Andean Macro Weekly Report - Chile: Economic activity and core CPI surprised on the upside
March 12, 2018 (Investorideas.com Newswire) Last week's highlights: • Time for a cyclical recovery: the challenge is preserving the animal spirits. After the presidential election, most confidence indicators returned to positive ground for the first time in almost four years and real effective data has also improved. The recovery has been explained not only by primary sectors but also by a gradual-but-steady improvement in non-mining industries. We are adjusting our 2018 GDP growth forecast to 3.5% from 3.2% before, while the balance of risks is still tilted to the upside, in our view. On the nominal front, despite the recent CLP appreciation, we predict that inflation will reach 2.8% this year after the sizeable Jan-18 CPI surprise, the expected recovery in activity and some increase in volatile CPI components. The BCCh is likely to remain on hold at least until 2H18, when 2x25bp rate hikes may occur should the economy grow close to its potential.
Economic activity is not only benefiting from a favorable comparison base. The BCCh announced that Imacec rose 3.9% y/y in Jan-18, slightly above market consensus and our own forecast. Importantly, the indicator posted its third monthly expansion in a row. The non-mining sectors registered a higher dynamism amid favorable figures in commerce, services and manufacturing production. For Feb-18, we project a 3.75-4.25% Imacec expansion. We continue to expect that GDP will grow 3.2%, while the balance of risks is clearly tilted to the upside (see the full note).
Core CPI surprised on the upside. The INE released the Feb-18 CPI, which was virtually nil (0.04%), standing below market expectations but close to our own forecast. Importantly, in contrast to the last figure registered, some negative contribution came from foodstuff prices, while core inflation (CPIEFE) surprised on the upside. The diffusion index stood close to its historical average, which allows us to discount the presence of broad disinflationary forces. Accordingly, we think that the Feb-18 core CPI and Jan-18 mining Imacec upward surprises should provide additional support to the most likely path for the BCCh to take on the reference rate (i.e. a stable MPR until at least 2H18 and then an evaluation of a gradual rate normalization). For Mar-18, we preliminarily expect a 0.4-0.5% m/m CPI increase, while inflation will likely remain close to the 2% threshold until at least May-18 (see the full note).
The FX closed at CLP 603 last week, recording a 0.6% depreciation against the previous Friday. This week the FX posted a depreciative trend amid some copper price contraction (0.2% w/w), while the multilateral USD appreciated on the margin (0.2% w/w). Also, Chile's 10Y CDS contracted by 11bp.
Main data and events to come
- On Monday, the BCCh will release the Mar-18 Economist Survey.
- On Thursday, the BCCh will publish the Mar-18 Financial Traders Survey.
Colombia: Congressional and Primary Elections: a strong support for the right wing. Petro is set to be a competitive candidate in the presidential elections
Last week's highlights
Yesterday, Congressional elections were held, with the right wing leading and gaining a higher number of seats vs 2014. In addition, primary elections of both the far-left and the center-right coalitions were carried out. Ivan Duque (Centro Democrático) was chosen as the center-right candidate, defeating Marta Lucía Ramírez (Conservative) by a wide margin. Likewise, Gustavo Petro comfortably won the far-left primary, as expected. Both primary elections received a combined number of votes above 9mn, suggesting that both Duque and Petro will be very competitive candidates in the first round of the presidential elections, in line with recent polls.
Our base case continues to assume the victory of a market-friendly candidate in presidential elections. That said, we also think that uncertainty may be high in the upcoming months as the likelihood of Petro achieving the second round is not negligible. However, we are of the view that the room for further upside for the left is limited whereas for the right may be high. Germán Vargas Lleras (former vice president) remains a competitive candidate as his political party (Cambio Radical) managed to substantially increase its number of seats in Congress. In fact, it is worth mentioning that, according to several political analysts, the 'political machinery' remains an important factor for presidential vote (see the full note).
