Bond Auctions Fail From Russia to Korea as Brazil Protests Rage; Brazilians spend as much as 26% of their income to ride the bus

Bond Auctions Fail From Russia to Korea as Brazil Protests Rage

Developing nations around the world are scaling back or canceling billions of dollars of bond sales as borrowing costs climb the most since 2008, just as spending needs increase amid slowing economic growth.

Romania’s Finance Ministry rejected all bids at a seven-year bond sale yesterday because of market volatility, while South Korea raised less than 10 percent of the amount planned in an auction of inflation-linked bonds. Russia scrapped a sale of 15-year ruble-denominated bonds June 19, the second time it canceled an auction this month, and Colombia pared an offering of 20-year peso debt by 40 percent. A cash shortage led to failures last week of China Ministry of Finance debt sales.The tumble in bonds, stocks and currencies, spurred by investors’ biggest retreat from emerging markets in two years, is tightening credit as the Federal Reserve says it may end cheap money that had made investment plentiful. Yields on local-currency emerging-nation bonds surged 75 basis points this month to 6.5 percent, the biggest increase in five years. In Turkey and Brazil, anti-government protests are challenging development plans that require additional funding.

“Trying to issue local currency debt is much more difficult, because nobody wants it, and U.S. dollar debt, which there’ll probably be some demand for, is just going to be a lot more expensive,” Michael Shaoul, chairman of Marketfield Asset Management, which oversees about $10 billion, said in a phone interview in New York. For countries with a high level of debt service payments, “you’re going to see a significant worsening of the fiscal position,” he said.

$3.9 Trillion

More than $6.9 billion left funds investing in developing-nation debt in the four weeks to June 19, the most since 2011, according to Morgan Stanley, citing EPFR Global data. The exodus is reversing the $3.9 trillion of cash that flowed into emerging markets in the past four years as China’s annual economic growth averaged 9.2 percent and spurred demand for Brazilian iron ore, Russian oil and gas and Chilean copper.

Fed Chairman Ben S. Bernanke said June 19 that the central bank may taper its monthly purchases of $85 billion in assets later this year and halt them around mid-2014 as long as the world’s largest economy performs in line with its projections. China’s benchmark money-market rate climbed to a record and a preliminary report showed manufacturing shrank at a faster pace this month.

Rupee Sinks

MSCI Inc.’s emerging-market stock index slumped the most in 20 months yesterday while currencies from Turkey to Colombia, South Korea and Poland lost more than 1 percent. Brazil’s real touched a four-year low while the Indian rupee and Turkish lira sank to records.

Romania rejected all 688 million lei ($201 million) of bids at a bond sale yesterday because of “unacceptable price offers,” according to an e-mailed statement from the central bank. It was the first failure since August.

South Korea sold just 9 percent of the 600 billion won ($519 million) it targeted from 10-year inflation-linked bonds this week. Colombia’s government pared an auction on June 19 of 20-year inflation-linked peso bonds by 40 percent, to 150 billion pesos ($77 million).

“The tapering genie is now out of the bottle and that will have some big implications,” Adrian Zuercher, head of emerging-market strategy at Credit Suisse (Hong Kong) Ltd., an asset management unit of Credit Suisse Group AG that oversees $450 billion, said in an interview yesterday. “The competition for emerging-market bonds has increased and investors will ask for higher yields there.”

Russian Sales

Russia canceled planned sales of 10 billion rubles ($304 million) of notes this week, citing a lack of demand within an acceptable yield range of 7.70 percent to 7.75 percent. Yields on ruble bonds due in 2028 jumped 30 basis points, or 0.30 percentage point, yesterday to 8.1 percent, the highest level since the debt was sold in January.

The Russian Finance Ministry canceled a June 5 auction ahead of schedule and shelved a sale on May 22 due to a lack of competitive bids.

In China, the Finance Ministry sold 9.53 billion yuan ($1.6 billion) of 273-day bills June 14, falling short of the 15 billion-yuan target, according to Chinabond, the nation’s biggest bond-clearing house. It was the first time the government didn’t sell all of the debt offered at an auction in 23 months. Countries including Indonesia and Egypt also scaled back debt sales this month.

Better Prepared

“Bond auctions in emerging-market Asia have been poorly received and that’s likely to continue as long as market volatility remains,” Wee-Khoon Chong, a Hong Kong-based strategist at Societe Generale SA, said in an interview yesterday. “While the higher yields would make bonds more attractive, the severe upside pressure in rates for now is likely to see more investors and dealers at the side line.”

Some countries are better prepared than others for the prospect of Fed policy changes.

Mexico’s government took advantage of lower borrowing costs earlier this year to lock in yields on benchmark bonds as low as 4.48 percent as it boosted the average local-currency debt maturity to 8.25 years, about 14 times longer than in 1994, the year of the Tequila Crisis, when U.S. interest rate increases helped spark a peso devaluation that fueled capital outflows across Latin America.

