CONFIDENTIAL
RESEARCH March 24 2016
LATAM
Risk is in the eye of the beholder Foreign investors are piling into Brazil: what do they see in the market turbulence that has left locals fearful and unimpressed? LATIN AMERICAN CONSUMERS FIND LITTLE REASON TO BE CHEERFUL
SWEET DISCOUNTS ON OFFER IN BRAZIL’S BATTERED SUGAR SECTOR
BOLIVIA’S PROMISE FOR INVESTORS AS EVO ERA DRAWS TO CLOSE
MAR 24 2016
Macro | LATAM
2
5 FINANCE Argentine equities from off-limits to top picks 11
Perceptions of Brazil vary dramatically. Stunned by a relentless flow of negative news, bearish Brazilian investors think CONSUMER FTCR Consumer risk-embracing foreigners have taken Survey finds little improvement leave of their senses in sentiment
13 ENERGY AND RESOURCES When it comes to dramatic inversions of fortune, Latin America loses none of its power to Brazil: Sugar and ethanol assets offer disappoint, providing fresh confirmation that risk is in the eye of the beholder. Argentina – long excluded from international capital markets – has now been almost value for vultures wholly rehabilitated, thanks to US president Barack Obama’s talks in Buenos Aires with his
counterpart Mauricio Macri, building on a previous surge of approval by G7 leaders, and MACRO Bolivia: Opportunity promises of foreign investment (LatAm Mar 1, Macro). Markets eagerly await a massive grows in twilight of Argentine sovereign bond issue – which, if it raises the expected $11bn-15bn, will treble Evo era issuance of emerging market sovereign debt so far in 2016.
23 METRICS
Meanwhile, the erstwhile regional darling Brazil is plunging into protracted economic and political self-harm as President Dilma Rousseff’s government teeters (LatAm Mar 17, Macro). Massive street demonstrations and growing polarisation, not just among the electorate but also between the executive and judicial branches of government, point to a coming rupture. Yet risk perceptions of Brazil vary dramatically. Brazil’s stock market has risen for six consecutive weeks, its longest bull run since 2010. For foreign investors trained to “buy on the dips”, there is a conviction that the country has finally hit bottom and cyclical investment patterns will reassert themselves. Stunned by the relentless flow of negative news, bearish Brazilian investors think risk-embracing foreigners have taken leave of their senses. Our quarterly LatAm Fund Manager Survey (see Finance) revealed that stocks on São Paulo’s Bovespa index were indeed top international investor picks. A growing number of respondents felt that Latin America’s most diverse equity market was ready to rebound.
1. Brazil tempting investors with bargains Brazil tempting investors with bargains
How would you assess equity valuations in these countries? Expensive
Fair
Cheap
I do not know
20
No. of respondents
18
15 10 5 0
4Q15
1Q16
4Q15
Argentina Source: FT Confidential Research
1Q16
Brazil
4Q15
1Q16
Chile
4Q15
1Q16
Colombia
4Q15
1Q16
Mexico
4Q15
1Q16
Peru
MAR 24 2016
3
Macro | LATAM
-3.8%
-3.6%
Overweight exposures doubled from three to six over the last three months, and investors planned to maintain this positive allocation into 2Q16 (see chart 1). The surprising optimism of our international respondents is confirmed by Bovespa fund flow data, which also highlights the conflicting pessimism of local investors. During the first half of March the Bovespa index rose 16% in large part because foreign investors bought a reported R$5.97bn ($1.66bn) worth of stocks (see chart 2).
2015
2016E
Catching a falling knife
But locals see it the other way around. In March, for every two dollars foreign fund managers pumped in to the Brazilian stock market, local investors withdrew one. So the jury is out. If Brazil’s current stock market bubble is caused by flows of hot money uncorrelated with economic fundamentals, is a slump coming? Local pessimism seems a more objective response than foreign optimism that regime change (if it comes) will rapidly unlock economic growth. The economy is expected to contract 3.6% in 2016, following on from 2015’s 3.8% slump. But political turmoil has seemingly distracted attention from the deep underlying fiscal problems that threaten the prospects for economic recovery (LatAm Mar 3, Macro). However many foreign investors may wish these troublesome facts away, current budgetary problems seem intractable because discretionary spending, which can legally be cut, comprises too small a share of the budget to make a real difference. Restrictions imposed by the country’s constitution mean that 80% of its budget spending is locked in.
Plus ça change
Aside from the prospect of impeachment for Ms Rousseff and the injunction blocking her controversial attempt to restore former president Luiz Inácio Lula da Silva to influence, the bad economic news keeps flooding in. Brazil’s bellwether stock Petrobras (PETR4:SAO) fell sharply on March 22 after reporting record quarterly losses of R$36.9bn, hit by low oil prices and the continuing fallout of the so-called Car Wash corruption scandal. And if consumer confidence is any indicator of future market performance, pessimists are on more solid ground. Car sales, a useful barometer of the relative level of economic hardship, have plummeted. Sales of locally made cars fell 31.3% YoY in February, with those of imported cars down an even-sharper 44% (LatAm Mar 9, Industry and manufacturing). Furthermore, our 1Q16 Consumer Survey found Brazilians in a gloomy mood: the Economic Confidence Index for the country remained deep in negative territory, at 9.0, down from 21.6 two years prior (see Consumer). Our Government Popularity Index for Brazil remained at
2. Brazil’s 2016 equity market in the making Brazil’s 2016 equity bullbull market in the making Bovespa index weekly change 20 15 10 % 5 0 -5
Source: Thomson Reuters Datastream
l-1 5 Au g15 Se p15 Oc t-1 5 No v15 De c15 Ja n16 Fe b16 M ar -16
Ju
n15 Ju
ay -15
r-1 5
M
Ap
ar -15
-15
M
Fe b
n15
-10 Ja
Brazil’s negative GDP growth to continue
MAR 24 2016
4
Macro | LATAM historically low levels – mirroring recent opinion polls that found 68% of respondents would support impeachment proceedings for Ms Rousseff.
68% Of respondents would support impeachment proceedings for Ms Rousseff
Sweet, sweet distress
But, as ever, bad economic news is good news for distressed asset investors, particularly would-be buyers of sugar and ethanol assets. A quarter of Brazil’s sugar and ethanol mills are closed or up for sale at discounts as steep as 85% (see chart 3). Despite the economic turmoil enveloping the country, the sugar market appears have taken an upward turn, with sugar prices up 37% from their August 2015 nadir and controls on ethanol fuel prices being relaxed (see Energy and resources). With the ethanol sector in deep crisis as a consequence of crushing debts and misguided government attempts to limit inflation via petrol price controls, bolder players are now seizing the opportunity as weaker firms exit and banks sell down distressed loans. Other opportunities for the bolder investor could be found in Bolivia, three years away from the completion of the mandate of leftist long-time leader Evo Morales. His bid to extend his hold on power until 2025 was rejected by the electorate in February. Our report on the country (see Macro “Bolivia: Opportunity grows in twilight of Evo era”) found Bolivia well placed for the future thanks to Mr Morales’ canny economic reforms. We saw particularly compelling opportunities for investors in retail and minerals, though some political and regulatory risk remains. n
Widespread distress in in Brazil’s sugar industry 3. Widespread distress Brazil’s sugar industry By harvest year* By harvest year*
Net new sugar mills 30
Net debt/editda
No. of mills in centre/south Brazil
Net debt/tonne crushed sugar cane Indebtedness
5
140
25
5 0 -5
Ratio
15 10
4
130
3
120
2
110
1
100
R$
No. of mills
20
-10 0
90 2012-13
2013-14
2014-15
20
0 20 5-0 0 6 20 6-07 0 20 7-0 08 8 20 -09 09 20 -10 10 20 -11 11 20 -12 12 20 -13 13 20 -14 1 20 4-1 15 5 -16 E
-15
*Harvest year runs to the end of March each year. Note: Includes companies responsible for 75% of production Sources: Unica, Banco Itaú BBA
CONFIDENTIAL
RESEARCH
LatAm: Principal Richard House Senior Researcher Luke McLeod-Roberts Researchers Cecilia T. Lanata Briones, Lucinda Elliott Contributor Stephen Woodman
FT Confidential Research: Chairman James Kynge Managing Editor Jeremy Grant Head of Research Rafael Halpin Head of Production Heidi Wilson Production Editor Caelin Robinson Sub Editor Richard Wells Senior Designer Paramjit Virdee Commercial Director James Mann Head of Sales Garrett MacCarthy Subscription Managers Dafydd Elias, Belinda Bamford Custom Research Nabeel Saeed Account Manager James Troy Product Managers David Griffith, Jenny Andrews Email: research.ftconfidentialresearch@ft.com Web: www.ftconfidentialresearch.com FT Confidential Research is published by The Financial Times Limited, Number One Southwark Bridge, London SE1 9HL © The Financial Times Limited 2016 The Client acknowledges that FT cannot provide the Client with any advice on dealing in specific investments and accordingly FT is not providing any such advice or making any recommendation to the Client on the merits of buying or selling or otherwise dealing in particular investments.
