#Andean Macro Weekly Report - #Chile: fiscal spending will increase by 3.9% in real terms during 2018
October 9, 2017 (Investorideas.com Newswire) Last week's highlights: Demand-side figures virtually in line with expectations. The Commerce Activity Index (CAI) expanded by 4.9% y/y in Aug-17 (Jul-17: 3.4%), being positively affected by all categories: car/motorcycle (28.4% y/y, +3.1pp contribution), retail sales (3.6% y/y, +1.5pp contribution), and wholesale (0.8% y/y, contribution: +0.4pp). Also, the INE released the prior retail sales index (which includes car sales), which increased by 6.0% y/y, slightly above market consensus and our expectation (5.5% and 5.4% y/y, respectively). In s.a. terms, we estimate that the series posted a mild m/m advance during the month. Also, supermarket sales expanded by 2.4% y/y.
2018's fiscal budget considers a 3.9% expansion in public expenditure. The MoF's Budget Office announced that fiscal spending is expected to increase by 3.9% during 2018, which surprised us on the upside considering that the Minister of Finance – Nicolas Eyzaguirre – commented on media that the fiscal expansion was likely to be similar to the 3% expected for 2018 GDP growth. Hence, current expenditure will increase by 4.6%, while public investment will register a 0.3% advance.
Aug-17 Imacec came in at 2.4% y/y, surprising both the market consensus and our forecast to the downside. Importantly, the series posted its fifth monthly advance in a row, an unobserved record since early-2013. Importantly, the mining Imacec posted its second consecutive positive annual reading, while non-mining output disappointed us considering the significant monthly expansion of fiscal spending.
Sep-17 CPI stood at -0.2% m/m, well below market consensus and our own forecast (both at +0.3% m/m). Volatile components strongly declined in y/y terms, both explaining most of the negative CPI m/m variation. That said, downside pressures were widespread with the CLP appreciation this year and the wider output gap playing a key role, in our view. Hence, importantly, the core measure (IPCSAE) surprised once again on the downside, posting no variation in monthly terms (Aug-17: -0.1% m/m) vs a +0.2% estimate by analysts (including us). While the BCCh is likely to remain on hold in Oct-17, the materialization of downside risks to prices in the short term increases the probability of new rate cuts ahead.
The FX closed at CLP 633 last week, appreciating by 1% against the previous Friday. The CLP was the outperformer currency in the region as a result of a strong recovery in the copper price, which exceeded 3 USD/lb again.
Main data and events to come
On Tuesday, the BCCh will release Sep-17's trade balance figures.
On Wednesday, the BCCh will publish the Oct-17's Economist Survey.
On Wednesday, BCCh will release the Oct-17's Financial Traders Survey.
Colombia: unexpectedly, headline annual inflation remained within the target range after a new strong drop of food prices
Last week's highlights
Inflation stood at 0.04% m/m in Sep-17, surprising both the market consensus and our forecast to the downside (0.18% and 0.12%, respectively). That said, annual inflation accelerated for the second straight month, reaching 3.97% from the 3.87% observed in Aug-17, although it unexpectedly remained within the target range of the BanRep for the fourth month in a row. The surprise to our forecast was explained once again by a stronger-than-expected negative print of foodstuff, as we anticipated a -0.15% figure (-0.4% observed; consensus: +0.03%). Thus, the breakdown of inflation was quite similar to the observed in previous months, as some core inflation measures such as non-tradable and regulated remained sticky at high levels, while the ex-food-and-regulated gauge, which is closely monitored by BanRep, fell once again (15bp to 4.44%). Non-food inflation came in at 0.22% m/m, broadly in line with our estimates of 0.24%.
While we continue to expect a further acceleration of annual inflation in the coming months (it should surpass the 4% mark in Oct-17), we are revising to the downside our year-end forecast from 4.1% to 4.0% following the soft headline print in Sep-17. The breakdown of the inflation figure, in addition to the expected continuation of its upward trend during the remainder of the year, leads us to reaffirm our view that the BanRep will remain on hold at 5.25% in the short term after pausing its easing cycle last month. However, this downward surprise of headline inflation strengthens the downside bias of our repo rate forecast for this year, as the Board remains concerned about the dynamics of economic activity according to the latest statement, so the expected rate cuts for 1H18 (wee se the repo rate reaching 4.50% next year) could be brought forward to 4Q17.
Slight appreciation of the COP during the week despite the adverse outlook. The COP strengthened slightly by 0.05% w/w, closing at COP 2,937 last Friday. This, despite the downward trend of oil prices (-1.9% w/w), and the multilateral appreciation of the USD during the week. Main data and events to come
On Friday, BanRep will publish the minutes of its latest monetary policy meeting, in which it left the repo rate unchanged at 5.25% after a 250bp easing cycle.
Peru: we expect no changes in the monetary policy rate this Thursday
Last week's highlights
The policy rate will remain unchanged at 3.50%. The Central Bank (BCRP) will hold its monetary policy meeting of Oct-17 this Thursday. We do not expect changes in the reference rate (3.50%).The institution will take into account:
Annual inflation slowed down from 3.2% in Aug-17 to 2.9% in Sep-17 due to a partial reversion of the supply-side shock registered in Aug-17. Hence, it returned to the target range of the BCRP (2.0% +/- 1pp). We foresee headline inflation to continue decelerating in Oct-17 amid the normalization of the supply-side shock and a positive base effect (Oct-16: +0.41%, 2006-2015 median: +0.13%). We could see annual inflation in Oct-17 standing close to 2.5% y/y, comfortably within the target range.
In Sep-17, core inflation fell from 2.57% y/y to 2.45% y/y, accumulating 15 consecutive months within the target range.
12-months-ahead inflation expectations stood at 2.8% in Sep-17 (Aug-17: 2.7%), and remain within the target range for the fifth consecutive month.
Since the latest monetary policy meeting, the FX rate increased from PEN 3.24 to 3.27, still below the closing print of 2016 (PEN 3.36).
Despite the uncertainty, the international macroeconomic environment remains benign: a) the PMI and ISM from China and US, respectively, stand at maximum levels of 4-5 years, b) copper's price fluctuates around USD/lb. 3.00 (~+40% y/y), and c) sovereign rates in Peru are among those in emerging markets with investment grade which have fallen the most YTD.
Economic data already shows a turning points for non-primary sectors and private investment. We foresee that in Aug-17 monthly economic activity grew just above 2% y/y (Jul-17:1.6%), mainly due to a more dynamic construction sector: it grew 4.8% y/y (Jul-17: 3.8%) and printed the highest growth rate in 18 months. Moreover, capital goods imports expanded 8.1% y/y (Jul-17: +22.1%) while mining investment grew 15% y/y (Jul-17: +28.1%). Available indicators for Sep-17 point towards another improvement of non-primary GDP. In particular, public investment grew almost 20% y/y in real terms (Aug-17: 6.1%). In 3Q17, private investment would have expanded after 14 consecutive quarters of contraction.
The messages of the official statement will be key in order to establish if the Central Bank will leave an open door for another rate cut, or a more neutral tone regarding the monetary policy stance becomes predominant. In the official statements of Apr-17, Jun-17 and Aug-17, the BCRP used expressions making reference to easing the monetary stance in the short-run. In the respective following meetings (May-17, Jul-17 and Sep-17) the institution lowered its policy rate in 25bps. Main data and events to come
On Thursday, BCRP will hold its monetary policy meeting of Oct-17 (Consensus: 3.50%, Credicorp Capital: 3.50%).
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