Geert Noels writes on General Motors and Opel Antwerp. General Motors will (of cours) file for Chapter 11; if not next week , then later this year. The reason is simple: the alternative would be a bailout of General Motors. But seriously, where does General Motors needs to invest money when it has a long term vision? In markets like the US or Belgium which have very low growth prospects? Of course not, that would make no sense. No, GM was planning to use this bailout money to invest for example 1 billion US$ in its Brazilian plants ; see the article in the Herald Tribune of last week . As Jaimle Ardila, president of GM Brazil-Mercosur puts it:
"It wouldn't be logical to withdraw the investment from where we're growing, and our goal is to protect investments in emerging markets," he said in a statement published by the business daily Gazeta Mercantil."
Only because of this a bailout would never be able to operationalise. The US public opinion would never accept that GM bailout money would be invested in Brazil while 35.000 jobs arte being cutted in the US. Yet purely figure wise GM has no alternative to do so; it's future growth beyond 2012 resides in countries as Brazil.
Have you sen the Chevrolet GPiX crossover coupe that was presented at the 25th edition of the Sao Paulo International Auto Show? The car was completely developed by General Motors Design in Brazil. It's a two-door body car which can drive on all kind of roads. A car build for Emerging Markets.“It offers the sporty design and versatility necessary for a country with the continental dimensions of Brazil,” said Carlos Barba, General Director of Design for GM Latin America, Africa and Middle East; with this project, the Chevrolet GPiX concept could result in the development of many models for Brazil and the Mercosur region.” 
GM Design Center Brazil is one of 11 GM studios around the world. Its facilities are being expanded to meet increased responsibilities in the GM global development process. GM is investing US$ 36 million to expand the facilities, acquire new and more modern equipment and hire new professionals. When complete, the GM Design Center in Brazil will triple in size from 3,000 sq. m. to 9,150 sq. m. and the staff will increase from 79 to 190 professionals.The Design Center, which was already one of the most modern in Brazil, will also add next generation equipment to its ‘3D’ virtual reality facility to become the most advanced studio in the country and on par with any automotive design studio in the world.
So, what will happen? GM will file for Chapter 11 and the company will be torn apart. GM Brazil will be a precious gem, since the Brazilian plants are amongst the most modern in the world. Not only the GM plants, but aksi the state-of-the-art Ford maunfacturig plant in Camaçari,in the northeastern state of Bahia; see a video on the plant here . And Opel Antwerp, we will be fully at the mercy of Opel Europe, with HQ in Germany. As if they care what will happen with the tiny plant in Europe where there is a screaming overcapacity. 
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Feb 15 2009
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Feb 7 2009
A very interesting discussion on which BRIC countries will be most affected by the crisis on Linkedin . This view of Larry Cristini , Political Risk Consultant at Eurasia Group is an extremely intelligent answer on the question:
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May 13 2008
I wondered who followed my 2008 predictions and bought on the Bovespa and especially went into Rio Vale Doce and Petrobras. Ratings agency Standard & Poor's upgraded Brazil to investment grade two weeks ago, and Bovespa shares promptly surged thanks to the earlier-than-expected bump. The iShares MSCI Brazil Index, an exchange-traded fund that tracks Brazil's Bovespa index, rallied 8 percent on the day of the announcement and continues to climb this week. Petrobras profit for the last trimester was up 68% totaling a profit of already 6,9 billion R$ for this year .
Slowly and without great fanfare (the Belgian news rarely mentions Brazil at all), Brazil's economy has turned a big corner. Already a global power in agriculture and natural resources, Brazil has added a key ingredient that had long eluded it: a currency with staying power. In turn, that's helping unleash the greatest burst of prosperity the country has witnessed in three decades .
Gross domestic product grew 5.7 percent last year, up from 3.7 percent in 2006, and public debt as a percentage of GDP has been shrinking for five years. Brazilian stocks jumped 70 percent in the past year, while other hot emerging markets like China and India watched equities slump mightily. The Bovespa index is now at 70.000 and I see it further rising to 74.000 end of this year.
