Latam Talking Points

Brazil
Last night, President Temer announced additional measures aimed at ending the strikes:

Diesel prices will be cut by 0.46 BRL / liter, with a BRL 13.5 billion fiscal cost until year-end. Part of this reduction will be done by cutting taxes worth 0.16 BRL / liter (0.05 through CIDE and 0.11 through PIS/Cofins), with a fiscal cost of BRL 4 billion until year-end. The remaining 0.30 BRL / liter will be achieved through a “temporary subsidy program” from the government to Petrobras and other suppliers, including importers. This program will have a fiscal cost of BRL 9.5 billion until year-end, assuming BRL and oil prices stable from current levels, and will be included in the budget as an extraordinary expenditure (“crédito extraordinário”) which doesn’t impact the spending cap. The cost will be higher or lower depending on the evolution of oil prices and the BRL.
According to Finance Minister Eduardo Guardia, the government will partly compensate these costs with 2 measures. First, the tax cuts (BRL 4bn until year-end) will be compensated with the reversal of the payroll tax break. Second, the government will cut other discretionary expenditures by BRL 3.8 billion.

By the end of the day, the net impact on fiscal accounts this year, assuming that all above will be implemented and approved by Congress, will be of BRL 5.7 billion. Before these measures, our scenario was pointing to a primary deficit in between BRL 140 and 145 billion this year, against a target of BRL -159 billion. After these measures, we will be looking at a primary deficit closer to BRL 150 billion.

The fiscal cost will increase if these measures remain in place into next year, and if BRL depreciates or oil prices increase. We highlight that these type of measures are not easy to eliminate, once they are implemented. The annualized fiscal cost of the tax cuts and the “temporary subsidy program” amounts to BRL 23 billion, or 0.4% of GDP, assuming oil prices and BRL stable at current levels.

FGV has released its monthly surveys on construction and commerce. The data gathering was between May 2-22, so the results are unlikely to reflect the truck drivers’ strike. Confidence in construction the sector rose 0.5% in May to 82.4. The breakdown shows a movement in the opposite direction of other confidences: stronger expectations (2.3%) while the current condition assessment fell 1.7%.  Expectations are well above current condition, suggesting the aggregate index may sustain its upward trend and the ongoing recovery in the sector may continue ahead. Moving to FGV’s monthly commerce survey, confidence in the retail sector plummeted 4.2% to 92.6 in May. The breakdown shows the decline was driven by both weaker expectations (-5.0%) and current conditions (-2.7%).

Power regulator Aneel changed to red from yellow mode in the electricity tariff flag system for June. We have updated our June’s IPCA monthly inflation for 0.66% from 0.53%.

Week Ahead: 1Q18 GDP will be released on Wednesday. We forecast a 0.3% qoq/sa increase, leading yoy growth to slow down to 1.0%. The national unemployment rate for April will come in on Tuesday – we expect it to decrease 0.2 p.p. to 12.9%. Finally, FGV’s business confidence surveys for May on industry (the preview was released a few days ago) and services, as well as the economic uncertainty indicator, will be released through the week. An IBOPE poll of voting intentions for the Presidential elections, conducted only in the state of São Paulo, is scheduled to be released from Monday onwards, with updates on the election scenario. On the external accounts, we expect the trade balance to post a USD 7.8 billion surplus in May. In month over month terms (seasonally adjusted), both exports and imports are set to recede (1.2% and 4.8% respectively). Over 12 months, we expect the trade surplus to remain flat at USD 66 billion. On fiscal accounts relative to April, we expect the central government (Tue.) to post a BRL 2.3 billion primary surplus and consolidated public sector (Wed.) to post a BRL 3.0 billion primary surplus. Tax collection will also be released during the week (without an official release date), for which we forecast BRL 127.7 billion. The Central Bank announced another FX swap rollover auction of up to 15,000 contracts today. ** Read our full week ahead note below.