5 SURVEY DETAILS:
• We interviewed 20 portfolio
managers between February 17 and 29
• Half of the funds are based
in New York or London, with the remainder in Latin American and other European financial centres.
• Typically these managers
administer assets of more than $500m and three-quarters are portfolios dedicated specifically to Latin American equities.
Finance | LATAM
MAR 24 2016
Argentine equities from off-limits to top picks •
Argentina – under its over-delivering new president Mauricio Macri – is wowing markets. But those entering the market now are unlikely to find the kind of bargains available last year.
•
Brazil, unloved throughout 2015 and battling a 3.8% GDP contraction, is bouncing back as equity allocations returned to levels not seen for over a year.
•
Overweight allocations to previously popular Mexico declined sharply to their lowest-ever reading, while Colombia has fallen out of favour with the majority of respondents underweight the country due to oil price volatility.
E
veryone loves a winner – especially one basking in the warm glow of a string of policy victories that are attracting world leaders to the country, after a decade of self-inflicted isolation (LatAm Mar 1, Macro). Argentina’s Mauricio Macri has turned the heads of equity investors, who have made his country the region’s most favoured spot for overweight allocations, earning it top spot in our otherwise-gloomy 1Q16 Equity Fund Manager Survey (see chart 1). Capitalising on widespread investor enthusiasm, the country is also preparing an $11.6bn bond issue expected to price in mid-April, which would be the largest sovereign debt issue by any developing nation since Mexico in 1996. Yet Argentina’s attractions are hardly novel for more seasoned investors, or indeed for those following our investment insights over the last 18 months (LatAm Apr 2 2015, Finance). While a small cadre of early bird investors pocketed big gains in 2015, most of the optimism about the impact of a Macri victory had already been priced in before many investors arrived late in the year. Elsewhere, we found a growing conviction among investors that Brazil has hit bottom, while Mexico and Colombia have lost much of their appeal.
Brazil experiences a surprise rebound
FIRST PUBLISHED ON MAR 10
Brazil’s economy may have shrunk 3.8% in 2015, but a growing number of respondents feel Latin America’s most diverse equity market is ready to bounce back. Overweight exposures doubled from three to six over the last three months, and investors plan to maintain this positive allocation into 2Q16. Since our survey was conducted, former President Luiz Inácio Lula da Silva was detained at his home in São Paulo for questioning in regard to the Petrobras (PETR4:SAO) corruption scandal, which has entered its most politically explosive phase yet. Markets immediately picked up on optimism that the 16-year-long era of leftist government could be drawing to a close. Indeed, our survey suggests that more investors could be tempted to increase allocations over the next quarter. Planned underweight allocations fell to eight for 2Q16 – the lowest number in nearly two years. All six investors who said they were overweight Brazilian equities planned to hold this position into the second quarter. But the investors with whom we spoke still plan to be selective, and buy on the dips. The Brazilian Bovespa index has outperformed all other emerging markets YTD. Share prices rose to their highest levels in three months on March 2, followed by the biggest single day gain in almost seven years on March 4. Eight investors considered the market “cheap”, doubling from four back in 4Q15
MAR 24 2016
6
Finance | LATAM
Argentine equities from off-limits to top picks (see chart 2), with banking stocks seen as holding value. Other stock picks included bus manufacturer MarcoPolo (POMO4:SAO), sugar and ethanol producer Cosan (CZZ:Nasdaq) and electricity provider Energias do Brasil (ENBR3:SAO).
Argentina gets red carpet treatment at last
Yet Argentina was the stellar performer this quarter. 14 out of 20 investors we interviewed owned Argentine shares, up from 12 after Mr Macri’s victory on December 10, and six at this time last year. Ten currently hold overweight positions, with two more planning to do so in 2Q16 (see chart 3). Political risk was cited by just two respondents this quarter as a key risk in Argentina, down from 12 in 4Q15. Fund managers were encouraged by the speed with which Mr Macri
1. Macri drives rising Argentine equity enthusiasm Country allocations (no. of respondents) Macri drives rising Argentine equity enthusiasm Country allocations (no. of respondents)
BIA Q15 4 OM L CO
1Q16
2Q15
Overweight Equal weight Underweight No investment
AR GE NT IN A 4
3Q1 5
15 3Q
D BA
5 2Q1
1Q16
16 1Q
2Q 15
Q1 5
GOOD
4Q15
3Q15
PERU
CHILE
4Q15
3Q15
15
5 2Q1
1Q16
16
2Q
1Q 4Q
3Q
15
ME
XIC O
3Q 1
4 Q1
5 2 Q 15
Source: FT Confidential Research
1 Q16
5
BR
AZ
IL
15
MAR 24 2016
7
Finance | LATAM
Argentine equities from off-limits to top picks delivered on a string of electoral campaign promises. McDonald’s (MCD:NYSE) franchise Arcos Dorados (ARCO:NYSE) was a popular stock pick. Tax cuts on beef exports introduced at the beginning of this year should be a boon for the company, and the domestic industry more widely (LatAm Feb 12, Trade).
Oil collapse ends Mexican fiesta
2. Brazil tempting investors with bargains Brazil tempting investors with bargains
How would you you assess assess equity equity valuations valuations in in these these countries? countries? How would Expensive
Fair
Cheap
I do not know
No. of respondents
20 15 10 5 0
4Q15
1Q16
4Q15
Argentina
1Q16
Brazil
4Q15
1Q16
Chile
4Q15
1Q16
Colombia
4Q15
1Q16
Mexico
4Q15
1Q16
Peru
Source: FT Confidential Research
3. Argentina’s ascent continue next quarter Argentina’s ascent to to continue next quarter Planned allocations in in 2Q16 2Q16 Planned allocations Overweight
Equal weight
Underweight
No investment
20
No. of respondents
6 investors out of 20 were overweight in Mexico, the lowest number since we began our survey in 3Q13
Argentina and Brazil may be in vogue, but the fiesta is over for Mexico. The number of respondents overweight Mexico fell by a third this quarter, from nine to six – the lowest number since we began our quarterly survey in 3Q13. 13 out of 20 investors with whom we spoke were underweight in the country, more than double the five underweight allocations recorded three months ago. Two more plan to reduce their exposure over the next three months. Investors polled were troubled by declining oil revenue in a country where oil exports contribute 7% of GDP, despite confidence about the political environment and the
15 10 5 0
Argentina
Source: FT Confidential Research
Brazil
Chile
Colombia
Mexico
Peru
MAR 24 2016
8
Finance | LATAM
Argentine equities from off-limits to top picks government’s fiscal adjustments – including raising interest rates 0.5% on February 17. 12 investors selected low oil prices as the biggest risk to the Mexico over the next quarter, behind only the oil-dependent economy of Colombia (see chart 4).
4. Oil price biggest concern for Mexico Investors are troubled by declining oil revenue in Mexico, where oil exports contribute 7% of GDP
What is the biggest risk over the next quarter? (No. of respondents) 4Q15 1Q16 QoQ change China slowdown Argentina 0 1 s Brazil 8 8 – Colombia 2 1 t Mexico 0 2 s Current account deficit/fiscal mismanagement Argentina 3 2 t Brazil 7 6 t Colombia 5 5 – Mexico 1 2 s Political risk Argentina 12 2 t Brazil 14 17 s Colombia 1 1 – Mexico 1 0 t Regulatory risk Argentina 3 1 t Brazil 2 6 s Colombia 1 0 s Mexico 0 0 – US monetary policy Argentina 1 0 t Brazil 5 4 t Colombia 2 2 – Mexico 8 10 s Valuation risk (earnings growth slows) Argentina 4 3 t Brazil 0 6 s Colombia 0 1 s Mexico 8 6 t Inflationary pressures Argentina 3 2 t Brazil 5 9 s Colombia 2 1 t Mexico 0 0 – Oil price decline* Argentina n/a 0 – Brazil n/a 2 – Colombia n/a 16 – Mexico n/a 12 – Other Argentina 1 1 – Brazil 0 1 s Colombia 13** 1 t Mexico 2 0 s *Oil price decline a new entry for whole region in 1Q16. **Oil price decline. Note: Multiple-choice question with no limit on possible answers Source: FT Confidential Research
MAR 24 2016
9
Finance | LATAM
Argentine equities from off-limits to top picks GETTY
Investors fear Colombia’s government will raise taxes even further to offset declining oil export revenue, hurting the consumer sector and local business environment in 2016
$30bn
Pemex’s record losses in 2015, nearly double those reported in 2014
Mexico’s oil price vulnerability is forcing the government to make major spending cuts. In February expenditure for the year was cut by 0.7% of GDP and the fund managers surveyed expected further adjustments. The oil revenue shortfall is also raising concerns over the state’s ability to fund Pemex, the national oil company. The world’s eighth largest oil producer announced record losses of $30bn last year, nearly double those reported in 2014, prompting the government to commit to help cover Pemex’s $91bn of pension liabilities and potentially even recapitalise it (LatAm Feb 23, Energy and resources). But our respondents felt that equity markets had yet to fully price in the enormous strain that oil poverty is putting on the government’s balance sheet. All 20 considered the market expensive – the only universal response ever recorded, and more than double the nine recorded at the end of last year. Several investors took profits at the end of December on consumer stocks such as supermarket chain Walmex (WALMEX:MEX) that had got “uncomfortably expensive”.
