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JPM

Chilean Corporates
Recommendations mostly unchanged after unrest; we remove the CENSUD 45s from our Top Trades
Protests in Chile escalated to violence Friday October 18 and through the weekend, including significant episodes of looting and arson. Unrest was sparked by the rise in metro fares in Santiago last week, which came just weeks after the government announced a 10% increase in electricity tariffs.
From a corporate perspective, the direct impacts of the recent events seem to be concentrated mainly in the consumer space, particularly hitting shopping centers and retail. We note that Chile represents 56% of Cencosud’s EBITDA, with the most significant chunk earned in the food retail segment (31% of 2Q19 LTM EBITDA). We await further clarity from the company, but note that supermarkets more broadly were targets of looting. Falabella reports 73% of its EBITDA in Chile, concentrated more in department stores, which were also impacted in major cities in the country.

In light of the recent events in Chile, we remove the Cencosud 6.625% ‘45s from our Top Trades. We are particularly concerned about potential direct damage to the company’s assets, including lost inventory as well as temporary closures, which could have near-term financial implications. We note that, like other operators in the country, Cencosud has insurance to minimize financial losses due to extraordinary events. While we await further details from the company, with the ‘45s now trading 12bp inside our 405bp spread target, we take profits and remove the trade.

Away from the consumer retail space, immediate implications for corporates appear mild. The utilities and TMT sectors appear to be minimally disrupted, with no significant damage to infrastructure reported at this juncture. Similarly, the banks have not been targets of the protests, and we do not anticipate a major direct impact at this stage. Finally, we do not anticipate significant disruption for the exporters, which are concentrated in the metals & mining and pulp spaces, at this moment.

We highlight modest indirect impacts tied to macroeconomic conditions, including possible near-term drags on growth and business sentiment. As a result of the recent events, J.P. Morgan economists estimate a negative impact on October economic activity of about 0.1-0.2%-pt and have reinforced their call for below-consensus 2020 GDP growth at 2.3% yoy, compared to the Central Bank, which expects 3-4% growth. Our economists also anticipate that BCCh will pull forward expected easing as a result of current conditions, cutting the policy rate by 50bp this week, relative to a prior expectation of 25bps of cuts this week followed by a further 25bps in December.
We retain our recommendations on Chilean corporate bonds at this juncture. The Cencosud ‘45s remain our only OW in the country, while we are UW the Banco Estado 3.875% ‘22s and the CMPC 4.5% ‘22s and Neutral the remainder of the space..
 

 

 

Go Long Chile Bonds as Stability To Return Soon: Tellimer

Investors have an opportunity to go long Chile credits as stability should return to the country within days or, at worst, within a couple of weeks, Tellimer strategist Rafael Elias writes in note to clients
Piñera’s main challenges are to prevent a further escalation and find a way to address discontent, “taking care of an economy that has weakened slightly as a result of the relatively low copper prices”
“We continue to see Chile as one of the most stable countries in the region, and believe that the current situation will be resolved soon” 

 

 

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bonded
Posted · Edited by bonded

Chile: There were 932 people arrested during last night´s curfew, and the death toll rises to 13 since the beginning of protests. All in all, more than 1400 have been arrested according to the authorities. President Piñera said yesterday that he is ready to meet with the opposition leaders to find a "new social agreement”. 

Most bankers came to work today so at least this morning is calm...but yesterday the videos I saw made it clear there is a reason to worry. And technically when u look at it...the Metro has been burnt...so not sure how long a city that depends on public transportation will take to restore trains and stations...but this has economic consequences for sure.

 

 

LatAm Economics & Strategy Daily

Piñera was conciliatory and pledged a “new social contract”

·         Chile: Protests continued after President Piñera declared a state of emergency and instituted a curfew. But on Monday evening the president sounded conciliatory and appeared to walk back earlier comments calling the country “at war.” Piñera said he would meet with opposition leaders to come up with a “new social contract.” He said his administration would find ways to reduce costs of electricity, medicine and highway tolls.

·         Pressure is also coming from congress to ease further electricity tariff increases, according to Pulso. After two rounds of tariff hikes this year amounting to ~20%, another round has been planned for January. No formal proposal has been put forward but the ministry of energy is reportedly working on one. A change will likely put downward pressure on inflation expectations.

 

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As 10 days of often-violent protests begins to wind down, analysts and investors say the market reaction to the civil unrest might be overdone, especially as emerging-market assets are on a rising trend due to the U.S. and China trade truce and optimism on a Brexit extension. The Chilean peso rose 0.6% as of 12:37 p.m. in New York, the fourth best performer among emerging-market currencies, and the IPSA stocks index advanced 0.3%.

“Despite the ongoing social turmoil in Chile and the negative impact it has had on Chilean assets, we think the CLP has overshot,” Deutsche Bank strategists led by Drausio Giacomelli wrote in a note. They recommend capturing a likely rebound of the peso with a long position in the currency funded by a short in the Peruvian sol.