Poland has financed 88 percent of this year’s borrowing needs and may not hold any bond sales in July and August if markets are unfavorable, Deputy Finance Minister Wojciech Kowalczyk said at a parliamentary hearing in Warsaw yesterday. Yields on 10-year Polish bonds increased to 4.26 percent yesterday, the highest level since November.

Emerging Slowdown

Auctions typically fail because governments don’t want to sell the bonds at expensive prices, not because they are unable to attract enough buyers, according to Arturo Porzecanski, a professor of international finance at American University.

“Governments usually can get the funding that they want,” Porzecanski said in a phone interview in New York. “It’s a question of the yield they’re willing to validate.”

Countries with higher debt-to-gross domestic product ratios, such as Brazil at 59 percent, face the biggest challenges as borrowing costs rise, according to Marketfield’s Shaoul.

The disruption comes at a time when emerging economies are slowing more than previously anticipated. China’s manufacturing is shrinking at a faster pace this month as the Purchasing Managers’ Index fell to 48.3 in June from 49.2, according to a preliminary reading released yesterday by HSBC Holdings Plc. and Markit Economics.

Growth Forecasts

The World Bank lowered its forecast this month for China’s expansion in 2013 to 7.7 percent, which would be the slowest since 1999, from an 8.4 percent estimate in January. The Washington-based institution cut its forecast for developing-nation growth this year to 5.1 percent, from 5.5 percent.

Government reports showed yesterday that Russian consumer spending decelerated in May, with disposable incomes unexpectedly shrinking for the first time since October 2011.

“The emerging market fundamentals have been deteriorating,” Rashique Rahman, a developing-market strategist at Morgan Stanley in New York, said in a phone interview yesterday. “Volatility has raised risk premium, suggesting monetary conditions are tightening. There’s a possibility it could develop into a negative feedback loop.”

The lack of reforms to improve productivity over the last few years has exhausted the growth potential among major economies, fueling social unrest, according Rahman.

Turkey, Brazil

Anti-government protests, sparked by anger over a planned development in Istanbul, spread nationwide in Turkey May 31, marking the most serious unrest during Prime Minister Recep Tayyip Erdogan’s decade in power.

In Brazil, protests erupted over an increase in bus fares and have spread across the country in the biggest demonstrations in the South American country in two decades. Protesters pledged more demonstrations even after the authorities in Sao Paulo and Rio de Janeiro said June 19 that they were scrapping bus fare increases.

“What we need to see is policy reforms and adjustment,” said Morgan Stanley’s Rahman. “These are difficult challenges.”

In the overseas markets, average dollar borrowing costs for developing-country companies increased to a one-year-high of 5.86 percent yesterday, according to data compiled by JPMorgan Chase & Co.

‘Falling Knife’

The increase in yields is causing companies to delay funding efforts. Minerva SA, Brazil’s third-largest beef producer, canceled a plan to sell perpetual dollar-denominated bonds June 17, four days after Odebrecht SA, a Salvador, Brazil-based construction and engineering firm, pulled a debt offering.

Isagen SA, Colombia’s second-biggest publicly traded power company by sales, said June 18 that it will delay a planned local bond offer as yields in the country jumped to 16-month highs.

While Brazil has taken advantage of falling prices to buy back bonds and said it has enough reserves to buffer swings in the market for three to six months, higher U.S. yields will continue to lure capital away from developing nations, according to Paul McNamara, who manages $9 billion in emerging-market debt at GAM Investment. U.S. Treasury yields touched 2.47 percent yesterday, the highest level since August 2011.

“It’s going to be painful,” said McNamara in a phone interview from London yesterday. “People don’t catch a falling knife.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net

Brazil’s Middle-Class Anxiety

It is tempting to liken this week’s surprising protests in Brazil, which have attracted huge crowds in the country’s biggest cities, to another movement a couple of years ago in the Northern Hemisphere. But there are important differences between Brazil’s unrest and the Occupy Wall Street movement.

Both succeeded in organizing the discontent of the middle class. Both started with specific complaints — in Brazil, a 20-centavos (9 cents) rise in bus fares; in the U.S., the excesses of Wall Street after the bailouts of the financial crisis — and soon grew to include a long list of amorphous and unrelated grievances. For Occupy Wall Street, it was everything from the cost of health care to Israeli-Palestinian politics; in Brazil, it includes health care as well as schools, crime, official corruption and public spending on the World Cup in 2014 and the Summer Olympics in 2016.

Another way of looking at both movements is that they were prompted by particular grievances but soon grew to embrace deeper structural inequities. And that is where the differences between the protests become more apparent. U.S. economic anxiety is less palpable than the Brazilian variety, in part because the U.S. is better able to withstand the upheavals wrought by economic turmoil and protect its middle class.

