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Andean Macro Weekly Report Chile: The long-awaited rating downgrade arrived... finally


July 17, 2017 ( Newswire) Last week's highlights: A mild upswing in the main consumer confidence indicator. Adimark released the Jun-17's consumer confidence indicator (IPEC), which increased by 0.2 pp to 40.8 points when compared to the last month figure (50 = neutral), standing above the 2016's average (35.2 points) and accumulating 37 months in a row under pessimistic levels. The monthly result was fully explained by the improvement of 5-years-ahead economic expectations, which offset the remaining categories monthly contractions (excluding household appliance consumption expectations, which slightly increased). That said, the index improved for the fourth straight month.

S&P downgraded Chile's sovereign long-term debt rating. S&P lowered the Chilean foreign sovereign long-term debt rating to “A+” from “AA-“, in line with our most likely scenario after granting a Negative outlook in early 2017. The “prolonged subdued economic growth” was the main factor behind the decision, as it contributed to a significant increase in the government's debt burden, while the higher social fiscal expenditure also played a relevant role. Regarding the economic activity, the entity projects a feeble 2.0% GDP growth for 2018, which we think constitutes a kind of insurance for the next government, as we consider the 2.0% GDP growth for 2018 as a pessimistic scenario. In our view, the Stable outlook represents very good news for the economy, as the main threats for the country's debt profile are likely to remain on the agenda for upcoming years. For more details please refer to: Chile Special Report – Chile's sovereign rating: the long-awaited rating downgrade arrived…finally, Jul-13.

The BCCh kept its reference rate unchanged at 2.50%. The communiqué mentioned the favorable external scenario that the Chilean economy still faces, but highlighted the absence of positive economic surprises and the recent upturn in long-term sovereign yields, which implies a less-benign external scenario on the margin. On the domestic front, the entity recognized the sizeable Jun-17's CPI surprise (-0.4% m/m), but pointed towards the temporary factors behind the print rather than general disinflationary pressures, while long-term projections are still close to the 3% threshold. Finally, considering that the monetary authority kept a neutral tone, we continue to expect that the BCCh will remain on hold (at 2.50%) during upcoming meetings. For more details please refer to: Chile Flash – BCCh's Monetary Policy Meeting: reference rate unchanged at 2.50%, as well as the neutral language, Jul-13.

The FX closed at CLP 657 last week, recording a 1.5% appreciation against the previous Friday. The currency posted a downward trend during amid a multilateral USD depreciation (0.9% w/w), while copper price increased by 1.9% w/w and Chile's 10Y CDS decreased by 2bp despite S&P's decision.

Main data and events to come

No relevant data to be published this week

Colombia: sovereign rating's outlook could be under pressure again amid risks to economic growth and the need of further fiscal adjustments according to Fitch

Last week's highlights

Fitch mentioned that the Colombia's stable outlook on its BBB rating could be pressured should economic growth be lower than expected, and the recent increase in the fiscal deficit targets compromise the stabilization of the debt burden and its projected future reduction. Recall that on Mar-17 Fitch revised the outlook from negative to stable following the approval of the tax reform. In any case, Fitch mentioned that “the changed fiscal targets do not jeopardize the overall trend toward reducing the debt burden in the medium term, but they do highlight risks of fiscal slippage”, although the rating agency also highlighted that the expected deficit reduction in 2018 (of 0.5% of GDP to 3.1%), which will rely on expenditure cuts, will be challenging given the Congressional and Presidential elections to be held next year.

Given the ongoing orderly adjustment of the Colombian economy to the external shock, we continue to expect rating agencies to give the benefit of the doubt in the upcoming months/quarters, especially considering the creation of an experts Commission that will provide proposals to improve and make public spending more efficient by year-end, once the government itself has acknowledged that an adjustment in expenditures will be key to comply with the fiscal rule in the upcoming years. In any case, we acknowledge that the macro scenario remains challenge amid the ongoing adjustment of the economy the strongest external shock since 1928.

