Connect with us

Economy

Brazil economy outshines Mexico after surprise role reversal – TheChronicleHerald.ca

Published

on


By Jamie McGeever and Dave Graham

BRASILIA/MEXICO CITY (Reuters) – The divergence between the Latin America’s two largest economies, Brazil and Mexico, is widening as the region’s most prominent left- and right-wing leaders adopt stridently different fiscal responses to the COVID-19 pandemic.

Their approaches, however, are not what would be expected – and investors are adapting accordingly.

The right-wing administration of President Jair Bolsonaro – which came to office last year pledging to lower public spending and cut Brazil’s debt – has opened the taps and spent billions on unemployment benefits.

Meanwhile, in Mexico, President Andres Manuel Lopez Obrador’s left-wing government – which promised to tackle poverty with state spending programs – has kept an iron grip on its purse strings.

Economists at Credit Suisse have estimated that Brazil’s spending in response to the epidemic was not only three times higher than the median for emerging market economies, it even exceeded the average of wealthy countries.

Citing International Monetary Fund data, the bank pegged Brazil’s fiscal effort at a whopping 6.5% of GDP – dwarfing Mexico’s spending, equivalent to just 0.7% of GDP.

The short-term economic impact of this fiscal divergence was reflected in the data. While Brazil’s economy shrank by a record 9.7% in the second quarter, Mexico’s plunged by a staggering 17.1%.

“The Brazilian economy in 2020 and 2021 (will) be less affected than that of the median of emerging countries,” Credit Suisse economists wrote, crediting Bolsonaro’s largesse.

In Mexico, the economic panorama certainly looks bleak. The central bank warned last week that the nation of 130 million people could see its output contract by almost 13% this year – the deepest slump since the Great Depression.

Even its rosiest scenario envisages an 8.8% slide this year in the roughly $1.1 trillion economy, before a 5.6% rebound next year.

By contrast, economists have been revising upwards their more bearish forecasts for Brazil, amid signs the economy is picking up in the third quarter following Bolsonaro’s calls for lockdowns to be scrapped.

A central bank survey of economists now predicts a contraction of 5.3% on average this year. The government says even that is too pessimistic and is forecasting a 4.7% decline – which would still be the biggest since records began in 1900.

Yet for investors, looking beyond the short-term economic impact, Lopez Obrador’s austerity may make Mexico’s government bonds and credit markets more attractive in the longer term, analysts say, while upward pressure may build on Brazil’s long-term interest rates.

“Mexican bonds could outperform provided there isn’t speculation about a possible downgrade to Mexico’s credit rating,” said Gabriela Siller, an economist at bank Banco BASE. In Brazil, she said, political turbulence was weighing on the performance of sovereign debt.

Graphic: Brazil, Mexico 2020 fiscal support – https://fingfx.thomsonreuters.com/gfx/mkt/jbyprqxjrve/BRMX1.png

Graphic: Brazil, Mexico 2020 GDP growth changes – https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdoxwovo/BRMX2.png

POLITICAL DIVIDENDS

While Bolsonaro’s government has been roiled by corruption scandals and rifts with Congress, his high spending has brought brightening political fortunes. Although Brazil is the world’s second-biggest COVID-19 hot spot, with over 120,000 deaths, Bolsonaro’s approval ratings have recovered.

Political analysts say that is largely down to a 600 reais ($110) monthly stipend transferred directly into the pockets of up to 85 million of Brazil’s poorest people.

A Datafolha poll last month found that 37% of those surveyed viewed his government as great or good, compared with 32% in June, while his rejection rate dropped 10 points to 34% who see his government as bad or terrible.

Crucially, much of the rise in popularity came in Northeast Brazil – a poor region and a bastion of the left-leaning Workers Party – which could be decisive in Bolsonaro’s 2022 reelection bid.

While Bolsonaro is also planning to revamp the “Bolsa Familia” welfare program launched by the Workers Party, many in the government are questioning how sustainable his anti-poverty initiatives are.