Risks remain however. The S&P upgrade will mean the real will even go higher. I'll sum up my expectation for the economies indicators in a next article, but as to the exchange rate, I expect the Real to end at 1,72 by end of 2008 and 1,8 by the end of 2009. Make your own bets how the dollar will behave against the Euro by the end of 2009...
The big question is however how Brazil could derail at the end of the commodity boom and a return to health for the US economy.
First, I don't believe the US is close to a recovery. The US (and many other parts in the world) are in for a huge real estate deflation , like the article in the Economsit states: the housing price-bust has a long way to go.
Secondly, some people claim commodity prices will come down sharply when the US economy starts to recover. This is utopic, commodities will not get back to their pre-2004 levels. At most the growth rythm will be lower or flattened . True, this could impact somewhat the speculations on Brazilian shares, it would however not impact the Brazilian economy. People tend to overestimate the importance of export for Brazil. Brazil is not Belgium, only 15% of the Brazilian GDP is composed of export. Also, analysis of past S&P upgrades shows that shares often fall following an investment-grade bump. Other nations like Mexico and Russia saw declines in the months following their upgrades. Still, Brazil's boost came earlier than expected, and that could help minimize some of the post-party hangover.
What worries me personally most is the exchange rate. FX is a beast, the Yuan is still seriously overvaluated and already since early 2006 I have the fear the Real is a bit overevaluated. My guts proved wrong. The Brazilian central bank has managed for more than 2 years to keep its currency neatly stable. Usually by intervening and buying up dollars (Brazil has now huge dollar reserves and even becaming a net creditor on it's balance sheets, this in sharp contrast to eg. South Africa).
And to keep the growth afloat the senate now has voted a plan to massively stimulate exports through subsidies in various sectors . More than 20 billion dollar will go into these subsidies. I agree with Miriam Leitao however (I'm her biggest fan) that this sector-oriented approach entails some dangers and that a general policy would be more beneficial to the country. -
Feb 11 2008
You'll find plenty of good analysis on the US$ FX forecas t , some foresights on the Brazilian Real but nearly no strategic analysis on the South African Rand FX.
The South African rand is hitting a historical low for the past 10 years. Only in december 2001 it reached a dipping point which is equivalent to the current rate.
Gold is hitting historical highs, while all Central Banks are lowering their interest rates, South Africa is keeping it's interest rate at a 14,5% high. Actually, if you plot the South African prime rate against the Brazilian SELIC for the last 2 years, you would have a completely opposite trend. Despite this high South African prime rate and gold prices, the South African Rand is plumetting.
Why?
When I was visiting South Africa last July I was reading on the first signals of the enormous problems Eskom, the South African electricity company, was about to face. My South African contacts minimalised the problems; Eskom was already remedying the problems with new electricity plants. I was sceptical and rightly so. One of the main reasons why the South African Rand is plumetting is the current energy crisis . And a crisis it is ! South Africa already had problems with a very negative account and with the current electricity crisis shaving away more than 1% of the GDP, South Africa is now needing around 3 billian South African Rand a week in equity and bond inflows to finance the deficit on its current account.
The current account deficit now widened in Q3 2007 to a massive 8,1% of gross domestic product, the most since the beginning of 1982.
Without the benchmark interest rate of 14,5% the South African Reserve Bank is now offering, inflation would reach double digit figures. CPIX inflation is now at 8,6%.
The current energy crisis is absolutely unseen. Google Trends results says it all.
Let's draw a comparison between the BRL and ZAR compared to the EU. The Brazilian story is quite transparant to explain:
- Late 2000 Brazil was impacted by the Argentinian crisis (and so was South Africa, all emerging markets were impacted)
- Brazil's recovery early 2003 was only short lived. Peole eventually feared Brazil might collapse as Argentina did
- The IMF loan of August 2002 stablised the situation; yet, uncertainty over newly voted president Lula's direction kept things down
- Early 2005 gloablly things are going well and comodities are skyrocketting
- Today: All IMF loans are paid back, Brazil is self sufficient in oil (and soon gas?) and became even a creditor. Most of Brazil's foreign reserves however are build up by foreign equities and only to a lesser extent of positive trade balances. If the US really crashes, an uncoupling scenario seems highly improbable. Yet, contrary to South Africa, Brazil is not impacted by the worldwide turndown. Even the Bovespa fully recovered from a serious dip in January.
