Latin

Weekly Observatory
th
July 16 2010

Economic Analysis
South America
Joaquín Vial
jvial@bbvaprovida.cl
Enestor Dos Santos
enestor.dossantos@grupobbva.com
Myriam Montañez
miriam.montanez@grupobbva.com
Argentina: Gloria Sorensen
gsorensen@bancofrances.com.ar
LatAm: a faster recovery
The recovery is gaining speed as the news arriving from the region continues to remain
positive. Very significant are the raised debt rating for Argentina by Fitch, the take-up of
Colombian bonds and good economic indicators in Colombia, Mexico and Peru. There are
some signs of a slowdown in Brazil after high growth in the first quarter of this year. The
official interest rate was increased in Chile, but continue to be very expansionary.
The equity markets are going up again, and we expect the same to happen in the
foreign currency market.
Most of the share indexes in the zone are reacting positively to the corporate results from
the USA and of a reduction in the risk premium. Currencies reacted to factors in the cycle,
which we expect to be corrected shortly.

Chile: Alejandro Puente Chart 1

apuente@grupobbva.cl CDS Sr 5A, Spread vs. Germany
1,000 400
Colombia: Juana Téllez
900
juana.tellez@bbva.com.co 350
800
300
Mexico: Julián Cubero 700
juan.cubero@bbva.bancomer.com 250
600

Peru: Hugo Perea 500 200

hperea@grupobbva.com.pe 400
150
300
Venezuela: Oswaldo López 100
200
oswaldo.lopez@pronvincial.com
50
100
Markets
0 0
Octavio Gutiérrez
May-10

May-10

May-10

May-10

May-10
Mar-10

Mar-10

Mar-10

Mar-10

Apr-10

Apr-10

Apr-10

Apr-10
Jan-10

Jan-10

Jan-10

Jan-10

Jan-10

Jun-10

Jun-10

Jun-10

Jun-10
Feb-10

Feb-10

Feb-10

Feb-10

Jul-10

Jul-10
o.gutierrez3@bbva.bancomer.com

Greece Portugal (right axis) Spain (right axis)

Source: Bloomberg and BBVA Research.

Highlights
Fitch raises Argentina's debt rating from RD to B
Markets
Signs of a slowdown in economic activity in Brazil
Chile: The Central Bank's interest rate was increased
Highlights
Colombia: faster recovery rates are confirmed
Industrial activity boosted by exports in Mexico
Calendar
Peru: continues to accelerate
Venezuela: Decree from the BCV improves capitalization in the financial system.
Market data
 Latin Weekly Watch
July 16th, 2010

Market analysis
Equities have performed slightly better, due to favorable reports and a
drop in risk premiums
Octavio Gutiérrez
o.gutierrez3@bbva.bancomer.com

Equity Latam Two elements have come together to make the global stock markets move up again: 1) the
Chief Analyst corporate results season in the USA has started off well; and 2) the lending markets are
Rodrigo Ortega
r.ortega@bbva.bancomer.com beginning to re-open. These two elements have had a positive effect of the market risk
premiums, where the more developed ones, which had been worse hit than those in Latin
LatAm FX
Chief Strategist
America, have shown a marked positive trend which could keep up over the next few
Moisés Junca, CFA, CMT weeks.
moises.junca@bbva.bancomer.com

Claudia Ceja
claudia.ceja@bbva.bancomer.com Forces in the global markets cause varying performances from Latam currencies

The above elements, together with the flow of economic news from the USA that may
confirm a moderation in growth, will continue to act as the driving force behind Latin
American currencies. Therefore, although uncertainty about the global cycle is still
pressurizing high-risk shares, these are gradually lessening. In fact, the 5-year CDS for the
zone remained on a downtrend (with weekly falls of about 4.8%), reflecting how less
uncertainty regarding peripheral EU countries and an upward trend in share indexes are
counteracting the risks. This, in turn, should shortly also move over to affect currencies.
In particular, we can still see value in the MXN, which continues to have the highest
sensitivity to external factors (target level 12.61). With the BRL, we expect new movement
into the region of 1.75, based on the BM&F taking a positive position on the currency. With
the COP, we expect stability around 1.870, due to Friday's decision on monetary policy
(especially with a market awaiting an announcement on appreciation of the currency).
Finally, we are still seeing stability in ARS and PEN, due to intervention from the central
banks.

