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Andean Macro Weekly Report - Chile: downgrading our 2018-end CPI forecast; we expect the BCCh to remain on hold throughout this year

 

April 23, 2018 (Investorideas.com Newswire) Last week's highlights: Piñera's pension reform is evaluating incentives to postpone the retirement age. According to El Pulso newspaper, the government is evaluating whether to extend the basic solidarity pillar, which provides ~USD 175 per month to people that do not receive any regular pension after reaching 65 years of age for men or 60 years of age for women, to those workers who decide to keep a job despite being eligible for the benefit (currently, people who stay in the labor market do not receive this monthly contribution). Also, the government is evaluating creating other incentives to postpone the retirement age, such as not charging any fee on older contributors.

  • Piñera expanded free education for advanced degree technical schools. Following through on his campaign promise, President Piñera announced that advanced degree technical education will be free for 70% of the population from 2019 onwards. This includes vocational schools and technical training centers; it is expected to cover 90% of the population eventually, conditional on economic growth. The measure will benefit 13,000 additional students and will have a fiscal cost of ~USD 32mn in 2019.
  • Downgrading our 2018-end CPI forecast but recognizing mid-term upside risks for inflation (full report). In our view, although the CLP appreciation has triggered the downward trend in the headline CPI, we see limited room for an additional negative contribution from current FX levels. For their part, current oil prices and the expectation of higher foodstuff prices in 2H18 limit the downside risk for the headline measure. In addition, we expect the output gap to be closed by 2019-end, which represents a longer-term upside risk for non-tradable/services inflation. All that said, considering the last couple of downward inflationary surprises and the recent downturn in nominal wages, we are downwardly adjusting the 2018-end CPI forecast to 2.5% (down from 2.8% previously). Also, we believe that the balance of risks for the CPI in the mid-term is slightly tilted to the upside. Thus, considering that inflation will take longer than previously expected to converge towards the 3% threshold, we assume that the BCCh will prefer to wait and see, postponing the gradual normalization of monetary policy (rate hikes) until 1Q19. Therefore, we expect an unchanged reference rate (2.50%) throughout 2018.
  • The FX closed at CLP 596 last week, recording a 0.3% w/w depreciation against the previous Friday. Last week, the FX posted a relatively stable trend amid a significant copper price advance (+2.1% w/w), while the multilateral USD appreciated by 0.5% w/w. Importantly, Chile's 10Y CDS expanded by 2.0bp.

Main data and events to come

  • On Friday the BCCh will released the Apr-18 Financial trader's survey

Colombia: retail sales and industrial production are being boosted by a favorable statistical base, though they came in below estimates in Feb-18

Last week's highlights

  • Activity leading indicators continued to post relatively high annual growth rates in Feb-18, though they came in below expectations (see full note). Specifically, retail sales rose 5.0% y/y in Feb-18, standing below our forecast (9.5%), while industrial production increased 1.5% y/y also below our estimate (2.8%). While these figures suggest at first glance that economic activity entered 2018 with strong momentum, it should be noted that a very favorable statistical base is playing a key role, as in early-2017 the 3pp VAT hike came into effect. In fact, the monthly growth of the seasonally-adjusted series of both samples came in weak, which signals a still low dynamism of overall economic activity in early-2018, considering the uncertainty surrounding the presidential elections. Finally, the performance of the leading indicators in Feb-18 supports the call of a 25bp rate cut by BanRep in this week's meeting, in our view.
  • MoF Cárdenas discussed several matters in a Bloomberg interview last week. While attending the Spring Meetings of the IMF in Washington, MoF Cárdenas was interviewed by Bloomberg. The hot topic of the interview was the recent trend of the COP, which has been the currency that has strengthened the most globally this year. Specifically, Cárdenas mentioned that the recent appreciation will surely be discussed in the BanRep meeting, though he does not seem eager to advocate for an FX intervention as he strongly defended the dynamics of a free-floating regime. He also emphasized that the COP is still weaker than it was 4 years ago, despite the recent trend. As for monetary policy, he does seem keen on pushing for a 50bp rate cut next week, though the broad message was there is enough room for the BanRep to restart the easing cycle.
  • Conservative party adhered to Vargas Lleras' presidential campaign. Last week, the Conservative party decided to adhere to Vargas Lleras´s presidential campaign rather than Ivan Duque's. This fact is relevant as Martha Lucía Ramírez, Duque's vice-presidential running mate, is a member of the Conservative party. The Conservative party's backing of Vargas Lleras supports our view that he remains a competitive candidate despite the outcome of recent polls. We think that he has strong political capital, with his party (Cambio Radical) obtaining a significant increase in seats in both chambers in the Congressional elections. Also, Cambio Radical currently has a strong presence in regional and local governments. These factors may be key as analysts believe that the political machinery plays an important role in presidential elections. Finally, it is worth noting that Vargas Lleras also received the support of the La U party a few days ago. In the past Congressional elections, the Conservative, Cambio Radical and La U parties obtained over 6mn combined votes.

Main data and events to come

  • In 1Q18, the annualized fiscal deficit represented 3.1% of GDP, the same level as 2017. Fiscal revenues represented 18.2% of GDP (2017: 18.0%), increasing for the second consecutive quarter. In contrast, the central government's non-financial expenditure remained stable at 20.0% of GDP.
  • Government has hinted at initiatives to bolster fiscal revenues. Fiscal revenues have been recovering since mid-2017 in response to the improvement in terms of trade; our estimates suggest that terms of trade reached their 7th consecutive quarter of expansion in March. In real terms, in 1Q18, fiscal revenues increased 7.2% y/y (4Q17: 7.9%), driven by the increase in tax revenues of 13.5% y/y (4Q17: 10.0%). Hence, in the last 12 months up to March, VAT revenues have increased 3.1% y/y (1Q17: -1.3%), which is consistent with the (still feeble) recovery of economic activity. It should be noted that Clearing Tax revenues increased 43.3% y/y in March mainly due to profits from mining firms. Despite the recovery of fiscal revenues, 18.2% of GDP is still among the lowest levels for emerging markets with investment grades. Hence, the government has hinted at initiatives to bolster fiscal revenues such as:
    • Revision of tax exemptions and other tax benefits. According to the national tax and customs agency (SUNAT, by its Spanish initials), these represent slightly above 2.0% of GDP.
    • The implementation of a ruling to fight tax evasion (it was suspended in 2014 until the MoF established a ruling).
    • Possible changes to the excise tax with the objective of collecting PEN 2,000 million.
  • Optimizing public spending is also a priority. The evolution of public spending has been led mainly by the current expenditures component. In real terms, in 1Q18, current expenditures increased 9.2% y/y (4Q17: 12.0%); the wages and salaries rubric increased 11.4% y/y (4Q17: 9.7%), the highest in 13 quarters, while spending on goods and services increased 5.6% y/y (4Q17: 12.5%). Public investment grew 14.0% y/y (4Q17: 7.6%) but continues to represent only 4.0% of GDP compared to the peak of 5.6% at end-2013. In this context, the MoF has announced its intention to cut current expenditure on consulting, recruitment and others for PEN 10,000 million (these have doubled in the past 10 years) in order to carry out more public investment. It should be noted that public investment in Apr-18 will have a positive base effect due to the contraction of 21% y/y in the same month last year.

  • No economic data will be published this week

For charts, tables and the full report, see the pdf file


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