Andre Loes is the chief economist for HSBC Latin America.
Brazil has just scrapped its 6 per cent tax on bond purchases from foreign investors. How significant is this?
It will be significant in the short term as fixed income portfolio investors have been deploying much less than in the past, which created an underweight position in some of these Brazilian funds. There has been a deterioration of the current account in Brazil because of the uncompetitiveness of exports and the fact that Brazil started to import more oil because of some delays in production of Petrobras. This came at the same time as commodity prices started to fall a little, so all of that has been driving a situation where the current account deficit is higher with some pressure on depreciation of the real. I guess the government was concerned this depreciation could happen too quick too soon with inflation roving around 6.5 per cent.
Will it help to grease the wheels for more investment from the Arabian Gulf?
This is significant for all investors because it increases the carry of the positions in a world where yields are too low. Some of the positions that were parked in Brazil haven't left the country because typically portfolio managers thought that if they reduced their positions, once they wanted to come back to Brazil they would have to pay the tax on the inflow again. So our strategists think in the short term there will be an inflow but with time you would have more volatility on these positions because some people that were in a way captive on this carry could come out and then return creating more volatility.
How important is slowing growth in China for Brazil and its commodity exports?
Since 2011, commodity prices have been trending down, of course with volatility, but trending down in general. But they are still seen as high if you compare them with historical averages. The main issue to understand here is whether China is trending to a systematic lower level of growth. If this is the case, at some point investors will also imply that commodities will stabilise at permanently lower levels. If this happens there are three transmission channels that affect commodity exporting countries. The first is the obvious one - exported volumes. The second one is consumption, as whenever you have a rise in commodity prices you generally have a positive wealth-creating effect for consumers. It generally comes with some appreciation of the currency which also helps your purchasing power to go up because part of your basket of consumption is imported goods. So consumption gets supported by the wealth effect plus currency appreciation. Of course if you have a reduction in commodity prices, it works the other way round. You have a negative wealth creation effect and probably currency depreciation. The third transmission channel is investment. Let's take mining, which is important for countries like Peru and Chile. If I have copper going below US$3 per pound, then at some point some of the Chilean and Peruvian mines will no longer be viable. For Brazil, the first transmission channel of exported volumes is important. The second and third are less important because Brazil is a bigger and more diversified economy. So this wealth effect, you feel it, but more in a regional way. If you go to the west of the country, the soy belt, whenever you have good soy prices you see consumption, you see people buying pickups. You don't feel this for the whole country. If you go to Peru, you feel this for the whole country.
Can we expect to see more big ticket investments from the UAE such as Mubadala's purchase of a stake in EBX Group a year ago?
I have not seen so much interest in fixed asset investments. What I have seen is interest in more liquid investments like mutual funds, stocks and bonds. Of course having transportation links helps. Brazil already has in the Middle East an important export market - accounting for maybe 4 or 5 per cent of Brazilian total exports. I don't think there are many emerging market countries with an important penetration in this country and we have some. What you see in Brazil now is an increased issuance in what are called infrastructure bonds. The government has regulated these and given some fiscal advantage to them. There are a lot of companies willing to issue this year and next. They tend to be good credit, good companies and good projects. There will be a lot of interest in these. The capacity of the Brazilian Development Bank to finance all of these infrastructure deals that Brazil needs badly is limited so you need the capital markets.