Bolsonaro announced on Tuesday the COVID stipend would be extended to the end of the year, although at a reduced rate of 300 reais a month.

However, the program – which will cost the Treasury around 350 billion reais, about 5% of GDP – has blown a hole in Economy Minister Paulo Guedes’ carefully constructed budget this year. Worryingly for investors, that may come at a political cost.

Bolsonaro’s relationship with Guedes, a respected ex-Chicago school graduate and fiscal disciplinarian, has been damaged and speculation persists that the “super minister” – a darling of the markets – may resign.

“A bad fiscal position is bad for bonds, even though I think a big deterioration is already priced in for Brazil,” said Luciano Sobral, chief economist at NEO Investimentos.

MEXICO MAY REAP REWARDS

Lopez Obrador, meanwhile, says Mexico will reap longer-term rewards by avoiding the mistakes of the past, when “neoliberal” governments wasted taxpayer money bailing out corporations – effectively, transferring money from ordinary Mexicans to the wealthy elite.

“In the end, I think Mexico will serve as an example,” Lopez Obrador said last week.

Since taking office in December 2018, Lopez Obrador has been cautious on spending – careful to avoid any risk of leaving his government hostage to debt markets.

He has slashed public sector pay to find money for his signature welfare and infrastructure projects. The modest relief measures his government has taken during the pandemic have been aimed mostly at key constituents such as the poor and the elderly.

Mexico pledged some 2 million loans for small businesses, but at 25,000 pesos each, the total outlay comes to less than $2.5 billion.

Some economists say Lopez Obrador has miscalculated the long-term effects of such a painful downturn.

Mariana Campos, a public spending expert at think tank Mexico Evalua, said the president has overlooked that the vast majority of Mexican employers were small- or medium-sized firms that cannot survive a major crisis without more government support.

“He’s completely overestimating how much capital they have and how long they can last without recurring income,” she said.

(Reporting by Jamie McGeever in Brasilia and Dave Graham in Mexico City; Editing by Daniel Flynn and Steve Orlofsky)

Let’s block ads! (Why?)



Source link

Continue Reading

Economy

Coronavirus economy: The 'banker ladies' saving friends from debt – BBC News

Published

on


Minority communities in the US and elsewhere have sometimes turned to traditional money saving methods outside the formal banking system. The economic shock from the coronavirus pandemic could spur renewed interest in those savings clubs.

When Hilda Robles recalls her first years in America, tears come to her eyes.

“I cried and even wanted to leave at one point because I felt alone,” she says. “I would ask people for help and they couldn’t help me because they didn’t understand Spanish and I didn’t understand English.”

When she came to San Antonio, Texas some 20 years ago, even daily duties like getting to work or going to the doctor were feats of bilingual diplomacy and logistical planning – she had no car, no English and almost no one to turn to for help.

Opening a bank account seemed impossible. “When I stepped into a bank for the first time, I was told I couldn’t open a bank account because I had no social security number,” she says.

“Someone told me about a bank where I could open an account with no social security number, but the language barrier stopped me from going.”

So Ms Robles, 49, went a different route – she started a tanda, an informal savings club popular in Latin America, with contributions from her extended relatives.

Members of the club each contribute a fixed sum to a pool of money on a regular, periodic schedule, with the lump sum going to one member each round until everyone gets paid.

This means that members get back what they put in over the course of the scheme, but by getting it in the form of a lump sum, the money can be put to use for purchases, investments or debt payments they otherwise could not afford. Members who get their “hand” early are effectively receiving an interest-free loan, while those who receive theirs later in the cycle are essentially withdrawing a lump of “saved” cash.

With the $5,000 lump sum she received for her turn of her tanda, Ms Robles bought her first car. Her relatives and friends in the savings club were able to put down payments on houses, pay for university tuition – and now, amid the Covid-19 pandemic, survive when their families have been out of work or sick.

