerdau (GGB), CSN (SID) and Gol (GOL) all fell during July 5
trading, mostly as a result of the growing political scandal. “The
repercussions for Brazilian ADRs are somewhat mitigated by the
investigation not being able to impact directly President Lula, and
it’s difficult to see a scenario for an impeachment,” says Christopher
Garman, a São Paulo-based analyst with the Eurasia Group.
Brazilian
ADRs had, in fact, rallied on the news of Dirceu’s resignation and the
fact that Jefferson had been unable to present concrete evidence for
his accusations.
Political turmoil
at home isn’t the only factor that can weaken ADRs, though. “It’s a
bigger financial market with a lot of demand, but riskier at times with
very high interest rates, big surplus due to exports and currency
benefits,” says Candice Teruszkin, JPMorgan’s ADR regional head of
Latin America. “Globally, it’s a very attractive market—high-risk
though, which can be very volatile at times with big political and
economic influences on the course of the market.” Not all Brazilian
companies view volatility as a disadvantage of the ADR program, though.
“Volatility [is] part of the game, “ says Charles Allen, investor
relations director at Telesp. “We would have that anyway. All stock
exchanges are somehow connected, so I wouldn’t say additional
volatility is bad or good.”
Brazil’s Trailblazers Continue to Drive Innovation in ADR Market
Braskem
Top line results (in Brazilian reals) 2004: Sales R$14.3 billion Net Profits: R$691 million 2003: Sales R$11.3 billion Net Profits: R$215 million
Company Profile Industry Sector: Petrochemicals ADR Program: Level III Product/Service
Description: Braskem produces a diversified portfolio of petrochemical
products, with a strategic focus on thermoplastic resins (polyethylene,
polypropylene and polyvinylchloride). While supplying petrochemical
products with applications in a wide variety of industries (such as
food packaging, automotive parts, paints, construction, agriculture,
fabrics and personal care products), Braskem is focused on
strengthening its position as a world-class petrochemical company as
well as on enhancing shareholder value, with strategic drivers
consisting of market leadership, cost competitiveness and technological
autonomy.
Business Developments Braskem
S.A. is the leading petrochemical company in Latin America and the
largest petrochemical cracker and thermoplastics producer in Brazil.
Its business operations are organized into four main business units:
Basic Petrochemicals, Polyolefins, Vinyls and Business Development. As
the only Brazilian company with integrated first- and second-generation
petrochemical production facilities, Braskem was created in 2002 as a
result of the successful merger of the operations of six Brazilian
petrochemical companies.
Outlook The growth
rate in the global demand for petrochemical products has surpassed the
increase in supply of petrochemical products. In Brazil, the
thermoplastic resins industry has registered a growth rate higher than
that of the GDP, with a historic elasticity of approximately three
times. In light of this scenario, Braskem’s strategic planning
focuses on positioning the company as a benchmark in value creation for
its shareholders through (1) its market leadership, (2) increasing its
production scale with cost competitiveness and (3) autonomy in
innovation and technology—as a distinguishing advantage in serving its
clients.
Top line results (in Brazilian reals) 2004: Sales R$5.5 billion Net Profits R$374 million 2003: Sales R$4.4 billion Net Profits R$171 million
Company Profile Industry Sector: Electric Power ADR Program: Level III Product/Service Description: Generation, transmission and distribution of electric power.
Business Developments The
company was formed in 1954 by the State of Paraná to engage in the
generation, transmission and distribution of electricity, as part of a
plan to bring electric power to the State of Paraná. Prior to 2001 it
was a single corporation engaged in the generation, transmission and
distribution of electricity and in certain related activities. In order
to comply with the changed regulatory regime, the company transferred
its operations to five wholly owned subsidiaries: generation,
transmission, distribution, telecommunications and partnerships.
Outlook COPEL is a
fully integrated electric power company engaged in the generation,
transmission and distribution of electricity in the Brazilian State of
Paraná, pursuant to concessions granted by the Brazilian regulatory
agency for the electric sector, ANEEL. At December 31, 2004, COPEL
generated electricity at 17 hydroelectric plants and one thermoelectric
plant, with a total installed capacity of 4,550 MW (approximately 99.6%
of which is hydroelectric) and 3.2 million customers. COPEL hold
concessions to distribute electricity in approximately 98% of the 399
municipalities in the State of Parana. As of December 31, 2004, COPEL
owned and operated 6,996 kilometers of transmission lines and 165,576
kilometers of distribution lines, constituting the second-largest
distribution network in Brazil.