Chart 2
S&P's correlation with Latam currencies (3M)
1

0.8

0.6

0.4

0.2

-0.2

-0.4

-0.6

-0.8

-1
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10
BRL ARS CLP PEN MXN COP

Source: Bloomberg and BBVA Research.

PAGE 2
 Latin Weekly Watch
July 16th, 2010

Economic Analysis
Highlights
Fitch raises Argentina's debt rating from RD to B
Fitch Ratings raised Argentina's rating from RD to B, due to the restructuring of 90% of its
bonds in default in 2002. This coincided with rises in bond prices and an increase in
purchase of dollars by the Central Bank.
More signs of a slowdown in economic activity in Brazil
The Central Bank's Economic Activity Index showed no change (0.0% m/m) in May, after
modest growth of 0.3% m/m in April. Retail sales went up by 1.4% m/m in May, lower than
expected (1.8%), and less than in Q110 (2.2%).
Chile: The Central Bank's upward trend continues
The Central Bank increased the policy rate by 50 basic points to reach 1.50%, in line with
expectations. We estimate that the Central Bank will increase the rate by another 50 bps
in August, and then slow the rate of increases to reach 3% at the end of the year.
Colombia: faster recovery rates are confirmed
The government issued a global bond expiring in 2021, denominated in pesos and
payable in dollars, for 500 million USD (equal to a bid to cover of 4.7), and an interest rate
lower by 0.1% over April's issue. This coincides with a rise in consumer and business
expectations, higher imports and an increase in vehicle sales, which confirm the speed of
recovery.
Industrial activity boosted by exports in Mexico
Industrial production rose 0.5% m/m in May, against a forecast of 0.1%. The largest
increase was in branches of manufacturing linked to exports, such as transport equipment,
and machinery and equipment. In the rest, the main negative factor is the weak recovery in
construction.
Peru: Advance indicators show a strong boost in activity
In May, the GDP grew 9.2% y/y, more than expected. Data from the sector suggest that
internal demand continues to boost activity. We think that the Central Bank will increase
the speed of removal of the monetary stimulus during the rest of the year.
Venezuela: Decree from the BCV improves capitalization in the financial system.
From 1 June, the financial institutions and insurers will be able to value their assets and
liabilities in foreign currency at an exchange rate of 4.3 BsF/USD, and not at 2.6
BsF/USD. This will improve the banks' capitalization index.
Chart 3 Chart 4
Brazil and Mexico: Activity Rates Peru: GDP
(seasonally adjusted index, Jan08 = 100) (seasonally-adjusted index, 2008 = 100)
122 112

