FX Perspectives in Latin America
In contrast to Emerging Europe, Latin America has emerged out of the crisis as more resilient. This is so in part because of flexible exchange rates, lower leverage than Emerging Europe and better macro conditions. In fact, some countries in Latin America are implementing counter cyclical fiscal policies to fight the external crisis. The key countries using counter cyclical fiscal policy in Latam are Brazil, Peru and Chile. This differentiation adds to the perception that Latin American credit ratings lag other emerging markets and the near-term prospects for rating actions in regards to several regional countries on the cusp of an investment grade including Brazil, Colombia, Panama, Peru and Costa Rica point to the upside. Regarding growth, we believe GDP will converge to its potential level by mid 2010. In the absence of significative inflationary pressures, it is hardly possible that monetary authorities in key Latam countries hike rates until Q2 2010. In turn, it is possible that FX play an imoportant role especially considering that moderate growth rates may also induce central banks to become more tolerant with eventual currency weakness.
Brazil: Inflation and Interest Rates Decision
The latest BCB's consensus survey showed significant upward revisions in inflation expectations, with the median of 2009 IPCA projections increasing to 4.50% (from 4.42% in the previous week), after hovering below the target midpoint for four months deterioration in the inflation scenario. It is not only the short term inflation expectations tht are deteriorating mostly because the 2010 expectations are also pointing to the target midpoint, with this week posting 4.40% from 4.43%. The clear signs that the economy is already expanding, along with the definition of the 2011 target at 4.50%, in an election year should move 2010 market expectations to 4.50% in the coming months, but still significant local and global idle capacity should prevent inflation expectations from moving above targeted levels. In our opinion, this picture is in line with the Copom delivering one more round of rate cuts (by 50bp) this month, which would leave the Selic at 8.75% until July 2010.