Strongly Rising Inflation in Brazil and Chile, Elections in Peru
By Win Thin
Populist candidate Ollanta Humala won the most votes in the weekend presidential vote in Peru, winning 29.3% so far with 75% of the ballots counted. By falling far short of the 50% + 1 needed to win, a second round vote will be held in June and it looks like Humala will run against Keiko Fujimori, who has 22.9% of the vote. Trailing the two frontrunners were former Finance Minister Kuczynski with 21% and former President Toledo with 15.2%. Markets will be disappointed that the most orthodox candidates lost despite Peru having one of the strongest economies in the region. Humala lost the June 2006 election to Alan Garcia in the second round by only a 52.6%-47.4% margin and the situation now may be shaping up in a similar fashion. In the first round in April 2006, Humala got 30.6% of the vote vs. 24.3% for Garcia, and those two top vote-getters went to the second round in an election season that saw investor concerns spikes before ebbing as Garcia rose in the polls. While Fujimori is a bit of an unknown, don’t forget that Garcia presided over hyperinflation and civil war during this first term. Fujimori would most likely continue with economic orthodoxy, which has in large part been institutionalized in Peru. However, a Humala victory could truly test this notion. Let’s see how the polls shape up in the coming weeks.
The weekly Brazil central bank survey shows inflation expectations worsening. Year-end IPCA inflation is now expected at 6.26% vs. 6.02% last week. It is clear to us that macroprudential measures are not working, and that the central bank will need to keep hiking the SELIC rate. Though the market still expects year-end SELIC at 12.25% vs. actual 11.75%, expectations should move higher as inflation data deteriorates. Market is looking for a 50 bp hike at the April 19/20 meeting, and we think there is a good chance that the tightening cycle will continue at the June 7/8 meeting as well. Price pressures are still building, and Petrobras CEO warned that gasoline prices may be increased if oil prices remain high. However, he added that authorities may cut taxes on gasoline in order to limit pass-through to the consumer. BRL is a bit weaker today as markets may be wary of stronger FX measures if the pace is too fast. However, we think that the market is still looking to test the 1.5545 low from 2008. We remain constructive on the real, and investors still see BRL weakness as a buying opportunity.
USD/CLP a bit softer today but remains within striking distance of the 465 level that triggered FX intervention back in early January. Officials have remained quiet with regards to recent peso strength, and so like Brazil may be resigned to further gains. Note that Chile central bank will meet tomorrow and is expected to hike 50 bp to 4.5%, which would pull it even with Mexico in terms of rates. The economic outlook remains strong, and further tightening is expected into next year. Year-end policy rate is seen at 5.5% and peaking at 6% by August 2012. The central bank’s most recent inflation report showed a material deterioration of the inflation outlook, with inflation now expected at 4.3% in 2011, up from 3.3% in the last report and above the 2-4% target band. The bank also noted that the output gap has effectively closed, so the case for further tightening coupled with moderate peso strength is quite clear.