Wednesday, January 23, 2008

Chile Is Riding The Storm!

Chile's peso gained the most in a week yesterday after the Federal Reserve lowered its benchmark U.S. interest rate. The Fed lowered the overnight rate 0.75 percentage point to 3.5 percent, widening the spread with Chile's 6.25 percent key rate to 2.75 percentage points. This is the biggest difference since 2002.

The rate cut is obviously going to translate itself into increasing appreciative forces in a number of emerging currency markets, among them the Chilean peso one. Indeed, if I had to list half a dozen emerging markets I thought would weather the storm better than others, Chile would definitely be there, as probably would Brzil (in Lat Am), Morocco and Turkey on Europe's southern fringe, and Thailand and India in Asia.

As if to confirm my intuitions Chile's peso advanced the most yesterday since Jan. 11, rising 1.4 percent to 478.64 per dollar at 2:33 p.m. in New York, and extending its advance so far this year to 4.3 percent. The yield on Chile's 8 percent bonds due June 2015 was little changed at 6.64 percent, according to Deutsche Bank Chile.

Concern that a slowdown in the U.S. economy will hurt demand for Latin American exports has put a certain restraint on gains in the region's currencies, and we are now about to see just how much "decoupling" has taken place in this particular corner of the globe.

All of this is reflected in the very upbeat tone adopted by Chile's Finance Minister Andres Velasco, who is quoted by Bloomberg as saying that yesterday's decision by the U.S. Federal Reserve to cut its benchmark interest rate was a "good signal" for markets. Velasco asserted that Chile is well-prepared to deal with the coming international crisis, since the government of the country which is the world's biggest copper exporter has used revenue from record prices for the metal to pay down debt and accumulate a fiscal surplus of $19 billion.

``The other day an investor remarked that when the tide goes out you see who's got their swimming suit on properly,'' Velasco said. ``I have no doubt that in this low tide, Chile will be seen to be very well-prepared and very well-dressed for whatever comes,'' The Fed's cut ``will contribute to the return of calm,'' the finance minister said, ``But there are no magic solutions. The world is living through, and will probably keep living through, a period of international volatility. We have to be very calm and very alert. In previous years we've saved, we've reduced debt, we've had a surplus, we've strengthened public and private finances,'' Velasco said. ``Sometimes people asked why we were doing all this, well now we see the answer and we see it very clearly.''

According to Velasco Chile's government hasn't yet discussed cutting its target for budget surpluses. Senators from the ruling coalition were reported by local newspaper La Tercera to have called yesterday for the government to aim for a balanced budget, instead of an excess of 0.5 percent of gross domestic product. This move seems sensible, given the strong downside risk which exists at this point.

Chile's central bank raised its benchmark lending rate to the highest in six years earlier this month as it seeks to curb the fastest inflation in a decade. Policy makers raised the benchmark rate a quarter point to 6.25 percent.The bank acted in response to inflation that climbed to an annual rate of 7.8 percent in December, driven by higher costs for food and transportation.

In the short term Chile's inflation problem may well get worse before it gets better, but as external conditions steadily change I doubt this will be the main threat to Chile's economic stability, so some counter-cyclical internal demand management in advance of any coming shock would seem to me to be a pretty prudent move.

Brazil Central Bank Likely to Keep Rates On Hold

Brazil's central bank will probably keep its benchmark interest rate unchanged at 11.25% today for a third straight meeting as policy makers gauge whether the recent acceleration in inflation is sustained. Against the backdrop of rising prices and Brazil's fastest growth since 2004, central bank President Henrique Meirelles decided on Oct. 17 to pause after a string of 18 straight cuts, the longest cycle of easing since Brazil adopted inflation targets in 1999.

Brazil's overnight rate has fallen by more than half over this period. The real interest rate, however, - or the difference between the 11.25 percent Selic benchmark lending rate and 4.46 annual inflation - is the sill highest in Latin America at 6.79 percent.

Policy makers will probably take the view that a worldwide economic slowdown will reduce Brazil's inflation rate by cutting demand for commodities, even after consumer prices jumped the most in more than two years in December. Inflation accelerated to 0.74 percent last month, led by food, the fastest pace since October 2005.

Rather than raising the central bank is much more likely to say that it will continue to monitor inflation to see whether it threatens its 4.5 percent target.

On the other hand, traders are forecasting higher rates. The yield on the interbank deposits future rate contract due January 2009 traded at 11.97 percent yesterday, above the current Selic rate.

Saturday, January 12, 2008

Argentina's Inflation Enigma

Well, make of it what you will is, I suppose, all you can say. Argentina released the latest data on the consumer prices index earlier this week, and according to the controversial Nacional Statistics and Census Office, Indec, retail price inflation was running at 0.9% in December, and at a year on year level for December of 8.5%.

