The president of Venezuela has ordered that nation’s legislature and central bank to introduce new currency, to be named the “nuevo bolivar”, which would take three zeroes off the exchange value. Legislators say that this “monetary reform” is aimed at reducing inflation and making accounting easier. The bolivar currently trades at a fixed rate of 2,150 to the US dollar. The new currency is expected to be introduced on January 1, 2008.
This sort of move has in the past been used by nations trying to rein in hyperinflation, but Venezuela’s current inflation rate of 14.4 percent is well below anything that could be included in that term. When nations such as Brazil, Bolivia, and Argentina used this tactic in the 1980s and 1990s, their inflation rates were in some cases measured in thousands of percentage points.
Some analysts believe that the real motive for the proposal by President Hugo Chavez is more in line with his penchant for patriotic symbolism, which has included the alteration of a number of national symbols, including the national flag. One analyst even went so far as to charge that Chavez’s real objective is to put the portraits of his own historical heroes on the new currency. It has also been pointed out that an introduction of new currency will have no effect on inflation unless fiscal policy is reformed at the same time.
August 23, 2005
Peso and IPC down in Mexico on interest rate expectations
The Mexican peso lost value on Tuesday as investors worried about a possible drop in domestic interest rates.
The peso was down 0.44 percent to 10.79 pesos to the dollar on speculation that interest rates in Mexico could be cut as early as this week when the central bank holds its twice-monthly monetary policy meeting.
The overnight lending rate fell by 10 basis points to 9.60 percent on Monday on anticipation that the central bank will drop interest rates, but it edged back up on Tuesday to 9.74 percent, around its recent level.
Meanwhile in the equities markets, the IPC index lost 0.44 percent as well, to 14,706, in late morning activity.
The telecommunications sector was down as America Movil lost 1.46 percent to $22.27 and Telefonos de Mexico dropped 0.10 percent to 10.41 pesos after it agreed to be a partner in Telecom, Colombia’s state-owned fixed-line company.
Telefonos’ shares trading in the United States fell 0.67 percent to $19.25. Not all stocks were down, however, as glass maker Vitro gained 2.68 percent to 13.80 pesos and its shares trading in New York gained 0.52 percent to $3.84.
Vitro has gained more than 40 percent since August 10 amid rumors that it will sell part of its Vitrocrisa subsidiary in order to reduce its debt.
August 22, 2005
Investors assured as Palocci denies scandal involvement
In Brazil on Monday, both the equities markets and currency were up after Finance Minister Antonio Palocci held a press conference Sunday to deny that he has any involvement in the bribes-for-votes scandal currently rocking the country.
He said that he would not resign his post and that Brazil’s economy would survive the current political turmoil.
Analysts said that Mr. Palocci’s speech had been convincing and would go a long way to calming investor speculation over whether or not he would quit his job.
One analyst, however, said that investors would probably remain cautious with testimony scheduled for Wednesday from a former aide of Mr. Palocci’s who accuses the finance minister of taking bribes.
The Bovespa index in Sao Paulo gained 1.97 percent to 27,169, while the real gained 2 percent to rise to 2.402 to the US dollar.
The real had lost 2.8 percent on Friday, while the Bovespa had fallen by 2.75 percent on the accusations against Mr. Palocci, who allegedly took the bribes when he was mayor of Ribeirao Preto.
August 18, 2005
Brazil markets disappointed as politics scandal grows
In Brazil on Thursday, the real weakened and the stock market lost almost 1 percent on new allegations growing out of the current political scandal and on frustration that an interest rate cut expected by some investors did not materialize.
The Bovespa index in Sao Paulo lost 0.95 percent to 27,156.
Some analysts called the decline a “correction” after the disappointment that rates were not cut, and said that they do not expect the decline to last. The index had risen over 1 percent on Wednesday in anticipation of the hoped-for cut.
Meanwhile the real was down 0.64 percent to 2.369 on the dollar as investors paid close attention to the testimony before parliament of the former treasurer of the Workers’ Party, Delubio Soares, who was accused by another congressman of paying off legislators in return for their votes.
Soares has denied the bribery accusations but has admitted to using off-books funds to pay for the party’s campaign expenses. He would not, however, directly answer some of the questions put to him during his testimony.
His testimony is being closely watched to see if he will make a direct connection between his admission of using illegal funds to pay for campaigns and the 2002 presidential campaign of President Luiz Inacio Lula da Silva.
Shares of foreign companies trading in New York were mixed on Monday as European companies did not do as well as did Latin American companies trading in the US.
The Bank of New York’s index of leading European shares fell 0.3 percent to 132.58, while the Latin American index gained 1.7 percent to 171.23.
