EUA – Bloomberg.com – 07/07/2009
Brazil’s ability to react faster to the global credit crisis than Mexico is prompting credit rating companies to reassess Latin America’s two largest economies, according to Goldman Sachs Group Inc.
Moody’s Investors Service put Brazil on review for a credit rating increase yesterday as Standard & Poor’s and Fitch Ratings reiterated concerns that Mexico may fail to pass tax legislation needed to stave off a rating cut after President Felipe Calderon’s party lost congressional seats in midterm elections. Brazil is rated below Mexico by all three companies.
“This shows the strong differentiation that the crisis has promoted,” said Alberto Ramos, an economist at Goldman Sachs in New York. “Mexico could have prepared much better. Brazil was more proactive.”
Brazilian bonds yielded 2.86 percentage points over U.S. Treasuries yesterday compared with 2.57 points for Mexican bonds, providing a gap of 0.29 percentage point between the two countries, according to JPMorgan Chase & Co.’s emerging-market bond index, known as EMBI+. A year ago, the difference was twice that at 0.58 percentage point.
Mexican borrowing costs may fall below Brazil’s in the EMBI+ index within six months, said Gabriel Casillas, head economist for Mexico and Chile at UBS AG in Mexico City.
“When money flows return to emerging markets, obviously they’re not going to return to where they were before,” Casillas said. “They’re going to see the possibility of a downgrade in Mexico and the possibility of an upgrade in Brazil.”
Investors in the credit-default swaps market began pricing Brazilian debt as a safer investment than Mexican debt in October for the first time since at least 2001 amid concern that the U.S. recession would hit Mexico harder.
Five-year credit-default swaps tied to Mexico’s bonds traded at 2.08 percentage points yesterday, compared with 1.76 percentage points for Brazil, data compiled by Bloomberg show.
That means it costs $208,000 a year to insure $10 million of Mexican debt with credit-default swaps, compared with $176,000 for Brazil. Credit-default swaps, which are used to hedge against losses or to speculate on a country’s ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.
Moody’s cited Brazil’s “demonstrated resilience to shocks” in the global economy in putting its credit rating of Ba1, or one level below investment grade, on review for upgrade. S&P and Fitch Ratings both assign Brazil a BBB- rating, the lowest investment grade level and two notches below Mexico.
While Moody’s highlighted Brazil’s ability to weather the crisis, S&P and Fitch said they are concerned that a congressional election defeat for Calderon’s party on July 5 will make it tougher for the government to pass legislation to bolster non-oil tax revenue. Oil accounts for 37 percent of Mexico’s budget.
“This is the key point — reducing the dependence on oil income,” Casillas said. ‘There’s a very good possibility that they’ll downgrade us a notch.”
Calderon will need “a lot of negotiation” to pass changes to tax laws through a divided congress, S&P analyst Lisa Schineller said in an interview yesterday from New York. Calderon’s electoral defeat raises the odds that tax legislation may be “diluted” by lawmakers before being passed, Shelly Shetty, an analyst at Fitch, said in a statement.
S&P cut the outlook on Mexico’s foreign debt to negative from stable in May, six months after Fitch. S&P and Fitch both rate Mexico’s debt BBB+, the third-lowest investment grade level.
Calderon’s National Action Party, or PAN, took 28 percent of the votes in the July 5 election to renew all 500 lower house seats while the opposition Institutional Revolutionary Party, or PRI, won 36.7 percent of the vote, according to 99.5 percent of all votes counted by the Federal Electoral Institute. The PAN has 41 percent of lower house seats and the PRI has 21 percent in the outgoing congress.
Brazil was quicker to shore up its currency and economy after the global crisis deepened in September, Ramos said. Brazil dipped into record foreign reserves of more than $200 billion to sell dollars in the foreign-exchange market, lowered banks’ reserve requirements and sold currency swap contracts while Mexico just sold dollars from its $80 billion stockpile, Ramos said.
“The Brazilians were faster in reacting,” Ramos said. “Mexico reacted later.”
Peso vs. Real
Mexico, Latin America’s second-biggest economy after Brazil, turned to the International Monetary Fund in April for a $47 billion credit line to shore up reserves and continue its peso defense. The peso has risen 3.3 percent against the dollar this year, the second-worst performance among Latin America’s six-most traded currencies after the Argentine peso. It tumbled 20 percent in 2008. Brazil’s real is up 18.5 percent, the best performance in the region, after sliding 23 percent last year.
“The exchange rate always tells the truth about a country’s economic situation,” said Eric Conrads, a Mexico City-based hedge fund manager at ING Investment Management SA. “We see how the real continues to appreciate.”
The IMF forecasts Mexico’s economy will contract 3.7 percent this year while Brazil’s will shrink 1.3 percent. Mexico’s government is predicting a 5.5 percent decline. Brazil is estimating growth of 1 percent this year.
Mexico has sought “to face the external crisis in the best way,” Rodrigo Brand, the Mexican Finance Ministry’s spokesman, wrote in an e-mail to Bloomberg News. He cited IMF data that show Mexico’s fiscal stimulus spending is the third-highest as a percentage of gross domestic product among G-20 nations as evidence of the government’s commitment to bolster the economy.
Calls placed after business hours to Brazil’s Deputy Treasury Secretary Paulo Valle and Treasury spokesman Ramiro Alves weren’t answered.
By Valerie Rota and Lester Pimentel