Brazilian year-to-date trade surplus at all-time high
We maintain our expectation of a large trade surplus this year (USD 62 billion), supported by the robust year-to-date result.
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The trade surplus reached USD 5.2 billion in September, slightly above our forecast (USD 4.9 billion) and market consensus (USD 5.0 billion). Over 12 months, the trade surplus increased again to USD 64.9 billion and the year-to-date figure is the highest in the historical series started in 1992. However, the seasonally-adjusted annualized quarterly moving average receded to USD 62 billion, reflecting some moderation of the trade balance at the margin. Exports, which advanced sharply earlier in the year, have stabilized at a lower level, in line with lower international commodity prices. Despite the recovery seen in recent months, imports also remain at low levels, ensuring stronger trade surpluses in 2017 than in 2016. We maintain our expectation of a large trade surplus this year (USD 62 billion), supported by the robust year-to-date result. ** Full story here.
According to Focus survey, IPCA inflation expectations slightly declined to 2.95% (-2bps) for 2017 and to 4.06% (-2bps) for 2018, and did not change for 2019 (at 4.25%). Also, year-end Selic expectations remained flat for the three years horizon, at 7.00% for 2017 and 2018, and 8.00% for 2019. GDP growth expectations increased 2bps for 2017 (to 0.70%) and 8bps for 2018 (to 2.38%), and did not change for 2019 (at 2.50%). Finally, the BRL remained flat for 2017 and 2018: at 3.16/USD and 3.30/USD, respectively, and slightly appreciated for 2019 to 3.36/USD (from 3.38/USD).
Macro Vision: how the TLP can impact monetary policy. In this report, we estimate that, when fully implemented, the new long-term interest rate (TLP) will allow a reduction of about 2.2 p.p. in the benchmark Selic interest rate, ceteris paribus. The TLP should also contribute to substantially boost the Selic rate’s influence on the economy: we estimated that the Selic rate impact on average interest rate can increase by about 50%. ** Full story here.
Orange Book: recovery becoming widespread. The improvement in economic activity data is becoming more widespread, and we have recently revised this year’s GDP growth forecast to 0.8% from 0.3%. For 2018, we expect 2.7% growth. The unsustainable public debt dynamics, however, continues to be the economy’s main vulnerability. Further reforms (especially the changes in the social security system) are a necessary condition for the recovery to be sustainable. ** Full story here.
August’s industrial production will be released today at 9:00 AM (SP time). We expect a 0.7% s.a. decline (consensus: 0.0%), following four consecutive monthly increases.
The fiscal deficit continued narrowing in August, right before the government presented the 2018 budget bill (which will mark the end of the 5-year fiscal consolidation plan) and two large earthquakes battered Mexico (posing negative risks on activity and fiscal accounts). Granted, the bulk of the improvement observed in the fiscal accounts throughout 2017 is attributable to the massive MXN 322 billion (1.5% of GDP) dividend received from Banxico in March (the outcome of exchange rate gains on international reserves during the previous year).
However, Mexico’s fiscal deficit indicators are narrowing beyond the windfall effects of the dividends. In fact, even if 70% of the amount of the dividends received is excluded (as the remaining 30% is directed to stabilization/sovereign funds, and therefore recorded as both revenues and expenditures), the 12-month rolling primary balance reached a MXN 91 billion surplus (0.4% of GDP) in August, from a MXN 52 billion surplus in July. Likewise, using the same metric (ex-dividend), the 12-month nominal fiscal deficit narrowed to MXN 421 billion (2% of GDP), from MXN 452 billion in July, and the public sector borrowing requirements (broadest deficit indicator) narrowed to MXN 501 billion (2.4% of GDP), from MXN 534 billion previously.
We see a substantial improvement of fiscal accounts in 2017, and expect fiscal consolidation to be carried on into 2018 (albeit with smaller budget cuts, in the midst of the electoral year). The 2018 budget bill presented to Congress in early September already shows that the government is planning to cut budget expenditures by much less (0.4 p.p. of GDP) than in the previous two budgets (1.2 p.p. of GDP in 2016, and 1.1 p.p. of GDP in 2017). In any case, this would still be sufficient to decrease the public-debt-to-GDP ratios in 2018 (and thereafter), as the government would achieve its long-term target for the public sector borrowing requirements (2.5% of GDP, from 4.6% of GDP in 2014); that is, the level that the Ministry of Finance considers enough to stabilize public-debt-to-GDP dynamics. In the short-term, the earthquakes – which disrupted activity in six states that together account for one third of the economy – could hurt GDP growth (denting revenues) and put pressure on spending (in the form of reconstruction works and financial aid). Last week, however, the Finance Minister, José Antonio Meade, told the press that the earthquakes will not compromise the fiscal consolidation. ** Full story here.