Colombia

The May 27 presidential election in Colombia came broadly in line with expectations. The vote showed a majority favored Iván Duque (Senator for the Centro Democrático party, backed by former president Álvaro Uribe) with 39.1% of the votes, followed by Gustavo Petro (former major of Bogotá, Decent Coalition), who obtained 25.1% of support, and Sergio Fajardo (former major of Medellín and governor of Antioquia, Green Alliance/Polo), with a better-than-expected 23.7% of the vote. Further behind were Germán Vargas-Lleras (former Vice President to current president Juan Manuel Santos, Radical Change Party; 7.3%) and Humberto de la Calle (former head of the peace negotiating team with FARC, Liberal Party; 2.1%), with the remaining candidates recording less than ½ of a percentage point of total votes each.

Colombia’s next president will be chosen on June 17, when Iván Duque (right) and Gustavo Petro (left) face each other in a runoff vote. A recent simulation by Invamer-Gallup show Mr. Duque would emerge a winner with just over 53% of the vote, while Mr. Petro gets 43.4% of the preference. The runner up will remain a relevant political actor as he heads to the Senate, while his running partner (Vice-Presidential candidate) gets a seat in congress.

Mr. Fajardo’s vote (over 4.5 million votes) shows the relevance of the political center. This comes alongside the highest participation rate (53.4% of the registry) in any year on record since 1994 (with the highest participation rate prior to this year being 51.6% in 1998).

The new administration will face a manifold of challenges. A tight fiscal situation, the expectation of returning the economy towards its potential after several years of sub-par growth, the implementation of the peace deal with FARC, and the humanitarian crisis-on-the-making in Venezuela will dominate the agenda of the incoming government.

Week Ahead: On Thursday, the institute of statistics (DANE) will release the unemployment rate for April. We expect the urban unemployment rate to come in at 10.5% in, resulting in a national unemployment rate of 8.9%. At the end of the week, the institute of statistics (DANE) will publish exports for the month of April. We expect April exports to come in at USD 3,492 million. ** Read our full week ahead note below.

Mexico

Mexico’s current account deficit (CAD) narrowed significantly in 1Q18, driven by a smaller net income deficit (reflecting lower profit remittances from foreign firms operating in Mexico, which more than offset higher interest payments on public sector securities) and a growing non-energy surplus (boosted by the pick-up of the U.S. economy). The CAD came in at USD 6.9 billion in 1Q18 – closer to our forecast (USD 7.9 billion) than to median market expectations (USD 4.7 billion, as per Bloomberg) – which reduced the rolling 4-quarter deficit to USD 15.9 billion (1.3% of GDP) from USD 19.4 billion in 4Q17 (1.7% of GDP, revised up from 1.6% of GDP). Looking at the breakdown, we note that the 0.4pp of GDP narrowing of the rolling 4-quarter CAD between 4Q17 and 1Q18 was accounted by lower net income payments (0.2pp), a smaller trade deficit (0.1pp), a slightly smaller services deficit (rounding up the variation to 0.1pp), and robust transfers (mainly remittances from the U.S., which stood unchanged at a sizable 2.4% of GDP). On the funding side, NAFTA uncertainty likely had a negative effect on foreign direct investment and portfolio inflows have also retreated.

We have revised our current account deficit forecast for 2018 (to 1% of GDP, from 1.3% of GDP). The CAD will likely narrow a bit more, as manufacturing exports continue accelerating, while internal demand expands at a more moderate pace ahead. Regarding the funding of the CAD, we expect the uncertainties associated to NAFTA and the presidential elections to have a moderately negative effect on FDI and portfolio investments in coming quarters (with portfolio inflows facing an additional headwind stemming from more restrictive global financing conditions).