111
118
110
114
109

110 108

107
106
106
102
105

98 104

103
94
102
90
101

86 100
May-08

May-09

May-10
Mar-08

Mar-09

Mar-10
Nov-08

Nov-09
Jan-08

Jul-08

Sep-08

Jul-09

Sep-09
Jan-09

Jan-10
May-08

May-09

May-10
Mar-08

Mar-09

Mar-10
Nov-08

Nov-09
Jan-08

Jul-08

Sep-08

Jan-09

Jul-09

Sep-09

Jan-10

Brazil: Retail Sales Mexico: Industrial Production

Source: IBGE and BBVA Research Source: BCR and BBVA Research

PAGE 3
 Latin Weekly Watch
July 16th, 2010

Calendar: indicators
Next Week: 19-23 july 2010
Argentina Data Period Forecast Consensus Previous Comment
Trade Balance 23-Jul June 2010 USD M1.494 USD M1.535 USD M1.905
Brazil Data Period Forecast Consensus Previous Comment
Unemployment Rate 22-Jul June 2010 7.5%
Colombia Data Period Forecast Consensus Previous Comment
Additional working day in May will push
Industrial production 19-Jul May 2010 9.8% y/y 7.6% y/y
figure upward.
Improving consumer confidence continues to
Retail sales 19-Jul May 2010 8.2% y/y 7.9% y/y
support retail sales.
Mexico Data Period Forecast Consensus Previous Comment
Improvement by recent employment
Retail Sales 21-Jul May 2010 0.4% m/m sa -1.1% m/m sa
evolution.

July 2010, 1st July could be the first period with CPI
IPC, Bi-Weekly 22-Jul 0.3% m/m 0.0 m/m
half increase after three months in a row of falls.
Downward rigidity due to informal
Unemployment rate 23-Jul June 2010 5.5% 5.7% employment fall and subdued evolution of
labour force.
Venezuela Data Period Forecast Consensus Previous Comment
Given the evolution on the electric and
automotive sector, we anticipate that
Unemployment rate 23-Jul June 2010 8.5% 8.1%
unemployment will keep the upward trend
(y/y).
Source: BBVA Research

Calendar: events
Brazil: Monetary Policy Rate (July, 21 July)
Forecast: 11.0% Consensus: 11.0% Previous: 10.25%

General consensus points toward the Central Bank raising rates by 75bps next week.

Colombia: Monetary Policy Rate (July, 23 July)

Forecast: 3.0% Consensus: 3.0% Previous: 3.0%

We expect the interest rate to remain stable at 3.0%, in line with consensus from analysts.

Calendar: holidays
Colombia 20 July.
Venezuela: 24 July.

PAGE 4
 Latin Weekly Watch
July 16th, 2010

Table 1
Market Movements
Close Weekly change Monthly change Annual change
3-month Libor rate 0.52 -1 -2 2
(changes in bps)
Interest rates

US

2-yr yield 0.58 -4 -12 -40

10-yr yield 2.94 -11 -25 -71
3-month Euribor rate 0.86 4 13 -9
EMU

2-yr yield 0.77 0 25 -49

10-yr yield 2.62 -1 -4 -78
Dollar-Euro 1.294 2.3 4.8 -8.4
Europe

Pound-Euro 0.84 0.5 1.1 -2.5

Swiss Franc-Euro 1.35 1.1 -1.7 -11.0
Argentina (peso-dollar) 3.93 0.0 0.2 3.4
Exchange rates
(changes in %)

Brazil (real-dollar) 1.78 1.2 -0.2 -7.7

America

Colombia (peso-dollar) 1881 0.3 -0.9 -6.3

Chile (peso-dollar) 530 -1.7 -0.2 -0.5
Mexico (peso-dollar) 12.87 0.7 2.1 -3.6
Peru (Nuevo sol-dollar) 2.82 -0.1 -0.4 -6.2
Japan (Yen-Dollar) 86.32 -2.5 -4.9 -8.2
Asia

Korea (KRW-Dollar) 1213.15 1.2 0.1 -3.7

Australia (AUD-Dollar) 0.871 -0.5 0.8 8.6
Brent oil ($/b) 75.0 -0.6 -4.7 14.7
(change
Comm.

s in %)

Gold ($/ounce) 1187.5 -2.0 -4.6 26.7

Base metals 471.3 -0.4 -1.2 13.7
Euro.

