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Weekly Export Risk Outlook: Argentina, Brazil, China, Russia




Brazil:  The beginning of the end?

Last Sunday’s Lower House impeachment vote against President Dilma Rousseff, currently serving a second term in office, was the beginning of the official process against her following accusations of manipulation of budgetary accounts. A large number of representatives (367) voted for her impeachment and only 137 voted against such a procedure. This reflects the president’s unpopularity in the country as a whole, with polls indicating that less than 10% of the population holds a favourable opinion of Rousseff and 60% supports the current impeachment procedure. The Senate (Upper House) will now decide, by the beginning of May, whether to carry the process forward towards trial and, if so, Rousseff will have to step down for a period of up to 180 days, temporarily replaced by Vice-President Michel Temer. The final vote of the Senate could be as early as June or as late as November. If Roussef is impeached (60% probability) Temer will hold office until the end of the current mandate, which expires in 2018. This political turmoil takes place amid economic recession (we expect GDP will contract by -3.5% in 2016), high inflation (9.4% y/y in March) and revived social tensions. 

China:  Bumpy ride or smooth sailing?

GDP growth slowed to +6.7% y/y in Q1 (after +6.9% in 2015). The tertiary sector was the main growth driver, with +7.6 % y/y (+8.3% in 2015) but the secondary sector continued to underperform (+5.8% in Q1). High-frequency indicators suggest that most of the momentum came in March, with nominal retail sales up +10.5% y/y (+10.2% in Jan-Feb), nominal urban fixed investment up +10.7% (from +10.2%) with stronger public investment and exports up by +11.5%. Real industrial production picked up to +6.8% y/y (+5.4% in Jan-Feb) as a result of improved new orders and better financing conditions. Meanwhile, price data indicate that manufacturing deflation is easing and consumer inflation is strengthening. Advanced indicators point to improved activity in Q2 as both official and unofficial PMI sent positive signals in March. Credit is expanding rapidly (easing monetary policy) and fiscal stimulus is scheduled, so GDP growth, although decelerating, will still be +6.5% in 2016. However, corporate risks remain elevated (insolvencies up +20%) with high corporate leverage and more payment delays.

Russia:  External trade remains weak

Initial official estimates indicate that the current account surplus in Q1 was +USD11.7bn, a decrease of –USD18.3bn (-61% y/y) from Q1 2015. Exports of goods contracted by -34% y/y as a result of a renewed fall in global oil prices as revenues from oil and oil products fell by -45% y/y. Imports of goods were also down but by a more moderate -15% y/y, reflecting the impact of a weaker RUB, still elevated inflation (average 8.4% y/y in Q1) and interest rates on domestic demand. As a result, the trade surplus contracted to +USD22bn in Q1, down from +USD46bn in Q1 2014. Meanwhile, industrial production edged up by +0.4% m/m in March (after +0.1% m/m in February) and its decline in y/y terms moderated to -0.7% in Q1 (from -3.9% y/y in Q4 2015). However, the manufacturing component remained weak and the manufacturing PMI deteriorated to 48.3 points in March (49.3 in February) while the services PMI edged up to 50.8 (from 50.6). Overall, this indicates that the slump in domestic demand is perhaps easing. Euler Hermes forecasts a contraction in GDP of -0.9% in 2016 (after -3.7% in 2015).

Argentina:  Welcome back to capital markets

On 18 April, the country made a striking return to capital markets after 15 years in exile. An initially-planned offering of USD15bn in sovereign bonds was easily surpassed, with actual sales of USD16.5bn. The offer was four times oversubscribed for all maturities. Overall, USD2.75bn three-year bonds were sold at 6.25% interest, USD4.5bn five-year bonds at 6.9%, USD6.5bn ten-year bonds at 7.5% and USD2.75bn 30-year bonds at 7.6%, implying an average interest rate of 7.1%. These rates reflect an improved investor confidence since Mauricio Macri won the presidential run-off at end-2015. The ten-year yield is markedly below that for Brazil (currently around 13%). Part of the new debt will be used to pay USD9.4bn due to the debt holdouts next Friday, thus ending the legal battle in New York courts that began in 2014 and reclassifying the country away from default. This represents a successful first step towards economic recovery but there is still a long way to go (see our latest Country Report).