On another note, Mexico’s rolling 12-month trade deficit widened a bit in April, although it continued showing benign dynamics at the margin. Mexico’s trade balance posted a USD 289 million deficit in April, below median market expectations of a UDS 500 million surplus (as per Bloomberg). Thus, the rolling 12-month trade deficit widened to USD 11.2 billion in April (from USD 10 billion in March) with the energy deficit widening (to USD 19.2 billion, from USD 18.7 billion) and the non-energy surplus decreasing a little bit (to USD 8 billion, from USD 8.8 billion). At the margin, however, the trade deficit narrowed. The seasonally-adjusted 3-month annualized trade deficit narrowed to USD 7.2 billion in April (from USD 9 billion in March) driven by a wider non-energy surplus (USD 12.8 billion, from USD 9.4 billion) which offset a larger energy deficit (USD 20 billion, from USD 18.4 billion). Although manufacturing exports had a month-over-month contraction in April, the trend is pretty strong and accelerating (16.2% qoq/saar, from 14.7% in March). In contrast, the momentum of non-oil imports moderated (9.6% qoq/saar, from 13.6% in March) with all components slowing down: consumer goods ex-oil (4.6% qoq/saar, from 11.2%), intermediate goods ex-oil (8.6% qoq/saar, from 11.6%), and capital goods (22.7% qoq/saar, from 31.3%). ** Full Story here.

Week Ahead: The statistics institute (INEGI) will announce April’s unemployment rate. We expect the unemployment rate to post 3.2%. The Ministry of Finance (Hacienda) will announce April’s fiscal balance on Wednesday. The government’s fiscal targets for 2018 are: Public sector borrowing requirements of 2.5% of GDP, nominal public deficit of 2%, and a primary surplus of 0.8% of GDP; and we believe they will be achieved. On the same day, the Central Bank (Banxico) will publish the second Quarterly Inflation Report of the year, including an update of its official inflation and GDP growth forecasts. We do not expect significant changes; neither in GDP growth nor in inflation forecasts. Even though activity surprised to the upside in 1Q18 and inflation surprised to the downside in the first four months of the year, Banxico will likely remain cautious given the deterioration of risks (U.S. monetary policy in the U.S., NAFTA, and elections). Banxico will publish the monetary policy minutes of the last board meeting (May) held two weeks ago. At this meeting, Banxico decided to maintain the reference rate constant (at 7.5%), in spite of a substantial weakening of the exchange rate (more than 8% form the day of the previous meeting, April 12th) driven by higher risks over NAFTA, elections and monetary policy abroad. Lastly, Banxico will publish May’s Expectations Survey. We do not expect significant changes in inflation and GDP growth expectations, but it is likely that the economists surveyed by Banxico will now have median expectations of a weaker Mexican Peso and tighter monetary policy (just like the changes observed in the Citi-Banamex survey, published in the previous week). ** Read our full week ahead note below.

Argentina

Week Ahead: Manufacturing and construction data for April will see the light on Thursday. According to the IPI (a private index published by OJF consulting firm), manufacturing rose 2.1% year over year in April, while construction activity continued rising. Tax collection for May be released on Friday. We expect tax collection to increase 29.2% yoy to ARS 266.2 billion in May. ** Read our full week ahead note below.

Chile

Week Ahead: On Thursday, the national institute of statistics (INE) releases the April industrial activity indicators. We expect manufacturing production to rise 11% year over year, aided by three additional working days and a low base of comparison. Also on Thursday, INE releases the national unemployment rate for the quarter ending in April. We expect an unemployment rate of 6.9%, as gains in participation likely surpass job creation. On Friday, INE will publish the private consumption activity indicators for April. We expect the commercial activity index to have expanded 7.5% from last year with retail sales growing 5.5%. ** Read our full week ahead note below.

Peru

Week Ahead: The statistics institute (INEI) will announce May’s CPI inflation on Tuesday, which we forecast at 0.6% month-over-month. Assuming our forecast is correct, headline inflation would jump to 1.51% year-over-year in May. On the same day, INEI will publish the full set of coincident indicators for April’s economic activity. We expect these indicators to come in significantly stronger. First and foremost, there will be a big tailwind from fishing output (given the largest quota approved in 6 years) which will boost manufacturing (through the processing of fishing goods). Moreover, we already know that several indicators accelerated in April: public investment, domestic cement consumption, electricity production, domestic VAT collections, auto sales, and oil output. On the negative side, labor market data (especially employment growth) remained poor. ** Read our full week ahead note below.

 

The Week Ahead in LatAm

Argentina

Manufacturing and construction data for April will see the light on Thursday. According to the IPI (a private index published by OJF consulting firm), manufacturing rose 2.1% year over year in April, while construction activity continued rising according to private indicators, as cement deliveries rose 13.3% yoy and grupo construya index expanded 18.5% yoy.