Colombia and Venezuela fall into disfavour
While our investors have long shunned Venezuelan shares – labelling the Caracas equity market “uninvestible” – they are increasingly skittish about Colombia. 14 investors were underweight Colombia, unchanged from three months ago. Investors told FT Confidential Research they feared Colombia’s government will raise taxes even further to offset declining oil export revenue, hurting the consumer sector and local business environment in 2016. “It’s not cheap enough, still trading at 12 times forward price-to-earnings,” said one New York based manager, “there may be a better interim point this year.” Yet after Argentina’s rebirth as an investment proposition, it is a case of never say never for Venezuela – even if the country defaults on its loans in 2016, as we expect it to (LatAm Feb 24, Energy and resources). Some investors see value potentially emerging in the aftermath of such a default. “If they change their model and show a clear path towards change, that would really spur me to look at distressed assets,” said one investor based in São Paulo.
MAR 24 2016
10
Finance | LATAM
Argentine equities from off-limits to top picks Brazilian banks invite contrarian players
14
17
4Q15 1Q16 No. of investors who selected political risk as the biggest risk for Brazil
With allocations to Chile also sliding, there is little to be bullish about in Latin America outside Argentina, Peru and Brazil. And even in Brazil, investors were divided. Brazil’s blue-chip banks, for example, which until recently led the stocks expected to outperform during 2016, are now being reassessed. Pessimists maintain that Brazilian banks – private or public – are cheap for a good reason. Unemployment is rising, as are non-performing loan ratios, and some investors are unconvinced that private banks will be able dodge the bad debt bullet this year. Yet optimists believe that some banks are now trading at multiples so low that they are impossible to ignore. State-owned Banco do Brasil (BBAS3:SAO) was trading at roughly 1.2 times earnings in February, and for good reason. But this is affecting perceptions of far better managed private banks. For example, private bank Bradesco (BBDC4:SAO) is considered very solid due to its highly cautious lending criteria, but was trading at roughly seven times earnings in February. Four separate investors told FTCR its stock was “too cheap to pass up”. Bullish or bearish, Brazilian stocks could turn out to be the region’s most volatile in the coming months, with rising portents of tumultuous political change. No wonder 17 investors selected political risk as the biggest risk for Brazil, up from 14 at the end of last year. But some told FTCR they relish this prospect. “If there are any signs of a political change then I would increase over the next three months,” said one investor based in Italy who manages a portfolio of more than $500m, “If Dilma is impeached or Lula is arrested, then the market is going to fly,” they said, a prediction that proved highly prescient just a few days later. n
What our fund managers say... “We are reducing our underweight in Brazil. Prices are dropping to interesting levels for some high-quality names.” Ian Simmons, portfolio manager at Charlemagne Capital
“Macri is getting through his long check list at a faster pace than the market expected. Improvements are priced in and 2017 could potentially see Argentina return to the Emerging Markets Index.” Will Landers, portfolio manager of the BlackRock Latin American Investment Trust
“We prefer Argentina to Brazil at this point. Argentine shares are not particularly expensive if you assume things will slowly turn around. This year is going to be a tough year - inflation is still going to be very high – but the market could eventually overshoot. Rapid political changes [in Brazil] could create great opportunities.” Paolo Monaco, fund manager of the Eurizon Azioni Paesi Emergenti fund
“We sold off most of the Argentine shares we own after the election. The banks are too expensive and the good news is behind us.” Marco Mencini, head of EM equities at Pioneer Investments
“Changes to Argentina’s economic model will be very important for the perception of Venezuela and Brazil if the changes are positive. She’s [Argentina] already influencing the mindset among investors.” Patricia Urbano, portfolio manager for Latin America equities at Edmond de Rothschild Asset Management
“Pemex of Mexico as a standalone company is in a worse state than Petrobras of Brazil. The national oil company has just as much debt but the big difference is they [Pemex] are selling oil at current prices, whereas in Brazil domestic gasoline prices are fixed above the market rate. Pemex is my biggest concern for Mexico over the next quarter.” Helder Soares, head of Latam equities at Claritas Investimentos
Consumer | LATAM
11
Consumer Survey finds little improvement in sentiment
SURVEY DETAILS:
• Our Consumer Survey included
MAR 24 2016
1,500 Brazilian respondents and 1,000 respondents from each of Argentina, Chile, Colombia, Mexico and Peru.
• Each of the samples was
weighted to be representative of the specific country’s demographic and geographical distribution.
FIRST PUBLISHED ON MAR 23
Our quarterly Consumer Survey found that the mood remains sombre across the LatAm region in 1Q16, with the exception of Argentina, which was awash with positivity following the inauguration of President Mauricio Macri.
O
ur 1Q16 Consumer Survey – presented here in a newly streamlined format – found little improvement in sentiment across the region after a bleak 4Q15. QoQ improvement was largely confined to the Southern Cone: the Macri effect producing a surge in most Argentine metrics, while lower inflation and a stronger peso helping improve the picture in Chile.
LatAm consumer indices 1Q16
1Q15 LATAM
ARGENTINA
BRAZIL
CHILE
ECONOMIC
50=no change COLOMBIA
MEXICO
PERU 50
CONFIDENCE INDEX HOUSEHOLD FINANCIAL SITUATION INDEX
0 60
20 80
SPENDING INDEX JOB PROSPECTS INDEX
50 70
20 60
GOVERNMENT POPULARITY INDEX Note: Any index reading above 50 indicates an increase; any reading below 50 indicates a decrease Source: FT Confidential Research
0
MAR 24 2016
12
Consumer | LATAM
Consumer Survey finds little improvement in sentiment FTCR LatAm Economic Confidence Index
Gauging respondents’ perception of the YoY change in the health of the domestic economy.
22.2pt QoQ rise in Argentina’s Government Popularity Index
• • •
Regional economic confidence ebbed further in 1Q16 after weakening consistently since 1Q14. Our Economic Confidence Index fell 0.9 points (pts) QoQ and 3.2pts YoY, with only Argentina – spurred by political change – and Brazil bucking the YoY decline trend. The improvement in Brazilian economic confidence may be surprising given the country’s slumping GDP, though this perhaps reflects the perception that the economic situation can hardly get any worse. Rising inflation and currency devaluation pushed down Colombia’s reading sharply.
FTCR LatAm Household Financial Situation Index
Gauging respondents’ perception of the YoY change in the health of their household finances. • • •
Perceptions of household finances continued to deteriorate across Latin America. Our Household Financial Situation Index was 1.7pts QoQ and 5.2pts YoY lower in 1Q16. The decline was led by a 12.8pt YoY and 12.6pt QoQ fall in Colombia, though Brazilian consumers remained the most pessimistic. Peruvians were still the most positive, despite continued decline.
FTCR LatAm Spending Index
Measuring respondents’ reported purchases of both essential and non-essential items. • • •
Reported spending remained relatively robust despite sustained economic troubles, but weakened sharply in Brazil and Colombia. Our Spending Index fell 2.4pts QoQ and 4.3pts YoY in 1Q16. Readings for Argentina and Mexico were up YoY, with the Chilean index rising 5.6pts QoQ. Brazil’s index was down a substantial 10.3pts YoY, but remains the region’s highest. Likewise, Colombian spending declined 6.9pts on both a quarterly and annual basis.
FTCR LatAm Job Prospects Index
Gauging respondents’ perception of the current health of the job market. • • •
While overall regional job prospects worsened, respondents were actually more positive QoQ in four of the six countries surveyed: Argentina, Peru, Mexico and Chile. Our Job Prospects Index fell 0.6pts QoQ and 3.6pts YoY in 1Q16. Peruvians and Mexicans were the region’s most optimistic jobseekers, and Argentines were far more positive. Unsurprisingly, Brazilian respondents were most negative about employment prospects, 10.5pts lower than the regional average.