The bank’s index of ADRs as a whole fell 0.2 percent.
One reason for the European index’s decline was the fall of European oil companies as crude oil prices backed off the record highs of last week. British oil company BP Plc were down nearly 1 percent to $69.90 and Royal Dutch Shell was down 0.6 percent to $66.86.
On the other hand, Brazil’s Petrobras gained 1 percent to $60.28 when Nigeria chose the company to help it develop ethanol production. Copper prices that reached new highs had mining stocks up, however.
With analysts saying that copper prices could go even higher, Brazilian miner Companhia Vale do Rio Doce’s US-traded shares gained 1.7 percent to $35.26.
When Swiss-based Xstrata Plc announced that it had bought 20 percent of Canadian base metal mining company Falconbridge Ltd. For $1.7 billion, Falconbridge’s New York-traded shares gained 2.1 percent to $24.20.
According to Mexico’s finance ministry, the Mexican economy grew by about 4 percent in the second quarter of the year compared to the same period in 2004.
This is an improvement over growth in the first quarter, which was just 2.4 percent better than the previous year.
The gains came on better consumer spending and growth in exports. The finance minister said in his report that both private spending and public investment had grown during the quarter.
Still, Mexico’s central bank lowered its outlook for the year, last week announcing that its new prediction was that the economy would grow between 3.25 and 3.75 percent in 2005.
The report out of the finance ministry also said that Mexico had a public surplus in the first half of the year of around 41.077 billion pesos ($3.87 billion), which was down by nearly 31 percent from the same period last year.
Budget income increased by 3.7 percent, but spending was up by 6.5 percent, due at least in part of large increases in government investment programs.
July 19, 2005
Brazil’s stock market declines over bribes scandal
As Congressional hearings begin in a bribes-for-votes scandal involving the ruling party in Brazil, the South American’s country’s stock market declined on Tuesday and its currency lost value against the US dollar.
The Brazilian real lost 0.17 percent to sit at 2.342 to the dollar, although it is still around 13 percent higher than it was in 2005 due to high domestic interest rates and strong exports.
The Bovespa index on the Sao Paulo Stock Exchange was down 0.71 percent to 25,142.
Analysts have advised investors to exercise caution as the political crisis worsens.
The ruling Workers Party has been accused of paying congressmen to secure their votes in support of party positions on various issues.
The former treasurer of the party, slated to testify before the hearings on Wednesday, denies these charges, but has admitted to funding campaigns without reporting the full amount of donations received.
Investors worry that if the scandal harms the image of Brazilian President Luiz Inacio Lula da Silva, the government will resort to higher government spending to try to improve his re-election chances in 2006.
Canada’s trade surplus dropped to C$4.0 billion in May, well below the expected figure of C$4.9 billion.
Statistics Canada said that the unexpected drop had to do with higher energy imports and the importation of heavy equipment to cope with a higher construction rates in western Canada.
Imports of machinery and heavy equipment was up by 0.3 percent in May, while imports of energy products was up by 19.0 percent on higher demand by refineries in the east.
In addition, exports were down by 0.5 percent. Machinery and equipment exports were down by 1.9 percent and energy exports fell by 4.9 percent.
The only sectors in which exports did not drop were the automotive products and consumer goods sectors. Exports of automotive products rose by 4.9 percent.
Analysts said that the news does not alter the near-certainty that the Bank of Canada will raise interest rates in September.
The bank had announced on Tuesday that it was leaving rates at their current level this month, but that rate raises would be needed soon.
Venezuela legislates on illegal currency exchanges
Venezuela’s parliament passed legislation on Wednesday that provides for fines and jail time for Venezuelans and foreigners who violate the country’s laws controlling currency exchanges.
The regulations controlling the exchange of foreign currencies were introduced in 2003 and included the creation of a state currency board, banned foreign exchange transactions outside of the board, and set a fixed exchange rate.
The regulations, however, did not prescribe penalties for violations, and an active black market in currencies grew up outside of the official exchange system.
The new legislation changes that, prescribing fines depending on the amount of currency involved in particular violations and jail terms of from two to six years for violations exceeding $20,000 in value.
The jail terms were less than those originally proposed. There are exceptions in the law allowing trade in dollar-denominated government bonds and for arbitrage trade in local shares and American Depositary Receipts of companies that trade on both the Caracas and New York exchanges, which will bring higher than the official exchange rate.
Brazil’s currency has surged to a 39-month high against the US dollar on news of a poll that shows the approval rate of President Luiz Inacio Lula da Silva rising despite the current political scandal.
