Paraguay: Central bank leaves the monetary policy rate unchanged

The central bank left the monetary policy rate unchanged in September, at 5.25%, after a rate cut in August.

• The central bank left the monetary policy rate unchanged in September, at 5.25%, after a rate cut in August. The central bank argued that the economy does not need additional monetary stimulus, for now. We do not expect further changes in the monetary policy rate for the remainder of the year. 

• Activity picked up in July due to a rebound in construction and improved performance in manufacturing, trade and some services. Our YE17 GDP growth forecast remains at 4.5%.

• The current account balance posted a deficit in 2Q17, reflecting the trade deficit in goods and services. The strong growth in imports led us to adjust our current YE17 account balance forecast to -1.5% of GDP, down from -0.5% of GDP in our previous scenario.

Policy rate is left unchanged

Paraguay’s central bank (BCP) left the monetary policy rate unchanged at 5.25% at its September meeting. The decision, which followed a 25-bp rate cut at the previous meeting, was expected by us and by the market. In the statement accompanying the decision, the committee noted that global activity indicators are developing favorably, with slight improvements at the margin across the LatAm region. On the domestic front, the BCP mentioned that inflation is in line with the target, while inflation expectations remain anchored. The BCP highlighted the slowdown of the economy’s growth rate. In the minutes of the meeting, committee members agreed that the economy does not need an additional monetary stimulus, for now. We do not expect further rate cuts for the remainder of the year, although we still expect the policy rate to reach 5% by the end of 2018, which would require one additional 25-bp rate cut next year.

Inflation remains near the BCP target (4%). Consumer prices rose by 0.3% in September, slightly more than the market expected (+0.2%) according to the latest survey by the central bank. Consequently, annual inflation rose to 4.2%, from 4% in August. The September increase in prices was due to higher prices for meat and meat substitutes and price increases for cereals and byproducts, mainly in baked goods. Core inflation, the main measure used by the BCP to set its monetary policy, also rose by 0.3% in September, and the annual reading remained at 3.1%. Core inflation has remained below the target since May 2016. According to the latest BCP survey, inflation expectations are anchored at 4% for both 2017 and 2018. We maintain our forecast for 4% inflation in both 2017 and 2018.

The PYG remained stable in September. The exchange rate closed at 5,670 PYG/USD. The currency also maintained parity with the Brazilian real, for a year-to-date cumulative depreciation of 1.4% due to the strength of the Brazilian currency. The BCP kept the daily limit of interventions at USD 5 million a day to offset net purchases by the ministry of finance. The BCP also reserves the right to intervene in fluctuations that are not related to fundamentals. We maintain our YE17 and YE18 exchange-rate forecasts of 5,700 PYG/USD and 5,900 PYG/USD, respectively, which are slightly below market expectations as recorded in the BCP survey (5,750 and 5,850, respectively).

Activity rebounds in July

Activity recovered in 3Q17 after a weak 2Q17. According to the IMAEP index, activity grew by 3.4% yoy in July, following a 0.1% contraction in June. In seasonally adjusted terms, activity grew by 1.8% mom and 1.2% qoq/saar. Excluding agriculture and binational hydroelectric power, the IMAEP registered a 5.9% yoy increase (+3.0% qoq/saar) in July. The economy grew by 4.0% in the first seven months of the year.

Business sales rose in July. According to the business sales estimator, sales grew by 9.3% yoy, driven by sales of cars (30.9% yoy), household appliances (21.5% yoy), construction materials (15.2% yoy) and fuels (15.1% yoy).

Our YE17 GDP growth forecast remains at 4.5%. Our forecast is above both the 4.2% projected by the BCP and the market’s 4% forecast. We are also leaving our 2018 GDP growth forecast unchanged, at 3.5%.

Unemployment stays high in urban areas, despite solid growth. The unemployment rate in Asunción and the urban areas of the Central department was 8.9% in 2Q17, practically unchanged from the same quarter of last year. The activity rate rose by 0.4% in the same period, while the employment rate remained unchanged. We have slightly increased our YE17 unemployment rate forecast, to 7.5% from 7%.

External accounts worsen

An increase in the trade deficit partly offset a current account surplus in 2Q17. The current account posted a USD 324 million deficit in 2Q17, down from a surplus of USD 477 million in the same quarter of 2016. As a result, the last-12-month current account balance plunged to a deficit of 1.2% of GDP in 2Q17 from a surplus of 1.6% of GDP in 1Q17. The drop was due to the lower trade balance in 2Q17 (USD 42 million deficit in 2Q17, down from a USD 712 surplus million a year ago). The services and revenues accounts posted deficits of USD 142 million and USD 348 million, respectively, deteriorating when compared with the same quarter of last year. Transfers (including remittances) remained solid, coming in at USD 208 million in 2Q17 (USD 189 million in 2Q16). The current account deficit was financed by direct investment (USD 128 million) and financial investment (USD 103 million). Net errors and omissions recorded revenues of USD 240 million. As a result, international reserves increased by USD 200 million in 2Q17, to USD 8.0 billion.

Strong domestic demand leads to solid growth in imports. In the first nine months of 2017, the total trade surplus was USD 749 million, down from USD 1.6 billion in the same period of last year. Imports grew by 19.2% yoy between January and September (USD 8.4 billion). The increase was broad-based, led by purchases of capital goods (+26% yoy) and imports of consumer goods (+24% yoy) and intermediate goods (+19% yoy). Total exports grew by 5.6% yoy, led by re-exports (+35.9% yoy, chiefly destined for Brazil), which more than offset the drop in recorded exports (-2.2% yoy). The last-12-month trade surplus stood at USD 500 million in September, compared with USD 1.4 billion in 2016. We now expect a trade surplus of USD 500 million this year (down from our previous forecast of USD 700 million). Accordingly, we have adjusted our 2017 current account balance forecast to -1.5% of GDP, down from -0.5% previously.

The fiscal deficit is in line with the target

The last-12-month fiscal deficit stood at 1.4% of GDP in August, marginally below the target set by the Fiscal Responsibility Law (-1.5% of GDP). Total revenues grew by 3.1% yoy, boosted by higher tax revenues (17.1% yoy), which were partly offset by lower royalties from Itaipu (-16.1% yoy). Primary expenditure (excluding interest) rose by 15.2% yoy, marking an acceleration from previous months. Higher expenditure on social benefits, capital expenditure, goods, services and salaries stood out in August. We maintain our forecast for fiscal deficits of 1.5% of GDP both this year and next, in line with the target set in the Fiscal Responsibility Law.

Fuente: ITAU BBA

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