FTCR LatAm Government Popularity Index
Gauging respondents’ perception of the current performance of their national government. • Negativity about their governments has deepened among Latin American respondents, though Argentines were far more optimistic following the election of Mauricio Macri as president. • Our Government Popularity Index fell 0.4pts QoQ and 3.1pts YoY in 1Q16. • The Argentine index rose 22.2pts QoQ to reach 57.6 – 40.9pts above the regional average – and become the most popular in the region. Dilma Rousseff’s Brazilian government remains the region’s least popular despite a fractional QoQ rise. n
13
MAR 24 2016
Energy and resources | LATAM
Brazil: Sugar and ethanol assets offer value for vultures •
Brazil’s sugar sector has been ravaged by government policy errors that have forced one-quarter of sugar and ethanol mills to close, with dozens more insolvent and up for sale at discounts as steep as 85%.
•
But the market appears to be taking an upward turn, with sugar prices up 37% from their August 2015 nadir and controls on ethanol fuel prices being relaxed. As such, opportunities are growing for those bolder players now entering the market, as weaker firms exit and banks sell down distressed loans.
•
Better capitalised listed players have outperformed the Bovespa stock market, while impaired assets offer opportunities for vulture investors.
G
ive your average stressed-out São Paulo taxi driver half an excuse to complain about the price of fuel, and he will explain to you the only formula necessary to understand Brazil’s turbulent sugar and ethanol markets. All modern vehicles in Brazil have so-called Flex engines that can run on either ethanol or petrol. But a full tank of ethanol only gets you two-thirds the distance that petrol will. So when the price of ethanol exceeds two-thirds that of petrol, taxi drivers and other motorists switch away from ethanol. You will likely also come to understand why insolvent Brazilian sugar mills are changing hands at average discounts of 70%. Ethanol producers – for three decades the beneficiaries of one of the world’s largest and most generously subsidised alternative energy programmes – have been the big unintended victims of a populist government plan, officially introduced in 2012, to hold down fuel prices to fight inflation. By setting a headline price for petrol far below the price of importing and refining oil, the pump price of ethanol – in effect capped at about two-thirds the petrol price fix – was forced down below production cost. This has led to the closure of about a quarter of Brazil’s mills, as the government seemingly starts to distance itself from the decades-old Proalcool ethanol subsidy programme.
More crushing capacity, more crushing debt
FIRST PUBLISHED ON MAR 15
Ten years ago Brazil’s sugar and ethanol sector was booming. Mill owners borrowed heavily, spurred by rising commodity prices, driven by China’s consumption boom, and generous subsidised credit from BNDES, Brazil’s development bank. In the four years to March 2009, a net 74 mills opened in Brazil, with 27 in the 2008-2009 harvest year alone. Angra Partners, a Rio de Janeiro-based private equity firm, was one investor that entered the sector at that time. It invested in 2007 at what turned out to be the peak of the market, acquiring a majority stake in Itapecuru Bioenergia, a mill in the north-eastern state of Maranhão, attracted in part by the tax breaks and premium paid for ethanol in this frontier region. Over the following four years it invested R$180m ($48.6m) in the company. “We had a very aggressive investment plan,” the firm’s Epitácio Miranda told FT Confidential Research. “It involved both our financial contribution and fundraising, which at the time was easy. We expanded the mill, but then came the financial crisis and we couldn’t raise debt to expand the land under cultivation.” As a result, despite quadrupling crushing
MAR 24 2016
Brazil: Sugar and ethanol assets offer value for vultures
BLOOMBERG
14
Energy and resources | LATAM
capacity to 800,000 tonnes, Itapecuru has only ever operated at 60% of this capacity. Then the federal government introduced its petrol price controls, crushing revenue. 85 mills have shut since 2008 – though net this reduction is 40 – according to Unica. Net debt in the sector had risen to R$56.8bn by March 2015, according to Itaú BBA, an investment bank. Gross debt for the sector is now almost twice that figure, according to Unica, an industry organisation. Bankruptcies have, unsurprisingly, increased sharply, with 70 of Brazil’s remaining 370 mills are at some stage of bankruptcy proceedings.
Sweetening economics
And yet, just as many of Brazil’s weary and debtburdened ethanol producers are ready to throw in the towel, the economics are finally turning positive. We believe the smart money is now flowing into the sector. From a nadir of 10.67 $ cents/lb in August 2015, raw sugar prices have risen 37% (as of the first week of March) on a combination of domestic and external factors (see chart 1), while ethanol prices have risen 61% over the same period, though this is partly seasonal. Bankruptcies of sugar mills have increased sharply, with 70 of Brazil’s The federal government has hiked petrol prices remaining 370 mills at some stage of bankruptcy proceedings at the pump in order to raise money both for itself and cash-strapped Petrobras (PETR4:SAO) (LatAm Feb 19, Energy and resources), while some state governments have levied extra local taxes on petrol. Brasilia has also boosted the proportion of ethanol required in blended petrol from 25% to 27%. Such moves boosted consumption of hydrous ethanol 37.5% in 2015, according to Unica, an industry organisation. More demand has led mills to switch production away from sugar
Sugary pick-me-up? 1. Sugary pick-me-up? Sugar and ethanol prices
Hydrous ethanol**
Anhydrous ethanol**
25
2.5
20
2.0
15
1.5
10
1.0
M
ar -11 Ju l-1 1 No v11 M ar -12 Ju l-1 2 No v12 M ar -13 Ju l-1 3 No v13 M ar -14 Ju l-1 4 No v14 M ar -15 Ju l-1 5 No v15 M ar -16
3.0
*NY No. 11 price. **Ex-mill before tax. Values are monthly averages. March value is average for first week Sources: Esalq/Cepea, Bloomberg, Credit Suisse
R$/litre
$ cents/lb
Raw sugar* 30
MAR 24 2016
Things looking up for big producers
Since September 2015, Brazil’s producers have been generating positive free cashflow and listed producers Biosev (BSEV3:SAO) (owned by Louis Dreyfus Commodities) and
Sugar increasingly used forfor ethanol production 2. Sugar increasingly used ethanol production Brazilian sugar cane harvest distribution, by harvest year* Ethanol
Sugar
100 80
45
48
50
45
43
42
55
52
50
55
57
58
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16E
60 % 40 20 0
*Harvest year runs to the end of March each year Source: Moody’s
Sugar deficit looming 3. Sugar deficit looming By harvest year*
Net surplus
Stock-to-use ratio 45
8
43
4
41
0
39
-4
37
-8
35
-12
33 20 12 -13 20 13 -14 20 14 -15 20 15 -16 E 20 16 -17 E 20 17 -18 E
1112
-11
*Harvest year runs to the end of March each year Source: Credit Suisse
20
10 20
-0 6 20 06 -0 7 20 07 -0 8 20 08 -0 9 20 09 -10
%
12
05
Of sugar cane is grown in Brazil’s centre-south region
Tonnes (m)
90%
Brazil: Sugar and ethanol assets offer value for vultures
and back to ethanol. The proportion of the 2014-15 harvest used for ethanol rose 2pp YoY to 57% (see chart 2). World sugar prices have risen as a result, given that Brazil is responsible for almost half of global supply and supply has fallen from elsewhere as a result of the El Niño climate phenomenon. Figures from Credit Suisse, the investment bank, suggest a sugar supply deficit is looming (see chart 3). Moreover, the weakening of the Real against the dollar means production costs have fallen sharply. Unit cost in Brazil’s centre-south region – where 90% of cane is grown – is now 13 $ cents/lb of sugar, making Brazil the cheapest producer in the world, according to Datagro. By comparison, costs are roughly 16.5 $ cents/lb in Thailand, 18.5 $ cents in India and 30 $ cents in the EU.
20
15
Energy and resources | LATAM
MAR 24 2016
Brazil: Sugar and ethanol assets offer value for vultures
Raizen Energia (the sugar and ethanol production division of Raizen, itself a joint venture between Cosan [CZZ:Nasdaq] and Shell [RDSA:LSE]) both moved back into the black in 4Q15, after recording losses in 4Q14 (see chart 4). And the market has responded. The share prices of Brazil’s better capitalised listed players rose an average of 43.6% in the six months to March 10, compared with a rise of just 4.14% in the Bovespa over the same period. And their position could be boosted by further fuel price rises, which are likely given the financial woes of Petrobras and the government. A government proposal for a 10.1% rise in the petrol price would trigger a rise of 12% in the pump price for hydrous ethanol, according to Credit Suisse. An expected increase in the fuel tax on petrol (LatAm Mar 3, Macro) would also be good news.