So, where does this take us with the Souh African Rand in 2008 (and 2009)?
- There is a general agreement amongst analysts that the South African Rand will not recover in 2008.
- Worse, Le Roux of RMB bank estimates that the chance that the ZAR will further fall towards ZAR 9/US$ has a 25% change . The SAR is currently at 7,89 against the US$. So, a further plunge to 9 would equal the SAR trading at ZAR 13/EU.
I give the chance that the ZAR will further tumble to ZAR 13/EU a 60% chance and the scenario where it tumbles to ZAR 14/EU a 30% chance. From Q3 2008 on it's SA bargain time. Also South African exporting ventures will have cheerful years ahead. I also believe that the current energy crisis will have a long term (2010+) positive effect on South Africa . The country needed a shake-up, the energy policies needed fresh dynamics. Brazil only started building it's huge hydro's back in the 80s when the country was swamped with electricty problems. They however never had to do loadshedding, citizens only had a rationalisation scheme where their usage was caped to a certain amount of Kw a day.
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Dec 22 2007
As follow-up on the post of last Wednesday : Jacob Zuma has indeed been elected as new president of the ANC Party. Below is an overview of the press-reactions:
December 19: The Economist: Zuma comes out on top
“Whatever happens, the relationship between the government, dominated by Mr Mbeki's faithful, and an ANC led by Mr Zuma will be awkward. The next few months could see either a patching-up of the rift over the succession or a purge inside the party of Mbeki loyalists. There are even questions over whether Mr Mbeki will finish his full term as the country's president, although Mr Zuma has said that he sees no reason for his early departure.”
December 19: UBS analysis: Jacob Zuma won leadership of South Africa’s Ruling ANC Party
“Looking at ZAR and equity levels before and after the announcement, it appears that the markets have not priced in a big political risk premium on South Africa, despite Zuma's background in trade union politics, legal wrangles (prosecutors to decide about charges soon), and less than clear stance on free market policies. Zuma did pledge not to change the country's economic policies if elected as president. It seems the market views him in the same vein as Lula in Brazil, the Congress coalition in India and PM Fico in Slovakia, all of who were initially feared to be populist, but eventually stuck to free market policies in practice. We think this is a reasonable base case view for Zuma as well, but we would not get complacent on this, and point to one big risk. Lula, Fico and India's communist backed coalition have governed through times of strength in the economic cycle. By contrast, the next ANC leader may find himself at the helm of a slowing South African economy, and potentially also facing more tricky international credit conditions. In our view, this increases the risk of populist policies.” -
Aug 15 2008
Europe had a quarter of negative growth , another quarter like this and the Euro enters its first recession, which is likely to happen.
While the Japanese Real Estate market is crashing , the smarter US analysts are warning that there are HUGE shadow inventories of US foreclosed homes still to be released on the market ; and meanwhile Greenspan wants you to believe that the US real estate market will stabalise from 2009 on ... right. Expect this graph to go further downwards , drastically.
Today Chief Investment Strategist Richard Bernstein of Merrill Lynch stated:
"We believe that the investors seriously underestimate the extents of the credit crisis and the consequences of the deflation which will follow now".
I have written for the past half year on the de flation storms which are about to hit Europe and the United States.
Meanwhile in South Africa, Standard Bank has to rely on its offshore business to hit targets:
"Johannesburg - Standard Bank would offset the effects of lower-than-expected economic growth rate in South Africa with profits from its offshore businesses in Nigeria and China. One worrying sign for Standard Bank was the increasing problems the company was facing in its card division. The credit loss ratio in card debtors increased from 6.34% to 9.44% indicating that the consumer was becoming increasingly stretched ." 9,44% credit loss ratio in amongst card debtors, ouch !! Meanwhile Mboweni decides to not raise interests above the current 12% rate. This is a strategic blunder. Yes, I know, the general tone is that he did good in not raising the rates, because ""… the alarming rate at which cars and houses had been repossessed should be a matter of concern to Mboweni and the MPC. " At the same time inflation keeps skyrocketing and will go from the current 11,6% to 13% by the third quarter. Yet, Mboweni keeps the repo at 12%. Read that again: inflation at 13% with a repo rate of 12%.