The Brazilian real, which has gained 13.4 percent against the dollar this year, was up 0.21 percent to R2.336 in relation to the dollar after hitting a high of R2.331 earlier in the day.
The poll, from the National Transport Confederation showed that Mr. Lula’s popularity was at 40.3 percent in July, up from 39.8 percent in May.
While the poll has a 3 percentage point margin of error, it’s results indicate that resurging economic growth has offset the effect of the money-for-votes scandal that resulted in the resignation of a presidential aide and the executive directors of the ruling Workers Party.
The scandal first made news on June 6, and since then stocks have dropped over 5 percent as of the close of trade on Monday.
Analysts were surprised by the outcome of the poll, but believe that it will be good for the stock market.
The Bovespa index in Sao Paulo was up 1.2 percent in early afternoon trade on Tuesday to 29,316 on news of the poll.
While the Bank of Canada has kept its overnight interest rate steady at 2.5 percent this month, unchanged since October, it said on Tuesday that interest rates would have to rise “in the near future.”
That statement was interpreted to mean that rates will likely rise at the next two opportunities, which will come on September 7 and October 18.
The bank will release its Monetary Policy Report on Thursday, detailing the reasons behind its statement on interest rates.
The Canadian dollar rose to its highest value in relation to the US dollar in three and a half months just before the bank’s announcement, to C$1.2034, while bond prices fell in anticipation of the higher interest rates.
Some analysts see the possibility that Canadian interest rates will now rise at all three possible opportunities for the rest of the year, in December as well as on the September and October dates.
Although this is the first time that the bank has explicitly stated that rates will rise soon, it had said in April that the prospect of higher rates at some point was there.
The bank also said that it expects the economy to continue at near capacity this year and next, and that it expects inflation, now at 1.6 percent in Canada, to return to 2 percent by the end of next year.
In Brasilia on Tuesday over 10,000 farmers marched past the palace of President Luiz Inacio Lula da Silva in an attempt to draw government attention to the worst farm crisis in Brazil in at least 10 years.
Prices for several crops have fallen sharply in the past year while Brazil’s currency has gained over 25 percent since last year’s crops were planted.
The head of Aprosoja, the soybean growers’ association, Jose Rogerio Salles, said that while costs were calculated with the real at R$3.20 to the dollar, crops are currently selling at R$2.40 to the dollar.
With soybean prices down 47 percent and cotton prices down 35 percent, farmers stand to lose over R$10 billion this year.
The farmers are asking for aid to assist in refinancing their expenditures for this year’s harvest, but finance minister Antonio Palocci has said that the government does not have the money to help.
According to one economist, Brazilian farmers are more at the mercy of market fluctuations than American and European farmers, with no insurance and no subsidies.
In addition, a drought in the south of Brazil has meant the loss of 15 percent of the grain crop, further hurting farmers.
Brazil is threatening to break the patent on an anti-retroviral drug for the treatment of AIDS if Abbot Laboratories, the holder of the patent, will not lower the price of the drug.
At the same time, the Brazilian government is in talks with two other US drug companies, Merck and Gilead Sciences, over the prices of their AIDS drugs.
Brazilian health minister Humberto Costa has said that if those companies will not cut the prices on their drugs, Brazil might break the patents on them as well.
Mr. Costa insisted that if Brazil does take this action, it will do so because it is in the “public interest.”
An official of a US industry lobby, the Pharmaceutical Research and Manufacturers of America, called the threat “troubling”, and Abbot Laboratories said that if Brazil begins to manufacture the drug itself, there could be a negative impact on the development of new drugs to treat not only AIDS but all diseases.
The World Trade Organization allows countries to break patents in circumstances of national emergency, but critics of Brazil’s potential move say that isn’t the case here and that Brazil is spending less on drugs to treat AIDS than it was five years ago.
Brazil wants Abbot to cut the price on the drug in question, Kaltera, by 42 percent. Abbot charges $1.17 per pill for the drug, but Brazil claims that a state owned laboratory could sell the drug for 68 cents per pill.
Six former British colonies in the Caribbean that are traditional exporters of sugar to Europe, complain that they were not included sufficiently in arrangements made by the European Union to cut sugar subsidies.
This week, a proposal was made to cut the guaranteed sugar prices that the EU pays by 39 percent, with only a two-year adjustment period.
While prices paid by the EU for sugar will still be almost double prices on the free market, the cuts will hit the countries involved hard and they will have less time than they had expected to adjust to the new conditions by finding other outlets for the sugar they produce.
Jamaica, with Guyana the hardest hit of the Caribbean countries involved, has plans to develop alternate uses for sugar such as ethanol production and Gagasse-based generation of electricity, but officials say they need more time than they will have to make adjustments.
