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Andean Macro Weekly Report - Chile: economic activity and inflation surprising on the upside


February 12, 2018 ( Newswire) Last week's highlights: Non-mining sectors gaining traction. The BCCh announced that Dec-17 Imacec increased by 2.6% y/y, slightly above market consensus and our own forecast. On its part, the non-mining Imacec continued with a higher dynamism amid favorable prints in demand-related industries (commerce and services), while the mining industry reaffirmed its negative m/m trend. Accordingly, we decided to add an upward bias to our 2018 GDP growth forecast of 3.2% due to the recent return to positive ground of both consumer and business confidence indicators. For more details, please refer to: Chile Flash – Non-mining sectors gaining traction, Feb-05.

A sizeable inflation surprise led by an unusual foodstuff advance. The INE released the Jan-18 CPI, which came in at 0.5%, almost doubling market expectations. In contrast to the last figure, the main contribution comes from the volatile components, mainly foodstuff. The diffusion index for the first month of the year reached its highest level since 2015, questioning the absence of broad inflationary pressures. Accordingly, we think that the Jan-18 CPI and Dec-17 non-mining Imacec figures should provide additional support to those Board members that continue to expect a stable reference rate, as stated in the last monetary policy meeting (see full note)

Overall optimism after the Presidential election. The BCCh released the Feb-18 Business Perception Report (IPN), in which most participants continue to expect a higher dynamism for the Chilean economy throughout 2018. Moreover, although the economic activity has not materially changed so far, after the Presidential election outcome, different sectors reported a higher dynamism. Importantly, investment seems set to achieve its first y/y advance in the last five years, as respondents mentioned that they have already begun – or will soon begin – moving forward on some new projects. That said, higher GDP growth rates must first be seen in order to execute capacity expansion initiatives. All this couples with our base scenario for a 2018 GDP growth of 3.2% with an upward bias (see full note).

The FX closed at CLP 604 last week, recording a 0.1% depreciation against the previous Friday. This week the FX posted a mixed trend, with the copper price decreasing by 4.2% w/w, while the multilateral USD appreciated by 1.4% w/w. Also, Chile 10Y CDS contracted by 1.2bp.

Main data and events to come

  • Today, the BCCh will publish the Feb-18 Economist Survey
  • On Wednesday, the BCCh will release the Feb-18 Financial Traders Survey
  • On Friday, the BCCh will publish de Feb-18 monetary policy minutes

Colombia: as expected, annual inflation posted a strong decrease in Jan-18, standing within the target range

Last week's highlights

Inflation rose by 0.63% m/m in Jan-18, slightly below both market consensus and our own forecast (both at 0.68%), causing the y/y figure to fall by 41bp to 3.68%. Thus, inflation stood within the BanRep's target range for the first time since Sep-17. Importantly, non-food inflation increased 0.39% m/m, driving the annual result to 4.61% from 5.0% in Dec-17. Likewise, ex-food and regulated inflation decreased by 34bp to 4.42%, reaching the lowest level since Jun-15. Accordingly, inflation strongly slowed down in Jan-18, as expected, the result of a favorable statistical base due to the VAT hike established a year ago, stronger COP and lower indexation mechanisms amid both a lower observed inflation in 2017 and a more moderate increase in the minimum wage in 2018 compared to previous years. We believe that these factors will remain in place during the upcoming months and that a wider output gap will also play a key role as the economy will accumulate four years of below-potential growth (full note).

Some BanRep Board members commented in the media in recent days. Governor Echavarría emphasized the phrase included in the last policy statement: “with the available information, the Board considers that the easing cycle has been completed”. He said that this is not a straitjacket and that the Board could reassess its stance in the future. This opens the door for additional rate cuts ahead, especially if inflation comes in below that expected by the BanRep in 1H18. As for economic activity, Echavarría stated that the worst was in the past, as GDP growth would accelerate to 2.7% in 2018 and to its potential of 3.3%-3.5% in 2019. Director Meisel said that he also expects an improvement in economic activity this year, pushed by the agricultural sector and non-traditional exports, while inflation should close 2018 around 3%. That said, the Director stated that the BanRep should remain on hold through 1H18, at the very least.

Divergent performance of exports in Dec-17. Sales abroad increased 13.6% y/y during Dec-17, accelerating from the +7.8% observed in Nov-17, while accumulating 14 consecutive months in positive ground. That said, non-traditional exports fell for the second straight month, doing so at the strongest pace since Jul-16 (-11.1% y/y), amid a 13.8% drop of the agricultural group (ex-coffee). Conversely, traditional exports soared 29% y/y, following the doubling of coal sales (+94%) and the strong increase in oil and derivatives exports (25.5%). With these results, overall exports rose 19% in 2017, after falling by -11.8% in 2016, -34.3% in 2015, and -6.7% in 2014, thus completing the traditional J-curve following the COP depreciation that started in 2014.

Main data and events to come

  • On Wednesday, DANE will release the figures of retail sales and industrial production for Dec-17. We expect retail sales to fall 1.3% y/y, while industrial production would have dropped 0.5% y/y (consensus: -1.5% and -1.7%, respectively).
  • On Thursday, DANE will release 4Q17 GDP data on the supply side. We expect activity to expand by 2% y/y (consensus: 1.9%).

Peru: we expect the Central Bank to cut the monetary policy rate in Mar-18

Last week's highlights

The Central Bank held its policy rate at 3.00%. The Central Bank of Peru (BCRP) kept its monetary policy rate unchanged at 3.00% in its second meeting of the year. The decision was in line with our call and market expectations. The Board's decision considered that inflation continued to slowdown and stood within the lower-bound of the target range (2.0% +/- 1pp.) for the third consecutive month. The result is mainly explained by the reversal of the supply-side shock, as well as economic activity below its potential. It is expected that inflation will continue to slow down in 1Q18 and thereafter to converge towards 2.0%. Moreover, the official statement noted that 12-months-ahead inflation expectations continued to fall (from 2.30% in Dec-17 to 2.23% in Jan-18). Regarding economic activity, the statement remarked that economic activity remained below its potential. Finally, the statement highlighted that global economic activity continues to show favorable indicators, with positive signs of raw materials and capital flows to emerging markets, although with increasing uncertainty in the international financial markets. It should be noted that on the post-meeting press conference, Jorge Estrella, Chief Economist of the BCRP, pointed that the current level of monetary stimulus is the adequate for the current scenario of the economy.

We expect the BCRP to lower its reference rate 25bps in March's meeting to 2.75% (-150bps since Apr-17). The decision would take place against a backdrop of headline inflation falling below the target range (1-3%) temporarily in March. Moreover, our estimates suggest economic activity will continue to grow below its potential in 1Q18, which would enable the BCRP to apply further monetary stimulus. Considering the downside risks for economic activity, we cannot rule out additional rate cuts from the Central Bank (see full note).

PEN loses ground in a week of international volatility. Global financial markets registered considerable volatility last week, in particular stock markets. Given this backdrop, the FX rate closed the week at PEN 3.275 (-1.7% w/w, -1.2% YTD), the highest print since the local political stress scenario of Presidential Vacancy in mid Dec-17. The PEN is the only currency in the region which has depreciated YTD. The BCRP intervened in the FX market through PEN 1,657 millions of BCRP Re-adjustable Certificates of Deposits and PEN 500 million of FX swaps to smooth the depreciation pressures on the local currency.

Main data and events to come

  • On Thursday, economic activity data of Dec-17 will be published (Consensus: 2.4% y/y, Credicorp: 1.8% y/y).

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