LatAm Weekly – July 8-12

Brazil – Almost there! Lower House is close to approving the pension reform In an historic vote, the lower house approved the pension reform with a comfortable margin, in the first of two rounds. The BRL has appreciated 6.3% since mid-May. This run may not be done—we think it could appreciate a bit more, to below 3.70. Late on Friday, Bloomberg news reported that congress will conduct the 2nd round vote on the proposal after its July recess (which starts on July 19th). This means that the lower house will likely finalize the 2nd, and final vote, in early August. Mexico – The Psychology of AMLO Despite this government targeting a higher primary fiscal surplus than those prior there is a very clear risk-premium. For example, if we take the year-to-date average of dollar bonds, we see that Mexican 10year bonds are trading in line with countries with a lower rating. Mexico – Minutes’ time On July 11th, Banxico released its June 27th minutes. The minutes revealed a board that was worried about Pemex’s downgrade, fiscal accounts and sticky inflation. One board member, aside from Esquivel, is considering supporting rate cut. This paragraph reads: “another member pointed that if inflation continues to converge to the target, it would be necessary to start a cutting cycle soon.” This member could not have been Esquivel because he voted for a cut. Therefore, it must be someone else. This member intentionally used the term “cycle”, and not a one-off cut. The level of inflation appears to be the main hinderance to rate cutting. While, this is unsubstantiated, we think this member is Heath. Peru – BCRP on hold, for now Perhaps, the more dovish signaling came from a comment by the chief of the staff, Adrian Armas , who said that the central bank would review a lowering of the policy rate if economic activity continued to moderate. However, Armas also said that he expected an acceleration in public investment in the second half of the year.