We expect a primary deficit of 2.6% of GDP this year, compared with a 2.7% target


The federal primary fiscal deficit in September came in significantly lower than that registered one year ago. The treasury ran a primary deficit of ARS 22.9 billion. As a consequence, we estimate the 12-month rolling primary deficit at 2.6% of GDP. The nominal deficit fell to 4.9% in September. Expenditures fell 10% yoy in real terms in September (an increase of 26.5% yoy in nominal terms). A weaker peso and higher oil prices had an impact on energy subsidies (+35.4% yoy in real terms), forcing the treasury to intensify controls on other items, like capital expenditures (-15.8%), transfers to provinces (-22.4%), and payroll (-17.8%). Pensions (which are indexed to past inflation) decreased 14.8% yoy in real terms. Tax revenues decreased 7.6% in real terms in September (29.8% yoy nominal) in spite of higher export tax collection (87.8% in real terms), as new export duties became effective on that month.

The government said the target agreed upon with the IMF for the first three quarters of 2018 was met. This fiscal target for that period (ARS 264.9 billion) includes expenditures and credits executed under the priority investment program (PIP), which are items not computed in the official definition of fiscal balance. The primary deficit run by the treasury was ARS 181.2 billion, including ARS 27.9 billion in the PIP. We expect a primary deficit of 2.6% of GDP this year, compared with a 2.7% target.

The Lower Chamber will likely start the discussion of the 2019 budget on Wednesday. The government is confident that it will have the necessary votes to pass the bill this week before the IMF board approves the new stand-by arrangement on Friday. The Senate is the next stop on the road to a final approval of the budget before year-end. The government targets a zero primary balance next year, in line with commitments with the IMF. Besides the re-introduction of export taxes, the government agreed with the opposition to an increase in the tax rate on individual assets to boost resources.
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Governor of the central bank presented the monetary policy report and expressed confidence in the sustainability of the new monetary policy framework. According to Guido Sandleris, the central bank’s commitment to not finance the treasury is key to meet the target of zero expansion for the monetary base until mid-2019. In the presentation, Sandleris said the central bank will evaluate the convenience of intervening (purchasing dollars) if the exchange rate hits the lower band of the non-intervention zone. He affirmed that the starting value of the recent real exchange rate appreciation was weak, so the recent strengthening of the peso represents no concern. Finally, the governor stated that the balance-sheet of the central bank is sound. Sandleris estimated the short-term debt of the central bank (Leliqs, Lebacs and Repos) at 5% of GDP (down from a peak of 11.2% in April) and projects 7.8% of GDP by end-2019 (if the nominal interest rates remains unchanged at the current level).

We note that the central bank pledged to not allow the monetary policy rate to fall below 60% until there is more evidence of falling inflation. The yield of the 7-day peso instrument (Leliq) stands at 72% (34.4% in real terms using the expected core inflation for the next three months according to the latest central bank survey, and 15.6% using the average core inflation in last quarter).
** Full Story here.

Day Ahead: The trade balance for September will come out at 4:00 PM (SP Time). We forecast a surplus of USD 150 million (consensus: USD 150 million deficit). If our forecast is correct, the rolling 12-month trade deficit will fall to USD 10.2 billion.


CAGED formal job creation came in at +137k in September, above our call (+77k) and the market’s (+82k). According to our seasonal adjustment, there was a 66k formal jobs creation – the highest level since February, 2014 – taking the 3-month moving average to +47k (from +19k). The sectorial breakdown shows gains in all sectors, especially in the services sector.

According to the latest MDA poll, Jair Bolsonaro (PSL) leads the presidential race with 57% of the valid votes (49% of total votes), while Fernando Haddad (PT) has 43% (37% of total votes). In the previous MDA poll, before the first round, Jair Bolsonaro had 54% of the valid votes (45% of total votes) and Fernando Haddad 46% (39%). Blanks and nulls dropped to 11% (from 13% in the previous MDA poll), and undecided increased to 4% (from 3%). The poll was conducted between October 20 and 21. A new MDA poll is scheduled to be released on Saturday.

In another poll, conducted by Real Time Big Data, Jair Bolsonaro has 58% of the valid votes (52% of total votes), while Fernando Haddad (PT) has 42% (37% of total votes). In the previous Real Time Big Data poll, Jair Bolsonaro had 60% (52% of total votes) and Fernando Haddad 40% (35%). Blank and nulls dropped to 7% (from 8% in the previous Real Time Big Data poll) and undecided to 4% (from 5%). Jair Bolsonaro is rejected by 43% (from 45% in the previous poll) and Fernando Haddad by 52% (from 54%). The survey was conducted between October 19 and 20. A new Real Time Big Data poll is expected to be released on Thursday.