Presidential elections and oil prices will be key factors for activity ahead. We hold our 2018 GDP growth estimate at 2.3%, meaning an acceleration vs 2017 (1.8%), due to: i) the positive impact of lower inflation; ii) lower interest rates; iii) lower corporate taxes; iv) a better external backdrop; and v) a gradual recovery in sentiment. The risks balance is biased to the upside for the fist time in several years. That said, we prefer to be conservative amid the electoral period and lower-than-expected growth in 4Q17. Our base case assumes the victory of a market-friendly candidate in the presidential election. We do not rule out a boost in sentiment should this view actualize amid current high polarization. We think that the BanRep has room for further rate cuts due to good inflation prints recently and still sluggish activity (see our Quarterly Andean Macro Report).
inflation stood at 0.71% m/m in Feb-18, slightly below market expectations and our own forecast (0.75% and 0.79%, respectively). The yearly figure reached 3.37%, the lowest level since Oct-14 and a large reduction compared to the Dec-17 figure (4.09%), further converging towards the BanRep target. The downward trend is mainly explained by the fading of the VAT hike effect; however, we believe that GDP growth well below potential and a more stable FX are playing an important role too (see the full note).
Main data and events to come
- On Wednesday, DANE will release the figures of retail sales and industrial production for Jan-18. We expect retail sales to advance 2.0% y/y, while industrial production would have grown 1.8% y/y (consensus: +1.1% and +2.7%, respectively).
Peru: 2018 will be the fifth consecutive year of downward revisions to GDP growth
Last week's highlights
A 3.5% GDP expansion seems to be the upper limit for this year amid important local risks. In Jan-18, we lowered our 2018 GDP growth forecast from 4.2% to 3.5%, mainly due to higher political uncertainty and new problems in the construction sector. Our new estimate even considered global GDP growth at a seven-year high and copper prices that stood at USD/lb. 3.20. However, the aforementioned local factors, along with other issues, would be impeding the Peruvian economy from growing around 5% (average of the last 25 years). In addition, these domestic factors have intensified in past weeks and create new downside risks for economic activity. In this context, a 3.5% expansion seems to be the upper limit for this year, even though domestic demand could grow around 4.0% y/y in 1H18. In a pessimistic scenario in which political turmoil intensifies (e.g. a new presidential vacancy request) and construction has a sudden stop, the economy could grow only between 2.0%-2.5% this year (probability: 30%). In the 2014-2018 period, Peru will grow below the global average after a decade of surpassing it (see our Quarterly Andean Macro Report).
Central Bank lowered its key rate to 2.75%, and we don't rule out further cuts. The Central Bank of Peru (BCRP) lowered its monetary policy rate 25bp to 2.75% (a reduction of 150bp in total in the past 12 months). The decision was in line with our call and market expectations. In our opinion, a scenario in which the Central Bank lowers its key rate below 2.75% has a probability of at least 35% in the context of low inflation. The likelihood will rise if: i) GDP growth forecasts continue to be cut (in Feb-18, they stood between 3.0%-3.5%), ii) macroeconomic expectations go to negative ground (in Feb-18, they all fell compared to Jan-18), iii) public investment grows below expectations in the upcoming months, iv) inflation expectations continue to fall below 2%, which implies a less expansive monetary policy stance and v) PEN does not depreciate (see the full note).
An overview of the presidential vacancy process in Peru. Last week, a presidential vacancy motion was presented to Congress, which implies president Kuczynski could be forced out of office (similar to the events in Dec-17). Presenting a presidential vacancy motion in Peru requires the signature of 26 congressman. After its acceptance, the motion would pass to its first voting process in Congress in order to approve its admission. The admission requires 40% of the votes from total congressman (52 of 130). Afterwards, Congress would cite the President to uphold his defense before the final debate and voting. For this last process, the approval of the motion requires two-thirds of congressman (87 votes), which is then promulgated in the following 24 hours. Back in Dec-17, the motion did not pass as only 79 of 87 votes required were obtained. The motion would be debated between three and ten days after the order is admitted. If the vacancy motion is admitted this Thursday, the final voting session could take place between March 21st and 29th.
Main data and events to come
- On Thursday, monthly economic activity of Jan-18 will be published (Consensus: 2.0% y/y, Credicorp: 1.7% y/y).
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