Value for the vultures
The equity market seems to have already priced in the improved economics sugar and ethanol producers face, but we see real value for distressed asset investors among smaller local players. Beneath the first tier of well-funded companies, there is a fast-growing cadre of embattled Brazilian producers with ballooning debt. Indeed, average net debt/ebitda ratios in the sector rose from 3.3 to 4.3 from 2013-2015, while net debt per tonne of sugar cane increased from R$104 to R$133 from 2013-2015. This figure could now be closer to R$150/tonne, according to analysts. And Unica forecasts that a net nine mills will have been shuttered this harvest year (see chart 5). Haircuts applied by commercial banks to non-performing loans (NPLs) in the sector are typically about 70%. But in the case of mills with unsecured debts, they are “at least 85%”,
Sweeter profits 4. Sweeter profits
Selected financial data for main listed companies 4Q14
4Q15
Net revenue
4.0 3.5
1.0 0.8 R$bn
R$bn
2.5 2.0 1.5
0.2
0.5 Biosev
Sao Martinho
0.0
Raizen Energia (Cosan)
Net income
0.6
Biosev
Sao Martinho
Raizen Energia (Cosan)
Production*
25
0.5
20 Tonnes (m)
0.4 0.3 0.2 0.1
15 10 5
0.0 -0.1
0.6 0.4
1.0 0.0
Adjusted ebitda
1.2
3.0
R$bn
16
Energy and resources | LATAM
Biosev
*Total sugar cane crushed Source: Company reports
Sao Martinho
Raizen Energia (Cosan)
0
Biosev
Sao Martinho
Raizen Energia (Cosan)
MAR 24 2016
17
Energy and resources | LATAM
Brazil: Sugar and ethanol assets offer value for vultures GETTY
Banks are increasingly likely to cut their losses in the sector, rather than risk years of delay in bankruptcy courts Brazil’s sugar and ethanol industry may finally be set for a more sustainable rise, and we think those investors with the stomach for the short-term risk could end up with long-term reward
according to Caio Blasco, a partner in São Paulo-based CRS Investments. This could present real opportunities for the vulture funds already circling Brazilian assets (LatAm Oct 1 2015, Finance). Mr Blasco’s company is in the process of fundraising for a $200m vehicle that will invest in a mixture of distressed debt and special situations across different sectors, with a target internal rate of return of 35%. CRS is targeting family offices in both Brazil and overseas to invest in the fund, because this class of investors may be more amenable to slightly higher levels of risk, according to Mr Blasco. Other brokers are lining up in expectation that banks will be forced to sell down NPLs for assets in the ethanol sector. The manager of the credit recovery division at one of Brazil’s biggest financial institutions told us that banks are increasingly likely to cut their losses in the sector, rather than risk years of delay in bankruptcy courts. So after a severe policy flip-flop, in which the sector went from being smothered by government kindness to nearly killed by neglect, Brazil’s sugar and ethanol industry may finally be set for a more sustainable rise, and we think those investors with the stomach for the short-term risk could end up with long-term reward. n
Widespread distress in in Brazil’s sugar industry 5. Widespread distress Brazil’s sugar industry By harvest year*
Net new sugar mills 30
Net debt/editda
No. of mills in centre/south Brazil
Net debt/tonne crushed sugar cane Indebtedness
5
140
25
10 5 0 -5
Ratio
15
4
130
3
120
2
110
1
100
-10 0
90 2012-13
2013-14
2014-15
20
0 20 5-0 0 6 20 6-07 0 20 7-0 08 8 20 -09 09 20 -10 10 20 -11 11 20 -12 12 20 -13 13 20 -14 1 20 4-1 15 5 -16 E
-15
*Harvest year runs to the end of March each year. Note: Includes companies responsible for 75% of production Sources: Unica, Banco Itaú BBA
R$
No. of mills
20
18
MAR 24 2016
Macro | LATAM
Bolivia: Opportunity grows in twilight of Evo era •
A long and bitter history of asset seizures could still discourage investors from putting money into Bolivia – even after Evo Morales steps down in 2019 – but for those willing to bear the risk, we see pockets of value for investors in retail and minerals.
•
Gas revenues have helped fund fast-growing consumption, offering retail investment opportunities and supporting social stability. But Bolivia remains too dependent on resource commodities, particularly energy, which accounted for half of exports in 2014.
•
Mining of lithium – of which Bolivia has the world’s largest reserves – holds big promise depending on uptake of battery-powered cars.
E
vo Morales, the political chimera whose uniquely blended “Andean capitalism” has laid the foundations of a market economy in Bolivia, has just three more years in charge of Latin America’s poorest country after his bid to win approval via referendum for a fourth presidential term failed in February. A narrow 51% of voters said no to Mr Morales, despite his success in transforming the subsistence economy he inherited in 2006 and tripling GDP. Indeed, Bolivia now boasts a broad mix of commodity exports, with a potential jackpot from world-leading deposits of lithium, a key component in new-generation car batteries. Meanwhile, demand from a rising middle class should support growth in both retail and services. As such, we believe the time is ripe for investors of all stripes to take a second look at a landlocked and in many ways underprivileged nation that has nevertheless dodged the bullet of the emerging market downturn. Its fundamentals are largely solid. Robust
1. Bolivia’s regional economic outperformance Bolivia’s regional economic outperformance Real GDP growth, constant prices Bolivia
Brazil
Ecuador
Venezuela
8 6 4 2 %
0 -2 -4 -6 -8
-10
FIRST PUBLISHED ON MAR 21
2013
2014
Note: No 2020 estimate for Venezuela Source: IMF
2015E
2016E
2017E
2018E
2019E
2020E
MAR 24 2016
Bolivia: Opportunity grows in twilight of Evo era
BLOOMBERG
19
Macro | LATAM
international FX reserves – currently standing at 42% of GDP – should stand Bolivia in good stead during an expected downturn over coming years in the region. Even with a decline, the IMF expects annual real GDP growth of 3.5% by 2020 (see chart 1).
A combustible mix of gas and nationalism
Yet investing in Bolivia is not easy – or for the faint-hearted. The La Paz stock market has only been operation since 1989. In 2014, the volume of equities traded was just $7.03bn and equity volume $304m. Half the traded stocks are energy companies. MSCI does not yet classify Bolivia as a Frontier market, and the country is referenced only sporadically in our Quarterly Fund Manager Survey of LatAm markets. In each of five survey quarters, just one out of 20 respondents has said they invested in Bolivia’s equity market. For investors in sovereign bonds, Bolivia is rated Ba3 (stable outlook) by Moody’s, and is a niche play, because compared with other junkrated debt, the returns they offer are very modest. In 2012, the country returned to international credit markets after almost a century of isolation, selling $500m in ten-year sovereign bonds with a Bolivia is off the radar for direct value investors due to pervasive state control 4.7% yield. In August 2013, the government sold and restrictions on foreign equity ownership in the energy and mining sectors another $500m of ten-year bonds with a 5.95% coupon and a 6.25% yield. By comparison, in Argentina, ten-year bonds issued in March 2016 by the province of Buenos Aires yielded 9.5%, while an upcoming $11bn-plus sovereign issue is expected to offer investors at least 7%. Meanwhile, the country is basically off the radar for direct value investors because of pervasive state control and restrictions on foreign equity ownership in the energy and mining sectors.
Resources an ideological warzone
But the chief impediment for investors of all types is fear – a consequence of the long and toxic history of asset seizures that stretches right back to the days of Spain’s conquistadores. The latest phase of struggles over the country’s substantial gas reserves was sparked in 1996, when the IMF sponsored the free distribution of state energy assets to multinationals Enron, Shell (RDSA:LSE) and Repsol YPF (YPFD:BUE), while the neoliberal government of then-president Sánchez de Lozada lowered royalties from 50% to 18%. In 2003, Mr Sánchez de Lozada resigned and fled to the US, after which a referendum overwhelmingly favoured a resumption of state control, forcing his successor Carlos Mesa to hike royalties back up to 50%. This paved the way for Mr Morales to renationalise the entire sector in 2006, reviving the state energy company YPFB. This sent shockwaves through the energy community – not least in Brazil, where national oil company Petrobras (PETR4:SAO) had spent $2.2bn on building a pipeline to import Bolivian gas. Yet even this turbulence, combined with Mr Morales’ peculiar Bolivarian socialist bluster, did not scare away investors. Foreign direct investment (FDI) has been robust, averaging 3.5% of GDP over the last six years, against a Latin American average of 3% in the years 20112014, according to the UN agency CEPAL. And the IMF expects it to remain stable over
MAR 24 2016
20
Macro | LATAM
Bolivia: Opportunity grows in twilight of Evo era
38%
coming years (see chart 2). Spanish and Swedish investors were the biggest investors in 1H15, accounting for 38% and 19%, respectively. But they were eclipsed with one stroke of a pen in October, when Bolivia signed a deal with China for an infrastructure loan worth $7bn.
