Regional: a more positive outlook for Andean Economies from the IMF
July 30, 2018 (Investorideas.com Newswire) The International Monetary Fund (IMF) updated its outlook for Latin America and the Caribbean, downwardly adjusting both 2018 and 2019 GDP growth forecasts by 40 and 20bp to 1.6% and 2.6% y/y, respectively. Even though the expected dynamism for Andean Economies improved on the margin, the sizeable adjustments in the cases of Brazil and Argentina tilted the regional balance to the downside. The IMF anticipates a 0.4% and 1.5% expansion this and next year in Argentina (down from 2.0% and 3.2% forecasted in Apr-18) amid lower confidence and tighter fiscal and monetary policies after the recent FX adjustment, whereas the Brazilian economy will increase 1.8% in 2018 (down from 2.3% expected in Apr-18) due to the recent truck drivers' strike and the uncertain outcome of the upcoming presidential election.
As for the Andean Region, Chile's GDP growth forecasts were upwardly adjusted by 40 and 10bp to 3.8% and 3.4%, virtually in line with our base scenario (3.7% and 3.5%) due to higher optimism in confidence indicators which will more than offset the negative effect from higher oil prices. In the case of Colombia, the IMF upwardly adjusted the 2019 economic activity forecast by 30bp to 3.6% and still anticipates a 2.7% expansion this year, both standing above our base scenario (2.3% and 3.3%, respectively) due to higher oil prices, stronger external demand, the BanRep monetary easing cycle and the impact of the tax reform. Finally, Peru's positive outlook remained virtually unchanged (3.7% and 4.1% this year and next year compared to 3.7% and 4.0% previously) due to higher copper prices and counter-cyclical fiscal and monetary stimulus. Both figures are similar to those of our base scenario: 3.8% and 3.5%, respectively.
Chile: the BCCh kept the reference rate unchanged at 2.50% but rate hikes are coming soon
Last week's highlights
- Monetary Policy: higher conviction on rate hikes in the upcoming quarters (full report). The BCCh decided to keep unchanged the monetary policy rate at 2.50%, as broadly expected. The Board mentioned that "the reference rate will return to its neutral level within the next quarters", which even though follows the 2Q18 IPoM working assumption, also suggests a higher conviction from the Board in terms of the upcoming normalization policy approach. On its part, domestic activity has been surprising the Board on the upside, particularly in some investment-related components, in a context where shorter-term inflation expectations have been upwardly revised due to the recent FX depreciation. Thus, with just three additional monetary policy meetings on the agenda this year, we still anticipate that the BCCh will start its gradual normalization policy approach in Dec-18 (+25bp to 2.75%), while room for 3x25bp rate hikes next year seems likely (to 3.50%). However, the tone suggests that the likelihood of a scenario with a faster-than-expected normalization approach increased on the margin.
- Moody's downgraded Chile's debt rating to A1 from Aa3. The credit rating agency downgraded Chile's long-term sovereign debt rating to A1 from Aa3 and changed the outlook from negative to stable. Recall that Moody's had the highest sovereign debt rating for Chile, with S&P and Fitch standing one and two notches, respectively, below the previously-held Moody's rating (Aa3). Moody's stated that the downgrade "reflects the gradual but broad-based deterioration in Chile's credit profile", while the recent cyclical upturn in GDP growth and the fiscal measures implemented by President Piñera will "help arrest the adverse trends that had been reported by fiscal and government debt metrics", stabilizing the debt ratio at 25-28%. That said, the ratio will "not go back to the levels observed in 2010-2014".
- The FX closed at CLP 643 last week, recording a significant 2.5% w/w appreciation against the previous Friday. The FX posted a strong appreciative trend amid a higher average copper price (1.5% w/w), whereas the multilateral USD mildly appreciated (0.2% w/w). Also, Chile's 10Y CDS contracted by 7bp despite Moody's credit rating downgrade.
Main data and events to come
- On Tuesday, the INE will release the Jun-18 supply-side economic sectors figures (Credicorp: 4.5% y/y for manufacturing production), and the Apr/Jun-18 employment data (Credicorp: 7.0% for the unemployment rate).
- On Thursday, the BCCh will release the 3Q18 Business Perception Report.
- Also on Thursday, the INE will publish the Jun-18 demand-side economic sectors figures (Credicorp: 5.0% for retail sales).
Colombia: no major change in BanRep's stance this month
Last week's highlights
- President-elect Iván Duque would file a tax reform in Congress immediately after his inauguration. The new director of the Senate, Ernesto Macías of the Centro Democrático party, affirmed in an interview that the president-elect will present a tax reform as soon as August 7th, the day on which the new administration will take office. Macías did not provide further details about the reform, and Duque has not given any statement about this issue recently. However, the president-elect said several times that a comprehensive tax reform would be a priority of his administration. With this in mind, the upcoming MoF, Alberto Carrasquilla, said that the effective corporate tax rate is too high in Colombia so it should be cut further in the upcoming years. Carrasquilla pointed out that the upcoming administration is studying the appropriate approach to widen the base for the personal income tax, which would offset (at least partially) the reduction in collection coming from the lower corporate taxes (see note).