President Sebastian Pinera fired eight members of his cabinet on Monday, including the interior, finance and economy ministers, in a shift to the center as he struggles to convince protesters that their voices have been heard.

While that doesn’t materially change the government’s policy direction, it “makes sense politically,” according to Alvaro Vivanco, the head of Latin America strategy and macro analysis at NatWest Markets Securities Inc. in Stamford, Connecticut, who also sees value in the peso.

“We think it’s an opportunity,” Vivanco said. “The events in Chile are pretty significant in terms of political direction, but we shouldn’t forget the good quality and good governance that Chile has had for many, many years.”

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Chile: Political crisis deepens

·      Chile is facing its worst social and political unrest since 1990, with the death toll currently at 23[1]. The demonstrations have led President Sebastián Piñera to take increasing policy action, starting with declaring a state of emergency in an effort to contain the violence, announcing fiscal easing measures, and a cabinet reshuffle. But the protests have only become larger and we do not rule out a deeper governability crisis.

·      Even if the political crisis is contained, we expect Piñera’s government to be forced to implement more spending measures and we expect the BCCh to deliver another 25bp cut in December. In the medium term, changes to the pension system and even to the constitution are among protesters’ demands and will be hard to dismiss from the public agenda.

·      Credit Strategy: Rising political risks in Chile due to social unrest have not been materially reflected in Chile sovereign spreads. Under such fluid circumstances, for investors seeking to insulate returns from Chile’s political risks, we recommend switching from Chile ’47s and ’50s into Panama ’47s or ’50s.

·      FX and local rates strategy: We recommend short CLPCOP, targeting 4.45 (stop-loss: 4.66, reference: 4.588). We also remain short CLP as part of a LatAm basket: long COP and MXN versus short CLP and BRL.

President Piñera’s first reaction to the crisis was to declare a state of emergency, which implies handing over the management of public safety to the armed forces, and he reverted the hikes in the subway fare that were the catalyst for the protests. But that was not enough. Faced with wide-spread protests in the streets, Piñera then announced some alleviation measures including an increase in the basic pension, a higher minimum wage, and other fiscal easing measures for an estimated total cost of USD1.5bn (c.0.5% of GDP).

But again that was not enough. A massive demonstration last Friday with more than 1.2mn people – the largest demonstration in Chile at least since 1990 – issued demands that included more income redistribution and changes to the constitution. In response, this Monday, President Piñera announced major changes to his cabinet changing eight ministers, with some of the replacements more liberally inclined like. For example, Finance Minister Felipe Larrain was replaced by Ignacio Briones, and Interior Minister Andrés Chadwick was replaced by Gonzalo Blumel. On 30 October, President Piñera canceled the APEC summit, scheduled for 16-17 November in Santiago, and a UN global climate change meeting that was scheduled to be held in Chile in early December. In our view, the cabinet reshuffle is unlikely to be enough to satisfy the protesters’ demands, considering there were more protests this week. In this context, we continue to see risks to governability, as we have pointed out before

Even without a governability crisis – or to prevent such scenario – we think the Piñera administration will be forced to make further concessions on its center-right economic agenda. In our view, the measures taken so far by Piñera will not be enough to resolve the political crisis. At the very least, we expect the government to announce more spending measures, which may or may not be fully offset by higher taxes. In fact, Mario Desbordes, president of the governing National Renewal Party already suggested more fiscal easing measures are likely to come and said that “we don’t win anything by handing an order fiscal account to some populist”[2]. 

We also expect the BCCh to deliver another 25bp cut in December, taking the monetary policy rate to 1.50%, given the guidance of the October meeting highlighting that convergence of inflation to the target could require additional monetary stimulus, and our US economists’ expectation of another 25bp cut by the Fed in December.

Demands from protesters are far-reaching and include changes to the pension system and the constitution, which was written in 1980 under General Augusto Pinochet. Mario Desbordes, has publicly recognized that the party might need to compromise on such issues as the possibility of a mixed pension system[3]. In addition, the idea of revising the constitution is strengthening and is something that opposition leaders in Congress have already started to discuss[4].

Credit Strategy: Switch from Chile into Panama to insulate from unpriced political risks

The increase in political risks in Chile due to social unrest has not been materially reflected in Chile sovereign spreads. However, the social situation remains fluid, with 23 deaths and over 2,000 arrests reported. The increased political risks led to the cancellation of the November APEC summit scheduled and the UN’s COP25 climate change conference scheduled for December. In response to the protests, the government has announced reform policies and the president has reshuffled his cabinet, but social pressures remain. Amid these fluid circumstances, for investors seeking to insulate returns from Chile’s political risks, we recommend switching from the Chile ’47s and ’50s into the Panama ’47s or ’50s. The spread relationship has tightened recently, but remains within the trading range, and the trade offers spread pickup, which despite Panama's lower BBB ratings, we consider attractive in the current circumstances.

 

Switch from Chile 2047, 2050 into Panama 2047s, 2050s

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