Brazil and Mexico Diverge

New presidents are steering Latin America's largest economies in different directions.

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Brazil and Mexico account for two-thirds of Latin America’s GDP. Over the past few years, recession and a crippling corruption probe battered Brazil’s economy. Mexico has maintained steady 2-3% GDP growth but has failed to develop quickly enough to reduce poverty. Now, as new presidents steer their economies toward potential inflection points, Predata signals show signs of optimism in Brazil and of concern in Mexico for investors.

Last week, Brazil’s lower house of Congress overwhelmingly passed a bill that reins in the unsustainable cost of public sector pensions. The pensions eat up nearly half of Brazil’s federal budget, and the reform will save the treasury $267 billion (1 trillion reais) over the next decade. The passage drove Brazil’s benchmark stock index Bovespa to close up 1.23%, and for the real to hit its highest level against the US dollar since February. 

Widespread public opposition — marked by intense street protests — thwarted former President Michel Temer’s efforts to pass pension reform last year. Now, as the strength of the left has diminished in Congress and among the public, popular opposition to the reform has weakened.

The pension reform bill now faces another vote in the lower house before moving on to the Senate. In a sign that bodes well for the bill’s prospects, a Predata signal that tracks online attention to Brazil’s fiscal policy has been exceptionally muted. The signal was high during past periods of opposition to pension reform.

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Meanwhile, economic reforms are floundering in Mexico. Recently elected President Andres Manuel Lopez Obrador (known as AMLO) declared ambitious goals: delivering a budget surplus, increasing social spending, launching infrastructure projects, and bolstering the struggling energy sector. His ambitions and the spirit of investors were dealt a major blow this month, when internationally respected Finance Minister Carlos Urzua abruptly resigned, depriving the government of its most investor-friendly voice. 

A Predata signal that tracks online attention to Mexico’s economy has jumped to historically high levels in the second quarter of 2019. That is a sign of heightened investor scrutiny -- and concern -- about the economy.

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A major source of concern is Pemex, Mexico’s state-owned oil company. Faced with declining crude production and a rising debt burden, Pemex is at risk of debt rating reduction. Last week, AMLO announced a plan to reduce Pemex’s tax burden, deliver it a cash injection, and pursue a new refinery project that analysts have called unfeasible. 

A Predata signal that tracks online attention to Pemex showed that the announcement was met with crickets — a bad sign for a government attempting to spur investor confidence in the company.

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