February 11: Brazil’s defence against meltdown

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The credit crunch that is exposing unsuspected fragility in markets around the world has yet to have any significant impact on Brazil. That is not to say that companies can raise capital as easily as they could a year ago. The São Paulo Stock Exchange (Bovespa), where 64 companies went public last year, raising R$55.5bn, has yet to see its first IPO of 2008. Some 27 listings, expected to raise about R$13bn, are on hold; a further 15 IPOs worth about R$10bn are expected to be delayed over the next two months.

But loan capital is still available. The most visible example is Vale, the mining giant formerly known as CVRD, which is understood to have secured, with room to spare, about $50bn as part of a daring $90bn cash and shares bid for Xstrata, its Anglo-Swiss rival.

Like Vale, smaller companies are issuing debt. It is costing more than it used to, but it is still possible. Most of it is funded in Brazil. Brazilian companies are under-leveraged and the country’s total stock of debt, while it has risen strongly in recent years, is still only about 35 per cent of gross domestic product, much less than in developed economies. A high level of investment in fixed income instruments by local investors provides a (comparatively) ready source of funds.

This is not decoupling, as the stasis on the Bovespa makes clear. But Brazilian entrepreneurs, beset by all the difficulties of doing business in Brazil – crumbling infrastructure, crippling rates of taxation, rigid labour laws, a profligate and ineffectual government, just to name a few – are at least cushioned from the climate of fear that now grips many of their foreign competitors.

Jonathan Wheatley

Another political football

Once again, Brazil’s leaders have hijacked a serious issue and turned it into a political football. This time it is the scandal over the use of credit cards by 11,500 public officials. The cards are designed to allow ministers and lowlier officials to spend public money on emergency expenses incurred on official business. Matilde Ribeiro, minister for racial equality, resigned on February 1 after it was revealed she had spent hundreds of thousands of reals on questionable items.

Since then Brazil’s media have delighted in revealing more and more details of scandalous expenditure, much of it gleaned from the “Transparency Portal” set up on the internet in 2005 to allow the public to monitor government spending.

Spending with the credit cards has grown exponentially since they were set up in 2001, rising from R$14.1m in 2004 to R$75.6m in 2007, of which R$58m took the form of withdrawals from cash machines.

Predictably, the opposition has called for a parliamentary inquiry into the affair. Equally predictably, the government has responded by insisting the inquiry should cover the previous administration, too.

Brazilians can be confident that nothing will come of the inquiry. They can also be sure that politicians will go on confusing public money with their own.

Jonathan Wheatley

ExxonMobil’s hollow victory over PDVSA

ExxonMobil’s success in securing court orders to freeze more than $12bn of Venezuelan national oil company PDVSA’s assets will undoubtedly create waves.

The news led to the sharpest-ever fall in PDVSA’s dollar-linked debt. Its cashflow could suffer too if, as seems inevitable, foreign banks shy away from lending to PDVSA at a time when it needs more credit to finance its ballooning spending commitments and aggressive investment programme. It may also make it difficult for PDVSA to continue divesting its foreign refining assets.

Nevertheless, the enforceability of the British and Dutch court orders and the applicability of their jurisdiction over PDVSA’s assets outside those countries remains unclear. The next court hearings on the matter are scheduled for February 13 in the US and February 22 in the UK. But with total consolidated assets of more than $92bn – mostly in Venezuela, as well as in the US – PDVSA would seem to retain plenty of financial flexibility.

Also, the value of the frozen assets is far beyond what Exxon could hope to receive in compensation for the project it abandoned in the Orinoco Belt. According to Ecoanalitica, a Caracas-based consultancy, the market value of Exxon’s stake in the project is around $1.4bn, excluding debt (although other analysts reckon the value is considerably higher). Certainly, PDVSA should have no problems mustering up that amount.

Ultimately, the move is unlikely to have much effect on PDVSA’s day-to-day production, for now at least. Indeed, its aim is probably to increase Exxon’s bargaining power in cutting a deal with PDVSA. Failing that, it could prevent PDVSA from selling off its assets before international courts can rule that it must compensate Exxon – although that may take as long as five years.

Benedict Mander

Mexico: where meddling makes sense

The appointment last week of Leonardo Valdés to the presidency of the IFE, Mexico’s Electoral Institute, as part of last year’s electoral reform, has once again divided opinion among the country’s chattering classes.

On the surface, the decision is controversial. The move by Congress to replace Luis Carlos Ugalde, IFE’s previous president who presided over the bitterly fought presidential election of 2006, looks potentially like an attack on IFE’s autonomy.

Who will be next, some observers ask? Guillermo Ortiz, governor of the central bank, another autonomous body?

Yet in the context of the wider electoral reform that Congress passed last year and of which Mr Ugalde’s replacement is merely one aspect, the move makes a lot of sense. For a start, Mr Ugalde’s appointment in 2003 never met with the approval of the leftwing Party of the Democratic Revolution. Now, at least, the IFE will have a president who at least is recognised and respected by all the main political forces in the country.

Second, the electoral reform severely limits the amount of money parties are allowed to spend on advertising as well as the amount of air time they are allowed to buy from Televisa and TV Azteca, the two dominant broadcasters. That will mean smaller and fairer campaigns that are less dependent on how much money a given candidate has.

It is never a good signal for a country’s parliament or Congress to step in and start tampering with institutions that are supposed to be autonomous. That is particularly true of a country such as Mexico, which for more than seven decades lived under a one-party regime that used democracy as window-dressing at best.

But for all the concerns, last year’s electoral reform injects more good than bad into the Mexican political system, and the appointment of Mr Valdés, a man respected by the vast bulk of Mexico’s political establishment, will breathe new life into an institution that could do with a facelift.

Adam Thomson

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