LatAm Weekly – Sept. 16-20

Brazil – Terminal value forecast lowered following dovish BCB As was widely expected on September 19th, the BCB lowered its Selic rate by 50 basis points to 5.50%. The BCB press release however was unexpectedly dovish thus meriting a downward revision to our terminal value forecast from 5.25% to 4.75%. We are now forecasting additional cuts of 50 and 25 basis points coming in the October 30th and December 11th meetings. The interest rate swap market (DI market) is pricing in 44.5 bps worth of cuts in October and 17.8 bps of cuts in December. The release of Copom minutes on September 24th and of the Quarterly Inflation Report on September 26th will be key inputs for the BCB to fine tune its communication about future rate decisions. Mexico - Pemex buyback of short end of curve Pemex is in the process of refinancing the short end of its curve. Pemex received US$5bn from the federal government and tapped markets for an additional US$7.5bn (7yr: $1.250bn @ 6.50%, 10yr: $3.250bn @ 6.85% and 30yr: $3.000bn @ 7.70%) last week to (in effect) buyback bonds. Authorities have said that Pemex’s net debt will remain unchanged. This means that all of this capital will be used for debt liability management. Amortizations occurring between 2020 and 2023 amount to US$28.1bn. This means that if Pemex were to buy back all debt maturing in the coming three years, it would still have enough cash buy back 44% of total amortizations. This is a strong positive. Today, Pemex announced the results of its buyback operation for US$5bn . It is unclear if Pemex will use the market’s US$7.5bn for another buyback round or if these funds will go to repaying revolving facilities with banks. In any cases, any reduction in Pemex’s financing needs would serve as another positive development. *** Tune in to hear our first LatAm Deep Dive Podcast *** on the Fiscal Accounts in Brazil with Benito Berber, Chief Economist Latin America, Natixis and Paulo Vieira Da Cunha, PhD., Advisor and Founding Partner, Verbank