Ibex 35 10022 -1.0 2.7 -0.2

EuroStoxx 50 2663 -0.7 -2.4 7.8
USA (S&P 500) 1075 -0.2 -3.6 14.4
Argentina (Merval) 2307 0.8 -0.3 42.2
Stock markets
(changes in %)

Brazil (Bovespa) 62780 -1.1 -2.7 20.6

America

Colombia (IGBC) 12958 3.3 4.4 31.0

Chile (IGPA) 19553 1.1 3.5 28.4
Mexico (CPI) 32293 0.9 -1.5 25.4
Peru (General Lima) 14078 0.7 -1.9 7.7
Venezuela (IBC) 64893 -1.0 0.3 41.4
Nikkei225 9408 -1.8 -5.9 0.1
Ind. Asia

HSI 20250 -0.6 0.6 7.7

Itraxx Main 115 1 -6 8
Itraxx Xover 527 -2 -14 -181
CDS Germany 41 -1 0 7
CDS Portugal 293 15 -7 227
(changes in bps)

CDS Spain 225 11 -18 147

Credit

CDS USA 36 0 0 ---

CDS Emerging 242 -5 -19 -150
Sovereign risk

CDS Argentina 908 2 -133 -1214

CDS Brazil 124 -5 -8 -47
CDS Colombia 133 -7 -19 -74
CDS Chile 92 -3 0 -16
CDS Mexico 124 -4 -4 -90
CDS Peru 118 -7 -10 -65
Source: Bloomberg, Datastream and JP Morgan

PAGE 5
 Appreciation Depreciation

70
90
110
130
150
170
190
210
230
250

50
100
150
200
250
300
350
400
450
500
550
Jan-09 Jan-09

70
75
80
85
90
95
100
105
110
115
120
Feb-09 Jan-09 Feb-09

Charts 8 & 9
Charts 6 & 7

Mar-09 Feb-09 Mar-09

Charts 10 & 11
Mar-09

Brazil
Apr-09 Apr-09

Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Apr-09 May-09

Argentina
May-09

Argentina
May-09 Jun-09
Jun-09
Jun-09 Jul-09
Jul-09

Chile
Jul-09
Aug-09 Aug-09

Brazil
Aug-09

Brazil
Sep-09 Sep-09
Sep-09
Oct-09 Oct-09
Oct-09

Credit Default Swaps (levels)

Nov-09 Nov-09
Nov-09

Chile
Dec-09

Chile
Dec-09

Colombia
Dec-09
Jan-10 Jan-10
Jan-10
Feb-10 Feb-10
Feb-10
Mar-10 Mar-10
Mar-10

Exchange rates (base index Jan09=100)

Apr-10 Apr-10
Stock exchanges (base index Jan09=100)

Mexico
Apr-10
Colombia

Colombia
May-10 May-10 May-10
Jun-10 Jun-10 Jun-10
Jul-10 Jul-10 Jul-10

Peru
70
90
110
130
150
170
190
210
230
250

85
90
95
100
105
110

80
580
1080
1580
2080
2580
3080
3580
4080
4580
Jan-09 Jan-09
Jan-09
Feb-09 Feb-09
Feb-09
Mar-09 Mar-09
Mar-09
Apr-09 Apr-09

Mexico
Mexico

Apr-09

Source: Bloomberg

Source: Bloomberg
Source: Bloomberg

May-09 May-09
May-09

Argentina
Jun-09 Jun-09
Jun-09
Jul-09 Jul-09
Jul-09
Peru

Peru
Aug-09 Aug-09 Aug-09

Sep-09 Sep-09 Sep-09

Oct-09 Oct-09 Oct-09

Venezuela
Nov-09 Nov-09 Nov-09
Dec-09 Dec-09 Dec-09
Venezuela

Jan-10 Jan-10 Jan-10

Feb-10 Feb-10 Feb-10
Mar-10 Mar-10 Mar-10
Apr-10 Apr-10 Apr-10
May-10 May-10 May-10
Jun-10 Jun-10 Jun-10
Latin Weekly Watch
July 16th, 2010

Jul-10 Jul-10 Jul-10

PAGE 6
 Latin Weekly Watch
July 16th, 2010

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