At the same time, South African banks are turning into vulture hawks. If you put down a deposit on a property and FNB reassessed your loan and denied you your bond causing you to lose your deposit, FNB says that you should thank them because in actual fact you probably were going to lose a lot more money later on. No, I didn't make this up, it's happening, on a wide scale .
Mboweni claims "``Food and oil price increases continue to cloud the inflation outlook, but there are tentative signs that these pressures may be moderating.'' The wording makes me smile: Food and oil price increases continue to cloud the inflation outlook, but there are tentative signs that these pressures may be moderating .
Well, I think Mboweni is wrong. "Prices will decrease when supply surpasses demand. And that will happen South Africa focuses now on expanding infrastructure and assist its people to be more productive. For this reason the government should now focus on the production side of the economy and increasing skills rather than simply placing money, in the form of social grants, in people's hands. When increased production is attained prices will be constrained, which will eventually also curb inflation." These are not my words, but a literal quote from this article . And the worst is, Mboweni will blind people, inflation will go down…well the CPI will go down…because the government plans to change the measurement of the consumer price index next year. The SA statistics office said on July 1st it will reduce the weighting of food in the CPI, which will lower the inflation rate… artificially ( see Bloomberg ).
Meanwhile, at the annual Rode conference on property in South Africa today " Johannesburg - House prices are expected to drop by between 10% and 15% in the next 12 months as rising interest rates and tougher credit-granting laws force buyers to tighten their purse strings, a property expert said on Thursday." Prices in Plettenberg Bay are taking a dive and when asked for the reason of selling, 18% of the people mention emigration, this figure is up from 7% 12 months ago .
Standard Bank posted a 7% rise in first-half normalised headline earnings per share (EPS) to 481,8 cents today, but said rising bad debts meant it could not give full-year guidance . When banks come with these messages you better brace yourselve for the storm, especially when you are in real estate business. One of the "saviours" of the housing market is supposed to be the Black Diamonds , the young black professionals who have been spending money like crazy the past few years. Only one problem though, they've been spending borrowed money (mainly via credit and store cards) and getting into a heap of debt, and now that debt is becoming overwhelming, read the details here .
Conclusion:
The monetary loosening of Mboweni worries me; of course it 'could' boost sentiment a little bit on a short term; but it will come at a very, very high price; if you lived in Brazil in the 70s and 90s, you know all about that.
Zimbabwe worries me.
And what worries me most (although there are some opportunities in it for the well connected) is the ongoing land reform in SA .
As I've been saying repeatedly: not just an ordinary global economical blip . -
Dec 19 2007
This weekend, the ruling South African party, the ANC, will decide the leadership of the party. By monday we know who the ANC will put forward in the presidential elections of 2009. Current ANC president Mr. Thabo Mbeki is not eligible for re-elections, since he is currently in his second term; but as ANC president he could keep on controlling the powers and handpick himself his successor in 2009. Technically, the new president of South Africa will only be voted in 2009. But since the ANC controls more than 70% of the votes, the decision will be made this weekend. Current president Mr. Mbeki is the most prestigious political leader on the African continent. He has done well in managing the South African economy, which has achieved an unprecedented growth the past 8 years. Yet, despite this success, the benefits of this growth have not reached the poor. Poverty remains an increasing major problem of South Africa. Currently Mr. Jacob Zuma, 65 is the frontrunner for this weekends elections. He was fired by current president Mr. Mbeki as deputy president of the country last year over corruption allegations and positions himself as a champion of the poor. He is also a Zulu, the largest black tribe. The last two presidents Mr Mandela and Mr Mbeki were both Xhosas.
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