Food Prices

It is probably no coincidence that the Brazilian protests were spurred by a rise in bus fares. (It’s worth noting that the spark behind the Arab Spring uprisings was soaring food prices; increases in food costs tend to destabilize democratic governments in developing nations.) Inflation has been picking up, particularly for food and fuel, and was 6.5 percent at the end of last month. Meanwhile, wage increases have barely kept pace with rising prices.

It all comes after a decade of strong growth. The Brazilian economy expanded at an average of more than 3 percent a year between 2000 and 2010, almost double the rate of the U.S. Much of the growth was driven by demand for raw materials, largely from China. The expansion gave millions of poor Brazilians purchase on a middle-class lifestyle. Combined with the availability of easier credit, Brazilians were able to buy electronics, cars and air conditioners.

Never mind that Brazil by many measures remained a country riven by one of the most unequal distributions of wealth and income in the world. The ascent of the middle class, combined with social programs promoted by President Dilma Rousseff and her predecessor, Luiz Inacio “Lula” Da Silva, seemed secure.

Not so much anymore. Annual growth since Rousseff took office in January 2011 has averaged 2.2 percent and was less than 1 percent for three quarters last year. It is the fragility of the Brazilian economy’s gains, so recently won, that undoubtedly fuels the unrest in Brazil. Whatever else might be said about the U.S. economy, it has proved itself over the last half-decade to be remarkably sturdy.

Rousseff doesn’t lack for reform plans — to Brazil’s tax code, its pension system, its labor laws, to name a few — and they are worth pursuing. It’s unlikely, however, that a dry recital of the necessity of economic reform will mean much to the hundreds of thousands of poor and middle-class Brazilians on the streets this week.

In that respect, Rousseff’s more immediate response to the unrest is encouraging. As a former revolutionary who was tortured during the dictatorship that ruled Brazil from 1964 to 1985, Rousseff knows something about challenging authority. “Peaceful protests are legitimate and a part of democracy,” she said in a statement posted on the presidential blog, ensuring that many of the young people protesting were likely to see it. Rousseff may want to get some printouts of her statement to hand out to police, who have been firing rubber bullets and tear gas at protesters in Rio de Janeiro and Brasilia.

The rallying cry at many of the protests is “O gigante acordou,” which translates as “The giant has awakened” (the reference is to a line from Brazil’s national anthem). Unless Rousseff can restore the growth that salves middle-class anxieties, those words will sound more like a threat than a promise.

Updated June 21, 2013, 9:01 p.m. ET

Brazil’s New Middle Class Takes to the Streets

After a Decade of Growth, Protests Seek To Build on Gains in Living Standards

By JOHN LYONS, LORETTA CHAO and MATTHEW COWLEY

SÃO PAULO—For Alexandre Peppe, the last decade has been great. The 29-year-old from the poor outskirts of São Paulo got a good job in state government, bought a car and became the first in his family to go to college.

All the same, he took to the streets this week with a million other members of Brazil’s new middle class over a wide range of grievances, from high bus fares to corruption and crime.

“The population is revolting against the government of Brazil,” said Mr. Peppe, who joined others to cram the broad avenues of São Paulo.

Over the last decade, Brazil capitalized on a global commodity boom to lift millions out of poverty and create a new middle class. Brazil’s politicians from all political stripes now find themselves under siege from the very same group.

“This middle class had economic growth in a period of low inflation, and suddenly they’ve unleashed a cauldron of complaints, on a range of issues like corruption, that have been accumulating for a decade,” said Maílson da Nóbrega, a former Brazilian finance minister.

On Friday, demonstrators returned to the streets in nearly sixty cities, with reports of looting in Rio de Janeiro, where some of the protests have turned violent in recent days. The protests have continued despite decisions by São Paulo and Rio to give in to a key demand for lower bus fares. But the protest movement has expanded beyond that issue to a field of middle class grievances.

The demonstrations couldn’t come at a worse time for Brazil, which is hosting the Confederations Cup soccer tournament in new stadiums built for next year’s World Cup. For this soccer-mad nation, hosting the tournament was meant to cap a national rise toward global prestige.

Instead, for some, the protest movement has brought to the fore a range of problems that were mostly left out of the Brazil story as the country became a darling of the global investment community amid the boom.

“This situation in Brazil is the coup de grâce on the idea that Brazil was the next big thing,” said Gesner Oliveira, a businessman who ran São Paulo’s main water utility for several years and now is a consultant.

In recent days, soccer fans in cities like Salvador and other growing urban centers have had to run for cover from police firing rubber bullets in order to get to games, raising questions about whether Brazil can handle hosting the Cup next year.