The CPI for Buenos Aires City and the metropolitan area shows that prices in 2007 rose less than in 2006 (9.8%), thus according to official statements inflation in Argentina is receding. But this is not a view many people outside the government are prepared to accept. The 8.5% figure is a long way from private economists estimates that inflation in 2007 was somewhere in the range between 17% (the optimists) and 22% (the more pessimistic).

Indec has been in the eye of the storm for months now, with the Kirchner administration sacking several technical staff responsible for the index for not “correctly” interpreting cost of living data, replacing them by more compliant personnel, who were less statistical experts and rather more “telephone extensions”, as the Buenos Aires press put it.

The Indec conflict has been ongoing with labor stoppages, official interventions, mutual threats and at the end of the day a general discrediting of the Argentine official statistics office.

One of the principal concerns of the Kirchner/Fernandez administration has been and is concerned that double inflation will have a significant impact on sovereign bonds liabilities, given their floating interest rates adjusted by economic growth and inflation.

To add to the scandal the regional Indec office in Mendoza province, which many consider apparently was doing a reasonable job, systematically calculated inflation as being higher than the official index, elaborated in the main office in Buenos Aires. But one of the first moves of the economic team of the Fernandez administration on taking office was to change all the staff at the Mendoza Indec office, and of course the inflation reading is now well aligned with the Buenos Aires data.

Make what you want of it, but the December index shows that compared to November, health and medical attention jumped 3.5%; leisure, 2.4%; other goods and services, 1.9%; clothing, 0.9%; housing and basic services, 0.8%; transport and communications, 0.7%; food and beverage, 0.4% and education, 0.2%. On the other hand home maintenance and equipment actually decreased 1.5%.

Wholesale prices in December increased 0.5% over November totaling 14.4% in the last twelve months and the construction index was up 0.7% in December.

Brazil Inflation December 2007

Brazil's consumer prices rose at the fastest inter-monthly rate in over two years last month, making it harder for the central bank to further cut Latin America's highest benchmark lending rate. Consumer prices, as measured by the IPCA index, jumped 0.74 percent in December, the biggest increase since October 2005, the national statistics agency said. The gain, fueled by food prices, was almost twice the 0.38 percent increase in November and pushed the annual rate to 4.46 percent.

Higher food prices accounted for most of the inflation increase, climbing 2.1 percent in December, the biggest gain since January 2003. Food prices climbed 10.8 percent last year and were responsible for almost half the increase in the annual rate, which accelerated for the first time in five years.

The central bank ended a two year cycle of interest rate cuts on Oct. 17 2007, after inflation began to accelerate. With both economic growth and annual inflation picking up speed, the central bank is unlikely to make further reductions to the overnight rate, which is already at a record low of 11.25 percent, and may be forced to raise rates at some point this year.

Brazil's central bank targets annual inflation of 4.5 percent. A plus or minus 2 percentage point range can be used to accommodate unexpected price shocks. ABN Amro expects inflation to quicken to 4.8 percent this year, up from an earlier forecast of 4.3 percent.

The real gained 0.5 percent to 1.7501 per dollar at 12:15 p.m. New York time yesterday, following a gain of 20 percent last year.

Friday, January 11, 2008

Chile's Central Bank Raises Rates

Chile's central bank raised its benchmark lending rate to the highest in six years as it seeks to curb the fastest inflation in a decade. Policy makers raised the benchmark rate a quarter point to 6.25 percent in a meeting yesterday.The bank acted in response to inflation that climbed to an annual rate of 7.8 percent in December, driven by higher costs for food and transportation. The question is, with the US Fed set to lower rates rapidly, will this move curb inflation, or attract funds which can only serve to accelerate it. With the Peso set to rise, dollar denominated loans are going to look increasingly attractive to Chilean clients.

It was the second consecutive monthly increase as the bank tries to bring inflation down to its target for two years from now: 3 percent plus or minus 1 percentage point. The bank's overnight lending rate has risen from a low of 1.75 percent in the first eight months of 2004.

December's inflation was a ``significant surprise,'' the central bank said after the meeting. ``Further additional adjustments may be necessary to guarantee that inflation converges with the target rate.''

The Chilean peso rose to its highest level versus the dollar since 1999 today on expectations the central bank would lift rates while the U.S. Federal Open Markets Committee cuts.

Chile's economy grew 4.6 percent in November from a year earlier. It is the only Latin American country to have closed its income gap with the U.S. since 1990, as surging demand for the country's exports has stoked expansion, Finance Minister Andres Velasco told El Diario Financiero last week.

