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Chile: Facing a perfect storm marked by a tough external backdrop, the COVID-19 and the social crisis

 

April 7, 2020 (Investorideas.com Newswire) Last week's highlights: Chile: Facing a perfect storm marked by a tough external backdrop, the COVID-19 and the social crisis (see our Quarterly Andean Macro Report). In addition to the impact from the global recession, lower copper prices and the coronavirus, the Chilean economy is also facing the effects derived from the domestic social crisis. This should mean a significant hit to activity, particularly through a strong reduction of investment. Its high degree of trade openness will play an important role too. As a result, we are cutting our 2020 GDP growth estimate from 1.2% to -3.0%. A large fiscal plan to face the sanitary emergency for 4.7% of GDP, together with the measures previously adopted to face the social crisis, will prevent activity and social conditions from worsening further. Also, the BCCh has cut rates by 125bps to 0.5% and adopted liquidity measures to guarantee a proper functioning of the financial system. Overall, we expect authorities to continue acting as required. Fiscal accounts will keep deteriorating with public debt reaching, as soon as this year, the levels previously estimated for 2024 amid the need of additional expenditures. The good news is that Chile has a good starting point to face the current scenario.

The BCCh cut rates to 0.5%, accumulating a reduction of 125bps in just 15 days (see report). In its ordinary meeting held last week, the Board of the Central Bank of Chile (BCCh) cut its reference rate by 50bps to 0.5% after cutting it by 75bps in an extraordinary meeting on March 16th, accumulating a reduction of 125bps in the last two weeks. The decision was in line with the market consensus and our own expectation and was based on the sharp deterioration of the economic outlook amid the expected global recession and the COVID-19 emergency; this implies that the medium-term inflationary pressures have fallen significantly. Thus, importantly, the BCCh affirmed that the reference rate has reached its “technical low” and that it will remain at this level for an extended period to guarantee the convergence of inflation to the 3% target. In addition, the monetary authority decided to widen the current banking bonds purchasing program by USD 4bn, meaning that the remaining amount now stands at USD 5.5bn. We do not rule out further measures aimed at guaranteeing the proper functioning of the financial system and the efficient transmission of monetary policy as required.

Main data and events to come

On Wednesday, the INE will publish the Mar-20 inflation figure (Credicorp: 0.4% m/m)

Colombia: the BanRep cut the repo rate by 50bp to 3.75% amid the dual shock for the Colombian economy; we expect more to come

Last week's highlights

The economy will contract in 2020 for the second time in the last 90 years (see our Quarterly Andean Macro Report). After starting this year at a good pace, the scenario for the economy has materially changed in recent weeks as it is facing several shocks simultaneously: lower foreign demand, lower oil prices and a partial paralysis of domestic activity due to the isolation measures adopted by local authorities. As a result, we are cutting our 2020 GDP growth projection from 3.2% to -1.7%. We expect both the BanRep and the government to continue taking proper measures to avoid a further deterioration of economic and social conditions. This will imply that the reference rate will reach 2.75% in the next months (at least), that additional liquidity measures from the BanRep are likely, and that the fiscal deficit could exceed our current 4.5% of GDP estimate. Positively, the MoF has announced the intention to use available resources in saving funds to avoid a worsening of debt ratios. However, the pressures on both fiscal and external accounts will remain high.

Inflation came in slightly above our estimate in Mar-20 amid quarantine-related pressures (see full note). The CPI rose 0.57% m/m in Mar-20, somewhat above our call of 0.50% m/m and the market consensus forecast (BanRep’s survey: 0.45%). Thus, annual inflation accelerated by 14bp to 3.86%, the highest level since Dec-17, as temporal demand-side pressures kicked in fast. Specifically, foodstuffs explained 60% of the monthly inflation figure, reaching 2.21% m/m, pushed by the demand of rushed consumers and some disrupted supply chains in the early days of the national quarantine. The other bulk of inflation pressures came from the housing group amid a strong increase of electricity tariffs (1.74% m/m). There were no significant FX pass-through this month as tradable and durable goods inflation remained broadly stable.

Another strong hit to the government: Fitch joins S&P at BBB-, also leaving a negative outlook (see full note). Following the last week’s move from S&P on the sovereign outlook (to negative on its BBB- rating), Fitch announced last week that it cut Colombia’s credit rating by one notch to BBB-, while it also kept a negative outlook, which was not expected, in our view. Thus, the country now faces direct threats of losing the Investment Grade from two agencies. While in its statement S&P seemed more focused on waiting for the next government’s steps to face the ongoing dual shock on the economy (global recession + COVID-19) before deciding on a rating action, Fitch centered its speech on the increasing weaknesses on growth, the fiscal outlook and, more importantly, fiscal policy credibility, setting a more negative perception, in our opinion.

Main data and events to come

No relevant data will be published this week.

Peru: strong GDP contraction with uncertainty on the speed of recovery

Last week's highlights

GDP could fall roughly 4% this year (see our Quarterly Andean Macro Report). The Peruvian economy could fall 4% this year, the first contraction since 1998. Private consumption would fall around 2% this year and private investment around 10%. Our view takes into account the following assumptions:

A global recession (of -1.1% at least, compared to our almost +3% expansion estimate 3 months ago) and a reduction in Peru’s terms of trade (-3.7%; copper prices have fallen ~23% YTD). The contraction of the global economy would be larger than in 2009 (-0.2%). We think the deterioration of the international environment would subtract 4pp from Peruvian GDP growth compared to our +3% growth estimate back in Dec-19.

The needed 28 calendar day lockdown (from March 16th to April 12th) is enough to contain the national sanitary emergency. Moreover, after the lockdown, certain mobility restrictions remain in place and a gradual return to normality occurs. Another month under lockdown (except for basic need activities) would subtract other 2.5pp from growth this year.

Households and firms remain with a cautious position and cost-adjustments occur throughout the rest of the year.

Financial health from firms and households is affected but in a mild manner (no significant defaults) due to the economic policy responses.

The speed of recovery is still uncertain. Our estimates suggest GDP would decline around 6% in y/y during 1H20, due to the needed measures to contain COVID-19 (both locally and abroad), and the subsequent effects after lockdown is over. That being said, the sped of economic recovery is still uncertain. We believe that the recovery in 2H20 will be gradual, and the key factors to monitor are: (i) a lockdown extension and the subsequent restrictions, (ii) the financial health of households and firms, (iii) the effectiveness of the adopted economic policy measures (announced measures of economic policy response total12% of GDP), and (iv) the need to avoid populist measures that undermine macroeconomic stability which has been built in the past 30 years (i.e. 25% Pension Fund withdrawal by Congress). In an optimistic scenario, the GDP contraction would come below our estimates in 2020, and GDP could rebound up to 6% in 2021 (electoral year).

Even with strong fundamentals one can not escape the global hit. The Peruvian economy has one of the strongest macroeconomic fundamentals in emerging markets: high international reserves (29% of GDP), a low current account deficit 1.5% of GDP), low public debt (27% of GDP), and large fiscal savings (12% of GDP). Nonetheless, it is clear that Peru will not be able to escape from the effects of a severe deterioration of the international environment and the COVID-19 outbreak. Importantly, almost 60% of GDP volatility is explained by external factors.

Main data and events to come

No relevant data will be published this week.

For charts, tables and the full report, Download File

Regards,

Credicorp Capital

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