A more challenging fiscal deficit target in Argentina – At current real exchange rate levels, the net public debt will likely end this year at 56% of GDP.

The treasury announced measures to deliver a balanced primary budget in 2019. The treasury will target a primary fiscal deficit of 0% of GDP in 2019 (down from an expected deficit of 2.6% of GDP for this year and the original target of 1.3% for 2019). The target for 2020 is a surplus of 1% of GDP.

To generate resources equivalent to 2.6% of GDP, the government announced a series of measures in revenues and expenses. The treasury will introduce a temporary export duty on all exports, generating resources equal to 1% of GDP (the tax rate on soy exports was cut to 18%). The government also plans to postpone the reduction in payroll taxes scheduled for 2019 (0.2% of GDP). Regarding expenses, the treasury will continue to cut discretionary expenditures (public works, utility subsidies, transfers to provinces and other current expenditures) equivalent to 1.6% of GDP, to offset the automatic 0.3% increase in pensions due to the indexation formula.

A burden-sharing agreement between the federal government and provinces will play a key role in making the necessary fiscal adjustments for 2019. While the opposition and the government coincide in the need for the adjustment, a final accord has yet to be reached. The Province of Buenos Aires – a key political ally of the federal government – will assume responsibility for utility tariffs and subsidies (particularly electricity and urban transportation), which are currently being managed by the federal government.

The strategy is not risk-free given the negative correlation between adjustments and the government’s popularity in an election year. The fact that approximately 90% of the net public debt is dollarized, when the market is concerned about debt service, means that the weaker currency does little to improve the chances of market stabilization. In fact, at current real exchange rate levels, the net public debt will likely end this year at 56% of GDP.

Day Ahead: The central bank will release its monthly expectations survey. We expect a further deterioration in inflation expectations due to the recent sharp depreciation of the peso against the dollar. Manufacturing and construction data for July will see the light at 4:00 PM (SP Time). We expect to see another drop in manufacturing.


The trade surplus reached USD 3.8 billion in August, below our estimate (USD 4.1 billion) and market consensus (USD 4.0 billion). However, exports and imports caused surprises, due to transactions involving oil-drilling rigs. The trade surplus over 12 months shrank to USD 57 billion, while the seasonally-adjusted annualized quarterly moving average was virtually stable at USD 46 billion. Exports totaled USD 22.6 billion, increasing 15.8% yoy, adjusted for the number of working days while imports totaled USD 18.8 billion and advanced 35.3% yoy. August figures showed moderation in the trade surplus at the margin, in line with our expectation of smaller trade surpluses in 2H18, as imports are lifted by somewhat of a rebound in economic activity.
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According to Fenabrave, vehicle sales reached 249k in August, a 3.2% increase in seasonally adjusted monthly terms (our seasonal adjustment). In yoy terms, sales increased 14.8%, a slight slowdown compared to July (17.7%). The breakdown shows a 3.2% increase in “passenger cars + light vehicles”, and a 1.1% gain in “trucks + buses”. Our forecast for August auto production (Anfavea, to be released September 6th) is 280k (7.4% yoy, 7.2% mom/sa).

The BCB released its weekly survey with market participants. According to the Focus survey, median GDP growth expectations declined to 1.44% for 2018 (from 1.47%) and did not change for 2019 and 2020 (both at 2.50%). Median forecasts for the exchange rate increased to BRL 3.80/USD for 2018 (from 3.75) and remained flat at BRL 3.70/USD for 2019 and virtually stable at BRL 3.67/USD for 2020 (from 3.68). IPCA inflation expectations declined 1 bp for 2018 and 2019, to 4.16% and 4.11%, respectively. For 2020, inflation expectations remained flat at 4.00%. The year-end Selic rate remained stable for the three years horizon (2018-2020): 6.50% for 2018 and 8.00% for 2019 and 2020.

Day Ahead: July’s industrial production will be released at 9:00 AM (SP Time). We expect a 2.1% mom/sa decrease, which translates to a 1.2% increase in year over year terms. In addition, an Ibope poll is expected to be released today.


High frequency activity data shows both investment and private consumption related activity was notably weak in July. Last week, industrial production indicators surprised to the downside. Yesterday’s commercial activity numbers also disappointed, dragged down by retail sales (while wholesales remained dynamic). All in all, we are revising our Imacec (monthly GDP) forecast for the month down to 2.5%, from the 3.2% preliminarily expected.