Gas-powered economy
2. Foreign direct investment Bolivia Foreign direct investment in in Bolivia FDI
FDI as % of GDP
2,500
6
2,000
5
1,500
4
1,000
3
500
2
$m
2009
2010
2011
2012
2013
2014 2015E 2016E 2017E 2018E 2019E 2020E
Source: IMF
Hydrocarbons and minerals toptop Bolivia exports 3. Hydrocarbons and minerals Bolivia exports Gas, petroleum and derivatives Quinoa
Minerals Brazil nuts
Volume
30
Value
15
25
12
20
9
15
6
10
3
5 0
Soya products Other
2012
2013
2014
Sources: IBCE, National Institute of Statistics
2015
0
2012
2013
2014
2015
1
%
0
$bn
The biggest investors in Bolivia in 1H15
The resilience of FDI largely reflects Bolivia’s huge natural gas industry potential: It is currently South America’s second largest producer of natural gas after Venezuela, with reserves estimated at 10.45tn cubic feet. Gas accounted for nearly half of exports in 2015, with gas and petroleum exports amounting to $4.03bn (see chart 3). Unsurprisingly, gross FDI flows were concentrated in hydrocarbons ($491m), industrial manufacturing ($120m) and mining ($110m) in 1H15. Together these sectors made up 89.6% of total FDI. Yet gas prices have plummeted (see chart 4), and Bolivia is being forced to increase production, in part because long-term export agreements typically use formulae based on ranges of both volume and value. Gas exports are expected to rise to 73m cubic metres/ day by 2020, up from 60m/day in 2015. To this end, YPFB plans to invest $4.3bn in gas
Tonnes (bn)
19%
MAR 24 2016
21
Macro | LATAM
Bolivia: Opportunity grows in twilight of Evo era Gas prices plummet 4. Gas prices plummet
Natural gas, Henry Hub prices 6
$/BTUs (m)
5 4 3 2
Ja n11 M ay -11 Se p11 Ja n12 M ay -12 Se p12 Ja n13 M ay -13 Se p13 Ja n14 M ay -14 Se p14 Ja n15 M ay -15 Se p15 Ja n16
1
Source: Thomson Reuters Datastream
A whole battery of rewards from lithium
But even if gas prices remain depressed, Bolivia has other resources upon which it can lean. In the centuries since its fabled Potosí silver mountain began propping up the Spanish empire, Bolivia’s mineral wealth has been the economy’s mainstay – and in 2014 generated $3.9bn in exports. Today’s new El Dorado is not silver but lithium, used for making batteries that power mobile phones and, increasingly, electric cars. The price of lithium has risen 130% since 2008, partly fuelled by the great battery race between Tesla (TSLA:Nasdaq), Google (GOOG:Nasdaq), Apple (AAPL:Nasdaq) and others. All are seeking to power new-generation electric cars using lithium-based batteries.
5. Keeping Brazil and Argentina well supplied with Keeping Brazil and Argentina well supplied with gasgas Gas Gas exports exports
YPFB-Petrobras (Brazil) contract
YPFB-Enarsa (Argentina) contract
35 30 25 20 15 10
Sources: YPFB, IBCE, National Institute of Statistics, Thomson Reuters Datastream
ay -15 M
n15 Ja
p14 Se
ay -14 M
n14 Ja
p13 Se
ay -13 M
n13 Ja
p12 Se
ay -12 M
n12 Ja
p11 Se
ay -11 M
n11
5 Ja
Increase in price of lithium since 2008
Cubic metres/day (m)
130%
exploration projects up to 2019. Major investors include Centrica (CAN:LSE), Spanish company Repsol (REP:MCE) and France’s Total (TOT:NYSE), as well as Brazil’s Petrobras. YPFB’s main gas export markets are Brazil, with which it has a contract until 2019, and Argentina, with which it is also contracted until 2026. In both cases these are captive buyers because of fixed pipeline infrastructure, but long-term contracts also oblige Bolivia to pump more gas as values fall (see chart 5).
MAR 24 2016
Bolivia: Opportunity grows in twilight of Evo era
GETTY
22
Macro | LATAM
The Salar de Uyuni salt flats contain 9m tonnes of lithium, roughly 22% of the world’s potentially mineable reserves, according to the US Geological Survey. Bolivia opened a pilot plant in 2014, with production set to start in 2018. The government invited two German companies (K-Utec and Ercosplan) and one Swiss firm (SEP), to bid for the right to build a lithium carbonate production plant in the highlands of Bolivia. However, harvest time for Bolivia’s lithium riches is “still a long way off,” according to Jon Hykawy, president and director of Stormcrow Capital, a mineral wealth consultancy. “A lithium processing plant requires a steady supply of reagents, like lime and soda ash, and Uyuni doesn’t really have excess supplies,” he said. Nor does the region have the infrastructure for bringing in chemicals on an industrial scale.
From coca to Starbucks
Under Mr Morales, GDP has almost tripled and more than 2.6m Bolivians joined the middle class
Indeed, Bolivia is still a poor country – GDP per capita was just $2,915 in 2015, according to the IMF. It will continue to be so as long as it remains resource dependent, and this is why – ironically for a Bolivarian socialist leader – Morales’ greatest achievement is to have kick-started the creation of a middleclass consumer society. This provides both the greatest hope of long-term economic stability in the post-Evo era, and a source of
opportunity for investors. Under Mr Morales, GDP has almost tripled and more than 2.6m people joined the middle class, according to Bolivia’s social and economic policy analysis unit, UDAPE. Annual household final consumption expenditure per person rocketed from $930 in 2006 to $2,027 in 2014. Last year, the finance ministry announced that restaurant and supermarket takings had grown 718% from 2005 to 2014. Mr Morales used state hydrocarbon revenues to fund “gas to cash” bonos, conditional transfer schemes benefiting pensioners, expectant mothers, schoolchildren and families. This revenue transfer boosted social welfare spending by 45% from 2005-2012, contributing to a halving of poverty rates between 2006 and 2013, according to the United Nations Development Programme. Bonos have helped fuel a consumption boom. Starbucks (SBUX:Nasdaq) opened their first location in La Paz in May 2014, with Krispy Kreme (KKD:NYSE) and Papa John’s Pizza (PZZA:Nasdaq) following in October 2015. Investors could potentially get exposure to Bolivian consumer markets via Chile’s listed retail stocks. Supermarket conglomerate Cencosud (CENCOSUD:SGO) has several pharmacies and supermarkets in Bolivia under the Marmentini brand. So for the first time since the Spanish arrived, Bolivia’s Aymara and Quechua indigenous populations are enjoying the benefits of the country’s resource wealth. This makes any reversion to the bitterly polarised politics of earlier years less likely should Morales or his ruling Movement Towards Socialism party fail to name a left-leaning successor. Bolivia is not on the radar of many investors yet, but as the Evo era winds down, it is certainly worth monitoring. n