Top line results: (in Brazilian reals) 2004: Sales R$2.0 billion Net Profits R$385 million 2003: Sales R$1.4 billion Net Profits R$175 million
Company Profile Industry Sector: Air Transportation ADR Program: 144 (a) Product/Service
Description: Gol Linhas Aéreas is the only low-fare, low-cost airline
operating in Brazil providing frequent service on routes connecting all
of Brazil’s major cities. Gol focuses on increasing the growth and
profits of its business by popularizing air travel and stimulating and
meeting demand for affordable, convenient air travel in Brazil and
between Brazil and other South American destinations for both business
and leisure travelers.
Business Developments Gol
has flown more than 29 million passengers since the beginning of its
operations in 2001 and, according to the DAC, Brazil´s civil aviation
industry, Gol´s share of the domestic market based on revenue passenger
kilometers grew to 28.8% as of the end of the first quarter of 2005.
Outlook In
2005 Gol will continue to invest in its successful low-fare, low-cost
business model. Gol will continue to evaluate opportunities to expand
operations by adding new flights in Brazil where sufficient market
demand exists and expand into other high-traffic centers in South
American countries. The addition of 13 aircraft to the fleet in 2005
will allow a 50% increase in available seat capacity.
Top line results (in Brazilian reals) 2004: Sales R$1.5 billion Net Profits -R$45.4 million 2003: Sales R$1.3 billion Net Profits -R$268.4 million
Company Profile Industry Sector: Communication (pay-TV and broadband) ADR Program: Level III Product/Service
Description: NET is the leader in pay-TV service in Brazil, with more
than 1.4 million connected subscribers. NET’s cable network extends
over 35,805 km and passes through approximately 6.7 million homes. Net
also offers the Vírtua, a wideband service, and is the only cable TV
company to provide the Globosat channels, being the leader in this
field with a market share greater than 60% and with its client base
formed by classes A and B.
Business Developments Net
Serviços is Latin America’s Leading pay-TV multi-operator. Net Serviços
shares are traded in Brazil (Bovespa), United Sates (Nasdaq) and Europe
(Latibex). Net Serviços was one of the first companies to join
Bovespa’s Special Corporate Governance—Level II, affirming its
commitment to the best corporate governance practices and investor
relations transparency. The company’s shareholder structure counts with
solid shareholders in its controlling group.
Outlook Net’s
operational view aims at maintaining leadership at the pay-TV segment,
investing in Vírtua’s continued growth through directed marketing, and
launching new packages and products. On the financial side, the company
has a strengthened capital structure, directed investment, and strong
controlling shareholders practicing corporate governance best
practices. Net’s main focuses are client satisfaction and profitability.
Helped
by rising demand in China, Brazilian steelmaker Acesita has grown
revenues this year. After hitting a low in July, its stock has been
climbing steadily and was selling for more than $35 in mid-October—a
15% improvement over a year earlier. So attractive is Acesita that
Arcelor, the world’s second-largest steelmaker, made a bid in October
to buy the company. 
Banco
Bradesco, Brazil’s top private bank, has seen its ADR jump from $34.82
in July to $50.17 on October 10. That brought its increase year-to-date
to an impressive 100%. The results are partly tied to the bank’s
performance so far this year; in the first half it managed to more than
double its net income over the same period last year. 
CVRD’s
preferred ADR (Rio-P) rose from $27.85 in July to $36.38 on October 10.
That was also a 49% increase year-to-date. CVRD, the world’s largest
producer of iron ore, has seen continued strong demand from China. And
global iron ore demand is rising faster than CVRD can boost its
production. 
The
ADR of Gerdau, Latin America’s largest steelmaker, has gone from $10.39
in July to $13.92 on October 10. The latest price is also a 16%
improvement year-to-date. The company has been helped both by rising
demand in China and more recently from Hurricane Katrina repair efforts
on the US Gulf Coast. 
Startup
and low-cost airline Gol has seen a slight increase in its ADR
price—from $29. 70 in July to $31.45 in October—yet it can boast rising
revenue and net income as it increasingly takes market share from the
established flag carrier, Varig. 