- No major change in BanRep's stance this month. The BanRep remained on hold at 4.25% in Friday's policy meeting, a decision that was unanimous and came in line with the expectations of all analysts. The statement of the Board was quite similar to those of previous meetings as the overall domestic macro picture has not changed much. Thus, the BanRep continued to highlight the accelerating economic activity, which could improve further ahead, and the upside risks to inflation. The broad expectation is that the repo rate will remain steady at 4.25% for a considerable period and that the discussion of a potential rate hike from the Board would start in 1H19 (see note).
- Setback for the labor market in Jun-18. Unemployment rates at the national and urban level deteriorated in Jun-18, reaching 9.1% (+0.4pp y/y) and 11.1% (+0.3pp y/y), respectively. The figure for the 13 main cities increased for the first time since Feb-18, while the nationwide figure rose for the fourth time this year. Both deteriorations were explained by a contraction in the employment rate stronger than the one observed in participation. Thus, job creation weakened after the recovery observed in the past three to four months, and it reached negative ground at both the national and urban level for the first time since Feb-18 (-0.7% y/y and -0.9% y/y, respectively).
- Business confidence soared in Jun-18. Commerce confidence stood at 30.7% in Jun-18, posting a monthly increase of 3.7pp and way above the 14.9% observed a year ago. Industrial confidence reached 2.4% (+1.9pp m/m; +7.8pp y/y), advancing 1pp in seasonally-adjusted terms in comparison to May-18. The improvement of both indicators was solely explained, once again, by the strong advance of expectations for the upcoming months, which is a clear sign of stronger economic activity ahead, in our view.
Main data and events to come
- On Thursday, DANE will publish Jun-18 exports (Credicorp Capital: USD 3,515mn; Bloomberg survey: USD 3,487mn).
- On Saturday, DANE will release Jul-18 inflation. We expect the m/m figure to stand at 0.13%, in line with the consensus (Bloomberg survey: 0.13%).
Peru: the IMF published the Peru's Article IV of 2018
Last week's highlights
- The IMF published the Peru's Article IV of 2018. According to the IMF, growth and job creation were subpar in 2017, but activity has picked up this year. Hence, domestic demand is expected to grow 4.5%, pushing GDP expansion to 3.7% in 2018. A key driver will be public investment, which would rise by 0.4% of GDP in 2018, and an overall fiscal impulse of 0.2% of GDP. The institution noted that private investment is also projected to grow for the first time in five years, supported by easier monetary conditions, a more favorable credit and investment climate that typically follows improvement in terms of trade, and a recovery of mining investment.
- The IMF forecasts a GDP growth above 4% in 2019, gradually declining back to its potential thereafter. A strong domestic demand (it is expected to accelerate to 4.7% in 2019), especially through higher private investment, should be a key driver in a context of gradual fiscal consolidation in 2019-20. Exports would also contribute significantly, supported by a continuing global recovery, although the current account will deteriorate somewhat given the impact of stronger import demand. In the medium term, growth is projected to fall moderately back to its potential (estimated at 4.0%) unless additional structural reforms are implemented.
- Finally, the IMF mentioned that the risks are balanced in 2018, but tilted to the downside for the medium-term: i) on the domestic front, key downside risks include further delays of public investment projects and PPPs given capacity constraints and the ongoing corruption investigations; and ii) as for the external backdrop, protectionist trade policies, a slowdown in China's growth, or a more rapid increase of international interest rates limit growth via lower exports and tighter financial conditions. However, the IMF notes that Peru has strong buffers (low public debt and a high level of international reserves) to manage potential shocks.
- Anglo American officially started the construction of the Quellaveco mine. Quellaveco is a major mining project based in Moquegua (a mining region in the south of Peru). According to the official statement, total investment would stand in the USD 5.0bn-5.3bn range (USD 1.2bn have already been invested between 2012 and Jun-18), and production is expected to start in 2022 with approximately 300k metric tons.
- Central Bank raised the limits for abroad investments for Pension Funds. The Central Bank raised the limits of abroad investments for Pension Funds from 49% in Jul-18, to 49.5% in Aug-18, and 50% in Sep-18. According to the Central Bank, in Jul-18 Pension Funds had 44.4% of their investment portfolio abroad.
Main data and events to come
- On Wednesday, the INEI will publish Jul-18 inflation (consensus: 0.36% m/m, 1.6% y/y; Credicorp: 0.30% m/m, 1.5% y/y).
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