We don’t expect a significant impact in 2018 fiscal accounts as the first cut in corporate income tax is scheduled for 2019.
Talk of the day
The treasury announced a tax reform proposal aimed at encouraging investment and reducing economic distortions. The plan would have a direct fiscal cost of 1.5% of GDP over the next five years, a cost the treasury assumes will be offset by higher growth.
The bill would implement a steady reduction in the corporate income tax rate, which would fall from 35% today to 25% by 2021, for companies that do not distribute dividends. In addition, the treasury would accelerate VAT rebates originating in capital expenditures. To encourage the formalization of employment, the government would set a minimum threshold for paying contributions to the social security system (on the excess over a nominal wage of ARS 12,000, or USD 685). Finally, the plan would eliminate the tax on banking transactions (on the use of checks) in five years; this liability would instead be computed as an advance payment of corporate income tax.
To partly offset the fiscal impact of the tax cuts, the government is seeking to eliminate the tax exemption for revenues originating in financial assets held by individuals (time deposits, federal and provincial bonds, and corporate bonds). The tax rates on the previously exempted revenues would be 15% for foreign-currency-denominated instruments and 5% for peso-denominated instruments. The tax on assets in local currency is lower due to the still-high level of inflation. Under the plan, the government would eventually increase this tax rate once inflation declines. Equity holdings would remain tax-exempt. Finally, levies on alcoholic and sugar-sweetened beverages would be hiked, while those on electronics, motorcycles and cars would be eliminated.
We don’t expect a significant impact in the fiscal accounts in 2018 as the first cut in corporate income tax is scheduled for 2019. Looking at the medium-term, we note that while the reform is pro-investment, the final impact on growth is difficult to estimate and the reform introduces some additional strain to the fiscal consolidation sought by the government in the next years.
Copom minutes: is the end coming? The Committee states that, considering the basic scenario and balance of risks, a 75bps rate cut is consistent with inflation convergence to the target in the relevant policy horizon. In paragraph 29, the committee notes again that the economic juncture warrants sub-structural (or neutral) interest rates. Looking forward, in paragraph 31 the Copom indicates that, under the basic scenario, a moderate reduction of the pace in the next policy meeting (to 50bps) seems, at the moment, adequate.
The minutes outline a flight path for the Selic on its way to 7.0% by year-end. The February decision is purposefully left wide open. This suggests that the authorities may consider, given the magnitude of estimated economic slack and the balance of risks around the basic scenario, that a little more stimulus than currently priced in may be appropriate. We thus keep, for now, our call that the end will only come in February, with a final 50bps rate cut, taking the Selic to 6.5%. ** Full story here.
Labor market still driven by growth in informal jobs in 3Q17. The nation-wide unemployment rate reached 12.4% in September, in line with expectations (median of market estimates: 12.4%; our call: 12.5%). The indicator increased 0.6 p.p. from 11.8% one year earlier. Applying our seasonal adjustment, the unemployment rate was stable at 12.6%. The labor force grew 0.2% at margin and 2.4% yoy. The participation rate (ratio of the labor force to the working-age population) remained stable at 61.8%, above its historical average (61.3%). Employment advanced 0.4% mom/sa and 1.6% yoy. This trend is still influenced mainly by informal jobs. ** Full story here.
According to FGV’s latest industry survey, business confidence in the industrial sector rose 2.8% mom/sa in October to 95.5. The final reading came in 0.8 p.p. above the preview. The confidence breakdown (expectations vs. current situation) shows a deep improvement in the current situation index (5.4%), and small gains in expectations (0.3%). Expected demand rose 3.3%, extending strong gains shown in the previous survey. Actual demand rose 8.4% and continues to trend upward. Capacity utilization rose 0.4 p.p. to 74.3, barely above recent lows. Inventories (excessive minus insufficient) fell to 7.2% from 8.1%, fully offsetting the increase in the previous survey. Eleven out of twenty activities showed an increase (diffusion: 55%), worse than the aggregate result.
FGV also released its monthly services survey: confidence in the services sector rose 2.6% in October to 87.8, up for the 4th month in a row. The improvement was driven by both the current situation index (2.8%) and expectations (2.3%).
According to ABRAS, supermarket sales rose 1.2% mom/sa in September (according to our estimates). The result extends the upward trend shown in 2017 so far. Along with other indicators, it contributes to our vision of a gradual recovery in economic activity. With the available information, we forecast a 0.6% mom/sa increase in core retail sales (6.5% yoy). Our preliminary forecast for the broad segment, which includes vehicle sales and construction material, is a 0.9% mom/sa gain (9.0% yoy).
September’s industrial production will be released today at 9:00 AM (SP time). We expect a 0.7% month over month s.a. increase, offsetting August’s drop. On external accounts, October’s trade balance will come through at 3:00 PM (SP time). We forecast a strong surplus of USD 5.0 billion, topping the USD 2.4 billion in the same month last year.
GDP growth weakened in 3Q17, both in year-over-year and sequential terms, dragged by two large earthquakes, which disrupted economic activity in September. The flash estimate of GDP growth came in at 1.6% year-over-year, in line with our forecast and median market expectations (both at 1.6%). According to calendar and seasonally-adjusted data reported by the statistics institute (INEGI), the flash estimate of GDP growth was 1.7% year-over-year and marked a significant slowdown with respect to 2Q17 (3% year-over-year). At the margin, GDP fell 0.2% from the previous quarter, after posting robust sequential expansions 0.6% and 0.7% in 2Q17 and 1Q17. Lastly, the volatile primary sectors (mostly agriculture) provided some cushion, posting a sequential expansion of 0.5% (after falling by 1.9% in 2Q17).
Overall, the 3Q17 flash GDP data poses a negative risk to our 2.3% growth forecast for 2017. Nevertheless, GDP will likely rebound in 4Q17 and we see significant buffers for activity in coming quarters. Manufacturing output will likely be boosted by the strength of the US industry, as the US ISM manufacturing index reached 60.8 in September (the highest level in thirteen years). Furthermore, we believe falling inflation coupled with robust employment (growing consistently above 4% year-over-year in the first nine months of 2017) will sustain consumption growth (service sectors were performing strongly until August). On the negative side, the poor performance of oil output and construction activity – reflecting the government’s fiscal consolidation (which has slashed public investment) – will likely persist. Also, the uncertainties associated to Nafta and the presidential elections pose the risk of a more pronounced deterioration of investment, with negative implications for many sectors of the economy. ** Full story here.
The unemployment rate remained low in the third quarter of the year, but job composition continues to point at a fragile labor market. The unemployment rate reached 6.7% in the quarter, down by 0.1 percentage points in 12 months. The print came in above the 6.5% Bloomberg market consensus, and our 6.6% estimate. Employment growth picked up to 2.3% (from 1.9% in 2Q17), but job growth continues to be led by the informal sector and public salaried posts, whereas private salaried employment shed 39 thousand jobs in the quarter (+13 thousand in 2Q17), subtracting 0.5 pp from the headline growth. We expect the unemployment rate to average 6.7% this year, up from the 6.5% recorded last year. The unfavorable composition of job growth will likely keep the private consumption recovery limited. ** Full story here.