23
MAR 24 2016
Metrics | LATAM
LATAM CONSUMER INDICES
GOING UP
LatAm Argentina
Brazil
Chile Colombia
Mexico
Peru
FTCR LatAm Economic Confidence Index
7.6%
Brazilian unemployment in Jan-16, up from 5.3% in Jan-15
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
22.5 15.7 17.7 23.8 41.6 17.9 50.5 18.3 24.4 6.0 30.5 36.9 20.7 45.5 16.5 22.8 5.7 25.6 33.5 18.5 38.8 12.9 20.1 5.1 17.2 27.5 11.6 34.9 16.0 24.9 4.0 19.8 31.8 20.9 36.7 15.1 26.0 9.0 22.8 14.3 16.4 32.0
FTCR LatAm Household Financial Situation Index
5.5%
1.0%
YoY rise in Colombian retail sales in Jan-16
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
42.7 29.5 44.1 39.0 54.6 37.1 57.4 37.6 33.7 30.6 45.1 52.3 39.3 54.4 35.5 34.2 29.2 40.7 51.8 35.2 51.4 32.7 34.2 25.7 37.3 48.9 32.6 49.9 34.1 35.2 24.3 36.4 52.1 38.7 49.2 32.4 30.2 26.2 38.5 39.5 36.1 47.0
FTCR LatAm Spending Index
YoY rise in Mexican industrial production in Jan-16
GOING DOWN
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
63.9 46.7 72.8 50.0 64.3 56.3 66.7 63.5 52.1 71.6 58.8 62.7 54.7 63.8 61.1 50.1 67.9 53.6 60.1 54.8 61.1 58.1 52.0 61.7 52.2 58.2 53.9 62.3 61.6 53.4 65.3 51.2 62.7 59.6 60.1 59.2 55.0 61.4 56.8 55.8 58.1 61.1
FTCR LatAm Job Prospects Index 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
49.8 34.7 52.9 40.4 55.1 45.8 63.2 45.3 36.7 38.9 46.7 55.2 50.3 63.5 40.7 36.4 33.1 39.9 52.1 45.8 58.6 39.4 35.1 30.8 37.3 47.2 48.7 55.4 42.3 37.4 33.7 41.8 53.0 50.5 57.4 41.7 40.2 31.2 43.9 48.3 52.8 58.6
FTCR LatAm Inflation Perception Index
75%
YoY decline in Venezuelan car sales in Feb-16
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
64.1 74.0 63.6 66.6 62.8 63.0 58.9 64.5 72.6 65.3 65.9 63.6 62.1 57.2 64.6 68.5 64.8 65.8 65.4 64.2 57.2 63.2 70.7 61.8 69.5 66.5 62.4 56.6 63.8 68.9 62.5 68.3 66.1 64.0 59.0 62.8 68.1 59.3 65.1 71.1 64.4 58.6
FTCR LatAm Inflation Expectations Index
10.3%
YoY decline in Brazilian retail sales in Jan-16
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
FTCR LatAm Government Popularity Index 1Q15 2Q15 3Q15 4Q15 1Q16
4.9%
56.8 64.8 53.5 60.5 56.3 59.8 54.7 54.6 61.4 53.0 59.8 52.5 55.5 52.9 54.0 58.5 51.0 58.7 54.5 57.1 52.4 54.5 60.1 50.7 60.9 56.8 57.4 52.7 55.7 59.0 52.2 62.1 59.4 58.2 55.5 53.6 58.4 49.1 59.4 58.8 56.1 56.5 19.8 35.3 17.7 37.5 15.7 33.5 17.1 35.4 16.7 57.6
9.1 31.6 42.9 18.9 30.0 9.4 25.9 35.3 15.8 20.8 8.3 20.6 32.1 13.7 20.3 6.9 21.0 40.5 18.3 16.0 7.2 19.7 23.1 15.1 17.6
FTCR LatAm Discretionary Spending Index
YoY decline in Peruvian gross fixed investment in 2015
2Q15 3Q15 4Q15 1Q16 Source: FT Confidential Research
17.7 37.5 9.4 25.9 35.3 15.8 20.8 15.7 33.5 8.3 20.6 32.1 13.7 20.3 17.1 35.4 6.9 21.0 40.5 18.3 16.0 34.1 38.1 45.8 44.7 40.6 40.9 48.5
MAR 24 2016
24
Metrics | LATAM MACRO
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
GDP (YoY % change) 2Q15 3Q15 4Q15 2015 2016E 2017E
1.9 – – – 0.0 1.5
-2.6 -4.5 -5.9 -3.8 -3.2 0.5
1.9 2.2 1.3 2.1 2.1 2.1
3.0 3.3 3.2 3.1 2.4 3.0
2.2 2.6 2.5 2.5 2.8 3.0
3.0 2.9 4.7 3.3 3.5 3.9
-4.7 -7.1 – – -6.0 0.0
4.7 3.8 0.7 3.9 4.0 4.9
-9.7 -4.2 -1.0 -4.9 0.9 3.5
-13.7 -26.0 – – -11.1 3.0
Gross fixed investment (YoY % change) 2Q15 3Q15 4Q15 2015 2016E 2017E
4.6 – – – 3.5 8.9
-11.9 -15.0 -18.5 -13.9 -9.7 1.6
-3.0 4.3 -1.3 -1.5 0.9 2.1
1.9 0.5 0.0 2.8 2.4 3.6
Sources: FT Confidential Research, Thomson Reuters and Latin American Consensus Forecast
GOVERNMENT
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
General government revenue (GDP %) 2012 2013 2014E 2015E 2016E
31.5 35.4 24.4 28.3 23.8 22.2 23.5 33.4 35.6 23.3 28.3 24.2 22.3 23.4 35.5 34.0 23.4 27.7 23.5 22.3 28.4 35.5 33.5 22.9 26.8 24.1 20.7 18.1 35.1 35.0 24.8 26.7 23.6 20.6 16.2
General government expenditure (GDP %) 2012 2013 2014E 2015E 2016E
33.9 38.0 23.7 28.3 27.5 20.3 40.0 35.4 38.6 23.7 29.2 28.1 21.5 38.0 38.1 40.2 24.9 29.5 28.1 22.5 43.4 40.3 41.2 26.2 29.9 28.1 22.6 42.5 40.0 42.1 27.1 29.7 27.1 22.8 41.2
General government overall balance (GDP %) 2012 2013 2014E 2015E 2016E
-2.4 -2.0 -2.6 -4.8 -4.9
-2.6 0.7 -3.0 -0.4 -6.2 -1.5 -7.7 -3.3 -7.1 -2.3
0.0 -3.7 1.9 -16.5 -0.9 -3.9 0.8 -14.6 -1.8 -4.6 -0.2 -15.0 -3.1 -4.0 -1.9 -24.4 -3.0 -3.5 -2.2 -25.0
Sources: IMF
JP MORGAN EMBI+ BONDS
Argentina
Brazil Colombia
Mexico Panama
Peru Venezuela
Stripped spread values Mar 22 2 wk prev Change (%) Change YTD (%)
437.0 464.0 -5.8 -0.2
391.0 460.0 -15.0 -25.2
283.0 335.0 -15.5 -11.8
214.0 245.0 -12.7 -7.8
199.0 217.0 -8.3 -8.7
218.0 243.0 -10.3 -11.4
2,821.0 2,887.0 -2.3 6.1
1,279.6 1,266.4 1.0 5.5
1,125.7 1,103.9 2.0 7.8
762.9 737.6 3.4 2.6
Total return values Mar 22 2 wk prev Change (%) Change YTD (%) Source: Thomson Reuters Datastream
267.6 263.1 1.7 4.8
979.6 933.3 5.0 15.1
537.8 515.5 4.3 7.9
641.0 623.0 2.9 6.7
MAR 24 2016
25
Metrics | LATAM CONSUMER
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
Consumer price index (YoY % change) Dec-15 Jan-16 Feb-16 2015 2016E 2017E
– 10.7 4.4 6.8 2.1 4.4 159.7 – 10.7 4.8 7.5 2.6 4.6 – – 10.4 4.7 7.6 2.9 4.5 – – 10.7 4.4 6.8 2.1 4.4 159.7 26.0 7.6 3.7 5.5 2.8 4.0 200.0 21.0 6.5 3.0 3.3 3.0 3.0 150.0
Wholesale price index (YoY % change) Dec-15 Jan-16 Feb-16 2015
– – – –
11.3 12.9 13.4 11.3
n/a n/a n/a n/a
5.5 6.7 9.3 5.5
1.3 2.8 3.4 1.4
2.6 2.9 2.8 2.6
– – – –
4.2 4.4 4.3 4.4
6.2 6.2 7.4 6.5
6.1 6.0 – 6.8
Unemployment (%) Nov-15 Dec-15 Jan-16 2015
n/a – – –
7.5 6.9 7.6 6.8
6.1 5.8 5.8 6.3
7.3 8.6 11.9 8.9
Industrial production (YoY % change) Nov-15 Dec-15 Jan-16 2015 2016E 2017E