In Guyana, where 750,000 people make their living working in the sugar industry, the EU cuts would cost the country $40 million (£22 million) in export revenues.
This is over six times the $8 million in relief that the nation is slated to receive from the recent G-8 debt relief program.
In early trade on Wednesday the São Paulo equities exchange in Brazil fell by at least three percent on renewed concern over a corruption scandal involving the ruling Worker’s party (PT).
There had been signs earlier in the week that the scandal was receding when a key witness was only able to provide circumstantial evidence that the PT had bribed some legislators.
However, fresh evidence brought forth Wednesday seemed to conform the information that had been testified to by Roberto Jefferson, head of the PTB party, a left-of-center member of the ruling coalition, when a former secretary to a PT aide said in an interview that she had seen repeated delivers of cash to government officials.
Economic analysts are now convinced that the crisis over the charges will continue for some time, especially as claim and counter-claim during the congressional hearings on the matter make the controversy seem to be tied as much to the upcoming general election in October as to an inquiry into corruption.
UK regional discount fare air carrier FlyBE announced on Monday that it will buy as many as 26 regional jets from Brazilian aircraft manufacturer Embraer.
The deal could be worth up to $950 million.
The planes, the first orders for the Embraer 195, are expected to be delivered at the rate of one plane per month beginning in August 2006.
The planes, which will replace the carrier’s 15 BAe146 planes, were said to be more appropriate to FlyBE’s regional routes than larger jets and have comparable seat costs.
The decision to buy the new planes comes ahead of either an initial public offering or an attempt to sell the airline.
In preparation for either alternative, FlyBE is reducing the number of aircraft types it flies from five to two - the 118-seat Embraer 195 and the 78-seat Bombardier Q400 turbroprop - in an attempt to simplify operations and cut costs.
The move will also reportedly allow FlyBE to expand the number of UK regions in which it could offer direct European service. It has been developing new bases in the past few months.
State-owned Chinese mining group Minmetals signed an agreement Tuesday with Corporación Nacional del Cobre de Chile (Codelco), the world’s largest copper producer, to develop copper mines in Chile.
The deal gives financial aid to Codelco to expand its operations while giving China access to more copper at a time when the Asian nation is becoming more dependent on foreign sources for raw materials.
Minmetals will put US$550 million into Codelco in the first phase of a reported US$2 billion commitment to developing copper projects and making supply deals with the Chilean company.
As part of the deal, Minmetals was given the option of acquiring a stake in Codelco’s Gaby copper mine at some time in the future. Minmetals is also reportedly trying to put together a partnership with Canadian base metals producer Noranda in order to ensure another source of supply for metals.
Minmetals is not the only Chinese metals group to be looking for deals in the Americas. Baosteel, China’s largest steel maker, has an agreement with Companhia Vale do Rio Doce to build a plant in Brazil that will produce 4.1 million tonnes of steel per year.
Peru’s president, Alejandro Toledo, is currently engaged in making his country a main focus of Chinese investment in Latin America.
In a trade mission to China, this week, Mr. Toledo hopes to secure Chinese promises to invest in the development of ports, oil exploration, and airlines, as well as to make a deal on lowering tariffs.
He is likely to point out to China that his country has the largest population of Chinese immigrants in Latin America and that Peru and China have been engaged in diplomatic relations for over a century and a half.
However, Peru will have to overcome a slow start in trade with the Asian nation.
Between 2000 and 2003, Peru’s exports to China grew by 50 percent, compared to a growth of 503 percent in exports from Brazil to China, a growth of 363 percent in trade from Argentina to China, and a 238 percent growth in trade from Chile to China.
Peru’s exports to China totaled $1.2 billion in 2004 and are expected to grow to a total of $2.6 billion this year. Over half of these exports were in minerals.
Data released this week by Brazil’s ministry of environment indicate that in the year ending in August of 2004 approximately 26,130 square kilometers of Amazon rainforest were destroyed, a six percent increase over the previous twelve months and the second-highest amount of last deforested since measurements began to be taken in 1988.
This rate of destruction was much higher than had been expected. Almost half of the new deforestation occurred in the state of Mato Grosso, in the western part of the country and a main agricultural region. Environmental experts say that the deforestation is mainly caused by expanding agriculture, new roads, and economic growth.
Critics put much of the blame on the governor of Mato Grosso, who took office in 2002 and is one of the largest soybean producers in the world.
Much of the deforestation, however, is not directly caused by agriculture, according to some experts, but by expanding agriculture forcing cattle ranchers and small-scale farmers deeper into the forest. Rates of deforestation are determined by studying satellite photographs.