Since that first savings club 14 years ago, Ms Robles has run them continuously with only a few months break to organise the next one.

“It gives me a lot of joy to see people reach their goals because of the tandas without having to drown in debt from loans,” she says. “It’s proof that among us Hispanics, we can get ahead here.”

Hispanic-Americans are not alone in their use of this ancient savings mechanism that has parallels all over the globe, known generally as a rotating savings and credit association, or roscas.

In Mexico, they are popularly called tandas, but they are also known as huis, susus or ballot committees in various parts of the world. Immigrant communities continue their practice in the US.

As economic hardship accompanies the public health crisis caused by the Covid-19 pandemic, for some families, traditional methods of saving outside the banking system have become a lifeline, especially for hard-hit immigrant communities with little access to mainstream sources of capital.

Financial access and security in America has become an increasingly pressing subject of discussion in 2020. Even before the pandemic, the US was behind other rich countries when it comes to accessing money and credit.

Some seven percent of Americans over the age of 15 did not have any kind of bank accounts in the US in 2017, compared to less than one percent of Canadians, and less than four percent of Britons, according to the World Bank.

A quarter of American adults – more than 80 million people – were “unbanked” or “underbanked”, meaning either that they had no accounts entirely, or that they are forced to use alternative services besides traditional banks in order to get enough financial access to meet goals or obligations.

Households most likely to fall into the two categories were black or Hispanic, lack university qualifications and to be poor. To access loans, they must sometimes turn to non-bank lending options like payday lenders or loan sharks.

These shadow banking options can be risky, charge high interests and bring dire consequences for borrowers who struggle to pay – but a rosca can provide a safer, more trustworthy alternative.

“These systems are actually useful when we have bank systems that have a finite possibility,” says Caroline Hossein, a professor of business and social studies at York University who studies roscas in communities in Canada.

“Banks only have a certain amount of money, and if you only have a certain amount of money, you’re only going to dish it out to those that are less risky.

“So it makes perfect sense that people would engage in these kinds of mutual aid or money pooling systems.”

Often, they are run by women, whom Dr Hossein calls the “banker ladies” of the community.

“The banker lady, who might be the one organising it – you can be in touch with her anytime of day, it may be someone who lives in your neighbourhood so [there’s] the ease of getting there.

“The paperwork is not as treacherous as it would be as a formal bank, so there’s a kind of kinship that exists because it’s people who voluntarily like and know each other.”

Though they tend to be “more of a life line for people who have difficulty accessing banking, particularly on the lending side,” such savings schemes are also used by more established members of communities who may have inherited knowledge about them from immigrant parents.

Beyond access to a pool of money, “a primary benefit is building ‘bonds of mutual trust’ within a network of trustworthy people,” says Lee Martin of the University of California, Davis. Roscas are primarily beneficial for people without access to mainstream forms of credit, he says.

But because they are used by marginalised communities, studying their overall prevalence and use has been difficult, says Dr Hossein, who participates in a rosca – known as a su-su in her Afro-Carribean community – as part of her research.

“A lot of these roscas, particularly in places like Canada, the US or Europe, tend to be underground,” she says, because many worry that the endeavour is seen as an unrespectable or even an illicit form of financing, only for those who are short of options. Clearly, unlike a savings account, they do not generate interest.

Yet economists believe they are probably quite common in the West. One survey of Korean-American garment business owners in Los Angeles from 2004 found that 77% of households had participated in a version of the lending scheme.

Self-lending within communities can have unexpected benefits. A rosca-like system among Chinese immigrants in Spain, for example, helped expatriate businessmen weather the Euro crisis of the late 2000s and 2010s.

The Chinese business community was “largely insulated from the vagaries of the country’s tottering retail banking system” – precisely because the system that shut them out meant they turned to each other, reported the Financial Times in 2014.

In the 2020 Covid-19 crisis, families who participated in the tanda Ms Robles is running were able to pay their bills when some fell ill and could not work.