The commercial activity index – which aggregates retail activity, wholesale and vehicle sales – grew 3.2% year over year in July, below our 5.5% forecast. Leading activity in the month was wholesales with growth of 5.2%. Machinery, equipment and materials – positive for an investment recovery – along with food, beverages and tobacco still led wholesale activity. The combined retail and car sales grew 0.1%, compared to our 3.3% forecast and the Bloomberg market consensus of 3.5%. The weaker retail performance can in part be due to fewer Argentinian tourists that boosted activity last year, but moderate supermarket sales of 0.6% points to a more widespread weakening.

If the recent weakness is transitory, the impressive start to the year (partly aided by a low base of comparison) still means Chile’s economy would expand 3.8% this year. However, headwinds are forming, as global trade tensions could affect external demand, hampering copper prices. Additionally, lower confidence could translate into slower implementation of investment projects and dent growth prospects. Adimark’s August public opinion survey showed president Sebastian Piñera’s approval rating dropping 4pp in one month to 48%, consumer confidence in July dipped to neutral levels, while Icare’s business confidence for August also moderated to 50.8, its lowest level since December last year.
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Business confidence in August moderated to the lowest level since the close of last year. Chile’s business confidence (PMI) remained in optimistic territory at 50.8 (50 = neutral), but is trending downwards, a concern for the durability of the investment recovery. All sub-indices remain above levels recorded one year ago, however, the magnitude of the gains is shrinking. Construction confidence is still most pessimistic sector low (45.1 vs 25.0 one year ago) after briefly reaching optimistic territory in March. Industrial confidence dropped into pessimistic ground (49.0 vs. 50.3 in July), for the first time this year. Meanwhile, mining confidence is still optimistic despite low copper prices (53.4 vs. 52.8 in July), but is far below the 66.5 peak earlier in the year. Commerce confidence moderated (to 55.8 vs. 58.6 in July), in line with the weaker retail numbers seen at the start of 3Q18. A recovery in business sentiment, alongside the monetary stimulus already in place and improved terms-of-trade will favor a growth recovery to 3.8% this year (from 1.5% in 2017). Lower confidence posing a risk to the growth recovery as it could translate into slower implementation of investment projects.

Day Ahead: The central bank will publish the decision of its two-day monetary policy meeting (September 3-4) at 6:00 PM (SP Time). We and the consensus believe that the current risk-off global sentiment, along with controlled inflationary pressures will result in another stay on hold decision.


August CPI posted an inflation of 0.13% month-over-month, below our forecast and median market expectations (as per Bloomberg) of 0.24%. The result was below the 10-year median variation for August by 24 bps. Annual headline inflation decelerated to 1.07% year-over-year in August. Food prices fell by 1.06% year-over-year. Also, core inflation (ex- food and energy) decreased to 2.04% in August. Moreover, the diffusion index shows that inflation is pretty low across a broad range of goods and services.  The indicator that tracks the percentage of items with annual inflation above the 2% target posted 28% in August. We expect annual headline inflation to increase to 2.2% by the end of 2018. A normalization of food prices and increasingly firmer domestic demand will likely push annual inflation slightly up from current levels.
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All LatAm

Weekly Fixed Income LatAm Strategy: Chilean Central Bank to remain on hold. All eyes are on Trump, who last week appeared reportedly in favor of tariffs on USD 200 billion imports (perhaps to be announced on September, 6th). There is no indication yet on the size of tariffs (10% or 25%) nor if the administration will enact tariffs on the USD 200 billion at once or in installments. If Trump decides for an immediate full escalation (25% tariffs on USD 200 billion), the risk is for a sell-off. If Trump decides for an incremental approach (10% on USD 50 billion), risk sentiment may improve.
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FX and Capital Markets: BRL hits new lows and Central Bank resumes interventions in the FX market. The Brazilian real fell to as low as 4.21 per dollar on Thursday. As the external environment improved and the Central Bank resumed interventions, the exchange rate rebounded and closed the week at 4.06. On a weekly basis, the local currency appreciated 1.22% and outperformed its peers. Last week, the monetary authority carried out an auction of USD 1.5 billion in FX swap contracts and a line auction involving USD 2.15 billion, the latter rolling over line contracts expiring in September. The Central Bank also announced the beginning of the full rollover of FX swap contracts expiring in October. Its stock of FX swaps now stands at USD 69 billion.
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Fuente: ITAU

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