Retail sales and Industrial production disappointed in May-17. Total retail sales fell for the fourth time this year in May-17 (-0.5% y/y), below the expected by the market consensus (+1.2%) and our estimate of +1.7%. Moreover, industrial production dropped -0.6% y/y, also surprising us and the market consensus to the downside (+2% and +1.2%, respectively). The negative performance of both samples occurred despite the positive calendar effect of May-17 having 21 working days vs 20 in May-16. Indeed, the seasonally-adjusted (s.a.) series of industrial production posted a stronger annual decline than that of the original series, although the one of retail sales reached positive ground. Overall, while still weak activity poses risks to our long-held 2.1% estimate for 2017 GDP growth, it is worth to mention that both retail sales and industrial production have accelerated in 2Q17 vs 1Q17. Considering the still widespread weakness of economic activity and the downward surprise of inflation in Jun-17, we expect the BanRep to continue with its easing cycle this month, while we still see the terminal rate at 5.25% this year (2018: 4.75%) with the risks balance tilted to the downside.

Main data and events to come

On Tuesday, Fedesarrollo will release Jun-17 consumer confidence index.

On Wednesday, DANE will release May-17 imports and trade balance figures (trade balance Credicorp: -265mn; consensus: -200mn).

Peru: Central Bank could lower its policy rate once again towards the end of year

Last week's highlights

The BCRP cut the policy rate in 25pb. Last Thursday, the Central Bank lowered its monetary policy rate in 25pb, from 4.00% to 3.75%, the second rate cut of the year. The official statement did not rule out another adjustment in the monetary stance. Furthermore, a relevant change was the introduction of private spending (consumption and investment) as a key variable in order to consider another adjustment in the monetary policy stance. It should be noted that in the post-meeting press conference the Central Bank mentioned that it expects GDP to grow around 3.5% y/y in 2H17.

Another rate cut could occur towards the end of year. As we have pointed out previously, we foresee a rebound of public investment in the upcoming quarters, and a flat private spending. Thus, with inflation and its expectations within the target range throughout this year and the next one, the Central Bank could decide to carry out a new 25pb rate cut towards the end of year. Before taking such decision, the monetary institution would gradually lower its GDP growth forecast for 2018 (currently at 4.2%) to a number closer to our most recent estimate (between 3.0%-3.5%) after growing around 2.3% this year.

Economic activity expanded 3.4% y/y in May-17. The result came in above expectations (consensus: 2.8%), and was explained by better-than-expected performance of the services sector and by an uptick in import duties (Apr-17: -0.4% y/y, May-17: +5.9% y/y). Even though primary sectors grew 7.0% y/y (Apr-17: 2.9%), the highest print in five months, non-primary sectors expanded 2.2% y/y (Apr-17: -0.6%); non-primary manufacturing fell 1.8% y/y (in negative ground in 31 of the past 36 months), while construction fell 3.9% y/y (ninth consecutive month of contraction). In 2Q17, GDP expanded around 2% y/y (1Q17: 2.1%), while non-primary sectors registered a mild advance close to 1% y/y (1Q17: 1.4%). Available indicators for Jun-17 point towards a slight recovery of non-primary sectors. Public investment of the general government grew 2.5% y/y in real terms, its first positive print in five months.

The plan for another fiscal stimulus is underway. According to Fernando Zavala, Prime Minister and head of the MoF, the government is designing measures to spur public investment, maintenance spending, rebuilding and consumer demand. This week the Government also sent to Congress a bill to reassign parts of the 2017 budget to ensure high levels of execution.

Low volatility from the FX rate. The FX rate closed last week at PEN 3.250, entailing a 0.1% w/w appreciation (+3.1% YTD). It should be noted that all of the region's currencies registered gains last week (BRL: +3.0%, MXN: +2.9%, COP: +2.0%, CLP: +1.5%).

Main data and events to come

No relevant data to be published this week.

For charts, tables and the full report, see the attached file.

Daniel Velandia, CFA
+ (571) 3394400 Ext. 1505

Camilo Durán
+ (571) 3394400 Ext. 1383

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