The BCB released its weekly survey with market participants. According to the Focus survey, the IPCA inflation expectations increased 1 bp for 2018 and 2019, to 4.44% and 4.22%, respectively, and remained stable at 4.00% for 2020. Median forecasts for the exchange rate declined to BRL 3.75/USD for 2018 (from BRL 3.81/USD). For 2019 and 2020, the exchange rate expectations remained flat at BRL 3.80 /USD and BRL 3.75/USD, respectively. The year-end Selic rate remained stable for 2018 (6.5%) and 2019 (8%). For 2020 the Selic rate expectations declined to 8.25% (from 8.38%). The median GDP growth expectations did not change for 2018 (at 1.34%), oscillated to 2.49% for 2019 (from 2.50%), and remained stable at 2.50% for 2020.

According to FGV’s industry survey preview, business confidence in the industrial sector fell 1.3p.p. in October to 94.8. Despite the positive results observed in August (both PM-Itaú and IBC-BR had monthly gains), industrial confidence is posting consecutive losses: its 6.8% lower than March, 2018,the most recent peak. The breakdown shows monthly declines in both current conditions (-1.6 p.p.) and expectations (-1.0 p.p.). The preview of the capacity utilization (NUCI) declined 0.8pp to 76.1, offsetting September’s gain. The index remains well below the neutral level (81.5, according to our estimates). The final survey will be released on October 29.

FX and Capital Markets: BRL outperforms its peer currencies. Notwithstanding some relief later in the week, the international background pressured FX markets. Concerns with higher interest rates in the U.S. and tense Italian politics fueled risk aversion, hurting emerging market assets. The Brazilian real strengthened to as much as 3.67 per dollar but closed at 3.71 on Friday. Still, the currency appreciated 1.9% during the week and outperformed its peers. Last week, the monetary authority did not offer additional FX swap contracts or carry out line auctions, and rather just rolled over of contracts expiring in November. Its stock of FX swaps now stands at $69 billion.
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Upcoming nationwide polls (as informed by the Superior Electoral Court): Ibope (October 23 and 27), Datafolha (October 25 and 27), Real Time Big Data (October 25 and 27), Paraná Pesquisas (October 26) and MDA (October 27).

Day Ahead: An Ibope nationwide poll is expected to be released tonight, in addition, a series of Ibope regional polls are also expected to be released, for the states of São Paulo, Minas Gerais, Rio Grande do Sul, Rio de Janeiro and Distrito Federal. October’s IPCA-15 inflation will be released at 9:00 AM (SP Time). We forecast a 0.66% monthly increase (consensus: 0.64%), with the 12-month reading increasing to 4.61% (consensus: 4.59%).


The coincident activity indicator (ISE) in August came in below expectations and moderated at the margin. The original series grew 2.3% year-over-year closer to Bloomberg market consensus 2.5% than our 3.0% estimate (2.0% in July, revised from 1.9%), meaning growth in the quarter ending in August was 2.2% year-over-year (2.8% in 2Q18). Once adjusted for seasonal and calendar effects, activity remained broadly stable from July at 2.1% year-over-year. Growth in the quarter ending in August came in at 2.1%, while the rolling 12-month growth rate was 2.0%, stable since March (2.1% in 2Q18). At the margin, activity decelerated to -1.1% qoq/saar (+0.5% in 2Q18) as the upcoming tax change proposal has likely affected private sentiment. With inflation under control and the activity recovery displaying mixed signals, we expect the central bank to hold the policy rate at a slightly expansionary 4.25% at its meeting on Friday.


Day Ahead: The statistics institute (INEGI) will publish August’s monthly GDP proxy IGAE at 10:00 AM (SP Time), which we expect to grow 1.8% year-over-year (consensus: 1.9% year-over-year).

All LatAm

Weekly Fixed Income LatAm Strategy: Keep receiving in Brazil, Mexican CPI on focus. Our Brazil’s DI Jan 21 receiver currently posts a 53bps gain, and we are keeping it, despite acknowledging that there may be less upside after the strong rally of recent weeksThe election result seems to be very much priced in, as polls have been consistent, but the market still has strong discussions about the economic team and the reform agenda, including doubts about governability. In Mexico, rates continued to widen last week, as Banxico confirmed the hawkish tone in the minutes of the last meeting. The local yield curve is pricing in around 25bps in hikes in the next 3 months. Monetary policy report: Central bank looks comfortable with the first weeks of the new monetary framework base-case is that Banxico will not hike, so we are keeping the position. If inflation comes in lower than expected this week, we would expect rates to tighten.

Fuente: Itaú

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