Helped
by soaring international oil prices, Brazil’s state oil producer
Petrobras can boast an ADR price increase of 58% year-to-date. The
October 10 price of $57.21 is also significantly higher than the July
closing price of $45.72. 
Martin
Redrado has had his hands full since taking over at Argentina’s central
bank in a surprise appointment in September 2004. Redrado, a former
deputy foreign minister, has had to fight rising inflation as
government expenditures have grown. Inflation is likely to reach 7.7%
this year, up from last year’s rate of 4.4%. Meanwhile, GDP will likely
grow by 6%, down from the 9% growth of last year. Redrado has made some
noise about reining in government expenditure, but his hopes of making
a difference are slim. Although Redrado’s predecessor, Alfonso
Pratt-Gay, lasted longer in the job than many previous central bankers,
his demise, after less than two years, was allegedly the result of a
disagreement with President Nestor Kirchner over economic policy.
Redrado will have to be very careful if he is to avoid the same fate.
Despite his claims that the central bank is independent of the
government, many local economists and investors view the central bank
as too weak to efficiently fight inflation. Few consider the frequent
changes in leadership at the central bank as anything other than
politically motivated and another indication that the central bank is a
Kirchner puppet. Redrado will have his work cut out if he wants to
restore confidence in his organization. Of course, if he does, he’ll
probably suffer the same fate as his predecessors. 
In
no small irony, Brazil’s top banker has survived yet another year,
despite allegations last year that he may have evaded taxes and engaged
in irregular forex transactions. Nevertheless, President Luiz Inácio
“Lula” da Silva decided to keep him on in a wise move, and today the
charges against Henrique de Campos Meirelles appear among the least of
Lula’s problems, as a number of his closest aides have had to resign
over direct corruption charges. But the current scandal has put
pressure on Meirelles to keep inflation down, a job he has managed
quite well. This year inflation will likely fall to 5.4%—an improvement
from last year’s 6.6%, although higher than the official target of
5.1%. Meanwhile, GDP will expand by 3.4%, much less than the growth of
last year, but only slightly lower than the early forecasts from the
central bank. Unlike its neighbor in Argentina, Brazil has managed to
keep the central bank strong and well respected. Meirelles thus gets to
keep his B grade yet another year. 
For
Vittorio Corbo, better than-expected GDP growth spells
worse-than-expected inflation. The good news is that the price of
copper, Chile’s top export, is up, leading to increased investments and
more job creation. The impact of this on GDP growth has been
impressive, with no less august an institution than the IMF predicting
that Chile’s economy will swell by more than 6% this year—substantially
more than the original 4.7% forecast. As is so often the case, though,
strong GDP growth, coupled with rising oil prices, is putting pressure
on inflation. By July it had scorched past its 3% annual target,
rocketing to a two year high of … 3.1%. Corbo is unlikely to be
breaking a sweat, partly because it is his actions that have kept
inflation under control. Between November 2004 and August this year he
raised rates eight times, nudging them up from a record low of 1.75% to
stand at 3.75% by mid-August. With one eye on continuing inflation
pressure, Corbo is expected to keep pushing on the brakes, perhaps
easing rates up to 4.5% or higher by the end of the year. His steady
hand at the bank and close control over inflation earns him an
impressive A-. 
Mexico’s
top banker is caught in a classic central bank bind:
Weaker-than-expected GDP growth is forcing him to cut lending rates,
but he needs to keep inflation under control. Such a conundrum is
hardly likely to rattle Guillermo Ortiz, who as finance minister 10
years ago was instrumental in helping to rebuild the country’s
financial stability after the December 1994 peso crash. This time
around Ortiz is facing fewer macro fluctuations, but with GDP growth
slowing down after a promising start to the year, the central bank has
had to change its forecast several times. The official growth forecast
is now back to its original figure of 3.7% (private sector economists
forecast even lower growth). The central bank has also had to change
tack on interest rates. After raising them 12 times between February
2004 and April this year, it’s now bringing them back down again.
Meanwhile, inflation will probably end up at less than 4%, better than
the original forecast of 4.6%. The central bank’s survey of 34
economists at the end of July even showed an average estimate of 3.8%,
which would be its lowest rate in three decades. 