Tax collection for May will see the light on Friday. Argentina’s tax revenue totaled ARS 236.3 billion in April, marking a 25.7% year-over-year nominal expansion, stable in real terms. We expect tax collection to increase 29.2% yoy to ARS 266.2 billion in May.

Brazil

1Q18 GDP will be released on Wednesday. We forecast a 0.3% qoq/sa increase, leading yoy growth to slow down to 1.0% from 2.2% in the previous quarter. This result will likely increase market fears that GDP may grow 1.5% or even less in 2018. Our forecast is 2.0%. The national unemployment rate for April will come in on Tuesday – we expect it to decrease 0.2 p.p. to 12.9% (remaining stable at 12.5% in seasonally adjusted terms). Finally, FGV’s business confidence surveys for May on industry (the preview was released a few days ago) and services, as well as the economic uncertainty indicator, will be released through the week.

An IBOPE poll of voting intentions for the Presidential elections, conducted only in the state of São Paulo, is scheduled to be released from Monday onwards, with updates on the election scenario.

On the external accounts, we expect the trade balance  to post a USD 7.8 bn surplus in May, broadly stable in comparison with the the USD 7.7 bn posted in the same month of last year. In month over month terms (seasonally adjusted), both exports and imports are set to recede (1.2% and 4.8% respectively). Over 12 months, we expect the trade surplus to remain flat at USD 66 bn, and the 3-month seasonally-adjusted and annualized surplus to recede to USD 67 bn.

On fiscal accounts relative to April, we expect the central government (Tue.) to post a BRL 2.3 bn primary surplus, and  consolidated public sector (Wed.) to post a BRL 3.0 bn primary surplus. Tax collection will also be released during the week (without an official release date), for which we forecast BRL 127.7 billion, increasing 5.2% y/y in real terms.

Chile

On Thursday, the national institute of statistics (INE) releases the April industrial activity indicators. The industrial production index expanded 8.7% year over year in March (9.1% in February) as mining grew 27% (17% in February), while manufacturing fell 2.4% (4.2%), negatively affected by two fewer working days. Once corrected for both seasonal and calendar effects, manufacturing growth in March was 1.6% year over year (4.2% in February). Besides higher processing of copper, a low base of comparison boosted mining growth. We expect manufacturing production to rise 11% year over year (-2.4% previously), aided by three additional working days and a low base of comparison.

Also on Thursday, INE releases the national unemployment rate for the quarter ending in April. The unemployment rate in 1Q18 was 6.9%, a 0.3pp pick-up over twelve months, partly explained by higher participation in the labor market as the activity improvement likely buoys job seekers. Employment growth was 2.2% (2.3% in 4Q17), led by the 2.6% salaried jobs rise (with an improvement of the private component since 4Q17). We expect an unemployment rate of 6.9% (6.7% one year earlier), as gains in participation likely surpass job creation.

On Friday, INE will publish the private consumption activity indicators for April. Improving retail sales and vehicles sales drove the commercial activity index in March. The commercial activity index grew 3.4% year over year (5.5% in February). Available data for April shows elevated car sales (43.7% yoy vs. 12.5% in March). Hence, we expect the commercial activity index to have expanded 7.5% from last year with retail sales growing 5.5% (4.1% previously).

Colombia

The first round of the Colombia presidential election will take place on Sunday. Opinion polls released this month have all pointed to the need for a runoff vote in June. One of the candidates most likely to be in the runoff is conservative Iván Duque who enjoys the backing and political machinery of former president Alvaro Uribe and is leading the race. His competitor is likely to be leftist, former Bogota mayor, Gustavo Petro. Polling averages show Duque with 37% of voting intentions, while Petro has on average 26% of support. Challenging Petro for the runoff spot will be former Medellin mayor, independent Sergio Fajardo (16% voting intention). Given high discontent with the Santos administration, former vice-president Vargas-Lleras has floundered in the polls, stuck in single digits.