Banxico published September’s expectations survey, which shows a slight increase of inflation expectations. Even though the recent hurricanes and earthquakes put upward risks on inflation, the decline of annual inflation (to 6.5% in the first half of September, from 6.7% in the second of August) seems to have reduced these concerns. In fact, the latest Banxico survey only shows a slight increase of median inflation expectations for some tenors; 2017 (to 6.30%, from 6.25%) and average of next 5-8 years (longest tenor, to 3.45%, from 3.40%). Median inflation expectations for the next 12-months (3.81%, from 3.82%) and 2018 (3.79%, from 3.80%) were broadly unchanged. Turning to the exchange rate, median USDMXN expectations decreased for year-end 2017 (18.05, 18.20 previously) and increased slightly for 2018 (18.15, 18.11 previously). The MXN depreciated 2.9 % in September, but mostly in the last week of the month, so it is possible that the survey is still not incorporating this event into expectations. The main driver of the depreciation has been the increase of U.S. treasury yields, which increased in response to the U.S. Fed’s guidance on balance sheet normalization (set to begin in October) and the announcement of President Trump’s tax reform (which aims at decreasing the corporate income tax rate, to 20% from 35%). Both of these developments put upward pressure on U.S. interest rates; the rolling-off of U.S. treasuries and MBS from the Fed’s balance sheet implies less demand for these securities (hence lower bond prices and higher yields), while tax cuts are conducive to an expansion of aggregate demand and, thus, higher yields. Regarding activity, median GDP growth expectations decreased, for 2017 (2.10%, from 2.15%), 2018 (2.3%, from 2.4%), and the average of the next 10 years (2.7%, from 2.8%). Finally, on monetary policy, median expectations show that most market participants believe Banxico will leave the policy rate at its current level for the rest of 2017 (7%, unchanged) and cut rates in 2018 (to 6.5%, from a previous median expectation of 6.75%). As per September’s survey, the first 25bp cut would come in 3Q18, and the second in 4Q18.
CPI recorded a monthly deflation in September, on the back of falling food prices (which reflect the ongoing normalization of agricultural output, after El Niño disrupted supply conditions in 1H17). The CPI fell 0.02% month-over-month, below our forecast and median market expectations (0.05%). Food prices, which account for 38% of the CPI basket, fell 0.22%, subtracting 9bps from the CPI print. Moreover, core prices (CPI excluding food and energy) fell by 0.02%. Annual headline inflation decreased to 2.94% year-over-year in September (from 3.17% in August), while core inflation (CPI ex food & energy) fell to 2.45% year-over-year (from 2.57%) during the same period. Moreover, different measures of diffusion indexes indicate that inflationary pressures are subsiding: the percentage of items in the consumer basket with annual inflation above the 2% target stood at 49% (down from 55% in August).
We continue expecting inflation to fall to 2.6% by the end of 2017. As we had pointed out in previous notes, the pressure stemming from the “lemonade effect” (combination of sharp price increases for lemons and regulated water tariffs) is temporary. In fact, lemon prices started to fall in September, along with other perishable foods which suffered supply disruptions in 1H17. Our base-case is that disinflation will be driven by the reversion of the agricultural supply shock of El Niño and – to lesser extent – by the benign evolution of the PEN and subdued domestic demand. ** Full story here.
The administration presented the 2018 budget plan to Congress. According to the bill, public expenditure will see a real growth rate of 3.9% next year (from the 4.6% estimated for this year), meaning it continues to lift activity given our 2.5% growth forecast. In nominal terms, the budget would come to USD 74 billion (27% of GDP), with a deficit that the government sees close to 1.9% of GDP (2.7% expected for this year). The budget goes in line with the administration’s commitment to decreasing the structural-balance deficit by 0.25% from this year (to 1.5% of GDP), with the cyclical component explained by the growth cycle (rather than copper prices). Health and education receive the bulk of the budget and will see expenditure growth of 6.9% and 5.9%, respectively, from this year. The budget assumptions include a growth recovery to 3.0% (from 1.5% this year) as the average copper price rises to USD 2.88/lb, from USD 2.71/lb expected for this year. Yearend inflation will pick up to 2.8% next year from 2.4% this year. Versus the expected income to be received this year, the budget envisions revenue growth of 7.4% (5.0% this year) boosted by private mining contributions. Following the recent credit rating downgrades by two of the three main rating agencies, the 2018 budget proposal signals Chile’s commitment to fiscal responsibility but questions remain as to whether the proposal is austere enough to address the rising debt levels and prevent further rating action.