Developments
in Latin America
By Vangie Bhagoo
Trinidad Guardian
Pirt Spain
Petroleumworldtt.com
07 08 07
Venezuela
The
nationalisation of major oil projects in Venezuela’s
oil-rich Orinoco belt is now in the final stages.
The future of the industry and the country’s
business climate remain uncertain.
Two
of the major US companies, Exxon Mobil and ConocoPhillips,
announced their decision to pull
out of operations altogether, raising the state-owned
Petróleos de Venezuela SA (Pdvsa)’s
stake in the exploration ventures from about 39
per cent to 78 per cent in the deals.
The major concern for investors is the lack of
technical expertise by Pdvsa or their inability
to operate efficiently and raise productivity in
the sector.
The government hopes to double oil output by 2012,
however, given the inefficiencies of the state-owned
company, this target seems unfeasible.
Meanwhile,
Venezuela and Russia are likely to discuss plans
for Russian gas giant, Gazprom and
oil giant Lukoil to develop projects in Venezuela.
The plans include a project to build a gas pipeline
linking Argentina, Bolivia, Brazil, Paraguay, Uruguay
and Venezuela. The spread between Venezuela’s
sovereign US$ Global 27 and both the Brazilian
Global 27 and Russia’s Global 30 has been
widening at an alarming rate in 2007, as investors
react to growing risks in the former.
Indeed,
against Brazil, the spread of the Venezuelan
bond has reached four-year highs, last seen during
a time of crisis involving a national oil strike
in 2003. If international oil prices contract,
Venezuela’ economic and financial stability
may be further threatened, thus the bearish view
on Venezuela debt remains.
Brazil
Brazil’s
macroeconomic performance continues to impress
and it is in this context that the Central
Bank is lowering the benchmark interest rate, the
Selic.
The Central Bank based its decision on expectations
of a decline in inflationary pressures as a result
of lower import costs and higher investments by
companies.
The
bank reduced the interest rate by half a percentage
point to 12 per cent, the biggest reduction this
year. Brazil’s real has appreciated to its
strongest level since 2000, during this year, which
cut import costs and kept consumer prices in check.
The real has gained over 80 per cent against the
dollar since President Lula took office in 2003
and is among one of the best performers of the
world major currencies during that period.
The
Brazilian economy continues to perform well,
with economic activity consolidating above four
per cent. The large accumulation of foreign exchange
reserves has helped to significantly lower the
country’s exposure to external volatility.
The central bank has continued to intervene in
the foreign exchange market in an effort to build
up its dollar reserves.
Latest
figures place the bank’s dollar holdings
at US$143billion, equivalent to roughly 13 per
cent of GDP. The outlook on Brazilian debt remains
upbeat. On the Emerging Markets Bond Index Plus
(EMBI+), Brazil’s sovereign debt spreads
also hit an all time low of 137 bps over US treasuries,
as investors’ appetite for risk remained
healthy. The absence of a major sell-off of Brazilian
bonds in response to the temporary weakness in
US treasuries confirms the view that risk appetite
remains high, and is evidence of the strong fundamentals
that underpin Brazilian debt markets.
Mexico
The final version of the fiscal reform package
was presented to the Congress this week. The aim
of the reform package is to increase government
revenue by as much as three per cent of GDP by
2012. Presently, current revenue only account for
about ten to 11 per cent of GDP.
The package envisages the introduction of several
new taxes and adjusting some of the existing ones,
and is not likely to affect workers in the lower
income bracket as well as the value added tax that
is currently in place. Additionally, the reforms
are expected to promote more efficient fiscal spending.
On
the political front, Calderon administration’s
commitment to successfully negotiating the 2007
income law and reform of the pension system bodes
well for future governance.
Additionally,
the administration’s stance
on national security is expected to keep Calderon
the favourite in the near future. The country’s
fiscal balances have also improved within the last
few years. Reaping the benefits of high oil prices
and the positive impact of the expected rise in
tax revenue, primary surpluses will enable Mexico
to reduce its debt to GDP ratio, which currently
stands at around 20 per cent. Overall, Mexico is
still considered a strong credit.
Colombia
The Colombian economy is steadily improving, despite
the aggressive pace of monetary tightening that
the Central Bank is currently engaged in. In 2006,
real GDP growth was estimated at 6.8 per cent,
a 29-year high, and the economy is believed to
be running at close to full capacity, which is
primarily driven by record levels of investments
and robust consumption levels.
In
the first quarter of 2007, economic expansion
came in at a buoyant 8.1 per cent year on year,
underpinned by strong performance of gross capital
formation. Government expenditure retreated slightly
by 0.6 per cent, given the splurge in 2006, ahead
of the presidential elections. The government’s
official GDP growth forecast for 2007 has been
revised upwards to 5.8 per cent from 5.5 per cent.
In
June, the central bank hiked its benchmark interest
rate for a seventh consecutive month to
a 5-year high of nine per cent. The rise in the
interest rate follows the central bank’s
commitment to curb consumer prices and anchor future
expectations, despite the sharp gains in the Colombian
peso.
The
country’s inflation rate is still above
the official target range of 3.5 to 4.0 per cent
for 2007. It is expected that the year end inflation
will be around five per cent, still above the target,
as such, interest rates are expected to further
rise. The market can expect a further 25 basis
points increase in the benchmark rate to 9.25 per
cent by the end of 2007.
Trinidad Guardian
Thursday 5th July, 2007
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©2007 Trinidad Publishing Company Limited
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