For most, it was their only source of cash, Ms Robles says – only one of the families has received a cheque from the government for coronavirus relief because they lack the papers to get onto the dole.

Like any investment scheme, however, roscas are not risk-free. A participant could fail to pay their hand, or take their share and run.

Ms Robles says there have been rare times that she misplaced a contribution and had to make up the difference out of her own pocket, which can be costly.

As they operate on trust, usually within a deeply connected community, the social consequences of misdeeds dissuades wrong-doing.

But since they are run by privately, there is little legal recourse for cheating. And unlike putting money in a bank savings account, there is no interest paid.

Could roscas catch on and become more mainstream? The Federal Reserve Bank of Philadelphia asked just such a question in 2006, but was sceptical given the depth of trust it would require.

An attempt by Yahoo Finance to popularise a tanda app in 2018 was unsuccessful. The scheme shut down after only a few months due to, it would seem, lack of participation.

There are two big hurdles, as Dr Hossein sees it – the stigma attached to a non-traditional financial tool used by ethnic minority communities, and the barrier in trust that must be surmounted to put one’s faith in other people to handle money.

But with the Covid-19 pandemic, a younger generation of North Americans with an interest in sharing resources and the technology to do so efficiently – from crowdfunding to forms of “caremongering” – roscas are bound to be a savings method that continue and evolve and expand.

For Mayra Martinez, 30, a university administration professional in Dallas, Texas, being in tandas has helped her learn about trust and foster a sense of obligation to save, which can otherwise be hard for young people like herself she says.

“It’s not like your commitment to yourself, where you can easily say ‘hmm, I’m not going to do that this month because I just don’t want to,” she says.

It is an added layer of security in an economic world that has been particularly unpredictable for young professionals, which Ms Martinez says she has seen first-hand – her sister and brother-in-law each recently tested positive for Covid-19 and could not work.

“She just happened to get her tanda this week,” says Ms Martinez. Because of that, Ms Martinez says, her sister was able to tell her husband: “It’s ok”.

The tanda Ms Martinez is involved in now consists of family members from all generations and is run by her mother.

Would she ever take over and start one for her own cohort of siblings and cousins once the older generations retire from such schemes?

“I wouldn’t mind running one,” she says, adding with a laugh, “but it depends on which cousins.”

Let’s block ads! (Why?)



Source link

Continue Reading

Economy

Trudeau Poised to Announce Three-Pillar Economic Recovery Plan – Yahoo Canada Finance

Published

on


Trudeau Poised to Announce Three-Pillar Economic Recovery Plan

(Bloomberg) — Prime Minister Justin Trudeau is set to unveil a new plan to try to contain the spread of Covid-19 and recharge Canada’s pandemic-battered economy, according to a senior government official.

The broad themes in this week’s so-called Throne Speech — which outlines his government’s priorities — will be a focus on the immediate task of tackling the coronavirus, a medium-term commitment to support Canadians through the pandemic and a “resiliency agenda” to spur recovery and reconstruction.

Trudeau’s agenda won’t establish budget targets, which will be left for Finance Minister Chrystia Freeland to detail later this year in a fiscal update, the official said, speaking on condition they not be identified because the document isn’t yet public.

Wednesday’s speech is one of the most anticipated in Trudeau’s five years in power, with questions mounting over how his governing Liberals plan to navigate their next policy steps amid surging Covid-19 case numbers and soaring budget deficits.

The prime minister needs to balance the need for more health-care spending with pledges to engineer an ambitious and green post-pandemic agenda. And he needs to do it without further eroding the nation’s financial credibility after one major credit-rating agency downgraded Canada’s debt.

“This government has set certain expectations and now the pressure is on them to meet their own expectations,” pollster Shachi Kurl, executive director of the Angus Reid Institute, said by phone.

Parliamentary Reset

Health care spending will be the first pillar for the economic recovery, the official said. This includes spending for vaccines, Covid-19 testing and support to localize outbreaks to maintain control over a resurgence of cases.