Protests erupted a few blocks from the hotel where the Italian national team was staying in Salvador on Friday, causing team coach Cesare Prandelli to say the team would remain holed up in the hotel ahead of its match the following day against Brazil. But he denied rumors that Italy asked for the tournament to be scrapped.

Soccer’s governing body FIFA said Friday it would not scrap the tournament due to the unrest and that no team had signaled a desire to pull out. In a statement that would have been unimaginable just two weeks ago, FIFA secretary-general Jérôme Valcke felt compelled to say that Brazil must host the World Cup next year. “There is no plan B,” he said.

The tournament has become a catalyst for some of the protesters’ complaints. That is because even in this soccer-mad country, the birthplace of Pelé, residents are increasingly frustrated at the amount of money that is been put into two major global events, the 2014 World Cup and the 2016 Olympics, compared with the lack of progress in the issues that impact people’s daily lives.

No one in Brazil was caught more off guard than President Dilma Rousseff and her left-wing Workers Party, in power for the last decade.

Before the protesters poured onto the streets, Ms. Rousseff appeared to be cruising toward an easy re-election bid next year as expanded welfare programs boosted living standards of the poor, and a growing economy brought greater prosperity to millions more.

Ms. Rousseff, the country’s first female president, at first sought to align with the protesters by reminding marchers that her own political career came from the opposition.

The strategy backfired after Workers Party officials sent their members to the streets, where they were booed by the stridently anti-party marchers.

Ms. Rousseff held an emergency cabinet meeting on Friday, officials said.

Governor Cid Gomes, the governor of Ceará state and a Rousseff ally, told reporters Friday that Ms. Rousseff called him on Thursday night and was in a state of “bewilderment.”

Government officials say Ms. Rousseff has been extremely active behind the scenes, and pushed officials in Rio and São Paulo to lower tariffs. Ms. Rousseff did not speak publicly in order to avoid inflaming the protests and on expectation that they might subside after the tariff reductions.

After violence across Brazil late Thursday, including protesters forcing into the foreign ministry, Ms. Rousseff planned a speech for late Friday, where she will acknowledge some of the grievances and offer dialogue with protesters. She will also firmly state that violence will not be tolerated in the country’s cities.

Some say much of the explanation for why hundreds of thousands of Brazilians are on the streets right now can be found in Mr. Peppe’s experience in recent years—and a school of thought in development economics about why seemingly better-off middle class populations have taken to the streets across the emerging world from Turkey to Chile.

The idea is that populations begin to demand more of their leaders as their own economic conditions improve. Citizens who are better off have the luxury to focus on social grievances that seem less pressing to impoverished people whose biggest concern are earning enough to feed themselves.

Mr. Peppe grew up in the sprawling northern outskirts of São Paulo, a poor and crime-ridden maze of small concrete homes during the years of four- digit inflation and successive currency crashes.

His mother, who never learned to read, raised him on around $80 a month. His father, a cop, was killed when Mr. Peppe was 11.

Amid Brazil’s boom, Mr. Peppe was able to find work, take out loans to pay for a new car and apartment, and took a second job to pay for it. As he marched, he took photos of face-painted protesters with sleek a Sony Ericsson smartphone.

But Mr. Peppe’s prosperity was matched by the bitterness for the injustices that he says came into focus as his life expanded beyond his neighborhood.

“The inequality is very sad, even revolting,” Mr. Peppe said. “And now, the population of Brazil is waking up.”

Much of the ire is directed at a political system that critics say affords broad impunity to engage in corruption while mostly ignoring the demands of ordinary Brazilians.

Adding to middle-class anxieties are warning signs that the commodity boom that lifted the economy is coming to an end. Brazil’s economy has slowed after posting 7.5% growth in 2010.

Brazilians spend as much as 26% of their income to ride the bus

By Roberto A. Ferdman @robferdman June 18, 2013

A $0.09 hike in the price of a single bus fare in Sao Paulo ignited the biggest protests to hit Brazil in over 20 years. As we noted earlier today, the bus fare hike was merely the last straw in a long list of public grievances about the shaky Brazilian economy.

But it’s worth noting that Sao Paulo’s bus riders are being majorly squeezed by fares. A fare price that sounds pretty minuscule in dollar terms actually takes up a huge chunk of Brazilian incomes for those at the bottom (and presumably, those who most need to use the bus).

The $0.09 hike brought the price of a single bus fare in Sao Paulo up to $1.47. Assuming Brazil’s city dwellers ride the bus twice daily—to and from work during the week, and to and from anywhere during the weekend—that’s $82.46 a month. For Brazilians making the minimum wage of $312.33 a month, that’s a whopping 26% of their income.

In Brazil’s lopsided economy, public funds are propping up a public transportation system that the public can’t afford.