– -12.4 0.7 5.2 0.2 1.4 – – -12.1 -3.3 3.9 0.0 5.0 – – -13.9 -8.3 – 1.0 -4.0 – -0.3 -8.2 -0.3 0.9 1.0 -1.7 -9.7 0.6 -4.7 1.2 3.1 2.9 1.1 -7.4 4.2 1.2 2.0 3.5 3.4 2.7 0.5
Retail sales (YoY % change) Nov-15 Dec-15 Jan-16 2015
– – – –
-7.8 -7.1 -10.3 -4.2
4.8 3.6 2.2 3.0
4.8 4.2 5.5 6.5
5.7 3.4 – 5.0
n/a n/a n/a n/a
– – – –
100.0 76.8 – 892.0
n/a n/a n/a n/a
1 .0 0.4 0.3 18.0
Car sales (000s units) Dec-15 Jan-16 Feb-16 2015
39 50 53 612
221 150 142 2,478
n/a n/a n/a n/a
n/a n/a n/a n/a
Note: Inflation in Argentina is MoM % change. Inflation in Peru is only for Lima city. Inflation for Venezuela is only for Caracas city. Unemployment in Argentina is a quarterly figure. Retail sales in Argentina and Chile are only supermarket sales Sources: Thomson Reuters Datastream, Latin American Consensus Forecast, central banks, FT Confidential Research
DOLLAR VS CURRENCIES
Argentina Brazil Chile Colombia Mexico Peru Venezuela (peso) (real) (peso) (peso) (peso) (nuevo sol) (bolívar)
Mar 22 2 wk prev Change (%) Change YTD (%)
15.39 15.73 -2.2 6.8
3.59 3.79 -5.4 -9.3
677.52 681.63 -0.6 -4.2
3,049.01 3,174.23 -3.9 -4.0
17.34 17.90 -3.1 0.8
3.41 3.47 -1.7 -0.1
10.00 6.30 58.7 58.7
Mexico (IPC)
Peru (IGBL)
Venezuela
45,632.3 44,504.3 2.5 6.2
12,042.5 11,382.8 5.8 22.3
14,951.3 16,315.9 -8.4 2.5
Source: Thomson Reuters Datastream
EQUITY INDICES Mar 22 2 wk prev Change (%) Change YTD (%)
Argentina (Merval) Brazil (Bovespa) 12,926.3 13,405.2 -3.6 10.7
Source: Thomson Reuters Datastream
51,010.2 49,102.1 3.9 17.7
Chile (IGPA) Colombia (IGBC) 19,335.5 18,725.4 3.3 6.5
9,743.4 9,590.7 1.6 14.0
MAR 24 2016
26
Metrics | LATAM EXTERNAL ACCOUNTS
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
Exports ($bn) Nov-15 Dec-15 Jan-16 2015 2016E 2017E
4.0 3.4 3.9 56.8 62.8 67.3
13.7 16.7 11.1 190.1 188.1 204.9
5.1 5.2 5.1 63.4 61.2 64.3
2.4 2.5 1.8 35.7 39.2 43.1
30.9 30.6 30.4 381.2 396.1 421.0
2.9 3.2 2.4 34.2 34.6 38.0
– – – 41.8 33.1 41.1
Imports ($bn) Nov-15 Dec-15 Jan-16 2015 2016E 2017E
4.7 12.8 4.5 10.6 4.0 10.5 59.8 172.4 59.1 153.0 64.5 164.6
4.7 5.4 4.4 59.2 58.3 61.0
4.2 32.3 4.2 31.9 3.5 32.2 54.1 395.6 50.7 407.8 52.8 431.6
3.2 – 3.0 – 2.9 – 37.4 34.1 37.1 30.5 39.4 34.6
Trade balance ($bn) Nov-15 Dec-15 Jan-16 2015 2016E 2017E
-0.7 0.9 0.4 -1.8 -1.4 -0.3 – -1.1 6.1 -0.2 -1.6 -1.2 0.2 – -0.1 0.6 0.7 -1.7 -1.8 -0.5 – -3.0 17.7 4.2 -18.4 -14.4 -3.2 7.7 3.7 35.1 2.9 -11.5 -11.7 -2.5 2.6 2.8 40.3 3.3 -9.7 -10.6 -1.4 6.5
Current account ($bn) 2Q15 3Q15 4Q15 2015 2016E
-2.1 -4.0 4.8 -15.9 -9.7
-12.8 -11.4 -9.7 -58.9 -34.1
0.0 -2.6 2.1 -4.8 -3.6
-4.3 -5.3 4.3 -18.9 -16.1
-8.0 -8.9 7.7 -32.4 -32.2
-1.6 -2.4 1.5 -8.4 -7.7
-1.9 -5.1 – – -11.8
3.8 2.8 3.9 -5.3 16.3
5.6 7.6 5.6 7.1 22.8
2.3 2.2 1.5 1.5 7.9
3.0 0.4 -0.8 -0.8 4.0
FDI ($bn) 4Q14 1Q15 2Q15 3Q15 2014
n/a n/a n/a n/a 6.6
16.3 – – – 62.5
n/a n/a n/a n/a 22.0
Sources: Thomson Reuters Datastream, Latin American Consensus Forecast
FRONTIER COUNTRIES 2011 2012 2013 2014 2015E 2016E Bolivia GDP (YoY % change) 5.2 5.2 6.8 5.5 4.1 4.1 Consumer price index (YoY % change) 6.1 5.3 6.5 5.2 3.0 4.6 Current account ($bn) 0.5 2.0 1.0 0.6 -0.5 -0.6
Costa Rica GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
4.4 4.8 -2.2
5.1 4.5 -2.3
3.6 3.7 -2.5
3.5 5.1 -2.4
2.5 -0.8 -2.1
3.5 3.7 -2.3
4.1 3.9 -2.5
7.3 1.6 -2.0
6.4 2.3 -1.3
4.9 3.0 -1.3
4.6 2.7 -1.2
3.7 3.7 -0.6
0.3 3.4 -2.0
-0.1 3.0 -2.5
2.0 0.5 -1.2
2.3 1.0 -0.6
2.4 1.4 -1.0
Dominican Republic GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
4.5 7.8 -4.4
3.9 3.9 -4.0
Ecuador GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
7.4 5.4 -0.2
5.0 4.2 -0.2
El Salvador GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
2.2 5.1 -1.1
1.9 0.8 -1.3
1.7 0.7 -1.6
MAR 24 2016
27
Metrics | LATAM FRONTIER COUNTRIES (cont.) 2011 2012 2013 2014 2015E 2016E
Guatemala GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
4.2 6.2 -1.6
3.0 3.4 -1.4
3.7 4.4 -1.5
4.2 2.9 -1.4
3.9 3.1 -0.7
3.6 3.6 -0.7
2.6 4.9 -1.8
3.1 5.8 -1.4
3.5 2.4 -1.2
3.5 4.6 -1.2
4.6 5.7 -1.3
4.7 6.5 -0.8
4.5 3.1 -9.0
4.5 5.7 -1.0
8.4 3.7 -4.8
6.2 2.6 -5.3
5.8 0.3 -5.0
5.9 2.3 -4.7
14.2 3.7 0.6
4.4 4.2 -0.1
3.2 3.1 -0.2
3.5 4.2 -0.2
4.4 8.5 -3.0
3.5 8.3 -2.5
1.8 9.4 -2.3
1.9 8.2 -2.1
Honduras GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
3.7 5.6 -1.5
3.3 5.4 -1.7
Nicaragua GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
5.4 8.0 -1.3
5.2 6.7 -1.4
Panama GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
10.8 6.4 -3.8
10.7 4.5 -3.3
Paraguay GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
4.3 4.9 -0.3
-1.2 3.9 0.1
Uruguay GDP (YoY % change) Consumer price index (YoY % change) Current account ($bn)
6.5 8.6 -1.4
3.9 7.5 -2.7
Sources: Latin American Consensus Forecasts, FT Confidential Research
MONEY AND BANKING
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
3,132.7 3,351.2 3,303.0 3,351.2
68.2 73.4 71.1 73.4
3,695.4 3,932.1 4,087.3 3,932.1
11,123.0 11,302.0 11,455.7 11,311.4
140.8 148.0 146.4 148.0
3,765.7 4,015.7 4,175.6 4,015.7
13,527.2 13,735.1 13,909.6 13,735.1
n/a n/a n/a n/a
3,765.7 4,015.7 4,175.6 4,015.7
3.25 3.75 3.75 3.00
4.00 4.25 4.25 3.50
n/a n/a n/a n/a
184.5 185.4 175.2 184.5
61.5 60.0 60.2 61.5
– – – –
M1 (local currency bn) Nov-15 Dec-15 Jan-16 2015
760.6 799.4 763.5 799.4
310.1 333.7 308.0 333.7
26,830.1 28,383.5 29,116.7 28,383.5
96,632.2 103,369.5 95,752.9 103,369.5
M2 (local currency bn) Nov-15 Dec-15 Jan-16 2015
996.3 1,052.9 1,016.6 1,052.9
2,219.1 2,271.5 2,252.5 2,271.5
97,401.3 99,303.4 101,514.8 99,773.0
374,864.5 381,851.0 376,203.8 381,851.0
M3 (local currency bn) Nov-15 Dec-15 Jan-16 2015
1,535.5 1,604.2 1,597.2 1,604.2
4,649.8 4,745.4 4,755.4 4,745.4
172,320.7 172,701.4 174,018.3 172,701.4
407,686.5 414,746.2 410,039.1 414,746.2
Benchmark interest rate (%)* Jan-16 Feb-16 Mar-16 2015
n/a n/a n/a n/a
14.25 14.25 14.25 14.25
3.50 3.50 3.50 3.25
5.75 6.25 6.50 5.50
Foreign reserves ($bn) Dec-15 Jan-16 Feb-16 2015
25.6 25.1 28.4 25.6
*End of period figure Sources: Thomson Reuters Datastream, central banks
356.5 357.5 359.4 356.5
38.6 38.5 38.3 38.6
46.7 46.7 46.8 46.7