Thursday, January 10, 2008

Chile and the OECD

Chile has a thriving and well-managed economy although income levels are only 40 per cent of the western average, according to a report from the Organisation for Economic Co-operation and Development that is likely to reinforce Chile’s case for joining the 30-nation group.

More efficient government spending on education and social programmes, success in tackling the "black" economy and getting more women and young people into work will be crucial to maintaining Chile's strong economic growth, according to a new OECD report.

The OECD Economic Survey also says public finances are robust, growth is strong, and inflation, despite having risen recently, remains low. But labour productivity compares poorly with many OECD countries. Boosting productivity will require more business innovation and improving the education levels of the workforce.

Chile's healthy public finances are allowing increased spending on education, healthcare and other social programmes. Although educational attainment levels of Chilean pupils compare well with other Latin American countries, they are generally lower than in OECD countries. The report argues that extra money alone will not raise educational standards or enrolment and graduation rates. It calls for more focus on the quality of education through, for instance, greater attention to students from disadvantaged backgrounds and additional training programmes for teachers and school managers.

Improving education and skills is also key to discouraging people from working in the informal or "black" economy. About 20% of Chileans aged over 15 and working at least 20 hours a week did not have a formal labour contract in 2003, the latest year for which figures are available, says the report. Streamlining business registration and tax procedures would reduce the number of enterprises operating informally while the labour code could made more flexible. At the same time, social security schemes should be enhanced to encourage firms and their workers to be part of the formal economy.

The percentage of women aged over 15 in the labour force has risen over recent years but remains relatively low at around 42%. Male participation in the workforce is about 73%. Increasing the number of women in paid employment would support Chile's long-term economic growth and help reduce poverty, the report says. It adds that further incentives could be provided by more flexibility in working time arrangements, adapting social security provisions and increasing publicly-funded child-care, especially for the poor. Policies to raise educational attainment would also help as participation is higher among better-educated women.

OECD countries have launched a drive to engage more closely with emerging economies worldwide. Chile is one of several countries, along with Estonia, Israel, Russia and Slovenia, which have been invited to open membership negotiations. OECD has also launched a process of "enhanced engagement" with major emerging economies including Brazil, China, India, Indonesia and South Africa, with a view to strengthening mutual links.

The OECD in May invited Chile to begin negotiations on becoming a member, a process expected to take at least two years and separate from Monday’s report.

The OECD report praised Chile’s strong economic growth – expected to be about 6 per cent next year – prudent fiscal policies and low, albeit rising, inflation. It also approved of the way it has been saving windfall copper revenue generated by record prices.

It highlighted important reforms to the pension system that the government of Michelle Bachelet, the president, has undertaken.

The report noted that a fifth of people over 15 who work more than 20 hours a week are in the informal economy. It was vital to change that to boost productivity and thus keep Chile growing sustainably.

Chile should also make labour rules more flexible and provide access to affordable child care to boost the number of women in the workforce from about 42 per cent now.

Friday, January 4, 2008

Chile Inflation December 2007

Chilean consumer prices climbed more than expected in December, boosting expectations that policy makers will raise interest rates next week to slow what is now the fastest annual inflation rate in almost 12 years. Consumer prices rose 0.5 percent in December, the government-run National Statistics Institute said yesterday in Santiago. The annual rate rose to 7.8 percent, the highest level since June 1996. The month on month rate of 0.5% however was down on November's 0.9% rise as fresh food prices dropped 0.8% on the month.

Housing costs, including basic services, and transportation both rose 1.4 percent from the previous month, following a 21 percent increase in long-distance bus fares and a 16 percent rise in the price of airline tickets. Core inflation, which strips out the prices of minus fresh fruit, vegetables and fuel, accelerated 0.9 percent in the month and 6.3 percent from December last year, the institute said.

The central bank voted unanimously last month to raise the benchmark interest rate by a quarter-point for the fourth time since July, citing an unexpected rise in inflation. Policy makers were concerned that faster inflation would spread across the economy and affect inflationary expectations, according to the minutes of the meeting released yesterday.

Chile's economy more than doubled dollar terms in the three years ending 2006 as surging demand for the country's exports stoked expansion of what is Latin America's fourth-largest economy.

Annual inflation has accelerated from 2.6 percent in 2006 to close out 2007 at a level that is almost double the central bank's target of 3 percent plus or minus 1 percentage point.

The bank's monetary policy council has pushed up the overnight rate to 6 percent from 5 percent last June - up from as low as 1.75 percent in September 2004 - as the economy and inflation have accelerated.

The peso strengthened for a third day on the back of the news, rising 0.1 percent to 495.72 per dollar at 12:51 p.m. New York time from 496.42 per dollar late yesterday.