The second will be a pledge to provide financial support to Canadians who are struggling economically due to the pandemic, with a focus on shifting people back into the workforce.

Economic recovery and reconstruction efforts are the third pillar. This will include a pledge to help foster green investments, resolve major health issues such as long-term care for seniors and bolster support systems for the most vulnerable, like low-income women and minorities.

Trudeau has spoken publicly about plans to overhaul the employment insurance system, provide support for childcare and long-term care and build a cleaner economy through climate initiatives like retrofitting buildings and electric vehicles.

The prime minister suspended all parliamentary business last month after a public rift with his previous finance chief prompted Freeland’s appointment, claiming he needed a new legislative slate in order to move ahead with a “bold” new spending plan to help drive the recovery.

Canada has already budgeted C$380 billion ($289 billion) in new debt this year as a response to the downturn, spending that will likely drive the federal government’s debt to about 50% of economic output, from 31% last year. That’s triggered a backlash from business groups and economists, who are calling on Trudeau to commit to specific new debt targets to impose discipline on the budgeting process.

To assuage those concerns, Freeland vowed last week to preserve Canada’s reputation for sound fiscal management as her government considers the next steps to drive the recovery.

Trudeau is prepared to spend whatever it takes to combat the immediate impacts of Covid-19, given the emergency expenditures will only be temporary, the official said. Any future spending deemed structural, however, would be within new “fiscal tracks” that will be laid out by the finance minister later this year.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="For more articles like this, please visit us at bloomberg.com” data-reactid=”34″>For more articles like this, please visit us at bloomberg.com

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Subscribe now to stay ahead with the most trusted business news source.” data-reactid=”35″>Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.

Let’s block ads! (Why?)



Source link

Continue Reading

Economy

Swedish government promises $12 billion to kick-start economy in 2021 budget – The Journal Pioneer

Published

on


By Simon Johnson

STOCKHOLM (Reuters) – Sweden’s government will pump 105 billion crowns ($12 billion) into the economy in 2021 through tax cuts and spending in a record giveaway aimed at getting the economy back on its feet after the coronavirus pandemic-induced slump.

Sweden’s economy will shrink around 4.6% this year, the minority coalition said its budget on Monday, a milder hit than many other European countries, some of which are being forced to re-impose COVID restrictions after a surge in new cases.

“Economic policy is going into a new phase,” Finance Minister Magdalena Andersson told reporters. “It is about a record-large budget to restart the Swedish economy: 100 billion so that we can work our way out of the crisis.”

The Social Democrat and Green coalition said the budget would focus would be on boosting jobs, welfare and supporting the switch to a carbon-free future.

Most measures, agreed with two small, centre-right parties which help keep the coalition in power, were already known.

Individuals and companies will get a tax cut and local authorities and welfare services more cash while around 10 billion crowns will go toward fighting climate change.

The budget is expected to create around 75,000 jobs.

LONG TERM WINNERS

While Sweden looks to have got off relatively lightly economically in the short term, analysts caution that it is too early to pick the longer term winners and losers from the pandemic.

Much will depend on how government largesse, including Europe’s 750 billion euro recovery find, is spent.

Sweden also faces a number of structural challenges, not least in the labour market where unemployment among young people and immigrants is uncomfortably high.

A dysfunctional housing market also threatens long-term economic stability while funding the country’s comprehensive welfare model as society as a whole ages will require a huge increase in productivity.

The government has promised to keep the taps open, at least for the next few years – tax cuts and spending will boost the economy by 85 billion in 2022.

But with a general election due that year, longer term policies remain unclear. The last national vote resulted an a virtual stalemate between the centre-left and centre-right blocs and there is little evidence that voters are any clearer about what they want now.

(Reporting by Simon Johnson, additional reporting by Johan Ahlander; Editing by Niklas Pollard and Toby Chopra)

Let’s block ads! (Why?)



Source link

Continue Reading

Trending