On Thursday, the institute of statistics (DANE) will release the unemployment rate for April. The national unemployment rate moderated to 9.4% in March (from 9.7% one year ago) amid a stable urban unemployment rate (10.6%). Falling urban participation rates is capping increases in the unemployment rate. We expect the urban unemployment rate to come in at 10.5% in April from 10.7% recorded in the same month of 2017, resulting in a national unemployment rate of 8.9% (stable from one year prior).

At the end of the week, the institute of statistics (DANE) will publish exports for the month of April. Export growth slowed in March to 1.4% (10.3% in February) as coffee exports moderated and falling oil volumes remained a drag. We expect April exports to come in at USD 3,492 million, a 30% increase from last year boosted by coal.

Mexico

Starting the week, the Statistics Institute (INEGI) will announce April’s unemployment rate. We expect the unemployment rate to post 3.2%, standing 0.3pp below the level recorded in the same month of last year. Notably, labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment grew 4.5% year-over-year in April.

The Ministry of Finance (Hacienda) will announce April’s fiscal balance on Wednesday. After a moderate widening of fiscal deficit indicators in 1Q18 – mainly because of an increase in expenditures (partly related to reconstruction works) – we expect stronger revenues (driven by higher oil prices) and fiscal consolidation to improve public finances in April. The government’s fiscal targets for 2018 are: Public sector borrowing requirements of 2.5% of GDP, nominal public deficit of 2%, and a primary surplus of 0.8% of GDP; and we believe they will be achieved.

On the same day, the Central Bank (Banxico) will publish the second Quarterly Inflation Report of the year, including an update of its official inflation and GDP growth forecasts. We do not expect significant changes; neither in GDP growth nor in inflation forecasts. Even though activity surprised to the upside in 1Q18 and inflation surprised to the downside in the first four months of the year, Banxico will likely remain cautious given the deterioration of risks (U.S. monetary policy in the U.S., NAFTA, and elections).

Banxico will publish the monetary policy minutes of the last board meeting (May) held two weeks ago. At this meeting, Banxico decided to maintain the reference rate constant (at 7.5%), in spite of a substantial weakening of the exchange rate (more than 8% form the day of the previous meeting, April 12th) driven by higher risks over NAFTA, elections and monetary policy abroad. Against this backdrop, the monetary policy statement of May’s meeting was more dovish than expected (for at least three reasons). First, the decision was unanimous (so even the two hawks in the board seem committed to the “inflation forecasting targeting” framework and less reactive to the exchange rate). Second, the board did not mention that the balance of risks for inflation deteriorated from the previous meeting. And third, the interest rate differential with the U.S. was not moved to the top of the list of variables that the board monitors for upcoming decisions (indicating that the board is not committed to follow the likely Fed rate hike in June).

Lastly, Banxico will publish May’s Expectations Survey. We do not expect significant changes in inflation and GDP growth expectations, but it is likely that the economists surveyed by Banxico will now have median expectations of a weaker Mexican Peso and tighter monetary policy (just like the changes observed in the Citi-Banamex survey, published in the previous week).

Peru

The statistics institute (INEI) will announce May’s CPI inflation on Tuesday, which we forecast at0.6% month-over-month. Inflation was likely driven by the recent Supreme Decree which approved an increase in excise taxes on alcoholic beverages, sugary beverages, cigarettes, fuels, and vehicles. Moreover, mobile telephone service prices and regulated natural gas prices also increased in May. Conversely, a 3.1% decrease in regulated electricity prices exerted downward pressure. Assuming our forecast is correct, headline inflation would jump from 0.48% year-over-year in April to 1.51% year-over-year in May. We note that an unfavorable base effect (resulting from monthly deflation in May 2017, because of the unwinding of El Niño) also pushed annual inflation up in May 2018.

On the same day, INEI will publish the full set of coincident indicators for April’s economic activity. We expect these indicators to come in significantly stronger. First and foremost, there will be a big tailwind from fishing output (given the largest quota approved in 6 years) which will boost manufacturing (through the processing of fishing goods). Moreover, we already know that several indicators accelerated in April: public investment, domestic cement consumption, electricity production, domestic VAT collections, auto sales, and oil output. On the negative side, labor market data (especially employment growth) remained poor.

Fuente: Itaú

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